Income Tax Appellate Tribunal - Hyderabad
Tns India Private Ltd.,, Hyderabad vs Assessee on 25 November, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B" : HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA.No.944/Hyd/2007
Assessment Year 2003-2004
TNS India Pvt. Ltd. vs. ACIT, Circle 2(3)
Hyderabad Hyderabad
PAN AABCN2278F
(Appellant (Respondent)
ITA.No.194/Hyd/2008
Assessment Year 2004-2005
TNS India Pvt. Ltd. vs. ACIT, Circle 2(3)
Hyderabad Hyderabad
PAN AABCN2278F
(Appellant (Respondent)
ITA.No.74/Hyd/2008
Assessment Year 2004-2005
ACIT, Circle 2(3) vs. TNS India Pvt. Ltd.
Hyderabad Hyderabad
PAN AABCN2278F
(Appellant (Respondent)
ITA.No.793/Hyd/2009
Assessment Year 2005-2006
TNS India Pvt. Ltd. vs. ACIT, Circle 2(3)
Hyderabad Hyderabad
PAN AABCN2278F
(Appellant (Respondent)
Ϯ
ITA.No.944/H/07, 194 & 74/H/08, 793/H/09,
654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
ITA.No.654 & 655, /Hyd/2010 & 7/Hyd/2012
Assessment Years 2003-04, 2004-05 &2005-06
TNS India Pvt. Ltd. vs. ACIT, Circle 2(3)
Hyderabad Hyderabad
PAN AABCN2278F
(Appellant (Respondent)
For Assessee : Mr. Pankaj Jain
For Revenue : Mr. D.Sudhakar Rao, CIT DR
Date of Hearing : 25.11.2013
Date of pronouncement : 22.01.2014
ORDER
PER BENCH These appeals are by assessee for assessment years 2003-2004 to 2005-2006 and cross-appeal by the Revenue for assessment year 2004-2005. ITA.No.654, 655 and 7 are against the Orders of the CIT(A) confirming the penalty under section 271(1)(c) for the same assessment years. Since, common issues are involved, these appeals were heard together and decided by this common order.
2. We have heard the learned Counsel and the learned D.R. and perused the paper books and other documents placed on record along with various case law referred. For the sake of convenience the issues in appeal for AY 2003-04 in ITA.No.944 are discussed in detail.
ITA.No.944/Hyd/2007 - A.Y. 2003-2004 :
3. This is assessee's appeal against the order of the CIT(A)-III, Hyderabad dated 15.06.2007. Assessee has raised the following grounds :
ϯ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
"1. The Order of the Assessing Officer and the CIT(A) is contrary to law, facts and circumstances of the case.
2. The Assessing Officer erred in determining the Arm's Length Price in respect of the management fee paid at Rs. NIL.
3. The CIT(A) ought not to have sustained the determining of the arm's length price at Rs. NIL.
4. The Assessing Officer ought to have calculated the arm's length price himself, if assessee could not substantiate the same.
5. The CIT(A) ought to have calculated the arm's length price himself, if assessee could not substantiate the same.
6. The Assessing Officer ought not to have disallowed the deferred revenue expenditure claimed by assessee.
7. The CIT(A) ought not to have sustained the disallowance of the deferred revenue expenditure by the Assessing Officer.
8. The Assessing Officer ought not to have disallowed the service tax credit notes u/s. 43B.
9. The CIT(A) ought not to have sustained the disallowance of the service tax credits notes u/s. 43B.
10. Any other ground which assessee may urge at or before the hearing."
4. Briefly stated, assessee TNS Pvt. Ltd. is engaged in conducting quantitative and qualitative market research, having specialized divisions for media, social development, healthcare projects, opinion polls, automotive and IT & telecom sectors. The company was incorporated in the year 1992 as Oracle Research and Consultancy Private Limited and was part of the MBL Group, which was acquired by NFO Group (NFO Worldwide Inc., together with its associates referred to as 'NFO Group'). In the year 2003, the NFO group was acquired by TNS Group. During the year, assessee had a turnover of Rs.28.76 crores and filed its return of income on November 28, 2003, disclosing a net income of Rs.1,99,26,317, after claiming ϰ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
deduction u/s. 80HHE of the Income Tax Act, 1961 ('Act') in respect of the profits from export of services. The Assessing Officer selected the case for scrutiny assessment under section 143(2) of the Act and further made a reference u/s. 92CA(1) of the Act to the Transfer Pricing Officer (Addl. Commissioner of Income Tax (Transfer Pricing) ) for determination of Arm's Length Price ('ALP') of its international transactions with Associated Enterprises ('AEs'). Assessee had the following international transactions with AEs during the year.
S.No. Particulars Name of the Amount (Rs.) AE
1. Income from provision Various AE's 3,96,87,253 of data processing around the services and market research services. world (19 No's)
2. Payment of royalty for NFO Market 43,81,044 using Market Mind mind 15,71,117 Technology, Trim Global Trim Technology and NFO 21,44,319 Central Auto Singapore Pte.
Technology to Ltd.
respective AEs
3. Payment of NFO Asia 1,14,09,520
management fees Pacific Ltd.
(group overhead HK
allocation cost and
regional overhead NFO World
12,90,667
allocation costs). Group Inc.
USA
4. Payment of interest NFO Research 3,43,894
Inc, US @
2.63%
NFO Asia
2,53,772
Pacific Ltd.
HK @ 6.20%
5. Reimbursement Various AEs 80,70,901
transactions (6 No's)
ϱ
ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
4.1. There were series of submissions made by assessee before the Transfer Pricing Officer in response to the TPO's notices, to justify the arms length nature of its international transactions.
5. The TPO after considering assessee's transfer pricing report and submissions passed his order under section 92CA dated 16.03.2006. The TPO aggregated the international transactions pertaining to provision of services and payment of royalty (S.No.1 and 2 in the above table) and applied TNMM as the most appropriate method. The margin of the company for the year was 9.89% on sales and the TPO identified two comparables with an average margin of 5.60%. Since the margin of the company was higher than the comparables, the transactions were concluded to be at arm's length. The TPO accepted the arms length nature of the interest payment and reimbursement transactions. However, TPO in respect of the transactions pertaining to management fees (group overhead allocation cost), requested assessee to substantiate the claim by furnishing details and submit evidence for the management services rendered by the AEs. In response, assessee furnished a detailed write-up of the functions performed by the AEs for the benefit of all the group companies, inter-company service agreement and the basis of allocation of cost to group companies. TPO determined the ALP of payment for management services at Rs. Nil as he held that assessee could not substantiate the services.
6. The Assessing Officer passed assessment order taking into account the Transfer Pricing Officer's order thereby making T.P. adjustment of Rs.1,27,00,187/- and also denying the deduction under section 80HHE. In addition, he also ϲ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
disallowed the deferred revenue expenditure claimed as part expenditure during the year but, allowed depreciation. The Assessing Officer also made disallowance under section 43B of the I.T. Act.
7. The learned CIT(A) after considering assessee's submissions allowed the claim in respect of deduction under section 80HHE following the ITAT decision in assessee's own case for assessment year 2002-2003. The revenue has preferred appeal ITA.956/Hyd/2007 which was disposed of by the ITAT separately vide its order dated 20.10.2008 upholding the CIT(A) order.
8. Grounds No.1 and 10 are general in nature whereas, grounds No. 2 to 5 pertains to determination of arms length price in respect of management fee paid. As briefly stated above, the TPO determined ALP of management fee at NIL whereas assessee contends that it has paid according to the market norms and the amounts paid was at arm's length.
9. Briefly submitted details are that TNS India has entered into service fee agreements with NFO World Group Inc. USA and NFO Asia Pacific Limited respectively. NFO group as part of its business strategy has centralized key management functions in SPVs set up for this purpose. These companies do not render any services to third parties and are set up exclusively for rendering services to group companies. Both the AE's are non-profit entities and assessee being a part of the global conglomerate has advantage of utilizing the specialization, expertise, know-how and technology, which has been developed in-house by the Group in all core areas of its business of market research. The AE employs personnel with substantial experience and acts as a central unit to provide ϳ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
variety of beneficial services inter alia in the below mentioned areas to companies of the Group. Due to the development in telecommunication and technology, these services / process / know-how / systems / knowledge are available to TNS India on a real-time and continuous basis through the group intra-net. The category of services provided, description of services and manner in which services are supplied are detailed in the agreements. In respect of the services being provided, assessee furnished the following services as detailed in the agreement in Annexure-1.
S.No. Nature of Description of service
service
1 New business Advice and assistance on targeting
targeting potential new MNC clients, provision
assistance of training in techniques for new
business development etc.,
2. Strategic Provision of background research
planning materials into potential clients,
assistance particular industry and markets etc.,
3. Media support Co-ordination of media requirements, services development and provision of planning and research tools etc.,
4. Public relations Advice, assist and training in services managing relationships with local media, publication and distribution of internal newsletter for employees, promotion of the Group name with potential clients, employees etc.,
5. Financial Advice on general accounting administration methods, preparing and monitoring services periodic profitability analysis, budgeting, financial forecasts, arrangement of financing facilities with banks, advice on treasury management, assistance in tax compliance, financial awareness education of personnel, central purchasing/ price negotiation service etc., ϴ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
6. Business Advising on claim, disputes, services litigation, locating and evaluating outside consultants and experts, advice and assistance on managing relationships with clients, advising on business strategy, marketing strategy, efficiency and controls, developing and improving management organization etc.,
10. Relying on the agreements placed in the paper book at page 242 and 250 it was submitted that the fee for services are calculated as under :
* The aggregate amount of costs that is subject to allocation is computed in accordance with an accepted full cost accounting method.
* From this, cost of specific services performed for Group companies is excluded;
* The costs relating to the services provided by the various department of the AE are recharged according to the selective allocation keys (i.e., primarily based on the turnover of the company - Company turnover/Group turnover * Indirect cost pool).
* Further shareholder costs including expenses relating to the issue of shares, acquisition, holding and disposal of investments and similar expenses are excluded.
11. It is submitted that assessee paid management fees of Rs.1,27,00,187/- to Worldwide Inc. USA and NFO Asia Pacific Ltd. Hongkong which comes to 4% of its revenue.
12. Referring to the submissions made before the authorities, it was contended that TNS Group Entities have entered into agreement in order to provide seamless and high quality service to the MNC clients and TNS India received benefits in the form of global consistency in business practices, ϵ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
economies of scale improvements in efficiency and access to skills, expertise on a global level and these benefits are intangible in nature and accordingly specific evidence could not be furnished to the Assessing Officer to his satisfaction for verifying the services. It was further submitted that business model of centralising activities that benefit the group is a common phenomenon in all multinational corporations and learned Counsel referred to OECD Transfer Pricing Guidelines for multinational enterprise and tax administrations to support that in the global nature of the business of the company, it is imperative for the company to avail services and any independent party would bear more than 4% of the revenue for the kind of support received from AEs.
13. Referring to the order of the CIT(A) some of the observations of the CIT(A) were contended as under.
14. With regard to the contention of the CIT(A) that the tax payer has not furnished any evidence of services rendered by AEs and further the services have not been backed by any worthwhile evidence, the learned Counsel submitted that a detailed description of services rendered by the AEs are placed before the Tribunal in its paper book at pages 46-47. The learned Counsel submitted that the inter-company agreement for the transactions which provides the categories of services, description of services and manner in which services are supplied (PB 240-255 of PB-A). The financial statements and tax return of the AE viz., NFO Asia-Pacific Limited, Hongkong (page 56 to 82 of PB-A), confirmation that such payment have been made by other group companies also (page 5 of CIT(A) order). The basis of allocation of costs by the global headquarters and regional headquarters ( page 242, 243 and ϭϬ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
250-251 of PB-A for pricing methodology and page 531 of PB-B for working of cost recharged to TNS India). A list of companies which has paid management fees, as per which the average payment of the management fees was 6.07% which was higher than the 4.5% paid by assessee. Copies of the debit notes raised on assessee by its AE ( page 215 - 218 of PB-A) and details of withholding tax on payments made to its AE (page 219 of PB-A).
14.1. With respect to the contention of the learned CIT(A) on assistance provided by the Global Headquarters are to be considered as part of shareholding activities, the learned Counsel submitted that as per the Glossary to the 2010 - OECD TP Guidelines, Shareholder activity has been defined "as an activity which is performed by a member of an MNE group (usually the parent company or a regional holding company) solely because of its ownership interest in one or more other group members, i.e., in its capacity as shareholder." The learned Counsel further taking reliance of the above submitted that the services rendered by the AEs are relating to development of new business opportunities, strategic planning assistance, media support services, public relations services, financial administration services etc., The said services provided by the AEs are not in the nature of activities carried out to protect shareholders interests in their investments and also not in the nature of stewardship. Further, as provided in the Agreements, the shareholder costs, if any are specifically excluded and not allocated to the group companies.
14.2. With respect to the contention of the learned CIT(A) on the AE has not paid any tax on management fees ϭϭ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
and hence assessee has got direct advantage of reduction of its tax liability, the learned Counsel while referring to pages 219 to 220 of the paper book, submitted that assessee has made TDS payments on the management fee payments to AE's. The AE's are subject to tax in the respective jurisdiction and have paid applicable taxes.
14.3. Learned Counsel referred to the Judgment of the Hon'ble Supreme Court in the case of CIT vs. Delhi Safe Deposit Co. Ltd., 133 ITR 756 for the proposition that true test of expenditure laid out wholly and exclusively for the business or trade is that it is incurred by assessee as incidental to that trade for the purpose of getting trade and make it pay and not in any other capacity eg. as a house holder. Learned Counsel also placed reliance on the following judgments in support of his contention that purpose of business is wider in scope than the expression for the purpose of earning profits.
• CIT vs. Malayalam Plantations Ltd. 53 ITR 140 • SA Builders vs. CIT 288 ITR 1 (S.C.) • Abhishek Auto Industries Ltd. vs. DCIT 15 ITR 168 (Trib.) • DCIT vs. Accenture Services Pvt. Ltd. (2010-TIOL- 409-ITAT-MUM); and • ITO vs. Alstom Limited (2010-TII-182-ITAT-MAD- INTL) 14.4. Referring to the order of the TPO, it was the contention that instead of determining the arms length price on the services, the TPO determined the fee payable at NIL which is in effect disallowing the entire expenditure claimed under section 37(1), which is not permitted under the provisions of Transfer Pricing Regulations. Learned Counsel ϭϮ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
referred to the Judgment of the Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd. ITA.1608 & 1070/2011 dated 29th March, 2012. In addition to the above Judgment, learned Counsel also relied on the Coordinate Bench decisions in the case of Social Media India Ltd. vs. ACIT ITA.No.1711/Hyd/2012 dated 04.10.2013, M/s. SC Enviro Agro India Pvt. Ltd. vs. DCIT ITA.No.2057 & 2058/Mum/2009 dated 07.11.2012 and M/s. Thyssen Krupp Industries India Pvt. Ltd. vs. ACIT ITA.No.7032/Mum/2011 dated 27.11.2012 and various other decisions.
14.5. Without prejudice to the above contention, it was also submitted that Transfer Pricing Officer in fact has concluded arms length nature of international transactions adopting TNMM as a method wherein the margin of assessee, considering the management fee as an expense, was arrived at 9.89 % on sales, which is higher than the arms length margin on comparable companies determined by the TPO at 5.60% and accordingly, no adjustment is warranted once arms length nature of transactions entered by the unit are considered as such under TNMM. Then he referred to the provisions of 92CA to explain scope of the provisions and determination of ALP by applying various methods prescribed under section 92C read with Rule 10B to submit that once a method was invoked by the TPO, other methods does not apply and this principle is no longer res integra. For this proposition, the learned Counsel relied on various decisions of the ITAT and High Court particularly, in the decision of Hero MotoCorp. Ltd. vs. Addl. CIT (Delhi) (Trib) in ITA.No.5130/Del/2010 dated 23.11.2012, CIT vs. Modi Revlon Pvt. Ltd. ITA.No. 1450/2010, 1451/2010, 1652/2010 and 825/2011 of Delhi High Court and various other decisions as placed in the paper book of case law.
ϭϯ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
15. Learned DR on the other hand, however, relied on the orders of the Assessing Officer and CIT(A) to submit that assessee could not provide the evidence of services provided and accordingly, the order of TPO read with Assessing Officer has to be upheld.
16. We have considered the issue. We are unable to accept the contention of the Assessing Officer/TPO with reference to the services provided by AEs. Assessee has provided the agreements which were entered not during the year but in earlier year and has been paying the service fee termed as management fee accordingly. This claim is not arising for the first time in this year but, is also there in earlier years and later years. Assessee is part of a worldwide group and they have placed some corporate centers for guidance of various units run by them across the globe. It was submitted that the costs being incurred by the centers are being shared by various units and assessee's share in this year has come to 5% of the receipts payable to NFO Worldwide Inc USA and at 4% to NFO Asia Pacific Ltd. Hongkong on the net revenues. These amounts are within the norms prescribed for payment of fees to various group companies of similar nature. There is no dispute with reference to services being provided by the group companies to assessee and assessee also paid various other amounts including royalty. As submitted by assessee, even though some correspondence was placed on record with reference to the advise given to assessee, providing a concrete evidence with reference to the services in the nature of specific activities is difficult, like proving the role of an anesthesian in an operation conducted by a surgeon. There may be an evidence of operation being performed by the Doctor in the form of sutures or scars etc, which can be proved later but the ϭϰ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
role of an anesthesian before operation and after gaining consciousness is difficult to prove as that is not tangible in nature. Likewise, for the advise given by various group centers to the group companies in day-to-day manner is difficult to place on record by way of concrete evidence but the way business is conducted, one can perceive the same. Assessee has given a detailed write-up as well as the services provided and benefit obtained which were not contradicted. The Assessing Officer did not believe the same in the absence of concrete evidence. Unless the Assessing Officer steps into assessee's business premises and observes the role of these companies/ assessee's business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations. What sort of evidence satisfies the AO is also not specified. Assessee has already placed lot of evidence in support of claims. Therefore, on that count, we are not in agreement with the Assessing Officer and TPO that services were not rendered by the group companies to assessee.
16.1. Even otherwise, the role of Transfer pricing Officer is to determine the arms length price of a transaction. He cannot reject the entire payment under the provisions of sec. 92CA as held by the Hon'ble Delhi High Court in the case of EKL Appliances ltd (supra) wherein the Hon'ble Delhi High Court, on similar facts where the TPO also determined the ALP at Nil, has held as under :
"21. The position emerging from the above decisions is that it is not necessary for assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for assessee to show that any ϭϱ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively"
for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above.
22. Even Rule IOB(l)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule lOB. Whether or not to enter into the transaction is for assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on ϭϲ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.
23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee / royalty payment was not warranted. Assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine.
24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee l royalty payment while determining the ϭϳ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs".
17. Respectfully following the above, we are of the opinion that the TPO went beyond his jurisdiction in denying the payment out-rightly, whereas, his role is limited to determining the ALP. In the guise of determination of ALP, the TPO cannot question the business decision of payment and determine that no services were rendered. In that view of the matter, the direction of the TPO cannot be upheld at all.
17.2 Be that as it may, the TPO also invoked Rule 10B to analyse the transactions on TNMM method. Accordingly, few of the transactions particularly, provisions for data processing services and royalty etc., were analysed under TNMM and accepted that assessee's PLI is more than the comparables. While determining the PLI, payment of management fees is also considered as an expenditure. In that sense, even after paying the management fee at 4%, the profit level indicator is more than the comparable cases. Therefore, assessee's transactions are deemed to be at arm's length. Considering that also, denial of management fees is not proper on the part of the TPO/ Assessing Officer. Considering the above, we are of the opinion that the action of the TPO in determining the ALP at NIL is not according to the provisions of law and also on facts. Therefore, we direct him to allow the claim.
18. However, as seen from the pricing pattern of the agreement, the methodology prescribed is not as fixed percentage of assessee's turnover/ net receipts. The costs are ϭϴ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
to be worked out in the group concern or service provider and are allocated to specific group companies. Neither the TPO nor Assessing Officer examined whether the payment of fee paid is according to the agreement or not. What we noticed, as per the invoice placed, is that assessee was given invoices at a fixed amount where as the agreement provides otherwise. There may be adjustments at the end of year based on over all cost incurred by AEs. This requires examination as TPO/AO denied the claim itself. Therefore, in order to verify the pricing methodology as prescribed in the agreement and payment of the amounts, the matter is restored to the file of the Assessing Officer to examine this aspect and allow the amounts, if the payment is according to pricing methodology agreed between the parties. Therefore, while allowing the ground on the question of claim of management fees as such, the quantification thereof is restored to the Assessing Officer to examine with reference to the agreement between the parties. Accordingly, grounds 2 to 5 are considered allowed for statistical purposes.
19. Assessee relied on various case law. In view of the above findings given, we are of the opinion that there is no need to discuss in detail case law on this issue. However, we have kept in mind various propositions and accordingly the issue was decided on merits.
20. Grounds No. 6 and 7 pertaining to deferred revenue expenditure claimed by assessee. Brief facts leading to the disallowance are that during the financial year 2002-03, the company has purchased photosets developed by M/s. Hindustan Lever Ltd. for a consideration of Rs.38,50,000/- vide agreement dated 30.01.2003. These photosets are a few ϭϵ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
sets of photographs developed, which are stated to have been used in market research studies. The company has claimed the above expenditure as revenue in nature while computing its taxable business income. However, in its books of accounts, the company chose to treat it as deferred revenue expenditure and wrote it off over a period of five years, anticipating the use of these photosets for that period in market research business. The A.O. has disallowed the same by considering the expenditure as acquisition of license rights in relation to market techniques (i.e., intangible assets) and has allowed depreciation @ 25%. The CIT(A) has upheld the same.
20.1. It was submitted that the issue whether expenditure is capital or revenue is no longer res integra. Various Supreme Court and High Court Rulings have held that the expenditure made with a view to bring into an asset or an advantage for the 'enduring benefit' of the trade is only attributable to 'Capital'. By 'enduring' it is meant ensuring in the way that fixed capital endures and it does not connote a benefit that endures in the sense that for a good number of years it relieves assessee of a revenue payment or a disadvantage. In the given instance, the expenditure on photosets is not towards bringing into an asset or an advantage for the enduring benefit of the business. The photoset are used by the company for its market research services. It was submitted that the expenditure should be allowed as revenue expenditure. Assessee places reliance on the following judicial precedents.
* ACIT vs. Core Healthcare Ltd. 37 SOT 383 * Charak Pharmaceuticals vs. JCIT 99 TTJ 1217.
ϮϬ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
20.2. Without prejudice to the above, even if the expenditure is considered to be capital in nature, the learned Counsel prayed to direct allowance of depreciation @ 25% for the balance period of years until the life of the asset, in accordance with the provisions of the Act.
21. After considering the rival contentions, we are of the opinion that on the given facts, we are unable to arrive at a finding whether it is a capital expenditure or revenue expenditure. As seen from the orders of the authorities, assessee has purchased certain photosets from Hindustan Lever for its business. As per the Assessing Officer those acquired are license rights in connection with purchase of market techniques whereas, assessee submits that they purchased photosets which are photographs developed. In view of the conflicting nature of findings, we are unable to give any finding whether the expenditure is capital or revenue. Since Assessing Officer allowed the depreciation which is also upheld by the CIT(A), without getting into the case law on the issue, we accept the alternate contention of assessee to direct the allowance of depreciation for the balance of the period until the life of the asset in accordance with the provisions of the Act. Therefore, the Assessing Officer is directed to allow depreciation in later years if not, already given to the asset capitalized by the Assessing Officer himself in this assessment year. This ground is accordingly considered as partly allowed.
22. Grounds 8 and 9 pertain to the claim of assessee on outstanding service tax liability shown in the books of accounts at Rs.47,96,834/- as on 31st March, 2003. During the assessment proceedings, assessee furnished a statement showing payment of Rs.47,90,550/- stating that the said Ϯϭ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
amount has been discharged, whereas an amount of Rs.4,33,447/- was reversed in the later year as such service tax was not receivable/payable. Since the amount is not receivable, payment does not fall within the conditions prescribed for disallowance under section 43B. Learned Assessing Officer did not agree and disallowed the same. the CIT(A) upheld the same on the reason that entries were reversed by assessee during later year therefore, the same remain outstanding and was liable for disallowance under section 43B.
23. After considering the rival contentions, we agree with assessee's claim that so much of the service tax not paid/payble cannot be disallowed under section 43B. However, there is nothing on record to examine whether the claim of service tax has been charged to P & L account. If the same is claimed as an expenditure in the P & L account, the amount to that extent cannot be claimed as an expenditure and to that extent, whether the amount is disallowable under section 43B or under section 37(1), the disallowance is required. In case assessee has not claimed service tax payments as a chargeable expenditure in its books of accounts then, question of disallowance does not arise as there is no claim in the P & L account. The reversal of entry even though happened in the books of accounts in the later year, does not affect the computation of income during the year and the same also does not come within the purview of disallowance under section 43B as the amount is not claimed otherwise. Therefore, while accepting assessee's contention in principle, the issue is restored to the file of the Assessing Officer to examine and decide accordingly. If assessee has not claimed the amount in P & L account, the disallowance of Rs.4,33,447/- does not ϮϮ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
arise. The grounds 8 and 9 are accordingly considered as allowed for statistical purposes.
24. In the result, ITA.No.944/Hyd/2007 of assessee for the assessment year 2003-2004 is partly allowed for statistical purposes.
ITA.No.194/Hyd/2008 - A.Y. 2004-2005 :
25. In this appeal assessee has raised the following grounds "1. The Order of the Assessing Officer and the CIT(A) is contrary to law, facts and circumstances of the case.
2. The Assessing Officer erred in determining the arm's length price in respect of the management fee paid at Rs. NIL.
3. The CIT(A) ought not to have sustained the determining the arm's length price at Rs. NIL.
4. The Assessing Officer ought to have calculated the arms' length price himself, if assessee could not substantiate the same".
5. The CIT(A) ought to have calculated the arm's length price himself, if assessee could not substantiate the same.
6. Any other ground which assessee may urge at or before hearing."
26. As can be seen, the issue is only with reference to transfer pricing adjustment on management fees by Ϯϯ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
determining arms length price of the transactions at NIL. During the year, assessee paid an amount of Rs.1,28,25,398/- as management fee to its AEs and the TPO determined the ALP at NIL, which the Assessing Officer disallowed in the impugned assessment year. Following the Order in earlier year, the learned CIT(A) confirmed the same.
27. This issue was discussed by us in detail in assessment year 2003-2004 and consequent to the findings in paras No. 16 to 18 hereinabove, the claim of management fee per se is accepted, but the quantification of the fee with reference to the agreements is restored to the file of the Assessing Officer. AO is directed to examine and allow as directed in assessment year 2003-2004. Grounds are considered as allowed for statistical purposes.
28. In the result, ITA.No.194/Hyd/2008 is allowed for statistical purposes.
ITA.No.74/Hyd/2008 - A.Y. 2004-2005 :
29. This is revenue's appeal on the issue of disallowance of deduction under section 80HHE which the learned CIT(A) allowed consequent to the Orders of the ITAT in earlier year. This issue is decided by the ITAT in assessment year 2003-2004 in assessee's own case in ITA.No.956/Hyd/2010 wherein it has been held as under :
"5. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit that the impugned issue is directly covered in favour of assessee by the order of the Tribunal in assessee's own case for assessment year 2002-03 wherein the Tribunal Ϯϰ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
vide para-7 of its order dated 30.11.2007 has held as under :
"7. We have carefully considered the rival submissions and perused the materials available on record. We find that the facts are not in dispute. We further find that the learned CIT(A) has allowed the deduction under sec. 80HHC vide findings recorded in paras 6.2 and 6.3 of his order which are reproduced.
6.2. After consideration of the arguments of learned Authorised Representative of the appellant, I find that it is a fact that the scope of benefit provided by section 80-HHE, has been explained and expanded vide CBDT notification dated 26.9.2000, referred to above, as per which, transmission of data processed has also been considered of similar nature as any customized electronic data (computer software), and, therefore, deduction is allowable with reference to the proceeds of data processing done for foreign enterprise. In the appellant's case, it cannot be denied that it has processed and sent data outside India to its associated enterprises, as evident from the order dated 4.3.2005 passed by the Addl. CIT (Transfer Pricing), Hyderabad, in its case for assessment year 2002-03. In normal course such proceeding of data and transmission of the same outside India may not be taken as export of computer software, but in view of the extended definition provided by the CBDT notification dated 26.9.2000, the amounts received for such services have to be treated as eligible for Ϯϱ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
deduction. Thus, in principle, I hold that the appellant is entitled for deduction u/s. 80HHE in respect of the income earned from data processing services rendered to the enterprise outside India.
6.3. However, before allowing deduction u/s.80HHE on these receipts, the Assessing Officer should satisfy himself that all the conditions prescribed in section 80HHE have been satisfied and profits of the business are adopted as per the Explanation (d) of section 80HHE, after deducting 90% of other receipts. It is further observed that allowance of deduction under sec. 80HHE for receipts arising out of information Technology enabled services (Data Processing) will not in any way entitle the appellant to claim deduction u/s.80IB of the Act on such receipts, because the transmission of data processed by the appellant outside India has been considered only as an I.T. enabled service within the extended meaning given by CBDT notification dt.26.9.00, and not as manufacture or processing of any article or thing."
In the absence of any contrary material brought on record by the Revenue against the finding of the learned CIT(A) and keeping in view the fact that there is no dispute that assessee company is simply carrying on market survey and that survey is complied as a data and such data is processed and sent to other countries;, we are of the view that in view of the CBDT Notification No.S.O.890(E) dated 26.9.2000, assessee is engaged in the export of data processing and accordingly he Ϯϲ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
is entitled to deduction under s.80HHE of the Act. This view also finds support from the decision of the Tribunal in ACIT vs. Amadeus India P. Ltd. (2002) 257 ITR (AT) 23 (Del.) wherein assessee was engaged in the export of data processing/software segment on computerized reservation system, and it has been held that the definition of computer programme includes data processing software. As such, the report of data processing software unit of assessee is entitled to deduction under s. 80HHE of the Act. Accordingly, the grounds taken by the revenue are rejected."
In the absence of any distinguishable feature brought on record by the revenue, we respectfully following the order of the Tribunal, decline to interfere with the order passed by the learned CIT(A) on this account and accordingly the grounds taken by the revenue are rejected."
30. Respectfully following the same, since the CIT(A) followed the order of ITAT on the issue, we do not see any reason to interfere with the order of the Ld.CIT(A). Accordingly, grounds are rejected.
31. In the result, appeal of the Revenue is dismissed.
ITA.No.793/Hyd/2009 - A.Y. 2005-2006 :
32. This is assessee's appeal in which assessee has raised the following grounds :
1. The order of the Assessing Officer and the CIT(A) is contrary to law, facts and circumstances of the case.
Ϯϳ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
2. The Assessing Officer erred in determining the arm's length price in respect of the management fee paid at Rs. NIL.
3. The CIT(A) ought not to have sustained the determining the arm's length price at Rs. NIL.
4. The Assessing Officer ought to have calculated the arms' length price himself, if assessee could not substantiate the same".
5. The CIT(A) ought to have calculated the arm's length price himself, if assessee could not substantiate the same.
6. Any other ground which assessee may urge at or before hearing."
33. As can be seen the only issue contested is on transfer pricing adjustment made on management fee at NIL. The issue is similar to the issue in earlier two assessment years which were decided at paras no. 16 to 18 and 26 & 27 hereinabove. Consistent with the view taken therein, the Assessing Officer is directed to allow the management fee subject to verification of quantification of the amount, as per the agreements as directed in assessment year 2003-2004. Accordingly, grounds are allowed for statistical purposes.
34. In the result, appeal of assessee is allowed for statistical purposes.
Ϯϴ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
ITA.No.654/Hyd/2010 - A.Y. 2003-2004 :
ITA.No.655/Hyd/2010 - A.Y. 2004-2005 :
ITA.No.7/Hyd/2012 - A.Y. 2005-2006 :
35. These three appeals are on penalties under section 271(1)(c) of the Act, 1961 on the disallowance of management fees at NIL. It was the submission of assessee that it has maintained documents pertaining to payment of said amount towards management fees to its AE during the previous year and furnished copies of agreements, sample invoices etc,. It was further contended that assessee has received technical, administrative and support services from its AE during the respective previous years and mere disallowance of the payments towards management fees made in those years does not attract penalty under section 271(1)(c) of the Act. Learned Assessing Officer levied penalty which the learned CIT(A) confirmed.
36. After considering the rival contentions, we do not see any reason to uphold the orders of the authorities. First of all, mere disallowance of an amount that too on transfer pricing provisions does not attract penalty under section 271(1)(c), as it cannot be considered as either the concealment of income or furnishing of inaccurate particulars. It is only a difference of opinion in determining the arms length price which may result in some adjustments, which does not lead to considering the disallowance either as concealment of income or furnishing of inaccurate particulars.
37. The Coordinate Bench of this Tribunal in the case of DCIT vs. RBS Equities India Ltd. 133 ITD 77 considered similar fact position and held that penalty is not leviable. In that case, the Tribunal has held as follows :
Ϯϵ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
"2. The assessee before us is a corporate member of the Bombay Stock Exchange as also National Stock Exchange, and also holds a merchant banker licence from Securities and Exchange Board of India. During the relevant previous year, the assessee has carried out stockbroking activities for foreign institutional investors, mutual funds, domestic financial institutions and banks. In the course of business so carried out, the assessee has also provided stockbroking services to certain AEs, namely, ABN Amro Asia (Mauritius) Ltd., Mauritius, ABN Amro Assets Management (Asia) Ltd, Hong Kong; ABM Amro Asia Equities (UK) Ltd. UK, and ABN Amro Bank NV, The Netherlands. While computing ALP, the assessee's transfer pricing study had adopted the TNMM. The CUP method was rejected for the reason that to compare similarity of transactions, one would need to establish the closeness of all material factors affecting the pricing of transactions, but there are various factors that affect the brokerage rates viz. volumes traded, types of trade and nature of services included therein, client relationship, client type, market forces at the point of time when transactions were entered into, brokerage offered by the competition, business referrals by the clients and other related factors, and the differences on account of these factors may not be quantifiable at all. The assessee took the stand that Indian transfer pricing regulations prescribe application of CUP method in determining ALP, only in cases wherein reliable adjustments can be made for differing factors, which would affect the price, and since, in the instant case, no reliable adjustments could be made to neutralize all the varying factors, it was not possible to apply internal CUPs for ascertaining the ALP. In the course of the assessment proceedings, the AO referred the ascertainment of ALP to the TPO, and, in the course of the proceedings before the TPO, it was once again contended by the assessee that prices charged for stockbroking services to the AEs cannot be compared with prices charged for stockbroking services to the non-AEs for the reason that no marketing effort are required, or credit risks involved, in doing business with AE, and as no research inputs are furnished to the AEs. It was submitted that while AEs are given services in the nature of 'execution only', non-AEs are being rendered 'full broking services'. The TPO rejected these contentions and observed that "there is no agreement between the assessee and its AE and no documentary evidences in this regard have been produced except a confirmation letter from Mr. Anil Shah, Head of Equities of the assessee company-which is only a self-serving letter". The TPO also observed that "..the contention of the assessee that no marketing and sales efforts are required in the case of the AEs is not acceptable in totality" and that "it is not possible that marketing and sales Department would not have made any efforts in sourcing business from AEs". With these observations, the TPO rejected the TNMM and ϯϬ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
proceeded to adopt CUP. It was mainly in this backdrop that the TPO made an adjustment of Rs 1,10,29,746 to the ALP of broking service charges invoiced by the assessee to its AEs. This determination of the ALP was adopted by the AO. The assessee did not pursue the matter in appeal, and this ALP adjustment of Rs 1,10,29,746 thus attained finality.
Held :
It is sine qua non for imposition of penalty that the AO or the CIT(A), during the course of any proceedings before him, should be satisfied that the assessee has (i) concealed his income, or (ii) furnished inaccurate particulars of income. In addition to normal connotations of 'concealment' and 'furnishing of inaccurate particulars' a deeming fiction is also implicit in the scheme of penalty provisions. One deeming fiction, by way of Expln. 1 to s. 271(1)(c) envisages two situations--(a) first, where in respect of any facts material to the computation of total income under the provisions of the Act, the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the AO or the CIT(A); and,
(b) second, where in respect of any facts material to the computation of total income under the provisions of this Act, the assessee is not able to substantiate the explanation and the assessee fails to prove that such explanation is bona fide and that the assessee had disclosed all the facts relating to the same and material to the computation of total income. There is, however, another deeming fiction, which is a special provision with regard to the ALP adjustments made by the AO under s.
92C(4). This deeming fiction provides that where any ALP adjustments are made under s. 92C(4), the amount so disallowed or added back is deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee can demonstrate "that the price charged or paid in such transaction was computed in accordance with the provisions contained in s. 92C and in the manner prescribed under that section, in good faith and with due diligence". In other words, therefore, the deeming fiction cannot apply when assessee is able to show that price charged or paid in respect of related international transaction was computed in accordance with the scheme of s. 92C, and in the manner prescribed therein, in good faith and due diligence. While Expln. 1 is a general provision in the sense it deals with explanation on "any facts relating to computation of total income", Expln. 7 is a specific provision which is confined to "any amount is added or disallowed in computing the total income under sub-s. (4) of s. 92C". The question as to which Explanation is to be applied, on the facts of this case which is specifically dealing with an ALP adjustment under s.
ϯϭ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
92C(4), is not difficult to answer. It is fairly well-settled in law that general provisions do not override specific provisions, as aptly described by the maxim 'generalia specialibus non derogant'. A special provision normally excludes the operation of a general provision and such a principle governs the instant case also. Therefore, in a situation in which Expln. 7 comes into play, the provisions of Expln. 1 cannot be applied. It is thus clear that so far as the present case is concerned, the same is to be examined on the touchstone of legal position under Expln. 7 to s. 271(1)(c). In this view of the matter, the AO's reference to Expln. 1 to s. 271(1)(c), and reliance upon judicial precedents on the scope of the said Explanation, is wholly misconceived. (Para 8) The scheme of Expln. 7 to s. 271(1)(c) makes it clear that the onus on the assessee is only to show that the ALP was computed by the assessee in accordance with the scheme of s. 92C in good faith and with due diligence. It is not even in dispute in the present case that the ALP was computed in accordance with the scheme of s. 92C in as much as TNMM, which is followed by the assessee, is one of the prescribed methods under s. 92C(1) and the AO has not found any faults in computation of ALP in accordance with TNMM. In fact, he has rejected the TNMM on the ground that CUP method could be applied to the facts of this case. Whatever be the legal merits of this approach and the judicial precedents by the Co-ordinate Benches on this issue, it is certainly a highly contentious issue whether a priority in the methods of determining ALP can be said to exist, even implicitly, giving an edge to CUP method over other methods. In a situation, therefore, when the TNMM is rejected by the Revenue authorities, without finding any specific reasons for inapplicability of the TNMM and simply on the ground that a direct method is more appropriate to the particular fact situation, it cannot at all be a fit case for imposition of penalty in as much as it cannot be said that in a such situation, and despite the findings--contested or uncontested--to the effect that a direct method is preferable, the ALP has not been computed by the assessee under the scheme of s. 92C. As to the scope of connotations of expression 'in good faith' appearing in Expln. 7, guidance is taken from s. 3(22) of General Clauses Act which states that "a thing shall be deemed to be done in 'good faith' where it is in fact done honestly, whether it is done negligently or not". A thing done in good faith is a thing done honestly, and, therefore, it is not even necessary whether in doing that thing the assessee has been negligent or not. There is no way that an assessee can prove his honesty, because honesty, in practical terms, only implies lack of dishonesty, and proving not being dishonest is essentially proving a negative, which is almost impossible. However, as the expression 'good faith' is used along with 'due diligence', which refers to proper care, it is ϯϮ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
also essential that not only the action of the assessee should be in good faith, i.e. honestly, but also with proper care. An act done with due diligence, would mean an act done with as much as care as a prudent person would take in such circumstances. In view of these discussions, as long as no dishonesty is found in the conduct of the assessee and as long as he has done what a reasonable man would have done in his circumstances, to ensure that the ALP was determined in accordance with the scheme of s. 92C, deeming fiction under Expln. 7 cannot be invoked. (Para 9) The assessee has determined the ALP in good faith in as much as he has proceeded on the basis that TNMM is most appropriate method on the facts of this case, and he has also set out the reasons as to why CUP method must not be applied in this case. While the TPO has not even questioned the former, he has rejected latter only on the grounds that (a) it is incorrect to proceed on the basis that no marketing efforts are required in the case of the AEs, and (b) the onus was on the assessee to demonstrate that no research inputs were given by the AEs. Both of these reasons, to say the least, are highly questionable. The very foundation of transfer pricing exercise is that whereas when independent enterprise deal with each other, their financial and commercial terms are dictated by the dynamics of market forces, it is not exactly the case vis-a- vis dealings with intra-AE transactions and that AEs are able to influence commercial decisions of each other. The plea that when intra-AE transactions are inherently treated as not really based on the dynamics of market forces, it is unrealistic to expect that marketing efforts are also required for securing intra-AE business, cannot be dismissed as worthy of outright rejection. It is also well- settled in law that nobody can be expected to prove the impossible of proving a negative. Therefore, to expect the assessee to establish that the assessee did not give research inputs to the AEs may perhaps indeed be an impossible burden to discharge. The grounds on which the ALP determination by the assessee has been rejected are thus reasonably debatable. Lack of good faith and due diligence cannot be inferred when the grounds on which ALP determined by the assessee has been rejected are reasonably debatable, even if correct. The assessee has obtained a TP study from an outside expert, and this study, objectivity of which is neither called into question nor seems to be, upon perusal of this TP study, questionable anyway, approves TNMM for determination of ALP--a proposition which has not been specifically rejected by the Revenue authorities. On these facts, lack of 'due diligence' in determining the ALP is neither indicated nor can be inferred. In such a situation, it cannot be said that the assessee has not determined the ALP in accordance with the scheme of s. 92C in good faith and with due ϯϯ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
diligence. Therefore, the conditions precedent for invoking Expln. 7 to s. 271(1)(c) did not exist on the facts of this case. Neither the case of the assessee is covered by the main s. 271(1)(c), nor Expln. 7 thereto can be invoked on the facts of this case. Explanation 1 to s. 271(1)(c), as seen earlier has no application in respect of additions or disallowances in respect of ALP adjustments anyway, nor any other deeming fictions come into play here. Accordingly, the facts of the present case did not warrant or justify the imposition of penalty under s. 271(1)(c). Therefore, the conclusions arrived at by the Commissioner (Appeals) are approved and no interference is called for in the manner. (Para 10)."
38. Likewise, penalty was also not approved in the case of DCIT vs. Vertex Customer Service India Pvt. Ltd. 34 SOT 532 wherein when there is full disclosure by the assessee and conduct being not malafide, penalty under section 271(1)(c) was held to be not justified. Neither the AO nor CIT(A) considered the Explanation 7 to Sec.271(1)(c) which is material for invoking the provisions in Transfer Pricing case. There is no discussion at all about lack of 'due diligence' in determining the ALP by assessee. Therefore, the conditions precedent for invoking Expln. 7 to s. 271(1)(c) did not exist on the facts of this case. Neither the case of the assessee is covered by the main s. 271(1)(c), nor Expln. 7 thereto can be invoked on the facts of this case.
39. Moreover, as can be seen from the Orders in quantum appeals, we have already held that payment of management fees is genuine and to be allowed and the matter is restored to the file of Assessing Officer to examine the quantification of the fee claimed as per the agreements. In these circumstances, there cannot be any issue of levy of penalty. For these reasons, the penalty levied in respective assessment years is considered unwarranted and accordingly, they are cancelled.
ϯϰ ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd.
40. In the result, these appeals of assessee are allowed.
41. To sum-up, ITA.No.944/Hyd/2007 of assessee is partly allowed for statistical purposes. ITA.No.194/Hyd/2008, and ITA.No.793/Hyd/2009 of assessee are allowed for statistical purposes, ITA.No.654 & 655/Hyd/2010 and 7/Hyd/2012 of assessee are allowed and ITA.No.74/Hyd/2008 of the Revenue is dismissed.
Order pronounced in the open Court on 22.01.2014.
Sd/- Sd/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Date 22nd January, 2014 VBP/- Copy to
1. TNS India Pvt. Ltd. 2nd Floor, Shree Prashanthi Sai Towers, Plot No.68, H.No.8-2-248, Sree Nagarjuna Cooperative Housing Society, Punjagutta, Hyderabad - 500 082.
2. ACIT, Circle 2(3), I.T. Towers, Masab Tank, Hyderabad.
3. CIT(A)-III, Hyderabad.
4. CIT-II, Hyderabad
5. D.R. 'B' Bench, ITAT, Hyderabad.