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TMI Blog2017 (11) TMI 1881X X X X Extracts X X X X X X X X Extracts X X X X ..... wide range of systems and equipment for civil and military airplanes and helicopters. Return of income for the assessment year 2010-11 was filed disclosing 'nil' income. The assessee-company also reported the following international transactions in its 92CE report: The assessee-company also submitted Transfer pricing (TP) study report applying TNMM as the most appropriate method and 12 comparables were selected by the tax-payer. 3. The Assessing Officer (AO) selected the case for scrutiny and referred the matter to the Transfer Pricing Officer (TPO) for the purpose of bench marking international transaction. The TPO, vide order passed order u/s 92CA, accepted that the international transaction relating to software development services and receipt of reimbursement of expenses are at arm's length. However, as regards payment of management technical support and professional fee (intra-group services), the TPO called upon the respondent-assessee to furnish the following documents in order to verify whether specified services are rendered at all, if services are rendered what is the basis for such payment and whether two independent parties will be willing to pay any consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence to show that a tangible and direct benefit is derived by the Taxpayer in paying the above amounts to the AEs. If no benefit is derived by the Taxpayer or the benefit derived is remote or the benefit is for the entire group, the same is not charged. Unless it is shown that tangible and direct benefit is derived by such payment, the arm's length price of intra-group service payments would be treated as Rs. Nil. 1.6 The details of similar payments made by the Taxpayer during the earlier three years and the subsequent two years with corresponding turnovers and net operating profits. 1.7 During the FY 2009-10, you have paid an amount of Rs. When any such huge amount is paid by way of Management fees/intra group service payments by unrelated parties, the parties there to would like to know what services one party is going to receive from other much before the start of the year and also how these services are going to be quantified. 1.8 The quantification of such services and also the basis for such apponionment if it is the case, as the Management fees/intra group services would have been rendered to various other group entities also. In this regard, please also jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceiving services to establish the relationship between the relevant services and the members' activities and performance. 1.13 Even if a service is rendered, the amount of the charge for such services must be determined based on arm's length principle. This requires a detailed cost benetit analysis by the Taxpayer like any other independent entity. An independent entity in an identical situation would examine whether it can get such services from third party or can do it on its own. It also examines alternatives for service providers and selects one service provider to which it would pay in accordance with the economic benefit derived by it from such services. Not only the mark-up but also quantification of service itself is the subject matter of transfer pricing. In this regard, please pluvidc thc quantification of such services in terms of actual expenditure incurred and commensurate benefits derived there from. 1.14 Whether any part Of the Management fees / intra group services rendered to the Taxpayer are in the nature of stewardship activities or shareholder activities, please submit the details of such expenses incurred by the AE(s) and charged to the Taxpayer, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work, * Technical proposal * Ledger a/c; invoice copies It was further submitted that the Program manager and the managing Director are employees of Techos SA who have been dedicated to work for SAIPL and their cost (salary, etc) are initially borne by Teuchos SA and later cross charged to the Indian entity. The nature of work performed by them is stated to be as per the description of services narrated at Pg 7 -Pg 18 of the submissions. 2.2 A perusal of the functions listed in the submissions is akin to those activities which the O CD has classified to be in the nature of 'shareholder' or 'stewardship activities'. The Taxpayer has submitted that there was a choice before it in respect of choosing to utilize the se ices of the program manager and the Managing deputed from the parent company. The submission is reproduced below: As has been mentioned earlier, there are group entities within the Safran Group with which Safran India competes for the same works thereby necessitating Safran India to pitchfor work within the Group. Therefore, it is impraiive for Safran India to have real time knowledge about the opportunities within the group and also h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices provided to AE are at arm's length and management services fee paid to be at 'nil' The DRP further held that differential between shareholders or stewardship activities is established. The relevant directions of the DRP are extracted below: 2.8 However, the treatment Of the ALP for the said fee at 'nil' is found to be erroneous and it shows that the TPO has not taken into account the specific business model of the taxpayer wherein it functions as a profit centre. Since the management fee paid is factored in while deciding the hourly rates to be charged to the AE, and the cost recovered therefrom, the TPO cannot simultaneously hold that the margins in the software development services provided to the AE are at arms' length but the management service fee was to be taken at 'nil'. The differentiation from shareholder or stewardship activities is aIso established. From the break-up of the details of the services it is also evident that the technical fee paid to the Managing Director was not a component of the impugned charges in the earlier year's for which the TPO has made adjustment. A blind reliance on the earlier years order, even though the facts h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LPs are pending before the Hon'ble Supreme Court. 6. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 7. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above. 8. Ground Nos.1, 6 and 7 are general in nature and do not require any adjudication. 9. Ground No.2 challenges the direction of the DRP suggesting nil adjustment on account of payment of management fee to its AE. 9.1 The ld.CIT(DR) contended that the DRP was not justified in deleting ALP adjustment on account of payment of management service fee. The respondent-assessee had failed to justify the payment of management services and failed to prove receipt of services from AE. The ld.CIT(DR) submitted that the DRP had deleted ALP adjustment without examining any evidence and without meeting objections raised by the TPO. She further submitted that in the immediately preceding years i.e. assessment year 2006-07 in ITA No.1261/Bang/2010 the Tribunal confirmed the ALP adjustment for want of evidence in support of receipt of ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement fee received by it. (iv) The assessee changed its stand many times during the course of the hearings that the payment is made towards marketing services and / or brands, trademarks etc." 11. No doubt, now it is settled proposition of law that it is beyond scope and powers of AO/TPO to question the necessity of incurring any expenditure. The Hon'ble Delhi High Court in the case of EKL Appliance Ltd. (supra) held that TPO cannot determine the ALP at Nil by holding that there was no need to incur any expenditure. The above decision was followed by the several coordinate benches of the Tribunal, some by them are as follows: i. Dresser-Rand India (P.) v. Addl. CIT [2011] 13 traxmann.com 82/[2012] 53 SOT 173 (Mum.) ii. Ericsson India (P.) Ltd. v. Dy. CIT [2012] 25 taxmann.com 472 (Delhi) iii. AWB India (P.) Ltd. v. ACIT [IT Appeal No. 4454 of 2011] (Delhi); iv. SC Enviro Agro India Ltd. v. Dy. CIT [2013] 34 taxmann.com 127/143 ITD 195 (Mum. - Trib.) v. Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxmann.com 27 (Delhi) vi. McCann Erickson India (P.) Ltd. v. Addl. CIT [2012] 24 taxmann.com 21 (Delhi) vii. DSM Anti-Infectives India Ltd. v. Addl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f avoiding tax are serious enough to doubt the genuineness of transactions. The appellant had made no effort to controvert the findings of the TPO. Therefore, in our considered opinion the TPO/AO is justified in adopting ALP at Nil. 13. Now we shall deal with the alternative submission of the learned counsel for the appellant that the transaction of management and support fee should be bundled with other transactions and bench marked by adopting TNMM cannot be accepted for the reason that bundling of transactions is permissible only when the transactions are closely related to each other and reliance in this regard can be placed on the decision of Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 and Punjab Haryana High Court in the case Knorr Bremse India (P) Ltd. v. Asstt. CIT [2016] 380 ITR 307/236 Taxman 318/[2015] 63 taxmann.com 186. It is not the case of the appellant that these transactions are closely linked with the other transactions and therefore the submission that these transactions should be bundled with other transactions cannot be accepted." 11. In the present case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of CIT vs. EKL Appliances Ltd. (345 ITR 241), after considering the judgment of the Apex Court in the case of CIT vs. Walchand & Co. P.Ltd. (65 ITR 381)(SC), Sassoon J.David & Co. Pvt. Ltd. vs. CIT (118 ITR 261)(SC) held that the TPO cannot determine ALP at nil by holding that there was no need to incur such expenditure. While coming to this conclusion, the Hon'ble High Court has referred to the judgment of the Apex Court in the case of Eastern Investments Ltd. vs. CIT (20 ITR 1)(SC) and CIT vs. Rajendra Prasad Moody (115 ITR 519)(SC). It has been held by the Hon'ble High Court that : "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 que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show 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 unremuner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 475/Del/2015 - AY 2010-11 xii. Hughes Systique India P. Ltd. v. ACIT: [2013] 25 ITR (Trib) 556 (Delhi) - AY 2007-08, 2008-09 xiii. Knorr-Bremse India (P.) Ltd. v. ACIT: [2013] 56 SOT 349 (Delhi) - AY 2007-08 xiv. Thyssen Krupp Industries India (P.) Ltd. v. ACIT: [2013] 55 SOT 497 (Mumbai) - AY 2007-08 xv. LG Polymers India P. Ltd. v. ACIT: [2012] 16 ITR (Trib) 240 - AY 2006-07 Thus, in the light of above legal position, though ALP of services by AE cannot be determined at 'nil' by questioning the necessity, the benefits of expenditure incurred, such expenditure can be allowed only after proving conclusively that there was actual rendition of services by AE. The onus lies on the assessee to prove that the services are actually rendered by the AE. In this context, we may point out to the decision in the case of Hon'ble Supreme Court in the case of Laxmi Narayan Madanlal vs. CIT (86 ITR 439) wherein it was held as follows:......... Thus, for allowability of this kind of expenditure, condition sine qua non is proof of actual services rendered. The co-ordinate bench of the Tribunal, to which one of us i.e. the Accountant Member is the author of the order, in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Schneider Electric (Ind.) Ltd Vs CIT (21008) 304 ITR 360 (Del.) held that in the absence of material on record suggesting that the commission agents had procured the sale orders, no commission should be allowed. The relevant para of the judgment is reproduced below; "13. We agree with the Tribunal that there is absolutely no material on record to suggest that M/s Ram Agencies had procured any sale orders for the assessee. The production of a few bills or payment having been made by account payee cheques cannot by itself show that M/s Ram Agencies had procured sale orders for the assessee. Apart from an internal note, there is no evidence of any correspondence or any personal; meetings etc. between the assessee and M/s Ram Agencies to suggest that the was any relationship on the basis of which M/s Ram Agencies procured some orders for the assessee for which it was entitled to receive commission. Moreover, we find that the understanding between the parties was an oral understanding and it appears to be doubtful that such an oral understanding can be arrived at without any long standing relationship having been established between the assessee and M/s Ram Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re actually rendered by the AE or not and direct the TPO/AO to bench mark the transaction of rendering of services of market management support services, after being satisfied himself that the services are actually rendered by the AE. 11. On the principle of consistency, we hold that each assessment year is separate and distinct. The principles of res judicata have no application to income-tax assessment proceedings. Simply because in the preceding year, this expenditure came to be allowed without any probe or enquiry it does not preclude the AO from making the enquiries on these issues. 11. Now, in the present case, assessee-company had not discharged the onus of proving the receipt of services before lower authorities. Despite opportunities given to the assessee-company, no attempt was made by the assessee-company to lead necessary evidence in support of receipt of actual services from the AE. The submission of the assessee-company that an opportunity may be granted to the assessee-company to discharge onus, cannot be accepted because it is settled principle of law that the assesseecompany cannot be given a second innings to patch up the weak parts of its case. Reliance can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicata is not applicable. Therefore, we do not find any merit in the submissions made by the learned counsel for the assessee for remand of the matter to the file of the TPO for de novo examination. Hence, grounds of appeal filed by the revenue in this regard are allowed. 12. Ground No.3 challenges directions of the DRP to consider interest income as part of eligible profits of the undertaking for purposes of computation of deduction u/s 10A. The direction of the DRP is in consonance with the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Motorola India Electronics (P) Ltd.(265 CTR 94). Therefore, we do not find any reason to differ with the direction of the DRP. Ground of appeal in this regard is dismissed. 13. Grounds No.4 & 5 challenge direction of the DRP to reduce expenditure incurred in foreign currency on travel and telecommunication to be reduced from both export turnover as well as total turnover. This direction is line with the decision of the Hon'ble jurisdictional High Court in the case of CIT vs. Tata Elxsi (349 ITR 98). We do not find any merit in the ground of appeal filed by the revenue and are accordingly dismissed. 14. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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