TMI Blog2016 (6) TMI 1008X X X X Extracts X X X X X X X X Extracts X X X X ..... agement 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 probe or enquiry it does not preclude the AO from making the enquiries on these issues. - IT(TP)A No.725/Bang/2011, IT(TP)A No.727/Bang/2011 - - - Dated:- 13-5-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Assessee : Shri Mukesh Bhutani, Advocate For The Respondent : Ms. Neera Malhotra, CIT(DR) ORDER Per INTURI RAMA RAO, AM : These are cross appeals filed by the assessee as well as the revenue directed against the order of the CIT(A)-LTU, Bangalore, 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 do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the transactions were held to be at arm s length. However, the TPO held that in respect of administrative business support service fee of ₹ 6,08,67,243/- paid by it to 3M Singapore were not at arm s length. The TPO held that ALP in respect of administrative business support fee at nil after making the following observations: Services did not result in any tangible benefit and profit margins have declined after the Appellant started paying administrative and business support service fee. Even after the provision 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 benefit analysis is not done by the Appellant. The expected benefit must be sufficiently direct and substantial so that independent recipient in similar circumstances wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Profit before Interest and Tax 31.84 38.87 41.69 60.31 % of PBIT to total revenues 14.73% 17.00% 14.67% 14.69% % of transaction value on total costs 0.84% 0.90% 2.51% 1.92% % of transaction value on total revenues 0.71% 0.74% 2.14% 1.64% 5. After considering the above material, the CIT(A) had come to the conclusion that decline in profitability is on account of the following reasons: The decline in the profitability is 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 busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefits Derived Backups available/Submitted on samples basis 1. Information technology Support services 3M Asia Pacific SSEA has established a regional database for the purpose of providing IT Support and services to 3M Subsidiaries in the group. The services are broadly classified 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 Group and provide a uniform platform for customers and distributors/suppliers resulting in an effective supply chain management from sales order, sourcing to final delivery which was essential for the business operation of 3M India The COFS is required for sales order processing, commencing from customer order creation to the dispatch of the goods to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 implementation charter manual Service level agreement for the FY 2005-06 to FY 2008-09 showing no charges paid for subsequent years ICAP and other IT related services. 2. Marketing and sales support services 3M India, being global brand, significant branding and marketing support services received by 3M India also include information on potential business opportunities arising out of activities of other activities of other 3M entities and assistance in pursuit of such opportunities. The overall broad business 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 Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Knorr - Bremse India Private Limited vs ACIT(ITA No. 182/2013)(P H HC) AWB India Pvt Ltd vs DCIT(ITA No.6480/12)(DEL ITAT) McCann Erickson India Private Limited vs ADCIT (ITA No 5781/2011)(Delhi ITAT) Hero Cycles (P.) Ltd vs CIT [2016] 236 Taxman 447(SC) Learned counsel for 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.228/2015) (Bang ITAT) DCIT vs Payne (India.) Pvt Ltd(ITA No.446(B)/2012)(Bang ITAT) TNS India Pvt. Ltd vs ACIT(ITA No.944/07, 194 74/08,793/09,654,655/10 AND 7/2012) 7. On the other hand, ld.CIT(DR) has vehemently opposed the submissions of the learned counsel for the assessee and submitted that the TPO was justified in adopting ALP at nil as the assessee-company could not produce evidence in suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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, 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 rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton 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 CIT v. Rajendra Prasad Moody, (1978 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 transaction as he actually finds the same and then make suitable adjustment but a wholes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 57(iii) cannot be different. The deduction of the expenditurecannot, 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) required that the expenditure should have been incurred wholly, necessarily and exclusively for the purposes of business in order to merit deduction. Pursuant to public protest, the word necessarily was omitted from the 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 AY 2007-08 vii. DSM Anti- Infectives India Ltd. v. ACIT : ITA Nos. 1139/Chd/2011 and 1290/Chd/2012 AY 2007-08; 2008-09 viii. TNS India Pvt. Ltd. V. ACIT: (2014) 32 ITR (Trib.) 44 (Hyd.) AY 2003-04; 2004- 05; 2005-06 ix. Atotech India Ltd. v. ACIT : ITA No.104/Del/2012 AY 2007-08 x. Nippon Leakless Talbros v. ACIT : I.T.A. No. 5931/Del/2012 AY 2008-09 xi. Nippon Leakless Talbros v. ACIT : IT(TP)A No. 475/Del/2015 AY 2010-11 xii. Hughes Systique India P. Ltd. v. ACIT : [2013] 25 ITR (Trib) 556 (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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our considered view the assessee has produced only skeletal paper work of the arrangement without any iota of evidence about actual business services rendered. 23. The assessee s claim for allowing similar commission payment in subsequent year caries no merit inasmuch as the learned 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 Schneider Electric (Ind.) Ltd Vs CIT (21008) 304 ITR 360 (Del.) held that in the absence of material on record suggesting that the commission agents had procured the sale orders, no commission should be allowed. The relevant para of the judgment is reproduced below; 13. We agree with the Tribunal that there is absolutely no material on record to suggest that M/s Ram Agencies had procured any sale orders for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 services rendered by the AE. The CIT(A) had no occasion to examine this evidence as it was claimed that this evidence was filed for the first time before us . Therefore, the CIT(A), without examining the aspect of actual rendition of services by the AE in respect of IT services, had directed the allowance of expenditure. Therefore, in interests of justice, we restore this issue to the file of the AO for purposes of verification of this evidence and come to conclusion whether the services are actually 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. 11. 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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