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TMI Blog2022 (9) TMI 880X X X X Extracts X X X X X X X X Extracts X X X X ..... ountries that did not have any permanent establishment in India or were not carrying on any business in India but were rendering services outside India. Accordingly, ground number 1 of the appeal of the assessee is allowed and the learned assessing officer is directed to delete the disallowance because of commission paid to associated enterprise for procurement of export orders. Provision for commission incurred by the assessee to associated enterprise for procuring export orders - mere provision cannot and ascertained liability and therefore provisions are not deductible as an expenditure - HELD THAT:- We find that when the sales are concluded during the year, naturally the corresponding expenses of commission have also accrued to the assessee. For such commission, the amount of commission, recipients of commission as well as the basis of such commission payment are known to the assessee. The liability for payment of commission has already been incurred by the assessee as soon as sales are concluded for the reason that corresponding bills have not been received from the associated enterprises cannot come into the way of deduction claimed by the assessee. It is not the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Prashant Maharishi, AM And Shri Sandeep Singh Karhail, JM For the Assessee : Shri V. Shridharan And Ms. Manasi C, AR For the Revenue : Shri C T Mathew, DR ORDER PER PRASHANT MAHARISHI, AM: 01. This appeal is filed by Sulzer Pumps India Private Limited (the assessee/ appellant) against the order passed by the Dy. Commissioner of Income-tax 15(3) (2), Mumbai (the learned Assessing Officer) under Section 143(3) of the Income Tax Act, 1961 [ he Act] on 30th October, 2019, wherein the return filed by the assessee on 30th November, 2014 at ₹88,63,34,310/- is assessed at ₹115,86,77,740/-. This assessment order was passed incorporating the adjustment proposed per order under Section 92CA(3) of the Act dated 16th October, 2018 passed by the Dy. Commissioner of Income-Tax, Transfer Pricing, 4(1)(1), Mumbai (the learned Transfer Pricing Officer) pursuant to the direction issued by the Learned Dispute Resolution Panel, No. II, Mumbai (the learned Dispute Resolution Panel) on 25.09.2019. 02. The assessee has raised following grounds:- Being aggrieved by the order of the learned DCIT, Circle - 15(3)(2), Mumbai, (AO'), read with the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of non-deduction of tax relating to professional fees paid by the assessee to its associated enterprises as well as to third parties. 4.1. The lower authorities erred on facts and in law, in ignoring the fact that the appropriate taxes had actually been withheld by the assessee while remitting the payment for professional fees. 4.2. The lower authorities erred in not appreciating the documentation, factual and legal submissions provided by the assessee to support its submission that the deduction of tax before remittance. 5. That on the facts and in the circumstances of the case, the lower authorities erred in treating a sum of Rs. 5,29,687/- as the income of the assessee on account of alleged discrepancy in receipts as per books of accounts and 26AS of the assessee. B. Grounds relating to additions on account of Transfer Pricing Adjustments 6. That on the facts and in the circumstances of the case, the lower authorities erred in upholding the adjustment of Rs. 7,05,39,108/- to the income of the assessee on account of payment of trademark fees to the associated enterprise. 6.1. The lower authorities erred in rejecting the transfer pricing docum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2. The lower authorities erred on facts and in law in determining the arm's length price of the annual charges towards Microsoft licensing to be Nil without allowing any of the prescribed methods under section 92C(1) of the Income-tax Act, 1961. 8.3. The lower authorities erred in linking the transaction of Microsoft charges paid with that of the transaction of payment for SAP related Support services and holding that since arm s length price of SAP charges is determined at Nil, there cannot he charges for the maintenance of such software. 8.4. The lower authorities erred in ignoring the documentation, factual and legal submissions provided by the assessee to substantiate the benefit, corresponding economic or commercial value derived oil of the Microsoft license. 9. That on the facts and in the circumstances of the case, the lower authorities erred in upholding the adjustment of Rs. 6,06,85,073/- to the income of the assessee on account of ASP management fees paid by the assessee to its associated enterprise. 9.1. The lower authorities erred in rejecting the transfer pricing documentation and the economic analysis undertaken by the assessee without any rob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to certain international transactions, after approval from the principal Commissioner of income tax 15, Mumbai per letter dated 22/6060 reference was made to The Deputy Commissioner of Income Tax (Transfer Pricing) 4 (1) 2, Mumbai (the learned TPO) for determination of arm s-length price of the international transactions entered into by the assessee. 04. The assessee has undertaken 16 types of international transactions with its associated enterprises adopting various methods as most appropriate method submitting that same are carried out at Arm s Length Price. The international transaction carried on by the assessee are as under:- S.NO. International Transaction Amount (In INR) Most Appropriate Method (MAM) adopted by assessee 1. Purchase of raw materials, parts, etc. 22,23,13,683 Transactional net Margin Method ( TNMM ) 2. Purchase return of raw materials, parts etc. 26,63,387 TNMM 3. Sale of finished goods 82,44,93,648 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment should not be made during the year. The fact shows that for assessment year 2014 15 certain international transactions were benchmarked by the learned TPO holding that arm s-length price of those transactions Rs. Nil. 06. He found that such transactions are with respect to [1] Payment of ASP management fees of ₹ 60,685,073/- which was in relation to administrative/management services provided by a Chinese entity affiliated entities operating in Asia-Pacific region. The cost was allocated by associated enterprise providing these services entities including assessee based on time spent in providing the said services. Assessee was charged at cost plus a markup of 5%. The nature of services were sales and marketing, information technology, finance, management support and human resources. Assessee adopted cost plus method as the most appropriate method for payment of these fees. The weighted average margins of the comparable independent companies were found in the range of 5.28% to 6.68% with an arithmetic mean of 6.75%. Therefore, the assessee stated that this international transaction is at arm s-length. The learned transfer-pricing officer held that in assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 018 submitting the invoice stating that this amount has been charged on back-to-back basis without any markup. The learned transfer-pricing officer held that these are annual maintenance cost of Microsoft licenses, as the SAP license fees have been determined at ALP at Rs Nil, in absence of the list of employees utilizing such licenses; this cost was also benchmarked at Rs. Nil [4] payment for professional fees of ₹ 434,858/ was made for technical services representing expenses relating to repair/rework/rectification work carried out for the purpose for to the end customers and the warranty period in respect of such forms were expired. The assessee stated that as per the group policy the associated enterprises have charged cost plus a markup of 5% the assessee for provision of the above professional services assessee also supported the same with sample copies of the invoices. The arm s-length price of the about transaction was determined by assessee adopting other method payment of the about transaction was clubbed with the transaction for payment of royalty. The region wise profitability was shown to the learned transfer pricing officer and stated that a markup of 5% whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, same was also disallowed under Section 40a(i) of the Act. III. He further disallowed the provision of commission expenditure to the extent of ₹1,70,99,895/- under Section 37 of the Act as these expenses are not incurred in the relevant accounting year. IV. He also made an addition of payment made to non-resident of ₹5,38,46,290/- for non-deduction of tax under Section 40a(i) of the Act. There were certain mismatches between the information available from annual information return wherein certain payments to the extent of ₹5,29,687/- are not offered as income. Therefore, same were added. 08. Consequently, total income of the assessee was determined at ₹117,61,65,952/-bypassing the draft assessment order u/s 143 (3) read with Section 144C (1) of the act on 28/12/2018 wherein total income of the assessee disclosed in the revised return of income of ₹ 799,172,952/ was determined at ₹ 1,176,154,952/ . 09. The draft assessment order was challenged by filing objections before the learned Dispute Resolution Panel who passed direction on 25th September, 2019. The learned dispute resolution panel upheld the transfer pricing adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and perused the orders of the road lower authorities as well as the order of the assessing officer in case of the assessee for assessment year 2007 08. We find that assessee is a manufacturer of power driven pumps. These pumps are sold to customers in India as well as in overseas market. Assessee does not have any offices outside India but market is served by the associated Enterprises of the assessee. For this purpose, the assessee pays the commission to the associated enterprises. This year such commission payment was of ₹ 35,424,361/ . Though the transaction was accepted by the learned transfer pricing officer at arm s-length price, however, the learned assessing officer disallowed the same for the reason that assessee has not deducted tax at source u/s 195 of the Act and hence disallowable u/s 40 (a)(i) of The Act , as according to the learned assessing officer u/s 195 of the income tax act the commission paid to associated enterprises should have been subjected to tax deduction at source. In the present case the associated enterprises do not carry on any business operation in India, they merely acted as selling agents of the assessee outside India. The issue is squarel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not merely a provision but an ascertained liability therefore it should have been allowed to assessee as deduction. 017. The learned departmental representative vehemently supported the order of the learned assessing officer stating that when the liabilities did not accrue, the deduction cannot be granted. 018. We have carefully considered the rival contention and perused the orders of the lower authorities. Admittedly, assessee exports the pumps to overseas customers. During the year, the assessee has exported of ₹ 251.91 crores, which is almost 50% of its turnover. Assessee does not have any branch office outside India to source its export orders. For this reason the associated Enterprises of the assessee performs the duty of the agents and assessee pays them commission on the sales. During the year, the assessee has recorded Rs 4, 94,66,527/- as commission due on account of sales recorded during the year. The arm s-length price of the commission expenses are accepted by the learned transfer pricing officer but the learned assessing officer stated that the commission paid is merely a provision because the invoices for commission has not been received by the assessee d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India private limited versus CIT 314 ITR 62 wherein the Hon. Supreme Court has held that the provisions for meeting warranty claims and sales computed on accrual basis as percentage method taking into account the past trends is an allowable expenditure. 021. On the issue of non-deduction of tax at source he submitted that if a resident is carrying business outside India or earning income from a source outside India, the expenditure of fees for technical services for that, cannot be subjected to withholding tax u/s 195 of the income tax act. 022. The learned departmental representative heavily relied on the orders of the lower authorities submitting that provision made by the assessee for warranty expenditure is not on scientific basis and further assessee has failed to deduct tax at source on payment of warranty expenditure to its associated enterprises u/s 195 of the income tax act and therefore the disallowance is correctly made by the learned assessing officer on twin charges. 023. We have carefully considered the rival contentions and perused the orders of the lower authorities. Assessee made provision for warranty expenditure on the pump and sold at the rate of 1.25% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranty expenditure if determined in accordance with some method based on past trends of the product failure, and such provision is not excessive, same deserves to be allowed as expenditure against the sales income by the assessee. The honourable Supreme Court covers this issue in favour of the assessee. Before us, assessee has provided the calculations of each for provision of warranty made in the respective year as well as the financial statements of the assessee for earlier years to show that such provision are not in excess of any requirement for meeting warranty liability. The learned assessing officer and the learned dispute resolution panel did not show what is the scientific method other than this that the assessee should have employed for determining the liability of warranty. In view of this, we are of the opinion that warranty provision made by the assessee is not an unascertained liability but definite and ascertained liability, which is quantified on the basis of past history of the product failure. Accordingly, the learned assessing officer is not correct in disallowing the warranty expenditure amounting to ₹ 37,310,658/ stating that it is not allowable. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to several judicial precedents. He submitted that this judicial precedents clearly lay down that even if the person does not have a physical persons in another jurisdiction, he can be considered as carrying on business in that country, if he habitually and regularly sales goods in that country. He further submitted that the term business is of a very wide import, thus he submitted that warranty services have been availed from Associated Enterprises for earning income form a source outside India and therefore, the payment is not subject to TDS under Section 195 of the Act. He further distinguished the decision of the Hon'ble Delhi High Court in case of CIT vs. Hevells India Ltd as well as of Hon'ble Madras High Court in CIT vs. Anglo French textiles (1993) 199 ITR7 85 (Mad) Hon'ble Delhi High Court was not concerned with the applicability of first explanation to section 9(1)(vii)(b) of the Act. He submitted that the Hon'ble Gujarat High Court in case of Motive India InfoTech Pvt. Ltd. [2018] 409 ITR 178 (Guj) squarely covers the issue in favour of the assessee. He further relied on the decision of DCIT vs. Lufthansa Cargo Hon'ble Delhi High Court 375 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x at source would arise only in a case where the payment made to a non-resident was taxable, still remains. It was observed in a decision dated April 9, 2018, rendered in Tax Appeal No. 290 of 2018 (Principal CIT v. Nova Technocast Pvt. Ltd. [2018] 12 ITR-OL 353 (Guj)) by the Division Bench of this court, as under (page 356 of 12 ITR-OL) : It can thus be seen that while confirming the order of CIT(A), the Tribunal relied on the judgment of the Supreme Court in the case of Page No : 183 GE India Technology Centre P. Limited v. CIT reported in [2010] 327 ITR 456 (SC). In such judgment, it was held and observed that the most important expression in section 195(1) of the Act consists of the words, 'chargeable under the provisions of the Act'. It was observed that, '. . . A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act'. The counsel for the Revenue, however, drew our attention to Explanation 2 to sub-section (1) of section 195 of the Act which was inserted by the Finance Act of 2012 with retrospective effect from April 1, 1962. Such Explanation reads as under : 'Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by such person outside India or for the purposes of making or earning any income from any source outside India ; or 35 8. As per sub-clause (b) thus, the income by way of fees for technical ser vices payable by a person who is a resident would be deemed to accrue or arise in India. However, this clause contains two Explanations, namely, where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India, or for the purpose of making or earning any income from any source outside India. In other words, therefore, if the assessment of an assessee falls in either of these two clauses, the income by way of fees for technical services paid by the assessee would still not be covered within the deeming clause of sub-section (1) of section 9. 9. In the present case, the Commissioner (Appeals) and the Tribunal have accepted the assessee's factual assertion that the payments were for technical services provided by a non-resident, for providing services to be utilized for serving the assessee's foreign clients. Thus, the fees for technical services was paid by the assessee for the purpose of making or earning any income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in fact has deducted tax at source on the above payment. The assessee submitted the list of 13 parties stating that to them the amount of ₹ 944,719/ is paid and tax is deducted of ₹ 194,024 . It was also stated that assessee submitted these details before the learned dispute resolution panel however, they were ignored. 029. We have carefully considered the rival contention, perused the orders of the lower authorities, and find that if the claim of the assessee is found to be correct that the assessee has already deducted tax at source on the above payment, no disallowance could have been made. Therefore, in the interest of justice, we set-aside this ground of the appeal to the file of the learned assessing officer with a direction to the assessee to show that on these payments the assessee has deducted tax at source u/s 195 of the income tax act, the learned assessing officer way verify the same and decide the issue in accordance with the law. Accordingly, ground number 4 of the appeal is allowed. 030. Ground number 5 was not pressed and therefore it is dismissed. 031. Ground number 6-10 of the appeal of the assessee relating to the transfer pricing issues. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t materials available on record. Having narrated at length the order of the TPO/AO and DRP, the contentions of the Ld. Counsel and the Ld. DR, we adjudicate below the above grounds appeal. We find that the assessee had filed before the TPO on 22.06.2015 (i) Transfer pricing study report for financial year 2011-12 (ii) Form 3CEB for FY 2011-12 (iii) Financial statements of Sulzer India for the year ended 31 March 2012. The assessee had also filed before the TPO on 04.09.2015 i) Copies of agreements for Trademark fees between Sulzer Management AG and Sulzer India, (ii) Copies of third party comparable agreements w.r.t trademark fees, (iii) Single year comparable companies margin for FY 2011 -12, (iv) Calculation of operating margin of Sulzer India for FY 2011-12, (v) Description of services and benefits received for payment of ASP management fees, (vi) Copy of agreement for ASP management fees, (vii) E-mail correspondences for payment of ASP management fees, (viii) Copy of inter-company agreement for SAP, (ix) Tickets raised by Appellant for SAP support services, (x) Agreement between Sulzer Holding Inc. and Microsoft Licensing GP, (xi) Agreement between Sulzer Holding Inc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ministration and (iii) payment of commission that assists the assessee in obtaining purchase orders from third parties. 25.2 Let us discuss a bit on the concept of burden of proof. This ambiguous term refers to two distinct concepts. The first concept is known particularly the burden of persuasion. A party meets this burden by convincing the fact- finder to view the facts in a way that favours that party. Today the phrase burden of proof most often bears this meaning. The second concept is known unambiguously as the duty of producing evidence, the burden of going forward with evidence, the production burden or the burden of evidence. A party meets this burden by introducing enough evidence to have a given issue considered in the case. In burden of proof, the onus frequently shifts as the case proceeds from the person on whom it rested at first to his opponent. This occurs whenever, a prima facie case has been established on any issue of fact or whenever a rebuttable presumption of law has arisen. Thus, the phrase burden of proof is used in two distinct meanings viz, the burden of establishing a case and the burden of introducing evidence. It is well-settled that the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties and perused the record. The first issue relates to the disallowance of Royalty, technical knowhow fees and annual charges of Microsoft licencing fee. We have considered an identical issue in the assessee's own case in ITA No.6059/Mum/2013 relating to AY 2008-09 and we have restored the issues to the file of the AO for examining them afresh, as the Tribunal held the assessee to be Licenced Manufacturer . For the sake of convenience, we extract below the operative portion of the order passed in Ay 2009-10 (supra):- 9. We heard the parties and perused the record. We notice that the tax authorities have considered the assessee as a Contract Manufacturer and accordingly disallowed the Royalty and Technical knowhow expenses. In the written submissions, the assessee has demonstrated that the purpose of obtaining approval for sales from its AE is to avoid competition between the AEs. The assessee has also submitted that out of the total export sales of Rs.87.63 crores, the exports made to AEs was only Rs.37.70 crores and the remaining exports have been made to non- AEs. Had the assessee been a contract manufacturer, it could not have sold the goods to non-AEs. Accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this transaction has also not been benchmarked under any of the recognised methods by the TPO. Accordingly we restore this issue also to the file of AO/TPO for examining it afresh. Following the decision rendered for AY 2008-09, we restore these issues to the file of the AO/TPO with identical directions. 039. Therefore for Ay 08-9, 09-10 11-12, the issues are set aside to the file fo the ld AO and for Ay 2012-13 and 13-14, the grounds of the assessee were allowed on identical facts and circumstances. 040. While deciding the case for AY 2012-13, 13-14 perhaps above finding of the coordinate bench did not come to the notice of the coordinate bench and therefore for those years. Transfer pricing additions were deleted without testing the benchmarking analysis of the assessee of the International Transactions. 041. We failed to understand that how an international transaction of two different years, particularly in the transactions where the rendition test, benefit test, etc are required to be proved . This exercise is required to be proved every year. Therefore, even if the issue is set aside or allowed in another years does not have any impact on determination of ALP o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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