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2017 (6) TMI 392 - AT - Income TaxALP adjustment - upward adjustment of management fees paid by the assessee, under a cost contribution arrangement, to its associated enterprises Schneider Electric Industries SAS, France (SEI-F) - whether services rendered by the SEI-F being in the nature of stewardship activities - Held that - TPO has rejected the determination of arm s length price on the basis of TNMM, at entity level, but then he has not adopted any other permissible method for determination of arm s length price. Such a course of action, as noted above, is not permissible in law. Just because these services are worthless in the eyes of the revenue authorities, the arm s length price of these services cannot be held to be NIL. Similarly, the findings that no services were rendered and that the assessee could have performed these services on its own are contradictory. If no services were rendered, which services the authorities below hold that the assessee could have performed on its own. There is also evidence for visits by the representatives of the group entity, i.e SEI-F, for rendition of these services. Consideration is not required to be charged for the shareholder activities, while other stewardship activities can, and must, be compensated. Nothing, therefore, turns in favour of the revenue on account of the services rendered by the SEI-F being in the nature of stewardship activities which is a term of much broader connotation than shareholder activities.Not charging for the rendition of shareholder activities can be justified but not for all the stewardship activities. Coming to the question of business expediency, in our considered view it was also not for the TPO to bother about business expediency of these services; all he was to see was what would be arm s length services of these services in an uncontrolled situation. That has to be done on the basis of a permissible method of ascertaining the arm s length price. It cannot be open to the TPO to reject a method of ascertaining the arm s length price without fining a legally permissible method to substitute for the method of ascertaining ALP as adopted by the assessee. To hold that the arm s length price of these services was NIL under the CUP method, the TPO had to necessarily to demonstrate that the same services, whatever be its intrinsic worth, were available for NIL consideration in an uncontrolled situation; that is not, and that cannot be, the case. It is also not the case of the authorities below that the arm s length price of these services, under any other legally permissible method is, NIL. There is thus no legally sustainable foundation for the impugned ALP adjustment. We have also noted that the managerial services, availed by the assessee under the same cost contribution arrangement, have been allowed all these years and have been accepted to be at an arm s length transaction. While there is indeed no res judicata in tax proceedings, its important to bear in mind the observations of Hon ble Supreme Court in the case of Radhasoami Satsang Vs CIT 1991 (11) TMI 2 - SUPREME Court , to the effect that where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year . - Decided in favour of assessee.
Issues Involved:
1. Upward adjustment of ?1,51,83,140 for management fees paid under a cost contribution arrangement. 2. Arm’s length price (ALP) determination for management fees. 3. Justification and documentation for services rendered. 4. Application of Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP) method. 5. Business expediency and benefit test. 6. Consistency with previous years' assessments. Issue-wise Detailed Analysis: 1. Upward Adjustment of ?1,51,83,140 for Management Fees: The primary grievance of the assessee was the upward adjustment of ?1,51,83,140 made by the Transfer Pricing Officer (TPO) for management fees paid to Schneider Electric Industries SAS, France (SEI-F) under a cost contribution arrangement. The TPO benchmarked the ALP of these services at NIL, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. 2. Arm’s Length Price (ALP) Determination for Management Fees: The TPO observed that the assessee failed to justify the payment of management fees by failing the receipt and benefit test. The TPO emphasized that an arm’s length entity would only pay for activities that confer a direct and substantial economic or commercial benefit. The TPO concluded that the management services were not adequately substantiated with proper documentation, and thus, the ALP was determined to be NIL. 3. Justification and Documentation for Services Rendered: The TPO and CIT(A) both noted that the assessee did not provide sufficient documentary evidence to prove that the services were actually rendered and that the payments were commensurate with the benefits derived. The CIT(A) highlighted the lack of specific details, qualifications of the individuals providing the services, and the absence of a cost-benefit analysis. 4. Application of TNMM vs. CUP Method: The TPO rejected the use of TNMM at the entity level for benchmarking the transaction, arguing that the international transaction of management fees should be separately benchmarked. The TPO suggested that the CUP method would be more appropriate but did not provide a comparable uncontrolled transaction to support this claim. 5. Business Expediency and Benefit Test: The TPO and CIT(A) questioned the business expediency of the payments, suggesting that the services were not necessary for the assessee’s operations. However, the Tribunal noted that the benefit test is not relevant for ALP determination. The Tribunal emphasized that the focus should be on whether the price paid for the services is what an independent enterprise would have paid under similar circumstances. 6. Consistency with Previous Years' Assessments: The Tribunal highlighted that similar transactions in previous years had been accepted as being at arm’s length. The Tribunal referred to the Supreme Court’s observation in Radhasoami Satsang Vs CIT, emphasizing that a consistent position should not be changed without substantial reasons. Tribunal’s Conclusion: The Tribunal found that the services were indeed rendered by SEI-F, as evidenced by the documentation provided. The Tribunal disagreed with the TPO’s rejection of the TNMM method without adopting an alternative permissible method. It was noted that the TPO’s determination that the services were worthless did not justify a NIL ALP. The Tribunal directed the Assessing Officer to delete the impugned ALP adjustment of ?1,51,83,140, allowing the assessee’s appeal. Final Judgment: The appeal was allowed, and the upward adjustment of ?1,51,83,140 was deleted. The Tribunal emphasized the need for proper documentation and adherence to permissible methods for ALP determination, rejecting the TPO’s and CIT(A)’s conclusions based on the lack of substantial evidence.
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