TaxTMI 
TaxTMI 
2020 (4) TMI 749
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....peal bearing ITA No. 5257/Del/2011 for assessment year 2007-08. The Grounds of appeal for assessment year 2007-08 are reproduced as under: 1. That the learned Assessing Officer ('AO') erred in passing the impugned draft assessment order dated November 30, 2010 ('the Draft Assessment order') and the Hon'ble Dispute Resolution Panel ('Hon'ble DRP') erred in passing directions under Section 144(C) of the Income Tax Act, 1961 ('the Act') confirming the Draft Assessment order. On the facts and circumstances of the case and in law, the learned AO erred in assessing the income of the Appellant at Rs. 342,239,410 as against the returned income of Rs. 162,653,930. 2. On the facts and in the circumstances of the case and in law, the Hon'ble DRP has erred in not considering the submissions filed by the Appellant and passed a very laconic and non-speaking order confirming the Draft Assessment order. 3. On the facts and in the circumstances of the case and in law, the learned AO erred in proposing and the Hon'ble DRP further erred in confirming the action of learned AO of disallowing the Appellant's claim of deduction under section 10B of the Act amounting to Rs. 154,143,267 in respect of....
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....nsaction of the Appellant for payment of testing, warranty repair and service charges fee to its AE to be NIL, thereby making an addition to the total income of Rs. 2,54,42,211/- on account of transfer pricing. 10. That the Ld. AO / TPO failed to appreciate the characterisation of the entities involved in the transaction and that the conduct of the Appellant confirms to the allocation of risk i.e. the entity bearing product liability risk is undertaking decisions in relation to the same. 11. That the Ld. AO / TPO have failed in understanding the nature of the transaction for payment of testing, warranty repair and service charges fee and the functions being performed by the AE in relation to the transaction under review. 12. That the Ld. AO / TPO have erred by questioning the commercial/business wisdom of the Appellant for undertaking the transaction of testing, warranty repair and service charges fee, which is imperative to Appellant's business. 13. That the Ld. AO / TPO have failed to appreciate the fact that no benefit has been passed on to the AE by payment of testing, warranty repair and service charges as the AE is recovering exactly the same amount as has been paid b....
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....icer also proposed disallowance of deduction under Section 10B of the Act, amounting to Rs. 15,41,43,267/-. In this manner, the learned Assessing Officer proposed total addition of Rs. 17,95,85,478/- in the Draft Assessment order dated 30.11.2020. Aggrieved, the assesse filed objection before the learned DRP, but could not succeed and the learned DRP upheld the additions proposed by the Assessing Officer in order dated 05.07.2011. Pursuant to the direction of the learned DRP, the Assessing Officer passed the impugned final assessment order on 23.09.2011 wherein following two additions have been made: 1. On account of TPO order in relation to Arm's Length Price of International Transactions (as discussed above) Rs. 2,54,42,211/- 2. On account of deduction u/s 10-B (as discussed above) Rs. 15,41,43,267/- Total Rs. 17,95,85,478/- 4. On the issue of disallowance of deduction under Section 10B of the Act, learned counsel submitted that in assessment year 2003-04 2006-07, the disallowance made by the Assessing Officer has been deleted by the Tribunal and, therefore, the issue in dispute being covered in favour of the assessee, the disallowance was required to be del....
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....ision of the Tribunal (supra), we delete the disallowance. The grounds of appeal of the assessee from ground nos. 1 to 8 are accordingly allowed. 5. Ground no. 9 to 13 of the appeal are related to the Transfer Pricing Adjustment. The learned counsel for the assessee referred to paper-books filed in two volumes from pages 1 to 715 and submitted that international transaction is in respect of 'firewall charges' reimbursement to AE. He submitted that when finished goods are shipped to the AE in US from Indian Ports, there is a time lag before the products reach the destined port. At times, motors capture moisture during the transit period and this can adversely impact their functioning. The moisture in the motor may cause sparking at the time of usage and can cause harm to the user. On the request of the assessee, the AE engages a third party that tests all the motors to ensure the desired quality standards of the US market. The learned counsel for the assessee further submitted that in order to determine whether all motors meet the desired quality standards, each motor needs to be tested individually. He submitted that such testing charges incurred are paid by assessee to the AE whi....
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....iding faulty products. In the instant case, if the motors supplied by MEIPL to the customer is used in a building and due to a short circuit in the motor (because of the moisture) it catches fire, then this could lead to huge product liability claims been initiated against the manufacturer i.e. MEIPL and not the distributor. The Assessee could also face trial for the same apart from huge damages claim which will impact the overall reputation/ functioning of the Assessee. (iii) Cost to cost charges: An important point which must be considered while evaluating arm's length nature of this transaction is that, on request of MEIPL, the AE appoints the third party that performs unpacking, testing and repacking of motors. The cost of such activities is borne by the AE which then recovers exactly the same from MEIPL i.e. without charging any mark-up. In other words, this is a cost to cost reimbursement and hence the AE has not benefitted anything from this arrangement. These motors ought to have been tested in US only and could not have happened in India (as testing is performed to check moisture in motors during transit). If testing was possible in India, MEIPL would have directly app....
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.... that fault or no fault in the motors can only be determined once all the motors are tested. Hence this argument is also flawed. Further, the Assessee believes that it is the responsibility of the manufacturer to provide goods in working conditions to its distributor. Hence all third-party manufacturers are likely to incur such expenses." 5.4 The learned counsel for the assessee also argued that this was a genuine business expenditure, incurred wholly and solely for the purpose of the business of the assessee and cannot be disallowed by the learned TPO. He submitted that the AE is merely acting as a distributor who is never liable for the goods manufactured. On the issue of application of the CUP method by the learned TPO, the learned counsel for the assessee submitted as under: "16. The learned TPO has further rejected the aggregation approach and benchmarked the transaction using CUP method. In this regard, the Assessee submits that subject transaction is interlinked with the primary transaction and the reason for the same is already mentioned in the TP study. However, without prejudice to the above, even if the approach of the Ld. TPO is to be selected, the Assessee furnished....
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..... The Ld. TPO has not brought any comparable cases under CUP method for determination of ALP. Therefore taking in to consideration the entire facts and the materials placed before us we, agree with the Ld.CIT(A) that the TNMM is most appropriate method to determine the ALP at entity level. " 19. Further, reliance is placed on Triniti Advanced Software Labs Pvt. Ltd. (ITA No. 1427/Hyd/2014) (refer para 11, page 8 of the ruling; to be handed over by the counsel) 20. Furthermore, in the case of Spencer Stuart (India) Private Limited (ITA No. 7117/2012, 1680/2014, 922/2015 and 1832/2016) it was held that if reimbursements are back by third party invoices, the same cannof-be benchmarked as 'Nil'. The relevant extract of the same is given below: "20. In view of the above and respectfully following the decision of the Co-ordinate Bench in case of assessee "v AE, we hold that reimbursements paid being backed by third party invoices without any element of mark-up, cannot be benchmarked at NIL as done by TPO. Accordingly, we delete the addition so made by the AO. " 22. It is also important to note that the Assessee has provided back to back invoices that act as CUP. Hence Assessee ha....
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....red by the Respondent in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. " 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 expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow' the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitab....
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....transaction and disregarding the fact that the conduct of the Appellant conforms to the allocation of risk i.e. the entity bearing product liability risk is undertaking decisions in relation to the same; 2.2 not appreciating the nature of the transaction and the functions being performed by the entities involved in relation to the transaction; 2.3 questioning the commercial/business wisdom of the Appellant for undertaking the said transaction; and 2.4 not appreciating the fact that no adjustment is warranted as no benefit has been passed on to the Associated enterprise since it is recovering exactly the same amount that has been paid to independent third party. 3. That the Ld. AO / TPO and the Ld. DRP have grossly erred by applying Comparable Uncontrolled Price method in contravention of the provisions of Rule 10 B of the Income Tax Rules, 1962. 4. That the Ld. AO / TPO and Ld. DRP have grossly erred by not appreciating the corroborative analysis furnished by the Appellant for the transaction under question. 5. That on the facts and in the circumstances of the case and in law, both the Ld. AO and the Ld. DRP erred in denying the Appellant's claim of deduction under sectio....