TMI Blog2014 (11) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... rowed funds for giving interest free advances to its joint venture company i.e. Hindustan Max-GB Ltd. (‘HMGB’) without appreciating that no advances have been made by the appellant company to HMGB during the year – Held that:- Following the decision in aseessee’s own case as decided in DSM Anti Infectives India Ltd. Versus Deputy Commissioner of Income-tax [2013 (11) TMI 1239 - ITAT CHANDIGARH] - The advances to joint venture company were made in the earlier years on which the assessee in the earlier years was earning interest income but because of the said joint venture company filing petition before BIFR, no interest was charged by the assessee company on the advances – there was no merit in the order of the AO in disallowing part of the expenditure being relatable to such advances made by the assessee interest free to it is joint venture company and the same is deleted – Decided in favour of assessee. Commission expenses charged to the P&L Account disallowed - Export sales invoiced to those parties and liability to pay commission to those parties or not - Held that:- Following the decision in aseessee’s own case as decided in DSM Anti Infectives India Ltd. Versus Deputy Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment had been made by the assessee in a joint venture for business expediency – Decided in favour of assessee. Transfer pricing adjustment – Determination of arm’s length price of the international transactions with associated enterprises - Disallowance of intra group services - Whether the assessee should have benchmarked each of the transactions separately – Held that:- The assessee had entered into series of transactions with its AE i.e. purchase of raw material, consumables, finished goods, etc, export of material, corporate services, reimbursement of expenses and interest paid on loan, which it had aggregated in order to determine the arm’s length price of the transactions except interest on loan – in UCB India (P.) Ltd. v. Asstt. CIT [2009 (2) TMI 237 - ITAT BOMBAY-L] it has been held that for determining the arm’s length price each of the assessee’s independent activities have to be segregated - the TPO is empowered to apply appropriate method for each of the international transactions and as the service fee paid by the assessee was a separate class of transactions, the same is to be analyzed separately, then from the other related party transactions. The total co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength and the balance payment is allowable in the hands of the assessee as being on arm’s length against which no adjustment is to be made – Decided partly in favour of assessee. - IT APPEAL NOS. 1139 (CHD.) OF 2011 AND 1290 (CHD.) OF 2012 - - - Dated:- 7-8-2014 - T.R. SOOD AND MS. SUSHMA CHOWLA, JJ. For The Nishant Saini, Ramit Katyal, Saurabh Bhattacharya and K.M. Singhj For The Ajay Sharma ORDER Ms. Sushma Chowla, Judicial Member - These two appeals filed by the assessee are against the separate orders of the Addl. Commissioner of Income Tax (Appeals), Chandigarh, dated 26.11.2010 and 31.10.2012 relating to assessment years 2007-08 and 2008-09 against the order passed under section 144C(1), read with section 143(3) of the Income-tax Act, 1961 (in short the Act ). 2. Both the appeals relating to the same assessee on similar issue were heard together and are being disposed off by this consolidated order for the sake of convenience. ITA No.1139/Chd/2011 :: Assessment Year 2007-08 3. The assessee in ITA No.1139/Chd/2011 has raised the following grounds of appeal: 1. That on the facts and in the circumstances of the case in law, the Hon ble DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year. 3.2 The ld. AO erred on facts and in law, in not following the favourable Tribunal decision in the appellant s own case for the assessment years 2003-04 2004-05 on the identical issue. 4. That the ld. AO erred on facts in law, in making a disallowance of ₹ 8,538,662/- out of commission expenses charged to the profit loss account for the year under consideration. 4.1 That the ld. AO erred on facts in law, in making a disallowance of ₹ 6,072,653/- (out of ₹ 8,538,662/-) on the alleged ground that the export sales were invoiced to those parties and hence there is no liability to pay commission to those parties without appreciating that the commission paid to those parties was out of purely commercial consideration and on account of business expediency. 4.2 That the ld. AO erred on facts and in law, in making a disallowance of ₹ 2,466,009/-(out of ₹ 8,538,662/-) by arbitrarily fixing an average rate of commission at 3% and holding the commission paid in excess of 3% paid to agents as excessive and unreasonable without appreciating that at none of the parties is a related party and commission paid in excess of 3% was on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaken with regard to cost of services and benefit received from AEs vis-a-vis independent parties 6.5 Holding that the cost incurred by AEs for providing services have been arbitrarily allocated to DSM India. 6.6 Making various statements in the order passed under section 143(3), read with section 144C(3), of the Act, based on his conjectures, surmises, inferences and presumptions which are not in accordance with facts of the case and against legal principles. 7. That on the facts and circumstances of the case and in law, the ld. AO has erred in charging interest under sections 234A, 234B, 234C and 234D of the Act. 8. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act mechanically and without recording any adequate reasons for such initiation. 4. The ground No.1 raised by the assessee is general in nature and the same is dismissed. 5. The issue in ground No.2 raised by the assessee is against disallowance of ₹ 1,14,432/- on account of DEPB claim. 6. The brief facts relating to the issue are that during the year under consideration the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived and short fall in the DEPB credit are as under : DEPB No.3710000460, dated 14.03.06 Applied for ₹ 2,690,915.80 December,2003 Received ₹ 1,614,400.00 Shortfall ₹ 1,076,515.80 DEPB No.3710000461, dated 14.03.2006 Applied for ₹ 3,592,065.94 January,2004 Received ₹ 2,858,140.00 Shortfall ₹ 733,925.94 DEPB No.3710000462, dated 14.03.2006 Applied for ₹ 85,762.73 Received ₹ 52,451.00 February,2004 Shortfall ₹ 33,311.73 Total DEPB written off during the year : ₹ 9,458,449.47 79. The assessee by way of application for admission of additional evidence has placed on record the copies of the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter in line with our directions. The ground No.2 raised by the assessee is thus allowed for statistical purposes. 11. The issue in ground No.3 raised by the assessee is against the disallowance of financial expenses of ₹ 9,85,67,574/-. The Assessing Officer during the year under consideration had made disallowance on account of interest on advances made to Hindustan Max GB Ltd. on which the assessee had not charged any interest as against interest expenses booked on interest bearing advances. The Assessing Officer was of the view that on the one hand the assessee had borrowed money from its parent company on interest and on the other hand, had diverted the funds to its joint venture company without charging any interest. The Assessing Officer further noted that similar issue arose in the earlier years and the assessee had taken the plea that advances were made to the said concern in earlier years for supply of raw material and the loan carried an interest rate of 16.5% per annum. However, since the subsidiary had made an application to the Board for Financial and Industrial Reconstruction (in short BIFR), no interest was charged on the said loan by the assessee from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany with HMGB, no provision has been considered for any possible losses which may arise on the above account. 10. The said advances made by the assessee were brought forward from the earlier years and because of the joint venture company being not in good financial conditions, no interest was charged on the said loan. The assessee in the earlier assessment years 2003-04 and 2004-05 had not charged any interest on the said loan and the Tribunal in ITA No.366/Chd/2007 relating to assessment year 2003-04 and ITA No.281/Chd/2008 relating to assessment year 2004-05 vide order dated 15.10.2008 had allowed the claim of the assessee observing that the borrowings made by the assessee from its parent company had been utilized for the purposes of business and the claim of interest expenditure had been constantly allowed in the preceding years. As there was no change in the facts and circumstances other than that part of the interest accrued on the advances made to M/s Hindustan Max G.B. Ltd. had been written off in the instant year, could not be the basis to suggest that the borrowings from the parent company had not been utilized for business purposes. Further it was held that there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cost of material which was paid by the assessee to the joint venture was lower than the cost from other concerns where the quantity was comparable. The aforesaid findings of CIT(A) and the Tribunal have not been shown to be erroneous or perverse in any manner. 12. In all fairness to learned counsel for the revenue, adverting to the judgments relied upon by her, in view of the findings of fact recorded by CIT(A) and the Tribunal that there existed commercial expediency in giving interest free loan to HMGB, which findings are not shown to be against the record, no advantage can be derived by the revenue from the pronouncement reported in Abhishek Industries Limited s case (supra). Insofar as Motor General Finance Limited and Indian Shavings Products Limited s cases (supra) are concerned, these pronouncements were prior to judgment of the Apex Court in S.A.Builders s case (supra). Further, on factual matrix therein, no commercial expediency was shown to be existing and therefore, in view of distinguishable circumstances involved, these do not advance the case of the revenue. 15. The issue arising vide ground of appeal No.3 is identical to the issue before the Hon ble Punja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Tribunal in assessment year 2006-07 and vide order dated 8.8.2013 vide paras 81 to 86, the issue was considered at length by the Tribunal. In respect of the commission paid in relation to export sales the matter has been remitted back to the Assessing Officer to verify the claim of assessee that the commission paid to the said concern had any connection with the sales made through said concern. The relevant findings of the Tribunal are as under: 81. The issue in ground No. 4 raised by the assessee is against disallowance of ₹ 96,15,144/- booked as commission expenses. 82. The brief facts relating to the issue are that during the year under consideration, the assessee had debited a sum of ₹ 2.60 crore under the head commission , which included a sum of ₹ 10,563,783/- on account of commission on exports and sum of ₹ 1,55,27,136/- on account of domestic sales. The assessee was show caused to furnish the complete details in respect of the said payments by the Assessing Officer. The assessee furnished details of commission agents and the amount of sales effected through them including the rate of commission. The Assessing Officer, from the det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations in para 5.8. The next objection of the ld. AR for the assessee was that the commission amount referred to by the Assessing Officer in respect of Edward Keller (Phils) INC were correct. However, the commission amount of Malachite Chemicals was incorrect and the sales amount in respect of the parties were wrong. It was pointed out by the ld. AR for the assessee that confirmations were filed before the DRP which are placed at page 305 of the paperbook. He further submitted that similar commission paid in the succeeding year has been allowed. The case of the assessee was that the said parties were traders and were also acting as commission agents and the business of the assessee was conducted through such agents who were making purchases on behalf of other parties. It has been further pointed out that the observation of the Assessing Officer that the assessee was paying commission on the purchases made by the parties is incorrect as the said commission was being paid to persons who were acting as commission agents. In respect of the domestic sales and the commission thereon, it was pointed out by the ld. AR for the assessee that the Assessing Officer had disallowed the commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- on sales of ₹ 2.35 crore to Edward Keller @ 2.950%. Further commission of ₹ 40,97,199/- on sale value of ₹ 13.80 crore has been paid to P.I. Mensangan Sakti. The next item of payment is to Malachite Chemicals, which as per the assessee is ₹ 885,880/- on sale value of ₹ 2.98 crore @ ₹ 2.966%. The Assessing Officer has adopted the commission paid to Malachite Chemicals at ₹ 455,257/-. The case of the assessee before us is that the commission agents are also traders of the drugs and are also acting as commission agents. The assessee is engaged in the manufacture of intermediaries and bulk drugs, which in turn are utilized by other concerns for the preparation of the final products. The assessee, through the said commission agents had sold the items manufactured by it to different concerns. The assessee has placed on record the confirmation from P.I. Mensangan Sakti in respect of receipt of commission of ₹ 40,97,199/-. The said certificate is placed at pages 305 of the Paper Book. We find merit in the case of the assessee. However, the necessary details in this regard are not available, in particular the plea of the Assessing Officer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es at the relevant time which determines the rate of commission to be paid on a particular transaction. In view thereof, we reverse the order of Assessing Officer in restricting the rate of commission to 3% . In any case, the said restriction was made by the Assessing Officer observing that the rate of commission paid by the assessee was 6.6% whereas the assessee claims that it had paid commission @ 4.48%. The other two parties to whom commission had been paid by the assessee and the same has been restricted by the Assessing Officer are Integrated Technology and Aakaar Engineering Manufacturing Co. The commission to the said parties, as alleged by the Assessing Officer are paid @ 6.90% and 6.76% respectively. In line with our observations hereinabove, we find no merit in the disallowance made by the Assessing Officer restricting to rate of commission to 3% as against the rates agreed upon between the parties. Reversing the order of the Assessing Officer, we delete the addition of ₹ 42,77,213/-. The Ground No. 4 raised by the assessee is, thus partly allowed. 22. The facts of the present case are identical to the facts in assessment year 2006-07 and the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer from the balance sheet noted the investment of ₹ 5 crore in shares of Hindustan Max-GB Ltd. The said investment was made in the earlier years on which the assessee was earning interest. While deciding ground No.3 of the present appeal, we have deliberated upon the issue of disallowance of interest relatable to such advances made by the assessee on which as per the Assessing Officer, no interest was charged as against the interest expenditure incurred by the assessee. It is an admitted position that the assessee was receiving interest on the said advances. The said investment was made for business purposes i.e. for the purchase of raw material from the said concern. However, as the said concern was in financial constraint, the application was made before the BIFR by the said concern and thereafter, no interest was being charged by the assessee on the said advances. Admittedly, the said investment was not made during the year under consideration, as is apparent from the fact that the issue of disallowance of interest under section 36(1)(iii) of the Act in relation to the said advance, arose before the Tribunal in assessment year 2003-04 and thereafter. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 36(l)(iii) or section 37 of the Act without appreciating that the interest expense incurred by the appellant during the year under consideration is on loan funds borrowed and utilized for working capital purposes and for new expansion and there is no nexus or diversion of funds to HMGB during the year. 2.2 That the ld. AO erred on facts and in law, in not following the favourable Tribunal decision in the appellant s own case for the assessment years 2003-04 2004-05 on the identical issue 3. That the ld. AO erred on facts in law, in making a disallowance of ₹ 8,575,079/- out of commission expenses charged to the profit loss account for the year under consideration. 3.1 That the ld. AO erred on facts in law, in making a disallowance of ₹ 5,677,403/- (out of ₹ 8,575,079/-) being the discount given to the buyer of goods in the normal course of business debited under the head commission expenses on surmises and self-assumed facts. 3.2 Without prejudice to the above, the ld. AO while disallowing the commission paid to parties who acted as principal distributors namely Malachite Chemicals and Edward Keller (Phils) Inc., inadvertently disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch payments and thereby passing the order in contradiction with the judicial pronouncements. 5.4 Holding that the assessee has not furnished/furnished only generic documentary evidence to demonstrate the benefits received from the AEs ignoring the submissions and documents submitted by the assessee during the assessment proceedings. 5.5 Holding that the assessee has not furnished any evidence as to cost benefit analysis with regard to cost of services and benefits received from AEs vis-a-vis independent parties and that no independent verification was conducted by the assessee to substantiate the costs incurred by the AE. 5.6 Asserting that the assessee has not identified payment for each and every service and holding that identification of separate payment for each service is necessary to determine the arm s length nature. 5.7 Asserting that the cost incurred by AEs for providing services have been arbitrarily allocated to DSM India. 5.8 Holding that the benchmarking done by the assessee in respect of international transaction relating to payment towards corporate service fees is not in accordance with the law and in doing so have grossly erred by; 5.8.1 Disregar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e completing the assessment under section 143(3) of the Act and has again suffered a tax in AY 2008-09 being credit to the Profit and Loss account and offered to tax in the return of income, this has resulted in double taxation of the same amount which is impermissible under the law. 30. The additional grounds of appeal being purely technical involving no investigation into the facts are admitted for adjudication. 31. The ground of appeal No.1 raised by the assessee is general in nature and the same is dismissed. 32. The issue in ground of appeal No.2 raised by the assessee is against the disallowance of financial expenses of ₹ 9,85,67,574/- on the interest free advances made to the joint venture company M/s Hindustan Max GB Ltd. The issue raised vide ground No.2 is identical to the issue raised vide ground No.2 in assessment year 2007-08 and following the same parity of reasoning, we allow the claim of the assessee and delete the addition of ₹ 9.85 crores. The ground of appeal No.2 raised by the assessee is thus allowed. 33. The issue in ground of appeal No.3 is against disallowance of ₹ 85,75,079/- out of commission expenses, out of which the disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 2006-07 in the Profit Loss Account, which was not allowed by the Assessing Officer while completing the assessment under section 143(3) of the Act holding that the write off was pre-mature and hence not allowable. However, during the year under consideration the assessee had recovered the said DEPB credit which was earlier written off in assessment year 2006-07. The additional ground of appeal raised by the assessee being consequential to the assessment proceedings in assessment year 2006-07 and being legal in nature wherein no investigation into facts is required is admitted for adjudication. 38. We find that the issue of write off DEPB credit being export incentives arose before the Tribunal in assessment year 2006-07 (supra) and the Tribunal vide its finding in paras 78 and 79 had remitted the issue back of the Act the Assessing Officer with directions to allow the claim of the assessee after verification. The assessee during the year under consideration had recovered the said DEPB credit which was written off in assessment year 2006-07. In case the said amount or any part of the said amount is added back in the hands of the assessee then the amount recovered in assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s transfer pricing approach under para 7 of the order and issued show cause notice to the assessee. The TPO noted that as per the Transfer Pricing (TP) document furnished for the assessment year 2007-08, the taxpayer company has purchased raw materials/consumables and finished goods from its A.E. s. and also has exported finished .goods to them. Further, it has received services from A.E. s, paid interest on loans received by it from A.E. and also has received reimbursement for expenses. All transactions relating to imports, exports services received have been clubbed together TNMM method was applied. Only interest paid on loan was separately bench-marked compared with Euribor. The assessee had paid service fee of ₹ 3,30,72,526/- as detailed under para 3.1 to its Associated Enterprises (AEs). As per the transfer pricing study report the assessee had explained the nature of the services as under : Corporate Service Charge : The AE provides the corporate services in the area of Production and Sales, Market Information, Business Intelligence, Safety, Health and Environment and Finance related strategic planning support to the assessee. For which it charges as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er services that are mentioned in the T.P. report are in the nature of incidental services for which no separate payment is required. 43. The TPO asked the assessee to furnish the following details as enumerated in para 5 : (a) Identify each of the Services actually received by you from the AEs for which the amount has been paid. (b) Please submit the contemporaneous documentary evidence to show that these services have actually been received by you. (c) Please state the payment made by you for each of the availed services. (d) Please furnish the copy of account of the AEs (providing the services) in your books of account and your copy of accounts in the books of AEs (providing the services). (e) How the payment has been quantified? Also please state as to whether any cost benefit analysis was done? If so the details thereof should be furnished. The cost benefit analysis should be (a) with reference to the cost of the services and benefit received therefrom and (b) services received from AEs vis-a-vis independent parties. (f) Whether any such services availed from AEs, have also been performed by you or availed from independent parties? If yes the details of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made to the provisions of section 92B of the Act, which recognizes the analysis of different clauses of transactions separately including the payment having made appearing on the income/profits. The break-up of the service fee of ₹ 3,30,72,526/- paid to AEs was as under: Name of the Associated Enterprise Amount of payment (Rs.) DSM Anti Infectives B.V., The Netherlands 43,76,479 DSM NV Concern, The Netherlands 2,86,59,149 DSM Nutritional Products, The Netherlands 36,898 TOTAL 3,30,72,526 46. The TPO considered the nature of each of the services and made observations as per para 8.2 at page 12 onwards as under: (a) The assessee has claimed payment of ₹ 36,898 to DSM Nutritional Products, The Netherlands in the Form 3CEB report whereas in the Transfer Pricing Study Report, the same payment is shown to DSM Food Specialists U.K. Ltd., U.K. In the submission filed by the assessee, no details have been provided on this payment to the AE. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us aspects of the service charges provided by the Assessing Officer i.e. in the field of financial accounting and auditing, environmental safety and health, business advisory - role of AE and examining OECD guidelines with regard to the intra group services. The relevant portion of the guidelines i.e. clauses 7.5,7.6,7.20,7.23,7.29 and 7.31 are reproduced under para 8.7 at pages 16 and 17 of the TPO order. The TPO thus analyzed that on the basis of the said guidelines in order to examine the arm s length price of intra group services received by one of the associated enterprises, following essential information should be available: 1. Whether the AE has received intra group services? 2. What are the economic and commercial benefits derived by the recipient of intra group services? 3. In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs. 4. Whether a comparable independent enterprise would have paid for the services in comparable circumstances? 48. However, from the details filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,526/- determined by the assessee. The Assessing Officer noted that the assessee had repeated the same submissions as were made before the TPO and in view thereof, the income of the assessee was proposed to be enhanced by ₹ 2,91,95,471/-. 50. The Dispute Resolution Panel-1, New Delhi upheld the proposal made by the TPO and the Assessing Officer thereafter passed an assessment order dated 28.9.2011 under section 144C(13) r.w.s. 143(3) of the Act enhancing the income of the assessee by ₹ 2,91,95,471/- on account of TP adjustment as discussed under para 6.4 of the assessment order. The assessee is in appeal against the said order of TPO. 51. During the assessment year 2008-09 similar reference was made by the ACIT, Circle-1, Chandigarh vis- -vis international transactions to the TPO under section 92CA(1). The assessee during the assessment year 2008-09 was engaged in similar business of manufacturing of intermediaries and bulk drugs. The assessee was wholly owned subsidiary of G.B. international, B.V., The Netherlands and which in turn was the subsidiary of DSM B.V., The Netherlands. The said concerns were associated enterprises within the meaning of section 92A(2)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e does not appear any rational for making payment of service fee. Further the assessee in the TP report had mentioned that the services provided by the AEs included marketing. Efforts were made by the assessee as the selling and distribution expenses as reported in the prowess database, included selling and distribution expenses of ₹ 18.94 crore during the year as against ₹ 13.61 crore during the preceding year. The TPO was of the view that most tangible marketing effort was made by the assessee and not by its AEs. Hence there was no justification for the assessee to make the payment to AEs for marketing. The TPO further held that all other services that are mentioned in the TP report are in the nature of incidental services for which no separate payment was required. In view thereof, the assessee was asked by the TPO to submit the following details: (a) Identify each of the Services actually received by you from the AEs for which the amount has been paid. (b) Please submit the contemporaneous documentary evidence to show that these services have actually been received by you. (c) Please state the payment made by you for each of the availed services. (d) Pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by one of the associated enterprises following essential information should be available: 1. Whether the AE has received intra group services? 2. What are the economic and commercial benefits derived by the recipient of intra group services? 3. In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs. 4. Whether a comparable independent enterprise would have paid for the services in comparable circumstances? From the details available it is clear that the assessee has not been able to prove that he has actually received services of some value that call for such a huge payment. 12.1 If one may sum up this discussion, the following points may be noted in terms of the questions posed to the assessee at Para 5 of the show-cause notice (reproduced at para No, 7.2 of the order). 54. The TPO thereafter considered the different methods prescribed under section 92C(1) of the Act and was of the view that the most appropriate method in assessee company would be the CUP method by selecting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some element which can be said to be related to assessee. Hence, ad adhoc allowance of 5% such costs can be attributed to be remuneration for services rendered. ALP is to be determined after reducing this amount, TPO is directed to recompute ALP accordingly. 57. The Assessing Officer vide order passed under section 144C(13) r.w.s. 143(3) of the Act dated 31.10.2012 made an addition on account of transfer pricing issue taking into consideration the directions of DRP, Panel-1, New Delhi. 58. The assessee is in appeal against the order of the Assessing Officer. 59. The ld. AR for the assessee pointed out that the issue raised on account of transfer pricing is in relation to disallowance of intra group services. It was pointed out by the ld. AR for the assessee that the international transaction relating to purchase and sale of goods was accepted by the TPO and the adjustment on account of Arm s Length Price was made only on account of Intra group services. Synopsis of the case was filed by the assessee and it was pointed out that various services were availed by the assessee from AEs against which payments were made totalling ₹ 330,72,526/-. The ld. AR for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rary cost allocation. The Assessing Officer thus enhanced the income by ₹ 291,95,471/-. 61. The ld. AR for the assessee pointed out that the assessee had entered into a Corporate Services Agreement which is placed at pages 10 to 17 of the paperbook under which it was agreed that the AE would provide corporate services of commercial, accounting, auditing, financial, fiscal, social, legal, environmental, safety, health and insurance nature against which it was agreed that payment for the said corporate services provided by the AE to the assessee would be paid as per the formula agreed upon. 62. The ld. AR for the assessee further pointed out that another service to be provided by the AE was the corporate guarantee which had not materialized during the year under consideration but had materialized in the succeeding year. Another aspect of the said guarantee was the reduction in the rate of interest on loan availed by the assessee which was reduced because of the intervention of the AE. The ld. AR for the assessee further stated that corporate operational audit was done by the AE and the TPO has seen the said report and commented it was of value to assessee. The case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Tribunal in various cases, adjustment made on account of these transactions i.e. payment of ICT services and aurora charges should be deleted. 67. The ld. DR for the revenue filed written synopsis along with the copy of the relevant portion of OECD guidelines. The first plea of the ld. DR for the revenue in respect of Intra Group Services was that the said service was performed by one member of the multi-national group for the benefit of one or more related members of the same group. Where the services had been rendered for the exclusive purpose of a single recipient, then it was easy to determine whether the service recipient had received a benefit or not. However, where the services rendered result in joint benefit, then the actual or perceived benefit for each individual recipient is to be established. The ld. DR for the revenue pointed out that para 7.2 of the OCED guidelines recognize the types of Intra Group Services, where the key issue to be considered regarding Intra Group Services was whether the said Intra Group Service had been rendered by the taxpayer and/or what are the economic and commercial benefits derived by the recipient. Reference was made to the para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed that the agreement entered into between the parties was to transfer profits out of India without paying the taxes thereon. In such circumstances, the transaction has to be seen at arm s length price, as transaction identification of the services in relation to which such charges are being paid. It was pointed out by the ld. DR for the revenue that wherever the services have been identified, the same have been allowed by the TPO and no disallowance has been made for the said services. 70. The ld. DR for the revenue referring to the facts of the case pointed out that in addition to the payments being made to the AE, the assessee had also incurred expenses under several heads which were interlinked to the Intra Group Services. Further reliance was placed on the following case laws : (i) Knorr-Bremse India (P.) Ltd. v. Asstt. CIT ITA No. 5097/DEL/2011, A.Y. 2007-08, dated 31.10.2012. (ii) M/s Deloitte Consulting India Pvt. Ltd. ITa No. 579, 1272, 1273/Mum/2011, order dated 30.03.2012. (iii) M//s Gem Plus India Pvt. Ltd. ITA No. 352/Bang/2009, dated 21.10.2010, 2010-TII-55-ITAT-Bang-TP. 71. The ld. AR for the assessee in rejoinder to the submissions made by ld. DR fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2008-09 was that the assessee had duly deducted the tax at source out of the corporate services charges paid by it. The said charges were paid as per the agreement between the parties and similar formula as in the earlier years was applied. The nature of corporate services involved provision of corporate services by the AEs to assessee in the nature of technical and commercial services and services with respect to accounting, auditing, financial, fiscal, social, legal, environmental, safety and health matters. For availing these services the assessee pays corporate service charges as per the allocation of total expense incurred by the AE, in accordance with the agreement. It was clarified by the ld. AR for the assessee that during the year under consideration only the corporate service charges were held to be not at arm s length price and disallowance of the total expenses was made except the concession allowed by the DRT Panel, New Delhi. The objective of entering the said agreement with its AE was to achieve business success of assessee in order to meet the demands of customer on product quality, continuous technological improvements. The aim of providing the corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer pricing addition made by the TPO should be deleted. Another contention raised by the ld. DR for the revenue is that the TPO had applied CUP method but had not furnished details of uncontrolled transaction based on which the arm s length price for the transaction was determined to be nil and hence, the same was not in accordance with law. 77. We have heard the rival contentions and perused the record. The assessee company before us is wholly owned subsidiary of DSM International B.V., The Netherlands. During the year under consideration the assessee was engaged in manufacturing of intermediaries and bulk drugs. The assessee had entered into an agreement with its principal i.e. DSM International B.V., The Netherlands on 1.1.2004. The agreement titled as Corporate Services Contract under which it was provided that the AE was engaged in research and development programmes in a variety of fields and had acquired large number of fundamental rights as well as knowledge and experience in the area of science and technology. It had also acquired knowledge in the area of commerce, finance, accounting, economics and other subjects for successful carrying out the business operation. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and training of personnel; e. environmental, safety and health matters, including responsible care issues; f. insurance; g. the admission, at the Company s request, of a reasonable number of its employees to DSM s sites and buildings to enable them to familiarize themselves with DSM s organization and working methods and to receive specific advice in the aforementioned fields; h. the sending, at the Company s request, of experts to the offices and factories of the Company for periods agreed by the parties, concerned for the purpose of advising the Company in the aforementioned fields; i. all other such matters on which the Company approaches DSM and which DSM considers to be reasonable and appropriate. 78. Further it was also agreed between the parties that the assessee would make available of its technical, commercial and other knowledge relating to the areas mentioned in article 4 to its AE. 79. As per article 6 of the agreement as per the agreement 5% markup was applied on the costs incurred for the provision of these services. The resultant amount was allocated to the appellant by applying the following formula: 2 X GVA of the assessee + I X Inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing study report totalling ₹ 3,30,72,526/- and the assessee was asked to show cause as to why all the transactions were grouped together to determine the arm s length pricing. As per the TPO, under Income-tax Act while applying arm s length pricing method, the same should be applied on transaction by transaction basis and separate analysis for the international transaction of payment towards service fee to the AE should have been carried on by the assessee. Further the assessee was also asked to demonstrate that whether an independent enterprise operating in uncontrolled environment would have made such a payment for such services. The assessee was asked to identify each of the services actually received by it from the AE for which the amount was paid and also to submit documentary evidence that the said services had actually been received by the assessee. The assessee was also asked to bifurcate the payments for each of the field services. The assessee was also requisitioned to quantify the payments made whether any cost benefit analysis were done. Reliance was placed on the ratio laid down by Mumbai Bench of the Tribunal in Star India (P.) Ltd. (supra) for the proposition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t charge method for charging for intra group service was difficult to apply in practice and where the groups have developed other methods for charging for services provided by parent companies or group service centre, then such method is to be applied. Under para 7.23 of OECD guidelines recognition of cost allocation and apportionment method involving same degree of estimation or approximation is recognized. Further under para 7.24 of OECD guidelines, an indirect charge method is recognized under which charges cannot be quantified except on approximate or estimate basis where there is rendering of service to various members of the group and there is recording of relevant service activity for each of the beneficiary. Applying the above said guidelines to the issue in hand, we hold that the assessee has benchmarked the intra group services as a whole and the payments have been made to the AEs on the basis of the corporate service contract entered into between the parties and there is no requirement to identify each and every service availed under Intra Group Services. 86. Though the assessee has made payments under different heads for services availed from the AE, as detailed in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as placed on series of decisions by the Tribunal for the proposition that the commercial wisdom of the assessee in making the payment to its AE under an agreement cannot be questioned. The learned A.R. for the assessee further submitted that various documents with regard to the nature of corporate services provided by the AE to the assessee, against which the assessee had paid the corporate service fee to its AE were furnished before the TPO and copies of which were also placed before us. Our attention was drawn to the submissions filed before the TPO along with the Annexure in respect of several documents placed at pages 1 to 245 of the Paper Book. The plea of the assessee was that the said documents have not been considered in entirety by the authorities below. In the synopsis submitted on 7.11.2013, the learned A.R. for the assessee had enlisted various benefits realized by the assessee from the payment of corporate service fee to its AE, which are as under: However, on without prejudice basis, to demonstrate the economic benefits realised by DSP India from payment of corporate service fee to its AEs, the appellant submitted the following documents/mails exchanged in day-to- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of better terms for financial charges due to global relation (please refer to page 148 of the paperbook); - issuance of letter of credit facility of Euro 10 million (approx 63 crore) (please refer to page 156 of the paperbook) - reduction in fees charged by the bank from DSP India based on the global relationship of the AE with the Bank (please refer to pages 157 and 158 of the paperbook) - sharing of best practices received by the appellant (please refer to pages 149 and 151 to 154 of the paperbook). 20. It is pertinent to mention that the ld. TPO, on one hand, in his order contended that no services has been received by the appellant; while on the other hand, himself accepted in its order that a Corporate Operational Audit 2006 was conducted by the AE for DSP India which is of value for appellant. 89. Similar list of the services provided by AE in assessment year 2008-09 had been summarized by the assessee in the synopsis filed, which reads as under: However, on without prejudice basis, to demonstrate the economic benefits realised by DSP India from payment of corporate service fee to its AEs, the appellant submitted the following documents/mails exchanged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urora Implementation (placed at pages 204 and 226 of the paperbook) Exchange of e-mails exchanged with AE in relation to - - Discussion on long term program for phased elimination of ozone-depleting substances in industrial applications in accordance with SHE requirements and discussion on replacement of CFC machines (please refer to pages 237 to 239 of the paperbook) - Aurora Rollout - August 2007 in relation reasons and benefits of implementing Aurora (please refer to page 298 and 299 of the paperbook) - FDA (Food and Drug Administration) audit in India- Mail sent by Jan W.H Smeets (Senior Manager, International Regulatory Affairs) to the FDA giving background information on the manufacturing facility and production process of 6-APA by DSM in India (placed at page 300 of the paperbook) 18. Further, the appellant also submitted that the financial services forming part of the CSC also include provisioning of guarantee(s) by AF, on behalf of DSP India (please refer to point b(iii) of Article 4 of the corporate service contract placed at page 142 of the paperbook). In this regard, it was submitted that the AE (Koninklije DSM NV) had guaranteed a letter of credit faci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn also encouraged energy savings and also safety, health and environment manufacturing and goods manufacturing practices. 92. The next set of services provided by the AE was in relation to health conference outside India where participation fee was not paid but the travelling expenses of the personnel travelling abroad were incurred by the assessee. In addition, there was a newsletter started by the AEs called SHE Flyer, which covered various facilities to be checked in respect of explosion of boilers and fire facilities. 93. Further there was exchange of e-mail between AE and the assessee regarding negotiations with bankers on account of finance and treasury services. The first set of negotiations was in respect of better terms of financial charges due to global relationship under which there was a rate correction vis- -vis rate of interest payable on loan in the year under consideration and also in the succeeding year. Further there was issuance of letter of credit of facilities of Euro 10 millions i.e. approximately ₹ 63 crore by the AE in favour of the assessee. The learned A.R. for the assessee pointed out that in the succeeding year the AE had granted a letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the manufacturing unit and cost incurred by the members, to streamline the functioning of different entities of the group and also for providing financial assistance by way of rate correction of the interest rate payable on the borrowings and also in the case of the assessee by providing guarantee in the form of actual money consideration, which in turn has resulted in monetary benefits to the assessee along with benefits of the research and development carried on by the members in the field of business. For availing the above said benefit, the assessee had entered into an agreement with its members in the preceding years and corporate service charges had been paid from year to year i.e. both in the preceding years and also in the succeeding years and we find no merit in the order of he Assessing Officer/TPO in holding that the assessee had not received any benefits under the said agreement and hence the payments made by to its AEs were not at arm s length price. 96. In assessment year 2008-09 under the head corporate service charges, in addition to the charges paid as in the preceding year, the assessee has also paid royalty for specific purposes to use trademark and patent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines., he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/royalty payment was not warranted. Assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these 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. The comparative position over a period of 5 years from 1998 to2003with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1.In fact there are four tabular statements furni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, New Delhi relating to assessment year 2008-09 has held that some benefits were allowable to the assessee. In addition to various services provided certain financial benefits in terms of savings were also made available to the assessee on account of the following: (i) Better terms for financial charges. (ii) Issuance of letter of credit of Euro 10 million (approximately 63 crore in assessment year 2007-08. (iii) Guarantee in assessment year 2008-09. (iv) Reduction in fees charged by Banks from the assessee. 100. The learned A.R. for the assessee has further furnished rejoinder to the submissions of the learned D.R. for the Revenue on 12.2.2014 in which it has filed the documents in relation to the loan agreement entered by the assessee with Deutsche Bank, against which it had availed term loan from the said loan amounting to ₹ 52.63 crore in assessment year 2008-09. Another documents filed by the assessee is letter issued by Deutsche to the AE confirming assumption of risk on behalf of the assessee. Further the copy of deed of pledge of sum of Euro 10 millions as guarantee against providing loan to the assessee has also been filed. The plea of the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O himself. The action of the TPO in applying CUP method without there being any valid comparable was thus patently incorrect. We reverse the findings of the TPO in this regard. 103. The ld. DR for the revenue relied upon various decisions. In Knorr-Bremse India (P.) Ltd. s case (supra), the proposition laid down was that CUP method had to be applied as no transaction-wise details were available. We find no merit in the said reliance in view of our holding that the TPO has failed to point out any comparable for applying the CUP method. Further, since the transaction has been found to be at arm s length, there is no merit in any adjustment on this account. 104. The ld. DR for the revenue further relied on Gem plus India (P.) Ltd. s case (supra), wherein it was held as under : We heard both sides in detail and also perused the records of the case including the paperbook filed by the assessee company running into 390 pages. The necessary facts of the case have already been discussed in paragraphs above. On examination of the facts and circumstances of the case and the terms of the agreement entered into by the assessee and its Singapore associate, the TPO has come to certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing certain expenditure is against the facts. The TPO has not disallowed any expenditure. Only the ALP was determined. It was the Assessing Officer who computed the income by adopting the ALP decided by the TPO at nil . 106. However, both these propositions laid down in Gem plus India (P.) Ltd. case (supra) and Deloitte Consulting India (P.) Ltd. case (supra) was overruled by the ratio laid down by the Hon ble Delhi High Court in EKL Appliances Ltd. (supra). The ratio in Deloitte Consulting India (P.) Ltd. case (supra) was laid down because of the peculiar facts of the case and as laid down by various Courts, the said proposition cannot be universally applied. 107. Another aspect raised by the TPO was that even after paying said Corporate Service Charges, no benefit had arisen to the assessee as the assessee was running into losses. We find no merit in the said plea of the TPO to dictate what the business deals of the assessee should be. It is the businessman who can only judge the legitimacy of the business needs of the company from the point of view of a prudent businessman. The benefit derived and occurring to the company must also be considered from the angle of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee as result of services provided by the AE should be considered while holding the transaction to be at arm s length. It was fairly conceded by the ld. AR for the assessee that under internationally accepted norms, savings are to be shared between the parties in the ratio of 50 : 50. The ld. AR for the assessee further pointed out that the savings on account of guarantee fee in assessment year 2007-08 were ₹ 1.40 cr and the total savings in assessment year 2008-09 were ₹ 9.29 cr. The TPO in assessment year 2007-08 has made an adjustment of ₹ 2,91,95,471/- and in the assessment year 2008-09 has made an adjustment of ₹ 6,14,13,983/-. In view of the admission of the assessee, we are of the view that 50% of the benefits arising to the assessee on account of financial benefits is to be retained by the assessee in independent party transaction. However, in the facts of the present case, the assessee has transferred 100% of the said benefits to the AE by way of paying the Corporate Service Charges. Accordingly, we direct the TPO/A.O. to disallow 50% of the benefits arising on account of guarantee fee and interest cost as being not on arm s length and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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