TaxTMI 
TaxTMI 
TaxTMI 
2019 (1) TMI 2018
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.... equipments including Backhoe Loaders, Skid Steer Loaders, Vibratory Compactors, Midi Excavators, etc. The assessee company can be characterized as a fullfledged manufacturer, assuming routine risks and employing routine assets for carrying out manufacturing activity. It does not own any significant intangible as compared to its AE. The assessee's sourcing activity can be characterized as routine low-end market support service provider, bearing minimal risk as compared to its AE and also in case of designing activity, the assessee is a low risk captive unit engaged in designing services for its AE. 4. The assessee has undertaken the below mentioned international transactions: S. No. Nature of International Transaction Value of Transaction Most Appropriat 1 Purchase of raw material and (1,574,706 in INR) e TNMM 2 Purchase of Spare parts 1,123,861 TNMM 3 Royalty Payment 42,850,867 TNMM 4 Provision of Sourcing services 4,054,893 TNMM 5 Provision of Designing Services 12,717,042 TNMM 6 Corporate Management Charges 16,285,589 TNMM 7 Reimbursement of Expenses 6,205,096 TNMM 8 Recovery of Expenses 1,941,912 - 9 Warranty Claim Recovered 1,488,064 &n....
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.... the assessee, the Hon'ble Delhi High Court in the case of EKL Appliances 345 ITR 241 has held as under: "14. On the submissions made by both the sides, the following substantial questions of law are framed: - ASSESSMENT YEAR 2003-04 "Whether on the facts and in the circumstances of the case and on a proper interpretation of Section 92CA of the Act and Rule 10B(1)(a) of the Income Tax Rules, 1962, the Tribunal was right in confirming the order of the CIT (Appeals) deleting the disallowance of the brand fee/ royalty payment of Rs. 3,42,97,940/- made by the assessee to its Associated Enterprise, while determining the Arm‟s Length Price"? ASSESSMENT YEAR 2002-03 "Whether on the facts and in the circumstances of the case and on a proper interpretation of Section 92CA of the Act and Rule 10B(1)(a) of the Income Tax Rules, 1962, the Tribunal was right in confirming the order of the CIT (Appeals) deleting the disallowance of the brand fee/ royalty payment of Rs. 3,99,51,000/- made by the assessee to its Associated Enterprise, while determining the Arm‟s Length Price"? 15. It seems to us that the decision taken by the Tribunal is the right decision. The TPO applied ....
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....n the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm's length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm's length principle, the guidelines provide for "recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are re-produced below: - "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercis....
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....onditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." 17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further sign....
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....rease 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 circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy tha....
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....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." 12. Respectfully following the ratio laid down by the Hon'ble jurisdictional High Court of Delhi [supra], we are of the considered opinion that corporate management charges should be allowed as such. We, therefore, direct the Assessing Officer to deleted the adjustment of Rs. 1,10,22,586/-." 11. Respectfully following the findings of the co-ordinate bench [supra], we direct the Assessing Officer to delete the adjustment of Rs. 1,62,85,589/-. First g....
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....ble. Considering these facts, we direct for exclusion of this comparable. 31. The ld. counsel for the assessee further pleaded for exclusion of TSR Darashaw Ltd which was earlier taken in TP study. 32. Facts show that this company is engaged in providing share registry, record management, fund management and payroll processing services which is functionally different from the assessee business. Considering the functional profile of this company, it deserves to be excluded and we direct accordingly. 17. Since these comparables were excluded in the immediately preceding assessment year, for similar reasons we direct for exclusion of these comparables. iii) HCAA Business Services Pvt Ltd 18. Nature of business in the Annual Report of this company shows that the company is engaged in providing payroll processing services and there is no other observation in the Annual Report from which it can be established that the company is engaged in marketing and sales support services comparable to the assessee. Being functionally different, this company cannot be used as a good comparable. For similar reasons, the co-ordinate bench of Bangalore in the case of Electronics for Imaging Indi....
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....efore the DRP but the DRP accepted all the ten comparables taken by the TPO. 24. Before us, the ld. counsel for the assessee requested for inclusion of two comparables viz., Neilsoft Limited & (2) Vama Industries Limited and prayed for exclusion of the eight comparables, namely, (1) Engineers India (2) IBI Chematur Ltd (3) Mahindra Consulting Engineers Ltd (4) RITES Ltd (5) TCE Consulting Engineers Ltd (6) Kitco Ltd (7) Dalkia Energy Services Ltd and (8) Kirloskar Consultants Ltd. 25. In so far as inclusion of the two companies, namely, Neilsoft Limited and Vama Industries Limited is concerned, we find that both these companies were accepted as good comparables in assessee's own case for assessment year 2009-10. The relevant findings of the coordinate bench read as under: "Neilsoft Ltd 26. The annual report of this company shows that the company is engaged in Software Engineering Services which is similar to the assessee's designing services. Therefore, it is incorrect to say that this company is functionally different from the appellant company looking to the functional profile of this company, in our considered opinion, this company deserves to be included in the final list ....