TaxTMI 
TaxTMI 
2015 (10) TMI 2794
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....uring the year under consideration, the assessee has reported the following international transaction with its AE : Particulars Amount(in INR) Outcome of TP order Purchase of raw materials 7,012,915 Accepted 1o be al arms' length Sale of kits 87,350 Accepted to be at arms' length Payment of administrative service fees 58,460,332 Adjustment of Rs. 58,460,332 Payment of royalty 19,056,804 Accepted to be at arms' length Reimbursement of expenses paid 7,339,244 Accepted to be at arms' length Recharge of expenses received 3,650,551 Accepted to be at arms' length Reimbursement of ESOP charges 129,540 Accepted to be a! arms' length Accordingly, the AO made a reference u/s 92CA of the Act to the TPO for determination of the ALP in respect of international transaction carried out by the assessee with its AE. The TPO, vide orders dated 31/10/2011, determined 'nil' ALP for transaction of administrative services fee paid by the assessee to its AE by holding that the assessee did not receive any services from its AE. The TPO was of the view that the assessee did not derive any benefit fr....
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....n law, the Ld AO and Ld DRP erred in not considering the correct nature of advances written off and thereby disallowing an amount of Rs. 1,14,05,413/-. 3(b) On the facts and circumstances of the case and in law, the Ld AO and Ld DRP should have appreciated that amount written off as advances is nothing but the expenditure payable to the agent against the amount receivable from it towards cash collected by it. 3(c) On the facts and circumstances of the case and in law, the Ld AO and Ld DRP should have appreciated that it is actual write off of expenditure incurred and allowable either under section 28 or section 37(1) of the Act. 4. (a) That on the facts and circumstances of the case and in law, the Ld. AO and the Ld. Panel erred in disallowing administrative fee of Rs. 4,81,97,802 by invoking the provisions of section 40A(2) of the Act. (b) That the Ld. AO and the Ld. Panel erred in invoking the provisions of section 40A(2) of the Act on an international transaction. 5.(a) That the Ld. AO, Ld. TPO and the Ld. Panel erred on facts and in law in holding that the international transaction of payment of administrative services fee amounting ....
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....ed the assessee in making its entire set up and thus the benefit received by the assessee is of enduring nature. Accordingly, consideration paid for such benefit is treated partly towards capital and partly towards revenue. The DRP upheld the view of the AO and confirmed the disallowance. 6. Before us, the learned authorised representative of the assessee has pointed out that an identical issue came up before this Tribunal for assessment year 2004-05 in ITA Nos.1290/Bang/2007 wherein the Tribunal has decided this issue in favour of the assessee by treating the payment of royalty as revenue expenditure. He has further pointed out that for the assessment year 2004-05, the Hon'ble jurisdictional High Court has upheld the finding of the Tribunal that treating the payment of royalty made by the assessee to its AE do not lead to accretion of capital asset or benefit of enduring nature to the assessee. Thus the learned authorised representative of the assessee has submitted that the issue is covered in favour of the assessee by the decision of this Tribunal as well as by the Hon'ble jurisdictional High Court. On the other hand, learned DR has relied upon the orders of the autho....
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.... for periods of one year, unless Licensee or Licensor has been notified otherwise not later than 90 days before the 7.2: Termination. Either party may terminate this Agreement, with or without cause, upon 90 days prior written notice given to the other party. This Agreement may be terminated by Licensor at any time by written notice of termination, effective on the date such notice is received, after the occurrence of any of the following events: (a) Any breach of Licensee's obligations under Articles VI or VII of this Agreement; (b) Upon the insolvency or bankruptcy of Licensee, the inability of License to pay its debts as they fall due or upon the appointment of a trustee or receiver or the equivalent for Licensee, or upon the institution of proceedings under the laws of the Territory relating to the dissolution, liquidation, winding up, bankruptcy, insolvency or the relief of creditors, if such proceedings are not terminated or discharged within thirty days; or (c) Upon a substantial change of management or ownership of Licensee or upon the acquisition of direct or indirect control of Licensee by any person which manufactures or markets pr....
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....ervices ('WMS' for short) vide agreement dated 1/9/2006 for fulfilment of sale of its products in North East region of India by providing logistic, warehousing and transportation services. WMS was also responsible for collecting sale proceeds from independent distributors and remitting the same to the assessee. During the year under consideration, assessee has shown sales collection outstanding from WMS amounting to Rs. 1,14,05,413/-. The assessee wrote off the said amount. During the course of assessment proceedings, the assessee submitted that the said amount was not remitted by WMS to the assessee and accordingly the assessee has written off the said amount. The AO did not accept the claim of the assessee and disallowed the claim of the assessee on the ground that the assessee did not produce any break-up of the amounts as well as advances and as per the AO the advances were capital in nature. The assessee raised objections before the DRP but could not succeed. 9.1 Before us, learned authorised representative of the assessee has submitted that during the year under consideration, WMS did not remit the amount of Rs. 1,14,05,413/- being sales collection. The assessee, even afte....
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.... the assessee had paid administrative service fee of Rs. 5,84,60,332/- to its AE. Out of the above, Rs. 5,50,24,791/- was paid to HII and Rs. 34,35,541/- to Herbalife International Singapore Pte Ltd. ('Herbalife Singapore'). The AO, apart from making disallowance of the said amount under TP provisions and treating the ALP at nil also disallowed part of the payment amounting to Rs. 4,81,97,802/- under section 40A(2) of the Act. The AO held that out of the total amount paid to AE, only Rs. 1,02,62,530/- equivalent to 2% of the turnover is allowable. Thus, the AO treated the balance amount as excess payment to the related party. 10.1 The assessee challenged the action of the AO before the DRP but could not succeed. 10.2 Before us, learned authorised representative of the assessee has submitted that the provisions of sec.40A(2) are not applicable to the said transaction when the assessee has already reported the transaction as international transaction which was referred by the AO to the TPO for determination of the ALP. Further the provisions of 40A(2) are not automatic provisions but the same can be invoked only when payment made to specified persons is found to be excessive or....
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.... X chapter of the Act which are specific provisions to deal with such transactions between the assessee and its AE. Therefore, once the transaction is undisputedly subject matter of Chapter X of the IT Act, then the other general provisions of the Act cannot be applied simultaneously. The AO, having considered the transaction being international transaction and making a reference to the TPO for determination of the ALP cannot go back to the provisions of sec.40A(2) for determining the reasonableness of the price paid by the assessee. Our attention was invited by the learned authorised representative of the assessee that for the assessment year 2001-02 to 2002-03 the payment in question was subjected to MAP and only 25% is charged to tax. Therefore, it was accepted by the department that the services were rendered by the AE to the assessee in India. We further note that the AO has not conducted any inquiry or investigation to find out the excessiveness of the payment made by the assessee to its AE. 10.5 The co-ordinate bench of this Tribunal in the case of M/s.Cisco Systems Capital (India) Pvt. Ltd., in ITA 1558/Bang/12 held in para.11 as under: "11. Having heard both the p....
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.... the TPO for determination of the ALP and therefore it cannot be considered for disallowance u/s 40A of the Act, since we have already held that the provisions of sec.40A are not attracted, we do not see the need to adjudicate this contention of the assessee. " 10.6 In the case in hand, when the AO has not conducted any inquiry or brought out any material on record to prove that payment made by the assessee is excessive and unreasonable making an adhoc disallowance by invoking the provisions of sec.40A(2) of the Act is not justified. Accordingly by following the decision of the co-ordinate bench of the Tribunal as well as in view of the facts and circumstances of the case as discussed above, we set aside the orders of the authorities below qua this issue and delete the addition made under section 40A(2) of the Act. Ground No.5 regarding TP adjustment in respect of administrative service fee: 11. During the year under consideration, the assessee paid administrative service fee of Rs. 5,84,63,222/- to its AE. In the TP analysis, the assessee has adopted TNMM at the entity level as the most appropriate method to determine the ALP of the international transaction. The TPO has ....
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....t the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 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 assessee 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 assessee 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....
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....onal manner. The OECD guidelines should be taken as a valid input in judging the action of the TPO because, in a different form, they have been recognized in India's tax jurisprudence. It is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same. 13. In light of the aforesaid decisions, it was submitted that the approach of the TPO is not proper and the same should be held as not valid in law. 14. The ld. DR relied on the order of the TPO. 15. We have considered the rival submissions and are of the view that the stand taken by the assessee in this regard deserves to be accepted. It is clear from the decisions referred to above that the TPO has to work out the ALP of the international transaction by applying the methods recognized under the Act. He is not competent to hold that the exp....