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2015 (9) TMI 610 - ITAT DELHI

2015 (9) TMI 610 - ITAT DELHI - TMI - Transfer pricing adjustment - Payment of royalty - Whether the assessee is paying royalty for the receipt of technical guidance, it need not have paid management fee as held by TPO - Commercial and Business expediency of incurring any expenditure - Held that:- The TPO while giving the appeal effect to the order of Hon'ble ITAT examined the additional evidences submitted by the assessee and deleted the addition on account of management fees vide its order dat .....

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tive charges - Held that:- It is not necessary for the assessee to show that any legitimate expenditure incurred by him is also incurred out of necessity or the expenditure incurred by him for the purpose of business actually resulted in profit. TPO is not justified in determining the ALP on the payment made for management fees.

There is no warrant for disallowance of sum paid to M/s Talbros Automotive Pvt. Ltd. as the Assessing Officer failed to discharge the onus that was lying upo .....

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der Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (for short the Act ). The assessee company raised the following grounds of appeal: General: 1. That the impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP') under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ( 'Act'), is bad in law, violative of principles of natural justice and void ab-initio. 1. .....

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assessing officer/ TPO erred on facts and in law in holding the arm's length price for international transaction of payment of management fee as Nil as against management fee of ₹ 2,99,52,717 paid by the appellant on the ground that no benefit was derived by the appellant from payment of such fee. 2.2 That the Assessing Officer/TPO erred on facts and in law in not appreciating that significant benefits were drawn by the appellant from payment of management fee in terms of increased rev .....

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Joint Venture agreement 2.5 That the assessing officer/TPO erred on facts and in law in not appreciating that the payment of management fee was validly bench marked applying TNMM as most appropriate method and that no adverse inference could be drawn on this account. 2.6 That the assessing officer/TPO erred on facts and in law in applying CUP method for benchmarking the transaction of payment of management fee without placing on record any comparable data for comparison. 2.7 That the assessing .....

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fit is flowing from Indian joint venture company, i.e., Talbros Automotive Components Limited while the Japanese Joint Venture Company i.e. Nippon Leakless Corporation is being remunerated more. 2.10 That the DRP erred on facts and in law in upholding the adjustment made by TPO without giving any cogent and germane reasons. Corporate Tax Issues: 3. That the assessing officer erred on facts and in law in disallowing a sum of ₹ 1,49,76,358 being payment made to Talbros Automotive Components .....

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g section 40A(2) of the Act on mere conjecture and surmises without bringing on record any comparable evidence of market price of such services to demonstrate that the expenditure incurred by the appellant was excessive. 3.3 That the assessing officer erred on facts and in law in not appreciating that the payment for administrative services, has also suffered tax in the hands of the recipient company and there could be no allegation of any tax evasion. 3.4 That the DRP erred on facts and in law .....

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pellant i.e. M/s Nippon Leakless Talbros Pvt. Ltd. is a company incorporated in India on 9th March, 2005 in pursuance of joint venture between Talbros Automotive Components Ltd. India (TACL) and Japanese partner M/s Nippon Leakless Corporation, Japan (NLK) ON 31.01.2000. The return of income for the assessment year 2010-11 was filed on 29th September, 2010 declaring income of ₹ 10,02,94,349/-. The return was accepted under the provisions of Section 143(1) of the Income-tax Act, 1961 (for s .....

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ALP of international transactions related to payment of management consultation fees to its AE M/s Nippon Leakless Corporation, Japan, as nil against ₹ 2,99,52,717/- claimed by the appellant on the ground that the appellant had failed to point out any comparables. The Assessing Officer based on the order of TPO passed a draft assessment order under Section 143 r.w.s. 144C of the Act. Against this drafted assessment order, the objections were filed before the DRP. The DRP vide order dated .....

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ieved the appellant had filed the present appeal before us. 3. Before us, ld. Senior Counsel for the appellant submitted that during the year under consideration, the applicant was primarily manufacturing and selling gaskets to Honda and Honda JVs in India. The applicant did not have the requisite resources, e.g., qualified and experienced personnel, and expertise to carry out product design and development to develop new models of gaskets as per specifications and requirements of the customers. .....

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requisite drawing, design and specification, etc. The process of development of gaskets for engine primarily involves the following activities: (i) Technical review and continuous interaction with the customers after the receipt of Request For Quotation (RFQ). (ii) Freezing of product specification in discussion with the customers. (iii) Agreeing on a time line of development. (iv) Development of proto type and submission to the customers with necessary inspection report. (v) Validation of the .....

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olving the associated enterprise, was the most economical and efficient way of developing gaskets which were approved by Honda, Japan for being manufactured by the assessee in India, to be fitted in the engine I vehicles assembled I manufactured by Honda in India. After the product is approved by Honda R&D and the specifications are frozen, the action shifts to India where the mass production takes place. The assessee has to co-ordinate very closely with Honda India for submission of off too .....

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nce it would involve travelling each time for a meeting or discussion. In any case, the assessee did not have the expertise and resources to develop new products. Further the prototypes are to be tested and validated in house by the supplier as well as by HONDA, this requires equipment for testing and in house capability, which were not available with the assessee. Accordingly, it was imperative for the assessee to avail the services from its associated enterprises. During the relevant previous .....

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ited India for the purpose of representing the assessee before various prospective customers as well as for the purpose of supervising the factory machinery and building of the assessee. The travel related expenses of the employees of the associated enterprise in relation to such visits amounting to JPY 28,37,108 (equivalent to ₹ 15,03,667) was borne by the AE. It would be noted that over a period of 6 years, the associated enterprise has developed more than 100 gaskets for the assessee. T .....

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s ratio 10.4% to 15.5% 4.10% In view of the aforesaid it is respectfully submitted that the assessee did not have the requisite expertise and was therefore dependent upon the associated enterprise of new product development and testing activity. It would also be appreciated that sales of the assessee have grown to ₹ 50.60 crores in FY 2009-10 from ₹ 32.18 crores in FY 2007-08. The automotive component industry is very competitive and it takes a company some time lag to get establishe .....

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ear i.e. an increase of 35.81 %. Itis pertinent to note that the AE has been providing the services since inception of the JV on account of the services received. the JV in a short span of 3 years has been able to become the preferred supplier of gaskets. Consequent to the support received from the AE the increasing turnover led to increase in the net profit margin to ₹ 10,48,34,509 from ₹ 8,58,91,331 in the preceding previous year resulting in year on year increase of 22.01 % in the .....

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be appreciated that in terms of the joint venture agreement dated 31.01.2005, the associated enterprise provided the assessee with the right to 'use the technical knowledge/information and proprietary know- how'. Such technology is in respect of manufacturing process as well as design engineering etc. On the other hand, against the payment of management fee, the associated enterprise is providing specific services of new product development, which involves inter-alia continuous interacti .....

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ets, it was imperative for the assessee to engage the services of the associated enterprise for such purpose. The fact that the assessee did not have the requisite resources is evident from its low employee cost to sales and depreciation to sales ratio, as has been submitted above. Reliance in this regard is also placed on the decision of the Hon'ble Delhi Bench of the tribunal in the case of Abhishek Auto Industries Ltd vs DCIT (ITA No 1433/Del/2009) wherein the Hon'ble Tribunal held as .....

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hinery under the normal circumstances. " It is further submitted that the TPO failed to appreciate the difference between the grant of 'right to use the technology' and provision of services which may involve/require use of such technology. In cases where a right to use the technology is granted, the licensee is required to absorb and apply the technology using its own resources viz. technically qualified employees and requisite assets. The licensor is only required to make availabl .....

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testing and validating indigenous raw material. Such services were not covered by the joint venture agreement and, are specifically covered by the management fee agreement (i) Whether intra-group services have been rendered As regards the first question, the OECD states that whether or not a service has, been, rendered depends, on whether the service provides the recipient with some commercial or economic value to enhance its commercial position: Para 7,6 of the guidelines states as under: " .....

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it by an independent enterprise or would have performed the activity inhouse for itself. It is respectfully submitted that development of the gasket is the most critical part of the business of the assessee without which the assessee could not have undertaken the business of manufacture and sale of gaskets. Since, the assessee did not had the requisite technical skills to develop the gaskets it had to avail the services of its associated enterprise. As a result of services provided by the assoc .....

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se of representing the assessee before various prospective customers as well as for the purpose of supervising the factory machinery and building of the assessee. The cost of such visits viz. gross CTC of such employees was also not recovered by the AE from the assessee company. Additionally, the cost of travel related expenses of the employees of the associated enterprise in relation to such visits amounted to JPY 28,37,108 (equivalent to ₹ 15,03,667). In view of the aforesaid, it is subm .....

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seen from the assessee's point of view. It is a settled position as laid down in the following decisions is that whether any expenditure is required to be incurred for the purpose of business and the reasonableness of the quantum thereof has to be judged from the point of view of the businessman and not of the Revenue: - CIT v. Malayalam Plantations Limited, 53 ITR 140 (SC) - CIT v. Walchand & Co. etc., (1967) 65 ITR 381 - J K Woollen Manufacturers v. CIT, 72 ITR 612(SC) - CIT v. Birla .....

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l application and cannot be given a go by on the pretext of application of the arm's length test provided under the Transfer Pricing Regulations and only price of an expenditure arising being an international transaction can be determined by the TPO having regard to the arm's length test under section 92(1) of the Act. Further, it is submitted that once expenditure on payment for management fees incurred by the assessee are accepted as having been incurred wholly and exclusively for the .....

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at any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter al .....

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wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorized. Following the decision of Delhi High Court, the Bangalore Bench of the Tribunal in the case of Festo Controls Pvt. Ltd. vs DC IT (ITA No. 969/Bang/2011) held that expense incurred wholly and exclusively for the purpose of business cannot be disallowed by the TPO alleging that such expenditure does not resulted in profits to the assessee. Recently the Hyderab .....

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ical knowhow fee and royalty under the provisions of section 37(1) rather than under the provisions of T.P. His decision of not allowing any royalty payment or technical knowhow payment and determining the ALP at NIL cannot be sustained in view of the fact that this technical knowhow fee and royalty were agreed upon when the assessee has originally entered into agreement as on 01.04.2000 much before the TP. provisions came on statute. It may be another reason that assessee has revised the agreem .....

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nt was required to be paid. Moreover, on the entire turnover in the intervening years, assessee also would have paid royalty. However, due to business requirements, both the parties agreed to revise the royalties. TP provisions does not empower the TPO to decide about the commercial decisions and determining the ALP at NIL thereby denying the entire claim instead of allowing the amount on the basis of ALP to be determined under the provisions. 20. The Hon'ble Delhi High Court in the case of .....

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t assessee need not pay any royalty or technical knowhow fee to the AE. Even though ORP has partly modified the payment of royalty, what we noticed is that they also made a mistake in allowing only 3.5% of royalty when in fact, there is no such claim in any of the earlier years. As submitted by the Ld. Counsel in the course of arguments/presentation before us assessee claimed at 7.5% in earlier year which was also allowed. The Hon'ble Tribunal in the case of M/s. Ericsson India Pvt. Ltd. vs. .....

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ciated enterprise held that benefits derived by the assessee is not a relevant criteria for determination of arm's length of an expenditure incurred by the assessee. Recently the Hon'ble Delhi High Court in the case of CIT vs Cushman and Wakefield (India) Pvt Ltd. (ITA 475/2012) has held that the authority of the TPO is to conduct a TP analysis to determine the ALP and not to determine whether the tax payer derives a benefit from the service. The Hon'ble Delhi High Court has opined t .....

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, 2012 (13) ITR (Trib) 422......... ....... 35. The TPO's Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise - of factual verification is retained by the AO under Section 37 in this case. .....

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0), the Hon'ble Visakhapatnam Bench of the Tribunal held as under: 13. We agree with the views of the Learned A.R on this issue. As submitted by him, it is the prerogative of the assessee to regulate its business affairs and it is not open for the department to question the same. Similar views have been expressed by the Hon'ble Supreme Court in the case of Dhanrajgiriji Raja Narasingirji, referred (Supra)" Recently in the case of SC Enviro Agro India Ltd vs DCIT (ITA No 2057 & 2 .....

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eld as under: "As also settled by judicial decision (supra), the revenue authorities are not empowered to question the commercial wisdom of the assessee and it is entirely for the assessee to take such decisions as favour the advancement of the assessee's business. Reliance in this regard is placed on the decision of Ahmadabad Bench of Tribunal in the case of KHS Machinery (P) Ltd. vs. ITO : 146 TTJ 692, wherein the Hon'ble Tribunal on the issue of similar disallowance made by the T .....

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l as ALP cannot be accepted since the AO in the present case has not brought on record, the ordinary profits which can be earned in such type of business. Therefore in our view the payment of royalty is not hit by the provisions of s. 92 of the Act and there is no reason to hold that the expenses should not be allowed under s. 37(1) of the Act, since the expenditure has been incurred by the appellant during the course of business and is having the nexus with the business of the appellant. Theref .....

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lant and the order of learned CIT(A) is reversed. Thus, ground no. 3 of the appellant is allowed. " The Hon'ble Delhi Bench of the Tribunal in the case of Maruti Suzuki India Ltd. (ITA No. 5237/Del/2011) also held in this regard as under: 15. Another realm of the assessee's submission is that as long as an item of expenditure has been incurred wholly and exclusively for the purpose of business of the assessee whether or not such expenditure actually benefits the assessee is an irrel .....

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. Ltd. vs. Addl. C.I.T. (I.T.A. No. 524/Vizag/2010). - Decision of the Tribunal in the case of M/s Ericsson India Pvt. Ltd. vs. DCIT (I.T.A. No. 5141/Del/2011). - Decision of the Mumbai Tribunal in the case of SC Enviro Agro India Ltd. vs. DCIT in (I.T.A. No . 2057 &2058/Mum/2009). " Further, the Hon'ble Hyderabad bench of Tribunal in the case of TNS India Pvt. Ltd (2014-TII-24-ITAT-HYD-TP) has deleted the similar royalty additions made by the TPO on the basis inter-alia that TPO ca .....

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ole is limited to determining the ALP. In the guise of determination of ALP, the TPO cannot question the business decision of payment and determine that no services were rendered. In that view of the matter, the direction of the TPO cannot be upheld at all" In view of the aforesaid, it is respectfully submitted that whether an expense actually benefits the assessee or not is not required to be examined while determining the ALP of an international transaction. Further the Hon'ble ITAT i .....

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s below. In our considered opinion, interest of justice will be served, if additional evidences as sought to be placed by the assessee are remitted to the file of the assessing officer for consideration. Accordingly we admit the additional evidence and remit the same to the file of the assessing officer. The AO shall consider these grounds afresh. The TPO while giving the appeal effect to the order of Hon'ble ITAT examined the additional evidences submitted by the assessee and deleted the ad .....

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(b) on account of payment of administrative charges: During the relevant previous years the assessee incurred expenditure amounting to ₹ 1,49,76,358 on account of administrative charges paid to Talbros Automotive Components Ltd. ( TACL ). The assessee entered into a Shared Services Agreement with TACL for availing certain services for assistance in day to day operations and administration of assessee. In terms of the agreement the day to day managerial and administrative services are provi .....

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he assessee: (a) IT Services - All the IT related activities/services were provided by IT department of TACL and there was not a single IT employee on the payroll of TACL. (b) Secretarial Services - The assessee company being a corporate entity has to comply with a large number of statutory requirements under the Indian Companies Act. During the year it had employed on its rolls only one junior company secretary for routine documentation and executive jobs. Being a junior he needed guidance and .....

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rvices - As is evident from the manpower strength at the assessee company, there is no set-up for sales and marketing services. Under the current competitive scenario, this is the most important area to survive and grow. Local day to day liasioning with HONDA India was thus taken case by TACL. The services provided by TACL broadly included: - Regular interaction and co-ordination with the customer. - Costing of the product in co-ordination with the technical and costing department and submission .....

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s due to inflationary increase in prices, exchange fluctuations or other external factors. - Understanding customer requirements and keeping the customer satisfied all the time. - Exploring possibilities of developing new business opportunities - TACL team regularly participated in domestic as well as overseas trade fairs and represented the assessee without debiting any costs to the assessee (d) Financial and Accounting Services - During the year aassesee had employed a graduate at assistant ma .....

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ty documentation and creating charges over the company's assets to the satisfaction of the lenders - Guidance for timely submission of required periodic returns and reports to banks and financial institutions. - Finalization of quarterly and annual accounts as per the statutory requirements - Ensuring due compliance of Accounting Standards and other statutory guidelines. - Dealing with Statutory and Internal Auditors, initiating necessary corrective actions and ensuring implementations of th .....

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ters, production processes and final products in co-ordination with the technical team - Ensuring maintenance of statutory cost accounting records - Identification and implementation of ERP system, co-coordinating with outside service provider and ensuring necessary modification/customization as and when required (e) Quality Systems - Provide necessary guidance to formalize quality systems and procedures. - Dealing with outside agency for quality certification - Analyzing quality issues from tim .....

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al matters, accounting, statutory compliances, secretarial and various other administrative and commercial issues. These people are at middle management and require regular support by team of professionals of TACL. At the time of setting up of assessee company, it was conscious decision taken by the joint venture partners to adopt a lean and thin management structure so as to avoid duplication of resources which might remain under-utilized at the joint venture company. In order to achieve this i .....

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: 4.1 Re: Reasonableness of expenses has to be seen from the point of view of businessman: The ld. Counsel for the appellant submitted before us that under section 37(1) of the Act, deduction is admissible for expenditure incurred wholly and exclusively for purposes of business. Expenditure justified by business considerations and incurred out of commercial expediency is allowable deduction. The settled position of law is' that the reasonableness of the expenditure has to be seen from the po .....

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gh Court in the case of CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377. In that case the assessee was a manufacturer of cement and had appointed a company CDL as its sole selling agent. The assessee paid ₹ 1.75 per M. T. as commission to this agent and claimed the same as business deduction. The assessing officer held that the amount as paid was on higher side and Re.1 per M. T. would be permissible deduction as anything beyond Re.1 per M. T. was not for commercial expediency. The balance amou .....

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854 holding, inter alia, the payment of ₹ 1.75 per M. T to Cement Distributors Ltd. is very much on the excessive side". This in our view was impermissible within the framework of section 37. The jurisdiction of the revenue is confined to deciding reality of the expenditure, namely, whether the amount claimed is as deduction was factually expended or laid down and whether it was wholly and exclusively for the purpose of the business. The reasonableness of the expenditure could be gone .....

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accepted position that the factum of services rendered by CDL has not been refuted by the revenue. It needs no reiteration that the settled position in law is that no businessman can be compelled to maximize his profits. The obvious answer to the first question is in the affirmative, in favour of the assessee and against the revenue." The Delhi High Court in the case of CIT vs. Padmani Packaging (P) Ltd.: 155 Taxmann 268 following the decision in the case of CIT vs. Dalmia Cement (Bharat) .....

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diture was not in dispute or had been established, the assessing authority could not sit in the arm chair of the businessman to determine as to what commission he ought to pay to its agents for doing his business. Mr. Jolly, however, argued that the CIT (Appeals) and the Tribunal had failed to take into account the fact that there was a search at the premises of the assessee in which it was discovered that the assessee was doing some business outside the books of account. We do not think that th .....

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) held that: ……..once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. .....

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Bharti Televentures Ltd: 331 ITR 502 (Del HC) • CIT v. Rockman Cycle Industries Ltd., 331 ITR 401 (P&H HC) (FB) The Hon'ble Delhi High Court in the case of CIT vs EKL Appliances Ltd (ITA No. 1070/2011) while adjudicating upon the transfer pricing adjustment made by the TPO, held that as long as an expense is incurred wholly and exclusively for the purpose of business, it is irrelevant as to whether such expenditure actually results in profit or not. The Hon'ble High Court held .....

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curred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted bove. . xxx So long as the expenditure or payment has been demonstrated to have been incurred or laid out for 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 t .....

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xpenditure should be disallowed only on the ground that these expenses were not required to be incurred by the ssessee…….. Further, in the case of LG Polymers India Pvt. Ltd. vs Addl. CIT (ITA No 524/Vizag/2010), the Hon'ble Visakhapatnam Bench of the Tribunal held as under "13. We agree with the views of the Learned A.R on this issue. As submitted by him, it is the prerogative of the assessee to regulate its business affairs and it is not open for the department to questi .....

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what is necessary for an assessee and what is not. XXX This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether th .....

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Senior Counsel for the appellant submitted before us that section 40A(2) is the only provision in the Act which empowers the Revenue to sit in judgment about the reasonableness of a claim of expenditure incurred by the assessee if the revenue were to consider the same as excessive or unreasonable having regard to the fair market value of the services or facilities, taking into account the legitimate needs of business or the benefit derived by or accruing to the assessee. Section 40A(2) names the .....

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xercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. " In this regard reliance is placed on the decision of the Bombay High Court in the case of CIT vs. Indo Saudi Services (Travel) (P.) Ltd., 219 CTR 562 wherein the Hon'ble Court held as under: &h .....

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o attempt to evade tax. 5. In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the CIT (A) was wrong in disallowing half percent commission paid to the sister concern of the appellant during the Assessment Years 1991- 92 and 1992-93. The learned Advocate appearing for the appellant was also not in a position to point out how the appellant evaded payment of tax by alleged payment of higher commission to its sister concern since .....

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g applicability of section 40A(2) of the Act held as under: "Having gone through the relevant material placed before us concerning Assessment Year 2001- 2002, we are of the view that, as far as this special leave petition is concerned, no interference is called for as the entire exercise is a revenue neutral exercise. Hence, this special leave petition filed by the Department stands dismissed. " . It has been held by the Courts that the disallowance under section 40A(2) of the Act coul .....

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Transformers (P) Ltd. vs. CIT: 129 ITR 105(Guj.) - Beta Naphthol P, Ltd. vs. OCIT: 50 TT J 375 (Ind) - Hathiwala Silk Mills vs. ITO: 19 TT J 284 (Ahd) - M & Co. vs. ITO: 23 Taxman (Mag), 27 (Ahd) - Binit Corporation vs. ITO: 25 Taxman 238 (Ahd.) (Mag). - Upvan International vs. ITO: 15 ITD 215 (Del) - Rangoon Chemical Works P. Ltd. vs. ACIT: 100 Taxman (Mag) 163 (Ahd). - Shriram Pistons & Rings Ltd. vs. IAC: 39 TT J 132 (Del). - Vikshra Trading and Investment Private Ltd. vs. CIT: 61 TT .....

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Revenue considering that TACL has paid tax on the said amount of management fee paid by the assessee, - there is no evasion of tax in the aforesaid arrangement. - the Assessing Officer before disallowing the expenditure has not brought on record comparable instances to show that the expenses incurred are excessive having regard to the legitimate needs of business of the assesses. It is submitted that management fee is paid by the assessee on the basis of the approval granted by Central Governmen .....

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disallowance of the same holding it to be excessive and unreasonable. The Supreme Court in the case of LIC v. Escorts Ltd (1986): 1 SCC 264 observed as under: "As we said earlier, under the scheme of the Act, it is the Reserve Bank of India that is constituted and entrusted with the task of regulating and conserving foreign exchange. If one may use such an expression, it is the 'custodian-general' of foreign exchange. The task of enforcement is left to the Directorate of Enforcement .....

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erally. " The Delhi High Court in the case of CIT v. Shriram Pistons & Rings Ltd., 181 ITR 230 held that where remuneration paid to son of a director of the assessee, was approved by the Company Law Board, no disallowance under section 40A(2) of the Act could be made by the Income-tax department on the ground that the same was excessive considering the professional qualification of the employee or the lack of it. It was observed by the Court that since the Company Law Board had decided .....

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be excessive or unreasonable 4.3 Re: Ad-hoc disallowance is impermissible Without prejudice, it is submitted that since the books of accounts have been audited in accordance with the provisions of the Act and has been accepted as true and correct, there is no justification to make any adhoc disallowance. Reliance is also placed on the decision of Hon'ble Delhi High Court in the case of Jai Engineering limited: 113 ITR 389, wherein it is held as under: "It is quite competent for the inc .....

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ims for deduction. Where the original account books of the assessee had been destroyed in a fire it was held that the Appellate Tribunal, in allowing a deduction, could rely upon other material mainly consisting of the auditors' reports from which it could be inferred that the deductions were properly supported by the relevant entries in the account books." Kind attention is further invited to the following decisions wherein adhoc disallowances made in absence of any specific mention of .....

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Tea Co. Ltd., [2003] SOT 72. • Continental Seeds & Chemicals Ltd. v. ACIT": (2003) SOT 393 Further the Hon'ble ITAT in the appellant's own case for AY 2008- 09 has allowed the payment of management fees and restored the matter to the books of TPO. The Hon'ble ITAT held as follows: "We have heard the matter both the counsel and perused the records. In our considered opinion the consideration of these additional evidences is necessary for proper adjudication of the i .....

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lly submitted, is based on mere suspicion and surmises and is devoid of any cogent reason. No evidence has been brought on record by the assessing officer to substantiate the allegation that the expenditure was excessive and unreasonable. For the aforesaid reasons, it is respectfully submitted that the addition made by the assessing officer under section 40A(2)(b) of the Act is not sustainable and is liable to be deleted. 5. The appellant filed an application for admission of additional evidence .....

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vices Fee to Talbros Automotive Components Ltd. Placed at pages 1 to 6 - Merits of the matter in relation to the aforesaid additional evidence are explained hereunder: The: appellant during the relevant previous year incurred expenditure, amounting to ₹ 1,49,76,358 on account of administrative charges paid to M/s Talbros Automotive Components Ltd. (TACL) for provision of services such as sales and marketing services, secretarial services, financial and accounting services etc. In view of t .....

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failed to prove the reasonableness and justification for the aforesaid amount. It is submitted that management fee is paid by the appellant on the basis of the approval granted by Central Government, which implies that such payments are as per industry norms and are comparable to payment of management fee by other industries in the segment. The payment of management fee made as per the agreement approved by the Government cannot, in our respectful submission, be disallowed under section 40A(2) .....

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ting and conserving foreign exchange. If one may use such an expression, it is the 'custodian-general' of foreign exchange. The task of enforcement is left to the Directorate of Enforcement, but it is the Reserve Bank of India and the Reserve Bank of India alone that has to decide whether permission mayor may not be granted under Section 29(1) of the ACT. The Act makes it its exclusive privilege and function. No other authority is vested with any power nor may it assume to itself the pow .....

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nt on the ground that the same was excessive considering the professional qualification of the employee or the lack of it. It was observed by the Court that since the Company Law Board had decided that the remuneration paid to the employee was reasonable, it was not ordinarily open to the Income-tax authorities to regard such fixation as unreasonable. Attention is also invited to the decision of Pune bench of the Tribunal in the case of Kinetic Honda Motors Limited: 77 ITO 393, wherein the Hon&# .....

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anted by the Government cannot be questioned by the assessing officer as being excessive or unreasonable. PRAYER: It would be appreciated that this is the first appeal before the Hon'ble Tribunal against the impugned assessment order. The aforesaid additional evidences have been placed on record to rebut the conclusion arbitrarily arrived at by the lower authorities and in the interest of Justice, the same may kindly be taken into consideration while deciding the appeal. Since the evidence p .....

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atter. Their Lordships further observed that the various procedures, including that relating to filing of additional evidence, is handmade for justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence. The relevant observations of the Court are reproduced hereunder: "13. The aforesaid case law clearly lays down a neat principle of lawthat discretion lies with the Tribunal to admit additional e .....

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matter. It is well settled that the procedure is handmade of justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence at the appropriate stage. Once it is found that the party intending to lead evidence before the Tribunal for the first time was prevented by sufficient cause to lead such an evidence and that this evidence would have material bearing on the issue which needs to be decided by the Tr .....

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his regard is also placed on. the decision of the Hon'ble Pune Bench of the Tribunal in the case of Rieterlndia Pvt Ltd vs ACIT (ITA No 1374/PN/2010) wherein, the Hon'ble Tribunal while dealing with an application for admission of additional evidence, examined the powers of the Tribunal in terms of Rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 and held as under: "9. We have heard the rival parties with respect to the preliminary prayer of the assessee seeking admission .....

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be filed to enable it to pass orders or for any other substantial cause, or, if the income- tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them, or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced." A perusal of the above rule would show that the parties .....

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cise of such discretionary power by the Tribunal is permissible. Shorn of other details, so far as it is relevant for the present purpose, one such situation which is prescribed is admission of additional evidence which enables the Tribunal "to pass orders or for any other substantial cause . The presence of the aforesaid expression in rule 29 of the Appellate Tribunal Rules shows that the Tribunal is competent to admit additional evidence in situation which enable to Tribunal to pass order .....

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o admit the additional evidences having regard to the facts and circumstances of the present case:" Further, recently in the case of Bentley Systems India Pvt Ltd vs ACIT (ITA No 6160/Del/2013) the Hon'ble Tribunal while adjudicating upon an issue involving transfer pricing adjustment on account of intra group services admitted the additional evidence, placed on record by the assessee for the purpose of substantiating the receipt of management services. The Hon'ble Tribunal held tha .....

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n'ble Tribunal under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963. 6. We considered the application for admission of additional evidence carefully keeping in view the judgment of the Hon ble Jurisdictional High Court in the case of CIT Vs. Text Hundred India Pvt. Ltd., 239 CTR 263 that the additional evidence should be admitted where such additional is necessary to do substantial justice in the matter. This evidence undisputably is necessary by adjudication of the matter on han .....

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hence held that ALP is nil and this was summarily rejected by the DRP vide his order dated 14.11.2014. The contention of the TPO cannot be upheld for the simple reason that there were no employees with the appellant who are technically competent to be able to develop new gasket. This is evident from its low employee cost to sales as well as depreciation sales. It is imperative to refer to the OECD guidelines whether the services have been rendered or not. Para 7.6 of the guidelines states as un .....

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formed for it by an independent enterprise or would have performed the activity inhouse for itself. 9. The Hon ble Jurisdictional High Court in the case of CIT Vs. EKL Appliances Ltd., 345 ITR 241 after referring to the abovementioned OECD guidelines held as follows vide paras 19 to 22: 19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decisi .....

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), it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. (P.) Ltd .....

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served by Lord Thankerton in Hughes v. Bank of New Zealand [1938] 6 ITR 636 (HL) that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by .....

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nt. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes th .....

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section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred .....

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assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous .....

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w 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. 10. The ratio that can be culled out from the above decision is that it is not necessary for the assessee to show that any legitimate expenditure incurred by h .....

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)-TP v. Thysssen Krup Industries India Pvt. Ltd. Vs. ACIT (2012) 27 taxmann.com 34 (Mum-Trib.) vi. Yokogawa India Ltd. Vs. ACIT, ITA No. 1329/Bang/2011 Therefore, respectfully following the above ratio we hold that the TPO is not justified in determining the ALP on the payment made for management fees of ₹ 2,99,52,717/- at nil. Accordingly, the grounds of appeal from 2 to 2.10 are allowed. 11. That brings to the issue relating to the disallowance of ₹ 1,49,76,358/- being the amount p .....

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d the additional evidence in support of the services rendered which was admitted by us as mentioned in paragraphs supra. This clearly establishes that the appellant had received the services from the said company. That apart, in our view, AO had not met the requirement of the provisions of Section 40A(2). A plain reading of the provisions of Section 40A(2) reveals that where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person refer .....

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diture as is so considered by the Assessing Officer to be excessive or unreasonable. Therefore, it becomes apparent that the Assessing Officer is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to any one of the three requirements prescribed. This opinion has to be formed by the Assessing Officer based on the material evidence available on the record. The Assessing Officer is duty bound to bring on record the comparable fair market value of the .....

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ment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. 14. In CIT Vs. Edward Keventer (P.) Ltd. [1972] 86 ITR 370, the Calcutta High Court considering identical provision in 1922 Act, it was held that the section places two limitations in the matter of exercise of the power. .....

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