TMI Blog2017 (5) TMI 1678X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. Disallowance of prior period expenses - HELD THAT:- 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 incurred in October 2005. The incurring of expenses, or its bonafides, are thus not really in doubt. In these circumstances, in our considered view, the disallowance was not really called for. We, therefore, direct the AO to delete this disallowance. Denial of carry forward of Long Term Capital Loss and setting it off against exempt Long Term Capital Gains - assessee had claimed exemption under section 10(38), in respect of the long term capital gain - HELD THAT:- We find that the issue is now covered, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating to payment of Royalty - HELD THAT:- 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. The assessee gets the relief accordingly Adjustment in relation to the international transaction relating to sales made to Associated Enterprises - HELD THAT:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05. The Appellant humbly prays that the said disallowance on account of provision for warranty expenses of ₹ 1,52,18,826/- be deleted. 5. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by a coordinate bench decision dated 22nd January 2010 in assessee 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. 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that its beyond their powers to take a call on an issue arising in the subsequent assessment year. The assessee is not satisfied and is in appeal before us. 10. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 11. We find that so far as the amount of ₹ 92,444 is concerned, there cannot be any dispute about the genuineness of the provision to this extent, 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 disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, direct the Assessing Officer to delete this disallowance of ₹ 97,286. 17. Ground no. 4 is thus allowed. 18. In ground no. 5, the assessee has raised the following grievance: 5. On the facts and circumstances of the case and in law, the Hon ble DRP and the AO have erred in ignoring the material placed before them and in denying the claim of the Appellant in respect of the carry forward of Long Term Capital Loss of ₹ 11,66,067/- and setting it off against exempt Long Term Capital Gains. The Appellant humbly 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 capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in respect of the total income of the previous year of every person. The charge of tax is thus on total income. Sec. 2(45) defines total income to mean total amount of income referred to in s. 5, computed in the manner laid down in this Act. Chapter II of the Act, from ss. 4 to 9 deals with basis of charge. Chapter III of the Act deals with incomes which do not form part of total income and are contained in ss. 10 to 13B of the Act. Chapter IV deals with the computation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisos which cover sums not liable to tax. Similar is s. 8. Sec. 14 also contains exemptions with regard to certain sums on which no tax is payable, and s. 15 contains exemptions in cases of life insurance. It will be noticed that the language used in all these sections, to which I have referred is similar, if not identical, with the language used in s. 25(4), viz., that the tax is not payable on these different sums. Now, if Mr. Joshi s contention was sound, then with regard to these various exemptions which I have enumerated, although tax is not payable, they should all be included in the total income for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from another source under the same head of income. ......(3) Where the result of the computation made for any assessment year under ss. 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset. 5.5 The case of the Revenue is that the long-term capital gain which was exempt under s. 10(38) of the Act, is income arrived 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. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em within its scope for a certain purpose. One such provision is s. 16(1)(a) which declares that in computing the total income of an assessee any sums exempted under some of the provisions mentioned above shall be included. These sums are included in the total income for the purpose of determining the true rate applicable to the rate applicable to the taxable income of the assessee. The sum exempted under s. 25(4) is not referred to in s. 16(1) and is not liable to be included in the total income of the assessee. It is exempt altogether from the operation of the Act. The Bombay High Court took this view in CIT vs. N.M. 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities, however, the gains are taxed as any other normal business income. With a view to simplify the tax regime on securities transactions, it was proposed to levy a tax @ 0.15 per cent on the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax was to be collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The above provisions relating to the proposed tax were contained in Chapter VII of the Finance (No. 2) Bill, 2004, and took effect from 1st Oct., 2004. Further, it was proposed to insert cl. (38) in s. 10 of the IT 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 Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iary of Inductotherm Industries Inc USA. During the relevant previous year, the assessee exported finished goods worth ₹ 12.40 crores, which consisted of 165 types of products, to its associated enterprises (AEs). The method adopted for determining the arm s length price (ALP) of these exports was CPM (Cost Plus Method). During the course of scrutiny proceedings before the Transfer Pricing Officer, however, it was observed that out of these 165 types of products, the assessee had sold 31 types of products to the non-AEs (i.e. independent enterprises) as well on a much higher profit margins. The TPO noted that as against a margin of ₹ 47.06% on exports to the AEs, the assessee has earned 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r repairs and replacements in the heat induction systems and related products. A sale to dealer of the same product, much less to a manufacturer of related end product, inherently cannot be equated with the sale to the end consumer. Under rule 10B(2)(d),the comparability of an international transaction with an uncontrolled transaction is to be judged with reference to, inter alia, conditions prevailing in the market in which the respective parties to the transactions operate, including the geographical location and size of the markets and level of competition and whether the markets are wholesale or retail . The case of sale to the end consumer which has to essentially buy the product from the same vendor who 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 nonAEs under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f profit over aggregate of such direct costs and indirect costs in respect of same or similar property or services in a comparable uncontrolled transaction or, of course, a number of such comparable uncontrolled transactions . When compared with CUP method, as against the price of a comparable uncontrolled transaction, one has to find out normal mark up of profit in a comparable uncontrolled transaction. Whether it is price or normal mark up of profit , the starting point of both these exercises in the CUP and the CPM is finding a comparable uncontrolled transaction . In order for such comparisons to be useful, the economically relevant characteristics of the situations being compared 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 asp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price or profits can be ascertained with sufficient accuracy to improve the reliability of the results. 5.1.6 The aforesaid degree of comparability between controlled and uncontrolled transactions is typically determined on the basis of a number of attributes of the transactions or parties that could materially affect prices or profits and the adjustment that can be made to account for differences. These attributes, which are usually referred to as the five comparability factors, include: Characteristics of the property or service transferred; Functions performed by the parties taking into account assets employed and risks assumed, in short referred to 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 ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the TPO, in imposing internal CPM by comparing margins on sale to AEs and non-AEs, cannot thus be justified. The benchmarking, on TNMM basis as a corroborative measure, also justifies this conclusion. 29. In view of all these factors, and as sales to the AEs and non-AEs, which belong to different class of markets, cannot be compared on the peculiar facts of this case, the assessee is indeed justified in its plea. We uphold the same and direct the Assessing Officer to delete the impugned ALP adjustment of ₹ 2,31,92,365. 30. Ground no. 6 is thus allowed in the terms indicated above. 31. In the result, the appeal for assessment year 2006-07 is partly allowed as indicated above. 32. We 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of export sales. It was also submitted that similar royalties paid by the assessee in the earlier year have been held to be, though at the DRP level, at an arm s length price and the matter rests there. It was also explained that at the entity level the profits in respect of all the transactions taken together have been benchmarked at an arm s length price, on the basis of TNMM, and as such there is no reason to disturb the arm s length price of royalty paid. It was also explained by the assessee that the effective rate of royalty works out to almost the same in case adjusted sales, after adjusting for the cost of imports, is taken into account in respect of the exported goods. On the basis of calculations furnished by the assessee, which have been reproduced at page 13 of the TPO s order, the effective rate of royalty for exports 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropositions- first, that there is no conceptual justification for higher rate of royalty in respect of exports vis- -vis royalty for domestic sales; and second, that the rates payable by other group entities for royalty to the parent company can be treated as valid inputs. The appeal of simplicity of approach in these propositions apart, both these propositions are factually incorrect and legally unsustainable. As for the difference in royalty rates applicable for domestic sales vis- -vis export sales by Indian entities, that is a standard norm duly recognized by the Reserve Bank of India. When regulatory framework itself accepts and permits such a variation in approach to domestic sales and export sales, it is futile to suggest that it does not legally acceptable conceptual foundation. Whether or not the higher ceiling of rates, per se, prescribed by 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 fra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 49. 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. 50. Ground no. 5 is thus dismissed. 51. In the result, assessee s appeal for the assessment year 2008-09 is also partly allowed. 52. We now take up ITA No. 671/Ahd/2014 i.e. appeal filed by the assessee for the assessment year 2009-10. 53. In the first ground of appeal, the assessee has raised the following grievance: On the facts and in the circumstances of the case and in law, the Learned Deputy Commissioner of Income-tax, Circle-4, Ahmedabad ('the Ld. AO') under the directions of Dispute Resolution Panel ('DRP') erred in making 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Deputy Commissioner of Income-tax, Circle-2(i)(i), Ahmedabad ('the Ld. AO') under the directions of Dispute Resolution Panel ('DRP') erred in making an adjustment of ₹ 80,47,461 in relation to the international transaction of payment of Royalty to the Associated Enterprise ('AE')- 66. 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 ₹ 80,47,461 also stands deleted. 67. Ground no. 1 is thus allowed. 68. 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 ₹ 11,59,728 in relation to the international transaction of sale of goods to the AEs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,31,934 stands deleted. 79. Ground no. 1 is thus allowed. 80. 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/TPO under the directions of DRP, erred in making an adjustment of ₹ 41,76,090 in relation to the international transaction of sale of goods to the AEs. 81. 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 ₹ 41,76,090 also stands deleted. 82. Ground no. 2 is thus allowed 83. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year . There is no dispute that since no part of the operations of the recipient non-residents is carried out in India, no income accrues to these non-residents in India. The case of the revenue hinges on income which is deemed to accrue or arise in India . Coming to the deeming provisions, which are set out in Section 9, we find that the following statutory provisions are relevant in this context: 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 case, on account of commission agent's business connection in India, it has no impact on taxability in the hands of commission agent because admittedly no business operations were carried out in India, and, therefore, Explanation 1 to Section 9(1)(i) comes into play. 33. There are a couple of rulings by the Authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot simply be brushed aside either, and that these rulings at least have persuasive value. We have no quarrel with this proposition. We have, with utmost care and deepest respect, perused the above rulings r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay, 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 services, may be technical services, but the amounts paid by the assessee are not for the rendition of these technical services nor the quantification of these amounts have any relation with the quantum of these technical services. The key to taxability of an amount under section 9(1)(vii) is that it should constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expressed by the coordinate bench, with which we are in considered agreement, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of ₹ 20,04,492. 92. Ground no. 5 is thus allowed. 93. In the result, the assessee s appeal for t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
