2022 (8) TMI 562 - AT - Income Tax

TP Adjustment - addition towards managerial and technical services - Proof of allowable as business expenditure incurred for the purpose of business of carrying out freight and other cargo forwarding services - whether management service charges paid by the assessee to its AE-CPA fails on the benefit test and since not incurred for business purposes, deserves to be disallowed? - as per AO Assessee failed to prove the benefit received by it by making payment to its AE-CPA for management support services - HELD THAT - We find that the alleged management services are merely 2% of the total revenue of the company which is even less than 2% of the revenue of the company and the said sum paid by the assessee has also been offered to tax by AE-CPA. Also the nature of services rendered by AE-CPA to the assessee are not specific but provided on day to day basis whenever needed. The AE-CPA has expertise in the overseas freight and forwarding business and there are various types of issues and problems attached in such services and the AE being an expertise in the international business - the assessee company is taking regular service through the personnel of AE-CPA to get guidelines on various fronts including the marketing, commercial management, corporate sales, invoicing, finance, other connected issues on various courses. For day to day smooth and effective working of business and for trying to keep an error free working environment, such management support services have been taken. In the past also, during the assessment year 2010-11 and 2011-12 such services have been taken and have been consistently charged in the books of account. The observation of the Revenue authorities is not specific but general in nature that the assessee has failed on the benefit test but nowhere any specific instances have been given to show that the so-called services taken by the assessee company from its AE under various agreements are not related to the nature of business carried on by the assessee. It is not the case that the assessee which is carrying on forwarding chain business has paid the management services for some other unrelated business activity. The nature of business of the assessee company is directly linked to the nature of services and business carried on by its AE-CPA. In simple way, we find that the AE-CPA is an associated enterprise and the headquarter of the group company is based in Austria and they have to maintain their brand and uniformity in services to be provided to its clients which are attached to its various subsidiaries and other enterprises located in various part of the world. Thus we are of the considered view that the alleged management charges paid towards management support services to the AE-CPA are allowable as business expenditure incurred for the purpose of business of carrying out freight and other cargo forwarding services and by paying the alleged charges the assessee has been able to run the business smoothly and effectively. We, therefore, delete the transfer pricing adjustment made and allow ground raised by the assessee. Non grant of credit for tax deducted at source - HELD THAT - As we find that during the course of hearing, no submissions were made by learned Counsel for the assessee on this issue. It seems that the assessee is not interested to press this ground. Even otherwise, this issue is of mere reconciliation of tax deducted at source and such exercise can be carried out at the level of Assessing Officer if not made earlier. Hence, ground No. 7 is allowed for statistical purposes.

Issues Involved:
1. Transfer Pricing Adjustment
2. Benefit Test for Management Services
3. Allowability of Business Expenditure
4. Credit for Tax Deducted at Source
5. Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

Issue 1: Transfer Pricing Adjustment
The appeal pertains to the assessment year 2012-13, where the assessee, a private limited company engaged in freight and cargo forwarding services, reported a loss of Rs. 6,45,739/-. The case was selected for scrutiny, and a Transfer Pricing Adjustment of Rs. 5,92,76,125/- was made by the AO-TPO. This adjustment was objected to by the assessee before the Dispute Resolution Panel (DRP), which partly upheld the adjustment. The AO confirmed the adjustment, assessing the income at Rs. 5,86,30,286/-. Subsequently, a rectification under Section 154 corrected the adjustment to Rs. 2,47,69,939/-.

Issue 2: Benefit Test for Management Services
The assessee challenged the disallowance of management charges paid to its AE-CPA, arguing that the services were essential for its business operations. The DRP concluded that the services failed the benefit test. The assessee provided detailed descriptions and benefits of the services, including IT, commercial management, corporate sales, marketing, finance, personnel, controlling, and consulting. The assessee argued that the services were necessary for compliance with international regulations, market analysis, and employee training. The assessee also submitted that the AE provided similar services to other group companies on the same basis.

Issue 3: Allowability of Business Expenditure
The Tribunal observed that the management services were necessary for the smooth running of the business and that the payment to AE-CPA was less than 2% of the total revenue. The Tribunal noted that the Revenue had accepted similar payments to other companies but doubted only the payments to AEs. The Tribunal relied on the rulings of the Hyderabad Tribunal in Social Media India Ltd. v. ACIT and the Kolkata Tribunal in NLC Nalco India Private Limited, which held that the TPO cannot determine the value of management services to be NIL without applying any transfer pricing methodology. The Tribunal concluded that the management charges paid to AE-CPA were allowable as business expenditure.

Issue 4: Credit for Tax Deducted at Source
The assessee claimed that the AO had not granted credit for tax deducted at source. As no submissions were made during the hearing, the Tribunal allowed this ground for statistical purposes, noting that the issue could be resolved at the AO's level.

Issue 5: Penalty Proceedings under Section 271(1)(c)
The Tribunal noted that this ground was consequential in nature and did not require separate adjudication.

Conclusion:
The Tribunal deleted the transfer pricing adjustment of Rs. 2,47,69,939/- and allowed the appeal partly for statistical purposes, directing the AO to reconcile the tax deducted at source. The ruling emphasized the necessity of the management services for the assessee's business and the improper application of the benefit test by the Revenue authorities.

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