2021 (10) TMI 550 - AT - Income Tax

Transfer pricing - international transactions - Determination of the nature of services availed by the assessee - Nature of stewardship activity or core business intra-group services - rendition of services by Nalco, USA and Nalco Pacific Pte Ltd., Singapore - Whether services performed by the AEs were in the nature of stewardship activity? - as per CIT intra group activities performed by NALCO USA under 'SA' and by Nalco Pacific under the 'TAMA' constitute intra group services and the said activities are not in the nature of stewardship activity - HELD THAT - The object is to protect the interest of the MSCo. These stewards are not involved in day to day management or in any specific services to be undertaken by MSAS. The stewardship activity is basically to protect the interest of the customer - In such a case it cannot be said that MSCo has been rendering the services to MSAS. In our view MSCo is merely protecting its own interests in the competitive world by ensuring the quality and confidentiality of MSAS services'. On going through the decision in Morgan Stanley 2007 (7) TMI 201 - SUPREME COURT it gets graphically clear that the stewardship activities are confined to protecting one's own interest rather than rendering benefit to the other company. We observe that the rendition of services by Nalco, USA and Nalco Pacific Pte Ltd., Singapore has given effect only to the assessee and has, in no manner, resulted in protecting the individual interests of such companies. All the services rendered by them facilitated the carrying on of the assessee's business. In such circumstances, we are satisfied that the reliance of the AO on the decision in Morgan Stanley 2007 (7) TMI 201 - SUPREME COURT is misconceived. We, therefore, accord our imprimatur to the conclusion drawn by the ld. CIT(A) that the services rendered by the two companies were in the nature of intra group services and not stewardship activity. Ordinarily, after answering the character of the services, the next point would have been to determine the ALP of the intra group services. We have noticed above that the TPO determined Nil ALP by holding that the services provided by Nalco, USA and Nalco Pacific Pte Ltd., Singapore were in the nature of stewardship activity. The ld. CIT(A) overturned the TPO's view on this score and further held that the transacted value of the intra group services was at ALP, albeit without carrying out any analysis. The ground taken by the Revenue, as reproduced above, is confined only to challenging the decision of the ld. CIT(A) in construing the services as intra group services.We, therefore, refrain from going into the aspect of the ALP determination, for which no ground has been raised. In the ultimate analysis, the ground raised in the appeal is not allowed. Disallowance of Travelling and Conveyance to 5% - assessee claimed Travelling expenses which included a sum as reimbursement of Travelling to employees - HELD THAT - As observed that the lower authorities have gone with their respective views taken for the immediately preceding year. The matter came up for consideration before the Tribunal for the A.Y. 2008-09. Vide its order 2017 (4) TMI 446 - ITAT KOLKATA dated 05-04-2017, the Tribunal dismissed the Revenue's ground by holding that the approach adopted by the ld. CIT(A) did not warrant interference. As the facts and circumstances of this ground are mutatis mutandis similar to those of the immediately preceding year, respectfully following the precedent, we uphold the impugned order on this score. Appeal is dismissed.

Summary

Issues Involved:
1. Determination of the nature of services (intra-group services vs. stewardship activity).
2. ALP (Arm's Length Price) determination of intra-group services.
3. Disallowance of Travelling and Conveyance expenses.

Issue-wise Detailed Analysis:

1. Determination of the Nature of Services:
The primary issue was whether the services performed by Nalco USA and Nalco Pacific under their respective agreements constituted intra-group services or stewardship activities. The assessee, an Indian subsidiary of Nalco USA, received Headquarter services from Nalco USA and Technical Consultancy services from Nalco Pacific Pte Ltd., Singapore. The Transfer Pricing Officer (TPO) classified these services as stewardship activities, implying no compensation was required, and determined a Nil ALP for the transactions. The TPO relied on the Supreme Court judgment in DIT(IT) Vs. Morgan Stanley and Company Inc. The CIT(A) disagreed, ruling that the services were indeed intra-group services, not stewardship activities, and thus warranted compensation.

The Tribunal examined the nature of the services, including Communication Services, Energy Services, Facilities Management, Finance Controller Services, Human Resources, and Information Technology Services, among others. It was determined that these services facilitated the assessee's business operations, adhering to international standards, and were not merely for protecting the interests of the parent company. The Tribunal emphasized that stewardship activities are those undertaken to protect one's own interests and do not produce any effect on the recipient company. In contrast, the services in question were found to benefit the assessee directly, thus qualifying as intra-group services.

2. ALP Determination of Intra-Group Services:
After concluding that the services were intra-group services, the next step would typically involve determining the ALP. However, the TPO had determined a Nil ALP based on the incorrect classification of the services as stewardship activities. The CIT(A) overturned this view but did not conduct a detailed ALP analysis. The Tribunal noted that the Revenue's appeal only challenged the classification of the services, not the ALP determination. Therefore, the Tribunal refrained from addressing the ALP aspect, as no specific ground was raised in the appeal regarding this.

3. Disallowance of Travelling and Conveyance Expenses:
The second issue involved the disallowance of Travelling and Conveyance expenses. The assessee claimed ?8,48,41,601/- in Travelling expenses, including ?38,67,746/- as reimbursement to employees. The AO disallowed the reimbursement amount, following the precedent set in the previous assessment year. The CIT(A) deleted the disallowance, relying on his earlier order. The Tribunal upheld the CIT(A)'s decision, referencing its own ruling for the previous year (A.Y. 2008-09) where it dismissed the Revenue's ground, finding no reason to interfere with the CIT(A)'s approach.

Conclusion:
The Tribunal concluded that the services rendered by Nalco USA and Nalco Pacific Pte Ltd., Singapore were intra-group services, not stewardship activities, and thus warranted compensation. It upheld the CIT(A)'s decision on the classification of services and the disallowance of Travelling and Conveyance expenses, dismissing the Revenue's appeal. The order was pronounced in the Open Court on 30th September, 2021.