Henkel Adhesives Technologies India ... vs Assessee

Henkel Adhesives Technologies India Private Limited, 10th Floor, Kesar Solitaire, Plot No.5, Sector - 19, Palm Beach Road, Sanpada, Navi Mumbai - 400 705. PAN : AAACL1954B .... Appellant

Vs.

Dy. Commissioner of Income Tax, Circle 1(2), Pune. .... Respondent

Assessee by : Mr. M. P. Lohia & Mr. Rajendra Agiwal Department by : Mr. A. K. Modi Date of hearing : 13-01-2015 Date of pronouncement : 18-02-2015

ORDER

PER G. S. PANNU, AM

The captioned appeal has been preferred by the assessee pertaining to

the assessment year 2008-09, which is directed against the order of the

Dy. Commissioner of Income Tax, Circle 1(2), Pune (in short 'the Assessing

Officer') passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961

(in short "the Act") dated 27.11.2012, which is in conformity with the directions

given by the Dispute Resolution Panel, Pune (in short 'the DRP') dated

05.09.2012.

2. In this appeal, the Grounds of Appeal raised by the assessee read as

under: -

"On being aggrieved by the final order dated 27 November 2012 passed by the learned Deputy Commissioner of Income-tax, Circle-1(2), Pune ('AO'), passed under section 143(3) read with section 144C(13) of the Income- tax Act, 1961 ('the Act') in pursuance of the directions issued by the DRP, the present appeal is being preferred on the following grounds amongst others which, it is prayed, may be considered without prejudice to one another.

2 ITA No.339/PN/2013 General grounds

1. On the facts and circumstances of the case and in law, the learned AO, based on directions of DRP erred in making addition of Rs.3,24,71,763/- in the Appellant's case.

Specific grounds Transfer pricing matter International Transaction: Import of raw materials from associated enterprises ('AEs') and export of finished goods to AEs

2. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred in proposing an adjustment of Rs.3,08,72,664/- and Rs.61,958/- to the international transactions pertaining to export of finished goods to AEs and import of raw materials from AEs respectively.

3. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred in rejecting the aggregation approach adopted by the Appellant for benchmarking its international transactions viz import of raw materials, import of packing materials and export of finished products (classified as 'Manufacturing Activity'), using Transactional Net Margin Method (TNMM'), without providing any cogent reasons for the same.

4. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred in applying Comparable Uncontrolled Price Method ('CUP') as the most appropriate method in the instant case for benchmarking international transactions pertaining to import of raw materials from AEs and export of finished goods to AEs.

5. On the facts and circumstances of the case, the learned AO/TPO/ DRP erred in not allowing working capital adjustment to the Appellant in respect of its international transaction of export of finished goods to AEs.

International Transaction: Receipt of commission for rendering drop shipment services to AEs

6. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred in proposing an addition of Rs.2,86,441/- to the commission income earned by the Appellant for drop shipment services rendered to its AEs without providing any cogent reasons for the same.

7. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred in rejecting the aggregation approach adopted by the Appellant for benchmarking its international transaction viz import of finished goods for resale and commission received for drop shipment services (classified as Trading Activity'), using TNMM, without providing any cogent reasons for the same.

8. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred in ignoring the fact that the Appellant had earned an operating margin of 13.14% vis-a-vis an arithmetic mean margin of 6.31% earned by the comparable companies in respect of its trading activity.

9. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred by proposing an addition to the income of the Appellant merely on account of the terms and conditions laid down in 3 ITA No.339/PN/2013

the service agreement entered into by the Appellant with its AEs instead of conducting an arm's length analysis for the international transaction as prescribed in section 92C(3) of the Act.

10. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred by not adopting any of the methods prescribed under section 92C of the Act for conducting arm's length analysis in relation to its international transaction of commission received for drop shipment services.

Benefit of +/- 5 percent not provided

11. On the facts and circumstances of the case and in law, the learned AO/TPO/ DRP erred in making transfer pricing adjustment without giving the option of +/- 5 percent variation as available under Proviso to section 92C(2) of the Act Non transfer pricing disallowances Disallowance of Provision for Onerous Charges

12. On the facts and circumstances of the case and in law, the learned AO erred in disallowing Provision for Onerous Charges of Rs.12,50,700/- claimed as expenses by the Appellant during the financial year 2007- 08 relevant to AY 2008-09 treating the same as contingent liability on which no taxes have been withheld.

Initiation of Penalty under section 271(1)(c)

13. On the facts and in the circumstances of the case and in law, the learned AO erred in initiating penalty proceedings under section 271(1)(c) when the Appellant had made full and true disclosures both, in the Return of Income and during the assessment proceedings. The Appellant submits that each of the above grounds of appeal is without prejudice to the other.

The Appellant craves leave to add, alter, omit or substitute any or all of the above grounds of appeal, at any time before or at the time of the appeal."

3. At the time of hearing, the Ld. Representative for the assessee pointed

out that the substantive dispute in this appeal is on account of Ground of

Appeal Nos.1 to 11, which relate to the determination of arm's length price in

relation to the international transactions entered by the assessee with its

associated enterprises. On this aspect, it was a common point between the

parties that similar dispute had arisen in assessee's own case for assessment

year 2007-08 which was dealt with by the Tribunal in ITA No.1647/PN/2011

order dated 18.03.2014 and that the aforestated Grounds of Appeal are liable

to be disposed-off in that light.

4 ITA No.339/PN/2013

4. In the aforesaid background, we may note the following facts. The

appellant is a company incorporated under the provisions of the Companies

Act, 1956 and is, inter-alia, engaged in the business of manufacturing and

trading of adhesive products as in the preceding assessment year. The

assessee company deals in engineering adhesives, sealants & speciality

maintenance solutions in India. The appellant company is a part of worldwide

Henkel group, a Germany based MNC, which is engaged in manufacturing

and marketing of a broad range of high technology sealants, adhesives and

coatings across the world.

5. For the assessment year under consideration, assessee company filed

a return of income on 30.09.2008 declaring total income of Rs.23,17,25,807/-,

which was subject to a scrutiny assessment. The assessee had undertaken

certain international transactions with its associate enterprises, which were

referred by the Assessing Officer to Transfer Pricing Officer (in short "the

TPO") in order to determine its arm's length price in terms of section 92CA(1)

of the Act. The TPO vide his order dated 28.10.2011 passed u/s 92CA(3) of

the Act proposed an adjustment of Rs.3,12,21,063/- to the stated value of the

international transactions undertaken by the assessee with its associated

enterprises in order to bring them to their arm's length price. The Assessing

Officer has thereafter passed an order u/s 143(3) r.w.s. 144C(13) of the Act

dated 27.11.2012 making an addition of Rs.3,12,21,063/- to the returned

income in conformity with the order of the TPO after considering the directions

of the DRP contained in its order dated 05.09.2012, which was approached by

the assessee raising objections against the draft assessment order proposed

by the Assessing Officer dated 20.12.2011. The aforesaid addition of

Rs.3,12,21,063/- on account of transfer pricing adjustment is the subject-

matter of dispute in the present proceeding.

5 ITA No.339/PN/2013

6. The appellant had undertaken international transactions with its

associated enterprises on account of : (i) import of raw materials, packing

materials, and finished goods; (ii) drop shipment commission receipts; and, (iii)

export of finished goods, which are similar to the transactions carried out in the

preceding assessment year 2007-08. In the Transfer Pricing Study conducted

by the assessee, it aggregated the aforesaid international transactions into two

broad segments for the purposes of benchmarking it with the comparables.

The international transactions comprising of import of raw materials & packing

materials, and export of finished goods were aggregated under Manufacturing

segment, and the residual international transactions on account of the import

of finished goods for re-sale and receipts by way of drop shipment

commission, were grouped together under Trading segment. The assessee

chose to aggregate the transactions into the respective segments for the

reason that the transactions of import of raw materials & packing materials,

and export of finished goods were relating to the manufacturing functions

whereas the import of finished goods for re-sale and receipts by way of drop

shipment commission related to trading activities. For both the segments,

assessee chose the Transactional Net Margin (TNM) method as the most

appropriate method and the operating profit/costs was taken as the Profit

Level Indicator (i.e. 'PLI'). After comparing the assessee's PLI in both the

segments with those of the external comparables chosen from the data base

in public domain, it was found that assessee's operating margins were above

the average mean margin of the comparables and thus it was inferred that the

stated values of the international transactions were at an arm's length price.

The aforesaid approach of the assessee was identical to its approach in

assessment year 2007-08, which was a subject-matter of consideration by the

Tribunal in order dated 18.03.2014 (supra).

6 ITA No.339/PN/2013

7. However, the TPO has not agreed with the assessee's selection of

TNM method as the most appropriate method and instead he has adopted the

Comparable Uncontrolled Price (i.e. 'CUP') method as the most appropriate

method. As a result, the TPO has not accepted assessee's plea that the

stated value of the international transactions in relation to import of raw

materials, export of finished goods and drop shipment services were at an

arm's length price. With respect to the stated value of import of raw materials,

the TPO adopted the CUP method and determined the arm's length price,

thereby making an adjustment of Rs.61,958/-. Similarly, the TPO did not

accept the stated value of the export of finished goods at Rs.1,38,45,540/- to

be at an arm's length price and instead determined the same at

Rs.4,47,18,204/-, thereby making an adjustment of Rs.3,08,72,664/-. Thirdly,

in relation to the stated value of receipts on account of drop shipment services

of Rs.49,02,853/-, the TPO computed its arm's length price by making an

adjustment of Rs.2,86,441/- to the stated value. In this manner, the total

adjustment on account of transfer pricing analysis has been computed at

Rs.3,12,21,063/-, which is the subject-matter of dispute before us. These

adjustments are similarly placed as were made by the Assessing Officer in

preceding assessment year 2007-08.

8. Now, with regard to the assessee's stand of aggregating the

international transactions of import of raw materials & packing materials and

export of finished goods under manufacturing segment. The assessee had

aggregated the transactions for the reason that import of raw materials &

packing materials and export of finished goods were relating to the

manufacturing functions and therefore they were aggregated for the purposes

of the benchmarking analysis. The TNM method was adopted as the most

appropriate method for the determination of arm's length price. Similar issue

came before the Tribunal in assessment year 2007-08 wherein the stand of 7 ITA No.339/PN/2013

the assessee was dismissed and the application of CUP method was upheld.

The following discussion in the order of the Tribunal is relevant :-

"We have carefully considered the rival submissions. As regards the method to be adopted for comparability analysis, at the outset we may say that the approach of the TPO and the DRP in this regard cannot be faulted. In our considered opinion, having regard to the facts and circumstances of the case, including the fact that internal comparable uncontrolled transactions are available, the adoption of CUP method as the most appropriate method for the purposes of comparability analysis, is liable to be upheld. The learned counsel for the assessee as well as the learned CIT(DR) have referred to certain decisions of the Tribunal in this regard in support of their respective stands. We are not inclined to discuss each of them as the adoption of the most appropriate method for the purposes of comparability analysis is determined by the peculiar facts and circumstances of each case. So however, in this regard, we may make a brief reference to the decision of the Mumbai Bench of the Tribunal in the case of Serdia Pharmaceuticals (India) (P) Ltd. vs. ACIT, (2011) 136 TTJ 129 (Mumbai) wherein the Bench was considering applicability of either the TNM method or the CUP method for the purposes of comparability analysis. As per the Tribunal, though the transfer pricing legislation does not prescribe a particular order of preference for the methods for determining the arm's length price, but the selection of most appropriate method essentially requires the methods to be ranked on a rational basis, having regard to the peculiarities of the facts of each case.

Following the aforesaid rationale, in the present case, having regard to the existence of internal comparable uncontrolled transactions, the CUP method has been rightly selected as the most appropriate method in order to determine the arm's length price of the international transactions of export of finished goods to the associated enterprises."

9. Now, we may take-up the adjustment made by the income-tax on

account of export of finished goods i.e. Rs.3,08,72,664/-. As noted earlier,

assessee had benchmarked the above transaction using TNM method as the

most appropriate method, it was disregarded by the TPO. The TPO applied

internal CUP method (i.e. sale to local and third parties) to benchmark the

above international transaction. The argument setup by the assessee was

that the comparison between the export prices and local sale prices using the

CUP method was inappropriate. Before the lower authorities, assessee had

furnished details of the difference in FAR analysis of the transaction of export

to associated enterprises vis-à-vis sales to local parties. Additionally, it was

also explained that assessee was undertaking certain functions in local third

party sales which were not so in case of export of products to the associated 8 ITA No.339/PN/2013

enterprises. The rival stands on this issue are similar to those which came

before the Tribunal in assessment year 2007-08 wherein it was held as

under :-

"No doubt, the onus shall be on the assessee to justify suitable adjustments to the comparable uncontrolled transaction. In the present case, assessee has claimed adjustments on account of differences in sales & marketing functions and credit risk, and such a plea was very much raised before the TPO. The assessee has referred to the segmental accounts placed at page 302 of the Paper Book to show that it had incurred expenditure on sales & marketing function, which is almost 41% of the sales made to the non-associated enterprises and on account of credit risk it is stated to be 1%, as the provision for bad and doubtful debts is around 1% of sales, and in this regard reference has been made to Schedule 16 of the financial statements placed at page 180 of the Paper Book. On this basis, the total adjustment to the comparable uncontrolled transaction has been worked at Rs.34,10,274/- as per details at page 303 of the Paper Book. The said working was very much before the TPO as is evident from a reading of para 8(A)(viii) of his order. The TPO has not disputed the working of the adjustments, and in principle also we find no reasons to deny the same. It is also not in dispute that in assessee's own case for assessment year 2008-09, the Ld. DRP itself has allowed adjustments on account of sales & marketing functions and credit risk. The plea of the TPO that such costs do not entire the product pricing as the products are priced at the prevailing market prices, in our opinion is not justified. Thus, in the absence of any credible reason advanced by the TPO to deny such adjustments, we are of the view that the adjustment of Rs.34,10,274/- computed by the assessee on account of sales & marketing function and credit risk is allowable. We hold so."

10. At the time of hearing, it was a common point between the parties that

this aspect of the matter is liable to be decided in the light of the directions of

the Tribunal for assessment year 2007-08. We therefore, deem it fit and

proper to restore this matter back to the file of the Assessing Officer, who shall

consider the facts and figures of the current year and decide afresh in the light

of the decision of the Tribunal referred above for assessment year 2007-08

(supra).

11. The next issue is with regard to the adjustment of Rs.61,958/- with

respect of the international transaction of import of raw materials from the

associated enterprise. In this context, the income-tax authorities have

compared the import prices with local prices and on that basis adjustment to 9 ITA No.339/PN/2013

the stated value of the transactions have been made. The aforesaid action of

the TPO was sought to be justified by the Revenue on account of the

availability of internal CUP data. The assessee had pointed out that the

quantity of the products imported from associated enterprises was very few

and the purchases from the associated enterprises and the local parties were

made at different time intervals. It was also pointed out that assessee had

purchased 1419 products out of which only 12 items were common products,

i.e. which were purchased from associated enterprises and local third parties,

though at a different time intervals. Only in case of 3 products, out of 12

items, the purchase price of the assessee from associated enterprises was

higher than the price at which the same was purchased from a local party,

which was explained to be on account of certain business exigencies. On this

aspect, it was pointed out that similar matter came before the Tribunal in

assessment year 2007-08 wherein the action of the TPO in applying CUP

method was upheld in-principle. However, the Tribunal allowed relief by

directing that the transactions of the import of raw material from associated

enterprises be benchmarked on a cumulative basis. In other words, it was

held that the transaction of import from associated enterprises should be

considered in entirety to calculate adjustment amounts instead of only those

common products whereby the import price from associated enterprises was

higher vis-à-vis the purchase price from the local third parties. The relevant

discussion in the order of the Tribunal on this aspect is contained in para 26 of

the order dated 18.03.2014 (supra), which reads as under :-

"26 We have carefully considered the rival submissions. In our considered opinion, the entire purpose of the transfer pricing analysis is to compute the income arising from an international transaction, having regard to its arm's length price. The 'international transaction' in question, relates to import of raw materials by the assessee from its associated enterprises. Therefore, what is expected of the TPO is to consider the transactions of import of raw materials by the assessee from its associated enterprises in its entirety. In the present case, as factually demonstrated by the assessee, TPO has ignored certain transactions of import of raw materials from the associated enterprises where the prices charged by the associated enterprises were 10 ITA No.339/PN/2013

lower than the prices charged by the non- associated enterprises. In other words, TPO has picked up only those transactions where the prices charged by the associated enterprises are higher in comparison to prices charged by the third parties, without considering the reasons for the same. In our considered opinion, the said approach of the TPO is quite flawed and is not justified. Moreover, in the tabulation noted above, assessee has explained reasons which prevailed with it to make imports from the associated enterprises of the 5 products, though the prices charged by associated enterprises were higher than the prices charged by the non-associated enterprises. The circumstances canvassed by the assessee have not been found to be lacking in bonafides by the TPO. He has merely brushed aside the same. In our considered opinion, it would meet the ends of justice, if the aforesaid action of the TPO is set-aside and the matter is remanded back for re-computation of the arm's length price by taking into consideration the international transaction of import of raw materials from the associated enterprises in its entirety and not merely in relation to 5 products and leaving out the other 5 products which are also imported from the associated enterprises. Thus, the TPO/Assessing Officer shall re-visit the controversy on this aspect after allowing the assessee a reasonable opportunity of being heard and thereafter decide as per law. Thus, on this Ground, assessee succeeds for statistical purposes."

12. On the basis of the aforesaid decision of the Tribunal, a working of the

comparability analysis was furnished at the time of the hearing. The Ld.

Representative submitted that the detailed working related to the transactions

where common products were being imported from associated enterprises,

which were also being purchased from third parties in India. The Ld.

Representative pointed out that as per the said working there was no

necessity of making any adjustment to the stated value of the imports from the

associated enterprises. Nevertheless, we find that the aforesaid working,

which is claimed to have been prepared as per the decision of the Tribunal in

assessment year 2007-08 (supra) requires to be verified by the Assessing

Officer. We therefore direct the Assessing Officer to verify the aforesaid

working and if it is in line with the directions of the Tribunal in assessment year

2007-08 (supra) then no addition would survive in relation to the international

transaction of import of products from associated enterprises. Needless to

say, the Assessing Officer shall allow the assessee an opportunity of being

heard before passing an order afresh on this aspect.

11 ITA No.339/PN/2013

13. The other adjustment in dispute is with regard to the international

transaction on account of drop shipment commission. The relevant facts in

this regard are that assessee earned drop shipment commission from its

associated enterprises i.e. Henkel USA and Henkel Malaysia for rendering

sales support services. The TPO noticed that in the case of Henkel Malaysia,

the associated enterprise deducted a 7% royalty before remitting the

commission to assessee whereas in the case of Henkel USA no such charge

was levied. The TPO compared the agreements entered by the assessee with

Henkel USA and Henkel Malaysia and proposed an adjustment to the extent

of 7% royalty deducted by Henkel Malaysia. This approach of the TPO is

identical to the approach for assessment year 2007-08 which came for

consideration by the Tribunal in its order dated 18.03.2014 (supra). The

Tribunal vide para 21 of its order held as under :-

"21. The aforesaid three steps would reveal that the action of the TPO in the present case is contrary to the prescription contained in sub-clause

(i) of clause (a) of sub-rule (1) of rule 10B of the Rules. Ostensibly, in terms of sub-clause (i), the price charged or paid in a "comparable uncontrolled transaction" is to be identified for the purpose of determining the arm's length price of the international transaction being tested. It is starkly evident that in the present case, the comparable transaction picked-up by the TPO, namely, agreement between assessee and Henkel USA is a transaction between two related/associated enterprises and therefore it is a controlled transaction and not a "uncontrolled transaction". Such a transaction undertaken between two controlled entities, in our view cannot be considered as a 'comparable uncontrolled transaction', as envisaged in clause (a) of sub-rule (1) of rule 10B of the Rules. Hence, on this count itself, in our view, the adjustment made by the TPO by considering the agreement between Henkel USA and assessee as an arm's length price for the impugned international transaction has to fail.

Therefore, the addition made by the TPO on this count amounting to Rs.2,29,410/- is hereby directed to be deleted."

14. Following the aforesaid precedent, wherein an identical controversy has

been discussed, the addition made to the international transaction of drop

shipment commission of Rs.2,86,441/- is directed to be deleted. We hold so.

15. In the above background, we therefore restore the matter relating to the

determination of arm's length price of the international transactions to the file 12 ITA No.339/PN/2013

of the Assessing Officer, who shall re-work the same keeping in mind the

order of the Tribunal dated 18.03.2014 (supra) as also the above discussion.

Needless to say, the Assessing Officer shall allow the assessee a reasonable

opportunity of being heard before re-working the addition if any on this aspect.

16. Thus, the Grounds of Appeal No.1 to 11 are accordingly disposed-off.

17. The only other Ground remaining is by way of Ground of Appeal No.12

which relates to a Provision for onerous charges of Rs.12,50,700/- which has

been disallowed by the Assessing Officer. In brief, the facts are that the

assessee-company entered into a lease agreement in November, 2006 for

taking an office space on lease. The lease-deed was entered with the landlord

for a period of 54 months effective from 01st November, 2006 and the monthly

rent as per the lease-deed was Rs.56,850/-. The lease-deed was subject to a

lock-in-period of 36 months. As per the said term of lease, in case the

assessee-company opted to terminate the lease-deed prior to lock-in-period of

36 months then assessee-company was liable to compensate the landlord for

the entire unexpired period of lock-in-period. In December, 2007, assessee-

company opted to terminate the said lease-deed and shifted to a new location.

As a consequence, assessee-company was liable to compensate the landlord

for the entire unexpired period of lock-in-period. The lock-in-period as per the

lease-deed was from November, 2006 to October, 2009 (i.e. 36 months). The

said compensation for the unexpired lock-in-period starting from January,

2008 to October, 2009 (i.e. 22 months) amounted to Rs.12,50,700/-. The said

amount was debited in the Profit & Loss Account for the year under

consideration under the head 'Provision for onerous charges' and claimed as a

deduction. The Assessing Officer has denied the claim on the ground that it

was a contingent liability. Alternatively, as per the Assessing Officer, if it was

not to be understood as a contingent liability even then its deduction cannot be 13 ITA No.339/PN/2013

allowed as the requisite tax at source was not deducted and therefore section

40(a)(ia) of the Act comes into operation.

18. Before the lower authorities as well as before us, the stand of the

assessee is that the said liability was a contractual obligation and not a

contingent liability. It was pointed out that the lease was terminated in

December, 2007 and therefore on account of the terms of the lease-deed, the

aforesaid liability had crystallized. Therefore, it cannot be said to be a

contingent liability. It was also pointed out that the said amount payable to the

landlord cannot be treated as a 'rent' as per the definition contained in

Explanation to section 194-I of the Act and therefore there was no requirement

of deducting tax at source. The Ld. Representative submitted that Explanation

to section 194-I of the Act defines the 'rent' to mean any payment for use of

the property whereas in the present case the impugned amount is not for use

for the property but it is for terminating the lease-deed prematurely.

19. On the other hand, the Ld. Departmental Representative appearing for

the Revenue has pointed out that it was a contingent liability and that in any

case the payment has been made in pursuance to the rental arrangement with

a landlord and therefore such amount is subject to TDS u/s 194-I of the Act.

Since the assessee had not deducted the TDS, the said expenditure was

allowable in view of section 40(a)(ia) of the Act also.

20. We have carefully considered the rival submissions. It is quite evident

from the factual matrix noted above that the payment in question has arisen on

account of the termination of lease-deed by the assessee. The assessee had

entered into a lease agreement in November, 2006 for taking a premises on

rent for the purposes of office. The lease-deed was for a period of 54 months

subject to a lock-in-period of 36 months from November, 2006. Since 14 ITA No.339/PN/2013

assessee terminated the lease-deed in November, 2007 i.e. before expiry of

the 36 months of the lock-in-period, assessee was required to compensate the

landlord for the unexpired period of lock-in-period. The impugned sum of

Rs.12,50,700/- reflects the compensation fastened on the assessee on

account of the lease-deed for the assessee having terminated it prematurely.

The aforesaid facts are not disputed by the Revenue. In our considered

opinion, the said liability cannot be treated as contingent liability. The liability

is an ascertained liability because it has arisen because of the assessee

having opted to terminate the said lease-deed prematurely. It is also nobody's

case that the said decision was not a business decision. Therefore, the

liability having crystallized in view of the terms and conditions of the lease-

deed, we find that its incurrence cannot be said to be contingent. Therefore,

the stand of the Revenue to say that it is a contingent liability is not justified.

21. Another plea of the Revenue is that the amount in question is a rent

payment and therefore tax ought to have been deducted at source in terms of

section 194-I of the Act. Since assessee had not deducted the tax at source,

the amount was disallowable in terms of section 40(a)(ia) of the Act. In this

context, the Explanation below section 194-I of the Act explains the meaning

of expression "rent", as under :-

"Explanation.--For the purposes of this section,-- [(i) "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,--

(a) land; or

(b) building (including factory building); or

(c) land appurtenant to a building (including factory building); or

(d) machinery; or

(e) plant; or

(f) equipment; or

(g) furniture; or

(h) fittings, whether or not any or all of the above are owned by the payee;]"

15 ITA No.339/PN/2013 22. The moot question is whether the impugned sum of Rs.12,50,700/- can

be considered as 'rent' so as to fall within the scope of section 194-I of the Act.

Notably, rent is understood to mean any payment, by whatever name called

"for the use" of the property specified in the said Explanation. Can it be said

that the aforesaid sum is paid by the assessee for use of the lease premises ?

In-fact, on an appreciation of the terms and conditions of the lease-deed which

required the assessee to pay such sum, it can be seen that the said payment

is for non-use of the property for the pre-contracted period. In other words, the

payment at best can be seen to be for breach of a contractual obligation of

taking premises on rent, but cannot be said to be for use of the property.

Therefore, in our view, it would be inappropriate to characterize the sum of

Rs.12,50,700/- as a payment made for the use of property so as to fall within

the meaning of expression "rent" u/s 194-I of the Act. Therefore, in our view,

the provisions of section 40(a)(ia) of the Act are not attracted in the present

case, as tax u/s 194-I of the Act was not required to be deducted.

23. In view of the aforesaid, we direct the Assessing Officer to delete the

aforesaid addition.

24. In the result, appeal of the assessee is partly allowed, as above.

Order pronounced on 18 th February, 2015.

Sd/- Sd/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 18 th February, 2015. Sujeet 16 ITA No.339/PN/2013

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The DRP, Pune; 4) The DIT (International Taxation), Pune; 5) The DR "B" Bench, I.T.A.T., Pune; 6) Guard File.

By Order //True Copy//

Assistant Registrar I.T.A.T., Pune