TMI Blog2023 (4) TMI 1260X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the AO/CIT(A). The factual position is that the total amount of investment in plant and machinery made by the assessee for setting up new unit was only a measure for determining the amount of subsidy. Taking note of the amendment in Section 2(24) by insertion of clause (Xviii) w.e.f. 01.04.2016 by the Finance Act, 2015 the Tribunal held that the amendment is effective from AY 2016-17 and hence will not apply to a case prior thereto. Since the case at hand pertains to AY 2011-12, the above amended law will not apply to it. We observe that the Pr. CIT s order u/s 264 in the case of the assessee pertaining to AY 2007-08 to 2010- 11 wherein he held that the subsidy was liable to be reduced from the cost of the assets in terms of Explanation to section 43 stands set aside by the decision of Hon ble Delhi High Court SUNBEAM AUTO PRIVATE LIMITED [ 2017 (12) TMI 475 - DELHI HIGH COURT] We decide ground in favour of the assessee and hold that the impugned capital subsidy cannot be deducted from the cost of assets under Explanation 10 to section 43(1) of the Act. TDS u/s 195 - disallowance u/s 40(a)(i) - non deduction of TDS on foreign commission - commission paid to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a different stand on the same facts have been taken. We are conscious that the principle of estoppel and resjudicata do not have any application in income tax proceedings, since each assessment year is a separate unit. However, it is necessary that consistency should be maintained when the facts are not different. Thus disallowance u/s 40(a)(i) made by the Ld. AO and confirmed by the Ld. CIT(A) is not sustainable - Decided in favour of assessee. - Shri G.S. Pannu, Hon ble President And Ms. Astha Chandra, Judicial Member For the Appellant : Assessee by: Ms. Shashi M Kapila, Advocate Shri R.R. Mourya, Advocate Shri Praveen Kumar, Advocate And Shri Sushil Kumar, Advocate For the Respondent : Shri Umesh Takyar, Sr. DR And Shri Sumit Kumar Verma, Sr. DR ORDER The cross appeals by the assessee and the Revenue arise out of the order dated 12.07.2016 of the Ld. Commissioner of Income Tax (Appeals)- 28, New Delhi ( CIT(A) ) pertaining to the assessment year ( AY ) 2011-12. Yet, another appeal by the assessee is directed against the order dated 19.12.2016 of the Ld. CIT(A) pertaining to the AY 2013-14. All the three appeals were heard together and are being dispose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yana should be deducted from the cost of assets under Explanation-10 to section 43(1) of the Act. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in sustaining the disallowance of Rs. 2,31,97,600/- u/s 40(a)(i)(B) of the aggregate amount of commission paid to U.S. resident agents for selling assessee s products in U.S. 4. The Revenue has taken only one ground of appeal which is as under:- Whether the Ld. CIT(A) was right in treating the sales tax subsidy as capital receipt particularly when the assessee has declared in the original return of income as well as in past it to be a revenue receipt. 5. Let us take up the appeal of the Revenue first. 5.1 We have heard the Ld. Representative of the parties and perused the material on the records. It has been submitted by the Ld. AR that the assessee offered the amount of subsidy received by it in AY 2007-08, 2008- 09, 2009-10 and 2010-11 as income which had been taxed under section 143(3) of the Act by the Ld. AO. Subsequently, the assessee filed an application under section 264 of the Act before the Principal Commissioner of Income Tax ( Pr. CIT ) pleading that the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 7. We now take up the appeal of the assessee for AY 2011-12. 7.1 Ground No. 1 is of general nature. 7.2 Ground No. 2 relates to deduction of capital subsidy received by the assessee from Haryana Govt. from the cost of assets under Explanation 10 to section 43(1) of the Act. On query raised by the Ld. AO, the assessee explained that even though the amount of subsidy is linked to the fixed capital investment made by the assessee, the aim is not to subsidize the cost of the assets. It is not a case that the subsidy is being provided to the assessee to meet the cost of asset. Referring to the Explanation 10 to Section 43(1), the assessee submitted that the subsidy provided is not for acquiring the assets but for encouraging setting up of a new unit. Even though, the subsidy is quantified on the basis of the fixed capital investment but that does not mean that the subsidy is given to purchase the assets. Placing reliance on several decisions including the decision of Hon ble Supreme Court in CIT vs. P.J. Chemicals Ltd. 210 ITR 830 (SC) it was submitted that the subsidy received by the assessee from Haryana Govt. cannot be reduced from the actual cost of the assets for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed for acquiring assets and hence actual cost was not directly or indirectly met by the grant of subsidy. 7.5.1 The Ld. AR relied on the decision of Pune Bench of the Tribunal in Alkoplus Producers (P) Ltd. v. Dy. CIT reported in (2019) 106 taxmann.com 115 (Pune-Trib) wherein the Tribunal held that if the object of the scheme is to accelerate the industrial development of the State, then the case is not caught within the mandate of the Explanation 10. In this decision the Tribunal considered the amendment introduced by the Finance Act, 2015 w.e.f. 01.04.2016 whereby the definition of income under section 2(24)(xviii) has been enlarged and held that since the amendment is effective from AY 2016-17, it will not apply to a case prior thereto. The Ld. AR relied on many other decisions including the decision of Hon ble Delhi High Court in its own case. 7.6 The Ld. DR supported the orders of the Ld. AO/CIT(A). 7.7 We have given our careful thought to the rival submissions and perused the material in the records. Perusal of the judgment of the Hon ble Supreme Court in P.J. Chemicals Ltd. (supra) will reveal that the Hon ble Supreme Court has laid down the guidelines /yardstick ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustrial sector to achieve effective, meaningful and speedy development of the state. 7.9 In the backdrop of the above factual matrix, there is no doubt that the impugned subsidy was granted to the assessee to provide assistance to the assessee for substantial expansion of an existing industrial unit undertaken by the assessee under Rule 28C of the General Sales Tax Rules , thereby contributing towards the industrial development in the State of Haryana. This is, then obvious that the impugned subsidy was not given to the assessee to subsidize the cost of assets. Nonetheless the amount of subsidy granted to the assessee is linked with the fixed capital investment by the assessee. This, however, is not detrimental to the claim of the assessee which is supported by the judgment of the Hon ble Supreme Court in P.J. Chemicals case (supra) wherein the Hon ble Supreme Court held that Govt. subsidy, it is not unreasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. If that be so, it does not partake of the character of a payment intended either directly or indirectly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxation Commissioner, Haryana informed the committee that under Rule 28-C, the High Powered Committee can take decision for the grant of tax concession on the basis of facts like employment generation, likely revenue, and impact on overall growth. The High Powered Committee shall have the powers to relax any of the conditions stipulated in the rules. No anneal shall be against the decision of High Powered Committee. After due deliberations the High Powered Committee declared it a Pipeline case which fulfills all the four conditions and considered the investment of Rs.9.19 crores on Die and Moulds as a part of fixed capita! investment and decided to grant sales tax concession of Rs.29.64 crore which is 100% of Fixed Capital Investment on Plant and Machinery for a period of 5 years under rule 28- C from the date of issue of Entitlement Certificate . Sd/- Joint Director (FA) For Director of Industries Commerce, Haryana Endst.No. FA/NSTE/ Dated: A copy of the above is forwarded to the following for information and necessary action:- 1. Deputy Excise Taxation Commissioner, Gurgaon. 2. General Manager, District Industries Centre, Gurgaon. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r insertion of Explanation 10 to section 43(1) of the Act, the basic principle underlying in the decision of the Apex Court in the case of P J Chemicals Ltd. (1994) 210 ITR 830, still holds the field. Their Lordships analysed the expression met directly or indirectly to come to the conclusion that only in a case where a subsidy or other grant was given to offset the cost of an asset, such payment/grant would fall within the expression met whereas the subsidy received merely to accelerate the industrial development of the State cannot be considered as payments made specifically to meet a portion of the cost of the assets. 8.4 In Alkoplus Producers P. Ltd. (supra) the Pune Bench of the Tribunal analysed the provisions of Explanation 10 to section 43(1) of the Act and observed that this explanation gets activated where the subsidy is specifically relatable to cost of a particular asset; that proviso also refers to such subsidy only. If the object of the scheme is to accelerate the industrial development of the State, then the case is not caught within the mandate of Explanation 10. Taking note of the amendment in Section 2(24) by insertion of clause (Xviii) w.e.f. 01.04.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the order of the Ld. AO by recording the following finding:- 9.5 However, from examination of the agreement of the assessee with M/s. Asian LLC and with M/s. ETCS LLC it emerges that the two foreign parties were not merely providing services for soliciting of business but were also providing services of prospecting, marketing, promotion and development of business which would give enduring benefit to the assessee. The aforesaid is discernible from the following points of the agreement: Salient point of agreement with M/s. Asian Manufacturing LLC As per the agreement, Asian Manufacturing LLC (AM) has knowledge and understanding of the automotive component manufacturing industry and marketing for such industry in the United States and North America. As per para 1.6 of this agreement, AM agrees to use its best efforts to promote and market the products and solicit purchase orders from customers located in the territory for delivery of products in the Territory. Further as per para 3 - AM shall be responsible to do the following with respect to the customers listed (a) Study the market for the Products in the Territory. (b) Appraise the potenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means any consideration received for rendering of any technical, managerial or consultancy services. As per the agreement, it is an undisputed fact that M/s. AM is providing to M/s. Sunbeam Auto Pvt. Ltd. business consultancy services and for which consideration is received by it from M/s. Sunbeam Auto Pvt. Ltd. 3. As per Article 12(4) of the India USA DTAA, the term FIS (Fee for Included Services) means payments of any kind to any person in consideration for the rendering of any technical or consultancy services. It is apparent that M/s. Asian Manufacturing LLC (AM) is providing the assessee comprehensive consultancy services related to business development and marketing and not merely soliciting of sales orders. The only objection of the assessee is, therefore, that the technical or consultancy service provided by M/s. Asian Manufacturing LLC (AM) does not satisfy the Make Available Clause of Article 12(4) of the DTAA between India and USA. It may be seen that as per the agreement M/s. AM is assisting and advising on commercial sales and contract development as well as in preparation of business proposals and bid documents to be submitted to the customers. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... points of agreement with M/s ETCS The agreements with M/s ETCS is designated as Professional Marketing Service Representative Agreement which clearly show the wide nature of the services and not merely acting as a sales agent. The paragraph on appointment and acceptance specifies that M/s ETCS agrees to sell and promote the sale of the products of the principle. The paragraph on agreement, describing the relationship of the party specifies the following. It is intended that the Marketing Representative shall be an impendent contractor and not exclusively devoted to the sales of Principal s product (s) or an agent or employment of this Principal. The Marketing Representative would not be representing any other company manufacturing Aluminium Die Casted Components to the company s listed in schedule a without taking the consent of the principal. Marketing Representative shall have no authority to act by or on behalf of the Principal nor shall the Marketing Representative be authorized to bind the Principal in any manner whatsoever. All knowledge and information that the Marketing Representative may acquire during the manufacturing and sales practices of the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al service because such services require the agents vast technical knowledge and experience. In its ruling Hon ble ITAT held that the work of the taxpayer does not end upon developing and installing the software at the client s site. It requires on-site monitoring, especially when the customized software is developed. Hence, it cannot be equated with the commodities, where the role of a commission agent normally ends after supply of goods and receipts of money. In the present case, the commission agent has vast technical knowledge and experience. Further, he is also one of the directors of the taxpayer. He is able to secure orders only because of his vast technical knowledge and experience. As per the clause of the agreement, the commission agent is responsible in securing orders and for that purpose he has to assist the taxpayer in all respects including identifying markets, making introductory contacts, arranging meeting with prospective clients, assisting in preparation of presentations for target clients. The commission agent s duty does not end on securing the orders, but he has to monitor the status and progress of the project, meaning thereby, the commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA, the Ld. AR submitted that it is settled law that if the provisions of DTAA are more beneficial, the assessee can invoke it in preference to the Act. He then referred to Article 12(4) of the India-US DTAA and relied upon the decision of Mumbai Bench of the Tribunal in Mckinsay and Co. Vs. ADIT 284 ITR (AT) 227. 11.5 The Ld. AR further submitted that the Hon ble Delhi High Court has also considered the scope of the expression make available in Article 13(4)(c) of the DTAA with UK in DIT v. Guy Carpenter Co. Ltd. (2012) 346 ITR 504 (Delhi). The Ld. AR also placed reliance on the decision of Hon ble Madras High Court in CIT vs. Orient Express (2015) 56 Taxmann. Com 331(Mad) and DCIT vs. McFills Enterprise (P) Ltd. (2019) 101 taxmann.Com 212 (Ahmedabad-Trib) 11.6 According to the Ld. AR services rendered outside India are not taxable under the India-USA DTAA. He pointed out that there is no dispute that the non-resident sales agents rendered service outside India. He submitted that in Ishikawajma-Harima Heavy Industries Ltd. vs. DIT (2007) 288 ITR 408 (SC), the Hon ble Supreme Court held that whatever was payable by a resident to a non-resident by way of technical fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion was paid since AY 2004-05 and has been allowed in assessments made under section 143(3) of the Act in all the preceding AYs. The modus operandi was also explained. The assessee receives the orders from parties through agents electronically and the goods are dispatched directly to the party with a copy invoice to agents. The role of the agent is for procuring orders/RFQ and getting the payment released from party. When the goods are exported and the payments are released by the party, the agents raise invoice in respect of commission giving complete details of sale invoice, the amount received and its commission. 12.1 It was also submitted before the Ld. AO/CIT(A) that no information in the nature of technical, management or consultancy services had been provided by any of the agent. The assessee had no PE in USA. Both the agents are tax residents of USA and had no business connection in India nor they have any PE in India. None of the agents is related to any of the Director of the company directly or indirectly. All the payments have been made in US$ through proper banking channels. 12.2 We have perused the agreement dated 31.08.2004 between the assessee (SBA) and Asia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1.7 AM shall have no authority to make any representations or warranties to any customer on behalf of SBA or to enter into any agreement of any kind on behalf of SBA. 2. Independent Contractor Status 2.1 SBA shall exercise no control over the activities and operations of AM, each being recognized hereunder as an independent contractor and free agent. 2.2 As AM is an independent contractor, it is not liable in any form or relations to any claim the customer may have towards SBA, including claims that may result from non-performance of timely delivery and quality problems. 3.0 AM shall be responsible to do the following with respect to the customers listed in Annexure C: a) study the market for the Products in the Territory; b) appraise the potential of the market for the Product, c) procure RFQ s from the prospective customers; and d) assist SBA in: i) making presentations to the potential customers; ii) establishing pricing and other commercial negotiations for finalization of the orders: iii) providing sales and after sales service to the customer on behalf of SBA; andiv) any other commercial or non-commer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll maintain due confidentiality at all times and shall not disclose any Confidential Information to any person or entity or earlier discharge or termination thereof except that AM may disclose such information as it is required to disclose by law or judicial process or, as may be required for enforcement of this agreement. Similarly, SBA shall also observe the same level of prudence and care in exercising and maintaining secrecy of the confidential information/trade secrets of AM. SBA also agrees to observe the same level of prudence and care in exercising and maintaining secrecy of the confidential information/trade secrets of AM. This clause shall survive the termination of this Agreement. 10.2 AM, Solanki and SBA shall each undertake all necessary action to protect the Confidential Information against misuse, loss, destruction, alteration or deletion from their respective premises. This clause shall survive the termination of this Agreement 12.3 The relevant portion of agreement between SBA (Principals) and ETCS LLC (Marketing Representative) are hereunder: Appointment and Acceptance Principals hereby appoint and authorize Marketing Representative the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement entered into by the assessee with AM and ETCS we are not inclined to agree with the view of the Ld. AO/CIT(A). As per the Explanation 2 to section 9(1)(vii) fees for technical services means any consideration for the rendering of any managerial, technical or consultancy services. Article 12(4) of DTAA between India and USA also defines fees for included services to mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge/experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design. None of the ingredient contained in the definition of Fees for technical services as per Explanation 2 to section 9(1)(vii) and/or in Article 12(4) of the India- USA DTAA is found in the impugned payment of commission by the assessee to AM and ETCS. It has been submitted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 2010-11 was involved. The Ld. AO held that the commission payment to the non-resident company on procuring orders was taxable as fees for technical service under sub-clause (b) to section 9(1)(vii), and thus assessee was liable to deduct tax at source while making said payments. On appeal, the Ld. CIT(A) reversed the aforesaid finding holding that the commission payment was not in the nature of fees for technical service ITAT confirmed the order of the Ld. CIT(A). On appeal by the Revenue the Hon ble High Court of Delhi held that commission paid by the assessee to its foreign agent for arranging of export sales and recovery of payment could not regarded as fees for technical services under section 9(1)(vii) of the Act. The decision (supra) squarely applies to the facts of the assessee s case. 15. As to the reference by the Ld. AO to the Explanation to section 9(2) as substituted by the Finance Act, 2010 w.r.e from 01.06.1976, the Hon ble Delhi High Court in Nokia Network OY (supra) has held that unilateral amendment of the domestic statute cannot be read into the Treaty with another sovereign state. Moreover it is now well settled that the provision of the Act or of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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