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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI VIJAY PAL RAO & SHRI JASON P BOAZ
Per VIJAY PAL RAO, JM:
These two appeals filed by the assessee are directed against the assessment order dated 29/10/2012 passed under section 143(3) r.w.s. 144C of the IT Act,1961 (‘the Act’ for short) in pursuance to the directions of the DRP dated 28/8/2012 for the assessment year 2008-09.
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 2 of 23 2. First we will take up IT(TP)A No.1679/Bang/2012. The assessee is engaged in the business of production and sale of nutritional and dietery supplements for weight management and personal care. The assessee has obtained relevant technology and know-how from its group companies. The assessee has also outsourced the manufacturing activity to third party manufacturer M/s.Litaka Pharma Ltd. During the year under consideration, the assessee has reported the following international transaction with its AE :
Accordingly, the AO made a reference u/s 92CA of the Act to the TPO for determination of the ALP in respect of international transaction carried out by the assessee with its AE. The TPO, vide orders dated 31/10/2011, determined ‘nil’ ALP for transaction of administrative services fee paid by the assessee to its AE by holding that the assessee did not receive any services from its AE. The TPO was of the view that the assessee did not derive any benefit from paying administrative service fee to the AE because the assessee was incurring losses. Accordingly, the TPO proposed upward adjustment of Rs.5,84,60,332/- towards
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 3 of 23 administrative service fee. Consequently, the AO framed a draft assessment dated 26/12/2011 whereby apart from making TP adjustment as proposed by the TPO, the AO has also made other disallowances/additions on account of royalty payment, doubtful advances written off and disallowance of administrative service fee (ASF) by invoking the provisions of sec.40A(2) of the Act.
The assessee raised objections against the draft assessment order before the DRP but could not succeed as the DRP has rejected the objections of the assessee while passing the directions dated 28/8/2012. Consequently, the AO passed the final order dated 29/10/2012. Aggrieved by the directions of the DRP and the consequential assessment order, the assessee filed the present appeal before the Tribunal.
The assessee has raised the following grounds in Form No.36 which were subsequently modified vide letter dated 31/8/2015. The grounds raised by the assessee after modifications are as under:
“The grounds mentioned herein are without prejudice to one another. 1. That on the facts and in the circumstances of the case the order passed by the learned (Ld.) Assistant Commissioner of Income-tax, Circle 11(4) Bangalore('Assessing Officer' or 'AO')/the Deputy Commissioner of Income-tax (Transfer Pricing) - V, Bangalore ('Transfer Pricing Officer' or 'TPO') and the Ld. Dispute Resolution Panel, Bangalore ('the Panel') is perverse, erroneous on facts and bad in law.
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 4 of 23 2. (a) That on the facts and circumstances of the case and in law, the Ld. AO and the Ld. Panel erred in disallowing a sum of Rs. 47,64,201 being 25% of Rs.1,90,56,804 representing turnover based royalty. (b) That without prejudice to the above, even assuming but not admitting that royalty of Rs.47,64,201 is spent towards acquisition of capital asset, the Ld. AO and the Ld. Panel erred in not granting depreciation on the said amount as per the provisions of Section 32(1)(ii) of the Income-tax Act, 1961 ('the Act') read with Rule 5(1) of the Income -tax Rules, 1962.
Disallowance of doubtful advances written off 3(a) On the facts and circumstances of the case and in law, the Ld AO and Ld DRP erred in not considering the correct nature of advances written off and thereby disallowing an amount of Rs. 1,14,05,413/-. 3(b) On the facts and circumstances of the case and in law, the Ld AO and Ld DRP should have appreciated that amount written off as advances is nothing but the expenditure payable to the agent against the amount receivable from it towards cash collected by it. 3(c) On the facts and circumstances of the case and in law, the Ld AO and Ld DRP should have appreciated that it is actual write off of expenditure incurred and allowable either under section 28 or section 37(1) of the Act.
(a) That on the facts and circumstances of the case and in law, the Ld. AO and the Ld. Panel erred in disallowing administrative fee of Rs. 4,81,97,802 by invoking the provisions of section 40A(2) of the Act. (b) That the Ld. AO and the Ld. Panel erred in invoking the provisions of section 40A(2) of the Act on an international transaction. 5.(a) That the Ld. AO, Ld. TPO and the Ld. Panel erred on facts and in law in holding that the international transaction of payment of administrative services fee amounting to Rs. 5,84,60,332 to associated enterprises (AE) does not satisfy the arm's
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 5 of 23 length principle. (b) That the Ld. AO, Ld. TPO and the Ld. Panel erred in holding that the administrative services fee paid by the appellant is not at arm's length, on the basis of using inappropriate methodology and incorrect allegations/ presumptions. (c) That the Ld. AO and the Ld. Panel have erred on facts and in law in not appreciating the benefit and corresponding economic or commercial value of administrative support services rendered by the overseas associated enterprises. 6. That on the facts and circumstances of the case and in law, the Ld. AO and the W. Panel erred in considering returned loss of Rs. 3,03,76,816 as per the original return of income as against returned loss of Rs. 3,67,17,5 24 as per the revised return of income. 7. The Ld. AO has erred in charging interest under section 234B and 234D of the Act at Rs. 63,23,989 and Rs. 7,96,230 respectively. 8. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this appeal.”
Ground No.1 is general in nature and does not require specific adjudication.
Ground No.2: Regarding 25% of the royalty disallowed by the AO and treating the same as capital expenditure. The assessee entered into a license and technical assistance agreement (royalty agreement) with its parent company Herbalife International Inc.(HII) on 10/11/1999 for licensing of the technical information including method of manufacture and improvements with respect to the products and technical services. The royalty agreement provides for payment of consideration to the parent company for using know-how and technical assistance
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 6 of 23 services amounting to a sum of USD 2 million and the royalty of 5% of aggregate net retail sales during each calendar month. During the year under consideration, the assessee has paid aggregate royalty of Rs.1,90,56,804/-. The AO has disallowed 25% of the royalty expenditure by holding that the same constitutes capital expenditure and consequently made an addition of Rs.47,64,201/- to the total income of the assessee. The AO was of the view that through provisions of benefits/ services under the royalty agreement, the parent company of the assessee has assisted the assessee in making its entire set up and thus the benefit received by the assessee is of enduring nature. Accordingly, consideration paid for such benefit is treated partly towards capital and partly towards revenue. The DRP upheld the view of the AO and confirmed the disallowance.
Before us, the learned authorised representative of the assessee has pointed out that an identical issue came up before this Tribunal for assessment year 2004-05 in ITA Nos.1290/Bang/2007 wherein the Tribunal has decided this issue in favour of the assessee by treating the payment of royalty as revenue expenditure. He has further pointed out that for the assessment year 2004-05, the Hon'ble jurisdictional High Court has upheld the finding of the Tribunal that treating the payment of royalty made by the assessee to its AE do not lead to accretion of capital asset or benefit of enduring nature to the assessee. Thus the learned authorised representative of the assessee has
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 7 of 23 submitted that the issue is covered in favour of the assessee by the decision of this Tribunal as well as by the Hon'ble jurisdictional High Court. On the other hand, learned DR has relied upon the orders of the authorities below.
We have considered the rival submissions as well as the relevant material on record. At the outset, we note that an identical issue has been considered and decided by this Tribunal in assessee’s own case for assessment year 1999-00, 2000-01 and 2004-05. The findings of the Tribunal for the assessment year 2004-05 have been upheld by the Hon'ble jurisdictional High Court vide its decision dated 28/10/2014 in ITA 3/2009. The substantial question of law admitted by the Hon’ble High Court for its consideration is reproduced in para.2 of the said decision as under:
“Whether the Appellate Authorities were correct in holding that royalty payments made for transfer of technical know how for manufacturing process in engineering input scientific and practical information and formula research data design and manufacturing procedure know how raw material data expertise specifications for designing and manufacturing etc to Herbalife International Incorporate cannot be treated as- capital in nature to the extent of 25% as held by the Apex Court in 232 ITC 359? ”
Thus it is clear that the issue involved is identical and while deciding the said substantial question of law, the Hon’ble High Court has held in para.5 to 9 as under:
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 8 of 23 “5. We have heard the learned counsel for the parties. 6. Clause 6.2 of the License and the Technical assistance agreement reads as under: 6.2: Ownership of Materials: Licensee expressly acknowledges and agrees that, except as specifically provided in this Agreement, at no time shall it acquire or retain, or appropriate for its own use, any right, title or interest in or to any Technical Information. All files, lists, records, documents, drawings and specifications which incorporate or refer to all or a portion of the Technical Information shall remain the sole property of Licensor. Such materials shall be promptly returned (a) upon Licensor's reasonable request, or (b) upon termination of this Agreement, whichever is earlier. 7. Similarly Clause 7.1, 7.2 and 7.3 reads as under: 7.1: Term and Renewal. The term of this Agreement shall commence on the effective date hereof and shall remain in effect until December 31, 2000, unless terminated earlier in accordance with Section 7.2 or 7.3 below. The Agreement shall automatically be renewed on the same terms and conditions for periods of one year, unless Licensee or Licensor has been notified otherwise not later than 90 days before the 7.2: Termination. Either party may terminate this Agreement, with or without cause, upon 90 days prior written notice given to the other party.
This Agreement may be terminated by Licensor at any time by written notice of termination, effective on the date such notice is received, after the occurrence of any of the following events: (a) Any breach of Licensee's obligations under Articles VI or VII of this Agreement; (b) Upon the insolvency or bankruptcy of Licensee, the inability of License to pay its debts as they fall due or upon the appointment of a trustee or receiver or the equivalent for Licensee, or upon the institution of proceedings under the laws of the
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 9 of 23 Territory relating to the dissolution, liquidation, winding up, bankruptcy, insolvency or the relief of creditors, if such proceedings are not terminated or discharged within thirty days; or (c) Upon a substantial change of management or ownership of Licensee or upon the acquisition of direct or indirect control of Licensee by any person which manufactures or markets products competing or likely to compete with the Products. 7.3: Cure Period If either party shall commit any breach or be in default of its duties and obligations under this Agreement, other than those set forth in Section 7.2(a), the non-breaching party shall give to the breaching party written notice of such breach or default and shall request that such breach or default be cured. If the breaching party shall fall to cure such breach or default within thirty days of the date of the notice of breach or default, the non-breaching party may terminate this Agreement immediately by gluing written notice of termination to the breaching party. 8. These two provisions have not been looked into by any of the authorities. The said provisions disclose that the agreement entered into between the parties provides for renewal automatically. Clause 6.2 makes it abundantly clear that no proprietary interest shall be transferred to the assessee in respect of the files, lists, records, documents, drawings, specifications and other technical information which was furnished to the assessee by the licensor. Under these circumstances, it cannot be said that the assessee got any enduring benefit in the said agreement which is a condition precedent for treating the payment as capital expenditure. Therefore, rightly the order passed by the Assessing Authority is set- aside by the Appellate Authority and held the entire amount as revenue expenditure. 9. In that view of the matter, we do not see any merit in the appeal. Accordingly, substantial questions of law is answered in favour of the assessee and against the revenue. Accordingly, the appeal is dismissed.”
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 10 of 23 8. It is pertinent to note that for the year under consideration, royalty paid by the assessee was under the same agreement as it was paid for the assessment year 2004-05. The Hon’ble High Court has decided this issue after considering the relevant clauses of the agreement and therefore, the issue of payment of royalty is now covered by the decision of the Hon’ble High Court in the assessee’s own case. Respectfully following the decision of the Hon'ble jurisdictional High Court, we allow the claim of the assessee and the addition made by the AO on this account is deleted.
Ground No.3 is regarding disallowance of doubtful advances written off. The assessee appointed M/s.Workline Management Services (‘WMS’ for short) vide agreement dated 1/9/2006 for fulfilment of sale of its products in North East region of India by providing logistic, warehousing and transportation services. WMS was also responsible for collecting sale proceeds from independent distributors and remitting the same to the assessee. During the year under consideration, assessee has shown sales collection outstanding from WMS amounting to Rs.1,14,05,413/-. The assessee wrote off the said amount. During the course of assessment proceedings, the assessee submitted that the said amount was not remitted by WMS to the assessee and accordingly the assessee has written off the said amount. The AO did not accept the claim of the assessee and disallowed the claim of the assessee on the ground that the
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 11 of 23 assessee did not produce any break-up of the amounts as well as advances and as per the AO the advances were capital in nature. The assessee raised objections before the DRP but could not succeed.
9.1 Before us, learned authorised representative of the assessee has submitted that during the year under consideration, WMS did not remit the amount of Rs.1,14,05,413/- being sales collection. The assessee, even after follow up could not realize that amount from WMS and accordingly the assessee decided to write off the said amount receivable from WMS. The learned authorised representative of the assessee has submitted that this amount of Rs.1,14,05,413/- represents the sales made at four stations viz., Guwahati, Imphal, Dibrugarh, Silchar from September 2006 to October,2007. Further, learned authorised representative of the assessee has referred to the additional evidence at pages 878 & 879 of the paper book and submitted that as per the minutes of meeting held on 25th, 26th September, 2009, a decision was taken to adjust the payables to WMS from receivables and accordingly the net receivables from WMS would be restricted to Rs.1,34,000/- instead of Rs.1,14,05,413/-. Thus, the learned authorised representative of the assessee has submitted that the assessee itself has revised the amount written off by adjusting the amounts payable to WMF and therefore, the net amount receivable written off would be Rs.1,34,000/-.
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 12 of 23 Hence, the additional evidence filed by the assessee may be considered for adjudication of the issue.
9.2 On the other hand, learned DR has submitted that the assessee failed to produce the requisite details and supporting evidence before the AO. Even before the DRP, the assessee failed to produce any supporting evidence. Therefore, the AO was justified in disallowing the claim of the assessee. He has relied upon the orders of the authorities below.
9.3 We have considered the rival submissions as well as the relevant material on record. New facts have been brought before us by the assessee stating that the assessee has now restricted the claim after netting the amount payable to WMS to the balance of amount Rs.1,34,000/- only which was to be written off on this account as against the original claim of Rs.1,14,05,413/-. Further, the assessee has produced additional evidence which is required to be verified and examined. Accordingly, in the facts and circumstances and in the interest of justice, we set aside this issue to the record of the AO to adjudicate the same after considering the facts as well as the additional evidence brought before us. This ground is partly allowed for statistical purposes.
Ground No.4 regarding disallowance of administrative fee by invoking the provisions of sec.40A(2) of the Act. During the year under consideration, the assessee had paid administrative service fee of Rs.5,84,60,332/- to its AE. Out of the above,
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 13 of 23 Rs.5,50,24,791/- was paid to HII and Rs.34,35,541/- to Herbalife International Singapore Pte Ltd. (‘Herbalife Singapore’). The AO, apart from making disallowance of the said amount under TP provisions and treating the ALP at nil also disallowed part of the payment amounting to Rs.4,81,97,802/- under section 40A(2) of the Act. The AO held that out of the total amount paid to AE, only Rs.1,02,62,530/- equivalent to 2% of the turnover is allowable. Thus, the AO treated the balance amount as excess payment to the related party.
10.1 The assessee challenged the action of the AO before the DRP but could not succeed.
10.2 Before us, learned authorised representative of the assessee has submitted that the provisions of sec.40A(2) are not applicable to the said transaction when the assessee has already reported the transaction as international transaction which was referred by the AO to the TPO for determination of the ALP. Further the provisions of 40A(2) are not automatic provisions but the same can be invoked only when payment made to specified persons is found to be excessive or unreasonable. The AO has not conducted any inquiry or investigation and disallowed the amount on the basis of estimate. Thus, in the absence of any exercise of determining the excessive or unreasonableness of the payment made by the assessee, the disallowance made by the AO is not justified. He has relied upon the decision of the co-ordinate
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 14 of 23 bench of this Tribunal in the case of Cisco Co. Pvt. Ltd. vs. JCIT (ITA No.1558/Bang/2012 dated 31/8/2015) and submitted that the AO has failed to point out the specific instances which are excessive or unreasonable and has merely made an adhoc disallowance. He has also relied upon the following decisions:
i. Johnson & Johnson Ltd. vs. CIT (ITA No.3289 & 7439(Mumbai ITAT) ii. CIT vs. Modi Revion Pvt. Ltd. (78 ITR 342 (Delhi High Court) iii. M/s.Goldcrest Exports vs. ITO (ITA No.442/Mum/2009)(Mumbai ITAT) Thus, learned authorised representative of the assessee has asserted that the payment of administrative service fee paid to AE is an international transaction and subjected to the examination under section 92CA of the Act and hence the same should not be evaluated under the provisions of sec.40A(2) of the Act. In support of his contention, he has relied upon the decision of the special bench of the Tribunal in the case of Aztex Software & Technology Services Ltd. (294 ITR 32).
10.3 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that the AO has made the additions only as an alternative measure apart from TP adjustment.
10.4 We have considered the rival submissions as well as the relevant material on record. This transaction of payment of
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 15 of 23 administrative service fee has been declared by the assessee as international transaction and is also subjected to TP provisions of sec.92CA, however, the AO made an alternative addition by invoking the provisions of sec.40A(2) of the Act. The AO allowed only 2% of the turnover amounting to Rs.1,02,62,530/- and the balance of Rs.4,81,97,802/- has been disallowed under section 40A(2) of the Act. There is no dispute that the transaction has been reported by the assessee as international transaction which was also accepted by the AO and the TPO as an international transaction. Thus, once a particular transaction is admitted as international transaction then the same falls in the ambit of the provisions of X chapter of the Act which are specific provisions to deal with such transactions between the assessee and its AE. Therefore, once the transaction is undisputedly subject matter of Chapter X of the IT Act, then the other general provisions of the Act cannot be applied simultaneously. The AO, having considered the transaction being international transaction and making a reference to the TPO for determination of the ALP cannot go back to the provisions of sec.40A(2) for determining the reasonableness of the price paid by the assessee. Our attention was invited by the learned authorised representative of the assessee that for the assessment year 2001-02 to 2002-03 the payment in question was subjected to MAP and only 25% is charged to tax. Therefore, it was accepted by the department that the services were rendered by the AE to the assessee in India.
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 16 of 23 We further note that the AO has not conducted any inquiry or investigation to find out the excessiveness of the payment made by the assessee to its AE. 10.5 The co-ordinate bench of this Tribunal in the case of M/s.Cisco Systems Capital (India) Pvt. Ltd., in ITA 1558/Bang/12 held in para.11 as under:
“11. Having heard both the parties and having considered the rival contentions and also the material on record, we find that the assessee has filed before us on 14-7-2014, the break-up of the expenditure as per profit and loss account during the financial year 2007-08. From the said details, it is seen that the services rendered by Cisco India to the assessee are in the nature of Financial and Accounting services, legal and tax related issues information system and related issues, Treasury services, Asset Management/residual value analysis, credit analysis and deal execution. The AO has not doubted the rendering of services by Cisco India to the assessee but has restricted the allowable expenditure to 5% of the operating expenses which means that he has only doubted the reasonableness of the quantum of payment. But to invoke the provisions of sec.40A(2) of the Act, as rightly pointed out by the learned counsel for the assessee, the AO cannot make an ad hoc disallowance u/s 40A of the Act but has to determine the expenses which are excessive and unreasonable. The AO, in the case before us, has failed to point out any particular expenditure which according to him, is excessive or unreasonable but has made an ad hoc disallowance which is not sustainable. Further, as rightly pointed out by the learned counsel for the assessee, disallowance u/s 40A(2) can be made only if the alleged excessive and unreasonable payment is made to any person enumerated under clause (b) of sub-sec.(2) of sec.40A of the Act. In the case before us, the AO has not brought out anything on record to show that Cisco India Ltd., falls in any of the categories of persons enumerated under clause (b) of sub-section (2) of sec.40A of the Act. The recipient of the payment i.e. Cisco India, definitely does not fall under any of the categories of persons under clause (b) of sub-sec.(2) of sec.40A. The AO has not carried out any exercise to bring on record that Cisco India has got substantial interest in the business or profession of the assessee or that it falls in any of the categories of persons. In view of the same, we are of the
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 17 of 23 opinion that the disallowance u/s 40A(2)(b) of the Act is not called for. 11.1 As regards the alternative contention of the learned counsel for the assessee that the transaction between the assessee and Cisco India Ltd., being an international transaction, the same has already been referred to the TPO for determination of the ALP and therefore it cannot be considered for disallowance u/s 40A of the Act, since we have already held that the provisions of sec.40A are not attracted, we do not see the need to adjudicate this contention of the assessee. ”
10.6 In the case in hand, when the AO has not conducted any inquiry or brought out any material on record to prove that payment made by the assessee is excessive and unreasonable making an adhoc disallowance by invoking the provisions of sec.40A(2) of the Act is not justified. Accordingly by following the decision of the co-ordinate bench of the Tribunal as well as in view of the facts and circumstances of the case as discussed above, we set aside the orders of the authorities below qua this issue and delete the addition made under section 40A(2) of the Act.
Ground No.5 regarding TP adjustment in respect of administrative service fee: 11. During the year under consideration, the assessee paid administrative service fee of Rs.5,84,63,222/- to its AE. In the TP analysis, the assessee has adopted TNMM at the entity level as the most appropriate method to determine the ALP of the international transaction. The TPO has observed that there was no evidence to show that service was rendered and the same was
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 18 of 23 beneficial to the assessee. Accordingly, the TPO determined the ALP of the administrative service fee payment at Nil and proposed adjustment of the said amount. The assessee challenged the action of the TPO by raising objections before the DRP but could not succeed.
11.2 Before us, learned authorised representative of the assessee submitted that the TPO has no jurisdiction to hold that the assessee has not received any service and the ALP of the payment is nil. In support of his contention, he has relied upon the judgment of the Hon’ble Delhi High Court dated 29/03/2012 in ITA Nos.1068 & 1070/2011 in the case of CIT vs. EKL Appliances. He has also relied upon the decisions of the co- ordinate bench of this Tribunal dated 4/1/2013 in the case of M/s.Festo Controls Pvt. Ltd. vs. DCIT in ITA No.969/Bang/2011. The Tribunal, by following the decisions of the Hon’ble Delhi High Court has held that the TPO has to work out the ALP of the international transaction by applying the method recognized under the Act. Further, TPO could not question the commercial expediency of the transaction and payment made by the assessee. The learned authorised representative of the assessee has also referred to the additional evidence in support of his claim of rendering of service by the AE.
11.3 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that when the assessee
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 19 of 23 has failed to prove that it has received services from the AE then the ALP determined at nil is justified.
11.4 We have considered the rival submissions as well as the relevant material on record. We find that the powers and jurisdiction of the AO and the TPO under the provisions of chapter X along with rule 10B has been examined by the Hon’ble Delhi High Court in the case of Ekta Appliances Ltd. (supra) in paras.21 and 22 as under:
“21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred “wholly and exclusively” for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense;
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 20 of 23 there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. ”
11.5 We further note that the co-ordinate bench of this Tribunal in the case of Festro Controls Pvt.Ltd. vs. DCIT in IT(TP)A No.969/Bang/2011 dated 4/1/2013 has followed the above view in paras.12 to 15 as under: “12. Our attention was also drawn to the decision of the Hon’ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., ITA No.1068/2011 dated 29.03.2012. In the aforesaid decision, the assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/ brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) & Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, the Hon’ble Delhi High Court held that the “transfer pricing guidelines” laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the form and substance of the transaction are the same but
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 21 of 23 arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The OECD guidelines should be taken as a valid input in judging the action of the TPO because, in a different form, they have been recognized in India’s tax jurisprudence. It is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same. 13. In light of the aforesaid decisions, it was submitted that the approach of the TPO is not proper and the same should be held as not valid in law. 14. The ld. DR relied on the order of the TPO. 15. We have considered the rival submissions and are of the view that the stand taken by the assessee in this regard deserves to be accepted. It is clear from the decisions referred to above that the TPO has to work out the ALP of the international transaction by applying the methods recognized under the Act. He is not competent to hold that the expenditure in question has not been incurred by the assessee or that the assessee has not derived any benefits for the payment made by the assessee and therefore he cannot consider the ALP as NIL. We hold accordingly. ”
Thus in view of the judgment of the Hon’ble Delhi High Court as well as the decision of the co-ordinate bench of this Tribunal, TPO is not empowered to determine the ALP at nil though the quantum/size has to be decided along with ALP to be determined as per Chapter X of the Act. The assessee has also filed additional evidence in support of its claim that the AE has rendered services. Since additional evidence filed by the
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 22 of 23 assessee is relevant and material document in adjudicating the issue, and further when the TPO has not determined the ALP as per the provisions of chapter X as well as the IT Rules, therefore, in the facts and circumstances in the case as well as in the interest of justice, the issue is set aside to the record of the AO/TPO for adjudication of the same after considering the relevant evidence as well as in the light of the above observations.
The last ground raised by the assessee is regarding levy of interest under section 234A and 234B of the Act. Levy of interest u/ss.234A and 234B is mandatory and consequential. Therefore, no separate finding is required.
The assessee has also filed another appeal in IT(TP)A No.184/Bang/2013 against the same impugned order. We find that the appeal of the assessee is a duplicate appeal filed under some mis-understanding. Accordingly, the appeal of the assessee in IT(TP)A No.184/Bang/2013 is dismissed as infructuous in view of the other appeal of the assessee.
In the result, IT(TP)A No.1679/Bang/2012 is partly allowed and IT(TP)A No.184/Bang/2013 is dismissed.
Pronounced in the open court on 09th October, 2015.
sd/- sd/- (Jason P Boaz) (Vijay Pal Rao) ACCOUNTANT MEMBER JUDICIAL MEMBER eksrinivasulu,sps
IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013 M/s.Herbalife International India Pvt. Ltd. Page 23 of 23 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order
Assistant Registrar Income-tax Appellate Tribunal Bangalore