AIA Engineering Ltd., Ahmedabad V. The Addl.CIT.,Range-1, Ahmedabad

ITA 580/AHD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 56978 (ITAT-AHMEDABAD)
• Duration Of Justice: 10 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 03-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 24-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Double taxation relief; Opportunity of being heard; Principle of natural justice; International transaction; Source of fund; Deemed to accrue or arise in india; Wholly owned subsidiary; Bad and doubtful debts
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, C BENCH, AHMEDABAD BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER I.T.A. NO. 580/ AHD/2011 (ASSESSMENT YEAR 2006-07) AIA ENGINEERING LTD., 115, G VMM ESTATE, ODHAV ROAD, ODHAV AHMEDABAD VS. ADD. CIT, RANGE I, AHMEDABAD PAN/GIR NO. : AABCA2777J (APPELLANT) .. (RESPONDENT) APPELLANT BY: S/SHRI PERCY PARDIWALA & TUSHAR HEMANI, AR RESPONDENT BY: S/SHRI S K GUPTA, SR. DR V.K.GUPTA, DIT, S C TIWARI, ADDL. DIT DATE OF HEARING: 09.11.2011 DATE OF PRONOUNCEMENT: 19.01.2012 O R D E R PER SHRI A. K. GARODIA, AM:- THIS IS ASSESSEES APPEAL DIRECTED AGAINST THE ASS ESSMENT ORDER PASSED BY THE A.O. WHO IS ADDITIONAL COMMISSIONER OF INCOME T AX XXI, AHMEDABAD AS PER THE DIRECTIONS OF DRP IN ITS ORDER DATED 10.12. 2010 U/S 144C(V) OF THE INCOME TAX ACT, 1961 FOR THE ASSESSMENT YEAR 2006-0 7. 2. GROUND NO.1 OF THE ASSESSEES APPEAL IS AS UNDER : GROUND NO. 1 - THE APPELLANT'S WHOLLY OWNED SUBSIDIARY IN UAE TREATED AS ITS PROPRIETARY CONCERN AND ITS INCOME O F RS. 5,54,98,000 TREATED AS IF EARNED BY THE APPELLANT. 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE AO ERRED AND THE DRP FURTHER V ERRED IN TREATING THE APPELLANT'S WHOLLY OWNED SUBSIDIARY IN UAE [I.E. VEGA INDUSTRIES (MIDD LE EAST) FZE, UAE] I.T.A.NO. 580 /AHD/2011 2 AS ITS PROPRIETARY CONCERN AND TREATING INCOME OF R S. 5.54,98.000 EARNED BY THE SAID WHOLLY OWNED SUBSIDIARY AS THAT EARNED BY THE APPELLANT. 1.2 THE AO FAILED TO INTIMATE HIS CONCLUSION AND GRANT AN OPPORTUNITY TO THE APPELLANT AND SHOW CAUSE WHY HE SHOULD NOT T REAT VEGA UAE AS THE PROPRIETARY CONCERN OF THE APPELLANT AND THE DR P AS WELL FAILED TO APPRECIATE THAT VEGA UAE IS A SEPARATE AND AN INDEP ENDENT BODY CORPORATE INCORPORATED IN UAE AS SUBSTANTIATED BY V ARIOUS DETAILS AND SUBMISSIONS SUCH AS THE TAX RESIDENCY CERTIFICATE. AJMAN FREE ZONE AUTHORITY CERTIFICATE AND THE LEGAL OPINION FROM TH E OVERSEAS LAWYER OBTAINED IN THIS REGARD. 1.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW. THE AO ERRED IN AND THE DRP FURTHER ERRED IN NOT CONSID ERING THE DOCUMENTARY EVIDENCE FURNISHED BY THE APPELLANT WHI CH DEMONSTRATED THAT VEGA UAE WAS WHOLLY MANAGED AND CONTROLLED IN UAE AND CONCLUDING THAT THE APPELLANT FAILED TO SUBMIT ANY DETAILS TO DEMONSTRATE THE SAME. 1.4 ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW. THE AO ERRED IN AND THE DRP FURTHER ERRED IN ALLEGING A CASE OF ROUND TRIPPING ON THE GROUND THAT THE APPELLANT WAS NOT E NTITLED TO CLAIM THE BENEFITS OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT ('DT AA') ENTERED INTO BETWEEN THE GOVERNMENTS OF INDIA AND UAE IN RE SPECT OF THE INCOME OF THE VEGA UAE WITHOUT APPRECIATING THE BENEFIT OF THE DTAA WAS CLAIMED NEITHER BY THE APPELLANT NOR BY VE GA UAE AND WITHOUT FURTHER APPRECIATING THAT THE APPELLANT HAD SUBMITTED TAX RESIDENCE CERTIFICATE DATED 11 FEBRUARY 2009 NOT WITH THE INT ENTION TO CLAIM ANY INDIA-UAE TAX TREATY BENEFITS BUT WITH AN INTENTION TO DEMONSTRATE THAT VEGA UAE IS A RESIDENT BODY CORPOR ATE UNDER THE LAWS OF UAE.. THE APPELLANT PRAYS THAT THE TREATMENT OF VEGA UAE AS THE PROPRIETARY CONCERN OF THE APPELLANT AND ADDITION T O INCOME MADE IN THIS REGARD IS ERRONEOUS, UNWARRANTED, AGAINST THE PRINC IPLES OF NATURAL JUSTICE, BE REVERSED AND THE ADDITION MADE IN THIS REGARD BE DELETED. 3. THE BRIEF FACTS OF THE CASE ARE THAT IT IS NOTED BY THE A.O. IN PARA 7 OF THE ASSESSMENT ORDER ON PAGE 4 THAT THE ASSESSEE COMPAN Y HAS MADE OUTWARD INVESTMENT IN EMIRATES OF AJMAN IN THE FORM OF A FR EE ZONE ENTITY VEGA INDUSTRIES (MIDDLE EAST) FZE IN THE AJMAN FREE ZONE . HE FURTHER NOTED THAT THE INCOME EARNED THROUGH THE SAID ESTABLISHMENT OF RS. 554.98 LACS HAS NOT BEEN SHOWN AS INCOME OF THE ASSESSEE COMPANY IN THE BOOK S OF THE ASSESSEE. HE I.T.A.NO. 580 /AHD/2011 3 FURTHER NOTED THAT SINCE IN THIS ENTITY, THE ASSESS EE WAS THE SOLE SHAREHOLDER HAVING 100% SHAREHOLDING, THE ASSESSEE WAS ASKED VI DE ORDER SHEET ENTRY DATED10.11.2009 TO EXPLAIN THE LEGAL STATUS OF THI S ENTITY AND TO EXPLAIN HOW THIS ENTITY IS LEGALLY INDEPENDENT ENTITY MANAGED AND CO NTROLLED WHOLLY FROM UAE. IN REPLY, IT WAS SUBMITTED BY THE ASSESSEE BEFORE T HE A.O. THAT THIS ENTITY M/S. VEGA INDUSTRIES (MIDDLE EAST) FZE IS A BODY CORPORA TE DULY ESTABLISHED UNDER THE LAW OF UAE, GOVERNMENT OF AJMAN. THE ASSESSEE ALSO PLACED A LETTER CUM CERTIFICATE ISSUED BY THE DIRECTOR GENERAL AJMAN FR EE ZONE AUTHORITY DATED 15.07.2009 CONFIRMING THAT M/S. VEGA INDUSTRIES IS A REGISTERED COMPANY, A BODY CORPORATE INCORPORATED IN THE FREE ZONE OF AJM AN UAE UNDER THE LAW LAID DOWN UNDER THE AMIRI DECREE NO.2 OF 1996 ON AMENDIN G THE AMIRI DECREE NO.3 OF 1988 (THE AMIRI DECREE). IT WAS FURTHER SU BMITTED THAT THE SAID CERTIFICATE ALSO CONFIRMS THAT THE COMPANY HAS BEEN INCORPORATED AS EVIDENT BY THE MEMORANDUM OF INCORPORATION DATED 22.04.2002 AN D HAS BEEN TAKEN ON RECORD BY THE AJMAN FREE ZONE AUTHORITY, GOVERNMENT OF UAE. IT WAS ALSO SUBMITTED THAT THE CERTIFICATE ALSO CONFIRMS THAT V EGA INDUSTRIES (MIDDLE EAST) FZE IS A BODY CORPORATE BASED IN THE FREE ZONE OF A JMAN AND IS ALSO REGISTERED WITH AJMAN FREE ZONE AUTHORITY - GOVERNMENT OF UAE. THE ASSESSEE ALSO ENCLOSED THE CERTIFICATE DATED 11.02.2009 ISSUED BY EXECUTIVE DIRECTOR OF REVENUE & BUDGET I.E. MINISTRY OF FINANCE OF UAE CE RTIFYING THAT IN PURSUANCE OF AGREEMENT BETWEEN GOVERNMENT OF UAE AND GOVERNME NT OF INDIA FOR AVOIDANCE OF DOUBLE TAXATION, VEGA INDUSTRIES (MIDD LE EAST) FZE QUALIFIES TO ENJOY THE BENEFIT OF ABOVE MENTIONED AGREEMENT. AS PER ANNEXURE 3, ASSESSEE ALSO ENCLOSED MEMORANDUM OF INCORPORATION OF THE CO MPANY M/S. VEGA INDUSTRIES (MIDDLE EAST) FZE AND IT WAS SUBMITTED T HAT THE ARTICLE CLEARLY MENTIONS AND CERTIFY THAT THIS FZE WITH LIMITED LIA BILITY IS ESTABLISHED AS CORPORATE ENTITY AND INDEPENDENT OF SEPARATE FINANC IAL LIABILITY FROM THOSE OF ITS OWNER AND THEREFORE, IT IS CLEARLY ESTABLISHED THAT IT IS A COMPANY, WHICH IS HAVING ITS OWN SEPARATE ENTITY INDEPENDENT STATURE AND HAS ITS SEPARATE FINANCIAL I.T.A.NO. 580 /AHD/2011 4 LIABILITY. THE A.O. WAS NOT SATISFIED. HE HAS STA TED IN PARA 7.4 OF THE ASSESSMENT ORDER THAT THE TERM COMPANY HAS BEEN D EFINED IN DTAA WITH UAE IN ARTICLE 3(1) (F) AS UNDER: THE TERM COMPANY MEANS ANY BODY CORPORATE OR ANY ENTITY WHICH IS TREATED AS A COMPANY OR BODY CORPORATE UNDER THE TA XATION LAWS IN FORCE IN THE RESPECTIVE CONTRACTING STATES. THE A.O. FURTHER MENTIONED THAT EMIRATES OF AJMAN A ND GOVERNMENT OF UAE DO NOT HAVE TAXATION LAW IN FORCE FOR THE PROPOSE O F ADMINISTRATION OF CORPORATE TAX AND IN VIEW OF THIS, THERE IS NO PROVISIONS AVA ILABLE STATING THAT THE ABOVE SAID ENTITY IS A COMPANY OR BODY CORPORATE RECOGNIZ ED UNDER THE TAXATION LAWS IN FORCE IN EMIRATES OF AJMAN OR UAE. THE A.O. FURTHE R STATED THAT THE COMPANY HAS BEEN DEFINED UNDER ARTICLE 4 OF COMMERCIAL COMP ANY LAW (CCL) OF UAE. THE A.O. HAS REPRODUCED ARTICLE 4 OF CCL AS PER WHI CH, THE COMPANY IS A CONTRACT BY WHICH TWO OR MORE PERSONS UNDERTAKE TO PARTICIPATE IN AN ECONOMIC PROJECT INTENDED TO MAKE PROFITS BY EACH PROVIDING A SHARE OF FUNDS OR EFFORT AND TO DIVIDE THE PROFITS OR LOSSES RESULTING FROM THE PROJECT BETWEEN THEM. IN PARA 7.11 OF THE ASSESSMENT ORDER, THE A.O. HAS ALSO NOT ED THAT AS PER UAE LAW AS WELL AS INDIAN COMPANIES LAW, COMPANY SHOULD HAVE A T LEAST TWO SHAREHOLDERS AND IT SHOULD HAVE PERPETUAL SUCCESSION, COMMON SEA L AND LEGAL ENTITY APART FROM MEMBER CONSTITUTING IT. HE HAS OBSERVED THAT VEGA INDUSTRIES (MIDDLE EAST) FZE DOES NOT COMPLY WITH ANY OF THESE CONDITI ONS. HE HAS FURTHER NOTED THAT AS PER MEMORANDUM OF INCORPORATION OF VEGA IND USTRIES (MIDDLE EAST) FZE UNDER ARTICLE 4, THE DURATION OF FZE IS 25 CALENDAR YEARS COMMENCING ON THE DATE OF ITS REGISTRATION IN THE FREE ZONE REGISTER WHICH MAY BE FURTHER EXTENDED/REDUCED ON RESOLUTION FROM THE OWNER. HE HAS FURTHER NOTED THAT THE ASSESSEE HAS BEEN SHOWN AS FOUNDER/THE OWNER OF THE SAID ESTABLISHMENT AS SOLE SHAREHOLDER. HE CAME TO THE CONCLUSION THAT THE EN TITY DOES NOT HAVE SEPARATE LEGAL IDENTITY VIS--VIS ITS SOLE SHAREHOLDER AND F OR ANY NON-COMPLIANCE, THE OWNER IS RESPONSIBLE LEGALLY WHEREAS IN INDIAN COMP ANIES ACT, 1956, I.T.A.NO. 580 /AHD/2011 5 SHAREHOLDERS ARE NOT LEGALLY LIABLE FOR ANY ACT OF THE COMPANY OR ITS BOARD OF DIRECTORS. THE A.O. FURTHER NOTED THAT THE ASSES SEE COMPANY HAS SUBMITTED ITS REPLY ON THIS ISSUE VIDE LETTER DATED 16.11.2009 AN D STATED THAT VEGA INDUSTRIES (MIDDLE EAST) FZE IS A SUBSIDIARY COMPANY DULY ESTA BLISHED UNDER THE LAWS OF UAE, GOVERNMENT OF AJMAN. HE FURTHER NOTED THAT TA X RESIDENCY CERTIFICATE ISSUED BY MINISTRY OF FINANCE UAE MERELY STATES THA T IT IS ELIGIBLE FOR THE BENEFIT UNDER THE TREATY WITHOUT TAKING ANY RESPONS IBILITY, WHATSOEVER ON THE MINISTRY OF FINANCE. HE ALSO STATED THAT THIS LETT ER OF MINISTRY OF FINANCE OF UAE DOES NOT FULFILL THE REQUIREMENT OF THE TREATY DEFINITION OF THE COMPANY. HE HAS CONCLUDED THAT IN VIEW OF THIS, THE SAID ENT ITY IS TREATED AS PROPRIETARY CONCERN OF THE ASSESSEE WHICH IS CARRYING OUT BUSIN ESS FROM AJMAN FREE ZONE. ONE MORE OBJECTION HAS BEEN RAISED BY THE A.O. THAT THE ASSESSEE WAS NOT ABLE TO PROVE THAT THIS FZE WAS MANAGED AND CONTROLLED W HOLLY IN THE UAE. HE ALSO OBSERVED THAT AS PER THE MEMORANDUM OF INCORPORATIO N, MR. P R SHAH HAS BEEN SHOWN AS MANAGER OF FZE BUT AS PER THE COPY HIS PAS SPORT FURNISHED BY THE ASSESSEE, IT DOES NOT SHOW THAT HE STAYED IN UAE DU RING THAT PERIOD. ON THIS BASIS, HE HAS STATED THAT VEGA INDUSTRIES (MIDDLE E AST) FZE CANNOT BE TREATED AS RESIDENT OF UAE FOR TREATY PURPOSE. ON THIS BASIS, THE A.O. TREATED THE INCOME OF THE VEGA INDUSTRIES (MIDDLE EAST) FZE OF RS.554. 98 LACS AS INCOME TAXABLE IN INDIA IN THE HANDS OF THE ASSESSEE U/S 5(1). NO W, THE ASSESSEE IS IN APPEAL BEFORE US. 4. IT WAS SUBMITTED BY THE LD. COUNSEL FOR THE ASSE SSEE THAT THE ASSESSEE COMPANYS WHOLLY OWNED SUBSIDIARY IN UAE IS VEGA UA E AND IS LOCATED IN AJMAN FREE ZONE AND IS INCORPORATED UNDER THE LAW O F UAE, MORE SPECIFICALLY THE AMIRI DECREE 2 OF 1996 ISSUED BY THE EMIRATES O F AJMAN. HE FURTHER SUBMITTED THAT THE CERTIFICATE OF FORMATION OF VEGA UAE ISSUED BY AJMAN FREE ZONE AUTHORITY IS AVAILABLE ON PAGE 677 OF THE PAPE R BOOK-III. HE ALSO SUBMITTED A COPY OF THE MEMORANDUM OF INCORPORATION OF VEGA UAE WHICH IS AVAILABLE ON PAGES 5-10 OF THE PAPER BOOK-I. HE AL SO SUBMITTED THAT TAX I.T.A.NO. 580 /AHD/2011 6 RESIDENCY CERTIFICATE OF VEGA UAE DATED 11.02.2009 ISSUED BY THE EXECUTIVE DIRECTOR OF REVENUE AND BUDGET I.E. MINISTRY OF FIN ANCE OF UAE IS AVAILABLE ON PAGE 4 OF THE PAPER BOOK-I. HE ALSO SUBMITTED THA T THE CERTIFICATE ISSUED BY AJMAN FREE ZONE AUTHORITY DATED 15.07.2009 CONFIRMI NG THAT VEGA UAE IS A REGISTERED COMPANY BODY CORPORATE INCORPORATED IN T HE FREE ZONE OF AJMAN (UAE) UNDER THE LAW LAID DOWN BY AMIRI DECREE NO. ( 2) OF 1996 ON AMENDING THE AMIRI DECREE NO. (3) OF 1988 IS AVAILABLE ON PA GE 3 OF THE PAPER BOOK-I. HE WENT ON TO SUBMIT THAT AS PER THE TAX RESIDENCY CER TIFICATE DATED 03.02.2010 ISSUED BY UAE, MINISTRY OF FINANCE, IT IS CERTIFIE D THAT VEGA UAE IS A REGISTERED COMPANY AS A BODY CORPORATE IN THE FREE ZONE OF AJMAN (UAE) WITH LIMITED LIABILITY AND HAS A BODY CORPORATE CAPACITY . IT IS FURTHER CLARIFIED THAT UAE COMMERCIAL COMPANY LAW DOES NOT APPLY TO THOSE COMPANIES INCORPORATED IN UAE FREE ZONE AND THIS CERTIFICATE HAS BEEN ISSUED BY THE MINISTRY OF FINANCE WITH FULL RESPONSIBILITY AS REG ARDS THIS CONTENTION AS PER THE COPY AVAILABLE ON PAGER 1011 OF PAPER BOOK-IV. HE ALSO SUBMITTED THAT HAVING REGARD TO THE CATEGORICAL CERTIFICATE ISSUED BY MIN ISTRY OF FINANCE UAE CERTIFYING THAT VEGA UAE IS A REGISTERED COMPANY AN D IS A BODY CORPORATE INCORPORATED IN A FREE ZONE OF AJMAN WITH LIMITED L IABILITY AND HAS THE BODY CORPORATE CAPACITY, IT IS NOT OPEN TO INDIAN TAX AU THORITY TO ADJUDICATE UPON THE ISSUE AS TO WHETHER VEGA UAE IS A COMPANY OR SOLE P ROPRIETORSHIP CONCERNS OF THE ASSESSEE. IN THIS REGARD, RELIANCE WAS PLACED BY HIM ON THE JUDGMENT OF HONBLE MADRAS HIGH COURT RENDERED IN THE CASE OF C IT VS LAXMI TEXTILE EXPORTS LTD. AS REPORTED IN 245 ITR 521 (MAD.). WI THOUT PREJUDICE TO THIS, HE ALSO SUBMITTED THAT EVEN IF IT IS PRESUMED THAT THE INDIAN TAX AUTHORITY COULD GO INTO THE ISSUE, THE CONCLUSION DRAWN BY THEM, IS ER RONEOUS. HE SUBMITTED THAT UAE IS A FEDERATION ESTABLISHED IN 1971 IN THE AREA PREVIOUSLY KNOWN AS THE TRUCIAL COAST IN GULF BY SEVEN EMIRATES THAT WERE SEMI INDEPENDENT BRITISH PROTECTORATES NAMELY, ABU DHABI, DUBAI, AJMAN, FUJA IRAH, SHARJAH, RAS AL KHAIMAH, UMM AL QUWAIN. THE RULERS OF THE SEVEN EM IRATES AGREED TO THE I.T.A.NO. 580 /AHD/2011 7 UAE PROVISIONAL CONSTITUTION, CHANGED LATER TO BECO ME THE UAE CONSTITUTION. HE FURTHER SUBMITTED THAT PRIOR TO THE ESTABLISHMEN T OF UAE AS A FEDERAL STATE; EACH OF THE EMIRATES REGULATED ITS OWN AFFAIRS BY P ASSING LOCAL LAWS AND REGULATIONS. TO MAINTAIN HARMONY BETWEEN THE EMIRA TES AND ENSURE CONTINUITY OF THE FEDERATION, THE UAE CONSTITUTION PROVIDED TH AT WHILST THE JURISDICTION TO PROMULGATE SUBSTANTIVE LEGISLATION WAS CONFINED TO THE FEDERAL GOVERNMENT, THE LOCAL GOVERNMENTS OF THE EMIRATES WERE AUTHORIZED T O REGULATE LOCAL MATTERS. REFERENCE WAS DRAWN TO ARTICLE 120 AND 121 OF UAE C ONSTITUTION WHICH LISTS DOWN MATTERS IN WHICH THE UNION HAVE EXCLUSIVE LEGI SLATIVE JURISDICTION WHEREIN UNDER ARTICLE 121 COMPANY LAW IS INCLUDED. HE WE NT ON TO SUBMIT THAT IN PURSUANT TO THIS, UAE ENACTED THE UAE CCL AS A FEDE RAL LAW NO. (8) OF 1984 AND THE SAME WAS THEREAFTER AMENDED IN 1998, INTER ALIA BY REPLACING ARTICLE 2 WITH ARTICLES 1, 2 AND 3 WHICH READ AS UNDER: 1. THE PROVISION OF THIS LAW SHALL APPLY TO THE COMMERCIAL COMPANIES THAT ARE ESTABLISHED IN THE UAE OR THAT TAKE THE UA E AS A BASE OF THE ACTIVITY; AND ALL COMPANIES THAT ARE ESTABLISHED IN THE UAE SHALL TAKE THE SAME AS THEIR DOMICILE. 2. THE PROVISION OF THE LAW SHALL NOT APPLY TO TH E COMPANIES THAT ARE ESTABLISHED IN THE FREE ZONES OF THE UAE IN CONJUNC TION OF WHICH A SPECIAL PROVISION IS MADE IN THE REGULATIONS OF THE FREE ZONE CONCERNED WITH THE EXCEPTION OF ACQUIRING THE UAE NATIONALITY . 3. SAVE THE ACQUISITION OF THE UAE NATIONALITY, T HE PROVISIONS OF THIS LAW DO NOT APPLY TO THE OIL COMPANIES OPERATING IN EXPL ORATION, EXTRACTION, MARKETING AND TRANSPORTATION; COMPANIES OPERATING I N PRODUCING ELECTRICITY, GAS, WATER, DESALINATION AND WHATEVER IS RELATED TO THEIR ACTIVITIES SUCH AS TRANSPORTATION, DISTRIBUTION AND OTHERS; AND COMPANIES REGARDING WHICH A DECISION IS ISSUED BY THE CABINET OF MINISTERS EXCLUDING THEM, ALL IN CONJUNCTION OF WHICH A SPECI AL A PROVISION IS MADE IN THEIR MEMORANDA OF ASSOCIATION AND THE-LAWS. 5. HE FURTHER SUBMITTED THAT ARTICLE 122 OF UAE CON STITUTION STATES THAT THE EMIRATES WILL HAVE COMPETENCE IN ALL THOSE MATTES W HICH ARE NOT DESIGNATED TO THE FEDERAL AUTHORITIES UNDER ARTICLES 120 AND 121. HE FURTHER SUBMITTED THAT ARTICLE 149 OF UAE CONSTITUTION PROVIDES AN EXEMPTI ON TO THE PROVISIONS OF I.T.A.NO. 580 /AHD/2011 8 ARTICLE 121 WHEREIN EMIRATES CAN PROMULGATE NECESSA RY LEGISLATIONS, FOR THE REGULATIONS OF MATTERS LAID DOWN UNDER ARTICLE 121 (INCLUDING COMPANY LAW) WITHOUT VIOLATION OF THE PROVISIONS OF ARTICLE 151 OF THE UAE CONSTITUTION. HE SUBMITTED THAT ARTICLE 151 OF UAE CONSTITUTION DEAL S WITH SUPREMACY AND CONFLICT OF THE PROVISIONS BETWEEN FEDERAL AND EMIR ATES LEGISLATION, IN WHICH CASE, THE FEDERAL PROVISION WOULD PREVAIL. HE SUBM ITTED THAT IN COMPLIANCE WITH THIS CONSTITUTIONAL FRAMEWORK, THE AMIRI DECRE E NO.(2) OF 1996 WAS PROMULGATED BY HIS HIGHNESS RULER OF THE EMIRATE OF AJMAN AND IT IS AVAILABLE ON PAGE 678 OF THE PAPER BOOK-III. HE SUBMITTED TH AT THE SAID AMIRI DECREE MENTIONS IN ITS SECOND ARTICLE THAT ANY ESTABLISHME NT IN FREE ZONE WILL BE CALLED THE FREE ZONE ESTABLISHMENT WITH LIMITED LIA BILITY AND SHALL HAVE THE BODY CORPORATE STATUS AND SHALL BELONG TO ONE NATUR AL PERSON OR ONE JUDICIAL PERSON. IT WAS SUBMITTED THAT UNDER THIS AMIRI DEC REE, THE FREE ZONE AUTHORITY OF THE EMIRATE OF AJMAN WAS SET UP, AND THIS FREE Z ONE AUTHORITY HAS THE POWER TO REGISTER COMPANIES, AND REGULATE THEM. IT WAS T HE SUBMISSION THAT EMIRATES IN UAE CAN PROMULGATE THEIR OWN LEGISLATION FOR COM PANY LAW IN THEIR RESPECTIVE EMIRATES IN UAE AND SINCE VEGA UAE IS IN CORPORATED IN AJMAN, THE RELEVANT PROVISIONS TO BE EXAMINED ARE THE PROVISI ONS OF THE AMIRI DECREE OF 1996 AND ACCORDINGLY, VEGA UAE IS A REGISTERED COMP ANY AND A BODY CORPORATE INCORPORATED IN THE FREE ZONE OF AJMAN (UAE) UNDER THE PROVISIONS OF THE AMIRI DECREE OF 1996. REGARDING UAE COMMERCIAL COMPANY LAW (CCL), IT WAS SUBMITTED THAT DRP/A.O. HAVE WRONGLY RELIED ON THE PROVISIONS OF UAE CCL IN REACHING TO THE CONCLUSION THAT VEGA UAE IS NOT A COMPANY. 6. THE LD. COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT VEGA UAE IS A BODY CORPORATE U/S 2(17) OF THE INCOME TAX ACT, 1961. H E FURTHER SUBMITTED THAT THE A.O. HAS INCORRECTLY INTERPRETED THE CIRCULAR NO.8 (26)/2(7)/63-PR DATED 13.03.1963 UNDER THE COMPANIES ACT 1956 AND THE PRO VISION OF SECTION 2(17) OF THE ACT TO CONCLUDE THAT VEGA UAE CANNOT BE RECOGNI ZED AS BODY CORPORATE DUE TO NON-SATISFACTION OF (A) PERPETUAL SUCCESSION ; (B) A LEGAL ENTITY APART FORM I.T.A.NO. 580 /AHD/2011 9 MEMBERS CONSTITUTING IT. WITH REGARD TO THESE POIN TS, IT WAS SUBMITTED THAT SECTION 2(17) OF THE INCOME TAX ACT, 1961 DEFINES A COMPANY TO INCLUDE ANY BODY CORPORATE INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA. IT IS THUS CLEAR THAT THIS SECTION MAKES NO REFERENCE TO THE PROVISIONS OF COMPANIES ACT 1956 REGARDING NEED TO HAVE AT LEAST TWO SHAREH OLDERS TO BE TREATED AS BODY CORPORATE. IT IS SUBMITTED THAT WHAT IS RELEVANT H ERE IS THE LAW OF THE COUNTRY OUTSIDE INDIA AND NOT WHAT IS PREVALENT IN INDIA. V ARIOUS OTHER SUBMISSIONS WERE ALSO MADE BY THE LD. COUNSEL FOR THE ASSESSEE BUT WE WILL CONSIDER THEM IF WE FEEL THAT THE ISSUE INVOLVED CANNOT BE DECIDED ON T HE BASIS OF ABOVE STATED SUBMISSIONS. 7. IN REPLY TO THESE SUBMISSIONS OF THE LD. A.R., I T WAS SUBMITTED BY THE LD. D.R. SHRI SATISH GUPTA, CIT DR THAT THE ASSESSEE AN D THE COUNSEL ARE NOT ABLE TO APPRECIATE CORRECTLY THE SCHEME OF THE ACT REGARDIN G TAXATION OF GLOBAL INCOME OF A RESIDENT IN INDIA AS PER INCOME TAX ACT, 1961. HE SUBMITTED THAT IN THE PRESENT CASE, AS PER THE PROVISIONS OF SECTION 5, T HE A.O. WANT TO TAX GLOBAL INCOME OF A RESIDENT ASSESSEE I.E. PRESENT ASSESSEE . HE SUBMITTED THAT AIA EARNED INCOME FROM OVERSEAS SOURCES, BRANCHES, PROP RIETARY UNDERTAKINGS, PARTNERSHIPS, SUBSIDIARY ETC. GLOBALLY. HE SUBMIT TED THAT EVEN INCOME OF A SUBSIDIARY CAN BE TAXED IN THE HAND OF THE RESIDENT IF SO PROVIDED BY DOMESTIC LAW AND NOT RESTRICTED BY APPLICABLE TREATY (IN TH E PRESENT CASE INDIA UAE TREATY). HE SUBMITTED THAT IN THE PRESENT CASE, T HE ASSESSEE AND ITS COUNSEL WERE NOT CLEARLY ABLE TO UNDERSTAND CORE OF THE PROBLEM WHICH IS RELATED TO TREATMENT OF A FOREIGN ENTITY I.E. VEGA FZE BY ANOTHER FOREIG N JURISDICTION (INDIA) WHICH APPLIES ITS DOMESTIC TAX LAW. HE ALSO SUBMITTED T HAT NORMALLY, TREATIES CLEARLY PROVIDE HOW ENTITY OF FOREIGN JURISDICTION WILL BE TREATED IN OTHER TREATY PARTNER COUNTRY. HE QUOTED THE RELEVANT ARTICLE OF INDIA U S TREATY AND INDIA UK TREATY AND SWITZERLAND TREATY AND OTHER TREATIES. REGARDI NG INDIA UAE TREATY, HE SUBMITTED THAT THE RELEVANT CLAUSE HAS BEEN DEFINED IN ARTICLE 3(1)(F) WHICH IS AS UNDER: I.T.A.NO. 580 /AHD/2011 10 THE TERM COMPANY MEANS ANY BODY CORPORATE OR ANY ENTITY WHICH IS TREATED AS A COMPANY OR BODY CORPORATE UNDER THE TA XATION LAWS IN FORCE IN THE RESPECTIVE CONTRACTING STATES. 8. HE FURTHER SUBMITTED THAT AT THE TIME OF SIGNING ABOVE TREATY ON 29.04.1992 AND EVEN TODAY, THERE ARE NO TAXATION LA WS IN FORCE IN UAE AND MORE PARTICULARLY IN EMIRATES OF AJMAN. HE ALSO SUBMITT ED THAT THE GOVERNMENT OF UAE HAVE SIGNED THE ABOVE AGREEMENT AND AGREED TO T HE DEFINITION OF THE COMPANY KNOWING FULLY WELL THAT THERE IS NO TAXATIO N LAW IN FORCE IN THE UAE. HE WENT ON TO SUBMIT THAT THE TERM TAXATION LAWS I N FORCE CANNOT BE TREATED AS REDUNDANT IN THIS CONTEXT MORE PARTICULARLY WHEN IN OTHER TREATIES WHICH INDIA HAS SIGNED WITH OTHER COUNTRIES, NO SUCH WORD HAS B EEN USED. IT CLEARLY MEANS THAT INDIAN TAXATION AUTHORITIES ARE TO APPLY DEFIN ITION OF COMPANY AS PER THEIR DOMESTIC LAW. IT IS ALSO SUBMITTED THAT IT IS CLEA RLY PROVIDED IN ARTICLE 3(2) OF THE INDIA UAE TREATY THAT ANY TERM NOT DEFINED IN THE SAID TREATY WILL HAVE THE MEANING WHICH IT HAS UNDER THE LAWS OF THAT STATE ( INDIA) CONCERNING THE TERMS TO WHICH THE AGREEMENT APPLIES. REGARDING CERTIFIC ATE REGARDING TAX RESIDENCY FORM AJMAN FREE ZONE AUTHORITY OF MINISTRY OF FINAN CE, UAE SUBMITTED BY THE ASSESSEE, HE SUBMITTED THAT THESE ARE NOT RELEVANT AS INDIAN AUTHORITIES HAVE TO APPLY THEIR DOMESTIC LAWS IN THIS REGARD. HE ALSO SUBMITTED THAT AS PER ARTICLE 121 OF UAE CONSTITUTION 1971, COMPANY IS WITHIN THE JURISDICTION OF FEDERAL CONSTITUTION AND AS PER ARTICLE 149 OF THE UAE CONS TITUTION, IN RESPECT OF SUBJECT REFERRED IN ARTICLE 121 TO ENACT LEGISLATIO N WHICH IS CONSISTENT WITH FEDERAL LEGISLATION, HE SUBMITTED THAT THE EMIRATES CAN HAVE LEGISLATION WHICH IS NOT IN CONFRONTATION WITH THE CONSTITUTIONAL PROVIS IONS OF UAE. HE ALSO DRAWN OUR ATTENTION TO ARTICLE 151 OF UAE CONSTITUTION AS PER WHICH THE PROVISIONS TO THE CONSTITUTION SHOULD HAVE PRECEDENCE OVER THE CO NSTITUTION OF EMIRATES BEING MEMBER OF THE FEDERATION AND FEDERAL LAW IN ACCORDA NCE WITH ITS PROVISIONS SHALL HAVE PRIORITY OVER THE LEGISLATION, REGULATION AND RESOLUTIONS ISSUED BY THE AUTHORITIES OF THE EMIRATES. HE SUBMITTED THAT IN VIEW OF THIS, THE LAW LAID DOWN I.T.A.NO. 580 /AHD/2011 11 UNDER THE AMIRI DECREE NO.(2) OF 1996 ON AMENDING D ECREE NO.(3) OF 1988 IS IN CONFLICT WITH SUPERIOR LEGISLATION I.E. COMMERCI AL COMPANY LAW, FEDERAL LAW NO.(8) OF 1984 CONCERNING COMMERCIAL COMPANIES, WHI CH PROVIDES THAT A COMPANY IS A CONTRACT BETWEEN TWO OR MORE PERSONS. HE ALSO SUBMITTED THAT AS PER ARTICLE 5 OF CCL, THERE SHOULD HAVE MINIMUM TWO SHAREHOLDERS IN A COMPANY AS HAS BEEN RECOGNIZE D BY INDIAN COMPANIES ACT, 1956. HE ALSO SUBMITTED THAT SECTION 2(17) OF THE INCOME TAX ACT, 1961 IS NOT APPLICABLE BECAUSE VEGA UAE IS NOT INCORPORATED UNDER THE LAW OF A COUNTRY OUTSIDE INDIA. HE SUBMITTED THAT IN VIEW OF THESE, THE A.O. AND TH E DRP HAVE RIGHTLY TREATED VEGA UAE AS PROPRIETARY CONCERN OF THE ASSESSEE AND , THEREFORE, ORDER OF THE A.O. SHOULD BE CONFIRMED. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSE D THE MATERIAL ON RECORD AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BEL OW. WE FIND THAT THE OBJECTION OF THE A.O. IS THIS THAT VEGA UAE IS NOT A LEGALLY INDEPENDENT ENTITY AND IT IS A SOLE PROPRIETORSHIP CONCERN OF THE ASSE SSEE AND THIS VIEW OF THE A.O. IS BASED ON THIS PREMISE THAT THE ASSESSEE IS A SOL E SHAREHOLDER HAVING 100% SHARES HOLDING IN THIS ENTITY AND THEREFORE, THIS E NTITY IS NOT A COMPANY AND AN INDEPENDENT ENTITY. IN THIS REGARD, WE FEEL THAT T HE PROVISIONS OF SECTION 2(17) OF INCOME TAX ACT ARE VERY MUCH RELEVANT AND THE SA ME ARE REPRODUCED BELOW: [(17) COMPANY MEANS (I) ANY INDIAN COMPANY, OR (II) ANY BODY CORPORATE INCORPORATED BY OR UNDER T HE LAWS OF A COUNTRY OUTSIDE INDIA, OR (III) ANY INSTITUTION, ASSOCIATION OR BODY WHICH I S OR WAS ASSESSABLE OR WAS ASSESSED AS A COMPANY FOR ANY ASSESSMENT YEAR U NDER THE INDIAN INCOME-TAX ACT, 1922 (11 OF 1922), OR WHICH IS OR W AS ASSESSABLE OR WAS ASSESSED UNDER THIS ACT AS A COMPANY FOR ANY AS SESSMENT YEAR COMMENCING ON OR BEFORE THE 1ST DAY OF APRIL, 1970, OR (IV) ANY INSTITUTION, ASSOCIATION OR BODY, WHETHER INCORPORATED OR NOT AND WHETHER INDIAN OR NON-INDIAN, WHICH IS DECLARED BY GENERAL OR SPECIAL ORDER OF THE BOARD TO BE A COMPANY : I.T.A.NO. 580 /AHD/2011 12 PROVIDED THAT SUCH INSTITUTION, ASSOCIATION OR BO DY SHALL BE DEEMED TO BE A COMPANY ONLY FOR SUCH ASSESSMENT YEAR OR AS SESSMENT YEARS (WHETHER COMMENCING BEFORE THE 1ST DAY OF APRIL, 19 71, OR ON OR AFTER THAT DATE) AS MAY BE SPECIFIED IN THE DECLARA TION ;] 10. AS PER THESE PROVISIONS OF SECTION 2(17), FOR O THER THAN AN INDIAN COMPANY, A COMPANY MEANS ANY BODY CORPORATE INCORPO RATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA AND VEGA UAE IS DEF INITELY NOT AN INDIAN COMPANY. NOW, WE HAVE TO EXAMINE AS TO WHETHER IT CAN BE SAID THAT VEGA UAE IS A BODY CORPORATE INCORPORATED BY AND UNDER T HE LAW OF A COUNTRY OUTSIDE INDIA. THE CERTIFICATE OF FORMATION OF VEGA UAE IS SUED BY AJMAN FREE ZONE AUTHORITY WHICH IS AVAILABLE ON PAGE 677 OF THE PAP ER BOOK III. THE CONTENTS OF THIS CERTIFICATE ARE REPRODUCED BELOW: AJMAN FREE ZONE 28 TH JANUARY, 2004 AFZA/408/2004/REGISTERED CO./DG/AS CERTIFICATE OF FORMATION WE, THE GOVERNMENT OF AJMAN FREE ZONE AUTHORITY CER TIFY THAT M/S. VEGA INDUSTRIES (MIDDLE EAST) IS A REGISTERED COMPA NY WITHIN THE FREE TRADE ZONE OF AJMAN, UNDER THE LICENSE NO.1165 WHIC H ISSUED ON 22/4/2003. THE ABOVE MENTIONED COMPANY IS FORMED UNDER OUR SEA L OF AJMAN FREE ZONE. SD./- MOHAMMED BIN ABDULLA AL NUAIMI DIRECTOR GENERAL AJMAN FREE ZONE AUTHORITY //SEAL// 11. AS PER THE MEMORANDUM OF INCORPORATION OF VEGA UAE WHICH IS AVAILABLE ON PAGE 5-10 OF THE PAPER BOOK, WE FIND T HAT AS PER THIS, IT HAS BEEN I.T.A.NO. 580 /AHD/2011 13 STATED THAT A FREE ZONE ESTABLISHMENT (FZE) IS DULY INCORPORATED ON 22.04.2002 IN ACCORDANCE WITH AMIRI DECREE NO.(3) OF 1988 IN R ESPECT OF ESTABLISHMENT OF FREE ZONE IN EMIRATES OF AJMAN AS AMENDED, ITS ENFO RCEMENT REGULATIONS AND ACCORDING TO VARIOUS TERMS AND CONDITIONS SPECIFIED IN THIS CERTIFICATE. IN THE SAID CERTIFICATE, DETAIL OF FOUNDER/OWNER HAS BEEN GIVEN AND AS PER THIS, THE ASSESSEE COMPANY IS THE OWNER OF THIS ENTITY. IN A RTICLE (1) OF THIS CERTIFICATE OF INCORPORATION, IT WAS CERTIFIED THAT THIS IS A FZE WITH LIMITED LIABILITY WITH CORPORATE ENTITY AND INDEPENDENT AND SEPARATE FINAN CIAL LIABILITY FOR THOSE OF ITS OWNER BUT AT ARTICLE (2), IT HAS BEEN STATED THAT T HE OWNER WILL BE PERSONALLY RESPONSIBLE FOR ANY OMISSION OF SUCH INFORMATION I. E. MENTIONING OF FZE ALONG WITH THE NAME OF THAT ENTITY ON ALL BUSINESS DOCUME NTATION, CONTRACTS, ADVERTISEMENT AND INVOICES AND THAT IT WILL BE PURS UANT TO AMIRI DECREE NO.(3) OF 1988 AS AMENDED AND IF THERE IS ANY OMISSION ON THIS ACCOUNT, THE OWNER SHALL BE PERSONALLY RESPONSIBLE FOR ANY OMISSION OF SUCH INFORMATION. ON THE BASIS OF THIS ARTICLE (2) OF THE MEMORANDUM OF INCORPORATION , IT IS THE ALLEGATION OF THE A.O. THAT THIS ENTITY HAS NO SEPARATE LEGAL STATUS BECAUSE THE OWNER IS PERSONALLY RESPONSIBLE FOR ANY OMISSION OF SUCH INFORMATION. IN THIS REGARD, WE DO NOT FIND ANY FORCE IN THIS CONTENTION OF THE A.O. BECAUSE AS PER ARTICLE (1) OF THE SAID MEMORANDUM OF INCORPORATION, IT HAS BEEN STATED THA T THIS ENTITY IS ESTABLISHED WITH CORPORATE ENTITY AND INDEPENDENT AND SEPARATE FINANCIAL LIABILITY FROM THOSE OF ITS OWNER IN ACCORDANCE WITH THIS MEMORANDUM OF INCORPORATION AND THE ONLY SITUATION WHERE THE OWNER WILL BE TREATED AS PERSON ALLY RESPONSIBLE IS REGARDING OMISSION OF SOME SPECIFIED INFORMATION THAT THE ENT ITY IS A FREE ZONE ESTABLISHMENT (FZE) AND IT WILL BE PURSUANT TO AMI RI DECREE NO.(3) OF 1988 AS AMENDED. IN OUR CONSIDERED OPINION, THIS IS A SITU ATION WHERE IT SPECIFIES THAT CORPORATE VEIL MAY BE LIFTED. THIS MAY DIFFER FROM COUNTRY TO COUNTRY AND IN INDIA ALSO, IN SOME SITUATIONS, CORPORATE VEIL CAN BE LIFTED AND, THEREFORE, BECAUSE OF THIS RESTRICTION ALONE, IT CANNOT BE SAI D THAT VEGA UAE IS NOT A SEPARATE LEGAL ENTITY. I.T.A.NO. 580 /AHD/2011 14 12. THE MAIN OBJECTION OF THE A.O. IS THAT SINCE TH E ASSESSEE IS THE ONLY SHAREHOLDER AND HOLDING 100% SHARES OF VEGA UAE, IT IS NOT A VALID COMPANY BECAUSE AS PER INDIAN COMPANIES ACT AND AS PER UAE CCL, TWO SHAREHOLDERS ARE REQUIRED. THE ARGUMENT OF THE REVENUE IS THIS THAT AS PER CCL OF UAE, TWO SHAREHOLDERS ARE REQUIRED AND AS PER ARTICLE 151 OF THE CONSTITUTION OF UAE, THE PROVISIONS OF CONSTITUTION SHALL HAVE PRECEDENCE OV ER THE CONSTITUTION OF EMIRATES WHICH ARE THE MEMBERS OF THE FEDERATION BU T THE CONTENTION OF LD. COUNSEL FOR THE ASSESSEE IS THAT AN EXCEPTION HAS B EEN CARVED OUT IN ARTICLE 149 OF THE SAID CONSTITUTION WHICH IS AVAILABLE ON PAGE 715 OF THE PAPER BOOK-III AND THE SAME IS REPRODUCED BELOW: ARTICLE 149- IN EXCEPTION TO THE PROVISIONS OF ART ICLE 121 OF THIS CONSTITUTION, THE EMIRATES MAY ISSUE THE LEGISLATIO N NECESSARY TO REGULATE THE MATTES INDICATED IN THE SAID ARTICLE, WITHOUT P REJUDICE TO THE PROVISIONS OF ARTICLE 151 OF THIS CONSTITUTION. 13. FROM THE ABOVE ARTICLE, IT IS SEEN THAT WITH RE GARD TO THE PROVISIONS OF ARTICLE 121 OF THIS CONSTITUTION WHICH INCLUDES CO MPANY, THE EMIRATES CAN ISSUE LEGISLATION NECESSARY TO REGULATE THE MATTER INDICATED IN THE SAID ARTICLE I.E. ARTICLE 121 WITHOUT PREJUDICE TO THE PROVISIONS OF ARTICLE 151 OF THIS CONSTITUTION. HENCE, FOR THE REGULATION OF A COMPA NY, THE EMIRATES CAN HAVE THEIR OWN LEGISLATION AND FOR THIS, ARTICLE 151 IS NOT APPLICABLE AND, THEREFORE, IT HAS TO BE ACCEPTED THAT AMIRI DECREE ISSUED BY EMIR ATES OF AJMAN IS NOT IN CONFLICT WITH THE CONSTITUTION OF UAE AND, THEREFOR E, IT IS VALID. 14. AS PER THIS AMIRI DECREE NO.(2) OF 1996 PROMULG ATED BY HIS HIGHNESS THE RULER OF EMIRATES OF AJMAN, FREE ZONE ESTABLISH MENT (FZE) CAN BE ESTABLISHED WITH LIMITED LIABILITY AND SHALL HAVE T HE BODY CORPORATE CAPACITY AND IT SHALL BELONG EITHER TO ONE NATURAL PERSON OR ONE JUDICIAL PERSON. IT GOES TO SHOW THAT VEGA UAE IS DULY INCORPORATED AS A BODY C ORPORATE UNDER THE LAW OF A COUNTRY OUTSIDE INDIA WHICH IS A REQUIREMENT OF S ECTION 2(17) OF THE INCOME TAX ACT, 1961 AND, THEREFORE, VEGA UAE HAS TO BE AC CEPTED AS A COMPANY WITHIN I.T.A.NO. 580 /AHD/2011 15 THE DEFINITION OF SECTION 2(17) OF THE INCOME TAX A CT, 1961. ONCE IT IS ACCEPTED, THE ADDITION MADE BY THE A.O. BY HOLDING THAT VEGA UAE IS A SOLE PROPRIETORSHIP CONCERN OF THE ASSESSEE COMPANY IS N OT SUSTAINABLE AND HENCE, THE ADDITION MADE BY THE A.O. IS TO BE DELETED. WE HOLD ACCORDINGLY. GROUND NO.1 OF THE ASSESSEE IS ALLOWED. REGARDING VARIOUS OTHER CONTENTIONS RAISED BY BOTH SIDES, WE WOULD LIKE TO OBSERVE THAT THE SAME ARE NOT RELEVANT IN VIEW OF OUR ABOVE DECISION. 15. GROUNDS NO.2 & 3 ARE REGARDING TP ADJUSTMENT MA DE BY THE A.O. OF RS.4,32,70,240/- IN RESPECT OF SALES MADE TO VEGA U AE AND OF RS.95,56,360/- IN RESPECT OF COMMISSION PAYMENT TO VEGA UK. THERE IS ONE MORE CONTENTION RAISED BY THE ASSESSEE IN RESPECT OF BOTH THESE ISS UES THAT BENEFIT OF 5% RANGE SHOULD HAVE BEEN ALLOWED AS PROVIDED IN PROVISO TO SECTION 92C(2) OF THE INCOME TAX ACT, 1961. 16. IT IS NOTED BY THE DRP ON PAGE 19 OF ITS ORDER THAT TPO DURING THE COURSE OF PROCEEDINGS REQUIRED THE ASSESSEE TO FURNISH THE GROSS AND NET MARGIN OF VEGA ENTITY. THE SAME WAS SUBMITTED BY THE ASSESSEE BEF ORE THE TPO AND IT HAS BEEN REPRODUCED BY THE DRP AS PER WHICH GROSS PROFIT PER CENTAGE OF VEGA UAE IS @ 14.5%, VEGA UK @ 14.2% AND VEGA US @ 9.1%. SIMILAR LY, NET OPERATING PROFIT PERCENTAGE HAS BEEN SHOWN AS VEGA UAE @ 7.4% , VEGA UK @ 4.9% AND VEGA US @ 2.9%. THIS CONTENTION WAS RAISED BY THE ASSESSEE BEFORE THE TPO THAT THE DIFFERENCE IN THE GROSS AND NET MARGINS OF VARIOUS VEGA ENTITIES IS BECAUSE OF DIFFERENCE IN ULTIMATE SALE PRICE AND TH E LEVEL OF OPERATING EXPENSES AND NOT FOR THIS REASON THAT DIFFERENT PURCHASE PRI CE HAD BEEN PAID TO THE ASSESSEE. A WORKING HAS BEEN SUBMITTED REGARDING T OTAL OPERATING EXPENSES OF THESE THREE VEGA ENTITIES AND ITS PERCENTAGE TO TUR NOVER. AS PER THIS, THE PERCENTAGE OF TOTAL OPERATING EXPENSES TO TURNOVER OF VEGA UAE WAS WORKED OUT @ 7.7%, OF VEGA UK @ 14.5% AND VEGA US @ 11.8%. THE ASSESSEE HAD ALSO FURNISHED SEPARATE WORKING OF THE PERCENTAGE O F TOTAL EMPLOYEES COST TO I.T.A.NO. 580 /AHD/2011 16 TURNOVER WHICH IS WORKED OUT @ 1.3% FOR VEGA UAE, 3 .6% FOR VEGA UK AND @ 6.5% FOR VEGA US. THIS SUBMISSION WAS ALSO MADE THAT TRUE PLI FOR DISTRIBUTOR CAN ONLY BE THE NET OPERATING PROFIT MA RGIN I.E. NOPM AND THE SAME WAS GIVEN ALONG WITH ARITHMETIC MEAN OF COMPARABLE COMPANIES. AS PER THE CHART REPRODUCED BY THE DRP ON PAGE 23 OF ITS ORDER , NET OPERATING PROFIT MARGIN OF VEGA UAE IS WORKED OUT @ 7.4% WHEREAS ARITHMETIC MEAN OF THE COMPARABLE COMPANIES HAS BEEN WORKED OUT @ 8.5%. S IMILARLY NOPM MARGIN OF VEGA UK HAS BEEN WORKED OUT @ 4.9% AND THAT OF T HE COMPARABLE COMPANIES @ 6.5% AND SIMILARLY FOR VEGA US, NOPM MA RGIN WAS WORKED OUT @ 2.9% AND THAT OF COMPARABLE COMPANIES WAS WORKED OUT @ 5.9%. IT WAS SUBMITTED BY THE ASSESSEE BEFORE THE DRP THAT THE T POS CONCLUSION BASED ON COMPARISON OF OPERATING PROFIT TO TOTAL COST IS IMP ROPER AND HENCE, CANNOT BE RELIED UPON. THE TPO HAD CHARACTERIZED THE VEGA UA E AS ONLY MARKETING ENTITY BUT AS PER THE ASSESSEE, THIS IS NOT CORRECT . VEGA UAE IS A FULL FLEDGED DISTRIBUTOR. THE RELEVANT PARAS OF THE ORDER OF DR P ARE PARAS 22-25 OF DRP ORDER AND THE SAME ARE REPRODUCED BELOW: 22. THE ASSESSEE HAS FURTHER OBJECTED TO THE ACTION OF THE TPO IN PROPOSING THE ADJUSTMENT TO THE INCOME OF THE ASSESSEE IN RESPECT OF GOODS SOLD TO VEGA UAE BY CONSIDERING THE CONT ROLLED TRANSACTIONS OF THE ASSESSEE AS COMPARABLE FOR BENCHMARKI NG THE INTERNATIONAL TRANSACTION. THE ASSESSEE HAS CONTENDED THAT TH IS ACTION OF THE TPO IS NOT IN CONSONANCE WITH RULE 10B(1)(E)(II) OF THE RULES. IN THIS REGARD, IT IS SEEN THAT VARIOUS DEFECTS WERE NOTICED BY THE TPO IN THE TRANSFER PRICING ANALYSIS CONDUCTED BY THE ASSESSEE AND TH EREFORE THE TPO HAD RIGHTLY REJECTED THE SAID TRANSFER PRICING ANALYSI S CONDUCTED BY THE ASSESSEE. FURTHER, IN THE TRANSFER PRICING ANALYSIS CONDUCTED BY THE ASSESSEE KEEPING THE ASSOCIATED ENTERPRISES AS TE STED O> PARTIES WHICH WAS SUBMITTED LATER BY THE ASSESSEE VIDE LE TTER DATED 13.03.2009, THE ASSESSEE HAD TAKEN COMPARABLES WHOSE FUNCTIONS AND RISK PROFILES WERE NOT SIMILAR TO THAT OF VEGA UAE AND THE SAID T RANSFER PRICING ANALYSIS WAS ALSO RIGHTLY NOT CONSIDERED BY THE TPO . IN SUCH EVENTUALITY, WHEN THE TRANSFER PRICING ANALYSIS CONDUCTED BY TH E ASSESSEE WAS DEFECTIVE AND THE COMPARABLES SELECTED BY THE ASSESSEE HAVE NOT BEEN FOUND TO BE APPROPRIATE, BENCHMARKING H AS TO BE CARRIED OUT BY THE TPO BASED ON THE LIMITED INFORMATION THAT MAY B E PROVIDED BY THE I.T.A.NO. 580 /AHD/2011 17 ASSESSEE TO THE TPO. UNDER THE CIRCUMSTANCES, THE T PO HAD TO RESORT TO THE COMPARISON OF OPERATING PROFIT TO THE TOTAL C OST OF THE SUBSIDIARIES/ENTITIES OF THE ASSESSEE COMPANY A ND THE SAID RATIO FOR THE US ENTITY COMPUTED AT 26.49% WAS RIGHTLY APPLIED BY THE TPO TO VEGA UK AND VEGA UAE, IT MAY BE MENTIONED HERE THAT T HE FOCUS OF TRANSFER PRICE OF DETERMINATION IS ON THE REASONABLENESS OF THE RESULT AND NOT THE DETAILS OF THE METHODOLOGY EMPLOYED, IF THE COMPARABILITY AND RELIABILITY LEVEL IS OF HIGH DEGREE, THERE COULD BE NO OBJECTION IN TAKING TRANSACTIONS WITH RELATED PARTIES AS TRULY COMP ARABLES. IN VIEW OF THE ABOVE, THE TPO WAS JUSTIFIED IN COMPARING THE OPERA TING PROFIT TO THE TOTAL COST OF THE THREE SUBSIDIARIES/ENTITIES OF THE ASSESSEE COMPANY. HENCE, THE UPWARD ADJUSTMENT OF RS.4,32,70,2407- MA DE BY THE TPO IN THE SALE PRICE TO VEGA UAE IS HEREBY UPHELD. 23. THE ASSESSEE HAS FURTHER OBJECTED TO THE ADDITI ON OF RS,95,56,3607- PROPOSED BY THE TPO BY MAKING DOWNWARD ADJUSTMENT I N RESPECT OF SALES COMMISSION PAID TO VEGA UK. THE ASSESSEE HAS SUBMIT TED THAT THE SAID ADJUSTMENT HAS BEEN MADE BY THE TPO WITHOUT PROVIDI NG AN OPPORTUNITY OF BEING HEARD AND WITHOUT EXAMINING THE RELEVANT F ACTS. THE ASSESSEE HAS FURTHER OBJECTED TO THE ACTION OF THE TPO IN CONCLU DING THAT VEGA UK HAD NOT CARRIED OUT ITS FUNCTIONS IN RESPECT OF WHICH T HE COMMISSION WAS PAID BY THE ASSESSEE TO VEGA UK. 24. WE DO NOT AGREE WITH THE CLAIM OF THE ASSESSEE THAT WHILE MAKING THE SAID ADJUSTMENT, NO OPPORTUNITY OF HEARING WAS ALLO WED BY THE TPO. A QUESTIONNAIRE DATED 06.05.2008 WAS ISSUED BY THE TP O AND THE HEARING WAS FIXED ON 04.06.2008. THE SECOND NOTICE WAS ISSU ED ON 07.01.2009 AND THE HEARING WAS FIXED ON 21.01.2009. THE THIRD NOTICE WAS ISSUED ON 21.07.2009 AND THE HEARING WAS FIXED ON 28.07.2009. WE ARE THEREFORE SATISFIED THAT ADEQUATE OPPORTUNITY OF HEARING WAS ALLOWED BY THE TPO TO THE ASSESSEE BEFORE PASSING THE ORDER. 25. THE TPO HAS MADE DOWNWARD ADJUSTMENT OF RS.95,5 6,3607- OUT OF THE TOTAL CLAIM OF COMMISSION OF RS.3,03,95,4057- S HOWN TO HAVE BEEN PAID BY THE ASSESSEE TO M/S. VEGA UK, ON THE GROUND THAT THE SAID SUBSIDIARY HAS NOT CARRIED OUT ALL THE FUNCTIONS RE LATED TO COMMISSION EARNING ACTIVITIES AND THE GEOGRAPHICAL TERRITORY H AS ALSO NOT BEEN ASSIGNED TO IT. AS ALREADY DISCUSSED EARLIER IN THI S ORDER, WE HAVE UPHELD THE FINDING OF THE TPO THAT THERE WAS NO PROPER DIS TRIBUTION OF TERRITORIES AMONGST THE ASSESSEE'S SUBSIDIARIES/ENTITIES. SINCE THERE IS NO CLEAR-CUT DEMARCATION OF THE GEOGRAPHICAL TERRITORIES AMONGST THE THREE SUBSIDIARIES OF THE ASSESSEE, THE TPO IS JUSTIFIED IN HOLDING TH AT ALL THE FUNCTIONS RELATED TO COMMISSION EARNING ACTIVITIES HAVE NOT B EEN CARRIED OUT BY I.T.A.NO. 580 /AHD/2011 18 VEGA UK AND THEREFORE THE DOWNWARD ADJUSTMENT OF RS .95,56,360/- MADE BY THE TPO IN THE COMMISSION INCOME EARNED BY M/S. VEGA UK IS UPHELD. 17. IT IS ALSO SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF GRINDIN G MEDIA, LINERS FOR MILLS, DIAPHRAGMS, HAMMERS AND CRUSHERS, HEAT RESISTANT CA ST STEEL, VERTICAL SPINDLE MILL SPARES, MILL CONTROL SYSTEMS ETC. IT WAS ALSO SUBM ITTED THAT ASSESSEE HAS THREE OVERSEAS SUBSIDIARIES, NAMELY, VEGA INDUSTRIES LIMI TED UK (VEGA UK), VEGA INDUSTRIES LIMITED, USA (VEGA US) AND VEGA INDUSTRI ES (MIDDLE EAST) FZE, UAE (VEGA UAE). IT IS ALSO SUBMITTED THAT THE ASSES SEE PRIMARILY SELLS ITS PRODUCTS IN THE DOMESTIC MARKET WHEREAS MARKETING A ND DISTRIBUTION OF ITS PRODUCTS IN THE INTERNATIONAL MARKETS IS UNDERTAKEN BY VEGA ENTITIES IN THEIR SPECIFIED JURISDICTIONS. THIS IS ALSO SUBMITTED T HAT VEGA UK WAS ADDITIONALLY RESPONSIBLE FOR SALES IN EUROPE, RUSSIA, AFRICA, TU RKEY AND OTHER ERSTWHILE COMMONWEALTH OF INDEPENDENT STATES, (CIS COUNTRIES) , VEGA US WAS RESPONSIBLE FOR SALES IN NORTH AMERICA AND VEGA UAE WAS RESPONSIBLE FOR SALES IN FAR EAST, MIDDLE EAST AND ASIAN COUNTRIES. IT I S FURTHER SUBMITTED THAT SPECIFICALLY, THE REVENUE PROCEEDED ON THE ASPECT A SSUMING THAT VEGA UAE WAS NEITHER BEARING ANY INVENTORY RISK NOR CONDUCT RISK AND HENCE IS ENTITLED ONLY TO A MARKUP ON VALUE ADDED EXPENSES INCURRED BY IT. I T WAS SUBMITTED THAT THE ACTIVITIES CARRIED OUT BY VARIOUS VEGA ENTITIES IN THEIR RESPECTIVE JURISDICTION ARE AS UNDER: (A) ESTIMATION OF MARKET SIZE AND SALES FORECAST; (B) CUSTOMER VISITS; (C) QUOTATION / OFFER TO THE CUSTOMER; (D) INTERACTION WITH CUSTOMERS FOR PRICING AND PERF ORMANCE OF PRODUCTS; (E) CUSTOMER ORDER/ CONTRACT; (F) SUPPLY OF MATERIAL; (G) INSTALLATION OF PRODUCT AND (H) BILLING AND COLLECTION I.T.A.NO. 580 /AHD/2011 19 18. IT IS ALSO SUBMITTED THAT VEGA UAE BEARS INVENT ORY RISK ALSO. IT IS FURTHER SUBMITTED THAT IN ARRIVING AT THE CONCLUSION, THE T PO AND DRP HAVE MAINLY PROCEEDED ON THIS BASIS THAT IN CERTAIN CASES, THE GOODS WERE DIRECTLY DELIVERED BY THE ASSESSEE TO THE PARTIES ON CUSTOMERS DESTIN ATION AND THE SAME WERE NOT STORED BY VEGA UAE IN ITS WAREHOUSE. IN THIS REGAR D, IT WAS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THE SALES MADE BY THE ASSESSEE TO VEGA UAE ARE ON FREE ON BOARD (FOB) BASIS AND ONCE THE GOODS LEAVE THE INDIAN CUSTOM STATION, THE INVENTORY RISK WITH REGARD TO THE SAID GOODS ARE CATEGORICALLY BORNE BY VEGA UAE AND EVEN THE INSURANCE COST FOR COVERIN G THE RISKS ASSOCIATED WITH THE TRANSIT OF GODS UP TO THE CUSTOMERS CHOSEN DES TINATION ARE BORNE BY VEGA UAE. IT IS FURTHER SUBMITTED THAT AS PER THE AUDIT ED FINANCIAL STATEMENTS OF VEGA UAE AS AVAILABLE ON PAGE 421 OF THE PAPER BOOK-II, INVENTORY OF FINISHED GOODS IS APPEARING IN THE CURRENT ASSETS OF VEGA UAE. IT IS FURTHER SUBMITTED THAT AS PER PARA 11 OF THE AGREEMENT AVAILABLE ON PAGE 594 595 OF THE PAPER BOOK-III, IT IS STATED THAT THE ASSESSEE WOULD BE RESPONSIBLE TO REPLACE/REPAIR DEFECTIVE PRODUCTS MANUFACTURED BY IT ONLY IF THE ASSESSEE RE CEIVES AN INTIMATION FROM THE DISTRIBUTOR VIZ. VEGA UAE THAT THE ASSESSEES PRODU CTS ARE DEFECTIVE WITHIN A PERIOD OF TWO WEEKS AFTER THE DATE OF DELIVERY TO T HE DISTRIBUTOR AND/OR THE END CUSTOMER AND HENCE, IF THE DISTRIBUTOR VEGA UAE IS UNABLE TO INTIMATE THE DEFECTS IN SUCH PRODUCT WITHIN A PERIOD OF SALES WI THIN TWO WEEKS, VEGA UAE IS EXPOSED TO INVENTORY RISK. REGARDING CREDIT RISK A LSO, IT WAS SUBMITTED THAT AS PER THE DISTRIBUTOR AGREEMENT BETWEEN THE ASSESSEE COMPANY AND VEGA UAE AS AVAILABLE ON PAGE 576 OF THE PAPER BOOK, IT IS CLEA RLY MENTIONED THAT THE DISTRIBUTOR SHALL BE RESPONSIBLE FOR ALL THE PAYMEN TS FROM ITS CUSTOMERS AND HENCE, BAD DEBTS IF ANY, SHALL BE TO THE COST OF TH E DISTRIBUTOR. REGARDING THE OBSERVATION OF THE TPO THAT VEGA UAE DOES NOT PROVI DE FOR BAD DEBS WHEREAS THE ASSESSEE COMPANY HAS PROVIDED FOR BAD DEBTS IN FINANCIAL YEAR 2005-06, IT WAS SUBMITTED THAT PROVISION IN FINANCIAL YEAR 2005 -06 HAS BEEN MADE IN RESPECT OF INDIGENOUS SALE IN THE DOMESTIC MARKET BUT IN FI NANCIAL YEAR 2007-08, VEGA I.T.A.NO. 580 /AHD/2011 20 UAE HAS MADE PROVISION FOR BAD DEBTS ON ACCOUNT OF UNRECOVERABLE AMOUNT FROM ITS END CUSTOMER IN OVERSEAS MARKET. IT IS SU BMITTED THAT UNDER THESE FACTS, VEGA UAE MUST BE CATEGORIZED AS A DISTRIBUTOR AND N OT AS A MARKET SERVICE PROVIDER. 19. AS AGAINST THIS, IT WAS SUBMITTED BY THE LD. D. R. THAT VEGA UAE IS NOT A DISTRIBUTOR AS IT DOES NOT HAVE INVENTORY RISK AND THE PRODUCTS ARE BEING DISPATCHED DIRECTLY BY THE ASSESSEE COMPANY AND VEG A DOES NOT HAVE WAREHOUSING FACILITY. HE FURTHER SUBMITTED THAT VEG A DID NOT BEAR ANY CREDIT RISK AS AMOUNTS ARE BEING PAID TO ASSESSEE AFTER RECEIPT BY VEGA FROM CUSTOMERS. HE FURTHER SUBMITTED THAT AS PER THE ANNUAL REPOT, ASS ESSEE HAS STATED THAT THE ASSESSEE COMPANY HAS SALES OFFICES IN UAE, UK, USA, AUSTRALIA, AND PHILIPPINES AND TWO WAREHOUSES IN USA AND ONE WAREH OUSE IN UK. HE FURTHER SUBMITTED THAT MANPOWER OF VEGA HAS BEEN CREATED BY THE PARENT COMPANY BY TRANSFERRING THE PART OF ITS OWN EMPLOYEES AND IT D OES NOT HAVE ANY PERSON TO LOOK AFTER DISTRIBUTION AND LOGISTICS BUT CONSISTS ONLY OF TECHNICAL PERSONS. HE FURTHER SUBMITTED THAT VEGA UAE DOES NOT HAVE CAPAC ITY TO HANDLE TECHNICAL ISSUES AND FIXATION OF FINAL PRICING. 20. IN THE REJOINDER, IT WAS SUBMITTED BY THE LD. C OUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAS AMPLY DEMONSTRATED THAT PURSUANT T O ITS PROPER AND VALIDLY EXECUTED DISTRIBUTOR AGREEMENT, THE ROLE OF VEGA UA E WAS OF A DISTRIBUTOR FOR ITS PRODUCT AS CLEARLY DEFINED. IT IS ALSO SUBMIT TED THAT THE ASSESSEE HAS ALSO DEMONSTRATED CONSISTENCY WITH THE DISTRIBUTOR AGREE MENT IN ITS CONDUCT WITH ALL ITS DISTRIBUTORS INCLUDING VEGA UAE. HE FURTHER SU BMITTED THAT THE ASSESSEE HAS DEMONSTRATED CLEARLY THAT VEGA UAE ACTUALLY BEARS T HE ENTIRE INVENTORY RISK AND THE CREDIT RISK INCLUDING PROVIDING FOR BAD DEBTS O F UNRECOVERABLE AMOUNTS FROM ITS END CUSTOMERS. HE FURTHER SUBMITTED THAT SINCE THE TITLE TO THE GOODS ACTUALLY PASSES TO THE DISTRIBUTOR ON THEIR DELIVERY AT INDI AN PORTS ON FOB BASIS, THE FACTS OF GOODS BEING DISPATCHED DIRECTLY TO SOME CUSTOMER S IN KEEPING WITH COMMERCIAL AND INDUSTRY PRACTICES IS NOT DETERMINAT IVE AND DOES NOT SUPPORT THE I.T.A.NO. 580 /AHD/2011 21 INCORRECT RE-CHARACTERIZATION OF VEGA UAE AS MARKE TING SERVICE PROVIDER. HE FURTHER SUBMITTED THAT VEGA UAE AS A DISTRIBUTOR HA S CONSISTENTLY SHOWN PURCHASES, SALES AND INVENTORIES IN ITS OWN AUDITED ANNUAL FINANCIAL STATEMENTS AND IN THE YEAR IN WHICH NEED AROSE TO PROVIDE FOR BAD DEBTS, VEGA UAE HAS DONE SO, DEMONSTRATING THAT IT BEARS CREDIT RISK AN D BAD DEBS RISK. HE FURTHER SUBMITTED THAT ADMITTEDLY, THE ASSESSEE HAS SEVERAL OFFICES AND WAREHOUSES IN VARIOUS COUNTRIES BUT IT DOES NOT TAKE THE CASE OF THE REVENUE ANY FURTHER AS ON THE VERY SAME PAGE OF THE ANNUAL REPORT. THE MANAG ING DIRECTOR OF THE ASSESSEE COMPANY HAS CLEARLY STATED THAT THE ASSESS EE COMPANY MARKET AND SELL ITS PRODUCTS INTERNATIONALLY THROUGH ITS SUBSIDIARI ES LOCATED IN UK, USA AND MIDDLE EAST UNDER VEGA BRAND. REGARDING THIS ALLEG ATION THAT MOST OF THE IMPORT OF THE ASSESSEE COMPANY WERE TRANSFER FROM V EGA UAE, IT WAS SUBMITTED THAT IT CANNOT CHANGE THE CHARACTER OF VEGA UAE FRO M DISTRIBUTOR TO MARKETING SERVICE PROVIDER. 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUS ED THE MATERIAL ON RECORD AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BEL OW. WE FIND THAT THIS IS ONE OF THE OBJECTIONS OF THE REVENUE THAT VEGA UAE IS N OT A DISTRIBUTOR BUT MARKET SERVICE PROVIDER AND MERELY ON THIS BASIS, THE TP A NALYSIS CONDUCTED BY THE ASSESSEE HAD BEEN REJECTED BY THE TPO. HE HAS ADOP TED THE TRANSFER PRICING ADJUSTMENT ON THE BASIS OF OPERATING COST/OPERATING PROFIT PERCENTAGE OF VEGA UAE, VEGA UK AND VEGA US. REGARDING THIS ASPECT TH AT AS TO WHETHER VEGA UIAE IS A DISTRIBUTOR OR SIMPLY MARKETING SERVICE P ROVIDER, WE FIND THAT THE OBJECTION OF THE REVENUE ON THIS ASPECT IS NOT SUST AINABLE IN VIEW OF THE FACTS OF THE PRESENT CASE BECAUSE WE FIND THAT THE ASSESSEE COMPANY HAS EXECUTED PROPER DISTRIBUTOR AGREEMENT WITH VEGA UAE AND IT HAS BEEN ADHERED TO ALSO AND SINCE THE OBJECTION OF THE REVENUE THAT VEGA UAE IS NOT B EARING ANY INVENTORY AND CREDIT RISK, WE FIND THAT AS PER THE FACTS OF THE P RESENT CASE, BOTH THESE OBJECTIONS ARE NOT CORRECT AND VEGA UAE IS CARRYING BOTH THE I NVENTORY RISK AS WELL AS CREDIT RISK AND THEREFORE, WE HOLD THAT VEGA UAE IS NOT A MARKETING SERVICE I.T.A.NO. 580 /AHD/2011 22 PROVIDER IN THE FACTS OF THE PRESENT CASE BUT IT IS A DISTRIBUTOR OF THE ASSESSEE COMPANY. ONCE IT IS ACCEPTED THAT VEGA UAE IS A D ISTRIBUTOR, ALP HAS TO BE DETERMINED ON THE BASIS OF PROFIT ON SALE OF GOODS BY THE ASSESSEE COMPANY AS COMPARED TO THE COMPARABLE COMPANIES. THE ASSESSEE HAS DEMONSTRATED THAT THE ARITHMETIC MEAN OF 3 YEARS WEIGHT AGE AVERAGE NOPM OF 12 COMPARABLE COMPANIES WAS 7.92% AS AGAINST NOPM OF 18.89% OF TH E ASSESSEE FOR THE PRESENT YEAR. LATER ON THE ASSESSEE HAS ALSO FURNI SHED THE REVISED ARITHMETIC MEAN OF NOPM OF THE COMPARABLE COMPANIES ON THE BAS IS OF CURRENT YEAR DATA ONLY AND IT WAS 7.04% WHEREAS MEAN OF 3 YEARS WEIGH T AGE AVERAGE NOPM OF 12 COMPARABLE COMPANIES WAS 7.92% AS AGAINST NOPM O F 18.89% OF THE ASSESSEE FOR THE PRESENT YEAR. LATER ON, THE ASSES SEE HAS ALSO FURNISHED THE REVISED ARITHMETIC MEAN OF NOPM OF THE COMPARABLE C ASES ON THE BASIS OF CURRENT YEAR DATA ONLY AND IT WAS 7.04% AS AGAINST 7.92% ON THE BASIS OF 3 YEAR WEIGHT AGE AVERAGE. THE ASSESSEE HAS ALSO FURNISHE D ONE ALTERNATIVE WORKING ON THE BASIS OF NET OPERATING PROFIT MARGIN OF VEGA UA E, VEGA UK AND VEGA US AND ARITHMETIC MEAN OF COMPARABLE COMPANIES. THE A RITHMETIC MEAN OF COMPARABLE COMPANIES IS HIGHER IN RESPECT OF ALL TH E THREE VEGA ENTITIES AND HENCE, ON BOTH THESE BASIS, NO TP ADJUSTMENT IS CAL LED FOR. TP ADJUSTMENT HAD BEEN PROPOSED BY THE TPO AND CONFIRMED BY DRP ON TH E BASIS OF OPERATING COST/OPERATING PROFIT MARGIN OF VEGA UAE, VEGA UK A ND VEGA US. THE SAME FOR VEGA US WAS CONSIDERED AS BASE AND DIFFERENCE O F VEGA UAE WAS PROPOSED AS TP ADJUSTMENT BY THE TPO BUT WHILE DOING SO, IT HAS TO BE KEPT IN MIND THAT OPERATING COST/OPERATING PROFIT MARGIN DEPENDS ON L EVEL OF OPERATING EXPENSES INCURRED BY THE RESPECTIVE VEGA ENTITIES AND ALSO T HE MAKING OF BUSINESS EARNING BY THE RESPECTIVE VEGA ENTITIES. WE FIND THAT PERC ENTAGE OF EMPLOYEE COST TO TOTAL TURNOVER OF VEGA US IS HIGHEST I.E. 6.5% AND IT IS LOWEST FOR VEGA UAE I.E. 1.3%. SIMILARLY, PERCENTAGE OF ADMINISTRATIVE EXPE NSES TO TURNOVER IS HIGHEST FOR VEGA US AND VEGA UK @ 4.9% AND IT IS ONLY 2% FO R VEGA UAE. IF THE OPERATING COST IS HIGHER IN VEGA US, IT CANNOT BE S AID THAT THE PROFIT MARGIN OF I.T.A.NO. 580 /AHD/2011 23 OTHER VEGA ENTITIES I.E. VEGA UK AND VEGA UAE SHOUL D BE AT PAR WITH THE PROFIT MARGIN OF VEGA US AND HENCE, TP ADJUSTMENT PROPOSED BY TPO AND CONFIRMED BY DRP ON THE BASIS OF OPERATING COST/OPERATING PRO FIT OF VEGA US IS NOT SUSTAINABLE. VARIOUS ALLEGATIONS RAISED BY THE TPO FOR NOT ACCEPTING THE TP ANALYSIS CARRIED OUT BY THE ASSESSEE ARE NOT FOUND TO BE VALID AND HENCE, WE HOLD THAT NO TP ADJUSTMENT IS CALLED FOR IN RESPECT OF V EGA UAE. THE SAME IS DELETED. HENCE, GROUND NO.2 OF THE ASSESSEE IS ALL OWED. 22. REGARDING GROUND NO.3 I.E. REGARDING TP ADJUSTM ENT PROPOSED BY THE TPO IN RESPECT OF COMMISSION PAYMENT TO VEGA UK, WE FIND THAT THE SAME IS ALSO ON THE SAME BASIS THAT OPERATING PROFIT/OPERAT ING COST RATIO OF VEGA UK SHOULD BE COMPARABLE TO OPERATING PROFIT/OPERATING COST RATIO OF VEGA US. WHILE DECIDING THE TP ADJUSTMENT ISSUE IN RESPECT O F VEGA UAE, WE HAVE HELD THAT ON THE BASIS OF OPERATING PROFIT/OPERATING COS T RATIO OF VEGA US, IT CANNOT BE HELD THAT SOME TP ADJUSTMENT CAN BE MADE. HENCE, W ITH REGARD TO THIS TP ADJUSTMENT ALSO, WE HOLD THAT THE SAME IS NOT SUSTA INABLE AND, THEREFORE, IT IS DELETED. GROUND NO.3 OF THE ASSESSEE IS ALSO ALLOW ED. 23. GROUND NO.4 OF THE ASSESSEES APPEAL IS REGARDI NG DISALLOWANCE OF RS.1,23,58,175/- U/S 14A OF THE INCOME TAX ACT, 196 1. REGARDING THE DISALLOWANCE MADE BY THE A.O. U/S 14A, IT WAS SUBMI TTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT EARNING DIVIDEND INCOME IS NOT TH E OBJECTIVE OF THE ASSESSEE AND THE ASSESSEE WAS HOLDING INVESTMENT IN MUTUAL F UND BEING INCIDENTAL TO ITS MAIN BUSINESS AND IN ADDITION TO THIS, ASSESSEE WAS HOLDING SHARES OF THE COMPANIES I.E. PARAMOUNT CENTRISPIN CASTINGS LTD. , RECLAMATION WELDING LIMITED AND WELCAST STEELS LIMITED AND THESE ARE ST RATEGIC INVESTMENTS AND HAD BEEN MADE WITH A VIEW TO HAVE ADDITIONAL MANUFACTUR ING FACILITIES, AND TO ELIMINATE COMPETITION TO MAIN BUSINESS ACTIVITY. H E FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT RECRUITED/EMPLOYED ANY SEPARATE ST AFF IN RELATION TO INVESTMENT I.T.A.NO. 580 /AHD/2011 24 ACTIVITIES. HE FURTHER SUBMITTED THAT INVESTMENT O F RS. 96.68 CRORES WAS MADE IN MUTUAL FUND OTHER THAN IN HDFC MUTUAL FUND AND ON T HESE INVESTMENTS, ASSESSEE HAVE EARNED DIVIDEND OF RS.152.72 LACS. R EGARDING THE SOURCE OF FUNDS FOR MAKING THESE INVESTMENTS, IT WAS SUBMITTE D THAT DURING NOVEMBER/DECEMBER 2005, THE ASSESSEE COMPLETED AN I NITIAL PUBLIC OFFERED OF ITS OWN EQUITY SHARES AND COLLECTED TOTAL AMOUNT OF RS.148.05 CRORES AND PENDING UTILIZATION OF THESE MONEY FOR THE INTENDED PURPOSE, SHORT TERM INVESTMENTS WERE MADE IN VARIOUS SCHEMES OF MUTUAL FUNDS AND HENCE, THERE WAS NO INTEREST EXPENDITURE INCURRED FOR MAKING THE SE INVESTMENTS IN MUTUAL FUNDS. REGARDING INVESTMENT IN SHARES OF WELCAST S TEELS LTD. OF RS. 11.57 CRORES, IT WAS SUBMITTED THAT THIS INVESTMENT WAS M ADE OUT OF OWN FUNDS/INTERNAL ACCRUALS. IT IS FURTHER SUBMITTED THAT AN AMOUNT O F RS.680 LACS WAS TRANSFERRED ON 26.09.2005 FROM ASSESSEES WORKING CAPITAL DEMAN D LOAN ACCOUNT WITH ABN AMRO BANK CARRYING INTEREST @ 10% PER ANNUM BUT THI S WORKING CAPITAL DEMAND LOAN WAS REPAID TO ABN AMRO BANK BY TAKING A TERM LOAN OF RS.10 CRORES FROM ABN AMRO BANK CARRYING INTEREST @ 7.25% PER ANNUM AND THIS TERM LOAN OF RS.10 CRORES WAS REPAID BY THE ASSESSE E COMPANY TO ABM AMRO BANK ON 28.01.2006 FROM THE ASSESSEES IPO PROCEEDS . IT IS SUBMITTED THAT THE INTEREST PAID ON ABOVE LOAN IS WORKED OUT TO RS.6,1 9,721/- IN RESPECT OF WORKING CAPITAL DEMAND LOAN @ 10% PER ANNUM FROM 23.9.2005 TO 27.10.2005 AND INTEREST OF RS.26,888/- IS WORKED OUT ON 6.80 CRORE S @ 7.25% PER ANNUM FROM 28 TH OCTOBER 2005TO 27 TH JAN 2006 AND IN THIS MANNER, TOTAL INTEREST EXPEND ITURE IN THIS REGARD IS ONLY RS.6,46,609/-. REGARDING IN VESTMENT OF RS.14 CRORES IN HDFC MUTUAL FUND, IT WAS SUBMITTED THAT ON THE DATE WHEN THIS INVESTMENT WAS MADE, THE ASSESSEE HAD POSITIVE BALANCE IN ITS BANK S I.E. SBI AND HDFC BANK EVIDENCING THAT THE SAID INVESTMENTS WERE MADE OUT OF ITS OWN FUNDS AND NO BORROWED FUNDS WAS USED. IT IS FURTHER SUBMITTED TH AT DURING THE PRESENT YEAR ALSO, THE ASSESSEE HAD EARNED PROFITS AFTER TAX OF RS.37.28 CRORES AND ITS RESERVE AND SURPLUS WAS RS.226.10 CRORES IN ADDITION TO THE SHARE CAPITAL OF 17.788 I.T.A.NO. 580 /AHD/2011 25 CRORES AND HENCE, THIS ENTIRE INVESTMENT OF RS.14 C RORES HAS BEEN MADE BY THE ASSESSEE OUT OF ITS OWN FUNDS. REGARDING INVESTMEN T OF RS.127.49 LACS IN SHARES OF WELCAST STEEL LTD., IT WAS SUBMITTED THAT THE SA ME WERE MADE IN EARLIER YEARS OUT OF OWN FUNDS IN THE YEAR 2003 AND ONLY AN INVES TMENT OF RS.60 LACS IN THE YEAR 2004 WAS MADE OUT OF BORROWED FUNDS FOR THE PE RIOD 11.02.2004 TO 04.03.2004 AND THE INTEREST ON THE SAID BORROWED FU NDS WORKED OUT TO APPROXIMATELY RS.50,000/-. REGARDING INVESTMENT IN SHARES OF RS.166.91 LACS, IN PARAMOUNT CENTRISPUN CASTINGS PRIVATE LIMITED, I T WAS SUBMITTED THAT INVESTMENT WAS MADE IN 1991-92, 1992-93 OUT OF OWN FUNDS AND THEREAFTER IN THE YEAR 2002-03, ACQUISITION WAS MADE BY WAY OF AM ALGAMATION OF AIA EXPORT PVT. LTD. WITH THE ASSESSEE FIRM FROM 01.04.2002 AN D NO BORROWED FUNDS WERE USED. REGARDING INVESTMENT OF RS.157.21 LACS IN SH ARES OF RECLAMATION WELDING LTD. IT WAS SUBMITTED THAT THE SAID INVESTM ENT IN THE YEAR 1992-93 AND 1993-94 WAS MADE OUT OF OWN FUNDS AND THEREAFTER AN AMOUNT OF RS.150 LACS WAS INVESTED IN THE YEAR 2003-04 OUT OF INTER CORPO RATE DEPOSITS WITH RWL. THE ASSESSEE WORKED OUT TOTAL INTEREST EXPENDITURE REGA RDING ALL THESE INVESTMENTS AT RS.6,96,609/- AND OFFERED THE SAME FOR THE PURPOSE OF DISALLOWANCE U/S 14A BEFORE THE A.O. BEFORE THE DRP, THE ASSESSEE FURTH ER OFFERED AN AMOUNT OF RS.4.52 LACS FOR DISALLOWANCE IN RESPECT OF INDIREC T EXPENDITURE AND IN THIS MANNER, THE ASSESSEE OFFERED TOTAL DISALLOWANCE O F RS.11,48,609/-. 24. IT WAS SUBMITTED BY THE LD. COUNSEL FOR THE ASS ESSEE THAT IN THE PRESENT YEAR, RULE 8D IS NOT APPLICABLE BECAUSE IT WAS INSE RTED ON 24.03.2008 AND IN SUPPORT OF THIS CONTENTION, RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE BOMBAY HIGH COURT RENDERED IN THE CASE OF GODREJ AN D BOYCE MFG. LTD. AS REPORTED IN 194 TAXMAN 203 (BBY.). 25. AS AGAINST THIS, IT WAS SUBMITTED BY THE LD. D. R. THAT EVEN AS PER THIS JUDGMENT OF HONBLE BOMBAY HIGH COURT RENDERED IN T HE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA), EVEN PRIOR TO THE ASSE SSMENT YEAR 2008-09, THE A.O. HAS TO ENFORCE THE PROVISIONS OF SECTION 14A. RELIANCE WAS PLACED ON THE I.T.A.NO. 580 /AHD/2011 26 DECISION OF SPECIAL BENCH OF THE TRIBUNAL RENDERED IN THE CASE OF CAMY INVESTMENTS PVT. LTD. AS REPORTED IN 121 ITD 318. 26. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUS ED THE MATERIAL ON RECORD AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BEL OW. WE FIND THAT THIS IS NOW A SETTLED LEGAL POSITION THAT RULE 8D IS NOT APPLIC ABLE IN ASSESSMENT YEAR 2006- 07. THE ASSESSEE HAS GIVEN WORKING REGARDING INTER EST EXPENDITURE WHICH CAN BE ATTRIBUTED FOR INVESTMENT IN SHARES/MUTUAL FUNDS ON WHICH DIVIDEND INCOME WAS EARNED BY THE ASSESSEE AND THE SAME HAS BEEN WO RKED OUT AT RS.6,96,609/-. THE LD. D.R. COULD NOT POINT OUT ANY MISTAKE IN THI S WORKING ON ACCOUNT OF INTEREST EXPENDITURE IN RESPECT OF INVESTMENT IN SH ARES/MUTUAL FUNDS. REGARDING INDIRECT EXPENDITURE, THE ASSESSEE HAS ALSO GIVEN W ORKING AS PER WHICH ATTRIBUTABLE EXPENDITURE HAS BEEN WORKED OUT AT RS. 4.52 LACS AND IN THIS WORKING ALSO, NO DEFECT COULD BE POINTED OUT BY THE LD. D.R . ON THE BASIS OF THESE TWO WORKINGS, THE TOTAL AMOUNT TO BE DISALLOWED U/S 14A COMES TO RS.11,48,609/-. HENCE, WE CONFIRM THE DISALLOWANCE U/S 14A TO THIS EXTENT AND DELETE THE BALANCE DISALLOWANCE MADE BY THE A.O. THIS GROUND OF THE ASSESSEE IS PARTLY ALLOWED. 27. AS PER GROUND NO.5, THE GRIEVANCE OF THE ASSESS EE IS REGARDING DISALLOWANCE OF RS.2,51,092/- U/S 40A(IA) FOR NON D EDUCTION OF TAX ON COMMISSION PAID ON NON RESIDENTS FOR THE SERVICES R ENDERED OUTSIDE INDIA. IT IS SUBMITTED BY THE LD. A.R. THAT MR. EUR IVAN MONJE C ASTRO, BOLIVIA IS THE ASSESSEES REPRESENTATIVE FOR BOLIVIA CEMENT MARKET . THE ASSESSEE COMPANY HAS GOT BUSINESS DUE TO THE REPRESENTATIVES INTERA CTION WITH CEMENT GROUP SOBOCE LOCATED IN BOLIVIA, LATIN AMERICA. HE FURTH ER SUBMITTED THAT SOBOCE DECIDED TO INCREASE THEIR CEMENT PRODUCTION CAPACITY AT THEIR EL PUNTE PLANT AND THEY PLACED THEIR ORDER ON CHANDERPUR WOR KS, INDIA (ORIGINAL EQUIPMENT MANUFACTURER) TO EXECUTE THE WHOLE PROJEC T. AN ORDER OF MILL INTERNALS WAS PLACED ON THE ASSESSEE BY CHANDERPUR WORKS WHICH IS A PART SUPPLY OF EL PUNTE PLANT. IN THIS CONNECTION, TH E ASSESSEE PAID COMMISSION OF I.T.A.NO. 580 /AHD/2011 27 US$ 5504 (RS.251,092) TO MR. EUR IVAN MONJE CASTRO. IT IS THE SUBMISSION OF THE ASSESSEE THAT NO SERVICES HAD BEEN RENDERED BY THE AGENT IN INDIA AND, THEREFORE, INCOME EARNED BY THIS AGENT CANNOT BE DE EMED TO ACCRUE AND ARISE IN INDIA BECAUSE THE AGENT DOES NOT HAVE ANY BUSINESS CONNECTION IN INDIA. HE FURTHER SUBMITTED THAT EVEN ASSUMING WITHOUT ADMITT ING THAT THERE EXISTS A BUSINESS CONNECTION OF THIS AGENT IN INDIA, NO PART OF HIS OPERATIONS HAS BEEN CARRIED OUT IN INDIA. HE FURTHER SUBMITTED THAT IT HAS NEVER BEEN THE CASE OF THE REVENUE THAT THE BUSINESS INCOME EARNED BY THE AGEN T IS TO BE CLASSIFIED AS ROYALTY OR FEES FOR TECHNICAL SERVICES UNDER THE IN COME TAX ACT, 1961. HE FURTHER SUBMITTED THAT UNDER THE PROVISION OF SECTI ON 9(1)(I) OF THE INCOME TAX ACT, 1961, THE INCOME OF NON RESIDENT IS DEEMED TO ACCRUE OR ARISE IN INDIA ONLY IF ANY PART OF INCOME IS REASONABLY ATTRIBUTABLE TO ANY OPERATION CARRIED OUT BY THE NON RESIDENT IN INDIA AND IF NO OPERATION IS CA RRIED OUT IN INDIA BY THE NON RESIDENT, NO INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA. HE FURTHER SUBMITTED THAT IF THE AGENT RENDERS HIS SERVICES OUTSIDE INDI A, THE SAME CANNOT BE DEEMED TO ACCRUE OR ARISE IN INDIA U/S 9(1)(I) OF THE INCO ME TAX ACT, 1961. 28. AS AGAINST THIS, LD. D.R. SUPPORTED THE ORDER O F THE A.O. AND DRP ON THIS ISSUE. 29. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUS ED THE MATERIAL ON RECORD AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BEL OW. WE FIND THAT NOTHING HAS BEEN BROUGHT ON RECORD BY THE REVENUE TO SHOW THAT THE FOREIGN AGENT TO WHOM COMMISSION WAS PAID, HAD ANY OPERATION CARRIED OUT IN INDIA AS PER THE PROVISIONS OF SECTION 9(1)(I) OF INCOME TAX ACT, 19 61, THE INCOME OF THE NON RESIDENT IS DEEMED TO ACCRUE OR ARISE IN INDIA ONLY IF ANY PART OF INCOME IS REASONABLY ATTRIBUTABLE TO OPERATION CARRIED OUT BY THE NON RESIDENT IN INDIA AND IF NO OPERATION IS CARRIED OUT IN INDIA BY THE NON RESIDENT, THERE WOULD BE NO INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. UNDER T HIS FACTUAL AND LEGAL POSITION, NO TAX WAS DEDUCTIBLE FROM THIS PAYMENT A ND HENCE, THE PROVISIONS OF I.T.A.NO. 580 /AHD/2011 28 SECTION 40A(IA) ARE NOT APPLICABLE WITH REGARD TO T HIS PAYMENT. WE, THEREFORE, DELETE THIS ADDITION. GROUND NO.5 OF THE ASSESSEE IS ALSO ALLOWED. 30. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. 31. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED HEREINABOVE. SD./- SD./- (BHAVNESH SAINI) (A. K. GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER SP COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) 5. THE DR, AHMEDABAD BY ORDER 6. THE GUARD FILE AR,ITAT,AHMEDABAD 1. DATE OF DICTATION 09/01/2012 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 10/01/2012.OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P .S./P.S. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 19/01 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S.23/01 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 23/01/2012 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK .. 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 9. DATE OF DESPATCH OF THE ORDER. ..