AI Drafter 
TaxTMI 
TaxTMI 
2018 (4) TMI 1957
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....ncorporated in Singapore and tax resident of Singapore. FHPL are pioneers in water purification industry. They have several registered patents and trademarks in their name. They licensed to the assessee technology owned by them to manufacture and sell carbon block cartridge. For right to use the technology, the assessee paid royalty of 9.86 crores to FHPL. 4. Filtrex International Pte. Ltd., (FIPL) is also a company incorporated in Singapore under tax resident of Singapore and it rendered administrative, financial and marketing services. The assessee paid sum of Rs.2.54 crores during the relevant previous year as consideration for the services rendered by FIPL. 5. It is not in dispute that the assessee FHPL and FIPL are associated enterprise and therefore, the transaction of licensing of royalty and rendering of management services were international transactions and in view of the provisos of sec. 92 of the Act, income arising from international transaction has to be determined having regard to Arms Length Price (ALP). The following chart will be explained as to how the assesee and FHPL and FIPL are associated enterprises and the international transactions between the associ....
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....responding service rendered for procuring orders, for use of the facilities of the payee company etc. The appellant's contention that the claim is allowable merely because the payment is made and the same bona fide cannot be accepted. This is because the payee is related company within the group and therefore the standard of proof required for allowing the claim is more than what is required in other cases. If the payment was to a stranger and bona fide, presumption of reasonableness of payment would apply but not when payments are between related parties. This is because in the case of related companies, beneficiaries are the same set of people and therefore unless details are furnished justifying the payment of services charged the Department is not bound to allow the claim." 11. In view of the above, the payments of the fees for Technical Services and fees for the Management Consultancy allegedly to FHPL and FIPL, respectively, in the case of the taxpayer is not at all justified. In view of the above it is concluded that the ALP is nil on the basis that an independent entity in a comparable situation would not pay any amount. Thus the arm's length price of these....
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....see could not explain the above aspect. No two independent parties at arm's length would enter into such a vague agreement. This also shows that the agreement is just a paper meant for the tax authorities and the same does not have any relevance as far as the assessee and its AE are concerned as their basic purpose is shifting of profits from assessee to AE. Further, amount of fee to be paid is independent of the actual services rendered by AE. The fee has been decided without indicating the extent of resources, which will be put up at the disposal of the assessee by the AE. The agreement doesn't provide for any safeguard to the assessee in case there is any deficiency in services provided by the AE and the assessee has to pay to the AE irrespective of quality or quantum of services rendered by it. Further, as pointed out by the TPO, FIPL does not have any resources to render these services. FIPL having its revenue from the assessee only and it is not having receipts from any other business activity. Although the agreement says that the ceiling of USD 5,00,000/- has been determined after due valuation and negotiation, however nothing has been brought on record to substantia....
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....ology Transfer Agreement says that the Fee is $0.50 per carbon block, but ceiling has now not been defined on the basis of actual direct and indirect costs of the AE. Instead, as for the case of agreement with FIPL, the agreement with F1-JPL also says that the ceiling of USD 19,40,000/- has been determined after due valuation and negotiation ever nothing has been brought on record to substantiate the same. Here too, in earlier years (upto AY 2010-11), the ceiling has been vaguely defiend so tht the AE cannot be asked by the assessee to show its correctness. Since FHPL had only paid remuneration to Sh.Bommi Govind, being Director, the maximum expenditure the AE could have claimed from assessee could have been such amount of remuneration. These aspects show the true nature of the transaction i.e. it is only a paper transaction without any actual services and the agreement has been drafted by just picking up some clauses from here and there, so as to make it look as a genuine agreement. Considering above the action of the TPO in treating ALP of the transaction relating to royalty/technical service fee as Nil, cannot be faulted with and the objection of the assessee is not accepted." ....
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....ing that the Appellant had motive of tax evasion; iv. Not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; and v. Not appreciating that there being no disallowance under section 40A(2) for royalty payment and management consultancy fee adjustment under Chapter X ought not to be made. GROUNDS RELATING TO TP ADJUSTMENT FOR ROYALTY AND MANAGEMENT CONSULTANCY FEE: 5. Without prejudice to above contention that re-assessment proceedings are bad in law, the lower authorities have erred in: i. Ignoring the business, commercial and industry realities and economic circumstances applicable to the Appellant; ii. Ignoring the Transfer Pricing analysis undertaken by the Appellant and performing fresh transfer pricing analysis without rejecting the TP analysis performed by the Appellant; iii. Rejecting TNMM applied by Appellant to justify its international transactions with A....
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.... considering the Appellant's submissions and not appreciating that the Appellant had submitted evidences regarding actual receipt of technical know-how and services from AE; and viii. Disregarding the alternative analysis performed by the Appellant, wherein comparable third party agreements were submitted to demonstrate that the price charged by AE's was in tune with the price charged by third parties in similar scenario. 8.The lower authorities have erred in not appreciating that in the assessment proceedings of AE, the returned income has been accepted thereby presupposing that the amount received by the AE from the Appellant is at arm's length and therefore amount paid by the Appellant should also be considered as at ALP in its hands. 9. Assuming without admitting that the adjustment is to be made, the lower income tax authorities have erred in not allowing the benefit of the +1-5% range prescribed in the proviso to section 92C(2). OTHER GROUNDS 10. The TPO have erred in levying interest of Rs 2,32,30,508/- under section 234B. On the facts and circumstances of the case, interest under section 234B is not leviable. The Appe....
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....4 between M/s F'iltrex Technology Pvt. Ltd.,lndia & M/s Filtrex International PTE Ltd.,Singapore, included implementation of the Global Strategy, integrating operation for environmental/ pollution reduction, helping write the process of Filtrex-India to achieve ISO 14001, introduction of Eco Carb concept to the leading companies on behalf of Filtrex-India to get the products to world class in quality, having the products tested at WQA and NSF in the United States of America and to facilitate the audit of Filtrex-India manufacturing sites in Bangalore by WQA and NSF, developing the marketing concept for GREEN CARBON, laying the foundation for ECOCARB business, writing the business plan for ECOCARB, facilitating foreign companies to visit Filtrex-India, advisory functions with respect to finance and treasury, Public Relationship and exhibitions participation, media relations, Corporate communications and marketing communications policies, Leadership training, Human Resource and Manpower Planning, Information Technology Services, any other service required from time to time by Filtrex-India, etc. In connection with rendering of these services, M/s Filtrex International PTE Ltd. ha....
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....ce in any areas of know how etc. In connection with rendering of these services, M/s Filtrex Holc1ins PTE Ltd. had received a sum of Rs. 9.86 crores from FTPL during the fl 20 11- 11) The receipts had been made by FFPL as the consideration for utilizing the technical services provided by FHPL. The amount received by Fl-IPL is assessable as FTS both under the provisions of Income-Tax Act, 1961 and DTAA between India and Singapore. In view of these facts, the amount of Rs. 9.86 crores received by M/s Filtrex Holdings PTE Ltd. had not been offered to tax and hence the AG had reason to believe that this income of Rs. 9.86 crores had escaped assessment for AY 2012-13." 15. The assessee offered to tax royalty income on gross basis u/s 115A of the Act at 10% of the gross receipts. In the order of assessment passed by the AO in the case of FHPL dated 21/12/2016, the AO has set out the various terms of the agreement for use of IPR owned by FHPL by the assessee and finally the AO accepted the income returned by FHPL. 16. The ld counsel for the assessee submitted before us that the receipts from the assessee by FHPL and FIPL were considered as appropriate and at arm's length in the asse....
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....to suitably substitute the ALP determined in the hands of assessee also in the hands of the AE. As rightly pointed out by the learned counsel for the assessee. the DRP can only give directions as regards the determination of ALP in the hands of the assessee before it. It cannot give directions to consider the issue n the hands of an assessee whose case is not before it, It is for the relevant TPO/AO to, take action in accordance with law in the light of facts and circumstances of the case before them applying their mind independently and not on the directions of DRP or any other authority in another case. Therefore, the relevant ground of appeal on this issue is allowed." 17. The learned counsel for the assessee therefore submitted that the Revenue having accepted the ALP in the assessment of the AEs cannot be allowed to take a opposite stand in the case of assessee. 18. The ld DR on the other hand submitted that the acceptance of the return of income of FHPL and FIPL by the AO cannot give raise to a presumption that the consideration paid by the assessee to FIPL and FHPL was at Arm's length. According to him, it can at best be said that the rendering of services by FIPL and ....
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....nature of services rendered was technical services and fees for right to use IPR i.e., royalty. Therefore the TPO in his order cannot say that no benefit or services were received by the Assessee from FHPL and FIPL. To this extent the orders of assessment in the case of FHPL and FIPL would be relevant and will go to show that the Assessee received benefit or service from FHPL and FIPL for which it made payments to FHPL and FIPL. 21. Apart from the conclusion that the Assessee received services from FHPL and FIPL for which it made payments from the orders of assessment in the case of FHPL and FIPL, we also find that the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., ITA No.1068/2011 dated 29.03.2012 had taken the view that the TPO has to evaluate the ALP of an international transaction and without doing so, he cannot give a finding that the Assessee received no services and therefore the ALP has to be determined at NIL. The Hon'ble Delhi High Court had to deal with a case where an assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee wa....
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....en related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, and secondly, whether that amount meets ALP criterion. In the present case however, the arrangement between the AE and the Assessee is not a cost sharing arrangement but a payment for specific services rendered. To this extent the above observations of the Hon'ble High Court may not be relevant to the present case. The Hon'ble Delhi High Court held that the following aspects would require consideration in order to identify intra group services requiring arm's length remuneration: * Whether services were received from related party. * Nature of services including quantum of services received by the related party. * Services were provided in order to meet specific need of recipient of the services. * The economic and commercial benefits deri....
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....tion before the Special Bench. The plea of the assessee was that there was no erosion of Indian tax base and therefore no such adjustment can be made. The special Bench ruled against the Assessee and held that in order to further the objective of preventing base erosion, the substantive section of the Indian TP code, i.e., section 92(1) of the Act, requires that any income arising from an international transaction shall be computed having regard to the ALP. Further, as per Rule 10D of the Income-tax Rules, 1962, ALP is required to be contemporaneously determined by an assessee. From a conjoint reading of CBDT circular No. 14 of 2001, section 92(1) and Rule 10D, contemporaneous determination of ALP would need to be undertaken by an assessee, and such determination cannot be bereft of the underlying intent of prevention of base erosion in India. 24. Section92(1) of the Act lays down that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92B(1) of the Act defines "international transaction" and it lays down that for the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means ....
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....er to the Assessing Officer and to the assessee." 25. Once, the TPO determines ALP, the AO has no other option but to make addition to the total income of an Assessee as TP adjustment by the TPO. This would be clear from the provisions of Section 92CA(4) of the Act. Sec.92CA(4) of the Act, as it stood prior to amendment by the Finance Act, 2007 read as follows:- "92CA (4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined under sub-section (3) by the Transfer Pricing Officer." ] The AO on receipt of a report from the TPO had power to disregard to the ALP determined by the TPO. However with effect from 1st June, 2007, Section 92CA(4) has undergone a change vide Section 33 of the Finance Act, 2007 whereby it has been laid down that the Assessing officer is bound to pass an order in conformity with the ALP determined by the TPO. Amended Section 92CA(4) reads as under:- "92CA(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the as....
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....he Assessing Officer.". 28. It is clear from the above circular that second proviso to Sec.94CA(4) is meant to apply only when ALP is determined in the case of FIPL and FHPL. Another aspect which the Circular makes it clear is that the commercial reality of a transaction will be looked into viz., wherever the determination of income or expense in the hands of one enterprise results in tax base erosion of the country, the AO is free to apply the provisions of Sec.92(1) read with Sec.92CA(4). Corresponding adjustment in the assessment of the other enterprise to the transaction need not be made where there is no tax base erosion of the country. This is also the purport of Sec.92(3) of the Act which lays down that wherever computation of income under sub-section (1) of Sec.92 or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) of Sec.92, has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previ....
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....ed, Ground No.1 raised by the Assessee is general. Gr.No.10 & 11 regarding charging of interest u/s.234B and 234C are consequential. These grounds need no specific adjudication. Gr.No.9 raised by the Assessee is unsustainable in view of the statutory amendment to Sec.92C(2) proviso. Gr.No.2 with regard to invalid reference to the TPO was not pressed and the same is dismissed as not pressed. Gr.No.3 with regard to the invalidity of the order of assessment making addition on account of adjustment in ALP suggested by TPO on the ground that TPO did not confront to the Assessee information received from IRA, Singapore, has already been dealt with while deciding Gr.No.8. Gr.No. 4 to 7 are with regard to merits of the addition made by the AO. As far as these grounds are concerned, we find that the Assessee has filed evidence to show services rendered by AE and use of IPR of AE. These are annexure 2 to 14 of the paper book filed by the Assessee and are at pages 370 to 504. Some additional evidence was also filed by the Assessee before DRP and these are annexure-2 to 5 of evidence filed before DRP and are at pages 513 to 651 of the Assessee's paper book. As we have already held, the TPO mis....