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TMI Blog2016 (4) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... asudevan, Advocate For The Respondent : Shri Sanjay Kumar, CIT-III(DR) ORDER Per Asha Vijayaraghavan, Judicial Member This appeal by the assessee is directed against the order dated 24.12.2014 of the Assessing Officer passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [hereinafter referred to as the Act ]. 2. The assessee company is in the business of manufacturing and/or trading of Air Compressors, Feeder Crushers, Loaders, Vibratory Compactors, Light Towers, Utility Vehicles and Pavers. Return of income for the A.Y. 2010-11 was filed by the assessee on 8.10.2010 declaring an income of ₹ 27,81,885 which was processed u/s. 143(1) of the Act. The case was selected for scrutiny under CASS and notice u/s. 143(2) issued on 9.9.2011 and notice u/s. 142(1) issued on 12.12.2013. 3. The information called for was furnished on 23.12.2013 and examined by the Assessing Officer. The case was referred to the TPO for determination of the arm s length price (ALP) u/s. 92CA of the Act. As per the order of the TPO dated 30.01.2014, draft assessment order was passed on 24.2.2014 against which objections were filed by the assessee before the DRP. The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunals ( ITAT ). 1.3. The learned TPO, AO and the Hon ble DRP erred in selecting Comparable Uncontrolled Price Method ( CUP ) as the most appropriate method in determining the arm s length price of payment towards management fees to AE despite the learned TPO not following the provisions prescribed in clause (a) of the sub-rule (1) of Rule l0B of the Rules for determination of ALP in relation to an international transaction under CUP. 1.4. The learned TPO, AO and the Hon ble DRP erred in ignoring the evidences submitted by the assessee to prove that it was in need of services, services were actually rendered and the benefit was derived from the services obtained from the AE. 2) The learned TPO, AO and the Hon ble DRP have erred in imputing notional interest on the outstanding receivables amounting to Rs.. 11,04,290/- from the AEs and while doing so: 2.1. The learned TPO, AO and the Hon ble DRP erred in imputing interest on the outstanding receivables from the AEs ignoring the fact that the assessee followed the same policy of not charging any interest on trade receivables from both AEs as well as Non-AEs. 2.2. Without prejudice, the learned TPO and AO ought to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gin Method (TNMM) was selected as the most appropriate method. The assessee earned operating profits to total costs (OP/TC) of 13.30% as against the OP/TC of 13.08% earned by the comparable companies. Accordingly, with the application of TNMM, the international transactions have been concluded by the assessee to be at arm s length. 7. It is now submitted before us that the TPO and the DRP erred in making a TP adjustment of ₹ 1,53,40,000 on account of payment of cost contribution charges by the assessee. The brief facts with regard to this issue are that the assessee received services from its AE in the area of Administration, Finance, Treasury, Tax and Strategy etc. These services are utilized by the assessee to undertake its business operations in India. In order to leverage the expertise of Ingersoll-Rand Company, assessee entered into a cost contribution agreement with Ingersoll-Rand Company. In this connection, the assessee has made the payment of ₹ 2,57,42,489 towards the cost contribution charges during FY 2009-10 relating to following periods: - Pertaining to FY 2009-10 - ₹ 1,53,40,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er etc. b . The provision of Human Resources support aims at developing global HR strategy, policies and procedures, guidance for structuring the organisation, recruitment support, global training and learning programs etc. These policies help the Appellant in establishing a world class working culture which is also in compliance with the regional norms. c . The Central Finance function aims at ensuring the efficient budgeting, forecasting, monitoring and reporting of the Group's financial performance and to provide support in connection with Tax and Treasury matters. This function enables the Appellant to benefit from the Group's good financial practices. d . AE also support in strategy and continuous improvement initiatives in the area of procurement, market research, supply chain, engineering, customer management etc. Total 2,57,42,489 11. It was submitted that the payments amounting to ₹ 2,57,42,489 towards cost contribution charges is reflective of an arm s length charge. It was further submitted that the assessee received servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was stated the detailed workings providing the allocations of cost among various Ingersoll Group companies was submitted to the learned TPO during the assessment proceedings. 14. It was submitted that the basis of allocation followed across group companies is identical to the one adopted for allocating intra group charges to India. The AE in the capacity of a Centralized service provider enters into agreements with all the concerned affiliates in respect of the allocation of costs. It was further submitted that an analysis of the facts as set out in the aforementioned paragraph would provide ample evidence to the fact that the allocation of intra group charges by the AE to the assessee adheres to the tenets of the indirect allocation mechanism provisions as stipulated under Paragraph 7.25 of the OECD Guidelines. It was pointed out that the AE has charged only the actual costs incurred and there is no mark-up charged on the same. 15. Reliance was placed on Circular no. 87-2R dated 27 September, 1999 of the Canada Customs and Revenue Agency wherein the above has been explained by means of an example:- For example, in many cases, the services provided through intragroup arra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it was in need of services and services were actually rendered and benefit was derived from the services obtained from the AE. Further, the guidance, advice and support obtained from the experienced and knowledgeable team of the AE helped in management of the operational and corporate activities reducing significantly the level of senior personnel required locally, and provided for a higher degree of co-ordination of the activities among assessee and its foreign affiliates. It was submitted that the key benefits to the assessee by availing the Intra-Group services include, but are not limited to:- Access to high quality services on as and when such a need arises basis; The staff providing the services have unequalled knowledge of the business and the issues, compared to third party providers; Some of the services provided by the AE would not likely be obtainable from third party service providers, and it may not be prudent from a business as well as commercial perspective to avail some of the services provided by the AE s, directly from third party service providers; It is practically and financially not possible for the assessee to employ such experienced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement etc. paperbook) Particulars Page Reference The Appellant has received services from its AE in the area of Information Technology, Administration, Human Resource, Finance, Legal, Tax, and Strategy etc. The example of these are provided below: a. Global IT Support ensures the efficient and effective operation of the Group's Information Systems Operating Platform - Conference Call Details and Presentation on Interim Forecast Process in HFM (Page 362 and 363 of the paper book) b. Headcount Improvement Meeting - These policies help the Appellant in establishing a world class working culture which is also in compliance with the regional norms. (Page 431 of the paper book) c. Accounts Receivable Dashboard - AE also support in strategy and continuous improvement initiatives in the area of supply chain and customer management etc. (Page 431 of the paper book) d. Presentation on Indian Time Deposits and Advisory on Financial Matters - The Central Finance function aims at ensuring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factors driven situation, the costs are shared in accordance with some objective criterion, including sales revenues and number of employees. In any case, the assessee has adopted TNMM as most appropriate method, and the revenue authorities have neither made an effort to show as to how this method is not appropriate to the facts of this case, nor shown as to which other prescribed method of ascertaining arm s length price of services received will be more appropriate to these facts. 23. Similarly, in the case of AWB India Pvt. Ltd., ITA No.4454/Del/2011 , the Delhi Bench of the Tribunal had noted that the assessee had produced evidence and that the contents of thereof were found to be amply supportive of the assessee s claim. The TPO had rejected TNMM and adopted CUP method for determining ALP. The Tribunal held that the TPO remained oblivious to the fact that Rule 10B(1)(a) stipulates comparable and uncontrolled transactions while applying the CUP method. Only a general observation was made by the TPO that no independent party would have made payment in uncontrolled circumstances. 24. In view of the above decisions of the Delhi Bench of the Tribunal in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-existent. It was submitted that in the absence of any specific provision in the Act which seeks to tax any hypothetical income, the assessee cannot be subject to tax in respect of hypothetical income , i.e., to say an income which ought to have been earned or that the assessee failed to earn. It was further submitted that in the present case, since no income has been earned or can be said to have been earned by the assessee in respect of interest chargeable from AEs, the question of applying the provisions of section 92 of the Act does not arise. 31. Section 92(1) of the Act provides that, Any income arising from an international transaction shall be computed having regard to the arm s length price . Further, Section 92B(1) of the Act defines an international transaction as under: For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .04.2015 while dealing with an identical issue, has held as follows:- 11.2.2 On the first issue of taxability of notional income, the assessee submitted that the TPO has tried to bring within the ambit of Section 92, a transaction that is non-existent and in the absence of any provision in the Act, the tax-payer cannot be subjected to tax in respect of hypothetical income . In the case on hand, since no income has been earned or can be said to have been earned by the assessee in respect of interest chargeable from AEs, the question of applying the provisions of Section 92 of the Act does not arise. In support of this proposition, the assessee placed reliance on the following judicial pronouncements :- 1) Vodafone India Services Pvt. Ltd. V UOI (W.P. No.871 of 2014) 2) Evonik Degussa P. Ltd. V ACIT OSD, Circle 3(1) (ITA No.7653/Mum/2011) of ITAT, Mumbai Bench. 11.2.3 It was also submitted by the assessee that it had not charged any interest for delayed realisations even in the case of Non-AE transactions. It was submitted that the debts were outstanding with both the AEs and Non-AEs for a period exceeding the credit period purely because of business reasons and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een made by the AE beyond the normal credit period, there is no interest cost to the assessee. Moreover, there is no such agreement whereby interest is to be charged on such a delayed payment. From the summary of payment submitted by the learned Counsel, it is seen that the billing is done on quarterly basis and, accordingly, the payment is being received. Therefore, the delay is not wholly on account of late payment by the AEs only. Moreover, the T.P. Adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case and is, accordingly, deleted. 11.4.2 Following the above decision of the ITAT, Mumbai Bench in the case of Evonik Degussa India P. Ltd. (supra), we also hold that the addition on account of notional interest relating to alleged delayed payment in collection of receivables from AEs is not called for. However, as can be seen from th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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