TMI Blog2017 (2) TMI 230X X X X Extracts X X X X X X X X Extracts X X X X ..... he export turnover - Held that:- We direct the AO/TPO to exclude the same amount from the total turnover as well while computing the deduction u/s 10A. Exclusion of expenditure in foreign currency - whether the same amount may be excluded from the total turnover as well - Held that:- Following the principles on the subject as laid down by the Hon’ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [2010 (6) TMI 65 - BOMBAY HIGH COURT] and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. [2009 (3) TMI 243 - ITAT MADRAS-D] AO is directed to exclude the same from the total turnover as well. Direct the AO to exclude whatever communication expenses disallowed from the export turnover, the same amount was also be disallowed from the total turnover while computing the deduction u/s 10A Disallowance of commission paid to Venture Global on entire sales under the CUP method with out there being any comparable cases - Held that:- For the reasons stated above in the earlier assessment years, instead of disallowance of the commission attributable to sales made to Satyam Group, the entire commission paid was disallowed without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slocation of work in the assessee company throwing accounting work out of gear. Since all the transactions between the assessee and SCSL had to be accounted and also closing balances had to be reconciled, the assessee company found that it would be difficult to finalise its accounts in time and accordingly petitioned to the Central Board of Direct Taxes, New Delhi [CBOT] seeking time for finalisation of accounts so that genuine hardship and financial loss are not caused to its investors. 3.3.The CBDT, considering the fact that investigation was being carded out by the Central Bureau of Investigation, Serious Fraud Investigation Office, Enforcement Directorate and the Income Tax Department and also considering the fact that the management of SCSL was taken over by M/s.Tech Mahindra Ltd., and also considering that the Company Law Board had allowed time to SCSL to file return and documents under different statutes till 30-06-2010/ condoned delay in performing various statutory obligations like obtaining tax audit reports, other reports, carry forward losses etc. till 31-03-2010. A copy of the order dated 25-01-2010 passed by the CBDT, New Delhi under Sec.119(2) of the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nexus to the everyday happenings at the assessee company more so as continuing without remit for the entire duration of 667 days. It was submitted that the ongoing enquiries commenced more than a month after receipt of the order of the CIT(A) and cannot be seen as detaining the key personnel of the assessee company for the entire length of the delay caused. It was further submitted that in addition to the existence of sufficient cause for delay, the assessee should be able to demonstrate presence of due diligence along with the absence of negligence . Reliance was placed upon the following decisions for the above propositions: a. JCIT, Spl Range 1 Vs. TAFE Ltd., [104 ITD 149, ITAT (Chennai) (TM); b. AP Housing Board Vs. DIT (Exemptions), ITA No. 110/H/08 dt. 14.05.2010 ITAT A Hyderabad; c. CIT Vs. Ram Mohan Kabra, [257 ITR 773] (P H) and the references contained therein to the Supreme Court decision in the case of Mst Katji [167 ITR 471] and K. Ramachandran Vs. State of Kerala (AIR 1998 SC 2276]; d. M.S. Nulon India Ltd., Vs. DCIT [219 ITR 736] (Del); e. M/s. Karnataka Forest Development Corporation Ltd., Vs. ACIT, ITA No. 266/Bang/08, dt. 23.10.2008; 5. Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers i.e., Satyam Computer Services Ltd., India and Venture (Group), USA. These two promoters hold share capital in assessee-company in equal proportion at 50:50. At the relevant point of time, Satyam (now merged with Tech Mahindra Ltd.,) was a leading global consulting company. Venture Global Engineering is an US based tier one automotive component supplier and developmental services speared across USA, Australia, South Africa, China and India. It has expertise in interior and exterior trimming, compound tooling and manufacturing. Both SCSL and Venture Global were rendering engineering services to various entities in automotive industries prior to the formation of assessee-company. Venture LLC, being the leader in automotive designing has entered into joint venture with Satyam and has decided to share their expertise. By virtue of joint venture agreement, various terms and conditions were proposed. We are not on the issue of joint venture but the issue in appeal, considered by the AO in the Transfer Pricing study, is with reference to commission paid to Venture on assessee s sales. There was an export sales commission agreement dt. 11-02-2000 by which assessee-company was to pay 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,26,559/- as exempted u/s. 10A. AO has excluded certain expenditure involving communication expenses and also foreign exchange in providing technical services outside India totaling to ₹ 22,74,75,484/- from export turnover. Therefore, as against ₹ 26.03 Crores of export turnover, the AO determined the export turnover at ₹ 3.28 Crores. Accordingly, the deduction u/s. 10A was reduced to an amount of ₹ 23,99,728/-. In addition to the above addition under the TP provisions, the TPO vide his order dt. 22-12-2006 has suggested TP adjustment of ₹ 5,15,778/- towards export of service income and disallowance of ₹ 85,65,314/- for payment of sales commission. Accordingly, the final order was passed by the AO incorporating the adjustments and re-working out the deduction u/s. 10A. 10. Ld. CIT(A) did not agree with the contention of assessee that the amount of ₹ 22,24,75,804/- was not liable to be considered under Explanation-2, Section 10A. However, Ld. CIT(A) accepted the alternate claim of assessee that such expenses if at all reduced from export turnover should also be reduced from the total turnover. Accordingly, he gave a direction to the AO f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yam was also in the business of providing CAD/CIM services to various automotive companies and they have placed a consolidated order to Satyam and part of which was in turn ordered to assessee-company. Such orders are from independent companies and as per the agreement commission was payable to Venture. It was further submitted that no commission was paid to Satyam, but entire commission was paid/payable to Venture only. He submitted that the commission was a business necessity, wholly and exclusively for the purpose of business. It was further submitted that 10% provided in the agreement is as per the guidelines and regulations prescribed under FEMA. Therefore, payment is to be considered as Arm s Length for this reason. It was also submitted that they are within the guidelines of RBI for remittance of the amounts. Therefore, there is no need to consider any TP adjustment. 11.1. Objecting the method adopted by the TPO i.e., CUP method, the Counsel s objections are as under: 1. The learned TPO observed that no tangible benefit was received by SVES to justify the commission payment to Venture Global LLC., USA. As explained above, the customers through whom SVES received incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CUP method and determined the ALP at NIL so as to disallow part of the commission paid to Venture on the so called sales made to Satyam, on the reason that Satyam is an affiliated company and no commission need to be paid on sales made to the affiliated companies . This aspect was examined in detail and we found that Satyam is an independent promoter and not an affiliate of Venture. Venture Global Services LLC is an independent globally operated lead company which was competing with Satyam before forming a joint venture company. The sales commission is provided by virtue of the agreement dt. 11-02-2000 and another agreement placed to be 18-02-2000 (Both are similarly worded except that one deals as export sales and other deals with domestic sales). The terms of agreement are as under: 2. SALES COMMISSION: (a) VENTURE shall receive a sales commission payment from the COMPANY of 10% of sales of all Engineering Services sold by the COMPANY (other than to VENTURE or for COMPANY s contract which are listed on Exhibit a hereto) for sales to customers located outside of India. Engineering Services is defined as CAD-based, CAE-based and CAM-based product and tool design p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sales are not made to any affiliated company of Venture. Therefore, the commission is payable to Venture. Accordingly, the same is allowable u/s. 37(1) of the Act. In view of this, we direct the AO to allow the amount. The ground is considered allowed for statistical purposes. ITA No. 217/Hyd/2009: 14. This is a cross-appeal by Revenue against the order of the CIT(A)-III, Hyderabad dt. 10-12-2008. Revenue is aggrieved on two issues and raised four grounds i.e., Ground Nos. 2 to 5. 15. Ground No. 2 pertains to the direction of the CIT(A) to exclude the so called expenses incurred abroad both from export turnover as well as total turnover. It was the contention of the Revenue that no such adjustment has been provided for total turnover in Section 10A. 15.1. We have considered the submissions of the parties on the issue and perused the materials on record. This issue is squarely covered by the decision of the Hon ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] (Bom) and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. [313 ITR (AT) 353] wherein it has been held that communication charges etc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on us and we are inclined to follow the same. That apart, we are of the view that Kolkata Bench of the Tribunal has taken a right view of the provision. We are to go by the language of the provision and when we do so, we do not see anything in the language to restrict the application of the provision only to marginal cases where price disclosed by the taxpayer does not exceed 5% of the arithmetic mean. In our considered opinion, the Arm's Length Price determined on application of Most Appropriate Method is only an approximation and is not a scientitic evaluation. Therefore, the legislature thought it proper to allow marginal benefit to cases who opt for such benefit .. Hence, we are of the view that second limb is applicable even to cases where the taxpayer intends to challenge Arm's Length Price taken as arithmetic mean and determined through the Most Appropriate Method. As stated above, the second proviso is intended to give marginal relief to all taxpayers as determination of Arm's Length Price is not an exact science but is an approximation. ..Therefore, in line with the view taken by Kolkata Bench of the Tribunal, we are of the view that benefit of the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the impugned assessment year, the amount is to be paid as per the agreement on which there is no dispute. 21. For the reasons stated in AY. 2004-05, we agree with the contention of assessee that the TPO cannot disallow the amount paid to Venture as the agreement under which assessee is operating covers export and domestic sales, other than those made to Venture or Venture Group. Satyam is not the part of Venture Group. Therefore, there is no valid reason for disallowing on that ground. Moreover, the TPO has to consider the ALP only under one of the methods prescribed and as already discussed in earlier year, CUP method cannot be invoked as there are no uncontrolled comparable prices. In view of that, the methodology adopted by the AO/TPO in disallowing the amount or fixing the ALP at NIL itself is not correct. Moreover, the Hon ble Delhi High Court in the case of EKL Appliances (2012) [24 taxmann.com 199] has already held that TPO cannot disallow the amounts u/s. 37(1) invoking transfer pricing provisions. In view of this, we direct the AO to allow the amount as claimed. Ground No. 5 of assessee is accordingly allowed. 22. The next issue for consideration is the disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the DRP, Hyderabad dt. 24-09-2010, raising grounds 1 to 6 and also an additional ground on the issue of not excluding foreign currency which was considered as part of communication expenses. This additional ground being legal in nature, is allowed after due consideration. 26. Ground No.2 pertains to addition made under TP provisions of ₹ 4,12,493/- being difference of export of engineering services. This issue has come up for consideration in AY. 2004-05 in Revenue s appeal in ITA No.217/Hyd/2009 for the reasons stated therein, since the difference is within (+/-) 5% range as provided u/s. 92CA(2) proviso, there is no need to make the adjustment. AO is directed to determine the ALP after considering the above said proviso. Ground of assessee is considered allowed. 27. Ground No. 3 pertains to disallowance of commission paid on sales to Venture Global at ₹ 4.38 Crores. Instead of disallowance on the commission attributable to sales made to Satyam Group as in earlier years, the entire commission paid was disallowed without assigning any reasons. As seen from the order of TPO, he was mainly discussing about the disallowance made of similar nature in earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to exclude from the export turnover. There is no legal base for the AO/TPO to exclude the profits from the export turnover and so the computation made by the AO is not according to the provisions of law. As there is no legal base to exclude the amount from export turn over, we direct the TPO not to exclude the above amounts from either export turnover or total turnover, as the profit enhanced cannot become turnover. The ground is considered allowed. 30. The additional ground raised in this year is with reference to exclusion of foreign currency from the export turnover. For the reasons stated in Ground No. 4 above, we direct the AO/TPO to exclude the same amount from the total turnover as well. Additional ground is allowed. 31. In the result, appeal in ITA No. 354/Hyd/2011 is allowed. ITA No. 1905/Hyd/2011 (AY. 2007-08) 32. In this appeal, assessee filed revised grounds from 1 to 4. Out of which, Ground Nos. 1 and 4 are general in nature. 33. Ground No. 2 pertains to disallowance of commission paid to Venture Global at ₹ 6.42 Crores. Instead of disallowance of commission attributable to sales made to Satyam Group, the entire commission paid was disallowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention that AO excluded the branch expenses as part of communication charges which are not to be included. The branch expenses cannot be considered as communication expenses unless there is a finding that these are incurred for delivery of products or services as per the provisions and do fall within the definition. AO is directed to examine this issue after giving due opportunity to assessee.. As held by the Hon ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] (Bom) and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. [313 ITR (AT) 353], AO is directed to exclude what ever expenses including communication expenses so determined are excluded from export turn over, the same is also to be excluded from total turnover as well. This ground is allowed. 40. Similarly, Ground Nos. 6 7 pertains to exclusion of expenditure in foreign currency. The ground itself is that the same amount may be excluded from the total turnover as well. Following the principles on the subject as laid down by the Hon ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] (Bom) and also Special ..... X X X X Extracts X X X X X X X X Extracts X X X X
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