PANASONIC INDUSTRIAL ASIA PTE LTD.- INDIA BRANCH OFFICE,NOIDA vs. ADIT (INTERNATIONAL TAXATION), NEW DELHI

1. Ld. CIT(A) has erred on facts and in law in not giving effect to the directions of the Hon’ble ITAT it toto.

In the present case, various notices were sent to the assessee at the address mentioned in Form 36 through registered post and despite service of notice none appeared on behalf of the assessee. Accordingly, the case of the appellant is decided ex-parte after considering the relevant material on record and the arguments made by the ld. DR.

The facts in brief are that the assessee, Panasonic Industrial Asia Pte. Ltd. is a company incorporated in Singapore and has primarily engaged in the business of trading for industrial products such as compressors, machinery and batteries. It has established a branch office in India whose activities is restricted to marketing and technical support and research activities. For the year under consideration, the assessee has filed its return of income on 30.10.2004 declaring income of Rs.48,37,180/-. In the first round of proceedings, the Assessing Officer in his assessment order passed u/s. 143(3) has recomputed income by applying the gross profit rates from consolidated accounts of the Mutsuhito group to the sales made by Head Office in India during the year and 50% of such profit was considered to be taxable in the hands of the appellant-assessee. Further, in respect of sales made in India by other group companies, an ad-hoc rate of commission of 6% was applied instead of 2% reported by the assessee. Accordingly, the assessee’s income was computed at Rs.12,67,74,060/-. In the first appeal, the Ld. CIT (A) has directed as under:- “Attribution of 50% profits of the Appellant to Indian operation was upheld. For purpose of computation of income in relation to sales made by Head Office in India, AO was directed to use net profit ratio of Head Office. Further, AO was directed to compute correct commission income using the correct turnover (as accepted in the remand report for the subject assessment year) and applying the correct commission rate (as per relevant agreement or using appropriate comparables).

Aggrieved by the said order, the assessee preferred an appeal before the Tribunal wherein the assessee contended that assessee should be allowed expenses against ‘commission income earned from group companies’ and ‘other income’ earned by it because the Assessing Officer has taxed on gross basis. The Tribunal vide order dated 27th December, 2010 in to 1727/Del/2009 has set aside the order of the Ld. CIT (A) and directed the Assessing Officer to allow deduction to the appellant-assessee on account of expenses incurred by it in connection with commission income received from the group companies and other income earned by it in accordance with chart prepared and submitted by the assessee. The Tribunal has categorically held that gross income cannot be brought to tax and only net income after allowing deduction of expenses, if any. The relevant observation of the Tribunal in this regard incorporated in the assessment order reads as under: “Since it is not possible for us to verify the correctness of this working, we restore this matter back to the file of the Assessing Officer for this purpose. We set aside the order of CIT(A) on this issue in Assessment Year 2003-04 & 2004-05 and direct the Assessing Officer to allow deduction to the assessee on account of expenses incurred by it in connection with earning of commission income from group companies and other incomes which are brought to tax on gross basis. The working of the assessee should be verified and expenses should be allowed as deduction to the extent it is found that the expenses are allocable towards earning of these two incomes. If the net income after allowing deduction of expenses is lower than returned income in any year, then the final assessed income should be the returned income which means that deduction on account of expenses should be restricted to that extent which results into net income to the extent of returned income. The AO should pass necessary order as per law as per above discussion after providing adequate opportunity of being heard to the assessee in A. Y. 2003-04 and 2004-05."

The assessee before the Assessing Officer has claimed expenses to the tune of Rs.2,01,70,190/- against income from ‘commission from group companies’ and ‘other income’ which cumulatively amounted to Rs.1,72,18,506/-. The total expenses as per the financial statements was Rs.3,21,54,525/-. The basis for allocation of expenses to the ‘Income from group companies’ and ‘other income’ given by the assessee was as under: “Direct expenses: Income considered on account of subsidy of Rs. 3,253,654 is actually reimbursement of expenses incurred by PIAPL - Branch office, as claimed by the assessee. If same is considered as income, direct expenses of same amount i.e. Rs. 3,253,654 has been claimed as expenses against subsidy income. In addition, direct expenses on account of sale of spare parts to the extent of Rs. 16,24,519 has been considered for allowing deduction against income on account of sale of spare parts of Rs. 24,93,372. Thus, direct expenses allowable against subsidy and sale of spare parts are as under: Direct expenses Amount (in Rs.) Expenses against subsidy 3,25,,654 3,253,654 16,24,519 Expenses against subsidy 3,253,654 4,878,173 Total direct expenses 4,878,173

The ld. Assessing Officer after seeking direction from the Additional Commissioner of Income Tax partly allowed the expenses, like direct expenses but has rejected the basis of allocation on indirect expenses against commission income from other group companies and other income and held that indirect expenses can be allocated, taking the sales made by the head office and other group companies in India and rejected the assessee’s allocation of indirect expenses taking income earned as the basis.

Ld. CIT (A) following predecessor’s order dated 28.01.2013 and dismissed the assessee’s appeal after holding and observing as under: “The aforesaid issue was before my learned predecessor who in Appeal No. 128/1 1-12 dated 28.01.2013, had adjudicated the issue. At Para 7.4 of his order, rejecting the claim of the appellant, he “I do no find merits in arguments of the appellant that indirect expenses should be charged, in ratio of respective incomes. As discussed above, the appellant is having two streams of income. The natures of activities I services rendered by branch office (PE) of the appellant to its head, office and other group companies undisputedly remain the same. Further, rate of commission charged from different group companies varies.

The Ld. DR has strongly relied upon the finding of the Assessing Officer as well as ld. CIT (A).

After considering the relevant findings given in the impugned orders, we find that the only issue for determination is allowability of deduction for indirect expenses against commission income from group companies and other income of the appellant-assessee. There is no dispute regarding deduction of direct expenses which had already been allowed by the Assessing Officer in pursuance of ITAT order. The assessee-company is a 100% subsidiary of Mutsuhito Electric Asia Pte, Singapore which is owned by Matsushita Electric Industrial Co. Ltd., Japan. Most of these companies are selling their products in India and Assessee- Company is selling its product through Branch Office in India. Besides this, other group companies are also selling their products in India through Branch Office of the assessee on which commission income is taxable in India. The Assessing Officer out of total income indirect expenses of Rs.1,23,78,008/- on proportional basis with reference to sales whereas assessee has claimed indirect expenses to the tune of Rs.1,52,92,017/- on proportional basis with reference to the income. Reasoning given by the authorities below are that assessee is having two streams of income, i.e., business income where assessee is selling its product through its Branch Office and selling products of other group companies in India through Branch Office from which it has earned commission. The rate of commission charged from different group companies varies, therefore, it is not proper method of allocation of indirect expenses through commission income, and therefore, apportion of indirect expense should be in the sales ratio. First of all, from the perusal of the relevant direction as incorporated in the ITAT order, it is seen that Assessing Officer was directed to allow the deduction to the assessee on account of expenses incurred by it in connection with earning of commission income from group companies and other income and the working given by the assessee should be verified and the expenses should be allowed as deduction to the extent it is found that expenses are allocable towards earning of these two income. Thus, there was a clear cut direction that expenses are to be allocated which are allocable towards earning of the income. It is undisputed fact that branch office of the assessee has earned income in India from provision of services only, and therefore, allocation of indirect expenses have to be based upon services rendered which in turn has led to earning of commission income. Thus, indirect expenses incurred by the Branch Office has to be seen qua the earning of services/commission income, and therefore, should be allocated based upon such commission income. It is the provision of services which results in incurring of various indirect expenses, and therefore, the contention raised by the assessee before the lower authorities, in our opinion, appears to be correct. The provision of service by the Branch Office for its Head Office and other group companies are like two different centres and the benefits received by these cost centres has to be seen in terms of service fee or commission, and therefore, indirect expenses of these two cost centres of the Branch Office should be allocated in proportion to the benefits received, i.e., service/commission income. The indirect expenses incurred by the Branch Office are wholly independent of sales made by the Head Office and other group companies, and therefore, the basis for sales taken by the Assessing Officer cannot be the correct method for allocation. This was also the mandate of the direction of the Tribunal also. Thus, in absence of any finding given by the Assessing Officer the basis for allocating the indirect expenses on proportion basis with reference to the commission income and other income as submitted by the assessee cannot be faulted with and is to be taken as correct. Accordingly, we direct the Assessing Officer to allow indirect expenses at Rs.1,52,92,017/- instead of Rs.1,23,78,008/- allowed by the Assessing Officer.

In the result, the appeal of the assessee is allowed.