TaxTMI 
TaxTMI 
2020 (9) TMI 65
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....A) erred in determining the arm's length price of the international transaction of reimbursement of expenses paid to the AE to be Nil, thereby making an addition to the total income of Rs. 5,870,089. In doing so, the Ld. CIT (A) grossly erred in: 2.1 not appreciating the characterization of the entities involved in the transaction; 2.2 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; 2.3 questioning the commercial/business wisdom of the Appellant for undertaking the said transaction and ignoring the vast jurisprudence on the matter; and 2.4 not appreciating the fact that no benefit has been passed on to the AE since it is recovering the same amount that has been paid to an independent third party. 3. The Learned Assessment Officer ("Ld. AO") grossly erred in initiating penalty proceedings u/s 271 (1 )(c) of the Act mechanically without recording any satisfaction for its limitation. 4. That the Ld. AO grossly erred in levying an interest u/s 234B, 234C and 234D of the Act to the taxable in....
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....method for benchmarking the international transactions. The ld TPO issued a show-cause notice on 19.12.2013 stating that assessee has paid a sum of Rs. 5870089/- to its associated concern on account of testing and warranty service charge. According to TPO same is not at Arm's Length Price. The reason is that as once sale has been affected the responsibility rests with the buyer and there is no case for bearing this charge by the seller i.e. assessee. Therefore, the Arm's length price of such charges should be Nil. 9. Assessee explained that when the finished goods are shipped to its associated enterprises from Indian ports there is time lag before the products reached to destination port. At times, motors capture moisture during the transit period, which can adversely impact its performance. Therefore, on the request of the assessee, associated enterprises engaged a third party for testing of the motors to ensure the desire quality standards of the US Market. These charges are paid on all motors those are tested in adherence to quality standards. Therefore, in order to determine that motors exported, meets the desired quality standards, they are tested. Such expenses are incurre....
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....ed the decision of the coordinate bench in assessee's own case for AY 2007-08 and 2009-10. The identical issue was considered by the coordinate bench and deleted the addition. The findings of the coordinate bench were as under:- "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 tes....
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....oped 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 not benefitted anything from this arrangement. These motors ought to have been tested in US only a....
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....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 benchmarked the transaction using CUP method. In this regard, the Assessee submit....
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....yalty 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 decision of the Co-ordinate Bench in case of assess....
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....ure 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 royalty/ br....