TaxTMI 
TaxTMI 
2015 (9) TMI 19
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....holding that assessee has not proved any need for services outsourcing such services and actually services were received by assesse. Thereby re computing the ALP of the payments of service fees at Rs. NIL resulting into adjustment of Rs. 2,51,97,157/- iii) Erred in holding that payment of Rs. 31,04,176/- was not actual reimbursement of advertisement expenses & making ALP adjustment of the transaction by applying operating margin of Rs. 12.40% on the said amount resulting into adjustment of Rs. 3,84,918/-. iv) The Ld. DRP has also erred on facts and in law in summarily holding that issue has been considered in detail by the TPO & even before DRP all old arguments have been reiterated without discussing the various objections raised & documentary evidences filed before it in respect of business service received by the assessee. It has further erred in directing the TPO to verify the nature of payment of Rs. 31.04 lacs instead of deciding the issue on the basis of evidences produced by the assessee which is not as per law in terms of section 144C(8) 2. Brief facts are -assessee is a public limited listed company and is engaged in the business of manufacturing and distribution....
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.... following such system integration, it adopted the global best practice of P&G including outsourcing of certain activities. ii. The P&G group had set up a shared service centre known as Global Business Service Centre(GBS)to provide customized and expert services to affiliate recipients to enable them to carry out their business in a more efficient and focused manner. P& G Singapore operates as GBS Centre with its branch in Manila, Phillippines. The assessee company has entered into a "Business Services Agreement" with P&G, Singapore (Service Provider) effective from July 1, 2006 to obtain various support services as outlined in the said agreement. iii. As per the terms of the agreement, P&G desired to conduct the respective business in an optimal and competitive way would involve unnecessary duplication of effort and costs and further due to increasing standardization of the product and businesses in P&G's market. It was beneficial to P&G to have collective organization work together to improve their overall efficiency and business ability. Consequent to such business policy assessee entered into this agreement to secure these services from the centralized source to improve i....
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....ther the documentary evidence of cost incurred by the AE for rendering each type of service nor the basis of allocation of cost amongst various entities and the basis of choosing a particular allocation key had been furnished by the assessee. - The basis on which billing is made is not provided and the rate at which such services has been rendered by AE for group companies has not been provided. - Assessee has not furnished individual service-wise calculation of reduction in cost. The cost benefit analysis is not proved simply from annual results. Assessee has not furnished information relating to Benchmarking of transaction by the AE. - The assessee is not a startup company. It has established business expenditure. Hence, sudden dependence on the AE, as claimed by the assessee, even for routine services, is questionable. Apparently, this is for the benefit of the parent company for consolidation and not for the benefit of the assessee. - The higher profit of the assessee during the year does not prove that the payment made to the AE was at arm's length. - Assessee has incurred huge expenditure on manpower and other administrative expenses. Hence, it cannot be said t....
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....3,84,918/-. Ld. Counsel contends that business support services were received from P & G Asia PTE Ltd. i.e AE as per agreement dated 1.7.2006. AE rendered various services to its assessee, which are narrated in form 35A and also finds mention TPO order page 5. These services are provided from following distant places: Manila: Accounting and payroll services are carried out there, as this has low rate of man-hour cost. Singapore: IT related and logistic services are based out here because of extremely good infrastructure. * The nature of services rendered by P & G Asia PTE Ltd., Philliphines (Code LE 753) and Singapore (LE 606) to the assessee company (Code 973) and basis of charge is as under: Category of Service Basis of Charge Accounting and Financial Reporting Services No. of Postings (Accounting Entries) Purchases Net Outside Sales (NOS) Employee Services No. of Employees managed Customer Logistic Financial Services Net Outside Sales (NOS) Business Intelligent Services Net Outside Sales (NOS) Work Place Service - Central IT and AFRS Central IT Work Place Maintenance - No. Of Employees, Floor Space Techno....
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....n account of services given by it to various group Indian Companies. * Besides ld. TPO in assessee's own case for AY 2011-12 has accepted the very same payments to AE and has not even proposed any ALP adjustment in this behalf. Revenue on the same facts cannot apply such variable treatment. In view of above observation of TPO as to non furnishing of evidence of cost incurred by AE for rendering the various services or basis of allocation of cost to various entities or basis of billing is incorrect. Ld. Counsel counters the TPO's remarks on cost benefits by contending that by this arrangement other cost has reduced drastically and at the same time sales has increased significantly which amounts to demonstrative cost benefit. Following is submitted in this behalf: (i) Payment to and provision for employees reduced to Rs. 33.71 Crores as against Rs. 42.47 Crores in the last year. The list of employees who were retrenched from the services during the year. (ii) Purchased services cost has reduced to Rs. 2.57 Crores as against Rs. 9.58 Crores in the last year. (iii) Other expenses (which generally comprises of professional expenses, misc administrative expenses) have a....
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..... (v) The benefit derived by the company is in the form of overall increase in its turnover and reduction of expenses and increase in the profit margins as detailed in the above stated points. The overall increase in turnover of the company since the financial year 2005-06 has been approximately at the rate of 20% every year which itself is a practical and live example of the benefit derived by the assessee on account of outsourcing its activities and these figures justify that the economic and commercial value derived by the company over the years by concentrating on the core areas. (vi) It is surprising to note from the order of TPO that due to non-providing of individual service wise calculations of reduction in cost, TPO has assumed that cost benefit analysis is not proved for annual results. The assessee company through its audited accounts and SAP extracts and detailed analysis of outsourcing expenses has proved beyond doubt the services availed by it from its associated enterprises. There can be no other means to justify the economic and commercial value received by the assessee. Financial accounting, administration are some of the activity to its AE which enhanced its....
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....s. CIT 288 ITR 1 (SC) - CIT Vs. EKL Appliances Ltd. 345 ITR 241 (Del.)(HC) - Ericson India Pvt. Ltd. VS. DCIT 17 ITR (Trib) 79(Delhi) - Dresser Rand India Pvt. Ltd. Vs. ACIT, 13 ITR (Trib.) 422 - Thyssen Krupp Inds India Pvt. Ltd. (2013) 55 SOT 497 (Mumbai) - Castrol India Ltd55 SOT 521 (Mum. Trib.) It is contended that Hon'ble Delhi High Court in the case of CIT Vs. Cushman and Wakefield India Pvt. Ltd. (2014) 225 Taxman has laid down the following propositions for TP adjustments: - The authority of TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. - The TPO's report is subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by AO, rather than determining whether such services exists or benefits have accrued. That exercise of factual verification is retained by the AO u/s 37 in this case. - Indeed, this is n....
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....d OECD guidelines it is contended that, ld. TPO in its order has observed that assessee has incurred huge expenditure on manpower and other administrative expenses. It is purely based on assumption that ithas much more experience of operating in India, most of its salesis in India and therefore AE is in no position to provide any support service to India or help it to develop the India market as the knowledge of local conditions lies with the assessee not the AE. (vi) While making this assumption it has been totally ignored that due to globalization and specialization, the outsourcing of routine activates have become an established global business methodology due to number of business advantages flowing from such arrangements like: Lower costs due to economies of scale (b) Ability to concentrate on core functions (c) Greater flexibility and ability to define the requisite service more readily (d)Specific supplier benefits. For example, better security, continuity, etc. (e) Higher quality service due to focus of the supplier.(f) Improved internal management disciplines resulting from the exercise.(g) Less dependency upon internal resources (h) Control of budget (i)Faster setup....
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....ia and other countries because of their economic and commercial needs and availing of Intra group services are recognized by global business practices and OECD guidelines. Thus assessee has provided all the information as referred by the TPO at para 21 of his order: (i) Evidence is furnished that assessee has received the intra group services. (ii) Economic and commercial benefit derived by the assessee from these services by way of reduction in cost as compared to the last year vis a vis the increase in sales is provided as above. (iii) There is a mechanism in place to identify the cost incurred by the AE in providing the intra group services and basis of allocation of cost to various AE's as is evident from the documents placed at. (iv) There is no material with the AO to hold that a comparable independent enterprise would not have paid for these services in comparable circumstances. In fact the similar services received by other group concern has been accepted by the TPO in those cases. (v) In view of above the ALP of the business services determined by the AO on the basis of TPO report by applying CUP method at Rs. NIL is unjustified and uncalled for. Hence the a....
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.... is reimbursement then no addition for mark up is to be made. Such directions given by DRP is beyond its scope as section 144C(8) specifically provides that DRP may confirm, reduce, or enhance the variation proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub sec.(5) for further enquiry in passing the assessment order. Therefore having once accepted that the same ledger account shows both the amounts, the direction given to the TPO to verify the nature of payment is beyond the scope of section 144C and therefore also the addition made by AO/TPO is illegal and bad in law. 3.6. In view of above the addition of Rs. 3,84,918/- made by AO/TPO is uncalled for and be deleted. 4. Ld. DR has filed written submissions and contends that OECD guidelines postulate that to allow AE transactions for rendering of intra group service following information should be made 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 mec....
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.... services or not. If so, what direct or tangible benefit it has derived. (c) Contemporaneous information on the basis of which rate or payment for the service is determined. This includes the cost benefit analysis done by the tax payer at the time of entering into agreement. Whether any bench marking analysis was done by the tax payer so as to compare the amount which he would have paid to an independent person under similar circumstances. (d) Whether an independent person would have paid such amount in comparable circumstances. (e) Whether the expected benefit is commensurate with the payment. (f) Whether the tax payer has separately incurred any expenditure on similar services and if so the necessity of making further payment to the AE for the same activity or it is a duplicate payment. (g) Whether the payment is in the nature of shareholder's activity or largely for the benefit of the AE. (h) Whether the AE is rendering such services to other AEs or independent parties and if so the rate/amount charged from such persons. (i) The cost incurred by the AE for providing such services and the basis of allocation key. (j) If the AE has charged any mark up on su....
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....record. 5.1. Similarly in assessee's own case for AY 2011-12 ld. TPO/AO have unhesitatingly accepted these payments and no any ALP adjustments in this behalf are made. 5.2. Further in the case of Cushman and Wakefield India Pvt. Ltd. (supra) it has been held that commercial wisdom of the assessee cannot be called into question. Therefore, we are unable to subscribe the view adopted by authorities below that these services were not required by the assessee. Such commercial decisions are better left to the business acumen of the assessee and not decided by the AO. We have perused the evidence on record, revenue's own treatment of the same AE and services in associate concern for AY 2007-08 and assessee's own case for AY 2011-12. We are unable to uphold the finding of TPO and AO that details about rendering of services were not furnished and its benefit on the assessee's business could not be ascertained. The details of services provided are mentioned as cited above, besides assessee has not incurred any expenditure on its own in this behalf. It cannot be accepted that assessee will provide even the scratches of information about rendering of services which is otherwise discerni....
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.... be said with surety that all scrap sales have been accounted for. In the draft assessment order, the A O has actually estimated the amount of suppressed sale of scrap. Admittedly, this is an estimate. The DRP, not being an appellate body, cannot on its own estimate any quantum of suppressed sales, if any. It therefore rejected the assessee's objection. Accordingly, the A O made addition of Rs. 1,00,00,000/-. 6.2. Ld. Counsel contends that the scrap as generated is sold off at regular intervals, generally monthly. The scrap lying in the factory at the year end is of a very low amount; hence stock of scrap is not valued at the year end considering the materiality of amount involved. In support, the details of Scrap sale for the month of April 2007 amounting to Rs. 5.35 Lacs were provided. It was categorically submitted that there is no suppression of sale of scrap as assumed by the AO in questionnaire dated 15.12.2010. In course of assessment proceedings, the nature of scrap generated, records maintained and month wise details of scrap sold was filed. The assessee company vide letter dated 28.10.2010 submitted the following facts: i. 99% of scrap sale at manufacturing location....
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....ing that it is not an appellate body to delete such arbitrary addition. Therefore addition made by AO is de-hors any material on record is unjustified and uncalled for. 6.5. Ld. D/R supported the orders of authorities below. 7. We have heard the rival contentions and perused the material available on record. In our considered view the approach adopted by DRP is unsustainable in as much as it has the power to issue necessary direction on the basis of material available on record. There is no gainsaying by shrugging off the decision on the pretext of not being an appellate authority. Adverting to AO's observation, assesses books are upheld, no evidence at all has been indicated to form even a suspicion that assessee indulged in any type of suppression of sales. Thus the finding is nothing but an assumed allegation. Never in past or future the assess's scrape sales have been question. The addition being presumptive and based on conjectures is deleted. This ground is allowed. Ground 3: Not allowing the claim of inventories written off at Rs. 91,83,353/- and the Ld. DRP has erred in not giving direction to delete the addition proposed by the AO in this regard. Both the authorit....
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....ance made in earlier years for AY 2003-04, 2004-05 and 2005-06 have been deleted by Hon'ble ITAT. The DRP observed that keeping in view the quantum involved in all the years, the Department may not have accepted the decision of the Tribunal and has filed an appeal. As the matter has not reached finality, the DRP refrains from taking a position in the matter at present and therefore, up held the order of the AO, resulting in disallowance of Rs. 91,83,353/-. 8.4. Ld. Counsel contends that during the year under consideration the assessee company has written off inventory items to the extent of Rs. 91,83,353/-. The comparative position of write off inventories of earlier years is as under:- A.Y. Inventory Written Off (Rs. Crore) Sales Volume (Rs. Crore) % to Sales Volume 2002-03 16.49 470.08 3.51 2003-04 12.58 432.82 2.91 2004-05 2.88 424.43 0.67 2005-06 3.70 453.56 0.81 2006-07 8.28 383.43 2.15 2007-08 0.92 493.57 0.19 The write off's have been fully allowed as deduction upto AY. 2001-02. In assessment year 2003-04 also the amount of inventory written off was allowed by CIT(A) vide thei....
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....with the details of items wise damaged goods and obsolescence. 8.8. The A O has raised a new issue about the claim of double deduction. Such issue was never raised in earlier years nor any query was raised in assessment proceedings. In fact the A O has made these observations in the assessment order on the basis of arguments of ld. D/R in course of appellate proceedings for assessment year 2003-04 before the ITAT. Hon'ble ITAT in assessment year 2003-04 in ITA No. 188 & 265/JP/2007 dated 9.8.2010 after considering the said arguments of ld. D/R held that there is no case of double deduction and deleted the disallowance made in respect of the inventories written off. Copy of ITAT order is at. 1. Reliance is placed on following cases: J. C.I.T. Vs. ITC Ltd. 299 ITR (AT) 341(SB)(Cal.): CIT Vs. Alfa Leval (India) Ltd. 295 ITR 451 (SC): 8.9. In the present case, the assessee has actually written off the inventory of Rs. 91,83,353/- by identifying the damaged / obsolete items. This is also the regular practice of the assessee. In any case since stock are valued at cost or market price whichever is lower and these inventory has no value, the same is to be allowed to the asse....
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....893/- includes expenditure under various heads which is claimed as business expenditure in the return of income as explained vide letter dated 23.12.2010. The broad nature of these expenses for the year is as under: Nature of Expenses Amount AY 2006-07 A Y 2007-08 Salary, Wages and Bonus 1,315,084 17,31,794 Contribution to PF and other funds 1,30,529 16,70,313 Employees' Welfare 77,033 3,063 Rent 70,820 70,820 State Sales Tax 1,04,71,902 8,01,057 Insurance 82,641 Nil Repair & Maintenance - Others 2,200 20,305 Advertisement 2,73,060 Nil Freight Transport 23,47,566 28,78,878 Travelling & Conveyance 28,65,137 30,98,315 Communication Expenses 35,950 66,174 Purchase services 51,83,184 8,73,738 Conference Expenses Nil 43,43,282 Trade Incentives Nil 1,34,06,436 Employees' relocation Nil 53,48,962 House Support Nil 2,10,66,873 Training / Travel Nil 66,41,842 Damaged Goods - Retail 6,93,20,528 60,18,094 Misc. Expenses 1,90,49,146 2,65,74,796 Others Nil 3,95,474 Total 11,....
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....Cotton Mills (116 ITR 1). 11.2. Expenditure incurred on ground of commercial expediency to facilitate carrying on of the business is allowable as revenue expenditure. By incurring the above expenditure, the assessee has not derived any enduring benefit. Of course, these are one time expenditure for restructuring to be incurred over a period of 18 to 24 months, they do not result into creation of any asset, but only facilitate in the efficient working of the assessee. Hence such expenditure are allowable as business expenditure u/s 37(1). Further reliance in this connection is placed on: CIT vs Madura Coats Ltd [2003] 263 ITR 0241.(Madras). Dalmia Jain & Co. Ltd. v. CIT [1971] 81 ITR 754 (SC) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) Alembic Chemical Works v. CIT [1989] 177 ITR 377 It is, therefore, contended that the disallowance being unjustified may be deleted. 11.3. Ld. D/R relied on authorities below. 12. We have heard the rival contentions and perused the material available on record. Hon'ble Supreme court in Empire Jute Mills has laid down the proposition that merely because expenditure results in some enduring benefit is not alone decisive of ....
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....nt order made following observations: The assessee was required to deduct Rs. 43,55,175/- u/s 194C in respect of amount paid to M/s. Madison Communications Pvt. Ltd. (1.133% of Rs. 38,43,93,204/-). As against this tax deducted is only Rs. 37,45,205/-. Thus tax was short deducted by Rs. 6,09,970/-. This was converted into the amount of payment at Rs. 5,38,36,717/-(Rs. 6,09,970 * 100 / 1.133). Since assessee has already disallowed Rs. 5,13,22,323/- in respect of this party, disallowance of Rs. 25,14,394/- was further made u/s 40(a)(ia). In respect of payment of Rs. 14,10,17,098/- under advertisement, TDS has been made on payment of Rs. 91,16,655/-. Further Rs. 1,48,749/- has been disallowed by the assessee himself u/s 40(a)(ia). Therefore further disallowance of Rs. 13,17,51,694/- is required to be made. He further observed that assessee has not furnished partywise details and therefore on the entire amount, tax ought to have been deducted. Assessee claimed expenditure under the head trade incentive of Rs. 27,07,86,281/- being incentive to distributor under the contractual obligation as per sales promotion scheme. By referring to various circulars of the Board, it was presum....
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....,936/- Total 27,07,86,281/- * The nature of expenditure debited under this head was duly explained vide letter dated 20.12.2010 as under: * Local Promotion expenses - representing expenses incurred on payment of endorsement charges to celebrities, promotional activities carried out in malls, stage events, display dummy packs, display units, cost of art work etc. On these payments tax has been deducted at source. * Temporary price reduction - represents amount reimbursed on account of price adjustment due to temporary reduction in price on scheme. * Damage concession - represents the fixed amount of discount on sales invoice. * Inventive gift to dealers - purchase of goods given to dealers as part of sales incentive. * Ld. AO without appreciating the facts and explanation without applying mind, summarily held that assessee was liable to deduct tax at source u/s 194C and accordingly disallowed sum of Rs. 23,97,32,519/- u/s 40(a)(ia). * In assessment proceedings assessee filed party wise detail of payment above Rs. 5 Lacs vide letter dated 20.12.2010 totalling an amount of Rs. 14,56,89,572/-. Tax has been deducted at source on payment of Rs. 3,10,5....
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....iation proposed in the draft order, which clearly implies that it shall not set aside any proposed variation or issue any direction under sub. sec.5 for further enquiry while passing the final assessment order. It denies the assessee a lawful opportunity of agitating his grievance again before DRP, which is in violation of principle of natural justice. More so when there is no allegation for want of availability of record from the side of the assessee. Consequently the DRP direction to AO to verify the applicability of TDS provisions again is beyond the scope of section 144C. On this count also the disallowance made by AO u/s 40(a)(ia) is illegal and bad in law. 14.4. Ld. Dr relied on the orders of authorities below. 15. We have heard the rival contentions and perused the material available on record. It shall be pertinent to observe that ld AO in A. Y 2008-09, raised similar issues in respect of Trade Inventive of Rs. 37,44,41,176/-and Distributor Coverage Expenses of Rs. 1,62,03,546/-. The AO himself accepted the same contentions of the assessee and made no disallowance qua these payments u/s 40(a)(ia). Since revenue itself has accepted no TDS liability on such trade incent....
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....e. The assessee does not have any agreement with Group M Media Pvt. Ltd. The payment of Rs. 23,44,747/- made to Group M Media Pvt. Ltd. are on behalf of Mindshare, Singapore. Therefore the payment is covered u/s 195. Disallowance was proposed u/s 40(a)(ia). 16.2 The DRP has given the following findings: "It is seen that in the last year also such disallowance was proposed and the DRP upheld the action of the AO. As the matter has not reached conclusion, DRP cannot take the final decision in the matter and therefore, confirms the action of the A O and the objection of the assessee this point is not accepted." Accordingly the A O made the disallowance of Rs. 23,44,747/- in final order. 16.3. Ld. Counsel contends that Group M Media India Pvt. Ltd. was a media advertising agency, the system in which this arrangement worked was to the effect that the scope of services were mutually agreed with no third party interference for advertisement in various Indian TV Channels i.e. Maa TV, Surya Channel, E TV, Star, SUN, etc. for advertising the Indian Product of the company. 16.4. The agreement between M/s. Mindshare, Singapore and Gillette, Singapore, for rendering certain servi....
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....oup M Media as covered by sec. 194C and not u/s 195 by following observations :- " 6.3. After considering the rival submission, we find that Group M Media India Pvt. Ltd. Is an Indian co. as is evident from the company master details placed at Paper Book Page 17. From the same, it is noted that this company is incorporated on 29.11.2001 having registered office at Mumbai. Therefore, it is an Indian Co. as defined u/s 2(26) and is a company resident in India u/s 6(3). All payment made to this company towards advertisement charges is in Indian currency. Tax is deducted at source on such payment u/s 194C. Sec. 195 is applicable when payment is made to a non resident. Admittedly, payment to Group M Media India Pvt. Ltd. Is a payment to resident and not a non resident. Therefore, section 195 is not attracted. The AO has not disputed the genuineness of the payment and therefore only because there is no agreement for the advertisement work with this company cannot be viewed adversely. Therefore, the disallowance of Rs. 36,70,04,056/- made by the AO is incorrect, against law and the same is deleted. So far as expenses on trade incentive is concerned, we find that similar incentives give....