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TMI Blog2015 (10) TMI 2794X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has reported the following international transaction with its AE : Particulars Amount(in INR) Outcome of TP order Purchase of raw materials 7,012,915 Accepted 1o be al arms' length Sale of kits 87,350 Accepted to be at arms' length Payment of administrative service fees 58,460,332 Adjustment of Rs. 58,460,332 Payment of royalty 19,056,804 Accepted to be at arms' length Reimbursement of expenses paid 7,339,244 Accepted to be at arms' length Recharge of expenses received 3,650,551 Accepted to be at arms' length Reimbursement of ESOP charges 129,540 Accepted to be a! arms' length Accordingly, the AO made a reference u/s 92CA of the Act to the TPO for determination of the ALP in respect of international transaction carried out by the assessee with its AE. The TPO, vide orders dated 31/10/2011, determined 'nil' ALP for transaction of administrative services fee paid by the assessee to its AE by holding that the assessee did not receive any services from its AE. The TPO was of the view that the assessee did not derive any benefit from paying administrative service fee to the AE because the assessee was incurring losses. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,14,05,413/-. 3(b) On the facts and circumstances of the case and in law, the Ld AO and Ld DRP should have appreciated that amount written off as advances is nothing but the expenditure payable to the agent against the amount receivable from it towards cash collected by it. 3(c) On the facts and circumstances of the case and in law, the Ld AO and Ld DRP should have appreciated that it is actual write off of expenditure incurred and allowable either under section 28 or section 37(1) of the Act. 4. (a) That on the facts and circumstances of the case and in law, the Ld. AO and the Ld. Panel erred in disallowing administrative fee of Rs. 4,81,97,802 by invoking the provisions of section 40A(2) of the Act. (b) That the Ld. AO and the Ld. Panel erred in invoking the provisions of section 40A(2) of the Act on an international transaction. 5.(a) That the Ld. AO, Ld. TPO and the Ld. Panel erred on facts and in law in holding that the international transaction of payment of administrative services fee amounting to Rs. 5,84,60,332 to associated enterprises (AE) does not satisfy the arm's length principle. (b) That the Ld. AO, Ld. TPO and the Ld. Panel erred in holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partly towards revenue. The DRP upheld the view of the AO and confirmed the disallowance. 6. Before us, the learned authorised representative of the assessee has pointed out that an identical issue came up before this Tribunal for assessment year 2004-05 in ITA Nos.1290/Bang/2007 wherein the Tribunal has decided this issue in favour of the assessee by treating the payment of royalty as revenue expenditure. He has further pointed out that for the assessment year 2004-05, the Hon'ble jurisdictional High Court has upheld the finding of the Tribunal that treating the payment of royalty made by the assessee to its AE do not lead to accretion of capital asset or benefit of enduring nature to the assessee. Thus the learned authorised representative of the assessee has submitted that the issue is covered in favour of the assessee by the decision of this Tribunal as well as by the Hon'ble jurisdictional High Court. On the other hand, learned DR has relied upon the orders of the authorities below. 7. We have considered the rival submissions as well as the relevant material on record. At the outset, we note that an identical issue has been considered and decided by this Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the other party. This Agreement may be terminated by Licensor at any time by written notice of termination, effective on the date such notice is received, after the occurrence of any of the following events: (a) Any breach of Licensee's obligations under Articles VI or VII of this Agreement; (b) Upon the insolvency or bankruptcy of Licensee, the inability of License to pay its debts as they fall due or upon the appointment of a trustee or receiver or the equivalent for Licensee, or upon the institution of proceedings under the laws of the Territory relating to the dissolution, liquidation, winding up, bankruptcy, insolvency or the relief of creditors, if such proceedings are not terminated or discharged within thirty days; or (c) Upon a substantial change of management or ownership of Licensee or upon the acquisition of direct or indirect control of Licensee by any person which manufactures or markets products competing or likely to compete with the Products. 7.3: Cure Period If either party shall commit any breach or be in default of its duties and obligations under this Agreement, other than those set forth in Section 7.2(a), the non-breaching party shall give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same to the assessee. During the year under consideration, assessee has shown sales collection outstanding from WMS amounting to Rs. 1,14,05,413/-. The assessee wrote off the said amount. During the course of assessment proceedings, the assessee submitted that the said amount was not remitted by WMS to the assessee and accordingly the assessee has written off the said amount. The AO did not accept the claim of the assessee and disallowed the claim of the assessee on the ground that the assessee did not produce any break-up of the amounts as well as advances and as per the AO the advances were capital in nature. The assessee raised objections before the DRP but could not succeed. 9.1 Before us, learned authorised representative of the assessee has submitted that during the year under consideration, WMS did not remit the amount of Rs. 1,14,05,413/- being sales collection. The assessee, even after follow up could not realize that amount from WMS and accordingly the assessee decided to write off the said amount receivable from WMS. The learned authorised representative of the assessee has submitted that this amount of Rs. 1,14,05,413/- represents the sales made at four stations vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions and treating the ALP at nil also disallowed part of the payment amounting to Rs. 4,81,97,802/- under section 40A(2) of the Act. The AO held that out of the total amount paid to AE, only Rs. 1,02,62,530/- equivalent to 2% of the turnover is allowable. Thus, the AO treated the balance amount as excess payment to the related party. 10.1 The assessee challenged the action of the AO before the DRP but could not succeed. 10.2 Before us, learned authorised representative of the assessee has submitted that the provisions of sec.40A(2) are not applicable to the said transaction when the assessee has already reported the transaction as international transaction which was referred by the AO to the TPO for determination of the ALP. Further the provisions of 40A(2) are not automatic provisions but the same can be invoked only when payment made to specified persons is found to be excessive or unreasonable. The AO has not conducted any inquiry or investigation and disallowed the amount on the basis of estimate. Thus, in the absence of any exercise of determining the excessive or unreasonableness of the payment made by the assessee, the disallowance made by the AO is not justified. He ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n being international transaction and making a reference to the TPO for determination of the ALP cannot go back to the provisions of sec.40A(2) for determining the reasonableness of the price paid by the assessee. Our attention was invited by the learned authorised representative of the assessee that for the assessment year 2001-02 to 2002-03 the payment in question was subjected to MAP and only 25% is charged to tax. Therefore, it was accepted by the department that the services were rendered by the AE to the assessee in India. We further note that the AO has not conducted any inquiry or investigation to find out the excessiveness of the payment made by the assessee to its AE. 10.5 The co-ordinate bench of this Tribunal in the case of M/s.Cisco Systems Capital (India) Pvt. Ltd., in ITA 1558/Bang/12 held in para.11 as under: "11. Having heard both the parties and having considered the rival contentions and also the material on record, we find that the assessee has filed before us on 14-7-2014, the break-up of the expenditure as per profit and loss account during the financial year 2007-08. From the said details, it is seen that the services rendered by Cisco India to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought out any material on record to prove that payment made by the assessee is excessive and unreasonable making an adhoc disallowance by invoking the provisions of sec.40A(2) of the Act is not justified. Accordingly by following the decision of the co-ordinate bench of the Tribunal as well as in view of the facts and circumstances of the case as discussed above, we set aside the orders of the authorities below qua this issue and delete the addition made under section 40A(2) of the Act. Ground No.5 regarding TP adjustment in respect of administrative service fee: 11. During the year under consideration, the assessee paid administrative service fee of Rs. 5,84,63,222/- to its AE. In the TP analysis, the assessee has adopted TNMM at the entity level as the most appropriate method to determine the ALP of the international transaction. The TPO has observed that there was no evidence to show that service was rendered and the same was beneficial to the assessee. Accordingly, the TPO determined the ALP of the administrative service fee payment at Nil and proposed adjustment of the said amount. The assessee challenged the action of the TPO by raising objections before the DRP but coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same. 13. In light of the aforesaid decisions, it was submitted that the approach of the TPO is not proper and the same should be held as not valid in law. 14. The ld. DR relied on the order of the TPO. 15. We have considered the rival submissions and are of the view that the stand taken by the assessee in this regard deserves to be accepted. It is clear from the decisions referred to above that the TPO has to work out the ALP of the international transaction by applying the methods recognized under the Act. He is not competent to hold that the expenditure in question has not been incurred by the assessee or that the assessee has not derived any benefits for the payment made by the assessee and therefore he cannot consider the ALP as NIL. We hold accordingly. " Thus in view of the judgment of the Hon'ble Delhi High Court as well as the decision of the co-ordinate bench of this Tribunal, TPO is not empowered to determine th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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