M/s. Faurecia Automotive Seating India Pvt.Ltd, Pune V. Deputy Commissioner of Income-tax, Circle - 9, Pune

ITA 3031/PUN/2017

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 9242 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 27-10-2022
• Assessment Year: 2013-2014
• Appeal Filed On: 19-12-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Additional evidence

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH, ‘C’ PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER आयकर अपीऱ सं. / ITA No.3031/PUN/2017 निर्धारण वषा / Assessment Year : 2013-14 M/s. Faurecia Automotive Seating India Private Limited, Plot No. T-187, Pimpri Industrial Area, B.G. Block, Bhosari, Pune 411 026 PAN : AADCS8694Q Vs. DCIT, Circle-9, Pune Appellant Respondent आदेश / ORDER PER R.S. SYAL, VP : This appeal by the assessee is directed against the final assessment order dated 11-10-2017 passed by the Assessing Officer (AO) u/s.143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2013-14. 2. The first issue raised in this appeal is the transfer pricing addition of Rs.10,34,34,819/- made by the AO. Succinctly, the facts of the case are that the assessee, an Indian company, is engaged in Assessee by Shri Ajit Jain and Shri Siddhesh Chaugule Revenue by Shri Keyur Patel Date of hearing 28-10-2022 Date of pronouncement 31-10-2022 ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 2 the manufacture of Recliner including Handle bars and Connecting rods. The handle bar is used in slider and connecting rod is used in recliner. The combination of slider, recliner, handle bar and connecting rod defines one complete assembly set for vehicle seats. The assessee filed its return declaring total income of Rs.13.15 crore. Certain international transactions were reported in Form No. 3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price (ALP) of the international transactions. Instantly, we are concerned with the international transaction of Payment of ‘Group Fees’ amounting to Rs.10,34,34,819/- consisting of Service fee of Rs.6,12,48,544/- and Research and Development cost sharing of Rs.4,21,86,275/-. The assessee aggregated all the international transactions, including, Raw material and components; Payment of Royalty; Payment of Group fees, Payment of Professional expenses; Payment for Training availed and declared them to be at ALP by applying the Transactional Net Margin Method (TNMM) on an aggregate basis. The TPO did not accept the aggregation approach adopted by the assessee. He separated the international transaction of ‘Group fees’ and called upon the assessee to show, inter alia, the evidence of actual receipt of services from its Associated Enterprise (AE) for ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 3 which the payment of Rs.6,12,48,544/- was made; and also whether such services were needed or gave any benefit to it. The assessee furnished some details including certain e-mails, which, in the opinion of the TPO, did not prove any actual rendition of services by the AE. In the absence of the assessee establishing the receipt of services, the TPO, applied the Comparable Uncontrolled Price (CUP) method and determined Nil ALP of the transaction. The TPO separately discussed the payment made by the assessee towards `Research and Development costs shared’ amounting to Rs.4.21 crore, which amount was paid to Faurecia, France. On being called upon to substantiate, the assessee submitted that such payment was made towards the Generic research and development for the use of all companies in the Faurecia group. The TPO noted that the assessee had also paid Royalty of Rs.2,20,39,766/- to its AE and questioned the need for separate payment of R&D Costs. In the absence of the assessee furnishing any plausible evidence, the TPO determined Nil ALP of the R&D cost as well. This led to proposing transfer pricing adjustment of Rs.10,34,34,819/-. The AO notified the draft order with the transfer pricing adjustment. The assessee approached the Dispute Resolution Panel (DRP) and submitted additional evidence in support of receipt of services. The DRP ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 4 refused to admit it and affirmed the draft order on this count. As a corollary, the AO made the transfer pricing addition in the final assessment order. 3. We have heard the rival submissions and perused the relevant material on record. The international transaction under consideration is payment of ‘Group fees’ totalling Rs.10.34 crore, having two constituents, viz., Rs.6.24 crore under the ‘Service Agreement with Faurecia, France; and Rs.4.21 crore under Cost Sharing Agreement with Faurecia, France. The assessee aggregated this overall transaction with other international transactions, which the TPO did not approve. The first question is whether the TPO was justified in segregating the international transaction of payment of ‘Group fees’ from others. It is seen that similar stand was taken by the assessee as well as the TPO on this issue in earlier years. The Tribunal, vide its order (ITA No.1592/PUN/2019) dated 20-05-2022, has countenanced the action of the authorities below on this score for the A.Y. 2011-12. Similar view has been followed by the Tribunal for the next year as well, that is, A.Y. 2012-13 holding that such a transaction needs to be separately benchmarked. The facts and circumstances for the year under consideration are admittedly similar. Following the view taken by the Tribunal for the immediately preceding two years, we uphold ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 5 the segregation of the international transaction of payment of ‘Group fees’ from the other international transactions. 4. The next question is about the services received by the assessee against which the payment in question was made. The assessee furnished certain incomplete evidence not to the satisfaction of the TPO. It came out with certain other additional evidence in support of the receipt of services, running into around 1200 pages before the DRP. The Panel refused to admit it. The ld. AR brought to our notice that similar position prevailed for the immediately preceding assessment year for which the assessee unsuccessfully tried to furnish additional evidence before the DRP, but the Tribunal restored the matter directing reconsideration of such evidence. 5. It hardly needs to be emphasized that receipt of services is sine qua non for justifying deduction towards their payment. The ALP cannot be of any hypothetical services but of the actual services received inasmuch as it is determined of a transaction and not of the payment against the transaction. If no services are established to have been actually received from the AE and still some payment is made, obviously, the ALP of the transaction would be Nil for there being no quid pro quo for the payment. Ex consequenti, no deduction can be allowed for payment towards non-services. It is only when the ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 6 services are received that the deduction, as a consequence of the ALP determination, can follow to the extent of the services actually received. 6. Given the fact that receipt of services is fundamental to deduction in the computation of income, it becomes paramount to examine the actual receipt of services for which the assessee paid the amount. At this juncture, it is elementary to keep in mind that onus is always on the assessee to prove the receipt of the services. Adverting to the facts of the extant case, it is noticed that the assessee furnished only a few documents before the TPO to demonstrate the services, which in the opinion of the Officer, were either general or did not prove the receipt of services. The assessee remained unsuccessful in getting the additional evidence admitted before the DRP. Such additional evidence is decisive for reaching the conclusion as to the receipt or non-receipt or the extent of receipt of services. Since such evidence has not been examined either by the TPO or the DRP, it would be premature on our part to embark an enquiry in this regard for the first time and comment on the same. In the given facts and circumstances, we are of the considered opinion that it would be just and proper if the impugned order on this score is set-aside and the matter is remitted to the file of the AO/TPO for ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 7 examining all the evidence to determine the factum of receipt of services. We order accordingly. In such a fresh exercise, the assessee will prove the receipt of services with all the evidence at its command to the satisfaction of the AO/TPO. The authorities, while examining the nature of services against the international transaction of `Group Fees’ will keep in mind that the assessee also separately paid to its AE a sum of Rs.1.44 crore as `Professional expenses’; Rs.2.57 lakh for `Training’; and Rs.1.20 crore as `Reimbursement of expenses’. It should be kept in mind that the relevant evidence relied by the assessee in support of ‘Group fees’ should be relevant only for ‘Group fees’ and not for other international transactions of expenses as noted above. 7. In the context of evaluation of R&D Cost sharing component of Rs.4.21 crore, the first thing to be ascertained by the AO is that the assessee paid this amount for availing some R&D services from its AE or just contributed its share in the R&D carried out by the latter, which did not culminate into conferring any direct benefit to the assessee during the year. It is relevant to note that the assessee paid the amount to Faurecia, France, which is in addition to payment of another sum of Rs.2.20 crore under the international transaction of `Payment of Royalty’ for use of Technology and Knowhow owned ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 8 by the AE. A pertinent question that has rightly been raised by the TPO is that if the assessee has to contribute towards Research & Development costs incurred by its AE for development of technology and know-how, then where is the point for making any payment separately towards Royalty? When the attention of the ld. AR was drawn towards this point, he submitted that the assessee was carrying on certain Research & Development activity at its own end and the AE assisted in such activity for which a sum of Rs.4.21 crore was paid. On being called upon to substantiate the claim with the help of the expenditure incurred by the assessee on its own Research & Development debited either to the Profit and loss account or shown in the Balance sheet, the ld. AR, on examination of the Annual accounts of the assessee, candidly admitted that no such expenditure was appearing therein. This shows that the theory of the assessee carrying out its own Research & Development has no legs to stand on. 8. Out of total payment of Rs.10.34 crore under the international transaction of `Group fees’, a sum of Rs.4.21 crore has been incurred towards Research & Development costs for the year under consideration. For the A.Y. 2011-12, the assessee paid Rs.11.63 crore towards such costs, which included a sum of Rs.4.04 crore ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 9 towards Research & Development cost sharing. Payment for such costs for the A.Y. 2012-13 stands at Rs.12.75 crore, but the separate figure of payment for Research & Development Cost sharing is not available. There is no information available on record for the payment made by the assessee towards R&D Cost sharing for prior years. This analysis deciphers that the assessee was wholeheartedly contributing towards Research & Development carried out by its AE. The Officer should examine the nature of development as a consequence of such costs contributions and the utilization of the same by the assessee in its business. That is the way to unearth the fact whether the royalty paid is for the same development or some different works. If the on-going R&D by the AE is towards development of Technology and Know-how used by all the group concerns including the assessee, then there can be no rationale on the part of the assessee to also simultaneously pay Royalty for the use of the same Technology and Know-how. Once the payment has been made towards share in R&D costs, which is a pre-development stage of the Technology and Know-how, then, there can be no logic in paying royalty once again for the use of the same Technology and Know-how after its development. An owner of an asset cannot be called upon to pay for its use. The ld. AR did not have any idea about ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 10 the outcome of the huge R&D costs shared by the assessee over the period. 9. There can be another possibility that R&D cost sharing is for a subject different from the use of Technology and Know-how against which the assessee paid Royalty. If both the payments are for two different air-tight things, without any overlapping, then there can be no embargo on allowing the deduction for both, after the ALP determination of the R&D Cost sharing. However, the ld. AR did not have any record to show the nature of benefit received for payment of royalty and R&D cost sharing. While evaluating the consideration for the R&D Cost sharing payment, the AO will look into the above discussed factors also. 10. Having discussed about the examination of the availment of actual services by the assessee, the next step is to determine the ALP of the international transaction of payment of ‘Group fees’. The TPO invoked the CUP method and determined Nil ALP on the ground that no evidence of receipt of services was provided. Once, on a fresh examination of the evidence to be filed by the assessee, if the TPO comes to the conclusion that the services were actually availed, then he will proceed to determine the ALP of the international transaction afresh. It is made clear that all the methods for determination of the ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 11 ALP are open before the TPO, who, depending upon the facts and circumstances, would be competent to adopt any one of them as the most appropriate method. In the ultimate analysis, we set-aside the impugned order and remit the matter of transfer pricing addition of Rs.10.34 core to the AO/TPO for a fresh determination in the hue of discussion made above. Needless to say, the assessee will be allowed reasonable opportunity of hearing. 11. Ground No. C about disallowance of Excise Duty amounting to Rs.6,49,823/- u/s.43B of the Act was not pressed by the ld. AR. The same is, therefore, dismissed. 12. Ground No. A is general and Ground No. D is consequential. Ground No. E about the imposition of penalty is premature. 13. In the result, the appeal is partly allowed for statistical purposes. Order pronounced in the Open Court on 31 st October, 2022. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; ददन ांक Dated : 31 st October, 2022 सतीश ITA No.3031/PUN/2017 M/s. Faurecia Automotive Seating India Private Limited 12 आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपील थी / The Appellant; 2. प्रत्यथी / The respondent 3. The CIT(A)-13, Pune 4. The PCIT-5, Pune 5. DR, ITAT, ‘C’ Bench, Pune 6. ग र्ड फ ईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अदधकरण ,पुणे / ITAT, Pune Date 1. Draft dictated on 28-10-2022 Sr.PS 2. Draft placed before author 31-10-2022 Sr.PS 3. Draft proposed & placed before the second member JM 4. Draft discussed/approved by Second Member. JM 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *