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Exxon Mobil Lubricants Pvt. Ltd., E-20, 1st and 2nd Floor, Main Market, Hauz Khas, New Delhi. vs ACIT, Circle-8(2), New Delhi.
August, 23rd 2018

Subject: ALP of the international transaction of ‘Receipt of business support services.’

Referred Sections:
Section 144C(13) of the Income-tax Act,
Section 37(1) of the Act.

Referred Cases / Judgments
Haryana High Court in Knorr-Bremse India P. Ltd. vs. ACIT (2016) 380 ITR 307 (P&H)
CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730 (Del)


             DELHI BENCHES : I-1 : NEW DELHI


                        ITA No.1153/Del/2015
                       Assessment Year : 2010-11

Exxon Mobil Lubricants Pvt. Ltd.,          Vs.       ACIT,
E-20, 1st and 2nd Floor,                             Circle-8(2),
Main Market, Hauz Khas,                              New Delhi.
New Delhi.


  (Appellant)                                             (Respondent)

            Assessee By       :     Shri Vishal Kalra, Advocate &
                                    Ms Reema Malik, CA
            Department By     :     Shri Sanjay I Bara, CIT, DR

         Date of Hearing               :   21.08.2018
         Date of Pronouncement         :   21.08.2018

     This is an appeal filed by the assessee against the final assessment

order dated 30.12.2014 passed by the Assessing Officer (A.O.) u/s 143(3)
                                                                ITA No.1153/Del/2015

read with section 144C(13) of the Income-tax Act, 1961 (hereinafter also

called `the Act') in relation to the assessment year 2010-11.

2.    Ground No.1 is general which does not require any separate


3.   Ground Nos.2 to 5 deal with addition on account of transfer pricing

adjustment amounting to Rs.25,74,03,817/-. Briefly stated, the facts of the

case are that the assessee is an Indian company engaged in manufacturing

and marketing of lubricants in India. It imports different grades of base oil

and additives. These base oils are blended with additives to manufacture

lubricants for different applications in automotive industry and marine

segments.   The assessee filed report in Form No. 3CEB declaring ten

international transactions. The A.O. referred the matter of determination of

arm's length price (ALP) of the international transactions to the Transfer

Pricing Officer (TPO). The TPO did not dispute the determination of ALP

by the assessee of all the transactions except one, namely, `Receipt of

business support services' with transacted value of Rs.26,22,03,817/-. The

assessee applied Transactional Net Margin Method (TNMM)                         for

                                                             ITA No.1153/Del/2015

demonstrating that this international transaction was at ALP. In order to

benchmark this transaction, the assessee selected its foreign AE as tested

party and chose foreign comparables. The assessee segregated services

availed under twelve heads, which have been set out on pages 5 and 6 of

the TPO's order. The TPO considered all the twelve transactions one by

one and came to the conclusion that either the services received were in the

nature of shareholders' services or duplication of services or no benefit was

received or there was no evidence of the assessee having received such

services at all. Except for `Information technology services' referred to at

Sl. No. (xi), the TPO determined Nil ALP of all the services. As regards

`Information technology services' for which the assessee paid a sum of

Rs.8.50 crore and odd, the TPO determined its ALP at Rs.48 lac by

estimating that not more than 5 persons @ Rs.80,000/- per month were

required for rendering such services.     He also rejected the assessee's

application of TNMM as the most appropriate method and resorted to

Comparable Uncontrolled Price Method (CUP) as the most appropriate

method for determining the ALP of the international transaction of `Receipt

of business support services.' This is how, he determined the ALP of

                                                            ITA No.1153/Del/2015

`Information technology services' at Rs.48 lac and Nil for all the remaining

eleven services which resulted into recommending transfer pricing

adjustment of Rs.25,74,03,817/- against the transacted value                 of

Rs.26,22,03,817/-. The assessee remained unsuccessful before the Dispute

Resolution Panel (DRP) on this issue. This led to the making of addition of

Rs.25.74 crore and odd in the final assessment order which has been

assailed before the Tribunal.

4.   We have heard both the sides and perused the relevant material on

record. It is observed that the assessee claimed to have received twelve

different services viz., Controllers, Human Resource; Corporate Law;

Public affairs; Security; Procurement; Safety, health and environment; Tax;

Treasury; Business advisory; Information technology; and Others including

Medical Services. While dealing with Controllers services, the TPO held

the same to be duplicate in nature despite the assessee's contention that it

related to managing its accounts, finance, internal control and reporting

issues. As regards Human Resource services, the assessee claimed to have

made payment in lieu of its AE providing support on personnel activities by

ensuring that such policies were streamlined and the required standards
                                                             ITA No.1153/Del/2015

were met. The TPO held that the assessee was not required to make any

payment for the same as it was the global policy of the group. Similar is

the position for all other services for which the assessee stated the nature

and the TPO determined Nil ALP by considering such services as either

duplicate in nature or not required except for `Information technology

services', for which he determined the ALP under CUP Method in a unique

way of estimating that not more than 5 persons @ Rs.80,000/- per month

were required for these services. The TPO further recorded at several places

about the non-furnishing of adequate evidence by the assessee in support of

such services. This shows that the TPO's determination of Rs.48 lac ALP

against actual payment of Rs.26.22 crore is premised on the foundation that

either no services were received or, in the alternative, the services, if any,

received by the assessee amounted to duplication of services which did not

give any benefit to the assessee.

5.     We find that on the `Benefit test' as applied by the TPO for

determining the ALP at Nil in respect of eleven services and Rs.48.00 lac in

respect of the service of `Information technology', the Hon'ble Punjab &

Haryana High Court in Knorr-Bremse India P. Ltd. vs. ACIT (2016) 380
                                                              ITA No.1153/Del/2015

ITR 307 (P&H) has held that the question whether a transaction is at an

arm's length price or not is not dependent on whether the transaction results

in an increase in the assessee's profit. A view to the contrary would then

raise a question as to the extent of profitability necessary for an assessee to

establish that the transaction was at an arm's length price. A further

question that may arise is whether the arm's length price is to be

determined in proportion to the extent of profit. Thus, while profit may

reflect upon the genuineness of an assessee's claim, it is not determinative

of the same. It went on to hold that business decisions are at times good

and profitable and at times bad and unprofitable. Business decisions may

and, in fact, often do result in a loss. The question whether the decision was

commercially sound or not is not relevant. The only question is whether the

transaction was entered into bona fide or not or whether it was sham and

only for the purpose of diverting the profits. Reverting to the facts of the

extant case, we find that the assessee furnished some evidence in support of

some of the services, though such evidence was not complete as has been

recorded by the TPO in respect of other services, such as, Controllers,

Corporate Law, Procurement, Treasury and Business Advisory. Thus, the

                                                             ITA No.1153/Del/2015

international transaction of receipt of services entered into by the assessee

with its AEs prima facie does not appear to be bogus, at least to some

extent for which evidence was furnished.

6.   It is found that the TPO rejected the TNMM as applied by the

assessee and stated to have applied the CUP method for determining the

ALP of the international transaction of receipt of intra-group services.

While applying the CUP method, it was obligatory upon him to bring on

record some comparable uncontrolled instances availing similar services as

per the mandate of rule 10B(1)(a)(i). Not even a single comparable case

has been brought on record to facilitate a comparison between the price for

the services availed by the assessee vis--vis that paid by other comparables

in similar circumstances.

7.   Even otherwise, we notice that the action of the TPO in determining

Nil ALP of the eleven services and Rs.48.00 lac of Information technology

on the ground that no such services were required to be availed or it was a

case of duplication of services or shareholders' services and then the AO

making addition simply on the basis of recommendation of the TPO, is not

                                                             ITA No.1153/Del/2015

in accordance with the judgment of the Hon'ble jurisdictional High Court

in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730

(Del), in which it has been held that the authority of the TPO is limited to

conducting transfer pricing analysis for determining the ALP of an

international transaction and not to decide if such services exist or benefits

did accrue to the assessee. Such later aspects have been held to be falling in

the exclusive domain of the AO. In that case, it was observed that the e-

mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt

with specific interaction and related to benefits obtained by assessee,

providing a sufficient basis to hold that benefit accrued to assessee. As the

details of specific activities for which cost was incurred by both AEs (for

activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to

assessee were not considered, the Hon'ble High Court remanded the matter

to file of concerned AO for an ALP assessment by TPO, followed by AO's

assessment order in accordance with law considering the deductibility or

otherwise as per section 37(1) of the Act.

8.   When we advert to the facts of the instant case, it turns out that the

TPO proposed the transfer pricing adjustment of Rs.25.74 crore and odd
                                                            ITA No.1153/Del/2015

almost equal to the stated value of the international transaction by holding

that no benefit was received by the assessee as a result of availing these

services or these amounted to duplication of services or shareholders'

services and hence no payment on these scores was warranted. The AO in

his draft order has taken ALP of these international transaction at Rs.48.00

lac on the basis of recommendation of the TPO without carrying out any

independent investigation in terms of the deductibility or otherwise of such

payment in terms of section 37(1) of the Act. The addition has been made

by the AO in his final assessment order giving effect to the direction given

by the DRP and not by invoking section 37(1) of the Act. As per the ratio

decidendi of Cushman & Wakefield India (P.) Ltd. (supra), the TPO

was required to simply determine the ALP of the international transaction,

unconcerned with the fact, if any benefit accrued to the assessee and

thereafter, it was for the AO to decide the deductibility of this amount u/s

37(1) of the Act. As the TPO in the instant case initially determined

Rs.48.00 lac as the ALP of the international transaction of Rs.26.22 crore

by holding that no benefit etc. accrued to the assessee and the AO made the

addition without examining the applicability of section 37(1) of the Act, we
                                                             ITA No.1153/Del/2015

find the actions of the AO/TPO running in contradiction with the ratio laid

down in Cushman & Wakefield (supra). Following this decision and the

discussion made supra, we are of the considered opinion that the impugned

order cannot stand. The same is, therefore, set aside and the matter is

remitted to the file of AO/TPO for determining the ALP of the international

transaction of `Receipt of business support services' de novo as per law

after allowing a reasonable opportunity of hearing to the assessee. The ld.

AR has undertaken to extend full co-operation to the AO/TPO by supplying

all the relevant material and evidence as demanded.

9.   Ground No.6 is against the disallowance of interest aggregating to

Rs.9,39,413/- which was paid on account of late payment of Central Sales-

tax, Service Tax and Value Added Tax. The ld. AR contended that the

assessee filed rectification application before the DRP, which was disposed

of vide order dated 21.05.2015. A copy of such order has been placed on

record. Similar to Ground No.6 raised in the Memorandum of Appeal

before the Tribunal, the assessee raised Objection No.2 before the DRP in

rectification application against the disallowance of interest paid on Central

Sales-tax, Service Tax and Value Added Tax. The DRP has decided this
                                                                ITA No.1153/Del/2015

issue in the assessee's favour vide para 3.2 of its direction given in

rectification proceedings.   The A.O. is directed to give effect to such

directions, which the ld. AR states has not been done so far.

10.   Ground No.7 is against the disallowance of interest on payment of

advance tax amounting to Rs.8,86,431/-. This issue has also been dealt

with by the DRP by holding that no deduction can be allowed in respect of

interest paid for payment of advance tax. It goes without saying that the

decision taken by the DRP is unimpeachable as has also been conceded by

the ld. AR that the payment of such interest cannot be allowed. The ld. AR,

however, submitted that the deduction on account of such interest claimed

by the assessee has been voluntariy reversed by the assessee in the

succeeding year. In our considered opinion, the suo motu offering of

income in a later year, will not make the amount deductible in the year

under consideration, which has been rightly held to be not deductible. The

assessee is at liberty to take remedial action in respect of such offering of

income in a later year in appropriate proceedings.

                                                                    ITA No.1153/Del/2015

11.       Ground No.8 is against not setting off of brought forward unabsorbed

depreciation of Rs.9,60,34,623/- while computing income of the assessee.

The A.O. is directed to examine this contention and deal with the same as

per law.

12.       The last ground regarding levy of interest u/s 234B is consequential.

13.       In the result, the appeal is allowed for statistical purposes only.

          The order pronounced in the open court on 21.08.2018.

                     Sd/-                                        Sd/-

           [BEENA A. PILLAI]                                 [R.S. SYAL]
          JUDICIAL MEMBER                                  VICE PRESIDENT

Dated, 21st August, 2018.
Copy forwarded to:
     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                                                         AR, ITAT, NEW DELHI.

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