2015 (7) TMI 41 - AT - Income Tax

Transfer pricing adjustment - CIT(A) confirming the ALP adjustment made by determining the ALP of Head office overheads at NIL - Held that - With regard to the comment of the TPO that there was no necessity for the AEs to charge Head office overheads to the assessee, we agree with the contentions of Ld A.R that the TPO is not entitled to comment upon the prudence of the assessee or the necessity to incur the expenses. The said view is also supported by the various decisions relied upon by the assessee. We further notice that the Hon ble Delhi High Court has also expressed the same view in the case of CIT V/s Cushman and Wakefield (India) (P.) Ltd. (2014 (5) TMI 897 - DELHI HIGH COURT ), which was relied upon by Ld D.R. Each of the members of JV would be charging ₹ 17.00 lakhs upon the Joint Venture. If we examine the first table given in the example, we may notice that E has not provided any service to the JV, but still it would be charging ₹ 17.00 lakhs upon the JV. The value of services provided by A are ten times of D, five times of C and two times of B, but still all the four persons would be charging ₹ 17.00 lakhs each. Thus it is seen that the quantum of Head officer overheads charged by each of the members is disproportionate to the value of services rendered by each of them. This example highlights the fallacy in the approach adopted by the assessee and its members. Hence charging of Head office overheads as a percentage of their respective turnover, in our view, may give misleading result. A perusal of the above said example would also show that the indirect expenses charged should depend upon value of services (value of assets & spares value of indirect expenses incurred) that is provided. In the instant case the assessee has not conducted any Transfer pricing study with regard to the Head officer over heads. The contention of the Ld A.R that the assessee has bench marked the transaction with the certificates issued by the auditors, in our view, is not acceptable for reasons pointed by Ld D.R as well as discussed below. In the T.P study, what is required to be seen is whether any other independent entity would have charged or the independent entity receiving the services would have paid to the extent that were charged by the AEs. Admittedly, this kind of study has not been carried out by the assessee. In our view, the Ld D.R has correctly submitted that the primary responsibility to bench mark the transactions with comparable cases in order to validate its international transactions lies upon the assessee. In this case, the assessee was under the impression that the certificate issued by the auditors would satisfy the tests of Transfer Pricing study. We have earlier noticed that the certificate issued by the auditors cannot be taken support of for the reasons that they pertain to different accounting periods, there is no standardization of types of overheads that is required to be considered and they have given certificates with qualifications. In any case, the certificate issued by the auditors only spell out the percentage of overheads over the revenue and hence it is only a factual aspect of internal figures. In Transfer pricing study, what is required to be done is to validate the said claim with an external comparable. TPO has disallowed the entire claim and accordingly held the ALP as NIL, i.e., he has also not determined the ALP of the transactions in accordance with the Transfer pricing provisions. Hence we are of the view that the issue under consideration requires fresh examination. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of AO/TPO for fresh consideration by taking into account the discussions made - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. ALP adjustment of Rs. 14.98 crores for Head Office Overheads.
2. Methodology and evidence for allocation of overhead expenses.
3. TPO's rejection of the claim for Head Office Overheads.
4. CIT(A)'s confirmation of the TPO's decision.
5. Assessee's contentions and legal precedents.

Issue-wise Detailed Analysis:

1. ALP Adjustment of Rs. 14.98 Crores for Head Office Overheads:
The assessee, a joint venture undertaking, contested the ALP adjustment of Rs. 14.98 crores made by determining the ALP of Head Office Overheads at NIL. The TPO accepted the ALP of transactions related to the purchase of assets and reimbursement of direct expenses but rejected the reimbursement of Head Office Overheads, determining the ALP as NIL. Consequently, the entire amount claimed by the assessee was added by the AO, which was confirmed by the Ld CIT(A).

2. Methodology and Evidence for Allocation of Overhead Expenses:
The assessee justified the allocation of overhead expenses based on an agreed formula in the MOU between the JV members. The formula involved computing the percentage of overhead expenses incurred by the Head Office over the sales revenue reported by the Head Office, subject to a maximum of 8.5% of the revenue attributable to the share of each member. The assessee argued that since it lacked its own infrastructure, the JV members carried out various tasks, and the overheads were charged based on the auditor's certificates.

3. TPO's Rejection of the Claim for Head Office Overheads:
The TPO rejected the claim for several reasons, including:
- Lack of an objective basis for allocating overheads up to 8.5%.
- Arbitrary charging of overheads based on auditor certificates without sound objective analysis.
- Failure to substantiate the services rendered by the members to justify the reimbursement.
- Absence of evidence showing that the payment was only to the extent of the benefit derived by the assessee.
- No demonstration of how such services would be valued by an independent entity.
- The assessee did not address the willingness of the service recipient to pay under arm's length conditions.

4. CIT(A)'s Confirmation of the TPO's Decision:
The Ld CIT(A) upheld the TPO's decision, noting:
- The allocation of overheads was not scientifically or systematically documented.
- Different accounting years and criteria were used by the auditors of the JV members.
- The expenses included under indirect costs varied significantly among the members.
- The nature of the expenses could not be directly related to specific activities or income.
- The auditor's certificates did not confirm the actual rendering of services by the AEs.
- The nature of expenses suggested they were operational and not for the benefit of the member as a shareholder.
- Previous acceptance of overhead costs did not apply due to negligible quantum of international transactions in earlier years.
- The case of Metro Civil Contractors was not comparable.

5. Assessee's Contentions and Legal Precedents:
The assessee argued that:
- The international transaction was bench-marked against the auditor's certificates using the Cost Plus Method, with reimbursements made on an actual basis without markup.
- Identical reimbursements in the preceding year were accepted by the AO.
- The foreign entities were bound to incur indirect expenses for supplying assets and incurring direct expenses.
- The TPO should not comment on the prudence or necessity of incurring expenses.
- The disallowance in a similar case (M/s International Metro Civil Contractors) was deleted by the Tribunal.
- Legal precedents supported the view that the TPO cannot question the commercial wisdom of the assessee or the necessity to incur expenses.

Conclusion:
The Tribunal noted that the basis of allocation of overheads and the determination of ALP required fresh examination. The TPO had not determined the ALP of the transactions in accordance with Transfer Pricing provisions. The Tribunal set aside the order of the Ld CIT(A) and restored the matter to the file of the AO/TPO for fresh consideration, emphasizing the need for a comprehensive Transfer Pricing study to validate the claim with external comparables. The appeal was treated as allowed for statistical purposes.