It is seen that the assessee paid commission of Rs.58.65 lakh to overseas agents for export orders obtained by them in overseas territories. Section 195 mandates the deduction of tax at source from any sum paid by the assessee which is ‘chargeable under the provisions of this Act‘. If the sum so paid is not chargeable to tax under the Act, there can be no question of deduction of tax at source and the consequential disallowance u/s.40(a)(i). As admittedly, the commission was paid by the assessee to overseas agents for procuring business in overseas territories, the amount of commission in the hands of the commission agents does not become chargeable to tax under the Act. The Hon’ble Bombay High Court in CIT Vs. Gujarat Reclaim and Rubber Products Ltd. (2016) 383 ITR 236 (Bom.) has held that the assessee was not obliged to deduct tax at source on commission paid to overseas agent in similar circumstances as are instantly obtaining before us. In view of the foregoing discussion, we are satisfied that the ld. CIT(A) has taken an unexceptionable view and hence no interference is warranted in the impugned order on this score. This ground is not allowed.
FULL TEXT OF THE ORDER OF ITAT PUNE
These two cross appeals – one by the assessee and the other by the Revenue – arise out of the order passed by the CIT(A)-13, Pune on 27-04-2018 in relation to the assessment year 2010-11.
2. The first issue raised by the assessee in its appeal through ground no.2 is against the transfer pricing adjustment of Rs.70,52,220/- in respect of Brand royalty. Ground nos. 2 to 4 of the Revenue’s appeal also deal with the Royalty issue.
3. Briefly stated, the facts of the case are that the assessee is engaged in the business of manufacturing of mechanical transmissions, clutches, hydraulic lifts, planetary drives, axles for agricultural tractors and industrial and construction applications including components parts and spares. The return of income was filed declaring loss of Rs.3.52 crore. Certain international transactions were reported in Form No. 3CEB. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transactions. Instantly, we are concerned with international transaction of brand royalty out of the composite international transaction of “Payment of Royalty” amounting to Rs.1,98,77,764/-, which covers both the brand royalty and also royalty for know-how. The assessee applied the Transactional Net Marginal Method (TNMM) for demonstrating that the international transaction was at ALP. The TPO did not accept the assessee’s contention that payment of Royalty, as permitted under the Automatic Route of the Government of India, was to be considered at ALP. He took note of the fact that the assessee paid Royalty for last eight years and most of the Royalty Agreements had expired. He further did not find any logic in the assessee’s contention of payment of brand royalty for the use of Carraro name and logo as the same was part of the assessee’s own name. He held that the additional and new brand royalty payments were nothing but an excuse taken for perpetual payments. Considering these facts, he determined Nil ALP of the international transaction of brand royalty and accordingly proposed transfer pricing adjustment of Rs.70,52,220/-. When the matter came up before the AO for passing the assessment order, he observed that the assessee paid total Royalty of Rs.2,36,20,250/-. He took note of the fact that the TPO proposed transfer pricing adjustment in respect of Brand Royalty at Rs.70,52,220/-. The AO made two observations in his order on the royalty payment. Firstly, he treated payment of Royalty as a capital expenditure subject to depreciation @25%. Secondly, he held that the total amount of Royalty paid at Rs.2.36 crore was not paid for any business purpose. Invoking the provisions of section 37 of the Act, he made the addition for the full amount of Rs.2.36 crore. The ld. CIT(A) overturned the assessment order on the disallowance made by the AO u/s.37 of the Act and also did not approve the capitalization of the Royalty by the AO. He, however, countenanced the transfer pricing adjustment proposed by the TPO at Rs.70,52,220/-. Both the sides are aggrieved by the impugned order on their respective stands.
4. We have head both the sides through Virtual Court and gone through the relevant material on record. Insofar as the assessee‟s ground on transfer pricing addition is concerned, it is seen that such an adjustment is based on the view taken by the AO/TPO in their respective orders for the immediately preceding assessment year 2009-10. This issue came up for consideration before the Tribunal for such earlier year. Vide its order dated 27-02-2019 in ITA No.1260/PUN/2018, the Tribunal has held that royalty paid through the automatic route as per the Press note issued by the Govt. of India, Ministry of Commerce and Industry, was to be taken at ALP. This issue has been discussed in paras 5 to 15 of the order. The Tribunal further observed in its order that the assessee paid Brand royalty under two Agreements, first, at 0.5% under the Agreement dated 01-07-2008 and then again under another Agreement dated 05-04-2001. The duplicate amount of Royalty paid was directed to be disallowed. Relevant discussion on this aspect of the matter has been made in para 12 of the order, which runs as under :
“12. It can be seen that the assessee paid royalty under agreement dated 05-04-2001 @ 2% in respect of steering axle and accessories for 35 and 55 HP tractors both towards use of technical knowhow and use of trade mark/brand name. It is further noticed that the assessee paid royalty of Rs.75.41 lakh @ 0.5% on total sales for use of name, logo and trade mark. Payment of Rs.75.41 lakh, as accepted by the ld. AR, is also in respect of sales made by the assessee of the products which were covered under agreement dated 05-04-2001, being, steering axle and accessories for 35 and 55 HP tractors. Thus, it is manifest that the assessee paid royalty for use of logo and trade mark in respect of steering, axle and accessories for 35 and 55 HP tractors, both under the agreement dated 05-042001 and once again under the new agreement dated 1.7.20008, which is plainly not permissible. Deduction can be allowed for payment of royalty for use of trade mark license etc. only once and not twice. As royalty for use of trade mark license in respect of steering axle and accessories for 35 and 55 HP tractors is covered within the payment of Rs.26.39 lakh, whose ALP has been determined by the TPO, at the transacted value, the amount of royalty paid by the assessee for use of trade mark license once again under the second agreement for which the TPO proposed TP adjustment of the full amount of Rs.75.41 lakh, cannot be allowed once again. Thus, royalty paid for use of trade mark license pertaining to steering axle and accessories for 35 and 55 HP tractors, included in the amount of Rs.75.41 lakh is required to be disallowed as a duplicate payment. The ld. AR was fair enough to concede this position. He submitted certain details, as per which a sum of Rs.4,95,166/- has been calculated as duplicate amount of royalty that could be disallowed. While making such a calculation, the ld. AR made a departure from the submission made on the earlier date as per which royalty paid at the rate of 2% for use of technical know-how and trade-mark was discontinued w.e.f. 30.6.2008. It was now stated that only royalty for use of brand name was discontinued w.e.f. 1.7.2008, but royalty for use of technical know-how continued to be paid even after 1.7.2008. The AO/TPO is directed to verify this contention of the assessee on the basis of the relevant documents and then work out the duplicate amount of royalty paid for use of brand/logo, included in the sum of Rs.75.41 lakh, which is to be disallowed.”
5. As the facts and circumstances of the assessee‟s ground for the year under consideration are admittedly similar to those of the preceding year, respectfully following the precedent, we set-aside the impugned order on this score and remit the matter to the file of AO/TPO for re-determining the ALP of the international transaction of payment of Royalty and disallow the duplicate payment of brand Royalty in terms indicated above in the Tribunal order for the assessment year 2009-10 above. This disposes of the assessee’s ground of appeal.
6. Now we turn to the Revenue’s grounds. Ground no. 2 is against the deletion of disallowance of the full amount of Rs.2.36 crore made by the AO u/s.37 of the Act. In this regard, it is observed that the assessee paid royalty for use of technical know-how and brand. The AO held such payments as not having been incurred for business purposes. It is noted that the assessee is engaged in manufacture of equipments through licenses from group concerns. Royalty has been paid in respect of technical know-how obtained for manufacturing of equipment. Since the technology and designs have been used by the assessee in its manufacturing, the royalty for the same cannot be said to be for non business purposes. Similarly, brand royalty has been paid for the use of brand on the products manufactured by it. Admittedly, the assessee was using the Brand name and logo on its manufactured products. These payments, therefore, cannot be considered as meant for non-business purpose, subject to the transfer pricing adjustment. We, therefore, approve the view point taken by the ld. CIT(A) in deleting the disallowance made by the AO u/s.37 of the Act. The Revenue’s ground is thus dismissed.
7. Now we turn to the ground nos. 3 and 4 taken by the Revenue in its appeal against the direction given by the ld. CIT(A) for not treating Royalty as a capital expenditure and holding the amount to be covered disallowance u/s 37 . In this regard, it is observed that similar issue came up for consideration before the Tribunal in the assessee‟s own case for the immediately preceding assessment year 2009-10, which has been discussed in paras 13 and 14. The Tribunal overturned the action of the AO in capitalizing the royalty payment by relying on its orders passed for the assessment years 2003-04, 2004-05 and 2005-06. Since the facts and circumstances of the instant grounds are admittedly similar, following the view taken for the immediately preceding assessment year 2009-10 and earlier years, we countenance the stand point of the ld. CIT(A) in not treating the Royalty as capital expenditure. These grounds of the Revenue fail.
8. To sum up, only the transfer pricing adjustment in respect of Brand royalty is required to be made in accordance with the direction given above out of the total disallowance of Rs.2.36 crore made by the AO. Rest of the addition is hereby ordered to be deleted.
9. Ground nos. 3 & 4 of the assessee‟s appeal are against the confirmation of transfer pricing addition on account of payment of Management fees amounting to Rs.4,86,14,759/-. The Revenue is also aggrieved by the decision of the ld. CIT(A) on payment of Management service fee through its ground no.5.
10. The facts of these grounds are that the assessee declared an international transaction of “Payment of Professional fee” at Rs.4,86,14,759/-. The TNMM was applied on entity level for demonstrating that the transaction was at the ALP. The TPO, following his view for the immediately preceding year, held that – the assessee did not prove rendition of services for which such payment was made; the TNMM was wrongly applied by the assessee; the CUP was the most appropriate method – and accordingly determined Nil ALP of the international transaction. At the time of passing the assessment order, the AO observed that total Legal and Professional charges paid by the assessee, including those paid to AE, stood at Rs.5,86,35,491/-. Adopting the reasoning given by the TPO for determining NIL ALP of the international transaction, the AO held that the assessee did not furnish any evidence of the receipt of other Legal and Professional services as well. He, therefore, disallowed the full amount of Rs.5.86 crore. The ld. CIT(A) upheld the transfer pricing adjustment proposed by the TPO. He, however, did not approve the view point of the AO that the entire amount of payment of Rs.5.86 crore was liable to be added by observing that no independent reasoning was given by the AO and the amount also included Testing fees paid to group concern amounting to Rs.40.85 lakh and Generic service charges paid at Rs.8.95 lakh. Both the sides have come up in appeal before the Tribunal on their respective stands.
11. Insofar as the Revenue’s appeal is concerned, it is observed that the ld. CIT(A) has given cogent reasons for deleting the disallowance inasmuch as the AO simply adopted the TPO’s reasoning without showing as to how the same applied to the non-AE transactions as well. Further, the expenditure contains payment for Testing fees and also Generic service fee. To this extent, we approve the view taken by the ld. CIT(A). Thus, the ground of the Revenue is dismissed.
12. Now coming to the assessee’s ground of appeal, it is seen that the AO, following the view taken by him for the preceding year, inter alia, held that the assessee for the year under consideration –
(i) did not prove the factum of receipt of the services from its AEs;
(ii) wrongly adopted the Foreign/AE as tested party; (iii) wrongly applied the TNM method. The Tribunal in its order for the assessment year 2009-10 has dealt with such issues. It referred to the extensive material placed before it for holding that assessee did avail services from its AE. Similar material for the instant year, running into more than 1500 pages, has been placed on record which amply demonstrates that the assessee did avail Management services. Following the view taken for the preceding year, we hold that the assessee did avail services from its AE and the authorities below were not justified in coming to the conclusion that no services were obtained by the assessee.
13. The TPO did not approve the Foreign/AE taken as a tested party for the preceding year as no comparable uncontrolled transaction was cited. The Tribunal has discussed this issue in paras 21 to 24 of its order and held that the Foreign/AEs could not be taken as tested parties. Since the facts and circumstances are admittedly similar, following the precedent, we hold that the Foreign/AE was wrongly taken by the assessee as tested party for this year as well.
14. The assessee applied the TNMM on aggregate basis and included the extant international transaction within that as was done for the preceding year. The Tribunal has discussed this issue in its order for the preceding assessment year through paras 28 to 30 and came to the conclusion that the aggregation approach adopted by the assessee was wrong and that the transaction of Management Fees was required to be benchmarked independently. As the facts and circumstances for the year under consideration are similar, we follow the same view and hold that the international transaction of Management services was wrongly clubbed and should be separately benchmarked.
15. Now we come to the TNMM adopted by the assessee as most appropriate method, which got disapproved by TPO. It is seen that the assessee for the preceding year also initially applied Cost Plus method and thereafter TNMM, firstly by taking Foreign/AE as Tested party and then taking itself as Tested party. The TPO rejected such method and applied the CUP method as is the position for the current year as well. The Tribunal for the preceding year set-aside the impugned order and remitted the matter to the file of AO for a fresh determination of the ALP of the international transaction of payment of Management services fee. Here, it is pertinent to mention that the assessee moved a Miscellaneous Application against the order of the Tribunal for the assessment year 2009-10 urging that a precise method for the ALP determination of Management Fees ought to have been directed by the Tribunal rather than leaving the matter open to the TPO’s wisdom. The said Miscellaneous Application came to be dismissed by the Tribunal vide its order dated 18-01-2021 in M.A.No.01/PUN/2020 by holding that the TPO was free to adopt the most appropriate method on the facts and circumstances of the case.
16. As the facts of this issue for the year under consideration are similar to those of the preceding year, following the view for such earlier year, we set-aside the impugned order on this score and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction of payment of Management Service Fee in accordance with the observations and directions given in the Tribunal order passed for the assessment year 2009-10. Needless to say, the assessee will be allowed reasonable opportunity of hearing in such fresh determination. The ground taken by the Revenue is dismissed and that by the assessee is allowed for statistical purpose.
17. Ground no.6 of the Revenue’s appeal is against allowing additional depreciation. The assessee claimed additional depreciation on foreign exchange fluctuation loss amounting to Rs.1,82,06,905/- on repayment of loans, which were taken for purchase of capital assets in the years 2002 and 2007. Such loss of was capitalized by the assessee on which additional depreciation u/s.32(1)(iia) was claimed amounting to Rs.27,53,105/-. The AO held that the additional depreciation was admissible only on `new‟ plant and machinery acquired and installed after 31st day of March 2005 by an assessee engaged in the manufacturing or production of any article or thing etc. The claim of the assessee was thus jettisoned. The ld. CIT(A) overturned the assessment order on this point.
18. It is seen that the assessee took loans in the calendar years 2002 and 2007 for purchase of certain new plant and machinery items in the same financial year or subsequent years. It was during the year under consideration that the assessee made repayment of such loans which resulted in excess payment of Rs.1.82 crore towards foreign exchange fluctuation rate difference. The assessee capitalized the same and also claimed additional depreciation on such amount. Section 43A opens with a non obstante clause and provides that where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and in consequence of a change in the rate of exchange there is an increase or reduction in the liability of the assessee as expressed in the Indian currency at the time of making payment, then the amount by which the liability has so increased or reduced shall be taken into account at the time of making payment and shall be added to or as the case may be reduced or deducted from the actual cost of the asset u/s.43(1) of the Act. Thus, it is ostensible that section 43A requires increase or decrease in the actual cost of asset with foreign exchange fluctuation at the time of repayment of loan. The AO has not denied that the assessee repaid loans in this year on which additional liability of Rs.1.82 crore was incurred and discharged. Now comes to the question of allowing additional depreciation u/s.32(1)(iia) which provides that : “in the case of new machinery or plant. . . . . . . which has been acquired and installed after the thirty first day of March, 2005. . . . . . a further sum equal to 20% of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii)”. The prescription of section 32(1)(iia) fairly indicates that the additional depreciation will be allowed where a new machinery or plant is acquired/installed after 31st March, 2005. We have noticed above that the assessee availed two loans, viz., first in the year 2002 and second in 2007 and repaid the same in the year under consideration resulting in incurring foreign exchange fluctuation loss. Such a loss is required to be capitalized in terms of section 43(1) read with section 43A. As regards the question of additional depreciation, the same is admissible in respect of assets acquired on or after 1.4.2005. Patently, no additional depreciation can be allowed to the assessee in respect of loan taken in the year 2002 and the claim will be valid for the loan taken in foreign currency for the purchase of asset in the year 2007. There is no discussion in the assessment order or the impugned order about the bifurcation of the amount of liability discharged by the assessee on account of foreign exchange fluctuation rate difference. On a pertinent query, the ld. AR did not have such figure of forex loss incurred by the assessee, liable to be capitalized for the purposes of additional depreciation, in respect of loan taken in the year 2007. We, therefore, set-aside the impugned order and remit the matter to the file of the AO for examining the detail of Rs.1.82 crore and allow additional depreciation on forex loss only in respect of repayment of loan taken in the year 2007. In other words, no additional depreciation will be allowed in respect of new asset purchased by the assessee against the loan taken in the year 2002 which got discharged during the year under consideration resulting in foreign exchange fluctuation loss.
19. The next ground of the Revenue is against the deletion of addition on account of commission. The factual scenario of this ground is that the assessee paid commission of Rs.58,65,026/- to overseas agents. On being called upon as to why no deduction of tax at source was made, the assessee submitted that the commission was paid to overseas agents for export orders/business procured by them in overseas territories and hence, deduction of tax at source was not warranted. The AO held that the provisions of section 195 were attracted. In the absence of the assessee making any deduction of tax at source, the AO disallowed Rs.58.65 lakh u/s.40(a)(i) of the Act. The ld. CIT(A) overturned the assessment order on this issue.
20. It is seen that the assessee paid commission of Rs.58.65 lakh to overseas agents for export orders obtained by them in overseas territories. Section 195 mandates the deduction of tax at source from any sum paid by the assessee which is “chargeable under the provisions of this Act”. If the sum so paid is not chargeable to tax under the Act, there can be no question of deduction of tax at source and the consequential disallowance u/s.40(a)(i). As admittedly, the commission was paid by the assessee to overseas agents for procuring business in overseas territories, the amount of commission in the hands of the commission agents does not become chargeable to tax under the Act. The Hon’ble Bombay High Court in CIT Vs. Gujarat Reclaim and Rubber Products Ltd. (2016) 383 ITR 236 (Bom.) has held that the assessee was not obliged to deduct tax at source on commission paid to overseas agent in similar circumstances as are instantly obtaining before us. In view of the foregoing discussion, we are satisfied that the ld. CIT(A) has taken an unexceptionable view and hence no interference is warranted in the impugned order on this score. This ground is not allowed.
21. Ground no.5 of the assessee’s appeal about initiation of penalty proceedings u/s.271(1)(c) is premature. Ground no.6 about levy of interest u/s.234A requires verification at the end of the AO as it is the claim of the assessee that return was filed in time. Ground no. 7 about the levy of interest u/s.234B is consequential.
22. In the result, both the appeals are partly allowed for statistical purposes.
Order pronounced in the Open Court on 15th July, 2021.