TaxTMI 
TaxTMI 
2017 (6) TMI 126
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.... Resolution Panel ("Ld. DRP") is a vitiated order as the Ld. DRP has erred both on facts and in law in confirming the addition to the extent of INR 16,60,70,145 in part made by the Ld. Transfer Pricing Officer ("TPO") to the Appellant's income, is without appropriate application of mind and in undue haste. 2. The reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the Learned Transfer Pricing Officer ("Ld. TPO") for computation of the Arm's Length Price ("ALP"), as is required under section 92CA(1) of the Act. 3. The Ld. AO pursuant to the directions of the Ld. DRP erred on facts and in law in enhancing the income of the Appellant by Rs. 16,60,70,145 holding that the international transactions pertaining to the receipt of second line support services do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred by: 3.1. not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case....
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.... 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : the assessee company, a wholly owned subsidiary of Telefonaktiebolaget LM Ericsson, Sweden, which is incorporated under the Indian Companies Act, 1956, which is the ultimate holding company of all Ericsson Group Companies situated across the globe. Assessee company, during the year under assessment, was into the business of trading, manufacturing/ assembly of telecommunication carrier equipment for sale to the independent customers, providing implementation, commissioning and support services relating to telecommunication systems and marketing of telecommunication equipment manufactured by Group Companies and contract telecommunication software development services. 3. During the year under assessment, the assessee company entered into following international transactions :- S.No. Description of transaction Method Selected Total value of Transaction (Rs.) 1. Purchase of raw material, spares etc. Transactional Net Margin Method ('TNMM') 18,766,728,990 2. Sale of material 113,386,404 3. Purchase of Finished goods 10,579,698,565 4. Pu....
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.... through the documents relied upon and 7 orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.3, 3.1, 3.2, 3.3, 3.4, 3.5 & 3.6 8. Ld. AR for the assessee challenging the impugned order relied upon the order passed by the Tribunal in assessee's own case for AY 2007-08 vide order dated 11.05.2012 in ITA No.5141/Del/2011 and this factual position has not been controverted by the ld. DR for the Revenue. It is also not in dispute that the facts of the present case are similar to that of AY 2007-08 qua receipt of second line support services from associated enterprises. AO/TPO enhanced the income of the assessee by Rs. 34,29,13,561/- on the ground that international transaction of receipt of second line support from AE does not satisfy the arms length principle under the Act. 9. Now, the sole question arises for determination in this case so far as transfer pricing issue is concerned :- "as to whether AO/DRP have erred in making upward adjustment of Rs. 16,60,70,145/- to the returned income of the assessee on account of ALP of the second line support services (SLS) provided by the AE to the assess....
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....blems have been referred to the AE. Therefore, for availing the services of the AE for resolving the complicated problems the prerogative is of the assessee and the Department cannot say that the assessee does not require to make any payment for resolving the complicated problems of the instruments. Anybody obtaining AMC must have intention that the instrument which he is operating for his use should run continuously and effectively and it is for that purpose only one would avail AMC. Anticipating that some problems may not be resolved at the level of the assessee's own staff available with as the said staff may not be having the skill upto the level which requires to resolve complicated problem and in turn assessee adopted a mode according to which it is ensured that all the problems arising in the functioning of the instrument are efficiently resolved. That decision of the assessee is business expediency of the assessee so that the customers to whom the instruments have been supplied remain satisfied about the functioning of the equipment. Therefore, we find no force in the claim of the Revenue that for availing these services the assessee was not required to make any payment....
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....rovided 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." 30. Keeping in view the aforementioned decision of Hon'ble Delhi High Court, we are of the opinion that it will be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee. At the same time it has also to be seen that whether the price paid by the assessee is at arm's length. The term 'arm's length price' has been defined in section 92F which means a price which is applied or proposed to be applied in the transactions between the persons other then Associate Enterprises in uncontrolled conditions. It is only because of that their Lordships in the aforementioned decision have observed that "the quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expendi....
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....7-08, held that, "it would be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee or those expenses have not benefited the assessee." So, in 13 the instant case also, the duty of the TPO is to examine the quantum of expenditure as per law but the allowability of the expenses as business expenditure is required to be examined by the AO. So, following the decision rendered by the coordinate Bench of the Tribunal in assessee's own case for AY 2007-08, we hereby restore the issue regarding determination of arms length price with regard to receipt of second line support services to the file of TPO/AO to redetermine in the light of the observation made by the coordinate Bench vide order dated 11.05.2012 rendered in ITA No.5141/Del/2011 in assessee's own case by providing adequate opportunity of being heard to the assessee. Grounds No.3, 3.1, 3.2, 3.3, 3.4, 3.5 & 3.6 are determined in favour of the assessee. GROUNDS NO.4 & 4.1 11. AO in accordance with the direction issued by DRP made ad hoc disallowance of Rs. 60,72,481/- being 10% of the advertisement and business promotion expenses b....