2019 (5) TMI 178 - AT - Income Tax

Transfer pricing adjustment - treating arm s length value of payment of management service fees at Nil - The TPO was of the view that since no benefit arose to the assessee - import of cutting and drilling tools from its associated enterprise and selling the same in domestic market - whether the payments made to Sandvik AB, the holding company is on account of provision of services by Walter AG, Germany ? - HELD THAT - The assessee had explained before the TPO that the said service fees consisted of cost pertaining to services within ambit of marketing management, general administration, human resources and information technology. The said interactions were happening on day-to-day basis and documentations were voluminous. Sample copies of documents, e-mails, advise visits reports, etc. were filed before the authorities below. The copies of same are available and the assessee had also filed certificate from the auditor of Sandvik AB under which they have certified the cost allocated by Sandvik AB to the assessee. As already referred to the terms of agreement, wherein Sandvik AB is referred to as Providing Party and the services are to be provided by the providing party, which is defined in clause 1.1 include all or some of Sandvik companies, which provide management services. The concern Walter AG, Germany is part of Sandvik group of companies, which is also not doubted and once the services were provided by Walter AG, Germany, which in turn, as part of Sandvik group of companies, which is headed by Sandvik AB, Germany, then there is no merit in the orders of authorities below in holding that no services have been provided by Sandvik AB to whom the management fees has been paid. Sandvik AB through its group companies was providing similar services to all the group companies and allocation key is adopted for allocating the cost to the individual companies, which is clearly mentioned in the report of auditor. The authorities below cannot sit in judgment over the decision of assessee in availing the services and there is no question of providing documentation to specify the benefit test. Only thing which needs to be considered is whether the services have been provided. However, in the facts of present case, the same is not doubted as the authorities below have time and again referred to the services being provided by Walter AG, Germany, but the adjustment has been made in the hands of assessee on the ground that services are not provided by Sandvik AB with whom the assessee has entered into an agreement. Where the management services have actually been rendered, may be by Sandvik entity i.e. Walter AG, Germany, then arm's length price of such transaction cannot be taken at Nil. However, we find no merit in the orders of authorities below - See SANDVIK ASIA (P.) LTD. VERSUS ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE- 10, PUNE 2017 (6) TMI 1290 - ITAT PUNE - No merit in the orders of authorities below in adopting the arm's length price of international transactions pertaining to payment of management service fees at Nil. The order of Assessing Officer / DRP in this regard is thus, reversed and the issue raised by assessee is thus, allowed.

Summary

Issues Involved:
1. Transfer pricing matters concerning the arm's length value of the international transaction pertaining to the payment of Management Service Fees.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment - Arm's Length Value of Management Service Fees:

The primary issue in this appeal is the transfer pricing adjustment made by treating the arm's length value of the international transaction related to the payment of management service fees as Nil. The assessee, a domestic company engaged in the distribution of cutting and drilling tools, had paid management service fees to its associated enterprise, Sandvik AB. The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) held that the arm's length value of these fees should be Nil, citing the absence of tangible benefits to the assessee and insufficient documentation supporting the receipt of services.

The TPO's determination was based on two key points:
- The reasonableness of the management service fees paid.
- The appropriateness of considering Sandvik AB as the tested party.

The TPO noted that similar discussions had been made in previous years, and there was no change in facts and circumstances. Consequently, the management service fees were considered Nil for the current year as well. The TPO also observed that the auditor's certificate provided by the assessee did not include documentary evidence of tangible advantages to the company. Therefore, the TPO proposed an upward adjustment of ?1,04,98,188/-. The DRP upheld this adjustment, leading to the final assessment order by the Assessing Officer, which included the upward adjustment.

The assessee argued that the management service fees were paid as per an agreement with Sandvik AB, and the services were indeed provided by Walter AG, a part of the Sandvik group. The DRP's observation that no documents were filed to support the receipt of services was contested by the assessee, who pointed out discrepancies in the DRP's order. The assessee emphasized that the agreement allowed services to be provided by any Sandvik group entity, and Walter AG was part of this group. The assessee also referenced a similar case (Sandvik Asia Pvt. Ltd. Vs. ACIT) where the issue was decided in favor of the assessee.

The Revenue argued that in the absence of any services received and no benefit arising to the assessee, the claim should be rejected. However, the Tribunal found merit in the assessee's arguments, noting that the agreement allowed services to be provided by any Sandvik group entity and that documentation supporting the provision of services was available. The Tribunal held that the authorities below could not sit in judgment over the business decisions of the assessee and that the provision of services by Walter AG, a part of the Sandvik group, could not be doubted.

The Tribunal concluded that the arm's length price of the management service fees could not be taken as Nil. The Tribunal also noted that the assessee's margins, after aggregating all transactions, were higher than the mean margins of comparables, further supporting the claim that no adjustment was necessary.

Conclusion:
The Tribunal reversed the orders of the authorities below, allowing the appeal of the assessee and holding that the arm's length price of the management service fees should not be Nil. The Tribunal also accepted the alternate plea of the assessee, aggregating the transactions and finding no adjustment necessary based on the higher margins of the assessee compared to the comparables. The appeal was allowed in favor of the assessee.