2018 (9) TMI 1880 - AT - Income Tax

TP adjustment - arm s length price adjustments in respect of management fees - HELD THAT - Expenditure to the extent of 60% was held to be capitalized on the ground that during that year the expenses of Asia Pacific headquarters were also aimed at increasing the installed capacity from 6 lakhs units p.a. to 10 lakhs units p.a. That aspect of the matter however is no longer relevant and that is not even revenue s case before us. There is no dispute about the rendition of services but as in the last year the dispute is about the services being in the nature of shareholder services. That plea in our considered view is wholly unsustainable in law. A core management support service under a cost contribution arrangement is inherently outside the limited scope of shareholder services. These services are required for effective administration and management of the assessee company on day-to-day basis. Whether assessee needs these services or not or whether assessee derives substantial benefit from these services or not is not really relevant. That should be best left to the commercial wisdom of the assessee. What is material is whether the services were rendered or not and whether or not the cost allocation was on a fair and reasonable even if not wholly precise and accurate basis and both of these tests are clearly satisfied on the facts of this case. It is also not a case in which benefits are so trivial or illusory that it can be said that the assessee did not derive any benefit from these services at all. The emails correspondence and other corroborative details clearly show rendition of services and the allocation being on approximate time basis show reasonableness in allocation of costs. As for the fact that the date of agreement is a date subsequent to commencement of work under the agreement nothing really turns on it inasmuch as the existence of a formal agreement is not even a sine qua non for a cost contribution arrangement. It is not the case of the revenue that the agreement is not a sham agreement. The agreement may have been formally entered into on a later date but it covers the entire period and there is no dispute about rendition of services. In our considered view in the light of these discussions and respectfully following the co-ordinate bench decision in assessee s own case for the assessment year 2008-09 we are unable to see any legally sustainable merits in the impugned arm s length price adjustments in respect of management fees Arm s length price adjustment in respect of insurance premium share - HELD THAT - We find that this issue is also covered by the co-ordinate bench decision in assessee s own case for the assessment year 2008-09 wherein held there was no error on the part of assessee claim the allocation of insurance cost and further there was no duplication of insurance expenditure because they were meant to cover up two types of insurances namely public liability insurance and product liability insurance.

Summary

Issues Involved:
1. Upward adjustment of ?3,50,13,068/- in respect of international transactions.
2. Upward adjustment in relation to payment of management fee of ?3,47,66,541.
3. Upward adjustment in relation to payment of insurance cost allocation of ?2,46,527.
4. Levy of interest under section 234A, B, C & D.

Detailed Analysis:

1. Upward Adjustment of ?3,50,13,068/- in Respect of International Transactions:
The appellant challenged the correctness of the order dated 10th December 2014, which involved an upward adjustment of ?3,50,13,068/- in respect of international transactions. The appellant contended that the order was erroneous and contrary to the provisions of law, facts, and circumstances of the case. The adjustment was primarily related to the payment of management fees and insurance costs to Associated Enterprises (AEs).

2. Upward Adjustment in Relation to Payment of Management Fee of ?3,47,66,541:
The appellant argued that the Assessing Officer (AO) and Transfer Pricing Officer (TPO) erred in making an upward adjustment for the management fee paid to AEs. The appellant maintained that the services received helped in its operations and the arm's length price (ALP) declared by the appellant should have been accepted. The TPO, however, concluded that the services were shareholder activities and that the appellant failed to establish the 'benefit test' for the allocation of management fees. The TPO disallowed the entire amount on a gross basis, considering the ALP to be NIL. The appellant provided evidence of services rendered, including cost-sharing agreements and time estimates, but the TPO found these insufficient.

3. Upward Adjustment in Relation to Payment of Insurance Cost Allocation of ?2,46,527:
The appellant contested the upward adjustment for insurance cost allocation, arguing that the TPO wrongly assumed duplication of insurance payments and disallowed the entire amount on a gross basis. The TPO noted that the insurance was taken at a global level and allocated based on turnover, but the appellant failed to produce evidence justifying the necessity of this payment. The TPO considered the payment to be duplicate and unnecessary, thus treating the ALP as NIL.

4. Levy of Interest Under Section 234A, B, C & D:
The appellant also raised grievances regarding the levy of interest under section 234A, B, C & D, seeking consequential relief. However, this ground was dismissed as infructuous since it did not require independent adjudication.

Tribunal's Findings:
1. Management Fees:
- The Tribunal found the issue to be broadly covered by the order dated 28.12.2017 in the appellant's own case for the assessment year 2008-09. It was observed that the services rendered by the President – Asia Pacific were indeed for the benefit of the appellant and not merely shareholder activities. The Tribunal emphasized that the benefit test is not relevant for ALP determination and that the commercial expediency of the payment should not be questioned by the TPO.
- The Tribunal noted that the services were rendered and the cost allocation was reasonable. Therefore, the impugned ALP adjustment for management fees was deleted.

2. Insurance Costs:
- The Tribunal referred to the co-ordinate bench decision in the appellant's case for the assessment year 2008-09, which held that the allocation of insurance costs based on turnover was appropriate and there was no duplication of insurance expenditure. The Tribunal upheld the finding that the insurance costs were necessary and dismissed the ALP adjustment for insurance costs.

3. Interest Under Section 234A, B, C & D:
- The Tribunal dismissed the ground regarding the levy of interest as infructuous, as it only sought consequential relief.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the ALP adjustments for management fees and insurance costs. The ground regarding the levy of interest was dismissed as infructuous. The Tribunal's decision emphasized the importance of not questioning the commercial expediency of payments and ensuring that ALP adjustments are based on permissible methods and substantial evidence.