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)
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-1 : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
SMT. BEENA A. PILLAI, JUDICIAL MEMBER
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.
PAN: AABCE0207H
(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
ORDER
PER R.S. SYAL, VP:
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
adjudication.
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
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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
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`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
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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
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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
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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
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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
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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
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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
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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.
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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.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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