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2016 (6) TMI 1008 - ITAT BANGALORE

2016 (6) TMI 1008 - ITAT BANGALORE - TMI - Transfer pricing adjustment - whether the services are actually rendered by the AE - Held that:- As the condition of rendition of services should be satisfied by the assessee so as to allow the same as expenditure. In the present case, assessee-company had not produced any evidence in support of rendering of services before the TPO. It is only before us, by way of additional evidence, assessee-company has filed some material, in support of the actual se .....

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lly rendered by the AE or not and direct the TPO/AO to bench mark the transaction of rendering of services of market management support services, after being satisfied himself that the services are actually rendered by the AE. - On the principle of consistency, we hold that each assessment year is separate and distinct. The principles of res judicata have no application to income-tax assessment proceedings. Simply because in the preceding year, this expenditure came to be allowed without any .....

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dated 03/05/2011 for the assessment year 2005-06. 2. Briefly, facts of the case are that assessee is a company duly incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing, conversion and trading in diversified products for sale in domestic and overseas market. Its parent company is 3M Company, US [3M US]. Its parent company has operations in more than 60 countries. One of its group companies viz., 3M Asia Pacific Pte.Ltd., a company incorpora .....

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ices. The assessee-company filed return of income for the assessment year 2005-06 and 31/3/2005 declaring income of ₹ 49,84,33,067/-. After processing return of income under the provisions of sec.143(1)of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short], the case was selected for scrutiny by issuing statutory notice u/s 143(2) of the Act. 3. During the course of assessment proceedings, Assessing Officer (AO) noticed that the assessee-company had reported th .....

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[ALP] in respect of the above transactions. The TPO, vide order dated 30/10/2008 u/s 92CA of the Act, in respect of transactions of import of raw materials, export of manufactured goods, import of finished goods, held that the transactions were at arm s length and the TPO accepted the Transactional Net Margin Method [TNMM] applied by the assessee-company in respect of above four transactions and held that the method adopted by the assesseecompany is correct and the transactions were held to be a .....

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on of the so called valuable services by 3M Singapore the appellant's profitability had declined by 300 basis points instead of improving which was a clear indication that the decline in profitability was mainly due to the payment of administrative and business support services. • Though the service fee paid by the appellant had increased by almost 4 times as compared to the earlier year i.e. AY 2005-06, sales had increased by only 14% as compared to the earlier year. • Cost benefi .....

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determined as NIL and amount of INR 60,867,243 was adjusted. and finally determined the ALP in respect of business administrative support service fee at of nil. The AO passed the assessment order dated 26/12/2008 incorporating the above transfer pricing adjustments of ₹ 46,08,67,243/-. 4. Being aggrieved, an appeal was preferred before the CIT(A). During the course of proceedings before the CIT(A), the assessee-company classified the services rendered by 3M Singapore broadly into informat .....

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ces are rendered and subsequently the CIT(A) had called for certain additional information based on the remand report of the TPO. The CIT(A) also made an analysis of administrative and business support services fee paid by the assessee-company as under: Particulars FY 2002-03 FY 2003-04 FY 2004-05 FY 2005-06 Value of administrative and business support services received from 3M Singapore 1.54 1.70 6.09 6.73 Total Revenue 216.16 228.64 284.26 410.47 % Growth in revenue 5.78% 24.33% 44.40% Total c .....

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attributable on account of various reasons detailed below o Decline in export sales from ₹ 2.09 crores to 45.75 lakhs. o Decline in revenues of electra & telecom business (divested) from ₹ 5.04 crores to 12.82 lakhs. o Decline in margins of Consumer market segment. o The total costs of the appellant has increased from 189 crores to 242 crores. o Even after reducing the entire payment made for business support services the profitability of the appellant still declined by 100 basis .....

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e generally incurred a set of expenses either at the level of the principle group company or set of companies, that provide tangible and intangible benefits to all the companies of the group. Clearly, these sort of expenses need to be apportioned, in some manner, across the group companies. It is often not possible to obtain direct evidence linking the expenses to specific companies to which the expenses is apportioned and the benefits that accrue to such companies from the expenses so incurred. .....

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e direction of the CIT(A) allowing information technology related expenses and the assessee-company is in appeal in IT(TP)A No.725/Bang/2011 challenging the directions of the CIT(A) confirming the addition on account of other services, marketing and sales support, Laboratory technical support services. 6. Before us, learned counsel for the assessee had filed a Note on the description of services provided by 3M Singapore Co. and also evidence to say that services have been rendered by 3M Singapor .....

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into three main categories. (a) COFS/DM Project Implementation (b) ICAP & application support (c) IT Support Services For the period under consideration, 3M India has upgraded its system to an advanced level to increase the operational efficiency and to align the business with global standards. During the Financial Year 2004-05, 3M India decided to implement the COFS/DM Project to overcome all the operational efficiencies and ensure an efficient it tool to standardize the platforms of the 3M .....

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agement, which is integrated with the inventory module and COFS for procurement of goods. International Common Application Portfolio is a globally centralized IT tool which is responsible in handling IT Matters across the globe. The ICAP provides a common interface/Platform between 3M and customers. The COFS/DM was part of the international Common Application Portfolio (ICAP).The architecture consists of Demand Management (DM), Customer Order Fulfillment Systems, Financial Systems, manufacturing .....

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ill help 3M India improve the operational efficiency by focusing and addressing key areas such as productivity gains Processing accuracy, efficiency and visibility, customer focus, inventory and warehouse management This is achieved through integration of systems to enable systematic order entry, tracking, web enabled order entry and enquiry. Automated pricing, ease of tracking customer order processing, providing customer and product history minimizing gaps between demand and supply chains. The .....

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n and networking and thus consequently reducing travel costs, developing new software platforms and sharing the best practices, maintenance support by an expert team, effective monitoring of the IT assets, website management etc. Submission dated 30th November 2010 explaining the IT Services in detail, need for the services, benefits from the services, Submission dated 22nd February 2010 explaining the IT Services in detail Service level Agreement for IT Support and services COFS/DM implementati .....

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ss enhancement strategies and objectives of 3M India are deliberated and determined by the 3M Group global management team. 3M being a global brand receives benefits by from significant branding activities carried on outside India. Marketing persons from other countries come and meet prospective customers to market the products, create awareness .3M India carries on the follow up activities of these meetings. Client visit and presentation, Flyers of SD connectors - products developed and trainin .....

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ee kheng cher explaining the services rendered by him to 3M India. (pg. no. 118 of the paper book 1) Flyers developed by Lee for various products to be launched in the market. (pg.nos.106-111 of paper book 1) Detailed Trip report of Mr. Freddie Yong meeting with various prospective customers and presentation made by him for creating awareness among customers for the products. (Page nos. 112-117 of paper book 1) Presentation materials used by Freddie Yong during the product training provided to c .....

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continued at a higher rate. It was submitted that similar services were received by the assessee-company in the preceding years which were held to be at arm s length by the TPO. Finally, learned counsel for the assessee submitted that it was not open to the TPO or the income-tax authorities to question the business wisdom of the assessee-company. All these business decisions have to be considered from the point of view of a prudent businessman and it is not expected of an assessee to maximize hi .....

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the assessee finally submitted that since similar expenditure was allowed in earlier years, and since there was no change in facts and circumstances, following the principle of consistency, same should be allowed in the year under consideration. In support of this, he relied on the following decisions: • Essentra India Private Limited vs DCIT(ITA No. 1308/2011)(Bang ITAT) • Dresser Rand vs Additioner CIT (2011) 47 SOT 423(MUM ITAT) • Ingersoll rand (India) Ltd vs DCIT(ITA nO.228/ .....

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ence in support of the cost incurred by the AE, it cannot be said that the transactions are at arm s length as 10% mark up was added on the actual cost incurred. She has placed reliance on the orders of the lower authorities. 8. We heard rival submissions and perused material on record. A perusal of the TPO s order reveals that the ALP in respect of intra-group services was determined at nil as, in his perspective, no benefits were derived by the assessee-company out of such services and there w .....

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on ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd. (345 ITR 241), after considering the judgment of the Apex Court in the case of CIT vs. Walchand & Co. P.Ltd. (65 ITR 381)(SC), Sassoon J.David & Co. Pvt. Ltd. vs. CIT (118 ITR 261)(SC) held that the TPO cannot determine ALP at nil by holding that there was no need to incur such expenditure. While coming to this conclusion, the Hon ble High Court has referred to the judgment of the Apex Court in the case of Eastern Investm .....

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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. etc., (1967) 65 ITR 381 .....

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n in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 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 the Supreme Court again in C .....

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iturecannot, 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 .....

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ove 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 "wholly and exclusively" for the pur .....

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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 losses. The financial health of assessee can n .....

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ovided 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. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expendi .....

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ot necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the .....

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tion whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. 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 .....

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ment 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) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of busine .....

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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 alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in t .....

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rity to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been .....

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by the co-ordinate benches of the Tribunal in several cases. Some of them are: i. Dresser-Rand India Pvt. Ltd. v. ACIT [2012] 13 ITR (Trib.) 422 (Mum) ii. Ericsson India (P) Ltd. v. DCIT [2012] 146 TTJ 708 (Del) iii. AWB India Pvt. Ltd. v. ACIT: ITA No.4454/Del/2011 (Del-ITAT); AY 2007-08 iv. SC Enviro Agro India Ltd. v. DCIT [ITA No.2057-2058/Mum/2009] v. Abhishek Auto Industries Ltd. v. DCIT: ITA No.1433/Del/2009 - AY 2004-05 vi. McCann Erickson India Pvt. Ltd. v. ACIT: ITA No.5871/Del/2011 - .....

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(Delhi) - AY 2007-08, 2008-09 xiii. Knorr-Bremse India (P.) Ltd. v. ACIT: [2013] 56 SOT 349 (Delhi) - AY 2007-08 xiv. Thyssen Krupp Industries India (P.) Ltd. v. ACIT: [2013] 55 SOT 497 (Mumbai) - AY 2007- 08 xv. LG Polymers India P. Ltd. v. ACIT: [2012] 16 ITR (Trib) 240 - AY 2006-07 Thus, in the light of above legal position, though ALP of services by AE cannot be determined at nil by questioning the necessity, the benefits of expenditure incurred, such expenditure can be allowed only after p .....

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, to which one of us i.e. the Accountant Member is the author of the order, in the case of M/s.B Fouress Pvt. Ltd. vs. DCIT in ITA Nos.847 & 847/Bang/2014 dated 30/12/2015 held as follows: ............Thus, the assessee failed to discharge the burden of proving that the expenditure laid out were incurred wholly and exclusively for the purpose of business. We may further add that the Hon ble Supreme Court in the case of CIT Vs Imperial Chemical Industries (Ind.) Pvt. Ltd (1969) 74 ITR 17 has .....

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ded wholly and exclusively for the purpose of business. 11. A Co-ordinate Bench Tribunal of Delhi in the case of Kanu Kitchen Kulture (P)Ltd Vs DCIT (2013) 28 ITR (T) 49 (Del.-Trib.) held that whether the assessee failed to demonstrate the services rendered by the commission agent, the commission was disallowed. The relevant paras of the judgment are reproduced below; 22. Thus the assessee as utterly failed to demonstrate the nature and extent of service rendered by the agent and availed of by t .....

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earned DR has rightly pleaded that each and every year of assessment is separate and independent unit and principles of resjudicata do not apply. The assessment for the assessment year 2009-10 is under section 143(1) and for the assessment year 2010-11 there is no mention of the commission at all. Therefore, we are unable to give evidenced to the facts whose record is not before us and not referred to before the lower authorities . 12. Similarly, the Hon ble Delhi High Court in the case of Schne .....

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es cannot by itself show that M/s Ram Agencies had procured sale orders for the assessee. Apart from an internal note, there is no evidence of any correspondence or any personal; meetings etc. between the assessee and M/s Ram Agencies to suggest that the was any relationship on the basis of which M/s Ram Agencies procured some orders for the assessee for which it was entitled to receive commission. Moreover, we find that the understanding between the parties was an oral understanding and it appe .....

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d as follows: Thus, having regard to the ratio laid down in the above cases that in the absence of proof in support of the services rendered by the commission agent, no commission can be allowed as a deduction. Therefore, we dismiss the appeal filed by the assessee and allow the appeals filed by the revenue . 14. In the present case, the learned CIT(A) had not examined any evidence to show that the agents have actually rendered their services. The learned CIT(A) had totally misdirected himself b .....

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