2015 (5) TMI 344 - AT - Income Tax

Transfer pricing adjustment - determination of arm s length price ALP in the case of cost contribution agreement - whether intra group services are duplication of services for which the AE has already paid in addition to what is paid by way of allocation is also to be looked into? - Held that - As decided in Dresser Rand India Pvt.Ltd. Vs. ACIT 2011 (9) TMI 261 - ITAT MUMBAI Even cost contribution arrangement should be consistent with arm s length principle, which, in plain words, requires that assessee s share of overall contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. The Assessee has in the present case filed material before the TPO to demonstrate the nature of services rendered. In the paper book filed before us the index of the paper book gives a description of the service. We are of the view that the above description alone would not suffice. As we have already seen the TPO had specifically called upon the Assessee to give details of the services rendered and how the same were utilized by the Assessee and its relevance for the Assessee s business. The evidence filed by the Assessee in this regard is in the form of e-mails between parties, reports etc. As to how the evidence filed by the Assessee was actually useful in its business has also to be highlighted as the Assessee will be the best person to know these facts which are within its knowledge. It is only if such a stand is taken by the Assessee can the TPO take the issue forward to arrive at a proper conclusion. In our opinion filing of voluminous correspondence, reports etc., would not be a proper way of discharge of Assessee s burden to establish the ALP of expenditure in question. We would therefore direct the Assessee to comply with the queries raised by the TPO in his show cause notice which has been set out in his order u/s.92CA of the Act. The Assessee has also given the breakup of costs incurred by the parent company and the basis of apportionment. The same has not been considered at all by the TPO. The findings of the DRP with regard to the nature of services as given in a chart in the earlier part of this order are general without reference to the material filed by the Assessee. The findings are purely on surmises and cannot be sustained in the absence of any material on the basis of which such conclusions were arrived at being set out in the DRP s directions. The Assessee in the present case has chosen TNMM at the entity level and has not provided any other method for determination of ALP in respect of the transaction of Payment of Technical and Management cost individually. This will take us to the question as to whether the TNMM at the entity level will be the MAM or should the ALP determined using CUP. This will again depend on the question whether all the activities manufacture and trading etc., carried on by the Assessee is closely linked so that benchmarking its overall results with comparable company using TNMM would be appropriate. - Decided in favour of assessee for statistical purpose

Issues Involved
1. Whether the assessee required services rendered by the Associated Enterprise (AE) and if such services were actually received.
2. Whether the transaction for providing technical and management services by the AE was a colorable device to siphon off profits.
3. Whether the addition of Rs. 7,27,57,135 to the total income of the assessee by way of adjustment consequent to the determination of arm's length price (ALP) was justified.

Issue-Wise Detailed Analysis

1. Requirement and Receipt of Services from AE
The assessee, a subsidiary of M/s. Fosroc International Ltd., U.K., engaged in the manufacture and sale of construction chemicals, entered into various international transactions with its AE, including the payment of technical and management costs amounting to Rs. 7,27,57,135. The Transfer Pricing Officer (TPO) questioned whether these services were necessary and whether they were actually rendered. The TPO issued a show cause notice and demanded primary evidence, such as invoices and ledger accounts, to prove the receipt of services. The assessee provided documents, including emails and reports, but the TPO concluded that these were general in nature and did not substantiate the receipt of substantial and tangible benefits. The TPO determined the ALP of the services at Nil, leading to an addition of Rs. 7,27,57,135.

2. Allegation of Colorable Device
The TPO and the Dispute Resolution Panel (DRP) suspected that the transaction was a colorable device to siphon off profits. They questioned the necessity of the services and whether they could have been performed locally or by the assessee itself. The DRP supported the TPO's view, stating that the services were more in the nature of commands from the shareholder to protect its interest rather than meeting the identified needs of the assessee. The DRP also noted that the acceptance of similar transactions in previous years did not preclude investigation in the current year, as each assessment year is independent.

3. Addition of Rs. 7,27,57,135 to Total Income
The TPO applied the Comparable Uncontrolled Price (CUP) method to determine the ALP and concluded that the payment for technical and management services should be Nil. The assessee argued that the Transaction Net Margin Method (TNMM) at the entity level was the most appropriate method due to the integrated nature of its business transactions. The DRP, however, insisted on benchmarking individual transactions separately unless they were closely linked. The Tribunal noted that the TPO did not perform a comparability analysis as required under Rule 10B(1)(a) of the Income Tax Rules, 1962. The Tribunal also referenced similar cases, such as Dresser Rand India Pvt. Ltd. and EKL Appliances Ltd., where it was held that the TPO cannot question the commercial wisdom of the assessee's decision to avail services from its AE.

Tribunal's Decision
The Tribunal remanded the issue to the TPO/AO for fresh consideration, directing them to:
1. Recompute the ALP by considering the allocated expenses by the AE to the assessee.
2. Determine whether the services were actually rendered and beneficial to the assessee.
3. Evaluate the justification for adopting TNMM at the entity level versus the CUP method.
4. Provide the assessee an opportunity to furnish detailed explanations and evidence regarding the nature and benefits of the services received.

The Tribunal emphasized that the TPO should not question the necessity of the services but should focus on determining the ALP based on comparable transactions. The appeal was allowed for statistical purposes, and the stay petition was dismissed as infructuous.

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