2019 (5) TMI 327 - AT - Income Tax

TP adjustment - clubbing service agreement income with provision of consulting services - Re-characterising the subsidy income as income received from provision of services - HELD THAT - As per Schedule 1 of the agreement it can be seen that the subsidy received by the appellant company is directly linked to the outcome of this agreement by which the appellant company agrees to provide all or some of the services listed in Schedule 1 hereinabove. No doubt, the assessee has shown this service charge subsidy in its profit and loss account, but the same has been shown separately without any bench marking. It is true that no third party would have paid such a subsidy to an unrelated party but the fact of the matter is that the appellant did receive this service charge subsidy which is directly related to services provided by it to its AEs. This service agreement income is part of provision of consulting services rendered by the assessee and, therefore, we do not find any error in clubbing service agreement income with provision of consulting services - This ground is accordingly dismissed. MAM selection - assessee has applied CUP as MAM for bench marking provision of consulting services - Rejection of Comparable Uncontrolled Price CUP method thereby applying Transactional Net Margin Method TNMM as the MAM - HELD THAT - No force in the contention that the evidences are not brought on record. The invoices raised to AEs and non AEs are exhibited in the paper book. Whether the same person is providing service to both the AEs and non AEs is irrelevant, so as long as the evidences of services provided are available. The services are provided by different set of personnel, having different qualification and it would not be justifiable to ask for invoices of the same person who has provided service to AEs and also to non AEs. A proper team composition is there to take care of the nature and technical difficulties of the project. Even the OECD Guidelines of July 2010 preferred internal CUP over other methods, since it bears a more direct and closer relationship to the transaction under review. Considering invoices relating to AEs and non AEs exhibited in the paper book, we are of the considered opinion that CUP is the MAM and has been rightly adopted by the assessee to bench mark its transactions for provision of consulting services rendered. This grievance is, accordingly, allowed. Addition of unreconciled entries in the AIR information - HELD THAT - Assessing Officer is directed to decide this issue afresh after verifying the AIR information with detailed submissions made by the assessee. The Assessing Officer is further directed to allow eligible brought forward business losses and unabsorbed depreciation as per provisions of law. These issues are treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Re-characterization of subsidy income.
2. Rejection of Comparable Uncontrolled Price (CUP) method.
3. Allocation of costs between Associated Enterprises (AEs) and non-AEs.
4. Non-disclosure of the search process for selecting comparable companies.
5. Addition of unreconciled entries in AIR information.

Issue-wise Detailed Analysis:

1. Re-characterization of Subsidy Income:
The appellant company received a subsidy of ?7,70,23,981/- from its Associated Enterprises (AE) under a 'Service Charge Agreement' to support its structural losses. The assessee argued that this subsidy was an ex-gratia payment and not linked to any services provided. However, the Department contended that the subsidy was linked to the provision of services as per Schedule 1 of the agreement, which required the subsidiary to provide various consultancy services. The Tribunal found that the subsidy was directly linked to the services provided to AEs and upheld the re-characterization of the subsidy as income from the provision of services. The Tribunal dismissed this ground of the assessee.

2. Rejection of CUP Method:
The assessee used the CUP method for benchmarking its international transactions related to consultancy services, comparing invoices raised on AEs with those on unrelated entities. The Transfer Pricing Officer (TPO) rejected this method, arguing that the comparables involved different geographical locations and lacked technical descriptions of services rendered. The Tribunal, however, found that the CUP method was appropriate as the consulting services provided by the assessee were consistent irrespective of the geographical location of the clients. The Tribunal noted that internal comparables were more relevant and reliable, and hence, the CUP method was rightly adopted by the assessee. This grievance was allowed in favor of the assessee.

3. Allocation of Costs Between AEs and Non-AEs:
The assessee argued that the Assessing Officer inappropriately allocated costs between AEs and non-AEs by including the subsidy as part of the turnover with AEs. Given the Tribunal's decision on the CUP method, this issue became academic and was not separately addressed.

4. Non-disclosure of Search Process for Selecting Comparable Companies:
The assessee contended that the TPO/Assessing Officer did not provide the search process used for selecting comparable companies. This issue was not explicitly addressed in the Tribunal's order, likely due to the resolution of the primary issue regarding the appropriate benchmarking method.

5. Addition of Unreconciled Entries in AIR Information:
The assessee was aggrieved by the addition of ?5,30,305/- for unreconciled entries in the AIR information. The Tribunal directed the Assessing Officer to verify the AIR information with the detailed submissions made by the assessee and to allow eligible brought forward business losses and unabsorbed depreciation as per the law. This issue was treated as allowed for statistical purposes.

Conclusion:
The Tribunal partly allowed the appeal, upholding the re-characterization of the subsidy income and the use of the CUP method for benchmarking international transactions. The other related issues were rendered academic or directed for fresh verification by the Assessing Officer. The appeal was thus partly allowed.