IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K , MUMBAI BEFORE SHRI R C SHARMA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA No. 1420/Mum/2016 (Assessment year: 2011-12) Vs Asst. CIT -4(3)(2), SKF India Limited, Room No.469, Mahatma Gandhi Memorial M K Marg, Aayakar Bhavan, Building, Netaji Subash Road, Mumbai -400 020 Charni Road, Mumbai -400 002 PAN:AAACS 0684 H (Appellant) (Respondent) Appellant by : Shri K R Vasudevan Respondent by : Mrs. Rupinder Brar Date of Hearing : 20-06-2016 Date of Pronouncement : 16-09-2016 ORDER : PER AMIT SHUKLA, JM: aforesaid appeal has been filed by 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 assessment year 2011-12 in pursuance of directions given by Dispute Resolution Panel (DRP) vide order dated 14.12.2015. In various grounds of appeal, assessee has challenged following issues:- 2 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 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 levy of penalty under section 271(1) (c) (Ground no.22). 2. Brief facts qua issue of Transfer Pricing adjustment are that, assessee company is part of Global AB SKF Group, which is leading technology and solution provider of products, solutions and services in area comprising Manufacturing & Sales of Ball Bearings, Roller Bearings, Hub Bearings & Textile Machinery components service and lubricants systems. In its Transfer Pricing Study report, assessee disclosed 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 SKF India Limited ITA 1420/Mum/2016 As regards availing of various services, it was reported that, AB SKF renders intra-group services in form of support services to SKF India and other Group Companies. During year, 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 said Associated Enterprises for smooth running of assessee s business. 3. For rendering all these services, AE charges intra- group service fees from assessee and other group companies, which are based on actual cost incurred plus mark-up of 5%. assessee has benchmarked entire international transactions with AE by aggregating under manufacturing segment as all transaction including services received were inextricably linked with manufacturing. For benchmarking entire transactions, assessee has adopted TNMM as MAM and margin earned by assessee on total assets in manufacturing segment was 32% and operating profit offered on total cost (OP/TC) was 19.77%. In TP Study undertaken, arithmetic mean of profit margins of comparable companies shortlisted was arrived at 10.85% and accordingly, it was stated that, assessee has earned very high margins as compared to comparable companies engaged in similar activities even after making payment of intragroup services. It was stated by assessee that, cost of 4 SKF India Limited ITA 1420/Mum/2016 intragroup services has been allocated in both segments on basis of direct allocation to extent possible and balance on basis of net sales. Thus, assessee contented for aggregation of transactions. 4. Intragroup services availed by assessee during assessment year 2011-12 was classified under 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 nature of each heads were elaborately given before AO vide letter dated 9th October, 2014, copy of which has been placed before us in Paper book from pages 246 to 263 and our specific attention was drawn to pages 250 onwards. TPO, noted that assessee except for providing sample copies of email correspondences in support of services rendered by 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 Transfer Pricing Study Report. On this premise and reasoning TPO held that, Arm s Length Price of services should be considered as Nil and entire payment made for such services of Rs.54.41 crores was added back. relevant observation for making said adjustments reads as under:- submissions provided by assessee are not acceptable. No supporting documents have been provided to show that these services were actually required by assessee from AEs. 5 SKF India Limited ITA 1420/Mum/2016 email correspondence provided is vague and cannot be used to determine actual receipt of services at all. assessee has not provided any documents to show that these costs were actually incurred by AEs. Even cost allocation formula or working has not been provided by assessee. In uncontrolled situation no entity would pay for any service which is of no use to it. In view of above, arm s length price of services availed by assessee from its AEs is considered to be Rs. Nil . In view of this, adjustment of Rs.54.41 crores is made to international transaction of assessee . Thus, entire transfer pricing adjustment and disallowance was made in aforesaid manner. 5. Before DRP, assessee objected to TPO s order on various counts and first and foremost contention raised was that TPO has passed 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 OECD Guidelines, aggregation of transactions can be done and further in support decision of Hon ble Delhi High Court in case of Sony Ericsson Mobile Communications India Pvt. Ltd., reported in [2015] 374 ITR 118 was relied upon. assessee s objections on various counts have been incorporated in DRP s order from pages 3 to 6. That apart, assessee had also filed various additional evidences giving details of intra-group services availed from AE during year. On such additional evidences and submissions, remand report was called for, in response TPO again contended that, no 6 SKF India Limited ITA 1420/Mum/2016 agreements for services with AE have been provided and how these services have been actually received and what benefits derived from such services has not been given. Hence, he again justified value of transaction to be taken at nil . In rebuttal, assessee submitted that such observation of TPO is absolutely incorrect as service agreement was very well filed before TPO along with various other evidences, which has not been considered by TPO. 6. DRP, after detailed discussion, rejected assessee s contention, which can be summarized in following manner:- (i) 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 AE. Apart from services covered under royalty agreement . (ii) only evidence on record is in form of e-mail correspondence which itself cannot prove that services were actually rendered by AE and were actually received by assessee; (iii) assessee has incurred employee cost of Rs.1238.9 million and has not furnished profiles of 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 related party; (v) Business support consultancy and training charges are typical shareholder activity of AE, as entire 7 SKF India Limited ITA 1420/Mum/2016 acquisition has been at behest of AE for benefit of its shareholders; (vi) management and consultancy services provided by AE fall in category of Services that provide incidental benefits . Ld. DRP referred to certain OECD guidelines, to strengthen its point; (vii) payment for intragroup services will be treated as Arm s Length when it is proved substantially by tax payer that such services were actually executed by and as such they were received from its AE; and (viii) Regarding corroboration of transaction by using TNMM method as pleaded by assessee, same was also rejected by DRP on ground that, there is absence of other test being satisfied in respect of intragroup services. Finally after relying upon certain decisions, they upheld entire adjustment made by TPO. 7. Before us, Ld. Counsel after explaining entire facts as discussed above, submitted that whole approach of TPO as well as DRP are factually and legally incorrect. He, first of all submitted that, plethora of evidences for rendering of intra-group services were filed before authorities below. At outset, service agreements between assessee and AE which has been placed in paper-book at page 264 and 274 onwards, clearly describes nature and scope of services rendered by AE. Apart from that, he pointed out to summary of various categories of services received by assessee which have been tabulated and given at pages 336 to 342 of paper-book. Our attention was also drawn to various e-mail correspondences 8 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 paper book from pages 478 onwards and also basis for allocation of expenses which has been given from pages 488 onwards, which indicated allocation of services to various group entities. Ld. Counsel submitted that assessee had given all details of services rendered for every division and this has been specifically highlighted in specific submissions filed before TPO vide reply dated 22nd September, 2015. Thus, he submitted that, entire observations made by TPO as well as DRP are completely divorced from material facts placed on record. He further argued that, neither TPO nor DRP have mentioned as to firstly, what should be appropriate method to benchmark this transaction and secondly, how adjustment can be taken at nil. If they were of opinion that separate benchmarking is to be done for intra-group services, then there has to be some comparability analysis vis- -vis comparable companies following certain method as per Transfer Pricing provisions provided under Act and Rules. In any case, once assessee had shown substantial high profit margin for entire manufacturing segment for which intragroup services has been availed, then aggregation of transaction has to be done under TNMM. In support, he strongly relied upon decision in case of CIT vs. EKL Appliances, reported in [2012] 345 ITR 241 and Sony Ericsson Mobile Communication P Ltd vs CIT (supra). 8. On other hand, Ld. DR strongly relied upon order of DRP and submitted that, firstly, intragroup 9 SKF India Limited ITA 1420/Mum/2016 transaction should have been separately benchmarked by assessee and secondly, onus is on assessee to show that, intra-group services have actually been received and if such onus has not been discharged then entire cost claimed in books of account has to be taken as Nil . 9. We have considered rival submissions, perused relevant finding given in impugned orders, as well as material referred and relied upon before us. main issue involved is Transfer Pricing Adjustment of Rs.54.41 crores on transaction of intra-group services. entire amount of payment made to AE has been added to income of assessee by departmental authorities holding that, assessee could not provide any evidences to show that these services were actually availed by assessee from AE and no separate benchmarking has been done by assessee qua this transaction. 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. overall profit margin of manufacturing and related activities worked out at 19.77% (on base of operating profit/total costs). This PLI was benchmarked with 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 transactions including relating to these 10 SKF India Limited ITA 1420/Mum/2016 services are to be taken into account, then also assessee s margin is at Arm s Length Price. 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 prescribed method. Secondly, assessee could not substantiate that any actual rendering of services was done by AE. From perusal of material placed before us, which was also there before authorities below, prima facie it is seen that various evidences were filed to corroborate rendering of services by AE and also nature of services along with allocation of costs. details of documents/evidences filed before TPO and DRP are as under:- A. Written submissions dated 09 October 2014 filed before Transfer Pricing Officer along with relevant annexures thereto: i. Service agreement dated 21 April 2008 entered into between Associated Enterprise (Aktiebolaget SKF, Sweden) and Appellant; ii. Addendum to Service agreement for prolongation of services for 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 Appellant; iv. Updated margin of comparable companies FYE March 2011 in Manufacturing and Trading Segment B. Written submissions dated 09 December 2014 filed before 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 Appellant; 11 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 Appellant; iii. Sample email correspondences to show Associated Enterprise has provided group insurance support service to appellant; iv. statement giving summary of sample documentary evidence for availing services and benefits received by Appellant Apart from that, before DRP, assessee had filed summary of intra-group services availed from AE, which was filed before DRP; memorandum of allocation of service fees amongst intra-group as well as allocation of service fees. In light of these evidences/documents, we are unable to apprehend as to what other kind of documents were required by assessee to show that these services has not been rendered. First of all order of TPO itself is very cryptic and passed in very callous manner, without any proper analysis and understanding of Transfer Pricing principles. DRP too has failed to take note of these evidences. If documents/evidences were deficient then DRP should have specified same and asked assessee to corroborate further. Various observations made by 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 typical shareholder activity of AE; management and consultancy services provided by AE fall in 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 SKF India Limited ITA 1420/Mum/2016 by department, then it is incumbent to arrive at ALP of such transaction. Department cannot disregard actual transaction between parties unless economic substance of transaction differ from its form; or arrangement made by parties in relation to transaction differ from those which is or should have been adopted by independent enterprises behaving in commercial rational manner. It is otherwise trite law that revenue authorities cannot dictate assessee as to how he should conduct his business and what expenditure he can incur. test of commercial expediency for determining, whether expenditure was wholly and exclusively for purpose of business or not has been time and again explained by our Courts. reasonableness of expenditure has to be judged from point of view of businessman and not of revenue. Even Rule 10B(1)(a) does not envisages disallowance of any expenditure on ground that it was not necessary for assessee to incur or avail same. Here in this case, revenue authorities, first of all, have disregarded 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 approach of revenue cannot be upheld and ALP of transaction cannot be taken at Nil because what is required to be analysed is whether payment made for services to AE meets requirement of Arm s Length Price or not. Arm s Length Price can only be determined under prescribed provisions of law that is, by carrying out comparability analysis by comparing controlled transactions with uncontrolled transactions under prescribed 13 SKF India Limited ITA 1420/Mum/2016 methods. Accordingly, we reject finding of DRP that, no services has been rendered by assessee and, therefore, Arm s Length Price of service availed by assessee from its AE should be taken at Nil . 10. Now, whether payment and margin on these services are to be subsumed with other transactions, that is, whether all transactions are to be aggregated for determination of ALP and would be covered under overall profit margin worked out under TNMM. As discussed in earlier part of our order, intra-group services were stated to be inextricably linked with manufacturing segment and hence it has been contended that margin earned on overall assets as well as operations have to be aggregated. Since, assessee s operating profit margin over total cost is much higher, that is 19.77% as compared to average profit margin of comparables arrived at 10.25% and, therefore, it has been contended that, such high margin will take care of payment made for intra-group services. In theory this contention of assessee appears to be tenable, however onus is on assessee to demonstrate, whether two AEs have treated international transactions as single transaction or is attributed to aggregate package or not. If assessee is able to demonstrate that transaction of intra-group services are inextricably linked with overall business activities undertaken by assessee which herein this case is manufacturing and has overall effect on net income or loss in final result then, such transaction can be aggregated for purpose of determining Arm s Length Price of transactions between AEs. Under facts and circumstances of 14 SKF India Limited ITA 1420/Mum/2016 case, we are of opinion that, this matter needs to be restored back to file of AO/TPO to examine whether transaction of intra-group services are inextricably linked with manufacturing and overall business activities carried out by assessee. primary onus would be on assessee to provide necessary details and explain as to how these services provided by AE can be subsumed or can be aggregated with overall business activities. If it is found that all transactions are to be aggregated then definitely under TNMM and given high profit margin of assessee, no separate benchmarking would be required qua 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 Transfer Pricing provisions. With these directions, issue of Transfer Pricing is set aside to file of TPO / AO for fresh and proper analysis after giving due and effective opportunity to assessee to present its case properly. 11. So far as second issue relating to adjustment to closing stock on account of CENVAT under section 145A, only contention raised by Ld. Counsel before us is that, same treatment should be given to opening stock also in line with decision of Hon ble Bombay High Court in 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 file of AO to follow principle laid down by Hon ble Bombay High Court. 15 SKF India Limited ITA 1420/Mum/2016 12. On perusal of impugned orders, we find that, DRP has referred to fact that in AY 2006-07, assessee has not pressed this issue. However, there cannot be estoppel to assessee to contend issue if proper adjustment is required to be made in accordance with provision of section 145A. If difference in valuation of closing stock is on account of CENVAT amount and has been added to closing stock, then same treatment has to be given in opening stock. This principle has been upheld by Hon ble jurisdictional High Court. Accordingly, we set aside this issue to file of AO apply principle laid down by Hon ble Bombay High Court in case of CIT vs. Mahalakshmi Glass Works Private Limited (supra) and grant consequential relief to assessee. 13. third issue relates to addition on account of reconciliation on basis of AIR information. It has been pointed out before us, in earlier year, Tribunal has set aside this issue to file of CIT(A) on this issue. 14. Both parties agreed that, this matter should be restored back to file of AO for this year on similar line of directions. We find that addition has been made on account of un-reconciled ITS data based on AIR Information. This precise issue had come up for consideration before Tribunal, wherein, matter was set aside to file of CIT(A) after observing and holding as under:- 9. In this regard, learned Counsel for assessee submitted that AIR data amounting to Rs.65,93,498, assessee successfully reconciled to extent of Rs.52,93,803 that constitute 80% of entire transaction. Regarding 16 SKF India Limited ITA 1420/Mum/2016 balance of Rs.12,99,690, Assessing Officer did not provide necessary details to enable assessee to reconcile same. It is settled issue that merely non-reconciliation of AIR data does not lead to sustainable addition in assessment. In our opinion, there is need for remanding this issue to file of Assessing Officer. Consequently, we set aside impugned order passed by learned CIT(A) on this issue and restore issue back to his file with direction to furnish requisite specific information to assessee calling for reconciliation. Normally, AIR data is generic as well as general in nature. Assessing Officer is required to first examine specific of transaction that require reconciliation. Thus, ground no.3, is allowed for statistical purposes 15. In this year also, we set aside this issue to file of AO (because matter has come through DRP route before us) and direct him to furnish all requisite information to assessee and after calling for re-conciliation, issue may be decided accordingly. Thus, these grounds are treated allowed for statistical purposes. 16. So far as short-deduction of TDS, it has been pleaded by Ld. Counsel that, directions should be given to AO for verifying same and give credit for TDS in accordance with law. Accordingly, we direct AO to examine this fact and to give credit for taxes on account of TDS after verification. Accordingly, ground on this score is allowed for statistical purposes. 17. Regarding last ground, it has been stated that, same is premature and accordingly said ground is dismissed. 17 SKF India Limited ITA 1420/Mum/2016 18. Accordingly, appeal of assessee is partly allowed for statistical purposes. Order pronounced in open court on 16th September, 2016. Sd/- Sd/- (R C SHARMA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 16th September, 2016. Copy to:- 1) Appellant. 2) Respondent. 3) CIT/DRP-2 Concerned Mumbai. 4) CIT-4/DIT - Concerned Mumbai 5) D.R. K Bench, Mumbai. 6) \ Copy to Guard File. By Order True Copy Dy./Asstt. Registrar I.T.A.T., Mumbai Chavan, Sr.PS SKF India Limited v. Asst. CIT-4(3)(2), Mumbai