TaxTMI 
TaxTMI 
2023 (4) TMI 1260
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....C engine parts and pistons for two wheelers and four wheelers. 2.1 For AY 2011-12 the assessee filed its return electronically on 26.09.2011 declaring income of Rs. 35,81,29,732/-. It was processed under section 143(1) of the Income Tax Act, 1961 ("the Act") on 10.01.2012. The return was revised subsequently on 08.03.2013 declaring income of Rs. 33,51,24,893/-. The case was selected for scrutiny. The assessment was completed on total income of Rs. 38,18,77,830/- by the Ld. Assessing Officer ("AO") on 20.03.2014 under section 143(3) of the Act wherein he rejected the claim of the assessee made in the revised return that the receipt by it of the sales tax subsidy of Rs. 2,32,51,000/- was capital subsidy and proceeded to compute the total income starting from income as per original return and making disallowance there from, penalty and interest in delayed payment of Rs. 2,95,940/-, disallowance of Rs. 2,54,561/- under section 14A and disallowance of foreign commission of Rs. 2,31,97,600/-. 2.2 On appeal, the Ld. CIT(A) held that the revised return filed by the assessee was valid return; that the subsidy of Rs. 2,32,51,000/- received by the assessee in the form of sales tax conce....
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.... not subject to tax. It is pointed out by the Ld. AR that the Ld. Pr. CIT vide order dated 30.03.2015 rejected the assessee's application, holding that the subsidy was revenue receipt. Alternatively, the Ld. Pr. CIT also held that the Explanation 10 to section 43(6) was applicable. 5.2 The Ld. AR further submitted that the assessee filed writ petition before the Hon'ble Delhi High Court and the Hon'ble Delhi High Court set aside the order dated 30.03.2015 of the Ld. Pr. CIT passed under section 264 of the Act and resultantly the order(s) of the Ld. AO . The Hon'ble Delhi High Court held that the sales tax subsidy received by the assessee be treated as capital receipt and not be added to the income of the assessee. The Hon'ble Delhi High Court went on to observe further that the consequential orders will now be passed by the Ld. AO. 5.3 The Ld. DR did not controvert the above submissions of the Ld. AR. 6. In the light of the factual matrix as submitted by the Ld. AR of the assessee we have no hesitation in holding that the issue that the sales tax subsidy received by the assessee from Haryana Govt. is capital receipt is covered in favour of the assessee and against the Reve....
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....rom the cost of the assets in terms of Explanation 10 to section 43(1) of the Act. 7.3 On appeal, the Ld. CIT(A) confirmed the view of the Ld. AO and observed in para 5.4 at page 10 of the appellate order as under:- "5.4 From the above silent features it is apparent that not only the quantification subsidy was calculated on the percentage of investment made in plant and machinery but the benefit of the sales tax exemption was only allowable on the investment made in plant and machinery. Hence the subsidy received in question was both directly and indirectly linked to the investment in the plant and machinery made by the assessee company. Moreover in the Scheme of Incentive it has been specially clarified under a separate sub head "Sales Tax concession on expansion/ Diversification" that for the industrial unit undergoing expansion/diversification will get benefit of subsidy only on the investment made by the unit in plant and machinery. Since the subsidy in question is linked with the investment made in plant and machinery, hence, the said subsidy amount has to be adjusted against the cost of assets and the depreciation is to be allowed on the re-worked cost of assets .....
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....for the purpose of allowing depreciation. To quote: [From para 13 of the judgment] "...The real question is as to the character and nature of a subsidy whether it was really intended to subsidize the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost which is the basis for determining the subsidy being only a measure adopted under the scheme to quantify the financial aid." 7.7.1 Let us apply the above yardstick to the facts of the assessee's case. Before the Ld. AO/CIT(A) the assessee submitted that the purpose/aim of the impugned subsidy was to promote industrial growth in the state. The main idea behind the subsidy scheme is overall economic development which directly or indirectly increase the employment opportunities. The basic objective of the scheme is to encourage establishment/expansion of new/existing undertaking by attracting new investment. It was thus explained that the object of grant of the impugned subsidy by way of sales tax concession under Rule 28C of the Haryana Sales Tax Rules was to promote industrial development in the ....
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.... assessee does not represent payment directly or indirectly to meet any portion of the 'actual cost' but it was intended as an incentive. However, the quantification of the amount of subsidy was determined at a percentage of the fixed capital cost. This is amply supported by the letter dated 29.11.2006 of the Director of Industries & Commerce Haryana to the assessee which is reproduced below:- "Registered From The Director of industries & Commerce, Haryana. To M/s. Sunbeam Auto Ltd., 38/06 KM Stone, Delhi-Jaipur Highway, Viii. Narsinghpur, Gurgaon. Memo. No. FA/NSTE/ CCN/S-16/17817-A Dated, Chandigarh the : 29.11.06 Subject: Sales Tax Concession - Case of M/s. Sunbeam Auto Ltd., 38/06 KM Stone, Delhi-Jaipur Highway, Vill. Narsinghpur, Gurgaon. Your case was placed before High Powered Committee in its meeting held on 9.11.2006 under the Chairmanship of Hon'ble Chief Minister, Haryana. The decision of the High Powered Committee is reproduced below:- "Director of industries & Commerce Haryana, explained to the committee that M/s. Sunbeam Auto Casting have invested Rs.43.47 crore....
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....of industries & Commerce, Haryana" 8.1 Hence, we do not agree with the view of the Ld. CIT(A) that since the subsidy is linked with the investment made in plant and machinery, it has to be adjusted against the cost of assets for the purpose of allowing depreciation. The Ld. AR has submitted that neither the CIT(A) nor the Ld. AO have identified any asset the cost of which was met directly or indirectly by the impugned subsidy. This is evident from the appeal effect order dated 06.09.2016 passed by the Ld. AO under section 250 of the Act brought on record by the Ld. AR. 8.2 Perusal of the Explanation 10 along with its proviso to section 43(1) would reveal that the provision requires that the subsidy will go to reduce the actual cost to the extent to which the cost is met directly or indirectly by the subsidy. The proviso enables pro rata allocation, where the subsidy does not directly relate to any particular asset. 8.3 The assessee's case is that the impugned assets were acquired by the assessee during the period from 01.12.1999 to 27.04.2002 and the cost was met from assessee's own funds whereas subsidy was sanctioned on 29.11.2006 and entitlement certificate under Rule 2....
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....e amendment is effective from AY 2016-17 and hence will not apply to a case prior thereto. Since the case at hand pertains to AY 2011-12, the above amended law will not apply to it. 8.5 We observe that the Pr. CIT's order dated 30.03.2015 under section 264 of the Act in the case of the assessee pertaining to AY 2007-08 to 2010- 11 wherein he held that the subsidy was liable to be reduced from the cost of the assets in terms of Explanation to section 43 stands set aside by the decision of Hon'ble Delhi High Court rendered on 07.12.2017 (copy at page 145-148 of Paper Book) 9. For the reasons recorded above, we decide ground No. 2 in favour of the assessee and hold that the impugned capital subsidy cannot be deducted from the cost of assets under Explanation 10 to section 43(1) of the Act. 10. Ground No. 3 relates to disallowance of Rs. 2,31,97,600/- under section 40(a)(i) of the Act. The Ld. AO discussed this issue in para 9 of his order. He found from the P & L Account that the assessee has debited the aforesaid sum as 'foreign commission'. On being asked the assessee submitted two agreements with two parties, namely M/s. Asian Manufacturing LLC and M/s. ETCSLLC both of USA....
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....market for the Product; (c) Procure RFQ's from the prospective customers; and (d) assist SBA in i) making presentations to the potential customers; ii) establishing pricing and other commercial negotiations for finalization of the order; iii) providing sales and after sales service to the customer on behalf of SBA; and iv) any other commercial or non-commercial communication, negotiation or any such matter to be dealt with the customer. • As per para 10- Confidentiality and Secrecy AM and Solanki acknowledge and agree that all tangible and intangible information including all documents, data, papers, statements, business/customer information, trade secrets and processes of SBA relating to its business provided to, obtained by or developed by AM for purposes of or pursuant to the performance of services under this Agreement or otherwise constitutes confidential and proprietary information of SBA ("Confidential Information") AM and Solanki shall maintain due confidentiality at all times and shall not disclose any confidential Information to any person or entity or earlier discharge or termination thereof except that AM may disclose suc....
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....customers. Therefore, it is but natural that while receiving the above stated well paid for business services, the recipient of such service which is the assessee is automatically put on a learning curve. As can be seen that as per the agreement, M/s. AM is mandated to assist and advise on commercial sales and contract development, make presentations for key, preparation of business proposals and documents to be submitted to the customers. The imparting of such important business services by a business consultancy provider and its assimilation by the recipient of such services is bound to equip the recipient with such knowledge which may enable it to use on its own. Also, there is no bar in the agreement which prohibits the recipient (assessee) to use on its own such knowledge as it has acquired through its close business association with M/s. AM. Therefore, the importance of learning and absorbing for its own future use and benefit by the recipient cannot be over emphasized. 4. As regard the Make available' clause, it is further stated as under;- Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to....
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....uire during the manufacturing and sales practices of the Principal, its operation and procedures shall be deemed to be proprietary and confidence to the Principle and Marketing Representative agrees to retain in confidence unless otherwise publicly available. The aforesaid points clearly show that the ambit of agreement is wider than mere soliciting of business. The objective of the work assigned to M/s ETCS is that of providing the services of marketing as well as development of business of the assessee concerned in USA. The assessee is also liable to get enduring benefit for the technical knowledge and experience of M/s ETCS. The domain work of M/s ETCS would include not only securing order of the assessee but in its larger ambit it would have to identify markets, make introductory contacts, assist in preparation of presentations, targets clients etc. These all would require vast technical knowledge and experience of the product as well as the market. Further this would also entail transfer of technical information and knowledge between M./s ETCS and the assessee providing enduring benefits to the assessee. 6. It is vital to mention that in the case of Intertek ....
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.... to monitor the status and progress of the project, meaning thereby, the commission agent is responsible for ensuring supply of the software and also for receiving the payments. All these activities could be carried on only by a person who has vast technical knowledge and experience. Accordingly, the payment made to a commission agent constitutes towards technical services." 10.2 Aggrieved the assessee is in appeal before the Tribunal. 11. At the very outset, it is submitted by the Ld. AR that the assessee has been paying commission to these two agents under the same agreement since AY 2004-05 which has been allowed in assessments framed under section 143(3) of the Act for AY 2005-06 to AY 2010-11. No new facts or law has been brought out by the Ld. AO/CIT(A) in AY 2011-12 under consideration. They have merely taken a different stand on the same facts which violates the principle of rule of consistency as held by the Hon'ble Supreme Court in Excel Industries 358 ITR 295 (SC). 11.1 On merits, the Ld. AR submitted that commission to foreign sales agents is paid for procuring successful orders only after the agreed price is released by the foreign purchaser. The agent carries....
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....t whatever was payable by a resident to a non-resident by way of technical fees would not always come within the purview of section 9(1)(vii). It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax as envisaged in Article 12 of DTAA with Japan. In order to overcome the judgment (supra) an explanation below section 9(2) was introduced by the Finance Act, 2010 retrospectively. Referring to the decision of Hon'ble Delhi High Court in DIT vs. Nokia Networks OY (2013) 358 ITR 259 (Del), the Ld. AR submitted that the amendment cannot be read into the DTAA. He also referred to the decision of Mumbai Bench of the Tribunal in IHI Corporation vs. Addl. DIT (Int. taxation) (2013) 32 taxmann.Com 132 (Mumbai Trib.) wherein the Tribunal held that in view of the amendment to the relevant provisions by means of the substitution of Explanation to section 9(2) governing the year made under consideration also, the income from offshore services rendered outside India would fall within the domain of section 9(1)(vii) of the Act. The Tribunal also observed that in assessee's own case for earlier years income on account of offshore services is not chargeable t....
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.... have perused the agreement dated 31.08.2004 between the assessee (SBA) and Asian Manufacturing LLC USA (AM) at page 152-162 of Paper Book as also the agreement dated 01.06.2004 between the assessee (Principals) and FTCS LLC (Marketing Representative) at pages 163-166 of Paper Book. The relevant portion of the agreement between SBA and AM is extracted below: "1. Appointment 1.1 SBA hereby appoints AM, and AM hereby accepts such appointment, as SBA's non-exclusive sales representative for the sale of Products to customers located in the Territory. However, AM will set as SBA's exclusive agent with respect to the customers set forth in Annexure "C". 2. Products and Territory 1.2 The product covered by this agreement consist of the products manufactured or outsourced as outlined in Annexure-A and modified from time to time as agreed mutually by parties (the "Product(s)"). 1.3 SBA shall have the sole right to determine its Product prices and terms of sale. All orders are subject to acceptance by SBA. 1.4 The appointment is for the region of North America (the ''Territory"). 1.5 AM shall communicate to SBA in the first insta....
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....f the orders: iii) providing sales and after sales service to the customer on behalf of SBA; andiv) any other commercial or non-commercial negotiation or any such matter to be dealt with the customers 4. Commission 4.1 AM shall be paid a commission of two percent (2%) on the orders which have been procured through AM's efforts for the Products in the Territory. In certain circumstances as listed in Annexure C, this rate may differ for specific customers^ or purchase orders as appropriate and mutually agreed upon. 4.2 SBA shall pay commission on the existing purchase orders of SBA as listed in Annexure B. Further, SBA may, at its option, pass to AM any purchase orders for which commission of 1% shall be payable by SBA to AM by mutual consent of AM, in which case such commission shall be payable to AM provided that AM agrees to and does, in fact, assist SBA in all facets of the business relationship with the customer, including the providing of those services as described in Section.3(d)(iii) and 3(d)(iv). 4.3 The Commission shall be paid to AM on the gross invoice price charged to customer. The invoice price used in this Agreement means p....
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....) and ETCS LLC (Marketing Representative) are hereunder: "Appointment and Acceptance Principals hereby appoint and authorize Marketing Representative the right to sell the principal's products to customers as outlined in Schedule A. Representative hereby agrees to sell and promote the sale of the Principal's products and accepts such appointment The principal may from time to time, include such other customer as it mutually decides with Marketing Representative and include it in Schedule A. Compensation A commission rate of five percent will be paid by tire Principle to the Representative on the sale of products, to the customers as appearing in Schedule A, excluding height, credits and returns. Commission structure is outlined as follows. Retainer Fee $ 2500/- 6 Months w.e.f. 01.06.04 Commission Fee 5.0% - Paid Monthly (based on sales) (Retainer fee will accrue on signing the agreement but will not be payable to Manufacturer's Rep till first business is won for the Principle as a result of this relationship). Relationship of Parties It is intended that the Marketing Representative shall be an....
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....r Explanation 2 to section 9(1)(vii) and/or in Article 12(4) of the India- USA DTAA is found in the impugned payment of commission by the assessee to AM and ETCS. It has been submitted by the assessee before Ld. AO/CIT(A) that both the parties, namely AM and ETCS provide leads for prospective buyers of the assessee's products in USA. These are not in the nature of any consultancy or managerial services. No managerial services or technical services are involved since the non-resident parties (AM and ETCS) were merely commission agents appointed to procure purchase orders for assessee's products. Further, the impugned payment is not in relation to any services which make available any technical skill or know-how. Nothing of the sort was involved in the assessee's case. In Outotec India P Ltd. Vs CIT (2015) 41 ITR (Trib) 449 (Delhi), Delhi Bench of the Tribunal pointed out that the expression "make available" in the context of 'fees for technical services' contemplates that the technical services should be of such a nature, that the payer comes to possess the technical knowledge so provided which enables it to utilize the same thenceforward. If the services are consumed without leavin....
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....eld that unilateral amendment of the domestic statute cannot be read into the Treaty with another sovereign state. Moreover it is now well settled that the provision of the Act or of the DTAA, whichever is more beneficial to the assessee shall apply. In this view of the matter, the amended law also cannot have adverse impact on the allowability of the claim of commission payment to the foreign agents. 16. Record shows that the assessee has been paying commission to these two agents under the same agreement since AY 2004-05 and the Ld. AO has consistently been allowing the payment of foreign commission in assessments framed under section 143(3) of the Act for AY 2005-06 to 2010- 11. It is only in the AY 2011-12 that a different stand on the same facts have been taken. We are conscious that the principle of estoppel and resjudicata do not have any application in income tax proceedings, since each assessment year is a separate unit. However, it is necessary that consistency should be maintained when the facts are not different. 17. We, therefore, hold that on the facts and in the circumstances of the assessee's case the impugned disallowance under section 40(a)(i) of the Act mad....