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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SMT ASHA VIJAYARAGHAVAN & SHRI INTURI RAMA RAO
Per Inturi Rama Rao, Accountant Member
This is an appeal filed by the assessee company directed against the order of learned Commissioner of Income Tax(Appeals), Bangalore dated 19-12-2008 for the assessment year 2005-06.
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2. The appellant raised the following grounds of appeal:
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Briefly the facts of the case are that the appellant is a company incorporated under the provisions of the Companies Act, 1956. It is a IT(TP)A No.384/Bang/2013 Page 4 of 14 100% subsidiary of M/s. Volvo Truck Corporation, AB, Sweden. It is engaged in the business of manufacture and sale of trucks, buses and distribution of construction equipment, etc.
The appellant filed the return of income for the assessment year 2005-06 on 31.10.2005 declaring a total income of Rs.162,76,44,630/-.
The said return of income was taken up for scrutiny assessment after issuing requisite notice under section 143(3). The AO, after noticing that the appellant had entered into following international transactions with its AE had referred the matter to the TPO for the purpose of bench marking the above international transactions with its AE:
The appellant in his TP study had applied Transactional Net Margin Method (TNMM) to establish the transaction with its AE at arm’s length.
IT(TP)A No.384/Bang/2013 Page 5 of 14 The TPO while accepting that the transaction other than the management fee and royalty are at arm’s length, had proceeded to determine the ALP in respect of management fee and royalty of Rs.26,22,19,000/- paid to Volvo Truck Corporation, Sweden, the parent company of the appellant. Out of this, Rs.13,60,00,0000/- was paid in respect of manufacturing segment and Rs.12,62,19,000/- was paid towards distribution agreement. During the course of proceedings before the TPO, the appellant submitted vide its letter dated 21.09.2007 regarding nature of services rendered by its AE in respect of marketing and support services in respect of Volvo group.
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Thus it was submitted before the TPO that the Volvo Group had supported the appellant in brand creating, corporate identity and in protecting the brand identity in India. When the assessee was asked to produce the details of the expenditure incurred on the following, no details or evidences in respect of such expenditure were furnished by the appellant before the TPO:
IT(TP)A No.384/Bang/2013 Page 9 of 14
Customer visits to various facilities of Volvo Group.
Mediaperson visits to Sweden 3. Visit of school children from India to Sweden 4. Sponsoring by Volvo Group several sports events 5. Brand surveys undertaken by Volvo Group in India 6. Knowledge sharing 7. Volvo Group shares product and market strategies 8. Customer profiling done by Volvo Group 9. Assistance in drafting service agreements 10. Training of taxpayer’s personnel by the technical people of Volvo group entities.
Therefore, the TPO concluded that no actual services were rendered by the AE and also no benefit out of such expenditure was derived by the assessee company and therefore concluded that the ALP in respect of the above transactions is “Nil”. The conclusions of the TPO on these transactions are as under:
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Thus the AO concluded that the ALP in respect of management support services is “Nil” and suggested adjustment of Rs.26,22,19,000/- under section 92CAof the Act. The AO passed the final assessment order under section 143(3) vide order dated 19.12.2008, incorporating the above adjustment.
Being aggrieved, an appeal was preferred before the CIT(A), Large Taxpayers Unit, Bangalore, who vide impugned order had confirmed the addition. Hence, the appellant is before us in the present appeal.
The learned Sr. Counsel Shri. Pardiwala vehemently contended that the TPO cannot determine ALP at “Nil” by holding that there was need to incur such expenditure and by questioning the necessity of benefit of IT(TP)A No.384/Bang/2013 Page 11 of 14 expenditure incurred and reliance in this regard was placed on the decision of Hon’ble Delhi High Court in the case of CIT Vs. EKL Appliance Ltd.,345 ITR 241. As regards the rendering of services, the learned counsel vehemently argued that the TPO impliedly satisfied with the condition of rendition of services. Alternatively, he submitted that the transaction of payment of management support fee should be aggregated and be considered to be a single transaction and ALP should be determined by applying TNMM. On other hand, the learned CIT(DR) placed reliance on the orders of TPO and CIT(A) and submitted that the condition of rendition of services is sine qua non for allowing the same as a deduction.
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:
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 IT(TP)A No.384/Bang/2013 Page 12 of 14 expenditure. The Hon’ble Delhi High Court in the case of CIT Vs.
EKL Appliance Ltd. 345 ITR 241 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:
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
IT(TP)A No.384/Bang/2013 Page 13 of 14 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.
Now we shall deal with the alternative submission of the learned counsel for the appellant that the transaction of management and 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 IT(TP)A No.384/Bang/2013 Page 14 of 14 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., Vs. CIT 374 ITR 118 and Punjab Haryana High Court in the case Knorr Bremse India (P) Ltd., Vs. Asst. CIT 2016 (380 ITR 307). 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.
In the result, the appeal filed by the assessee is dismissed.
Pronounced in the open court on this 16th day of December, 2016.