TaxTMI 
TaxTMI 
2017 (5) TMI 1738
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....mmissioner of Income-tax 8(2), Mumbai (Ld. AO'), 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 ....
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....TDS of Rs. 48,81,824(i.e. Rs. 4,73,63,440 less Rs. 4,24,81,616). 5. Ground No 5 5.1. On the facts and circumstances of the case and in law, the Ld. AO erred in stating 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 submi....
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.... 25.25 The TPO observed that the assessee company (JCIPL) was a wholly owned subsidiary of M/s Johnson Controls Inc. US ('JC US') and was engaged in the business of developing, engineering, marketing and servicing building automation and control products for a diversity of comfort conditions. The 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 a....
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....,781/- proposed by the TPO u/s 92CA(3) of the 'Act', therein dealt with the same as under:- (a). The assessee objected to the rejection by the TPO of the method which was adopted to benchmark transactions pertaining to receipt of DSC. The DRP observed that though as per the terms of the agreement remuneration to the assessee was fixed at 2% of the sales, however, 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 h....
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....ts existing within the group, which substantiated that the group followed a consistent pricing policy. The DRP however, observing that as the comparable instances quoted by the assessee were in the nature of controlled transactions taking place within the group entities, thus did not find favor with the said objection of the assessee and rejected the same. (e). The assessee further objected 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 +/- ....
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....that the A.O. vide his draft assessment order had erred in proposing to give credit of TDS to the extent of Rs. 4,24,81,616/- only, as against Rs. 4,73,63,440/- claimed by the assessee. It was thus submitted by the assessee that the A.O. be directed to give the balance credit of TDS of Rs. 48,81,824/- (i.e. Rs. 4,73,63,440/- less Rs. 4,24,81,616/-). The assessee further averred before the DRP that the A.O. had erred in stating that refund of 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....
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....elates to the percentage of commission in ALP studies. It is an admitted fact that the assessee offered the commission income i.e. 2% in accordance with the bilateral agreement with the AE. Relying on the PSM, TPO benchmarked the same applying ad-hoc percentage of 10% out of AE profit margin of 16%. Considering the unfairness of such percentage, DRP restricted the same to 5%. Before us, Ld. Counsel for the assessee brought our attention to page 335 of the paper book and submitted that the rate of commission range from 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 r....
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.... 5%* Average 3.62% , thus in all fairness be taken as the arm's length commission rate in the hands of the assessee. Thus on the basis of his aforesaid submission, it was averred by the Ld. A.R that the 3.62% would be the appropriate rate to be adopted by the AO for calculating the adjustments to be made. Per contra, the Ld. Departmental Representative (for short 'D.R') heavily relied on the orders of the lower authorities and submitted that the DRP had rightly determined the ALP for direct sales compensation received by the assessee from 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....
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....riate rate for benchmarking the Direct Sales Compensation ('DSC') received by the assessee from its AEs. The Ground of appeal No. 1 to 1.3 raised by the assessee before us are thus allowed in terms of our aforesaid observations. 14. The assessee had further assailed before us the disallowance by the A.O of 10% of the expenses incurred on Global Work Space Solutions/Facilities Management, therein leading to an addition of Rs. 6,28,43,080/- in the hands of the assessee. It was submitted by the Ld. A.R that the income from Global Work Space Solutions/Facilities Management (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 ....
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....he vendor, address, PAN, and the amount of the expenditure stood duly reflected. The assessee had further submitted before us that it had also 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 contentions of the assessee and the facts of the case. We are of the considered view that in the case of companies which are having large volume of transactions, it would be practically difficult to bring all evidences to substantiate the expenses 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 d....
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....n justified carrying out of adhoc disallowance @ 10.21% in the hands of the assessee. We thus in light of our aforesaid observations, are thus of the considered view that the half hearted approach of the A.O , which can safely be held to be based on misconceived facts, thus cannot be sustained. We thus direct the A.O to delete the addition/disallowance of Rs. 6,28,43,080/-, and thus order accordingly. The Ground of appeal No. 2 is thus allowed. 16. That the assessee being aggrieved with the disallowance of an amount of Rs. 4 lac pertaining to the write off of earnest money 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 ....
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....foresaid contentions of the assessee, and in case if it emerges from the records that a short credit of TDS of Rs. 48,81,824/- (supra) had been given to the assesse, then the requisite remedial action be taken and the balance credit of the TDS be allowed in the hands of the assessee. We further direct the A.O. to verify the contention of the assessee that no refund of Rs. 4,58,80,144/- had been received by the assessee, while for a fact to the contrary had been recorded by the A.O. The A.O. is herein directed to verify the factual position in respect of both of the aforesaid contentions 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. ....
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.... which has been benchmarked using TNMM and also accepted by the Ld. AO/Ld. TPO to be at arm's length. The Appellant prays that the amount of bad debts written off by the Appellant be allowed and consequently the TP adjustment of Rs. 1,26,36,953 be deleted. Ground No. 4 On the facts and circumstance of the case and in law, the Ld. A.O., erred in granting credit of tax deducted at source ('TDS') to the extent of Rs. 3,89,13,845/- only as aginat Rs. 3,98,90,197/- claimed by the Appellant. The appellant prays that the Ld. A.O. be direct to give the balance credit in respect of TDS of Rs. 9,76,352/- (i.e. Rs. 3,98,90,197/- less Rs. 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 p....
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....s regards the disallowance of 'bad debts' of Rs. 1,26,36,953/- by the TPO as operating expenses for the purposes of computation of operating margins of the assessee, therein observed that the allowability of the debts written off u/s 36(1)(vii) was not in dispute, but the issue involved was as to whether such AE bad debts written off was an international transaction, and whether any commensurate benefit had been received on such write off. The DRP after deliberating on the contentions of the assessee, therein concluded that there could be no reason to write off an AE debt for the reasons of invoicing disputes, and as such upheld the order of the TPO. 7. The A.O. after receiving the order of the DRP passed u/s 144C(5) of 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 thu....
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....e Arms length compensation (DSC) in the hands of the assessee. Thus in the backdrop of our aforesaid observations, we herein adjudicate the present issue in terms of our order passed while disposing of the 'Grounds of appeal No. 1 to 1.3' in the appeal of the assessee for A.Y. 2008-09, marked as ITA No. 638/Mum/2013, and our decision passed in context of the issue under consideration in the said appeal shall principally in light of our aforesaid observations, apply mutatis mutandis in the present appeal also. 12. We now take up the disallowance by the A.O of the 'bad debts' of Rs. 1,26,36,953/-. We find that the assessee had incurred the aforesaid 'bad debt' during the year pertaining to CoEE segment, which as claimed by the assessee was due to dispute regarding the work done by the 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 ....
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....he basis of which adverse inferences had been drawn in respect of the 'bad debts' claimed by the assessee are, viz. (i). there can be no justifiable reason to write off an AE debt for the reason of invoicing disputes; (ii).the assessee had failed to justify the write off of the debt on the basis of any evidence regarding any dispute with the AE; (iii). the assessee had not furnished any cogent reason with verifiable evidence to demonstrate the justification for non-recovery of AEs debts. We in light of the fact that the DRP had categorically conceded that allowability of the aforesaid amount as 'bad debt' under Sec. 36(1)(vii) was not in dispute, therefore do not divulge and go any further on the said issue. 14. We further find that the assessee had claimed that the PLI of the assessee on 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....