2016 (9) TMI 1597 - AT - Income Tax

Disallowance of royalty payment on export sales - assessee company paid royalty on export sales to one of its Associated Enterprise ( A.E. ). the Gulf Oil International Mauritius (Inc.) (GOIL) as per agreement dated 01.08.2003 and the supplemental agreement dated 10.11.2003 - HELD THAT - We find that this issue had arisen in the earlier assessment years and for the A.Y. 2006-07 2014 (1) TMI 1899 - ITAT HYDERABAD this is not a disallowance under section 37(1) but an adjustment made under Transfer Pricing Provisions where arms length price is to be determined whether the agreement is approved or not. Keeping that in mind we are of the opinion that the decision relied on by the learned Counsel does not apply to the facts of the case. As decided earlier the restriction on the royalty amount is limited to Rs. 44, 24, 184/-. Addition made on the ground that the said amount is paid to foreign concerns without making TDS - DRP has disposed of the objections of the assessee by observing that similar issue was there in the proceedings before the DRP for the Asst.Year 2010-11 and the learned DRP has favourably inclined with the arguments of the tax payer and directed the Assessing Officer to verify assessee s claim as to whether the amount was actually paid on behalf of Gulf Oil International Lubricants Pvt. Ltd. and allow assessee s claim accordingly - HELD THAT - DRP has not applied its mind to the contentions of the assessee. Therefore in the interest of justice we deem it fit and proper to remit the issue to the file of the Assessing Officer with a direction to verify the assessee s claim. Thus grounds of appeal No.3 and 4 are treated as allowed for statistical purposes. Correct figure taken by the Assessing Officer towards carry forward of short term capital loss as against the correct amount of loss carried forward - HELD THAT - We deem it fit and proper to remand this issue to the file of the Assessing Officer with a direction to give consequential effect in computation of the brought forward short term capital loss pursuant to the loss arrived at in the earlier assessment years consequent to remand by the ITAT.

Summary

Issues Involved:
1. Disallowance of royalty payment on export sales.
2. Addition made for payments to foreign concerns without making TDS.
3. Incorrect figure taken for carry forward of short-term capital loss.

Issue-wise Detailed Analysis:

1. Disallowance of royalty payment on export sales:
The assessee contested the disallowance of Rs. 13,18,304 as royalty payment on export sales. The assessee paid royalty to Gulf Oil International Mauritius (Inc.) (GOIL) as per agreements dated 01.08.2003 and 10.11.2003, approved by the Government of India. The royalty rates approved were 5.88% for domestic sales and 9.41% for export sales. For the relevant financial year, the assessee paid royalty of Rs. 27,16,107 on export sales of Rs. 13,35,82,370, which worked out to 2.03%. However, the TPO restricted the deduction to 1% of export sales, based on a prior ITAT order, resulting in an adjustment of Rs. 13,80,304. The DRP confirmed this order. The assessee argued that the royalty was reasonable and at arm's length, citing higher percentages paid by third parties and other subsidiaries, and approvals by the RBI. However, the tribunal upheld the disallowance, referencing a prior decision where 1% royalty on export sales was deemed reasonable. Thus, ground of appeal No.2 was rejected.

2. Addition made for payments to foreign concerns without making TDS:
The assessee challenged the addition of Rs. 45,97,042 for payments made to foreign entities without TDS. The payments were Rs. 44,86,063 to M/s. C & C Maritime P. Ltd. and Rs. 1,10,979 to M/s. East Port Maritime P. Ltd. for services rendered outside India. The assessee argued that these payments were for freight charges and commission, respectively, and since the payees had no permanent establishment in India, TDS provisions were not applicable. The DRP had previously directed the AO to verify the assessee's claim regarding similar payments for AY 2010-11. The tribunal remanded the issue back to the AO for verification of the assessee's claims, thus allowing grounds No.3 and 4 for statistical purposes.

3. Incorrect figure taken for carry forward of short-term capital loss:
The assessee contended that the AO incorrectly recorded the carry forward of short-term capital loss as Rs. 16,99,16,235 instead of the correct amount of Rs. 38,42,82,950. The tribunal noted that this issue had been previously remanded to the AO by the ITAT for earlier years. Consequently, the tribunal remanded this issue back to the AO for recalculating the correct carry forward amount in line with the earlier remand orders. Thus, ground of appeal No.5 was allowed for statistical purposes.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific issues remanded to the AO for further verification and recalculations. The tribunal upheld the disallowance of royalty payments on export sales, citing consistency with prior decisions.