TMI Blog2016 (2) TMI 1340X X X X Extracts X X X X X X X X Extracts X X X X ..... 0) TMI 651 - ITAT HYDERABAD] where it has been held that RBI approval of the royalty rates paid by assessee itself implies that the payments were at Arm s Length. So considering the apparent facts and circumstances the ld. Commissioner of Income Tax (Appeals) has examined the issue and verified the statements and material filed and viz a viz explanations of the assessee. We, therefore are not inclined to interfere with the order of the CIT(A) on this ground. Accordingly, this ground of the Revenue is dismissed. Price variation of Arms Length Price transaction is at higher and volatile - HELD THAT:- Revenue has not brought any evidence to show that price variation is on higher side and impact on the Arms Length Price. Though ld. Authorised Representative justified his arguments with the submissions and judicial decisions. Considering the summary of module and agreements entered by the assessee company with Associated Enterprise, we find the order of Commissioner of Income Tax (Appeals) is in order and we do not interfere with the findings and uphold the findings of the Commissioner of Income Tax (Appeals) and direct the Assessing Officer to delete the addition. This ground of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er considering the matrix of facts, judicial decisions and Audit report observed in assessment order which indicates the services are rendered in India and report was obtained in India. Therefore, we remit the issue to the Assessing Officer for limited purpose to verify the working system of Audited and consultancy work or inspection was carried by the Auditors on lab analysis and we set aside the order of the Commissioner of Income Tax (Appeals) and direct the Assessing Officer to consider the issue and pass the order after providing adequate opportunity of hearing before passing the order on merits. In the result, the appeal of the assessee is partly allowed for statistical purpose. - I.T.A. Nos.2167, 2168 & 2169/Mds/2013, I.T.A. No.58/Mds/2015 - - - Dated:- 19-2-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER For The Department : Shri. A.V.Sreekanth, IRS, JCIT. For The Assessee : Shri. T. Banusekar, C.A ORDER PER G. PAVAN KUMAR, JUDICIAL MEMBER: The Revenue filed three appeals against the common order of Commissioner of Income Tax (Appeals)-I, Chennai in ITA TR Nos.17 18/09-10/A-I and ITA No.713/11-12/A-I dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced to Nil after set off of brought forward unabsorbed deprecation but paid Minimum Alternative Tax (MAT) as per the provisions of u/s.115JB of the Act on a Book profits of ₹ 2,15,01,033/- and the return of income was processed u/s.143(1) and subsequently, notice u/s.143(2) was issued. In response to notice, the ld. Authorised Representative appeared and furnished details in assessment proceedings. The Assessing Officer alongwith other disallowances made addition in respect of international transactions. During the year, the assessee company entered into international transactions with Associated Enterprise M/s. McCormick Company Inc., USA were the transactions exceeded ₹ 5 crores and referred to the Transfer Pricing Officer (TPO) to consider the Arms Length Price. The ld. TPO vide order No. C.No.42/PO I/A.Y.2004-05, dated 7.12.2006 made an adjustment of ₹ 19,31,513/- on account of Arms Length Price of transaction between company for payment of royalty of ₹ 7,78,019/- as price variation in export sales. On receipt of order u/s.92CA(3) of the Act, the Assessing Officer provided opportunity for submitting reply to the assessee and ld. Authorised Representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a variation of ₹ 5,00,462/- The Transfer Pricing Officer has also not considered the fact that overall, there is a positive variation to the extent of ₹ 1.80 crores. Being a small lot, naturally the pricing of 500 kgs was higher. To compute arms length price adopting the rate for 500kgs for ₹ 4,31,150 kgs is highly illogical and against the principal of natural justice . The ld. Assessing Officer considered the submissions of the assessee on record and also findings of the TPO on determination of Arms Length Price. Since Royalty of ₹ 19,31,513/- was disallowed by the assessee u/s.40(a)(ia) of the Act for non deduction of TDS and no further adjustment was made and completed assessment with only adjustment on account of price variation ₹ 7,78,019/- and passed order u/s.143(3) dated 20.12.2006. Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). 4. In the appellate proceedings, the ld. Authorised Representative submitted that the Assessing Officer considered the TPO order ignoring various relevant and important facts and the price variation in transaction with Associated E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adjustment in respect of full payments. In our considered opinion, when the rate of royalty payment and fee for drawings etc, has been approved or deemed to have approved by the RBI, then such payment has to be considered at ALP. Thus, on the facts and on merits, the determination of Arms Length Price of the payment of royalty at Nil for A.Y. 2004-05, 05- 06 and 08-09 is set aside and the Assessing Officer is directed to treat the payment of royalty at ARM s length for respective assessment years . On the next ground of price variance the ld. Commissioner of Income Tax (Appeals) considered the grounds of appeal, submissions, arguments and the material evidence filed in appellate proceedings and findings of price variance and perused the export price of Associated Enterprise and non Associated Enterprise for all the products in the relevant assessment year. On comparison of variance based on the comparative tables, the ld. Commissioner of Income Tax (Appeals) found negative variance is negligible compared to the positive variance in respect of the exports made to Associated Enterprise and held at page no.3, page no.4.2 of CIT order as under:- It is also to be not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears commencing on March 3, 2004 AVT McC Shall pay McCormick royalties for the licenses as mentioned in Section 7 of the said McCormick Technology License Agreement dated March 3, 1994 and as amended by the agreement dated March 4, 1994, subject however that the total royalty including royalty already paid shall not exceed US $400,000. and further on approval of RBI, the ld. Authorised Representative referred to the letter dated 18.0.8.2004 at page no.110 of paper book. Government of India, Ministry of Commerce and Industry, (Dept. of Industrial Policy and Promotion ) Udyog Bhawan, New Delhi 110 001. Dated 18.08.2004 M/s. AVT McCormick Ingrdients Pvt. Ltd Plot No.225/1. A5-7, Kaipoorikkara, Vazhakulam Marampilly P.O. Aluva 683 107, Dist Ernakulam, Kerala. Subject: Application for extension /renewal of foreign technology trademark licence agreements. Sir, I am directed to refer to your letter dated 3rd August, 2004 on the subject mentioned above and to say that renewal of foreign technology trade mark license agreements is essential for continued payment of royalty under the Automatic Route. However no Gov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egawa Precision Forgings Ltd vs. Addl. CIT in ITA No.4781/Del/2010, dated 16th Dec. 2011 held that assessee has sold only a part of goods manufactured to its Associated Enterprise and bulk of sales were made to uncontrolled parties, and the Assessing Officer has failed to bring any material on record to show that payment of royalty @ 3 per cent was not at arm s length which was also approved by RBI, hence disallowance of royalty is not justified and assessee also relied on various judicial decisions to support his case and as per the directions of Government of India the approval of RBI is very much necessary for determination of Arms Length Price and considered by the Hyderabad Bench of Tribunal in the case of DCIT vs. Owens Corining Industries (India) Pvt Ltd (2014) 41 CCH 0152 (Hyd Trib) where the decision was based on the ALP rate and it held as under;- Transfer pricing-Arms' Length price-Payment of royalty to AE-Assessee engaged in business of manufacturing and trading of glass fibre products and articles thereof was provided technical assistance by Netherlands and claimed that quantum of royalty payment was at 5% and 4% of net of its sales- TPO restricted payment of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r grounds with financial statements and comparable statements. We perused the RBI letter and follow the decision of Hyderabad Bench of Tribunal in the case of Owens Corining Industries (India) Ltd (supra) where it has been held that RBI approval of the royalty rates paid by assessee itself implies that the payments were at Arm s Length. So considering the apparent facts and circumstances the ld. Commissioner of Income Tax (Appeals) has examined the issue and verified the statements and material filed and viz a viz explanations of the assessee. We, therefore are not inclined to interfere with the order of the CIT(A) on this ground. Accordingly, this ground of the Revenue is dismissed. 7.1 Before Tribunal on second ground, the ld. Departmental Representative submitted that the price variation of Arms Length Price transaction is at higher and volatile. The variation of positive and negative impact considering the spices rates on the determination of Arms Length Price and price variation has arised with the transactions of Associated Enterprise. The ld. Commissioner of Income Tax (Appeals) has erred in deleting the addition on account of negative variation being negligible in compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee that payments were to procure orders outside India and no party has permanent establishment in India and provisions of Sec. 195 does not apply. But the ld. Assessing Officer based on the Finance Act 2010 and CBDT circular distinguished the decision relied by the assessee and made addition. Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). 8.2 Before Commissioner of Income Tax (Appeals) the assessee has reiterated his submissions in respect of Agency commission paid to foreign sales agent. The assessee has given bifurcation of foreign agencies commission and relied on the amendment of Finance Act, 2010 and CBDT circulars and criteria of deduction of TDS as there is no permanent establishment in India and also relied on the decision of Co-ordinate bench and argued that the commission earned outside the country is taxable in respective recipient countries. The ld. Commissioner of Income Tax (Appeals) considered the submissions and distinguished the decisions and made a finding that payments are neither fees for technical services nor royalty nor interest and also these payments are commission payments to foreign agents and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has paid foreign commission to outside foreign agencies who do not have business establishment in India and liable for taxation in their respective countries. We rely on the Coordinate Bench decision in the case of ACIT vs. Euro Leder Fashions Ltd (2015) 44 ITR (Trib) 571 (Chennai) it was observed at para 10 11 as under:- The aforesaid clause makes it clear that the disallowance shall be made in case of any payment made which is chargeable under this Act and is payable outside India or in India to a nonresident not being a company or to a foreign company on which tax is deductible at source. Therefore, the first condition required to be fulfilled is the payment must be chargeable under the Act, thereafter the question of deduction of tax will arise. Section 195 (1) of the Act also prescribes that tax has to be deducted while making payment to non-resident which is chargeable under the provisions of the Act. Therefore, the condition precedent for deduction of tax is the income must be chargeable under the provisions of the Act. In the facts of the present case, the assessee has not produced the agreement entered into by the assessee with foreign agents to show that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved on 06.09.2011 on the assessee. Due to change in jurisdiction, letter dated 11.11.2013 alongwith notice u/s.142(1) was issued. In reply to the notice, the ld. Authorised Representative appeared on various dates of hearing and filed details called for. The Assessing Officer upon verification of details and submissions and discussions completed assessment u/s.143(3) of the Act. Since the assessee had international transactions the Assessing Officer referred the matter to Transfer Pricing Officer and TPO-I, Chennai in order dated 09.01.2014 in F.No.104/TPO-I/A.Y.2010-11 held that international transactions of the assessee company are within Arm s Length Price and hence no adjustment is considered necessary for the assessment year 2010-2011 and the assessment order was passed u/s.143(3)r.w.s. 92CA(3) of the Act dated 17.03.2014. The sole dispute before the Tribunal being the disallowance of lab analysis fees of ₹ 8,92,635/- on account of non deduction of TDS u/s.40(a)(i) of the Act. In the assessment proceedings, the ld. AR submitted details of lab analysis fees paid to the various organizations in USA, Europe and Germany and copies of lab report of organizations were produce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. Authorised Representative alleged that Assessing Officer has disallowed lab analysis fee paid to various foreign parties ₹ 8,92,635/- under the provisions of u/s.40(a) (i) of the Act on the presumption that technology is available to the assessee and report has been furnished and subject to tax in India. The ld. Authorised Representative further submitted that only Audit report was given to the assessee and no technology was available and also no scope to consider taxing of such payments in foreign currencies. Further, Assessing Officer should know that even assuming such payments brought into scope of technical services as per Explanation 2 to Sec. 9(1)(vii) of the Act and such receipt constitute business receipts in the hands of the recipients. Further double taxation avoidance agreement shall come into effect the payment does not constitute income chargeable to taxation in India and none of the recipients have permanent establishment and such payments are not routed through permanent establishment of recipients of foreign countries. On the issue of fees for technical services, interest and royalty to non residents the issue in dispute is pure agency commission for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exports its product accordingly, it means the technical knowledge is made available to the appellant in India. The argument of the appellant that the payments were made outside India and there is no PE in India, therefore TDS provisions will not attract for such remittances, is rejected. In view of the above discussion, I confirm the disallowance made by the AO u/s 40(a)(i) in this regard . Aggrieved, the assessee assailed an appeal before the Tribunal. 10.2 Before the Tribunal, the ld. Authorised Representative raised sole substantive ground that the Commissioner of Income Tax (Appeals) erred in confirming the order of the Assessing Officer and also disallowance u/s.40(a)(i) r.w.s.195 of the Act in respect of lab analysis fees paid and the income of such foreign agencies are not liable to be taxed in India. The payment of lab analysis fees are not covered under the meaning of technical services u/s.9(1)(vii) of the Act or under Double Taxation Avoidance Agreements (DTAA) with the foreign countries. Further the assessee company does not have technical know how which has been considered as available and foreign agencies does not have permanent establishment in India. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, The lab analysis fees will not fall into category of technical service. The lower authorities presumed that the Audit report know how is available to the assessee and site inspection was carried out hence income has accrued in India. The ld. Authorised Representative also relied on the operative parts of Double Taxation Avoidance Agreements with the USA, UK and Germany and made a elaborate submissions regarding permanent establishment and technical fees and concluded that the lab fees to non resident does not come into purview of Sec.9(1)(vii) of the Act and does not constitute managerial consultancy or technical service and as per the Double Taxation Avoidance Agreements with three countries USA, UK and Germany, such payments are not chargeable and relied on the decisions of CIT vs. De Beers India Minerals (P) Ltd (2012) 346 ITR 0467 (Kar) were it was held that technical services as defined u/s 9(1)(vii) of the Act and Explanation 2 such payments does not satisfy the requirement of technical services considered in India and supported the arguments on technical fees with decision of Tuv Bayren (India) Ltd vs. DCIT (2012) 33 CCH 0212 (Mum Trib) were it was held that income from ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
