2015 (5) TMI 855 - AT - Income Tax

Rectification of mistake - Issue of guarantee by DSM Finance B.V.- Held that - It is respectfully submitted that the appellant enjoyed significant savings interest cost due to the guarantee provided by the associated enterprise against the LC facility availed by the appellant. The detailed economic analysis undertaken by the appellant for benchmarking the guarantee provided by the associated enterprise is provided as Annexure 4A guarantee fee charged by DSM Netherlands to DSM India at 4% for the overall arrangement, shall be considered to be at arm s length as required under Indian Regulations.In view of the aforesaid, it is respectfully submitted that the above documents now placed on record by the appellant pursuant to the query raised by the Hon ble Tribunal may kindly be taken into consideration while adjudicating the appeal of the assessee. Corporate Service Charge - Held that - The assessee had started receiving some financial services also from the holding company which explained the increase in total payments on account of corporate services. The assessee had tried to justify the payment on account of such financial services but when again it was confronted that if assessee had saved ₹ 100/- and if he pays the entire amount of ₹ 100/- to the holding company and in that case there would be no savings to the assessee. In response to this query, the Ld. Counsel on behalf of the assessee had admitted that there is international practice to pass on 50% of the amount of such financial savings on account of financial services and balance 50% was to be retained by the recipients of the services. This was found to be logical because benefit was being shared on 50 - 50 basis. Therefore, assessee was asked to give amount of total benefit on account of financial services.On the basis of above admission the Bench held that fee paid for other corporate services could not have increased so much and therefore, it was fair and just that that normal fee paid for corporate services should not be disallowed but in view of the increase in the amount the benefits obtained by the assessee on account of financial services have to be shared on the basis of 50-50. Thus no error in the order of Tribunal and therefore, no rectification can be made.

Summary

Issues Involved:
1. Rectification of an error in the Tribunal's order regarding adjustment made by the Assessing Officer/TPO.
2. Determination of the correct percentage of financial benefits to be passed on to the holding company.
3. Justification for the increase in corporate service charges over the years.
4. Application of international practice in sharing financial benefits.

Issue-wise Detailed Analysis:

1. Rectification of an Error in the Tribunal's Order:
The assessee sought rectification of an error in the Tribunal's order in ITA Nos. 1139/Chd/2011 and 1290/Chd/2012. The Tribunal initially held that no adjustment could be made regarding corporate services provided by the holding company DSM Netherlands and reversed the TPO's application of the CUP method. However, the Tribunal later concluded that the assessee had passed on 100% of the financial service benefits to the holding company and disallowed 50% of such sum, which was contrary to earlier findings. The assessee argued that this was an error and requested rectification.

2. Determination of the Correct Percentage of Financial Benefits:
The Tribunal noted that during the hearing, it was admitted by the assessee that there was an international practice of passing on 50% of the financial service benefits to the service provider. The Tribunal clarified that the assessee had agreed to this during the original hearing, and thus, it was logical to share the benefits on a 50-50 basis. The Tribunal found no error in its decision to disallow 50% of the financial benefits passed on to the holding company.

3. Justification for the Increase in Corporate Service Charges:
The Tribunal observed that the corporate service charges paid by the assessee had increased significantly over the years. The assessee explained that the increase was due to the addition of financial services, such as bank guarantees and sanction of limits at competitive interest rates, provided by the holding company. The Tribunal examined the nature of these services and the associated benefits, concluding that the increase in charges was justified by the financial services received.

4. Application of International Practice in Sharing Financial Benefits:
The Tribunal highlighted that the international practice of sharing financial benefits was to pass on 50% to the service provider and retain 50% by the recipient. The assessee had quantified the benefits received from financial services and admitted that it was reasonable to share these benefits equally. The Tribunal found this approach logical and fair, reinforcing its decision to disallow 50% of the financial service benefits passed on to the holding company.

Conclusion:
The Tribunal concluded that there was no error in its original order and upheld the decision to disallow 50% of the financial benefits passed on to the holding company. The Miscellaneous Application filed by the assessee was dismissed, affirming the Tribunal's findings and the rationale behind the adjustments made.