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Facts
The assessee, a private limited company dealing in specialty chemicals and a subsidiary of a US-based company, claimed deductions for shared services and royalties paid to its Associated Enterprise (AE). The Assessing Officer (AO) disallowed these payments, and the CIT(A) upheld the disallowance.
Held
The Tribunal, taking into consideration the additional evidence filed by the assessee and the lack of opportunity for a hearing, decided to restore the matter to the AO. The AO is to re-examine the payments claimed as deductions under section 37.
Key Issues
Whether the shared services and royalty payments made by the assessee to its AE were for the purpose of business and allowable as a deduction, considering the admission of additional evidence and the opportunity for a hearing.
Sections Cited
37(1), 143(2), 143(3), 144B, 250
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA
आदेश /O R D E R
PER GEORGE GEORGE K, VICE PRESIDENT:
1. This appeal at the instance of the assessee is directed against CIT(A) - NFAC order dated 22.07.2024, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2018-19.
Brief facts of the case as follows:-
The assessee is a private limited company. It is engaged in the dealing of specialty chemicals meant for paper & pulp, leather,
- 2 - direct water treatment and other customer specific applications. The assessee is a subsidiary of Bulab Holdings Inc. USA. For the assessment year 2018-19, return of income was filed on 30.11.2018 declaring total taxable income of Rs.8,35,75,210/-.
While arriving at taxable income, the assessee had claimed as deduction u/s.37(1) of the Income Tax Act, 1961, the following payments made to its Associate Enterprise (AE) Buckman Laboratories International Inc.USA (Buckman US): a) For shared services availed during the year a shared service fee of Rs. : 87,15,270 b) For the use of technology IP, a royalty of Rs.: 1,19,20,575 c) For the use of trademark IP, a royalty of Rs. : 1,19,20,576
The assessment was selected for scrutiny and notice u/s.143(2) was issued on 22.09.2019. The assessment was completed u/s.143(3) r.w.s 144B of the Act vide order dated 22.02.2021. In the said assessment order, the AO disallowed the aforesaid payments claimed u/s.37 of the Act made by assessee to its Associated Enterprise. The AO made the following observations:-
“In respect of payment of shared services fee: i)Buckman India has not provided proof of services received from the AEs. ii)The agreement is not a conclusive proof of services received.
- 3 - iii)The nature of services as stated to be received from the AE is very general in nature and any company will have in house personnel to do the same.
In respect of payment of royalty usage trademark IP: i)The AO has not provided its observations with respect to disallowance of payment of royalty for usage of trademark IP.
In respect of payment of royalty towards usage of technology IP: i)In the manufacturing segment, there is no agreement between the Appellant company & the toll manufacturers but it is between Buckman laboratories (Asia) and Venus Sthoxyethers Pvt Ltd. regarding sharing of knowhow. Further, there is a confidentiality clause in the inter-company agreement which prohibits the Appellant from sharing the knowhow. Also, international agreements which have greater ramifications with financial implications have to be interpreted very strictly. ii)The Appellant is deriving major portion of income from sale of traded goods. iii)Buckman India has not utilized the know-how in the business and thus the royalty is disallowed u/s 37 of the Act.”
Aggrieved by the assessment completed by making aforesaid disallowances, the assessee filed an appeal before First Appellate Authority. The CIT(A) confirmed the view taken by the AO by stating that the assessee had not established the services have been actually received by the assessee for making aforesaid payments. It was also stated by the CIT(A) that assessee has not furnished supporting evidences in respect of claim of deduction made.
- 4 - ITA No.2451//CHNY/2024
Aggrieved by the order of the CIT(A), the assessee has filed present appeal before the Tribunal. The assessee has filed several sets of paper books. The Ld.AR, by referring to ground no.1 raised in the memorandum of appeal, submitted that the assessee was not provided with reasonable opportunity of being heard, despite the request for either virtual or physical hearing prior to passing of impugned order. The Ld.AR further submitted that assessee has filed a petition for admission of additional evidence in support of allowability of royalty payment for the use of intellectual property right and use of trademark IP . It has also stated that assessee has submitted additional evidences /documents in support of shared service fees, the basis of which allocation is made. It was submitted that these documents were not submitted as these were not expressly requested during the course of assessment proceedings or before the CIT(A). It was further submitted these were only recently obtained in view of confidentiality norms since assessee company was dealing in the business of toxic chemicals. It was stated that these additional documents/evidences submitted along with a petition under Rule 29 of Income Tax (Appellate Tribunal) Rules, 1963, goes to the root of the matter. It was submitted that for substantial justice and for a proper adjudication of the issues raised in this appeal, the same may be take on record and justice may be - 5 - rendered. It was prayed the matter may be restored back to the files of AO for proper adjudication of the issues raised in this appeal.
The Ld.DR apart from supporting orders of the AO and CIT(A), did not have serious objection in restoring the matter to the files of the AO.
We have heard rival submissions and perused the records. The assessee in its submissions made before the First Appellate Authority (submissions dated 23.05.2024) had specifically requested that it may be granted an opportunity to represent its case through video conferencing or physical hearing before the order is passed. In spite of specific request made by the assessee, the assessee was not given an opportunity to represent its case through video conferencing or physical hearing. Many of the documents / evidences filed in support of claim of deduction u/s.37 of the Act has not been properly appreciated / taken note of by the CIT(A). Moreover, the assessee has filed a petition for admission of additional evidences. The relevant portion of the petition for admission of additional evidence for ready reference is reproduced below:-
“The Appellant wishes to draw reference to the additional evidence application submitted with the Hon'ble Tribunal on 17 February 2024:
S.No. Particulars Page No. 1 In support of allowability of royalty paid by the - 6 - ITA No.2451//CHNY/2024
Appellant to Associated Enterprises ('AE') for usage of Technology Intellectual Property ('IP'): (in relation to Ground 3 and 4) (a) Sample Standard Operating Procedures (SOPs) of the 01-08 chemicals for sales made by the Appellant during the year (b) Sales lnvoice(s) raised on customers in relation to the 09-35 above (on a sample basis) 2 In support of allowability of royalty paid by the Appellant to AE for usage of Trademark IP: (in relation to Ground 3 and 4) (a) Documents published by the Buckman Group ('the 36-136 Group') on public domain showcasing history and achievements of the Group (b) Reports published by third-party research agencies 137-146 showcasing brand image and reputation of the Group 3 In support of allowability of shared service fees paid by the Appellant to AE: (in relation to Ground 8) (a) Documents issued by the AE towards shared service fee paid by the Appellant availed (on sample basis) i.Technical Reports 147-150 ii.Guide notes for marketing activities 151-152 (b) Email exchanges towards IT services received by the Appellant from AE i.Affidavit in relation to email exchanges 153-155 ii.Copies of sample e-mail exchanges towards IT 156-185 services received by the appellant from AE
4 Analysis of margin earned by companies engaged in 186 similar business
Further, to the above, the Assessee wishes to submit as under: i. Regarding SOPs of chemicals for sales made by the Appellant during the year: By virtue of the Non-Exclusive Patent and Technology License Agreement entered by Buckman India with Buckman US, Buckman US provides technical know-how to Buckman India to enable functioning as distributor of specialty chemicals in India. Such know-how includes the details about mixing of chemicals, dilutions of the chemicals, altering the composition of the chemicals etc. in defined proportions based on specific requirements and applications of such chemicals (refer page 370 of Factual Paper book)
This know-how is provided in the form of Standard Operating Procedures ('SOPs')
The SOPs have helped Buckman India provide a clear and structured framework for the sale of specialty chemicals. This has been particularly helpful in ensuring that all necessary steps are followed and that all relevant
- 7 - information is gathered and conveyed to potential buyers dealing with complex or specialized chemicals. By providing clear and detailed instructions on how to carry out the sales process, these SOPs have ensured that Buckman India's employees have been able to contribute the sales quickly and effectively.
Further, given the nature of business involving toxic chemicals and having regard to the confidentiality norms, it is not possible to procure these services from any third-party service provider. Since these SOPs are very critical and confidential in nature, an approval from the executive management is required to make available these documents to other parties.
The same has been mentioned in our submission dated 23 May 2024 with the Learned Commissioner of Income Tax (Appeals) (Ld. CIT(A)). (refer page 399 of Factual Paper book)
Also, these documents were not submitted as these were not expressly requested during the / assessments by the Ld. CIT(A) / Learned Assessing Officer (Ld. AO). As the Appellant has only recently obtained access to provide these documents before the [Hon'ble Tribunal for the sole requirement of this appeal, we wish to submit the aforementioned documents as supporting additional evidence in the aforementioned application.
Regarding other documents provided as additional evidence (other than SOPs as mentioned above):
Documents submitted are only supporting in nature and are submitted only to facilitate in objective consideration of Appellant's claims.
The aforementioned additional evidences being requested for consideration under this application goes to the root of the dispute and requires kind consideration of the Hon'ble Tribunal in this appeal to ensure that injustice is not perpetuated. Once this additional evidence is considered, the invalidity of adjustments relating to AY 2018-19 would be easy to appreciate.
Prayer
It is respectfully submitted before Hon'ble Tribunal that the aforesaid documents, being relevant for deciding the appeal, may kindly be taken on record and considered. Consideration of the documents will facilitate in objective consideration of Applicant's claims and would further the cause of substantial justice and prevent miscarriage of justice. The Appellant respectfully submits that the documents are only supporting in nature. We, therefore, request Hon'ble Tribunal to kindly admit the abovementioned documents in the larger interest of justice and pass any - 8 - ITA No.2451//CHNY/2024
other order that may be necessary in the circumstances of the case and render justice.”
As mentioned earlier, the assessee is a distributor of specialized chemicals. Such know-how includes details about mixing of chemicals, alteration of composition of chemicals etc. The standard operating procedures helps the assessee to provide a clear and structured framework for sale of specialty chemicals.
Given the nature of business involving toxic chemicals and having the confidentiality norms in the agreement, these Standard Operating Procedures are critical and confidential in nature.
Therefore, approval from the executive management was required and obtained at the time of appellate proceedings before the Tribunal. Moreover, these documents were not expressly requested during the course of assessment proceedings or before first appellate proceedings. The documents that are now submitted before the Tribunal goes to the root of the dispute. For substantial justice and for a proper adjudication of issues raised in this appeal, we take the same on record. Since the additional evidences / documents are taken on record, we deem it appropriate to restore the matter to the files of AO for him to examine these aspects and come to a conclusion whether the payments claimed as deduction u/s.37 were for the purpose of the business of the assessee and is - 9 - an allowable deduction. The assessee shall be afford reasonable opportunity of being heard. It is ordered accordingly.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 25th February, 2025.