SGS INDIA P.;LTD, MUMBAI V. ADDL CIT 10(3), MUMBAI

ITA 9110/MUM/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1858 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 17-01-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 28-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SUNIL LALA
• Keywords: Transfer pricing; International transaction; Additional evidence

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K, MUMBAI BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 2406/MUM/2006 (ASSESSMENT YEAR : 2002-03) SGS INDIA PRIVATE LIMITED, SGS HOUSE, 4B, ADI SHANKRACHARYA MARG, VIKHROLI (WEST) MUMBAI -400 083 VS ADDL. COMMISSIONER OF INCOME-TAX 10(3), AAYAKAR BHAVAN, M K ROAD, MUMBAI -400 020 (APPELLANT) (RESPONDENT) ITA NO. 9035/MUM/2010 (ASSESSMENT YEAR : 2003-04) ADDL. COMMISSIONER OF MUMBAI -400 020 VS SGS INDIA PRIVATE LIMITED, MUMBAI -400 083 (APPELLANT) (RESPONDENT) C.O NO. 245/MUM/2012 ARISING OUT OF ITA NO. 9035/MUM/2010, AY. 2003-04 SGS INDIA PRIVATE LIMITED, MUMBAI -400 083 VS ADDL. COMMISSIONER OF MUMBAI -400 020 (CROSS OBJECTOR) (RESPONDENT) ITA NO. 9110/MUM/2010 (ASSESSMENT YEAR : 2003-04) SGS INDIA PRIVATE LIMITED, MUMBAI -400 083 PAN: AAACS 5514 Q VS ADDL. COMMISSIONER OF MUMBAI -400 020 (APPELLANT) (RESPONDENT) APPELLANT-CROSS OBJECTOR BY : SHRI SUNIL LALA RESPONDENT-REVENUE BY : SHRI AJEET KUMAR JAIN SHRI PRAVEEN KUMAR DATES OF HEARING :16 & 17-01-2013 DATE OF PRONOUNCEMENT : 30-01-2013 O R D E R PER VIVEK VARMA, JM: THE INSTANT APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF CIT(A) X, MUMBAI, DATED 20.01.2006. SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 2 THE INSTANT APPEALS : ONE CROSS APPEAL AND ONE APPEAL BY THE ASSESSEE AND A CROSS OBJECTION FILED BY THE ASSESSEE, EM ANATES FROM THE DIFFERENT ORDERS OF THE CIT(A), MUMBAI, DATED 20.01.2006 AND 4.10.2010. AS COMMON ISSUES ARE INVOLVED IN ALL THESE APPEALS HENCE THEY ARE CLUBBED TOGETHER AND ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. THE AR PREFERRED TO INITIATE PROCEEDINGS ON TP ISSUES FIRST, SO HE TOOK UP GROUND NO. 3 AND ITS SUB-GROUNDS, I.E. 3.1, 3.2 & 3 .3. THE AR SUBMITTED THAT HE WAS NOT PRESSING SUB GROUND NO. 3.1, TH E DR HAD NO OBJECTION, WE, THEREFORE, REJECT SUB GROUND NO. 3.1. 3. GROUND NO. 3 SUB GROUNDS 3.2 & 3.3 ARE CONNECTED, WH EREIN THERE WAS AN ADDITION PROPOSED BY THE TPO AT RS. 15,98 8,100 WITH RESPECT TO TECHNICAL FEE PAID TO AE. 4. THE AR GIVING THE DESCRIPTION OF THE BUSINESS OF THE AS SESSEE, SUBMITTED THAT THE ASSESSEE IS ONE OF THE AFFILIATES OF GEN ERALE DE SURVILLANCE (SGS), BASED IN GENEVA, SWITZERLAND, WHICH OPERATES A NETWORK OF 840 OFFICES & SUBSIDIARIES AND HAVE OVER 320 LAB ORATORIES AND HAVE PRESENCE IN OVER 140 COUNTRIES AROUND THE W ORLD, WHO ARE PROVIDING VERIFICATION, INSPECTION AND CERTIFICATIONS SERVICES INC LUDING IN INDIA FOR THE PAST OVER 50 YEARS. FROM INDIA OFFICE, THE ASSESSEE MONITORS INTERNATIONALLY TRADED AGRICULTURAL PRODUCTS, MINER ALS, PETROLEUM, PETROCHEMICALS, CONSUMER GOODS AND PROVIDES CE RTIFICATION AND OTHER SERVICES TO INDUSTRIAL ENVIRONMENT, NON DESTRUC TIVE TESTING, PROJECT RESOURCING, LOGISTICS AND HYGIENE SECTORS. 5. SINCE THE ASSESSEE IS PROVIDING SUCH A WIDE RANGE OF S ERVICES WITH ITS AES AND OTHER AFFILIATE WITH WHOM THERE WERE INTERN ATIONAL TRANSACTION, REFERENCE WAS MADE TO THE TPO WITH REGARD TO, SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 3 PARTICULARS AMOUNT TECHNICAL FEES PAID BY SGS INDIA FOR THE YEAR ENDED MARCH 31, 2002 5.04 BREAK UP OF SERVICES/BENEFITS RECEIVED BY SGS INDIA : LICENSE FEES @ 3% OF TURNOVER (RS. 89.61 CRORES) FOR US OF INTELLECTUAL PROPERTY/INTANGIBLES 2.69 AREAS, SECTOR & FUNCTION COSTS ATTRIBUTABLE TO SGS INDIA FOR THE YEAR ENDED MARCH 31, 2002 2.87 TOTAL 5.56 6. ON THE QUERY RAISED BY THE TPO FOR JUSTIFICATION OF ALP , THE ASSESSEE EXPLAINED THAT THE GROUP IS REQUIRED TO GIVE HIG H QUALITY OF SERVICE TO ITS CLIENTS AND HAS OVER THE YEARS DEVELOPED A BRAND. TO GIVE HIGH QUALITY BUSINESS, THE ASSESSEE USES THE PARENT AES TRADEMARK, NAMES AND LOGOS, MARKETING AND SALES KNOWHOW, DOMAIN, IT PA YS TO ITS PARENT AE LICENSE FEE AS PER THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH SGS SA, DATED 26.09.2000, WHICH ARE IN CONTIN UATION AND INCORPORATES APPROVALS FROM GOVERNMENT AUTHORITIES D ATED DECEMBER 1995 AND ACCORDINGLY PAYS LICENSE FEE RANGING BE TWEEN 2.5% TO 4% ON THE REVENUE GENERATED. AS PER THE INTERNATION AL STUDY TO ANALYZE FROM FISCAL AND ECONOMIC POINT OF VIEW, ALP AT 3% WAS CONSIDERED AS REASONABLE FOR THE USE OF THE INTANGIBLES PR OVIDED BY THE PARENT AE. 7. THE AR SUBMITTED THAT AS PER THE AGREEMENT AND AP PROVAL GRANTED BY FOREIGN INVESTMENT PROMOTION BOARD (FIPB) DA TED 25.09.2000, THE ASSESSEE WAS REQUIRED TO PAY TO ITS PARE NT AE, USD 10 MILLION IN 20 EQUAL QUARTERLY INSTALLMENTS OF USD 5 MILLION EACH (IT WAS LATER EXTENDED TO 38 EQUAL QUARTERLY INSTALLMENTS). 8. THE ASSESSEE AR SUBMITTED THAT SINCE THE ASSESSEE WAS BOUND BY THE WORLDWIDE AGREEMENT AND APPROVAL OF THE GOVERNME NT AGENCY, I.E. FIPB, IT HAS TO BE ACCEPTED THAT THE ASSESSEE HAS C OMPLIED WITH THE ARM LENGTH PRINCIPLES AND NO ADJUSTMENT WAS REQUIRED TO BE MADE. SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 4 9. WITH REGARD TO THE ABOVE SUBMISSIONS, THE TPO ADOPTE D TNMM TO TEST THE PAYMENT OF ROYALTY AND PROPOSED TO SELECT COMPARABLES ON FUNCTIONALLY SIMILAR COMPANIES AND THE TPO OBSERVED THAT T HE STUDY CONSIDERS EUROPEAN COUNTRIES AND COMPARABLE COMPANIES LO CATED THERE AND SINCE INDIAN BUSINESS CONDITIONS CANNOT BE MA TCHED WITH THEM, THE TPO OBSERVED THAT PROFIT MARGIN CANNOT BE MAT CHED AND CANNOT BE TAKEN AS THE BENCHMARK AND HENCE INDIAN CO MPANIES NORMAL PROFIT COULD NOT BE ACCEPTED. THE TPO, THEREFORE, E NQUIRED FROM THE ASSESSEE AS TO HOW THE LICENSE FEE COULD BE REGARDE D AT ARMS LENGTH, SPECIFICALLY WITH REGARD TO PRESS NOTE NO. 9, ISSUED BY MINISTRY OF COMMERCE AND INDUSTRY WHICH PERMITTED PAYMENT @ 1% ON DOMESTIC SALE AND 2% ON EXPORT FOR THE USE OF TRADEMARK AND BRAND NAME ON FOREIGN COLLABORATION. 10. IN RESPONSE TO THIS NOTICE, THE ASSESSEE SUBMITTED BEFORE THE TPO THAT IT HAD ADOPTED COMPARABLES OF FOUR ENTITIES AND MADE COMPARISONS, WHEREIN ONE OF THE COMPARABLES WAS AN INDEPE NDENT ENTITY. AND TO GIVE AN IDEA WITH REGARD TO MARGINS RECOVE RED AGAINST TURNOVER, THE ASSESSEE PROVIDED THE FOLLOWING TABLE : SGS INDIAS TURNOVER & MARGINS OVER THE YEARS PARTICULARS 2000-01 2001-02 2002-03 2003-04 SGS INDIAS TURNOVER (RUPEES IN CRORES) 83.54 89.61 107.45 116.40 SGS INDIAS OP/TC 13.46% 6.63% 20.05% 32.63% PAYMENT OF LUMPSUM TECHNICAL FEES (AMOUNT IN USD MILLION) 0.52 1.05 1.05 1.05 MARGIN OF COMPARABLE COMP ANIES S.NO. COMPANY NAME OPERATING PROFIT/TOTAL COST 1 UTILITY POWERTECH LTD. 7.81% 2 VIMTA LABS LTD. 32.54% SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 5 3 CHOKSI LABORATORIES LTD. 16.36% 4 ENVIRO TECHNOLOGY LTD. 5.76% MEAN 15.62% 11. FROM THE ABOVE TABLES IT IS SEEN THAT IN THE CASE OF COMPARABLES, OP/TC COMES TO 15.62%, AS AGAINST THE ASSESSEE AVERAGE 18.44%. IT WAS ALSO STATED THAT AFFILIATES LOCATED IN ASIA REGION SUCH A S MALAYSIA, THAILAND & PAKISTAN WERE PAYING LICENSE FEE @ 5% OF THE TUR NOVER. THE ASSESSEE ALSO SUBMITTED WITH RESPECT TO LICENSE FEE @ 1% THAT GUIDELINES ISSUED BY THE RBI OR FIPB ARE NOT NECESSARILY INDICATIVE OF THE ALP. IT WAS ALSO SUBMITTED THAT IN INSTANCES OF PART ICULAR MERIT, RBI OR FIPB CAN ALLOW APPROVAL OF HIGHER AMOUNT ALSO. IN THE CASE OF THE ASSESSEE, FIPB HAS ALLOWED A HIGHER AMOUNT. 12. CONSIDERING ALL FACTS, THE TPO CONSIDERED THE RATES AS PRESCRIBED BY THE PRESS NO. 9, WHEREIN THE LICENSE FEE WAS ALLOWED AT 1% ON LOCAL TURNOVER AND 2% ON EXPORT TURNOVER AND ARRIVED AT TH E ADJUSTMENT, WHICH HE COMPUTED AS PARTICULARS AMOUNT LICENSE FEES PAID 2,69,00,000 LICENSE FEE @ 1% ON LOCAL SALES OF RS 70,10,38,000/- 70,10,380 LICENSE FEE @ 2% ON EXPORT SALES OF RS 19,50,76,000/- 39,01,520 ARMS LENGTH PRICE OF LICENSE FEE 1,09,11,900 ADJUSTMENT 1,59,88,100 13. THE TPO, THEREFORE, SUGGESTED THE ADJUSTMENT BY LO WERING THE ALP AND COMPUTED THE SAME AT RS. 1,59,88,100. 14. THE ASSESSEE APPROACHED THE CIT(A), WHEREIN THE ASS ESSEE SUBMITTED (IN THE SOF) A. TO JUSTIFY THAT PAYMENT OF LICENSE FEES @ 3% IS AT ARMS LENGTH; RELIANCE WAS PLACED ON THE INTERNATIONAL BENCHMARKING STUDY COMMISSIONED BY THE SGS GROUP. THE STUDY HAS CONCLUDED THE 2.5%-4% RANGE TO BE ARMS LENGTH. B. THE SAID STUDY ALSO MENTIONED THAT IN PRINCIPLE A HIGHER RATE THAN 4% COULD BE JUSTIFIED, PARTICULARLY IN COUNTRIES WHERE THE SGS IMAGE PLAYS A SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 6 MORE SIGNIFICANT ROLE IN GENERATING BUSINESS. FURTH ER, OTHER GROUP AFFILIATES IN THE ASIA REGIONAL (MALAYSIA, THAILAND , PAKISTAN AND BANGLADESH) ARE PAYING LICENSE FEES @ 5% OF TURNOVE R AND INTERNAL LICENSE AGREEMENTS WITH MINORITY SHAREHOLDERS AND O NE THIRD PARTY ALSO RANGE BETWEEN 2.5% - 10%. C. THE ADDL. C.I.T. HAS ERRED IN LAW AND ON FACTS B Y ACCEPTING THE TREATMENT ACCORDED BY THE TPO IN DETERMINING THE AR MS LENGTH PRICE OF LICENSE FEES FOR USE OF INTANGIBLES/INTELLECTUAL PR OPERTY ON THE BASIS OF GOVERNMENT OF INDIAS PRESS NOTE NO. 9 OF 2000 ISSU ED BY THE MINISTRY OF COMMERCE AND INDUSTRY WHICH PERMITS ROYALTY @ 1% ON DOMESTIC SALES AND 2% ON EXPORT SALES FOR THE USE OF TRADE M ARK AND BRAND NAME. IN DOING SO, THE TPO HAS FAILED TO TAKE COGNI ZANCE OF THE FACT THAT THE WHERE THE PAYMENT IS INTENDED TO BE MADE FOR TR ADEMARKS, BRAND NAME AND OTHER INTANGIBLES SUCH AS KNOW-HOW, TECHNO LOGY ETC. THEN THE CEILING-RATES FOR PERMISSION UNDER AUTOMATIC ROUTE ARE 8% ON EXPORTS AND 5% ON DOMESTIC SALES WITHOUT ANY RESTRICTION ON THE DURATION OF ROYALTY PAYMENTS. 15. THE CIT(A), SUSTAINING THE ADJUSTMENT MADE BY THE TPO OBSERVED, .IT IS NOT IN DISPUTE THAT APPELLANT HAD NOT JUST IFIED SUCH PAYMENT @ 3% BASED ON ANY COMPARABLE CASES NOT WITH ANY PRESC RIBED METHOD WHERE SUCH HIGHER PAYMENTS COULD BE JUSTIFIED, HE, THEREFORE, SUSTAINED THE ADDITION. 16. IT HAS BEEN CONTENDED BEFORE US THAT THE ASSESSE E HAS MADE PAYMENTS FOR USE OF LOGOS AND OTHER INTANGIBLES, STRICTLY IN ACCORDANCE WITH THE AUTHORIZATION OF THE GOVERNMENT OF INDIA AND THE BOARD CONTROLLING THE PAYMENTS. THE AR REFERRED TO THE CASE O F SONA OKEGAWA PRECISION FORGINGS LTD. VS ADD. CIT, ITA NO. 4781/DEL/2010, WHEREIN COORDINATE BENCH AT DELHI, HELD, IT IS SEEN THAT THE MAIN QUESTION IS WHETHER THE R OYALTY PAID BY THE ASSESSEE @ 3 PER CENT OF THE NET SALE PRICE STANDS JUSTIFIED UNDER CUP. THE ASSESSEE HAS PLACED ON RECORD A COPY OF THE LET TER DT. 30 TH APRIL, 1993 WRITTEN BY THE RBI, EXCHANGE CONTROL DEPARTMEN T , TO SSS LTD. IN WHICH PAYMENT OF ROYALTY @ 3 PER CENT ON DOMESTIC S ALES WAS ALLOWED TO BE PAID FOR A PERIOD OF FIVE YEARS. THERE ARE SI MILAR OTHER CORRESPONDENCES WHICH HAVE BEEN PLACED ON RECORD. T HE ASSESSEE HAS ALSO PLACED ON RECORD A PRESS NOTE ISSUED BY THE GO VERNMENT OF INDIA, MINISTRY OF COMMERCE AND INDUSTRIES, DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION, ISSUED IN 2003, UNDER WHICH ROYALTY PAYMENT @ 8 PER CENT ON EXPORT SALES AND 5 PER CENT ON DOMESTIC SAL ES HAS BEEN REFERRED TO BE REASONABLE FOR THE PURPOSE OF PROCESSING APPR OVAL OF PAYMENTS. ON THE OTHER HAND, THE AO FAILED TO BRING ANY MATER IAL ON RECORD THAT PAYMENT OF ROYALTY @ 3 PER CENT WAS NOT AT ARMS LE NGTH. THEREFORE, THE PAYMENT STANDS JUSTIFIED UNDER THE CUP METHOD. SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 7 THE MAIN QUESTION IS WHETHER THE ROYALTY PAID BY TH E ASSESSEE @ 3 PER CENT OF THE NET SALE PRICE STANDS JUSTIFIED UNDER C UP. THE ASSESSEE HAS PLACED ON RECORD A COPY OF THE LETTER DT. 30 TH APRIL, 1993 WRITTEN BY THE RBI, EXCHANGE CONTROL DEPARTMENT, TO SONA STEERING SYSTEMS LTD. IN WHICH PAYMENT OF ROYALTY @ 3 PER CENT ON DOMESTIC S ALES WAS ALLOWED TO BE PAID FOR A PERIOD OF FIVE YEARS. ASSESSEE HAS ALSO PLACED ON RECORD A PRESS NOT ISSUED BY THE GOVERNMENT OF INDIA, MINI STRY OF COMMERCE AND INDUSTRIES, DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION, ISSUED IN 2003, UNDER WHICH ROYALTY PAYMENTS @ 8 PER CENT ON EXPORT SALES AND 5 PER CENT ON DOMESTIC SALES HAVE BEEN REFERRED TO B E REASONABLE FOR THE PURPOSE OF PROCESSING APPROVAL OF PAYMENTS. ON THE OTHER HAND, THE AO FAILED TO BRING ANY MATERIAL ON RECORD THAT PAYMENT OF ROYALTY @ 3 PER CENT WAS NOT AT ARMS LENGTH. THEREFORE, THE PAYMEN T STANDS JUSTIFIED UNDER THE CUP METHOD. 17. THE AR ALSO REFERRED TO THE ASSESSEES OWN CASE B EFORE THE HONBLE BOMBAY HIGH COURT AGAINST THE REASSESSMENT PRO CEEDINGS INITIATED BY THE AO ON THE BASIS OF THE ADDITION MADE IN TH E INSTANT YEAR, IT WAS HELD, FURTHER, THE EXPENSES IN QUESTION HAVE BEEN INCURR ED AFTER OBTAINING FIPB APPROVAL AND APPROVAL FROM THE RBI IMPUGNED N OTICE QUASHED AND SET ASIDE. ADMITTEDLY, THE EXPENSES IN QUESTIO N HAVE BEEN INCURRED AFTER OBTAINING FIPB APPROVAL AND APPROVAL FROM THE RBI. THEREFORE, REOPENING OF THE ASSESSMENT FOR ASSESSMENT YEAR 200 1-02 ON THE GROUND THAT THE TRANSACTIONS ARE NOT AT ARMS LENGT H IS WITHOUT ANY MERIT. THE LAW IN THE SUBSEQUENT YEAR BEING DIFFERE NT, REOPENING OF THE ASSESSMENT BASED ON THE SUBSEQUENT ASSESSMENT ORDER CANNOT BE SUSTAINED. IN THIS VIEW OF THE MATTER, THE REOPENIN G OF THE ASSESSMENT FOR ASSESSMENT YEAR 2001-02 ON THE GROUND THAT TRAN SACTIONS WERE NOT AT ARMS LENGTH AS HELD IN THE ASSESSMENT ORDER FOR ASSESSMENT YEARS 2002-03 CANNOT BE SUSTAINED. THE IMPUGNED NOTICE IS SUED BY THE AO UNDER S.148 OF THE ACT IS QUASHED AND SET ASIDE. AD MITTEDLY, THE EXPENSES IN QUESTION HAVE BEEN INCURRED AFTER OBTAI NING FIPB APPROVAL AND APPROVAL FROM THE RBI. THEREFORE, REOPENING OF THE ASSESSMENT FOR ASSESSMENT YEAR 2001-02 ON THE GROUND THAT THE TRAN SACTIONS ARE NOT AT ARMS LENGTH IS WITHOUT ANY MERIT. 18. WHEN WE LOOK INTO THE TABLE 1, WHERE THE BREAKUP OF SERVICES/BENEFITS RECEIVED BY SGS INDIA, WE FIND THAT THERE ARE TWO ELEMENTS, I.E. LICENSE FEE @ 3% OF TURNOVER OF 89.61 CRORES, WH ICH COMES TO 2.69 CRORES AND ASF PAYMENT WHICH COMES TO 2 .87 CRORES, WHICH, APPARENTLY STANDS ACCEPTED BY THE TPO AS THERE IS NO PROPOSED ADJUSTMENT, THEREFORE, WE ARE CONCERNED WITH A NET OF 2.1 7 (5.04 2.87). IN THAT CASE COMPUTATION MADE BY THE TPO AT 5.56 IS FACTUALLY INCORRECT. HENCE 5.56 COULD NOT HAVE BEEN THE PAYMENT M ADE, AS THE PAYMENTS DEBITED TO THE P&L ACCOUNT WAS IN ACCORDANCE WITH PRESS SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 8 NOTE, AGREEMENT DATED 26.09.2000 AND FIPB APPROVAL DATE D 06.04.2000, SAID THE PAYMENTS TO BE MADE NET OF TAXES . 19. THE DR STRONGLY OPPOSED AND CONTENDED THAT VERY BASIS OF ADOPTION OF A PARTICULAR METHOD WOULD ITSELF RENDER THE COM PUTATION AND RELIANCE BY THE ASSESSEE ON AN INFIRMITY, AS THERE CAN NOT BE ANY BENCHMARKING FOR ALP 20. AT THIS JUNCTURE, WE ENQUIRED FROM THE AR, AS TO HOW CUP COULD BE SUGGESTED, THE AR POINTED OUT THAT IN THAT SET OF C OMPARABLES AS PROVIDED BY THE ASSESSEE, THERE IS ONE ENTITY, WHICH COULD BE TAKEN AS FALLING IN CUP WHICH COULD BE COMPARED WITH THE ASSESSEE, I.E. W. RABBAL & CO. THE AR ALSO REFERRED TO THE RELEVANT RULE I.E. RULE 10B(2)(D) WHICH READS AS UNDER: 10B(2) (A) ; (B) ; (C) ; (D) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT OR DERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONO MIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WH OLESALE OR RETAIL. 21. THE DR, SUBMITTED THAT SINCE THERE IS NEITHER ANY CO MPARABLE NOR ANY BENCHMARKING DONE AS PER THE PROVISIONS OF ACT AND RULES, IT WOULD BE APPROPRIATE THAT THE CASE BE SET ASIDE TO THE AO FOR FRESH APPRAISAL FOR FRESH SEARCH AND COMPARABLES, AS MAY BE AVAILABLE. 22. WE HAVE HEARD THE ARGUMENTS AND ALSO PERUSED THE DOCUMENTS, PLACED ON RECORD. THE ISSUE BEFORE US IS ONLY ON ROYALTY AND NOT OTHER CHARGES, WHICH HAVE BEEN ACCEPTED BY THE TPO. IN THE T P STUDY, THE ASSESSEE CHOSE CUP AS THE MOST APPROPRIATE METHOD FOR THIS SEGMENT SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 9 AND ALSO RELIED ON GOVERNMENTS DIRECTIVES. THE AR ALSO DE MONSTRATED BEFORE US THAT THE ISSUE WAS COVERED BY FIPB INSTRUCTIO NS, WHERE ROYALTY IS ACCEPTED TO BE 5% TO 8%. IT WAS POINTED OUT BY THE AR THAT THIS INSTRUCTION WAS BEFORE THE TPO, WHO, MAYBE UNDER SOM E MISCONCEPTION, DID NOT REFER IN HIS DRAFT ORDER. WHEN WE APP LY THE CIRCUMSTANCES OF THE CASE WITH THE PROVISIONS OF ACT AND RULES, WE DO FIND THAT ON THE BASIS OF GLOBAL STUDY, RELIANCE CAN BE MADE ON ONE ENTITY, WHICH CAN BE ACCEPTED TO BE CUP, SO FAR AS THE BUSINESS OF THE ASSESSEE AND ITS AFFILIATES ARE CONCERNED, WHERE THE TP ST UDY IDENTIFIED THE UNCONTROLLED TRANSACTION OF ROYALTY OF 10%, AGAINST WHIC H, THE ASSESSEES PAYMENT WAS AT 3%, WHICH CAN BE ACCEPTED T O BE THE ALP. IN ANY CASE, THE COMPARABLES AS SUGGESTED BY THE TPO CANNOT BE ACCEPTED IN THE DEFINED SEGMENT OF THE BUSINESS, WHICH DO ES NOT HAVE GLOBAL PRESENCE. WE ALSO FIND THAT THE ASSESSEE HAS DONE ITS BUSINESS, STRICTLY IN ACCORDANCE WITH THE BUSINESS AGREEMENT WITH ITS PARENT AE AND HAS MADE THE PAYMENTS ALSO IN ACCORDANCE WITH THE NORMS AS PRESCRIBED BY THE GOVERNMENT OF INDIA REGULATIONS AND FI PB, MINISTRY OF COMMERCE. WE HAVE TAKE INTO CONSIDERATION THAT THE TP O ALSO USED FIPB ROUTE TO BENCHMARK THE ALP, HENCE, THE DRS OBSE RVATIONS THAT FIPB CANNOT BE TAKEN AS THE BENCHMARK, CANNOT BE ACCEPTED. 23. IN THE LIGHT OF OUR OBSERVATIONS, WE REVERSE THE ADJ USTMENT PROPOSED BY THE TPO AND HOLD THAT ASSESSEE PAYMENT M ADE ON ACCOUNT OF ROYALTY/LICENSE FEE OF RS. 1,59,88,100 TO BE AT ARMS LENGTH. 24. GROUNDS NO. 3, 3.2 & 3.3 ARE, THEREFORE, ALLOWED. 25. GROUNDS NO. 4 & 4.1 WITH REGARD PAYMENT OF RS. 28,79 4,000 ON ACCOUNT OF RESEARCH AND DEVELOPMENT. 26. SINCE THE PAYMENTS MADE UNDER THIS SEGMENT PERTAIN ED TO INTERNATIONAL TRANSACTIONS, THIS SEGMENT WAS ALSO REFERRED TO THE TPO, BEFORE WHOM, THE ASSESSEE SUBMITTED, SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 10 10. IT IS EXPLAINED BY THE ASSESSEE THAT IN ORDER TO KEEP ABREAST WITH THE VARI6US DEVELOPMENTS ON ACCOUNT OF TECHNOL OGICAL STRIDES AND BREAKTHROUGHS IN THE RECENT YEARS, RAPI D GLOBALIZATION AND THE COMPUTERIZATION THE ASSOCIATE ENTITY SWITZERLAND HAD UNDERTAKEN SEVERAL COMPUTERIZATION AND COMMUNICATION PROJECTS. IT IS STATED THAT THE ASSOC IATE ENTITY SPENT SIZEABLE ARE SUMS OF MONEY IN CONDUCTING RESE ARCH AND DEVELOPMENT IN NEW AREAS AND IS CONSTANTLY DEVELOPI NG BETTER AND MORE ECONOMICAL AND EFFICIENT METHODS, TECHNIQU ES AND PROCESS. IT IS STATED THAT SUCH PROJECTS BENEFIT TH E ASSESSEE AND THE OTHER GROUP ENTITIES AND ARE AIMED AT DEVELOPIN G LATEST CUSTOMISED SOFTWARE, NETWORK SYSTEMS AND IN TRAININ G EMPLOYEES FOR IMPLEMENTATION. IT IS STATED THAT AS SUCH PROJECTS UNDERTAKEN BY THE ASSOCIATE ENTITY WOULD BENEFIT SE VERAL AFFILIATES OF THE GROUP THE COSTS RELATING TO THE S AME ARE SHARED BY THEM. IT IS STATED THAT DURING THE PREVIOUS YEAR THE COSTS INCURRED IN RELATION TO THE E-BUSINESS PLAN WAS ALL OCATED TO THEM BY THE ASSOCIATE ENTITY. IT IS STATED THAT THE ASSE SSEE HAS OBTAINED THE APPROVAL FROM THE FIPB FOR THE PAYMENT OF A LUMP- SUM AMOUNT OF $3 MILLION IN 20 EQUAL QUARTERLY INST ALMENTS FOR THE AVAILING THE BENEFITS OF SUCH RESEARCH AND DEVE LOPMENT ACTIVITIES PURSUED BY THE ASSOCIATE ENTITY. 10.2 AS REGARDS THE REASONS GIVEN BY THE ASSESSEE REGARDING THE ARMS LENGTH NATURE OF THIS TRANSACTION, THE ONLY SU BMISSION MADE BY THE ASSESSEE IN THE STUDY REPORT AT PARAGRA PH 5.53 IS AS FOLLOWS. BASED ON UNDERSTANDING PROVIDED BY SOS SWITZERLAND, THAT SUCH RESEARCH AND DEVELOPMENT FEE S PAID BY THE ASSESSEE REPRESENTS THE COSTS ATTRIBUTABLE TO I T USING A CERTAIN APPORTIONMENT MECHANISM, IT WOULD BE POSSIB LE TO CONCLUDE THAT SUCH PAYMENT IS NOT INCONSISTENT WITH THE ARMS LENGTH PRINCIPLE. 10.3 IN SUPPORT OF THIS TRANSACTION THE ASSESSEE H AS FURNISHED A COPY OF THE FIPB APPROVAL DATED SEPTEMBER 26, 2000 WHICH PERMITS THE REMITTANCE OF A SUM OF USD 3 MILLION PAYABLE IN 20 EQUAL QUARTERLY INSTALMENTS OF USD 1.5 MILLION EACH. THE ASSESSEE HAS ALSO FILED A COPY OF LETTER DATED OCTOBER 4, 2002 W HEREIN THE ASSESSEE HAS AGREED TO BEAR THESE COSTS. REGARDING THE ALP FOR THIS TRANSACTION THE ASSESSEE HAS MERELY STATED THA T IT IS A COST ALLOCATION AND HENCE AS NO MARKUP IS INVOLVED, IT I S COMPLIES WITH THE ARMS LENGTH PRINCIPLE. 10.4 THE ASSESSEE HAS A FURTHER EXPLAINED THE NATU RE OF THIS TRANSACTION IN THEIR LETTER DATED NOVEMBER 20, 2004 . IT IS STATED THAT TO RESPOND TO THE OPPORTUNITIES EMERGING FROM THE GROWTH IN INTERNET TRADE, IN THE YEAR 1999 THE ASSOCIATE ENTI TY IN SWITZERLAND COMMISSIONED THE CREATION OF BUSINESS P LAN WHICH ANALYZED THE PROSPECTS OF THE GROUP IN THE BUSINESS TO BUSINESS SEGMENT (B2B). THE OBJECT OF THE BUSINESS PLAN WAS TO DEVELOP A STRATEGY TO ALLOW THE GROUP ENTITIES TO PROGRESSIVE LY E-ENABLE THE INTERFACE WITH EXISTING CLIENTS WHILE ADDING NEW RE VENUE GENERATING SERVICES. IT IS STATED THAT THE PROJECT WAS SPECIFICALLY UNDERTAKEN FOR THE BENEFIT OF FEW OF THE GROUP ENTI TIES TO ENABLE THEM TO GAIN FROM THE COMMUNICATION REVOLUTION IN T HE BUSINESS TO BUSINESS SEGMENT. IT IS STATED THAT THE COST HEN CE HAD TO BE ALLOCATED AMONGST THESE ENTITIES ONLY. THE ASSESSEE CONTENDS THAT THE CHARGE IN THIS REGARD IS IN THE NATURE OF COST CONTRIBUTION ARRANGEMENT AND IS IN ACCORDANCE WITH THE OECD GUID ELINES IN THIS REGARD. SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 11 27. THE TPO, AFTER EXAMINING THE CONTENTIONS OF THE ASSES SEE, OBSERVES, IN THE CASE OF A COST CONTRIBUTION ARRANGEMENT, IT WOULD BE NECESSARY FOR E ASSESSEE TO ENTER INTO A PRIOR AGRE EMENT WITH THE OTHER PARTIES TO THE ARRANGEMENT WHEREIN THE COSTS PROPOSED TO BE INCURRED BY THE VARIOUS ENTITIES WOULD BE DETERM INED, AS ALSO THE BENEFITS THAT EACH OF THE ENTITY EXPECTS TO DER IVE FROM THE ARRANGEMENT. IN THE CASE OF A COST CONTRIBUTION ARR ANGEMENT THROUGH NO SPECIFIC METHOD IS PRESCRIBED UNDER THE INDIAN TAX LAWS, THE PRINCIPLES OF OECD REQUIRES THAT THE BENE FITS WHICH A PERSON EXPECTS TO DERIVE FROM THE ARRANGEMENT SHOUL D BE COMMENSURATE WITH THE COSTS ALLOCATED TO IT. THEREF ORE, IN ORDER TO JUSTIFY THE TRANSACTION THE ASSESSEE AT LEAST NE EDS TO ESTABLISH THAT IT EXPECTED TO DERIVE CERTAIN BENEFI TS FROM THE ARRANGEMENT, THERE MUST BE A APPROXIMATE QUANTIFICA TION OF SUCH BENEFITS AND AT LEAST AT A BROAD LEVEL THE ASS ESSEE SHOULD SHOW THAT CONTRIBUTIONS MADE BY IT ARE PROPORTIONAT E TO THE BENEFITS EXPECTED. IN THE GIVEN CASE NO SUCH INFORM ATION HAS BEEN PROVIDED BY THE ASSESSEE. ALL THAT HAS BEEN FU RNISHED IS THE APPROVAL OF THE RBI FOR REMITTANCE AND A LETTER DATED OCTOBER OR 2002. NOTHING IS CONTAINED IN THESE TWO DOCUMENT S FROM WHICH WE MAY INFER THE ASSESSEES EXPECTATIONS FROM THE ARRANGEMENT AND ITS ESTIMATE AS TO THE COST THAT IT MAY HAVE TO BEAR. IN FACT THERE IS NO BASIS FOR THE 70% ALLOCAT ION MADE BY THE ASSOCIATE ENTITY. HENCE THE ALLOCATION MADE TO THE ASSESSEE IS HELD TO BE NOT RELATABLE TO IT AND THE ALP FOR THE SAME IS DETERMINED AT NIL, 28. THE TPO REFERS TO THE ASSESSEES WORKING AND OBSERVES, IN THIS CONNECTION, THE ASSESSEE WAS REQUESTED BY THIS OFFICE TO JUSTIFY E VARIOUS INTERNATIONAL TRANSACTIONS BY PER FORMING A ENTITY LEVEL TNM METHOD. IN THIS CONNECTION, THIS O FFICE HAD UNDERTAKEN A SEARCH IN THE DATABASE TO IDENTIFY OTH ER COMPANIES ENGAGED IN SIMILAR ACTIVITIES. ON THE BASIS OF THE INFORMATION OBTAINED A LIST OF CASES WAS FORWARDED TO THE ASSES SEE WHICH ACCORDING TO THIS OFFICE WERE CONSIDERED TO BE COMP ARABLE TO IT. SUBSEQUENTLY THE ASSESSEE HAS UNDERTAKEN ANOTHER SE ARCH ON THE SPECIFIC DIRECTION OF THIS OFFICE (ON WITHOUT P REJUDICE BASIS) IN THE DATABASE AND THROUGH THEIR LETTER DATED 4.3.200 5 HAVE SUBMITTED THAT THE AVERAGE MARGINS OF COMPARABLE CO MPANIES DURING THE PREVIOUS YEAR WAS 15.62% [DETAILS REPROD UCED AT PARA 7(A) EARLIER]. AS AGAINST THE SAME THE ASSESSE ES MARGINS DURING THE RELEVANT PERIOD WAS 6.63% ON COST. THE ASSESSEES COSTS AND REVENUES ARE AS UNDE R (RS. IN THOUSANDS) PARTICULARS AMOUNT INCOME (A) 965,415 FEES 896,114 OTHER INCOME 69,301 EXPENDITURE (B) 901,720 PROFIT BEFORE TAX (C = A-B) 63,695 SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 12 ADD: NON OPERATING EXPENSES (D) 24,713 LOSS ON SALE OF FIXED ASSETS 53 INTEREST 24,660 LESS: NON OPERATING INCOME (E) 30,300 OTHER INCOME 69,301 LESS: RECOVERY OF EXPENSES (39,001) OPERATING PROFIT (F=C+D-E) 58,108 OP/TC % [F/C(B-D)] 6.63% HENCE CLEARLY EVEN IF THE COMPARABLES AS IDENTIFIED BY THE ASSESSEE ARE NOT DISTURBED, IT IS FOUND THAT THE MA RGINS EARNED BY THE ASSESSEE ARE NOT COMPARABLE WITH OTHER ENTIT IES FUNCTIONING IN THIS INDUSTRY. FURTHER, IT WAS FOUND THAT TUV INDIA PVT. LTD. WHICH IS ENGAGED IN A BUSINESS SIMILAR TO THAT OF THE ASSESSEE AND IS IN FACT A COMPETITOR IN MANY SEGMEN TS WAS MAKING A NET PROFIT OF 36% ON SALES DURING THE PREV IOUS YEAR WHICH IS ALSO MUCH HIGHER THAN THAT OF THE ASSESSEE . THOUGH THE TRANSACTIONS ENTERED INTO BY TUV INDIA PVT. LTD. AR E CONTROLLED TRANSACTIONS AND BY DEFINITION CAN NOT BE USED TO D ETERMINE THE ALP, THEY STILL GIVE A FAIR INDICATION OF THE MARGI NS PREVAILING IN THE INDUSTRY. HENCE EVEN AT AN ENTITY LEVEL TNMM IT IS ESTABLISHED THAT THE INTERNATIONAL TRANSACTIONS ENT ERED INTO BY THE ASSESSEE ARE NOT AT ARMS LENGTH. AFTER MAKING THE ADJUSTMENT TO THE EXTENT PROPOSED ABOVE, THE ASSESS EES OPERATING PROFIT MARGINS WOULD STILL BE LOWER THAN THAT OF THE COMPARABLES. HENCE THE DETERMINATION OF ALP ON TRAN SACTION BY TRANSACTION BASIS IS LESSER THAN WHAT IS REQUIRED T O BE MADE UNDER THE TNM METHOD AND HENCE CORROBORATED TO THAT EXTENT. AND SUGGESTS AN ADJUSTMENT OF RS. 28,794,000 IN THIS SEGMENT. 29. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A), W HO, AFTER EXAMINING THE SUBMISSIONS MADE BEFORE HIM, OBSERVES, AS FAR AS PAYMENT OF RESEARCH AND DEVELOPMENT EXPE NSES IS CONCERNED IT IS ALSO SEEN THAT THE APPELLANT HAD AGREED TO PA Y SUE AMOUNT DESPITE THAT PRIOR ARRANGEMENT OF SHARING THE INCOME, TRUE IS THE FACT THAT EXPENSES INCURRED IN RESPECT OF RESEARCH AND DEVELO PMENT DOES NOT NECESSARILY ACCRUE THE BENEFIT AND AS SUCH THE SAME COULD NOT BE THE DETERMINATIVE FACTOR OF THE PAYMENT HOWEVER IT IS E QUALLY TRUE THAT SUCH ARRANGEMENT SHOULD CLEARLY LAY DOWN THE METHOD OF S HARING SUCH BENEFIT IN CASE OF COST SHARING ARRANGEMENTS. AND T HEREFORE IN ABSENCE OF SUCH CATEGORIC ARRANGEMENT I AM UNABLE TO ACCEDE TO THE ARGUMENTS OF THE APPELLANT THAT EXPENSES WERE JUSTIFIED FOR A LLOWANCE OF THE SAME IN TERMS LENGTH TRANSACTIONS. FURTHER AS HAS BEEN SEEN THAT FIPB APPROVAL CANNOT BE TREATED AS ACCEPTANCE OF ARMS L ENGTH PRICE MORE SO IN VIEW OF THE SPECIFIC METHOD PRESCRIBED UNDER THE ACT. THUS CONSIDERING THE FACT THAT IN COST SHARING ARRANGEME NT APPELLANT COMPANYS TERMS OF SHARING OF BENEFIT BEING NOT DEF INED EXPENSES CAN NOT BE SAID TO MEET THE CRITERIA LAID DOWN UNDER TH E STATUTE OR FOR THAT MATTER OECD MODEL AND AS SUCH I AM ALSO NOT INCLINE D TO ACCEPT THE ARGUMENTS OF THE APPELLANT IN THIS REGARD AND AS SU CH DISALLOWANCE MADE BY THE AO IN THIS REGARD IS ALSO CONFIRMED. SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 13 THE CIT(A), THUS CONFIRMED THE ADDITION, SUGGESTED BY THE TPO. 30. THE ASSESSEE IS NOW BEFORE THE ITAT. BEFORE US, THE AR SUBMITS THAT THE CASE OF THE ASSESSEE IS COVERED BY THE HONB LE BOMBAY HIGH COURT IN ITS CASE, WHEREIN, THE HONBLE BOMBAY HIGH COUR T HAD SET ASIDE THE REOPENING ON THIS ISSUE, HOLDING THAT THE PAYMEN TS HAD BEEN MADE AS PER GOVERNMENT NORMS AND APPROVALS. 31. THE DR ON THE OTHER HAND CONTENDED THAT NO DOUB T THE HONBLE BOMBAY HIGH COURT HAD SET ASIDE THE REOPENING ON THE IS SUE IN THE PRECEDING YEAR BUT THE FACT REMAINS THAT NO DETAILS OR C LARIFICATIONS HAD BEEN PROVIDED BY THE ASSESSEE, AS STATED BY THE CIT(A). THEREFORE, IN THE CIRCUMSTANCES, THE DR PLEADED THAT THE ADDITION MA Y BE CONFIRMED. 32. WE HAVE HEARD THE ARGUMENTS OF THE CONTENDING PAR TIES AND ON GOING THROUGH THE IMPUGNED ORDER, THAT THE CIT(A) HAS V ERY CATEGORICALLY OBSERVED THAT, THERE IS NOTHING ON RECORD TO SUGGEST THE BENCH MARKING THE ALP. EVEN IN THE RECORDS, WE FIND THAT THERE IS NOTHING SPECIFIC, WHICH CLEARLY SUGGESTS THE BENCH M ARK FOR THE IMPUGNED ADDITION. 33. IN THE INTEREST OF JUSTICE, WE, DEEM IT FIT TO RESTORE THE ISSUE BACK TO THE FILE OF THE AO, WHO SHALL ADJUDICATE THE ISSUE AFRESH , NEEDLESS TO SAY THAT PROPER AND ADEQUATE OPPORTUNITY SHALL BE PROV IDED TO THE ASSESSEE TO PRESENT ITS CASE. 34. IN THE RESULT, THE GROUNDS NO. 4 AND 4.1 ARE TREA TED AS ALLOWED FOR STATISTICAL PURPOSES. 35. RESORTING OURSELVES TO DOMESTIC ISSUES IN GROUNDS NO. 1 & 2. SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 14 36. GROUND NO. 1 IS IN RESPECT TO THE DISALLOWANCE OF RS. 70 ,844 ON ACCOUNT OF DELAYED PAYMENT OF CONTRIBUTION TO PF, RS. 45,90 7 ON ACCOUNT OF ESIC AND RS. 32,518 ON ACCOUNT OF THE FUND AMOUNT (RS.) PENSION FUND EDLI INSPECTION CHARGES ADMN. CHARGES DATE OF PAYMENT DUE DATE 22,582 1,355 2,981 7 13.08.2001 15.06.2001 4,413 265 583 0 17.04.2002 15.04.2002 26,995 1,620 3,564 7 AMOUNT (RS. ) DATE OF PAYMENT DUE DATE 32,518 13.08.2001 15.06.2001 31,966 16.03.2002 15.03.2002 6,360 17.04.2002 15.04.2002 70,844 THE AMOUNT OF RS. 70,844/- IS ADDED TO THE INCOME O F THE ASSESSEE. EMPLOYEES CONTRIBUTION TO ESIC:- AMOUNT (RS. ) DATE OF PAYMENT DUE DATE 1,435 23.01.2001 21.10.2001 1,508 13.01.2002 21.02.2002 7,980 23.01.2002 21.02.2002 1,159 23.01.2002 21.02.2002 542 23.01.2002 21.02.2002 9,364 25.02.2002 21.02.2002 1,142 25.02.2002 21.02.2002 414 25.02.2002 21.02.2002 273 25.02.2002 21.02.2002 10,248 25.03.2002 21.03.2002 1,311 26.03.2002 21.03.2002 9,155 01.05.2002 21.04.2002 1,376 01.05.2002 21.04.2002 45,907 THE AMOUNT OF RS. 45,907/- IS ADDED TO THE INCOME O F THE ASSESSEE. 37. FROM THE ORDER OF ASSESSMENT, WE FIND THAT THE ABOV E PAYMENTS HAVE BEEN MADE BEFORE THE DUE DATE OF FILING OF THE RETURN , IN WHICH CASE, THE IMPUGNED ADDITION CANNOT BE MADE. WE, THEREFORE, DELETE THE SAME. 38. GROUND NO. 1 IS, THEREFORE ALLOWED. SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 15 39. GROUND NO. 2 IS IN RESPECT TO THE ALLOWANCE OF CREDIT OF RS. 5,44,475 ON ACCOUNT OF TDS. 40. THE AO IS DIRECTED TO ALLOW THE CREDIT OF TDS AS PER LAW. GROUND NO. 2 IS THEREFORE, ALLOWED. 41. IN THE RESULT, THE APPEAL, AS FILED IS PARTLY ALLOWED. 42. FOR ASSESSMENT YEAR 2003-04, THE FOLLOWING APPEALS A RE FILED: APPEAL FILED BY THE DEPARTMENT, BEARING ITA NO. 9035/MUM/2010, CROSS OBJECTION FILED BY THE ASSESSEE, BEARING CO NO. 245/MUM/2012 AND APPEAL FILED BY THE ASSESSEE, BEARING ITA NO. 9110/MUM/2010 43. THE DEPARTMENT, IN ITA NO. 9035/MUM/2010 HAS RAISED THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE PAYMEN T OF TECHNICAL FEES BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE I S AT ARMS LENGTH AND HENCE NO ADJUSTMENT IS REQUIRED TO BE MA DE ON ACCOUNT OF TECHNICAL FEES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) HAS FAILED TO APPRECIATE THAT NO EVI DENCE WAS PRODUCED BY THE ASSESSEE TO ESTABLISH THAT THE PAYM ENT MADE FOR AREA, SECTOR & FUNCTIONS (ASF) COSTS WOULD BE R S 4.20 CRORES AND HENCE THE ARMS LENGTH PRICE OF ASF COSTS SHOUL D HAVE BEEN RESTRICTED TO THE DIFFERENCE BETWEEN THE TECHNICAL FEES PAID OF RS. 5.10 CRORES AND THE LICENSE FEES PAID OF RS. 3.22 C RORES. 44. THE ASSESSEE, IN CO NO. 245/MUM/2012 HAS RAISED THE FOLLOWING GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) FAILED TO APPRECIATE THAT THE REMITT ANCE OF LICENSE FEE EVEN IF COMPUTED AT THE RATE OF 3% OF TURNOVER WAS AT ARMS LENGTH.. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) FAILED TO APPRECIATE THAT THE REMITT ANCE OF TECHNICAL FEES (COMPRISING OF LICENSE FEE AND AREA, SECTOR AND SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 16 FUNCTION (ASF) CISTS(M BEING SPECIFICALLY APPROVED BY THE FOREIGN INVESTMENT PROMOTION BOARD, WAS AT ARMS LE NGTH. 45. GROUND NO. 1 IS ALREADY COVERED BY OUR DETAILED OBSER VATIONS IN ITA NO. 2406/MUM/2006, WHERE WE HAVE ACCEPTED TECHNICA L FEE AT 3% TO BE AT ARMS LENGTH AND DELETED THE ADDITION, THEREFORE , RELYING ON THE SAME FACTS, WE HOLD THAT PAYMENT OF LICENSE FEE AT 3% IN T HE CURRENT YEAR WOULD BE AT ARMS LENGTH, AS WELL. 46. THE GROUND AS RAISED BY THE DEPARTMENT IS, THEREFORE , REJECTED AND THE ASSESSEES GROUND STAND IN CO STANDS ALLOWED. 47. GROUND NO. 2 PERTAINS ASF COSTS. 48. THE ISSUE HAD NOT BEEN IMPUGNED BY THE TPO AND THE REVENUE AUTHORITIES, THEREFORE, AT THIS STAGE, TAKING UP A GROUND, W HICH WAS NEVER IN DISPUTE CANNOT BE ENTERTAINED AND HAS TO BE H ELD TO BE NON MAINTAINABLE. 49. IN THE RESULT, THE GROUND TAKEN IN THE APPEAL BY THE DEPARTMENT & IN CO BY THE ASSESSEE ARE REJECTED. 50. IN THE RESULT, THE APPEAL FILED BY THE DEPARTMENT IS DIS MISSED AND THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE ALLOWED IN PART. 51. ASSESSEES APPEAL : ITA NO. 9110/MUM/2010 52. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS: 1. THE FOLLOWING GROUNDS OF APPEAL ARE INDEPENDENT OF, AND WITHOUT PREJUDICE TO, ONE ANOTHER: 1. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE ADDITION MADE BY THE ASSESSING OFFICER/TRANSFER PRICING OFFICER WITH RESPECT TO RE SEARCH & DEVELOPMENT (R&D) EXPENSES OF RS. 1,46,51,865/- BY: SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 17 NOT APPRECIATING THE ADDITIONAL EVIDENCES PRESENTED BY THE ASSESSEE FOR JUSTIFYING THE PAYMENT OF R&D EXPENSES; DISREGARDING THE REMAND REPORT PREPARED BY THE JO INT COMMISSIONER OF INCOME TAXTRANSFER PRICING II(4), WHICH STATED THAT THE ADDITIONAL EVIDENCE PROVIDED IN RES PECT OF THE R&D EXPENSES SEEMS ACCEPTABLE; NOT APPLYING A FRESH MIND OR APPRECIATING THE NEW F ACTS AN CIRCUMSTANCES, WHILE FOLLOWING PRECEDENT FOR AY 2002-03 WHICH IS UNDER APPEAL BEFORE THE INCOME TAX APPELLATE TRIBUNAL. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED CIT(A) OUGHT TO HAVE GRANTED THE BENEFIT OF ARTICLE 10 OF THE INDIA SWITZERLAND DOUBLE TAXATION AVOIDANCE AGR EEMENT, THAT THE DIVIDEND DECLARED BY THE APPELLANT IS LIAB LE TO DIVIDEND DISTRIBUTION TAX AT THE RAT OF 10 PER CENT. 53. GROUND NO. 1 IS WITH REGARD TO TP ADJUSTMENT ON R&D EXPENSES AT RS. 1,46,51,865. IN THE PRECEDING YEAR, WE HAVE RESTOR ED THE ISSUE TO THE FILE OF THE AO FOR RECONSIDERING THE IMPUGNED ISSUE, A FRESH, AFTER AFFORDING A REASONABLE AND ADEQUATE OPPORTUNITY. 54. IN THE INSTANT YEAR AS WELL, WE RESTORE THE ISSUE TO THE FILE OF THE AO, SO THAT A CONSISTENT VIEW MAY BE TAKEN BY THE REVENUE AUTHORITY . 55. THE GROUND IS, THUS, TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 56. GROUND NO. 2 IS NOT PRESSED, HENCE THE GROUND IS REJECTED. 57. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TRE ATED AS ALLOWED PARTLY. 58. TO SUM UP: APPEAL BY THE ASSESSEE FOR AY 2002-03 IN ITA NO. 2406/ MUM/2006 IS PARTLY ALLOWED APPEAL BY THE ASSESSEE FOR AY 2003-04 IN ITA. NO. 9035/ MUM/2010 IS PARTLY ALLOWED APPEAL BY THE DEPARTMENT FOR AY 2003-04 IN ITA NO. 9110 /MUM/2010 IS PARTLY ALLOWED SGS INDIA PRIVATE LIMITED ITA NO. 2406/M/2006 ITA NO. 9110/M/2010 ITA NO. 9035/M/2010 CO NO. 245/M/2012 18 CO BY THE ASSESSEE FOR AY 2003-04 IN CO NO. 245/MUM/2 012 IS PARTLY ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JANUARY, 2013 SD/- SD/- (R.S. SYAL) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI : 30 TH JANUARY, 2013 COPY TO: 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT (A)-X, MUMBAI. 4) THE CIT, MC-X, MUMBAI. 5) THE DR, K BENCH MUMBAI. 6) COPY TO GUARD FILE BY ORDER / / TRUE COPY / / ASST. REGISTRAR, ITAT, MUMBAI *CHAVAN