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TMI Blog2017 (6) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Deputy Commissioner of Income Tax, Circle-4 ("the AO") have erred in ignoring the material placed before them and in disallowing provision for warranty expenses of Rs. 1,52,18,826/-. (b) On the facts and circumstances of the case and in law, the Hon'ble DRP and the AO have erred in not considering the favourable orders of the Hon'ble ITAT in the appellant's own case for the assessment years 2000-01, 2001-02, 2003-04 and 2004-05. The Appellant humbly prays that the said disallowance on account of provision for warranty expenses of Rs. 1,52,18,826/- be deleted. 5. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by a coordinate bench decision dated 22nd January 2010 in assessee's own cases for the assessment years 2000-01, 2001-02, 2002-03, and another decision dated 22nd March 2010 for thee assessment year 2004-05. Learned Departmental Representative, nevertheless, relies upon the stand of the Assessing Officer, even as he has no submissions to make on as to why should the Tribunal not follow these binding judicial precedents. We have also noted that Hon'ble jurisdictional High Court has declined to admit the appeal on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and reiterated his logic. As for the alternate plea of the assessee that the actual expenses of Rs. 92,444, be allowed as deduction in the subsequent year and the balance amount be allowed to be written back in the said subsequent year, the DRP expressed its inability to deal with the same on the ground that its beyond their powers to take a call on an issue arising in the subsequent assessment year. The assessee is not satisfied and is in appeal before us. 10. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 11. We find that so far as the amount of Rs. 92,444 is concerned, there cannot be any dispute about the genuineness of the provision to this extent, as the related payment has indeed been made, in respect of the expenses of that year, in the subsequent year. We, therefore, deem it and proper to allow the provision to this extent. The alternate plea of the assessee is thus upheld. In any case, learned counsel for the assessee did not have much to say in support of the basic plea either inasmuch as no scientific basis, for quantification of provision, was furnished. 12. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curring of expenses, or its bonafides, are thus not really in doubt. In these circumstances, in our considered view, the disallowance of Rs. 97,286 was not really called for. We, therefore, direct the Assessing Officer to delete this disallowance of Rs. 97,286. 17. Ground no. 4 is thus allowed. 18. In ground no. 5, the assessee has raised the following grievance: 5. On the facts and circumstances of the case and in law, the Hon'ble DRP and the AO have erred in ignoring the material placed before them and in denying the claim of the Appellant in respect of the carry forward of Long Term Capital Loss of Rs. 11,66,067/- and setting it off against exempt Long Term Capital Gains. The Appellant humbly prays that the AO be directed to allow the claim of the Appellant of Rs. 1,66,067/- in respect of the carry forward of Long Term Capital Loss. 19. So far as this ground of appeal is concerned, it is sufficient to take note of the fact that, as noted by the Assessing Officer, the assessee had claimed exemption under section 10(38), in respect of the long term capital gain of Rs. 68,27,758, and that he did not set off the same against the long term capital loss brought forward to the ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in respect of the total income of the previous year of every person. The charge of tax is thus on total income. Sec. 2(45) defines total income to mean total amount of income referred to in s. 5, computed in the manner laid down in this Act. Chapter II of the Act, from ss. 4 to 9 deals with basis of charge. Chapter III of the Act deals with incomes which do not form part of total income and are contained in ss. 10 to 13B of the Act. Chapter IV deals with the computation of total income. Firstly income is categorized under various heads of income. This is laid down in s. 14 of the Act, which lays down that save as otherwise provided by this Act, all incomes shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income-Salaries, income from house property, profits and gains of business or profession, capital gains, income from other sources. Chapter V then brings income of other persons, which are to be included in the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontains various provisos which cover sums not liable to tax. Similar is s. 8. Sec. 14 also contains exemptions with regard to certain sums on which no tax is payable, and s. 15 contains exemptions in cases of life insurance. It will be noticed that the language used in all these sections, to which I have referred is similar, if not identical, with the language used in s. 25(4), viz., that the tax is not payable on these different sums. Now, if Mr. Joshi's contention was sound, then with regard to these various exemptions which I have enumerated, although tax is not payable, they should all be included in the total income for the purpose of determining the rate payable in respect of income-tax. Now, the short and conclusive answer to that contention is s. 16 of the Indian IT Act. It is that section which in terms includes in the total income of an assessee only certain sums which are exempted from the payment of tax. Therefore, by implication, where the sums are not included in the total income by s. 16, those sums are not only exempted from the payment of tax, but they are also excluded from the total income. Now, when we look at s. 16, it does not include the sum covered by s. 25( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same head of income. ......(3) Where the result of the computation made for any assessment year under ss. 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset." 5.5 The case of the Revenue is that the long-term capital gain which was exempt under s. 10(38) of the Act, is income arrived at under similar computation made as the long-term capital loss was arrived at and therefore the long-term capital loss has to be set off against long-term capital gain. In other words the case of the Revenue is that the long-term capital gain is income notwithstanding the fact that it is exempt under s. 10(38) of the Act. This reasoning in our view is fallacious. We have already pointed out that incomes which do not form part of the total income do not enter the computation of total income at all i.e., under any of the heads of income mentioned in s. 14 of the Act. Therefore, the question of aggregating them unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(a) which declares that in computing the total income of an assessee any sums exempted under some of the provisions mentioned above shall be included. These sums are included in the total income for the purpose of determining the true rate applicable to the rate applicable to the taxable income of the assessee. The sum exempted under s. 25(4) is not referred to in s. 16(1) and is not liable to be included in the total income of the assessee. It is exempt altogether from the operation of the Act. The Bombay High Court took this view in CIT vs. N.M. Raiji (1949) 17 ITR 180 (Bom), and we are in respectful agreement with that decision. 4. The assessee points out that before its amendment by the IT (Amendment) Act, 1939, the definition of 'total income' was : ' Total income means total amount of income, profits and gains from all sources to which this Act applies computed in the manner laid down in s. 16.' As a result of the Amendment Act of 1939, the present definition of 'total income' is : 'Total amount of income, profits and gains referred to in sub-s. (1) of s. 4 computed in the manner laid down in this Act.' 5. It is contended that the amendment extended the scope of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposed to levy a tax @ 0.15 per cent on the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax was to be collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The above provisions relating to the proposed tax were contained in Chapter VII of the Finance (No. 2) Bill, 2004, and took effect from 1st Oct., 2004. Further, it was proposed to insert cl. (38) in s. 10 of the IT Act, so as to provide exemption from long-term capital gains arising out of securities sold on the stock exchange. Thus, s. 10(38) has been inserted with a particular object to grant exemption to such income as tax has already been levied on some different footings. If we accept the contention of the Revenue to adjust long-term capital loss against exempt income (long-term capital gain) that will be contrary to law and contrary to the intention, object and purpose of the legislature in introducing cl. (38) to s. 10 of the Act. Further, on acceptance of Revenue's view on the issue, there is absurd outcome of interpretation if the facts are reversed, then, long-term capital loss from taxable assets will h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's length price (ALP) of these exports was CPM (Cost Plus Method). During the course of scrutiny proceedings before the Transfer Pricing Officer, however, it was observed that out of these 165 types of products, the assessee had sold 31 types of products to the non-AEs (i.e. independent enterprises) as well on a much higher profit margins. The TPO noted that as against a margin of Rs. 47.06% on exports to the AEs, the assessee has earned a margin of 194.43% margin on sales to the non-AEs. It was mainly in this backdrop that the TPO required the assessee to show cause as to why the margin of 194.43% not be adopted for the CPM. It was explained by the assessee that it had dealt in about 2,500 types of products, whereas the transactions with AEs were only in resptect of 165 types of products, out of which comparables, or near comparables, were available in respect of only 31 products. Therefore, according to the assessee, this approach to the determination was bound to be a failure. The assessee further explained that so far as the market in the case of transactions with AEs is concerned vis-à-vis the market in respect of transactions with AEs, there is a sea change in the grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction with an uncontrolled transaction is to be judged with reference to, inter alia, "conditions prevailing in the market in which the respective parties to the transactions operate, including the geographical location and size of the markets......... and level of competition and whether the markets are wholesale or retail". The case of sale to the end consumer which has to essentially buy the product from the same vendor who supplied him the furnace or other equipment is not the same thing as sale to the manufacturer or dealer a particular type of product, which uses the material so sold as input raw material etc. The distinction between these markets is so fundamental that the comparison is meaningless. In any case, while sale to AEs is in USA, UK, Australia, China, Brazil, Turkey and Korea etc, the sale to non-AEs, i.e. independent enterprises, is mostly in India. The sale to non- AEs under nearly monopolistic environment, whereas sale to AEs is under competitive environment. All these differences render the comparison of products sold to AEs and non-AEs irrelevant. While on this issue, we may also usefully refer to the observations made by a coordinate bench, in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a comparable uncontrolled transaction. Whether it is "price" or "normal mark up of profit", the starting point of both these exercises in the CUP and the CPM is finding a "comparable uncontrolled transaction". In order for such comparisons to be useful, the economically relevant characteristics of the situations being compared must be sufficiently comparable. It is only elementary, as is also noted in the OECD Transfer Pricing Guidelines, that "to be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences". .................... 20. In OECD Transfer Pricing Guidelines, this aspect of the matter, so far as comparability analysis is concerned, has been explained thus: 1.47 The functions carried out (taking into account the assets used and the risks assumed) will determine to some extent the allocation of risks between the parties, and therefore the conditions each party would expect in arm's length transactions. For example, when a distributor takes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are usually referred to as the five comparability factors, include: Characteristics of the property or service transferred; § Functions performed by the parties taking into account assets employed and risks assumed, in short referred to as the "functional analysis"; * Contractual terms; * Economic circumstances; and * Business strategies pursued. [Emphasis, by underlining, supplied by us] 22. On the facts of the present case, however, the comparability analysis has been confined to the first segment itself, i.e. characteristic of the property transferred. Undoubtedly, the product comparability is an important factor but its certainly not the sole or decisive factor. The assessee was producing the same products for its AEs as it was producing for independent enterprises but that was all so far as similarities were concerned. The FAR profile was not the same, the contract terms were not the same, the economic circumstances were not the same and the business strategies were not the same. Viewed thus, necessary precondition for application of CPM, i.e. finding normal mark up of profit in comparable uncontrolled transactions, could not have been fulfilled. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of Rs. 2,31,92,365. 30. Ground no. 6 is thus allowed in the terms indicated above. 31. In the result, the appeal for assessment year 2006-07 is partly allowed as indicated above. 32. We now take up ITA No. 2609/Ahd/2012, i.e. the appeal filed by the assessee for the assessment year 2008-09. 33. In the first ground of appeal, the assessee has raised the following grievance: On the facts and circumstances of the case, the learned Joint Commissioner of Income-tax, Range-4, Ahmedabad ('the Assessing Officer'), erred in disallowing provision towards warranty expenses amounting to Rs. 76,66,825. 34. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by a coordinate bench decision dated 22nd January 2010 in assesseee's own cases for the assessment years 2000-01, 2001-02, 2002-03, and another decision dated 22nd March 2010 for thee assessment year 2004-05. Learned Departmental Representative, nevertheless, relies upon the stand of the Assessing Officer, even as he has no submissions to make on as to why should the Tribunal not follow these binding judicial precedents. We have also noted that Hon'ble jurisdictional High Court has decli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of calculations furnished by the assessee, which have been reproduced at page 13 of the TPO's order, the effective rate of royalty for exports works out to 2.86% and royalty for domestic sales works out to 3.0029%. The TPO, however, rejected the stand so taken by the assessee. He was of the view that aggregation of all the transactions of an assessee is warranted only in such a situation when these transactions cannot be segregated. That's not the case here. The TPO was also of the view that computation of effective rate of royalty by the assessee is meaningless as "the assessee has only reduced the cost of imported equipment" whereas "all the deductions mandated in the formulae prescribed by the Government of India should have been taken into account". It was so for the reason, as noted by the TPO, that " since the payment of royalty is for the usage of .... Intangibles, the calculation for payment of royalty should be such that it should take into account the usage of intangible assets provided by the entity receiving the royalty" and that it should not "take into account the revenue earned by the entity received by the royalty on account of its own efforts". In other w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales, it is futile to suggest that it does not legally acceptable conceptual foundation. Whether or not the higher ceiling of rates, per se, prescribed by the RBI for payment of royalty can be accepted as an arm's length price may possibly have different approaches to this issue, there can be no dispute that there is a difference in approach to the rates of royalties in respect of domestic sales and exports. This commercial reality is duly recognized and accepted by the regulatory framework in India. In any case, even if one is to ignore this reality it for a minute, what is being used as a valid CUP input is an intra AE transaction, which a parent subsidiary transaction inherently is. Even in a case in which the royalty is being given to a rank outsider, by the virtue of 92A(2)(g), the entities paying and receiving royalties become AEs. It is only elementary that a transaction between the AEs can never be a valid CUP input. If needed, authority for this proposition is contained in ACIT Vs MSS India Ltd [(2009) 25 DTR 1 (Pune)], ACIT Vs Technimont ICB India Pvt Ltd [(2012) 75 DTR 259 (Mum)] and Sabic Innovative Plastics India Ltd Vs DCIT [(2013) 90 DTR 203 (Ahd)]. What the TPO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le-4, Ahmedabad ('the Ld. AO') under the directions of Dispute Resolution Panel ('DRP') erred in making an adjustment of Rs. 1,56,04,699 in relation to the international transaction of payment of Royalty to the associated enterprise ('AE'). 54. Learned representatives fairly agree that whatever we decide for the assessment year 2008-09 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of ALP adjustment on royalty payment. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of Rs. 1,56,04,699 also stands deleted. 55. Ground no. 1 is thus allowed. 56. In ground no. 2, the assessee has raised the following grievance: On the facts and in the circumstances of the case and in law, the Ld AO under the directions of DRP erred in making an adjustment of Rs. 1,81,03,806 in relation to the international transaction of sales made to AE, 57. Learned representatives fairly agree that whatever we decide for the assessment year 2006-07 on this is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in making an adjustment of Rs. 11,59,728 in relation to the international transaction of sale of goods to the AEs. 69. Learned representatives fairly agree that whatever we decide for the assessment year 2006-07 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of sale of products to the AEs. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of Rs. 11,59,728 also stands deleted. 70. Ground no. 2 is thus allowed 71. In ground no. 3, the assessee has raised the following grievance: On the facts and circumstances of the case, the AO erred in not allowing the benefit of +5% range as per Section 92C(2) of the Act, in respect of the aforesaid adjustments made under Transfer Pricing. 72. As we have upheld the basic plea, regarding ALP adjustment in respect of sale of goods to AEs, this plea is rendered infructuous and academic. 73. Ground no. 3 is thus dismissed. 74. Ground no. 4 is not pressed as it pertains to a small disallowance of Rs. 3,630. It is ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment in respect of sale of goods to AEs, this plea is rendered infructuous and academic. 85. Ground no. 3 is thus dismissed. 86. Ground no. 4 is not pressed as it pertains to a small disallowance of Rs. 4,210 It is accordingly dismissed as not pressed. 87. In ground no. 5, the assessee has raised the following grievance: On the facts and circumstances of the case and in law, the learned AO erred in disallowing the commission expenses paid to non residents amounting to Rs. 20,04,492 88. So far as this disallowance is concerned, it is sufficient to take note of the fact that the assessee had paid commission, amounting to Rs. 20,04,492, to nonresidents and in respect of services rendered abroad, primarily on the ground that income accrues or arises in India. Reliance was placed on decisions of Authority for Advance Ruling, in the cases of Rajiv Malhotra [(2006) 284 ITR 564 (AAR)] and SKF Boilers and Driers Pvt Ltd [(2012) 343 ITR 385 (AAR)]. It was thus held that the assessee ought to have deducted tax at source from these commission payments, and that his failure to do so would attract disallowance under section 40(a)(i). The assessee's objection before the DRP has also been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c)** ** **" Explanation 1-.............* Explanation 2.- For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head" Salaries".' * Not relevant for our purposes 32. So far as deeming fiction under section 9(1)(i) is concerned, it cannot be invoked in the present case since no part of the operations of the recipient's business, as commission agent, was carried out in India. Even though deeming fiction under section 9(1)(i) is triggered on the facts of this case, on account of commission agent's business connection in India, it has no impact on taxability in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambit of income 'deemed to accrue or arise in India' for the purpose of Section 5(2)(b). The point of time when commission agent's right to receive the commission fructifies is irrelevant to decide the scope of Explanation 1 to Section 9(1 )(i), which is what is material in the context of the situation that we are in seisin of. The revenue's case before us hinges on the applicability of Section 9(1)(i) and, it is, therefore. important to ascertain as to what extent would the rigour of Section 9(1)(i) be relaxed by Explanation 1 to Section 9(1)(i). When we examine things from this perspective, the inevitable conclusion is that since no part of the operations of the business of the commission agent is carried out in India, no part of the income of the commission agent can be brought to tax in India. In this view of the matter, views expressed by the Hon'ble AAR, which do not fetter our independent opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is the event of securing orders and not the rendition of alleged technical services. In a situation in which the agent does not render any of the services but secures the business anyway, the agent is entitled to his commission which is computed in terms of a percentage of the value of the order. In a reverse situation, in which an agent renders all the alleged technical services but does not secure any order for the principal i.e. the assessee, the agent is not entitled to any commission. Clearly, therefore, the event triggering the earnings by the agent is securing the business and not rendition of any services. In this view of the matter, in our considered view, the amounts paid by the assessee to its non-resident agents, even in the event of holding that the agents did indeed render technical services, cannot be said to be consideration for rendering of any managerial, technical or consultancy services (Emphasis by underlining supplied by us)". The services rendered by the agents, even if these services are held to be in the nature of technical services, may be technical services, but the amounts paid by the assessee are not for the rendition of these technical services nor t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rincipal, the consideration for securing business cannot be taxed under section 9(1)(vii) at all. This profits of such a business can have taxability in India only to the extent such profits relate to the business operations in India, but then, as are the admitted facts of this case, no part of operations of business were carried out in India. The commission agents employed by the assessee, therefore, did not have any tax liability in India in respect of the commission agency business so carried out. 91. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. As the recipient of the commission did not have any tax liability in respect of income embedded in such payments and as liability under section 195 can come into play only when the recipient has a tax liability in respect of income embedded in the related payments, the assessee cannot be faulted for not having deducted tax at source, and, disallowance under section 40(a)(i) does not, therefore, come into play. Respectfully following the views so expressed by the coordinate bench, with which we are in considered agreement, we uphold the plea of the assessee and direct the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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