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TMI Blog2017 (4) TMI 908X X X X Extracts X X X X X X X X Extracts X X X X ..... d of appeal raised by the assessee is thus, allowed. Disallowance of Management Fees - Held that:- 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. Applying the proposition laid down in S.A. Builders Ltd. Vs. CIT [2006 (12) TMI 82 - SUPREME COURT ]we hold that 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. Similar expenditure has been allowed in the hands of assessee in preceding year. Another aspect of the issue is that the said management fees is to be taxed in the hands of recipient and even the service tax has been paid by the recipient, evidence of which is placed in the Paper Book. Once the commercial expediency of expenditure is established, then the same is to be allowed as business expenditure in the hands of assessee. - Decided in favour of assessee Royalty paid by the assessee to its associate enterprises - TPA - Held that:- where the Royalties were paid in terms of approval granted by SIA / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; AEs') and concluding that the value of the international transactions are not at arm's length 2. Inappropriate non acceptance of the approach and analysis provided by the Appellant in its transfer pricing study report Erred by not accepting the approach and analysis undertaken provided by the Appellant in its transfer pricing study report for benchmarking its international transactions. 3. Inappropriately considering Shanthi Gears Limited and International Combustion (India) Limited as comparable for AY 2009-10 Erred by concluding that Shanthi Gears Limited and International Combustion (India) Limited are comparable to the Appellant for arriving at the arm's length price in relation to the international transactions 4. Inappropriate non consideration of the correct operating profit margins of the Appellant for AY 2009-10 Erred by not considering the correct operating profit margins of the Appellant for AY 2009-10 computed based on the audited financial statements of the appellant for AY 2009-10. Grounds of appeal pertaining to corporate tax adjustment: 5. Inappropriate disallowance of management fees amounting to ₹ 8,11,62 , 59 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uity of 75.90%. The assessee was primarily engaged in the business of manufacture and sale of drive train components namely propeller shafts, universal joints, axles and components thereof, which constitute heart of the transmission system. The assessee had set up its unit to manufacture components of propeller shafts at Jodalli, assembling of propeller shafts at Hosur and Satara, manufacturing of axles at Chakan and driveshaft assembly plant at Pantnagar. The assessee had filed revised return of income declaring total income of ₹ 9,56,666/-. During the year under consideration, the assessee had entered into international transactions with its associated enterprises and hence, the Assessing Officer made reference to the Transfer Pricing Officer (in short the TPO ) for benchmarking the international transactions. The assessee had applied modified CPM method in order to benchmark its international transactions of purchase of machined components of ₹ 29,32,27,007/-, sale of machined components of ₹ 118,18,97,136/-, payment of Royalty of ₹ 8,11,62,596/- and reimbursement of freight / sorting charges of ₹ 1,29,23,310/-. The TPO rejected the approach adopte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted for benchmarking international transactions of the assessee and in case, the same is to be included, then at best the same is to be taken at 0.17%. 9. The learned Departmental Representative for the Revenue in this regard placed reliance on the orders of authorities below. 10. We have heard the rival contentions and perused the record. The assessee had entered into various international transactions with its associated enterprises. The assessee was engaged in the business of manufacture and sale of drive train components namely propeller shafts, universal joints, axles and components thereof which constitute heart of the transmission system. The assessee had set up units to manufacture different components at different places. The assessee had entered into international transactions and had applied modified CPM method in order to benchmark its international transactions. However, the TPO rejected the method adopted by assessee and applied TNMM method to benchmark the international transactions of assessee with its associated enterprises. The learned Authorized Representative for the assessee during the course of hearing admitted that the assessee was not challenging the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP Indian Regulations, it is incumbent upon the TPO to select the concerns which are functionally similar and apply the financials of such concerns in order to benchmark the arm's length price of international transactions undertaken by the assessee. The OECD Guidelines also emphasize the need to apply the test of functional analysis in order to benchmark the international transactions. The bare perusal of website details of the said concern which list out the activities undertaken by it and the range of applications of items manufactured by it, clearly shows that the items manufactured by Shanthi Gears Ltd. are not utilized for automotive industries. As referred to by us in the paras hereinabove, the assessee is engaged in the manufacture and sale of drive train components, which constitute the heart of transmission system of the automobiles and has no application in the fields in which the items manufactured by Shanthi Gears Ltd. are applied. Accordingly, we find no merit in the order of TPO in including the said concern Shanthi Gears Ltd. as comparable. We direct the TPO / Assessing Officer to exclude the same and re-compute the arithmetic mean of finally selected comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LI of assessee as under:- Particulars Amount in INR Crs Net Sales A 528.37 OI B 87.31 OR C=A+B 615.68 COGS Mfg D 547.79 Other Expenses E 47.88 COGS with other Expenses F=D+E 595.67 Net Operating Margin G=F-CIT(A) 20.01 Net operating Margin % to Sales H=G/C 3.25% 14. The assessee objected to the said approach and pointed out that at entity level, it had earned 3.66%, as per audited segmental financials which was as under:- Particulars Reference Amount (Rs Crores) / % Net Sales A 528.38 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned Authorized Representative for the assessee pointed out that the TPO while working out net operating margins had by an error adopted the other income at ₹ 87.31 crores as against correct figure of ₹ 8.52 crores. The learned Authorized Representative for the assessee pointed out that under Rule 13 of DRP Rules, any mistake apparent from the record can be rectified by the DRP and there was no merit in the re-rectified order passed by the DRP accepting the contention of TPO that no rectification proceedings can be undertaken by the DRP. 16. The learned Departmental Representative for the Revenue on the other hand, fairly admitted that in case there is calculation error, then the same can be rectified. 17. We have heard the rival contentions and perused the record. The issue which arises vide present ground of appeal is against calculation of operating margins. The TPO had worked out the net operating margins percentage to sale at 3.25% by adopting the other income at 87.31%. However, the plea of assessee before us is that the other income was only to the extent of ₹ 8.52 crores and operating profit / operating revenue thus, works out to 3.66%. We find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and communication, support and assistance in other corporate areas. AIPL also supported the assessee to prepare strategic sales plans and forecasts based on the knowledge of latest development and competition all over the world. During the course of assessment proceedings, the assessee was asked to furnish the details and evidence to prove the genuineness of payments made to AIPL. The copy of Corporate Services Agreement between the parties was filed and list of management services availed from the said concern was filed along with declaration from AIPL for business income received from assessee. The assessee also filed detailed documentation i.e. email communications, manuals, articles, etc. to demonstrate the benefits received by AIPL in various areas by making payment of management fees to it. The said documents are placed at pages 645 to 651 of Paper Book. The Assessing Officer however, disallowed the management fees paid to AIPL on the surmise that the assessee had failed to demonstrate the benefits to it by making payment of management fees to AIPL and therefore, the same is not allowable to the assessee under section 37(1) of the Act. The Assessing Officer also challenged th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.5661/Del/2011, order dated 31.10.2014. 22. The learned Departmental Representative for the Revenue placed reliance on the order passed by the Assessing Officer and pointed out that principle of res-judicata do not apply to the income tax proceedings. 23. We have heard the rival contentions and perused the record. The corporate issue raised by the assessee is against the disallowance of management fees paid by the assessee. The assessee had entered into an agreement with AIPL dated 14.12.2004. The said concern was engaged in providing professional and management services to the assessee. The assessee has enlisted benefits received by it by making the said payment of management fees to AIPL which are as under:- Human Resource : AIPL consistently provided Human resource services like education / trainings services with the intention of developing a talent pool, by educating, training, and developing a chain of employees who are slated to take over the baton of future leadership. Further, AIPL advised SIPL based on survey output like Compensation Survey, supported in forming HR policies like performance management system etc., supported on Setting-up and deplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on : Assisted SIPL to have effective interaction with various Government agencies, Ministry and Trade Chambers of Commerce etc. Corporate relations and communications : Continuous corporate communication department with contracts with media and brought out a quarterly corporate publication which helped SIPL in branding and publicity. Strategic sourcing : Supported in vendor development and defining strategy for sourcing commodities or materials through various activities. Environment, Health and Safety : AIPL supported in forming group environment policies which laid down the actions expected from employees and various green initiatives. Standards of services with business code of conduct : AIPL deployed Business code of conduct in confirmation with standards of services and made available ethics helpline to report non-compliances. 24. In the facts of the present case, the assessee was paying Royalty to Dana Corporation @ 2.85% and was also paying management fees to AIPL for rendering several types of services at remuneration which was equivalent to the amount of Royalty i.e. 2.85% of sales. The perusal of agreement reflects the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the assessee are thus, partly allowed. 26. Now, coming to the appeal filed by the Revenue against order of DRP under Rule 13 of the DRP Rules. The grounds of appeal raised by the Revenue are as under:- 1a. Whether on the facts and circumstances of the case, the DRP was justified in re-adjudicating the issues which were rejected in its earlier order confirming proposed TP adjustments and where differing views were possible? 1b. Whether it was open for the DRP to revise its order under the garb of rectification, which is not permissible under law? 2. Whether on the facts and circumstances of the case, the DRP erred when it gave relief for proportionate adjustment when Indian Transfer Pricing does not conceptually allow it, as it pre-supposes that the net margin in AE and non-AE transaction are same, which ordinarily is not the same and ITTPL does not permit further adjustment to adjustment? 3a. Whether on the facts and circumstances of the case, the DRP erred in holding that companies M/s Raunaq Automotive Components Ltd. and M/s RSB Transmissions India Ltd., were comparable, when it was clearly pointed out in remand report, that these companies were no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation order passed by the DRP, under which certain issue which was not adjudicated by the DRP while disposing of the objections of assessee were directed to be rectified. The TPO after the said rectification order had moved an application and the DRP has modified its earlier order. However, the Revenue is in appeal against the rectification order passed by the DRP. 28. The learned Authorized Representative for the assessee pointed out that the objection was to the fact as to whether the safe harbour rules were to be applied or not to apply. The DRP by way of second rectification order dated 21.05.2014 has deleted the reference to Safe Harbour Rules and consequent to which, the Assessing Officer has passed the rectification order. 29. The learned Departmental Representative for the Revenue on the other hand, referred to the rectification order and pointed out that the order passed by the DRP was not rectifying any mistake apparent from the record but was allowing the claim of assessee on the basis of change of opinion. 30. The learned Authorized Representative for the assessee pointed out that the TPO had made adjustment at entity level of ₹ 57 crores, whereas intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t entity level. The Pune Bench of Tribunal in Demag Cranes Components (India) Pvt. Ltd. Vs. DCIT in ITA No.120/PN/2011, relating to assessment year 2006-07, order dated 04.01.2012 have taken view that only proportionate adjustment has to be made of international transaction and not at entity level profits. The DRP originally had not decided the said issue which was decided by way of order under Rule 13 of DRP Rules. We find no error in the exercise of jurisdiction by DRP in this regard. Accordingly, we hold that the directions of DRP in this regard are to be upheld. 34. Now, coming to the next objection i.e. ground of appeal No.3 which have been decided by the DRP i.e. holding that the companies M/s Raunaq Automotive Components Ltd. and M/s RSB Transmissions India Ltd. were comparable. The plea of the assessee by way of rectification application was that the TPO had not commented on the functional comparability of the said cases and had rejected the said concerns on other grounds. The DRP vide rectification order held that the said companies were functionally comparable to the assessee as it also dealt in automotive parts and directed the Assessing Officer to apply other filte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer to examine the computation of working capital adjustment provided by the assessee and to adopt correct operating margins of comparable companies after working capital adjustment. 38. The Revenue is aggrieved by the said directions of DRP. We find no merit in the ground of appeal raised by the Revenue, where the issue was raised before the TPO and also before the DRP in the original proceedings which has not been adjudicated by the DRP. Hence, the mistake has crept in the order of DRP which has been rectified by the DRP under Rule 13 of the DRP Rules. Upholding the same, ground of appeal No.5 raised by the Revenue is dismissed. The grounds of appeal raised by the Revenue are thus, partly allowed. 39. The assessee by way of cross objections has raised the following issues. 1. Erred in making addition of entire Royalty paid to the AE ₹ 8,11,62,596/- in the absence of any direction of DRP thereof and by draw i ng an unwarranted inference that the said addition was somehow required to be sustained as the upward adjustment initially made by the A . O . in the order u/s 144C read with Section 92CA of the Income Tax Act under TNMM due to lower P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the assessee with its associate enterprises also took up the issue of payment of Royalty to associate enterprises. The assessee had paid Royalty @ 3% on domestic sales in the earlier years but for the year under consideration, the Royalty was paid only @ 2.85% on the net sales of licence products. The claim of assessee was that the said Royalty payments were at arm's length price as the same were approved by SIA and Reserve Bank of India. 42. It was pointed out that as per decision of Delhi Bench of Tribunal in the case of Sona Okegawa Precision Forgings Ltd. Vs. Addl. CIT, order dated 06.12.2011, the rate of 2.85% was at arm's length price. The TPO issued show cause notice to the assessee to explain its booking to two expenses i.e. one under the head Royalty and similar payment under the head Management Fees . The assessee was also asked to explain the basis for quantifying the rate of payment of Royalty and management fees. The TPO was of the view that Royalty transactions needed to be taken at an arm's length price on Nil. In reply, the assessee explained that it was paying Royalty not @ 3% but @ 2.85% as per automatic route provided for such payment by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the payment of Royalty is determined at Nil and accordingly, an adjustment of ₹ 8,11,62,569/- is made to the value of the international transaction in order to arrive at the arm's length price of this international transaction. With this adjustment the total income of the assessee shall be increased by ₹ 8,11,62,569/-. 40. To conclude looking at the facts of the case and considering the details filed, TP adjustment of ₹ 8,11,62,569/- is made to the international transaction of payment of Royalty to Dana Corp. USA taking ALP at NIL under CUP. Consequent to this adjustment, the total income of the assessee shall go up by ₹ 8,11,62,56/-. 43. The TPO further vide para 41 observed that adjustment at the entity level of ₹ 56.27 crores in relation to international transaction has been made. The TP adjustment on account of international transaction of reimbursement of Royalty payment of ₹ 8.12 crores would get subsumed in overall TP adjustment of ₹ 56.27 crores and no other adjustment was made on account of Royalty payment. 44. Before the DRP, the assessee claimed that it filed separate application along with additional submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on ble Bombay High Court in CIT Vs. SGS India Pvt. Ltd. in Income Tax Appeal No.1807 of 2013, judgment dated 18.11.2015 and the Mumbai Bench of Tribunal in ACIT Vs. M/s. Dow Agrosciences India Pvt. Ltd. in ITA No.1443/Mum/2011, relating to assessment year 2004-05, order dated 10.08.2016. He further stressed that the benefit test of said Royalty payment was examined by the CIT(A) in assessment year 2010-11 and the same was accepted. He also pointed out that the assessee had furnished detailed note on the services provided by the associate enterprises against which the Royalty was being paid and all the documents evidenced that technical support was given by the associate enterprises. 47. The learned Departmental Representative for the Revenue placing reliance on the order of TPO pointed out that elaborate show cause notice was given to the assessee and after considering the reply of the assessee and since the assessee had not been able to establish the quantum of services rendered by associate enterprises, the aforesaid TP adjustment was made. Reliance was placed on the order of TPO in this regard. 48. We have heard the rival contentions and perused the record. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty and hence, the Royalty transaction was held to be not at arm's length. The first issue which has been raised before us is against justification of Royalty payment vis- -vis benefits received by the assessee and whether it was beyond the scope of TPO while determining the arm's length price of said transactions. The second issue raised before us was that the transactions undertaken by the assessee on account of Royalty payment were at arm's length or not. 50. The first aspect of the issue is that the assessee has been paying the said Royalty payment from year to year, which has been allowed in the hands of assessee by the TPO without making any adjustment in assessment years 2005- 06 to 2008-09. The Assessing Officer had also allowed the claim of assessee. Further, in assessment year 2010-11, it has been allowed by the CIT(A) and in assessment year 2011-12, allowed by the DRP. The second aspect is that whether the rate of Royalty approved by SIA / RBI would constitute CUP data and the transaction is at arm's length price. The Hon ble Bombay High Court in CIT Vs. SGS India Pvt. Ltd. (supra) has held so. The said proposition has also been laid down by the Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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