Income Tax Appellate Tribunal - Ahmedabad
Inductotherm (India) Private Ltd., ... vs Dy.Cit.,Circle-2(1)(1), , Ahmedabad on 24 May, 2017
ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 1 of 31 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD "I" BENCH, AHMEDBAD [Coram: Pramod Kumar AM and S.S. Godara JM] ITA Nos.3108/Ahd/2010 Assessment year: 2006-07 Inductotherm (India) Pvt. Ltd., .....................Appellant Ambli-Bopal Road, Bopal, Ahmedabad - 380 058.
[PAN: AAACI 3672 B] Vs. Deputy Commissioner of Income Tax Circle-4 Ahmedabad. ..................Respondent ITA Nos.2609/Ahd/2012 Assessment year: 2008-09 Inductotherm (India) Pvt. Ltd., .....................Appellant Ambli-Bopal Road, Bopal, Ahmedabad - 380 058.
[PAN: AAACI 3672 B] Vs. Joint Commissioner of Income Tax Range-4 Ahmedabad. ..................Respondent ITA Nos.671/Ahd/2014, 243/Ahd/15 and 370/Ahd/16 Assessment year: 2009-10, 2010-11 and 2011-12 Inductotherm (India) Pvt. Ltd., .....................Appellant Ambli-Bopal Road, Bopal, Ahmedabad - 380 058. [PAN: AAACI 3672 B] Vs. Deputy Commissioner of Income Tax Circle-4 Ahmedabad. ..................Respondent Appearances by:
Dhanesh Bafna along-with Pratik Shah for the appellant M P Singh and O.P. Sharma for the respondent ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 2 of 31 Date of concluding the hearing : 25.02.2017 Date of pronouncing the order : 24.05.2017 O R D E R Per Pramod Kumar AM:
1. These five appeals pertain to the same assessee, involve some common issues and were heard together. As a matter of convenience, therefore, all the five appeals are being disposed of by way of this consolidated order.
2. We will first take up ITA No. 3108/Ahd/10 i.e. assessee's appeal for the assessment year 2006-07.
3. Ground no. 1, as learned representatives fairly agree, is general in nature and it does not call for any specific adjudication.
4. In ground no. 2, the assessee has raised the following grievance:
2. (a) On the facts and circumstances of the case and in law, the Honourable Dispute Resolution Panel ('Hon'ble DRP'} and the Learned Deputy Commissioner of Income Tax, Circle-4 ("the AO") have erred in ignoring the material placed before them and in disallowing provision for warranty expenses of Rs.1,52,18,826/-.
(b) On the facts and circumstances of the case and in law, the Hon'ble DRP and the AO have erred in not considering the favourable orders of the Hon'ble ITAT in the appellant's own case for the assessment years 2000-01, 2001-02, 2003-04 and 2004-05.
The Appellant humbly prays that the said disallowance on account of provision for warranty expenses of Rs.1,52,18,826/- be deleted.
5. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by a coordinate bench decision dated 22nd January 2010 in assessee's own cases for the assessment years 2000-01, 2001-02, 2002-03, and another decision dated 22nd March 2010 for thee assessment year 2004-05. Learned Departmental Representative, nevertheless, relies upon the stand of the Assessing Officer, even as he has no submissions to make on as to why should the Tribunal not follow these binding judicial precedents. We have also noted that Hon'ble ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 3 of 31 jurisdictional High Court has declined to admit the appeal on this issue and the matter has thus attained finality.
6. In view of the above discussions and respectfully following the binding judicial precedents of the coordinate benches, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs 1,52,18,826. The assessee gets the relief accordingly.
7. Ground no. 2 is thus allowed.
8. In ground no. 3, the assessee has raised the following grievance:
3. (a) On the facts and circumstances of the case and in law, the Hon'ble DRP and the AO have erred in disallowing provision for expenses of Rs. 5,00,000/-
The Appellant humbly prays that the said disallowance for provision for expenses of Rs.5,00,000/- be deleted.
(b) On the facts and circumstances of the case and in law and without prejudice to the contention of the Appellant that the expenses are allowable on provision basis, the Hon'ble DRP and the AO have erred in not allowing an amount of Rs.92,444, which was actually paid during the subsequent assessment year.
The Appellant humbly prays that the AO be directed to allow the sum of Rs.92,444/-.
9. So far as these issues are concerned, the relevant material facts are like this. During the course of scrutiny assessment proceedings, it was noticed by the Assessing Officer that a sum of Rs 5,00,000 has been debited to the profit and loss account towards provision for expenses. When he probed the matter further, it was explained by the assessee that as the assessee is required to finalized its annual accounts by 10th April 2017, so as to facilitate consolidation of accounts by the parent company in USA, there is very little time available to it for ascertaining actual provision required for the expenses inasmuch as all the related bills, vouchers, delivery challans etc may not be available, an adhok provision, based on the past experience, is made. It was in this backdrop that the assessee created a provision of Rs 5,00,000. The Assessing Officer was of the view that the provision so made is contingent expenses in nature and cannot be disallowed. Relying upon Hon'ble Supreme Court's decision in the case of Indian Molasses Co Pvt Ltd Vs CIT [(1959) 37 ITR 66 (SC)], the Assessing Officer proposed to reject the said claim. Aggrieved, ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 4 of 31 assessee did raise an objection before the DRP but without any success. The DRP confirmed the stand of the Assessing Officer and reiterated his logic. As for the alternate plea of the assessee that the actual expenses of Rs 92,444, be allowed as deduction in the subsequent year and the balance amount be allowed to be written back in the said subsequent year, the DRP expressed its inability to deal with the same on the ground that its beyond their powers to take a call on an issue arising in the subsequent assessment year. The assessee is not satisfied and is in appeal before us.
10. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
11. We find that so far as the amount of Rs 92,444 is concerned, there cannot be any dispute about the genuineness of the provision to this extent, as the related payment has indeed been made, in respect of the expenses of that year, in the subsequent year. We, therefore, deem it and proper to allow the provision to this extent. The alternate plea of the assessee is thus upheld. In any case, learned counsel for the assessee did not have much to say in support of the basic plea either inasmuch as no scientific basis, for quantification of provision, was furnished.
12. Ground no. 3 is thus partly allowed in the terms indicated above.
13. In ground no. 4, the assessee has raises the following grievance:
4. On the facts and circumstances of the case and in law, the Hon'ble DRP and the AO have erred in disallowing prior period expenses of Rs.97,286/-.
The Appellant humbly prays that the said disallowance or\ account of prior period expenses of Rs.97,286/- be deleted.
14. So far as this grievance of the assessee is concerned, the relevant material facts are like this. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited prior period expenses, to the tune of Rs 2,27,647, in its profit and loss account but disallowed Rs 1,30,361 in the computation of taxable income. As for the balance amount of Rs 97,286, the stand of the assessee was that this amount was spent of erection and testing of furnace sold to Moet Ispat Limited, Raipur, in the immediately preceding year. The Assessing Officer, however, proposed to decline the deduction for the short reason that no provision was made in respect of the said amount in the preceding year. Aggrieved, ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 5 of 31 assessee raised the grievance before the Dispute Resolution Panel but without any success. The assessee is not satisfied and is in appeal before us.
15. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
16. There is an inherent fallacy in the stand of the Assessing Officer inasmuch as in the event of assessee's being able to make a provision for these expenses in the preceding year, the amount would have been claimed as a deduction in the preceding year, and not in the current year, yet the Assessing Officer has declined the deduction on the ground that the provision was not made in the preceding year. In any case, as we have noted, while dealing with the earlier grounds of appeal, this is a peculiar case in which the accounts are finalized within 10 days of the annual closing, so as to facilitate consolidation of accounts by the US based parent company, leading to practical problems with respect to creation of adequate provisions on the basis of cogent material. We have also noted that the assessee had presented a copy of the ledger account to the AO which showed that the expenses were actually incurred in October 2005. The incurring of expenses, or its bonafides, are thus not really in doubt. In these circumstances, in our considered view, the disallowance of Rs 97,286 was not really called for. We, therefore, direct the Assessing Officer to delete this disallowance of Rs 97,286.
17. Ground no. 4 is thus allowed.
18. In ground no. 5, the assessee has raised the following grievance:
5. On the facts and circumstances of the case and in law, the Hon'ble DRP and the AO have erred in ignoring the material placed before them and in denying the claim of the Appellant in respect of the carry forward of Long Term Capital Loss of Rs.11,66,067/- and setting it off against exempt Long Term Capital Gains.
The Appellant humbly prays that the AO be directed to allow the claim of the Appellant of Rs. 1,66,067/- in respect of the carry forward of Long Term Capital Loss.
19. So far as this ground of appeal is concerned, it is sufficient to take note of the fact that, as noted by the Assessing Officer, the assessee had claimed exemption under section 10(38), in respect of the long term capital gain of Rs 68,27,758, and that he did not set off the same against the long term capital loss brought forward to ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 6 of 31 the extent of Rs 11,66,067. The Assessing Officer was of the view that the assessee ought to have set off the capital gains against the capital loss brought forward, and since he did not do so, the Assessing Officer declined the carry forward of long term capital loss of Rs 11,66,067. Aggrieved, assessee raised the grievance before the Dispute Resolution Panel but without any success. The assessee is not satisfied and is in further appeal before us.
20. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
21. We find that the issue is now covered, in favour of the assessee, by a decision of the coordinate bench, in the case of G K Ramamurthy Vs JCIT [(2010) 37 SOT 345 (Mum)] wherein the coordinate bench has, inter alia, observed as follows:
5. We have heard the learned representatives of the parties and perused the record as well as gone through the decisions cited. Some admitted facts of the case are that there was long-term capital gain of Rs. 33,01,57,200 on sale of certain shares between the period 1st Oct., 2004 and 31st March, 2005, in respect of which, STT was paid and the same was exempted under s. 10(38) of the Act. The assessee was also having long-term capital loss in respect of redemption of units and other loss pertaining to the period prior to 1st Oct., 2004 amounting to Rs. 9,23,55,945. The assessee claimed carry forward of long-term capital losses of Rs. 9,23,55,945 to the subsequent years. There is no dispute that the capital gain in question was exempt under s. 10(38) of the Act. There is also no dispute that the capital loss on sale of shares which was claimed by the assessee to be carried forward for set off in subsequent assessment year was incurred prior to 1st Oct., 2004 when s. 10(38) was not in existence. The case of the Revenue is that such loss is adjustable against the long-term capital gains, which were under the same head though the same was exempt under s. 10(38) of the Act.
5.1 We shall now examine the scheme of the Act, to find out if income which does not form part of the total income under Chapter III of the Act, enters the computation of total income. Sec. 4 of the Act creates charge of income-tax and it provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in respect of the total income of the previous year of every person.
The charge of tax is thus on total income. Sec. 2(45) defines total income to mean total amount of income referred to in s. 5, computed in the manner laid down in this Act. Chapter II of the Act, from ss. 4 to 9 deals with basis of charge. Chapter III of the Act deals with incomes which do not form part of ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 7 of 31 total income and are contained in ss. 10 to 13B of the Act. Chapter IV deals with the computation of total income. Firstly income is categorized under various heads of income. This is laid down in s. 14 of the Act, which lays down that save as otherwise provided by this Act, all incomes shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income--Salaries, income from house property, profits and gains of business or profession, capital gains, income from other sources. Chapter V then brings income of other persons, which are to be included in the total income of an assessee and this is contained in ss. 60 to 65 of the Act. Chapter VI (containing ss. 66 to 80) then lays down provisions regarding aggregation of income and set off or carry forward of loss. Sec. 60 reads as under :
"Total income--in computing the total income of an assessee, there shall be included all income on which no income-tax is payable under Chapter VII."
5.2 The provisions of s. 66 are not applicable to incomes which are absolutely exempt from tax as per s. 10 and s. 11 etc., falling under Chapter III. This position is made clear by s. 66 itself as it speaks only of incomes on which tax is not payable and similar words are used in Chapter VII only thus leaving out by implication incomes which do not form part of total income at all as per Chapter III from the scope of s. 66. In CIT vs. N.M. Raiji (1949) 17 ITR 180 (Bom), the question for consideration before the Hon'ble Bombay High Court was as to whether share income of a partner which does not form part of the total income has to be added to the total income in order to determine the rate at which income-tax was payable by the partner. Sec. 16 of the IT Act, 1922 corresponding to s. 66 of the IT Act, 1961 was subject-matter under consideration in the aforesaid decision. The Hon'ble Bombay High Court held as follows :
"2. Now, the scheme of the Indian IT Act is that income, profits and gains of an assessee are liable to tax subject to certain exemptions and exceptions. Although certain sums may be exempted from taxation, still they may form part of the total income of an assessee in order to determine the rate at which income-tax is payable. Therefore, it follows that the total income of an assessee is not necessarily wholly subject to tax. Portions of it may be exempt from taxation and yet may be computed for the purpose of determining the rate at which tax is payable..
....Total income is defined in s. 2(15) of the Act and it means total amount of income, profits and gains computed in the manner laid down in this Act. Therefore, it would be erroneous to suggest that total income is to be determined only in the light of s. 4, sub-s. (3) of the Act. How total income is to be computed and determined depends upon the various provisions contained in the Act as a whole. Then we might look at various sections which provide for exemptions from the payment of tax. There is s. 7 which contains various provisos which cover sums not liable to tax. Similar is s. 8. Sec. 14 also ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 8 of 31 contains exemptions with regard to certain sums on which no tax is payable, and s. 15 contains exemptions in cases of life insurance. It will be noticed that the language used in all these sections, to which I have referred is similar, if not identical, with the language used in s. 25(4), viz., that the tax is not payable on these different sums. Now, if Mr. Joshi's contention was sound, then with regard to these various exemptions which I have enumerated, although tax is not payable, they should all be included in the total income for the purpose of determining the rate payable in respect of income-tax. Now, the short and conclusive answer to that contention is s. 16 of the Indian IT Act. It is that section which in terms includes in the total income of an assessee only certain sums which are exempted from the payment of tax. Therefore, by implication, where the sums are not included in the total income by s. 16, those sums are not only exempted from the payment of tax, but they are also excluded from the total income. Now, when we look at s. 16, it does not include the sum covered by s. 25(4) as a sum which is to be included in the total income of the assessee. The scheme, therefore, of the IT Act is clear and is very different from what Mr. Joshi suggests it is. The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose of computing the total income. Not only is the sum not liable to tax, but it is also not to form part of the total income for the purpose of determining the rate. When the legislature intends that certain sums, although not liable to tax, should be included in the total income, it expressly so provides, as it is done in s. 16 and therefore prima facie when we come to s. 25(4) and when we find that the assessee is not liable to pay tax on the sum received by him as his share if the partnership, that sum cannot and does not form part of his total income. Mr. Joshi has not succeeded in pointing out to us any provisions in the Act whereby this particular sum covered by s. 25(4) has been made a part of the total income of the assessee. Therefore, in my opinion, the share of the profit of the assessee in the firm, S.B. Billimoria & Co., in the accounting year 1943 cannot be included in the total income of the assessee for ascertaining the rate of income-tax."
5.3 It is thus clear from the scheme of the Act that incomes which do not form part of the total income as laid down in Chapter III of the Act, do not enter the computation of total income at all.
5.4 Now, we shall examine the provisions with regard to claim of carry forward and set off. The assessee in the present case has claimed carry forward of long-term capital loss. Such claim has to be tested in terms of s. 74 of the Act, which confers such right on the assessee. The relevant portion of s. 74 of the Act, reads as follows :
"Losses under the head 'Capital gains'--(1) Where in respect of any assessment year, the net result of the computation under the head 'Capital gains' is a loss to the assessee, the whole loss shall, subject to the other ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 9 of 31 provisions of this chapter, be carried forward to the following assessment year....."
The section says 'subject to other provisions of this chapter i.e., Chapter VI containing ss. 66 to 80'. The other provisions which will be relevant in this regard are s. 70(3).
"Sec. 70 : Set off of loss from one source against income from another source under the same head of income.
......(3) Where the result of the computation made for any assessment year under ss. 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset."
5.5 The case of the Revenue is that the long-term capital gain which was exempt under s. 10(38) of the Act, is income arrived at under similar computation made as the long-term capital loss was arrived at and therefore the long-term capital loss has to be set off against long-term capital gain. In other words the case of the Revenue is that the long-term capital gain is income notwithstanding the fact that it is exempt under s. 10(38) of the Act. This reasoning in our view is fallacious. We have already pointed out that incomes which do not form part of the total income do not enter the computation of total income at all i.e., under any of the heads of income mentioned in s. 14 of the Act. Therefore, the question of aggregating them under Chapter VI at all does not arise. Therefore, the question of set off of the same under s. 70(3) of the Act also does not arise for consideration. Therefore, the right of carry forward under s. 74(1) of the Act in respect of the long-term capital loss suffered by the assessee is not hit by the provisions of s. 70(3) of the Act.
5.6 In Ramjilal Rais vs. CIT (supra) an identical stand was taken by the assessee. The facts in the aforesaid case were that the assessee HUF suffered loss in business during the broken period when the HUF business on partition passed hands to a partnership business. The income for the broken period was income which did not from part of the total income. The assessee claimed that it was entitled to set off the loss from the business against the income under other heads. This claim was rejected by the ITO and he did not set off the loss against the income under other heads. The AAC, however, on appeal, held in favour of the assessee but the Tribunal reversed the finding of the AAC and restored that of the ITO. The question before the Court was as to whether the loss suffered in the business during the broken period, can be set off against income under other heads. The Hon'ble Allahabad High Court held as follows :
ITA Nos. 3108/A/2010, 2609/A/2012,671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 10 of 31 ".......We are of opinion that the set off cannot be allowed.
3. The Indian IT Act, 1922, expressly exempts certain items of classes of income from its operation. Such income is not liable to be considered for the purposes of the Act at all, unless some other provision of the Act brings it within its scope for some specific purpose. The Act contained from time to time various provisions which provided for exemption. There were the provisos to s. 7 before it was amended in 1955. There are the provisos to s. 8.
Sec. 14 sets out a number of exemptions of general nature. Secs. 15, 15A, 15B and 15C similarly provide for exemption. Although the language generally employed is that the 'the tax shall not be payable' in respect of such sums, the actual language employed is immaterial. What is to be ascertained is whether the language clearly intends an exemption from the operation of the Act. Now, the several sums covered by these provisions would lie outside the scope of the Act altogether, were it not that certain provisions of the Act expressly include them within its scope for a certain purpose. One such provision is s. 16(1)(a) which declares that in computing the total income of an assessee any sums exempted under some of the provisions mentioned above shall be included. These sums are included in the total income for the purpose of determining the true rate applicable to the rate applicable to the taxable income of the assessee. The sum exempted under s. 25(4) is not referred to in s. 16(1) and is not liable to be included in the total income of the assessee. It is exempt altogether from the operation of the Act. The Bombay High Court took this view in CIT vs. N.M. Raiji (1949) 17 ITR 180 (Bom), and we are in respectful agreement with that decision.
4. The assessee points out that before its amendment by the IT (Amendment) Act, 1939, the definition of 'total income' was :
'Total income means total amount of income, profits and gains from all sources to which this Act applies computed in the manner laid down in s. 16.' As a result of the Amendment Act of 1939, the present definition of 'total income' is :
'Total amount of income, profits and gains referred to in sub-s. (1) of s. 4 computed in the manner laid down in this Act.'
5. It is contended that the amendment extended the scope of the definition of 'total income' so that it covered not only the sums specifically referred to in s. 16, but also those sums mentioned under other provisions of the Act in respect of which it was declared that no tax was payable. It appears to us that the contention is stated rather widely. It is not every sum declared by the Act to be exempt which is liable to be included in the total income. It is only those sums which the Act specifically requires to be so included. To our mind, the amendment of the definition of 'total income' does not eliminate the distinction between the two categories of exempted sums, those which are exempt from ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 11 of 31 charge as well as from inclusion in the total income and those which are exempt from charge but are liable to be included in the total income. Nothing has been shown to us to take us to the conclusion contended for by the assessee.
6. If, as it seems to us, the income of the broken period is exempt altogether from the operation of the IT Act, then there is no basis for applying the provisions of s. 24(1) to that sum. If the assessee has earned a profit during the broken period, it is not liable to be considered for any purpose in respect of the assessment year to which the broken period relates."
5.7 One more angle of examination of matter is to see the purpose and intention of insertion of cl. (38) of the s. 10 of the Act of the legislature. Before insertion of cl. (38) of the s. 10 of the Act, the existing provisions of the IT Act, profits and gains arising to an investor from the transfer of securities were charged to tax either as long-term capital gains or short-term capital gains depending on the period of holding of the said securities. Short-term capital gains arising from transfer of securities are taxed at the applicable rates. Long-term capital gains are taxed at 20 per cent, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the taxpayer has an option to pay tax on long-term capital gains at 10 per cent but without indexation. For foreign institutional investors (FIIs), the long-term capital gains and short-term capital gains are taxed @ 10 per cent (without indexation) and 30 per cent respectively. In case of a trader in securities, however, the gains are taxed as any other normal business income. With a view to simplify the tax regime on securities transactions, it was proposed to levy a tax @ 0.15 per cent on the value of all the transactions of purchase of securities that take place in a recognized stock exchange in India. This tax was to be collected by the stock exchange from the purchaser of such securities and paid to the exchequer. The above provisions relating to the proposed tax were contained in Chapter VII of the Finance (No. 2) Bill, 2004, and took effect from 1st Oct., 2004. Further, it was proposed to insert cl. (38) in s. 10 of the IT Act, so as to provide exemption from long-term capital gains arising out of securities sold on the stock exchange. Thus, s. 10(38) has been inserted with a particular object to grant exemption to such income as tax has already been levied on some different footings. If we accept the contention of the Revenue to adjust long-term capital loss against exempt income (long-term capital gain) that will be contrary to law and contrary to the intention, object and purpose of the legislature in introducing cl. (38) to s. 10 of the Act. Further, on acceptance of Revenue's view on the issue, there is absurd outcome of interpretation if the facts are reversed, then, long-term capital loss from taxable assets will have to be adjusted against the long-term capital gains exempt under s. 10(38) of the Act. Suppose in the case on hand, if there is taxable long-term capital gain before 1st Oct., 2004 of Rs. 33,01,57,200 and long-term capital loss of Rs. 9,23,55,945, which may be exempt under s. 10(38) after 1st Oct., 2004, then the loss from exempt source would be set off against taxable gain; such set off is contrary to law.
ITA Nos. 3108/A/2010, 2609/A/2012,671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 12 of 31 5.8 In the light of the above discussion, we are not in agreement with the view of the Revenue that long-term capital loss is to be set off against exempt income (long-term capital gains) after 1st Oct., 2004. We, therefore, set aside the orders of the Revenue authorities and allow the claim of the assessee.
22. Respectfully following the views so taken by the coordinate bench, we uphold the plea of the assessee. The action of the Assessing Officer on this point is reversed, and the set off of loss carried forward as thrust by the Assessing Officer, is vacated.
23. Ground no. 5 is thus allowed.
24. In ground no. 6, the assessee has raised the following grievance:
6. (a) On the facts and circumstances of the case and in law, the Hon'ble DRP and the AO erred in making an adjustment of Rs.2,31,92,365/- on account of international transaction of sales made to the Associated Enterprises.
The Appellant humbly prays that the said adjustment of Rs.2,31,92,365/- on account of international transaction of sales made to the Associated Enterprises be deleted.
(b) Without prejudice to the Ground No.6(a) above, the Hon'ble DRP and the Assessing Officer erred in not allowing the benefit of +/- 5% range in respect of above transaction.
The Appellant humbly prays that the Assessing Officer be directed to allow the benefit of +/- 5% range in respect of above transaction.
25. As far as this ground of appeal is concerned, the relevant material facts are as follows. The assessee is engaged in the business of manufacturing induction melting systems, and is stated to be a market leader in induction technology for melting, heating and welding equipment. The assessee is a part of Inductotherm Group and a subsidiary of Inductotherm Industries Inc USA. During the relevant previous year, the assessee exported finished goods worth Rs 12.40 crores, which consisted of 165 types of products, to its associated enterprises (AEs). The method adopted for determining the arm's length price (ALP) of these exports was CPM (Cost Plus Method). During the course of scrutiny proceedings before the Transfer Pricing Officer, however, it was observed that out of these 165 types of products, the assessee had sold 31 types of products to the non-AEs (i.e. independent ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 13 of 31 enterprises) as well on a much higher profit margins. The TPO noted that as against a margin of Rs 47.06% on exports to the AEs, the assessee has earned a margin of 194.43% margin on sales to the non-AEs. It was mainly in this backdrop that the TPO required the assessee to show cause as to why the margin of 194.43% not be adopted for the CPM. It was explained by the assessee that it had dealt in about 2,500 types of products, whereas the transactions with AEs were only in resptect of 165 types of products, out of which comparables, or near comparables, were available in respect of only 31 products. Therefore, according to the assessee, this approach to the determination was bound to be a failure. The assessee further explained that so far as the market in the case of transactions with AEs is concerned vis-à-vis the market in respect of transactions with AEs, there is a sea change in the ground realities. The products supplied to the AEs are used as raw materials whereas the products sold to non AEs are used for repairs and replacements in products supplied by the assessee. The assessee further submitted that as a corroborative measure, the benchmarking is also done on the basis of TNMM which shows the mean margin at 4.99% and the highest comparable margin at 10.58%, as against the assessee's margin of 30.29%. None of these submissions, however, impressed the TPO. He was of the view that sale to the AEs was at nominal profit margin in comparison of sales with non-AEs. He was also of the view that the assessee has acted malafide in not furnishing costing details in respect of all the items, so as to suppress the relevant information. The TPO thus proceeded to adopt 213.44% operating profit margin, as against 45.54% shown by the assessee, and recommend an ALP adjustment of Rs 14,30,70,358. Aggrieved, assessee raised an objection before the Dispute Resolution Panel but without complete success. The DRP upheld the stand of the TPO in principle but restricted the ALP adjustment in respect of only such items for which comparables, or near comparables, were available i.e. 31 items. The ALP adjustment was thus scaled down to Rs 2,31,92,365. It was in this backdrop that the Assessing Office made the impugned ALP adjustment of Rs 2,31,92,365. The assessee is aggrieved and is in appeal before us.
26. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
27. We find, from the details of transactions as produced before us, that so far as exports to AEs are concerned, these AEs are entities engaged in manufacturing induction melting systems and related products, whereas admittedly the transactions with the non-AEs, i.e. independent enterprises, are in respect of end consumers of such systems and related products. While AEs are thus using the products sold to them as inputs for manufacturing or assembling process, the non-AEs are using the products as final consumers for repairs and replacements in the heat induction ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 14 of 31 systems and related products. A sale to dealer of the same product, much less to a manufacturer of related end product, inherently cannot be equated with the sale to the end consumer. Under rule 10B(2)(d),the comparability of an international transaction with an uncontrolled transaction is to be judged with reference to, inter alia, "conditions prevailing in the market in which the respective parties to the transactions operate, including the geographical location and size of the markets......... and level of competition and whether the markets are wholesale or retail". The case of sale to the end consumer which has to essentially buy the product from the same vendor who supplied him the furnace or other equipment is not the same thing as sale to the manufacturer or dealer a particular type of product, which uses the material so sold as input raw material etc. The distinction between these markets is so fundamental that the comparison is meaningless. In any case, while sale to AEs is in USA, UK, Australia, China, Brazil, Turkey and Korea etc, the sale to non-AEs, i.e. independent enterprises, is mostly in India. The sale to non- AEs under nearly monopolistic environment, whereas sale to AEs is under competitive environment. All these differences render the comparison of products sold to AEs and non-AEs irrelevant. While on this issue, we may also usefully refer to the observations made by a coordinate bench, in the case of Wrigley India Pvt Ltd Vs ACIT [(2015) 114 DTR 1 (Del)], as follows:
13. The question that we must decide at the threshold is as to which is the most appropriate method of determining arm's length price on the facts of this case. On this aspect of the matter, the dispute is confined to even narrower a question, i.e. whether or not CPM is the most appropriate method on the facts of this case, because neither revenue authorities have justified any other method of determining the ALP, nor is it in dispute that, if the CPM fails, the TNMM, as canvassed by the assessee, is the only method which can be applied.
15. Rule 10B(1)(c) defines the cost plus method, i.e. CPM, as follows:
Cost plus method, by which,-
(i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined;
(ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;
(iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 15 of 31 such transactions, which could materially affect such profit markup in the open market;
(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii);
v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise
16. The fundamental input for application of CPM method, next only to ascertainment of historical costs, is ascertainment of the normal mark-up of profit over aggregate of such direct costs and indirect costs in respect of same or similar property or services in a "comparable uncontrolled transaction" or, of course, a number of such "comparable uncontrolled transactions". When compared with CUP method, as against the "price" of a comparable uncontrolled transaction, one has to find out "normal mark up of profit" in a comparable uncontrolled transaction. Whether it is "price" or "normal mark up of profit", the starting point of both these exercises in the CUP and the CPM is finding a "comparable uncontrolled transaction". In order for such comparisons to be useful, the economically relevant characteristics of the situations being compared must be sufficiently comparable. It is only elementary, as is also noted in the OECD Transfer Pricing Guidelines, that "to be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences".
....................
20. In OECD Transfer Pricing Guidelines, this aspect of the matter, so far as comparability analysis is concerned, has been explained thus:
1.47 The functions carried out (taking into account the assets used and the risks assumed) will determine to some extent the allocation of risks between the parties, and therefore the conditions each party would expect in arm's length transactions. For example, when a distributor takes on responsibility for marketing and advertising by risking its own resources in these activities, its expected return from the activity would usually be commensurately higher and the conditions of the transaction would be different from when the distributor acts merely as an agent, being reimbursed for its costs and receiving the income appropriate to that activity. Similarly, a contract manufacturer or a contract research provider that takes on no meaningful risk would usually expect only a limited return.
[Emphasis, by underlining, supplied by us]
21. The UN Transfer Pricing Manual, elaborating upon the comparability analysis and which is broadly on the same lines as OECD Transfer Pricing Guidelines in this respect, states as follows:
ITA Nos. 3108/A/2010, 2609/A/2012,671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 16 of 31 5.1.5. A controlled and an uncontrolled transaction are regarded as comparable if the economically relevant characteristics of the two transactions and the circumstances surrounding them are sufficiently similar to provide a reliable measure of an arm's length result. It is recognized that in reality two transactions are seldom completely alike and in this imperfect world, perfect comparables are often not available.
It is therefore necessary to use a practical approach to establish the degree of comparability between controlled and uncontrolled transactions. To be comparable does not mean that the two transactions are necessarily identical, but instead means that either none of the differences between them could materially affect the arm's length price or profit or, where such material differences exist, that reasonably accurate adjustments can be made to eliminate their effect. Thus, in determining a reasonable degree of comparability, adjustments may need to be made to account for certain material differences between the controlled and uncontrolled transactions.
These adjustments (which are referred to as "comparability adjustments") are to be made only if the effect of the material differences on price or profits can be ascertained with sufficient accuracy to improve the reliability of the results.
5.1.6 The aforesaid degree of comparability between controlled and uncontrolled transactions is typically determined on the basis of a number of attributes of the transactions or parties that could materially affect prices or profits and the adjustment that can be made to account for differences. These attributes, which are usually referred to as the five comparability factors, include:
Characteristics of the property or service transferred; § Functions performed by the parties taking into account assets employed and risks assumed, in short referred to as the "functional analysis";
§ Contractual terms;
§ Economic circumstances; and § Business strategies pursued.
[Emphasis, by underlining, supplied by us]
22. On the facts of the present case, however, the comparability analysis has been confined to the first segment itself, i.e. characteristic of the property transferred.
Undoubtedly, the product comparability is an important factor but its certainly not the sole or decisive factor. The assessee was producing the same products for its AEs as it was producing for independent enterprises but that was all so far as similarities were concerned. The FAR profile was not the same, the contract terms were not the same, the economic circumstances were not the same and the business strategies were not the same. Viewed thus, necessary precondition for application of CPM, i.e. finding normal mark up of profit in comparable uncontrolled transactions, could not ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 17 of 31 have been fulfilled. When uncontrolled transactions were not comparable, the normal mark up on profit on such transactions could not have been relevant either.
23. In view of the above discussions, in our considered view, the authorities below were not justified in holding that the cost plus method was the most appropriate method on the facts of this case. One of the necessary ingredient for application of CPM, i.e. normal mark up of profit in the comparable uncontrolled transactions- whether internal or external, was not available as no comparable uncontrolled transactions were brought on record by the authorities below. What was brought on record as an internal comparable uncontrolled transaction, i.e. manufacturing for the domestic independent enterprises, was uncomparable as the FAR profile was significantly different. Undoubtedly, direct methods of determining ALP, including cost plus method, have an inherent edge over the indirect methods, such as TNMM, but such a preference can come into play only when appropriate comparable uncontrolled transactions can be identified and analysed accordingly. That has not been done in the present case. There is, therefore, no good reason to disturb the TNMM method adopted by the assessee.
28. Quite clearly, therefore, just because the assessee has sold the same product, as exported to the AEs, to the domestic enterprises, CPM method cannot be applied. That is precisely what the TPO has done. There is no other objection taken by the authorities below. There is a difference in geographical location of the market as also in the value chain and utility of the product. It is also important to bear in mind that while the products sold by the assessee to the AEs are propriety products, having unique specifications which non AEs cannot obtain from others, the assessee is in a position to fetch higher prices for the same from non-AEs.. The action of the TPO, in imposing internal CPM by comparing margins on sale to AEs and non-AEs, cannot thus be justified. The benchmarking, on TNMM basis as a corroborative measure, also justifies this conclusion.
29. In view of all these factors, and as sales to the AEs and non-AEs, which belong to different class of markets, cannot be compared on the peculiar facts of this case, the assessee is indeed justified in its plea. We uphold the same and direct the Assessing Officer to delete the impugned ALP adjustment of Rs 2,31,92,365.
30. Ground no. 6 is thus allowed in the terms indicated above.
31. In the result, the appeal for assessment year 2006-07 is partly allowed as indicated above.
32. We now take up ITA No. 2609/Ahd/2012, i.e. the appeal filed by the assessee for the assessment year 2008-09.
ITA Nos. 3108/A/2010, 2609/A/2012,671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 18 of 31
33. In the first ground of appeal, the assessee has raised the following grievance:
. On the facts and circumstances of the case, the learned Joint Commissioner of Income-tax, Range-4, Ahmedabad ('the Assessing Officer'), erred in disallowing provision towards warranty expenses amounting to Rs.76,66,825.
34. Learned representatives fairly agree that this issue is covered, in favour of the assessee, by a coordinate bench decision dated 22nd January 2010 in assesseee's own cases for the assessment years 2000-01, 2001-02, 2002-03, and another decision dated 22nd March 2010 for thee assessment year 2004-05. Learned Departmental Representative, nevertheless, relies upon the stand of the Assessing Officer, even as he has no submissions to make on as to why should the Tribunal not follow these binding judicial precedents. We have also noted that Hon'ble jurisdictional High Court has declined to admit the appeal on this issue and the matter has thus attained finality.
35. In view of the above discussions and respectfully following the binding judicial precedents of the coordinate benches, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs 1,52,18,826. The assessee gets the relief accordingly.
36. Ground no. 1 is thus allowed.
37. In ground no. 2, the assessee has raised the following grievance:
On the facts and circumstances of the case, the AO erred in making a disallowance of Rs.4,162 under Section 14A of the Income-tax Act, 1961 ('the Act') by invoking Rule 8D of the Income-tax Rules, 1962.
38. The above grievance is not pressed by the assessee, on account of smallness of amount, and is dismissed as such.
39. Ground no. 2 is dismissed.
40. In ground no. 3, the assessee has raised the following grievance:
On the facts and circumstances of the case, the AO erred in making an adjustment of Rs.82,87,963 in relation to the international transaction relating to payment of Royalty.
41. The relevant material facts are like this. During the course of proceedings before the Transfer Pricing Officer, it was noticed that the assessee has paid royalty ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 19 of 31 to its parent company, i.e. Inductotherm Industries Inc USA (III, in short), aggregating to Rs 8,48,05,337. This was computed @ 5% in respect of domestic sales and @ 8% in respect of export sales. In response to the questions from the TPO, it was explained by the assessee that regulatory environment in India recognizes the difference in the treatment and puts the cap on allowability of such royalty @ 5% in respect of domestic sales and 8% in respect of export sales. It was also submitted that similar royalties paid by the assessee in the earlier year have been held to be, though at the DRP level, at an arm's length price and the matter rests there. It was also explained that at the entity level the profits in respect of all the transactions taken together have been benchmarked at an arm's length price, on the basis of TNMM, and as such there is no reason to disturb the arm's length price of royalty paid. It was also explained by the assessee that the effective rate of royalty works out to almost the same in case adjusted sales, after adjusting for the cost of imports, is taken into account in respect of the exported goods. On the basis of calculations furnished by the assessee, which have been reproduced at page 13 of the TPO's order, the effective rate of royalty for exports works out to 2.86% and royalty for domestic sales works out to 3.0029%. The TPO, however, rejected the stand so taken by the assessee. He was of the view that aggregation of all the transactions of an assessee is warranted only in such a situation when these transactions cannot be segregated. That's not the case here. The TPO was also of the view that computation of effective rate of royalty by the assessee is meaningless as "the assessee has only reduced the cost of imported equipment" whereas "all the deductions mandated in the formulae prescribed by the Government of India should have been taken into account". It was so for the reason, as noted by the TPO, that "
since the payment of royalty is for the usage of .... Intangibles, the calculation for payment of royalty should be such that it should take into account the usage of intangible assets provided by the entity receiving the royalty" and that it should not "take into account the revenue earned by the entity received by the royalty on account of its own efforts". In other words, according to the TPO, there was no conceptual justification for adjusting the cost of imports from value of exports for computing effective rate of royalty. In effect, the TPO was of the view that such a difference in rates applicable for domestic sales and exports is incorrect. As for the RBI approval of the royalty rates, the TPO referred to Hon'ble Punjab & Haryana High Court's judgment in the case of Coca Cola India Inc Vs CIT [(2009) 17 DTR 66 (P&H)]. The TPO, accordingly, concluded that "the difference in royalty payment in domestic and export transactions, after taking into account ALP rate of 5%, is required to be adjusted in order that international transaction representing royalty payment is at arm's length". In effect thus, 5% royalty payment for export sales was held to be arm's length price, and the balance amount was disallowed as an ALP adjustment. On this basis, an ALP adjustment of Rs.82,87,963 was proposed by the TPO. Aggrieved by the stand so taken by the TPO, assessee did raise an objection ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 20 of 31 before the DRP but without any success. The DRP was of the view that "effective rate of royalty in assessee's case works out to much higher when compared with other group concern" and that "there is no rationale for payment of higher royalty in case of exports when there is no difference in the technology used in domestic and export segments". The assessee is not satisfied and is in appeal before us.
42. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal positon.
43. The stand of the authorities below has, as its foundational basis, two basic propositions- first, that there is no conceptual justification for higher rate of royalty in respect of exports vis-à-vis royalty for domestic sales; and - second, that the rates payable by other group entities for royalty to the parent company can be treated as valid inputs. The appeal of simplicity of approach in these propositions apart, both these propositions are factually incorrect and legally unsustainable. As for the difference in royalty rates applicable for domestic sales vis-à-vis export sales by Indian entities, that is a standard norm duly recognized by the Reserve Bank of India. When regulatory framework itself accepts and permits such a variation in approach to domestic sales and export sales, it is futile to suggest that it does not legally acceptable conceptual foundation. Whether or not the higher ceiling of rates, per se, prescribed by the RBI for payment of royalty can be accepted as an arm's length price may possibly have different approaches to this issue, there can be no dispute that there is a difference in approach to the rates of royalties in respect of domestic sales and exports. This commercial reality is duly recognized and accepted by the regulatory framework in India. In any case, even if one is to ignore this reality it for a minute, what is being used as a valid CUP input is an intra AE transaction, which a parent subsidiary transaction inherently is. Even in a case in which the royalty is being given to a rank outsider, by the virtue of 92A(2)(g), the entities paying and receiving royalties become AEs. It is only elementary that a transaction between the AEs can never be a valid CUP input. If needed, authority for this proposition is contained in ACIT Vs MSS India Ltd [(2009) 25 DTR 1 (Pune)], ACIT Vs Technimont ICB India Pvt Ltd [(2012) 75 DTR 259 (Mum)] and Sabic Innovative Plastics India Ltd Vs DCIT [(2013) 90 DTR 203 (Ahd)]. What the TPO has adopted to be an ALP is essentially on the basis of intra AE transactions but in the scheme of CUP analysis such an approach is not permissible. The approach adopted by the authorities below is thus wholly devoid of legally sustainable merits. There is no other justification for the impugned ALP adjustment. In any case, in the assessment year 2006-07, these royalty payments have been held to be arm's length payments by the DRP and that matter rests there. In view of these discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee. The Assessing Officer is, accordingly, ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 21 of 31 directed to delete the impugned ALP adjustment of Rs.82,87,963. The assessee gets the relief accordingly.
44. Ground no. 3 is thus allowed.
45. In ground no. 4, the assessee has raised the following grievance:
On the facts and circumstances of the case, the AO erred in making an adjustment of Rs.3,27,54,693 in relation to the international transaction relating to sales made to Associated Enterprises.
46. Learned representatives fairly agree that whatever we decide for the assessment year 2006-07 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of sales to AEs. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of Rs 3,27,54,693 also stands deleted.
47. Ground no. 4 is thus allowed.
48. In ground no. 5, the assessee has raised the following grievance:
On the facts and circumstances of the case, the AO erred in not allowing the benefit of +5% range as per Section 92C(2) of the Act, in respect of the aforesaid adjustments made under Transfer Pricing.
49. As we have upheld the basic plea, regarding ALP adjustment in respect of sale of goods to AEs, this plea is rendered infructuous and academic.
50. Ground no. 5 is thus dismissed.
51. In the result, assessee's appeal for the assessment year 2008-09 is also partly allowed.
52. We now take up ITA No. 671/Ahd/2014 i.e. appeal filed by the assessee for the assessment year 2009-10.
53. In the first ground of appeal, the assessee has raised the following grievance:
On the facts and in the circumstances of the case and in law, the Learned Deputy Commissioner of Income-tax, Circle-4, Ahmedabad ('the Ld. AO') under the directions of Dispute Resolution Panel ('DRP') erred ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 22 of 31 in making an adjustment of Rs.1,56,04,699 in relation to the international transaction of payment of Royalty to the associated enterprise ('AE').
54. Learned representatives fairly agree that whatever we decide for the assessment year 2008-09 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of ALP adjustment on royalty payment. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of Rs 1,56,04,699 also stands deleted.
55. Ground no. 1 is thus allowed.
56. In ground no. 2, the assessee has raised the following grievance:
On the facts and in the circumstances of the case and in law, the Ld AO under the directions of DRP erred in making an adjustment of Rs.1,81,03,806 in relation to the international transaction of sales made to AE,
57. Learned representatives fairly agree that whatever we decide for the assessment year 2006-07 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of sale of products to the AEs. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of Rs1,81,03,806 also stands deleted.
58. Ground no. 2 is thus allowed
59. In ground no. 3, the assessee has raised the following grievance:
On the facts and circumstances of the case, the AO erred in not allowing the benefit of +5% range as per Section 92C(2) of the Act, in respect of the aforesaid adjustments made under Transfer Pricing.
60. As we have upheld the basic plea, regarding ALP adjustment in respect of sale of goods to AEs, this plea is rendered infructuous and academic.
61. Ground no. 3 is thus dismissed.
62. Ground no. 4 is not pressed as it pertains to a small disallowance of Rs 3,403. It is accordingly dismissed as not pressed.
ITA Nos. 3108/A/2010, 2609/A/2012,671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 23 of 31
63. In the result, appeal of the assessee for the assessment year 2009-10 is also partly allowed.
64. We now take up ITA No.243/Ahd/2015 i.e. appeal filed by the assessee for the assessment year 2010-11
65. In the first ground of appeal, the assessee has raised the following grievance:
On the facts and in the circumstances of the case and in law, the Learned Deputy Commissioner of Income-tax, Circle-2(i)(i), Ahmedabad ('the Ld. AO') under the directions of Dispute Resolution Panel ('DRP') erred in making an adjustment of Rs.80,47,461 in relation to the international transaction of payment of Royalty to the Associated Enterprise ('AE')-
66. Learned representatives fairly agree that whatever we decide for the assessment year 2008-09 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of ALP adjustment on royalty payment. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of Rs 80,47,461 also stands deleted.
67. Ground no. 1 is thus allowed.
68. In ground no. 2, the assessee has raised the following grievance:
On the facts and in the circumstances of the case and in law, the Ld AO under the directions of DRP erred in making an adjustment of Rs.11,59,728 in relation to the international transaction of sale of goods to the AEs.
69. Learned representatives fairly agree that whatever we decide for the assessment year 2006-07 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of sale of products to the AEs. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of Rs 11,59,728 also stands deleted.
70. Ground no. 2 is thus allowed ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 24 of 31
71. In ground no. 3, the assessee has raised the following grievance:
On the facts and circumstances of the case, the AO erred in not allowing the benefit of +5% range as per Section 92C(2) of the Act, in respect of the aforesaid adjustments made under Transfer Pricing.
72. As we have upheld the basic plea, regarding ALP adjustment in respect of sale of goods to AEs, this plea is rendered infructuous and academic.
73. Ground no. 3 is thus dismissed.
74. Ground no. 4 is not pressed as it pertains to a small disallowance of Rs 3,630. It is accordingly dismissed as not pressed.
75. In the result, appeal of the assessee for the assessment year 2010-11 is also partly allowed.
76. We now take up ITA No.370/Ahd/16 i.e. appeal filed by the assessee for the assessment year 2011-12.
77. In the first ground of appeal, the assessee has raised the following grievance:
On the facts and in the circumstances of the case and in law, the Learned Deputy Commissioner of Income-tax, Circle-2(i)(i), Ahmedabad ('the Ld. AO') under the directions of Dispute Resolution Panel ('DRP'), erred in making an adjustment of Rs.8,031,934 in relation to the international transaction of payment of Royalty to the Associated Enterprise ('AE').
78. Learned representatives fairly agree that whatever we decide for the assessment year 2008-09 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of ALP adjustment on royalty payment. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of Rs 80,31,934 stands deleted.
79. Ground no. 1 is thus allowed.
80. In ground no. 2, the assessee has raised the following grievance:
On the facts and in the circumstances of the case and in law, the Ld AO/TPO under the directions of DRP, erred in making an adjustment of ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 25 of 31 Rs.41,76,090 in relation to the international transaction of sale of goods to the AEs.
81. Learned representatives fairly agree that whatever we decide for the assessment year 2006-07 on this issue will apply mutatis mutandis in this assessment year as well. Vide our order earlier, we have upheld the said plea of the assessee and directed the Assessing Officer to delete the similar ALP adjustment in respect of sale of products to the AEs. We see no reasons to take any other view of the matter in this year. Accordingly, this ALP adjustment of Rs 41,76,090 also stands deleted.
82. Ground no. 2 is thus allowed
83. In ground no. 3, the assessee has raised the following grievance:
On the facts and circumstances of the case, the AO erred in not allowing the benefit of +5% range as per Section 92C(2) of the Act, in respect of the aforesaid adjustments made under Transfer Pricing.
84. As we have upheld the basic plea, regarding ALP adjustment in respect of sale of goods to AEs, this plea is rendered infructuous and academic.
85. Ground no. 3 is thus dismissed.
86. Ground no. 4 is not pressed as it pertains to a small disallowance of Rs 4,210 It is accordingly dismissed as not pressed.
87. In ground no. 5, the assessee has raised the following grievance:
On the facts and circumstances of the case and in law, the learned AO erred in disallowing the commission expenses paid to non residents amounting to Rs 20,04,492
88. So far as this disallowance is concerned, it is sufficient to take note of the fact that the assessee had paid commission, amounting to Rs 20,04,492, to non- residents and in respect of services rendered abroad, primarily on the ground that income accrues or arises in India. Reliance was placed on decisions of Authority for Advance Ruling, in the cases of Rajiv Malhotra [(2006) 284 ITR 564 (AAR)] and SKF Boilers and Driers Pvt Ltd [(2012) 343 ITR 385 (AAR)]. It was thus held that the assessee ought to have deducted tax at source from these commission payments, and that his failure to do so would attract disallowance under section 40(a)(i). The assessee's objection before the DRP has also been negated. The assessee is not satisfied and is in appeal before us.
ITA Nos. 3108/A/2010, 2609/A/2012,671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 26 of 31
89. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
90. As learned representatives fairly agree, even as learned Departmental Representative dutifully relies on the orders of the authorities below, this issue is now covered by a series of decisions of this Tribunal, including by this very coram, in the case of DCIT Vs Welspun Corporation Ltd and vice versa [(2017) 77 taxmann.com 165 (Ahd)] wherein the Tribunal has, inter alia, observed as follows:
31. The scheme of taxability in India, so far as the non-residents, are concerned, is like this. Section 5 (2), which deals with the taxability of income in the hands of a non-resident, provides that "the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year". There is no dispute that since no part of the operations of the recipient non-residents is carried out in India, no income accrues to these non-residents in India. The case of the revenue hinges on income which is "deemed to accrue or arise in India". Coming to the deeming provisions, which are set out in Section 9, we find that the following statutory provisions are relevant in this context:
'Section 9- Incomes deemed to accrue or arise in India (1) The following incomes will be deemed to accrue or arise in India:
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, Explanation: For the purpose of this clause [i.e. 9(1)(i)],
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;
(b) (c) (d)** ** **"
(vii) income by way of fees for technical services payable by-
(a)** ** **"
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 27 of 31
(c)** ** **"
Explanation 1-.............* Explanation 2.- For the purposes of this clause, "fees for technical services"
means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head" Salaries".' * Not relevant for our purposes
32. So far as deeming fiction under section 9(1)(i) is concerned, it cannot be invoked in the present case since no part of the operations of the recipient's business, as commission agent, was carried out in India. Even though deeming fiction under section 9(1)(i) is triggered on the facts of this case, on account of commission agent's business connection in India, it has no impact on taxability in the hands of commission agent because admittedly no business operations were carried out in India, and, therefore, Explanation 1 to Section 9(1)(i) comes into play.
33. There are a couple of rulings by the Authority for Advance Ruling, which support taxability of commission paid to non-residents under section 9(1)(i), but, neither these rulings are binding precedents for us nor are we persuaded by the line of reasoning adopted in these rulings. As for the AAR ruling in the case of SKF Boilers & Driers (P.) Ltd. In re [2012] 343 ITR 385/206 Taxman 19/18 taxmann.com 325 (AAR - New Delhi), we find that this decision merely follows the earlier ruling in the case of Rajiv Malhotra, In re [2006] 284 ITR 564/155 Taxman 101 (AAR - New Delhi) which, in our considered view, does not take into account the impact of Explanation 1 to Section 9(1)(i) properly. That was a case in which the non-resident commission agent worked for procuring participation by other non-resident entities in a food and wine show in India, and the claim of the assessee was that since the agent has not carried out any business operations in India, the commission agent was not chargeable to tax in India, and, accordingly, the assessee had no obligation to deduct tax at source from such commission payments to the non-resident agent. On these facts, the Authority for Advance Ruling, inter alia, opined that "no doubt the agent renders services abroad and pursues and solicits exhibitors there in the territory allotted to him, but the right to receive the commission arises in India only when exhibitor participates in the India International Food & Wine Show (to be held in India), and makes full and final payment to the applicant in India" and that "the commission income would, therefore, be taxable under section 5(2)(b) read with section 9(1)(i) of the Act".
The Authority for Advance Ruling also held that "the fact that the agent renders services abroad in the form of pursuing and soliciting participants and that the commission is remitted to him abroad are wholly irrelevant for the ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 28 of 31 purpose of determining situs of his income". We do not consider this approach to be correct. When no operations of the business of commission agent is carried on in India, the Explanation 1 to Section 9(1)(i) takes the entire commission income from outside the ambit of deeming fiction under section 9(1)(i), and, in effect, outside the ambit of income 'deemed to accrue or arise in India' for the purpose of Section 5(2)(b). The point of time when commission agent's right to receive the commission fructifies is irrelevant to decide the scope of Explanation 1 to Section 9(1 )(i), which is what is material in the context of the situation that we are in seisin of. The revenue's case before us hinges on the applicability of Section 9(1)(i) and, it is, therefore. important to ascertain as to what extent would the rigour of Section 9(1)(i) be relaxed by Explanation 1 to Section 9(1)(i). When we examine things from this perspective, the inevitable conclusion is that since no part of the operations of the business of the commission agent is carried out in India, no part of the income of the commission agent can be brought to tax in India. In this view of the matter, views expressed by the Hon'ble AAR, which do not fetter our independent opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot simply be brushed aside either, and that these rulings at least have persuasive value. We have no quarrel with this proposition. We have, with utmost care and deepest respect, perused the above rulings rendered by the Hon'ble Authority for Advance Ruling. With greatest respect, but without slightest hesitation, we humbly come to the conclusion that we are not persuaded by these rulings.
34. Coming to Section 9(1)(vii)(b), this deeming fiction- which is foundational basis for the action of the Assessing Officer, inter alia, provides that the income by way of technical services payable by a person resident in India, except in certain situations- which are not attracted in the present case anyway, are deemed to be income accruing or arising in India. Explanation 2 to Section 9(1)(vii) defines 'fees for technical services' as any consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'Salaries' [Relevant portion highlighted by underlining]".
35. In the light of the above legal position, what we need to decide at the outset is whether the amounts paid by the assessee to the non-resident agents could be termed as "consideration for the rendering of any managerial, technical and consultancy services". As we do so, it is useful to bear in mind the fact that even going by the stand of the Assessing Officer, at best services rendered by the non-resident to the agent included technical services but it is for this reason that the amounts paid to these agents, on account of commission on exports, should be treated as fees for technical services. Even ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 29 of 31 proceeding on the assumption that these non-resident agents did render the technical services, which, as we will see a little later, an incorrect assumption anyway, what is important to appreciate is that the amounts paid by the assessee to these agents constituted consideration for the orders secured by the agents and not the services alleged rendered by the agents. The event triggering crystallization of liability of the assessee, under the commission agency agreement, is the event of securing orders and not the rendition of alleged technical services. In a situation in which the agent does not render any of the services but secures the business anyway, the agent is entitled to his commission which is computed in terms of a percentage of the value of the order. In a reverse situation, in which an agent renders all the alleged technical services but does not secure any order for the principal i.e. the assessee, the agent is not entitled to any commission. Clearly, therefore, the event triggering the earnings by the agent is securing the business and not rendition of any services. In this view of the matter, in our considered view, the amounts paid by the assessee to its non-resident agents, even in the event of holding that the agents did indeed render technical services, cannot be said to be consideration for rendering of any managerial, technical or consultancy services (Emphasis by underlining supplied by us)". The services rendered by the agents, even if these services are held to be in the nature of technical services, may be technical services, but the amounts paid by the assessee are not for the rendition of these technical services nor the quantification of these amounts have any relation with the quantum of these technical services. The key to taxability of an amount under section 9(1)(vii) is that it should constitute "consideration" for rendition of technical services. The case of the revenue fails on this short test, as in the present case the amounts paid by the assessee are "consideration" for orders secured by the assessee irrespective of how and whether or not the agents have performed the so called technical services.
36. Let us sum up our discussions on this part of the scheme of Section 9, so far as tax implications on commission agency business carried out by non- residents for Indian principals is concerned. It does not need much of a cerebral exercise to find out whether the income from the business carried on by a non-resident assessee, as a commission agent and to the extent it can be said to directly or indirectly accruing through or from any business connection in India, is required to be taxed under section 9(1)(i) or under section 9(1)(vii), of the Income Tax Act, 1961. The answer is obvious. Deeming fiction under section 9(1)(i) read with proviso thereto, as we have seen in the earlier discussions, holds the key, and lays down that only to the extent that which the operations of such a business is carried out in India, the income from such a business is taxable in India. When no operations of the business are carried on India, there is no taxability of the profits of such a business in India either. The question then arises whether in a situation in which, in the course of carrying on such business, the assessee has to necessarily render certain services, which are of such a nature as covered by Explanation 2 to Section 9(1)(vii), and even though the assessee is not paid ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 30 of 31 any fees for such services per se, any part of the business profits of the assessee can be treated as 'fees for technical services' and taxed as such under section 9(1)(vii). This question does not pose much difficulty either. In the light of the discussions in the foregoing paragraph, unless there is a specific and identifiable consideration for the rendition of technical services, taxability under section 9(1)(vii) does not get triggered. Therefore, irrespective of whether any technical services are rendered during the course of carrying on such agency commission business on behalf of Indian principal, the consideration for securing business cannot be taxed under section 9(1)(vii) at all. This profits of such a business can have taxability in India only to the extent such profits relate to the business operations in India, but then, as are the admitted facts of this case, no part of operations of business were carried out in India. The commission agents employed by the assessee, therefore, did not have any tax liability in India in respect of the commission agency business so carried out.
91. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. As the recipient of the commission did not have any tax liability in respect of income embedded in such payments and as liability under section 195 can come into play only when the recipient has a tax liability in respect of income embedded in the related payments, the assessee cannot be faulted for not having deducted tax at source, and, disallowance under section 40(a)(i) does not, therefore, come into play. Respectfully following the views so expressed by the coordinate bench, with which we are in considered agreement, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs 20,04,492.
92. Ground no. 5 is thus allowed.
93. In the result, the assessee's appeal for the assessment year 2011-12 is also partly allowed in the terms indicated above. To sum up, all the appeals filed by the assessee are partly allowed. Pronounced in the open court today on the 24 th day of May, 2017.
Sd/- Sd/- S.S. Godara Pramod Kumar (Judicial Member) (Accountant Member) Ahmedabad, dated the 24 th day of May, 2017 ITA Nos. 3108/A/2010, 2609/A/2012, 671/A/2014, 243/ A/2015 & 370/A/2016 AYs: 2006-07, 2008-09, 2009-10, 2010-11 & 2011- 12 Page 31 of 31 Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad