2016 (3) TMI 310 - AT - Income Tax

Addition on unexplained difference in the value of sales - Held that - There is no dispute on the fact that the assessee credited a sum of ₹ 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 ₹ 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 ₹ 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 ₹ 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. - Decided in favour of assessee Disallowance on account of unexplained commission payment where corresponding sales had not been credited by the assessee to the Trading and Profit & Loss Account - Held that - 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 ₹ 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 ₹ 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 ₹ 1.27 crore. Under these circumstances, we find no reason to interfere with the impugned order deleting disallowance of commission - Decided in favour of assessee Disallowance towards technical fee payment - non deduction of tds - Held that - 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. - Decided in favour of assessee for statistical purposes. Disallowance on account of royalty payment made by the assessee - disallowance by applying section 40(a)(ia) - Applicability of section 2(22)(e)Held that - 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. - Decided in favour of assessee

Summary

Issues involved:
1. Deletion of addition on account of unexplained difference in the value of sales.
2. Deletion of disallowance of unexplained commission payment.
3. Deletion of disallowance towards technical fee payment.
4. Deletion of disallowance on account of royalty payment.

Issue 1: Deletion of addition on account of unexplained difference in the value of sales

The appeal by the Revenue challenged the deletion of an addition of Rs. 6,15,68,134 made by the Assessing Officer (AO) due to an unexplained difference in the value of sales. The AO observed a variance between two annexures submitted by the assessee regarding sales details, resulting in the addition. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance after considering additional details provided by the assessee. The Tribunal upheld the CIT(A)'s decision, stating that the disputed items were already included in the total turnover as per the Trading account, hence no further addition was warranted.

Issue 2: Deletion of disallowance of unexplained commission payment

The second ground of appeal related to the deletion of a disallowance of Rs. 60,19,438 made by the AO concerning unexplained commission payments. This issue was found to be connected to the first ground. The Tribunal noted that the commission details were adequately reflected in the turnover breakup, and all relevant sales items were accounted for, leading to the deletion of the disallowance.

Issue 3: Deletion of disallowance towards technical fee payment

The third ground of appeal contested the deletion of a disallowance of Rs. 67,67,729 towards technical fee payment. The AO disallowed the amount as technical fees were not adequately supported by the agreement provided. The CIT(A) deleted the disallowance, but the Tribunal remitted the matter back to the AO for a fresh decision. The Tribunal found discrepancies in the documentation and requested further evidence to justify the technical fee payment.

Issue 4: Deletion of disallowance on account of royalty payment

The final ground of appeal concerned the deletion of a disallowance of Rs. 38,11,165 on account of royalty payment made by the assessee. The AO disallowed the deduction, alleging that the payment was made to a related party. However, the Tribunal upheld the deletion, emphasizing that the royalty payment was for the use of patents/brands, which had been accepted in previous years and was at arm's length. The Tribunal rejected the AO's arguments regarding the applicability of certain provisions and approved the CIT(A)'s decision to delete the disallowance.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, upholding the deletions of the various disallowances made by the AO in the assessment.