TMI Blog2018 (11) TMI 1543X X X X Extracts X X X X X X X X Extracts X X X X ..... ’, and hence, not taxable in India as per the Double Taxation Avoidance Agreement (DTAA) between India and USA - disallowance u/s 40(a)(i) is not justified. Management services paid to the AE of the assessee disallowed u/s 37 - Held that:- DRP has only given a general direction based on the finding of the TPO that there was no benefit accrued to the assessee on payment of management fees and hence ALP of said international transaction is to be determined at ‘Nil’. The fact that the above expenditure, whether it is business expenditure, which can be claimed as deduction u/s 37 of the I.T.Act, was never examined. Therefore this issue is also restored to the A.O. to test the reasonableness of the claim of deduction u/s 37 of the I.T.Act. - decided in favour of assessee for statistical purposes. - IT(TP)A No.283/Coch/2017 - - - Dated:- 14-11-2018 - Shri Chandra Poojari, AM And Shri George George K, JM For The Appellant : Sri.Raghunathan S For The Respondent : Sri.Santham Bose ORDER Per George George K., JM This appeal at the instance of the assessee is directed against the final assessment order dated 31.03.2017 passed u/s 143 r.w.s. 92CA r.w.s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded Services and hence not taxable in India as per the Double Taxation Avoidance Agreement ( DTAA ) between India and United States of America. 3. Ground 5 Without prejudice to the above grounds, the management service fees is wholly incurred for the purpose of business cannot be disallowed under section 37 of the Act. We shall adjudicate the issue as under:- Ground No.3 : Determination of Arm s Length Price in relation to Management Support Services 5. We find an identical issue was considered by the Tribunal in assessee s own case pertaining to assessment year 2012-2013 in IT(TP)A No.475/Coch/2016 and for assessment year 2011-2012 in IT(TP)A No.134/Coch/2016. The Tribunal relied on the order of the Chennai Bench of the Tribunal in the case of M/s.Seimens Gamesa Renewable Power Private Limited v. DCIT [(2018) 92 Taxmann.com330 (Chennai Trib.) . The order of the Chennai Bench of the Tribunal in the case of M/s.Seimens Gamesa Renewable Power Private Limited (supra) had considered the judicial pronouncements on the subject and had held that TPO has no jurisdict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, answered in favour of the assessee, the TNMM had to be applied by the TPO/ AO in respect of the technical fee payment too. 20.5.1 In the case of Air Liquide Engg. India (P.) Ltd. (supra) held that:- 33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a stand-alone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owance mainly on the ground of the benefit test, is unsustainable in law. 36. Keeping in view all the above factors, the disallowance made on account of royalty is found to be totally uncalled for and it is deleted as such. 21. Hence, following the ratio of the Hon'ble Delhi High Court in CIT v. EKL Appliances (supra) and various other decisions as noted above and given the facts and circumstances of the instant case, we hold that the addition made by the TPO and upheld by the DRP is unsustainable and is to be deleted. Hence Ground No.2 is held in favour of the assessee. Hence, the appeal of the Revenue ITA. No. 1040/Hyd/2011 is dismissed and Assessee's appeal in ITA. No. 1159/Hyd/2011 is allowed. 20.5.2 In the case of Sakata Inx (India) Ltd. (supra) wherein held that:- 2.9 We have heard the rival contentions and perused the material available on record. In our considered view, there is no infirmity in the order of ld. CIT(A) inasmuch as: ( i) Id. DR could not justify the application of CUP method to Arm's Length working. ( ii) The products manufactured by the appellant were developed from technology support provided by the AE i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had submitted that in case the assessee had paid to the AE at man hour rate for the technical services provided during the year in relation to SAP implementation, the fees payable would have been significantly higher. There is nothing produced before us to controvert the said claim. The assessee has applied TNMM which shows that the margin shown by the assessee was higher than the comparable companies. The case of the assessee is also supported by the decision of Tribunal in case of Me Can Erricson India Pvt. Ltd. (supra) in which the decision of TPO to take the value of certain services at nil has not been upheld. Considering the entirety of facts and circumstances, the adjustment made by TPO which is nothing but disallowance of expenses cannot be upheld. We, therefore, set aside the order of CIT (A) on this point and delete the addition made. 20.7 Further, this view was supported by the decision of Co-ordinate Bench, Chennai in the case of Flakt India Ltd. (supra) vide order dated 9th June, 2016 for assessment year 2009-10 and in the case of Da Business Process Services (P.) Ltd. v. Dy. CITITAT in ITA No. 2166 of2011. 20.8 In our considered opinion, Jurisdiction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O has followed CUP -method for determining ALP of royalty payment, as held by Id. DRP, it needs to be examined if it is strictly in compliance with statutory provisions. Rule 1OB(1 )(a) lays down the procedure for determining ALP under CUP method. As per the said provision. TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions. Thereafter, making necessary adjustments to such price, on account of differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market, TPO will determine the ALP. It is patent and obvious from TPO's order, the determination of ALP at 2% is not at all in conformity with Rule 1OB(1)(a). The TPO has not brought even a single comparable to justify arm's length percentage of royalty at 2% either under CUP or TNMM method. On the contrary, observations made by TPO gives ample scope to conclude that adoption of royalty at 2% is neither on the basis of any approved method nor any reasonable basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y payment was untenable and even going by the said basis wrongly adopted by the TPO, no TP adjustment in respect of royalty payment was liable to be made. As per the said basis, the net sales of the assessee after excluding export sale and other income were to the extent of ₹ 1118.70 crores and the royalty paid thereon at ₹ 24.38 crores being less than the rate of 3.5% approved by SIA, there was no case of any excess payment made of royalty by assessee than approved by SIA to justify its disallowance by way of TP adjustment. In our opinion, the Id. CIT (A) could not appreciate these infirmities in the order of the TPO despite the same were specifically brought to his notice on behalf of the assessee and confirmed the TP adjustment made by the TPO in respect of royalty payment which was totally unjustified. We therefore, delete the addition made by the AOI/PO and confirmed by the Id. CIT on account of TP adjustment in respect of royalty payment and allow ground NO.3 of the assessee's appeal.' ( ii) TNS India (P.) Ltd. (supra) '16. We have considered the issue. We are unable to accept the contention of the Assessing Officer/TPO with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt, we are not in agreement with the Assessing Officer and TPO that services were not rendered by the group companies to assessee. 16.1. Even otherwise, the role of transfer pricing Officer is to determine the arm's length price of a transaction. He cannot reject the entire payment under the provisions of sec. 92CA as held by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd. (supra) wherein the Hon'ble Delhi High Court, on I similar facts where the TPC also determined the ALP at Nil, has held as under: 21. The position emerging from the above decisions is that it is not necessary for assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for assessee to show that any ITA Nos. 944/H/07, 194 74/H/OB, 793/H/09, 654, 655/H/10 7/H/2012 TNS India Pvt. Ltd. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs '. 6. In view of the above order of the Chennai Bench of the Tribunal and the Cochin Bench order of the Tribunal in assessee s own case, we hold that the benefit is not a precondition for justifying arm s length price. Under Rule 10B of the Income-tax Rules, 1962 which deals with Determination of the arm s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no protective disallowance u/s 37 of the I.T.Act made by the Assessing Officer in the draft assessment order. The DRP in its directions dated 21.02.2017 held that the assessee had failed to substantiate its claim that any services were actually rendered by the AE i.e., USTG based on the findings of the TPO. It was further held by the DRP that the said expenditure, whether it was incurred wholly and exclusively for the purpose of the business was not proved. Therefore, the same requires to be disallowed protectively u/s 37 of the I.T.Act. 10. Aggrieved by the above directions of the DRP, the assessee has preferred the present appeal before the Tribunal. The learned AR submitted that the expenditure pertaining to management services has been incurred by the assessee for the purpose of its business and the assessee does not have any other employee cost and USTG provided managerial services to the assessee. The learned AR relied on the judgments of the Hon ble Apex Court in the case of CIT v. Walchand Co. (P) Ltd. [(1967) 65 ITR 381 (SC) and Sasoon J.David And Co. (P.) Ltd. v. CIT [(1979) 118 ITR 261 (SC)] and contended that it is not open for the Department to adopt a su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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