M/s. Taegu Tec India Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1337/BANG/2010

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5327 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 21-06-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 29-11-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Additional evidence
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI. VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI. INTURI RAMA RAO, ACCOUNTANT MEMBER IT(TP)A NO.1337/BANG/2010 ASSESSMENT YEAR : 2006-07 M/S. TAEGUTEC INDIA PVT. LTD., 119 & 120, IV PHASE, BOMMASANDRA INDUSTRIAL AREA, BENGALURU-560099. PAN : AAACT 9923 C VS. THE DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAX PAYER UNIT (LTU), JSS TOWERS, 100 FEET RING ROAD, BANASHANKARI 3 RD STAGE, BENGALURU 560 085. APPELLANT RESPONDENT ASSESSEE BY : SHRI. DHANESH BAFNA, CA REVENUE BY : MS. NEERA MALHOTRA, CIT(DR) DATE OF HEARING : 30.03.2017 DATE OF PRONOUNCEMENT : 24.05.2017 O R D E R PER INTURI RAMA RAO, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY ASSESSEE COMPANY DIRECTE D AGAINST THE ASSESSMENT ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, LARGE TAX PAYERS UNIT, BANGALORE UNDER SECTION 143 R.W.S. 144(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2 006-07. ITA NO. 1337/BANG/2010 PAGE 2 OF 11 2. THE APPELLANT RAISED THE FOLLOWING GROUNDS OF AP PEAL: 3. BRIEFLY THE FACTS OF THE CASE ARE THE APPELLANT IS A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING, TRADING AND MARKETING. THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07 WAS FILED ON 27.11.2006, DECLARING INCOME OF RS.31,61,66,533/-. THE SAID RE TURN OF INCOME WAS PROCESSED UNDER THE PROVISIONS OF SECTION 143(1) AN D THEN THE CASE WAS ITA NO. 1337/BANG/2010 PAGE 3 OF 11 TAKEN UP FOR SCRUTINY ASSESSMENT BY ISSUING NOTICE UNDER SECTION 143(2). 4. DURING THE COURSE OF THE SCRUTINY PROCEEDINGS, T HE ASSESSING OFFICER NOTICED THAT THE APPELLANT HAS REPORTED THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AE IN FORM 3CEB : 5. THE APPELLANT ALSO SUBMITTED THE TRANSFER PRICIN G STUDY REPORT ADOPTING TNMM AT ENTITY LEVEL AND SOUGHT TO JUSTIFY THAT THE TRANSACTIONS ARE AT ARMS LENGTH. THE LEARNED AO R EFERRED THE MATTER TO THE TPO FOR THE PURPOSE OF BENCH MARKING THE ABOVE INTERNATIONAL TRANSACTIONS. THE TPO ACCEPTED THAT ALL OTHER TRAN SACTIONS EXPECT THE TRANSACTION OF MANAGEMENT FEE ARE AT ARMS LENGTH. AS REGARDS THE PAYMENT OF MANAGEMENT FEE IS CONCERNED, IT WAS CONS IDERED AS A SEPARATE CLASS OF TRANSACTION BY THE TPO. THE SUBM ISSION OF THE ITA NO. 1337/BANG/2010 PAGE 4 OF 11 APPELLANT THAT THE TRANSACTION IS CLOSELY CONNECTED WITH THE MANUFACTURING AND SAME SHOULD BE AGGREGATED AND TNM M SHOULD BE APPLIED AT ENTITY LEVEL WAS NOT ACCEPTED BY THE TPO . THE TPO PROCEEDED TO BENCH MARK THIS TRANSACTION SEPARATELY . THE TPO OBSERVED THAT THE APPELLANT PAID THE MANAGEMENT FE E ONLY FROM THE ASSESSMENT YEAR 2005-06 AND NO SUCH FEE WAS PAID IN THE FINANCIAL YEAR 2004-05. CONSIDERING THE FACT THAT WHEN NO MANAGEM ENT FEE WAS PAID IN THE YEAR 2004-05, THE PROFIT IN TERMS OF THE PER CENTAGE OF SALES WAS 48% IN THE FINANCIAL YEAR 2004-05 AND WHEREAS IN TH E FINANCIAL YEAR 2005-06, AFTER THE PAYMENT OF THE MANAGEMENT FEE, T HE PROFIT IN TERMS OF PERCENTAGE OF SALES WAS 35.95%. BASED ON THESE FACTUAL INFORMATION, THE TPO HAS INFERRED THAT THE ABOVE PA YMENT HAD NOT RESULTED IN ANY TANGIBLE BENEFIT TO THE APPELLANT C OMPANY AND DID NOT PROVIDE ANY ECONOMIC VALUE TO THE APPELLANT. HE FU RTHER HELD THAT THE APPELLANT HAS FAILED TO FURNISH ANY EVIDENCE REGARD ING ACTUAL SERVICES RECEIVED FROM ASSOCIATE ENTERPRISES AND THEREFORE H ELD THAT THE ARMS LENGTH PRICE IS NIL AND ACCORDINGLY SUGGESTED THE TP ADJUSTMENT OF RS.2,21,64,344/-. THE AO PASSED THE DRAFT ASSESSME NT ORDER DATED 18.11.2009 INCORPORATING THE ABOVE TP ADJUSTMENT. AFTER RECEIPT OF THE DRAFT ASSESSMENT ORDER, THE APPELLANT FILED AN OBJECTION BEFORE THE ITA NO. 1337/BANG/2010 PAGE 5 OF 11 HONBLE DRP CONTENDING INTERALIA THAT TPO WAS NOT J USTIFIED TO TREAT THE TRANSACTION OF PAYMENT OF MANAGEMENT FEE AS A S EPARATE CLASS OF TRANSACTION WITHOUT REJECTING THE TP STUDY REPORT S UBMITTED BY THE APPELLANT. IT WAS FURTHER CONTENDED THAT THE TPO W AS NOT JUSTIFIED IN NOT AGGREGATING THE TRANSACTION OF MANAGEMENT FEE W ITH OTHER TRANSACTIONS AS THE TRANSACTIONS WERE INTERLINKED. IT WAS FURTHER CONTENDED THAT THE TPO IS NOT JUSTIFIED IN APPLYING THE CUP METHOD AS AGAINST THE TNMM ADOPTED BY THE APPELLANT FOR BE NCH MARKING THE MANAGEMENT SERVICE FEE AND FINALLY CONTENDED THAT T HE TPO WAS NOT JUSTIFIED IN SUGGESTING THE TP ADJUSTMENT OF RS.2,2 1,64,344/-. THE HONBLE DRP AFTER CONSIDERING THE SUBMISSION OF THE APPELLANT CONFIRMED THE FINDINGS OF THE TPO VIDE ORDER DATED 27.08.2010. PURSUANT TO THE ORDER OF HONBLE DRP, FINAL ASSESSM ENT ORDER WAS PASSED BY THE AO VIDE ORDER DATED 31.08.2010 PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE ACT. 6. BEING AGGRIEVED, THE APPELLANT IS BEFORE US IN T HE PRESENT APPEAL. IT WAS CONTENDED ON BEHALF OF THE APPELLANT THAT FO R THE PURPOSE OF BENCH MARKING THE INTRA GROUP SERVICES, TPO WAS NOT JUSTIFIED IN EXAMINING THE NECESSITY AS WELL AS THE PROFITABILIT Y OF SUCH EXPENDITURE ITA NO. 1337/BANG/2010 PAGE 6 OF 11 AND RELIANCE IN THIS REGARD WAS PLACED ON THE DECIS ION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES 345 ITR 241 AND THE COORDINATE BENCH DECISION CITED SUPRA. THE LEA RNED AR FURTHER CONTENDED THAT THE LEARNED TPO IS NOT JUSTIFIED IN REJECTING THE TNMM AT ENTITY LEVEL WITHOUT DEMONSTRATING AS TO HOW SOM E OTHER METHOD WILL BE MORE APPROPRIATE FOR THE PURPOSE OF BENCH MARKIN G THE ALP. HE ALSO FILED SOME ADDITIONAL EVIDENCE VIDE AN APPLICA TION FOR ADMISSION OF ADDITIONAL EVIDENCE TO DEMONSTRATE THAT THE APPE LLANT ACTUALLY RECEIVED THE MANAGEMENT SERVICES. THE ADDITIONAL E VIDENCE WAS IN THE FORM OF EMAIL CORRESPONDENCE AND EDP SCREENSHOT, ET C. IT WAS CONTENDED THAT THE ADDITIONAL EVIDENCE MAY BE ADMIT TED AS THE SAME WAS NECESSARY FOR DECIDING THE ISSUE INVOLVED IN TH E APPEAL AND RELIANCE IN THIS REGARD WAS PLACED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. TEXT HUNDRED INDIA 351 ITR 57 AND ALSO RELIED UPON THE DECISION OF HONBLE HIGH COURT IN THE CASE OF CIT VS. KUM. SATYA SETIA 143 ITR 486(M.P.). THUS HE PRAYED THAT THE ADJUSTMENT MADE BY THE TPO SHOULD BE DELETED. ON OT HER HAND THE LEARNED DR PLACED RELIANCE ON THE ORDER OF THE LOWE R AUTHORITIES. ITA NO. 1337/BANG/2010 PAGE 7 OF 11 7. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE M ATERIAL ON RECORD. THE ONLY ISSUE THAT ARISES FOR CONSIDERATI ON IN THE PRESENT APPEAL IS WHETHER THE TPO IS JUSTIFIED IN MAKING AL P ADJUSTMENT AT NIL BY HOLDING THAT THERE WAS NO NECESSITY OF INCURRING SUCH EXPENDITURE AND NO BENEFIT WAS DERIVED AND THERE WAS NO PROOF O F ACTUAL RENDITION OF SERVICES. THE TPO TREATED THE TRANSACTION OF PA YMENT OF MANAGEMENT FEE ON STAND ALONE BASIS. NO DOUBT THE LAW IS QUITE SETTLED NOW. IT IS BEYOND THE POWERS OF AO/TPO TO QUESTION THE NECESSITY OF INCURRING EXPENDITURE OR DENY THE DEDUCTION ON THE GROUND THAT NO BENEFIT OUT OF SUCH EXPENDITURE WAS INCURRED. THE TPO/AO CANNOT DETERMINE THE ALP IN SUCH TRANSACTION AT NIL. THE RELIANCE IN THIS REGARD CAN BE PLACED ON THE DECISION OF HONBLE DEL HI HIGH COURT IN THE CASE OF DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES LTD ., 345 ITR 241. THE HONBLE DELHI HIGH COURT HAS REITERAT ED THE POSITION LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF EASTERN INVESTMENT LTD. V. CIT [1951] 20 ITR 1 (SC) AND SASSOON J. DAVID & CO. (P.) LTD. V. CIT [1979] 118 ITR 261. THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES WAS FOLLOWED BY ITA NO. 1337/BANG/2010 PAGE 8 OF 11 SEVERAL COORDINATE BENCHES OF THIS TRIBUNAL, FEW OF THEM ARE AS FOLLOWS: 8. THEREFORE WHAT FOLLOWS FROM THE ABOVE DECISION I S THAT THE ALP OF THE MANAGEMENT SERVICES FEE CANNOT BE DETERMINED AT NIL BY QUESTIONING THE NECESSITY OR THE BENEFITS OUT OF TH E EXPENDITURE INCURRED. BUT ONUS LIES ON THE ASSESSEE TO FURNISH THE PROOF OF ACTUAL RECEIPT OF THE SERVICES BY THE APPELLANT FROM THE A E. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF UMAKANT VS. DCIT 3 69 ITR 220 HELD THAT PROOF OF RENDITION OF SERVICES IS A SINEQ UANONE FOR ALLOWABILITY OF EXPENDITURE IN THE HANDS OF THE REC IPIENT OF THE SERVICES. BUT IN THE PRESENT CASE, IT IS NOT DISCERNIBLE THAT THE APPELLANT MADE ANY ITA NO. 1337/BANG/2010 PAGE 9 OF 11 ATTEMPT TO FURNISH THE PROOF OF RECEIPT OF THE SERV ICES. THE APPELLANT ALSO FILED AN APPLICATION FOR ADMISSION OF THIS ADD ITIONAL EVIDENCE, IN TERMS OF PROVISIONS OF RULE 29 OF THE ITAT RULES. NO DOUBT THE PARTIES TO THE APPEAL ARE ENTITLED TO PRODUCE THE A DDITIONAL EVIDENCE EITHER ON SUO MOTTO DIRECTION OF THE TRIBUNAL ON IT S OWN IN TERMS OF RULE 29 OF ITAT RULES, 1964. WHERE THE ADDITIONAL EVIDENCE IS FILED BY THE EITHER PARTY TO THE APPEAL, THE ADDITIONAL E VIDENCE CAN BE ADMITTED BY THE TRIBUNAL AT ITS DISCRETION ONLY IN THE EVENT THAT THE PARTY LEADING THE ADDITIONAL EVIDENCE SATISFIED THE TRIBUNAL THAT IT WAS PREVENTED BY SUFFICIENT CAUSE FROM LEADING SUCH EVI DENCE AND THIS EVIDENCE WOULD HAVE MATERIAL BEARING ON THE ISSUE W HICH IS TO BE DECIDED BY THE TRIBUNAL AND ENDS OF JUSTICE DEMANDS THE ADMISSION OF SUCH EVIDENCE. THE TRIBUNAL CAN ONLY ADMIT THIS EV IDENCE AFTER SATISFYING THE ABOVE CONDITIONS AND PASSING AN ORDE R TO THAT EFFECT. IN THE PRESENT CASE, THE APPELLANT HAD NOT EXPLAINED A S TO HOW IT WAS PREVENTED FROM FURNISHING EVIDENCES BEFORE LOWER AU THORITIES AND ALSO HOW THIS EVIDENCE WOULD PROVE CONCLUSIVELY THAT AE HAD RENDERED THE SERVICES FOR WHICH MANAGEMENT FEE WAS PAID BY THE A PPELLANT. IN THE CIRCUMSTANCES, WE DO NOT FIND ANY VALUABLE REASON F OR ADMISSION OF ADDITIONAL EVIDENCE AS THE ADDITIONAL EVIDENCE DOES NOT CONCLUSIVELY ITA NO. 1337/BANG/2010 PAGE 10 OF 11 PROVE THAT THE SERVICES WERE ACTUALLY RENDERED BY T HE AE. THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF VO LVO INDIA PVT. LTD., OF WHICH THE HONBLE AM IS THE AUTHOR, HELD AS FOLL OWS: 12. THUS IN THE LIGHT OF THE ABOVE LEGAL POSITION, THE ALP OF SERVICES OF AE CANNOT BE DETERMINED AT NIL BY QUEST IONING THE NECESSITY OF BENEFITS OF EXPENDITURE INCURRED. BUT THE MATTER D OES NOT END THERE. THE ONUS LIES ON THE ASSESSEE TO PROVE THAT THE SERVICE S ARE ACTUALLY RENDERED BY THE AE. BUT THE ASSESSEE HAD FAILED TO DISCHARG E THIS ONUS LYING UPON IT DESPITE BEING ASKED TO DO SO BY THE TPO. THE TPO H AD ESPECIALLY INVITED THE ASSESSEE COMPANY TO PRODUCE THE PROOF IN SUPPOR T OF THE SERVICES RENDERED BY AE. THE APPELLANT ONLY HAD TRIED TO PR OVE THIS BY PRODUCING SOME CORRESPONDENCE WHICH DOES NOT PROVE THAT THE S ERVICES ARE ACTUALLY RENDERED. THE FAILURE BY THE ASSESSEE TO DISCHARGE THE ONUS CAN BE PRESUMED THAT THE ASSESSEE HAD NO EVIDENCE TO ESTAB LISH THAT SERVICES OF MANAGEMENT SUPPORT ARE RENDERED BY ITS AE IN CONSID ERATION TO PAYMENT OF RS.26,22,19,000/-. THIS PRESUMPTION CAN BE DRAWN E VEN AS PER THE PROVISIONS UNDER SECTION 86 OF INDIAN EVIDENCE ACT. THE SUBMISSION THAT THE TPO HAD IMPLIEDLY ACCEPTED THE RENDITION OF SER VICES CANNOT BE ACCEPTED AS THERE WAS NO FINDING GIVEN BY THE TPO T HAT SERVICES ARE ACTUALLY RENDERED. IN FACT, THE TPO WHILE SUMMARIZ ING THIS OBSERVATION VIDE PAGE NO. 30 OF HIS ORDER VIDE COLUMN NO.6 HAD SPECI FICALLY MENTIONED THAT THE ASSESSEE HAD FAILED TO PROVE THAT THE SERVICES ARE ACTUALLY RENDERED BY AE. FURTHERMORE THE FINDING OF THE TPO THAT THE IN VOICE WAS RAISED MUCH AFTER THE CLOSURE OF THE ACCOUNTING YEAR AND THE PA YMENT OF MANAGEMENT FEE IN NOTHING BUT SIPHONING OF THE PROFITS FROM IN DIA WITH THE INTENTION OF AVOIDING TAX ARE SERIOUS ENOUGH TO DOUBT THE GENUIN ENESS OF TRANSACTIONS. THE APPELLANT HAD MADE NO EFFORT TO CONTROVERT THE FINDINGS OF THE TPO. THEREFORE, IN OUR CONSIDERED OPINION THE TPO/AO IS JUSTIFIED IN ADOPTING ALP AT NIL. 9. RESPECTIVELY FOLLOWING THE DECISION OF CO-ORDINA TE BENCH CITED SUPRA, WE HOLD THAT IN THE ABSENCE OF PROOF OF ACTU AL RENDITION OF SERVICES ON RECORD, TPO WAS JUSTIFIED IN MAKING THE ALP ADJUSTMENT OF RS. 2,21,64,344/-. ITA NO. 1337/BANG/2010 PAGE 11 OF 11 10. AS REGARDS THE OTHER CONTENTION OF THE AR THAT THE TRANSACTION OF MANAGEMENT SUPPORT FEE SHOULD BE AGGREGATED WITH OT HER TRANSACTION AND BE BENCH MARKED BY ADOPTING TNMM CANNOT BE ACCE PTED FOR THE SIMPLE REASON THAT WHEN THERE WAS NO PROOF OF ACTUA L RENDITION OF SERVICES BY AE, THE VERY TRANSACTION IS A SHAM TRAN SACTION AND IN WHICH EVENT IT CANNOT BE SAID THAT THE TRANSACTION CAN BE BUNDLED WITH OTHER TRANSACTIONS. 11. IN THE RESULT APPEAL FILED BY THE ASSESSEE IS D ISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF MAY, 2017. SD/- SD/- (VIJAY PAL RAO) (INTURI RAMA RAO) JUDICIAL MEMBER ACC OUNTANT MEMBER BANGALORE. DATED: 24 TH MAY, 2017. /NSHYLU/* COPY TO: 1. APPELLANTS 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANG ALORE.