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Before: Shri Bhavnesh Saini & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This appeal by the assessee is directed against the order of Assessing Officer dated 30.11.2015 read with directions of ld. DRP dated 27.10.2015 for the assessment year 2011-12. The assessee has raised as much as six grounds in the memorandum of appeal, out of which ground No. 1 is general in nature and ground No. 6 pertaining to interest u/s. 234B is consequential in nature.
The assessee has also filed an application on 30.07.2018 (Wrong date written on application as August 30, 2018) before the bench stating that the appellant has entered into an Advance pricing agreement (APA) with CBDT on ITA No. 161/Del./2016 2 25.07.2018 (wrong date written in application as August 25, 2018) which is applicable to five consecutive years commencing from F.Y. 2014-15 to 2018- 19 and four consecutive rollback years commencing from F.Y. 2010-11 to 2013-14 relevant to A.Yrs. 2011-12 to 2014-15. It is also stated that the appellant is entitled to file modified return as per section 92CD(1) in accordance with the APA within a period of three months from the end of the month in which the agreement was entered into and as per Rule 10RA(4) of the IT Rules, the appeal, if pending for any rollback year on the issue which is subject matter of APA, shall be withdrawn to the extent of the issues covered by the agreement. He, therefore, submitted that relevant grounds Nos. 2 & 3 of appeal under consideration are withdrawn. Accordingly, these grounds of appeal are dismissed as withdrawn, as noted above.
2. The remaining grounds, which need adjudication read as under :
4.Disallowance under section 40(a)(i) and section 37(1) of the Act 4.1. That on the facts and circumstances of the case and in law, the AO /DRP have erred in making a disallowance of INR 8,61,72,048 under - section 40(a)(i) of the Act, in respect of reimbursements paid to its Associate Enterprise ("AE") on account of salaries and travel cost of the seconded employees, alleging that the same is in the nature of Fee for technical services ("FTS") and is chargeable to tax in India in the hands of the AE, thus, Appellant ought to have deducted taxes on such payments.
4.2. That on the facts and circumstances of the case and in law, the AO / DRP have erred in not appreciating the fact that the Appellant had duly deducted tax under section 192 of the Act on the entire salary paid to the ITA No. 161/Del./2016 3 seconded employees, The AO / DRP further erred in not taking into consideration the evidence submitted by the Appellant demonstrating due deduction of taxes in the hands of seconded employees and re- characterizing such payments as FTS.
4.3. That on the facts and circumstances of the case and in law, the AO / DRP have erred in incorrectly placing reliance on the decision of the Delhi High Court in the case of Centrica India Offshore Pvt Ltd vs CIT [2014] 364ITR 336 ("Centrica"), holding that the AE was rendering technical services to the Appellant which are chargeable to tax in India in the hands of the AE.
Disallowance under section 37(1) of the Act. 4.4. That on the facts and circumstances of the case and in law, the DRP directions are bad in law, to the extent of enhancement of income in relation to disallowance of expenditure amounting to made amounting to INR 3,68,01,315, as no show-cause or opportunity of being heard was given before making such disallowance, which is sine qua non as per provisions of section 144C(11).
4.5. That on the facts and circumstances of the case and in law, the AO / DRP have erred in disallowing the expenditure of INR 3,68,01,315 under section 37(1) of the Act, on account consultancy charges paid by the Appellant to its AE, alleging that the same have not been incurred wholly and exclusively for the purposes of the business.
4.6. That on the facts and circumstances of the case and in law, the DRP has erred in computing the ALP of consultancy charges paid by the Appellant to its AE as Nil, alleging that such services were in the nature of shareholder services, duplicative and provide incidental or passive benefits.
4.7. That on the facts and circumstances of the case and in law, the DRP has erred in computing the ALP of consultancy charges paid by the Appellant to its AE as Nil, alleging that the Appellant did not furnish any evidence to substantiate that the services were indeed rendered by the AE and failed to show that such services were not in the nature of shareholder services, duplicative, and that provide incidental benefits or passive benefits.
ITA No. 161/Del./2016 4
5. That on the facts and circumstances of the case and in law, the A.O. has erred in not allowing full credit of taxes paid/deducted.”
The brief facts of the case are that the appellant, Daikin Air conditioning (India) Private Limited ("DAIPL") is a private limited company incorporated under the Companies Act, 1956 and operates as a wholly owned subsidiary of Daikin industries Limited, Japan ("DIL"). During the subject assessment year, the Appellant was engaged in the following activities:
• Purchase of air conditioners ('ACs') and other products from its associated enterprises ("AEs") for the purpose of resale in India, which are imported on a principle to principle basis;
• Provision of after-sales services of air conditioners and other related activities; and • Manufacturing of air-conditioners for the purpose of selling to third party customers in India.
The Appellant had set-up a factory in Rajasthan in February, 2008 for manufacturing of air conditioners and started manufacturing operations in September, 2009. The Appellant incurred expenditure on import of raw materials for undertaking manufacturing function. It also incurred training cost and consultancy services cost in relation to its manufacturing operations and has also made payment for royalty for receipt of technical know-how in relation to manufacturing operations.
3.1. For the subject assessment year, the Appellant entered into the following international transactions with its AE.
ITA No. 161/Del./2016 5
* Distribution Function - Purchase and resale of air conditioners * Marketing Support Function - Purchase and resale of air conditioners • Marketing Support function - Provision of MSS - Import of spare-parts of ACs - Provision of warranty support services - Import of fixed assets • Manufacturing function - Import of raw material and spare parts - Receipt of training services - Receipt of consultancy services - Payment of royalty • Reimbursement of expenses (impugned transaction) • Recovery of expenses 3.2. The TPO vide order dated January 7, 2015 made the adjustments / additions to the income of the Appellant in relation to international transactions pertaining to (i) distribution function and (ii.) manufacturing segment.
3.3.The DRP vide directions dated October 15, 2015, has dealt with the issue as under :
• Upheld the adjustment made by TPO in relation to both distribution and manufacturing segment with certain directions granting minor relief.
• Additionally, during the course of proceedings before the DRP, certain additional details / information were sought by the Panel in relation to international transaction of reimbursement of expenses, in order to ascertain
ITA No. 161/Del./2016 6 the withholding tax liability of the Appellant on such remittances. The break- up of reimbursement of expenses as provided to the DRP is as under:
Particulars Amount (in INR) Salaries 8,09,97,689 Consultancy expenses 3,68,01,315 Travel Costs 51,74,359 Total reimbursement by 12,29,73,363 Appellant 3.4 Thereafter, the DRP suo-moto directed for the following additions / disallowances:
- In relation to expenditure incurred towards (i.) salaries and (ii.) travel cost, the DRP held that the same constitutes Fee for Technical Services ("FTS"), chargeable to tax in India in the hands of OIL and accordingly disallowed the aggregate claim amounting to Rs. 8,61,72,048 under section 40(a)(i) of the Act, since no tax was withheld on the same.
- In relation to consultancy fee amounting to Rs. 3,68,01,315, the DRP held it to be disallowable under section 37(1) of the Act, as such consultancy charges were not incurred wholly for the for the purposes of the business of the Appellant.
3.5 The final assessment order dated November 30, 2015 was passed by the AO in pursuance to the directions of the DRP and order of TPO giving effect to such directions. The AO inter-alia made additions to the returned income as under :
ITA No. 161/Del./2016 7
Particulars Amount (In lNR) Loss as returned under the normal provisions 27,57,00,801 of the Act Add: Transfer pricing additions on account of 1,51,5,3,24,766 adjustment of ALP (covered by APA} Disallowance under section 40(a)(1 ) of the Act 8,6,1,72,048 Disallowance under section 37(1) of the Act 3,6,8,01,315 Total Income 1,362,597,328 Aggrieved from the order of the Assessing Officer /DRP, the assessee is in appeal before the ITAT.
The learned AR submitted that the ld. DRP has wrongly held that these payments come within the category of Fees for Technical Services (FTS), whereas the same relate to the payment to employees and necessary TDS has been deducted. Form No. 16 has been issued and quarterly TDS return has been filed. EPF has also been deducted from the salaries of the employees. The ld. DRP without verifying the documents submitted, upheld it as payment for FTS. He also submitted that the similar payments made by assessee in A.Y. 2010-11, 2012-13 to 2014-15 have been accepted by the Revenue. He requested that the mater should go back to the Assessing Officer for verification to ascertain the exact nature of payments to the employees.
The ld. DR relied on the orders of the authorities below and stated that the matter may be remanded to A.O.
ITA No. 161/Del./2016 8
We have heard both the sides and perused the entire material on record. The ld. AR of the assessee drew our attention to copies of Form No. 16 and details of the employees placed in the paper book, which have not been examined by the authorities below. We, therefore, think it proper to send the matter back to the Assessing Officer for verification of the payments made- whether they were made to employees of the assessee company or whether the same were made as fee for Technical services and also whether TDS has been correctly deducted on payment of Rs.8,61,72,048/- (Salaries & Travel cost) and decide the issue afresh in accordance with law.
Further, in respect of disallowance u/s. 37(1) of Rs.3,68,01,315/-, the Assessing Officer/DRP have disallowed these expenditures being not relating to business purpose of assessee. The ld. AR requested to send back this issue also to the Assessing Officer for verification because the ld. DRP did not consider the vouchers placed before them. He placed evidences before the DRP to establish that the expenditure were incurred wholly and exclusively for the purpose of business. In the totality of facts and circumstances, we therefore, restore this matter to the file of the Assessing Officer on this issue also for verification and decision afresh in accordance with law. Needless to say, the assessee shall be given reasonable opportunity of being heard. The assessee is also directed to adduce all the documentary evidences in support of its claim before the Assessing Officer. Accordingly, the relevant ground is allowed for statistical purposes.
ITA No. 161/Del./2016 9
Regarding ground No. 5, the assessee has contended that the authorities below have not given due credit of tax paid/deducted. The Assessing Officer is directed to verify the contention of the assessee and to give due credit of tax paid/deducted to the assessee.
In the result, the appeal of the assessee deserves to be partly allowed as indicated above.
Order pronounced in the open court on 6TH August, 2018.