TaxTMI 
TaxTMI 
2012 (12) TMI 71
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....39;). 4. The AO erred in making TP adjustment of Rs. 11,27,16,302 in relation to payment of royalty and project engineering and manufacturing drawing fees. 5. Without prejudice to Ground No.4, the AO erred in making a double adjustment of Rs. 11,27,16,302 in relation to payment of royalty and project engineering and manufacturing drawing fees. 6. The AO erred in making a TP adjustment of Rs. 2,70,38,800 in relation to payment of liquidated damages. 7. Without prejudice to Ground No.6, the AO erred in making a double adjustment in respect of payment of liquidated damages of Rs. 2,70,38,800. 8. The AO erred in making TP adjustment of RS.32,359 by adding notional interest on payment received from AE. 9. The AO ought to have granted the 5% standard deduction under Section 92C(2) of the Act. 10. The reference to the Transfer Pricing Officer under Section 92CA by the AO was bad in law, in excess of jurisdiction and/ or void in law". 2. We have heard the Learned Counsel Shri P.J. Pardiwala and the Learned CIT (DR) Shri Ajeet Kumar Jain in detail and perused the paper book containing pages 1 to 555. The issue in the present appeal is with reference to transfer pricing adjust....
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.... TPO as well as the DRP did not agree and disallowed the entire amount as the arm's length price was taken at NIL and accordingly made adjustment of Rs. 11.2 crores. (C) The next issue is of liquidated damages. Assessee made payment to its AE on account of liquidated damages paid by the AE to Neyveli Lignite Corporation Ltd (NLC), the third party on account of deals made on two contracts. The background is that NLC gave contract to M/s Krupp Fordertechnik GmbH, Germany (KF) for design and supply of two Bucket Wheel Excavators (BWE). As per this contract KF was to supply products to NLC. There was another agreement according to which assessee was to supply a few components of BWE. There was a delay in supply of BWE and as a consequence, NLC charged damages on KF. According to assessee the delay occurred in supply to NLC is due to technical reasons and as liquidated damages were deducted from KF payments by NLC, assessee was liable to reimburse the same to KF. The TPO did not agree. The arms length price was determined at Nil and made an adjustment of Rs. 2,70,38,800. It was the submission before the DRP that this is a business decision and the amount paid to KF was same amount....
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....t all under the TP provisions. He relied on the following decisions to submit that the TP addition cannot be made on the entire turnover of the entity, whereas that should be restricted to AE transaction alone on pro rata basis. 1. DCIT v. Starlite (40 SOT 421 (Mum) 2. DCIT v. Ankit Diamonds (43 SOT 523 (Mum) 3. Addl. CIT v. Tej Dam (37 SOT 341 (Mum) 4. M/s Genesys Integrating Systems (India) Pvt. Ltd (ITA No.1231/Bang/2010) 5. ACIT v. Wockhardt Ltd 6. Abhishek Auto Industries Ltd (2010 TII-54-ITAT (Del) 7. DCIT v. Startex Networks (India) Pvt. Ltd (2010 - TII-13 ITAT (Del). 8. Il Jin Electronics(I) Ltd v. ACIT 36 SOT 227(Delhi) 9. Phoenix Mecano (India) Ltd. v. Deputy Commissioner of Income-tax, 49 SOT 515 10. Lion Bridge Technology Ltd - 9032/10 6. With reference to the other adjustments in addition to the arguments raised before the TPO and the DRP, it was also submitted that once the adjustments are made at the entity level, AO was precluded in making item-wise adjustments as was done by TPO on royalty payments and on liquidated damages. The learned Counsel relied on the judgment of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd, ....
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....cts of the case. 10. With reference to the royalty and the liquidated damages, it was the submission that the TPO was correct in analyzing the individual transactions even though entity level adjustment was made and ALP on these transactions was determined at Nil. 11. In reply, the learned Counsel submitted that the audit report was submitted as per the company law and the certificates were furnished as provided under the law. The segmental data as required for the TP study was not part of either company law or under the I.T Act and these segmental data were taken for the purpose of analyzing internal and external comparables and to bench mark the transactions. The objection of the DR that this segmental data is not as prescribed is not valid as assessee has duly furnished the relevant segmental data in line with the comparables on FAR analysis and so these are to be accepted. 12. On a query from the Bench whether the relevant royalty payments made on various projects were also taken into account in segmental data, the learned Counsel fairly admitted that these payments were not taken into account. 13. We have considered the issue and examined the various arguments placed befor....
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.... the assessment and make the adjustment only to the extent of the difference in the arm's length operating profit adjusted with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. Therefore, to that extent, the addition made by the Assessing Officer and further confirmed by the Commissioner (Appeals) was to be reduced.". 14. Further, this issue was already crystallized in favour of assessee by the following decisions: (a) DCIT v. Starlite (40 SOT 421 (Mum) (b) DCIT v. Ankit Diamonds (43 SOT 523 (Mum) (c) Addl. CIT v. Tej Dam (37 SOT 341 (Mum) (d) M/s Genisys Integrating Systems (India) Pvt. Ltd (ITA No.1231/Bang/2010) (e) ACIT v. Wockhardt Ltd (f) Abhishek Auto Industries Ltd (2010 TII-54-ITAT (Del) (g) DCIT v. Startex Networks (India) Pvt. Ltd (2010 - TII-13 ITAT (Del). (h) Phoenix Mecano (India) Ltd. v. Deputy Commissioner of Income-tax, 49 SOT 515 (i) Lion Bridge Technology Ltd - 9032/10 15. Respectfully following, whatever be the method followed or adopted for arriving at the ALP, the ALP can only be determined on the value of international transactions alone and not on the entire turnover of assessee at entity....
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....iso to section 92C(2) of the Act complies with the arm's length standard required by the Transfer Pricing Regulations. 17. Since the ALP determined at Rs. 35.10 crores is within the +/- 5% range of the AE transactions of Rs. 35.5 crs, there is no need for any adjustment to be made on the said transactions. In view of this the adjustment proposed at Rs. 9,67,80,000 requires to be cancelled. 18. With reference to the adjustment for the royalty payment and liquidity damages, we agree with the submission of assessee that these adjustments are not required. As far as facts are concerned, assessee entered into a collaboration agreement dated 23.07.1996 for payment of 2% of contract value for the manufacturing drawing & engineering services and 5% of the selling price as royalty. This agreement was approved by FIPB and the payments are being made in earlier years. As submitted before the TPO, this is the 5th year of TP study and there was no adjustment made in the earlier years. On facts, the payment of 2% of contract value and 5% of selling on royalty should have been bench marked if at all, on the similar payments with the comparable cases. No such exercise was undertaken by the T....
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....ITR 636 that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, [1978] 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the la....
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....red into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorized". Keeping in mind the principles laid down above, we are of the view that the TPO should not have undertaken determining the ALP at nil whereas the jurisdiction provided to him is to determine the ALP of the transactions under the method(s) provided under the Act. Therefore, on legal principles also this adjustment made by AO cannot be upheld. Therefore, this is deleted. 19. Similar is with the case with reference to the liquidated damages. There is no dispute with reference to the payment of liquidated damages to NLC. NLC is having agreement with the principal KF for supply of Bucket Whee....