TMI Blog2023 (8) TMI 1105X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM method, began with the rejection of the segmental accounts of the assessee, we deem it fit to restore this issue to the file of the TPO. The entire issue relating to the determination of ALP of international transaction of the sale is restored back to the TPO, to be determined afresh after first dealing with the aspect of justifiability of segmental data submitted by the assessee along with the MAM adopted by it for determining the ALP of the transaction. Needless to add the assessee be provided due opportunity of hearing in this regard. Addition u/s 37(1) - payment of Management fees, SAP and Opti-mill fees and Business Area Service fees disallowed by concluding that the expenses are not incurred wholly and exclusively for the purpose of business - HELD THAT:- The said expenses could not be held as not having been incurred wholly and exclusively for the purpose of business of the assessee. As rightly pointed out by the ld. counsel for the assessee, there are several judgments including that of Apex Court laying down the principle to be applied for determining allowability of expenses under section 37(1) of the Act and this principle have emerged over years by virtue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11, the preceding year. The assessee has sufficiently demonstrated before us that the invoices were raised during the year by Ahlstrom Corporation, Finland on the issue and related to the bank guarantee commission for the impugned year alone. No hesitation in holding that the bank guarantee expenses paid by the assessee pertained to the impugned year, and could not disallowed as prior period expenses u/s 37(1) - order of the DRP/ AO holding so, is accordingly set aside. Disallowing bank guarantee expenses, as being disallowable in terms of section 40(a)(i) of the Act for non-deduction of tax at source - assessee pointed out that despite exhaustive contentions raised by the assessee against the applicability of Article 21 of the DTAA between India and Finland to the transaction of reimbursement of Bank guarantee commission, the DRP held Article 21 applicable without dealing with the contentions of the assessee - HELD THAT:- As agreed that the issue needed reconsideration by the AO. In view of the same, the issue of disallowance of bank guarantee commission is restored back to the AO to be dealt with after considering the arguments raised by the assessee. The AO is directed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the transaction of sale of goods to AEs. 1.4. Without prejudice, the Ld. TPO erred in selecting certain functionally dissimilar companies as comparable to benchmark the international transaction of sales of goods to AEs under TNMM approach. The Appellant prays that the addition made by the Ld. AO/TPO in relation to the international transaction of sales to AE be deleted. 5. As is evident from the above, the issue in the above grounds relates to transfer pricing adjustment made in relation to the international transaction of sales made by the assessee with its Associate Enterprise (AEs). 6. Brief background of the case is that the assessee, M/s Ahlstrom Fiber Composites India Pvt. Ltd. (AFCIPL), was incorporated in 2008 and is a subsidiary of Ahlstrom Corporation, Finland. The assessee is engaged in the production of variety of non-woven fabrics. It started commercial production from April 5, 2010 and the Asst. Year 2011-12, the impugned year before us, was the first year of production of the assessee. During the impugned year, due to certain technical issues, it could not manufacture the desired products, being anti-static/alcohol repellent treated advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were to the effect that by virtue of segmental accounts the assessee had taken an internal comparable for the CPM selected by it for benchmarking international transaction and that the ld. TPO had rejected the segmental accounts on frivolous basis, without pointing out any specific defect in the same. That further the DRP had failed to adjudicate the objections of the assessee before it in this regard. He drew our attention to the show cause notice issued by the TPO during TP proceedings, reproduced at page no. 3 of the order of the TPO, pointing out therefrom the basis with the TPO for rejecting the segmental accounts of the assessee as being; i) That as per the Notes to Accounts to the audited accounts of the assessee, there were no primary reportable segments; ii) That despite the same, the assessee had submitted segmental accounts in relation to its export and domestic segments, with the exports segment being further bifurcated into AE and non-AE segment. That these segmental accounts were verified by Chartered Accountants, who had not prepared the audited accounts of the assessee. Our attention was drawn to the show cause notice, bringing out the above at para 4-1 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services that the concerned business segment produces which includes the different geographical areas of business operation. This being the criteria since the assessee produced only one product, there was no requirement of furnishing any segmental data as per the AS-17 in the audited accounts; but for the purpose of benchmarking of international transaction on sales, the assessee had got the segmental accounts prepared with the respect to the AE and non-AE segments of export sales undertaken by it, thus creating data relating to an internal comparable. He therefore stated that the mere fact that the segmental accounts were not reported in its audited balance sheet and /or were audited by some other C as who were not auditors of the assessee company, made no difference nor had any effect on the veracity of segmental accounts. He therefore stated that TPO had given no cogent reason for rejecting the assessee s segmental accounts. 11. To this, the ld. DR countered by stating that segmental accounts prepared by the assessee were not reliable since they reflected huge difference between the profits of the AE export segments and the non-AE export segments which was as high as 19.21%; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to Rs. 1,60,83,722/- by concluding that the expenses are not incurred wholly and exclusively for the purpose of business. While making the addition, the Ld. AO erred in law and on facts on the following: i. in stating that services are not rendered for all the months; ii. in correlating the payment of management charges with the sales/production; iii. in stating that the agreement is one sided and is only taking care of Ahlstrom Non-woven LLC; iv. in questioning the business requirement of the services; v. in stating that the payment mechanism is nothing but a mere revenue sharing agreement with the group entities and vi. in stating that services paid for do not provide any benefit or provide benefit that are duplicative in nature. 2.2 On the facts and in the circumstances of the case and in law, the Ld. AO under the directions of Hon'ble DRP, erred in not appreciating the observation of the Ld. TPO that no adverse inference have been drawn for the international transactions of Management fees and Business Area Service Fees. The Appellant prays that the additions made by the Ld. AO in relation to the disallowance of Management f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered for the purpose of business; ii) For the purpose of making disallowance under section 37(1) of the Act, the necessity of incurring of expenses is not required to be established, and as long as expenses were incurred for the purpose of business, and as long commercial expediency for incurring expense was established, which was to be determined from the stand point of the assessee, the disallowance could not made under section 37(1) of the Act; iii) In any case, the TPO had made no adverse inference with regard to the ALP of the transactions, therefore, the AO could not have made any disallowance under section 37(1) of the Act. 20. With regard to his contention on the nature of services received by virtue of these expenses being established to the AO, he drew our attention to the facts noted by the DRP in its order as reproduced above vis- -vis these expenses, and pointed out that the payment for management fee and SAP Opti-mill service charges had been made in lieu of agreement entered into by the assessee with M/s Ahlstrom Corporation dated 1.1.2001 for intra-group Service arrangement for management and advisory services in the field of human resource, IT, legal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for the first two quarters of the year were also filed. He also pointed out that it was explained to the DRP that no services were availed by the assessee from the group concern in relation to routine business activities to run business operation and the services received had no direct linkage to the sales or the revenue, and therefore, insistence on benefit accrued to the assessee on account of incurrence of expenses was demonstrated to be misplaced. 21. The ld. counsel for the assessee further pointed out the finding of the AO that the expenses incurred under the head management charges could not be stated to be wholly and exclusively for the purpose of business, since in addition to these expenses, the assessee had incurred office expenses, misc. expenses was also demonstrated to the DRP to be misplaced. He contended that it was pointed out to the DRP that payment for management services rendered by the Ahlstrom Corporation was completely different from the administrative expenses incurred by the assessee under the head office expenses and Misc. Expenses , pointing out that office expenses included expenditure incurred on account of purchases of office consumables, cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes and are neither capital nor personal in nature. 4.8.31 No adverse inference for the international transactions of management fees has been made by Ld. TPO in the TP assessment order dated 27 January 2015. 4.8.32 Use of Software support services (SAP and opti-mill) does not relate to / has nothing to do with the revenue of business. It is incurred as and when required and has no nexus with earning of revenue. iii. Requirement of services vis-a-vis business not proved and payment is mere revenue sharing arrangement with the Group Concern 22. He further contended that in various judgments it has been laid down that for expenses incurred relating to the business of the assessee, the assessee cannot be questioned on the purpose for incurrence of such expenses, that whether any expenses are required or not is a matter of business prudence. In this regard, he drew our attention to the following decisions: i) Atherton Vs. British Insulated Helsby Cables Ltd., (1925) 10 TC 155; ii) Eastern Investments Ltd. Vs. CIT (1951) 20 ITR 1 (SC) iii) CIT Vs. Microsoft Corporation of India P. Ltd., (2008) 220 CTR 410 (Delhi); iv) Ravi Marketing P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of judicial interpretation of expression wholly and exclusively for the purpose of business appearing in section 37(1) of the Act. Broadly, the principle laid down are i. the term wholly and exclusively for the purpose of business is of a wider import, wider than the expression for the purpose of earning profit ; ii. expenses are allowable under section 37(1)( of the Act if it is commercially expedient; and iii. the expenses should be commercially expedient from the perspective of a prudent businessman and not from the point of view of Revenue. It is enough to show that money is expended, not out of necessity and with a view to a direct and immediate benefit, but voluntarily on account of commercial expediency, and in order indirectly facilitate the carrying on of business. iv. Lastly, it is not necessary to show that the expenditure was profitable one and in fact it earned any profit. 26. On the touch-stone of jurisprudence regarding interpretation of the term wholly and exclusively for the purpose of business, we find that no case has been made out by the Revenue showing that the assessee does not fulfill the required parameter to qualify for deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as pointed out by the DRP also from the OECD commentary and from the various decision of the ITAT on this issue. Therefore also, disallowance made by the AO on the impugned expenses amounting to Rs. 1.60 crores is held to be not sustainable in law, and directed to be deleted. Ground no. 2 raised by the assessee is allowed. 28. Ground no. 3 reads as under: Ground No. 3: Disallowance on reimbursement of Bank guarantee commission 3.1 On the facts and in the circumstances of the case and in law, the Ld. AO under the directions of Hon'ble DRP, erred in disallowing amount paid towards reimbursement of Bank guarantee commission amounting to Rs. 1,12,29,8977- u/s. 37(1) by holding it to be a prior period expense. 3.2 On the facts and in the circumstances of the case and in law, the Ld. AO under the directions of Hon'ble DRP, erred in disallowing amount paid towards reimbursement of Bank guarantee commission amounting to Rs. 1,12,29,8977- u/s. 4Oa(i). While doing so, he erred in the following: i. in concluding that Pohjola Bank has an Agency Permanent Establishment ('PE') in India and accordingly tax was deductible at source on reimbursement of ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es liable to be disallowed in terms of section 40(a)(i) of the Act. The assessee objected to the disallowance before the DRP who upheld the disallowance proposed by the AO, applying section 37(1) of the Act and also section 40(a)(ia) of the Act for the purpose of holding that the assessee was liable to withhold the tax in terms of Treaty with Finland. The DRP took a different view as opposed to that taken by the AO holding that the impugned amount qualified as Other Income liable to withholding tax in India in terms of Article 21 of the Treaty with Finland in the source country. The relevant finding of the DRP in this regard at page no. 22 of the order is as under: 31. Before us, ld. counsel for the assessee pointed out that the finding of the DRP in this regard were in total disregard to the arguments and contentions made by the ld. counsel for the assessee before it. He contended that it had been demonstrated to the DRP that the impugned expenses could not be categorized as prior period expenses, as pointing out that they related to the commission paid for the impugned year evidenced with bills/invoices issued by the Ahlstrom Corporation, Finland to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y demonstrated before us that the invoices were raised during the year by Ahlstrom Corporation, Finland on the issue and related to the bank guarantee commission for the impugned year alone. In view of the same, we have no hesitation in holding that the bank guarantee expenses paid by the assessee pertained to the impugned year, and could not disallowed as prior period expenses under section 37(1) of the Act. The order of the DRP/ AO holding so, is accordingly set aside. 34. We take up now the alternate reason for disallowing bank guarantee expenses, as being disallowable in terms of section 40(a)(i) of the Act for non-deduction of tax at source. As is evident from the order of the DRP reproduced above, the assessee was held liable to withhold the tax on the impugned payment in terms of Article 21 of the DTAA entered into with Finland. The Article 21 is reproduced hereunder: ARTICLE 21 OTHER INCOME 1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v) Even otherwise, in terms of section 195 of the Act, since reimbursement of expenses is without any mark-up, the provisions of section 195 cannot be invoked in the absence of any amount chargeable to tax in terms of provision of the Act. (v) On account of non-discriminatory clause of India-Finland DTAA, in the context of the section 40(a)(ia) of the Act, no disallowance can be made of the impugned amount. Article 23(3) of the India-Finland DTAA was invoked by the ld. counsel for the assessee pointing out that as per the Article 23(3) of the said DTAA, interest, royalty and other disbursements paid by an enterprise of a Contracting State (India) to the resident of other Contracting State (Finland), shall for the purpose of determining the taxable profits of such enterprise, be deductible under the same condition, as if they had been paid to a resident of the first mentioned State and considered from this aspect, if the commission payment by the assessee to the Ahlstrom Corporation, Finland is to be treated as that paid to an Indian entity, then for non-deduction of TDS on the said payment, no disallowance under the applicable section 40(a)(ia) of the Act is attracted, since the ..... 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