IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: ` I ' NEW DELHI
BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER
AND
SMT DIVA SINGH, JUDICIAL MEMBER
I.T.A .No.-1942/Del/2011
(ASSESSMENT YEAR-2005-06)
DCIT, vs M/s Lear Automotive India Pvt. Ltd.,
Circle-4(1), Room No-407, 206 & 206A, Rectangle-1, D-4, Saket
th
4 Floor, C.R. Building, Dist. Centre, Saket, New Delhi.
I.P.Estate, New Delhi. PAN-AAACL1978K
(APPELLANT) (RESPONDENT)
I.T.A .No.-5903/Del/2010
(ASSESSMENT YEAR-2006-07)
M/s Lear Automotive India Pvt. Ltd., vs ACIT,
E-25, 26, 27, Bhosari MIDC, Bhosari, Range-4, New Delhi.
Pune, Maharashtra-411026
(APPELLANT) (RESPONDENT)
I.T.A .No.-5955/Del/2012
(ASSESSMENT YEAR-2008-09)
M/s Lear Automotive India Pvt. Ltd., vs DCIT,
E-25, 26, 27, Bhosari MIDC, Bhosari, Circle-4(1),
Pune, Maharashtra-411026 New Delhi.
(APPELLANT) (RESPONDENT)
Appellant by Sh. Rohit Tiwari, Miss Amisha Relan,
Sh. Sanjay Arora, CAs
Respondent by Sh. Peeyush Jain, CIT DR (T.P.)
Sh. Yogesh Kumar Verma, CIT DR (T.P)
ORDER
PER DIVA SINGH, JM
All these three appeals are being decided by a common order for the sake of
convenience in view of the common stand of the parties before the Bench on most
of the issues. ITA No-1942/Del/2011 has been filed by the Revenue against the
order of the CIT(A)-X, New Delhi dated 22.03.2011 pertaining to 2005-06
assessment years; ITA No-5903/Del/2010 has been filed by the assessee against
2 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
the final assessment order dated 25.10.2010 passed by the AO consequent to the
Dispute Resolution Panel's (hereinafter referred to as the "DRP") order dated
27.09.2010; and ITA No-5955/Del/2012 has also been filed by the assessee against
the final order passed by the AO pursuant to the order dated 13.08.2012 of the
DRP. The appeals pertain to 2005-06, 2006-07 and 2008-09 Assessment Years
respectively.
2. The parties before the bench in their respective appeals have agitated the
following grounds before us:
ITA No-1942/Del/2011 filed by the Revenue
01. "The order of the learned CIT(Appeals) is erroneous & contrary to facts
and law.
02. On the facts and in the circumstances of the case and in law, the Ld.
CIT(Appeals) has erred in deleting the addition of rs.1,75,53,297/- made
by the AO on account of T.P. Adjustments.
2.1. The Ld. CIT(A) has ignored the findings recorded by the T.P.O & A.O.
and the fact that the assessee could not establish the genuineness of these
transactions either during the T.P.O proceedings or during assessment
proceedings.
03. The appellant craves leave to add, to alter, or to amend any grounds of the
appeal raised above at the time of the hearing."
ITA-5903/Del/2010 filed by the Assessee
1. The Ld. Dispute Resolution Panel ("Ld DRP") and the Ld. Additional
Commissioner of Income-tax ("Ld. AO") (following the directions of the
Ld. DRP), erred on facts and in law, in enhancing the income of the
appellant by Rs.14,529,430/- on account of the Transfer Pricing ("TP)
adjustment u/s 92CA(3) of the Income Tax Act, pricing Officer-1(3) ("Ld.
TPO"), by holding that the international transaction of cost allocation
from the associated enterprise (AE) to the appellant does not satisfy the
arm's length principle envisaged under the Act.
2. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP),
erred on facts and in law, in upholding the Ld. TPO's stance of
disregarding the benchmarking approach and methodology followed by
the appellant for determining the arm's length nature of the TP
arrangement with regard to cost allocation from overseas AEs in its TP
documentation maintained u/s 92D of the Act read with Rule 10D of the
Income Tax Rules, 1962.
3. The Ld. DRP and the Ld. AO (following the directions of the Ld. DRP),
erred on facts and in law, in upholding the Ld. TPO's stance of
3 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
erroneously concluding that the arm's length price of the transaction of
cost allocation of expenses should be Nil and in doing so:
3.1. not appreciating that none of the conditions set out in
Section 92C(3) of the Act are satisfied in the present case;
3.2. ignoring /rejecting the Comparable Uncontrolled Price
(`CUP') analysis undertaken by the appellant to substantiate the
arm's length nature of the pricing of the transaction of cost
allocation from AE and by not considering the detailed
contentions/arguments/evidentiary data put forward by the
appellant in this regard;
3.3. failing to acknowledge the business efficacy of the cost
allocation arrangement between the appellant and its AE and the
benefits received by the appellant from the same;
3.4. making various erroneous conjectures/statements in the TP
order to disregard the sanctity of the transaction of cost allocation
from AE and by proceeding to pass a judgment on the case without
going into its merits and without taking into proper cognizance,
the evidentiary supporting/back-up information/documents filed in
this regard:
3.5. disregarding the corroborative Transactional Net Margin
Method (`TNMM') analysis carried out by the appellant in its
Transfer Pricing (`TP') documentation report maintained u/s 92D
of the Act read with Rule 10D of the Income Tax Rules, 1962
(`Rules') to justify the arm's length nature of the pricing of the
transaction of cost allocation from overseas AE; and
3.6. making an adjustment of Rs.14,529,430/- to the transaction
of cost allocation from AE in complete disregard of the fact that
the said transaction continued to have the same pricing basis
during financial year (`FY') 2005-06 as during FYs 2002-03 and
2003-04 and no adverse inference was drawn on the pricing of this
transaction during the TP assessment proceedings for these years.
4. The Ld. DRP and the Ld. AO( following the directions of the Ld. DRP),
erred on facts and in law, in disregarding the detailed submissions filed by
the appellant during the course of the DRP proceedings to justify the cost
allocation from the overseas AE.
5. The Ld. DRP and the Ld. AO(following the directions of the Ld. DRP),
erred on facts and in law, in disposing off the appellant's detailed
submissions and objections against the TP adjustment without
appropriately discussing/appreciating/understanding the merits of the
case.
6. The Ld. AO also erred in facts and in law in initiating penalty proceedings
u/s 271(1) (c) of the Act for furnishing inaccurate particulars of income."
ITA No-5955/Del/2012 filed by the Assessee
1. The Ld. Dispute Resolution Panel ("Ld DRP") and the Ld. Additional
Commissioner of Income-tax ("Ld. AO") (following the directions of the Ld.
DRP), erred on facts and in law, in enhancing the income of the appellant by
Rs4, 97,45,614/- on account of the Transfer Pricing ("TP) adjustment u/s
4 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
92CA(3) of the Income Tax Act,1961 (`Act') made by the Ld. Additional
Commissioner of Income-tax, Transfer Pricing Officer-1(2) (`Ld. TPO').
2. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld.
DRP), erred on facts and in law
2.1.1. In enhancing the income of the appellant by Rs.1,17,09,474, by
holding that the international transaction of cost allocation from the
associated enterprise (AE) to the appellant does not satisfy the arm's length
principle envisaged under the Act and in doing so have grossly erred:
2.1.2. by ignoring and rejecting the Comparable Uncontrolled Price
(`CUP') analysis undertaken by the appellant to substantiate the arm's length
nature of the pricing of the transaction of cost allocation from AE and by not
considering the detailed contentions and arguments data put forward by the
appellant in this regard;
2.1.3. By failing to acknowledge the business efficacy of the cost allocation
arrangement between the appellant and its AE and the benefits received by the
appellant from the same.
2.1.4. By disregarding the corroborative Transactional Net Margin
Method (`TNMM') analysis carried out by the appellant in its Transfer
Pricing (`TP') documentation report maintained u/s 92D of the Act read with
Rule 10D of the Income Tax Rules, 1962 (`Rules') to justify the arm's length
nature of the pricing of the transaction of cost allocation from overseas AE;
and
2.2. the Ld. TPO/Ld.AO erred in enhancing the income of the appellant by
Rs.38,036,140 holding that the international transaction pertaining to its cost
recharges do not satisfy the arm's length principle envisaged under the Act
and in doing so have grossly erred:
2.2.1. by ignoring and rejecting the Comparable Uncontrolled Price
(`CUP') analysis undertaken by the appellant to substantiate the arm's length
nature of the pricing of the transaction of cost recharges from AE and by not
considering the detailed contentions and arguments put forward by the
appellant. Also, failing to acknowledge the business efficacy of the
arrangement and the benefits received by the appellant from the same in this
regard;
2.2.2. by disregarding the corroborative Transactional Net Margin
Method (`TNMM') analysis carried out by the appellant in its TP
documentation report maintained u/s 92D of the Act read with Rule 10D of
the Rules to justify the arm's length nature of the pricing of the transaction of
cost allocation from overseas AE; and
2.2.3. in completely disregarding of the fact that the said transaction
continued to have the same pricing basis during FY 2007-08 as during the
prior years when the appellant has faced TP assessment proceedings for those
years and no adverse inference was drawn on the pricing of this transaction.
3. The Ld. DRP and Ld. AO in disallowing an amount of Rs.17,80,906/- by
treating the consultancy charges paid for assistance in assessing the
feasibility/viability of opening another unit in relation to proposed extension
programme of the company as capital in nature.
5 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
4. The Ld. AO erred in levying interest u/s 234D of the act and withdrawing
interest u/s 244A of the Act.
5. Without prejudice to the above grounds, the Ld. AO erred in levying interest
u/s 234B of the Act.
6. The Ld. AO erred in initiating penalty proceedings u/s 271(1) (c) of the Act
for furnishing inaccurate particulars of income
That the above grounds of appeal are without prejudice to each other."
2.1. Addressing the transfer pricing issue agitated by the Revenue and the
assessee in their respective appeals, it is seen that qua the departmental appeal in
2005-06 assessment year the record shows that the Transfer Pricing Officer
(hereinafter referred to as the "TPO") vide his order u/s 92CA(3) addressing in
page 2 para 2 to 4 of his order observes that the assessee is engaged in the business
of manufacturing assembling of automotive seating systems and interior, and in the
design and development of automotive seating systems and interiors. He also
takes note of the fact that Lear Seating Private Limited is a wholly owned
subsidiary of Lear Corporation USA which holds the entire share capital of the
company through its affiliate Lear Corporation (Mauritius) Ltd (formerly known as
Ramco investment ltd., Mauritius). The TPO noted that during the year, the
assessee had undertaken the following international transactions :-
S.No. International Transaction Value (in Rs.)
1 Import of raw materials/Components 3,58,36,976/-
2. Receipt of services 2,14,525/-
3. Import of seat samples 1,13,509/-
4. Provision support services 21,58,31,917/-
5. Royalty 12,02,326/-
6. Cost allocation from associated enterprises 1,73,53,297/-
7. Cost recharges from associated enterprises 1,84,31,276/-
8. Cost recharges to associated enterprises 1,73,19,458/-
2.2. Discussing the transfer pricing approach of the assessee, the TPO observed
that the assessee had selected TNMM as the most appropriate method for bench-
marking of the international transactions relating to import of raw-material, receipt
of services, import of seat samples, provision for support services with OP/Sales as
6 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
a profit level indicator. The other international transaction relating to cost
allocation from associated enterprises and cost charges from AEs and cost charges
to AEs had been claimed to be bench-marked using CUP method. In the facts of
the present case for the year under consideration we are concerned only with cost
allocations.
2.3. Considering the submissions advanced in support of the cost allocations
questioned by the TPO he was of the view that no basis for apportionment of costs
was given and considering the allocations he noticed that some of it pertained to
costs of pre-loaded desktop softwares, cost of maintenance of pre-loaded desktop
softwares and the remaining cost was related to maintenance cost of using
CAD/CAE softwares. He also found that some of the expenses also related to
pension, dental expenses, hardship allowance, bonus paid, holiday pay expenses
etc. Apart from that it was also observed that the claim pertained to some of the
expenses which were incurred by the Southfield and not by the assessee and no
explanation of allocation of each and every expense was explained.
2.4. In these peculiar circumstances, he held that in the absence of any evidence
that the benefit of expenditure has accrued to the assessee or pertained to it, the
claim was not to be allowed. He was also of the view that it was difficult to
understand how the expenses have been allocated. He took note of the fact that
although the assessee has stated that it had bench-marked the transaction on the
basis of CUP however no CUP was furnished. On account of these arguments the
submissions were considered to be vague. The adjustment of Rs.1,73,19,297/-
was accordingly proposed as under :-
6.7. "From the above guidelines it is seen that the allocation of cost can be
made by a group company only when the specific services have been provided.
When the use of a service is incidental then the associated enterprises should
not charge. In the case of cost contribution also the allocation made should be
on the basis of certain allocation keys among the member of the multinational
group company. In this case t6he assessee had neither furnished an evidence to
support the claim that the AE had provided specific services to the assessee and
7 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
that these alleged services were not incidental nor had disclosed basis for such
cost allocation. The details of expenses as noted in the invoices submitted by
the assessee did not stipulate that a benefit had accrued to the assessee.
Further the benefit from such transactions for the year or for further year could
not be established on the basis of submissions made by the assessee. Therefore
in the absence of evidence advanced by the assessee for the allocation of
expenses amounting to Rs.1,73,53,297/-, I am concluding that the arm's length
price of this international transaction is zero."
3. In 2006-07 assessment years, the business profile of the assessee was
considered by the TPO vide his order u/s 92CA(3) dated 01.09.2009 in the
following manner:-
2. "Nature of Business:
LAIPL was incorporated in India as a private limited company in 1996. LAIPL
is a wholly owned subsidiary of Lear Corporation, USA, which holds the entire
share capital of the Company, through its affiliate viz Lear Corporation
(Mauritius) Limited.
The Company is primarily engaged in the manufacture/assembly of automotive
seating systems (i.e. seats and seat trims) and interior parts (hereinafter also
referred to as "interiors"). IN respect of automotive seating systems and
interiors, the Company also provides design and engineering support services
and embedded software development support services to Group Companies, and
design and engineering services to automotive industry customers.
LAIPL's key customers in India include General Motors India and Mahindra
and Mahindra (`M&M')
3. Overview of Company
Lear is the ultimate parent company of the Lear Group of companies ("Lear
Group" or "the Group") that consists of approximately 100 corporations with
more than 300 facilities, operating in 34 countries. Its clientele includes major
automotive manufacturers in the world viz, General Motors, Ford, Dailer
Chrysler, BMW, Fiat, Volkswagen, PSA, Renault-Nissan, Toyota, Hyundai, and
Subaru."
3.1. The following international transactions were disclosed by the assessee:-
S.No. International Transaction Value (in Rs.)
1. Import of raw materials/components 25,467,421
2. Import of seat samples 26,623
3. Import of software 492,184
4. Royalty 1,377,875
5. Receipt of services 15,196,252
6. Provision of support services 191,960,011
7. Cost allocation 14,529,429
8. Cost recharges from associated enterprises 14,445,502
9. Cost recharges to associated enterprises 11,838,478
8 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
3.2. Herein also the assessee was required to explain by the TPO the allocated
cost of Rs.1,45,29,429/-. Considering the reply of the assessee the TPO herein
also observed that although the Transfer Pricing Report mentions that the
transaction has been bench-marked using CUP method but no comparable un-
controlled price was disclosed by the assessee. He also observed that in the
Transfer Pricing Report drawn under Rule 10D and there was also no evidence of
any independent party CUP available on record maintained by the assessee.
Considering the facts that sufficient opportunity had been given to explain, the
TPO herein also propose the addition of Rs.1,45,29,430/- in the following manner:-
9."Whether cost allocation of Rs.1,45,29,429 made to the assessee is at arm's length?
I have reached to following conclusion on the basis of careful perusal of
findings as discussed in proceedings paragraphs of this order:
9.1. It is evident from facts of the case that the assessee has failed to furnish
details of exact nature of services received by it and benefit accrued to if from
these alleged services. Since the assessee has failed to furnish details of
specific services it is not known if these cost allocation of alleged unknown
service is a part of shareholder activity or incidental service in nature. It is
also not explained if the assessee did need this alleged services. In certain
circumstances a AE may perform activities in relation to i6ts affiliate which
affiliate do not need and would not have been prepared to pay for had they been
independent business. Such activities are referred to in the OECD guidelines as
shareholders activities and they do not meet criteria for intra-group services
and they do not warrant a charge under transfer pricing principles. Even in
case of incidental services like centralized group IT, infrastructure within
parent company may benefit its subsidiary but no charge could be levied. IN
this case most of invoices filed by the AR vide letter dated 03.08.2009 pertain to
IT functions of the AE to increase its efficiency and it is likely that incidental
benefit which might be obtained by the assessee being a member of a group and
no cost allocation in such case are required to be made. Since in this case the
assessee has failed to furnish details of nature, need and benefit services in my
view following OECD guidelines the AE was not required to allocate cost to the
assessee and the same was not at arm's length.
9.2. The assessee has failed to furnish total cost of the AE and allocation
keys on the basis of which the cost was allocated to the assessee. In absence of
these relevant details arm's length price is not proved and onus to prove arm's
length price under Indian transfer pricing provision is on the assessee.
9.3. The claim of the assessee that the cost allocation was proved at arm's
length price using CUP method in transfer pricing report is found false. It is
9 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
matter of record that inspite of several opportunities allowed to the assessee, it
could not furnish details of comparables third party transactions.
In view of above discussion and in absence of any evidence led by the assessee
for allocation of expenses amounting to Rs.1,45,29,430. I am of considered
view that the AE was not required to charge cost on the assessee and arm's
length price of the international transactions is zero.
10. The assessing officer shall increase the income of the assessee for the
AY 2006-07 by rs.14,529,430/- for the international transaction undertaken by
the assessee during the FY 2005-06. The other international transactions
undertaken by the assessee are held to be at arm's length price and no adverse
inference is drawn for the FY 2005-06."
4. In 2008-09 assessment year, the TPO vide his order u/s 92CA(3) of the Act
proposed an addition qua the international transactions disclosed by the assessee
not only on account of cost allocation of Rs.11,79,474/- as in earlier years but also
on account of cost recharges of Rs.3,80,36,140/-. For the record the following
international transactions were disclosed by the assessee in its 92CE Reports:-
Import of raw materials, components 174,580,242
Export of seat components and samples 2,480,397
Provision of development support services 7,836,010
Provision of support services 238,054,629
Receipt of services 13,800,750
Cost allocations from associated enterprises 11,709,474
Cost recharges from associated enterprises 38,036,140
Cost recharges to associated enterprises 17,797,316
4.1. Herein also the TPO require the assessee to justify the arm's length price for
the cost allocations. Apart from that he also required the assessee to explain cost
recharges with which we shall deal subsequently.
4.2. Qua cost allocation the facts are found discussed at page 144 to 153 of the
TPO's order. For ready-reference we reproduce the relevant extracts from his
order:-
5. Cost allocation from Associated Enterprises
Claim of the Assessee
The Assessee has claimed that the cost allocation received from the AE is not in
the nature of any service fee payment but on account of software licenses,
maintenance costs of software for CAD/CAE etc. which are owned by the group
company. Of the total licenses which they own, group companies have set aside
a fixed number of licenses as per the request of the Company for its use. Group
companies pay annual maintenance charges for these softwares to third party
10 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
software vendors on a per license basis. These annual maintenance costs are
thereafter, allocated by the group companies proportionately to the company
based on the number of licenses set aside for its use. Further, the assessee has
mentioned that the company has derived substantial benefits out of purchasing
these softwares through group entities. These softwares are essential operating
tools for the company that are required by it to carry out its business
operations. As a result of purchasing these softwares through group entities,
the company availed of substantial discounts on the actual costs/purchase
prices of these softwares. Had the company purchased these softwares directly
from independent third parties, the costs would have been significantly higher.
Group entities are able to negotiate favorable pricing terms with the third party
vendors because of their better market standing and also because they purchase
these softwares jointly for a number of other group entities who require them,
including the company.
6. Observation on the above claim
The business leaders of the assessee saw the increasing need for a proper
infrastructure to manage the needs of a fast expanding business, customers,
employees, vendors, suppliers, information, data, etc. These include the use of
computers and software to manage information, store information, protect
information, process the information, transmit the information as necessary,
and later retrieve information as necessary.
The assessee has not been able to provide any proof as to what are the complex
problems that the AE has solved, which the assessee would have been unable to
do. The only benefit which the assessee has mentioned is obtaining discounts.
The greatest flaw in the assessee's case is that it is unable to give details of the
cost incurred by the AE on these services. IF the AE is purchasing software for
its operating entities, what is the problem in determining the cost? IF the AE is
maintaining a team for trouble shooting/maintenance it should be able to arrive
at its cost. That would have formed a rational basis for placing a charge on the
assessee. It has already been brought out that any arrangement will have to
answer the arm's length principle. No independent enterprise would be able to
pay out a portion of its profits, big or small, before it knows what is the cost
incurred by the service provider. The assessee has failed to follow this basic
tenet of independent behavior. In any case, while India is the hub of the global
IT-ITES, it is not believable when the assessee states that there are certain
problems that the AE solves and it would not have been able to do so. It is true
that if it had done so it would have done so on its own, it would have incurred a
cost. However, now the assessee has no idea about the actual cost incurred by
the assessee. The assessee has also not been able to convincingly answer the
point that the cost of developing a software is one thing and the cost of
maintaining it would be much lower. Hence, the assessee need not have made
any payment on account of this service."
4.3. Accordingly the TPO proceeded to refer to the OECD Guidelines with
regard to intra-Group services specific para 7.1 to 7.6 and then after discussing
11 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
certain international jurisprudence by way of case laws proceeded to discuss the
position of the issue in different tax jurisdictions of the world. For the sake of
completeness we propose to address these issues briefly.
4.4. A perusal of the OECD Guidelines extracted in the TPO's order shows that
as per the Guidelines in order to analyze transfer pricing for intra group services
two issues need to be considered. One issue to be analyzed is whether intra group
services have been provided. The other issue would be what the intra group charge
for such services for tax purposes should be in accordance with arm's length. It
addresses the position that under the arm's length principle the question to be
considered namely whether intra group services has been rendered when an
activity is performed for one or more group member by another group member
should depend on whether the activity provides a respective group member with
economic or commercial value to enhance its commercial position. In order to
determine this fact it can be considered whether an independent enterprise in
comparable circumstances would have been willing to pay for the activity if
performed for it by an independent enterprise or would have performed the activity
in house for itself. The Guidelines elaborate that a tax administration in order to
identify the amount if any has actually been charged for service would need to
identify what arrangements if any have actually been put in place between the
Associated Enterprise to facilitate charges being made for the provisions of
services between them. The arrangements if a direct charge can be readily
identified which is of great practical convenience to tax administration. They also
consider the possibility that (MNEs) Multi- National Enterprise may also use cost
allocation and apportionment method which often necessitate some degree of
estimation or approximation, as a basis of calculating an arm's length charge.
These methods are generally referred to as indirect charge method and as per
OECD Guidelines should be allowed provided sufficient regard has been given to
12 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
the value of the services to the recipient and the extent to which the comparable
services are provided between independent enterprises. Indirect charge method as
per OECD Guidelines should be sensitive to commercial features of the individual
case for example the allocation key it has been observed makes sense under the
circumstances. The method should also contains safeguards against manipulation
and follow sound accounting principles, and be capable of producing charges or
allocation of costs that commensurate to the actual or reasonably accepted benefits
to the recipient of the service. It has also been addressed that the determination of
arm's length principle should be considered both from the perspective of the
service provider and from the perspective of the recipient of the service. For the
said purpose the relevant consideration include the value of the service to the
recipient and how much a comparable independent enterprise would be prepared to
pay for that service incomparable circumstances as well as costs to the service
provider. The Guidelines also consider that often the application of these
guidelines will lead to the use of CUP or cost plus method for pricing intra group
services. The CUP method it considers is likely to be used where there is
comparable services provided between independent enterprises in the recipient
market or by the associated enterprise providing the services to an independent
enterprise incomparable circumstances as an illustration it is considered if
accounting, auditing, legal or computer services are being provided. However cost
plus method is considered to be appropriate in the absence of CUP where the
nature of the activities involved, assets used and risks assume are comparable to
those undertaken to be independent enterprises. They also consider the possibility
where it may be difficult to apply the CUP method or the cost plus method in those
circumstances it may be helpful to take account of more than one method and in
reaching a satisfactory determination of arm's length pricing, transactional profit
methods may have to be used as a last resort.
13 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
4.5. Accordingly the TPO summed up the position as under:-
"On the basis of above it can be seen that in order to examine the arm's length
price of intra group services received by one of the associated
enterprises following essential information should be available:-
1. Whether the AE has received intra group services?
2. What are the economic and commercial benefits derived by the recipient
of intra group services?
3. In order to identify the charges relating to services, there should be a
mechanism in place which can identify (i) the cost incurred by the AE in
providing the intra group services and (ii) the basis of allocation of cost
to various AEs.
4. Whether a comparable independent enterprise would have paid for the
services in comparable circumstances?
From the details available it is clear that the assessee has not been able to
prove that he has actually received services of some value that call for such a
huge payment. No independent party would have paid for such services in an
uncontrolled environment. The assessee has not even submitted the basis of
quantifications of these charges. No invoices have either been submitted or
produced for verification during the TP Audit hearing proceedings.
Following the discussion in the preceding paras, it is also seen that that the
assessee has not been able to show that any tangible benefit has passed to it
following the payment of these charges. As stated earlier, though fashioned as
a cost allocation, the payment is actually a payment for services said to have
been received. Let us kow revisit the questions that were put to the assessee in
the course of these proceeding and evaluate the assessee's replies:
(a) The assessee has not been able to provide any basis of this payment
made to the AE.
(b) The assessee has not been able to provide any separate benchmarking
for the payments of these charges. The assessee should have been able
to demonstrate that any independent party would also have made this
payment in similar circumstances, it has not been able to do so.
(c) The assessee has not been able to give the details of cost incurred by AE
on accounts of various services. Because of this the AE and the assessee
has adopted the device of `cost allocation'.
(d) The assessee has not been able to provide any Documentary proof of
tangible benefit received on account of these services.
4.6. In view of the above he was of the view that none of the benefits were
tangible. For ready reference the relevant portion is extracted from the order:-
As per the comments above it can be seen that none of the benefits are tangible
or real. A mere façade has been raised to give an impression that some vital
benefit has passed to the assessee, which is actually not the case. Related
parties are quite likely to give a form that will give an impression that a real
service is being rendered by one to another. But the necessity to look beyond
the veil is recognized across tax jurisdictions. In the above circumstances the
14 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
payment of service fee is only an arrangement to change tax base without any
economic substance in the transaction.
4.7. He further found support from the following international decisions :-
"In Saviano vs Commissioner 765F. 2d 643, 654 (7th Cir. 1985) it was
observed, "the freedom to arrange one's affairs to minimize taxes does not
include the right to engage in financial fantasies with the expectation that the
internal Revenue service and the Courts will play along."
In Frank Lyon Co. vs US 435, US 561, 573 (1978) the Hon'ble US Supreme
Court observed, "in applying the doctrine of substance over form, the Court has
looked to the objective economic realities of a transaction rather than to the
particular form the parties employs."
"In the field of taxation administrators of law and the courts are concerned with
substance, relations and formal written documents are not rigidly binding."
{Helvery vs Lazanus & Co. 308 US (252)]."
4.8. The relevance of contracts and arrangements to be considered for deciding
the issue was also summed up by the TPO. The same is extracted hereunder :-
1.67. "Associated enterprises are able to make a much greater variety of
contracts and arrangements than can independent enterprises because the
normal conflict of interest which would exist between independent parties is
often absent. Associated enterprises may and frequently do conclude
arrangements of a specific nature that are not or are very rarely encountered
between independent parties. This may be done for various economic, legal or
fiscal reasons dependent on the circumstances in a particular case. Moreover,
contracts within an MNE could be quite easily altered, suspended, extended, or
terminated accordingly to the overall strategies of the MNE as a whole, and
such alterations may even be made retroactively behind a contractual
arrangement in applying the arm's length principle.
1.68. IN addition, tax administrations may find it useful to refer to
alternatively structured transactions between independent enterprises to
determine whether the controlled transaction as structured satisfied the arm's
length principle. Whether evidence from a particular alternative can be
considered will depend on the facts and circumstances of the particular case,
including the number and accuracy of the adjustments necessary to account for
differences between the controlled transaction and the alternative and the
quality of any other evidence that may be available."
4.9. How different international tax jurisdictions considered the issue of intra
group services in transfer pricing was also considered by him. The same is
extracted hereunder :-
15 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
6.1. AUSTRALIA
In January 199, the ATO (Australian tax Office) issued its taxation
ruling on services; Income tax: international transfer pricing for intra-
group services (TR1999/1). In it, the ATO outlined its position in
relation to charging for services within a multinational group. In
general, the ruling follows the international consensus on the arm's
length principle and its application, expressed in Chap. VII; Special
Considerations for intra-Group Services of the OECD Guidelines. The
ruling is discussed in further detail below.
The benefit test
To conform with the arm's length principle, the costs of intra-group
services can only be charged for where the recipient of the services
expected, at the time the relevant activities were undertaken, to derive a
benefit from those activities. The expected benefit must be sufficiently
direct and substantial so that an independent recipient, in similar
circumstances, would be prepared to pay for it. If no benefit has been
provided (or was expected to be provided), then the service cannot be
charged for.
It follows that functions undertaken by one member of an MNE group
exclusively for its own benefit cannot be charged for. This category of
functions includes shareholder activities, which are tasks undertaken by
a group company that relate solely to its own business activities as a
shareholder, or ultimate shareholder. Such functions, would include the
preparation of consolidated accounts and the organization of annual
general meetings.
Determining the amount of charges
To determine the amount of charges for intra-group services, the arm's
length principle requires the that the consideration should be
determined from the perspective of both the-service provider and the
service recipient. The consideration includes:
-how much a comparable independent- service recipient, under
comparable circumstances, would be willing to pay for that service; and
- whether an independent service provider would be willing to supply the
service at that price.
The amount charged to the individual group members should he in the
same proportion to the benefits or expected benefits to the respective
members.
6.2 CANADA
Canada normally follows the OECD guidelines in this regard.
The OECD Guidelines on providing intra-group services include a
framework to determine: whether a charge for a
particular service is justified; and, if so, - how to determine the amount
of the charge.
Therefore; in applying the arm's length principle to intra-group
services; a taxpayer must first determine whether a specific activity
performed by a member of the group for another member
is a service far which a charge is justified. An arm's length entity would
16 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
be willing to pay for an activity only to the extent that the activity
confers on it a benefit of economic or commercial value.
The test to determine if a charge for an activity is justified, would
involve the following question: Would the entity for whom the activity is
being performed either have been willing to
pay for the activity if performed by an arm's length entity or have
performed the activity itself? Where it would not have been reasonable
to expect the entity to either pay an arm's length entity for the activity or
to perform it itself, it is unlikely that any charge for the activity would
be justified.
Certain costs are incurred for the sole benefit of shareholders and,
therefore, should not be charged to other members of the group.
Costs relating to the legal structure or the general financial reporting
requirements of a particular group member should not be charged to
another member. Certain other costs, such as those involved in raising
funds for the acquisition of an interest in a business; would
generally not be attributable to another member of the group. However,
as suggested in paragraph 7.10 of the OECD Guidelines, if the funds
were raised on behalf of another member of the group that used them to
acquire a new company, it may be appropriate to attribute the
costs to that other group member.
It would be unusual for a group member to incur a charge for a service
performed by another member of the group if that activity is performed
by the member itself or by an arm's length party on the member's
behalf. In some cases, however there may be a valid business reason for
duplicating a service.
Where a charge for a service is justified, the amount charged should be
determined in accordance with the arm's length principle. The OECD
Guidelines state that the issue must be considered from the pointed of
view of both the supplier and the recipient of the service. The arm's
length charge is not only a function of the price at which a supplier is
prepared to perform the service (or the cost of providing the service),
but also a function of the value to the recipient of the service. Therefore,
the determination of an arm's length charge must take into
consideration the amount that an arm's length entity is prepared to pay
for such a service in comparable circumstances.
6.3. FRANCE
Under the French regulations the compensation paid for the
services is deductible for French corporate tax purposes provided the
French company can adduce proof (a) that such company actually
benefits from the services rendered and (b)that the amount of the
compensation paid is not excessive. In the absence of fulfillment of these
two conditions service charges paid to an AE are disallowed under the
French regulations.
6.4. GERMANY
Under the German regulations there are two issues that must be
kept in mind when charging for services. First, the parties must
17 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
determine who is receiving the benefit of a service} that is, it must for
instance be determined whether the services are rendered in the interest
of the shareholder. These expenses cannot be charged to the group
companies, but only to the
shareholder, given that those costs were incurred on its behalf. Because
the German tax authorities often adopt a very broad interpretation of
these costs, this issue is a main source of disagreement between
taxpayers and the German tax administration. Second, once it is
determined who benefits from the services, the arm's length
compensation for the transaction must be determined.
A separate transfer price can be charged if independently of the
corporate or other legal relationship an unrelated party would have
paid remuneration for the services in question. The transfer price must
be agreed in advance by the paying corporation and proof must be
provided. No separate transfer price can be charged if the services
provided or costs incurred by the management entity are recharged to
the receiving corporation in some other form, e.g.
by intra-group transfers of goods or services at arm's length prices
which themselves take account of the administrative services or costs.
Remuneration for such services would only be paid between unrelated
parties if the services
- can be clearly distinguished and quantified and
- are rendered in the recipient's own interest (i.e. provide an expected
benefit and reduce the recipient's costs).
No transfer price can be charged if a subsidiary corporation utilizes
services taking into consideration only the circumstances of the parent
corporation, and if the subsidiary corporation, considering only its own
circumstances, would not have utilized the services had it been an
independent enterprise.
The services must actually be performed. The mere availability of
services within a group is not sufficient since, as a general rule,
unrelated parties only pay for services which have actually been
rendered, However, where the volume of services fluctuates there is no
objection if an
average amount of remuneration is charged which corresponds to the
services actually rendered over a period of years. .
Applying these principles remuneration is chargeable e.g .for:
- the taking over of bookkeeping functions and similar services e.g.
specific consultancy services concerning-the related enterprise's own
economic and legal affairs;
- the temporary transfer of personnel including transfers involving the
top management of the related enterprise;
- the training and continued education, as well as payments made for the
social security, of personnel employed with a related enterprise in its
own interest;
- services provided by the parent corporation for the procurement of
goods and services which the, respective subsidiaries have obtained. or
18 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
utilized directly;
- the provision of services on call if this is a usual feature of the market,
and to the extent that it is shown that the subsidiary needs such services
and has actually made use of the services to an appropriate extent.
On the other hand, a parent corporation cannot charge remuneration
e.g. for:
- so-called group support, including the right to use the group name and
benefits derived from the mere fact of legal, financial and organizational
integration in the group;
the activities of its own board of directors and supervisory board as
such, and for its shareholders' meetings;
- the legal organization of the group as a whole, as well as production
and investment planning for the entire group; -
activities which reflect its position as shareholder, including general
organization as well as control and group audit in support of the group's
headquarters;
- the protection and administration of investments;
6.5 UNITED STATES OF AMERICA
The Sec. 482 regulations require that services performed for
controlled entities be charged to the receiving entities if they are for the
joint benefit of the members of a group of controlled entities or if they
are performed by one member of the group exclusively for the
benefit of another member of the group. Treas. Reg. § 1.482-2(b)(2)(i).
If the benefits to those entities are so indirect or remote that unrelated
parties would not have charged for such services, then a service fee is
not warranted. In addition, service fees are not required for so-
called stewardship services or for services that merely duplicate services
the related party independently performs.
As is the case in most countries, stewardship services are treated as a
cost of the parent company and cannot be charged to subsidiaries of
multinational companies. In IRS Technical Advise Memorandum
8806002 (24 September 1987) the IURS defined stewardship services to
include periodic reviews and visitations by management, the cost of
meeting reporting requirements or other legal obligations and the cost
associated with financing the parent's ownership in the affiliate.
Expenses relating to the investigation of new business opportunities,
installation of corporate tracking systems and other corporate actions
are generally considered costs of the parent company and are not
charged to affiliates.
4.10. The position was consequently summed up by him in the following manner
at page 153 of his order :-
"Universally, such payments are being treated at arm's length only when it is
proved substantially by the tax payer that such services were actually received
and further proving that such received services have benefited it. In most of the
19 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
countries like UK, USA, Germany, etc it is an established position that a
subsidiary does not to have to pay for the auditing, accounting and such other
functions performed by the parent company as owner of the subsidiary
company. If the subsidiary were an independent company it would neither
require such services nor would it pay for the same.
In support of its contention, the assessee has not been able to provide all the
details of invoices, and other back-up documents to show that the aforesaid
expenses were actually incurred by the overseas group companies on behalf of
the Assessee. It is to be noted here that no third party would be willing to pay
without any evidence/ back up documents. Accordingly, the payment made by
the assessee with respect to cost allocation is unjustified."
4.11. It is further seen that apart from cost allocation as observed cost recharges
was also considerably by the TPO who considering the reply given, proposed an
addition in the following manner:-
8. Observations on the above claim
With respect to the cost recharges from group companies, the assessee has
reimbursed the salary cost of an expatriate, who is an employee of the AE. The
assessee has also reimbursed rent and other miscellaneous expenses.
The assessee has claimed that the expenses are a mere reimbursement and thus
do not classify as a service. Accordingly, no benefit is drawn by the assessee by
incurring such expenses.
It is to be noted here that any independent entity would not incur any expenses
without deriving any benefit. The assessee has not been able to quantify any
benefit that accrues to it. However, the expenditure is incurred by the assessee.
Further, the assessee has not been able to submit all debit notes raised by AEs
on the Assessee, copies of ledger accounts showing the booking of relevant
expenses/invoices in the Assessee's books of accounts and other back-up
documents to show that the aforesaid expenses were actually incurred by the
overseas group companies on behalf of the assessee. This is itself creates doubt
over the justification/appropriateness of the expenses.
In view of the lack of justification, benefit derived and lack of sufficient
evidence, the above mentioned payment of costs is held to be unjustified.
9. Determination of Arm's length price:
Following the discussion in the preceding paras of this order, it is concluded
that the assessee has not been able to demonstrate that an independent party
would have made a payment of Rs.11,709,474 on account of cost allocation and
Rs.38,036,140 on account of cost reimbursements as the assessee has done.
Therefore, by the application of CUP, the arm's length price in respect of this
transaction is determined at `nil'. The assessing officer shall accordingly
enhance the income of the assessee by Rs.49,745,614. The Assessing Officer
may examine the feasibility of initiating penalty proceedings u/s 271(1)(c) of the
Act in accordance with Explanation 7 of the same."
20 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
5. In the said background qua the departmental appeal in 2005-06 assessment
years, the stand of the assessee has been that it has primarily bench-marked its
international transaction pertaining to cost allocation on CUP basis and TNMM has
been used only as a corroborative analysis. Referring to the chart of issues filed it
was submitted that before the TPO it was submitted that the assessee had advanced
submissions dated 21.11.2007 placed at pages 210-237 of the paper book of the
said year wherein the nature of the cost has been explained at paper book page 214.
Attention was also invited to paper book pages-6, 7 & 8 which contain the specific
pages of the TP study Report of the assessee. It was his stand that the allegation
of the TPO has been fully met by the detailed submissions advanced before the
TPO by the assessee and aggrieved by this the assessee had filed an appeal before
the CIT(A) wherein also detailed submissions were advanced which are found at
pages 154-184 of the paper book which are dated 04.11.2010. Specific attention
was invited to page 173 para 5.23 5.25 so as to explain that the transactions of
cost allocations to the assessee by the AE is not an intra group service and the
CIT(A) has deleted the addition considering the material available on record
which consisted of invoices justifying the claim and also the submissions
advanced.
5.1. Qua the facts pertaining to 2006-07 assessment years on cost allocation it
was pointed out by the Ld. AR that the assessee while agitating against the
proposed addition made by the TPO before the DRP had placed reliance upon the
submissions made before the TPO dated 28.01.2009 placed at pages 148-252 of the
paper book for the said year. Page 151 para 3 of the same it was submitted
explained, the nature of the cost. The Transfer Pricing Study Report it was
submitted explained these facts at paper book page-6, 7-8 & 8-9 of the paper book.
It was submitted that the submissions advanced before the TPO dated 25.03.2009
which contains the summary of invoices alongwith copies of invoices were relied
21 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
upon, thereafter submissions dated 03.08.2009 alongwith sample copies of
independent parties invoices raised on the AE placed at pages 398-410 were relied
upon. Detailed submissions reiterating this position it was stated were advanced
before the DRP vide letter dated 04.08.2010 (copy placed at pages 141-147 of the
paper book). The submissions it was stated were rejected by the DRP. In view of
the same referring to the material available on record it was submitted that the
assessee has moved an application dated 10.01.2010 under Rule 29 of the ITAT
rules 1963 seeking permission to file additional evidence for consideration. It was
submitted that the evidence sought to be relied upon is crucial for determining the
issue as the assessee's case has been rejected for want of independent authority
certificate. The certification sought to be relied upon it was submitted is a
necessary evidence and could not be placed by the assessee on record as
appreciation of the transfer pricing issues and the knowledge and understanding is
constantly growing as such the same could not be placed before the authorities
before. It was accordingly submitted that accepting the fresh evidence the Bench
may restore the issue to the TPO so as to consider the additional evidences.
5.2. It was his submission that similar prayer would be warranted in 2008-09
assessment year also as herein also the assessee qua the cost allocation which is
also an issue arising even in the earlier year the fresh evidence will need to be
considered.
5.3. Apart from that issue it was his submission that in 2008-09 assessment year
there is an additional transfer pricing issue i.e cost recharges claimed which have
been disallowed by the TPO. The said issue it was submitted is arising for the first
time in 2007-08 Assessment year. The said appeal the record shows is a Stay
Granted appeal having certain other issues and has not been heard alongwith the
present group of appeals and kept separately for an independent hearing. As such
since the issue of cost recharges has arisen, for the first time in 2007-08 assessment
22 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
year it was his prayer that herein also fresh evidences will have to be led by the
assessee, accordingly, it was his prayer that it may also be restored to the TPO.
5.4. In the light of these facts it was his submission that qua the departmental
appeal in 2005-06 assessment year wherein the addition of Rs.1.73 crore odd
which has been deleted by the CIT(A) since identical view qua the cost allocation
for the three years under consideration needs to be taken wherein in 2006-07
Assessment year, the assessee seeks permission to place fresh evidence on record
and in 2008-09 assessment years, it pleads lack of opportunity for placing evidence
on record accordingly it was his submission that the issue may be restored by
setting aside the relief granted to the assessee and allowing the departmental appeal
in 2005-06 assessment year also. It was submitted that the transfer pricing issues
were new at the time of hearing and passing of the orders not only for the assessee
but also for the department as such in these initial years the quality of the
representation and the orders with hindsight may bring out some shortcomings
accordingly in order to do justice to the issue as well as the parties concerned, it
was his humble prayer that the cost allocation in the three years and the cost
recharges issues in 2008-09 assessment years may be restored to the TPO for fresh
adjudication.
6. The said stand of the assessee was not seriously disputed by the Ld. CIT DR.
The Ld. CIT DR placed reliance on the facts available on record. Addressing the
nature of evidence placed before the TPO in 2005-06 assessment year where
admittedly the evidence did not pertain to the issue at hand as dental expenses,
medical expenses, holiday expenses etc. were also placed by the assessee before
the TPO to justify its claim. Accordingly in support of the ground filed reliance
was placed thereon and aggrieved by the findings contrary to the finding on facts
by the TPO, the department is in appeal. However in the face of the categoric
stand of the assessee that the assessee is ready and willing to go back and place his
23 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
facts afresh before the TPO, he had no objection if the departmental appeal is
allowed in 2005-06 assessment year and the issue is restored. Since the issue in
2006-07 and 2008-09 assessment years will depend not only on the outcome of
2005-06 assessment years and also on the facts and evidences for that year the
request that the cost allocation issue may go back for these two years was also not
objected to by the CIT DR. However his objection was posed to the arguments that
the nature of fresh evidence sought to be admitted in 2006-07 assessment year
would necessarily warrant in granting relief to the assessee. Addressing the same,
though not opposing the admission thereof, it was his submission that the evidence
is not a relevant evidence and he would want that his opposition be recorded in
case the Bench so desires to direct the TPO to grant relief considering the same. It
was his stand that the TPO should be left free to consider the relevance if any of
that evidence.
6.1. On cost recharge issue it was his submission that the first year is 2007-08
assessment year which has been segregated from the group of appeals being heard
as such in the circumstances the only direction which the Bench may give to which
the department would have no objection is that the TPO be directed to decide the
issue in the light of the conclusion of the base year i.e 2007-08 assessment year
and of course the facts of the year under consideration. However the plea of
permitting liberty to the assessee to place fresh evidence qua the same was strongly
opposed as the evidence if any would have already been considered in 2007-08
assessment year.
7. It is a matter of record that the hearing in the facts of the present appeals for
the three years took place on different dates and the parties submission advanced
had finally been summed up qua the assessee in its chart of issues finally filed
which was exchanged by the parties and addressed by them at the time of hearing.
24 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
8. In the light of the above background and the material available on record, we
have heard the rival submission and perused the material on record. Before
proceeding to address the same, we first deem it appropriate to set out the relevant
extracts from the assessee's petition dated 10.01.2012 under Rule 29 of the ITAT
Rules 1963 moved in 2006-07 assessment year :-
1.In the captioned appeal preferred by appellant, against the order dated
October 25, 2010 passed by the Learned (`Ld') Assessing Officer (`AO') under
section 143(3) of the Income-Tax Act, 1961, the appellant has raised grounds
challenging the Ld. Transfer Pricing transaction of cost allocation of expenses
by overseas Associated Enterprises (`AEs') should be Nil. Also, the appellant
has raised a ground challenging that the Ld. TPO disregarded various
submissions and documentary evidences filed by the appellant to establish the
bonafide of the transaction, on the basis of pre-conceived notions, surmises and
conjectures and without providing any cogent evidence, facts or reasons
whatsoever.
2. In this regard, in addition to various documentary evidences filed by the
appellant before the Ld. TPO/DRP, the appellant would like to bring on record,
a Certificate from an independent author, certifying that Lear US incurred
certain expenses on behalf of various Lear entities and allocate these expenses
based on sound allocation mechanism to various Lear group entities including
the appellant on a cost-to-cost basis i.e without charging any mark-up thereon.
However, the Certificate clearly supports the bonafied of the transaction in
question.
3. In view of the above, the appellant, by way of this application, seeks
permission to bring the said information/documents on record as an additional
evidence to substantiate its claim it is also submitted that this particular
certificate was not available with either the Ld. TPO or the Ld. DRP during the
respective proceedings.
4. It may appreciated the said additional evidence is relevant and
necessary for the proper disposal of the above-referred ground of appeal, and
hence the appellant, humbly requests the Hon'ble Bench to kindly consider them
in the interest of substantial justice.
5. Accordingly, the said certificate is attached herewith (refer pages 1 to 5)
8.1. Considering the above additional evidence in the light of the submissions
advanced by the parties before the Bench which we have discussed above in
significant detail, we considering the respective stand and the material available on
record qua the cost allocation issue which is the only issue in 2005-06 and 2006-07
assessment year set aside the impugned order of the CIT(A) in 2005-06 assessment
25 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
year and allow the departmental ground. The issue as such is restored back to the
TPO with the direction to decide the same afresh in accordance with law. While
doing so we find merit in the arguments advanced that the transfer pricing issues
being still new as such not only qua the representation but even qua the orders
there is scope of tremendous improvement. The issue which is a continuous issue
arising in every year because of the nature of the transaction to our minds cannot
be allowed to be glossed over for want of representation. Being a continuous issue
over the years full and correct facts need to be taken into consideration. The
impugned order as addressed has ignored significant material findings of the TPO
and considering the stand of the parties and the material available on record, the
departmental appeal is allowed.
8.2. For 2006-07 and 2008-009 assessment year on the cost allocation issue
which is the only issue in 2006-07 assessment year, considering the arguments of
the CIT DR, we while admitting the fresh evidence sought to be relied upon before
us leave the issue of merit of the evidence sought to be placed on record open to
the TPO for his consideration. Accordingly the issue as such is restored to the
TPO setting aside the impugned order and admitting the fresh evidence as it is
necessary to consider the relevance and impact of the same for deciding the issue.
The TPO is directed to consider the same before passing his order while, doing so
the TPO shall pass a speaking order in accordance with law after giving the
assessee a reasonable opportunity of being heard.
8.3. In 2008-09 assessment year the issue of cost allocation which is a
continuous issue over the years is also necessarily restored to the TPO with similar
directions as in earlier years as it is dependent on the earlier year's legal position
which for consideration on facts has been restored to the TPO. Accordingly herein
also the cost allocation issue is restored to the TPO with similar direction by
26 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
setting aside the impugned order and allowing the assessee's grounds to that
extent.
8.4. The cost recharges issue which is an issue arising only in 2008-09
assessment year amongst the present group of appeals being heard which does not
arise in the other two years considered, as addressed earlier arises for the first time
in 2007-08 assessment year. The appeal for the said year as observed has been
segregated as it is stay granted appeal accordingly paying heed to the stand of the
CIT DR the issue is restored to the TPO with the direction to decide the same in
accordance with the view taken in 2007-08 assessment year, the year in which the
issue arises for the first time as it is the very same Agreements, contracts and
arrangements, of the parties which needs to be considered in the base year which
is 2007-08 for the cost-recharge issue. The plea of the assessee seeking permission
for filing fresh evidence cannot be accepted as nothing has been placed on record
to show what is the nature of the evidence which the assessee now seeks to address
that too in 2008-09 which could not be placed on record in 2007-08 assessment
year and would be different and distinguishable from the evidence of 2007-08
assessment year.
9. In ITA 5955/Del/2012, apart from the above issues, the assessee vide
Ground No. 3 has assailed the action of the AO and the DRP in disallowing the
amount 17,18,906/-claim by the assessee as a revenue expenditure. The relevant
facts available qua the same on the issue are found discussed at pages 3 & 4 of the
assessment order passed u/s 143(3) read with Section 144 C of the Income Tax
Act. The relevant extract is reproduced hereunder for ready reference:-
"4. During the course of assessment, it came to the notice that the assessee
has paid an amount of Rs.42,58,542/- to Bizsolindia Services Pvt. Ltd. for
obtaining its specialized management/consultancy services. Out of total
payment of Rs.42,58,542/- an amount of Rs.17,80,906/- was paid towards
consultancy charges and fee for assistance provided by Bizolindia in assessing
the feasibility/viability of opening another unit in Pune in relation to the
proposed extension programme of the company. The assessee vide order sheet
27 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
query dated 2/12/2011 was asked to sow cause as to why the amount of
Rs.17,80,906/- paid for setting up a new unit may not be disallowed being an
expenditure of capital in nature. The assessee vide reply dated 14/12/2011 has
admitted that the said expenditure of Rs.17,80,906/- paid for setting up a new
unit may not be disallowed being an expenditure of capital in nature. The
assessee vide reply dated 14/12/2011 has admitted that the said expenditure of
Rs.17,80,906/- was made for setting up of the new unit in Pune. However, the
assessee has claimed that the said expenditure should be allowed as revenue
expenditure u/s 37 of the Act. The submissions of the assessee were examined,
considered and however, not found acceptable. The expenditure is made for
setting up of the new unit on which the production has not yet started. Thus, it
is not true that the expenditure is a revenue expenditure. Thus, it is not
allowable u/s 37 of the Income Tax Act, 1961. In view of the facts and in the
circumstances of the cases, the said amount of Rs.17,80,906/- is disallowed and
added back to the total income of the assessee.
I am satisfied that the assessee filed inaccurate particulars of the its income and
thereby concealed its income to the tune of Rs.17,80,906/-. Penalty proceedings
u/s 271(1) (C) are initiated separately for furnishing inaccurate particulars of
income. (Addition of Rs.17,80,906/-)
9.1. The issue was agitated by the assessee before the DRP and the DRP decided
the same in the following manner:-
"6. The Ld. AO has erred in proposing to disallow an amount of
Rs.17,80,906/- by treating the consultancy charge paid for assistance in
assessing the feasibility/viability of opening another unit in relation to proposed
extension programme of the company, as capital in nature.
The assessee craves leave alter, amend or withdraw all or any of the ground of
objections herein or add any further grounds as may be considered necessary
and to submit such statement, documents and papers ass may be considered
necessary either before or during hearing.
We have heard the submissions and augments of the Ld. AR and have
considered the facts of the issue carefully In our opinion, the proposed
disallowance has to be upheld.
The company is primarily engaged in the manufacture/assembly of automotive
seating systems (i.e seats and seat trims) and interior parts, and in the design
and development of automotive seating systems and interiors, for automotive
industry customers and/or its Group Companies. During the yer, Lear India had
two factories in Nasik, one in Halol and one in Chennai for carrying on the
manufacturing/assembly to automotive seating systems and interior parts. In
addition to this, it has one engineering centre in Thane. Assessee paid a sum of
Rs.17,80,906/- towards consultancy charges to M/s Bizsolindia for a
feasibility/viability report for opening of another manufacturing unit in Pune in
relation to the proposed expansion programme of the company.
In the case of M/s Saurashtra Cements and Chemicals Industry Ltd. 196ITR 237
(Guj), it has been held that expansion of business mean acquisition of new set
28 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
and the expenditure on feasibility report for setting up a new soda ash was held
to be capital in nature.
In the case of M/s Ambika Mills 236 ITR 921 (Guj), the Gujarat High Court
held that the expenditure on feasibility report for setting up a new steel palnt
which did not materialize is capital expenditure.
In the case of M/s Asam Asbestors Ltd 263 ITR 357 (Guw), the assessee, who
was running a cement factory, with a view to set up a new asbestos sheets unit
incurred expenditure on obtaining a feasibility report for setting up the new
asbestos unit, for which eventually the government did not grant permission.
The Gaua High Court held that the expenditure was capital in nature.
Similarly in the case of M/s Gujarat Alkali Ltd 82 ITD 135 (Ahd.) the ITAT held
that the expenditure on feasibility report for setting up a captive power plant is
capital in nature.
In view of the above legal position, it is held that the AO has correctly proposed
to hold the expenditure on obtaining feasibility report for setting up a new
plant, which though has not been set up so far as capital in nature. The
objection is accordingly rejected."
10. Aggrieved by which the assessee is in appeal before the Tribunal.
11. Ld. AR relying upon the judgment of the jurisdiction High Court in case of
CIT Vs. Priya Village Road Show Ltd (2011) 332 ITR594 (Delhi) submitted that
the claim of the assessee should have been allowed. The following quote from the
said decision was heavily relied upon.
"When we keep in mind the aforesaid fine distinction, the conclusion on the facts of
this case becomes obvious. The expenditure was incurred in respect of same business
which is already carried on by the assessee. Two projects which were undertaken
were for the expansion of same business, namely, one for taking over Savitri Cinema
for conversion into multiplex and operation and management thereof and other for
conversion of Priya Cinema into four-screen multiplex. Payments were made to the
consultants for preparing feasibility reports respect of both the projects. However,
ultimately projects were not found to be financially and technically viable and were
shelved. Thus, we find that no new asset came into existence, which was the basis
adopted by the Assessing Officer for treating the expenditure as capital expenditure
but wrongly."
11.1 It was further submitted that the judgment of the Jurisdictional High
Court has taken into consideration the judgement of the Gauhati High Court
relied upon by the DRP. The following extracted was relied upon:-
" 13. We note two judgments of other High Courts taking this view in identical
circumstances. One case is decided by Gauhati High Court which is reported
as Dy. CIT Vs. Assam Asbestos Ltd.[2003] 263 ITR 357. In that case the
29 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
assessee was in the business of manufacturing asbestos sheets. Contemplating
to set up a mini cement plant, which was the same line of business activity of the
assessee, a feasibility report was prepared. However, the project would not be
undertaken as Government refused to grant required permission. The Court
opined that no new capital asset came into existence and the expenses incurred
on preparation of the feasibility report, same line of business, were in the nature
of revenue expenditure. Rajasthan High Court had also occasion to deal with
this issue in the case of Maharaja Shri Umaid Mills Ltd Vs. CIT [1989] 175 ITR
73. There also the expenditure incurred in obtaining survey and feasibility
report for setting up polyethylene plant for manufacturing packing material was
treated as revenue expenditure as the new venture was inter-connected and
formed part of existing business."
11.2. In support of the claim made apart addressing the jurisdictional High Court
following averments were also made:-
" In another decision of Hon'ble High Court in the case of Indo Rama
Synthetics (i) Ltd. vs. Commissioner of Income-tax 185 Taxman 277 similar
view is once again expresses in the following words:-
"......9. In the present case also, as already pointed out above, the expenditure
incurred was in the nature of salary, wages, repairs, maintenance, design and
engineering fee, traveling and other expenses of administrative nature.
Indubitably, in normal course, these expenses would be treated as revenue
expenditure. The unit, which the appellant proposed to set up had inextricable
linkage with the existing business of the appellant. The proposed business was
not an individual business but vertical expansion of the present business. Thus,
test of existing business with common administration and common fund is
clearly met. Since the project was abandoned, no new asset also came to be
created.
10. We may point out at this stage that this Court in CIT Vs. Monnet
Industries Ltd.[2009] 176 Taxman 81 treated the interest borrowed on capital
as business expenditure when the amount was borrowed for setting up a new
plant. That was a case where the assessee was already in the business of Ferro
alloys plant and it had set up sugar plant. Still, the interest paid on borrowed
capital was treated as revenue expenditure by applying the test of common
management and common funds, in as much as, there was a common Board of
Directors controlling the two plants, which operated from the head office
located at New Delhi and funds of the two plants were common. On this basis,
it was opined that there was intermingling and interlacing of funds. The fact
that the two divisions are located, at different sites did not affect the outcome
since marketing of the final products of both divisions was carried out under the
supervision and control of the same set of executives at the head office."
In view of the above authorities of Jurisdictional High Court, we most
respectfully prays that the legal and professional expenses of INR 17,80,906/-
incurred in connection with expansion of the existing business obtained techno
30 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
commercial report may kindly be allowed as revenue expenditure and the
ground NO. 3 be allowed in favour of the Appellant."
11.3. In view thereof it was his submission that the claim should have been
allowed as revenue expenditure.
12. The Ld. CIT DR on the other hand contended that it is a factual issue and the
decision of the AO and the DRP were heavily relied upon.
13. We have heard the rival submission and perused the material available on
record. On a careful consideration of the same looking at the material available on
record as has been as discussion in the orders of the AO and the DRP we are of the
view that the DRP without discussing the facts has decided the issue relying upon
judgments which proceed on a specific set of facts. To our minds the approach
followed by the DRP cannot be upheld. Before applying the case law it is first
primarily and necessarily important to set out the full and correct facts which
necessarily require the marshalling of relevant facts. From the facts on record it is
necessary to address whether the project ultimately translated into a unit being set-
up or was the project abandoned. On this aspect there is no discussion in the
orders nor has the assessee considered it necessary to address this aspect. It is a
settled legal position that the ratio of judgements applies to a given set of facts and
without setting out the material facts the principles laid down on the issue by
various Courts would have no meaning or relevance. As each judgements operates
on the facts of its case. Accordingly we deem it appropriate to set aside the issue
back to the file of the A.O with the direction to re-adjudicate the issue after setting
out and marshalling the facts and then applying the case law which may be
applicable to those sets of facts. Needless to say that the assessee shall be granted
a reasonable opportunity of being heard. Accordingly Ground No. 3 in ITA NO.
5955/Del/2012 is allowed for statistical purposes.
31 I.T.As .No.-1942/Del/2011,
5903/Del/2010 & 5955/Del/2012
14. Grounds No. 4 & 5 in ITA No-5955/Del/2012 are consequential as such
require no adjudication. Ground No. 6 is premature and it does not arise in the
present proceeding consequently dismissed.
15. In result ITA No-1942/Del/2011 of the Revenue and ITA No-5903/Del/2010
and in ITA 5955/Del/2012 of the assessee are allowed for statistical purposes.
The order was pronounced in the open Court on 18th December, 2013.
Sd/- Sd/-
(S.V.MEHROTRA) (DIVA SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 18/12/2013
*Amit Kumar & Reshma*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
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