TaxTMI 
TaxTMI 
2021 (9) TMI 1517
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.... 1. On the facts and circumstances of the case, the learned AO has erred both on facts and in law, in proposing to access the income of the Appellant at Rs. 22,95,77,110/- as against returned income of Rs. 5,62,31,989/- declared by the Appellant. II) In respect of Corporate Tax Disallowance: On the facts and in the circumstances of the case and in law, the Hon'ble DRP and consequently the learned AO have : Erroneous disallowance amounting to Rs. 8,17,28,763/-on account of brand royalty and royalty paid for use of technical know-how for the purposes of business. 2. Erred in making disallowance under Section 37 of the Act in respect of royalty expenditure incurred by the Appellant, without considering the fact that the same is incurred wholly and exclusively for the purpose of business of the Appellant. Erroneous disallowance of Rs. 2,28,567/- in relation to amortization of lease charges on leasehold land 3. Erred in making disallowance under section 37 of the Act in respect of amortization of lease charges on leasehold land incurred by the Appellant considering the same as a capital expenditure. Erroneous disallowance of Rs. 9,....
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....yment of professional fees to AEs as NIL, without identifying any comparable uncontrolled transaction. 12. Erred in concluding that no professional services have been received by the Appellant and in disregarding the explanations along with documentary evidence submitted to substantiate the actual payments made with regard to the same. 13. Erred in concluding that the Appellant has not derived any benefit from the payment of professional fees to its AE. 14. Erred in concluding that no independent enterprise would have made such payment for similar services rendered by another enterprise without providing any material on record to substantiate the basis of such conclusion. IV) Other grounds 15. Initiation of penalty proceedings under section 271(1)(c) of the Act Erred in initiating penalty proceedings under section 271 (1 )(c) without considering the fact that corporate tax disallowances as well as transfer pricing adjustments have been made on account of difference of opinion, interpretation of provisions of law, etc and not due to concealment of or furnishing of inaccurate particulars of income. Levy of interest under section 2....
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.... per TP study report appearing at Para 5 of the TPO's order, Sr. No.4 and Sr. No.5 relating to payment of royalty and payment of professional fees are the item in dispute for the adjustment of arm's length price (ALP). 8. First, we would be adjudicating the issue relating to payment of brand royalty involving Grounds No. 7 to 10. The TPO had issued show cause notice to the assessee which reads as follows: ".....3. Brand Royalty 3.1 It is seen that this year an agreement is entered into dated 15-12- 2008 w.e.t: 1-7-2008 in terms of which brand royalty at 0.50% of sales has been paid to Carrara SpA. The amount paid is Rs. 1,47,57,866/-. There is no justification for the same, No charge was made earlier prior to 01.07.2008 even though the company was in existence for several years. If at all, the Indian entity is responsible for establishing the brand in India. Since the name of the company is now Carrara India Ltd, use of company name cannot be chargeable as Royalty for use of Carrara logo. Further, such use of Carraro name actually builds the brand recognition of Carrara in India and there is a case for Carrara India for charging the AE for the same. Or at best ....
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....and royalty agreement, company has been able to rope in large multinational customers like BETC Drive, Action Construction Equipment, caterpillar, GE India Industrial Pvt. Ltd. etc. The brand royalty is being paid for the use of "CARRARO" brand name, logo and trade mark which has emerged as a leader in its class of products like Gears, Axles, Drivelines and Power Transmission systems reflecting guarantee of quality of the products and proven exclusive original of the products from the source represented by the company i.e. Carraro Spa, Italy. The case of the assesse is that Carraro Spa has several trademarks registered under its name since as early as 1981 and by using the brand name and trademark owned by Carraro Spa, it has helped the assessee company to generate substantial business from the overseas customers who had been using "CARRARO' products from the past several years. 11. The TPO did not find favour with the arguments of the assessee and it was observed by the TPO that no such charge with regard to brand royalty was made earlier prior to 01.07.2008 even though the company was in existence for several years. It was further held that the assessee was a part of Carraro g....
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....that the assessee paid Brand royalty under two Agreements, first, at 0.5% under the Agreement dated 01- 07-2008 and then again under another Agreement dated 05-04-2001. The duplicate amount of Royalty paid was directed to be disallowed. Relevant discussion on this aspect of the matter has been made in para 12 of the order, which runs as under : "12. It can be seen that the assessee paid royalty under agreement dated 05-04-2001 @ 2% in respect of steering axle and accessories for 35 and 55 HP tractors both towards use of technical knowhow and use of trade mark/brand name. It is further noticed that the assessee paid royalty of Rs. 75.41 lakh @ 0.5% on total sales for use of name, logo and trade mark. Payment of Rs. 75.41 lakh, as accepted by the ld. AR, is also in respect of sales made by the assessee of the products which were covered under agreement dated 05-04-2001, being, steering axle and accessories for 35 and 55 HP tractors. Thus, it is manifest that the assessee paid royalty for use of logo and trade mark in respect of steering, axle and accessories for 35 and 55 HP tractors, both under the agreement dated 05-04- 2001 and once again under the new agreement dated 1.7....
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.... 15. Having heard the parties herein and after going through the order of the Tribunal, following the same parity of reasoning, we set aside the impugned order and remand the matter to the file of the Assessing Officer/TPO for re-determination of ALP as per similar directions given in assessee's own case for the assessment year 2010-11 (supra.) Accordingly, Grounds No. 7 to 10 are allowed for statistical purposes. 16. Grounds No. 11 to 14 pertains to the issue of management services fess and payment of professional fees. 17. It is the case of the assessee that the company has a very lean organization structure in India for carrying out its operations to meet local management of the plant and the strategic planning, strategic management and the major business plants and policy initiates are worked out by group headquarters located at Italy. As a result the cost of employees in the case of the company is much lower compared to that of other comparables. That the headquarters have not charged all the costs to subsidiaries/units of the group and only part of the defined and listed costs has been charged to subsidiaries/units of the group. That further, approximately 90% to 95% o....
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....ost incurred by the AE is not available. You have submitted that the same policy is applied to all Carrara entities across the world. From the above, the exact nature and need of services availed, nature of value addition and quantification of demonstrated benefits due to availing such services, what new things have taken place as a result of availing such services, concrete evidence for receipt of such valuable services how the calculation of payments made to the AE is related to any service received has not been explained/furnished with any cogent evidences/supporting documents. There is no explicit cost allocation formula to link it to actual service or volume or value of' service received. The terms are general and vague. Even though the services agreement states that AE shall keep books and records in such detail as is necessary to identify the service cost related to providing services, neither has the assessee bothered to ask for it on an ongoing basis nor has it been provided in the proceedings so far clearly suggesting that these are standard clauses for formality but not meant for actual implementation. Even though the agreement ostensibly stipulates that you will be ....
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....me of the e-mails, which go to prove that the assessee did avail services from its AEs. In fact, this material was submitted before the ld. CIT(A) also. In the remand report, though the TPO acknowledged the existence of such a material, but did not alter his earlier stance on extraneous reasons. This evidences that the assessee, in fact, availed the services from its AEs. The TPO favored Nil ALP of the transaction, inter alia, on the ground that the assessee was not benefitted by such services. The view point of the TPO that no benefit was derived by the assessee because of such services and hence, ALP should be determined at NIL, is bereft of any force. 20. Once the fact of having availed services from AEs is established, the TPO cannot determine NIL ALP simply by holding that no benefit was received by the assessee. Having or not having a benefit from services is one thing, which cannot be confused with the availing of services, if these are really received. The TPO cannot turn around the determination of NIL ALP simply on the ground that no benefit was received by the assessee from such services. It is for the assessee to decide the way in which it has to carry on its b....
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....18 (supra.) at Para 12 of its order has observed that the Assessing Officer following the view taken by him for the preceding year inter alia held that the assessee for the year under consideration - (i) did not prove the factum of receipt of the services from its AEs; (ii) wrongly adopted the Foreign/AE as tested party ; (iii) wrongly applied the TNM method. Thereafter, the Tribunal observed that in its own order for the assessment year 2009-10, it had dealt with such issues and referred to the extensive materials placed before it for holding that assessee did avail services from its AEs. Similar material were also placed for the assessment year 2010-11 running into more than 1500 pages which demonstrated that the assessee did avail management services. The Tribunal thereafter following the view taken for the preceding year held that the assessee did avail services from its AE and the authorities below were not justified in coming to the conclusion that no services were obtained by the assessee. The Tribunal arrived at its findings on this issue at Para 16 of its order and the same reads as follows : "16. As the facts of this issue for the year under consideration are sim....
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..... Admittedly, the assessee was using the Brand name and logo on its manufactured products. These payments, therefore, cannot be considered as meant for non- business purpose, subject to the transfer pricing adjustment. We, therefore, approve the view point taken by the ld. CIT(A) in deleting the disallowance made by the AO u/s.37 of the Act. The Revenue's ground is thus dismissed." 26. In the above referred para, the Revenue had preferred appeal against the deletion of disallowance of the full amount of Rs. 2.36 crore made by the Assessing Officer u/s.37 of the Act. It was observed that the assessee paid royalty for use of technical know- how and brand. The Assessing Officer held such payments as not having been incurred for business purposes. The Ld. CIT(Appeals) had taken a view that the assessee is engaged in manufacture of equipments through licenses from group concerns. Royalty has been paid in respect of technical know-how obtained for manufacturing of equipments. Since the technology and designs have been used by the assessee in its manufacturing, the royalty for the same cannot be said to be for nonbusiness purposes. Similarly, brand royalty has been paid for the use of ....
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.... "11. Insofar as the Revenue's appeal is concerned, it is observed that the ld. CIT(A) has given cogent reasons for deleting the disallowance inasmuch as the AO simply adopted the TPO's reasoning without showing as to how the same applied to the non- AE transactions as well. Further, the expenditure contains payment for Testing fees and also Generic service fee. To this extent, we approve the view taken by the ld. CIT(A). Thus, the ground of the Revenue is dismissed." 31. The Ld. DR conceded that the facts and circumstances in the present assessment year are absolutely similar and identical with the assessment year 2010-11. The Ld. DR could not bring on record any evidence contrary to these facts already on record. Therefore, following the Tribunal's order in respect of the assessment year 2010-11, on same parity of reasoning and under same set of facts, Ground No.4 raised in appeal stands allowed. 32. In the result, appeal of the assessee in ITA No.835/PUN/2016 is partly allowed for statistical purposes. ITA No.823/PUN/2016 ( Revenue's Appeal) A.Y.2011-12 33. In ITA No.823/PUN/2016, the Revenue has raised following grounds of appeal: "1. The Hon'ble DRP on t....
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....ee has paid the amount of commission to foreign agents for the services rendered by them outside India. The assessee also cited the judgment in the case of The commissioner of Income Tax Vs. Kikani Exports Pvt. Ltd. (2014) 369 ITR 96 (Mad.) wherein it was held that the services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of fees for technical services and therefore, section 9 of the Act is not applicable to the instant case and consequently, section 195 of the Act does not come into play. The assessee has further submitted that it is a settled position of law that the retainer ship charges/commission paid to overseas non-resident agents for promoting assessee's business in foreign countries is not in the nature of fees for technical services and therefore, is not liable to be taxed in India. The assessee has relied on the following decisions: (i) In the ITAT Delhi Bench "D' Le Passage to India Tour & Travels (P).Ltd. Vs. Deputy Commissioner of Income Tax, Circle 4(1), New Delhi (2015) 54 taxmann.com 138 ( Delhi Trib.) (ii) In the ITAT Chennai Bench "A' Deputy....
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....ng the year with regard to this investment. However, the Assessing Officer cited the following reasons to compute the amount disallowable of Rs. 4,22,929/- u/s.14A r.w. Rule 8D. (i) The contention of the assessee that it has not incurred any expenditure in relation to exempt income is rejected as section 14A is applicable even if the assessee claims that no expenditure has been incurred in earning exempt income. (ii) The assessee incurred various kinds of expenses in the P & L account and the assessee has not demonstrated with evidence that non interest bearing funds were utilized in FY 2003-04 to make the investment in the shares of the subsidiary company. (iii) The assesse admitted that it has not maintained separate fund flow for business activity and investment. Hence, the assessee could not furnish proof that non interest bearing funds have been used for the said investment. 42. The contentions of the assessee before the Ld. DRP on this issue were as follows : (i) The investment in the shares was made in the FY 2003-04 out of cash profits of the assessee and no borrowed funds were utilized. (ii) No disallowance u/s.14A can be mad....