CITICORP MARUTI FINANCE LTD.,NEW DELHI vs. DCIT, NEW DELHI

PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER This appeal has been preferred by the assessee against the

order of DCIT, New Delhi, dated 17.8.2010, passed u/s 143(3) r.w.s.

144C of the Income Tax Act, 1961 and passed consequent to the

directions of the Hon’ble DRP vide order dated 02/07/2010 for

assessment year 2006-07.

2.0 The facts, in brief are, that the assessee is a non-banking

finance company engaged in the business of hire purchase and auto

loans. By an order u/s 92CA(3) of the Income-tax Act, 1961 (‘the

Act’), the Ld. TPO has made an upward adjustment of Rs.

4,46,62,367/- in the income returned by the assessee for the

I.T.A. 4634/Del/2010 Assessment year 2006-07

assessment year 2006-07. The adjustments made of in respect of the

Arms’ Length Price (ALP) of the international transaction for the year

under consideration are as under:

S.No. Nature of transaction Expenditure Arm’s Length Difference incurred Price 1. Technology Support 2,36,16,000 Nil 2,36,16,000 Charges 2. Back-end Service Charges 29,82,614 Nil 29,82,614 3. Loan Processing Fees 1,08,43,184 4,04,812 1,04,38,373 4. Interest on Fixed Deposits 9,47,088 9,47,088 Nil Earned 5. Interest and Finance Charges 1,59,19,041 1,59,19,041 Nil Paid – Debentures 6. Interest on Term Loans 2,57,07,055 2,57,07,055 Nil 7. Interest and Finance charges 55,45,626 55,45,626 Nil paid to others 8. Secondment charges 5,14,625 5,14,625 Nil 9. Shared cost for co-located 76,25,380 Nil 76,25,380 Premises 4,46,62,367

2.1 Thus, an upward adjustment was made in respect of:

(a) Technology Support Charges;

(b) Back-end Service Charges;

(c) Loan Processing Fees; and

(d) Shared cost for co-located premises.

2.2 The Hon’ble DRP upheld the proposed adjustment in the

ALP. Apart from the adjustment relating to ALP in respect of

international transactions, the Hon’ble DRP also upheld addition

of Rs. 1,12,05,815/- on account of loss on sale of repossessed

assets on the ground that the same was capital in nature and

I.T.A. 4634/Del/2010 Assessment year 2006-07 hence not an allowable expenses. The Hon’ble DRP also upheld

the disallowance of expenditure amounting to Rs. 4,08,770/- on

sales promotion. The Hon’ble DRP also upheld the proposed

action of the AO in not allowing depreciation @ 60% on computer

accessories and peripherals like printers, scanners, racks,

network cables etc.

2.3 The following grounds have been raised by the assessee:-

“1. On the facts and in the circumstances of the case, the learned Transfer Pricing Officer (TPO) and the learned Assessing Officer (AO) have erred in proposing and the Hon'ble Dispute Resolution Panel (DRP) has further erred in confirming the proposed addition on account of payment of Rs. 4,46,62,367/- made by the assessee to Citibank NA, India Branch (Citibank India), its associated enterprise, in respect of the international transactions undertaken by the assessee by allegedly holding that the same are not at arms’ length price. That the Ld. TPO and AO have erred, both on facts and in 1.1. law, in proposing and the Hon’ble DRP has further erred in determining nil arm’s length price in the hands of the assessee; That the Ld. TPO, AO and Hon’ble DRP failed to appreciate 1.2. the fact that transfer pricing assessment of Citibank India for financial year 2005-06 has been completed, wherein the same transaction involving receipt of income by Citibank India Branch office has been accepted at arms’ length by the Revenue.

Loss on sale of repossessed assets:

I.T.A. 4634/Del/2010 Assessment year 2006-07

Disallowance on account of sale promotion expenses:

Depreciation on computer peripherals: 4. On the facts and in the circumstances of the case, the Ld. AO has erred in proposing and the Hon’ble DRP has further erred in not allowing depreciation under the block of ‘computers’ @ 60% amounting to Rs. 3,645/- in respect of computer accessories and peripherals like printers, scanners, racks, network cables etc.

4.1 That the Ld. AO and the Hon’ble DRP have erred in not considering the fact that similar issue has been decided in assessee’s favour in assessee’s own case by Delhi Bench of Tribunal in AY 2003-04 and 2004-05. 4

I.T.A. 4634/Del/2010 Assessment year 2006-07 Initiation of penalty proceedings u/s 271(l)(c): 5. On the facts and in the circumstances of the case, the Id. AO has erred in initiating penalty proceedings under section 271(l)(c) of the Act.

Principles of natural justice: 6. That the directions issued by the Hon’ble DRP are bad in law and violate the principles of natural justice by being non- speaking in nature.”

3.0 The Ld. Authorised Representative, in respect of ground no.

1, submitted that the payment of technology support services

amounted to Rs. 2,36,16,000/-. No bench marking was done by

the assessee whereas the Ld. TPO had applied CUP Method in

which the Arm’s Length Price has been determined at nil. It was

submitted that the department’s ground for such addition was

that no documentary evidence was furnished in respect of

rendition the services except the agreement and confirmation

from the Citibank NA. He submitted that it was also the

contention of the department that the nature of the services were

in the nature of Information Technology Enabled Services (ITES)

and that the same should have been benchmarked from the data

available in the public domain. It was further submitted by the

Ld. AR that the contention of the department is also that mark

I.T.A. 4634/Del/2010 Assessment year 2006-07 up calculated and given by the assessee was not verifiable and

that no uncontrolled enterprises would prefer to make any kind

of payment which was not in accordance with the current rates

in vogue. The Ld. Authorised Representative submitted that

these contentions of the department were factually incorrect as

proper evidence of having rendered services was available on

pages 226 to 232 and page 236 of the Paper Book 1. It was also

submitted that for similar services, price being charged was

higher than the price paid by the assessee. It was submitted that

the mark up charged by the AE was only 15% whereas other

reputed IT Companies were charging the rates after a mark up

which ranged between 27% and 32%. He drew our attention to

page 232 of the Paper Book 1 in this regard. It was also

submitted that in the Transfer Pricing assessment of the

Associated Enterprise (AE) for the instant year, the receipt of

payment from the assessee has been accepted as being at arm’s

length by the department as was evident from page no. 305 and

pages 423 to 466 of Paper Book 1. It was further submitted by

the Ld. Authorised Representative that the AE of the assessee,

being a branch of foreign bank, was assessed in India and was

liable to pay tax @40% whereas the assessee was liable to pay tax

I.T.A. 4634/Del/2010 Assessment year 2006-07 @30% and, therefore, by paying a higher amount to the AE, AE of

the assessee cannot be said to have benefitted or any tax having

been avoided. Ld. Authorised Representative also submitted

that the Arm’s Length Price was accepted in case of the assessee

in the preceding Assessment Year i.e. 2005-06 as well as in

succeeding Assessment Years 2007-08 and 2008-09.

3.01 It was further submitted that the payment of backend

support service charges amounted to Rs. 29,82,614/- during the

instant assessment year which had not been benchmarked by

the assessee whereas the Ld. TPO had applied the CUP method

and determined the Arm’s Length Price as nil and consequently

proposed an addition of Rs. 29,82,614/-. It was submitted that

the department’s contention was that the services specified in the

agreement between Quest Screening Services Pvt. Ltd. and

CitiFinancial Consumer Finance India Ltd. cannot be compared

with that of the services provided to the assessee and that no

uncontrolled enterprise would prefer any kind of payment which

was not subject to the present rates in vogue. The Ld.

Authorised Representative submitted that these contentions of

the department were incorrect because evidence of financial

services rendered by the AE were available on page no. 226 to

I.T.A. 4634/Del/2010 Assessment year 2006-07 232 and page 306 of Paper Book 1 to which our attention was

drawn. It was further submitted that back end support services

provided by Infomax to CitiFinancial Consumer Finance India

Ltd. were similar to the services provided by the AE to the

assessee and, as such, the agreement had been arbitrarily

ignored. Our attention was drawn to page no. 301 and 302 of the

Paper Book 1 and it was submitted that the quotations received

from two independent parties would show that the price offered

was higher than the price charged by the AE. It was also

submitted that in the TP assessment of the AE for this very same

assessment year, the receipt of payment from the assessee has

been accepted as being at arm’s length. It was also submitted

that the Arm’s Length Price has been accepted in Assessment

Years 2005-06, 2006-07 and 2008-09 by the department.

3.02 Ld. Authorised Representative also submitted that the

shared cost for co-located premises was Rs. 76,25,380/- which

had not been benchmarked by the assessee but the Ld. TPO had

applied CUP and had determined the Arm’s Length Price at nil in

this respect also. It was submitted that the contention of the

department has been that no documentary evidence had been

furnished by the assessee to determine the area occupied by

I.T.A. 4634/Del/2010 Assessment year 2006-07 Citibank India and also the amount charged by the landlords

from Citibank India and subsequently the amount charged by

Citibank India from the assessee. Ld. Authorised Representative

drew our attention to page no. 226 to 232 of the paper book and

submitted that the relevant evidences were filed before the

Assessing Officer. It was also submitted that the assessee had

duly submitted the area occupied by the assessee in respect of

the premises shared with Citibank India in Gurgaon and Mumbai

which was available on page 222-298 of Paper Book 1 and had

also submitted the break-up of monthly rentals charged from the

assessee. It was also submitted that in the TP assessment of the

AE for the same assessment year, the receipt of payment from

the assessee has been accepted as being at arm’s length by the

department. It was also submitted that the ALP has been

accepted by the department in Assessment Year 2007-08 and

2008-09.

3.03 Ld. Authorised Representative further submitted that the

assessee had paid loan processing fee amounting to Rs.

1,08,43,184/- to its AE during the year which the assessee had

not benchmarked but the Ld. TPO, after applying the CUP

method, had determined the ALP at nil. Ld. Authorised

I.T.A. 4634/Del/2010 Assessment year 2006-07 Representative submitted that it was the contention of the

Assessing Officer that the assessee had paid loan processing fee

at Rs. 750/- per file whereas for similar services, CitiFinancial

Consumer Finance India Ltd. had paid an amount of Rs. 28/- per

file to Infomax Management Services (India) Pvt. Ltd. It was

submitted that for similar services, CitiFinancial Consumer

Finance India Ltd. had paid Rs. 1500/- to M/s Quest Screening

Services Pvt. Ltd. as against Rs. 750/- paid by the assessee and,

therefore, this contention of the Assessing Officer was incorrect.

Our attention was drawn to page no. 257-275 of the Paper Book

in support of this argument. Our attention was also drawn to

page 302 to 304 of the paper book and it was submitted that the

quotation received from the two independent parties would show

that the price offered was higher than the price charged by the

AE. It was also submitted that the comparison by the Revenue in

respect of services provided by Infomax Management Services

(India) Pvt. Ltd. was entirely erroneous as background check of

customer cannot be equated with the transaction of processing of

transaction and updating of records. It was also submitted that

in the transfer pricing assessment of the AE in the instant

assessment year, receipt of payment from the assessee had been

I.T.A. 4634/Del/2010 Assessment year 2006-07 accepted as being at arm’s length and also the ALP has been

accepted by the department in Assessment Years 2005-06 and

2007-08.

3.04 It was further submitted that the finding of the Ld. TPO

was highly arbitrary. Once the Ld. TPO has adopted CUP method

as the most appropriate method, it is difficult to accept the

proposition by any standard or logic that value of services in

respect of which expenditure has been incurred could be Nil. It

was submitted that, Rule 10 B(1) of Income Tax Rules on

determination of Arm’s Length Price u/s 92C of the Act, provides

that for the purposes of sub-section (2) of section 92C of the Act,

the arm’s length price in relation to an international transaction

shall be determined by any of the following methods, being the

most appropriate method, in the following manner namely:

(a) Comparable Uncontrolled Price method, by which-

(i) The price charged or paid for property transferred or services

provided in a comparable uncontrolled transaction, or a number

of such transactions, is identified;

(ii) Such price is adjusted to account for differences, if any,

between the international transaction and the comparable

I.T.A. 4634/Del/2010 Assessment year 2006-07 uncontrolled transactions or between the enterprises entering

into such transactions, which could materially affect the price in

the open market;

(iii) The adjusted price arrived at under sub-clause(ii) is taken to

be an arm’s length price in respect of the property transferred or

services provided in the international transaction.

3.05 The Ld. AR submitted that while adopting the aforesaid

method clause (1) specifically provides that the price paid for

services provided in a comparable uncontrolled transaction

should first be adopted. In the instant case, if that be so, in a

case of comparable uncontrolled transaction where such services

have been provided as the most appropriate method, it cannot be

Nil. It was submitted that, no basis has been given by the Ld.

TPO to hold that the same is Nil.

3.06 It was further submitted by the Ld. AR that it is one thing

to say that the assessee had failed to establish that the payments

have been made for rendering the services and it is another thing

to say that on the application of CUP method, the value is Nil. It

was submitted that the Ld. TPO had failed to comprehend that

the evidences furnished established rendering of services and

I.T.A. 4634/Del/2010 Assessment year 2006-07 therefore it is highly arbitrary to hold that on adoption of CUP

method the ALP is Nil.

3.07. The Ld. AR also submitted that, in case the A.O. framing

assessment on the assessee u/s 143(3) of the Act was not

satisfied that such services have been rendered, the disallowance

would have been made by holding the same as not allowable u/s

37 of the Act and not by invoking the provisions of section 92

C(1) of the Act.

3.08 It was further submitted by the Ld. AR that the A.O. has

not disputed that the assessee has furnished before the A.O. the

confirmations from the payers who provided the services.

However, the A.O. ignored that the aforesaid entity to whom

payments has been made is subject to assessment and subject to

assessment at the maximum rate. It is a well settled rule of law

that the burden is on the assessee to establish that the

expenditure has been incurred and when the assessee leads the

primary evidence to establish the same, the burden shifts on the

revenue. The Ld. AR submitted that the Hon’ble Delhi High Court

in the case of CIT vs. Genesis Commet (P.) Ltd. reported in 163

Taxman 482, has held that, if the Assessing Officer was not

inclined to believe the material produced by the assessee, he 13

I.T.A. 4634/Del/2010 Assessment year 2006-07 could have used the coercive powers available to him. The Ld. AR

submitted that the assessee was never called upon to produce

the parties to whom the payments have been made, each of them

being the tax assessee in India.

3.09 The Ld. AR re-emphasised that in the succeeding year i.e.

in AY 2007-08, the assessee had undertaken similar

international transaction with its AE i.e. M/s Citibank N.A.

However, the Ld. TPO found all such transactions to be at arm’s

length and made no adjustment in the case of the assessee since

in the case of the related party i.e. AE, the said transactions were

found to have been entered at arm’s length.

3.1 On ground no. 2 pertaining to loss on sale of repossessed

assets, Ld. Authorised Representative submitted that the issue

stood covered in favour of the assessee by the order of the ITAT

and affirmed by the Hon'ble Delhi High Court in assessee’s own

case for Assessment Year 2005-06 in I.T.A. No. 1712/2010 and

1714/2010.

3.2 On ground no. 3 pertaining to disallowance on account of

sale promotion expenses, it was submitted that there was an ad

hoc disallowance by the department in this respect in Assessment

I.T.A. 4634/Del/2010 Assessment year 2006-07 Year 2005-06 also and the same was remanded to the file of the

Assessing Officer by the ITAT. It was also submitted that the

sales promotion expenses incurred by the assessee for

Assessment Years 2001-02 to 2004-05 were fully allowed by the

department whereas in Assessment Years 2005-06, 2006-07 and

2007-08, 10% of the expenditure was disallowed on ad hoc basis

and in Assessment Year 2008-09 and 2009-10 again, the

department allowed the entire expenditure in the year in which

the expenditure was incurred. It was also submitted that

wherever payments have been made towards reimbursement of

expenses to agents for procuring orders for sale, tax had been

duly deducted at source at the rate applicable.

3.3 On ground no. 4 pertaining to depreciation of computer

peripherals, it was submitted that the same stood covered by the

order of the ITAT for Assessment Years 2003-04 and 2004-05 in

assessee’s own case which were affirmed by the Hon'ble Delhi

High Court.

3.4 The Ld. AR also submitted that Ground No. 6 pertaining to

violation of principles of natural justice was not being pressed.

I.T.A. 4634/Del/2010 Assessment year 2006-07 4. In response, the Ld. CIT DR submitted that as far as ground

no. 1 of the assessee’s appeal was concerned, the burden of

determination of ALP as well as proper documentation was on the

assessee which the assessee had failed to do. Reliance was

placed on the following judicial precedents:-

Aztec Software And Technology vs ACIT 294 ITR 32 (AT)

UCB India (P) Limited Vs. ACIT (2009) 121 ITD 131,

ACIT Vs. Golawala Diamonds 44 SOT 645

CA Computer Associates India Pvt. Ltd. Vs. DCIT- order

dated 28.1.2010 of ITAT, Mumbai.

4.1 It was further submitted that the transactions accepted in

the hands of the AE would not necessarily mean that ALP has

been accepted in the case of the assessee. It was submitted that

benchmarking has to be done separately in both the cases. Ld.

CIT DR submitted that section 37 of the Income Tax Act was

entirely on a different footing as compared to section 92 and,

therefore, this contention of the assessee had no force. Reliance

was placed on the decision of Bangalore Bench of ITAT in the

case of Festo Controls (Pvt). vs DCIT reported in 150 ITD 305

(Bang). Ld. CIT DR submitted that the entire issue relating to the 16

I.T.A. 4634/Del/2010 Assessment year 2006-07 determination of ALP needed to be restored to the file of the Ld.

TPO for fresh determination. It was submitted that the

department’s acceptance of ALP in preceding and succeeding

assessment years does not make a difference as the principle of

res judicata do not apply to income tax proceedings.

4.2 On ground nos. 2, 3 and 4, the Ld. CIT DR placed reliance

on the order of the Assessing Officer.

the relevant records. As far as ground No. 1 of assessee’s appeal

is concerned, the primary contention of the assessee is that

similar international transactions were considered to be at arm’s

length in the immediately preceding assessment year as well as

in succeeding assessment years and, therefore, on identical facts,

the international transactions in the year under consideration

should also be considered to be at arm’s length. The assessee’s

plea that since the international transactions relating to these

services were held to be at arm’s length in the previous

assessment year as well as in succeeding assessment years by

the Department cannot succeed as there can be no presumption

that if in one year, the business with the AE is carried at arm’s

length, then it is carried at arm’s length in other assessment 17

I.T.A. 4634/Del/2010 Assessment year 2006-07 years as well. The facts and circumstances of each year are to be

examined separately. We find support for this view from the order

of the ITAT Delhi Bench in ITA No. 2207/DEL/2005 in the case

of DCIT versus Carraro India Ltd reported in 120 TTJ 77 wherein

the coordinate Bench held that the contention of the Ld. AR that

since the TPO accepted that international transactions were

carried at arm’s length in the subsequent years, the international

transactions for the year under consideration should also be

accepted as such, was not acceptable. Accordingly, we also reject

the assessee’s contention in this regard.

5.01 Further, a perusal of the transfer pricing study of the

assessee shows that it has been stated therein that in respect of

international transactions relating to payment for technology

support services, back-end processing and loan processing

services, as per the transactional and economic analysis, these

services cannot be benchmarked under any of the methods

prescribed under the Income Tax Act because of the following

reasons:

• CUP method cannot be applied because Citibank India does

not provide the aforesaid services to third parties in India

and further Citicorp Maruti Finance Limited (CMFL) i.e. the

I.T.A. 4634/Del/2010 Assessment year 2006-07 assessee does not receive similar services from any third-

party. • In absence of gross profit margin data, cost plus method

also cannot be applied. • RPM and PSM could also not be applied because of the

nature of transactions. • TNMM was also not considered as the most appropriate

method because there was a decline in the profitability of

the assessee which was not on account of the pricing of the

international transactions but due to external factors like

increased competition, higher commission payout to the

dealers and bad debts.

5.02 The transfer pricing study went on to conclude that the

client, i.e. the assessee, was satisfied that the payments made to

Citibank NA (AE) was at arm’s length.

5.03 In respect of international transaction relating to

payment of rent for sharing of premises, the transfer pricing

report has stated that payment may be considered as reasonable

but has refrained from making any comment or analysis as to

whether the transaction so entered into meets the arms length

standard or not.

I.T.A. 4634/Del/2010 Assessment year 2006-07 5.04 It would be appropriate to refer to the legal provisions at

this juncture. Section 92(1) of the Income Tax Act, 1961 provides

that any income arising from an international transaction has to

be computed having regard to the arm’s length price. Further,

section 92C provides that the arm’s length price in relation to an

international transaction has to be determined by any of the

prescribed methods, being the most appropriate method, having

regard to the nature of transaction or class of transaction or class

of associated persons or functions performed by such persons or

such other relevant factors as the Board may prescribe. Further,

section 92D of the Act read with Rule 10D of the Income Tax

Rules provides that every person who has entered into an

international transaction shall keep and maintain such

information and document in respect thereof as may be

prescribed.

5.05 A perusal of the transfer pricing report shows that no

exercise/documentation was carried out for the purpose of

benchmarking of the international transactions and the transfer

pricing report has simply relied on the assessee’s contention that

none of the methods for the purpose of computation of arm’s

length price, as prescribed in the Income Tax Act, were applicable

I.T.A. 4634/Del/2010 Assessment year 2006-07 in the assessee’s case and having regard to the economic and

commercial factors and also keeping the benefits derived from

various services in perspective, the payments made to the AE

were at arm’s length. Thus, primarily, it is apparent that the

assessee has not duly discharged the onus cast upon it to either

compute the ALP itself or provide such documentation as

envisaged in section 92D of the Income Tax Act so as to enable

the Department to compute the arm’s length price of the

impugned international transactions.

5.06 The ITAT Special Bench in the case of Aztec Software and

Technology Services Ltd versus ACIT reported in 294 ITR (AT) 32

(SB) has laid down that the onus is on the assessee to provide

details for the determination of the most appropriate method in

respect of international transactions. The Special Bench held as

under (From Head notes) -

“Computation of arm’s length price is essentially a factual exercise. Each case depends on its own peculiar facts and circumstances. In certain cases where an identical or almost similar uncontrolled transaction is available for comparison, determination of the arm’s length price is an easy task. However, it is not so in most transactions and rarely is one able to locate an identical transaction. In such cases the arm’s length price is determined by taking the results of a

I.T.A. 4634/Del/2010 Assessment year 2006-07 comparable transaction in comparable circumstances and making suitable adjustments for the differences. The fundamental requirement, in any of the method selected, is the selection of comparables, for benchmarking international transactions. The selection of a comparable should be based on functional, asset, and risk analysis of both the parties and transactions. Whatever methodology is chosen for the purpose of determination of the arm’s length price under section 92C, these criteria, as specified in the Act and the Rules have to form a basis of judging the comparability. Thus, there should be a proper analysis of such transactions with respect to the functions performed, the assets employed and the risk assumed by the respective parties with reference to the transaction in question. This can be termed as functional, asset, risk analysis, i.e., FAR analysis. All the three ingredients of FAR have a direct bearing on the pricing of products/services. The provision also provides scope for carrying out adjustments in cases where there are some differences or variations to make two transactions commercially comparable, for the purpose of benchmarking. The adjustments are suggested to achieve the object of testing and trying to see if both the parties or/and the transactions are similar or nearly similar. The selection of the most appropriate method (MAM) is based on the nature of transaction, the availability of relevant data and the possibility of making appropriate adjustments. The burden is on the assessee to select the most appropriate

I.T.A. 4634/Del/2010 Assessment year 2006-07 method (MAM). This decision of selecting the MAM is to be substantiated by the assessee by an appropriate documentation as well as by substantiating why a particular method is considered best suited to the facts and circumstances of the international transaction and as to how it provides the most reliable result of the arm’s length price. The purpose of providing penal consequences for not maintaining or not producing the requisite documentation sections 271AA and 271G emphasises legislative intention to insist upon and ensure compliance by the assessee to produce the necessary inputs. The burden to establish that the international transaction was carried out at the arm’s length price is on the taxpayer. He has also to furnish comparable transactions, apply the appropriate method for determination of the arm’s length price and justify the same by producing relevant material and documents before the revenue authorities. In case the revenue authorities are not satisfied with the arm’s length price and the supporting documents/information furnished by the taxpayer, the authorities have ample power to determine the same and make suitable adjustments. In such a situation, this responsibility of determination of the arm’s length price is shifted to the revenue authorities who are to determine the same in accordance with the statutory regulations. The taxpayer as a party to the transaction has full knowledge of the transaction carried out and the profit earned by him. As a person associated with that particular line of business activity, the assessee is reasonably expected to be not only

I.T.A. 4634/Del/2010 Assessment year 2006-07 aware about nuances of that business, but also about economic conditions and peculiar circumstances, if any, of that business. He is likely to be know even about comparable uncontrolled transactions. The following are certain fundamental features relating to burden of proof: (i) The burden to establish that an international transaction is carried out at the arm’s length price, is on the taxpayer who is to disclose all the relevant information and documents relating to prices charged and profit and with related and unrelated customers. (ii) If the assessing officer has determined the arm’s length price, he has to prove that the price determined by him is reliable and reasonable and conforms to the statutory requirement except in case of failure on the part of the taxpayer to comply with the statutory provisions. (iii) Where the tax authorities determine the arm’s length price the burden of proof on the tax authorities is much reduced. Adjustments made on account of the arms length price by the tax authorities can be deleted in appeal only if the appellate authorities are satisfied and record a finding that the arm’s length price submitted by the assessee is reasonable. Merely by finding fault with the transfer price determined by the revenue authorities additions on account of adjustments cannot be deleted. This is because the mandate of section 92 (1) is that in every case of international transaction, income has to be determined having regard to the arm’s length price. Therefore, unless the arm’s length price furnished by the

I.T.A. 4634/Del/2010 Assessment year 2006-07 taxpayer is specifically accepted, appellate authority on the basis of material available on record has to determine the arm’s length price itself. Subject to the statutory provisions, the appellate authority can direct the lower revenue authorities to carry out this exercise in accordance with law. There would be cases where the taxpayer does not cooperate and fails to furnish the arm’s length price or disclose fully information, relevant for determination of the arm’s length price when called upon to do so by the tax authorities. The taxpayer fails to discharge the burden based on the taxpayer. The tax authorities therefore, have to resort to the provisions of section 144 of the Income Tax Act and determine the arm’s length price on the basis of material collected or available on record. In such circumstances, the arm’s length price determined should be on parity with the best judgement assessment. Such assessment (determination of the arms length price) would have some approximations and estimations. But even such approximation and estimations cannot be arbitrary and capricious. The order of the transfer pricing officer is appealable and therefore, it must be objective, contain detailed reasons, conform to regulations and should be seen as just and fair.”

5.07 Therefore, on the facts of the case, it is our considered

opinion that the assessee has not been able to discharge the

onus cost upon it for the purpose of proper determination of

arm’s length price of the impugned international transactions. 25

I.T.A. 4634/Del/2010 Assessment year 2006-07 For determination of ALP under the Act, the provisions prescribe

that the assessee has to adopt one of the methods laid down in

section 92C (1) of the Act and the assessee has to substantiate

the price that is paid to its AE is at arm’s length within one of the

methods so prescribed. Further, we find that the TP study of the

assessee is not in tune with the provisions of section 92C of the

Act as it has simply relied on the contentions of the assessee that

the payments made to the AE were at arm’s length.

5.08 It is further seen that the Ld. TPO has applied the CUP

method while determining the ALP of the impugned international

transactions and has determined the value by applying the CUP

method at nil. However, this approach of the Ld. TPO is also not

as per the mandate of law. The Ld. AR is absolutely correct in

contending that where CUP is considered as the most appropriate

method, the value cannot be nil. A perusal of the order of the Ld.

TPO shows that no basis has been given by the Ld. TPO to hold

that the ALP was nil. ITAT Bangalore Bench in the case of Festo

Controls Private Limited versus DCIT reported in 150 ITD 305

has held that the TPO has to work out the ALP of the

international transaction by applying the methods recognised

under the act. The Bench held that the TPO is not competent to

I.T.A. 4634/Del/2010 Assessment year 2006-07 hold that the expenditure in question has not been incurred by

the assessee or that the assessee has not derived any benefits for

the payment made by the assessee and, therefore, he cannot

consider the ALP as nil. Therefore, in the given circumstances, we

deem it fit to set aside the order of the Hon’ble DRP and restore

the issue of determination of arm’s length price to the file of the

transfer pricing officer. The taxpayer is directed to furnish the

arm’s length price as may be calculated by the tax payer as per

the provisions of the Act and all the material and

information/document which the taxpayer is obliged to maintain

under Rule 10D of the Income Tax Rules. The TPO will also be at

liberty to collect independent relevant information of comparable

uncontrolled transactions. The TPO is to determine the fresh

arm’s length price in light of our observations and in accordance

with the regulations after giving a reasonable opportunity to the

assessee. Thus, ground numbers 1, 1.1 and 1.2 stand allowed for

statistical purposes.

5.1 As far as ground No. 2 pertaining to loss on sale of

repossessed assets is concerned, it is seen that the same is

covered in favour of the assessee order of the ITAT Delhi Bench

for assessment year 2005-06 which was also subsequently

I.T.A. 4634/Del/2010 Assessment year 2006-07 affirmed by the Hon’ble Delhi High Court vide order dated

09/11/2010 in ITA 1712/2010 and ITA 1714/2010. Respectfully

following the same we allow ground numbers 2, 2.1 and 2.2 of

this appeal.

5.2 As far as ground No. 3 pertaining to ad hoc disallowance on

account of sales promotion expenses is concerned, it is seen that

identical issue was before the ITAT Delhi Bench for assessment

year 2005 – 06 and the ITAT had remitted this issue back to the

file of the AO to verify the claim of the assessee in respect of

services rendered by the agents and the payments made thereof

by the assessee. The ITAT in assessee’s appeal for AY 05-06 in

gave directions while remitting the issue to the file of the AO that

in case the assessee was able to demonstrate that the

expenditure was incurred towards services rendered by the

agents/dealers for the business of the assessee, the AO would

allow the entire claim of the assessee and in case the assessee

was unable to substantiate its claim then in that eventuality the

disallowance at the rate of 10%, as made by the AO, would

remain confirmed. Since the impugned disallowance was on

identical facts, we deem it fit to restore this issue to the file of the

AO with the similar directions as contained in Para 16 of the

I.T.A. 4634/Del/2010 Assessment year 2006-07 order of the ITAT Delhi Bench for assessment year 05-06.

Therefore, ground No. 3 also stands allowed for statistical

purposes.

5.3 As far as ground No. 4 of the assessee’s appeal is

concerned, this appeal is also covered in favour of the assessee

by the order of the ITAT Delhi Bench in assessee’s own case for

AY 2005 – 06 (supra) wherein the assessee was allowed extra

depreciation on computer peripherals/accessories in Para 7 of

the Tribunal’s order wherein the ITAT has followed the judgement

of the Hon’ble Delhi High Court in the case of CIT versus BSES

Yamuna Private Limited in ITA No. 1267/2010 decided on

31/08/2010. Following the same, we allow ground numbers 4

and 4.1 of assessee’s appeal in this year also.

5.4 Ground No. 5 challenges the initiation of penalty

proceedings under section 271(1) (c) of the Act which is being

dismissed as being premature.

5.5 Ground No. 6 challenges the violation of principles of

natural justice but the Ld. AR has submitted that this ground is

not being pressed. Hence, this ground is dismissed as not

pressed.

I.T.A. 4634/Del/2010 Assessment year 2006-07 allowed in terms of our observations contained in the preceding

paragraphs.

Order is pronounced in the open court on 11.05.2017.

Sd/- Sd/- (N.K. SAINI) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated: 11th May, 2017 ‘GS’