TaxTMI 
TaxTMI 
2017 (11) TMI 1881
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....les and satellites. It also provides a wide range of systems and equipment for civil and military airplanes and helicopters. Return of income for the assessment year 2010-11 was filed disclosing 'nil' income. The assessee-company also reported the following international transactions in its 92CE report: The assessee-company also submitted Transfer pricing (TP) study report applying TNMM as the most appropriate method and 12 comparables were selected by the tax-payer. 3. The Assessing Officer (AO) selected the case for scrutiny and referred the matter to the Transfer Pricing Officer (TPO) for the purpose of bench marking international transaction. The TPO, vide order passed order u/s 92CA, accepted that the international transaction relating to software development services and receipt of reimbursement of expenses are at arm's length. However, as regards payment of management technical support and professional fee (intra-group services), the TPO called upon the respondent-assessee to furnish the following documents in order to verify whether specified services are rendered at all, if services are rendered what is the basis for such payment and whether two independent par....
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....a; • Correspondence between the Taxpayer and the AE In regard to such services; 1.5 Please submit the documentation and also evidence to show that a tangible and direct benefit is derived by the Taxpayer in paying the above amounts to the AEs. If no benefit is derived by the Taxpayer or the benefit derived is remote or the benefit is for the entire group, the same is not charged. Unless it is shown that tangible and direct benefit is derived by such payment, the arm's length price of intra-group service payments would be treated as Rs. Nil. 1.6 The details of similar payments made by the Taxpayer during the earlier three years and the subsequent two years with corresponding turnovers and net operating profits. 1.7 During the FY 2009-10, you have paid an amount of Rs. When any such huge amount is paid by way of Management fees/intra group service payments by unrelated parties, the parties there to would like to know what services one party is going to receive from other much before the start of the year and also how these services are going to be quantified. 1.8 The quantification of such services and also the basis for s....
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....methodologies and any documentation supporting the consideration and rejection of other methodologies; and e. documentation created in the undertaking of a functional analysis Of the various group members providing and receiving services to establish the relationship between the relevant services and the members' activities and performance. 1.13 Even if a service is rendered, the amount of the charge for such services must be determined based on arm's length principle. This requires a detailed cost benetit analysis by the Taxpayer like any other independent entity. An independent entity in an identical situation would examine whether it can get such services from third party or can do it on its own. It also examines alternatives for service providers and selects one service provider to which it would pay in accordance with the economic benefit derived by it from such services. Not only the mark-up but also quantification of service itself is the subject matter of transfer pricing. In this regard, please pluvidc thc quantification of such services in terms of actual expenditure incurred and commensurate benefits derived there from. 1.14 Whether any....
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....support of its claim it has submitted the following documents: • Purchase order raised to Teuchos SA towards payment for the provision of services of the dedicated manager, the deputed managing director from Teuchos SA and towards information technology services, • Statement of work, • Technical proposal • Ledger a/c; invoice copies It was further submitted that the Program manager and the managing Director are employees of Techos SA who have been dedicated to work for SAIPL and their cost (salary, etc) are initially borne by Teuchos SA and later cross charged to the Indian entity. The nature of work performed by them is stated to be as per the description of services narrated at Pg 7 -Pg 18 of the submissions. 2.2 A perusal of the functions listed in the submissions is akin to those activities which the O CD has classified to be in the nature of 'shareholder' or 'stewardship activities'. The Taxpayer has submitted that there was a choice before it in respect of choosing to utilize the se ices of the program manager and the Managing deputed from the parent company. The subm....
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.... details provided by the assessee for receipt of management technical support and profession charges and also contending that TNMM is the most appropriate method for bench marking international transaction pertaining to payments made to intra-group services. The DRP, after considering objections of the respondent-assessee held that the TPO was not justified in holding that software development services provided to AE are at arm's length and management services fee paid to be at 'nil' The DRP further held that differential between shareholders or stewardship activities is established. The relevant directions of the DRP are extracted below: 2.8 However, the treatment Of the ALP for the said fee at 'nil' is found to be erroneous and it shows that the TPO has not taken into account the specific business model of the taxpayer wherein it functions as a profit centre. Since the management fee paid is factored in while deciding the hourly rates to be charged to the AE, and the cost recovered therefrom, the TPO cannot simultaneously hold that the margins in the software development services provided to the AE are at arms' length but the management service fee was to be ....
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....r defined in the Act and there is no specific provision in section IOA warranting exclusion of above expenses from the total turnover also. 5. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in placing reliance on the decision of the Hon'ble High Court of Karnataka in the case of M/S. Tata Elxsi Ltd. which has not become final since the same has been not accepted by the Department and SLPs are pending before the Hon'ble Supreme Court. 6. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 7. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above. 8. Ground Nos.1, 6 and 7 are general in nature and do not require any adjudication. 9. Ground No.2 challenges the direction of the DRP suggesting nil adjustment on account of payment of management fee to its AE. 9.1 The ld.CIT(DR) contended that the DRP was not justified in deleting ALP adjustment on account of payment of management service fee. The respondent-assessee had f....
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....ellant to its AE. Primarily, the TPO determined the ALP as Nil for the following reasons:- "(i) The assessee paid management fee through a single invoice, raised much after the closure of the financial year. (ii) The Assessee failed to produce any evidence regarding the expenditure incurred by the AE on behalf of the assessee. (iii) The AE, Volvo Truck Corporation also did not furnish any details of expenditure incurred by it in connection with the management fee received by it. (iv) The assessee changed its stand many times during the course of the hearings that the payment is made towards marketing services and / or brands, trademarks etc." 11. No doubt, now it is settled proposition of law that it is beyond scope and powers of AO/TPO to question the necessity of incurring any expenditure. The Hon'ble Delhi High Court in the case of EKL Appliance Ltd. (supra) held that TPO cannot determine the ALP at Nil by holding that there was no need to incur any expenditure. The above decision was followed by the several coordinate benches of the Tribunal, some by them are as follows: i. Dresser-Rand India (P.) v. Addl. CIT [2011] 13 ....
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....sion that the TPO had impliedly accepted the rendition of services cannot be accepted as there was no finding given by the TPO that services are actually rendered. In fact, the TPO while summarizing this observation vide page No. 30 of his order vide column No.6 had specifically mentioned that the assessee had failed to prove that the services are actually rendered by AE. Furthermore the finding of the TPO that the invoice was raised much after the closure of the accounting year and the payment of management fee in nothing but siphoning of the profits from India with the intention of avoiding tax are serious enough to doubt the genuineness of transactions. The appellant had made no effort to controvert the findings of the TPO. Therefore, in our considered opinion the TPO/AO is justified in adopting ALP at Nil. 13. Now we shall deal with the alternative submission of the learned counsel for the appellant that the transaction of management and support fee should be bundled with other transactions and bench marked by adopting TNMM cannot be accepted for the reason that bundling of transactions is permissible only when the transactions are closely related to each other and rel....
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.... benefits were derived by the assessee-company out of such services and there was no need of such services and there was no proof in support of rendition of such services to the assessee- company. The TPO has neither challenged the keys applied for allocation of cost by AE nor the TPO has disputed the actual cost incurred by the AE. 9. Now, we shall analyze each of the above reasons assigned by the TPO for determining ALP at 'nil'. The law is now quite well settled that it is beyond the scope and powers of the AO/TPO to question the necessity of incurring expenditure. The Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd. (345 ITR 241), after considering the judgment of the Apex Court in the case of CIT vs. Walchand & Co. P.Ltd. (65 ITR 381)(SC), Sassoon J.David & Co. Pvt. Ltd. vs. CIT (118 ITR 261)(SC) held that the TPO cannot determine ALP at nil by holding 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 H....
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....eld to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. 21. 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....
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.....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/2009 - AY 2004-05 vi. McCann Erickson India Pvt. Ltd. v. ACIT: ITA No.5871/Del/2011 - AY 2007-08 vii. DSM Anti- Infectives India Ltd. v. ACIT: ITA Nos. 1139/Chd/2011 and 1290/Chd/2012 -AY 200708; 2008-09 viii. TNS India Pvt. Ltd. V. ACIT: (2014) 32 ITR (Trib.) 44 (Hyd.) -AY 2003-04; 2004-05; 2005-06 ix. Atotech India Ltd. v. ACIT: ITA No.104/Del/2012 -AY 2007-08 x. Nippon Leakless Talbros v. ACIT: I.T.A. No. 5931/Del/2012 - AY 2008-09 xi. Nippon Leakless Talbros v. ACIT: IT(TP)A No. 475/Del/2015 - AY 2010-11 xii. Hughes Systique India P. Ltd. v. ACIT: [2013] 25 ITR (Trib) 556 (Delhi) - AY 2007-08, 2008-09 xiii. Knorr-Bremse India (P.) Ltd. v. ACIT: [2013] 56 SOT 349 (Delhi) - AY 2007-08 xiv. Thyssen Krupp Industries India (P.) Ltd. v. ACIT: [2013] 55 SOT 497 (Mumbai) - AY 2007-08 xv. LG Polymers India P. Ltd. v. ACIT: [2012] 16 ITR (Trib) 240 - AY 2006-07 Thus, in the light of above legal position, though AL....
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....ing 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 subsequent year caries no merit inasmuch as the learned DR has rightly pleaded that each and every year of assessment is separate and independent unit and principles of resjudicata do not apply. The assessment for the assessment year 2009-10 is under section 143(1) and for the assessment year 2010-11 there is no mention of the commission at all. Therefore, we are unable to give evidenced to the facts whose record is not before us and not referred to before the lower authorities". 12. Similarly, the Hon'ble Delhi High Court in the case of Schneider Electric (Ind.) Ltd Vs CIT (21008) 304 ITR 360 (Del.) held that in the absence of material on record suggesting that the commission agents had procured the sale orders, no commission should be allowed. The relevant para of the judgment is reproduced below; "13. We agree with the Tribunal that there is absolutely no material on record to suggest that M/s Ram Agencies ....
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....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, assesseecompany has filed some material, in support of the actual services rendered by the AE. The CIT(A) had no occasion to examine this evidence as it was claimed that this evidence was filed for the first time before us . Therefore, the CIT(A), without examining the aspect of actual rendition of services by the AE in respect of IT services, had directed the allowance of expenditure. Therefore, in interests of justice, we restore this issue to the file of the AO for purposes of verification of this evidence and come to conclusion whether the services are actually rendered by the AE or not and direct the TPO/AO to bench mark the transaction of rendering of services of market management support services, after being satisfied himself that the services are actually rendered by the AE. 11. On the principle of consistency, we hold that each assessment year is separate and distinct. The principles of res judicata have no ap....