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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
These appeals are originally heard and disposed of by this Tribunal vide order dated 7.4.2017. Against this assessee went in appeal before the Hon’ble Karnataka High Court in & 630 of 2017, wherein the following questions were framed: ITA No.629 of 2017: 1. Whether in the facts and circumstance of the case and in law, the Tribunal erred in drawing a presumption based on provisions of the Indian Evidence Act, without taking cognizance of the fact that evidence to prove the receipt
IT(TP)A No.1406/Bang/2010 & IT(TP)A No.924/Bang/2012 M/s. Herbalife International India Pvt. Ltd., Bangalore Page 2 of 10 of the administrative services and technical know-how were filed and relied by the appellant? 2. Whether the Tribunal has erred in ignoring the principle of stare decisis and not following its orders in appellant’s own case especially when there is no change in facts? 3. Whether the Tribunal erred in not appreciating that transaction approved by the FIPB and RBI can be considered to be at arm’s length as per the requirement of the Income-Tax Act? 4. Whether on the facts and in the circumstances of the case, the Tribunal’s order in so far it is passed without adjudicating all the grounds raised by the appellant, is not in compliance with principles of natural justice and liable to be set-aside?
The Hon’ble High Court has given following findings on these questions: “7. We have carefully considered rival contentions and perused the records. 8. Annexure H is a letter dated August 24, 2015. It contains an index of papers filed in the paper book. A copy of the Administrative Service Agreement is marked at Sl.No.8 and copy of the Royalty Agreement is marked at Sl.No.11. Annexure J is a letter dated January 5, 2016 under which the assessee has sought to produce additional supporting documents/evidences. The said aspects not being in dispute, the findings recorded by the Tribunal in paragraphs No.10 & 11 run counter to the material on record. In that view of the mater, we are of the considered opinion that the impugned order passed on the basis of the findings recorded at paragraphs No.10 and 11 is not sustainable. Hence, the following ORDER a) Appeal is allowed. b) Order dated April 17, 2017 in IT(TP)A No.1406/Bang/2010 passed by the ITAT is set aside. c) Matter is remitted to the file of ITAT, A Bench for reconsideration in accordance with law. All contentions of parties are kept open. No costs.”
3. Similarly following questions were raised in of 2017: 1. Whether in the facts and circumstances of the case and in law, the Tribunal erred in drawing a presumption based on provisions of the Indian Evidence Act, without taking cognizance of the fact that evidence to prove the receipt of Technical know-how were filed and relied by the appellant?
IT(TP)A No.1406/Bang/2010 & IT(TP)A No.924/Bang/2012 M/s. Herbalife International India Pvt. Ltd., Bangalore Page 3 of 10 2. Whether the Tribunal erred in not appreciating that transaction approved by the FIPB and RBI can be considered to be at arm’s length as per the requirement of the Income-Tax Act? 3. Whether the ITAT is wrong in stating that the amount of doubtful advances written off is not forming part of total income in the earlier years? 4. Whether the ITAT erred in not appreciating that it is not necessary for the assessee to establish that the debt, in fact, has become irrevocable and it is enough if the bad debt is written off as irrevocable in the accounts of the assessee? 5. Whether the ITAT erred in not appreciating that doubtful advances written off is a loss which has been incurred in the normal course of business and is allowable as business loss under Section 28 of the Act? 6. Whether on the facts and in the circumstances of the case, the Tribunal’s order in so far it is passed without adjudicating all the grounds raised by the Appellant, is not in compliance with principles of natural justice and liable to be set aside?
3.1 The Hon’ble High Court has given following findings on these questions:
At the outset, Shri. Pardiwalla submitted that questions No. 1 and 2 are covered by the order of even date in considered simultaneously with this appeal. With regard to questions No.3, 4 and 5, he submitted that for the year relevant to A. Y. 2002-03, assessee had incurred excise duty of Rs.1,25,20,839/-. The goods manufactured were subsequently exported and assessee became eligible to claim rebate on the excise duty as duty draw back, as assessee accounted the same as ‘receivables’ under the head ‘Loans and Advances’ in the Balance Sheet dated 31.03.2002. It had also voluntarily disallowed the provision so created. In substance, assessee had not claimed deduction of excise duty payment. Subsequently, vide order, dated 08.02.2023, the JCIT has passed an order holding that the assessee had subsequently written-off a sum of Rs.1,20,16,395/- out of the aforementioned amount during the financial year relevant to AN. 2007-08 and claimed the same as deduction in the computation of income of the said assessment year. In view of JCIT's order dated 08.02.2023, Shri. Pardiwalla does not press questions No. 3, 4 and 5. He does not press question No.6 as well.
4. We may record that for the reasons recorded therein, we have held in ITA No.629/2017 that questions No. 1 and 2 require reconsideration by the ITAT and remitted the matter to the file of the ITAT. 5. Hence, the following:
IT(TP)A No.1406/Bang/2010 & IT(TP)A No.924/Bang/2012 M/s. Herbalife International India Pvt. Ltd., Bangalore Page 4 of 10 ORDER a) Appeal is allowed. b) Order dated April 17, 2017 in IT(TP)A No.924/Bang/2012 passed by the ITAT is set aside. c) Matter is remitted to the file of ITAT A Bench for reconsideration with regard to questions Nos.1 & 2 in accordance with law. All contentions of parties are kept open.’ No costs.”
3.2 Hence, these appeals came for hearing before this Tribunal once again.
The ld. A.R. submitted that the Assessee is a private limited company and is a subsidiary of Herbalife International Inc. and HIIP Investment Co LLC. The Assessee is licensed to manufacture various products developed by Herbalife group in accordance with the license and Technical Assistance Agreement. Also, the Assessee in order to avail administrative services had entered into an Administrative Service Agreement with Herbalife America.
4.1 He submitted that for assessment year 2006-07, the Assessee filed a ‘Nil’ return of income and the same was selected for scrutiny by the Assessing Officer. Thereafter, on a reference being made to the Transfer Pricing Officer (“TPO”), the TPO came to the conclusion that no management services were actually received by the Assessee and determined the Arm’s Length Price (“ALP”) of administrative fees as ‘Nil’, making an adjustment of Rs. 5,47,91,533/-. The TPO further held the ALP of the Royalty payment also to be ‘Nil’, making an adjustment of Rs.2,37,93,205/- on the ground that no economic benefit was received by the Assessee. Incorporating the said adjustment, a draft assessment order dated 24.12.2009 came to be passed.
4.2 Aggrieved by the aforesaid order, the Assessee filed its objections before the Dispute Resolution Panel which upheld the order of the TPO. Consequently, the final assessment order dated 08.10.2010 came to be passed inter alia incorporating the aforesaid
IT(TP)A No.1406/Bang/2010 & IT(TP)A No.924/Bang/2012 M/s. Herbalife International India Pvt. Ltd., Bangalore Page 5 of 10 TP adjustments. On appeal before this Tribunal, the Tribunal upheld the TP adjustment on the ground that the Assessee had not filed any evidence to prove that the administrative services/technical knowhow was actually received by the Assessee (para 10-11 of the order passed by this Tribunal dated 17.04.2017).
4.3 On appeal to the Hon’ble High Court, the High Court remanded the matter to the file of this Tribunal holding that the finding of the Tribunal that no evidence was filed to be unsustainable (order dated 11.07.2023 in para 8).
4.4 In this regard, the ld. A.R. submitted that it is apparent from the material on record that the Assessee has received the administrative services as well as technical knowhow. Except for AY 2006-07, the issue of TP adjustment pertaining to administrative services has not arisen in any of the subsequent assessment years.
4.5 He submitted that in Assessee’s own case for assessment year 2008-09, this Tribunal had remanded the issue with respect to administrative services fees to the file of the TPO to consider the evidences filed by the Assessee. On remand, the TPO on verification, deleted the TP adjustment with respect to the administrative service fees. For the subsequent years from assessment year 2009-10 till 2021-22 the said issue has not been disputed by the TPO.
4.6 The ld. A.R. further submitted that it is apparent from the material on record that the Assessee has received technical information and assistance in relation to manufacture of Herbalife products in India, it being a manufacturer. He submitted that a TP adjustment for payment of royalty was made only in three AYs in the case of the Assessee i.e., assessment years 2005-06, 2006-07 and 2007-08. For assessment year 2005-06, the TP adjustment was deleted by the CIT(A) and no further appeal has been filed before this Tribunal by the Revenue (at para 4.1 of the order). No TP adjustment
IT(TP)A No.1406/Bang/2010 & IT(TP)A No.924/Bang/2012 M/s. Herbalife International India Pvt. Ltd., Bangalore Page 6 of 10 has been made towards payment of royalty in any subsequent assessment year from assessment year 2008-09 onwards. Therefore, the ld. A.R. submitted that since consistently the TPO has been accepting the payment of royalty as being at arm’s length, and the payment arises out of the very same royalty agreement, the addition made ought to be deleted. In view of the above, the ld. A.R. submitted that the Tribunal may be pleased to allow the appeal in the interests of justice and equity.
4.7 Same argument has been made by the ld. A.R. for the AY 2007- 08 only with respect to royalty payment/technical know-how payment.
The ld. D.R. submitted that both the issues involved herein be remitted to ld. AO for fresh consideration.
We have heard the rival submissions and perused the materials available on record. The main contention of the ld. A.R. is that the expenditure related to administrative services and technical know-how allowed in earlier assessment years and also in subsequent assessment years. More specifically, he submitted that the same issue came for consideration before this Tribunal in assessment year 2008-09. The Tribunal vide order in IT(TP)A No.1679/Bang/2012 & IT(TP)A No.184/Bang/2013 dated 9.10.2015 remitted the issue to the file of ld. AO with following observations: 11. During the year under consideration, the assessee paid administrative service fee of Rs.5,84,63,222/- to its AE. In the TP analysis, the assessee has adopted TNMM at the entity level as the most appropriate method to determine the ALP of the international transaction. The TPO has observed that there was no evidence to show that service was rendered and the same was beneficial to the assessee. Accordingly, the TPO determined the ALP of the administrative service fee payment at Nil and proposed adjustment of the said amount. The assessee challenged the action of the TPO by raising objections before the DRP but could not succeed. 11.2 Before us, learned authorised representative of the assessee submitted that the TPO has no jurisdiction to hold that the assessee has not received any service and the ALP of the payment is nil. In support of his contention, he has relied upon the judgment of the Hon’ble Delhi High Court dated 29/03/2012 in & 1070/2011 in the case of CIT vs. EKL Appliances. He has also relied upon the IT(TP)A No.1406/Bang/2010 & IT(TP)A No.924/Bang/2012 M/s. Herbalife International India Pvt. Ltd., Bangalore Page 7 of 10 decisions of the coordinate bench of this Tribunal dated 4/1/2013 in the case of M/s.Festo Controls Pvt. Ltd. vs. DCIT in ITA No.969/Bang/2011. The Tribunal, by following the decisions of the Hon’ble Delhi High Court has held that the TPO has to work out the ALP of the international transaction by applying the method recognized under the Act. Further, TPO could not question the commercial expediency of the transaction and payment made by the assessee. The learned authorised representative of the assessee has also referred to the additional evidence in support of his claim of rendering of service by the AE. 11.3 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that when the assessee has failed to prove that it has received services from the AE then the ALP determined at nil is justified. 11.4 We have considered the rival submissions as well as the relevant material on record. We find that the powers and jurisdiction of the AO and the TPO under the provisions of chapter X along with rule 10B has been examined by the Hon’ble Delhi High Court in the case of Ekta Appliances Ltd. (supra) in paras.21 and 22 as under:
21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred “wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above.
Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same
IT(TP)A No.1406/Bang/2010 & IT(TP)A No.924/Bang/2012 M/s. Herbalife International India Pvt. Ltd., Bangalore Page 8 of 10 on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.”
11.5 We further note that the co-ordinate bench of this Tribunal in the case of Festro Controls Pvt.Ltd. vs. DCIT in IT(TP)A No.969/Bang/2011 dated 4/1/2013 has followed the above view in paras.12 to 15 as under: “12. Our attention was also drawn to the decision of the Hon’ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., dated 29.03.2012. In the aforesaid decision, the assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/ brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) & Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, the Hon’ble Delhi High Court held that the “transfer pricing guidelines” laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The OECD guidelines should be taken as a valid input in judging the action of the TPO because, in a different form, they have been recognized in India’s tax jurisprudence. It is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same.
In light of the aforesaid decisions, it was submitted that the approach of the TPO is not proper and the same should be held as not valid in law.
The ld. DR relied on the order of the TPO.
IT(TP)A No.1406/Bang/2010 & IT(TP)A No.924/Bang/2012 M/s. Herbalife International India Pvt. Ltd., Bangalore Page 9 of 10 15. We have considered the rival submissions and are of the view that the stand taken by the assessee in this regard deserves to be accepted. It is clear from the decisions referred to above that the TPO has to work out the ALP of the international transaction by applying the methods recognized under the Act. He is not competent to hold that the expenditure in question has not been incurred by the assessee or that the assessee has not derived any benefits for the payment made by the assessee and therefore he cannot consider the ALP as NIL. We hold accordingly.”
Thus in view of the judgment of the Hon’ble Delhi High Court as well as the decision of the co-ordinate bench of this Tribunal, TPO is not empowered to determine the ALP at nil though the quantum/size has to be decided along with ALP to be determined as per Chapter X of the Act. The assessee has also filed additional evidence in support of its claim that the AE has rendered services. Since additional evidence filed by the assessee is relevant and material document in adjudicating the issue, and further when the TPO has not determined the ALP as per the provisions of chapter X as well as the IT Rules, therefore, in the facts and circumstances in the case as well as in the interest of justice, the issue is set aside to the record of the AO/TPO for adjudication of the same after considering the relevant evidence as well as in the light of the above observations.” 6.1 On remitting the issue back to the file of ld. AO, the ld. AO passed the consequent assessment order u/s 143(3) r.w.s. 254 of the Act for the assessment year 2008-09 dated 31.10.2016, wherein discussed the issue as follows: “The Assessee Company subsequently filed appeal before Hon’ble ITAT against the assessment order u/s 143(3) r.w.s 144C of the I.T Act dated 29.10.2012. The Hon'ble ITAT vide order in No.1679/Bang/2012 and No. 184/ Bang/ 2013 dated 09.10.2015 has partly allowed assessee's appeal. Hon’ble ITAT has deleted the additions made by the AO on the issue of Capitalization of 25% of royalty of Rs.47,64,201 and Disallowance u/ s 40A(2) of Rs.4,81,97,802 on protective basis. Hon’ble ITAT issued certain directions to the TPO to re-compute the ALP adjustment. In this regard a letter was issued to the TPO to pass the OGE to the order of Hon’ble ITAT. The TPO vide order u/ s 92CA r.w.s 254 of the I.T Act dated 29.06.2016 has determined the ALP adjustment at Nil. On the issue of Disallowance of doubtful debts written off of Rs.1,14,05,413, The Hon’ble ITAT has set aside this issue to the record of the AO to adjudicate the facts and additional evidences brought before Hon'ble ITAT.
4. In compliance to the directions of the ITAT, Bangalore, notice u/s 142(1) of the I.T Act was issued to the assessee company, asking the assessee company to submit the details in relation to the disallowance of doubtful debts written off of Rs.1,14,05,413/-.”
IT(TP)A No.1406/Bang/2010 & IT(TP)A No.924/Bang/2012 M/s. Herbalife International India Pvt. Ltd., Bangalore Page 10 of 10 6.2 The ld. AO while passing giving effect to above Tribunal order, he has not sustained any TP adjustment u/s 92CA of the Act for the AY 2008-09. Being so, in our opinion, if there is no TP adjustment in earlier year or subsequent assessment year on these issues, there cannot be any TP adjustment on these two issues in Assessment year 2006-07 and payment for technical know-how in assessment year 2007-08. With these observations, we remit the entire disputed issue/issues to the file of ld. AO for fresh consideration.
In the result, appeals of the assessee are partly allowed for statistical purposes. Order pronounced in the open court on 8th Nov, 2023