TaxTMI 
TaxTMI 
2016 (6) TMI 1008
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....o and for the benefit of 3M's affiliated subsidiary in APAC region. Further it also undertakes coordination of certain services from other companies in 3M group for the benefit of various 3M subsidiaries in APAC region. 3M India is a purchaser of certain services. Key services provided are as follows: * Information Technology Support services * Marketing and sales support services. * Laboratory and technical support services. The assessee-company filed return of income for the assessment year 2005-06 and 31/3/2005 declaring income of Rs. 49,84,33,067/-. After processing return of income under the provisions of sec.143(1)of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short], the case was selected for scrutiny by issuing statutory notice u/s 143(2) of the Act. 3. During the course of assessment proceedings, Assessing Officer (AO) noticed that the assessee-company had reported the following international transactions: Import of raw materials ... Rs.30,53,79,366 Export of manufactured products ... Rs. 45,75,095 Import of finished products for Resale ... Rs.61,03,51,199 Provision of administrative and business support se....
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.... The AO passed the assessment order dated 26/12/2008 incorporating the above transfer pricing adjustments of Rs. 46,08,67,243/-. 4. Being aggrieved, an appeal was preferred before the CIT(A). During the course of proceedings before the CIT(A), the assessee-company classified the services rendered by 3M Singapore broadly into information technology services, administrative business support service fees (marketing and sales support services), laboratory and technical services. It was also stated that the assessee-company filed certain evidence in support of the above services rendered by 3M Singapore Co. The CIT(A) called for remand report from the TPO on the additional evidence filed by the assessee-company. However, the TPO, vide letter dated 29/12/2009 held that the evidence filed does not conclusively prove that the services are rendered and subsequently the CIT(A) had called for certain additional information based on the remand report of the TPO. The CIT(A) also made an analysis of administrative and business support services fee paid by the assessee-company as under: Particulars FY 2002-03 FY 2003-04 FY 2004-05 FY 2005-06 Value of administrative and busine....
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.... doubt the expense or consider their payment to be beyond what is justified as an arm's length payment." After making the above observations, the CIT(A) held that there was sufficient evidence in respect of information technology services. However, in respect of other services, the CIT(A) was not convinced about the services rendered and therefore, disallowed it. The department is in appeal before us in IT(TP)A No.727/Bang/2011 challenging the direction of the CIT(A) allowing information technology related expenses and the assessee-company is in appeal in IT(TP)A No.725/Bang/2011 challenging the directions of the CIT(A) confirming the addition on account of other services, marketing and sales support, Laboratory technical support services. 6. Before us, learned counsel for the assessee had filed a Note on the description of services provided by 3M Singapore Co. and also evidence to say that services have been rendered by 3M Singapore in the form of chart. It is stated that 3M Singapore Co., had provided Information Technology Support Services as under: S. No. Description of Service Explanation on the type of services Mode of receipt of service Benefits Deri....
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....s Processing accuracy, efficiency and visibility, customer focus, inventory and warehouse management This is achieved through integration of systems to enable systematic order entry, tracking, web enabled order entry and enquiry. Automated pricing, ease of tracking customer order processing, providing customer and product history minimizing gaps between demand and supply chains. The ICAP Applications are very useful and are necessary to carry out the day to day operations of the enterprise. These systems provide comprehensive solutions to manage the business right from procurement to sales, financial accounting and reporting system solutions. 3M India benefits from these services by having a safe and secure data processing platform, develop appropriate internal check and control procedure, gain faster connectivity to global servers, effective intra company telecommunication and networking and thus consequently reducing travel costs, developing new software platforms and sharing the best practices, maintenance support by an expert team, effective monitoring of the IT assets, website management etc. Submission dated 30th November 2010 explaining the IT Services in detail, need for....
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....ation etc., that was available with the group and the copy of invoices raised by 3M Singapore and the working for cost allocation sheet were also filed. It was further submitted that by availing the above services, there was a growth in revenue which is 25% compared to 5% of the previous year and the growth continued at a higher rate. It was submitted that similar services were received by the assessee-company in the preceding years which were held to be at arm's length by the TPO. Finally, learned counsel for the assessee submitted that it was not open to the TPO or the income-tax authorities to question the business wisdom of the assessee-company. All these business decisions have to be considered from the point of view of a prudent businessman and it is not expected of an assessee to maximize his profits. Revenue cannot sit on the business decision of the assessee. In this connection, reliance was placed on the following decisions: * CIT VS EKL Appliances. [2012]345ITR241(DEL HC) * Knorr - Bremse India Private Limited vs ACIT(ITA No. 182/2013)(P&H HC) * AWB India Pvt Ltd vs DCIT(ITA No.6480/12)(DEL ITAT) * McCann Erickson India Private Limited vs ADCIT (ITA No 5781/2....
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....ding that there was no need to incur such expenditure. While coming to this conclusion, the Hon'ble High Court has referred to the judgment of the Apex Court in the case of Eastern Investments Ltd. vs. CIT (20 ITR 1)(SC) and CIT vs. Rajendra Prasad Moody (115 ITR 519)(SC). It has been held by the Hon'ble High Court that : "It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was held by the Supreme Cou....
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....1. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the asses....
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....was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditurecannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observat....
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....y no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorized. The ratio of the above decision was followed by the co-ordinate benches of the Tribunal in several cases. Some of them are: i. Dresser-Rand India Pvt. Ltd. v. ACIT [2012] 13 ITR (Trib.) 422 (Mum) ii. Ericsson India (P) Ltd. v. DCIT [2012] 146 TTJ 708 (Del) iii. AWB India Pvt. Ltd. v. ACIT: ITA No.4454/Del/2011 (Del-ITAT); AY 2007-08 iv. SC Enviro Agro India Ltd. v. DCIT [ITA No.2057-2058/Mum/2009] v. Abhishek Auto Industries Ltd. v. DCIT: ITA No.1433/Del/2....
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....rely book entries and paper work. The mere fact of payment of commission by account payee cheques and compliances with the TDS provisions shall not alone enable the assessee to claim deduction unless and amount has been expended wholly and exclusively for the purpose of business. 11. A Co-ordinate Bench Tribunal of Delhi in the case of Kanu Kitchen Kulture (P)Ltd Vs DCIT (2013) 28 ITR (T) 49 (Del.-Trib.) held that whether the assessee failed to demonstrate the services rendered by the commission agent, the commission was disallowed. The relevant paras of the judgment are reproduced below; "22. Thus the assessee as utterly failed to demonstrate the nature and extent of service rendered by the agent and availed of by the assessee for its business of modular kitchen. In this scenario what appears on record is merely book entries coupled with TDS the amount which will be claimed as a refund by the recipient being a loss making concern. In our considered view the assessee has produced only skeletal paper work of the arrangement without any iota of evidence about actual business services rendered. 23. The assessee's claim for allowing similar commission payment in su....
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....esent case, the learned CIT(A) had not examined any evidence to show that the agents have actually rendered their services. The learned CIT(A) had totally misdirected himself by examining the issue from the angle of tax deducted at source and he had failed to examine whether the services are actually rendered by the commission agents or not. Therefore, we are unable to sustain the order of the learned CIT(A) and hold that the commission payments in question are not allowable keeping in view the ratio laid down in the cases cited supra. The assessee company had miserably failed to demonstrate the actual services rendered by the agents to whom the commission payments were made, despite ample opportunity granted by this Tribunal to furnish evidence in support of service rendered by commission agent. 10. In light of the ratio laid down in the cases cited supra we hold that the condition of rendition of services should be satisfied by the assessee so as to allow the same as expenditure. In the present case, assessee-company had not produced any evidence in support of rendering of services before the TPO. It is only before us, by way of additional evidence, assessee-company has filed ....