Income Tax Appellate Tribunal - Chennai
Madura Coats Private Limited, ... vs Dcit, Madurai on 16 November, 2016
आयकर अपील य अ
धकरण, 'डी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
' D' BENCH : CHENNAI
ी एन.आर.एस. गणेशन, या यक सद य एवं
ी अ ाहम पी. जॉज%, लेखा सद य के सम' ।
[BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER]
आयकर अपील सं./I.T.A. No.770/Mds/2014
नधा रण वष /Assessment year : 2009-2010
Madura Coats Private Vs. The Deputy Commissioner of
Limited, Income Tax,
New Jail Road, Circle I(1)
Madurai 625 001. Madurai.
[PAN AABCM 8279K]
(अपीलाथ*/Appellant) (+,यथ*/Respondent)
अपीलाथ क ओर से/ Appellant by : Shri. K.R. Vasudevan, Advocate
यथ क ओर से /Respondent by : Shri. D.N. Kar, IRS, CIT.
सन
ु वाई क तार ख/Date of Hearing : 08-11-2016
घोषणा क तार ख /Date of : 16-11-2016
Pronouncement
आदे श / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
This appeal filed by the assessee is directed against an order dated 28.01.2014 of the Assessing Officer passed u/s.143(3) r.w.s. 144C(13) of the Act.
:- 2 -: ITA No.770/Mds/2014.
2. Assessee has taken altogether three grounds of which ground No.1 is general in nature needing no specific adjudication.
3. In ground No.2, assessee assails upward adjustment of B2,31,14,990/- made on the value of its international transactions with its Associate Enterprises (''AEs'') .
4. Facts apropos are that assessee engaged in the business of manufacturing and selling sewing threads, yarns and industrial fabrics had filed its return of income for the impugned assessment year declaring income of B32,84,78,420/-. Since assessee company had entered into international transactions with its Associated Enterprises exceeding B 15 Crores a reference was made by the ld. Assessing Officer to the Transfer Pricing Officer (TPO) u/s.92CA of the Act. The international transactions undertaken by the assessee during the relevant previous year were as under:-
Sl.No Nature of Transaction Amount
(B)
1 Import of raw material 1,67,41,477
2 Import of shade cards 15,26,327
3 Exports of threads 241,16,32,540
4 Import of Machinery/ Purchase of 2,50,42,305
computer software
5 Payment of reality 27,97,89,894
6 Payment of mangement services fees 5,98,86,162
Payment of commission on exports 7,84,20,835
7 Reimbursement of expenses paid 13,54,24,482
8 Reimbursement of expenses received 11,71,300
Total 300,96,95,322
:- 3 -: ITA No.770/Mds/2014.
5. In its Coats India division, assessee was manufacturing various types of sewing threads and selling it to its Associated Enterprises situated in sixty three countries. Assessee had adopted Internal Transactional Net Margin Method (hereinafter referred to as ''TNMM'') to bench mark its international transactions with its Associated Enterprises. In other words assessee made a comparison of margin earned on export of threads to Associated Enterprises with the margin earned on exports of threads to Non Associated Enterprises. As per assessee margins earned on exports to Non Associated Enterprises was 7.02% against a margin 17.76% earned on its exports to Associated Enterprises. Hence according to the assessee there was no requirement for any Arms Length Price adjustment.
6. Ld. TPO issued a show cause notice to the assessee pointing out a number of instances of thread sales to Associated Enterprises, where the prices billed were much lower than what was billed by the assessee on sale of similar treads to Non Associated Enterprises and seeking reasons why Comparable Uncontrolled Pricing Method (CUP) should not be preferred over TNMM. In reply to the above, assessee submitted that the difference in prices on sale was due to difference in market, difference in mode of delivery of products, geographical difference and difference in volume. Objecting to the proposal to :- 4 -: ITA No.770/Mds/2014.
consider CUP in the place of TNMM, assessee argued that former was not appropriate since there were difference between quality of products supplied to Associated Enterprises and Non Associated Enterprises. Further, as per assessee, the contract, terms were also different. However, TPO was not impressed. According to him, each transaction had to individually analyzed and appropriate method applied for arriving Arms Length Price. As per TPO, assessee had not done a FAR analysis. Further, according to him, aggregation of transaction could not be done when CUP could be determined for similar items sold by the assessee. In respect of assessee's argument regarding difference in geographical location, TPO took a view that such difference did not exist since there were sales to both Associated Enterprises and Non Associated Enterprises in developing countries of Asia and Africa. He found that assessee had in respect of forty nine items of thread sold very same varieties to non Associated Enterprises also. He made an analysis of price charged by the assessee on such threads to the Associated Enterprise as well as the Non Associated Enterprise and found that selling price billed on Non Associated Enterprise was in the aggregate higher than the selling price of similar items sold to Associated Enterprise. Number of such items came to forty nine. Applying CUP method on these forty nine items, he recommended an upward adjustment of B1,52,16,747/-.
:- 5 -: ITA No.770/Mds/2014.
7. When a proposal on the above line was given to the assessee by the ld. Assessing Officer, assessee chose to move the Dispute Resolution Panel (DRP). Argument of the assessee before DRP was that Associated Enterprise to which thread were sold, was an intermediary in a supply chain, whereas Non Associated Enterprises represented end customers. Further as per the assessee delivery of products to Non Associated Enterprises were through Air. Assessee also submitted that prices charged on Associated Enterprise were fixed considering the bulk purchases they were making. Assessee also brought to the notice of the DRP, directions of the Co-ordinate Bench for assessment years 2002-03 to 2004-05, 2006-07 & 2007-08 (ITA Nos. 2207, 2212, 2213/Mds/2007 & 19 & 2032/Mds/2011, dated 21.12.2012). As per assessee for these years Tribunal had remitted the issue of fixing the Arms Length Price of the international transactions back to the file of the DRP.
8. DRP after considering the above arguments of the assessee held that Tribunal had in its order dated 21.12.2012 for assessment years 2002-03 to 2004-05, 2006-07 & 2007-08 upheld application of CUP method. As per DRP, Tribunal had directed assessee to furnish external comparables also so that the DRR could effectively adjudicate the issues raised before it. In any case, as per DRP, by virtue of the decision of Co-ordinate bench in the case of Delphi TVS Diesel Systems :- 6 -: ITA No.770/Mds/2014.
Ltd vs. ACIT, (2013) 22 ITR (T) 478 (Chennai), a transaction to transaction comparison was to be preferred, while making a transfer pricing study. Further as per the DRP, whether buyer of the goods was a trader or consumer did not affect the price of the goods. Viz-a-viz contention of the assessee that volume discounts were offered to its Associated Enterprise, Ld. DRP noted that quantity sold in many of the varieties listed by them at para 2.10 of their order, to Associated Enterprise and Non Associated Enterprise were comparable. Ld. DRP noted five separate items where sales to Non Associated Enterprises were in substantial quantities. The only adjustment recommended by the ld. DRP was for freight differences. In other words, ld. DRP confirmed the proposal of the Assessing Officer with regard to adjustment to international pricing on account of sales effected by the assessee to its Associated Enterprises and assessment was completed accordingly.
9. Now before us, ld. Authorised Representative strongly assailing the orders of the lower authorities submitted that assessee was manufacturing more than three thousand two hundred different varieties of threads. As per ld. Authorised Representative, it had eight different classes of international transactions with its Associated Enterprise and therefore aggregate value of its transactions had to be considered for Arms Length Price study. As per ld. Authorised :- 7 -: ITA No.770/Mds/2014.
Representative considering various varieties of threads that assessee was dealing with, and various classes of transactions with the Associated Enterprises, most appropriate method was TNMM. The lower authorities as per ld. Authorised Representative had rejected TNMM and selected forty nine numbers of thread varieties out of more than three thousand two hundred, for making a selective application of CUP method. As per ld. Authorised Representative selective use of CUP method was not appropriate since Sec. 92C of the Act mandated application of most appropriate method on a class of transactions. As per ld. Authorised Representative exports done by the assessee as a whole had to be considered as a class. Forty nine items selected by the lower authorities did not fall in a class of its own. Reliance was placed in the decisions of Pune Bench in the case of Amphenol Interconnect India (P) Ltd vs. DCIT, (2014) 107 DTR 337, Mumbai Bench of this Tribunal in the case of Intervet India Pvt. Ltd vs. DCIT (2010) 38 DTR 422 and that of Chennai bench of the Tribunal in the case of Mainetti India (P) Ltd vs. ACIT, (2012) 77 DTR 60. Further, according to him, geographical difference of the countries where Associated Enterprise and Non Associated Enterprise were functioning made the comparison attempted by TPO incorrect. Reliance was placed on the decision of Pune Bench in the case of Cummins India P. Ltd vs. Addl. CIT, (2015) 119 DTR 0182.
:- 8 -: ITA No.770/Mds/2014. 10. Per Contra, ld. Departmental Representative strongly
supporting the orders of the authorities below submitted that by virtue of the decision of Co-ordinate Bench in the case of Delphi TVS Diesel Systems Ltd (supra) the lower authorities were justified in preferring CUP method over TNMM selected by the assessee.
11. We have considered the rival contentions and perused the orders of the authorities below. The question before us is whether CUP method was rightly adopted by the lower authorities for evaluation of the international transactions undertaken by the assessee with its Associated Enterprise, in preference to TNM method adopted by the assessee. The TPO and DRP had taken a view that for forty nine varieties of threads sold by the assessee, Comparable Uncontrolled transactions with Non Associated Enterprise were readily available for comparison. For assessment years 2002-03 to 2004-05 , 2006-07 and 2007-2008 also, assessee had followed TNM Method which was disregarded and CUP method applied in relation to sale of threads to Associated Enterprise. This is clear from the para 4 in the order of the Co-ordinate Bench in the appeals for these years in ITA No.2207, 2212, 2213/Mds/2007, 192, 2032/Mds/2011 (supra) wherein the issues were sized up :-
:- 9 -: ITA No.770/Mds/2014.
''4. The brief facts of the case are that the assessee company is one of the largest textile company. It is operating through its three divisions viz:
1. Coats India;
2. Madura Industrial Textiles; &
3. Global Thread Supply, India Coats India division is a marketer of sewing threads throughout the world. Madura Industrial Textiles manufactures wide range of textile products and the Global Thread Supply India division manages the day-to-
day operations and administration of the spinning and twisting facilities . The assessee is an exporter of thread and other ancillary products. The assessee had adopted TNM Method to arrive at arms' length price for the export of threads. As regards export of grey cotton canvass, the assessee had applied CUP method. The TPO vide order dated 8.3.2005 for the assessment year 2002-03 held that the assessee has wrongly applied TNMM for determining arms' length price for the export of threads. The TPO rejected the method applied by the assessee for determining the arms' length price and adopted CUP method stating it to be most preferred method over the other methods. The TPO also rejected the arms' length price determined by the assessee on account of export of grey cotton canvass as it was determined for representative sample of 52.68% of the turnover. The assessee had asked for volume discount of 15% in case CUP method is to be adopted for determining the ALP for export of threads. The TPO rejected the contention of the assessee on the ground that volume discount offered on the local sales cannot be accepted as comparable for export sales, on account of different market conditions especially when the assessee has not compared local sales to export sales of Associated Enterprise in the Transfer Pricing Documentations. The TPO rejected the ALP determined by the assessee on TNMM on account of export of threads as well as CUP method adopted for export of grey cotton canvass.
This Tribunal in its findings recorded at para 11 and 12 of its order had observed as under:-
''11. We have heard the submissions made by the respective parties. We have also perused the orders passed by the authorities below and the documents referred to. During the course of submissions, a query was :- 10 -: ITA No.770/Mds/2014.
put to the learned counsel for the assessee as to why only internal comparables were given to the TPO for determining cup method. The counsel for the assessee stated that at that time only internal comparables were available. He further submitted, now if required, external comparables can be placed on record for determining the international pricing under CUP method. A perusal of the order of the CIT(A) shows that the same is sketchy and non-speaking. The findings of the CIT(A) in assessment
3.
2.
1.
4. year 2002-03 are reproduced herein below:-
"I have carefully considered the facts and submissions made by the representatives. The AO I TPO In their orders have not discussed as to why TNMM is not applicable in the case of Export of threads and as to why CUP method is the most appropriate method. The basic requirement of CUP method is that the product should be sold in similar commerce: environment i.e. in similar quantities, similar location with similar quality Even the OECD Guidelines describes the CUP method as a transfer pricing method that compares the price for property or services transferred in a comparable uncontrolled transactions in comparable circumstances. But In the present case as can be seen from the submissions made. the products sold to AE's are not comparable to what is being sold to Non-AE's.
7.1 In the circumstances I am inclined to agree with the appellants contention that CUP is not applicable as regards Export of threads in the instant case due to the following factors.
•• The markets are different •• Conditions of the transactions are different • A few transactions cannot be selected in isolation and CUP cannot be selectively applied.
Accordingly I agree with the method of TNMM adopted by the appellant with regard to the Export of Thread. Applying the TNMM method the appellant has demonstrated that the international transaction of Export of thread with AEs are at Arm's Length :- 11 -: ITA No.770/Mds/2014.
Price. This ground is decided in favour of the assessee. The addition of ` 113,32,042. is deleted.
7.2 Even If CUP were to be applied. I agree with the appellants contention that the price is to be adjusted for volume discount in my opinion , the volume discount is an accepted industry practice, that is well recognised. Relying on the supreme court judgements in the case of Mirah Exports Private Limited vs. Collector of Customs -(098j-EL T -0003 and Basant Industries Vs. Addl CC [1996 (66) ECR 227 and also on the international guidelines viz. the OECD and the US TP regulations, volume discounts are not unusual and that they need to be considered as a valid factor. As I have held that CUP cannot be applied to the Export of Threads in the present case. the alternative submissions are of academe value Export of Grey Cotton Canvas - ` 48,71,239/-
7.3 The appellant applied CUP method for the purpose of determining the ALP in the case of export of grey canvas. However, , the appellant company has applied the CUP method on a representatives sample of 52.68 % of the turnover The A.O/TPO asked the appellant company to apply the CUP method to the entire turnover of Grey Cotton Canvas by taking only those products which has also been sold to AE's and Non-AEs.
7.4 The learned representatives contended that the CUP method could not be applied to all transactions as the appellant company was in the process of closing down its canvas division and hence the assessee was disposing off the stock at :- 12 -: ITA No.770/Mds/2014.
a discounted price. The appellant submitted that transactions of distress sales entered into by the appellant could not be regarded under normal circumstances and thus the workings already submitted by the appellant hold good. The A.OI TPO applied the CUP method to the entire turnover and has arrived at a transfer pricing adjustment of ` 48,71,239 .
8. I have carefully considered the facts and submissions put forth by the appellant's representatives. It is clear from the facts that the appellant had applied the CUP method only to 52.68% of the transactions being exports of grey canvas in arriving at the ALP. The appellant when asked by the TPO was unable to apply any appropriate methodology for the balance transactions. As such, I have to agree with the decision of toe TPO in applying the CUP method for the rest of the turnover However, it is also true that the appellant was in the process of closing down its division of grey canvas and as such the sales were distress sales. In cases of distress sales a seller is not bothered about the price he realises, Instead he is more concerned with disposing off the goods. As such, the seller tends to sell the goods at much lower rates than normal. Whereas I uphold the decision of the A.O. in applying CUP for the entire turnover of Export of Grey Cotton canvas, however while arriving at the transfer pricing adjustment to be made the A 0 shall grant appropriate relief to factor in the condition of distress sale after giving opportunity of hearing to the appellant."
The CIT(A) has passed similar order in subsequent assessment years. The CIT(A) has not given any plausible reason for :- 13 -: ITA No.770/Mds/2014.
accepting the submissions of the assessee and rejecting the contentions of the Revenue. It seems that CIT(A) has lost sight of the fact that it has got concurrent jurisdiction to make assessment, in case the authorities below have not exercised their jurisdiction. The CIT(A) in para 7 of his order stated that the Assessing Officer /TPO in their orders have not discussed as to why TNMM is not applicable in the case of export of threads and as to why CUP method is the most appropriate method. Similar is the situation with the order of the CIT(A). The CIT(A) has also failed to give valid reason for reversing the findings of the TPO and has merely placed reliance on the submissions made by the assessee without assigning any valid and plausible reasons. The Hon'ble Madras High Court in the case of Vodafone Essar Ltd. Vs. Dispute Resolution Panel & Others reported as 340 ITR 352 (Del) has held as under:-
"Be it noted, when a quasi-judicial authority deals with a lis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter, and further, the same also facilitates appreciation when the order is called in question before the superior forum. Needless to say that the competent authority, while passing the order, shall keep in mind the order dated November 29, 2010, wherein we had directed that the period from the date of filing the writ petition and four weeks after its disposal shall stand excluded, while computing the limitation for the Department to pass an assessment order."
12. In view of the above, we are of the considered opinion that the matter requires fresh adjudication. The order passed by the DRP is in subsequent years to the order of CIT(A), the orders passed by CIT(A) in assessment year 2002-03 to 2005- 06 will have bearing in later years. We, therefore, remit the matter back to the CIT(A) for the assessment years 2002-03 to 2005-06 and DRP for the assessment years 2006-07 and 2007- 08 for deciding the matter afresh by passing a detailed and speaking order. The CIT(A)/DRP while adjudicating the matter afresh shall inter-alia, take into account external comparables while determining the international pricing. The counsel for the assessee has made a statement at the Bar that the assessee would provide details of international comparables. The CIT(A)/DRP shall also take into consideration the different market conditions. The market conditions does not mean geographical condition alone but also includes the size of the :- 14 -: ITA No.770/Mds/2014.
market, demand and other relevant factors influencing the market conditions as a whole''.
12. In our opinion, the decision of the Tribunal is clear in that CUP method was appropriately used in preference to TNM method. The only modification suggested by the Tribunal was to consider the external comparables also and this direction was given noting, the submissions of the assessee that external comparables could be placed on record for determining the Arms Length Price under CUP method, if it was given an opportunity. The above decision was available with the DRP when it was dealing with the matter for the impugned assessment year. That assessee could not furnish any external comparable has been specifically noted by the ld. DRP at para 2.7 of its order. Hence, in our opinion assessee cannot say that ld. DRP had not taken proper cognizance of the Tribunal order for the earlier years. Apart from this, what we find is that there were forty nine number of items in which internal comparables which were totally uncontrolled were readily available. No doubt, it is true that Pune bench in the case of Amphenol Interconnect India P. Ltd (supra) held that CUP method was not appropriate for evaluating part of the exports. But the reasons for taking the said view was on account of difficulties in carrying out the adjustments for differences between the transactions :- 15 -: ITA No.770/Mds/2014.
with Associated Enterprise and Non Associated Enterprise, which is not the case here.
13. Coming to the contention of the ld. Authorised Representative that Sec. 92C of the Act mandates adjustment and determination of Arms Length Price on a class of transactions, it is necessary to have a look of Sec. 92C(1) of the Act, which is reproduced hereunder:-
''1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :--
(a) comparable uncontrolled price method ;
(b) resale price method ;
(c) cost plus method ;
(d) profit split method ;
(e) transactional net margin method ;
(f) such other method as may be prescribed by the Board''.
A reading of the above, clearly indicate that the most appropriate method has to be selected having regard to the nature of transactions or class of transactions. In our opinion, when uncontrolled comparables are available internally on some of the items which was :- 16 -: ITA No.770/Mds/2014.
sold to Associated Enterprise then such comparables would form a separate class of its own. TPO had considered forty nine thread types for which there were internal uncontrolled transactions available for comparison. TPO had not made an adjustment for any of the other varieties of thread sales made by the assessee to its Associated Enterprise. Nevertheless, we do find that atleast for eight items among these forty nine thread types, mentioned at Sl. No.27,28,30,35,37,38,39 & 44, there was negative differences adjustment which were ignored by the TPO, in the work out at annexure A of its order. When a class of items are considered for adjustment, the negative effect of some of the items therein cannot be ignored. As for contention of the assessee is that there were geographical difference between supplies made to Associated Enterprise and Non Associated Enterprise, there is a clear finding by the ld. DRP that assessee was catering to Asian countries and Associated Enterprise were located in Sri Lanka, Mauritius, Pakistan and Egypt and Non Associated Enterprises were located in Srilanka, Bangladesh, Malawi etc with not much of a geographical difference. Viz-a-viz volume discount mentioned by the ld. Authorised Representative, ld. DRP had given a clear finding that there were substantial sales in alteast in five items falling in the table appearing in para 2.10 of its order. Considering all these, we are the opinion :- 17 -: ITA No.770/Mds/2014.
that lower authorities were justified in selecting CUP method over TNM method. However, as mentioned by us, computation of the Arms Length Price adjustment required on forty nine number of items mentioned in the order of TPO requires to be reworked, so that negative amounts are also considered for aggregation and for working out the Arms Length Price adjustment that is required. For this limited purpose of recalculation, we remit the issue back to the file of the Assessing Officer/TPO.
14. Ground No.2 is treated as partly allowed for statistical purpose.
15. Vide ground No.3, assessee assails downward adjustment of B7,84,20,835/- on commission paid to its Associated Enterprises.
16. Facts apropos are that as mentioned at para 4 above, assessee had paid commission of B7,84,20,835/- to its Associated Enterprise for exports. Ld. TPO put assessee on notice as to how such commission payment was justified. Assessee relying on an agreement entered with its Associated Enterprise submitted that Associated Enterprise was appointed as a non exclusive agent for promoting and selling sewing threads for a commission of 1.5% on invoice value :- 18 -: ITA No.770/Mds/2014.
export of existing products and 5% on export of new products. As per the assessee amount was paid based on such agreement, for the services rendered by the Associated Enterprise. Assessee also produced in support, copies of invoices raised by the Associated Enterprise and the email exchange between them. Reliance was placed on the judgment of Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd (345 ITR 241). However, ld. TPO was not impressed. According to him, nothing was produced by the assessee to substantiate any services rendered by the Associated Enterprise to it. As per ld. TPO correspondence between assessee and Associated Enterprise was routine in nature and did not demonstrate any services done by Associated Enterprise. Ld. TPO distinguished the judgment of Hon'ble Delhi High Court in the case of EKL Appliances Ltd (supra) by noting that EKL Appliances Ltd, was consistently incurring huge losses. Relying on the Bangalore Bench Tribunal decision in the case of Gemplus India Pvt. Ltd vs. ACIT (ITA No.352/Bang/2009), ld. TPO held that payment on account of mangement services unless not shown to be commensurate with the volume and the quality of services rendered could not be allowed. He held the Arms Length Price of each services as 'Zero' and recommended an adjustment of B7,84,20,835/-.
:- 19 -: ITA No.770/Mds/2014.
17. When a proposal on the above lines was made to the assessee, assessee chose to move to ld. DRP. Argument of the assessee before ld. DRP was that its Associated Enterprise was identifying the requirements of the products, reaching out to other entities and assisting it in procuring orders, obtaining licenses, permits etc., for the countries where it was procuring orders. Assessee also placed reliance on para 7.14 OECD guidelines. It also stated that the Associated Enterprise was providing rolling forecast and benefits was derived by the assessee through accelerated growth in export sales. As per the assessee, consolidation of demand from various countries reduced the cost of production and helped efficient sourcing and lowering of risk.
18. However, ld. DRP was not impressed by the above arguments. According to it, Associated Enterprise M/s. TCA was setup by the group in which assessee was a member, to manage its own affairs. According to ld.DRP, M/s.TCA was not a sales agent, since there was no need to promote assessee's sales to its own group concerns. As per ld. DRP, M/s. TCA was only a centralized entity distributing the orders from the various group concerns to the assessee. Ld. DRP also noted that assessee had not furnished any evidence to show any services rendered by M/s. TCA for justifying the :- 20 -: ITA No.770/Mds/2014.
sales commission. Further, as the ld. DRP, assessee was a low cost production company of the group and the receipt of service was not supported by any evidence. He thus, upheld the directions of the ld. TPO.
19. Now before us, the ld. Authorised Representative strongly assailing the orders of the lower authorities submitted that assessee had to supply threads to more than sixty concerns located in different countries and M/s. TCA was doing the consolidation of fragmental requirements. As per ld. Authorised Representative in the subsequent years such payment of commission was considered at Arms Length Price by TPO. According to him, agreement with M/s. TCS clearly indicated the type of services that was rendered. Reliance was once again placed on the judgment of Hon'ble Delhi High Court in the case of EKL Appliances Ltd (supra). Reliance was also placed on the decision of Delhi Bench of the Tribunal in the case of M/s. McCann Erickson India (P) Ltd vs. Addl. CIT (ITA No.5871/Del/2011 dated 8th June, 2012).
20. Per contra, ld. Departmental Representative strongly supported the orders of the authorities below.
:- 21 -: ITA No.770/Mds/2014.
21. We have considered the rival contentions and perused the orders of the lower authorities. In the first place what we note in that agreement between assessee and Associated Enterprise named the Central Agency Limited was not for any managerial services. It was pure and simple agency agreement. Relevant part of said agreement is reproduced hereunder:-
''SUPPLEMENTAL AGREEMENT THIS SUPPLEMENTAL AGREEMENT is made the 24th day of March, 2005 BETWEEN MADURA COATS PRIVATE LIMITED (formerly MADURA COATS LIMITED), having its registered office at New Jail Road, Madurai 625 001 (hereinafter referred to as "the Principal") of the one part.
And THE CENTRAL AGENCY LIMITED whose registered office is at Pacific House, 70, Wellington Street, Glasgow G2 6 VB (hereinafter referred to as "the Agent") of the other part.
WHEREAS the parties had signed an agency agreement dated ] st April 2001 on certain terms and conditions WHEREAS consequent to the introduction of certain "New Products" for export. and the prospect of introduction of further varieties, the parties now desire to amend the agency agreement dated 1st April 2001 to include the "New Products" on the following revised terms and conditions.
NOW IT IS HEREBY AGREED / MODIFIED AS FOLLOWS
1. The definition of "Products" set out under Definitions in the principal Agreement is hereby deleted and substituted by the following:
Existing Products- : Shall mean yarn and sewing thread or all types, whether in finished or semi-finished form, but excluding "Corespun" products of all kinds.
:- 22 -: ITA No.770/Mds/2014.
New Products:- Shall mean the "Corespun" variety of sewing threads , whether in finished or semi-finished form together with any new varieties of sewing threads which may be added by agreement of the parties ill writing.
Products :- Shall mean existing products and new products together.
The Parties further agree to retain/ amend the Qther terms as follows:
1. With effect from 1 April 2005 for a period of 5 years the Principal hereby re-appoints the Agent as its non-exclusive agent for the promotion and sale of products, both existing as well as new, to customers in the territory.
2. The Principal agrees to pay to the Agent commission:
a. at one and a half percent (1 .5%)on. The net invoice value in respect of orders for the existing Products procured /booked directly by or through the Agent for and on behalf of the Principal.
b. at five percent (5 %) on the net invoice value in respect of orders for the New ; Products procured/booked directly by or through the Agent for and on behalf of the Principal.
3. The commission as aforesaid shall be paid by the Principal to the Agent on or before the end of the quarter following the quarter in which the Principal receives payment against the orders booked by the Agent. The Principal will provide to the Agent a quarterly statement of commission due to the Agent (such statement to be provided not later than the end of the month following the relevant quarter) and the Agent may (subject to reasonable notice) inspect the Principal's accounting records to verify such statement and the commission due to it. The Agent shall supply an invoice forthwith in respect 01' such quarterly commission paid''.
What the assessee was bound to pay was commission based on net invoice value. What the agent was supposed to do was promote the sale of the assessee. Finding of the ld. TPO is that no such services :- 23 -: ITA No.770/Mds/2014.
were rendered by the TCA to the assessee. It is not disputed that invoices were raised by the TCA on the assessee, based on the net value of the order. It is also not disputed that supplies were made by the assessee only to its group concerns. The question that is to be addressed is whether TCA had procured the orders for the assessee as its agent. Ld. Assessing Officer had given a clear finding that no services in the nature of procurement of any orders were discernable from the e-mail correspondence between the assessee and M/s. TCA. Argument of the assessee before ld. TPO and ld. DRP was that primary role of M/s. TCA ws to indentify the requirements of the assessee and get orders. However, no evidence whatsoever was produced by the assessee in support of this contention. It was for the assessee to show the services it had received from M/s. TCA. When the supplies were all to group concerns, we cannot fathom what marketing services could have been done by M/s. TCA. No doubt, Hon'ble Delhi High Court in the case of M/s. EKL Appliances Ltd (supra) had held that legitimate business needs of the assessee should be understood from the point of a prudent businessman and it was not for the Assessing Officer to dictate what the business needs. There can be no quarrel on this view taken by the Hon'ble Delhi High Court. Nor can there be any quarrel on the view taken by the same Court that ld. TPO should not question how to conduct the business. These judgments :- 24 -: ITA No.770/Mds/2014.
cannot in our opinion be extra-polated to mean that there rested no onus on the assessee, to show the business purpose for which payments were effected by it. Commercial necessity of a payment is something which is well within the power of an assessee to decide considering its business interest. However, it cannot say that such commercial necessity or expediency has to be presumed. Assessee was bound to show the agency services rendered by M/s. TCA which it failed to do. Mere raising of bills cannot give rise to presumption of rendering any services. As already noted by us the orders on which commission was paid was only on items sold to group concerns and not to any third parties. There is much strength in the argument of the ld. Departmental Representative that in such a situation onus of the assessee was much more than in a scenario where orders on which commission was received were on supplies to third parties. Assessee had failed to discharge this. Consolidation of fragmented orders could have been done by the assessee itself and did not require services of an Associated Enterprise or knowledge of any sublims stalls. When assessee was unable to bring on record anything to show for what reason agency commission was paid, in our opinion there arose an exceptional circumstance where by Arms Length Price could be taken as Nil. As for decision of the Delhi Bench of the Tribunal in the case M/s. McCann Erickson India (P) Ltd (supra) :- 25 -: ITA No.770/Mds/2014.
strongly relied by the ld. Authorised Representative, assessee therein was able to demonstrate the type of services, description of service and benefits received by the it from its Associated Enterprise. Further, the payment was not agency commission but management commission fees. In the host of other judicial decisions relied by the ld. Authorised Representative also the question dealt was on the management fees and not on agency commission. In these circumstances, we do not find any reason to interfere with the orders of the lower authorities. Ground No.3 stands dismissed.
22. In the result, the appeal of the assessee is partly allowed for statistical purpose.
Order pronounced on Wednesday, the 16th day of November, 2016, at Chennai.
Sd/- Sd/-
(एन.आर.एस. गणेशन)) (अ ाहम पी. जॉज%)
(N.R.S. GANESAN) (ABRAHAM P. GEORGE)
या यक सद य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER
चे$नई/Chennai
%दनांक/Dated: 16th November, 2016
KV
आदे श क त(ल)प अ*े)षत/Copy to:
1. अपीलाथ /Appellant 3. आयकर आयु+त (अपील)/CIT(A) 5. )वभागीय त न/ध/DR
2. यथ /Respondent 4. आयकर आय+
ु त/CIT 6. गाड फाईल/GF