IN INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER IT(TP)A No.188/Bang/2015, IT(TP)A Nos. 87 & 88/Bang/2016 Assessment years : 2010-11, 2007-08 & 2011-12 M/s. Fosroc Chemicals (India) Vs. Deputy Commissioner of Pvt. Ltd., Income Tax, # 38, 12th Cross, III Floor, Large Taxpayer Unit, Circle 1, PSIRD CBI Road, Bangalore. Ganganagar North, Bangalore 560 032. PAN: AAACF 2300D APPELLANT RESPONDENT IT(TP)A No.295/Bang/2015, Assessment year : 2010-11 Assistant Commissioner of Vs. M/s. Fosroc Chemicals (India) Income Tax, Pvt. Ltd., Large Taxpayer Unit, Bangalore 560 032. Bangalore. PAN: AAACF 2300D APPELLANT RESPONDENT Assessee by : Shri S. Ramasubramanian, CA Revenue by : Miss Neera Malhotra, CIT(DR) Date of hearing : 25.08.2016 Date of Pronouncement : 17.10.2016 ORDER Per A.K. Garodia, Accountant Member Out of four appeals, two appeals are filed by assessee for assessment years 2007-08 and 2011-12 and remaining two appeals are for assessment year 2010-11 which are cross appeals filed by assessee and IT(TP)A Nos.188 & 295/Bang/2015 & 87 & 88/Bang/2016 Page 2 of 11 revenue. All these were heard together and are being disposed of by way of this common order for sake of convenience. 2. grounds raised by assessee in ITA No.87/Bang/2016 are as under:- 1. That order of learned assessing officer in so far it is prejudicial to interests of appellant is bad and erroneous in law and against facts and circumstances of case. 2. That Hon'ble Dispute Resolution Panel erred in law and on facts in holding that it has no jurisdiction to entertain objection u/s 144C of Act against draft assessment order passed in consequence of directions given by Hon 'ble Tribunal earlier. 3. That Honble Transfer Pricing Officer (TPO) erred in law and on facts in passing consequential order without giving opportunity to appellant while passing consequential order u/s 92CA of Act. 4. That learned TPO erred in law and on facts in holding that appellant has to establish that payments made were commensurate to volume and quality of service and cost and commensurate benefits were derived and such finding of learned TPO is contrary to clear directions of Hon ble Tribunal in ITA (TP) 1256/Bang/2011. 5. That learned lower authorities erred in law and on facts in holding that appellant should demonstrate that it has received benefit form various services. should furnish cost benefit analysis to justify price paid for international transaction and that such services are necessary. 6. That learned lower authorities erred in law and on facts in holding that TNMM is not most appropriate method but CUP method is most appropriate method even though service transactions are integrally connected with manufacturing business of appellant. 7. That learned lower authorities erred in law and on facts in not determining ALP even under CUP method by following procedure under rule 10B (l) (a) of Income-tax Rules. 1962. 8. That learned lower authorities erred in law and on facts in adopting hypothetical CUP for determining ALP of services received. IT(TP)A Nos.188 & 295/Bang/2015 & 87 & 88/Bang/2016 Page 3 of 11 9. That learned lower authorities erred in law and on facts in determining ALP as nil on ground in hypothetical situation, no third party would make payment for these kind of services. 10. That learned assessing officer erred in law and on facts in levying interest u/s 234D on Rs.78,61,430 Instead of Rs.77,34,386. 11. That learned assessing officer erred in law and on facts in holding that sum of Rs. 50,51,711 has been received on 17.03.2010 and such finding is perverse as appellant has not received above sum. 12. That learned assessing officer erred in law and on facts in holding interest u/s 234D of Act on sum of Rs. 50,51,711 even though appellant has not received refund at all. 13. That learned assessing officer erred in law and on facts in levying interest u/s 220(2) of Act even though demand raised in original assessment order does not survive once Hon ble Tribunal has set aside such assessment. Each of above grounds is without prejudice to one another and appellant craves leave of Hon'ble Income Tax Appellate Tribunal, Bangalore to add, delete, amend or otherwise modify one or more of above grounds either before or time of hearing of this appeal. 3. Ground No. 1 is general and no separate adjudication is called for. Regarding ground No.2, it was submitted by ld. AR of assessee that DRP should have decided issue on merit and it is not correct on part of DRP to say that DRP has no jurisdiction to decide matter arising out of draft assessment order passed in consequence to directions of Tribunal u/s. 254. 4. Regarding ground No.3, it was submitted that TPO should have provided opportunity of being heard to assessee before passing consequential order u/s. 92CA as per directions of DRP. 5. ld. DR of revenue supported orders of authorities below. IT(TP)A Nos.188 & 295/Bang/2015 & 87 & 88/Bang/2016 Page 4 of 11 6. We have considered rival submissions. First of all, we reproduce provisions of section 144C from where DRP gets power and jurisdiction. These are as under:- 144C. (1) Assessing Officer shall, notwithstanding anything to contrary contained in this Act, in first instance, forward draft of proposed order of assessment (hereafter in this section referred to as draft order) to eligible assessee if he proposes to make, on or after 1st day of October, 2009, any variation in income or loss returned which is prejudicial to interest of such assessee. (2) On receipt of draft order, eligible assessee shall, within thirty days of receipt by him of draft order, (a) file his acceptance of variations to Assessing Officer; or (b) file his objections, if any, to such variation with, (i) Dispute Resolution Panel; and (ii) Assessing Officer. (3) Assessing Officer shall complete assessment on basis of draft order, if (a) assessee intimates to Assessing Officer acceptance of variation; or (b) no objections are received within period specified in sub-section (2). 7. From sub-section (1) of section 144C, it is seen that in this sub-section, words first instance has been used and DRP has drawn conclusion from these words that they have to decide only dispute arising out of draft assessment order passed originally and not out of draft assessment order passed as per direction of Tribunal but same is misconceived because as per scheme of this section, AO shall pass draft assessment order at first instance and forward same to assessee and within 30 days of receipt of draft order, assessee can file his IT(TP)A Nos.188 & 295/Bang/2015 & 87 & 88/Bang/2016 Page 5 of 11 acceptance of draft order or he may file objections with DRP or with AO and AO shall complete assessment on basis of draft assessment order, if assessee intimates to AO that draft assessment order is acceptable to assessee and if no objections are received within period specified under sub- section (2) of section 144C. Hence these words first instance is not with this purpose that DRP will get jurisdiction only against original draft assessment order and not against draft assessment order passed as per direction of Tribunal. Hence on this aspect, we reverse order of DRP and hold that DRP should have decided issue on merits instead of saying that DRP has no jurisdiction when draft assessment order is passed by A. O. on set aside of earlier order by Tribunal. Ideally in this situation, we should have restored back matter to file of DRP for decision on merits but in view of ground No.3 of assessee s appeal and as per order passed by TPO u/s. 92CA, we find that TPO has passed order without giving any opportunity of being heard to assessee. 8. We find that in order of TPO dated 30.01.2015, TPO has reproduced directions of Tribunal and thereafter, he has stated that accordingly this order is being passed and he has passed order on various issues such as Most Appropriate Method, variables, determination of ALP and there is no whisper in this order of TPO that any opportunity of being heard was provided by him to assessee. Hence, we feel it proper that this matter should go back to file of TPO for fresh decision after providing reasonable opportunity of being heard to assessee. We order accordingly. IT(TP)A Nos.188 & 295/Bang/2015 & 87 & 88/Bang/2016 Page 6 of 11 9. In view of our above decision, other grounds raised by assessee do not call for any adjudication at this stage. 10. In result, appeal of assessee is allowed for statistical purposes. 11. Now we take up remaining two appeals of assessee for AYs 2010-11 and 2011-12. In both these years, grounds No.1 to 5 are identical and therefore, these grounds are reproduced below from assessee s appeal for AY 2011-12 i.e. IT(TP)A No.88/Bang/2016:- 1. That order of learned lower authorities in so far it is prejudicial to interests of appellant is bad and erroneous in law and against facts and circumstances of case. 2. That learned lower authorities erred in law and on facts in holding that appellant has not received services from its Associated Enterprise and such finding is perverse as being contrary to materials on record and not supported by any evidence on record. 3. That learned lower authorities erred in law and on facts in holding that appellant should demonstrate that it has received benefit form various services, should furnish cost benefit analysis to justify price paid for international transaction and that such services are necessary. 4. That learned lower authorities erred in law and on facts in holding that TNMM is not most appropriate method but CUP method is most appropriate method even though service transactions are integrally connected with manufacturing business of appellant. 5. That learned lower authorities erred in law and on facts in not determining ALP even under CUP method by following procedure under rule 1 OB( 1 )(a) of Income-tax Rules. 1962. 12. In this regard, it was submitted by ld. AR of assessee that as per Tribunal s order in AY 2007-08 in ITA No.1256/Bang/2015 dated 5.4.2013, copy available on pages 1 to 13 of PB, Tribunal restored IT(TP)A Nos.188 & 295/Bang/2015 & 87 & 88/Bang/2016 Page 7 of 11 matter back to file of TPO with direction to again reconsider issue of adoption of Most Appropriate Method and shall arrive at ALP before making adjustment after taking appropriate comparables as even for computation of ALP by adopting CUP method, decision of comparables is essential. It is submitted that accordingly in present two years also, entire matter in connection with TP issue should be restored back to file of TPO for fresh decision with similar directions. 13. ld. DR supported orders of authorities below. 14. We have considered rival submissions. We find that in present two years, main objection of TPO is that assessee has not shown that allied services received from AE are required for assessee s business and also that assessee is not capable of getting these services locally or on its own. Thereafter, TPO concluded that assessee did not show as to what is tangible and substantial commercial benefit derived by assessee from allied services and consequent payment of technical and management cost and on this basis, he disallowed entire payment. 15. For AY 2007-08, similar issue was before Tribunal and as per Tribunal order for AY 2007-08 (copy available in Paperbook), this issue was decided by Tribunal vide para 9.1, which is reproduced below for sake of ready reference:- 9.1 Now whether any services have been rendered by AE to assessee company is to be examined. assessee has drawn our attention to pages 61 to 67 of paper book which consists of e-mails between IT(TP)A Nos.188 & 295/Bang/2015 & 87 & 88/Bang/2016 Page 8 of 11 assessee and personnel of AE and also reports of personnel of AE who have visited India which are at pages 61-523. We find that TPO has brushed aside these documents perfunctorily stating that there are only e- mails and is not evidence of services rendered. We are of opinion that TPO ought to have considered documents in proper perspective to see whether assessee has received any services. documents purportedly are advices given by AE to assessee on various issues concerning its business. As held by Hon'ble Delhi High Court in case of CIT Vs E.K.L Appliances Ltd (In ITA Nos.1068/2011 & 1070/2011..whether or not to enter into transaction is for assessee to decide and TPO can only examine and compute quantum of ALP, but he has no authority to disallow entire expenditure or part thereof on ground that assessee has suffered continuous losses and therefore, not gained any commensurate benefit there from. Similar view was expressed by Bench of Tribunal at Mumbai in case of Dresser Rand India (P) Ltd., cited supra. Respectfully following same, we hold that TPO has no authority to hold that since assessee has not been able to demonstrate commensurate benefit for expenditure incurred by it, ALP to be determined is nil. As TPO has erred in appreciating clause 9.2 of licence agreement and coming to erroneous conclusion with said clause authorises assessee to only reimburse expenses, we hold that said clause requires assessee to make payment over and above reimbursement of expenses. Further, as regards quantification of expenses and commensurate benefit is concerned, we hold that TPO cannot go into fact whether assessee is actually benefited from such expenditure. As held by Hon'ble Gujarat High Court in case of Veer Gems (cited supra). TPO is only required to determine ALP of International transaction, but cannot examine whether there was any international transaction between assessee and its AE. This power is vested with AO only. Having regard to comparable cases, as far as quantification of expenses is concerned, we find that as held by Hon'ble Supreme Court of India in case of M/ s Consolidated Coffee Ltd., Vs State of Karnataka 248 ITR 432 (cited supra), has held that allocation of expenditure on basis of turnover is justified. Since these findings of TPO on rendering of services and allocation of expenses are erroneous, we set aside matter to TPO with direction to recompute ALP by taking into consideration allocated expenses by AE to assessee. Further, it is also to be observed that revenue authorities have to adopt uniform and consistent approach in case of assessee on same set of facts for each year. Though, assessee has been receiving services from its AE from year 2003 onwards, TPO has not made any transfer pricing adjustment till AY: 2006-07 and even for subsequent AY: 2008-09 where assessee has received services from its AE. Once TPO has accepted ALP computed by assessee by virtue very same licence agreement dated 31- 10-2003 (as per which assessee has been receiving services year after year), it cannot take contrary view only for assessment year 2007-08 holding IT(TP)A Nos.188 & 295/Bang/2015 & 87 & 88/Bang/2016 Page 9 of 11 that assessee is not receiving any services. In view of same, we deem it fit and proper to remand issue to file of TPO for recomputing of ALP without insisting upon quantification of each of services received by assessee and commensurate benefit that has accrued to assessee. entire payment made by assessee towards 'management services' shall be taken as aggregate payment for all services rendered by AE. TPO is also directed to again reconsider issue on adoption of most appropriate method and shall arrive at ALP before making adjustment after taking appropriate comparables, as even for computation of ALP by adopting CUP method, identifying comparables is essential. 16. Respectfully following this Tribunal order, in present two years also, we decide issue on similar line and restore this matter back to TPO for fresh decision with same directions as was given by Tribunal in AY 2007-08. Accordingly, these grounds are allowed for statistical purposes. 17. Thereafter, it was submitted by ld. DR of revenue that grounds raised by revenue in its appeal for AY 2010-11 and ground No.9 to 10 of assessee s appeal in AY 2010-11 are on same issue i.e., regarding payment of royalty for Rudrapur unit. In this regard, ld. DR of revenue supported assessment order whereas ld. AR of assessee supported order of ld. CIT (Appeals) for AY 2010-11. It was also submitted that on page 108 of PB is letter regarding royalty waiver. Therefore, direction of DRP in AY 2010-11 should be upheld on this account. 18. We have considered rival submissions. We find that assessee is paying royalty @ 8% on exports and 5% for sale within India IT(TP)A Nos.188 & 295/Bang/2015 & 87 & 88/Bang/2016 Page 10 of 11 as per license agreement dated 31.10.2003. Subsequently, principal agreed to waive royalty in respect of Rudrapur plant of assessee w.e.f. 1st April, 2007. It is not case of AO or TPO that royalty rate of other units excluding Rudrapur unit has been increased on waiver of royalty for Rudrapur unit. It is also not case of AO/TPO that sales from Rudrapur unit was also included to compute royalty payable to principal. Under these facts, in our considered opinion, no part of royalty payment can be considered as royalty of Rudrapur unit and therefore, action of AO/TPO to apportion part of royalty payment to Rudrapur unit is not valid and proper. We hold accordingly and appeal of Revenue for AY 2010-11 is dismissed and ground Nos. 9 & 10 of assessee s appeal for AY 2011-12 are allowed. 19. Regarding ground No.11 of assessee s appeal for AY 2011-12, ld. AR of assessee reiterated same contentions which were raised before DRP. ld. DR supported orders of authorities below. 20. We have considered rival submissions. We find that it is noted by DRP on page 9 of its order that assessee has provided sample copy of invoice regarding addition to fixed assets. Hence it is seen that even before DRP, full details and supporting invoices regarding claim of addition to fixed assets were not furnished. Hence on this issue, we find no reason to interfere in order of AO/TPO. Accordingly ground Nos. 11 of assessee s appeal is rejected. 21. In result, appeal of assessee for AY 2010-11 is allowed for IT(TP)A Nos.188 & 295/Bang/2015 & 87 & 88/Bang/2016 Page 11 of 11 statistical purpose and for AY 2011-12 is partly allowed for statistical purposes and appeal of revenue for AY 2010-11 is dismissed. 22. In combined result, appeal of assessee for AY 2007-08 & 2010- 11 are allowed for statistical purposes, for AY 2011-12 is partly allowed for statistical and appeal of revenue for AY 2010-11 is dismissed. Pronounced in open court on this 17th day of October, 2016. Sd/- Sd/- (SUNIL KUMAR YADAV ) ( A.K. GARODIA ) Judicial Member Accountant Member Bangalore, Dated, 17th October, 2016. /D S/ Copy to: 1. Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order Assistant Registrar, ITAT, Bangalore. M/s. Fosroc Chemicals (India) Pvt. Ltd. v. Deputy Commissioner of Income Tax, Large Taxpayer Unit, Circle 1, Bangalore