M/s.US Technology Resources P. Ltd, Trivandrum V. The DCIT, Trivandrum

ITA 283/COCH/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2273 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 5 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 13-11-2018
• Assessment Year: 2013-2014
• Appeal Filed On: 31-05-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANTHAM BOSE
• Assessee Lawyers: RAGHUNATHAN S
• Keywords: Depreciation; Transfer pricing; Business expenditure; Double taxation relief; International transaction; Commercial expediency
• Section: 37; 92C; 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI CHANDRA POOJAR I, AM & SHRI GEORGE GEORGE K, JM IT (TP) A NO. 283 /COCH/201 7 : ASST.YEAR 2013 - 2014 M/S. US TECHNOLOGY RESOURCES PRIVATE LIMITED 721/722, NILA, TECHNO PARK CAMPUS, THIRUVANANTHAPURAM PIN 695 581 . PAN : AAACU6085C . VS. THE DY.COMMISSIONER OF INCOME - TAX, CIRCLE 2(1) TRIVANDRUM. (APPELLANT) (RESPONDENT) APPELLANT BY : SRI.RAGHUNATHAN S RESPONDENT BY : SRI.SANTHAM BOSE DATE OF HEARING : 13.11.2018 DATE OF PRONOUNCEMENT : 14 .11.2018 O R D E R PER GEORGE GEORGE K., JM THIS APPEAL AT THE INSTANCE OF THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER DATED 31.03.2017 PASSED U/S 143 R.W.S. 92CA R.W.S. 144C OF THE INCOME - TAX ACT, 1961. THE RELEVANT ASSESSMENT YEAR IS 2013 - 2014 . 2. THE BRIEF FACTS OF THE CASE ARE AS FOLLOWS: - THE ASSESSEE IS A COMPANY, ENGAGED IN THE BUSINESS OF DEVELOPMENT AND SALE OF COMPUTER SOFTWARE. FOR THE ASSESSMENT YEAR 2013 - 2014, THE RETURN OF INCOME WAS FILED ON 29.11.2013 DECLARING TOTAL INCOME OF RS.9,68,80,643. DURING THE COURSE OF ASSESSMENT PROCE EDINGS, IT WAS NOTICED THAT THE ASSESSEE HAD ENTERED INTO AN INTERNATIONAL IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 2 TRANSACTION AMOUNTING TO RS.9,03,65,295 WITH ITS ASSOCIATE ENTERPRISES (AE). T HE CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER (TPO) U/S 92CA OF THE I.T.ACT TO DETERMINE THE ARM S LENGTH PRICE (ALP) IN THE SAID INTERNATIONAL TRANSACTION. THE INTERNATIONAL TRANSACTION THAT THE ASSESSEE HAD UNDERTAKEN WAS THAT IT HAD MADE A PAYMENT TO ITS US AFFILIATE UST GLOBAL FOR A SUM OF RS.9,01,63,335 AS MANAGEMENT FEES. THE TPO HELD THAT BY T HE SAID PAYMENT OF MANAGEMENT FEES, THE ASSESSEE HAS NOT GOT ANY BENEFIT OUT OF THE SAME AND HENCE THE ALP SHOULD BE DETERMINED AT NIL AND THE TRANSFER PRICING ADJUSTMENT WAS PROPOSED FOR RS.9,01,63,335. ON RECEIPT OF THE TPOS ORDER , THE ASSESSING OFFICER PREPARED A DRAFT ASSESSMENT ORDER INCORPORATING TRANSFER PRICING ADJUSTMENT MADE BY THE TPO OF MANAGEMENT FEES OF RS.9,01,63,335 . FURTHER, THE A.O. ALSO DISALLOWED THE AFORESAID MANAGEMENT FEES U/S 40(A)(I) OF THE I.T.ACT ON A PROTECTIVE BASIS , SINCE NO TDS WAS MADE BY THE ASSESSEE . 3. AGAINST THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) U/S 144C (2)(B) OF THE I.T.ACT. THE DRP CONFIRMED THE VIEW TAKEN BY THE TPO / AO. ON RECEIPT OF THE DRPS DIRECTIO N DATED 21.02.2017, FINAL ASSESSMENT ORDERS WERE PASSED ON 31.03.2017. 4. AGGRIEVED BY THE FINAL ASSESSMENT ORDER, THE ASSESSEE HAS FILED THE PRESENT APPEAL. T HREE ISSUES ARE RAISED IN THE PRESENT APPEAL BEFORE THE TRIBUNAL . THEY ARE AS FOLLOWS : - IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 3 SR. N O. GROUND NO. PARTICULARS AMOUNT INVOLVED (RS.) 1. GROUND 3 DETERMINATION OF ARMS LENGTH PRICE IN RELATION TO MANAGEMENT SUPPORT SERVICES. 9,01,63,335 2. GROUND 4 WITHOUT PREJUDICE, MANAGEMENT SERVICES CANNOT BE CATEGORIZED AS `FEES FOR INCLUDED SERVICES AND HENCE NOT TAXABLE IN INDIA AS PER THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AND UNITED STATES OF AMERICA. 3. GROUND 5 WITHOUT PREJUDICE TO THE ABOVE GROUNDS, THE MANAGEMENT SERVICE FEES IS WHOLLY INCURRED FOR THE PURPOSE OF BUSINESS CANNOT BE DISALLOWED UNDER SECTION 37 OF THE ACT. WE SHALL ADJUDICATE THE ISSUE AS UNDER: - GROUND NO.3 : DETERMINATION OF ARMS LENGTH PRICE IN RELATION TO MANAGEMENT SUPPORT SERVICES 5. WE FIND AN IDENTICAL ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE PERTAINING TO ASSESSMENT YEAR 2012 - 2013 IN IT(TP)A NO. 475/COCH/2016 AND FOR ASSESSMENT YEAR 2011 - 2012 IN IT(TP)A NO.134/COCH/2016. THE TRIBUNAL RELIED ON THE ORDER OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF M /S.SEIMENS GAMESA & RENEWABLE POWER PRIVATE LIMITED V. DCIT [(2018) 92 TAXMANN.COM330 (CHENNAI TRIB.) . THE ORDER OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S.SEIMENS GAMESA & RENEWABLE POWER PRIVATE LIMITED (SUPRA) HAD CONSIDERED THE JUDICIAL PRONOUNCEMENTS ON THE SUBJECT AND HAD HELD THAT TPO HAS NO JURISDICTION TO QUESTION IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 4 THE REASONABILITY OF PAYMENT OF MANAGEMENT SERVICE FEES AND HENCE NO TRANSFER PRICING ADJUSTMENT CAN BE MADE BY HIM. THE RELEVANT FINDING OF THE CHENNAI BENCH OF THE TRIBUNAL, WHICH HAS CONSIDERED THE JUDICIAL PRONOUNCEMENTS ON THE SUBJECT, READS AS FOLLOWS: - 20.5 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED OPINION, TRANSACTION TO TRANSACTION APPROACH IS NOT REQUIRED I F THE PROFIT LEVEL INDICATOR (PLI) OF ASSESSEE AT ENTITY SEGMENT LEVEL IS AT ARM'S LENGTH WHERE THE ASSESSEE COMPANY HAS ADOPTED TNMM FOR THE PURPOSES OF BENCHMARKING, ITS ADOPTION OF CUP SOLELY FOR THE PURPOSES OF EVALUATING TECHNICAL ASSISTANCE FEE WOU LD LEAD TO CHAOS AND BE DETRIMENTAL TO THE INTERESTS OF BOTH REVENUE AND THE ASSESSEE. IN OTHER WORDS, ONCE THE ARM'S LENGTH CRITERION IS TESTED AT ENTITY LEVEL, THE LEARNED TPO HAS NO JURISDICTION TO EXAMINE THE NEED, BENEFIT ETC. IN RELATION TO EACH TRAN SACTION. THIS VIEW WAS SUPPORTED BY THE JUDGMENT OF DELHI HIGH COURT IN THE CASE OF MAGNETIC MARELLI POWERTRAIN INDIA (P.) LTD. (SUPRA) WHEREIN HELD THAT: - '17. AS FAR AS THE SECOND QUESTION I S CONCERNED, THE TPO ACCEPTED TN MM APPLIED BY THE ASSESSEE AS THE MOST APPROPRIATE METHOD IN RESPECT OF ALL THE INTERNATIONAL TRANSACTIONS INCLUDING PAYMENT OF ROYALTY. THE TPO, HOWEVER, DISPUTED APPLICATION OF TN MM AS THE MOST APPROPRIATE METHOD FOR THE PAYMENT OF TECHNICAL ASSISTANCE FEE OF RS. 38,58,80,000 ONLY F OR WHICH COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD WAS SOUGHT TO BE APPLIED. HERE, THIS COURT CONCURS WITH THE ASSESSEE THAT HAVING ACCEPTED THE TNMM AS THE MOST APPROPRIATE, IT WAS NOT OPEN TO THE TPO TO SUBJECT ONLY ONE ELEMENT I.E PAYMENT OF TECHNICA L ASSISTANCE FEE, TO AN ENTIRELY DIFFERENT (CUP) METHOD. THE ADOPTION OF A METHOD AS THE MOST APPROPRIATE ONE ASSURES THE APPLICABILITY OF ONE STANDARD OR CRITERIA IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 5 TO JUDGE AN INTERNATIONAL TRANSACTION BY EACH METHOD IS A PACKAGE IN ITSELF, AS IT WERE, CO NTAINING THE NECESSARY ELEMENTS THAT ARE TO BE USED AS FILTERS TO JUDGE THE SOUNDNESS OF THE INTERNATIONAL TRANSACTION IN AN ALP FIXING EXERCISE. IF THIS WERE TO BE DISTURBED, THE END - RESULT WOULD BE DISTORTED AND WITHIN ONE ALP DETERMINATION FOR A YEAR, T WO OR EVEN FIVE METHODS CAN BE ADOPTED. THIS WOULD SPELL CHAOS AND BE DETRIMENTAL TO THE INTERESTS OF BOTH THE ASSESSEE AND THE REVENUE. THE SECOND QUESTION IS, THEREFORE, ANSWERED IN FAVOUR O F THE ASSESSEE, THE TN MM HAD TO BE APPLIED BY THE TPO/ AO IN RES PECT OF THE TECHNICAL FEE PAYMENT TOO.' 20.5.1 IN THE CASE OF AIR LIQUIDE ENGG. INDIA (P.) LTD. (SUPRA) HELD THAT: - '33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS REGARD, IT IS SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMINED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY LINKED WITH THESE ACTIVITIES. IN THE ABSENCE OF PRODUCTION AND SALE OF PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARDIN G PAYMENT OF ANY ROYALTY. RULE 10A( D) OF THE ITA T RULES DEFINES 'TRANSACTION' AS A NUMBER OF CLOSELY LINKED TRANSACTIONS. ROYALTY, THEN, IS A TRANSACTION CLOSELY LINKED WITH PRODUCTION AND SALES. IT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTERP RISE, BEING EMBEDDED THEREIN. THAT BEING SO, ROYALTY CANNOT BE CONSIDERED AND EXAMINED IN ISOLATION ON A STAND - ALONE BASIS. ROYALTY IS TO BE CALCULATED ON A SPECIFIED AGREED BASIS, ON DETERMINING THE NET SALES WHICH, IN THE PRESENT CASE, ARE REQUIRED TO B E DETERMINED AFTER EXCLUDING THE AMOUNTS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SINCE SUCH NET SALES DO NOT STAND RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THEREFORE, IT IS OUR CONSIDERED OPINION THAT THE ASSESSEE WAS CORRECT IN EMPLOYING AN O VERALL TNMM FOR EXAMINING THE ROYALTY. THE TPO WORKED OUT THE DIFFERENCE IN THE PU OF THE OUTSIDE PARTY (THE ASSESSEE) AT 4.09% AND THE COMPARABLES AT 7.05%. IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 6 THIS HAS NOT BEEN SHOWN TO FALL OUTSIDE THE PERMISSIBLE RANGE. 34. THE DECISION OF THE TRIBUNAL IN 'EKLA APPLIANCES', 2012 - TH - OI - HC DEL - TP, HAS BEEN SOUGHT TO BE DISTINGUISHED BY THE TPO, OBSERVING THAT THE FACTS IN THAT CASE ARE NOT IN PARI MATERIA WITH THOSE OF THE ASSESSEE'S CASE. HOWEVER, THEREIN ALSO, THE BENEFIT TEST HAD BEEN APPLIED BY THE TPO, AS IN THE PRESENT CASE. THE MATTER WAS CARRIED IN APPEAL BEFORE THE HON'BLE HIGH COURT. THE HON'BLE DELHI HIGH COURT HAS HELD THAT THE SO - CALLED BENEFIT TEST CANNOT BE APPLIED TO DETERMINE THE ALP OF ROYALTY PAYMENT AT NIL AND THAT THE TPO COULD A PPLY ONLY ONE OF THE METHODS PRESCRIBED UNDER THE LAW. A SIMILAR VIEW HAS BEEN TAKEN IN 'SONA OKEGAWA PRECISION FORGINGS LTD.' (SUPRA) AND IN 'KHS MACHINERY PVT. LTD. V. ITO 53 SOT 100 (AHM) (URO). 35. IT IS, THUS, SEEN THAT THE ROYALTY PAYMENT @ 3% BY THE ASSESSEE IS AT ARM'S LENGTH. THE TECHNICAL COLLABORATION AGREEMENT STANDS APPROVED BY THE GOVERNMENT OF INDIA. THE ROYALTY PAYMENT HAS BEEN ACCEPTED BY THE DEPARTMENT AS HAVING BEEN MADE BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR ITS BUSINESS PURPO SES. FOR ASSESSMENT YEARS 2004 - 05 AND 2005 - 06, SUCH PAYMENT OF ROYALTY HAS BEEN ALLOWED BY THE CIT (A). AS PER THE FEMA REGULATIONS, ROYALTY CAN BE PAID ON NET SALES @ 5% ON DOMESTIC SALES AND @ 8% ON EXPORT SALES. THE ROYALTY PAYMENT BY THE ASSESSEE FAL LS WITHIN THESE LIMITS. IT ALSO FALLS WITHIN THE LIMITS OF PAYMENT OF ROYALTY IN THE AUTO MOBILE SECTOR, AS PER THE MARKET TREND. THIS PAYMENT OF ROYALTY IS AT THE SAME PERCENTAGE AS THAT PAID BY OTHER AUTO ANCILLARIES IN THE AUTOMOTIVE INDUSTRY. THEN I N 'EKLA APPLIANCES' (SUPRA) AND IN 'ERICSSON INDIA PVT. LTD. V. DEIT 2012 - TII - 48 - ITAT - QEL - TP, IT HAS BEEN HELD THAT ROYALTY PAYMENT CANNOT BE DISALLOWED ON THE BASIS OF THE SO - CALLED BENEFIT TEST AND THE DOMAIN OF THE TPO IS ONLY TO EXAMINE AS TO WHETHER THE PAYMENT BASED ON THE AGREEMENT ADHERES TO THE ARM'S LENGTH PRINCIPLE OR NOT. THAT IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 7 BEING SO, THE ACTION OF THE TPO IN THE PRESENT CASE, TO MAKE THE DISALLOWANCE MAINLY ON THE GROUND OF THE BENEFIT TEST, IS UNSUSTAINABLE IN LAW. 36. KEEPING IN VIEW ALL THE ABOVE FACTORS, THE DISALLOWANCE MADE ON ACCOUNT OF ROYALTY IS FOUND TO BE TOTALLY UNCALLED FOR AND IT IS DELETED AS SUCH . 21. HENCE, FOLLOWING THE RATIO OF THE HON'BLE DELHI HIGH COURT IN C IT V. EKL APPLIANCES (SUPRA) AND VARIOUS OTHER DECISIONS AS NOTED ABOVE AND GIVEN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, WE HOLD THAT THE ADDITION MADE BY THE TPO AND UPHELD BY THE DRP IS UNSUSTAINABLE AND IS TO BE DELETED. HENCE GROUND NO.2 IS HELD IN FAVOUR OF THE ASSESS EE. HENCE, THE APPEAL OF THE REVENUE ITA. NO. 1 040/HYD/ 20 11 IS DISMISSED AND ASSESSEE'S APPEAL IN ITA. NO. 1159/HYD/ 20 11 IS ALLOWED.' 20.5.2 IN THE CASE OF SAKATA INX (INDIA) LTD. (SUPRA) WHEREIN HELD THAT: - '2.9 WE HAVE HEARD THE RIVAL CONTENTIONS AN D PERUSED THE MATERIAL AVAILABLE ON RECORD. IN OUR CONSIDERED VIEW, THERE IS NO INFIRMITY IN THE ORDER OF LD. CIT(A) INASMUCH AS: (I) ID. DR COULD NOT JUSTIFY THE APPLICATION OF CUP METHOD TO ARM'S LENGTH WORKING. (II) THE PRODUCTS MANUFACTURED BY THE APPELLANT WERE DEVELOPED FROM TECHNOLOGY SUPPORT PROVIDED BY THE AE IT WOULD NOT HAVE BEEN POSSIBLE SO WITHOUT THE CONTINUOUS AE SUPPORT. THE RIGHTS OF ACCESS TO THE ONGOING TECHNICAL SUPPORT AND DEVELOPMENT OF NEW PRODUCT S RECEIVED BY THE APPELLANT WERE CLEARLY PROVIDED IN THE AGREEMENTS ENTERED INTO WITH THE AE. (III) THE COST BENEFIT TEST AS WORKED OUT BY THE TPO WAS NOT BASED ON PROPER APPRECIATION OF THE FACTS AND THUS CUP METHOD APPLIED BY THE AO/TPO WAS NOT JUS TIFIABLE. (IV) THE JUDICIAL CITATIONS RELIED ON BY ID. CIT(A) AS WELL AS FURTHER JUDGMENTS RELIED ON BY THE ASSESSEE IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 8 INCLUDING HON'BLE HIGH COURT IN THE CASE OF DELHI EKL APPLIANCE LTD. (SUPRA) SUPPORT THE VIEW TAKEN BY ID. CIT(A). IN VIEW OF THE FOREGOING WE UPHOLD THE ORDER OF THE CIT(APPEALS) AND DISMISS THE REVENUE'S APPEAL.' 20.6 IN OUR CONSIDERED OPINION, ALP OF MANAGEMENT SERVICE CANNOT BE SAID TO BE NIL IN THE ABSENCE OF A VALID COMPARABLE. SINCE NO EFFORT HAD BEEN MADE BY TPO TO DETERMINE MARKET VALUE OF SERVICES RECEIVED BY ASSESSEE, ADJUSTMENT MADE BY TPO AS A DISALLOWANCE OF EXPENSE COULD NOT BE UPHELD. IN OTHER WORDS, THE TPO CANNOT SIMPLY ARRIVE AT A CONCLUSION THAT QUALITY AND VOLUME OF SERVICES RECEIVED BY THE APPE LLANT WERE NOT COMMENSURATE WITH PAYMENT MADE BY THE APPELLANT. THIS VIEW IS FORTIFIED BY THE ORDER OF TRIBUNAL IN THE CASE OF MERCK LTD. (SUPRA) - UPHELD BY BOMBAY HIGH COURT [ITA 272 OF 2014]. 24.7 SUCH ARGUMENT IN OUR VIEW IS NOT CONVINCING. THE ARGU MENT WOULD HAVE BEEN VALID IF FEES WAS FIXED IN RESPECT OF EACH SERVICE, WHICH WAS COMPULSORILY REQUIRED TO BE PROVIDED TO THE ASSESSEE, BUT IT IS NOT SO IN THE PRESENT CASE. THE AGREEMENT LISTED CERTAIN SERVICES ON WHICH THE ASSESSEE REQUIRES GUIDANCE/ ASSISTANCE FROM TIME TO TIME. THE ASSESSEE WAS THUS ENTITLED TO ANY OF THE SERVICES AS AND WHEN REQUIRED. THEREFORE, APPLYING CUP METHOD TO THE SERVICE NOT AVAILED BY THE ASSESSEE DURING THE YEAR IS NOT JUSTIFIED. IT WOULD HAVE BEEN APPROPRIATE IF THE AO HAD APPLIED CUP METHOD TO THE PAYMENT MADE DURING THE YEAR BY THE ASSESSEE FOR THE THREE SERVICES AND COMPARED WITH SIMILAR PAYMENT FOR SUCH SERVICES BY AN INDEPENDENT PARTY. NO EFFORTS HAVE BEEN MADE BY TPO/ AO TO DETERMINE THE MARKET VALUE OF SERVICE S RECEIVED BY THE ASSESSEE DURING THE YEAR RELATING TO SAP IMPLEMENTATION AND QUALITY CONTROL TO SHOW THAT THE ASSESSEE HAD PAID MORE COMPARED TO ANY INDEPENDENT PARTY FOR THE SAME SERVICES. THE ASSESSEE HAD SUBMITTED THAT IN CASE THE ASSESSEE HAD PAID TO THE AE AT MAN HOUR RATE FOR THE TECHNICAL SERVICES PROVIDED DURING THE YEAR IN RELATION TO IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 9 SAP IMPLEMENTATION, THE FEES PAYABLE WOULD HAVE BEEN SIGNIFICANTLY HIGHER. THERE IS NOTHING PRODUCED BEFORE US TO CONTROVERT THE SAID CLAIM. THE ASSESSEE HAS APPL IED T N MM WHICH SHOWS THAT THE MARGIN SHOWN BY THE ASSESSEE WAS HIGHER THAN THE COMPARABLE COMPANIES. THE CASE OF THE ASSESSEE IS ALSO SUPPORTED BY THE DECISION OF TRIBUNAL IN CASE OF ME CAN ERRICSON INDIA PVT. LTD. (SUPRA) IN WHICH THE DECISION OF TPO T O TAKE THE VALUE OF CERTAIN SERVICES AT NIL HAS NOT BEEN UPHELD. CONSIDERING THE ENTIRETY OF FACTS AND CIRCUMSTANCES, THE ADJUSTMENT MADE BY TPO WHICH IS NOTHING BUT DISALLOWANCE OF EXPENSES CANNOT BE UPHELD. WE, THEREFORE, SET ASIDE THE ORDER OF CIT (A) ON THIS POINT AND DELETE THE ADDITION MADE. 20.7 FURTHER, THIS VIEW WAS SUPPORTED BY THE DECISION OF CO - ORDINATE BENCH, CHENNAI IN THE CASE OF FLAKT INDIA LTD. (SUPRA) VIDE ORDER DATED 9TH JUNE, 2016 FOR ASSESSMENT YEAR 2009 - 10 AND IN THE CASE OF DA B USINESS PROCESS SERVICES (P.) LTD. V. DY. CITITAT IN ITA NO. 2166 OF2011. 20.8 IN OUR CONSIDERED OPINION, JURISDICTION OF THE TPO IS TO DETERMINE THE COMMERCIAL EXPEDIENCY AND NECESSITY IN THE HANDS OF THE ASSESSEE. THE LEARNED TPO HAS REMARKED THAT THE ASSESSEE HAS NOT SUBSTANTIATED THE NECESSITY TO INCUR SUCH EXPENDITURE. IN THIS REGARD, IT IS PERTINENT TO NOTE THAT THE BUSINESS TRANSACTIONS OF THE ASSESSEES TAKEN PLACE IN TH E ORDINARY COURSE, WHICH CANNOT BE QUESTIONED B Y THE TPO. FURTHER, THE LEARNED TPO CANNOT CONCLUDE BASED ON MERE ASSUMPTIONS WITHOUT EXAMINING THE COMMERCIAL EXPEDIENCY OF THE ASSESSEE. THIS VIEW IS FORTIFIED BY THE JUDGMENTS/ORDER OF THE VARIOU S COURTS AS BELOW: - (I) HIVE COMMUNICATION (P.) LTD. (SUPRA) (II) CIT V EKL APPLIANCES LTD. [(2012) 345 ITR 241 (DELHI)] (III) COMPUTER GRAPHICS LTD. (SUPRA) 20.9 IN OUR CONSIDERED OPINION, BENEFIT TEST IS NOT A PRECONDITION FOR JUSTIFYING ARM'S LENGTH PRICE. UNDER RULE 10 B OF THE INCOME - TAX RULES, 1962 WHICH DEALS IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 10 WITH 'DETERMINATION OF THE ARM'S LENGTH PRICE'. THERE IS NO MENTION OF THE 'BENEFIT TEST' BEING ADOPTED FOR THE PURPOSE OF DETERMINING SUCH ARM'S LENGTH PRICE. IT IS NOT A PRECONDITION TO CONCLUDE THAT THE PAYMENT IS WITHIN ARM'S LENGTH. IN OTHER WORDS, THE TPO CANNOT APPLY THE BENEFIT TEST FOR DETERMINING ALP AS HE CANNOT ASSESS THE BENEFIT DERIV ED BY ASSESSEE IN A PARTICULAR TRANSACTION. THIS VIEW IS FORTIFIED BY THE FOLLOWING JUDGMENTS: - (I) R.A.K CERAMICS INDIA (P.) LTD. (SUPRA) WHICH WAS UPHELD BY ANDHRA PRADESH HIGH COURT [IT APPEAL NO. 595 OF 2016] - '10. WE ARE REALLY SURPRISED TO SEE THE REASONING OF TPO IN FIXING THE ALP OF ROYALTY PAYMENT AT 2%. IT IS MANIFEST FROM TPO'S ORDER HE HAS REJECTED ASSESSEE'S TP ANALYSIS UNDER TNMM. FURTHER, IN PARA 6.4 OF HIS ORDER TPO HAS MENTIONED OF UNDERTAKING AN INDEPENDENT ANALYSIS UNDER TNMM FOR SELECTING COMPARABLES AND DETERMINING ALP. HOWEVER, EVEN AFTER REPEATEDLY SCANNING THROUGH HIS ORDER, WE FAILED TO FIND ANY SUCH ANALYSIS BEING DONE BY HIM. SIMILARLY, THOUGH IN PARA 5.1.1, ID. DRP HAS OBSERVED THAT TPO HAS BENCHMARKED INTANGIBLE TRANSACT IONS BY USING CUP, BUT, THE ORDER PASSED BY TPO DOES NOT SUPPORT SUCH CONCLUSION. IT IS AN ACCEPTED PRINCIPLE OF LAW THAT TPO HAS TO DETERMINE THE ALP BY ADOPTING ANYONE OF THE METHODS PRESCRIBED U/S 92C OF THE ACT. MODE AND MANNER OF COMPUTATION OF ALP UNDER DIFFERENT METHODS HAVE BEEN LAID DOWN IN RULE 10B. EVEN, ASSUMING THAT TPO HAS FOLLOWED CUP - METHOD FOR DETERMINING ALP OF ROYALTY PAYMENT, AS HELD BY ID. DRP, IT NEEDS TO BE EXAMINED IF IT IS STRICTLY IN COMPLIANCE WITH STATUTORY PROVISIONS. RULE 1OB(1 )(A) LAYS DOWN THE PROCEDURE FOR DETERMINING ALP UNDER CUP METHOD. AS PER THE SAID PROVISION. TPO AT FIRST HAS TO FIND OUT THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLE D TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS. THEREAFTER, MAKING NECESSARY ADJUSTMENTS TO SUCH PRICE, ON ACCOUNT OF DIFFERENCES BETWEEN THE IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 11 INTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET, TPO WILL DETERMINE THE ALP. IT IS PATENT AND OBVIOUS FROM TPO'S ORDER, THE DETERMINATION OF ALP AT 2% IS NOT AT ALL IN CONFORMITY WIT H RULE 1OB(1 )(A). THE TPO HAS NOT BROUGHT EVEN A SINGLE COMPARABLE TO JUSTIFY ARM'S LENGTH PERCENTAGE OF ROYALTY AT 2% EITHER UNDER CUP OR TNMM METHOD. ON THE CONTRARY, OBSERVATIONS MADE BY TPO GIVES AMPLE SCOPE TO CONCLUDE THAT ADOPTION OF ROYALTY AT 2% IS NEITHER ON THE BASIS OF ANY APPROVED METHOD NOR ANY REASONABLE BASIS. RATHER IT IS ON AD HOC OR ESTIMATE BASIS, HENCE, NOT IN ACCORDANCE WITH STATUTORY PROVISIONS. THE APPROACH OF TPO IN ESTIMATING ROYALTY AT 2% BY APPLYING THE BENEFIT TEST, IN OUR VIEW, IS NOT ONLY IN COMPLETE VIOLATION OF TP PRO VISIONS BUT AGAINST THE SETTLED PRINCIPLES OF LAW. ITAT, MUMBAI BENCH IN CASE OF CASTROL INDIA LTD. V. ADDITIONAL CIT, ITA NO. 1292/MUM/2007 DATED 20/12/2013 WHILE EXAMINING IDENTICAL ISSUE OF DETERMINATION OF ALP AT 'NIL' BY APPLYING THE BENEFIT TEST HEL D AS UNDER: '11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE IMPUGNED ROYALTY WAS PAID BY THE ASSESSEE COMPANY TO ITS AE NAMELY CASTRO I LTD. UK AT 3.5% OF THE NET EX - FACTORY SALE PRICE O F PRODUCTS MANUFACTURED AND SOLD IN INDIA AS PER THE TECHNICAL COLLABORATION AGREEMENT. THIS INTERNATIONAL TRANSACTION INVOLVING PAYMENT OF ROYALTY TO ITS AE WAS BENCHMARKED BY THE ASSESSEE R.A.K CERAMICS INDIA P. LTD. BY FOLLOWING CUP METHOD IN ITS TP S TUDY REPORT AND SINCE AVERAGE RATE OF ROYALTY OF THREE COMPARABLES SELECTED BY IT WAS HIGHER AT 4.67% THAN THE RATE AT WHICH ROYALTY WAS PAID BY THE ASSESSEE TO ITS AE, THE TRANSACTION INVOLVING PAYMENT OF ROYALTY WAS CLAIMED TO BE AT ARM'S LENGTH. A PER USAL OF THE ORDER PASSED BY THE TPO U/S 92CA(3) OF THE ACT SHOWS THAT NEITHER THESE COM PARABLES SELECTED BY THE ASSESSEE IN ITS TP IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 12 STUDY REPORT WERE REJECTED BY HER NOR ANY NEW COM PARABLES WERE SELECTED BY HER BY MAKING A FRESH SEARCH IN ORDER TO SHOW T HAT THE PAYMENT OF ROYALTY BY THE ASSESSEE TO ITS AE WAS NOT AT ARM'S LENGTH. SHE SIMPLY RELIED ON THE APPROVAL OF SIA TO HOLD THAT ANY ROYALTY PAID BY THE ASSESSEE ON EXPORTS AND OTHER INCOME WAS NOT ALLOWABLE AND DISALLOWED THE ROYALTY PAYMENT TO THE EX TENT OF RS. 40,51,486/ - TREATING THE SAME AS THE ROYALTY PAID BY THE ASSESSEE IN RESPECT OF EXPORTS SALE AND OTHER INCOME. WE ARE UNABLE TO AGREE WITH THIS STRANGE METHOD FOLLOWED BY THE TPO TO MAKE A TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WHICH IS N OT SUSTAINABLE EITHER IN LAW OR ON THE FACTS OF THE CASE. SHE HAS NEITHER REJECTED THE METHOD FOLLOWED BY THE ASSESSEE TO BENCHMARK THE TRANSACTION IN RESPECT OF PAYMENT OF ROYALTY NOR HAS BEEN ADOPTED ANY RECOGNIZED METHOD TO DETERMINE THE ALP OF THE SAID TRANSACTIONS. THE APPROVAL OF SIA ADOPTED BY THE TPO AS BASIS TO MAKE TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WAS UNTENABLE AND EVEN GOING BY THE SAID BASIS WRONGLY ADOPTED BY THE TPO, NO TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WAS LIABLE TO BE M ADE. AS PER THE SAID BASIS, THE NET SALES OF THE ASSESSEE AFTER EXCLUDING EXPORT SALE AND OTHER INCOME WERE TO THE EXTENT OF RS. 1118.70 CRORES AND THE ROYALTY PAID THEREON AT RS. 24.38 CRORES BEING LESS THAN THE RATE OF 3.5% APPROVED BY SIA, THERE WAS NO CASE OF ANY EXCESS PAYMENT MADE OF ROYALTY BY ASSESSEE THAN APPROVED BY SIA TO JUSTIFY ITS DISALLOWANCE BY WAY OF TP ADJUSTMENT. IN OUR OPINION, THE ID. CIT (A) COULD NOT APPRECIATE THESE INFIRMITIES IN THE ORDER OF THE TPO DESPITE THE SAME WERE SPECIFI CALLY BROUGHT TO HIS NOTICE ON BEHALF OF THE ASSESSEE AND CONFIRMED THE TP ADJUSTMENT MADE BY THE TPO IN RESPECT OF ROYALTY PAYMENT WHICH WAS TOTALLY UNJUSTIFIED. WE THEREFORE, DELETE THE ADDITION MADE BY THE AOI / PO AND CONFIRMED BY THE ID. CIT ON ACCOUNT OF TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT AND ALLOW GROUND NO.3 OF THE ASSESSEE'S APPEAL.'' IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 13 (II) TNS INDIA (P.) LTD. (SUPRA) '16. WE HAVE CONSIDERED THE ISSUE. WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE ASSESSING OFFICER/TPO WITH REFERENCE T O THE SERVICES PROVIDED BY AES. ASSESSEE HAS PROVIDED THE AGREEMENTS WHICH WERE ENTERED NOT DURING THE YEAR BUT IN EARLIER YEAR AND HAS BEEN PAYING THE SERVICE FEE TERMED AS MANAGEMENT FEE ACCORDINGLY. THIS CLAIM IS NOT ARISING FOR THE FIRST TIME IN THIS YEAR BUT, IS ALSO THERE IN EARLIER YEARS AND LATER YEARS. ASSESSEE IS PART OF A WORLDWIDE GROUP AND THEY HAVE PLACED SOME CORPORATE CENTRES FOR GUIDANCE OF VARIOUS UNITS RUN BY THEM ACROSS THE GLOBE. IT WAS SUBMITTED THAT THE COSTS BEING INCURRED BY THE CENTRES ARE BEING SHARED BY VARIOUS UNITS AND ASSESSEE'S SHARE IN THIS YEAR HAS COME TO 5% OF THE RECEIPTS PAYABLE TO NFO WORLDWIDE INC USA AND AT 4% TO NFO ASIA PACIFIC LTD. HONGKONG ON THE NET REVENUES. THESE AMOUNTS ARE WITHIN THE NORMS PRESCRIBED FOR PAYMENT OF FEES TO VARIOUS GROUP COMPANIES OF SIMILAR NATURE. THERE IS NO DISPUTE WITH REFERENCE TO SERVICES BEING PROVIDED BY THE GROUP COMPANIES TO ASSESSEE AND ASSESSEE ALSO PAID VARIOUS OTHER AMOUNTS INCLUDING ROYALTY. AS SUBMITTED BY ASSESSEE, EVEN THOUGH SOME CORRESPONDENCE WAS PLACED ON RECORD WITH REFERENCE TO THE ADVISE GIVEN TO ASSESSEE, PROVIDING A CONCRETE EVIDENCE WITH REFERENCE TO THE SERVICES IN THE NATURE OF SPECIFIC ACTIVITIES IS DIFFICULT, LIKE PROVING THE ROLE OF AN ANESTHESIAN IN AN OPERATION CONDUCTED BY A SURGEON. THERE MAY BE AN EVIDENCE OF OPERATION BEING PERFORMED BY THE DOCTOR IN THE FORM OF SUTURES OR SCARS ETC., WHICH CAN BE PROVED LATER BUT THE ROLE OF AN ANESTHESIAN BEFORE OPERATION AND AFTER GAINING CONSCIOUSNESS IS DIFFI CULT TO PROVE AS THAT IS NOT TANGIBLE IN NATURE. LIKEWISE, FOR THE ADVISE GIVEN BY VARIOUS GROUP CENTRES TO THE GROUP COMPANIES IN DAY - TO - DAY MANNER IS DIFFICULT TO PLACE ON RECORD BY WAY OF CONCRETE EVIDENCE BUT THE WAY BUSINESS IS CONDUCTED, ONE CAN PER CEIVE THE SAME. ASSESSEE HAS GIVEN A DETAILED WRITE - UP AS WELL AS THE SERVICES PROVIDED AND BENEFIT OBTAINED WHICH WERE NOT CONTRADICTED. IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 14 THE ASSESSING OFFICER DID NOT BELIEVE THE SAME IN THE ABSENCE OF CONCRETE EVIDENCE. UNLESS THE ASSESSING OFFICER STE PS INTO ASSESSEE'S BUSINESS PREMISES AND OBSERVES THE ROLE OF THESE COMPANIES/ASSESSEE'S BUSINESS TRANSACTIONS, IT WILL BE DIFFICULT TO PLACE ON RECORD THE SORT OF ADVICE GIVEN IN DAY - TO - DAY OPERATIONS. WHAT SORT OF EVIDENCE SATISFIES THE AO ALSO NOT SPEC IFIED. ASSESSEE HAS ALREADY PLACED LOT OF EVIDENCE IN SUPPORT OF CLAIMS. THEREFORE, ON THAT COURT, WE ARE NOT IN AGREEMENT WITH THE ASSESSING OFFICER AND TPO THAT SERVICES WERE NOT RENDERED BY THE GROUP COMPANIES TO ASSESSEE. 16.1. EVEN OTHERWISE, THE ROLE OF TRANSFER PRICING OFFICER IS TO DETERMINE THE ARM'S LENGTH PRICE OF A TRANSACTION. HE CANNOT REJECT THE ENTIRE PAYMENT UNDER THE PROVISIONS OF SEC. 92CA AS HELD BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES LTD. (SUPRA) WHEREIN THE HON'BLE DELHI HIGH COURT, ON I SIMILAR FACTS WHERE THE TPC ALSO DETERMINED THE ALP AT NIL, HAS HELD AS UNDER: '21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR ASSESSEE TO SHOW THAT ANY LEGITIM ATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR ASSESSEE TO SHOW THAT ANY ITA NOS. 944/H/07, 194 & 74/H/OB, 793/H/09, 654, 655/H/10 & 7/H/2012 TNS INDIA PVT. LTD. EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY AND EXCLUSIVELY' FOR THE PURPOSE OF BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THAT INTER ALIA FINDS EXPRESSION IN THE OECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. 22. EVEN RULE 10B(I)(A) DOES NOT AUTHORISE IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 15 DISALLOWANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUNERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXP ENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR ASSESSEE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY T HEREOF AS BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EXPE NSE; THERE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PRESENT CASE IS TO HOLD THAT ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/BRAND FEE, BECAUSE IT HAS BEEN SUFFERING LOSSES CONTINUOUSLY. SO LONG AS THE EXP ENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES, HE IS EXPECTED TO EXAMINE THE INTER NATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORIZED. 23. APART FROM THE LEGA L POSITION STATED ABOVE, EVEN ON MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE/ROYALTY PAYMENT WAS NOT WARRANTED. ASSESSEE HAS FURNISHED COPIOUS MATERIAL AND VALID REASONS AS TO WHY IT WAS SUFFERING LOSSES CONTINUOUSLY AND THESE HAVE BEEN REFERRED TO BY US EARLIER. FULL JUSTIFICATION SUPPORTED BY FACTS AND FIGURES HAVE BEEN GIVEN TO DEMONSTRATE THAT THE INCREASE IN THE EMPLOYEES COST, FINANCE CHARGES, IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 16 ADMINISTRATIVE EXPENSES, DEPRECIATION COST AND CAPACITY INCREASE HAVE CONTRIBUTED TO THE CONTINUOUS LOS SES. THE COMPARATIVE POSITION OVER A PERIOD OF 5 YEARS FROM 1998 TO 2003 WITH RELEVANT FIGURES HAVE BEEN GIVEN BEFORE THE CIT (APPEALS) AND THEY ARE REFERRED TO IN A TABULAR FORM IN HIS ORDER IN PARAGRAPH 5.5.1. IN FACT THERE ARE FOUR TABULAR STATEMENTS F URNISHED BY ASSESSEE BEFORE THE CIT (APPEALS) IN SUPPORT OF THE REASONS FOR THE CONTINUOUS LOSSES. THERE IS NO MATERIAL BROUGHT BY THE REVENUE EITHER BEFORE THE CIT (APPEALS) OR BEFORE THE TRIBUNAL OR EVEN BEFORE US TO SHOW THAT THESE ARE INCORRECT FIGURES OR THAT EVEN ON MERITS THE REASONS FOR THE LOSSES ARE NOT GENUINE. 24. WE ARE, THEREFORE, UNABLE TO HOLD THAT THE TRIBUNAL COMMITTED ANY ERROR IN CONFIRMING THE ORDER OF THE CIT (APPEALS) FOR BOTH THE YEARS DELETING THE DISALLOWANCE OF THE BRAND FEE RO YALTY PAYMENT WHILE DETERMINING THE ALP. ACCORDINGLY, THE SUBSTANTIAL QUESTIONS OF LAW ARE ANSWERED IN THE AFFIRMATIVE AND IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE. THE APPEALS ARE ACCORDINGLY DISMISSED WITH NO ORDER AS TO COSTS''. 6. IN VIEW OF THE ABOVE ORDER OF THE CHENNAI BENCH OF THE TRIBUNAL AND THE COCHIN BENCH ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE HOLD THAT THE BENEFIT IS NOT A PRECONDITION FOR JUSTIFYING ARMS LENGTH PRICE. UNDER RULE 10B OF THE INCOME - TAX RULES, 196 2 WHICH DEALS WITH `DETERMINATION OF THE ARMS LENGTH PRICE. THERE IS NO MENTION OF THE `BENEFIT TEST BEING ADOPTED FOR THE PURPOSE OF DETERMINING SUCH ARMS LENGTH PRICE. IT IS NOT A PRECONDITION TO CONCLUDE THAT THE PAYMENT IS WITHIN ARMS LENGTH. IN O THER WORDS, THE TPO CANNOT APPLY THE BENEFIT TEST FOR DETERMINING ALP AS HE CANNOT ASSESS THE BENEFIT DERIVED BY ASSESSEE IN A IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 17 PARTICULAR TRANSACTION. ACCORDINGLY, GROUND NO.3 RAISED BY THE ASSESSEE IS ALLOWED. GROUND NO.4 7. THIS ISSUE IS COVERED IN FA VOUR OF THE ASSESSEE BY THE JUDGMENT OF THE HONBLE HIGH COURT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007 - 2008 IN ITA NO.38/2014 (JUDGMENT DATED 09.08.2018). IN THE SAID JUDGMENT, THE HONBLE HIGH COURT HELD THAT MANAGEMENT SERVICE CANNOT BE CHARACTER IZED AS `FEES FOR INCLUDED SERVICES, AND HENCE, NOT TAXABLE IN INDIA AS PER THE DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA AND USA. THE CONCLUSION OF THE HONBLE HIGH COURT WHILE SETTING ASIDE THE ORDER OF THE TRIBUNAL READS AS FOLLOWS: - 21. WE HAVE ALREADY HELD THAT THE SERVICES OFFERED BY THE US COMPANY WOULD NOT COME UNDER THE DEFINITION OF `INCLUDED SERVICES AS AVAILABLE UNDER THE DTAA AND AS A CONSEQUENCE, THE REMUNERATION RECEIVED BY THE US COMPANY WOULD NOT BE `FEES FOR INCLUDED SE RVICES. WE HAVE TO FIND THAT THE INTERPRETATION OF THE PROVISIONS OF THE DTAA BETWEEN THE GOVERNMENTS OF INDIA AND USA HAVE NOT BEEN CORRECTLY CARRIED OUT BY THE TRIBUNAL. WE, HENCE, SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES ANSWERING THE QUESTIONS OF LAW (III) AND (IV) AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. IN VIEW OF THE ANSWERS ALREADY GIVEN BY US, WE ARE OF THE OPINION THAT QUESTIONS OF LAW RAISED AT (V) AND (VI) NEED NOT BE ANSWERED. IN ITA NO.38 OF 2014, THE ORDERS ARE SET ASIDE AND T HE AO IS DIRECTED TO CONSIDER THE CLAIM OF EXPENDITURE AFRESH WITHOUT LOOKING AT THE APPLICATION OF SECTION 195(1), WHICH IS NOT APPLICABLE. THERE IS NO REQUIREMENT, AS FOUND BY US, TO DEDUCT TAX AT SOURCE. IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 18 IN ALL THE OTHER APPEALS, THE PROCEEDINGS UNDER S ECTION 201 OF THE IT ACT ARE SET ASIDE. 8. IN VIEW OF THE JUDGMENT OF THE HONBLE HIGH COURT, WE HOLD THAT THE DISALLOWANCE U/S 40(A)(I) IS NOT JUSTIFIED. IT IS ORDERED ACCORDINGLY. HENCE, GROUND NO.4 IS ALLOWED. GROUND NO.5 9. AS MENTIONED EARLIER, TH E ASSESSEE HAD PAID MANAGEMENT SERVICE FEES AMOUNTING TO RS.9,01,63,335 TO ITS AFFILIATE IN US, UST GLOBAL. THERE WAS NO PROTECTIVE DISALLOWANCE U/S 37 OF THE I.T.ACT MADE BY THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER. THE DRP IN ITS DIRECTIONS DATED 21.02.2017 HELD THAT THE ASSESSEE HAD FAILED TO SUBSTANTIATE ITS CLAIM THAT ANY SERVICES WERE ACTUALLY RENDERED BY THE AE I.E., USTG BASED ON THE FINDINGS OF THE TPO. IT WAS FURTHER HELD BY THE DRP THAT THE SAID EXPENDITURE , WHETHER IT WAS INCURRED W HOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS WAS NOT PROVED. THEREFORE, THE SAME REQUIRES TO BE DISALLOWED PROTECTIVELY U/S 37 OF THE I.T.ACT. 10. AGGRIEVED BY THE ABOVE DIRECTIONS OF THE DRP, THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. THE LEARNED AR SUBMITTED THAT THE EXPENDITURE PERTAINING TO MANAGEMENT SERVICES HAS BEEN INCURRED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS AND THE ASSESSEE DOES NOT HAVE ANY OTHER EMPLOYEE COST AND USTG PROVIDED MANAGERIAL SERVICES TO THE ASSESSEE. THE LEARNED AR RELIED ON THE IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 19 JUDGMENT S OF THE HON BLE APEX COURT IN THE CASE OF CIT V. WALCHAND & CO. (P) LTD. [(1967) 65 IT R 381 (SC) AND SASOON J.DAVID AND CO. (P.) LTD. V. CIT [(1979) 118 ITR 261 (SC)] AND CONTENDED THAT IT IS NOT OPEN FO R THE DEPARTMENT TO ADOPT A SUBJECTIVE STANDARD OF REASONABLENESS AND DISALLOW THE BUSINESS EXPENDITURE OR WHAT TYPE OF EXPENDITURE AN ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE DIRECTIONS OF THE DRP. 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE EXPENDITURE PERTAINING TO MANAGEMENT SERVICES PAID TO THE AE OF THE ASSESSEE, I.E. USTG, HAS NOT BEEN EXAMINED WHETHER IT IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURP OSE OF ITS BUSINESS. WHETHER THIS IS A BUSINESS EXPENDITURE REQUIRING DEDUCTION U/S 37 OF THE I.T.ACT, HAS NOT BEEN PUT TO TEST BY THE ASSESSING OFFICER NOR BY THE DRP. THE DRP HAS ONLY GIVEN A GENERAL DIRECTION BASED ON THE FINDING OF THE TPO THAT THERE WA S NO BENEFIT ACCRUED TO THE ASSESSEE ON PAYMENT OF MANAGEMENT FEES AND HENCE ALP OF SAID INTERNATIONAL TRANSACTION IS TO BE DETERMINED AT `NIL. THE FACT THAT THE ABOVE EXPENDITURE, WHETHER IT IS BUSINESS EXPENDITURE, WHICH CAN BE CLAIMED AS DEDUCTION U/S 37 OF THE I.T.ACT, WAS NEVER EXAMINED. THEREFORE THIS ISSUE IS ALSO RESTORED TO THE A.O. TO TEST THE REASONABLENESS OF THE CLAIM OF DEDUCTION U/S 37 OF THE I.T.ACT. THE ASSESSING OFFICER SHALL EX AMINE WHETHER THE MANAGEMENT SERVICE FEES PAID BY THE ASSESSEE TO ITS AE WA S INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND CAN BE ALLOWED AS A DEDUCTION U/S IT (TP) A NO. 283 / COCH /201 7 . M/S. US TECHNOLOGY RESOURCES P.LTD. 20 37 OF THE I.T.ACT. IT IS ORDERED ACCORDINGLY. HENCE, GROUND NO.5 IS ALLOWED FOR ST ATISTICAL PURPOSES. 12 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 14 TH DAY OF NOVEMBER, 2018 . SD/ - SD/ - ( CHANDRA POOJARI ) ( GEORGE GEORGE K. ) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN ; DATED : 14 TH NOVEMBER, 2018 . DEVDAS* COPY OF THE ORDER FORWARDED TO : BY ORDER, (ASSTT. REGISTRAR) ITAT, COCHIN 1. THE APPELLANT 2. THE RESPONDENT. 3. THE DRP - 2 , BANGALORE . 4. THE PR.CIT - 2 , THIRUVANANTHAPURAM. 5. DR, ITAT, COCHIN 6 . GUARD FILE.