Ita/492/2015 Of The Commissioner Of Income Tax v. M/S Fosroc Chemicals India Pvt Ltd

IN THR HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 22 DAY OF MARCH 2016 PRESENT THR HON’BLE MR.JUSTICE JAYANT PATEL AND THR HON’BLE MRS. JUSTICE B.V.NAGARATHNA ITA NO.492/2015 & ITA NO.642/2015 C/W ITA NO.470/2013 ITA No.492/2015 & ITA No.642/2015 BBRTWEE 1.THR COMMISSIONER OF INCOME-TAX_LTUJSS TOWEBRRBSK III STAGE.BANGALORE-560 O85)LTUJSS TOWEBRRBSK III STAGE.BANGALORE-560 O85) a2THR DEPUTY COMMISSIONBR OF INCOME-TAXLTU|JSS TOWEBRRBSK III STAGE.BANGALORE-560 O85)LTU|JSS TOWEBRRBSK III STAGE.BANGALORE-560 O85) _ APPBLLANTS (BY SRI.K.V.ARAVIND, ADVOCATE) ANI M/S FOSROC CHEMICALS INDIA PVT LTDNO.38, 12TH CROSS33RD FLOOR“PSRID” CBI ROAD.GANGANAGAR NORTH.BANGALORE — 560 032|PAN: AAACHKH 2300 .. RESPONDENT THESK APPBALS ARE FILBED UNDER SKC.260-AOF INCOME TAX ACT 1961, ARISING OUT OF ORDER)DATED:10/04/2015.PASSEDIN|ITANO.148/BANG/2014 AND 8.P.NO.107/BANG/2014, FOR)THR ASSESSMENT YBAR 2OO9-2010 PRAYING TO,FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED ABOVE AND ALLOW THR APPRAL AND SBHKASIDE;THEORDER|PASSEDBY|THEITAT,BANGALORE IN ITA NO.148/BANG/2014 AND 8$.P.NO.107/BANG/2014 DATED:10/04/2015 AND CONFIRM|THR ORDEBR OF THR DRP CONFIRMING THR ORDERPASSEDBY|THERDBPUTYCOMMISSIONBROFINCOME TAX, LTU, BANGALORE. ITA No.470/2013 BBRTWEE 1.THR COMMISSIONER OF INCOME-TAXLTU, JSS TOWERS BSK III STAGE.BANGALORE a2THR DEPUTY COMMISSIONER OF INCOMBE-TAXLTU|JSS TOWEBRRBSK III STAGE.BANGALORE-560 O85)LTU|JSS TOWEBRRBSK III STAGE.BANGALORE-560 O85) _ APPBLLANTS (BY SRILK.V.ARAVIND, ADVOCATE) AN M/S. FOSROC CHEMICALS INDIA PVT. LTD.,PSRID NO.38, 12TH CROSS3RD FLOOR, CBI ROADGANGANAGAR NORTH.BANGALORE-560 O32| — RBSPONDBNT THIS APPBAL IS FILED UNDER SEBEC.260-A OINCOME TAX ACT 1961, ARISING OUT OF ORDER)DATEHD:05/04/13PASSEDIN|IT(TP)A.1256/BANG/2011, FOR THE ASSESSMENTYHBAR2007-08,PRAYINGTORFORMULATETHE.SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN|AND ALLOW THR APPKAL AND SBT ASIDBK THEORDER PASSED BY THE ITAT, BANGALORE IN IT(TP)A_NO.1256/BANG/2011DATED|05/04/13AND,CONFIRM.THEORDEROFTHEAPPBRLLATECOMMISSIONBR CONFIRMING THR ORDER PASSED|BY THE DEPUTY COMMISSIONER OF INCOME TAX,|LTU, BANGALORE. THRESH APPEALS COMING ON FOR ADMISSIONTHIS DAY,JAYANT PATEL J©, DELIVERED THE)HOLLOWING: JUDGMENT Theappellants-Revenuehave|preferredthepresent appeals by raising the following substantialquestions of law in ITA Nos.492/15 and 642/20109: 1.“Whether on the tacts and in the circumstances ofthe case, the Tribunal is right in law in settingaside the issue of transfer pricing to the file of theTPO for reconsidering the issue on the adoption ofthe most appropriate method and to arrive at theALP after making the adjustment after taking theappropriate comparables, as even for computationof ALP by adopting CUP method, identifyingcomparables is essential by following its earlierwhich has not reached finality and when the TPOrightly held that the payment made by theassessee for technical and management cost ofRs.7,27,97,135/- to the AE was an independentinternationaltransactionwhichhadTObeanalysed by applying CUP method prescribed byRule 10B (1)(a) of the Act’? substantial questions of law in ITA No.470/2013. anWhether|OT]the factsand1n the circumstances and in law the Tribunal was)correct is setting aside the determination of ALPon the International Transaction Payment of|Technical Services Fees, directing the Transfer|Pricing Officer to reconsider the issue on the|most appropriate method and holding that the|Transfer Pricing Officer cannot examine the|payment commensurate to the volume and_quality of services and recorded _ perversfinding? 2 |Whether.OT]thefactsand1n the.circumstances and in law the ‘Tribunal wascorrect in holding that the Transfer Pricing|Officer is required to determine the ALP of the|International transaction but cannot examine|whether|there.WaS anyinternationaltransaction between the assessee and the ABEand recorded perverse finding?”| substantial questions of law in ITA No.470/2013. anWhether|OT]the factsand1n the circumstances and in law the Tribunal was)correct is setting aside the determination of ALPon the International Transaction Payment of|Technical Services Fees, directing the Transfer|Pricing Officer to reconsider the issue on the|most appropriate method and holding that the|Transfer Pricing Officer cannot examine the|payment commensurate to the volume and_quality of services and recorded _ perversfinding? 2 |Whether.OT]thefactsand1n the.circumstances and in law the ‘Tribunal wascorrect in holding that the Transfer Pricing|Officer is required to determine the ALP of the|International transaction but cannot examine|whether|there.WaS anyinternationaltransaction between the assessee and the ABEand recorded perverse finding?”| 2. We have heard Mr.K.V.Aravind, learned Counselappearing for the appellants. 3. It may be recorded that the Tribunal whileconsidering the relevant aspects at paragraphs-9 and 10.has observed thus: “9, Having heard both the parties and having|considered the rival contentions and also the.material on record, we find that the basic)finding of the TPO is that the assessee has not)received any services from its AE and also that)the payments made by the assessee are not)required to be made as provided in clause-9.2|of the licence agreement between the assessee|and its AK. Let us Tirst examine the second|question i.e whether the licence agreement)provides for making of any payment to the AE|for the management services rendered by it or|is it only required to reimburse the expenses of|the personnel visiting the sites in India? As for|as clause 9.2 of the licence agreement is) concerned, we find that it for the services|rendered by the AE as enumerated in clause)6.2 and 6.7 of the licence agreement that the|payments are to be made by the ssesseee and)those payments shall also include the living)expenses, travel expenses etc., The word)‘Including’ used in this clause demonstrates|that the payment is something over and above|the expenses of travel, living etc., and that the|payment for the services exceeding these)expenses have to be agreed upon by the parties|mutually. As far as the reimbursement of)expenses are concerned, we have asked the.aSSCSSEEaCTossthe Benchwhetherthe|assessee has reimbursed the expenses and the|learned counsel for the assessee submitted.that the assessee has reimbursed the expenses|and the TPO has not made any adjustment as)far as the said reimbursement of the expenses|1Sconcerned.When|theaAsSSsSE€hasreimbursed the expenses of travel, living etc.,|of the personnel of the AE on their visit to)India, then it is established that the AE) personnel have visited India and might have)rendered their services to the assessee.. 9.1 Now whether any services have been)rendered by the AE to the assessee company is|to be examined. The assessee has drawn our)attention to pages 61 to 67 of the paper book|which consists of the e-mails between the.assessee and the personnel of the AE and also)reports of the personnel of AE who have visited|India which are at pages 61-923. We find that)the TPO has brushed aside these documents|perfunctorily stating that there are only the e-mails and are not evidence of the services|rendered. We are of the opinion that the TPO)ought to have considered the documents in)proper perspective to see whether the assessee|has received any services. The documents|purportedly are advices given by the AE to the)assessee on various issues concerning its)business. As held by the Hon'ble Delhi High|Court in the case of CIT Vs E.K.L Appliances|Ltd (In ITA Nos.1068/2011 & 1070/2011.) whether or not to enter into a transaction is for|the assessee to decide and the TPO can onlyexamine and compute the quantum of ALP,but he has no authority to disallow the entireexpenditure or a part thereof on the groundthat the assessee has sutfered continuous.losses|andtherefore,notgainedany|commensurate benefit there from. Similarview was expressed by the Bench of theTribunal at Mumbai in the case ot DresserRand India (P) Ltd., cited supra. Respectfullyfollowing the same, we hold that the TPO hasno authority to hold that since the assesseehasnotbeenableTOdemonstratecommensurate benefit for the expenditureincurred by it, the ALP to be determined is nil.As the TPO has erred in appreciating clause9.2 of the licence agreement and coming toerroneous conclusion with the said clauseauthorizes the assessee to only reimburse theexpenses, we hold that the said clause requires.the assessee to make the payment over andabove|thereimbursementoT CXPCIses. Further, as regards the quantification of the)expenses and the commensurate benefit is)concerned, we hold that the TPO cannot go)into the fact whether the assessee is actually|benefited from such expenditure. As held by)the Hon’ble Gujarat High Court in the case of)Veer Gems (cited supra). The TPO is only)requiredTOdetermine.theAl,PoT|theInternational transactions, but cannot examine|whether|there.WaS anyinternationaltransaction between the assessee and its AK.This power is vested with the AO only. Having|regard to the comparable cases, as far as)quantification of the expenses is concerned, we|find that as held by the Hon’ble Supreme)Court of India in the case of M/s Consolidated|Coffee Ltd., Vs State of Karnataka 248 ITR 432)(cited supra), has held that allocation of)expenditure on the basis of turnover is)justified. Since these findings of the TPO on)the rendering of services and allocation of)expenses are erroneous, we set aside the)matter to the TPO with ae direction to recomputethe|ALPby|takingintoconsideration the allocated expenses by the AE|to assessee. Further, it is also to be observed|that the revenue authorities have to adopt a)uniform and consistent approach in the case of|the assessee on the same set of facts for each|year. Though, the assessee has been receiving|the services from its AE from the year 2003|onwards, the TPO has not made any transfer|pricing adjustment till the AY: 2006-07 and)even for the subsequent AY: 2008-09 where)the assessee has received the services from its|AE. Once the TPO has accepted the ALP)computed by the assessee by virtue the very)same licence agreement dated 31-10-2003 (as)per which the assessee has been receiving|services year aiter year), it cannot take a)contrary view only for the assessment year)2007-08 holding that the assessee is not)receiving any services. In view of the same, we)deem it fit and proper to remand the issue to.the file of the TPO for recomputing of the ALP|without insisting upon the quantification of| each of the services received by the assessee|and the commensurate benefit that has.accrued to the assessee. The entire payment)made by the assessee towards ‘management|services’ Shall be taken as the aggregate|payment for all the services rendered by the)AE. The TPO is also directed to again)reconsider the issue on the adoption of the.most appropriate method and shall arrive at,the ALP before making the adjustment aiter|taking the appropriate comparables, as even)for computation of ALP by adopting CUP)method, identifying comparables is essential. 10. In the result, the assessee’s appeal is)partly allowed for statistical purposes.” 4 The aforesaid shows that the Tribunal whileconsidering the matter has found that the incurring ofthe expenses and the reimbursement is established. —Further, on the aspects of services rendered by theAssociated Enterprises (AE for short) to the assessee- Company is concerned, the Tribunal found that thevoluminous record was produced from page Nos.61 to923. The Tribunal after examining the said record, hasnoted the finding of fact which reads as under: 10. In the result, the assessee’s appeal is)partly allowed for statistical purposes.” 4 The aforesaid shows that the Tribunal whileconsidering the matter has found that the incurring ofthe expenses and the reimbursement is established. —Further, on the aspects of services rendered by theAssociated Enterprises (AE for short) to the assessee- Company is concerned, the Tribunal found that thevoluminous record was produced from page Nos.61 to923. The Tribunal after examining the said record, hasnoted the finding of fact which reads as under: “The documents purportedly are advices given|by the AE to the assessee on various iSSUEeSconcerning its business.” o. Thereafter, the Tribunal has found it proper forthe matter to be relegated to Transfer Pricing Officer(hereinafter referred to as ‘TPO’ for brevity) with adirectionCO recomputetheALP,takingIntoconsideration the allocated expenses by AssociatedEnterprises to the assessee. Further, the Tribunal hasalso observed that the entire payment made by theassessee towards ‘management services’ shall be takenas the aggregate payment for all the services renderedby it and the matter is remanded for computation. 6. Mr.K.V.Aravind, learned Counsel appearing forthe appellants contended that the comparable aspectsof the quantum of the services rendered vis-a-vis theexpenses incurred, is not left open by the Tribunal andthe Tribunal has concluded the same and therefore,there is a valid grievance of the appellants-Revenue. Hesubmitted that such an exercise is permissible undersection 92 of the Income Tax Act. He also relied uponthe decision of Delhi High Court in the case ofCommissioner of Income Tax Vs. EKL AppliancesLtdreported at(2012) 81 CCH 0027 DelHC, which wasbrought to the notice of the Tribunal, more particularly,by relying upon the observations made at paragraphs-39 and 40, he submitted that when the expenses areincurred in respect of the related concern, the scrutinyshould have been left open by the Tribunal even whileremanding the matter to TPO and therefore, the Tribunal has committed an error and this Court mayconsider substantial questions of law in the presentappeals. 7. Even if we consider that under Section 92 of theIncome Tax Act, such an exercise is available read with|the decision of Delhi High Court in the case ofEKLAppliances Ltd(supra) then also, the Tribunal afterexamining the record has found that the servicesrendered were concerning the business and once thenexus is found and the factual aspect is considered bythe Tribunal, it cannot be said that the Tribunal oughtto have remanded the matter by keeping that questiononce again open for consideration by the TPO. Further,the Tribunal has rightly considered and examined thedecision of Delhi High Court in case ofEKL AppliancesLtd(Supra). "���7�79D0$�?5�A9:�8?1B$�5A�79=76256?24�C9176?A5�A;�42B�2:?717�;A:�DA57?<1:26?A5$�27�7A9@06�6A�=1�D2582771<���15D1�601�2331247�2:1�<?7E?771<�� ��&� ����������� �����������