TMI Blog2018 (8) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidy - taxable revenue receipt OR capital receipt - Held that:- As following the order of the Tribunal in assessee’s own case for assessment year 2002-03 has decided the issue against the assessee by observing that the facts concerning this ground are that the assessee treated sales tax subsidy as capital receipt, which was held by the AO to be chargeable to tax in the nature of revenue receipt. It is noticed that this issue came up for consideration before the Tribunal in earlier years. For the first time, the tribunal decided it against the assessee for the assessment year 2002-03 and such view has been followed for the subsequent years. In view of the consistent view taken by the Tribunal in deciding sales tax subsidy as revenue receipt, we do not find any reason to interfere with the impugned order on this issue. Disallowing the provision for service warranty - Held that:- We find the Tribunal following the order of the Tribunal in assessee’s own case for assessment years 2002-03, 2003-04 and 2004-05 has decided the issue in favour of the assessee Disallowing royalty paid to LG Electronics Inc. Korea holding the same to be capital expenditure - Held that:- Respectfull ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Department : Shri H. K. Choudhary, CIT-DR ORDER PER R. K. PANDA, AM : The above two appeals filed by the assessee are directed against the common order dated 31.03.2017 of the CIT(A)- I, Noida, Uttar Pradesh relating to assessment years 2005-06 2006-07 respectively. Since common grounds are involved in both the appeals, therefore, these were heard together and are being disposed of by this common order for the sake of convenience. ITA No.3612/Del/2017 (A.Y. 2005-06) : 2. Facts of the case, in brief, are that the assessee is a private limited company engaged in trading, manufacturing, marketing and sale of electronics, home appliances, IT products, supply and installation of WLL systems, terminals and GSM Mobile handsets and maintenance, repair and servicing of CDMA networks, CDMA/GSM terminals and mobile handsets. It filed its return of income on 29.10.2005 declaring total income of ₹ 1,52,98,08,547/-. Subsequently, the assessee filed a revised return declaring total income of ₹ 1,02,78,01,120/- after claiming the receipt of ₹ 57,71,79,709/- from sales tax department as capital receipts. Since the assessee has undertaken cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of ₹ 11,13,06,73,826/-, the assessee furnished relevant certificate prescribed under the second proviso to section 40(a)(ia) read with proviso to section 201(1) of the I.T. Act substantiating that the payees to the extent of ₹ 871,52,97,960/- have discharged their tax liability. He, therefore, made the disallowance of the balance amount of ₹ 241,53,75,866/- since the assessee was unable to furnish necessary details/certificates demonstrating that the payees had paid tax on the said payments. 8. Aggrieved with such order of the ld. CIT(A), the assessee is in appeal before the Tribunal. 9. Ld. counsel for the assessee strongly objected to the order of the ld. CIT(A) in disallowing the payment of ₹ 241,53,75,866/- by enhancing the assessment. Ld. counsel for the assessee at the outset submitted that the powers of enhancement available with the ld. CIT(A) do not extend to discovering new sources of income. Referring to the decisions of the Hon ble Supreme Court in the case of CIT vs. Shapoorji Pallonji Mistry reported in 44 ITR 891 and in the case of CIT vs. Rai Bahadur Hardutroy Motilal Chamaria reported in 66 ITR 443, he submitted that the Hon ble Ape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufactured according to specifications of the buyer is not relevant in determining whether the contract is a contract of sale or works contract. What is relevant to determine is passing of property/title in the goods from the vendor to the buyer. He submitted that identical issue was raised by the Assessing Officer (TDS) for assessment year 2001-02 and 2002-03 wherein after detailed analysis, the tax demand was deleted by all the appellate forums including the Hon'ble Supreme Court in the case reported as CIT vs. Silver Oak Laboratories P. Ltd. vide SLP No.18012/2009 wherein the assessee was also a respondent. He submitted that the decision of the Hon'ble Supreme Court squarely applies to the year under consideration insofar as agreements entered into by the assessee with third party manufactures during the year under consideration are same as agreements in earlier years which have been held to be contract for sale by the Apex Court and, therefore, the question of applicability of section 194C on payments for purchase of finished goods does not arise. He also relied on the following decisions :- (i) BDA Ltd. vs. ITO, 281 ITR 89 (Bom.). (ii) CIT vs. Dabur India Ltd., 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ascertained goods, therefore, the contract is thus one of sale and not a contract for carrying out work. He accordingly submitted that the provisions of section 194C are not applicable to the facts of the present case and, therefore, disallowance made u/s 40(a)(ia) is liable to be deleted. 12. In his yet another alternate arguments, he submitted that there was a bona-fide belief on the part of the assessee for non-deduction of tax at source from such payments since in the prior years and subsequent years, no such addition/disallowance was made. Referring to the decision of Hon ble Bombay High Court in the case CIT vs. Kotak Securities Ltd. reported in 245 CTR 3, he submitted that the Hon'ble High Court in the said decision has held that where both Revenue and assessee were under bona-fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault could be found with the assessee in not deducting tax at source in assessment year in question and consequently disallowance made by the Assessing Officer u/s 40(a)(ia) in respect of transaction charges could not be sustained. Therefore, the ld. CIT(A) is not justified in making the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r other related entities did not have any Permanent Establishment (PE) in India within the meaning of Article 5 of Treaty. He submitted that having PE of a foreign company in India does not make such company a resident in India within the meaning of section 6 of the Act. He submitted that the provisions of section 6 are plain and unambiguous and there is no stipulation for a foreign company to be considered as resident in India, if such foreign company has PE in India. He submitted that the provisions of section 40(a)(ia) r.w.s. 194C are applicable only in relation to sum payable to a resident and not to a non-resident. Therefore, the provisions of section 40(a)(ia) cannot be invoked for disallowance of payment made to such entities for failing to deduct tax at source u/s 194C of the I.T. Act. The Revenue has not demonstrated that the employees of the assessee are actually the employees and nominees of the said overseas entities and are working under the direct control and supervision of the overseas entities. Relying on various decisions, he submitted that no disallowance u/s 40(a)(ia) is called for. 15. The ld. DR on the other hand heavily relied on the order of the ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by both the sides and perused the orders of the Assessing Officer and the ld. CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. It is an admitted fact that the Assessing Officer in the body of the assessment order has not discussed anything about the applicability of the provisions of section 40(a)(ia) on account of non-deduction of tax from payments made on account of procurement of material from third party vendors. We find the ld. CIT(A) during the appellate proceedings before him has issued the enhancement notice for such disallowance. It is the submission of the ld. counsel for the assessee that that powers of enhancement available with the ld. CIT(A) do not extend to discovery of new sources of income. As per the provisions of section 251(1) in disposing of appeal, the ld. CIT(A) in an appeal against the order of assessment may confirm/reduce/enhance or annul the assessment. The Hon ble Delhi High Court in the case of CIT vs. Sardari Lal and Co. (supra) has held as under :- Looking from the aforesaid angles, the inevitable conclusion is that whenever the question of taxability of income from a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income tax that the word assessment here means the ultimate amount which an assessee must pay, regard being had to the charging section and his total income. In this view, it is said that the words enhance the assessment are not confined to the assessment reached through a particular process but the amount which ought to have been computed if the true total income had been found. There is no doubt that this view is also possible. On the other hand, it must not be overlooked that there are other provisions like sections 34 and 33B, which enable escaped income from new sources to be brought to tax after following a special procedure. The assessee contends that the powers of the Appellate Assistant Commissioner extend to matters considered by the Income tax Officer, and if a new source is to be considered, then the power of remand should be exercised. By the exercise of the power to assess fresh sources of income, the assessee is deprived of a finding by two tribunals and one right of appeal. 9. The question is whether we should accept the interpretation suggested by the Commissioner in preference to the one, which has held the field for near ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver the question of taxability of income from a new source of income is concerned, which had not been considered by the Assessing Officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 of the Act and section 263 of the Act, if requisite conditions are fulfilled. It is inconceivable that in the presence of such specific provisions, a similar power is available to the first appellate authority . Thus, in view of the well settled law laid down by the Hon ble Apex Court and subsequently followed by the Hon ble Delhi High Court we hold that the Commissioner of Income Tax (Appeals) has exceeded his jurisdiction in making addition u/s. 2(22)(e) of the Act as there is no reference of such income either in the return of income or in the assessment proceedings. Thus, the addition made u/s. 2(22)(e) by Commissioner of Income Tax (Appeals) is not sustainable and is therefore set aside being void ab-initio. Since, the addition made by the Commissioner of Income Tax (Appeals) u/s. 2(22)(e) of the Act has been held to be void ab-initio, the arguments raised by the ld. AR of the assessee on merits have become academic and are thus, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nged the order of the ld. CIT(A) in upholding the action of the Assessing Officer in disallowing the provision for service warranty of ₹ 10,05,19,000/-. 22. After hearing both the sides, we find identical issue had come up before the Tribunal in assessee s own case for assessment year 2007-08. We find the Tribunal following the order of the Tribunal in assessee s own case for assessment years 2002-03, 2003-04 and 2004-05 has decided the issue in favour of the assessee. Respectfully following the precedent, the ground raised by the assessee on this issue is allowed. 23. In ground no.5, the assessee has challenged the order of the ld. CIT(A) in upholding the action of the Assessing Officer in disallowing royalty amounting to ₹ 88,38,75,000/- paid to LG Electronics Inc. Korea holding the same to be capital expenditure. 24. The facts of the case, in brief, are that the assessee during the year made payment on royalty to his holding company M/s LG Electronics, Korea (LGEK) for the right to use technical knowledge, know-how, process, specifications, lay outs, designs, drawings and quality standard, standard calculation, etc.. Rejecting the various explanations given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entiality stipulates that: The Licensee shall keep secret and confidential, and shall not directly or indirectly disclose, divulge or reveal either during continuance of this agreement or at any time thereafter, the classified information disclosed, communicated or given or granted or otherwise acquired by the Licensee . . Para 11.3 stipulates that: Upon the termination, all the respective rights and obligation of the parties hereunder, except for obligations having accrued to the date and those of a continuing nature such as confidentiality, shall cease. . On an overview of the various clauses of the Agreement, it transpires that the Agreement is for allowing the use of the Technical Information and IPRS for the manufacture of specified products. Such rights have been given exclusively to the assessee. This agreement simply allows the use of Technical Information and IPRS without granting any ownership rights in it to the assessee. Further the grant of license to the assessee is non-transferable with no right of sub-licensing. Apart from that, there is a confidentiality clause which prohibits the assessee from disclosing the information received pursuant to this Agreement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le even prior to the period specified therein. The payment so made was held to be of revenue nature. In CIT Vs Wavin (India) Ltd. (1996) 236 ITR 314 (SC), payment made by that assessee was under nonexclusive and non-transferable agreement for the use of technical information, which was held by the Hon ble Supreme Court as a revenue expenditure. 16.3. In contrast to above decisions holding payment of royalty as a revenue expenditure, there is a line of judgments holding the payment of royalty as a capital expenditure. In Jonas Woodhead Sons Ltd. Vs CIT (1997) 224 ITR 342 (SC), the assessee set up a new business and the foreign firm, in addition to supplying technical knowhow, also rendered valuable services in setting up the factory itself and the assessee was allowed to manufacture the products even after the expiry of the agreement. The Hon ble Supreme Court held that 25% of the royalty was a capital expenditure. In Southern Switchgear Ltd. VS. CIT and Anr. (1998) 232 ITR 359 (SC), the foreign company provided technical knowhow and other services to the assessee company. The technical assistance also contemplated establishment of a factory. On the expiry of agreement after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition of asset as an owner and not as a mere user, which augments the fixed capital base, the payment is a capital expenditure. 16.5. Armed with the above legal position, we need to ascertain if the assessee acquired use as well as ownership of technical know-how etc. or was allowed a simple use devoid of ownership. In order to decide this issue, all the attending facts and circumstances of the case need to be viewed. Some of the factors of relevance in deciding the overall question as to whether the payment is capital or revenue can be, the exclusive or nonexclusive use; fixed or perpetual tenure of the agreement for transfer of the technical knowhow; the availability or otherwise of technical knowhow after the termination of the agreement; pursuant to the surrendering of such technical know-how on the termination of the agreement, the existence or otherwise of right to use technical knowledge which the licensee may have imbibed during the currency of the agreement; the existence or otherwise of confidentiality clause in the agreement debarring the licensee from sharing it with others during the continuance of the agreement or thereafter. In fact, there can be no single con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tfully following the decision of the Tribunal in assessee s own case for assessment year 2007-08, we hold that the total royalty payment as reduced by the transfer pricing adjustment on this score be treated as revenue expenditure. The ground raised by the assessee on this issue is accordingly allowed. 27. In ground no.6, the assessee has challenged the order of the ld. CIT(A) in upholding the action of the Assessing Officer in disallowing the export commission of ₹ 3,23,54,000/- paid to LG Electronics Inc. Korea holding the same as not genuine business expenditure. 28. The ld. counsel for the assessee at the outset fairly conceded that this issue has been decided against the assessee by the order of the Tribunal in assessee s own case. Therefore, the ground raised by the assessee on this issue is dismissed. 29. In ground no.7, the assessee has challenged the order of the ld. CIT(A) in upholding the action of the Assessing Officer in disallowing the claim of bad debts of ₹ 2,13,72,159/-. 30. Facts of the case, in brief, are that the assessee claimed expenditure of ₹ 2,13,72,159/- on account of bad debts written off. The Assessing Officer disallowed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical know-how @ 5%. The assessee benchmarked the aforesaid transaction by applying the Comparable Uncontrolled Price (CUP) Method and selected certain comparables for the purpose of benchmarking analysis. However, the TPO/DRP rejected the same and determined the arm's length royalty rate at 4.50%. 38. The TPO, in the remand report, proposed the transfer pricing adjustment on account of payment of royalty amounting to ₹ 26,51,62,726/-. 39. However, the CIT(A), in the impugned order, following the order of AY 2007-08 restricted the arm's length royalty rate to 4.05% and accordingly made an adjustment of ₹ 25,19,045/- being the excess amount paid by the assessee as royalty. 40. After hearing both the sides, we do not find any infirmity in the order of the ld. CIT(A) who has decided the issue by following the order of the Tribunal in assessee s own case for assessment year 2007-08. In absence of any contrary material brought to our notice against the order of the Tribunal, the order of the ld. CIT(A) on this issue is upheld and the ground raised by the assessee is dismissed. 41. In ground no.13 to 13.3, the assessee has challenged the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y expenditure incurred by the appellant company for the benefit of its parent company and because of the complete control of the affairs of the appellant by its parent company so much so that the officers of the appellant company are invariably the employees of the parent company of the appellant and have been deputed, deployed and assigned to run and control the appellant for the benefit of the parent company of the appellant; it is held that instead of a factor of 1.39%, the 50% of the expenditure incurred by the appellant on advertisement, marketing and promotion expenses is in respect of benefits accruing to the parent company of the appellant and therefore not necessary for the exigencies of the business of the appellant. 33. In view of the above the 50% of the expenditure claimed by the appellant for advertisement, marketing and promotional expenses is disallowed and added to the income of the appellant. 46. The ld. counsel for the assessee submitted that the CIT(A) has confirmed/enhanced the adjustment on account of AMP expenses merely on the basis of assumption that 50% of the benefits arising from the AMP expenses ITA No.3612/Del/2017 ITA No.3613/Del/2017 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2007-08. The Tribunal vide ITA No.5140/Del/2011 order dated 08.12.2014 has decided the issue and restored the same to the file of the Assessing Officer/TPO for deciding the issue afresh in accordance with Special Bench verdict. The relevant observation of the Tribunal at para 4 reads as under :- 4. Ground No.3 is against making of addition towards transfer pricing adjustment amounting to ₹ 1,82,71,11,446/- in relation to the advertisement, marketing and sales promotion (AMP) expenses. Here, it is pertinent to mention that a Special Bench was constituted on this issue in this very appeal. An order dated 23.1.2013 has since been passed by the Special Bench as LG Electronics Pvt. Ltd. Vs ACIT (2013) 140 ITD 41 (Del) (SB). Two questions were referred to the Special Bench. The first question has been answered by holding that the transfer pricing adjustment in relation to the AMP expenses incurred by the assessee for creating or improving the marketing intangibles for and on behalf of its foreign associated enterprises, is permissible. The second question as to whether the assessee should have earned a mark-up from its AE in respect of such AMP expenses incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ground no.17 relating to penalty proceedings u/s 271(1)(c) being premature at this juncture is dismissed. ITA No.3613/Del/2017 (A.Y. 2006-07) : 57. Ground no.1 being general in nature is dismissed. 58. In ground no.2 to 2.11, the assessee has challenged the order of the ld. CIT(A) in making disallowance of ₹ 210,22,81,553/- u/s 40(a)(ia) by enhancing income u/s 251(1)(a) of the I.T. Act. 59. After hearing both the sides, we find these grounds are identical to grounds no.2 to 2.11 in ITA No.3612/Del/2017. We have already decided the issue and the grounds raised by the assessee have been allowed. Following similar reasoning, the above grounds by the assessee are allowed. 60. Ground no.3 by the assessee relates to sales-tax subsidy of ₹ 59,17,48,717/- as taxable revenue receipt as against capital receipt treated by the assessee. 61. After hearing both the sides, we find this ground is identical to ground no.3 in ITA No.3612/Del/2017. We have already decided the issue and the ground has been dismissed. Following similar reasoning this ground by the assessee is dismissed. 62. Ground no.4 relates to disallowance of provision for service warranty am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.3612/Del/2017. We have already decided the issue in preceding paragraph and the grounds raised by the assessee has been dismissed. Following similar reasoning, these grounds raised by the assessee are dismissed. 75. In ground no.12 to 12.5, the assessee has challenged the order of the ld. CIT(A) in making transfer pricing adjustment amounting to ₹ 157,84,56,692/- in relation to AMP expenses. 76. After hearing both the sides, we find the above grounds are identical to ground no.14 to 14.5 in ITA No.3612/Del/2017. We have already decided the issue and the matter has been restored to the file of the Assessing Officer with certain directions. Following similar reasoning, these grounds raised by the assessee are allowed for statistical purposes. 77. In ground no.13, the assessee has challenged the order of the ld. CIT(A) in confirming the disallowance of ₹ 77,24,028/- in respect of sponsorship payment made to GCC. Since the issue was not adjudicated by ld. CIT(A), therefore, following our observation in ground no.15 in ITA No.3612/Del/2017, we restore this issue to the file of the ld. CIT(A) with a direction to decide the issue after giving due opportunity of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
