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2017 (5) TMI 435 - HC - Income TaxTDS u/s 195 - Addition of export commission - treating the payment of export commission as royalty for the purposes of Section 9 (1) (vi) read with Section 40 (a) (i) - export of specified models to specified countries - Held that - The specific wording of the clauses of both the LTAA and the EA, it is not possible to accept the contention that the export commission was in fact the monetisation of the negative covenant of the LTAA viz., abstaining from exporting to territories outside India. This argument at its best is ingenious but far removed from what the transaction in fact is. The consideration for the EA is clearly spelt out. Consequently, there was no question of there having to be an principal-agent relationship to justify the payment of the export commission. The amount spent on that score by the Assessee was for the benefit of its business and in fact resulted in a benefit. The payment of export commission by the Assessee to HMCL was not in the nature of payment of royalty or fee for technical services attracting disallowance under Section 40 (a) (i) of the Act. No substantial question of law - Decided in favour of assessee.
Issues Involved:
1. Treatment of export commission as an international transaction. 2. Whether the export commission payment qualifies as royalty requiring tax deduction at source. Issue-wise Detailed Analysis: 1. Treatment of Export Commission as an International Transaction: The Revenue's appeal under Section 260A of the Income Tax Act, 1961, challenged the ITAT's decision regarding the export commission paid by the Assessee to its Associated Enterprise (AE), HMCL. The Transfer Pricing Officer (TPO) had determined that the payment of export commission was unnecessary and detrimental to the Assessee, recommending a Transfer Pricing (TP) adjustment of ?12.19 crores. The ITAT reversed this decision, holding that the payment of export commission was not an international transaction warranting a TP adjustment. The ITAT found that the Assessee benefitted from the transaction, earning a profit of ?13.05 crores through exports, and the export sale rate was higher than the domestic sale rate even after considering the export commission. 2. Whether the Export Commission Payment Qualifies as Royalty Requiring Tax Deduction at Source: The Revenue contended that the export commission should be treated as royalty under Explanation 2 below sub-clause (vi) of Section 9 (1) of the Act, necessitating tax deduction at source under Section 195. The Revenue argued that the License and Technical Assistance Agreement (LTAA) and the Export Agreement (EA) were part of the same scheme, with the export commission being a monetisation of the negative covenant in the LTAA. The Assessee countered that the LTAA and EA were separate agreements, with the EA allowing the Assessee to export vehicles to specified countries using HMCL's distribution network without extra payment. The Assessee continued to pay royalties under the LTAA for exported vehicles, separate from the export commission. The Court held that the export commission was not royalty. The EA permitted the Assessee to export specified vehicles to certain countries, and the payment of export commission was for the benefit of the Assessee's business, resulting in profits. The Court concurred with the ITAT's findings that the export commission was neither royalty nor a fee for technical services, and the Assessee was not required to deduct tax at source on the payment of export commission. Consequently, Section 40 (a) (i) of the Act did not apply. Conclusion: The Court concluded that the payment of export commission by the Assessee to HMCL was not in the nature of royalty or a fee for technical services, and thus did not attract disallowance under Section 40 (a) (i) of the Act. The appeal was dismissed, and no substantial question of law arose from the issue.
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