IN INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA.No.401/Hyd/2016 Assessment Year 2011-2012 GOCL Corporation Limited (Formerly Gulf Oil vs. Asst. Commissioner of Income Corporation Ltd.,) Tax, Circle-2(2), Hyderabad. Hyderabad. PAN AABCG8433B (Appellant) (Respondent) For Assessee : Mr. Y. Ratnakar For Revenue : Mr. P. Chandrasekhar Date of Hearing : 01.09.2016 Date of Pronouncement : 21.09.2016 ORDER PER SMT. P. MADHAVI DEVI, J.M. This is assessees appeal for A.Y. 2011-2012. In this appeal assessee has raised 8 grounds of appeal. Grounds No.1, 6, 7 and 8 are general in nature which need no adjudication. 2. As regards ground No.2 against disallowance of royalty payment of Rs.13,18,304 on export sales, brief facts of case are that assessee company paid royalty on export sales to one of its Associated Enterprise ( A.E."). Gulf Oil International Mauritius (Inc.) (GOIL), as per agreement dated 01.08.2003 and supplemental agreement dated 10.11.2003. This agreement was approved by Government of India and 2 ITA.No.401/Hyd/2016 GOCL Corporation Limited, Hyderabad. rate of royalty inclusive of tax as approved by GOI is as under : On domestic sales 5.88% (inclusive of taxes) On export sales 9.41% (inclusive of taxes) 2.1. During relevant financial year, assessee paid royalty of Rs.27,16,107 on export sales of Rs.13,35,82,370 which worked-out to 2.03%. According to TPO, relief to be allowed as deduction should be restricted to 1% of export sales, based on order of Coordinate Bench of ITAT, Hyderabad in assessee s own case for earlier years. Following same, Assessing Officer worked-out ALP adjustment of royalty at Rs.13,35,804 as against royalty actually paid of Rs.27,16,107 and arrived at adjustment of Rs.13,80,304 and disallowed same and brought it to tax. assessee raised objections before DRP who confirmed order of Assessing Officer and assessee is in appeal before us. 3. According to assessee, royalty is paid for use of trade mark Gulf in India and also for providing technical information of compounding, testing and packaging and application of products and license to use trade mark and design/indicia on products and therefore, is reasonable and is at arms length price for following reasons : a) percentage of payment of royalty by third parties to other hubs is more than what was paid by appellant to Gulf Oil International Mauritius (Inc.). b) percentage of payment of royalty by other subsidiaries to other hubs (AEs) is more than what was 3 ITA.No.401/Hyd/2016 GOCL Corporation Limited, Hyderabad. paid by appellant to Gulf Oil International Mauritius (Inc.). c) actual percentage of commission paid is very much less in comparison to what was approved by RBI while according approval to royalty agreement entered into. d) matter stands covered in favour of assessee by order of ITAT, Pune Bench in Kinetic Hondia Motors Ltd. Vs. J.C.I.T reported in 77 ITD 393 and also decision of ITAT in Cadbury India Ltd. Vs Additional Commissioner of Income Tax. Thus, according to Learned Counsel for assessee entire amount of royalty paid by assessee should be allowed. 4. Ld. D.R. however, supported orders of authorities below and also submitted that very same issue had arisen in assessee s own case in earlier A.Y. 2006-07 and this Tribunal has held 1% to be reasonable royalty on export sales. 5. Having regard to rival submissions and material on record, we find that this issue had arisen in earlier assessment years and for A.Y. 2006-07 in ITA.No.1450/Hyd/2010, B Bench of this Tribunal vide its order dated 22.01.2014 has held as under : 10. next issue for consideration through grounds No.6 to 11 is on issue of disallowance of royalty amount 4 ITA.No.401/Hyd/2016 GOCL Corporation Limited, Hyderabad. of Rs.2,76,58,080/- paid by assessee to Gulf Oil International (Maritius) Inc. (In short GOIMI ). 11. It was submitted that assessee has entered into agreement with GOIMI on 01.08.2003 for payment of royalty on entire turnover of lubricants including domestic and export sales at 5.5% (net of taxes). When assessee sought approval of Government of India, Ministry of Petroleum and Gas gave its NOC vide letter dated 03rd October, 2003 suggesting changes relating to rate of royalty and period of royalty. Accordingly, supplementary agreement was entered on 10.11.2003 making royalty payable at internal sales at 5% and export sales at 8% (net of taxes) and royalty was payable for period of 7 years from date of commencement of commercial production. Since royalty is net of taxes and as tax paid was 15% as per DTAA, calculated royalty rate worked out as follows i.e., on domestic sales at 5.88% and on export sales at 9.41%. Accordingly, assessee claimed amount of Rs.2,76,58,080/- for year ending 31st March, 2006. entire royalty for A.Y. 2006-2007 was disallowed by TPO, which was confirmed by DRP. 12. It was submitted that on basis of same agreement for same services rendered, entire royalty paid at Rs.3,00,01,312/- was disallowed in next A.Y. 2007- 2008 and very same factual position was placed before DRP. DRP in that year has allowed royalty on internal sales/domestic sales whereas, royalty on export sales were restricted to 1%. 13. Learned Counsel referred to relevant portion of DRP order dated 20.09.2011 for A.Y. 2007-2008 wherein it was held that given above internal CUP information there is no need for TPO to have disallowed royalty payments and determine ALP CUP as NIL. Accordingly, objection relating to royalty payment on domestic sale was allowed and with regard to royalty payment on export sales same was allowed in part to extent of 1% of export sales. It was further submitted that in A.Y. 2008-2009 5 ITA.No.401/Hyd/2016 GOCL Corporation Limited, Hyderabad. also DRP has followed similar orders and in later year i.e., A.Y. 2009-2010 also TPO himself has determined disallowance of royalty on export sales in excess of 1% and remaining amount was fully allowed. 14. Learned Counsel placed facts of later years and has submitted that on domestic sales there is no disallowance in later years and accordingly, commission paid on domestic sales in this year amounting to Rs.2,14,28,108/- is allowable. Coming to export sales claim of Rs.62,29,972/-, it was submitted that entire royalty should be allowed and not merely restricted to 1% for following reasons (a) percentage of payment of royalty by third parties to other hubs is more than what was paid by assessee/appellant to GOIMI. (b) percentage of payment of royalty by other subsidiaries to other hubs is more than what was paid by assessee/appellant to GOIMI. (c) percentage of commission paid was very much less in comparison what was approved by RBI while according approval to royalty agreement entered into (3.45% as against 8% approved by RBI). (d) matter stands covered in favour of assessee by Order of ITAT in Kinetic Motor vs. JCIT 77 ITD 393. 15. learned D.R. however, accepted factual position in later years and relied on Orders of authorities. 16. We have considered issue and examined documents placed on record. As far as issue of royalty on domestic sales is concerned, as rightly pointed out by learned Counsel, DRP in later two years has examined internal CUP and allowed royalty on domestic sales. Keeping in view factual position as examined by DRP and also Order of TPO for A.Y. 2009-2010, we are of opinion that there is no need to disallow royalty payment on domestic sales. Therefore, claim of Rs.2,14,28,108/- is allowable based on above facts. 6 ITA.No.401/Hyd/2016 GOCL Corporation Limited, Hyderabad. 16.1. Coming to export sales, learned Counsel relied on various factors for allowing entire claim. However, considering fact that same issue was also examined by DRP in A.Ys. 2007-2008 and 2008-2009 which assessee/appellant seems to have accepted, we are of opinion that royalty on export sales can be restricted to 1% as was done in later years and accordingly, royalty is restricted to amount of Rs.18,05,788/- as per working furnished by assessee at para 24 in page 7 of paper book volume-2. Therefore, out of amount of Rs.62,29,972/- Assessing Officer is directed to allow royalty at Rs.18,05,788/- and balance amount of Rs.44,24,184/- stands disallowed. 17. Learned Counsel relied on decision of Coordinate Bench in case of Kinetic Motor Ltd. Vs. JCIT 77 ITD 393 to submit that once agreement was approved by Government of India, no disallowance is required to be made. We have perused said decision and noticed that assessment year involved was A.Y. 1995-1996 and royalty claim was allowed by A.O. in immediate preceding year i.e., A.Y. 1994-1995. Accordingly, ITAT held that though principles of resjudicata does not apply to decision of I.T. authorities, yet, on same facts, assessee cannot deny benefit given in preceding year. same was upheld by Hon ble High Court. We are of opinion that said facts of case are entirely different to facts in this case. Therefore, precedent of decision cannot be followed here. Moreover, this is not disallowance under section 37(1) but adjustment made under Transfer Pricing Provisions where arms length price is to be determined, whether agreement is approved or not. Keeping that in mind, we are of opinion that decision relied on by learned Counsel, does not apply to facts of case. As decided earlier, restriction on royalty amount is limited to Rs.44,24,184/-. Accordingly, grounds No. 6 to 11 are partly allowed. 5.1. Since issue is covered by decision of Coordinate Bench, to which one of us i.e., Accountant Member is 7 ITA.No.401/Hyd/2016 GOCL Corporation Limited, Hyderabad. signatory, we do not see any reason to interfere with order of Assessing Officer which is in consonance with said decision. Thus, ground of appeal No.2 is rejected. 6. As regards grounds No.3 and 4 against addition of Rs.45,97,042 made on ground that said amount is paid to foreign concerns without making TDS, contention of Learned Counsel for assessee is that assessee has paid Rs.44,86,063 to M/s. C & C Maritime P. Ltd., and Rs.1,10,979 to M/s. East Port Maritime P. Ltd., towards trade and commission respectively for services rendered outside country and since payees are not liable to tax in India, disallowance of said amount for non-deduction of tax does not arise. It was further submitted that these payments are made for purchase of raw material and therefore, is business income of A.E. and hence, do not attract provisions of TDS since payees do not have permanent establishments in India. Learned Counsel for assessee drew our attention to assessee s submissions before DRP on this issue and submitted that DRP without considering assessee s submissions has rejected assessee s contentions on basis of earlier years order which are on totally different set of facts. Thus, he prayed that issue may be remanded to file of DRP or else to modify direction of DRP. 7. Ld. D.R. was also heard. 8. We find that on this issue assessee has made elaborate submissions before DRP as under : 8 ITA.No.401/Hyd/2016 GOCL Corporation Limited, Hyderabad. Objection No.3 : It is contended that addition of Rs.45,97,042 made on ground that said amount has been paid to foreign concerns without deducting tax at source is erroneous. said amount was paid by assessee company to M/s C & C Maritime Pte Limited, Singapore of Rs.44,86,063/- and to M/s East Port Maritime Pte Limited, Singapore of Rs. 1,10,979/- towards Freight Charges and Commission respectively for services rendered outside country. Both above vendors are not have any permanent establishment in India. They are not liable to tax in India. Assessing Officer was clearly in error in disallowing said amount because of not submitting copy of From 15CA. provisions of TDS are not attracted to these payments. Submission : 1. sum of Rs.44,86,063/- was paid to C & C Maritime Pte Limited Singapore, towards reimbursement freight charges paid to shipping Company for trans-shipment of raw material. further sum of Rs. 1,10,979/was paid towards brokerage & commission to M/s East Port Maritime Pte Limited for arranging vessel in Singapore for import of raw material. Both parties to whom payments are made have not rendered any services in India. They do not have any permanent establishment in India. Hence, provisions of TDS are not attracted in respect of above payments. Even otherwise, both amounts paid constitute cost of raw material. provisions of TDS are inapplicable where assessee purchases raw material from non-resident for its production. There is no TDS payment on cost of raw material purchases. As such, same cannot be disallowed u/s.40(a)(ia) of I.T. Act on plea that tax has not been deducted at source in respect of said amount. provisions of section 40(a)(ia) of I.T. Act are not attracted towards cost of purchases. 8.1. DRP has disposed of objections of assessee by observing as under : 9 ITA.No.401/Hyd/2016 GOCL Corporation Limited, Hyderabad. Having considered submissions we have noticed that similar issue was there in proceedings before DRP for Asst.Year 2010-11 and learned DRP has favourably inclined with arguments of tax payer and directed Assessing Officer to verify assessee's claim as to whether amount was actually paid on behalf of Gulf Oil International Lubricants Pvt. Ltd. and allow assessee's claim accordingly. Further, it is also noticed that Hon'ble ITAT, Hyderabad, on appeal by tax payer has remitted back this matter for AY 2010-11 to AO for detailed verification. Respectfully following above orders, we direct AO to verify assessee's claim as to whether amount was actually paid on behalf of Gulf Oil International Lubricants Pvt. Ltd. and allow assessee's claim accordingly. 8.2. Thus, it can be seen that DRP has not applied its mind to contentions of assessee. Therefore, in interest of justice, we deem it fit and proper to remit issue to file of Assessing Officer with direction to verify assessee s claim. Thus, grounds of appeal No.3 and 4 are treated as allowed for statistical purposes. 9. As regards grounds of appeal No.5, grievance of assessee is against figure of Rs.16,99,16,235 taken by Assessing Officer towards carry forward of short term capital loss as against correct amount of loss carried forward i.e., Rs.38,42,82,950. Learned Counsel for assessee submitted that in earlier years, this issue has been set aside by ITAT to file of Assessing Officer for arriving at correct capital loss and prayed that for relevant assessment year also, issue may be set aside to file of Assessing Officer for giving consequential effect to computation made in earlier assessment years. 10. Ld. D.R. was also heard. 10 ITA.No.401/Hyd/2016 GOCL Corporation Limited, Hyderabad. 11. In view of above, we deem it fit and proper to remand this issue to file of Assessing Officer with direction to give consequential effect in computation of brought forward short term capital loss, pursuant to loss arrived at in earlier assessment years consequent to remand by ITAT. This ground of appeal No.5 of assessee is, therefore, treated as allowed for statistical purposes. 12. In result, assessee s appeal is partly allowed for statistical purposes. Order pronounced in open Court on 21.09.2016. Sd/- Sd/- (B. RAMAKOTAIAH) (SMT. P. MADHAVI DEVI) ACOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated 21st September, 2016 VBP/- Copy to : 1. GOCL Corporation Ltd., (Formerly Gulf Oil Corporation Ltd.,) Kukatpally, P.B.No.1, Sanathnagar IE (PO), Hyderabad. 2. Asst. Commissioner of Income Tax, Circle-2(2), Hyderabad. 3. Dispute Resolution Panel-1, G-16, Ground Floor, Central Revenue Buildings, Queens Road, Bengaluru 560 001. 4. Pr. CIT-2, Hyderabad. 5. DCIT (Transfer Pricing)-II, 3rd Floor, D Block, I.T. Towers, A.C. Guards, Hyderabad 500 004. 6. D.R. ITAT Bench, Hyderabad. 7. Guard File. GOCL Corporation Limited (Formerly Gulf Oil Corporation Ltd.,) v. Asst. Commissioner of Income-tax, Circle-2(2), Hyderabad