Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” BENCH, PUNE
Before: SHRI INTURI RAMA RAO & SHRI PARTHA SARATHI CHAUDHURY
आदेश / ORDER PER PARTHA SARATHI CHAUDHURY, JM:
This cross-appeals preferred by the Revenue and assessee emanates from the directions of the Ld. Dispute Resolution Panel-3, Mumbai (DRP) dated 31.12.2015 passed u/s.144C(5) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟) for the assessment year 2011-12 as per the grounds of appeal on record.
First, we would take up assessee‟s appeal for the assessment year 2011-12 for adjudication.
ITA No.835/PUN/2016 ( Assessee’s Appeal) A.Y.2011-12
In ITA No.835/PUN/2016, the assessee has raised following grounds of appeal: “I) General ground: 1. On the facts and circumstances of the case, the learned AO has erred both on facts and in law, in proposing to access the income of the Appellant at Rs.22,95,77,110/- as against returned income of Rs.5,62,31,989/- declared by the Appellant. II) In respect of Corporate Tax Disallowance: On the facts and in the circumstances of the case and in law, the Hon‟ble DRP and consequently the learned AO have : Erroneous disallowance amounting to Rs.8,17,28,763/-on account of brand royalty and royalty paid for use of technical know-how for the purposes of business. 2. Erred in making disallowance under Section 37 of the Act in respect of royalty expenditure incurred by the Appellant, without considering the fact that the same is incurred wholly and exclusively for the purpose of business of the Appellant.
3 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
Erroneous disallowance of Rs.2,28,567/- in relation to amortization of lease charges on leasehold land 3. Erred in making disallowance under section 37 of the Act in respect of amortization of lease charges on leasehold land incurred by the Appellant considering the same as a capital expenditure. Erroneous disallowance of Rs.9,13,87,792/- in relation to legal and professional fees. 4. Erred in making disallowance under Section 37 of the Act in respect of legal and professional fees incurred by the Appellant on account of HR, legal, IT, finance, sales, marketing and other ancillary services without considering the fact that the same have been incurred wholly and exclusively for the purpose of business of the Appellant. III) In respect of transfer pricing adjustment : General ground challenging the transfer pricing adjustment of Rs.9,11,83,759/- 5. Erred on facts and in law by making a transfer pricing adjustment to its international transactions in connection with payment of brand royalty and payment of professional fees and not accepting the analysis undertaken by the Appellant to determine the arm's length price ('ALP'). Non-acceptance of the comparability analysis as documented in the transfer pricing documentation 6. Erred on facts and in law by not accepting the comparability analysis as documented in the transfer pricing documentation maintained by the Appellant in relation to international transactions relating to payment of brand royalty and professional fees. Adjustment of Rs.1,40,98,865/- in respect of payment of brand royalty 7. Erred in not considering the aggregation approach for benchmarking the international transaction of payment of brand royalty without appreciating the fact that the said international transaction is closely interlinked to the manufacturing activity of the Appellant. 8. Erred in applying Comparable Uncontrolled Price ('CUP') method and determining the ALP of the international transaction pertaining to payment of brand royalty fees to AE as NIL, without identifying any comparable uncontrolled transaction. 9. Erred in concluding that the Appellant has not derived any benefit from the payment of brand royalty to its AE in relation to use of name, logo and trademark by the Appellant. 10. Erred in disregarding the explanations along with documentary evidences to substantiate the actual payments made in relation to use of name, logo and trademark. Adjustment of Rs.7,70,84,894/- in respect of payment of professional fees
4 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
Erred in applying CUP method and determining the ALP of the international transactions pertaining to payment of professional fees to AEs as NIL, without identifying any comparable uncontrolled transaction. 12. Erred in concluding that no professional services have been received by the Appellant and in disregarding the explanations along with documentary evidence submitted to substantiate the actual payments made with regard to the same. 13. Erred in concluding that the Appellant has not derived any benefit from the payment of professional fees to its AE. 14. Erred in concluding that no independent enterprise would have made such payment for similar services rendered by another enterprise without providing any material on record to substantiate the basis of such conclusion. IV) Other grounds 15. Initiation of penalty proceedings under section 271(1)(c) of the Act Erred in initiating penalty proceedings under section 271 (1 )(c) without considering the fact that corporate tax disallowances as well as transfer pricing adjustments have been made on account of difference of opinion, interpretation of provisions of law, etc and not due to concealment of or furnishing of inaccurate particulars of income. Levy of interest under section 234B section of the Act. 16. Erred in law and on facts in levying interest under section 234B of the Act. The Appellant craves leave to add, alter, vary, omit, substitute, amend or delete one or more of the above grounds of appeal on or before or at the time of hearing of the appeal, so as to enable the Hon'ble Income Tax Appellate Tribunal to dispose off the appeal according to law.”
At the very outset, the Ld. AR for the assessee submitted that in the grounds of appeal, Grounds No.1, 5 and 6 are general in nature and hence, no adjudication is required.
The Ld. AR for the assessee submitted that he is not pressing ground No.3 and in view of the submissions, Ground No.3 is dismissed as not pressed.
The Ld. AR further submitted that grounds No. 15 and 16 are consequential only hence the same are treated accordingly.
5 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
The only effective grounds are Grounds No.2 & 4 which pertains to disallowance u/s.37 of the Act. Then there are grounds regarding payment of brand royalty from Grounds No. 7 to 10 and grounds relating to payment of professional fees which are grounds No. 11 to 14 of the grounds of appeal memo.
Therefore, in effect in the assessee‟s appeal, the grievance of the assessee is with regard to (i) disallowance u/s.37 of the Act; (ii) dispute with regard to payment of brand royalty and (iii) dispute with regard to payment of professional fees and management services fees.
The brief facts in this case are that the assessee, Carraro India Limited, set up in 1997, is a joint venture of Carraro Spa of Italy (51%) and Carraro International S.A. Luxembourg (49%). It set up manufacturing facilities in 1999 at Ranjangaon, near Pune. The assessee is engaged in the business of designing, manufacturing and marketing mechanical and transmission systems for on-road and off-road vehicles and for stationary application, clutches, hydraulic lifts, axles for agricultural tractors, transmission for loaders and backhoe and planetary drives for construction of equipment and other off-highway applications. Axles and transmissions are also the core business of the group. The assessee is the first and only non –captive manufacturer of agricultural transmissions for tractors in India. In the detailed chart of international transactions undertaken by the assessee during the previous year relevant to assessment year 2011-12 as per TP study report appearing at Para 5 of the TPO‟s order, Sr. No.4 and Sr. No.5 relating to payment of royalty and payment of professional fees are the item in dispute for the adjustment of arm‟s length price (ALP).
6 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
First, we would be adjudicating the issue relating to payment of brand royalty involving Grounds No. 7 to 10. The TPO had issued show cause notice to the assessee which reads as follows: “…..3. Brand Royalty 3.1 It is seen that this year an agreement is entered into dated 15-12- 2008 w.e.t: 1-7-2008 in terms of which brand royalty at 0.50% of sales has been paid to Carrara SpA. The amount paid is Rs.1,47,57,866/-. There is no justification for the same, No charge was made earlier prior to 01.07.2008 even though the company was in existence for several years. If at all, the Indian entity is responsible for establishing the brand in India. Since the name of the company is now Carrara India Ltd, use of company name cannot be chargeable as Royalty for use of Carrara logo. Further, such use of Carraro name actually builds the brand recognition of Carrara in India and there is a case for Carrara India for charging the AE for the same. Or at best it is a mutual benefit.Various other royalty payments have been paid and are being paid even now. There is no justification for this new additional claim for royalty when earlier Royalty agreements are expiring after the period is over. The report of Praxis does not look at the Indian market and is not appropriate for the facts of this transaction. Since approvals by SIA is now automatic where rate is less than 5%, nothing much tums on such approval by SIA. State why the ALP with respect to Brand Royalty should not be taken at NIL and accordingly, the Adjustment to this transaction of Rs.1,47,57,866/-.”
The assessee submitted with regard to this show cause notice that as per the agreements the royalty fee is paid /payable for the use of technical know-how and not for acquiring any technical know-how from the AEs. The technical know-how, designs, drawings continue to be the sole property of the AEs and the assessee is in no way entitled to own, sell, transfer or share the know-how made available to it pursuant to the agreements. The assessee further clarified before the Department that the company is paying brand royalty at the rate of 0.5% only on the sales to its customers other than related parties as per the agreement dated 15.12.2008. A sum of Rs.140,98,865/- only has been paid during the year to Carraro Spa for use of its brand name, logo and trademark instead of Rs.147,57,866/- as mentioned in the above show cause notice and the balance of Rs.659,001/- has been
7 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
paid as royalty for product technology. In this regard the Ld. DRP has given directions to the Assessing Officer/TPO to verify and then decide the claim of the assessee accordingly.
The assessee further submitted that Carraro Spa is a registered owner of a number of trademarks in different regions and countries. The assessee Carraro India Pvt. Ltd. enjoys the fruits of these trademarks and has leveraged the same for constantly increasing its turnover as shown in the financial statements submitted to the Department and annexed in the paper book. In the said statements, it is clearly established that the assessee company has added many new customers and sales to them has almost doubled during financial year 2010-11 compared to FY 2008-09. The Carraro India Pvt. Ltd. has gained tremendously by using the brand name and logo of CARRARO . It is also stated that after signing of the brand royalty agreement, company has been able to rope in large multinational customers like BETC Drive, Action Construction Equipment, caterpillar, GE India Industrial Pvt. Ltd. etc. The brand royalty is being paid for the use of “CARRARO” brand name, logo and trade mark which has emerged as a leader in its class of products like Gears, Axles, Drivelines and Power Transmission systems reflecting guarantee of quality of the products and proven exclusive original of the products from the source represented by the company i.e. Carraro Spa, Italy. The case of the assesse is that Carraro Spa has several trademarks registered under its name since as early as 1981 and by using the brand name and trademark owned by Carraro Spa, it has helped the assessee company to generate substantial business from the overseas customers who had been using „CARRARO‟ products from the past several years.
8 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
The TPO did not find favour with the arguments of the assessee and it was observed by the TPO that no such charge with regard to brand royalty was made earlier prior to 01.07.2008 even though the company was in existence for several years. It was further held that the assessee was a part of Carraro group and the name of the company is itself Carraro India Pvt. Ltd. It was further held that sale products of the Carraro India Pvt. Ltd. carried brand name and logo directly which plays a role for generating substantial business from the overseas customers and accordingly, the TPO held the ALP of this company i.e. Carraro India (P) Ltd. at Nil.
When the matter reached before the Ld. DRP, the Ld. DRP at Para 3.3 onwards of their order had upheld the reasoning and findings given by the TPO and the objection of the assessee was rejected. However, the Ld. DRP had directed the TPO to examine the claim of assessee on the total amount of Rs.1,40,98,865/- instead of Rs.1,47,57,866/- being difference of Rs.6,59,001/-, to be decided accordingly.
The Ld. AR for the assessee submitted that this issue had come up for consideration before the Tribunal in assessee‟s own case for the assessment year 2009-10 and thereafter, also in assessment year 2010-11. In the order of the Tribunal for the assessment year 2010-11, it had considered its earlier order for the assessment year 2009-10. The crux of the discussions wherein in the Tribunal‟s order for the assessment year 2009-10, it has observed that the assessee had paid brand royalty under two agreements, first, at 0.5% under the agreement dated 01.07.2008 and then again under another agreement dated 05.04.2001. The duplicate amount of royalty earlier paid was directed to be disallowed. The relevant part of this Tribunal order in ITA
9 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
No.1261/PUN/2018 and ITA No.1309/PUN/2018 for the assessment year 2010-11 in assessee‟s own case are extracted herein below :
“4. We have head both the sides through Virtual Court and gone through the relevant material on record. Insofar as the assessee‟s ground on transfer pricing addition is concerned, it is seen that such an adjustment is based on the view taken by the AO/TPO in their respective orders for the immediately preceding assessment year 2009-10. This issue came up for consideration before the Tribunal for such earlier year. Vide its order dated 27-02-2019 in ITA No.1260/PUN/2018, the Tribunal has held that royalty paid through the automatic route as per the Press note issued by the Govt. of India, Ministry of Commerce and Industry, was to be taken at ALP. This issue has been discussed in paras 5 to 15 of the order. The Tribunal further observed in its order that the assessee paid Brand royalty under two Agreements, first, at 0.5% under the Agreement dated 01- 07-2008 and then again under another Agreement dated 05-04-2001. The duplicate amount of Royalty paid was directed to be disallowed. Relevant discussion on this aspect of the matter has been made in para 12 of the order, which runs as under : "12. It can be seen that the assessee paid royalty under agreement dated 05-04-2001 @ 2% in respect of steering axle and accessories for 35 and 55 HP tractors both towards use of technical knowhow and use of trade mark/brand name. It is further noticed that the assessee paid royalty of Rs.75.41 lakh @ 0.5% on total sales for use of name, logo and trade mark. Payment of Rs.75.41 lakh, as accepted by the ld. AR, is also in respect of sales made by the assessee of the products which were covered under agreement dated 05-04-2001, being, steering axle and accessories for 35 and 55 HP tractors. Thus, it is manifest that the assessee paid royalty for use of logo and trade mark in respect of steering, axle and accessories for 35 and 55 HP tractors, both under the agreement dated 05-04- 2001 and once again under the new agreement dated 1.7.20008, which is plainly not permissible. Deduction can be allowed for payment of royalty for use of trade mark license etc. only once and not twice. As royalty for use of trade mark license in respect of steering axle and accessories for 35 and 55 HP tractors is covered within the payment of Rs.26.39 lakh, whose ALP has been determined by the TPO, at the transacted value, the amount of royalty paid by the assessee for use of trade mark license once again under the second agreement for which the TPO proposed TP adjustment of the full amount of Rs.75.41 lakh, cannot be allowed once again. Thus, royalty paid for use of trade mark license pertaining to steering axle and accessories for 35 and 55 HP tractors, included in the amount of Rs.75.41 lakh is required to be disallowed as a duplicate payment. The ld. AR was fair enough to concede this position. He submitted certain details, as per which a sum of Rs.4,95,166/- has been calculated as duplicate amount of royalty that could be disallowed. While making such a calculation, the ld. AR made a departure from the submission made on the earlier date as per which royalty paid at the rate of 2% for use of technical know-how and trade-mark was discontinued w.e.f. 30.6.2008. It was now stated that only royalty for use of brand name was discontinued w.e.f. 1.7.2008, but royalty for use of technical know-how
10 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
continued to be paid even after 1.7.2008. The AO/TPO is directed to verify this contention of the assessee on the basis of the relevant documents and then work out the duplicate amount of royalty paid for use of brand/logo, included in the sum of Rs.75.41 lakh, which is to be disallowed." 5. As the facts and circumstances of the assessee‟s ground for the year under consideration are admittedly similar to those of the preceding year, respectfully following the precedent, we set-aside the impugned order on this score and remit the matter to the file of AO/TPO for re- determining the ALP of the international transaction of payment of Royalty and disallow the duplicate payment of brand Royalty in terms indicated above in the Tribunal order for the assessment year 2009-10 above. This disposes of the assessee‟s ground of appeal.”
The Ld. DR conceded that the facts in this assessment year are absolutely identical and therefore, the issue is covered by the Tribunal‟s order in assessee‟s own case (supra.)
Having heard the parties herein and after going through the order of the Tribunal, following the same parity of reasoning, we set aside the impugned order and remand the matter to the file of the Assessing Officer/TPO for re-determination of ALP as per similar directions given in assessee‟s own case for the assessment year 2010-11 (supra.) Accordingly, Grounds No. 7 to 10 are allowed for statistical purposes.
Grounds No. 11 to 14 pertains to the issue of management services fess and payment of professional fees.
It is the case of the assessee that the company has a very lean organization structure in India for carrying out its operations to meet local management of the plant and the strategic planning, strategic management and the major business plants and policy initiates are worked out by group headquarters located at Italy. As a result the cost of employees in the case of the company is much lower compared to that of other comparables. That the headquarters have not charged all the costs to subsidiaries/units of the
11 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
group and only part of the defined and listed costs has been charged to subsidiaries/units of the group. That further, approximately 90% to 95% of business Carraro India has procured through headquarters directly or through leads generated by headquarters. All this necessitates and justifies sharing of common costs for various functions performed by headquarters on behalf of the company and to provide all the support and services to efficiently carry on its business.
As per audited Income Statement of Carraro Spa for 2010 total income earned from fees by Carraro Spa from services is Euro 91,88,342 against which total costs incurred on services are Euro 1,38,44,407. The above cost is in addition to personnel costs of Euro 1,53,91,138/- incurred for the year. The provision of services by headquarters to its subsidiaries including Carraro India, helps reduction in overall costs of such services as the services are not duplicated at all the locations which avoids duplication of activities, imbibes expertise in respective function and enables better bargaining with third parties including suppliers, bankers etc. resulting in savings to the entire group companies including Carraro India (P) Limited. This was demonstrated by lower employees costs in the case of Carraro India compared other comparables.
The TPO had issued show cause notice to the assessee in respect of management services and the same is extracted herein below:
“4. Management Services : 4.1 It is seen that two agreements are entered into with the AEs dated 15-12-2008 w.e.f. 1-7-2008 for advisory services. In one agreement with Carraro Drivetech SpA, Italy, payment of Rs.3,21,74,545/- is made for finance, HR, Legal, IT, business development, marketing etc. In the second agreement with Csrrsro SpA, ftaly payment of Rs.4,36,09,122/-. made for Global Sourdng, Quality Contra/, Supply chain management, Measuring Strategy etc. As per the agreement, various markups are
12 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
prescribed. A report by PWC is submitted to state that the charges are based on allocation keys prescribed. The report lays down qualification as to the fact that this is not an audit. The costs are not shown from the relevant accounts of the AEs as being incurred for this purpose. Further, there is no identification of the costs with any services received. 4.2 The justification /need for services, evidence of services, valuation of services, benefit of services and basis of for charge and supporting evidences including evidence of cost incurred by the AE is not available. You have submitted that the same policy is applied to all Carrara entities across the world. From the above, the exact nature and need of services availed, nature of value addition and quantification of demonstrated benefits due to availing such services, what new things have taken place as a result of availing such services, concrete evidence for receipt of such valuable services how the calculation of payments made to the AE is related to any service received has not been explained/furnished with any cogent evidences/supporting documents. There is no explicit cost allocation formula to link it to actual service or volume or value of' service received. The terms are general and vague. Even though the services agreement states that AE shall keep books and records in such detail as is necessary to identify the service cost related to providing services, neither has the assessee bothered to ask for it on an ongoing basis nor has it been provided in the proceedings so far clearly suggesting that these are standard clauses for formality but not meant for actual implementation. Even though the agreement ostensibly stipulates that you will be provided complete details of expenses incurred and basis for amount charged, it is quite dear that it is only a part of agreement but not considered to be seriously followed, which no independent party will do if payments are really justified The agreements have no clause for review by assessee as to whether payments are commensurate with any service received. It is a mere loading of levy. 4.3 In view of the above facts, state why the arm’s length price of the above transaction should not be treated at Nil as against Rs.7,57,83,667/-”
Thereafter, considering the submissions of the assessee as afore-stated, the TPO observed that the amount of Rs.7,70,84,894/- was quite large and significant, considering the fact that this is second year in which such a transaction is reflected by the assessee.
The TPO further observed that the assessee has not given any evidence regarding the services being provided by headquarters. The assessee has only furnished evidence in the form of e-mails and letters in respect of such services provided by headquarters without giving any concrete evidence of
13 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
services provided. The TPO has also opined that no contemporaneous records were produced to indicate that such a need was identified which preceded the entering into agreement for such services. In nutshell, the TPO observed that there are no direct evidences of receipt of services and even the need for such services was not clear in the case of the assessee.
Per contra, the Ld. AR for the assessee submitted that in the preamble of the agreement itself, it spells out the need for these services which was already before the TPO. That further, the Tribunal in assessee‟s own case for the assessment year 2009-10 as well as assessment year 2010-11 (supra.) has accepted the fact that the assessee did avail services from its AEs. There were voluminous documents placed before the Tribunal including e-mails between assessee company and AEs on wide spectrum that the services were actually rendered. The Tribunal in ITA No.1260/PUN/2018 and ITA No.1308/PUN/2018 for the assessment year 2009-10 on this issue has held as follows :
“19. The ld. AR has drawn our attention towards voluminous documents including e-mails between the assessee company and AEs on wide spectrum of the matters to establish that the services were actually availed. We have gone through some of the e-mails, which go to prove that the assessee did avail services from its AEs. In fact, this material was submitted before the ld. CIT(A) also. In the remand report, though the TPO acknowledged the existence of such a material, but did not alter his earlier stance on extraneous reasons. This evidences that the assessee, in fact, availed the services from its AEs. The TPO favored Nil ALP of the transaction, inter alia, on the ground that the assessee was not benefitted by such services. The view point of the TPO that no benefit was derived by the assessee because of such services and hence, ALP should be determined at NIL, is bereft of any force. 20. Once the fact of having availed services from AEs is established, the TPO cannot determine NIL ALP simply by holding that no benefit was received by the assessee. Having or not having a benefit from services is one thing, which cannot be confused with the availing of services, if these are really received. The TPO cannot turn around the determination of NIL ALP simply on the ground that no benefit was received by the assessee from such services. It is for the assessee to decide the way in which it has to carry on its business. If it feels that services are required to be availed, the TPO cannot reject the allowability of such payment simply on the ground that no benefit was derived. It is not necessary that
14 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
every incurring of expenditure must necessarily result in to some benefit. Had it been the situation, then no businessman would have ever incurred loss, which is a proposition far away from the stark reality. Once it is proved that the services were availed by the assessee, then his jurisdiction gets restricted to determining the ALP of the transaction. We have noticed above that the assessee did avail services from its AEs. In such a situation, it is held that the view point of the authorities that NIL ALP should be determined because the assessee did not get any benefit out of the services, is rejected. ………………….”
Thereafter, the Tribunal in assessee‟s own case for the assessment year 2009-10 (supra.) had set aside the matter to the file of the Assessing Officer/TPO by observing as follows :
“34. It has been noted above that the TPO proceeded to determine Nil ALP on the reason that the assessee did not avail any services. We have found out supra that the services were, in fact, availed by the assessee. Since neither the exercise done by the TPO for benchmarking the international transaction, either originally or during the course of the first appellate proceedings, is sustainable nor the view point of the TPO determining Nil ALP can be affirmed because of the assessee having actually availed the services, we are of the considered opinion that the ends of justice would meet adequately if the impugned order is set aside and the matter is restored to the file of AO. To sum up, the impugned order on this issue is set aside and the matter is restored to the file of AO for determining the ALP of the international transactions of payment of Corporate/management services afresh as per law after allowing reasonable opportunity of being heard to the assessee. It is directed that the AO/TPO will firstly determine the most appropriate method and then find out the ALP of the international transaction in accordance with our above observations and directions. Needless to say, the assessee will be allowed an opportunity of hearing in such fresh exercise.”
That for the assessment year 2010-11, the Tribunal in ITA No.1261/PUN/2018 and ITA No.1309/PUN/2018 (supra.) at Para 12 of its order has observed that the Assessing Officer following the view taken by him for the preceding year inter alia held that the assessee for the year under consideration – (i) did not prove the factum of receipt of the services from its AEs; (ii) wrongly adopted the Foreign/AE as tested party ; (iii) wrongly applied the TNM method. Thereafter, the Tribunal observed that in its own order for the assessment year 2009-10, it had dealt with such issues and referred to the extensive materials placed before it for holding that assessee did avail
15 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
services from its AEs. Similar material were also placed for the assessment year 2010-11 running into more than 1500 pages which demonstrated that the assessee did avail management services. The Tribunal thereafter following the view taken for the preceding year held that the assessee did avail services from its AE and the authorities below were not justified in coming to the conclusion that no services were obtained by the assessee. The Tribunal arrived at its findings on this issue at Para 16 of its order and the same reads as follows :
“16. As the facts of this issue for the year under consideration are similar to those of the preceding year, following the view for such earlier year, we set-aside the impugned order on this score and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction of payment of Management Service Fee in accordance with the observations and directions given in the Tribunal order passed for the assessment year 2009-10. Needless to say, the assessee will be allowed reasonable opportunity of hearing in such fresh determination. The ground taken by the Revenue is dismissed and that by the assessee is allowed for statistical purpose.”
The Ld. DR fairly conceded that on the similar set of facts and circumstances, this issue is covered as per the Tribunal order and following the same parity of reasoning, we set aside the impugned order on this score and remit the same to the file of the Assessing Officer/TPO for fresh determination of ALP of the international transaction of payment of management services fee in accordance with the observations and directions given in the Tribunal order passed for the assessment year 2009-10 and 2010-11 (supra.). Thus, Grounds No. 11 to 14 are allowed for statistical purposes.
Ground No.2 pertains to disallowance u/s.37 of the Act in respect of royalty expenditure incurred by the assessee.
16 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
The Ld. AR submitted that this issue is covered by the decision of the Pune Bench of the Tribunal in assessee‟s own case for the assessment year 2010-11 (supra.). The Tribunal has discussed this issue vide Para 6 of its order and the same reads as follows:
“6. Now we turn to the Revenue‟s grounds. Ground no. 2 is against the deletion of disallowance of the full amount of Rs.2.36 crore made by the AO u/s.37 of the Act. In this regard, it is observed that the assessee paid royalty for use of technical know- how and brand. The AO held such payments as not having been incurred for business purposes. It is noted that the assessee is engaged in manufacture of equipments through licenses from group concerns. Royalty has been paid in respect of technical know-how obtained for manufacturing of equipment. Since the technology and designs have been used by the assessee in its manufacturing, the royalty for the same cannot be said to be for non business purposes. Similarly, brand royalty has been paid for the use of brand on the products manufactured by it. Admittedly, the assessee was using the Brand name and logo on its manufactured products. These payments, therefore, cannot be considered as meant for non- business purpose, subject to the transfer pricing adjustment. We, therefore, approve the view point taken by the ld. CIT(A) in deleting the disallowance made by the AO u/s.37 of the Act. The Revenue‟s ground is thus dismissed.”
In the above referred para, the Revenue had preferred appeal against the deletion of disallowance of the full amount of Rs.2.36 crore made by the Assessing Officer u/s.37 of the Act. It was observed that the assessee paid royalty for use of technical know- how and brand. The Assessing Officer held such payments as not having been incurred for business purposes. The Ld. CIT(Appeals) had taken a view that the assessee is engaged in manufacture of equipments through licenses from group concerns. Royalty has been paid in respect of technical know-how obtained for manufacturing of equipments. Since the technology and designs have been used by the assessee in its manufacturing, the royalty for the same cannot be said to be for non- business purposes. Similarly, brand royalty has been paid for the use of brand on the products manufactured by it. It was therefore an admitted fact that assessee was using the Brand name and logo on its manufactured
17 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
products. These payments, therefore, cannot be considered as meant for non- business purposes in respect of transfer pricing adjustment. This view of the Ld. CIT(Appeals) was left unaltered and relief provided to the assessee was sustained by the Tribunal.
Before us also, the Ld. DR submitted that there is no difference on the facts and circumstances for this year also and the issue is covered in favour of the assessee. That when the facts and circumstances are similar and that a view has already been taken which is factually analyzed, therefore, on same parity of reasoning under same set of facts and circumstances, we allow this ground of appeal. Thus, Ground No.2 raised in appeal by the assessee is allowed.
Ground No.4 pertains to disallowance u/s.37 of the Act in respect of legal and professional fees incurred by the assessee on account of HR, legal, IT, finance, sales, marketing and other ancillary services.
The Ld. AR for the assessee submitted that this issue had also come up for consideration before the Tribunal in assessee‟s own case for the assessment year 2010-11 (supra.) and the Tribunal vide Para 10 of its order on the issue has discussed as follows:
“10. ………………. At the time of passing the assessment order, the AO observed that total Legal and Professional charges paid by the assessee, including those paid to AE, stood at Rs.5,86,35,491/-. Adopting the reasoning given by the TPO for determining NIL ALP of the international transaction, the AO held that the assessee did not furnish any evidence of the receipt of other Legal and Professional services as well. He, therefore, disallowed the full amount of Rs.5.86 crore. The ld. CIT(A) upheld the transfer pricing adjustment proposed by the TPO. He, however, did not approve the view point of the AO that the entire amount of payment of Rs.5.86 crore was liable to be added by observing that no independent reasoning was given by the AO and the amount also included Testing fees paid to group concern amounting to Rs.40.85 lakh and Generic service charges paid at Rs.8.95 lakh. Both the sides have come up in appeal before the Tribunal on their respective stands.
18 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
The Tribunal on this issue has held as follows : “11. Insofar as the Revenue‟s appeal is concerned, it is observed that the ld. CIT(A) has given cogent reasons for deleting the disallowance inasmuch as the AO simply adopted the TPO‟s reasoning without showing as to how the same applied to the non- AE transactions as well. Further, the expenditure contains payment for Testing fees and also Generic service fee. To this extent, we approve the view taken by the ld. CIT(A). Thus, the ground of the Revenue is dismissed.”
The Ld. DR conceded that the facts and circumstances in the present assessment year are absolutely similar and identical with the assessment year 2010-11. The Ld. DR could not bring on record any evidence contrary to these facts already on record. Therefore, following the Tribunal‟s order in respect of the assessment year 2010-11, on same parity of reasoning and under same set of facts, Ground No.4 raised in appeal stands allowed.
In the result, appeal of the assessee in ITA No.835/PUN/2016 is partly allowed for statistical purposes.
ITA No.823/PUN/2016 ( Revenue’s Appeal) A.Y.2011-12
In ITA No.823/PUN/2016, the Revenue has raised following grounds of appeal: “ 1. The Hon‟ble DRP on the facts and circumstances of the case and in law has erred in deleting the addition on account of commission of sale as the assessee has failed to deduct TDS u/s.195 of the Act. 2. The Hon‟ble DRP on the facts and circumstances of the case and in law, has erred in deleting the addition on account of disallowance u/s.14A r.w. Rule 8D as the assessee has failed to prove that the non- interest bearing funds have been used for making investment.”
19 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
The Ld. DR for the Revenue fairly conceded that the findings of the Ld. DRP are correct on the present set of facts and circumstances in respect of both the issues raised in Revenue‟s appeal.
Ground No.1 pertains to the deletion of addition on account of commission of sale as the assessee had failed to deduct TDS u/s.195 of the Act. Before the Ld. DRP, the objection No.11 raised by the assessee reads as under: “On the facts and circumstances of the case, the learned AO has erred both on facts & in law in proposing to disallow an amount of Rs.1,61,03,794/- on account of commission on sale by invoking the provision of section 40(a)(i) of the Act.”
The brief facts on this issue are that the assessee made commission payments of Rs.1,61,03,794/- during the year to overseas sales agents. During the assessment proceedings, it was noticed that the assessee did not make TDS in respect of these payments u/s.195 of the Act. The Assessing Officer held that this expenditure was disallowable under the provisions of section 40(a)(i) of the Act by citing the following reasons :
(i) Though these services were rendered by the overseas agents outside India, the commission becomes payable to the agent only after the purchase order is placed and executed in India. It is therefore clear that the source of income for the agent is the execution of the order in India. The right to receive the commission therefore arises in India Only. (ii) The fact that agent renders the service abroad in the form of pursuing the order and commission is remitted to him abroad are wholly irrelevant for the purpose of determining the situs of this income.”
Thereafter, the assessee submitted detailed submissions wherein, it explained that commission was paid to the overseas agents for the export orders/business procured by the agents in overseas territories. The fact of the
20 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
matter was that the assessee has paid the amount of commission to foreign agents for the services rendered by them outside India. The assessee also cited the judgment in the case of The commissioner of Income Tax Vs. Kikani Exports Pvt. Ltd. (2014) 369 ITR 96 (Mad.) wherein it was held that the services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of fees for technical services and therefore, section 9 of the Act is not applicable to the instant case and consequently, section 195 of the Act does not come into play. The assessee has further submitted that it is a settled position of law that the retainer ship charges/commission paid to overseas non-resident agents for promoting assessee‟s business in foreign countries is not in the nature of fees for technical services and therefore, is not liable to be taxed in India. The assessee has relied on the following decisions: (i) In the ITAT Delhi Bench „D‟ Le Passage to India Tour & Travels (P).Ltd. Vs. Deputy Commissioner of Income Tax, Circle 4(1), New Delhi (2015) 54 taxmann.com 138 ( Delhi Trib.) (ii) In the ITAT Chennai Bench „A‟ Deputy Commissioner of Income Tax, Co. Circle II(3), Chennai V. I M Gears (P) Ltd. (2014) 49 taxmann.com 175 ( Chennai-Trib) (iii) In the ITAT Hyderabad Bench „A‟ Deputy Commissioner of Income Tax, Circle 1(1), Hyderabad Vs. Divi‟s Laboratories Ltd. (2011) 12 taxmann.com 103 (Hyd.)
The Ld. DRP vide Para 8.3 of his order on this issue has held and observed as follows:
“8.3 We have considered the draft order of the AO and the submissions of the assessee. The incomes which are deemed to accrue or arise in India are specified in section 9 of the IT Act. Considering the nature of service rendered by the assessee from outside India and the absence of any presence of the agent in India, the taxability of the income earned by the overseas sales agents needs to be examined u/s.9(1)(vii) dealing with “Fees for Technical Services” and not under section 9(1)(i) dealing with “Income arising from business connection”. The services rendered
21 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
by way of booking export orders can no way be considered as either technical or managerial or consultancy services within the meaning of the term “Fees for technical services” as defined in section 9(1)(vii) of the IT Act. 8.4 Hence, the assessee had no statutory obligation to make TDS u/s.195 of the IT Act in respect of the commission paid to overseas sales agents. Hence, the disallowance of the said expenditure on the grounds of failure to make TDS is not permissible. 8.5. Therefore, we direct the AO to delete the proposed addition of Rs.1,61,03,794/- u/s.40(a)(ia).”
After hearing the submissions of the Ld. DR and going through the findings of the Ld. DRP, we do not find any reason to interfere with the same and relief provided to the assessee is hereby sustained. Thus, Ground No.1 raised in appeal by the Revenue is dismissed.
Ground No.2 pertains to disallowance u/s.14A r.w. Rule 8D of the Income Tax Rules, 1962.
The brief facts on this issue are that the Assessing Officer noticed that the assessee had made investment of Rs.1 crore in the shares of subsidiary company during the earlier years. The Assessing Officer proposed to the assessee that the expenditure incurred in relation to the dividend income in respect of this investment is required to be disallowed u/s.14A r.w. Rule 8D. The assessee objected to the same on the ground that no dividend income has been received during the year with regard to this investment. However, the Assessing Officer cited the following reasons to compute the amount disallowable of Rs.4,22,929/- u/s.14A r.w. Rule 8D.
(i) The contention of the assessee that it has not incurred any expenditure in relation to exempt income is rejected as section 14A is applicable even if the assessee claims that no expenditure has been incurred in earning exempt income. (ii) The assessee incurred various kinds of expenses in the P & L account and the assessee has not demonstrated with
22 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
evidence that non interest bearing funds were utilized in FY 2003-04 to make the investment in the shares of the subsidiary company. (iii) The assesse admitted that it has not maintained separate fund flow for business activity and investment. Hence, the assessee could not furnish proof that non interest bearing funds have been used for the said investment.
The contentions of the assessee before the Ld. DRP on this issue were as follows : (i) The investment in the shares was made in the FY 2003-04 out of cash profits of the assessee and no borrowed funds were utilized. (ii) No disallowance u/s.14A can be made if the assessee has not earned any tax free income from the investment during the year. (iii) The Hon‟ble Delhi High Court held in the case of Holecim India Pvt. Ltd. that section 14A has no applicability when no exempt income has been received during the year.
The Ld. DRP vide Para 10.3 of its order on this issue has held and observed as follows:
“10.3 We have considered the order of the AO and the submissions of the assessee. As per the decision of the Hon‟ble Delhi High Court in the case of Holecim India Pvt. Ltd. (272 ITR 282), no disallowance can be made u/s.14A in the absence of any exempt income during the year. Hence, by relying on the said decision, we delete the addition of Rs.4,22,929/- proposed by the AO u/s.14A.”
The Ld. AR on this issue relied on the decision of the Hon‟ble Bombay High Court in the case of Pr. Commissioner of Income Tax Vs. Kohinoor Projects (P) Ltd., IT Appeal No.1124 of 2017 dated 27th January, 2020 reported in 425 ITR 700 (Bombay). In this case, the Hon‟ble Bombay High Court had held that Section 14A would not apply when no exempt income was received or was receivable during the relevant previous year. That when the matter was before the Tribunal, it had considered the contentions of the
23 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
assessee that no exempt income was claimed by the assessee u/s.14A of the Act and therefore, no disallowance could have been made by the Assessing Officer by invoking section 14A r.w.Rule 8D of the Income Tax Rules, 1962. The Tribunal relied upon the decision of the Hon‟ble Delhi High Court in the case of Cheminvest Ld. Vs. CIT (2015) 61 taxmann.com 118/234 Taxman 761/378 ITR 33 (Delhi); the decision of the Punjab & Haryana High Court in the case of CIT Vs. Lakhani Marketing Inc. (2014) 49 taxman.com 257/226 Taxman 45 (Mag.); and the decision of the Allahabad High Court in the case of CIT Vs. Shivam Motors (P) Ltd. (2015) 55 taxmann.com 262/230 Taxman 63 (All.) and observed that there is uniformity in the view that in case there is no exempt income claimed by the assessee in the return of income, no disallowance can be made by the Revenue. This has been upheld by the Hon‟ble Bombay High Court and the Hon‟ble Bombay High Court in another case Pr. CIT Vs. Man Infraprojects Ltd. IT Appeal No.259 of 2017 dated 09.04.2019, had followed the decision of the Hon‟ble Delhi High Court in the case of Cheminvest Ltd. (supra.) and provided relief to the assessee. It was also observed by the Hon‟ble Bombay High Court that the decision of the Hon‟ble Delhi High Court was challenged by the Revenue before the Hon‟ble Supreme Court by filing SLP but SLP was dismissed.
Therefore, it is a settled position of law that when no exempt income has been received by the assessee then there cannot be any disallowance u/s.14A of the Act. This view was also taken by the Hon‟ble Delhi High Court in the case of Holecim India Pvt. Ltd. (supra.) and based on this decision of the Hon‟ble Delhi High Court, the Ld. DRP had directed the Assessing Officer to delete the addition. Therefore, we are of the considered view on the given facts and circumstances, there is no need for interference with the findings of
24 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
the Ld. DRP and relief provided to the assessee is sustained. Thus, Ground No.2 raised in appeal by the Revenue is dismissed.
In the result, appeal of the Revenue in ITA No.823/PUN/2016 is dismissed.
In the combined result, appeal of the assesse is partly allowed for statistical purposes and appeal of the Revenue is dismissed.
Order pronounced on 02nd day of September, 2021. Sd/- Sd/- INTURI RAMA RAO PARTHA SARATHI CHAUDHURY ACCOUNTANT MEMBER JUDICIAL MEMBER पुणे / Pune; ददनांक / Dated : 02nd September, 2021 SB आदेश की प्रधतधलधप अग्रेधषत / Copy of the Order forwarded to : अपीलाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The CIT(Appeals)-13, Pune. 4. The Pr. CIT-5, Pune. धवभागीय प्रधतधनधध, आयकर अपीलीय अधधकरण, “सी” बेंच, 5. पुणे / DR, ITAT, “C” Bench, Pune. गार्ा फ़ाइल / Guard File. 6.
आदेशानुसार / BY ORDER, // True Copy // धनजी सधचव / Private Secretary आयकर अपीलीय अधधकरण, पुणे / ITAT, Pune.
25 ITA No. 823/PUN/2016 ITA No.835/PUN/2016 A.Y.2011-12
Date 1 Draft dictated on 01.09.2021 Sr.PS/PS 2 Draft placed before author 02.09.2021 Sr.PS/PS 3 Draft proposed and placed JM/AM before the second Member 4 Draft discussed/approved by AM/JM second Member 5 Approved draft comes to the Sr.PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order