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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Assessing Officer consequent to the direction of the Dispute Resolution Panel, for the assessment year 2007-08.
The first issue arises for consideration is with regard to disallowance of `55,23,653/- towards management fees paid by the assessee to its Associate Enterprise.
Shri S.P. Chidambaram, the Ld.counsel for the assessee, submitted that the assessee entered into an Intra-group services agreement with AB Mauri (UK) Ltd. to avail support services primarily in the nature of marketing, finance, technology and human resource. The management teams like the Chief Executive Officer, Director (Marketing & Finance) besides Director (Technical & HR) who visit the manufacturing locations and offices in India regularly to assist and advise on the management. The assessee paid cost plus 5% as management charges to AB Mauri (UK) Ltd. for availing the above management services. In the transfer pricing documentation, the assessee has benchmarked its international transactions by aggregating all the transactions under Transaction Net Margin Method. The Ld.counsel further submitted that The margin earned by the assessee is 8.06%. However, the comparable companies’ was 7.18%. The Transfer Pricing Officer while completing the transfer pricing assessment, found that the international transactions of the assessee is at arm’s length.
However, the Transfer Pricing Officer found that there was only a marginal improvement in the revenue. Therefore, she concluded that the payment of management fees is not required and consequently held the Arm's Length Price as “nil”. Referring to the order of the Transfer Pricing Officer, the Ld.counsel submitted that the management fees paid by the assessee was determined “0” and there was an upward adjustment of `1,35,94,560/-. However, the Dispute Resolution Panel reduced the same to `55,23,653/-. The Ld.counsel submitted that the Transfer Pricing Officer as well as the Dispute Resolution Panel have not compared the payment made by the assessee with comparable companies. Without making comparison, merely because there was no improvement in the revenue, the Transfer Pricing Officer made upward adjustment.
According to the Ld. counsel, it is for the assessee to decide whether the payment is required or not and not by the Transfer Pricing Officer. Irrespective of the improvement in revenue or profit, it has to be seen whether the payment of management fees is made for business purpose. When the payment is made for business purpose, it is not for the Transfer Pricing Officer or Dispute Resolution Panel to disallow the claim of the assessee or to make adjustment without considering any comparable cases as found in the Income-tax Act and Rules made thereafter.
On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that the assessee has not demonstrated either before the Transfer Pricing Officer or before the Dispute Resolution Panel what economic and commercial benefits were received from its Associate Enterprise on payment of management fees. According to the Ld. D.R., even after specifically required by the Transfer Pricing Officer, the assessee could not file any material to suggest tangible growth in the economic front.
Therefore, in the absence of any improvement in the revenue on payment of management fees, the Transfer Pricing Officer has rightly found that there is no justification in making the payment, therefore, she made the adjustment. After considering the submission of the assessee, the Dispute Resolution Panel has restricted the upward adjustment to the extent of `55,23,653/-.
We have considered the rival submissions on either side and perused the relevant material available on record. For making adjustment in transfer pricing matter, five methods prescribed under Rule 10B of Income-tax Rules, 1962 have to be followed. In the case before us, the Assessing Officer has not followed any method.
Though the assessee claimed that the Transaction Net Margin Method is the most appropriate method, the Transfer Pricing Officer has not discussed in her order with regard to appropriate method and she simply found that since there was no improvement in the revenue, the payment of management fees is not justified. This Tribunal is of the considered opinion that when the assessee claims that management fee was paid in respect of the services provided by the Associate Enterprise outside the country, the payment made by the assessee has to be compared with similarly placed companies in India and whether the payment made by the assessee is at arm’s length. The Transfer Pricing Officer and the Dispute Resolution Panel are expected to compare the payment with that of the comparable companies in India on the basis of method prescribed under Rule 10B. Unfortunately, both the Transfer Pricing Officer and the Dispute Resolution Panel have not taken such pain in comparing the payment made by the assessee with that of the comparable companies in India by applying provisions of Rule 10B.
Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the issue of payment of management fee is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter to the Transfer Pricing Officer for reconsideration. The Transfer Pricing Officer shall compare the payment made by the assessee with that of payment made by comparable companies in India and point out whether the payment made by the assessee is really at arm’s length. The Transfer Pricing Officer shall examine the issue in the light of the method prescribed under Rule 10B for the purpose of determination of the Arm's Length Price.
The next issue arises for consideration is with regard to depreciation on non-compete fee.
Shri S.P. Chidambaram, the Ld.counsel for the assessee, submitted that the assessee claimed depreciation on the payment made to various persons. According to the Ld. counsel, the identical payment made by the assessee in assessment year 2003- 04 was confirmed by this Tribunal vide order dated 10.07.2009.
Even though the Dispute Resolution Panel referred the order of the Tribunal, has confirmed the order of the Transfer Pricing Officer, only on the ground that the an appeal filed by the Revenue before the High Court against the order of the Tribunal is pending before the High Court. According to the Ld. counsel, mere pendency of appeal before the High Court cannot be a reason to disallow the claim of the assessee.
On the contrary, Dr. Milind Madhukar Bhusari, the Ld. Departmental Representative, submitted that no doubt, for the assessment year 2003-04, this Tribunal allowed similar depreciation on non-compete fee. Now, the matter is pending before the High Court. Therefore, the DRP has confirmed the order of the Transfer Pricing Officer.
We have considered the rival submissions on either side and perused the relevant material available on record. For the assessment year 2003-04, on identical set of facts, this Tribunal allowed the claim of the assessee. Even though this fact was brought to the notice of the Dispute Resolution Panel, Dispute Resolution Panel simply rejected on the ground that the issue has not reached finality. This Tribunal is of the considered opinion that due to pendency of the appeal before the High Court, this Tribunal cannot take a different view on the issue. When this Tribunal in the earlier assessment year allowed the claim of the assessee depreciation on non-compete fee, mere pendency of appeal before the High Court cannot be a ground to disallow the claim of the assessee. It is nobody’s case that the order of this Tribunal is stayed by the High Court. In those circumstances, we are unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside and the Assessing Officer is directed to allow the depreciation on non-compete fee.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced on 5th May, 2016 at Chennai.