In the Income-Tax Appellate Tribunal,
Delhi Bench `I-1', New Delhi
Before : Shri Bhavnesh Saini, Judicial Member And
Shri L.P. Sahu, Accountant Member
ITA No. 161/Del./2016
Assessment Year: 2011-12
Daikin Air-Conditioning India Pvt. Ltd., vs. DCIT, Circle 7(1),
12th Floor, Building No. 9, Tower-A, New Delhi.
DLF Cyber City, DLF Phase-III,
Gurgaon. PAN- AABCD0971F.
(Appellant) (Respondent)
Appellant by Sh. Vishal Kalra, Advocate &
Sh. Ankit Sahni, Advocate
Respondent by Sh. Sanjay-I- Bara, CIT/DR
Date of Hearing 30.07.2018
Date of Pronouncement 06.08.2018
ORDER
Per L.P. Sahu, A.M.:
This appeal by the assessee is directed against the order of Assessing
Officer dated 30.11.2015 read with directions of ld. DRP dated 27.10.2015 for
the assessment year 2011-12. The assessee has raised as much as six grounds
in the memorandum of appeal, out of which ground No. 1 is general in nature
and ground No. 6 pertaining to interest u/s. 234B is consequential in nature.
The assessee has also filed an application on 30.07.2018 (Wrong date written
on application as August 30, 2018) before the bench stating that the appellant
has entered into an Advance pricing agreement (APA) with CBDT on
ITA No. 161/Del./2016 2
25.07.2018 (wrong date written in application as August 25, 2018) which is
applicable to five consecutive years commencing from F.Y. 2014-15 to 2018-
19 and four consecutive rollback years commencing from F.Y. 2010-11 to
2013-14 relevant to A.Yrs. 2011-12 to 2014-15. It is also stated that the
appellant is entitled to file modified return as per section 92CD(1) in
accordance with the APA within a period of three months from the end of the
month in which the agreement was entered into and as per Rule 10RA(4) of
the IT Rules, the appeal, if pending for any rollback year on the issue which is
subject matter of APA, shall be withdrawn to the extent of the issues covered
by the agreement. He, therefore, submitted that relevant grounds Nos. 2 & 3 of
appeal under consideration are withdrawn. Accordingly, these grounds of
appeal are dismissed as withdrawn, as noted above.
2. The remaining grounds, which need adjudication read as under :
4.Disallowance under section 40(a)(i) and section 37(1) of the Act
4.1. That on the facts and circumstances of the case and in law, the AO
/DRP have erred in making a disallowance of INR 8,61,72,048 under -
section 40(a)(i) of the Act, in respect of reimbursements paid to its
Associate Enterprise ("AE") on account of salaries and travel cost of the
seconded employees, alleging that the same is in the nature of Fee for
technical services ("FTS") and is chargeable to tax in India in the hands of
the AE, thus, Appellant ought to have deducted taxes on such payments.
4.2. That on the facts and circumstances of the case and in law, the AO /
DRP have erred in not appreciating the fact that the Appellant had duly
deducted tax under section 192 of the Act on the entire salary paid to the
ITA No. 161/Del./2016 3
seconded employees, The AO / DRP further erred in not taking into
consideration the evidence submitted by the Appellant demonstrating due
deduction of taxes in the hands of seconded employees and re-
characterizing such payments as FTS.
4.3. That on the facts and circumstances of the case and in law, the AO /
DRP have erred in incorrectly placing reliance on the decision of the Delhi
High Court in the case of Centrica India Offshore Pvt Ltd vs CIT [2014]
364ITR 336 ("Centrica"), holding that the AE was rendering technical
services to the Appellant which are chargeable to tax in India in the hands
of the AE.
Disallowance under section 37(1) of the Act.
4.4. That on the facts and circumstances of the case and in law, the DRP
directions are bad in law, to the extent of enhancement of income in
relation to disallowance of expenditure amounting to made amounting to
INR 3,68,01,315, as no show-cause or opportunity of being heard was
given before making such disallowance, which is sine qua non as per
provisions of section 144C(11).
4.5. That on the facts and circumstances of the case and in law, the AO /
DRP have erred in disallowing the expenditure of INR 3,68,01,315 under
section 37(1) of the Act, on account consultancy charges paid by the
Appellant to its AE, alleging that the same have not been incurred wholly
and exclusively for the purposes of the business.
4.6. That on the facts and circumstances of the case and in law, the DRP
has erred in computing the ALP of consultancy charges paid by the
Appellant to its AE as Nil, alleging that such services were in the nature of
shareholder services, duplicative and provide incidental or passive
benefits.
4.7. That on the facts and circumstances of the case and in law, the DRP
has erred in computing the ALP of consultancy charges paid by the
Appellant to its AE as Nil, alleging that the Appellant did not furnish any
evidence to substantiate that the services were indeed rendered by the AE
and failed to show that such services were not in the nature of shareholder
services, duplicative, and that provide incidental benefits or passive
benefits.
ITA No. 161/Del./2016 4
5. That on the facts and circumstances of the case and in law, the A.O. has
erred in not allowing full credit of taxes paid/deducted."
3. The brief facts of the case are that the appellant, Daikin Air conditioning
(India) Private Limited ("DAIPL") is a private limited company incorporated
under the Companies Act, 1956 and operates as a wholly owned subsidiary of
Daikin industries Limited, Japan ("DIL"). During the subject assessment year,
the Appellant was engaged in the following activities:
· Purchase of air conditioners ('ACs') and other products from its
associated enterprises ("AEs") for the purpose of resale in India, which
are imported on a principle to principle basis;
· Provision of after-sales services of air conditioners and other related
activities; and
· Manufacturing of air-conditioners for the purpose of selling to third
party customers in India.
The Appellant had set-up a factory in Rajasthan in February, 2008 for
manufacturing of air conditioners and started manufacturing operations in
September, 2009. The Appellant incurred expenditure on import of raw
materials for undertaking manufacturing function. It also incurred training
cost and consultancy services cost in relation to its manufacturing operations
and has also made payment for royalty for receipt of technical know-how in
relation to manufacturing operations.
3.1. For the subject assessment year, the Appellant entered into the
following international transactions with its AE.
ITA No. 161/Del./2016 5
* Distribution Function
- Purchase and resale of air conditioners
* Marketing Support Function
- Purchase and resale of air conditioners
· Marketing Support function
- Provision of MSS
- Import of spare-parts of ACs
- Provision of warranty support services
- Import of fixed assets
· Manufacturing function
- Import of raw material and spare parts
- Receipt of training services
- Receipt of consultancy services
- Payment of royalty
· Reimbursement of expenses (impugned transaction)
· Recovery of expenses
3.2. The TPO vide order dated January 7, 2015 made the adjustments /
additions to the income of the Appellant in relation to international
transactions pertaining to (i) distribution function and (ii.) manufacturing
segment.
3.3.The DRP vide directions dated October 15, 2015, has dealt with the
issue as under :
· Upheld the adjustment made by TPO in relation to both distribution and
manufacturing segment with certain directions granting minor relief.
· Additionally, during the course of proceedings before the DRP, certain
additional details / information were sought by the Panel in relation to
international transaction of reimbursement of expenses, in order to ascertain
ITA No. 161/Del./2016 6
the withholding tax liability of the Appellant on such remittances. The break-
up of reimbursement of expenses as provided to the DRP is as under:
Particulars Amount (in INR)
Salaries 8,09,97,689
Consultancy expenses 3,68,01,315
Travel Costs 51,74,359
Total reimbursement by 12,29,73,363
Appellant
3.4 Thereafter, the DRP suo-moto directed for the following additions /
disallowances:
- In relation to expenditure incurred towards (i.) salaries and (ii.) travel cost,
the DRP held that the same constitutes Fee for Technical Services ("FTS"),
chargeable to tax in India in the hands of OIL and accordingly disallowed the
aggregate claim amounting to Rs. 8,61,72,048 under section 40(a)(i) of the
Act, since no tax was withheld on the same.
- In relation to consultancy fee amounting to Rs. 3,68,01,315, the DRP held it
to be disallowable under section 37(1) of the Act, as such consultancy charges
were not incurred wholly for the for the purposes of the business of the
Appellant.
3.5 The final assessment order dated November 30, 2015 was passed by
the AO in pursuance to the directions of the DRP and order of TPO giving
effect to such directions. The AO inter-alia made additions to the returned
income as under :
ITA No. 161/Del./2016 7
Particulars Amount (In lNR)
Loss as returned under the normal provisions 27,57,00,801
of the Act
Add:
Transfer pricing additions on account of 1,51,5,3,24,766
adjustment of ALP (covered by APA}
Disallowance under section 40(a)(1 ) of the Act 8,6,1,72,048
Disallowance under section 37(1) of the Act 3,6,8,01,315
Total Income 1,362,597,328
Aggrieved from the order of the Assessing Officer /DRP, the assessee is in
appeal before the ITAT.
4. The learned AR submitted that the ld. DRP has wrongly held that these
payments come within the category of Fees for Technical Services (FTS),
whereas the same relate to the payment to employees and necessary TDS has
been deducted. Form No. 16 has been issued and quarterly TDS return has
been filed. EPF has also been deducted from the salaries of the employees. The
ld. DRP without verifying the documents submitted, upheld it as payment for
FTS. He also submitted that the similar payments made by assessee in A.Y.
2010-11, 2012-13 to 2014-15 have been accepted by the Revenue. He
requested that the mater should go back to the Assessing Officer for
verification to ascertain the exact nature of payments to the employees.
5. The ld. DR relied on the orders of the authorities below and stated that
the matter may be remanded to A.O.
ITA No. 161/Del./2016 8
6. We have heard both the sides and perused the entire material on
record. The ld. AR of the assessee drew our attention to copies of Form No. 16
and details of the employees placed in the paper book, which have not been
examined by the authorities below. We, therefore, think it proper to send the
matter back to the Assessing Officer for verification of the payments made-
whether they were made to employees of the assessee company or whether
the same were made as fee for Technical services and also whether TDS has
been correctly deducted on payment of Rs.8,61,72,048/- (Salaries & Travel
cost) and decide the issue afresh in accordance with law.
7. Further, in respect of disallowance u/s. 37(1) of Rs.3,68,01,315/-, the
Assessing Officer/DRP have disallowed these expenditures being not relating
to business purpose of assessee. The ld. AR requested to send back this issue
also to the Assessing Officer for verification because the ld. DRP did not
consider the vouchers placed before them. He placed evidences before the
DRP to establish that the expenditure were incurred wholly and exclusively
for the purpose of business. In the totality of facts and circumstances, we
therefore, restore this matter to the file of the Assessing Officer on this issue
also for verification and decision afresh in accordance with law. Needless to
say, the assessee shall be given reasonable opportunity of being heard. The
assessee is also directed to adduce all the documentary evidences in support
of its claim before the Assessing Officer. Accordingly, the relevant ground is
allowed for statistical purposes.
ITA No. 161/Del./2016 9
8. Regarding ground No. 5, the assessee has contended that the authorities
below have not given due credit of tax paid/deducted. The Assessing Officer is
directed to verify the contention of the assessee and to give due credit of tax
paid/deducted to the assessee.
9. In the result, the appeal of the assessee deserves to be partly allowed as
indicated above.
Order pronounced in the open court on 6TH August, 2018.
Sd/- Sd/-
(Bhavnesh Saini) (L.P. Sahu)
Judicial member Accountant Member
Dated: 6th August, 2018
*aks*
Copy of order forwarded to:
(1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative (6) Guard File
By order
Assistant Registrar
Income Tax Appellate Tribunal
Delhi Benches, New Delhi
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