9911796707
TMI Blog2016 (5) TMI 548X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee had filed its return of income on 12.10.2010 declaring an income of Rs. 9,30,49,569/-. The international transactions for the year under consideration were as per the following chart - International transactions shown by the taxpayer: Sr. No. Nature of transaction Method Selected Arm's length price as per taxpayer (i) Purchase of raw materials TNMM using Operating profit 10,477,158 (ii) Purchase of trading goods 37,051,810 (iii) Payment of royalty 84,765,448 (iv) Payment of management consultancy fees 48,591,848 (v) Sale of finished goods -------------as PLI Operating Revenue 27,347,679 (vi) Sale of components and spares 27,312,504 (vii) Receipt of sales commission 8,479,350 (viii) Purchase of fixed assets 6,717,589 (ix) Provision of support services TNMM using Operating profit --------- as PLI Operating Cost 47,841,967 4. Since the assessee had undertaken international transactions with its Associated Enterprises (AE), a reference was made by the Assessing Officer to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act. The TPO proposed an addition of Rs. 8,77,31,148 vide order dated 29.01.2014 and the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee under section 92CA(3) of the Act on account of adjustment in the arm's length price of the international transaction of payment of management fee. In doing so, the learned TPO has erred in: a) Misinterpreted/ misconstrued the facts with respect to the international transactions relating to management fee on the basis of incorrect presumptions. b) Disregarding the Global Transfer Pricing Report justifying the arm's length nature of the transaction under a transaction-by-transaction analysis. 5. The learned TPO erred, on facts and circumstances of the case and disallowed the payment of royalty by considering the ALP of the same to be NIL and making an adjustment of INR 84,765,448 to the total income of the Assessee under section 92CA(3) of the Act on account of adjustment in the arm's length price of the international transaction of payment of royalty. In doing so, the learned TPO have erred in: a) Disregarding the documentary evidence submitted by the Assessee and alleging no services were actually received by the assessee; b) Misinterpreted/ misconstrued the facts with respect to the international transactions relating to payment of royalty on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Rs. 29,65,700/- on account of adjustment in the ALP of international transactions of payment of management fee, the DRP held that the assessee had made payments for services availed which contained two mark-ups, one by the entity rendering the services and the other by the entity in Greece. Therefore, the second mark-up of 6.5% was rightly to be adjusted in the determination of ALP. (v) As regards the ad hoc disallowance of 5% of the miscellaneous expenses, the DRP ruled in favour of the assessee and held that since the disallowance was not supported by any evidence, the same had to be deleted. 7. The TPO consequently passed the order on 6.1.2015 giving effect to the directions of the DRP stating that there was no change in the TPO's order dated 29.01.14. Accordingly, the same amount of Rs. 8,77,31,148/- on account of T.P. Adjustment was disallowed. Further, an amount of Rs. 8,55,912/- being 5% of total miscellaneous income was also added back and the assessment was completed at Rs. 18,16,36,630/-. 8. Aggrieved, the assessee is before us and has preferred the following grounds of appeal:- "1. 1.1. The learned Deputy Commissioner of Income Tax, Circle- 9(2), New Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 10B(1)(a) of the Rules. 3.3. The Ld. TPO/ Hon'ble DRP have erred in upholding the adoption of CUP method as the most appropriate method for determining the arm's length price in respect of the impugned international transaction without identifying any comparable uncontrolled transaction(s) for the computation of the ALP as prescribed in Section 92F(ii) of the Act. 4. 4.1. The Ld. TPO/ Hon'ble DRP erred in passing an order that is perverse in law ignoring the relevant submissions, information and documents provided by the Appellant to substantiate the services and benefits received by the appellant in lieu of payment of royalty, and based on a preoccupied mind reached at an inappropriate conclusion that the arm's length value of the transaction pertaining to payment of royalty should be Nil. 4.2. The Ld. TPO/ Hon'ble DRP erred in misinterpreting/ misconstrued the facts with respect to the international transaction relating to payment of and royalty on the basis of incorrect presumptions and accordingly made an adjustment of INR 84,765,448 to the total income of the Assessee. 4.3. The Ld. TPO/ Hon'ble DRP erred in misinterpreting/ misconstrued the facts with resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of royalty, the Ld. AR submitted that the assessee has entered into royalty agreement with its AE - Frigoglass SAIC (Head Office) on account of receipt of ICM Technology and for use of trademark. It was submitted that CUP method could not be applied in the case as neither the AE nor the assessee have entered into similar royalty arrangements with third parties and the data for external comparable transactions between independent parties in India was not available. It was submitted that the only method which could be correctly applied was TNMM (which has been applied by the assessee). It was further submitted that the benchmarking approach adopted by the assessee has been wrongly rejected and that the application of CUP method was erroneous. It was submitted that FIPL's principal activity being manufacturing of glass door refrigerators, the international transactions form an integral part of FIPL's business of manufacture and sale of glass door refrigerators. Accordingly, for the purpose of economic analysis, the assessee combined the international transaction pertaining to payment of royalty as in this case; the transaction was so closely linked or continuous that it could not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been increasing on an year to year basis because of availing of the services of Frigoglass SAIC and, therefore, since the benefits received from FIPL from receipt of such services outweigh the payment for such services, the assessee was justified in making payments for royalty. 10. It was also submitted that royalty has been paid only as per the terms of the agreement. The Ld. AR submitted that the disallowance for royalty was ultimately made on the ground of commercial expediency and he placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT vs EKL Appliances Ltd. 345 UTR 241 (Del) and that of the ITAT Hyderabad 'B' Bench in the case of DCIT vs Air Liquide Engineering in I.T.A. No. 1040/Hyd/2011 for the proposition that so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it was no concern of the TPO to disallow it on any extraneous reasoning. He submitted that on the facts of the case, the payment of royalty deserves to be allowed in Toto as it was allowable business expenditure. 11. Regarding the second issue of payment of management consultancy fee, it was submitted that FIP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s providers resulted in the identification of 720 independent companies. These comparables exhibited an arm's length inter-quartile range of 3.7% to 13.3% with a median of 7.4%. On the basis of this, the 6.5% cost plus mark-up charged by the Frigoglass group can be considered consistent with the arm's length principle. The Ld. AR further submitted that the TPO has accepted the receipt of services as well as the needs and benefits availed by the assessee and has only challenged the computation mechanism for such services and that too disallowing only the mark-up charged on the cost allocated to AE, considering the same to be duplicative in nature and the DRP has simply followed the reasoning of the TPO without exercising an independent analysis. The Ld. AR refereed to the Allocation Sheet appearing on page 10 of the order of the TPO and submitted that the TPO has mixed up two sets of transactions viz. availing of services from AE at cost plus 6.5% mark-up and rendering services to AE at cost plus 15% mark-up. Referring to Para (ii) on page 9 of the TPO's order, the Ld. AR pointed out that the Agreement with Cyprus referred to in the said Para was an altogether different agreement, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P, detailed submissions, including agreement between AE and the assessee, justifying how the technical know-how supplied by its AE was crucial to the running of its business. In CIT vs EKL Appliances 341 ITR 241 (Del), the Hon'ble Delhi High Court had the occasion to consider an issue of disallowance of royalty by TPO because the assessee in that case had been suffering losses, the Hon'ble High Court while holding that so long as the expenditure or payment by assessee has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning, observed as follows:- "16. The Organization for Economic Cooperation and Development ("OECD‟, for short) has laid down transfer pricing guidelines" for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm's length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT , (1951) 20 ITR 1, it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B (1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of the co-ordinate I Bench of the Delhi Tribunal in the case of Bombardier Transporation India Pvt. Ltd. is concerned, these judgments were rendered on a different set of facts and hence the ratio as laid down by these are not applicable to the facts of the present appeal. 18. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company's transaction, it covers within its ambit the royalty transactions in question too and hence the Department's contention for applying the CUP method is erroneous. We draw support from the decision of the Mumbai Bench of the Tribunal in Cadbury India Ltd. vs ACIT in I.T.A. No. 7408/Mum/2010 and I.T.A. No. 7641/Mum/2010 wherein the Bench has upheld the use of TNMM for royalty by holding: "33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A (d) defines 'transaction' as ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
