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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI. VIJAY PAL RAO & SHRI. INTURI RAMA RAO
Per Inturi Rama Rao, Accountant Member
This is an appeal filed by assessee company directed against the assessment order passed by the Deputy Commissioner of Income Tax, Large Tax Payers Unit, Bangalore under section 143 r.w.s. 144(3) of the Income Tax Act, 1961, for the assessment year 2006-07.
The appellant raised the following grounds of appeal:
3. Briefly the facts of the case are the appellant is a company incorporated under the Companies Act, 1956. It is engaged in the business of manufacturing, trading and marketing. The return of income for the assessment year 2006-07 was filed on 27.11.2006, declaring income of Rs.31,61,66,533/-. The said return of income was processed under the provisions of section 143(1) and then the case was Page 3 of 11 taken up for scrutiny assessment by issuing notice under section 143(2).
During the course of the scrutiny proceedings, the Assessing Officer noticed that the appellant has reported the following international transactions with its AE in Form 3CEB:
The appellant also submitted the Transfer Pricing Study Report adopting TNMM at entity level and sought to justify that the transactions are at arm’s length. The learned AO referred the matter to the TPO for the purpose of bench marking the above international transactions. The TPO accepted that all other transactions expect the transaction of management fee are at arm’s length. As regards the payment of management fee is concerned, it was considered as a separate class of transaction by the TPO. The submission of the Page 4 of 11 appellant that the transaction is closely connected with the manufacturing and same should be aggregated and TNMM should be applied at entity level was not accepted by the TPO. The TPO proceeded to bench mark this transaction separately. The TPO observed that the appellant paid the management fee only from the assessment year 2005-06 and no such fee was paid in the financial year 2004-05. Considering the fact that when no management fee was paid in the year 2004-05, the profit in terms of the percentage of sales was 48% in the financial year 2004-05 and whereas in the financial year 2005-06, after the payment of the management fee, the profit in terms of percentage of sales was 35.95%. Based on these factual information, the TPO has inferred that the above payment had not resulted in any tangible benefit to the appellant company and did not provide any economic value to the appellant. He further held that the appellant has failed to furnish any evidence regarding actual services received from Associate Enterprises and therefore held that the arm’s length price is ‘Nil’ and accordingly suggested the TP adjustment of Rs.2,21,64,344/-. The AO passed the draft assessment order dated 18.11.2009 incorporating the above TP adjustment. After receipt of the draft assessment order, the appellant filed an objection before the Page 5 of 11 Hon’ble DRP contending interalia that TPO was not justified to treat the transaction of payment of management fee as a separate class of transaction without rejecting the TP study report submitted by the appellant. It was further contended that the TPO was not justified in not aggregating the transaction of management fee with other transactions as the transactions were interlinked. It was further contended that the TPO is not justified in applying the ‘CUP’ method as against the TNMM adopted by the appellant for bench marking the management service fee and finally contended that the TPO was not justified in suggesting the TP adjustment of Rs.2,21,64,344/-. The Hon’ble DRP after considering the submission of the appellant confirmed the findings of the TPO vide order dated 27.08.2010.
Pursuant to the order of Hon’ble DRP, final assessment order was passed by the AO vide order dated 31.08.2010 passed under section 143(3) r.w.s. 144C of the Act.
Being aggrieved, the appellant is before us in the present appeal.
It was contended on behalf of the appellant that for the purpose of bench marking the intra group services, TPO was not justified in examining the necessity as well as the profitability of such expenditure
Page 6 of 11 and reliance in this regard was placed on the decision of Hon’ble Delhi High Court in the case of CIT Vs. EKL Appliances 345 ITR 241 and the Coordinate Bench decision cited supra. The learned AR further contended that the learned TPO is not justified in rejecting the TNMM at entity level without demonstrating as to how some other method will be more appropriate for the purpose of bench marking the ALP. He also filed some additional evidence vide an application for admission of additional evidence to demonstrate that the appellant actually received the management services. The additional evidence was in the form of email correspondence and EDP screenshot, etc. It was contended that the additional evidence may be admitted as the same was necessary for deciding the issue involved in the appeal and reliance in this regard was placed on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Text Hundred India 351 ITR 57 and also relied upon the decision of Hon’ble High Court in the case of CIT Vs. Kum. Satya Setia 143 ITR 486(M.P.). Thus he prayed that the adjustment made by the TPO should be deleted. On other hand the learned DR placed reliance on the order of the lower authorities.
We heard the rival submissions and perused the material on record. The only issue that arises for consideration in the present appeal is whether the TPO is justified in making ALP adjustment at Nil by holding that there was no necessity of incurring such expenditure and no benefit was derived and there was no proof of actual rendition of services. The TPO treated the transaction of payment of management fee on stand alone basis. No doubt the law is quite settled now. It is beyond the powers of AO/TPO to question the necessity of incurring expenditure or deny the deduction on the ground that no benefit out of such expenditure was incurred. The TPO/AO cannot determine the ALP in such transaction at Nil. The reliance in this regard can be placed on the decision of Hon’ble Delhi High Court in the case of Delhi High Court in the case of EKL Appliances Ltd., 345 ITR 241. The Hon’ble Delhi High Court has reiterated the position laid down by the Hon’ble Supreme Court in the case of Eastern Investment Ltd. v. CIT [1951] 20 ITR 1 (SC) and Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261. The decision of Hon’ble Delhi High Court in the case of EKL Appliances was followed by Page 8 of 11 several coordinate benches of this Tribunal, few of them are as follows:
Therefore what follows from the above decision is that the ALP of the management services fee cannot be determined at Nil by questioning the necessity or the benefits out of the expenditure incurred. But onus lies on the assessee to furnish the proof of actual receipt of the services by the appellant from the AE. The Hon’ble Bombay High Court in the case of Umakant Vs. DCIT 369 ITR 220 held that proof of rendition of services is a sinequanone for allowability of expenditure in the hands of the recipient of the services.
But in the present case, it is not discernible that the appellant made any Page 9 of 11 attempt to furnish the proof of receipt of the services. The appellant also filed an application for admission of this additional evidence, in terms of provisions of Rule 29 of the ITAT Rules. No doubt the parties to the appeal are entitled to produce the additional evidence either on suo motto direction of the Tribunal on its own in terms of Rule 29 of ITAT Rules, 1964. Where the additional evidence is filed by the either party to the appeal, the additional evidence can be admitted by the Tribunal at its discretion only in the event that the party leading the additional evidence satisfied the Tribunal that it was prevented by sufficient cause from leading such evidence and this evidence would have material bearing on the issue which is to be decided by the Tribunal and ends of justice demands the admission of such evidence. The Tribunal can only admit this evidence after satisfying the above conditions and passing an order to that effect. In the present case, the appellant had not explained as to how it was prevented from furnishing evidences before lower authorities and also how this evidence would prove conclusively that AE had rendered the services for which management fee was paid by the appellant. In the circumstances, we do not find any valuable reason for admission of additional evidence as the additional evidence does not conclusively
Page 10 of 11 prove that the services were actually rendered by the AE. The coordinate bench of this Tribunal in the case of Volvo India Pvt. Ltd., of which the Hon’ble AM is the author, held as follows:
“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.”
Respectively following the decision of co-ordinate bench cited supra, we hold that in the absence of proof of actual rendition of services on record, TPO was justified in making the ALP adjustment of Rs. 2,21,64,344/-.
Page 11 of 11 10. As regards the other contention of the AR that the transaction of management support fee should be aggregated with other transaction and be bench marked by adopting TNMM cannot be accepted for the simple reason that when there was no proof of actual rendition of services by AE, the very transaction is a sham transaction and in which event it cannot be said that the transaction can be bundled with other transactions.
In the result appeal filed by the assessee is dismissed.
Pronounced in the open court on this 24th day of May, 2017.