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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
Appellant, M/s. Cargill India Private Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 19.02.2015 passed by the ld. Commissioner of Income-tax (Appeals)-44, New Delhi in an appeal challenging the orders passed by the ld. TPO/AO qua the assessment year 2008-09 on the grounds inter alia that :-
“Based on the facts and circumstances of the case, the Appellant respectfully submits:
GROUNDS RELATING TO CORPORATE TAX ADDITIONS
That on the facts and circumstance of the case and in law, the Ld. CIT (A) erred in not allowing a legal claim of depreciation on goodwill which is in clear violation of the powers vested under section 251(1)(c) of the Act and settled judicial precedents.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not allowing legal claim of depreciation on goodwill under section 32 of the Act.
3. Even otherwise, on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in not appreciating that appellant was entitled to claim depreciation on goodwill which is an 'intangible asset' under section 32 of the Act.
GROUNDS RELATING TO TRANSFER PRICING ADDITIONS
4. That on facts and in law, the Learned CIT (A) has erred in confirming that the Learned TPO has discharged his statutory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C (3) of the Act have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length price himself.
The Learned CIT (A) has grossly erred in contending that no proper evidence was submitted by the Appellant to prove that certain intra group services were actually availed by the Appellant, undermining the reasonableness of the evidence submitted by the Appellant.
6. The Learned CIT (A) by upholding the addition made by the Ld. Assessing Officer/Transfer Pricing Officer, has grossly erred in questioning the need for availing certain intra group services from its associated enterprises (AEs). The Learned CIT (A) has exceeded his jurisdictional reach by challenging the commercial expediency and business decisions of the Appellant and by expecting the Appellant to demonstrate any tangible/quantitative benefit from the receipt of such services.
7. The Learned CIT(A) has failed to take cognizance of the fact that certain intra group services a ailed by it from its associated enterprises have benefitted the Appellant in the smooth and efficient functioning of its various businesses in India and erroneously concluded that only incidental benefits were received by the Appellant from availing such services.
8. The Learned CIT(A) has grossly erred by concluding that certain intra group services received by the Appellant from its AE were 'duplicate' in nature.
9. The Learned CIT(A) has grossly erred by not giving due cognizance to the fact that the Appellant could not have availed certain intra group services from unrelated parties which were a case of business necessity and requirement for the Appellant and the associated enterprises have not provided such services in the capacity of holding company/group company.
10. The Learned CIT(A) has failed to understand that even in prior years, when facts of these impugned transactions remained same as in A Y 2008-09, the Appellant has availed similar services from its group companies and the transaction prices of the Appellant were considered by the Learned AOITPO at arm's length in those years. Further, the same was not even questioned at the time of assessment proceedings of the associated enterprises.
Without prejudice to the above grounds, the Learned CIT (A) has failed to prove that the Arm's Length Price of certain intra group services availed would depend on the benefit derived by the Appellant.
12. Without prejudice to the above grounds, the Learned CIT(A) has grossly erred by assuming the Arm's Length Price for certain intra group services to be 'Nil' while applying the Comparable Uncontrolled Price ("CUP") method to benchmark the impugned transactions. The Learned CIT (A) has not made any efforts to identify comparable uncontrolled transactions, in the absence of which, the CUP method cannot be applied above grounds are independent and without prejudice to each other.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Cargill India Private Ltd., the taxpayer, incorporated on April 12, 1996 is into trading of agricultural commodities and processed foods, such as, wheat, corn, soyameal, etc. and processing and sale of refined oil. The taxpayer has also set up an Overseas Trading Branch (OTB) in Singapore in 1998 after obtaining the prior approval from the Reserve Bank of India (RBI). The taxpayer is part of the Cargill Group which is an international marketer, processor and distributor of agricultural, food, industrial and financial products.
The taxpayer provides distinctive customer solutions in supply chain management, food applications and health & nutrition.
The taxpayer in its transfer pricing study classified its international transactions into 3 categories viz. (i) physical trade which included purchase of oil and wheat and sale of sugar, soyameal, corn and cotton; (ii) merchanting trade; and (iii) other transactions. The taxpayer in order to benchmark its international transactions qua physical purchase and sale of commodities like sugar, wheat, soyameal and oil using Comparable Uncontrolled Price (CUP) as the Most Appropriate Method (MAM) to benchmark its international transactions qua merchanting trade using Transactional Net Margin Method (TNMM) as the MAM whereas benchmarked the international transactions using TNMM / CUP and computed the international transactions as under :-
Type of international Method Selected Total value (Rs.) transaction Merchanting trade 4166424840+ 435503723+ TNMM using (purchase) 4117362140+ 617722320+ Operating Profit 822323079+ 447254878 as a PLI Value Merchanting trade 8725208443+ 1441488626+ added cost (sales) 447483729 Export of Cotton CUP 264904879 CUP Export of Sugar 322734818 CUP Export of Corn 1344700066 CUP Export of soya meals 724024834+4405508880 (including sales by OTB) CUP Export of rapeseed meal 2058169 Import of Oil CUP 3821959048+2153664960+ 882905773+ 160575764 Import of wheat CUP 322106833
Import of ingredients CUP 6221057 (for fish/shrimp feed) Import of raw material TNMM using 11505203 (for flavours and Operating Profit emulsifiers) as a PLI Operating Revenue Export of fishmeal CUP 7291677 Receipt of agency fee TNMM using 61229077+ 23326139+ 34876448+ Operating Profit 6424923 as a PLI Operating Cost Discounting charges CUP 137826682 Prepayment discount CUP 88690478 charges Availing of treasury TNMM USING 4047708+ 698421 services Operating Profit as a PLI Operating Cost Availing of TNMM USING 91770637 administrative services Operating Profit as a PLI Operating Cost Interest paid to AEs CUP 1178897+ 9885893+ 157476 Payment of royalty CUP 3818910+ 48950 Receipt of carrying cost CUP 3977358+ 48950 charges (Cotton BU) Gain on cancellation of CUP 360328617 purchase/sale contracts CUP Loss on cancellation 58990193 + 269224 purchase/sale contracts Provision of business TNMM using 2038228+3516738+ support services Operating Profit 4201533+2587274 as a PLI Operating Cost Purchase of fixed assets CUP 193450 Provision of liaison CUP 15771999 support services (commission agency services to CISA) Provision of marketing TNMM using 3227820 support services Operating Profit as a PLI Operating Cost Provision of support TNMM using 5834832 services Operating Profit as a PLI Operating Cost Availing of brokerages/ CUP 835992 commission agency services Receipt of interest CUP 7795 Receipt of handling No 7634604 income benchmarking required Cost sharing/ recharge No 7721643+21206453+ by AEs benchmarking 1560534+6660786+219111+31336 required Provision of other TNMM using 1431869+3516738 support services Operating Profit as a PLI Operating Cost Write back to excess No 208794 provision benchmarking required Demurrage expenses No 20204479+2066934+159814 benchmarking required Dispatch Income No 8068541+213171 benchmarking required Payment of lab analysis No 132353 fee benchmarking required Stock option cost No 105 adjustment benchmarking required Reimbursement paid to No 404559+60585+433717+100790+ AEs benchmarking 240179+8929+34122+125207+ required 1271518+180895+47369 Reimbursement received No 111722 from AEs benchmarking required
Ld. TPO noticed that the taxpayer has made payment for certain Intra Group Services (IGS), issued questionnaire to the taxpayer seeking information/evidence in order to determine the arm’s length price by examining if the services were really needed by the taxpayer and also invoked the principle of “benefit test”. After examining the reply filed by the taxpayer, ld. TPO reached the conclusion that no independent party would have made such large payments in uncontrolled circumstances and, therefore, by applying CUP method determined the ALP for international transactions qua availing of treasury services, availing of administrative services and cost recharge, transactions as nil as against Rs.13,65,07,645/- determined by the taxpayer. Ld. TPO proposed the enhancement of the income of the taxpayer at Rs.13,65,07,645/-. AO rejected the claim of the taxpayer for depreciation on goodwill on the ground that goodwill in this case does not form intangible asset eligible for depreciation. AO thereby assessed the income of the assessee at loss of Rs.138,03,92,588/- . The taxpayer carried the matter before the ld. CIT (A) by 5. way of filing an appeal who has partly allowed the same. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
TRANSFER PRICING GROUNDS
Ld. AR for the taxpayer contended that transfer pricing study prepared for benchmarking the international transaction as to payment towards intra group services have been unjustly and wrongly rejected by the TPO by applying CUP as the MAM without any reason; without indicating any basis for selection of MAM; without reference to any uncontrolled transactions rather laid emphasis on the fact that services received in question are duplicative in nature, tangible benefit accruing to the taxpayer has not been established and that there is no need for procuring such services, thus arbitrarily fixed ALP of administrative services and cost reimbursed at 30% of the value and 70% of the same has been directed to be adjusted.
However, on the other hand, ld. DR for the Revenue supported the orders passed by the AO/TPO/CIT(A) and contended that the assessee is to satisfy the TPO that services have been rendered.
Undisputedly, during the course of first appellate proceedings, the taxpayer has filed additional evidence qua intra group services received from its AEs qua which remand report was called. In the remand report, ld. TPO divided the services received by the taxpayer as under ;-
S.No. Services 1 Administrative Services 2 Corporate IT & other service 3 Treasury Services 4 Admin & Tech training 5 Brokerage services 6 Other services 7 Software Sharing
A remand report itself shows that plethora of evidence has been brought on record by the taxpayer to prove the receipt of the intra group services received from the AE but TPO, without making any cogent comment on the evidences, dismissed the same by mentioning that there is no clearly defined evidence in respect of these evidences.
11. Ld. CIT (A) upheld the view taken by the AO that the services are partly in the nature of duplicative of services, incidental services and partly in the nature of shareholder services. Ld. CIT (A) also held that from the additional evidence, it is made out that there is no proper evidence to prove that these services were actually rendered, in other words, the services were actually received by the taxpayer and thereby upheld the determination of ALP by the TPO qua administrative services for the value of Rs.91,17,70,637/-.
For treasury services, ld. TPO has again observed that no documentation regarding the services received from the AE has been brought on record. Ld. CIT (A) on the basis of remand report and documents brought on record by the taxpayer held that, “there is no proper evidence to prove that these services were actually rendered by its AE. The taxpayer could not demonstrate that services were actually received by it from its AE and accordingly upheld the order of TPO determining treasury services of Rs.47,46,129/- at nil”.
So far as administrative and technical training services are concerned, the taxpayer claimed to have received these services from CTSFA to the tune of Rs.77,21,643/-. Ld. TPO again determined its ALP at nil on the ground that no documentation has been filed by the taxpayer in respect of services availed and the taxpayer has failed to provide any basis for making this payment.
Ld. CIT (A) again upheld the findings of the TPO by observing that the taxpayer has engaged legal professionals for administrative and technical training services by incurring huge expenses, so these services are in the nature of duplicative of services/incidental services/shareholder services.
Ld. CIT (A) also observed that no proper evidence to prove that these services are actually rendered by its AE. For brokerage services, the taxpayer also entered into agreement with Cargill Tarim Ve Gida Sayani Ticaret AS (Cargill, Turkey) for availing brokerage/commission agency services in the nature of marketing / sales support services. Ld. TPO determined its value at nil on the ground that the taxpayer has not received any service from Cargill, Turkey. Ld. CIT (A) also upheld the findings of the TPO and proceeded to hold that brokerage services are in the nature of duplicative of services / incidental services and not supported by proper evidence.
In case of “other services”, the taxpayer was also charged for one-off services provided by Cargill BV, Cargill BA-Cargill PLC Cargill SRL and Cargill Agri Purina Inc. for Rs.86,40,242/-. Ld. TPO determined the ALP of other services at nil by observing that from the details of evidence submitted by the taxpayer, most of it is irrelevant since it consists of invoices and simply filing of invoices cannot be considered services rendered. Ld. CIT (A) also upheld the findings returned by the TPO by holding that other services are in the nature of duplicative/incidental services and are not supported by proper evidence.
In case of software sharing services of the value of Rs.15,60,534/-, ld. TPO again determined the ALP of the services at nil on the ground that the taxpayer has failed to bring on record any basis to claim that it is sharing the trading terminals and it has not shown what kind of project work has been undertaken and even HR services that it refers to. Ld. CIT (A) again upheld the findings of the ld. TPO by holding that these services in the nature of duplicative/ incidental/ shareholder services. Ld. CIT (A) accordingly determined the intra group services at Rs.2,27,84,103/- as against nil computed by the TPO.
We are of the considered view that when we examine the order passed by the ld. TPO as well as ld. CIT (A), they have determined the ALP of intra group services viz. administrative services, corporate IT & other services, treasury services, administrative and technical training services, brokerage services, other services and software sharing services at nil by using the same terminology without discussing the plethora of evidences brought on record by the taxpayer inter alia that the taxpayer has not filed any evidence as to how it has been benefited from the receipt of these services; that the taxpayer has engaged local professionals for administrative services and incurred huge expenses of these accounts; that there is no proper evidence to prove that these services were actually rendered; that most of the evidences filed by the taxpayer consist of invoices which is not sufficient to prove that the services were actually rendered; that ld. CIT (A) upheld the findings returned by the ld. TPO by merely observing that the services claimed to have been received by the taxpayer are in the nature of duplication of services, incidental of services and shareholder services.
It is settled principle of law as has been held by Hon’ble High Court of Delhi in case of CIT vs. EKL Appliances Ltd. 345 ITR 241 that there is no need to establish necessity and benefit especially in proceedings before the TPO. In case of Cushman Wakefield 46 taxmann.com 317, similar view has been expressed by Hon’ble Delhi High Court.
Ld. TPO/AO/CIT (A) have also proceeded to apply CUP as MAM without any basis and without having reference to any uncontrolled transaction rather relying upon irrelevant aspects eg. services received in questions are duplicate in nature or tangible benefits accrued to the taxpayer has not been established or that there was no need for procuring such services.
So, in these circumstances, we are of the considered view that the matter is required to be remanded back to the TPO to decide afresh after examining the evidence/additional evidence brought on record by the taxpayer without harping on the irrelevant aspect that services received in question being duplicative in nature or tangible benefit accrued to the taxpayer has not been established and that there is no need for procuring such services in the light of the decisions rendered by Hon’ble Delhi High Court in case of EKL Appliances Ltd. and Cushman Wakefield (supra) after providing an opportunity of being heard to the taxpayer.
ISSUE AS TO DEPRECIATION IN RELATION TO GOODWILL
Undisputedly, on account of amalgamation of company with taxpayer company w.e.f. 01.04.2007 as per scheme of amalgamation approved by the Hon’ble Delhi High Court, the same has been resulted into goodwill which was recorded in the books of account. It is also not in dispute that depreciation claimed under Income-tax Act, 1961 was claimed only during the assessment proceedings by way of filing revised return of income.
However, AO/CIT (A) have rejected claim of the taxpayer of ground of goodwill. It is contended by the ld. AR for the taxpayer that in AYs 2009-10 and 2010-11, Revenue itself has allowed the depreciation on goodwill. We are of the considered view that even if the revised return is filed qua legitimate claim by the taxpayer, AO is required to be directed to consider the same by following the rule of consistency. So, this issue is remitted to the AO to decide afresh on the basis of revised return in accordance with the law after providing an opportunity of being heard to the taxpayer.
Resultantly, the appeal filed by the taxpayer is allowed for statistical purposes. Order pronounced in open court on this 18th day of May, 2020.