TMI Blog2014 (2) TMI 894X X X X Extracts X X X X X X X X Extracts X X X X ..... se have been referred to by us earlier - Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses – thus, the TPO went beyond his jurisdiction in denying the payment out-rightly, whereas, his role is limited to determining the ALP - In the guise of determination of ALP, the TPO cannot question the business decision of payment and determine that no services were rendered – thus, the direction of the TPO cannot be upheld at all - while allowing the ground on the question of claim of management fees as such, the quantification thereof is restored to the Assessing Officer to examine with reference to the agreement between the parties – Decided in favour of Assessee. Deferred revenue expenditure – Held that:- It could not be arrives at whether it is a capital expenditure or revenue expenditure - assessee has purchased certain photosets from Hindustan Lever for its business - In view of the conflicting nature of findings, any finding whether the expenditure is capital or revenue cannot be given - th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement fees is genuine and to be allowed and the matter is restored to the file of Assessing Officer to examine the quantification of the fee claimed as per the agreements – thus, there cannot be any issue of levy of penalty – thus, the penalty levied is unwarranted and cancelled – Decided in favour of Assessee. - ITA.No.944/Hyd/2007, ITA.No.194/Hyd/2008, ITA.No.74/Hyd/2008, ITA.No.793/Hyd/2009 - - - Dated:- 22-1-2014 - Shri B. Ramakotaiah And Shri Saktijit Dey,JJ. For the Petitioner : Mr. Pankaj Jain For the Respondent : Mr. D.Sudhakar Rao, CIT DR ORDER Per Bench These appeals are by assessee for assessment years 2003-2004 to 2005-2006 and cross-appeal by the Revenue for assessment year 2004-2005. ITA.No.654, 655 and 7 are against the Orders of the CIT(A) confirming the penalty under section 271(1)(c) for the same assessment years. Since, common issues are involved, these appeals were heard together and decided by this common order. 2. We have heard the learned Counsel and the learned D.R. and perused the paper books and other documents placed on record along with various case law referred. For the sake of convenience the issues in appeal for AY 2003-04 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce ('ALP') of its international transactions with Associated Enterprises ('AEs'). Assessee had the following international transactions with AEs during the year. S. No. Particulars Name of the AE Name of the AE 1 Income from provision of data processing services and market research services Various AE s around the world (19 No s) 3,96,87,253 2 Payment of royalty for using Market Mind Technology, Trim Technology and Central Auto Technology to respective AEs NFO Market mind Global Trim NFO Singapore Pte. Ltd. 43,81,044 15,71,117 21,44,319 3 Payment of management fees (group overhead allocation cost and regional overhead allocation costs). NFO Asia Pacific Ltd. HK NFO World Group Inc. USA 1,14,09,520 12,90,667 4 Payment of interest NFO Research Inc, US @ 2.63% NFO Asia Pacific Ltd. HK @ 6.20% 3,43,894 2,53,772 5 Reimbursement transactions Various AEs (6 No s) 80,70,901 4.1. There were series of submissions made by assessee before the Transfer Pricing Officer in response to the TPO's notices, to justify the arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he market norms and the amounts paid was at arm's length. 9. Briefly submitted details are that TNS India has entered into service fee agreements with NFO World Group Inc. USA and NFO Asia Pacific Limited respectively. NFO group as part of its business strategy has centralized key management functions in SPVs set up for this purpose. These companies do not render any services to third parties and are set up exclusively for rendering services to group companies. Both the AE's are non-profit entities and assessee being a part of the global conglomerate has advantage of utilizing the specialization, expertise, know-how and technology, which has been developed in-house by the Group in all core areas of its business of market research. The AE employs personnel with substantial experience and acts as a central unit to providevariety of beneficial services inter alia in the below mentioned areas to companies of the Group. Due to the development in telecommunication and technology, these services / process / know-how / systems / knowledge are available to TNS India on a real-time and continuous basis through the group intra-net. The category of services provided, description of services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs including expenses relating to the issue of shares, acquisition, holding and disposal of investments and similar expenses are excluded. 11. It is submitted that assessee paid management fees of Rs.1,27,00,187/- to Worldwide Inc. USA and NFO Asia Pacific Ltd. Hongkong which comes to 4% of its revenue. 12. Referring to the submissions made before the authorities, it was contended that TNS Group Entities have entered into agreement in order to provide seamless and high quality service to the MNC clients and TNS India received benefits in the form of global consistency in business practices, economies of scale improvements in efficiency and access to skills, expertise on a global level and these benefits are intangible in nature and accordingly specific evidence could not be furnished to the Assessing Officer to his satisfaction for verifying the services. It was further submitted that business model of centralising activities that benefit the group is a common phenomenon in all multinational corporations and learned Counsel referred to OECD Transfer Pricing Guidelines for multinational enterprise and tax administrations to support that in the global nature of the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ministration services etc., The said services provided by the AEs are not in the nature of activities carried out to protect shareholders interests in their investments and also not in the nature of stewardship. Further, as provided in the Agreements, the shareholder costs, if any are specifically excluded and not allocated to the group companies. 14.2. With respect to the contention of the learned CIT(A) on the AE has not paid any tax on management fees and hence assessee has got direct advantage of reduction of its tax liability, the learned Counsel while referring to pages 219 to 220 of the paper book, submitted that assessee has made TDS payments on the management fee payments to AE's. The AE's are subject to tax in the respective jurisdiction and have paid applicable taxes. 14.3. Learned Counsel referred to the Judgment of the Hon'ble Supreme Court in the case of CIT vs. Delhi Safe Deposit Co. Ltd., 133 ITR 756 for the proposition that true test of expenditure laid out wholly and exclusively for the business or trade is that it is incurred by assessee as incidental to that trade for the purpose of getting trade and make it pay and not in any other capacity eg. as a house h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) (Trib) in ITA.No.5130/Del/2010 dated 23.11.2012, CIT vs. Modi Revlon Pvt. Ltd. ITA.No. 1450/2010, 1451/2010, 1652/2010 and 825/2011 of Delhi High Court and various other decisions as placed in the paper book of case law. 15. Learned DR on the other hand, however, relied on the orders of the Assessing Officer and CIT(A) to submit that assessee could not provide the evidence of services provided and accordingly, the order of TPO read with Assessing Officer has to be upheld. 16. We have considered the issue. We are unable to accept the contention of the Assessing Officer/TPO with reference to the services provided by AEs. Assessee has provided the agreements which were entered not during the year but in earlier year and has been paying the service fee termed as management fee accordingly. This claim is not arising for the first time in this year but, is also there in earlier years and later years. Assessee is part of a worldwide group and they have placed some corporate centers for guidance of various units run by them across the globe. It was submitted that the costs being incurred by the centers are being shared by various units and assessee's share in this year has come to 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for 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 IOB(l)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule lOB. Whether or not to enter into the transaction is for assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w are answered in the affirmative and in favour of assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs". 17. Respectfully following the above, we are of the opinion that the TPO went beyond his jurisdiction in denying the payment out-rightly, whereas, his role is limited to determining the ALP. In the guise of determination of ALP, the TPO cannot question the business decision of payment and determine that no services were rendered. In that view of the matter, the direction of the TPO cannot be upheld at all. 17.2 Be that as it may, the TPO also invoked Rule 10B to analyse the transactions on TNMM method. Accordingly, few of the transactions particularly, provisions for data processing services and royalty etc., were analysed under TNMM and accepted that assessee's PLI is more than the comparables. While determining the PLI, payment of management fees is also considered as an expenditure. In that sense, even after paying the management fee at 4%, the profit level indicator is more than the comparable cases. Therefore, assessee's transactions are deemed to be at arm's length. Considering that also, denial of management fees is not pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se to treat it as deferred revenue expenditure and wrote it off over a period of five years, anticipating the use of these photosets for that period in market research business. The A.O. has disallowed the same by considering the expenditure as acquisition of license rights in relation to market techniques (i.e., intangible assets) and has allowed depreciation @ 25%. The CIT(A) has upheld the same. 20.1. It was submitted that the issue whether expenditure is capital or revenue is no longer res integra. Various Supreme Court and High Court Rulings have held that the expenditure made with a view to bring into an asset or an advantage for the 'enduring benefit' of the trade is only attributable to 'Capital'. By 'enduring' it is meant ensuring in the way that fixed capital endures and it does not connote a benefit that endures in the sense that for a good number of years it relieves assessee of a revenue payment or a disadvantage. In the given instance, the expenditure on photosets is not towards bringing into an asset or an advantage for the enduring benefit of the business. The photoset are used by the company for its market research services. It was submitted that the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter year therefore, the same remain outstanding and was liable for disallowance under section 43B. 23. After considering the rival contentions, we agree with assessee's claim that so much of the service tax not paid/payble cannot be disallowed under section 43B. However, there is nothing on record to examine whether the claim of service tax has been charged to P L account. If the same is claimed as an expenditure in the P L account, the amount to that extent cannot be claimed as an expenditure and to that extent, whether the amount is disallowable under section 43B or under section 37(1), the disallowance is required. In case assessee has not claimed service tax payments as a chargeable expenditure in its books of accounts then, question of disallowance does not arise as there is no claim in the P L account. The reversal of entry even though happened in the books of accounts in the later year, does not affect the computation of income during the year and the same also does not come within the purview of disallowance under section 43B as the amount is not claimed otherwise. Therefore, while accepting assessee's contention in principle, the issue is restored to the file of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ITA.No.956/Hyd/2010 wherein it has been held as under : "5. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit that the impugned issue is directly covered in favour of assessee by the order of the Tribunal in assessee's own case for assessment year 2002-03 wherein the Tribunal vide para-7 of its order dated 30.11.2007 has held as under : "7. We have carefully considered the rival submissions and perused the materials available on record. We find that the facts are not in dispute. We further find that the learned CIT(A) has allowed the deduction under sec. 80HHC vide findings recorded in paras 6.2 and 6.3 of his order which are reproduced. 6.2. After consideration of the arguments of learned Authorised Representative of the appellant, I find that it is a fact that the scope of benefit provided by section 80-HHE, has been explained and expanded vide CBDT notification dated 26.9.2000, referred to above, as per which, transmission of data processed has also been considered of similar nature as any customized electronic data (computer software), and, therefore, deduction is allowable with reference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation system, and it has been held that the definition of computer programme includes data processing software. As such, the report of data processing software unit of assessee is entitled to deduction under s. 80HHE of the Act. Accordingly, the grounds taken by the revenue are rejected." In the absence of any distinguishable feature brought on record by the revenue, we respectfully following the order of the Tribunal, decline to interfere with the order passed by the learned CIT(A) on this account and accordingly the grounds taken by the revenue are rejected." 30. Respectfully following the same, since the CIT(A) followed the order of ITAT on the issue, we do not see any reason to interfere with the order of the Ld.CIT(A). Accordingly, grounds are rejected. 31. In the result, appeal of the Revenue is dismissed. ITA.No.793/Hyd/2009 - A.Y. 2005-2006 : 32. This is assessee's appeal in which assessee has raised the following grounds : 1. The order of the Assessing Officer and the CIT(A) is contrary to law, facts and circumstances of the case. 2. The Assessing Officer erred in determining the arm's length price in respect of the management fee paid at Rs. NIL. 3. The CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of inaccurate particulars. 37. The Coordinate Bench of this Tribunal in the case of DCIT vs. RBS Equities India Ltd. 133 ITD 77 considered similar fact position and held that penalty is not leviable. In that case, the Tribunal has held as follows : "2. The assessee before us is a corporate member of the Bombay Stock Exchange as also National Stock Exchange, and also holds a merchant banker licence from Securities and Exchange Board of India. During the relevant previous year, the assessee has carried out stockbroking activities for foreign institutional investors, mutual funds, domestic financial institutions and banks. In the course of business so carried out, the assessee has also provided stockbroking services to certain AEs, namely, ABN Amro Asia (Mauritius) Ltd., Mauritius, ABN Amro Assets Management (Asia) Ltd, Hong Kong; ABM Amro Asia Equities (UK) Ltd. UK, and ABN Amro Bank NV, The Netherlands. While computing ALP, the assessee's transfer pricing study had adopted the TNMM. The CUP method was rejected for the reason that to compare similarity of transactions, one would need to establish the closeness of all material factors affecting the pricing of transactions, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP adjustment of Rs 1,10,29,746 thus attained finality. Held : It is sine qua non for imposition of penalty that the AO or the CIT(A), during the course of any proceedings before him, should be satisfied that the assessee has (i) concealed his income, or (ii) furnished inaccurate particulars of income. In addition to normal connotations of 'concealment' and 'furnishing of inaccurate particulars' a deeming fiction is also implicit in the scheme of penalty provisions. One deeming fiction, by way of Expln. 1 to s. 271(1)(c) envisages two situations--(a) first, where in respect of any facts material to the computation of total income under the provisions of the Act, the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the AO or the CIT(A); and, (b) second, where in respect of any facts material to the computation of total income under the provisions of this Act, the assessee is not able to substantiate the explanation and the assessee fails to prove that such explanation is bona fide and that the assessee had disclosed all the facts relating to the same and material to the computation of total income. There is, however, ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted in accordance with the scheme of s. 92C in as much as TNMM, which is followed by the assessee, is one of the prescribed methods under s. 92C(1) and the AO has not found any faults in computation of ALP in accordance with TNMM. In fact, he has rejected the TNMM on the ground that CUP method could be applied to the facts of this case. Whatever be the legal merits of this approach and the judicial precedents by the Co-ordinate Benches on this issue, it is certainly a highly contentious issue whether a priority in the methods of determining ALP can be said to exist, even implicitly, giving an edge to CUP method over other methods. In a situation, therefore, when the TNMM is rejected by the Revenue authorities, without finding any specific reasons for inapplicability of the TNMM and simply on the ground that a direct method is more appropriate to the particular fact situation, it cannot at all be a fit case for imposition of penalty in as much as it cannot be said that in a such situation, and despite the findings--contested or uncontested--to the effect that a direct method is preferable, the ALP has not been computed by the assessee under the scheme of s. 92C. As to the scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market forces, it is unrealistic to expect that marketing efforts are also required for securing intra-AE business, cannot be dismissed as worthy of outright rejection. It is also well- settled in law that nobody can be expected to prove the impossible of proving a negative. Therefore, to expect the assessee to establish that the assessee did not give research inputs to the AEs may perhaps indeed be an impossible burden to discharge. The grounds on which the ALP determination by the assessee has been rejected are thus reasonably debatable. Lack of good faith and due diligence cannot be inferred when the grounds on which ALP determined by the assessee has been rejected are reasonably debatable, even if correct. The assessee has obtained a TP study from an outside expert, and this study, objectivity of which is neither called into question nor seems to be, upon perusal of this TP study, questionable anyway, approves TNMM for determination of ALP--a proposition which has not been specifically rejected by the Revenue authorities. On these facts, lack of 'due diligence' in determining the ALP is neither indicated nor can be inferred. In such a situation, it cannot be said that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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