DCIT, CHENNAI V. AVT McCormick Ingredients Pvt Ltd., CHENNAI

ITA 1277/CHNY/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9753 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-04-2016
• Appeal Filed By: Department
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 07-06-2013
• Court: TRIBUNAL
• Department Lawyers: T BANUSEKAR
• Assessee Lawyers: SURESH KUMAR
• Keywords: Transfer pricing; International transaction; Permanent establishment

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , ! ' # , $ %& ' [ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD , JUDICIAL MEMBER ] ./ I.T.A.NOS.1277/MDS/2013 & 142/MDS/2015 / ASSESSMENT YEARS : 2007-08 & 2010-11 THE DY. COMMISSIONER OF INCOME-TAX COMPANY CIRCLE I(1) CHENNAI VS. M/S AVT MCCORMICK INGREDIENTS PVT. LTD. 64, RUKMANI LAKSHMIPATHY SALAI EGMORE, CHENNAI 600 008 [PAN AAACA 3217 E ] ( () / APPELLANT) ( #*() /RESPONDENT) / APPELLANT BY : SHRI T. BANUSEKAR, CA /RESPONDENT BY : SHRI SURESH KUMAR, JCIT / DATE OF HEARING : 30 - 03 - 201 6 / DATE OF PRONOUNCEMENT : 01 - 0 4 - 2016 + / O R D E R PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER THESE APPEALS OF THE REVENUE ARE DIRECTED AGAINS T DIFFERENT ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS), CHENNAI, FOR ASSESSMENT YEARS 2007-08 AND 2010-11. 2. FIRST WE TAKE UP APPEAL IN I.T.A.NO.1277/MDS/2013 F OR ASSESSMENT YEAR 2007-08. ITA NOS. 1277/13 & 142/15 :- 2 -: 3. THE FIRST ISSUE IS THAT THE CIT(A) ERRED IN DELETI NG THE UPWARD ADJUSTMENT TO THE TOTAL INCOME IN RESPECT OF ROYALTY ADJUSTMENTS IN DETERMINATION OF ARMS LENGTH PRICE MADE BY THE ASSESSING OFFICER. 4. FACTS OF THIS ISSUE ARE THAT THE ASSESSEE HAS ENTE RED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES AND THE PRICE CHARGED BY THEM WAS LESSER THAN THE ALP. THE ASSE SSEE TOOK A PLEA BEFORE THE LOWER AUTHORITIES THAT THE MARKETS AND C OUNTRIES IN WHICH NON-AES WERE SOLD MATERIALS ARE TOTALLY DIFFERENT F ROM THE COUNTRIES IN WHICH AES WERE SOLD TO IMPLYING THAT THE MARKET CON DITIONS RISK, REWARDS ARE DIFFERENT IN DIFFERENT COUNTRIES. IT I S ALSO POINTED OUT THAT ON THE PRODUCTS SOLD WORTH ` 35.02 CRORES TO AES, THE NEGATIVE VARIANCE WORKS OUT TO ` 11,58,543/- WHICH IS LESS THAN 0.3% AND PRAYED THAT IT IS TO BE IGNORED. HOWEVER, THE CIT( A) HAS NOT AGREED WITH THE CONTENTION OF THE ASSESSEE AND AS SUCH, T HE ASSESSEE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. SIMILAR ISSUE WAS TAKEN UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASS ESSMENT YEAR 2004- 05 IN I.T.A.NO. 2167/MDS/2013 & OTHERS DATED 19.2.2 016 AND THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF THE ASSESS EE BY OBSERVING AS UNDER: ITA NOS. 1277/13 & 142/15 :- 3 -: 7. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD, JUDICIAL DECISIONS AND CIRCULARS. THE LD. DEPARTMENTAL REPRESENTATIVE CONTESTING THE RATE APPROVED BY THE RBI PRIOR TO 1994 AND CANNOT BE CONSIDERED FOR THE PURPOSE OF ARMS LE NGTH PRICE. FACT THAT ROYALTY AGREEMENT BETWEEN THE ASSESSEE COMPANY AND USA COMPANY REFERRED IN THE PAPER BOOK WAS ENTERED MUCH PRIOR TO THE APPLICABILITY OF TPO PROVISIONS AND AS PER THE NOTI FICATION APPLICABLE TO ASSESSMENT YEAR THE ROYALTY PAID AT 0.75% ON THE FO B VALUE OF EXPORTS IS BELOW THE 8% RATE PRESCRIBED UNDER AUTOM ATIC ROUTE FOR THE YEAR 2004. THE LD. COMMISSIONER OF INCOME TAX (APP EALS) HAS DIRECTED THE ASSESSING OFFICER TO CALCULATE ROYALTY AT ARMS LENGTH PRICE @0.75% REJECTING THE DETERMINATION BY TPO. T HE LD. AUTHORISED REPRESENTATIVE EXPLAINED THE PROVISIONS AND CONDITI ONS OF AGREEMENTS AND APPROVAL OF THE RBI AT PAGE NO.87 O F PAPER BOOK. WE ON PERUSAL OF THE DOCUMENTARY EVIDENCE FILED BY THE AUTHORISED REPRESENTATIVE AND ALSO JUDICIAL DECISIONS APPROVIN G THE ROYALTY PAYMENTS WHICH THE RBI PRESCRIBED, FOUND THE APPROV AL OF GOVERNMENT OF INDIA AND RBI WAS IN 1994 AND AS PER THE TERMS ROYALTY RATE IS CALCULATED. THE ASSESSEE COMPANY S UBSTANTIATED THEIR GROUNDS WITH FINANCIAL STATEMENTS AND COMPARABLE S TATEMENTS. WE PERUSED THE RBI LETTER AND FOLLOW THE DECISION OF H YDERABAD BENCH OF TRIBUNAL IN THE CASE OF OWENS CORINING INDUSTRIES (INDIA) LTD (SUPRA ) WHERE IT HAS BEEN HELD THAT RBI APPROVAL OF THE ROY ALTY RATES PAID BY ASSESSEE ITSELF IMPLIES THAT THE PAYMENTS WERE AT A RMS LENGTH. SO CONSIDERING THE APPARENT FACTS AND CIRCUMSTANCES TH E LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS EXAMINED T HE ISSUE AND VERIFIED THE STATEMENTS AND MATERIAL FILED AND VI Z A VIZ EXPLANATIONS OF THE ASSESSEE. WE, THEREFORE ARE NOT INCLINED TO INTERFERE WITH THE ORDER OF THE CIT(A) ON THIS GROUND. ACCORDINGLY, T HIS GROUND OF THE REVENUE IS DISMISSED. 6. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE AND AGA INST THE REVENUE. THIS GROUND IS DISMISSED. 7. THE NEXT GROUND OF APPEAL IS THAT THE CIT(A) ERRED IN DELETING THE ADJUSTMENT MADE ON ACCOUNT OF PRICE VA RIATION IN EXPORT SALES. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. WE FIND THAT THIS ISSUE IS AL SO CONSIDERED AND ITA NOS. 1277/13 & 142/15 :- 4 -: DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2004-05 I.T.A.NO. 2167/MDS /2013 & OTHERS DATED 19.2.2016 BY OBSERVING AS UNDER: 7.3 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE CONTENTI ON OF THE LD. DEPARTMENTAL REPRESENTATIVE THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN NOT CONSIDERING THE ADJUSTME NT OF ARMS LENGTH PRICE IN RESPECT OF SPICES WERE THE MARKET IS HIGHL Y VOLATILE AND VARIATION WILL HAVE BEARING ON DETERMINATION OF ARM S LENGTH PRICE. THE LD. DEPARTMENTAL REPRESENTATIVE FURTHER RELIED ON THE ORDER OF TPO WERE THE ADJUSTMENT WERE CONSIDERED. THE LD. A UTHORISED REPRESENTATIVE SUBSTANTIATED HIS ARGUMENTS THAT THE ADJUSTMENT IS NEGLIGIBLE COMPARED TO THE TURNOVER AND GLOBAL PRES ENCE OF THE COMPANY AND THE COMMISSIONER OF INCOME TAX (APPEAL S) ON COMPARISON WITH OVER ALL POSITIVE VARIATIONS HAD DE LETED THE ADDITION. BEFORE US, THE REVENUE HAS NOT BROUGHT ANY EVIDENCE TO SHOW THAT PRICE VARIATION IS ON HIGHER SIDE AND IMPACT ON THE ARMS LENGTH PRICE. THOUGH LD. AUTHORISED REPRESENTATIVE JUSTIFIED HIS ARGUMENTS WITH THE SUBMISSIONS AND JUDICIAL DECISIONS. CONSIDERING THE SUMMARY OF MODULE AND AGREEMENTS ENTERED BY THE ASSESSEE COMPA NY WITH ASSOCIATED ENTERPRISE, WE FIND THE ORDER OF COMMISS IONER OF INCOME TAX (APPEALS) IS IN ORDER AND WE DO NOT INTERFERE W ITH THE FINDINGS AND UPHOLD THE FINDINGS OF THE COMMISSIONER OF INC OME TAX (APPEALS) AND DIRECT THE ASSESSING OFFICER TO DELET E THE ADDITION. THIS GROUND OF THE REVENUE IS DISMISSED. 9. IN VIEW OF THE ABOVE, WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 10. IN THE RESULT, I.T.A.NO.1277/MDS/2013 IS DISMISSED. 11. NOW COMING TO I.T.A.NO.142/MDS/2015 FOR ASSESSMENT YEAR 2010-11 THE ONLY ISSUE FOR CONSIDERATION IS WITH RE GARD TO DELETION OF DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 40( A)(I) OF THE ACT TOWARDS AGENCY COMMISSION PAID TO FOREIGN AGENT. ITA NOS. 1277/13 & 142/15 :- 5 -: 12. FACTS OF THIS ISSUE ARE THAT THE ASSESSEE PAID FOR EIGN SALES COMMISSION TO THE TUNE OF ` 1,31,57,895/-. THERE WAS NO TDS DEDUCTION ON THE SAME AND THE AMOUNT WAS DISALLOWED BY THE ASSESSING OFFICER U/S 40(A)(I) OF THE ACT. HOWEVE R, THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD. SIMILAR ISSUE CAME UP FOR CON SIDERATION BEFORE THIS TRIBUNAL IN THE CASE OF ACIT VS EURO LEDER FA SHIONS LTD, 156 ITD 208, WHEREIN THE TRIBUNAL REMITTED THE ISSUE BACK T O THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION BY OBSERV ING AS UNDER: 6. WE HAVE HEARD THE PARTIES AND PERUSED THE RECO RD. AT THE OUTSET, CERTAIN PROVISIONS OF THE ACT NEEDS TO BE LOOKED INTO SECTI ON 40(A)(I) WHICH READS AS UNDER:- 40 NOT WITHSTANDING ............. (A) IN THE CASE OF ANY ASSESSEE (I) ANY INTEREST (NOT BEING INTEREST ON A LOAN ISSU ED FOR PUBLIC SUBSCRIPTION BEFORE THE 1ST DAY OF APRIL, 1938) ROY ALTY, FEES FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER TH IS ACT, WHICH IS PAYABLE A. OUTSIDE INDIA B. IN INDIA TO A NON-RESIDENT, NOT BEING A COMPANY OR TO A FOREIGN COMPANY, ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER VIIB AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCT ION, HAS NOT BEEN PAID DURING THE PREVIOUS YEAR, OR IN THE SUBSEQUENT YEAR BEFORE THE EXPIRY OF THE TIME PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200: 7. THE AFORESAID CLAUSE MAKES IT CLEAR THAT THE DIS ALLOWANCE SHALL BE MADE IN CASE OF ANY PAYMENT MADE WHICH IS CHARGEABLE UNDER THIS ACT AND IS PAYABLE OUTSIDE INDIA OR IN INDIA TO A NON- RESIDENT NOT BE ING A COMPANY OR TO A FOREIGN COMPANY ON WHICH TAX IS DEDUCTIBLE AT SOURC E. THEREFORE, THE FIRST CONDITION REQUIRED TO BE FULFILLED IS THE PAYMENT M UST BE CHARGEABLE UNDER THE ACT, THEREAFTER THE QUESTION OF DEDUCTION OF TAX WI LL ARISE. SECTION 195 (1) OF ITA NOS. 1277/13 & 142/15 :- 6 -: THE ACT ALSO PRESCRIBES THAT TAX HAS TO BE DEDUCTED WHILE MAKING PAYMENT TO NON-RESIDENT WHICH IS CHARGEABLE UNDER THE PROVISIO NS OF THE ACT. THEREFORE, THE CONDITION PRECEDENT FOR DEDUCTION OF TAX IS THE INCOME MUST BE CHARGEABLE UNDER THE PROVISIONS OF THE ACT. IN THE FACTS OF TH E PRESENT CASE, THE ASSESSEE HAS NOT PRODUCED THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH FOREIGN AGENTS TO SHOW THAT THEY WERE APPOINTED TO ACT AS C OMMISSION AGENTS OUTSIDE INDIA IN THEIR RESPECTIVE COUNTRIES. THE AO HAS DIS ALLOWED COMMISSION PAYMENT U/S 40(A)(I) OF THE ACT, SINCE, THERE WAS N O AGREEMENT TO SUGGEST THE PAYMENT OF SALES COMMISSION. 8. AS SEEN FROM THE ORDERS OF THE LOWER AUTHORITIES , THE ASSESSEE HAS NOT DISCHARGED THE BURDEN CAST UPON IT TO SHOW THE NATU RE OF SERVICES RENDERED BY NON-RESIDENT AGENT. IF THERE ARE SERVICES RENDERED BY NON-RESIDENTS, WHO HAVE NO PERMANENT ESTABLISHMENT IN INDIA OR HAVE ANY BUS INESS CONNECTION IN INDIA, BY VIRTUE OF WHICH THE PAYMENT OF COMMISSION ACCRUED OR AROSE IN INDIA THEN, IT IS EXEMPTED, IF THE ASSESSEE IS ABLE TO PROVE THAT THE SERVICES WERE RENDERED BY THOSE NON-RESIDENTS AT ABROAD. IN THE PRESENT CASE, THE ASSESSEE HAS NOT ESTABLISHED THE FACTS ON RECORD TH AT THE NON-RESIDENT HAS RENDERED SERVICES AT ABROAD AND THERE IS NO BUSINES S CONNECTION IN INDIA BY PRODUCING RELEVANT RECORDS, VIZ., EITHER AGREEMENT ENTERED INTO BY THE ASSESSEE WITH THEM OR CORRESPONDENCE TOOK BETWEEN T HE PARTIES. WITHOUT EXAMINING THESE DETAILS, WE ARE NOT IN A POSITION T O DECIDE THE NATURE OF SERVICES RENDERED BY THE NON-RESIDENT AGENT. THEREF ORE, IT IS APPROPRIATE TO REMIT THE ENTIRE ISSUE BACK TO THE FILE OF THE AO W ITH DIRECTION TO THE ASSESSEE TO PROVE THAT IT WAS SALES COMMISSION TOWARDS PROCU REMENT OF ORDERS FROM ABROAD. ACCORDINGLY, THE ENTIRE ISSUE IS REMITTED B ACK TO THE FILE OF THE AO FOR FRESH CONSIDERATION AND THE AO IS DIRECTED TO MAKE NECESSARY ENQUIRY REGARDING THE NATURE OF SERVICES RENDERED BY THE NO N-RESIDENT AGENT AND THE PAYMENTS MADE THEREOF. WITH THESE OBSERVATIONS, THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 14. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL AND SINC E THERE IS NO DETAILS AVAILABLE ON RECORD REGARDING THE NATURE OF SERVICES RENDERED BY THE RECIPIENTS OF THE COMMISSION, WE RE STORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH SIMILAR DIRE CTION. 15. IN THE RESULT, I.T.A.NO. 142/MDS/2015 IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. ITA NOS. 1277/13 & 142/15 :- 7 -: 16. TO SUMMARIZE, I.T.A.NO. 1277/MDS/2013 IS DISMISSED AND I.T.A.NO. 142/MDS/2015 IS PARTLY ALLOWED FOR STATIS TICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST APRIL, 2016, AT CHENNAI. SD/- SD/- ( !'# $ % ) (CHANDRA POOJARI) &' / ACCOUNTANT MEMBER # ( !) *+' & ) (CHALLA NAGENDRA PRASAD) + &' / JUDICIAL MEMBER !+ / CHENNAI ,& / DATED: 1 ST APRIL, 2016 RD &-## ./#0/ / COPY TO: # 1 . / APPELLANT 4. # 1 / CIT 2. / RESPONDENT 5. /2*# 3 / DR 3. # 1#(4 / CIT(A) 6. *5#6 / GF