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2019 (12) TMI 1282 - AT - Income TaxTP Adjustment - Arms Length Price in respect of shared services at Rs.Nil. - assessee is a market research company - HELD THAT - We find from the perusal of Clause 6 of the said agreement , it specifically excludes from within its ambit, the services which are in the nature of shareholder services or services which have been provided by the group company to another for the exclusive benefit of the other. Hence the argument of the revenue that the services rendered are in the nature of shareholder activities cannot be accepted as the same is without any basis. We find that as per Clauses 11 and 12 of the said agreement, SMSL is appointed as a pooling entity for all costs incurred by each of the group companies in rendering the shared services and thereafter to allocate the same to the various group companies based on benefits the respective companies had derived. There is a binding agreement between parties to render services and contribute costs ; that there is a recognition by all group entities of the need for such services ; that SMSL is a special purpose vehicle existing for the sole purpose of pooling of costs ; that no costs for rendering of any shareholder/stewardship services are charged under the Shared Resources Allocation Agreement and that no costs for rendering any exclusive group company specific services are charged under the Shared Resources Allocation Agreement. PO has accepted the segmentals so prepared. This demonstrates that the ld TPO agrees that the support and assistance under the Shared Resources Allocation Agreement are integral to rendition of the Market Research Services. Further when the TPO had accepted the receipts and payments towards the Market Research Services (rendered and received) by the assessee to be at arm's length by applying Internal TNMM, and when, the segmental margin have been arrived at after debiting the payments under Shared Resources Allocation Agreement, which segmentals have been accepted by the ld TPO for benchmarking the Market Research Services and accepting the same to be at arm's length , we find that automatically the payments under the Shared Resources Allocation Agreement also stand benchmarked. It is therefore improper of the ld TPO to then once again separately benchmark payments under Shared Resources Allocation Agreement and subject them to a CUP analysis. We further find that the co-ordinate bench of this tribunal in assessee s own case for the Asst Year 2008-09 , being the first year of operation of Shared Resources Allocation Agreement, had upheld the method of benchmarking adopted by the assessee. It is well settled that Internal TNMM based on segmental data would always be preferable over Extenal TNMM. On applying Internal TNMM , the margin from services rendered to international AEs is 22.04% , whereas the margin from services rendered to other international Non-AEs is 4.29%; and hence no adjustment is required to be made with respect to payments made under the Shared Resources Allocation Agreement. We find that the ld TPO ought not to have determined the ALP of the payment made under the Shared Resources Allocation Agreement at Rs Nil. Cost incurred on Shared Resources Allocation Agreement - It would be pertinent to note here that the payment made under Shared Resources Allocation Agreement had been duly subjected to deduction of tax at source, except an amount of ₹ 73.81 lakhs which was suo moto disallowed by the assessee for failure to deduct tax at source, and that no refunds have been claimed by the recipients thereon. Hence the actual claim by the assessee for the year under consideration is ₹ 6.77 crores only and therefore it is erroneous to make an addition of the entire amount of ₹ 7,50,68,892/-. This is only made as a passive observation by us as we direct the ld TPO to delete the entire adjustment made towards payment of cost contribution charges pursuant to Shared Resources Allocation Agreement. - Decided in favour of assessee.
Issues Involved:
Adjustment of ?7,50,68,892/- to Arm's Length Price (ALP) for shared services under the Cost Contribution Arrangement. Detailed Analysis: 1. Background and Transaction Details: The assessee is a market research company part of Aegis Group PLC, U.K., and was involved in various international transactions, including market research services rendered and received, cost contribution arrangements, and reimbursements of expenses. The primary issue is the adjustment of ?7,50,68,892/- to ALP for shared services under the Cost Contribution Arrangement, which was benchmarked using the Internal Transaction Net Margin Method (TNMM). 2. TPO's Analysis and Queries: The Transfer Pricing Officer (TPO) directed the assessee to justify the payment for management charges under the cost contribution arrangement by providing detailed information on various aspects such as the nature of services, beneficiaries, cost allocation, evidence of services rendered, and the benefits derived. The assessee provided responses, including the Shared Resources Allocation Agreement, which detailed the services and cost allocation mechanism. 3. TPO's Findings: The TPO concluded that the assessee failed to demonstrate that services were rendered or received, quantify the benefits derived, and show what an independent entity would be willing to pay for such services. Consequently, the TPO determined the ALP for the shared services at NIL. 4. DRP's Confirmation: The Dispute Resolution Panel (DRP) upheld the TPO's findings, emphasizing that the assessee did not provide adequate evidence to substantiate the receipt of services and the benefits derived therefrom. The DRP also noted that the assessee failed to benchmark the international transactions of intra-group services properly. 5. Assessee's Arguments: The assessee argued that the intra-group services were commercially expedient, and exact quantification of services was neither possible nor necessary. The assessee also contended that since the entity-level margin was at ALP, no TP adjustment was required. The assessee provided a detailed write-up on the group's operations and the necessity of shared services for maintaining efficiency and uniformity in quality. 6. Tribunal's Observations: The Tribunal noted that the assessee had adopted Internal TNMM as the Most Appropriate Method (MAM) based on segmental data, which was duly audited and submitted to the TPO. The Tribunal found that the income earned from services rendered under the Shared Resources Allocation Agreement was accepted by the TPO to be at ALP. However, the TPO's determination of ALP at NIL for the payment made under the same agreement was contradictory. 7. Tribunal's Conclusion: The Tribunal held that the assessee had demonstrated the need and benefits of the shared services, and the TPO's conclusion that no services were rendered was incorrect. The Tribunal emphasized that the TPO cannot sit in judgment over the benefit claimed to have been received by the assessee from the services received. The Tribunal directed the TPO to delete the entire adjustment of ?7,50,68,892/- made towards the payment of cost contribution charges under the Shared Resources Allocation Agreement. 8. Judicial Precedents: The Tribunal referred to various judicial decisions supporting the assessee's contention that the TPO cannot question the commercial expediency of the transaction and that the benefit derived from the services cannot always be quantified in monetary terms. Conclusion: The Tribunal allowed the appeal of the assessee, directing the deletion of the adjustment made to the ALP for the shared services under the Cost Contribution Arrangement. The Tribunal emphasized the necessity and benefits of the shared services and the inconsistency in the TPO's findings.
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