TaxTMI 
TaxTMI 
2014 (11) TMI 146
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....onfirming the draft assessment order of the ld. AO on the following issues and directing the ld. AO to assess loss at Rs. 47,023,341/- as against the returned loss of Rs. 184,949,539/-: - Disallowance of Rs. 114,432/- being the DEPB claims short received and written off during the year. - Disallowance of Rs. 98,567,574/- out of the interest paid & financial expenses incurred during the year. - Disallowance of Rs. 8,538,662/- out of the commission expenses incurred during the year. - Disallowance of Rs. 1,510,059/- under section 14A of the Act on an arbitrary basis. - Addition on account of Transfer Pricing ('TP') Adjustment of Rs. 29,195,471/-. 2. That the ld. AO erred on facts and in law, in making a disallowance of Rs. 114,432/- on account of DEPB claims rejected or short received and written off during the year in the profit & loss account. 2.1 That the ld. AO erred on facts and in law, in making a disallowance of Rs. 114,432/- of DEPB Credit short received in the relevant year and written off in the profit and loss account during the year under consideration without appreciating that the same has been considered and offered to tax in the earlier years. 2.2 That the ld. ....
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.... expenditure of Rs. 1,510,059/- on the alleged ground that said expenditure is incurred for earning tax exempt income ("Dividend") from investments by invoking the provisions of section 14A of the Act. 5.1 That the ld. AO erred on facts & in law, by not appreciating fact of the assessee's case and making an arbitrary disallowance under section 14A of the Act. 5.2 That the ld. AO erred in not appreciating that the appellant has neither earned any income on investments held during the year nor such income has been claimed exempt and further the appellant has not incurred any expenditure in relation to investments or earning of exempt income. 6. That the ld. AO erred on facts and in law, in enhancing the income of the appellant by Rs. 2,91,95,471/- by holding that the appellant's international transactions do not satisfy the arm's length principle as envisaged under the Act and in doing so have grossly erred in: 6.1 Disregarding the arm's length price ('ALP'), as determined by the appellant in the TP documentation maintained by it in terms of section 920 of the Act read with Rule 10D of the Rules. 6.2 Holding that the benchmarking done by the appellant in respect of international....
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....im, which had earlier been offered to tax. However, no deduction on the said DEPB claim was claimed in the earlier years. The assessee furnished copies of the relevant licences and sanction letters issued by Kandla Special Economic Zone (SEZ) before the Assessing Officer to prove its case of short receipt of incentive. The Assessing Officer in the draft assessment order proposed disallowance of the said amount following disallowance made in assessment year 2006-07. The DRP, New Delhi also dismissed the objection of the assessee in view of the decision being made in the earlier years. 7. The learned A.R. for the assessee pointed out that the Tribunal in the appeals of assessee and Revenue for assessment years 2005-06 and 2006-07 in ITA Nos.1395, 1360 & 1455/Chd/2010 vide consolidated order dated 8.8.2013 had considered the issue vide paras 76 to 79 and remitted the issue back to the file of the Assessing Officer with directions to adjudicate the issue. The learned A.R. for the assessee further pointed out that for the year under consideration the relevant details were filed before the Assessing Officer. 8. The learned D.R. for the Revenue placed reliance on the order of the Assess....
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....Admittedly, the assessee had received the said communication on 14.03.2006 i.e. falling within the financial year 2005-06 and hence, the said claim of the assessee is allowable for the captioned assessment year. However, the additional evidence filed by the assessee in respect of the copies of application made in respect of the DEPB claim and also the copies of the DEPB licence received by the assessee under which the claim of DEPB was restricted by Kandla SEZ, were not available before the Assessing Officer. Hence, the issue is restored back to the file of the Assessing Officer for the limited purpose of verifying the quantum of the DEPB licence received by the assessee under which its claim was rejected. The plea of the assessee is that as against the claim of DEPB of Rs. 35,92,066/- and Rs. 85,762/-, it had only received sum of Rs. 28,58,140/- and Rs. 52,451/- as DEPB licence. In case the claim of the assessee is found to be correct after verification of the requisite documents, which are placed at pages 695 to 711 of the paperbook as additional evidence, the deduction of Rs. 18,43,753/- is to be allowed in the hands of the assessee. The Assessing Officer shall afford reasonable....
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....e Tribunal (supra) had considered the issue in assessment year 2005-06 vide paras 5 to 11 and vide paras 9 to 11 had held as under: "9. We have heard the rival contentions and perused the record. The issue arising in the appeal filed by the Revenue is in relation to the interest chargeable on the advances made by the assessee in the earlier years. During the year under consideration a sum of Rs. 59.55 crore was due from Hindustan Max G.B. Ltd., which was joint venture company promoted by the assessee company. The assessee had advanced the said amount to Hindustan Max G.B. Ltd. against supply of raw material, and was carrying interest @ 16.5% per annum. However, because of the financial constraints, Hindustan Max G.B. Ltd. moved an application before the BIFR for winding up and thereafter no interest was earned on the said loan. The assessee while filing the return of income had not recognized the interest due on the said advances made by it in the earlier years. As per Note No.6 i.e. notes to the Balance Sheet and Profit & Loss Account annexed to the financial statement placed at pages 25 and 27 of the Paper Book, as per clause 7-A, it was reported as under: "Based on the unaudit....
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....ngs had been made during the year under consideration. The interest expenditure had been allowed in the hands of the assessee from year to year. Further the advances to Hindustan Max G.B. Ltd. were also made in the earlier years and the balance is brought forward from the preceding year on which in the earlier years the assessee was charging interest. However, the interest on the said loan had not been recognized during the year under consideration as Hindustan Max G.B. Ltd. had gone before the BIFR because of financial constraint. In the abovesaid circumstances, we find no merit in the order of the Assessing Officer and upholding the order of the CIT (Appeals) we dismiss ground No.1 raised by the Revenue." 14. The Hon'ble Punjab & Haryana High Court in CIT v. DSM Anti Infectives India Ltd. [IT Appeal No.257 of 2009 (O&M), dated 28.10.2013] on the issue of disallowance of interest had held as under: 11. From the above, it emerges that the CIT (A) and the Tribunal had concluded that there was commercial expediency in giving interest free loan to HMGB and the deduction was admissible under Section 36(1) (iii) of the Act. The primary factors inter alia which were taken into consider....
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....ppeal No.4 raised by the assessee is against disallowance of commission expenses totalling Rs. 85,38,662/-. The said disallowance out of commission expenses are against disallowance of Rs. 60,72,653/- out of export sales commission and Rs. 24,66,009/- out of domestic sales commission. 17. The learned A.R. for the assessee pointed out that both the issues were before the Tribunal in assessment year 2006-07 and the matter in respect of allowance of export sales commission has been remitted back to the Assessing Officer for verification and the issue in relation to domestic sales commission has been decided in favour of the assessee. 18. We have heard the rival contentions and perused the record. The Assessing Officer while completing the assessment under section 144C(13) of the Act, read with section 143(3) of the Act had noted that during the year under consideration the assessee had incurred expenditure of Rs. 45.85 million under the head 'commission as per Schedule-XIX'. The assessee was asked to furnish the details and confirmation in respect of commission paid. The reply of the assessee before the Assessing Officer is incorporated at pages 31 to 40 of the assessment order. The....
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....paid to many of the parties to whom exports have been made or to whom domestic sales have been made. The Assessing Officer, thus held that there was no merit in the commission paid to the parties to whom sales had been made i.e. P.I. Mensangan Sakti amounting to Rs. 40,97,199/-, Edward Keller (Phils) INC amounting to Rs. 6,95,475/- and also Malachite Chemicals amounting to Rs. 545,257/-. Thus, disallowance of Rs. 53,37,931/- was made out of the commission paid by the assessee to the respective parties to whom sales were made. Further, in respect of commission paid to Ace Corporation @ 6.6% as against normal rate of commission at 3% was held by the assessee to be excessive. Similar excessive commission paid to other parties, all totalling Rs. 42,77,212/-was disallowed by the Assessing Officer. The assessee is in appeal against said disallowance. 83. The DRP vide order dated 20.09.2010 had upheld the disallowance proposed by the Assessing Officer. 84. The ld. AR for the assessee pointed out that the allegations of the Assessing Officer that no details were filed, are incorrect as the perusal of the assessment order would reflect that assessee was appearing from day-to-day and was f....
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....iance was placed on Assam Pesticides & Agro Chemicals v. CIT [1997] 227 ITR 846 (Gau). 86. We have heard the rival contentions and perused the record. The issue raised vide ground No. 4 is against the disallowance of commission expenses totalling Rs. 96,15,144/-. During the year under consideration, the assessee had claimed total expenditure of Rs. 2.60 crore under the head 'commission'. The said commission included both commission paid on account of exports and also the commission paid on domestic sales. The case of the revenue is that the assessee had made sales to certain parties, to whom commission was also paid and the same being not relatable to the business of the assessee, was not to be allowed as an expenditure. However, the case of the assessee before us is that the said commission has been paid against the purchase orders booked by the said concern, who were engaged in trading and were also commission agents. The two transactions were claimed to be different and without any connection to each other. The assessee has placed on record the details of commission paid at pages 291 & 292 of the Paper Book. The abovesaid details reflect commission on export sales paid of Rs. 1....
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....the file of the Assessing Officer to decide the same in line with our directions in assessment year 2006-07. 21. The second limb of the issue is in connection with the commission paid on domestic sales. Similar issue arose before the Tribunal in assessment year 2006-07 and vide para 87 it was observed as under: "87. The second aspect of the claim of expenditure under the head 'commission' relates to the commission paid on domestic sales. The Assessing Officer noted that the assessee had paid commission at varying rates starting from about 1% to 5%. The assessee has filed on record the details of the abovesaid commission totalling Rs. 155,27,136/-The assessee has tabulated the names of the parties along with the details of same value of sales, commission paid and the rates at which paid. The perusal of the said details reflect the commission @ 4.48% being paid to Ace Corporation. The total amount paid to the said party is Rs. 1351,250/-. The Assessing Officer, on the other hand, vide para 5.12 has noted that the commission to the said party has been made @ 6.6% vide para 5.12 at page 32 of the assessment order. The assessee, on the other hand, has furnished the details of commissi....
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....visions of section 14A of the Act were not applicable. Another plea raised by the assessee was that the said investment was made in the earlier years and no fresh investment was made during the year under consideration. The Assessing Officer, however, invoking the provisions of section 14A of the Act disallowed a sum of Rs. 15,10,059/- out of interest expenditure being attributable to the tax free investment made by the assessee. The said addition was confirmed by the DRP. 24. We find that similar issue arose before the Tribunal in assessment year 2006-07 and the Tribunal vide paras 88 and 89 held as under: "88. The ground No. 5 raised by the assessee is against the disallowance made under section 14A of the Act, read with Rule 8D of the Act. The case of the assessee was that the said provisions were not applicable as the assessee had made only one investment of Rs. 5 crore in 1996 in Hindustan Max-GB Ltd. on which the assessee was receiving interest. However, since the said company had gone into liquidation, no interest was received from the said parties. It was further pointed out that at the time of investment, the dividend income was taxable and in any case, the investment wa....
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....ssee is against charging of interest under section 234A, 234B, 234C and 234D of the Act, which is consequential in nature and hence the same is dismissed. ITA No.1290/Chd/2012 :: Assessment Year 2008-09 28. The assessee in ITA No.1290/Chd/2012 has raised the following grounds of appeal: "1. On the facts and in the circumstances of the case & in law, the Hon'ble DRP erred in confirming the draft assessment order of the ld. AO on the following issues: - Disallowance of Rs. 9,85,67,574/- being the interest on account of diversion of funds. - Disallowance of Rs. 85,75,079/- out of the commission expenses incurred during the year. - Disallowance of Rs. 21,36,334/- under section 14A of the Act on an arbitrary basis. - Addition on account of Transfer Pricing ('TP') Adjustment of Rs. 6,14,13,983/-. 2. That the ld. AO erred on facts and in law, in making a disallowance of finance expenses of Rs. 98,567,574 by inadvertently holding that the appellant had utilized borrowed funds for giving interest free advances to its joint venture company i.e. Hindustan Max-GB Ltd. ('HMGB') without appreciating that no advances have been made by the appellant company to HMGB during the year under co....
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....e -is incurred for earning tax exempt income from investments by invoking the provisions of section 14A of the Act, read with Rule 8D of the Income-tax Rules, 1962. 4.1 That the ld. AO erred on facts and in law, by not appreciating facts of the assessee's case and making an arbitrary disallowance under section 14A of the Act. 4.2 That the ld. AO erred in not appreciating that the appellant has neither earned any income on investments held during the year nor such income has been claimed exempt and further the appellant has not incurred any expenditure in relation to investments or earning of exempt income. 5. The ld. AO/DRP erred on facts and in law determining the arm's length price ('ALP') of the assessee's international transactions pertaining to payment towards corporate service fees to its Associated Enterprises (AEs) at Rs. 32,32,315/- against the sum of Rs. 6,46,46,298/- incurred by the assessee and in doing so have grossly erred in: 5.1 Disallowing 95% of the amount paid toward corporate service charge, on an ad hoc basis, despite Ld. DRP acknowledging that services have been received by the Appellant. 5.2 Alleging that the appellant has received duplicative services u....
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....f the case and in law, while suggesting the addition, the ld. AO / TPO have inter alia grossly erred in making statements in the order passed under section 92CA of the Act, based on his conjectures and surmises, which are not in accordance with facts of the case, thereby making a high pitched assessment. 7. That the ld. AO erred on facts and in law in charging interest under sections 234B of the Act. 8. The ld. AO also erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act for concealment of income or furnishing inaccurate particulars of income. That the above grounds and sub-grounds of objections are without prejudice to each other.' 29. The assessee has also raised additional grounds of appeal which read as under: "Ground No. 8.1: That on the facts and circumstances of the case and in law, the ld. AO had erred in not reducing a sum of Rs. 7,614,696/- being DEPB credit recovered in AY 2008-09 which was earlier written off in AY 2006-07 in the profit and loss account but not allowed in the assessment under section 143(3) of the Act by holding that the write off is premature and thus not allowable. Ground No. 8.2: That the ld. AO failed to apprec....
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.... has been decided in favour of the assessee in view of the fact that the said investment in shares of joint venture company was made by the assessee in assessment year 1997-98 and out of its own funds. Further the said investment was in the earlier years for business expediency. However, since joint venture company has approached BIFR, no income was arising on the investment made in the said concern. In line with our order in the paras hereinabove relating to ground No.5 raised in assessment year 2007-08, we delete the addition of Rs. 21,36,334/- made by the Assessing Officer by invoking section 14A of the Act. The ground of appeal No. 4 is allowed. 35. The issue in ground of appeal Nos. 5 and 6 raised by the assessee is against transfer pricing adjustment and we shall deal with the same alongwith the issue raised in assessment year 2007-08. 36. The ground of appeal No.7 raised by the assessee is against charging of interest under section 234B of the Act is consequential in nature and hence the same is dismissed. 37. The assessee has raised additional ground of appeal against the treatment of DEPB credit, which was recovered in assessment year 2008-09. The facts relating to the ....
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....ands. The said concerns were found to be associated enterprises within the meaning of section 92A(2)(a) of the Act. The Transfer Pricing Officer(TPO) had summarized the business activities and nature of relationship with the assessee company of various associated enterprises in the table under para 5.2 at page 5 of the transfer pricing order. The assessee had adopted Transaction Net Margin Method (TNMM) for transfer pricing analysis with operating profit/sales ratio as profit level indicator. The same method was used in the preceding years by the assessee. For choosing independent comparables, the assessee had used 'Prowess database. The assessee was engaged in the following international transactions with its associated enterprises: A. Export of Active Pharmaceutical Ingredients B. Import of Raw Material C. Import of Finished Goods D. Payment of Corporate Services Charges/ Management Service Charges E. Reimbursement of expenses F. Payment of Interest on loans taken 41. For determining the arm's length price of the international transactions, all the transactions other than interest on loan were grouped together and the profitability had been determined for the company as a ....
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....any support from its AE, Hence, there does not appear to be any rationale for making a payment of services fee. (c) It has been mentioned in the T.P. report that the services provided by the AE include "marketing". However, it has been brought out that all the marketing efforts are made by the assessee. The selling and distribution expenses, as reported in the Prowess database, for the last few years, is tabulated below. A.Y. 2007- A.Y.2006- A.Y.2005- A.Y.2004-05 selling & distribution expenses 13.61 7.27 6.31 5.09 it can be seen that the most tangible marketing effort is made by the assessee, not its AE. The assessee is present in India for a few decades. Hence, it is the assessee which has built-up the presence of the brand in India. These can be no justification for the assessee to make a payment to the AE for marketing. (d) Further, as itself admitted by the assessee, it performs advertising and marketing functions. It cannot be expected to pay the AE for functions that it performs on its own. (e) All other services that are mentioned in the T.P. report are in the nature of incidental services for which no separate payment is required. 43. The TP....
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....ndent entity would have made such a payment in similar circumstances. The assessee has not raised any objection over the proposed CUP method in the show cause letter. The assessee has not been able to give a separate benchmarking for each of the services . that he has supposedly received. The assessee has aggregated this transaction with other transactions as a class of transactions. However, it should have benchmarked each transaction separately." 45. Reliance was placed on the ratio laid down by the Mumbai Bench of the Tribunal in Star India (P.) Ltd. v. ACIT [IT Appeal No. 3585 (Mum.) of 2006, dated of 28-5-2008 MUM for the said proposition. It was further observed that in such circumstances the TPO was empowered to apply appropriate method for each transaction. The TPO thus held that for analyzing the arm's length nature of service fee paid by the assessee to its AEs, CUP method could be applied. The service fee for separate class of transaction, as per the TPO, could be analyzed separately. Reference was made to the provisions of section 92B of the Act, which recognizes the analysis of different clauses of transactions separately including the payment having made appearing o....
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....p; 47. However, as per the TPO no details of the said expenses were provided though the assessee had filed copy of agreement dated 1.1.2004 with the AE. The TPO at page 13 had considered the nature of service covered by the said agreement but observed that the assessee had only given a general description of the so-called services and their benefits, without linking to the two aspects. The TPO thereafter vide para 8.5 at page 14 onwards had considered the various aspects of the service charges provided by the Assessing Officer i.e. in the field of financial accounting and auditing, environmental safety and health, business advisory - role of AE and examining OECD guidelines with regard to the intra group services. The relevant portion of the guidelines i.e. clauses 7.5,7.6,7.20,7.23,7.29 and 7.31 are reproduced under para 8.7 at pages 16 and 17 of the TPO order. The TPO thus analyzed that on the basis of the said guidelines in order to examine the arm's length price of intra group services received by one of the associated enterprises, following essential information should be available: 1. Whether the AE has received intra group services? 2. What are the economic and commercial....
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....s against Rs. 3,30,72,526 determined by the assessee. The Assessing Officer shall enhance the income of the assessee by Rs. 2,91,95,471 (3,30,72,526 - 38,77,055). 49. The Assessing Officer vide para 6 of the draft assessment order after relying upon the report of the TPO and after confronting the same to the assessee, determined the arm's length of exports to AEs at Rs. 38,27,055/- as against the value of Rs. 3,30,74,526/- determined by the assessee. The Assessing Officer noted that the assessee had repeated the same submissions as were made before the TPO and in view thereof, the income of the assessee was proposed to be enhanced by Rs. 2,91,95,471/-. 50. The Dispute Resolution Panel-1, New Delhi upheld the proposal made by the TPO and the Assessing Officer thereafter passed an assessment order dated 28.9.2011 under section 144C(13) r.w.s. 143(3) of the Act enhancing the income of the assessee by Rs. 2,91,95,471/- on account of TP adjustment as discussed under para 6.4 of the assessment order. The assessee is in appeal against the said order of TPO. 51. During the assessment year 2008-09 similar reference was made by the ACIT, Circle-1, Chandigarh vis-à-vis international....
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.... support from its AEs and hence there does not appear any rational for making payment of service fee. Further the assessee in the TP report had mentioned that the services provided by the AEs included marketing. Efforts were made by the assessee as the selling and distribution expenses as reported in the prowess database, included selling and distribution expenses of Rs. 18.94 crore during the year as against Rs. 13.61 crore during the preceding year. The TPO was of the view that most tangible marketing effort was made by the assessee and not by its AEs. Hence there was no justification for the assessee to make the payment to AEs for marketing. The TPO further held that all other services that are mentioned in the TP report are in the nature of incidental services for which no separate payment was required. In view thereof, the assessee was asked by the TPO to submit the following details: "(a) Identify each of the Services actually received by you from the AEs for which the amount has been paid. (b) Please submit the contemporaneous documentary evidence to show that these services have actually been received by you. (c) Please state the payment made by you for each of the avail....
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....ceived by one of the associated enterprises following essential information should be available: 1. Whether the AE has received intra group services? 2. What are the economic and commercial benefits derived by the recipient of intra group services? 3. In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs. 4. Whether a comparable independent enterprise would have paid for the services in comparable circumstances? From the details available it is clear that the assessee has not been able to prove that he has actually received services of some value that call for such a huge payment. 12.1 If one may sum up this discussion, the following points may be noted in terms of the questions posed to the assessee at Para 5 of the show-cause notice (reproduced at para No, 7.2 of the order)." 54. The TPO thereafter considered the different methods prescribed under section 92C(1) of the Act and was of the view that the most appropriate method in assessee company would be the CUP method by selecting the assessee....
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....ted to assessee. Hence, ad adhoc allowance of 5% such costs can be attributed to be remuneration for services rendered. ALP is to be determined after reducing this amount, TPO is directed to recompute ALP accordingly." 57. The Assessing Officer vide order passed under section 144C(13) r.w.s. 143(3) of the Act dated 31.10.2012 made an addition on account of transfer pricing issue taking into consideration the directions of DRP, Panel-1, New Delhi. 58. The assessee is in appeal against the order of the Assessing Officer. 59. The ld. AR for the assessee pointed out that the issue raised on account of transfer pricing is in relation to disallowance of intra group services. It was pointed out by the ld. AR for the assessee that the international transaction relating to purchase and sale of goods was accepted by the TPO and the adjustment on account of Arm's Length Price was made only on account of Intra group services. Synopsis of the case was filed by the assessee and it was pointed out that various services were availed by the assessee from AEs against which payments were made totalling Rs. 330,72,526/-. The ld. AR for the assessee pointed out that part of the payments for differen....
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....income by Rs. 291,95,471/-. 61. The ld. AR for the assessee pointed out that the assessee had entered into a Corporate Services Agreement which is placed at pages 10 to 17 of the paperbook under which it was agreed that the AE would provide corporate services of commercial, accounting, auditing, financial, fiscal, social, legal, environmental, safety, health and insurance nature against which it was agreed that payment for the said corporate services provided by the AE to the assessee would be paid as per the formula agreed upon. 62. The ld. AR for the assessee further pointed out that another service to be provided by the AE was the corporate guarantee which had not materialized during the year under consideration but had materialized in the succeeding year. Another aspect of the said guarantee was the reduction in the rate of interest on loan availed by the assessee which was reduced because of the intervention of the AE. The ld. AR for the assessee further stated that corporate operational audit was done by the AE and the TPO has seen the said report and commented it was of value to assessee. The case of the assessee before us was that it was an overall management of operation....
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....i.e. payment of ICT services and aurora charges should be deleted. 67. The ld. DR for the revenue filed written synopsis along with the copy of the relevant portion of OECD guidelines. The first plea of the ld. DR for the revenue in respect of Intra Group Services was that the said service was performed by one member of the multi-national group for the benefit of one or more related members of the same group. Where the services had been rendered for the exclusive purpose of a single recipient, then it was easy to determine whether the service recipient had received a benefit or not. However, where the services rendered result in joint benefit, then the actual or perceived benefit for each individual recipient is to be established. The ld. DR for the revenue pointed out that para 7.2 of the OCED guidelines recognize the types of Intra Group Services, where the key issue to be considered regarding Intra Group Services was whether the said Intra Group Service had been rendered by the taxpayer and/or what are the economic and commercial benefits derived by the recipient. Reference was made to the para 7.5 of OECD guidelines for the analysis of transfer pricing for Intra Group Services....
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....India without paying the taxes thereon. In such circumstances, the transaction has to be seen at arm's length price, as transaction identification of the services in relation to which such charges are being paid. It was pointed out by the ld. DR for the revenue that wherever the services have been identified, the same have been allowed by the TPO and no disallowance has been made for the said services. 70. The ld. DR for the revenue referring to the facts of the case pointed out that in addition to the payments being made to the AE, the assessee had also incurred expenses under several heads which were interlinked to the Intra Group Services. Further reliance was placed on the following case laws : (i) Knorr-Bremse India (P.) Ltd. v. Asstt. CIT ITA No. 5097/DEL/2011, A.Y. 2007-08, dated 31.10.2012. (ii) M/s Deloitte Consulting India Pvt. Ltd. ITa No. 579, 1272, 1273/Mum/2011, order dated 30.03.2012. (iii) M//s Gem Plus India Pvt. Ltd. ITA No. 352/Bang/2009, dated 21.10.2010, 2010-TII-55-ITAT-Bang-TP. 71. The ld. AR for the assessee in rejoinder to the submissions made by ld. DR for the revenue pointed out that there is no merit in the plea of the ld. DR relying upon the OECD g....
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....ces charges paid by it. The said charges were paid as per the agreement between the parties and similar formula as in the earlier years was applied. The nature of corporate services involved provision of corporate services by the AEs to assessee in the nature of technical and commercial services and services with respect to accounting, auditing, financial, fiscal, social, legal, environmental, safety and health matters. For availing these services the assessee pays corporate service charges as per the allocation of total expense incurred by the AE, in accordance with the agreement. It was clarified by the ld. AR for the assessee that during the year under consideration only the corporate service charges were held to be not at arm's length price and disallowance of the total expenses was made except the concession allowed by the DRT Panel, New Delhi. The objective of entering the said agreement with its AE was to achieve business success of assessee in order to meet the demands of customer on product quality, continuous technological improvements. The aim of providing the corporate service agreement was to enable the assessee in carrying out its business operations more efficiently ....
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....O had applied CUP method but had not furnished details of uncontrolled transaction based on which the arm's length price for the transaction was determined to be 'nil' and hence, the same was not in accordance with law. 77. We have heard the rival contentions and perused the record. The assessee company before us is wholly owned subsidiary of DSM International B.V., The Netherlands. During the year under consideration the assessee was engaged in manufacturing of intermediaries and bulk drugs. The assessee had entered into an agreement with its principal i.e. DSM International B.V., The Netherlands on 1.1.2004. The agreement titled as Corporate Services Contract under which it was provided that the AE was engaged in research and development programmes in a variety of fields and had acquired large number of fundamental rights as well as knowledge and experience in the area of science and technology. It had also acquired knowledge in the area of commerce, finance, accounting, economics and other subjects for successful carrying out the business operation. The said rights and knowledge and experience were acquired for the benefit of all the related companies. However, it was acknowled....
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....surance; g. the admission, at the Company's request, of a reasonable number of its employees to DSM's sites and buildings to enable them to familiarize themselves with DSM's organization and working methods and to receive specific advice in the aforementioned fields; h. the sending, at the Company's request, of experts to the offices and factories of the Company for periods agreed by the parties, concerned for the purpose of advising the Company in the aforementioned fields; i. all other such matters on which the Company approaches DSM and which DSM considers to be reasonable and appropriate." 78. Further it was also agreed between the parties that the assessee would make available of its technical, commercial and other knowledge relating to the areas mentioned in article 4 to its AE. 79. As per article 6 of the agreement as per the agreement 5% markup was applied on the costs incurred for the provision of these services. The resultant amount was allocated to the appellant by applying the following formula: 2 X GVA of the assessee + I X Invested Capital of the assesse Corporate Costs" 2 X GVA of the assessee + IX Total Invested Capital of the Group 80. The....
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.... each of the services actually received by it from the AE for which the amount was paid and also to submit documentary evidence that the said services had actually been received by the assessee. The assessee was also asked to bifurcate the payments for each of the field services. The assessee was also requisitioned to quantify the payments made whether any cost benefit analysis were done. Reliance was placed on the ratio laid down by Mumbai Bench of the Tribunal in Star India (P.) Ltd. (supra) for the proposition that each transaction should have been benchmarked separately. The relevant extract of the said decision is reproduced under para 8.1 at pages 9 and 10 of the order of the TPO. 84. The first aspect raised before us is whether the assessee should have benchmarked each of the transactions separately. Admittedly, the assessee had entered into series of transactions with its AE i.e. purchase of raw material, consumables, finished goods, etc, export of material, corporate services, reimbursement of expenses and interest paid on loan, which it had aggregated in order to determine the arm's length price of the transactions except interest on loan. We find support from the ratio ....
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.... service activity for each of the beneficiary. Applying the above said guidelines to the issue in hand, we hold that the assessee has benchmarked the intra group services as a whole and the payments have been made to the AEs on the basis of the corporate service contract entered into between the parties and there is no requirement to identify each and every service availed under Intra Group Services. 86. Though the assessee has made payments under different heads for services availed from the AE, as detailed in chart in the paras hereinabove, however, the TPO had accepted the payments made on account of technical assistance and training, conference charges at Sr.Nos. 6 to 9 in the table above but had disallowed balance sum of Rs. 2,91,95,471/-, which constitute of items at Sr.Nos.1 to 5 in the table above. 87. Now coming to the individual items considered by the TPO, the list includes ICT services of Rs. 58,01,076/- and Aurora charges of Rs. 5,29,125/-. The payments had been made by the assessee in the succeeding year which had been allowed by the TPO and it has been held that the transaction was at arm's length price. During the year under consideration the said amounts were not....
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....ve not been considered in entirety by the authorities below. In the synopsis submitted on 7.11.2013, the learned A.R. for the assessee had enlisted various benefits realized by the assessee from the payment of corporate service fee to its AE, which are as under: "However, on without prejudice basis, to demonstrate the economic benefits realised by DSP India from payment of corporate service fee to its AEs, the appellant submitted the following documents/mails exchanged in day-to-day operations with AEs on a sample basis vide submission dated 21 October, 2010, evidencing this fact (placed at pages 88 to 160 of paper book): * Proposal to set-up DSM Anti infective Energy & Utilities Network with the 'objective of saving on energy and utility cost, covering - objective, scope, timing/implementation and approved budget (placed at pages 88 to 94 of the paperbook) * Presentation on Safety, Health and Environment ('SHE') Audit showing scores on different SHE categories (placed at page 9710 102 of the paperbook) * Presentation on Corporate SHE and Manufacturing Practices discussing "Operating Window SHE", clarifying how it works, process of establishing limits and instructions describin....
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....' 2006 was conducted by the AE for DSP India which is of value for appellant.' 89. Similar list of the services provided by AE in assessment year 2008-09 had been summarized by the assessee in the synopsis filed, which reads as under: "However, on without prejudice basis, to demonstrate the economic benefits realised by DSP India from payment of corporate service fee to its AEs, the appellant submitted the following documents/mails exchanged in day-to-day operations with AEs on a sample basis vide submission dated 26 July, 2011 (placed at pages 1-108 of paper book) and 12 September 2011, (placed at pages 109 to 321 of paper book) evidencing the receipt of economic benefits by the appellant from the services rendered by its AEs: * Agenda of Safety, Health and Environment (SHE) course (held on April 17-2007 and June 5-8, 2007) designed for engineers who are concerned with process installation & product manufacturing (placed at pages 146 to 172 of the paperbook), covering- - Description of SHE course held, target audience for the said course, topics to be addressed and issues to be covered during the course (please refer to page 148 of the paperbook) - Names and designations of I....
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....placed at page 300 of the paperbook) 18. Further, the appellant also submitted that the financial services forming part of the CSC also include provisioning of guarantee(s) by AF, on behalf of DSP India (please refer to point b(iii) of Article 4 of the corporate service contract placed at page 142 of the paperbook). In this regard, it was submitted that the AE (Koninklije DSM NV) had guaranteed a letter of credit facility of DSP India amounting to Euro 30 million (approx 190 crore). Furthermore, the AE had also provided a corporate guarantee amounting to INR 52.63 crore on behalf of DSP India to Deutsche Bank. It is respectfully submitted that as a result of the guarantee provided by the associated enterprises, the appellant was able to borrow funds at cheaper rates of interest." 90. The first reference made was to the Corporate Operational Audit 2006 report. It was carried out by the AE for detailing its findings, significance and proposed action to be taken by the assessee. The said report is placed at pages 111 to 117 of the Paper Book. The assessee has also placed on record a letter received from AE with regard to corporate operational audit conducted, which in turn contains ....
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....lationship under which there was a rate correction vis-à-vis rate of interest payable on loan in the year under consideration and also in the succeeding year. Further there was issuance of letter of credit of facilities of Euro 10 millions i.e. approximately Rs. 63 crore by the AE in favour of the assessee. The learned A.R. for the assessee pointed out that in the succeeding year the AE had granted a letter of credit facility of Euro 30 millions approximately Rs. 190 crore and also AE had provided a corporate guarantee amounting to INR 52.63 crore to the Bank. As a result of guarantee provided by AE the assessee was able to borrow funds at cheaper rate of interest. In the financial year 2006-07, there was interest saving of Rs. 1.40 crore, while in financial year 2007-08 there was cumulative saving of Rs. 9.29 crore. 94. The case of the assessee before us was that on the basis of allocation used by the group to allocate cost incurred in relation to services rendered, the total amount had been allocated among group companies in a systematic manner, which in turn leaves no scope for arbitrary allocation of cost. The formula worked out by the parties safeguarded that the cost ....
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....he Assessing Officer/TPO in holding that the assessee had not received any benefits under the said agreement and hence the payments made by to its AEs were not at arm's length price. 96. In assessment year 2008-09 under the head corporate service charges, in addition to the charges paid as in the preceding year, the assessee has also paid royalty for specific purposes to use trademark and patent, which admittedly is a business expenditure and is to be allowed as an expenditure in the hands of the assessee. In any case, the role of the TPO is to determine the arm's length service of a transaction and he cannot reject the entire payment under the provisions of section 92CA of the Act. The said proposition has been laid down by the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. (supra), wherein on similar facts where the TPO had determined ALP at nil, it was held as under: "21. The position emerging from the above decisions is that it is not necessary for assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for assessee to show that any expenditure incurred by him for the purpose of business....
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.... employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to2003with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1.In fact there are four tabular statements furnished by assessee before the CIT(Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT(Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee I royalty payment while determining the ALP, Accordingly, the substantial questions of law are answered in the affirmative and in favour of assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs". 97. We further find that the said principle has been applied by ....
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....m the said loan amounting to Rs. 52.63 crore in assessment year 2008-09. Another documents filed by the assessee is letter issued by Deutsche to the AE confirming assumption of risk on behalf of the assessee. Further the copy of deed of pledge of sum of Euro 10 millions as guarantee against providing loan to the assessee has also been filed. The plea of the assessee was that as per the benchmarking analysis conducted by the assessee, the arm's length price of the guarantee issued by AE to the assessee was 2.65% for financial year 2006-07 and 4.65% for financial year 2007-08, which translate into benefit of Rs. 1.39 crore and Rs. 2.45 crore respectively. Further during financial year 2007-08 the assessee availed letter of credit i.e. LC facility from Royal Bank of Scotland and same was issued on the basis of corporate guarantee amounting Euro 30 millions issued by the associated enterprises. The assessee submitted that for availing LC facility fixed deposit was required to be pledged by the customer as a security against the facility availed, however, the assessee did not furnish any security as guarantee was provided by the AE. The assessee has further furnished economic analysis u....
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....records of the case including the paperbook filed by the assessee company running into 390 pages. The necessary facts of the case have already been discussed in paragraphs above. On examination of the facts and circumstances of the case and the terms of the agreement entered into by the assessee and its Singapore associate, the TPO has come to certain pertinent observations in her order. She has observed that the terms prescribed in the agreement in respect of the payments to be made by the assessee company are independent of the nature and volume of services, if any rendered by the Singapore Associate. This is a vital observation made by the TPO which goes to the root of the issue. The function of the TPO is to compare the payments made by the assessee company for services received if any and to see whether those payments are comparable. In a given scenario, the TPO has to examine whether the payments were ALP conducive. Therefore it is very imperative on the part of the assessee to establish before the TPO that the payments were made commensurate to the volume and quality of services and such costs are comparable. The payment terms as pointed out by the TPO are independent of the....
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....ses. We find no merit in the said plea of the TPO to dictate what the business deals of the assessee should be. "It is the businessman who can only judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived and occurring to the company must also be considered from the angle of a prudent businessman." Such was the proposition laid down by the Delhi Bench of Tribunal in McCann Erickson India (P.) Ltd. (supra). Applying the said principle, we hold that it is not open to the Assessing Officer to decide the necessity or otherwise of an expenditure incurred by a businessman. The benefit arisen to a company are wide and varied. We have elaborately considered the nature of services provided by the AE to the assessee before us and it cannot be said that no benefits have arisen to the assessee. In addition to the benefits arising for conducting the business in a more systematic manner, the assessee has also made sufficient savings on account of the guarantee provided by the AE and also rate correction on the borrowings made by the assessee. 108. The ld. DR for the revenue further pointed out that the direct cost allocation ....