2015 (8) TMI 1473 - AT - Income Tax

TP adjustment - Management fee paid to parent company at Korea - Arm s Length Price (ALP) adopting CUP method - nature of work involved - HELD THAT - Entire matter has to be remitted back to the file of Ld. TPO for denovo consideration because both the assessee as well as the Revenue has not examined the issue with respect to the correct factual matrix. Management services and Technical services false under different field and the nature of work involved both these services are different. When the assessee has made payments to its parent company it has to establish and justify the nature of payment and the nature of service received for the purpose of determining Arms length price in Transfer pricing matters. The onus is on the assessee to substantiate its claim. Just because the operating cost incurred by the assessee company is less than the operating cost of the comparable companies, the claim of expenses incurred towards payment made to its parent company on an adhoc basis cannot be justified. In modern management and technical field there are sufficient ways and measures to measure the services rendered by one entity to other entity - the assessee is bound to produce satisfactory evidence before the Revenue to establish its stand. In fact in this instance case the entire confusion has arisen because the assessee company has not submitted the evidence for the service rendered by the parent company to the assessee company against which the payments are made to the parent company by the assessee company. With these observations we remit the matter back to the file of TPO for fresh considerations - Appeal of assessee is allowed for statistical purposes

Summary

Issues:
Transfer pricing - Disallowance of management fee paid to parent company

Analysis:
The appeal was filed by the assessee against the order of the Assessing Officer following the directions of the Transfer Pricing Officer (T.P.O) and the Dispute Resolution Panel (D.R.P). The crux of the issue revolved around the disallowance of the "Management fee" paid to the parent company in Korea while determining the Arm's Length Price (ALP) using the Comparable Uncontrolled Price (CUP) method.

The assessee, engaged in manufacturing various products, had incurred a management fee towards activities like new customer development, raw material procurement, critical issue support, and finance and accounts support. The fee was disclosed in the balance sheet under "direct manufacturing cost" and "factory expenses." However, the Tribunal observed discrepancies in treating this expenditure as "administrative overheads/management fee."

The T.P.O proceeded on the premise that the amount paid to the parent company was for managerial services, but the assessee argued that the services were technical, not managerial. The T.P.O noted the lack of evidence for the services rendered by the parent company. The assessee contended that comparing operating costs with comparable companies could validate the technical services payment, but the Revenue demanded proof of services rendered.

After considering both arguments, the Tribunal concluded that the matter should be remitted back to the T.P.O for fresh consideration. It emphasized the importance of establishing the nature of payment and services received for determining the Arm's Length Price in transfer pricing matters. The burden of proof lay on the assessee to substantiate its claim, and the lack of evidence for services rendered led to the confusion. The Tribunal stressed the need for satisfactory evidence to support the claim of expenses paid to the parent company.

Ultimately, the appeal of the assessee was allowed for statistical purposes, and the matter was remitted to the T.P.O for a reevaluation of the issue.