Eaton Industries Manufacaturing GmbH., Pune V. Deputy Commissioner of Income-tax,

ITA 415/PUN/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 0275 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-12-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 08-04-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Additional evidence
• Section: 92C; 143(3); 234B; 37(1); 37; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , , , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 415 /PN/201 5 / ASSESSMENT YEAR : 20 1 1 - 1 2 EATON INDUSTRIES MANUFACTURING GMBH, 145, OFF MUMBAI PUNE ROAD, PIMPRI, PUNE 41101 8 . / APPELLANT PAN: AA BC E6833D VS. THE DY. COMMISSIONER OF INCOME - TAX (INTERNAT IONAL TAXATION) - I, PUNE . / RESPONDENT / APPELLANT BY : SHRI VISHAL KALRA / RESPONDENT BY : S HRI RAJEEV KUMAR , CIT / DATE OF HEARING : 14.12 .201 6 / DATE OF PRONOUNCEMENT: 28 . 12 .201 6 DATE OF HEARING : 14.12 .201 6 DATE OF PRONOUNCEMENT: 28 . 12 .201 6 / ORDER PER SUSHMA CHOWLA, J M : TH IS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF DY. C IT(INTERNATIONAL TAXATION) - I , PUNE , DATED 2 3 . 02 .20 1 5 RELATING TO ASSESSMENT YEAR C IT(INTERNATIONAL TAXATION) - I , PUNE , DATED 2 3 . 02 .20 1 5 RELATING TO ASSESSMENT YEAR 20 1 1 - 1 2 PASSED UNDER SECTION 144C(13) R .W.S. 143(3) OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE A O HAS ERRED IN ASSESSING THE TOTAL INCOME OF THE APPELLANT UNDER S ECTION 143(3) READ WITH SECTION 144C(13) OF THE ACT AT INR 2,76 , 23,600 IN PURSUANCE TO THE DIRECTIONS ISSUED BY THE DRP , AS AGAINST RETURNED INCOME OF INR 1 , 33 , 23 , 590 . ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 2 2 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW , THE A O / DRP HAVE ERRED IN DISALLOWING THE EXPENDITURE OF INR 39,70 , 458 UNDER SECTION 37(1) OF THE ACT , TOWARDS COST ALLOCATED BY THE ASSOCIATED ENTERPRISES ('AES ' ) 37(1) OF THE ACT , TOWARDS COST ALLOCATED BY THE ASSOCIATED ENTERPRISES ('AES ' ) OF THE APPELLANT IN RESPECT OF PROVISION OF SUPPORT SERVICES , ALLEGING THAT THE APPELLANT HAD FAILED TO ESTABLISH THE RECEIPT OF SERVICES AND THE BENEFITS REALIZED FROM SUCH SERVICES . THE A O / DRP HAVE FURTHER ERRED BY DETERMINING THE ARM ' S LENGTH PRICE ( ' ALP') FOR SUCH SUPPORT SERVICES AS NIL . 3 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW , THE A O / DRP HA VE ERRED IN DISALLOWING THE EXPENDITURE OF INR 33 , 67 , 455 , UNDER SECTION 37(1) OF THE ACT , TOWARDS COST ALLOCATED BY THE AES , SPECIFICALLY INCURRED IN CONNECTION WITH THE APPELLANT ' S INDIAN OPERATIONS , ALLEGING THAT THE APPELLANT HAD FAILED TO ESTABLISH THE RECEIPT OF SERVICES AND THE BENEFITS REALIZED THEREFROM . THE A O/ DRP HAVE FURTHER ERRED BY DETERMINING THE ALP FOR COST ALLOCATED AS N I L . 4 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW , THE A O / DRP HAVE ERRED IN DISALLOWING THE EXPENDITURE O F INR 69,62 , 059 UNDER SECTION 37(1) OF THE ACT , TOWARDS CORPORATE COST ALLOCATED BY ITS AE , NAMELY EATON TECHNOLOGIES PR I VATE LIMITED ( ' ETPL ' ) , ALLEGING THAT THE APPELLANT HAD FAILED TO ESTABLISH THE RECEIPT OF SERVICES AND THE BENEFITS REALIZED THEREFROM . THE AO / DRP HAVE FURTHER ERRED BY DETERMINING THE ALP FOR SUCH CORPORATE COST ALLOCATED AS NIL . 5 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/DRP HAVE ERRED BY FAILING TO APPRECIATE THE SUBMISSIONS / EVIDENCES FURNISHED BY THE APPEL LANT, TO ESTABLISH THE RECEIPT OF THE ABOVE SERVICES AND BENEFITS RECEIVED THEREFROM. 6 . THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234B OF THE ACT. EACH OF THE ABOVE GROUNDS IS INDEPENDENT AND WITHOUT PREJUDICE TO THE OTHER GROUNDS OF APPEAL PREFERRED BY THE APPELLANT. 3 . GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE BEING GENERAL IS DISMISSED. 4 . THE ISSUE IN GROUND S OF APPEAL NO.2 TO 5 RAISED BY THE ASSESSEE IS AGAINST COST ALLOCATION WH EREIN THE ASSESSING OFFICER/DRP HAD DISALLOWED EXPENDITURE UNDER SECTION 37(1) OF THE ACT TOWARDS COST ALLOCATED BY THE AES. 5 . GROUND OF APPEAL NO.6 RAISED BY THE ASSESSEE IS CONSEQUENTIAL, I . E., CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT. ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 3 6 . BR IEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE IS A FOREIGN COMPANY INCORPORATED IN SWTIZERLAND WITH BRANCH OFFICE IN INDIA. THE BRANCH OFFICE CAME INTO EXISTENCE W.E.F. 09 - 06 - 2005 CONSEQUENT TO NECESSARY APPROVALS FROM RESERVE BANK OF INDIA. THE BRANCH O FFICE IS ENGAGED IN PROVIDING GLOBAL SOURCING SUPPORT SERVICES TO ITS HEAD OFFICE IN SWITZERLAND. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE WAS ENGAGED IN RENDERING PROCUREMENT SERVICES TO E IMG , SWITZERLAND FOR PROCURING GOODS FROM INDIAN SUPPLIERS FOR ITS GROUP COMPANIES, WHICH ARE ENGAGED IN THE MANUFACTURE AND DISTRIBUTION OF FLUID POWER EQUIPMENTS, ELECTRICAL, AUTOMOTIVE AND TRUCK COMPONENTS AND AEROSPACE EQUIPMENTS. THE SERVICES RENDERED DURING THE RELEVANT ASSESSMENT YEAR INCLUDE D : 1. IDEN TIFYING AND EVALUATING RAW MATERIAL SUPPLIERS IN INDIA, 2. QUALITY REVIEW OF GOODS PROCURED FROM THE INDIAN SUPPLIERS, 3. CO - ORDINATION OF SHIPMENT OF GOODS, AND 4. CO - ORDINATION FOR TIMELY PAYMENT TO INDIAN SUPPLIERS. 7. THE ASSESSEE WAS COMPENSATED B Y ITS PRINCIPAL EIMG , SWITZERLAND ON COST PLUS MARK UP OF 18.8% FOR RENDERING THE SAID SERVICES. IN CONNECTION WITH THE PROCUREMENT SERVICES, THE ASSESSEE HAD AVAILED SOME SERVICES FROM ITS AES, I.E. SUPPORT SERVICES RECEIVED BY THE ASSESSEE FROM ITS AES AMOUNTING TO RS.39,70,458/ - COSTS ALLOCATED TO THE ASSESSEE BY ITS AE AMOUNTING TO RS.1,03,29,514/ - . FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD FURNISHED THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS.1,33,23,590/ - . THE CASE OF THE ASSESSEE WA S SELECTED FOR SCRUTINY. IN THE DRAFT ASSESSMENT ORDER THE ASSESSING OFFICER SHOW CAUSED THE ASSESSEE TO SUBMIT THE BASIS OF ALLOCATION OF CORPORAT E COST BY THE AE TO THE ASSESSEE AND ALSO THE EVIDENCES FOR RECEIPT OF ACTUAL SERVICES. IN REPLY, THE ASSES SEE EXPLAINED THE MODE OF APPLICATION OF EXPENSES BY THE AE AND ALSO ELABORATED UPON THE LIST OF SERVICES UNDERTAKEN BY THE AE, COST OF WHICH WAS ALLOCATED TO THE ASSESSEE. ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 4 8 . HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED AS THE BASIS OF ALLOCATION AN D ALSO THE DOCUMENTARY EVIDENCE FOR RECEIPT OF ACTUAL SERVICES FROM THE INDIAN ENTITY WERE NOT FURNISHED, THEREFORE, THE ASSESSING OFFICER PROPOSED TO DISALLOW THE SAID EXPENSES UNDER SECTION 37(1) OF THE ACT. THE ASSESSEE FURTHER EXPLAINED THE BASIS OF A LLOCATION WHICH ADMITTEDLY HAS BEEN NOTED BY THE ASSESSING OFFICER, HOWEVER, IN THE ABSENCE OF ANY DOCUMENTARY EVIDENCE FOR THE SAME, THE ASSESSING OFFICER HELD THAT THE ASSESSEE FAILED TO PROVE THAT THE EXPENSES HAVE BEEN WHOLLY AND EXCLUSIVELY INCURRED F OR THE PURPOSE OF BUSINESS. FURTHER RELIANCE WAS PLACED ON THE ORDER OF THE DRP FOR ASSESSMENT YEAR S 2008 - 09 AND 2009 - 10 WHEREIN SIMILAR DISALLOWANCE WAS MADE. THE TPO OBSERVED THAT FOR THE YEAR UNDER CONSIDERATION THE FACTS WERE IDENTICAL TO THE FACTS I N ASSESSMENT YEAR 2009 - 10. ANOTHER OBSERVATION OF THE ASSESSING OFFICER WAS THE ASSESSEE HAS NOT PRODUCED THE ORDER OF TPO FOR ASSESSMENT YEAR 2011 - 12 WHEREIN THE COST ALLOCATION TRANSACTIONS ARE ACCEPTED AS AT ARMS LENGTH. ACCORDINGLY, THE ASSESSING O FFICER DISALLOWED THE SUPPORT SERVICES AVAILED FROM AES WORTH RS.39,70,758/ - AND ALSO CORPORATE COST ALLOCATION OF RS.1,03,29,514/ - . THE ASSESSING OFFICER ALSO ALTERNATIVELY CONSIDERED VARIOUS ASPECTS TO EXAMINE WHETHER THE INTRA GROUP SERVICES WERE AT ARM S LENGTH UNDER PARA 4.6 AT PAGES 7 TO 9 OF THE ASSESSMENT ORDER AND CONCLUDED BY HOLDING THAT PAYMENT FOR INTRA GROUP ARE BEING TREATED AT ARMS LENGTH ONLY WHEN IT IS PROVED SUBSTANTIALLY BY THE ASSESSEE THAT SUCH SERVICES WERE ACTUALLY RECEIVED AND FURT HER PROVING THAT SUCH RECEIVED SERVICES HAVE BENEFITTED IT. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP UNDER SECTION 144C(2) OF THE ACT WHO REJECTED THE OBJECTIONS OF THE ASSESSEE VIDE ORDER DATED 26 - 12 - 2014 CONFIRMING THE VARIATIONS PROPOSED BY THE ASS ESSING OFFICER. THE FINAL ORDER WAS PASSED BY THE ASSESSING OFFICER IN PURSUANT TO THE DIRECTIONS OF THE DRP MAKING TOTAL DISALLOWANCE OF RS.1,42,99,972/ - IN RELATION TO ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 5 COST ALLOCATION EXPENSES AND EXPENSES INCURRED IN RELATION TO SUPPORT SERVICES AVAILE D FROM THE AES. 9 . THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF THE ASSESSING OFFICER/DRP. THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT NO REFERENCE WAS MADE TO THE TPO U/S.92C OF THE ACT BY THE ASSESSING OFFICER WHILE ADJUDICAT ING TP ISSUE , HOWEVER, THE ASSESSING OFFICER SAYS THAT THE COST ALLOCATION HAS TO BE MADE AT NIL. HE FURTHER POINTED OUT THAT THE ASSESSEE AS A BRANCH OFFICE WAS RENDERING PROCUREMENT SERVICES TO ITS PRINCIPAL AND WAS BEING REIMBURSED AT COST PLUS 18.8% A ND THERE IS NO DISPUTE IN RESPECT OF THE SAME. HE FURTHER STATED THAT THE ASSESSEE WAS NOT MAINTAINING FULL - FLEDGED OFFICE AND HAD NO INFRASTRUCTURE IN INDIA AND WAS ALSO NOT PAYING ANY RENT BUT SINCE IT WAS UTILIZING PREMISES OF THE AES IN INDIA AND WAS ALSO USING THEIR BACK OFFICE SERVICE AND IT SUPPORT SERVICES, THEN THE COST WAS ALLOCATED BY THE RESPECTIVE AES TO THE ASSESSEE WHICH WAS DEBITED BY THE ASSESSEE . H OWEVER, THE SAID COST EXPENDITURE WAS REIMBURSED BY DEBITED BY THE ASSESSEE . H OWEVER, THE SAID COST EXPENDITURE WAS REIMBURSED BY THE PRINCIPAL AT A MARK - UP OF 18.8%. TH E LEARNED AUTHORI Z ED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSING OFFICER HAD DISALLOWED THE SAID EXPENDITURE UNDER SECTION 37(1) OF THE ACT BY TRANSGRESSING INTO TP PROVISIONS THAT ARMS LENGTH PRICE OF THE SAID COST ALLOCATION SHOULD BE TAKEN AT NIL. HE STRESSED THAT WHERE COST WAS DEBITED HAS BEEN RECEIVED WITH MARK - UP FROM THE PRINCIPAL BY THE ASSESSEE, THERE IS NO QUESTION OF DISALLOWANCE OF ANY PART OF THE COST ALLOCATED EXPENSES. OUR ATTENTION WAS DRAWN TO THE BREAK - UP OF THE DETA ILS RELATING TO SUPPORT SERVICES RECEIVED FROM THE AES WHICH ARE ENLISTED IN THE WRITTEN SUBMISSIONS AND IT WAS POINTED OUT THAT THERE IS NO MERIT IN THE DISALLOWANCE OF RS.39,70,458/, 33,67,455/ - AND SUM OF RS.69,92,059/ - ON ACCOUNT OF CORPORATE COST ALLO CATION. HE FURTHER POINTED OUT THAT THE TRIBUNAL WHILE DECIDING THE ISSUE IN ASSESSMENT YEAR 2009 - 10 HAS SENT BACK THE MATTER TO THE ASSESSING OFFICER , WHO ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 6 IN TURN GIVING EFFECT TO THE ORDER OF THE TRIBUNAL , HAD NOT MADE ANY DISALLOWANCE ON ACCOUNT COST ALLOCATION. HE STRESSED THAT WHERE THE ASSESSEE WAS RECOVERING THE COST WITH MARK - UP AND EVEN AFTER APPLYING THE TRANSFER PRICING ADJUSTMENTS , THE SAME WAS HIGHER THAN THE COMPARABLES, THERE WAS NO MERIT IN ANY DISALLOWANCE IN THE HANDS OF THE ASSESSEE. 1 0 . THE AUTHORISED REPRESENTATIVE FOR THE ASSESSEE FURTHER REFERRED TO THE DIRECTIONS OF THE DRP RELATING TO ASSESSMENT YEAR 2012 - 13 WHEREIN THE DRP DIRECTED THE ASSESSING OFFICER NOT TO MAKE ANY ADJUSTMENT OR DISALLOWANCE ON ACCOUNT OF COST ALLOCATION OF SUPPORT SERVICES AND CORPORATE COST. HE ALSO POINTED OUT THAT THE ASSESSING OFFICER IN ASSESSMENT YEAR 2012 - 13 HAD DETERMINED THE ALP AT NIL AS IN THE PRESENT CASE. HE FURTHER REFERRED TO THE ORDER OF THE ASSESSING OFFICER IN ASSESSMENT YEAR 2014 - 015 WHE REIN THE ASSESSING OFFICER HIMSELF HAS ACCEPTED THIS PROPOSITION AND HAS NOT MADE ANY DISALLOWANCE OF ANY EXPENDITURE UNDER SECTION 37(1) OF THE ACT. 1 1 . THE LD. DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS O F THE ASSESSING OFFICER/DRP. 1 2 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. IN THE FACTS OF THE PRESENT CASE BEFORE US , THE ASSESSEE IS A BRANCH OFFICE OF EIMG, SWITZERLAND TO WHICH IT WAS RENDERING PROCUREMENT SERVICES. THE ASSESSEE WA S BEING COMPENSATED ON COST PLUS 18.8% MARK - UP. THE ENTIRE COST INCURRED BY THE ASSESSEE HAS BEEN REMUNERATED BY THE EIMG, SWITZERLAND WITH A MARK - UP OF 18.8%. THE ASSESSEE HAD RECEIVED VARIOUS SUPPORT SERVICES FROM DIFFERENT AES AND THE DETAILS RELATING TO THE SAME WERE FILED BEFORE THE ASSESSING OFFICER/DRP WHICH ARE AS UNDER: ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 7 ASSOCIATED ENTERPRISES NATURE OF EXPENSE AMOUNT (INR) SUBMISSIONS FILED BEFORE THE AO/DRP EATON TECHNOLOGIES PRIVATE LIMITED ( ETPL ) BACK OFFICE ACCOUNTING SERVICES 26,50,96 0 - COPY OF SERVICE AGREEMENT ENTERED INTO BETWEEN ETPL AND THE APPELLANT FOR PROVISION OF BACK OFFICE SUPPORT SERVICES (REFER PAGES 40 - 50 OF THE PAPER BOOK) - SAMPLE COPIES OF INVOICES RECEIVED BY THE APPELLANT FROM ETPL FOR PROVISION OF BACK OFFICE ACCOUNTING SERVICE (REFER PAGES 51 - 60 OF THE PAPER BOOK) - COPY OF TP STUDY REPORT BENCHMARKING THE CHARGE PAYABLE BY THE APPELLANT TO ITS AES FOR RECEIPT OF SUPPORT SERVICES (REFER PAGES 175 AND 192 OF THE PAPER BOOK) ETPL IT AND COMMUNICATION SUPPORT SERVICES 760, 666 - SAMPLE COPIES OF INVOICES RECEIVED BY THE APPELLANT FROM ETPL FOR PROVISION OF IT AND COMMUNICATION SUPPORT SERVICES (REFER PAGES 61 - 72 OF THE PAPER BOOK) - COPY OF TP STUDY REPORT BENCHMARKING THE CHARGE PAYABLE BY THE APPELLANT TO ITS AES FOR RECEIPT OF SUPPORT SERVICES (REFER PAGES 175 AND SERVICES (REFER PAGES 175 AND 192 OF THE PAPER BOOK) EATON INDUSTRIAL SYSTEMS PRIVATE LIMITED ( EISPL ) IT AND COMMUNICATION SUPPORT SERVICES 36,653 - COPY OF TP STUDY REPORT BENCHMARKING THE CHARGE PAYABLE BY THE APPELLANT TO ITS AES FOR RECE IPT OF SUPPORT SERVICES (REFER PAGES 175 AND 192 OF THE PAPER BOOK) EATON SHARED SERVICES LIMITED, UK IT SUPPORT SERVICES POST IMPLEMENTATION SUPPORT ON ORACLE SYSTEM 5,21,979 - COPY OF TP STUDY REPORT BENCHMARKING THE CHARGE PAYABLE BY THE APPELLANT TO I TS AES FOR RECEIPT OF SUPPORT SERVICES (REFER PAGES 175 AND 192 OF THE PAPER BOOK) - SAMPLE COPIES OF INVOICES RECEIVED BY THE APPELLANT FROM EATON LIMITED UK (REFER PAGES 99 AND 114 OF THE PAPER BOOK) TOTAL 39,70,458 1 3 . WE FIND CERTAIN SPECIFIC EXP ENDITURE WAS INCURRED ON BEHALF OF THE ASSESSEE , COST OF WHICH WAS ALLOCATED BY THE AE TO THE ASSESSEE TOTALING TO RS.33,67,455/ - AND THE CASE OF THE ASSESSEE BEFORE THE AUTHORITIES BELOW WAS THAT SUCH COST ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 8 ALLOCATED BY THE AES IS TO BE ALLOWED AS EXPENDIT URE IN THE HANDS OF THE ASSESSEE. THE DETAILS OF THE EXPENDITURE ARE AS UNDER: ASSOCIATED ENTERPRISE NATURE OF EXPENSE ALLOCATION KEY AMOUNT (INR) SUBMISSIONS FILED BEFORE THE ASSESSING OFFICER/DRP EATON INDUSTRIES PRIVATE LIMITED DEPRECIATION INR 40 PE R SQUARE FOOT OF OCCUPANCY 11,44,016 - COPY OF THE TP STUDY REPORT BENCHMARKING THE COST ALLOCATED BY AES WHICH WERE SPECIFICALLY INCURRED FOR THE APPELLANT (REFER PAGES 175 AND 192 OF THE PAPER BOOK) RENT AND ELECTRICITY 604,921 TELEPHONE HEAD COUNT 173,998 SERVICE TAX 54,780 EATON POWER QUALITY PRIVATE LIMITED RENT INR 40 PER SQUARE FOOT OF OCCUPANCY 13,89,780 - DETAILS RELATING TO NATURE OF SERVICES RECEIVED, ALLOCATION KEY AND THE BENEFITS DERIVED BY THE APPELLANT FROM ALLOCATION OF SUCH COSTS BY AES (REFER PAGES 19 - 24 OF THE PAPER BOOK) TOTAL 33,67,455 1 4 . IN ADDITION TO THE TWO, EATON TECHNOLOGIES PVT. LTD. HAD ALSO ALLOCATED CORPORATE COST AMOUNTING TO RS.69,62,659/ - TOWARDS VARIOUS COMMON SERVICES PROVIDED BY IT TO THE GROUP EN TITIES AND THE COST ALLOCATION AS PER SET FORMULA WAS MADE AND WAS CHARGED TO THE RESPECTIVE COMPANIES UTILIZING THE SERVICES OF CORPORATE OFFICE ON APPROPRIATE BASIS. THE SAID APPROPRIATION WAS ON THE BASIS OF ACTUAL S WITHOUT ANY MARK - UP AND WERE IN THE FOLLOWING FIELDS: 1. HUMAN RESOURCE DEVELOPMENT AND ADMINISTRATION SERVICES 2. AUDIT, FINANCE AND STATUTORY COMPLIANCE SERVICES 3. LEGAL SUPPORT SERVICES 4. CORPORATE COMMUNICATION & MARKETING SUPPORT SERVICES 1 5 . THE ASSESSING OFFICER HAD DISALLOWED T HE SAID EXPENDITURE IN THE HANDS OF THE ASSESSEE UNDER SECTION 37(1) OF THE ACT ON THE PREMISE THAT THE ASSESSEE HAS FAILED TO FURNISH EVIDENCE IN RELATION TO ACTUAL RECEIPT OF SERVICES AND ALSO BENEFITS DERIVED FROM SUCH SERVICES BEING AVAILED BY THE ASSE SSEE. THE ASSESSING OFFICER ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 9 DETERMINED THE ALP FOR SUCH SUPPORT SERVICES AT NIL. FOR MAKING THE SAID DISALLOWANCE THE ASSESSING OFFICER PLACED RELIANCE ON IDENTICAL ISSUE BEING DECIDED IN ASSESSMENT YEAR 2009 - 10. FURTHER, THE ASSESSING OFFICER HAD ALLEG ED THAT THE ASSESSEE HAD NOT PRODUCED THE ORDER OF TPO FOR ASSESSMENT YEAR 2011 - 12 UNDER WHICH COST ALLOCATION TRANSACTIONS WERE ACCEPTED AT ARMS LENGTH. 16 . IN THE PRESENT SET OF FACTS WHERE THE ASSESSEE IS RENDERING PROCUREMENT SERVICES TO ITS PRINCIPA L AND WHICH IN TURN IS BEING COMPENSATED ON COST PLUS 18.8% MARK - UP ; WHERE THE ENTIRE COST INCURRED BY THE ASSESSEE HAS BEEN REMUNERATED WITH A MARK - UP WHICH IS BEING OFFERED TO TAX BY THE ASSESSEE IN YEAR TO YEAR, THERE IS NO MERIT IN THE ORDERS OF ASSES SING OFFICER/DRP IN MAKI NG THE AFORESAID DISALLOWANCE UNDER SECTION 37(1) OF THE ACT . W HERE THE COST DEBITED BY THE ASSESSEE HAS BEEN RECOVERED FROM ITS PRINCIPAL WITH MARK - UP AND TAXED IN THE HANDS OF THE ASSESSEE, THERE IS NO LOSS TO THE REVENUE AND IN ANY CASE THE DISALLOWANCE OF THE EXPENDITURE WOULD LEAD TO A SITUATION WHEREIN ON ONE HAND THERE IS DISALLOWANCE IN THE HANDS OF THE ASSESSEE AND ON THE OTHER HAND THE MARK - UP ON THE RECOVERY OF THE SAID EXPENDITURE IS TAXED IN THE HANDS OF THE ASSESSEE. SUCH AN ANOMALY CANNOT BE UPHELD IN THE HANDS OF THE ASSESSEE. IN ANY CASE THE ASSESSEE HAS PLACED ON RECORD THE EVIDENCE OF SUPPORT SERVICES BEING RECEIVED FROM THE AES WHICH ARE IN THE NATURE OF BACK OFFICE ACCOUNTING SERVICES AND IT SUPPORT SERVICES W HICH ENABLE THE ASSESSEE TO RUN ITS BUSINESS IN INDIA. THE ASSESSEE HAS NO ESTABLISHMENT IN INDIA AND HAS ONLY A BRANCH OFFICE WHEREIN IT IS UTILIZING THE PLACE OF ITS AES AND IS ALSO USING SERVICES FOR CARRYING ON ITS SERVICE OR PROVIDING PROCUREMENT SERV ICES TO ITS PRINCIPAL, I.E. EIMG, SWITZERLAND, THEN IT CANNOT BE SAID THAT THE SAID EXPENDITURE HAS NOT BEEN WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS . THE COST OF THE SERVICES PROVIDED BY THE AES HAS BEEN ALLOCATED ON A FORMULA WHICH HA S BEEN FOLLOWED ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 10 FORM YEAR TO YEAR AND THERE IS NO MERIT IN DISALLOWANCE OF THE COST INCURRED ON RECEIPT OF SUPPORT SERVICES FROM ITS AE. 17 . THE SECOND SET OF COST ALLOCATED BY THE AE TO THE ASSESSEE WERE THE SPECIFIC COST INCURRED BY THE SAID AES WHICH A RE DIRECTLY LINKED TO THE CARRYING ON THE BASI C ACTIVITIES/FUNCTIONS OF THE ASSESSEES BUSINESS AND HENCE THE SAME ARE TO BE ALLOWED AS EXPENDITURE UNDER SECTION 37(1) OF THE ACT. 18 . THE LAST SET OF DISALLOWANCE MADE IN THE HANDS OF THE ASSESSEE IS ON AC COUNT OF CORPORATE COST ALLOCATED BY THE AE TO THE ASSESSEE. THE SAID CORPORATE COST AS MENTIONED ABOVE IS ON ACCOUNT OF PROVISION OF SERVICES IN THE FIELD OF HUMAN RESOURCES, TAX, INTERNAL AUDIT ETC TO THE AE. EATON TECHNOLOGIES PVT. LTD. IS PERFORMING THESE CORPORATE FUNCTIONS FOR ALL THE EATON GROUP INCLUDING THE ASSESSEE AND THE SAME ARE ALLOCATED BY EATON TECHNOLOGIES PVT. LTD. IN PROPORTIONATE BASIS. THE ACTIVITIES ARE ROUTINE ACTIVITIES AND THE SAID EXPENDITURE CANNOT BE DISALLOWED ON THE GROUND T HAT ASSESSEE HAS FAILED TO PROVIDE DOCUMENTARY PROOF TO EVIDENCE RECEIPT OF BENEFITS OF CORPORAT E FUNCTIONS. IT MAY BE REITERATED HERE THAT SIMILAR SERVICES ARE BEING PROVIDED TO THE ASSESSEE BY EATON TECHNOLOGIES PVT. LTD. FROM YEAR TO YEAR. 19 . THE ASS ESSING OFFICER/DRP HAD DETERMINED THE ARMS LENGTH PRICE IN RELATION TO CORPORATE TAX ALLOCATION TRANSACTION AND PROVISIONS OF SUPPORT SERVICES A T NIL AND DETERMINED THE ALP FOR THE TRANSACTION AT NIL. UNDER THE TP PROVISIONS THE PRICE OF INTERNATIONAL TR ANSACTION IS TO BE BENCHMARKED HAVING REGARD TO THE ARMS LENGTH PRICE OF THE SAID TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS AES. THE PROVISIONS OF SECTION 37 (1) OF THE I.T. ACT ON THE OTHER HAND ENLIST THE CONDITIONS OF ALLOWABILITY OF AN EXPENDI TURE SUBJECT TO FULFILLMENT OF THE CONDITIONS STIPULATED ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 11 THEREIN. WHILE APPLYING THE PROVISIONS OF SECTION 37(1) OF THE ACT THE NATURE OF THE EXPENDITURE IS TO BE SEEN AND WHERE THE SAME IS INCURRED FOR THE PURPOSE OF BUSINESS AND IS NOT IN THE NATURE OF CAPITAL OR PERSONAL EXPENDITURE; WHEREAS UNDER THE PROVISIONS OF SECTION 92 WHAT HAS TO BE DETERMINED IS THE PRICE OF SUCH EXPENDITURE AND WHE THER THE SAME IS AT ARMS LENGTH, THEN NO ADJUSTMENT IS TO BE MADE TO THE PRICE. THE TWO PROVISIONS OPERATE IN DI FFERENT FIELDS. 2 0 . THE FIRST ASPECT TO BE ADDRESSED, VIS - - VIS THE DISALLOWANCE OF EXPENDITURE IS WHETHER THE SAME IS DISALLOWABLE UNDER SECTION 37(1) OF THE ACT. THE ASSESSEE IS INCURRING SIMILAR EXPENDITURE AND CLAIMING THE SAME AS BUSINESS EXPENDITU RE IN ITS HANDS FROM YEAR TO YEAR. THE ASSESSEE IS ALSO BEING REIMBURSED THE SAID EXPENDITURE BY ITS PRINCIPAL WITH MARK - UP OF 18.8% IN ALL THE YEARS PRECEDING AND ALSO SUCCEEDING. THE ASSESSING OFFICER WHILE MAKING THE DISALLOWANCE HAD REFERRED TO THE O RDER OF THE DRP IN ASSESSMENT YEAR 2009 - 10. THE ASSESSEE HAD CARRIED THE MATTER OF DISALLOWANCE MADE UNDER SECTION 37(1) OF THE ACT TO THE PUNE BENCH OF THE TRIBUNAL AND THE TRIBUNAL IN EATON INDUSTRIES MANUFACTURING GMBH VS. DCIT REPORTED IN 53 TAXMANN.C OM 394 (PUNE - TRIB.) RELATING TO ASSESSMENT YEAR 2009 - 10 HAD REMITTED THE MATTER BACK TO THE ASSESSING OFFICER , SINCE THE ASSESSEE HAD NEITHER PRODUCED THE BASIS OF ALLOCATION NOR PRODUCED THE DOCUMENTARY EVIDENCE FOR RECEIPT OF ACTUAL SERVICES. THE ASSESS EE HAD FURNISHED EVIDENCE BEFORE THE TRIBUNAL AND THE MATTER WAS RESTORED BACK TO THE ASSESSING OFFICER TO ADJUDICATE THE ISSUE OF ALLOWABILITY OF CORPORATE COST OF THE ALLOCATED EXPENSES. THE ASSESSING OFFICER, GIVING EFFECT TO THE ORDER OF THE TRIBUNAL VIDE ORDER DATED 28 - 03 - 2016 HAS CONSIDERED THE ISSUE AND AFTER TAKING NOTE OF THE EXPLANATION OF THE ASSESSEE FOR RECEIVING SUPPORT SERVICES AND ALSO IN RESPECT OF CORPORATE COST HAD ALLOWED THE CLAIM OF THE ASSESSEE OBSERVING THAT THE ASSESSEE HAD ALREADY BEEN REMUNERATED BY THE HEAD OFFICE ON COST PLUS MARK - UP OF 18.8%. ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 12 THE ASSESSING OFFICER ALSO OBSERVED THAT EVEN AFTER CONSIDERING THE PAYMENT TOWARDS CORPORATION SUPPORT , THE ASSESSEE WAS EARNING HIGH PROFITS AT ENTITY LEVEL IN COMPARISON TO THE COMPARA BLE COMPANIES AND CONSEQUENTLY IT WAS HELD THAT THE DISALLOWANCE OF THE ALLOCATED COST WAS NOT CORRECT. 2 1 . FURTHER, THE AUTHORISED REPRESENTATIVE FOR THE ASSESSEE FURNISHED ON RECORD THE DIRECTIONS ISSUED BY THE DRP RELATING TO ASSESSMENT YEAR 2012 - 13 UN DER WHICH THE ALLOWABILITY OF EXPENDITURE TOWARDS BACK OFFICE ACCOUNTING SERVICES, ADDITIONAL EVIDENCE WAS FILED BY THE ASSESSEE DURING THE PROCEEDING BEFORE THE DRP WHICH WAS FORWARDED TO THE ASSESSING OFFICER. THE TPO IN THE REMAND REPORT SUBMITTED THAT THE INVOICES FURNISHED BY THE ASSESSEE WHEREIN SERVICE TAX HAS BEEN CHARGED HAVE BEEN EXAMINED AND THE SAME ARE FOUND TO BE GENUINE. IT WAS ALSO STATED BY THE TPO THAT THE PREPARATION OF THE AUDITED BALANCE SHEET AND PROFIT AND LOSS ACCOUNT ESTABLISHES P ROOF FOR THE RECEIPT OF THE BACK OFFICE ACCOUNTING SERVICES SINCE THE ASSESSEE DID NOT HAVE ANY SEPARATE ACCOUNTING TEAM OF ITS OWN. AS REGARDS THE ARMS LENGTH NATURE OF THE TRANSACTION , THE TPO REMARKED THAT SINCE THE EXPENDITURE INCURRED TOWARDS BACK OFFICE ACCOUNTING SERVICES HAD BEEN INCLUDED IN COST BASIS AND RECOVER ED FROM EIMG, SWITZERLAND WITH A MARK - UP OF 18.8%, WHICH HAS BEEN ACCEPTED TO BE AT ARMS LENGTH DURING THE ASSESSMENT PROCEEDINGS, THE TRANSACTION OF SUPPORT SERVICES COULD ALSO BE CONS IDERED TO BE AT ARMS LENGTH. SIMILAR REPORT WAS GIVEN WITH REGARD TO THE RENT PAID TO AE - EATON POWER QUALITY PVT. LTD. AND ALSO TOWARDS CORPORATE SERVICE SERVICES. THE DRP ALLOWED THE CLAIM OF THE ASSESSEE TOWARDS BACK OFFICE SERVICES, PAYMENT OF RENT A ND EVEN CORPORATE SUPPORT SERVICES. ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 13 22. FURTHER, THE ASSESSING OFFICER WHILE CARRYING OUT THE ASSESSMENT PROCEEDINGS FOR ASSESSMENT YEAR 2014 - 15 DID NOT MAKE ANY DISALLOWANCE UNDER SECTION 37(1) OF THE ACT ON ACCOUNT OF ANY ALLOCATION OF COST. 2 3 . THE ASSESSEE HAD DEBITED TOTAL COST INCURRED DURING THE YEAR AT RS.6,58,82,666/ - WHICH IS EVIDENT FROM THE PROFIT AND LOSS ACCOUNT PLACED AT PAGE 130 OF THE PAPER BOOK. THE ASSESSEE CLAIMS THAT THIS RS.6.58 CRORES INCLUDE SERVICE TAX REFUND OF RS.16,12,402/ - WHICH FORM PART OF OTHER INCOME AND WAS ACCORDINGLY SHOWN AS OTHER INCOME WHILE RECOGNIZING THE REVENUE FOR THE YEAR INCLUDING THE EXCHANGE DIFFEREN CE GAIN ( NET ) . HE POINTED OUT THAT THE MARK - UP OF 18.8% AT RS.6,42,70,263/ - WORKED OUT TO RS.1,20,82,809/ - A ND THE TOTAL COST PLUS MARK - UP AT RS.7 , 6 3,53,162/ - HAS BEEN SHOWN AS SALE OF SERVICES. OUR ATTENTION WAS DRAWN TO THE PROFIT AND LOSS ACCOUNT PLACED AT PAGE 130 OF THE PAPER BOOK IN THIS REGARD AND WE HAVE VERIFIED THE SAME. THE PROFIT BEFORE TAX HAS BEEN DETERMINED IN THE HANDS OF THE ASSESSEE AT RS.1,24,07,532/ - . IN THE ENTIRETY OF THE FACT AND EVIDENCES PRODUCED BY THE ASSESSEE IN RESPECT OF ITS CLAIM OF RECEIPT OF SERVICES FROM ITS AES IN INDIA , B OTH SUPPORT SERVICES AND CORPORATE SERVICES AND ALSO CO NSIDERING THE FACT THAT THE ASSESSEE WAS RECOVERING THE SAID COST WITH MARK - UP OF 18.8%, THERE IS NO MERIT IN THE DISALLOWANCE MADE UNDER SECTION 37(1) OF THE ACT. FURTHER, THE TRANSACTION IS DEEMED TO HAVE BEEN ACCEPTED AT ARMS LENGTH PRICE WHERE NO SUC H ADJUSTMENT HAS BEEN MADE BY THE ASSESSING OFFICER. THE ASSESSING OFFICER IN ITS ORDER MAKES A REMARK THAT THE ASSESSEE HAD NOT PRODUCED THE ORDER OF TPO FOR ASSESSMENT YEAR 2011 - 12 TO SHOW THAT THE COST ALLOCATION TRANSACTIONS WERE ACCEPTED AT ARMS LENG TH. THERE IS NO MERIT IN THE SAID OBSERVATION OF THE ASSESSING OFFICER AS UNDER THE STATUTE IT IS INCUMBENT UPON THE ASSESSING OFFICER, IF IT THINKS FIT, TO MAKE A REFERENCE TO THE TPO UNDER SECTION 92C OF THE ACT TO BENCHMARK THE INTERNATIONAL TRANSACTIO NS ENTERED INTO BY THE ITA NO. 415 /PN/20 1 5 EATON INDUSTRIES MANUFACTURING GMBH 14 ASSESSEE. THE ASSESSING OFFICER IN THE PRESENT CASE HAS FAILED TO MAKE ANY SUCH REFERENCE. CONSEQUENTLY, THERE IS NO MERIT IN THE OBSERVATION OF THE ASSESSING OFFICER IN THIS REGARD. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE EXPENDITURE OF RS.1,03,29,514/ - AND RS.39,70,458/ - . THE GROUNDS OF APPEAL NO.2 TO 5 RAISED BY THE ASSESSEE ARE THUS, ALLOWED. 2 4 . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 28 TH DAY OF DECEMBER , 201 6 . SD/ - SD/ - (ANIL CHATURVEDI ) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 28 TH DECEMBER , 201 6 . SATISH / GCVSR / COPY OF THE ORDER IS FORWARDED TO : / COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT ; 2. THE RESPONDENT; 3. THE DIT (INTL. TAXATION), PUNE; 4. THE DRP, PUNE; 5. THE DR A , ITAT, PUNE; / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE