2018 (2) TMI 975 - AT - Income Tax

Disallowance of management services fees - Held that - Management service fee paid by assessee to Asia Investment Pvt. Ltd is allowable. As decided in assessee s own case 2017 (4) TMI 908 - ITAT PUNE where there is nexus between the expenditure incurred and the purpose of business, then the revenue cannot put itself in the arm chair of the businessman to decide how much of the expenditure is reasonable.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. - Decided in favour of assessee Addition on account of payment of Royalty to Dana Corp., USA. - TPA addition - Held that - Since, identical issue has already been decided in favour of assessee by the Tribunal in assessment years 2009-10 and 2010-11 that where the payment of Royalty by the assessee to its associate enterprise Dana Corporation is @ 2.85%is liable to be considered at arm s length rate and no addition is warranted on this count. Accordingly, the claim of assessee is thus, allowed. In any case, the jurisdiction and power of TPO is to determine arm s length price of Royalty and the order of TPO holding that the assessee had not derived any benefit under the said Agreement is beyond the scope of TPO while benchmarking the international transaction for the purpose of determining arm s length price - Decided against revenue Warranty provision applicability - Held that - DRP has given categoric finding that provision of warranty made by assessee are based on scientific analysis of the past data and represents a reliable estimate of obligation arising out of sales made during the relevant previous year. The ld. DR has not been able to controvert the findings of DRP. In Rotork Controls India P. Ltd.(2009 (5) TMI 16 - SUPREME COURT OF INDIA) has held that where provision for warranty is made on scientific basis, the same is to be allowed.- Decided against revenue

Summary

Issues Involved:
1. Disallowance of management services fees paid to Asia Investment Pvt. Ltd.
2. Deleting addition on account of payment of Royalty to Dana Corp., USA.
3. Deleting addition on account of warranty provision.

Detailed Analysis:

1. Disallowance of Management Services Fees Paid to Asia Investment Pvt. Ltd.:
The assessee challenged the disallowance of management services fees amounting to ?14,54,45,173/- paid to Asia Investment Pvt. Ltd. The Tribunal noted that the facts and circumstances were identical to those in the assessment year 2009-10, where the assessee had paid management services fees under a Corporate Services Agreement. The Tribunal found that the services provided by Asia Investment Pvt. Ltd. were essential for the smooth operation of the assessee's business, covering areas such as human resources, business development, marketing, finance, legal, taxation, and operational excellence. The Tribunal held that the expenditure incurred by the assessee was justified and allowable as business expenditure, following the principle of commercial expediency as laid down by the Hon’ble Supreme Court in Hero Cycles (P) Ltd. Vs. CIT and S.A. Builders Ltd. Vs. CIT(A). Consequently, the Tribunal allowed the appeal of the assessee on this ground.

2. Deleting Addition on Account of Payment of Royalty to Dana Corp., USA:
The Revenue contested the deletion of the addition related to the payment of royalty amounting to ?14,54,45,173/- to Dana Corp., USA. The Tribunal observed that the payment of royalty was consistent with the agreements and approvals from the Secretariat of Industrial Approval (SIA) and the Reserve Bank of India (RBI). The Tribunal referred to its previous judgments in the assessee's own case for the assessment years 2009-10 and 2010-11, where similar royalty payments were deemed to be at arm's length price. The Tribunal held that the TPO’s adjustment to the royalty payment was beyond his jurisdiction, as the payment was already approved by SIA and RBI, and thus, constituted reliable CUP data. Therefore, the Tribunal dismissed the Revenue's appeal on this ground.

3. Deleting Addition on Account of Warranty Provision:
The Revenue also challenged the deletion of the addition related to the warranty provision. The Tribunal noted that the Dispute Resolution Panel (DRP) had found the provision for warranty to be based on a scientific analysis of past data, representing a reliable estimate of the obligation arising from sales made during the relevant previous year. The Tribunal referred to the Hon'ble Supreme Court's judgment in Rotork Controls India P. Ltd. Vs. CIT, which held that a scientifically based provision for warranty is allowable. The Tribunal found no infirmity in the DRP’s findings and dismissed the Revenue’s appeal on this ground.

Conclusion:
In conclusion, the Tribunal allowed the appeal of the assessee regarding the disallowance of management services fees and dismissed the Revenue's appeals concerning the deletion of additions on account of royalty payment and warranty provision. The Tribunal's decision was consistent with its earlier judgments in the assessee's own cases for previous assessment years.