TaxTMI 
TaxTMI 
2020 (9) TMI 65
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....nternational 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 income of the Appellant." 3. Ground No. 1 is general in nature, Ground No. 3 is against the initiation....
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....ng 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 incurred by AE and same are reimbursed at cost to cost by the assessee. 10. The ld TPO rejected the contentions of the as....
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....y 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 tested individually. He submitted that such testing charges incurred are paid by assessee to the AE which the AE pays to the third party ....
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.... 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 appointed the third party. In this cas....
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....t 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 third party invoic....
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.... 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 has....
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....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/ 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....