DRESSER-RAND INDIA P. LTD, MUMBAI v. ADDL CIT RG 6(2), MUMBAI

ITA 8753/MUM/2010 | 2006-2007
Pronouncement Date: 07-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 875319914 RSA 2010
Assessee PAN AAACD9867P
Bench Mumbai
Appeal Number ITA 8753/MUM/2010
Duration Of Justice 8 month(s) 23 day(s)
Appellant DRESSER-RAND INDIA P. LTD, MUMBAI
Respondent ADDL CIT RG 6(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 07-09-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 07-09-2011
Assessment Year 2006-2007
Appeal Filed On 15-12-2010
Judgment Text
ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 1 OF 21 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH MUMBAI BEFORE SHRI PRAMOD KUMAR (ACCOUNTANT MEMBER) AND SHRI VIJAY PAL RAO (JUDICIAL MEMBER) ITA NO. 8753/MUM/2010 ASSESSMENT YEAR: 2006-07 DRESSER- RAND INDIA PVT LTD ... APPELLANT LOTUS BUSINESS PARK 11 TH FLOOR VEERA DESAI ROAD ANDHERI WEST MUMBAI 400053 [PAN : AAACD9867P] VS. ADDITIONAL COMMISSIONER OF INCOME TAX RANGE 6(2) MUMBAI RESPONDENT APPEARANCES: SUNIL M LALA ALONGWITH SHABBIR MOTORWALA AND DIVNAG SHAH FOR THE APPELLANT KUSUM INGLE FOR THE RESPONDENT DATE OF HEARING : JUNE 14 2011 DATE OF PRONOUNCEMENT : SEPTEMBER 7 2011 O R D E R PER PRAMOD KUMAR : 1. BY WAY OF THIS APPEAL THE ASSESSEE APPELLANT HA S CHALLENGED CORRECTNESS OF ORDER DATED 28 TH OCTOBER 2010 PASSED BY THE ASSESSING OFFICER UNDE R SECTION ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 2 OF 21 143(3) R.W.S. 144C(5) OF THE INCOME TAX ACT 1961 FOR THE ASSESSMENT YEAR 2006-07. 2. GROUND NOS. 2 AND 3 WHICH ARE MAIN ISSUES REQUI RING OUR ADJUDICATION IN THIS APPEAL ARE AS FOLLOWS: GROUND NO.2-ADDITIONS UNDER SECTION 92CA(3) OF THE ACT IN RESPECT OF PAYMENTS TO PARENT COMPANY: DRESSER RAND US AGG REGATING TO RS.10 59 70 009(RS.10 55 00 000 TOWARDS COST CONTRI BUTIONS AND RS.4 70 009 TOWARDS FIELD SUPERVISION). 2.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE TRANSFER PRICING OFFICER 9TOP) AND THE AO ERRED AND THE DRP FURTHER ERRED IN CONFIRMING THE ADDITIONS ON COST C ONTRIBUTION (RS.10 55 00 000) AND FIELD SUPERVISION CHARGES (RS .4 70 009) UNDER SECTION 92CA(3) OF THE ACT BY DISREGARDING THE DOCU MENTATION MAINTAINED UNDER SECTION 92D OF THE ACT READ WITH R ULE 10D OF THE INCOME TAX RULES 1962(THE RULES) AND NOT APPRECIAT ING THE FACTUAL DETAILS SUBMISSIONS AND VARIOUS DOCUMENTARY EVIDEN CES DEMONSTRATING BENEFITS TO THE APPELLANT UNDER THE C OST CONTRIBUTION AGREEMENT. 2.2 THE APPELLANT SUBMITS THAT THE TOP THE AO AND THE DRP FAILED TO APPRECIATE THE COMPUTATION OF ARMS LENGTH PRICE IN ACCORDANCE WITH THE TRANSACTIONAL NET MARGIN METHOD PRESCRIBED UNDER SECTION 92C(1) OF THE ACT READ WITH RULE 10B(1)(E) OF THE R ULES. ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 3 OF 21 2.3 THE APPELLANTS PRAYS THAT THE TRANSFER PRICING ADJUSTMENTS MADE UNDER SECTION 92CA (3) OF THE ACT ARE ERRONEOU S UNWARRANTED AND BE DELETED. GROUND NO.3 ALTERNATIVE DISALLOWANCE ON ACCOUNT OF ALLOCATION OF COST CONTRIBUTION CHARGES PAID TO DRESSER RAND US O F RS.10 55 00 000 UNDER SECTION 37(1) SECTION 40A(2) (B) AND SECTION 40(A)(I) OF THE ACT . 3.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE AO ERRED AND THE DRP FURTHER ERRED IN CONFIRMIN G THE ADDITIONS ON COST CONTRIBUTION (RS.10 55 00 000) TO DRESSER R AND US UNDER SECTION 37(1) SECTION 40(2)(B) AND SECTION 40(A)(I ) OF THE ACT WITHOUT ANY SHOW CAUSE NOTICE AND DISREGARDING THE FACTUAL DETAILS SUBMISSIONS AND VARIOUS DOCUMENTARY EVIDENCES FILED WITH RESPECT OF THE COST CONTRIBUTION AGREEMENT. 3.2 THE APPELLANTS SUBMITS THAT THE AO AND DRP FAIL ED TO APPRECIATE THE FACT THAT SERVICES HAVE BEEN AVAILED AND THAT THE EXPENSE TOWARDS COST CONTRIBUTION CHARGES HAVE BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND IS FULLY DEDUCTIBLE UNDER SECTION 37 OF THE ACT. 3.3 THE APPELLANT SUBMITS THAT THE AO AND DRP FAILE D TO APPRECIATE THAT THE PAYMENT OF COST CONTRIBUTION TO DRESSER RAND US DOES NOT FALL WITHIN THE AMBIT OF SECTION 40A(2)(B) OF THE ACT IN VIEW OF SPECIFIC COVERABLE UNDER SECTIONS 92 TO 92F OF T HE ACT. ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 4 OF 21 3.4 THE APPELLANTS SUBMITS THAT THE AO AND DRP FAIL ED TO APPRECIATE THAT NO TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE ON THE COST CONTRIBUTION PAYMENT TO DRESSER RAND US AS THE SAME ARE NOT IN THE NATURE OF INCOME TAXABLE IN INDIA UNDER THE ACT AND/OR UNDER THE INDIA-USA TAX TREATY AND THEREBY THE DISALLOWAN CE UNDER SECTION 40(A)(IA) OF THE ACT IS UNWARRANTED. 3.5 THE APPELLANTS PRAYS THAT THE DISALLOWANCE ON ACCOUNT OF COST CONTRIBUTION PAYMENT OF RS.10 55 00 000 IS ERRONEOU S UNWARRANTED AND BE DELETED. 3. BRIEFLY STATED THE MATERIAL FACTS AS CULLED OU T FROM MATERIAL BEFORE US ARE LIKE THIS. THE ASSESSEE IS A WHOLLY OWNED SUBSIDIAR Y OF DRESSER RAND CO USA. UNTIL THE TIME THE ASSESSEE COMPANY WAS INCORPORATE D AS A SEPARATE ENTITY IN THE YEAR 2000 AS A RESULT OF DEMERGER THE ASSESSEE WAS SAID TO BE A PART OF INGERSOLL RAND INDIA LIMITED. UPON BEING INCORPORAT ED AS A SEPARATE COMPANY THE ASSESSEE WAS INITIALLY A WHOLLY OWNED SUBSIDIAR Y OF INGERSOLL RAND BUT EFFECTIVE 1 ST NOVEMBER 2004 DRESSER RAND US ACQUIRED THIS COMPA NY FROM INGERSOLL RAND AND DRESSER RAND US CONTINUES TO BE OWNER OF THE ASSESSEE COMPANY. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING VARIOUS TYPES OF PROCESS GAS COMPRESSORS INCLUDING HORSEPO WER RECIPROCATING COMPRESSORS AND ITS ACCESSORIES AS ALSO OF PROVIDI NG FIELD SERVICES IN CONNECTION WITH THE SAME. DURING THE RELEVANT PREVIOUS YEAR T HE ASSESSEE HAD INTER ALIA INCURRED EXPENDITURE OF RS 10 54 98 908 TOWARDS COS T CONTRIBUTION ALLOCATION BY DRESSER RAND USA. AS ALL THE INTERNATIONAL TRANSACT IONS ENTERED INTO BY THE ASSESSEE WERE REFERRED TO THE TRANSFER PRICING OFFI CER FOR DETERMINATION OF ARMS LENGTH PRICE THIS COST CONTRIBUTION ALLOCATION ALS O CAME UP FOR EXAMINATION BY THE TRANSFER PRICING OFFICER. IN THE COURSE OF PROC EEDINGS BEFORE THE TRANSFER PRICING OFFICER IT WAS NOTICED THAT THE ASSESSEE H AD ENTERED INTO A COST CONTRIBUTION AGREEMENT WITH ITS PARENT COMPANY AN D IN TERMS OF THE SAID ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 5 OF 21 AGREEMENT (A) THE ASSESSEE SHOULD COMPENSATE ON AN EQUITABLE BASIS FOR THE EXPENSES INCURRED BY THE HOLDING COMPANY ON ITS RES OURCES WHICH ARE BEING SHARED WITH THE ASSESSEE AND OTHER AFFILIATES(ARTIC LE-1); (B) THE ALLOCATION OF THE COST CONTRIBUTION TO VARIOUS AFFILIATES OF THE GROU P (INCLUDING THE ASSESSEE) DEPENDS ON TWO ALLOCATION KEYS I.E. BASED ON NUMBE R OF HEADCOUNT AND BASED ON SALES PROPORTION (ARTICLE 4.2); (C) ALL THE DIR ECT AND INDIRECT COSTS INCLUDING OVERHEADS AND TERMINATION COSTS INCURRED BY DRESSER RAND GROUP INC WITH RESPECT TO THE RESOURCES SHALL BE COMPUTED AS COST CONTRIBUTION (ARTICLE 4.1); AND (D) THE RESOURCES INCLUDE STRATEGY ADMINISTRAT ION FINANCE AND TREASURY TAX AND LEGAL SERVICES (ARTICLE -3). IT WAS ALSO NOTED THAT THE SAID AGREEMENT WAS VALID FOR 1.6.2005 TO 31.12.2005 AND RENEWABLE THE REAFTER BY TWO-YEAR PERIODS. IN RESPONSE TO THE TRANSFER PRICING OFFICER TO EXPL AIN THE SERVICES RENDERED BY DRESSER RAND FOR WHICH ASSESSEE WAS TO CONTRIBUTE COSTS IT WAS EXPLAINED BY THE ASSESSEE THAT THE SERVICES SO RENDERED BY DRES SER RAND INCLUDED (I) HUMAN RESOURCES SERVICES (II) LEGAL SERVICES ; (III) TRE ASURY SERVICES (IV) TECHNICAL SUPPORT SERVICES; (V) MARKETING SERVICES; (VI) GLOB AL BUSINESS OVERSIGHT SERVICES; (VII) INTERNAL AUDIT AND CONTROLS AND (VI II) OTHER SERVICES SUCH AS PROVISION FOR VALUE ADDED SERVICES SHARING FOR BES T PRACTICES FOR OPTIMIZATION OF SERVICES AND SAFETY PROCEDURES ETC. IT WAS ALS O EXPLAINED BY THE ASSESSE THAT IT HAS NO FACILITIES OR MANPOWER IN ORDER TO HANDLE THE ABOVE FIELDS EXCEPT FOR A THREE MEMBER TEAM IN THE FIELD OF HUMAN RESOURCE SE RVICES AND IT WAS FOR THIS REASON THAT THE COMPANY HAD TO AVAIL THE SERVICES O F THE HOLDING/PARENT COMPANY AND THE COST CONTRIBUTION ALLOCATED BY TH E DRESSER RAND GROUP TO THE ASSESSEE IS JUSTIFIED. NONE OF THESE SUBMISSIONS I MPRESSED THE TRANSFER PRICING OFFICER. THE REASONS FOR TPOS REJECTING THE SUBMIS SIONS MADE BY THE ASSESSEE AND FOR HIS HOLDING THAT THE ARMS LENGTH PRICE OF SERVICES RENDERED IN THE COST CONTRIBUTION ARRANGEMENT WAS NIL WERE STATED TO BE AS FOLLOWS :- A. IT WAS INCORRECT ON THE PART OF THE ASSESSEE THAT T HE ASSESSEE DID NOT HAVE AN AUDIT DEPARTMENT AND THAT THE ASSESSEE NEE DED TO AVAIL AUDIT SERVICES FROM DRESSER RAND USA. THE TPO CAME TO THIS ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 6 OF 21 CONCLUSION ON THE BASIS OF HIS FINDING THAT (I) THE ASSESSEE HAD TWO MANAGERS AND EXECUTIVES IN THE FIELD OF ACCOUNTS; ( II) THE SALARIES OF THESE MANAGERS AND EXECUTIVES IN THE FIELD OF ACCOU NTS AMOUNTING TO RS 11.65 LAKHS WERE INCLUDED IN THE STAFF COSTS ; AND (III) THE ASSESSEE HAD ALSO PAID RS 21.86 TOWARDS AUDIT FEES AS EVIDENT FROM THE PROFIT AND LOSS ACCOUNT. B. WHILE THE ASSESSEE HAD INCURRED COST CONTRIBUTION A LLOCATION OF US $ 5 03 660 TOWARDS TREASURY SERVICES WHICH INCLUDE NEGOTIATIONS WITH BANKING INSTITUTIONS CORPORATE GUARANTEES AND FOREIGN CURRENCY MANAGEMENT ETC THE ASSESSEE IS INFACT A C ASH RICH COMPANY WHICH DID NOT NEED ANY LOANS OR GUARANTEES. THE TREASURY SERVICES WERE THUS NOT RELATED TO ASSESSEES REQUIR EMENTS. C. WHILE THE ASSESSEE HAD CLAIMED COST CONTRIBUTION AL LOCATION OF US $ 6 37 070 TOWARDS GLOBAL BUSINESS OVERSIGHT WHICH WERE SAID TO BE TOWARDS GUIDANCE PROVIDED BY THE GLOBAL LEADERSHIP TEAM FOR EFFICIENT MANAGEMENT FOR INDIA OPERATIONS THE ASS ESSEE HAS NOT FURNISHED ANY PRECISE DETAILS OR EVIDENCE OF THE EX ACT SERVICES RECEIVED BY THE ASSESSEE. IT WAS ALSO NOTED THAT TH E ASSESSEES STAFF MEMBERS ALSO INCLUDE SEVERAL EXPERTS IN THE FIELD O F BUSINESS MANAGEMENT PRODUCTION AND MARKETING OPERATIONS AN D AS SUCH THE ASSESSEE DID NOT REALLY NEED ANY SERVICES FOR G LOBAL BUSINESS OVERSIGHT. D. THE ASSESSEE DID NOT INCUR ANY SUCH COSTS IN THE PR ECEDING PERIOD AND THE AGREEMENT WAS ENTERED INTO ON 15.12.2005 B UT WITH RETROSPECTIVE EFFECT FROM 1 ST JUNE 2005. THE ASSESSEES RELATIONSHIP WITH THE AE REMAINED THE SAME BEFORE THE COST SHARI NG AGREEMENT WAS ENTERED INTO. ALL THESE FACTS INDICATE THAT THE COST SHARING AGREEMENT WAS AN AFTERTHOUGHT FOR THE PURPOSE OF SH IFTING PROFITS. ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 7 OF 21 E. AN ANALYSIS OF SALES EXPENSES AND PROFITABILITY OF THE ASSESSEE FOR LAST THREE YEARS INDICATES THAT THE COST SHARING A GREEMENT IS NOT A GENUINE BUSINESS ARRANGEMENT. THIS CONCLUSION WAS BASED ON THE OBSERVATIONS (A) THAT NORMALLY AS TURNOVER INCREASE S THE RATIO OF OVERHEADS TO SALES SHOULD REDUCE BUT THIS YEAR AS A RESULT OF COST SHARING ARRANGEMENT THE RATIO HAS GONE UP EVEN AS THE TURNOVER HAS GONE UP; (B) THAT OPERATING COSTS IN PERCENTAGE TER MS WHICH SHOULD COME DOWN AS A RESULT OF TURNOVER INCREASE HAS INC REASED THIS YEAR; (C) THE TURNOVER OF THE ASSESSEE SHOULD HAVE GROWN AT AN ACCELERATED RATE AS A RESULT OF AVAILING THESE SERVICES BUT TH E GROWTH RATE HAS COME DOWN THIS YEAR VIS--VIS THE GROWTH RATE LAST YEAR 21.29% AS AGAINST 33.07% LAST YEAR; (D) OVERALL PROFITABILITY OF THE ASSESSEE SHOULD HAVE INCREASED WITH INCREASE OF TURNOVER BU T IT HAS REDUCED FROM 13.72% TO 13.31%. 4. THE TRANSFER PRICING OFFICER THUS HELD THAT THE RE ARE NO REAL SERVICES AVAILED BY THE ASSESSEE FROM DRESSER RAND US UNDER THE COST CONTRIBUTION ARRANGEMENT AND HENCE THE PAYMENT OF RS. 10.055 CR ORES UNDER THE SAID ARRANGEMENT WAS NOT A GENUINE EXPENDITURE INCURRED FOR THE PURPOSES OF BUSINESS OF THE ASSESSEE. IT WAS ALSO HELD THAT THE ARMS LENGTH PRICE OF SERVICES AVAILED BY THE ASSESSEE UNDER THE COST CONTRIBUTION ARRANGEMENT IS NIL. THE TPO FURTHER OBSERVED THAT EVEN IF SOME SERVICES WER E ACTUALLY AVAILED BY THE ASSESSEE THE COST SHARING ON THE BASIS OF HEAD COU NT WAS A WHOLLY UNACCEPTABLE PROPOSITION AND THAT COST SHARING SHOULD BE ON THE BASIS OF ACTUAL SERVICES AVAILED BY THE ASSESSEE. HE WENT ON TO OBSERVE THAT IF THE ASSESSEE WANTS TO GET SUCH SERVICES IN INDIA THE EXPENSES WILL BE IN TER MS OF INDIA EMPLOYEE COST AND THEREFORE ALLOCATION OF THE PARENT COMPANYS EXPE NSES INCURRED IN USA TO AN INDIAN COMPANY ON HEAD COUNT BASIS GIVES A TOTALLY DISTORTED PICTURE AND RESULTS IN EXCESS ALLOCATION OF SUCH EXPENSES TO INDIAN COM PANY. THE NEXT INTERNATIONAL ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 8 OF 21 TRANSACTION WHICH WAS PICKED UP FOR EXAMINATION BY THE TRANSFER PRICING OFFICER WAS WITH RESPECT TO FIELD SERVICES RENDERED TO (I) DRESSER RAND USA RS 1 02 250; (II) DRESSER RAND FRANCE RS 74 65 517; AND DRESSER RAND ASIA PACIFIC RS 20 63 009. THE TRANSFER PRICING OFFICE R NOTED THAT THESE SERVICES ARE RENDERED TO THE DOMESTIC CUSTOMERS AS ALSO THE ASSO CIATED ENTERPRISES ABROAD BUT THE ASSESSEE GRANTS A DISCOUNT OF 10% TO THE AE S. HE NOTED THE ASSESSEES CONTENTION THAT THIS DISCOUNT OF 10% IS GIVEN TO TH E AES AS A PART OF THE GLOBAL POLICY AND ON RECIPROCAL BASIS. HOWEVER THE TPO HELD THAT THE SINCE ASSESSEE HAS ALLOWED DISCOUNT TO THE AES TO THAT EXTENT TH E PRICE OF SERVICES RENDERED IS NOT AN ARMS LENGTH PRICE. ACCORDINGLY AN UPWARD A DJUSTMENT IN ALP WAS RECOMMENDED TO THE EXTENT OF DISCOUNT ALLOWED WHIC H WORKED OUT TO RS 10 70 089. 5. IN THE COURSE OF PROCEEDINGS BEFORE THE ASSESSIN G OFFICER THE ASSESSEE ONCE AGAIN SUBMITTED THAT THE CONCLUSIONS ARRIVED A T BY THE TPO ARE INCORRECT THAT THE TPO HAS IGNORED FACTUAL DETAILS SUBMITTED EXPLAINING THE NATURE OF SERVICES AND BENEFITS RECEIVED UNDER CCA THAT THE TPO HAS IGNORED EVIDENCE SUBMITTED TO DEMONSTRATE THAT THE SERVICES WERE ACT UALLY RECEIVED THAT THE TPO IGNORED THE FACT THAT SIMILAR SERVICES WERE AVAILED IN THE EARLIER YEARS ALSO BUT WERE NOT SPECIFICALLY PAID FOR IN THOSE YEARS THAT THE TPO HAS INCORRECTLY ASSUMED AND INTERPRETED DETAILS RELATING TO EMPLOYE ES OF THE ASSESSEE AND THAT THE TPO HAS INCORRECTLY AND INAPPROPRIATELY ANALYZE D PAST FINANCIAL RESULTS OF THE ASSESSEE. NONE OF THESE SUBMISSIONS FOUND FAVO UR WITH THE ASSESSING OFFICER EITHER. THE ASSESSING OFFICER WAS OF THE VI EW THAT THE TPO HAD GIVEN ENOUGH OPPORTUNITIES TO THE ASSESSEE AND HAD DETER MINED THE ALP AFTER TAKING INTO ACCOUNT ALL THE RELEVANT FACTORS AND THAT THE RE IS NO ROOM FOR INTERFERENCE IN THE MATTER. THE ASSESSING OFFICER FURTHER OBSER VED THAT EVEN IF THE ALP OF ALLOCATION OF COST CONTRIBUTION TO THE ASSESSEE IS HELD TO BE AT AN ARMS LENGTH THE AMOUNTS SO PAID CAN STILL NOT BE ALLOWED AS DEDUCTI ON IN COMPUTATION OF BUSINESS ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 9 OF 21 INCOME AS (I) THERE IS NO EVIDENCE OF ASSESSEE HAV ING AVAILED ANY SERVICES ; (II) ENTIRE AMOUNT PAID UNDER CCA IS HELD TO BE EXCESSIV E AND UNREASONABLE AND THUS DISALLOWABLE UNDER SECTION 40A(2)(B); AND (III) THE DEDUCTION CANNOT BE ALLOWED IN VIEW OF THE FACT THAT THE ASSESSEE HAS NOT DEDUC TED ANY TAX AT SOURCE FROM SUCH PAYMENTS AND IN VIEW OF PROVISIONS OF SECTION 40(A)(I) OF THE INCOME TAX ACT. THE ASSESSING OFFICER THUS HELD ALP OF THE SER VICES RECEIVED UNDER CCA AS NIL AND ALSO HELD THAT THE AMOUNTS SO PAID ARE AL SO NOT ALLOWABLE AS DEDUCTION IN COMPUTATION OF BUSINESS INCOME IN VIEW OF THE PROVI SIONS OF SECTIONS 37(1) 40A(2)(B) AND 40(A)(I) OF THE ACT. UPON HIS PROPOSI NG TO MAKE THE ARMS LENGTH PRICE ADJUSTMENT IN THE DRAFT ORDER AND HOLD THE EX PENSES AS NOT CONSTITUTING ADMISSIBLE DEDUCTION ANYWAY THE ASSESSEE RAISED OB JECTIONS BEFORE THE DISPUTE RESOLUTION PANEL AS WELL. IN A VERY BRIEF ORDER PA SSED BY THE DISPUTE RESOLUTION PANEL THESE OBJECTIONS WERE DISPOSED OF BY OBSERVI NG AS FOLLOWS: ..THE DRP HAS PERUSED THE SUBMISSIONS OF THE ASSE SSEE AND THE DOCUMENTS. IN VIEW OF THE DRP SUCH DOCUMENTS DO NO T PROVE THE RECEIPT OF SERVICES BY THE ASSESSEE ASCERTAINED (ASSERTED ?) TO BE PROVIDED BY ITS AE AND ACCORDINGLY THE ACTION OF THE AO IN TREATING THE COST OF SUCH SERVICES AT ZERO IS CONFIRMED. THE TP ADJUSTMENT MADE BY THE AO IS ACCORDINGLY UPHELD. .......THE ASSESSEE HAS CONTENDED THAT ALLOWANCE OF DISCOUNTS AND REBATES IS A NORMAL FEATURE OF THE BUSINESS ACTIVIT Y AND THERE WAS NOTHING UNUSUAL WHILE THE TPO HAS HELD THAT THERE WAS NO JUSTIFICATION FOR ALLOWING DISCOUNTS TO THE ASSOCIA TED CONCERNS AND ACCORDINGLY MADE A DISALLOWANCE OF 10% OF COMMISSIO N/ DISCOUNT. IN THE ALTERNATIVE THE ASSESSEE CONTENDED THAT DISALL OWANCE MADE IS HIGHER THAN10% OF ACTUAL REBATES AND DISCOUNTS WHIC H AMOUNTED TO ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 10 OF 21 RS 4 70 000. THE DRP CONSIDERS IT PROPER TO DIRECT THE AO TO VERIFY THE ACTUAL QUANTUM OF DISCOUNTS ALLOWED BY THE ASSE SSEE AND RESTRICT THE DISALLOWANCE TO THAT EXTENT. SINCE THE ASSESSEE COULD NOT PROVE TO THE HAVE RE CEIVED THE SERVICES FROM ITS AE THE ACTION OF THE AO IN INVOK ING PROVISIONS OF SECTION 40A (2)(B) IS AS PER LAW AND ACCORDINGLY CONFIRMED .IT IS CLAIMED BY THE ASSESSEE THAT NO TAX WAS RE QUIRED TO BE DEDUCTED UNDER SECTION 195 OF THE INCOME TAX ACT F ROM THE COST SHARING PAID TO ITS AES AND RELIED UPON ARTICLE 12 AND 7 OF INDIA- USA TREATY. SINCE THE PAYMENT HAS BEEN MADE WITHIN INDIA THE ASSESSEE WAS LIABLE TO DEDUCT TAX. HENCE THE ACTIO N OF THE AO IN INVOKING THE PROVISIONS OF SECTION 40(A)(IA) ARE JU STIFIED. 6. PURSUANT TO THESE DIRECTIONS OF THE DRP THE ASS ESSING OFFICER MADE ALP ADJUSTMENT OF RS 10 55 00 000 IN THE ARMS LENGTH P RICE OF SERVICES RECEIVED UNDER THE COST CONTRIBUTION ARRANGEMENT AND OF RS 4 70 009 IN RESPECT OF FIELD SERVICES RENDERED TO THREE ASSOCIATED ENTERPRISES A BROAD. THE ASSESSEE IS AGGRIEVED AND IS IN APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 8. WE FIND THAT THE BASIC REASON OF THE TRANSFER PR ICING OFFICERS DETERMINATION OF ALP OF THE SERVICES RECEIVED UNDER COST CONTRIBUTION ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 11 OF 21 ARRANGEMENT AS NIL IS HIS PERCEPTION THAT THE ASS ESSEE DID NOT NEED THESE SERVICES AT ALL AS THE ASSESSEE HAD SUFFICIENT EXP ERTS OF HIS OWN WHO WERE COMPETENT ENOUGH TO DO THIS WORK. FOR EXAMPLE THE TRANSFER PRICING OFFICER HAD POINTED OUT THAT THE ASSESSEE HAS QUALIFIED ACCOUNT ING STAFF WHICH COULD HAVE HANDLED THE AUDIT WORK AND IN ANY CASE THE ASSESSEE HAS PAID AUDIT FEES TO EXTERNAL FIRM. SIMILARLY THE TRANSFER PRICING OFFI CER WAS OF THE VIEW THAT THE ASSESSEE HAD MANAGEMENT EXPERTS ON ITS ROLLS AND THEREFORE GLOBAL BUSINESS OVERSIGHT SERVICES WERE NOT NEEDED. IT IS DIFFICULT TO UNDERSTAND MUCH LESS APPROVE THIS LINE OF REASONING. IT IS ONLY ELEMENT ARY THAT HOW AN ASSESSEE CONDUCTS HIS BUSINESS IS ENTIRELY HIS PREROGATIVE A ND IT IS NOT FOR THE REVENUE AUTHORITIES TO DECIDE WHAT IS NECESSARY FOR AN ASSE SSEE AND WHAT IS NOT. AN ASSESSEE MAY HAVE ANY NUMBER OF QUALIFIED ACCOUNTAN TS AND MANAGEMENT EXPERTS ON HIS ROLLS AND YET HE MAY DECIDE TO ENGA GE SERVICES OF OUTSIDE EXPERTS FOR AUDITING AND MANAGEMENT CONSULTANCY; IT IS NOT FOR THE REVENUE OFFICERS TO QUESTION ASSESSEES WISDOM IN DOING SO. THE TRANSFE R PRICING OFFICER WAS NOT ONLY GOING MUCH BEYOND HIS POWERS IN QUESTIONING CO MMERCIAL WISDOM OF ASSESSEES DECISION TO TAKE BENEFIT OF EXPERTISE OF DRESSER RAND US BUT ALSO BEYOND THE POWERS OF THE ASSESSING OFFICER. WE DO NOT APPROVE THIS APPROACH OF THE REVENUE AUTHORITIES. WE HAVE FURTHER NOTICED TH AT THE TRANSFER PRICING OFFICER HAS MADE SEVERAL OBSERVATIONS TO THE EFFECT THAT AS EVIDENT FROM THE ANALYSIS OF FINANCIAL PERFORMANCE THE ASSESSEE DID NOT BENEFIT IN TERMS OF FINANCIAL RESULTS FROM THESE SERVICES. THIS ANALYS IS IS ALSO COMPLETELY IRRELEVANT BECAUSE WHETHER A PARTICULAR EXPENSE ON SERVICES RE CEIVED ACTUALLY BENEFITS AN ASSESSEE IN MONETARY TERMS OR NOT EVEN A CONSIDERAT ION FOR ITS BEING ALLOWED AS A DEDUCTION IN COMPUTATION OF INCOME AND BY NO STRE TCH OF LOGIC IT CAN HAVE ANY ROLE IN DETERMINING ARMS LENGTH PRICE OF THAT SERV ICE. WHEN EVALUATING THE ARMS LENGTH PRICE OF A SERVICE IT IS WHOLLY IRRELEVANT AS TO WHETHER THE ASSESSEE BENEFITS FROM IT OR NOT; THE REAL QUESTION WHICH IS TO BE DETERMINED IN SUCH CASES IS WHETHER THE PRICE OF THIS SERVICE IS WHAT AN IND EPENDENT ENTERPRISE WOULD HAVE PAID FOR THE SAME. SIMILARLY WHETHER THE AE G AVE THE SAME SERVICES TO THE ASSESSEE IN THE PRECEDING YEARS WITHOUT ANY CONSIDE RATION OR NOT IS ALSO ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 12 OF 21 IRRELEVANT. THE AE MAY HAVE GIVEN THE SAME SERVICE ON GRATUITOUS BASIS IN THE EARLIER PERIOD BUT THAT DOES NOT MEAN THAT ARMS L ENGTH PRICE OF THESE SERVICES IS NIL. THE AUTHORITIES BELOW HAVE BEEN SWAYED BY T HE CONSIDERATIONS WHICH ARE NOT AT ALL RELEVANT IN THE CONTEXT OF DETERMINING T HE ARMS LENGTH PRICE OF THE COSTS INCURRED BY THE ASSESSEE IN COST CONTRIBUTION ARRANGEMENT. WE HAVE ALSO NOTED THAT THE STAND OF THE REVENUE AUTHORITIES IN THIS CASE IS THAT NO SERVICES WERE RENDERED BY THE AE AT ALL AND THAT SINCE THER E IS NO EVIDENCE OF SERVICES HAVING BEEN RENDERED AT ALL THE ARMS LENGTH PRICE OF THESE SERVICES IS NIL. THE DISPUTE RESOLUTION PANEL HAS ALSO CONFIRMED THESE F INDINGS OF THE TRANSFER P- RICING OFFICER AND THE ASSESSING OFFICER. HOWEVER WE HAVE NOTED THAT VIDE LETTER DATED 25 TH JANUARY 2010 (ACKNOWLEDGED TO HAVE BEEN RECEIVED I N DRP OFFICE ON 28 TH JANUARY 2010) THE ASSESSEE HAS FILED A HUGE COMPI LATION OF PAPERS RUNNING INTO ALMOST THREE HUNDRED PAGES INCLUDING COPIES O F REPORTS EMAILS AND OTHER DOCUMENTS EVIDENCING THE RENDERING OF SERVICES. YET THE DRP SIMPLY BRUSHED ASIDE THESE DOCUMENTS BY SIMPLY OBSERVING THAT THE DRP HAS PERUSED THE SUBMISSIONS OF THE ASSESSEE AND THE DOCUMENTS. IN V IEW OF THE DRP SUCH DOCUMENTS DO NOT PROVE THE RECEIPT OF SERVICES BY T HE ASSESSEE ASCERTAINED (ASSERTED ?) TO BE PROVIDED BY ITS AE AND ACCORDINGLY THE AC TION OF THE AO IN TREATING THE COST OF SUCH SERVICES AT ZERO IS CO NFIRMED . ALL THESE EVIDENCES WERE BEFORE THE DRP BUT THERE IS NOT EVE N A WHISPER ABOUT WHAT WAS THE NATURE OF THESE DOCUMENTS WHY DOES THE DRP FIN D THESE DOCUMENTS TO BE NOT SATISFACTORY WHAT IS THE KIND OF EVIDENCE THAT WAS NECESSARY TO PROVE THE FACTUM OF SERVICES HAVING BEEN AVAILED AND WHAT PRECISELY IS THE REASON THAT THESE DOCUMENTS CANNOT BE RELIED UPON. THE SOUL OF AN ORD ER IS IN ITS REASONING AND UNLESS THE REASONS FOR COMING TO A CONCLUSION IN TH E ORDER ARE NOT SET OUT IT IS NOT POSSIBLE TO DO A MEANINGFUL SCRUTINY OF THE ORD ER BUT WE FIND NO REASONING AT ALL IN THE ORDER PASSED BY THE DRP. WE MAY IN THIS REGARD REFER TO THE OBSERVATIONS MADE BY HONBLE SUPREME COURT IN THE C ASE OF UNION OF INDIA VS M L KAPOOR AIR 1974 SC 87 WHEREIN THEIR LORDSHIPS HA VE INTER ALIA OBSERVED AS FOLLOWS: ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 13 OF 21 IF THE STATUTE REQUIRES RECORDING OF REASONS THEN IT IS THE STATUTORY REQUIREMENT AND THEREFORE THERE IS NO SCOPE FOR F URTHER INQUIRY. BUT EVEN WHEN THE STATUTE DOES NOT IMPOSE SUCH AN O BLIGATION IT IS NECESSARY FOR THE QUASI-JUDICIAL AUTHORITIES TO REC ORD REASON AS IT IS ONLY VISIBLE SAFEGUARD AGAINST POSSIBLE INJUSTICE A ND ARBITRARINESS AND AFFORDS PROTECTION TO THE PERSON ADVERSELY AFFE CTED. REASONS ARE THE LINKS BETWEEN THE MATERIAL ON WHICH CERTAIN CON CLUSIONS ARE BASED AND THE ACTUAL CONCLUSIONS. THEY DISCLOSE HOW THE MIND IS APPLIED TO THE SUBJECT-MATTER FOR A DECISION WHETH ER IT IS PURELY ADMINISTRATIVE OR QUASI-JUDICIAL. THEY SHOULD REVEA L RATIONAL NEXUS BETWEEN THE FACTS CONSIDERED AND THE CONCLUSION REA CHED. ONLY IN THIS WAY CAN OPINIONS OR DECISIONS RECORDED BE SHOW N TO BE MANIFESTLY JUST AND REASONABLE. 9. IN OUR CONSIDERED VIEW IT IS NOT OPEN TO DISPUT E RESOLUTION PANEL TO REJECT THE OBJECTIONS OF THE ASSESSEE IN A SUMMARY MANNER WITHOUT PROPERLY ANALYZING THE OBJECTIONS OF THE ASSESSEE AND DEALIN G WITH EVIDENCES FILED BY THE ASSESSEE. UNDER SECTION 144 C (6) THE DISPUTE RES OLUTION PANEL CAN ISSUE DIRECTIONS AFTER INTER ALIA CONSIDERING OBJECTION S OF THE ASSESSEE AND EVIDENCES FILED BY THE ASSESSEE. THAT EXERCISE IS CLEARLY NOT DONE. IN THE CASE OF VODAFONE ESSAR LIMITED VS DISPUTE RESOLUTION PANEL (240 CTR 263) HONBLE DELHI HIGH COURT HAS OBSERVED THAT WHEN A QUASI JUDICIAL AUTHORITY (LIKE THE DRP) DEALS WITH A LIS IT IS OBLIGATORY ON ITS PART TO ASCRIBE COGENT AN D GERMANE REASONS AS THE SAME IS THE HEART AND SOUL OF THE MA TTER. AND FURTHER THE SAME ALSO FACILITATES APPRECIATION WHEN THE ORDER I S CALLED IN QUESTION BY THE SUPERIOR FORUM. YET MORE OFTEN THAN NOT THE ORDERS PASSED BY THE DISPUTE RESOLUTION PANELS LIKE ONE BEFORE US ARE NOT ONLY WANTING IN TERMS OF THEIR ANALYSIS OF FACTS AND LAW AND LACKING IN REAS ONS FOR ARRIVING AT CONCLUSIONS ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 14 OF 21 THESE ORDERS ALSO OFFER US NO ASSISTANCE IN ANY MAN NER AT ALL. IN THIS VIEW OF THE MATTER WE DEEM IT FIT AND PROPER TO REMIT THE MATT ER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION ON THE QUESTION OF SERVICES HAVING BEEN ACTUALLY RENDERED IN THE LIGHT OF EVIDENCES FILED BY THE AS SESSEE. 10. IN CASE THE ASSESSING OFFICER COMES TO THE CON CLUSION THAT THE ASSESSEE HAS INDEED RECEIVED THE SERVICES FROM THE AE THE NE XT QUESTION WHICH WE HAVE TO DECIDE IS AS TO WHAT IS THE ARMS LENGTH PRICE O F THESE SERVICES RECEIVED UNDER COST CONTRIBUTION AGREEMENT. IT HARDLY NEEDS TO BE EMPHASIZED THAT EVEN COST CONTRIBUTION ARRANGEMENT SHOULD BE CONSISTENT WITH ARMS LENGTH PRINCIPLE WHICH IN PLAIN WORDS REQUIRES THAT ASSESSEES SHA RE OF OVERALL CONTRIBUTION TO THE COSTS IS CONSISTENT WITH BENEFITS EXPECTED TO B E RECEIVED AS AN INDEPENDENT ENTERPRISE WOULD HAVE ASSIGNED TO THE CONTRIBUTION IN HYPOTHETICALLY SIMILAR SITUATION. IN THE CASE BEFORE US AS EVIDENT FROM T HE COST CONTRIBUTION AGREEMENT THE COSTS HAVE BEEN SHARED AT AVERAGE OF PERCENTAGE OF (I) HEAD COUNT TO THE TOTAL COUNT AND (II) SALES REVENUE TO TOTAL REVENUE. THE ASSESSEES SHARE OF HEAD COUNT IS 3.90% AND OF TOTAL REVENUE IS 3.30% AND ACCORD INGLY 3.50% BEING AVERAGE OF THESE TWO PARAMETERS IS TAKEN AS THE COST CONTRIBU TION RATIO. WE SEE NO INFIRMITY IN THIS CONTRIBUTION BEING TAKEN AS AN ARMS LENGTH CONTRIBUTION TO THE COSTS. THE TPOS OBJECTION TO THIS ARRANGEMENT WAS TWO FOLD FIRST THAT THE COST SHOULD BE SHARED IN THE RATIO OF ACTUAL USE OF SERVICES; AND SECOND THAT THE COSTS SHOULD BE CHARGED TO THE ASSESSEE AS PER INDIAN EMPLOYEE C OSTS. NONE OF THESE OBJECTIONS HAS ANY LEGALLY SUSTAINABLE MERITS. THER E IS NO OBJECTIVE WAY IN WHICH USE OF SERVICES CAN BE MEASURED AND AS IS THE COMME RCIAL PRACTICE EVEN IN MARKET FACTORS DRIVEN SITUATION THE COSTS ARE SHAR ED IN ACCORDANCE WITH SOME OBJECTIVE CRITERION INCLUDING SALES REVENUES AND N UMBER OF EMPLOYEES. THE QUESTION OF CHARGING AS PER DOMESTIC EMPLOYEE COSTS CANNOT BE A BASIS OF ALLOCATION THE COSTS BECAUSE SUCH AN ALLOCATION WIL L DEAL WITH SOME HYPOTHETICAL PRICING WHEREAS THE ALLOCATIONS ARE TO BE DONE FOR THE ACTUAL COSTS INCURRED. AS IT IS AN ALLOCATION OF COSTS ON THE BASIS OF ACTUAL CO STS AND THE FACT OF EXPENDITURE IS ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 15 OF 21 NOT EVEN IN DISPUTE THE DISPUTE IS CONFINED TO THE BASIS ON WHICH COST ALLOCATIONS MUST TAKE PLACE AND SINCE WE FIND THE BASIS OF ALLOCATION OF COSTS AS REASONABLE NO INTERFERENCE IS REALLY CALLED FOR. I N ANY CASE WE HAVE NOTED THAT THE ASSESSEE HAS ADOPTED TNMM AS MOST APPROPRIATE M ETHOD AND THE REVENUE AUTHORITIES HAVE NEITHER MADE AN EFFORT TO SHOW AS TO HOW THIS METHOD IS NOT APPROPRIATE TO THE FACTS OF THIS CASE NOR SHOWN AS TO WHICH OTHER PRESCRIBED METHOD OF ASCERTAINING ARMS LENGTH PRICE OF SERVIC ES RECEIVED UNDER CCA WILL BE MORE APPROPRIATE TO THESE FACTS. 11. THE NEXT ADJUSTMENT OF RS 4 70 000 ON THE GROU ND THAT THE ASSESSEE OUGHT NOT TO HAVE ALLOWED DISCOUNT OF 10% TO AES I S ALSO EQUALLY DEVOID OF ANY MERITS. WE HAVE NOTED THAT THE ASSESSEE HAS FOLLOWE D THE TNMM FOR DETERMINATION OF ALP AND THE ASSESSING OFFICER HAS NOT EVEN DISPUTED TNMM BEING MOST APPROPRIATE METHOD ON THE FACTS OF THIS CASE. THE QUESTION OF APPLYING CUP EVEN IF THAT BE SO CAN ONLY ARISE WH EN TNMM IS REJECTED. EVEN UNDER CUP METHOD IT IS NOT NECESSARY THAT ALL SALE S MUST TAKE AT THE SAME PRICE. THERE CAN ALWAYS BE VARIATIONS OF PRICES FOR THE SA ME PRODUCT OR SERVICES ON VALID GROUNDS SUCH AS QUANTUM OF BUSINESS RISK FA CTORS MARKETING EFFORTS NEEDED ETC. WHEN ASSESSEE IS DEALING WITH AN AE AT LEAST THERE ARE NO COMMERCIAL RISKS NO MARKETING COSTS AND THERE COUL D BE SEVERAL OTHER FACTORS AS WELL JUSTIFYING A NORMAL DISCOUNT AS THE ASSESSEE C OULD INDEED GO TO MANY IMPORTANT CUSTOMERS. IT HARDLY NEEDS TO BE EMPHASIZ ED THAT EVEN IN INDEPENDENT BUSINESS SITUATIONS GRANTING DISCOUNT IS A NORMAL O CCURRENCE AND UNLESS THE ASSESSING OFFICER DEMONSTRATES THAT THE DISCOUNT SO ALLOWED WOULD NOT HAVE BEEN ALLOWED IN AN ARMS LENGTH SITUATION ALP ADJU STMENT CANNOT BE MADE IN RESPECT OF THE SAME. WE ARE ALIVE TO THE FACT THAT THE DISCOUNT IS ALLOWED BY THE VIRTUE OF STATUS AS ASSOCIATED ENTERPRISE BUT THAT IS NOT A MATERIAL FACTOR; IN OUR CONSIDERED VIEW THE MATERIAL FACTOR IS WHETHER SUC H A DISCOUNT OF 10% IS AN ARMS LENGTH DISCOUNT I.E. A DISCOUNT WHICH IS GIVE N EVEN IN A SITUATION IN WHICH AN ENTERPRISE IS DEALING WITH INDEPENDENT ENTERPRIS E. THERE IS NOTHING ON RECORD ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 16 OF 21 TO EVEN SUGGEST THAT SUCH A DISCOUNT IS NOT AN ARM S LENGTH DISCOUNT OR THAT DISCOUNTS HAVE NOT BEEN ALLOWED UNDER ANY OTHER SIT UATIONS. IN VIEW OF THESE DISCUSSIONS AND BEARING IN MIND ENTIRETY OF THE CA SE WE DELETE THE IMPUGNED DISALLOWANCE OF RS 4 70 000 AS WELL. 12. LET US NOW DEAL WITH THE STAND OF THE ASSESSING OFFICER THAT EVEN OTHERWISE PAYMENTS UNDER CCA ARE NON-DEDUCTIBLE IN COMPUTATION OF BUSINESS INCOME. 13. AS FAR AS DISALLOWANCE UNDER SECTION 40 A (2) ( B) AND INADMISSIBILITY OF DEDUCTION UNDER SECTION 37(1) ARE CONCERNED THE A CTION OF THE ASSESSING OFFICER WAS CONFIRMED BY THE DRP ONLY ON THE GROUND THAT TH E RENDERING OF SERVICES IS NOT PROVED. THE QUESTION OF SERVICES HAVING BEEN ACTUALLY RENDERED IS NOW BEFORE THE ASSESSING OFFICER AND THE ASSESSING OFF ICER HAS TO GIVE HIS FINDINGS ON THE SAME. HOWEVER THE PAYMENT HAS BEEN MADE TO THE AE UNDER A COST CONTRIBUTION AGREEMENT WITHOUT INVOLVING ANY MARKS UPS WHICH IS HELD TO BE AT AN ARMS LENGTH PRICE AND THE COSTS HAVING BEEN AC TUALLY INCURRED IS NOT EVEN IN DISPUTE. . AS LONG AS THE SERVICES HAVE BEEN AVAIL ED BY THE ASSESSEE IS LEGITIMATE FURTHERANCE OF ITS BUSINESS INTERESTS AND ARE THUS WHOLLY EXCLUSIVELY FOR THE PURPOSES OF BUSINESS THE COSTS OF THESE SHARED SER VICES AS ALLOCATED TO THE ASSESSEE ARE REQUIRED TO BE TREATED TO HAVE BEEN C OMPUTED IN A FAIR AND TRANSPARENT MANNER. 14. THE NEXT ISSUE REQUIRING OUR ADJUDICATION IS WH ETHER THE ASSESSING OFFICER WAS JUSTIFIED IN HOLDING THAT EVEN OTHERWIS E THE PAYMENT UNDER CCA COULD NOT BE ALLOWED DUE TO THE FACT THAT THE ASSES SEE HAS NOT DEDUCTED AT TAX SOURCE FROM THESE PAYMENTS AND ACCORDINGLY DISAL LOWANCE UNDER SECTION 40(A)(I) COMES INTO PLAY. THIS OBJECTION PROCEEDS O N THE ASSUMPTION THAT THE TAXES WERE DEDUCTIBLE AT SOURCE FROM THE PAYMENTS M ADE TO AES UNDER THE CCA. WHILE AT ONE PLACE THE DRP NOTES THE ASSESSEES AR GUMENT THAT IT IS CLAIMED BY ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 17 OF 21 THE ASSESSEE THAT NO TAX WAS REQUIRED TO BE DEDUCTE D UNDER SECTION 195 OF THE INCOME TAX ACT FROM THE COST SHARING PAID TO I TS AES AND RELIED UPON ARTICLE 12 AND 7 OF INDIA-USA TREATY BUT THE IT PROCEEDS TO SUMMARILY REJECT THE SAME IN THE IMMEDIATELY FOLLOWING SENTENCES BY OBSERVING THAT SINCE THE PAYMENT HAS BEEN MADE WITHIN INDIA THE ASSESSEE WA S LIABLE TO DEDUCT TAX. HENCE THE ACTION OF THE AO IN INVOKING THE PROVISI ONS OF SECTION 40(A)(IA) ARE JUSTIFIED. CLEARLY THIS IS A CASE OF NON APPLICATION OF MIND BY THE ASSESSING OFFICER AS ALSO BY THE DISPUTE RESOLUTION PANEL. TH E ISSUE BEFORE THE DRP WAS THAT SINCE THE RECIPIENT DOES NOT HAVE THE PRIMARY LIABILITIES TO PAY TAX ON THESE RECEIPTS TAX WITHHOLDING REQUIREMENTS DO COME INTO PLAY AT ALL. HOWEVER IT APPEARS THAT NOT ONLY THE DRP COMPLETELY MISSED THE ARGUMENT IT MADE SOME IRRELEVANT OBSERVATIONS ABOUT TAX WITHHOLDING REQUI REMENTS FROM PAYMENTS MADE WITHIN INDIA. THAT IS NOT THE ISSUE HERE. THE ISSUE IS WHETHER ANY TAX WAS DEDUCTIBLE FROM THESE PAYMENTS TO NON RESIDENTS. JU ST BECAUSE A PAYMENT IS MADE TO NON RESIDENT TAX WITHHOLDING REQUIREMENTS UNDER SECTION 195 DONOT COME INTO PLAY. WE FIND THAT AS HELD BY HONBLE SUPREME COUR T IN THE CASE OF GE INDIA TECHNOLOGY CENTRE PVT LTD VS CIT (327 ITR 456) TAX DEDUCTION AT SOURCE OBLIGATIONS UNDER SECTION 195(1) ARISE ONLY IF THE PAYMENT IS CHARGEABLE TO TAX IN THE HANDS OF NON-RESIDENT RECIPIENT. THEREFORE MERELY BECAUSE A PERSON HAS NOT DEDUCTED TAX AT SOURCE FROM A REMITTANCE ABROAD IT CANNOT BE INFERRED THAT THE PERSON MAKING THE REMITTANCE HAS COMMITTED A FA ILURE IN DISCHARGING HIS TAX WITHHOLDING OBLIGATIONS BECAUSE SUCH OBLIGATIONS C OME INTO EXISTENCE ONLY WHEN RECIPIENT HAS A TAX LIABILITY IN INDIA. THE UN DERLYING PRINCIPLE IS THIS. TAX WITHHOLDING LIABILITY OF THE PAYEE IS INHERENTLY A VICARIOUS LIABILITY ON BEHALF OF THE RECIPIENT AND THEREFORE WHEN RECIPIENT DOES NOT HAVE THE PRIMARY LIABILITY TO BE TAXABLE IN RESPECT OF INCOME EMBEDDED IN THE RECEIPT THE VICARIOUS LIABILITY OF THE PAYER CANNOT BUT BE INEFFECTUAL. THIS VICARIOUS TAX WITHHOLDING LIABILITY CANNOT BE INVOKED UNLESS PRIMARY TAX LIAB ILITY OF THE RECIPIENT IS ESTABLISHED. JUST BECAUSE THE PAYER HAS NOT OBTAINE D A SPECIFIC DECLARATION FROM THE REVENUE AUTHORITIES TO THE EFFECT THAT THE RECI PIENT IS NOT LIABLE TO BE TAXED IN INDIA IN RESPECT OF INCOME EMBEDDED IN PARTICULA R PAYMENT HOWSOEVER ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 18 OF 21 DESIRABLE BE THAT PRACTICE THE ASSESSING OFFICER CAN NOT PROCEED ON THE BASIS THAT THE PAYER HAD AN OBLIGATION TO DEDUCT TAX AT S OURCE. HE STILL HAS TO DEMONSTRATE AND ESTABLISH THAT THE PAYEE HAS A TAX LIABILITY IN RESPECT OF THE INCOME EMBEDDED IN THE IMPUGNED PAYMENT. THAT EXERC ISE WAS NOT CARRIED OUT BY THE ASSESSING OFFICER ON THE FACTS OF THIS CASE. THE ASSESSING OFFICER WAS THUS CLEARLY IN ERROR IN PROCEEDING TO INVOKE DISAL LOWANCE UNDER SECTION 40(A)(I) ON THE SHORT GROUND THAT THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE FROM THE FOREIGN REMITTANCE. WE HAVE ALSO NOTED THE ASSE SSEES CLAIM THAT PAYMENTS MADE TO THE US BASED AE UNDER A COST CONTRIBUTION AGREEMENT DO NOT WARRANT ANY TAX WITHHOLDING AS NEITHER THE AE HAS ANY PERMA NENT ESTABLISHMENT IN INDIA NOR THE SERVICES SO RENDERED ARE COVERED BY THE SCOPE OF FEES FOR INCLUDED SERVICES. WE SEE MERITS IN THIS SUBMISSIO N. IN VIEW OF THE PROVISIONS OF ARTICLE 5 READ WITH ARTICLE 7 OF INDIA US DOUBLE TAXATION AVOIDANCE AGREEMENT UNLESS THE US BASED AE CAN BE SAID TO HA VE A PE IN INDIA AND UNLESS INCOME EMBEDDED IN SUCH PAYMENTS CAN BE SAID TO BE ATTRIBUTABLE TO THAT PE THE US BASED AE CANNOT HAVE ANY TAX LIABILITY IN IN DIA IN RESPECT OF THE BUSINESS PROFITS SO EARNED EVEN IF ANY. THE ONLY OTHER SITU ATION IN WHICH THESE PAYMENTS CAN BE TAXED IN INDIA IS WHEN THESE PAYMENTS ARE TR EATED AS FEES FOR INCLUDED SERVICES UNDER ARTICLE 12 OF INDIA US DOUBLE TAXAT ION AVOIDANCE AGREEMENT BUT THEN SINCE THESE SERVICES PRIMA FACIE ARE NOT COVERED BY THE MAKE AVAILABLE CLAUSE OF ARTICLE 12(4)(B) THE PAYMENT SO MADE CAN NOT BE TAXED AS FEES FOR INCLUDED SERVICES EITHER. IN ANY EVENT THE ASSE SSING OFFICER HAS NOT EVEN MADE OUT THE CASE FOR TAXABILITY OF THE IMPUGNED PAYMENT S IN INDIA. ACCORDINGLY WE SEE NO SUBSTANCE IN ASSESSING OFFICERS INVOKING TH E DISALLOWANCE UNDER SECTION 40(A)(I) EITHER. 15 IN VIEW OF THE ABOVE DISCUSSIONS AS ALSO BEARIN G IN MIND ENTIRETY OF THE CASE WE PARTLY UPHOLD THE GRIEVANCE OF THE ASSESSE E SO FAR AS ALP ADJUSTMENTS IN RESPECT OF PAYMENTS UNDER COST CONTRIBUTION ARRANGE MENTS AND IN RESPECT OF SERVICE CHARGES FROM AES ARE CONCERNED TO THE EXTE NT INDICATED ABOVE. ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 19 OF 21 16. GROUND NOS. 2 AND 3 ARE THUS PARTLY ALLOWED FOR STATISTICAL PURPOSES IN THE TERMS INDICATED ABOVE. 17. IN THE FIRST GROUND OF APPEAL THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE : 1. DENIAL OF DEDUCTION OF RS 21 67 679 UNDER SECTIO N 80IB OF THE INCOME TAX ACT 1961 ON OTHER INCOME IN THE NATURE OF RECOVERY OF FREIGHT 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE ASSESSING OFFICER ERRED AND DISPUTE RESOLUTION PAN EL FURTHER ERRED IN DENYING DEDUCTION UNDER SECTION 80IB OF THE INCOME TAX ACT 1961 ON OTHER INCOME BEING IN THE NATURE OF RECOVERY OF FRE IGHT BY CONCLUDING THAT IT IS NOT AN INCOME DERIVED FROM INDUSTRIAL UN DERTAKING. 1.2 THE APPELLANT SUBMITS THAT THE AO AND THE DRP F AILED TO APPRECIATE THAT SUCH INCOME IS AN INCOME DERIVED IN THE ORDINA RY COURSE OF OPERATIONS OF INDUSTRIAL UNDERTAKING AND THEREBY IS ELIGIBLE FOR DEDUCTION UNDER SECTION 80 IB OF THE ACT. 18. LEARNED COUNSEL FOR THE ASSESSEE DID NOT MAKE A NY SPECIFIC SUBMISSIONS BEYOND PLACING RELIANCE ON THE SUBMISSIONS MADE BEF ORE THE AUTHORITIES BELOW AND REITERATING THE SAME. HAVING REGARD TO THIS APP ROACH OF THE LEARNED COUNSEL ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 20 OF 21 WE TREAT THIS GRIEVANCE AS PRACTICALLY NOT PRESSED AND DISMISS IT AS SUCH. GROUND NO. 1 IS THUS DISMISSED. 19. IN GROUND NO. 4 THE ASSESSEE HAS RAISED THE FO LLOWING GRIEVANCE: GROUND NO.4- ADDITIONS UNDER SECTION 145A OF THE AC T ON ACCOUNT OF UNUTILIZED CENVAT CREDIT TO CLOSING STOCK OF RS.98 85 175. 4.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE AO ERRED AND THE DRP FURTHER ERRED IN CONFIRMIN G THE ACTION OF THE AO IN MAKING ADDITION UNDER SECTION 1 45A OF THE ACT ON ACCOUNT OF UNUTILIZED CENVAT CREDIT TO THE C LOSING STOCK (NET OF OPENING STOCK) ON THE CONTEXT THAT TH E APPELLANT FOLLOWS THE EXCLUSIVE METHOD OF ACCOUNTING WHICH DO ES NOT DEPICT TRUE AND FAIR PROFITS OF THE BUSINESS. 4.2 THE APPELLANTS SUBMITS THAT THE AO AND THE DRP FAIL ED TO APPRECIATE THAT THE EXCLUSIVE METHOD OF ACCOUNTING DOES NOT IMPACT THE PROFIT AND LOSS ACCOUNT THEREBY THE ADJU STMENT UNDER SECTION 145A ON ACCOUNT OF UNUTILIZED CENVAT CREDIT TO THE CLOSING STOCK IS UNWARRANTED AND BE DELETED. 20. THE SHORT ISSUE IN THIS GROUND OF APPEAL IS AS TO HOW ADJUSTMENT FOR UNUTILIZED CENVAT CREDIT IS TO BE MADE TO THE CLOSI NG STOCK. WHILE THE ASSESSING OFFICER HELD THAT THE ADJUSTMENT IS TO BE ALLOWED IN RESPECT OF THE CLOSING STOCK THE DRP DIRECTED THE ASSESSING OFFIC ER TO GRANT THE SAME IN RESPECT OF BOTH CLOSING STOCK. LEARNED COUNSEL SUBM ITS THAT THE DIRECTIONS OF THE DRP WERE NOT PROPERLY WORDED AND THE ISSUE STANDS C ONCLUDED BY A COORDINATE ITA NO.8753/MUM/2010 ASSESSMENT YEAR: 2006- 07 PAGE 21 OF 21 BENCHS DECISION DATED 7 TH FEBRUARY 2008 IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2001-02. LEARNED DEPARTMENTAL REPRE SENTATIVE ALSO DOES NOT DISPUTE THE FACT THAT THE ISSUE IS COVERED BY THE S AID ORDER. IN THIS VIEW OF THE MATTER WE REMIT THE MATTER TO THE FILE OF THE ASSE SSING OFFICER FOR REDOING THE COMPUTATION IN ACCORDANCE THE SAID ORDER WHICH WILL APPLY MUTATIS MUTANDI TO THIS ASSESSMENT YEAR AS WELL. GROUND NO. 4 IS THUS ALLOWED FOR STATISTICAL PURPOSES IN THE TERMS INDICATED ABOVE. 21. IN THE RESULT THE APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 7 TH DAY OF SEPTEMBER 2011. SD/- SD/- (VIJAY PAL RAO ) (PRA MOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMB ER MUMBAI; 7 TH DAY OF SEPTEMBER 2011 . COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER MUMBAI 4. COMMISSIONER (APPEALS) MUMBAI 5. DEPARTMENTAL REPRESENTATIVE D BENCH MUMBAI 6. GUARD FILE TRUE COPY BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI