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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, M/s. Donaldson India Filter Systems Pvt. Ltd. (for short ‘the taxpayer’), by filing the present appeal sought to set aside the impugned order dated 08.01.2015, passed by the AO under section 144C read with section 143 (3) of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2010-11 in consonance with the orders passed by the ld. DRP/TPO on the grounds inter alia that :-
“1) That on the facts and in the circumstances of the case and in law, the order passed by the Ld. AO is bad in law and void ab-initio.
2) The Ld. AO/Ld. TPO/ Ld. Dispute Resolution Panel ("DRP") erred on facts and circumstances of the case in determining the arm's length adjustment to the Assessee's international transactions from Associated Enterprises ("AEs") and thereby resulting in the enhancement of returned income of the Assessee by Rs.10,692,707/-. 3) That the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. TPO for computation of the arm's length price, as is required under section 92CA(1) of the 'Income Tax Act, 1961 ("Act"). 4) The Ld. AO / Ld. TPO/ Ld. DRP erred on facts and in law determining the ALP of the Assessee's international transactions pertaining to payment of intra group services/management fee as NIL against the sum of Rs.10,692,707/- incurred by the Assessee and in doing so have grossly erred in the following manner- 4.1 The Ld. AO/Ld. TPO/ Ld. DRP erred in facts and in law in holding that neither the Assessee has received any service and/ or benefit in lieu of the payment made by it for services availed nor was there was any need for such services/ payments; 4.2 The Ld. AO/Ld. TPO/ Ld. DRP erred in facts and in law by arbitrarily rejecting the Transactional Net Margin Method analysis adopted by the Assessee as the most appropriate method for benchmarking 4,3 The Ld. AO/Ld. TPO/ Ld. DRP erred in facts and in law in applying CUP method merely based on presumptions and without furnishing details of price charged in any comparable uncontrolled transaction which is in contravention of the provisions of Rule 10B of the Rules. 4.4 The Ld. AO/Ld. TPOI Ld. DRP erred in facts and in law by not considering that such payment was made by the Assessee in the earlier years also and no adverse inference was drawn by the Ld. TPO in those years. 5 That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation. 6 That the Ld. AO erred in facts and in law in charging and computing interest under section 234B and 234D of the Act.”
Briefly stated the facts necessary to adjudicate the issues in controversy are : the taxpayer company being a subsidiary of Donaldson Company Inc., USA (DCI) is into the manufacturing and marketing of air filtration systems, related supplies and parts. It also provides design service and after sales service for equipment sold by the taxpayer to the customer in India. The company was incorporated with the objective of carrying on the business of manufacturing, buying, selling, exporting and importing of all kind of hydraulic, namely filters and filter media including air filter and self-cleaning air filtration system for gas turbines, compressors, automobiles filters, filters for construction equipment, ventilation, cooling pollution control etc. The taxpayer’s parent company, Donaldson Company Inc., USA (DCI), is a company based in Minneapolis, Minnesota USA and is the main parent company of the Donaldson Group.
During the year under assessment, the taxpayer has reportedly entered into international transactions as under :-
International Method Donaldson India Comparables Transaction [“PLI”] Value (Rs.) Margin Arithmetic Mean Purchase of 89,205,633 raw materials, components etc. Purchase of 197,507,240 Filters Sale of Filters 50,840,054 TNMM OP/Sales 9.38% 9.08% Royalty 10,127,454 Management 10,692,716 fee paid / project fee Erection 138,151 Charges received Reimbursement 10,288,161 of expenses paid Reimbursement CUP NA 531,880 NA NA of expenses received Commission TNMM OP/Sales 2,337,475 1.12% 2.70% received TNMM Reimbursement OP/Sales 769,505 1.12% 2.70% of expenses paid TNMM Provision of OP/OC 21,057,318 119.85% 15.15% Engineering Design Services
For benchmarking the international transactions during the year under assessment, the taxpayer has adopted segmental approach for its manufacturing, trading and service transaction by using Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) and found its international transactions including management fees transaction at arm’s length. The ld. TPO accepted all the international transactions entered into by the taxpayer during the year under assessment at arm’s length except transaction qua payment of management fee/intra-group services. The ld. TPO also not accepted the taxpayer’s approach aggregating all the international transitions for benchmarking and sought to analyze services transactions as a separate class of transaction for benchmarking the same.
Ld. TPO also preferred to apply CUP method for benchmarking the international transactions and proceeded to conclude that taxpayer has failed to prove that the intra-group services have been availed from its AE for which payment of Rs.1,06,92,707/- was made and thereby taken the Arm’s Length Price (ALP) of alleged intra-group services as Nil and thereby proposed the ALP adjustment as under :-
S.No. Nature of ALP ALP determined Adjustment international determined by this office (Rs.) u/s 92CA transaction by (Rs.) taxpayer (Rs.) 1. IGS 10,692,707 Nil 10,692,707 Total 10,692,707
The taxpayer carried the matter before the ld. DRP by raising objections who has upheld the ALP adjustment proposed by the TPO by dismissing all the objections. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Undisputedly, the taxpayer has been making payment of management fee for intra group services to its Associated Enterprises (AEs) since AY 2008-09 and the ld. TPO in earlier assessment years i.e. 2008-09 & 2009-10 and subsequent assessment years 2011-12 & 2012-13 has held the payments of management fee services by the taxpayer to its AE at arm’s length in terms of agreement of 2004. It is also not in dispute that the price for intra-group services was charged at cost plus mark-up of 6%. It is also not in dispute that services rendered by the AE during the year under assessment are similar and under the same agreement. It is also not in dispute that the quantum of payment of management fee constitutes only 1.39% of the total turnover of the taxpayer. It is also not in dispute that the taxpayer’s turnover has increased five times in the last five years.
When we examine the findings returned by the TPO contained in paras 9.1 & 9.4 of the TP order in the backdrop of the aforesaid undisputed facts, he has merely based his findings on the reasons inter alia that the taxpayer has failed to prove that the services have been actually rendered and any benefit has been derived by the taxpayer; that services received are incidental in the nature due to long association; that the taxpayer did not file any evidence to support its claim that the services were actually provided; that under uncontrolled circumstances, any independent enterprise having skilled and sufficiently trained manpower would not have willingly paid for such services to the third party; that payment for liaison services allegedly provided by AE are not at ALP nor the taxpayer has conducted FAR analysis with regard to the alleged services nor carried out any cost benefit analysis at the time of requisitioning the so called services.
It is the case of the taxpayer that it had received support services from its AE as per agreement at the fee equivalent to a prorata share of the defined pools of expenses provided or procured by the taxpayer on cost plus markup of 6% viz. (a) administrative coordination services, planning & strategy and training; and (b) conduct market research.
Ld. AR for the taxpayer challenging the impugned order contended that in case of administrative coordination services, planning and strategy and training received by the taxpayer, these services have been provided by the AE for new customer tenders and specifications, introduction of new product, market adaptation of products built in the US and Europe to suit local requirement etc. and that support team of AE does business travel with sales team in meeting suppliers, resolve quality and production issues and it has also provided training on selling techniques, product information, market exploration, contract negotiations and pricing etc., from which it has derived substantial benefits and drew our attention to page 272 of the Paper Book Vol.II.
When we examine page 272 of Paper book Vol.II, the , the taxpayer has elaborated the benefit received. The taxpayer in order to prove the rendering of services and benefits derived thereon produced before TPO copy of administrative service agreement with AEs, letter for remittance of management fee along with debit note, undertaking, copy of challan, TDS deposited and certificate given by Chartered Accountant and taxpayer also brought on record emails regarding arrival and programme schedule according to which experts arrived in it and provided services to the taxpayer and they have also given DIFS expansion presentation, power point presentation, flight details of visitors and meeting, mails and reports in relation to internal audit for expansion, expansion project, procurement and human resources process review of the taxpayer.
So far as question of availing services as to conducting marketing research from its AE is concerned, since the taxpayer is into sale of product by manufacture, market research for the demand of such product, sale forecast and inventory level requirement is necessary. So, it cannot be denied that market research services are of no benefits to the taxpayer operating in India as the sale has been increased five times during the last five years. The taxpayer has explained the services rendered and benefit derived at pages 272 and 273 of the Paper Book Vol.II.
So far as question of rendering information technology support services are concerned, it is the case of the taxpayer that AE has provided services of information technology support services, SOX compliance, controlled environment, organization and administrative and internal audit in conjunction with the business of the taxpayer and has derived benefit otherwise the taxpayer would have to hire a third party for availing such services necessary to run the business in order to resolve various issues.
The ld. TPO held that the taxpayer has not proved as to how these services were useful and that the services appeared to be very generic in nature and are in the nature of shareholder services nor any cost benefit analysis provided by the taxpayer.
When we examine the reasons given by ld. TPO for declining the contentions of the taxpayer for rendering such services by the AE and taking benefit therefrom by the taxpayer in the light of the fact that its intra-group charges are merely 1.39% of the total turnover which has been increased five times within last five years and the taxpayer is a subsidiary of Donaldson Company Inc., USA, its AE, and is into manufacturing and marketing of air filtration systems, etc., without these services 5 times increase is not possible. Moreover, all the services are being rendered as per agreement of 2004 and since then facts have not been changed.
Merely because of the fact that the payment on account of management fee / intra-group services is increasing every year, the case of the taxpayer cannot be falsified as it is to be seen in the light of the fact that if payment of services has been increasing the turnover has also been increasing.
Moreover, it is the case of the taxpayer that payment has been made for beneficial services as per OECD Guidelines of 2010 to cater the specific needs of the taxpayer necessary for business of the taxpayer in India. Moreover, had these services been availed of by the taxpayer from a third party, it would have entailed more cost.
Moreover Revenue Officer cannot decide while sitting on the armchair of a businessman to decide as to what services are required. So far as question of deriving the benefit of such services is concerned, benefit may always not be the result of any business decision. But, in the instant case, the taxpayer has explained the benefits derived from rendering of services by the AE.
Furthermore, when it is not in dispute that the business model of the taxpayer has not undergone any change since 2004 and payment of intra-group services have been formed to be at arm’s length by the Revenue by passing detailed order by the TPO for AYs 2008-009, 2009-10, 2011-12 and 2012-13, available at pages 129 to 136 of Case Law Paper book, no reason whatsoever has been given by the ld. TPO to depart from the rule of consistency. No doubt, principle of res judicata is not attracted to the income-tax matter but when the business model has not undergone any change and facts and circumstances are identical “rule of consistency” is required to be maintained as has been held by Hon’ble Apex Court in Radhasoami Satsang vs. CIT - 193 ITR 321.
When we examined TP order for AY 2011-12 and 2012-13, available at pages 133 to 136 of the Case Law Paper book, payment of intra-group charges to the tune of Rs.1,26,97,965 and Rs.1,56,08,715/- respectively have been held to be arm’s length as per TP analysis conducted by the taxpayer. So, it cannot be held that since payment of intra-group services is increasing day by day, it leads to profit shifting.
In view of what has been discussed above, we are of the considered view that issue at hand is required to be remitted back to the TPO/AO to decide afresh in the light of the observation made herein before and in view of the order passed by ld. TPO in preceding and succeeding years. Consequently, the appeal filed by the taxpayer is allowed for statistical purposes. Order pronounced in open court on this 3rd day of October, 2018.