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TMI Blog2016 (5) TMI 277X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical fees and alleged reimbursement of group IT expenditure to the AEs back to the file of the AO / TPO for consideration afresh in accordance with law. Assessee is free to produce any evidence to show that services were indeed received by it from the AE. Assessee is also duty bound to bench-mark such services by comparing it with uncontrolled transactions by independent enterprises where similar services are received. - Decided in favour of assessee TDS u/s 195 - disallowance of reimbursement of IT expenditure to SKF Data Services, Sweden for nondeduction of tax at source, applying Section 40(a)(ia) of the Act - Held that:- AO had in the draft assessment order noted that assessee had not deducted tax at source on payments effected to SKF Data Services, Sweden. As per the AO no supporting evidence was filed by the assessee to show that these were reimbursement of expenditure. AO also noted that assessee was selling its entire product line in India and there could not be any services rendered by M/s. SKF Data Services in Sweden, for such business operations. According to him, payments were unrelated to business of assessee in India. What we find is that none of the lower auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to claim for carry forward loss and disallowance of group information technology (IT) expenditure twice, appearing in the appeals for A. Ys. 2007-08, the other grounds are common for both the years. 03. Common grounds are dealt with first. Vide its ground I assessee assails the TP adjustment of ₹ 1,13,68,945/- for A. Y. 2006-07 and ₹ 91,85,559/- for A. Y. 2007-08. 04. Facts apropos are that assessee engaged in the business of manufacture and trading of oil seals, had international transactions reported in form 3 CEB filed for the impugned assessment years, as under : A. Y. 2006-07 : Manufacturing Rs. Import of Raw materials 53,03,080 Expori of raw materials 1,88,263 Export of finished goods 10,84,75,954 Trading Import of finished goods For trading 10,56,65,603 Others Rs. Import of capital goods 48,35,102 Test certification fees re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TNMM study. TPO also relied on OECD guidelines for coming to the opinion that aggregation of international transactions should be done only where it is not possible to apply the arms length principle on a transaction to transaction basis. Ld. TPO thereafter proceeded to do a TP analysis aggregating the group IT services charges and technical fees together. When so aggregated amount came to ₹ 1,13,68,945/- for A. Y. 2006-07 and ₹ 91,85,559/- for A. Y. 2007-08. TPO required the assessee had to establish receipt of actual services from the AE. As per the TPO unless services were proved to have been received by the assessee, no value could be attached to it. Reply of the assessee to the queries raised by the TPO as appearing in the TP order for A. Y. 2006-07 was as under : 1. Query 2 Heading Reference in the notice-2.1 Submit copies of the invoices raised by each of the AEs in favour of SKF India and also the ledger accounts of Group IT Services in SKF India's books of accounts for the Financial Year 2005-06. Response The copies of the invoices raised by each of the AEs along with the ledger extracts are attached along with the submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc including the details of the application of this mechanism to the costs incurred during the FY 2005-06 and documentation supporting any review of the applicability of the chosen mechanism: c. documents supporting the selection of keys for apportionment among several associated enterprises. Including in the circumstances of the case; d. documents supporting the selection of a pricing methodology or methodologies and any documentation supporting the consideration and rejection of other methodologies; and e. Documentation created in the undertaking of a functional analysis of the various group members providing and receiving services to establish the relationship between the relevant services and the member's activities and performance. 3.8 Please provide the quantification of such services in terms of actual expenditure incurred and commensurate benefits derived there from. 3.9 Whether the charges paid by the taxpayer for intra group services reflect the same charges for the services that would have been, or would reasonably be expected to be, levied between independent parties dealing at arm's length for comparable services under comparable circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee had not made an analysis by comparing such costs with the cost it would have incurred if similar services were sourced locally. As per the TPO no independent party would have opted for the procurement of such services without first estimating the cost. Though the assessee took an argument that bulk purchase by M/s. SKF Data Services AB, Sweden would result in a cost benefit when the cost was shared, TPO did not find it convincing since the submissions were not substantiated. After verifying allocation keys TPO noted that such allocation keys employed by the AE for sharing of the cost were based on para meters such as capital employed, number of employees and sales. The sharing was not, as per the TPO , based on actual usage in terms of time and actual number of computer links and personnel using such links. In effect, he held that assessee was not able to show any proof for having received any services either in regard to the fee paid for technical services or any IT services. According to him, the payments made by the assessee were a tribute by a subsidiary to a holding company and not relatable to any tangible services rendered by the holding company to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y those placed at p.nos.16 and 17 of the paper book, Ld. AR submitted that assessee had used RFT S.P.A's technical know how to build its own competency in seal designing, seal moulding and seal testing. As per the Ld. AR, AE had rendered services in the following aspects : (1) Design, Development and Testing of Bearing seals (Part nos. - SR6005, WN3016-0111 and others). (2) Design, development and testing of mudblock seals. (3) Process Engineering Support for the above products. (4) Laboratory testing Rubber Compound Homologation. The aforementioned services were rendered by the AE to the assessee by employing a combination of the methods as stated herein below: (1) Visit by the AE's personnel to the factory and offices of the AE; (2) Visit by the assessee's personnel to the factory and offices of the AE; (3) Teleconferences; and (4) Inputs through emails 14. Ld. AR pointed out that assessee filed a declaration from AE that there was no mark-up on the charges incurred by it while raising the bills on the assessee. Vis-a-vis reimbursement for IT related services, rendered by to M/s. SKF Data Services AB, Sweden, Ld. AR submitted that M/s. SK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of IT cost was concerned, Ld. DR submitted that assessee could not show how it was benefitted by sharing such IT costs and could not produce any comparable case of uncontrolled transactions. Further as per the Ld. DR onus was on the assessee to show that the services received by it from AEs were at charges lower or on par with cost if similar services were rendered by unrelated parties. As per the Ld. DR assessee also could not show how the documents now sought to be produced as additional evidence were linked to the payments made for the alleged technical services and reimbursement of cost. Thus according to him, lower authorities were justified in considering the ALP of these at nil. 17. We have perused the orders and heard the rival contentions. Claim of the assessee is that it had received technical services relating to its manufacturing line from its AE in Italy, namely RFT S.P.A. As per the assessee payments made to the said company were for said technical services and taxes were duly deducted thereon . In so far as intra-group payments to AE in Sweden are concerned, claim of the assessee is that it was on cost-sharing basis for centralised DTP services done by such subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are sent to CR India or they are sent to any other country on behalf of CR India towards technical assistance and training. In case the personnel of RFT are injured or meet with mishaps during their training at CR India, CR India shall not be held responsible for such injury or mishaps unless the said injury or mishaps are arising from gross negligence on the part of CR India or its personnel. 5. Without affecting the generality of the preceding clauses, RFT shall furnish CR India with technical documents and drawings necessary for the training of CR India personnel. Such technical documents and drawings, will be provided in the same language, format and system of measurement as recorded by RFT for its own use. 6. In addition to the furnishing of technical documents and drawings in accordance with article 5 hereof, RFT will use reasonable efforts to supply, from time to time, appropriate explanations and data to CR India's questions being relevant to know-how and to any other technical information relating to manufacture of Oil seals. Payment 7. For the technical assistance under this agreement, CR India snail pay to RFT, an amount not exceeding 165,000 Euros as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be shared by the assessee, the Swedish AE has vide a certificate placed at page 160 of the paper book stated that there was no profit mark-up. That payments were effected by the assessee to both the above AEs has not been disputed by the lower authorities. However, TPO was of the opinion that assessee could not prove any benefit to have been received. As per the TPO assessee ought to have shown that such services would have been acquired by an uncontrolled entity for similar cost for justifying such payments and TNMM study would not suffice. In other words, TPO was of the opinion that assessee could not produce evidence for either the technical services nor the sharing of cost in relation to the IT services. In a similar situation, Hon'ble Delhi High Court in the case of CIT v. Cushman Wakefield India P. Ltd [(2015) 367 ITR 730] held as under at paras 29 to 46 of its judgment as under : 29. The argument, in this case, is that the assessee only paid for the cost incurred, while an uncontrolled transaction would involve an additional element of profit, thus leading to a greater claim for reimbursement. If true, this would no doubt place this transaction within section 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by CWHK, acting as the co-ordinating entity for the Client Solutions Group. The cost allocation to the assessee is on the basis of a percentage of the cost relatable to the revenue generated by Cushman and Wakefield Asia. This is explained through the following chart, on which the Income-tax Appellate Tribunal placed reliance : NY Revenue estimate C and W Asia revenue estimate Allocation Country Net fee to local office (US$) percent. allocation Asia revenue allocation (US$) $ Allocation 75 percent. NY revenue allocation 25 percent. gross revenue Allocation Total allocation on US BP percent. allocation BP allocation $ US$ India 3037398 82. 44 percent. 1122093 2 42.7 percent. 173990 30031 203931 72.5 150.360 China 369000 10.01 percent. 5859619 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t passed muster under a transfer pricing analysis. 32. Having made these observations, the court also notes that the contrary findings of the Transfer Pricing Officer, that no services were rendered, and those of the Income-tax Appellate Tribunal, that services were rendered, must be viewed in this context. The ultimate analysis has to disclose whether the service rendered has a value and, if so, determine that. Particular reliance has been placed by the Transfer Pricing Officer and the Income-tax Appellate Tribunal, on the 2009 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of the Organization for Economic Co-operation and Development ( OECD ), specifically paragraphs 7.4-7.6. These concern intra-group services (i.e., services provided by one member of a group to another, such as the case presently), and factors relevant to determine whether such a service exists. The court notes, first, that the 2009 OECD Guidelines are not binding and further, that paragraph 7.4. of the Guidelines itself recognizes that each case depends on its facts and circumstances. Whilst the factors enumerated in paragraph 7.6 are relevant, strict adherence to the OE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Addl. CIT [2012] 13 ITR (Trib) 422 (Mumbai) (page 432) : We find that the basic reason of the Transfer Pricing Officer's determination of the arm's length price of the services received under cost contribution arrangement as 'nil' is his perception that the asses see did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the asses see has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the Revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the Transfer Pricing Officer's authority in this case, which is to determining the arm's length price for international transactions referred to him or her by the Assessing Officer rather than determining whether such services exist or benefits have accrued. That exercise-of factual verification is retained by the Assessing Officer under section 37 in this case. Indeed, this is not to say that the Transfer Pricing Officer cannot-after a consideration of the facts-state that the arm's length price is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the Transfer Pricing Officer stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the Transfer Pricing Officer. This aspect was made clear by the Income-tax Appellate Tribunal in Deloitte Consulting India Pvt. Ltd. v. Deputy CIT/ITO [2012] 19 ITR (Trib) 378 (Mumbai) ; [2012] 137 ITD 21 (Mumbai) (page 402 of 19 ITR (Trib)) : On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at nil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices cannot-as the Income-tax Appellate Tribunal correctly surmised-be duplicated in India in so far as they require interaction abroad. Whether it is commercially prudent or not to employ outsiders to conduct this activity is a matter that lies within the assessee's exclusive domain and cannot be second-guessed by the Revenue. 37. At this point, it is noteworthy that the circumstance that the assessee had market research facilities in India does not correspond to the performance of services abroad, especially in relation to client interaction services located outside India-albeit for ultimately sourcing them into the Indian market. The e-mails considered by the Income-tax Appellate Tribunal from Mr. Braganza and Mr. Choudhary so far as they deal with specific interaction with IBM by those persons and relate it to benefits obtained by the assessee, provide a sufficient basis to hold that benefit accrued to the assessee. However, this determination remains unclear and inchoate. The devil here lies in the details. The details of the specific activities for which cost was incurred by both CWS and CWHK (for the activities of Mr. Braganza and Mr. Choudhary) and the attendant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh rate nor the business purpose of the same. 4.8 On close scrutiny of the e-mails, copies of which have been given in the submissions, it is seen that most of them are cryptic mails in that most of them do not clearly mention either the client or the requirements of the client which is the mandatory requirement for any entity referring to any other entity. There is no evidence submit ted regarding the services provided by the group entities to merit the referral fee. Copies of some invoices are also given but again raising invoices does not substantiate or gives proof of the work done by the group entities. 4.9 The assessee has not been able to demonstrate as to how the Indian entities from whom income was generated on account of rendering off services, etc., is linked to the associate enterprises of the assessee to whom referral fee is paid. In simpler words the link between the clients based in India and the associate enterprises of the assessee-company which could enable their referral in the first instance has not been established. The assessee's case is a pure and simple case of tax planning . . . 39. The Income-tax Appellate Tribunal reversed this fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00, the Assessing Officer has a very limited role. He has to mechanically follow these instructions. There is no application of mind. There is no formation of any opinion at the stage of reference. Thus, to presume that he has allowed a particular expenditure under section 37, does not seem to be the right view of the matter. In any event, this is not a case where the Transfer Pricing Officer or the Assessing Officer made a disallowance under section 37 of the Act. It is a case where an adjustment has been made under section 92C(4) of the Act, after the Transfer Pricing Officer determined the arm's length price at nil under section 92CA(3). Hence, this argument is devoid of merit. Indeed, a Division Bench of this court, in Sony India Pvt. Ltd. v. CBDT [2007] 288 ITR 52 (Delhi) (albeit considering the law prior to the 2007 amendment to the Act), concurred with this view (pages 69 and 74 of 288 ITR) : a reading of section 92C and section 92CA does not indicate that the Assessing Officer is required to form a prior considered opinion after considering all the available materials even before making a reference to the Transfer Pricing Officer. A prima facie opinion wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout competition : For the portion between $0 $20000 0 per cent. For the portion between $20001- $150000 30 per cent. For the portion between $150001 $500000 40 per cent. For the portion above $500001 50 per cent. 42. Whether these figures represented the arm's length price of such referral transactions was to be decided by the Transfer Pricing Officer, who concluded that no adverse inference is drawn . This determination is binding on the Assessing Officer, who cannot consider the quantum of referral fees paid, but only whether such fees was backed by an actual referral by the associated enterprises. In other words, the Assessing Officer's jurisdiction in such case is to only verify whether the claim of the assessee is borne out by the materials relied on by it and finalize the assessment order. This-as discussed-is the distinction between the jurisdiction of the Assessing Officer and the Transfer Pricing Officer ; the Transfer Pricing Officer determines wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The payment was at the arm's length ; the Assessing Officer cannot reassess that issue or draw adverse conclusions from the percentage value of the referral fees. The Assessing Officer can, however, in his assessment under section 37 decide whether work or services were actually rendered as claimed by the assessee. In other words, the Assessing Officer may determine whether the stated transactions are real and genuine, i.e., the existence of a referral from the associated enterprises to the assessee. This, as part of the broader exercise to determine whether the expenditure was for the purposes of the business, lies unquestionably within the domain of the Assessing Officer. Indeed, this is also precisely what the Assessing Officer did : 4.5 Repeatedly during the course of the hearings, the assessee- company had been asked to match each transaction in the list to the work done by the group entity specifically in relation to the property transaction done but this has not been given by the assessee in its submissions. This makes it clear that the assessee-company is in no position to clarify or substantiate the work done or services rendered by the group concerns to mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the Assessing Officer's assessment of evidence was incorrect because the assessee had submitted ample evidence to support the expenditure. Having set aside the Income- tax Appellate Tribunal's reasoning that the Transfer Pricing Officer's report was binding on this issue, this bare assertion of ample evidence remains the only reference to the merits of the Assessing Officer's order. This court notes that neither the Assessing Officer (who did admittedly deal with the issue at some length) nor the Income-tax Appellate Tribunal (which summarily noted that presence of evidence) have discussed what such evidence is. Details of the e-mails, and why they do or do not disclose the existence of referral transactions or any other material concerning the transactions, have not been disclosed, let alone discussed in any detail. In such a case, the court is faced with contrary assertions of the Assessing Officer and the Income-tax Appellate Tribunal, and nothing more. No conclusions about the correctness of either approach can be taken in this background. 45. The finding of the Income-tax Appellate Tribunal on this count are, therefore, liable to be set asid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indeed received by it from the AE. Assessee is also duty bound to bench-mark such services by comparing it with uncontrolled transactions by independent enterprises where similar services are received. Accordingly, ground I of the assessee for both years is treated as allowed. 20. Vide its ground II(1), grievance of the assessee is on disallowance of reimbursement of IT expenditure to SKF Data Services, Sweden for nondeduction of tax at source, applying Section 40(a)(ia) of the Act. 21. Ld. Counsel for the assessee submitted that this was one of the two international transactions, bench-marked by the TPO with an ALP of zero. As per the Ld. AR assessee, what was paid to M/s. SKF Data Services, Sweden, was reimbursement of information technology related services. Ld. AR submitted that SAP software and related supporting software were acquired by M/s. SKF Data Services, and given for use to all the SKF group entities. As per the Ld. AR though there was no agreement with M/s. SKF Data Services, understanding was that the cost incurred by M/s. SKF Data Services, would be shared by group entities applying appropriate keys. According to him, there was no profit element in the reimbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the assessee which appears in appeal for A. Y. 2007-08. First one relates to set off of carry forward loss. As per the assessee, carry forward loss for A. Y. 2006-07 was ₹ 41,95,29,825/- and not ₹ 10,96,29,092/-. Ld. AR submitted that if the correct figure of carry forward of loss is considered then there would be no positive income for the impugned assessment year. 25. Since the question is regarding what was the actual carry forward loss available to the assessee for A. Y. 2006-07, we are of the opinion that it is an aspect which can be verified by the AO. We therefore direct the AO to verify and give the assessee the benefit of actual carry forward of loss as assessed for A. Y. 2006-07, for the impugned assessment year. Ground II(2) is allowed for statistical purpose. 26. Vide its ground II(3), grievance of the assessee is that disallowance of expenditure towards group IT services were considered twice, once u/s.40(a)(ia) of the Act and again u/s.92CA of the Act. What we find is that bench marking of the international transactions u/s.92CA of the Act, is entirely different from allowance of disallowance of an expenditure u/s.37 of the Act. We have already ..... X X X X Extracts X X X X X X X X Extracts X X X X
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