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TMI Blog2019 (9) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... to know whether the services are required or not. Such issues should be left best to the commercial wisdom of the assessee. What is important is whether the services were rendered or not and whether the cost allocation was on a fair and reasonable basis. In the case on hand, the rendition of services has not been disputed. However, lot of emphasis has been put on the issue of Arm s length price in respect of the management fees. This aspect has also been well discussed by the Tribunal. - Decided against revenue X X X X Extracts X X X X X X X X Extracts X X X X ..... al, as pleaded in the memo of the tax appeal, is as under: "The decision of the Appellate Tribunal is erroneous. With respect to payment of management fee, the assessee failed to produce evidence in support for allocation of expenditure at 11.7% and also failed to provide the basis of the estimation of time spent by the President Asia Pacific for supervising the operations of the group entities. The assessee failed to demonstrate the claim of ALP of the management fee. No details were submitted to support of the estimation of time spent by the president-Asia Pacific and no basis was submitted for taking the figure of 11.72%. The assessee also failed to submit that how the experience of Mr.Lu was utilized for the benefit of the assessee company. In absence of any documentary evidences and concrete reply of the assessee to justify the receipt of benefit by the assessee from the payment of such management fees (through non submission of evidence to show that President -Asia Pacific had indeed devoted time for supervising the Operations) and in absence of any documentary evidence to justify the arm's length nature of this payment, the management fee was considered at NIL by the A0 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng activities being undertaken on behalf of the parent rather than any activity which could benefit the assessee. Therefore, it can be seen that the activities being undertaken by Mr. Lu are more in the nature of shareholding activities for the parent group and thus no charge for the same needs to be levied. iv. Further the assessee could not justify if such services were indeed required by it or called for by it from the Asia Pacific headquarters or they were simply piled upon it since it was a group entity. v. As per para 4.2 of the agreement, as reproduced below, all the expenses incurred by the office of Mr Lu are first required to be allocated to the "beneficiary" entities on the basis of time spent. "4.2 The APBA expenses referred to in clause 4.1 above shall be allocated to the Reporting entities on the basis of time spent, which is best estimated and determined by the PAP, on each of the reporting entities in accordance with the business volumes and complexity of operations. The APBA expenses so allocated among the reporting entities as provided in this clause 4.2 shall be shared in accordance with the following ratio (Cost sharing ratio"):- GNB-H:2.42%, Exide-C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income tax law nowhere provides any reliance of transfer pricing report of AE as an evidence for the determination of ALP of any transaction of Indian entity. The Indian entity has to prove the ALP of its transaction analyzing in detail in its own transfer pricing report; while the assessee has failed to analyze in detail the Management services in its report. Again this report only enumerates the nature of the services but doesn't provide any proof of actual services received by the various entities including the assessee. On perusal of above, it is clear that the cost sharing is not being made on the basis of time spent, it has been fixed alleged expenses occurred. It is to be noted that the date of signing the agreement is 3.12.2009 while the agreement is stated to be effective on April 1, 2009 (Clause 3.3 of the agreement). This means that the agreement is not made prior to rendering any service rather it shows that it is an arrangement after the alleged services have been rendered just to siphon the revenue in the form of cost sharing from the assessee to its AEs. It is interesting to note that in both the agreements, the cost allocation ratio between various countries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove, it is clear that since there was no requirement for such payment and the assessee somehow wanted to make such payment, it was made on an ad-hoc basis. Further, the assessee submitted Transfer Pricing Report of Exide Technologies (Shanghai) Co. Ltd., China. This document just gives a theoretical analysis of cost digestion which is not substantiated by ample documentary proofs supporting the methodology adopted in this report, in absence of detailed computations and other supporting documentation this report cannot be accepted as a justification of management fee to be at APL. Thus, the asessee fails on both the counts i.e. substantiation of the requirement for such payment with direct and substantial benefit arising out of the same and substantiation of the basis of payment. As a result of the above, the Arms length Price of the management fees paid by the assessee is taken as NIL. Similarly, Management fee charged by Exide Technologies Inc, USA is also not justifiable on the basis of reply of the show cause. i. During T.P. proceedings for this A.Y. 2010-11, the assessee had submitted 'Expense Sharing Agreement' made on 17th March 2010. In clause 4 of this agreement the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit" from these services or not is not really relevant. That should be best left to the commercial wisdom of the assesses. What is material is whether the services were rendered or not. and whether or not the cost allocation was on a fair and reasonable, even if not wholly precise and accurate, basis and both of these tests are clearly satisfied on the facts of this case. it is also not a case in which benefits are so trivial or illusory that it can be said that the assesses did not derive any benefit from these services at all. The emails, correspondence and other corroborative details clearly show rendition of services, and the allocation being on approximate time basis show reasonableness in allocation of costs. As for the fact that the date of agreement is a date subsequent to commencement of work under the agreement, nothing really turns on it inasmuch as the existence of a formal agreement is not even a sine qua non for a cost contribution arrangement. it is not the case of the revenue that the agreement is not a sham agreement. The agreement may have been formally entered into on a later date but it covers the entire period and there is no dispute about rendition of services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke any other view of the matter than the view so taken by the co-ordinate bench. Respectfully following the same, we are unable to see any legally sustainable merits in the impugned arm's length price adjustments in respect of insurance premium share as well." 10. Mr. J.P. Shah, the learned senior counsel is on a caveat. Mr. Shah has vehemently opposed this tax appeal. He submitted that having regard to the findings of fact recorded by the Appellate Tribunal, the Revenue should not have preferred the present appeal, more particularly, having regard to the scope of Section 260-A of the Act. Mr. Shah laid much emphasis on the fact that there is no dispute about the rendition of services. According to Mr. Shah, if there is no dispute at the end of the Revenue as regards the rendition of services, then the other issues which were considered by the Dispute Resolution Panel would pale into insignificance. He submitted that none of the two questions proposed by the Revenue could be termed as questions of law much less substantial questions of law. 11. The Karnataka High Court, in the case of Pr. Commissioner of Income Tax, Bangalore & Ors. vs. Softbrands India P. Ltd., reported in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 260-A to High Court and Section 261 to the Hon'ble Supreme Court are applicable to these special assessments under Chapter X as well." 12. In para-11 of the judgment, the Hon'ble Court diluted upon the following three questions; "[I] The analysis of the provisions relating to the Transfer Pricing/ determination of the 'Arm's Length Price'; [II] The Scheme of procedure of assessment and appeals to the Tribunal and High Court/Supreme Court. [III] The scope of interference by High Court under Section 260-A of the Act in these type of cases." 13. The Court, thereafter, expressed its prima facie opinion as regards the transfer pricing adjustments. "Prima Facie Opinion: 15. We are of the considered opinion that this entire exercise of making Transfer Pricing Adjustments on the basis of the comparables is nothing but a matter of estimate of a broad and fair guess-work of the Authorities based on relevant material brought before the Authorities including the Appellate Tribunal, but nonetheless the Tribunal being the final fact finding body remains so for this Special Chapter X also and therefore, unless this Court is satisfied that a substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to call such findings of the Tribunal perverse in any manner so as to require our interference under Section 260-A of the Act. 18. We now take up the analysis of Section 260- A of the Act which we have already said is in pari materia with Sections 100 and 103 of the Civil Procedure Code. 19. The said provisions are quoted below for ready reference and comparison. Section 260-A of the Income Tax Act, 1961 reads as under: "260A - Appeal to High Court: (1) An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal [before the date of establishment of the National Tax Tribunal], if the High Court is satisfied that the case involves a substantial question of law. (2) [The [Principal Chief Commissioner or] Chief Commissioner or the [Principal Commissioner or] Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under this sub-section shall be-] (a) filed within one hundred and twenty days from the date on which the order appealed against is [received by the assessee or the [Principal Chief Commissioner or] Chief Commissioner or [Principal Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstantial question of law is involved in any case, it shall formulate the question. (5) The appeal shall be heard on the question so formulated and the respondent shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question: Provided that nothing in this sub- section shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law, not formulated by it, if it is satisfied that the case involves such question." Section 103 - Power of High Court to determine issues of fact - In any second appeal, the High Court may, if the evidence on the record is sufficient, determine any issue necessary for the disposal of the appeal, - (a) which has not been determined by the lower Appellate Court or both by the Court of first instance and the lower Appellate Court, or (b) which has been wrongly determined by such Court or Courts by reason of a decision on such question of law as is referred to in section 100." What is a Substantial Question of Law? 20. From a bare comparison of the provisions quoted above and as discussed in various judgments of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sub- Section (6) of Section 260-A of the Income Tax Act, 1961 to submit that the High Court can touch upon the issues of facts also in an appeal under this provision bereft of substantial question of law, is a misconceived argument. 24. In our opinion, both the Clause (a) and Clause (b) of Sub-Section (6) of Section 260-A of the Act are circumscribed by the words 'by reason of the decision on such question of law as is referred to in Sub- section (1)'. Therefore, even if an issue which has not been determined by the Tribunal, which was required to be so determined in terms of the answer to the substantial question of law given by the High Court, such an issue not determined by the Tribunal could also be decided by the High Court with reference to Clause (a) and more so, if such an issue has been wrongly decided according to the answer given by the High Court to such a substantial question of law, then also the High Court can set it right to fall in line with the answer given by the High Court to such a substantial question of law raised before it and determined by it in terms of Clause (b) thereof. 25. Sub-section (6) of Section 260-A of the Act, therefore, does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Hazari Vs. Purushottam Tiwari (Deceased) by LRs., [2001] 3 SCC 179, another Three Judges' Bench of the Honble Supreme Court explained the meaning of the substantial questions of law in paras.11 and 12 in the following manner. "11. Even under the old Section 100 of the Code (pre-1976 amendment), a pure finding of fact was not open to challenge before the High Court in second appeal. However the Law Commission noticed a plethora of conflicting judgments. It noted that in dealing with second appeals, the courts were devising and successfully adopting several concepts such as, a mixed question of fact and law, a legal inference to be drawn from facts proved, and even the point that the case has not been properly approached by the courts below. This was creating confusion in the minds of the public as to the legitimate scope of second appeal under Section 100 and had burdened the High courts with an unnecessarily large number of second appeals. Section 100 was, therefore, suggested to be amended so as to provide that the right of second appeal should be confined to cases where a question of law is involved and such question of law is a substantial one. (See Statement of Objects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a question of fact. But the legal effect of the terms of a document is a question of law. Construction of a document involving the application of any principle of law, is also a question of law. Therefore, when there is misconstruction of a document or wrong application of a principles of law in construing a document, it gives rise to a question of law. (ii) The High Court should be satisfied that the case involves a substantial question of law, and not a mere question of law. A question of law having a material bearing on the decision of the case (that is, a question, answer to which affects the rights of parties to the suit) will be a substantial question of law, if it is not covered by any specific provisions of law or settled legal principle emerging from binding precedents, and involves a debatable legal issue. A substantial question of law will also arise in a contrary situation; where the legal position is clear, either on account of express provisions of law or binding precedents, but the Court below has decided the matter, either ignoring or acting contrary to such legal principle. In the second type of cases, the substantial question of law arises not because the la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain the scheme of assessment of the Transfer Pricing Cases. "Scheme of Assessment of the Transfer Pricing Cases: 32. Let us briefly now discuss the Scheme of assessment under Chapter X relating to Transfer Pricing cases of International Taxation under these provisions in income arising from international transactions which shall be computed having regard to the 'Arm's Length Price' (Sec.92). 33. Section 92-A defines an 'Associate Enterprise' viz., the Company which participates directly or indirectly, or through one or more intermediaries, in its Management or control or Capital of the other Enterprise by holding more than 26% of the share holding in such other Enterprises and satisfy the other criterias as stated in Section 92-A of the Act. 34. The word 'International Transaction' is defined in Section 92-B of the Act. 35. The most important provision concerning us in this batch of cases is Section 92-C of the Act which provides for 'Computation of Arm's Length Price' and the said provision stipulates that the 'Arm's Length Price' in relation to the international transactions shall be determined by following any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority in pursuance of the directions of the Dispute Resolution Panel (DRP) is directly appealable to the Income Tax Tribunal under Section 253 (1) (d) of the Act. Section 254 of the Act empowers the Appellate Tribunal to pass such orders on the appeals 'as it thinks fit' after giving an opportunity of hearing to both the parties. 38. From the aforesaid Scheme of assessment with regard to international transactions, it is clear that the process of determination of 'Arm's Length Price' has to be undertaken by the Expert Wing of the Income Tax Department which is manned by Transfer Pricing Officer (TPO) and at the higher level by a Collegium of three Commissioners in the form of Dispute Resolution Panel (DRP) whose orders on questions of facts are appealable before the highest fact finding body, viz., the Appellate Tribunal. 39. The process of determination of 'Arm's Length Price' as observed above, necessarily takes into account the comparable cases of other similarly situated or nearly similarly situated Corporate Entities whose data are in public domain or on the Data Bases like Prowess and Capital Line Data Base etc." 16. The Court, thereaft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual informations nor any technical expertise is available with this Court to undertake any such fact finding exercise in the said appeals under Section 260-A of the Act. This Court is only concerned with the question of law and that too a substantial one, which has a well defined connotations as explained above and findings of facts arrived at by the Tribunal in these type of assessments like any other type of assessments in other regular assessment provisions of the Act, viz. Sections 143, 147 etc. are final and are binding on this Court. While dealing with these appeals under Section 260-A of the Act, we cannot disturb those findings of fact under Section 260-A of the Act, unless such findings are exfacie perverse and unsustainable and exhibit a total nonapplication of mind by the Tribunal to the relevant facts of the case and evidence before the Tribunal. 45. Otherwise if the High Court takes the path of making such a comparative analysis and pronounces upon the questions as to which Filter is good and which comparable is really comparable case or not, it will drag the High Courts into a whirlpool of such Data analysis defeating the very purpose and purport of the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware Giant Infosys or Wipro are compared to a newly established small size Company engaged in Software service, it would obviously be wrong and perverse. The very word "comparable" means that the Group of Entities should be in a homogeneous Group. They should not be wildly dissimilar or unlike or poles apart. Such wild comparisons may result in the best judgment assessment going haywire and directionless wild, which may land up the findings of the Tribunal in the realm of perversity attracting interference under Section 260-A of the Act." 18. In the last, the Court concluded as under: "The procedure of assessment under Chapter X relating to international transactions as indicated above is already a lengthy one and involves multiple Authorities of the Department. A huge, cumbersome and tenacious exercise of Transfer Pricing Analysis has to be undertaken by the Corporate Entities who have to comply with the various provisions of the Act and Rules with a huge Data Bank and in the first instance they have to satisfy that the profits or the income from transactions declared by them is at 'Arm's length' which analysis is invariably put to test and inquiry by the Authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed. 57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an 'Arm's Length Price' in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court. " 19. The Delhi High Court, in the case of CIT vs. EKL Appliances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm‟s length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm‟s length principle, the guidelines provide for "recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below: - "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment 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. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously ..... X X X X Extracts X X X X X X X X Extracts X X X X
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