TMI Blog2013 (12) TMI 942X X X X Extracts X X X X X X X X Extracts X X X X ..... xcessive and unreasonable - Held that:- DRP has also affirmed Assessing Officer's action by stating that claim of assessee that 17% of the time of employees of MIL has been spent for the assessee is also without any supporting evidence. Thus, we find that there is conflict between submissions of the assessee and finding by the authorities below. - Issue remitted back. - IT Appeal No.5297 (Delhi) of 2012 - - - Dated:- 23-8-2013 - RAJPAL YADAV AND SHAMIM YAHYA, JJ. For the Appellant : Pradeep Dinodia, R.K. Kapoor and Miss Pallavi Dinodia. For the Respondent : Peeyush Jain and Yogesh Kumar Verma. ORDER:- PER : Shamim Yahya This appeal by the Assessee is directed against the order of the Assessing Officer dated 31.3.2008 passed u/s. 143(3) read with section 144C of the I.T. Act for assessment year 2008-09. 2. The grounds raised read as under: (1) That the learned Assessing Officer has erred in law and on facts in making an assessment of the assessee's income at Rs.8, 79, 70,228/- against the returned income of Rs. 8,08,05,625/- and thus making total additions of Rs. 71,64,603/- on wholly illegal, erroneous and untenable grounds. (2) The order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termine the ALP of the Technical Services at NIL. (11) That the determination of ALP at Nil pertaining to Technical Know how Fees and reimbursement of training and testing expenses and payment for Design and Development expenses is based on surmises , conjectures and imaginary consideration is bad in law. (12) The ld. TPO, Ld. AO and then further Ld. DRP grossly erred in law in determining the ALP of the Technical Know Fees, Training cost, Testing expenses payment for Design and Development expenses at NIL by holding that these services were of such a nature that partakes the character of shareholder services and for preserving the interest of the AE in assessee's business. (13) On the facts, and in law, the Ld. AO has erred in disallowing and the Hon'ble DRP has further erred in disallowance of 50% of the corporate expenses i.e. Rs. 45,00,000/- under section 37(1)/ 40A(2) (b) of the Act on wholly erroneous, illegal and untenable grounds. 13.1 The disallowances of Rs. 45,00,000/- is bad in law. 13.2 The ld. TPO, Ld. AO and then further Ld. DRP failed to appreciated that provisions of section 40A(2)(b) are not applicable to the assessee to the exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analysis at the time of entering into the agreement with its AE showing that the royalty rate is not fixed based on expected benefit. 3. There is no proof that the other group concerns or third parties are also charged identical royalty. 4. The taxpayer has also not been able to show that it derived any economic benefit from the alleged know how received the AE. 5. The profitability is below the arithmetical mean margin of the comparable companies considered by the TPO. 6. The profit that accrues to the licensee may not arise solely through the engine of the technology. There are returns from the mix of assets it employees such as fixed and working capital and the returns from intangible assets such as distribution systems, trained workforce, etc. allowances need to be made for them. In the absence of any data provided by the taxpayer, it is impossible to know that what percentage of profits the licenses would like to share at an arm's length after removing the returns from assets employed and other economic factors which may not arise solely through the engine of the technology. 7. The taxpayer did not give the details of royalty rates in the ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... helped the taxpayer in reducing its losses significantly. It was also found that there were peculiar reasons for incurring the losses. Thus the aforesaid decision is of no help. Similarly, the decision of ITAT, Hyderabad in the case of LG Polymers is of no help as in that case the transaction was treated as sham and the matter was restored to the file of the Assessing Officer/TPO for fresh determination of the ALP. The Ld. DRP for the A.Y. 2007-08 at para 3 and 7 of the order has allowed relief to the assessee. Relevant portion of the order is reproduced as under:- "3 ..The Panel feels that while a payment of royalty may still be justified, the other payments cannot be held at arm's length. This is because that either the service that they claim to be receiving for these payments is either subsumed in the payment of royalty or the supposed service is of such nature that it partakes the character of a shareholder service. If indeed such a service is provided by the AE, it is towards preserving its inherent interest in the assessee business. The AE also has to insource uniformity of process across the globe. ------------ 7 .The DRP is of the opinion that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s connection matter may be remitted to the file of the TPO to give a comprehensive findings. In this connection, ld. Ld. Departmental Representative relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v. Chetan Das Laxman Das vide order dated 7.8.2012. 8. We have carefully considered the submissions and perused the records. We find that TPO in this case has taken up the issue of adjustment of arm's length price of royalty paid by the tax payer. In this connection, the TPO noted that assessee has debited the following payments: Royalty payments :1,56,43,832/- Payment of Technical Fee : 12,31,863/- Payment of Training and Testing Expenses : 13,46,823/- Payment modification of tools : 165,734/- Payment of design Development expenses : 69,734/- Total :1,82,92,510/- 8.1 TPO noted that the total royalty made and other allied payment made to AEs is Rs. 1,82,92,510/-. Thereafter, TPO proceeded to examine the various aspects of arm's length nature of royalty payment. In this connection, we find that in the entire transfer pricing order, the TPO has only discussed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee will be put to great hardship, if the TPO is given a second inning to make out a fresh case. Hence, we reject these submissions made by the Ld. Departmental Representative. 9. Apropos disallowance of 50% corporate expenses of Rs. 45,00,000/- 9.1 On this issue Assessing Officer noted that assessee had made payment of Rs. 90,00,000/- to group and related company M/s Minda Industries Ltd. as under: Particulars Amount (i) Overhead expenses Rs. 48,13,108/- (ii) Personnel cost Rs. 41,86,892/- Total Rs. 90,00,000/- 9.2 Assessing Officer asked the assessee to justify the above claim. Assessee explained as under: (a) The charges recovered by M/s Minda Industries Ltd., the parent company are towards services provided with expert knowledge in handling of corporate matter like HR, Secretariat, Legal, Taxes, BEST, MD office, review and finalization of budget, monthly MIS, internal and statutory review, finance planning, debtors review and computation of tax, etc. (b) Service tax is charged by the parent company and tax is deducted by the assessee company. (c) Both companies are subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the assessee to its sister concern, MIL. The assessee itself, has incurred salary and wages expenses of Rs. 16.43 crores, which included a salary of Rs. 63.82 lakhs to a common director, Mr. Nirmal Minda. The salary and wages expenses of the assessee include compensation paid to senior officer, Vice President, managers extra amounting to about Rs. 10 crores. There is no direct evidence for the alleged liaisoning work arrangement for funds from banks, application for getting certain approval, legal drafting, interview for recruitment, liaison with foreign customers, supervising direct tax issue, planning etc. claimed to have been rendered to the assessee by MIL. The claim of the assessee that 17% of the time of employees of MIL has been spent for the assessee is also without any supporting evidence. The further claim of the assessee that 17% of the employee cost of MIL coupled with overhead expenses total to Rs. 90 lakhs is quite fanciful and without any basis. The assessee has made this arrangement to match the expenditure with the amount of Rs. 90 lakhs to be paid to MIL as per the agreement between two sister companies, which is arranged as per the convenience of the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer has not responded to the above submissions and has proceeded to make ad hoc of 50% of expenses. DRP has also affirmed Assessing Officer's action by stating that claim of assessee that 17% of the time of employees of MIL has been spent for the assessee is also without any supporting evidence. Thus, we find that there is conflict between submissions of the assessee and finding by the authorities below. While assessee is claiming to have submitted elaborate details. The revenue has claimed that proper supporting evidence were not there. 15. In our considered opinion, in these circumstances, interest of justice demands that the matter may be remitted to the file of the Assessing Officer. Accordingly, this issue is remitted back to the file of the Assessing Officer. Assessing Officer is directed to examine in detail the details and break-up in the time charts submitted by the assessee and thereafter consider the issue afresh. Needless to add that the assessee should be granted adequate opportunity of being heard. 16. In the result, the appeal filed by the Assessee is allowed for statistical purposes. Order pronounced in the Open Court on 23/8/2013. - - TaxT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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