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2020 (11) TMI 171 - AT - Income TaxTP Adjustment - international transaction of Payment of Regional Service charges (RSC) pertaining to five intragroup services, whose ALP has been determined by the TPO at Nil - Whether the services were actually availed? - HELD THAT - Payment for technical regional services in dispute refers to such technical guidance/resolution which the assessee received on day-to-day basis on the issues during the manufacturing activity. To accentuate on the duplication of services, the TPO referred to the payment under the head Legal Professional expenses debited to the Profit and loss account, which was in addition to the legal charges paid under the regional services. Here again, we find that the separate payment debited to the Profit Loss account is towards availing the services of the consultants in India for local compliance. Thus, it is evident that there is no duplication of services as was canvassed by the TPO. Next point taken up by the TPO is that the assessee did not derive any benefit from such services or there was no need for such services. Suffice to say, it is prerogative of the assessee to have or not to have any services in the course of its business. Assessee is the best judge to decide if any particular services are required for carrying on its business. The TPO cannot step into the shoes of the assessee and decide if there was any need for services. Evidence of availing services by the assessee forecloses the examination by the TPO whether such services were needed or not and whether any benefit was derived or not. Shareholder services take place when some act or service is done by a shareholder to the company in order to ensure that his investment in the shares is safe and further such an act or service does not produce any effect to the company receiving it. TPO has referred to regional services being in the nature of shareholder services in a generic sense. He has not specifically spelt out which services are shareholder services. From the detailed narration of services above, it is more than overt that the services did produce effect to the assessee company. As such, they go outside the ambit of the shareholder services. We are fully satisfied that the assessee availed the regional services in the carrying on its business at the transacted value. Whether the costs are rightly allocated to the assessee? - Amount of costs incurred by the service-providing companies on rendition of services - All details were filed before the TPO, who has acknowledged this fact in second bullet point in para 9.19 on page 42 of impugned order by noticing that The certificate issued by the independent auditor is only with regard to correctness of the cost allocation as per the terms of the Agreement and the same cannot be considered as a documentary evidence for establishing the ALP of the transaction. The TPO has nowhere in his order questioned the correctness of the certificate of the auditor on cost allocation. Correctness of the cost allocation as per the terms of the Agreement. This brings us to the point that the assessee was allocated ₹ 30.22 crore as Regional Service charges on the basis of actual costs incurred by Goodyear USA and other Goodyear affiliates on which only three Goodyear entities, namely, Goodyear Singapore, Goodyear Shanghai and Goodyear Thailand added mark-up of 5% while Goodyear USA eventually and other entities not adding any mark-up. Whether the payment by the assessee is at ALP? - No substance in the argument of DR that the TPO applied any other method . Firstly, the TPO has nowhere mentioned in his order that he was applying such any other method in terms of rule 10AB. Secondly, the TPO has not determined the ALP in any manner. He simply wrote that the arm s length price of the balance amount of ₹ 26,87,68,644/- is taken as Nil and accordingly an adjustment of ₹ 26,87,68,644/- is made to the value of international transactions of payment of Regional service charges made to the AE . This indicates that the TPO did not determine the ALP under any method much less any other method . In such circumstances, we cannot countenance the argument of the ld. DR, which is just in the air and does not emanate from the TPO s order. As seen that like the assessee who did not conduct any benchmarking and straightway treated the transaction at ALP under the CUP method without comparing it with any other comparable uncontrolled transaction, the TPO also did not apply any of the prescribed methods for determining the ALP. We respectfully agree with the proposition propounded and do not dispute the ratio laid down in the cited decisions. However, if we hold that the ALP determination by the TPO was not done under any specific or general method and hence the same should be obliterated, a fortiori would be that the ALP determination by the assessee would resurface. Had there been any valid ALP determination by the assessee, we would have readily accepted the proposition laid down in such decisions and set aside the TPO s ALP determination based on no method. But acceptance of such an argument in the instant case will lead to burying the ALP determination of an international transaction with an admitted mark-up, which position is contrary to the prescription of the Chapter-X of the Act. The additional ground urging to set aside the transfer pricing addition on this count, in the prevailing facts is, ergo, not allowed. As seen from the above calculation given on behalf of the assessee and duly verified by the ld. DR that the mark-up on actual costs incurred by the Goodyear entities in rendering regional services to the assessee is 2.22% on total value of services invoiced. This calculation is based on taking all the six regional services together. As the IT services are not to be considered for our purpose, the ld. AR pointed out that even if such services are considered as without any mark-up, the mark-up on aggregate basis in respect of the remaining five services will be 2.52%. Such mark-up is within the tolerance range of 3%. In other words, even if presume that the comparable uncontrolled transaction is at zero mark-up, still the value of the international transaction is within the notified tolerance range. In that view of the matter, the case gets covered by the second proviso to section 92C(2) of the Act not warranting any transfer pricing addition. We, therefore, order to delete the addition of ₹ 26.87 crore and odd.
Issues Involved:
1. Transfer Pricing (TP) addition for the international transaction of Payment of Regional Service Charges (RSC) excluding IT Services. 2. Determination of Arm's Length Price (ALP) for intra-group services. 3. Evidence of receipt of services and their commercial benefit. 4. Duplication of services and shareholder services. 5. Correctness of cost allocation and benchmarking method. Issue-wise Detailed Analysis: 1. Transfer Pricing (TP) Addition for Payment of Regional Service Charges (RSC) Excluding IT Services: The assessee challenged the TP addition of ?26,87,68,644/- made by the AO for the international transaction of Payment of Regional Service Charges (RSC), excluding IT Services. The TPO determined the ALP at Nil for the five regional services, leading to the addition. The DRP upheld this view based on its earlier decision for AY 2012-13. 2. Determination of Arm's Length Price (ALP) for Intra-Group Services: The TPO rejected the CUP method adopted by the assessee for benchmarking the RSC transaction, stating that the comparison was made with a controlled transaction rather than an uncontrolled one. The TPO requested evidence for receipt of services, nature of services, and benefit derived. The assessee provided agreements, service break-ups, and an independent CA certificate. The TPO found the evidence insufficient and determined the ALP at Nil, leading to the transfer pricing adjustment. 3. Evidence of Receipt of Services and Their Commercial Benefit: The Tribunal examined the detailed evidence provided by the assessee, including emails and presentations, demonstrating the receipt of services under various heads like Production and Tyre performance, Procurement and Material Management, Sales and Marketing, Financial Services, and Human Resource and General Administrative services. The Tribunal found that the assessee did receive the services, contrary to the TPO's findings. 4. Duplication of Services and Shareholder Services: The TPO argued that some services were duplicated or were shareholder services, providing no commercial benefit to the assessee. The Tribunal found no duplication of services, as the regional services were general in nature, whereas the services recorded separately in the Profit and Loss account were specific. The Tribunal also rejected the TPO's argument about shareholder services, stating that the services did produce an effect on the assessee company. 5. Correctness of Cost Allocation and Benchmarking Method: The Tribunal examined the cost allocation method and found it to be in accordance with the Service Agreement. The independent auditor's certificate confirmed the correctness of the cost allocation. The Tribunal noted that the TPO did not dispute the correctness of the cost allocation but did not apply any method to determine the ALP, leading to a flawed TP adjustment. The Tribunal found that the overall mark-up on costs was within the tolerance range of 3%, making the transaction compliant with the arm's length principle. Conclusion: The Tribunal concluded that the assessee did receive the regional services, the costs were correctly allocated, and the payment was at arm's length. Consequently, the TP addition of ?26.87 crore for AY 2014-15 and ?32.06 crore for AY 2015-16 was deleted. The appeals were partly allowed, with the Tribunal ordering the deletion of the TP adjustments.
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