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TMI Blog2023 (8) TMI 1105X X X X Extracts X X X X X X X X Extracts X X X X ..... g TNMM method, began with the rejection of the segmental accounts of the assessee, we deem it fit to restore this issue to the file of the TPO. The entire issue relating to the determination of ALP of international transaction of the sale is restored back to the TPO, to be determined afresh after first dealing with the aspect of justifiability of segmental data submitted by the assessee along with the MAM adopted by it for determining the ALP of the transaction. Needless to add the assessee be provided due opportunity of hearing in this regard. Addition u/s 37(1) - payment of Management fees, SAP and Opti-mill fees and Business Area Service fees disallowed by concluding that the expenses are not incurred wholly and exclusively for the purpose of business - HELD THAT:- The said expenses could not be held as not having been incurred wholly and exclusively for the purpose of business of the assessee. As rightly pointed out by the ld. counsel for the assessee, there are several judgments including that of Apex Court laying down the principle to be applied for determining allowability of expenses under section 37(1) of the Act and this principle have emerged over years by virtue of judi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee has sufficiently demonstrated before us that the invoices were raised during the year by Ahlstrom Corporation, Finland on the issue and related to the bank guarantee commission for the impugned year alone. No hesitation in holding that the bank guarantee expenses paid by the assessee pertained to the impugned year, and could not disallowed as prior period expenses u/s 37(1) - order of the DRP/ AO holding so, is accordingly set aside. Disallowing bank guarantee expenses, as being disallowable in terms of section 40(a)(i) of the Act for non-deduction of tax at source - assessee pointed out that despite exhaustive contentions raised by the assessee against the applicability of Article 21 of the DTAA between India and Finland to the transaction of reimbursement of Bank guarantee commission, the DRP held Article 21 applicable without dealing with the contentions of the assessee - HELD THAT:- As agreed that the issue needed reconsideration by the AO. In view of the same, the issue of disallowance of bank guarantee commission is restored back to the AO to be dealt with after considering the arguments raised by the assessee. The AO is directed to pass a speaking order after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the Ld. TPO erred in selecting certain functionally dissimilar companies as comparable to benchmark the international transaction of sales of goods to AEs under TNMM approach. The Appellant prays that the addition made by the Ld. AO/TPO in relation to the international transaction of sales to AE be deleted. 5. As is evident from the above, the issue in the above grounds relates to transfer pricing adjustment made in relation to the international transaction of sales made by the assessee with its Associate Enterprise (AEs). 6. Brief background of the case is that the assessee, M/s Ahlstrom Fiber Composites India Pvt. Ltd. (AFCIPL), was incorporated in 2008 and is a subsidiary of Ahlstrom Corporation, Finland. The assessee is engaged in the production of variety of non-woven fabrics. It started commercial production from April 5, 2010 and the Asst. Year 2011-12, the impugned year before us, was the first year of production of the assessee. During the impugned year, due to certain technical issues, it could not manufacture the desired products, being anti-static/alcohol repellent treated advanced non-woven, and therefore in order to utilize its large production capacity, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable for the CPM selected by it for benchmarking international transaction and that the ld. TPO had rejected the segmental accounts on frivolous basis, without pointing out any specific defect in the same. That further the DRP had failed to adjudicate the objections of the assessee before it in this regard. He drew our attention to the show cause notice issued by the TPO during TP proceedings, reproduced at page no. 3 of the order of the TPO, pointing out therefrom the basis with the TPO for rejecting the segmental accounts of the assessee as being; i) That as per the Notes to Accounts to the audited accounts of the assessee, there were no primary reportable segments; ii) That despite the same, the assessee had submitted segmental accounts in relation to its export and domestic segments, with the exports segment being further bifurcated into AE and non-AE segment. That these segmental accounts were verified by Chartered Accountants, who had not prepared the audited accounts of the assessee. Our attention was drawn to the show cause notice, bringing out the above at para 4-1 of the order as under: 3. (i) As per Note-15 to the accounts, the company has determined its bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al data as per the AS-17 in the audited accounts; but for the purpose of benchmarking of international transaction on sales, the assessee had got the segmental accounts prepared with the respect to the AE and non-AE segments of export sales undertaken by it, thus creating data relating to an internal comparable. He therefore stated that the mere fact that the segmental accounts were not reported in its audited balance sheet and /or were audited by some other C as who were not auditors of the assessee company, made no difference nor had any effect on the veracity of segmental accounts. He therefore stated that TPO had given no cogent reason for rejecting the assessee's segmental accounts. 11. To this, the ld. DR countered by stating that segmental accounts prepared by the assessee were not reliable since they reflected huge difference between the profits of the AE export segments and the non-AE export segments which was as high as 19.21%; that segmental analysis by the assessee was cryptic and there was no notes or explanation to justify allocation of expenditure between two segments nor any material was produced before the TPO; that even prima facie, it was evident from a very sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the months; ii. in correlating the payment of management charges with the sales/production; iii. in stating that the agreement is one sided and is only taking care of Ahlstrom Non-woven LLC; iv. in questioning the business requirement of the services; v. in stating that the payment mechanism is nothing but a mere revenue sharing agreement with the group entities and vi. in stating that services paid for do not provide any benefit or provide benefit that are duplicative in nature. 2.2 On the facts and in the circumstances of the case and in law, the Ld. AO under the directions of Hon'ble DRP, erred in not appreciating the observation of the Ld. TPO that no adverse inference have been drawn for the international transactions of Management fees and Business Area Service Fees. The Appellant prays that the additions made by the Ld. AO in relation to the disallowance of Management fees, SAP and Opti-mill fees and Business Area Service fees be deleted." 15. The facts relating to the issue are that expenditure amounting in all to Rs. 1,60,83,722/- incurred on account of the following were disallowed under section 37(1) of the Act: i) Management fees : Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not have made any disallowance under section 37(1) of the Act. 20. With regard to his contention on the nature of services received by virtue of these expenses being established to the AO, he drew our attention to the facts noted by the DRP in its order as reproduced above vis-à-vis these expenses, and pointed out that the payment for management fee and SAP & Opti-mill service charges had been made in lieu of agreement entered into by the assessee with M/s Ahlstrom Corporation dated 1.1.2001 for intra-group Service arrangement for management and advisory services in the field of human resource, IT, legal, risk management, finance, etc and for receiving software support with respect to SAP and Opti-mill business IT system (inventory management software) . That the charges were based on actual cost incurred by Ahlstrom Corporation plus markup of 10%; that these services were rendered to all group companies; that the business area service fee was incurred for sharing costs and benefits of the joint management and advisory function of the business area in which the assessee operated i.e. food and medical business area. The business area team with the Ahlstrom Group from time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad "management charges" could not be stated to be wholly and exclusively for the purpose of business, since in addition to these expenses, the assessee had incurred office expenses, misc. expenses was also demonstrated to the DRP to be misplaced. He contended that it was pointed out to the DRP that payment for management services rendered by the Ahlstrom Corporation was completely different from the administrative expenses incurred by the assessee under the head "office expenses" and "Misc. Expenses", pointing out that office expenses included expenditure incurred on account of purchases of office consumables, cleaning, books & periodicals etc. whereas management charges were for general management, business development, financial advisory services etc. He drew our attention to the submissions explaining anomaly pointed out to the DRP from para 4.8.22 to 4.8.32 and 4.8.43 as under: "4.8.22 Ld. AO in the order has mentioned that the services are not rendered for all the months. All the invoices have been raised in the third and fourth quarter of FY 2010-11. This shows that the activities of the Assessee can be carried out even without these services. In arriving at this conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in various judgments it has been laid down that for expenses incurred relating to the business of the assessee, the assessee cannot be questioned on the purpose for incurrence of such expenses, that whether any expenses are required or not is a matter of business prudence. In this regard, he drew our attention to the following decisions: i) Atherton Vs. British Insulated & Helsby Cables Ltd., (1925) 10 TC 155; ii) Eastern Investments Ltd. Vs. CIT (1951) 20 ITR 1 (SC) iii) CIT Vs. Microsoft Corporation of India P. Ltd., (2008) 220 CTR 410 (Delhi); iv) Ravi Marketing P. Ltd. Vs. CIT (2006) 280 ITR 519 (Cal); v) Sassoon J. David & Co. P. Ltd. Vs. CIT (1979) 1 taxman 485 (SC); vi) Jamna Auto industries Vs. CIT, (2008) 167 TAXMAN 192 (P&H HC) Finally, he contended that the TPO had categorically held that no adverse inference was to be drawn with regard to other international transactions entered into by the assessee which included the present intra-group services arranged including payment for management fees, SAP and Opti-mill expenses and the business area service expenditure. 23. The ld. DR, on the other hand, relied on the order of the AO/DRP. 24. We have caref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity and with a view to a direct and immediate benefit, but voluntarily on account of commercial expediency, and in order indirectly facilitate the carrying on of business. iv. Lastly, it is not necessary to show that the expenditure was profitable one and in fact it earned any profit. 26. On the touch-stone of jurisprudence regarding interpretation of the term "wholly and exclusively" for the purpose of business, we find that no case has been made out by the Revenue showing that the assessee does not fulfill the required parameter to qualify for deduction under section 37(1) of the Act. The only basis being that the assessee was unable to establish necessity of incurring the expenses and benefit accrued to it, which has been outrightly ruled out by Courts for establishing commercial expediency of incurrence of the expenditure, the basis with Revenue authorities therefore for disallowing the impugned expenditure of Rs. 1.60 crores in the present case is found to be not in accordance with law. 27. Even otherwise, we have noted from the order of the DRP that it has heavily relied on OECD commentary and various case laws for emphasizing the establishment of necessity of incurring e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion amounting to Rs. 1,12,29,8977- u/s. 37(1) by holding it to be a prior period expense. 3.2 On the facts and in the circumstances of the case and in law, the Ld. AO under the directions of Hon'ble DRP, erred in disallowing amount paid towards reimbursement of Bank guarantee commission amounting to Rs. 1,12,29,8977- u/s. 4Oa(i). While doing so, he erred in the following: i. in concluding that Pohjola Bank has an Agency Permanent Establishment ('PE') in India and accordingly tax was deductible at source on reimbursement of bank guarantee commission considering it as taxable under Article 7 ("Business Income"); and ii. in concluding that bank guarantee fees would get covered under Article 21 ("Other Income") of India-Finland DTAA and should be taxable in India and accordingly tax was deductible at source. 29. The issue raised in the above grounds relates to disallowance of bank guarantee commission paid by the assessee amounting to Rs. 1,12,29,897/-. The facts relating to the issue are that the assessee had paid a sum of Rs. 1,12,29,897/- towards bank guarantee commission to its related party, Ahlstrom Corporation, Finland. The same was pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no. 22 of the order is as under: 31. Before us, ld. counsel for the assessee pointed out that the finding of the DRP in this regard were in total disregard to the arguments and contentions made by the ld. counsel for the assessee before it. He contended that it had been demonstrated to the DRP that the impugned expenses could not be categorized as prior period expenses, as pointing out that they related to the commission paid for the impugned year evidenced with bills/invoices issued by the Ahlstrom Corporation, Finland to the assessee, demonstrating the said facts and that in any case, since the invoices were raised on the assessee during the impugned year itself, the liability for the expenses had crystalised during the impugned year, and therefore, could not be treated as prior period expenses. Our attention was drawn to the submissions made before the DRP in this regard as under: 32. He further drew our attention to the order of the DRP pointing out that the DRP had not even dealt with submissions made by the assessee before it. 33. On the issue of disallowance of bank guarantee commission expenses made under section 37(1) of the Act, we have heard both the parties and als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the DRP reproduced above, the assessee was held liable to withhold the tax on the impugned payment in terms of Article 21 of the DTAA entered into with Finland. The Article 21 is reproduced hereunder: "ARTICLE 21 OTHER INCOME 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 3. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, items of income of a resident of a Contracting State not dealt wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nland), shall for the purpose of determining the taxable profits of such enterprise, be deductible under the same condition, as if they had been paid to a resident of the first mentioned State and considered from this aspect, if the commission payment by the assessee to the Ahlstrom Corporation, Finland is to be treated as that paid to an Indian entity, then for non-deduction of TDS on the said payment, no disallowance under the applicable section 40(a)(ia) of the Act is attracted, since the term "commission" mentioned in section 40(a)(ia) is to be read in only the context of commission paid on sales and does not include bank guarantee commission. For this purpose, reliance was placed on the decision of Mumbai Tribunal in the case of Kotak Securities Vs. DCIT, ITA No.6657/Mum/2011. In view of the same, since if the impugned payment of bank guarantee were to be treated as having paid to resident, no disallowance under the provision of the Act were attracted. Applying non-discriminatory clause of the India-Finland DTAA no disallowance could be made for non-deduction of tax at source to the resident-recipient. 36. Ld.Counsel for the assessee pointed out that despite exhaustive conten ..... X X X X Extracts X X X X X X X X Extracts X X X X
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