2016 (5) TMI 1584 - AT - Income Tax

TP Adjustment - payment of the group charges to its AE - whether the issue as to the payment on account of other group charges made by the assessee to its AE for services rendered was to be determined by the TPO/DRP or it was to be determined by the AO u/s 37 (1) - HELD THAT - TPO goes to prove that the TPO has decided the issue as to making payment of the group charges to its AE for rendering services, such as, OTO and support and application work in respect of various projects for which tenders were submitted. TPO returned the categoric finding that assessee has failed to demonstrate as to whether the services were claimed to have been rendered by its AE were actually received and as such failed the benefit test applied by the TPO, which amounts to assuming the powers of AO. Identical issue has come up before the Hon ble jurisdictional High Court in judgment cited as Commissioner of Income-tax-I vs. Cushman and Wakefield (India) (P.) Ltd. 2014 (5) TMI 897 - DELHI HIGH COURT TPO has exceeded his power by determining that the assessee has not received services from its AE, thus failed the benefit test and further held that the assessee had not furnished any evidence to any visit of the employee of its AE in connection with the services rendered entailing payment of group charges by the assessee. We are of the considered view that since the payment made by the assessee to its AE for services rendered was basically an expenditure incurred for the purposes of business, the same are to be determined u/s 37(1) of the Act, if allowable or not and this issue is in the exclusive domain of the AO to be determined. Adverting to the assessment order passed by the AO which is in consonance with the direction issued by TPO/DRP vide which group charges have been treated as adjustment in the ALP - AO has neither examined nor returned any findings whatsoever if the payment made to the AE for availing services from its AE is an expenditure incurred for the purposes of business u/s 37 (1) rather passed the assessment order in mechanical manner in consonance with the directions issued by the TPO/DRP. Moreover, when the TPO has not disputed that the services were availed by the assessee from its AE, the question of determining the ALP of group charges to the tune of Rs.1,89,53,444/- does not arise because it was to be done by the AO only. We are of the considered view that without entering into merits of the case, the matter is required to be restored to the AO to determine the issue as to the payment of group charges by the assessee to its AE afresh after providing an opportunity of being heard to the assessee in the light of the observations returned hereinbefore. Consequently, the present appeal filed by the assessee is hereby allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer Pricing Adjustment of Rs. 1,89,53,444.
2. Engineering Services availed by the Appellant from its AEs.
3. Benchmarking Analysis.
4. Administrative Support Services.
5. Other Grounds related to economic analysis and comparables.

Issue-wise Detailed Analysis:

Transfer Pricing Adjustment of Rs. 1,89,53,444:
The appellant contested the addition of Rs. 1,89,53,444 made by the AO in the final assessment order dated October 19, 2011. The DRP rejected the appellant's objections and confirmed the transfer pricing adjustment. The TPO had determined the ALP for intra-group charges at Rs. 1,89,53,444, concluding that the appellant failed to demonstrate actual receipt and benefit from the services claimed to have been rendered by its AE.

Engineering Services availed by the Appellant from its AEs:
The appellant argued that the DRP misconstrued its business model and overlooked evidence supporting the real benefits received from the "Engineering Services." The DRP erroneously concluded an overlap between royalty payments and charges for Engineering Services, failing to appreciate the distinct nature of these payments. The DRP also disregarded the fact that most Engineering Services were availed during the tender filing stage when no sale was generated, and the few instances of concurrent services with royalty payments were project-specific, not covered under the License Agreement.

Benchmarking Analysis:
The DRP summarily disregarded the appellant's evidence, including an Independent Auditor's Certificate validating the cost allocation for Engineering Services. The DRP also rejected the "Cost Plus Method" identified by the appellant as the Most Appropriate Method under section 92C(1) of the Act and upheld incorrect comparables, disregarding the appellant's business model as an EPC contractor. The DRP ignored the corroborative analysis using the Transactional Net Margin Method (TNMM).

Administrative Support Services:
The DRP incorrectly concluded that administrative support services of Rs. 43,32,041 availed by the appellant from its AEs formed part of Engineering Services. The appellant argued that this finding was perverse and not sustainable.

Other Grounds:
The appellant's economic analysis for benchmarking outbound engineering services was rejected summarily, disregarding the segmental approach under Rule 10B(e) of the Income-tax Rules. The TPO/DRP relied on comparables' data for the financial year 2006-07 only, overlooking the appellant's accounting practices and the market conditions for EPC contractors.

Judgment Analysis:
The Tribunal noted that the TPO decided the issue of group charges payment by the appellant to its AE for OTO support and application work, concluding that the appellant failed the "benefit test." The Tribunal referred to the jurisdictional High Court's judgment in Commissioner of Income-tax-I vs. Cushman and Wakefield (India) (P.) Ltd., which held that the TPO's authority is to conduct a transfer pricing analysis to determine ALP, not to determine whether there is a service or benefit derived by the appellant. The determination of whether the payment for services rendered is an expenditure incurred for business purposes falls under the AO's jurisdiction under section 37(1) of the Act.

The Tribunal concluded that the TPO exceeded his power by determining that the appellant did not receive services from its AE and failed the benefit test. The AO did not examine whether the payment for services was an expenditure incurred for business purposes under section 37(1) of the Act. The Tribunal restored the matter to the AO to determine the issue afresh, providing an opportunity for the appellant to be heard.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to re-examine the payment of group charges by the appellant to its AE afresh, considering the observations made in the judgment. The order was pronounced on May 4, 2016.