2017 (10) TMI 1291 - AT - Income Tax

Disallowance of the entire management services fees paid - proof of revenue expenses incurred by the appellant wholly and exclusively for the legitimate purposes of its business - Held that - We find that facts in the present appeal are similar to the one adjudicated by the Co-ordinate Bench in the assessee s own case in immediately preceding assessment year i.e. 2009-10 wherein held the expenditure incurred by the assessee on management fees in order to facilitate smooth running of its business is an allowable expenditure in the hands of assessee. Similar expenditure has been allowed in the hands of assessee in preceding year. Another aspect of the issue is that the said management fees is to be taxed in the hands of recipient and even the service tax has been paid by the recipient, evidence of which is placed in the Paper Book. Once the commercial expediency of expenditure is established, then the same is to be allowed as business expenditure in the hands of assessee - Decided in favour of assessee. Addition on account of Royalty expenses - no tangible benefit had accrued to the assessee on account of payment of Royalty - Held that - It is undisputed fact that the issue relating to payment of royalty in assessment year under appeal is arising from same set of facts in assessee s own case in assessment year 2009-10.. The royalty paid by the assessee to Dana Corporation, USA during the period relevant to assessment year 2010-11 is germinating from same agreement which was subject matter of dispute in assessment year 2009-10. The detailed reasons have been given by the Co-ordinate Bench in assessment year 2009-10 for allowing the payment of royalty. Following the decision of co-ordinate Bench, we hold that the payment of royalty paid by the assessee to its AE is justified and is at arm s length price. We find no merit in the grounds raised by the Revenue.

Summary

Issues Involved:
1. Disallowance of management services fees.
2. Disallowance of royalty payment.

Detailed Analysis:

1. Disallowance of Management Services Fees:

The assessee company, a joint venture between Anand Automotive Systems and Dana Corporation, USA, engaged in manufacturing drive train components, entered into various international transactions with its Associate Enterprises (AEs). The Transfer Pricing Officer (TPO) observed that the assessee paid ?11,24,11,686/- as management services fees to Asia Investment Pvt. Ltd. (AIPL), a group concern with 25.10% shareholding in the assessee company. The Assessing Officer (AO) disallowed this payment, concluding that no substantial evidence was provided to justify the services received.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's disallowance, prompting the assessee to appeal before the Tribunal. The assessee argued that similar disallowance in the previous assessment year (2009-10) was overturned by the Tribunal, which recognized the commercial expediency of the expenditure. The Tribunal, referencing its prior decision, reiterated that the management services fees were justified as business expenditure, emphasizing that the assessee is the best judge of its business needs, and the AO cannot override this judgment. Consequently, the Tribunal allowed the assessee's appeal, reversing the disallowance of ?11,24,11,686/-.

2. Disallowance of Royalty Payment:

The TPO also disallowed ?11,24,11,686/- paid as royalty to Dana Corporation, USA, arguing that the payment did not result in any tangible benefit to the assessee and that the technology transfer agreement, initially signed 15 years ago, had become obsolete. The AO followed the TPO's findings, leading to the disallowance.

The CIT(A) reversed the AO's findings, accepting the assessee's justification for the royalty payment, which was based on a Technology License Agreement renewed periodically. The Revenue appealed against this decision. The Tribunal noted that the issue was identical to the one adjudicated in the previous assessment year (2009-10), where the Tribunal had allowed the royalty payment, recognizing it as an arm's length transaction approved by the Secretariat of Industrial Approval (SIA) and the Reserve Bank of India (RBI). The Tribunal reiterated that the TPO's role is limited to determining the arm's length price and not questioning the commercial expediency of the expenditure. Thus, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow the royalty payment.

Conclusion:

The Tribunal allowed the assessee's appeal regarding the disallowance of management services fees and dismissed the Revenue's appeal regarding the disallowance of royalty payment, affirming that both expenditures were justified and at arm's length.