2019 (9) TMI 58 - HC - Income Tax

TP Adjustment - upward adjustment made by Transfer Pricing Officer on account of Management fees - Upward adjustment on account of Insurance Payment - ITAT deleted the addition - HELD THAT - We are of the view that the findings of fact recorded by the Tribunal in its impugned order cannot be termed as perverse or contrary to the evidence on record. The very same issue was duly considered by the ITAT for the A.Y. 2008-09. However, according to the learned counsel appearing for the Revenue, having regard to the low tax effect, the order passed by the ITAT for the A.Y. 2008-09 could not be challenged. We are convinced that the decision of the Tribunal is correct and requires no interference. The Tribunal took into consideration the voluminous documentary evidence on record in the form of e-mails correspondence indicating the rendition of services. The Tribunal is right in its view that the assessee would be the right person to know whether the services are required or not. Such issues should be left best to the commercial wisdom of the assessee. What is important is whether the services were rendered or not and whether the cost allocation was on a fair and reasonable basis. In the case on hand, the rendition of services has not been disputed. However, lot of emphasis has been put on the issue of Arm's length price in respect of the management fees. This aspect has also been well discussed by the Tribunal. - Decided against revenue

Summary

Issues Involved:
1. Deletion of upward adjustment made by Transfer Pricing Officer on account of Management fees.
2. Deletion of upward adjustment made by Transfer Pricing Officer on account of Insurance Payment.

Issue-wise Detailed Analysis:

1. Deletion of Upward Adjustment on Account of Management Fees
The Revenue proposed that the Appellate Tribunal erred in law and on facts by deleting the upward adjustment of ?3,47,66,541/- made by the Transfer Pricing Officer (TPO) concerning Management fees. The assessee had declared NIL total income and showed book profit under Section 115JB of the Act. The TPO made an upward adjustment for management and insurance allocation, which was upheld by the Dispute Resolution Panel (DRP). The Appellate Tribunal, however, deleted this addition, leading to the Revenue's appeal.

The Tribunal's decision was based on its earlier ruling in the assessee's case for A.Y. 2008-09, where it was held that core management support services under a cost contribution arrangement are inherently outside the scope of shareholder services. It emphasized that the services were necessary for effective administration and management of the assessee's company on a day-to-day basis. The Tribunal found no dispute about the rendition of services and considered the cost allocation to be fair and reasonable.

The Tribunal also noted that the existence of a formal agreement was not a prerequisite for a cost contribution arrangement and that the agreement, though signed later, covered the entire period of service. It concluded that the arm's length price adjustments in respect of management fees were not legally sustainable.

2. Deletion of Upward Adjustment on Account of Insurance Payment
The Revenue also contested the deletion of the upward adjustment of ?2,46,527/- made by the TPO concerning Insurance Payment. The TPO had considered the payment for insurance premium on public liability as NIL, arguing that the assessee failed to substantiate the claim and provide necessary documentation.

The Tribunal, however, relied on its previous decision for A.Y. 2008-09, where it was established that the assessee needed to take insurance for public and product liability. The Tribunal found that the allocation of insurance charges based on turnover was appropriate and that there was no duplication of insurance expenditure. It upheld the finding that the insurance cost allocation was justified and dismissed the Revenue's grounds.

Conclusion:
The High Court dismissed the Revenue's appeal, affirming the Tribunal's findings. It emphasized that the Tribunal's decision was based on substantial evidence, including voluminous documentary evidence indicating the rendition of services. The Court reiterated that the assessee's commercial wisdom in determining the necessity of services should be respected and that the allocation of costs was fair and reasonable. The appeal was dismissed as it did not raise any substantial question of law.