TaxTMI 
TaxTMI 
2018 (8) TMI 53
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....d maintenance, repair and servicing of CDMA networks, CDMA/GSM terminals and mobile handsets. It filed its return of income on 29.10.2005 declaring total income of Rs. 1,52,98,08,547/-. Subsequently, the assessee filed a revised return declaring total income of Rs. 1,02,78,01,120/- after claiming the receipt of Rs. 57,71,79,709/- from sales tax department as capital receipts. Since the assessee has undertaken certain international transactions with its AEs, the Assessing Officer referred the matter to the TPO u/s 92CA(1) of the I.T. Act. The TPO vide order dated 31.10.2008 suggested upward adjustment of Rs. 5,12,44,116/- being the arm's length price of the international transactions of contribution towards World Cup Tournament and an amount of Rs. 18,66,31,111/- being the arm's length price of the reimbursement of advertising, marketing and sales promotion expenses. The Assessing Officer completed the assessment u/s 143(3) on 30.12.2008 determining the total income of the assessee at Rs. 3,34,18,55,880/- after allowing deduction of Rs. 1,21,50,770/- u/s 80JJAA of the I.T. Act, 1961 as against Rs. 2,52,29,510/- claimed by the assessee in the original return of income. The Assessing ....
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....bmitted that the powers of enhancement available with the ld. CIT(A) do not extend to discovering new sources of income. Referring to the decisions of the Hon'ble Supreme Court in the case of CIT vs. Shapoorji Pallonji Mistry reported in 44 ITR 891 and in the case of CIT vs. Rai Bahadur Hardutroy Motilal Chamaria reported in 66 ITR 443, he submitted that the Hon'ble Apex Court has categorically held that the ld. CIT(A) has no jurisdiction to travel beyond the subject-matter of assessment and powers of enhancement relate only to that income which has been subjected to assessment and not to new sources of income. Referring to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Sardari Lal and Company reported in 251 ITR 864 and in the case of CIT vs. Union Tyres reported in 240 ITR 556 and various other decision, he submitted that similar view has been taken in the above decisions. He accordingly submitted that the disallowance of expenditure incurred on purchase of finished goods from third party manufactures on the ground of tax being not deducted at source at the time of making payment, which issue was not raised by the Assessing Officer and was not subject-matter ....
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....ar under consideration are same as agreements in earlier years which have been held to be contract for sale by the Apex Court and, therefore, the question of applicability of section 194C on payments for purchase of finished goods does not arise. He also relied on the following decisions :- (i) BDA Ltd. vs. ITO, 281 ITR 89 (Bom.). (ii) CIT vs. Dabur India Ltd., 283 ITR 197 (Del.). (iii) Dr. Willmar Sochwade India (P) Ltd., ITA NO.160/2006 (Del. HC). (iv) CIT vs. Reebok India Co., 306 ITR 124 (Del.). (v) CIT vs. Glenmark Pharamceuticals Ltd., 324 ITR 199 (Bom.). (vi) DCIT vs. Samsung India Electronics Ltd. (ITA 3703/D/05). (vii) Whirpool India Limited vs. JCIT, 109 TTJ 994 (Del.). (viii) Hero MotoCorp Ltd. vs. ACIT, ITA No.1980/Del/2012 (Del Trib.). (ix) ITO (OSD) vs. Mahanagar Telephone Nigam Ltd., 166 ITD 631 (Del Trib.). (x) H.I. Tamboli & Co. vs. ACIT, Satara - [2017] 87 taxmann.com 155 (Pune - Trib.). 11. He submitted that section 194C was amended by the Finance (No.2) Act, 2009 w.e.f. 01.10.2009 whereby the definition of "work" was enlarged to include contract for manufacturing or supp....
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....venue and assessee were under bona-fide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault could be found with the assessee in not deducting tax at source in assessment year in question and consequently disallowance made by the Assessing Officer u/s 40(a)(ia) in respect of transaction charges could not be sustained. Therefore, the ld. CIT(A) is not justified in making the above addition u/s 40(a)(ia) of the I.T. Act. 13. In yet another alternate argument, ld. counsel for the assessee submitted that the payees have already paid the tax and, therefore, no disallowance u/s 40(a)(ia) is called for. Referring to the decision of the Hon'ble Allahabad High Court in the case of Jagran Prakashan Ltd. vs. DCIT reported in 345 ITR 288, he submitted that the Hon'ble High Court in the said decision has held that in a case where tax has not been deducted at source, the short deducted tax at source cannot be realized from the deductor and the liability to pay such tax shall continue to be with the assessee direct whose income has to be charged and a person who fails to deduct the tax at source, at best, is liable for interest and pe....
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.... at source u/s 194C of the I.T. Act. The Revenue has not demonstrated that the employees of the assessee are actually the employees and nominees of the said overseas entities and are working under the direct control and supervision of the overseas entities. Relying on various decisions, he submitted that no disallowance u/s 40(a)(ia) is called for. 15. The ld. DR on the other hand heavily relied on the order of the ld. CIT(A). He submitted that the powers of the ld. CIT(A) are coterminous with that of the Assessing Officer. He could do what the Assessing Officer has failed to do. He submitted that any allowance/disallowance u/s 40(a)(ia) is not a new source. It is only an interpretation of the existing source of income. Since the disallowance u/s 40(a)(ia) is not new source of income, therefore, various decisions relied on by the ld. counsel for the assessee are not applicable to the facts of the present case. Heavily relying on the order of the ld. CIT(A), he submitted that these purchasers are to be termed as "works contract" and not mere purchase of goods. The assessee has not demonstrated as to how the ld. CIT(A)'s findings are wrong or erroneous. Referring to the provision ....
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....f new sources of income. As per the provisions of section 251(1) in disposing of appeal, the ld. CIT(A) in an appeal against the order of assessment may confirm/reduce/enhance or annul the assessment. The Hon'ble Delhi High Court in the case of CIT vs. Sardari Lal and Co. (supra) has held as under :- "Looking from the aforesaid angles, the inevitable conclusion is that whenever the question of taxability of income from a new source of income is concerned, which had not been considered by the Assessing Officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 of the Act and section 263 of the Act, if requisite conditions are fulfilled. It is inconceivable that in the presence of such specific provisions, a similar power is available to the first appellate authority. That being the position, the decision in Union Tyres' case [1999] 240 ITR 556 of this court expresses the correct view and does not need reconsideration. This reference is accordingly disposed of." 16.1 The Pune Bench of the Tribunal in the case of Ram Infrastructure Ltd. vs. JCIT vide ITA No.746/PN/2013 order dated 30.12.2016 while dealing with an identi....
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....sidered by the Income tax Officer, and if a new source is to be considered, then the power of remand should be exercised. By the exercise of the power to assess fresh sources of income, the assessee is deprived of a finding by two tribunals and one right of appeal. 9. The question is whether we should accept the interpretation suggested by the Commissioner in preference to the one, which has held the field for nearly 37 years. In view of the provisions of sections 34 and 33B by which escaped income can be brought to tax, there is reason to think that the view expressed uniformly about the limits of the powers of the Appellate Assistant Commissioner to enhance the assessment has been accepted by the legislature as the true exposition of the words of the section. If it were not, one would expect that the legislature would have amended section 31 and specified the other intention in express words. The Income tax Act was amended several times in the last 37 years, but no amendment of section 31(3) was undertaken to nullify the rulings, to which we have referred. In view of this, we do not think that we should interpret section 31 differently from what has been accepted in Indi....
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....in the assessment proceedings. Thus, the addition made u/s. 2(22)(e) by Commissioner of Income Tax (Appeals) is not sustainable and is therefore set aside being void ab-initio. Since, the addition made by the Commissioner of Income Tax (Appeals) u/s. 2(22)(e) of the Act has been held to be void ab-initio, the arguments raised by the ld. AR of the assessee on merits have become academic and are thus, not dealt with. The ground Nos. 5 and 6 raised by the assessee in grounds of appeal are allowed, accordingly." 17. Since in the instant case also, there is no discussion of any such disallowance either in the return of income or in the assessment proceedings, therefore, the disallowance made by the ld. CIT(A) by discovering a new source of income is not sustainable in law. We, therefore, hold that the disallowance made by the ld. CIT(A) u/s 40(a)(ia) is void ab-initio. Since we are allowing the grounds raised by the assessee on the issue of enhancement of assessment by the ld. CIT(A) by discovering a new source of income, the other alternate arguments made by the ld. counsel for the assessee become academic in nature and therefore are not being adjudicated. The grounds no.2 to 2.11 a....
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....me to be capital expenditure. 24. The facts of the case, in brief, are that the assessee during the year made payment on royalty to his holding company M/s LG Electronics, Korea (LGEK) for the right to use technical knowledge, know-how, process, specifications, lay outs, designs, drawings and quality standard, standard calculation, etc.. Rejecting the various explanations given by the assessee and relying on various decision, the Assessing Officer treated such royalty payment as capital expenditure as against revenue expenditure treated by the assessee. In appeal, the ld. CIT(A) upheld the action of the Assessing Officer for which assessee is in appeal before the Tribunal. 25. We find identical issue had come up before the Tribunal in assessee's own case for assessment year 2007-08. We find the Tribunal decided the issue in favour of the assessee by observing as under :- 16.1. We have heard the rival submissions and perused the relevant material on record. In order to decide as to whether the royalty paid by the assessee is of a capital or revenue nature, it is appropriate to see the relevant clauses of the Agreement dated 01.07.2001, pursuant to which such royalty w....
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....en given exclusively to the assessee. This agreement simply allows the use of Technical Information and IPRS without granting any ownership rights in it to the assessee. Further the grant of license to the assessee is non-transferable with no right of sub-licensing. Apart from that, there is a confidentiality clause which prohibits the assessee from disclosing the information received pursuant to this Agreement, to anyone else either during the continuation of this agreement or at any time thereafter. It is a perpetual agreement without there being any fixed duration of the license. The termination clause provides that upon termination, all the respective rights and obligation of the parties, namely, the use of technical knowhow and IPRS, shall cease. In other words, the assessee will not be entitled to use this technical know-how or IPRS after the termination of the agreement. Now the moot question which arises is as to whether the royalty paid for the use of technical knowhow and IPRS in the given circumstances be held as a capital expenditure as has been held by the AO or revenue expenditure as claimed by the assessee. 16.2. The Hon'ble Supreme Court in CIT Vs Ciba of I....
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....llowed to manufacture the products even after the expiry of the agreement. The Hon'ble Supreme Court held that 25% of the royalty was a capital expenditure. In Southern Switchgear Ltd. VS. CIT and Anr. (1998) 232 ITR 359 (SC), the foreign company provided technical knowhow and other services to the assessee company. The technical assistance also contemplated establishment of a factory. On the expiry of agreement after 5 years, the assessee could use method of production, procedure etc. In the backdrop of these facts, the Hon'ble Supreme Court held that the payment was made by the Indian assessee for acquisition of knowledge which was of enduring nature and hence a capital expenditure. 16.4. An analysis of the above judgments rendered by the Hon'ble Summit Court clearly brings out that whereas the payment made for acquisition of technical knowhow etc. on ownership basis is a capital expenditure, the payment made for use of such technical know-how is a revenue expenditure. A divider in the capital and revenue expenditure in the circumstances as are presently prevailing can be placed by ascertaining the correct nature of the right vested in the licensee. If licensee is allowe....
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....e surrendering of such technical know-how on the termination of the agreement, the existence or otherwise of right to use technical knowledge which the licensee may have imbibed during the currency of the agreement; the existence or otherwise of confidentiality clause in the agreement debarring the licensee from sharing it with others during the continuance of the agreement or thereafter. In fact, there can be no single conclusive test for deciding the nature of royalty payment as to whether it is revenue or capital. It is the cumulative effect of all the above discussed factors which helps in ascertaining the true nature of royalty payment. 16.6. When we come back to the facts of the instant case it is observed that the factors which weigh in favour of the assessee are that the license was given on nontransferable basis; there is a confidentiality clause prohibiting the assessee from divulging the relevant information during continuation of the agreement or any time thereafter; on the termination of the agreement, respective rights or obligations under the agreement shall cease; and there is no power with the assessee to sub-license. On the other hand, the factors which w....
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....he ground raised by the assessee on this issue is dismissed. 29. In ground no.7, the assessee has challenged the order of the ld. CIT(A) in upholding the action of the Assessing Officer in disallowing the claim of bad debts of Rs. 2,13,72,159/-. 30. Facts of the case, in brief, are that the assessee claimed expenditure of Rs. 2,13,72,159/- on account of bad debts written off. The Assessing Officer disallowed the same which was upheld by the ld. CIT(A). It is the submission of the ld. counsel for the assessee that the amounts were actually written off by the assessee during the relevant previous year. Relying on the decision of the Hon'ble Supreme Court in the case of TRF Ltd. vs. CIT reported in 323 ITR 397, he submitted that the bad debts written off should be deleted. We find the ld. CIT(A) rejected the claim of the assessee on the ground that the assessee has not made out any case except making a bald claim that it has fulfilled the requirement of section 36(1)(vii) or 36(2) of the I.T. Act. Since the assessee is required to fulfill the twin conditions, therefore, considering the totality of the facts of the case and in the interest of justice, we deem it proper to res....
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.... the ld. CIT(A) who has decided the issue by following the order of the Tribunal in assessee's own case for assessment year 2007-08. In absence of any contrary material brought to our notice against the order of the Tribunal, the order of the ld. CIT(A) on this issue is upheld and the ground raised by the assessee is dismissed. 41. In ground no.13 to 13.3, the assessee has challenged the disallowance of payment of export commission of Rs. 3,23,53,741/- holding the same to be diversion of profits to LG Electronics Korea ('LGEK'). 42. Briefly stated, the facts of the case is that the assessee exports CTVs to LG Group entities in the Middle- East and South Asian countries and to some unrelated distributors outside India. LG Electronics Korea ('LGEK') assists the assessee to increase the export of CTVs through its huge marketing network across the globe. The assessee pays commission @ 4.50% of the exports of CTVs made to various entities in Middle-East and South Asian countries. We find the issue is covered against the assessee by the order of the Tribunal for A.Y. 2007-08 in assessee's own case. Accordingly, these grounds are dismissed. 43. In grounds no.14 to....
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.... appellant for advertisement, marketing and promotional expenses is disallowed and added to the income of the appellant." 46. The ld. counsel for the assessee submitted that the CIT(A) has confirmed/enhanced the adjustment on account of AMP expenses merely on the basis of assumption that 50% of the benefits arising from the AMP expenses ITA No.3612/Del/2017 ITA No.3613/Del/2017 incurred by the assessee is in respect of the benefits accruing to the associated enterprise and that the associated enterprise has complete control of the affairs of the assessee. 47. He submitted that the approach of the CIT(A) is not in accordance with law for the following reasons: (a) The assessee has exclusive right to manufacture and sell products bearing 'LG' brand in India and the benefit of advertisement and brand promotion expenses incurred in India to the assessee in the form of higher sale and consequently higher profit. (b) The assessee incurs advertisement expenditure to promote its own sales and thereby the profits of its own business and not for brandbuilding of other group entity. The direct advantage from promotion of brands in India was to the assessee and ....
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....d to the Special Bench. The first question has been answered by holding that the transfer pricing adjustment in relation to the AMP expenses incurred by the assessee for creating or improving the marketing intangibles for and on behalf of its foreign associated enterprises, is permissible. The second question as to whether the assessee should have earned a mark-up from its AE in respect of such AMP expenses incurred for and on behalf of the AE, has also been answered by eventually restoring the matter to the file of TPO for de novo adjudication in the light of certain guidelines outlined in the order. Now, this Division Bench is bound by the Special bench decision and cannot tinker or amend the conclusions so drawn, as was argued by the ld. AR in an attempt to persuade us for re-deciding this issue or sending it back to the AO/TPO for a fresh decision as per law. In fact, the Special bench order, passed in this appeal alone, constitutes an integral part of this order. Respectfully following the view taken by the Special Bench, we send the matter back to the TPO/AO for deciding it in accordance with the Special bench verdict. Accordingly, Ground No. 3 is allowed for statistical purp....
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....evenue receipt as against capital receipt treated by the assessee. 61. After hearing both the sides, we find this ground is identical to ground no.3 in ITA No.3612/Del/2017. We have already decided the issue and the ground has been dismissed. Following similar reasoning this ground by the assessee is dismissed. 62. Ground no.4 relates to disallowance of provision for service warranty amounting to Rs. 5,05,62,710/-. 63. After hearing both the sides, we find this ground is identical to ground no.4 in ITA No.3612/Del/2017. We have already decided the issue and the ground raised by the assessee has been allowed. Following similar reasoning this ground raised by the assessee is allowed. 64. Ground no.5 relates to disallowance of royalty amounting to Rs. 107,47,71,000/- paid to LG Electronics Inc. Korea treating the same as capital expenditure. 65. After hearing both the sides, we find this ground is identical to ground no.5 in ITA No.3612/Del/2017. We have already decided the issue and the ground raised by the assessee has been allowed. Following similar reasoning this ground raised by the assessee is allowed. 66. Ground no.6 relates to disallowance of export commissio....