Gulf Oil Corporation Ltd., Hyderabad V. ACIT, Hyderabad

ITA 1450/HYD/2010

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5527 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: misc
• Appeal Filed On: 24-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Keywords: Transfer pricing; Double taxation relief; Earning of tax free income
• Section: 143(3); 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.1450/HYD/2010 ASSESSMENT YEAR 2006-2007 GULF OIL CORPORATION LTD. HYDERABAD PAN AABCG8433B VS. ACIT, CIRCLE 2(3) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. Y. RATNAKAR FOR REVENUE : MR. D. SUDHAKAR RAO DATE OF HEARING : 27.11.2013 DATE OF PRONOUNCEMENT : 22.01.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY ASSESSEE IS AGAINST THE ORDER OF THE ASSESSING OFFICER CONSEQUENT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (IN SHORT DRP), HYDERABAD PASSED U NDER SECTION 143(3) READ WITH SECTION 92CA(3) / 144C(13) OF T HE INCOME TAX ACT, 1961. 2. THE ASSESSEE HAS RAISED 14 GROUNDS ON THREE ISSUES. WE HAVE HEARD THE LEARNED COUNSEL MR. Y.RATNAKA R AND THE LEARNED CIT(DR0 MR. D.SUDHAKAR RAO IN DETAIL A ND PERUSED PAPER BOOKS PLACED ON RECORD COVERING EACH OF THE ISSUES. 3. GROUNDS NO. 1, 13 AND 14 ARE GENERAL IN NATURE WHICH DOES NOT REQUIRE ANY ADJUDICATION. 2 ITA.NO.1450/HYD/2010 GULF OIL CORPORATION LTD. HYDERABAD 4. GROUNDS NO. 2 AND 3 PERTAINS TO INCLUSION OF CAPITAL GAIN OF RS.4,64,92,152/- ON SALE OF PROPERTY AT BANGALORE WHICH ASSESSEE CLAIMS THAT IT HAS ALREADY B EEN INCLUDED BY THE A.O. WHILE COMPUTING THE LONG TERM CAP ITAL GAIN FOR A.Y. 2005-2006. IT IS THE CONTENTION THAT SA ME ITEM OF INCOME CANNOT BE TAXED IN TWO DIFFERENT ASSESSMENT YE ARS. THE FACTS LEADING TO THE PRESENT ISSUE ARE THAT THE ASSES SEE SOLD PROPERTIES OF B1 IN BANGALORE IN FAVOUR OF AKSHAY DEVEL OPERS AND A PART OF THE LAND WAS TRANSFERRED IN THE FINANCIAL YEAR RELEVANT FOR A.Y. 2005-2006 AND ANOTHER PART IN THE IMPU GNED ASSESSMENT YEAR. THE ASSESSEE ACCORDINGLY, DECLARED CA PITAL GAIN OF RS.4,64,92,152/- ON THE DEEMED SALE OF 2461.2 83 SQ. METERS OF PART 2 OF B1 LAND IN THIS ASSESSMENT YEAR. WHILE ASSESSING THE CAPITAL GAINS IN A.Y. 2005-2006, THE A.O. HELD THAT ENTIRE LAND WAS TRANSFERRED IN A.Y. 2005-2006 AND THE CAPITAL GAINS WAS BROUGHT TO TAX IN THAT YEAR. 5. BEFORE US, LEARNED COUNSEL SUBMITTED THAT THE ISSUE IN A.Y. 2005-2006 WAS RECENTLY DECIDED BY THE C IT(A)-III, HYDERABAD VIDE HIS ORDER DATED 29.10.2013 VIDE PARA 1 0 IN PAGE 30 ONWARDS OF THE ORDER. HE REFERRED TO THE ISSUE AND SUBMITTED THAT THE A.O. MAY BE DIRECTED ACCORDINGLY. 6. ON PERUSAL OF THE ORDER OF THE CIT(A), THE CIT(A) SEEMS TO HAVE ACCEPTED THAT OUT OF RS.24.53 CRORES RECE IVED BY THE ASSESSEE AS A TOTAL CONSIDERATION OF BLOCK-B1, RS .6.03 CRORES DID NOT ACCRUE DURING THAT YEAR. THEREFORE, TO T HAT EXTENT, THE GROUND DOES NOT SURVIVE. HOWEVER, WHETHER THE ORDER OF THE CIT(A) WAS ACCEPTED BY THE REVENUE OR NOT IS NOT KNOWN TO US. THEREFORE, A.O. IS DIRECTED TO CONSIDER EXC LUSION OF THE AMOUNT BROUGHT TO TAX, TO THE EXTENT INCLUDED IN THIS YEAR IN ASSESSEE COMPUTATION, IN CASE THE SAME WAS ASSE SSED 3 ITA.NO.1450/HYD/2010 GULF OIL CORPORATION LTD. HYDERABAD IN A.Y. 2005-2006. WITH THIS DIRECTION, THE GROUND IS CONSIDERED AS ALLOWED FOR STATISTICAL PURPOSES. 7. THE NEXT ISSUE FOR CONSIDERATION IS ISSUE OF DISALLOWANCE UNDER SECTION 14A CONTESTED BY THE ASSES SEE IN GROUNDS NO.4 AND 5. THE ASSESSEE HAS EARNED DIVIDEND IN COME OF RS.83,70,201/- AND CLAIMED EXEMPTION. BASED ON THE ORDERS IN A.Y. 2005-2006, A.O. MADE THE SAME ADDITION OF RS . 10 LAKHS AS EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME. LEARNED COUNSEL SUBMITTED THAT THIS ISSUE WAS DECIDED BY THE ITAT IN A.Y. 2004-2005 AND THE AMOUNT OF DISALLOWANCE OF RS.3 LAKHS CONFIRMED BY CIT(A) WAS DELETED IN FULL BY THE ITAT. REFERENCE WAS MADE TO PARAS 5 TO 7 OF ORDER IN ITA.1364/H /08 DATED 18.12.2009. IT WAS FURTHER SUBMITTED THAT UP TO AND INCLUDING A.Y. 2003-2004, NO DISALLOWANCE WAS MADE U NDER SECTION 14A TOWARDS ANY ALLEGED EXPENSES FOR EARNING DIV IDEND INCOME. 8. LEARNED D.R. HOWEVER, RELIED ON THE ORDERS OF THE ASSESSING OFFICER. 9. WE HAVE CONSIDERED THE ISSUE AND PERUSED THE ORDERS OF THE ITAT IN EARLIER YEARS. MAJOR DISALLOWANCE IS O N THE ISSUE OF EXPENDITURE RELATABLE TO FLORICULTURE BUSINESS WHICH WAS CLAIMED AS EXEMPT. IN THAT CONNECTION, IT WAS HELD THAT THERE ARE NO BORROWALS FOR THAT BUSINESS AND SO, DISALLOWANCE OF INTEREST DOES NOT ARISE. SIMILAR VIEW WAS ALSO TAKEN B ASED ON THE ORDERS OF THE ITAT IN EARLIER YEARS BY THE CIT(A) IN A. Y. 2005-2006, WHEREIN HE HAS HELD THAT INTEREST ATTRIBUTA BLE TO EARNING OF EXEMPT INCOME AMOUNTING TO RS.47 LAKHS DOES N OT DESERVE TO BE ADDED. HOWEVER, HE HAS GIVEN A FINDING T HAT TOP MANAGEMENT AS WELL AS THE EMPLOYEES OF THE COMPANY 4 ITA.NO.1450/HYD/2010 GULF OIL CORPORATION LTD. HYDERABAD DEFINITELY SPENT MAN-HOURS TO NOT ONLY DECIDE ON THE INVESTMENTS BUT TO FILL THE RELEVANT FORMS, TO CONCLUDE STATUTORY OBLIGATIONS AND TO FOLLOW-UP REGULARLY ON INVESTMENTS. ACCORDINGLY, HE HAS CONFIRMED PART OF THE AMOUNT IN T HE YEAR. CONSIDERING THE FACTS OF THE CASE AND ORDERS ON THE ISS UE, WE ARE OF THE OPINION THAT THE ENTIRE DISALLOWANCE MADE B Y THE A.O. CANNOT BE SUSTAINED. HOWEVER, KEEPING IN VIEW T HAT ASSESSEE HAS EARNED SUBSTANTIAL AMOUNT OF DIVIDEND ON INVESTMENTS AND ALSO KEEPING VARIOUS COORDINATE BENCH DECISIONS ON SIMILAR ISSUE IN THE RELEVANT A.Y., WE AR E OF THE OPINION THAT 2% OF THE AMOUNT EARNED AS DIVIDENDS CAN BE CONSIDERED AS EXPENDITURE RELATED TO EXEMPT INCOME. ACCORDINGLY, A.O. IS DIRECTED TO RESTRICT THE DISALLOWA NCE TO 2% OF THE DIVIDEND INCOME EARNED DURING THE YEAR. WITH TH IS DIRECTION, GROUNDS NO.4 AND 5 ARE PARTLY ALLOWED. 10. THE NEXT ISSUE FOR CONSIDERATION THROUGH GROUNDS NO.6 TO 11 IS ON THE ISSUE OF DISALLOWANCE OF ROYALTY AMO UNT OF RS.2,76,58,080/- PAID BY THE ASSESSEE TO GULF OIL IN TERNATIONAL (MARITIUS) INC. (IN SHORT GOIMI). 11. IT WAS SUBMITTED THAT ASSESSEE HAS ENTERED INTO AN AGREEMENT WITH GOIMI ON 01.08.2003 FOR PAYMENT OF ROYAL TY ON ENTIRE TURNOVER OF LUBRICANTS INCLUDING DOMESTIC AND EXPORT SALES AT 5.5% (NET OF TAXES). WHEN THE ASSESSEE SOUG HT APPROVAL OF THE GOVERNMENT OF INDIA, THE MINISTRY OF PET ROLEUM AND GAS GAVE ITS NOC VIDE LETTER DATED 03 RD OCTOBER, 2003 SUGGESTING CHANGES RELATING TO RATE OF ROYALTY AND PERIOD OF ROYALTY. ACCORDINGLY, SUPPLEMENTARY AGREEMENT WAS ENTE RED ON 10.11.2003 MAKING ROYALTY PAYABLE AT INTERNAL SALES A T 5% AND EXPORT SALES AT 8% (NET OF TAXES) AND THE ROYALTY WAS P AYABLE FOR A PERIOD OF 7 YEARS FROM THE DATE OF COMMENCEMENT OF 5 ITA.NO.1450/HYD/2010 GULF OIL CORPORATION LTD. HYDERABAD COMMERCIAL PRODUCTION. SINCE ROYALTY IS NET OF TAXES A ND AS THE TAX PAID WAS 15% AS PER DTAA, THE CALCULATED ROYALTY RA TE WORKED OUT AS FOLLOWS I.E., ON DOMESTIC SALES AT 5.88% AND ON EXPORT SALES AT 9.41%. ACCORDINGLY, ASSESSEE CLAIMED AN AMOUNT OF RS.2,76,58,080/- FOR THE YEAR ENDING 31 ST MARCH, 2006. THE ENTIRE ROYALTY FOR A.Y. 2006-2007 WAS DISALLO WED BY THE TPO, WHICH WAS CONFIRMED BY THE DRP. 12. IT WAS SUBMITTED THAT ON THE BASIS OF THE SAME AGREEMENT FOR THE SAME SERVICES RENDERED, THE ENTIRE ROYALT Y PAID AT RS.3,00,01,312/- WAS DISALLOWED IN NEXT A.Y. 2 007- 2008 AND THE VERY SAME FACTUAL POSITION WAS PLACED BE FORE THE DRP. THE DRP IN THAT YEAR HAS ALLOWED THE ROYALTY ON T HE INTERNAL SALES/DOMESTIC SALES WHEREAS, THE ROYALTY ON E XPORT SALES WERE RESTRICTED TO 1%. 13. LEARNED COUNSEL REFERRED TO THE RELEVANT PORTION OF THE DRP ORDER DATED 20.09.2011 FOR A.Y. 2007-2008 WHERE IN IT WAS HELD THAT GIVEN THE ABOVE INTERNAL CUP INFORMATION THERE IS NO NEED FOR THE TPO TO HAVE DISALLOWED THE ROYALTY PAY MENTS AND DETERMINE CUP AS NIL. ACCORDINGLY, THE OBJECTION RELATING TO ROYALTY PAYMENT ON DOMESTIC SALE WAS ALLOWED AND WITH REGARD TO ROYALTY PAYMENT ON EXPORT SALES THE SAME WAS ALLOWED IN PART TO THE EXTENT OF 1% OF EXPORT SALES. IT WAS FURTHER SUBMITTED THAT IN A.Y. 2008-2009 ALSO THE DR P HAS FOLLOWED SIMILAR ORDERS AND IN LATER YEAR I.E., A.Y. 2009 -2010 ALSO THE TPO HIMSELF HAS DETERMINED THE DISALLOWANCE OF ROYALTY ON EXPORT SALES IN EXCESS OF 1% AND THE REMAINING AMOUNT WAS FULLY ALLOWED. 14. LEARNED COUNSEL PLACED THE FACTS OF THE LATER YEA RS AND HAS SUBMITTED THAT ON DOMESTIC SALES THERE IS NO 6 ITA.NO.1450/HYD/2010 GULF OIL CORPORATION LTD. HYDERABAD DISALLOWANCE IN LATER YEARS AND ACCORDINGLY, THE COMMISSI ON PAID ON DOMESTIC SALES IN THIS YEAR AMOUNTING TO RS.2,14,28,108/- IS ALLOWABLE. COMING TO THE EXPORT SALES CLAIM OF RS.62,29,972/-, IT WAS SUBMITTED THAT ENTIRE ROYALTY SHOULD BE ALLOWED AND NOT MERELY RESTRICTED TO 1% FOR T HE FOLLOWING REASONS (A) THE PERCENTAGE OF PAYMENT OF ROYAL TY BY THIRD PARTIES TO OTHER HUBS IS MORE THAN WHAT WAS PAID BY THE ASSESSEE/APPELLANT TO GOIMI. (B) PERCENTAGE OF PAYM ENT OF ROYALTY BY OTHER SUBSIDIARIES TO OTHER HUBS IS MORE THAN WHAT WAS PAID BY THE ASSESSEE/APPELLANT TO GOIMI. (C) PERC ENTAGE OF COMMISSION PAID WAS VERY MUCH LESS IN COMPARISON WHAT WAS APPROVED BY RBI WHILE ACCORDING APPROVAL TO THE ROYALTY AGREEMENT ENTERED INTO (3.45% AS AGAINST 8% APPROVED BY THE RBI). (D) MATTER STANDS COVERED IN FAVOUR OF THE ASSES SEE BY THE ORDER OF THE ITAT IN KINETIC MOTOR VS. JCIT 77 ITD 393. 15. THE LEARNED D.R. HOWEVER, ACCEPTED THE FACTUAL POSITION IN LATER YEARS AND RELIED ON THE ORDERS OF THE AUTHORITIES. 16. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE DOCUMENTS PLACED ON RECORD. AS FAR AS THE ISSUE OF ROY ALTY ON DOMESTIC SALES IS CONCERNED, AS RIGHTLY POINTED OUT B Y THE LEARNED COUNSEL, THE DRP IN LATER TWO YEARS HAS EXAMINE D THE INTERNAL CUP AND ALLOWED THE ROYALTY ON THE DOMESTIC S ALES. KEEPING IN VIEW THE FACTUAL POSITION AS EXAMINED BY T HE DRP AND ALSO THE ORDER OF THE TPO FOR A.Y. 2009-2010, WE ARE OF THE OPINION THAT THERE IS NO NEED TO DISALLOW THE ROYALT Y PAYMENT ON DOMESTIC SALES. THEREFORE, THE CLAIM OF RS.2,14,28,108/- IS ALLOWABLE BASED ON THE ABOVE FACTS. 7 ITA.NO.1450/HYD/2010 GULF OIL CORPORATION LTD. HYDERABAD 16.1. COMING TO THE EXPORT SALES, THE LEARNED COUNSEL RELIED ON THE VARIOUS FACTORS FOR ALLOWING THE ENTIRE CLAIM . HOWEVER, CONSIDERING THE FACT THAT SAME ISSUE WAS ALSO EXAMINED BY THE DRP IN A.YS. 2007-2008 AND 2008-200 9 WHICH THE ASSESSEE/APPELLANT SEEMS TO HAVE ACCEPTED, WE ARE OF THE OPINION THAT THE ROYALTY ON EXPORT SALES CAN BE REST RICTED TO 1% AS WAS DONE IN LATER YEARS AND ACCORDINGLY, THE ROY ALTY IS RESTRICTED TO AN AMOUNT OF RS.18,05,788/- AS PER THE WORKING FURNISHED ED BY ASSESSEE AT PARA 24 IN PAGE 7 OF TH E PAPER BOOK VOLUME-2. THEREFORE, OUT OF THE AMOUNT OF RS.62,29,97 2/- ASSESSING OFFICER IS DIRECTED TO ALLOW ROYALTY AT RS.18 ,05,788/- AND BALANCE AMOUNT OF RS.44,24,184/- STANDS DISALLOWED . 17. LEARNED COUNSEL RELIED ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF KINETIC MOTOR LTD. VS. JCIT 77 ITD 393 TO SUBMIT THAT ONCE THE AGREEMENT WAS APPROVED B Y THE GOVERNMENT OF INDIA, NO DISALLOWANCE IS REQUIRED T O BE MADE. WE HAVE PERUSED THE SAID DECISION AND NOTICED THAT THE ASSESSMENT YEAR INVOLVED WAS A.Y. 1995-1996 AND ROYALTY CLAIM WAS ALLOWED BY THE A.O. IN THE IMMEDIATE PRECEDIN G YEAR I.E., A.Y. 1994-1995. ACCORDINGLY, THE ITAT HELD THA T THOUGH THE PRINCIPLES OF RESJUDICATA DOES NOT APPLY TO THE DECISION OF THE I.T. AUTHORITIES, YET, ON THE SAME FACTS, THE ASSES SEE CANNOT DENY THE BENEFIT GIVEN IN THE PRECEDING YEAR. THE SAM E WAS UPHELD BY THE HONBLE HIGH COURT. WE ARE OF THE OPINION THAT THE SAID FACTS OF THE CASE ARE ENTIRELY DIFFERENT TO THE FACTS IN THIS CASE. THEREFORE, THE PRECEDENT OF THE DECISION CA NNOT BE FOLLOWED HERE. MOREOVER, THIS IS NOT A DISALLOWANCE UNDER SECTION 37(1) BUT AN ADJUSTMENT MADE UNDER TRANSFER PRIC ING PROVISIONS WHERE ARMS LENGTH PRICE IS TO BE DETERMINED, WHETHER THE AGREEMENT IS APPROVED OR NOT. KEEPING THAT IN 8 ITA.NO.1450/HYD/2010 GULF OIL CORPORATION LTD. HYDERABAD MIND, WE ARE OF THE OPINION THAT THE DECISION RELIED ON BY THE LEARNED COUNSEL, DOES NOT APPLY TO THE FACTS OF THE CASE . AS DECIDED EARLIER, THE RESTRICTION ON THE ROYALTY AMOUNT IS LIMITED TO RS.44,24,184/-. ACCORDINGLY, GROUNDS NO. 6 TO 11 ARE PARTLY ALLOWED. 18. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22.01.2014. SD/- SD/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATE 22 ND JANUARY, 2014 VBP/- COPY TO : 1. GULF OIL CORPORATION LTD. KUKATPALLI, SANATHNAGAR, HYDERABAD 2. ACIT, CIRCLE (3) HYDERABAD 3. DISPUTES RESOLUTION PANEL, 4A, I.T. TOWERS, AC GUARDS, HYDERABAD 500 004. 4. ADDL. CIT, TRANSFER PRICING, HYDERABAD 5. D.R. ITAT B BENCH, HYDERABAD.