IN INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 , NEW DELHI Before Sh. N. K. Saini, AM and Smt. Beena Pillai, JM ITA No. 3443/Del/2016 : Asstt. Year : 2011-12 Contitech India Pvt. Ltd., Vs Asstt. Commissioner of Income DSM 249, DLF Tower, Shivaji Tax, Circle-6(2), Marg, Najafgarh Road, Industrial New Delhi Area, New Delhi-110015 (APPELLANT) (RESPONDENT) PAN No. AABCR6921P Assessee by : Sh. Ajay Vohra, Sr. Adv., Neeraj Jain, Adv. & Puneet Chugh, CA Revenue by : Sh. N. C. Swain, Sr. DR Date of Hearing : 04.08.2016 Date of Pronouncement : 17.10.2016 ORDER Per N. K. Saini, AM: This is appeal by assessee against order dated 29.01.2016 of AO passed u/s 144C r.w.s. 143(3) of Income Tax Act, 1961 (hereinafter referred to as Act). 2. Following grounds have been raised in this appeal: 1. That assessing officer erred on facts and in law in completing assessment under section 144C/143(3) of Income-tax Act, 1961 ('the Act') at income of Rs. 9,96,58,477 as against income of Rs. 7,10,81,725 returned by appellant. 2 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. 2. That assessing officer erred on facts and in law in making adjustment of Rs. 2,53,87,180 to arm's length price of 'international transactions' of payment of corporate expense (intra group charges) on basis of order passed under section 92CA(3) of Act by TPO. 2.1 That assessing officer/ TPO erred on facts and in law in holding arms length price of international transactions of payment of corporate charges as NIL as against Rs.2,53,87,180 incurred by appellant, alleging that (i) no services were received by appellant (ii) cost are charged on allocation basis and therefore, some of group cost may be loaded in appellant share of corporate charges (iii) services received are incidental being in nature of long association. 2.2 That assessing officer/TPO erred on facts and in law in not appreciating that payment of corporate charges was appropriately benchmarked applying TNMM as most appropriate method and that no adverse inference could be drawn on this account. 2.3 That 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 basic principles of TP regulations. 2.4 That assessing officer/TPO erred on facts and in law in undertaking cost benefit analysis to determine arm's length price of payment of corporate charges without appreciating that cost- 3 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. benefit analysis is not prescribed method under Rule 10B of Income Tax Rules, 1963. 2.5 That assessing officer/TPO erred on facts and in law in applying CUP method for benchmarking transaction of payment of corporate charges without placing on record any comparable data for comparison. 2.6 That assessing officer/TPO erred on facts and in law in not appreciating that expenditure on payment of corporate charges was wholly and exclusively for purpose of business of appellant. 2.7 That assessing officer/TPO erred on facts and in law in concluding that appellant has failed to maintain documents for purpose of cost analysis. 2.8 That Dispute Resolution Panel erred on facts and in law in confirming adjustment made by TPO with regard to payment of corporate expense holding that (i) services rendered by associated enterprise are in nature of shareholders activities (ii) services are duplicative services and no additional benefit or additional saving has resulted to appellant on payment of corporate charges; (iii) services received by appellant are generic. 2.9 That Dispute Resolution Panel erred on facts and in law in holding that additional evidences filed by appellant are generic in nature and are 4 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. regular communications between AE and appellant. 2.10 That Dispute Resolution Panel erred on facts and in law in directing assessing officer to alternatively disallow payment of corporate charges u/s 37(1). 3. That assessing officer erred on facts and in law in making adjustment of Rs. 29,14,135 to arm's length price of 'international transactions' of payment of fees for technical know-how on basis of order passed under section 92CA(3) of Act by TPO. 3.1 That assessing officer/ TPO erred on facts and in law in considering arm's length price of international transactions of payment of fees for technical know-how at Rs. NIL as against Rs. 29,14,135 incurred by appellant, holding that (i) payment of fees for technical know-how is in nature of price reduction for products sold to AE (ii) appellant is in fact working as contract manufacturer for limited purpose of exports made to AE. 3.2 That assessing officer/TPO failed to appreciate that appellant manufactures products on basis of technical know-how provided by AE and fees for technical services is paid as percentage of sales. 3.3 That assessing officer/TPO erred on facts and in law in not appreciating that intangibles provided by AE helps appellant to manufacture 5 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. new products, upgrade existing products, reduce manpower, reduce raw material cost and increase in productivity. 3.4 That Dispute Resolution Panel erred on facts and in law in confirming adjustment made by TPO with regard to payment of royalty by relying on its order for AY 2009-10 & AY 2010-11 and holding that issues are identical. 4. That assessing officer erred on facts and in law in making ad-hoc disallowance of Rs 2,75,437 to returned income on account of advertising and sales promotion expenses incurred by assessee. 4.1 That assessing officer erred on facts and in law in making ad-hoc disallowance of 5% of advertising & publicity expenditure incurred by assessee during relevant previous year by holding that complete bills/vouchers in support of its claims of advertising & sales promotion expenses was not produced before assessing officer. 4.2 That assessing officer erred on facts and in law in not appreciating that assessee has furnished ail evidences as asked by assessing officer during assessment proceedings in order to substantiate occurrence/ claims of advertising & sales promotion expense. 4.3 That Dispute Resolution Panel erred on facts and in law in confirming adjustment made by assessing officer by holding that appellant has failed to adduce evidence in support of claims of expenditure. 6 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. 5. That assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of Act. appellant craves leave to add, alter, supplement, amend, vary, withdraw or otherwise modify ground mentioned herein above at or before time of hearing. 3. Ground No. 1 in this appeal is general in nature so does not require any comments on our part. 4. Vide Ground Nos. 2 to 2.10, grievance of assessee relates to arm s length price of international transactions of Rs.2,53,87,180/- made by AO on account of corporate expenses. 5. Facts of case related to this issue in brief are that assessee filed its return of income on 30.11.2011 declaring total income of Rs.7,10,81,725/-.Later on, case was selected for scrutiny. Since assessee had undertaken international transactions with its associated enterprises (AE), AO made reference to TPO, New Delhi u/s 92CA(1) of Act. During year under consideration, assessee in terms of agreement dated 20.10.2006 for availing technical, marketing and administrative support services had entered into, inter alia, international transaction for payment 7 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. of corporate charges amounting to Rs. 2,53,87,180/- with its AE. In transfer pricing document maintained by assessee, said transaction for purpose of benchmarking was aggregated with other international transactions and benchmarked by applying TNMM as most appropriate method with OP/OC as Profit Level Indicator (PLI). assessee submitted before TPO that since operating profit margin to operating cost (OP/OC%) of assessee at 9.20% was higher than weighted average profit margin of comparable companies at 8.43%, therefore, international transactions undertaken by it with AE were at arm s length price. However, TPO held that assessee has failed to substantiate that services have actually been rendered to it and benefit has actually been derived by it on basis of documentary evidence. He further observed that assessee in support of its contention has merely furnished copies of certain mails exchanged between its personnel. TPO was of view that none of e-mails exchanged between employees established requirement/specific need of assessee for their services, benefit which had accrued to assessee or that independent party would have been willing to pay another independent party for services purported to be received by taxpayer. TPO applied 8 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. CUP method and concluded that arm s length price of this transaction for payment of corporate charges was at Nil as against Rs. 2,53,87,180/- paid by assessee to its AE. Thereafter, AO passed draft assessment order by making addition of aforesaid amount. Against draft assessment order, assessee raised objection before ld. DRP who upheld additions made by TPO. Accordingly, AO made impugned addition of Rs. 2,53,87,180/- on account of arm s length price of payment relating to international transaction of corporate expenses (intragroup charges). 6. Now assessee is in appeal. ld. Counsel for assessee at very outset stated that this issue is covered in assessee s own case for assessment year 2008-09 in ITA No. 5765/Del/2012 wherein ITAT remanded matter back to file of TPO for de-novo consideration vide para 4.5 at pages no. 9 & 10 of order dated 29.08.2014. It was also submitted that assessee could not procure evidences from its AE earlier which now had been obtained. Therefore, this matter may go back to file of TPO/AO as has been done in earlier year. 9 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. 7. ld. DR in his rival submissions although supported orders of authorities below but could not controvert aforesaid contention of ld. Counsel for assessee. 8. We have considered submissions of both parties and perused material available on record. In present case, it is admitted fact that assessee could not procure summary of invoices raised on it by its AE and could not furnish specific details or complete break-up of how cost had been allocated, during proceeding before TPO/DRP. Therefore, this issue was set aside to file of TPO/AO in appeal relating to assessment year 2008-09 and said order has been followed by ITAT in ITA No. 455/Del/2014 for assessment year 2009-10. relevant findings have been given vide para 4.5 of order dated 29.08.2014 in ITA No. 5765/Del/2012 for assessment year 2008-09 which read as under: 4.5. We have heard rival submissions and perused material on record. assessee, in accordance with terms of service agreement dated 20.10.2006 received various technical, marketing and administrative support service from its AE. TPO had restricted payment of service fee to amount of Rs. 7,20,010/- (5% of total payment) as against 1,58,01,22/- determined by assessee. DRP on its part has made increase of deduction from 5% allowed by TPO to 10% of total expenditure. Broad details of various technical, 10 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. marketing and administrative support service were furnished to TPO / DRP. In terms of application dated 4.7.2014 under Rule 29 of ITAT Rules, assessee had sought to place on record summary of invoices raised on assessee by its AE during financial year 2007-08. detailed break up of invoices on basis of nature of services and summary of man hours spent by various divisions of AE in rendering technical, marketing and administrative service to Contitech group of companies. It is case of assessee that above said specific details or complete break up of how cost has been allocated could not be furnished before completion of proceedings before TPO/DRP, since these details were to be obtained from its AE Germany. We find that details now produced have important bearing for resolving transfer pricing dispute and therefore in interest substantial justice and equity, we admit same on record. Since additional evidence is admitted on record same needs to verify by TPO/AO. Hence, transfer pricing dispute of payment of corporate charges is restored to TPO for denovo consideration. Needless to state assessee shall be afforded reasonable opportunity of being heard before matter is decided. It is ordered accordingly. 9. Since facts for year under consideration are identical to facts involved in preceding years. So, respectfully following earlier order dated 29.08.2014 of Tribunal for assessment year 2008-09 in ITA No. 5765/Del/2012, issue under consideration is set aside to file of AO/TPO to be adjudicated afresh in accordance with 11 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. law after providing due and reasonable opportunity of being heard to assessee. 10. Vide Ground Nos. 3 to 3.4, grievance of assessee relates to adjustment amounting to Rs.29,14,135/- on account of payment of royalty. 11. As regards to this issue ld. Counsel for assessee at very outset stated that identical issue having similar facts was involved in ITA No. 455/Del/2014 for assessment year 2009-10 in assessee s own case wherein vide order dated 18.02.2016 and matter was remanded back to file of AO/TPO for reconsideration and deciding it in conformity with law laid down in recent judgment of Hon ble Delhi High Court in case of CIT Vs Cushman & Wakefield India Pvt. Ltd. (2014) 367 ITR 730. 12. In his rival submissions ld. DR could not controvert aforesaid contention of ld. Counsel for assessee. 13. After considering submissions of both parties and material on record, it is noticed that identical issue having similar facts has already been adjudicated by this bench of Tribunal in ITA No. 455/Del/2014 for assessment year 2009-10 in assessee s own case vide order dated 12 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. 18.02.2016 wherein relevant findings have been given in paras 8 to 11 of said order which read as under: 8. We have heard rival submissions and perused relevant material on record. It is observed that TPO has computed ALP of international transaction of `Payment of Royalty at Nil by holding that assessee did not avail any benefit and services provided by foreign AEs were unwarranted. In doing so, he rejected assessee s adoption of TNMM as most appropriate method and followed CUP method. That is how, he computed ALP of this international transaction at Nil. AO in his order has simply incorporated conclusion of TPO in determining ALP of this international transaction at Nil without carrying out any independent analysis or evaluation as to whether or not such use of technical know-how was required/availed by assessee in terms of section 37(1) of Act. ld. AR fairly admitted that there is no independent discussion in assessment order about disallowance of royalty payment, except for reproduction of relevant parts from order of TPO. 9. Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730(Del) has held that authority of TPO is limited to conducting transfer pricing analysis for determining ALP of international transaction and not to decide if such services exist or benefits did accrue to assessee. Such later aspects have been held to be falling in exclusive domain of AO. In that case, it was observed that E-mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt with specific interaction and related to benefits obtained by assessee, providing sufficient basis to hold that benefit accrued to assessee. Since details of specific activities for 13 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee were not considered, Hon'ble High Court remanded matter to file of concerned AO for ALP assessment by TPO, followed by AO's assessment order in accordance with law considering deductibility or otherwise as per section 37(1) of Act. 10. When we advert to facts of instant case, it turns out that TPO proposed transfer pricing adjustment with Nil ALP of international transaction of `Payment of royalty on ground that no such payment was warranted and further no cost benefit analysis on this count was brought to his notice and as such payment of royalty was not required. AO in his final assessment order dated 26.12.2013 has taken ALP at Nil on basis of recommendation of TPO without carrying out any independent investigation in terms of deductibility or otherwise of such payment in terms of section 37(1) of Act. As per ratio decidendi of Cushman & Wakefield India (P.) Ltd. (supra), TPO was required to simply determine ALP of this transaction unconcerned with fact, if any benefit accrued to assessee and thereafter, it was for AO to decide deductibility of this amount u/s 37(1) of Act. 11. Since authorities below have acted in contradiction to ratio laid down in Cushman & Wakefield (supra), we set aside impugned order on this score and remit matter to file of AO/TPO for deciding it in conformity with law laid down by Hon'ble jurisdictional High Court in case of Cushman & Wakefield (India) (P.) Ltd. (supra). 14. So, respectfully following aforesaid referred to order for assessment year 2009-10 in assessee s own case, this 14 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. issue is set aside to file of AO/TPO to be adjudicated as directed vide order dated 18.02.2016 in assessee s own case in ITA No. 455/Del/2014 for assessment year 2009-10. 15. Next issue vide Ground Nos. 4 to 4.3 relates to ad-hoc disallowance of Rs.2,75,437/- made by AO on account of advertising and sales promotion expenses incurred by assessee. 16. facts related to this issue in brief are that AO during course of assessment proceedings asked assessee to produce books of accounts in respect of expenses claimed. According to AO assessee could not produce complete bills/vouchers in support of its claim in respect of sales promotion and advertising. He made disallowance @ 5% on ad-hoc basis to prevent leakages of revenue, if any. Accordingly, disallowance of Rs.2,75,437/- @ 5% of Rs.55,08,731/- was made. 17. Being aggrieved assessee is in appeal. ld. Counsel for assessee submitted that AO had not brought any evidence on record to substantiate that sales promotion and advertising expenses was not incurred by assessee for business purposes. It was further stated that despite of all 15 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. bills/vouchers as asked by AO being produced before him, AO without pointing out any specific instance of non- incurrence of said expenditure, had simply disallowed @ 5% of total expenditure which was not justified. reliance was placed on following case laws: Dwarka Prasad Agarwal Vs ITO 52 ITD 239 (Cal) Mahendra Oil Cake Industries Pvt. Ltd. Vs ACIT 55 TTJ 711 Rattah Mechanical Works Ltd. Vs ITO 87 Taxman 288 (Chd.) Shriram Pistons and Rings Ltd. Vs IAC 39 TTJ 132(Del.) CIT Vs Gemi Motors India Ltd. in ITA 130 of 2011 J.J. Enterprises Vs CIT 254 ITR 216 (SC) Friends Clearing Agency P. Ltd. Vs CIT 332 ITR 269 (Del) Nodi Exports Vs ACIT 24 SOT 526 (Del) ACIT Vs Amtek Auto Ltd. 112 TTJ 455 (Del) Roger Enterprises Pvt. Ltd. Vs ITA 52 TTJ 198 (Del) Ramji Das Modi Vs DCIT 110 Taxman 107 (JP) ACIT Vs Bateli Tea Co. Ltd. (2003) SOT 72 (Kol) Continental Seeds & Chemicals Ltd. Vs ACIT (2003) SOT 393 (Del) Agarwal Trading Co. Vs ITO 108 TTJ 589 (Del) Sterling Motors Vs Addl. CIT in ITA No. 3217 to 3219/Mum/2009 (Mum) Asstt. CIT Vs Amrik Singh in ITA No. 987/2010 (Kol) Rajni Combustion P. Ltd. Vs DCIT in ITA No. 1779/Ahd./2009 (Ahd.) 16 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. 18. In his rival submissions ld. DR strongly supported orders of authorities below and further submitted that assessee could not produce complete bills and vouchers in respect of its claim for expenses incurred for sales promotion and advertisement. Therefore, AO to prevent revenue leakage had no option except to make impugned disallowance. 19. We have considered submissions of both parties and carefully gone through material available on record. In present case, it is admitted fact that AO made impugned disallowance without pointing out any specific instances where expenses were not incurred for business purposes. He made general remark that disallowance on ad-hoc basis was required to prevent leakage of revenue but no basis has been given to make disallowance @ 5%. In instance case, DRP confirmed action of AO by observing that onus lies on taxpayer to adduce evidence in support of claims of expenditure. However, no cogent reason has been given that ad-hoc disallowance @ 5% made by AO was justified, particularly when nothing is brought on record to substantiate that expenses incurred by assessee were not related to its business. Therefore, in absence of any specific item 17 ITA No. 3443/Del/2016 Contitech India Pvt. Ltd. pointed out by AO for non-business purposes out of expenses incurred during course of carrying on business on account of sales promotion and advertising of products, ad-hoc disallowance @ 5% was not justified. We, therefore, delete ad-hoc disallowance amounting to Rs.2,75,437/- made by AO. 20. As regards to Ground No. 5 relating to charging of interest u/s 234B and 234C of Act. It was common contention of both parties that it is consequential in nature. We order accordingly. 21. In result, appeal of assessee is partly allowed for statistical purposes. (Order Pronounced in Court on 17/10/2016) Sd/- Sd/- (Beena Pillai) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 17/10/2016 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR Contitech India Pvt. Ltd. v. Asstt. Commissioner of Income Tax, Circle-6(2), New Delhi