TaxTMI 
TaxTMI 
2017 (5) TMI 1678
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 j....
X X X X Extracts X X X X
X X X X Extracts X X X X
....proposed to reject the said claim. Aggrieved, 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 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 thi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0(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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tal 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 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 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he net result of the computation under the head 'Capital gains' is a loss to the assessee, the whole loss shall, subject to the other 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 the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eneral 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 w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-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 ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nefit 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 enterprises) as well on a much higher profit margins. The TPO noted that as against a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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 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 ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onal transaction and the comparable uncontrolled transactions, or between the enterprises entering into 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 CP....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 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, in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 assess....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tances 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 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 leg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts 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 dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er 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. 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 app....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hmedabad ('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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 releva....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vices abroad in the form of pursuing and soliciting participants and that the commission is remitted to him abroad are wholly irrelevant for the 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 ag....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nical services. Even 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 asses....