TaxTMI 
TaxTMI 
2024 (3) TMI 1544
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....following questions of law: "(A) Whether on the facts and circumstances of the case and in law, the Appellate Tribunal is justified in deleting the addition/adjustment of Rs. 6, 97,69,928/- on account of Global Head Office (GHO) charges and Rs. 21,64,01,560/- on account of Regional Head Office (RHO) charges without appreciating the approach adopted by TPO?" (B) Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was justified in not considering the provisions of section 92D of the IT Act r.w. Rule 10D of the IT Rules?" 4. Tax Appeal No. 683 of 2023 is filed by the Revenue under Section 260A of the Income Tax Act, 1961 (for short 'the Act, 1961') challenging the order dated 03.08.2022 passed by the Income Tax Appellate Tribunal, "D" Bench, Ahmedabad (for short "the Tribunal") in ITA no. 58/Ahd/2022 for A.Y. 2017-2018 proposing the following questions of law: A) Whether on the facts and circumstances of the case and in law, the Appellate Tribunal is justified in allowing the appeal of the assessee amounting to Rs. 9,76,70,814/- on account of Global Head Office (GHO) charges and Rs. 21,14,85,404/- on account of Re....
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....hen TPO, assessee filed appeal before DRTP-2, Mumbai which restricted the adjustment as under: Issue Adjustment as per original order (Rs.) Adjustment as per directions of DRP (Rs.) Global Head Office Services Non-IT Section 32,87,008/- 0 Non-IT Section 8,10,45,412/- 8,10,45,412/- IT charges 56,42,798/- 56,42,798/- Software licenses 10,80,730/- 10,80,730/- 99,01,874/- 99,01,874/- Regional Head Office Services 22,20,59,674/- 22,20,59,674/- Total adjustments 32,30,17,496/- 30,91,56,218/- 9. Being aggrieved, the assessee filed an appeal before the Tribunal. 10. The Tribunal after considering the submissions made by the Assessing Officer on behalf of the assessee as well as appellant-Revenue held as under: "9. We have heard the rival contentions and perused the material on record. We shall divide our conclusion in two parts- firstly, whether factually it can be concluded that the assessee has availed India related. services from its global/ regional headquarters. In our considered view, the Ld. TPO has taken a rather restrictive view while coming to the conclusion that n....
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....ogies provided for under the Income Tax Act, 1961 read with I. T. Rules. In our view, the judicial opinion on this issue is unanimous that where TPO does not resort to any transfer pricing exercise as per any of methods prescribed in section 92C (1) and determines ALP at Nil, transfer pricing adjustment with respect to such services received by assessee from its foreign AE is not sustainable." 11. The Tribunal in its order considered the following decisions : "10.1 In the case of Henkel Chambord Surface Technologies Ltd. v. ACIT [2021] 125 taxmann.com 65 (Mumbai - Trib.), the Mumbai ITAT held that where TPO did not resort to any transfer pricing exercise as per any of methods prescribed in section 92C (1) and determined ALP of regional management services at nil, transfer pricing adjustment with respect to regional management services received by assessee from its foreign AE be deleted. 13. We have perused the orders of the lower authorities and the material available on record, and are unable to persuade ourselves to subscribe to the view taken by the lower authorities as regards determining of the arms length of the regional management services received by th....
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....ssessee made certain payments, on account of intra-group management services to its associated enterprises. The TPO however determined value of service at NIL on the basis that such services were not worthwhile. The Ahmadabad ITAT held that there was reasonable evidence of the rendition of service and it could not be open to TPO to proceed on the basis that the services were not rendered. The impugned ALP adjustments was directed to be deleted. While passing the order, Ahmadabad ITAT made the following observations : 10. In any case, we have carefully perused the evidence of services rendered and the nature of services in question, on random sample basis. In our considered view, there is reasonable evidence of the rendition of service and it cannot be open to TPO to proceed on the basis that the services were not rendered. The method of ascertaining the arm's length price, on the basis of TPO's subjective perception about worth of services, is not sustainable in law either. In view of these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the impugned ALP adjustments. Ground Nos. 2 to 8 are, therefore, to be allowed. In....
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....idencing the receipt of the services. Regarding the receipt of the services from AE, the assessee can be asked to maintain and produce the evidence of receipt of services, which a business person keeps and services related from the third party. The burden cannot be higher on the assessee for evidencing the receipt of services of higher level merely because the services have been rendered by its AE Against these evidence placed by the assessee before the lower authorities Id. DRP has merely stated that assessee has not been able to provide sufficient evidence and that the AE has provided such services to the assessee. We failed to understand what 'sufficient evidence' was and what was lacking in the case of the assessee. We could not Jind any instances placed where the TPO/DRP held that the evidence placed by the assessee are not substantiated by rendition of service by the AE .... 10.5 in the case of TNS India (P.) Ltd. v. ACIT [2014] 48 taxmann.com 128 (Hyderabad Trib.), ITAT held that role of TPO is to determine arm's length price of a transaction, however, he cannot reject entire payment under provisions of section 92CA 10.6 In the case of PPG Coati....
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....terprises, straightaway treated the value of the international transaction to be at "NIL". In the present case, no search was conducted to find out the independent entity in a comparable transaction and the arm's length price of the international transaction was treated to be NIL. In the present case, no doubts about payments made by the assessee have been raised by the Assessing Officer under section 37 of the Act. Further, accrual of benefit to assessee or the commercial expediency of any expenditure incurred by the assessee cannot be the basis for disallowing the same, as held by Hon'ble Delhi High Court in the case of EKL Appliances Ltd. [2012] 345 ITR 241 (Del.) In our considered view, the assessee has been able to demonstrate, with substantial supporting material that it availed India specific services from its Head Office / Regional Office. The Ld. Transfer Pricing Officer in view has taken a rather restrictive view in coming to the conclusion that no services were rendered for which any independent third party would pay and hence it was not possible to determine arm's length price in the instant set of facts. As held in various decisions, the TPO cannot stand in....
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....ut the Global Head Office profit salary of earning on CEO/CFO/ employees of group entities and there is no reason for the assessee company to make a profit on account of carrying on its own business and charge it to the Indian company. It was therefore, submitted that mark-up charged is not on the basis of facts of the case and no third independent party would pay any mark-up for such services in an independent situation. Similarly, mark-up of 5% on Regional Head Office also is not tenable. It was submitted that the benchmark was provided by the assessee by taking foreign AE as the tested party and using the foreign database for determining the ALP of mark-up of the company, however all the companies were engaged in providing services to different entities whereas in case of the assessee, the AE are not providing any active services to the assessee company in India but only an allocation of expenses based on formula is decided by the parent company of the assessee. It was therefore, submitted that the Tribunal without considering the issues incorporated in the order passed by TPO and confirmed by DRP based upon non furnishing proof of actual receipt of services or concrete informat....
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....t Nil. TPO did not conduct any search to find out independent entity in a comparable transaction and arm's length price of international transaction was treated to be Nil in absence of such inquiry. Tribunal has also arrived at finding of fact that assessee has been able to demonstrate with substantial supporting material that it availed India services from its head specific office/regional office and in view of such findings, Tribunal has rightly held that view taken by the TPO is a restrictive view in coming to the conclusion that no services were rendered for which any independent 3rd party would be paid resulting into impossibility to determine the arm's length price in facts of the case. 19. Tribunal has therefore, rightly held that once the assessee has been able to demonstrate the receipt of services Transfer Pricing adjustment without applying any prescribed bench-marking method is not tenable and TPO cannot determine ALP at Nil and ALP has to be determined as per one of the methods prescribed under the Act read with Rules. 20. In similar facts, this Court in case of Principal Commissioner of Income Tax, Gandhinagar v. Tudor India Private Limited (Order dated ....
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....ent Tax Administration both at Departmental level and in Judicial Courts so that the economic activity in such borderless trade thrives and enures to the benefit of the Indian economy at large and Software Industry in particular. While the special provisions have been made for computation of 'Arm's Length Price' to arrive at a fair assessment of income taxable in the hands of the Indian Resident Companies and these special provisions also provide for an elaborate and in-depth analysis of huge data of the comparable cases of other similarly situated Companies to arrive at a fair 'Arm's Length Price' designated Authorities have been created under the Income Tax Act, 1961, but still retaining the normal provisions for assessments of appeals in the Indian Income Tax Act about the remedial Forums or the appeal mechanisms and the Income Tax Appellate Tribunal constituted under Section 253 of the Act continues to be the final fact finding body under the Act even with regard to the assessments of the international transactions under the Special Chapter X as aforesaid and the appeal to the Constitutional Courts as provided in Section 260-A to High Court and Section 2....
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....satisfy the other criterias as stated in Section 92-A of the Act. 34. The word 'International Transaction' is defined in Section 92- B of the Act. 35. The most important provision concerning us in this batch of cases is Section 92-C of the Act which provides for 'Computation of Arm's Length Price' and the said provision stipulates that the 'Arm's Length Price' in relation to the international transactions shall be determined by following any of these methods enumerated in Section 92-C of the Act which is considered to be the 'Most Appropriate Method' by the Authorities under the Act. The methods provided are: Clause (a) : Comparable Uncontrolled Principles Method (CUP) ; Clause (b) : Resale Price Method (RP) Clause (c) : Cost Plus Method (CP) Clause (d) : Profit Split Method (PS) Clause (e) : Transactional Net Margin Method (TNMM) ; and Clause (f) : such other Method as may be prescribed by the Board. 36. It appears from the true facts of the various cases before us and the arguments of the learned counsels that the TNNM Method appears to be the most popular and ....
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.... and at the higher level by a Collegium of three Commissioners in the form of Dispute Resolution Panel (DRP) whose orders on questions of facts are appealable before the highest fact finding body, viz., the Appellate Tribunal. 39. The process of determination of 'Arm's Length Price' as observed above, necessarily takes into account the comparable cases of other similarly situated or nearly similarly situated Corporate Entities whose data are in public domain or on the Data Bases like Prowess and Capital Line Data Base etc. " 16. The Court, thereafter, proceeded to discuss whether any substantial question of law could be said to be involved in the matter. "No Substantial Question of Law Arises in these Cases: 40. The dispute essentially before us is the pairing and matching such comparables with the Transfer Pricing Analysis of the profit margins given by the Assessee himself during the course of determination of such 'Arm's Length Price' . 41. The shades of arguments raised by both the sides before us in these appeals and most of which have been filed by the Revenue are that either the wrong Filters have been appl....
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....s under Section 260-A of the Act, we cannot disturb those findings of fact under Section 260-A of the Act, unless such findings are exfacie perverse and unsustainable and exhibit a total nonapplication of mind by the Tribunal to the relevant facts of the case and evidence before the Tribunal. 45. Otherwise if the High Court takes the path of making such a comparative analysis and pronounces upon the questions as to which Filter is good and which comparable is really comparable case or not, it will drag the High Courts into a whirlpool of such Data analysis defeating the very purpose and purport of the provisions of Section 260-A of the Act. Therefore what we observed above appears to us to be the sustainable view that the key to the lock for entering into the jurisdiction of High Court under Section 260-A of the Act is the existence of a substantial question of law involved in the matter. The key of ex-facie perversity of the findings of the Tribunal duly established with the relevant evidence and facts. Unless it is so, no other key or for that matter, even the in-consistent view taken by the Tribunal in different cases depending upon the relevant facts available before i....
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....Act. " 18. In the last, the Court concluded as under: "The procedure of assessment under Chapter X relating to international transactions as indicated above is already a lengthy one and involves multiple Authorities of the Department. A huge, cumbersome and tenacious exercise of Transfer Pricing Analysis has to be undertaken by the Corporate Entities who have to comply with the various provisions of the Act and Rules with a huge Data Bank and in the first instance they have to satisfy that the profits or the income from transactions declared by them is at 'Arm's length' which analysis is invariably put to test and inquiry by the Authorities of the Department and through the process of Transfer Pricing Officer (TPO) and Dispute Tribunal at various stages, the assessee has a cumbersome task of compliance and it has to satisfy the Authorities that what has been declared by them is true and fair disclosure and much of the Transfer Pricing Adjustments is not required but the Tax Authorities have their own view on the other side and the effort on the part of the Tax Revenue Authorities is always to extract more and more revenue. This process of making huge T....
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....dsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an 'Arm's Length Price' in the case of the assessee with which the assessee may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court. " 19. The Delhi High Court, in the case of CIT vs. EKL Appliances Ltd., reported in (2012) 345 ITR 241 (Delhi), in context with Section 92CA of the Act, had observed as under: "It seems to us that the decision taken by the Tribunal is the right decision. The TPO applied the CUP method while examining the payment of brand fee/ royalty. The CUP method which in its expanded form is known as "comparable uncontrolled price" method is provided for in Rule 10B (1) (a) of the Income Tax Rules, 1962. It is one of the methods recognised for determining the ALP in relation to an internat....
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.... 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 reproduced below: - "1.36 A tax administration's examination of a col 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 exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, ....
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....n 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." 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 significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such restructuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create doubl....
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....tion 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 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 itsel....
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....fering 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 expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referre....