2017 (4) TMI 1340 - AT - Income Tax

TPA - addition made on account of payment of administrative services fees and addition on account of payment - of royalty to AE - proof of receipt of administrative services as well as technical knowhow - Held that - The onus lies on the assessee to prove that the actual services for which the administrative services fees were paid are actually rendered or the use of technical knowhow @ 5% of the domestic sales. It may be mentioned that the question of the bench marking of transaction would arise only if the assessee proves that there was actual transfer of technical knowhow to the appellant and the technical knowhow was actually used by the assessee in the manufacturing activity of the appellant. It is a matter of fact that before the lower authorities as well as before us, the assessee company had only described the nature of technical knowhow and nature of administrative services received. It does not conclusively prove that the assessee company actually received the administrative services as well as the technical knowhow which are used in the manufacturing activity of the appellant. The appellant had not filed any additional evidences to prove the administrative services/technical knowhow are actually received by the appellant and thus the assessee company had failed to discharge this onus of proving this aspect. Therefore, even as per the provisions of Indian Evidence Act, the presumption can be drawn that the assessee has no evidence to prove this aspect. Therefore, the AO/TPO was justified in adopting the ALP in respect of payment of administrative services and royalty at Nil. Thus, the grounds of appeal in ground Nos. 2 to 7 are dismissed. In respect of the other grounds of appeal, since we held that there was no proof of receipt of administrative services as well as technical knowhow which is used in the process of manufacturing activity, the question of bundling of transaction or aggregating all other transactions does not arise. Disallowance on account of doubtful advance written off - Held that - The conditions necessary for allowance as a bad debt are not applicable in the present case. It is not a debt arising on account of any sale transaction and a bad debt presupposes existence of a debt and these were not a forming part of the total income in the earlier years of the appellant. Therefore, the claim cannot be allowed as a bad debt. Further, this cannot even be allowed as a business loss for the reason that the issue of irrecoverability from the department has not attained the finality as the issue is pending before the appellant authorities. This can be claimed as a deduction only if it becomes clear that it cannot be recovered as a deduction.

Issues Involved:
1. Addition on account of payment of administrative services fees.
2. Addition on account of payment of royalty to AE.
3. Disallowance on account of doubtful advance written off.

Detailed Analysis:

1. Addition on Account of Payment of Administrative Services Fees:
The assessee, a private limited company, reported several international transactions with its AE, including the payment of administrative fees. The assessee justified these transactions as being at arm's length using the Transactional Net Margin Method (TNMM) and claimed a profit margin of 5%. The TPO, however, treated the payment of administrative service fees at Nil, stating that the assessee failed to establish the actual receipt of services and the benefits derived from such expenditure. The DRP upheld the TPO's order, emphasizing that the assessee could not prove the actual receipt of services.

The Tribunal referred to the Delhi High Court's ruling in CIT Vs. EKL Appliances, which held that the TPO cannot determine the ALP at Nil by questioning the necessity of the expenditure. The Tribunal noted that while the TPO cannot disallow the expenditure based on the necessity or benefits, the onus lies on the assessee to prove that the services were actually rendered. In this case, the assessee failed to provide conclusive evidence of the receipt of administrative services. Consequently, the Tribunal upheld the TPO's decision to adopt the ALP for administrative services at Nil, dismissing the grounds of appeal related to the administrative fees.

2. Addition on Account of Payment of Royalty to AE:
Similar to the administrative fees, the payment of royalty to AE was also contested. The TPO treated the royalty payment at Nil, citing the same reasons as for the administrative fees. The DRP confirmed this view, and the Tribunal referred to the same legal principles as discussed in the previous issue. The Tribunal emphasized that the assessee must prove the actual transfer and use of technical know-how for the royalty payment to be considered at arm's length. Since the assessee failed to provide evidence of the actual receipt and use of technical know-how, the Tribunal upheld the TPO's decision to adopt the ALP for royalty payment at Nil, dismissing the related grounds of appeal.

3. Disallowance on Account of Doubtful Advance Written Off:
For the assessment year 2007-08, the assessee appealed against the disallowance of ?1,20,16,395/- written off as a doubtful advance. The assessee had exported weight management products to its parent company and claimed duty drawback from the Central Excise department, which was rejected and pending appeal. The assessee wrote off this amount as a bad debt. The AO rejected this claim, stating that it was not a debt arising from a sale transaction and had not attained finality as irrecoverable. The CIT(A) confirmed this view, holding that it could not be allowed as a business loss.

The Tribunal agreed with the AO and CIT(A), stating that the conditions for allowance as a bad debt were not met, as it was not a debt from a sale transaction and had not been included in the total income of earlier years. Additionally, the issue of irrecoverability had not attained finality since it was pending appeal. Therefore, the Tribunal dismissed the appeal, upholding the disallowance of the doubtful advance written off.

Conclusion:
The Tribunal dismissed the appeals related to the addition of administrative services fees and royalty payments, citing the assessee's failure to prove the actual receipt and use of services and technical know-how. Additionally, the Tribunal upheld the disallowance of the doubtful advance written off, affirming that it did not meet the criteria for a bad debt or business loss. The decisions were pronounced in the open court on April 17, 2017.

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