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2017 (4) TMI 1340

knowhow - Held that:- The onus lies on the assessee to prove that the actual services for which the administrative services fees were paid are actually rendered or the use of technical knowhow @ 5% of the domestic sales. It may be mentioned that the question of the bench marking of transaction would arise only if the assessee proves that there was actual transfer of technical knowhow to the appellant and the technical knowhow was actually used by the assessee in the manufacturing activity of the appellant. It is a matter of fact that before the lower authorities as well as before us, the assessee company had only described the nature of technical knowhow and nature of administrative services received. It does not conclusively prove that the assessee company actually received the administrative services as well as the technical knowhow which are used in the manufacturing activity of the appellant. - The appellant had not filed any additional evidences to prove the administrative services/technical knowhow are actually received by the appellant and thus the assessee company had failed to discharge this onus of proving this aspect. Therefore, even as per the provisions of Indian E .....

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in its Form 3 CEB: Purchase of articles of Promotional Products 14,73,293/- Sale of Kits 70,576/- Royalty paid 2,37,93,205/- Cost Recharge 80,44,537/- Payment towards stock option 2,17,262/- Payment of Administrative Fee 5,47,91,533/- 3. The assessee company sought to justify the consideration paid for the above international transactions entered with its AE to be at arm s length. The assessee company also submitted transfer pricing study report adopting Transactional Net Margin Method (TNMM) which is considered to be the most appropriate method for the purpose of bench marking the above international transactions. The assessee company also adopted profit before income tax to sales as a profit level indicator. The assessee company s profit margin was computed at 5%. The assessee company claimed that the same was comparable with other companies and claimed that the payment of management fees and royalty are at arm s length. For the purpose of transfer pricing study, the assessee company has chosen comparables whose profit margin was computed at 5%. Thus it was claimed that the payments of management fees and royalty is at arm s length. 4. The AO referred the matter to the TPO for t .....

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incorporating the above addition. 7. Being aggrieved, the appellant is in appeal before us in the present appeal and raised the following grounds of appeal: 8. Ground No. 1 and 2 are general in nature, do not require any adjudication. Ground No. 3,5 & 6 challenges the addition made on account of payment of administrative services fees of ₹ 5,47,91,533/- and ground No. 7 challenges the addition on account of payment of royalty to AE of ₹ 2,37,93,205/-. The whole case of the TPO is that the assessee had failed to demonstrate the benefits derived out of such expenditure and also the necessity of incurring such expenditure and finally on the ground that the assessee has failed to prove that the assessee has actually received the services. The Hon ble DRP also confirmed the addition holding that the assessee only made the submission regarding the nature of services received but had not been able to prove that the services are actually received by the assessee company. 9. We heard the rival submission and perused the material on record. Now the law is quite settled that it is beyond the scope and powers of TPO/AO to question the necessity of incurring the expenditure or t .....

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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] 115 ITR 519 (SC), and it was observed as under (page 523): "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 e language employed .....

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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 Transfer Pricing Officer 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 wholesale disallowance of the expenditure, particularly on the grounds which have been given by the Transfer Pricing Officer is not contemplated or authorized. 10. Thus, the ratio of the above judgment is that the ALP in respect of any transaction cannot be determined at Nil by holding that there was no benefit accrued on account of incurring such expenditure nor there was any necessity of incurring such expenditure. But the matter does not end there. The onus lies on the assessee to prove that the actual services for which the administrative services fees were paid are actually rendered or the use of technical knowhow @ 5% of the domestic sales. It may be .....

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agement products and paid excise duty thereon and these products could not sold in the market owning to unfavourable conditions and therefore, the appellant was forced to export these products to the parent company. On account of these exports made, the company claimed duty draw back from Central Excise department for the duty already paid. The claim was rejected by the Central Excise department and this claim is now pending in the appeal stage. While the matter stood thus during the previous year relevant to the assessment year under consideration, the appellant written off this amount as a bad debt and claimed as deduction. This was rejected by the AO by holding that it is not a debt but a statutory duty recoverable from the concerned authorities unless and otherwise the issue of irrecoverability attains the finality by the decision of the appellate courts, the same cannot be allowed as deduction and the same came to be confirmed by the CIT(A) holding that the it cannot be allowed as a business loss. 13. Being aggrieved, the appellant is in appeal before us in present appeal. 14. We heard the rival submission and perused the material on record. The conditions necessary for allowa .....

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