TaxTMI 
TaxTMI 
2014 (11) TMI 146
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.... of the case & in law, the Hon'ble DRP erred in confirming 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 conside....
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....ncy. 5. That the ld. AO erred on facts & in law, in making a disallowance of 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 Rule....
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....of export incentives written off. The claim of the assessee was that this pertains to short receipt of DEPB claim, 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 fi....
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....ion of DEPB licence to the assessee under which its claim was restricted, is to be allowed as a deduction in the year in which the said communication has been received by the assessee. 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 a....
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....ssue arose before the Tribunal in assessment year 2003-04 and assessment year 2005-06 and the said addition was deleted in the hands of the assessee in the earlier years. 13. We find that the 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....
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....assessee's own case relating to assessment years 2003-04 and 2004-05. Admittedly, the assessee had paid interest on the borrowings made from its parent company in the earlier years and no fresh borrowings 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 t....
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....enditure being relatable to such advances made by the assessee interest free to it is joint venture company and the same is deleted. The ground of appeal No.3 raised by the assessee is thus allowed. 16. The ground of appeal 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 S....
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.... afforded various opportunities to the assessee which were not complied with. The Assessing Officer further noted that some of the parties to whom sales had been made, had also been paid commission. However, no such commission was 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.....
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....ils of the business services conducted by the said commission agent and as the assessee has failed to justify the rendering of services by the said commission agent, the said expenditure is not allowable in the hands of the assessee. Reliance 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 ....
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.... file of Assessing Officer with our directions." 20. As the issue arising before us is identical to the issue arising before the Tribunal in assessment year 2006-07, following the same parity of reasoning we remit this issue also back to 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/-. Th....
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....on account of investment of Rs. 50 million as on 31.3.2007 in the shares of HMGB Ltd. The claim of the assessee before the Assessing Officer was that it had not utilized any of the borrowed funds for investment in the said shares and as such the provisions 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....
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.... 26. The issue in ground No.6 raised by the assessee is against the adjustment made on account of arm's length price and we shall deal with this issue along with the issue raised in assessment year 2008-09. 27. The ground of appeal No.7 raised by the assessee 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 i....
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....paid is in any way related to the assessee company and commission paid to these agents in excess of 3% is on account of business expediency. 4. That the ld. AO erred on facts and in law, in making a disallowance of expenditure of Rs. 2,136,334/- on the alleged ground that said expenditure -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 ....
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....the transaction in respect of payment of corporate service charge as 32,32,315/- against the sum of Rs. 6,46,46,298/- by in appropriate application of CUP method merely based on presumptions without furnishing details of price charged in any comparable uncontrolled transaction. 6. That on the facts and in circumstances of 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 no....
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....f disallowance out of domestic sales commission. The ground of appeal No.3.1 raised by the assessee is thus allowed for statistical purposes and ground No.3.2 is allowed. 34. The issue in ground of appeal No.4 is against the disallowance of Rs. 21,36,334/-. Similar issue has been raised by the assessee in assessment year 2007-08 and the issue 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-....
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....ade of Rs. 2,91,95,471/- in assessment year 2007-08 and Rs. 6,46,46,298/- in assessment year 2008-09. 40. The assessee during the year under consideration was engaged in the process of manufacturing of intermediaries and bulk drugs. The assessee was wholly owned subsidiary of GB International B.V., The Netherlands, which was subsidiary of DSM BV, Netherlands. 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 Fi....
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.... of payment towards service fees to its AE's. The assessee should have been able to demonstrate that an independent enterprise operating in uncontrolled environment would have made such a payment for such service. That has not been done. (b) The functions and responsibility of the assessee that have been mentioned above show that the assessee performs vital functions without 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 n....
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....ee had aggregated the international transactions of imports, exports and payment of service fees and applied TNM Method using Operating Profit Margin at sales as the Profit Level Indicator. In the show cause letter (reproduced in para No. 7 above), it was pointed out to the assessee, that this approach is incorrect. It was mentioned in the show cause that the correct approach would have been for the assessee to demonstrate that an independent 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....
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....t is observed that payment of Rs. 16,82,944/- is towards conferences and Orient Courses organized by the assessee for the employees of the assessee company and the remaining payment is towards ICT charges. The assessee has submitted the break-up of these ICT charges as under : Sr. No. Nature of Services Amount (Rs.} 1. R & M Others 29,13,335 2. Rates & Taxes 5,29,125 3. Legal & professional 2,27,59,133 4. Infrastructure 7,74,611 Total 2,69,76,205 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 ....
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....n respect of technical assistance (project related) of Rs. 21,94,111 (Para No. 8.2.2) and of Rs. 16,82,944 towards conference/training of employees of assessee company abroad (para No. 8.2.3). For the remaining services, the assessee has not been able to show that any service has actually passed to it. No independent party would have made a payment in uncontrolled circumstances. Therefore, by the application of CUP, the arm's length of this transaction of payment of service fee is determined at Rs. 38,77,055 (21,94,111 + 16,82,944) as 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/....
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....crore. As per the TPO the benchmarking process adopted by the assessee was incorrect as the assessee had used TNMM method wherein various transactions were grouped together. An attempt was made to demonstrate that the payment by the assessee was at arm's length. As per the TPO, under the Income Tax Act, application of arm's length pricing method require that the method should be applied on a transaction by transaction basis. Further the functions and responsibility of the assessee which are part of the transfer pricing report show that the assessee performs vital functions without any 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 assesse....
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....1)(e)(i) of the Income-tax Rules. Reliance was placed on various decisions of the Tribunal for the proposition that the entity level margins could not be compared particularly when other segment had significant revenue. As per the said decisions, segmental results had to be compared. The TPO vide para 10 elaborately considered each item of nature of services received from AEs and vide para 11 deliberated upon the payment of CS charges to the AEs. The TPO vide para 12 then observed as under: "12. On the basis of above it can be seen that 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 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 ....
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....d it was also held that the assessee was not entitled to any deduction under sections 10A,10AA, 10B or Chapter-VI-A in respect of the enhanced amount. 56. The DRP, Panel-1, New Delhi vide para 4 considered the issue and also examined various evidences filed by the assessee and held as under: "DRP has examined the evidences and details filed on 26.07.2011 before TPO and now before DRP in Vol. I of paperbook (pages 7& 8) has come to the conclusion that it can not be said that no services have been received by the assessee. While some services may be duplicate or not relevant, there is some element which can be said to be related 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 assess....
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....TPO, no services were provided by the said AEs and the payments made under corporate service fee by the assessee to its AE was in the nature of incidental/imaginary services. The TPO thus adopted the Comparative Uncontrolled Price ('CUP') method as the appropriate method for benchmarking the international transaction and determined the arm's length price at 'nil'. It was further pointed out by the ld. AR for the assessee that the DRP confirmed the additions proposed by the Assessing Officer in the draft assessment order mentioning that the formula itself shows that there was arbitrary cost allocation. The Assessing Officer thus enhanced the 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 l....
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....vice request handling, Onsite support, E-mail system, software applications e.g. Microsoft, Maximo, Sametime etc. Further Aurora charges of Rs. 529,125/- relate to depreciation on IT assets owned by the AEs but used by the appellant for the purpose of its business in India. It was pointed out by the ld. AR for the assessee that the TPO has accepted the arm's length price of international transactions pertaining to payment made for ICT services and Aurora charges in the next assessment year 2008-09. Accordingly, following the rule of consistency which has also been upheld by the Tribunal in various cases, adjustment made on account of these transactions 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....
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....uch operations. 69. Another aspect raised by the ld. DR for the revenue was that the taxpayer in the present case had not quantified services received by it and for each and every service received by it, no break-up has been given by the taxpayer and charges are paid on the basis of the formula agreed upon between the parties which cannot be accepted per se. It was fairly admitted by the ld. DR for the revenue that the ICT charges and aurora charges disallowed during the year have been allowed by the TPO in the succeeding year. The ld. DR for the revenue vehemently stressed that the agreement entered into between the parties was to transfer profits out of 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....
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.....46 cr with regard to the payment towards corporate service charges made by the assessee alleging that no benefits were availed by the assessee by making such payments to its AEs and determined the arm's price length at 'nil'. The DRP acknowledged that the assessee had received services by making payment of corporate service charges. However, the arm's length price of the corporate service charges was determined at 5% of the total payment against which the assessee is in appeal before us. 74. The first contention raised by the ld. AR for the assessee in relation to assessment year 2008-09 was that the assessee had duly deducted the tax at source out of the corporate services 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....
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....Private Limi ted [ I .T.A. No.6060/Mum/2011] * Festo Controls Private Ltd vs. DOT [TS-4- ITAT-2O13(Bang)-TP] 76. The ld. AR for the assessee thereafter elaborately took us through the economic benefits realized by the assessee from the payment of Corporate Service Fee to its AE which we shall refer to while deciding the nature of expenses. The plea of the assessee was that as the services availed by it resulted in benefit to it and also added economic and commercial value to the business of the assessee, hence, the said benefits should be considered and the transfer pricing addition made by the TPO should be deleted. Another contention raised by the ld. DR for the revenue is that the TPO 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....
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....ions, etc.; b. financial, accounting and auditing matters as related to; (I) accounting principles and methods; (II) budgeting methods; (III) capital structure, loans, currency policy, financial research, providing guarantees, credit management, buy or lease decisions, general banking matters, long-term credit, etc.; (IV) data processing techniques; c. fiscal and legal matters, including patents, trade names, import and excise duties, compliance, etc., with respect to cross-border and other activities; d. personnel matters, including the selection and training of personnel; e. environmental, safety and health matters, including responsible care issues; f. insurance; 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 af....
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.... the profitability had been determined for the company as a whole. The TPO segregated the payment of service fee as per the transfer pricing study report totalling Rs. 3,30,72,526/- and the assessee was asked to show cause as to why all the transactions were grouped together to determine the arm's length pricing. As per the TPO, under Income-tax Act while applying arm's length pricing method, the same should be applied on transaction by transaction basis and separate analysis for the international transaction of payment towards service fee to the AE should have been carried on by the assessee. Further the assessee was also asked to demonstrate that whether an independent enterprise operating in uncontrolled environment would have made such a payment for such services. The assessee was asked to identify 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 d....
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....ssociated enterprises are to be charged for specific services. However, under para 7.22 of OECD guidelines it is recognized that the direct charge method for charging for intra group service was difficult to apply in practice and where the groups have developed other methods for charging for services provided by parent companies or group service centre, then such method is to be applied. Under para 7.23 of OECD guidelines recognition of cost allocation and apportionment method involving same degree of estimation or approximation is recognized. Further under para 7.24 of OECD guidelines, an indirect charge method is recognized under which charges cannot be quantified except on approximate or estimate basis where there is rendering of service to various members of the group and there is recording of relevant 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 I....
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.... of the assessee in making the aforesaid payments could not be questioned by the authorities below. Reliance was placed on series of decisions by the Tribunal for the proposition that the commercial wisdom of the assessee in making the payment to its AE under an agreement cannot be questioned. The learned A.R. for the assessee further submitted that various documents with regard to the nature of corporate services provided by the AE to the assessee, against which the assessee had paid the corporate service fee to its AE were furnished before the TPO and copies of which were also placed before us. Our attention was drawn to the submissions filed before the TPO along with the Annexure in respect of several documents placed at pages 1 to 245 of the Paper Book. The plea of the assessee was that the said documents have 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 o....
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.... pages 129 to 147 of the paperbook) * Exchange of e-mails exchanged with AE in relation to - - negotiation of better terms for financial charges due to global relation (please refer to page 148 of the paperbook); - issuance of letter of credit facility of Euro 10 million (approx 63 crore) (please refer to page 156 of the paperbook) - reduction in fees charged by the bank from DSP India based on the global relationship of the AE with the Bank (please refer to pages 157 and 158 of the paperbook) - sharing of best practices received by the appellant (please refer to pages 149 and 151 to 154 of the paperbook). 20. It is pertinent to mention that the ld. TPO, on one hand, in his order contended that no services has been received by the appellant; while on the other hand, himself accepted in its order that a Corporate Operational Audit' 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 fro....
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....ation- A presentation describing the uses and benefits of Aurora and why it is required, along with advantages of Aurora Implementation (placed at pages 204 and 226 of the paperbook) * Exchange of e-mails exchanged with AE in relation to - - Discussion on long term program for phased elimination of ozone-depleting substances in industrial applications in accordance with SHE requirements and discussion on replacement of CFC machines (please refer to pages 237 to 239 of the paperbook) - Aurora Rollout - August 2007 in relation reasons and benefits of implementing Aurora (please refer to page 298 and 299 of the paperbook) - FDA (Food and Drug Administration) audit in India- Mail sent by Jan W.H Smeets (Senior Manager, International Regulatory Affairs) to the FDA giving background information on the manufacturing facility and production process of 6-APA by DSM in India (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 ....
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....ted out that the services provided by the AE helped the assessee in carrying on their day-to-day business, which in turn also encouraged energy savings and also safety, health and environment manufacturing and goods manufacturing practices. 92. The next set of services provided by the AE was in relation to health conference outside India where participation fee was not paid but the travelling expenses of the personnel travelling abroad were incurred by the assessee. In addition, there was a newsletter started by the AEs called SHE Flyer, which covered various facilities to be checked in respect of explosion of boilers and fire facilities. 93. Further there was exchange of e-mail between AE and the assessee regarding negotiations with bankers on account of finance and treasury services. The first set of negotiations was in respect of better terms of financial charges due to global relationship 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 ....
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....for running various units across the globe. The group as a whole had decided to fix certain norms for running the manufacturing unit and cost incurred by the members, to streamline the functioning of different entities of the group and also for providing financial assistance by way of rate correction of the interest rate payable on the borrowings and also in the case of the assessee by providing guarantee in the form of actual money consideration, which in turn has resulted in monetary benefits to the assessee along with benefits of the research and development carried on by the members in the field of business. For availing the above said benefit, the assessee had entered into an agreement with its members in the preceding years and corporate service charges had been paid from year to year i.e. both in the preceding years and also in the succeeding years and we find no merit in the order of 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 i....
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....inuously. 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 authorised. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/royalty payment was not warranted. Assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the 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 ref....
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....s were provided by the AE. The TPO has disregarded the documents filed before him. Further the DRP, Panel-1, New Delhi relating to assessment year 2008-09 has held that some benefits were allowable to the assessee. In addition to various services provided certain financial benefits in terms of savings were also made available to the assessee on account of the following: (i) Better terms for financial charges. (ii) Issuance of letter of credit of Euro 10 million (approximately 63 crore in assessment year 2007-08. (iii) Guarantee in assessment year 2008-09. (iv) Reduction in fees charged by Banks from the assessee. 100. The learned A.R. for the assessee has further furnished rejoinder to the submissions of the learned D.R. for the Revenue on 12.2.2014 in which it has filed the documents in relation to the loan agreement entered by the assessee with Deutsche Bank, against which it had availed term loan from 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 million....
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.... as in earlier year, in respect of which no adjustment was made in the earlier years by the TPO himself. The action of the TPO in applying CUP method without there being any valid comparable was thus patently incorrect. We reverse the findings of the TPO in this regard. 103. The ld. DR for the revenue relied upon various decisions. In Knorr-Bremse India (P.) Ltd.'s case (supra), the proposition laid down was that 'CUP' method had to be applied as no transaction-wise details were available. We find no merit in the said reliance in view of our holding that the TPO has failed to point out any comparable for applying the CUP method. Further, since the transaction has been found to be at arm's length, there is no merit in any adjustment on this account. 104. The ld. DR for the revenue further relied on Gem plus India (P.) Ltd.'s case (supra), wherein it was held as under : We heard both sides in detail and also perused the 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 a....
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.... the ALP. Thus, the argument of the assessee that the TPO has exceeded his jurisdiction by disallowing certain expenditure is against the facts. The TPO has not disallowed any expenditure. Only the ALP was determined. It was the Assessing Officer who computed the income by adopting the ALP decided by the TPO at "nil". 106. However, both these propositions laid down in Gem plus India (P.) Ltd.' case (supra) and Deloitte Consulting India (P.) Ltd.' case (supra) was overruled by the ratio laid down by the Hon'ble Delhi High Court in EKL Appliances Ltd. (supra). The ratio in Deloitte Consulting India (P.) Ltd.' case (supra) was laid down because of the peculiar facts of the case and as laid down by various Courts, the said proposition cannot be universally applied. 107. Another aspect raised by the TPO was that even after paying said Corporate Service Charges, no benefit had arisen to the assessee as the assessee was running into losses. 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 businessm....