Loading judgment…
No AI summary yet for this case.
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI R C SHARMA & SHRI AMIT SHUKLA
आदेश ORDER �ी अिमत शु�ला, �या स: PER AMIT SHUKLA, JM:
The aforesaid appeal has been filed by the assessee against Final Assessment Order dated 30th January, 2016, passed by ACIT, Circle 4(3)(2), Mumbai, (AO) under section 144C r.w.s. 143(3) for the assessment year 2011-12 in pursuance of the directions given by the Dispute Resolution Panel (DRP) vide order dated 14.12.2015. In various grounds of appeal, the assessee has challenged following issues:-
2 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 (i) Firstly, Transfer Pricing Adjustment of Rs. 54,41,53,295/- on account of intra-group services. (ground no.1 to 2); (ii) Secondly, adjustment made under section 145A of Rs.3,62,52,879/- being difference on account of CENVAT in the closing stock (ground no.12 to 14); (iii) Thirdly, addition in respect of un-reconciled transactions reported in AIR for sum of Rs.54,76,427/- (ground no.15 to 19); (iv) Fourthly, short-credit of TDS of Rs.8,69,914/-(ground no. 20); (v) Fifthly, levy of interest under section 234B & 234C (Ground No.21); and (vi) Lastly, initiation of proceedings on the levy of penalty under section 271(1) (c) (Ground no.22).
Brief facts qua the issue of Transfer Pricing adjustment are that, the assessee company is part of Global AB SKF Group, which is a leading technology and solution provider of products, solutions and services in the area comprising Manufacturing & Sales of Ball Bearings, Roller Bearings, Hub Bearings & Textile Machinery components service and lubricants systems. In its Transfer Pricing Study report, the assessee disclosed the following transactions with its AE:- International transactions Value Rs.in lakhs) Purchase of Raw materials, consumables or any other supplies for manufacturing of goods from associated enterprises 5,028.82 Sale of finished goods (bearings) to associated enterprises 17,978.02 Purchase of finished goods from associated enterprises 66,845.16 Import of Capital items 1,081.17 International Transaction(s) in respect of use of Intangible Property such as know-how, patents, 1,168,55 copyrights, licenses, etc. Availing of services such as financial, administrative, technical, Commercial services, etc. 5,441.53 Total 97,543.25
3 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 As regards the availing of various services, it was reported that, AB SKF renders intra-group services in the form of support services to SKF India and other Group Companies. During the year, the assessee had availed various kinds of services in relation to IT services, maintenance services; services like planning; assistance in new product developments; assistance in purchasing, accounting, budgeting, finance, administration, employee relations, transportation, public relations, technical services in various fields including market research, business development and sales etc. from the said Associated Enterprises for the smooth running of assessee’s business.
For rendering all these services, the AE charges intra- group service fees from the assessee and other group companies, which are based on actual cost incurred plus a mark-up of 5%. The assessee has benchmarked the entire international transactions with the AE by aggregating under the manufacturing segment as all the transaction including services received were inextricably linked with manufacturing. For benchmarking the entire transactions, the assessee has adopted TNMM as MAM and the margin earned by the assessee on the total assets in the manufacturing segment was 32% and operating profit offered on total cost (OP/TC) was 19.77%. In the TP Study undertaken, the arithmetic mean of the profit margins of the comparable companies shortlisted was arrived at 10.85% and accordingly, it was stated that, assessee has earned very high margins as compared to the comparable companies engaged in the similar activities even after making the payment of intragroup services. It was stated by the assessee that, the cost of the 4 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 intragroup services has been allocated in both the segments on the basis of direct allocation to the extent possible and the balance on the basis of net sales. Thus, the assessee contented for the aggregation of the transactions.
Intragroup services availed by the assessee during the assessment year 2011-12 was classified under the following heads:- (Amount in Lakhs) Data Cost 1,730.34 Business support and Consultancy 205.73 Service Charges 3,339.48 Testing Charges 47.89 Training Charges 118.08 Total 5,441.53 The nature of each heads were elaborately given before the AO vide letter dated 9th October, 2014, the copy of which has been placed before us in the Paper book from pages 246 to 263 and our specific attention was drawn to pages 250 onwards. The TPO, noted that assessee except for providing sample copies of email correspondences in support of services rendered by the AE, and write-up of nature of services, no other documents were submitted to show that these costs were actually incurred. Further no separate benchmarking has been done for these transactions in the Transfer Pricing Study Report. On this premise and reasoning the TPO held that, Arm’s Length Price of services should be considered as “Nil” and the entire payment made for such services of Rs.54.41 crores was added back. The relevant observation for making the said adjustments reads as under:- “The submissions provided by the assessee are not acceptable. No supporting documents have been provided to show that these services were actually required by the assessee from the AEs. The 5 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 email correspondence provided is vague and cannot be used to determine the actual receipt of the services at all. The assessee has not provided any documents to show that these costs were actually incurred by the AEs. Even the cost allocation formula or working has not been provided by the assessee.
In an uncontrolled situation no entity would pay for any service which is of no use to it. In view of the above, the arm’s length price of services availed by the assessee from its AEs is considered to be Rs. “Nil”.
In view of this, adjustment of Rs.54.41 crores is made to the international transaction of the assessee”.
Thus, the entire transfer pricing adjustment and disallowance was made in the aforesaid manner.
Before the DRP, assessee objected to the TPO’s order on various counts and first and foremost contention raised was that TPO has passed a non-speaking order without giving any show-cause notice for adjustment of intra-group services and ignoring submissions made in this regard. It was further submitted that, as per the OECD Guidelines, aggregation of the transactions can be done and further in support decision of Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd., reported in [2015] 374 ITR 118 was relied upon. The assessee’s objections on various counts have been incorporated in the DRP’s order from pages 3 to 6. That apart, the assessee had also filed various additional evidences giving the details of intra-group services availed from the AE during the year. On such additional evidences and submissions, remand report was called for, in response the TPO again contended that, no 6 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 agreements for services with the AE have been provided and how these services have been actually received and what the benefits derived from such services has not been given. Hence, he again justified the value of the transaction to be taken at “nil”. In rebuttal, assessee submitted that such an observation of the TPO is absolutely incorrect as the service agreement was very well filed before the TPO along with the various other evidences, which has not been considered by the TPO.
The DRP, after detailed discussion, rejected the assessee’s contention, which can be summarized in the following manner:- (i) The assessee company is paying Royalty of Rs.116.9 million to its AE and has not been able to justify what extra services were required from the AE. Apart from the services covered under the “royalty agreement”. (ii) The only evidence on record is in the form of e-mail correspondence which itself cannot prove that services were actually rendered by the AE and were actually received by the assessee; (iii) The assessee has incurred employee cost of Rs.1238.9 million and has not furnished the profiles of the employees and what kind of services rendered were by them; (iv) There is no added commercial value provided by providing such kind of services and thus, it cannot be regarded being rendered for the related party; (v) Business support consultancy and training charges are a typical shareholder activity of the AE, as the entire
7 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 acquisition has been at the behest of the AE for the benefit of its shareholders; (vi) The management and consultancy services provided by the AE fall in the category of “Services that provide incidental benefits”. Ld. DRP referred to certain OECD guidelines, to strengthen its point; (vii) The payment for intragroup services will be treated as Arm’s Length when it is proved substantially by the tax payer that such services were actually executed by and as such they were received from its AE; and (viii) Regarding the corroboration of the transaction by using TNMM method as pleaded by the assessee, the same was also rejected by the DRP on the ground that, there is absence of other test being satisfied in respect of intragroup services. Finally after relying upon certain decisions, they upheld the entire adjustment made by the TPO.
Before us, the Ld. Counsel after explaining the entire facts as discussed above, submitted that the whole approach of the TPO as well as the DRP are factually and legally incorrect. He, first of all submitted that, plethora of evidences for rendering of intra-group services were filed before the authorities below. At the outset, the service agreements between the assessee and AE which has been placed in the paper-book at page 264 and 274 onwards, clearly describes the nature and scope of services rendered by the AE. Apart from that, he pointed out to summary of various categories of services received by the assessee which have been tabulated and given at pages 336 to 342 of the paper-book. Our attention was also drawn to various e-mail correspondences
8 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 to show that, actual services were rendered on day to day basis. He also referred to memorandum concerning allocation of services which has been placed in the paper book from pages 478 onwards and also the basis for allocation of expenses which has been given from pages 488 onwards, which indicated the allocation of services to various group entities. Ld. Counsel submitted that the assessee had given all the details of services rendered for every division and this has been specifically highlighted in the specific submissions filed before the TPO vide reply dated 22nd September, 2015. Thus, he submitted that, the entire observations made by the TPO as well as DRP are completely divorced from the material facts placed on record. He further argued that, neither the TPO nor the DRP have mentioned as to firstly, what should be the appropriate method to benchmark this transaction and secondly, how the adjustment can be taken at nil. If they were of the opinion that separate benchmarking is to be done for the intra-group services, then there has to be some comparability analysis vis-à-vis the comparable companies following certain method as per the Transfer Pricing provisions provided under the Act and the Rules. In any case, once the assessee had shown a substantial high profit margin for the entire manufacturing segment for which the intragroup services has been availed, then aggregation of the transaction has to be done under the TNMM. In support, he strongly relied upon the decision in the case of CIT vs. EKL Appliances, reported in [2012] 345 ITR 241 and Sony Ericsson Mobile Communication P Ltd vs CIT (supra).
On the other hand, the Ld. DR strongly relied upon the order of the DRP and submitted that, firstly, the intragroup
9 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 transaction should have been separately benchmarked by the assessee and secondly, the onus is on the assessee to show that, intra-group services have actually been received and if such a onus has not been discharged then the entire cost claimed in the books of account has to be taken as “Nil”.
We have considered the rival submissions, perused the relevant finding given in the impugned orders, as well as material referred and relied upon before us. The main issue involved is Transfer Pricing Adjustment of Rs.54.41 crores on the transaction of intra-group services. The entire amount of payment made to the AE has been added to the income of the assessee by the departmental authorities holding that, the assessee could not provide any evidences to show that these services were actually availed by the assessee from the AE and no separate benchmarking has been done by the assessee qua this transaction. The assessee company which is part of SKF Group Worldwide is mainly engaged in Manufacturing & Sales of Ball Bearings, Roller Bearings, Hub Bearings & Textile Machinery components service and lubricants systems etc. As part of its manufacturing activity, assessee has shown availing of various services from its AE. The overall profit margin of the manufacturing and related activities worked out at 19.77% (on the base of operating profit/total costs). This PLI was benchmarked with the independent comparables whose average profit margin was worked out at 10.85% and hence it was reported that assessee’s entire transaction of manufacturing segment which included these services also are at Arm’s Length Price. Even if aggregations of all the transactions including relating to these
10 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 services are to be taken into account, then also the assessee’s margin is at Arm’s Length Price. The revenue’s case is that, firstly, assessee has not separately benchmarked these services; however, they themselves have failed to carry out proper transfer pricing analysis to benchmark and arrive at appropriate ALP by following any of the prescribed method. Secondly, assessee could not substantiate that any actual rendering of services was done by AE. From the perusal of the material placed before us, which was also there before the authorities below, prima facie it is seen that various evidences were filed to corroborate the rendering of services by the AE and also the nature of services along with the allocation of costs. The details of documents/evidences filed before the TPO and DRP are as under:- A. “Written submissions dated 09 October 2014 filed before the Transfer Pricing Officer along with the relevant annexures thereto: i. Service agreement dated 21 April 2008 entered into between Associated Enterprise (Aktiebolaget SKF, Sweden) and the Appellant; ii. Addendum to the Service agreement for prolongation of services for the period 2010 and 2011 dated 16 March 2010 and 28 March 2011; iii. IT Services delivery agreement dated 07 January 2011 entered into between Associated Enterprise (Aktiebolaget SKF, Sweden) and the Appellant; iv. Updated margin of comparable companies FYE March 2011 in Manufacturing and Trading Segment
B. Written submissions dated 09 December 2014 filed before the Transfer Pricing Officer along with relevant annexures thereto: i. Sample email correspondences to show Associated Enterprise has provided assistance and clarification with respect to accounting related issues to the Appellant;
11 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 ii. Sample email correspondences to show Associated Enterprise has provided review and inputs on Term sheet / agreements, assistance in training for legal risk management to the Appellant; iii. Sample email correspondences to show Associated Enterprise has provided group insurance support service to the appellant; iv. A statement giving summary of sample documentary evidence for availing services and benefits received by the Appellant”
Apart from that, before the DRP, the assessee had filed summary of intra-group services availed from the AE, which was filed before the DRP; memorandum of allocation of service fees amongst the intra-group as well as the allocation of service fees. In the light of these evidences/documents, we are unable to apprehend as to what other kind of documents were required by the assessee to show that these services has not been rendered. First of all the order of the TPO itself is very cryptic and passed in a very callous manner, without any proper analysis and understanding of the Transfer Pricing principles. The DRP too has failed to take note of these evidences. If the documents/evidences were deficient then DRP should have specified the same and asked the assessee to corroborate further. Various observations made by the DRP to arrive at their conclusion like, there is no added commercial value provided by providing such kind of services; business support consultancy and training charges are a typical shareholder activity of the AE; the management and consultancy services provided by the AE fall in the category of “Services that provide incidental benefits”, etc. as discussed above is again too generic and how can value of such services can be treated as ‘nil’ under transfer pricing principle. If any transaction has been recognized as international transaction
12 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 by the department, then it is incumbent to arrive at the ALP of such transaction. The Department cannot disregard the actual transaction between the parties unless the economic substance of the transaction differ from its form; or the arrangement made by the parties in relation to the transaction differ from those which is or should have been adopted by an independent enterprises behaving in a commercial rational manner. It is otherwise a trite law that revenue authorities cannot dictate the assessee as to how he should conduct his business and what expenditure he can incur. The test of “commercial expediency” for determining, whether the expenditure was wholly and exclusively for the purpose of the business or not has been time and again explained by our Courts. The reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the revenue. Even Rule 10B(1)(a) does not envisages the disallowance of any expenditure on the ground that it was not necessary for the assessee to incur or avail the same. Here in this case, the revenue authorities, first of all, have disregarded the voluminous documents and evidences filed before them and secondly, have opined that these expenditures are not separately required to be incurred because of various reasons as given above. Such an approach of the revenue cannot be upheld and the ALP of the transaction cannot be taken at “Nil” because what is required to be analysed is whether the payment made for the services to the AE meets the requirement of Arm’s Length Price or not. The Arm’s Length Price can only be determined under the prescribed provisions of law that is, by carrying out comparability analysis by comparing the controlled transactions with uncontrolled transactions under prescribed
13 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 methods. Accordingly, we reject the finding of the DRP that, no services has been rendered by the assessee and, therefore, the Arm’s Length Price of the service availed by the assessee from its AE should be taken at “Nil”.
Now, whether the payment and the margin on these services are to be subsumed with other transactions, that is, whether all the transactions are to be aggregated for determination of ALP and would be covered under the overall profit margin worked out under the TNMM. As discussed in earlier part of our order, the intra-group services were stated to be inextricably linked with the manufacturing segment and hence it has been contended that the margin earned on the overall assets as well as the operations have to be aggregated. Since, the assessee’s operating profit margin over total cost is much higher, that is 19.77% as compared to the average profit margin of comparables arrived at 10.25% and, therefore, it has been contended that, such a high margin will take care of the payment made for intra-group services. In theory this contention of the assessee appears to be tenable, however the onus is on the assessee to demonstrate, whether the two AEs have treated the international transactions as a single transaction or is attributed to the aggregate package or not. If the assessee is able to demonstrate that the transaction of intra-group services are inextricably linked with the overall business activities undertaken by the assessee which herein this case is ‘manufacturing’ and has a overall effect on net income or loss in the final result then, such a transaction can be aggregated for the purpose of determining the Arm’s Length Price of the transactions between the AEs. Under the facts and circumstances of the 14 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 case, we are of the opinion that, this matter needs to be restored back to the file of the AO/TPO to examine whether the transaction of intra-group services are inextricably linked with the manufacturing and overall business activities carried out by the assessee. The primary onus would be on the assessee to provide necessary details and explain as to how these services provided by the AE can be subsumed or can be aggregated with the overall business activities. If it is found that all the transactions are to be aggregated then definitely under the TNMM and given the high profit margin of the assessee, no separate benchmarking would be required qua the intra-group services. In case, if it is found that these transactions needs to be separately benchmarked, then needless to say that, proper comparability analysis has to be carried out by following prescribed method under the Transfer Pricing provisions. With these directions, the issue of Transfer Pricing is set aside to the file of the TPO / AO for fresh and proper analysis after giving due and effective opportunity to the assessee to present its case properly.
So far as second issue relating to adjustment to closing stock on account of CENVAT under section 145A, the only contention raised by the Ld. Counsel before us is that, the same treatment should be given to the opening stock also in line with the decision of Hon’ble Bombay High Court in the case of CIT vs Mahalakshmi Glass Works Private Limited, reported in [2009] 318 ITR 116. Ld. DR admitted that, this issue may be set aside to the file of the AO to follow the principle laid down by the Hon’ble Bombay High Court.
15 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 12. On the perusal of the impugned orders, we find that, DRP has referred to the fact that in AY 2006-07, the assessee has not pressed this issue. However, there cannot be an estoppel to the assessee to contend the issue if a proper adjustment is required to be made in accordance with the provision of section 145A. If the difference in the valuation of closing stock is on account of CENVAT amount and has been added to the closing stock, then same treatment has to be given in the opening stock. This principle has been upheld by the Hon’ble jurisdictional High Court. Accordingly, we set aside this issue to the file of the AO apply the principle laid down by the Hon’ble Bombay High Court in the case of CIT vs. Mahalakshmi Glass Works Private Limited (supra) and grant consequential relief to the assessee.
The third issue relates to addition on account of reconciliation on the basis of AIR information. It has been pointed out before us, in the earlier year, the Tribunal has set aside this issue to the file of the CIT(A) on this issue.
Both the parties agreed that, this matter should be restored back to the file of the AO for this year on the similar line of directions. We find that the addition has been made on account of un-reconciled ITS data based on AIR Information. This precise issue had come up for consideration before the Tribunal, wherein, the matter was set aside to the file of the CIT(A) after observing and holding as under:- “9. In this regard, the learned Counsel for the assessee submitted that AIR data amounting to Rs.65,93,498, the assessee successfully reconciled to the extent of Rs.52,93,803 that constitute 80% of the entire transaction. Regarding the 16 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 balance of Rs.12,99,690, the Assessing Officer did not provide the necessary details to enable the assessee to reconcile the same. It is a settled issue that merely non-reconciliation of the AIR data does not lead to sustainable addition in the assessment. In our opinion, there is a need for remanding this issue to the file of the Assessing Officer. Consequently, we set aside the impugned order passed by the learned CIT(A) on this issue and restore the issue back to his file with a direction to furnish requisite specific information to the assessee calling for reconciliation. Normally, the AIR data is generic as well as general in nature. The Assessing Officer is required to first examine the specific of the transaction that require reconciliation. Thus, ground no.3, is allowed for statistical purposes”
In this year also, we set aside this issue to the file of the AO (because the matter has come through DRP route before us) and direct him to furnish all the requisite information to the assessee and after calling for the re-conciliation, the issue may be decided accordingly. Thus, these grounds are treated allowed for statistical purposes.
So far as short-deduction of TDS, it has been pleaded by the Ld. Counsel that, directions should be given to the AO for verifying the same and give the credit for TDS in accordance with the law. Accordingly, we direct the AO to examine this fact and to give credit for taxes on account of TDS after verification. Accordingly, the ground on this score is allowed for statistical purposes.
Regarding last ground, it has been stated that, the same is premature and accordingly the said ground is dismissed.
17 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 18. Accordingly, appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 16th September, 2016. Sd/- Sd/- (आर सी शमा�) (अिमत शु�ला) लेखा सद�य �याईक सद�य (R C SHARMA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 16th September, 2016. ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT/DRP-2 / Concerned___, Mumbai. 4) The CIT-4/DIT - Concerned___, Mumbai 5) िवभागीय �ितिनिध “के”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “K” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /