TaxTMI 
TaxTMI 
2016 (2) TMI 1340
X X X X Extracts X X X X
X X X X Extracts X X X X
....are common in nature, hence these appeals are combined, heard together, and disposed off by this common order for the sake of convenience. 2. The Revenue has raised two substantive grounds on the issues pertaining to Transfer Pricing for the assessment years 2004-05 and 2005-06 and three grounds for assessment year 2008-09. ''2.1 The CIT(A) erred in directing the assessing officer to treat the payment of royalty at Arm's Length (0.75%), rejecting the determination of Arm's Length at NIL. 2.2. The CIT(A) failed to appreciate that Reserve Bank of India approval has nothing to do with Income-tax provisions, with regard to determination of Arms Length Price (ALP). 2.3. Having regard to the following decisions, the learned CIT(A) ought to have upheld the action of the Assessing Officer. (a) SKOL Breweries Ltd. v. ACIT (ITA No.6175/Mum /2011 dt.18.01.2013(Mum) (b) CIT v. I\lestle India Ltd. (337 ITR 103)(Del.) 3.1. The learned CIT(A) erred in disapproving the adjustment to Arms Length Price (ALP), in respect of royalty, made by the A.O. on the basis of neqative variation. 3.2. The learned CIT(A) ought to have noted that the instant case deals with determinati....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... into force, Moreover, as per the recent guidelines, the payment of royalty if it is within the limits qualifying for automatic route, government approval 1$ not required either for extending tile duration of the quantum or change In royalty rates it the rates ale within the rates permitted which is at present 8% on the FOB value of exports. The quantum of royalty and the rate of royalty on the turnover was fixed in the year 1894 and It has not been changed upwards and the assessee company is paying only 0.75% on the GOB value or exports which is much below the rate permitted by the Government of India for automatic route. The Transfer Pricinq Officer has disallowed the royalty payment as according to him, there is failure e on the part of the assessee to furnish cost of development of technology and It is Impossible tor him to find out the correctness of figures as per A.LP regulations. Since because there is no comparable cases and the cost cannot be ascertained, there is no justification for disallowing royalty payments in full. The assessee further submitted that without prejudice to the above stand, the said amount at Rs. 19,31,513/- has already been disallowed by itself u/....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntered into joint venture with M/s. A.V. Thomas Group Companies and Mccormick & Company Inc. USA. The assessee company exports spices to Associated Enterprise and non Associated Enterprise in different parts of the world. The ld. Authorised Representative submitted that Mccormick & Company Inc. USA has setup a joint venture with M/s. A.V. Thomas Group Companies and has given their support and technology for setting up a state of the art steam sterilization facilities to cater the spices market of the world and Mccormick & Company Inc. USA does not have a similar joint venture in any part of the world except India. The agreement for payment of royalty entered in the year 1994 very much before applicability of Transfer Pricing Provisions. As per notification dated 24.06.2003, applicable to the assessee, the royalty was paid at 0.75% on FOB value of exports which is below 8% prescribed rate under the automatic route and supported the case with the decision of ACIT vs. Dufon Laboratoies (2010) 39 SOT 59 (Mum) and EKL Appliances (24 Taxmann 199). The Commissioner of Income Tax (Appeals) observed at para No.4.3 at page no. 4 and directed the Assessing Officer to consider royalty at Arms ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rtly allowed the appeal. Aggrieved by the order, the Revenue has filed an appeal before Tribunal on two substantive grounds. 5. Before the Tribunal, the ld. Departmental Representative reiterated his submissions on the grounds that the royalty payment 0.75% cannot be accepted and the price variation on spices market is highly volatile and the agreement was entered in the year 1994. The ld. Commissioner of Income Tax (Appeals) has considered percentage ignoring royalty paid to the US based company Mccormick & Company Inc. being 0.75% of FOB value of exports was approved in the year 1994 by Reserve Bank of India and the decision relied by the assessee of Mumbai Tribunal Thyssenkrupp vs. Addl. CIT in ITA 6460/Mum/2012 is distinguished and prayed for set aside of the Commissioner of Income Tax (Appeals) order and also supported the arguments with the judicial decisions. 6. The ld. Authorised Representative in reply to the submissions clarified that the company has entered into Joint Venture between M/s. A.V. Thomas Group Companies and Mccormick Companies Inc. USA and export spices to Associated Enterprise. During the year the assessee company exported Rs. 12,28,18,436/- to the Associ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent of India at page no.111 and 112 as under:- Government of India, Ministry of Commerce and Industry, (Dept. of Industrial Policy and Promotion ) Udyog Bhawan, New Delhi 110 001. Dated 02.07.2004 To M/s. AVT McCormick Ingrdients Pvt. Ltd 64, Rukmini Lakshmipathy Salai, Egmore, Chennai 600 008. Subject: Application for extension /renewal of foreign technology & trademark license agreements. Sir, I am directed to refer to your letter dated 17th June, 2004 on the subject mentioned above and to say that as per the provisions of Press Note 2 of 2003(copy enclosed) the restriction on the duration of the royalty payments for the foreign technology agreements has been removed. Accordingly, no Government approval is required for your present request. Yours faithfully, Sd/- (Pramila Raghavendran) Under Secretary to the Govt. of India Fax No.23017227. Considering the submissions, the payment of royalty is in order and TPO has erred in considering the adjustment to Arms Length Price. The ld. Authorised Representative drew attention to the financial statements and also made submissions on product wise variation filed referred at page no.75 to 83 and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yalty rate was obtained and payment was considered to be held at arm'slength, no further adjustment were warranted- TPO erred in holding that no tangible benefits were derived by assessee out of royalty payments made by it and restricting payment to 2% of net sales-Assessee's appeal allowed. and finally the RBI approval for royalty rate paid by the assessee itself implied that payments are at Arms Length Price and the ld. Authorised Representative prayed for dismissal of Revenue appeal. 7. We heard the rival submissions and perused the material on record, judicial decisions and circulars. The ld. Departmental Representative contesting the rate approved by the RBI prior to 1994 and cannot be considered for the purpose of Arms Length Price. Fact that royalty agreement between the assessee company and USA company referred in the paper book was entered much prior to the applicability of TPO provisions and as per the notification applicable to assessment year the royalty paid at 0.75% on the FOB value of exports is below the 8% rate prescribed under automatic route for the year 2004. The ld. Commissioner of Income Tax (Appeals) has directed the Assessing Officer to calculate ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecisions. 7.3 We heard the rival submissions and perused the material on record and judicial decisions cited. The contention of the ld. Departmental Representative that the Commissioner of Income Tax (Appeals) has erred in not considering the adjustment of Arms Length Price in respect of spices were the market is highly volatile and variation will have bearing on determination of Arms Length Price. The ld. Departmental Representative further relied on the order of TPO were the adjustment were considered. The ld. Authorised Representative substantiated his arguments that the adjustment is negligible compared to the turnover and global presence of the company and the Commissioner of Income Tax (Appeals) on comparison with over all positive variations had deleted the addition. Before us, the Revenue has not brought any evidence to show that price variation is on higher side and impact on the Arms Length Price. Though ld. Authorised Representative justified his arguments with the submissions and judicial decisions. Considering the summary of module and agreements entered by the assessee company with Associated Enterprise, we find the order of Commissioner of Income Tax (Appeals) is in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... overlooked the business connection which developed with the assessee company and the explanations 4 to Sec. 9(1)(i) and Explanation 2 to Sec. 195(1) such commission is liable to tax and subject to TDS and prayed for set aside of the Commissioner of Income Tax (Appeals) order. 8.4 Contra, the ld. Authorised Representative relied on the findings of the Commissioner of Income Tax (Appeals) and supported arguments with technicalities, judicial decisions and circulars. The foreign agency commission was paid to non-residents and the provisions of Sec. 195 shall not apply and relied on the decision of CIT vs Kikani Exports Pvt. Ltd 369 ITR 0096 (Mad) were it was held that services rendered by a non-resident agent can at best be called as a service for completion of the export commitment, same would not fall within the definition of ''fees for technical services'' and consequently, provision of Section 9 of the Act will not applicable in such a case and hence, Section 195 of the Act shall be applicable and also Section 195 of the Act. Further in the light of decision of CIT vs. Faizan Shoes Pvt. Ltd 89 CCH 0213 which fits to assessee's submissions directly as payments were made to non re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dered by those non-residents at abroad. In the present case, the assessee has not established the facts on record that the non-resident has rendered services at abroad and there is no business connection in India by producing relevant records, viz., either agreement entered into by the assessee with them or correspondence took between the parties. Without examining these details, we are not in a position to decide the nature of services rendered by the non-resident agent. Therefore, it is appropriate to remit the entire issue back to the file of the AO with direction to the assessee to prove that it was sales commission towards procurement of orders from abroad. Accordingly, the entire issue is remitted back to the file of the AO for fresh consideration and the AO is directed to make necessary enquiry regarding the nature of services rendered by the non-resident agent and the payments made thereof. With these observations, the appeal is allowed for statistical purposes''. Respectfully, following the decision of Co-ordinate Bench, we remit the issue to the file of Assessing Officer for verification and examination and the appeal of the Revenue is partly allowed for statistical pur....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in order to confirm the standards of the US & European Markets get lab analysis and technical, consultancy and managerial service to the assessee company. Even as per the Double taxation Avoidance agreement with US & UK, the services are available in India as observed at page no.12 of Assessing Officer order as under:- ''5.5 It clearly shows that, even as per DT AA with US & UK, the services are made available in India because, the training for Audit is also a part of the Lab Analysis and the Audit Report clearly mentions that, they have verified the induction training programme of the assessee company 5.6 Also, from the above, it is clear that, site verification has been done, which shows that the services have been rendered in India. Therefore, the payment made should be treated as payment for 'technical services' which are taxable in India. 5.7 In view of the above discussion, the assesse's argument that, none of the entities to whom payment has been made by the assessee have a Permanent Establishment (PE) in India and as per the relevant Articles of the DT AA entered into by India with the respective countries, the income earned is taxable only in those cou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ality management, factory environment and standards. The ld. Commissioner of Income Tax (Appeals) is of the opinion that the Audit report involves technical knowledge of spice and spice blends manufacture and market and evolution of the facilities available at the premises of the assessee company to confirm to the standards of the USA and European Markets. The Audit team has done site verification in India and comes into the purview of services rendered in India as technical services were availed by the assessee company. Based on this analogy, it was presumed that lab analysis fees paid in foreign currency is for technical services. Hence provisions u/s.40(a)(ia) are applicable. The ld. Commissioner of Income Tax (Appeals) further observed at para 4.3.7 and confirmed the findings of the Assessing Officer as under:- ''I have gone through the facts of the case, the AO has made efforts to study the fee paid towards lab analysis and has come to the conclusion that the fee paid is towards technical services since the outcome of lab reports Will have a direct impact on the composition and quality of the product which the appellant exports. I am also of the opinion. that. the appellant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... fit for sale in the international market and also to comply with ''Food Safety and Standards Authority of India'' Rules. The testing lab will provide the report of the product alongwith list of conformances and non conformances with the prescribed standards and if the product gets favourable report proceed with export sale. Under the provisions of Sec.195 of the Act tax is to be deducted on payment to non residents due in nature of income chargeable to tax in India, were as nature of lab analysis fees falls in the category of service rendered outside India in the Foreign country and similar to Diagnostic centre which shall give report without going into advisory or consultancy. The ld. Authorised Representative relied on the decision of jurisdictional High Court in case of Skycell Communications Ltd. vs. DCIT (2001) 251 ITR 0053(Mad) were the technical fees service has been defined. ''Technical service' referred in Section 9(1)(vii) contemplates rendering of a ''service'' to the payer of the fee. Mere collection of a 'fee' for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services'. on apply....