TaxTMI 
TaxTMI 
2016 (5) TMI 277
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..../- for A. Y. 2006-07 and Rs. 91,85,559/- for A. Y. 2007-08. 04. Facts apropos are that assessee engaged in the business of manufacture and trading of oil seals, had international transactions reported in form 3 CEB filed for the impugned assessment years, as under : A. Y. 2006-07 : Manufacturing Rs. Import of Raw materials 53,03,080 Expori of raw materials 1,88,263 Export of finished goods 10,84,75,954 Trading Import of finished goods For trading 10,56,65,603 Others Rs. Import of capital goods 48,35,102 Test certification fees received 91.700 Professional charges received 38,37,608 Group IT Services paid 23,53,757 Technical Fees paid 90,15,188 Reimbursement of expenses paid 7,88,007 A. Y. 2007-08 : Transactions Amounts in Rs. Import of raw materials 97,91,164 Export of raw materials 2,95,611 Export of finished goods 15,40,10,598 Import of finished goods 13,87,70,814 Import of capital goods 1,08,76,107 Payment for Group IT Services 74,32,059 Technical Fee paid 17,53,500 Reimbursement of expenses 36,36,500 05. Out of the above international transactions, the technical fee paid was to M/s. RFT S.P.A, Italy, as pe....
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.... along with the submission as Annexure-I. Heading Reference in the notice-2.3 In respect of each type of expenses under the Intra group services rendered by the Associated Enterprises, the basis of such quantification of services or costs involved. Also justify mark-up in each category of expenses as mentioned above. Response None of the intra group services that are rendered by the Associated Enterprises to SKF India embed a mark-up on costs. The compensation for such activities are on a pure cost basis. Heading Reference in the notice-2.5 Whether such payments are made by any independent concern or entity in any other country through which the SKF Group carries on similar business as that of you. If yes, copies of the agreements for such services and also the basis on which such payments are paid. Response No such payments are made by any independent concern or entity in any other country through which the SKF Group carries on similar business as that of you. 2. Query 3 Heading Reference in the notice-3.2 Submit copies of invoices raised by your AE in your favour and also ledger account of "Technical Fee" in your books of account for the Financial Year 2005-....
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....sfer of the said technical assistance was by way of package (bundled) price purchase contract. 4.5 The rotes and method of commission of such fees finer technical services that are paid payable to the RFT S. Pun suavity few fees substitutions because in other countries for manufacturing same or similar products under the following categories: 4.6 The rates and method of computation of such fees for technical services in respect of those countries wherein the RFT S.p.a., Italy/your AEs manufactures its products through unrelated parties under the following heads: (a) To & fro transport cost (b) Preparation allowance (c) Hotel stay charges (d) Instruction fee (e) Daily allowance and diet charges (f) Any other fee Pleases file the copies of relevant agreements in this regard. 4.7 Whether for the payment made towards fees for technical services. Any separate transfer pricing has been done. If yes, please submit the transfer pricing analysis done. If no, then justify the rates at which the company paid technical assistance fees covering the aspects such as benefits value additions achieved on account of such assistance." 08. TPO was of the opinion that assessee had....
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....ero. Result was that an adjustment equaling to the total payments alleged to have been made by the assessee to its AE was recommended for u/s.92CA of the Act. 10. When draft assessment orders on the above mentioned lines were issued, assessee preferred to move the DRP. Assessee assailed the rejection of TNMM applied by it on the aggregate of transactions. Assessee also assailed the finding of the TPO that no services were rendered by the AE to the assessee. As per the assessee, technical service fee could not be tested in isolation since technology to manufacture the oil-seals were proprietary to its AE and closely inter linked to the manufacturing process. Assessee once again relied on the agreement entered with its M/s. RFT S. P. A, Italy. It also relied on OECD guidelines on intra group services. As per the assessee its AEs were a centralised service provider and acted as facilitators. 11. However, DRP was not impressed by any of the above arguments. According to them, fees for technical services was fixed at a sum of 1,65,000 Euros and did not depend on actual quantum of assistance. As per the DRP, no uncontrolled party would agree to pay a fixed amount for such services. DRP....
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....y them for which reimbursement was made on cost basis inter alia included the following : 1 Developing and maintaining common (SKI-' Group) applications as well as FT systems specific to the assessee in India : 2 Providing computer operation capacity and run applications concerning the business of the 3 Providing the assessee with telecommunication, electronic data interchange and electronic mail services; 4 Purchasing software & software licenses using the purchasing power of central acquisition in all service categories as may be necessary or helpful for the development, expansion and improvement of the business of the assessee; 5 Providing the assessee with SKF Data service common (SKF Group) IT infrastructure; 6 Providing the assessee with factual information, data and recommendation and the results of studies and service relating to the IT business and management of the assessee, "so as to enable it to promote and improve its business; 7 Providing the assessee with onsite and remote technical support concerning personal computing, problem management, installation and test of IT applications and hardware; 8 Providing helpdesk and knowledge support not availa....
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....ow for the manufacturing operations of the assessee. Vis-a-vis the latter, claim of the assessee was that there was no profit element for the AE since the allocations were done on appropriate keys. Another argument of the assessee is that in relation to the latter, there was no technology made available by the AE. TPO had on the other hand aggregated the two set of transactions and came to a conclusion that no services were rendered by the AEs namely, one in Italy and the other in Sweden. With regard to the alleged payment of technical services, assessee had an agreement dt.06.04.2005, with RFT S.P.A, Italy. Clauses (i) to (xi) are reproduced hereunder : NOW THEREFORE, the parties hereby agree as follows:- 1. RFT, during the term of this Agreement, train and instruct the CR India personnel at RFT's plants and/or at CR India factory premises at Bangalore in order to enable CR India personnel to become familiar with the know-how and any other technical information and any other data related to manuals, manufacturing and assembly data in the form of drawings, specifications, description, instruction, advice, recommendation, production & design processes, production methods, te....
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....d Accommodation expenses of technical personnel sent by RFT and also subject to deduction of applicable Income Tax prevailing on the date of payment and only the balance shall be paid as technical fee. RFT to raise separate invoice for technical assistance fee and debit note for reimbursement of expenses with necessary documents. For the purpose of this clause, any Income Tax deducted at the time of payment, shall be followed by a Tax Deduction Certificate at the end of each quarter following the payment. 8. All payments made to RFT hereunder shall be by telegraphic transfer remittance to banks designated by RFT. 9. CR India shall undertake to obtain necessary permission from Reserve Bank of India and under other regulatory authorities, if any, required under any Indian Law for the payment of technical fee as mentioned in article 7 above. Bank charges incurred in India shall be paid by CR India, and bank charges incurred outside India shall be paid by RFT. 10. RFT shall not be responsible for any damages resulting from the incorrect application by the CR India of Technical Information, Technical Know-How, or Technical Support given by RFT. RFT shall not have any indirect and ....
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....whether a third party-in an uncontrolled transaction with the assessee would have charged amounts lower, equal to or greater than the amounts claimed by the associated enterprises, CWS and CWHK has to perforce be tested under the various methods prescribed in section 92C of the Act. The question thus required to be addressed-and determined, is whether an independent entity-for the same liaisoning and client interaction services as were provided by CWS and CWHK-charges an amount less than or equal to or more than SGD 74,330 and SGD 281,265. An independent entity would quite possibly include a mark-up over and above the cost, and thus, exceed the value charged by the associated enterprises in this case. The sequitur cannot be that the cost incurred by those entities would be the same as the associated enterprises in this case. It may be greater (in which case section 92(3) would clearly apply) or lower. This cannot be a matter of speculation. Nor is the application of section 92(3) a logical inference from the fact that CWS and CWHK have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter....
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....r cent. The precise activities conducted by the Client Solutions Group for the benefit of the assessee out of the entire range of activities conducted by it, and the cost applicable to such activities have not been provided. Instead a broad-brush approach at flatly "equating" the costs relatable to the revenue generated has been provided. Whilst several e-mails from Mr. Arshpreet Choudhary were placed on record, they evidence the fact that certain services were rendered. That constitutes only the first part of the exercise- the second aspect is to relate the cost of specific activities conducted to the benefit incurred by the assessee, rather than allocate cost from a common pool or basket of revenue generated through an unexplained percentage relation to the revenue generated. The basis for the costs incurred, the activities for which they were incurred and the benefit accruing to the assessee from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the assessee (deductible under section 37 of the Act) and, secondly, whether that amount passed muster under a transfer pricing analysis. 32. Having ma....
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.... obtain revenue upon dealing in real estate, certain work has to be done. All the primary facts were submitted to the Assessing Officer as well as the Transfer Pricing Officer. The names of the parties were mentioned. Without examining any such details, it cannot be said that the revenue earned by the assessee was only on account of incidental benefit. There is a force in the claim of the assessee that to enable it to earn revenue from IBM, it was necessary to provide services to IBM outside India. If such services are provided by the employees of the assessee- company, then, it has to incur the cost of its employee who has to travel to the destination and that would result in extra expenditure . . ." 34. The court first notes that the authority of the Transfer Pricing Officer is to conduct a transfer pricing analysis to determine the arm's length price 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 Assessing Officer. This distinction was made clear by the Income-tax Appellate Tribunal in Dresser-Rand India Pvt. Ltd. v. Addl. CIT [2012] 13 ITR (Trib) 422 (Mumbai) (page 432) : "We find tha....
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.... this service is what an independent enterprise would have paid for the same. Similarly, whether the associated enterprises gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The associated enterprises may have given the same service on gratuitous basis in the earlier period, but that does not mean that the arm's length price of these services is 'nil'. The author ities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the Revenue authorities in this case is that no services were rendered by the associated enterprises at all, and that since there is no evidence of services having been rendered at all, the arm's length price of these services is 'nil'." 35. The Transfer Pricing Officer'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 Transfer Pricing Officer's authority in this case, which is to ....
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....ng Officer at 'nil'." This is a slender yet the crucial distinction that restricts the authority of the Transfer Pricing Officer. Whilst the report of the Transfer Pricing Officer in this case ultimately noted that the arm's length price was 'nil', since a com parable entity would pay 'nil' amount for these services, this court noted that remarks concerning and the final decision relating to, benefit arising from these services are properly reserved for the Assessing Officer. 36. In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client interaction with IBM on behalf of the assessee- activities for which, according to the assessee's claim-interaction with IBM's regional offices in Singapore and the United States was necessary. These services cannot-as the Income-tax Appellate Tribunal correctly surmised-be duplicated in Ind....
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....ng Officer are extracted below : "4.5 Repeatedly during the course of the hearings, the assessee- company bad been asked to match each transaction in the list to work done by the group entity specifically in relation to the property trans action done but this has not been given by the assessee in its submissions. This makes it clear that the assessee-company is in no position to clarify or substantiate the work done or services rendered by the group concerns to men this payment of referral fee to them at a high rate of 30 per cent. 4.6 In the submissions given the assessee-company has simply filed some invoices raised on the group entities where it is written that the referral fee at 30 per cent. of the gross fee earned by C&W India . . . None of the agreements filed by the assessee-company specify the exact percentage of fee to be received by CWS. No prudent business person will leave the issue of payment of fee open. The assessee has not been able to demonstrate the genuineness of the transaction, the services rendered by the group entities to merit this referral fee at a high rate nor the business purpose of the same. 4.8 On close scrutiny of the e-mails, copies of whic....
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....pra) (page 401 of 19 ITR (Trib)) : "The second argument of learned counsel that the Transfer Pricing Officer is not empowered to disallow the expenditure and that the very reference to the Transfer Pricing Officer by the Assessing Officer presumes that the amount in question is allowable under section 37 of the Act and certain case laws were relied upon for this proposition. We are unable to persuade ourselves to agree to this proposition for the reasons that the Central Board of Direct Taxes, by way of a circular, has directed the Assessing Officer to refer to all transactions beyond a specified limit, to the Transfer Pricing Officer for determining the arm's length price. When the Assessing Officer has no discretion in the matter, in view of the binding nature of the Central Board of Direct Taxes instructions dated May 20, 2003, directing all the officers of the Department to refer the matters to the Transfer Pricing Officer for determination of the arm's length price where the aggregate value of international transactions exceeds Rs. 5,00,00,000, the Assessing Officer has a very limited role. He has to mechanically follow these instructions. There is no application....
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....e contrary, it represents the correct division of jurisdiction between the two entities. 41. On the merits, the court notes that the referral fees was paid according to "international fee sharing rules and referral fees on tenant representation transactions", details of which were provided by the assessee. This is extracted below : "Tenant representation transactions The referring party will receive the following percentage of the net commission paid to the executing For business referred with competition : For the portion between $0 $20000 0 per cent. For the portion between $20001 $150000 20 per cent. For the portion between $150001 $500000 30 per cent. For the portion above $500001 40 per cent. For business referred without competition : For the portion between $0 $20000 0 per cent. For the portion between $20001- $150000 30 per cent. For the portion between $150001 $500000 40 per cent. For the portion above $500001 50 per cent. " 42. Whether these figures represented the arm's length price of such referral transactions was to be decided by the Transfer Pricing Officer, who concluded that "no adverse in....
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....d (though still not proven) referral transactions, the Assessing Officer was bound to accept that finding ; it is, post-2007, binding. In this context, it was incorrect for the Assessing Officer to remark that the "assessee is in no position to clarify or substantiate the work or services rendered by the group concerns to merit this payment of referral fees to them at a high rate of 30 per cent." (emphasis supplied) The quantum of payment, i.e., the value of transaction or the percentage referral fees paid was confirmed by the Transfer Pricing Officer in his determination. The payment was at the arm's length ; the Assessing Officer cannot reassess that issue or draw adverse conclusions from the percentage value of the referral fees. The Assessing Officer can, however, in his assessment under section 37 decide whether work or services were actually rendered as claimed by the assessee. In other words, the Assessing Officer may determine whether the stated transactions are real and genuine, i.e., the existence of a referral from the associated enterprises to the assessee. This, as part of the broader exercise to determine whether the expenditure was for the purposes of the b....
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.... not for a business purpose. This clearly lies within the Assessing Officer's jurisdiction ; a ruling to the contrary would mean that the expenditure cannot be tested as against the legal standard under section 37. The Income- tax Appellate Tribunal reasoned that this amounts to doing something indirectly that cannot be done directly. Quite to the contrary, this is something that the Assessing Officer can do, and has done, directly. 44. The other aspect is that the Income-tax Appellate Tribunal dismissed the assessment order on the merits as well. It held that the Assessing Officer's assessment of evidence was incorrect because "the assessee had submitted ample evidence to support the expenditure." Having set aside the Income- tax Appellate Tribunal's reasoning that the Transfer Pricing Officer's report was binding on this issue, this bare assertion of "ample evidence" remains the only reference to the merits of the Assessing Officer's order. This court notes that neither the Assessing Officer (who did admittedly deal with the issue at some length) nor the Income-tax Appellate Tribunal (which summarily noted that presence of evidence) have discussed what such....
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....ly prove rendering of services by the AEs to the assessee . The facts and circumstances of the case as described above show that the question of bench-marking the value of such services requires a fresh look by the AO / TPO. We therefore set aside the orders of the AO / TPO and remit the issues relating to alleged payments for technical fees and alleged reimbursement of group IT expenditure to the AEs back to the file of the AO / TPO for consideration afresh in accordance with law. Assessee is free to produce any evidence to show that services were indeed received by it from the AE. Assessee is also duty bound to bench-mark such services by comparing it with uncontrolled transactions by independent enterprises where similar services are received. Accordingly, ground I of the assessee for both years is treated as allowed. 20. Vide its ground II(1), grievance of the assessee is on disallowance of reimbursement of IT expenditure to SKF Data Services, Sweden for nondeduction of tax at source, applying Section 40(a)(ia) of the Act. 21. Ld. Counsel for the assessee submitted that this was one of the two international transactions, bench-marked by the TPO with an ALP of zero. As per the....
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....re rendered by M/s. SKF Data Services, Sweden, to the assessee and how far the "make available" clause was or was not satisfied were never verified either by the TPO or the DRP. In our opinion, this aspect also requires a fresh look by the AO. We set aside the orders of the authorities on the aspect of disallowance u/s.40(a)(ia) of the Act also and remit it back to the file of the AO for consideration in accordance with law. Ground.II(1) of the assessee stands allowed for statistical purpose. 24. This leaves us with two other grounds taken by the assessee which appears in appeal for A. Y. 2007-08. First one relates to set off of carry forward loss. As per the assessee, carry forward loss for A. Y. 2006-07 was Rs. 41,95,29,825/- and not Rs. 10,96,29,092/-. Ld. AR submitted that if the correct figure of carry forward of loss is considered then there would be no positive income for the impugned assessment year. 25. Since the question is regarding what was the actual carry forward loss available to the assessee for A. Y. 2006-07, we are of the opinion that it is an aspect which can be verified by the AO. We therefore direct the AO to verify and give the assessee the benefit of actual....