TMI Blog2011 (9) TMI 261X X X X Extracts X X X X X X X X Extracts X X X X ..... ount is allowed by the virtue of status as associated enterprise, but that is not a material factor; in our considered view, the material factor is whether such a discount of 10% is an arm’s length discount i.e. a discount which is given even in a situation in which an enterprise is dealing with independent enterprise. There is nothing on record to even suggest that such a discount is not an arm’s length discount, or that discounts have not been allowed under any other situations. In view of these discussions, and bearing in mind entirety of the case, we delete the impugned disallowance of Rs 4,70,000 as well. Disallowance u/s 40A(2)(b) - Held that: - As long as the services have been availed by the assessee is legitimate furtherance of its business interests and are, thus, wholly exclusively for the purposes of business, the costs of these shared services, as allocated to the assessee, are required to be treated to have been computed in a fair and transparent manner. Disallowance u/s 40(1)(i) - non deduction of TDS - assessee claims that payments made to the US based AE, under a cost contribution agreement, do not warrant any tax withholding as neither the AE has any permanen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 40(a)(i) of the Act. 3.1 On the facts and in the circumstances of the case and in law, the AO erred and the DRP further erred in confirming the additions on cost contribution (Rs.10,55,00,000) to Dresser Rand US under section 37(1), Section 40(2)(b) and Section 40(a)(i) of the Act without any show cause notice and disregarding the factual details, submissions and various documentary evidences filed with respect of the Cost Contribution Agreement. 3.2 The appellants submits that the AO and DRP failed to appreciate the fact that services have been availed and that the expense towards cost contribution charges have been incurred wholly and exclusively for the purpose of business and is fully deductible under section 37 of the Act. 3.3 The appellant submits that the AO and DRP failed to appreciate that the payment of cost contribution to Dresser Rand US does not fall within the ambit of section 40A(2)(b) of the Act in view of specific coverable under sections 92 to 92F of the Act. 3.4 The appellants submits that the AO and DRP failed to appreciate that no tax was required to be deducted at source on the cost contribution payment to Dresser Rand US as the same are not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (article 4.1); and (d) the resources include strategy, administration, finance and treasury, tax and legal services (article -3). It was also noted that the said agreement was valid for 1.6.2005 to 31.12.2005 and, renewable thereafter by two-year periods. In response to the Transfer Pricing Officer to explain the services rendered by Dresser Rand, for which assessee was to contribute costs, it was explained by the assessee that the services so rendered by Dresser Rand included (i) human Resources services, (ii) legal services ; (iii) treasury services (iv) technical support services; (v) marketing services; (vi) global business oversight services; (vii) internal audit and controls and (viii) other services such as provision for value added services, sharing for best practices for optimization of services, and safety procedures etc. It was also explained by the assesse that it has no facilities or manpower in order to handle the above fields, except for a three member team in the field of human resource services, and it was for this reason that the company had to avail the services of the holding/parent company and the cost contribution allocated by the Dresser Rand Group to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not a genuine business arrangement. This conclusion was based on the observations (a) that normally as turnover increases, the ratio of overheads to sales should reduce, but this year, as a result of cost sharing arrangement, the ratio has gone up even as the turnover has gone up; (b) that operating costs in percentage terms, which should come down as a result of turnover increase, has increased this year; (c) the turnover of the assessee should have grown at an accelerated rate as a result of availing these services, but the growth rate has come down this year vis- -vis the growth rate last year 21.29% as against 33.07% last year; (d) overall profitability of the assessee should have increased with increase of turnover, but it has reduced from 13.72% to 13.31%. 4. The Transfer Pricing Officer thus held that there are no real services availed by the assessee from Dresser Rand US, under the cost contribution arrangement, and hence the payment of Rs. 10.055 crores, under the said arrangement, was not a genuine expenditure incurred for the purposes of business of the assessee. It was also held that the arm s length price of services availed by the assessee under the cost contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pportunities to the assessee, and had determined the ALP after taking into account all the relevant factors, and that there is no room for interference in the matter. The Assessing Officer further observed that even if the ALP of allocation of cost contribution to the assessee is held to be at an arm s length, the amounts so paid can still not be allowed as deduction in computation of business income, as (i) there is no evidence of assessee having availed any services ; (ii) entire amount paid under CCA is held to be excessive and unreasonable and thus disallowable under section 40A(2)(b); and (iii) the deduction cannot be allowed in view of the fact that the assessee has not deducted any tax at source from such payments and in view of provisions of Section 40(a)(i) of the Income Tax Act. The Assessing Officer thus held ALP of the services received under CCA as nil and also held that the amounts so paid are also not allowable as deduction in computation of business income in view of the provisions of Sections 37(1), 40A(2)(b) and 40(a)(i) of the Act. Upon his proposing to make the arm s length price adjustment in the draft order and hold the expenses as not constituting admissibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP of the services received under cost contribution arrangement as NIL is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee s wisdom in doing so. The Transfer Pricing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents by simply observing that The DRP has perused the submissions of the assessee and the documents. In view of the DRP, such documents do not prove the receipt of services by the assessee ascertained (asserted ?) to be provided by its AE, and, accordingly, the action of the AO in treating the cost of such services at zero is confirmed . All these evidences were before the DRP, but there is not even a whisper about what was the nature of these documents, why does the DRP find these documents to be not satisfactory, what is the kind of evidence that was necessary to prove the factum of services having been availed, and what precisely is the reason that these documents cannot be relied upon. The soul of an order is in its reasoning, and unless the reasons for coming to a conclusion in the order are not set out, it is not possible to do a meaningful scrutiny of the order, but we find no reasoning at all in the order passed by the DRP. We may in this regard refer to the observations made by Hon ble Supreme Court in the case of Union of India Vs M L Kapoor AIR 1974 SC 87, wherein Their Lordships have, inter alia, observed as follows: If the statute requires recording of reasons, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm s length principle, which, in plain words, requires that assessee s share of overall contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. In the case before us, as evident from the cost contribution agreement, the costs have been shared at average of percentage of (i) head count to the total count and (ii) sales revenue to total revenue. The assessee s share of head count is 3.90% and of total revenue is 3.30%, and, accordingly, 3.50%, being average of these two parameters, is taken as the cost contribution ratio. We see no infirmity in this contribution being taken as an arm s length contribution to the costs. The TPO s objection to this arrangement was two fold first, that the cost should be shared in the ratio of actual use of services; and second, that the costs should be charged to the assessee as per Indian employee costs. None of these objections has any legally sustainable merits. There is no obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the fact that the discount is allowed by the virtue of status as associated enterprise, but that is not a material factor; in our considered view, the material factor is whether such a discount of 10% is an arm s length discount i.e. a discount which is given even in a situation in which an enterprise is dealing with independent enterprise. There is nothing on record to even suggest that such a discount is not an arm s length discount, or that discounts have not been allowed under any other situations. In view of these discussions, and bearing in mind entirety of the case, we delete the impugned disallowance of Rs 4,70,000 as well. 12. Let us now deal with the stand of the Assessing Officer that even otherwise payments under CCA are non-deductible in computation of business income. 13. As far as disallowance under section 40 A (2) (b), and inadmissibility of deduction under section 37(1), are concerned, the action of the Assessing Officer was confirmed by the DRP only on the ground that the rendering of services is not proved. The question of services having been actually rendered is now before the Assessing Officer, and the Assessing Officer has to give his findings on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on at source obligations under section 195(1) arise only if the payment is chargeable to tax in the hands of non-resident recipient. Therefore, merely because a person has not deducted tax at source from a remittance abroad, it cannot be inferred that the person making the remittance has committed a failure in discharging his tax withholding obligations because such obligations come into existence only when recipient has a tax liability in India. The underlying principle is this. Tax withholding liability of the payee is inherently a vicarious liability, on behalf of the recipient, and, therefore, when recipient does not have the primary liability to be taxable in respect of income embedded in the receipt, the vicarious liability of the payer cannot but be ineffectual. This vicarious tax withholding liability cannot be invoked unless primary tax liability of the recipient is established. Just because the payer has not obtained a specific declaration from the revenue authorities to the effect that the recipient is not liable to be taxed in India in respect of income embedded in particular payment, howsoever desirable be that practice, the Assessing Officer can not proceed on the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, on other income in the nature of recovery of freight 1.1 On the facts and in the circumstances of the case and in law, the Assessing Officer erred, and Dispute Resolution Panel further erred, in denying deduction under section 80IB of the Income Tax Act, 1961, on other income being in the nature of recovery of freight, by concluding that it is not an income derived from industrial undertaking. 1.2 The appellant submits that the AO and the DRP failed to appreciate that such income is an income derived in the ordinary course of operations of industrial undertaking and thereby is eligible for deduction under section 80 IB of the Act. 18. Learned counsel for the assessee did not make any specific submissions beyond placing reliance on the submissions made before the authorities below and reiterating the same. Having regard to this approach of the learned counsel, we treat this grievance as practically not pressed and dismiss it as such. Ground No. 1 is thus dismissed. 19. In ground no. 4, the assessee has raised the following grievance: Ground No.4- Additions under section 145A of the Act on account of unutilized CENVAT credit to closing stock of Rs.98,85,175. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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