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TMI Blog2014 (12) TMI 927X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacturing/assembling automation and industrial control products/systems. Apart from manufacturing/assembling, the assessee company is also engaged in trading in certain products. The assessee company is also providing services like information technology and engineering based consultancy services, training etc. During the relevant assessment year, assessee had undertaken the following international transactions, with its AE's: S.No. Nature of international transaction Method selected Value of international transaction (INR) 1 Export of finished goods TNMM 3,95,64,400 2. Import of products/components 166,27,89,247 3. Import of capital goods 1,16,47,164 4. Receipts of services 57,80,247 5. Provision of services 2,47,39,568 6. Payment of management fee 10,29,82,002 7. Cost recharges of group companies CUP 5,11,75,520 Total 189,86,78,148 5. All the international transaction of the assessee, except payment of Management fee to Rockwell Automation Asia Pacific Ltd. (RAAPL)(AE) were accepted to be at arm's length by the TPO. During the year, assessee had entered into services agreements with RAAPL for availing various administrative and support services. The assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessing officer shall enhance the income of the assessee by Rs. 10,29,82,002/-. The Assessing Officer may examine feasibility of initiation of penalty u/s 271(1)(c) of the Act in accordance with Explanation 7 of the same." 7. Based on the TPO's order, the Assessing Officer passed a draft assessment order. In the draft assessment order, the Assessing Officer also disallowed a sum of Rs. 4,0,017,141/- incurred on leasehold premises, for the reason that these expenditure incurred were capital in nature. 8. Aggrieved by the draft assessment order, the assessee filed objection before the DRP. The DRP disposed off the assessee's objections vide order/direction dated 25.09.2012. The DRP confirmed the Transfer pricing adjustment as well as the disallowance of Rs. 4,0,017,141/-. The relevant finding of the DRP with reference to affirmation of the Transfer Pricing adjustment reads as under:- (Para 12.5) "After going through the submissions of the assessee, the panel is of the view that the assessee has not been establish that it derived direct and substantial benefit from such services and the assessee would not have availed such services had it be and independent enterprise. We ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess oversight services were not needed. It is difficult tounderstand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Transfer Pricing Officer is empowered to determine the arm's length price at "nil", we find that the Bangalore Bench of the Tribunal in Gemplus India (P.) Ltd. v. Asstt. CIT [IT Appeal No. 352 (Bang.) of 2009, dated 20-10-2010] held that the assessee has to establish before the Transfer Pricing Officer that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price. 38. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at "nil" keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, have not been considered till date. This must be provided, in addition to a consideration of the ALP vis-a-vis the total cost claimed by these AEs. To this extent, for the consideration of ALP in respect of these transactions, the matter is remanded back to the file of the concerned AO, for an ALP assessment by the TPO, followed by the AO's ssessment order in accordance with law." 12. The Hon'ble High Court categorically held that the TPO is to conduct a Transfer Pricing analysis to determine the arm's length price (ALP) and not to determine whether there is a service from which assessee has derived benefit or not. The Hon'ble Court held that the exercise to determine whether assessee had derived any benefit or not from payment of such management fee is to be examined by the AO and appropriate disallowance u/s 37 is called for. In the instant case, the TPO had determined the ALP of payment of management fees at 'NIL' by holding that the assessee did not derive any benefit from services rendered by the AE. Therefore, keeping in view the dictum laid down by the judgment of the Hon'ble Jurisdictional High Court, necessarily AO as to determine whether the assessee has deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of capital before the High Court. Similarly, the asstt. year 2006-07, disallowance of Rs. 51,20,021/- in respect of expenditure on leasehold premises was made in the assessee case holding the same to be of capital in nature. The assessee did not file any appeal before the CIT(A) against this order. These facts have been admitted by the assessee vide its letter dated 22.12.2011 filed before the AO (Copy at paper book no.779 and 780). In view of the facts stated above and the past history of disallowance on the same issue which has been accepted by the assessee and has attained finality the proposed action of the AO in holding expenditure of Rs. 4,00,17,141/- to be of capital in nature is upheld." 14. We have heard rival submissions and perused the material on record. The assessee has incurred a sum of Rs. 40,017,141/- on interiors of lease hold premises. The details of the expenditure are listed out in the assessment order at Pages 3 & 4. On perusal of these details, we find that majority of these expenditures are expended for major renovation and these expenses are clearly capital in nature. In view of explanation 1 to Section 32 of the Act, if the said capital expenditure is in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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