Income Tax Appellate Tribunal - Hyderabad
Itw India Ltd., Hyderabad vs Assessee on 27 March, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No.206/Hyd/2009 : Assessment year 2004-05
M/s. ITW India Ltd., Hyderabad V/s. Dy. Commissioner of Income-tax
Circle 2(1), Hyderabad
(PAN - AAACI 4550 Q)
(Applicant) (Respondent)
ITA No.190/Hyd/2009 : Assessment year 2004-05
Asst. Commissioner of Income- V/s. M/s. ITW India Ltd., Hyderabad
tax Circle 2(1), Hyderabad
(PAN - AAACI 4550 Q)
(Applicant) (Respondent)
Assessee by : Shri Rupesh Jain
Department by : Shri D.Sudhakar Rao DR
Date of Hearing 19.02.2015
Date of Pronouncement 27.03.2015
ORDER
Per P.M.Jagtap, Accountant Member :
These two appeals, one filed by the assessee, being ITA No.206/Hyd/2009 and the other filed by the Revenue, being ITA No.190/Hyd/2009 are cross appeals, which are directed against the order of the learned CIT(A) III, Hyderabad dated 3.12.2008.
2. In grounds 1 and 2 of its appeal, the assessee has challenged the action of the learned CIT(A) in confirming the action of the Assessing Officer in excluding interest income of Rs.2,58,88,833, while computing the profits of the business for the 2 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad purpose of determining the deduction allowable to the assessee under S.80HHC of the Act.
3. As agreed by the learned representatives of both the sides at the time of hearing before us, this issue is squarely covered in favour of the Revenue and against the assessee by the decision of the coordinate bench of this Tribunal in assessee's own case for assessment year 2003-04 rendered vide order dated 23.7.2009 passed in ITA No.662/Hyd/2006 and others wherein it was held by following the decision of Hon'ble Delhi High Court in the case of CIT V/s. Shriram Honda Power Equipment Ltd. (289 ITR 475), that interest income received on deposits was chargeable to tax in the hands of the assessee under the head 'income from other sources' and the same, therefore, was liable to be excluded from the profits of the business for the purpose of computing the deduction under S.80HHC allowable to the assessee. As the issue involved in the year under consideration as well as all the material facts relevant thereto are admittedly similar to that of assessment year 2003-04, we respectfully follow the order of the coordinate bench for the assessment year 2003-04 and uphold the impugned order of the learned CIT(A), confirming the action of the Assessing Officer in excluding the interest income on fixed deposits from the profits of the business for the purposes of computing the deduction allowable to the assessee under S.80HHC of the Act. Grounds No.1 and 2 of the assessee's appeal are accordingly dismissed.
4. In ground No.3, the assessee has challenging the order of the learned CIT(A) in confirming the action of the Assessing Officer in allowing deduction under S.80HHC with reference to the eligible profits of the business as reduced by the amount of deduction allowed under S.80IB of the Act.
3 ITA No.190 & 206/Hyd/2009M/s. ITW India Ltd., Hyderabad
5. After considering the rival submissions and perusing the relevant material on record, it is observed that a similar issue has been decided in favour of the assessee by the Hon'ble Bombay High Court in the case of Associated Capsules P. Ltd. V/s. DCIT (332 ITR
42) holding that the amount of profit allowable as deduction under S.80IA of the Act is not required to be reduced from the profits of the business of the undertaking, while computing the deduction under any other provisions under Heading C in Chapter VI-A of the Act, which also includes S.80HHC. It is also observed that a similar issue has been decided even by the Hon'ble Karnataka High Court in favour of the assessee in the case of CIT V/s. Millipore India P. Ltd. (341 ITR 219). Although the decision of the Hon'ble Delhi High Court in the case of Great Eastern Exports V/s.CIT (332 ITR 14), cited by the learned Departmental Representative is against the assessee on this issue, there being no decision of the Hon'ble jurisdictional Andhra Pradesh High Court on the issue under consideration, we follow the view taken by the Hon'ble Bombay High Court in the case of Associated Capsules P. Ltd.(supra) and of the Hon'ble Karnataka High Court in the case of Millipore India P. Ltd.(supra), which are in favour of the assessee, relying on the decision of the Hon'ble Supreme Court in the case of CIT V/s. Vegetable Products Ltd.(88 ITR 192). This ground is accordingly allowed.
6. Grounds No.4.1 to 4.3 raised in the appeal of the assessee are not pressed by the learned counsel for the assessee, at the time of hearing before us. The same are accordingly dismissed as not pressed.
7. Grounds No.4.4 to 4.11 involve a common issue relating to TP adjustment made by the Assessing Officer and sustained by the learned CIT(A) to the extent of Rs.1,02,47,642 in 4 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad respect of international transactions of the assessee company with its AE involving export of manufactured goods,
8. The assessee in the present case is a company which is engaged in the business of manufacturing and trading of packaging material. The return of income for the year under consideration was filed by it on 30.10.2004 declaring total income of Rs.40,19,33,216. As noted by the Assessing Officer during the course of assessment proceedings, international transactions were entered into by the assessee company with its AE involving inter-alia export of finished goods amounting to Rs.9,22,35,092. A reference, therefore, was made by him to the Transfer Pricing Officer(TPO) under S.92CA(1) of the Act, to determine the Arm's Length Price (ALP ) of these international transactions as well as other international transactions entered into by the assessee company with its AE. In the Transfer Pricing Study report furnished by the assessee, the bench marking of the international transaction was done by following the Transactions Net Margin Method (TNMM) taking Net Profit over Sales as Profit Level Indicator (PLI). The relevant data pertaining to the financial years 2001-02, 2002-03 and 2003-04 was used and 19 Indian companies engaged in the manufacture of packaging material, i.e. steel strapping, were identified as comparables. Since the Arithmetic Mean of the Net Margin of the said comparables as worked out at 2.26% was much less than the net margin of 16.09% earned by the assessee company at entity level, the price charged by it to AE in the relevant international transaction was claimed by the assessee to be at Arm's length.
9. The TPO did not dispute that the TNMM adopted by the assessee for benchmarking the international transactions with its AE was the most appropriate method. He however, did not approve the action of the assessee in taking the entity level net margin and 5 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad comparing the same with the margin earned by the comparables from the uncontrolled transaction. According to him, the margin earned by the assessee from the export of manufactured goods to AE alone should have been compared to the margin earned from the comparable uncontrolled transactions. He therefore, bifurcated the financial results of the assessee company for the year under consideration as under -
(Amount in Rs.)
Particulars Domestic Export AE Export Non- Sudan Manufacture
AE (non-AE) Total
Quantity(MT)
24,608 2,935.67 848.26 885.89
Sales 151,54,73,729 8,94,19,590 2,59,09,742 5,01,28,840 168,09,31,901
Other Income 1,30,89,886 7,72,361 2,23,795 4,32,987 1,45,19,029
Export 10,59,688 1,43,50,814 41,46,640 43,30,591 2,38,80,733
Benefit
Total Income 152,96,16,303 10,45,42,465 3,02,80,177 5,48,92,418 171,93,31,363
Total Costs 125,14,79,317 9,41,56,034 2,92,00,086 5,38,68,988 1,42,87,04,425
Profit/(Loss) 27,81,36,986 1,03,86,731 10,80,091 10,24,430 29,06,28,238
Less:
(i)Other
1,30,89,886 7,72,361 2,23,795 4,32,987 1,45,19,029
income
(ii)export 10,52,688 1,43,50,814 41,46,640 43,30,591 2,38,80,733
benefit
Profit(without
other income
& export) 26,39,94,412 -47,36,444 -32,90,344 -37,39,148 25,22,28,476
Net Profit/- 17.42% -5.29% -12.69% -7.45% 15%
sales %
Net profit/- 21.10% -5% 11.26% -6.94% 17.65%
cost %
10. On the basis of the above working, the TPO noted that the internal comparables in the form of domestic segment was available in the case of the assessee as the said segment manufactured same or similar goods and sold the same in the domestic market. In this regard, the objection raised by the assessee that the margins on account of domestic and export sale should not be compared as the price charged in domestic market was different from the export market on account of various factors 6 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad was not found sustainable by the TPO. He held by relying on the OECD guidelines on Transfer Pricing that the internal comparables i.e. manufacturing domestic segment of the assessee was the preferable and most suitable comparable to the manufactured export segment to AE and accordingly applying the Net Profit to Cost ratio of 21.10% of the domestic manufacturing segment of the assessee company to the cost of export of manufactured goods amounting to Rs.9,41,51,979, he determined the Arm's Length Price of the international transactions of the assessee with its AE involving export of manufactured goods of Rs.11,40,89,046 as against Rs.8,94,19,590 charged by the assessee. The difference of Rs.2,45,98,456 accordingly was worked out by the TPO as transfer pricing adjustment, which is required to be made in respect of international transaction of the assessee company with its AE involving export of manufactured goods.
11. The alternative contention of the assessee to compare the margin of AE transactions with that of non-resident unrelated parties, being better internal comparable, was also considered by the TPO. In this regard, he accepted the stand of the assessee that these two segments were in fact better comparables, provided that the material differences between the two segments are adjusted. He also accepted the claim of the assessee that such adjustments on account of freight charges to the extent of 75 US Dollars per MT and extra material consumption to the extent of 158.60 US Dollars Per MT are required to be made. The claim of the assessee for such adjustment on account of commission at the rate of 24.6% of the sales, however, was considered reasonable by the TPO only to the extent of 12.5% and accordingly, making the adjustments to the sale price charged by the assessee to non-resident entity in Sudan, at US Dollars 1250 per MT, the adjusted price was worked out by the TPO at US Dollars 860.15. As the average price charged by the 7 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad assessee to its AE was US Dollars 641.00, the transfer pricing adjustment on the basis of this alternative analysis was worked out by the TPO at US Dollars 219.15 per MT. Since the quantity of Magnus sold by the assessee company to its AE during the year under consideration was 2223.693 MTs, the transfer pricing adjustment required to made on the basis of this alternative analysis was worked out by the TPO at Rs.2,21,24,433. On the basis of the TPO's order, addition of Rs.2,45,98,456 was made by the Assessing Officer to the total income of the assessee on account of transfer pricing adjustment in the assessment made under S.143(3) vide order dated 29.12.2013.,
12. Against the order passed by the Assessing Officer under S.143(3), an appeal was preferred by the assessee before the learned CIT(A), challenging inter alia the transfer pricing adjustment made by the Assessing Officer on account of its international transactions with AE involving export of manufactured goods. During the course of appellate proceedings, the said addition was challenged by the assessee by raising the following points-
1. TPO erred in computing the operating profit of exports to AE by excluding export incentives & other income which was in the nature of interest, commission, lease rent on machinery etc. It was claimed that these income were not required to be excluded from the operating profits.
2. TPO erred in adopting the profit level indicator as net profit on cost instead of net profit on sales adopted by the assessee.
3. TPO erred in rejecting the external comparables selected by the assessee by using the data of earlier years. Since the data of the previous year relevant to AY 04-05 was not available at the time of preparing TP documents, the appellant rightly used the data of earlier:
years.
4. TPO erred in holding that the domestic sales were the best internal comparables for determining the ALP. The exportisales were necessitated due to unutilized production capacity and therefore the appellant had to export part of its production at whatever price it got, in order to recover its cost and to increase the profitability.
8 ITA No.190 & 206/Hyd/2009M/s. ITW India Ltd., Hyderabad
5. The TPO erred in comparing the non AE export made to Sudan only. The finished goods exported to Sudan were of different quality and were not usually manufactured and sold by the assessee. It was an exceptional transaction undertaken at a substantially high price of $1250 per MT against the usual sale price, of $641.44 per MT. TPO also erred in considering the commission @ 12.5% while the actual commission paid in this transaction was @ 24.6%.
6. TPO erred in not allowing the benefit of variation of +/-5% as provided in S.92C(2). AR relied on the decision of ITAT, Delhi in the case of Sony India Pvt. Ltd.
13. The learned CIT(A) did not agree with most of the points raised by the assessee and rejected the same. He, however, agreed with the stand of the assessee that while computing the operating profit from exports to AE, export benefits should also be considered and included in the profit as they were directly related to the exports and the export prices were fixed considering such export benefits. Accordingly, taking into consideration the amount of export benefits related to the export of the assessee company made to its AE, the TP adjustment required to be made was worked out by the CIT(A) at Rs.1,02,47,642 as against Rs.2,45,98,456 worked out by the TPO. He further noticed that while determining the profit margin of 21.10% on domestic sale, the TPO had not considered the export benefits of Rs.10,52,600 received by the assessee. He therefore, directed the Assessing Officer/TPO to recompute the profit margin on domestic sales, after considering the export benefits and by applying the same on the AE exports including the export benefits to recompute the transfer pricing adjustment required to be made on this count.
14. As regards the alternative analysis made by the TPO, the learned CIT(A) found merit in the contention raised on behalf of the assessee that the TPO was not justified in considering only exports made to Sudan for comparison and excluding other non-AE exports. He however, did not subscribe to the view of the assessee 9 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad that exports to Sudan should be excluded from comparison due to difference in quality of finished goods. He held that in TMMM such minor functional and transactional differences are not of any importance, since net margins are very intolerant to such differences. He accordingly directed the assessee to furnish a comparative statement showing the sale price of exports made to AE and non-AE including Sudan and found from such workings furnished by the assessee that the export price to AE came to US Dollars 641 per MT as against export price to non-AE which came to US Dollars 767.93 per MT after allowing +/-5% variation. By applying the said difference to the total exports of 2,223.693 MTs made by the assessee to its AE, the adjustment required to be made as per this alternative analysis was worked out by the learned CIT(A) at Rs.1,28,14,302. Since the TP adjustment worked out by him as per the main method followed was at Rs.1,02,47,642, after some adjustments, the learned CIT(A) held that the alternative analysis merely support the quantum of TP adjustment made as per the first method.
15. The learned counsel for the assessee submitted that TNMM was taken as the most appropriate method in the TP study report furnished by the assessee and entity level net profit to sale was taken as Price Level Indicator, which were compared with the entity level margin of 19 comparable entities, which are engaged in the business of manufacturing packaging material. He submitted that although the TNMM was accepted by the TPO as the most appropriate method for benchmarking the international transactions of the assessee company with its AE involving export of manufactured goods, he took the profit margin of the assessee company from the relevant international transactions with its AE as worked out on the basis of segmental details as PLI and compared the same with the profit margin of the assessee company from 10 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad domestic segment involving sale of similar products. He contended that this comparison made by the TPO for bench marking the relevant international transactions was not appropriate as the export made to AE cannot be considered comparable with domestic sale made to non-AE because there are substantial differences between these two types of transactions because of export incentives, quantum of turnover, high competition in the international market, levy of duty by government to protect domestic market, high freight cost involved in exporting, etc. The learned counsel for the assessee also contended that the assessee had idle capacity during the relevant period and the same was utilised by making exports, since domestic market for its products was practically saturated. He contended that the comparison made by the TPO of the export made by the assessee to AE with domestic sale made to the non-AE itself was not proper and he ought to have compared the exports made by the assessee to its AE with the exports made of similar products to non-AE instead of domestic sales made to non-AE especially when such exports made to non- AE were very much available. In support of this contention, the learned counsel for the assessee relied on the following decisions of Tribunal-
(a) Vedaris Technology (P) Limited V/s. ACIT (131 TTJ
309)(Del)
(b) ITO V/s. CRM Services India Pvt. Ltd. (ITA No.4068/Del /2009 dated 30.6.2011)
(c) Ariva Industries Limited V/s. ACIT (48 SOT 418)(Mum)
16. In order to substantiate his case that the export made to AE should be compared with exports made to non-AE, the learned counsel for the assessee invited our attention to the relevant details given at pages Nos.323 to 326 and pointed out that 11 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad two products, namely Magnus and Apex were exported by the assessee company to its AE as well as to Non-AE. He contended that since similar products were exported by the assessee company to its AE as well as to non-AEs, the price charged in the relevant controlled transactions should be compared with the price charged in non-controlled transactions. He pointed out that the average price charged by the assessee company for the exports made to non-AE was Rs.646 in case of Magnus and Rs.568 in case of Apex as against average price of Rs.641 charged to AE in the case of Magnus and Rs.561 charged in the case of Apex.
17. The learned counsel for the assessee submitted that although the TPO, as an alternative, made a transfer pricing analysis by comparing the exports made by the assessee to its AE with the exports made to the non-AE, he considered only the exports made by the assessee company to non-AE in Sudan, ignoring the fact brought out by the assessee to its notice that the type of material supplied to the non-AE in Sudan was different. He invited our attention to the copy of the submissions made before the TPO in this regard vide letter dated November 8, 2006 placed at pages 329 to 333 of the paper-book, to show that the material differences in the transactions involved in the exports to non-AE in Sudan and the exports made to AE were specifically brought to the notice of the TPO. He then invited our attention to the relevant portion of the TPO's order at page No.429 of the paper book to point out that although adjustment on account of freight charges and extra material consumed were allowed by the TPO, while making comparison between the price charged by the assessee company to non-AE in Sudan and price charged to the AE as claimed by the assessee, adjustment on account of commission was allowed by him only to the extent of 12.5% as against 24.16% claimed by the assessee. He contended that since the commission 12 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad of 24.6% was actually paid by the assessee and the same was taken into consideration while fixing the price charged to the non- AE in Sudan, there was no justification in the action of the TPO to allow the adjustment on account of commission only to the extent of 12.5%, treating the same to be genuine or reasonable. He contended that genuineness or reasonableness cannot be a relevant factor, while making the adjustment in the transfer pricing analysis, especially when the fact that the commission of 24.6% actually paid by the assessee was not disputed by the TPO. He contended that the exports to non-AE in Sudan in any case cannot be compared with the exports made to AE keeping in view the material differences specifically pointed out by the assessee, and since there were other transactions of export of similar products made by the assessee to non-AEs in other countries, the international transactions of the assessee company with the AEs should be compared with the other international transactions with non-AEs.
18. The Learned Departmental Representative on the other hand, strongly supported the order of the TPO comparing the international transactions of the assessee company with its AE with the similar transactions made in domestic segment with non-AEs. He contended that since the products manufactured and sold in both these types of transactions are undisputedly similar, there is nothing wrong in comparing these transactions for the purpose of transfer pricing analysis as done by the TPO. He submitted that even the stand of the assessee to compare the exports to AE with exports to non-AE was also considered by the TPO and in the alternative analysis made in this regard, based on the comparison made between the exports made to AE with the exports made by the assessee to non-AE, he found that it supports the TP adjustment worked out by him by comparing the international 13 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad transactions of the assessee company with its AE to the domestic transactions made by the assessee with its non-AE.
19. As regards the adjustment allowed by the TPO on account of commission while making such alternative working only to the extent of 12.5% as against 24.6% claimed by the assessee, the Learned Departmental Representative contended that the rate of 12.5% allowed by the TPO was found to be at Arm's Length and as rightly held by him, unreasonable or excessive commission cannot be considered while making the transfer pricing analysis.
20. We have considered the rival submissions and perused the relevant material available on record. It is observed that the TP adjustment in question was worked out by the TPO by comparing the international transactions of the assessee company with its AE involving export of manufactured goods with the sales of the manufactured goods made in domestic segment. Although the products sold/exported in these transactions were similar as pointed out by the Learned Departmental Representative, we find merit in the contention of the learned counsel for the assessee that keeping in view the material differences such as the quantum of export incentives, level of competition, corresponding freight cost involved etc., affecting substantially the profitability of export transactions vis-à-vis domestic transactions, it would not be fair and proper to compare the exports made by the assessee to its AE with the sales made by the assessee company to non-AEs in domestic segment, especially when specific instances of export of similar products to overseas Non-AEs were available. As a matter of fact, the TPO also made an alternative analysis by comparing the exports made by the assessee company to its AE with the exports made to Non-AEs. While doing this exercise, he however, took into account only the exports made by the assessee company to the 14 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad non-AE in Sudan, which in our opinion, was not correct because the material exported by the assessee company to non-AE in Sudan was of different quality and there were other material differences also. This position in fact was accepted even by the TPO, when he allowed adjustment of 158.60 US Dollars per MT to the price charged by the assessee company to the non-AE in Sudan on account of extra material consumption as well as a further adjustment of 75 US Dollars per MT on account of extra freight charges. He also allowed an adjustment of 12.5% on account of commission on sales made by the assessee company to the non-AE in Sudan as against the adjustment of 24.6% claimed by the assessee company as the commission actually paid. These adjustments allowed by the TPO himself clearly show that there were material differences in the transactions involving exports made by the assessee company to its AE and exports made by it to the non-AE in Sudan and the bench marking done by the TPO by comparing these transactions in the course of alternative analysis which entailed adjustments on account of material differences, was not fair and proper.
21. As submitted by the learned counsel for the assessee before us, mainly two products viz. Magnus and Apex were exported by the assessee company to its AE during the year under consideration and similar products were also exported to non-AE in some countries other than Sudan. He has also furnished details of these exports made at pages 323 to 326 of his paper-book, which clearly show that instances of export of similar products to non-AEs were available, and the bench marking of the international transactions of the assessee company to its AE involving export of similar products can appropriately be done by taking these comparables. In this regard, the learned counsel for the assessee has submitted that the average price charged by the assessee 15 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad company for the exports made to non-AE was Rs.646 in the case of Magnus and Rs.556 in the case of Apex as against average price of Rs.641 in the case of Magnus and Rs.561 in the case of Apex charged to AE. It is however, observed that these average prices are worked out by the assessee taking all the transactions entered into by the assessee during the year under consideration which is not proper. First of all, taking the average of the prices charged by the assessee to its non-AE in the relevant international transactions for the purpose of comparability analysis is not permitted under the Indian Transfer Pricing Rules. What the relevant provisions stipulate in this regard is that where more than one price is determined by the most appropriate method, the Arm's Length Price shall be taken to be the Arithmetic Mean of such prices and then such Arithmetic Mean being the average price is to be compared with the price charged by the assessee in the relevant international transactions with its AE. We therefore, set aside the impugned order of the learned CIT(A) on this issue and restore the matter to the file of the Assessing Officer/TPO with a direction to do the exercise of transfer pricing analysis afresh by comparing the average price (Arithmetic Mean) charged by the assessee company to its non-AEs other than in Sudan with the price charged by the assessee company to its AE for the similar products. The AO/TPO shall determine the Arm's Length Price by taking the arithmetic mean of the prices charged by the assessee company to its non-AEs and apply the same to the relevant international transactions of the assessee company to its AE, in order to determine the transfer pricing adjustment, if any, that is required to be made on account of these transactions. Grounds No.4.4 to 4.11 are accordingly treated as allowed for statistical purposes.
22. On this very issue relating to TP adjustment, Revenue has raised the following grounds in its appeal-
16 ITA No.190 & 206/Hyd/2009M/s. ITW India Ltd., Hyderabad
1. CIT(A) has erred in holding that the export benefits credited to the P&L Account should be considered in arriving at the adjustment to be made to the Arms Length Price. Export benefits are indirect benefits and there is no evidence that the export prices are fixed considering these benefits. If the same logic is extended, deduction under VIA and exemption under Sec.10A/B have also to be considered in arriving at the port price.
2. For similar reasons, CIT(A)'s direction that profit margin as domestic sales should be reworked after working the deemed export benefits is not acceptable.
3. CIT(A) has erred in holding that + 5% variation in terms of proviso to sec.92(2) should be allowed. It is applicable only in cases where more than one price is determined by the most appro0riate method. Both the assessee and TPO officer had used TNMM method to determine ALP. So, no two appropriate methods have been used to arrive at ALP to consider + 5% variation from the arithmetic mean of the prices arrived in two methods.
4. ...."
23. Keeping in view our decision rendered above restoring the issue relating to TP adjustment that is required to be made in respect of international transactions of the assessee company with its AE involving export of manufactured goods to the file of the AO/TPO, for deciding the same afresh, as per the specific directions given by us, the issues raised by the Revenue in its appeal have become infructuous. We therefore, do not consider it necessary or expedient to adjudicate upon the same separately. Being infructuous, grounds of the Revenue in its appeal are dismissed.
24. Grounds no.4.12 to 4.19 of the assessee's appeal involve a common issue relating to TP adjustment of Rs.20,60,722 made by the Assessing Officer/TPO and confirmed by the learned CIT(A) on account of international transactions of the assessee company with its AE involving payment of agency commission, while the issue involved in Grounds No.5 and 5.1 of the assessee's appeal relates to disallowance of Rs.2,70,424 made by the 17 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad Assessing Officer and confirmed by the learned CIT(A) on account of payment of agency commission to M/s. Agabna Alaraby International Company Ltd.(AAICL).
25 During the year under consideration, the assessee company had paid Rs.20,60,722 its AE, M/s. Signode System Gmbh, Germany as commission. In this regard, explanation offered in the TP report furnished by the assessee was that in the absence of any marketing executive/manager specifically appointed in Sudan, the supply orders from Sudan could be procured only because of market support from the AE. It was stated that a commission of US Dollars 50 per MT was paid to the AE for such active support, which amounted to a nominal 4% of the export order value. The assessee, however, expressed its inability to provide any comparable cases of commission paid for market support services. In this regard, it was found by the TPO that a further commission of 20.6% was paid by the assessee for procuring the same export order to two different parties located in Sudan and Bangladesh. He also noted that the assessee could not produce any cogent evidence to support its claim that the AE in fact had rendered any services in procuring the order from Sudan in order to justify the payment of commission. In the absence of any such evidence, the Arm's Length Price of the relevant transaction of the assessee company with its AE involving payment of commission was taken by the TPO at NIL and the TP adjustment required to be made on this count was worked out by him at Rs.20,60,722. Accordingly, the Assessing Officer made the addition of the said amount to the total income of the assessee on account of TP adjustment relating to the international transaction of the assessee company with its AE involving payment of commission.
26. In the Profit & Loss Account filed alongwith the return of income, a sum of Rs.1,76,32,771 was debited by the assessee on 18 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad account of commission paid on sales. During the course of assessment proceedings, the claim of the assessee for deduction on account of this commission was examined by the Assessing Officer. On such examination, he found that the claim of the assessee for sales commission to the extent of Rs.1,73,62,347 was duly supported by the relevant documentary evidence, and the balance amount for Rs.2,70,424 claimed to be paid on account of commission, however, was not supported by proper documentary evidence. He therefore, disallowed the claim or the assessee for commission to the extent of Rs.2,70,424.
27. The addition made by the Assessing Officer on account of TP adjustment in relation to the international transactions with AE involving payment of commission amounting to Rs.20,60,722 and disallowance of commission of Rs.2,70,424 was challenged by the assessee in the appeal filed before the learned CIT(A), and after considering the submissions made by the assessee as well as the material available on record, the learned CIT(A) confirmed both these additions for the following reasons given by the CIT(A) in paras 9.3 to 9.7 of his impugned order-
"9.3 I have perused the copies of the relevant agreements and other material placed on record. The facts of the issue are that a tender was floated by Sudan Gezeira Board (SGB) in July, 2003 for supply of Steel strappings. The bid of M/s. Golden Fibre Trade Centre Limited (GFTCL) was accepted by SGB and the order was placed on them. GFTCL entered into a contract with the assessee on 22/10/.2003 by which assessee agreed to supply the entire goods to SGB and also agreed to pay a commission of $ 200 per MT to GFTCL. It is mentioned in Article- 9 of the agreement dated 22/10/2003 with GFTCL that later acted as an agent of assessee company for procuring the said export order. The commission was paid for its services in procuring the order and closing the documentation.
9.4 The agreement with M/s. Agabna Alaraby International Company Ltd.(AAICL)was dated 22/10/2003 but signed on 6/03/2004 by AAICL. The agreement states that AAICL was appointed as the assessee's agent for supplies to SGB for one year effective from 22/10/2003. It further provided for payment of commission of $57.5 per MT against all sales made to SGB. AAICL was supposed to procure orders from SGB 19 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad and to promote the sale of products of assessee.
9.5 The agreement with M/s. Signode Gmbh, filed by the Id. AR (page.110-111 of paper book) is undated and not signed by anyone on behalf of M/s. Signode Gmbh. In fact the document filed by the AR is an undated letter addressed to M/s. Signode Gmbh stating that it was appointed as the appellant's agent for supplies made to SGB. The agency was valid for one year effective from 22/10/2003 and the commission was payable @ $ 50 per MT against all sales made to SGB. M/s. Signode Gmbh was supposed to procure orders from SGB and to promote the sale of products of the assessee.
9.6 It is thus evident from the perusal of the aforesaid agreements that the commission was paid to all the three concerns in respect of same export order from SGB. It is evident from the contract with GFTCL that the contract was awarded to GFTCL as an agent of the assessee, hence commission payn;ent can be justified for the services rendered by GFTCL in procuring the order. However, there is no evidence on record that any services were rendered by other two concerns named AACL & Signode Gmbh. During the appeal proceedings, the Id. AR was given a show cause notice that why the payments made to both AAICL and M/s. Signode Gmbh should not be disallowed, being not genuine payments and not incurred wholly & exclusively for the business purposes of the assessee in terms of S.37(1) of the Act. The Id. AR filed certain photocopies of e-mail allegedly received from AAICL and Signode Gmbh. But, neither the veracity of these evidences were proved nor these evidences substantiate that the said export order from SGB was procured due to services rendered by these two concerns. The circumstantial evidences further indicate that the transactions with these two concerns were not genuine ego agreement with AAICL was signed on 6/3/2004 ie much after the contract was awarded by SGB to GFTCL and in turn to assessee, while no agreement was signed by Signode Gmbh. It is also noticed that the commission was not paid to M/s. Signode Gmbh by transfer of funds by cash or cheque. The same was adjusted at the year end against the imports made by the assessee from M/s. Signode Gmbh. It is a settled position of law that where assessee is claiming any expenses as allowable u/s 37(1) of the Act, the burden is on him to prove that the same were incurred wholly and exclusively for buslness purposes. It is not on the Assessing Officer to prove it otherwise When the assessee has claimed commission expenses, the onusfvinq on him to prove that the services were rendered by the said commission agents. Mere agreement or confirmation or the payments of commission by account payee cheques, is not a conclusive proof that any services were actually rendered by the commission agent who earned that commission. It has been held by the Hon'ble Supreme Court in the case of Laxmiratan Cotton Mills Co. (73 ITR 634) that the burden is on the assessee to prove that services were rendered by the commission agent. Again in the case of Laxminarayan Madanlal (86 ITR 439 it was held by the Hon'ble Supreme Court that the mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open 20 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad to the Income-tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37(1) of the Act. Similarly, in another decision given in the case of Nund and Samont Co. Pvt. Ltd Vs CIT (78 ITR 268) by Hon'ble Supreme Court, in the absence of evidence relating to duties of the directors and the services rendered by them, the manner in which the profits of the assessee were enhanced and the benefits derived by the assessee in consequence of services rendered by them, the disallowance of remuneration paid to the directors was upheld.
This principle is further explained by Hon'ble Andhra Pradesh High Court in the case of CIT Vs. Transport Corporation of India Itd., (256 ITR 701), wherein Hon'ble Jurisdictional High court observed as under :- (at pages 706 - 707 of 256 ITR).
"The burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purposes of business so that the assessee may be entitled to claim deduction is on the assessee. This position is well settled by the judgments of the apex court in CIT Vs. Calcutta Agency Ltd. (1951) 19 ITR 19i and CIT Vs. Imperial Chemical Industries [India] (P) Ltd., [1969] 74 ITR
17. The mere object of incurring expenditure is not decisive whether it is of a capital nature or revenue nature. Therefore, the onus is on the assessee to prove, inter alia, that the item of expenditure in question for admissibility to deduction is not in the nature of capital expenditure. Further, mere payment by itself would not entitle the assessee to deduction of the said expenditure unless the same was proved to be paid for commercial considerations. The onus of proof is alwavs upon the assessee. It cannot be said that even if the taxpayer does not produce any evidence in support of the claim. for deduction, the AO himself independently is to collect evidence and decide that the deduction claimed is baseless having regard to the legitimate business needs of the assessee, as the Tribunal seems to think in the present case. It is for the taxpayer to establish by evidence that a particular allowance is justified. But, as held by the Supreme Court in CIT Vs C. Parekh and Co. (India) Ltd. (1956) 29 ITR 661 whether an assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which he might take of his rights. At the time, the onus is on the assessee to establish that there are facts in existence which entitle it to a deduction and it is for the assessee to adduce necessary evidence in this regard. Therefore, if the assessee fails to place sufficient material, he is not entitled to claim this allowance under section 37(1) of the Act. In CIT Vs. Chandravilas Hotel (1987) 164 ITR 102 (Guj.), it is held that if the expenditure is doubted by the assessing authority, it is the duty of the assessee to prove by leading evidence that the expenditure was in fact, incurred".21 ITA No.190 & 206/Hyd/2009
M/s. ITW India Ltd., Hyderabad Reliance is also placed on the decisions in Vishnu Agencies (P.) Ltd. v. CIT [1979} 117 ITR 754 (Ca!), Ramdas Ramlal v. CIT [1983} 139 ITR 620(MP), 149 ITR256(Mad), Ess Ess Kay Engg. Co. (P.) Ltd. v. CIT [1985} 151 ITR 636(P&H) and decision of ITAT Hyderabad in the case of Smt. Pushpa Agarwal(ITA No. 110/Hyd/2005, order dated 30-09- 2005).
The ratio of the above decisions makes it clear that the allowability of an expenditure depends not merely on an agreement between the assessee and another party and consequent payments made by the assessee, but on the evidence of specific services rendered by the payee resulting into benefit to the assessee, in absence of which the claim of expenditure cannot be allowed.
9.7. In view of the above discussion, I hold that the commission payments made to AAICL & M/s. Signode Gmbh were not allowable as 'business expenses' as the. same were not incurred wholly and exclusively for business purposes. Since the said payments were held as not allowable at all as 'business expenses', there is no need to determine the ALP in respect of the said international transaction. The AO is directed to make further disallowance in respect of payment made to AAICL over and above the adjustment made in respect of payment made to M/s. Signode Gmbh."
28. The learned counsel for the assessee submitted that the claim of the assessee for commission plaid to its AE amounting to Rs.20,60,722 was treated by the TPO as not genuine and Arm's Length Price of the same therefore, was taken by him at NIL, working out the TP adjustment on this count being the entire amount of commission paid by the assessee to its AE. He submitted that the learned CIT(A) confirmed this TP adjustment made by the AO/TPO as well as the disallowance made on account of commission paid to other concern amounting to Rs.2,70,424, holding that in the absence of sufficient documentary evidence produced by the assessee to establish the services rendered by these two parties, the claim for deduction on account of these amounts of commission paid to them cannot be allowed. In this regard, he invited our attention to the submissions made by the assessee before the learned CIT(A) justifying its claim for deduction on account of commission paid to these two parties as well as documentary evidence placed at pages 471 to 489 of its paper-book 22 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad in the form of e-mail and correspondence exchanged between the assessee company and its two agents. He contended that this documentary evidence filed by the assessee was sufficient to show the exact nature of services rendered by the two agents justifying the commission claimed to have been paid by the assessee to them. He submitted that the AE of the assessee company had filed tender on behalf of the assessee company for securing the order from Sudan party, and although the bid was not successful, the fact remains to be seen as that the services were rendered by the concerned AE to the assessee company. He contended that both the parties had provided the required logistic support to the assessee company for finally executing the order received from Sudan and the documentary evidence filed by the assessee company being sufficient to support and substantiate the claim, the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on account of such commission payments is not sustainable. He also pointed out that the commission paid by the assessee company to both the parties concerned was quite fair and reasonable in the facts and circumstances of the case and the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on this count may be deleted.
29. The Learned Departmental Representative, on the other hand, strongly relied on the impugned order of the learned CIT(A) confirming the disallowance made by the Assessing Officer on account of sales commission claimed to be paid by the assessee to its AE and other party. He took us through the relevant portion of the order of the learned CIT(A) and submitted that cogent and convincing reasons are given by the learned CIT(A) to come to the conclusion that the claim of the assessee was not established either on evidence or in the facts of the case. As regards the documentary evidence filed by the assessee in support of its claim 23 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad for commission, the Learned Departmental Representative submitted that the same is only a self serving evidence in the form of correspondence and e-mails exchanged between the interested parties and in the absence of any independent evidence of third parties, the same is not reliable to show that the services in fact were rendered by the concerned parties to the assessee company.
30. We have considered the rival submissions and also perused the relevant material on record. It is observed that the amount of commission in question was claimed to be paid by the assessee to its AE, M/s. Signode System Gmbh, Germany as well as to M/s. Agabna Alaraby International Limited, in connection with the procurement or orders from M/s. Sudan Gezeria Board, Sudan(SGB). As noted by the learned CIT(A) in his impugned order, against the tender floated by the said party for supply of steel strapping, the bid of M/s. Golden Fibre Trade Centre Limited (GFTCL) was accepted and even the order was placed on the GFTCL. GFTCL thereafter entered into a contract with the assessee company by which the assessee agreed to supply the entire goods to M/s. Sudan Gezeria Board and agreed to pay a commission of US Dollars 200 per MT to GFTCL. As further noted by the learned CIT(A) from Article 9 of the agreement dated 22.10.2003 between the assessee company and GFTCL, the latter had acted as an agent of the assessee company for procuring the export order from M/s. Sudan Gezeria Board and the commission was paid to them by the assessee for the services rendered in procuring the order and closing the documentation. In this factual background, it is not understandable how the other two parties to whom the impugned amounts of commission were claimed to be paid by the assessee came in picture, and what exactly was the nature of services rendered by them. It is also not understandable as to how and why the assessee company required the services of these two parties 24 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad when GFTCL was not only the successful bidder in the tender floated by M/s. Sudan Gezeria Board, but also agreed as per Article 9 of the agreement that it had acted as an agent of the assessee company for procuring the said export order. Finally, the said export order was executed by the assessee company and for the services rendered in procuring the export order as well as closing the documentation, commission of US Dollars 200 per MT was also paid by the assessee company to GFTCL.
31. Before the learned CIT(A), an attempt was made by the assessee to explain the services rendered by the concerned two parties with the support of agreement entered into with the said parties as well as other evidence in the form of correspondence and e-mail exchanged with them. From the perusal of these agreements as well as other evidence, the learned CIT(A) however, found that the same were not sufficient to establish the services rendered by the concerned parties. He also narrated the relevant facts and circumstances involved in the case of the assessee in paragraph 9.6 of his impugned order and came to the conclusion that even the circumstantial evidence indicated that the transactions with these two concerned parties were not genuine. We have also gone through the documentary evidence filed by the assessee in the paper book in support of the claim of the assessee on this issue, and find that the same mainly comprising of e-mails and correspondence exchanged with the concerned tow parties is only self serving evidence, which is not sufficient to establish the claim of the assessee of having received the services from the concerned two parties, especially when there is no third party evidence like any correspondence or communication from M/s. Sudan Gezeria Board recognizing the said two parties as the agents of the assessee company or of any services rendered by them in connection with the procurement of the orders by the assessee 25 ITA No.190 & 206/Hyd/2009 M/s. ITW India Ltd., Hyderabad company from M/s. Sudan Gezeria Board. Considering all these facts and circumstances of the case, we find ourselves in agreement with the learned CIT(A) that the claim of the assessee of having paid the commission to the concerned two parties for the services rendered in connection with procurement of export order from M/s. Sudan Gezeria Board was not established either on evidence or even in the facts of the case, and hence, upholding the order of the CIT(A) confirming the disallowance made by the Assessing Officer on this issue, we dismiss grounds No.4.12 to 4.19 and 5 and 5.1 of the assessee's appeal.
32. In the result, assessee's appeal is treated as partly allowed, and the Revenue's appeal, being infructuous, is dismissed.
Order pronounced in the court on 27th March, 2015.
Sd/- Sd/-
(Saktijit Dey) (P.M.Jagtap)
Judicial Member Accountant Member
Dt/- 27th March, 2015
Copy forwarded to:
1. M/s. ITW India Ltd., 34d Floor, Merchant Towers, 5, Road No.4, Banjara Hills, Hyderabad 500 034
2. Dy. Commissioner of Income-tax Circle 2(1), Hyderabad
3. Commissioner of Income-tax(Appeals) III, Hyderabad
4. Commissioner of Income-tax II, Hyderabad
5. Departmental Representative, ITAT, Hyderabad. B.V.S