TaxTMI 
TaxTMI 
2023 (2) TMI 553
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....Commissioner of Income-tax (Appeals) , Circle - 3 ["CIT(A)"], Bangalore under section 250 of the Act on the following grounds: On the facts and circumstances of the case and in law, the Honorable CIT(A) erred in upholding the order of the learned Deputy Commissioner of Income Tax- Circle 12(1), New Delhi ("learned AO") which has been passed after taking into account the order of the learned Additional Commissioner of Income tax (Transfer Pricing Officer - I), New Delhi ("learned TPO") whereby the learned TPO and the learned AO have : A) Grounds of appeal relating to Transfer pricing (`TP') adjustment 1. Erred in making an addition of INR 12,59,12,420 to the total income of the Appellant on account of adjustment in the arm's length price with respect to the international transactions of the Appellant. International transaction relating to Export of Finished Goods to Associated Enterprise VAE") 2. Erred in making an upward TP adjustment of INR 7,75,62,042 to the international transaction of Export of Finished goods to AE. 3. Erred in not considering various submissions, workings and evidences furnished by the Appellant to ....
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....t considering that CIT(A) has the right to consider additional grounds even if not raised before the AO 15. Adopting pedantic and hyper technical approach resulting in denial of substantial justice. 16. Erred in levying interest under the provisions of Income Tax Act, 1961. Further, the Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal." ITA No. 2068/Bang/2017 (AY: 2005-06) "Based on the facts and circumstances of the case and in law, Herbalife International India Private Limited ("Herbalife India" or the "Company" or the "Appellant") respectfully craves leave to prefer an appeal under section 253 of the Income-tax Act, 1961 ("the Act") against the order dated 29 August 2017 passed by Commissioner of Income-tax (Appeals) , Circle - 3 ["CIT(A)"], Bangalore under section 250 of the Act on the following grounds: On the facts and circumstances of the case and in law, the Honorable CIT(A) erred in upholding the order of the learned Assistant Commissioner of Income tax, Circle - 11(4), Bangalore ("learned AO") which has been passed ....
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....ant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal." 2. Brief facts of the case for AY 2003-04 are as under: 2.1 Assessee was incorporated in the year 1998 and started its manufacturing activity in the Indian market through third party contract manufacturers. It is submitted that the in its initial years of operations, it manufactured certain products which did not prove to be viable in the Indian domestic market. Considering that the Herbalife products have low shelf life and are perishable in nature, some products were written off in the AY 2002-03 In cases where the rework/reuse was perceived to be possible so as to be fit for human consumption. The same were reworked and sold to its AE, Herbalife International of America Inc., US, in the AY 2003-04. 2.2 It is again submitted that the assessee had a policy of accumulating finished goods inventory equivalent to 16 weeks' sale in anticipation of the growing demand of products. However, during FY 2001-02, the sales slumped significantly as opposed to the anticipated sales. On account of this decline, there was a huge ....
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.... Total 10,51,221 Restricted to USD 1 million (in line with RBI approval) 10,00,000 Amount paid in INR 4,83,50,378 2.6 The Ld.AO note that assessee specified CUP as its benchmarking method in Form 3CEB however in the transfer pricing study report, assessee also substantiated the international transaction by using a secondary method which is TNMM. While doing so, assessee had aggregated its other international transaction and computed its margin at entity level of 12% with comparables margins of 4% and concluded that the international transaction for A.Y. 2003-04 at arms length. 2.7 The Ld.TPO distributed the manner of computing the margin. The Ld.TPO was of the view that the products sold to AE were also sold to unrelated parties, the controlled prices were available in an internal CIP. The Ld.TPO thus computed the margin by using CUP as the most appropriate method. It was also observed by the Ld.TPO that assessee did not submit invoices of sales with unrelated party however the assessee had compared the per unit sale price of the obsolete stock sold with the per unit manufacturing cost of production and arrived at the gross profit o....
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....rite off of inventory during the year under consideration. The appellant has prayed for the admission of the same. On perusal of record it is observed that these grounds are not arising out of the order of the Assessing Officer (AO). These issues were never raised by the appellant before the AO. Further these are not legal issues. it would require fresh investigation into facts as to whether the write off of inventory was to be allowed in the year under consideration or not. The CIT(A) as well as AO have just given remarks that the matter can only be considered in AY 2003-04. Nowhere is it stated that any such allowance needs to be given to the appellant in AY 2003- 04 without any verification. Considering above, these additional grounds of appeal are not admitted." Aggrieved by the order of Ld.CIT(A), assessee is in appeal before this Tribunal. 4. Ground no. 1 raised by assessee is general in nature and therefore do not require adjudication. 5. Ground nos. 2-5 is in respect of the export of finished goods to the associated enterprises wherein an upward TP adjustment was made. The Ld.AR submitted that the products reproduced in para 2.3 sold to the AE was one time export a....
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....ansfer pricing analysis is tied to the business realities. 5.5 Assessee in its TP study submitted that in its TP report, compared its entity level margin of 12% with the comparables' margin of 4% and concluded that all its international transactions for A.Y. 2003-04 to be at arm's length. 5.6 On the contrary, the Ld.DR submitted that the export of unsalable products in India to the AE itself is primarily unacceptable and it is a made up story. It was submitted by the Ld.DR that the products that are not saleable in India cannot anyway cross the boundaries of India as it requires necessary approvals being food products for consumption and certificate of quality assurance has to be submitted. The Ld.DR supported the transfer pricing addition in respect of the international transaction of export of finished goods to the AE. We have perused the submissions advanced by both sides in the light of records placed before us. 5.7 We appreciate the argument advanced by the Ld.DR however there are various documents filed by the assessee in support of the products that are submitted to be remodified and was made to be fit for consumption. However, such modification did not fit into ....
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....rdance with the observations by the Tribunal in assessee's own case as relied by the Ld.AR. We have perused the submissions advanced by both sides in the light of records placed before us. We note that Tribunal in assessee's own case for A.Y. 2008-09 on identical issue observed as under: "10.4 We have considered the rival submissions as well as the relevant material on record. This transaction of payment of administrative service fee has been declared by the assessee as international transaction and is also subjected to TP provisions of sec.92CA, however, the AO made an alternative addition by invoking the provisions of sec.40A(2) of the Act. The AO allowed only 2% of the turnover amounting to Rs.1,02,62,530/- and the balance of Rs.4,81,97,802/- has been disallowed under section 40A(2) of the Act. There is no dispute that the transaction has been reported by the assessee as international transaction which was also accepted by the AO and the TPO as an international transaction. Thus, once a particular transaction is admitted as international transaction then the same falls in the ambit of the provisions of X chapter of the Act which are specific provisions to deal wit....
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....as rightly pointed out by the learned counsel for the assessee, disallowance u/s 40A(2) can be made only if the alleged excessive and unreasonable payment is made to any person enumerated under clause (b) of sub-sec.(2) of sec.40A of the Act. In the case before us, the AO has not brought out anything on record to show that Cisco India Ltd., falls in any of the categories of persons enumerated under clause (b) of sub-section (2) of sec.40A of the Act. The recipient of the payment i.e. Cisco India, definitely does not fall under any of the categories of persons under clause (b) of sub-sec.(2) of sec.40A. The AO has not carried out any exercise to bring on record that Cisco India has got substantial interest in the business or profession of the assessee or that it falls in any of the categories of persons. In view of the same, we are of the opinion that the disallowance u/s 40A(2)(b) of the Act is not called for. 11.1 As regards the alternative contention of the learned counsel for the assessee that the transaction between the assessee and Cisco India Ltd., being an international transaction, the same has already been referred to the TPO for determination of the ALP and there....
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.... February 2022 had upheld the disallowance observing that the disposal notes which form basis of write off of inventory is received on 24 October 2002 i.e.. in FY 2002- 03 (AY 2003-04). 7.3 Based on the noting in the order of CIT(A), the Company had raised additional grounds before CIT(A) for AY 2003-04. vide letter dated 26 October 2016, for allowing the claim for write off inventory in AY 2003-04. 7.4 The Ld.CIT(A) vide order dated 29 August 2017, observed that said ground are not arising out of the order of the AO for AY 2003 04 as no claim was made before the AO. Relevant extract of CIT(A) order is re-produced below '(Refer page 8-9 of the paper book): "Vide letter dt 26.10.2016, the appellant has raised more additional grounds of appeal. The same relate to allowing of write off of inventory during the year under consideration. The appellant has prayed for the admission of the same. On perusal of record it is observed that these grounds are not arising out of the order of the Assessing Officer (AO). These issues were never raised by the appellant before the AO. Further these are not legal issues. It would require fresh investigation into facts as to whether t....
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....ant and may be considered while adjudicating the issue. We have perused the submissions advanced by both sides in the light of records placed before us. 11. As we have already remanded the issue back to the Ld.AO for denovo verification based on the evidences filed by the assessee to commensurate the rendition of services relying on the order passed by this Tribunal in assessee's own case for A.Y. 2008-09. Applying the same view mutatis mutandis, we remand this issue back to the Ld.AO to be decided afresh by considering the principles laid down in various decisions of this Tribunal as well as that of assessee on similar issues. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Accordingly, this appeal filed by assessee stands allowed for statistical purposes. In the result, both the appeals filed by assessee stands allowed for statistical purposes. Order pronounced in the open court on 29th September, 2022. ============= Document 1 4.1 During hearings the appellant has just relied upon the submissions made by it before the TPO. The submissions of the appellant have duly been considered. In his ord....
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....oods to its AE. So argument of the appellant that the goods had to be destroyed by its AE is of no consequence in determination of ALP of international transaction. As regards the issue of discount, the aspect of discount on local sales has already been considered by the TPO while working out the ALP of the international transaction. The TPO has allowed 50% discount on the sale price of local sales to arrive at the comparable price for the export sales. The issue has been discussed in detail by the TPO on pages 5 to 7 of his order in the same cannot be faulted with as the assessee has failed to controvert the findings of the TPO. Considering above, the value of international transaction worked out at Rs.10,22,05,674/- as against Rs.2,46,43,632/- as determined by the appellant, is found to be justified and the ground of appeal of the appellant in this regard is dismissed. 5.0 • . . Ground of appeal 3 relates to determination of ALP of Administrative Services Fees paid by the appellant to its AE. The same has been worked out to be Nil by the TPO. The appellant has made detailed submissions on this issue to justify its claim tha....
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....r any independent third party would have availed of such services and pay the same amount. The taxpayer in response fumished the cost classification of the expenditure incurred under the lead administrative fees and in further support has attached sample e mail correspondences with the parent company personnel justifying the payment made. Document 4 The submission made by the taxpayer were analyzed and the following shortcomings were found. a) The taxpayer has not furnished the total cost incurred for the cornenon group services by the parent company and the basis of allocation among different group entities. The taxpayer has given the write up on the method of cost allocation but whether the same principle has been followed among all the group entities has not been demonstrated. b) The basis of allocation is not on specific query or trouble shoot or requested service. The total cost incurred by the parent company is at the end allocated on gross income of the individual group entity. This at the end entails to cross charge or cross subsidy among the group entities. c) The taxpayer has not established that the cost allocated for different servi....
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.... unrelated parties. The email correspondences, furnished as evidence, were found to be vague in nature and they did not establish that the payments made were commensurate with the services rendered. Although the appellant has filed his rejoinder to the remand Document 5 report vide its letter dt 18.03.2016, however it submissions are just repetition of earlier submissions before TPO or that made during appellate proceedings. 5.3 The TPO has examined the agreement entered into by the appellant with its AE as well as the documents produced by it before him during pendency of proceedings as well as during remand proceedings. The TPO has discussed in detail the nature of various services, claimed to have been received by the appellant from its AE, however the important fact is that the appellant failed to produce any document to substantiate its claim that these services were actually rendered by the AE to it. It is not the stand of the TPO that appellant should not have taken these services or in other words TPO is not challenging as to how the appellant runs or wants to run its business but TPO just wants the appellant to show that the service....
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....e company cannot be accepted for the purpose of ALP. Therefore, the claim for the payment of service charges has been rejected by the TPO w/s 92C(3). 9. In the hearing taken before the TPO, the assessee has elaborately explained why the payment of fee for management services was justified in the present case. As per the agreement, the assessee painted out, that Gemplus Singapore would provide need based services to the assessee company in different fields, such as, marketing and sales, customer service, finance & accounting, administration and legal support. The TPO found that the expenditure per person works out to Rs. 10 lakhs which is more than the course fee charged by any Primary Management Institution in the country. She has also found that the only evidence filed by the taxpayer was training certificate issued in the name of two persons. The assessee has explained that Rs. 15,94,824/- was paid towards customer service support. The TPO has observed that the explanation offered by the assessee was a vague one. In respect of services regarding finance and accounting, the assessee had paid Rs. 42,04,536/- The TPO has observed that the....
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....discharge this onus lying upon it despite being asked to do so by the TPO. The TPO had especially invited the assessee company to produce the proof in support of the services rendered by AE. The appellant only had tried to prove this by producing some correspondence which does not prove that the services are actually rendered. The failure by the assessee to discharge the onus can be presumed that the assessee had no evidence to establish that services of management support are rendered by its AE in consideration to payment of Rs.26,22,19,000/-. This presumption can be drawn even as per the provisions under section 86 of Indian Evidence Act. The submission that the TPO had impliedly accepted the rendition of services cannot be accepted as there was no finding given by the TPO that services are actually rendered. In fact, the TPO while summarizing this observation vide page No. 30 of his order vide column No.6 had specifically mentioned that the assessee had failed to prove that the services are actually rendered by AE. Furthermore the finding of the TPO that the invoice was raised much after the closure of the accounting year and the payment....
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....roving this aspect. Therefore, even as per Document 9 the provisions of Indian Evidence Act, the presumption can be drawn that the assessee has no evidence to prove this aspect. Therefore, the AO/TPO was justified in adopting the ALP in respect of payment of administrative services and royalty at Nil. Thus, the grounds of appeal in ground Nos. 2 to 7 are dismissed In respect of the other grounds of appeal, since we held that there was no proof of receipt of administrative services as well as technical knowhow which is used in the process of manufacturing activity, the question of bundling of transaction or aggregating all other transactions does not arise." 5.8 In the year under consideration too, the facts remain that neither has appellant substantiated the receipt of services nor it has produced any document to show that the payment were at arm's length (even if it is presumed that the services were actually rendered). So the action of the TPO cannot be faulted with and this ground of appeal of the appellant is dismissed. Document 10 11A VOIDARU Annexure 1-Details of closing stock for AY 2002-03 and goods sold to AE after rework subse....