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TMI Blog2016 (7) TMI 245X X X X Extracts X X X X X X X X Extracts X X X X ..... dered was basically an expenditure incurred for the purposes of business, the same are to be determined under section 37(1) of the Act, if allowable or not and this issue is in the exclusive domain of the Assessing Officer to be determined. Now, adverting to the assessment order passed by the Assessing Officer which is in consonance with the direction issued by the Transfer Pricing Officer/Dispute Resolution Panel, vide which group charges to the tune of ₹ 1,89,53,444 have been treated as adjustment in the arm's length price. The Assessing Officer has neither examined nor returned any findings whatsoever if the payment to the tune of ₹ 1,89,53,444 made to the associated enterprise for availing of services from its associated enterprise is an expenditure incurred for the purposes of business under section 37(1) of the Act rather passed the assessment order in a mechanical manner in consonance with the directions issued by the Transfer Pricing Officer/ Dispute Resolution Panel. Moreover, when the Transfer Pricing Officer has not disputed that the services were availed of by the assessee from its associated enterprise, the question of determining the arm's length price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble Dispute Resolution Panel has further erred in confirming the transfer pricing adjustment of ₹ 1,89,53,444 on the following grounds : Engineering services availed of by the appellant from its associated enterprises ('engineering services')-Rs. 1,46,21,403 1.1 By misconstruing the appellant's business model and by dismissing/overlooking the supporting evidence and arguments that the appellant filed/adduced during the course of the proceedings to support the 'real benefits' it received in return for 'engineering services' on summary basis. In this regard, the observations made by the Dispute Resolution Panel (in paragraph 3.2 of the Dispute Resolution Panel direction) are perverse on the facts and based on misplaced notions owing to, but not limited to, the following : (a) The Dispute Resolution Panel has misconstrued the facts of the case by drawing an erroneous conclusion that there is an overlap between the royalty payments and charges paid for availing of engineering services. In doing so, the Dispute Resolution Panel has failed to appreciate that royalty paid by the appellant pursuant to the licence and technical collaborat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dispute Resolution Panel has erred by not giving any consideration to the corroborative analysis placed on record by the appellant to justify the arm's length nature of engineering services on an aggregated basis using transactional net margin method ('TNMM'). Administrative support services-Rs. 43,32,041 1.5 By arriving at a prima facie incorrect conclusion that administrative support services of ₹ 43,32,041 (refer page 3/4 of the Dispute Resolution Panel directions) availed of by the appellant from its associated enterprises in the nature of sourcing, public relations, etc., form part of engineering services. Accordingly, the finding of the hon'ble Dispute Resolution Panel in this regard is perverse on facts, and therefore, not sustainable. Other grounds 1.6 By rejecting the economic analysis carried out by the appellant for benchmarking engineering services provided by it to its associated enterprises ('outbound engineering services'), in a summary manner, by disregarding the segmental approach adopted by the appellant in accordance with rule 10B(e) of the Income-tax Rules, 1962 ('the Rules'). 1.7 By relying upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he group expenses from April 1, 2006, to March 31, 2007, charged by Voith Siemens Hydro Power Generation GmbH and Co. Germany to the taxpayer are as follows : Invoice No. Date Gross amount Gross amount (INR) DR20625250 29-09-2006 27,678 16,31,035 DR20625160 28-06-2006 16,114 9,11,853 DT20725082 27-03-2007 59,042 34,59,861 DR20725038 05-01-2007 11,076 6,49,054 Voith Siemens Hydro Power Generation-provision from January to March, 2007 1,36,000 79,69,600 2,49,910 1,46,21,403 Group charges -Admin Charges DR20625200 24-08-2006 43,600 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rature connecting with the business of the taxpayer are furnished. Similarly, for corporate human resources (annexure XVTII and corporate sourcing (annexure XX), evidence furnished for services received contain certain papers on technical write-up along with certain e-mails received. The second part of the agreement relates to charging of specific item of expenses (clause 3.3) based on actual basis, subject to production of documentary evidence. The said expenses relate to : (a) IT-consultancy (b) Business consultancy (c) Engineering services (d) Training For the service (charges paid at ₹ 43,32,041), the taxpayer has justified the payment in the following manner : VSH as the intellectual and administrative head of the group provides certain administrative and special services for all the companies of the Voith Siemens Hydro Group including VSID. These services include public relations human resources, corporate sourcing, ProCS and product data management (PDM). Similarly, in respect of engineering charges paid at ₹ 1,46,21,403, the taxpayer has justified the payment in the following manner : VSID, being a new company, has mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is noticed that the payments made towards so-called engineering services rendered by its associated enterprise (Rs. 1.46 crores), the invoices raised by Voith Germany speaks about OTO- support and application work. None of the projects mentioned therein in respect of whom OTO-support and application work given are undertaken during the year under reference. The projects under taken by the taxpayer during the year are as follows : (i) Omkareshwar Hydroelectric project of Narmada Hydro Corporation Ltd., Madhya Pradesh (ii) Baglihar Hydroelectric Power Project, Jammu and Kashmir (iii) Hirakud Hydroelectric Project, Orissa Therefore, the projects against whom it is aimed that the engi neering services are provided by Voith Germany were not undertaken by the taxpayer. As per annexure XIV of the submissions made on April 19, 2010, it is claimed that the so-called OTO-support and application services rendered by its associated enterprise are for submission of tender documents. What is so unique in this offer to order (OTO) and order to cash (OTC) services remained unanswered. In fact, the taxpayer has debited an amount of ₹ 6.98 crores on account of manpower t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain engineering services were received from its associated enterprise. The taxpayer failed to substantiate as to why the services that are claimed to have been received by its associated enterprise could not be undertaken by its own manpower when they are having requisite expertise in this field. 4.2.1.3 No group charges paid by the taxpayer in the preceding previous year Also, it is important to note that no such group charges were paid by the taxpayer in the preceding previous year, i.e., the financial year 2005-06, when in fact, an operating margin of 6.2 per cent. on sale price was shown as against 5.17 per cent. during the year under consideration. Therefore, there is no tangible benefit in terms of higher profits during the year as compared to the preceding previous year. In fact, the operating margin has declined from 6.2 per cent. to 5.17 per cent. Further, the taxpayer could not demonstrate as to what is the economic rationale and the commercial expediency that neces sitated group services when the business operations were carried on without any such services during the preceding previous years. Therefore, the arm's length price of payments made towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in judgment cited as CIT v. Cushman and Wakefield (India) Pvt. Ltd. [2014] 367 ITR 730 (Delhi) and operative part of the judgment is reproduced for ready reference as under : Section 92CA, read with section 37(1) of the Income-tax Act, 1961 -Transfer pricing-Reference to TPO (Section 37(1) v. section 92CA)-Whether jurisdiction of Assessing Officer under section 37 and TPO under section 92CA is distinct and, therefore, a referral made by Assessing Officer to TPO for limited purpose of determining ALP does not take away power of Assessing Officer to determine as to whether payment made by assessee to its AE for services rendered was basically an expenditure incurred for purpose of business so as to allow same under section 37(1)-Held, yes [In favour of revenue] Section 92CA of the Income-tax Act, 1961-Transfer pricing- Reference to TPO (General principles)-Whether authority of TPO is to conduct a transfer pricing analysis to determine ALP and not to determine whether there is a service or not from which assessee benefits-Held, yes-Whether, therefore, TPO cannot determine ALP of payments made by assessee to its AE at nil taking a view that assessee did not derive ..... 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