The order of the Bench was delivered by
George George K, Judicial member - This appeal arises out of assessment order dated 12.9.2012 passed u/s 143(3) read with section 144 C of the Act, in relation to assessment year 2008-09.
2. The grounds raised read as follows :—
"1. That the assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 12,42,56,100 as against the income of Rs. 10,95,02,380/- returned by the appellant.
2. That the assessing officer erred on facts and in law in making an adjustment of Rs. 1,42,20,920/- to the arm's length price of the 'international transactions' of payment of corporate expense (intra group charges) on the basis of the order passed under section 92CA(3) of the Act by the TPO.
2.1 That the assessing officer / TPO erred on facts and in law in considering the arms length price of international transactions of payment of corporate charges at Rs. 1,580,102 as against Rs. 1,50,81,012 incurred by the appellant, holding that (i) no such service has been received by the appellant (ii) cost are charged on allocation basis and therefore, some of the group cost may be loaded in appellant share of corporate charges.
2.2 That the assessing officer /TPO erred on facts and in law in not appreciating that the payment of corporate charges was validly benchmarked applying TNMM as most appropriate method and that no adverse inference could be drawn on this account.
2.3 That the assessing officer / TPO erred on facts and in law in computing adjustment on account of international transaction of payment of corporate charges without reasonably applying any prescribed methods, thereby, violating the basic principles of TP regulations.
2.4 That the assessing officer/TPO erred on facts and in law in undertaking cost benefit analysis to determine the arms length price of payment of corporate charges without appreciating that cost-benefit analysis is not a prescribed method under Rule 10B of Income Tax Rules, 1963.
2.5 That the assessing officer/TPO erred on facts and in law in applying CUP method for benchmarking the transaction of payment of corporate charges without placing on record any comparable data for comparison.
2.6 That the assessing officer /TPO erred on facts and in law in not appreciating that the expenditure on the payment of corporate charges was wholly and exclusively for the purpose of business of the appellant.
3. That the assessing officer erred on facts and in law in disallowing a sum of s. 5,32,712/- under section 14A of the Act, without appreciating that no expenditure, direct or indirect, was incurred by the appellant in earning the exempt dividend income.
3.1 That the assessing officer/DRP erred on facts and in law in not appreciating that only expenditure having nexus to the earning of exempt income could be disallowed under section 14A of the Act.
3.2 The assessing officer erred on facts and in law in making the aforesaid disallowance by simply applying the formula given in Rule 8D of the Income Tax Rules, 1962, without appreciating that the said rule had no application on the facts of the appellant's case."
2.1 Ground No. 1 is general in nature and no specific adjudication is called for, hence, the same is dismissed. Ground No. 2 to 2.9 relate to transfer pricing adjustment on account of international transactions of payment of corporate charges. Ground No. 3 to 3.2 is with reference to disallowance of a sum of Rs. 5,32,712/- by invoking the provisions of section 14A of the Act read with rule 8D of the Income Tax Rules 1962.
3. The assessee is a wholly owned subsidiary of Roulands Rubber, Denmark. It is engaged in the business of manufacturing of automotive power transmission V-Belts and industrial power transmission V-Belts. For the assessment year under dispute the assessee filed return of income, declaring income of Rs. 10,93,11,580/-. The assessment was completed vide order dated 12.9.2012 under Section 143(3) read with Section 144C of the Act, assessing the income of the assessee at Rs. 12,42,56,100/- after making the following addition :
| "(i) |
Transfer pricing adjustment on international transaction of payment of corporate charges - Rs. 1,42,20,920/- on account of international transaction of payment of corporate charges |
(ii) |
Disallowance u/s 14A -Rs. 5,32,712/-" |
3.1 The assessee being aggrieved is in appeal before us. We shall first adjudicate the transfer pricing dispute and then the disallowance made u/s 14A of the Act.
Transfer pricing adjustment of Rs. 1,42,20,920/- on account of international transaction of payment of corporate charges (grounds 2 to 2.6)
4. During the relevant year, the assessee in terms of agreement dated 20th October, 2006 for availing the technical, marketing and administrative support services has entered into, inter alia, international transaction of payment of corporate charges of Rs. 1,58,01,022/- with its associated enterprises. In the transfer pricing study of the assessee, the said transaction was, for the purpose of benchmarking, aggregated with other international transactions and benchmarked applying TNMM as the most appropriate method with OP/OC as the Profit Level Indicator ('PLI'). The operating profit margin to cost (OP/OC%) of the assessee was shown at 19% which being higher than the weighted average profit margin of 20 comparable companies at 12.48%, the international transactions undertaken by the assessee with associated enterprise was sought to be justified at arms length price.
4.1 The TPO, however, rejected the TNMM applied by the assessee and benchmarked the transaction of payment of corporate charges amounting to Rs. 1,58,01,022/- applying CUP method. The TPO has made the Transfer Pricing adjustment in respect of the said services by observing as under :—
"The assessee has not been able to show that any service has actually passed to it, except partly in the case of Operations and Supply Chain Management where it purchases its raw materials and traded goods from the AEs and due credit has been given for this. No independent party would have made a payment in uncontrolled circumstances for the evident lack of services. Therefore, by the application of CUP, the arm's length of this transaction of payment of service fee is determined at Rs. 7,20,010/- as against Rs. 1,58,01,022 determined by the assessee."
4.2 The Dispute Resolution Panel ("DRP") sustained Transfer Pricing adjustment made by the TPO. However the DRP on an ad-hoc basis increased deduction from 5% as allowed by the TPO to 10% of the total expenditure. The relevant finding of the DRP need as follows :—
"Assessee's submission filed on 22.8.2012 giving the allocation key have been considered expense allocated to India are product, plant administration, selling including PE selling and F.G. & A. Invoices, travel details have been submitted. However, DPR finds that these costs are charged to the assessee not on actual but on allocation basis. In the circumstances, it cannot be denied that some of the group costs may be loaded on this charge out.
The TPO has allowed 5% adhoc deduction on this account. But after examining all the submissions and the economic factors including increase in sales and that as OEM assessee is supplying to large numbers of companies which is not possible unless the product is of high quality and that there is a mark up personnel costs of 3%. DRP is of the view that adhoc allowance of 10% instead of 5% allowed by TPO would be fair as being actually having been incurred wholly for purpose of business."
4.3 The assessee being aggrieved is in appeal before us. The Ld. Counsel for the assessee submitted that Roulands Denmark (assessee's parent company) was taken over by Continental AG, Germany. After the take over, it was submitted that there was a need for change in the business model and accordingly the assessee and Contitech AG Germany (AE) entered into an agreement dated 20th October, 2006, for availing various technical, marketing and administrative support services. It was submitted in terms of agreement between the assessee and its AE, the corporate charges were only on actual basis and on personnel related expenses the AE had charged a mark up of 3% on cost. Accordingly , during the relevant previous year, the assessee had made a payment of a sum of Rs. 1,58,01,022/- to continental AG Germany for the various services in terms of the agreement dated 20th October, 2006. It was further submitted that the above said expenses were in the interest of assessee's business and commercial expediency and the same is to be allowed.
4.3.1 In order to rebut the conclusion arrived at by the TPO/DRP, the assessee by way of additional evidence in terms of application dated 4.7.2014 under rule 29 of the ITAT Rules, has placed on record, the following :
Details |
Summary of invoices raised on the assessee during the financial year 2007-08 |
Detailed break up of invoices on the basis of nature of services |
Summary of man hours spent by various division of the associated enterprise in rendering technical, marketing and administrative services to Contitech group companies |
Copy of invoices raised by the associated enterprise |
|
Nature of services |
Amount (Euros) |
Evidences attached |
Quality Management |
€ 56,000 |
Details of man hours spent by employees in rendering quality management services to Contitech group entities and basis of allocation to India entity
Details of quality management services rendered by Mrs. Rudolph to Contitech India Private Limited
Details of quality visit reports carried by Mrs. Rudolph along with email correspondences
Blue print detailing quality training and inspection plan to be undertaken in India
Sample copy of quality assurance and scrap audit supervised by Mrs. Rudolph |
Industrial Engineering Designs |
€40,000
€12,0000 |
Details of man hours spent by employees in rendering€ Industrial Engineering Design services to Contitech group entities and basis of allocation to India entity
Sample instances of activities carried out by the project team carrying out industrial designs along with email correspondences and drawings and designs
Details of man hours spent by employees in rendering Sales development services to Contitech group entities and basis of allocation to India entity.
Detail of activities carried out by sales development team
Email correspondences substantiating the technical trainings conducted in India
Detail of AAM strategy prepared by sales development team
Email correspondences substantiating that the AE is assisting Contitech India in designing the packaging of the products
Meeting reports for meeting held between the appellant and associated enterprises along with email correspondences and back up documents |
Industrial Sales Services |
€18,000 |
Details of man hours spent by employees in rendering Industrial Sales services to Contitech group entities and basis of allocation to India entity
Detailed Strategic action plan recommended to boos the sales in India along with documentary correspondences |
General management |
€9000 |
Details of man hours spent by employees in rendering general management services to Contitech group entities and basis of allocation to India entity
Details of services rendered by Mr. Claus Peter Spile
Detail of cultural training received by Continental India
Detail of recommended changes suggested by the AE so as to initiate change in management along with study report and email correspondences.
Detail of visit reports prepared by Mr. Clause Peter Spile highlighting HR relates issues. Sales related issues, production related issues to initiate the change management. |
Control Management Services |
€16,000 |
Details of man hours spent by employees in rendering control services to Contitech group entities and basis of allocation to India entity.
Details of services rendered by Mr. Andreas Qual along with agenda of vist. |
Hardware and software installation |
€ 5,899 |
Third party invoice evidencing the price of hardware and software installations made for Continental India |
4.3.2 It is submitted on perusal of the above evidence it can be appreciated that:
| (i) |
the actual expenditure/cost incurred by the associated enterprises in providing technical, marketing and administrative support services to its group companies (including assessee) is identifiable under various service heads, |
(ii) |
the allocation of expenses to the assessee and group companies is on the basis of actual man hour worked by each employee for each entity and |
(iii) |
the services rendered by the employees of associated enterprise to the assessee is clearly evidenced. |
4.3.3 It was prayed that the aforesaid additional evidence sought to be placed on record is very important and has a direct bearing on the transfer pricing dispute involved in the appeal. It was submitted broad details with reference to the services rendered by the AE to assessee was given to the TPO/DRP. However, the complete break up of cost allocated could be obtained from assessee's AE in Germany only subsequent to the proceedings before the TPO and the DRP. Therefore, it was submitted that in the interest of substantial justice and for a proper adjudication of the transfer pricing dispute involved in the appeal, the additional evidence in question need to be admitted in terms of Rule 29 of the Income Tax Appellate rules.
4.4 Ld. DR opposed the admission of the additional evidence. Alternatively, it was submitted by the Ld. DR, in the event additional evidence is admitted on record, the transfer pricing dispute need to be restored to the Ld. TPO for de novo consideration.
4.5 We have heard the rival submissions and perused the material on record. The assessee, in accordance with the terms of service agreement dated 20.10.2006 received various technical, marketing and administrative support service from its AE. The TPO had restricted the payment of service fee to an amount of Rs. 7,20,010/-(5% of the total payment) as against 1,58,01,22/- determined by the assessee. The DRP on its part has made an increase of deduction from 5% allowed by the TPO to 10% of the total expenditure. Broad details of various technical, marketing and administrative support service were furnished to the TPO / DRP. In terms of application dated 4.7.2014 under Rule 29 of the ITAT Rules, the assessee had sought to place on record the summary of invoices raised on the assessee by its AE during the financial year 2007-08. The detailed break up of invoices on the basis of nature of services and the summary of the man hours spent by the various divisions of the AE in rendering technical, marketing and administrative service to Contitech group of companies. It is a case of the assessee that the above said specific details or complete break up of how the cost has been allocated could not be furnished before the completion of the proceedings before the TPO/DRP, since these details were to be obtained form its AE Germany. We find that the details now produced have an important bearing for resolving the transfer pricing dispute and therefore in the interest substantial justice and equity, we admit the same on record. Since the additional evidence is admitted on record the same needs to verified by the TPO/AO. Hence, the transfer pricing dispute of payment of corporate charges is restored to the TPO for de novo consideration. Needless to state the assessee shall be afforded reasonable opportunity of being heard before the matter is decided. It is ordered accordingly.
4.6 In the result, ground No. 2 to 2.9 are allowed for statistical purposes.
Disallowance of Rs. 5,32,712/- as per section 14A of the Act read with rule 8D of the Income Tax Rule 1961. (ground No. 3 to 3.2)
5. During the previous year relevant to the concerned assessment year, assessee was in receipt of dividend income amounting to Rs. 56,83,646/-. The dividend income being exempt u/s 10(34) of the Act, the AO show caused the assessee as to why disallowance u/s 14A of the Act read with Rule 8D of the Income Tax Rules should not be made. The assessee objected to the proposed disallowance vide its letter dated 29.11.2011. The AO however overruled the objections and disallowed a sum of Rs. 5,32,712/- by invoking section 14A of the Act read with Rule 8D (2)(iii) of the Income Tax Rule 1962. The relevant finding of the AO reads as follows:—
The assessee has not taken into account the indirect expenses incurred to earn the exempt income. The assessee could not explain satisfactorily the basis of NIL disallowance of expense related to exempted income. The method of calculating expenditure in relation of income non includible in total income that has been adopted by the assessee is not satisfactory.
In view of the above, I am not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. And I hereby held that this is a fit case for invoking the provisions of S.14A (2) of the I.T. Act 1961 and to compute the expenses related to exempted income in accordance with the Rule 8D of the Income Tax Rules 1962."
5.1 DRP affirmed the view taken by the AO. Hence the assessee is in appeal before us on this issue.
5.2 The Ld. AR reiterated the submissions made before the Income Tax authorities. The DR present was duly heard.
5.3 We have heard the rival submissions and perused the material on record. The assessee is in receipt of dividend income to the tune of Rs. 56,83,646/-. For making investment in shares and for earning such huge dividend income of Rs. 56,83,646/-, it cannot be said, that the assessee has not incurred any indirect expenses such as management establishment expenses and other office overheads. The AO has given a categorical finding that the assessee's method of calculating expenditure in relation of income not included in the total income is not satisfactory. Therefore, the AO's disallowance of a sum of Rs. 5,32,712/- by invoking provisions of section 14A read with 8D (2) (iii) is justified and is in accordance with law and no interference is warranted. It is ordered accordingly.
5.4 Hence, ground Nos. 3 to 3.2 are rejected.
6. Therefore, the appeal of the assessee is partly allowed for statistical purpose as indicated above.