DRP entitled to enhance by questioning very existence of transaction

Before Shri R.S.Syal, AM and Shri Vijay Pal Rao, JM
ITA No. 7982/Mum/2011: Asst. Year 2007-2008

M/s.Hamon Shriram Cottrell Pvt.Ltd.

versus

The Income Tax Officer

Date of Pronouncement: 19.04.2013

 ORDER

Per R.S.Syal ( AM) :

This appeal by the assessee is directed against the order dated 26.09.2011 passed by the Assessing Officer u/s 143(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter called the Act) in relation to the assessment year 2007-2008.

2. Briefly stated the facts of the case are that the assessee is a part of Hamon D’Hondt Group, which is headquartered in Belgium with its original and core business of design, manufacture, supply, erection and servicing of Cooling Systems, Heat Exchangers and Air Pollution Control systems. The assessee- company is engaged in the business of manufacturing, designing, engineering and supply of cooling towers, spares and providing engineering services. The assessee filed its return declaring total income of Rs. 11,42,254. The assessee entered into six types of international transactions with its Associated Enterprises (AEs). Because of such international transactions, the Assessing Officer made reference u/s 92CA(1) to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP). First transaction which is disputed in the present appeal is the payment of Management Fees amounting to Rs. 40,65,733 to its AE. The ALP of this transaction was determined by applying Comparable Uncontrolled Price (CUP) method. The assessee claimed to have paid the said amount at the rate of 1.5% of the turnover. The TPO observed that the total turnover of the assessee was at Rs. 16.21 crore. Even if the rate of 1.5% was accepted at ALP, still a Transfer Pricing (TP) adjustment of Rs. 16,34,091 was called for as 1.5% rate on the turnover would work out Management fees at Rs. 24.31 lakh as against the amount paid at Rs. 40,65,733. The second item which is disputed is Tender cost reimbursed. The assessee paid Rs. 28,61,598 . The TPO observed that this amount was paid on behalf of AE (Belgium) and the same was not paid back to the assessee. As such the ALP of this payment was treated as Nil thereby proposing an adjustment of equal amount at Rs. 28.61 lakh. The third item is R&D expenses paid by the assessee to the tune of Rs. 47,72,982. The assessee determined ALP of this transaction by applying the CUP method. It was observed by the TPO that a sum of Rs. 18.74 lakh out of this amount was a mere provision and further a sum of Rs. 13.91 lakh pertained to the year 2005. An adjustment of Rs. 18.74 lakh was recommended in respect of the amount of provision. That is how a total adjustment of Rs. 63,69,689 was proposed in respect of the above referred three items. There is no controversy in respect of the remaining international transactions. The amount as proposed by the TPO was added by the A.O. in the draft order passed u/s 143(3) read with section 144C(1) on 15.11.2010. The assessee agitated the TP adjustments made through the draft order before the Dispute Resolution Panel (DRP). The DRP noticed that the payments by the assessee to its parent AE in respect of Management fees, Tender cost reimbursed and R&D expenses were in the nature of intra group transactions. It was opined that no payment in respect of intra group services could be justified unless it was shown that some tangible and direct benefit was derived as a result of such payment or that the payment made was commensurate with the benefit derived or expected to be derived. As such a letter dated 27.07.2011 was sent by the DRP to the assessee seeking written explanation, documentation and evidence as to whether any specified services were rendered; and if rendered, whether two independent parties would be willing to pay for such services; and if two independent parties would be willing to pay, what would be the basis and amount of such payment. The assessee was further directed to furnish details in respect of Management fees which the TPO had considered at 1.5% of the turnover as at the ALP. Since the TPO, in the opinion of the DRP, did not examine as to whether any R&D services were rendered by the foreign AE for which a sum of Rs. 28.98 lakh was allowed, the DRP requested the assessee to furnish necessary details in this regard also. Similar direction was given qua the “Tender cost”. The assessee filed a reply on 16.08.2011 which the DRP considered to be a simple reiteration of what was submitted before the TPO. In the absence of any additional information given by the assessee justifying these payments, the DRP held that no tangible and direct benefit was derived by such payment made by the assessee to its AE. As such, the DRP proposed an adjustment of Rs. 1,17,00,313 to the total income as against lower amount proposed by the TPO. The A.O. vide the impugned order passed u/ss 143(3) read with 144C(13) on 26.09.2011 made an addition of Rs. 1.17 crore as suggested by the DRP. The assessee is in appeal.