AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2017 (12) TMI 1860
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....ed DRP erred in not appreciating the fact that the Appellant had prepared 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 Appellan....
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....rprise / "AE"). It is engaged in the business of manufacture and sale of trucks and buses and distribution & construction of equipment. The return of income for the 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 m....
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.... 2.4 In respect of each type of expense under the management services rendered, the basis of such quantification of service or cost involved. Because, no independent party would like to pay for a service without knowing the cost of such service or without knowing the cost at which such service is rendered in the market. No independent company would pay management fee without actually 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 ac....
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....on the explanation furnished by the appellant as under:- "1. The reply nowhere contains the information asked by the TPO specifically the amount spent by VTC towards management fee and how much of it apportioned to India. 2. The AE treats non-Swedish entities as service providers whereas the taxpayer is a manufacture as well as distributor of commercial vehicles of Volvo in India. This admitted even in the functional analysis done by the taxpayer in its TP report. 3. 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, Volv....
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....age of trademark, brand and guidelines and background material for all kind of activities related to such services. It also states that it is not necessarily VTC that has provided these services, they might just as well have been provided by another Volvo Group company in Sweden or as a Service Provider to Volvo Sweden. It should be mentioned that AB Volvo, the parent company in the Volvo Group has the overall responsibility of building the Volvo trade-mark and brand and much of the costs related hereto is borne by AB Volvo. 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. 37.8....
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....ncidence of tax as the taxpayer has paid only 10%, when compared to the tax rate of 40% (30% tax + 10% dividend tax) if the same was shown as profits and remitted as dividend. 11. The imports from AEs constitute major consumption of raw material / purchases indicating that the AEs are already compensated enough in the form of purchase price and also compensated for the value addition in India by way of royalty paid based on the technology received from AE. 12. The taxpayer did not prove the arm's length nature of management fee paid to Volvo Truck Corporation. Thus the arm's length 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 hug....
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.... the appellant and the reports provide valuable input to the appellant. He submitted that in respect of customer relationship support, the following services are provided by its AE:- "a) The products manufactured by the appellant are used in the construction and mining industry. Such products are required to be customized/modified depending upon the kind of mining activity carried on by the customer viz., coal mining, granite mining etc. The associated enterprise understands the requirements of the customer and supports the appellant in identifying the customization requirements as well as carrying out the requisite modification 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....
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....dling, marketing communication, results of Volvo Global surveys, films on brands and product and general communication portal. e) The associated enterprise also provides and shares the product and market strategies and plans with the personnel of the appellant, thereby providing an insight into the Volvo global business operations. Knowledge of other market experiences is also shared by the associated enterprise with the appellant. The associated enterprise has also undertaken customer profiling for the appellant by means of launch under Area Asia." 14. The ld. Counsel for the assessee further submitted that during the course of proceedings before the TPO, copies of invoices 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 ....
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....H). Finally, he contended that merely because no management fee was charged by the AE in the earlier years cannot be a bar to charge fees in the subsequent years. Reliance in this regard was placed on judgment of the Hon'ble Supreme Court in the case of Shahzada Nand and Sons v. CIT (1977) CTR (SC) 246 and CIT v. Laxmi Cement Distributors (P) Ltd., (1976) CTR (Guj) 338 / 104 ITR 711 (Guj). It was further contended that the TPO was not justified to benchmark the payment of management fees on a stand alone basis when the TNMM was applied as the most appropriate method. 16. On the other hand, the ld. DR has submitted that the transaction of payment of management and marketing support services fees is a sham transaction as the assessee company had failed to prove 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 hav....
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.... boat races across the world such as Volvo Youth Sailing Regatta which is also known in the sailing world as the 'Youth Olympics' as part of global sailing strategy that culminates every four years in the Volvo Ocean Race. Such global brand building exercise helps VIPL to project a global image in India. 4.5.5 Several brand surveys as well as customer satisfaction surveys, Volvo attitude survey are undertaken by Volvo Group and the results of the same are shared with VIPL. These provide valuable inputs to VIPL in terms of positioning its products to the requisite customers. Thus, through all the above initiatives Volvo Group provides VIPL with the required brand identity, value and culture in India. 4.5.6 As knowledge sharing initiative, Volvo Group has hosted intranet website containing 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 pers....
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....ing support services fees in the earlier years cannot be a ground for determination of the ALP at Nil, as each assessment year is independent and the principle of res judicata has no place in the income-tax proceedings. (2) The next reason is that appellant had failed to produce any evidence regarding expenditure incurred by the AE on behalf of the appellant. This ground cannot be a relevant consideration for determination of ALP at Nil in the light of the decision of the Hon'ble Punjab & Haryana High Court in the case of KnorrBremse India (P.) Ltd. v. ACIT, 380 ITR 307 (P&H). The relevant part of the judgment is as under:- "48. The TPO also held that no independent enterprise would pay out a portion of its profit big or small before it knows the cost incurred by the service provider. The TPO held that the assessee had failed to follow this basic tenet of independent behaviour. 49. A purchaser 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....
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....on for determining the ALP at Rs. Nil. Needless to say that when the services are not actually rendered in terms of the master agreement, it is nothing but a sham transaction and the real purpose of the transaction is something else than what is apparent. Now it is trite law that in the absence of any evidence in support of rendering of services by the AE, the TPO is justified in adopting the ALP of such management fee at 'Nil'. Reliance in this regard is placed on the following decisions:- i) Decision of the coordinate Bench of the Tribunal in the assessee's own case for the AY 2005-06 reported in [2017] 77 taxmann.com 207 (Bangalore - Trib.). The relevant paragraphs are extracted hereunder: "11. No doubt, now it is settled proposition of law that it is beyond scope and powers of AO/TPO to question the necessity of incurring any expenditure. The Hon'ble Delhi High Court in the case of EKL Appliance Ltd. (supra) held that TPO 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.....
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....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 of the TPO. Therefore, in our considered opinion the TPO/AO is justified in adopting ALP at Nil. 13. Now we shall deal with the alternative submission of the learned counsel for the appellant that the transaction of management and support fee should be bundled with other transactions and bench marked by adopting TNMM cannot be accepted for the reason that bundling of transactions is permissible only when the transactions are closely relat....
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....he 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 by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding ....
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....r 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 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 criterio....
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.... 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 circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position strong....
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....e 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 authorized.' The ratio of the above decision was followed by the co-ordinate benches of the Tribunal in several cases. Some of them are: i. Dresser-Rand India (P.) (supra) 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 - ITAT); AY 2007-08 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. (supra) vii. DSM Anti-Infectives India Ltd. v. Addl. CIT [2014] 50 taxmann.com 239 (Chd. - Trib.) viii. TNS India (P.) Ltd. (supra) ix. Atotech India Ltd. v. Asstt. CIT [2014] 148 ITD 670/42 taxmann.co....
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....unt has been expended wholly and exclusively for the purpose of business. 11. A Co-ordinate Bench Tribunal of Delhi in the case of Kanu Kitchen Kulture (P.) Ltd. v. DCIT (2013) 28 ITR (T) 49 (Del. - Trib.) held that whether the assessee failed to demonstrate the services rendered by the commission agent, the commission was disallowed. The relevant paras of the judgment are reproduced below; "22. Thus the assessee as utterly failed to demonstrate the nature and extent of service rendered by the agent and availed of by the assessee for its business of modular kitchen. In this scenario what appears on record is merely book entries coupled with TDS the amount which will be claimed as a refund by the recipient being a loss making concern. In our considered view the assessee has produced only skeletal paper work of the arrangement without any iota of evidence about actual business services rendered. 23. The assessee's claim for allowing similar commission payment in subsequent year caries no merit inasmuch as the learned DR has rightly pleaded that each and every year of assessment is separate and independent unit and principles of resjudicata do not apply.....
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.... himself by examining the issue from the angle of tax deducted at source and he had failed to examine whether the services are actually rendered by the commission agents or not. Therefore, we are unable to sustain the order of the learned CIT (A) and hold that the commission payments in question are not allowable keeping in view the ratio laid down in the cases cited supra. The assessee company had miserably failed to demonstrate the actual services rendered by the agents to whom the commission payments were made, despite ample opportunity granted by this Tribunal to furnish evidence in support of service rendered by commission agent.' 10. In light of the ratio laid down in the cases cited supra we hold that the condition of rendition of services should be satisfied by the assessee so as to allow the same as expenditure. In the present case, assessee-company had not produced any evidence in support of rendering of services before the TPO. It is only before us, by way of additional evidence, assessee-company has filed some material, in support of the actual services rendered by the AE. The CIT (A) had no occasion to examine this evidence as it was claimed that this evid....
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....igned by the TPO which remain uncontroverted for determining the ALP of the transaction of payment of management and marketing support services fees at Rs.Nil is that there was no evidence in support of rendering of services by the AE and the failure to substantiate real nature of services actually rendered by the AE . In the light of the above settled position of law and placing reliance on the decisions cites supra, we hold that the TPO was justified in determining the ALP of transaction of marketing and management support fees at 'nil'. 22. Before us during the course of hearing of the appeal, the ld. Counsel for the assessee, Mr. Naresh Jain from M/s. Vaish Associates, filed an application for admission of additional evidence in terms of Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 ["the ITAT Rules"]. 23. At the outset, it is also incumbent to deal with the conduct of the ld. Counsel arguing for the appellant and also the chequered history of this case for better appreciation of the misconduct of the ld. Counsel who argued before us. It is clear that it is a matter of 2010. The appeal was registered in this Tribunal on 01.12.2010 and the hearing was fixed....
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....ly rendered by the AE to the assessee company, especially in the light of the fact that categorical finding of the TPO was that the appellant had only described the nature of services, but never attempted to file any evidence in support of rendering of services. It is trite law that admission of additional evidence by the Tribunal is at the sole discretion of the Tribunal. The provisions of Rule 29 of the ITAT Rules govern the admission of additional evidence before the Tribunal. The said Rule reads as under:- "[Production of additional evidence before the Tribunal. 29. The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any document to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or, if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined o....
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....issue which needs to be tested by the Tribunal. Only in such circumstances, the Tribunal can admit the application for admission of additional evidence led by one of the parties to the appeal, after recording due reasons for doing so. 26. In the present case, from a perusal of the application filed before the Tribunal for admission of additional evidence, there is no averment as to why the assessee could not furnish this evidence before the lower authorities i.e., either before the AO or before the DRP. Furthermore, there is also no averment as to how the additional evidence filed before us has a bearing on the issue before us. In other words, the appellant had not made any efforts to demonstrate before us that this evidence will prove to the hilt the actual rendition of the services by the AE to the appellant in terms of clause 4.5 of the master agreement. In the aforesaid circumstances, we have no option but to reject the application for admission of additional evidence. Accordingly, we pronounced in the open court dismissing the application for admission of additional evidence. 27. At this juncture, again the ld. Counsel for the assessee, Mr. Naresh Jain, had made a repeat....
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....IT [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 [2013] 36 taxmann.com 41 (Delhi - Trib.) xiii. Knorr-Bremse India (P.) Ltd. v. Asstt. CIT [2013] 56 SOT 349/[2012] 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 (Visakha). 12. Thus in the light of the above legal position, the ALP of services of AE cannot be determined at Nil by questioning the necessity of benefit....
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.... 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." 28. When the case is covered against the assessee in its own case for the earlier assessment year, we find no reason for the ld. Counsel for the assessee to seek adjournment of the case, especially in the matters of very old matters i.e., 2010. It is for the assessee to arrange for its own affairs. The court cannot come to the rescue of an assessee who keeps changing counsel from time to time in order to gain time. We do not approve of this kind of practice of frequent change of counsel. 29. When the application for admission of additional evidence was rejected, the ld. Counsel for the assessee again started pleading adjournment of the case. In any case, once the issue is duly covered against assessee, there was no occasion for the bench to adjourn the matter and further it is not befitting the stature of the counsel, to seek for adjournment in a covered matter. 30. As held earlier, the issue is squarely covered by the decision of the Tribunal in the earlier ....