9911796707
TMI Blog2012 (11) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellants income, is without appropriate application of mind and in undue haste. 1.1 The assessment order passed by the learned Assessing Officer pursuant to the directions of learned DRP is bad in law and void ab initio. 1.2 The reference made by the learned Assessing Officer suffers from jurisdictional errors as the learned Assessing Officer has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the learned Transfer Pricing Officer for computation of the Arm's Length Price ("ALP") as is required under section 92CA(1) of the Act 1.3 The learned Assessing Officer pursuant to the directions of the learned DRP erred on facts and in law in enhancing the income of the appellant by Rs. 31,34,48,369/- holding that the international transactions pertaining to the provision of secondment related services do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred by: 1.3.1 not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case; 1.3.2 disregarding the AP, as determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t manufactured by group companies, construction, assembly and installation and support/technical services related to telecommunication systems and development of telecommunication software. A reference u/s 92CA was made by the Assessing Officer to Transfer Pricing Officer (TPO) after obtaining approval from the Commissioner The TPO examined the international transactions entered into by the assessee-company during the relevant period and passed order u/s 92CA(3) of the Act on 25th October, 2010. After analyzing the details of international transactions entered into by the assessee with its associate enterprises, learned TPO found that Arm's Length price with regard to the services availed by the assessee "Second line support including software related errors" was to be determined at Rs. 31,34,48,369/- as against nil reported by the assessee. The Assessing Officer relying upon that order of TPO asked the assessee as to why the aforementioned addition should not be made to the income of the assessee. Finding that no objection was raised by the assessee during the initial course of assessment proceedings vide which draft of order was generated, the addition was made and a draft order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is an amount of Rs. 31,34,48,369/-. According to TPO the assessee was not required to pay such amount to its AEs. The learned TPO has described various factors, according to which the assessee was not needed to pay the aforementioned amount of Rs. 31,34,48,369/- to its AEs for Second Line Support. The factors enumerated by the TPO in the order are as under: "1. The assessee claims that where it has a back to back warranty from its AE, its risk is reduced. 2. The assessee claims that it does not face technology risk, 3. The assessee pays Rs. 211,666,073/- for the consultancy that the AE provides for the installation and commissioning of the equipment 4. The assessee pays Rs. 15,348,506/- on account of the repair services that the AE provides. 5. The assessee pays Rs. 59,480, 756/- for the training services that the AE provides. 6. The assessee pays Rs. 165,605,613/- for the hardware repair services. Though the assessee is making payment for repair services separately, no dispute is being made on this account as it involves export and reimport of machinery." 7. Learned TPO has considered various factors on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upgrading the network to incorporate new technologies as and when the need arises. The assessee referred to the life cycle of the telecom network which includes 4 stages; (i) Supply of telecom network (ii) Installation of telecom network (iii) Maintenance of telecom network (iv) Upgradation of telecom network 10. It was submitted that post-sales support is provided in cases where the warranty of the equipment supplied by the assessee has expired. Post-sales support services are provided to the telecom services providers as part of an Annual Maintenance Contract (AMC) entered into by the assessee with the telecom services provider/customer. At the most basic level maintenance services consist of network performance checks, ensuring that the network is operating to its full potential. At its most complex level, this service area extends to complete management of an outsourced network - from side acquisition to full end to end service assurance. It is also the case of the assessee that system maintenance services include following services: ♦ Emergency services: consisting of telephone support or onsite support to take care of eme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and error is rectified. Such process gives the customer complete transparency of the error rectification process and it knows exactly what is the escalation level of its error. This generates a lot of trust in the minds of the customer who knows that the error would be rectified by the concerned person. 13. It may be mentioned that the assessee is receiving separate revenue in respect of Annual Maintenance Contract (AMC) and the gross revenue of the assessee on this account, as per page 208 of the paper book, is a sum of Rs. 118,94,04,863/- and after reducing the expenditure incurred thereon of Rs.101,59,98,248/- {which includes aforementioned amount of Rs.31,34,48,369), the operating profit from this segment is Rs.17,34,06,615/- and OP/TC is 17%. 14. After narrating all the aforementioned facts, the learned AR submitted before us that as a part of support services, the assessee provides post-sales support to telecom service providers/customers in cases where warranty has expired. These post-sales support services are provided to the telecom service providers/customers as part of an Annual Maintenance Contract (AMC) entered into by the assessee with the telecom service provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ean margin was computed at 6.59% against 17% shown by the assessee. Thus, it was submitted by learned AR that the assessee's payment made to its AEs of Rs.31,34,48,369/-should be considered at Arm's Length. He submitted that allegations of the TPO which have been affirmed by Dispute Resolution Panel are as under: "1. During the Transfer Pricing assessment proceedings, learned TPO disallowed the international transaction of receipt of Second Line Support services of Rs. 31,34,48,369/- from the AEs. 2. The learned TPO in support of his argument for non-chargeability of second line support services alleged that the Appellant has been unable to show any tangible economic or commercial benefit that it has derived from these services. 3. The learned TPO stated that these services were routine services which could not be classified as shareholder services. Further, in support his argument the learned TPO placed reliance on various international regulations including the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations released by the Organization for Economic Cooperation and Development (OPCD Guidelines) or other country reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant on a cost to cost basis without a mark-up and these costs have been passed on by the Appellant to the telecom service providers/customers under the AMC. Thus the Appellant has not absorbed these costs but has recovered the same from the telecom service provider/customer 4. Further, since only cost allocation is being made by the AEs for rendering of second line support services without a mark-up therefore question of the arm's length transfer price does not arise. Therefore, what needs to be seen is whether the right allocation of cost has been or not 5. Further, as the learned TPO rejected the Appellant's primary approach of determination of arm's length margin. The Appellant during the TP assessment proceedings had further suggested an alternative approach on a without prejudice basis wherein the Appellant demonstrated that it had earned an Operating Profit/Total Cost margin of 17.07% (which translates to an Operating Profit/Sales margin of 14.58%) (refer page 208 of the paper book) with respect to system support services, as compared to the comparable companies OP/TC margin of 6.59% (which translates to an OP/Sales margin of 4.74%) (refer page 182 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entirely his prerogative and it is not for the Revenue authorities to decide that what is necessary for an assessee and what is not. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer; when evaluating the Arm's Length price of a service; it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. 18. The learned AR further referred to the decision of ITAT Delhi Bench in the case of Cushman & Wakefield India (P.) Ltd. v. Asstt. CIT [2012] 135 ITD 242 in which case also, according to learned AR, it was decided that whether the assessee is only reimbursing the expenses of an employee of AE who was sitting at Singapore, it was cost effective to the assessee, hence, no adjustment can be made. Thus, it was pleaded by learned AR that TPO cannot question the business judgment of the assessee and cannot decide as to which course of action shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices. The apportionment of cost is done on a scientific basis under which the cost of the SLS centres are allocated to the various Ericsson entities across the world based on the number of CSRs escalated for Second Line Support and also on the revenue earned by various Ericsson entities from providing post-sales support services to telecom service provider/customer. Such method was applied by AEs for apportionment of cost as fault rectification is an ongoing process and it is not possible to keep a track of the time spent by the employees of the AEs for rectifying the faults across the world, including India. 21. To demonstrate that AMC did not relate to warranty period, learned AR referred to the agreement of the assessee with M/s Aircell Cellular Limited wherein telecom equipment were sold to third party customers which is an agreement dated 01/07/2005 wherein as per clause 19.2 and 19.3 which separately deals with hardware and software spare parts respectively, it is mentioned that the supplier shall, for a period of 12 months from the respective date of acceptance or eighteen months from respective delivery date, whichever expires earlier, repair/replace without expense to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition to the scope of warranty originally provided by the supplier of the system........" 22. Thus, it was submitted by learned AR that it is clear from the above that AMC contract is entered into with the third party customer once the warranty period has expired. During such warranty period, no payment is made to the AEs for any SLS services that may be received. Thus learned AR concluded his arguments and contended that addition has wrongly been made. There being no mark up in the amount charged by AEs and only cost has been reimbursed therefore, the impugned transaction should be considered to be at arm's length. 23. The formula, according to which the aforementioned payment has been made by the assessee to its AEs, has been described at page 224 of the paper book which is as under: "PRICING" The annual fee for Support Services provided under this agreement shall based on the following formula: The service Recipient's support services revenue x 60% + No. of CSRs escalated by the Service recipient x 40% x cost of providing support services Global support services revenue Total no. of global CSRs The support services revenue of the Service Recipient and the global s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions. These questions have already been described in the above part of this order. Referring to these observations of the TPO, he submitted that the assessee has not been able to prove that actual services have been received of some value which were required to make such huge payment. The services rendered are at best shared service or stewardship activities of the AE for which no separate payment was needed to be made. The assessee does not undertake the responsibility of goods that are procured from its AE. Therefore, the assessee should not be expected to pay for product failure and it has no role to play in that Thus, it was submitted by learned D.R. that arm's length price of the alleged services availed by the assessee from its AE has rightly been determined at nil by the TPO and learned DRP has rightly upheld this action of the TPO therefore, appeal of the assessee should be dismissed. 25. Learned D.R. also relied upon the decision of Hon'ble Delhi High Court in the case of CIT v. Nestle India Ltd. [2011] 337 ITR 103 wherein in para 16 their Lordships in answer to question No. 2 in which it was required to decide that whether the ITAT was correct in law in holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12/04/2012. 28. On 24/04/2012, the learned AR has submitted letter dated 20/04/2012, a copy of which has also been stated to be given to learned D.R. It has been mentioned that an amendment to the SLS agreement was entered into between assessee and its AE on 12th September, 2006 onwards. The copy of the said amendment is being filed. It is submitted that the amendment provides 60% weightage to the number of Customer Service Request (CSRs) escalated to the AEs and 40% weightage to the number of nodes (telecom equipments) installed in India for the purpose of allocation costs incurred by the AEs for providing SLS. It is also submitted that under the previous model the cost of SLS incurred by the AE was allocated to the various service recipients, including the assessee, based on their respective support service revenues ([Annual Maintenance Contract (AMC) revenues]. However, it was observed that such an approach only concentrated upon the AMC revenue and did not take into account the actual number of telecom equipments installed. These telecom equipments represent the actual equipments that were installed in the service recipients territory and on which SLS may be required. It is su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 705 USD 04/28/2006 7. 9019056045 4,464,360 100,334 USD 12/11/2006 8. 9019056678 2,810,479 62,838 USD 12/15/2006 9. 9019059469 76,183,537 1,753,764 USD 03/27/2007 313,448,369 6,992,069 29. We have carefully considered the rival submissions in the light of material placed before us. The facts have already been discussed in detail in the above part of this order. Mainly it is the case of the Revenue that assessee does not require to make any payment with regard to Second Line Support (SLS) obtained by it from its AE. As against that it is the case of the assessee that SLS services have been availed to minimum level where the assessee on its own is not able to resolve the problem as most of the problems have been resolved at the level of the assessee. It has been submitted that during the relevant assessment year the assessee has received customer service request to the tune of 11,108 out of which 1,245 have been addressed for SLS. No doubt that equipment has been supplied by the parent company of the assessee and the parent company of the assessee, who has supplied the instruments, can only resolve the complicated problems. Durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to make any payment. The assessee has the right to enter into an arrangement according to which its business interests are protected and for protection of such interests of the business of the assessee, it has entered into an agreement with its AE. To hold that is the prerogative of the assessee to see and decide the business expediency, the reference can be made to the decision of Hon'ble Delhi High Court referred to by learned AR in the case of EKL Appliances Ltd. (supra) wherein their Lordships have observed that even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in view of the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. Whether or not to enter into the transaction is for the assessee to decide. It will be relevant to reproduce these observations of their Lordships which is contained in para 22 of the order as under: "22. Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof on the ground that the assessee has suffered continuous losses." Earlier to this they have observed that Revenue cannot disallow any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative. Looking into observations of their Lordships, it has to be held that reasonableness of an expenditure has not been excluded from determination. Here it can be mentioned that the formula, which was placed before the Assessing Officer, TPO, and DRP, was different from the formula according to which the impugned amounts have been calculated. For the first time it is brought to our notice that an amended formula has been adopted to calculate the impugned amount. Though it is the case of the learned AR that this formula is more logical and reasonable but at the same time this formula has not been examined by the authorities below. Though on the face of it the arguments of learned AR appear to have force but unless the new formula is also confronted to the Assessing Officer, it will be wholly unjustified to uphold the correctness & reasonableness of this formula which has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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