TMI Blog2017 (6) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... lea of the assessee is thus upheld. In any case, learned counsel for the assessee did not have much to say in support of the basic plea either inasmuch as no scientific basis, for quantification of provision, was furnished. Allowability of expenditure - prior period expenses - Held that:- There is an inherent fallacy in the stand of the Assessing Officer inasmuch as in the event of assessee’s being able to make a provision for these expenses in the preceding year, the amount would have been claimed as a deduction in the preceding year, and not in the current year, yet the Assessing Officer has declined the deduction on the ground that the provision was not made in the preceding year. In any case, as we have noted, while dealing with the earlier grounds of appeal, this is a peculiar case in which the accounts are finalized within 10 days of the annual closing, so as to facilitate consolidation of accounts by the US based parent company, leading to practical problems with respect to creation of adequate provisions on the basis of cogent material. We have also noted that the assessee had presented a copy of the ledger account to the AO which showed that the expenses were actually i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and accepted by the regulatory framework in India. In any case, even if one is to ignore this reality it for a minute, what is being used as a valid CUP input is an intra AE transaction, which a parent subsidiary transaction inherently is. Even in a case in which the royalty is being given to a rank outsider, by the virtue of 92A(2)(g), the entities paying and receiving royalties become AEs. It is only elementary that a transaction between the AEs can never be a valid CUP input.What the TPO has adopted to be an ALP is essentially on the basis of intra AE transactions but in the scheme of CUP analysis such an approach is not permissible. The approach adopted by the authorities below is thus wholly devoid of legally sustainable merits. There is no other justification for the impugned ALP adjustment. In any case, in the assessment year 2006-07, these royalty payments have been held to be arm’s length payments by the DRP and that matter rests there. In view of these discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee. The Assessing Officer is, accordingly, directed to delete the impugned ALP adjustment. Thus we uphold the plea of the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nother decision dated 22nd March 2010 for thee assessment year 2004-05. Learned Departmental Representative, nevertheless, relies upon the stand of the Assessing Officer, even as he has no submissions to make on as to why should the Tribunal not follow these binding judicial precedents. We have also noted that Hon ble jurisdictional High Court has declined to admit the appeal on this issue and the matter has thus attained finality. 6. In view of the above discussions and respectfully following the binding judicial precedents of the coordinate benches, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of ₹ 1,52,18,826. The assessee gets the relief accordingly. 7. Ground no. 2 is thus allowed. 8. In ground no. 3, the assessee has raised the following grievance: 3. (a) On the facts and circumstances of the case and in law, the Hon'ble DRP and the AO have erred in disallowing provision for expenses of ₹ 5,00,000/- The Appellant humbly prays that the said disallowance for provision for expenses of ₹ 5,00,000/- be deleted. (b) On the facts and circumstances of the case and in law and without prejud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent, as the related payment has indeed been made, in respect of the expenses of that year, in the subsequent year. We, therefore, deem it and proper to allow the provision to this extent. The alternate plea of the assessee is thus upheld. In any case, learned counsel for the assessee did not have much to say in support of the basic plea either inasmuch as no scientific basis, for quantification of provision, was furnished. 12. Ground no. 3 is thus partly allowed in the terms indicated above. 13. In ground no. 4, the assessee has raises the following grievance: 4. On the facts and circumstances of the case and in law, the Hon'ble DRP and the AO have erred in disallowing prior period expenses of ₹ 97,286/-. The Appellant humbly prays that the said disallowance or\ account of prior period expenses of ₹ 97,286/- be deleted. 14. So far as this grievance of the assessee is concerned, the relevant material facts are like this. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited prior period expenses, to the tune of ₹ 2,27,647, in its profit and loss account but disallowed ₹ 1,30,361 in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prays that the AO be directed to allow the claim of the Appellant of ₹ 1,66,067/- in respect of the carry forward of Long Term Capital Loss. 19. So far as this ground of appeal is concerned, it is sufficient to take note of the fact that, as noted by the Assessing Officer, the assessee had claimed exemption under section 10(38), in respect of the long term capital gain of ₹ 68,27,758, and that he did not set off the same against the long term capital loss brought forward to the extent of ₹ 11,66,067. The Assessing Officer was of the view that the assessee ought to have set off the capital gains against the capital loss brought forward, and since he did not do so, the Assessing Officer declined the carry forward of long term capital loss of ₹ 11,66,067. Aggrieved, assessee raised the grievance before the Dispute Resolution Panel but without any success. The assessee is not satisfied and is in further appeal before us. 20. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 21. We find that the issue is now covered, in favour of the assessee, by a deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of total income. Firstly income is categorized under various heads of income. This is laid down in s. 14 of the Act, which lays down that save as otherwise provided by this Act, all incomes shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income - Salaries, income from house property, profits and gains of business or profession, capital gains, income from other sources. Chapter V then brings income of other persons, which are to be included in the total income of an assessee and this is contained in ss. 60 to 65 of the Act. Chapter VI (containing ss. 66 to 80) then lays down provisions regarding aggregation of income and set off or carry forward of loss. Sec. 60 reads as under : Total income - in computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chapter VII. 5.2 The provisions of s. 66 are not applicable to incomes which are absolutely exempt from tax as per s. 10 and s. 11 etc., falling under Chapter III. This position is made clear by s. 66 itself as it speaks only of incomes on which tax is not payable and similar word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of determining the rate payable in respect of income-tax. Now, the short and conclusive answer to that contention is s. 16 of the Indian IT Act. It is that section which in terms includes in the total income of an assessee only certain sums which are exempted from the payment of tax. Therefore, by implication, where the sums are not included in the total income by s. 16, those sums are not only exempted from the payment of tax, but they are also excluded from the total income. Now, when we look at s. 16, it does not include the sum covered by s. 25(4) as a sum which is to be included in the total income of the assessee. The scheme, therefore, of the IT Act is clear and is very different from what Mr. Joshi suggests it is. The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose of computing the total income. Not only is the sum not liable to tax, but it is also not to form part of the total income for the purpose of determining the rate. When the legislature intends that certain sums, although not liable to tax, should be included in the total income, it expressly so provides, as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at under similar computation made as the long-term capital loss was arrived at and therefore the long-term capital loss has to be set off against long-term capital gain. In other words the case of the Revenue is that the long-term capital gain is income notwithstanding the fact that it is exempt under s. 10(38) of the Act. This reasoning in our view is fallacious. We have already pointed out that incomes which do not form part of the total income do not enter the computation of total income at all i.e., under any of the heads of income mentioned in s. 14 of the Act. Therefore, the question of aggregating them under Chapter VI at all does not arise. Therefore, the question of set off of the same under s. 70(3) of the Act also does not arise for consideration. Therefore, the right of carry forward under s. 74(1) of the Act in respect of the long-term capital loss suffered by the assessee is not hit by the provisions of s. 70(3) of the Act. 5.6 In Ramjilal Rais vs. CIT (supra) an identical stand was taken by the assessee. The facts in the aforesaid case were that the assessee HUF suffered loss in business during the broken period when the HUF business on partition passed hands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Raiji (1949) 17 ITR 180 (Bom), and we are in respectful agreement with that decision. 4. The assessee points out that before its amendment by the IT (Amendment) Act, 1939, the definition of total income was : Total income means total amount of income, profits and gains from all sources to which this Act applies computed in the manner laid down in s. 16. As a result of the Amendment Act of 1939, the present definition of total income is : Total amount of income, profits and gains referred to in sub-s. (1) of s. 4 computed in the manner laid down in this Act. 5. It is contended that the amendment extended the scope of the definition of total income so that it covered not only the sums specifically referred to in s. 16, but also those sums mentioned under other provisions of the Act in respect of which it was declared that no tax was payable. It appears to us that the contention is stated rather widely. It is not every sum declared by the Act to be exempt which is liable to be included in the total income. It is only those sums which the Act specifically requires to be so included. To our mind, the amendment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Act, so as to provide exemption from long-term capital gains arising out of securities sold on the stock exchange. Thus, s. 10(38) has been inserted with a particular object to grant exemption to such income as tax has already been levied on some different footings. If we accept the contention of the Revenue to adjust long-term capital loss against exempt income (long-term capital gain) that will be contrary to law and contrary to the intention, object and purpose of the legislature in introducing cl. (38) to s. 10 of the Act. Further, on acceptance of Revenue s view on the issue, there is absurd outcome of interpretation if the facts are reversed, then, long-term capital loss from taxable assets will have to be adjusted against the long-term capital gains exempt under s. 10(38) of the Act. Suppose in the case on hand, if there is taxable long-term capital gain before 1st Oct., 2004 of ₹ 33,01,57,200 and long-term capital loss of ₹ 9,23,55,945, which may be exempt under s. 10(38) after 1st Oct., 2004, then the loss from exempt source would be set off against taxable gain; such set off is contrary to law. 5.8 In the light of the above discussion, we are not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned a margin of 194.43% margin on sales to the non-AEs. It was mainly in this backdrop that the TPO required the assessee to show cause as to why the margin of 194.43% not be adopted for the CPM. It was explained by the assessee that it had dealt in about 2,500 types of products, whereas the transactions with AEs were only in resptect of 165 types of products, out of which comparables, or near comparables, were available in respect of only 31 products. Therefore, according to the assessee, this approach to the determination was bound to be a failure. The assessee further explained that so far as the market in the case of transactions with AEs is concerned vis- -vis the market in respect of transactions with AEs, there is a sea change in the ground realities. The products supplied to the AEs are used as raw materials whereas the products sold to non AEs are used for repairs and replacements in products supplied by the assessee. The assessee further submitted that as a corroborative measure, the benchmarking is also done on the basis of TNMM which shows the mean margin at 4.99% and the highest comparable margin at 10.58%, as against the assessee s margin of 30.29%. None of these sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplied him the furnace or other equipment is not the same thing as sale to the manufacturer or dealer a particular type of product, which uses the material so sold as input raw material etc. The distinction between these markets is so fundamental that the comparison is meaningless. In any case, while sale to AEs is in USA, UK, Australia, China, Brazil, Turkey and Korea etc, the sale to non-AEs, i.e. independent enterprises, is mostly in India. The sale to non- AEs under nearly monopolistic environment, whereas sale to AEs is under competitive environment. All these differences render the comparison of products sold to AEs and non-AEs irrelevant. While on this issue, we may also usefully refer to the observations made by a coordinate bench, in the case of Wrigley India Pvt Ltd Vs ACIT [(2015) 114 DTR 1 (Del)] , as follows: 13. The question that we must decide at the threshold is as to which is the most appropriate method of determining arm s length price on the facts of this case. On this aspect of the matter, the dispute is confined to even narrower a question, i.e. whether or not CPM is the most appropriate method on the facts of this case, because neither revenue auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red must be sufficiently comparable. It is only elementary, as is also noted in the OECD Transfer Pricing Guidelines, that to be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences . .. 20. In OECD Transfer Pricing Guidelines, this aspect of the matter, so far as comparability analysis is concerned, has been explained thus: 1.47 The functions carried out (taking into account the assets used and the risks assumed) will determine to some extent the allocation of risks between the parties, and therefore the conditions each party would expect in arm s length transactions. For example, when a distributor takes on responsibility for marketing and advertising by risking its own resources in these activities, its expected return from the activity would usually be commensurately higher and the conditions of the transaction would be different from when the distributor acts merely as an agent, being reimbursed for its co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the functional analysis ; * Contractual terms; * Economic circumstances; and * Business strategies pursued. [Emphasis, by underlining, supplied by us] 22. On the facts of the present case, however, the comparability analysis has been confined to the first segment itself, i.e. characteristic of the property transferred. Undoubtedly, the product comparability is an important factor but its certainly not the sole or decisive factor. The assessee was producing the same products for its AEs as it was producing for independent enterprises but that was all so far as similarities were concerned. The FAR profile was not the same, the contract terms were not the same, the economic circumstances were not the same and the business strategies were not the same. Viewed thus, necessary precondition for application of CPM, i.e. finding normal mark up of profit in comparable uncontrolled transactions, could not have been fulfilled. When uncontrolled transactions were not comparable, the normal mark up on profit on such transactions could not have been relevant either. 23. In view of the above discussions, in our considered view, the aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now take up ITA No. 2609/Ahd/2012, i.e. the appeal filed by the assessee for the assessment year 2008-09. 33. In the first ground of appeal, the assessee has raised the following grievance: On the facts and circumstances of the case, the learned Joint Commissioner of Income-tax, Range-4, Ahmedabad ('the Assessing Officer ), erred in disallowing provision towards warranty expenses amounting to ₹ 76,66,825. 34. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by a coordinate bench decision dated 22nd January 2010 in assesseee s own cases for the assessment years 2000-01, 2001-02, 2002-03, and another decision dated 22nd March 2010 for thee assessment year 2004-05. Learned Departmental Representative, nevertheless, relies upon the stand of the Assessing Officer, even as he has no submissions to make on as to why should the Tribunal not follow these binding judicial precedents. We have also noted that Hon ble jurisdictional High Court has declined to admit the appeal on this issue and the matter has thus attained finality. 35. In view of the above discussions and respectfully following the binding judicial precedents of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts works out to 2.86% and royalty for domestic sales works out to 3.0029%. The TPO, however, rejected the stand so taken by the assessee. He was of the view that aggregation of all the transactions of an assessee is warranted only in such a situation when these transactions cannot be segregated. That s not the case here. The TPO was also of the view that computation of effective rate of royalty by the assessee is meaningless as the assessee has only reduced the cost of imported equipment whereas all the deductions mandated in the formulae prescribed by the Government of India should have been taken into account . It was so for the reason, as noted by the TPO, that since the payment of royalty is for the usage of . Intangibles, the calculation for payment of royalty should be such that it should take into account the usage of intangible assets provided by the entity receiving the royalty and that it should not take into account the revenue earned by the entity received by the royalty on account of its own efforts . In other words, according to the TPO, there was no conceptual justification for adjusting the cost of imports from value of exports for computing effective rate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the RBI for payment of royalty can be accepted as an arm s length price may possibly have different approaches to this issue, there can be no dispute that there is a difference in approach to the rates of royalties in respect of domestic sales and exports. This commercial reality is duly recognized and accepted by the regulatory framework in India. In any case, even if one is to ignore this reality it for a minute, what is being used as a valid CUP input is an intra AE transaction, which a parent subsidiary transaction inherently is. Even in a case in which the royalty is being given to a rank outsider, by the virtue of 92A(2)(g), the entities paying and receiving royalties become AEs. It is only elementary that a transaction between the AEs can never be a valid CUP input. If needed, authority for this proposition is contained in ACIT Vs MSS India Ltd [(2009) 25 DTR 1 (Pune)], ACIT Vs Technimont ICB India Pvt Ltd [(2012) 75 DTR 259 (Mum)] and Sabic Innovative Plastics India Ltd Vs DCIT [(2013) 90 DTR 203 (Ahd)]. What the TPO has adopted to be an ALP is essentially on the basis of intra AE transactions but in the scheme of CUP analysis such an approach is not permissible. The appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g an adjustment of ₹ 1,56,04,699 in relation to the international transaction of payment of Royalty to the associated enterprise ('AE'). 54. Learned representatives fairly agree that whatever we decide for the assessment year 2008-09 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of ALP adjustment on royalty payment. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of ₹ 1,56,04,699 also stands deleted. 55. Ground no. 1 is thus allowed. 56. In ground no. 2, the assessee has raised the following grievance: On the facts and in the circumstances of the case and in law, the Ld AO under the directions of DRP erred in making an adjustment of ₹ 1,81,03,806 in relation to the international transaction of sales made to AE, 57. Learned representatives fairly agree that whatever we decide for the assessment year 2006-07 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the international transaction of sale of goods to the AEs. 69. Learned representatives fairly agree that whatever we decide for the assessment year 2006-07 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of sale of products to the AEs. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of ₹ 11,59,728 also stands deleted. 70. Ground no. 2 is thus allowed 71. In ground no. 3, the assessee has raised the following grievance: On the facts and circumstances of the case, the AO erred in not allowing the benefit of +5% range as per Section 92C(2) of the Act, in respect of the aforesaid adjustments made under Transfer Pricing. 72. As we have upheld the basic plea, regarding ALP adjustment in respect of sale of goods to AEs, this plea is rendered infructuous and academic. 73. Ground no. 3 is thus dismissed. 74. Ground no. 4 is not pressed as it pertains to a small disallowance of ₹ 3,630. It is accordingly dismisse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asic plea, regarding ALP adjustment in respect of sale of goods to AEs, this plea is rendered infructuous and academic. 85. Ground no. 3 is thus dismissed. 86. Ground no. 4 is not pressed as it pertains to a small disallowance of ₹ 4,210 It is accordingly dismissed as not pressed. 87. In ground no. 5, the assessee has raised the following grievance: On the facts and circumstances of the case and in law, the learned AO erred in disallowing the commission expenses paid to non residents amounting to ₹ 20,04,492 88. So far as this disallowance is concerned, it is sufficient to take note of the fact that the assessee had paid commission, amounting to ₹ 20,04,492, to nonresidents and in respect of services rendered abroad, primarily on the ground that income accrues or arises in India. Reliance was placed on decisions of Authority for Advance Ruling, in the cases of Rajiv Malhotra [(2006) 284 ITR 564 (AAR)] and SKF Boilers and Driers Pvt Ltd [(2012) 343 ITR 385 (AAR)]. It was thus held that the assessee ought to have deducted tax at source from these commission payments, and that his failure to do so would attract disallowance under section 40(a)(i). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices payable by- (a)** ** ** (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c)** ** ** Explanation 1- .* Explanation 2.- For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries .' * Not relevant for our purposes 32. So far as deeming fiction under section 9(1)(i) is concerned, it cannot be invoked in the present case since no part of the operations of the recipient's business, as commission agent, was carried out in India. Even though deeming fiction under section 9(1)(i) is triggered on the facts of this cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire commission income from outside the ambit of deeming fiction under section 9(1)(i), and, in effect, outside the ambit of income 'deemed to accrue or arise in India' for the purpose of Section 5(2)(b). The point of time when commission agent's right to receive the commission fructifies is irrelevant to decide the scope of Explanation 1 to Section 9(1 )(i), which is what is material in the context of the situation that we are in seisin of. The revenue's case before us hinges on the applicability of Section 9(1)(i) and, it is, therefore. important to ascertain as to what extent would the rigour of Section 9(1)(i) be relaxed by Explanation 1 to Section 9(1)(i). When we examine things from this perspective, the inevitable conclusion is that since no part of the operations of the business of the commission agent is carried out in India, no part of the income of the commission agent can be brought to tax in India. In this view of the matter, views expressed by the Hon'ble AAR, which do not fetter our independent opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by the agents. The event triggering crystallization of liability of the assessee, under the commission agency agreement, is the event of securing orders and not the rendition of alleged technical services. In a situation in which the agent does not render any of the services but secures the business anyway, the agent is entitled to his commission which is computed in terms of a percentage of the value of the order. In a reverse situation, in which an agent renders all the alleged technical services but does not secure any order for the principal i.e. the assessee, the agent is not entitled to any commission. Clearly, therefore, the event triggering the earnings by the agent is securing the business and not rendition of any services. In this view of the matter, in our considered view, the amounts paid by the assessee to its non-resident agents, even in the event of holding that the agents did indeed render technical services, cannot be said to be consideration for rendering of any managerial, technical or consultancy services (Emphasis by underlining supplied by us) . The services rendered by the agents, even if these services are held to be in the nature of technical serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of whether any technical services are rendered during the course of carrying on such agency commission business on behalf of Indian principal, the consideration for securing business cannot be taxed under section 9(1)(vii) at all. This profits of such a business can have taxability in India only to the extent such profits relate to the business operations in India, but then, as are the admitted facts of this case, no part of operations of business were carried out in India. The commission agents employed by the assessee, therefore, did not have any tax liability in India in respect of the commission agency business so carried out. 91. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. As the recipient of the commission did not have any tax liability in respect of income embedded in such payments and as liability under section 195 can come into play only when the recipient has a tax liability in respect of income embedded in the related payments, the assessee cannot be faulted for not having deducted tax at source, and, disallowance under section 40(a)(i) does not, therefore, come into play. Respectfully following the views so ..... X X X X Extracts X X X X X X X X Extracts X X X X
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