DCIT, New Delhi V. M/s Weir Engineering Services (India) Ltd., New Delhi

ITA 2557/DEL/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7053 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 29-01-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 16-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : H : NEW DELHI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO.2557/DEL/2011 ASSESSMENT YEAR : 2007-08 DCIT, CIRCLE-18(1), NEW DELHI . VS. WEIR ENGINEERING SERVICES (INDIA) LTD., 219, ANSAL CHAMBERS-II, BHIKAJI CAMA PLACE, NEW DELHI. PAN: AAACW0042P ASSESSEE BY : SHRI MANONEET DALAL, & SHRI YISHU GOEL, ADVOCATES DEPTT. BY : SHRI RAJIV RANKA, SR. DR DATE OF HEARING : 29.01.2016 DATE OF PRONOUNCEMENT : 29.01.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE REVENUE ARISES OUT OF THE ORDER PASSED BY THE CIT(A) ON 28.2.2011 IN RELATION TO THE ASSES SMENT YEAR 2007-08. ITA NO.2557/DEL/2011 2 2. THE FIRST GROUND IS AGAINST THE DELETION OF ADDI TION OF RS.6,15,68,134/- MADE BY THE AO ON ACCOUNT OF UNEXP LAINED DIFFERENCE IN THE VALUE OF SALES. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE DECLARED SALES OF RS.24,78,70,238/- INCLUSIVE OF RS.3,90,17,944/- ON ACCOUNT OF SERVICE CHARGES IN I TS TRADING ACCOUNT. DURING THE COURSE OF ASSESSMENT PROCEEDIN GS, THE AO CALLED FOR DETAILS OF SALES ON WHICH COMMISSION WAS PAID AND ON WHICH COMMISSION WAS STILL PAYABLE. SUCH DETAIL S FILED BY THE ASSESSEE HAVE BEEN INCORPORATED ON PAGES 3 ONWA RDS OF THE ASSESSMENT ORDER. AFTER GOING THROUGH TWO ANNEXURE S FILED BY THE ASSESSEE IN THIS REGARD, THE AO OBSERVED THAT T HERE WAS A DIFFERENCE OF RS.6,15,68,134/- BETWEEN TWO FIGURES, NAMELY, RS.18,21,12,483/- AS PER ANNEXURE-7 AND RS.12,05,44 ,349/- AS PER ANNEXURE-1. HE NOTED THAT WHEREAS ANNEXURE-7 C ONTAINED 74 BILLS, ANNEXURE-1 HAD ONLY 61 BILLS. REPRODUCIN G THE DIFFERENCE BETWEEN THE TWO ANNEXURES WITH DATE OF I NVOICE, ITA NO.2557/DEL/2011 3 CUSTOMER AND SALES VALUE ON PAGE 9 OF THE ASSESSMEN T ORDER, HE MADE ADDITION FOR THIS DIFFERENTIAL AMOUNT OF RS.6, 15,68,134/-. DURING THE COURSE OF FIRST APPELLATE PROCEEDINGS, T HE ASSESSEE FILED CERTAIN DETAILS, WHICH WERE SENT BY THE LD. C IT(A) TO THE AO FOR REMAND REPORT. AFTER CONSIDERING THESE DETA ILS AND THE REMAND REPORT OF THE AO, THE LD. CIT(A) DELETED THE DISALLOWANCE. THE REVENUE IS AGGRIEVED AGAINST THE DELETION OF DISALLOWANCE. 4. WE HAVE HEARD THE RIVAL PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE FAC T THAT THE ASSESSEE CREDITED A SUM OF RS.24.78 CRORE TO ITS TR ADING ACCOUNT AS SALES AND SERVICE CHARGES. THE CASE OF THE AO IS THAT CERTAIN ITEMS, AS LISTED ON PAGE 9 OF THE ASSE SSMENT ORDER TOTALING RS.6.15 CRORE, WERE NOT INCLUDED BY THE AS SESSEE IN THE FIGURE OF TOTAL SALES, WHICH POSITION HAS NOT BEEN ACCEPTED BY THE LD.CIT(A). WE HAVE PERUSED BREAK-UP OF TOTAL SA LES WITH COMMISSION, A COPY OF WHICH IS AVAILABLE ON PAGES 3 7-46 OF ITA NO.2557/DEL/2011 4 THE PAPER BOOK. THE THIRTEEN ITEMS AS NOTICED BY T HE AO ARE, IN FACT, APPEARING IN SUCH BREAK-UP OF TOTAL TURNOV ER OF RS.24.78 CRORE ALONG WITH THE AMOUNT OF COMMISSION ON SUCH SALES, WHICH MATCHES WITH THE AMOUNT CREDITED TO TH E TRADING ACCOUNT. ONCE THESE 13 ITEMS TOTALLING SALE OF RS. 6.15 CRORE STAND INCLUDED IN THE FIGURE OF TOTAL TURNOVER AS P ER THE TRADING ACCOUNT, THERE CAN BE NO QUESTION OF MAKING ANY FUR THER ADDITION ON THE SAME SCORE. WE, THEREFORE, UPHOLD T HE IMPUGNED ORDER IN DELETING THIS DISALLOWANCE. THIS GROUND IS NOT ALLOWED. 5. GROUND NO. 2 IS AGAINST THE DELETION OF DISALLOW ANCE OF RS.60,19,438/- MADE BY THE AO ON ACCOUNT OF UNEXPLA INED COMMISSION PAYMENT WHERE CORRESPONDING SALES HAD NO T BEEN CREDITED BY THE ASSESSEE TO THE TRADING AND PROFIT & LOSS ACCOUNT. THIS GROUND IS, IN FACT, CONSEQUENTIAL TO GROUND NO. 1. IT IS SEEN FROM BREAK-UP OF TOTAL TURNOVER AND TOTAL COMMISSION, AS DISCUSSED SUPRA , THAT THERE IS COMPLETE DETAIL ITA NO.2557/DEL/2011 5 OF COMMISSION ON SALES TO THE TUNE OF RS.1,27,77,51 5/- WHICH FIGURE MATCHES WITH THE AMOUNT OF DEDUCTION CLAIMED BY THE ASSESSEE IN ITS PROFIT & LOSS ACCOUNT. ALL THE 13 ITEMS OF SALES TOTALING RS.6.15 CRORE HAVE BEEN FOUND TO BE PRESENT IN SUCH BREAK-UP OF TURNOVER AS HAS BEEN NOTICED WHILE DISPOSING OF GROUND NO.1. IT IS FURTHER NOTED THAT SIMULTANE OUS WITH THE AMOUNT OF TURNOVER, THERE IS DEBIT FOR COMMISSION I N RESPECT OF THESE 13 ITEMS AS WELL, WHICH IS PART AND PARCEL OF TOTAL COMMISSION CLAIMED BY THE ASSESSEE AS DEDUCTION FOR A SUM OF RS.1.27 CRORE. UNDER THESE CIRCUMSTANCES, WE FIND NO REASON TO INTERFERE WITH THE IMPUGNED ORDER DELETING DISAL LOWANCE OF COMMISSION. THIS GROUND FAILS. 6. GROUND NO. 3 IS AGAINST THE DELETION OF DISALLOW ANCE OF RS.67,67,729/- TOWARDS TECHNICAL FEE PAYMENT. THE ASSESSEE DEBITED A SUM OF RS.67.67 LAC UNDER THE HEAD TECHN ICAL EXPENSES. ON BEING CALLED UPON TO SUBMIT JUSTIFICA TION FOR THIS DEDUCTION, THE ASSESSEE FILED A LETTER STATING THAT TECHNICAL ITA NO.2557/DEL/2011 6 ASSISTANCE AND LICENCE AGREEMENT WAS MADE WITH WEIR PUMPS LTD., SCOTLAND, AND PURSUANT TO SUCH AGREEMENT, THE SAID TECHNICAL FEES WAS PAID. ON PERUSAL OF THIS AGREEME NT, THE AO OBSERVED THAT THE SAME RELATED ONLY TO ROYALTY AND NOT TECHNICAL EXPENSES. HE, THEREFORE, MADE DISALLOWANC E OF RS.67.67 LAC. WITHOUT PREJUDICE TO HIS MAIN REASON FOR ADDITION, HE SUSTAINED DISALLOWANCE U/S 40(A)(IA) O F THE ACT AS WELL, SINCE IN HIS OPINION NO DEDUCTION OF TAX AT SOURCE WAS MADE ON SUCH PAYMENT. THE LD. CIT(A) DELETED THE DISALLOWANCE. 7. WE HAVE HEARD THE RIVAL PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LD. AR INVITED OUR ATTENTI ON TOWARDS PAGE 90 OF THE PAPER BOOK WHICH IS AN AGREEMENT BET WEEN ONGC AND THE ASSESSEE. IT WAS CLAIMED THAT PURSUAN T TO THIS AGREEMENT, THE ASSESSEE GOT TECHNICAL ASSISTANCE FR OM ITS PARENT COMPANY FOR WHICH THE SAID PAYMENT WAS MADE. HOWEVER, ON A SPECIFIC QUERY, NO AGREEMENT, BETWEEN THE ITA NO.2557/DEL/2011 7 ASSESSEE AND PARENT COMPANY EVIDENCING THE NATURE O F WORK DONE AND REMUNERATION FOR SUCH TECHNICAL ASSISTANCE WAS PLACED ON RECORD. IN THE ABSENCE OF ANY SUCH AGREE MENT, IT IS DIFFICULT TO UNDERSTAND THE NATURE OF WORK FOR WHIC H THE ASSESSEE MADE THE PAYMENT AND ALSO ITS QUANTIFICATI ON. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER ON THIS ISS UE AND REMIT THE MATTER TO THE FILE OF AO FOR DECIDING THIS POIN T AFRESH IN THE LIGHT OF THE MATERIAL PLACED OR TO BE FURTHER P LACED BY THE ASSESSEE IN SUPPORT OF TECHNICAL FEE PAID TO ITS PA RENT COMPANY AND ALSO THE RELEVANT AGREEMENT. IN SO FAR AS THE AOS FINDING ABOUT THE APPLICABILITY OF SECTION 40(A)(IA) IS CON CERNED, WE FIND THAT THE SAME IS NOT CORRECT INASMUCH AS THE A SSESSEE DID DEDUCT TAX AT SOURCE FROM PAYMENTS MADE TO ITS PARE NT COMPANY. THIS ISSUE IS, THEREFORE, SENT BACK TO THE FILE OF AO FOR A FRESH DECISION AS DISCUSSED HEREINABOVE. 8. THE ONLY OTHER GROUND WHICH SURVIVES FOR ADJUDIC ATION IS GROUND NO. 4, WHICH IS AGAINST THE DELETION OF DISA LLOWANCE OF ITA NO.2557/DEL/2011 8 RS.38,11,165/- ON ACCOUNT OF ROYALTY PAYMENT MADE B Y THE ASSESSEE TO M/S WEIR PUMPS LTD., SCOTLAND. THE ASS ESSEE CLAIMED DEDUCTION OF ROYALTY EXPENDITURE AMOUNTING TO RS.38,11,165/-. THE AO NEGATED SUCH CLAIM ON THE PR EMISE THAT ROYALTY WAS PAID TO HOLDING COMPANY WHICH HAD 75% SHAREHOLDING IN THE ASSESSEE COMPANY ONLY AND THIS PAYMENT WAS NOTHING BUT PAYMENT TO SELF. IN DOING SO, HE L IFTED THE CORPORATE VEIL AND, EVENTUALLY, MADE THE DISALLOWAN CE. APART FROM THAT, HE ALSO RELIED ON SECTION 2(22)(E) OF TH E ACT FOR MAKING THIS DISALLOWANCE IN ADDITION TO APPLYING TH E PROVISIONS OF SECTION 40(A)(I) OF THE ACT. THE LD. CIT(A) DELETED THE DISALLOWANCE. 9. WE HAVE HEARD THE PARTIES AND PERUSED THE RELEVA NT MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE ENTE RED INTO AN AGREEMENT WITH ITS SISTER CONCERN FOR THE USE OF PA TENT/BRAND IN LIEU OF WHICH IT STARTED MAKING PAYMENT OF ROYAL TY AT THE STIPULATED RATE. UNDER SIMILAR CIRCUMSTANCES, SUCH ROYALTY ITA NO.2557/DEL/2011 9 PAYMENT MADE BY THE ASSESSEE TO ITS SISTER CONCERN CAME TO BE ACCEPTED AND ALLOWED AS DEDUCTION BY THE REVENUE IN EARLIER YEARS. EVEN THE TRANSFER PRICING OFFICER FOUND SUC H PAYMENT TO BE AT ARMS LENGTH. THE VIEWPOINT OF THE AO IN LIFTING THE CORPORATE VEIL BY TREATING ROYALTY PAYMENT TO ITS S ISTER CONCERN AS PAYMENT TO SELF, HAS ABSOLUTELY NO BASIS AS BOTH ARE INDEPENDENT ENTITIES AND THE FACTUM OF USER OF PATENT/TRADEMARK ETC. HAS NOT BEEN DENIED BY THE AO . OBVIOUSLY, WHEN THE ASSESSEE IS USING PATENTS/TRADE MARKS OF ITS PARENT COMPANY, IT WILL HAVE TO PAY ROYALTY FOR THE SAME WHICH CANNOT BE DISALLOWED, UNLESS IT IS NOT AT ARMS LEN GTH PRICE. WE, THEREFORE, UPHOLD THE IMPUGNED ORDER ON THIS SC ORE. 10. AS REGARDS THE APPLICABILITY OF SECTION 2(22 )(E), WE FIND THAT THE SAME IS AGAIN WITHOUT ANY BEDROCK. THE IN GREDIENTS OF THIS PROVISION ARE NOT APPLICABLE TO THE RELEVANT F ACT SITUATION OBTAINING IN THIS CASE. THE ASSESSEE OBTAINED THE U SE OF ITA NO.2557/DEL/2011 10 PATENT/TRADEMARK/BRAND NAME AND IN A QUID PRO QUO PAID ROYALTY TO ITS PARENT CONCERN. 11. SIMILARLY, THE VIEWPOINT OF THE AO IN SUSTAINI NG DISALLOWANCE BY APPLYING SECTION 40(A)(IA) OF THE A CT IS AGAIN UNSUSTAINABLE BECAUSE THE ASSESSEE DID DEDUCT TAX A T SOURCE BEFORE MAKING THE PAYMENT. WE, THEREFORE, APPROVE THE VIEW TAKEN BY THE CIT(A) IN DELETING THIS DISALLOWANCE. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29.01.2016. SD/- SD/- [SUDHANSHU SRIVASTAVA] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 29 TH JANUARY, 2016. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.