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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Assessing Officer dated 11.01.2016 consequent to the direction of Dispute Resolution Panel, for the assessment year 2011-12.
Shri Ajit Tolani, the Ld. representative for the assessee, submitted that the assessee-company engaged in manufacturing and service of wind turbine generators and sale of wind turbine components. According to the Ld. representative, the assessee is selling the wind turbine generators and its components in the domestic market as well as in the international markets. Referring to the objection raised before the Dispute Resolution Panel in the grounds of objection No.6, a copy of which is available at page 71 of the appeal folder, the Ld. representative submitted that the assessee claimed before the Dispute Resolution Panel that the Transfer Pricing Officer computed the sales of the assessee by excluding the income from annual maintenance service without excluding the corresponding cost of rendering such services. The Ld. representative further submitted that since the income from annual maintenance service is not included in the operating revenue, the corresponding cost also needs to be excluded from the total cost for computation of the operating margins. Referring to the direction of the Dispute Resolution Panel, the Ld. representative submitted that this objection of the assessee was not taken cognizance of Dispute Resolution Panel, therefore, it remains to be disposed of. Referring to the order of the Transfer Pricing Officer, more particularly the computation of income, the Ld. representative submitted that the Transfer Pricing Officer excluded the income from annual maintenance service, however, failed to exclude the expenditure. Referring to the order of the Transfer Pricing Officer, more particularly para 9.1, the Ld. representative submitted that the shortfall in revenue recognition from annual maintenance charges and the adjustment thereunder requires no consideration as the service income from annual maintenance income is proposed to be excluded while computing the profit from manufacture and sale of wind turbine generators. Once the income is excluded, according to the Ld. representative, the cost is also to be excluded. Since the cost / expenditure is not excluded, the Assessing Officer may be directed to exclude the expenditure incurred by the assessee for annual maintenance service.
On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that the Transfer Pricing Officer found that income from annual maintenance service needs to be excluded. Therefore, the expenditure incurred for annual maintenance service also needs to be excluded. However, it is not clear from the assessment order and the order of the Transfer Pricing Officer whether it was really excluded from the operating cost. Therefore, the Assessing Officer may be directed to verify whether the expenditure for annual maintenance service is excluded or not.
We have considered the rival submissions on either side and perused the relevant material available on record. The Transfer Pricing Officer by way of show cause notice observed that the miscellaneous income in the form annual maintenance service requires to be excluded. Therefore, the justice requires that the corresponding cost incurred for earning the miscellaneous income also requires to be excluded. After reproducing the show cause notice dated 03.11.2014, the Transfer Pricing Officer found at para 9.1 that the shortfall in revenue recognition from AMC, the adjustment thereunder requires no consideration as the service income from annual maintenance is proposed to be excluded while computing the profit from manufacture and sale of wind turbine generators. Therefore, it is obvious that the Transfer Pricing Officer has proposed to exclude the income from annual maintenance charges from the total income. Once the income was excluded, the expenditure for earning the annual maintenance income also needs to be excluded. As rightly submitted by the Ld. D.R., it is not clear either from the assessment order or TPO’s order. This aspect was not considered by the Dispute Resolution Panel in their order.
Therefore, this Tribunal is of the considered opinion that the matter needs to be verified by the Assessing Officer. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to refer the issue of expenditure for maintenance charges to the Dispute Resolution Panel. In such reference, the DRP shall examine whether the expenditure said to be incurred by the assessee for earning income from annual maintenance is to be excluded or not? The Assessing Officer after receiving the report from the DRP, shall pass order in conformity with the direction of the DRP as provided in Section 144C(13) of the Act.
Now coming to the second ground of appeal with regard to disallowance of `10,50,000/- towards sales commission.
6. Shri Ajit Tolani, the Ld. representative for the assessee, submitted that the assessee claimed an expenditure of `10,50,000/- towards sales commission. The assessee had filed copy of the invoice before the Assessing Officer. The Assessing Officer disallowed the claim of the assessee only on the ground that there was no agreement between the parties. According to the Ld. representative, the payment of sales commission is not in dispute.
According to the Ld. representative, since the assessee filed the invoices before the authorities below, there cannot be any disallowance, especially when the payments were not in dispute.
On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that the assessee has not filed the details of service rendered by the person to whom the commission was paid. Even the names and address of the agents were not produced. The assessee has not filed any other details.
Therefore, the Dispute Resolution Panel has confirmed the order of the Transfer Pricing Officer. In the absence of any evidence to indicate the service said to be rendered by the agents, an identical disallowance which was made for the assessment year 2010-11.
Hence, DRP has rightly confirmed the order of the TPO for the year under consideration also.
We have considered the rival submissions on either side and perused the relevant material available on record. The assessee claims that a sum of `10,50,000/- was paid towards sales commission. The assessee has filed copies of invoice. On perusal of the direction of the Dispute Resolution Panel, it shows that the assessee has not produced the details of the service rendered, the names and address of the commission agents and the details of the commission paid, etc. Even before this Tribunal, the details of the agents, the payment of commission are not available. The assessee claims a lump sum payment of `10,50,000/-. In the absence of any details with regard to names and address of commission agents and the commission paid, this Tribunal is of the considered opinion that the disallowance has rightly been made. It is not in dispute that an identical disallowance was made in the earlier assessment year 2010-11 on identical set of facts.
Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly, the same is confirmed.
The next ground of appeal is with regard to disallowance of `3,87,91,750/- under Section 40(a)(i) of the Act.
10. Shri Ajit Tolani, the Ld. representative for the assessee, submitted that the parent company of the assessee, namely, Vestas Denmark, gave guarantee to the customers of the assessee who purchased windmill in India. The assessee has paid corporate performance guarantee fee of `3,87,91,750/- and claimed the same as expenditure. The Assessing Officer, however, found that the payment made by the assessee is in the nature of interest, therefore, the assessee is liable to deduct tax under Section 194-I of the Act . Referring to the order of the Tribunal in ACIT v. GMAC Financial Services India Ltd. in 1537, 1538 & 1539/Mds/2009 dated 20.04.2011, the Ld. representative submitted that an identical payment was held to be not in the nature of interest. In fact, this Tribunal placed his reliance on the Double Taxation Avoidance Agreement between India and USA. In the case before us, the payment was made to the parent company at Denmark. Placing reliance on the Double Taxation Avoidance Agreement between Government of India and Government of Denmark, the Ld. representative submitted that “interest” is defined in Article 12. Article 12(4) clearly says that “interest” means income from debt-claimed of every kind and income from bonds or debentures. However, the payment of penalty for late payment shall not be regarded as interest for the purpose of this Article. In view of the Double Taxation Avoidance Agreement, according to the Ld. representative, what is paid by the assessee as guarantee to the parent company cannot be regarded as interest. On a query from the Bench, when the assessee has paid to the parent company on the basis of guarantee performance given to the customers, why such payment shall not be treated as business profits in the hands of the parent company? The Ld. representative submitted that in case the payment was considered as business profit, then naturally there should be a permanent establishment for parent company in India. In this case, there is no permanent establishment, therefore, payment made to the parent company is not chargeable under the Indian income-tax. The Ld. representative further submitted that a copy of the guarantee performance given by the parent company is available at page 49 of the paper-book. The parent company guarantees to perform the contract of warranty and service in case the assessee-company fails to perform. In view of this guarantee, according to the Ld. representative, the image of the assessee- company in the market increases, therefore, the assessee was able to sell its product in the Indian market. On a query from the Bench, the Ld. representative clarified that the guarantee was given to the Indian customers by the assessee’s parent company. The Ld. representative further clarified that there is no provision in the guarantee performance agreement for a dispute resolution in case it arises between the Indian customers and the assessee. On a query from the Bench, when the Indian customer is aggrieved over the performance of wind turbine generators, where he can raise the dispute either in India or in Denmark? The Ld. representative submitted that the agreement is silent on this aspect. The Ld. representative further submitted that in view of the guarantee given by the parent company, the payment was made, therefore, it is a business expenditure.
11. On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that the so-called guarantee said to be given by the parent company is in the nature of interest. Therefore, the Dispute Resolution Panel has rightly confirmed the order of the Transfer Pricing Officer.
We have considered the rival submissions on either side and perused the relevant material available on record. The Transfer Pricing Officer proceeded on the presumption that what was paid by the assessee is interest. A perusal of the Double Taxation Avoidance Agreement between India and Denmark clearly shows that what was paid by the assessee is not interest. It is a payment for the so-called guarantee said to be given by the parent company.
The question arises for consideration is what kind of services are rendered by the parent company and whether such services are rendered in India and whether such payment is liable for taxation in India. This Tribunal is of the considered opinion that since the payment does not partake the character of interest, it would naturally be a business profit for the parent company. In the course of its business activity, the parent company of the assessee gives guarantee to Indian customers for performance in case the assessee-company fails to perform its obligations. The agreement, namely, performance guarantee agreement, is silent in respect of dispute resolution. An Indian company or customer naturally cannot be expected to travel all the way to Denmark for enforcing this guarantee. This guarantee agreement does not provide for any arbitration in India. Therefore, it has to be examined whether the guarantee said to be given by the parent company is enforceable in India? If it is not enforceable in India, whether such kind of agreement is for business purpose or not? It also needs to be examined when the parent company gives guarantee to Indian customers in respect of the product sold by the assessee-company in India, whether the assessee-company can be considered as permanent establishment in India in respect of the income earned by the assessee in the form of guarantee performance fee? These aspects were not considered either by the Transfer Pricing Officer or by the Dispute Resolution Panel. Therefore, this Tribunal is of the considered opinion that the matter needs to be re-examined. Accordingly, the orders of the lower authorities are set aside. The issue of performance guarantee fee is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter to the DRP. The DRP shall examine the issue in the light of the material available on record and thereafter decide the issue after giving reasonable opportunity to the assessee. Thereafter, the Assessing Officer shall pass necessary order under Section 144C(13) of the Act.
In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced on 22nd April, 2016 at Chennai.