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TMI Blog2022 (5) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord. The subject payments are duly supported by agreements which details the nature of services performed by the associated enterprises to the assessee company. Given the above factual background, we find that the management fee and technology license fee are interlinked and interconnected with the business of manufacture. Given the difficulty / impossibility in computing ALP using CUP and considering the close nexus between the manufacturing activity and payment of management / license fees, the method to be adopted for benchmarking the above international transactions by the assessee ought to be TNMM. The TPO is accordingly directed to consider TNMM as MAM for determination of ALP for payment of license and management fees. The contention of the TPO that the assessee has not submitted the documentary evidence for the benefit received on account of services rendered is factually incorrect in view of voluminous evidences filed as a paper book. The assessee has also submitted a detailed note explaining the benefits received on account of payment of license and management fees. The TPO and the DRP have failed to consider the same in an objective manner. The Delhi High Court in CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned subsidiary of Bostik Australia Pvt. Ltd. which in turn is part of the `Bostik International Group'. The assessee is engaged in the manufacture of industrial adhesives, more particularly, applications used in the footwear industry, hotmelts, non-woven products consisting of hygiene product like diapers. The assessee also manufactures adhesives used in construction sector like water proofing. It is stated that the assessee has only one Indian employee director and the company has directly employed about 150 persons engaged mainly in production and marketing functions. It is stated that additional management support, assistance in decision making, strategic planning, etc. are received from the Bostik International Group. The assessee procures the material as required, carries out the manufacturing function, markets and sells the same to that parties situated mainly within India. 3. For the assessment year 2011-2012 to 2013-2014, the assessments were selected for scrutiny and as there were international transactions with Associated Enterprises (AEs), the Assessing Officer referred the matter under provisions of section 92CA(1) of the I.T.Act to the Transfer Pricing Officer (TPO) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch-Product customization expenses 81,07,973 40,49,304 10,78,000 Total 24,32,12,842 14,21,25,248 17,81,71,870 6. However, the TPO rejected the TNMM to determine the ALP in respect of payments for intra group services, namely, Technology License renewal fees, commercial services (IT support services) and management fee. The TPO instead proposed to adopt CUP for these transactions as the most appropriate methods. In the opinion of the TPO, these transactions were in a separate class of their own. It was observed by the TPO that the ALP of these transactions should not be determined using TNMM and issued a show cause notice based on this conclusion. The assessee in turn submitted a detailed response to the show cause notice. The content of same is reproduced in the order of the TPO passed u/s 92CA of the I.T.Act. The TPO, however, rejected the submissions of the assessee which inter alia pleaded that the Technology License Fee and the Management Fee paid by the assessee are so interdependent and interlinked with the main activity of manufacture and sale of adhesive products that these transactions should not be benchmarked separately. Further, the TPO proceeded to pass an orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s treated as Rs.Nil. 8. Consequent to the TPO's order, the AO served a draft assessment order with TP additions made by the TPO. Other than the TP adjustment, there were no other additions or modifications in the draft order for all the three relevant assessment years. 9. Aggrieved by the draft assessment orders for assessment years 2011-2012 to 2013-2014, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP passed orders giving directions to the TPO / AO. The DRP deleted the TP addition made towards `Commercial Services (IT Support Services) for two AYs out of three assessment years (no relief given for A.Y.2011-2012) :- 10. The observations/conclusions arrived by the DRP are summarized below: (Referring to DRP order for A Y 2013-14). (i) On page 3 & 4 the DRP's directions it was stated that "TNMM is not an appropriate method and a separate transaction approach was warranted in the case of the assessee relying on the Hon'ble Punjab & Haryana high court in IT Appeal No 182 & 172 of 2013(O&M) in the case of Knorr Bremse on whether composite transaction approach to be adopted or separate transaction approach to be adopted for evaluation of the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any expenditure in respect of the international transactions the assessee has to prove that the expenses have been incurred wholly and exclusively for the purpose of the business as per section 37(1) of the IT Act. The special provisions of chapter X of the IT Act overrides the general Provisions of the act which means that even if it is proved that the expenditure has been incurred, the assessee has to prove that such payment has been incurred for the purpose of the business. The appellant has to prove that such payment of expenses was in accordance with Arms length price." (iv) On page 8 of the DRP direction, it was held that "for claiming any deduction under section 37(1) of the Act, the onus is on the assessee to produce the evidences to prove the receipt of actual services". 11. Based on the aforementioned observations, the DRP confirmed the TP adjustment proposed by the TPO, except for providing relief by excluding payment for commercial services (IT support services) for two of the three years amounting to Rs.26,18,154 for A.Y.2013-14 and Rs.25,60,345 for the A.Y. 2012-13 (This relief was not given for the AY 2011-12). Consequent to the DRP's directions, final assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout following the due procedure in applying the CUP method as prescribed under Rule 10B(1)(a) of the Income-tax Rules, 1962. Further, it was submitted that there is no provision under the Rules and Act to construct a hypothetical CUP that too at `Nil' value. It was stated that the particular areas where the assessee had received services rendered by the AE are detailed in exhibits submitted before the lower authorities. It was submitted that the TPO has ignored the evidences submitted by the assessee to prove its case that the services rendered by the AE is required. It was contended that the AO has wrongly come to a conclusion that no commercial benefit was received by the assesee and no cost benefit analysis was furnished. It was submitted that it is settled position of law that reasonableness of the expenditure has to be seen from the point of businessman and not that of the Revenue. In this context, the learned AR has relied on various judicial pronouncements. 14. As regards the payment of commercial services is concerned (IT services of Rs.19,97,000) (only for assessment year 2011-2012), it was stated that Bostik SA France had rendered IT support services to the assessee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,01,67,905 2,67,01,782 Total 4,75,27,881 3,55,89,074 3,43,38,782 16.1 We shall first adjudicate the payments made for Technology License renewal fees and management fees. With respect to the above two payments to AE, the choice of method of benchmarking, the assessee has considered TNMM as MAM and the TPO has considered `hypothetical CUP' by rejecting TNMM. The basis of rejection of the method of benchmarking was by placing reliance on the ruling of ITAT Delhi Bench in the case of Knorr Bremse. (Refer TPO's order at para 6.4 for A.Y.2011-12). The decision relied on by the AO / TPO was, however, carried in appeal to the Hon'ble High Court and the Hon'ble High Court vide judgment dated 06.11.2015 remanded the matter to ITAT for reconsideration, whether the transaction ought to be benchmarked separately or whether TNMM could be adopted. The Delhi Bench of the ITAT in ITA No.5097/Del/ 2011 (order dated 31.05.2018) (Refer page 556 to 575 of the paper book-3 of A.Y. 2013-2014) ruled in favour of the assessee upholding TNMM for benchmarking license fee and Management Fee. Further, the ITAT Delhi Bench for subsequent years, i.e., A.Y. 2008-09, 2009-2010 and for A.Y. 2010-2011 (page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made towards it till A.Y.2011-2012. In this regard, we will follow the ruling of the coordinate bench in the case of Dresser Rand India Pvt. Ltd. in ITA No.8753/Mum/2010 wherein it had been held that "the fact that the assessee has availed services in the preceding years without any consideration or not is irrelevant. `The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that ALP of these services are Nil'. The contention of the TPO that the assessee has not submitted the documentary evidence for the benefit received on account of services rendered is factually incorrect in view of voluminous evidences filed as a paper book. The assessee has also submitted a detailed note explaining the benefits received on account of payment of license and management fees. The TPO and the DRP have failed to consider the same in an objective manner. The Delhi High Court in CIT v EKL Appliances Ltd [2012] 24 taxmann.com 199 held that so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purpose of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. The TPO and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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