2018 (3) TMI 2014 - AT - Income Tax

TP Adjustment - disallowing assessee s payment for intragroup services by TPO and DRP as assessee has not been able to substantiate from the documents, the need of services rendered and benefit derived from the services provided by AE - what's benefit derived by assessee from the services rendered by AE? - case of the assessee is that assessee has paid cost for sharing intra-group services, provided by the parent company , which in-turn provided various services which inter alia includes marketing, recruitment and technical support etc. to the group companies in Asia-Australia region - HELD THAT - TPO has admitted that documentary evidence has been submitted by the assessee. TPO time again has questioned justification of the payment with reference to benefit received. We are of considered view that questioning the need of having such services from any outside agency by the assessee is beyond purview of Revenue Authorities. In so far as benefit derived from services is concerned, the Authorities below without appreciating the documents furnished by assessee has formed opinion that the assessee has not benefited from services provided by Rehau Pte. Ltd. Singapore. As decided in EKL Appliances Ltd 2012 (4) TMI 346 - DELHI HIGH COURT it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorized. Thus Authorities below have erred in determining cost of Intra Group Services as Nil and making adjustment in respect of international transactions pertaining to intra group services provided by AE to the assessee. Decided in favour of assessee.

Summary

Issues Involved:
1. Determination of Arm’s Length Price (ALP) for intra-group services.
2. Rejection of aggregation approach for evaluating international transactions.
3. Application of Comparable Uncontrolled Price (CUP) method by the Transfer Pricing Officer (TPO).
4. Validity of benefit test applied by the TPO.

Detailed Analysis:

1. Determination of Arm’s Length Price (ALP) for intra-group services:
The primary issue in this case was the determination of ALP for payments made by the assessee to its Associated Enterprises (AE) for intra-group services, which included technical, marketing & sales, and administrative services. The TPO determined the ALP for these services as ‘Nil’ based on the CUP method, asserting that the assessee had not demonstrated any benefit derived from the services rendered by Rehau Pte. Ltd., Singapore.

The assessee contended that the services were rendered as per the agreement dated 05.01.1998, which was supplemented by subsequent agreements. The services were provided at cost without any markup, and the payments were made based on budgeted sales. The assessee provided extensive documentation, including emails and correspondence, to substantiate the services rendered.

2. Rejection of aggregation approach for evaluating international transactions:
The TPO rejected the aggregation approach adopted by the assessee for benchmarking its international transactions. Instead, the TPO evaluated the intra-group services separately. The assessee argued that the allocation of costs for intra-group services was in line with the OECD guidelines, which allow cost allocation on the basis of turnover or headcount.

3. Application of Comparable Uncontrolled Price (CUP) method by the TPO:
The TPO applied the CUP method to determine the ALP for intra-group services and concluded that the cost should be ‘Nil’. The assessee argued that the TPO did not select suitable comparables and that the services were provided at cost without any markup. The assessee also highlighted that in the assessment year 2006-07, the TPO had accepted similar payments made to Rehau Pte. Ltd., Singapore.

4. Validity of benefit test applied by the TPO:
The TPO and the Dispute Resolution Panel (DRP) questioned the benefit derived by the assessee from the services rendered by its AE and concluded that no independent enterprise would have paid for such services. The assessee contended that the benefit test should not be applied by the TPO while determining the ALP of intra-group services. The assessee cited several judicial precedents, including the decisions of the Hon’ble Delhi High Court in CIT Vs. EKL Appliances Ltd., and the Mumbai Tribunal in Dresser-Rand India Pvt. Ltd. Vs. Addl CIT, which held that the benefit test is not relevant for determining the ALP.

Tribunal’s Findings:
The Tribunal held that the TPO and the DRP erred in determining the cost of intra-group services as ‘Nil’. The Tribunal emphasized that the Revenue Authorities cannot question the need for services and that it should be left to the prudence of the assessee to ascertain the requirement of services. The Tribunal also noted that the TPO had accepted similar payments in the assessment year 2006-07, and the method for determining the ALP had not been disputed by the Authorities below.

The Tribunal referred to the OECD guidelines, which recognize the need for allowability of costs paid to a parent company where services are centralized and provided to group entities. The Tribunal concluded that the Authorities below had erred in making the adjustment of Rs. 4,36,74,768/- and allowed the appeal of the assessee.

Conclusion:
The Tribunal set aside the impugned order and allowed the appeal of the assessee, holding that the Authorities below had erred in determining the cost of intra-group services as ‘Nil’ and making the adjustment in respect of international transactions pertaining to intra-group services provided by the AE to the assessee.