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TMI Blog2016 (1) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, modifying the order of TPO, we determine the Management Consultancy Fee as detailed above and AO is directed to modify the order accordingly. In arriving at the above, we have considered the OECD Transfer Pricing guidelines 2010, Chapter-VII pertaining to ‘special considerations for intra group services’. Considering the assessee’s agreement with DQE Mauritius which in turn has an agreement with DQ Entertainment Plc, and the reimbursement of cost from one company to another, we agree with the TPO’s observation that foreign exchange loss in financial transactions cannot be considered as ‘service charge’ for the intra group and therefore, we after considering the facts of the case, restrict the amount to the actual management fees charged by the DQE Mauritius along with other cost of administration and audit and mark up at 5%. X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 3,19,23,085/- to its holding company DQ Entertainment (Mauritius) Ltd., on account of management consultancy services availed. TPO examined the intra group service aspect and also the decisions of/approach followed by other countries like USA, Australia, Canada and Germany etc., while examining the payments made for intra group services and OECD guidelines. Based on the above aspects and considering assessee's objections, the TPO came to the conclusion that assessee could not substantiate the queries raised by him and could not prove the services rendered by the Associated Enterprise (AE). Applying the benefit test, he determined the Arm's Length Price (ALP) value of the services at NIL. ii. The second aspect which the AO considered is with reference to reimbursement of commission at ₹ 73,62,023/-. Even though, assessee submitted that this amount was not charged to P&L A/c and was reduced from the consideration paid to certain erstwhile shareholders, as a result of an agreement by the shareholders to bear part of the IPO expenses for the purpose of listing of DQ Entertainment PLC in London Stock Exchange. TPO however, was of the view that no tangible and direct benefit c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and DQE India based on shares of agreed budgeted sales for the coming financial year • DQE Mauritius will pass through at cost any major items of third party expenses to which it has not added value • All costs will be marked up with a profit element of 5% DQE Maintenance will invoice DQE India for the management and supporting services quarterly on the last day of each month. DQE will settle these invoices in US Dollars within thirty days. The invoices will be supported by an analysis made at the start of the financial year of the agreed budgeted costs to be incurred by DQE Mauritius and the costs to which the mark up is to be applied. Interest at a rate of 1% per month may be charged on that part of the invoices which is not paid within thirty days. Thus, it is seen that DQE Mauritius will identify those costs of its officers and consultants who are chiefly involved in providing management and supporting services to DQE India. Their costs will be allocated across DQE Mauritius and DQE India based on shares of agreed budgeted sales. DQE Mauritius will pass through at cost any major items of third party expenses to which it has not added value. All costs will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eas, the TPO included the reimbursement amount of ₹ 73,62,023/- so as to make it to ₹ 3,92,85,108/-. Even though DRP has given clear directions and as seen from the order of TPO, he was only discussing about the ALP of Management Consultancy Services, it seems that TPO wrongly took the amount at ₹ 3,92,85,108/- which included the above amount which was not charged to P&L A/c. Since DRP has already directed it to be excluded, we direct the TPO/AO to delete the above amount and consider the management fee paid at only ₹ 3,19,23,085/- which was charged to P&L A/c as stated by assessee in various submissions, which can also be verified as Appendix-B to Form No. 3CEB placed in Page 71 of the Paper Book. In view of this, Ground No.4 is considered allowed. 5. Coming to Ground Nos. 2 & 3 on the issue of Management Consultancy Fees paid to AE, We have heard both Ld. Counsel and Ld. DR in detail. 5.1. It was the submission of Ld. Counsel that assessee submitted before TPO that Board of Directors of DQ Entertainment, Plc has been instrumental in bringing in a number of projects with imparting customers. These projects valued at approximately ₹ 64 Crores have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has not furnished complete details and justification of the payment was not made. He relied on the orders of the TPO. 6. We have considered the issue and examined the documents placed on record and orders of the authorities. There is no dispute with reference to the fact that assessee has availed intra group services from the DQ Mauritius which in turn has entered into another agreement with DQE, Plc, Isle of Man. There are two issues in the analysis of transfer pricing for the intra group services. • First issue is whether intra group services have in fact been provided? • The other issue is what could be the intra group charge for such services for tax purposes should be in accordance with the Arm's Length principle? As far as the issue whether intra group services have in fact been provided, there is no dispute with reference to same as the DRP has accepted that there are intra group services. To that extent, there is no dispute and Revenue is not aggrieved on the DRP's opinion/direction. What the DRP did not decide is the other issueintra group charges for such services. 6.1. The issue, as stated above by extracting the order of DRP, was referred to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00/- pertains to reevaluation of the foreign currency loan taken by the AE, Mauritius from AE, Isle of Man. Therefore, the expenses which pertain to the AE, Mauritius are only US$ 13000/- which include administration charges of US$ 9000/- and audit fee of US$ 4000/-. Since the foreign exchange loss of US$ 321000/- does not pertain to any management and consultancy services, it cannot be allowed to be included in the total expenses under the heading 'management consultancy services'. The balance amount of 'management and consultancy services' is analysed in the subsequent paras. 9. It is therefore clear that the DQ Entertainment (Mauritius) Ltd., Mauritius has not incurred any expenditure pertaining to management or consultancy services. The entire management consultancy charges pertain to expenditure incurred by DQ Entertainment Plc. As per the Memorandum of Understanding between the taxpayer and DQ Entertainment (Mauritius) Ltd., Mauritius, the remuneration payable by the taxpayer to the AE DQ Entertainment (Mauritius) Ltd., Mauritius on account of management and consultancy services is discussed in the following words: "REMUNERATION In consideration for the management an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Plc, Isle of Man to DQ Entertainment (Mauritius) Ltd., Mauritius. 10.4 It is noteworthy that there are only the following 3 persons working in the DQ Entertainment (Mauritius) Ltd., Mauritius - (i) Mr. Tapaas Chakravarti, Chairman and Chief Executive Officer, (ii) Mr. Kam Young - Member of the ACCA in charge of the finance and accounts, audit and foreign exchange transactions management, budgeting and MIS etc. (iii) Mr. Maro Eddy - Level 1 ACCA : He is the in-charge of book keeping and accountancy, computation, filing of VAT returns, IT returns etc., It is noteworthy. 10.5 Sri Tapas Chakravarti, Chairman & Chief Executive Officer, is also a Director in the taxpayer's company as well as in DQ Entertainment Plc, Isle of Man. In the table containing the list of expenses incurred by DQ Entertainment Plc, Isle of Man, there is no expense associated with him. In other words, there are only third party expenses. With respect to the third party expenses, the MOU signed between the taxpayer and the AE mentions the following: • DQE Mauritius will pass through at cost any major items of third party expense to which it has not added value. 11.1 Since, the third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the taxpayer, DQ Entertainment India, in support of its contention that the expenses passed on the taxpayer were in fact incurred for the benefit of the taxpayer, the taxpayer has submitted two certificates, one from Mr. Nicolas Goldstein and the other from Method Animation SAS. The relevant para of the certificates signed by Mr. Nicolas Goldstein is as under: Mr. Nicolas Goldstein: "I have seen direct guidelines, advise and support given by Board of Directors of DQ Entertainment Plc resulting in the DQ Entertainment (International) Limited having finalized various projects over a number of years since 2007". 12.2 The relevant para of the certificates signed by Method Animation SAS is as under: Method Animation SAS: "Method Animation and Board of Directors of DQ Entertainment Plc have had been jointly interacting on various productions. This relationship was made strong by way of the agreement entered into between Method Animation and DQ Entertainment Plc whereby Method Animation agreed to make first offer to DQ Entertainment International Limited before entering into Production Service Agreement for any project started by Method Animation SAS being initiated, develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the MNE group's attributes that positively enhances the profit making potential of particular members of the group. Each case must be determined according to its own facts and circumstances. 15. The taxpayer has not filed any supporting document as was discussed by the Hon'ble DRP in the directions issued u/s. 144C vide its order 14.09.2012. The relevant portion of the order is as under: "Thus, detailed budgeting and documentation needs to be maintained for the services being rendered by the AE. These records, if produced before the TPO would throw more clarity and proof for the actual rendering of services". 16. The taxpayer has not filed any detailed budgeting or documentation by either the taxpayer or any of the two AE i.e., DQ Entertainment (Mauritius) Ltd., Mauritius or DQ Entertainment Plc, Isle of Man to show how and what part of the Director's Fees incurred by the DQ Entertainment Plc, Isle of Man, should be considered as management and consultancy services provided to taxpayer. In this regard the para 7.18 of the OECD Guidelines states the following- 7.18. The fact that a payment was made to an associated enterprise for purported services can be useful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss does not pertain to any management and consultancy services. To that extent his order has to be approved. 6.3. What the TPO has missed is with reference the amounts other than foreign exchange loss. In the absence of any comparable figures and in the absence of any further enquiry and having the fact that services have been rendered to assessee as accepted by DRP also, TPO cannot take the amount of ALP at NIL, ignoring the payment by assessee of US$ 4,27,000. As per the agreement, all the costs incurred by the DQE Mauritius with 5% markup had to be charged to assessee. Therefore, as per the details furnished by assessee before the TPO, the actual management fee of US$ 4,27,000 with administration charges of US$ 14000 and markup of 5%, at the exchange value as on the date of 31-03-2008, can be considered as 'service charges' for the intra group services rendered. This can be taken as ALP. Therefore, modifying the order of TPO, we determine the Management Consultancy Fee as detailed above and AO is directed to modify the order accordingly. 7. In arriving at the above, we have considered the OECD Transfer Pricing guidelines 2010, Chapter-VII pertaining to 'special considerations ..... X X X X Extracts X X X X X X X X Extracts X X X X
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