Deputy Commissioner of Income-tax, V. M/s. Foeseco India Ltd., Pune

ITA 1976/PUN/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 0387 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 11-07-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 08-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANIL KUMAR CHAWARE
• Assessee Lawyers: ATUL PODDAR; SOUMEN ADAK SANDEEP RUSTAGI
• Keywords: Depreciation; Transfer pricing; International transaction; Retrospective amendment; Additional evidence; Non-deduction of tax; Bad and doubtful debts; Royalty expenses
• Section: 143(3)

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE , ! ' # $ , % & BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM ! . / ITA NOS.1976, 1977 & 1978 /PN/2013 ' ' ' / ASSESSMENT YEARS : 2005-06, 2007-08 & 2008-09 DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE. . APPELLANT VS. M/S. FOESECO INDIA LTD., GAT NO. 922 929, PUNE NAGAR ROAD, SANASWADI, TALUKA SHIRUR, PUNE 412 208. PAN: AAACF1049H . RESPONDENT C.O.NOS.95 & 96/PN/2014 (ARISING OUT OF ITA NOS.1976 & 1978 / PN /2013) ' ' ' / ASSESSMENT YEARS : 2005-06 & 2008-09 M/S. FOESECO INDIA LTD., GAT NO. 922 929, PUNE NAGAR ROAD, SANASWADI, TALUKA SHIRUR, PUNE 412 208. PAN: AAACF1049H . APPELLANT VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE. . RESPONDENT ITA NOS.1976,1977&1978/PN/2 013 2 ASSESSEE BY : SHRI.SOUMEN ADAK, SANDEEP RUSTAGI & ATUL PODDAR. DEPARTMENT BY : SHRI ANIL KUMAR CHAWARE / DATE OF HEARING : 21-09-2016 / DATE OF PRONOUNCEMENT : 30-11-2016 ( / ORDER PER ANIL CHATURVEDI, AM: THESE APPEALS BY THE DEPARTMENT ARE DIRECTED AGAINST T HE COMMON ORDER OF COMMISSIONER OF INCOME TAX(APPEALS)-IT/TP , PUNE DATED 07.08.2013 FOR THE ASSESSMENT YEARS 2005 06, 2007 08 & 2008 09 RESPECTIVELY. THE ASSESSEE HAS ALSO FILED CROSS OBJECTIONS FOR ASSESSMENT YEARS 2005 06 & 2008 09. 2. BEFORE US AT THE OUTSET THE LD.AR SUBMITTED THAT IN THE THREE APPEALS OF REVENUE, THE GROUNDS RAISED BY THE REVENUE IN ALL THE THREE YEARS ARE IDENTICAL EXCEPT OF THE YEAR AND AMOUNT INVOLVED AND THEREFORE HIS SUBMISSIONS MADE WHILE ARGUING THE GROUN D FOR ONE YEAR WOULD BE APPLICABLE TO OTHER YEARS ALSO AND THE REFORE ALL THE APPEALS CAN BE HEARD TOGETHER. LD.DR DID NOT OBJECT TO THE AFORESAID SUBMISSION OF LD.AR. WE THEREFORE, FOR THE SAKE OF CONVENIENCE, PROCEED TO DISPOSE OF ALL THE APPEALS BY WAY OF A CONSOLIDATED ORDER. WE HOWEVER PROCEED TO NARRATE WITH THE FACTS FOR AY 05-06. ITA NOS.1976,1977&1978/PN/2 013 3 3. THE FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER: 4. ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE B USINESS OF MANUFACTURE OF FOUNDRY AND STEEL, CHEMICAL AND FLUXES. ASSESS EE FILED ITS RETURN OF INCOME FOR AY 2005-06 ON 30.10.2005 DEC LARING TOTAL INCOME OF RS 22,35,83,820/-. THE RETURN OF INCOME WAS INITIALLY PROCESSED U/S 143(1) ON 22.7.2016. LATER ON THE CA SE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) DATED 14.9.200 6 WAS SERVED ON THE ASSESSEE AND IN RESPONSE TO WHICH ASSES SEE FILED THE DETAILS. ON PERUSING THE DETAILS FILED BY THE ASSESSEE, IT WAS NOTICED BY THE AO THAT DURING THE YEAR ASSESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE (A E) AND THE AGGREGATE OF SUCH TRANSACTIONS WAS RS 12,70,41,395/- AO ACCORDINGLY MADE REFERENCE U/S 92CA(1) OF THE ACT TO TRA NSFER PRICING OFFICER (TPO) FOR THE COMPUTATION OF ARMS LENGTH PR ICE (ALP) IN RELATION TO THE INTERNATIONAL TRANSACTIONS. THEREAFTE R, TPO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND AFTE R CONDUCTING NECESSARY VERIFICATION CONCLUDED THAT ROYALTY P AYMENT BY THE ASSESSEE TO ITS AE WAS EXCESSIVE TO THE EXTENT OF RS 3,90,27,845 AND ACCORDINGLY DIRECTED THE AO TO MAKE ITS ADJUSTMENT VIDE ORDER DATED 31.10.2008 PASSED U/S 92CA (3) OF THE ACT. AO THEREAFTER ON 26.11.2008 PASSED ORDER U/S 143(3 ) AND DETERMINED THE TOTAL INCOME AT RS 26,26,11,667/-. AGGRIEV ED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD CIT(A ), WHO PASSED A CONSOLIDATED ORDER DATED 27.2.2015 FOR AY 2005- 06, 2007- 08 AND 2008-09 IN APPEAL NOS PN/CIT(A)-IT/TP/MUM/70/2 009- 10, PN/CIT(A)-IT/TP/CIRCLE 1(2)/40/2010-11 AND PN/CIT(A)- IT/TP/RANGE 1/104/2011-12. FOR THE YEAR UNDER CONSIDERATION , ITA NOS.1976,1977&1978/PN/2 013 4 LD CIT(A) GRANTED PARTIAL RELIEF TO THE ASSESSEE AGGRIEVED BY THE ORDER OF LD CIT(A), REVENUE IS NOW IN APPEAL BEFORE US AND ASSESSEE HAS ALSO FILED CROSS OBJECTIONS. THE GROUNDS RAISED BY TH E REVENUE IN APPEAL NO 1976/PN/2013 READS AS UNDER: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME- TAX (APPEALS) IS CONTRARY TO LAW AND TO THE FACTS AND C IRCUMSTANCES OF THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) GROSSLY ERRED IN DELETING THE ADJUSTMENT OF RS.3,58,59,956J- MADE BY THE TRANSFER PRICING OFFICER J ASSESSING OFFICER ON ACCOUNT OF THE EXCESSIVE ROYALTY PAYMENT MADE BY THE ASSESSEE TO M/ S. FOSECO INTERNATIONAL, INSTEAD CONFIRMING THE SAID ADJUSTME NT. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) GROSSLY ERRED IN FAILING TO APPRECIATE THAT BY VIRTUE OF TH E COLLABORATION AGREEMENT DATED 01.07.1974, THE ASSES SEE DID NOT ACQUIRE ANY ADDITIONAL OR SUBSTANTIAL BENEFITS OVER AND ABOVE THE BENEFITS AS PER THE EARLIER AGREEMENT DAT ED 30.04.2003, AND, IN THE CIRCUMSTANCES, ENHANCED PAY MENT OF ROYALTY TO M/S. FOSECO INTERNATIONAL WAS NOT AT ARM'S LENGTH PRICE. 4. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) GROSSLY ERRED IN HOLDING THAT THE 'BENEFIT TEST' CAN NOT BE APPLIED FOR ROYALTY PAYMENTS AND THAT SUFFICIENT OR CORRECTNESS OF ROYALTY WOULD NOT DEPEND ON WHETHER OR NOT THE RIGHT WAS AC TUALLY EXERCISED BY THE RECIPIENT. 5. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) GROSSLY ERRED IN FAILING TO APPRECIATE THAT EVEN IN THE CAS E OF REEBOK INDIA CO. VS. ADDL.CIT (ITA NO.5857 JDELJ2012, A.Y. 2008-09), ON WHICH THE COMMISSIONER OF INCOME-TAX (APPEALS) HIMSELF HAS RELIED, THE 'BE NEFIT TEST' WAS IMPLIEDLY APPROVED. 6. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) GROSSLY ERRED IN NOT TAKING DUE COGNIZANCE OF THE ARGUMENTS ADVANCED BY THE LEARNED TRANSFER PRICING OFFICER IN HIS REMA ND REPORT IN SUPPORT OF THE PROPOSITION THAT CONTROLLED TRANSACT ION CAN BE COMPARED WITH ANOTHER CONTROLLED TRANSACTION AND AL SO IN FAILING TO TAKE DUE COGNIZANCE OF A COMPARABLE CASE CITED BY THE TRANSFER PRICING OFFICER IN HIS REMAND REPORT W HEREIN THE ROYALTY PAID BY THE COMPANY WAS 2% OF ITS NET SALES FOR MANUFACTURING AND DISTRIBUTION RIGHTS. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) GROSSLY ERRED IN DISTINGUISHING THE TWO CASES EVEN THOUGH THE SAME W ERE ESSENTIALLY COMPARABLE. ITA NOS.1976,1977&1978/PN/2 013 5 7. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS] GROSSLY ERRED IN HOLDING THAT THE IMPUGNED ADJUSTMENT COULD NOT HAVE BEEN MADE UNDER THE TRANSFER PRICING OFFICER REGULA TIONS. ALTERNATELY, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) OUGHT TO HAVE EXAMINED AND UPHELD THE COR RECTNESS OF THE ADJUSTMENT AS PER THE REGULAR PROVISIONS OF THE INCOME- TAX ACT, 1961. 8. FOR THESE AND SUCH OTHER GROUNDS AS MAY BE URGED AT THE TIME OF THE HEARING, THE ORDER OF THE LEARNED COMMI SSIONER OF INCOME-TAX(APPEALS) MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 9. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTER OR DELETE ANY OF THE ABOVE GROUNDS OF APPEAL DURING THE COURS E OF THE APPELLATE PROCEEDINGS BEFORE THE HON'BLE TRIBUNAL. 5. ON THE OTHER HAND, THE GROUNDS RAISED BY THE ASSESS EE IN THE CO NO. 95 / PN / 2014 FOR A.Y. 2005 06. GROUNDS IN CROSS OBJECTION NO.95/PN/2014 FOR THE A.Y . 2005-06: 1.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IT/TP , PUNE (HERE-IN-AFTER REFERRED TO AS CIT(APPEALS)] WAS N OT JUSTIFIED AND GROSSLY ERRED IN CONFIRMING THE DISALLOWANCE ON ACCOUNT OF PURCHASE OF GOODS FROM ASSOCIATED ENTERPRISES (HERE -IN-AFTER REFERRED TO AS AE) AMOUNTING TO RS. 1,30,693/-. 2.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(APPEALS) WAS NOT JUSTIFIED AND GROSSLY ERRE D IN CONFIRMING THE DISALLOWANCE ON ACCOUNT OF SALE OF G OODS TO AE AMOUNTING TO RS. 30,37,196/-. 3.0 THAT THE APPELLANT CRAVE LEAVE TO ADD, AMEND, MODIFY, RESCIND, SUPPLEMENT, OR ALTER ANY OF THE GROUNDS ST ATED HERE-IN- ABOVE, EITHER BEFORE OR AT THE TIME OF HEARING OF T HIS APPEAL. 6. WE FIRST TAKE UP REVENUES APPEAL FOR ADJUDICATION: AT THE OUTSET, LD DR SUBMITTED THAT THOUGH THE REVENU E HAS RAISED VARIOUS GROUNDS, BUT THE SOLE CONTROVERSY IS WITH RESPEC T TO DELETION BY LD CIT(A) OF ADJUSTMENT MADE TO ROYALTY PAYMENT AND THEREFORE ALL THE GROUNDS CAN BE CONSIDERED TO BE A PART OF THE IMPUGNED DELETION. ITA NOS.1976,1977&1978/PN/2 013 6 7. TPO NOTICED THAT ASSESSEE IS 46 YEAR OLD COMPANY AND IS A PART OF FOSECO GROUP WHICH HAS PRESENCE IN 34 COUNTRIES IN T HE WORLD. THE HOLDING COMPANY NAMELY FOSECO UK, HOLDS ALMOST 66.48% OF THE SHAREHOLDING OF THE ASSESSEE COMPANY. ON 30.4.2003 AS SESSEE HAD ENTERED INTO AGREEMENT WITH FOSECO INTERNATIONAL FOR USE OF TRADEMARKS OF FOSECO INTERNATIONAL FOR PROMOTION DISTRIBUT ION AND SALE OF PRODUCTS MANUFACTURED BY THE ASSESSEE AND FOR W HICH ASSESSEE WAS TO MAKE PAYMENT OF ROYALTY AT 1% OF THE NET SALES OF ALL PRODUCTS SOLD IN INDIA AND 2% OF NET SALES OF ALL PRODUCT S SOLD BY THE ASSESSEE OUT OF INDIA. THE RESERVE BANK OF INDIA (RBI ) ISSUED A CIRCULAR (NO 76 DTD 24.2.2004) WHEREBY ON ACCOUNT OF LIBERALIZ ATION OF FOREIGN EXCHANGE MANAGEMENT, RBI CONVEYED THAT THE B ANKS COULD ALLOW REMITTANCE FOR ROYALTY AND PAYMENT OF LUMPSUM FE ES WITHIN THE PRESCRIBED NORMS (I.E. ROYALTY NOT TO EXCEED 5% ON LOCAL SALES AND 8% ON EXPORTS AND LUMP SUM FEE DID NOT EXCEED USD 2 MILLION). TPO NOTICED THAT ASSESSEE THEREAFTER ON 1.7.2004 EN TERED INTO ANOTHER AGREEMENT WITH FOSECO INTERNATIONAL, WHICH WAS TERMED AS COLLABORATION AGREEMENT WHEREBY ASSESSEE A GREED TO PAY A COMPENSATION OF 5% OF THE NET SALES VALUE OF PRODUC TS SOLD IN INDIA AND 8% OF THE NET SALES VALUE OF ALL PRODUCTS SOLD O UT OF INDIA. THE ASSESSEE ALSO DISPENSED WITH THE PAYMENT OF FEES TOW ARD, TRADEMARKS THAT WAS ENTERED VIDE AGREEMENT DATED 30.4 .2003. THE TPO ASKED THE ASSESSEE TO JUSTIFY, EXPLAIN AND SUBSTANT IATE THE PAYMENT OF ADDITIONAL ROYALTY. ASSESSEE INTER-ALIA SUBMITTE D THAT THE AGREEMENT DATED 30.4.2003 WAS FOR THE USE OF TRADEM ARKS AND BRANDS WITHOUT TECHNOLOGY TRANSFER AND THAT THE NEW AG REEMENT WAS IN TERMS OF THE REVISED RBI CIRCULAR AND DUE TO THE NEW ITA NOS.1976,1977&1978/PN/2 013 7 AGREEMENT, ASSESSEE, APART FROM OTHER SERVICES THAT IT W OULD BE ELIGIBLE, THE ASSESSEE IT WOULD ALSO BE MADE AVAILABLE WITH ALL N EW RECIPE OF FORMULATIONS AND RECEIPE CHANGES WHICH ARE BEING DEVELOPED BY FOSECO INTERNATIONAL. THE SUBMISSIONS OF ASSE SSEE WAS NOT FOUND ACCEPTABLE TO TPO. HE WAS INTER-ALIA OF THE VIEW THAT ON ACCOUNT OF LIBERALIZED SCHEME ANNOUNCED BY RBI, ASSES SEE TERMINATED ITS EARLIER AGREEMENT AND ENTERED INTO A NEW AGREEMENT UNDER THE PRETEXT OF A TECHNOLOGY TRANSFER AGREEMENT T O MAKE PAYMENT OF ROYALTY AT A HIGHER RATE, THE NEW AGREEMENT DOES NOT SHOW ANY SPECIFIC BENEFIT CONFERRED UPON THE ASSESSEE. HE ACCORDINGLY CONCLUDED THAT NO BENEFIT IS DERIVED BY THE A SSESSEE OUT OF THE ROYALTY AGREEMENT DTD 1.7.2004 AND THEREFORE THE PAYMENT OF ROYALTY AT EXCESSIVE RATE IS NOT AT ARMS LENGTH. HE THE REAFTER DETERMINED THE EXCESS PAYMENT OF ROYALTY AT RS 3,58,59,95 6/- AND DIRECTED AO TO MAKE ITS ADJUSTMENT. AO ACCORDINGLY MADE THE ADJUSTMENT WHILE PASSING THE ORDER U/S 143(3). AGGRIEVED B Y THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE LD CIT(A ) WHEREIN VARIOUS CONTENTIONS WERE RAISED BY THE ASSESSEE. LD CIT (A) AFTER CONSIDERING THE SUBMISSIONS, THE REMAND REPORT FROM TPO A ND ASSESSEES REPLY TO THE REMAND REPORT, DECIDED THE IS SUE IN FAVOUR OF THE ASSESSEE BY DIRECTING THE DELETION OF ADJUSTMENT BY HOLDING AS UNDER: 2.3.23 I HAVE CAREFULLY CONSIDERED THE ARGUMENTS O F THE LEARNED TPO AND THE APPELLANT. ACCORDING TO ME, THE ADJUSTMENT MADE BY THE LEARNED TPO IS BASED ON THE INCORRECT APPROACH. I A M OF THE VIEW THAT THIS ADJUSTMENT CANNOT BE SUSTAINED. THE REASONS FO R MY DECISION ARE AS UNDER: 2.3.24 FIRSTLY, I FIND THAT, THE LEARNED TPO HAD N OT APPRECIATED THE FUNDAMENTAL DIFFERENCE BETWEEN THE AGREEMENT DATED 01.06.2003 AND THE AGREEMENT DATED 01.07.2004. THE FIRST AGREEMENT WAS WITH RESPECT TO ACQUISITION OF LICENSE TO USE TRADEMARK OF THE F OSECO, WHEREAS THE SECOND AGREEMENT GRANTED THE APPELLANT RIGHT TO MAN UFACTURE, HAVE ITA NOS.1976,1977&1978/PN/2 013 8 MANUFACTURED, USE AND SELL THE PRODUCTS IN THE TERR ITORIES OF INDIA AND TO EXPORT MANUFACTURED PRODUCTS FROM TIME TO TIME. THEREFORE, AS CONTENDED BY THE APPELLANT, THE SCOPE OF THE SECOND AGREEMENT - 'COLLABORATION AGREEMENT' - IS MUCH WIDER THAN THE EARLIER 'TRADE- MARK LICENSE AGREEMENT' DATED 01.06.2003. THE FIRST AGRE EMENT PERTAINED TO GRANTING OF DISTRIBUTORSHIP RIGHTS WHEREAS VIDE SEC OND AGREEMENT, THE APPELLANT WAS GRANTED RIGHTS OF MANUFACTURING OF PR ODUCTS IN ADDITION TO THE DISTRIBUTION RIGHTS. IT IS FUNDAMENTAL THAT THE COMPENSATION FOR GRANTING RIGHTS FOR PERFORMANCE OF ADDITIONAL FUNCT IONS WOULD BE MORE THAN RIGHTS GRANTED FOR PERFORMANCE OF LIMITED NUMB ER OF FUNCTIONS. FROM THIS PERSPECTIVE, IF THE APPELLANT HAS PAID MO RE ROYALTY ON ACQUIRING ADDITIONAL RIGHT TO MANUFACTURE THEN IT W OULD BE JUSTIFIED IN PAYING ROYALTY AT HIGHER RATE THAN WHAT WAS BEING P AID EARLIER. IT MAY BE MENTIONED THAT, IT IS ALTOGETHER DIFFERENT ASPEC T AS TO WHETHER THE INCREASED RATE OF ROYALTY REPRESENTS THE ARM'S LENG TH PRICE OR NOT. TO ASCERTAIN THE ARM'S LENGTH PRICE OF THE TRANSACTION , COMPARABILITY ANALYSIS HAS TO BE CARRIED OUT AND ARM'S LENGTH PRI CE HAS TO BE DETERMINED BY USING THE 'MOST APPROPRIATE TRANSFER PRICING METHOD'. THIS HAS NOT BEEN DONE BY THE LEARNED TPO. 2.3.25 MAIN REASON OF THE LEARNED TPO APPEARS TO B E THAT THE APPELLANT HAS NOT RECEIVED ENHANCED BENEFIT JUSTIFYING THE IN CREASED RATE OF ROYALTY PAYMENT. THE LEARNED TPO HAS TRIED TO LINK THE ENHANCED RATE OF ROYALTY WITH THE APPELLANT'S EARLIER RATE OF ROYALT Y PAYMENT. THIS APPROACH MAY APPEAR TO BE COMMERCIALLY SOUND, HOWEV ER, THE SAME IS NOT PROVIDED IN THE TRANSFER PRICING REGULATIONS. A CADEMICALLY SPEAKING, ARM'S LENGTH PRICE FOR EACH YEAR FOR THE SAME COMMO DITY OR SERVICE COULD BE DIFFERENT AS IT IS MARKET PRICE. THEREFORE , IT CAN BE ARGUED THAT ANY ENHANCEMENT OF PRICE COULD BE REFLECTION OF THE CHANGE OF MARKET FORCES IN THE RELEVANT YEAR AFFECTING TRANSFER PRIC E OF THAT YEAR AND NOT NECESSARILY BECAUSE OF THE ADDITIONAL BENEFITS RECE IVED DURING THE YEAR. EXAMINING THE ISSUE FROM THIS PERSPECTIVE, THE APPR OACH OF THE LEARNED TPO APPEARS TO BE ERRONEOUS AND THE ADJUSTMENT BASE D ON SUCH APPROACH CANNOT BE SUSTAINED. 2.3.26 FURTHER, THE EMPHASIS PLACED BY THE LEARNED TPO ON THE BENEFITS RECEIVED, IN MY VIEW, IS MISPLACED. THIS IS BECAUSE ; THERE IS NO CONCEPT UNDER TRANSFER PRICING REGULATIONS OF EXAMINING COR RESPONDING BENEFITS RECEIVED BY THE RECIPIENT IN PROPORTION TO THE ACQU ISITION PRICE FOR ROYALTY TRANSACTION. IT MAY BE APPRECIATED THAT THE APPELLANT HAS NOT MADE PAYMENT FOR AVAILING SERVICES. THE BENEFIT TES T IS APPLICABLE FOR AVAILING SERVICES. BENEFIT TEST CANNOT BE APPLIED F OR ACQUISITION OF RIGHTS. THIS PROPOSITION MAY BE ELABORATED FURTHER BY STATI NG THAT WHAT THE APPELLANT HAS ACQUIRED IS RIGHTS OF MANUFACTURE AND DISTRIBUTION. ACADEMICALLY SPEAKING, IN CASE OF THE AGREEMENT REQ UIRING RECIPIENT TO PAY ROYALTY ON A YEARLY FIXED PAYMENT, THE RECIPIEN T WILL HAVE TO MAKE SUCH PAYMENT EVERY YEAR, REGARDLESS OF THE FACT THA T WHETHER SUCH RIGHT WAS ACTUALLY EXERCISED BY THE RECIPIENT OR NOT. IN OTHER WORDS, ROYALTY WILL BE PAID IRRESPECTIVE OF THE FACT THAT ACTUAL M ANUFACTURING TAKES PLACE OR NOT. ROYALTY CAN ALSO COMPARED WITH THE RE NT PAID FOR THE USE OF IMMOVABLE PROPERTY. THE RENT FOR THE SAME IS PAY ABLE EVEN IF THE PROPERTY IS NOT ACTUALLY USED BY THE TENANT. ACCORD INGLY, THE AGREEMENTS PROVIDING PAYMENT ON THE BASIS OF NET SALES MERELY PROVIDE DIFFERENT MODE OF PAYMENT, HOWEVER, IT DOES NOT CHANGE THE FU NDAMENTAL CHARACTER THAT THE PAYMENT IS MADE FOR ACQUIRING RI GHT, DOES NOT DEPEND IN REALITY WHETHER RIGHT IS ACTUALLY EXERCIS ED OR NOT. THEREFORE, THE BENEFIT TEST CANNOT BE APPLIED FOR ROYALTY PAYM ENTS, WHICH IS MADE IN THIS CASE FOR USING OR RIGHT TO USE INTELLECTUAL PROPERTIES OR FOR ACQUISITION OF LICENSE. IN VIEW OF THIS DISCUSSION, I AM OF THE OPINION THAT THE ENTIRE BASIS OF THE LEARNED TPO'S DECISION IS N OT IN ACCORDANCE WITH THE TRANSFER PRICING REGULATIONS. ITA NOS.1976,1977&1978/PN/2 013 9 2.3.27 FURTHER, IN THE RECENT DECISION OF THE DELH I TRIBUNAL IN CASE OF REEBOK INDIA CO V ADDL CIT ITA 5857/DEL 2012 ASSESSMENT YEAR 2008-09, IT IS HELD THAT, ENHANCEMENT OF ROYALTY PA YMENT HAS TO BE VIEWED FROM THE PERSPECTIVE OF THE TAXPAYER. THE T PO CANNOT STEP IN TO THE SHOES OF THE BUSINESS MAN, THE TRIBUNAL HELD AS UNDER: 'THE TPO'S ARGUMENT THAT THE ASSESSEE NEED NOT HAVE PAID FOR THE TECHNOLOGY AS IT DID NOT DERIVE ANY BENEFIT THERE F ROM IS NOT ACCEPTABLE. THE ASSESSEE IS FREE TO CONDUCT BUSINESS IN THE MAN NER IT DEEMS FIT AND THE COMMERCIAL AND BUSINESS EXPEDIENCY OF INCURRING ANY EXPENDITURE HAS TO BE SEEN FROM THE ASSESSEE'S POINT OF VIEW. T HE REVENUE CANNOT STEP INTO THE SHOE OF THE ASSESSEE AND DECIDE WHAT IS PRUDENT FOR THE BUSINESS. ON FACTS, THE VERY SURVIVAL OF THE ASSESS EE IN THE INDUSTRY DEPENDED UPON THE LICENCE AND TECHNOLOGY & KNOW HOW PROVIDED BY THE AE THERE HAS BEEN A CONSIDERABLE INCREASE IN THE SA LES FIGURES AND THE GROWTH IN REVENUE CLEARLY DEMONSTRATES THE BENEFITS DERIVED BY THE ASSESSEE FROM THE USE OF TECHNOLOGY; FURTHER, THE PAYMENT OF ROYALTY WAS APPROVED BY THE GOVERNMENT OF INDIA. THOUGH IT IS NOT CONCLUSIVE PROOF, THE SAID APPROVAL OF THE GOVERNMENT HAS TO BE GIVEN CONSIDERATION WHILE CONS IDERING THE ARMS LENGTH PRICE OF THE TRANSACTION; 2.3.28 THEREFORE, THE ACTION OF THE LEARNED TPO C ANNOT BE JUSTIFIED, EVEN IF IT IS VIEWED FROM THIS PERSPECTIVE. 2.3.29 AS FAR AS LEGAL ASPECTS ARE CONCERNED, THE A PPELLANT HAS RELIED OR THE DECISION OF THE CABOT INDIA LIMITED TO STATE TH AT APPELLANT'S INTERNAL COMPARABLE IS A CONTROLLED TRANSACTION, WH ICH CANNOT BE USED FOR THE COMPARISON. I AGREE WITH THE FUNDAMENTAL PR OPOSITION BECAUSE THE RULE 10B(1)(A)(I) REQUIRES COMPARISON OF THE CO NTROLLED TRANSACTION WITH THE UNCONTROLLED TRANSACTION UNDER CUP METHOD. THE MUMBAI TRIBUNAL IN THE CASE OF THE TECHNIMONT ICB P VT LIMITED 148 TTJ 54 HAS HELD THAT THE CONTROLLED TRANSACTION CAN NOT BE COMPARED WITH THE ANOTHER CONTROLLED TRANSACTION. THEREFORE, THE METHODOLOGY USED BY THE LEARNED TPO FAILS ON THIS GROUND. THE L EARNED TPO IN HIS REMAND REPORT HAS RELIED ON THE SEVERAL DECISIONS I N SUPPORT OF THE PROPOSITION THAT CONTROLLED TRANSACTION CAN BE COMP ARED WITH THE OTHER CONTROLLED TRANSACTION. I HAVE PERUSED THESE DECISIONS. FIRSTLY, THE CASE RELIED ON BY THE LEARNED TPO OF TECHNIMONT ICB PVT LTD, IN FACT HAS HELD THAT CONTROLLED TRANSACTION CANNOT BE COMPARED WITH THE ANOTHER CONTROLLED TRANSACTION. SECONDLY, THE OTHER DECISIO NS RELIED UPON BY THE LEARNED TPO DO NOT HELP HIS CAUSE AS THESE CASES NE ITHER DIRECTLY OR INDIRECTLY DECIDE THIS ISSUE. 2.3.30 THERE IS ONE MORE LEGAL ASPECT INVOLVED. THE LEARNED TPO HAS USED INTERNAL COMPARABLE TRANSACTION FOR THE USE OF THE CUP METHOD. THE CUP METHOD REQUIRES STRICT COMPARABILITY OF THE PRODUCT OR SERVICE TRANSACTION ALONG WITH THE COMPARISION OF THE CONTR ACTUAL TERMS AND CONDITIONS OF BOTH THE TRANSACTIONS. IT IS DISCUSSE D IN THE EARLIER PARAGRAPHS THAT THE FIRST AGREEMENT WAS WITH RESPEC T TO THE ACQUISITION OF DISTRIBUTION RIGHTS WHEREAS THE SECOND AGREEMENT PERTAINED TO THE ACQUISITION OF MANUFACTURING AND DISTRIBUTION RIGHT S. THEREFORE, THESE TWO TRANSACTIONS CANNOT BE COMPARED WITH EACH OTHER BECAUSE OF THESE FUNDAMENTAL DIFFERENCES. ITA NOS.1976,1977&1978/PN/2 013 10 2.3.31THE LEARNED TPO HAS FURNISHED ONE AGREEMENT I N A COMPARABLE CASE IN WHICH ROYALTY @ 2% WAS PAID FOR MANUFACTURI NG AND DISTRIBUTION RIGHTS. IT WAS CONTENDED THAT IN VIEW OF THIS COMPARABLE CASE, ARM'S LENGTH PRICE DETERMINED BY THE LEARNED TPO IS PROPER. I HAVE CONSIDERED THE ISSUE RAISED BY THE LEARNED TPO . I DO NOT AGREE WITH THE SAME FOR THE REASON THAT THE LEARNED TPO HAS NO T ESTABLISHED EXACT COMPARABILITY IN TERMS OF THE PRODUCTS MANUFACTURED , ADDITIONAL SERVICES RENDERED ALONG WITH THE OTHER TERMS AND CO NDITIONS WITH THE APPELLANT. THE AGREEMENT RELIED ON BY THE LEARNED T PO DEALS WITH DEVELOPMENT AND MARKETING OF ARCOPLATE PROCESS WHER EAS THE APPELLANT MANUFACTURES CHEMICALS AND FLUXES FOR FOU NDRIES AND STEEL MILLS. THEREFORE, THE CASE RELIED UPON BY THE LEARN ED TPO CANNOT BE CONSIDERED AS A COMPARABLE. 2.3.32 IN VIEW OF THE ABOVE DISCUSSION, I HOLD THAT THE ADJUSTMENT MADE BY THE LEARNED TPO WAS IMPROPER. ACCORDINGLY, I DEL ETE THE ADJUSTMENT. 2.3.33 AS I HAVE DECIDED THE ISSUE WITHOUT USING AD DITIONAL EVIDENCE, I DO NOT GIVE MY FINDINGS ON ADMISSION OR OTHERWISE O F THE ADDITIONAL EVIDENCE. 8. AGGREIVED BY THE ORDER OF LD CIT(A), REVENUE IS NOW IN APPEAL BEFORE US. 9. BEFORE US, LD DR TOOK US THROUGH THE ORDER OF TPO AND POINTED TO THE FINDINGS OF TPO. HE STRONGLY SUPPORTED THE ORDER OF TPO AND SUBMITTED THAT IN VIEW OF THE OBSERVATIONS AND FINDINGS OF T PO, THE ORDER OF LD.CIT(A) BE SET ASIDE. LD AR ON THE OTHER HAND REITERATED THE SUBMISSIONS MADE BEFORE TPO AND LD CIT(A) AND FURTHE R POINTED TO THE TERMS OF AGREEMENT THAT WERE PLACED IN T HE PAPER BOOK AND SUBMITTED THAT THE FIRST AGREEMENT WAS WITH RE SPECT TO ACQUISITION OF LICENCE BY THE ASSESSEE TO USE TRADEMARK O F FOSECO WHEREAS THE SECOND AGREEMENT GRANTED RIGHT TO THE AS SESSEE TO MANUFACTURE, HAVE MANUFACTURED, USE AND SELL THE PRODUCTS WITHIN INDIA AND ALSO TO EXPORT THE PRODUCTS. HE THEREFORE SUB MITTED THE SCOPE OF SECOND AGREEMENT WAS MUCH WIDER THAN THE FIRST AGREEMENT. HE FURTHER SUBMITTED THAT THE BENEFIT TEST AS APPLIED BY TPO CANNOT BE APPLIED TO THE PRESENT FACTS. HE FURTHER P LACED RELIANCE ON THE DECISION OF AHMEDABAD TRIBUNAL IN THE CASE OF MICRO ITA NOS.1976,1977&1978/PN/2 013 11 INKS LTD VS ADDL. CIT (ITA NO 2873/AHD/10 ORDER DTD 2 7.11.2015 FOR THE PROPOSITION THAT BENEFIT TEST IS ALIEN TO THE DEFINIT ION OF INTERNATIONAL TRANSACTION UNDER THE INDIAN TRANSFER PRICING LEGISLATION. HE FURTHER SUBMITTED THAT WHEN THE AGREEMENT IS IN LINE WITH THE LIBERALIZED SCHEME OF RBI MEANING THAT RBI HAS AP PROVED THE AGREEMENT AND IN SUCH A CASE THERE CANNOT BE ANY ADJUSTMENT TO ROYALTY PAYMENT AND IN SUPPORT OF THIS CONTENTION HE PLACED RELIANCE ON THE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF THYSSENKRUPP INDUSTRIES LTD (ITA NO 6460/MUM/2012 OR DER DTD 27.3.2013).HE ALSO PLACED RELIANCE ON THE DECISION OF HBLE BOM BAY HIGH COURT IN THE CASE OF SGS INDIA P LTD (ITA NO 1807 OF 2013). HE ALSO RELIED ON THE DECISION RENDERED IN THE CASE OF CUSHMA N AND WAKEFIELD (INDIA) (P) LTD BY HONBLE DELHI HC REPORTED IN (20 14) 46 TAXMANN.COM 317 (DEL) FOR THE PROPOSITION THAT AUTHORITY OF THE TPO IS TO CONDUCT A TRANSFER PRICING ANALYSIS AND TO DE TERMINE ALP AND NOT TO DETERMINE WHETHER THERE IS A SERVICE OR NOT FROM WHICH ASSESSEE BENEFITS. HE THUS SUPPORTED THE ORDER OF LD CIT(A). 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH REFERENC E TO ADJUSTMENT OF ROYALTY PAYMENT BY THE ASSESSEE TO ITS A E BY CONSIDERING IT TO BE EXCESSIVE. IT IS AN UNDISPUTED FACT TH AT ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH FOSECO INTERNATIONA L ON 1.7.2004 AND THE PAYMENT OF ROYALTY IS AS PER THE AFORES AID AGREEMENT. IT IS ALSO AN UNDISPUTED FACT THAT THE PERCE NTAGE OF ROYALTY PAYMENT MADE BY THE ASSESSEE TO ITS AE IS AS P ER THE LIBERALIZED SCHEME OF RBI. THE ONLY REASON FOR DISALLOWANCE O F ROYALTY PAYMENT BY THE TPO/AO IS THAT THE AS PER THE EARLIER AGREEMENT ENTERED BY THE ASSESSEE THE RATE OF ROYALTY WAS LESS THAN ITA NOS.1976,1977&1978/PN/2 013 12 THE RATE OF ROYALTY THAT WAS AGREED AS PER THE AGREEM ENT DATED 1.7.2004 AND THEREFORE ACCORDING TO TPO THE PAYMENT OF R OYALTY WAS EXCESSIVE AND THAT NO BENEFIT WAS DERIVED BY THE AS SESSEE BY MAKING THE EXCESS ROYALTY PAYMENT. WE FIND THAT LD CIT(A) WHILE DECIDING THE ISSUE HAS GIVEN A FINDING THAT THAT THE FIRST A GREEMENT DATED 30.4.2003 THAT WAS ENTERED INTO BY THE ASSESSEE WITH FOSECO INTERNATIONAL WAS ONLY WITH RESPECT TO ACQUISITION OF LICEN CE TO USE THE TRADEMARK OF FOSECO WHEREAS THE SECOND AGREEMENT DATED 1.7.2004 ENTERED BY THE ASSESSEE WITH FOSECO INTERNATIO NAL WAS A MUCH WIDER AGREEMENT IN ITS SCOPE AS IT INTER ALIA GRANTED THE ASSESSEE RIGHT TO MANUFACTURE, HAVE MANUFACTURED, USE AN D SELL THE PRODUCTS IN INDIA AND OUTSIDE INDIA AND THUS THE SCOPE OF SECOND AGREEMENT WAS MUCH WIDER THAN THE FIRST AGREEMENT. HE H AS FURTHER GIVEN A FINDING THAT THE BENEFIT TEST ADOPTED BY TPO/AO FOR DISALLOWING THE ROYALTY PAYMENT CANNOT BE APPLIED BECAUSE BENEFIT TEST IS APPLICABLE FOR AVAILING SERVICES AND CANNOT BE APPLIED FOR ACQUISITION OF RIGHTS AND THAT THERE IS NO CONCEPT OF APPLIC ATION OF BENEFIT TEST UNDER INDIAN TRANSFER PRICING REGULATIONS. BEFO RE US, REVENUE HAS NEITHER BROUGHT ANY MATERIAL ON RECORD TO CONTROVERT THE FINDINGS OF LD.CIT(A) NOR HAS PLACED ON RECORD ANY CONT RARY BINDING DECISION. REVENUE HAS ALSO NOT PLACED ANY MATERIAL O N RECORD TO DEMONSTRATE AS TO HOW THE DECISIONS RELIED U PON BY THE LD AR ARE NOT APPLICABLE TO THE PRESENT FACTS. WE FURTHER FIND THAT THE DECISIONS RELIED UPON BY THE LD.AR AND THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF SGS INDIA PVT. LTD(SUPRA ) ARE SQUARELY APPLICABLE TO THE PRESENT FACTS. IN VIEW OF THE A FORESAID FACTS, WE FIND NO REASON TO INTERFERE WITH THE ORDER OF LD.C IT(A) AND THUS THE GROUNDS OF REVENUE ARE DISMISSED. ITA NOS.1976,1977&1978/PN/2 013 13 11. AS FAR THE GROUNDS OF REVENUE IN A.Y. 2007 08 & 20 08 09 ARE CONCERNED, SINCE BOTH THE PARTIES BEFORE US HAVE SU BMITTED THAT THE GROUNDS RAISED BY THE REVENUE IN ITS APPEAL FOR AY 20 07-08 AND 2008-09 ARE IDENTICAL TO THE GROUND RAISED BY THE REVEN UE IN AY 2005-06, WE THEREFORE FOR SIMILAR REASONS AS STATED HEREIN ABOVE WHILE DISPOSING THE APPEAL FOR REVENUE FOR AY 2005-06 AND FOR SIMILAR REASONS, DISMISS THE GROUNDS OF REVENUE IN AY 2007- 08 AND AY 2008-09. 12. IN THE RESULT ALL THE APPEALS OF REVENUE ARE DISM ISSED. 13. WE NOW TAKE UP ASSESSEES CO FOR ADJUDICATION: 1 ST GROUND IS WITH REFERENCE TO CONFIRMING THE DISALLOWANCE OF RS.1,30,693/-. 14. TPO NOTICED THAT ASSESSEE HAD IMPORTED ATTA GEL 50 FROM ITS AE LOCATED IN CHINA AND FROM THE AE LOCATED IN NETHERLAND AT A PRICE (I.E RS.86 PER KG) HIGHER THAN THE PRICE PAID TO THE THIRD PARTY FOR THE SAME MATERIAL (RS 39.57 PER KG). THE ASSESSEE WAS ASKED TO JUSTLY THE HIGHER PRICE TO WHICH ASSESSEE INTER-ALIA SUBM ITTED THAT THE HIGHER PURCHASE PRICE WAS DUE TO BUSINESS EXIGENCY AND ON ACCOUNT OF AIR FREIGHT. TPO NOTED THAT ASSESSEE DID NOT FU RNISH THE BREAKUP OF AIRFREIGHT FOR PURCHASE FROM CHINA. HE THEREAFTER WORKED OUT AN ADJUSTMENT AT RS 1,30,693/- AND DIRECTED THE AO ACCORDINGLY. AGGRIEVED BY THE ORDER OF AO, ASSESSEE CAR RIED THE MATTER BEFORE LD CIT(A) WHO CONFIRMED THE ACTION OF AO BY HOLDING AS UNDER: 2.1.4 I HAVE CONSIDERED THE ARGUMENTS OF BOTH TH E SIDES. I FIND THAT THE APPELLANT HAS NO BASIS OF THE ADJUSTMENT MADE B Y IT. IT HAS MADE MARKETING ADJUSTMENT OF 35% FOR NETHERLANDS AND 20% FOR CHINA. IT HAS ALSO MADE THE ADJUSTMENTS OF 10% FOR DIFFERENCE S IN VOLUME FOR BOTH THE COUNTRIES AND 15% ADJUSTMENT IS MADE FOR T HE CURRENCIES OF ITA NOS.1976,1977&1978/PN/2 013 14 NETHERLANDS AND 10% FOR CHINA. THE ADJUSTMENTS MAD E IN THE ROUNDED OF FIGURES SHOW THAT THEY ARE MADE ON AD-HOC BASIS WITH LITTLE BASIS ON THE REAL POSITION. THE APPELLANT HAS NEITHER EXPLA INED THE DATA ON THE BASIS OF WHICH THE ADJUSTMENT IS MADE NOR HAS PROVI DED COMPUTATION FOR THE PERCENTAGE OF ADJUSTMENT. FUNDAMENTAL REQU IREMENT UNDER THE RULE 10B(3) IS THAT THAT THE ADJUSTMENT SHOULD BE R ELIABLE. THESE ADJUSTMENTS CANNOT BE CONSIDERED RELIABLE IN ABSENC E OF UNDERLYING BASIC DATA ON WHICH ADJUSTMENT IS MADE. ACCORDINGL Y, I FIND THAT THE APPELLANT HAS NOT BEEN ABLE TO EFFECTIVELY EXPLAIN THE REASONS OF THE PRICE DIFFERENCE BETWEEN THE CONTROLLED AND THE UNC ONTROLLED TRANSACTIONS. AS FAR AS THE APPELLANTS ARGUMENT O F GRANTING STANDARD DEDUCTION OF +/- 5% U/S 92C(2) IS CONCERNED, SAME I S HELD AGAINST THE APPELLANT IN VIEW OF THE RETROSPECTIVE AMENDMENT TO THE FINANCE ACT, 2012. ACCORDINGLY, I CONFIRM THE ADJUSTMENT OF RS 1,30,693 MADE BY THE LEARNED TPO TO THE IMPORT TRANSACTION OF THE APPELL ANT. 15. AGGRIEVED BY THE ORDER OF CIT(A), ASSESSEE IS NOW IN A PPEAL BEFORE US. 16. BEFORE US, LD AR REITERATED THE SUBMISSIONS MADE BEFOR E TPO AND LD CIT(A). HE FURTHER SUBMITTED THAT THE DIFFERENCE IN PRICE WAS DUE TO THE DIFFERENCE IN GEOGRAPHICAL LOCATION AND THE QUAN TITY IMPORTED AND FURTHER THAT THE IMPORTS WERE BASICALLY IN T HE FORM OF SAMPLES FOR NECESSARY TESTING ETC AND THEREFORE IT CANNO T BE COMPARED WITH OTHER TRANSACTIONS AS DONE BY TPO. HE TH EREFORE SUBMITTED THAT THE ADDITION BE DELETED. LD DR ON THE OTH ER HAND SUPPORTED THE ORDER OF LD CIT(A). 17. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH REFERENC E TO ADJUSTMENT MADE ON ACCOUNT OF HIGHER PRICE PAID BY ASSE SSEE TO AE WHEN COMPARED WITH THE PRICE PAID BY ASSESSEE FOR PURCH ASE OF SIMILAR PRODUCT FROM THIRD PARTY. WE FIND THAT WHILE DECIDING THE ISSUE LD CIT(A) HAS INTER-ALIA OBSERVED THAT ASSESSEE HAS NOT BEEN ABLE TO EXPLAIN THE PRICE DIFFERENCE AND FURTHER THE CLAIM OF ADJUSTMENT ON ACCOUNT OF +/- 5% U/S 92C(2) WAS NOT APP LICABLE ON ACCOUNT OF RETROSPECTIVE AMENDMENT BY FINANCE ACT 2012 . BEFORE US, LD AR COULD NOT CONTROVERT THE FINDINGS OF LD CIT(A) A ND ITA NOS.1976,1977&1978/PN/2 013 15 THEREFORE WE FIND NO REASON TO INTERFERE WITH THE ORDER O F CIT(A) AND THUS THE GROUND OF ASSESSEE IS DISMISSED. 18. 2 ND GROUND IS WITH REFERENCE TO CONFIRMING THE DISALLOWANCE O N ACCOUNT OF SALE OF GOODS TO AE AMOUNTING TO RS 30,37,196/- 19. TPO NOTICED THAT ASSESSEE HAS UNDERTAKEN EXPORT O F GOODS TO ITS VARIOUS AES OUTSIDE INDIA AND IT HAS BEEN BENCHMARKED BY ASSESSEE BY FOLLOWING COMPARABLE UNCONTROLLED PRICE (CUP) MET HOD AFTER MAKING SUITABLE ADJUSTMENTS. ON EXAMINATION OF THE ADJUSTMENTS, TPO NOTICED THAT ASSESSEE HAS CLAIMED A DE DUCTION OF 13.88% OF THE LOCAL SALE PRICE AS REBATE AND THE PERCENTA GE OF 13.88% WAS ARRIVED BY DEDUCTING ROYALTY EXPENSES, DIRECTO RS COMMISSION AND SITTING FEES AND PURE CORPORATE EXPENSES FROM THE MANUFACTURING EXPENSES, DEPRECIATION, PERSONNEL EXPENSES A ND ADMINISTRATIVE AND SELLING EXPENSES. TPO WAS OF THE VIEW THA T ONLY EXPENSES ON ACCOUNT OF ADVERTISING, COMMISSION ON SALES, PR OVISION FOR DOUBTFUL DEBTS, BAD DEBTS WRITTEN OFF AND TRAVELLING AND CONVEYANCE EXPENSES CAN BE ATTRIBUTED TO SELLING AND DIS TRIBUTION EXPENSES. HE WAS THEREFORE OF THE VIEW THAT ASSESSEE HA S CLAIMED EXCESSIVE ADJUSTMENT ON ACCOUNT OF SELLING AND DISTRIBUTIO N EXPENSES AND THEREFORE HE WORKED OUT UPWARD ADJUSTME NT AT RS 30,37,196/- AND DIRECTED THE AO TO MAKE THE ADJUSTM ENT WHO IN TURN MADE THE AFORESAID ADJUSTMENT. AGGRIEVED BY THE OR DER OF AO. ASSESSEE CARRIED THE MATTER BEFORE CIT(A), WHO UPHELD THE ORDER OF AO BY HOLDING AS UNDER: 2.2.7 I HAVE CONSIDERED THE FACTS AND THE ARGUMENTS OF THE APPELLANT. I AGREE WITH THE LEARNED TPO THAT THE APPELLANT HAS CLAIMED EXCESSIVE DEDUCTION. I FIND THAT THE APPELLANTS CONTENTION THAT CERTAIN EXPENSES WERE INCURRED ONLY FOR THE DOMESTIC MARKET IS BASEL ESS. IT IS FUNDAMENTAL THAT THE DIRECTORS FEES, AUDITORS REM UNERATION, SOFTWARE ITA NOS.1976,1977&1978/PN/2 013 16 AND MAINTENANCE CHARGES, ROYALTY EXPENSES WOULD BE COMMON FOR THE EXPORT SEGMENT AS WELL AS FOR THE DOMESTIC SALES SE GMENT, WHICH WILL HAVE TO BE ALLOCATED BETWEEN BOTH THE SEGMENTS ON A REASONABLE BASIS. 2.2.8 ACCORDING TO THE ACCOUNTING STANDARD (AS2), ALLOCATION OF INDIRECT EXPENSES SHOULD BE DONE EITHER ON ACTUAL B ASIS OR ON THE BASIS OF THE SALES IN EACH SEGMENT OR ON ANY OTHER SOUND BASIS. FROM THIS PERSPECTIVE, APPELLANTS QUANTIFICATION OF ADJUSTME NT OF 13.88% APPEARS TO HAVE BEEN WORKED OUT ON UNSCIENTIFIC AS WELL AS ON THE SUBJECTIVE BASIS AS THE ALLOCATION OF EXPENSES SEEMS TO HAVE B EEN DONE ACCORDING TO THE APPELLANTS SWEET WILL. HAD THE APPELLANT U SED THE OBJECTIVE BASIS OF AS 2 FOR THE ALLOCATION OF THE EXPENSES, THIS DI SPUTE WOULD NOT HAVE ARISEN. 2.2.9 FURTHER, THE APPELLANT HAS ALSO STATED THAT I T HAS EARNED EQUAL MARGIN IN ITS EXPORT TRANSACTION WITH THE AE AS WEL L AS FROM THE EXPORT TRANSACTION WITH THE NON-AE. THUS, IT HAS FURNISHE D DETAILED COMPUTATION OF THE PROFIT MARGIN EARNED IN ITS TRAN SACTIONS IN SUPPORT OF ITS ARGUMENT. I HAVE GONE THROUGH THE COMPUTATI ON. I FIND THAT THIS COMPUTATION ALSO SUFFERS FROM THE SAME INCONSISTENC IES AS DISCUSSED ABOVE. MOREOVER, THE APPELLANT HAS DEBITED SALES C OMMISSION OF RS 5,47,110/- WITH RESPECT TO ITS EXPORT TRANSACTION W ITH THE AE BUT HAS NOT DEBITED SALES COMMISSION WITH RESPECT TO ITS EXPORT TRANSACTION WITH THE NON-AE. THIS IS QUITE ILLOGICAL AS NORMALLY, SALES COMMISSION IS PAID IN CASE OF THE TRANSACTION WITH THE NON-AE. TO ME, TH E COMPUTATION DOES NOT APPEAR TO BE RELIABLE HENCE IT SERVES NO PURPOS E IN ARRIVING AT THE DECISION. I DISMISS THIS ARGUMENT OF THE APPELLANT . AS FAR AS THE APPELLANTS ARGUMENT OF GRANTING STANDARD DEDUCTION OF +/- 5% U/S 92(C)2 IS CONCERNED, SAME IS HELD AGAINST THE APPEL LANT HELD AGAINST THE APPELLANT IN VIEW OF THE RETROSPECTIVE AMENDMENT TO THE FINANCE ACT, 2012. 2.2.10 ACCORDING TO ME, THE WORKING MADE BY THE LEA RNED TPO APPEARS TO BE PROPER. HIS BASIS OF WORKING IS BASED ON THE FUNDAMENTAL PREMISE THAT CERTAIN EXPENSES NEED TO BE ALLOCATED BETWEEN BOTH THE SEGMENTS. WITH THE RESULT, I CONFIRM THE ADJUSTMENT OF RS.30, 374,196/- MADE BY THE LEARNED TPO TO THE EXPORT TRANSACTION OF THE AP PELLANT. 20. AGGRIEVED BY THE ORDER OF LD CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 21. BEFORE US, LD AR REITERATED THE SUBMISSIONS MADE BEFOR E TPO AND CIT(A) AND FURTHER SUBMITTED THAT TPO WAS NOT JUSTI FIED IN RESTRICTING THE SELLING AND DISTRIBUTION EXPENSES ONLY TO A FEW HEADS OF EXPENSES AND THAT OECD GUIDELINES ALSO SUPPORT THE S TAND OF ASSESSEE. HE FURTHER SUBMITTED THAT THE NET PROFIT MARGIN S OF THE AE ON EXPORT OF GOODS TO AE WAS HIGHER THAN THE NET P ROFIT MARGIN ON SALES MADE IN DOMESTIC MARKET. HE THEREFORE SUBMITTED THAT THE ITA NOS.1976,1977&1978/PN/2 013 17 ADDITION BE DELETED. LD DR ON THE OTHER HAND SUPPORTED THE ORDER OF THE LD CIT(A). 22. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT LD CIT(A) WHILE DECIDING THE ISSUE HA S GIVEN A FINDING THAT CERTAIN EXPENSES LIKE ROYALTY EXPENSES, DIREC TORS FEES ETC WOULD BE COMMON FOR EXPORT AS WELL AS DOMESTIC SEGM ENT AND THAT THE ALLOCATION OF EXPENSES HAS NOT BEEN MADE ON AC TUAL BASIS OR ON THE BASIS OF SALES IN EACH SEGMENT AND THAT ASSES SEE HAD NOT DONE THE ALLOCATION ON THE BASIS OF ACCOUNTING STANDARD (A S-2) ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA BUT ON T HE CONTRARY THE ALLOCATION HAS BEEN BASED ON UNSCIENTIFIC AN D SUBJECTIVE BASIS AND THEREFORE THE COMPUTATION COULD NOT BE RELIED UPON. BEFORE US, LD AR HAS NOT CONTROVERTED THE FINDINGS OF LD CIT(A). WE THEREFORE FIND NO REASON TO INTERFERE WITH THE O RDER OF CIT(A) AND THUS THIS GROUND OF ASSESSEE IS DISMISSED. 23. IN THE RESULT THE C.O. OF ASSESSEE IS DISMISSED. 24. WE NOW TAKE UP ASSESSEES CO FOR AY 2008-09 IN ITA NO. 96/PN/2014. GROUNDS IN CROSS OBJECTION NO.96/PN/2014 FOR THE A.Y . 2008-09: 1.0 THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WAS NOT JUSTIF IED AND GROSSLY ERRED IN CONFIRMING THE DISALLOWANCE ON ACCOUNT OF COMMISSION PAID BY THE APPELLANT AMOUNTING TO RS.21,75,000/- 2.0 THAT THE APPELLANT CRAVES LEAVE TO ADD, AMEND, MODIFY, RESCIND, SUPPLEMENT, OR ALTER ANY OF THE GROUNDS STATED HERE -IN-ABOVE, EITHER BEFORE OR AT THE TIME OF HEARING OF THIS APPEAL. 25. ASSESSEE FILED ITS RETURN OF INCOME FOR AY 2008-09 ON 2 6.9.2008 DECLARING TOTAL INCOME OF RS 32,41,98,087/-. THE RETURN OF IN COME ITA NOS.1976,1977&1978/PN/2 013 18 WAS INITIALLY PROCESSED U/S 143(1) ON 30.3.2010. LATER ON TH E CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) DATED 1.8.2 011 WAS SERVED ON THE ASSESSEE AND IN RESPONSE TO WHICH ASSES SEE FILED THE DETAILS. ON PERUSING THE DETAILS FILED BY THE ASSESSEE IT WA S NOTED BY THE AO THAT DURING THE YEAR ASSESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE (A E). AO ACCORDINGLY MADE REFERENCE U/S 92CA(3) OF THE ACT TO TRA NSFER PRICING OFFICER (TPO) FOR THE COMPUTATION OF ARMS LENGTH PR ICE (ALP) IN RELATION TO THE INTERNATIONAL TRANSACTIONS. THEREAFTE R, TPO VIDE ORDER DTD 25.10.2011 PASSED U/S 92CA(3) DETERMINED T HE ALP OF THE ASSESSEE AND DIRECTED THE AO TO TAKE EFFECT OF T HE SAME FOR ENHANCEMENT OF INCOME OF THE ASSESSEE. AO THEREAFTER PAS SED A DRAFT ASSESSMENT ORDER U/S 143(3) READ WITH SECTION 144C ON 15.12.2011. IN RESPONSE TO THE DRAFT ASSESSMENT ORDER, A SSESSEE VIDE LETTER DATED 17.1.2012 SUBMITTED THAT IT HAS PREFERR ED NOT TO EXERCISE THE OPTION AVAILABLE U/S 144C OF FILING OBJECTIONS BE FORE DISPUTE RESOLUTION PANEL (DRP) AND INSTEAD IT WOULD FILE APPEAL BEFORE LD CIT(A). AO THEREAFTER ON 8.2.2012 PASSED ORDER U/S 143(3) WHEREIN APART FROM THE ADJUSTMENTS DIRECTED BY TPO ALSO MADE CERTAIN OTHER DISALLOWANCES AND THEREBY DETERMINED THE T OTAL INCOME AT RS 39,69,58,690/-. AGGRIEVED BY THE ORDER OF AO , ASSESSEE CARRIED THE MATTER BEFORE LD CIT(A), WHO VIDE CO NSOLIDATED ORDER DATED 7.8.2013 GRANTED PARTIAL RELIEF TO THE ASSESS EE. AGGRIEVED BY THE ORDER OF LD CIT(A), ASSESSEE IS NOW BEFORE US. 26. AO NOTICED THAT ASSESSEE HAD PAID COMMISSION OF RS 7.2 5 LACS EACH TO THE THREE NON EXECUTIVE DIRECTORS AND THE AGG REGATE COMMISSION PAID WAS RS 21.75 LACS. HE NOTICED THAT WHILE MAK ING ITA NOS.1976,1977&1978/PN/2 013 19 THE PAYMENT OF COMMISSION, ASSESSEE HAD NOT DEDUCTED TD S U/S 194H OF THE ACT. AO WAS OF THE VIEW THAT SINCE THE PAYM ENT HAS BEEN MADE WITHOUT DEDUCTION OF TDS, THE EXPENSES WAS LIAB LE FOR DISALLOWANCE U/S 40(A)(IA) OF THE ACT AND ACCORDINGLY DISALLOWED THE PAYMENT OF COMMISSION OF RS 21,75,000. AGGRIEVED BY THE ORD ER OF AO, ASSESSEE CARRIED THE MATTER BEFORE CIT(A), WHO UPHELD THE ORDER OF AO BY HOLDING AS UNDER: 4.3.1 THE APPELLANT SUBMITTED THAT IT PAID COMMISS ION AMOUNTING TO RS.21.75 LAKHS TO ITS THREE NON-EXECUTIVE DIRECTORS. THE PA YMENTS MADE TO THE DIRECTORS ARE NEITHER IN THE NATURE OF THE FEES FOR PROFESSI ONAL SERVICE NOR FEES FOR TECHNICAL SERVICES ACCORDING TO THE EXPLANATION (A ) TO SECTION 194J FEES FOR TECHNICAL SERVICES, AS PER THE EXPLANATION 2 TO SE CTION 9(1)(VII) OF THE ACT. SUCH PAYMENTS ARE ALSO NOT WITHIN PURVIEW OF THE SECTION 194 OF THE ACT AS THEY WERE NOT MADE FOR ANY SERVICES RENDERED BY THE DIRECTORS OR WERE NOT MADE FOR SERVICES IN COURSE OF BUYING OR SELLING OF GOODS OR ANY TRANSACTION RELATING TO ANY ASSET VALUABLE ARTICLE OR THING, NOT BEING SECU RED. THE PAYMENT OF SUCH COMMISSION WAS WITHIN THE LIMITS PRESCRIBED AS PER SECTION 309 OF THE COMPANIES ACT, 1956 AND DEDUCTION OF TAX AT SOURCE IS NOT JUSTIFIED. 4.3.2 THE LEARNED TPO DID NOT ACCEPT THE ARGUMENTS OF THE APPELLANT. HE STATED THAT THE SECTION 194H SPECIFICALLY DEALS WITH TDS O N COMMISSION. HE STATED THAT THE APPELLANTS CASE FULFILS ALL THREE CONDITI ONS MENTIONED IN SECTION 194H FOR DEDUCTION OF TAX. ACCORDINGLY, THE APPELLANT O UGHT TO HAVE DEDUCTED TAX AT SOURCE ON COMMISSION PAYMENTS. 4.3.3 THE APPELLANT HAS ADVANCED THE SAME ARGUMENT S, WHICH WERE ADVANCED BEFORE THE LEARNED TPO. THE APPELLANT REQUESTED TH AT THE AMOUNT OF RS 21.75 LAKHS, WHICH IS DISALLOWED U/S 40(A)(IA) SHOULD BE DELETED. 4.3.4 I FIND THAT APPELANTS CASE CLEARLY FALLS U/ S 194H. ACCORDINGLY, THE LEARNED AO HAS NOT MADE ANY ERROR IN MAKING DISALLOWANCE MA DE U/S 40 (A)(IA). IN CONFIRM THE DISALLOWANCE. 27. AGGRIEVED BY THE ORDER OF CIT(A), ASSESSEE IS NOW IN A PPEAL BEFORE US. 28. BEFORE US, LD AR REITERATED THE SUBMISSIONS MADE BEF ORE AO AND CIT(A) AND FURTHER SUBMITTED THAT THE NON EXECUTIVE DIRECTORS DO NOT RENDER ANY OF THE SERVICES REFERRED AS COMMISSIO N OR BROKERAGE IN S.194H OF THE ACT AND THEREFORE THERE WA S NO QUESTION ITA NOS.1976,1977&1978/PN/2 013 20 OF ANY DEDUCTION OF TDS & THEREBY ON ACCOUNT OF NON DED UCTION OF TDS, DISALLOWANCE U/S 40(A) (IA) OF THE ACT. HE FURTHER SUBMITTE D THAT ON IDENTICAL FACTS, THE CO-ORDINATE BENCH OF TRIBUNAL IN THE CASE OF KIRLOSKAR OIL ENGINES LTD HAS DECIDED THE ISSUE IN FA VOUR OF THE ASSESSEE. HE PLACED ON RECORD THE DECISION IN THE AFO RESAID CASE IN ITA NO 414 & ORS OF 2014 ORDER DATED 11.3.2016 AND P OINTED TO THE RELEVANT PARAGRAPH OF THE ORDER. HE THEREFORE SUBMIT TED THAT THE ADDITION BE DELETED. LD DR ON THE OTHER HAND SUPPORTED THE ORDER OF AO AND CIT(A). 29. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH REFERENC E TO DISALLOWANCE U/S 40(A)(IA) OF THE ACT ON ACCOUNT OF NON DEDUC TION OF TDS ON THE COMMISSION PAID BY ASSESSEE TO ITS NON EXEC UTIVE DIRECTORS. IT IS AN UNDISPUTED FACT THAT THE COMMISSION HA S BEEN PAID TO THE NON EXECUTIVE DIRECTORS OF THE ASSESSEE. IT IS ALSO A FACT THAT THE COMMOISSION PAID IS NOT FOR ANY SERVICES RENDERE D IN THE COURSE OF BUYING OR SELLING OF GOODS OR IN RELATION TO ANY T RANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING ARE REFERRE D IN S.194H OF THE ACT. WE FIND THAT THE CO-ORDINATE BENCH OF TRIBUN AL IN THE CASE OF KIRLOSKAR OIL ENGINES (SUPRA) AND AFTER RELYING ON T HE DECISION IN THE CASE OF BHARAT FORGE LTD, HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE BY HOLDING AS UNDER: 6. BEFORE WE PROCEED WITH THE ISSUE IT WOULD BE REL EVANT TO REFERRED TO THE DEFINITION OF COMMISSION AS DEFINED IN EXPLAN ATION (I) TO SECTION 194H OF THE ACT. THE SAME IS REPRODUCED HERE-IN-UN DER: I) COMMISSION OR BROKERAGE INCLUDES ANY PAYMENT R ECEIVED OR RECEIVABLE DIRECTLY OR INDIRECTLY, BY A PERSON ACTI NG ON BEHALF OF ANOTHER PERSON FOR SERVICES RENDERED (NOT BEING PRO FESSIONAL SERVICES) OR FOR ANY SERVICES IN THE COURSE OF BUYI NG OR SELLING OF GOODS OR IN RELATION TO ANY TRANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING, NOT BEING SECURITIES; ITA NOS.1976,1977&1978/PN/2 013 21 7. UNDER THE PROVISIONS OF SECTION 194H TAX IS TO B E DEDUCTED AT SOURCE ON THE PAYMENTS MADE TO A RESIDENT BY WAY OF COMMIS SION (NOT BEING INSURANCE COMMISSION REFERRED TO IN SECTION 194D) O R BROKERAGE. A BARE PERUSAL OF THE DEFINITION WOULD SHOW THAT IT I S AN INCLUSI9VE DEFINITION WHICH INCLUDES PAYMENTS MADE DIRECTLY OR INDIRECTLY FOR SERVICES RENDERED IN THE COURSE OF BUYING OR SELLIN G GOODS OR IN RELATION TO ANY TRANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING, NOT BEING SECURITIES. THE NON-EXECUTIVE DIRECTORS APPO INTED ON THE BOARD OF DIRECTORS OF THE COMPANY DO NOT RENDER ANY OF THE S ERVICES REFERRED TO IN THE DEFINITION OF COMMISSION OR BROKERAGE. A ROL E OF NON-EXECUTIVE DIRECTOR IS TO PROVIDE CONSTRUCTIVE SUGGESTION FOR THE BETTER PERFORMANCE OF THE COMPANY AND TO PROTECT THE INTER EST OF THE ORGANIZATION/SHAREHOLDERS BY WHOM HE HAS BEEN NOMIN ATED ON THE BOARD. THUS, BY NO STRETCH OF IMAGINATION THE PAYMENTS MAD E TO THE NON-EXECUTIVE DIRECTOR FALL WITHIN THE AMBIT OF TER M COMMISSION OR BROKERAGE AS DEFINED U/S. 194H OF T HE ACT. 8. THE PROVISIONS RELATING TO DEDUCTION OF TAX AT S OURCE ON PAYMENT OF FEE FOR PROFESSIONAL OR TECHNICAL SERVICES ARE CONT AINED IN SECTION 194J. THE PROVISIONS OF SECTION 194J HAVE BEEN AMENDED BY THE FINANCE ACT, 2012 W.E.F 01-07-2012 VIDE WHICH CLAUSE (BA) HAS BE EN INSERTED IN SUB- SECTION (1) OF SECTION 194J. THE NEW CLAUSE INSERT ED BY THE FINANCE ACT, 2012 READS AS UNDER: [(BA)] ANY REMUNERATION OR FEES OR COMMISSION BY WHATEVER NAME CALLED, OTHER THAN THOSE ON WHICH TAX IS DEDUC TIBLE UNDER SECTION 192, TO A DIRECTOR OF A COMPANY, OR] THE MEMORANDUM EXPLAINING THE AMENDMENT BROUGHT IN BY THE FINANCE BILL 2012 IS AS UNDER: TDS ON REMUNERATION TO A DIRECTOR : UNDER THE EXISTING PROVISIONS OF THE INCOME TAX ACT , A COMPANY, BEING AN EMPLOYER, IS REQUIRED TO DEDUCT TAX AT THE TIME OF PAYMENT TO ITS EMPLOYEES INCLUDING MANAGING DIRECTO R/WHOLE TIME DIRECTOR. HOWEVER, THERE IS NO SPECIFIC PROVI SION FOR DEDUCTION OF TAX ON THE REMUNERATION PAID TO A DIRE CTOR WHICH IS NOT IN THE NATURE OF SALARY. IT IS PROPOSED TO AMEND SECTION 194J TO PROVIDE THA T TAX IS REQUIRED TO BE DEDUCTED ON THE REMUNERATION PAID TO A DIRECTOR, WHICH IS NOT IN THE NATURE OF SALARY, AT THE RATE O F 10% OF SUCH REMUNERATION. THIS AMENDMENT WILL TAKE EFFECT FROM IST JULY, 2012. THE PROVISIONS OF NEWLY INSERTED CLAUSES ARE ENFORC EABLE W.E.F 01-07-2012, THEREFORE, IT WILL HAVE NO APPLICATION IN THE ASSESSMENT YEARS UNDER APPEAL. 9. THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CAS E OF BHARAT FORGE LTD. VS. ADDITIONAL COMMISSIONER OF INCOME TAX (SUP RA) HAD OCCASION TO DEAL WITH THIS ISSUE. THE TRIBUNAL HELD THAT NO TA X AT SOURCE WAS REQUIRED TO BE DEDUCTED U/S. 194J FROM THE PAYMENTS MADE TOWARDS THE DIRECTORS SITTING FEES PRIOR TO 01-07-2012. THE R ELEVANT EXTRACT OF THE FINDINGS OF THE TRIBUNAL ARE REPRODUCED HERE-IN-BEL OW: 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICE R AND THE ITA NOS.1976,1977&1978/PN/2 013 22 CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE AS SESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS RELIED O N BY THE LEARNED COUNSEL FOR THE ASSESSEE. THE ONLY DISPUTE IN THIS GROUND IS REGARDING DEDUCTION OF TAX AT SOURCE FROM THE SITTING FEES PAID TO THE DIRECTORS. ACCORDING TO THE LEARN ED COUNSEL FOR THE ASSESSEE THE PROVISIONS OF SECTION 194J IS NOT APPLICABLE FROM SUCH SITTING FEES SINCE FEES DOES NOT FALL IN ANY O F THE CATEGORIES OF PROFESSIONAL SERVICE AS PER EXPLANATION TO SECTI ON 194J. FURTHER, NO SUCH OBJECTION WAS TAKEN IN THE PAST BY THE DEPARTMENT FOR SUCH NON DEDUCTION AND IN VIEW OF IN SERTION OF SUB SECTION (BA) TO SECTION 194J(1) TDS IS REQUIRED TO BE MADE OUT OF SUCH DIRECTOR SITTING FEES W.E.F., 01-07-201 2. THEREFORE, FOR NON-DEDUCTION OF TAX AT SOURCE FROM THE SITTING FEES FOR THE IMPUGNED ASSESSMENT YEAR THERE IS NO DEFAULT ON THE PART OF THE ASSESSEE. ACCORDING TO THE REVENUE THE DIRECTOR IS ALSO A MANGER UNDER THE PROVISIONS OF THE COMPANIES ACT AND THERE FORE TECHNICAL PERSONNEL AND THEREFORE THE COMPANY IS LI ABLE TO DEDUCT TAX AT SOURCE UNDER THE PROVISIONS OF SECTIO N 194J. 8.1 AS PER THE EXPLANATION TO PROVISIONS OF SECTION 194J PROFESSIONAL SERVICE MEANS SERVICES RENDERED BY A PERSON IN THE COURSE OF CARRYING LEGAL, MEDICAL, ENGINEERING OR ARCHITECTURAL PROFES SION OR THE PROFESSION OF ACCOUNTANCY OR TECHNICAL CONSULTANCY OR INTERIOR DECORATION OR ADVERTISING OR SUCH OTHER PROFESSION AS IS NOTIFIED BY THE BOARD. WE, THEREFORE, FIND FORCE IN THE SUBMISSION OF THE LEAR NED COUNSEL FOR THE ASSESSEE THAT SITTING FEES PAID TO THE DIRECTORS DO ES NOT AMOUNT TO FEES PAID FOR ANY PROFESSIONAL SERVICES AS HAS BEEN MENT IONED IN THE EXPLANATION TO SECTION 194J(1). WE FURTHER FIND FRO M THE MEMORANDUM EXPLAINING TO PROVISIONS OF THE FINANCE BILL 2012 T HAT AS PER CLAUSE NO.71 IT WAS SPECIFICALLY MENTIONED THAT THERE WAS NO SPECIFIC PROVISION FOR DEDUCTION OF TAX ON THE REMUNERATION PAID TO A DIRECTOR WHICH IS NOT IN THE NATURE OF SALARY. WE FIND THE PROVISIONS OF SECTION 194J(1)(BA) SPEAKS OF ANY REMUNERATION OR FEES OR COMMISSION BY WHATEVER NAME CALLED OTHER THAN THOSE ON WHICH TAX IS DEDUCTIBLE U/S. 192 TO A DIRECTOR OF A COMPANY ON WHICH TAX HAS TO BE DEDUCTED AT THE APPLICABLE RATE AND THE ABOVE PROVISION HAS BEEN INSERTED BY THE FI NANCE ACT, 2012. WE, THEREFORE, FIND FORCE IN THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT NO TAX IS REQUIRED TO BE DEDUCTED U/S . 194J OUT OF SUCH DIRECTORS SITTING FEES FOR THE A.Y. 2007-08. IN T HIS VIEW OF THE MATTER, THE ORDER OF THE CIT(A) IS SET-ASIDE AND THE GROUND RAISED BY THE ASSESSEE ON THE ISSUE OF TDS ON SITTING FEES PAID T O DIRECTORS IS ALLOWED. 10. THE LD. DR HAS NOT BEEN ABLE TO DISTINGUISH THE FINDINGS OF THE TRIBUNAL IN THE CASE OF BHARAT FORGE LTD. VS. ADDIT IONAL COMMISSIONER OF INCOME TAX (SUPRA). RESPECTFULLY FOLLOWING THE SAME WE AFFIRM THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE AND DISMISS THE APPEALS OF THE REVENUE. 30. BEFORE US, LD DR COULD NOT POINT OUT ANY DISTINGUISHING FEATURE IN THE FACTS OF THE PRESENT CASE AND THAT OF KIRLOSKAR OIL (SUPRA) NOR HAS PLACED ON RECORD ANY CONTRARY BINDING DECISION IN ITS FAVOUR. IN VIEW OF THE AFORESAID FACTS, AND FOLLOWING THE SAME REASONIN G AS GIVEN BY THE CO-ORDINATE BENCH WHILE DECIDING THE ISSUE IN THE CASE OF KIRLOSKAR OIL (SUPRA), WE ARE OF THE VIEW THAT IN THE PRE SENT CASE ITA NOS.1976,1977&1978/PN/2 013 23 ASSESSEE WAS NOT REQUIRED TO DEDUCT TDS U/S 194H ON THE PAYMENT OF COMMISSION TO NON EXECUTIVE DIRECTORS AND THEREFORE PROVISIONS OF S.40(A)(IA) ARE NOT ATTRACTED AND THEREFORE NO DISALLOWANCE OF EXPENSES IS CALLED FOR. THUS THE GROUND OF ASSESSEE IS ALLOWED. 31. THUS THE CO OF ASSESSEE IS ALLOWED. 32. IN THE RESULT ALL THE APPEALS FOR REVENUE ARE DISM ISSED, CO OF ASSESSEE FOR AY 2005-06 IS DISMISSED AND CO FOR AY 2008-09 IS ALLOWED. ORDER PRONOUNCED ON THIS WEDNESDAY, THE 30 TH DAY OF NOVEMBER, 2016. SD/- SD/- ( SUSHMA CHOWLA ) ( ANIL CHATURVEDI ) / JUDICIAL MEMBER % /ACCOUNTANT MEMBER PUNE ; DATED : 30 TH NOVEMBER, 2016. S S G G R R ( ) *#+, -,# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE LD.CIT(A)-IT/TP, PUNE 4. THE LD.DY.CIT. CIRCLE-1(2), PUNE 5. ! ''#$ , % #$ , & '() , / DR, ITAT, A BENCH, PUNE. 6. !*+ ,- / GUARD FILE. %. / BY ORDER, / / TRUE COPY / / .'0 #) / SR. PRIVATE SECRETARY, % #$ , / ITAT, PUNE