DCIT, CHENNAI v. M/s. Mainetti (India) Pvt. Ltd., CHENNAI

ITA 2201/CHNY/2010 | 2005-2006
Pronouncement Date: 25-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 220121714 RSA 2010
Assessee PAN AAACM6894M
Bench Chennai
Appeal Number ITA 2201/CHNY/2010
Duration Of Justice 2 month(s) 27 day(s)
Appellant DCIT, CHENNAI
Respondent M/s. Mainetti (India) Pvt. Ltd., CHENNAI
Appeal Type Income Tax Appeal
Pronouncement Date 25-03-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 25-03-2011
Assessment Year 2005-2006
Appeal Filed On 29-12-2010
Judgment Text
IN THE INCOME-TAX APPELLATE TRIBUNAL: B- BENCH: CHENNAI (BEFORE SHRI ABRAHAM P GEORGE AM & SHRI G EORGE MATHAN JM) ITA NO.2201/MDS/2010 ASSESSMENT YEAR 2005-06 THE DCIT VS. M/S MAINETTI (INDIA) P. LTD CO. CIR.IV(I) CHENNAI 138/20 FLORIDA TOWERS 3 RD FLOOR NELSON MANICKAM RD CHENNAI 600029 PAN AAACM 6894M (APPLICANT) (RESPONDENT) APPELLANT BY: SHRI P.B.SEKARAN C IT-DR RESPONDENT BY: SHRI T.BANUSEKAR ORDER PER ABRAHAM P.GEORGE ACCOUNTANT MEMBER IN THIS APPEAL FILED BY REVENUE ITS GRIEVANCE IS THAT CIT(A) DELETED THE DISALLOWANCE OF ` 1 46 16 995/- DEBITED BY THE ASSESSEE AS COMMISSIO N TO ITS GROUP CONCERNS ABROAD. 2. SHORT FACTS APROPOS ARE THAT ASSESSEE A COMPANY ENGAGED IN THE MANUFACTURE OF HANGERS HAD RETURNED AN INCOME OF ` 22 70 762/- FOR THE IMPUGNED A.Y. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO REQUIRED THE A SSESSEE TO JUSTIFY THE COMMISSION CLAIM OF ` 1 46 16 995/-. AS PER THE ASSESSEE IT WAS EXPORTIN G GOODS DIRECTLY TO ITS CUSTOMERS IN VARIOUS COUNTRIES BUT NEVERTHELESS INVOICING WAS DONE AS PER THE PRICES ITA NO.2201/MDS/10 2 NEGOTIATED BY THE GROUP CONCERNS LOCATED IN THE RE SPECTIVE COUNTRIES. SUBMISSION OF THE ASSESSEE WAS THAT THE DIFFERENCE BETWEEN THE PR ICE AT WHICH THE SUPPLIES WERE MADE AND AT WHICH THE GROUP HAD AGREED WITH THE RES PECTIVE CUSTOMERS WERE PAID AS COMMISSION TO THE GROUP COMPANIES IN THE RESPECTIV E COUNTRIES BY WAY OF CREDIT NOTE. AO WAS OF THE OPINION THAT ASSESSEE WAS DOING BUSIN ESS WITH THE GROUP COMPANIES AND ALL ASSISTANCE FOR SELLING THE PRODUCT IN SUCH COUN TRIES WERE PRESUMABLY MADE BY THE GROUP COMPANIES. ACCORDING TO AO THE GROUP COMPAN IES WERE PRODUCING THE SAME PRODUCTS IN SUCH COUNTRIES AND THERE WAS NO NECESSI TY FOR SUPPLY TO BE MADE BY THE ASSESSEE TO THE CUSTOMERS IN SUCH COUNTRIES. FURTHE R ACCORDING TO THE AO THERE WAS NO WRITTEN AGREEMENT BETWEEN ASSESSEE AND THE GROUP CO NCERNS AND THEREFORE THE METHOD OF QUANTIFYING THE COMMISSION WAS NOT KNOWN. AO ALS O NOTED THAT THERE WAS NO INVOLVEMENT OF THE GROUP COMPANIES IN THE TRANSACTI ONS ENTERED INTO BY THE ASSESSEE THE CLAIM WAS MERELY BASED ON ENTRIES MADE BY THE A SSESSEE COMPANY. THEREFORE AO CAME TO THE CONCLUSION THAT ASSESSEE WAS NOT ABLE T O PROVE THE BUSINESS NEED OF THE COMMISSION PAYMENT. ALTERNATIVELY AO NOTED THAT SUC H PAYMENT COULD BE REGARDED AS MADE FOR TECHNICAL SERVICES AND ASSESSEE HAVING NOT DEDUCTED TAX AT SOURCE SEC.40(A)(I) OF THE INCOME-TAX ACT 11961 (THE ACT FOR SHORT) WAS APPLICABLE. THUS THE COMMISSION PAYMENT OF ` 1 46 16 995/- CLAIMED WAS DISALLOWED. 3. IN ITS APPEAL BEFORE THE CIT(A) SUBMISSION OF T HE ASSESSEE WAS THAT IT WAS A PART OF WORLDWIDE GROUP OF CONCERNS CALLED MAINETTI WHICH HAD MANUFACTURING CONCERN MANUFACTURING HANGERS ALL OVER THE WORLD. SIMILAR B USINESS WAS BEING CARRIED ON BY ALL THE COMPANIES PLACED IN VARIOUS LOCATIONS. THE SUPP LIES MADE BY ASSESSEE TO CUSTOMERS ITA NO.2201/MDS/10 3 OUTSIDE WERE CANVASSED BY THE GROUP CONCERNS IN SU CH COUNTRIES WHICH COULD NOT CATER TO THE REQUIREMENT OF CUSTOMERS DUE TO NON-AV AILABILITY. HENCE AS PER THE ASSESSEE IT WAS OBLIGED TO SUPPLY GOODS AT PRICE N EGOTIATED BY THE GROUP CONCERN TO SUCH CUSTOMERS AND EXCESS OVER THE NORMAL PRICING W AS GIVEN AS COMMISSION TO SUCH GROUP CONCERNS. THE ARGUMENT OF THE ASSESSEE WAS TH AT IT WAS SIMPLE COMMISSION PAYMENT FOR PROCUREMENT OF ORDERS AND THERE WAS NO TECHNICAL SERVICE ASSOCIATED AS SUCH. ASSESSEE ALSO SUBMITTED THAT THE PAYMENTS WOU LD ALSO NOT BE ROYALTY SINCE THERE WAS NO TRANSFER OF ANY RIGHTS OR ANY USE OF P ATENT OR USE OF INFORMATION IMPORTED FROM THE ASSOCIATED CONCERNS OUTSIDE INDIA. THERE W AS NO MANAGERIAL OR CONSULTANCY SERVICES OUTSIDE INDIA AND HENCE ACCORDING TO THE A SSESSEE THERE WAS NO REQUIREMENT FOR IT TO DEDUCT TAX AT SOURCE WHEN THE PAYMENTS W ERE PURELY COMMISSION. ASSESSEE ALSO RELIED ON THE ORDER OF THE TRANSFER PRICING OF FICER DATED 16-10-2008 UNDER SEC. 92CA OF THE ACT WHEREIN THE TRANSFER PRICING OFFICE R (TPO FOR SHORT) HAD STATED THAT NO ADJUSTMENT WAS CONSIDERED NECESSARY TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. LD. CIT(A) WAS APPRECIATIVE O F THESE CONTENTIONS. ACCORDING TO HIM ASSESSEE HAD RAISED CREDIT NOTES IN FAVOUR OF THE GROUP CONCERNS AND HENCE PROVED PAYMENT OF COMMISSION. FURTHER AS PER LD.CIT(A) AS SESSEE WAS SUPPLYING GOODS ON THE BASIS OF PURCHASE ORDERS RECEIVED FROM THE CUSTOMER S AND SUCH ORDERS HAVING BEEN NEGOTIATED BY THE GROUP CONCERN PAYMENT OF COMMISS ION WAS JUSTIFIED. VIS--VIS THE ISSUE OF NON DEDUCTION OF TAX LD. CIT(A) NOTED THA T THE PAYMENTS MADE WERE NOT IN THE NATURE OF FEES FOR TECHNICAL SERVICES NOR ROYALTY. HE THEREFORE DELETED THE DISALLOWANCE. ITA NO.2201/MDS/10 4 4. NOW BEFORE US LD. DR STRONGLY ASSAILING THE ORD ER OF THE CIT(A) SUBMITTED THAT THE PAYMENT OF COMMISSION WAS NOTHING BUT IN THE NA TURE OF MANAGERIAL SERVICES AND FELL WITHIN THE DEFINITION OF TECHNICAL SERVICES UNDER EXPLANATION 2 TO SEC.9(1)(VII) OF THE ACT. THEREFORE ACCORDING TO LD. DR ASSESSEE WA S OBLIGED TO DEDUCT TAX AT SOURCE AND AO WAS JUSTIFIED IN MAKING DISALLOWANCE UNDER S EC 40(A)(I) OF THE ACT SINCE ASSESSEE HAD FAILED TO DEDUCT TAX AS MANDATED UNDER LAW. FURTHER ACCORDING TO LD. DR ASSESSEE COULD NOT PROVE THAT THE PAYMENTS WERE COM MISSION FOR CANVASSING ORDERS BUT ON THE OTHER HAND SUCH PAYMENTS WERE NOT PROVED AS INCURRED FOR ANY BUSINESS PURPOSE. 5. PER CONTRA LD. AR SUBMITTING A STATEMENT OF SU CH COMMISSION PAYMENTS ARGUED THAT ASSESSEE WAS PART OF MAINETTI GROUP WHICH HAD ITS PRINCIPAL AT ITALY. ACCORDING TO THE LD.AR SUPPLIES MADE TO VARIOUS CUSTOMERS OUTS IDE INDIA WERE AS PER PRICES NEGOTIATED BY THE MAINETTI GROUP CONCERNS SITUATED IN SUCH OUTSIDE COUNTRIES AND ASSESSEE WAS OBLIGED TO GIVE COMMISSION TO SUCH CON CERNS ON PRICE IT RECEIVED OVER AND ABOVE THE NORMAL SALE PRICE. FURTHER AS PER LD.AR IN VIEW OF THE DECISION OF HONBLE APEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P.LTD. V. CIT (328 ITR 456) ASSESSEE HAVING NOT DEDUCTED TAX ON A BONAFIDE BELI EF THAT IT WAS ONLY COMMISSION PAYMENT NOT COMING WITHIN THE AMBIT OF A PAYMENT O N WHICH TAX WAS DEDUCTIBLE AT SOURCE THE DISALLOWANCE UNDER SEC. 40(A)((I) WAS NOT JUSTIFIED. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL S UBMISSIONS. THE DISALLOWANCE WAS MADE FOR TWO REASONS BY THE AO. FIRST ONE WAS T HAT ASSESSEE COULD NOT PROVE THE BUSINESS PURPOSE SINCE THE INVOLVEMENT OF THE GROU P COMPANY IN THE RELATED ITA NO.2201/MDS/10 5 TRANSACTIONS WAS NOT DEMONSTRATED. ACCORDING TO AO THERE WAS NO WRITTEN AGREEMENT BETWEEN THE GROUP CONCERNS AND ASSESSEE AND NEITHER THE PERCENTAGE OF COMMISSION AND WHO FIXED THE COMMISSION WERE KNOWN. IN OTHER WORDS ACCORDING TO THE AO THE BUSINESS PURPOSE OF THE CREDIT NOTES ISSUED IN FAVO UR OF THE GROUP CONCERNS COULD NOT BE ESTABLISHED BY THE ASSESSEE. SECONDLY AO RELIED ON SEC.40(A)(I) OF THE ACT CONSIDERING SUCH PAYMENT TO BE FOR TECHNICAL SERVIC ES. VIS--VIS THE FIRST REASON WE ARE OF THE OPINION THAT ASSESSEE HAD PRODUCED RECORD I N THE NATURE OF CREDIT NOTES ISSUED BY IT TO THE GROUP COMPANIES. AO HAS NOT REBUTTED T HE CONTENTION OF THE ASSESSEE THAT THE PURCHASES WERE CANVASSED BY GROUP CONCERN SITUA TED IN COUNTRIES ABROAD AND HENCE IT WAS OBLIGED TO GIVE COMMISSION TO THEM. IF THE ASSESSEE HAD PAID ANY EXCESS COMMISSION NO DOUBT THE TPO WOULD HAVE POINTED IT OUT IN HIS ORDER. ON THE OTHER HAND TPO AT PARA-4 OF HIS ORDER DATED 16-10-2008 W ITH REF. NO.M503/TPO-V/A.Y.2005- 06 HAS GIVEN HER COMMENTS AS UNDER: 4. THE CASE WAS DISCUSSED WITH THE ASSESSEES REPRE SENTATIVE. AFTER EXAMINING INTERNATIONAL TRANSACTIONS NO ADJUSTMENT IS CONSID ERED NECESSARY TO THE VALUE OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE. ACCORDINGLY THE INTERNATIONAL TRANSACTIONS REFERRED ARE ACCEPTED T O BE AT ARMS LENGTH PRICE. IT IS HEREBY CLARIFIED THAT THE FINDINGS AND DISCUSSIONS MADE IN THIS ORDER ARE APPLICABLE ONLY IN RESPECT OF REFERENCE RECEIVED FO R ASSESMENT YEAR 2005-06 AND NOT FOR ANY OTHER ASSESSMENT YEAR. SO WE DO NOT FIND ANY JUSTIFICATION FOR THE CONCLUS ION OF THE AO THAT THERE WAS NO INVOLVEMENT BY THE GROUP COMPANY FOR THE COMMISSION PAYMENT. JUST BECAUSE GROUP CONCERN ALSO PRODUCED SAME PRODUCT IN THE RESPECTIV E COUNTRY WOULD NOT BE SUFFICIENT TO COME TO A CONCLUSION THAT ASSESSEE NEED NOT HAVE MADE ANY EXPORTS TO SUCH COUNTRY ITA NO.2201/MDS/10 6 BUT THE SUPPLY OUGHT HAVE BEEN MADE ONLY BY THE GRO UP CONCERN IN THE SAID COUNTRY. THERE COULD HAVE BEEN A MYRIAD OF REASONS FOR THE A SSESSEE AND ASSESSEES GROUP CONCERNS ABROAD TO SOURCE ITS SUPPLIES FROM ASSE SSEE TO ITS ULTIMATE CUSTOMERS AND SUCH A DECISION TAKEN BY A BUSINESSMAN COULD NOT HA VE BEEN QUESTION BY AN AO WITHOUT CONCLUSIVELY PROVING THAT SUCH SOURCING WAS A COLORABLE EXERCISE. THE ORDER THE TPO MENTIONED ABOVE CLEARLY PROVE THAT THERE WAS NO COLORABLE EXERCISE NOR EXCESSIVE BILLING. ON THE OTHER HAND THE PAYMENT OF COMMISSI ON IS CLEARLY PROVED. 7. NOW COMING TO THE SECOND ASPECT REGARDING DEDUCT ION OF TAX AT SOUCE HAVING NOT BEING MADE OBVIOUSLY AO AFTER COMING TO A CON CLUSION THAT INVOLVEMENT OF GROUP COMPANY WAS NOT PROVED COULD NOT HAVE IN THE SAME BREATH HELD THAT THE PAYMENT WAS FOR TECHNICAL SERVICES. NO DOUBT TECHNICAL SERV ICE WOULD DEFINITELY INCLUDE MANAGERIAL SERVICES. HOWEVER IN OUR OPINION CANVASS ING OF ORDERS ABROAD COULD NOT BE FOR MANAGERIAL SERVICES NOR CAN IT BE SAID TO BE FOR ANY CONSULTATION. THUS DEFINITELY TECHNICAL SERVICES AS PER EXPLANATION 2 TO SEC. 9(1 )(VII) OF THE ACT WOULD HAVE NO APPLICATION. WHEN AN ASSESSEE IS NOT OBLIGED TO DED UCT TAX ON A PAYMENT MADE TO NON RESIDENT THEN IN VIEW OF THE DECISION OF HON. APEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P. LTD. (SUPRA) THERE WAS NO QUES TION OF ANY FAILURE TO DEDUCT SUCH TAX BEING FASTENED ON IT. OR IN OTHER WORDS AN ASS ESSEE CANNOT BE VISITED IN SUCH A SITUATION WITH CONSEQUENCES OF A NATURE MENTIONED IN SEC. 40(A)(I) OF THE ACT. IN OUR OPINION THERE WAS NO QUESTION OF DEDUCTION OF TAX BEING MADE BY THE ASSESSEE ON THE COMMISSION PAYMENT ABROAD. HOWEVER FROM THE LIST S UBMITTED BY THE ASSESSEE WE FIND THAT A SUM OF ` 2 37 648/- WAS DOMESTIC COMMISSION AND ONLY ` 1 43 79 3457/- WAS ITA NO.2201/MDS/10 7 COMMISSION PAID OVERSEAS. FOR DOMESTIC COMMISSION O F ` 2 37 648/- ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOURCE IF THE PAYMENT EXCEEDED THE LIMIT PRESCRIBED UNDER THE ACT. HENCE WHILE HOLDING THAT THERE WAS NO FAILURE ON TH E PART OF THE ASSESSEE FOR WARRANTING A DISALLOWANCE INSOFAR AS IT RELATED TO OVERSEAS CO MMISSION OF ` 1 43 79 347/-. WE ARE OF THE OPINION THAT THE BALANCE OF ` 2 37 648/- BEING DOMESTIC COMMISSION THE LATTER PORTION REQUIRE A RELOOK BY THE AO. SO WE REMIT THE QUESTION OF DISALLOWANCE BY APPLICATION OF SEC. 40(A)(I) OF THE ACT INSOFAR AS IT RELATES TO DOMESTIC COMMISSION OF ` 2 37 648/- BACK TO THE FILE OF THE AO FOR VERIFICA TION AND DISPOSAL IN ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE AN OPPORTUNITY TO EX PLAIN ITS CASE. BUT INSOFAR AS OVERSEAS COMMISSION OF ` 1 43 79 347/- IS CONCERNED WE UPHOLD THE ORDER OF THE CIT(A) DELETING SUCH DISALLOWANCE. 8. IN THE RESULT APPEAL OF THE REVENUE IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 25- 03-2 011. . . SD/- SD/- (GEORGE MATHAN) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI: 25 TH MARCH 2011. CC: THE ASSESSEE 2)THE ASSESSING OFFICER 3)THE C IT(A) 4) THE CIT 5)THE D.R 6)GUARD FILE. NBR ITA NO.2201/MDS/10 8