TaxTMI 
TaxTMI 
2017 (12) TMI 1860
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....red the TP documentation bona fide and in good faith in compliance with the Act and Income tax Rules, 1962 (the Rules). 3. The Learned AO and the Learned DRP erred in considering the international transactions relating to the payment of management fees in isolation of the Transfer Pricing Documentation maintained by the Appellant. 4. In connection with the management and marketing support services fees the Learned AO and the Learned DRP erred in: 4.1. concluding that no economic value was derived and that no tangible and substantial commercial benefit was derived by the Appellant; 4.2. concluding that no supporting evidence were furnished to justify the management and marketing support services rendered to Volvo India; 4.3. concluding that the there is no correlation between the amount of management and marketing support services fees paid and the services rendered by the Associated enterprises of the Appellant. 5. The Learned AO and the Learned DRP erred in disregarding the contemporaneous planning study and the benchmarking analysis submitted by the Appellant without prejudice in substantiation of the management & marketing support services fees. 6. The Learn....
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....e AY 2006-07 was filed on 30.11.2006 disclosing total income of Rs.250,59,79,920. The assessee company also reported the following international transactions:- S.No. Nature of International Transactions Amount (Rs.) 1. Purchase of truck kits 112,07,37,202 2. Purchase of parts and spares 33,25,73,885 3. Sale of goods 25,93,43,143 4. Sale of parts and spares 4,02,65,039 5. Purchase of Bus Kits 46,91,95,683 6. Purchase of VCE Kits completely knocked down condition 271,70,67,143 7. Services provided 42,89,95,417 8. Services availed 2,28,31,374 9. IT charges received 16,28,28,614 10. Payment for services 91,78,096 11. Service income 51,96,167 12. Reimbursement of expenses received 1,51,87,481 13. Reimbursement of expenses paid 20,233 14. Royalty 6,26,72,000 15. Purchase of printed matter 16. Management fee (Mfg & distribution) 37,89,35,000 17. Technical Fee paid 9,30,00,000 The aforesaid international transactions were benchmarked applying Transactional Net Margin Method (`TNMM') and the results of the said analysis are as under: Nature of business segment Method sel....
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....lly knowing the basis for apportionment and also so huge amount of Rs. 37,89,35,000/- which is about 14% of profit (before management fee) is paid as management fee. 2.5 Whether management fee is paid by any of the concern or subsidiary of Volvo Group any where in the world. If yes, copies of the agreements for management fee and also the basis on which such payments are paid. 2.6 Whether management fee is paid by any independent concern or entity in any other country through which Volvo Group carries on similar business as that of you. If yes, copies of the agreements for management, fee and also the basis on which such payments are paid. 2.7 Copy of the agreements with AEs in respect of management fee. 2.8 Please establish that a service (i.e., a benefit) has actually been supplied for which management fee is paid by you. In this respect please produce a. documents supporting the calculation of cost-based charges, for example, direct costs plus a reasonable proportion of indirect costs, and adequate records to permit verification of such costs; b. documents supporting the mechanism used to determine the amounts to be apportioned among associated enterprises, for examp....
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..... The VTC says that the taxpayer is guaranteed an arm's length profitability is not true. As the taxpayer is carrying on significant manufacturing and distribution functions attached with consonants risk, how can the return can be guaranteed. 4. The AE says that the arm's length result is usually based on certain range of Return on Capital Employed ("ROCE") for manufacturing and Berry Ratio (`Gross Profit/ Value Added Expenses') for distribution functions. Other services are remunerated on a Cost Plus Mark-up (`Operating Profit/ Total Cost') basis. As per the Volvo Group transfer pricing system, in the event that the actual result falls below the established range, Volvo Sweden compensates the Service Provider with transfer pricing adjustment large enough to bring the Service Provider within the range. However, in case the actual profits are above the established range, the Service Provider compensates Volvo Sweden with an amount sufficient to bring the profit within the range. The second statement clearly states that in the event actual profits are above the established range, Volvo Sweden is compensated the excess above the established range. But, this adjustmen....
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....olvo. The AE again mixes the purpose for which the management service is received. It does not know which group member provided such services. Hence, the invoice raised by the VTC can be treated as only a paper and nothing beyond as either the taxpayer or the AE did not show how such expenses are incurred only for India and not for the rest of the country." 6. Finally the TPO had given the following reasons for treating the arm's length price [ALP] of the transaction of payment of management fee at Rs. Nil. :- "1. The taxpayer did not pay any management fee in the financial year 2003-04, but started paying substantial amounts of Rs. 26.22 crores, Rs. 37.89 crores and Rs. 42.62 crores for the FY 2004-05, FY 2005-06 and FY 2006-07. 2. The taxpayer failed to produce any evidence regarding the expenditure incurred by the AE on behalf of the taxpayer. 3. The AB, Volvo Truck Corporation, also did not give any details of expenditure incurred by it in connection with management fee received by it. Further, as per the transfer pricing strategy adopted by the AE, the profitability of Volvo India is the determining factor in deciding the management fee and is not based on the services ....
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....ength price of management fee paid is treated as Rs. Nil due to inadequacy of the taxpayer's argument and the entire payment of management fee of Rs. 37,89,35,000/- is treated as an adjustment U/s 92CA." 7. In respect of the payment of royalty and payment of technical services, the TPO held it to be at arm's length. He treated the arm's length price of the payment of management fee of Rs.37,89,35,000 at Nil as no evidence was filed in support of the rendering of services and it was not demonstrated any tangible and substantial commercial benefit was derived by such huge payment of management fee. 8. After the receipt of TPO's order, the AO passed a draft assessment order dated 30.11.2009 incorporating the TP adjustment of Rs. 37,89,35,000. The AO also restricted the deduction u/s. 10A of the Act by reducing the expenditure incurred on telecommunication and internet charges incurred in foreign currency from the total turnover. 9. Being aggrieved, objections were taken before the DRP contending inter alia that the TPO was not justified in making ALP adjustment on account of treatment of payment of management fee at Nil on the ground that no tangible or substantial commercial ....
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....ification to meet the needs of the customer. b) The marketing team of the associated enterprise assists the appellant in identifying new products which may be launched in India depending upon the needs of the Indian industry and potential customers. As a result of the support provided by the associated enterprise, the appellant successfully launched the I-shift technology in India which leads to improved fuel mileage of the products resulting in increased revenue for the appellant. c) The associated enterprise conceptualized and developed a mobile office in the form of a truck trailer, a 40 feet container having a visitors room, meeting room, cubicles etc. for the purpose of exhibiting the products and capabilities to the potential customers of the appellant in India. The said mobile office conceptualized and developed by the associated enterprise and was provided to the appellant free of cost. 13. As regards the central/core marketing activities and provision of background material, it is submitted that the AE undertakes central marketing activities such as organizing customer visits to its facilities to boost consumer confidence, sponsors various sports events, etc. It is fu....
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....voices raised by the AE towards management and marketing support services fee are furnished and also the details of nature of services rendered by the AE are also provided. It is further contended that the basis of quantification of services or cost involved is also submitted. He further contended that the TPO had failed to consider the evidence and explanation filed by the appellant as proof of provision of services by the A and had wrongly come to the conclusion that the appellant had failed to place on record the evidence in support of services rendered by the AE. He further submitted that in order to rebut the findings of the TPO, the appellant by way of application dated 14/09/2017 for admission of additional evidence sought to place on record certain evidence in the form of emails, presentation, business plans, etc. to substantiate the provision of services by the AE. He further submitted that significant benefits were derived by the appellant on account of payment of management and marketing support services fees to its AE. Without prejudice to this contention, it is contended that the benefit test is not the criteria for allowing expenditure, so long as an item of expenditu....
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....ve the receipt of services from its AE and the issue involved in the appeal is covered by the earlier decision of the coordinate Bench in assessee's own case for the AY 2005-06. He further submitted that the additional evidence sought to be filed cannot be admitted as there is no explanation in the application for admission of additional evidence as to why the same could not be filed before the lower authorities. 17. We have heard the rival submissions and perused the material on record. The issue in the present appeal is whether the TPO/AO was justified in adopting the ALP in respect of management and marketing support services fees paid by the appellant to its AE at Rs.Nil. The payment for said services was made in terms of master agreement dated 01.04.2001entered by the appellant with Volvo Truck Corporation, Sweden, i.e., its AE, which is a holding company. The nature of management and marketing support services to be provided by the AE to the appellant are provided in clause 4.5 Annexure to the master agreement which reads as under:- "4.5 Marketing and Management Support rendered by Volvo Group to VIPL 4.5.1 VIPL sells its products under the Volvo brand name. Volvo Group ....
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....ing information on contacts handling, marketing communication, results of Volvo Global surveys, films on brands and product and general communication portal. All the above help the personnel at VIPL feel as part of the Global Volvo team and focus on their functions better. 4.5.7 Volvo Group also provides and shares the product and market strategies and plans with personnel at VIPL, thereby providing an insight for them into the Volvo global business operations. Knowledge of other market experiences is also shared. Volvo Group has undertaken Customer profiling for VIPL by means of launch under Area Asia. All the above mentioned support flowing from Volvo Group to VIPL has helped it secure a niche position in the Indian market. The same has contributed to the growth in revenues of VIPL and thus the management fee payable by VIPL to Volvo Group has been computed on the basis of VIPL's revenues." 18. The TPO had determined the ALP in respect of management and marketing support services fees paid by the appellant to its AE at Nil primarily for the following reasons:- 1. There was no payment of management and marketing support services fees in the earlier years. 2. The appella....
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....urchaser of goods or of services is not concerned with the price at which its vendor of goods or supplier of services in turn acquired the same. This, at the highest, would be a factor while negotiating the purchase of goods or the acquisition of services. Even if the vendor or supplier acquired the assets or the know-how as a gift, it would be irrelevant as far as the onward sale thereof is concerned. The purchaser determines the price it is willing to pay for the goods or services independent of what the same cost its vendor/service provider. The TPO, therefore, proceeded on an entirely erroneous basis while computing the arm's length price." (3) The next reason assigned by the TPO is that payment of management and marketing support services fees is guided by the profitability of the AE and is not based on the services rendered by the AE to the appellant. No doubt, it is a relevant criterion and it is settled principle of law that onus always lies on the assessee to prove the business exigency of any expenditure incurred and prove that expenditure is incurred wholly and exclusively for the purpose of business of the assessee. In the present case, the appellant had failed to....
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....O cannot determine the ALP at Nil by holding that there was no need to incur any expenditure. The above decision was followed by the several coordinate benches of the Tribunal, some by them are as follows: i. Dresser-Rand India (P.) v. Addl. CIT [2011] 13 traxmann.com 82/[2012] 53 SOT 173 (Mum.) ii. Ericsson India (P.) Ltd. v. Dy. CIT [2012] 25 taxmann.com 472 (Delhi) iii. AWB India (P.) Ltd. v. ACIT [IT Appeal No. 4454 of 2011] (Delhi); iv. SC Enviro Agro India Ltd. v. Dy. CIT [2013] 34 taxmann.com 127/143 ITD 195 (Mum. - Trib.) v. Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxmann.com 27 (Delhi) vi. McCann Erickson India (P.) Ltd. v. Addl. CIT [2012] 24 taxmann.com 21 (Delhi) vii. DSM Anti-Infectives India Ltd. v. Addl. CIT [2014] 50 taxmann.com 239 (Chd. - Trib.) viii. TNS India (P.) Ltd. v. Asstt. CIT [2014] 48 taxmann.com 128/[2015] 152 ITD 123 (Hyd. - Trib.) ix. Atotech India Ltd. v. Asstt. CIT [2014] 148 ITD 670/42 taxmann.com 468 (Delhi - Trib.) x. Nippon Leakless Talbros v. ACIT [IT Appeal No. 5931 (Delhi) of 2012] xi. Nippon Leakless Talbros v. ACIT [IT(TP) Appeal No. 475 (Delhi) of 2015] xii. Hughes Systique India (P.) Ltd. v. Asstt. CIT [2....
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....nnot be accepted for the reason that bundling of transactions is permissible only when the transactions are closely related to each other and reliance in this regard can be placed on the decision of Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 and Punjab Haryana High Court in the case Knorr Bremse India (P) Ltd. v. Asstt. CIT [2016] 380 ITR 307/236 Taxman 318/[2015] 63 taxmann.com 186. It is not the case of the appellant that these transactions are closely linked with the other transactions and therefore the submission that these transactions should be bundled with other transactions cannot be accepted. ii) Decision of the co-ordinate Bench of the Tribunal in the case of 3M India Ltd. vs. Addl.CIT(LTU) reported in [2016] 70 taxmann.com 231 (Bangalore - Trib.). The relevant paragraphs are extracted hereunder: "8. We heard rival submissions and perused material on record. A perusal of the TPO's order reveals that the ALP in respect of intragroup services was determined at 'nil' as, in his perspective, no benefits were derived by the assessee-company out of such services ....
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....ther observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, [1938] 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstan....
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..... 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 the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. It has been held by our courts that it is not for the revenue authorities to 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. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, [1957] 20 ITR 1, it was held b....
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....57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that 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 R....
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....) x. Nippon Leakless Talbros v. ACIT [IT Appeal No. 5931 (Delhi) of 2012] - AY 2008-09 xi. Nippon Leakless Talbros v. ACIT [IT(TP) Appeal No. 475 (Delhi) of 2015] - AY 2010-11 xii. Hughes Systique India (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 41 (Delhi - Trib.) xiii. Knorr-Bremse India (P.) Ltd. v. Asstt. CIT [2013] 56 SOT 349/27 taxmann.com 16 (Delhi - Trib.) xiv. Thyssen Krupp Industries India (P.) Ltd. v. Asstt. CIT [2013] 55 SOT 497/[2012] 27 taxmann.com 334 (Mum. - Trib.) xv. LG Polymers India (P.) Ltd. v. Addl. CIT [2011] 48 SOT 269/15 taxmann.com 79 (Vishakhapatnam) Thus, in the light of above legal position, though ALP of services by AE cannot be determined at 'nil' by questioning the necessity, the benefits of expenditure incurred, such expenditure can be allowed only after proving conclusively that there was actual rendition of services by AE. The onus lies on the assessee to prove that the services are actually rendered by the AE. In this context, we may point out to the decision in the case of Hon'ble Supreme Court in the case of Laxmi Narayan Madanlal v. CIT [1972] 86 ITR 439 wherein it was held as follows: ** ** ** Thus, for allowab....
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....t year 2010-11 there is no mention of the commission at all. Therefore, we are unable to give evidenced to the facts whose record is not before us and not referred to before the lower authorities". 12. Similarly, the Hon'ble Delhi High Court in the case of Schneider Electric (Ind.) Ltd. v. CIT (21008) 304 ITR 360 (Del.) held that in the absence of material on record suggesting that the commission agents had procured the sale orders, no commission should be allowed. The relevant para of the judgment is reproduced below; "13. We agree with the Tribunal that there is absolutely no material on record to suggest that M/s Ram Agencies had procured any sale orders for the assessee. The production of a few bills or payment having been made by account payee cheques cannot by itself show that M/s Ram Agencies had procured sale orders for the assessee. Apart from an internal note, there is no evidence of any correspondence or any personal; meetings etc. between the assessee and M/s Ram Agencies to suggest that the was any relationship on the basis of which M/s Ram Agencies procured some orders for the assessee for which it was entitled to receive commission. Moreover, we find that the....
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....e AE in respect of IT services, had directed the allowance of expenditure. Therefore, in interests of justice, we restore this issue to the file of the AO for purposes of verification of this evidence and come to conclusion whether the services are actually rendered by the AE or not and direct the TPO/AO to bench mark the transaction of rendering of services of market management support services, after being satisfied himself that the services are actually rendered by the AE. 11. On the principle of consistency, we hold that each assessment year is separate and distinct. The principles of res judicata have no application to income-tax assessment proceedings. Simply because in the preceding year, this expenditure came to be allowed without any probe or enquiry it does not preclude the AO from making the enquiries on these issues." (6) The next reason assigned by the TPO is that the appellant had failed to prove the valuation done by the AE. In our considered opinion, valuation is nothing but price mentioned in the invoices raised by the AE against the appellant company and this may not be a relevant criterion for determining the ALP of the transaction at Rs.Nil. (7) The other ....
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.....10.2014, 03.12.2014 and 07.04.2015. On 09.04.2015, this appeal was represented by one Mr. Nageshwar Rao, Advocate and he also sought time and the case was posted for hearing on 29.07.2015 on which date, Sr. Advocate Mr. P.J. Pardiwalla appeared and at the request of ld. DR, the matter was adjourned to 19.01.2016. On 19.01.2016, one Mr. Keerthi Narayan, CA had appeared and sought adjournment of the hearing and the matter was posted to 19.07.2016, on which date, the Bench did not function, the case was posted for hearing again on 03.10.2016, on which date at the request of Mr. P.J.Pardiwalla, Sr. Advocate, who caused appearance, the matter was adjourned to 19.10.2016, on which date again Mr. Pardiwalla appeared and the matter was adjourned to 29.11.2016. Again on 29.11.2016 at the request of Mr. Chavali Narayan, CA, who represented the assessee company, the matter was adjourned to 14.02.2017. Again on 14.02.2017, at the request of ld. AR, Mr. Chavali Narayan, the matter was posted to 09.05.2017 and as the Bench did not function, the matter was posted to 16.08.2017. On 16.08.2017 at the request of ld. AR, Mr.Chavali Narayan, the matter was adjourned to 14.09.2017. Again on 14.09.2017....
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....entitled to produce additional evidence. It is only when the Tribunal requires such additional evidence in the form of any document, affidavit or examination of witness, it would call for the same only in the following three circumstances:- (a) When the Tribunal feels that it is necessary to explain to it to pass the order; or (b) for any substantial cause; or (c) where the income-tax authorities did not provide sufficient opportunity to the assessee to adduce the evidence. 25. In the present case, it is the appellant company who made an application for production of additional evidence in support of rendering of the services by the AE. It is an undisputed fact that the appellant had chosen not to file these evidence either before the AO or the before the DRP. But the fact also remains that this Tribunal had not asked the appellant to produce these additional evidence on its own during the course of hearing of the appeal. The ambit of provisions of Rule 29 of the ITAT Rules came up for consideration before the Hon'ble Delhi High Court in the case of CIT v. Text Hundred India Pvt. Ltd., [2013] 351 ITR 57 (Delhi) wherein after referring to the earlier precedents on the subject....
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....in the earlier years in the appellant's own case, wherein the Tribunal on an identical issue held that in the absence of evidence on record in support of rendering of services by the AE, the TPO was justified in determining the ALP of the transaction of payment of management and marketing support services fees at Rs.Nil. The relevant part of the order of the Tribunal reads as under:- "10. We heard the rival submissions and perused the material on record. The issue in the present appeal is whether the AO/TPO was justified in adopting the ALP at Rs. Nil in respect of management and support services fee paid by the appellant to its AE. Primarily, the TPO determined the ALP as Nil for the following reasons:- "(i) The assessee paid management fee through a single invoice, raised much after the closure of the financial year. (ii) The Assessee failed to produce any evidence regarding the expenditure incurred by the AE on behalf of the assessee. (iii)The AE, Volvo Truck Corporation also did not furnish any details of expenditure incurred by it in connection with the management fee received by it. (iv) The assessee changed its stand many times during the course of the hearings tha....
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.... 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 of management fee in nothing but siphoning of the profits from India with the intention of avoiding tax are serious enough to doubt the genuineness of transactions. The appellant had made no effort to controvert the findings....