AI Insights
The case involves Transporter Industry International Gmbh, a foreign company, appealing against the orders of the TPO and the DRP concerning transfer pricing adjustments for the assessment year 2016-17. The primary legal contention was the TPO's passing of the transfer pricing order beyond the statutory limitation period, which the assessee argued rendered the order invalid. Additionally, the assessee contested the inclusion of certain reimbursements as 'Fees for Technical Services', arguing they were mere reimbursements without any profit element. The Tribunal examined the procedural adherence to statutory timelines and the substantive nature of the transactions in question.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 299551 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
1 year(s) 11 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-05-2023
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
I
Next Hearing Date
29-03-2023
Assessment Year
2016-2017
Appeal Filed On
22-06-2021
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SHRI ABY T. VARKEY, JM AND SHRI S. RIFAUR RAHMAN, AM आयकर अपील सं/ I.T.A. No.1240/Mum/2021 (निर्धारण वर्ा / Assessment Years: 2016-17) Transporter Industry International Gmbh. Kalisrabe 57, 74076 Heilbronn, Germany, Pin- 999999. बिधम/ Vs. DCIT, Int Tax Circle- 4(1)(2) Air India Building, Nariman Point, Mumbai- 400021. स्थधयी लेखध सं./जीआइआर सं./PAN/GIR No. : AAFCT0013Q (अपीलार्थी /Appellant) .. (प्रत्यर्थी / Respondent) सुनवाई की तारीख / Date of Hearing: 30/03/2023 घोषणा की तारीख /Date of Pronouncement: 31/05/2023 आदेश / O R D E R PER ABY T. VARKEY, JM: This is an appeal preferred by the assessee company against the order of the AO/DCIT, Circle-4(1)(2), Mumbai r.w.s 144C(13) of the Income Tax Act, 1961 (hereinafter “the Act”) dated 25.04.2021 pursuant to the direction of the Ld. Dispute Resolution Panel (DRP) dated 18.03.2021. 2. Ground no. 1 is general in nature, so dismissed. 3. Ground no. 3 is a legal issue which has been raised by the assessee challenging the action of the Transfer Pricing Officer (TPO) to have passed the Transfer Pricing (TP) order, after the due date prescribed in section 92(3A) r.w.s 153 of the Act. Therefore, the assessee is challenging the action of the TPO in passing Transfer Pricing Order after limitation period by citing the decision of the Hon’ble Madras High Court (DB) in the case of M/s. Saint Gobain Assessee by: Shri Nikil Tiwari Revenue by: Shri Soumedu Kumar Dash (Sr. AR) ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 2 India (P) Ltd. (444 ITR 636) (Mad) and the decision in the case of M/s. Pfizer Healthcare India Pvt. Ltd. (2021) (433 ITR 28) (Mad). 4. First of all we will deal with the legal issue which has been raised by the assessee company challenging the action of the TPO to have passed the TP order, after the limitation time prescribed in section 92(3A) r.w.s. 153 of the Act. Drawing our attention to the following chart placed below, the Ld. AR of the assessee Shri Nikhil Tiwari submitted that the relevant assessment year under consideration is AY. 2016-17 and the period of limitation Prescribed for making an order of assessment as per section 153 of the Act was “twenty one (21) months from the end of the assessment year”. And the said period gets extended by a period of twelve (12) months in case AO makes reference to the TPO u/s 92CA of the Act. And since in this case, the AO has made reference to the TPO, the assessment should be completed on or before the extended date (i.e. after taking into consideration the extended period also of twelve (12) months which in this case would be 31.12.2019). Further, according to Ld. AR, as per section 92CA(3A) of the Act, the TPO has to pass an order under sub- section 3 of Section 92CA of the Act at any time before sixty (60) days’s prior to the date on which the period of limitation as referred to in section 153 of the Act i.e sixty (60) days prior to 31.12.2019; and since the TPO has to pass the order on a date prior to date on which period of limitation expires that date would by excluding the date of 31.12.2019 i.e. 30.12.2019; so accordingly TP order need to be passed on or before 31.10.2019. However, according to Ld. AR, since in this ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 3 case, the TP order has been passed (electronically signed) on 01.11.2019 [though in the caption of TP order it is dated 31.10.2019] it is barred by limitation being beyond the date 31.10.2019, and so bad in law. Per contra the Ld. DR pointed out that the TP order has been passed on 31.10.2019 [as seen in the caption of TP order], so it has been passed well within the limitation period and so order of TPO is valid. In his re-joinder, the Ld. AR on this crucial point drew our attention to the foot note of TP order wherein it is clarified that if the order is digitally signed order, then the date of digital signature must be taken as date of document, and in the instant case it can be seen at the bottom of the last page of T P order that it has been digitally signed on Nov 01, 2019 “Signed SAMPADA RAO MAHALAKSHMI MAKE Date: Friday, Nov 01, 2019, 12:25AM”. So we find that the TP order in this case has been passed on 01.11.2019 and not on 31.10.2019 as shown in the caption of the T.P. order. The chart which the Ld. AR referred as observed by us (supra) gives the relevant dates/date of events which would give a bird’s eye view of the aforesaid facts on the legal issue raised before us. Sr. No. Particular Assessee A Assessment Year 2016-17 B Period of limitation for making an order of assessment as per Section 153 of the Act 21 months from the end of assessment year (31.12.2018) C Extension of period of limitation in case reference is made under section 92CA of the Act 12 months (31.12.2019) D Proceeding for assessment should be completed on/before this date 31.12.2019 E A date prior to the date on which period of limitation expires 30.12.2019 F Sixty day period expires on 01.11.2019 G Transfer Pricing Officer’s order to be passed any time on/before this date 31.10.2019 H Date on which Transfer Pricing Officer’s 01.11.2019 ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 4 order is passed Notes 1. Calculation of break up of sixty days December: 30 days (excluding 31.12.2019) November: 30 days 5. In order to support the legal issue against the passing of TPO’s order being hit by limitation, the Ld. AR refers to the decision laid by the Hon’ble Madras High Court in the case of M/s. Pfizer Healthcare India Pvt. Ltd. (supra) which we note was also for AY. 2016-17 (i.e. relevant assessment year in this present case also) and it is noted to squarely cover the issue raised by him. The Hon’ble High Court decision; which reads as under: - “4.1 The writ petitioner is a private limited company, engaged in the business of manufacturing generic drugs, exporting the same to group entities and contract research and development services for pharmaceutical products. For the assessment year 2016-2017, they filed their return of income on 30-11-2016. On receipt of the same, a notice dated 18-7-2017 was issued to the writ petitioner under section 143(2) of the Act. Subsequently, a reference was made by the second appellant to the first appellant for determining the arm's length price of the international transactions reported in Form No. 3CEB. On 10-12-2018, a notice under section 92CA(2) of the Act was issued by the first appellant calling upon the writ petitioner to furnish certain particulars. The first appellant, thereafter, passed the order under section 92CA(3) of the Act on 1-11-2019, which according to the writ petitioner, was passed, after the time limit prescribed for passing such order until 31-10-2019. Therefore, the order dated 1-11-2019 passed by the first appellant is beyond the period of limitation as stipulated under section 92CA(3A) of the Act.” 6. According to Ld. AR, the aforesaid order of the Hon’ble High Court has been affirmed by the Hon’ble Madras High Court (DB) decision in the case of M/s. Saint Gobain India (P) Ltd. (supra) which reads as under: - “28. The word "date" in section 92CA(3A) would indicate 31-12-2019. But the preceding words "prior to" would indicate that for the purpose of calculating the 60 days, 31-12-2019 must be excluded. The usage of the word "prior" is not without significance. It is not open to this court to just consider the word "to" by ignoring "prior". The word "prior" in the present context, not only denotes the flow of direction, but also actual date from which the period of 60 days is to be calculated. It is settled law that while interpreting a statute, it is not for the courts to treat any word(s) as redundant or superfluous and ignore the same. In this connection, it is pertinent to ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 5 note the judgment of the Apex Court in Grasim Industries Ltd. v. Collector of Customs 2002 taxmann.com 1803, wherein, it was held as follows : "10. No words or expressions used in any statute can be said to be redundant or superfluous. In matters of interpretation one should not concentrate too much on one word and pay too little attention to other words. No provision in the statute and no word in any section can be construed in isolation. Every provision and every word must be looked at generally and in the context in which it is used. It is said that every statute is an edict of the legislature. The elementary principle of interpreting any word while considering a statute is to gather the mens or sententia legis of the legislature. Where the words are clear and there is no obscurity, and there is no ambiguity and the intention of the legislature is clearly conveyed, there is no scope for the court to take upon itself the task of amending or alternating (sic altering) the statutory provisions. Wherever the language is clear the intention of the legislature is to be gathered from the language used. While doing so, what has been said in the statute as also what has not been said has to be noted. The construction which requires for its support addition or substitution of words or which results in rejection of words has to be avoided. As stated by the Privy Council in Crawford v. Spooner [(1846) 6 Moore PC 1 : 4 MIA 179] "we cannot aid the legislature's defective phrasing of an Act, we cannot add or mend and, by construction make up deficiencies which are left there". In case of an ordinary word there should be no attempt to substitute or paraphrase of general application. Attention should be confined to what is necessary for deciding the particular case. This principle is too well settled and reference to a few decisions of this Court would suffice. (See : Gwalior Rayons Silk Mfg. (Wvg.) Co. Ltd. v. Custodian of Vested Forests [1990 Supp SCC 785 : AIR 1990 SC 1747] , Union of India v. Deoki Nandan Aggarwal [1992 Supp (1) SCC 323 : 1992 SCC (L&S) 248 : (1992) 19 ATC 219 : AIR 1992 SC 96] , Institute of Chartered Accountants of India v. Price Waterhouse [(1997) 6 SCC 312] and Harbhajan Singh v. Press Council of India [(2002) 3 SCC 722 : JT (2002) 3 SC 21] .)" 29. The language employed is simple. 31-12-2019 is the last date for the assessing officer to pass his order under section 153. The TPO has to pass order before 60 days prior to the last date. The 60 days is to be calculated excluding the last date because of the use of the words "prior to" and the TPO has to pass order before the 60th day. In the present case, the word "before" used before "60 days" would indicate that an order has to be passed before 1-11-2019 i.e on or before 31-10- 2019 as rightly held by the Learned Judge. 30. Even considering for the purpose of alternate interpretation, the scope of section 9 of the General Clauses Act, it is to be noted that an inverted calculation of the period of limitation takes place here. If the last date is taken to be the first date from which the period of 60 days is to be calculated, reading down the provision with the use of the word "from", which denotes the starting point or period of direction in general parlance, would mean that 60 days "from the last date". Even going by section 9 of the General Clauses Act, when the word "from" is used, then, that date is to be excluded, implying here that 31-12-2019 must be excluded. After excluding 31- ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 6 12-2019, if the period of 60 days is calculated, the 60th day would fall on 1-11-2019 and the TPO must have passed the order on or before 31-10-2019 as orders are to be passed before the 60th day. Therefore, either way the contention of the Revenue is a fallacy and has no legs to stand. 7. Therefore, we find that the decision of the Hon’ble Madras High Court in the case of M/s. Saint Gobain India (P) Ltd. (supra) is squarely applicable in the case because in that case also the Hon’ble Division Bench of the High Court was dealing with the case of the assessee for AY. 2016-17; and assessee’s case also is that of the AY. 2016-17; and therefore the issue and facts being similar, we hold that TPO ought to have passed the order on or before on 31.10.2019, And since he has passed the order on 01.11.2019, the order of the TPO is bad in law, since it has been passed beyond the limitation period prescribed by the Act and so the TP order is barred by limitation. And so is non-est in the eyes of law. 8. Now coming to the merits of the ‘Corporate Issues’ raised by the assessee, we note that the assessee is an ‘eligible assessee’ as defined u/s 144C of the Act, therefore the same needs to be adjudicated and it was fairly pointed out by the Ld. AR that the decision in M/s. Atos India Pvt. Ltd. does not apply because assessee is a ‘Foreign Company’. 9. This first issue is against the action of the AO making an addition of 15% Mark-up on reimbursement of expenses received by the assessee/Foreign Company for expenses relating to registration of Patents and Trademark for the Indian Subsidiary. The facts as well as the decision as noted by the DRP in this regard is as under: - ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 7 “11.3.1 Vide this ground applicant has agitated against addition of Rs. 34,61,520/- claimed by the applicant as reimbursement for registration expenses of patents and trademarks. In para 6 of the Draft Assessment Order the Ld. AO had mentioned that the assessee company had received Rs. 34,61,520 from TII India Pvt Ltd. as registration expenses for patent and trademarks. During the course of assessment proceedings the Ld. AO called the necessary details and held that the payments was in lieu of use of patents and trademarks. Therefore, same is taxable as royalty u/s 9(1)(vi) of the Act. During course of proceedings before DRP the applicant submitted that the payments were not received in lieu of use of trademarks for patents. Rather these were legal and registration charges incurred by the Appellant for registration of patents and trademarks in Germany without any element of service being provided by the appellant to TII India. During the course of proceedings before DRP, the appellant submitted the debit notes raised by the appellant on TII India. The debit notes were raised on cost basis by the appellant. Along with the debit notes as already submitted before the learned AO, the appellant has filed herewith the invoices copies of the registration related. Necessary evidences regarding nature of expenses incurred were submitted by the applicant as additional evidences which were forwarded to the AO for necessary verifications. 11.3.2 Since consideration of additional evidences was necessary for ascertain ng the true nature of expenses. Therefore, some were admitted during remand proceedings the Ld. AO had reiterated the same arguments. We have considered the written submissions of the applicant, evidences produced and remand report of the AO. From perusal of the evidences ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 8 furnished it is evident that the amount under consideration was not received for use of trademarks for patent. Rather these were the payments made to authorities responsible for registration of trademarks for patents. Apart from it, if also consists of legal charges said for the registration of patents and trademarks. Therefore, it can't be treated as royalty. Hence, AO is directed not to treat the receipt as royalty. 11.3.3 We have also considered the fact that services of assessee company and its staff were utilized for the business of its AE. Applicant has not charged any markup on facilitation of registration of patents and trademark. Therefore, we direct the AO to charge 15% markup for services provided to its AE by the applicant in this regard.” 10. Pursuant thereto, the AO has made an adjustment of Rs.5,19,228/- (15% of Rs.34,61,520/-). Aggrieved by the aforesaid action of the AO, the assessee is before us. 11. Assailing the action of the AO, giving effect to the Ld. DRP order, the Ld. AR submitted that the assessee had shown in its Form no. 3CEB (report furnished u/s 92E of the Act relating to the International transaction and specified domestic transaction) wherein at item no. 19, the description of the transaction i.e. registration expenses for Patent and Trademark is reflected i.e. the amount paid to the assessee Foreign Company from Indian Subsidiary M/s. TII India Pvt. Ltd. to the tune of Rs.34,61,520/-. According to the Ld. AR, the AO in the present case has referred the International Transaction to the TPO for determination of Arm’s Length Price (ALP) with reference to ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 9 the International Transaction reported in Form 3CEB filed by the assessee which has been acknowledged by the TPO at Paragraph No. one (1) of his order. According to the Ld. AR, despite the reference made by AO, the TPO has not made any adjustment on this transaction with Associate Enterprise (AE) (M/s. TII India) which decision of the TPO was binding on the AO. And therefore, the adjustment made by him (AO) was bad in law. Further, according to the Ld. AR, since the DRP has held the action of the AO treating the amount paid by M/s. TII India Pvt Ltd. to the assessee Foreign Company as ‘Royality’ as erroneous, but still the DRP’s action of directing the AO to charge 15% mark-up for services providing to its AE by the assessee Foreign Company is erroneous and cited the decision of the jurisdictional High Court in the case of M/s. Lever India Exports Ltd. (292 CTR 393) (Bom) wherein it was held that Adhoc determination of the ALP by the TPO dehors section 92CA of the Act cannot be sustained. And further the Hon’ble High Court clarified that the TPO was bound to determine to ALP of an International Transaction in terms of Chapter – X read with rule 10A to 10E of the Income Tax Rules, 1962 (hereinafter “the Rules”). And in that case, the Hon’ble High Court held that since the TPO has not fixed the mark up of the International transaction by adopting appropriate method prescribed by any Act/Rules, the Adhoc determination of the ALP was bad in law and held as under: - “7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 10 advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales. Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO's determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. The jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an International Transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules. The determination of the ALP by the respondent assessee of its advertisement expenses has not been disputed on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT (A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained.” ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 11 12. And the Ld. AR also drew our attention to page no. 564 of PB wherein the copy of the order and the decision of this Tribunal in M/s Kodak India Pvt. Ltd. (155 TTJ 697) is found placed and the Tribunal has held as under: - “64. On the other legal issue that whether the TPO was correct to employ an alien method for arriving at the ALP. Once again, relevant section is very clear, which reads, "The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe." 65. It is important to take note of the word "shall" used in the section. No doubt that under the General Clauses Act, shall can be used as may or vice versa, but the Hon'ble Supreme Court of India in the case of CIT v. Anjum M.H. Ghaswala, [2001] 252 ITR 1/119 Taxman 352, sitting in Constitution Bench explained the exact premise of the word "shall". The case was pertaining to the levy of interest under section 234B on Chapter XIXA of the Income-tax Act, i.e. Settlement Commission. In the decision, the Hon'ble Supreme Court held, 'Nextly, the Commission has elaborately discussed the object of introduction of Chapter XIX-A in the Act, the history behind the introduction and schematic rationalisation of the provisions of Chapter XIX-A brought about through Finance Act, 1987 to hold that in exercising its power under Chapter XIX-A it has almost an unbridled power to arrive at a settlement. This exercise of purposive interpretation by looking into the object ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 12 and scheme of the Act and legislative intendment would arise, in our opinion, if the language of the Statute is either ambiguous or conflicting or gives a meaning leading to absurdity. We do not find any such problem in the provisions of the Act to which we have already referred to Sections 234A, 234B and 234C in clear terms impose a mandate to collect interest at the rates stipulated therein. The expression "shall" used in the said Section cannot by any stretch of imagination be construed as "may". There are sufficient indications in the scheme of the Act to show that the expression "shall" used in Sections 234A, 234B and 234C is used by the Legislature deliberately and it has not left any scope for interpreting the said expression as "may".' 66. By the use of the word "shall", for computing the ALP in one of the following methods, the Legislature has cast an embargo that no seventh method could be adopted by the TPO for computing the ALP. Even the Special Bench of the ITAT in the case of LG Electronics India (P.) Ltd., (supra), in paras 22.10 and 22.11, pages 128 and 129, observes, "As regards the contention that methods are tools for determining the ALP, we find that there is dispute that there is no dispute the main purpose of Chapter X is to determine the ALP of an international transaction, but such determination can be done only by way of the methods specified by the statute. When the Legislature has specifically enshrined a provision under section 92C requiring the computation of ALP by any of the prescribed methods, it does not fall in the realm of the TPO or for that matter any other authority to breach such mandate and apply or direct to apply any other method. Going by the dictate of the provision as subsists under sub-section (1) of ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 13 section 92C, there can be absolutely no doubt on adoption of any single method of those set out in section. Rule 10B has specified a set procedure to be followed for determining the ALP distinctly under the five methods. It is equally not permissible to invent a new procedure and try to fit such procedure within any of the existing procedures prescribed as per these methods. No one is authorized to add one ore more new steps in the prescribed procedure or to substitute any other mechanism with the prescribed under the rule. It is neither possible to invent a method nor to substitute a new methodology in place of the one prescribed in the rule." 67. We cannot accept the arguments of the DR that the word any has been used in section 92C(1), which could give leeway to the TPO to ascribe to a non-specific method. Word any, is founded on the suffix, "of the following methods being the most appropriate method". Therefore, the ambit of the word any in section 92C(1) has been restricted within the precinct of the five specific methods. This gathers strength from the fact that even in the Rules, relevant Rule 10B provides with the similar wordings. 68. Taking into account the clear and unambiguous wordings of the provisions of the Income-tax Act and Rules and respectfully following the decision of the Special Bench in the case of LG Electronics India (P.) Ltd. (supra), we hold that even on this legal issue, the assessee succeeds.” 13. It was brought to our notice that the aforesaid decision of the Tribunal on the aforesaid issue was not challenged by the Revenue before the Hon’ble Bombay High Court which fact was noticed by the Hon’ble High Court in the appeal filed by the revenue i.e. CIT Vs. ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 14 Kodak India Pvt. Ltd (supra) wherein at para no. 10, it was observed by the Hon’ble High Court as under: - “10. We must also record the fact that the ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under Section 92C of the Act. The method to determine the ALP adopted was not one of the prescribed methods for computing the ALP. It was not even any method prescribed by the Board. At the relevant time, i.e. for A.Y. 2008-09 Section 92C of the Act did not provide for other method as provided in Section 92C(1)(f) of the Act. The impugned order of the Tribunal holds that the method adopted by the Revenue to determine the ALP was alien to the methods prescribed under Section 92C of the Act. In the above circumstances, the Tribunal declined to restore the issue to the Assessing Officer for re-determining the ALP by adopting one of the methods as listed out in Section 92C of the Act. This finding of the Tribunal has also not been challenged by the Revenue.” 14. In the light of the aforesaid judicial precedents, it was contended by Ld. AR that the Ld. DRP direction to the AO to mark-up 15% for services provided by the assessee to its AE/M/s TII India Pvt. Ltd. is erroneous, since this issue of International transaction was referred to TPO to determine the Arm’s Length Price (ALP) which been accepted by the TPO; and therefore, no adjustment could have been ordered by the Ld. DRP that also on Adhoc basis after having found that AO’s action of treating it as Royalty was incorrect. According to us, the Adhoc mark-up directed by Ld. DRP cannot be accepted since the Ld. DRP did not follow any method prescribed u/s 92C of the Act for determining the ALP of International Transaction between two Associated Enterprises u/s 92B of the Act. And it is trite that the ALP ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 15 has to be determined as per section 92C of the Act. And further for any comparability analysis, the Ld. DRP ought to have followed the mandate under Rule 10B(1)(a) of the Rules, i.e. one of the method prescribed u/s 92C of the Act needs to be used while determining the ALP as held by the Hon’ble Bombay High Court in the case of Kodak India Pvt. Ltd (supra). Therefore, the action of Ld. DRP directing mark-up of 15% without adhering to the methods prescribed u/s 92C of the Act, cannot be countenanced since it would breach the ‘Rule of law’ and makes the order arbitrary. Therefore, this ground of appeal of the assessee is allowed and the addition made by AO pursuant to such a direction of Ld. DRP of Rs.5,19,228/- is directed to be deleted. 15. Ground no. 10 is against the action of the AO to have made an addition of Rs.1,81,61,306/- as ‘Fees for Technical Services’ ignoring the assessee’s contention that it was purely reimbursement received for Construction and Management Expenses. 16. On this issue it is noted that during the AY 2015-16 the assessee received reimbursement of Construction and Management Expenses of Rs.1,81.61,306 from M/s. TII India Pvt. Ltd. And when confronted by AO, the assessee submitted that it had incurred the said expenses on behalf of M/s. TII India Pvt. Ltd during the earlier year in order to set up the subsidiary company i.e. M/s. TII India Pvt. Ltd. because M/s. TII India Pvt. Ltd. did not had sufficient employees, admin facilities etc, to assist the set up process (construction management expenses) and since the assessee as its parent company had acted as a pure facilitator to appoint certain third party vendors to facilitate the ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 16 same and the invoices of such third-party vendors were processed initially by the assessee company on behalf of M/s. TII India Pvt. Ltd. it is only recovering the same from M/s. TII India Pvt. Ltd. by raising debit note on cost-to-cost basis without any mark up (i.e. expenses reimbursement which included incorporation expenses related to travelling cost and charges of third party vendors engaged for set up related activities). Thus according to Ld. AR, the payment received by M/s. TII GmbH (assessee) was pure reimbursement of the expenses for set up of subsidiary, therefore it was contended that there is no service element involved and hence, are not in nature of fees for Technical Services. 17. Before the Ld. DRP, the assessee submitted additional evidences viz the backup invoices along with description of services and the Debit notes raised by the assessee on M/s. TII India which was on cost to basis which according to Ld. AR shows that the charges are without any element of profit and also without any service element. However, the AO in the remand report (refer page 251 & 252 of the PB) after considering the details filed by the assessee, held that debit notes submitted by the appellant did not have the details regarding nature of charges reimbursed by the assessee. (i.e. according to AO the third party invoices submitted by the assessee company did not have details about nature of expenses incurred). Accordingly, the AO held that the assessee could not establish that the charges claimed by appellant were pure reimbursement of expenses and hence, held it to be in the ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 17 nature of managerial related expenses and treated the same as fees for technical services. Thereafter, the Ld. DRP held as follows: - "Even during proceedings before DRP applicant had failed to prove that true nature of expenses incurred it relevant to the business of the assessee. In the written submission applicant had relied upon certain judgements of Hon'ble courts where it had been held that purely reimbursement are not revenue in nature and can't be taxed under provision of the law. We have considered the decisions cited by the applicant on facts applicant had failed to prove that the expenses incurred were purely in the nature of reimbursement. Therefore, the case laws cited by the applicant have we have no reason to interfere with the findings given by the AO in the draft assessment order on the objection raised by the applicant." 18. Assailing the action of Ld. DRP, the Ld. AR submitted that the Ld. DRP has not duly considered the detailed documentation filed by the assessee to establish the nature of expenditure and drew our attention to page 166 to 265 of factual paper book. The Ld. AR submitted that a perusal of the same would clearly show that the assessee has recovered the expenses only on cost to cost basis without any profit element and also that appellant has not rendered any services. The Ld. AR reiterated that the assessee had only incurred expenditure for purpose of setup of M/s. TII in India and the expenses were reimbursed by TII India to assessee at cost to cost basis without any profit element. And since, there was no services provided by the assessee to TII India for which any charges were to be recovered from TII, therefore, reimbursement of expenses received on cost to cost ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 18 basis ought not to have been taxed in India as fees for technical services. The Ld. AR also brought to our notice that the transaction of reimbursement for construction and management expenses of INR 1,81,61,306 was included in the form 3CEB filed for the corresponding year. (Copy of Form 3CEB which and is enclosed as Page 682 to 689) and the fact that the same was accepted by the TPO at arm length as reimbursement of expenses. In this regard, assessee placed reliance on the decision of the Hon'ble Supreme Court in case of AP Moller Maersk AS 78 taxmann.com 287 (SC). (Refer page 469 to 476 of legal PB) wherein the Hon’ble Supreme Court held that that once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax as under: - “8. Aggrieved by the order passed by the ITAT, the department filed ITA No. 1306 of 2013 before the High Court of Bombay. The High Court, by judgment DIT (IT) v. A.P.Moller Maersk [2015] 374 ITR 497/232 Taxman 564/59 taxmann.com 105, has dismissed the Revenue's appeal holding that the ITAT has correctly observed that utilisation of the Maersk Net Communication System was an automated software based communication system which did not require the assessee to render any technical services. It was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business. The High Court has further held that the principles involved in the decision of DIT (International Taxation) v. Safmarine Container Lines [2014] 367 ITR 209/225 Taxman 299/48 taxmann.com 238 (Bom) will also govern the present case and that the Maersk Net used by the agents of the assessee ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 19 entailed certain costs reimbursement. It was part of the shipping business and could not be captured under any other provisions of the Income Tax Act except under DTAA It is also pertinent to mention that while arriving at the aforesaid decision, the High Court has specifically observed that there is no finding by the AO or the Commissioner that there is only profit element involved in the payments received by the assessee from its agents. 9. It is in the aforesaid circumstances the issue arose as to whether any technical services were rendered by the assessee to its aforesaid three agents and the payment made by the agents was in the form of fee for the said technical services OR the payment was nothing but reimbursement of the cost by the three agents to the assessee for using the Maersk Net 10. Aforesaid are the findings of facts. It is clearly held that no technical services are provided by the assessee to the agents. Once these are accepted by no stretch of imagination, payments made by the agents can be treated as fee for technical service. It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. It is re-emphasised that neither the AO nor the CIT (A) has stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Record shows that the assessee had given the calculations of the total costs and pro rata division thereof among the agents for reimbursement. Not only that, the assessee have even submitted before the Transfer Pricing Officer that these payments were reimbursement in the hands of the assessee and the reimbursement was accepted as such at arm's length. Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax.” ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 20 19. The Ld. AR for assessee also placed reliance on the following judicial precedents: Industrial Engineering Projects (P) Ltd (202 ITR 1014) Delhi High Court (refer page 477 of the Paper book ) Spencer Stuart International B.V )146 taxmann.com 235( )Mumbai Tribunal( )refer page 480 of the Paper book( ITP Publishing India Pvt Ltd )ITA No.4407/M/2019( dated 13 January 2023 )Mumbai Tribunal( )refer page 491 of the paper book( National Health & Education Society (412 ITR 404) (Bom HC) (refer page 502 of the paper book) 20. In light of the above and after considering the facts and documents submitted by the assessee, it was submitted by Ld. AR that the entire addition of INR 1,81,61,306 as income of the assessee ought to be deleted. 21. We have heard both the parties and perused the records. We note that the assessee (foreign company) has claimed Rs.1,81,61,306/- as reimbursement from its subsidiary Indian company M/s. TII India on the ground that these were expenses incurred on behalf of the Indian subsidiary for setting up the company in earlier years. Even though, the Ld. DRP has called for the remand report twice, the AO’s struck to the stands that the assessee has not been able to prove the nature of the expenses as reimbursement for the purpose of setting up of the subsidiary company (M/s TII India). According to the AO, the third party invoices submitted by the assessee company did not have the detail about the nature of expenses incurred. And therefore, he held it to be in the nature of managerial/consultancy and therefore treated ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 21 the same as fees for technical services. The Ld. DRP also after going through the additional evidences and remand report was of the same view and upheld the action of the AO. Before us, the assessee has brought to our notice that the assessee during the proceedings before the Ld. DRP has filed the following documents which is given in the following chart below: - Sr.No Third Party Details Invoice Amount in Euro reimbursed Page No. German Copy English Copy B1 Construction management invoice -debit note 1 SKP India 5915 166 169 SKP India 2325 170 171-172 F. Ladenburger 3500 173 174 Semco Tec 2824 176 177-178 SKP India 15303 179 180-181 EIM GmbH 35000 182 183 MPS 3445 184 185 MPS 20000 188 189 Sub Total- INR 64,02,934(Ex Rate 72.50 INR/Euro) 88315 264 B2 Construction management invoice -debit note 2 F. Ladenburger 7000 190 192 F. Ladenburger 7000 193 195 MPS 16840 196 205 MPS 19213 206 210 MPS 16258 211 214 MPS 16809 215 218 MPS 15442 219 222 MPS 15079 223 224 MPS 14609 225 228 MPS 15558 229 232 MPS 10102 233 238 MPS 8267 239 240 Sub Total (INR 1,17,58,372 (Ex Rate 72.50 INR/Euro) 1,62,181 265 Total B1 +B2 (INR 1,81,61,306) 2,50,497/- 22. After going through the documents submitted before us, we note that other than the expenses of Euro 5,900/- raised by cross border consultancy which has given the nature of expenses as “being advance towards statutory expenses to be incurred for incorporation of subsidiary company of assessee dated 21.06.2013’ a perusal of the other invoices, it is not discernable as to whether the expenses pertains ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 22 to the subsidiary company or not. And without ascertaining the nature of the expenses, it is not possible to determine whether the claim of assessee that it is only reimbursement is possible. However, since the Ld. AR pleaded that provided an opportunity is given to the assessee, it would be able to bring in evidence to show that the expenses have been made for the purpose of setting up of the business of the subsidiary company. Therefore, we set aside this issue back to the file of the AO for deciding this issue afresh after giving an opportunity to the assessee. This issue is allowed for statistical purposes. 23. Since the legal issue has been answered in favour of the assessee and against the revenue ground no. 2, 4 to 8 of the assessee has become infructuous and academic. Accordingly, it is not adjudicated. 24. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on this 31/05/2022. Sd/- Sd/- (S. RIFAUR RAHMAN) (ABY T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER मुंबई Mumbai; दिनांक Dated : 31/05/2022. Vijay Pal Singh, (Sr. PS) ITA No.1240/Mum/2021 A.Y. 2016-17 Transporter Industry International 23 आदेश की प्रनिनलनि अग्रेनर्ि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. दवभागीय प्रदतदनदि, आयकर अपीलीय अदिकरण, मुंबई / DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. आदेशधिुसधर/ BY ORDER, सत्यादपत प्रदत //True Copy// उि/सहधयक िंजीकधर /(Dy./Asstt. Registrar) आयकर अिीलीय अनर्करण, मुंबई / ITAT, Mumbai
Other Referred Cases
M/s. Saint Gobain India (P) Ltd., M/s. Pfizer Healthcare India Pvt. Ltd., M/s. Kodak India Pvt. Ltd.
Laws Referred To
Income Tax Act, 1961
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