TaxTMI 
TaxTMI 
2017 (1) TMI 311
X X X X Extracts X X X X
X X X X Extracts X X X X
....39,70,458 under section 37(1) of the Act, towards cost allocated by the associated enterprises ("AEs") of the Appellant in respect of provision of support services, alleging that the Appellant had failed to establish the receipt of services and the benefits realized from such services. The AO / DRP have further erred by determining the arm's length price ("ALP") for such support services as Nil. 3. That on the facts and circumstances of the case and in law, the AO / DRP have erred in disallowing the expenditure of INR 33,67,455, under section 37(1) of the Act, towards cost allocated by the AEs, specifically incurred in connection with the Appellant's Indian operations, alleging that the Appellant had failed to establish the receipt of services and the benefits realized therefrom. The AO/DRP have further erred by determining the ALP for cost allocated as Nil. 4. That on the facts and circumstances of the case and in law, the AO / DRP have erred in disallowing the expenditure of INR 69,62,059 under section 37(1) of the Act, towards corporate cost allocated by its AE, namely Eaton Technologies Private Limited ("ETPL"), alleging that the Appellant had failed to establish ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 39,70,458/- Costs allocated to the assessee by its AE amounting to Rs. 1,03,29,514/-. For the year under consideration, the assessee had furnished the return of income declaring total income of Rs. 1,33,23,590/-. The case of the assessee was selected for scrutiny. In the draft assessment order the Assessing Officer show caused the assessee to submit the basis of allocation of corporate cost by the AE to the assessee and also the evidences for receipt of actual services. In reply, the assessee explained the mode of application of expenses by the AE and also elaborated upon the list of services undertaken by the AE, cost of which was allocated to the assessee. 8. However, the Assessing Officer was not satisfied as the basis of allocation and also the documentary evidence for receipt of actual services from the Indian entity were not furnished, therefore, the Assessing Officer proposed to disallow the said expenses under section 37(1) of the Act. The assessee further explained the basis of allocation which admittedly has been noted by the Assessing Officer, however, in the absence of any documentary evidence for the same, the Assessing Officer held that the assessee failed to pro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vice and IT support services, then the cost was allocated by the respective AEs to the assessee which was debited by the assessee. However, the said cost expenditure was reimbursed by the principal at a mark-up of 18.8%. The learned Authorized Representative for the assessee pointed out that the Assessing Officer had disallowed the said expenditure under section 37(1) of the Act by transgressing into TP provisions that Arm's Length price of the said cost allocation should be taken at Nil. He stressed that where cost was debited has been received with mark-up from the principal by the assessee, there is no question of disallowance of any part of the cost allocated expenses. Our attention was drawn to the break-up of the details relating to support services received from the AEs which are enlisted in the written submissions and it was pointed out that there is no merit in the disallowance of Rs. 39,70,458/, 33,67,455/- and sum of Rs. 69,92,059/- on account of corporate cost allocation. He further pointed out that the Tribunal while deciding the issue in assessment year 2009-10 has sent back the matter to the Assessing Officer, who in turn giving effect to the order of the Tribunal, h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....T and communication support services 760,666 -Sample copies of invoices received by the Appellant from ETPL for provision of IT and communication support services (Refer pages 61-72 of the paper book) -Copy of TP study report benchmarking the charge payable by the Appellant to its AEs for receipt of support services (Refer pages 175 and 192 of the paper book) Eaton Industrial Systems Private Limited ('EISPL') IT and communication support services 36,653 -Copy of TP study report benchmarking the charge payable by the Appellant to its AEs for receipt of support services (Refer pages 175 and 192 of the paper book) Eaton Shared Services Limited, UK IT support services -Post implementation support on Oracle system 5,21,979 benchmarking the charge payable by the Appellant to its AEs for receipt of support services (Refer pages 175 and 192 of the paper book) -Sample copies of invoices received by the Appellant from Eaton Limited UK (Refer pages 99 and 114 of the paper book) Total 39,70,458 13. We find certain specific expenditure was incurred on behalf of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....roduced the order of TPO for assessment year 2011- 12 under which cost allocation transactions were accepted at Arm's Length. 16. In the present set of facts where the assessee is rendering procurement services to its principal and which in turn is being compensated on cost plus 18.8% mark-up; where the entire cost incurred by the assessee has been remunerated with a mark-up which is being offered to tax by the assessee in year to year, there is no merit in the orders of Assessing Officer/DRP in making the aforesaid disallowance under section 37(1) of the Act. Where the cost debited by the assessee has been recovered from its principal with mark-up and taxed in the hands of the assessee, there is no loss to the Revenue and in any case the disallowance of the expenditure would lead to a situation wherein on one hand there is disallowance in the hands of the assessee and on the other hand the mark-up on the recovery of the said expenditure is taxed in the hands of the assessee. Such an anomaly cannot be upheld in the hands of the assessee. In any case the assessee has placed on record the evidence of support services being received from the AEs which are in the nature of back offi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pulated therein. While applying the provisions of section 37(1) of the Act the nature of the expenditure is to be seen and where the same is incurred for the purpose of business and is not in the nature of capital or personal expenditure; whereas under the provisions of section 92 what has to be determined is the price of such expenditure and whether the same is at Arm's Length, then no adjustment is to be made to the price. The two provisions operate in different fields. 20. The first aspect to be addressed, vis-à-vis the disallowance of expenditure is whether the same is disallowable under section 37(1) of the Act. The assessee is incurring similar expenditure and claiming the same as business expenditure in its hands from year to year. The assessee is also being reimbursed the said expenditure by its principal with mark-up of 18.8% in all the years preceding and also succeeding. The Assessing Officer while making the disallowance had referred to the order of the DRP in assessment year 2009-10. The assessee had carried the matter of disallowance made under section 37(1) of the Act to the Pune Bench of the Tribunal and the Tribunal in Eaton Industries Manufacturing Gmbh ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o the rent paid to AE-Eaton Power Quality Pvt. Ltd. and also towards corporate service services. The DRP allowed the claim of the assessee towards back office services, payment of rent and even corporate support services. 22. Further, the Assessing Officer while carrying out the assessment proceedings for assessment year 2014-15 did not make any disallowance under section 37(1) of the Act on account of any allocation of cost. 23. The assessee had debited total cost incurred during the year at Rs. 6,58,82,666/- which is evident from the profit and loss account placed at page 130 of the paper book. The assessee claims that this Rs. 6.58 crores include service tax refund of Rs. 16,12,402/- which form part of other income and was accordingly shown as other income while recognizing the revenue for the year including the exchange difference gain (net). He pointed out that the mark-up of 18.8% at Rs. 6,42,70,263/- worked out to Rs. 1,20,82,809/- and the total cost plus mark-up at Rs. 7,63,53,162/- has been shown as sale of services. Our attention was drawn to the profit and loss account placed at page 130 of the paper book in this regard and we have verified the same. The profit bef....