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Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH
Before: Shri Mahavir Prasad & Shri Amarjit Singh
आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
This revenue ’s appeal and assessee’s cross objection for A.Y. 2012- 13, arises from order of the CIT(A), Ahmedabad, in proceedings under section 143(3) r.w.s. 144C & 92CA(3) of the Income Tax Act, 1961; in short “the Act”.
The Revenue has raised following grounds of appeal:-
“1. The Ld CIT(A) had erred in law and on facts in deleting the upward adjustment of Rs 1,12,25,575/- made by the TPO on benchmarking of Royalty payments 2. The Ld CIT(A) had erred in law and on facts in deleting the upward adjustment of Rs 49,56,356/- made by the TPO on benchmarking of sales 3. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance amounting to Rs. 8,03,511/- paid on the alleged export commisson charges. 3.1 The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of commission to foreign agents amounting to Rs.803511/- without properly appreciating the facts that the assessee was unable to lead evidences to prove the genuineness of such expenditure and also the factum of actual rendering of services by such recipients. Reference in this regard is made to the decision of Hon'ble Supreme Court in the case of Premier Breweries Ltd vs CIT Cochin 2015 56 Taxmann.com 361 (SC) . 3.2 Without prejudice to the above, the Ld. CIT(A) has erred in law on facts in deleting the disallowance u/s. 40(a)(ia) of the IT. Act on export commission payments made to the Nonresident Agents solely relying on the decision of the Hon'ble Supreme Court in the case of CIT vs. Toshuku Ltd. (1980) 125 ITR 525 (SC) which stands superseded by the subsequent amendments brought in IT. Act.”
The fact in brief is that return declaring income of Rs. 1,17,78,34,550/- was filed on 28th Nov, 2012. The case was subject to scrutiny assessment and notice u/s. 143(2) of the Act was issued on 23rd Sep, 2013. The further facts of the case are discussed while adjudicating the three grounds of appeal of the revenue as follows:-
Ground No. 1 ( Adjustment in relation to international transaction of payment of royalty to the associated enterprises)
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During the course of assessment Assessing Officer/TPO has made upward adjustment of Rs. 1,12,25,575/- on royalty payment to associated enterprises. The Assessing Officer/TPO has made adjustment as assessee company was paying royalty @ 5% on domestic sales and 8% on export sales to the associated enterprises. The Assessing Officer/TPO has benchmarked the royalty payment for export transaction using internal comparable after taking the effective royalty rate paid for the domestic sale to be at arm’s length and made the adjustment of Rs. 1,12,25,575/-.
The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee after following the decision of ITAT for assessment year 2006-07 to 2011-12 order dated 24th May, 2019.
During the course of appellate proceedings before us, the ld. counsel has submitted that the issue in the appeal is squarely covered by the decision of ITAT in the case of the assessee vide ITA 3108/Ahd/2010, 2609/Ahd/2012, ITA Nos. 671/Ahd/2014, 243/Ahd/2015 & 370/Ahd/2016. The ld. Departmental Representative is fair enough not to controvert the fact reported by the ld. counsel that issue is covered by the decision of ITAT as referred above.
With the assistance of ld. representatives, we have gone through the decision of the Coordinate Bench of the ITAT as referred above. The relevant part of the decision is reproduced as under:- "42. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 43. The stand of the authorities below has. as its foundational basis, two basic propositions- first, that there is no conceptual justification for higher rate of royalty in respect of exports vis-a-vis
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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-a-vis export sales by Indian entities, that is a standard norm duly recognised 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 RB1 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 rcspecl of domestic sales and exports. This commercial reality is duly recognized and accepted by the regulatory framework in India. In any case, even if one is to ignore this reality it for a minute, what is being used as a valid CUP input is an intra AE transaction, which a parent subsidiary transaction inherently is. Even in a case in which the royalty is being given to a rank outsider, by the virtue of 92A(2)(g), the entities paying and receiving royalties become AEs. It is only elementary that a transaction between the AEs can never be a valid CUP input. If needed, authority for this proposition is contained in AC1T Vs MSS India Ltd [(2009) 25 DTR 1 (Pune)l, ACIT Vs Technimont iCB India Pvt Ltd [(2012) 75 DTR 259 (Mum)] and Sabic Innovative Plastics India Ltd Vs DC1T [(2013) 90 DTR 203 (And)]. 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, ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 directed to delete the impugned ALP adjustment of Rs.82,87,963. The assessee gets the relief accordingly."
Respectfully following the decision of the Co-ordinate Bench of the ITAT, we do not find any infirmity in the decision of the ld. CIT(A), therefore, this ground of appeal is allowed.
Ground No. 2 (Adjustment on account of international transaction of sales made to the associate enterprise of Rs. 49,56,356/-)
During the course of assessment, the Assessing Officer/TPO has made upward adjustment of Rs. 49,56,356/- on sale of goods to associate enterprises after following the cost plus method (CPM) after rejecting the TNMM method followed by the assessee.
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The assessee has filed the appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee after following the decision of the Co- ordinate Bench Ahmedabad as above.
With the assistance of ld. representatives, we have gone through the decision of ITAT Ahmedabad. The relevant part of the decision of the Co- ordinate Bench is reproduced as under:- "28. Quite clearly, therefore, just because the assessee has sold the same product, as exported to the AEs, to the domestic enterprises, CPM method cannot be applied. That is precisely what the TPO has done. There is no other objection taken by the authorities below. There is a difference in geographical location of the market as also in the value chain and utility of the product. It is also important to bear in mind that while the products sold by the assessee to the ALs are propriety products, having unique specifications which non AEs cannot obtain from others, the assessee is in a position to fetch higher prices for the same from non-ACs.. The action 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 ail 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 Rs 2,31,92,365." Respectfully following the decision of the Co-ordinate Bench as cited above, we do not find any infirmity in the decision of the ld. CIT(A), therefore, this ground of appeal of the revenue is dismissed.
Ground No. 3 (Disallowance of commission paid to non-resident of Rs. 8,03,551/-)
During the course of assessment, the Assessing Officer has made disallowance of foreign commission of Rs. 8,03,511/- paid to non-resident
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agents u/s. 40(a)(ia) of the act on the ground that tax has not been deducted on the commission payment. 12. The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee after following the decision of ITAT Ahmedabad.
With the assistance of ld. representatives, we have gone through the decision of ITAT Ahmedabad. The relevant part of the decision is reproduced as under:- "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 Rs 20,04,492."
Respectfully following the decision of ITAT as cited above, we do not find any infirmity in the decision of the ld. CIT(A), therefore, this ground of appeal of the revenue is dismissed.
In the result, the appeal of the revenue is dismissed.
CO No. 127/Ahd/2019 filed by the assessee
The assessee has filed cross objection in support of the finding of the ld. CIT(A). Since we have dismissed the appeal of the revenue as
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supra in this order, therefore, the cross objection filed by the assessee has become infructuous and therefore the same stands dismissed.
In the result, the appeal filed by the revenue and cross objection filed by the assessee both are dismissed.
Order pronounced in the open court on 23-09-2021 Sd/- Sd/- (MAHAVIR PRASAD) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 23/09/2021 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद