M/s. TRW Sun Steering Wheels Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 1091/DEL/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 1346 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 09-05-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 26-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: K SAMPAT SH V RAJA KUMAR
• Keywords: Transfer pricing; Business expenditure; Earning of tax free income; Wholly owned subsidiary; Fair market value; Tax effect
• Section: 143(3); 14A

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D: NEW DELHI BEFORE SHRI G.D. AGRAWAL, HONBLE PRESIDENT AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO.:- 1091/DEL/2014 ASSESSMENT YEAR: 2010-11 ITA NO. 6651/DEL/2014 ASSESSMENT YEAR : 2011-12 O R D E R M/S. TRW SUN STEERING WHEELS PVT. LTD. A-47, LOWER GROUND FLOOR, HAUZ KHAS, NEW DELHI-110 016 AAFCS3981E VS. DCIT CIRCLE-9(1) NEW DELHI. (APPELLANT) (RESPONDENT) DCIT CIRCLE-24(2) NEW DELHI VS. M/S. TRW SUN STEERING WHEELS PVT. LTD. A-47, LOWER GROUND FLOOR, HAUZ KHAS, NEW DELHI 110 016 AAFCS3981E (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI K. SAMPAT, ADVOCATE SH. V RAJA KUMAR , ADVOCATE RESPONDENT BY : SHRI AMIT JAIN, SR. DR DATE OF HEARING 11/06 /201 8 DATE OF PRONOUNCEMENT / 09 /2018 2 PER AMIT SHUKLA, J.M. THE AFORESAID CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE AGAINST IMPUGNED ORDER DATED 17.1.2014, PASSED BY THE LD. CIT (APPEALS) XI, NEW DELHI FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3) FOR THE ASSESSMENT YEAR 2010-11. 2. IN ASSESSEES APPEAL, THE ASSESSEE HAS CHALLENGED THE FOLLOWING TWO ADDITIONS: - I) ADDITION OF RS. 31,432/- MADE U/S 14A; II) ADDITION OF RS. 36,00,000/- AFTER INVOKING PROVISION OF SECTION 40A(2)(B) FOR THE PAYMENT MADE TO M/S. SUN VACUUM FORMERS PRIVATE LIMITED TOWARDS MANAGEMENT AND CONSULTANCY SERVICES. 3. THE FACTS IN BRIEF ARE THAT ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AUTOMOBILE PARTS, STEERING WHEELS AND MOULDS FOR VARIOUS AUTOMOBILE COMPANIES AND MAINLY SUPPLIES TO VARIOUS AUTOMOBILES COMPANIES LIKE, MARUTI UDYOG LTD., T.S. TECH SUN (INDIA) PVT. LTD., MAHINDRA & MAHINDRA, TATA MOTORS, FIAT INDIA AUTOMOBILES, FORD INDIA, GENERAL MOTORS. AS REGARDS THE ADDITION OF RS. 36,00,000/-, THE AO OBSERVED THAT THE ASSESSEE DURING THE YEAR HAS DEBITED SUM OF RS. 48,12,083/- UNDER LEGAL AND PROFESSIONAL CHARGES AND ON PERUSAL OF THE DETAILS FILED, HE NOTICED THAT SUM OF RS. 36,00,000/- WAS PAID TO SUN VACUUM FORMERS PVT. LTD. WHICH IS A RELATED PARTY BEING THE HOLDING COMPANY OF THE ASSESSEE. HE OBSERVED FOLLOWING PATTERN OF THE ASSESSEE COMPANY VIS A VIS M/S. SUN VACUUM FORMERS PVT. LTD.: - I) ASSESSEE COMPANY WAS 100% SUBSIDIARY OF M/S. SUN VACUUM FORMERS PVT. LTD. (SVF). DURING THE FINANCIAL YEAR 2008-09, THE HOLDING COMPANY HAS SOLD 49% OF ITS HOLDING IN THE ASSESSEES COMPANY TO M/S. TRW AUTOMOTIVE AFTERMARKET INC SINGAPORE. 3 II) TRW WANTED TO SET UP A PLANT AT PUNE AND FOR THIS PURPOSE, TRW ALONG WITH THE ASSESSEE COMPANY HAS STATED TO ENGAGE SVF, WHICH WAS A RELATED PARTY, FOR SETTING UP OF PLANT AND PRODUCTION LINE AT PUNE AND BUILT UP NECESSARY MACHINERY WITH PROPER SPECIFICATION. III) SINCE, SVF IS A HOLDING COMPANY OF TRW AND IT IS NOT ENGAGED IN THE BUSINESS OF LEGAL AND PROFESSION SERVICES TO QUALIFY FOR THE PAYMENT, HENCE PROVISION OF SECTION 40A(2)(B) IS CLEARLY ATTRACTED. 4. THE ASSESSEES CASE BEFORE THE AO WAS THAT, IT HAD SET UP OF FULL- FLEDGED PRODUCTION LINE AT PUNE WHICH INVOLVED METICULOUS PLANNING, ENGINEERING BUILT UP OF MACHINERY, MACHINERY LAYOUT AND POSITIONING TOOL ROOM, PLANNING LIAISON FOR COMPLIANCE AND APPROVALS FROM VARIOUS DEPARTMENTS ETC., WHICH THE SVF HAS DONE, SINCE THEY WERE QUITE EXPERIENCED IN THE LINE OF ACTIVITY FOR MORE THAN TWO DECADES. APART FROM THAT, SVF HAS ALSO GIVEN ADVICE AND SERVICES TO ASSESSEE COMPANY REGARDING ALL FORMALITIES AND COMPLIANCES WITH VARIOUS AUTHORITIES RELATED TO THE TRANSFER AND JOINT VENTURE. FOR ALL THESE SERVICES SVF HAS CHARGED THE ASSESSEE COMPANY AMOUNT OF RS. 36,00,000/- TOWARDS MANAGEMENT AND CONSULTANCY FEES FOR WHICH NECESSARY INVOICES RAISED BY SVP AND BOARD RESOLUTION AUTHORIZING THE ABOVE PAYMENT WAS SUBMITTED BEFORE THE AO. SINCE SVF WAS TAXED IN INDIA, THE ENTIRE DETAILS OF PAN AND THE PLACE OF ASSESSMENT WAS GIVEN. HOWEVER, LD AO HELD THAT SVF IS NOT ENGAGED IN THE BUSINESS OF LEGAL AND PROFESSIONAL SERVICES TO QUALIFY FOR THE PAYMENT AND THE EXPERIENCE OF SVF IS NOT MATERIAL, BECAUSE SUCH AN EXPERIENCE COULD BENEFIT TO ITSELF NOT TO OTHERS. GENERAL EXPERIENCE AND NOT GIVE TO OTHERS, INDICATES THAT BY MAKING SUCH PAYMENT TO THE HOLDING COMPANY WAS TO SUPPRESS ITS PROFIT. FURTHER SVF IS NOT A SPECIALIST 4 WHICH SUGGESTS THAT NO EXPERT ENGAGEMENT IS REQUIRED. FURTHER, BOARD RESOLUTION AUTHORISING THE PAYMENT IS NOT RELEVANT BECAUSE IT HAS CONTROLLED OVER THE MANAGEMENT IN TERMS OF DECISION AND PRICE FIXATION. OTHERWISE ALSO, AO HELD THAT EVEN IF SVS HAD RENDERED PROFESSIONAL SERVICES, THEN ALSO IT IS NOT ACCEPTABLE THAT SUCH A PAYMENT MADE FOR WORK DONE FOR ITS OWN BENEFIT WILL QUALIFY AS A GENUINE EXPENDITURE. ACCORDINGLY, HE ADDED THE AMOUNT OF RS. 36,00,000/-. 5. LD. CIT(A) TOO HAS CONFIRMED THE SAID ADDITION AFTER HOLDING THAT ASSESSEE COULD NOT PRODUCE BEFORE EITHER BEFORE THE AO IN THE ASSESSMENT PROCEEDINGS OR DURING THE APPELLATE PROCEEDINGS ANY EVIDENCE OF ACTUAL SERVICES BEING RENDERED BY SVF TO THE ASSESSEE COMPANY. SIMPLY STATING THAT SVF HAD EXPERIENCE IN THE FIELD DOES NOT JUSTIFY THE PAYMENT, IF THERE IS NO PRIMARY EVIDENCE TOWARDS THE ACTUAL UTILISATION OF SUCH EXPERIENCE AT THE GROUND LEVEL. HE CATEGORICALLY OBSERVED THAT, ASSESSEE FAILED TO PROVIDE DETAILS OF SERVICES RENDERED BY SVP. THE DOCUMENTATION OF THE TRANSACTION IS ONLY SELF-SERVING ARRANGEMENTS WHICH DOES NOT IPSO FACTO SHOW THAT THE SERVICES WERE RENDERED. 6. LD. COUNSEL FOR THE ASSESSEE BEFORE US AFTER NARRATING THE ENTIRE FACTS, SUBMITTED THAT ONCE A PAYMENT HAS BEEN MADE TOWARDS MANAGEMENT AND CONSULTANCY SERVICES WITH ALL THE PROPER DOCUMENTATION, THEN WITHOUT BRINGING ANYTHING CONTRARY MATERIAL ON RECORD TO HOLD THAT SUCH A PAYMENT IS EXCESSIVE, NO DISALLOWANCE CAN BE MADE U/S 40A(2)(B). SIMPLY BECAUSE PAYMENT HAS BEEN MADE TO A RELATED PARTY THAT DOES NOT MEAN DISALLOWANCE HAS TO BE MADE. IF ALL THE NECESSARY EVIDENCES HAVE BEEN FILED SHOWING THE PAYMENT WHICH OTHERWISE ITS GENUINENESS HAS NOT BEEN DOUBTED, THEN ADDITION SUSTAINED BY THE LD. CIT(A) DESERVES TO BE DELETED. 5 7. ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE LD. CIT(A) AND SUBMITTED THAT NOT AN IOTA OF EVIDENCE WAS FILED TO PROVE THAT ANY KIND OF SERVICES WAS RENDERED BY SVF TO THE ASSESSEE AND THEREFORE, SUCH A PAYMENT NEITHER CAN BE HELD TO BE GENUINE BUSINESS EXPENDITURE AND ADDITION HAS RIGHTLY BEEN UNDER SECTION 40A(2)(B) BEING PAYMENT MADE TO THE RELATED PARTY. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS. IT IS NOT IN DISPUTE THAT THE PAYMENT OF RS. 36,00,000/- HAS BEEN PAID TO SVF, WHICH IS A RELATED PARTY BEING A HOLDING COMPANY OF THE ASSESSEE. THE PAYMENT HAS BEEN SAID TO BE MADE FOR CONSULTANCY SERVICES RENDERED BY SVF FOR SETTING UP OF PLANT AND PRODUCTION LINE AT PUNE FOR WHICH IT HAS BEEN STATED THAT METICULOUS PLANNING, ENGINEERING BUILT UP OF MACHINERY, MACHINERY LAYOUT AND POSITIONING TOOL ROOM, PLANNING, LIAISON FOR COMPLIANCE AND APPROVALS FROM VARIOUS DEPARTMENTS ETC. HAS BEEN DONE BY SVF. LD. AO HAS DISALLOWED THE PAYMENT, ON THE GROUND THAT, THE PAYMENT HAS BEEN MADE TO RELATED PARTY WHO DOES NOT HAVE ANY SPECIAL AND TECHNICAL EXPERIENCE AND CANNOT BE HELD TO BE RENDERING ANY KIND OF MANAGERIAL, TECHNICAL AND CONSULTANCY SERVICES TO THE ASSESSEE SIMPLY BECAUSE IT HAD GENERAL EXPERIENCE. LD. CIT(A) HAS OBSERVED THAT NO EVIDENCE WHATSOEVER HAS BEEN GIVEN TO SHOW THAT SERVICES WERE ACTUALLY RENDERED BY SVF. 9. THOUGH THERE IS NO BAR THAT PAYMENT TO THE RELATED PARTY FOR RENDERING OF SERVICES CANNOT BE MADE OR SUCH PAYMENT WARRANTS ANY KIND OF DISALLOWANCE, BUT THE ONUS IS HEAVILY UPON THE ASSESSEE THAT THE PAYMENT MADE TO THE RELATED PARTY FOR RENDERING SERVICES HAS BEEN DONE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES PROVIDED AND FOR THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSEE. HERE THE PAYMENT MADE TO THE RELATED PARTY WOULD BE FULLY JUSTIFIED, IF THE 6 ASSESSEE IS ABLE TO PRODUCE ANY EVIDENCE THAT SVF HAS RENDERED ANY KIND OF SERVICES TO THE ASSESSEE COMPANY FOR SETTING UP OF A PLANT AND PRODUCTION LINE AT PUNE AND FOR CARRYING LIAISON WORK. THE REASONING GIVEN BY THE AO MAY NOT BE ENOUGH TO MAKE THE ADDITION BUT PROVING OF ACTUAL RENDERING OF SERVICES BY THE RELATED PARTY/ ASSOCIATED ENTERPRISE IS ESSENTIAL. RAISING OF INVOICE BY THE AE FOR THE SERVICES WOULD NOT BE SUFFICIENT BUT IT NEEDS TO BE CORROBORATED WITH THE RENDERING OF SERVICES. HENCE, IN THE INTEREST OF JUSTICE, WE FEEL THAT THIS MATTER SHOULD BE REMANDED BACK TO THE FILE OF THE AO, BEFORE WHOM ASSESSEE WILL PROVIDE NECESSARY EVIDENCE FOR RENDERING OF SERVICE BY THE SVF TO THE ASSESSEE FOR WHICH THE PAYMENT HAS BEEN MADE. LD. AO WILL PROVIDE DUE AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE IN SUBSTANTIATING ITS CASE. ACCORDINGLY, THIS ISSUE IS REMANDED BACK TO THE FILE OF THE AO AND IS THUS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 10. IN SO FAR AS THE DISALLOWANCE U/S 14A OF RS. 31,432/- IS CONCERNED, THE BRIEF FACTS OF THE CASE ARE THAT, ASSESSEE HAS SHOWN DIVIDEND INCOME OF RS. 3,64,456/- IN THE FORM OF DIVIDEND. IN RESPONSE TO THE SHOW CAUSE NOTICE BY THE AO TO GIVE THE CALCULATION IN RESPECT OF DISALLOWANCE UNDER SECTION14A READ WITH RULE 8D, THE ASSESSEE SUBMITTED IT HAS NOT INCURRED ANY EXPENDITURE AND IT HAS APPORTIONED PART OF THE AMOUNT OF SALARY PAID TO ACCOUNT ASSISTANT, WHICH CAN AT BEST BE SAID TO BE ATTRIBUTABLE TOWARDS DEPOSITING THE CHEQUES OF DIVIDEND INCOME IN BANKS AND MAY BE TREATED AS EXPENDITURE TOWARDS EARNING OF TAX FREE INCOME. ACCORDINGLY, SUM OF RS. 16,800/- WAS OFFERED FOR DISALLOWANCE. HOWEVER, LD. AO COMPUTED THE DISALLOWANCE UNDER RULE 8D BY DISALLOWING THE INTEREST EXPENDITURE OF RS.96,598/- UNDER RULE 8D(2)(II); AND SUM OF RS. 31,432/-, ON ACCOUNT OF INDIRECT EXPENDITURE UNDER RULE 8D(2)(III). 7 11. BEFORE THE LD. CIT(A), THE ASSESSEE SUBMITTED THAT IN SO FAR AS DISALLOWANCE OF INTEREST EXPENDITURE IS CONCERNED, THE ASSESSEE HAD MADE THE INVESTMENT IN THE EARLIER YEARS OUT OF ITS OWN SURPLUS FUND AND MOREOVER THE INTEREST HAS BEEN PAID TOWARDS CASH CREDIT, TERM LOAN, VEHICLE LOAN AND TOOLING ADVANCE ETC., WHICH WERE DIRECTLY PERTAINING TO THE PRODUCTION AND SALES AND THE MAIN BUSINESS OF THE ASSESSEE AND NO PART OF INTEREST IS ATTRIBUTABLE FOR EARNING OF THE DIVIDEND INCOME. IN SO FAR AS DISALLOWANCE OF INDIRECT EXPENDITURE, ASSESSEE HAD SUO-MOTO DISALLOWED SUM OF RS.16,800/-, AND WITHOUT THEIR BEING ANY SATISFACTION BY THE AO, DISALLOWANCE UNDER RULE 8D CANNOT BE APPLIED MECHANICALLY. IN SO FAR AS DISALLOWANCE OF INTEREST IS CONCERNED, LD. CIT(A) AGREED WITH THE ASSESSEE ON THE PERUSAL OF THE MATERIAL ON RECORD THAT, FIRSTLY , INVESTMENTS WERE OLD AND MADE OUT OF SURPLUS FUND AND DIVIDEND HAS BEEN RECEIVED BY THE ASSESSEE WHICH WERE INVESTED IN THE MUTUAL FUND; AND SECONDLY , INTEREST CLAIMED IN THE PROFIT AND LOSS ACCOUNT WERE PURELY TOWARDS CASH CREDIT, TERM LOAN, CAR LOAN ETC., WHICH PERTAINED TO PRODUCTION AND SALES AND THE MAIN BUSINESS OF THE ASSESSEE. HOWEVER, IN SO FAR AS DISALLOWANCE OF RS. 31,432/- UNDER RULE 8D(2)(III) IS CONCERNED, THE LD. CIT(A) REJECTED THE ASSESSEES CONTENTION AND UPHELD THE SAME ON THE GROUND THAT, ASSESSEE COULD NOT ESTABLISH OR PRODUCE ANY EVIDENCE IN THE FORM OF LOG BOOK WHICH COULD ESTABLISH THE MAN HOUR UTILISED BY THE ACCOUNT ASSISTANT TOWARDS DEPOSITING THE CHEQUES OF DIVIDEND INCOME IN THE BANKS AND OTHER ADMINISTRATIVE AND INCIDENTAL EXPENSES ALSO OCCUR IN SUCH KIND OF INVESTMENTS. 12. AFTER HEARING BOTH THE PARTIES AND ON PERUSAL OF THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS, WE FIND THAT THE ONLY ISSUE BEFORE US IS, DISALLOWANCE OF RS. 31,432/-, OUT OF WHICH ASSESSEE HAS HAD SUO-MOTO DISALLOWED SUM OF RS. 16,800/- ON ACCOUNT OF SALARY PAID TO THE ACCOUNT ASSISTANT. AFTER HAVING GIVEN THE EXPLANATION BY 8 THE ASSESSEE OF THE AMOUNT WHICH CAN BE SAID TO ATTRIBUTABLE FOR EARNING OF DIVIDEND INCOME, LD. AO WITHOUT EXAMINING THE NATURE OF ACCOUNTS AND EXPENDITURE DEBITED IN THE P& L ACCOUNT AND RECORD HIS SATISFACTION HAS MECHANICALLY PROCEEDED TO APPLY RULE 8D WHICH IN OUR OPINION AND ALSO AS PER THE SETTLED PROPOSITION BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF HT MEDIA LIMITED VS. PR. CIT-IV NEW DELHI IN ITA NOS. 548/2015 AND 549/2015; AND BY THE HONBLE SUPREME COURT IN THE CASE OF M/S. GODREJ & BOYCE CO. LTD., WHEREIN IT HAS BEEN HELD THAT BEFORE INVOKING THE PROVISION OF RULE 8 D IT IS SINE-QUA-NON THAT AO HAS TO SATISFY HIMSELF HAVING REGARD TO THE ACCOUNTS MAINTAINED BY THE ASSESSEE AND THE NATURE OF EXPENDITURE DEBITED AND IF SUCH SATISFACTION HAS NOT BEEN RECORDED, THEN DISALLOWANCE UNDER RULE 8D CANNOT BE MADE. THUS, WITHOUT ANY SPECIFIC FINDING GIVEN BY THE AO, NO FURTHER DISALLOWANCE COULD HAVE BEEN MADE. IN SO FAR AS OBSERVATION OF THE LD. CIT(A) THAT ASSESSEE HAS NOT MAINTAINED ANY LOG BOOK OF THE MAN HOURS IS NOT VERY RELEVANT FACTOR, BECAUSE WHAT NEEDS TO BE SEEN IS, WHETHER THE SALARY PAID TO THE PERSONS ARE IN CONSONANCE WITH THE OVERALL BUSINESS CARRIED OUT BY THE ASSESSEE OR NOT. THUS, ADDITION MADE OVER AND ABOVE SUM OF RS. 16,800/- IS DIRECTED TO BE DELETED. IN THE RESULT, THIS ISSUE STANDS ALLOWED. 13 IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 6651/DEL/2014 ASSTT. YEAR 2011-12 14. IN THE REVENUES APPEAL IT IS NOTED THAT THE TAX EFFECT ON THE DISPUTED ISSUE INVOLVED IS MUCH LESS THAN RS. 20,00,000/-. NOW IN VIEW OF RECENT CIRCULAR OF CBDT NO. 3/2018 DATED 11TH JULY 2018, WHEREBY THE MONETARY LIMIT OF TAX EFFECT FOR NOT FILING APPEALS BEFORE 9 THE TRIBUNAL HAS BEEN REVISED TO RS. 20,00,000/-, THEREFORE, THE APPEAL OF THE REVENUE IS TREATED AS NOT MAINTAINABLE. ACCORDINGLY, WE DISMISS THE APPEAL FILED BY THE REVENUE AS NOT MAINTAINABLE AS THE TAX EFFECT INVOLVED IN THIS APPEAL IS LESS THAN RS. 20.00 LACS. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH SEPTEMBER 2018. SD/- SD/- (G.D. AGRAWAL) (AMIT SHUKLA) PRESIDENT JUDICIAL MEMBER DATED: 04/09/2018 VEENA COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI