TaxTMI 
TaxTMI 
2023 (8) TMI 1105
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....t of facts relating to the Asst. Year 2011-12 in ITA No.97/RJT/2016 and our decision rendered will apply pari passu to the rest of the appeals. ITA No.97/RJT/2016 Asst. Year 2011-12 4. Ground no. 1 raised by the assessee reads as under: "Ground No. i: Transfer Pricing adjustment in relation to international transaction of sales to Associated Enterprises 1.1. On the facts and in the circumstances of the case and in law, the Learned Income-tax Officer, Deputy Commissioner of Income Tax-Gandhidham Circle, Gandhidham ('Ld. AO') under the directions of Honourable Dispute Resolution Panel ('Hon'ble DRP'), erred in making an upward adjustment of Rs. 15,83,20,738/- in relation to the international transaction of sales to Associated Enterprises ('AEs'). 1.2. On the facts and in the circumstances of the case and in law, the Ld. AO and the Learned Additional Commissioner of Income-tax, Transfer Pricing Officer - i ('Ld. TPO') erred in rejecting the audited segmental financials of the Appellant, thereby ignoring the internal AE and Non AE segment comparison. 1.3. On the facts and in the circumstances of the case and ....
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....ernal comparable, the assessee had demonstrated that its markup to cost in the AE segment, at 9.84%, exceeded that of its internal comparable non-AE segment, at (-) 9.37%, thus demonstrating that its international transaction of sales to its AE was at ALP. The TPO rejected the segmental accounts of the assessee and also the CPM method selected as the Most Appropriate Method (MAM) for benchmarking the transactions and treating Transactional Net Margin Method (TNMM) as the MAM, he selected comparables and determined their average margin of operating profit to operating cost, OP/OC, at 5.41%. Applying this to the proportionate operating cost of the AE segment of the assessee, he determined ALP of the sales made to the AE at Rs. 68,94,57,783/- as opposed to Rs. 53,11,37,045/- shown by the assessee; resulting in proposed adjustment of Rs. 15,893,20,738/ on account of determination of ALP of the international transactions of sales. The assessee objected to the aforesaid proposed adjustment before the DRP who dismissed all the objections of the assessee, and accordingly, the adjustment of Rs. 15.83 crores was made to the international transaction of sales, in the order passed under sectio....
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....led by the taxpayer are therefore rejected." 10. He thereafter drew our attention to the reply of the assessee, pointing out that the segmental analysis was done based on actual/allocation keys and was further reviewed by the independent auditors. The submission of the assessee to this are reproduced at para 4.2 of the order. He thereafter drew our attention to the finding of the TPO while rejecting the assessee's contentions contained in para 8, wherein he pointed out that TPO had reiterated the basis mentioned in his show cause notice for rejecting the segmental accounts, as audited accounts mentioning no segment and segmental data having been audited by CAs who had not audited the final accounts. The ld. counsel for the assessee pointed out that without going into the basis of preparation of the segmental accounts, which the assessee had reiterated had been prepared based on actual allocation keys, the TPO had summarily rejected the same merely on frivolous basis. He contended that for the purpose of reporting in the audited annual accounts the segments identified are totally different; that Accounting standard prescribed by the Institute of Chartered accountants of India for....
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....accounts, nor was it examined by the TPO on this basis, it was considered fit to restore the issue to the AO/TPO to examine the basis of preparing segmental accounts by the assessee. Both the parties fairly agreed with the same. 13. Since the entire basis of the TPO for rejecting benchmarking analysis done by the assessee and proposing the adjustment to the international transactions of sale by adopting TNMM method, began with the rejection of the segmental accounts of the assessee, we deem it fit to restore this issue to the file of the TPO. The entire issue relating to the determination of ALP of international transaction of the sale is restored back to the TPO, to be determined afresh after first dealing with the aspect of justifiability of segmental data submitted by the assessee along with the MAM adopted by it for determining the ALP of the transaction. Needless to add the assessee be provided due opportunity of hearing in this regard. In view of the above, ground no.1 raised by the assessee is allowed for statistical purposes. 14. Ground no.2 raised by the assessee reads as under: "2.1 On the facts and in the circumstances of the case and in law, the Ld. AO....
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....der passed u/s 143(3) of the Act. 17. During the course of hearing before us, the ld. counsel for the assessee drew our attention to the order of the DRP dismissing the assessee's objections to the proposed disallowance of the impugned expenses from page no.16 to 19 of the order as under: 18. Referring to the same, he pointed out that the DRP in substance had agreed with the finding of the AO that since the assessee had failed to establish the necessity for availing services in connection with the expenses incurred and benefit thereto was not proved, therefore, the expenses were liable to be disallowed under section 37(1) of the Act. He pointed out that the DRP had relied on various case laws in support of his finding as above. 19. The ld. counsel for the assessee argued that the finding of the DRP in this regard were not in accordance with law. His contention primarily was to the effect that - i) Nature of services received by virtue of incurrence of these expenses was established by the assessee, and factum of receipt of services was not doubted by the AO nor was the fact that the services were rendered for the purpose of business; ii) For the purpose o....
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....ed to it. The ld. counsel for the assessee pointed out that the AO arrived at this finding of no necessity for incurring the expenses noting, from the details of the payment of management charges made during the year furnished by the assessee, that the services were not rendered for all the months of the year, and were rendered only for fourth quarter 2010 and first quarter of 2011. From the same, the AO inferred that there were periods during which all activities of the assessee had been carried out even without services for which a sum of Rs. 1.60 crores was paid. He pointed out from the details of sales made in each quarter, which showed an increasing trend, the AO questioned the assessee as to why only the services were required in the last two quarters. The ld. counsel for the assessee contended that the doubts raised by the AO in his draft order were clarified pointing out that the services were actually rendered for the entire year, but the group company had waived off charges for the first two quarters as a matter of business prudence and in support of this contention an illustrative chart reflecting management services rendered for the first two quarters of the year were a....
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....ge for the first two quarters of FY 2010-11 on the Assessee. 4.8.25 It was only from the third quarter of the financial year 2010-11 that the Group Companies started charging the management expenses to the Assessee. 4.8.26 In support of this contention, the Assessee wishes to submit the e-mail correspondence reflecting the waiver of management charges for the first two quarters of FY 2010-11. [Please refer to Page No. 369 to 370 of the Paper Book] 4.8.27 From the above, it is amply clear that the argument of the Ld. AO that the services were received only in some months of the year and hence it shows that they were not necessarily required is incorrect. i. "Expenditure is not in direct relation to the revenue of the business" 4.8.28 Management fees relate to expenses pertaining to business operations of the Assessee and relates to various day to day routine business activities to run business operations. 4.8.29 These are in nature of routine business operations and administrative expenses which do not have direct linkage to the sales revenue of the Assessee. 4.8.30 All the expenses are for business purposes and are n....
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....cally states that no adverse inference can be drawn with respect to this transaction. The ld. Departmental Representative also does not contradict this fact. These expenses have been disallowed under section 37(1) of the Act and held not to have been incurred wholly and exclusively for the purpose of the business of the assessee. The reason being that the assessee was unable to establish the business necessity for incurring these expenses and also demonstrating benefit derived by the assessee from the same. The factum of incurrence of expenses by the assessee and the fact of service having rendered by the group concern i.e. Ahlstrom Corporation to the assessee have not been disputed. 25. In the light of the above facts, we are in agreement with the ld. counsel for the assessee that the said expenses could not be held as not having been incurred wholly and exclusively for the purpose of business of the assessee. As rightly pointed out by the ld. counsel for the assessee, there are several judgments including that of Apex Court laying down the principle to be applied for determining allowability of expenses under section 37(1) of the Act and this principle have emerged over years ....
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....l transaction entered into with the associated enterprise. In the present case, the TPO in his order clearly found the impugned transaction to be at ALP. The TPO being an officer specially designated for the purpose of determining ALP of international transactions officer and finding the transaction to be at ALP there is no question of the AO thereafter stepping into the shoes of the TPO, applying benefit test to the expenditure incurred, and disallow the expenses u/s 37(1) of the Act for failure to fulfil the said test. The scope of powers of the TPO and that of the AO are completely different. The TPO being a specialized officer for determining the ALP of international transactions, his finding on this aspect of the international transactions are to be treated as final. Once the TPO has given his finding on the issue of determination of ALP of international transactions entered into by the assessee, they are to be accepted by the AO and cannot be inquired into by the AO further. In the present case, the AO, by applying benefit test to the impugned international transaction has attempted to step into the shoes of TPO, since the benefit test could have been applied only for the pur....
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....ned term loan agreement. Pohjola Bank Plc charged Ahlstrom Corporation, Finland for the commission cost and expenses relating to the guarantee which Ahlstrom Corporation, Finland re-invoiced to the assessee, in terms of an agreement for reimbursement of guarantee expense entered into between the assessee and Ahlstrom Corporation, Finland. The bank guarantee commission therefore paid by the assessee to its related entity was claimed as reimbursement of such expenses charged by Pohjola Bank Plc without any mark-up. 30. The AO in his draft order proposed a disallowance of this expense for two alternate reasons viz. that since it related to prior period, it is disallowable under section 37(1) of the Act; alternatively, the AO held that the commission expenses were liable to withholding tax in India, since as per the AO, Pohjola Bank Plc had business connection/ permanent establishment(PE) in India in terms of section 9(1)(1) read with explanation 1(a), explanation 2 and 2^nd proviso to the Act, as also, in terms of Article 5 of Double Taxation Avoidance Agreement between the India and Finland. He further stated that it was liable to TDS in terms of section 195 of the Act also and si....
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.... that the impugned expenses were not prior period expenses, but pertained to the impugned year itself. The assessee had filed copies of invoices raised by the Ahlstrom Corporation, Finland for the bank guarantee commission which described the alleged prior period commission expenses raised as pertaining to the impugned year. Even otherwise, we find that the invoices were raised by the Ahlstrom Corporation, Finland on the assessee during the impugned year itself. These facts are all evident from the copies of invoices which were placed before us also in the paper book at page no. There is no iota of doubt, therefore, that the expenses pertained to the impugned year alone and could not be categorized as prior period expenses. We have noted that basis for the AO for treating it as prior period expenses was that the loan agreement entered into by the assessee with the ICICI Bank, which was guaranteed by Pohjola Bank Plc., and commission expenses reimbursed from the assessee to the Ahlstrom Corporation, Finland, was dated 8.5.2009. From the same, we deduced that the bank guarantee commission pertained to the financial year 2009-10 relating to the Asst. Year 2010-11, the preceding year. ....
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....produced in the submissions made to the DRP- (i) DRP has relied on the US Model Tax Convention 2006 (US-MTC) in order to conclude that to the transaction of bank guarantee commission Article 21 applied, which is applicable only in cases where one of the contracting States to the DTTA is USA, while in the present case the other contracting state is Finland and the India Finland DTAA applies. (ii) that even otherwise as per the US-MTC applied by the DRP, it dealt with the situation where bank guarantee commission is paid within intra-company group. In the present case, the said transaction is between the Ahlstrom Corporation, Finland and Pohjola Bank Plc which are unrelated party, and therefore, even as per the US-MTC, Article 21 is not attracted to the bank guarantee commission paid, and (iii) assuming bank guarantee to be covered under Article 21 of the India Finland DTTA, the same be taxed in India as other income under section 56(1) of the Act and in terms of the same expenses incurred for earning income as per the section 57 of the Act are to be allowed, which in the present case would result in NIL income to Ahlstrom Corporation, Finland, since it is ....
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....mission is restored back to the AO to be dealt with after considering the arguments raised by the assessee. The AO is directed to pass a speaking order after granting due opportunity of hearing to the assessee. Ground No. 3 is allowed for statistical purposes. 38. In effect appeal of the assessee is allowed for statistical purposes. 37. As far as other appeals of the assessee for the Asst. Years 2012-13 and 2013-14 are concerned, as stated in the aforementioned para-2, the grounds and issues raised in these appeals are identically worded except variation in the quantum, and for the reasons, observations and findings given by us in the ITA No.97/RJT/2016 for Asst. Year 2011-12, appeals for the Asst. Years 2012-13 and 2013-14 are allowed for statistical purposes. 38. In the result, the appeals of the assessee are allowed for statistical purposes. Order pronounced in the Court on 3^rd August, 2023 at Ahmedabad. ============= Document 1 S. No. 1 Sale of finished goods 2 Description of the transactions Reimbursement of Bank guarantee commission Amount (Rs.). 531,137,045 3 Payment of Business area service fee 4 Reimbursement of Freight....
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....nd advisory function of this business area pide agreement dated 01 January 2010 required that the actual direct and indirect cost are allocated to the companies based on the business areas external net sales. The assessing officer has given detailed arguments at para 5.3 to 5.7. The AO has pointed out that the services have not been consistently rendered from month to month, and that the nature of benefits derived from the services received is not clear since the taxpayer is in a position to perform most of these services for itself. In these circumstances the AO has held the necessity of the services and connection with business and benefit thereto is not proved. Delhi High Court in Cushman and Wakefield (India) Pvt Ltd 367 ITR 730, has explained in similar circumstances that expenses are disallowable u/s 37(1) is not having been incurred wholly and exclusively for the purpose of business, in similar circumstances benchmarking of Intra Group Services at NIL has also been upheld by Courts and Tribunals and the following extract from OECD guidelines is elucidatory. Extract from OECD Transfer pricing guidelines for Multinational Enterprises and ....
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....re affiliate TPO was justified in holding that taxpayer had not prove commusurate benefits against payments of service charges and making an ALP adjustment. Knorr Bremse India Incidental benefit to taxpayer does not require any payment to AE Pvt. Ltd. 2012-TII- 138-ITAT-DEL-TP Emails and other contemporaneous record revealed that incidental and passive association benefit had been provided by the AE and thus ITAT held that TPO had rightly adopted nil value for benchmarking ALP. CIT Vs. Cushman Reimbursement for services on cost basis also require and Wake filed benchmarking India P Ltd. 2014- TII-07-HC-DEL-TP Cranes Software International Ltd. TS-353-ITAT- 2014 (BANG)-TP Festo Controls Pvt. Ltd. Vs. DCIT (2013) 30 taxman.com 16 (BANG-TRIB) Deloitte Consulting India (P) Ltd Vs. DY.CIT/ITO(2012)22 This being a transaction between related parties, since taxpayer did not benchmark these costs in its TP study, benchmarking is required under comprehensive transfer pricing analysis. Sufficient Evidence of costs involved and services as actually rendered should be provided. Taxpayer failed to maintain do....
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....ently carrying its business operation by leveraging on group synergies. In this regard, the Assessee company has attached as Annexure-2 to the synopsis submitted at the time of hearing, brief overview on the various intra-group services received by it during the year from the various Hub divisions and from the Group entities which were substantiated and validated by the intercompany service agreements entered into by the assessee company with its Associated Enterprises' (AEs) along with various documentary evidences submitted before the Ld. TPO and the Ld. DRP, The said Annexure provides the resultant benefits derived by the Assessee company by availing the intra- group service, Though, the said Annexure-it show that the Assessee company was benefitted significantly from the intra-group services received from its AEs, it failed to give the supporting evidence such as invoice, confirmation from parties to prove the same. The assessee company has also undertaken a detailed cost benefit analysis in order to demonstrate the cost savings achieved by the Assessee company by availing the said services from the AEs. Therefore, when AEs transact with e....
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....7 paid to Ahlstrom Corporation. In proposing this disallowance, the Ld, AO has erred in law and on facts on the following:" in concluding that bank guarantee commission is a prior period expense and not allowable under section 37(1) of the Act; In concluding that Pohjola Bank has an Agency Permanent Establishment ("PE") in India and accordingly tax was deductible at source on reimbursement of bank guarantee commission. DRP adjudication Ground No 11 The Ahlstrom Corporation has entered into an Agreement dated 26 November 2009 with ICICI Bank for term loan facility of Rs 171.5 crore on 6 May 2009. Pohjola Bank PLC has issued a Bank guarantee of Rs 25 Million Euro as a security for performance of the companies obligation under the aforementioned term loan facility for which it charges Ahlstrom Corporation and Ahlstrom Corporation reinvoices taxpayer. During the year taxpayer has reimbursed Ahlstrom Corporation Rs 11229897/-under the said Agreement. The assessing officer has taken up several arguments. COMPOS Document 6 The short point here is that no TDS has been effected on bank guarantee charges paid by the taxpayer to Alstrom corporation ....
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....ofits derived in the conduct of a business are "dealt with" in Article 7 (Business Profits) whether or not they have their source in one of the Contracting States. Examples of items of income covered by Article 21 include income from gambling, punitive (but not compensatory) damages and covenants not to compete. The article would also apply to income from a variety of financial transactions, where such income does not arise in the course of the conduct of a trade or business. For example, income from notional principal contracts and other derivatives would fall within Article 21 if derived by persons not engaged in the trade or business of dealing in such instruments, unless such instruments were being used to hedge risks arising in a trade or business. It would also apply to securities lending fees derived by an institutional investor. નયન In view of the foregoing discussion, bank guarantee fees paid by the taxpayer would go to Article 21, of Document 7 India Finland Treaty le "Other Income" being an article of income not dealt with in the foregoing articles of this convention and arising in the other contracting state which may be ta....
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.... Corporation. It is clearly evident from the invoices that the expenditure pertains to FY 2010-11 and as per the mercantile system of accounting followed by the Assessee, the same have been booked as expense in FY 2010-11. 4.9.25 Further, the Ld. AO has not provided any evidence in support of his contention that the expenditure relates to FY 2009-10 and not FY 2010-11. 4.9.26 Ahlstrom Corporation raises separate invoice for each bank guarantee commission to the Assessee on a quarterly basis. The period to which it pertains is clearly mentioned in the invoice/s. Thus, the liability of the Assessee crystallises as soon as it receives the invoice from Ahlstrom Corporation. 4.9.27 Further, not only Ahlstrom Corporation has raised the said invoices in the said period i.e, FY 2010-11, but also Pohjola Bank Plc. has raised the same during the FY 2010-11. 4.9.28 Further, we would like to bring to the notice of Hon'ble DRP the Guarantee Expenses Re-invoicing Agreement entered on 26 November 2009. [Please refer Page No. 335 to 337 of Paper Book]. In the agreement it is clearly mentioned that Ahlstrom Corporation would immediately raise an invoice ....
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.... both are liable to specifically report for prior period expense, if they come across such prior period expense during their audit procedures. However, both of the auditors have not qualified their audit reports in the said manner and accordingly the said guarantee commission expense relate to the said FY 2010-11 only and Ld. AO has erred in contending the same as prior period expense. 4.9.32 The Ld. AO while passing draft order has relied on the below mentioned judgements: a) Seshasayee Bros (Travancore) (P) Ltd. vs. CIT (supra) b) Mysore Spinning & Manufacturing Co. Ltd. vs. CIT (supra) c) Tara Agency vs. CIT (supra) All the above judgements relied by the Ld. AO discusses non-allowability of prior period expense. In the instant case, the Assessee had paid bank guarantee commission to Ahlstrom Corporation pursuant to an agreement. Chargeability of bank guarantee commission would trigger when Ahlstrom Corporation has been raised with an invoice from Pohjola Bank Plc. 4-9.33 Since the expenses has been crystallised and booked in the said relevant period in the books of accounts by the Assessee, question of categorising the said expense as....