Deputy Commissioner of Income-tax, V. W.B. Engineers International Private Ltd., Pune

ITA 523/PUN/2014

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1189 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 18-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K RASTOGI
• Assessee Lawyers: B; NIKHIL PATHAK HEERAJ JAIN
• Keywords: Transfer pricing; Double taxation relief; Revised return
• Section: 92A

Judgement Text

IN THE INCOME TAX APPELLATE T RIBUNAL PUNE BENCH A, PUNE . . , , BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS A WASTHY, JM . / ITA NO.523/PN/2 014 / ASSESSMENT YEAR : 2009-10 DCIT, CIRCLE-7, PUNE . / APPELLANT V/S W.B. ENGINEERS INTE RNATIONAL PRIVATE LIMITED, C-21-22, LIBERTY SOC IETY, KOREGAON PARK, NORT H MAIN ROAD, PUNE 411 001 PAN NO. AAACW101 6H . / RESPONDENT / APPELLANT BY : SHRI S.K. RASTOGI, C IT / RESPONDENT BY : SHRI NIKHIL PATHAK HEERAJ JAIN & B / ORDER PER R.K. PANDA, A M : THIS APPEAL FILED BY THE REVENUE IS DIREC TED AGAINST THE ORDER DATED 18-12-2013 O F THE DRP, PUNE RE LATING TO ASSESSMEN T YEAR 2009-10. 2. FACTS OF THE CA SE, IN BRIEF, ARE THAT THE ASSESSEE COMPA NY IS ENGAGED IN TRADING AND SALES AND S ERVICES OF EARTH M OVING EQUIPMENT, MINING E QUIPMENT, STEEL ITEM S, FUEL ENERGIZERS AN D ALSO INTO AGENCY BUSINES S. IT FILED ITS RETURN OF INCOME ON 30-09 -2009 / DATE OF HEARING :20. 08.2015 / DATE OF PRONOUNCEM ENT:26.08.2015 2 ITA NO.523/PN/2014 DECLARING TOTAL LOSS O F RS.2,08,66,575/-. SUBSEQUENTLY, THE AS SESSEE FILED A REVISED RETURN ON 01-10-2010 DECLA RING TOTAL INCOME OF N IL. 3. THE AO MADE A REFERENCE U/S.92C A(1) OF THE I.T. ACT IN THE CASE OF THE ASSESSE E TO THE TPO FOR C OMPUTATION OF THE ALP IN RELATION TO THE INTERN ATIONAL TRANSACTIONS. THE AO ALSO FORWAR DED A COPY OF THE DISTRIBU TION AGREEMENT DATE D 25-05-2012 BETWE EN A CONCERN CALLED TEREX GB LTD. WITH REGIS TERED OFFICE AT COALI SLAND ROAD, DUNGANNON, BT71 4DR, NORTHE RN IRELAND. THE TPO ACCORDINGLY ISSUED A DETAILED QUESTIONNA IRE TO THE ASSESSEE A SKING HIM TO FILE THE DETAIL S/EXPLANATIONS WITH REGARD TO THE COMPU TATION OF THE ALP. 4. FROM THE VARIO US DETAILS FURNISHED BY THE ASSESSEE, TH E TPO NOTED THAT THE ASSE SSEE WAS IMPORTING TRADING GOODS ONLY FROM A SINGLE SOURCE. IT WAS IMPORTING HEAVY MA CHINERY USED IN MINI NG ETC. IT HAS EARNED INCOM E OF RS.41,03,20,951 /- AND HAD LOSS BEFO RE TAX OF RS.3,24,32,211/- WHICH WAS (-)7.9% O F INCOME AS COMPAR ED TO 9.6% FOR THE PREVIO US YEAR. THE TPO, THEREFORE, CONFRONT ED THE ASSESSEE REGARDING THE APPLICABILITY OF THE TP PROVISIONS. THE ASSESSEE SUBMITTED T HAT THE PROVISIONS OF THE TRANSFER PRICING DO NOT APPLY TO IT AS FINLAY HYDRASCREENS OMAG H LTD. (FHOL) HAVE OTHER DISTRIBUTORS IN IND IA, NAMELY GMMCO AND SUCHITA MILL ENIUM PROJECTS. THE ASSES SEE IS ONLY A DISTRIB UTOR AND NOT THE AS SOCIATE ENTERPRISE. FINLAY HYDRASCREENS OMAG H LTD. IS WHOLLY O WNED SUBSIDIARY OF THE TER EX CORPORATION. THE ASSESSEE IS NON EXC LUSIVE DISTRIBUTOR OF THE FH OL AND THE FOREIGN C OMPANY DOES NOT EX ERCISE ANY CONTROL OVER THE ASSESSEE. 3 ITA NO.523/PN/2014 5. HOWEVER, THE T PO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AN D HELD THAT THE FO REIGN COMPANY EXE RCISES COMPLETE INFLUENCE O N THE ACTIVITIES OF TH E ASSESSEE COMPANY . THE ASSESSEE IS LIABLE TO G ET A COMMISSION OF 5 % OF THE NET SALES VA LUE FOR THE ORDERS WHICH AR E DIRECTLY EXECUTED BY THE FOREIGN ENTITY . THE DUTIES AND OBLIGATION S OF THE DISTRIBUTOR, I.E. THE ASSESSEE HAV E ALSO BEEN CLEARLY DEFINED. THE AGREEMENT IS A 45 PAGE LONG WITH V ARIOUS STIPULATIONS. THIS A CCORDING TO THE TPO SHOWS THAT THE AGR EEMENT PROVIDES FOR THE CONT ROL OF THE RELATIONSHI P BETWEEN THE PARTIE S. HE OBSERVED THAT THE AS SESSEE HAD PURCHASE D AN AMOUNT OF RS. 30.33 CRORES FROM FHOL A S COMPARED TO THE T OTAL PURCHASE OF RS .31.83 CORES. 6. FROM THE DETA ILS FURNISHED BY THE ASSESSEE DURING TH E TP ASSESSMENT PROCEED INGS, HE NOTED THAT OUT OF THE PURCHA SES OF RS.29.82 CRORES THE ASSESSEE HAD PURCHA SED/IMPORTED EQUIPM ENTS AND GOODS WORTH RS. 28.46 CRORES. THIS W ORKS OUT TO 95.43% WHICH IS A SUBSTANTIAL PORT ION OF THE PURCHASES FROM A SINGLE PARTY . THE TPO ACCORDINGLY HELD THAT THE ASSESSEE IS THE ASSOCIATE ENTERP RISE OF THE TEREX CORPORATIO N IN THE CURRENT TP A UDIT. 7. THE ASSESSEE A PPROACHED THE DRP. IT WAS SUBMITTED TH AT THE CONTENTION OF THE TP O IS NOT CORRECT. T HE ASSESSEE COMPAN Y AND TEREX GB LIMITED AR E INDEPENDENT ENTITI ES. THEY HAVE ENTER ED INTO CONTRACT FOR THE DIS TRIBUTION OF GOODS M ANUFACTURED BY TERE X GB LTD. IRELAND IN THE TERRITORY OF SOUTH IN DIA AND WEST INDIA. THE DISTRIBUTION AGREEME NT ENTERED INTO BETW EEN THE SAME PARTIE S AND TERMS OF FINALISED AGREEMENT WERE BE NEFICIAL TO THE BUS INESS INTERESTS OF BOTH THE PARTIES. THEREFORE, T HE ASSESSEE AGREED TO THE 4 ITA NO.523/PN/2014 TERMS RELATING TO MAINTENANCE OF M INIMUM STOCK, MIN IMUM PURCHASES AND MARK ETING EXPENDITURE TO EARN COMMISSION INC OME OF 5% OF NET SALES EFFECT ED BY TEREX GB LIMIT ED. 8. IT WAS ARGUED THAT JUST BECAUSE T HE ASSESSEE COMPLIE S WITH CERTAIN TERMS OF CONT RACT, IT DOES NOT MEA N THAT TEREX GB LIM ITED' IS INFLUENCING TERMS OF THE CONTRACT FOR THE BUSINESS DECISIONS OF THE ASSESSEE COMPANY. REFERRING TO CLAUSE 16 OF THE DISTRIB UTION AGREEMENT, WHICH STA TES THAT NO VARIATION IN THE TERMS AGREED A S PER THE DISTRIBUTION AGRE EMENT SHALL BE EFFECT IVE UNLESS SUCH VARIA TION IS AGREED IN WRITING BY BOTH THE PARTIES, IT W AS STATED THAT NO PAR TY HAS RIGHT TO INFLUENCE OR VARY THE AGREED TERM S AT OWN DISCRETION B ECAUSE VARIATION HAS TO BE A GREED UPON BY BOTH T HE PARTIES. FURTHER, R IGHT TO TERMINATION IS ALSO P ROVIDED TO BOTH THE PARTIES: THUS, IF THE ENTIRE AGREEMENT IS CONSID ERED, IT IS CLEAR THAT TEREX GB LIMITED H AS NO RIGHT TO INFLUENCE CO NDITIONS OF THE AGREE MENT AND THE ASSESS EE HAS EVERY RIGHT TO REJECT T HE PROPOSAL FROM TER EX GB LIMITED. IT WA S ALSO ARGUED THAT ACCORDIN G TO THE CLAUSE 13 O F THE AGREEMENT, BOT H THE PARTIES ARE INDEPEND ENT TO EACH OTHER. T HIS CLAUSE ITSELF IND ICATES THAT TEREX GB LIMITE D WAS NOT INFLUENCIN G THE BUSINESS DECIS IONS OF THE ASSESSEE AND HE NCE ASSESSEE COMPA NY IS NOT AE OF TER EX GB LIMITED. 9. THE ASSESSEE ANALYSED THE PROVISI ON OF 92A(2)(I) AND ARGUED THAT THE SAID CLAUSE IS ATTRACTED ONLY IN THE CASES IN WHICH , THE GOODS MANUFACTURED BY ONE ENTITY ARE SO LD TO THE 'OTHER ENTIT Y' AND THE PRICES AND OTHE R CONDITIONS RELATING THERETO ARE INFLUEN CED BY 'SUCH OTHER ENTITY I.E . THE PARTY, WHICH PU RCHASES THE GOODS FRO M THE MANUFACTURING ENTITY . THE SECTION IS APPL ICABLE ONLY IN CASES WHERE 5 ITA NO.523/PN/2014 THE PARTY PURCHASING THE GOODS INFLUENCES THE CONDITIONS AND N OT IN CASES WHERE THE M ANUFACTURING ENTITY INFLUENCES THE PRICE S AND OTHER CONDITIONS. 10. THE ASSESSEE WITHOUT PREJUDICE TO THE ABOVE SUBM ISSION SUBMITTED THAT THE A SSESSEE CANNOT BE CO NSIDERED TO BE AE OF TEREX GB LIMITED ACCORDIN G TO THE PROVISIONS O F THE DTAA BETWEEN INDIA AND NORTHERN IRELAND (UK). IT WAS SUBMIT TED THAT TEREX GB LI MITED IS NOT A SHARE-HOLDER OF THE ASSESSEE NOR I T IS HAVING ANY CONTR OL OVER ASSESSEE'S MANAGEM ENT. THE ASSESSEE FU RTHER SUBMITTED THAT AS PER THE PROVISIONS OF SE CTION 90(2), MORE BE NEFICIAL PROVISIONS B ETWEEN THE INCOME TAX ACT A ND THE DTAA WOULD BE APPLICABLE. IN THIS CASE, PROVISIONS OF THE DT AA ARE MORE BENEFIC IAL TO THE ASSESSEE. THUS, TEREX GB LIMITED IS NOT AN AE OF THE ASS ESSEE AND TRANSFER P RICING PROVISIONS ARE NOT A PPLICABLE TO IT. IT W AS ACCORDINGLY ARGUE D THAT THE TP PROVISIONS AR E NOT APPLICABLE TO T HE FACTS OF THE PRESE NT CASE AND THEREFORE THE TP ADJUSTMENT MADE BY THE TP O AT RS.4,04,08,285/- SHO ULD BE DELETED. 11. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE DRP HELD THAT THE TP PRO VISIONS ARE NOT APPL ICABLE TO THE ASSESSE E AND ACCORDINGLY DELETED T HE ADJUSTMENT OF RS. 4,04,08,285/- BY OBS ERVING AS UNDER : FINDINGS : 2.2.8 WE HAVE CONSIDE RED THE FACTS, ARGUMENT S OF THE ASSESSEE AND OF THE LEARNED TPO AND TH E LEGAL POSITION FOR DEC IDING AS TO WHETHER THE ASSESSEE AND TEREX GB LIMITED ATE AES OR NOT. FOR THIS PURPOSE, IT MAY BE NECESSARY TO PERUSE THE RELEVANT PROVISION OF SECTION 92A, WHICH I S REPRODUCED AS UNDER: (2) FOR THE PURPOSES OF SUBSECTION (1), TW O ENTERPRISES SHALL BE DEEMED TO BE ASSOCIATE D ENTERPRISES IF, AT ANY T IME DURING THE PREVIOUS YEAR, 6 ITA NO.523/PN/2014 (I) THE GOODS OR ARTICL ES MANUFACTURED OR PR OCESSED BY ONE ENTERPRISE, ARE SOLD T O THE OTHER ENTERPRIS E OR TO PERSONS SPECIFIED BY THE OTHER ENTERPRISE, AND THE P RICES AND OTHER CONDITIONS RELATING TH ERETO ARE INFLUENCED BY SUCH OTHER ENTERPRISE. 2.2.9 THE READING OF C LAUSE (I) MAKES IT CLEAR THAT THE CLAUSE REFERS TO THE GOODS MANUFACTURE D OR PROCESSED BY ONE ENTERPRISE (TEREX GB LIMITED) AND SOLD TO O THER ENTERPRISE (THE AS SESSEE) AND PRICES AND OTHER CONDITIONS RELA TING THERETO ARE INFLU ENCED BY SUCH OTHER ENTERPRISE (THE ASSESSEE ). THEREFORE, IN ORDER TO CONSIDER THE TEREX GB LIMITED' AS THE ASSESSE E'S AE, THE ASSESSEE SH OULD PURCHASE GOODS O R ARTICLES MANUFACTURED B Y TEREX GB LIMITED AN D ALSO INFLUENCE 'PRICES AND OTHER CONDITIONS REL ATING THERETO 'OF TEREX G B LIMITED. 2.2.10 IN THE PRESENT CA SE, THE FIRST CONDITION O F CLAUSE (I) IS MET WITH, ACCORDINGLY, THE GOOD S MANUFACTURED BY T EREX GB LIMITED ARE PURCHASED BY THE ASSES SEE. HOWEVER, THE SECO ND CONDITION I.E. 'PRICES AND OTHER CONDITIONS RE LATING THERETO' ARE INFLUE NCED BY THE ASSESSEE .IS NOT SATISFIED. WE HAVE G ONE THROUGH THE AGREEM ENT AND WE DO NOT FIND ANYTHING, WHICH WOULD SUGGEST THAT THE ASSESSE E HAS INFLUENCED PRICES AND OTHER CONDITIONS R ELATING THERETO OF TERE X GB LIMITED. ON THE CONTRARY, WE AGREE WI TH THE ASSESSEE THAT R ELEVANT CLAUSES OF THE AGREEMENT AS REFERRE D BY THE ASSESSEE S UGGEST THAT BOTH ARE INDEPENDENT PARTIES. A CCORDING TO US, IT IS O NE OF THE ROUTINE, NON EXCLUSIVE MANUFACTURER DISTRIBUTOR AGREEMENTS . ON THE BASIS OF SUCH AN AGREEMENT, IF BOTH THE P ERSONS ARE TREATED AS AE , THEN ALL MANUFACTURERS AND THEIR DISTRIBUTORS W ILL BE CONSIDERED AS AES . SUCH CONCLUSION WOULD BE FARFETCHED. 2.2.11 WE HOLD THAT T EREX GB LIMITED IS N OT THE ASSESSEE'S AE. ACCORDINGLY, WE HOLD T HAT THE ADJUSTMENT OF RS 4,04,08,285 IS NOT I N ACCORDANCE WITH THE PRO VISIONS OF LAW AND HENCE IS DELETED. 2.2.12 WE HAVE DECIDE D THAT THE TRANSFER PRI CING PROVISIONS ARE NO T APPLICABLE TO THE ASSESS EE. THEREFORE, THE OTHE R GROUNDS OF OBJECTIONS HAVE BECOME INFRUCTUOU S AND WE DO NOT DECIDE T HE SAME. 12. AGGRIEVED WITH SUCH ORDER OF THE DR P THE REVENUE IS IN A PPEAL BEFORE US WITH THE FO LLOWING GROUNDS : 1. WHETHER HON'BLE DR P WAS CORRECT IN LAW AN D FACTS IN HOLDING THAT THE TRANSFER PRICING PRO VISIONS WILL NOT BE APPLI CABLE TO THE ASSESSEE BY HOLDING THAT TEREX GB LIMITED IS NOT THE ASSO CIATED ENTERPRISE OF THE ASSESSEE EVEN WHEN MO RE THAN 95% OF THE TOTA L PURCHASES WERE MADE FROM ASSOCIATE ENTERPRI SE. 2. WHETHER HON'BLE DR P WAS CORRECT IN LAW A ND FACTS IN HOLDING THA T ASSESSEE IS NOT COVERED U/S 92A(2) OF THE I.T.AC T,1961. 7 ITA NO.523/PN/2014 13. THE LD. DEPA RTMENTAL REPRESENTA TIVE HEAVILY RELIED O N THE ORDER OF THE TPO. 14. THE LD. COUN SEL FOR THE ASSESSEE ON THE OTHER HAND WHILE SUPPORTING THE ORDER OF THE DRP DREW TH E ATTENTION OF THE BE NCH TO PAGE 83 OF THE PAPE R BOOK WHICH GIVES THE DETAILS OF SHAREH OLDING PATTERN. REFERRING T O THE SAID CHART HE SUBMITTED THAT THE ENTIRE SHARES ARE HELD BY B ARRETO FAMILY AND THE IR ASSOCIATES AND TER EX GB LTD. IS NOT AT ALL A S HAREHOLDER OF THE AS SESSEE COMPANY. HE DREW THE ATTENTION OF THE BENCH TO PROVISIONS OF SECTION 92A WHICH READS AS UNDER : (2) FOR THE PURPOSES OF SUBSECTION (1), TW O ENTERPRISES SHALL BE DEEMED TO BE ASSOCIATE D ENTERPRISES IF, AT ANY T IME DURING THE PREVIOUS YEAR, (I) THE GOODS OR ARTICL ES MANUFACTURED OR PR OCESSED BY ONE ENTERPRISE, ARE SOLD T O THE OTHER ENTERPRIS E OR TO PERSONS SPECIFIED BY THE OTHER ENTERPRISE, AND THE P RICES AND OTHER CONDITIONS RELATING TH ERETO ARE INFLUENCED BY SUCH OTHER ENTERPRISE. REFERRING TO THE SAM E HE SUBMITTED THAT ALTHOUGH THE FIRST L IMB OF THAT CLAUSE IS FULFILLE D, HOWEVER, THE SECO ND LIMB OF THE CLAUS E, I.E. THE PRICES AND OTHER CONDITIONS RELATING THERETO ARE INFLUENC ED BY SUCH OTHER ENTERPRISE S IS NOT FULFILLED. 15. THE LD. COUN SEL FOR THE ASSESSEE DREW THE ATTENTION OF THE BENCH TO THE DISTRIB UTOR AGREEMENT WHIC H IS PLACED IN PAPER BOOK PAGES 1 TO 45. REFE RRING TO PAGE 25 OF T HE AGREEMENT HE DRE W THE ATTENTION OF THE BENC H TO CLAUSE 16 ACCOR DING TO WHICH NO VARIATION TO THIS AGREEMENT SH ALL BE EFFECTIVE UNLE SS IN WRITING SIGNED BY A DIRECTOR OR OTHER DULY AUTHORIZED OFFICER OF EACH OF THE PARTIES HE RETO . REFERRING TO CLAUSE 1 0 OF THE AGREEMENT W HICH SPEAKS OF TERMI NATION PROVISIONS (PAGE 21 O F THE AGREEMENT) HE S UBMITTED THAT EITHER PARTY 8 ITA NO.523/PN/2014 MAY TERMINATE THIS AGREEMENT WITHOUT C AUSE UPON NOT LESS THAN NINETY (90) DAYS WRI TTEN NOTICE TO THE OTH ER PARTY . HE ACCORDINGLY SUBMITTED THAT TH E PRICES AND OTH ER CONDITIONS ARE NOT CONTROLLED/INFLUENCED BY TEREX GB LTD ., THEREFORE, THE TR ANSFER PRICING PROVISIONS AR E NOT APPLICABLE TO TH E FACTS OF THE PRESEN T CASE. HE ACCORDINGLY SUBM ITTED THAT THE ORDER OF THE DRP BE UPHEL D AND THE GROUNDS RAISED B Y THE REVENUE SHOULD BE DISMISSED. 16. WE HAVE CONS IDERED THE RIVAL ARGU MENTS MADE BY BOT H THE SIDES, PERUSED THE OR DERS OF THE ASSESSING OFFICER AND THE CIT(A ) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSE SSEE. THE FINDING GI VEN BY DRP THAT THE PRICES AND OTHER CONDITION S RELATING THERETO AR E NOT INFLUENCED EITHER BY THE ASSESSEE OR TE REX GB LTD. COULD NOT BE CONTROVERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE. A BARE PERUSAL OF THE VARIOU S CLAUSES OF THE DIS TRIBUTOR AGREEMENT S HOWS THAT BOTH ARE INDEP ENDENT PARTIES. WE THEREFORE DO NOT FIN D ANY INFIRMITY IN THE ORDE R OF THE DRP HOLDING THAT TEREX GB LTD. IS NOT ASSESSEES ASSOCIA TE ENTERPRISE. THE LD. DEPARTM ENTAL REPRESENTATIVE ALSO C OULD NOT POINT OUT AN Y DISTINGUISHABLE FEA TURES SO AS TO TAKE A DIFFER ENT VIEW THAN THE VI EW TAKEN BY THE DRP . WE ACCORDINGLY UPHOLD T HE SAME. THE GROUN DS RAISED BY THE REV ENUE ARE ACCORDINGLY DISM ISSED. 17. IN THE RESULT, T HE APPEAL FILED BY THE REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 26 -08-2015. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEM BER IQ.KS PUNE ; DATED : 26 TH AUGUST, 2015. LRH'K 9 ITA NO.523/PN/2014 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. DRP, PUNE 4 . 5. , , IQ.KS / DR, ITAT, A PUNE; / GUARD FILE. / BY ORDER , //TRUE C //TRUE COPY// / SR. PRIVATE SECRETA RY , IQ.KS / ITAT, PUNE