Income Tax Appellate Tribunal - Mumbai
Varian India P.Ltd, Mumbai vs Assessee on 12 February, 2016
आयकर अपीलीय अधिकरण "के" न्यायपीठ मुंबई में।
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "K", MUMBAI
श्री अमित शुक्ला, न्यायिक सदस्य एवं
श्री बी आर भास्करन, लेखा सदस्य के समक्ष ।
BEFORE SHRI B R BASKARAN, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
ITA:. 1214/Mum/2014
(Assessment year: 2009-10)
Varian India P Ltd.,
G 01 Prime Corporate Prk 230-231,
Opposite Blue Dart Centre,
Sahar Road,, Andheri (East),
Mumbai -400 099
स्थयी लेखा सं.:PAN: AAACV 3294 Q
Vs
Asst. DIT (IT) RG 2(2),
Mumbai
अपीलार्थी (Appellant)
प्रत्यर्थी (Respondent)
Appellant by
:
श्री धनेश बफना Shri Dhanesh Bafna
Respondent by
:
श्री जयंत कुमार Shri Jayant Kumar
ITA:. 1030/Mum/2014
(Assessment year: 2009-10)
Asst. DIT (IT) RG 2(2),
Mumbai
Vs
Varian India P Ltd.,
G 01 Prime Corporate Prk 230-231,
Opposite Blue Dart Centre,
Sahar Road,, Andheri (East),
Mumbai -400 099
स्थयी लेखा सं.:PAN: AAACV 3294 Q
अपीलार्थी (Appellant)
प्रत्यर्थी (Respondent)
Appellant by
:
श्री जयंत कुमार Shri Jayant Kumar
Respondent by
:
श्री धनेश बफना Shri Dhanesh Bafna
सुनवाई की तारीख /Date of Hearing : 24-11-2015
घोषणा की तारीख /Date of Pronouncement : 12-02-2016
आदेश
ORDER
अमित शुक्ला : न्या. स.:
PER AMIT SHUKLA, JM:
The aforesaid cross appeals have been filed by the assessee as well as by the revenue against final assessment order dated 30.12.2013, passed under section 144C(13) r.w.s. 143(3) by the Assessing Officer in pursuance of direction given by the Dispute Resolution Panel-II (DRP), vide order dated 06.12.2014, under section 144C(5) for the quantum of assessment for the assessment year 2009-10. We will first take-up assessee's appeal being ITA No. 1214/Mum/2014, vide which following grounds have been raised:
"The under mentioned grounds of appeal are without prejudice to each other:
Ground No. I - Addition of Rs.1,12,95,509/- on account of inclusion of reimbursement of expenses for the purpose of computing commission income On the facts and in the circumstances of the case and in law, the Assistant Director of Income-tax (International Taxation), Range 2(2), Mumbai (hereinafter referred to as the Learned AD') erred in including the amount of reimbursement of expenses received by the Appellant for the purposes of computing the commission income, and thereby, making an addition of Rs.1,12,95,509 to the total income of the Appellant for the year under consideration The Appellant prays that the AD be directed to delete the addition of Rs 1,12,95,509.
Ground No. 2 - Transfer Pricing adjustment of Rs.28,14,739/-
On the facts and circumstances of the case and in law, the Learned AD erred in concluding the assessment under Section 143(3) of the Income tax Act, 1961 read with Section 144C(13) of the Act, as follows:
• disregarding the segmental profitability prepared by the Appellant, by disaggregating the segments into commission (marketing service), trading (purchase of spares and accessories) and services (maintenance and after sates support) segments, and further using Gross profit ratio as an allocation key for expenses as against different allocation keys used by Appellant, • disregarding the methodology adopted by the Appellant and applying Resale Price Method as the Most Appropriate Method for the 'Trading' segment, thereby applying Gross Profit Margin as the Profit Level Indicator for benchmarking, • making an adjustment of Rs. 28,14,739 in relation to the international transaction in respect of import of spares and accessories by Appellant from its associated enterprises.
The Appellant prays that the learned AD be directed to consider the international transaction of the Appellant as arm's length, and accordingly, the transfer pricing adjustment of Rs 28,14,739 should be deleted.
Ground No. 3 - No grant of refund of Rs.5,38,870/-
On the facts and in the circumstances of the case and in law, the Learned AO erred in adjusting refund of Rs.5,38,870 without appreciating the fact that the same has not been received by the Appellant.
The Appellant prays that the Learned AO be directed to delete the adjustment towards grant of refund.
Ground No. 4 - Levy of interest under section 234D of the Act of Rs.88,914/-
On the facts and in the circumstances of the case and in law, the Learned AO has erred in levying interest under section 234D of the Act without appreciating the fact that the refund has not been granted to the Appellant.
The Appellant prays that e Learned AO be directed to delete interest levied under section 234D of the Act".
2. At the outset, Ld. Counsel, submitted that ground no. 2 relating to Transfer Pricing adjustment of Rs.28,14,739/- is not pressed due to smallness of the amount, however, he submitted that same should not be construed as assessee's acceptance or acquiescence in principle. Ld. DR also did not have any objection. Accordingly, ground no. 2 relating to transfer pricing adjustment of Rs. 28,14,739/- is dismissed as not pressed.
3. As regards the issue raised vide ground no. 1, that is, addition of Rs.1,12,95,509/- on account of inclusion of reimbursement of expenses for the purpose of computing the commission income, the Ld. Counsel submitted that, this issue is covered in favour of the assessee and against the Department by the order of the Tribunal in assessee's own case for the assessment year 2007-08 and 2008-09, wherein, this matter has been restored back to the file of the AO in the light of the direction given therein.
4. Ld. DR also admitted that this issue has been set aside to the file of the AO.
5. From the perusal of the orders for the earlier years, we find that this issue had come up for consideration before the Tribunal wherein this matter has been restored back to the file of the AO. Brief facts qua this issue are that, assessee carries out two types of sale of Varian products in India, one is direct sale and other is indent sale. Insofar as direct sale is concerned, the assessee directly imports spare parts from Varian Group of Companies (for short "VGCs") and sell them to Indian customers directly on its own account on principal-to-principal basis. These spare parts are made available on discounted price by the various Associates Enterprises (for short "AEs") i.e., Varian Group of Companies which is sold by the assessee on its own account. In the activities relating to indent sale, the Varian group of companies sell analytical lab instruments to the Indian customers directly and the assessee carries out pre-sale activities like liaisoning and other incidental post-sale support activities for which it is entitled for commission. Any expenses incurred by the assessee are reimbursed to the assessee at cost which is separately reflected as 'other income' in the financial statement for the purpose of disclosure. The assessee's contention before the DRP as well as the AO has been summarized by the DRP in Para 4.2.1 to 4.2.3 which for the sake of ready reference reproduced herein below:-
Following key submissions were made before the panel 4.2.1 The commission income earned by the Assessee is towards the indent sales by VGCs, which is at an arm's length value, and amount of reimbursements are only towards the actual amount of expenses incurred by the Assessee in connection with the indent sales. The commission was to be computed on the basis of the terms of the DR agreement, which provided that it would be computed on the price list net of discounts.
4.2.2 The AO has failed to appreciate the terms of the DR agreement/s, wherein it is specifically provided that on the amounts of local procurement (i.e. any expenses incurred by the Assessee for procuring any additional equipment/material, other than that supplied by VGCs to the customers), commission shall not be computed.
4.2.3 Without prejudice to the above, it was also submitted that the computation of commission income is on notional basis as the actual commission income earned by the Assessee is already offered to tax for the year under consideration. Hence, the Assessee has received commission income based on the mechanism provided by the DR agreements and hence, the action of the Learned AO is not tenable on facts and in law".
DRP following earlier order of the 2007-08 and 2008-09 had decided this issue against the assessee.
6. We find that in AY 2007-08, the Tribunal has discussed this issue from para 4 onwards and the relevant finding has been given at para 10 & 11 which for the sake of ready reference are reproduced hereunder:-
"10. We have heard the rival submissions and also perused the relevant material placed on record. The department's case is that for the purpose of calculation of commission, the reimbursement of expenses, which has been received by the assessee has to be included in the gross sale value, as the commission is payable on the entire sales executed by the assessee including the part/equipment procured locally. In other words, the commission is receivable on the reimbursement of the expenses, because it is directly linked with the sales. Whereas, the assessee's case is that, the reimbursement is on account of cost of procurement of the local equipments which are required to fulfill the entire sale contract and such a cost incurred on procurement of local content/equipments cannot be included for the payment of commission. The commission receivable is only on the Varian products sold and not on the cost of locally procured equipments. From the perusal of the agreement as has been referred by the ld. Assessing Officer as well as by the ld. Counsel, it is seen that the entitlement of the assessee for the commission receivable has been specified in Schedule 'A'. In the paper book, there are two Schedule 'A', one which provides that, assessee's entitlement to the commission is on the sale value net of freight, insurance and other charges, whereas the other Schedule 'A'; categorically provides details of percentage of commission receivable and also provides a strict rider that:- "Local content- Where contractor's commission order requires the procurement of local non-Varian content by Contractor to fill such order, commissions shall not be computed on local supplies".
11. If the aforesaid Schedule 'A' categorically provides that commission is not to be computed on the sale orders which requires the procurement of local content by the assessee, then on such procurement of equipments by the assessee, commission cannot be imputed, because it is the reimbursement of the cost of local equipments procured. Further, it appears that this relevant piece of document which is also a part of "Distribution and Representation Agreement", has not been examined by the Assessing Officer. Therefore, for the purpose of verification and examining of the content of this schedule, we restore the matter back to the file of AO, to adjudicate this issue afresh in light of the aforesaid document, because it changes the entire colour of the conclusion drawn by the AO. The AO will also examine the fact, whether the commission is on sale of Varian products only or not. The quantum of commission is a question of fact and cannot be imputed or presumed. In case of reimbursement of expenses from Varian Germany also, the matter is set-aside for examining, whether the commission is on gross sales or on the net of sales of the equipments directly procured by the associate enterprises. If the arrangement with this AE is also the same, then the same conclusion should be drawn in this case also. In the result, ground no.1 is treated as allowed for statistical purpose.
This order of the Tribunal has been followed in AY 2008-09 also, vide order dated 26.09.2013. Thus, following the same lines, we also restore this matter to the file of the AO to adjudicate this issue in the light of the directions given by the Tribunal in the earlier years. Accordingly, ground no.1 is treated as allowed for statistical purposes.
7. As regards ground no.3 and 4, no contention has been put forth by the Ld. Counsel and accordingly, the same are dismissed.
8. In the result, appeal of the assessee is partly allowed for statistical purposes.
9. Now, we will take-up revenue's appeal in ITA No.1030/Mum/2014, vide which following effective ground has been raised:-
"1. Whether, on the facts and in the circumstances of the case and in law, the Hon'ble DRP was right in holding that the assessee is not a PE of Varian Group, USA and thereof, the business profit attributable to the PE is not taxable in India "
10. Before us, it has been admitted by both the parties that this issue stands covered by the order of the Tribunal in assessee's own case right from the AYs 2002-03 to AY 2006-07, wherein, impugned issue has been discussed by the Tribunal in great detail and it has been held that, assessee is not an dependent agent of any of VGC and does not constitute PE of the VGC group companies. The relevant finding has been given in ITA No. 4672 to 4676/Mum/2011 vide order dated 27th February, 2013. However, in AY 2007-08 the Tribunal has summarized the entire issue as under:-
"13. On perusal of the assessment order, it is seen that the Assessing Officer while adjudicating the issue whether, the Varian Group of Companies have PE in India in the form of the branch of the assessee company, has followed the reasoning given in the assessment order for the A.Y. 2002-03. The detail reasoning of the Assessing Officer which in turn is based on the finding given in assessment year 2002-03 has been dealt by the Assessing Officer from paras 6.1 to para 13. This issue, whether the assessee is a PE of various Varian group of companies or not, has been discussed in detail by the Tribunal in assessee's own case in ITA No. 4672 to 4676/Mum/2011 for the assessment years 2002-03 to 2006-07 vide order dated 27/02/2013. After detail analysis, the Tribunal has finally held that, the Indian branch of the VIPL is not dependent agent of VGCs and therefore, it does not constitute PE for various Varian companies in India, as per Article 5(4) 5(5), respective DTAAs. The relevant finding of the Tribunal has given from para 25 to para 43 of the order. Thus, in view of the findings given therein and as a matter of judicial precedence, we hold that the assessee branch, does not constitute PE of Varian-Italy and, therefore, the addition of Rs.10,80,117/-, being 10% of gross sales made by Varian Italy to its customer in India, cannot be taxed in the hands of the assessee. Thus ground no. 2 as raised by the assessee is treated as allowed".
Thus, in view of the earlier years' precedence, we decide this issue in favour of the assessee and against the Department. Accordingly, the order of the DRP is upheld.
11. In the result, revenue's appeal stands dismissed.
Sum-up:
Assessee's appeal stands partly allowed for statistical purposes whereas the revenue's appeal stands dismissed.
Order pronounced in the open court on 12th February, 2016.
Sd/- Sd/-
(बी आर भास्करन) (अमित शुक्ला)
लेखा सदस्य न्याईक सदस्य
(B R BHASKARAN) (AMIT SHUKLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Date: 12th February, 2016
प्रति/Copy to:-
अपीलार्थी /The Appellant.
प्रत्यर्थी /The Respondent.
3) The CIT(A) concerned/DRP-II, Mumbai.
The CIT/DRP concerned ___, Mumbai.
विभागीय प्रतिनिधि "के" ", आयकर अपीलीय अधिकरण, मुंबई/
The D.R. "K" Bench, Mumbai.
गार्ड फाईल \
Copy to Guard File.
आदेशानुसार/By Order
/ / True Copy / /
उप/सहायक पंजीकार
आयकर अपीलीय अधिकरण, मुंबई
Dy./Asstt. Registrar
I.T.A.T., Mumbai
*चव्हान व.नि.स
*Chavan, Sr.PS
अनु क्र.
Sr.N
आदेश का घट्नक्रम
Episode of an order
दिनाक
Date
स्वाशिरि
Initials
यथोचित
Concerned
1
Draft on handwritten Manuscript
05.02.2016
व.नि.स Sr.PS
2
Draft placed before author
08.02.2016
व.नि.स Sr.PS
3
Draft proposed & placed before the second Member
न्यास/ JM
4
Draft discussed/approved by Second Member
लेस/AM
5
Approved Draft comes to the Sr.PS/PS
व.नि.स Sr.PS
6
Kept for pronouncement on
व.नि.स Sr.PS
7
File sent to the Bench Clerk
व.नि.स Sr.PS
8
Date on which file goes to the Head Clerk
9
Date of dispatch of Order
ITA:. 1402/Mum/2013
(Assessment year: 2006-07)
ITA:. 1663/Mum/2013
(Assessment year: 2005-06)
The aforesaid cross appeals has been filed by the assessee as well as revenue against impugned order dated 17.12.2013 passed by CIT(A) -17, Mumbai for the quantum of assessment passed u/s 143(3) for the assessment year 2009-10. Despite several notices and notice served through DR, the assessee did not appear nor any adjournment application has been filed. The matter is being giving up for hearing since 2014 and after the case being adjourned to various dates, the assessee has not appeared, therefore, the appeal of the assessee as well as of the revenue is being decided on merits after hearing Ld. DR.
2. In the grounds of appeal, the assessee has raised following grounds:
Flag "A"
3. Brief facts are that the assessee company is engaged in the business of manufacturing of engineering products and consultancy services related to oil field business. On the perusal of the audited accounts, the AO noted the assessee has debited a sum of Rs. 31,64,286/- as commission to Directors under the head 'Directors' remuneration'. He further noted that, commission paid to the Directors' of Rs. 20,88,746/- and TDS of Rs. 10,75,540/- has been shown as unpaid, that is not incurred during the year. Thus, he observed that, assessee has neither paid TDS to the Directors nor made any commission during the year and accordingly, he required the assessee as to why the said amount should not be allowed u/s 40(a)(i). In response to the show cause notice, the assessee agreed for disallowance of commission paid to the Directors of Rs. 31,64,286/- on which no TDS has been deducted vide order sheet noting dated 26.09.2011 accordingly, the said amount was disallowed u/s 40(a)(i).
4. Before the CIT(A), the assessee has challenged the said disallowance and stated that commission has been paid to the Director as per their terms of employment and as part of salary remuneration. The said commission was actually in the nature of salary and is covered under the definition of 'salary' u/s 17(1). Not only that, TDS Range-I vide order dated 22.03.2012 has considered the assessee as assessee in default for non-payment of TDS of salary paid to the Directors' which the assessee has paid. Further, the provisions under section 40 is not applicable in respect of payment of salary covered u/s 192. The Ld. CIT(A) held that a particular resolution of the assessee company provides for incentive to be given to the employee directors and such an incentive is part of remuneration covered under the head "salary". It is that the department has dictated default and tax has been deducted & paid by the assessee on the same. Therefore, it was clear that TDS was payable on such commission which has been paid by the assessee as demanded by the TDS-Range-I. However, he confirmed the addition on the ground that assessee has admitted for such a disallowance.
5. After hearing the DR and on perusal of the relevant finding given in the impugned order, we find that the CIT(A) has held that the incentive paid by the assessee (to the employee director was part of remuneration and is covered under the head 'salary'). This is also covered within the definition of salary as noted in section 17(1). Once the payment has made on account of salary and TDS is deductible u/s 192, then it has to be seen whether disallowance u/s 40(a)(i) can be made or not. Section 40(a)(i) is a non-obstantive clause, which reads as under:-
40(i)
6. From the perusal of the aforesaid afore said clause, it is evidently clear that it does not cover the salary payment. Once the payment of the amount is not covered u/s 40(a)(ia) then no disallowance can be made under the said section and, therefore, on the legal provisions the disallowance as confirmed by the CIT(A) cannot be upheld even though assessee might have on wrong notion as agreed for such a disallowance. It trite law that income cannot be taxed on mere acquiescence by the assessee but under the relevant provisions of the statute if under the statutory provision in payment of amount is not disallowable then same cannot be disallowed. Thus, disallowance confirmed by the CIT(A) stands deleted.
7. In second ground, the assessee has challenged Rs. 6,88,856/- under section 43B in respect of sum payable under the 'Superannuation Scheme'.
8. The AO has disallowed the payment on the ground that same was not paid before the due date of filing of return. The assessee's case before the CIT(A) was that, the said amount represents the 'superannuation' paid to "directors" and the "employees" and amount not payable to the "superannuation fund" as covered under section 43B, therefore, no disallowance is called for in respect of the said amount. The Ld. CIT(A) held that, the purpose of provision of section 43B that the amount due to the employees should be given in the present case, the same has not been, therefore, said to be disallowance has been confirmed. Not only that, he has also held that, the assessee has agreed for such a disallowance before the AO. On perusal of the finding given in the impugned order, we find that the disallowance of superannuation payable to the directors' has been disallowed under section 43B. Section 43B r.w. Clause B provides that any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees shall be allowed in the previous year in which such sum is paid, however, here there is not sum payable on account of provident fund, superannuation fund, gratuity fund or any other fund. It is amount payable to the Director which is culled out from the reply of the assessee incorporated by the CIT(A) at page 6. If such an amount does not pertained to amount payable by way of contribution to any fund then needless to say that disallowance u/s 43B cannot be made. Accordingly, the disallowance as upheld by the CIT(A) cannot be confirmed. Accordingly, the assessee gets relief on this score also.
9. In the result, appeal filed by the assessee stands allowed.
10. Now, we will take revenue's appeal being ITA No. 1663/Mum/2013 vide which following grounds have been heard :-
Grounds of appeal
11. Brief facts are that, the assessee has made payment of Rs.6,3,64,00,44/- to M/s. _______________ on which TDS of Rs. 4,86,689/- was deducted. The AO noted that, in the order under 195 on the order dated 24th July, 20___ ADIT(Int.tax.) has held that payment had to be made to such a entity after deduction of withholding tax @ 4.23% which comes to Rs. 15,37,733/- thus, there was a shortfall of Rs. 10,51,034/-. Accordingly, the disallowance made by the AO u/s 40(a)(i) which in fact should have been u/s 40(i).
12. The assessee's case before the CIT(A) is that the payment was made to the G... D.. Research as charges of IDP to the survey work at Bantunall: Field Andhra Pradesh and the tax was deducted under section 195, because it was on account of payment in pursuance of works contract. It was further submitted that provision of section 40(i) will apply only when tax has not been deducted and not on any particular shortfall of deduction. Reliance was placed on various decisions of the Tribunal including that of ____vs CIT in ITA No. 1135/Mum/2010 , the Ld. CIT(A), held that such a disallowance cannot be made simply on the ground that, there is a short deduction of tax. Accordingly, he deleted the said disallowance.
13. After considering submission made by the DR and on perusal of the finding of the impugned order, we find that, assessee has made payment to the said entity which is a non-resident company and said payment was made in pursuance of 'Works Contract' given in carrying out 'IDPs survey work'. The said entity does not have any PE in India. Despite that, the assessee had deducted the TDS u/s 195 a disallowance has been made on the ground that in the order passed under section 195, he rate of TDS has been determined which cannot be the ground for disallowance under section 40(i)(a), because such disallowance only entails when there is a non-deduction of tax and not in the case of short-deduction. This has been held in catena of decisions passed by ITAT Mumbai benches, which has been followed by the CIT(A). Accordingly, we do not find any infirmity in the order of the CIT(A), thus, ground of the appeal filed by the revenue are dismissed.
14. In the result, appeals of the assessee stands allowed and that of the revenue stands dismissed.
PAGE 8 Varian India P Ltd.
ITA 1214/Mum/2014 ITA 1030/Mum/2014