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TMI Blog2021 (3) TMI 1053X X X X Extracts X X X X X X X X Extracts X X X X ..... sidering it, as there is no difference between the original grounds of appeal and the revised one, we consider below the original one for adjudication. ITA No. 1153/MUM/2017 Assessment Year: 2012-13 3. The assessee, M/s. Sulzer Pumps India Private Limited, is engaged in the business of manufacturing and sale of single and multistage power-driven pumps for industrial use. The assessee is a part of the Sulzer group which is headquartered at Winterthur, Switzerland. It filed its return of income for the AY 2012-13 on 30.11.2012 declaring total income at Rs. 54,27,19,898/-. The Assessing Officer (AO) referred the international transactions to the Transfer Pricing Officer (TPO) for determination of assessee's income on an arm's length basis. The TPO vide order dated 21.01.2016 passed u/s.92CA held the Arm's Length Price (ALP) of certain international transactions as "Nil" on the ground that the receipt of the services was not established. The AO, thereafter made certain additions to the income returned by the assessee. The assessee preferred a reference to the Dispute Resolution Panel (DRP). The DRP approved the order passed by the TPO/AO. The AO, thereafter completed the assessment v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th grounds of appeal in para 25 infra. So we come to the other grounds of appeal serially. The 4th ground of appeal is reproduced below: "4. On the facts and in the circumstances of the case and in law, the AO and the TPO erred in concluding and the DRP erred in confirming the adjustment of Rs. 3,85,71,874/- relating to the international transaction of payment of Asia Pacific ('ASP') Management fee to associated enterprise by determining its arm's length price at NIL instead of Rs. 3,85,71,874/-." 6. During the year under consideration, the assessee had paid management fee of Rs. 3,85,71,874/- to its AE Sulzer Pumps Ltd. It submitted before the TPO that Sulzer Asia Pacific Business Area, Shanghai, P.R. China, an AE of the assessee, provides administrative service to its foreign operating affiliates in the Asia Pacific region and that such service encompasses business area marketing including business intelligence, tender support and tracking system support, general management (including human resources), finance controlling, quality environment and safety support and segment support. The assessee further submitted before the TPO that the charges for such service are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minimize frauds, ensuring correct bids to potential customers etc. It is argued that the assessee had submitted benefit derived on account of such services along with detailed nature of services and the mechanism of cost and also a certificate from its AE certifying the details regarding ASP management fees such as total amount incurred by the AE in provision of the services, the amount allocated to the assessee and the fact that the amount is allocated on a cost to cost basis. As regards the determination of ALP of the transactions, it is explained that the management services are closely connected with the core business operations of the company and hence the said transaction of receipt of management services has been aggregated with the manufacturing activity for benchmarking purposes and based on the said analysis, the ASP management fee paid by the assessee meet with the ALP standard required under the Indian Regulations. The Ld. Counsel submits that before the DRP, the assessee had relied on the decision of the Delhi High Court in EKL Appliances Ltd. v CIT (ITA Nos. 1068 & 1070/2011) and the order of the Tribunal in TNS India Pvt. Ltd. [TS- 21-ITAT-2014(HYD)-TP], Dresser-Ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE. It had claimed that the budgeted rate of CHF 228 per user per month has been charged on the basis of number of users to arrive at the cost. However, the TPO was not convinced with the above explanation of the assessee on the ground that it is imperative that the assessee should have benchmarked this service separately. Further, as per the TPO, the assessee has not submitted any analysis on the basis of which such budgeted rate was arrived at; no list of employees for whom such licenses were obtained was ever submitted despite specific query being raised; the assessee also did not submit any detail of budget which was received by it and also did not submit the actual expenditures incurred. As per the TPO the expected benefit from such service must be sufficiently direct and substantial so that an independent recipient in similar circumstances would be prepared to pay for it. Following the order of the DRP for AY 2011-12, on the above issue, the TPO determined the ALP of SAP related charges at Nil. As regards the payment of Microsoft license charges which are annual maintenance cost of the SAP software paid to the AE, since the ALP of SAP related charges has been determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of substantiating its claim, the assessee had also submitted the copy of SAP software related agreement, e-mail correspondences demonstrating the receipt of services from the AE, details of SAP tickets raised by Assessee while using SAP, sample copies of invoices and certificate from its AE certifying the total amount incurred by the AE and the amount allocated to the assessee including the details of number of users and the rate per month per user. Regarding the adjustment on account of annual charges paid towards Microsoft licenses, the Ld. Counsel submits that Sulzer US Holding Inc. entered into Microsoft Volume Licensing Agreement with Microsoft Licensing GP, which in turn transferred all the license rights acquired under the said Agreement to Sulzer Management AG ( 'AE'). Based on the Agreement, the AE entered into arrangement with the assessee and allocated the license cost without mark-up on the basis of the amount charged by Microsoft. It is stated that the benefits derived by the assessee from the user Microsoft licenses are as under:- "a. The assessee gets additional product use rights and the right to copy software onto multiple devices from one standard image usi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated by the Ld. DR that since the ALP of SAP related charges has been determined at Nil, there cannot be any charge to maintain such software/license. Finally, it is stated that as assessee failed to submit the list of employees who are utilizing such licenses and the work done by them, the TPO has rightly determined the ALP of such charges at Nil. 13. The 6th ground of appeal reads as under:- "6. On the facts and in the circumstances of the case and in law, the AO and the TPO erred in concluding and the DRP erred in confirming the adjustment of Rs. 3,03,08,932/- relating to the international transaction of payment of trademark fees to associated enterprise by determining its arm's length price at NIL instead of Rs. 3,03,08,932/-." 14. During the year under consideration, the assessee had paid royalty / fee for use of trademark /brand name 'SULZER' which is owned by its AE. To determine ALP of trademark royalty, the assessee had considered comparable uncontrolled price ('CUP') as the most appropriate method. It claimed that the use of brand name / trademark of 'SULZER' has resulted in certain benefits to the assessee for which it paid royalty to its AE and hence, the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogies which produce different types of pumps with high quality ; hence, at the initial stage the main objective of the Sulzer Group was to revamp the business of the then Khimline Pumps Limited and enhance the technology so as to manufacture different types of pumps used in varied industries ; hence, Sulzer Group initially provided drawings of pumps and technical know-how to the assessee so as to equip the assessee with the required wherewithal to meet the global standards in pump industry. It is thus stated that the assessee and the AE had mutually agreed to pay fees for trademark only after the assessee was equipped enough to manufacture pumps as per the standard of Sulzer Group ; hence, the AE and the Assessee entered into an agreement for paying royalty from 1 January 2008; however, due to commercial and business reasons it was mutually agreed between the parties to pay trademark fees from FY 2011-12. Finally it is stated that the benefits received by using the Sulzer brand are evident from substantial increase in sales and profits before tax (nine times) of the assessee since, 1998 to FY 2011-12. 16. On the other hand, the Ld. DR submits that though, the assessee has given t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and the AE regarding the services; it had also submitted the invoices raised by the AE on the assessee for providing the engineering services to him. In this regard, the Ld. Counsel refers to the following invoices:- Invoice Number Particulars 919001407 For a standard pump (300 class flanges), the pressure vs temperature chart allows only 41.5 bar pressure. The Assessee however needed 50 bar pressure, which means a pumps of 600 class flanges. Being first pump of its kind in India, such change was executed (drawings only) by the AE as they are the designers of such pumps. 919001406 The invoice was raised against the casting and machining drawings including 3D models for side nozzles provided by the AE, which is not a standard feature in pumps. The AE also provided the base frame design and its verification services. Thus, it is stated by the Ld. Counsel that the tax authorities erred in holding that the assessee failed to substantiate its claim of having received the engineering services. 20. On the other hand, the Ld. DR submits that the assessee failed to produce before the TPO the details of employees of the AE who worked for the assessee, the time spent b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. DR submits that the TPO has rightly rejected the benchmarking of the assessee and determined the ALP at Nil on account of the services being incidental and duplicative in nature. Referring to the OECD guidelines, it is argued by him that the services in the present case do not warrant an allocation as those rendered result in an incidental benefit. Thus, the Ld. DR supports the order passed by the TPO and AO. 25. We have heard the rival submissions and perused the relevant materials available on record. Having narrated at length the order of the TPO/AO and DRP, the contentions of the Ld. Counsel and the Ld. DR, we adjudicate below the above grounds appeal. We find that the assessee had filed before the TPO on 22.06.2015 (i) Transfer pricing study report for financial year 2011-12 (ii) Form 3CEB for FY 2011-12 (iii) Financial statements of Sulzer India for the year ended 31 March 2012. The assessee had also filed before the TPO on 04.09.2015 i) Copies of agreements for Trademark fees between Sulzer Management AG and Sulzer India, (ii) Copies of third party comparable agreements w.r.t trademark fees, (iii) Single year comparable companies margin for FY 20 1 1 -12, (iv) Calcul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered view that given the range of transactions involved, the arm's length method cannot be adequately applied on a transaction-by-transaction basis. Accordingly, for the purpose of determining the ALP, the assessee has rightly aggregated for the purpose of benchmarking (i) purchase of raw materials, sale of finished goods and engineering services that are essentials to its business, (ii) payment of ASP charges, IT and service charges to assist in business administration and (iii) payment of commission that assists the assessee in obtaining purchase orders from third parties. 25.2 Let us discuss a bit on the concept of burden of proof. This ambiguous term refers to two distinct concepts. The first concept is known particularly the burden of persuasion. A party meets this burden by convincing the fact- finder to view the facts in a way that favours that party. Today the phrase burden of proof most often bears this meaning. The second concept is known unambiguously as the duty of producing evidence, the burden of going forward with evidence, the production burden or the burden of evidence. A party meets this burden by introducing enough evidence to have a given issue considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to Restricted Stock Units issued by associated enterprise, by determining its arm's length price at NIL instead of Rs. 33,23,965/-." 27. The assessee had granted Restricted Stock Units('RSUs) to one of its employees, Mr. Ramanathan Venkatasubramanian. The assessee submitted before the TPO that considering the experience and competence of the employee, his appointment was considered to be very crucial and instrumental for the growth of the company; the employee was associated with the assessee -company since August, 2009 and the RSUs were granted in order to retain and motivate him; the employee continued his employment with the company till the time the RSUs were vested with him and hence, he was granted 457 stock units of Sulzer AG, the AE; the shares of the AE are listed on the Swiss Stock Exchange and hence, the market value of the shares on the respective vesting dates was considered to determine the value of RSUs. However, the TPO held that such RSUs were not issued for the benefit of the assessee and completed the assessment by re-computing the ALP of the international transaction relating to recharged RSUs as Nil. The DRP confirmed the said addition excluding the glo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. DR that RSUs have been granted by the AE to Mr. Venkatasubramanian, which is an independent transaction and therefore, there was no need for the assessee to reimburse the AE and the RSUs were not issued for the benefit of the assessee; the assessee cannot keep on reimbursing the payments made by the AE to anyone unless the payments are made on behalf of the assessee. It is further argued that the AE started to grant the RSUs to Mr. Venkatasubramanian much before the agreement was entered between the assessee and the AE and as is evident that the first RSU was granted in 2009, whereas the agreement was entered on 15.03.2011, which appears to be an afterthought. Reiterating the findings of the TPO, the Ld. DR concludes that the assessee cannot take on the liability of the AE on itself, and therefore rightly the ALP of the transaction has been determined at Nil. 30. We have heard the rival submissions and perused the relevant material available on record. Reasons for our decision are giving below. As mentioned earlier, the assessee had filed before the TPO on 15.12.2015 (i) Brief description for payment of 'RSUs', (ii) copy of agreement of RSUs (iii) copy inter-company invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment of Rs. 33,23,965/- and allow the 10th ground of appeal. 31. The 11th ground of appeal reads as under:- "11. On the facts and in the circumstances of the case and in law, the AO has erred in concluding and the DRP erred in confirming that unreconciled income appearing in Form 26AS is unaccounted in the books of accounts amounting to Rs. 9,70,797/- and should be charged to tax." 32. During the course of assessment proceedings, the AO provided the assessee details available in AIR and asked the assessee to reconcile the TDS and receipts with the corresponding receipts accounted for in the books of accounts. The assessee could not reconcile an amount of Rs. 9,70,797/- which was added by the AO. 33. The Ld. Counsel submits that the tax authorities has confirmed the addition of Rs. 9,70,797/- to the income of the assessee being the unreconciled amount as per the books of accounts and Form 26AS. It is explained that the assessee was able to reconcile 97.17% of the entries recorded in its books of accounts and it was merely 2.83% of the entries which could not be reconciled by the assessee. Further, it is stated that merely because, it could not reconcile its 26AS and the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of income u/s. 139(1) and the said return is final and not revised ever. It is stated that if the additional ground of appeal is now admitted in favour of the assessee, it will result in reducing returned income. Elaborating further, it is explained by him that earlier upto 31st March, 1989 "correctness and completeness" of return of income is the purpose of issue of notice u/s. 143(2), meaning final assessment can go either way, unlike provisions of law from 01.04.1989 [change brought above by Direct Tax laws (Amendment) Act, 1987] where purpose is " to ensure that the assessee has not understated the income or has not computed excessive loss or has not underpaid the tax in any manner". Thus, as per him, post 01.04.1989, the outcome as a result of issue of notice u/s. 143(2) is restricted, unidirectional, for the purpose of revenue. The Ld. DR further explains that the language of section 143(2) has undergone sea change; by not filing revised return of income u/s. 139(5), the legally available right under procedure prescribed by law is forfeited i.e, time barred; the adoption of appeal route to claim ineligible i.e, time barred claim ( restoration of a lost claim) is not accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for the assessee to file the above ground on 13.02.2017. It is well settled that the decision of the High Court would have binding force in the state in which the court has jurisdiction as held in CIT vs. Benoykumar 32 ITR 466 (SC); CIT vs. Jyotikana 32 ITR 705 (SC). Thus, the decision of the High Court are binding on the Sub-ordinate courts, authorities and Tribunal situated within its jurisdictional territory as held in Taylor vs. CIT 232 ITR 771; CGT v Jain 230 ITR 839; CIT v Sunil Kumar 212 ITR 238; CIT v Thana Elec 206 ITR 727; Indian Tube v CIT 203 ITR 54; CIT v Joshi and Joshi 202 ITR 1017. CIT v Highway 217 ITR 234; CIT v Maganlal 210 ITR 580. The above additional ground is a purely legal one and following the decision in NTPC v. CIT (1998) 229 ITR 383 (SC), we admit it for adjudication. Further in Sesa Goa Ltd. (supra), the Hon'ble Bombay High Court has held that: "24. The legislative history bears out that the Income Tax Bill, 1961, as introduced in the Parliament, had Section 40(a)(ii) which read as follows : "(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n additional reason as to why the expression "cess" ought not to be read or included in the expression "any rate or tax levied" as appearing in section 40(a)(ii) of the IT Act. 28. In the Income-tax Act, 1922, section 10(4) had banned allowance of any sum paid on account of 'any cess, rate or tax levied on the profits or gains of any business or profession'. In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression "cess" is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income-tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression "cess" and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(ii) does not include, "cess" and consequently, "cess" whenever paid in relation to business, is allowable as deductable expenditure. 29. In Kanga and Palkhivala's "The Law and Practice of Income Tax" (Tenth Edition), several decisions have been analyzed in the context of provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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