TaxTMI 
TaxTMI 
2017 (5) TMI 1738
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.... under the directions of the Hon'ble Dispute Resolution Panel ('Ld. DRP') erred both, on facts and in law, in confirming the addition of Rs. 7,70,87,718 to the income of the appellant, on account of the transfer pricing ('TP') adjustment u/s 92CA(3) of the Income Tax Act. 1961 (the 'Act') made by the Learned Transfer Pricing Officer ('TPO'), by holding that the international transaction of 'receipt of direct sales compensation' of the Appellant does not satisfy the arm's length principle envisaged under the Act. The Appellant prays that the arm's length price of the international transaction of receipt of direct sales compensation as computed by the Appellant be accepted and consequently the TP adjustment of Rs. 7,70,87,718 be deleted. 1.2. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP) erred on facts and in law- a) in rejecting the methodology adopted by the Appellant for benchmarking the impugned international transaction, without giving any cogent reasons; b) by stating that no Functions, Asset and Risk analysis of the Appellant and its Associated Enterprises ('AEs') was submitted by the Ap....
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....ing that refund of Rs. 4,58,80,144 has been issued to Appellant. 5.2. The Appellant prays that the Ld. AO be directed to grant refund after considering the fact that no refund has been received by the Appellant till date. 6. Ground No 6 6.1. On the facts and in the circumstances of the case and in law, the Ld. AO erred in charging interest under section 234D of the Act of Rs. 51,38,009. 6.2. The Appellant prays that the Ld. AO be directed to delete the interest charged under section 234D of the Act. 7. Ground No 7 7.1. On the facts and circumstances of the case and in law, the Ld. AO erred in granting interest under section 244A of the Act of Rs. 8,96,857 only. 7.2. The Appellant prays that the Ld. AO be directed to grant Interest under section 244A of the Act upto date of grant of refund. The Appellant craves leave to add, alter, amend, substitute or withdraw all or any of the Grounds of Appeal herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing so as to enable the Hon'ble Tribunal members to decide these according to the law". 3. Briefly stated, the facts of the case ar....
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....e business of the assessee company was divided into two segments, viz. Centre of Excellence in Engineering ('CoEE') segment and the Project and Services segment. The assessee was appointed as a concessionaire by the AEs, and as per the terms of the agreements between the assessee and the AEs, the assessee acting as a coordinator/canvasser was to promote the products manufactured by the AEs, in India. That in lieu of the services rendered, the assessee was to receive Direct Sales Compensation ('DSC') on products sales of the AEs to the Indian Customers. 7. The TPO in order to verify as to whether the commission @ 2% for the indenting services received by the assessee from its AEs was Arm's Length compensation, thus called upon the assessee to submit comparable instances of the rates at which DSC was received by other Johnson Controls Group entities. The assessee in compliance to the aforesaid direction of the TPO, therein furnished sample copies of two comparable agreements between the Johnson Controls Group entities, as under: - Support service provider Service recipient Rate of DSC York Philippines Inc, Philippines York International Pte. Ltd. Singapore 2% York Air Conditi....
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....r, as claimed by the assessee that it was not merely a commission agent, but was also engaged in the business of developing market for the AEs and servicing their installations in India, therefore, observed that the TPO had rightly concluded that the assessee had not benchmarked the compensation @ 2% correctly. The DRP observed that as the two instances of commission relied upon by the assessee were transactions between group companies and therefore, were controlled transactions, the same had rightly not been considered by the TPO to benchmark the AEs transactions. The DRP further upheld the rejection of the CUP method, and adoption of the Profit Split Method ('PSM') to benchmark the transactions. The DRP further observed that in the absence of FAR of assessee and its AEs, the splitting of 50% profit in the hands of the assessee could not be faulted with. (b). The DRP dealing with the contention of the assessee that the TPO had erred in observing that the sale price charged by the AEs on sales to third parties in India was too huge to justify the 'low' commission of 2% on sales, without appreciating the fact that the higher sales resulted in a higher commission for the as....
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....ed to the failure of the TPO to consider the directions issued by the DRP in the case of the assessee for A.Y. 2006-07, wherein on identical facts, the DRP had determined the arm's length rate for DSC as 5%. The DRP after deliberating on the aforesaid contentions of the assessee therein observed that as during the year under consideration the TPO had demonstrated that the assessee was entitled to 50% of profits and accordingly invoked PSM, applied 50:50 ratio and determined ALP remuneration to the assessee, therefore in the backdrop of the fact that the principle of res judicata does not apply in Income Tax proceedings, thus declined to disturb the evaluation matrix of the TPO. (f). The Assessee further objected before the DRP that the TPO had erred in granting the benefit of +/- 5% range as envisaged by the proviso to Section 92C(2) of the 'Act', however, the DRP rejected the said contention of the assessee at the threshold by referring to Section 92C(2A) which had been made available on the statute vide the Finance Act, 2012, w.r.e.f 01.04.2002. (ii) As regards disallowance of expenses of Rs. 6,28,43,080/- in relation to Facilities Management: (a). The assessee further sub....
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....Rs. 4,58,80,144/- had been issued to the assessee, while for no such refund was received by the assessee till date, despite the fact that a rectification application was filed by the assessee on 21.09.2011. The assessee thus submitted that the A.O. be directed to grant refund after considering the fact that no refund had been received by the assessee till date. The assessee further objected to the proposed levy of interest u/s 234B of Rs. 17,89,295/- and interest u/s 234D of Rs. 68,82,022/-. The DRP after deliberating on the aforesaid contentions of the assessee, therein declined to deal with the same, for the reason that neither of the said objections dealt with variations of income and loss. The DRP thus on the basis of his aforesaid observations therein directed the A.O. to give effect to his aforesaid directions as per the provisions of section 144C(13) of the Act. BEFORE THE A.O:- 10. The A.O. after receiving the order of the DRP passed u/s 144C(5) of the 'Act', dated 28.09.2012, gave effect to the directions of the DRP and made the following additions/disallowances in the hands of the assessee:- Particulars Amt (Rs.) Amt (Rs.) Total Income as per return (before set o....
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....om 1.35% (Cisco Systems (India) Private Ltd. (ITA No. 1410/Bang/2010) to 5% (Bayer Material Science Private Limited vs. ACIT (ITA No.7977/Mum/2010). He also brought our attention to the Tribunal's order in the case of Sumitomo Corporation India Private Limited (supra) and submitted that this is the case where the internal CUP was approved as most appropriate, where the rate of percentage of commission of 2.26% was found to be the ALP. However, Ld. Counsel for the assessee submitted that ALP in the present case may be finalized with the Bench and requested for not remanding the matter to the Revenue for one more round. 9. On the other hand, on this issue of rate of commission, Ld. DR for the Revenue argued for considering 5% as an appropriate ALP as held by the Tribunal in the case of Bayer Material Science Private Limited (supra). 10. We have heard both the parties on this issue of the appropriate rate of commission and find the rate of 1.35% (in the case of Cisco Systems (supra) and 1.49% [in the case of Hoganas India Private limited vs. DCIT No.1463/PN/2010] have to be rejected considering the rates approved in the case of Sumitomo Corporation (2.26%) (supra) and Bayer Ma....
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.... its AEs at 8.77%. 13. We have heard the Authorized Representatives for both the parties, perused the orders of the lower authorities and the material produced before us. We have given a thoughtful consideration to the facts of the case and are of the considered view that the Tribunal while disposing of the appeals of the assessee for A.Y. 2006-07 and A.Y. 2007-08, vide order dated 31.12.2013, had held that CUP and TNMM were the most appropriate methods for benchmarking the transaction of Direct Sales Compensation ('DSC'). We find that the assessee had submitted before the Tribunal in respect of its appeals for the aforesaid preceding years, viz A.Y. 2006-07 and A.Y. 2007-08 certain case laws, where on similar facts the ALP of commission was decided by the Tribunal. We find that the Tribunal after deliberating on the following case laws relied upon by the assessee, had therein taken the arm's length commission rate of 3.63% :- Particulars Rate of commission accepted Sumitomo Corporation India Private Ltd. vs. Addl CIT (ITA No.5095/Del/2011) 2.26% Bayer Material Science Private Ltd. (ITA No. 7977/Mum/2010) 5% Average 3.63% We have perused the facts of the case and ar....
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....t (for short 'GWS') had during the year increased by 114% (approximately to Rs. 73,79,04,723/- in A.Y. 2008-09 as compared to Rs. 34,53,59,501 in A.Y. 2007-08). The Ld. A.R submitted that as against the aforesaid increase in income, the expenditure of GWS increased to Rs. 62,84,30,804/-, as against Rs. 29,22,15,696/- incurred in A.Y. 2007-08, therein witnessing an increase of approximately 115%. The Ld. A.R submitted that the Gross profit margin had reduced marginally to 14.85% in A.Y. 2008-09 , as against the GP margin of 15.35% in A.Y. 2007-08. It was submitted by the Ld. A.R that the minimal fall in gross margin by 0.51% was because of competitive market scenario and customer preferences, as a result of which the assessee company was compelled to increase its focus on quality of service and thus compromised, though only to some extent, on its gross margins, which therein resulted into comparative decline during the year under consideration. The Ld. A.R assailing the ad-hoc disallowance carried out by the A.O., therein submitted that during the course of the proceedings, the assessee as directed by the A.O, had vide its submissions dated 17.08.2011 submitted party vise details of....
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....s in one go. Hence, the ledger account copies are furnished to the tax authorities, which normally are verified on a test check basis. We find that as averred by the Ld. A.R, the assessee had furnished complete party vise details of purchases and labour expenses exceeding an amount of Rs. 10 lac, as directed by the A.O, as well as furnished copies of invoices of expenditure on GWS aggregating to Rs. 82,22,049/- on a sample basis during the course of the DRP proceedings. We have given a thoughtful consideration to the facts of the case and are of the considered view that now when the assessee in compliance to the directions of the A.O had placed on record substantial material, viz. complete party vise details of the purchases and labour expenses exceeding Rs. 10 lac amounting to Rs. 55 crores (aprox), which worked out to about 89% of the total GWS expenses, as well as had furnished with the A.O the copies of invoices of expenditure on GWS aggregating to Rs. 82,22,049/-, for verification on sample basis, therefore in the backdrop of the said factual matrix, we are unable to persuade ourselves to subscribe to the adhoc disallowance carried out by the A.O. We are of the firm view that ....
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....y deposit by the A.O., had therein carried the matter in appeal before us. The Ld. A.R submitted that the assessee in the normal course of its business had given earnest money at the start of a project, which thereafter on the failure of the party to pay back the same was thus written off and claimed by the assessee as a revenue loss, being a debt gone bad. It was submitted by the Ld. AR that the A.O. failing to appreciate the facts of the case in the right perspective, had thus erred in disallowing the aforesaid amount which was claimed as a revenue loss by the assessee. Per contra, the Ld. D.R relied upon the order of the lower Authorities. 17. We have heard the Authorized Representatives for both the parties, perused the orders of the lower authorities and the material produced before us. We are of the considered view that as the aforesaid amount of Rs. 4 lac was given as an advance by the assessee at the start of the project, and thus was never taken into account by the assessee as its income during the year under consideration, or in any of the previous years, therefore, the same did not satisfy the conditions contemplated u/s 36(1)(vii) r.w.s. 36(2) of the 'Act', and as such....
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....ntions of the assessee and give the necessary consequential effect, as per law. The Ground of appeal No. 4 and Ground of appeal No. 5 are thus allowed for statistical purposes. 20. That the Ld. A.R had further assailed the charging of interest u/s 234D of Rs. 51,38,009/-, as well as the calculation of interest u/s 244A of Rs. 8,96,857/- by the A.O. We herein restore the aforesaid issues also to the file of the A.O., who is herein directed to re-compute the aforesaid interest u/s 234D and 244A of the 'Act'. The Ground of appeal No. 6 and Ground of appeal No. 7 are thus allowed for statistical purposes. 21. The appeal of the assessee for A.Y. 2008-09, marked as ITA No. 638/Mum/2013 is partly allowed in terms of our aforesaid observations. I.T.A. No(s) 691/M/2014 (A.Y. 2009-10) 1. We now advert to the appeal of the assessee for A.Y. 200910, wherein the assessee challenging the assessment order passed by the A.O under Sec. 143(3) r.w.s 144C(13), had raised the following grounds of appeal:- "1. Ground No 1 On the facts and circumstances of the case and in law, the Deputy Commissioner of Income-tax 8(2), Mumbai ('Ld. AO'), under the directions of the Hon'ble Di....
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..... 3,89,13,845/-). Ground No. 5 On the facts and circumstances of the case and in law, the Ld. AO has erred in initiating the penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the Ld. AO be directed to drop the initiation of penalty proceedings under section 271(1)(c) of the Act." 3. Briefly stated, the facts of the case are that the assessee had e-filed its return of income for A.Y. 2009-10 on 30.09.2009 declaring loss of (Rs. 7,08,88,790/-), which was processed as such u/s 143(1) of the Act. The case of the assessee was thereafter taken up for scrutiny assessment u/s 143(2). 4. That during the course of assessment proceedings the A.O. made a reference to the Transfer Pricing Officer ('TPO') for the determination of arm's length price in respect of the assessee's international transactions with its associate enterprises (AEs). 5. The TPO after perusing the international transactions of the assessee with its AEs in the backdrop of the contentions of the assessee, therein carried out a TP adjustment of Rs. 13,52,29,899/- in respect of value of international transactions of Direct Sales Commission ('DSC') received by the assessee from its AEs, a....
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.... the Act, dated 05.04.2013, gave effect to be directions of the DRP and made the following additions/disallowances in the hands of the assessee:- Particulars Amt (Rs.) Amt (Rs.) Total loss as per return (before set off of loses) (70,888,790) Add:Addition / Disallowances (i) Addition under section 92CA(3). 147,866,852 (ii) Earnest Money Deposit W/off. 92,833 147,959,735 ,and thus assessed the income of the assessee at Rs. 77,070,945/-. 8. The assessee being aggrieved with the order of the A.O had therein carried the matter in appeal before us. The assessee had assailed before us the upwards TP adjustment aggregating to Rs. 147,866,852/- made by the A.O/TPO, viz. upward adjustment of DSC of Rs. 13,52,29,899/-, and disallowance of 'bad debts' of Rs. 1,26,36,953/-. 9. We find that the A.O going by the directions of the DRP had therein made an upward TP adjustment of Rs. 13,52,29,899/- as regards the DSC received by the assessee from its AEs. The Ld. A.R. had brought to our notice that the identical issue was involved in the appeal of the assessee for A.Y. 2008-09, marked as ITA No. 638/Mum/2013, which factual position had not been di....
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....assessee. The Ld. A,R had submitted before us that the assessee which is not a captive service provider of the AEs in the CoEE segments, therein raises bills on the AEs on the basis of hours spent. The Ld. A.R submitted that a dispute surfaced between the assessee and the AEs on the issue as to whether the work for which bill was raised was as per the agreed scope of work, or not. It was due to this dispute, the assessee had written off the debts which pertained to F.Y. 2006-07, 2007-08 and 2008-09, as bad. The Ld. A.R further submitted that as the AEs had disputed the time spent by the assessee on their project, therefore to resolve the said dispute the assessee decided to reverse the disputed invoices, and as such the entry showing write off of the bad debts was passed by the assessee in its books of accounts. We find that as observed by the DRP, the allowability of the debts written off u/s 36(1)(vii) is not in dispute, but the issue involved was whether such AE bad debts written off is an international transaction, and whether any commensurate benefit had been received on such write off. We had observed that the DRP had upheld the disallowance of the 'bad debts' by the TPO, by ....
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....n the treatment of the 'bad debts' as an operating expenses, would not be adversely hit, and is found to be within the arms length, thus no TP adjustment could have been made in the hands of the assessee. That as regards the observations of the DRP as to whether the writing off by the assessee of the debt recoverable from the AEs, would therein lead to any commensurate benefit on such writing off of the AEs debt as bad, we are of the considered view that characterizing of the writing off of the debt by the assessee as an operating expense by the DRP, would in no way adversely affect the operating margin of the assessee, as the PLI of the assessee, as claimed by the Ld. A.R continues to remain within the parameters of +/-5% variation, as a result whereof no TP adjustment would be called for in the hands of the assessee in respect of the CoEE segment to which such 'bad debts' so pertain, wherein the benchmarking for the said segment had been carried out by adopting TNMM. We thus not being impressed by the aforesaid observations of the lower authorities are thus not persuaded to subscribe to the same, and as such direct the A.O to delete the addition/disallowance of Rs. 1,26,36,953/-(....