2019 (12) TMI 440 - AT - Income Tax

TP Adjustment - TPO in determining the Arm s Length Price (ALP) in respect of payment for E-Connectivity services availed by the assessee from its Associated Enterprises (AE) at NIL - HELD THAT - Whole purpose of having a centralized IT-set up within the group was to avoid duplication of efforts and to make the arrangement administratively convenient and cost effective. Accordingly, we hold that the said services are such that an independent enterprise in comparable uncontrolled circumstances would have been willing to pay for the activity if performed for it by an independent enterprise. We find that the cost has been allocated by the AE to the Indian entity (i.e assessee herein) by applying Indirect Charge Method based on the Usage. AR stated that each DSM group entity availing the services from the AE will give the AE the projected number of users for each service and based on that the AE will determine the per user cost. The total cost is accumulated with respect to each service and per user cost is calculated by dividing the total cost by number of budgeted users. The invoices raised by the AE on the assessee in this regard also goes to prove that the same are on cost to cost without any mark up. All these facts are confirmed by the AE vide separate letter dated 21.10.2014 filed before the lower authorities. Payment of e-connectivity charges forms part of the cost base (i.e operating cost in both marketing support services and distribution activity) and the entire operating costs had been recovered with arm s length margin from the AE. Hence there is no reason to determine the ALP of the said international transaction at NIL by the ld TPO which has been wrongly upheld by the DRP. TPO had determined the ALP of payment for e-connectivity charges at NIL without resorting to any of the methods prescribed in the statute. Once a reference is received by the TPO u/s.92CA(1) from the ld. AO, TPO is required to determine the ALP of the international transaction as per the provisions contained in Section 92C and 92CA read with relevant rules thereon. From the conjoint reading of the relevant sections and the relevant rules, we find that the duty of the ld. TPO is restricted only to the determination of the arm s length price of an international transaction between two related parties by applying any of the methods prescribed u/s.92C read with rule 10B of the rules. Thus, there is no provision made in the statute empowering TPO for determining the ALP on a particular international transaction at NIL without resorting to any of the methods prescribed. TPO in determining the ALP of payment for e-connectivity charges at NIL without resorting to any of the methods prescribed under the statute deserves to be dismissed. We have no hesitation in directing the TPO/ ld AO to accept the claim of payment for e-connectivity charges in the sum to be at Arm s Length. Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Whether the Dispute Resolution Panel (DRP) was justified in confirming the action of the Transfer Pricing Officer (TPO) in determining the Arm's Length Price (ALP) for payment of e-connectivity services availed by the assessee from its Associated Enterprises (AE) at NIL instead of ?52,83,464/-.

Detailed Analysis:

Issue 1: Justification of DRP in Confirming TPO's Determination of ALP at NIL

Facts and Background:
The assessee, engaged in marketing support services and distribution of Animal Health and Nutrition Products, reported an international transaction involving payment of ?52,83,464/- for e-connectivity services to its AE. The assessee applied the Comparable Uncontrolled Price (CUP) method to determine the ALP, asserting the costs were charged on a cost-to-cost basis without markup. The TPO, however, determined the ALP at NIL, citing the assessee's failure to substantiate the cost allocation and benefits derived from the services.

DRP's Observations:
The DRP upheld the TPO's determination, noting the assessee's inability to provide evidence of service receipt, cost determination, or benefits derived. The DRP emphasized the necessity of proving that services were obtained at arm's length vis-à-vis third-party transactions, which the assessee failed to establish.

Assessee's Grounds of Appeal:
1. The DRP erred in confirming the TPO's determination of the ALP at NIL.
2. The DRP/TPO ignored the evidences supporting the e-connectivity charges.
3. The commercial rationale and expediency of availing services were challenged.
4. The requirement to establish the benefit arising from the services was incorrectly imposed.
5. The comparability analysis carried out by the assessee was rejected.

Tribunal's Findings:
1. Evidence of Services and Cost Allocation:
- The assessee provided detailed evidence, including invoices and a confirmation letter from the AE, specifying the services rendered and confirming cost allocation on a cost-to-cost basis without markup.
- Services included Information & Communication Technology (Aurora), Server Maintenance, Intranet Services, Access to DSM from non-DSM locations, Pushmail on Tablets & Smartphones, and Applications like Domino and Quickplace.

2. Nature and Benefit of Services:
- The services were critical for the smooth functioning of the assessee's day-to-day business operations.
- The centralized IT setup within the group was administratively convenient and cost-effective, avoiding duplication of efforts.
- The services were such that an independent enterprise would be willing to pay for them under comparable uncontrolled circumstances.

3. Cost Allocation Basis:
- The cost was allocated based on 'Per User' usage, consistent with OECD TP Guidelines on Direct and Indirect Charge Methods.
- The TPO accepted the rendering of services but deemed them routine, not warranting payment. However, the Tribunal found this inconsistent with evidence provided.

4. Consistency with Previous and Subsequent Years:
- For the immediately preceding assessment year (2010-11) and the subsequent year (2012-13), the TPO accepted the payment for e-connectivity charges as arm's length, following the same methodology.

5. Legal Precedent:
- The Tribunal referenced the Hon'ble Jurisdictional High Court's decision in CIT vs. Johnson & Johnson Limited, emphasizing that the TPO must determine the ALP using prescribed methods and cannot arbitrarily determine it at NIL.

Conclusion:
The Tribunal concluded that the TPO's determination of the ALP at NIL without using any prescribed methods was unjustified. The assessee's payment for e-connectivity charges of ?52,83,464/- was deemed to be at arm's length. The appeal was allowed, directing the TPO/AO to accept the assessee's claim.

Order:
The appeal of the assessee is allowed, and the order was pronounced in the open court on 04/10/2019.