9911796707
TMI Blog2023 (4) TMI 1260X X X X Extracts X X X X X X X X Extracts X X X X ..... s and four wheelers. 2.1 For AY 2011-12 the assessee filed its return electronically on 26.09.2011 declaring income of Rs. 35,81,29,732/-. It was processed under section 143(1) of the Income Tax Act, 1961 ("the Act") on 10.01.2012. The return was revised subsequently on 08.03.2013 declaring income of Rs. 33,51,24,893/-. The case was selected for scrutiny. The assessment was completed on total income of Rs. 38,18,77,830/- by the Ld. Assessing Officer ("AO") on 20.03.2014 under section 143(3) of the Act wherein he rejected the claim of the assessee made in the revised return that the receipt by it of the sales tax subsidy of Rs. 2,32,51,000/- was capital subsidy and proceeded to compute the total income starting from income as per original return and making disallowance there from, penalty and interest in delayed payment of Rs. 2,95,940/-, disallowance of Rs. 2,54,561/- under section 14A and disallowance of foreign commission of Rs. 2,31,97,600/-. 2.2 On appeal, the Ld. CIT(A) held that the revised return filed by the assessee was valid return; that the subsidy of Rs. 2,32,51,000/- received by the assessee in the form of sales tax concession is capital receipt but for the purpose o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder dated 30.03.2015 rejected the assessee's application, holding that the subsidy was revenue receipt. Alternatively, the Ld. Pr. CIT also held that the Explanation 10 to section 43(6) was applicable. 5.2 The Ld. AR further submitted that the assessee filed writ petition before the Hon'ble Delhi High Court and the Hon'ble Delhi High Court set aside the order dated 30.03.2015 of the Ld. Pr. CIT passed under section 264 of the Act and resultantly the order(s) of the Ld. AO . The Hon'ble Delhi High Court held that the sales tax subsidy received by the assessee be treated as capital receipt and not be added to the income of the assessee. The Hon'ble Delhi High Court went on to observe further that the consequential orders will now be passed by the Ld. AO. 5.3 The Ld. DR did not controvert the above submissions of the Ld. AR. 6. In the light of the factual matrix as submitted by the Ld. AR of the assessee we have no hesitation in holding that the issue that the sales tax subsidy received by the assessee from Haryana Govt. is capital receipt is covered in favour of the assessee and against the Revenue by the decision of Hon'ble Delhi High Court in the assessee's own case in WP(C)894 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT(A) confirmed the view of the Ld. AO and observed in para 5.4 at page 10 of the appellate order as under:- "5.4 From the above silent features it is apparent that not only the quantification subsidy was calculated on the percentage of investment made in plant and machinery but the benefit of the sales tax exemption was only allowable on the investment made in plant and machinery. Hence the subsidy received in question was both directly and indirectly linked to the investment in the plant and machinery made by the assessee company. Moreover in the Scheme of Incentive it has been specially clarified under a separate sub head "Sales Tax concession on expansion/ Diversification" that for the industrial unit undergoing expansion/diversification will get benefit of subsidy only on the investment made by the unit in plant and machinery. Since the subsidy in question is linked with the investment made in plant and machinery, hence, the said subsidy amount has to be adjusted against the cost of assets and the depreciation is to be allowed on the re-worked cost of assets . The decisions relied by the assessee is distinguishable and not applicable to the facts of the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the character and nature of a subsidy whether it was really intended to subsidize the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost which is the basis for determining the subsidy being only a measure adopted under the scheme to quantify the financial aid." 7.7.1 Let us apply the above yardstick to the facts of the assessee's case. Before the Ld. AO/CIT(A) the assessee submitted that the purpose/aim of the impugned subsidy was to promote industrial growth in the state. The main idea behind the subsidy scheme is overall economic development which directly or indirectly increase the employment opportunities. The basic objective of the scheme is to encourage establishment/expansion of new/existing undertaking by attracting new investment. It was thus explained that the object of grant of the impugned subsidy by way of sales tax concession under Rule 28C of the Haryana Sales Tax Rules was to promote industrial development in the State by promoting establishment of a new industrial unit or substantial expansion of an existing industrial unit. 7.8 On c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, the quantification of the amount of subsidy was determined at a percentage of the fixed capital cost. This is amply supported by the letter dated 29.11.2006 of the Director of Industries & Commerce Haryana to the assessee which is reproduced below:- "Registered From The Director of industries & Commerce, Haryana. To M/s. Sunbeam Auto Ltd., 38/06 KM Stone, Delhi-Jaipur Highway, Viii. Narsinghpur, Gurgaon. Memo. No. FA/NSTE/ CCN/S-16/17817-A Dated, Chandigarh the : 29.11.06 Subject: Sales Tax Concession - Case of M/s. Sunbeam Auto Ltd., 38/06 KM Stone, Delhi-Jaipur Highway, Vill. Narsinghpur, Gurgaon. Your case was placed before High Powered Committee in its meeting held on 9.11.2006 under the Chairmanship of Hon'ble Chief Minister, Haryana. The decision of the High Powered Committee is reproduced below:- "Director of industries & Commerce Haryana, explained to the committee that M/s. Sunbeam Auto Casting have invested Rs.43.47 crores on their 4th expansion. The investment made by the unit is more than Rs.30,00 crores as this is a case to be decided by the High Powered Committee under Rule 28-C. The case fails under the unit in Pipeline u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that neither the CIT(A) nor the Ld. AO have identified any asset the cost of which was met directly or indirectly by the impugned subsidy. This is evident from the appeal effect order dated 06.09.2016 passed by the Ld. AO under section 250 of the Act brought on record by the Ld. AR. 8.2 Perusal of the Explanation 10 along with its proviso to section 43(1) would reveal that the provision requires that the subsidy will go to reduce the actual cost to the extent to which the cost is met directly or indirectly by the subsidy. The proviso enables pro rata allocation, where the subsidy does not directly relate to any particular asset. 8.3 The assessee's case is that the impugned assets were acquired by the assessee during the period from 01.12.1999 to 27.04.2002 and the cost was met from assessee's own funds whereas subsidy was sanctioned on 29.11.2006 and entitlement certificate under Rule 28C of the Haryana Sales Tax Rules Granting tax subsidy of Rs. 29.14 crores was issued on 01.02.2007 and the first tranche of subsidy was received in Financial Year 2006-07 relevant to AY 2007-08. These facts were on the records and very much verifiable. Thus, it is evident that the cost of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aining to AY 2007-08 to 2010- 11 wherein he held that the subsidy was liable to be reduced from the cost of the assets in terms of Explanation to section 43 stands set aside by the decision of Hon'ble Delhi High Court rendered on 07.12.2017 (copy at page 145-148 of Paper Book) 9. For the reasons recorded above, we decide ground No. 2 in favour of the assessee and hold that the impugned capital subsidy cannot be deducted from the cost of assets under Explanation 10 to section 43(1) of the Act. 10. Ground No. 3 relates to disallowance of Rs. 2,31,97,600/- under section 40(a)(i) of the Act. The Ld. AO discussed this issue in para 9 of his order. He found from the P & L Account that the assessee has debited the aforesaid sum as 'foreign commission'. On being asked the assessee submitted two agreements with two parties, namely M/s. Asian Manufacturing LLC and M/s. ETCSLLC both of USA which were valid till 31.03.2012. The Ld. AO noted the salient point of these two agreements and rejecting the explanation of the assessee held that the services provided by the said parties fall within the purview of Fees for Technical Services ("FTS") as per section 9(1)(vii) of the Act and Fees for Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial communication, negotiation or any such matter to be dealt with the customer. * As per para 10- Confidentiality and Secrecy AM and Solanki acknowledge and agree that all tangible and intangible information including all documents, data, papers, statements, business/customer information, trade secrets and processes of SBA relating to its business provided to, obtained by or developed by AM for purposes of or pursuant to the performance of services under this Agreement or otherwise constitutes confidential and proprietary information of SBA ("Confidential Information") AM and Solanki shall maintain due confidentiality at all times and shall not disclose any confidential Information to any person or entity or earlier discharge or termination thereof except that AM may disclose such information as it is required to disclose by law or judicial process or as may be required for enforcement of this agreement. 9.6 Thus from the above points its amply clear that the agent M/s. Asian Manufacturing LLC (AM) has specialized knowledge and understanding of automotive component, manufacturing industries and marketing of these products in USA and North America. It has to study the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e customers. The imparting of such important business services by a business consultancy provider and its assimilation by the recipient of such services is bound to equip the recipient with such knowledge which may enable it to use on its own. Also, there is no bar in the agreement which prohibits the recipient (assessee) to use on its own such knowledge as it has acquired through its close business association with M/s. AM. Therefore, the importance of learning and absorbing for its own future use and benefit by the recipient cannot be over emphasized. 4. As regard the Make available' clause, it is further stated as under;- Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. It has been shown in detail above that business development and marketing services are being provided by M/s. AM to the assessee in a coordinated fashion and M/s. AM is assisting and advising the assessee in an array of business related services in a way which encourages learning, absorption and assimilation of such services and therefore, enables the recipient for its own future use and benefit. Therefore, it is bey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the assessee concerned in USA. The assessee is also liable to get enduring benefit for the technical knowledge and experience of M/s ETCS. The domain work of M/s ETCS would include not only securing order of the assessee but in its larger ambit it would have to identify markets, make introductory contacts, assist in preparation of presentations, targets clients etc. These all would require vast technical knowledge and experience of the product as well as the market. Further this would also entail transfer of technical information and knowledge between M./s ETCS and the assessee providing enduring benefits to the assessee. 6. It is vital to mention that in the case of Intertek Testing Services, in (2008) 307 ITR 418, the AAR held that the expression 'Technical Services' cannot be construed in a narrow sense. It has been observed that the terms 'technical' ought not to be confined in India only to technology relating to engineering, manufacturing or other applied sciences. In this regard, it is important to cite an important ruling by the AAR dated 17.01.2012 in the case of M/s Shell India Markets Pvt. Ltd. (AAR No. 833 of 2009). In the said ruling, business support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion to these two agents under the same agreement since AY 2004-05 which has been allowed in assessments framed under section 143(3) of the Act for AY 2005-06 to AY 2010-11. No new facts or law has been brought out by the Ld. AO/CIT(A) in AY 2011-12 under consideration. They have merely taken a different stand on the same facts which violates the principle of rule of consistency as held by the Hon'ble Supreme Court in Excel Industries 358 ITR 295 (SC). 11.1 On merits, the Ld. AR submitted that commission to foreign sales agents is paid for procuring successful orders only after the agreed price is released by the foreign purchaser. The agent carries out market study etc. for boosting his commission income. The agents act at the dictates of the assessee. They were not authorized to make any binding representation without written authorization duly signed by the assessee. The foreign agents rendered such services which are typical of any commission agency business. Such services are not 'technical services' and therefore, tax at source need not be deducted as held by the Hon'ble Delhi High Court in DIT vs. Panalfa Autoelektrik Ltd. (2014) 49 taxmann. Com 412 (Del). 11.2 As to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the amendment cannot be read into the DTAA. He also referred to the decision of Mumbai Bench of the Tribunal in IHI Corporation vs. Addl. DIT (Int. taxation) (2013) 32 taxmann.Com 132 (Mumbai Trib.) wherein the Tribunal held that in view of the amendment to the relevant provisions by means of the substitution of Explanation to section 9(2) governing the year made under consideration also, the income from offshore services rendered outside India would fall within the domain of section 9(1)(vii) of the Act. The Tribunal also observed that in assessee's own case for earlier years income on account of offshore services is not chargeable to tax as per Article 7 of the DTAA. The Tribunal held that the crux of the matter is that the provision of the Act or of the DTAA whichever is more beneficial shall apply and therefore, the income from offshore services though chargeable under section 9(1)(vii) but exempt under the DTAA cannot be charged to tax in the light of section 90(2) of the Act. 11.7 The Ld. AR concluded that since the sales agents rendered services outside India and that they had no 'business connection' or PE and that they are tax residents of USA, the payments made an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, AM will set as SBA's exclusive agent with respect to the customers set forth in Annexure "C". 2. Products and Territory 1.2 The product covered by this agreement consist of the products manufactured or outsourced as outlined in Annexure-A and modified from time to time as agreed mutually by parties (the "Product(s)"). 1.3 SBA shall have the sole right to determine its Product prices and terms of sale. All orders are subject to acceptance by SBA. 1.4 The appointment is for the region of North America (the ''Territory"). 1.5 AM shall communicate to SBA in the first instance any business relationship for a potential sale of the Products it wants to establish/follow/open with any prospective customer ("Lead"). Upon receiving consent from SBA with respect to a Lead, AM shall start the process of establishing the same Lead. In case AM receives no response from SBA with a request for consent to develop a Lead, AM shall send a reminder after 2 weeks ("Reminder"). If AM does not receive any response from SBA within one week after the Reminder, AM can choose, by written notice to SBA, to add the prospective customer corresponding to the same Lead to Annexure C. If no RFQ i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e orders for which commission of 1% shall be payable by SBA to AM by mutual consent of AM, in which case such commission shall be payable to AM provided that AM agrees to and does, in fact, assist SBA in all facets of the business relationship with the customer, including the providing of those services as described in Section.3(d)(iii) and 3(d)(iv). 4.3 The Commission shall be paid to AM on the gross invoice price charged to customer. The invoice price used in this Agreement means purchase prices paid to SBA by the customer. 4.4 Commission shall be considered due within five days after receipt of payment from the customer. All payments due will be paid once a month.. SBA shall provide to AM Purchase Orders and Invoice/Payment receipt summaries that apply to all orders that are commissionable. 4.5 SBA shall pay to AM commission of 5% of the gross invoice price on all tooling. The invoice price used in this agreement means purchase prices received by SBA from the prospective buyers when it is charged to the customer. 4.5.1 Any increase in prices that is negotiated with customers over the SBA prices submitted to AM will be shared between AM and SBA on a 50/50 basis. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined as follows. Retainer Fee $ 2500/- 6 Months w.e.f. 01.06.04 Commission Fee 5.0% - Paid Monthly (based on sales) (Retainer fee will accrue on signing the agreement but will not be payable to Manufacturer's Rep till first business is won for the Principle as a result of this relationship). Relationship of Parties It is intended that the Marketing Representative shall be an impendent contractor and not exclusively devoted to the sales of Principal's product (s) or an agent or employment of this Principal. The Marketing Representative would not be representing any other company manufacturing Aluminium Die Casted Components to the company's listed in schedule A without taking the consent of the principal. Marketing Representative shall have no authority to act by or on behalf of the principal nor shall the Marketing Representative be authorized to bind the Principal in any manner whatsoever. All knowledge and information that the Marketing Representative may acquire during the relationship between the Marketing Representative and the Principal concerning , manufacturing and sales practices of the Principal, its operation and procedures shall be deemed to be proprietar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15) 41 ITR (Trib) 449 (Delhi), Delhi Bench of the Tribunal pointed out that the expression "make available" in the context of 'fees for technical services' contemplates that the technical services should be of such a nature, that the payer comes to possess the technical knowledge so provided which enables it to utilize the same thenceforward. If the services are consumed without leaving anything tangible with the payer for use in future, it will not be 'make available' of the technical services notwithstanding the fact that its benefit flowed directly to the payer. In Mahindra and Mahindra Ltd. vs. Dy CIT (2009) 313 ITR (AT) 263 (Mumbai) (SB) it has been held that where the payer only obtained the benefit from the services, but did not get any technical knowledge experience or skill in its possession for future use, it cannot be said that technical know-how was made available. 13.1 Before the Ld. AO/CIT(A) the assessee submitted that no information in the nature of technical, managerial or consultancy services had been provided by any of the two agents to the assessee. No such information has been brought on record by the Revenue. The assessee has been asserting that these foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... toppel and resjudicata do not have any application in income tax proceedings, since each assessment year is a separate unit. However, it is necessary that consistency should be maintained when the facts are not different. 17. We, therefore, hold that on the facts and in the circumstances of the assessee's case the impugned disallowance under section 40(a)(i) of the Act made by the Ld. AO and confirmed by the Ld. CIT(A) is not sustainable. Accordingly, the orders of the Ld. AO/CIT(A) are set aside. The ground No. 3 of the assessee is decided in favour of the assessee. 18. In the result, the appeal of the assessee in ITA No. 4378/Del/2016 for AY 2011-12 is allowed. 19. Now we take up the appeal of the assessee for AY 2013-14. The assessee has taken the following grounds of appeal:- "1. That the order passed by the Ld. CIT(Appeal) is bad in law and against the facts of the case. 2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in sustaining the addition of Rs. 1,82,08,923/- u/s 40(a)(i) on account of commission paid to US resident agents for selling assessee's products in US." 20. Ground No. 1 is of general nature. 21. Ground No. 2 rel ..... 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