2020 (3) TMI 175 - AT - Income Tax

TP addition - treating Arms Length Price (ALP) of the international transaction of Payment of Management Services Fees at Nil - HELD THAT - When the assessee offered suo motu transfer pricing adjustment of Rs. 6.07 crore at 5.97% considering arm s length margin at 7.00% the same also encompassed the effect of international transaction of Payment of management services fees at ALP. The AO/TPO in our considered opinion were not justified in accepting on one hand the transfer pricing adjustment of Rs. 6.07 crore in the international transaction of import of goods with the assessee s margin at 1.03% (after the claim of management services fees at 1.59 core at ALP) and simultaneously on the other hand making separate transfer pricing adjustment of Rs. 1.59 crore in the international transaction of Payment of management support fees. Such an action has resulted into double disallowance of Rs. 1.59 crore which cannot legally stand. The amount of transfer pricing adjustment made by the assessee by taking Nil ALP of the international transaction of Payment of management services fees at Rs. 1.59 crore accounts for only 1.63% 2.66% (margin of the assessee by taking ALP of Management services fee at Rs. 1.59 crore) minus 1.03% (margin of the assessee by taking ALP of Management services fee at Nil) . The amount of transfer pricing adjustment of Rs. 1.59 crore representing 1.63% profit rate is in any case less than even 1.80% being the cushion between the adjusted and unadjusted mean margin of the comparables. On this score alone there was no reason to go ahead with the transfer pricing addition of Rs. 1.59 crore. TPO Justification in determining Nil ALP of the international transaction of Payment of management services fees - It is seen from a copy of Management services Agreement between Sandvik AB (the providing party) and the assessee (the receiving party) which is applicable to the year under consideration as well that the term Providing party has been defined as all or some of the Sandvik companies which provide management services . Thus it is clear that the charges by Sandvik AB were not only for the services provided by it but also some other group companies including Walter AB. The view point of the DRP on this issue is therefore not correct. Availing actual services - It is seen from the Agreement that it provides for rendering intra group services consisting of Management services IT related services Services primarily aimed at increasing and retaining the value of intangible assets Sales services and Schedule related service activities. The Agreement provides that there will be no charge for shareholder related activities. We have perused the nature of services received by the assessee which have been tabulated on pages 521 and 522 of the paper book. There is a detailed description of services in the categories of Pricing and quotation Product and proposal Product related pricing and quotation Product drawing and pricing Business promotion and Calculation. Against each of the above categories there is an elaborate description of the nature of services and the persons/AE providing them. Then there are copies of e-mails from pages 523 to 537 of the paper book which demonstrate that the personnel of the AE rendered services to the assessee that have been captured in the table given at pages 521 and 522 of the paper book. This shows that not only there was an Agreement between the assessee and its AE for rendering the services but the assessee actually availed the same. Having come to the conclusion that the services were availed by the assessee the next question is determination of the ALP of the transaction. The ld. AR drew our attention towards the order passed by the Tribunal in the assessee s own case for the immediately preceding assessment year 2011-12. It was shown that in the identical fact situation the Tribunal has held the transaction of Payment of management services fee at ALP. This factual assertion could not be controverted by the ld. DR. In the absence of any distinguishing feature in the facts of the immediately preceding year vis-a-vis the current year respectfully following the precedent we hold the international transaction of Payment of management services fees was at ALP. Appeal is allowed.

Summary

Issues Involved:
1. Transfer Pricing Addition
2. Arm's Length Price (ALP) of Payment of Management Services Fees
3. Evidence of Availing Management Services
4. Determination of ALP for Management Services Fees

Issue-wise Detailed Analysis:

1. Transfer Pricing Addition:
The core issue in the appeal is the transfer pricing addition of Rs. 1,59,45,450 made by the Assessing Officer (AO) by treating the Arms’ Length Price (ALP) of the international transaction of 'Payment of Management Services Fees' at Nil. The assessee, a domestic company engaged in the distribution of cutting and drilling tools, had imported finished goods from overseas Walter group entities for resale in India and declared a total income of Rs. 49,25,610. The return included Form No. 3CEB with details of various international transactions, including the payment of management services fees.

2. Arm's Length Price (ALP) of Payment of Management Services Fees:
The assessee benchmarked the international transactions of import of finished goods and payment of management services fees separately under the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) accepted the ALP for the import of finished goods after considering a voluntarily offered transfer pricing adjustment of Rs. 6.07 crore. However, the TPO disputed the ALP of the payment of management services fees, determining it at Nil due to a lack of evidence for availing the services, leading to a recommended transfer pricing adjustment of Rs. 1.59 crore.

3. Evidence of Availing Management Services:
The TPO's determination of Nil ALP was based on the absence of evidence showing that the assessee availed the management services. The Dispute Resolution Panel (DRP) upheld the TPO's decision, noting inconsistencies and a lack of evidence. However, the assessee provided detailed descriptions and emails demonstrating the receipt of services, which were tabulated and presented in the paper book. The Tribunal observed that the services were indeed availed, as evidenced by the Management Services Agreement and supporting documentation.

4. Determination of ALP for Management Services Fees:
The Tribunal noted that the assessee had already offered a transfer pricing adjustment of Rs. 6.07 crore, representing a profit margin of 5.97%, which included the effect of the payment of management services fees. The AO/TPO's separate adjustment of Rs. 1.59 crore resulted in double disallowance, which was deemed unjustified. Additionally, the Tribunal referred to the order for the preceding assessment year (2011-12), where the identical transaction was held at ALP. In the absence of any distinguishing features between the two years, the Tribunal concluded that the payment of management services fees was at ALP.

Conclusion:
The Tribunal allowed the appeal, holding that the payment of management services fees was at ALP and quashing the transfer pricing addition of Rs. 1.59 crore. The order was pronounced in the Open Court on 28th February 2020.