TaxTMI 
TaxTMI 
2020 (4) TMI 749
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....ment Year : 2007-08 2. First we take up the appeal 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 u....
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....O') / Transfer Pricing Officer ('TPO') have erred in determining the arm's length price of the international transaction 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 passe....
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....ated 06.08.2010. The learned Assessing Officer in the proposed draft assessment order made addition of transfer pricing adjustment of Rs. 2,54,42,211/-. The Assessing Officer 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 disallow....
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....tled to the relief u/s 10B of the Act." 4.3 Since in the year under consideration, the Assessing Officer has followed the earlier years' order, therefore, the issue in dispute being squarely covered by the decision 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 subm....
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.... the Assessee. (ii) Penal charges: It is important to understand that US being the most developed country in the world has the most stringent laws against the damages caused by the use of faulty/ defective items. A company could even face trial for providing 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 ....
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....sit. It is beyond the understanding how this can tantamount to duplication. 13. The Ld. TPO has mentioned that 'no third party ' would incur such expenses in which no fault is detected. While saying this, the Ld. TPO has not given any reference to any third party not incurring such expense. It is apparent, 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 benchma....
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....ate method for determining the transfer pricing of the royalty but did not bring any comparables for determination of the royalty payment.................... ....................In the instant case assessee has not availed similar technology from any other third party and the associated enterprise has not provided the technology to any other third party. 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 de....
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....he expenditure by the learned TPO is not authorized. The relevant finding of the High Court is reproduced as under: "22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the Respondent to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered 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 roya....
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.... / Transfer Pricing Officer ('TPO') have erred in determining the arm's length price of the international transaction of payment of testing, warranty repair and service charges fee to be NIL, thereby making an addition to the total income of Rs. 1,89,98,051/- on account of transfer pricing. In doing so the Ld. AO/TPO and the Ld. DRP have grossly erred in: 2.1 not appreciating the characterization of the entities involved in the 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....