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Assessee by : Shri Nishit Gandhi (AR) Revenue by : Shri Mahesh Kumar (CIT- DR) Date of hearing : 05.04.2017 Date of Pronouncement : 26.04.2017 Order Under Section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. These Cross Appeal u/s 253 of the Income-tax Act (“the Act”) are directed against the order of ld. CIT(A)-15, Mumbai dated 19.08.2010 for Assessment Year (AY) 2005-06. The assessee has raised the following grounds of appeal: (i) The ld. CIT(A) erred in not deleting the entire adjustment of Rs. 2,31,89,859/- recommended by Transfer Pricing Authority(TPA) (Ground No. 1.1 to 1.6)”.
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(ii) The ld. CIT(A) erred in confirming the disallowance of Guarantee Commission of Rs. 9,78,334/- paid by assessee to its Director on the ground of non-deduction of TDS”. 2. The Revenue in its Cross Appeal raised the following grounds of appeal: 1.“In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing to limit adjustment u/s. 92CA(3) of the I.T. Act to the extent of Rs.10,90,880/- as against addition of Rs.2,31,89,849/- without appreciating the fact that volume of import purchase is tainted one and is under test and therefore the proportion cannot be applied. 2.In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.769512/- relating to unutilized MODVAT credit relying on the decision of the Supreme Court in the case of Indo Nippon Ltd., without appreciating the fact that the decision of the said case law is not applicable to the instant assessment year after insertion of provision u/s. 145A of the I.T. Act. 3.In the facts and circumstances of the case and in law, the Ld. CIT(A) erred in directing to delete expenditure of Rs.10,47,333/- incurred on research and development expenses without appreciating the fact that the assessee failed to submit any proof of research activity carried out and no supporting evidences to establish the nature of research was produced.”
3. The brief facts of the case are that the Assessee-Company is engaged in manufacturing of Blister Packing Machine, Change parts and other Packaging Machine, filed return of income for relevant AY on 09.11.2005 declaring total income of Rs. 5,57,51,342/-. Along with the return of income, the assessee submitted report in Form No. 3CEB relating to International Transaction with its Associated Enterprises (AE). The Assessing Officer (AO) made reference to Transfer Pricing Officer (TPO) u/s 92CA (1) of the Act for adjustment of Arms Length Price (ALP). The TPO entered into reference and noticed that assessee purchased components worth Rs. 81,37,340/- from its AE. Details of which are as under: Name of the AE Description of the Total amount paid Method used transaction (Rs.) 1.IMA SPA Italy Purchase of 79,99,844/- TNMM components 2.IMA EST -do- 1,28,784/- CUP 3.IMA North -do- 8,712/- CUP America
The assessee in its Transfer Pricing Study report selected four companies as comparable under Transaction Net Margin Method (TNMM) to bench mark transaction with AE. Details which are as under:
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S.No. Name of the company Data Source OP/Sales 1. Gansons Ltd Prowess 1.02% Prowess 2. Remi Process Plant & Machinery 1.69% Ltd. Prowess 3. Swiss Glascoat Equipments Ltd 7.66% Prowess 4. Veejay lakshmi Engg. Works Ltd 12.34% Mean 5.68% Median 4.68%
The TPO while making the adjustment removed one of the comparable i.e. M/s Remi Process Plant & Machinery and worked out the average margin of remaining three comparable at 9.76%. On the basis of arithmetical means of profit margin @ 9.76%, the TPO suggested the adjustment of Rs. 2,31,89,849/- vide order dated 31.08.2008 u/s 92CA(3). The AO on basis of the order of TPO under section 93CA (3) added the adjustment of Rs. 2,31,89,849/-. Besides the adjustment of Transfer Pricing, the AO disallowed MODVAT credit of Rs. 7,69,512/-, disallowed Research and Development Expenses of Rs. 10,47,333/- and a Guarantee Commission of Rs. 9,78,334/- holding that assessee-company not deducted TDS on commission. On appeal before the ld. CIT(A), the Transfer Pricing Adjustment was restricted to Rs. 10,96,880/-, the disallowance on account of Guarantee Commission was sustained. However, the adjustment on account of MODVAT credit and Research and Development Expenses were deleted. Thus, aggrieved by the order of ld. CIT(A), the assessee has filed appeal challenging partial confirming the addition of T.P. adjustment and confirming the addition of Guarantee Commission. On the other hand the Revenue has also filed Cross Appeal against deleting the addition of relating to T. P. adjustment of Rs. 2,20,92,696/- , MODVAT Credit and Research and Development Expenses.
First, we take up common ground urged by both the parties relating to Transfer Pricing adjustment. The T.P.O suggested the adjustment of Rs. 2,31,89,489/-. On appeal before the ld. CIT(A), the adjustment was restricted to Rs. 10,90,880/- and granted the relief of Rs. 2,20,92,969/- to the assessee. Thus both the parties have challenged the order of ld CIT(A).
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We have heard the ld. Authorized Representative (AR) of assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The Ld. AR of the assessee argued that in AY 2003-04 & 2004-05 the assessee entered into similar transaction with its AEs and despite the fact that during the assessment for those years, the matter was referred for Transfer Pricing adjustment; however, no adjustment was suggested /made in earlier years. For the year under consideration the T.P.O. issued a show-cause notice dated 14.10.2008 in respect of purchase of components from AEs for Rs. 8,137,340/-, however the adjustment has been made with reference to the entire turnover of the assessee. The Ld. AR of the assessee further argued that in the show-cause notice, the T.P.O asked as to why 7.01% should not be taken as Arms Length Price (ALP). However, in the order u/s 92CA(3) the rate of 9.76% was taken for determining ALP, the T.P.O applied the 9.76% to the entire transaction instead of international transaction of assessee with its AE, and suggested the adjustment of Rs. 2,31,89,849/-. The action of T.P.O is illegal and arbitrary. The Ld. AR of the assessee argued that T.P. Adjustment cannot exceed the amount of specified transaction. The ld. AR of the assessee further submitted that the ld. CIT(A) also failed to consider the fact that the adjustment has been made with reference to the entire turnover of the assessee. On the other hand, ld. DR for the Revenue supported the order of T.P.O as well as ld. CIT(A). The ld. DR for the Revenue further argued that T.P.O applied 9.76% after removing the M/s Rimy Process Plant and Machinery Ltd. being not a good comparable. The ld. DR argued that the entire adjustment as suggested by TPO should have been sustained by ld. CIT(A) and the same was wrongly deleted. In the rejoinder argument, ld. AR of the assessee argued that before removing M/s Rimy Process Plant and Machinery Ltd. and while making adjustment on the basis of operating profit, no opportunity was given to the assessee for explaining the fact and thus T.P.O made the illegality while applying the T.P. Adjustment with reference to the entire turnover.
We have considered the contention of both the parties and perused the material available on record. There is no dispute that total cost of purchased component / 4 & 7650/M/20140 IMA PG India Limited.
transaction with AEs is Rs. 81,37,340/-. The AO while issuing show-cause notice proposed the adjustment on purchase of material from its AE at 7.01%. However, he applied 9.76% to the entire turnover after removing M/s Rimy Process Plant and Machinery Ltd. The action of T.P.O is unfair. The T.P.O was required to make adjustment only in respect of International Transaction and not with the entire turnover. The ld CIT(A) while considering this ground of appeal sustained the action of TPO in eliminating M/s Remi Process Plant & Machinery Ltd. holding that TPO has taken current year data and the selling price of this comparable was higher than the 5% margin adopted by TPO. We have further noticed that the ld CIT(A) worked out the adjustment on the basis of ratio of 4.73% calculated by taking in account the total purchase of components and purchases from AEs and recommended adjustment of Rs.10,96,880/-. The TPO while making this adjustment has not given opportunity to the parties. The ld. AR also argued that sales expenses of M/s Remy Process Plant & Machinery Ltd. includes as exceptional item of “late delivery charges” and if the same is excluded it would become a good comparable. This contention of assessee also requires examination. Thus, we deem it appropriate to restore this ground of appeal to the file of TPO/AO to pass the order afresh in accordance with law. It is made clear that that TPO shall suggest the adjustment only in respect of purchased components made by assessee from its AEs and not in respect of entire turnover of the assessee. Needless to say that the T.P.O shall grant sufficient opportunity of hearing to the assessee before passing the order. In the result the Ground no.1 is allowed for statistical purpose.
8. Ground No.2 relates to disallowance of Guarantee Commission. Ld. AR of the assessee argued that this ground of appeal is covered in favour of assessee by the decision of Tribunal in case of Kotak Securities Pvt. Ltd. vs. DCIT (2012) 14 ITR (Trib.) 495 (Mum). Ld. DR for the Revenue not disputed the legal position.
9. We have considered the contention of the parties and seen that the Co-ordinate Bench of Mumbai Tribunal in Kotak Securities Pvt. Ltd.(supra) while considering the similar ground of appeal held as under:
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“7. We find that the expression ‘commission’ and ‘brokerage’ have been used together in the statute. It is well settled, as noted by Maxwell in Interpretation of Statutes and while elaborating on the principle of noscitur a sociis, that when two or more words which are susceptible to analogous meaning are used together they are deemed to be used in their cognate sense. They take, as it were, their colours from each other, the meaning of more general being restricted to a sense analogous to that of less general. Explaining this principle in general terms, Hon’ble Shri M.K. Chaturvedi, the then Vice President (MZ) has, in Interpretation of Taxing Statutes (AIFTP Journal : Vol. 4, No. 7, July, 2002, at p. 7), in his inimitable words observed: Law is not a brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism. Similarly, the rules relating to interpretation are also based on common-sense approach. Suppose a man tells his wife to go out and buy bread, milk or anything else she needs, he will not normally be understood to include in the terms ‘anything else she needs’ a new car or an item of jewellery. The dictum of ejusdem generis refers to similar situation. It means of the same kind, class or nature. The rule is that when general words follow particular and specific words of the same nature, the general words must be confined to the things of same kind as specified. Noscitur a sociis is a broader version of the maxim ejusdem generis. A man may be known by the company he keeps and a word may be interpreted with reference to be accompanying words. Words derive colour from the surrounding words.
Broom’s Legal Maxims (10th Edn.) observes that “It is a rule laid down by Lord Bacon, that copulatio verborum indicat acceptationem in eodem sensu the coupling of words together shows that they are to be understood in the same sense.” Let us now deal with legal connotations of these two expressions, namely ‘commission’ and ‘brokerage’. The Law Lexicon (Edited by Justice Y.V. Chandrachud; 1997 Edn.) observes that “in commercial law, commission is a compensation to a factor or other agent for services to be rendered in making a sale or otherwise; a sum allowed as compensation to a servant, factor or agent who manages the affairs of others, in recompense for his services.” According to the given definition, “It is an allowance, recompense or reward made to agents, factors and brokers and others for effecting sales and carrying out business transactions. It is generally calculated as a certain percentage on the amount of the transactions on the profits to the principal.” The expression ‘brokerage’ is defined as ‘fees or commission given to or charged by a broker’. In turn a broker is defined as “a middleman or agent who, for a commission on the value of transaction, negotiates for others the purchase or sale of books, bonds or commodities, or property of any kind, or who attends to the doing of something for another”.
In the light of the above discussions, and when we look at the connotations of expression ‘commission or brokerage’ in its cognate sense, as in the light of the principle of noscitur a sociis as we are obliged to, in our considered view, scope of expression ‘commission’, for this purpose, will be confined to ‘an allowance, recompense or reward made to agents, factors and brokers and others for effecting sales and carrying out business transactions’ and shall not extend to the payments, such as ‘bank guarantee commission’, which are in the nature of fees for services rendered or product offered by the recipient of such payments on principal to principal basis. Even when an expression is statutorily defined under section 2, it still has to meet the test of contextual relevance as section 2 itself starts with the words “In this Act (i.e. Income Tax Act), unless context otherwise requires…”, and, therefore, contextual meaning assumes significance. Every definition in the & 7650/M/20140 IMA PG India Limited.
Income Tax Act must depend on the context in which the expression in set out, and the context in which expression ‘commission’ appears in section 194 H, i.e. alongwith the expression ‘brokerage’, significantly restricts its connotations. The common parlance meaning of the expression ‘commission’ thus does not extend to a payment which is in the nature of fees for a product or service; it must remain restricted to , as has been elaborated above, a payment in the nature of reward for effecting sales or business transactions etc. The inclusive definition of the expression ‘commission or brokerage’ in Explanation to Section 194 H is quite in harmony with this approach as it only provides that “any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities” is includible in the scope of meaning of ‘commission or brokerage’. Therefore, what the inclusive definition really contains is nothing but normal meaning of the expression ‘commission or brokerage’. In the case of South Gujarat Roofing Tiles Manufacturers Association Vs State of Gujarat [(1976) 4 SCC 601], Hon’ble Supreme Court were in seisin of a situation in which an expression, namely ‘processing’, was given an inclusive definition, but Their Lordships were of the view that “there could be no other meaning of ‘processing’ besides what is stated as included in that expression” and that “Though ‘include’ is generally used in interpretation clause as a word of enlargement, in some cases context might suggest a different intention’. Their Lordships then concluded that though the expression used in the definition clause is ‘includes’, “it seems to us that the word ‘includes’ has been used here in the same sense of ‘means’; this is the only construction that the word can bear in this context”. In other words, an inclusive definition, as Their Lordships noted, does not necessarily always extend the meaning of an expression. When inclusive definition contains ordinary normal connotations of an expression, in our considered view, even an inclusive definition has to be treated as exhaustive. That is the situation in the case before us as well. Even as definition of expression ‘commission or brokerage’, in Explanation to Section 194 H, is stated to be exclusive, it does not really mean anything other than what has been specifically stated in the said definition. Therefore, as held by the coordinate benches in a number of cases including SRL Ranbaxy Ltd vs ACIT (ITA No. 434/Del/11; order dated 16.12.2011), Fosters India Ltd Vs ITO (117 TTJ 346), and Ajmer Zila Dugdh Utpadak Sangh Ltd Vs ITO (34 SOT 216), principal agent relationship is a sine qua non for invoking the provisions of Section 194 H. In the case before us, there is no principal agent relationship between the bank issuing the bank guarantee and the assessee. When bank issues the bank guarantee, on behalf of the assessee, all it does is to accept the commitment of making payment of a specified amount to, on demand, the beneficiary, and it is in consideration of this commitment, the bank charges a fees which is customarily termed as ‘bank guarantee commission’ . While it is termed as ‘guarantee commission’, it is not in the nature of ‘commission’ as it is understood in common business parlance and in the context of the section 194H. This transaction, in our considered view, is not a transaction between principal and agent so as to attract the tax deduction requirements under section 194H. We are, therefore, of the considered view that the CIT(A) indeed erred in holding that the assessee was indeed under an obligation to deduct tax at source under section 194 H from payments made by the assessee to various banks. As we have held that the assessee was not required to deduct tax at source under section 194 H, the question of levy of interest under section 201(1A) cannot arise.” Considering the decision of Co-ordinate Bench, the Ground No.2 of the appeal is allowed in favour of assessee. In the result, appeal of the assessee is allowed. 7 & 7650/M/20140 IMA PG India Limited. Appeal by Revenue. 10. The Ground No.1 relates to the T.P. Adjustment. This ground is connected with the Ground No.1 of assessee’s appeal in . We have already restored the connected grounds of appeal in assessee’s appeal to the file of TPO/AO, hence, this ground of appeal is also allowed for statistical purpose with the same observation.
11. Ground No.2 relates to deletion of disallowance of MODVAT Credit. The ld DR for the revenue supported the order of assessing officer and prayed to reverse the finding of ld CIT(A). On the other hand the ld. AR of the assessee argued that the assessee is consistently following the inclusive method of accounting which has been accepted by the Department from so many years, the assessee was not required to add the valuation of closing stock of finished goods and unutilized MODVAT Credit. It was further submitted that the assessee furnished the details of Cenvet Credit. However, the AO has not given any credit as per the calculation submitted before him. On the other hand, ld. DR for the Revenue supported the order of authorities below.
12. We have considered the contention of the parties and seen the order of authorities below. The AO during the assessment proceeding asked the assessee to submit the justification for unutilized MODVAT Credit. The assessee filed its explanation vide reply dated 26.11.2008. The assessee contended that there was no impact on the profit of assessee as due to the increase in the profit in closing stock have been increased by corresponding decrease in profit due to inclusion of excise duty in opening stock and purchase. The contention of assessee was not accepted by AO holding that unutilized MODVAT Credit is to be added in the valuation of closing stock of raw-material and thereby added Rs. 7,69,512/-. On appeal, the addition was deleted by ld. CIT(A) on the basis of decision of Hon’ble Bombay High Court in Indo-Nippon.
13. We have considered the contention of both the parties and find that assessee has not shown that there will be no impact on profit by following exclusive method. Hence, we deem it appropriate to restore this ground of appeal to the file of AO, the assessee is directed to given complete calculation of Cenvet Credit to the 8 & 7650/M/20140 IMA PG India Limited.
AO. The AO is directed to pass the order afresh in accordance with law. Needless to say that AO shall provide sufficient opportunity of hearing to the assessee before passing the order. 14. Ground No.3 relates to deleting the disallowance of Research and Development Expenses. Ld. AR of the assessee argued that this ground of appeal is covered by the decision of Tribunal in assessee’s own case for Ay 2002-03 in ITA No. 3361/Mum/2006. Ld. DR for the Revenue not disputed the factual and legal position.
15. We have considered the contention of both the parties and have seen that similar disallowance was made in AY 2002-03 and the same was deleted by ld. CIT(A) and the appeal filed by Revenue before the Tribunal was dismissed vide order dated 30.09.2011in holding as under:
“54. Ground No. 8 - Issue of Research & Development Expenses: - The A.O. has discussed this issue in para-14 at page-6 of the assessment order. The A.O. made the disallowance of Rs. 14,25,040/-since assessee did not explain the nature of these expenses. Before the CIT(A) it was submitted that assessee was manufacturing Blister Packing Machines (Tablets & Capsules packing machines) used by pharmaceutical industry. The suppliers of packing machinery to pharmaceutical units have to undertake Research and Development of their products to keep in pace with changing needs of Pharmaceutical Industry. For Research and Development of products, assessee has employed an engineer and 3-4 other staff since years continuously for doing the R & D work. The break up of R&D expenses of Rs. 14,25,040/- was provided by assessee to the A.O. through its letter dated 10.02.2005 during assessment proceedings. Besides expenses on salary, bonus, etc. to R & D staff and other expenses like electricity charges and telephone expenses have been incurred. The other expenses incurred include Rs. 50,000/- paid to Sharpline Automation for designing change in product and Rs.1,80,000/- paid to Electronics Regional Test Laboratory (West) (Govt. Dept like ISI) for issuing a certificate regarding fitness of changes brought in machines manufactured by assessee. Research and Development expenses incurred are revenue expenses only. Revenue Expenses on Research and Development are fully allowable under clause (1)(i) of section 35 of I.T. Act, 1961. Capital Expenditure is allowable under clause (iv) while payments made to other institutes for R & D are allowable under clause (ii) and (iii) of sub-section (1). It was submitted that the R & D expenses incurred in earlier years shown here under were fully allowed. 2001-2002 Rs.12,68,735/- 2000-2001 Rs.12,21,524/- 1999-2000 Rs. 8,84,323/- & 7650/M/20140 IMA PG India Limited.
1998-1999 Rs.3,38,181/- 1997-1998 Rs.2,41,145/- The CIT(A) opined that since the A.O. had made disallowance of research and development expenses without giving sufficient opportunity to assessee CIT(A) remanded the issue back to the A.O. for his comments. The A.O. sent his remand report vide his letter dated 13.06.2005. After considering the report and explanation of assessee and documents placed the CIT(A) gave a finding that assessee has carried out research and development work in respect of various products manufactured by it. The said expenditure is allowable under section 35 of the I.T. Act. Moreover, on perusal of the details of expenses debited under the head 'research and development expenses', it is seen that these expenses are of revenue nature and they would be otherwise allowable under section 37 of the IT. Act. In view of this discussion the CIT(A) deleted the addition of Rs.14,25,040/- made by the A.O. on this account. Revenue is aggrieved.
After considering the arguments of rival parties we agree with the finding of CIT(A) on the issue. What assessee has spent was only revenue expenditure for R&D work in the form of salaries etc and certain payments for approvals. Similar expenditure in earlier years was also allowed without any disallowance. The ground raised
is also not correct as the Act allows even the capital expenditure as deduction, sometimes weighted deduction, so the argument of enduring advantage is not appropriate. It seems the ground was raised without considering the provisions of IT Act. The same is therefore dismissed.”
16. Considering the decision of Co-ordinate Bench in assessee’s own case on identical grounds of appeal, we do not find any merit in the grounds of appeal raised by Revenue. Hence, this Ground of appeal is dismissed.
17. In the Result, appeal of the Revenue is partly allowed.
Order pronounced in the open court on this 26th April, 2017.