9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2021 (6) TMI 71 - AT - Income TaxTP Adjustment - Whether any services requiring payment were availed by the assessee? - what is its ALP? - HELD THAT - TACO provided specific and also exclusive services under the Agreement to the assessee along with certain other group entities, which are not general in nature but precise, detailed and specific. TPO determined Nil ALP by assigning another reason that the assessee failed to show any benefit received by it from the services. In our considered opinion, what is relevant is to consider the availing of the services and not the resultant benefit arising there from. Every expenditure incurred by a businessman cannot necessarily lead to swelling the profit. If the proposition of the TPO is taken to a logical conclusion, then it would mean that no business would ever incur loss, which is not a reality. The important consideration is the incurring of bona fide expenditure and availing of service, which may or may not lead to the increased income. Application of the benefit test is not warranted. Enquiry in this regard should come to an end as soon as the factum of availing the services for the business purpose is established. We have noticed above that the assessee did avail the services from TACO for running its business operations. As such, there was no need to look beyond that and search for some benefit accruing to the assessee as a pre-condition for allowing the deduction. TPO also held that the services, if any, availed by the assessee were in the nature of shareholders services, not requiring payment of any consideration. Suffice to say, shareholder or stewardship 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. From the detailed narration of services above, it is overt that the services did produce effect to the assessee company. As such, they go outside the ambit of the shareholder services as branded by the TPO. It is, therefore, held that TACO rendered specific and also exclusive services to the assessee, which are not in the nature of shareholder services, and hence require payment of consideration as a quid pro quo in an uncontrolled situation. What is its ALP? - Selection of MAM - CUP V/S TNMM - As neither the comparables chosen by the assessee rendered similar services nor were they located in India. In our considered opinion, the authorities below were justified in rejecting the CUP method applied by the assessee in such a manner. TPO after rejecting the assessee s benchmarking under the CUP method, proceeded to determine the ALP of the transaction under other method as per rule 10AB of the Rules - A bare perusal of the rule makes it graphically clear that the other method is the one which not only encompasses the price actually charged or paid for benchmarking but also the price which would have been charged or paid in a comparable uncontrolled transaction. Any potential price which could be charged or paid for similar goods/services, even though not actually transacted, can also be accepted for benchmarking the SDT under consideration. In principle, no fault can be found with the TPO in interpreting the rule in the way he did. However, the steps following such an interpretation went awry as he determined the Nil ALP on the bedrock that no services were actually availed by the assessee requiring payment of any consideration, which has been overturned supra. Thus, the application of this method by the TPO in this way is rendered nugatory. Indisputably, all the transactions cited as evidence of reasonableness are between the associated enterprises and hence controlled transactions. When the legislature specifically provided for considering transactions only between non-associated enterprises, it is absolutely unwarranted to consider any transaction between two associated enterprises for determining the ALP under rule 10AB. We, therefore, jettison the contention advanced on behalf of the assessee in this regard and hold that the transactions between two related enterprises cannot be construed at ALP on the basis of reasonableness of the amount per se. Transaction at ALP On the strength of reasonableness of expenditure as per the mandate of section 40A(2) - Adopting the TNMM as most appropriate method for showing the SDT at ALP - On an examination of the nature of the SDT of payment of service charges by assessee to TACO, it turns out that the same is entirely different and not at all inter-related with other transactions that the assessee aggregated with. It is just elementary that intra-group services cannot be clubbed with the manufacturing or trading transactions undertaken by the assessee justifying aggregation. We, therefore, hold that the TPO was justified in repelling the assessee s aggregation approach under the TNMM. Having found that the mechanism applied either by the assessee or the TPO under all the three methods is improper, we are left with nothing to adjudicate upon. The Tribunal, being an adjudicating and not an original authority, cannot usurp the power of the AO/TPO and itself undertake the ALP determination in the peculiar circumstances as are instantly obtaining. We set aside the impugned order and remit the matter to the file of the AO/TPO for re-determining the ALP of the SDT afresh as per law after affording opportunity of hearing to the assessee. It is made patent that in the fresh determination, it would be open to the TPO to choose any of the prescribed methods as the most appropriate method to be applied in the prevailing circumstances for re-determining the ALP - we have not totally ruled out the application of the CUP under rule 10B(1)(a) or other method under rule 10AB or the TNMM under rule 10B(1)(e) but rejected the application of the CUP method only because the assessee wrongly applied it by choosing functionally different companies and that too from foreign jurisdictions; of any other method because the TPO wrongly held that no services were availed and the assessee also wrongly contented for accepting the transaction at ALP only on the strength of reasonableness of expenditure as per the mandate of section 40A(2) of the Act; and of the TNMM because of the aggregation approach adopted by the assessee. To put it simply, such three methods, inter alia, are also open before the TPO in the fresh proceedings to choose from provided the flaws in their application, as discussed above, are removed and they are correctly applied as per their respective prescriptions.
Issues Involved:
1. Whether any services requiring payment were availed by the assessee? 2. What is its Arm's Length Price (ALP)? Detailed Analysis: I. Whether any services requiring payment were availed by the assessee? The assessee entered into an Administrative Service Agreement (ASA) with TACO for receiving various services, including Human resource, Group policies/Databases, Marketing and sales, Finance, and Legal & taxation advisory services. The assessee provided detailed documentation showing the specific services availed, such as price strategies, production and sales reports, HR recruitment, budgeting guidelines, and legal advisories. The Tribunal found that TACO provided specific and exclusive services to the assessee, which were not general but precise, detailed, and specific. The TPO's determination of Nil ALP was based on the premise that the assessee failed to show any benefit received from the services. The Tribunal held that the relevant consideration is the availing of the services and not the resultant benefit. The application of the benefit test is not warranted, and the factum of availing the services for business purposes is sufficient. The TPO also categorized the services as shareholders' services, which do not require payment. However, the Tribunal found that the services did produce an effect on the assessee company and were not in the nature of shareholder services. Thus, it was held that TACO rendered specific services to the assessee, requiring payment of consideration. II. What is its ALP? A. CUP Method: The assessee applied the Comparable Uncontrolled Price (CUP) method using 13 agreements from foreign databases for Marketing services. The TPO rejected this method due to functional differences between the services availed by the assessee and those selected as comparables. The Tribunal agreed with the TPO, noting that the services availed were diverse (including Finance, HR, Legal, Marketing, etc.) and could not be logically compared with companies rendering only marketing services. Additionally, the comparables were from foreign jurisdictions, which is inappropriate for benchmarking transactions between Indian entities. B. Any Other Method: The TPO applied the 'other method' under rule 10AB, determining Nil ALP on the ground that no services were availed requiring payment. The Tribunal found this application incorrect as it was based on the erroneous conclusion that no services were availed. The Tribunal also rejected the assessee's argument of using the 'reasonableness' of the expenditure as a yardstick for ALP determination, emphasizing that Chapter X of the Act requires strict adherence to prescribed methods for ALP determination. C. TNM Method: The assessee's alternate argument for adopting the Transactional Net Marginal Method (TNMM) by aggregating the SDT with other transactions was rejected by the TPO. The Tribunal upheld this rejection, noting that the service charges were not closely linked with other transactions and could not be aggregated for ALP determination. The Tribunal referenced judicial precedents to support that aggregation is permissible only for closely linked transactions, which was not the case here. Conclusion: The Tribunal found flaws in the application of all three methods by both the assessee and the TPO. Consequently, the matter was remitted to the AO/TPO for re-determining the ALP of the SDT afresh as per law. The Tribunal clarified that the TPO could choose any of the prescribed methods, provided the flaws in their application are removed and they are correctly applied. The assessee is allowed to present fresh evidence in the new proceedings. Order: The appeal is allowed for statistical purposes, and the order was pronounced in the Open Court on 31st May 2021.
|
