M/s. Mindarika Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 5297/DEL/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69237 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 05-08-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 16-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; YOGESH KUMAR VERMA C I
• Assessee Lawyers: PALLAVI DINODIA
• Keywords: Transfer pricing; International transaction; Corroborative evidences; Revenue expenditure

Judgement Text

ITA NO. 5297/DEL/2012 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 5297/DEL/2012 A.Y. : 200 8 - 0 9 M/S MINDARIKA PVT. LTD., B-64/1, WAZIRPUR INDUSTRIAL AREA, NEW DELHI 110 052 (PAN: AAACM 8583F) VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 6(1), NEW DELHI (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ASSESSEE BY : SH. PRADEEP DINODIA, CA, SH. R.K. KAPOOR, CA & MISS PALLAVI DINODIA, CA DEPARTMENT BY : SH. PEEYUSH JAIN, C.I.T.(D.R.) & SH. YOGESH KUMAR VERMA, C.I.T.(D.R.) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE ASSESSING OFFICER DATED 31.3.2008 PASSED U/S. 14 3(3) READ WITH SECTION 144C OF THE I.T. ACT FOR ASSESSMENT YEAR 20 08-09. 2. THE GROUNDS RAISED READ AS UNDER:- 1) THAT THE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN MAKING AN ASSESSMENT OF THE ASSESSEE'S INC OME AT RS.8, 79, 70,228/- AGAINST THE RETURNED INCOME OF R S. 8,08,05,625/- AND THUS MAKING TOTAL ADDITIONS OF RS . ITA NO. 5297/DEL/2012 2 71,64,603/- ON WHOLLY ILLEGAL, ERRONEOUS AND UNTENA BLE GROUNDS. 2) THE ORDER OF ASSESSMENT IS BAD IN LAW. 3) THAT THE LEARNED AO HAS ERRED IN LAW, ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN MAKING ADDITION ON ACC OUNT OF ARMS' LENGTH PRICE UNDER SECTION 92CA(3) OF THE INC OME-TAX ACT AMOUNTING TO RS. 26,48,678/- ON WHOLLY ILLEGAL, ERR ONEOUS AND UNTENABLE GROUNDS. 4) ON THE FACTS AND IN LAW, THE LEARNED TRANSFER PR ICING OFFICER AND THE LEARNED ASSESSING OFFICER HAVE ERRED IN PROPOSI NG, AND THE HON'BLE DISPUTE RESOLUTION PANEL HAS FURTHER ERRED IN CONFIRMING, THE ADDITION OF 26,48,678/- TO THE INCO ME OF THE APPELLANT, BY DETERMINING THE ARM'S LENGTH PRICE OF THE FOLLOWING TRANSACTIONS AT RS. NIL: I. PAYMENT OF TECHNICAL FEES RS. 12,31,863/- 2. PAYMENT OF TRAINING AND TESTING EXPENSES RS. 13,46,823/- 3. PAYMENT OF DESIGN AND DEVELOPMENT EXPENSES RS. 69,992/- 5) THE ID. TPO, LD. AO AND THEN FURTHER LD.DRP HAV E ERRED IN MAKING AN ADJUSTMENT FOR THE ENTIRE VALUE OF THE TR ANSACTION WITHOUT CONSIDERING THE FACT THAT THE ASSESSEE HAS NOT CLAIMED THE ENTIRE EXPENDITURE AS REVENUE EXPENDITURE AND H AS CAPITALIZED 12,31,863/- ON ACCOUNT OF TECHNICAL FEE S PAID DURING THE YEAR. 6) ON THE FACTS AND IN LAW, THE LEARNED TRANSFER PR ICING OFFICER AND THE LEARNED ASSESSING OFFICER HAVE ERRED IN PROPOSI NG, AND THE ITA NO. 5297/DEL/2012 3 HON'BLE DISPUTE RESOLUTION PANEL HAS FURTHER ERRED IN ALLEGING THAT NO BENEFIT WAS DERIVED BY THE APPELLANT FROM R ECEIPT OF INTANGIBLE AND INTRA GROUP SERVICES. 7) THE ID. TPO, LD. AO AND THEN FURTHER LD.DRP HAVE ERRED BY DISREGARDING THE FACT THAT THE ASSESSEE IS A JOINT STOCK COMPANY AND PAYMENTS MADE TO FOREIGN AFFILIATED WHO BEING MINORITY SHAREHOLDERS CANNOT INFLUENCE THE PRICING OF THE TRANSACTIONS. 8) THE ID. TPO, LD. AO AND THEN FURTHER LD.DRP HAS ERRED IN REJECTING THE COMPARABLES SELECTED BY THE ASSESSEE BY DISREGARDING THE SEARCH PROCESS CONDUCTED BY THE AS SESSEE DURING ECONOMIC ANALYSIS. 9) THE ID. TPO, LD. AO AND THEN FURTHER LD.DRP FAIL ED TO APPRECIATE THAT THE NATURE OF PAYMENTS I.E. ROYALTY , TECHNICAL KNOW HOW FEES, REIMBURSEMENT MADE TOWARDS TRAINING AND TESTING EXPENSES AND DESIGN AND DEVELOPMENT EXPENSE S AROSE OUT OF THE SAME AGREEMENT AND HAD BEEN CLEARL Y SPELT OUT IN THE AGREEMENT. 10) THE ID. TPO, LD. AO AND THEN FURTHER LD.DRP DID NOT APPLY THE TP RULES AND REGULATION TO DETERMINE THE ALP OF THE TECHNICAL SERVICES AT NIL. 11) THAT THE DETERMINATION OF ALP AT NIL PERTAINING TO TECHNICAL KNOW HOW FEES AND REIMBURSEMENT OF TRAINING AND TES TING EXPENSES AND PAYMENT FOR DESIGN AND DEVELOPMENT EXP ENSES IS BASED ON SURMISES , CONJECTURES AND IMAGINARY CO NSIDERATION IS BAD IN LAW. 12) THE ID. TPO, LD. AO AND THEN FURTHER LD.DRP GRO SSLY ERRED IN LAW IN DETERMINING THE ALP OF THE TECHNICAL KNOW FE ES, ITA NO. 5297/DEL/2012 4 TRAINING COST, TESTING EXPENSES PAYMENT FOR DESIGN AND DEVELOPMENT EXPENSES AT NIL BY HOLDING THAT THESE S ERVICES WERE OF SUCH A NATURE THAT PARTAKES THE CHARACTER O F SHAREHOLDER SERVICES AND FOR PRESERVING THE INTERES T OF THE AE IN ASSESSEE'S BUSINESS. 13) ON THE FACTS, AND IN LAW, THE LD. AO HAS ERRED IN DISALLOWING AND THE HON'BLE DRP HAS FURTHER ERRED IN DISALLOWAN CE OF 50% OF THE CORPORATE EXPENSES I.E. RS. 45,00,000/- UNDE R SECTION 37(1)/ 40A(2) (B) OF THE ACT ON WHOLLY ERRONEOUS, I LLEGAL AND UNTENABLE GROUNDS. 13.1 THE DISALLOWANCES OF RS. 45,00,000/- IS BAD IN LAW. 13.2 THE ID. TPO, LD. AO AND THEN FURTHER LD.DRP FAILED TO APPRECIATED THAT PROVISIONS OF SECTION 40A(2)(B) AR E NOT APPLICABLE TO THE ASSESSEE TO THE EXTENT THE PAYMEN T IS NOT EXCESSIVE AND UNREASONABLE. 14) THAT EACH GROUND IS INDEPENDENT OF AND WITHOUT PREJUDICE TO THE OTHER GROUNDS RAISED HEREIN. PRAYER PRAYER PRAYER PRAYER THE APPELLANT-ASSESSEE PRAYS THAT THE RELIEF AS PER GROUNDS OF APPEAL ABOVE MAY KINDLY BE ALLOWED TO IT AND THE A PPELLANT MAY ALSO BE ALLOWED TO ADD, DELETE, AMEND OR SUBSTITUT E ANY GROUND(S) OF APPEAL EITHER AT OR BEFORE THE DATE OF HEARING. ITA NO. 5297/DEL/2012 5 3. APROP APROP APROP APROPOS TRANSFER PRICING ISSUE: OS TRANSFER PRICING ISSUE: OS TRANSFER PRICING ISSUE: OS TRANSFER PRICING ISSUE:- -- - THE ASSESSEE IN THIS CASE M/S MINDARIKA PRIVATE LIM ITED (MPL) IS A JOINT VENTURE COMPANY SINCE 1995, BETWEEN MIND A GROUP (INDIA) AND TOKAI RIKA CO. LTD. OF JAPAN WITH SHAREHOLDING AS UNDER:- MINDA GROUP INDIA - 60% TOKAI RIKA, JAPAN - 35% OTHERS - 5% 3.1 THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF ELECTRICAL COMPONENTS / PARTS I.E. LEVER COMBINATION SWITCHES, PANEL SWITCHES, ASH TRAYS AND LIGHTERS AND SUPPLIES THE SAME TO DOMESTIC FOUR WHEELER MANUFACT URERS IN THE AUTOMOTIVE SECTORS AND ALSO EXPORTS THE SAME. 3.2 IN THE TRANSFER PRICING ORDER THE TPO CONSIDERE D THE JUSTIFICATION OF ARMS LENGTH PRICE OF ROYALTY PAID BY THE TAX PAYER. THE TPO NOTED THAT ASSESSEE COMPANY HAS DEBITED TH E FOLLOWING PAYMENTS TO ITS ACCOUNT:- ROYALTY PAYMENTS : 1,56,43,832/- PAYMENT OF TECHNICAL FEE : 12,31,863/- PAYMENT OF TRAINING AND TESTING EXPENSES : 13,4 6,823/- PAYMENT MODIFICATION OF TOOLS : 165,734/- PAYMENT OF DESIGN DEVELOPMENT EXPENSES : 69,734 /- TOTAL : 1,82,92,510/- 3.3 TPO NOTED THAT TAXPAYERS HAS JUSTIFIED THE PAYM ENT OF THESE AMOUNTS BY AGGREGATING TRANSACTIONS ALONGWITH ALL O THER ITA NO. 5297/DEL/2012 6 INTERNATIONAL TRANSACTIONS FOR A SINGLE ANALYSIS BA SED ON CUP. THEREAFTER, TPO CONSIDERED THE TOTAL ROYALTY PAYME NT MADE TO AE. AFTER ELABORATELY DISCUSSING THE ISSUE ROYALTY PAI D AND THE ASSESSEE RESPONSE TO THE SAME, TPO SUMMED-UP HIS OBSERVATI ON AS UNDER:- TO SUM UP THE ALP OF THE ROYALTY PAYMENTS BY THE TAXPAYER FOR USE OF KNOW HOW IS DETERMINED AT NIL BECAUSE: 1. THE TAXPAYER DID NOT PRODUCE ANY EVIDENCE/ DOCUMENTATION ON HOW THE ROYALTY RATE FIXED. AT AN ARMS LENGTH, PARTY RECEIVING TECHNOLOGY WOULD LIKE TO SEE THE PROFITABILITY FROM FUTURE REVENUE STREAMS BEFORE FIXING A ROYALTY RATE. 2. THE TAXPAYER DID NOT PRODUCE ANY COST BENEFIT ANALYSIS AT THE TIME OF ENTERING INTO THE AGREEMENT WITH ITS AE SHOWING THAT THE ROYALTY RATE IS NOT FIXED BASED ON EXPECTED BENEFIT. 3. THERE IS NO PROOF THAT THE OTHER GROUP CONCERNS OR THIRD PARTIES ARE ALSO CHARGED IDENTICAL ROYALTY . 4. THE TAXPAYER HAS ALSO NOT BEEN ABLE TO SHOW THAT IT DERIVED ANY ECONOMIC BENEFIT FROM THE ALLEGED KNOW HOW RECEIVED THE AE. 5. THE PROFITABILITY IS BELOW THE ARITHMETICAL MEAN MARGIN OF THE COMPARABLE COMPANIES CONSIDERED BY THE TPO. 6. THE PROFIT THAT ACCRUES TO THE LICENSEE MAY NOT ARISE SOLELY THROUGH THE ENGINE OF THE TECHNOLOGY. THERE ARE RETURNS FROM THE MIX OF ASSETS IT EMPLOYEES SUCH AS FIXED AND WORKING CAPITAL AND THE RETURNS FROM INTANGIBLE ASSETS SUCH AS DISTRIBUTION SYSTEMS, TRAINED WORKFORCE, ITA NO. 5297/DEL/2012 7 ETC. ALLOWANCES NEED TO BE MADE FOR THEM. IN THE ABSENCE OF ANY DATA PROVIDED BY THE TAXPAYER, IT IS IMPOSSIBLE TO KNOW THAT WHAT PERCENTAGE OF PROFITS THE LICENSES WOULD LIKE TO SHARE AT AN ARMS LENGTH AFTER REMOVING THE RETURNS FROM ASSETS EMPLOYED AND OTHER ECONOMIC FACTORS WHICH MAY NOT ARISE SOLELY THROUGH THE ENGINE OF THE TECHNOLOGY. 7. THE TAXPAYER DID NOT GIVE THE DETAILS OF ROYALTY RATES IN THE INDUSTRY. 3.4 THEREAFTER, TPO PROCEEDED TO DETERMINE THE ARM S LENGTH PRICE. HE OBSERVED THAT AS PER THE SETTLED LAW T HE INITIAL ONUS IS ON THE ASSESSEE TO SHOW THAT THE INTERNATIONAL TRANSA CTION WAS AT ARMS LENGTH. TPO NOTED THAT IN THE PRESENT CASE T AX PAYER HAS BENCH MARKED THE TRANSACTION RELATED TO PAYMENT OF ROYALTY UNDER CUP. BUT THE TPO NOTED THAT THE TAXPAYER HAS FAIL ED TO FURNISH THE CERTAIN VITAL INFORMATION LIKE HOW THE ROYALTY RAT E WAS DETERMINED ALONGWITH THE BASIS THEREOF, WHAT COST BENEFIT ANA LYSIS WAS DONE; WHAT IS THE ROYALTY PAID BY THE OTHER AES OR INDE PENDENT PERSONS; WHAT IS THE INDUSTRY RATE; WHAT WAS THE COST INCURR ED BY THE AE FOR DEVELOPING THE INTANGIBLES; WHAT WAS THE EXPECTED B ENEFIT FROM THE USE OF THE INTANGIBLE ETC. TPO NOTED THAT SUCH INF ORMATION WAS ESSENTIAL TO BENCHMARK THE TRANSACTION. 3.5 TPO OBSERVED THAT HE WAS LEFT WITH NO OTHER ALT ERNATIVE, BUT TO BENCHMARK THE TRANSACTIONS BY APPLYING THE BENEFIT TEST. THE TPO NOTED THAT UNDER THIS TEST IT IS TO BE SEEN THAT AS TO WHETHER THE TAX PAYER HAS RECEIVED ANY TANGIBLE BENEFIT FROM THE US E OF THE INTANGIBLE WHICH WOULD HELP IT IN EARNING GREATER E CONOMIC BENEFITS. TPO OBSERVED THAT IN THE PRESENT CASE DESPITE THE U SE OF INTANGIBLE THE MARGIN OF THE ASSESSEE IS LOWER THAN THE COMPAR ABLES. FROM ITA NO. 5297/DEL/2012 8 THIS TPO INFERRED THAT THIS CLEARLY SHOWS THAT THE TECHNOLOGY HAS NOT PROVIDED ANY BENEFIT TO THE ASSESSEE. THAT NO INDE PENDENT PERSON IN SUCH A SITUATION WILL PAY ANY ROYALTY. 3.6 IN VIEW OF THE ABOVE DISCUSSIONS, TPO CONCLUDED AS UNDER:- IN VIEW OF THE ABOVE DISCUSSION AND PARTICULARLY KEEPING IN VIEW THE FACT THAT THE ASSESSEE HAS NEITHER BENCHMARKED THIS TRANSACTION PROPERLY BY APPLYING T HE MOST APPROPRIATE METHOD AND NOR HAS IT FURNISHED TH E REQUISITE INFORMATION I AM CONSTRAINED TO DETERMIN E THE ARMS LENGTH PRICE OF THIS TRANSACTION AT NIL UNDE R CUP METHOD. NO INDEPENDENT PERSON IN SIMILAR CIRCUMSTA NCES WOULD PAY ANY SUCH ROYALTY. THE ASSESSEE INSPITE OF THE FACT THAT IT WAS ASKED TO FURNISH VITAL INFORMATION ABOUT PAYMENT OF ROYALTY, TECHNICAL FEES, TRAINING AND TE STING CHARGES, HAVE NOT SUPPLIED THE DESIRED DETAILS SO AS TO REACH THE HOLISTIC CONCLUSION. I AM AWARE OF THE I.T.A.T., DELHIS DECISION IN THE CASE OF EKTA APPLIANCES (2011-TII-37-ITAT-DEL-TP). HOWEVER, THE AFORESAID DECISION IS NOT APPLICABLE AS IN THAT CAS E IT WAS FOUND THAT THE TECHNOLOGY HAD HELPED THE TAXPAYER IN REDUCING ITS LOSSES SIGNIFICANTLY. IT WAS ALSO FOUN D THAT THERE WERE PECULIAR REASONS FOR INCURRING THE LOSS ES. THUS THE AFORESAID DECISION IS OF NO HELP. SIMILAR LY, THE DECISION OF ITAT, HYDERABAD IN THE CASE OF LG POLYM ERS IS OF NO HELP AS IN THAT CASE THE TRANSACTION WAS TREA TED AS SHAM AND THE MATTER WAS RESTORED TO THE FILE OF THE ASSESSING OFFICER /TPO FOR FRESH DETERMINATION OF T HE ALP. ITA NO. 5297/DEL/2012 9 THE LD. DRP FOR THE A.Y. 2007-08 AT PARA 3 AND 7 OF THE ORDER HAS ALLOWED RELIEF TO THE ASSESSEE. RELEVANT PORTION OF THE ORDER IS REPRODUCED AS UNDER:- 3..THE PANEL FEELS THAT WHILE A PAYMENT OF ROYALT Y MAY STILL BE JUSTIFIED, THE OTHER PAYMENTS CANNOT BE HE LD AT ARMS LENGTH. THIS IS BECAUSE THAT EITHER THE SERVI CE THAT THEY CLAIM TO BE RECEIVING FOR THESE PAYMENTS IS EI THER SUBSUMED IN THE PAYMENT OF ROYALTY OR THE SUPPOSED SERVICE IS OF SUCH NATURE THAT IT PARTAKES THE CHAR ACTER OF A SHAREHOLDER SERVICE. IF INDEED SUCH A SERVICE IS PROVIDED BY THE AE, IT IS TOWARDS PRESERVING ITS IN HERENT INTEREST IN THE ASSESSEE BUSINESS. THE AE ALSO HA S TO INSOURCE UNIFORMITY OF PROCESS ACROSS THE GLOBE. .. 7.THE DRP IS OF THE OPINION THAT THE PAYMENT MADE UNDER THE HEAD ROYALTY IS AT ARMS LENGTH. AS FOR T HE PAYMENT MADE UNDER THE OTHER HEADS THEN STAND TAKEN BY THE TPO IS APPROVED. WITH DUE REGARDS TO DRPS ORDER IT MAY BE POINTED O UT THAT WHILE TREATING THE PAYMENT OF ROYALTY BY THE A SSESSEE AT ARMS LENGTH LD. DRP HAS NOT GIVEN ANY COGENT REASO NS FOR ALLOWING THE RELIEF. OTHERWISE TOO ON THE PRINCIPLE S OF RES JUDICATA EVERY YEAR IS A DIFFERENT YEAR. THEREFORE , DRPS FINDINGS FOR THE EARLIER ASSESSMENT YEAR DO NOT HAV E BEARING IN THE CURRENT YEAR. THUS THE ARMS LENGTH PRICE OF ROYALTY IS DETERMINE D AT RS. NIL. ITA NO. 5297/DEL/2012 10 A. PAYMENT OF ROYALTY AND OTHER ALLIED PAYMENTS RS. 1,82,92,510/- B. ARMS LENGTH PRICE UNDER CUP RS. NIL. C. ADJUSTMENT U/S. 92CA RS. 1,82,92,510/- THE ABOVE AMOUNT OF RS. 1,82,92,510/- IS TREATED AS ADJUSTMENTS U/S. 92CA AS THE VALUE OF ROYALTY AND T HE OTHER TRANSACTIONS IN UNCONTROLLED CONDITIONS IS TREATED AS RS. NIL UNDER CUP AND IN THE ABSENCE OF ANY SUBSTANTIATION TO SHOW THAT SUBSTANTIAL BENEFIT HAS ACCRUED TO THE TAX PAY ER. 4. UPON ASSESSEES OBJECTION DRP HELD THAT IT WAS OF THE OPINION THAT PAYMENT MADE UNDER THE HEAD ON ROYALTY IS AT ARMS LENGTH. DRP FURTHER OBSERVED THAT AS FOR THE PAYMENT MADE UNDER THE OTHER HEADS THE STAND TAKEN BY THE TPO IS APPROVED. TPO WAS DIRECTED TO COMPUTE ACCORDINGLY. ACCORDINGLY, THE ADDITION FOR TRANSFER PRICING ADJUSTMENT WAS TAKEN AT RS. 26,48,678/-. 5. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APP EAL BEFORE US. 6. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT WHILE EXAMIN ING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION, THE TPO PROCEEDED WITH A BIASED MIND, SINCE HE HAS ONLY DISCUSSED THE TRANSA CTION OF ROYALTY PAYMENT THROUGH OUT HIS ORDER. HOWEVER, ONLY IN TH E CONCLUDING PART OF HIS ORDER HE CLUBS THE PAYMENT FOR ALL SERV ICES AND KNOW HOW UNDER ROYALTY AND DETERMINED THE ALP AT NIL IN ONE STROKE. LD. COUNSEL FURTHER SUBMITTED THAT THE DRP HAS DIRECTE D THE TPO TO ALLOW THE ROYALTY PAYMENT AND DISALLOW ALL OTHER AL LIED PAYMENTS. IT HAS FURTHER BEEN SUBMITTED THAT NO LOGICAL REASONS HAVE BEEN GIVEN BY THE DRP. ITA NO. 5297/DEL/2012 11 7. LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAN D SUPPORTED THE TPOS ORDER. HE FURTHER SUBMITTED THAT IF THERE WAS ANY FLAW IN THE TPOS ORDER, IT WAS THE DUTY OF THE TRIBUNAL TO MAKE THE CORRECT FINDING OF FACT AND IN THIS CONNECTION MATTER MAY B E REMITTED TO THE FILE OF THE TPO TO GIVE A COMPREHENSIVE FINDINGS. IN THIS CONNECTION, LD. LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN C.I.T. VS. CHE TAN DAS LAXMAN DAS VIDE ORDER DATED 7.8.2012. 8. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND PERUSED THE RECORDS. WE FIND THAT TPO IN THIS CASE HAS TAKEN U P THE ISSUE OF ADJUSTMENT OF ARMS LENGTH PRICE OF ROYALTY PAID BY THE TAX PAYER. IN THIS CONNECTION, THE TPO NOTED THAT ASSESSEE HAS DE BITED THE FOLLOWING PAYMENTS:- ROYALTY PAYMENTS : 1,56,43,832/- PAYMENT OF TECHNICAL FEE : 12,31,863/- PAYMENT OF TRAINING AND TESTING EXPENSES : 13,4 6,823/- PAYMENT MODIFICATION OF TOOLS : 165,734/- PAYMENT OF DESIGN DEVELOPMENT EXPENSES : 69,734 /- TOTAL : 1,82,92,510/- 8.1 TPO NOTED THAT THE TOTAL ROYALTY MADE AND OTHER ALLIED PAYMENT MADE TO AES IS RS. 1,82,92,510/-. THEREAFTE R, TPO PROCEEDED TO EXAMINE THE VARIOUS ASPECTS OF ARMS L ENGTH NATURE OF ROYALTY PAYMENT. IN THIS CONNECTION, WE FIND THAT I N THE ENTIRE TRANSFER PRICING ORDER, THE TPO HAS ONLY DISCUSSED THE TRANSACTION OF ROYALTY PAYMENT. HOWEVER, ONLY IN THE CONCLUDING PA RA OF HIS ORDER, HE CLUBS THE PAYMENT FOR ALL SERVICES AND KNOW HOW UNDER ROYALTY ITA NO. 5297/DEL/2012 12 AND DETERMINES THE ALP AT NIL. THUS, WE FIND THAT FOR THE FOLLOWING PAYMENTS THERE IS NO INDEPENDENT DISCUSSION BY THE TPO NAMELY:- I) PAYMENT OF TECHNICAL FEE : RS. 12,31,863/- II) PAYMENT OF TRAINING AND TESTING : RS. 13,46, 823/- EXPENSES III) PAYMENT OF MODIFICATION OF TOOLS : RS. 165 ,734/- IV) PAYMENT OF DESIGN & DEVELOPMENT : RS. 69,992/ - EXPENSES 8.2 ASSESSEE FILED THE OBJECTIONS BEFORE THE DRP. THE DRP HELD THAT IN ITS OPINION, THE PAYMENT MADE UNDER HEAD RO YALTY WAS AT ARMS LENGTH, AS FOR THE PAYMENT MADE UNDER OTHER HE ADS, THE STAND TAKEN BY THE TPO WAS APPROVED. THUS, WE FIND THAT DRP HAS HELD THAT THE ROYALTY PAYMENT WAS AT ARMS LENGTH WHICH COVER A SUBSTANTIAL PART OF TPOS DISALLOWANCE AT RS. 156,4 3,832/-. THE DRP HAS OBSERVED THAT AS FOR THE PAYMENT MADE UNDER THE OTHER HEADS THE STAND TAKEN BY THE TPO WAS APPROVED. WE FIND TH AT REGARDING THE PAYMENTS MADE UNDER OTHER HEADS, TPO HAS NOT AT ALL TAKEN ANY DETAILED STAND THROUGH OUT HIS TRANSFER PRICING ORD ER. THE TPO HAS DISCUSSED THE TRANSACTION OF ROYALTY PAYMENT. HE HA S NOT TAKEN UP ANY OTHER HEADS INDEPENDENTLY. IN THESE CIRCUMSTANC ES, WE FIND THAT THERE IS NO COGENT BASIS FOR SUSTAINING THE ADDITIO N MADE WITH REGARD TO THE PAYMENT OF TECHNICAL FEE, TRAINING FEE, TEST ING EXPENSES, PAYMENT OF MODIFICATION OF TOOLS AND PAYMENT OF DES IGN AND DEVELOPMENT EXPENSES. ITA NO. 5297/DEL/2012 13 8.3 THE DRP ALSO HAS ALLOWED THE ROYALTY PAYMENT AN D DISALLOWED THE OTHER ALLIED PAYMENTS. FOR ARRIVING AT THE ABO VE DECISION, DRP HAS NOT GIVEN ANY COGENT REASONS. IN THESE CIRCUM STANCES, IN OUR CONSIDERED OPINION, THE ADDITION ON ACCOUNT OF ARM S LENGTH PRICE AMOUNTING TO RS. 26,48,678/- IS NOT SUSTAINABLE. 8.4 NOW WE DEAL WITH THE LD. DEPARTMENTAL REPRESENT ATIVES SUBMISSIONS THAT THE MATTER MAY BE REMITTED TO THE FILE OF THE TPO TO GIVE A DETAILED AND PROPER FINDING ON ALLIED PA YMENTS OTHER THAN ROYALTY. 8.5 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS. W E FIND THAT THE TPO HAS MADE THE ELABORATE ORDER WHEREBY HE HAS ONLY DEALT WITH ROYALTY ASPECT AND NOT DEALT WITH THE OTHER AL LIED PAYMENTS. THE ROYALTY PAYMENT HAS BEEN ALLOWED BY THE DRP. IN THESE CIRCUMSTANCES, ASSESSEE WILL BE PUT TO GREAT HARDSH IP, IF THE TPO IS GIVEN A SECOND INNING TO MAKE OUT A FRESH CASE. HE NCE, WE REJECT THESE SUBMISSIONS MADE BY THE LD. DEPARTMENTAL REPR ESENTATIVE. 9. APROPOS DISALLOWANCE OF 50% CORPORATE EXPENSES O F RS. 45,00,000/- 9.1 ON THIS ISSUE ASSESSING OFFICER NOTED THAT ASS ESSEE HAD MADE PAYMENT OF RS. 90,00,000/- TO GROUP AND RELATED COM PANY M/S MINDA INDUSTRIES LTD. AS UNDER:- PARTICULARS PARTICULARS PARTICULARS PARTICULARS AMOUNT AMOUNT AMOUNT AMOUNT I) OVERHEAD EXPENSES RS. 48,13,108/- ITA NO. 5297/DEL/2012 14 II) PERSONNEL COST RS. 41,86,892/- TOTAL RS. 90,00,000/- 9.2 ASSESSING OFFICER ASKED THE ASSESSEE TO JUSTIF Y THE ABOVE CLAIM. ASSESSEE EXPLAINED AS UNDER:- (A) THE CHARGES RECOVERED BY M/S MINDA INDUSTRIES LTD., THE PARENT COMPANY ARE TOWARDS SERVICES PROVIDED WITH EXPERT KNOWLEDGE IN HANDLING OF CORPORATE MATTER LI KE HR, SECRETARIAT, LEGAL, TAXES, BEST, MD OFFICE, REV IEW AND FINALIZATION OF BUDGET, MONTHLY MIS, INTERNAL A ND STATUTORY REVIEW, FINANCE PLANNING, DEBTORS REVIEW AND COMPUTATION OF TAX, ETC. (B) SERVICE TAX IS CHARGED BY THE PARENT COMPANY AND TA X IS DEDUCTED BY THE ASSESSEE COMPANY. (C) BOTH COMPANIES ARE SUBJECT TO MAXIMUM RATE OF TAX A ND THEREFORE THIS ARRANGEMENT IS TAX NEUTRAL. 9.3 THE ASSESSING OFFICER WAS NOT SATISFIED WITH T HE ABOVE EXPLANATION. HE REFERRED TO THE SALARY AND WAGE PAY MENT. HE NOTED THAT NARRATION SUBMITTED REGARDING THE WORK DONE BY THE EMPLOYEES OF MINDA INDUSTRIES LTD. IS LIAISONING WORK, ARRAN GEMENTS OF FUNDS FROM BANKS, APPLICATION FOR GETTING CERTAIN APPROVA LS, LEGAL DRAFTING, INTERVIEW FOR RECRUITMENT, LIAISONING WITH FOREIGN CUSTOMERS, SUPERVISING DIRECT TAX ISSUES, PLANNING ETC.. ASSE SSING OFFICER OBSERVED THAT THESE SERVICES ARE OF ROUTINE NATURE AND ARE NOT OF ITA NO. 5297/DEL/2012 15 HIGHLY SPECIALIZED NATURE AND OVERLAP ON MOST OF TH E SCORES FOR WHICH PROFESSIONAL CHARGES ARE RECOVERED BY MINDA INDUSTRIES LTD. 9.4 ASSESSING OFFICER FURTHER NOTED THAT IN ADDITI ON TO SALARY, EXPENDITURE HAS ALSO INCURRED OF ALL OTHER REGULAR HEADS OF EXPENSES SUCH AS LEGAL AND PROFESSIONAL CHARGES, AUDIT FEE, CONSULTANCY ETC. THAT WHEN REQUIRED MANPOWER HAS BEEN ENGAGED BY TH E COMPANY AND EXPENDITURE BEING DEBITED UNDER THE SPECIFIC H EADS, THEN THERE WAS NO NEED TO CONTRIBUTE THE EXPENSE INCURRED BY T HE PARENT COMPANY. ASSESSING OFFICER FURTHER OBSERVED THAT O N THE BASIS OF THE AGREEMENT IT CANNOT BE VERIFIED WHERE THESE COR PORATE EXPENSE WERE REQUIRED AND WHETHER THESE WERE ACTUALLY BEING INCURRED. ASSESSING OFFICER FURTHER OBSERVED THAT BY THE ABO VE BILLS OF M/S MIRANDA INDUSTRIES LTD. PLACED ON RECORD, THE SERV ICES RENDERED AND THE REQUIREMENT DOES NOT GET SUBSTANTIATED. HE OBSE RVED THAT SINCE THE CHARGES REIMBURSED ARE ON FIXED BASIS AND NOT RELATED TO THE ACTUAL SERVICES, THERE IS NO ACTUAL BASIS OF AN AP PORTIONMENT OF EXPENSES. ASSESSING OFFICER CONCLUDED AS UNDER:- IN VIEW OF THE ABOVE DISCUSSION, SINCE IT CANNOT B E DETERMINED WHETHER THE SERVICES FOR WHICH CHARGES OF RS. 90,00,000/- HAVE BEEN PAID TO M/S MIL WERE ACTUALLY (I) REQUIRED IN THE YEAR UNDER CONSIDERATI ON BY THE ASSESSEE IN ITS PRESENT SET OF RESOURCES; (I I) AVAILED; AND (III) INCURRED BY M/S MIL, HALF THE CL AIM ITA NO. 5297/DEL/2012 16 OF RS. 90,00,000/- BEING RS. 45,00,000/- IS DISALLOWED AND ADDED BACK TO THE ASSESSEES INCOME. 10. AGAINST THE ABOVE ORDER THE ASSESSEE FILED THE OBJECTIONS BEFORE THE DRP. THE DRP SUSTAINED THE ADDITION BY HOLDING AS UNDER:- WE HAVE CONSIDERED THE OBJECTIONS OF THE ASSESSEE V ERY CAREFULLY. WE ARE OF THE VIEW THAT THE ASSESSING OF FICER HAS CORRECTLY DISALLOWED 50% OF THE CHARGES PAID BY THE ASSESSEE TO ITS SISTER CONCERN, MIL. THE ASSESSEE I TSELF, HAS INCURRED SALARY AND WAGES EXPENSES OF RS. 16.43 CRORES, WHICH INCLUDED A SALARY OF RS. 63.82 LAKHS TO A COMMON DIRECTOR, MR. NIRMAL MINDA. THE SALARY AND WAGES EXPENSES OF THE ASSESSEE INCLUDE COMPENSATIO N PAID TO SENIOR OFFICER, VICE PRESIDENT, MANAGERS EX TRA AMOUNTING TO ABOUT RS. 10 CRORES. THERE IS NO DIREC T EVIDENCE FOR THE ALLEGED LIAISONING WORK ARRANGEMEN T FOR FUNDS FROM BANKS, APPLICATION FOR GETTING CERTAIN APPROVAL, LEGAL DRAFTING, INTERVIEW FOR RECRUITMENT , LIAISON WITH FOREIGN CUSTOMERS, SUPERVISING DIRECT TAX ISS UE, PLANNING ETC. CLAIMED TO HAVE BEEN RENDERED TO THE ASSESSEE BY MIL. THE CLAIM OF THE ASSESSEE THAT 17% OF THE TIME OF EMPLOYEES OF MIL HAS BEEN SPENT FOR THE ITA NO. 5297/DEL/2012 17 ASSESSEE IS ALSO WITHOUT ANY SUPPORTING EVIDENCE. T HE FURTHER CLAIM OF THE ASSESSEE THAT 17% OF THE EMPLO YEE COST OF MIL COUPLED WITH OVERHEAD EXPENSES TOTAL TO RS. 90 LAKHS IS QUITE FANCIFUL AND WITHOUT ANY BASIS. T HE ASSESSEE HAS MADE THIS ARRANGEMENT TO MATCH THE EXPENDITURE WITH THE AMOUNT OF RS. 90 LAKHS TO BE P AID TO MIL AS PER THE AGREEMENT BETWEEN TWO SISTER COMPANI ES, WHICH IS ARRANGED AS PER THE CONVENIENCE OF THE TWO GROUP COMPANIES. THE OBJECTION OF THE ASSESSEE IS ACCORDINGLY REJECTED. 11. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPE AL BEFORE US. 12. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LD. COUNSEL OF THE ASSESSEE IN THIS REGARD HAS SUBMITTE D THAT ASSESSING OFFICER IN THE ASSESSMENT ORDER AMONGST OTHER THIN GS, HAS ALLEGED THAT THE EXPENSES ARE BOGUS IN NATURE AND THE SAME HAVE BEEN BOOKED BY WAY OF SOME TAX AVOIDANCE MEASURES. HOWEV ER, THE ASSESSING OFFICER TOWARDS THE END, HAS ALLOWED 50% OF SUCH EXPENSES AS EXCESSIVE AND UNREASONABLE. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT DURING THE ASSESSMENT PROCE EDINGS, ASSESSEE HAS FILED COMPLETE DETAILS AND JUSTIFICATI ON OF INCURRING SUCH EXPENSES WHICH INTER-ALIA INCLUDE COPY OF BALA NCE SHEET OF M/S MINDA INDUSTRIES LTD TO WHOM THE SAID CORPORATE EXP ENSES HAVE BEEN PAID. THAT AMONGST OTHERS, IT WAS EXPLAINED TH AT IF ASSESSEE ITA NO. 5297/DEL/2012 18 WAS TO EMPLOY IS RESOURCES TO GET THE SIMILAR SERVI CES, IT WOULD HAVE REQUIRED INCURRING OF THE EXPENSES OF ABOUT RS. 2.1 4 CRORES BASED ON THE TIME SPENT AND THE NATURE OF SERVICES OBTAINED FROM MINDA INDUSTRIES LTD. THAT IT WAS FURTHER SUBMITTED THAT IF THE SAME SERVICES WERE TO BE OBTAINED FROM AN INDIVIDUAL CON SULTANTS, IT WOULD HAVE REQUIRED TO SPEND ABOUT RS. 3.56 CRORES. 13. LD. COUNSEL FURTHER SUBMITTED THAT ASSESSEE HAD GIVEN COMPLETE BREAKUP, TIME SPENT OF PERSONS BY M/S MI L AND DETAILED WORKING OF DEBIT NOTES RAISED. THAT IT WAS ALSO EXP LAINED THAT THE RECIPIENT IS A HIGH TAX PAYING ENTITY AND THERE SHO ULD BE NO DOUBT ABOUT THE GENUINENESS OF THE EXPENSES. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER HAS NOT CONTR ADICTED ANY OF THE ASSESSEES SUBMISSIONS AND HAS CHOSEN TO APPLY AN A DHOC DISALLOWANCE OF 50% OF EXPENSES, OUT OF TOTAL AMOUN T SPENT. 13.1 LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER H AND RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 14. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. WE FIND THAT ON THE ISSUE OF REIMBURSEMENT OF EXPENSES AMOUNTING TO RS. 90 LACS PAID TO M/S MINDA INDUSTRIES LTD., ASS ESSEE HAS CLAIMED TO HAVE MADE ELABORATE SUBMISSIONS BEFORE THE AUTHO RITIES BELOW. VARIOUS DETAILS AND THEIR BREAK UP WERE SAID TO HAV E BEEN GIVEN TO THE ASSESSING OFFICER. THAT ASSESSEE HAS EVEN SUBMI TTED TIME SPENT CHART WHEREIN THE EXACT AMOUNT OF TIME SPENT BY THE EMPLOYEES OF MINDA INDUSTRIES LTD. WERE NOTED. THAT THE ASSESSIN G OFFICER HAS NOT RESPONDED TO THE ABOVE SUBMISSIONS AND HAS PROCEEDE D TO MAKE ITA NO. 5297/DEL/2012 19 ADHOC OF 50% OF EXPENSES. DRP HAS ALSO AFFIRMED A SSESSING OFFICERS ACTION BY STATING THAT CLAIM OF ASSESSEE THAT 17% OF THE TIME OF EMPLOYEES OF MIL HAS BEEN SPENT FOR THE A SSESSEE IS ALSO WITHOUT ANY SUPPORTING EVIDENCE. THUS, WE FIND THAT THERE IS CONFLICT BETWEEN SUBMISSIONS OF THE ASSESSEE AND FINDING BY THE AUTHORITIES BELOW. WHILE ASSESSEE IS CLAIMING TO HAVE SUBMITTED ELABORATE DETAILS. THE REVENUE HAS CLAIMED THAT PROPER SUPPOR TING EVIDENCE WERE NOT THERE. 15. IN OUR CONSIDERED OPINION, IN THESE CIRCUMSTANC ES, INTEREST OF JUSTICE DEMANDS THAT THE MATTER MAY BE REMITTED TO THE FILE OF THE ASSESSING OFFICER. ACCORDINGLY, THIS ISSUE IS REMIT TED BACK TO THE FILE OF THE ASSESSING OFFICER. ASSESSING OFFICER IS DIR ECTED TO EXAMINE IN DETAIL THE DETAILS AND BREAK-UP IN THE TIME CHARTS SUBMITTED BY THE ASSESSEE AND THEREAFTER CONSIDER THE ISSUE AFRESH. NEEDLESS TO ADD THAT THE ASSESSEE SHOULD BE GRANTED ADEQUATE OPPORT UNITY OF BEING HEARD. 16. IN THE RESULT, THE APPEAL FILED BY THE ASSESS EE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 23/8/2013. SD/- SD/- [ [[ [RAJPAL YADAV RAJPAL YADAV RAJPAL YADAV RAJPAL YADAV] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 23/8/2013 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES ITA NO. 5297/DEL/2012 20