Asstt.CIT, Cir.-1,, Aurangabad v. Greaves Morganite Crucible Ltd.,, Aurangabad

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV JUDICIAL MEMBER AND SHRI G.S. PANNU ACCOUNTANT MEMBER ITA NO. 1075/PN/09 (ASSTT. YEAR:2005-06) ASSTT. COMMISSIONER OF INCOME-TAX .. APPELLANT CIR.1 AURANGABAD VS. GREAVES MORGANITE CRUCIBLE LTD. RESPONDEN T B-11 MIDC WALUJ AURANGABAD AABCG0895P APPELLANT BY : SHRI ABHAY DAMLE RESPONDENT BY : SHRI RISHIKESH D. JAISWAL ORDER PER G.S. PANNU A.M: THIS IS AN APPEAL BY THE REVENUE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AURANGABAD DA TED 16.6.2009 WHICH IN TURN HAS ARISEN FROM AN ORDER OF THE ASSESSING OFFICER DATED 06.12.2007 PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT 1961 (IN SHORT THE ACT) PERTAINING TO THE ASSESSMENT YEAR 2005-06. 2. IN THIS APPEAL ALTHOUGH THE REVENUE HAS RAISED MULTIPLE GROUNDS OF APPEAL BUT ESSENTIALLY THE DISPUTE RELATES TO AN A DDITION OF RS 10 71 057/- DELETED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) WHICH WAS PAID BY THE ASSESSEE AS NON-CONVEYANCE CHARGES. 3. BRIEFLY STATED THE FACTS ARE THAT THE RESPONDENT -ASSESSEE IS ENGAGED IN THE MANUFACTURE OF SILICON CARBIDE CRUCIBLES CLAY GRAPHITE CRUCIBLES AND ACCESSORIES. IN THE COURSE OF ASSESSMENT PROCEEDING S IT WAS NOTICED THAT THE ASSESSEE PAID A SUM OF RS 10 71 507/- TO ANOTHER GR OUP CONCERN M/S GREAVES COTTON LTD. MUMBAI AS NON-CONVEYANCE CHARG ES IN TERMS OF AN ITA NO1075/PN/09 GREAVES M ORGANITE CRUCIBLE LTD. AURANGABAD 2 AGREEMENT WITH THE SAID CONCERN. AFTER CONSIDERING THE EXPLANATIONS FURNISHED BY THE ASSESSEE THE ASSESSING OFFICER CONCLUDED TH AT SUCH PAYMENT WAS IN THE NATURE OF ROYALTY AND THEREFORE TAX WAS LIABL E TO BE DEDUCTED AT SOURCE UNDER SECTION 194J OF THE ACT FOR THE SAID PAYMENT. SINCE NO TAX WAS DEDUCTED AT SOURCE AS PER THE ASSESSING OFFICER THE SAID S UM WAS DISALLOWABLE IN TERMS OF SECTION 40(A)(IA) OF THE ACT. SECONDLY TH E ASSESSING OFFICER ALSO OBSERVED THAT THE PAYMENTS WERE MADE TO A RELATED P ARTY. THE ASSESSEE EXPLAINED THAT IT WAS EXPORTING ITS PRODUCTS THROUG H GREAVES COTTON LTD. IN EARLIER YEARS BUT FOR THE YEAR UNDER CONSIDERATION IT HAD EXPORTED ITS GOODS THROUGH INDEPENDENT AGENTS WHICH CAUSED A LOSS OF MARKET TO GREAVES COTTON LTD. HENCE NON-CONVEYANCE CHARGES @ 3% OF TOTAL EX PORT THROUGH INDEPENDENT AGENTS WAS PAID TO GREAVES COTTON LTD. AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAD PAID ON-CONVEYANCE CHARGES TO THE OTHE R CONCERN WITHOUT ANY RATIONAL AND THEREFORE THE SAME VIOLATED THE PROV ISIONS OF SECTION 40A(2)(B) OF THE ACT ALSO. ON BOTH THESE COUNTS THE SUM OF RS 1 0 71 507/- WAS DISALLOWED. 4. THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS DEL ETED THE ADDITION HOLDING THAT ON BOTH THE COUNTS NO DISALLOWANCE WA S MERITED. IN SO FAR AS THE REQUIREMENT OF DEDUCTING TAX AT SOURCE ON PAYMENTS IN THE NATURE OF ROYALTY UNDER SECTION 194J IS CONCERNED THE COMMISSIONER O F INCOME-TAX (APPEALS) NOTED THAT THE SAME WAS INSERTED BY WAY OF CLAUSE ( C) IN SUB-SECTION (1) OF SECTION 194J BY THE TAXATION LAWS (AMENDMENT) ACT 2006 WITH EFFECT FROM 13.7.2006 AND THEREFORE THERE WAS NO REQUIREMENT TO DEDUCT TAX AT SOURCE FOR THE INSTANT ASSESSMENT YEAR. SECONDLY THE COMMISSI ONER OF INCOME-TAX (APPEALS) EXAMINED THE AGREEMENT DATED 27.7.1999 EN TERED BY THE ASSESSEE COMPANY WITH THE OTHER CONCERN AND ALSO THE REMAND REPORT OF THE ASSESSING ITA NO1075/PN/09 GREAVES M ORGANITE CRUCIBLE LTD. AURANGABAD 3 OFFICER AND CONCLUDED THAT THE PAYMENT MADE BY THE ASSESSEE COMPANY AT THE RATE OF 3% TO THE OTHER CONCERN WAS REASONABLE. THE RELEVANT DISCUSSION IN THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEAL S) IS AS UNDER: DURING THE COURSE OF APPELLATE AS WELL AS REMAND P ROCEEDINGS A COPY OF MOU DATED 27.07.1999 ENTERED BY THE APPELLANT COMPANY WITH GR EAVES LTD. AND MORGANITE THERMAL CERAMICS LTD. WAS PRODUCED AND THE PERUSAL OF AFORESAID MOU SHOWS THAT THE PAYMENT OF COMPENSATION @ 3% WAS AGREED UPON BY THE APPELLANT COMPANY ON THE BASIS OF A SPECIFIC CLAUSE IN THIS REGARD. THE RELEVANT PORTION OF MOU IS AS UNDER: AS MTCL ENJOYS WORLDWIDE REPUTATION AND WOULD BE B RINGING IN LATEST TECHNOLOGY TO GMCL WITH A VIEW TO EXPANDING GMCLS PRODUCT RANGE WHICH COULD BE MARKETED WORLDWIDE AS PER THE POLICY OF MT CL WHICH WOULD BENEFIT GMCL TO BECOME PROSPEROUS FLOURISH AND GROW GREAV ES AGREES FURTHER TO THE FOLLOWING:- A) GREAVES SHALL SURRENDER THE EXPORT TERRITORY OF GMCL IN FAVOUR OF MTCL. THE EXPORT TERRITORY IS DEFINED AS ALL MARKET S OUTSIDE OF INDIA AND NEPAL. B) GMCL MAY EXPORT THE PRODUCTS USING MTCLS WORLDW IDE CONNECTIONS OR THROUGH THEIR DISTRIBUTORS WITH 60 DAYS PAYMENT TERMS TO GMCL. GMCLS EXPORT PRICE LIST IS TO BE FINALIZED IN CONS ULTATION WITH GREAVES SUCH THAT IT IS SIMILAR TO DOMESTIC LEVELS OR THE S AME SIZES (WITH FLOOR PRICE NOT LESS THAN THE DOMESTIC PRICES) THUS PROTE CTING GMCLS FUTURE GROSS MARGINS. FOR NEW PRODUCTS TO BE PREDOMINANTLY EXPORTED PRICES SHALL BE CALCULATED AT A LEVEL WHICH PRESERV ES/MAINTAINS THE EXISTING LEVEL OF GMCL GROSS MARGIN. C) GREAVES SHALL PERMIT SHOULD MTCL AND GMCL SO DE CIDE THE USE OF GREAVES TRADE MARKS/LOGO/HOUSE MARK FOR EXPORTS IN LINE WITH THE MARKS BEING USED CURRENTLY BY GMCL WHILE SELLING IT S PRODUCTS IN INDIA. D) IN CONSIDERATION OF GREAVES CONSENTING TO THE AB OVE AND TO THE FACT THAT GMCL WILL EXPORT THROUGH MTCL UNLIKE AS AT PRE SENT THROUGH GREAVES THE PARTIES AGREE THAT GMCL SHALL PAY GREA VES A 3% COMPENSATION CALCULATED ON THE EX-FACTORY PRICE OF ALL EXPORTS OF GMCL IN ACCORDANCE WITH THE DRAFT TRADE MARK LICENS E AGREEMENT BEING ATTACHMENT 1 HERETO. THE FACTS OF THE CASE CLEARLY INDICATE THAT COMPENS ATION OF 3% WAS PAID BY THE APPELLANT COMPANY NOT FOR TERMINATION OF EARLIER AG REEMENT BUT FOR ACQUIRING READYMADE EXPORT MARKET DEVELOPED BY GREAVES LTD. A S DISCUSSED ABOVE BEFORE ENTERING INTO THE AFORESAID AGREEMENT APPELLANT US ED TO SELL THE ITEMS TO GREAVES COTTON LTD. LOCALLY AND GREAVES COTTON LTD. IN-TUR N USED TO EXPORT THE PRODUCTS MANUFACTURED BY THE APPELLANT COMPANY UNDER ITS OWN BRAND. VIDE ABOVE REFERRED MOU APPELLANT ACQUIRED THE RIGHT TO SELL ITS PRODU CTS IN INTERNATIONAL MARKET UNDER THE GREAVES LTD. BRAND WHICH RESULTED INTO HIGHER PROFI TABILITY AS WELL AS EXPORT EARNINGS IN THE HAND OF APPELLANT COMPANY. BESIDES ABOVE REFERR ED BENEFIT APPELLANT COMPANY ALSO ACQUIRED READYMADE EXPORT MARKET OF ITS PRODUC TS WHICH WAS DEVELOPED BY GREAVES LTD. AFTER MUCH EFFORT AND INVESTMENT. IN V IEW OF THIS IN MY OPINION THE COMPENSATION PAID BY THE APPELLANT COMPANY @ 3% IS REASONABLE CONSIDERING THE PROFITABILITY OF EXPORT MARKET AS WELL AS EXPENSES INCURRED BY THE GREAVES LTD. IN CREATING THE EXPORT MARKET. REGARDING AOS OBSERVATION ON THE ISSUE OF DEDUCTI ON OF TAX AT SOURCE THE AO HIMSELF ADMITTED IN HIS REPORT THAT THE PROVISIO NS OF SECTION 194J(1)(C) ARE INSERTED BY TAXATION LAW (AMENDMENT) ACT 2006 W.E.F. 13.07. 2006 THEREFORE SAME WAS NOT APPLICABLE TO THE PAYMENT OF RW 10 71 507/-. ITA NO1075/PN/09 GREAVES M ORGANITE CRUCIBLE LTD. AURANGABAD 4 IN VIEW OF THE ABOVE IN MY OPINION THE COMPENSAT ION PAID BY THE APPELLANT COMPANY @ 3% FOR ACQUIRING EXPORT MARKET IS REASONABLE AND P ROVISIONS OF TDS WERE NOT APPLICABLE ON SUCH PAYMENTS. I THEREFORE DELE TE THE ADDITION OF RS 10 71 507/-. 5. AGAINST THE AFORESAID REVENUE IS IN APPEAL BEFO RE US. BEFORE US THE LEARNED DEPARTMENTAL REPRESENTATIVE APPEARING FOR THE REVENUE HAS PRIMARILY RELIED UPON THE ORDER OF THE ASSESSING OF FICER IN SUPPORT OF THE CASE OF THE REVENUE. THE REASONING EXTENDED BY THE ASSES SING OFFICER HAS ALREADY BEEN REPRODUCED BY US IN THE EARLIER PART OF THIS O RDER AND THE SAME IS NOT REPEATED FOR THE SAKE OF CONVENIENCE. 6. THE LEARNED COUNSEL FOR THE ASSESSEE HAS POINTED OUT THAT THE PAYMENT IN QUESTION CANNOT BE CONSIDERED AS IN THE NATURE O F ROYALTY HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE. IT IS SUBM ITTED THAT EVEN IF THE AMOUNT IS TO BE UNDERSTOOD AS ROYALTY THERE WAS NO REQUIR EMENT TO DEDUCT TAX AT SOURCE DURING THE YEAR UNDER CONSIDERATION AND THE REFORE NO DISALLOWANCE COULD BE MADE UNDER SECTION 40(A)(IA) OF THE ACT A S HAS BEEN CORRECTLY CONCLUDED BY THE COMMISSIONER OF INCOME-TAX (APPEAL S). 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY. EVEN IF IT IS ASSUMED THAT THE PAYMENT IN QUESTION IS IN THE NATU RE OF ROYALTY IT IS EVIDENT THAT THE PROVISIONS OF SECTION 194J CANNOT BE FASTE NED ON THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. THE REQUIREMENT OF DE DUCTING TAX AT SOURCE ON ROYALTY PAYMENT HAS BEEN INSERTED WITH EFFECT FROM 13.7.2006 AND THEREFORE THE SAME DOES NOT COVER THE PERIOD UNDER CONSIDERAT ION. AS A RESULT THEREOF INVOKING OF PROVISIONS OF SEC. 40(A)(IA) IN ORDER T O MAKE THE DISALLOWANCE HAS BEEN RIGHTLY NEGATED BY THE COMMISSIONER OF INCOME- TAX (APPEALS). WITH REGARD TO THE SECOND ASPECT OF THE REASONABLENESS O F THE EXPENDITURE THE DISCUSSION IN THE ORDER OF THE COMMISSIONER OF INCO ME-TAX (APPEALS) WHICH HAS BEEN EXTRACTED ABOVE CLEARLY BRINGS OUT THE IN ADEQUACY IN THE CASE SET ITA NO1075/PN/09 GREAVES M ORGANITE CRUCIBLE LTD. AURANGABAD 5 UP BY THE ASSESSING OFFICER. NO COGENT REASONING OR MATERIAL HAS BEEN BROUGHT ON RECORD TO DEMONSTRATE ANY INFIRMITY IN T HE CONCLUSIONS DRAWN BY THE COMMISSIONER OF INCOME-TAX (APPEALS) AND THEREFORE WE HEREBY AFFIRM THE SAME. 8. WE FIND NO ERROR ON THE PART OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IN DELETING THE IMPUGNED DISALLOWANCE. TH US THE APPEAL OF THE REVENUE IS DISMISSED. 9. RESULTANTLY THE APPEAL OF THE REVENUE IS DISMIS SED. PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF FEBRUARY 2011. SD/- SD/- (SHAILENDRA KUMAR YADAV) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMB ER PUNE DATED:28 TH FEBRUARY 2011 COPY TO:- 1) GREAVES MORGANITE CRUCIBLE LTD. AURANGABAD 2) ACIT CIR.1 AURANGABAD 3) THE CIT (A) AURANGABAD 4) THE CIT AURANGABAD 5) THE DEPARTMENTAL REPRESENTATIVE A BENCH I.T.A.T. PUNE. BY ORDER TRUE COPY ASST. REGISTRAR I.T.A.T. PUNE B