ITW India Ltd., Hyderabad V. DCIT, Hyderabad

ITA 206/HYD/2009

• Counselvise Citation: 20622514 RSA 2009
• Duration Of Justice: 6 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 19-02-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 13-02-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: RUPESH J AIN
• Keywords: Transfer pricing; Business expenditure; International transaction; Deemed export; Capital expenditure
• Section: 37(1); 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.206/HYD/2009 : ASSESSMENT YEAR 20 04 - 05 M/S. ITW INDIA LTD., HYDERABAD (PAN AAACI 4550 Q) V/S. DY. COMMISSIONER OF INCOME - TAX CIRCLE 2(1), HYDERABAD (APPLICANT) (RESPONDENT) ITA NO. 1 90/HYD/2009 : ASSESSMENT YEAR 20 04 - 05 ASST . COMMISSIONER OF INCOME - TAX CIRCLE 2(1), HYDERABAD V/S. M/S. ITW INDIA LTD., HYDERABAD (PAN AAACI 4550 Q) (APPLICANT) (RESPONDENT) ASSESSEE BY : S HRI RUPESH JAIN DEPARTMENT BY : SHRI D.SUDHAKAR RAO DR DATE OF HEARING 19 . 02 .201 5 DATE OF PRONOUNCEMENT 27.03.2015 O R D E R PER P.M.JAGTAP, ACCOUNTANT MEMBER : THESE TWO APPEALS, ONE FIL E D BY THE ASSESSEE, B E IN G I T A NO.20 6 /HYD/2009 AND THE OTHER FIL E D BY TH E R EVENUE, BEIN G I TA NO. 190/HYD/2009 ARE CROSS A PP E ALS, WHICH ARE DIRECTED AGAINST THE O R DER OF THE LEARNED CIT(A) III , HYDERABAD DATED 3.12.2008. 2. IN GROUNDS 1 AND 2 OF ITS APPEAL, THE ASSESSEE HAS CHALLENGED THE ACTION OF THE LEARNED CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN EXCLUDING INTEREST INCOME OF RS. 2,58,88,833, WHILE COMPUTING THE PROFITS OF THE BUSINESS FOR THE I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 2 PURPOSE OF DETERMINING THE DEDUCTION ALLOWABLE TO THE ASSESSEE UNDER S.80HHC OF THE ACT. 3. AS AGREED BY THE LEARNED REPR E SENTATIVES OF BOTH THE SIDES AT THE TIME OF H E ARIN G B E FORE US, THIS ISSUE IS S QUARELY COVERED IN F AV OUR O F THE RE VENUE AND AGAINST THE ASSESSEE BY THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CA S E FOR ASSESSMENT YEAR 2003 - 04 RENDERED VIDE O RD ER D A TED 23.7.2009 PASSED IN ITA NO.6 62/HYD/2006 AND OTHERS WHEREIN I T WAS HELD BY FOLLOWING THE DECISION OF HON'BLE DELHI HIGH COURT IN TH E CA S E OF CIT V/S. SHRIRAM H ON D A POW E R EQUIPMENT LTD. (289 I TR 475 ) , THAT INTEREST INCOME RECEIVED ON DEPOSITS WAS CHARGEABLE TO TAX IN THE H A N D S OF THE ASSESSEE UN D ER THE HEAD INCOME FROM OTHER SOU R CES AND THE SAME, TH E R E FORE, WAS LIABLE TO BE EXCLUDED F R OM THE PROFITS OF THE BU S IN E SS FOR THE PURPOSE OF COMPUTING THE DEDUCTION UN D ER S.80HHC ALLOWABLE TO TH E ASSESSEE . AS THE ISSUE INVOLVED IN THE YEAR UN D ER CON S I D ERATION AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE ADMITTEDLY SIMILAR TO THAT OF ASSESSMENT YEAR 2003 - 04, WE RESPECTFULLY FOLLOW THE O R DER O F THE COORDINATE BENCH FOR THE ASSESSMENT YEAR 2003 - 04 AND UPHOLD THE IMPU G N E D ORDER OF THE LEARNED CIT(A), CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN EXCLUDING THE INTEREST INCOME ON FI X ED DEPO S ITS F R OM THE PROFITS OF THE BU S IN ES S FOR THE PU R PO S ES OF COMPU T IN G THE DEDUCTION ALLO W ABL E TO THE ASSESSEE UN D ER S.8 0 HHC OF THE AC T. GROUNDS NO. 1 AND 2 OF TH E ASSESSEE S APPEAL ARE ACCORDINGLY DISMISSED. 4 . IN GROUND NO.3, THE ASSESSEE HAS CHALLENGING THE O R DER OF THE LEARNED CIT(A) IN CONFIRMIN G TH E AC T ION OF THE ASSESSING OFFICER IN AL L O W IN G DEDUC T I O N UN D ER S.80HHC WITH REFERENCE TO THE ELIGI BLE PROFITS OF THE BUSINESS AS REDUCED BY TH E AMOUNT O F DEDUCTION ALLOWED UN D ER S.80IB OF THE ACT. I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 3 5 . AFTER CON S I D ERING THE RIVAL SUBMI S SION S AND PE R USING THE REL E VANT MATE R IAL ON RECORD, IT IS OBSERVED THAT A SIMIL A R ISSUE HA S BEEN DECIDED IN F A VOUR OF THE ASSESSEE BY THE HON'BLE BOMBAY HIGH COURT IN TH E CA S E OF ASSOCI A TED CAPSULES P. L TD. V/S. DCIT (332 ITR 42) HOL D IN G THAT THE AMOUNT OF PROFIT ALLOWABLE AS DEDUCTION UN D ER S.80IA OF THE ACT IS NOT REQUIRED TO BE REDUCED FROM THE P R O F ITS O F THE BU S IN E S S OF THE UN D ERTAKIN G , WHIL E COMPU T IN G THE DEDUC T ION UN D ER ANY OTHER PROVISIONS UNDER HEADING C IN CHAPTER VI - A OF THE ACT , WHICH ALSO INCLUDES S.80HHC. IT IS ALSO OBSERVED THAT A SI M ILAR ISSUE HAS BEEN DECIDED EVEN BY THE HON'BLE KARNATAKA HIGH C OU R T IN FAVOU R O F T H E ASSESSEE IN TH E CA S E OF CIT V/S. MILLIPORE INDIA P. LTD. ( 341 ITR 219 ) . A L T HOUGH THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF GREAT EASTERN EXPORTS V/S.CIT ( 332 ITR 14 ) , CITED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE IS AGAINST THE ASSESSEE ON THIS ISSUE, THERE BEING NO DECISION OF THE HON'BLE JURISDICTION AL ANDHRA PRADESH HIGH COU R T ON TH E ISSUE UN D ER CONSIDERATION, WE FOLLOW THE VIEW TAKEN BY THE HON'BLE BOMBAY HIGH COURT IN TH E CA S E OF ASSOCIATED CAPSULES P. LTD.(SUPR A) AND OF THE HON'BLE KARNATAKA HIGH COURT IN TH E CA S E OF MILLIPORE INDIA P. LTD.(SUPRA) , WHICH ARE IN FA V OU R O F THE ASSESSEE , RELYING ON TH E DECISION OF THE HON'BLE SUPREME COURT IN TH E CA S E OF CIT V/S. V E GETABL E PRODUCTS LTD.(88 ITR 192) . THIS GROUND I S ACCORDINGLY ALLOWED. 6 . GROUNDS NO.4 . 1 TO 4.3 RAISED IN THE APPEAL O F TH E ASSESSEE ARE NO T PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE, AT THE TIM E O F H EA RING BEFORE US. TH E SAM E ARE ACCORDINGLY DISMI S SED AS NO T PRESSED. 7 . GROUN D S NO.4.4 TO 4.11 INVOLVE A COMMON ISSUE REL A TIN G TO TP ADJUSTMENT MADE BY TH E ASSESSING OFFICER AND SUSTAINED BY THE LEARNED CIT(A) TO THE EXTENT OF RS.1,02,47,642 IN I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 4 RESPE C T OF INTERNATIONAL TRANSAC T IONS O F THE ASSESSEE COMPANY WITH ITS AE INVOLVING EXPORT OF MANUF ACTURED GOODS, 8 . THE ASSESSEE IN THE PRE SE NT CA S E IS A COMPANY WHICH I S ENGAGED IN TH E BUSINESS O F MANUFACTURING AND TRADING OF PACKAGING MA TERIAL . THE RETURN OF IN C OM E FOR THE YEAR UN D ER CON S ID E RATION WAS FILED BY IT ON 30.10.20 04 DECL A RING TOTAL IN C OM E OF R S .40 , 19,33,216. AS NOTED BY THE ASSESSING OFFICER DURING TH E COU RS E OF ASSESSMENT PROCEEDINGS, INTERNATIONAL TRANSAC T ION S WERE ENTERED INTO BY THE ASSESSEE COMPANY WITH ITS AE INVOLVING INTER - ALIA EXPORT OF FINISHED GOODS AMOUNTING TO RS.9,22, 35,092. A REFERENCE, TH E R E FORE, WAS MADE BY HIM TO THE T RANSFER PRICIN G OFFI C ER(TPO ) UN D ER S.92CA(1) OF THE ACT, TO DETER M INE THE ARMS LENGTH PRICE (ALP ) OF THESE IN T ERNATIONAL TRANS A CTIONS AS WELL AS OTHER INTERNATIONAL T RANSACTION S EN T ERED INTO BY THE ASSESSEE COMPANY WITH ITS AE. IN THE TRANSFER P RICING STUDY REPORT FURNI S H E D BY TH E ASSESSEE , THE BENCH MARKING OF THE INTE R NATIONAL TRANS A CTION WAS D ON E BY FOLLO W IN G TH E T R ANSAC T IONS NET M ARGIN M ETHOD ( TNMM) TAKING N ET P ROFIT OVER SALES AS P ROFIT LEVEL INDICATOR (PLI). THE REL E VANT DATA PERTAINING TO THE FINANCIAL Y E ARS 2001 - 02, 2002 - 03 AND 2003 - 04 WAS USED AND 19 INDIAN COMPANIES ENGAGED IN TH E MANUFACTURE OF PACKAGING MATERIAL, I.E. STEEL STRAPPING, WERE IDENTIFIED AS COMPARABLES. SIN C E THE ARITHM E TI C M E A N OF THE NET M A RGIN OF THE SAID COMPARABLES AS WORK ED OUT AT 2.26% W A S MUCH LESS THAN THE NET MARGIN O F 16.09% EARNED BY TH E ASSESSEE COMPANY AT ENTITY LEVEL, THE PRICE CHARGED BY IT TO AE IN TH E REL E VANT INTERNATIONAL TRANSACTION WAS CLAIM E D BY THE A SSESSEE TO BE AT ARMS LENGTH. 9. THE TPO DID NO T DISPUTE THAT THE TNMM ADOPTED BY TH E ASSESSEE FOR B E NCHMARKIN G THE INTERNATIONAL TRANSAC T IONS WITH IT S AE W AS THE MOST APPROPRIATE METHOD. HE HO WE VER , DID NO T APPROVE TH E ACTION OF TH E ASSESSEE IN TAKING THE ENTITY LEVEL NET MARGIN AND I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 5 COMPARING THE SAME WITH THE MARGIN EARNED BY THE COMPARABLE S F R OM THE UNCONTROLL E D TR A NSAC T ION. A C COR D ING TO HIM, TH E M A RGIN EARNED BY TH E ASSESSEE F R OM TH E EXPORT OF MANUFACTURED GOODS TO AE ALONE SHOU LD HAVE BEEN COMPARED TO THE MARGIN EARNED F R OM TH E COMPA RA BLE UN C ON T ROLLED TR A NSAC T IONS. HE THEREFORE, BIFURCATED THE FINANCIAL RESULTS O F THE ASSESSEE COMPANY FOR THE YEAR UNDER CONSIDERATION AS UNDER (AMOUNT IN RS.) PARTICULARS DOMESTIC EXPORT AE EXPORT NON - AE SUDAN (NON - AE) MANUFACTURE TOTAL QUANTITY (MT) 24,608 2,935.67 848.26 885.89 SALES 151,54,73,729 8,94,19,590 2,59,09,742 5,01,28,840 168,09,31,901 OTHER INCOME 1,30,89,886 7,72,361 2,23,795 4,32,987 1,45,19,029 EXPORT BENEFIT 10,59,688 1,43,50,814 41,46,640 43,30,591 2,38,80,733 TOTAL INCOME 152,96,16,303 10,45,42,465 3,02,80,177 5,48,92,418 171,93,31,363 TOTAL COSTS 125,14,79,317 9,41,56,034 2,92,00,086 5,38,68,988 1,42,87,04,425 PROFIT/(LOSS) 27,81,36,986 1,03,86,731 10,80,091 10,24,430 29,06,28,238 LESS: (I)OTHER INCOME 1,30,89,886 7,72,361 2,23,795 4,32,987 1,45,19,029 (II)EXPORT BENEFIT 10,52,688 1,43,50,814 41,46,640 43,30,591 2,38,80,733 PROFIT(WITHOUT OTHER INCOME & EXPORT) 26,39,94,412 - 47,36,444 - 32,90,344 - 37,39,148 25,22,28,476 NET PROFIT / - SALES % 17.42% - 5.29% - 12.69% - 7.45% 15% NET PROFIT/ - COST % 21.10% - 5% 11.26% - 6.94% 17.65% 10. ON THE B A SIS OF THE ABO V E WORKING, TH E TPO NOTED THAT THE INTER N AL COMPARABLES IN TH E FORM OF DOMESTIC SEGMENT WAS AVAILABLE IN TH E C A S E OF THE ASSESSEE AS THE SAID SEGMENT MANUFACTURED SAME OR SIMILAR GOODS AND SOLD THE SAME IN THE DOMESTIC MARKET. IN THI S REGARD, THE OBJECTION R AISED BY THE ASSESSEE TH AT THE MARGINS ON ACCOUNT OF DOMESTIC AND EXPORT SALE SHOULD NO T BE COMP A RED AS THE P R ICE CH A RGED IN DOM E STI C MARKET WAS DIFF E REN T FROM TH E EXPO R T MARKET ON A C COUN T OF VARIOU S FACTORS I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 6 WAS NO T F O UN D SUSTAINABLE BY THE TPO. HE HELD BY RELYING ON THE OECD GU I DELIN E S ON TRANSFER P RICING THAT THE IN TE RNAL COMPARABLE S I.E. MANUFACTURING DOMESTIC SEGMENT OF THE ASSESSEE WAS THE PREFERABLE AND MOST SUITABLE COMPARABLE TO THE MANUFACTURED EXPORT SEGMENT TO AE AND AC C OR D INGLY APPLYING THE NET PROFIT TO COST RATIO O F 21.10% OF THE DOMESTIC MANUFA CT URING SEGMENT OF THE ASSESSEE COMPANY TO THE COST OF EXPORT OF MANUFACTURED GOODS AMOUN T IN G TO RS.9,41,51,979, HE DETE R MIN E D THE A R MS LENGTH PRICE O F THE IN T ERNATIONAL TRANS A C T ION S O F TH E ASSESSEE WITH ITS A E INVOLVING EXPORT OF MANUFACTUR ED GOODS OF RS.11,40,89,046 AS AGAINST RS.8,94, 19,5 9 0 CHARGED BY TH E ASSESSEE . THE DIFFERENCE OF RS.2,45,98,456 A C COR D IN G LY WAS WORKED OUT BY TH E TPO AS TRANSFER PRICING ADJUSTMENT, WHICH IS REQUIRED TO BE MADE IN RESPECT OF INTERNATIONAL T R A N S AC T ION OF THE ASSESSEE COMPANY WITH ITS AE INVOLVING EXPORT OF MANUFACTUR ED GOODS. 11 . THE ALTERNATIVE CONTENTION OF TH E ASSESSEE TO COM PARE THE MARGIN O F AE TRANSACTIONS WITH TH A T OF NON - RESIDENT UNRELATED PARTIES, B E IN G BETTER INTERNAL COMPARABLE, WAS ALSO CON S I D ERED BY THE TPO. IN THIS REGARD, H E ACCEPTED THE STAND O F TH E ASSESSEE THAT THE SE TWO SEGMENTS W E RE IN FACT BETTER COMPARABLES, P R OVI D ED T H A T THE M A TERIAL DIFFERENCES BETWEEN TH E TWO SEGMENTS ARE ADJU S TED. HE ALSO ACCEPTED THE CLAIM O F TH E ASSESSEE THAT SUCH ADJUSTMENTS ON AC C OUNT OF FREIGHT CH A RGES TO THE EXTENT OF 75 US DOLLARS PER MT AND EXTRA MATERIAL CONSUMPTION TO THE E X TENT OF 158.60 US DOLLARS PER MT ARE REQUIRED TO B E MADE. THE CL A IM O F TH E ASSESSEE FOR SUCH ADJUSTMENT ON ACCOUNT OF COM M I S SION AT TH E RATE O F 24.6% O F THE SALES, HOWEVER, WAS CON S I D ERED REASONABLE BY THE TPO ONLY TO THE E X TENT OF 12.5% AND ACC O RD INGLY, MAKING THE ADJU S TMEN T S TO THE SALE PRICE CH A RGED BY TH E ASSESSEE TO NON - RESIDENT ENTITY IN SUDAN, AT US DOLLARS 1250 PER MT, THE ADJU S TED PRICE WAS WORKED OUT BY TH E TPO AT US DOLLARS 860.15. AS THE AVERAGE PRICE CHARGED BY THE I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 7 ASSESSEE TO ITS AE WAS U S D OLLARS 641 .00, THE TRANSFER PRICING ADJUSTMENT ON THE BASIS OF THIS ALTERNATIVE ANALYSIS WAS WORKED OUT BY TH E TPO AT US DOLLARS 219.15 PER MT. SIN C E THE QUANTITY OF MAGNUS SOLD BY THE ASSESSEE COMPANY TO I T S AE DURING THE Y E AR UN D ER CON S I D ERATION WAS 2223.693 MTS, THE TRANSFER PRICING ADJU S TM E NT REQUI R ED TO MADE ON THE BASIS OF THIS ALTE R N A TIVE ANALYSIS WAS WORKED OUT BY THE TPO AT R S .2,21,24,433. ON THE B A SIS OF THE TPOS ORDER, ADDITION OF RS .2,45,98,456 WAS M A DE BY THE ASSESSING OFFICER TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF TRANSFER PRI C IN G ADJUSTMENT IN THE ASSESSMENT MADE UN D ER S.143(3) VIDE ORDER DATED 29.12.2013., 1 2 . AGA IN ST THE ORDER PASSED B Y THE ASSESSING OFFICER UN D ER S.143(3 ) , AN APPEAL W AS PREFERRED BY THE ASSESSEE B EF OR E THE LEARNED CIT(A), CHALLENGING IN T ER ALIA THE TRANSFER PRIC ING ADJU S TMENT MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ITS INTERNATIONAL TRANS A CTION S WITH AE INVOLVING EXPORT OF MANUFACTURED GOODS. DURIN G THE COURSE OF APPELL A TE P R OCEEDIN G S, TH E SAID ADDITION WAS CHALLENGED BY THE ASSESSEE BY RAISING THE FOLLOWING POINTS - 1 . T PO ERRED IN COMPUTING THE OPERATING PROFIT OF EXPORTS TO AE BY EXCLUDING EXPOR T INCENTIVES & OTHER INCOME WHICH WAS IN THE NATURE OF INTEREST, COMMISSION, LEASE RENT ON MACHINERY ETC. IT WAS CLAIMED THAT THESE INCOME WERE NOT REQUIRED TO BE EXCLUDED FROM THE OPERATING PROFITS. 2 . TPO ERRED IN ADOPTING THE PROFIT LEVEL INDICATOR AS NET PROFIT ON COST INSTEAD OF NET PROFIT ON SALES ADOPTED BY THE ASSESSEE. 3 . TPO ERRED IN REJECTING THE EXTERNAL COMPARABLES SELECTED BY THE ASSESSEE BY USING THE DATA OF EARLIER YEARS. SINCE THE DATA OF THE PREVIOUS YEAR RELEVANT TO AY 04 - 05 WAS NOT AV AILABLE AT THE TIME OF PREPARING TP DOCUMENTS, THE APPELLANT RIGHTLY USED THE DATA OF EARLIER: YEARS. 4 . TPO ERRED IN HOLDING THAT THE DOMESTIC SALES WERE THE BEST INTERNAL COMPARABLES FOR DETERMINING THE ALP. THE EXPORTISALES WERE NECESSITATED DUE TO U NUTILIZED PRODUCTION CAPACITY AND THEREFORE THE APPELLANT HAD TO EXPORT PART OF ITS PRODUCTION AT WHATEVER PRICE IT GOT, IN ORDER TO RECOVER ITS COST AND TO INCREASE THE PROFITABILITY. I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 8 5 . THE TPO ERRED IN COMPARING THE NON AE EXPORT MADE TO SUDAN ONLY. THE FINISHED GOODS EXPORTED TO SUDAN WERE OF DIFFERENT QUALITY AND WERE NOT USUALLY MANUFACTURED AND SOLD BY THE ASSESSEE. IT WAS AN EXCEPTIONAL TRANSACTION UNDERTAKEN AT A SUBSTANTIALLY HIGH PRICE OF $1250 PER MT AGAINST THE USUAL SALE PRICE, OF $641.44 PER MT. TPO ALSO ERRED IN CONSIDERING THE COMMISSION @ 12.5% WHILE THE ACTUAL COMMISSION PAID IN THIS TRANSACTION WAS @ 24.6%. 6 . TPO ERRED IN NOT ALLOWING THE BENEFIT OF VARIATION OF +/ - 5% AS PROVIDED IN S.92C(2). AR RELIED ON THE DECISION OF ITAT, DELHI IN THE CASE OF SONY INDIA PVT. LTD. 1 3 . THE LEARNED CIT(A) DID NO T AGREE WITH MOST O F THE POINTS RAISED BY THE ASSESSEE AND REJECTED THE SAME. HE, HOWEVER, AGREED WITH THE STAND OF THE ASSESSEE THAT WHIL E COMPUTING T H E OPERATING PROFIT FROM EXPO R T S TO AE , EXPORT BENEFIT S SHOULD ALSO BE CON S I DE RED AND INCLUDED IN THE PROFIT AS THEY WERE DIRECTLY RELATED TO THE EXPORTS AND THE EXPORT PRICES W E RE FIXED CON S I D ERING SUCH EXPORT BENEFITS. ACCOR D INGLY, TAKING INTO CON S I D ERATION THE AMOUNT O F EXPO R T BENEFITS RELATED TO THE EXPORT OF THE ASSESSEE CO M P A NY MADE TO I T S A E , TH E TP ADJU S TMEN T REQUIRED TO B E MADE WAS WORKED OUT BY THE CIT(A) AT R S .1,02,47,642 AS AGAINST R S . 2,45,98,456 WORKED OUT BY THE TPO. HE FURTHER NOTICED THAT WHIL E DETERMINING THE PRO F IT MARGIN OF 21.10% ON DOMESTIC SALE, TH E TPO HAD NOT CON S I DE RED THE EXPORT BENEFITS OF R S.10,52,600 RECEIVED BY TH E ASSESSEE . HE THER EF ORE, DIRE C TED THE ASSESSING OFFICER/TPO TO RECOMPU T E THE PROFIT MARGIN ON DOMESTIC SALES, AFTER CON S I DE RIN G THE EX P ORT BENEFITS AND BY APPLYING THE SAME ON TH E AE EXPORTS INCLUDING THE EXPORT BENEFITS TO RECOMPU T E TH E TRANSFER PRICIN G ADJU S TMENT REQUIRED TO B E MADE ON THIS COUNT. 1 4 . AS REGARDS THE ALTERNATIVE ANALYSIS MADE BY THE TPO, THE LEARNED CIT(A) FOUND M E RIT IN TH E CON T ENTION RAISED ON BEHALF O F TH E ASSESSEE T HA T TH E TPO WAS NO T JUSTIFIED IN CONSIDERING ONLY EXPORTS MADE TO SUDAN FOR CO M PARISON AND EXCLU D IN G OTHER NON - AE EXPORTS. HE HO W EVER , DID NO T SUBSCRIBE TO TH E VIEW OF THE ASSESSEE I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 9 T HAT EXPORTS TO S UDAN SHOULD BE EXCLUDED FROM COMPARISON DUE TO DIFFER E NCE IN QUA L ITY O F FINISHED GOODS. HE HELD THAT IN TMMM SUCH M I NOR FUNCTIONAL AND TRANSACTIONAL DIFFERENCES ARE NO T O F ANY IMPORTANCE, SIN C E NET MARGIN S ARE VERY IN TOLERANT TO SUCH D IFFERENCES. HE ACCORDINGLY DIRECTED THE ASSESSEE TO FURNI S H A COMPARATIVE STATEMENT SHOWING THE SALE PRICE OF EXPORTS MADE TO AE AND NON - AE INCLU D IN G SUDAN AND FOUND FROM SUCH WORKINGS FURNI S H E D BY TH E ASSESSEE T H A T THE EXPORT PRICE TO AE CAME TO US DOLLA RS 641 PER MT AS AGAINST EXPORT PRICE TO NON - AE WHICH CAME TO US DOLLARS 767.93 PER M T AFTER AL LOWI NG +/ - 5% VARIATION . BY APPLYING THE SAID DIFFE RE NC E TO TH E TOTAL EXPORTS OF 2,223.693 MTS MADE BY THE ASSESSEE TO ITS AE , THE ADJUSTMENT REQUIRED TO BE MAD E AS PER THIS AL T ERNATIVE ANALYSIS WAS WORKED OUT BY TH E LEARNED CIT(A) AT R S .1,28,14,302. SIN C E TH E TP ADJU S TMEN T WORKED OUT BY HIM AS PER THE M AIN METHOD FOLLOWED WAS AT R S .1,02,47,642, AFTER SOME ADJU S TM E N T S, THE LEARNED CIT(A) HELD THAT THE ALTERNATIV E ANALYSIS MERELY SUPPORT THE QUANTUM OF TP ADJU S TM E NT MADE AS P E R THE FIRST METHOD. 1 5 . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMI T TED THAT TNMM WAS TAKEN AS THE MOST APPROP R I A TE METHOD IN THE TP STUDY REPORT FURNI S H E D BY TH E ASSESSEE AND ENTITY LEVEL NET PROFIT TO SALE WAS TAKEN AS PRICE LEVEL IND I CATOR, WHI C H W ERE COMPARED WITH THE E N T ITY LE V EL MARGIN OF 19 CO MP ARABLE ENTITIES, WHI C H ARE ENGAGED IN TH E BU S IN ES S OF MANUFACTURING PACKA G ING MATE R IA L . HE SUBMI T TED THAT ALTHOUGH THE TNMM WAS ACCEPTED BY T H E TPO AS THE MOST APPR O P R I AT E METHOD FOR BENCHMARKING THE IN T ERNATIONAL TR A NSAC T IONS O F TH E ASSESSEE COMPANY WITH ITS AE INVOLVING EXPORT OF MANU FA CTURED GOODS, H E TOOK THE P R O F IT MARGIN OF THE ASSESSEE COMPANY FROM THE RELEVANT INTERNATIONAL TRANSACTION S WITH ITS AE AS WORKED OUT ON THE BASIS OF SEGMENTAL DETAILS AS PLI AND COMPARED THE SAME WITH T H E P RO F I T MARGIN O F TH E ASSESSEE COMPANY FROM I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 10 DOM E STIC SEGMENT INVOLVING SALE O F SIMILAR PRO D U C TS. HE CONTENDED THAT THIS COMP A RISON MADE BY THE TPO FOR BENCH MARKING THE REL E VANT INTERNATION AL TRAN S ACTION S WAS NO T APPROPRIATE AS THE EXPORT MADE TO AE CANNOT B E CON S I D ERED COMPA RA BLE WITH DOMESTIC SALE MADE TO NON - AE B E CAU S E THERE ARE SUBSTANTIAL DIFFERENCE S BETWEEN THESE TWO TYPES OF TRANSACTIONS BECAUSE OF EX PORT INCENTIVES, QUANTUM O F TURNOVER, HIGH COMPETITION IN THE IN T ERNATIONAL MARKET, L E VY OF DUTY BY GOVERNM E N T TO PROTECT DOMESTIC MARKET, HIGH FREIGHT COST INVOLVED IN EX PORTING, ETC. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO CON T ENDED THAT THE ASSESSEE HAD IDLE CAPACITY DURIN G THE REL E VANT PERIOD AND THE SAME WAS UTILI S ED BY MAKING EXPORTS, SIN C E DOMESTIC M A RK E T FOR ITS PRODUCTS W AS PRACTICALLY SATURATED. HE CONTENDED THAT T H E COMPARISON MADE BY TH E TPO OF THE EXPORT MADE BY TH E ASSESSEE TO AE WITH DOMESTIC SALE MADE TO TH E NON - AE ITSELF WAS NO T PRO PE R AND H E OUGHT TO HAVE COMPARED THE EXPORTS M A DE BY TH E ASSESSEE TO ITS AE WITH THE EXPORT S MADE OF SIMI L AR P R O D U C TS TO NON - AE INSTEAD OF D O MESTIC SALES MADE TO NON - AE ESP E C I ALLY WHEN SUCH EXPORTS MADE T O NON - AE WERE VERY MUCH AVAILABLE. IN SUPPO R T OF THIS CONTENTION, THE LEARNED COUNSEL F O R THE ASSESSEE RELIED ON THE FOLLOWING DECISIONS OF TRIBUNAL - ( A ) VEDARIS TECHNOLOGY (P) LIMITED V/S. ACIT ( 131 TTJ 309 )(DEL) ( B ) ITO V/S. CRM SERVICES INDIA PVT. LTD. (ITA NO.4068/DEL /2009 DATED 30.6.2011) ( C ) ARIVA INDUSTRIES LIMITED V/S. ACIT (48 SOT 418)(MUM) 16. IN ORDER TO SUB S TANTIATE HIS CA S E THAT THE EXPORT MA D E TO AE SHOULD B E COMPARED WITH EXPORTS MADE TO NON - AE, TH E LEARNED COUNSEL FO R THE ASSESSEE INVITED OU R ATTENTION TO THE REL E VANT DETAILS GIVEN AT P A GES NOS.323 TO 326 AND POINTED OUT THAT I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 11 TWO PRO D U C TS, NAMELY MAGNUS AND APEX W E RE E X PORTED BY THE ASSESSEE COMPANY TO ITS AE AS WELL AS TO NON - AE. HE CONTENDED THAT SIN C E SIMILAR PRODUCTS WERE EXPORTED BY TH E ASSESSEE COMPANY TO ITS AE AS WELL AS TO NON - AES, THE PRICE CHARGED IN TH E RELEVANT CONTROLLED TRANSACTIONS SHOULD BE COMP A RED WITH TH E P R ICE CHARGED IN NON - CONTROLL E D TR A NSAC T ION S . H E POIN TE D OUT THAT THE AVERAGE P R ICE CHARGED BY THE ASSESSEE COMPANY FO R THE EX P ORTS MADE TO NON - AE WAS RS.646 IN CA S E OF MAGNUS AND R S .568 IN CA S E OF APEX AS A GAIN S T AVERAGE PRICE OF R S .641 CHARGED TO AE IN TH E CA S E OF MAGNUS AND R S .561 CHARGED IN TH E CA S E OF APEX. 1 7 . THE LEARNED COUN S EL FOR THE ASSESSEE SUBMI T TED THAT ALTHOUGH THE TPO , AS AN AL T ERNATIVE , MADE A TR A N S FER PR I CING ANALYSIS BY CO M P A RING THE EXPORTS MADE BY THE ASSESSEE TO ITS AE WITH THE EXPORTS MADE TO THE NON - AE, H E CONSIDERED ONLY TH E EXPORTS MADE BY TH E ASSESSEE COMPANY TO NON - AE IN SUDAN, IGNORIN G THE FACT BROUGHT OUT BY THE ASSESSEE TO ITS NOTICE THAT THE TYPE OF M A TERIAL SUPPLI E D TO THE NON - AE IN SUDAN WAS DIFFERENT. HE INVITED OU R ATTENTION TO THE COPY OF THE SUBMI S SIONS MADE BEFORE THE TPO IN THI S REGARD VIDE LETTER DATED NOVEMB E R 8, 2006 PLACED AT PA G ES 329 TO 333 OF THE PAPER - BOOK, TO SHOW THAT THE M A TERIAL DIFFE RE N C ES IN TH E T RANSACTIONS INVOLVED IN THE EXPORTS TO NON - AE IN SUDAN AND THE EX PORTS MADE TO AE WERE SPECIFICALLY BROUGHT TO TH E NO T I C E O F THE TPO. HE TH E N INVITED OU R ATTENTION TO TH E R EL E VANT PO R TION OF THE TPOS ORDER AT PAGE NO.429 OF THE PAP E R BOOK TO POINT OUT THAT ALTHOUGH A D JU S TMENT ON AC C OUN T OF FREIGHT CHARGES AND EXTRA MATERIAL CONSUMED WERE ALLO W ED BY TH E TPO, WHILE MAKING COMPARISON B E TWEEN TH E PRICE CHARGED BY TH E ASSESSEE COMPANY TO NON - AE IN SUDAN AND PRICE CHARGED TO TH E AE AS CLAIMED BY THE ASSESSEE, AD J U S TMENT ON ACCOUNT OF COMMISSION W AS ALLOWED BY HIM ONLY TO THE EXTENT OF 12.5% AS AGAINST 24.16% CLAIMED BY TH E ASSESSEE . H E CONTENDED THAT SINCE THE COMMISSION I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 12 OF 24. 6% WAS ACTUALLY PAID BY TH E ASSESSEE AND THE SAME WAS TAKEN INTO CON S I DE RATION WHILE FIXING THE PRICE CHARGED TO THE NON - AE IN S UDAN, TH E RE WAS NO JUSTIFICATION IN T HE AC T ION OF TH E TPO TO ALLOW THE ADJUSTMENT ON ACCOUNT OF COMMISSION ONLY TO THE E X TENT O F 12.5%, TR E ATIN G THE S AME TO B E GENUINE OR REASONABLE. HE CONTENDED THAT GENUINENESS OR REASONABLENESS CANNOT B E A RELEVANT FACTOR, WHILE M A KI N G THE ADJU ST M E NT IN T H E TR ANS FER PRICING ANALYSIS, ESPECIALLY WHEN TH E FACT THAT THE COM M I S SION OF 24.6% ACTUALLY PAID BY TH E ASSESSEE WAS NO T DISPUTED BY THE TPO. HE CONTENDED THAT THE E XPO R TS TO NON - AE IN SUDAN IN ANY CASE CANNO T B E COMPARED WI T H T H E EXPORTS MADE TO AE KEEPING IN VIEW THE MATERIAL DIFF ER EN C ES SPECIFICALLY POIN TE D OUT BY TH E ASSESSEE , AN D S IN C E THERE WERE OTHER TRANSACTION S O F EXPORT OF SIMILAR PRODUCTS MA D E BY THE ASSESSEE T O NON - AES IN OTHER COUNTRIES, THE INTERNATIONAL TRAN SACT ION S O F TH E ASSESSEE COMP A NY WITH THE AES SHOULD B E COMPARED WITH THE OTHER INTERNATIONAL TRAN S AC T ION S WITH NON - A ES. 1 8 . THE LEARNED DEPARTMENTAL REPRESENTATIVE ON TH E O T H E R HAND, STRONGLY SUPPO R TED THE O R DER O F THE TPO COMPARING THE IN T ERNATIONAL TRANSAC T ION S O F THE ASSESSEE CO MPA NY WITH ITS A E WITH THE SI M IL A R TRANSACTION S MADE IN DOM E STIC SEGMENT WITH NON - AES. HE CONTENDED THAT SIN C E THE PR OD U C TS MANUFACTURED AND S OLD IN BOTH THESE TYPES OF TRANSACTIONS ARE UNDISPUTEDLY SIMILAR, TH E RE IS NOTHING WRONG IN COMP A RIN G TH E SE TR A N S ACTION S FOR THE PU R PO S E OF TRANSFER PRICING ANALYSIS AS DON E BY THE T PO. HE SUBMI T TED THAT EVEN TH E STAND O F T H E ASSESSEE TO COMPARE THE EXPORTS TO AE WITH EXPORTS TO NON - AE WAS ALSO CON S I D ERED BY THE TPO AND IN TH E ALTE R NATI V E ANALYSIS MADE IN THIS REGARD, BASED ON TH E CO M PARISON MADE BE T WEEN THE E XPO R TS MADE TO AE WITH THE EXPORTS MADE BY TH E ASSESSEE TO NON - AE , HE FOUND THAT I T SUPPORTS THE TP ADJU S TM E N T WORKED OUT BY HIM BY COM P ARING THE IN T ERNATIONAL I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 13 TRAN S ACTION S O F TH E ASSESSEE COMPANY WITH ITS AE TO THE DOMESTIC TR A NSACTION S MADE BY THE ASSESSEE WITH ITS NON - AE. 1 9 . AS REGAR DS THE ADJU S TMENT ALLOWED BY THE TPO ON AC C OUNT OF COMMI S SION WHILE MAKING SUCH ALTERNATIVE WORKING ONLY TO THE EXTENT OF 12.5% AS AGAINST 24.6% CLAIMED BY TH E ASSESSEE , THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED T H A T THE R ATE O F 1 2.5% ALLOWED BY THE T PO WAS FOUND TO BE AT ARMS LENGTH AND AS RIGHTLY HELD BY HIM , UNREASONABLE OR EXCESSIVE COMMISSION CANNOT BE CON S I DE RED W HILE MAKING THE TR A NS F ER PRICING ANALYS I S . 20 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEV ANT MATERIAL AVAILABLE ON RECORD. IT IS OB S ERV E D THAT THE TP ADJU S TM E N T IN QUESTION WAS WORKED OUT BY THE TPO BY COMPARING THE INTERNATIONAL TRANS AC TION S O F TH E ASSESSEE COMPANY WITH ITS AE INVOLVING EXPORT OF MANUFACTURED GOODS WITH THE SA LES OF THE MA NUF AC TURE D GOODS MADE IN DOMESTIC SEGMENT. ALTHOUGH THE PRODUCTS SOLD/EXPORTED IN TH E SE TRANS A CTION S W E RE SIMILAR AS POINTED OUT BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE FIND MERIT IN THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT K E EPI NG IN VIEW THE MATERIAL DIFFERENCES SUCH AS THE QU A NTUM OF EXPORT INCENTIVES, LEVEL OF CO M PETITION, CORRESPONDING FREIGHT COST INVOLVED ETC., AFFECTING SUBST A NTIALLY THE PROFITABILITY O F EXPORT TRANSACTIONS VIS - - VIS DOMESTIC TRAN S AC T ION S , IT WOULD NO T B E FAIR AND PROPER TO CO M PARE THE E X PORTS MADE BY TH E ASSESSEE TO ITS AE WITH THE SA LES MADE BY THE ASSESSEE COMPANY TO N O N - AE S IN DOMESTIC SEGMENT, ESPECIALLY WHEN SPECIFIC INSTANCES OF EXPORT O F SIMI L AR PRODUCTS TO OVERSEAS NON - AES WERE AVAILABLE. AS A MA T TER OF FACT, THE TPO ALSO MADE AN ALTERNATIVE ANALYSIS BY COMP A RIN G THE EXPORTS MADE BY THE ASSESSEE COMPANY TO ITS AE WITH THE EXPORTS MADE TO NON - AE S . WHILE DOING THIS EXERC I SE, HE HOW E VER , TOOK INTO ACCOUNT ONLY THE EXPO R TS MADE BY TH E ASSESSEE COM PANY TO THE I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 14 NON - AE IN SUDAN, WHICH IN OUR OPINION, WAS NO T CORR E CT B E CAU S E THE MATERIAL EXPO R TED BY TH E ASSESSEE COMPANY TO NON - AE IN SUDAN WAS OF DIFF ER ENT QUALITY AND TH E RE WERE OTHER M A TE R IAL DIFFERENCES ALSO. THIS POSITION IN FACT WAS ACCEPTED EVEN B Y THE TPO, WHEN HE ALLOWED ADJU S TM E N T OF 158.60 US DO LLARS P ER MT TO THE PRICE CHARGED BY TH E ASSESSEE COMPANY TO THE NON - AE IN SUDAN ON ACCOUNT OF EXTRA MATE R IAL CONSUMPTION AS WELL AS A FURTHER ADJU S TM E N T OF 75 US DOLLARS PER M T ON ACCOUNT OF EXTRA FREI G HT CHAR G ES. HE ALSO ALLO W E D AN ADJUSTMENT O F 12.5% ON ACCOUNT OF COMMISSION ON SALES MADE BY THE ASSESSEE COMPANY TO THE NON - AE IN SUDAN AS AGAINST THE ADJU S TM E N T O F 24.6% CLAIMED BY TH E ASSESSEE COMPANY AS THE COMMISSION ACTUALLY PAID. THESE ADJU S TM E N T S ALLO W ED BY THE TPO HIMSELF CLEARLY SHOW THAT THERE WERE MATERIAL DIFFE RE NCES IN TH E TR A N S ACTION S INVOLVING E X PO R TS MADE BY TH E ASSESSEE COMPANY TO ITS AE AND EXPORTS MADE BY IT TO THE NON - AE IN SUDAN AND THE BENCH MARKING DO N E BY THE TPO BY COMPARING THE SE TR A N S AC T ION S IN TH E COU R SE OF ALTERNATIVE ANALYSIS WHICH ENTAILED ADJU S T ME N T S ON ACCOUNT O F M A TERIAL DIFFER E NCES , WAS NO T FAIR AND PROPER. 21. AS SUBMITTED BY THE LEARNED COUN S EL F OR THE ASSESSEE BEFORE US, MAINLY TWO PRO D U C TS VIZ. MAGNUS AND APEX WERE EXPORTED BY THE ASSESSEE COMPANY TO ITS A E DURING THE YEAR UN D ER CON S I DE RATION AND SIMILAR PRODUCTS WERE ALSO EX P O R TED TO NON - AE IN SOME COUNTRIES OTHER THAN SUD A N. HE HAS ALSO FURNISHED DETAILS O F THESE EXPORTS MADE AT PAGES 323 TO 3 26 OF HIS PAPER - BOOK, WHICH CLEARLY SHOW THAT INSTANCES OF EXPORT OF SIMILAR PRODUCTS TO NON - AES WERE AVAILABLE, AND THE BENCH MARKIN G OF THE IN T ERNATIONAL TR A N S AC T ION S O F THE ASSESSEE COMPANY TO ITS AE INVOLVING EXPORT OF SIMILAR PRODUCTS CAN APPROPRIATEL Y BE DONE BY TAKING THESE COMPARABLES. IN THIS REGARD, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED T H A T THE AVERAGE PRICE CHARGED BY THE ASSESSEE I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 15 COMPANY FOR THE EXPORTS MADE TO NON - AE WAS RS.646 IN THE CA S E OF MAGNUS AND RS.556 IN THE CASE OF APEX AS AGAINST AV E RAGE PRICE OF RS.641 IN THE CASE OF MAGNUS AND R S .561 IN THE CA S E OF APEX CHARGED TO AE . IT IS HO W EVER , OBSERVED THAT TH E SE AVERAGE PRICES A RE W O R K ED OUT BY TH E ASSESSEE TAKING ALL THE TRANSACTION S ENTERED INTO BY THE ASSESSEE DURING THE YEAR UN D ER CONSIDERATION WHICH IS NOT PROPER. FIRST OF ALL, TAKING THE AVERAGE OF THE PRICES CHARGED BY THE ASSESSEE TO ITS NON - AE IN THE REL E VANT INTERNATIONAL TR A NSACTION S FOR THE PU R PO S E OF COMP A RABILITY ANALYSIS I S NO T PERMITTED UN D ER THE INDIAN TRAN S FER P RICING RULES. WHAT THE REL E VANT PROVISION S STIPUL A TE IN THI S REGA R D IS THAT W H E RE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO B E THE ARITHMETIC MEAN OF SUCH PRICES AND THEN SUCH ARITHMETIC MEAN BEIN G THE AVERAGE PRICE IS TO BE COMPARED WITH TH E P RICE CHARGED BY THE ASSESSEE IN TH E RELEVANT IN T ERNATION A L TRAN S ACTION S WITH ITS AE. WE THEREFORE, SET ASIDE THE I M PU G N E D ORDER OF THE LEARNED CIT(A) ON THIS I S SUE AND R E STORE THE MAT T ER TO THE FIL E O F THE ASSESSING OFFICER/TPO WITH A DIRECTION TO DO THE EXE R CISE OF TRAN S FER PRICING ANALYSIS AFR E SH BY COMP A RIN G THE AVERAGE PRICE (ARITHMETIC MEAN) CHARGED BY THE ASSESSEE COMPANY TO ITS NON - AES OTHER THAN IN SUDAN WITH THE PRICE CHARGED BY THE ASSES SEE COMPANY TO I T S AE F OR THE SIMILAR PRO D U C TS. THE AO/TPO SHALL DETERMINE THE ARMS LENGTH PRICE BY TAKING THE ARITHMETIC MEAN OF THE PRICES CHARGED BY THE ASSESSEE COMPANY TO ITS NON - AES AND APPLY TH E SAME TO THE RELE V ANT INTERNATION A L TR A N S ACTION S O F T H E ASSESSEE COMPANY TO I T S AE, IN ORDER TO DETERMINE THE TRANSFER PRICING ADJU S TM E NT, IF ANY, THAT IS REQUI R ED TO B E MADE ON ACCOUNT OF THESE TR A NSA CT IONS. GROUN D S NO.4.4 TO 4.11 ARE ACCOR D INGLY TR E ATED AS ALLOWED FOR STATI S TICAL PU R PO SE S. 22 . ON THIS VERY ISSUE RELATING TO TP ADJUSTMENT, REVENUE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL - I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 16 1 . CIT(A) HAS ERRED IN HOLDING THAT THE EXPORT BENEFITS CREDITED TO THE P&L ACCOUNT SHOULD BE CONSIDERED IN ARRIVING AT THE ADJUSTMENT TO BE MADE TO THE ARMS LENGT H PRICE. EXPO R T BENEFITS ARE IN D I R ECT BENEFITS AND THERE IS NO EVI D ENCE THAT TH E EXPORT PRICES ARE FIXED CONSIDERING TH E SE BENEFITS. IF THE SAME LOGIC IS EXTENDED, DEDUCTION UN D ER VIA AND EXEMPTION UNDER SEC.10A/B HAVE ALSO TO BE CONSIDERED IN ARRIVING AT THE PORT PRICE. 2 . FOR SIMILAR REASONS, CIT(A)S DIRECTION T H A T PROFIT MARGIN AS DOMESTIC SALES SHOULD BE REWORK E D AFTER WORKING THE DEEMED EXPORT BENEFITS IS NO T ACCEPTABL E . 3 . CIT(A) HAS E RRED IN HOLDING THAT + 5% VARIATION IN TERMS OF PROVISO TO SEC.92(2 ) SHOULD B E ALLOWED. IT IS APPLICABLE ONLY IN CASES WH E RE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPRO0RIATE METHOD. BO TH THE ASSESSEE AND T PO OFFICER HAD USED TNMM METHOD TO DETERMINE ALP. SO, NO TWO APPROP R I A TE METHODS HAVE BEEN USED TO ARRIVE AT ALP TO CONSIDER + 5% VARIATION FROM THE ARITHMETIC MEAN OF THE PRICES ARRIVED IN TWO METHODS. 4. . 23 . KE E PIN G IN VI E W OUR DECISION RENDERED ABOVE RESTORING THE ISSUE RELATING TO TP ADJU S TMENT THAT IS REQUIRED TO BE MADE IN RESP E CT OF IN TE RNATIONAL TR A N S AC T ION S O F TH E ASSESSEE COMP AN Y WITH ITS AE INVOLVING EXPORT OF MANUFACTUR ED GOODS TO THE FILE O F THE AO/TPO, FOR DECIDING THE SAME AFRESH, AS PER THE SPECIFIC DIRECTION S GIVEN BY US, THE I S SUES RAISED BY TH E R E VEN U E IN ITS APPEAL HAVE BECOME INFRUCTUOUS. WE THEREFORE, DO NO T CON S I D ER IT NECESSARY OR EXPEDIENT TO ADJU DI CATE UPON TH E SAME SEPARATELY. BEING INFRUCTUOUS, GROUNDS OF THE REVENUE IN ITS APPEAL ARE DISMISSED. 2 4 . GROUNDS NO.4.12 TO 4.19 OF THE ASSES SEES APPEAL INVOLV E A COMMON ISSUE R E LATING TO TP AD J USTMENT OF R S .20,60,722 MADE BY THE ASSESSING OFFICER/ TPO AND CONFIRMED BY THE LEARNED CIT(A) ON AC C OUN T O F IN TE RNATIONAL TR A N S ACTION S O F THE ASSESSEE COMPANY WITH ITS AE INVOLVING PAYM E N T OF AGENCY CO MMISSION , W HIL E THE ISSUE INVOLVED IN G R OUND S NO.5 AND 5.1 OF TH E ASSESSEE S APPEAL RELATES TO DISALLOWANCE OF RS.2, 70 , 42 4 M A DE BY THE I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 17 ASSESSING OFFICER AND CONFIRMED BY THE LEARNED CIT(A) ON ACCOUNT O F P A YM E N T O F AGENCY COMMISSION TO M/S. AGABNA ALARABY INTERNATIONAL COMPANY LTD.(AAICL) . 2 5 DURING THE Y E AR UN D ER CON S I DE RATION, TH E ASSESSEE COMPANY HA D P A ID RS.20,60,722 ITS AE , M/S. SIGNODE SYSTEM GMBH , GERMANY AS COMMISSION. IN TH IS REGARD, EXPLANATION OFFERED IN TH E TP REPORT FURNISHED BY THE ASSESSEE WAS THAT IN THE ABSENCE OF ANY MARKETING EXECUTIVE/MANAGER SPECIFICALLY AP P O I N T ED IN SUDAN, TH E SUPPLY ORDERS FROM SUDAN C OULD BE PROCURED ONLY B E CAU S E OF MARKET SUPPORT FROM THE AE. IT WAS STA T ED THAT A COMMISSION OF US DOLLARS 50 PER MT W AS PAID TO THE AE FOR SUCH ACTIVE SUPPORT, WHICH AMOUNTED TO A NOMINAL 4% OF THE EXPORT ORDER VALUE. TH E ASSESSEE , HO WE VER, EXPRESSED ITS INABILITY TO PROVIDE ANY COMPARABLE CASES OF COMMISSION PAID FOR MARKET SUPPORT SERVI C ES. IN THI S REGARD, I T WA S FOUND B Y TH E T PO THAT A FURTHER COMMI S SION OF 20.6% WAS PAID BY THE ASSESSEE FOR PROCURING THE SAME E X PO R T ORDER TO TWO DIFFERENT PAR T IES LOCATED IN SUDAN AND BANGLADESH. HE ALSO NO T ED T HAT THE ASSESSEE COULD NO T PRODUCE ANY COGENT EVIDENCE TO SUPPO R T ITS CL A IM T H AT THE AE IN FACT H A D RENDER E D ANY SERVI C ES IN P R OCURIN G THE ORD E R F RO M SU D AN IN ORDER TO JUSTIFY THE PAYM E NT O F COMMISSION. IN TH E AB S EN C E OF ANY SUCH EVI D ENCE, TH E ARMS LENGTH PRICE OF TH E REL E VANT TR A N S ACTION OF THE ASSESSEE COMPANY WITH I T S AE INVOL V IN G PAYM E N T OF COMMI S SION WAS TAK E N BY THE TPO AT NIL AND THE TP AD J U S TM E N T REQUIRED TO BE MADE ON THI S COUNT WAS WORKED OUT BY HIM AT RS.20,60,722. ACCORDIN G LY, THE ASSESSING OFFICER MADE THE ADDITION OF THE SAID AMOUNT TO TH E TOTAL IN C OM E O F TH E ASSESSEE ON ACCOUNT OF TP ADJU S TM E N T RELATING TO TH E IN TE RN A TIONAL TR A N S ACTION O F THE ASSESSEE COMP A NY WITH ITS AE INVOLVING PAYMENT O F COMMISSION. 2 6 . IN THE PROFIT & LOSS ACCOUNT FIL E D ALONGWITH TH E RETURN OF INCOME, A SUM OF RS.1,76,32,771 WAS DEBI T ED BY THE ASSESSEE ON I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 18 AC C OUN T OF COMMISSION PAID ON SALES. DURIN G TH E COU R SE OF ASSESSMENT PROCE E DIN G S, THE CLAIM O F TH E ASSESSEE FOR DEDUCTION ON A C COUN T O F THI S COMMISSION WAS EXAMINED BY THE ASSESSING OFFICER. O N SUCH EXAMINATION, H E FOUND TH A T TH E CLA IM O F TH E ASSESSEE FOR SALES COMMISSION TO TH E EXTENT OF R S .1,73,62,347 WAS DULY SUPPO R TED BY THE REL E VANT DOCUMENTARY EVIDENCE, AND THE BALAN C E AMOUNT FOR RS.2,70,424 CLAIM E D TO BE P A I D ON AC C OUN T OF COMMI S SION, H O W EVER, WAS NO T SUPPO R TE D BY PROPER DOCUM E N T ARY EVIDENCE. HE THER E FOR E , DISALLOWED THE CL A IM OR TH E ASSESSEE FOR COMMI S SION TO TH E E X TENT OF RS. 2,70,424. 2 7 . THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF TP ADJUSTMENT IN REL A TION TO TH E INTERNATIONAL TR A N S ACTION S W ITH AE INVOL V IN G PAYM E N T O F COMMISSION AMOUN T IN G TO R S . 20,60, 722 AND DISALLOWANCE OF COMMISSION OF R S . 2,70, 42 4 WAS CH A LL E N G ED BY THE ASSESSEE IN TH E APPEAL FILED BEFORE TH E LEARNED CIT(A), AND A F TER CONSI DE RIN G TH E SUBMI SS IONS M A DE BY TH E ASSESSEE AS WELL AS THE MATE R IAL AVAILABLE ON RECORD, THE LEARNED CIT(A) CONFIRMED BOTH THESE ADDITIONS FOR THE FOLLO W IN G REASON S GIVEN BY TH E CIT(A) IN PARAS 9.3 TO 9.7 OF HI S IMPUGNED ORDER - 9.3 I HAVE PERUSED THE COPIES OF THE RELEVANT AGREEMENTS AND OTHER MATERIA L PLACED ON RECORD. THE FACTS OF THE ISSUE ARE THAT A TENDER WAS FLOATED BY SUDAN GEZEIRA BOARD (SGB) IN JULY, 2003 FOR SUPPLY OF STEEL STRAPPINGS. THE BID OF M/S. GOLDEN FIBRE TRADE CENTRE LIMITED (GFTCL) WAS ACCEPTED BY SGB AND THE ORDER WAS PLACED ON THEM. GFTCL ENTERED INTO A CONTRACT WITH THE ASSESSEE ON 22/10/.2003 BY WHICH ASSESSEE AGREED TO SUPPLY THE ENTIRE GOODS TO SGB AND ALSO AGREED TO PAY A COMMISSION OF $ 200 PER MT TO GFTCL. IT IS MENTIONED IN ARTICLE - 9 OF THE AGREEMENT DATED 22/10/2003 WITH GFTCL THAT LATER ACTED AS AN AGENT OF ASSESSEE COMPANY FOR PROCURING THE SAID EXPORT ORDER. THE COMMISSION WAS PAID FOR ITS SERVICES IN PROCURING THE ORDER AND CLOSING THE DOCUMENTATION. 9.4 THE AGREEMENT WITH M /S. AGABNA ALARABY INTERNATIONAL COMPANY LTD.(AAICL)WAS DATED 22/10/2003 BUT SIGNED ON 6/03/2004 BY AAICL. THE AGREEMENT STATES THAT AAICL WAS APPOINTED AS THE ASSESSEE'S AGENT FOR SUPPLIES TO SGB FOR ONE YEAR EFFECTIVE FROM 22/10/2003. IT FURTHER PROV IDED FOR PAYMENT OF COMMISSION OF $57.5 PER MT AGAINST ALL SALES MADE TO SGB. AAICL WAS SUPPOSED TO PROCURE ORDERS FROM SGB I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 19 AND TO PROMOTE THE SALE OF PRODUCTS OF ASSESSEE. 9.5 THE AGREEMENT WITH M/S. SIGNODE GMBH , FILED BY THE ID. AR (PAGE.110 - 111 OF PAPER BOOK) IS UNDATED AND NOT SIGNED BY ANYONE ON BEHALF OF M/S. SIGNODE GMBH . IN FACT THE DOCUMENT FILED BY THE AR IS AN UNDATED LETTER ADDRESSED TO M/S. SIGNODE GMBH STATING THAT IT WAS APPOINTED AS THE APPELLANTS AGENT FOR SUPPLIES MADE TO SGB. THE AGENCY WAS VALID FOR ONE YEAR EFFECTIVE FROM 22/10/2003 AND THE COMMISSION WAS PAYABLE @ $ 50 PER MT AGAINST ALL SALES MADE TO SGB. M/S. SIGNODE GMBH WAS SUPPOSED TO PROCURE ORDERS FROM SGB AND TO PROMOTE THE SALE OF PRODUCTS OF THE ASSESSEE. 9.6 IT IS THUS EVIDENT FROM THE PERUSAL OF THE AFORESAID AGREEMENTS THAT THE COMMISSION WAS PAID TO ALL THE THREE CONCERNS IN RESPECT OF SAME EXPORT ORDER FROM SGB. IT IS EVIDENT FROM THE CONTRACT WITH GFTCL THAT THE CONTRACT WAS AWARDED TO GFTCL AS AN AGENT OF THE ASSESSEE, HENCE COMMISSION PAYN;ENT CAN BE JUSTIFIED FOR THE SERVICES RENDERED BY GFTCL IN PROCURING THE ORDER. HOWEVER, THERE IS NO EVIDENCE ON RECORD THAT ANY SERVICES WERE RENDERED BY O THER TWO CONCERNS NAMED AACL & SIGNODE GMBH . DURING THE APPEAL PROCEEDINGS, THE ID. AR WAS GIVEN A SHOW CAUSE NOTICE THAT WHY THE PAYMENTS MADE TO BOTH AAICL AND M/S. SIGNODE GMBH SHOULD NOT BE DISALLOWED, BEING NOT GENUINE PAYMENTS AND NOT INCURRED WHOL LY & EXCLUSIVELY FOR THE BUSINESS PURPOSES OF THE ASSESSEE IN TERMS OF S.37(1) OF THE ACT. THE ID. AR FILED CERTAIN PHOTOCOPIES OF E - MAIL ALLEGEDLY RECEIVED FROM AAICL AND SIGNODE GMBH . BUT, NEITHER THE VERACITY OF THESE EVIDENCES WERE PROVED NOR THESE EVIDENCES SUBSTANTIATE THAT THE SAID EXPORT ORDER FROM SGB WAS PROCURED DUE TO SERVICES RENDERED BY THESE TWO CONCERNS. THE CIRCUMSTANTIAL EVIDENCES FURTHER INDICATE THAT THE TRANSACTIONS WITH THESE TWO CONCERNS WERE NOT GENUINE EGO AGREEMENT WITH AAICL WAS SIGNED ON 6/3/2004 IE MUCH AFTER THE CONTRACT WAS AWARDED BY SGB TO GFTCL AND IN TURN TO ASSESSEE, WHILE NO AGREEMENT WAS SIGNED BY SIGNODE GMBH . IT IS ALSO NOTICED THAT THE COMMISSION WAS NOT PAID TO M/S. SIGNODE GMBH BY TRANSFER OF FUNDS BY CASH OR CHEQUE. THE SAME WAS ADJUSTED AT THE YEAR END AGAINST THE IMPORTS MADE BY THE ASSESSEE FROM M/S. SIGNODE GMBH . IT IS A SETTLED POSITION OF LAW THAT WHERE ASSESSEE IS CLAIMING ANY EXPENSES AS ALLOWAB LE U/S 37(1) OF THE ACT, THE BURDEN IS ON HIM TO PROVE THAT THE SAME WERE INCURRED WHOLLY AND EXCLUSIVELY FOR BUSLNESS PURPOSES. IT IS NOT ON THE ASSESSING OFFICER TO PROVE IT OTHERWISE WHEN THE ASSESSEE HAS CLAIMED COMMISSION EXPENSES, THE ONUSFVINQ O N HIM TO PROVE THAT THE SERVICES WERE RENDERED BY THE SAID COMMISSION AGENTS. MERE AGREEMENT OR CONFIRMATION OR THE PAYMENTS OF COMMISSION BY ACCOUNT PAYEE CHEQUES, IS NOT A CONCLUSIVE PROOF THAT ANY SERVICES WERE ACTUALLY RENDERED BY THE COMMISSION AGE NT WHO EARNED THAT COMMISSION. IT HAS BEEN HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF LAXMIRATAN COTTON MILLS CO. (73 ITR 634) THAT THE BURDEN IS ON THE ASSESSEE TO PROVE THAT SERVICES WERE RENDERED BY THE COMMISSION AGENT. AGAIN IN THE CASE OF L AXMINARAYAN MADANLAL (86 ITR 439 IT WAS HELD BY TH E H ON BLE SUPREME COURT THAT THE MERE EXISTENCE OF AN AGREEMENT BETWEEN TH E ASSESSEE AND ITS SEL L ING AGENTS OR PAYM E N T OF CERTAIN AMOUN T S AS COMMISSION, ASSUMING THERE WAS SUCH PAYMENT, DOES NOT BIND THE INCOME - TAX OFFICER TO HOLD THAT THE PAYMENT WAS MADE EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS. ALTHOUGH THERE MIGHT BE SUCH AN AGREEMENT IN EXISTENCE AND THE PAYMENTS MIGHT HAVE BEEN MADE, IT IS STILL OPEN I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 20 TO THE INCOME - TAX OFFICER TO CONSIDER THE RELEVANT FACTS AND DETERMINE FOR HIMSELF WHETHER THE COMMISSION SAID TO HAVE BEEN PAID TO THE SELLING AGENTS OR ANY PART THEREOF IS PROPERLY DEDUCTIBLE UNDER SECTION 37( 1) OF THE ACT. SIMILARLY, IN ANOTHER DECISION GIVEN IN THE CASE OF NUND AND SAMONT CO. PVT. LTD VS CIT (78 ITR 268) BY HON'BLE SUPREME COURT, IN THE ABSENCE OF EVIDENCE RELATING TO DUTIES OF THE DIRECTORS AND THE SERVICES RENDERED BY THEM, THE MANNER IN WHICH THE PROFITS OF THE ASSESSEE WERE ENHANCED AND THE BENEFITS DERIVED BY THE ASSESSEE IN CONSEQUENCE OF SERVICES RENDERED BY THEM, THE DISALLOWANCE OF REMUNERATION PAID TO THE DIRECTORS WAS UPHELD. THIS PRINCIPLE IS FURTHER EXPLAINED BY HON'BLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. TRANSPORT CORPORATION OF INDIA ITD., (256 ITR 701), WHEREIN HON'BLE JURISDICTIONAL HIGH COURT OBSERVED AS UNDER : - (AT PAGES 706 - 707 OF 256 ITR). 'THE BURDEN OF PROVING THAT A PARTICULAR EXPENDITURE HAS BEEN LAID OUT OR EXPENDED WHOLLY AND EX CLUSIVELY FOR THE PURPOSES OF BUSINESS SO THAT THE ASSESSEE MAY BE ENTITLED TO CLAIM DEDUCTION IS ON THE ASSESSEE. THIS POSITION IS WELL SETTLED BY THE JUDGMENTS OF THE APEX COURT IN CIT VS. CALCUTTA AGENCY LTD. (1951) 19 ITR 19I AND CIT VS. IMPERIAL CHEMICAL INDUSTRIES [INDIA] (P) LTD., [1969] 74 ITR 17. THE MERE OBJECT OF INCURRING EXPENDITURE IS NOT DECISIVE WHETHER IT IS OF A CAPITAL NATURE OR REVENUE NATURE. THEREFORE, THE ONUS IS ON THE ASSESSEE TO PROVE, INTER ALIA, THAT THE ITEM OF EXPENDITURE IN QUESTION FOR ADMISSIBILITY TO DEDUCTION IS NOT IN THE NATURE OF CAPITAL EXPENDITURE. FURTHER, MERE PAYMENT BY ITSELF WOULD NOT ENTITLE THE ASSESSEE TO DEDUCTION OF THE SAID EXPENDITURE UNLESS THE SAME WAS PROVED TO BE PAID FOR COMMERCIA L CONSIDERATIONS. THE ONUS OF PROOF IS ALWAVS UPON THE ASSESSEE. IT CANNOT BE SAID THAT EVEN IF THE TAXPAYER DOES NOT PRODUCE ANY EVIDENCE IN SUPPORT OF THE CLAIM. FOR DEDUCTION, THE AO HIMSELF INDEPENDENTLY IS TO COLLECT EVIDENCE AND DECIDE THAT THE D EDUCTION CLAIMED IS BASELESS HAVING REGARD TO THE LEGITIMATE BUSINESS NEEDS OF THE ASSESSEE, AS THE TRIBUNAL SEEMS TO THINK IN THE PRESENT CASE. IT IS FOR THE TAXPAYER TO ESTABLISH BY EVIDENCE THAT A PARTICULAR ALLOWANCE IS JUSTIFIED. BUT, AS HELD BY T HE SUPREME COURT IN CIT VS C. PAREKH AND CO. (INDIA) LTD. (1956) 29 ITR 661 WHETHER AN ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW RELATING THERETO, AND NOT ON THE VIEW WHICH HE MIGHT TAKE OF HIS RIGHTS. AT THE TIME, THE ONUS IS ON THE ASSESSEE TO ESTABLISH THAT THERE ARE FACTS IN EXISTENCE WHICH ENTITLE IT TO A DEDUCTION AND IT IS FOR THE ASSESSEE TO ADDUCE NECESSARY EVIDENCE IN THIS REGARD. THEREFORE, IF THE ASSESSEE FAILS TO PLACE SUFFICIENT MATERIA L, HE IS NOT ENTITLED TO CLAIM THIS ALLOWANCE UNDER SECTION 37(1) OF THE ACT. IN CIT VS. CHANDRAVILAS HOTEL (1987) 164 ITR 102 (GUJ.), IT IS HELD THAT IF THE EXPENDITURE IS DOUBTED BY THE ASSESSING AUTHORITY, IT IS THE DUTY OF THE ASSESSEE TO PROVE BY LEADING EVIDENCE THAT THE EXPENDITURE WAS IN FACT, INCURRED'. I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 21 RELIANCE IS ALSO PLACED ON THE DECISIONS IN VISHNU AGENCIES (P.) LTD. V. CIT [1979} 117 ITR 754 (CA!), RAMDAS RAMLAL V. CIT [1983} 139 ITR 620(MP), 149 ITR256(MAD) , ESS ESS KAY ENGG . CO. (P.) LTD. V. CIT [1985} 151 ITR 636(P&H) AND DECISION OF ITAT HYDERABAD IN THE CASE OF SMT. PUSHPA AGARWAL(ITA NO. 110/HYD/2005, ORDER DATED 30 - 09 - 2005). THE RATIO OF THE ABOVE DECISIONS MAKES IT CLEAR THAT THE ALLOWABILITY OF AN EXPENDITURE DEPENDS NOT MERELY ON AN AGREEMENT BETWEEN THE ASSESSEE AND ANOTHER PARTY AND CONSEQUENT PAYMENTS MADE BY THE ASSESSEE, BUT ON THE EVIDENCE OF SPECIFIC SERVICES RENDERED BY THE PAYEE RESULTING INTO BENEFIT TO THE ASSESSEE, IN ABSENCE OF WHICH THE CLAIM OF EXPENDITURE CANNOT BE ALLOWED. 9.7. IN VIEW OF THE ABOVE DISCUSSION, I HOLD THAT THE COMMISSION PAYMENTS MADE TO AAICL & M/S. SI G NODE GMBH WERE NOT ALLOWABLE AS 'BUSINESS EXPENSES' AS THE. SAME WERE NOT INCURRED WHOL LY AND EXC L USIVELY FOR BUSINESS PURPOSES. SINC E THE SAID PAYMENTS WERE HELD AS NOT ALLOWABLE AT ALL AS BUSINESS EXPENSES, THERE IS NO NEED TO DETERMINE THE ALP IN RESPECT OF THE SAID INTERNATIONAL TRANSACTION. THE AO IS DIRECTED TO MAKE FURTHER DISALLOW ANCE IN RESPECT OF PAYMENT MADE TO AAICL OVER AND ABOVE THE ADJUSTMENT MADE IN RESPECT OF PAYMENT MADE TO M/S. SIGNODE GMBH . 28 . THE LEARNED COUN S EL FOR THE ASSESSEE S UBMI T TED THAT T H E CL A IM O F TH E ASSESSEE FOR COMMISSION PLAID TO ITS AE AMOUNTING TO R S . 20,60,722 WA S TREATED BY TH E TPO AS NOT GENUINE AND ARMS LENGTH PRICE OF TH E SAME TH E R E FORE , WAS TAKEN BY HIM AT NIL, WORKING OUT TH E TP ADJUSTMENT ON THI S COUNT B E IN G THE ENTIRE AMOUNT O F COMMI S S ION PAI D BY THE ASSESSEE TO ITS AE. HE SUBMI TTE D T HAT THE LEARNED CIT(A) CONFIRMED THIS TP ADJU S TM E N T MADE BY TH E AO/TPO AS WELL AS THE DISALLOWANCE MA D E ON AC C OUNT OF COMMISSION PAI D TO OTHER CONCERN AMOUN T IN G TO R S . 2,70,424 , HOL D IN G TH A T IN THE ABS E NCE OF SUFFICIENT DOCUM E N T ARY EVIDENCE PRODUCED BY TH E ASSESSEE TO ESTABLISH THE SERVI C ES REN D ERED BY THESE TWO PARTIES, THE CLAIM FOR DEDUC T ION ON ACCOUNT OF THESE AMOUNTS OF COMMISSION P AID TO THEM CANNOT BE ALLOWED. IN THI S RE G ARD, HE INVITED OU R ATTENTIO N TO THE SUBMI S SION S MADE BY THE ASSESSEE B E FORE THE LEARNED CIT(A) JU S TIFYING ITS CLAIM FOR DEDUC T ION ON ACCOUNT O F COMMISSION PAI D TO THESE TWO PARTIES AS WELL AS DOCUMENTARY EVI D ENCE PLACED AT PAGES 471 TO 489 OF I T S PAPER - B OOK I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 22 IN THE F ORM OF E - MAIL AND CORRESPONDENCE E X C H ANGED BETWEEN THE ASSESSEE COMPANY AND ITS TWO A G ENTS. HE CONTENDED THAT TH IS DOCUM E N T ARY EVIDENCE FILED BY TH E ASSESSEE WAS S UFFICIENT TO SHO W TH E EXACT NATURE O F SERVICES RENDERED BY THE TWO AGEN T S JU S TIFYIN G THE COMMISSION CLAIMED TO HAVE B E EN PAID BY TH E ASSESSEE TO THEM. HE SUBMITTED THAT THE AE OF THE ASSESSEE COMPANY HA D FILED TENDER ON BEHALF O F TH E ASSESSEE COMPANY FOR SECURING THE ORD E R FROM SUDAN PARTY, AND ALTHOUGH THE BID WAS NO T SUCCESSFUL, THE F ACT REMAINS TO B E SEEN AS THAT THE S E RVI C ES WERE RENDERED BY TH E CON C ERNED AE TO TH E ASSESSEE COMPANY. HE CONTENDED THAT BOTH THE P A RTIES H A D PROVIDED THE R E QUIRED LOGISTIC SUPPORT TO THE ASSESSEE COMPANY FOR FINALLY EX E CUTING THE ORDER RE CE IVED FROM SUDAN AND THE DOCUM E N T ARY EVIDENCE FI L ED BY THE ASSESSEE COMPANY BEIN G SUF F I C IENT TO SUPPORT AND SUBSTANTIATE THE C L AIM, TH E DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CON F I R M E D BY TH E LEARNED CIT(A) ON ACCOUNT OF SUCH COMMISSION PAYM E N T S IS NO T SU S TAINABLE. HE ALSO POINTED OUT THAT THE COMMI S SION PAID BY T H E ASSESSEE COMPANY TO BOTH THE PAR T IES CON C ERNED WAS QUITE FAIR AND REASONABLE IN THE FACTS AND CIRC U M S TANCES OF TH E C ASE AND TH E DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CON F IRM E D BY TH E L EARNED CIT(A) ON THI S COUNT MAY BE DELETED. 2 9 . THE LEARNED DEPARTMENTAL REPRESENTATIVE , ON THE OTHER HAND, STRONGLY RELIED ON TH E IMPU G N E D ORD E R OF TH E LEARNED CIT(A) CONFIRMING TH E DISALLOWANCE MADE BY THE ASSESSING OFFICER ON AC C OUNT OF SALES COMMISS ION CLAIMED TO BE PAID BY TH E ASSESSEE TO ITS AE AND OTHER PARTY. HE TOOK US THROUGH TH E REL E VANT PO R TION OF TH E ORDER O F THE LEARNED CIT(A) AND SUBMITTED THAT COGENT AND CONVINCING REASONS A RE GIVEN BY THE LEARNED CIT(A) TO COME TO TH E CONCLUSION THAT THE CLAIM OF THE ASSESSEE WAS NO T ESTABLISHED EITHER ON EVIDENCE OR IN THE FACTS OF THE CASE. AS REGARDS THE DOCUM E N T ARY EVIDEN C E FIL E D BY TH E ASSESSEE IN SUP POR T OF ITS CLAIM I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 23 FOR COMMISSION, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMI T TED THAT THE SAME IS ONLY A SELF SERVING EVI D ENCE IN TH E FORM OF CORRESPON DEN CE AND E - MAILS EXCH A NGED BETWEEN THE INTERESTED P A RTIES AND IN TH E ABSENCE OF ANY IN D EPENDENT EVIDENCE OF THIRD PARTIES, THE SAME IS NO T RELIABLE TO SHOW THAT THE SER V I CE S IN FAC T WERE RENDERED BY TH E CON C ERNED P A RT IES TO THE ASSESSEE COMP AN Y. 30 . WE HA V E CON S I D ERED TH E RIVAL SUBMISSIONS AND ALSO PERU S ED THE RELE V ANT MATERIAL ON RECORD. IT IS OB S ERVED T H A T THE AMOUNT OF C OMMI S SION IN QUESTION W AS CLAIMED TO B E PAID BY THE ASSESSEE TO ITS AE, M/S. SIGNODE SYSTEM GMBH , GERMANY AS WELL AS TO M/S. AGABNA ALARABY INTERNATIONAL LIMITED, IN CONNECTION W ITH THE PROCUREMENT OR ORDERS FROM M/S. SUDAN GEZERIA BOARD, SUDAN(SGB). AS NOTED BY THE LEARNED CIT(A) IN HIS IMPUG NED ORDER , AGAINST THE TENDER FLOATED BY THE SAID PAR T Y FOR SUPPLY OF STEEL STRAPPING, THE BID OF M/S. GOL D EN FIBRE TRADE CENTRE LIMITED (GFTCL) WAS ACCEPTED AND EVEN THE ORDER WAS PLACED ON THE GFTCL . GFTCL THEREAF T ER ENTERED INTO A CONTRACT WITH THE AS SESSEE COMPANY BY WHICH THE ASSESSEE AGREED TO SUPPLY THE ENTIRE GOODS TO M/S. SUDAN GEZERIA BOARD AND AGREED TO PAY A COMMI S SION OF US DOLLARS 200 PER MT TO GFTCL. AS FU R TH E R NO T ED BY THE LEARNED CIT(A) FROM A R TICLE 9 OF TH E AG REEM E N T DATED 22.10.2003 B E T WEEN THE ASSESSEE COMPANY AND GFTCL, THE LATTER HAD ACTED AS AN AGENT OF THE ASSESSEE COMPA N Y FOR PROCURING THE EXPORT ORDER F R OM M/S. SUDAN GEZERIA BOARD AND THE COMMI S SION WAS PAID TO THEM BY THE ASSESSEE FOR THE SERVI C ES RENDERED IN PROCURING THE ORDE R AND CLOSING THE DOCUMENTATION. IN THIS FACTUAL BACKGROUND, IT I S NO T UN D ERS T A NDA BLE HOW TH E OTHER TWO PARTIES TO WHOM THE IMPUGNED AMOUNTS OF COMMISSION W ERE CLAIMED TO BE PAID BY THE ASSESSEE CAME IN PICTURE, AND WHAT EXACTLY WAS THE NATURE OF SERVICES RENDERED BY THEM. IT IS ALSO NO T UNDERSTANDABLE AS TO HOW AND WHY THE ASSESSEE COMPANY REQUI R ED TH E SERVI C ES OF THESE TWO PARTIES I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 24 WHEN GFTCL WA S NOT ONLY THE SUCCESSFUL BIDDER IN THE TENDER FLOATE D BY M/S. SUDAN GEZERIA BOARD, BUT ALSO AGREED AS PER ARTICLE 9 OF THE AGREEMENT THAT IT HAD ACTED AS AN AGENT OF THE ASSESSEE COMPANY FOR PROCURING THE SAID EXPORT ORDER. FINALLY, THE SAID EXPORT ORDER WAS EXECUTED BY THE ASSESSEE COMPANY AND FOR TH E SERV ICES RENDERED IN PROCURING THE EXPORT ORDER AS WELL AS CLOSING THE DOCUM E N T ATION, COMMISSION OF US DOLLARS 200 PER M T WAS ALSO PAID BY TH E ASSESSEE COMPANY TO GFTCL. 31 . BEFORE THE LEARNED CIT(A), AN ATTEMPT WAS MADE BY THE ASSESSEE T O EXPLAIN THE S E RVI C ES RENDERED BY TH E CON CE RNED TWO PARTIES WITH THE SUP PO RT OF AGRE E MENT ENTERED INTO WITH THE SAID P A RTIES AS WELL AS OTHER EVIDENCE IN THE FORM OF CORRESPOND E NCE AND E - MAIL EXCHANGED WITH THEM. FROM THE P E RU S AL OF TH E SE AGR E EMENTS AS WELL AS OTHER EVIDENC E, THE LEARNED CIT(A) HO W EVER , FOUND THAT THE SAME WERE NO T SUFFICIENT TO ESTABLISH THE SER V I C ES RENDERED BY TH E CON C ERNED PARTIES . HE ALSO NARRATED THE RELE V ANT FACTS AND CIR C UM S TANC E S INVOLVED IN TH E C A SE OF THE ASSESSEE IN PARAGRAPH 9.6 OF HIS IMPU G N E D ORDER AND CAME TO THE CONCLUSION THAT EVEN THE CIRCUMSTANTIAL EVIDENCE INDICATED THAT THE TR A NS A CTION S WITH THESE TWO CONCERNED PARTIES WERE NO T GENUINE. WE HAVE ALSO G ONE THROUGH THE DOCU ME N T ARY EVI D ENCE FIL E D BY THE ASSESSEE IN TH E PAPER BOOK IN SUPPO R T O F THE CL A IM O F TH E ASSESSEE ON THI S I S SUE, AND FIND THAT THE SAME MAINLY COMPRISING OF E - MAILS AND CORRESPO NDE NCE EX C HAN GE D WITH THE CONCERNED TOW PARTIES IS ONLY SELF SERVING EVI D ENCE, WHICH IS NOT SUFFICIENT TO ESTABLISH THE CLAIM OF TH E ASSESSEE OF H A VIN G RECEIVED THE SERVI C ES F R OM THE CO N CERNED T WO PA R TIES, ESPECIALLY WHEN THERE IS NO THIRD PARTY EVID E NCE LIKE ANY CORRE S PON D ENCE OR COMMUNI CA TION FROM M/S. SUDAN GEZERIA BOARD RECOGNIZING THE SAID TWO P A RTIES AS THE AGENTS OF THE ASSESSEE COMPANY OR OF ANY SER V IC E S RENDERED BY THEM IN CONN E C T ION WITH TH E PROCUREMENT OF THE ORDERS BY THE ASSESSEE I TA NO .190 & 206/H YD/20 09 M/S. ITW INDIA LTD., HYDERABAD 25 COMPANY F ROM M/S. SUDAN GEZERIA BOARD. CON S I D ERIN G ALL THE SE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND OURSELVES IN AGRE E MENT WITH THE LEARNED CIT(A) THAT THE CLAIM OF THE ASSESSEE OF HAVING PAID THE COM MI S S ION TO TH E CONCERNED TWO PARTIES FOR TH E SERVI C ES RENDERED IN CONN E C T ION WITH PROCUREMENT OF EXPORT ORDER FROM M/S. SUDAN GEZERIA BOARD WAS NOT ESTABLISHED EITHER ON E VI D ENCE OR EVEN IN TH E FACTS OF THE CA S E, AND HENCE, UPHOL D IN G THE ORDER OF THE CIT(A) CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ISSUE, WE DISMISS GROUNDS N O .4 .12 TO 4.19 AND 5 AND 5.1 OF THE ASSESSEE S APPEAL. 32 . IN THE RESULT, ASSESSEES APPEAL IS TREATED AS PARTLY ALLOWED, AND THE REVENUES APPEAL, BEING INFRUCTUOUS, IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 27 TH MARCH, 2015. SD/ - SD/ - ( SAKTIJIT DEY ) ( P.M.JAGTAP ) JUDICIAL MEMBER ACCOUNTANT MEMBER DT/ - 27 TH MARCH, 201 5 COPY FORWARDED TO: 1. M/S. ITW INDIA LTD., 34D FLOOR, MERCHANT TOWERS, 5, ROAD NO.4, BANJARA HILLS, HYDERABAD 500 034 2 . DY. COMMISSIONER OF INCOME - TAX CIRCLE 2(1), HYDERABAD 3. 4. COMMISSIONER OF INCOME - TAX(APPEALS) III , HYDERABAD COMMISSIONER OF INCOME - TAX II , HYDERABAD 5. DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S