SKF TECHNOLOGIES (INDIA) PRIVATE LIMITED,BANGALORE vs. ACIT, BANGALORE

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : These are appeals filed by the assessee directed against orders dt.14.10.2010 and 30.09.2011 passed by the ACIT, Circle -12(3) and

DCIT, Circle -12(3), Bengaluru, respectively, pursuant to directions of DRP

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u/s.144C(5) of the Income-tax Act, 1961('the Act' in short), for assessment

years 2006-07 and 2007-08 respectively.

disallowance of group information technology (IT) expenditure twice,

appearing in the appeals for A. Ys. 2007-08, the other grounds are common

for both the years.

assails the TP adjustment of Rs.1,13,68,945/- for A. Y. 2006-07 and

Rs.91,85,559/- for A. Y. 2007-08.

manufacture and trading of oil seals, had international transactions reported

in form 3 CEB filed for the impugned assessment years, as under :

A. Y. 2006-07 :

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A. Y. 2007-08 :

was to M/s. RFT S.P.A, Italy, as per an agreement entered with the latter

on 06.04.2005. Payment for group IT services were to M/s. SKF Data

services, Sweden. Both were associated enterprises (AE) of the assessee.

Financial results of the assessee after reducing other income for the

impugned assessment years reflected a PBIT on sales of 17.65% and

15.19% respectively. PBIT on cost came to 21.44% and 17.91%

respectively. For both the years assessee used TNMM for justifying the

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value of its international transactions, after aggregation. As per the

assessee, technical fees related to its manufacturing operations and hence

had to be aggregated with other costs. As per assessee, application of

TNMM method, proved that the payment of technical fee was at arms

length. In so far as payment of group IT service charge was concerned,

assessee stated that it was on a cost sharing basis and was only

reimbursement of cost.

transactions to the TPO, he was of the opinion that aggregation of

transactions was permissible only if there were closely linked transactions

which could not be separately analysed. As per the TPO assessee had two

segments namely manufacturing and trading and even these were

aggregated for the TNMM study. TPO also relied on OECD guidelines for

coming to the opinion that aggregation of international transactions should

be done only where it is not possible to apply the arms length principle on a

transaction to transaction basis. Ld. TPO thereafter proceeded to do a TP

analysis aggregating the group IT services charges and technical fees

together. When so aggregated amount came to Rs.1,13,68,945/- for A. Y.

2006-07 and Rs.91,85,559/- for A. Y. 2007-08. TPO required the assessee

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had to establish receipt of actual services from the AE. As per the TPO

unless services were proved to have been received by the assessee, no value

could be attached to it. Reply of the assessee to the queries raised by the

TPO as appearing in the TP order for A. Y. 2006-07 was as under :

According to him the following queries raised by him did not evoke any

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response from the assessee :

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the queries which would show that any services were provided by AEs. As

per the TPO assessee could not furnish a functional analysis of various

group IT services provided by the AE nor for the services received by it

nor could it explain how the allocation keys applied by the AEs were

justified. TPO also noted that assessee could not even produce the ledger

accounts of its AEs reflecting the total expenditure incurred by them for the

intra group services rendered. Though the assessee filed an agreement it

had entered with M/s. RFT S.P.A, as per the TPO, such agreement and the

invoices raised by the AEs which were furnished by the assessee could at

the best be considered as evidence for the accounting done and not

evidence for rendering or receiving actual services. As per the TPO

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primary evidence in the form of vouchers for expenditure incurred by the

AE for payments to third parties in relation to the services rendered by the

AE to the assessee were not produced.

concerned, TPO noted that assessee had not made an analysis by comparing

such costs with the cost it would have incurred if similar services were

sourced locally. As per the TPO no independent party would have opted

for the procurement of such services without first estimating the cost.

Though the assessee took an argument that bulk purchase by M/s. SKF

Data Services AB, Sweden would result in a cost benefit when the cost was

shared, TPO did not find it convincing since the submissions were not

substantiated. After verifying allocation keys TPO noted that such

allocation keys employed by the AE for sharing of the cost were based on

para meters such as capital employed, number of employees and sales. The

sharing was not, as per the TPO , based on actual usage in terms of time

and actual number of computer links and personnel using such links. In

effect, he held that assessee was not able to show any proof for having

received any services either in regard to the fee paid for technical services

or any IT services. According to him, the payments made by the assessee

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were a tribute by a subsidiary to a holding company and not relatable to

any tangible services rendered by the holding company to the assessee. He

treated it as an ex-gratia payment. The ALP of the technical services and

IT fees were taken at zero. Result was that an adjustment equaling to the

total payments alleged to have been made by the assessee to its AE was

recommended for u/s.92CA of the Act.

issued, assessee preferred to move the DRP. Assessee assailed the rejection

of TNMM applied by it on the aggregate of transactions. Assessee also

assailed the finding of the TPO that no services were rendered by the AE to

the assessee. As per the assessee, technical service fee could not be tested

in isolation since technology to manufacture the oil-seals were proprietary

to its AE and closely inter linked to the manufacturing process. Assessee

once again relied on the agreement entered with its M/s. RFT S. P. A, Italy.

It also relied on OECD guidelines on intra group services. As per the

assessee its AEs were a centralised service provider and acted as

facilitators.

According to them, fees for technical services was fixed at a sum of

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1,65,000 Euros and did not depend on actual quantum of assistance. As

per the DRP, no uncontrolled party would agree to pay a fixed amount for

such services. DRP noted that assessee failed to produce evidence in the

form of copies of vouchers raised by the AE.

Services, Sweden, argument of the assessee was that there was no element

of income in it and there was no technology what ever made available to

the assessee. Assessee referred to Article 12(4) of DTAA for this purpose.

However, DRP was not impressed by this line of argument also. According

to them, assessee could not show that there was no element of profit in such

reimbursement and it was not in the nature of technical services. Pursuant

to this, assessment was completed by making an addition in accordance

with TPO recommendations.

authorities had carefully gone through the agreement and supporting

records produced. As per the Ld. AR, vis-a-vis rendering of technical

services, assessee had produced agreement with M/s.RFT S.P.A, and also

the invoices raised by them. Relying on the objections raised by the

assessee before the DRP specifically those placed at p.nos.16 and 17 of the

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paper book, Ld. AR submitted that assessee had used RFT S.P.A's technical

know how to build its own competency in seal designing, seal moulding

and seal testing. As per the Ld. AR, AE had rendered services in the

following aspects :

there was no mark-up on the charges incurred by it while raising the bills

on the assessee. Vis-a-vis reimbursement for IT related services, rendered

by to M/s. SKF Data Services AB, Sweden, Ld. AR submitted that M/s.

SKF Data Services AB, Sweden acted as a centralised facilitator for EDP

services. Ld. AR pointed out that services rendered by them for which

reimbursement was made on cost basis inter alia included the following :

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Sweden, was also clearly mentioned by the assessee. Again, as per the Ld.

AR, actual cost incurred by the AE was the basis of billing done on the

assessee. Ld. AR sought placing additional evidence before this Tribunal in

the nature of various communication between the assessee and its AEs,

which according to him, will prove rendering services by the AEs.

According to him, he was seeking leave for admission of evidence which

related to both technical fee payment and group IT fee payment to

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demonstrate that assessee had received intra group services from its AEs.

Submission of the Ld. AR was that if these were considered along with the

bills and agreements it would amply show that assessee had received

considerable services from the AEs abroad.

benefit, if any, received by it from its AEs. In so far as sharing of IT cost

was concerned, Ld. DR submitted that assessee could not show how it was

benefitted by sharing such IT costs and could not produce any comparable

case of uncontrolled transactions. Further as per the Ld. DR onus was on

the assessee to show that the services received by it from AEs were at

charges lower or on par with cost if similar services were rendered by

unrelated parties. As per the Ld. DR assessee also could not show how the

documents now sought to be produced as additional evidence were linked

to the payments made for the alleged technical services and reimbursement

of cost. Thus according to him, lower authorities were justified in

considering the ALP of these at nil.

of the assessee is that it had received technical services relating to its

manufacturing line from its AE in Italy, namely RFT S.P.A. As per the

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assessee payments made to the said company were for said technical

services and taxes were duly deducted thereon . In so far as intra-group

payments to AE in Sweden are concerned, claim of the assessee is that it

was on cost-sharing basis for centralised DTP services done by such

subsidiary in Sweden. As per the assessee, the former could not be

considered on a stand alone basis since it was closely related to the

knowhow for the manufacturing operations of the assessee. Vis-a-vis the

latter, claim of the assessee was that there was no profit element for the AE

since the allocations were done on appropriate keys. Another argument of

the assessee is that in relation to the latter, there was no technology made

available by the AE. TPO had on the other hand aggregated the two set of

transactions and came to a conclusion that no services were rendered by the

AEs namely, one in Italy and the other in Sweden. With regard to the

alleged payment of technical services, assessee had an agreement

dt.06.04.2005, with RFT S.P.A, Italy. Clauses (i) to (xi) are reproduced

hereunder :

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It is not disputed that pursuant to the above agreement invoices were raised

by the AE in Sweden.

Swedish AE has vide a certificate placed at page 160 of the paper book

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stated that there was no profit mark-up. That payments were effected by the assessee to both the above AEs has not been disputed by the lower authorities. However, TPO was of the opinion that assessee could not prove any benefit to have been received. As per the TPO assessee ought to have shown that such services would have been acquired by an uncontrolled entity for similar cost for justifying such payments and TNMM study would not suffice. In other words, TPO was of the opinion that assessee could not produce evidence for either the technical services nor the sharing of cost in relation to the IT services. In a similar situation, Hon'ble Delhi High Court in the case of CIT v. Cushman & Wakefield India P. Ltd [(2015) 367 ITR 730] held as under at paras 29 to 46 of its judgment as under :

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enterprises in this case. The sequitur cannot be that the cost incurred by those entities would be the same as the associated enterprises in this case. It may be greater (in which case section 92(3) would clearly apply) or lower. This cannot be a matter of speculation. Nor is the application of section 92(3) a logical inference from the fact that CWS and CWHK have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The assessee did not benchmark these costs in its transfer pricing study. Neither was any transfer pricing study conducted by the Transfer Pricing Officer, who, crucially, did not say that the arm's length price was lower than the amount claimed. He, instead disallowed the expenditure altogether on the ground that there were no services rendered to begin with. The Income-tax Appellate Tribunal overruled the Transfer Pricing Officer on that limited ground but did not concern itself with a transfer pricing analysis as contemplated under section 92 ; to the contrary, it accepted the assessee's stated return (absent any benchmarking) as the true and correct value under an implicit (and incorrect) understanding of section 92(3). 30. As regards the costs incurred by CWHK, a further issue arises. Whilst the costs incurred by Mr. Braganza, for CWS, for the benefit of the assessee were detailed, no such details were provided for the services rendered by CWHK, acting as the co-ordinating entity for the Client Solutions Group. The cost allocation to the assessee is on the basis of a percentage of the cost relatable to the revenue generated by Cushman and Wakefield Asia. This is explained through the following chart, on which the Income-tax Appellate Tribunal placed reliance :

NY C and W Allocation Revenue Asia estimate revenue

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estimate

Country Net fee to per Asia $ 75 per 25 per Total BP BP local office cent. revenue Alloca cent. NY cent. allocatio per allocatio (US$) allocati allocati tion revenue gross n on US cent. n $ US$ on on allocatio revenue alloca (US$) n Allocatio -tion n

India 3037398 82.44 1122093 42.7 173990 30031 203931 72.5 150.360 per 2 per cent. cent.

China 369000 10.01 585961 22.3 21126 15682 36809 13.1 146.243 per 9 per cent. cent.

Hong 120065 3.26 per 429285 16.3 6874 11489 18363 6.5 124.770 Kong cent. 1 per cent.

Korea 24252 0.66 per 324499 12.4 1389 8685 10073 3.6 47.784 cent. 2 per cent.

Singapo 133782 3.63 per 165523 6.3 7659 4430 12089 4.3 47.926 re cent. 9 per cent.

C& 3684497 100 per 262736 100 210949 70316 281265 100 517.083 W Asia cent. 33 per per cent. cent.

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but rather, that the relationship between Cushman and Wakefield, United States and IBM predated the assessee's involvement. The assessee thus received only an incidental benefit from that relationship. The Transfer Pricing Officer further noted that no independent enterprise would be willing to engage a third party for such a transaction, and in any case, the associated enterprises means to conduct market research vis-Ã -vis the Indian market was questionable in the absence of any evidence to the contrary. Moreover, the Transfer Pricing Officer noted that the assessee itself had many offices in India which conducted market research, and in that sense, this was merely a duplication of services. The Income-tax Appellate Tribunal reversed this finding (page 63 of 17 ITR(Trib)) : "The assessee has been shown to have earned substantial revenues from IBM and that cannot be the result of only incidental benefit received by the assessee from old business relationship between the holding company of the assessee and IBM. If one wants to obtain revenue upon dealing in real estate, certain work has to be done. All the primary facts were submitted to the Assessing Officer as well as the Transfer Pricing Officer. The names of the parties were mentioned. Without examining any such details, it cannot be said that the revenue earned by the assessee was only on account of incidental benefit. There is a force in the claim of the assessee that to enable it to earn revenue from IBM, it was necessary to provide services to IBM outside India. If such services are provided by the employees of the assessee- company, then, it has to incur the cost of its employee who has to travel to the destination and that would result in extra expenditure . . ." 34. The court first notes that the authority of the Transfer Pricing Officer is to conduct a transfer pricing analysis to determine the arm's length price and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the Assessing Officer. This distinction was made clear by the Income-tax Appellate Tribunal in Dresser-Rand India Pvt. Ltd. v. Addl. CIT [2012] 13 ITR (Trib) 422 (Mumbai) (page 432) : "We find that the basic reason of the Transfer Pricing Officer's determination of the arm's length price of the services received under cost contribution arrangement as 'nil' is his perception that the asses see did not need these services at all, as the assessee had sufficient experts of

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his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the asses see has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the Revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy ; it is not for the revenue officers to question the assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of the assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the Revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrel evant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining the arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not ; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the associated enterprises gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The associated enterprises may have given the same service on gratuitous basis in the earlier period, but that does not mean that the arm's length price of these services is 'nil'. The author ities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the

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Revenue authorities in this case is that no services were rendered by the associated enterprises at all, and that since there is no evidence of services having been rendered at all, the arm's length price of these services is 'nil'." 35. The Transfer Pricing Officer's report is, subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more important to clarify the extent of the Transfer Pricing Officer's authority in this case, which is to determining the arm's length price for international transactions referred to him or her by the Assessing Officer rather than determining whether such services exist or benefits have accrued. That exercise—of factual verification is retained by the Assessing Officer under section 37 in this case. Indeed, this is not to say that the Transfer Pricing Officer cannot—after a consideration of the facts—state that the arm's length price is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the Transfer Pricing Officer stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the Transfer Pricing Officer. This aspect was made clear by the Income-tax Appellate Tribunal in Deloitte Consulting India Pvt. Ltd. v. Deputy CIT/ITO [2012] 19 ITR (Trib) 378 (Mumbai) ; [2012] 137 ITD 21 (Mumbai) (page 402 of 19 ITR (Trib)) : "On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at "nil", we find that the Bangalore Bench of the Tribunal in Gemplus India P. Ltd. 2010-TII- 55-ITAT- BANG-TP, held that the assessee has to establish before the Transfer Pricing Officer that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at 'nil' keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the

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assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at 'nil'." This is a slender yet the crucial distinction that restricts the authority of the Transfer Pricing Officer. Whilst the report of the Transfer Pricing Officer in this case ultimately noted that the arm's length price was 'nil', since a com parable entity would pay 'nil' amount for these services, this court noted that remarks concerning and the final decision relating to, benefit arising from these services are properly reserved for the Assessing Officer. 36. In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client interaction with IBM on behalf of the assessee— activities for which, according to the assessee's claim—interaction with IBM's regional offices in Singapore and the United States was necessary. These services cannot—as the Income-tax Appellate Tribunal correctly surmised—be duplicated in India in so far as they require interaction abroad. Whether it is commercially prudent or not to employ outsiders to conduct this activity is a matter that lies within the assessee's exclusive domain and cannot be second-guessed by the Revenue. 37. At this point, it is noteworthy that the circumstance that the assessee had market research facilities in India does not correspond to the performance of services abroad, especially in relation to client interaction services located outside India—albeit for ultimately sourcing them into the Indian market. The e-mails considered by the Income-tax Appellate Tribunal from Mr. Braganza and Mr. Choudhary so far as they deal with specific interaction with IBM by those persons and relate it to benefits obtained by the assessee, provide a sufficient basis to hold that benefit accrued to the assessee. However, this determination remains unclear and inchoate. The devil here lies in the details. The details of the specific

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activities for which cost was incurred by both CWS and CWHK (for the activities of Mr. Braganza and Mr. Choudhary) and the attendant benefit to the assessee, have not been considered till date. This must be provided, in addition to a consideration of the arm's length price vis-a -vis the total cost claimed by these associated enterprises. To this extent, for the consideration of arm's length price in respect of these transactions, the matter is remanded back to the file of the concerned Assessing Officer, for an arm's length price assessment by the Transfer Pricing Officer, followed by the Assessing Officer's assessment order in accordance with law. 38. The second issue which arises in these proceedings concerned the disallowance of referral fees paid by the assessee to various associated enterprises, for the referral of clients in the real estate business to the assessee. This was referred by the Assessing Officer to the Transfer Pricing Officer, who in this report stated that "no adverse inference is drawn". The assessee had—in its own transfer pricing analysis—conducted a benchmarking for these transactions, through the comparable uncontrolled prices ("CUP") method, with which the Transfer Pricing Officer found no infirmity. The Assessing Officer subsequently, however, found that no services were actually rendered for which referral fees was to be paid. The findings of the Assessing Officer are extracted below : "4.5 Repeatedly during the course of the hearings, the assessee- company bad been asked to match each transaction in the list to work done by the group entity specifically in relation to the property trans action done but this has not been given by the assessee in its submissions. This makes it clear that the assessee-company is in no position to clarify or substantiate the work done or services rendered by the group concerns to men this payment of referral fee to them at a high rate of 30 per cent. 4.6 In the submissions given the assessee-company has simply filed some invoices raised on the group entities where it is written that the referral fee at 30 per cent. of the gross fee earned by C&W India . . . None of the agreements filed by the assessee-company specify the exact percentage of fee to be received by CWS. No prudent business person will leave the issue of payment of fee open. The assessee has not been able to demonstrate the genuineness of the transaction, the services rendered by the group entities to merit this referral fee at a high rate nor the business purpose of the same.

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4.8 On close scrutiny of the e-mails, copies of which have been given in the submissions, it is seen that most of them are cryptic mails in that most of them do not clearly mention either the client or the requirements of the client which is the mandatory requirement for any entity referring to any other entity. There is no evidence submit ted regarding the services provided by the group entities to merit the referral fee. Copies of some invoices are also given but again raising invoices does not substantiate or gives proof of the work done by the group entities. 4.9 The assessee has not been able to demonstrate as to how the Indian entities from whom income was generated on account of rendering off services, etc., is linked to the associate enterprises of the assessee to whom referral fee is paid. In simpler words the link between the clients based in India and the associate enterprises of the assessee-company which could enable their referral in the first instance has not been established. The assessee's case is a pure and simple case of tax planning . . ." 39. The Income-tax Appellate Tribunal reversed this finding on two grounds. The first was that the Assessing Officer, after having referred the matter to the Transfer Pricing Officer, could not reopen or re-examine the transaction, which was done in this case. This, it was argued by the assessee, and held by the Income-tax Appellate Tribunal, amounts to doing something indirectly which cannot be done directly ; secondly, on the merits, the Income-tax Appellate Tribunal held that "the assessee has submitted ample evidence to support the expenditure and it was shown that such expenditure is incurred with respect to revenue earned by the assessee on property transaction referred to the assessee by its associate enterprises". 40. On the first ground, this court notes that the jurisdiction of the Assessing Officer, under section 37, and the Transfer Pricing Officer, under section 92CA, are distinct. A referral by the Assessing Officer to the Transfer Pricing Officer is only for the limited purpose of determining the arm's length price, based on a prima facie view that such a referral is necessary. It does not imply a concrete view as to the existence of services, or the accrual of benefit (such that allowance under section 37 must be permitted). This very argument was considered and rejected by the Income- tax Appellate Tribunal in Deloitte (supra) (page 401 of 19 ITR (Trib)) :

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"The second argument of learned counsel that the Transfer Pricing Officer is not empowered to disallow the expenditure and that the very reference to the Transfer Pricing Officer by the Assessing Officer presumes that the amount in question is allowable under section 37 of the Act and certain case laws were relied upon for this proposition. We are unable to persuade ourselves to agree to this proposition for the reasons that the Central Board of Direct Taxes, by way of a circular, has directed the Assessing Officer to refer to all transactions beyond a specified limit, to the Transfer Pricing Officer for determining the arm's length price. When the Assessing Officer has no discretion in the matter, in view of the binding nature of the Central Board of Direct Taxes instructions dated May 20, 2003, directing all the officers of the Department to refer the matters to the Transfer Pricing Officer for determination of the arm's length price where the aggregate value of international transactions exceeds Rs. 5,00,00,000, the Assessing Officer has a very limited role. He has to mechanically follow these instructions. There is no application of mind. There is no formation of any opinion at the stage of reference. Thus, to presume that he has allowed a particular expenditure under section 37, does not seem to be the right view of the matter. In any event, this is not a case where the Transfer Pricing Officer or the Assessing Officer made a disallowance under section 37 of the Act. It is a case where an adjustment has been made under section 92C(4) of the Act, after the Transfer Pricing Officer determined the arm's length price at nil under section 92CA(3). Hence, this argument is devoid of merit." Indeed, a Division Bench of this court, in Sony India Pvt. Ltd. v. CBDT [2007] 288 ITR 52 (Delhi) (albeit considering the law prior to the 2007 amendment to the Act), concurred with this view (pages 69 and 74 of 288 ITR) : "a reading of section 92C and section 92CA does not indicate that the Assessing Officer is required to form a prior considered opinion after considering all the available materials even before making a reference to the Transfer Pricing Officer. A prima facie opinion would suffice at the stage of making the reference . . . It correctly interprets the law as requiring only a formation of a prima facie opinion by the Assessing Officer at the stage of the ref erence.

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Therefore, the question of the CBDT supplanting the judicial discretion of the Assessing Officer does not arise. It is perfectly pos sible that, independent of the circular, the Assessing Officer might still 'consider it necessary or expedient' to refer an international trans action of such value to the Transfer Pricing Officer for determination of the arm's length price. At the same time it is not as if the trans actions of the value of less than Rs. 5 crores cannot be referred to the Transfer Pricing Officer by the Assessing Officer. Ultimately, any exercise of discretion by the Assessing Officer is bound to be judicially reviewed by the statutory appellate authorities as well as by the courts. Therefore, it is not as if there is no check on the exercise of discretion by the Assessing Officer." The Assessing Officer can, therefore, determine under section 37 that the expenditure claimed (in this case, the referral fees) was not for the benefit of the business, and thus, disallow that amount. This does not restrict or in any way bypass the functions of the Transfer Pricing Officer. Quite to the contrary, it represents the correct division of jurisdiction between the two entities. 41. On the merits, the court notes that the referral fees was paid according to "international fee sharing rules and referral fees on tenant representation transactions", details of which were provided by the assessee. This is extracted below : “Tenant representation transactions The referring party will receive the following percentage of the net commission paid to the executing For business referred with competition : For the portion between $0 $20000 0 per cent. For the portion between $20001 $150000 20 per cent. For the portion between $150001 $500000 30 per cent. For the portion above $500001 40 per cent. For business referred without competition : For the portion between $0 $20000 0 per cent. For the portion between $20001- $150000 30 per cent. For the portion between $150001 $500000 40 per cent. For the portion above $500001 50 per cent. ”

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Assessing Officer to remark that the "assessee is in no position to clarify or substantiate the work or services rendered by the group concerns to merit this payment of referral fees to them at a high rate of 30 per cent." (emphasis supplied) The quantum of payment, i.e., the value of transaction or the percentage referral fees paid was confirmed by the Transfer Pricing Officer in his determination. The payment was at the arm's length ; the Assessing Officer cannot reassess that issue or draw adverse conclusions from the percentage value of the referral fees. The Assessing Officer can, however, in his assessment under section 37 decide whether work or services were actually rendered as claimed by the assessee. In other words, the Assessing Officer may determine whether the stated transactions are real and genuine, i.e., the existence of a referral from the associated enterprises to the assessee. This, as part of the broader exercise to determine whether the expenditure was for the purposes of the business, lies unquestionably within the domain of the Assessing Officer. Indeed, this is also precisely what the Assessing Officer did : "4.5 Repeatedly during the course of the hearings, the assessee- company had been asked to match each transaction in the list to the work done by the group entity specifically in relation to the property transaction done but this has not been given by the assessee in its submissions. This makes it clear that the assessee-company is in no position to clarify or substantiate the work done or services rendered by the group concerns to merit this . . . 4.6 None of the agreements filed by the assessee-company specify the exact percentage of fee to be received by CWS. No prudent business person will leave the issue of payment of fee open. The assessee has not been able to demonstrate the genuineness of the transaction, the services rendered by the group entities to merit this referral fee at a high rate nor the business purpose of the same. 4.8 On close scrutiny of the e-mails, copies of which have been given in the submissions, it is seen that most of them are cryptic mails in that most of them do not clearly mention either the client or the requirements of the client which is the mandatory requirement for any entity referring to any other entity. There is no evidence submitted regarding the services

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provided by the group entities to merit the referral fee. Copies of some invoices are also given but again raising invoices does not substantiate or gives proof of the work done by the group entities. 4.9 The assessee has not been able to demonstrate as to how the Indian entities from whom income was generated on account of rendering off services, etc., is linked to the associate enterprise of the assessee to whom referral fee is paid. In simpler words the link between the clients based in India and the associate enterprises of the assessee-company which could enable their referral in the first instance has not been established. The assessee's case is a pure and simple case of tax planning otherwise." (emphasis supplied) Based on the evidence provided by the assessee, the Assessing Officer found that there was no underlying referral that justified the payment of fees (which, if the transactions were genuine, would have been at the arm's length as per the Transfer Pricing Officer) and, thus, the expenditure was not for a business purpose. This clearly lies within the Assessing Officer's jurisdiction ; a ruling to the contrary would mean that the expenditure cannot be tested as against the legal standard under section 37. The Income- tax Appellate Tribunal reasoned that this amounts to doing something indirectly that cannot be done directly. Quite to the contrary, this is something that the Assessing Officer can do, and has done, directly. 44. The other aspect is that the Income-tax Appellate Tribunal dismissed the assessment order on the merits as well. It held that the Assessing Officer's assessment of evidence was incorrect because "the assessee had submitted ample evidence to support the expenditure." Having set aside the Income- tax Appellate Tribunal's reasoning that the Transfer Pricing Officer's report was binding on this issue, this bare assertion of "ample evidence" remains the only reference to the merits of the Assessing Officer's order. This court notes that neither the Assessing Officer (who did admittedly deal with the issue at some length) nor the Income-tax Appellate Tribunal (which summarily noted that presence of evidence) have discussed what such evidence is. Details of the e-mails, and why they do or do not disclose the existence of referral transactions or any other material concerning the transactions, have not been disclosed, let alone discussed in any detail. In such a case, the court is faced with contrary assertions of the Assessing Officer and the Income-tax Appellate Tribunal, and nothing

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more. No conclusions about the correctness of either approach can be taken in this background. 45. The finding of the Income-tax Appellate Tribunal on this count are, therefore, liable to be set aside and this aspect of the matter is to be remanded to the file of the Assessing Officer for a detailed verification of facts and provision of reasoned conclusions, with the Assessing Officer being bound by the Transfer Pricing Officer's approval of the pricing of the referral fees. 46. Accordingly, the findings of the Income-tax Appellate Tribunal concerning reimbursement of costs and payment of referral fees to the foreign associated enterprises are set aside. The matter is remanded to the file of the Assessing Officer, in view of the directions in paragraphs 37 and 45 above. On the question of reimbursement of costs, the matter is remanded to the file of the Assessing Officer, for an arm's length price assessment by the Transfer Pricing Officer, followed by the Assessing Officer's assessment order in accordance with law. On the question of referral fees, the report of the Transfer Pricing Officer validating the arm's length price of the transactions is binding on the Assessing Officer, who may verify the transactions and assess the deductions under section 37 of the Act in accordance with law. For these reasons, the appeal is partly allowed. There shall be no order as to costs. 19. In our opinion, there is no doubt that assessee has to establish receipt of benefits on account of services rendered by its AEs and these were compensated on a level comparable to payments that would have been made if similar services were received from unrelated parties or in an uncontrolled transaction. At the same time, it is not open for the TPO to consider that there was no benefit whatever received by the assessee without verifying the documentation submitted by the assessee. As per the assessee, it had evidence to show that there was considerable

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correspondence between the AE and itself which could amply prove

rendering of services by the AEs to the assessee . The facts and

circumstances of the case as described above show that the question of

bench-marking the value of such services requires a fresh look by the AO /

TPO. We therefore set aside the orders of the AO / TPO and remit the

issues relating to alleged payments for technical fees and alleged

reimbursement of group IT expenditure to the AEs back to the file of the

AO / TPO for consideration afresh in accordance with law. Assessee is free

to produce any evidence to show that services were indeed received by it

from the AE. Assessee is also duty bound to bench-mark such services by

comparing it with uncontrolled transactions by independent enterprises

where similar services are received. Accordingly, ground I of the assessee

for both years is treated as allowed.

reimbursement of IT expenditure to SKF Data Services, Sweden for non-

deduction of tax at source, applying Section 40(a)(ia) of the Act.

international transactions, bench-marked by the TPO with an ALP of zero.

As per the Ld. AR assessee, what was paid to M/s. SKF Data Services,

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Sweden, was reimbursement of information technology related services.

Ld. AR submitted that SAP software and related supporting software were

acquired by M/s. SKF Data Services, and given for use to all the SKF

group entities. As per the Ld. AR though there was no agreement with M/s.

SKF Data Services, understanding was that the cost incurred by M/s. SKF

Data Services, would be shared by group entities applying appropriate

keys. According to him, there was no profit element in the reimbursement

to M/s. SKF Data Services. Thus there was no requirement of TDS on such

payment. As per the Ld. AR there was no technical services rendered by

M/s. SKF Data Services. Technical services even if it was presumed to

have been rendered, as per the Ld. AR, unless the “make available” clause

was satisfied, payments thereof could not be taxed in India. Ld. AR also

relied on DTAA between India and Sweden and the protocol indexed to it

wherein it is mentioned that India Canada DTAA had to be applied. As per

the Ld. AR, provisions of India Canada DTAA if applied would show that

assessee would not be required to deduct tax at source since there was no

technical services rendered by M/s. SKF Data Services, Sweden, to the

assessee in terms of DTAA.

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in the draft assessment order noted that assessee had not deducted tax at

source on payments effected to SKF Data Services, Sweden. As per the

AO no supporting evidence was filed by the assessee to show that these

were reimbursement of expenditure. AO also noted that assessee was

selling its entire product line in India and there could not be any services

rendered by M/s. SKF Data Services in Sweden, for such business

operations. According to him, payments were unrelated to business of

assessee in India. What we find is that none of the lower authorities had

carefully looked into the “make available” clause in Article 12(4) of the

DTAA between India and Canada which was called into operation by the

assessee. Lower authorities did not look into the applicability of the DTAA

in relation to the alleged cost sharing passed on by M/s. SKF Data Services,

Sweden, to the assessee for the IT related services. Question whether any

technical services were rendered by M/s. SKF Data Services, Sweden, to

the assessee and how far the “make available” clause was or was not

satisfied were never verified either by the TPO or the DRP. In our

opinion, this aspect also requires a fresh look by the AO. We set aside the

orders of the authorities on the aspect of disallowance u/s.40(a)(ia) of the

Act also and remit it back to the file of the AO for consideration in

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accordance with law. Ground.II(1) of the assessee stands allowed for

statistical purpose.

appears in appeal for A. Y. 2007-08. First one relates to set off of carry

forward loss. As per the assessee, carry forward loss for A. Y. 2006-07 was

Rs.41,95,29,825/- and not Rs.10,96,29,092/-. Ld. AR submitted that if the

correct figure of carry forward of loss is considered then there would be no

positive income for the impugned assessment year.

loss available to the assessee for A. Y. 2006-07, we are of the opinion that it

is an aspect which can be verified by the AO. We therefore direct the AO

to verify and give the assessee the benefit of actual carry forward of loss as

assessed for A. Y. 2006-07, for the impugned assessment year. Ground

II(2) is allowed for statistical purpose.

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of expenditure towards group IT services were considered twice, once

u/s.40(a)(ia) of the Act and again u/s.92CA of the Act. What we find is that

bench marking of the international transactions u/s.92CA of the Act, is

entirely different from allowance of disallowance of an expenditure u/s.37

of the Act. We have already set aside the issue regarding bench marking of

group IT services rendered by SKF Data Services, Sweden, to the assessee,

back to the file of the AO / TPO for consideration afresh. Irrespective of

any addition made, under ALP pricing provisions, application of Section

40(a)(ia) of the Act can definitely be done by the AO. Since these two

provisions apply in altogether different independent spheres, we do not find

any merit in this ground taken by the assessee. Ground.II(3) of the assessee

stands dismissed.

the Act, which is consequential in nature.

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Assistant Registrar