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2017 (6) TMI 123 - AT - Income TaxTPA - whether the consideration paid by the Assessee to ANPAP under the SLA is at Arm s Length? - Held that - Assessee has established the nature of services including quantum of services received from ANPAP, that services were provided in order to meet specific need of the assessee for such services, the economic and commercial benefits derived by the assessee from intra group services. In its submission dated 5.11.2012 filed before the TPO, the Assessee filed report dated 30.6.2009 of Pricewaterhouse Coopers LLP, Chartered Accountants. In such a report a search for similar independent service providers providing services that were provided by ANPAP under SLA was identified and it was found on such analysis that similar services provided by and to unrelated parties were at an average margin of cost 5.1% and it was opined that the cost 5% margin for similar services paid by the Assessee to its AE should be regarded as confirming to the ALP. The Assessee also filed a certificate of KPMG, LLP, Singapore, an independent third party accounting expert, certifying the basis of cost allocation by ANPAP for the various services rendered by the Assessee based on the evidence of services rendered by ANPAP to the Assessee. The TPO has not disputed the above cost allocation as well as the fact that the comparative cost charged by unrelated parties for similar services was at a margin of 5.1% of the cost. In view of our conclusion that the TPO and the DRP were in error in holding that the nature of services rendered by ANPAP were in the nature of stewardship activity or shareholder activity, we hold that the TPO s conclusion no charges ought to have been paid by the Assessee. The charges paid by the Assessee to ANPAP are held to be at Arm s Length. Consequently, the addition made by the revenue authorities in this regard are directed to be deleted and the appeal of the Assessee Services received by the Assessee from ANDC - Held that - SAP system is ERP software which is required for the day-to-day running of the business. In view of the above facts, we are of the opinion that it improves alignment of strategies and operations and helps in achieving corporate objectives by aligning workforce and organizational objectives. Implementation of SAP. leads to improved productivity and reduce costs through increased flexibility. It also helps in increased profitability, improved financial Control, and management of risk as well as optimization of IT spending. Hence it would be erroneous to classify the services to be in the nature of stewardship services. Hence, it should be judged to be legitimate business expenditure of the assessee. The assessee has undertaken the bench marking study of international transaction, payment of management fee, at a overall company level profitability wherein the assessee has selected itself as the tested party and compared its operating profit level with similar uncontrolled comparable companies. The average of margins earned by functionally comparable companies is 8.29%. The profitability of the company after taking into account the payments for intra-group services is 9.54% which is as per the arm s length standard. The nature of services received from the AE are in conjunction with its primary and only business segment i.e. manufacturing and selling of paints. These services are continuous in nature to the primary and only business segment of the assessee. Owning to, this fact and business reality of the assessee it has also benchmarked the prices of this international transaction by undertaking entity level bench marking. Even after considering the payment of management service charge, the, assessee s net margin. is greater than its comparable companies. This panel holds this issue in favour of the assessee. Disallowance of interest expenses in terms of Rule 8D(2)(i) or (ii) - Held that - No loan funds were in the books of accounts of the company, there cannot be any question of payment of interest against the loan funds and consequently disallowance of interest expenses in terms of Rule 8D(2)(i) or (ii) of the Rules. Since there is no unallocable interest the DRP has rightly held that no interest expenses can be disallowed. We find no grounds to interfere with the order of the DRP. Consequently ground no.1 raised by the revenue is dismissed. Deduction on account of bad debts written off - Held that - DRP has placed reliance on the amendment to the law and the CBDT Circular. The amendment to the law and CBDT circular which were considered by the DRP was also considered by the Hon ble Supreme Court in the case of TRF Ltd. Vs CIT 2010 (2) TMI 211 - SUPREME COURT and it was held by the Hon ble Supreme Court that w.e.f. 01.04.1987 it is no longer necessary for a claim for deduction on account of bad debts written off that the assessee should establish that the debt in question has become bad. Determination of depreciation treating the sale of rubber chemical business as not slum sale - Held that - In view of the decision of CIT(A) for A.Y.2006-07 holding that the sale in question was a slum sale, the disallowance of depreciation by the AO in the present A.Y.2009-10 which was a fall out of the finding of the AO in AY 2006-07 was rightly deleted by DRP. We however wish to add that this issue is consequential and dependent on the ultimate outcome on the question whether the same is a slump sale or not in A.Y.2006-07. With these observations we dismiss the additional ground of appeal raised by the revenue.
Issues Involved:
1. Transfer Pricing Regulations: Arm's Length Price (ALP) for payments under Service Level Agreement (SLA) and Trinity Service Agreement (TSA). 2. Disallowance under Section 14A of the Income Tax Act. 3. Deduction on account of bad debts written off. 4. Depreciation claim related to the sale of Rubber Chemical business. Detailed Analysis: 1. Transfer Pricing Regulations: Arm's Length Price (ALP) for payments under SLA and TSA Assessee's Appeal (ITA No.531/Kol/2014): - Issue: Whether the payment made by the Assessee to ANPAP under the SLA is at Arm's Length as required under Section 92 of the Income Tax Act. - Arguments: The Assessee claimed that services provided by ANPAP under the SLA were support services in various functional areas, leading to cost savings and enhanced commercial benefits. The Assessee provided evidence of services rendered and benefits received. - TPO's Stand: The TPO categorized the services as "stewardship activities" and held that no charges should have been paid by the Assessee. - DRP's Conclusion: Although the DRP acknowledged that the Assessee benefitted from the services, it upheld the TPO's view that the services were primarily for the parent company's benefit. - Tribunal's Decision: The Tribunal concluded that the services were not stewardship activities and were essential for the Assessee's operations. The charges paid by the Assessee to ANPAP were held to be at Arm's Length. The addition made by the revenue authorities was directed to be deleted. Revenue's Appeal (ITA No.335/Kol/2014): - Issue: Whether the payment made by the Assessee to ANDC under the TSA was at Arm's Length. - Arguments: The Assessee argued that the SAP implementation services provided by ANDC under the TSA were essential for operational efficiency and were not stewardship activities. - TPO's Stand: The TPO held that the services were in the nature of "Control, Supervisory, monitoring function" and thus, no consideration was payable. - DRP's Conclusion: The DRP found that the services received from ANDC were beneficial and necessary for the Assessee's operations, leading to improved productivity and cost savings. - Tribunal's Decision: The Tribunal upheld the DRP's decision, confirming that the payment towards SAP deployment services was in accordance with transfer pricing regulations. 2. Disallowance under Section 14A of the Income Tax Act - Issue: The disallowance of expenses incurred in earning income which does not form part of the total income under Section 14A. - Assessee's Stand: The Assessee made a suo-moto disallowance based on its estimate of proportionate manpower and operating costs. It argued that there were no borrowed funds used for investments yielding tax-free income. - AO's Stand: The AO applied Rule 8D, estimating higher operating and manpower costs, and disallowed additional expenses. - DRP's Conclusion: The DRP held that the AO did not provide cogent reasons for rejecting the Assessee's computation and that there were no interest expenses incurred by the Assessee. The DRP directed the AO to accept the Assessee's computation. - Tribunal's Decision: The Tribunal found no grounds to interfere with the DRP's order and dismissed the revenue's ground. 3. Deduction on account of bad debts written off - Issue: The disallowance of the Assessee's claim for deduction on account of bad debts written off. - Assessee's Stand: The Assessee provided a party-wise break-up of bad debts written off and argued that post-amendment, it was sufficient to write off the debts in the accounts. - AO's Stand: The AO disallowed the claim, stating that the Assessee failed to provide evidence that the debts had become bad. - DRP's Conclusion: The DRP allowed the claim, citing the amendment to Section 36(1)(vii) and a CBDT circular, which eliminated the need to prove that the debt had become bad. - Tribunal's Decision: The Tribunal upheld the DRP's decision, referencing the Supreme Court's ruling in TRF Ltd. Vs CIT, which supported the Assessee's position. 4. Depreciation claim related to the sale of Rubber Chemical business - Issue: The disallowance of depreciation due to the AO's treatment of the sale as an item-wise sale of assets rather than a slump sale. - DRP's Conclusion: The DRP accepted the Assessee's treatment of the sale as a slump sale, based on the CIT(A)'s decision for AY 2006-07. - Tribunal's Decision: The Tribunal upheld the DRP's decision, noting that the issue was consequential and dependent on the final outcome of the AY 2006-07 decision. Conclusion: - Assessee's Appeal (ITA No.531/Kol/2014): Allowed. - Revenue's Appeal (ITA No.335/Kol/2014): Dismissed. - Order Pronounced: 03.05.2017.
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