LITE-ON MOBILE INDIA PRIVATE LIMITED,KANCHEEPURAM vs. DCIT CORPORATE CIRCLE 4(1), CHENNAI

Brief facts of the case are that M/s. Lite-on Mobile India Pvt.Ltd. is wholly owned subsidiary of Perlos Oyj, Finland, is engaged in the business of manufacture and supply of moulded components for telecommunication industry. The assessee does moulding, painting, punching and assembly for manufacture of plastic covers of mobile phones. The assessee imports raw materials like display window, key pads from its Associated Enterprises. The assessee does not possess technology for manufacture of aforesaid materials in India. The assessee had entered into an agreement with its AE on 12.12.2011 for availing various managerial services for which it has paid management fees. The assessee had also entered into various other international transactions with its AEs. The assessee has aggregated all transactions with its AEs and has adopted Transactional Net Margin Method (TNMM) to bench mark all international transactions, except transaction pertaining to payment of interest on ECB (External Commercial Borrowings) which was benchmarked under Comparable Uncontrolled Price method (CUP) and concluded that international transactions with its AEs are at arms’ length price.

The assessee has filed its return of income for assessment year 2012-13 on 30.11.2012 admitting total income of Rs.42,53,25,645/-. The assessee had also filed revised return on 27.03.2014 admitting total income of Rs.32,31,23,250/-. The case was taken up for scrutiny and during the course of assessment proceedings, a reference was made to the TPO to determine arm’s length price of international transactions of the assessee with its AEs. During transfer pricing proceedings, the TPO has accepted TP study conducted by the assessee by adopting Transactional Net Margin Method in respect of all international transactions.

Consequent to TP adjustment, as suggested by TPO vide his order dated 25.01.2016 u/s.92CA(3) of the Act, the Assessing Officer has passed draft assessment order u/s.144C(1) of the Income Tax Act, 1961 on 30.03.2016 and proposed transfer pricing adjustment of Rs.17,24,94,523/- in respect of management fees paid to its AEs. The assessee has challenged draft assessment order passed by the Assessing Officer before the DRP-2, Bengaluru and filed objections for making adjustment for management fees paid to its AEs and argued that when the assessee has demonstrated and justified payment of management fees with necessary evidences, including agreement with its AEs, invoices raised by AEs for rendering services and also other evidences including e-mail correspondence between the assessee and its AEs, the TPO has erred in determining Nil arm’s length price for management fees on the ground that the assessee has not demonstrated with evidences necessity of availing services from its AEs.

The ld. DRP vide its directions dated 04.11.2016 issued u/s.144C(5) of the Income Tax Act, 1961, rejected arguments taken by the assessee and confirmed additions made by the Assessing Officer by holding that on the basis of evidences filed by the assessee, including agreement between parties dated 12.12.2011, it is difficult to imagine that such services as indicated could have been discussed verbally by two parties have been availed. The ld. DRP has discussed issue at length in light of agreement between parties and other evidences filed by the assessee to come to conclusion that the assessee had not availed any services from its AE to justify payment of management fees. The ld. DRP further observed that since payment for management fee has been paid without getting any actual services, the TPO/ AO was right in disallowing total amount paid by the assessee to its AE for management services. The relevant findings of the Ld. DRP are as under:-

The learned A.R for the assessee submitted that the ld.

The learned DR, on the other hand, strongly supporting order of the ld. DRP submitted that the assessee is a contract manufacturer engaged in manufacturing moulded components for mobile phones with technology support from its AE for which it has paid royalty. The assessee had also made periodical payment of management fees on the basis of agreement between parties without any supporting evidences including proof of rendering of services by its AE. The assessee has paid periodical payments on monthly basis without any justification for making payment to its AE. The TPO as well as ld.DRP has brought out clear facts to the effect that the assessee is shifting profit to its AE in the guise of payment of management fees without any justification for making such payment. Therefore, there is no merit in arguments taken by the assessee that the TPO has made adjustment to management fees only on the basis of necessity of availing such services.

We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The assessee is in the business of contract manufacturing of moulded components for mobile phones had entered into managerial services agreement with its AE for rendering various services. As per agreement between parties dated 12.12.2011, which is made applicable from 01.01.2011, the assessee has listed out various services to be provided by its AE. A careful examination of agreement dated 12.12.2011 shows that agreement is general one, which specifies various need based services to be provided by its AEs to its group company without any specific services that required by the assessee. We further noted from agreement between parties that agreement does not have any clause to protect beneficiary from deficiency in services provided by service provider. From the above, what we understand is agreement between parties is only refers to various services to be provided by its AEs, but not specific document of rendering actual services to the assessee. Further, Appendix III to agreement gives allocation keys for determining fees for various services. The allocation is based mainly on percentage of external sales against group total sales. Therefore, from the above, what we understand is charges are fixed in relation to most of the services on the basis of sales without any reference to what services that are required by AE and their technical specification. Further, clause 2.7 of agreement provides that cost of HO management services would be substantiated by documents evidencing trips carried out, meeting held and more generally, work performed for benefit of beneficiary and involving LOM personnel and those documents would be provided to beneficiary. In this case, the assessee, except furnishing agreement between parties, invoices raised by AE and few e-mail correspondence, no other documents have been filed to prove any services in fact, was rendered by its AE. Therefore, in our considered view, even if agreement is considered to be genuine, the assessee has never tried to verify correctness of cost allocation done by service provider. Further, the assessee has failed to substantiate payment of such huge managerial fees month on month without any supporting evidences like technical specification of services rendered by its AE, personnel deployed for said purposes and other evidences including correspondence between parties. Although, the assessee refers to number of e-mail correspondence between few employees of the assessee and its AE, but on perusal of e-mail samples filed by the assessee, what we could notice is these e-mails are general in nature and further with reference to daily production of products manufactured by the assessee in respect of sales to different regions. Further, none of e-mail correspondence filed by the assessee depicts any evidence of rendering any kind of managerial or technical services to justify claim of the assessee that it has received managerial services from its AE.

Another important aspect of the issue is that, the assessee is contesting findings of the TPO in respect of cost benefit analysis of expenditure incurred by the assessee. No doubt, the TPO has made a specific observation of necessity of availing such services by the assessee. But, fact remains that disallowances made by the TPO is on cumulative ground, including necessity of services and want of evidence to justify payment of management fees. It is well settled principle of law by the decisions of various courts, including decision of the Hon’ble Delhi High Court in the case of CIT vs Ekl Appliances Ltd., 345 ITR 241, that the Assessing Officer cannot question wisdom of businessman to incur a particular expenditure. But, fact remains that the AO/TPO is having all powers to examine whether particular expenditure incurred is genuine in nature and further it is supported by necessary evidence. In this case, on the basis of facts brought out by the authorities below clearly indicate that the assessee has failed to file any evidence to justify payment of management fees. In fact, the assessee has failed to file any evidence except few e-mail correspondence and agreement between parties. Further, no other credible evidences were filed to justify payment of management fees.

As regards arguments of the assessee that it has tested its international transactions with its AE by adopting TNMM as most appropriate method and the Assessing Officer has accepted TP study conducted by the assessee without any adjustment, we find that whether particular expenditure is incurred or not has to be tested with reference to evidences placed on record. The operating margin of the assessee and method adopted for testing arm’s length price does not prove fact of rendering services and payment of management fees.

In this view of the matter and considering facts and circumstances of the case, we are of the considered view that there is no error in reasons given by ld.TPO/DRP in making TP adjustments for payment of managerial services fee to its AE.

In the result, appeal filed by the assessee for assessment year 2012-13 is dismissed.

The assessee has raised following grounds of appeal:-

The facts and issues involved in this appeal are identical to facts and issues, which we had considered in for assessment year 2012-13.

The first issue that came up for our consideration from ground no.2 to 4 of assessee’s appeal is TP adjustment made by the TPO and confirmed by the Ld.DRP in respect of managerial fees paid by the assessee to its AE. An identical issue has been considered by us in preceding paragraphs in for assessment year 2012-13. The reasons given by us in preceding paragraphs shall mutatis mutandis shall apply to this appeal as well. Therefore, for similar reasons, we are inclined to uphold findings of the ld.DRP and reject ground taken by the assessee.

The next issue that came up for our consideration from ground no.5 of assessee appeal is disallowance of grossed up portion of TDS on payment of interest on external commercial borrowings amounting to Rs.78,15,435/-. The assessee has availed ECB loan from related parties and provided interest of Rs. 4,93,04,021/-. The assessee has grossed up interest payment for TDS portion amounting to Rs.78,15,435/-.The TPO has disallowed grossing up of TDS amounting to Rs.78,15,435/- on the ground that TDS deducted on payment made to AE was liability of AE which the assessee has met and thus, same cannot be allowed as deduction u/s.40A(2) of the Income Tax Act, 1961. It was explanation of the assessee before the Assessing Officer that as per agreement between the assessee and AE, beneficiary is required to bear and pay withholding taxes and all other applicable taxes attracted on services rendered in India. Therefore, the assessee has grossed up TDS remitted on payment made to AE and thus, same is in the nature of expenditure incurred and hence, needs to be allowed as deduction u/s.37 of the Income Tax Act, 1961.

The learned AR for the assessee submitted that the learned DRP has erred in sustaining additions made by the TPO towards disallowance of grossed up portion of TDS of Rs.78,15,435/- without appreciating fact that as per contractual arrangement between parties, the assessee is liable to deposit TDS applicable on said payment and thus, same partakes nature of expenditure which needs to be allowed as deduction.

The learned D.R., on the other hand, strongly supporting order of the learned DRP submitted that what was paid by the assessee is liability of AE, but not payment for services rendered by the AE. Therefore, the learned TPO/DRP has rightly disallowed TDS deducted and remitted on behalf of AE and grossed up in interest provided on ECB loan and thus, their orders should be upheld.

We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We have also carefully considered agreement between the parties dated 28.09.2006. As per said agreement, any tax liability including income tax, if any, on interest accrued to the lender under the agreement would be borne by lender. The agreement further states that borrower will compute appropriate amount of taxes required to be withheld and deposit same to credit of Indian Govt. treasury. The borrower will provide lender with a certificate evidencing deposit of such taxes. Therefore, from the conditions of agreement between parties, it is very clear that tax liability, if any, on interest paid to lender is responsibility of lender. However, the assessee should deduct applicable tax deducted at source as per law, remit the same to Govt. treasury and furnish proof to lender. In this case, the assessee has deducted TDS on interest payment. But, instead of reducing it from payment made to the AE, has grossed up TDS portion to interest paid to AE and claimed as deduction. In our view, procedure followed by the assessee for grossing up of interest is contrary to agreement between the parties and also contrary to provisions of law. Therefore, we are of the considered view that there is no error in the reasons given by the learned TPO/DRP in disallowing grossed up portion of TDS deducted on interest paid to AE on External Commercial Borrowings. Hence, we are inclined to uphold findings of the learned DRP and reject ground taken by the assessee.

In the result, appeal filed by the assessee for assessment year 2013-14 is dismissed.

As a result, both these appeals filed by the assessee are dismissed. Order pronounced in the open court on 3rd November, 2021