TMI Blog2014 (5) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... matter is remitted back to TPO for fresh adjudication – Decided against Revenue. Cost allocation – Held that:- While admitting the fresh evidence sought to be relied upon, the issue of merit of the evidence sought to be placed on record open to the TPO for his consideration is left open – thus, the matter is remitted back to the TPO for fresh admission of the evidences as it is necessary to consider the relevance and impact of the same for deciding the issue – Decided in favour of Revenue. Cost recharges – Held that:- The appeal for the year has been segregated as it is stay granted appeal accordingly paying heed to the stand of the CIT - the issue is restored to the TPO with the direction to decide the same in accordance with the view taken in 2007-08 assessment year – Decided in favour of Revenue. Disallowance of claim as revenue expenses – Case law applied without appreciating the facts - Held that:- The DRP without discussing the facts has decided the issue relying upon judgments which proceed on a specific set of facts - the approach followed by the DRP cannot be upheld - Before applying the case law it is first primarily and necessarily important to set out the full ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establish the genuineness of these transactions either during the T.P.O proceedings or during assessment proceedings. 03. The appellant craves leave to add, to alter, or to amend any grounds of the appeal raised above at the time of the hearing. ITA-5903/Del/2010 filed by the Assessee 1. The Ld. Dispute Resolution Panel ( Ld DRP ) and the Ld. Additional Commissioner of Income-tax ( Ld. AO ) (following the directions of the Ld. DRP), erred on facts and in law, in enhancing the income of the appellant by Rs.14,529,430/- on account of the Transfer Pricing ( TP) adjustment u/s 92CA(3) of the Income Tax Act, pricing Officer-1(3) ( Ld. TPO ), by holding that the international transaction of cost allocation from the associated enterprise (AE) to the appellant does not satisfy the arm s length principle envisaged under the Act. 2. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law, in upholding the Ld. TPO s stance of disregarding the benchmarking approach and methodology followed by the appellant for determining the arm s length nature of the TP arrangement with regard to cost allocation from overseas AEs in its TP documentation mainta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. DRP), erred on facts and in law, in disposing off the appellant s detailed submissions and objections against the TP adjustment without appropriately discussing/appreciating/understanding the merits of the case. 6. The Ld. AO also erred in facts and in law in initiating penalty proceedings u/s 271(1) (c) of the Act for furnishing inaccurate particulars of income. ITA No-5955/Del/2012 filed by the Assessee 1. The Ld. Dispute Resolution Panel ( Ld DRP ) and the Ld. Additional Commissioner of Income-tax ( Ld. AO ) (following the directions of the Ld. DRP), erred on facts and in law, in enhancing the income of the appellant by Rs4, 97,45,614/- on account of the Transfer Pricing ( TP) adjustment u/s 92CA(3) of the Income Tax Act,1961 ( Act ) made by the Ld. Additional Commissioner of Income-tax, Transfer Pricing Officer-1(2) ( Ld. TPO ). 2. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law 2.1.1. In enhancing the income of the appellant by Rs.1,17,09,474, by holding that the international transaction of cost allocation from the associated enterprise (AE) to the appellant does not satisfy the arm s length principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assistance in assessing the feasibility/viability of opening another unit in relation to proposed extension programme of the company as capital in nature. 4. The Ld. AO erred in levying interest u/s 234D of the act and withdrawing interest u/s 244A of the Act. 5. Without prejudice to the above grounds, the Ld. AO erred in levying interest u/s 234B of the Act. 6. The Ld. AO erred in initiating penalty proceedings u/s 271(1) (c) of the Act for furnishing inaccurate particulars of income That the above grounds of appeal are without prejudice to each other. 2.1. Addressing the transfer pricing issue agitated by the Revenue and the assessee in their respective appeals, it is seen that qua the departmental appeal in 2005-06 assessment year the record shows that the Transfer Pricing Officer (hereinafter referred to as the TPO ) vide his order u/s 92CA(3) addressing in page 2 para 2 to 4 of his order observes that the assessee is engaged in the business of manufacturing assembling of automotive seating systems and interior, and in the design and development of automotive seating systems and interiors. He also takes note of the fact that Lear Seating Private Limited is a wholly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances, he held that in the absence of any evidence that the benefit of expenditure has accrued to the assessee or pertained to it, the claim was not to be allowed. He was also of the view that it was difficult to understand how the expenses have been allocated. He took note of the fact that although the assessee has stated that it had bench-marked the transaction on the basis of CUP however no CUP was furnished. On account of these arguments the submissions were considered to be vague. The adjustment of Rs.1,73,19,297/- was accordingly proposed as under :- 6.7. From the above guidelines it is seen that the allocation of cost can be made by a group company only when the specific services have been provided. When the use of a service is incidental then the associated enterprises should not charge. In the case of cost contribution also the allocation made should be on the basis of certain allocation keys among the member of the multinational group company. In this case t6he assessee had neither furnished an evidence to support the claim that the AE had provided specific services to the assessee and that these alleged services were not incidental nor had disclosed basis for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 191,960,011 7. Cost allocation 14,529,429 8. Cost recharges from associated enterprises 14,445,502 9. Cost recharges to associated enterprises 11,838,478 3.2. Herein also the assessee was required to explain by the TPO the allocated cost of Rs.1,45,29,429/-. Considering the reply of the assessee the TPO herein also observed that although the Transfer Pricing Report mentions that the transaction has been bench-marked using CUP method but no comparable uncontrolled price was disclosed by the assessee. He also observed that in the Transfer Pricing Report drawn under Rule 10D and there was also no evidence of any independent party CUP available on record maintained by the assessee. Considering the facts that sufficient opportunity had been given to explain, the TPO herein also propose the addition of Rs.1,45,29,430/- in the following manner:- 9. Whether cost allocation of Rs.1,45,29,429 made to the assessee is at arm s length? I have reached to following conclusion on the basis of careful perusal of findings as discussed in proceedings paragraphs of this order: 9.1. It is evident from facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions is zero. 10. The assessing officer shall increase the income of the assessee for the AY 2006-07 by rs.14,529,430/- for the international transaction undertaken by the assessee during the FY 2005-06. The other international transactions undertaken by the assessee are held to be at arm s length price and no adverse inference is drawn for the FY 2005-06. 4. In 2008-09 assessment year, the TPO vide his order u/s 92CA(3) of the Act proposed an addition qua the international transactions disclosed by the assessee not only on account of cost allocation of Rs.11,79,474/- as in earlier years but also on account of cost recharges of Rs.3,80,36,140/-. For the record the following international transactions were disclosed by the assessee in its 92CE Reports:- Import of raw materials, components 174,580,242 Export of seat components and samples 2,480,397 Provision of development support services 7,836,010 Provision of support services 238,054,629 Receipt of services 13,800,750 Cost allocations from associated enterprises 11,709,474 Cost recharges from associated enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information, process the information, transmit the information as necessary, and later retrieve information as necessary. The assessee has not been able to provide any proof as to what are the complex problems that the AE has solved, which the assessee would have been unable to do. The only benefit which the assessee has mentioned is obtaining discounts. The greatest flaw in the assessee s case is that it is unable to give details of the cost incurred by the AE on these services. IF the AE is purchasing software for its operating entities, what is the problem in determining the cost? IF the AE is maintaining a team for trouble shooting/maintenance it should be able to arrive at its cost. That would have formed a rational basis for placing a charge on the assessee. It has already been brought out that any arrangement will have to answer the arm s length principle. No independent enterprise would be able to pay out a portion of its profits, big or small, before it knows what is the cost incurred by the service provider. The assessee has failed to follow this basic tenet of independent behavior. In any case, while India is the hub of the global IT-ITES, it is not believable when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax administration. They also consider the possibility that (MNEs) Multi- National Enterprise may also use cost allocation and apportionment method which often necessitate some degree of estimation or approximation, as a basis of calculating an arm s length charge. These methods are generally referred to as indirect charge method and as per OECD Guidelines should be allowed provided sufficient regard has been given to the value of the services to the recipient and the extent to which the comparable services are provided between independent enterprises. Indirect charge method as per OECD Guidelines should be sensitive to commercial features of the individual case for example the allocation key it has been observed makes sense under the circumstances. The method should also contains safeguards against manipulation and follow sound accounting principles, and be capable of producing charges or allocation of costs that commensurate to the actual or reasonably accepted benefits to the recipient of the service. It has also been addressed that the determination of arm s length principle should be considered both from the perspective of the service provider and from the perspective of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has not even submitted the basis of quantifications of these charges. No invoices have either been submitted or produced for verification during the TP Audit hearing proceedings. Following the discussion in the preceding paras, it is also seen that that the assessee has not been able to show that any tangible benefit has passed to it following the payment of these charges. As stated earlier, though fashioned as a cost allocation, the payment is actually a payment for services said to have been received. Let us kow revisit the questions that were put to the assessee in the course of these proceeding and evaluate the assessee s replies: (a) The assessee has not been able to provide any basis of this payment made to the AE. (b) The assessee has not been able to provide any separate benchmarking for the payments of these charges. The assessee should have been able to demonstrate that any independent party would also have made this payment in similar circumstances, it has not been able to do so. (c) The assessee has not been able to give the details of cost incurred by AE on accounts of various services. Because of this the AE and the assessee has adopted the device of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase. Moreover, contracts within an MNE could be quite easily altered, suspended, extended, or terminated accordingly to the overall strategies of the MNE as a whole, and such alterations may even be made retroactively behind a contractual arrangement in applying the arm s length principle. 1.68. IN addition, tax administrations may find it useful to refer to alternatively structured transactions between independent enterprises to determine whether the controlled transaction as structured satisfied the arm s length principle. Whether evidence from a particular alternative can be considered will depend on the facts and circumstances of the particular case, including the number and accuracy of the adjustments necessary to account for differences between the controlled transaction and the alternative and the quality of any other evidence that may be available. 4.9. How different international tax jurisdictions considered the issue of intra group services in transfer pricing was also considered by him. The same is extracted hereunder :- 6.1. AUSTRALIA In January 199, the ATO (Australian tax Office) issued its taxation ruling on services; Income tax: international transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayer must first determine whether a specific activity performed by a member of the group for another member is a service far which a charge is justified. An arm's length entity would be willing to pay for an activity only to the extent that the activity confers on it a benefit of economic or commercial value. The test to determine if a charge for an activity is justified, would involve the following question: Would the entity for whom the activity is being performed either have been willing to pay for the activity if performed by an arm's length entity or have performed the activity itself? Where it would not have been reasonable to expect the entity to either pay an arm's length entity for the activity or to perform it itself, it is unlikely that any charge for the activity would be justified. Certain costs are incurred for the sole benefit of shareholders and, therefore, should not be charged to other members of the group. Costs relating to the legal structure or the general financial reporting requirements of a particular group member should not be charged to another member. Certain other costs, such as those involved in raising funds for the acquisition of an interest in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is determined who benefits from the services, the arm's length compensation for the transaction must be determined. A separate transfer price can be charged if independently of the corporate or other legal relationship an unrelated party would have paid remuneration for the services in question. The transfer price must be agreed in advance by the paying corporation and proof must be provided. No separate transfer price can be charged if the services provided or costs incurred by the management entity are recharged to the receiving corporation in some other form, e.g. by intra-group transfers of goods or services at arm's length prices which themselves take account of the administrative services or costs. Remuneration for such services would only be paid between unrelated parties if the services - can be clearly distinguished and quantified and - are rendered in the recipient's own interest (i.e. provide an expected benefit and reduce the recipient's costs). No transfer price can be charged if a subsidiary corporation utilizes services taking into consideration only the circumstances of the parent corporation, and if the subsidiary corporation, considering only its own cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit of another member of the group. Treas. Reg. 1.482-2(b)(2)(i). If the benefits to those entities are so indirect or remote that unrelated parties would not have charged for such services, then a service fee is not warranted. In addition, service fees are not required for socalled stewardship services or for services that merely duplicate services the related party independently performs. As is the case in most countries, stewardship services are treated as a cost of the parent company and cannot be charged to subsidiaries of multinational companies. In IRS Technical Advise Memorandum 8806002 (24 September 1987) the IURS defined stewardship services to include periodic reviews and visitations by management, the cost of meeting reporting requirements or other legal obligations and the cost associated with financing the parent s ownership in the affiliate. Expenses relating to the investigation of new business opportunities, installation of corporate tracking systems and other corporate actions are generally considered costs of the parent company and are not charged to affiliates. 4.10. The position was consequently summed up by him in the following manner at page 153 of h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of justification, benefit derived and lack of sufficient evidence, the above mentioned payment of costs is held to be unjustified. 9. Determination of Arm s length price: Following the discussion in the preceding paras of this order, it is concluded that the assessee has not been able to demonstrate that an independent party would have made a payment of Rs.11,709,474 on account of cost allocation and Rs.38,036,140 on account of cost reimbursements as the assessee has done. Therefore, by the application of CUP, the arm s length price in respect of this transaction is determined at nil . The assessing officer shall accordingly enhance the income of the assessee by Rs.49,745,614. The Assessing Officer may examine the feasibility of initiating penalty proceedings u/s 271(1)(c) of the Act in accordance with Explanation 7 of the same. 5. In the said background qua the departmental appeal in 2005-06 assessment years, the stand of the assessee has been that it has primarily bench-marked its international transaction pertaining to cost allocation on CUP basis and TNMM has been used only as a corroborative analysis. Referring to the chart of issues filed it was submitted that before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce sought to be relied upon is crucial for determining the issue as the assessee s case has been rejected for want of independent authority certificate. The certification sought to be relied upon it was submitted is a necessary evidence and could not be placed by the assessee on record as appreciation of the transfer pricing issues and the knowledge and understanding is constantly growing as such the same could not be placed before the authorities before. It was accordingly submitted that accepting the fresh evidence the Bench may restore the issue to the TPO so as to consider the additional evidences. 5.2. It was his submission that similar prayer would be warranted in 2008-09 assessment year also as herein also the assessee qua the cost allocation which is also an issue arising even in the earlier year the fresh evidence will need to be considered. 5.3. Apart from that issue it was his submission that in 2008-09 assessment year there is an additional transfer pricing issue i.e cost recharges claimed which have been disallowed by the TPO. The said issue it was submitted is arising for the first time in 2007-08 Assessment year. The said appeal the record shows is a Stay Granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjection if the departmental appeal is allowed in 2005-06 assessment year and the issue is restored. Since the issue in 2006-07 and 2008-09 assessment years will depend not only on the outcome of 2005-06 assessment years and also on the facts and evidences for that year the request that the cost allocation issue may go back for these two years was also not objected to by the CIT DR. However his objection was posed to the arguments that the nature of fresh evidence sought to be admitted in 2006-07 assessment year would necessarily warrant in granting relief to the assessee. Addressing the same, though not opposing the admission thereof, it was his submission that the evidence is not a relevant evidence and he would want that his opposition be recorded in case the Bench so desires to direct the TPO to grant relief considering the same. It was his stand that the TPO should be left free to consider the relevance if any of that evidence. 6.1. On cost recharge issue it was his submission that the first year is 2007-08 assessment year which has been segregated from the group of appeals being heard as such in the circumstances the only direction which the Bench may give to which the depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant, by way of this application, seeks permission to bring the said information/documents on record as an additional evidence to substantiate its claim it is also submitted that this particular certificate was not available with either the Ld. TPO or the Ld. DRP during the respective proceedings. 4. It may appreciated the said additional evidence is relevant and necessary for the proper disposal of the above-referred ground of appeal, and hence the appellant, humbly requests the Hon ble Bench to kindly consider them in the interest of substantial justice. 5. Accordingly, the said certificate is attached herewith (refer pages 1 to 5) 8.1. Considering the above additional evidence in the light of the submissions advanced by the parties before the Bench which we have discussed above in significant detail, we considering the respective stand and the material available on record qua the cost allocation issue which is the only issue in 2005-06 and 2006-07 assessment year set aside the impugned order of the CIT(A) in 2005-06 assessment year and allow the departmental ground. The issue as such is restored back to the TPO with the direction to decide the same afresh in accordan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the TPO with the direction to decide the same in accordance with the view taken in 2007-08 assessment year, the year in which the issue arises for the first time as it is the very same Agreements, contracts and arrangements, of the parties which needs to be considered in the base year which is 2007-08 for the cost-recharge issue. The plea of the assessee seeking permission for filing fresh evidence cannot be accepted as nothing has been placed on record to show what is the nature of the evidence which the assessee now seeks to address that too in 2008-09 which could not be placed on record in 2007-08 assessment year and would be different and distinguishable from the evidence of 2007-08 assessment year. 9. In ITA 5955/Del/2012, apart from the above issues, the assessee vide Ground No. 3 has assailed the action of the AO and the DRP in disallowing the amount 17,18,906/-claim by the assessee as a revenue expenditure. The relevant facts available qua the same on the issue are found discussed at pages 3 4 of the assessment order passed u/s 143(3) read with Section 144 C of the Income Tax Act. The relevant extract is reproduced hereunder for ready reference:- 4. During the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions herein or add any further grounds as may be considered necessary and to submit such statement, documents and papers ass may be considered necessary either before or during hearing. We have heard the submissions and augments of the Ld. AR and have considered the facts of the issue carefully In our opinion, the proposed disallowance has to be upheld. The company is primarily engaged in the manufacture/assembly of automotive seating systems (i.e seats and seat trims) and interior parts, and in the design and development of automotive seating systems and interiors, for automotive industry customers and/or its Group Companies. During the yer, Lear India had two factories in Nasik, one in Halol and one in Chennai for carrying on the manufacturing/assembly to automotive seating systems and interior parts. In addition to this, it has one engineering centre in Thane. Assessee paid a sum of Rs.17,80,906/- towards consultancy charges to M/s Bizsolindia for a feasibility/viability report for opening of another manufacturing unit in Pune in relation to the proposed expansion programme of the company. In the case of M/s Saurashtra Cements and Chemicals Industry Ltd. 196ITR 237 (Guj), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture but wrongly. 11.1 It was further submitted that the judgment of the Jurisdictional High Court has taken into consideration the judgement of the Gauhati High Court relied upon by the DRP. The following extracted was relied upon:- 13. We note two judgments of other High Courts taking this view in identical circumstances. One case is decided by Gauhati High Court which is reported as Dy. CIT Vs. Assam Asbestos Ltd.[2003] 263 ITR 357. In that case the assessee was in the business of manufacturing asbestos sheets. Contemplating to set up a mini cement plant, which was the same line of business activity of the assessee, a feasibility report was prepared. However, the project would not be undertaken as Government refused to grant required permission. The Court opined that no new capital asset came into existence and the expenses incurred on preparation of the feasibility report, same line of business, were in the nature of revenue expenditure. Rajasthan High Court had also occasion to deal with this issue in the case of Maharaja Shri Umaid Mills Ltd Vs. CIT [1989] 175 ITR 73. There also the expenditure incurred in obtaining survey and feasibility report for setting up polyethyl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... techno commercial report may kindly be allowed as revenue expenditure and the ground NO. 3 be allowed in favour of the Appellant. 11.3. In view thereof it was his submission that the claim should have been allowed as revenue expenditure. 12. The Ld. CIT DR on the other hand contended that it is a factual issue and the decision of the AO and the DRP were heavily relied upon. 13. We have heard the rival submission and perused the material available on record. On a careful consideration of the same looking at the material available on record as has been as discussion in the orders of the AO and the DRP we are of the view that the DRP without discussing the facts has decided the issue relying upon judgments which proceed on a specific set of facts. To our minds the approach followed by the DRP cannot be upheld. Before applying the case law it is first primarily and necessarily important to set out the full and correct facts which necessarily require the marshalling of relevant facts. From the facts on record it is necessary to address whether the project ultimately translated into a unit being setup or was the project abandoned. On this aspect there is no discussion in the order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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