TMI Blog2016 (5) TMI 548X X X X Extracts X X X X X X X X Extracts X X X X ..... DHANSHU SRIVASTAVA, JUDICIAL MEMBER This appeal has been preferred by the assessee against the assessment order dated 27.01.2015 for assessment year 2010-11 passed u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter called the Act ). 2. The assessee, Frigoglass India Pvt. Ltd. (FIPL), was established in November 1998 and is a subsidiary of Norcool Holding ASA, Norway. The assessee is in the business of glass door merchandising and has a manufacturing plant in Manesar, Gurgaon. The FIPL Plant caters to the Indian market and acts as an export platform for the Asian market. Glass door merchandising concept is relevant in alcoholic and non-alcoholic beverages, water, dairy products, bakery, confectionary, pharmaceuticals etc. 3. The assessee had filed its return of income on 12.10.2010 declaring an income of ₹ 9,30,49,569/-. The international transactions for the year under consideration were as per the following chart International transactions shown by the taxpayer: Sr. No. Nature of transaction Method Selected Arm's length price as per taxpayer (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in its transfer pricing documentation and proceeding to determine the ALP of international transactions pertaining to payment of royalty and management fee to its Associated Enterprise ( AE ) on a standalone basis by rejecting TNMM as the most appropriate method ( MAM ).in doing so, the learned TPO erred in not considering the transaction by transaction analysis submitted by the Assessee during the assessment proceedings. 3. The learned TPO erred, on facts and circumstances of the case and in law, in arbitrarily selecting Comparable Uncontrolled Price ( CUP ) method as the most appropriate method to benchmark the international transaction pertaining to payment of management fee and royalty by the Assessee to its AE. In doing so, the learned TPO has erred in: a) Not undertaken the MAM analysis as prescribed under Rule 10C of the Rules and accordingly not documented the same as prescribed under Rule 10D of the Rules; b) Determining the ALP of the international transaction without following the manner of applying the CUP method prescribed under Rule 10B(1)(a) of the Rules; c) Adopting an ad-hoc and irrational approach to re-compute the ALP of payment of managem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said expense is unreasonable. 6. The DRP adjudicated these issues as under:- (i) The DRP concluded that the TPO had rightly rejected the Transfer Pricing Study (TP Study) of the assessee. (ii) The DRP concluded that the royalty payment being sent through RBI s approval at certain rates cannot be equated as payment being at arm s length and that it cannot be used as Comparable Uncontrolled Price (CUP). The DRP further held that since the payment for Royalty to AE was a separate international transaction independent of financial results and capable of being verified separately, the TPO was justified in determining the ALP separately rather than aggregating it with other transactions under Transactional Net Margin Method (TNMM). The DRP further held that since the assessee could not substantiate the benefit derived from the payment of royalty, the TPO was justified in holding the ALP for payment of royalty to be at NIL. (iii) As regards the issue of selection of CUP as the Most Appropriate Method of TNMM for benchmarking the payments made on account of intra group services and licence fee, the DRP held that since the payment for intergroup services and payment for manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in not accepting the economic analysis of the Appellant, for determination of the arm's length price ( ALP ) in connection with the impugned International transactions. 2.2. That the Ld. TPO/ Hon ble DRP has grossly erred in rejecting the Combined transaction approach of benchmarking adopted by the Appellant in its transfer pricing analysis by selecting Transitional Net Margin Method ( TNMM ) as the most appropriate method ( MAM ) for determining the arms length price ( ALP ) of payment of royalty and payment of management fee to its AEs in accordance with the Act, Rules and the generally accepted OECD guidelines. 2.3. The Ld. TPO/ Hon ble DRP erred in not appreciating that the receipt of various management services, technical knowhow and brand usage are closely linked to the overall business activities of the Appellant and erred in analyzing the transaction separately for the determination of ALP. 2.4. The Ld. TPO/ Hon ble DRP erred in disregarding the Global Transfer Pricing Report justifying the arm s length nature of the transaction under analysis; 3. 3.1. That the Ld. TPO/ Hon ble DRP erred in not conducting the analysis of selecting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on ad-hoc and arbitrary basis alleging that the expenditure incurred by the Assessee is not totally vouched. In doing so, the Ld. AO has failed to bring on record any evidence to demonstrate how the said expense is unreasonable. Without prejudice, the Ld. AO has further erred in disallowing 5% of the miscellaneous expenses without providing any opportunity of being heard to violating the principles of natural justice. In doing so the Ld. AO also erred in not allowing the direction of the Hon ble DRP, which had directed the AO to delete the adjustment; 7. 7.1 That on the facts and in the circumstances of the case, the Ld. AO has erred in charging interest under 234A, 234B, 234C and 234D of the Act, as consequences of the additions made in the assessment order passed under section 143(3) read with section 144C of the Act. 7.2 The Appellant denies its liability to such interest and prays that the AO be directed to delete the levy of aforesaid interest as it is entirely a result of additions/disallowance and consequential in nature. 8. 8.1. The Ld. AO has erred in initiating penalty proceedings under Section 271(1)(c) read with Section 274 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length nature of 4% royalty applied by the Head Office for the licensing of the ICM technology and trademarks to related group entities and based on the terms and conditions of the License Agreement between Frigoglass SAIC and its affiliates and in view of the broadly comparable licensing agreements identified from the search of publicly available license agreements, it was concluded that a royalty rate of 4% on sale of products for the use of trademarks and ICM technology was considered to be an arm s length rate. It was also submitted that no independent third party will let any other entity use its Intellectual Property Rights (IPR) and allow to enjoy the benefits from the usage of such IPR without charging a fee. It was submitted that FIPL enjoys a lot of benefits in manufacturing and marketing from the use of the IPRs owned by Frigoglass SAIC. It was submitted that FIPL had started enjoying the benefits from the usage of the trademarks and ICM technology from very inception although a formal agreement was entered into in September 2007 and had started making payment for such services from Assessment Year 2009-10 only. It was further submitted that the activities performed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration, costs for the following services were charged to FIPL Finance and Accounting/Corporate Governance, HR, IT, General Management, Supply Chain, ICM Manufacturing and Engineering Services. 12. The Ld. AR submitted that in order to effectively track the time and cost utilized by each group entity, each group entity has an in house mechanism to capture all the direct and indirect cost incurred to provide these services to other group entities (including FIPL) and once the cost is accurately determined by each group entity, such cost details are sent to Frigoglass SAIC where similar costs are pooled from different Frigoglass entities globally. This combined cost pool is then adjusted for costs incurred on shareholder activities and duplicate services. Once a combined cost pool is determined, costs are allocated to different entities on the basis of benefits received by the particular entity. The allocation keys used are compensation and benefit cost of the person providing the services and actual time spent by the person providing services allocated by using time sheets etc. At this stage, an appropriate mark-up is applied to the chargeable costs identified by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the essence of OECD guidelines and the benefit accruing as a result of the payment of royalty has to be examined. He emphasized that the assessee has failed to demonstrate as to what direct benefit had accrued to the assessee from the payment of royalty. He alleged that in absence of proper justification for the payment of royalty, the same was a sham transaction for profit shifting out of India. He placed reliance on the decision of the Hon'ble Delhi High Court in CIT vs Abhinandan Investment Ltd. in I.T.A. No. 130/2001 for the proposition that all colorable devices in the garb of tax planning should be ignored and substance over form should prevail. He also placed reliance on the decision of the Coordinate I Bench of this Tribunal in Bombardier Transportation India Pvt. Ltd. vs DCIT in I.T.A. No. 1626/Del/2015 wherein the Bench had upheld the action of the DRP in determining the ALP of intra-group services received from its AE at nil. The Ld. DR submitted that the order of the DRP should be upheld. 15. On the issue of management fees, the Ld. DR submitted that the TPO had correctly calculated the disallowance and as such, no restoration was necessary. On the issue of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant to our purpose. These paragraphs are reproduced below: - 1.36 A tax administration s examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm s length. 17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such re-structuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured. 18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Rajendra Prasad Moody , (1978) 115 ITR 519, and it was observed as under: - We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. 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 the position stronger. 20. In the case of Sassoon J. David Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .. 19. In the case of DCIT LTU vs CLSA India Ltd. (2013) 33 taxmann.com 260 (Mumbai Tribunal), the Bench held that CUP method cannot be applied if the relevant information is not available. No such comparable transaction has been brought on record by the Assessing Officer or even by the DRP. No such comparable case has been placed by the revenue even now. 20. Hence, following the ratio of the Hon'ble Delhi High Court in CIT vs EKL Appliances (supra), we hold that the addition made by the TPO and upheld by the DRP is unsustainable and is liable to be deleted. Hence, ground nos. 4.1 and 4.2 are allowed. 21. Ground No. 4.3 on the issue of management fee is restored to the file of the TPO to verify as to whether the Head Office has correctly allocated the hours of service/cost of service rendered and also whether any other cost centres have been erroneously included in the allocation. The TPO is directed to examine the issue afresh after giving due opportunity to the assessee in this regard. 22. As regards the issue of miscellaneous expenses, it is seen from para 10.2 of the DRP s order that since the DRP has directed that the Assessing Officer had not noted any di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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