TaxTMI 
TaxTMI 
2013 (2) TMI 351
X X X X Extracts X X X X
X X X X Extracts X X X X
....d in making an addition of Rs. 22,865,807 to the total income of the appellant on account of adjustment in the arm's length price ("ALP") of one of the international transactions entered by the appellant with its associated enterprises. 4. The learned AO/TPO have erred, in law and in facts, by not accepting the transfer pricing analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, conducting a fresh economic analysis for the determination of the ALP for the impugned international transaction, and holding that the Assessee's impugned international transaction is not at arm's length. 5. The learned AO/TPO have erred, in law and in facts, by concluding that the Appellant has not been able to prove substantially that the SAP services have actually been rendered to it, that the Appellant has not derived any economic benefit from the SAP services received from the AE, and thereby holding that the ALP of the SAP service charges is Nil. The Hon'ble DRP, in turn, has erred by overlooking the Appellant's objections on the subject and in concluding that the benefit derived by the Appellant was remote or indirect. 6.&n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....implement the software and the on-going cost towards user license and maintenance is allocated to each of the group companies on the basis of use. For the FY 2006-07, Festo Germany has allocated the actual cost incurred in relation to use of such software amounting to Rs.22,865,807 to Festo India." 6. The stand of the assessee with regard to the charges paid as above as being one at arm's length price ("ALP") was as follows:- "During the prior financial years Festo India has undertaken implementation of the SAP R/3 system for the entire business application such as sales, production, planning, finance support etc, which is directly integrated with the Festo Germany server. This project was a part of global initiative undertaken by Festo Germany, in order to bring about uniformity in the sales and distribution processes across Festo group companies worldwide. Also, as part of the SAP implementation activity, Festo Germany had provided frame relay connectivity and certain software to Festo India. For the FY 2006-07, Festo Germany has allocated the actual cost incurred in relation to use of such software amounting to Rs. 22,865,807 to Festo India. The provision of the SAP services....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the SAP services charged by Festo Germany to Festo India." 7. The AO referred the determination of ALP in respect of the aforesaid transaction to the TPO u/s. 92CA of the Act. It is not in dispute that except the international transaction under which SAP charges were paid to Festo, Germany, all other international transactions of the Assessee with its AE were considered as at arm's length by the TPO. 8. As far as international transaction in which SAP charges were paid by the Assessee to Festo, Germany, the AO was of the view that the assessee was not able to demonstrate the services rendered by Festo, Germany for which the payment was made. The conclusions of the TPO on the SAP charges paid to Festo, Germany were as follows:- 1. The taxpayer already paid for SAP implementation in the earlier years. 2. The taxpayer did not produce any evidence regarding the payment made for the SAP implementation by the AE and how it would be quantified at an arm's length condition. As seen by the TPO, SAP implementation in an independent company with similar number of user licenses costs less than the amount paid by the taxpayer in the earlier years. 3. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m AEs constitute substantial portion of consumption of raw material/purchases indicating that the AEs are already compensated enough in the form of purchase price and also compensated for the value addition in India by way of royalty paid based on the technology received from AE. 10. The taxpayer did not prove the arm's length nature of SAP Service charges paid to Festo Controls Pvt. Ltd. USA. 11. The taxpayer did not provide any details regarding how these services are valued between two independent entities dealing in similar circumstances. Thus the arm's length price of SAP Service charges paid is worked out as under. Arms Length Price Rs. Nil Price charged in the international transactions (Payment made for SAP Services) Rs.2,28,65,807 Excess paid being adjustment u/s 92CA Rs.2,28,65,807 The above excess of Rs. 2,28,65,807/- is being treated as an adjustment to the price shown by the taxpayer in its books of account in respect of payment made for SAP service charges." 9. It is to be mentioned here that in the earlier financial years, the assessee had made payments for implementation of SAP. The payment made for implementation of SAP modules is....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in this regard. He has submitted that the copies of invoices raised in this regard by the AEs were furnished by the assessee along with respective allocation keys. Keeping in view this submission made by the learned counsel for the assessee as well as on perusal of the relevant details available on record, we agree with the contention of the learned counsel for the assessee that there is no justification in the action of the TPO in ignoring all these details and taking the ALP of the relevant transactions at Nil. In our opinion, it is incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil keeping in view the facts and circumstances of the case and the relevant details furnished by the assessee. The learned counsel for the assessee in this regard has submitted that in the subsequent years i.e. assessment years 2005-06 and 2006-07, a similar issue was involved in the assessee's case and the learned CIT(Appeals) has allowed the expenses allocated to the extent of 50%. We have perused the orders of the learned CIT(Appeals) passed in the assessee'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....been recognized in India's tax jurisprudence. It is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd. v. CIT [1951] 20 ITR 1 (SC), CIT v. Walchand & Co [1967] 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same. 13. In light of the aforesaid decisions, it was submitted that the approach of the TPO is not proper and the same should be held as not valid in law. 14. The ld. DR relied on the order of the TPO. 15. We have considered the rival submissions and are of the view that the stand taken by the assessee in this regard deserves to be accepted. It is clear from the decisions referred to above that the TPO has to work out the ALP of the international transaction by applying the methods recognized under the Act. He is not competent to hold that the expenditure in question has not been incurred by the assessee or that the assessee has not derived any benefits for the payment made by t....