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2011 (9) TMI 261 - AT - Income TaxArm s Length price (ALP) - Addition u/s 92CA(3) - Payment made to parent company - the basic reason of the Transfer Pricing Officer s determination of ALP of the services received under cost contribution arrangement as NIL is his perception that the assessee did not need these services at all as the assessee had sufficient experts of his own who were competent enough to do this work. - Held that - The TPO s objection to this arrangement was two fold first that the cost should be shared in the ratio of actual use of services; and second that the costs should be charged to the assessee as per Indian employee costs. None of these objections has any legally sustainable merits. - the assessee has adopted TNMM as most appropriate method and the revenue authorities have neither made an effort to show as to how this method is not appropriate to the facts of this case nor shown as to which other prescribed method of ascertaining arm s length price of services received under CCA will be more appropriate to these facts. Discount of 10% to AEs - the discount is allowed by the virtue of status as associated enterprise but that is not a material factor; in our considered view the material factor is whether such a discount of 10% is an arm s length discount i.e. a discount which is given even in a situation in which an enterprise is dealing with independent enterprise. There is nothing on record to even suggest that such a discount is not an arm s length discount or that discounts have not been allowed under any other situations. In view of these discussions and bearing in mind entirety of the case we delete the impugned disallowance of Rs 4, 70, 000 as well. Disallowance u/s 40A(2)(b) - Held that - As long as the services have been availed by the assessee is legitimate furtherance of its business interests and are thus wholly exclusively for the purposes of business the costs of these shared services as allocated to the assessee are required to be treated to have been computed in a fair and transparent manner. Disallowance u/s 40(1)(i) - non deduction of TDS - assessee claims that payments made to the US based AE under a cost contribution agreement do not warrant any tax withholding as neither the AE has any permanent establishment in India nor the services so rendered are covered by the scope of fees for included services . - since these services prima facie are not covered by the make available clause of Article 12(4)(b) the payment so made cannot be taxed as fees for included services either. - AO has not even made out the case for taxability of the impugned payments in India.
Issues Involved:
1. Additions under section 92CA(3) of the Income Tax Act, 1961, in respect of payments to Parent Company. 2. Alternative disallowance on account of allocation of cost contribution charges under sections 37(1), 40A(2)(b), and 40(a)(i) of the Income Tax Act. 3. Denial of deduction under section 80IB of the Income Tax Act on other income. 4. Additions under section 145A of the Income Tax Act on account of unutilized CENVAT credit to closing stock. Detailed Analysis: Issue 1: Additions under section 92CA(3) of the Income Tax Act, 1961, in respect of payments to Parent Company The assessee challenged the correctness of the order passed by the Assessing Officer (AO) under section 143(3) read with section 144C(5) for the assessment year 2006-07, particularly focusing on the additions made under section 92CA(3) regarding payments to the Parent Company, Dresser Rand US, totaling Rs.10,59,70,009. The Transfer Pricing Officer (TPO) and AO, confirmed by the Dispute Resolution Panel (DRP), disregarded the documentation maintained under section 92D and did not appreciate the factual details and various documentary evidence demonstrating benefits to the appellant under the cost contribution agreement. The TPO concluded that the arm's length price (ALP) of services rendered in the cost contribution arrangement was nil, citing reasons such as the assessee having sufficient internal resources to handle the services for which costs were allocated, the irrelevance of treasury services due to the assessee being cash-rich, and the lack of evidence of the exact services received. The TPO also noted that the cost-sharing agreement appeared to be an afterthought for profit shifting, as it was entered into retrospectively and the financial performance analysis indicated no genuine business arrangement. The Tribunal found the TPO's reasoning flawed, emphasizing that it is not within the revenue authorities' purview to question the commercial wisdom of the assessee's business decisions. The Tribunal also noted the irrelevance of the financial performance analysis in determining the ALP of services and criticized the DRP for summarily rejecting the evidence provided by the assessee without proper analysis or reasoning. The matter was remitted to the AO for fresh adjudication on the actual rendering of services, considering the evidence filed by the assessee. Issue 2: Alternative disallowance on account of allocation of cost contribution charges under sections 37(1), 40A(2)(b), and 40(a)(i) of the Income Tax Act The AO and DRP confirmed the disallowance of cost contribution charges paid to Dresser Rand US under sections 37(1), 40A(2)(b), and 40(a)(i), without any show cause notice and disregarding the documentary evidence filed by the assessee. The Tribunal noted that if the services were indeed rendered, the costs should be considered as incurred wholly and exclusively for business purposes and thus deductible under section 37(1). The Tribunal also emphasized that the cost contribution payment does not fall within the ambit of section 40A(2)(b) due to specific coverage under sections 92 to 92F. Furthermore, the Tribunal found that no tax was required to be deducted at source on the cost contribution payment to Dresser Rand US, as the payments were not taxable in India under the Act or the India-USA Tax Treaty. The matter was remitted to the AO for fresh adjudication. Issue 3: Denial of deduction under section 80IB of the Income Tax Act on other income The assessee raised a grievance regarding the denial of deduction under section 80IB on other income in the nature of recovery of freight, arguing that such income is derived in the ordinary course of operations of the industrial undertaking and thus eligible for deduction. However, the Tribunal noted that the learned counsel for the assessee did not make any specific submissions beyond reiterating the submissions made before the authorities below. Consequently, this ground of appeal was dismissed as practically not pressed. Issue 4: Additions under section 145A of the Income Tax Act on account of unutilized CENVAT credit to closing stock The issue revolved around the adjustment for unutilized CENVAT credit to the closing stock. The AO made the adjustment, and the DRP directed the AO to grant the adjustment in respect of both opening and closing stock. The Tribunal noted that the issue was covered by a coordinate bench's decision in the assessee's own case for the assessment year 2001-02. The matter was remitted to the AO for redoing the computation in accordance with the said order. Conclusion: The Tribunal partly upheld the grievances of the assessee regarding ALP adjustments and service charges from associated enterprises, remitting the matter to the AO for fresh adjudication. The appeal was partly allowed for statistical purposes, with specific directions for the AO to reconsider the evidence and apply the appropriate legal principles.
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