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Income Tax Appellate Tribunal, DELHI BENCHES : H : NEW DELHI
Before: SHRI R.S. SYAL & SHRI SUDHANSHU SRIVASTAVA
PER R.S. SYAL, AM:
1. This appeal by the Revenue arises out of the order passed by the CIT(A) on 28.2.2011 in relation to the assessment year 2007-08.
The first ground is against the deletion of addition of Rs.6,15,68,134/- made by the AO on account of unexplained difference in the value of sales.
Briefly stated, the facts of the case are that the assessee declared sales of Rs.24,78,70,238/- inclusive of Rs.3,90,17,944/- on account of Service charges in its Trading account. During the course of assessment proceedings, the AO called for details of sales on which commission was paid and on which commission was still payable. Such details filed by the assessee have been incorporated on pages 3 onwards of the assessment order. After going through two Annexures filed by the assessee in this regard, the AO observed that there was a difference of Rs.6,15,68,134/- between two figures, namely, Rs.18,21,12,483/- as per Annexure-7 and Rs.12,05,44,349/- as
per Annexure-1. He noted that whereas Annexure-7 contained 74 bills, Annexure-1 had only 61 bills. Reproducing the difference between the two Annexures with date of invoice, customer and sales value on page 9 of the assessment order, he made addition for this differential amount of Rs.6,15,68,134/-.
During the course of first appellate proceedings, the assessee filed certain details, which were sent by the ld. CIT(A) to the AO for remand report. After considering these details and the remand report of the AO, the ld. CIT(A) deleted the disallowance. The Revenue is aggrieved against the deletion of disallowance.
We have heard the rival parties and perused the relevant material on record. There is no dispute on the fact that the assessee credited a sum of Rs.24.78 crore to its Trading account as Sales and Service charges. The case of the AO is that certain items, as listed on page 9 of the assessment order totaling Rs.6.15 crore, were not included by the assessee in the figure of total sales, which position has not been accepted by the ld.CIT(A). We have perused break-up of total Sales with Commission, a copy of which is available on pages 37-46 of the paper book. The thirteen items as noticed by the AO are, in fact, appearing in such break-up of total turnover of Rs.24.78 crore along with the amount of commission on such sales, which matches with the amount credited to the Trading account. Once these 13 items totalling sale of Rs.6.15 crore stand included in the figure of total turnover as per the Trading account, there can be no question of making any further addition on the same score. We, therefore, uphold the impugned order in deleting this disallowance. This ground is not allowed.
Ground no. 2 is against the deletion of disallowance of Rs.60,19,438/- made by the AO on account of unexplained commission payment where corresponding sales had not been credited by the assessee to the Trading and Profit & Loss Account. This ground is, in fact, consequential to ground no.
It is seen from break-up of total turnover and total commission, as discussed supra, that there is complete detail of commission on sales to the tune of Rs.1,27,77,515/- which figure matches with the amount of deduction claimed by the assessee in its Profit & Loss Account. All the 13 items of sales totaling Rs.6.15 crore have been found to be present in such break-up of turnover as has been noticed while disposing of ground No.1. It is further noted that simultaneous with the amount of turnover, there is debit for commission in respect of these 13 items as well, which is part and parcel of total commission claimed by the assessee as deduction for a sum of Rs.1.27 crore. Under these circumstances, we find no reason to interfere with the impugned order deleting disallowance of commission. This ground fails.
Ground no. 3 is against the deletion of disallowance of Rs.67,67,729/- towards technical fee payment. The assessee debited a sum of Rs.67.67 lac under the head ‘Technical expenses.’ On being called upon to submit justification for this deduction, the assessee filed a letter stating that technical assistance and licence agreement was made with Weir Pumps Ltd., Scotland, and pursuant to such Agreement, the said technical fees was paid. On perusal of this Agreement, the AO observed that the same related only to Royalty and not technical expenses. He, therefore, made disallowance of Rs.67.67 lac. Without prejudice to his main reason for addition, he sustained disallowance u/s 40(a)(ia) of the Act as well, since in his opinion no deduction of tax at source was made on such payment. The ld. CIT(A) deleted the disallowance.
We have heard the rival parties and perused the relevant material on record. The ld. AR invited our attention towards page 90 of the paper book which is an Agreement between ONGC and the assessee. It was claimed that pursuant to this Agreement, the assessee got technical assistance from its parent company for which the said payment was made.
However, on a specific query, no Agreement, between the assessee and parent company evidencing the nature of work done and remuneration for such technical assistance was placed on record. In the absence of any such Agreement, it is difficult to understand the nature of work for which the assessee made the payment and also its quantification. We, therefore, set aside the impugned order on this issue and remit the matter to the file of AO for deciding this point afresh in the light of the material placed or to be further placed by the assessee in support of technical fee paid to its parent company and also the relevant Agreement. In so far as the AO’s finding about the applicability of section 40(a)(ia) is concerned, we find that the same is not correct inasmuch as the assessee did deduct tax at source from payments made to its parent company. This issue is, therefore, sent back to the file of AO for a fresh decision as discussed hereinabove.
The only other ground which survives for adjudication is ground no. 4, which is against the deletion of disallowance of Rs.38,11,165/- on account of royalty payment made by the assessee to M/s Weir Pumps Ltd., Scotland. The assessee claimed deduction of royalty expenditure amounting to Rs.38,11,165/-. The AO negated such claim on the premise that royalty was paid to holding company which had 75% shareholding in the assessee company only and this payment was nothing but payment to self. In doing so, he lifted the corporate veil and, eventually, made the disallowance. Apart from that, he also relied on section 2(22)(e) of the Act for making this disallowance in addition to applying the provisions of section 40(a)(i) of the Act. The ld. CIT(A) deleted the disallowance.
We have heard the parties and perused the relevant material on record. We find that the assessee entered into an Agreement with its sister concern for the use of patent/brand in lieu of which it started making payment of royalty at the stipulated rate. Under similar circumstances, such royalty payment made by the assessee to its sister concern came to be accepted and allowed as deduction by the Revenue in earlier years. Even the Transfer Pricing Officer found such payment to be at arm’s length. The viewpoint of the AO in lifting the corporate veil by treating royalty payment to its sister concern as payment to self, has absolutely no basis as both are independent entities and the factum of user of patent/trademark etc. has not been denied by the AO.
Obviously, when the assessee is using patents/trademarks of its parent company, it will have to pay royalty for the same which cannot be disallowed, unless it is not at arm’s length price.
We, therefore, uphold the impugned order on this score.
As regards the applicability of section 2(22)(e), we find that the same is again without any bedrock. The ingredients of this provision are not applicable to the relevant fact situation obtaining in this case. The assessee obtained the use of patent/trademark/brand name and in a quid pro quo paid royalty to its parent concern.
Similarly, the viewpoint of the AO in sustaining disallowance by applying section 40(a)(ia) of the Act is again unsustainable because the assessee did deduct tax at source before making the payment. We, therefore, approve the view taken by the CIT(A) in deleting this disallowance.
In the result, the appeal of the Revenue is partly allowed for statistical purposes.
Order Pronounced in the open Court on 29.01.2016.