TMI Blog2019 (9) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... om of the assessee. What is important is whether the services were rendered or not and whether the cost allocation was on a fair and reasonable basis. In the case on hand, the rendition of services has not been disputed. However, lot of emphasis has been put on the issue of Arm's length price in respect of the management fees. This aspect has also been well discussed by the Tribunal. - Decided against revenue - R/TAX APPEAL NO. 106 of 2019 - - - Dated:- 27-8-2019 - MR J. B. PARDIWALA AND MR A. C. RAO, JJ. For The Appellant (s) : MRS MAUNA M BHATT (174) For The Opponent (s) : MR MANISH J SHAH (1320) ORAL ORDER ( PER : HONOURABLE MR.JUSTICE J. B. PARDIWALA) 1. This tax appeal under Section 260-A of the Income Tax Act, 1961 (for short the Act, 1961 ) is at the instance of the revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad 'D' Bench, Ahmedabad dated 07.09.2018 in the ITA No.381/Ahd/2015 for the A.Y. 2010-11. 2. The Revenue has proposed the following two questions of law for the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Being dissatisfied with the order passed by the Appellate Tribunal,the Revenue is here before this Court with the present appeal. 7. The substantial ground of challenge to the order passed by the Appellate Tribunal, as pleaded in the memo of the tax appeal, is as under: The decision of the Appellate Tribunal is erroneous. With respect to payment of management fee, the assessee failed to produce evidence in support for allocation of expenditure at 11.7% and also failed to provide the basis of the estimation of time spent by the President Asia Pacific for supervising the operations of the group entities. The assessee failed to demonstrate the claim of ALP of the management fee. No details were submitted to support of the estimation of time spent by the president-Asia Pacific and no basis was submitted for taking the figure of 11.72%. The assessee also failed to submit that how the experience of Mr.Lu was utilized for the benefit of the assessee company. In absence of any documentary evidences and concrete reply of the assessee to justify the receipt of benefit by the assessee from the payment of such management fees (through non subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain to his approval for placing purchase orders or show the control he exercises in respect of smallest decision making. The fact that even purchase orders are being sent to him for approval signifies the control that the parent group is exercising over the subsidiaries. Therefore these activities are more in the nature of supervising activities being undertaken on behalf of the parent rather than any activity which could benefit the assessee. Therefore, it can be seen that the activities being undertaken by Mr. Lu are more in the nature of shareholding activities for the parent group and thus no charge for the same needs to be levied. iv. Further the assessee could not justify if such services were indeed required by it or called for by it from the Asia Pacific headquarters or they were simply piled upon it since it was a group entity. v. As per para 4.2 of the agreement, as reproduced below, all the expenses incurred by the office of Mr Lu are first required to be allocated to the beneficiary entities on the basis of time spent. 4.2 The APBA expenses referred to in clause 4.1 above shall be allocated to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party Management service transactions for services provided by Exide China to group entities for F.Y. 2008 to 2013 . The said report does not substantiate the genuineness of the Management Services , since it is not clear whether the Transfer Pricing authorities of China had accepted this report or not. Even if it is assumed that the TP authorities of China accepted this report, this has no relevance in TP proceedings in India, since the requirement of Indian Income tax law nowhere provides any reliance of transfer pricing report of AE as an evidence for the determination of ALP of any transaction of Indian entity. The Indian entity has to prove the ALP of its transaction analyzing in detail in its own transfer pricing report; while the assessee has failed to analyze in detail the Management services in its report. Again this report only enumerates the nature of the services but doesn't provide any proof of actual services received by the various entities including the assessee. On perusal of above, it is clear that the cost sharing is not being made on the basis of time spent, it has been fixed alleged expenses occurred. It is to be noted that the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement services. For example, for cost centre Finance of APAC, in the tabulated services, the services for China, India, Japan, Australasia (Australia New Zealand) are mentioned but no services of any type for Singapore and Hong Kong are mentioned yet the percentage of time spent for providing management services to Singapore and Hong Kong are mentioned as 10.29% and 2.42% respectively, this further raises doubt on the genuineness of the services rendered and allocation of expenses. Therefore, on the basis of the facts mentioned above, it is clear that since there was no requirement for such payment and the assessee somehow wanted to make such payment, it was made on an ad-hoc basis. Further, the assessee submitted Transfer Pricing Report of Exide Technologies (Shanghai) Co. Ltd., China. This document just gives a theoretical analysis of cost digestion which is not substantiated by ample documentary proofs supporting the methodology adopted in this report, in absence of detailed computations and other supporting documentation this report cannot be accepted as a justification of management fee to be at APL. Thus, the asessee fails on both the counts i.e. subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, is no longer relevant, and that is not even revenue s case before us. We have also noted that there is no dispute about the rendition of services, but, as in the last year, the dispute is about the services being in the nature of shareholder services. That plea, in our considered view, is wholly unsustainable in law. A core management support service, under a cost contribution arrangement, is inherently outside the limited scope of shareholder services. These services are required for effective administration and management of the assesses company on day to-day basis. Whether assesses needs these services or not or whether assesses derives substantial benefit from these services or not is not really relevant. That should be best left to the commercial wisdom of the assesses. What is material is whether the services were rendered or not. and whether or not the cost allocation was on a fair and reasonable, even if not wholly precise and accurate, basis and both of these tests are clearly satisfied on the facts of this case. it is also not a case in which benefits are so trivial or illusory that it can be said that the assesses did not derive any benefit from these services at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciate the finding of Ld. CIT(A) accepting the basis of turnover as a proper allocation key to proportionately allocate the insurance charges in relation to master insurance policy taken by Exide Technology which takes care of the product liability claim. 15. We therefore in the given facts and circumstance of the case are of the view that there was no error on the part of assessee claim the allocation of Insurance cost and further there was no duplication of insurance expenditure because they were meant to cover up two types of insurances namely public liability insurance and product liability insurance. We therefore uphold the finding of Ld. CIT (A) and dismiss ground No.2 3 raised by the Revenue. 12. We see no reason to take any other view of the matter than the view so taken by the co-ordinate bench. Respectfully following the same, we are unable to see any legally sustainable merits in the impugned arm's length price adjustments in respect of insurance premium share as well. 10. Mr. J.P. Shah, the learned senior counsel is on a caveat. Mr. Shah has vehemently opposed this tax appeal. He submitted that havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Arm's Length Price' to arrive at a fair assessment of income taxable in the hands of the Indian Resident Companies and these special provisions also provide for an elaborate and in-depth analysis of huge data of the comparable cases of other similarly situated Companies to arrive at a fair 'Arm's Length Price' and for that, Special Cells and designated Authorities have been created under the Income Tax Act, 1961, but still retaining the normal provisions for assessments of appeals in the Indian Income Tax Act about the remedial Forums or the appeal mechanisms and the Income Tax Appellate Tribunal constituted under Section 253 of the Act continues to be the final fact finding body under the Act even with regard to the assessments of the international transactions under the Special Chapter X as aforesaid and the appeal to the Constitutional Courts as provided in Section 260-A to High Court and Section 261 to the Hon'ble Supreme Court are applicable to these special assessments under Chapter X as well. 12. In para-11 of the judgment, the Hon'ble Court diluted upon the following three questions; [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers for determining the same as perverse. It is not allowed to either of the parties, i.e. the Assessee or the Revenue to invoke the jurisdiction of this Court under Section 260-A of the Act merely because the Tribunal comes to reverse or modify the findings given by the lower Authority, viz. Transfer Pricing Officer (TPO) or Dispute Resolution Panel (DRP) which comprises of three Commissioners and the Revenue or the assessee may feel dissatisfied, because of the reversal or modification of such findings by the Tribunal resulting in leaving out of certain comparables or adding on of certain comparables for determining the 'Arm's Length Price' in the hands of the Assessee Company. 17. Unless such perversity in the findings of the Tribunal is established we are of the opinion that the appeals under Section 260-A of the Act cannot and should not be entertained at the instance of either of the parties and the present cases before us, we find that the Tribunal has given cogent reasons and detailed findings upon discussing each case of comparable corporate properly and therefore, we find ourselves unable to call such findings of the Tribunal perverse in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by it, if it is satisfied that the case involves such question. ( 5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit. ( 6) The High Court may determine any issue which - ( a) has not been determined by the Appellate Tribunal; or ( b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section (1). [( 7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this Section.] Sections 100 and 103 of the Code of Civil Procedure, 1908 read thus: Section 100 - Second Appeal. ( 1) Save as otherwise expressly provided in the body of this Code or by any other law for the time being in force, an appeal shall lie to the High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct finding by the Tribunal under the Income Tax Act, whereas the Second Appeal on substantial question of law before High Court under Section 100 would lie against the Judgment and Decree of the first Appellate Court disposing of an appeal against the Judgment and Decree of a Trial Court, but nonetheless it is the third round of consideration at the level of the High Court, where the facts and law both have been screened, discussed and analyzed by the Authorities or the Courts below and therefore the tenor and color of the words substantial question of law in both these enactments remains the same. 22. The High Court has power to not only formulate the substantial questions of law and rather it has the duty to do so and can also frame additional substantial questions of law at a later stage, if such a substantial question of law is involved in the appeal before it under these provisions and the appeal should be heard and decided only on such substantial questions of law after allowing the parties to address their arguments on the same. The extended power given to the High Courts to decide even an issue under Sub- section (6) of Section 260-A of the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s they now stand by Finance Act of 1998, with effect from 01/10/1998 was only to clarify and support that the parameters of Sections 100 103 of the Civil Procedure Code and other provisions of Civil Procedure Code relating to appeals of High Court shall apply to the appeals under Section 260-A of the Income Tax Act also. 27. The insertion of Sub-section (7) in Section 260-A of the Act does not give any new or extended powers to the High Court and the pre-existing provisions from Subsection (1) to Sub-section (6) in Section 260-A of the Act already had all the trappings of Sections 100 and 103 of the Civil Procedure Code. Case Laws on Substantial Question of Law: 28. In the leading and the first and foremost case on the interpretation of Section 100 of the Code of Civil Procedure Code, the Constitution Bench of the Hon'ble Supreme Court in the case of Sir Chunilal V. Mehta and Sons Limited Vs. Century Spinning and Manufacturing Co. Limited AIR 1962 SC 1314, held in para.6 as under: 6. We are in general agreement with the view taken by the Madras High Court and we think that while the vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any question of law under sub-section (4) of Section 100 of the Code; though such reasons are to be recorded under proviso to sub-section (5) while exercising power to hear on any other substantial question of law, other than the one formulated under sub-section (4). 12. The phrase substantial question of law , as occurring in the amended substantial, as qualifying question of law , means - of having substance, essential, real, of sound worth, important or considerable. It is to be understood as something in contradistinction with - technical, of no substance or consequence, or academic merely. However, it is clear that the legislature has chosen not to qualify the scope of substantial question of law by suffixing the words of general importance as has been done in many other provisions such as Section 109 of the Code or Article 133(1)(a) of the Constitution. The substantial question of law on which a second appeal shall be heard need not necessarily be a substantial question of law of general importance. In Guran Ditta v. T. Ram Ditta , the phrase substantial question of law as it was employed in the last clause of the then existing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he settled position of law. ( iii) The general rule is that High Court will not interfere with the concurrent findings of the courts below. But it is not an absolute rule. Some of the well-recognised exceptions are where (i) the courts below have ignored material evidence or acted on no evidence; (ii) the courts have drawn wrong inferences from proved facts by applying the law erroneously; or (iii) the courts have wrongly cast the burden of proof. When we refer to decision based on no evidence , it not only refers to cases where there is a total dearth of evidence, but also refers to any case, where the evidence, taken as a whole, is not reasonably capable of supporting the finding. 31. In the case of Vijay Kumar Talwar Vs. Commissioner of Income Tax, Delhi, [2011] 1 SCC 673, comparing the provisions of Section 260-A of the Act with Section 100 of the Civil Procedure Code, the Hon'ble Supreme Court held that in the absence of demonstrated perversity in the findings of the Tribunal, the Court cannot interfere and a finding of fact may give rise to a substantial question of law, only if it is perverse. Paragra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the 'Arm's Length Price' in relation to the international transactions shall be determined by following any of these methods enumerated in Section 92-C of the Act which is considered to be the 'Most Appropriate Method' by the Authorities under the Act. The methods provided are: Clause (a): Comparable Uncontrolled Principles Method (CUP); Clause (b): Resale Price Method (RP) Clause (c): Cost Plus Method (CP) Clause (d): Profit Split Method (PS) Clause (e): Transactional Net Margin Method (TNMM); and Clause (f): such other Method as may be prescribed by the Board. 36. It appears from the true facts of the various cases before us and the arguments of the learned counsels that the TNNM Method appears to be the most popular and widely adopted Method for determining the 'Arm's length price' in which the Operating Profit Margin of comparable Companies are considered by the Authorities and applied to the cases of the Assessees to determined the 'Arm's Length Price' and make Transfer Pricing Adjustments. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m's Length Price' as observed above, necessarily takes into account the comparable cases of other similarly situated or nearly similarly situated Corporate Entities whose data are in public domain or on the Data Bases like Prowess and Capital Line Data Base etc. 16. The Court, thereafter, proceeded to discuss whether any substantial question of law could be said to be involved in the matter. No Substantial Question of Law Arises in these Cases: 40. The dispute essentially before us is the pairing and matching such comparables with the Transfer Pricing Analysis of the profit margins given by the Assessee himself during the course of determination of such 'Arm's Length Price'. 41. The shades of arguments raised by both the sides before us in these appeals and most of which have been filed by the Revenue are that either the wrong Filters have been applied or Filters have been wrongly applied, particularly qua Turnover Filter giving a far too wide or narrower range of comparables or even though comparable Entities were functionally different entities from the Entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nonapplication of mind by the Tribunal to the relevant facts of the case and evidence before the Tribunal. 45. Otherwise if the High Court takes the path of making such a comparative analysis and pronounces upon the questions as to which Filter is good and which comparable is really comparable case or not, it will drag the High Courts into a whirlpool of such Data analysis defeating the very purpose and purport of the provisions of Section 260-A of the Act. Therefore what we observed above appears to us to be the sustainable view that the key to the lock for entering into the jurisdiction of High Court under Section 260-A of the Act is the existence of a substantial question of law involved in the matter. The key of ex-facie perversity of the findings of the Tribunal duly established with the relevant evidence and facts. Unless it is so, no other key or for that matter, even the in-consistent view taken by the Tribunal in different cases depending upon the relevant facts available before it cannot lead to the formation of a substantial question of law in any particular case to determine the aspects of determination of 'Arm's Length Price' as is soug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The procedure of assessment under Chapter X relating to international transactions as indicated above is already a lengthy one and involves multiple Authorities of the Department. A huge, cumbersome and tenacious exercise of Transfer Pricing Analysis has to be undertaken by the Corporate Entities who have to comply with the various provisions of the Act and Rules with a huge Data Bank and in the first instance they have to satisfy that the profits or the income from transactions declared by them is at 'Arm's length' which analysis is invariably put to test and inquiry by the Authorities of the Department and through the process of Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) and the Tribunal at various stages, the assessee has a cumbersome task of compliance and it has to satisfy the Authorities that what has been declared by them is true and fair disclosure and much of the Transfer Pricing Adjustments is not required but the Tax Authorities have their own view on the other side and the effort on the part of the Tax Revenue Authorities is always to extract more and more revenue. This process of making huge Transfer Pricing Adjustments results ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an 'Arm's Length Price' in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court. 19. The Delhi High Court, in the case of CIT vs. EKL Appliances Ltd. , reported in (2012) 345 ITR 241 (Delhi) , in context with Section 92CA of the Act, had observed as under: It seems to us that the decision taken by the Tribunal is the right decision. The TPO applied the CUP method while examining the payment of brand fee/ royalty. The CUP method which in its expanded form is known as comparable uncontrolled price method is provided for in Rule 10B(1)(a) of the Income Tax Rules, 1962. It is one of the methods reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits in the above manner, the arm ‟ s length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm ‟ s length principle, the guidelines provide for recognition of the actual transactions undertaken in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant 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 exerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement. 1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 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 ..... 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