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TMI Blog2018 (12) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... al tax jurisprudence. Further, the allocation of concerned group expenses to different accounting units is a duly accepted accounting procedure. Furthermore, the assessee has used a CPA certificate for the allocation of intra group services from the AE. The authorities below have rejected the CPA certificate on the ground that underlying documents on the basis of which the CPA certificate has been issued has not been produced before them. In this regard, we note that the CPA certificate is quite specific and has been duly authenticated. We find that in Rule 10D, containing information and documents to be kept and maintained u/s.92D it has been duly mentioned that the information’s required under Rule 10D(2)(A) shall be supported by authentic documents which may include inter alia public accounts and the financial statements relating to the business of the associated enterprises. Hence, the evidence for international transaction can be duly supported by public accounts and financial statements relating to business affairs of the AE. With such mandate of law, in our considered opinion, the action of the authorities below in rejecting the CPA certificate is not sustainable. The variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Transfer pricing adjustment on account of corporate support services received from AE Erred in concluding that no direct evidence is produced to substantiate receipt of corporate support services from AE and also erred in applying CUP method for determining the ALP of the international transactions pertaining to payment of corporate support services to AE without identifying any comparable uncontrolled transaction. 2. Transfer pricing adjustment on account of business support services from AE Erred in concluding that no direct evidence is produced to substantiate receipt of business development support services from AE and also erred in applying CUP method for determining the ALP of the international transactions pertaining to payment of business development support services to AE without identifying any comparable uncontrolled transaction. Grounds of appeal in respect of Corporate tax adjustment 3. Disallowance of expenses of ₹ 3,14,07,000 pertaining to the Chennai unit of the appellant Erred in disallowing expenses of ₹ 3,14,07,000 pertaining to the Appellant's unit at Chennai on the grounds that the Appellant had leased out the factory building thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital goods 2,59,31,803 8 Sale of Capital Goods 6,46,658 9 Payment of rework charges 39,05,646 10 Payment of prototype charges 11 Business Development Support services received 5,34,80,267 12 Cost allocation to JCIPL - computer maintenance charges 19,78,425 13 Cost allocation to JCIPL - Insurance cost 8,52,254 14 Cost allocation to JCIPL - corporate support charges and contract design and development services 29,27,90,502 15 Reimbursement of expenses by JCIPL 7,13,71,710 7. Out of the above international transactions, the Assessee has voluntarily offered following amount for disallowance in the return of income:- Sr. No. Particulars Voluntarily offered for disallowance (Rs.) 1 Voluntary Transfer Pricing adjustment {in case of international transaction stated in S.No.2 of above table) 4,16,381 2 Voluntary Transfer Pricing adjustment (in case of international transaction stated in 5. No. 77 of above table) 27,32,688 3 Voluntary Transfer Pricing adjustment (in case of international transaction stated in S.A/o. 74 of above table) 2,04,148 4 Voluntary Transfer Pricing adjustment (in case of international transaction pertaining to reim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development, operations development and support, procurement and inventory control and quality assurance and Business support services like accounting & finance, human resources, investor relations, legal, risk management and tax) 11. During the course of assessment proceedings, based on the request of the TPO details about the nature of services provided by overseas Jabil Group entities, cost allocation methodology adopted as well as evidence of receipt of services by JCIPL were submitted to the TPO. However, in the TP order, the learned TPO rejected the ALP of cost allocated to JCIPL by stating that JCIPL failed to produce the supporting/evidence to substantiate that the services are rendered by the AE and the charge reflects the value/benefit of service received. Further, the learned TPO and learned AO applied CUP method to benchmark the said transaction. 12. Further during the year under consideration, JCIPL has received change of business development support charges amounting to ₹ 5,34,80,267 with respect to Echostar, Ericcson, NCR, Schneider, Solaria, Thales, etc. (which included a mark up of INR 27,32,688) provided by overseas Jabil group entities. However, JCIPL h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00/- per hour, the arms length compensation of the services rendered by the AE to the assessee, applying the cup method, is arrived at ₹ 1,27,50,000/-. Hence the arm's length price for payment towards these services is treated as ₹ 1,27,50,0007-by the TPO and an adjustment of ₹ 33..36 crores(Rs34.63crore-Rs.l,27crore/-) is made to the international transactions on a/c of IT and other support services charges paid by the assessee to the AE. The total adjustment made to the international transaction of cost allocation charges is ₹ 33.36 crores. Hence the arm's length price for payment towards these services is treated as 1.27 crores by the TPO and an adjustment of ₹ 33.36 crores is made to the international transactions on a/c of corporate cost allocation charges paid by the assessee to the AE. The total adjustment made to the informational transaction of cost allocation charges is Rs,33.36 crores/- 15. Against the above order, the assessee filed objections before the learned dispute resolution panel. 16. The dispute resolution panel referred to the additional evidences submitted by the assessee. The remand report obtained and the rejoinder fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is hardly of any evidentiary value in support of the services rendered by the assessee from its associated enterprises. It further noted that assessee has not furnished information regarding costs incurred by associated enterprise in providing the services. It noted that instead of submitting all the evidence for support of its claim for having availed the services, the assessee has contended that they are voluminous in nature and they are often captured internally on software is. It noted that assessee has submitted a CPA certificate. It noted that the said certificate furnished has no basis for determining the name and number of employees identified for rendering the service to Indian entity. That further the nature and details of the IT services claimed to have been rendered to the assessee have not been certified by the CPA. It noted that the assessee failed to identify the employees who were providing the services along with the qualification experience etc. It noted that the evidence furnished by the assessee before the panel in respect of cost allocation key are vague. It further noted that in respect of IT services claimed to have been rendered by the, associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various group entities. We are of the view that the TPO has not questioned the commercial expediency of such transaction entered into by the assessee, rather, has only worked out the arms length price of the purported service. We are further of the view that no services are rendered nor received by the assessee and what is received (if at all) do not take character of chargeable service. The perusal of the e-mails and other contemporaneous record only goes to show that incidental and passive association benefits have been provided by the AE. !n this view of the matter, there could neither be any cost contribution or payment for such service to the AE. Further, as no expenditure would have been incurred, there is no necessity to apply a particular method to arrive at such conclusion. The TPO has been more than fair in granting the deduction on estimates based on the evidence produced. Therefore, the adjustment done by the TPO on this ground is upheld. 5.44 However, the TPO has concluded that the assessee would have received some services for which he has already allowed the deduction for 1500 hours at the rate of Rs, 8,500 per hour. We are of the opinion that the number of hours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und to be correct. SAP system, if taken from a third party, would be required for all 364 days, 24 hours each day. Hence, the estimation done by the TPO with respect to the IT charges is not found in accordance with the demands of the system. Further, each SAP system is tailored to suit specific demands of clients. Such services are not openly available in the market and cannot be acquired at a short notice. Hence, the claim of the assessee that the services could only be obtained from a related party is also found tenable, 5.12. The assessee has submitted that the IT costs are allocated on the basis of number of users on the SAP system. In our view, this is a reasonable allocation key and should be accepted. 5.13. In tight of the above discussion, we respectfully differ from the decision of the DRP in the preceding year. The TPO is directed to segregate the IT cost allocation from the total corporate allocation. The IT cost allocation is to be taken as arm's length allocation and should be allowed as such. In respect of other cost allocations, the action of the TPO is sustained. 19. Against the above order the assessee is in appeal before us. 20. We have heard both the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are received (i) IT support services a) Description of nature of services availed - extract of transfer pricing report of Jabil US, including details of various IT departments, specific services provided by them and no. of individuals in each department b) Reasons tor availing services c) Break-up of costs for SAP license charges and related support charges and list of SAP users d) Copies of global IT contracts with SAP and other IT service providers e) Email correspondence regarding the SAP support service received Non-IT corporate support services Invoices for allocations received from Jabil US and Jabil Singapore (ii) Business support services a) Description of nature of services availed - extract of transfer pricing report of Jabil US, including details of various departments. specific services provided by them and no. of individuals in each departing b) Power point presentations i. Powerpoint presentation on lax package training dated 27th January 2 oil* ii. Learning process presentation :- A screenshot of the coaching material available for the employees of JCIPL at Jabil University - Learning management system provided by the SR iii. JABIL Legal presentati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and projections. xii. Email communication in respect of quarterly questions for audit & SEC completion of regions xiii. Email communication for correspondence for actual & forecasted cash flow xv. Email correspondence in relation to Quarterly bid Review (QBR) d) Frequently asked questions on intercompany manual ser\lice charges early cut offs (iii) Operations and logistics support services a) Description of nature of services availed -extract of transfer pricing report of Jabil US, including details of various departments, specific services provided by them and no. of individuals in each department b) Email communications i. Email correspondence evidencing communication in relation to the solar business (Cost centre 2001) ii. Email correspondences evidencing assistance in global supply chain management (for Cost centre 2002) iii. Email correspondences depicting services in relation to global quality programs & quality personnel (Cost Centre 3106) iv. Email correspondences evidencing receipt of services in relation to SCM optimization (Cost Centre 3141) v.Email & powerpoint presentation in respect of global manufacturing services vi. Email communication bv Keith Coch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... werpoint presentation for Scorecard improvement lorQ3 iii. Powerpoint presentation for .JABIL scorecard for Ericsson Copy of invoices i. Business development support services received Copy of inter- company invoices with .JAB 11, Circuit Inc- US-St Petersburg, FL (Florida) on sample basis. ii. Business development support services received - Copy of inter-company invoices with JABIL, Circuit Limited (Scotland-Livingston & Ayr) on sample basis. III Contract design & development services i. Copy of agreement for Sector strategic & R&D Investment ii. Design & R&D Approval form for sector specific charges to respective manufacturing locations iii. Invoices for allocations received from Jabil Belgium and Jabil Taiwan 22. The ld. Counsel of the assessee further referred to following case laws for his proposition as under: (I) Indirect charge method under OECD guidelines can be used to determine arm's length price of intra-group services. N LC Nalco (India) Ltd (2016) 71 taxniann.com 57 (Kol Tribunal) (II) TPO is precluded from commenting upon the necessity of services and need to make payment for the same Dresser-Rand India (P.) Ltd. [2011] 13 taxniann.com 82 (Mum) Emers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that the assessee has not submitted necessary evidence. The ld. Counsel of the assessee vehemently objected on the DR's plea to send the matter back. The ld. Counsel of the assessee submitted that the allocation keys are now part of IT rules under safe rules. He submitted that upto assessment year 2011-12, the allocation for business support services were duly accepted by the TPO and in A.Y. 2013-14, the allocation for IT services has also been accepted by the DRP. 26. Upon careful consideration, we note that the issue in dispute is the allocation of intra group services to be borne by the assessee from its AE in 16 worldwide localities. The assessee's allocation is based upon a global agreement between the AEs in this regard. Various allocation keys, i.e., asset, revenue, number of employee, depending upon the nature has been used. The allocation is supported by a CPA certificate. The Revenue's grouse is that necessary evidence in this regard for the veracity of allocation and incurring of expenditure has not been submitted. That the CPA certificate is not credible in absence of supporting documents on the basis of which the said certificate was issued. That there ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such an act of TPO and DRP cannot be set right by remitting the issue on this account. 28. We note that it is the claim of the assessee that the assessee has intra group AEs spread around the length and breadth of the globe. It has been claimed that the intra group services have been allocated on the basis of global agreement among the AEs. Proper allocation keys have been used and that the methodology adopted has the mandate of guiding of the OECD. In this regard, we note that in the OECD guidelines in the Chapter VII relating to special consideration for intra group services has observed that mainly two issues were to be considered, one was whether intra group service have in fact been provided. The other issue is whether the intra group charge for such services for tax purpose should be in accordance with the arms length principle. The OECD guidelines interalia also provide that the allocation of the group cost might be based upon the turnover or staff employed or some other basis. It mentioned that whether the allocation method is appropriate may depend upon the nature and use of the services. A reading of this OECD guidelines makes it abundantly clear that contrary to the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s asked to explain as to why the depreciation and expenses pertaining to the Chennai Unit should not be disallowed as the same had been let out and income from the same had been offered under the head income from house property. Further, the assessee was also asked to furnish the details of depreciation and expenses pertaining to the discontinued business of the Chennai unit. In response to the same, the assessee vide letter dated 04.03.2016, 15.03.2016 & 18.03.2016 submitted their explanation. The assessee relied upon the various judicial pronouncements including the decision of Hon'ble Supreme Court in the case Virmani Industries Pvt, Ltd. 216 ITR 607 and Hon'ble Bombay High Court in the case of Estate and Finance Ltd. 111 ITR 119 and other judgments and submitted that depreciation claimed is in respect of assets of the non-functional plant and the same is based on provisions of the Act, As regards the claim of expenditure on discontinued business of the Chennai unit, the assessee relied upon the decision of Hon'ble Supreme Court in the case of Produce Exchange Corporation (77 ITR 739). By relying upon the above judgement the assessee submitted that expenses incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee for claiming exchange loss of ₹ 1,96,30,000/-. Further, the other expenses claimed also were not allowable as the assessee had shown the income from the Chennai SE2 unit under the head income from house property. He was of the opinion that it was immaterial as to whether the entire unit was leased out or part of it was only leased out. When income from any capital asset had been offered under the head income from house property the expenses allowable will be those available under that head. In view of the above discussion the claim of the assessee for expenditure of ₹ 3,14,07,000/- (4,53,99,000-1,39,92,000) was disallowed as expenditure not incurred for the purpose of the business and added back to the total income of the assessee in the draft assessment order. 33. The assessee did not furnish the quantum of depreciation of Chennai SEZ unit, the income from which was shown under the head income from house property. From the perusal of the tax audit report it was seen by the A.O. that the assessee had claimed depreciation of ₹ 8,15,88,309/- in respect of building @ 10%. As per the submission of the assessee, it has 3 units, i.e., Rajangaon DTA u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difference, all that the assessee has submitted before us is that this is on account of restatement of noncapital creditors, it Is clear that this is only a notional loss and not a real loss incurred by the assessee. Therefore, the same cannot be allowed as a deduction. The assessee has also not furnished any details or documents in connection with this loss claimed by it so as to enable us to examine the genuineness of the same. Under the circumstances, the loss claimed by the assessee cannot be allowed as a deduction. In view of the aforesaid reasons, we uphold the action of the A.O. of disallowing the expenditure of ₹ 3,14,07,000/- claimed by the assessee in respect of the Chennai unit. 35. As regards, the issue of disallowance of deprecation, the DRP confirmed the action of the A.O. by holding as under: 8.6 We have considered the facts of the case and the submission made by the assessee. There is no dispute on the fact that no business operations have been/are being carried out from the Chennai premises from the last many years. In fact, the assessee has also admitted to the fact that the activities of the Chennai Unit stand discontinued since 2009. Therefore, it is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation on all the 10 items, it would be claiming excess depreciation to the extent of 9 assets, when the same have never been used for the purposes of the business. This cannot be closely allowed. In view of the aforesaid reasons, no depreciation can be allowed to the assessee. 8.10 The assessee has placed reliance on some decisions to support its claim. however, find that these decisions are on absolutely different issues having no relevance to the facts of the assessee's case. We, therefore, do not feel the necessity to discuss these cases here. Since the assessee has not furnished the details of the assets relating to the Chennai Unit and has also not given details of the depreciation claimed on these assets, we uphold the action of the AO of disallowing the depreciation in the manner computed by him. 36. Against the above order, the assessee is in appeal before us. 37. We have heard both the counsel and perused the records. In this regard, the ld. Counsel of the assessee has made the following proposition along with the case laws: (I) Expenses pertaining to any unit, even if closed, forming part of the same business, control and management cannot be disallowed Veecum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Our efforts over the years have been met with positive results and global customers have shown keen interest in awarding us business, which we can cater to in the facility set up by us. In view of these developments, we would request you to kindly extend the existing LOP for a further period of five years from 2012-13 to 2016-17. We enclose the Foreign Exchange Balance Sheet for the further 5-year period as required by you. We also enclose copies of all the past year's Annual Performance Reports duly certified by Chartered accountant for your ready reference. We request you to kindly extend the LOP for the further period of 5-years to enable us to revive operations and serve our customers. We thank you for your understanding and cooperation in this regard. 40. Upon careful consideration, we note that the authorities below are quite correct in holding that it is undisputed fact that no business operation have been/are being carried out from the Chennai premises for the last many years. The DRP has noted that the assessee has admitted to the fact that the activities of the Chennai unit stand discontinued since 2009. Furthermore, from the letter to The Development Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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