TMI Blog2018 (4) TMI 1957X X X X Extracts X X X X X X X X Extracts X X X X ..... of ALP to the TPO for fresh consideration. It is made clear that the TPO shall not dispute that services were rendered by the AE. If the approach of the Assessee in adopting TNMM at entity level is disputed by the TPO, the Assessee should be permitted to file TP study for each of the international transaction separately. Assessee is also directed to file the TP study, if not already filed which is in accordance with the provisions of the Act and substantiate that the price paid by it to its AE is at arm's length within the methods laid down in the Act and the judicial decisions rendered on this issue. TPO will consider the same in accordance with the law, after affording an opportunity of being heard. Validity of the order of assessment making addition on account of adjustment in ALP suggested by TPO on the ground that TPO did not confront to the Assessee information received from IRA, Singapore - As as already held, the TPO misdirected himself by not examining these evidence on the premise that the payment to the AE s was only with a view to reduce tax liability in India and to shift profits earned in India out of India. The tests laid down in the judicial decision re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td., (FIPL) is also a company incorporated in Singapore under tax resident of Singapore and it rendered administrative, financial and marketing services. The assessee paid sum of Rs.2.54 crores during the relevant previous year as consideration for the services rendered by FIPL. 5. It is not in dispute that the assessee FHPL and FIPL are associated enterprise and therefore, the transaction of licensing of royalty and rendering of management services were international transactions and in view of the provisos of sec. 92 of the Act, income arising from international transaction has to be determined having regard to Arms Length Price (ALP). The following chart will be explained as to how the assesee and FHPL and FIPL are associated enterprises and the international transactions between the associated enterprises. 6. The Assessing Officer made a reference to the TPO for determination of ALP of the international transaction between the assessee and FHPL and FIPL. As far as the determination of ALP with regard to transaction between the assessee and FHPL and FIPL is concerned, the TPO rejected the TP analysis justifying price paid for the international transactions paid as at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in other cases. If the payment was to a stranger and bona fide, presumption of reasonableness of payment would apply but not when payments are between related parties. This is because in the case of related companies, beneficiaries are the same set of people and therefore unless details are furnished justifying the payment of services charged the Department is not bound to allow the claim. 11. In view of the above, the payments of the fees for Technical Services and fees for the Management Consultancy allegedly to FHPL and FIPL, respectively, in the case of the taxpayer is not at all justified. In view of the above it is concluded that the ALP is nil on the basis that an independent entity in a comparable situation would not pay any amount. Thus the arm's length price of these payments is treated as Rs. Nil due to inadequacy of the taxpayer's argument and the entire payment of Rs. 12,40,74,000/- is treated as an adjustment U/s 92CA of the Income Tax Act, 1961. 7. Aggrieved by the adjustment to ALP suggested by the TPO, the assessee preferred objections before the Dispute Resolution Panel (DRP). The DRP concurred with the view of the TPO. The following were t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent of the actual services rendered by AE. The fee has been decided without indicating the extent of resources, which will be put up at the disposal of the assessee by the AE. The agreement doesn't provide for any safeguard to the assessee in case there is any deficiency in services provided by the AE and the assessee has to pay to the AE irrespective of quality or quantum of services rendered by it. Further, as pointed out by the TPO, FIPL does not have any resources to render these services. FIPL having its revenue from the assessee only and it is not having receipts from any other business activity. Although the agreement says that the ceiling of USD 5,00,000/- has been determined after due valuation and negotiation, however nothing has been brought on record to substantiate the same. In earlier years (upto AY 2010-11), the ceiling was stated to be sum of direct and indirect costs incurred by the AE, however now the same has been vaguely defined so that the AE cannot be asked by the assessee to show its correctness. Although the assessee is obliged to make available its records for inspection to be carried out by the AE, however, the assessee cannot inspect the records of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, in earlier years (upto AY 2010-11), the ceiling has been vaguely defiend so tht the AE cannot be asked by the assessee to show its correctness. Since FHPL had only paid remuneration to Sh.Bommi Govind, being Director, the maximum expenditure the AE could have claimed from assessee could have been such amount of remuneration. These aspects show the true nature of the transaction i.e. it is only a paper transaction without any actual services and the agreement has been drafted by just picking up some clauses from here and there, so as to make it look as a genuine agreement. Considering above the action of the TPO in treating ALP of the transaction relating to royalty/technical service fee as Nil, cannot be faulted with and the objection of the assessee is not accepted. 8. The AO passed final order of assessment, wherein he added to the total income, the adjustment to the ALP as suggested by the TPO in his order, which was confirmed by the DRP. 9. Aggrieved by the final assessment order dated 13/1/2017, the assessee has preferred the present appeal before the Tribunal. 10. The grounds of appeal raised by the assessee before the Tribunal reads as follows:- GENERAL G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under section 40A(2) for royalty payment and management consultancy fee adjustment under Chapter X ought not to be made. GROUNDS RELATING TO TP ADJUSTMENT FOR ROYALTY AND MANAGEMENT CONSULTANCY FEE: 5. Without prejudice to above contention that re-assessment proceedings are bad in law, the lower authorities have erred in: i. Ignoring the business, commercial and industry realities and economic circumstances applicable to the Appellant; ii. Ignoring the Transfer Pricing analysis undertaken by the Appellant and performing fresh transfer pricing analysis without rejecting the TP analysis performed by the Appellant; iii. Rejecting TNMM applied by Appellant to justify its international transactions with AE on unjustifiable grounds; iv. Not appreciating that Appellant had adopted TNMM at the entity level, in which process, the royalty payment and management fee was considered and accordingly benchmarked; and v. Not appreciating that once the net profit is tested on the touchstone of arm's length price, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciating that in the assessment proceedings of AE, the returned income has been accepted thereby presupposing that the amount received by the AE from the Appellant is at arm's length and therefore amount paid by the Appellant should also be considered as at ALP in its hands. 9. Assuming without admitting that the adjustment is to be made, the lower income tax authorities have erred in not allowing the benefit of the +1-5% range prescribed in the proviso to section 92C(2). OTHER GROUNDS 10. The TPO have erred in levying interest of Rs 2,32,30,508/- under section 234B. On the facts and circumstances of the case, interest under section 234B is not leviable. The Appellant denies its liability to pay interest under section 234B and section 234C. 11. Further, the lower authorities have erred in levying interest of Rs. 16,063/- under section 234D. On the facts and circumstances of the case, interest under section 234D is not leviable. The Appellant denies its liability to pay interest under section 234D. The Appellant submits that each of the above grounds/ subgrounds are independent and without prejudice to one another. The Appellant craves leave to add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rex-India manufacturing sites in Bangalore by WQA and NSF, developing the marketing concept for GREEN CARBON, laying the foundation for ECOCARB business, writing the business plan for ECOCARB, facilitating foreign companies to visit Filtrex-India, advisory functions with respect to finance and treasury, Public Relationship and exhibitions participation, media relations, Corporate communications and marketing communications policies, Leadership training, Human Resource and Manpower Planning, Information Technology Services, any other service required from time to time by Filtrex-India, etc. In connection with rendering of these services, M/s Filtrex International PTE Ltd. had received a sum of Rs. 2.54 crores from FTPL during the FY 2011-12. The receipts had been made by FTPL as the consideration for utilizing the management services provided by FIPL. The amount. received by FIPL is assessable as F'TS both under the provisions of Income-Tax Act, 1961 and DTAA between India and Singapore. In view of these facts, the amount of Rs. 2.54 crores received by M/s Filtrex International PTE Ltd. had not been offered to tax and hence the AO had reason to believe that this income of Rs. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs PTE Ltd. had not been offered to tax and hence the AG had reason to believe that this income of Rs. 9.86 crores had escaped assessment for AY 2012-13. 15. The assessee offered to tax royalty income on gross basis u/s 115A of the Act at 10% of the gross receipts. In the order of assessment passed by the AO in the case of FHPL dated 21/12/2016, the AO has set out the various terms of the agreement for use of IPR owned by FHPL by the assessee and finally the AO accepted the income returned by FHPL. 16. The ld counsel for the assessee submitted before us that the receipts from the assessee by FHPL and FIPL were considered as appropriate and at arm s length in the assessment of FIPL and FHPL by the Indian tax authorities. He highlighted the fact that in the assessment of FIPL and FHPL, the fact that the services were rendered and right to use Intellectual Property Rights (IPRs) were given for which royalty were paid has been duly recognized. The prayer of the learned counsel was that the revenue having accepted the arms length prices in the case of FIPL and FHPL should not be permitted to take the different stand when it comes to assessment of the assessee who is the person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mind independently and not on the directions of DRP or any other authority in another case. Therefore, the relevant ground of appeal on this issue is allowed. 17. The learned counsel for the assessee therefore submitted that the Revenue having accepted the ALP in the assessment of the AEs cannot be allowed to take a opposite stand in the case of assessee. 18. The ld DR on the other hand submitted that the acceptance of the return of income of FHPL and FIPL by the AO cannot give raise to a presumption that the consideration paid by the assessee to FIPL and FHPL was at Arm s length. According to him, it can at best be said that the rendering of services by FIPL and the licencing of IPR by FHPL have been accepted but the arm s length price paid by the assessee to FIPL FHPL cannot be said to have been established. In this regard, the ld DR pointed out that if it is considered that the consideration received by FHPL and FIPL was less than the ALP then the AO need not determine the ALP but can accept a higher income declared by FIPL and FHPL. The AO cannot reduce the income declared by the assessee in the return of income. Therefore according to the ld DR, the orders of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L for which it made payments from the orders of assessment in the case of FHPL and FIPL, we also find that the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., ITA No.1068/2011 dated 29.03.2012 had taken the view that the TPO has to evaluate the ALP of an international transaction and without doing so, he cannot give a finding that the Assessee received no services and therefore the ALP has to be determined at NIL. The Hon ble Delhi High Court had to deal with a case where an assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/ brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, the Hon'ble Delhi High Court held that the transfer pricing guidelines laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the AE and the Assessee is not a cost sharing arrangement but a payment for specific services rendered. To this extent the above observations of the Hon ble High Court may not be relevant to the present case. The Hon ble Delhi High Court held that the following aspects would require consideration in order to identify intra group services requiring arm s length remuneration: * Whether services were received from related party. * Nature of services including quantum of services received by the related party. * Services were provided in order to meet specific need of recipient of the services. * The economic and commercial benefits derived by the recipient of intra group services. * In comparable circumstances an independent enterprise would be willing to pay the price for such services? * An independent third party would be willing and able to provide such services? Whether payment made to AE meets ALP criterion will be determined, keeping in mind all the above factors, as well. 23. The learned counsel placed reliance on the decision of the ITAT Bangalore in the case of UAE Development India Pvt.Ltd. (supra). This decision was rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contemporaneously determined by an assessee. From a conjoint reading of CBDT circular No. 14 of 2001, section 92(1) and Rule 10D, contemporaneous determination of ALP would need to be undertaken by an assessee, and such determination cannot be bereft of the underlying intent of prevention of base erosion in India. 24. Section92(1) of the Act lays down that any income arising from an international transaction shall be computed having regard to the arm s length price. Section 92B(1) of the Act defines international transaction and it lays down that for the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having regard to the arm's length price determined under sub-section (3) by the Transfer Pricing Officer. ] The AO on receipt of a report from the TPO had power to disregard to the ALP determined by the TPO. However with effect from 1st June, 2007, Section 92CA(4) has undergone a change vide Section 33 of the Finance Act, 2007 whereby it has been laid down that the Assessing officer is bound to pass an order in conformity with the ALP determined by the TPO. Amended Section 92CA(4) reads as under: 92CA(4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer. (Emphasis supplied) 26. The provisos to Sec.92CA(4) of the Act read thus: Provided that no deduction under section 10A or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section : Provided further that where the total income of an associated enterprise is computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise to the transaction need not be made where there is no tax base erosion of the country. This is also the purport of Sec.92(3) of the Act which lays down that wherever computation of income under sub-section (1) of Sec.92 or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) of Sec.92, has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into. There would appear to be a conflict between the provisions of Sec.92CA(4) and Sec.92(3) but a harmonious construction of these provisions would be hold that in respect of a same transaction the revenue can opt to determine total income on the basis of ALP determined in accordance with Sec.92(1) of the Act, in the hands of one party to the said transaction, wherever tax base of the country would erode. The revenue can desist from doing so in the assessment of the other party to the said trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the Assessee information received from IRA, Singapore, has already been dealt with while deciding Gr.No.8. Gr.No. 4 to 7 are with regard to merits of the addition made by the AO. As far as these grounds are concerned, we find that the Assessee has filed evidence to show services rendered by AE and use of IPR of AE. These are annexure 2 to 14 of the paper book filed by the Assessee and are at pages 370 to 504. Some additional evidence was also filed by the Assessee before DRP and these are annexure-2 to 5 of evidence filed before DRP and are at pages 513 to 651 of the Assessee s paper book. As we have already held, the TPO misdirected himself by not examining these evidence on the premise that the payment to the AE s was only with a view to reduce tax liability in India and to shift profits earned in India out of India. The tests laid down in the judicial decision referred to in the earlier part of this order have to be applied to the evidence filed by the Assessee. Since this exercise has not been carried out, we have remanded the issue to the TPO for fresh consideration. The learned counsel for the Assessee vehemently argued that the revenue should not be given a second innin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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