TaxTMI 
TaxTMI 
2022 (9) TMI 880
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....olution Panel, No. II, Mumbai (the learned Dispute Resolution Panel) on 25.09.2019. 02. The assessee has raised following grounds:- "Being aggrieved by the order of the learned DCIT, Circle - 15(3)(2), Mumbai, (AO'), read with the order of the learned Dispute Resolution Panel (DRP'), Mumbai, the assessee begs to prefer the present appeal on the following grounds: A. Grounds relating to additions other than Transfer Pricing Adjustments 1. That on the facts and in the circumstances of the case, the lower authorities erred in upholding the disallowance of Rs. 3,54,24,353/- oil of non-deduction of tax relating to export commission paid by the assessee to its associated enterprises. 1.1. The lower authorities erred in holding that the payments made towards export sales commission are in the nature of fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961. 1.2. The lower authorities erred on facts and in law, in not appreciating the decision of Hon'ble Apex Court in the case of CIT V. Toshoku Ltd. [1980] 125 ITR 525 (SC) and by the Bombay High Court in DIT v. Wizcraft International Entertainment Pvt. Ltd....
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....s 6. That on the facts and in the circumstances of the case, the lower authorities erred in upholding the adjustment of Rs. 7,05,39,108/- to the income of the assessee on account of payment of trademark fees to the associated enterprise. 6.1. The lower authorities erred in rejecting the transfer pricing documentation and the economic analysis undertaken by the assessee without any robust reasons to determine the arm's length price for the use of the trademark 'SULZER'. 6.2. The lower authorities erred on facts and in law in determining the arm's length price of the payment of trademark fees to be Nil without following any of the prescribed methods under section 92C(1) of the Income-tax Act, 1961. 6.3. The lower authorities erred in ignoring the documentation, factual and legal submissions provided by the assessee to substantiate the benefit, corresponding economic or commercial value derived by the use of the trademark 'SULZER'. 7. That on the facts and in the circumstances of the case, the lower authorities erred in upholding the adjustment of Rs. 3,92,66,987/- to the income of the assessee on account of SAP rela....
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....in the circumstances of the case, the lower authorities erred in upholding the adjustment of Rs. 6,06,85,073/- to the income of the assessee on account of ASP management fees paid by the assessee to its associated enterprise. 9.1. The lower authorities erred in rejecting the transfer pricing documentation and the economic analysis undertaken by the assessee without any robust reasons to determine the arm's length price of management services. 9.2. The lower authorities erred on facts and in law in determining the arm's length price of ASP management services to be Nil without following any of the prescribed methods under section 92C(1) of the Income-tax Act, 1961. 9.3. The lower authorities erred in going beyond the scope of section 92CA and in questioning the commercial rationale of the legitimate business expenses incurred by the assessee. 9.4. The lower authorities erred in ignoring the documentation, factual and legal submissions provided by the assessee to substantiate the benefit corresponding economic or commercial value derived oil of management services. 10. That on the facts and in the circumstances of the case, the low....
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....aterials, parts, etc. 22,23,13,683 Transactional net Margin Method ('TNMM') 2. Purchase return of raw materials, parts etc. 26,63,387 TNMM 3. Sale of finished goods 82,44,93,648 TNMM 4. Use of Trademark and payment of Fees thereof 7,05,39,108 Comparable Uncontrolled Price method (CUP) 5. Use of Technical know-how and payment of Royalty thereof 16,45,91,253 CUP 6. Technical Service rendered, consideration received thereof 1,17,91,101, Other method 7. Professional services availed, and Fees paid thereof 4,34,858 Other Method 8. Marketing services (agency services) received and Commission paid thereof 1,70,99,895 CUP 9. Marketing services (agency services) rendered and Commission received thereof 28,62,597 CUP 10. Warranty expenses paid to AES for undertaking repair/ rectification work on behalf of the Assessee (including reversal of amount charged by the AEs for warranty claims in earlier years) 2,29,53,871 Other Method 11. SAP related support services received, and payments made thereof 3,92,66,987 Cost Plus Method (CPM) 12. ASP management services rece....
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....xpenditure. He further held that the allocation of management fees is nothing but diversion of profits from India and therefore he determined the arm's-length price of the service at Rs. nil. [2] payment in relation to SAP related support services of Rs. 39,266,987/- which is pertaining to running the Sap server infrastructure and data centers as well as training, and implementation services which are more precisely described at paragraph number 10 of the order of the learned TPO. The assessee benchmarked the same showing the group transfer pricing policy where such services are charged at cost plus markup of 5% based on in to company agreement dated 2 August 2018. The learned TPO found that the identical service was also tested for its arm's-length price in earlier year where it has been determined at Rs. Nil and confirmed by the learned DRP. The learned TPO therefore determined the arm's-length price of the same at Rs. nil holding that assessee has merely submitted budget rate per user per month arrive at the cost and has not submitted any analysis on the basis of which such budget rate was arrived at. Merely a management certificate with respect to monthly cost was subm....
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....,108 - was incurred by the assessee for using the trademark brand name by its associated enterprise in terms of the agreement submitted on 2/8/2018. Assessee adopted comparable uncontrolled price method as most appropriate method. The comparability analysis was made based on the search conducted on Royalstate database. Assessee also explained the benefits derived by it and stated that the payment of the royalty is at arm's-length as the royalty rate of the comparable companies was found at 2.69% where the assessee has paid royalty at the rate of 1.5% on sales to 3rd parties. The learned transfer-pricing officer has noted that assessee has submitted the agreement dated 2/1/2008 wherein the royalty rates were 1% from 1/1/2008 and the second agreement dated 9/2/2012 where the rate of royalty is 1.5% from 1/1/2012. As per these agreements the royalty was payable on monthly basis. He found that in the earlier years the arm's-length price of the royalty payment was determined at Rs. Nil as assessee failed to substantiate any benefit received. Accordingly, he also determined the arm's-length price of royalty payment at Rs. Nil. Accordingly, as per order dated 16/10/2018 u/s 92CA ....
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....t of mismatch between annual information return with the income of the assessee of Rs. 529,687/-. 010. Accordingly, the final assessment order under Section 143(3) of the Act was passed on 30th December 2019. By this order, the learned Assessing Officer retain following additions:- I. Addition on account of Arm's Length Price of international transaction at Rs.18,10,34,113/-. II. Disallowance of warranty expenditure of Rs.3,73,10,658/-. III. Disallowance of provision for commission of Rs.1,70,99,895/-. IV. Disallowance under Section 40a(ia) of the Act of Rs.3,63,69,080/-. V. Addition on account of AIR information of Rs.5,29,687/-. 011. Assessee aggrieved by this order has preferred this appeal. 012. Ground number 1 of the appeal is with respect to the disallowance of commission paid to associated enterprise for procurement of export orders amounting to Rs. 35,424,361 on which the assessee did not deduct tax at source. The learned authorised representative submitted that this issue is squarely covered in favour of the assessee for the reason that for assessment year 2007 - 08 identical issue arose where the issue was set-aside to....
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....ted by the learned revenue authorities in earlier years. In view of this, we do not agree with the findings of the lower authorities that the assessee should have deducted tax at source on payment of commission to its associated enterprises in Foreign Countries , that did not have any permanent establishment in India or were not carrying on any business in India but were rendering services outside India. Accordingly, ground number 1 of the appeal of the assessee is allowed and the learned assessing officer is directed to delete the disallowance of Rs. 35,424,361/- because of commission paid to associated enterprise for procurement of export orders. 015. Ground number 2 is with respect to the provision for commission incurred by the assessee to associated enterprise for procuring export orders which was disallowed by the learned assessing officer amounting to Rs 1,70,99,895/- stating that it represents a mere provision cannot and ascertained liability and therefore provisions are not deductible as an expenditure. 016. The learned authorised representative submitted that the commission expenses on account of concluded sales as per the matching concept of expenses for which reve....
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....annot come into the way of deduction claimed by the assessee. It is not the case of the revenue that subsequently also the assessee did not receive the bill or no export commission was required to be paid on such sales. Therefore, it is an ascertained liability of the assessee as soon as sales are made. Learned transferpricing officer by determining the arm's-length price of the commission expenses clearly proved that the services been rendered by those agents. Therefore, it cannot be said that such provision is not allowable. In View of this, we do not find any reason to uphold disallowance made by the learned assessing officer holding that provision for commission payable to associated enterprises for procuring export order is merely a provision and not an ascertained liability. Hence, we direct the learned assessing Officer delete the disallowance of Rs. 170,99,895/- on this account stop accordingly ground number 2 of the appeal is allowed. 019. Ground number 3 is against the disallowance of provision of warranty expenditure provided by the assessee at the rate of 1.25% of the pumps sold on account of between charges that firstly it is merely a provision and not an ascertaine....
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....ork and rectify any defect in the product and sold it provides warranty on the basis of past history and scientific basis of failure of the product sold. For 18 months of sale of pump, the assessee makes the provision of warranty. The learned Authorized Representative demonstrated the warranty expenditure for various period where the actual warranty percentage are ranging from 6.48% to 2.46% and which averages out to 1.25 percentage and therefore, the provision was credited in the books of account on that basis. He also referred to the past trend for last three years to show that average warranty is 1.17% of the sales. He submitted that as the warranty condition is embedded into the sale price, as soon as the sale are recorded and recognized as Revenue, related warranty cost is also required to be provided for according to the accounting standard 9 of the ICAI. He therefore, submitted that this warranty cost is ascertained liability and not merely the provision. He further, stated that this issue is squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in case of Rotork Controls India (P.) Ltd. (2009) 314 ITR 62 (SC). We find that the provision....
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....ase of the assessee that there are multiple associated enterprises in a particular jurisdiction to perform this activity and assessee selects one of them to perform the same. Therefore, the payees are identified, the quantum is ascertained and the period for which the payment is required to be made is also known. Hence, we reject this argument. There is one more reason to reject the same because at the time of booking of export commission expenses without receiving the bill, the argument of the assessee was exactly opposite. The export commission liability as well as the liability of warranty which are embedded in the sale price and are incurred simultaneously. 025. The next argument for non-deduction of tax of the warranty expenditure raised by the learned authorised representative is that as the warranty expenditure relates to services utilized in business carried out by the assessee outside India and thereby it falls into the exclusion under Section 9(1) (vii) (b) of the Act from the definition of income of fees for technical services. He submitted that assessee export goods manufactured by it to overseas customers. To them, the warranty obligation of the assessee was fulfill....
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....see by decision of the honourable Gujarat High Court in [2018] 409 ITR 178 (Guj)in wherein it has been held as Under:- "5. Having heard learned advocates for the parties, we notice that indisputably the assessee who provides software related services to many of its clients situated abroad, had hired services of the said M/s. Pacific Hub Corporation, Philippines. The said M/s. PHC, Philippines does not have a permanent establishment in India. It would render services for obtaining human resources and infrastructure services to the assessee for serving its foreign based clients. In this context, a question arises whether at the time of making payments for such services, deduction of tax at source was31 necessary. 6. In the case of GE India Technology Centre P. Limited v. CIT reported in [2010] 327 ITR 456 (SC), the ratio laid down by the Supreme Court was that mere remittance of money to a non-resident would not give rise to the requirement of deducting tax at source, unless such remittance contains wholly or partly taxable income. It is true that after such judgment was rendered, the Legislature had amended section 195 of the Act by inserting Explanation 2 by the F....
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....ctive effect provides that obligation to comply with sub-section (1) of section 195 would extend to any person resident or non-resident, whether or not non- resident person has a residence or place of business or business connections in India or any other persons in any manner whatsoever in India. This expression which is added for removal of doubt is clear from the plain language thereof, may have a bearing while ascertaining whether certain payment made to a nonresident was taxable under the Act or not. However, once the conclusion is arrived that such payment did not entail tax liability of the payee under the Act, as held by the Supreme Court in the case of GE India Technology Centre P. Limited (supra), sub-section (1) of section 195 of the Act would not apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not even seriously contended that the payment to foreign commission agent was not taxable in India." 7. In this context, we would refer to section 9(1)(vii)(b) of the Act. Sub-section (1) of section 9 enlist....
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.... however, relied on a decision of the Delhi High Court in the case of CIT v. Havells India Limited reported in [2013] 352 ITR 376 (Delhi). In such case, however, the court was of the opinion that the payment made by the assessee to a US based company for certification facilitating export was not in relation to the source of income which was based in India. The facts were thus different. It was also argued that the Commissioner (Appeals) had relied on a decision in the case of Adani Enterprises Ltd. (supra) against which, the Revenue's appeal has been admitted by the High Court. It prima facie appears that the facts in the case of Adani Enterprises were different. In the present case, we have primarily gone on the question of the nature of the assessee's activities and the nature of services rendered by the parent based company, for which commission was paid. Keeping the question pending before the High Court in the case of Adani Enterprises untouched, we can still dispose of this appeal.‖ 026. Above decision of the honourable Gujarat High Court has also considered the decision of the honourable Delhi High Court of CIT V Havells India Ltd 280 taxman accordingly, we ....
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.... the associated enterprise. Ld AR submitted that the royalty payment made to the associated enterprises which at the rate of 1.5% of sale price for use of trademark is at Arm's Length Price which is determined by the learned Transfer Pricing Officer at Rs. Nil and confirmed by the Dispute Resolution Panel amounting to Rs.7,05,39,108/- challenged in this appeal by ground no. 6. It is squarely covered by ground no. 6 of the appeal of the assessee in order of ITAT for earlier years. 033. With respect to ground no. 7, he submitted that SAP license fee and Support fees paid to Associated Enterprises amounting to Rs.3,92,66,987/-, whereas the learned Transfer Pricing Officer determine its Arm's Length Price at Rs. Nil is covered by ground no. 5 of the earlier years of the ITAT Orders. 034. The ground no. 8 of the appeal challenges the determination of Arm's Length Price at Rs. Nil of international transaction of Rs.1,01,08,087/- of Microsoft software license fee reimbursed to the associate enterprises is covered by ground no. 7 of the order of the ITAT orders. 035. He submitted that ground no. 9 with respect to management fee paid to associate enterprises of Rs.6,06,85,073/- who....
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....SAP software related support, (v) Description of payment of annual charges towards Microsoft licenses fees, (vi) Invoice raised by Sulzer Management AG on SPIL for Microsoft licenses fees The assessee had also filed before the TPO on 08.12.2015 (i) Certificate from Sulzer Management AG for Microsoft Licencce fees along with invoice from Sulzer Holding US to Sulzer Management AG for Microsoft licenses fees, (ii) Certificate from AE for payment of ASP Management fees, (iii) Certificate from AE for payment of SAP software related support The assessee had also filed before the TPO 15.12.2015 (i) Show cause reply for SAP software related support, (ii) Sample copies of email correspondence for SAP software related support, (iii) Show cause reply for payment of trademark fees, (iv) Show cause reply for payment of engineering services, (v) Show cause reply for payment of annual charges towards Microsoft licenses fees, (vi) Brief description for payment of Global IT support service. Finally, the assessee had filed additional evidences before the DRP on 10.06.2016 (i) Detailed note on engineering services along with copies of invoices, (ii) Copy of inter-company invoice for payment ....
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.... the assessee to prove why the method adopted by the assessee is correct. In the instant case, as narrated hereinabove the assessee has discharged its onus by maintaining the documentation. Further, during the TP proceedings, the assessee has filed before the TPO sufficient details called for. Then the burden of proof has shifted to the TPO. However, the TPO has made the disallowances / adjustments on general propositions. We are reminded by the great aphorism of Justice Oliver Wendell Holmes in Lochner v. New York, 198 U.S. 45,76 (1905) that "general propositions do not decide concrete cases." As mentioned earlier, the assessee vide letter dated 27.02.2015, 04.09.2015, 24.09.2015, 08.12.2015 and 15.12.2015 has filed sufficient details in response to the queries raised by the TPO during the course of TP proceedings. Further, the assessee has filed before the DRP additional evidence dated 06.06.2016. However, instead of examining / scrutinizing those submissions, the tax authorities have made disallowances/adjustments on general propositions. Having considered the above factual scenario, we allow the 4th , 5th, 6th, 7th, 8th and 9th ground of appeal." 0....
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....ts available on record would show that the assessee has been selling goods to Non-AEs also. Accordingly we hold that the assessee should be considered as a Licence Manufacturer in the facts and circumstances of the case. ulzer Pumps India Pvt. Ltd. 10. Since we have held that the assessee is licenced manufacturer, the basic foundation on which the disallowances of royalty and technical knowhow expenses were made would fail. Further the assessee has also pointed out that the TPO has not adopted any of one of the prescribed methods for benchmarking the transactions. Further the assessee has also taken support of certain case laws to contend that the aggregation of intrically connected transactions and determining the ALP of the transactions at entity level under TNMM method was justified. We notice that the TPO had no occasion to examine all these contentions, since he considered the assessee to be a contract manufacturer. Accordingly we are of the view that the issues relating to Royalty and Technical knowhow requires fresh examination at the end of the AO/TPO. Accordingly we set aside the order passed by Ld CIT(A) on these two issues and restore the same to the file of AO/....