2018 (10) TMI 1982 - AT - Income Tax

TP Adjustment - determining the arm's length adjustment to the Assessee's international transactions from Associated Enterprises ( AEs ) - payment of intra group services/management fee - HELD THAT - When we examine the reasons given by ld. TPO for declining the contentions of the taxpayer for rendering such services by the AE and taking benefit therefrom by the taxpayer in the light of the fact that its intra-group charges are merely 1.39% of the total turnover which has been increased five times within last five years and the taxpayer is a subsidiary of Donaldson Company Inc., USA, its AE, and is into manufacturing and marketing of air filtration systems, etc., without these services 5 times increase is not possible. Moreover, all the services are being rendered as per agreement of 2004 and since then facts have not been changed. Merely because of the fact that the payment on account of management fee / intra-group services is increasing every year, the case of the taxpayer cannot be falsified as it is to be seen in the light of the fact that if payment of services has been increasing the turnover has also been increasing. It is the case of the taxpayer that payment has been made for beneficial services as per OECD Guidelines of 2010 to cater the specific needs of the taxpayer necessary for business of the taxpayer in India. Moreover, had these services been availed of by the taxpayer from a third party, it would have entailed more cost. Revenue Officer cannot decide while sitting on the armchair of a businessman to decide as to what services are required. So far as question of deriving the benefit of such services is concerned, benefit may always not be the result of any business decision. But, in the instant case, the taxpayer has explained the benefits derived from rendering of services by the AE. When it is not in dispute that the business model of the taxpayer has not undergone any change since 2004 and payment of intra-group services have been formed to be at arm s length by the Revenue by passing detailed order by the TPO for AYs 2008-009, 2009-10, 2011-12 and 2012-13, available at pages 129 to 136 of Case Law Paper book, no reason whatsoever has been given by the ld. TPO to depart from the rule of consistency. No doubt, principle of res judicata is not attracted to the income-tax matter but when the business model has not undergone any change and facts and circumstances are identical rule of consistency is required to be maintained as has been held by Hon ble Apex Court in Radhasoami Satsang payment of intra group services/management fee When we examined TP order payment of intra-group charges respectively have been held to be arm s length as per TP analysis conducted by the taxpayer. So, it cannot be held that since payment of intra-group services is increasing day by day, it leads to profit shifting. We are of the considered view that issue at hand is required to be remitted back to the TPO/AO to decide afresh in the light of the observation made herein before and in view of the order passed by ld. TPO in preceding and succeeding years. Appeal filed by the taxpayer is allowed for statistical purposes.

Summary

Issues Involved:
1. Validity of the order passed by the AO.
2. Determination of arm's length adjustment for international transactions.
3. Jurisdictional error in the reference made by the AO.
4. ALP determination of intra-group services/management fees.
5. Initiation of penalty proceedings under section 271(1)(c).
6. Charging and computation of interest under sections 234B and 234D.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed by the AO:
The appellant contended that the order passed by the AO was "bad in law and void ab-initio." However, the judgment does not provide a detailed analysis of this issue, focusing instead on the substantive issues related to the arm's length price (ALP) determination and other procedural aspects.

2. Determination of Arm's Length Adjustment for International Transactions:
The taxpayer, a subsidiary of Donaldson Company Inc., USA, engaged in various international transactions including the purchase and sale of filters, payment of royalties, and management fees. The taxpayer used the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for benchmarking these transactions. The TPO accepted all transactions at arm's length except for the payment of management fees/intra-group services, for which the TPO applied the Comparable Uncontrolled Price (CUP) method and determined the ALP as NIL, resulting in an adjustment of Rs.10,692,707.

3. Jurisdictional Error in the Reference Made by the AO:
The appellant argued that the AO did not record any reasons in the assessment order to justify the reference to the TPO for ALP determination, as required under section 92CA(1) of the Act. The judgment does not elaborate on this issue, focusing instead on the substantive determination of the ALP.

4. ALP Determination of Intra-Group Services/Management Fees:
The TPO rejected the taxpayer's approach of aggregating all international transactions for benchmarking and analyzed the services transactions separately. The TPO concluded that the taxpayer failed to prove that intra-group services were availed, determining the ALP as NIL. The taxpayer provided extensive documentation, including agreements, remittance letters, debit notes, TDS certificates, and emails, to prove the rendering of services and benefits derived. The Tribunal noted that the taxpayer had been making similar payments since AY 2008-09, which were accepted as arm's length in previous and subsequent years. The Tribunal found that the TPO's findings were based on presumptions and lacked evidence. The Tribunal emphasized the "rule of consistency," noting that the business model had not changed since 2004 and similar payments were accepted in other years.

5. Initiation of Penalty Proceedings Under Section 271(1)(c):
The appellant contended that the AO erred in initiating penalty proceedings mechanically and without adequate satisfaction. The judgment does not provide a detailed analysis of this issue, focusing instead on the substantive issues related to the ALP determination.

6. Charging and Computation of Interest Under Sections 234B and 234D:
The appellant argued that the AO erred in charging and computing interest under these sections. The judgment does not provide a detailed analysis of this issue, focusing instead on the substantive issues related to the ALP determination.

Conclusion:
The Tribunal remitted the issue back to the TPO/AO for fresh consideration in light of the observations made in the judgment and the orders passed by the TPO in preceding and succeeding years. The appeal filed by the taxpayer was allowed for statistical purposes.