ROLLS ROYCE MARINE INDIA P.LTD,NAVI MUMBAI vs. DCIT CIR 15(3)(2), MUMBAI

The brief facts of the case are, assessee filed its return of income on 28.03.2014 declaring total income of Rs. 5,56,17,488/-. Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) along with questionnaire were issued and served on the assessee. In response, AR of the assessee filed the relevant information as called for.

Assessee company is a global leader in power propulsion and motion control systems. It is the customer’s worldwide partner for marine solutions, from concept to complete life-cycle support provided through the company’s global service network. It is engaged in business sales and support of marine equipment of group companies, servicing of marine equipments, sale of marine spares and assembly of marine electrical systems /switch boards for group companies. 4. During assessment proceedings, AO noticed that assessee had entered into international transaction with its associate enterprises and AO referred the matter to TPO and based on the recommendation of TPO, AO passed the draft assessment order. Assessee filed objection before Dispute Resolution Panel-2, Mumbai. After receiving the direction of DRP dated 09.09.16, Rolls-Royce Marine India Pvt. Ltd. AO passed the final assessment determining the income of the assessee at Rs. 11.28 crores. During the appellate proceedings, assessee filed the additional evidences under Rule 29 of the Income Tax Appellate Tribunal Rules 1963 vide its application dated 25.07.17. The Coordinate Bench of ITAT after considering the submission of both the counsels admitted the additional evidences under Rule 29 of the ITAT Rules 1963 to adjudicate the matter. Accordingly, the issue of corporate fee for intra group services were remitted back to the AO for considering the additional evidence and determine the ALP on the intra group services. In case, it is found factually correct, the issue may be decided in favour of the assessee. 5. Aggrieved with the above order, assessee filed MA before ITAT with the plea that Coordinate Bench has not provided any findings with respect to the grounds of appeal even though after accepting the additional evidences. After considering the submissions of assessee, Coordinate Bench has dismissed the MA with the observation that the issue pointed out by the counsel of the assessee does not fall under realm of mistake apparent on record liable to be rectified under section 254(2) of the Act.

Aggrieved with the above, assessee filed Writ Petition before Hon’ble High Court and Hon’ble High Court observed that however this was a fit case, were the Tribunal ought to have exercised the rectification powers. They observed that assessee had raised specific ground before the Tribunal to challenge the addition of Rs. 4,88,96,708/-. They also observed that this was a substantial part of the petitioner’s challenge in the appeal before the Tribunal. In support of such ground, assessee had also sought permission to produce additional evidence. Such permission was granted and additional evidence was allowed to be brought on record. They further observed that thereafter the choice before the Tribunal was either to ask the AO to take such additional evidence into account and re-decide the issue or to do itself. They observed that Tribunal disposed of the assessee’s appeal without giving any answer to the assessee’s challenge to the addition of Rs. 4,88,96,708/-. Accordingly, matter was remitted back to the Tribunal to decide on hand.

At the time of hearing, Ld. AR brought to our notice the additional evidences which are placed on record page 534 to 604 of the paper book. He further brought to our notice page 138 of Rolls-Royce Marine India Pvt. Ltd. the paper book which is the Management services agreement between Rolls-Royce Marine AS, Norway and other subsidiary companies. He further brought to our notice para 8.3 of DRP order and submitted that Ld. DRP has observed after considering the submission of the assessee that assessee has only provided general statement regarding the benefits received by the assessee from such payment to its AE. He further submitted that Ld. DRP from the perusal of records, observed that even though the receipt of services may be ascertained, it does not get proved that the service was indeed required by the assessee and the same was asked for by it from the AE. He further submitted that Ld. DRP observed that the services may be ascertained that means it has accepted that the services can be ascertained still it rejected the plea of the assessee. He further submitted that TPO applied the ‘CUP’ method and disallowed the payment on adhoc basis. Since ITAT has accepted the additional evidences and the issue under consideration is squarely covered by the decision of Coordinate bench of ITAT in assessee’s own case for Assessment Year 2013-14, wherein Hon’ble ITAT has decided the issue and deleted the addition made by the AO/TPO. The facts in dispute in Rolls-Royce Marine India Pvt. Ltd. the impugned assessment year also same. Therefore, he prayed for deletion of addition in this Assessment Year also.

On the other hand, Ld. DR brought to our notice covering letter to the additional evidences and submitted that the additional evidences submitted by the assessee are irrelevant and are general communication between associate companies and assessee. He further brought to our notice findings of ITAT in main appeal/MA and supported the findings and prima facie, Hon’ble ITAT has accepted the additional evidence submitted by the assessee and remitted back to the AO/TPO for further verification. Since the additional evidences submitted by the assessee is only a regular communication and it has no relevance for the addition made by the TPO /AO. Further on merit, he submitted that assessee has not bench marked based on the method subscribed in the provisions of the Act. He brought to our notice page 9 and 11 of the TPO order and submitted that TPO has issued several communications to assessee with detailed questionnaire asking it to submit proof of receiving the services from the AE as well as to justify the payment made to AE is Rolls-Royce Marine India Pvt. Ltd. commensurate with the services received. In response, assessee has filed only an e-mail communication in this regard and he brought to our notice findings of TPO. He also brought to our notice page 133 of the paper book which is TP study submitted by the assessee and in the TP study, assessee has not followed any method except giving a general note no.3. Further, in reference to the service agreement filed by the assessee, he submitted that what is the cost incurred and how the fees are determined by the AE for the services rendered are not clear. He further brought to our notice the details of additional evidences submitted by the assessee which is not anything but a general communication between the sisters concern. He prayed that additional evidences should be rejected and sustained the addition made by TPO/AO.

In rejoinder, Ld. AR submitted that assessee has already bench marked based cost allocated and he brought to our notice page 79 of the paper book and also brought to our notice OECD guidelines in this regard, wherein the uses of other method are encouraged. He further brought to our notice page 181 & 182 of the paper book in which assessee has submitted the basis of Rolls-Royce Marine India Pvt. Ltd. transactional /split profit and loss account for various business segment based on the services rendered and allocation of cost on actual basis. He further brought to our notice page 25 of the TPO wherein TPO has treated the ALP of the transaction of intra group services at NIL.

Considered the rival submissions and material placed on record. We notice from the record that in the earlier proceedings, assessee has submitted additional evidences before the bench and the Coordinate Bench has admitted those additional evidences. We do not see any reason to reassess the same. Hence, coming to the facts, we notice that business module and functions of the assessee are same during the Assessment Year 2012-13 and Assessment Year 2013-14. In both the Assessment Year’s, assessee has submitted the intra group agreements, communications and cost allocations between the group concerns based on allocation method adopted before tax authorities. AO/TPO have rejected the same and analyzed the intra group services on the basis of benefit test. The AO/TPO determined the ALP at NIL.

Since the facts and issues are exactly similar, therefore for the sake of clarity, we deem it fit to reproduce the findings of Coordinate Bench in assessee’s own case in the Assessment Year 2013-14, which are as under:-

We have considered rival submissions in the light of the decisions relied upon and perused the material on record. As could be seen, the Transfer Pricing Officer has disallowed the payment made towards Intra Group Services (Corporate Fee) primarily on the reason that the assessee failed to furnish required documentary evidences to show that it has received such services from the AEs and further, to show that it has been benefited by such services. Further, the Transfer Pricing Officer has observed that in an arm's length scenario, no independent party would have made such payment to another party. Thus, the Transfer Pricing Officer has held that as per CUP method, the payment made is not at arm's length and ultimately has determined the arm's length price of such payment at nil. On a perusal of the aforesaid order of the Transfer Pricing Officer, it is very much clear that he has mentioned that the arm's length price has to be determined by applying CUP method. However, factually, he has not done so. It is very much Rolls-Royce Marine India Pvt. Ltd. clear that the Transfer Pricing Officer has not brought even a single comparable to justify the applicability of CUP. Rather, it is evident, the Transfer Pricing Officer has determined the arm's length price at nil on the reasoning that the assessee has not received the service and has not proved the benefit test. Though, learned DRP has upheld the aforesaid decision of the Transfer Pricing Officer, however, accepting without prejudice submissions of the assessee, they have granted partial relief by holding that since the cost is charged back to the AEs with mark–up, no addition can be made if the payment and receipt are to the very same AE. Be that as it may, the issue before us is, whether the Transfer Pricing Officer can determine the arm's length price of an international transaction at nil without following any approved method and whether he can apply the benefit test. On a careful reading of the relevant statutory provisions i.e., section 92C and rule 10B, we are of the considered opinion that the Transfer Pricing Officer cannot determine the arm's length price of a international transaction at nil on purely ad–hoc basis without applying any one of the prescribed methods. In the facts of the present case, though, the Transfer Pricing Officer has mentioned that CUP is the most appropriate method, however, it is very much clear that he has neither applied CUP method as per letter Rolls-Royce Marine India Pvt. Ltd.

and spirit of rule 10B(1)(a) nor has followed any other prescribed method while determining the arm's length price at nil. In our considered opinion, the Transfer Pricing Officer is not authorized under the statute to do so. Therefore, the adjustment made by the Transfer Pricing Officer with regard to the arm's length price of the Corporate Fee cannot be sustained. Our aforesaid view is well supported by the judicial precedents cited by the learned Authorised Representative. As regards the contention of the learned Departmental Representative for restoring the issue to the Assessing Officer, we are of the view that there is no necessity to do so in the facts of the present case, as all the required evidences relating to the issue are already on record and have been considered by the Transfer Pricing Officer and learned DRP. In fact, after perusing the evidences available on record, learned DRP has recorded a categorical finding that receipt of service is ascertainable. Learned DRP has upheld the action of the Transfer Pricing Officer by merely observing that the benefits received by the assessee is not proved and further the assessee has not proved that such services were really required by the assessee. In our considered opinion, the aforesaid decision of the Revenue authorities cannot be upheld in view of the ratio laid in the judicial precedents cited before us.

Even in the current assessment year, TPO determined the ALP at NIL on the reasoning that assessee has not received the services and has not proved the benefit test. Since the facts are similar to the facts in Assessment Year 2013-14, we deem it fit to follow the decision of Coordinate Bench of ITAT for Assessment Year 2013-14. Accordingly, the grounds of appeal raised by the assessee are allowed.