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Income Tax Appellate Tribunal, ‘C’ BENCH, PUNE
Before: SHRI R.S.SYAL, VP & SHRI PARTHA SARATHI CHAUDHURY, JM
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, PUNE BEFORE SHRI R.S.SYAL, VP AND SHRI PARTHA SARATHI CHAUDHURY, JM ITA No. 1892/PUN/2018 Assessment Year:2014-15
Nalco Water India Ltd. Sr.No. 238/239, 3rd floor, Quadra 1, Magarpatta Road, Sade Satra Nali, Hadapsar, Pune. PAN : AAACO4994N Appellant Vs. Asstt. CIT Cir. 2, Pune. Respondent Appellant by : Shri Ketan Ved Respondent by : Shri Shivaji B. More
Date of Hearing : 16-02-2022 Date of Pronouncement :_02-03-2022
ORDER PER PARTHA SARATHI CHAUDHURY, JM : This appeal preferred by the assessee emanates from the directions of the Ld. Dispute Resolution Panel (DRP), Panel-3, Mumbai dated 18-09-2018 passed u/s.144C(5) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the assessment year 2014-15 as per the following grounds of appeal on record : “The Appellant objects to the Order dated 15 October 2018 passed by the Assistant Commissioner of Income Tax, Circle 2, Pune ("AO") under Section 143(3) r.w.s. 144C (13) of the Income-tax Act, 1961 ("the Act") in pursuance of the directions of the Hon'ble Dispute Resolution Panel, Mumbai ("DRP") for the Assessment Year ("AY") 2014-15 on the following grounds: 1. General a.On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/Transfer Pricing Officer ("TPO"), pursuant to the directions of the Hon'ble DRP, has erred in making transfer pricing adjustments totaling to INR 32,37,89,951 to the value of various international transactions.
2 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15. b. The AO has also erred in disallowing depreciation of INR 1,75,34,827 on the assets installed at the premises of the Appellant's customers, by holding that the same were not used for the purpose of its own business. c. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/TPO, pursuant to the directions of the Hon'ble DRP, has erred in not providing reasons to demonstrate that either of the conditions prescribed under clauses (a) to (d) of Section 92C(3) of the Act are satisfied for rejecting/ disregarding the transfer pricing study prepared by the Appellant. Corporate Taxation 2. Erroneous disallowance of depreciation of INR 1,75,34,827 on plant and machinery On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO pursuant to the directions of the DRP erred in disallowing depreciation of INR 1,75,34,827 on plant and machinery on the ground that the plant and machinery were installed at customer's premises and hence were not 'put to use' in the business of the Appellant. Transfer Pricing 3. Without prejudice to the other grounds of appeal, the transfer prlcing adjustment, if any, should be restricted to the value of international transactions only. On the facts and in circumstances of the case and on the law prevailing on the subject, the AOI TPO, pursuant to the directions of the Hon'ble DRP, has erred in not restricting the transfer pricing adjustment to the value of the international transactions only. 4. Erroneous transfer pricing adjustment in the Manufacturing segment a. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AOI TPO, pursuant to the directions of the Hon'ble DRP, has erred in modifying the benchmarking analysts, by modifying the set of comparables. In doing so, the AO I TPO IDRP has erred in: i. Rejecting the search carried out by the Appellant without providing sufficient reasons; ii. Not following a methodological/Scientific search process and Relying on previous years' TP order/ DRP directions; and iii. adding/rejecting certain companies in the final set of comparables which were functionally not similar to the Appellant's manufacturing segment. b. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AOI TPO, pursuant to the directions of the Hon'ble DRP, has erred in not applying earnings in foreign exchange to sales filter for selection of comparable companies.
c. The Appellant submits that the AO I TPO I DRP, having tested the arm's length price of the international transaction pertaining to payment of management charges separately, ought not to consider the same while determining the operating margin of the manufacturing segment either on a
d. protective basis or substantive basis. In the alternative, while computing the proportionate adjustment for the segments, if any, the management cross charge amount should not be considered, since tested separately.
3 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15. 5. Erroneous determination of arm's length price of intra- group service fee ("payment of headquarter common expenses and allocation of management assistance related fees") of INR 18,15,39,759 as NIL a. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AOI TPO, pursuant to the directions of the Hon'ble DRP,has erred in rejecting the methodology adopted by the Appellant (by aggregating this transaction with the other international transactions and benchmarking the international transactions using the transactional net margin method) for benchmarking the international transactions of payment of headquarter common expenses and allocation of management assistance related fees. b. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/ TPO, pursuant to the directions of the Hon'ble DRP, has erred in not applying any of the six methods for determining the arm's length price of the international transactions of payment of headquarter common expenses and allocation of regional management assistance fees, by the Appellant to its Associated Enterprises. Further, no comparability analysis is carried out by the AO/TPO for determining the arm's length price of this international transaction as NIL. b. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/ TPO, pursuant to the directions of the Hon'ble DRP, has erred in determining the arm's length price of the international transactions of payment of headquarter common expenses and allocation of regional management assistance fees, by the Appellant to its Associated Enterprises as NIL stating that no documentary evidences have been submitted and that the assessee has not furnished cost benefit analysis. In doing so, the AO/TPO, pursuant to the directions of the Hon'ble DRP, have erred in disregarding the fact that the need for services or benefit received from intra-group services is not required to be demonstrated under the provisions of the Act. Further, the AO/ TPO, pursuant to the directions of the Hon'ble DRP, have also disregarded the judicial precedence available in this regard. c. Without prejudice to the other grounds of objections, on the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/ TPO pursuant to the directions of the Hon'ble DRP, has erred in holding that the Appellant has not demonstrated the need and the receipt of services under the headquarter common expenses and the allocation of regional management assistance, ignoring substantive documentary evidences submitted by the Appellant before the TPO, demonstrating the need, actual receipt of the services and benefits therefrom 6. Erroneous rejection of the multiple year data of comparable companies On the facts and in circumstances of the case and on the law prevailing on the subject, the AO/ TPO, pursuant to the directions of the Hon'ble DRP, has erred in law and on the facts and in circumstances of the case in not accepting the use of multiple year data for computing the Profit Level Indicators of the comparable companies.
Without prejudice to the other grounds of objections, the Appellant requests that the benefit of + / - 30/0 range as per the proviso to Section 92C(2) of the Income Tax Act, 1961 should be granted while calculating the transfer pricing adjustment, if any. On the facts and circumstances of the case,.the Appellant requests that the benefit of +/- 3% range as per the proviso to Section 92C(2) of the Income Tax Act, should be granted while calculating the transfer pricing adjustment, if any.
4 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15. 8. Levying of interest The AO, has erred on the facts and in law by levying interest under Section 234A and 234B of the Act, on account of the unanticipated transfer pricing adjustment made by theTPO and disallowance made by the AO. 9. Initiation of penalty proceedings The AO, erred on the facts and in law in initiating penalty proceedings under section 271(1) (c) of the Act. Each one of the above grounds of appeal is without prejudice to the other. The Appellant requests the Hon'ble members a right to amend, alter, substitute or add to the grounds of appeal at any time before or at the time of hearing of the appeal so as to allow the Hon'ble Tribunal to decide this appeal according to law. Prayer The Appellant claims relief on the above grounds and additional grounds/ additional evidences that may be submitted during the course of the hearing of this appeal and thereby prays for deletion of adjustments made by the AO in the final assessment order.”
At the outset, the learned counsel for the assessee submitted that Ground No. 1 is general in nature. Hence no adjudication is required. 3. Ground No. 2 deals with erroneous disallowance of depreciation of Rs. 1,75,34,827/- on plant and machinery. The grievance of the assessee is that the A.O pursuant to the directions of D.R.P. has erred in disallowing depreciation of Rs. 1,75,34,827/-on plant and machinery on the ground that the plant and machinery were installed at customer’s premises and hence were not ‘put to use ‘ in the business of the assessee. The brief facts of the case are as follows: “4.1 The assessee company in the relevant previous year has claimed depreciation on plant and machinery installed at customer‟s premises. The assessee company vide its letter dated 23-11-2017 provided the justification for allowing the aforesaid claim on the ground that the same plant and machinery were used by the assessee company at customer‟s premises for the purpose of carry8ing out its own business. Further, in the aforesaid letter, the assessee company has also stated that the Hon‟ble Supreme Court in the case of ICDS Ltd. Vs. CIT (350 ITR 527 SC) has held that even if the assets of the lessor are put at lessee‟s premises and used by the lessee, then also the lessor would get the depreciation claim for the simple reason that the lessor is the owner of their assets and the income for the lease is shown as the income in the books of accounts of the lessor. The assessee has further stated that the instruction issued by the CBDT (Instruction No. F.10/14/66/IT (A-I) dated 12-12-1996), wherein the CBDT has instructed to allow the claim for depreciation in the hands of the employer w.r.t. the assets provided by the employer to the employees and placed at the residence of the employees on the ground that the assets were wholly and fully used for the purposes of employer‟s business.
5 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15. 4.2 Further, in the aforesaid letter, the assessee company has also stated that the order had been passed by the Commissioner of Income-tax (Appeals) (hereinafter referred to as the ld. CIT(A) for the A.Y. 2008-09 wherein the depreciation claim of the assessee company on the plant and machinery purchased during the year and installed at customer‟s premises for the purpose of carrying out the business of the assessee was allowed. 4.3 Accordingly, the assessee had prayed that no disallowance for the claim of the above depreciation should be made in respect of the plant and machinery installed at the customer‟s premises for carrying out the business by the assessee company.”
Thereafter, the learned A.O at para 4.4 of his order held that the claim of the assessee cannot be accepted since on similar grounds, the same has been disallowed by the Department in earlier years. Hence, in order to maintain consistency with the earlier years order, the claim of the assessee for depreciation of Rs. 1,75,34,827 was disallowed for similar reasons as mentioned for A.Ys 2008-09, 2009-10, 2010-11 and 2011-12 and added to the total income of the assessee. Therefore, the A.O for A.Y 2014-15 had relied on the earlier assessment years order and made the addition.
The ld. D.R.P at para 10.3 of their findings upheld the observations of the A.O stating that the A.O has not erred in disallowing depreciation of Rs. 1,75,34,827/- on the plant and machinery since the same have been installed in customer’s premises and so have not been ‘put to use’ in the business of the assessee. The learned D.R.P. confirmed the disallowance on the ground also that such was made in consonance with the same issues in the past assessment years as has been brought on record by the learned A.O. Accordingly, the learned D.R.P confirmed the addition.
At the time of hearing, the learned counsel for the assessee submitted that this issue stands covered in favour of the assessee by the order of Pune Bench of the Tribunal in assessee’s own case for A.Y. 2012-13 in I.T.A. No. 742/PUN/2017, dated 06-09-2019 wherein it was observed that the issue of depreciation on assets installed at customer’s premises, was decided in favour
6 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15.
of the assessee by the Kolkata Bench of Tribunal in assessee’s own case for A.Y. 2008-09 in ITA No. 2111/Kol/2013 vide para 9 of order dated 05-04-2017. The relevant observations of Pune Bench of the Tribunal are as follows: “19. Now, coming to ground of appeal No. 3, the issue which is raised is the depreciation on assets installed at the customer‟s premises. 20. The issue stands covered in favour of assessee by the decision of Kolkata Bench of Tribunal in assessee‟s own case for A.Y 2008-09 in ITA No. 2111/Kol/2013, vide para 9 of order dated 5-4-2017. Following the same parity of reasons, we allow this claim of assessee. However, for the sake of brevity, the said para 9 is not being reproduced. The ground of appeal No. 3 raised by assessee is thus, allowed.” 7. That also in the concerned order in assessee’s own case, the Kolkata Bench of the Tribunal in ITA No. 2111/Kol/2013 for A.Y. 2008-09 dated 5-4- 2017, had held as follows: “9. We have given a very careful consideration to the rival submissions. The details of the addition to fixed assets which were installed in the customer‟s premises are given at pages 20 to 26 of the assessee‟s paper book. The assessee has also brought to our notice by filing sample copies of some of the agreements whereby the assessee had agreed that monitoring equipments and pumps would be installed at the client‟s premises. Thus it becomes clear that the installation of equipments in the client‟s premises of assessee‟s equipments was necessary and part and parcel of nature of business carried on by the assessee. It cannot therefore be said that the equipments in question had not been used for the purpose of the business of the assessee. The fact that the equipments were used in the business premises of the clients cannot be the basis to disallow the claim of the assessee for deduction on account of depreciation. The decision of the Hon‟ble Supreme Court in the case of ICDS Ltd. vs CIT clearly supports the claim of the assessee in this regard. It is clear from the perusal of the order of AO that the AO‟s objection was that since the equipments in question had not been installed at the assessee‟s factory premises, it cannot be said that the equipments were used for the purpose of assessee‟s business. This reason given by the AO for disallowing the claim of the assessee for depreciation cannot be sustained in view of the factual and legal position discussed as above. We therefore are of the view that CIT (A) was fully justified in deleting the addition made by the AO in this regard. Order of CIT (A) does not call for any interference.” 8. Respectfully following the aforesaid decision on the same parity of reasoning, ground No. 2 of the assessee is allowed.
In ground No. 3, the assessee submits that as per the various decisions of the Tribunal, the transfer pricing adjustments, if any, should be restricted to the value of the international transactions only. Similar issue came up for consideration before the co-ordinate Bench of this Tribunal in assessee’s own case in ITA No. 742/PUN/2017 for A.Y. 2012-13 dated 6-9-2019, wherein vide para 54 of its order it has observed and held as follows: “We have heard the rival contentions and perused the record. The issue of transfer pricing adjustment vis-à-vis in proportion with the value of international transactions now stands settled by the Hon'ble Supreme Court in CIT Vs. Hindustan Unilever Ltd. (supra) and the Hon‟ble Bombay High Court in CIT Vs. Firestone International P. Ltd. (supra). The benchmarking on account of transfer pricing adjustment, if any,
7 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15. has to be done for associated enterprises transactions only and not the entire turnover. Accordingly, we direct the Assessing Officer to carry out the said exercise after verifying the computation of proportionate adjustment filed by assessee before us and also after calculating the margins of assessee in line with our directions in the paras above. This takes care of ground of appeal No.10 and corrected additional ground of appeal No.2. The Assessing Officer / TPO shall give effect to our directions with regard to subvention amount, also our decision on the payment of intra-group services and royalty to be at arm's length price and no adjustment to be made on that account and also proportionate adjustment to associated enterprises transactions. The learned Authorized Representative for the assessee also pointed out that while making proportionate adjustment, royalty and intra-group fees having been held to be at arm's length, could not form part of operating cost, also requires proportionate adjustment. Similar adjustment is to be made in respect of R&D segment, though at present ITA No.742/PUN/2017 36 Nalco Water India Ltd. no R&D adjustment has been made. This takes care of additional ground of appeal No.1 raised by assessee”
Respectfully following the aforesaid decision of Pune Bench of the Tribunal in assessee’s own case for A.Y. 2008-09 (supra), we direct the A.O to restrict the transfer pricing adjustment to the value of the international transactions only. Ground No. 3 is accordingly allowed for statistical purposes.
In ground No. 4, the assessee is challenging the erroneous computation of transfer pricing adjustment of Rs. 14,22,50,192/-in the manufacturing segment. The learned counsel submitted, referring to the order of the T.P.O at para 3 onwards wherein the facts are enshrined as to the nature of business of the assessee. Thereafter at para 4, the T.P.O listed the transactions. It is manufacturing segment which is in dispute. At para 5 of the T.P.O’s order, there are financials of the assessee as per T.P. study report. The learned counsel further submitted that the PLI is not disputed. What is disputed is only the selection of comparable companies. At page 284, the TPO had earlier calculated the PLI at 5.75% and thereafter at page 286 he calculates current PLI at 1.02%. While re-adjusting the PLI at 1.02%, the TPO makes protective adjustment of Rs. 3.04 crores, then finally TPO arrives at the TP adjustment made at Rs. 32.61 crores. The relevant paras 12 and 13 of TPO’s order are extracted as follows: “12. Accordingly the total adjustment is as follows
Sr.No. Particulars Substantial Protective adjustment adjustment Amount (in Rs.) Amount (in Rs.) 1. Management services 18,15,39,759 18,15,39,759 2. Manufacturing segment 14,46,13,160 30,42,10,447
8 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15.
In view of the facts of the case, submissions of assessee, economic analysis carried out discussion made above, Arm‟s Length Price of transactions as reported by the assessee company is altered and an adjustment of Rs. 32,61,52,919/- is made in respect of international transaction entered by the assessee. “ 12. The D.R.P has given their findings at para 5.3 which are as follows: “5.3 Findings: Objection No. 4, 5 and 6 are disposed off as under: It is seen that in this ground (No. 4) the assessee has requested for application of forex earnings to sales filter for selection of comparable this year. The TPO has not applied this filter but taken 18 comparables which have more than 15% of the export revenue. The assessee states that its export revenue is only 1% of its manufacturing segment (3.15 crores out of total turnover of Rs. 337 crores). But, here it is seen that assessee is not a captive e entity and so the issue of applying forex filter at 15% does not arise. The assessee has also not given any reason as to why this filter should be applied in its case with evidence and satisfactory evidence nor any reason and justification as to why a filter at 15% and below should be applied. It is also seen that financials are not available in the segmental level. So, the without prejudice ground for appropriate functional adjustment, such as elimination of export incentives, duty draw back from computation of operating margins as per rule 10B(3) cannot be given. Objection No. 4 is rejected.” 13. The ld. AR stated that its export revenue is only 1% of its manufacturing segment (3.15 crores out of total turnover of Rs. 337 crores). He requested to apply the export to sales filter of 15% in the matter of selection of comparables. It is seen from the aforesaid objection before the DRP that the assessee had requested for the application of the forex earning to sales filter of 15% for selection of comparables for this year before the DRP, which came to be jettisoned. Neither the assessee nor the T.P.O applied any such filter at the time of the Transfer pricing study or the TP assessment. The selection of 18 comparables by the TPO is without any such filter. We appreciate that there is a marked difference in the profit earned from export and domestic sales of similar goods because of foreign market conditions and export incentives allowed by the Government of India. In such a scenario, some sort of export to sales filter is warranted. There is no foundation for the assessee seeking 15% filter of export sales to total sales of the segment. In fact, there is no statutory mandate of any specified percentage. Giving due importance to this filter in the facts and circumstances of the extant case, we are of the considered opinion that filter of 25% of export sales to sales of the segment will be in order. We order accordingly. Our view is fortified by the judicially accepted related party transactions (RPT) filter of 25% in several cases. Both the sides agreed to such a filter during the course of hearing. We, therefore, set aside the impugned
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order and remit the matter to the file of the AO/TPO to undertake the selection of comparables afresh in the light of the above filter and re-adjudicate the issue as per law after complying with the principles of natural justice. Therefore, ground No. 4 is allowed for statistical purposes.
In ground No. 5, the assessee contends erroneous determination of A.L.P of intra-group service fee of Rs. 18,15,39,759/- as NIL. The T.P.O has discussed this issue from para 7.1.2 onwards in great detail as per observations brought on record. Thereafter, at para (x) the T.P.O decides while holding that the assessee has not been able to prove the benefits that it had derived from the services purportedly provided by the related parties. The assessee has also not furnished any evidence as to the cost benefit analysis with regard to the independent service provider. It was also observed by the T.P.O that the documentation produced by the assessee to support its claim for the receipt of management services was too generic. The T.P.O has further observed as follows: “xi) As per the comments above, it can be seen that none of the benefits are tangible or real. A mere façade has been raised to give an impression that some vital benefit has passed to the assessee, which is actually not the case. Related parties are quite likely to give a form that will give an impression that a real service is being rendered by one to another. But the necessity to look beyond the veil is recognized across tax jurisdictions. In the above circumstances the payment of service fee is only an arrangement to change tax base without any economic substance in the transaction. xii) No transfer price can be charged if a subsidiary corporation utilizes services taking into consideration only the circumstances of the parent corporation, and if the subsidiary corporation, considering only its own circumstances, would not have utilized the services had it been as independent enterprises. The services must actually be performed. The mere availability of services within a group is not sufficient since, as a general rule unrelated parties only pay for services which have actually been rendered. However, where the volume of services fluctuates there is no objection an average amount of remuneration is charged which corresponds to the services actually rendered over a period of years. As per Rule 10AB, the determination of ALP in relation to international transaction shall be the price which has been charged or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. Therefore, as stated in above paras and in the assessee's case, there occurs no benefit to the assessee for the price which has been charged. And therefore for the similar uncontrolled transactions with or between non-associated enterprises, under similar circumstances, the price will be definitely zero. Thus ALP for the management services fee will be zero.
10 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15. xiii) The reliance is placed on the decision in the case "Gem plus India .Ltd". Wherein, the Taxpayer entered into a services agreement with its AE for receipt of services in marketing and sales support, customer service. Support, finance, accounting and administration support and legal support. The TPO observed that there was no clear proof that such services had actually been rendered by the AE. There was no specific benefit derived by the Indian entity. The taxpayer had not established the necessity for availing these services from the AE and had already incurred expenses towards professional and consultancy services and employed qualified personnel in India for rendering similar services. The volume and quality of services were disproportionate to the amount paid, and the charge was based on cost apportionment amongst the group entities on a mutually agreed basis and not on the basis of actual services rendered. The Appellate Tribunal decided the case in favour of Revenue. This ruling has laid down some vital and necessary principles applicable for service transactions, which would in fact apply to any transactions involving intra group services or intangibles. Simply put, to satisfy the arm's-length standard, a charge for intra group services or intangibles must at least meet the following conditions: The need for intra group services or intangibles is established. The intra group intra group services or intangibles have actually been received. The benefit from intra group services or intangibles is commeasure. xiv) However, in the present case, assessee failed to substantiate its claim. Assessee' further has not demonstrated the receipt of services and tangible benefit derived from such a services as per the principles laid down' by the hon'ble ITAT. Since the assessee has failed to prove the receipt of above mentioned services and tangible benefit derived from such a services, the ALP of transactions related to said Services treated, NIL and adjustment of Rs. 18,15,39,759/- is proposed for AY 2014-15. xv) The assessee's contention that the Hon'ble !TAT has pronounced an order in Assessee's own case, deleting the adjustment based on NIL ALP as computed by the Ld. TPO for AY 2003-04 and AY 2004-05. The assessee has further contend that the Ld. CIT(A) has deleted the adjustment made by Ld. TPO in his orders for A.Y 2009-10 t 2011-12. The assessee in this regard claimed that mentioned orders were passed after the TP order dated 10th October 2016 for AY 2013-14.
xvi) The assessee contention that the said order was pronounced after the date of TP order for AY 2013-14 and hence relying on the TP Order for AY 2012-13 and AY 2013-14 is not appropriate. The assessee is not correct on facts as the issue is rejected for AY 2003- 04 and AY 2004-05. The assessee has not demonstrated that the facts for the AY 2003-04 and AY 2004-05 are similar and alike in nature. Moreover, the issue on the similar nature of adjustment in services as nil ALP are being challenged in the Pune jurisdiction before the Hon'ble High Court Bombay. Moreover, during the AY 2012-13 and AY 2013-14 the TPO has conducted an elaborated scrutiny on the issue and made adjustment accordingly afte rproviding sufficient opportunity to the assessee to prove the ALP of the intra group services. Similarly, this year too i.e. AY 2014- 15, the undersigned has concluded only after going through comprehensive scrutiny and discussion on each and every aspect of the issues pertaining to intra group services. Hence, the contention of the assessee is stand rejected.
Since the assessee has failed to prove the receipt of above mentioned services and tangible benefit derived from such a services, the ALP of transactions related to said services treated NIL and an adjustment of Rs. 18,15,39,759/- is made for AY 2014-15.”
11 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15.
The ld. D.R.P held at para 3.3 of their findings regarding the aforesaid that the assessee has failed to prove tangible benefits derived from the services received and that the evidences produced were generic and theoretical in nature as a result of which the benefit received cannot be quantified from it. It was also seen that the T.P.O has correctly held that the bench marking approach used by the assessee was not as per law and they had applied CUP. Thus, the adjustment of Rs. 18,15,39,759/- was confirmed by the D.R.P. Thereafter, the D.R.P refers to its earlier order for A.Y 2012- 13 in respect of the assessee. That accordingly for this year, the ld. D.R.P held as follows:
“(iv) It is seen that the facts and circumstances are identical in this year also. It is also seen that the TPO has confirmed the same issue for A.Y. 2013-14 and the assessee has preferred appeal before CIT (A). So, we see no reason to differ from DROP‟s finding in A.Y. 2012- 13.
(v) Thereafter, in para 7.1.3-7.1.4 (at page No. 20-21 of his order), TPO has discussed in length the issue of protective adjustment and made the adjustment accordingly on protective basis in lieu of the litigation history of NALCO US and assessee itself for A.Y. 2013- 14 relating to A.Y 2014-15 in the same line as in A.Y 2012-13. We concur with TIP‟s finding. Hence, the ground No. 2 is rejected.”
At the time of hearing, the learned counsel for the assessee brought to our notice page 293 of the paper book Vol. 1, wherein the assessee has given detailed reply to the T.P.O as per the show cause notice issued, justifying the management fees. The learned counsel also demonstrated vide pages 667 to 1440 also enclosed in the paper book before us, providing all evidences for the receipt of services and need for such support services in India which were all explained before the T.P.O. That further, the learned counsel submitted that in assessee’s own case for A.Y. 2003-04 in ITA No. 529/Kol/2008 and ITA No. 1256/Kol/2009 for A.Y. 2004-05, order dated3-2-2016, has
12 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15.
dealt with similar issue on the same set of facts and circumstances as enshrined at page 13 of the said order wherein the grounds are mentioned. In this case, the Tribunal from Para 19 onwards has observed and held as follows:
“19. We have gone through the data as well through the details filed by assessee in its paper book and the TPO himself mentioned in his order that the assessee performed arm's length analysis in respect of all the international transactions entered into by assesse with its associated enterprises under section 92C of the Act read with rule 10B and 10C of the Rules. And that nothing was found in the TPO's order which was indicative of the existence of any of the circumstances prescribed under (a) to (d) of section 92C (3) of the Act which necessitates intervention of the AO/TPO for determination of arm's length price. But TPO, determined the arm's length price of the international transactions under review at 'NIL' value, based on his main allegation that the benefits claimed to have been received by the assesse from Nalco Pacific under the agreement would not be ones for which an independent enterprise would be willing to pay. In this connection Ld. Counsel referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances [2012] 24 taxmann.com 199 (Delhi), wherein the Hon'ble High Court has examined the issue as to whether the TPO has power to restrict the value of an international transaction to nil when he was supposed to have determined the arm's length price of the international transaction. The Hon'ble High Court after examining the facts of the case held as under:
"19…… In CIT v. Walchand & Co. etc. [1967] 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. 14 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003-04& 2004-05 22.Even Rule 10B(1)(a) does not authorize 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 un-remunerative 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 l0B. Whether or not to enter into the transaction is for the assessee to decide........ 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 on any extraneous reasoning ..."
Ld. Counsel also relied on the case of CIT v. Walchand& Co. etc. [1967] 65 ITR 381, the Hon'ble Apex Court has held that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. The essence is that a businessman himself is the best judge in determining the reasonableness / usefulness / benefit of an expenditure which is wholly and exclusively laid out for the purpose of business. The Revenue has no role to play in determining the reasonableness / usefulness / benefit of a business expenditure. However, in the instant case, the TPO had judged the reasonableness of the aforesaid intra-group service charge (regarding which there was no dispute that the same was incurred wholly and exclusively for the purpose of business) from his own point of view and computed the arm's length price of the international transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assessee from Nalco Pacific under the aforesaid agreement would not be ones for which an independent enterprise would be
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willing to pay. Hence, the first ground for confirming the disallowance by CIT (A) will not stand. Ld. Counsel also referred to the case of CIT v. EKL Appliances (supra), the Hon'ble Delhi High Court has held that rule 10B of the Rules does not authorize 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 un remunerative. The Hon'ble High Court has further held that the quantum of expenditure can be examined by the TPO as per law and 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 on any extraneous reasoning. But in the present case before us, the TPO judged the reasonableness of the aforesaid intra-group service 15 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003-04& 2004-05 charge and computed the arm's length price of the international transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assessee from Nalco Pacific under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. The CIT (A) also confirmed his order.
Attention was further invited to the decision of Hon'ble Delhi Tribunal of McCann Erickson India (P.) Ltd vs. Addl. CIT [2012] 24 taxmann.com 21 (Delhi), wherein the Tribunal, following the aforesaid decision of the Hon'ble Delhi High Court, has interalia held that:
"9. We have heard both sides and have also gone through the orders of the AO, TPO and DRP…. The evidences have been submitted before the authorities below showing rendering of the certain services against the payments made to the associated enterprises. In the arena in which the assessee company is functioning, it will be difficult to imagine a successful business entity in the global environment without receipt of the services which carries huge intrinsic and creative value. In our considered view, it is only a particular business expert who can evaluate the true intrinsic and creative value of such services. In view of these facts, it shall be just to avoid any guesswork to evaluate or judge value of these services in isolation or individually. In any case, the value of these services cannot be taken at nil which the AO as well as TPO originally sought to do......... The term "benefit" to a company in relation to its business has a very wide connotation. It is difficult to accurately measure these benefits in terms of money value separately. Therefore, we find no justification to sustain any addition in this regard on this issue. We direct to delete the addition and this ground is allowed”.
We have gone through the case of McCann Erickson India (P.) Ltd (supra), the Delhi Tribunal has held that it is only a particular business expert who can evaluate the true intrinsic and creative value of intra-group services and in any case, the value of these services cannot be taken at nil. However, in the instant case, the TPO judged the reasonableness of the aforesaid intra-group service charge and computed the arm's length price of the international transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assesse from Nalco Pacific under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. The CIT (A) accepted the valuation of the intra-group services made by the TPO at 'NIL' value. We have observed from the facts of the case that in the instant case, the TPO determined the arm's length prices of the intra-group services claimed to have been received by assessee from Nalco Pacific at 'NIL' value without applying any of the transfer pricing methods prescribed under section 92C of the Act read with rule 10B and 10C of the Rules. In this connection, Co-ordinate bench decision of Mumbai Tribunal in the matter of DCIT vs. Diebold Software Services (P.) 16 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003- 04& 2004-05 Ltd. [2014] 48 taxmann.com 26 (Mumbai - Trib) was referred, wherein the principle laid down by Tribunal along with brief facts are as under:
• The assessee received information technology (in short, 'I.T.')services from its associated enterprise and paid service charge to the latter. The assessee clubbed the aforesaid international transaction together with other international
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transactions, applied the TNMM as the most appropriate method and selected a set of external comparables. As per this analysis, the international transactions covered under the TNMM, were at arm's length. The aforesaid analysis by assessee was not disputed by the TPO.
• The assessee was called upon by TPO to provide the basis of pricing of these transactions. The assessee was also required by the TPO to provide necessary details along with allocation keys and basis of calculation of payment made for I.T. support services. According to TPO, the assessee, however, failed to comply with these requirements and the ALP of the relevant transactions therefore was determined by TPO at 'nil' value.
• The CIT(A) held that the action of TPO in arriving at the ALP of the relevant international transactions at "nil" was without any basis and accordingly he deleted the addition made on account of the transfer pricing adjustments made by A.O./TPO holding the same to be unsustainable. • The Tribunal observed that the exercise of benchmarking made by the assessee to show that the price charged by its associated enterprise for providing IT support services was at arm's length had not been disputed by TPO. It was also observed by the Tribunal that the arm's length price of the international transaction under review was determined by the TPO at "nil" without applying any of the prescribed methods and the entire payment made by the assessee for availing the IT support services from its associated enterprise was added as TP adjustment.
• In view this, the Tribunal had given the decision that the addition made by A.O./TPO on account of TP adjustments in respect of the international transactions of the assessee company with its AE involving availing of IT support services was not sustainable either in law or on the facts of the case. The Tribunal upheld the order of CIT (A).
According to assessee the aforesaid decision is squarely applicable to the case of assessee. In the instant case, TPO computed the arm's length price of intra-group services received by assessee from Nalco Pacific under the aforesaid agreements at 'nil' value without applying any of the transfer pricing methodologies prescribed under section 92C of the Act read with rule 10B and 10C of the Rules. Accordingly, the action of the TPO in arriving at the arm's length price of the relevant international transactions at 'nil' value without application of any transfer pricing methodology, was without any basis and hence, was not sustainable. In the instant case, TPO was authorised to determine, by order in writing, the arm's length price of an international transaction in accordance with section 92C (3) of the Act. The TPO mentioned in his order that during the course of hearing in response to notice issued under section 92CA (2) of the Act, assessee had attended the office of the TPO from time to time and filed details as requisitioned by the TPO which were placed on records. The TPO had examined the details filed by assessee and based on such examination, he held in his order that the pricing of the aforesaid agreements was 17 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003-04& 2004-05 justified by assessee on the basis of the TNMM. We find that the TPO did not make any adverse comments in his order upon the arm's length analysis carried out by assesse under the TNMM as per section 92C of the Act read with rule 10B of the Rules. Accordingly, we feel that TPO made proper enquiry and applied his mind to the details brought on record by assessee. He had agreed with the assessee that the international transactions covered by the TNMM analysis (including the intra-group service charge paid /payable to Nalco Pacific) adhered to the arm‟s length principle Transfer Pricing Regulation.
Further, it is also a fact that the aforesaid intra-group service charge was allowed as deduction by TPO for the assessment years 2005-06, 2006-07, 2007-08 and 2008-09. In this connection, Ld. Counsel referred to the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Britannia Industries Ltd 257 ITR 225, wherein Hon'ble Calcutta High Court has held that the Department cannot take a contrary view in respect of any issue which has been accepted by the Department for succeeding assessment year based
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upon the similar set of facts. Thus, by following the above principle laid down by the Hon'ble Calcutta High Court, we feel that the action of TPO in making disallowance of the intra-group service charge paid/payable by assesse to Nalco Pacific for the assessment year 2004-05, after allowing the same for the assessment years 2005-06,2006-07,2007-08 and 2008-09 based on the same facts, has no leg to stand. Ld. Counsel referred to the relevant information in the tabular format: Asstt. Year Associated Enterprise Infra-group Service Charge allowed as Deduction (Rs. „000) 2005-06 Nalco Pacific Pte Ltd. 19,543 2006-07 Nalco Pacific Pte Ltd. 31,128 2007-08 Nalco Pacific Pte Ltd. 27,157 2008-09 Nalco Pacific Pte Ltd. 28,120
We also find from the records that assesse submitted various evidences of receipt of intragroup services to the TPO which are enclosed in page no. 71- 79, 103-124, 129-132, 133- 138, 139-140, 143-144 and 157-162 of the assessee‟s paper book. The assesse also furnished explanation in regard to the nature of the aforesaid services in page no. 9, 11and 12 of its first submissions. Further, in appeal before CIT(A)also assesse submitted a certificate of services dated 01.09.2008, issued by LiawHinHao, Finance Director, Nalco 18 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003-04& 2004-05 Pacific. Copy of the certificate was also submitted before us and marked the same as Annexure No. 1. The certificate contains the nature of services rendered by Nalco Pacific to Nalco Asia Pacific group of companies including, the personnel/department engaged in rendering service, expenses incurred by various personnel/departments in rendering services from the year 2002 to 2004 (separately for each year) and the intra- group service fees charged (billing) by Nalco Pacific to various group companies including the assesse company from the year 2002 to 2004 (separately for each year). The assesse also submitted various evidences of receipt of intra-group services to CIT (A) which are enclosed in page no.195- 216, 243, 249-252 of the assessee‟s paper book. The assesse also filed explanations in regard to the nature of the aforesaid services in page no. 10 of its first submissions. 25. In the instant case, Nalco Pacific operated as the regional headquarters company in relation to Nalco Asia Pacific group of companies including assessee. It functioned as a group service centre and recruited regional employees, though located in Singapore, exclusively for the purpose of rendering services to Nalco Asia Pacific group of companies including assessee. Nalco Pacific incurred expenses for the payment of salaries & other benefits to the regional employees. We find that the services rendered by Nalco Pacific to assessee under the agreement were similar to the services mentioned in paragraph no. 7.14 of the DECD Guidelines. In view of this, we appreciate that the services rendered by Nalco Pacific to assessee were intra- group services for which independent enterprises would have been willing to pay for or to perform in-house for themselves and hence, the value of the aforesaid services in comparable uncontrolled transactions could not be 'nil'. The paragraph no. 7.12 of the OECD Guidelines provides that there are some cases where an intra-group service performed by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members. Examples could be analysing the question whether to recognise the group, to acquire new members, or to terminate a division. These activities may constitute intra- group services to the particular group members involved, for example those members who will make the acquisition or terminate one of their divisions, but they may also produce economic benefits for other group members not involved in the object of the decision by increasing efficiencies, economies of scale, or other synergies. The incidental benefits ordinarily would not cause 19 ITA Nos.529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003- 04& 2004-05 these other group members to be treated as receiving intra- group services because the activities producing the benefits would not be
16 ITA No. 1892/PUN/2018 Nalco Water India Ltd. A.Y. 2014-15. ones for which an independent enterprise ordinarily would be willing to pay. But in the instant case no such benefits such as those mentioned in paragraph no. 7.12 of the OECD Guidelines accrued to assessee under the agreement and hence, no incidental benefits accrued under the agreement. 26. Accordingly, We are of the view that the first ground for confirming disallowance by CIT (A) that no independent documentary evidence had been furnished by assesse to show that the fact of actual services having been rendered to assessee and Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence, has no leg to stand.” 17. Respectfully following the aforesaid decision on the same set of facts and circumstances and on same parity of reasoning, ground No. 5 of assessee’s appeal is allowed.
The ground of appeal No. 6 raised by the assessee is against use of multiple year data. The learned counsel for the assessee submitted that this issue is decided against the assessee, vide order of Pune Bench of the Tribunal in assessee’s own case for A.Y. 2012- 13. Respectfully following the same on the same set of facts and circumstances and on same parity of reasoning, ground No. 6 is dismissed.
In ground No. 7, the assessee submitted that the benefit of +/- 3% range as per the proviso to sec. 92C(2) of the Act should be granted while calculating the transfer pricing adjustments, if any. It is seen that similar ground was raised by the assessee in A.Y. 2012-13 and while dealing with the same, the Tribunal vide its order in ITA No. 742/PUN/2017 has rejected this ground. Respectfully following the same on the same set of facts and circumstances and on same parity of reasoning, ground No. 7 is dismissed.
Ground No. 8 is regarding levy of interest u/s 234A and 234B of the Act on account of unanticipated transfer pricing adjustment made by the TPO and disallowance made by the A.O. That at the time of hearing, the learned counsel for the assessee fairly submitted that this issue may be remanded to the file of the A.O/TPO for verification and then re-
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adjudicate as per law. The learned D.R conceded to the submissions of the assessee. Having heard the parties, in the interest of justice, we remand this issue to the file of the A.O/T.P.O for re-adjudication as per law while complying with the principles of natural justice. Ground No. 8 of the assessee’s appeal is allowed for statistical purposes.
Ground No. 9 is with regard to initiation of penalty proceedings u/s 271(1)(c) of the Act, which is premature in nature. Hence Ground No. 9 is dismissed.
In the combined result, the appeal of the assessee is partly allowed for statistical purposes as indicated herein above.
Order pronounced in the open Court on this 2nd day of March 2022.
Sd/- sd/- (R.S.SYAL) (PARTHA SARATHI CHAUDHURY) VICE PRESIDENT JUDICIAL MEMBER Pune; Dated : 2nd March 2022 . Ankam
Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The Pr. CIT concerned 4. The Dy. CIT (TP) 2(1) Pune. 5. The D.R. ITAT ‘C’ Bench 6. Guard File BY ORDER,
Sr. Private Secretary ITAT, Pune. ///TRUE COPY ///
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Date 1 Draft dictated on 16.02.2022 Sr.PS 2 Draft placed before author 18.02.2022 Sr.PS 3 Draft proposed and placed JM/VP before the second Member 4 Draft discussed/approved by JM/VP second Member 5 Approved draft comes to the Sr. Sr.PS PS 6 Kept for pronouncement on Sr.PS 7 Date of uploading of order 02-03-2022 Sr.PS 8 File sent to Bench Clerk 02-03-2022 Sr.PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order