2017 (2) TMI 230 - AT - Income Tax

Disallowance of commission on sales made to Satyam Computer Services, invoking TP provisions and also CUP method - Held that - TPO cannot disallow the amount paid to Venture as the agreement under which assessee is operating covers export and domestic sales, other than those made to Venture or Venture Group. Satyam is not the part of Venture Group. Therefore, there is no valid reason for disallowing on that ground. Moreover, the TPO has to consider the ALP only under one of the methods prescribed and as already discussed in earlier year, CUP method cannot be invoked as there are no uncontrolled comparable prices. In view of that, the methodology adopted by the AO/TPO in disallowing the amount or fixing the ALP at NIL itself is not correct. TPO cannot disallow the amounts u/s. 37(1) invoking transfer pricing provisions Addition under TP provisions - Held that - Since the difference is within ( /-) 5% range as provided u/s. 92CA(2) proviso, there is no need to make the adjustment. Exclusion of foreign currency from the export turnover - Held that - We direct the AO/TPO to exclude the same amount from the total turnover as well while computing the deduction u/s 10A. Exclusion of expenditure in foreign currency - whether the same amount may be excluded from the total turnover as well - Held that - Following the principles on the subject as laid down by the Hon ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., 2010 (6) TMI 65 - BOMBAY HIGH COURT and also Special Bench decision of the ITAT, Chennai in the case of ITO Vs. Sak Soft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D AO is directed to exclude the same from the total turnover as well. Direct the AO to exclude whatever communication expenses disallowed from the export turnover, the same amount was also be disallowed from the total turnover while computing the deduction u/s 10A Disallowance of commission paid to Venture Global on entire sales under the CUP method with out there being any comparable cases - Held that - For the reasons stated above in the earlier assessment years, instead of disallowance of the commission attributable to sales made to Satyam Group, the entire commission paid was disallowed without assigning any reasons. For the reasons stated in earlier years, we are of the opinion that TPO is not correct in disallowing the amount by determining the ALP at NIL. As stated in earlier years, the commission paid to Venture is payable and accordingly, the ground is considered allowed.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance of commission paid to Venture Global Engineering Services LLC.
3. Reworking of deduction under Section 10A.
4. Adjustment made under Transfer Pricing (TP) provisions.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal by the assessee was filed with a delay of 667 days. The delay was attributed to the upheaval in the Satyam group following the admission of financial impropriety by its Chairman, which led to investigations by various authorities. The assessee argued that this caused a dislocation of work, particularly in the finance and accounts department. The Tribunal noted the extraordinary circumstances and the reasonable cause for the delay, considering the investigations and the subsequent dislocation of administrative work. The Tribunal thus condoned the delay and admitted the appeal.

2. Disallowance of Commission Paid to Venture Global Engineering Services LLC:
The primary issue across multiple years was the disallowance of commission paid to Venture Global Engineering Services LLC. The assessee argued that the commission was paid as per agreements for sales, both domestic and export, excluding sales to Venture or its affiliates. The Transfer Pricing Officer (TPO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the commission, particularly on sales routed through Satyam, considering Satyam as an affiliate of Venture. The Tribunal found that Satyam was an independent promoter and not an affiliate of Venture. The Tribunal held that the commission paid to Venture was allowable under Section 37(1) of the Income Tax Act, as it was incurred wholly and exclusively for business purposes. The Tribunal directed the Assessing Officer (AO) to allow the commission payments.

3. Reworking of Deduction under Section 10A:
The AO excluded certain expenses from the export turnover while computing the deduction under Section 10A, which the assessee contested. The CIT(A) directed that such expenses should also be excluded from the total turnover if excluded from the export turnover. This direction was upheld by the Tribunal, following the decisions of the Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. and the Special Bench of the ITAT in ITO Vs. Sak Soft Ltd. The Tribunal directed the AO to rework the deduction under Section 10A by excluding the same amount from both export turnover and total turnover.

4. Adjustment Made Under Transfer Pricing (TP) Provisions:
The TPO made adjustments to the Arm’s Length Price (ALP) for services provided to associated enterprises (AEs) and disallowed commission payments under the Comparable Uncontrolled Price (CUP) method. The Tribunal found that the TPO’s methodology was flawed due to the lack of valid comparables. The Tribunal also noted that the TPO cannot disallow amounts under Section 37(1) while invoking TP provisions, as held by the Delhi High Court in the case of EKL Appliances. The Tribunal directed the AO to allow the commission payments and to consider the +/- 5% range provided under Section 92C(2) for ALP determination.

Separate Judgments Delivered by the Tribunal:
- For the appeal in ITA No. 1590/Hyd/2010 (AY 2004-05), the Tribunal condoned the delay and allowed the appeal for statistical purposes.
- For the cross-appeal by the Revenue in ITA No. 217/Hyd/2009 (AY 2004-05), the Tribunal dismissed the appeal.
- For the appeal in ITA No. 197/Hyd/2011 (AY 2005-06), the Tribunal allowed the appeal.
- For the appeal in ITA No. 354/Hyd/2011 (AY 2006-07), the Tribunal allowed the appeal.
- For the appeal in ITA No. 1905/Hyd/2011 (AY 2007-08), the Tribunal allowed the appeal.
- For the appeal in ITA No. 1138/Hyd/2013 (AY 2008-09), the Tribunal partly allowed the appeal.

Conclusion:
The Tribunal provided a comprehensive analysis of the issues, allowing the appeals of the assessee on the grounds of condonation of delay, disallowance of commission payments, and reworking of deductions under Section 10A. The Tribunal also addressed the TP adjustments, directing the AO to consider the +/- 5% range and to allow the commission payments as per the agreements.