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2017 (11) TMI 1743
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.... the case are that Siemens Gamesa Renewable Power Pvt. Ltd., (formerly known as 'Gamesa Renewable Private Limited') ('Gamesa India' or 'the assessee') is an Indian company engaged in the business of manufacture of renewable energy equipments like Wind Energy Generation ('WEG', commonly known as 'windmills') and Solar Power Generators. The assessee provides turnkey solutions to its customers which includes the following activities: (a) Undertaking preliminary activities such as identifying land, obtaining approvals for developing wind farms (b) Manufacture and sale of WEGs (c) Erection and commissioning of WEGs (d) Operation & Maintenance of wind turbine generators 3.1 The facts of the issue as narrated in the assessment year 2012-13 are that the assessee maintained the documentation as required under the Rule 10D of the IT Rules, 1962 with respect to international transaction for the financial year 2011-12. The assessee is engaged in manufacturing and assembly of wind turbines, wind farm development, erection and commissioning and operations & maintenance of wind turbines. Based on the Functional Asset a....
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....ed & bought out components 33,10,48,591 Total 39,08,95,979 The TPO contended that no technology is required for development of windfarm, erection and commissioning activities. 3.3 Further, the TPO questioned why imported bought out components should not be reduced from turnover and applied the rate of royalty on net turnover. In this regard, the TPO mentioned that under the provisions of the Foreign Exchange Management Act, 1999 (FEMA), no royalty can be paid on bought out components. With respect to adoption of CUP as alternate method, the TPO remarked that he is not inclined to accept the supplementary benchmarking done to prove the ALP of royalty on the ground that the database and copies of the agreements of comparables are not available for verification. In this regard, it is pertinent to note that the TPO has not disputed the said position in the preceding year and in the show-cause notice for the subject assessment year. The DRP has upheld the adjustment made by the TPO in this regard without appreciating the submissions of the assessee. Against this, the assessee is in appeal before us. 4. The ld. AR submitted that there is no transfer ....
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.... 1. Magneti Marelli Powertrain India (P.) Ltd. v. Dy. CIT [2016] 389 ITR 469/75 taxmann.com 213 (Delhi) 2. Dy. CIT v. Air Liquide Engg. India (P.) Ltd. [2014] 43 taxmann.com 299/[2015] 152 ITD 157 (Hyd.) 3. Daksh Business Process Services (P.) Ltd. v. Dy. CIT [2016] 72 taxmann.com 44 (Delhi - Trib.) 4. Asstt. CIT v. Sakata Inx (India) Ltd. [2015] 54 taxmann.com 106 (Jp. - Trib.) 4.2 The ld. AR submitted that the transactions entered into by the assessee with its AE are at arm's length under the methods prescribed under Rule 10B of the Rules and the TPO has no jurisdiction to identify any method which is not prescribed under the aforesaid Rules. To support his view, the ld. AR relied on the following decisions, wherein it has been held that the TPO has no jurisdiction to apply any method other than those prescribed under the Rules. 1. Dy. CIT v. Diebold Software Services (P.) Ltd. [2014] 151 ITD 463/48 taxmann.com 26 (Mum. - Trib.) 2. Merck Ltd. v. Dy. CIT [2014] 148 ITD 513/37 taxmann.com 433 (Delhi - Trib.) 4.3 Regarding the jurisdiction of the AO and the TPO to determine the commercial expediency of the assessee, it w....
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....E, it cannot be said that the assessee would be competent to make use of such machinery without the support of the AE and according to the ld. AR, the TPO cannot determine the ALP of any transaction merely based on assumptions. The ld. AR submitted that the TPO does not extend to stepping into the shoes of the assessee and determining the necessity of incurrence of expenditure and the commercial expediency of a transaction has to be evaluated from the assessee's standpoint and not from Revenue's standpoint. Therefore, the ld. AR, submitted that the contention of the TPO that no technology is required for wind farm development and erection and commissioning activities is unwarranted. 4.5 Without prejudice to the above submissions, the ld. AR submitted that for the subject A.Ys. there is no such restriction on payment of royalty on bought out components under the provisions of FEMA on the reasons that as per erstwhile Foreign Exchange Management (Current Account Transactions) Rules, 2000, any remittance under technical collaboration agreement to the extent of 5% on local sales and 8% on exports was permitted without any prior approval of RBI. Further, it was submitted that....
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.... Both the legislations operate into different fields. The rates allowed under the automatic route by the RBI or FIPB are meant to achieve objectives in different areas. The whole thrust of the income tax proceedings and transfer pricing regulations is to ensure that taxable profit earned by an entity India are not shifted to foreign tax jurisdiction without payment of legitimate share of tax due in India. Therefore, according to the ld. AR, the transfer pricing adjustment proposed by the TPO on the ground that the royalty payment is not within the limits prescribed under FEMA purposes is not tenable. 4.7 The ld. AR, further submitted that the TPO has no jurisdiction to interpret the provisions of FEMA. In other words, the issue on whether the assessee has remitted excess royalty or not is a prerogative of regulatory authorities and not tax authorities. In this regard, the ld. AR relied on the decision of the Tribunal, Pune Bench, in the case of Akzo Nobel Chemicals (India) Ltd. v. Dy. CIT [IT Appeal No. 1477 (Pune) of 2010] wherein it has held that the TPO has no jurisdiction to interpret the provisions of FEMA in order to compute net sales/turnover for 'the purpose of ro....
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....following processes which require tremendous expertise and cannot be undertaken directly by semi-skilled or unskilled workmen : Wind farm development Erection & Commissioning Environmental sustainability - Visual aspects - Ecological/architectural protection - Providing guidelines to use tools - Validation of foundation designs - Training to personnel of Gamesa India at the time of development of new prototypes Technical sustainability - Wind speed - Grid connection - Providing drawings and design - Supervisory control and Data acquisition (SCADA - for monitoring WTG throughout the year on remote basic Professional support - Conceptual design - Design verification - Process validation - Wind measurement and assessment The ld. AR, further submitted that the TPO himself has agreed that such activities require technology support. The only contention raised by the TPO is that such activities do not require any technology, which is not available in India. According to the ld. AR, it is not the prerogative of the TPO to decide whether the assessee should have used the technology provided by its AE or not. The TPO ought to....
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.... step in determining the ALP of a transaction. If the assessee could not provide the details in support of its claim, the benchmarking done by the assessee should be rejected for the abovementioned reasons. 5.1 The ld. DR, submitted that the assessee is not correct in stating that no method prescribed under the statute has been followed by the TPO. In a comparable situation involving an unrelated party, such payment would not have been made by that party without commensurate benefits accruing to it Even otherwise, the assessee did not demonstrate the need and benefit relating to such a payment. This has been elaborately dealt with by the TPO in his order u/s.92CA(3) of the Act dated 29.1.2015. Such comparison has been contemplated in the OECD Guidelines, 2010 which held the field at the relevant time of passing the order. The same is reproduced below: "7.6 Under the arm's length principle, the question whether an infra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or social value too enhance its commercial posit....
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.... standard bought out components while calculating the royalty and similar method of calculation for royalty also provided under FEMA regulations. So the TPO has formed his opinion based on the royalty calculation of unrelated parties which does not include the value of bought out components as the cost for the technology already impeded into the price of the raw material (bought out components). The Id DR submitted that the RBI is an authority to regulate the foreign payments including royalty, put restriction on the royalty payments. However, the RBI has relaxed the ceiling for the payment of royalty does not mean that the assessee can pay entire profits to its AE as royalty. Though the ceilings for royalty relaxed by RBI, the method of calculation of royalty provided by the RBI can be taken as a reference as the same method followed by most of the companies for calculating the value of royalty. 5.4 The ld. DR submitted that the reason behind the reduction of the value of bought out components from the total sales while calculating the royalty is the cost of the technology already embedded in the price of the raw material and for better understanding, the royalty calculation of....
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.... involve any technology out of common infrastructure activities which do not involve any element of transfer of technology. This has not been countered by the assessee and the issue has been dealt with by the DRP in its order. 6. We have heard both the parties and perused the material on record. In this case, under the technology transfer agreement dated 01.01.2009 and 11.07.2011 with Gamesa Innovation and Technology SL (Gamesa Spain), for availing technology in relation to A.E 59 and G 97 models respectively, the assessee agreed to pay royalty @ 4%/4.50% respectively on net amount of annual turnover on sale of Wind Energy Generators (WEG) to its customers including charges for development of land, substation, and erection & commissioning. The assessee aggregated the royalty payment which is being international transaction with AE and benchmarking it by using Net Present Cost (NPC) on Revenues as PLI with TNMM method as most appropriate method. The assessee's NPC on revenue was claimed to be at 1.49% with three year weighted margin on revenue of comparables of 0.07% and therefore, the AE transactions were claimed to be at arm's length. According to TPO, the assessee'....
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....The learned CIT (DR) pointed out that the TPO in respect of the nine services not availed by the Assessee has treated the payment as nil since no independent party would make any payment for services not provided. The TPO thus had applied the CUP method and made adjustment on account of nine services on average basis. (para 24.6) Agreement listed certain services on which the Assessee requires guidance/assistance from time to time. The Assessee was thus entitled to any of the services as and when required. Therefore, applying CUP method to the service not availed by the Assessee during the year is not justified. It would have been appropriate if the AO had applied CUP method to the payment made during the year by the Assessee for the three services and compared with similar payment for such services by an independent party. No efforts have been made by TPO/AO to determine the market value of services received by the Assessee during the year relating to SAP implementation and quality control to show that the Assessee had paid more compared to any independent party for the same services. The Assessee had submitted that in case the Assessee had paid to the AE at man hour rate fo....
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....nts that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too." 6.3 Similar view was taken by co-ordinate Bench of Hyderabad Tribunal in the case of Air Liquid Engg. India (P.) Ltd. (supra) wherein held that:- '20. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company's transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion of the Royalty payments by the TPO in the instant case seems erroneous. We draw support from the Hon'ble Mumbai ITAT decision in Cadbury India Ltd. v. ACIT (ITA No. 7408/Mum/2010 and ITA No.7641/Mum/2010 dated 13-11-2013) wherein the Hon'ble ITAT upheld the use of TNMM for Royal....
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....he royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits. It also falls within the limits of payment of royalty in the automobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in 'Ekla Appliances' (supra) and in 'Ericsson India Pvt. Ltd. v. DCIT, 2012-TII-48-ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of the benefit test, is unsustainable in law. 36. Keeping in view all the above factors, the disa....
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.... RESERVE BANK OF INDIA Foreign Exchange Department Central Office Mumbai - 400-001 RB112009-1 01465 A.P. (DIR Series) Circular No. 52 May 13, 2010 To All Category-I Authorised Dealer Banks Madam/Sir, Foreign Exchange Management Act (FEMA), 1999 - Current Account Transactions - Liberalisation Attention of Authorised Dealer Category-I (AD Category-I) banks is invited to Foreign Exchange Management (Current Account Transactions) Rules, 2000 notified vide Notification No.G.S.R.381(E) dated 3rd May 2000, as amended from time to time. 2. In terms of Rule 4 of the Foreign Exchange Management (Current Account Transactions) Rules 2000, prior approval of the Ministry of Commerce and Industry, Government of India, is required for drawing foreign exchange for remittances under technical collaboration agreements where payment of royalty exceeds 5% on local sales and 8% on exports and lump- sum payment exceeds USD 2 million [item 8 of Schedule ii to the Foreign Exchange Management (Current Account Transactions) Rules, 2000]. The Government of India has reviewed the extant policy with regard to liberalization of foreign technology agreement as it wa....
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....ed the extant policy with regard to liberalization of foreign technology agreement and it was decided to permit, with immediate effect, payments for royalty, lump sum fee for transfer of technology and payments for use of trademark/brand name on the automatic route. Accordingly, Government of India issued a Press Note on 16.12.2009. Hence, the rule shall be deemed to have come into force with retrospective effect, i.e. from 16.12.2009. 1. It is certified that no person will be adversely affected by giving retrospective effect to these rules. 6.6 In view of this, there is no merit in applying the provisions of FEMA as indicated by the TPO and placing reliance on the provision of FEMA is incorrect. 6.7 Further, it is to be noted that there cannot be any restriction on payment of royalty on bought out components which were subject to further processing by the assessee and which was not sold on as is basis to end customers. This view of ours is fortified by the decision of the Tribunal in the case of Akzo Nobel Chemicals (India) Ltd. (supra) wherein held in para -23 that what is liable to be considered as standard bought out components are such material on which no further ....
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.... assessee to its AE on the basis of his Interpretation of the expression "Net Sales" for the purposes of determining ALP of the international transaction of royalty payment to the AE, while applying the CUP method. The moot point to be considered is whether the action of the TPO in interpreting the expression "Net Sales", contained in the Foreign Technology Collaboration agreement approved by the Govt. of India, differently from what has been understood by the assessee is justified and falls within the exceptions provided in the OECD guidelines which permit the TPO to rewrite the transaction or to disregard actual transactions. Considered in the context of the OECD guidelines which have been exhaustively referred by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd. (supra), the impugned situation does not fit into the two exceptions. Firstly, neither the Revenue has alleged and nor is there any material on record to suggest that the economic substance of the impugned transaction differs from its form. Secondly, there is no material on record to suggest that there is an arrangement between assessee and the AE made in relation to the impugned transaction which would....
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....lied activities such as erection and commissioning, development etc. During the course of proceedings before the TPO and DRP, the assessee has clearly explained the reasons for requirement of technology at different stages including development of land, erection and commissioning. The TPO ought to have appreciated that WEG is not a standard product to be manufactured based on a tailor made technology. In other words, it requires detailed examination right from soil testing, examining the appropriateness of wind direction etc. which requires cumbersome technology failure of which the entire product would be of no use to the customers. Therefore, the action of the TPO and DRP in holding that no royalty is required on allied activities such as development of land, erection and commissioning etc. is not tenable on the first place. The ld. AR further submitted that the copy of sample reports provided by its AE in relation to wind farm development and sample mail correspondences evidencing the fact that the assessee has sought the inputs from its AE are also provided. 10. The ld. DR's submitted that the assessee had claimed royalty on substation development charges, development re....
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....ook a long time to execute, then the royally for an order booked during the period of agreement, but executed after the period of agreement, would be payable only after a Chartered Accountant certifies that the orders in fact have been firmly booked and execution began during the period of agreement and the technical assistance was available on a continuing basis even after the period of agreement (c) No minimum guaranteed royalty would be allowed. 3. The lump sum shall be paid in three instalments as detailed below, unless otherwise stipulated in the approval letter:- First 1/3rd after the approval for collaboration proposal is obtained from the Reserve Bank of India and collaboration agreement is filed with the Authorized Dealer in Foreign Exchange. Second 1/3rd on delivery of know-how documentation. Third and final l/3rd on commencement of commercial production, or four years after the proposal is approved by the Reserve Bank of India and agreement is filed with the Authorised Dealer in Foreign Exchange, whichever is earlier." 3.2 Thus the royalty was required to be calculated by the assessee on the basis of the net ex-factor....
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....owever the assessee has not replied as to how the transfer of technology was linked to the sale of its products and how the same has been used by it for sale of its products. Similarly, how separate technology for O&M activities is required when the assessee has already got the entire technology for the manufacture of the product. The assessee has not explained as to how the technology could have been transferred without technical documents, drawings, type certificates etc. So reliance of the assessee on these words in the agreement to support its claim, is totally misplaced. The action of the TPO is found to be correct and the objection of the assessee on this issue is not accepted.'" 10.2 Further, ld. D.R submitted that during the year under consideration, the issues regarding royalty payment on bought out components, royalty on substation development charges, royalty on development revenue and royalty on erection & commission charges remain same as for the AY 2012-13. Since the facts remain the same, there is no reason to differ with the order on the same issues for AY 2012-13 and the DRP concurs with the reasoning given by the DRP for AY 2012-13 for rejecting the objecti....
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....rial on record. The assessee claimed royalty of 4% on revenue generated from erected and commission, which worked out at Rs. 2,96,65,850/- for assessment year 2011-12 and a sum of Rs. 5,98,47,389/- for assessment year 2012-13. The ld. Assessing Officer after going through the agreement entered into by the assessee with the customer in this respect and scope of work agreed to perform by the assessee to its customers, was of the opinion that it does not involve any application of technology transferred to the assessee by the AE for which the assessee is depending on the AE as part of the Technology Transfer Agreement. Therefore, the claim of arm's length price on royalty claimed on development of revenue was determined as 'Nil'. Before us, the assessee explained the activities, which involved high degree of expertise and cannot be undertaken directly by semi-skilled or unskilled workmen, which is as follows:- Wind farm development Erection & Commissioning Environmental sustainability - Visual aspects - Ecology/architectural protection - Providing guidelines to use tools - Validation of foundation designs - Training to personnel of Gamesa India at t....
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.... Language : EN Security : Public classification Page :1 of 37 The aim is to define the control activities for the design and validation of foundations and to develop, in detail, the activities to be carried out for the execution of the slab or pile cap at the wind farm. This instruction applies to all shallow or deep foundations with piles in situ or micorpiles of Gamesa 850 dw and Gamesa 2.0 MW standard type wind turbines (with welded foundation section) and for those in which the farm is supplied concrete from a factory. Construction Operations: Erecting wind turbines requires the efforts of many skilled construction workers. The work begins before the turbine components arrive on site: construction labourers and construction equipment operators are responsible for building local access roads and the foundations that support the turbines. Based on the experience Gamesa-Spain provide know-how on, how to build the access roads, transport the wind turbine blades across remote places which more challenging. They also provide the technical feasibility to approach the site. After the turbine components arrive, crane operators set the first tower segment vertica....
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....h school classes in English, mathematics, physics, mechanical drawing, blueprint reading, welding and general shop can be helpful to prepare for the apprenticeships. Many construction labourers' skills are learned on the job and by assisting more experienced workers. Local contractors may or may not have worked with wind turbines before. However, construction workers and wind turbine service technicians employed by companies specializing in wind farm development handle the more technical operations and usually have extensive experience in the wind industry. Construction equipment operators and crane operators learn their skills through on-the-job training, apprenticeships, or, for some, union instruction. In addition, the operators are expected to be certified to operate their equipment. Crane operators need to be highly skilled, especially when handling large, expensive cargo like wind turbine components. Most electricians learn their trade through apprenticeship programs that combine on-the-job training with related classroom instruction. Apprenticeship programs usually last 4 years, and, in them, electricians learn skills such as electrical theory, blueprint reading el....
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....ecoming important, and most project managers hold a bachelor's degree or higher in construction management, business management, or engineering. Advanced degrees, such as an MBA, are becoming more common. Because experience is so important for these positions, years of experience may substitute for some educational requirements. However, this is becoming increasingly rare, as projects grow more complex and employers place more emphasis on specialized education. New graduates from construction management or engineering programs may be hired as assistants to project managers to gain experience. Towards empowering the project managers, Gamesa-Spain helps the company in providing suitable training to the staff. Gamesa Guideline Short-circuit calculations Code: GDE-TEC-004 Previous code: N/A Edition: 1 Date: 14/02/2012 Language: Security : Public Rating Page:1 of 133 The above guidelines are explaining how to proceed with the calculations of short-circuits currents and its connection with cable sizing and protective devices sizing documents. It is important to know the correct application of the various short-circuit ratings by the circuit designer, in....
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....alysis and consequent deletion of royalty payment is unwarranted. Placing reliance in the case of Magneti Marelli Powertrain India (P.) Ltd. (supra) wherein held that:- 17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs. 38,58,80,000 only for which Comparable Uncontrolled Price ("CUP") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this we....
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....(the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range. 34. The decision of the Tribunal in 'Ekla Appliances', 2012- TH-01-HCDel- TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in pari materia with those of the assessee's case. However, therein also, the benefit test had been applied by the TPO, as in the present case. The matter was carried in appeal before the Hon'ble High Court. The Hon'ble Delhi High Court has held that the so-called benefit test cannot be applied to determine the ALP of royalty payment at nil and that the TPO could apply only one of the methods prescribed under the law. A similar view has been taken in 'Sona Okegawa Precision Forgings Ltd.' case (supra) and in 'KHS Machinery Pvt. Ltd. v. ITO' 53 SOT 100 (Ahm) (URO). 35. It is, thus, seen that the royalty payment @ 3% by the assessee is at arm's length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusive....
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....activities, no royalty would have been otherwise paid to an unrelated party. No business entity would wilfully impose on itself any financial obligation for a period for which there was no legal obligation. 14. The ld. AR submitted that the Technology Transfer Agreement has been signed on 1st January, 2009. Further, the ld. AR submitted that the TPO has not disputed the fact that the assessee utilized the technology of the AE during the preceding year. Further, the expenditure has not been booked during the preceding year on account of the fact that the invoice has been received from its AE only during the subject asst. year. Therefore, according to the ld. AR, the contention of the TPO that such expenditure is unwarranted is baseless. 15. The ld. DR submitted that the assessee had claimed royalty on substation development charges, development revenues and revenue on erection & commissioning of wind turbine generator (WTG5). This issue has been discussed by the TPO in paras 9.7 to 11.2 of his order. He has after the perusal of Agreements relating to the above activities, held that what was being done under these categories did not involve any technology transfer and that a th....
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....d opinion, if the expenditure was crystallized and accrued in the assessment year under consideration, the same is to be allowed subject to deduction of TDS as held by Delhi High Court in the case of CIT v. SMCC Construction India [2010] 320 ITR 534/[2011] 198 Taxman 181. Similar view was taken by Tribunal in the case of (i) Termo Penpol Ltd. v. Asstt. CIT [2015] 59 taxmann.com 90 (Cochin - Trib.) and ACIT v. Ennore Coke Ltd. [IT Appeal No.1921/Mds./2015, dated. 22-1-2016]. The assessee has to furnish the details of product sold date and date of completion of installation work with corresponding agreements. The AO/TPO should examine the same and decide the issue in the light of above judgments. This ground is remitted to the file of AO for fresh consideration. 17. The next common ground in these appeals is with regard to downward adjustment in respect of management fee. 17.1 The assessee filed the following additional evidences for A.Y 2012-13 and submitted that the assessee could not foresee the requirement of the tax authorities and DRP, therefore the assessee did not specifically submit the details of allocation of management fee:- Sl. No. Particulars 1 Stateme....
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....uments before the TPO, which in its opinion could support its case. However, the assessee failed to do so. The assessee has not brought anything on record to show that the documents could not have been produced by it before TPO despite its best efforts Admission of the additional evidence cannot be claimed as a matter of right and it is the duty of the assessee to explain the circumstances which prevented it from submitting such documents before the lower authorities. Since the assessee failed to provide sufficient cause to furnish these, documents before the TPO, the same cannot be admitted at this stage. 17.3 The ld. DR, by placing reliance in the judgment of ITAT, Bangalore in case of Anupam Kothar IT Appeal No. 837 (Bang.) of 2012] held that for admission of additional evidence, it is required for the assessee to show that authorities had decided its grounds without giving sufficient opportunity to adduce evidence. Considering above the request of assessee for admission of additional evidences is not accepted. Even on merits, these additional evidences the assessee has not explained as to how the said document was relevant to its case, which relates to FY 2011-12, The TPO ha....
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....ion of India Ltd. v. CIT [1990] 88 CTR (SC) 66 : (1991) 187 ITR 688 (SC) : TC 7R.343 applied; CIT v. Anand Prasad (1981) 128 ITR 388 (Delhi) : TC 8R.1021, CIT v. Karamchand Premchand (P.) Ltd. (1969) 74 ITR 254 (Guj.) : TC 8R.547 and CIT v. Cellulose Products of India Ltd. (1985) 44 CTR (Guj.) 278 (FB) : (1985) 151 ITR 499 (Guj.)(FB): TC 8R.965 overruled. (Para 3) The view that the Tribunal is confined only to issues arising out of appeal before the CIT(A) takes too narrow a view of the powers of the Tribunal. Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings such a question should be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee." Hence, it is appropriate to admit the same as additional evidence for adjudication for the assessment year 2012-13. 18. The facts of the issue are that the assessee has entered into a Service Agreement dated 1st April, 2010 with Gamesa Corporation Technologic....
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....he costs are allocated to all affiliates principally on the basis of 'revenue which is based on the principle of capacity to pay' rather than on the basis of the need and extent of services available by the affiliates. * A multinational enterprise functioning globally may like to co-ordinate with the affiliates taking into account the principle of optimization of profits. But such an exercise is not necessarily comparable to a service provided by a third party professional service provider. * In the instant case, the ultimate holding company either by itself or through step down subsidiaries have stakes in affiliates and in pursuit of such investment interest, constantly exercise control, direction, supervision and hold over the affiliates. Such a monitoring is not necessitated by the needs of the affiliates, rather they stem from the inherent interest of the holding company in the affiliates and the resulting costs need not be passed on to the affiliates. 18.4 The TPO relied on the following decisions without mentioning the citations and held that the ALP of the management fee is NIL; a. Gemplus India (P.) Ltd. v. Asstt. CIT [2010] 3 taxmann.c....
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....merely held that the ALP of the transaction is Nil without even identifying comparables which is not in accordance with the methodologies provided in the Rules. The ld. AR, also relied on the following judgments, wherein it has been held that no transfer pricing adjustment is warranted in a scenario where the officer has not taken any step to identify a comparable to determine the ALP: a. Merck Ltd. (supra) - upheld by Bombay High Court [ITA 272 of 2014] b. Dy. CIT v. Flakt India Ltd. [2016] 70 taxmann.com 342 (Chennai - Trib.) c. Sabic Innovative Plastics India (P.) Ltd. v. Asstt. IT [IT Appeal No. 1125 of 2014 - Ahmedabad ITAT] Applying the above principles to the current fact pattern, the assessee submitted that the action of the TPO in determining the ALP to be Nil without even identifying a comparable transaction is inappropriate. Therefore, the ld. AR submitted that the transfer pricing adjustment in this regards needs to be set aside. 19.1 The ld. AR argued that there is no transfer pricing adjustment in a scenario where the transactions are at arm's length in accordance with the methods prescribed under Rule 10B. Without prejudice to the....
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....ies have no jurisdiction to question the commercial expediency of the transactions. In other words, the TPO has the limited responsibility of computing the arm's length price of the transactions consideration the methods prescribed in the Act read with Rules. The said principle has been laid down in the following decision: a. Hive Communication (P.) Ltd. (supra) b. EKL Appliances Ltd. (supra) c. Computer Graphics Ltd. (supra) d. Showa India (P.) Ltd. (supra) Therefore, the ld. AR submitted that the jurisdiction of the TPO does not extend to stepping into the shoes of the assessee and determining the necessity of incurrence of expenditure and the contention of the TPO that there is no necessity on the part of the assessee to avail the management fee is unwarranted in the first Place. 19.3 Without prejudice to the submission that the assessee has availed substantial benefits on account of management service, the ld. AR submitted that the assessee has entered into agreement with GCT Spain for the purpose of availing services in the avenues of finance, legal assistance, advisory, operations management, business development etc. It is pertin....
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....entral activities are carried out by GCT and where necessary, GCT obtains the assistance of third party vendors in providing the central services in the nature of management activities. The affiliates companies (which include the assessee) obtain advice and assistance from GCT and the cost incurred (GCT owns cost and cost charged by third party vendors) were charged to all the group companies. GCT has tremendous managerial talent and experience in the field of Wind Turbine industry. It has senior professionals with lots of years of experience in the field. As a new player in India, there was a critical need for the assessee to draw managerial services from this entity to face the challenges in the emerging market like India, where the market is very early phase of development and challenging. With further expansion of manufacturing operations and globalization of customer activities, it was essential for the assessee to adopt a global approach for its own activities to serve its global customer base and maintain competitive position in the market. It would have been difficult for the assessee to procure the services from third party service providers which are group and product spe....
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....ubmitted that allocation of cost based on turnover of AEs cannot be a factor to propose transfer pricing adjustments. In the transfer pricing order, the TPO remarked that the costs are allocated to all affiliates principally on the basis of 'revenue' which is based on the principle of 'capacity to pay' rather than on the basis of the need and extent of services availed by the affiliates. In this regard, the ld. AR, submitted that under the provisions of sec.92CA of the Act, the TPO has the authority to determine the ALP of the transactions undertaken by the assessee. The jurisdiction of the TPO cannot extend to decide the basis of charge/allocation of expenses. In the instant case, the TPO ought to have confined his jurisdiction in determining whether the costs allocated by GCT Spain are at arm's length or not. For the purposes of benchmarking the profits the assessee considered TNMM as the most appropriate method and the PLI of the assessee is higher than that of the comparable companies. Recently, in the case of Durr India (P.) Ltd. v. Asstt. CIT [2017] 78 taxmann.com 50 (Chennai - Trib.), the co-ordinate Bench of the Tribunal held that allocation of cost part....
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....has been subject matter of service tax and specific lower tax deduction certificate has been availed. 20. The ld. DR submitted that the basic issue before the TPO was to determine ALP of the fee paid by the assessee. For determining the ALP of the transaction, a proper show-cause notice was issued and served upon the assessee. The assessee has only referred to the service agreement, summary of the cost allocation among various services provided and copy of the various invoices/debit notes/credit notes raised during the relevant year under consideration; however the queries of the TPO still remained unanswered. When the assessee is paying on cost to cost basis to AE, then where are the actual details of the cost, how assessee has calculated that the invoice raised by AE is correct, when details of costs are not available to it? Where such a transaction at arm's length, the assessee would have asked for the complete details of the cost incurred by the AE before accepting the amount claimed by AE from it. However, assessee has not brought on record any such details to satisfy the TPO. Documents relied upon by the assessee are thus just unsupported piece of papers, without any e....
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....wo separate issues and are needed to be dealt with separately. In any case, the assessee could not substantiate the need-benefit analysis before the TPO as a result of which downward adjustments were proposed in respect of royalty and management service fee. The transactions can be aggregated only if they are intricately intertwined and cannot be separately analyzed. This is not the case here. Moreover, aggregated approach to transfer pricing analysis is the exception rather than the norm. This issue has been dealt with extensively by the DRP in its order dated 24.3.2007. The DRP has quoted the case laws to reject the assessee's objections in this regard. The Guidelines of 2010 has also taken the view that as far as possible, transactions are to be evaluated separately. 20.2 The ld. DR, further submitted that the TPO has not sought to question the commercial expediency of the management fee. What has been done is to compare the circumstances surrounding the payment and the services said to have received with an independent party in the uncontrolled situation. After analyzing the agreement and other documents in this regard, the TPO has come to the conclusion that the transac....
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....y would be one that a group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies assumes significance." The European Union Joint Transfer Pricing Forum (JTPF), in their summit at Brussels on 04.02.2010 on the "Guidelines on low value adding Intra-Group Services" has discussed this issue elaborately. It says that Costs of managerial and control (monitoring) activities related to the management and protection of the investments in participations are of shareholders activities only and these costs are to be classified as shareholders cost only. 20.4 Hence, the ld. DR, submitted that the benefit received from such stewardship services can only be considered as 'incidental benefits' as per the OECD guidelines and do not require a separate payment. The relevant para No.7 of OECD guidelines states that: "The incidental benefits ordinarily would not cause these other group members to be treated as receiving on intra-group service because the activities producing the benefits would not be ones for which an independent enterprise ordinarily would be willing to pay". The ld. DR further submitted tha....
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....e one assures the applicability of one standard or criteria to judge an international transaction by each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end-result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee, the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too." 20.5.1 In the case of Air Liquide Engg. India (P.) Ltd. (supra) held that:- "33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules ....
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....he market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then in 'Ekla Appliances' (supra) and in 'Ericsson India Pvt. Ltd. v. DCIT 2012-TII-48-ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of the benefit test, is unsustainable in law. 36. Keeping in view all the above factors, the disallowance made on account of royalty is found to be totally uncalled for and it is deleted as such...... 21. Hence, following the ratio of the Hon'ble Delhi High Court in CIT v. EKL Appliances (supra) and various other decisions as noted above and given the facts and circumstances of the instant case, we hold that the addition made by the TPO and upheld by the DRP is unsustainable and is to be deleted. Hence Ground No. 2 is held in favour of the assessee. Hence, the appeal of the Revenue....
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....e service not availed by the assessee during the year is not justified. It would have been appropriate if the AO had applied CUP method to the payment made during the year by the assessee for the three services and compared with similar payment for such services by an independent party. No efforts have been made by TPO/AO to determine the market value of services received by the assessee during the year relating to SAP implementation and quality control to show that the assessee had paid more compared to any independent party for the same services. The assessee had submitted that in case the assessee had paid to the AE at man hour rate for the technical services provided during the year in relation to SAP implementation, the fees payable would have been significantly higher. There is nothing produced before us to controvert the said claim. The assessee has applied TNMM which shows that the margin shown by the assessee was higher than the comparable companies. The case of the assessee is also supported by the decision of Tribunal in case of Mc Can Erricson India Pvt. Ltd. (supra) in which the decision of TPO to take the value of certain services at nil has not been upheld. Consideri....
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....r, even after repeatedly scanning through his order, we failed to find any such analysis being done by him. Similarly, though in para 5.1.1, ld. DRP has observed that TPO has benchmarked intangible transactions by using CUP, but, the order passed by TPO does not support such conclusion. It is an accepted principle of law that TPO has to determine the ALP by adopting any one of the methods prescribed u/s 92C of the Act. Mode and manner of computation of ALP under different methods have been laid down in rule 10B. Even, assuming that TPO has followed CUP method for determining ALP of royalty payment, as held by ld. DRP, it needs to be examined if it is strictly in compliance with statutory provisions. Rule 10B(1)(a) lays down the procedure for determining ALP under CUP method. As per the said provision. TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions. Thereafter, making necessary adjustments to such price, on account of differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such tra....
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....spect of exports sale and other income. We are unable to agree with this strange method followed by the TPO to make a TP adjustment in respect of royalty payment which is not sustainable either in law or on the facts of the case. She has neither rejected the method followed by the assessee to benchmark the transaction in respect of payment of royalty nor has been adopted any recognized method to determine the ALP of the said transactions. The approval of SIA adopted by the TPO as basis to make TP adjustment in respect of royalty payment was untenable and even going by the said basis wrongly adopted by the TPO, no TP adjustment in respect of royalty payment was liable to be made. As per the said basis, the net sales of the assessee after excluding export sale and other income were to the extent of Rs. 1118.70 crores and the royalty paid thereon at Rs. 24.38 crores being less than the rate of 3.5% approved by SIA, there was no case of any excess payment made of royalty by assessee than approved by SIA to justify its disallowance by way of TP adjustment. In our opinion, the ld. CIT (A) could not appreciate these infirmities in the order of the TPO despite the same were specifically br....
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.... and benefit obtained which were not contradicted. The Assessing Officer did not believe the same in the absence of concrete evidence. Unless the Assessing Officer steps into assessee's business premises and observes the role of these companies/assessee's business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations. What sort of evidence satisfies the AO also not specified. Assessee has already placed lot of evidence in support of claims. Therefore, on that court, we are not in agreement with the Assessing Officer and TPO that services were not rendered by the group companies to assessee. 16.1. Even otherwise, the role of transfer pricing Officer is to determine the arm's length price of a transaction. He cannot reject the entire payment under the provisions of sec. 92CA as held by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd. (supra) wherein the Hon'ble Delhi High Court, on similar facts where the TPC also determined the ALP at Nil, has held as under: "21. The position emerging from the above decisions is that it is not necessary for assessee to show that any legitimate expe....
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.... not warranted. Assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee royalty payment whi....
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....or the purposes of benchmarking the profits, the Appellant considered TNMM as the most appropriate method and the PLI of the Appellant is higher than that of the comparable companies. Recently, in the case of Durr India (P.) Ltd. (supra) the co-ordinate Bench of Tribunal held that allocation of cost partly on the basis of turnover and net profit cannot be considered as a factor to propose transfer pricing adjustment. Further, it was held that where the PLI of the Appellant under TNMM is at arm's length and it is not possible on the part of the department to identify a comparable, which is rendering similar services, the question of considering CUP method would not arise at all. 20.13 The Appellant remitted service tax under reverse charge mechanism in respect of the said management fee. Further, the Appellant has obtained a certificate under section 197 of the Act from the Deputy Director of Income Tax, International Taxation, Chennai in relation to the management fee. Recently, in the case of Aban Offshore Ltd. (supra), the Co-ordinate bench has held that any payment which is systematically subject to deduction of tax at source cannot be said to be non-genuine and further h....
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.... 6.2 it is pertinent to note that the Tribunal Hyderabad Bench in the case of Air Liquide Engineering India P. Ltd. In IT Appeal Nos. 1040 & 1159/Hyd/2011 and 1408/Hyd/2010, vide order dated 13-2-2014 held that in transfer pricing proceedings TPO could not sit in judgment on business and commercial expediency of assessee company so as to conclude that payment of royalty made by assessee to its AE was unreasonable and thus ALP of said payment was to be taken as nil. 6.3 It is to be noted that in the case of DCIT v. Sona Okegawa Precision Forgings Ltd. in IT Appeal No. 5386/Del/2010 dated 16-12-2011, the Tribunal held that the assessee entered into an international transaction with its overseas associates and paid royalty @ 3% which was considered as excessive by TPO did not bring any material on record which could suggest that payment of royalty as excessive order of TPO was to be dismissed and a collaboration agreement had been approved by the Ministry of Industries, Department of Industrial Policy and Promotion. 6.4 The Tribunal also held in the case of Abhishek Auto Industries Ltd. in IT Appeal No.1433/Del/2009 dated 12-11-2010, that it is a settled propositio....
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....r 2012-13 is with regard to disallowance u/s. 14A read with Rule 8D of the Income-tax Rules, 1962 for the purpose of computing total income. 23. The facts of the issue are that for the subject asst. year, the company had investments in its wholly owned subsidiaries i.e. GM Navarra Wind Energy Pvt. Ltd. RSR Power Pvt. Limited and Kintech Santalpur Pvt. Ltd. amounting to Rs. 12,25,00,000/-. The assessee had also submitted the Tax Audit Report in Form 3CA and 3CD, which clearly indicates that the Company had not incurred any expenditure towards maintenance of the aforesaid investments or for earning any exempt income from the said investment. The assessee claimed that no expenditure is required to be disallowed u/s. 14A of the Act. However, the AO modified the facts that there is a direct nexus between increase in investments and borrowed capital and as per the given portfolio of investment; the assessee should have incurred minor expenditure embedded in the indirect expenditure of the assessee towards maintaining these investments. 24. The ld. AR submitted that sec.14A of the Act cannot be applied if there is no exempt income earned during the year. The ld. AR, further submitte....
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.... funds have not been utilized for making investments and therefore no disallowance can be made by applying the second limb of Rule 8D i.e. no requirement to disallow proportionate interest cost. The ld. AR also submitted the extracts of bank statement substantiating that only interest free funds in the form of share capital has been invested in subsidiaries. Therefore, the AO has factually erred in not appreciating the same. The ld. AR relied on the decision in the case of Beach Minerals Co. (P.) Ltd. v. Asstt. CIT [2015] 64 taxmann.com 218 (Chennai - Trib.), wherein the Tribunal, Chennai Bench upheld the above principle. 24.3 On the other hand, the ld. DR relied on the orders of the DRP. 25. We have heard both the parties and perused the material on record. It was submitted before us that there was no exempted income; hence, Sec.14A read with Rule 8D cannot be applied. In our considered opinion, this issue came for consideration before the jurisdictional High Court in the following cases and held as follows:- (i) Chettinad Logistics (P.) Ltd. (supra) where-in-held that:- "In our opinion section 14A, can only be triggered, if, the Assessee seeks to square of....
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....e substantial question of law raised in that case for the consideration of the Court was couched in general terms as follows: "Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in confirming the disallowance under section 11.1 of the Income-tax Act, of an amount of Rs. 55,00.000/- in relation to assessment year 2007-2008?" 14. Nothing much turns on the use of the word 'includable' and the phrase 'under the act' in s. 14A and we are not persuaded to accept emphasis laid or the interpretation of the same by the Revenue. An assessment in terms of the Income-tax Act is specific to an assessment year and the related previous year. S. 4 of the Act, which imposes the charge to tax reads thus: Charge of income-tax 4. (1) Where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every pers....
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....is ground of the assessee is allowed. 28. The next ground for the A.Y. 2011-12 is with regard to deduction of interest on service tax and TDS. 28.1 The facts of the issue are that the assessee has incurred expenditure in the nature of interest on delayed payment of service tax (Rs. 12,02,485) and TDS (Rs. 3.81,650). The AO disallowed the expenditure citing that under the provisions of sec. 37(1) of the Act, any expenditure for any purpose in the nature of offence which is prohibited by law shall not be eligible for deduction. 28.2 The ld. AR submitted that as per the Explanation to sec. 37 of the Act, allowability of any expenditure would depend on whether the expenditure incurred is penal or compensatory in nature. Where the expenditure incurred is compensatory in nature, the same should be allowed as deduction. It is pertinent to note that any interest payment is compensatory in nature and therefore cannot be said to be a penal expenditure. The ld. AR relied on the decision of the Tribunal, Delhi Bench in the case of Dy. CIT v. Messee Dusseldorf India (P.) Ltd. [2010] 129 TTJ 81 (UO) (Delhi) regarding the interest on service tax. He also relied in respect of interest on ....
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.... Further, in the case of CIT v. Udaipur Distillary (160 ITR 444 (Rajasthan) wherein it was held that interest paid for delay in payment of sales tax is allowable expenditure. Kerala High Court in the case of CIT v. TM Chacko And Partners (115 ITR 40) (Kerala) wherein it was held that interest paid for late payment of Kist is allowable business expenditure. The same view was taken by the Kerala High Court 128 in the case of CIT v. Pachi Phillip & Co. 212 ITR 75 (Kerala). Further, the Tribunal in the case of Remfry & Sagar Consultants (P.) Ltd. v. ACIT (34 CCH 131 (Delhi) wherein it has been held that interest paid for delayed payment of service-tax is allowable. However, in respect of payment of interest on delayed TDS payment it cannot be allowed in view of the judgment of Supreme Court in the case of Bharat Commerce & Industries Ltd. v. CIT (230 ITR 733). Further, the Kolkotta High Court in the case of East India Pharmaceutical India Ltd. v. CIT 114 ITR 423 wherein it was held that interest paid on money borrowed for the payment of income-tax could not be allowed as a business expenditure. In view of the above discussion, we are of the opinion that interest on delay in payment of ....
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....ery used for less than 180 days and used for 180 days or more" Thus, the memorandum acknowledges that as of today if the assets are used for less than 180 days, it is not eligible for full 100% of additional depreciation. Accordingly, the amendment is more for the future years rather than an amendment as applicable even to earlier years prior to financial year 2015-16. Thus, it was never the intention of the legislature to allow the claim of balance 50% additional depreciation in the immediately subsequent year in case of financial years prior to 2015-16. The issue also has been decided by the Tribunal, Chennai Bench in the case of Brakes India Ltd. (supra), where the Tribunal did not allow the balance additional depreciation in subsequent financial year. 34. After hearing both the parties, we find that similar issue was considered by the Karnataka High Court in the case of Rittal India (P.) Ltd. (supra) wherein held that:- 'It has been consistently held by this Court, as well as the Apex Court, that beneficial legislation, as in the present case, should be given liberal interpretation so as to benefit the assessee. In this case, the intention of the legislation ....