M/S. VOLVO INDIA PVT. LTD.,,BANGALORE vs. DCIT, BANGALORE

Per INTURI RAMA RAO, AM :

This appeal is filed by the assessee company directed against the final assessment order dated 02.09.2000 passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [“the Act”].

The appellant raised the following grounds of appeal:- 2.

“The grounds mentioned herein are without prejudice to one another.

ITA No.1353/Bang/2010 Page 2 Transfer Pricing 1. That the order of the Learned Deputy Commissioner of Income-tax, LTU, Bangalore ('Assessing Officer' or 'Learned AO') which is in conformity with the directions of the Dispute Resolution Panel, Bangalore (DRP), to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. 2. That the Learned AO and the Learned DRP erred in not appreciating the fact that the Appellant had prepared the TP documentation bona fide and in good faith in compliance with the Act and Income tax Rules, 1962 (the Rules). 3. The Learned AO and the Learned DRP erred in considering the international transactions relating to the payment of management fees in isolation of the Transfer Pricing Documentation maintained by the Appellant. 4. In connection with the management and marketing support services fees the Learned AO and the Learned DRP erred in: 4.1. concluding that no economic value was derived and that no tangible and substantial commercial benefit was derived by the Appellant; 4.2. concluding that no supporting evidence were furnished to justify the management and marketing support services rendered to Volvo India; 4.3. concluding that the there is no correlation between the amount of management and marketing support services fees paid and the services rendered by the Associated enterprises of the Appellant. 5. The Learned AO and the Learned DRP erred in disregarding the contemporaneous planning study and the benchmarking analysis submitted by the Appellant without prejudice in substantiation of the management & marketing support services fees. 6. The Learned AO and the Learned DRP erred in ignoring the fact that the Learned TPO has transgressed the powers provided u/s 92CA of the Act. Others 7. That the learned AO erred in not allowing deduction under section 10A of the Act of the entire profits of the undertaking registered with the Software Technology Park of India.

ITA No.1353/Bang/2010 Page 3 8. (i) That on the facts and in the circumstances of the case, the Learned AO erred in reducing the tele-communication expenses incurred in India amounting to Rs 4,899,396 from 'export turnover' while computing deduction under section 10A of the Act as 'expenditure attributable to delivery of software outside India' under Explanation 2(iv) to Section 10A of the Income-tax Act, 1961 ('the Act'). (ii) That the Learned AO has erred in not allowing the reduction of telecommunication expenses of Rs 4,899,396 from the total turnover of the Appellant in computing the deduction under section 10A of the Act. 9. The Learned AO has erred in not following the decisions of the jurisdictional Income Tax Appellate Tribunal in respect of the application of the formula as prescribed under sub- section (4) of Section 10A in terms of which the total turnover needs to be adjusted corresponding to any adjustment in export turnover. 10. The Learned AO failed to appreciate and ought to have held that the deduction u/s 10A of the Act is granted on the proportion which export turnover bears to total turnover of the undertaking, corresponding effect of reduction of various expenses from export turnover would have to be given to total turnover to achieve uniformity between the export turnover and total turnover. 11. Consequently, the learned AO erred in charging interest under section 234C of the Act. Consequently, the learned AO erred in charging interest under section 234D of the Act. That the Appellant craves leave to add to and / or to alter, amend, rescind, modify, the grounds herein above or produce further documents before or at the time of hearing of this Appeal.”

ITA No.1353/Bang/2010 Page 4 The assessee company also reported the following international transactions:-

S.No. Nature of International Amount Transactions (Rs.) 1. Purchase of truck kits 112,07,37,202 2. Purchase of parts and spares 33,25,73,885 3. Sale of goods 25,93,43,143 4. Sale of parts and spares 4,02,65,039 5. Purchase of Bus Kits 46,91,95,683 6. Purchase of VCE Kits completely 271,70,67,143 knocked down condition 7. Services provided 42,89,95,417 8. Services availed 2,28,31,374 9. IT charges received 16,28,28,614 10. Payment for services 91,78,096 11. Service income 51,96,167 12. Reimbursement of expenses received 1,51,87,481 13. Reimbursement of expenses paid 20,233 14. Royalty 6,26,72,000 15. Purchase of printed matter 37,89,35,000 16. Management fee (Mfg & distribution) 17. Technical Fee paid 9,30,00,000

The aforesaid international transactions were benchmarked applying Transactional Net Margin Method (`TNMM') and the results of the said analysis are as under:

Nature of Method Profit level Volvo Comparables business selected indicator India's result segment result Licensed Transactional Operating Manufacture Net Margin Profit 16% 4% Method Margin Routine Transactional Operating distributor Net Margin Profit 36% 5% Method Margin

ITA No.1353/Bang/2010 Page 5 Management Transactional Operating service Net Margin Profit/Total 6% 6% provider Method cost

2.1 Submit copies of invoices raised by the AE in your favour and also ledger account of "Management Fee" in your books of account for the FY 2005-06. 2.2 During the FY 2005-06, you have paid an amount of Rs. 37,89,35,000/-: When any such huge amount is paid by way of management fees by unrelated parties, the parties would like to know what are the services one party is going to receive from other party much before the start of the year and also how these services are going to be quantified. Further, no management fee would be paid in terms of percentage of revenues as the effort of the management at your parent company or AE would be independent of your turnover and the management efforts in terms of hours spent by the management team of your parent company or AE would not change. 2.3 The details and nature of management services rendered by your parent company or AEs. The quantification of such services and also the basis for such apportionment as the management services would have been rendered to various other Volvo group entities. In this regard, please also justify how two independent parties would have quantified the services. 2.4 In respect of each type of expense under the management services rendered, the basis of such quantification of service or cost involved. Because, no independent party would like to pay for a service without knowing the cost of such service or without knowing the cost at which such service is rendered in the market. No independent company would pay management fee without actually knowing the basis for

ITA No.1353/Bang/2010 Page 6 apportionment and also so huge amount of Rs. 37,89,35,000/- which is about 14% of profit (before management fee) is paid as management fee. 2.5 Whether management fee is paid by any of the concern or subsidiary of Volvo Group any where in the world. If yes, copies of the agreements for management fee and also the basis on which such payments are paid. 2.6 Whether management fee is paid by any independent concern or entity in any other country through which Volvo Group carries on similar business as that of you. If yes, copies of the agreements for management, fee and also the basis on which such payments are paid. 2.7 Copy of the agreements with AEs in respect of management fee. 2.8 Please establish that a service (i.e., a benefit) has actually been supplied for which management fee is paid by you. In this respect please produce a. documents supporting the calculation of cost-based charges, for example, direct costs plus a reasonable proportion of indirect costs, and adequate records to permit verification of such costs; b. documents supporting the mechanism used to determine the amounts to be apportioned among associated enterprises, for example, use of formulas, time surveys, etc including the details of the application of this mechanism to the costs incurred during the FY 2005¬06 and documentation supporting any review of the applicability of the chosen mechanism; c. documents supporting the selection of keys for apportionment among several associated enterprises, including reasons why particular keys were considered the most appropriate in the circumstances of the case; d documents supporting the selection of a pricing methodology or methodologies and any documentation supporting the consideration and rejection of other methodologies; and e. documentation created in the undertaking of a functional analysis of the various group members providing and receiving services to establish the relationship between the relevant services and the members' activities and performance.

ITA No.1353/Bang/2010 Page 7 2.9 Please provide the quantification of such services in terms of actual expenditure incurred and commensurate benefits derived there from. 2.10 Whether the charges paid by the taxpayer for intra group services as management fee reflect the same charges for the services that would have been, or would reasonably be expected to be, levied between independent parties dealing at arm's length for comparable services under comparable circumstances. 2.11 Please give the details of head or heads under which such payment is shown in the books of account of AE and also produce a copy of ledger account of the taxpayer in the books of ATE in respect of management fee. Also give the details of head under which these payments are shown for the income tax authorities in the respective countries of AEs."

The taxpayer vide its letter dated 13.08.2009 furnished the 5. information as in the earlier years and the TPO had held that the appellant had not filed any factual information on the actual amount spent by the AE. The TPO had summarized his comments on the explanation furnished by the appellant as under:-

“1. The reply nowhere contains the information asked by the TPO specifically the amount spent by VTC towards management fee and how much of it apportioned to India. 2. The AE treats non-Swedish entities as service providers whereas the taxpayer is a manufacture as well as distributor of commercial vehicles of Volvo in India. This admitted even in the functional analysis done by the taxpayer in its TP report. 3. The VTC says that the taxpayer is guaranteed an arm's length profitability is not true. As the taxpayer is carrying on significant manufacturing and distribution functions attached with consonants risk, how can the return can be guaranteed. 4. The AE says that the arm's length result is usually based on certain range of Return on Capital Employed ("ROCE") for manufacturing and Berry Ratio (`Gross Profit/ Value Added Expenses') for distribution functions. Other services are remunerated on a Cost Plus Mark-up (`Operating Profit/ Total Cost') basis. As per the Volvo Group transfer

ITA No.1353/Bang/2010 Page 8 pricing system, in the event that the actual result falls below the established range, Volvo Sweden compensates the Service Provider with transfer pricing adjustment large enough to bring the Service Provider within the range. However, in case the actual profits are above the established range, the Service Provider compensates Volvo Sweden with an amount sufficient to bring the profit within the range. The second statement clearly states that in the event actual profits are above the established range, Volvo Sweden is compensated the excess above the established range. But, this adjustment cannot be made in the guise of management fee. The compensation for the parent company can only be in the form of dividend or transfer pricing adjustment. In a way the AE is accepting that management fee is nothing to do with the services rendered by the AE. 5. Volvo Sweden says it assumes the cost and associated risk of developing the intangibles relating to technology, trade- mark, trade-name and other marketing intangibles. Accordingly, the return also accrues to Volvo Sweden. Therefore, there is no need for VTC to charge the Service Providers for use of technology, use of trademark, marketing and management services etc. If these costs had been charged they would affect the result of the Service Provider and hence, also the transfer pricing adjustments between the Service Provider and VTC. But in the case of taxpayer, VTC has in fact charged royalty for using technology which goes against the statement of the AE. 6. The concept of bringing the profit of the AE within the range of the comparables is itself a transfer pricing methodology adopted by the AE. By way of management fee, the so called excess profit is siphoned off from India with minimum incidence of tax by paying just 10% on the management fee instead of 40% (30% on profits and 10% dividend distribution tax) if the same is taken by the AE as dividend. The above clearly shows that management fee is a transfer pricing mechanism because in the case of independent enteritis, the payment for any services is not dependent on the profitability or capacity to pay of the recipient as is the case here. Even otherwise, the taxpayer did not show any instance where the parent company compensated the taxpayer when Volvo India was under losses in the initial years. 7. The AE further says that management fee refers to various kinds of marketing activities, customer relationship support, usage of trademark, brand and guidelines and background material for all kind of activities related to such

ITA No.1353/Bang/2010 Page 9 services. It also states that it is not necessarily VTC that has provided these services, they might just as well have been provided by another Volvo Group company in Sweden or as a Service Provider to Volvo Sweden. It should be mentioned that AB Volvo, the parent company in the Volvo Group has the overall responsibility of building the Volvo trade-mark and brand and much of the costs related hereto is borne by AB Volvo. The AE again mixes the purpose for which the management service is received. It does not know which group member provided such services. Hence, the invoice raised by the VTC can be treated as only a paper and nothing beyond as either the taxpayer or the AE did not show how such expenses are incurred only for India and not for the rest of the country.”

“1. The taxpayer did not pay any management fee in the financial year 2003-04, but started paying substantial amounts of Rs. 26.22 crores, Rs. 37.89 crores and Rs. 42.62 crores for the FY 2004-05, FY 2005-06 and FY 2006- 07. 2. The taxpayer failed to produce any evidence regarding the expenditure incurred by the AE on behalf of the taxpayer. 3. The AB, Volvo Truck Corporation, also did not give any details of expenditure incurred by it in connection with management fee received by it. Further, as per the transfer pricing strategy adopted by the AE, the profitability of Volvo India is the determining factor in deciding the management fee and is not based on the services rendered by it. 4. The taxpayer changed its stand many times during the course of proceedings that the payment is made towards marketing services and / or brand, trademark etc. 5. The taxpayer has not shown whether such services are rendered except producing invoice copy and describing the nature of services. 6. The taxpayer has not shown how such services would be valued by an independent entity dealing in similar circumstances.

ITA No.1353/Bang/2010 Page 10 7. The taxpayer did not show what is the tangible and substantial commercial benefit derived by such huge payment of Rs. 37.89 crores, when compared to Nil payment made during the year 2003-04. The taxpayer tried to explain the tangible benefit by showing the improved profitability in this year when compared to last year. But, the actual reason for the improved profitability is due to the increased (doubled when compared to the year 2003-04 during which the taxpayer did not pay any management fee) gross margin in the distribution segment of construction equipment, where no service element is involved except the difference between the purchase and sale price. 8. As admitted by the taxpayer, in the commercial vehicle industry, the revenues were driven by technology and quality and not by the marketing efforts as evidenced by low selling and business promotion expenses in the case of taxpayer for the last two to three years. 9. When the taxpayer is capable of rendering marketing services to its group company in respect of Volvo products in India and Asian region, it would be very difficult to agree with the taxpayer that it has taken the help of the AE for marketing efforts, especially when the marketing is majorly concentrated in India. 10. The taxpayer's management fee is nothing but siphoning off profits from India with minimum incidence of tax as the taxpayer has paid only 10%, when compared to the tax rate of 40% (30% tax + 10% dividend tax) if the same was shown as profits and remitted as dividend. 11. The imports from AEs constitute major consumption of raw material / purchases indicating that the AEs are already compensated enough in the form of purchase price and also compensated for the value addition in India by way of royalty paid based on the technology received from AE. 12. The taxpayer did not prove the arm's length nature of management fee paid to Volvo Truck Corporation. Thus the arm's length price of management fee paid is treated as Rs. Nil due to inadequacy of the taxpayer's argument and the entire payment of management fee of Rs. 37,89,35,000/- is treated as an adjustment U/s 92CA.”

ITA No.1353/Bang/2010 Page 11 7. In respect of the payment of royalty and payment of technical services, the TPO held it to be at arm’s length. He treated the arm’s length price of the payment of management fee of Rs.37,89,35,000 at Nil as no evidence was filed in support of the rendering of services and it was not demonstrated any tangible and substantial commercial benefit was derived by such huge payment of management fee.

ITA No.1353/Bang/2010 Page 12 trademark, brand and guidelines and background material for all kinds of activities related to such services. It is further submitted that the appellant is only entitled to use the trademark granted by the AE. By use of this trademark, the appellant commands a premium over the product sold by its competitors in the field such as TATA Motors and Ashok Leyland. It is further submitted that the appellant derived significant benefits from the use of brand name in terms of higher operating margins, when compared to its competitors in the business. As regards the customer relationship support, he submitted that the AE of the appellant conducts brand surveys as well as customer satisfaction surveys and results of such surveys are shared with the appellant and the reports provide valuable input to the appellant. He submitted that in respect of customer relationship support, the following services are provided by its AE:-

“a) The products manufactured by the appellant are used in the construction and mining industry. Such products are required to be customized/modified depending upon the kind of mining activity carried on by the customer viz., coal mining, granite mining etc. The associated enterprise understands the requirements of the customer and supports the appellant in identifying the customization requirements as well as carrying out the requisite modification to meet the needs of the customer. b) The marketing team of the associated enterprise assists the appellant in identifying new products which may be launched in India depending upon the needs of the Indian industry and potential customers. As a result of the support provided by the associated enterprise, the appellant successfully launched the I-shift technology in India which leads to improved fuel mileage of the products resulting in increased revenue for the appellant. c) The associated enterprise conceptualized and developed a mobile office in the form of a truck trailer, a 40 feet container having a visitors room, meeting room, cubicles etc. for the purpose of exhibiting the products and capabilities to the potential customers of the appellant in India. The said mobile office conceptualized and developed by the associated enterprise and was provided to the appellant free of cost.

ITA No.1353/Bang/2010 Page 13 13. As regards the central/core marketing activities and provision of background material, it is submitted that the AE undertakes central marketing activities such as organizing customer visits to its facilities to boost consumer confidence, sponsors various sports events, etc. It is further submitted that these activities benefit the appellant in the form of higher brand and product visibility resulting in higher sales to the appellant. The nature of activities to be performed by the AE in the central/core marketing activities and provision of background material are as under:-

“a) The associated enterprise organizes for customer visits to its various facilities to boost customer confidence levels. As part of brand building exercise, media personnel from India were sponsored for a trip to Sweden by Volvo Group. These efforts provided the appellant with a strong brand image in India. b) The associated enterprise initiated a Volvo environmentalist award and several Indians have won the same over the years. Several safety, emission and quality seminars are held as part of promoting the Volvo Group's core values and image across the globe. A select batch of school children from India were called for a tour to Sweden by Volvo Group to bring environment consciousness among young global citizens. It would be appreciated that such events enhances the awareness about the products offered by the appellant and also increases the brand recognition. c) The associated enterprise sponsors several sports events like Golf, motor events and boat races across the world such as Volvo Youth Sailing Regatta which is also known in the sailing world as the 'Youth Olympics' as part of global sailing strategy that culminates every four years in the Volvo Ocean Race. Such global brand building exercise helps the appellant to project a global image in India. d) As knowledge sharing initiative, the associated enterprise hosts intranet website containing information on contacts handling, marketing communication, results of Volvo Global surveys, films on brands and product and general communication portal. e) The associated enterprise also provides and shares the product and market strategies and plans with the personnel of the appellant, thereby providing an insight into the Volvo global business operations. Knowledge of other market experiences is also shared by the associated enterprise with

ITA No.1353/Bang/2010 Page 14 the appellant. The associated enterprise has also undertaken customer profiling for the appellant by means of launch under Area Asia.”

The ld. Counsel for the assessee further submitted that during 14. the course of proceedings before the TPO, copies of invoices raised by the AE towards management and marketing support services fee are furnished and also the details of nature of services rendered by the AE are also provided. It is further contended that the basis of quantification of services or cost involved is also submitted. He further contended that the TPO had failed to consider the evidence and explanation filed by the appellant as proof of provision of services by the A and had wrongly come to the conclusion that the appellant had failed to place on record the evidence in support of services rendered by the AE. He further submitted that in order to rebut the findings of the TPO, the appellant by way of application dated 14/09/2017 for admission of additional evidence sought to place on record certain evidence in the form of emails, presentation, business plans, etc. to substantiate the provision of services by the AE. He further submitted that significant benefits were derived by the appellant on account of payment of management and marketing support services fees to its AE. Without prejudice to this contention, it is contended that the benefit test is not the criteria for allowing expenditure, so long as an item of expenditure had been incurred wholly and exclusively for the purpose of the business of the appellant irrespective of the fact that such expenditure actually benefits the appellant. In support of these contentions, he placed reliance on a catena of following decisions :-

- CIT vs. Malayalam Plantations Limited: 53 ITR 140 (SC) - CIT v. Walchand & Co. etc. (1967) 65 ITR 381 - J K Woollen Manufacturers v. CIT: 72 ITR 612(SC) - CIT v. Birla Cotton Spg. And Wvg. Mills Ltd.: 82 ITR 166 (SC) - Madhav Prasad Jatia v. CIT U.P.: 118 ITR 200 (SC) - S.A. Builders Ltd. vs. CIT : 288 ITR 1 (SC) - CIT V. Bharti Televentures Ltd: 331 ITR 502 (Del)

ITA No.1353/Bang/2010 Page 15 - CIT vs. Padmani Packaging (P) Ltd.: 155 Taxmann 268 (Del) - CIT v. Rockman Cycle Industries Ltd.: 331 ITR 401 (P&H) (FB) - CIT vs. EKL Appliances Ltd. : ITA No. 1068/2011 & 1070/2011 (Del HC) - CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377 (Del)

ITA No.1353/Bang/2010 Page 16 explanation in the application for admission of additional evidence as to why the same could not be filed before the lower authorities.

ITA No.1353/Bang/2010 Page 17 motor events and boat races across the world such as Volvo Youth Sailing Regatta which is also known in the sailing world as the 'Youth Olympics' as part of global sailing strategy that culminates every four years in the Volvo Ocean Race. Such global brand building exercise helps VIPL to project a global image in India. 4.5.5 Several brand surveys as well as customer satisfaction surveys, Volvo attitude survey are undertaken by Volvo Group and the results of the same are shared with VIPL. These provide valuable inputs to VIPL in terms of positioning its products to the requisite customers. Thus, through all the above initiatives Volvo Group provides VIPL with the required brand identity, value and culture in India. 4.5.6 As knowledge sharing initiative, Volvo Group has hosted intranet website containing information on contacts handling, marketing communication, results of Volvo Global surveys, films on brands and product and general communication portal. All the above help the personnel at VIPL feel as part of the Global Volvo team and focus on their functions better. 4.5.7 Volvo Group also provides and shares the product and market strategies and plans with personnel at VIPL, thereby providing an insight for them into the Volvo global business operations. Knowledge of other market experiences is also shared. Volvo Group has undertaken Customer profiling for VIPL by means of launch under Area Asia. All the above mentioned support flowing from Volvo Group to VIPL has helped it secure a niche position in the Indian market. The same has contributed to the growth in revenues of VIPL and thus the management fee payable by VIPL to Volvo Group has been computed on the basis of VIPL's revenues.”

ITA No.1353/Bang/2010 Page 18 3. The payment of management and marketing support services fees is guided by the profitability of the AE and is not based on the services rendered by the AE.

(1) The first reason that no payment was made towards management and marketing support services fees in the earlier years cannot be a ground for determination of the ALP at Nil, as each

ITA No.1353/Bang/2010 Page 19 assessment year is independent and the principle of res judicata has no place in the income-tax proceedings.

(2) The next reason is that appellant had failed to produce any evidence regarding expenditure incurred by the AE on behalf of the appellant. This ground cannot be a relevant consideration for determination of ALP at Nil in the light of the decision of the Hon’ble Punjab & Haryana High Court in the case of Knorr- Bremse India (P.) Ltd. v. ACIT, 380 ITR 307 (P&H). The relevant part of the judgment is as under:-

“48. The TPO also held that no independent enterprise would pay out a portion of its profit big or small before it knows the cost incurred by the service provider. The TPO held that the assessee had failed to follow this basic tenet of independent behaviour. 49. A purchaser of goods or of services is not concerned with the price at which its vendor of goods or supplier of services in turn acquired the same. This, at the highest, would be a factor while negotiating the purchase of goods or the acquisition of services. Even if the vendor or supplier acquired the assets or the know-how as a gift, it would be irrelevant as far as the onward sale thereof is concerned. The purchaser determines the price it is willing to pay for the goods or services independent of what the same cost its vendor/service provider. The TPO, therefore, proceeded on an entirely erroneous basis while computing the arm's length price." (3) The next reason assigned by the TPO is that payment of management and marketing support services fees is guided by the profitability of the AE and is not based on the services rendered by the AE to the appellant. No doubt, it is a relevant criterion and it is settled principle of law that onus always lies on the assessee to prove the business exigency of any expenditure incurred and prove that expenditure is incurred wholly and exclusively for the purpose of business of the assessee. In the present case, the appellant had failed to discharge its onus and therefore, in our considered opinion, this is a relevant consideration for determination of the ALP of the transaction of

ITA No.1353/Bang/2010 Page 20 payment of management and marketing support services fees at Rs.Nil.

(4) The next reason assigned by the TPO is that the appellant had changed its stand as to the nature of services provided by the AE to the appellant. We observe that the nature of services are provided in clause 4.5 of the master agreement. From a mere reading of these clauses, it is clear that there are no terms enabling the appellant to use its trademark. In fact, the use of trademark amounts to ‘royalty’ and undoubtedly it is not the case of the appellant that the appellant had deducted tax at source on this payment. Therefore, this goes to prove that the appellant had even failed to prove the nature of services actually received by it.

(5) The other reason assigned by the TPO is that the appellant had failed to substantiate the actual rendering of services by the AE to the appellant. Undisputedly, the appellant had not made any efforts to substantiate the rendering of services by its AE before the lower authorities. This is evident from the fact that the appellant had filed an application before us for admission of additional evidence in support of rendition of services by the AE. We shall deal with the application for admission of additional evidence in the later part of this order. But at criterian consideration for determining the ALP at Rs. Nil. Needless to say that when the services are not actually rendered in terms of the master agreement, it is nothing but a sham transaction and the real purpose of the transaction is something else than what is apparent. Now it is trite law that in the absence of any evidence in support of rendering of services by the AE, the TPO is justified in adopting the ALP of such management fee at ‘Nil’. Reliance in this regard is placed on the following decisions:-

i) Decision of the coordinate Bench of the Tribunal in the assessee’s own case for the AY 2005-06 reported in [2017] 77

ITA No.1353/Bang/2010 Page 21 taxmann.com 207 (Bangalore – Trib.). The relevant paragraphs are extracted hereunder:

“11. No doubt, now it is settled proposition of law that it is beyond scope and powers of AO/TPO to question the necessity of incurring any expenditure. The Hon'ble Delhi High Court in the case of EKL Appliance Ltd. (supra) held that TPO cannot determine the ALP at Nil by holding that there was no need to incur any expenditure. The above decision was followed by the several coordinate benches of the Tribunal, some by them are as follows: i. Dresser-Rand India (P.) v. Addl. CIT [2011] 13 traxmann.com 82/[2012] 53 SOT 173 (Mum.) ii. Ericsson India (P.) Ltd. v. Dy. CIT [2012] 25 taxmann.com 472 (Delhi) iii. AWB India (P.) Ltd. v. ACIT [IT Appeal No. 4454 of 2011] (Delhi); iv. SC Enviro Agro India Ltd. v. Dy. CIT [2013] 34 taxmann.com 127/143 ITD 195 (Mum. - Trib.) v. Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxmann.com 27 (Delhi) vi. McCann Erickson India (P.) Ltd. v. Addl. CIT [2012] 24 taxmann.com 21 (Delhi) vii. DSM Anti-Infectives India Ltd. v. Addl. CIT [2014] 50 taxmann.com 239 (Chd. - Trib.) viii. TNS India (P.) Ltd. v. Asstt. CIT [2014] 48 taxmann.com 128/[2015] 152 ITD 123 (Hyd. - Trib.) ix. Atotech India Ltd. v. Asstt. CIT [2014] 148 ITD 670/42 taxmann.com 468 (Delhi - Trib.)

x. Nippon Leakless Talbros v. ACIT [IT Appeal No. 5931 (Delhi) of 2012] xi. Nippon Leakless Talbros v. ACIT [IT(TP) Appeal No. 475 (Delhi) of 2015] xii. Hughes Systique India (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 41 (Delhi - Trib.) xiii. Knorr-Bremse India (P.) Ltd. v. Asstt. CIT [2013] 56 SOT 349/[2012] 27 taxmann.com 16

ITA No.1353/Bang/2010 Page 22 (Delhi - Trib.) xiv. Thyssen Krupp Industries India (P.) Ltd. v. Asstt. CIT [2013] 55 SOT 497/[2012] 27 taxmann.com 334 (Mum. - Trib.) xv. LG Polymers India (P.) Ltd. v. Addl. CIT [2011] 48 SOT 269/15 taxmann.com 79 (Visakha).

ITA No.1353/Bang/2010 Page 23 with the other transactions and therefore the submission that these transactions should be bundled with other transactions cannot be accepted.

ii) Decision of the co-ordinate Bench of the Tribunal in the case of 3M India Ltd. vs. Addl.CIT(LTU) reported in [2016] 70 taxmann.com 231 (Bangalore - Trib.). The relevant paragraphs are extracted hereunder: “8. We heard rival submissions and perused material on record. A perusal of the TPO's order reveals that the ALP in respect of intra- group services was determined at 'nil' as, in his perspective, no benefits were derived by the assessee-company out of such services and there was no need of such services and there was no proof in support of rendition of such services to the assessee-company. The TPO has neither challenged the keys applied for allocation of cost by AE nor the TPO has disputed the actual cost incurred by the AE. 9. Now, we shall analyze each of the above reasons assigned by the TPO for determining ALP at 'nil'. The law is now quite well settled that it is beyond the scope and powers of the AO/TPO to question the necessity of incurring expenditure. The Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199, after considering the judgment of the Apex Court in the case of CIT v. Walchand & Co. (P.) Ltd. [1967] 65 ITR 381 (SC), Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC) held that the TPO cannot determine ALP at nil by holding that there was no need to incur such expenditure. While coming to this conclusion, the Hon'ble High Court has referred to the judgment of the Apex Court in the case of Eastern Investments Ltd. v. CIT [1957] 20 ITR 1 (SC) and CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC). It has been held by the Hon'ble High Court that: 'It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, [1957] 20 ITR 1, it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". 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

ITA No.1353/Bang/2010 Page 24 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. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, [1938] 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT , (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above.

ITA No.1353/Bang/2010 Page 25 22. Even Rule 10B(1)(a) does not authorise 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 unremunerative 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 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. 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. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, [1957] 20 ITR 1, it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". 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. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an

ITA No.1353/Bang/2010 Page 26 expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody,(1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B(1)(a) does not authorise 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 unremunerative 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 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no

ITA No.1353/Bang/2010 Page 27 authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. 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. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorized.' The ratio of the above decision was followed by the co-ordinate benches of the Tribunal in several cases. Some of them are: i. Dresser-Rand India (P.) (supra) ii. Ericsson India (P.) Ltd. v. Dy. CIT [2012] 25 taxmann.com 472 (Delhi) iii. AWB India (P.) Ltd. v. ACIT [IT Appeal No. 4454 of 2011] (Delhi - ITAT); AY 2007-08 iv. SC Enviro Agro India Ltd. v. Dy. CIT [2013] 34 taxmann.com 127/143 ITD 195 (Mum. - Trib.) v. Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxmann.com 27 (Delhi) vi. McCann Erickson India (P.) Ltd. (supra) vii. DSM Anti-Infectives India Ltd. v. Addl. CIT [2014] 50 taxmann.com 239 (Chd. - Trib.) viii. TNS India (P.) Ltd. (supra) ix. Atotech India Ltd. v. Asstt. CIT [2014] 148 ITD 670/42 taxmann.com 468 (Delhi - Trib.) x. Nippon Leakless Talbros v. ACIT [IT Appeal No. 5931 (Delhi) of 2012] - AY 2008-09 xi. Nippon Leakless Talbros v. ACIT [IT(TP) Appeal No. 475 (Delhi) of 2015] - AY 2010-11 xii. Hughes Systique India (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 41 (Delhi - Trib.)

ITA No.1353/Bang/2010 Page 28 xiii. Knorr-Bremse India (P.) Ltd. v. Asstt. CIT [2013] 56 SOT 349/27 taxmann.com 16 (Delhi - Trib.) xiv. Thyssen Krupp Industries India (P.) Ltd. v. Asstt. CIT [2013] 55 SOT 497/[2012] 27 taxmann.com 334 (Mum. - Trib.) xv. LG Polymers India (P.) Ltd. v. Addl. CIT [2011] 48 SOT 269/15 taxmann.com 79 (Vishakhapatnam)

Thus, in the light of above legal position, though ALP of services by AE cannot be determined at 'nil' by questioning the necessity, the benefits of expenditure incurred, such expenditure can be allowed only after proving conclusively that there was actual rendition of services by AE. The onus lies on the assessee to prove that the services are actually rendered by the AE. In this context, we may point out to the decision in the case of Hon'ble Supreme Court in the case of Laxmi Narayan Madanlal v. CIT [1972] 86 ITR 439 wherein it was held as follows: ** ** ** Thus, for allowability of this kind of expenditure, condition sine qua non is proof of actual services rendered. The co-ordinate bench of the Tribunal, to which one of us i.e. the Accountant Member is the author of the order, in the case of Dy. CIT v. B Fouress (P.) Ltd. [IT Appeal Nos. 847 & 848 (Bang.) of 2014, dated 30-12-2015] held as follows: '..... Thus, the assessee failed to discharge the burden of proving that the expenditure laid out were incurred wholly and exclusively for the purpose of business. We may further add that the Hon'ble Supreme Court in the case of CIT v. Imperial Chemical Industries (Ind.) Pvt. Ltd. (1969) 74 ITR 17 has unequivocally held that the burden of proving that a particular expenditure had been aid out or incurred wholly and exclusively for the purpose of business entirely lies on the assessee. The discharge of the burden had to be effective and meaningful and not to cover up by merely book entries and paper work. The mere fact of payment of commission by account payee cheques and compliances with the TDS provisions shall not alone enable the assessee to claim deduction unless and amount has been expended wholly and exclusively for the purpose of business. 11. A Co-ordinate Bench Tribunal of Delhi in the case of Kanu Kitchen Kulture (P.) Ltd. v. DCIT (2013) 28 ITR (T) 49 (Del. - Trib.) held that whether the assessee failed to demonstrate the services rendered by the commission agent, the commission was disallowed. The relevant paras of the judgment are reproduced below; "22. Thus the assessee as utterly failed to demonstrate the nature and extent of service rendered by the agent and availed of by the assessee

ITA No.1353/Bang/2010 Page 29 for its business of modular kitchen. In this scenario what appears on record is merely book entries coupled with TDS the amount which will be claimed as a refund by the recipient being a loss making concern. In our considered view the assessee has produced only skeletal paper work of the arrangement without any iota of evidence about actual business services rendered. 23. The assessee's claim for allowing similar commission payment in subsequent year caries no merit inasmuch as the learned DR has rightly pleaded that each and every year of assessment is separate and independent unit and principles of resjudicata do not apply. The assessment for the assessment year 2009-10 is under section 143(1) and for the assessment year 2010-11 there is no mention of the commission at all. Therefore, we are unable to give evidenced to the facts whose record is not before us and not referred to before the lower authorities". 12. Similarly, the Hon'ble Delhi High Court in the case of Schneider Electric (Ind.) Ltd. v. CIT (21008) 304 ITR 360 (Del.) held that in the absence of material on record suggesting that the commission agents had procured the sale orders, no commission should be allowed. The relevant para of the judgment is reproduced below; "13. We agree with the Tribunal that there is absolutely no material on record to suggest that M/s Ram Agencies had procured any sale orders for the assessee. The production of a few bills or payment having been made by account payee cheques cannot by itself show that M/s Ram Agencies had procured sale orders for the assessee. Apart from an internal note, there is no evidence of any correspondence or any personal; meetings etc. between the assessee and M/s Ram Agencies to suggest that the was any relationship on the basis of which M/s Ram Agencies procured some orders for the assessee for which it was entitled to receive commission. Moreover, we find that the understanding between the parties was an oral understanding and it appears to be doubtful that such an oral understanding can be arrived at without any long standing relationship having been established between the assessee and M/s Ram Agencies. It seems a bit out of place that the parties entered into an oral business relationship involving such huge amounts of money over a period of time". 13. The Co-ordinate Bench of Delhi in the case of Printer House Pvt. Ltd. v. DCIT (Del.) authored by Accountant Member, after referring to the above precedence on this issue held as follows: "Thus, having regard to the ratio laid down in the above cases that in the absence of proof in support of the services rendered by the commission agent, no commission can be allowed as a deduction. Therefore, we dismiss the appeal filed by the assessee and allow the appeals filed by the revenue".

ITA No.1353/Bang/2010 Page 30 14. In the present case, the learned CIT (A) had not examined any evidence to show that the agents have actually rendered their services. The learned CIT (A) had totally misdirected himself by examining the issue from the angle of tax deducted at source and he had failed to examine whether the services are actually rendered by the commission agents or not. Therefore, we are unable to sustain the order of the learned CIT (A) and hold that the commission payments in question are not allowable keeping in view the ratio laid down in the cases cited supra. The assessee company had miserably failed to demonstrate the actual services rendered by the agents to whom the commission payments were made, despite ample opportunity granted by this Tribunal to furnish evidence in support of service rendered by commission agent.' 10. In light of the ratio laid down in the cases cited supra we hold that the condition of rendition of services should be satisfied by the assessee so as to allow the same as expenditure. In the present case, assessee-company had not produced any evidence in support of rendering of services before the TPO. It is only before us, by way of additional evidence, assessee-company has filed some material, in support of the actual services rendered by the AE. The CIT (A) had no occasion to examine this evidence as it was claimed that this evidence was filed for the first time before us. Therefore, the CIT (A), without examining the aspect of actual rendition of services by the AE in respect of IT services, had directed the allowance of expenditure. Therefore, in interests of justice, we restore this issue to the file of the AO for purposes of verification of this evidence and come to conclusion whether the services are actually rendered by the AE or not and direct the TPO/AO to bench mark the transaction of rendering of services of market management support services, after being satisfied himself that the services are actually rendered by the AE. 11. On the principle of consistency, we hold that each assessment year is separate and distinct. The principles of res judicata have no application to income-tax assessment proceedings. Simply because in the preceding year, this expenditure came to be allowed without any probe or enquiry it does not preclude the AO from making the enquiries on these issues.”

(6) The next reason assigned by the TPO is that the appellant had failed to prove the valuation done by the AE. In our considered opinion, valuation is nothing but price mentioned in the invoices raised by the AE against the appellant company and this may not be a relevant criterion for determining the ALP of the transaction at Rs.Nil.

ITA No.1353/Bang/2010 Page 31 (7) The other reason assigned by the TPO is that the appellant had failed to substantiate the tangible and substantial commercial benefit derived by the appellant of the payment of management fees. Now it is trite law that the TPO cannot determine the ALP of transaction on account of the fact that no benefit was derived by the assessee. Reliance is placed on the decisions of the Hon’ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., 345 ITR 241 (Del), CIT v. Reebok India Co. Ltd., 374 ITR 118 (Del), CIT v. Lumax Industries Ltd. (ITA No.102/2014) and CIT v. Cushman and Wakefield (India) Pvt. Ltd., 367 ITR 730.

(8) The last reason assigned by the TPO is that there was no necessity of paying such fees. This issue was also considered by the Hon’ble Delhi High Court in the case cited supra wherein it was held it was beyond the domain of the TPO to question the necessity of expenditure. Hence it cannot be a relevant consideration for determining the ALP of the transaction at Rs.Nil.

In the light of the above settled position of law and placing reliance on the decisions cites supra, we hold that the TPO was justified in determining the ALP of transaction of marketing and management support fees at ‘nil’.

ITA No.1353/Bang/2010 Page 32 23. At the outset, it is also incumbent to deal with the conduct of the ld. Counsel arguing for the appellant and also the chequered history of this case for better appreciation of the misconduct of the ld. Counsel who argued before us. It is clear that it is a matter of 2010. The appeal was registered in this Tribunal on 01.12.2010 and the hearing was fixed for the first time on 30.10.2014 and till 07.04.2015, one Mr. Chavali Narayan, CA, represented this company before the Tribunal, who sought adjournments of the case on 30.10.2014, 03.12.2014 and 07.04.2015. On 09.04.2015, this appeal was represented by one Mr. Nageshwar Rao, Advocate and he also sought time and the case was posted for hearing on 29.07.2015 on which date, Sr. Advocate Mr. P.J. Pardiwalla appeared and at the request of ld. DR, the matter was adjourned to 19.01.2016. On 19.01.2016, one Mr. Keerthi Narayan, CA had appeared and sought adjournment of the hearing and the matter was posted to 19.07.2016, on which date, the Bench did not function, the case was posted for hearing again on 03.10.2016, on which date at the request of Mr. P.J.Pardiwalla, Sr. Advocate, who caused appearance, the matter was adjourned to 19.10.2016, on which date again Mr. Pardiwalla appeared and the matter was adjourned to 29.11.2016. Again on 29.11.2016 at the request of Mr. Chavali Narayan, CA, who represented the assessee company, the matter was adjourned to 14.02.2017. Again on 14.02.2017, at the request of ld. AR, Mr. Chavali Narayan, the matter was posted to 09.05.2017 and as the Bench did not function, the matter was posted to 16.08.2017. On 16.08.2017 at the request of ld. AR, Mr.Chavali Narayan, the matter was adjourned to 14.09.2017. Again on 14.09.2017, one Mr. Siddharth Dang from M/s. Vaish Associates represented the assessee company and at his request, the matter was posted for hearing to 05.09.2017, on which date one Mr. Neeraj Jain, CA supposed to be from M/s. Vaish Associates appeared and started with a prayer that the matter be adjourned again as the brief was received by him only in the previous day, throughout the night he was travelling from Delhi and he could not prepare for the case. The adjournment request of the ld. Counsel was turned down by the Bench as the ld. JM was proceeding on tour to Delhi Benches for

ITA No.1353/Bang/2010 Page 33 two weeks. Then the ld. Counsel for the assessee ventured into accusing the Bench of unfairness in not granting the adjournment. Then we proceeded to deal with the application filed for admission of additional evidence. From this application, it is clear that there is no averment as to why these additional evidence could not be filed before the lower authorities and how it is crucial and necessary to the issue on hand i.e. services were actually rendered by the AE to the assessee company, especially in the light of the fact that categorical finding of the TPO was that the appellant had only described the nature of services, but never attempted to file any evidence in support of rendering of services. It is trite law that admission of additional evidence by the Tribunal is at the sole discretion of the Tribunal. The provisions of Rule 29 of the ITAT Rules govern the admission of additional evidence before the Tribunal. The said Rule reads as under:-

“[Production of additional evidence before the Tribunal. 29. The parties to the appeal shall not be entitled to produce additional evidence either oral or documentary before the Tribunal, but if the Tribunal requires any document to be produced or any witness to be examined or any affidavit to be filed to enable it to pass orders or for any other substantial cause, or, if the income-tax authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced.]”

(a) When the Tribunal feels that it is necessary to explain to it to pass the order; or (b) for any substantial cause; or

ITA No.1353/Bang/2010 Page 34 (c) where the income-tax authorities did not provide sufficient opportunity to the assessee to adduce the evidence. 25. In the present case, it is the appellant company who made an application for production of additional evidence in support of rendering of the services by the AE. It is an undisputed fact that the appellant had chosen not to file these evidence either before the AO or the before the DRP. But the fact also remains that this Tribunal had not asked the appellant to produce these additional evidence on its own during the course of hearing of the appeal. The ambit of provisions of Rule 29 of the ITAT Rules came up for consideration before the Hon’ble Delhi High Court in the case of CIT v. Text Hundred India Pvt. Ltd., [2013] 351 ITR 57 (Delhi) wherein after referring to the earlier precedents on the subject by the Hon’ble Madras High Court in the case of R.S.S. Shanmugam Pillai & Sons v. CIT, [1974] 95 ITR 109 (Mad), the Hon’ble Delhi High Court in the case of Dalmia (R.) v. CIT, [1978] 113 ITR 522 (Del) and also the Hon’ble Calcutta High Court in the case of ITO v. Bhattacharya (B.N.), [1978] 112 ITR 423 (Cal), the Hon’ble Madras High Court had culled out the principle that discretion always lies with the Tribunal to admit the additional evidence in the interest of justice, once the Tribunal forms an opinion that it would be necessary to do so for adjudication of the matter. This can be done even when the application is filed by one of the parties to the appeal and need not be suo motu action of the Tribunal and the Tribunal is entitled to exercise this discretion only when it is found that the party intending to lead the evidence before the Tribunal for the first time was prevented by sufficient cause to lead such evidence and such evidence would have a material bearing on the issue which needs to be tested by the Tribunal. Only in such circumstances, the Tribunal can admit the application for admission of additional evidence led by one of the parties to the appeal, after recording due reasons for doing so.

ITA No.1353/Bang/2010 Page 35 authorities i.e., either before the AO or before the DRP. Furthermore, there is also no averment as to how the additional evidence filed before us has a bearing on the issue before us. In other words, the appellant had not made any efforts to demonstrate before us that this evidence will prove to the hilt the actual rendition of the services by the AE to the appellant in terms of clause 4.5 of the master agreement. In the aforesaid circumstances, we have no option but to reject the application for admission of additional evidence. Accordingly, we pronounced in the open court dismissing the application for admission of additional evidence.

“10. We heard the rival submissions and perused the material on record. The issue in the present appeal is whether the AO/TPO was justified in adopting the ALP at Rs. Nil in respect of management and support services fee paid by the appellant to its AE. Primarily, the TPO determined the ALP as Nil for the following reasons:— "(i) The assessee paid management fee through a single invoice, raised much after the closure of the financial year. (ii) The Assessee failed to produce any evidence regarding the expenditure incurred by the AE on behalf of the assessee. (iii)The AE, Volvo Truck Corporation also did not furnish any details of expenditure incurred by it in connection with the management fee received by it.

ITA No.1353/Bang/2010 Page 36 (iv) The assessee changed its stand many times during the course of the hearings that the payment is made towards marketing services and / or brands, trademarks etc." 11. No doubt, now it is settled proposition of law that it is beyond scope and powers of AO/TPO to question the necessity of incurring any expenditure. The Hon'ble Delhi High Court in the case of EKL Appliance Ltd. (supra) held that TPO cannot determine the ALP at Nil by holding that there was no need to incur any expenditure. The above decision was followed by the several coordinate benches of the Tribunal, some by them are as follows: i. Dresser-Rand India (P.) v. Addl. CIT [2011] 13 traxmann.com 82/[2012] 53 SOT 173 (Mum.) ii. Ericsson India (P.) Ltd. v. Dy. CIT [2012] 25 taxmann.com 472 (Delhi) iii. AWB India (P.) Ltd. v. ACIT [IT Appeal No. 4454 of 2011] (Delhi); iv. SC Enviro Agro India Ltd. v. Dy. CIT [2013] 34 taxmann.com 127/143 ITD 195 (Mum. - Trib.) v. Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxmann.com 27 (Delhi) vi. McCann Erickson India (P.) Ltd. v. Addl. CIT [2012] 24 taxmann.com 21 (Delhi) vii. DSM Anti-Infectives India Ltd. v. Addl. CIT [2014] 50 taxmann.com 239 (Chd. - Trib.) viii. TNS India (P.) Ltd. v. Asstt. CIT [2014] 48 taxmann.com 128/[2015] 152 ITD 123 (Hyd. - Trib.) ix. Atotech India Ltd. v. Asstt. CIT [2014] 148 ITD 670/42 taxmann.com 468 (Delhi - Trib.) x. Nippon Leakless Talbros v. ACIT [IT Appeal No. 5931 (Delhi) of 2012] xi. Nippon Leakless Talbros v. ACIT [IT(TP) Appeal No. 475 (Delhi) of 2015] xii. Hughes Systique India (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 41 (Delhi - Trib.) xiii. Knorr-Bremse India (P.) Ltd. v. Asstt. CIT [2013] 56 SOT 349/[2012] 27 taxmann.com 16 (Delhi - Trib.)

ITA No.1353/Bang/2010 Page 37 xiv. Thyssen Krupp Industries India (P.) Ltd. v. Asstt. CIT [2013] 55 SOT 497/[2012] 27 taxmann.com 334 (Mum. - Trib.) xv. LG Polymers India (P.) Ltd. v. Addl. CIT [2011] 48 SOT 269/15 taxmann.com 79 (Visakha). 12. Thus in the light of the above legal position, the ALP of services of AE cannot be determined at Nil by questioning the necessity of benefits of expenditure incurred. But the matter does not end there. The onus lies on the assessee to prove that the services are actually rendered by the AE. But the assessee had failed to discharge this onus lying upon it despite being asked to do so by the TPO. The TPO had especially invited the assessee company to produce the proof in support of the services rendered by AE. The appellant only had tried to prove this by producing some correspondence which does not prove that the services are actually rendered. The failure by the assessee to discharge the onus can be presumed that the assessee had no evidence to establish that services of management support are rendered by its AE in consideration to payment of Rs.26,22,19,000/-. This presumption can be drawn even as per the provisions under section 86 of Indian Evidence Act. The submission that the TPO had impliedly accepted the rendition of services cannot be accepted as there was no finding given by the TPO that services are actually rendered. In fact, the TPO while summarizing this observation vide page No. 30 of his order vide column No.6 had specifically mentioned that the assessee had failed to prove that the services are actually rendered by AE. Furthermore the finding of the TPO that the invoice was raised much after the closure of the accounting year and the payment of management fee in nothing but siphoning of the profits from India with the intention of avoiding tax are serious enough to doubt the genuineness of transactions. The appellant had made no effort to controvert the findings of the TPO. Therefore, in our considered opinion the TPO/AO is justified in adopting ALP at Nil.

ITA No.1353/Bang/2010 Page 38 support fee should be bundled with other transactions and bench marked by adopting TNMM cannot be accepted for the reason that bundling of transactions is permissible only when the transactions are closely related to each other and reliance in this regard can be placed on the decision of Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 and Punjab Haryana High Court in the case Knorr Bremse India (P) Ltd. v. Asstt. CIT [2016] 380 ITR 307/236 Taxman 318/[2015] 63 taxmann.com 186. It is not the case of the appellant that these transactions are closely linked with the other transactions and therefore the submission that these transactions should be bundled with other transactions cannot be accepted.”

ITA No.1353/Bang/2010 Page 39 not justified in adopting the CUP method for the purpose of benchmarking the transaction of payment of management and marketing support services fee, is not correct in asmuchas the TPO had not examined the other transactions under the TNMM method. 32. The other grievance of the assessee in this appeal is that the AO in reducing the tele-communication expenses incurred in India amounting to Rs 4,899,396 from 'export turnover' while computing deduction under section 10A of the Act as 'expenditure attributable to delivery of software outside India' under Explanation 2(iv) to Section 10A of the Income-tax Act, 1961 ('the Act').

Order pronounced in the open court on 11th December, 2017

sd/- sd/- (LALIT KUMAR) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place : Bengaluru D a t e : 11/12/2017 Desai Murthy/Srinivasulu Copy to : 1 Appellant 2 Respondent 3 CIT(A) 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order

Senior Private Secretary Income-tax Appellate Tribunal Bangalore

ITA No.1353/Bang/2010 Page 40