2012 (4) TMI 354 - AT - Income Tax

Treating the Appellant s wholly owned subsidiary in UAE as its proprietary concern and treating income earned by the said wholly owned subsidiary as that earned by the Appellant A.O stated since the assessee is the only shareholder and holding 100% shares of Vega UAE, it is not a valid company as two shareholders are required - Held that - Article (1) of the said Memorandum of Incorporation states that this entity is established with corporate entity and independent and separate financial liability from those of its owner and the only situation where the owner will be treated as personally responsible is regarding omission of some specified information that the entity FZE - this is a situation where it specifies that corporate veil may be lifted therefore, because of this restriction alone, it cannot be said that Vega UAE is not a separate legal entity - as per these provisions of Section 2(17) UAE is definitely not an Indian company - As per this Amiri Decree No. (2) of 1996 promulgated by His Highness the Ruler of Emirates of Ajman, Free Zone Establishment can be established with limited liability and shall have the body corporate capacity and it shall belong either to one natural person or one judicial person - in favour of assesee. TP adjustment made by the A.O in respect of sales made to Vega UAE and commission payment considering the controlled transactions of the assessee as comparable for benchmarking the international transaction Held that - Vega UAE is carrying both the inventory risk as well as credit risk and therefore is not a marketing service provider but a distributor of the assessee company - ALP has to be determined on the basis of profit on sale of goods by the assessee company as compared to the comparable companies - If the operating cost is higher in Vega US, it cannot be said that the profit margin of other Vega Entities should be at par with the profit margin of Vega US and hence, TP adjustment proposed by TPO and confirmed by DRP on the basis of operating cost/operating profit of Vega US is not sustainable in favour of assessee. Disallowance u/s 14A of the Income tax Act, 1961 - Held that - the assessee working regarding interest expenditure and indirect expenditure accepted without any mistake - confirm the disallowance u/s 14A to the extent ₹ 11,48,609/- and delete the balance disallowance made by the A.O - appeal assessee is partly allowed. Disallowance u/s 40a(ia) for non deduction of tax on commission paid on non residents for the services rendered outside India - Held that - nothing has been brought on record by the revenue to show that the foreign agent to whom commission was paid, had any operation carried out in India as per the provisions of Section 9(1)(i) of Income tax Act,1961- the provisions of Section 40a(ia) are not applicable in favour of assessee.

Summary

Issues Involved:
1. Treatment of the Appellant's wholly owned subsidiary in UAE as a Proprietary Concern.
2. Transfer Pricing (TP) adjustments in respect of sales made to Vega UAE and commission payment to Vega UK.
3. Disallowance under Section 14A of the Income Tax Act, 1961.
4. Disallowance under Section 40(a)(ia) for non-deduction of tax on commission paid to non-residents for services rendered outside India.

Detailed Analysis:

1. Treatment of the Appellant's wholly owned subsidiary in UAE as a Proprietary Concern:
The main issue was whether the Appellant's wholly owned subsidiary in UAE, Vega Industries (Middle East) FZE, should be treated as a proprietary concern and its income treated as that of the Appellant. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) treated Vega UAE as a proprietary concern due to the Appellant being the sole shareholder. The AO argued that UAE does not have a taxation law in force, hence Vega UAE cannot be considered a separate legal entity. However, the Tribunal found that Vega UAE is a body corporate incorporated under the laws of UAE, and as per Section 2(17) of the Income Tax Act, 1961, it qualifies as a company. The Tribunal concluded that Vega UAE is an independent entity and the addition made by the AO was not sustainable. Therefore, the Tribunal allowed the ground in favor of the Appellant.

2. Transfer Pricing (TP) adjustments in respect of sales made to Vega UAE and commission payment to Vega UK:
The AO made TP adjustments on the grounds that Vega UAE was not a distributor but a marketing service provider, and hence, the profit margins should be adjusted. The Tribunal found that Vega UAE was indeed a distributor bearing both inventory and credit risks. The Tribunal accepted the Appellant's TP analysis, which showed that the profit margins were consistent with comparable companies, and hence, no TP adjustment was called for. Similarly, the TP adjustment regarding commission payment to Vega UK was also deleted as the Tribunal found that the basis of comparison used by the AO was not appropriate. Both grounds were allowed in favor of the Appellant.

3. Disallowance under Section 14A of the Income Tax Act, 1961:
The AO made a disallowance under Section 14A, which was contested by the Appellant. The Tribunal noted that Rule 8D was not applicable for the assessment year 2006-07. The Appellant provided a working of interest expenditure attributable to investments in shares/mutual funds, which was accepted by the Tribunal. The Tribunal confirmed the disallowance to the extent of Rs. 11,48,609/- and deleted the balance disallowance made by the AO. This ground was partly allowed.

4. Disallowance under Section 40(a)(ia) for non-deduction of tax on commission paid to non-residents for services rendered outside India:
The AO disallowed the commission payment to a foreign agent under Section 40(a)(ia) for non-deduction of tax. The Tribunal found that the foreign agent did not carry out any operations in India, and hence, no income was deemed to accrue or arise in India under Section 9(1)(i) of the Income Tax Act, 1961. Therefore, no tax was deductible on this payment, and the provisions of Section 40(a)(ia) were not applicable. This ground was allowed in favor of the Appellant.

Conclusion:
The appeal of the Appellant was partly allowed, with the Tribunal ruling in favor of the Appellant on most grounds except for a partial allowance under Section 14A disallowance.