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Facts
The revenue filed an appeal against the CIT(A)'s order, which allowed the assessee's appeal. The dispute concerns the sharing of documentation charges between the assessee (agent) and its principal, Wan Hai Lines Ltd, Taiwan. The AO made an adjustment for documentation charges, which was contested by the assessee.
Held
The Tribunal held that the assessee acted as an agent for its principal and that the documentation charges were shared equally as per their agreement. Relying on the Bharati Cellular Ltd case, the Tribunal found no infirmity in the CIT(A)'s order.
Key Issues
Whether the adjustment made by the AO for documentation charges shared between the assessee (agent) and its principal was justified, considering the principal-agent relationship and the agreed sharing ratio.
Sections Cited
250, 143(3), 144C(3), 148, 148A, 147, 151A, 144C(1), 139(1), 92CA, 182
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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI AMARJIT SINGH & SHRI ANIKESH BANERJEE
Instant appeal of the revenue and the cross objection of the assesseewere filed against the order of the National Faceless Appeal Centre (NFAC), Delhi [for brevity, ‘Ld.CIT(A)’) passed under section 250 of the Income-tax Act, 1961 (for brevity, ‘the Act’), date of order 13/08/2024 for A.Y. 2016-17. The impugned order was emanated from the order of the Ld.Assistant Commissioner of Income- tax, Circle 5(3)2), Mumbai (for brevity the “Ld. AO”)passed under section 143(3) read with section 144C(3) of the Act, date of order 26/02/2019.
2. The revenue has taken the following grounds: - “1. Whether on facts and circumstances of the case and in law, the CIT(A) erred in allowing the assessee's appeal ignoring the fact that assessee had shared documentation charges with its principal entity i.e. WAN HAI Lines Ltd., Taiwan in equal ratio (50% each) but had not received any services from the Principal in respect of the functions related to the documentation charges and the Principal has not incurred any cost in relation to the documentation charges?
2. Whether on facts and circumstances of the case and in law, CIT(A) erred in allowing the assessee's appeal ignoring the fact the assessee, from starting of its business was collecting and retaining the entire documentation charges since July 2002 and subsequently opted to split the documentation charges with the Principal in a general ratio of 50% but assessee failed to provide the reason for the modifying the agreement with Principal.
3. The appellant prays that the order of the CIT(A) on the grounds be set aside and confirm the order of the AO.
4. The appellant craves leave to add, amend or alter all or any of the grounds of appeal.”
CO 247/Mum/2024 M/s Wan HAI (Lines) Private Limited 2.1 Whereas the assessee has taken the following grounds in its cross objection:-
1. The notice issued u/s 148 of the Act dated 28.03.2024, order u/s 148A(d) of the Act dated 28.03.2024 and the notice u/s 148A(b) of the Act are bad in law and without jurisdiction. The Ld. AO has not fulfilled the jurisdictional requirements of section 147 to 151A of the Act.
The assessment order passed is bad in law and the adjustment made is without jurisdiction, as the adjustment made is without making a reference to the Ld. ΤΡΟ.
The assessment order is bad in law and without jurisdiction, as the Ld. AO has erred in not passing a draft assessment order u/s 144C(1) of the Act”
3. Tersely we advert the fact of the case that the assessee filed its original return of income under Section 139(1) of the Act on 7th November 2016, declaring a total income of Rs.2,26,62,600. The case was selected for scrutiny, referred to the Transfer Pricing Officer (TPO), and a notice under Section 92CA of the Act was issued, requiring the assessee to furnish all necessary details and documents in support of the Arm's Length Price (ALP). The assessee provided the relevant information and explanations to the TPO during the course of hearings. After examining the case, the Ld. TPO issued an order under Section 92CA(3) of the Act, concluding that the value of international transactions with Associated Enterprises (AEs) regarding the ALP required no adjustment. The TPO accepted that the transactions were at Arm's Length Price. Subsequently, the assessee received a notice under Clause (b) of Section 148A, stating that 50% of the documentation receipts, as per the agency agreement, amounted to Rs.23,46,20,369/-. However, the assessee had accounted for documentation receipts of Rs.22,54,97,644/-, leading to an alleged CO 247/Mum/2024 M/s Wan HAI (Lines) Private Limited underassessment of income of Rs.91,22,725/-. In response, the assessee submitted the required information and explanation to the Ld. AO. The assessee filed a return under Section 148 on 25th April 2023, declaring the same total income of Rs.2,26,62,600/-. Despite this, the AO issued a show-cause notice proposing an addition of Rs.45,61,738/- to the assessee's income. The assessee provided an explanation in response to this notice. Subsequently, another show-cause notice was issued, questioning why a variation of Rs.2,58,23,149/- should not be added to the assessee's income, despite an earlier adjustment of Rs.45,61,738/-. The assessee again submitted an explanation in response to the notice.Considering the TPO's order under Section 92CA(3) of the Act, the Ld. AO made an adjustment of Rs.12,58,23,149/- in respect of documentation charges. This adjustment failed to take into account the fact that the documentation charges relate to services ancillary to the principal- agent relationship, wherein it was mutually agreed between the parties to share these charges equally, i.e., 50% each. Aggrieved assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) rejected the addition and allowed appeal of the assessee. Being aggrieved on impugned appeal order the revenue filed an appeal before us.
We heard the rival submissions and considered the documents available in the record. The Ld.DR vehemently argued and relied on the order of the Ld.AO. The Ld.AR argued that the assessee is an agent of Wan Hai (Lines) Ltd, Taiwan (in short, ‘WHLLT’). The assessee has procured the service charges from the ships and accordingly assessee retained 50% of the documentation charges and 50% was transferred to the Principal as per the agreement of 2004. The assessee is in CO 247/Mum/2024 M/s Wan HAI (Lines) Private Limited relationship with the AE as a Principal and Agent and assessee first credited in the books of account only 50% charge not the entire amount. The 50% of Principal’s part directly transferred to the principal.
The assessments of preceding years and subsequent assessment years were completed. But the TPO had never directed any adjustment of ALP under section 92CA(3) of the Act. The assessee submitted the paper book and the following orders are duly annexed from APB pages 1 to 26 where the TPO had accepted assessee’s submission and the international transaction with the AE was not disturbed. Only in this assessment year the TPO has made adverse remark and the AO had adjusted 50% of the documentation charges in relation to transfer pricing adjustment. Reliance was placed on the order of Hon’ble Supreme Court in case of Bharati Cellular Ltd vs ACIT (2024) 164 taxmann.com 12 (SC) where the Hon’ble Apex Court has taken the view that in relation to Principal andAgent, the agent is only to follow the directions of the principal. Relevant paragraphs 7 & 8B are reproduced below:- “7. Section 182 of the Contract Act, defines the words 'agent' and 'principal and reads as under "182. "Agent" and "principal" defined. An "agent" is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the "principal"." Agency in terms of Section 182 exists when the principal employs another person, who is not his employee, to act or represent him in dealings with a third person. An agent renders services to the principal. The agent docs what has been entrusted to him by the principal to do. It is the principal he represents before third parties, and not himself. As the transaction by the agent is on behalf of the principal whom the agent represents, the contract is between the principal and the third party. Accordingly the agent, except in some circumstances, is not liable to the third party
Agency is therefore a triangular relationship between the principal, agent and the third party. In order to understand this relationship, one has to examine the inter se relationship between CO 247/Mum/2024 M/s Wan HAI (Lines) Private Limited the principal and the third party and the agent and the third party. When we examine whether a legal relationship of a principal and agent exists, the following factors/aspects should be taken into consideration:
(a) The essential characteristic of an agent is the legal power vested with the agent to alter his principal's legal relationship with a third party and the principal's co-relative liability to have his relations altered."
(b) As the agent acts on behalf of the principal, one of the prime elements of the relationship is the exercise of a degree of control by the principal over the conduct of the activities of the agent. This degree of control is less than the control exercised by the master on the servant, and is different from the rights and obligations in case of principal to principal and independent contractor relationship. (c )………………………… (d)………………………...”
6. Further reliance was placed on the impugned appeal order, para 4.5, which is reproduced as below: - “4.5 From the above agreement it is clear that the claim of the appellant was as per agreements between Wan Hai Lines Ltd. (Principal) and Wan Hai Lines India Pvt. Ltd. (Agent). Further, as per the information provided in Form 3CEB, the Documentation Charges and Telex Charges are shared equally between the company and its principal. “Documentation Charges and Telex Charges are shared equally between the company and principal” is a general approximation of the nature of arrangement between the company and its principal. There are a number of charges (under different charge codes) that are collected by the company from customers which are together referred to as “documentation charges and telex charges”. Some of these charges are shared equally, some are retained entirely by the principal, and some are retained entirely by the agent assessee company. As an average approximation, these charges get distributed more or less equally between the parties. A detailed break up of these charges and their individual sharing as explained by appellant are tabulated below:-
Based on the facts and records presented, I do not find that there was any underassessment of income, as explained by AO in the assessment order.”
In our considered view, we find that under the terms of the agreement, the appellant acts as an agent of the Principal, WHLLT. Further, the information provided in Form 3CEB indicates that the documentation charges and telex charges are shared equally between the company and its principal. Accordingly, 50% of these charges were duly reimbursed to the principal.The amounts received by the assessee company on behalf of the principal were merely in the capacity of an agent, acting under the directions of the principal. Additionally, we CO 247/Mum/2024 M/s Wan HAI (Lines) Private Limited note that in the books of account, only 50% of the charges were credited, and no corresponding expenses were debited that were reimbursed to the principal. Considering the impugned appeal order we find the charges were distributed by the assessee and AE and the said chart related details breakup of charges and they are distributed between the parties. We respectfully rely on the decision of the Hon’ble Apex Court in Bharati Cellular Ltd. (supra), where a similar issue was considered. The relationship between the assessee and the AEis that of a Principal and Agent, with the assessee acting solely under the instructions of the principal. Considering the assessment orders for the preceding and succeeding years, we observe that no adjustments were directed against the ALP. Furthermore, the Ld. DR was unable to provide any contrary judicial precedent to rebut this position. In view of the above, we find no infirmity in the impugned appellate order. Accordingly, the grounds raised
by the revenue fail.
7. As the grounds of the revenue are dismissed, so the Cross Objection of the assessee is infructuous.
8. In the result, the appeal of the revenue is dismissed and the Cross objection of the assessee is also dismissed.