2017 (12) TMI 1860 - AT - Income Tax

TP Adjustment - TPO/AO adopting the ALP in respect of management and marketing support services fees paid by the appellant to its AE at Rs.Nil - payment for said services was made in terms of master agreement entered by the appellant with Volvo Truck Corporation, Sweden, i.e., its AE, which is a holding company. HELD THAT - Only valid reasons assigned by the TPO which remain uncontroverted for determining the ALP of the transaction of payment of management and marketing support services fees at Rs.Nil is that there was no evidence in support of rendering of services by the AE and the failure to substantiate real nature of services actually rendered by the AE . We hold that the TPO was justified in determining the ALP of transaction of marketing and management support fees at nil . When the case is covered against the assessee in its own case for the earlier assessment year, we find no reason for assessee to seek adjournment of the case, especially in the matters of very old matters i.e., 2010. It is for the assessee to arrange for its own affairs. The court cannot come to the rescue of an assessee who keeps changing counsel from time to time in order to gain time. We do not approve of this kind of practice of frequent change of counsel. When the application for admission of additional evidence was rejected, the assessee again started pleading adjournment of the case. In any case, once the issue is duly covered against assessee, there was no occasion for the bench to adjourn the matter and further it is not befitting the stature of the counsel, to seek for adjournment in a covered matter. It is a classic example of shifting of profit base outside the country. The appellant has also not controverted the findings of the TPO that it adopted a colourable device to shift the tax base of this country. When the other transactions are accepted to be at arm s length under the TNMM method, the TPO is not justified in adopting the CUP method for the purpose of benchmarking the transaction of payment of management and marketing support services fee, is not correct in asmuchas the TPO had not examined the other transactions under the TNMM method. Deduction u/s 10A - AO in reducing the tele-communication expenses incurred in India from 'export turnover' while computing deduction under section 10A as 'expenditure attributable to delivery of software outside India' under Explanation 2(iv) to Section 10A - HELD THAT - We find that this issue is squarely covered in favour of the assessee by the decision of Tata Elxsi ( 2011 (8) TMI 782 - KARNATAKA HIGH COURT ). We direct the AO to reduce telecommunication expenses both from export turnover as well as total turnover.

Issues Involved:
1. Transfer Pricing Adjustments
2. Deduction under Section 10A
3. Charging of Interest under Sections 234C and 234D

Detailed Analysis:

Transfer Pricing Adjustments:
The primary issue revolved around the payment of management and marketing support services fees by the appellant to its Associated Enterprise (AE). The Assessing Officer (AO) and the Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) of this transaction at Rs. Nil due to several reasons:

1. Lack of Evidence for Services Rendered: The TPO found that the appellant failed to produce evidence regarding the actual expenditure incurred by the AE on behalf of the appellant. Despite multiple requests, the appellant could not substantiate the rendering of services by the AE with adequate documentation.

2. Inconsistent Justifications: The appellant changed its stand multiple times during the proceedings, initially stating that the payment was for marketing services and later for brand and trademark usage. This inconsistency weakened their position.

3. Profitability-Based Payment: The TPO noted that the payment was guided by the profitability of the AE rather than the services rendered, indicating a potential mechanism for profit shifting.

4. No Tangible Benefits: The appellant failed to demonstrate tangible and substantial commercial benefits derived from the payment of such a significant fee. The TPO concluded that the payment was a device to siphon off profits from India to a lower tax jurisdiction.

5. Historical Non-Payment: The appellant had not paid any management fee in the earlier years, which raised questions about the necessity and legitimacy of the payment in the assessment year under consideration.

The Tribunal upheld the TPO's determination of the ALP at Rs. Nil, citing the appellant's failure to provide sufficient evidence of the services rendered by the AE. The Tribunal also rejected the appellant's application to admit additional evidence, as there was no justification for not presenting this evidence earlier.

Deduction under Section 10A:
The appellant contested the AO's decision to reduce telecommunication expenses from the 'export turnover' while computing the deduction under Section 10A of the Income-tax Act. The Tribunal referred to the jurisdictional High Court's decision in CIT vs. Tata Elxsi (349 ITR 98), which mandated that telecommunication expenses should be reduced from both the export turnover and the total turnover. Consequently, the Tribunal directed the AO to follow this approach.

Charging of Interest under Sections 234C and 234D:
The appellant also challenged the charging of interest under Sections 234C and 234D of the Act. However, the Tribunal did not provide a detailed analysis on this issue, indicating that the primary focus was on the transfer pricing adjustments and the Section 10A deduction.

Conclusion:
The Tribunal's decision primarily hinged on the appellant's inability to substantiate the payment of management and marketing support services fees to its AE. The Tribunal upheld the TPO's determination of the ALP at Rs. Nil and directed the AO to adjust the telecommunication expenses from both the export and total turnover while computing the Section 10A deduction. The appeal was partly allowed, providing relief on the Section 10A issue but not on the transfer pricing adjustments.

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