The ACIT,(OSD)-1 Circle-4, Ahmedabad V. KHS Machinery Pvt.ltd., Ahmedabad

MA 74/AHD/2012

• Counselvise Citation: [2013] 124 COUNSELVISE.COM (IT) 0709 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 23 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 27-09-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2004-2005
• Appeal Filed On: 04-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K C MATHEW
• Assessee Lawyers: J P SHAH WITH SHRI M J SHAH
• Keywords: Transfer pricing; International transaction; Commercial expediency
• Section: 92F; 92A; 92

Judgement Text

, , , , C, IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, C BENCH . .. . . .. . , !' !' !' !', , , , #$ #$ #$ #$ . .. . . .. .% %% %, ,, , &' ( & ' &' ( & ' &' ( & ' &' ( & ' BEFORE S/SHRI G.C. GUPTA, VICE-PRESIDENT AND B.P. JAIN, ACCOUNTANT MEMBER) MA NO.74/AHD/2012 IN ITA NO.79/AHD/2008 [ASSTT.YEAR : 2004-2005] THE ITO, WARD-4(2) AHMEDABAD. /VS. KHS MACHINERY P. LTD. 53, MADHUBAN NR. MADALPUR, UNDERBRIDGE AHMEDABAD 380 006. ( (( (*+ *+ *+ *+ / APPELLANT) ( (( (,-*+ ,-*+ ,-*+ ,-*+ / RESPONDENT) ( . / &/ REVENUE BY : SHRI K.C. MATHEW, SR.DR 12 . / &/ ASSESSEE BY : SHRI J.P. SHAH WITH SHRI M.J. SHAH 3 . 24'/ DATE OF HEARING : 20 TH SEPTEMBER, 2013 567 . 24'/ DATE OF PRONOUNCEMENT : 27.09.2013 &8 / O R D E R PER B.P. JAIN, ACCOUNTANT MEMBER : THIS MISC. APPLICATION OF THE REVENUE IS ARISING FROM THE ORDE R OF THE ITAT IN ITA NO.79/AHD/2008 DATED 10.02.2012. THE ASSESS EES MA IS REPRODUCED HEREINBELOW FOR THE SAKE OF CONVENIENCE: 2. THE HON.ITAT,'C' BENCH, AHMEDABAD PRONOUNCED OR DER MA NO.74/AHD/2012 -2- IN ABOVE MENTIONED CASE FOR AY 2004-05 ON 10-02-201 2 FOR WHICH THE SUPPORTING MATERIAL/BRIEFING FOR ARGUMENT S WAS PROVIDED BY THE LD. DR. THE ISSUES DECIDED BY THE H ONBLE ITAT INTER-ALIA INCLUDED DISALLOWANCE OF PAYMENT OF ROYALTY MADE BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE AM OUNTING TO RS.74,63,975/-. THE ADDITION MADE BY THE AO AND CON FIRMED BY LD CIT(A) WAS DELETED BY THE HON. TRIBUNAL. THE DIS CUSSION ON THE ISSUE IS MADE IN PARA 10-17 OF THE ITAT'S ORDER WHILE THE FINDINGS ARE CONTAINED IN PARA -16-17. FROM PERUSAL OF PARA-17 OF THE ORDER, IT BECOMES CLEAR THAT THE HONBLE TRI BUNAL HAS DELIVERED THE JUDGMENT IN CONTEXT OF SECTION 92 OF THE I.T. ACT AS IT EXISTED PRIOR TO AMENDMENT MADE BY THE FINANCE. ACT,2001 W.E.F 01-04-2002. THE SAME IS FORTIFIED BY THE OBSE RVATION OF THE HONBLE TRIBUNAL WHERE IT IS HELD THAT '.....IT IS NECESSARY TO ESTABLISH THE COURSE OF BU SINESS BETWEEN RESIDENT AND NON RESIDENT IS SO ARRANGED THAT THE B USINESS TRANSACTED BETWEEN THEM PROVIDES TO THE RESIDENT EI THER (I) NO PROFITS OR (II) LESS THAN ORDINARY PROFITS WHICH MI GHT BE EXPECTED TO ARISE IN THE BUSINESS. IN THE PRESENT C ASE, THE ASSESSEE HAD DECLARED INCOME AND THEREFORE IT IS NO T CASE OF' NO PROFIT '. SO AS REGARDS THE ADEQUACY OF PROFITS VIS -A-VIS ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE I N THE BUSINESS, THE SANE CAN BE FOUND OUT ONLY, WHEN EXER CISE IS DONE TO COMPARE THE INCOME OF THE ASSESSEE WITH OTHER CO MPARABLE ENTERPRISES IN INDIA. ' 3. IN THIS CONTEXT, IT IS SEEN THAT THE TRANSFER P RICING PROVISION RELEVANT FOR A.Y.2004-05 ARE CONTAINED IN CHAPTER-X OF THE INCOME TAX ACT STARTING FROM SECTION 92-32F. THESE VERY SECTION WERE SUBSTITUTED FOR SECTION 92 BY FINANCE ACT 2001 W.E.F 01-04-2002 AND THE EXPLANATORY MEMORANDA FOR THE SAME IS AVAILABLE IN PARA-55 OF CIRCULAR NO. 14 OF 2001, A FACT WHICH WAS POINTED OUT BY THE LD. DR AND WHICH IS AVAILABL E AT PAGE - 16 OF DEPARTMENTAL PAPER BOOK AS MENTIONED BY THE H ON'BLE TRIBUNAL IN ITS ORDER IN PARS-15. PARA-55. I TO 55. 3 OF THE CIRCULAR ARE REPRODUCED BELOW: NEW LEGISLATION TO CURB TAX AVOIDANCE BY ABUSE OF TRANSFER PRICING 55.1 THE INCREASING PARTICIPATION OF MULTI- NATIONA L GROUPS IN ECONOMIC ACTIVITIES IN THE COUNTY HAS GIVEN RISE TO NEW AND MA NO.74/AHD/2012 -3- COMPLEX ISSUES FORM TRANSACTIONS ENTERED INTO BETWE EN TWO OR MORE ENTERPRISES CARRYING BELONGING TO THE SAME MUM -NATIONAL GROUP. THE PROFITS DERIVED BY SUCH ENTERPRISES CARR YING ON BUSINESS IN INDIA CAN BE CONTROLLED BY THE MULTI-NA TIONAL GROUP, BY MANIPULATING THE PRICES CHARGED AND PAID IN SUCH INTRA- GROUP TRANSACTIONS, THEREBY, LEADING TO EROSION OF TAX REVENUES. 55.2 UNDER THE EXISTING SECTION 92 OF THE INCOME-TA X ACT, WHICH WAS THE ONLY SECTION DEALING SPECIFICALLY WITH CROS S BORDER TRANSACTIONS, AN ADJUSTMENT COULD BE MADE TO THE PR OFITS OF A RESIDENT ARISING FROM A BUSINESS CARRIED ON BETWEEN THE RESIDENT AND A NON-RESIDENT, IF' IT APPEARED TO THE ASSESSIN G OFFICER THAT OWING TO THE CLOSE CONNECTION BETWEEN THEM, THE COU RSE OF BUSINESS WAS SO ARRANGED SO AS TO PRODUCE LESS THAN EXPECTED PROFITS TO THE RESIDENT. RULE I1 PRESCRIBED UNDER T HE SECTION PROVIDED A METHOD OF ESTIMATION OF REASONABLE PROFI TS IN SUCH CASES. HOWEVER, THIS PROVISION WAS OF A GENERAL NAT URE AND LIMITED IN SCOPE. IT DID NOT ALLOW ADJUSTMENT OF IN COME IN THE CASER OF NON-RESIDENTS. IT REFERRED TO A 'CLOSE CON NECTION ' WHICH WAS UNDEFINED AND VAGUE. IT PROVIDED FOR ADJU STMENT OF PROFITS RATHER THAN ADJUSTMENT OF PRICES, AND THE R ULE PRESCRIBED FIN ESTIMATING PROFITS WAS NOT SCIENTIFIC. IT ALSO DID NOT APPLY TO INDIVIDUAL TRANSACTION SUCH AS PAYMENT OF ROYALTY, ETC., WHICH ARE NOT PART OF A REGULAR BUSINESS CARRIED ON BETWE EN A RESIDENT AND A NON-RESIDENT. THERE WERE ALSO NO DETAILED RUL ES PRESCRIBING THE DOCUMENTATION REQUIRED TO BE MAINTA INED. 55.3 WITH A VIEW TO PROVIDE A DETAILS STATUTORY FRA MEWORK WHICH CAN LEAD TO COMPUTATION OF REASONABLE, FAIR A ND EQUITABLE PROFITS AND TAX IN INDIA, IN THE CASE OF SUCH MULTINATIONAL ENTERPRISES, THE ACT HAS SUBSTITUTED SECTION 92 WITH A NEW SECTION AND HAS INTRODUCED NEW SECTIONS 92A TO 92F IN THE INCOME-TAX ACT, RELATING TO COMPUTATION OF I NCOME FROM AN INTERNATIONAL TRANSACTION HAVING REGARD TO THE A RM'S LENGTH PRICE, MEANING OF ASSOCIATED ENTERPRISE, MEANING OF INTERNATIONAL TRANSACTION BY PERSONS ENTERING INTO INTERNATIONAL TRANSACTIONS AND DEFINITIONS OF CERTAIN EXPRESSIONS OCCURRING IN THE SAID SECTIONS. ' 3.1 FROM PERUSAL OF THESE PARAGRAPHS, IT BECOMES A BSOLUTELY CLEAR THAT IN ORDER TO OVERCOME THE DIFFICULTIES PO SED BY THE ERSTWHILE SECTION 92, THESE NEW PROVISION WERE INTR ODUCED. FURTHER FROM PERUSAL OF THE JUDGMENT, IT BECOMES AB SOLUTELY MA NO.74/AHD/2012 -4- CLEAR THAT THE HONBLE TRIBUNAL HAS INCORRECTLY REL IED ON THE PRE-AMENDED PROVISION OF LAW TO DECIDE THE ISSUE OF ROYALTY PAYMENT, EVEN THOUGH THE RELEVANT PORTIONS OF CIRCU LAR DISCUSSED ABOVE WERE AVAILABLE IN DEPARTMENT PAPER BOOK AND THIS FACT WAS MENTIONED IN THE ORDER ITSELF. 4. THE HON'BLE TRIBUNAL HAS ALSO MISUNDERSTOOD THE CONNECTION RAISED BY THE LD D.R. WHEREIN IT WAS SUBMITTED THAT THE ROYALTY PAYMENT CANNOT BE BENCH MARKED BY CLUBBING THE SAME WITH OTHER TRANSACTIONS OF THE ASSESSEE. THE CASE LAWS I N SUPPORT OF THE SAME, CITED BY THE REVENUE WAS MISUNDERSTOOD BY THE HON'BLE TRIBUNAL TO BE A CONTENTION BEING AGAINST T HE PAYMENT OF ROYALTY ON AGGREGATE AMOUNT. SUCH A CONTENTION W AS NEVER RAISED BY THE REVENUE. THE HON'BLE TRIBUNAL HAS ALS O PLACED MISPLACED RELIANCE ON THE PROVISION OF SECTION 37(L ) OF THE ACT AS THE DETERMINATION OF ARMS LENGTH PRICE IS DONE U NDER THE PROVISION OF CHAPTER X BEING SPECIAL PROVISION TO D EAL WITH THE TRANSFER PRICING ISSUES WHEREIN THE CONCEPTS OF 'CO MMERCIAL EXPEDIENCY' AND 'BUSINESS EXPEDIENCY' CAN'T BE INVO KED. SUCH A PROPOSITION IS DISCUSSED BY THE HON'BLE DELHI TRIBU NAL IN THE CASE OF PEROT SYSTEM TSI( INDIA) LTD. [2010]37 SOT3 58 (DELHI). THE RELEVANT PORTION OF THE JUDGEMENT IS R EPRODUCED BELOW: '10. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS A ND THE RECORDS. THE PRIMARY CONTENTION BEFORE US, AS SUBMITTED BY THE ID. COUNSEL OF THE ASSESSEE IS THA T IT WAS COMMERCIALLY EXPEDIENT FOR ASSESSEE TO ADVANCE INTE REST FREE LOANS TO THE AES AND THAT SINCE NO INTEREST HA S ACTUALLY BEEN CHARGED, THERE IS NO REAL INCOME ELIG IBLE TO TAX. AS OBSERVED BY THE ID. CIT(A) THE AGREEMENTS S HOW THAT THESE ARE LOAN AMOUNTS GIVEN BY THE ASSESSEE T O ASSOCIATED ENTERPRISES (AES). THIS IN FACT IS AN AD MITTED POSITION. THERE IS NO CASE THAT ANY SPECIAL FEATURE IN THE CONTRACT MAKE THE TRANSACTION AS CAPITAL IN NATURE. IT IS ALSO AN ADMITTED PROPOSITION THAT THE ASSESSEE HAS EXTENDED THE LOAN TO ITS AE'S WHO ARE 100 PER CENT SUBSIDIARIES. THE ASSESSEE 'S CASE IS THAT IT HAS A CTUALLY NOT EARNED ANY INTEREST AND IT WAS COMMERCIALLY EXPEDIENT TO EXTEND THESE INTEREST FREE LOANS. NOW IT IS NOTED THAT THIS IS NOT A CASE OF ORDINARY BUSINESS TRANSACTION. THE QUESTION RELATE TO SCRUTINY OF INTERNATIONAL TRANSACTION TO DETERMINE WHETHER OR N OT THE MA NO.74/AHD/2012 -5- SAME IT AS AMT'S LENGTH. THE PRINCIPLE OF TRANSFER PRICING AIMS AT DETERMINING THE PRICING IN THE SITUATIONS O F CROSS BORDER INTERNATIONAL TRANSACTION, WHERE TWO ENTERPR ISES WHICH ARE SUBJECT TO THE SAME CENTRE OR DIRECTION O R CONTROL (ASSOCIATED ENTERPRISE) MAINTAIN COMMERCIAL LY OR FINANCIALLY RELATION WITH OTHER. IN SUCH A SITUATIO N, THE POSSIBILITY EXIST THAT BY WAY OF INTERVENTION FROM THE CENTRE OR OTHERWISE, BUSINESS CONDITIONS MAST BE ACCEPTED BY THE ACTING UNITS WHICH DYERS JIOTN THO SE WHICH IN THE SAME CIRCUMSTANCES WOULD HAVE AGREED UPON BETWEEN UNRELATED PARTIES. THE AIM IS TO EXAMI NE WHETHER THERE IS ANOMALY IN THE TRANSACTION WHICH A RISE OUT OF SPECIAL RELATIONSHIP BETWEEN THE CREDITOR AN D THE DEBTOR. HENCE THE CONTENTION OF HAVING ACTUALLY NOT EARNED ANY INCOME CANNOT COME TO THE RESCUE OF THE ASSESSEE IN THIS SCENARIO. THE CASE LAWS FROM THE A PEX COURT CITED BY THE ID. COUNSEL OF THE ASSESSEE ARE IN THE CONTEXT OF THE PROPOSITION THAT ONLY THE REAL INCOM E HAS TO BE TAXED AND INTEREST FREE ADVANCES CAN BE GIVEN BY COMPANIES (DOMESTIC) TO THEIR SUBSIDIARIES ON THE G ROUND OF COMMERCIAL EXPEDIENCY. BUT THESE DECISIONS ARE N OT IN THE CONTEXT OF CHAPTER X OF THE IT ACT WHICH RELATE S TO SPECIAL PREVISION RELATING TO COMPUTATION OF INCOME FROM INTERNATIONAL HAVING REGARD TO ARM'S LENGTH PRICE. OTHER CASE LAWS CITED BY THE ASSESSEE ARE NOT GERMANE TO THE FACTS OF THIS CASE. HENCE IN OUR CONSIDERED OPINION THEY DO NOT HELP THE CASE OF THE ASSESSEE.' 5. SINCE THE JUDGEMENT HAS BEEN DELIVERED ON THE BA SIS OF ERSTWHILE SECTION 92 NOT APPLICABLE FOR A.Y. 2004-0 5, EVEN WHEN THIS FACT WAS POINTED OUT THROUGH WRITTEN SUBMISSIO NS SUBMITTED BY THE REVENUE, THE NON-CONSIDERATION OF THE SAME I S AN ERROR APPARENT FROM THE RECORD. IT IS, THEREFORE, REQUEST ED THAT THE HON'BLE ITAT MAY KINDLY RECTIFY THE ORDER PASSED IN ITA NO.79/AHD/2008 DATED 10.02.2012 TO THE ABOVE EXTENT . 2. THE LEARNED DR AGUED THAT SECTION 92 OF THE I.T. ACT. DOES NOT APPLY TO THE ASSESSMENT YEAR 2004-2005, AND ARG UED THAT TRANSFER PRICING PROVISIONS RELATING TO THE ASSESSM ENT YEAR 2004- 2005 ARE CONTAINED IN CHAPTER-X OF THE INCOME TAX A CT. THESE MA NO.74/AHD/2012 -6- VERY SECTIONS WERE SUBSTITUTED FOR SECTION 92 BY TH E FINANCE ACT, 2001 W.E.F. 1.4.2002 AND THE EXPLANATORY MEMORANDA FOR THE SAME IS AVAILABLE IN PARA-55 OF THE CIRCULAR NO.14 OF 2001. THE LEARNED DR ARGUED THAT THE ITAT IN ITS ORDER DATED 10.2.2012 HAS INCORRECTLY RELIED ON THE PRE-AMENDED PROVISION OF LAW TO DECIDE THE ISSUE OF ROYALTY PAYMENT, EVEN THOUGH, THE RELE VANT PORTION OF THE CIRCULAR DISCUSSED ABOVE, IS AVAILABLE IN THE D EPARTMENTS PAPER BOOK. THEREFORE, THE LEARNED DR PRAYED THAT THERE IS A MISTAKE APPARENT FROM THE RECORD. 3. THE LD.COUNSEL FOR THE ASSESSEE ARGUED AND RELIE D ON PARA- 16 AND 17 OF THE ITAT ORDER TO POINT OUT THAT THE O RDER HAS BEEN PASSED ON MERIT, AND THERE IS NO MENTION OF ANY WRO NG LAW WHICH HAS BEEN APPLIED BY THE ITAT, IN PARA-16 AND 17 OF THIS ORDER. THEREFORE, THE LEARNED DR IS SEEKING REVIEW OF THE ORDER OF THE ITAT, WHICH IS OUTSIDE THE SCOPE OF SECTION 254(2) OF THE ACT. 4. WE HAVE CONSIDERED RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. WE ARE OF THE VIEW THAT THE MATTER HA S BEEN DECIDED ON MERIT, AND WE FIND NO MISTAKE APPARENT FROM THE RECORD. MOREOVER, THE LEARNED DR COULD NOT POINT OUT IN PAR A 16 AND 17 OF OUR ORDER THAT ANY WRONG LAW HAS BEEN APPLIED BY US IN THE ORDER DATED 10.2.2012. THEREFORE, THE MA FILED BY THE REVENUE AND ARGUMENTS MADE BY THE LEARNED DR SUGGEST REVIEW OF OUR OWN ORDER. THE SCOPE OF SECTION 254(2) OF THE ACT IS LIMITED AND POWER OF RECTIFICATION DOES NOT EMPOWER TO REVIEW O F OUR OWN MA NO.74/AHD/2012 -7- ORDER. THEREFORE, IN THE CIRCUMSTANCES AND FACTS O F THE CASES, THE MA FILED BY THE REVENUE IS DISMISSED. 5. IN THE RESULT, THE MA NO.74/AHD/2008 IS DISMISSE D. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE. SD/- SD/- ( . .. . . .. . /G.C. GUPTA) !' !' !' !' /VICE-PRESIDENT ( . .. . . .. .% %% % / B.P.JAIN) &' ( &' ( &' ( &' ( /ACCOUNTANT MEMBER