9911796707
TMI Blog2024 (10) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... s is much higher than the receivable and the Associated Enterprises has not charged the interest on delay in payment made by the assessee, therefore, in our considered opinion, charging of notional interest on outstanding receivables does not arise. Accordingly, the addition on account of Arm s Length Price of outstanding receivables are hereby deleted. Addition in Arm s Length Price of international transaction of purchase of sale of finished goods - HELD THAT:- As observed that the detailed working submitted by the assessee has not been examined at all either by the TPO or the DRP, therefore, it is in the interest of justice, issue is set aside to the file of the TPO for fresh adjudication by given due consideration to the submission made by the assessee. Accordingly, the Assessee s Ground partly allowed for statistical purpose. TP Adjustment - Arm s Length Price of international transaction of payment of Regional Service Charges (RSC) and addition in the Arm s Length Price of international transaction of receipt of accounting support services - selection of Most Appropriate Method (MAM) - HELD THAT:- We are of the opinion that comparable Uncontrolled Price (CUP) has been rightly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... And Shri Yogesh Kumar U.S., Judicial Member For the Assessee : Shri Ajay Vohra, Sr. Adv. Sh. Neeraj Jain, Adv Mr. Abhishek Aggarwal, AR For the Department : Shri Vivek Verma CIT (DR) And Sh. Kanv Bali, Sr. DR ORDER PER YOGESH KUMAR U.S., JM These two appeals are filed by the assessee for Assessment Years 2017- 18 and 2018-19 against the assessment orders passed by DCIT, New Delhi dated 27/01/2022 and 30/05/2022 respectively u/s 143(3) r/w Section 144C (13) read with Section 144B of the Income tax Act, 1961, (Act for short). 2. The assessee has raised the following grounds of appeal:- I.T.A. No. 346/DEL/2022 (A.Y 2017-18) 1. That the impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as DRP ) under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ( Act ), is bad in law and unsustainable. 1.1 That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 ( the Act ) at an income of Rs. 255,67,96,910 as against the income of Rs. 193,62,59,440 determined by the appellant in its income tax return. 1.2 That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / services to the associated enterprise. 3.2 That the DRP/ TPO erred on facts and in law in not appreciating that the appellant huge outstanding payables to the associated enterprise and no interest has been charged by the associated enterprise on such delay in receipt of payables and therefore, on the parity of treatment, no interest ought to be imputed on delay in receipt of receivables. 3.3 Without prejudice, that the DRP/ TPO erred on facts and in law in not appreciating that the appellant has also not charged interest on delay in receipt of receivable from unrelated third parties and accordingly, considering the uniformity in approach of the appellant, no interest ought to be charged on the delay in receipt of receivables from associated enterprise. 3.4 That the TPO erred on facts and in law in not accepting that in any case the transaction of delay in respect of receivables was closely linked international transaction of sale of finished goods/ services and since the profit earned by the appellant as a percentage of cost is higher than the profit earned by comparable companies, no transfer pricing adjustment was even otherwise required to be made in this regard. 3.5 That the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore there was no rationale for making such payment to the AE. 5.2 That the DRP/ TPO erred on facts and in law in determining the arm s length price of international transaction of payment of RSC and Accounting Support Services fees at NIL without bringing on record any comparable uncontrolled transaction and therefore, not correctly applying CUP method in terms of Rule 10B(1) of the Income Tax Rules, 1962. 5.3. That the DRP/ TPO erred on facts and in law in determining the arm s length price of international transaction of payment of RSC at NIL not applying any of the prescribed method provided under Rule 10B of the Income Tax Rules, 1962 for determination of arm s length price. 5.4 That the DRP/ TPO erred on facts and in law in determining the arm s length price of international transaction of payment of RSC and Accounting Support Services fees at NIL arbitrarily holding that the services are in the nature of shareholder services and duplicative services . 5.5. That the DRP/ TPO erred on facts and in law in not appreciating that the expenditure on the payment of RSC and Accounting Support Services fees was wholly and exclusively for the purpose of business of the appellant. 5.6 W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its business and were allowable deduction as business expenditure. 7. That the assessing officer erred on facts and in law in making disallowance of Rs. 19,452 in relation to late deposit of employee contribution to employee state insurance for the month of January 2017, without appreciating that the aforementioned contribution was deposited before the due date of filing of return of income and therefore, otherwise allowable under section 43B of the Act. 7.1 That while making disallowance of Rs. 19452, the assessing officer erred on facts and in law in relying on the Explanation 2 to section 36(l)(va) of the Act inserted vide Finance Act 2021, without appreciating that the amendment made by the Finance Act 2021 is prospective in nature and does not apply to the year under consideration, i.e. AY 2017-18. 8. That the assessing officer erred on the facts and in law in determining Dividend Distribution Tax ( DDT ) payable of Rs. 9,29,76,804 (including interest of Rs. 3,66,27,226) in Computation Sheet issued along with order passed under section 143(3) r.w.s. 144C(13) of the Act, without appreciating that DDT was already paid by the appellant vide challan dated 02.09.2016 and Challan se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NIL, without bringing on record any comparable uncontrolled transaction and therefore, not correctly applying CUP method in terms of Rule 10B(1) of the Income Tax Rules, 1962. 2.3 That the DRP/ TPO erred on facts and in law in disregarding the comparable uncontrolled agreements considered in the Transfer Pricing Report for benchmarking the international transaction of payment of royalty, applying CUP method. 2.4 That the DRP/ TPO erred on facts and in law in not appreciating that non-charging of trademark fee in earlier years by the associated enterprise cannot adversely affect its right to charge arm s length fee for providing access to valuable intangibles. 3. That the DRP/ TPO erred on facts and in law in making an adjustment of Rs. 7,17,113 by re-characterizing the alleged transaction of delay in receipts of receivables from the associated enterprise as unsecured loans advanced to the associated enterprises. 3.1 That the DRP/ TPO erred on facts and in law in not appreciating that delay in receipt of receivable is not an international transaction , per se, under section 92B of the Act but is a consequence of an international transaction undertaken in the form of sale of finished ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivate Limited ' ( GSATL ) 4.3 That the DRP/ TPO erred on facts and in law in applying RPM with internal comparable not appreciating that there are functional differences in the AE and non-AE segment and therefore both the segment cannot be compared to each other. 4.4 That the DRP/ TPO erred on facts and in law in not appreciating that the benchmarking analysis undertaken by the appellant in its trading segment, applying TNMM with external comparable was consistently found to be appropriate in preceding years and no adverse inference was drawn in those years. 5. That the DRP/ TPO erred on facts and in law in making an addition of Rs. 45,00,06,112 allegedly on account of difference in the arm s length price of international transaction of payment of Regional Service Charges ( RSC ) and Rs. 1,64,18,543 in respect of international transaction payment of Accounting Support Services fees entered into by the appellant with its associated enterprise. 5.1 That the DRP/ TPO erred on facts and in law in holding the arm s length price of the international transaction of payment of RSC of Rs. 45,00,06,112 and payment of Accounting Support Services fees of Rs. 1,64,18,543 at Nil allegedly ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being 30% of the total expenditure of Rs. 9,91,00,000/- incurred by the appellant on advertisement and publicity following the finding in the preceding assessment year allegedly holding that the expenditure was incurred for the benefit of the enterprise who owns brand name. 6.1 That the assessing officer erred on facts and in law in arbitrarily relying on the decision of Hon ble Delhi High Court in the case of Maruti Suzuki India Limited to hold that if the brand name is not owned by the appellant, such expenditure is incurred for the benefits of the enterprise who own the brand name, not appreciating that the said decision was set aside by the Hon ble Supreme Court. 6.2 That the DRP erred on facts and in law in confirming the action of the AO by holding that the arguments of the appellant were bereft of any evidence, and that the assessee has not been able to counter the argument of Assessing Officer that the assessee was not the owner of the brand and therefore, such expenditure, incurred for the benefit of the enterprise who owned the brand name, must be reimbursed by that enterprise. 6.3 That the assessing officer/DRP erred on facts and in law in not appreciating that the adver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copy of accounts and replies and documents filed during the assessment proceedings, a draft assessment order u/s 143(3) r.w.s. 144C(1) of the Income-tax Act, 1961, was passed on 30.03.2021 proposing to assess the total income of the assessee company for A.Y. 2017-18 at Rs. 262,19,15,200/-. The said order was duly served on the assessee. Consequently, the assessee filed objections before the Dispute Resolution Panel against the draft assessment order. The DRP-I, New Delhi, issued directions u/s. 144C(5) of the I.T. Act, 1961 dated 30.11.2021, disposing off the objections raised by the assessee. The issues involved in the proposed variation are finalized by the A.O as per the directions issued by the Ld. DRP. A final assessment order came to be passed u/s 143(3) read with Section 144C, read with 144B of the Income Tax Act vide order dated 27/01/2022 by computing the income of the assessee as under:- Income of the assessee as per intimation u/s 143(1) dated 29/03/2019 Rs. 197,86,77,180 Less: Disallowance on account of inconsistency in the provision for the payment of gratuity as per the directions of DRP Rs. 29,56,028/- Less: Disallowance on account of inconsistency in amount disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding that no benefit has been received by the assessee from payment of trade mark fee and, therefore, there was no rational for paying such amount to the A.E. Accordingly, adjustment of Rs. 10,38,00,000/- made on account of payment of trade mark fee which has been confirmed by the DRP. 8. The Ld. Counsel for the assessee has submitted that the said issue has been considered by the Co-ordinate Bench of this Tribunal for Assessment Year 2007-08 to 2014-15 in ITA No. 5650/Del/2011, 6240/Del/2012, 916/Del/2014, 1516/Del/2015, 1004/Del/2016, 1706/Del/2017, 7716/Del/2017 8006/Del/2018 and recently vide order dated 11/08/2021 in ITA No. 467/Del/2021, the Tribunal has deleted the identical adjustment made by DRP, TPO for Assessment Year 2016-17. 9. Per contra, the Ld. DR vehemently argued on the said issue but failed to bring out any contrary decision or could not point out any factual differences in the year under consideration. 10. Heard and perused the material on record. The Co-ordinate Bench of the Tribunal in Assessee s own case in ITA No. 467/Del/2021 for AY 2016-17, vide order dated 11/08/2021, while deleting the similar addition held as under:- 8. We have heard the rival contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arbitrarily divided the license agreement of the appellant without appreciating that all the license agreement is a single in severable agreement. 9. Reliance has also been placed by the assessee on the decision of Delhi Bench of Tribunal in the case of Lumax Industries Ltd. vs. ACIT (ITA No. 4456/Del/2012), wherein, in the similar case of payment of royalty, this Tribunal concluded that: 7 .............the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines transaction as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis .. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sister concern of the assessee, Goodyear South Asia Private Limited, is not making payment of royalty, therefore, there shall be no payment of royalty by the assessee either. We have considered this aspect and found that there is difference in business dynamics and commercial realities in both the companies in as much as 60% of the sales made by Goodyear South Asia Limited is made to its related parties itself. Nevertheless, the AR of the assessee has rightly pointed out that in terms of Rule 10B(1)(a) of the Rules, international transactions entered into by the assessee with its AE, Goodyear Inc. USA cannot be compared with the international transaction entered between another AE, Goodyear South Asia Pvt. Ltd. with Goodyear Inc. USA. 14. The AR of the assessee has rightly placed reliance on the decision of third Member Bench of the Mumbai Tribunal, in the case of Tecnimont ICB Pvt. Ltd. vs. ACIT (ITA No. 4608 5085/Mum/2010), wherein, while explaining the import of clause (i) of Rule 10B(e) of the Act, held that the Rules strictly provides that an uncontrolled transaction shall be a transaction undertaken between two unrelated parties and cannot be given a wider term to include tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of third parties, it may demonstrate the same cooked results in both the situations, thereby leaving no scope for any adjustment. In this eventuality, the very object of such provisions will be frustrated. Thus, it follows that the ALP can be determined only by making comparison with a comparable uncontrolled transaction and not a comparable controlled transaction. 15. It is also not acceptable that an international transaction which is not undertaken in the preceding year, cannot be undertaken between parties subsequently. In pursuance to direction of the Bench, the appellant has submitted three documents as additional evidence, i.e. (i) certificate issued by the associated enterprise, i.e. The Goodyear Tire Rubber Company, USA explaining the reasons for not charging royalty in the earlier years; (ii) Copy of extracts of Minutes of Board of Directors meeting dated 31.07.2006 regarding approval for execution of Trademark License Agreement and (iii) copy of an email exchanged between the appellant and the associated enterprise regarding payment of trade mark fee in July 2006. These evidences are admitted on record. The ld. DR has no objection to admit these evidences on record. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t demonstrated how the payment for royalty beneficial to the taxpayer. We are of the opinion that, ascertaining whether a service has actually benefitted the assessee is not within the prerogative of the tax authorities. The Hon'ble Delhi High Court in CIT v. Cushman Wakefield (India) (P.) Ltd. (2014) 367 ITR 730(Del) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. 17. Accordingly, in view of the aforesaid, we are of the opinion that since the operating margin of the assessee at 6.96% is higher than the comparables at 2.77%, the international transaction of payment of royalty entered into by the assessee are to be considered being at arm s length applying TNMM as the most appropriate method. 18. We therefore direct the assessing officer to delete the adjustment on this account. This decision of the Tribunal has been followed in the preceding Assessment Years 2007-08 to 2012-13 and 2014-15 in ITA Nos. 5650/Del/2011, 6240/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest cost has already been suitably factored in the sale price, wherein the Assessee s margin is 6.36% and a comparable margin is between 4.032 5.93%. The Ld. Counsel for the assessee has also relied on Kusum Health Care Pvt. Ltd. Vs. ACIT in ITA No. 6814/Del/2014 and Pr. CIT Vs. Inductis India Pvt. Ltd. ITA No. 144/2019. 14. Per contra, Ld. DR relied on the orders of the Lower Authorities and justified the action of the ld. TPO/DRP. 15. We have heard the parties, verified the material on record and gave out thoughtful consideration. During the course of TP proceedings, based on the details submitted by the assessee, re-characterized the delay in receipt of receivables as unsecured loans advanced to the A.E and imputed a notional interest @5.47% being LIBOR + 400 BPS on the period of delay. 16. During the course of hearing, the Ld. AR of the assessee submitted that the outstanding payable to the respective AE s is much higher the receivables and Associated Enterprises has not charged interest on delay in payment made by the assessee. The detail of receivables payable as on 31/03/2007 is made available by the assessee which is extracted as under:- Name of AE s Receivable as o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from AE and its affiliates of INR 26,88,97,856. We find that the account payables are more than the account receivables from AE. Hence, charging notional interest does not arise. 18. By relying on the binding decision of the Hyderabad Bench in the case of Satyam Venture Engineering Services Pvt. Ltd. (Supra) and by, considering the fact that the outstanding payable to the respective AE s is much higher than the receivable and the Associated Enterprises has not charged the interest on delay in payment made by the assessee, therefore, in our considered opinion, charging of notional interest on outstanding receivables does not arise. Accordingly, the addition of Rs. 10,04,075/- on account of Arm s Length Price of outstanding receivables are hereby deleted and the Assessee s Grounds of Appeal No. 3- 3.5 are allowed. 19. The Grounds of Appeal No. 4-4.4 are in respect of addition of Rs. 1,52,85,800/- in Arm s Length Price of international transaction of purchase of sale of finished goods. The assessee in order to cater to the customer requirements, imported certain specific variety of tires of overseas Goodyear Group Companies and sells to Indian third party customers in India. These tir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions and warranty management function on its sale to non-AE, the GP/sales margin of the assessee is still higher in the non-AE segment (26%) viz-a-viz AE (21.4%). Further, the assessee has itself submitted that the prices of goods pertaining to sales to AE is driven by the group s transfer pricing policy and the assessee is not free to negotiate the price, which clearly demonstrates that the assessee is not independent in framing/charging the prices on the sales to AEs. 6.2.1 In view of the discussion above, the Arm s Length Price to purchase off finished goods from the from the Associated Enterprises is computed as under. Total value of transaction with AE(A) RS. 33,23,00,000/- Gross Margin from AE segment(B) Rs. 21.4% Gross Margin from non-AE segment 26% Difference in the Margin 4.60% Proposed Transfer Pricing adjustment/s = Rs. 1,52,85,800 92CA The above said proposed adjustment made by the TPO has been upheld by the DRP. 24. The Ld. Counsel for the assessee submitted that in the segment profit analysis, the AE s segment includes (i) sale of finished goods to AE s amounting to Rs. 9,17,40,511/- and (ii) Purchase of trade goods from AE amounting to Rs. 33,23,21,633/- and sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 92C of the Act in unrelated third party segment at 26%, thus, there is no requirement of any transfer pricing adjustment in this segment. 28. We have heard the rival contentions and the detailed submissions made by the both the parties. It is observed that the detailed working submitted by the assessee has not been examined at all either by the TPO or the DRP, therefore, it is in the interest of justice, issue is set aside to the file of the TPO for fresh adjudication by given due consideration to the submission made by the assessee. Accordingly, the Assessee s Ground No. 4 to 4.4 are partly allowed for statistical purpose. 29. Ground No. 5 to 5.8 are in respect of addition of Rs. 46,05,42,787/- in the Arm s Length Price of international transaction of payment of Regional Service Charges (RSC) and addition of Rs. 37,35,360/-in the Arm s Length Price of international transaction of receipt of accounting support services. The Ld. Counsel for the assessee submitted that, during the year under consideration, the assessee made payments of Regional Service Charges amounting to Rs. 55.23 crores as per RSC Agreement entered by the assessee with Goodyear USA and the assessee has av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Lower Authorities and sought for dismissal of the Ground No. 5 to 5.8. 32. We have heard the parties, perused the material on record. In the assessment order, the Ld. Assessing Officer has incorporated the findings of the DRP, which is reproduced as under:- The Panel has considered the rival arguments. It is noticed that the TPO recorded a clear finding at p. 7.3 onwards of his order, after analysis of documentary evidence and consideration of the evidence submitted by the assessee, that the assessee has not received the services listed under RSC (other than IT charges) and no recognizable benefit is passed on to the assessee in lieu of this payment without appreciating the evidences regarding the receipt of the services and benefits received there from as furnished by the assessee. The TPO, in fact, has classified these services y* as 'shareholder' or 'duplicative services' and held on the basis of the documentary evidences for the majority of services that the assessee's role was limited only to the execution of production and tire performance services, while the strategy and guidelines for the same were devised by Goodyear USA, which makes the nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO is correct in observing that according to the assessee itself, the basic purpose for receipt of financial services was to determine cost outlay in adherence with the overall objectives of the Group which makes it amply clear that the aforementioned service is being provided by Goodyear USA so that the financial objectives/goals / polices of Goodyear India are in line with the polices of the Group Company. For payment for sales and marketing services, the assessee in addendum to his reply has submitted that GIL s role is limited to the, operational and execution aspects of the function, with the entire polices, guidelines, strategies, reviews and roadmaps being provided by the region. Thus, the TPO is correct in his conclusion that GIL's role was limited only to the execution of sales and marketing expenses, while Goodyear USA devises the strategy and guidelines for the same, which makes the nature of activity performed by Goodyear USA to be that of a shareholder activity. For payment for Information Technology Services, the assessee in addendum to his reply has submitted that the region was responsible for formulating the IT strategy and IT roadmap for the Goodyear Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. One these reasonings, in the absence of any material change justifying the Revenue to take a different view of the matter and, if there was no change, it was in support of the assessee we do not think the question should have been reopened and contrary to what had been decided by the CIT in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under ss. 11 and 12 of the IT Act of 1961. What emerges from the above holding of the Hon'ble Supreme Court that the doctrine of consistency is applicable only when two conditions are met. Firstly, there a should be a decision in the earlier years, one way or the other and secondly, there must not be any material change justifying the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces including nature, need benefit etc. in the case of GSAT for AY 2014-15 AY 2015-16 and has adjudicated in the favour of the assessee. A copy of the ITAT's order has been filed before the Panel. 3.4.6.1 The Panel, however, finds that the aforesaid findings of facts, recorded by the Tribunal in the case of another group concern, do not and cannot serve as a precedent for other group concern as the same has to decided on the basis of facts obtaining in that case for every assessment year. This aspect was in fact reiterated by the Hon'ble ITAT in para 7 of the aforesaid order in the following words: Be that as it may, the question of rendering of services is independent every year, which has to be proved on the basis of positive evidence. Simply because the assessee was found to have availed services in the preceding year, the same per se would not lead to inference that the services were also received in the current year. The factum of availing services needs to be establsiehd independently every year. The Panel accordingly, rejects this argument as well. 33. We have gone through the assessment order and perused the material on record and also examined the method used as Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2007-08 in ITA No. 5650/Del/2011 held as under:- We have heard the rival contentions in the light of the material produced and precedent relied upon. We have already held that advertisement expenditure incurred by the appellant is incurred wholly for the purpose of its business and profession and ought to be allowed in entirety. Further the Assessing Officer has clearly made an ad-hoc disallowance of advertisement expenditure incurred by the appellant which is not permissible under the law. We are of the considered view that the AO was not justified in making such adhoc disallowance and therefore direct him to delete the adjustment on this account. 37. By respectfully following the above judicial pronouncement and finding the parity, we are inclined to allow the Grounds of Appeal No. 6 to 6.3 by deleting the disallowance made by DRP/A.O in the year under consideration. 38. Ground No. 7 and 7.1 are in respect of disallowance of Employees Contribution to ESI amounting to Rs. 19,452/-. The Assessing Officer has disallowed a sum of Rs. 19,452/- relying on the Explanation 2 to Section 36(1)(va) of the Act on the ground that the assessee has deposited Employees Contribution Funds ESI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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