2023 (5) TMI 1475 - AT - Income Tax

Agency commission to related parties: lack of service proof led to nil ALP TP adjustment; s.80JJAA deduction remanded.

For TP adjustment on agency commission paid to AEs, the Tribunal held that the taxpayer failed to discharge the onus of proving actual services rendered, ... TP adjustment towards payment of agency commission - TPO bench marked payment of agency commission as ‘nil’ - HELD THAT:- As gone through a chart showing few samples, email correspondence between the assessee and AEs for all three assessment years and on perusal of these emails, what we understood is that these are general correspondence between assessee and its AEs regarding follow up on orders and delivery, production planning, and capacity assessment introduction of a new model and communications of order confirmations, etc., However, these emails does not show any light on the services rendered by these two AEs in connection with sales made in USA. Therefore, assessee could not file any evidences to prove that AEs have rendered services to justify payment of agency commission. It is not a case of the assessee that sales agents (AEs) have rendered services in connection with achieving sales targets, identifying new customers, collection follow up, etc. The assessee could not even furnish any evidences to prove that there are negotiations between the assessee and the AEs with regard to marketing strategy, sales targets, credit period, etc. In absence of any evidences with regard to rendering of services by the AEs, in our considered view, the TPO/AO has rightly bench marked payment of agency commission as ‘nil’, because, it is for the assessee to discharge its onus by filing necessary evidences to prove rendering of services, which is pre-requisite for making any payment. Arguments of the assessee in light of principle of res judicata and rule of consistency - As in the case of Radhasoami Satsang [1991 (11) TMI 2 - SUPREME COURT] held that res judicata is not applicable to the income tax proceedings. However, rule of consistency needs to be followed. There is no dispute on this legal aspect, because, when there is no change in the facts and circumstances of the case, the AO needs to take a consistent view on this issue. But, in the present case, if Department has disputed payments of agency commission and in earlier assessment years, the same has been disallowed u/s.37(1) of the Act, as wholly and exclusively not incurred for the purpose of business and up to AY 2008-09, the issue has been in some years accepted by the AO without any dispute and in some years, the addition has been made by the AO was finally deleted by the Ld.CIT(A). It is also an admitted fact that the assessee paying agency commission on the basis of very same agreement, but fact remains that from AY 2009-10 onwards, the issue has been examined in light of TP provisions, where ALP of international transactions of the assessee is required to be verified with reference to price charged by similar entities in uncontrolled transactions and also payments should be examined in light of evidences filed by the assessee. In this case, the TPO has made downward adjustment towards agency commission at ‘nil’ on the ground that the assessee could not file evidences to justify rendering of services by AE and payment of commission is commensurate with rendering of services. Therefore, in our considered view, the arguments of the assessee in light of rule of consistency and res judicata does not hold good. Thus, no error in the reasons given by the DPR/Ld.CIT(A) to sustain additions made by the AO/TPO towards TP adjustment on payment of agency commission. Deduction u/s.80JJAA in respect of additional wages paid to newly appointed employees - claim made by the assessee, has been allowed in the year in which assessee has made its claim - AO restricted the deduction u/s.80JJAA to 30% of the salary paid to additional employees in subject assessment year alone, but disallowed claim of remaining amount in successive two assessment years - HELD THAT:- We are of the considered view that the AO is erred in not allowing deduction claimed u/s.80JJAA of the Act, for subsequent two assessment years, even though, the law is very clear in as much as the assessee is entitled for deduction for next two assessment years @ 30% wages paid to new workmen and this proportion is supported by the decision of Page Industries Ltd [2015 (7) TMI 1117 - ITAT BANGALORE] where it has been clearly stated that the assessee is entitled for deduction u/s.80JJAA of the Act, for subsequent two assessment years. We further noted that the DRP has accepted the claim of the assessee for the AY 2011- 12 and directed the AO to verify whether conditions are satisfied to allow deduction for three consecutive years. Therefore, we are of the considered view that the issue needs to go back to the file of the AO and thus, we set aside the issue to the file of the AO for all three assessment years, and direct the AO to verify the claim of the assessee in light of our discussion given hereinabove, and if assessee satisfies conditions specified in subsection (2), then, the AO is directed to allow the claim of the assessee for subsequent two assessment years. ISSUES PRESENTED AND CONSIDERED 1. Whether the transfer pricing adjustment determining the arm's length price of agency/sales commission paid to associated enterprises as 'NIL' was sustainable, on the ground that the assessee failed to prove actual rendering of services warranting such commission, particularly when 100% sales were made to one joint venture partner under the joint venture arrangement. 2. Whether deduction under section 80JJAA was wrongly restricted to the year of claim alone, and whether the assessee is eligible to claim 30% of additional employee cost for three consecutive assessment years (subject year plus two succeeding years), subject to verification of statutory conditions. ISSUE-WISE DETAILED ANALYSIS Issue 1: TP adjustment on agency commission paid to associated enterprises-ALP determined at 'NIL' Legal framework (as discussed by the Court): The Court proceeded on the basis that, under transfer pricing examination, the assessee must justify the international transaction by demonstrating that services were actually rendered and that payment is commensurate with such services; further, it noted the CUP requirement that comparable uncontrolled transactions are ordinarily relevant, but emphasized the foundational requirement of proving receipt of services before benchmarking the price. Interpretation and reasoning: The Court treated as decisive the admitted factual matrix that under the joint venture arrangement one partner was obligated to purchase at least 50% of production and, in fact, the assessee sold 100% of its goods to that partner in the relevant years. Against that backdrop, the Court examined the agency agreements and the evidence relied upon (mainly sample emails). It held that although the agreements contained broad clauses describing possible services, the assessee failed to produce credible evidence demonstrating what specific services were actually rendered by the concerned associated enterprises in connection with the sales made to the purchasing joint venture partner. The email correspondence was found to reflect only general operational communications (follow-ups, production planning, order confirmations, delivery matters) and not proof of marketing/sales agency services or other actionable support justifying commission. The Court also rejected reliance on earlier years for consistency/finality, holding that the issue had not been finally adjudicated on merits for the relevant transfer pricing context and, from the year under consideration onwards, the matter was being tested under TP provisions where evidentiary proof of services was critical. Conclusions: The Court upheld the determination of the arm's length price of the agency commission as 'NIL' and sustained the transfer pricing adjustment for the relevant years, holding that the assessee did not discharge the onus of proving actual rendition of services by the associated enterprises so as to justify any commission payment. Issue 2: Deduction under section 80JJAA-eligibility for three consecutive years and remand for verification Legal framework (as discussed by the Court): The Court interpreted section 80JJAA to allow deduction of an amount equal to 30% of additional employee cost incurred in the relevant previous year, for three assessment years including the assessment year relevant to the previous year of such employment, subject to satisfaction of conditions specified in sub-section (2). Interpretation and reasoning: The Court found that the Assessing Officer erred in restricting the deduction only to 30% of salaries in the subject assessment year and in denying the carry-forward benefit to the succeeding two years. The Court held that the statutory language contemplates entitlement for the next two consecutive assessment years as well, provided the prescribed conditions are met. Since the record required verification of whether those conditions were satisfied, the Court considered it appropriate to remit the matter for factual verification and correct application of law. Conclusions: The Court set aside the disallowance/restriction under section 80JJAA and remanded the issue to the Assessing Officer for verification of compliance with statutory conditions; if satisfied, deduction is to be allowed at 30% for the subject year and the two succeeding assessment years as contemplated by the provision.