9911796707
TMI Blog2017 (6) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... garded as confirming to the ALP. The Assessee also filed a certificate of KPMG, LLP, Singapore, an independent third party accounting expert, certifying the basis of cost allocation by ANPAP for the various services rendered by the Assessee based on the evidence of services rendered by ANPAP to the Assessee. The TPO has not disputed the above cost allocation as well as the fact that the comparative cost charged by unrelated parties for similar services was at a margin of 5.1% of the cost. In view of our conclusion that the TPO and the DRP were in error in holding that the nature of services rendered by ANPAP were in the nature of stewardship activity or shareholder activity, we hold that the TPO’s conclusion no charges ought to have been paid by the Assessee. The charges paid by the Assessee to ANPAP are held to be at Arm’s Length. Consequently, the addition made by the revenue authorities in this regard are directed to be deleted and the appeal of the Assessee Services received by the Assessee from “ANDC” - Held that:- SAP system is ERP software which is required for the day-to-day running of the business. In view of the above facts, we are of the opinion that it improves alignmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich were considered by the DRP was also considered by the Hon’ble Supreme Court in the case of TRF Ltd. Vs CIT [2010 (2) TMI 211 - SUPREME COURT] and it was held by the Hon’ble Supreme Court that w.e.f. 01.04.1987 it is no longer necessary for a claim for deduction on account of bad debts written off that the assessee should establish that the debt in question has become bad. Determination of depreciation treating the sale of rubber chemical business as not slum sale - Held that:- In view of the decision of CIT(A) for A.Y.2006-07 holding that the sale in question was a slum sale, the disallowance of depreciation by the AO in the present A.Y.2009-10 which was a fall out of the finding of the AO in AY 2006-07 was rightly deleted by DRP. We however wish to add that this issue is consequential and dependent on the ultimate outcome on the question whether the same is a slump sale or not in A.Y.2006-07. With these observations we dismiss the additional ground of appeal raised by the revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... cost incurred by ANPAP for providing services to the Assessee plus a margin of 5% of such cost. The issue in the Assessee's appeal is as to whether the payment made by the Assessee under SLA is at Arm's Length as required under the provisions of Sec.92 of the Act. 5. Akzo Nobel Decorative Coating B.V. (hereinafter referred to as 'ANDC') is another company belonging to the Akzo Nobel group. Under an Agreement dated 23.3.2010, which is titled as 'Trinity Service Agreement' (hereinafter referred to as TSA), ANDC was to provide SAP software implementation programme during the period 2008-2010 to all Akzo Nobel Group companies belonging to the business area of Decorative Paints. As per TSA costs incurred are recorded, categorised and recharged based on the principles set out in Schedule 1 to 4 of the TSA which classifies costs as Expended costs, Capitalized Costs, Start up Costs and Local Akzo Nobel Own Account Costs. The issue in Revenue's appeal is as to whether the DRP was justified in coming to the conclusion that the payment made by the Asssessee to ANDC under TSA was at Arm's Length. 6. Consequent to globalization, multinational enterprises ("MNEs") set up their subsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, 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, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. 7. There is no specific mention of allocation of common cost in the Act. Services rendered are generally intangible and therefore difficult to identify the services actually received/rendered. In the first place it has to be proved that services were rendered. Secondly it has to shown as to how benefits were received by the entity paying. It is a settled principal in the Indian tax law and has been ruled out in various adjudications like EKL Appliances Limited [(2012) 209 Taxman 200 by the Hon'ble Delhi High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Administrations, 2010 (amended since 1995), lists the following as shareholder activities: costs of activities relating to the juridical structure of the parent company itself, such as parent company shareholder meetings, issuing shares in the parent company and supervisory board costs; costs relating to reporting requirements of the parent company, including the consolidation of reports; and costs of raising funds for acquisition by its participants 11. Furthermore, in relation to activities which concern more than one enterprise of an MNE, the OECD Guidelines state that shareholder activities should be distinguished from the broader concept of stewardship activities which include the following: Stewardship activities cover a range of activities by a shareholder that may include the provision of services to other group members, for example services that would be provided by a coordination centre. These latter types of nonshareholder activities could include detailed planning services for particular operations, emergency management or technical advice (troubleshooting), or in some cases assistance in day to-day management. Thus, in the case of central coordination and contro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain services were in the nature of stewardship services. Secondly the observations were made by the Hon'ble Supreme Court as to whether stewardship activity rendered by the holding company for the Indian subsidiary in India would constitute a Permanent Establishment (PE) within the meaning of Article 5(2)(l) of the DTAA between India and USA. In the present case the factual dispute is as to whether the nature of services rendered by ANPAP was in the nature of stewardship services or not. To this extent we have to conclude that the reference to the decision of the Hon'ble Supreme Court in the case of Morgan Stanley (supra) by the TPO in his order has to be held as not relevant. 14. Keeping in mind the principles emanating from the aforesaid discussion, we shall now proceed to examine the grounds of appeal of the Assessee and the Revenue in so far as it relates to issues arising out of Transfer Pricing Reglations. 15. First we shall take up for consideration, appeal by the Assessee. The main issue for consideration in this appeal is as to whether the consideration paid by the Assessee to ANPAP under the SLA is at Arm's Length. 16. The following are the criteria to determine ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intaining proper employee records, relevant job/project codes for respective employees, continuous personnel training and development on employee database (Peoplesoft). • Operations Supply chain and production management is a very critical factor in the assessee's business operations. This ensures that the flow of goods within the supply chain is performed in a cost-effective manner. The AE provides advice and assistance on plant activities including assistance in adherence to engineering and technical standards, assisting in forecasting projections in line with plant capacity, undertaking workshops, assistance in utility, waste and environmental management. In addition, AE also provides assistance and guidance on various cost saving mechanisms and assists in capturing market trends and uncertainties. • Purchasing The assessee receives services in the nature of advice and support on strategies to optimise cost efficiencies including processes involving leveraging prices from suppliers, assisting on inventory planning, etc. Further as a part of the Akzo group's suppliers support programme, the AE along with the assessee visit suppliers to leverage their global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll, the nature of services rendered, the e-mail in support of the Assessee's claim that ANPAP provided those services through e-mails and the benefit the Assessee received as a result of those services was given by the Assessee before the TPO in the form of a chart with cross reference to the page number of the paper book. The same is given as an annexure "A" to this order. 19. In the Transfer Pricing Study filed by the Assessee before the AO, the Assessee has not done individual analysis of international transactions but has combined all international transactions and compared the overall profits of the Assessee with comparable companies and claimed that all international transactions were at Arm's Length. This approach of aggregation is not correct and against the provisions of the Act. Therefore, it would not be worthwhile to discuss the Transfer Pricing Study of the Assessee filed in Form No.3CEB. However the Assessee made up for this deficiency by filing along with its submission dated 5.11.2012 before the TPO report dated 30.6.2009 of Pricewaterhouse Coopers LLP, Chartered Accountants. In such a report a search for similar independent service providers providing services tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and therefore whatever consideration was paid by the Assessee should be added to the total income of the Assessee as Arm's Length Price was nil. The DRP was of the view that the services were rendered by ANPAP to the Assessee and that the Assessee benefitted from such services. Having held so, the DRP contradicted its own finding by holding that majority of the services helped the parent company in supervising and controlling subsidiary company and therefore the services were in the nature of "Stewardship Services". The DRP also concluded that some benefit would have accrued to the Assessee as a result of such services but such services cannot be determined with certainty and therefore the conclusion of the TPO should be upheld. The following were the conclusions of the DRP in this regard. "1.4.4. The evidences and other information submitted by the assessee before the TPO have been gone through. It is evident that the services received form Akzo Nobel Paints (Asia Pacific) Pte Ltd have benefitted the Indian assessee also. But the assessee has not discussed the aspect of how these services have been useful and benefitted the parent also in executing its supervisory and control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to as "Ld. Panel") and consequently incorporated by the Deputy Commissioner of Income Tax (hereinafter referred to as "Ld. AO") in the assessment order u/s 143(3) r/w section 144C(13) of the Act, is erroneous on facts and bad in law. 2. That on the facts and in the circumstances of the case, Ld. Panel erred in confirming the adjustment of ₹ 39,411,875/- to the international transactions of the appellant with its Associated Enterprise (hereinafter referred to as 'AE') Akzo Nobel Paints (Asia Pacific) Pte. Ltd., Singapore. 3. That on the facts and in the circumstances of the case, the Ld. Panel on perusing through the nature of services, evidences of services, ensuing benefits and pricing of services, had acknowledged the receipt of benefits to the appellant in its business operation but still grossly erred in disallowing the entire payment without any basis. 4. That on the facts and in the circumstances of the case, Ld. Panel while acknowledging the receipt of benefit to the appellant in its business operation, had erred in not providing due cognizance to the audited cost allocation statement showing segregation of cost incurred by AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of services to be available to its members, in particular administrative, technical, financial and commercial services. Such services may include management, coordination and control functions for the whole group. (emphasis added) The U.S. regulations define an intra-group service in the following manner (Treas. reg. § 1-482-9(1)(1)): Controlled services transaction - (i) In general. A controlled services transaction includes any activity (as defined in paragraph (1)(2)of this section) by one member of a group of controlled taxpayers (the renderer) that results in a benefit (as defined in paragraph (1)(3) of this section) to one or more other members of the controlled group (the recipient(s)). Thus, as per this definition of services, first there should be an activity performed by one of the members of a group of related parties which lies within the ambit of definition of activity (the 'activity test') and second, that activity should result in a benefit (the 'benefit test') to one or more members of that group of related entities. The OECD Guidelines also concur with this view in paragraph 7.5: There are two issues in the analysis of transfer pricing fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omic or commercial value to enhance its commercial position: This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity inhouse for itself. If the activity is not one for which the independent enterprise would have been willing to Pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm's length principle. (emphasis added) 28. As we have already observed the question we need to decide is as to whether the services rendered by ANPAP can be said to be stewardship services. If the answer is in the negative, then we need not go into the question regarding rendering of services, benefit received by the Assessee, ALP of the price paid by the Assessee, as these have not been disputed by the TPO and hence we have to proceed on the basis that the TPO was otherwise satisfied that the price paid under SLA was at Arm's length. The TPO's observation on the nature of services rendered by ANPAP was that it was in the nature of Stewardship activity. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 89 Deciding to consolidated foreign Offices; travelling to such offices to solve personnel problems. General supervisory services offices; travelling to such offices in attempt to control to solve personnel problems activities of subsidiaries Specific services considered in decisions of the US Courts on stewardship activity, monitoring and supervisory activity and 'direct and proximate benefit test', has also been highlighted by the TPO in his order: Service Type Reference Diligent efforts to provide the subsidiary with highest feasible sales revenues, including shutting down a U.S. plant in order to keep the subsidiary in production; The establishment of artificial and unreasonably high prices to help the subsidiary in production; and The provision of personnel who served as members of the board of directors and officers of the subsidiary Merck & Co. v. United States, 24 Cl.Ct.73 (1991) Audits by the parent Reporting requirements of the parent, Reviewing of contracts by the parent, Providing for consistency of accounting systems etc Business development activities H Group Holding Inc. v. Commissioner, TCM 1999-334 (1999) 29. As far as the Intra group services rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er commented that the services were in the nature of control, supervisory, monitoring functions. By way of illustration let us take item No.1 of the list of services, which were claimed by the Assessee to be relating to Marketing. The Assessee has referred to a mail from Anton (Singapore) providing access to internet site and enable configuration for all users to facilitate distribution of campaign information. This was in connection with the new guidelines for Teaser Campaign (must be for a new product launch). The benefit was to enable group companies to utilize marketing strategies uniformly so that commercially all group companies benefit. This was named as "Control, supervisory, monitoring function" by the TPO. Similarly item No.2 of the list of services given in Annexure "A" to this order, which is a function relating to "Information Technology", makes a reference to a mail for updation of country level lotus note user headcount by each entity to Singapore personnel. This was to enable creation of a data back for all users and enable carrying out planning and strategic activities for IT services. This was termed as "Control, supervisory, monitoring function" by the TPO. Annex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Assessee to its AE should be regarded as confirming to the ALP. The Assessee also filed a certificate of KPMG, LLP, Singapore, an independent third party accounting expert, certifying the basis of cost allocation by ANPAP for the various services rendered by the Assessee based on the evidence of services rendered by ANPAP to the Assessee. The TPO has not disputed the above cost allocation as well as the fact that the comparative cost charged by unrelated parties for similar services was at a margin of 5.1% of the cost. In view of our conclusion that the TPO and the DRP were in error in holding that the nature of services rendered by ANPAP were in the nature of stewardship activity or shareholder activity, we hold that the TPO's conclusion no charges ought to have been paid by the Assessee. The charges paid by the Assessee to ANPAP are held to be at Arm's Length. Consequently, the addition made by the revenue authorities in this regard are directed to be deleted and the appeal of the Assessee ITA No. 531/Kol/2014 is allowed. 33. We shall now take up for consideration the Transfer Pricing issue that arises for consideration in the appeal by the Revenue. We have already seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to each country. Schedule 3 - Start up Costs These costs would be incurred and expensed via invoices from third party suppliers and would be allocated on a per user basis to a deployment country as a one-time start lip fee at the point of go-live. Schedule 4 - Local Akzo Nobel Own Account Costs The costs referred to hereinabove would be incurred and expensed directly by the local deployment country with no recharge taking place to the central Trinity project. SAP system is ERP software which is required for the day-to-day running of the business. It improves alignment of strategies and operations and helps in achieving corporate objectives by aligning workforce and organizational objectives. Implementation of SAP leads to improved productivity and reduce costs through increased flexibility. It also helps in increased profitability, improved financial control, and management of risk as well as optimization of IT spending. 35. The assessee also submitted evidence of communication, training manuals and other documents shared which evidence the valuable assistance provided by ANDC as well as the nature of services received under the TSA framework. The Details of benefits emanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who are involved in enhancing the SAP kernel, including implementing new functionality and extending/enhancing current functionality. • Identification of resources - Separately, the AE identifies and employs resources and external consultants for assistance in upgrading the system implementing various functionalities. 38. It was reiterated that in relation to SAP deployment and implementation, ANDC acted as a cost pooling and recharging centre wherein the costs are recharged to the Akzo Nobel N.V. group of companies on the basis of principles defined in the agreement for each category of cost by ANDC and under each stage from deployment of SAP to its final implementation i.e. go-live. The costs recharged primarily include third party licensing costs or costs incurred by ANDC (which include reimbursement costs and other expenses incurred by ANDC). It was reiterated that the TPO has erred in judging the commercial expediency of the transaction of installation of SAP by viewing that the decision was not feasible from the point of view of a company with turnover similar to the assessee's. Reliance was placed on the decision of the Hon'ble Delhi High Court in the case of EKL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are spread across the country for sales order and billing, sales return, material receipt from factories, inter depot stock transfer payment receipting and adhoc requisition 2. 4 regional sales Offices for credit management,' bank reconciliation, bill booking, accounts payable and journal voucher 3. 3 factories for back-end operations like manufacturing, shop floor control, purchasing, accounts payable etc. 4. Head office for master data management (customer, vendor, product, price), bill booking and. accounts payable, asset accounting, journal voucher and overall Controlling. SAP is used for Product costing and Finished products stock valuation. The' data related to production quantities and values as. well as RM/PM consumption values and quantities are down loaded from BPCS running in the three factories and all stock, movement data from Depots are down loaded from SAP for this purpose. The company has used the said software for integrating the processes at the above varied locations of the business. This ensures that there is one version of the data available at all locations thereby providing huge benefits to the accounting and manufacturing processes at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solely because of its ownership interest in one or more other group members, i. e. in its capacity as shareholder. This type of. activity would not. justify a charge to the' recipient companies. It may be referred to as a 'shareholder activity'. In view of the nature of services being; received by the assessee, we are of the opinion that had the assessee not received such support from its AE, it would to perform the functions In-house, or hire experienced and trained service providers. Hence, such services are not in the nature of simply oversight ions, which' have been performed by ANDC to protect its investment in the company. 2.5.8. SAP system is ERP software which is required for the day-to-day running of the business. In view of the above facts, we are of the opinion that it improves alignment of strategies and operations and helps in' achieving corporate objectives by aligning workforce and organizational objectives. Implementation of SAP. leads to improved productivity and reduce costs through increased flexibility. It also helps in increased profitability, improved financial Control, and management of risk as well as optimization of IT spending. Hence it would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nner of cost allocation and the bench marking approach adopted by the Assessee. We have considered the rival submissions. 43. We have considered the rival submissions. A voluminous set of documentary evidence such as sample evidences of communications, training manuals, and other relevant documents was submitted with the transfer pricing officer vide Annexure 1 to submission dated 15 January 2013 ( page 907 - 2305 of the paperbook). The documentary evidence shows valuable commercial services received from ANDC. It is also not disputed that the SAP implementation services was rendered exclusively for Akzo Nobel N.V group of companies and that services similar to this was not provided to any third party. The commercial essence of Trinity agreement is embedded in the fact that ANDC was a recharging entity for the costs incurred with respect to implantation of SAP platform in participating entities and thus, the Assessee through execution of the agreement had subscribed to a cost effective means of implementation of SAP platform which led to an increase in its operational, accounting and management reporting efficiencies. SAP system is ERP based software which is required for day to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rates all information and data on one system and therefore the services should be construed as Stewardship services. The This approach of the TPO was erroneous. Assessee has substantially grown in the highly competitive market and with the help of operational efficiency achieved has been able to post a robust revenue growth. The same is evident from the table presented underneath: Particulars FY 2007-08 FY 2008-09 FY 2009-10 FY 2010-11 Sales 8,988 9,970 9,909 11,732 Operating Margin 9.25% 10.73% 12.96% 10.08% 44. As per Trinity Agreement costs were recorded, categorized and recharged based on principles which have already been given while discussing the facts and circumstances under which the issue in question arise for consideration. Suffice it to say that the manner of allocation of cost is scientific and correct. We may add that the basis of determination of cost has not been disputed by the TPO. Therefore we presume that the TPO has no grievance in so far as the manner of arriving at the cost for SAP implementation and that the cost is at Arm's Length. Thus based on the above, the payment towards SAP deployment services are in accordance with transfer pricing re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and closing of total investments and similarly average of investments yielding exempt income and offered manpower cost as disallowance in proportion to the proportion of investments yielding exempt income to average total investments. The figure of proportionate manpower cost comes to ₹ 1,131/-. 47. The AO however was of the view that the expenditure offered by the assessee under section 14A by the above methodology was not acceptable. He proceeded to apply Rule 8D of the Rules by estimating operating cost of ₹ 1,00,000 per month and manpower cost ₹ 29,36,078/- which was the total expenditure debited to the profit and loss account by the Assessee under this head. The Assessee did not disallow any interest expenditure because there was no borrowed funds on which interest was paid that were used to make investments that yielded tax free income. The AO however proceeded to compute disallowance u/s.14A of the Act, as follows: Rule 8D(i) (as discussed) 2,936,078 Rule 8D(ii) A. Interest Expenses 29,300,000 B. Avg. value of investment, income from which does not form part of total income 5,237,725 C. Total Assets as per computation below 12,442,200,000 A*B/C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. claim would not suffice. 4.6: Further, while applying Rule 8D, only unallocable interest expense needs to be taken into account for computing disallowance u/s 14A. However; the AO erred in allocating the interest expenses to the exempt income earned. whereas there were no interest expenses incurred by the assessee during the F.Y. 2008- 09. The amount disclosed as interest was mainly on account of bill discounting charges and cheque collection charges paid to the banks for conducting the business operations of the assessee." 4.7. In view of the aforesaid, application of Rule 8D is not warranted and direction is given to the AO to accept the computation of assessee." 51. Aggrieved by the order of DRP the revenue has raised ground no.1 before the Tribunal. The Ld. DR reiterated the stand of the revenue as reflected in ground no.1. 52. We find in the light of the admitted factual position that no loan funds were in the books of accounts of the company, there cannot be any question of payment of interest against the loan funds and consequently disallowance of interest expenses in terms of Rule 8D(2)(i) or (ii) of the Rules. Since there is no unallocable interest the DRP has right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section (2) of the section to provide that the claim for the bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee. 6.4. In as much as the assessee in the annual accounts for FY 2008-09 has written off an amount of ₹ 3,24,04,575/- as bad debts which was claimed in the return of income the AO is directed to allow the claim of the assessee as it is in accordance with the law." 55. Aggrieved by the order of DRP the revenue has raised ground no.2 before the Tribunal. The Ld.DR reiterated the stand of the revenue as reflected in the grounds of appeal. We are of the view that there is no merit in ground no.2 raised by the revenue. The DRP has placed reliance on the amendment to the law and the CBDT Circular. The amendment to the law and CBDT circular which were considered by the DRP was also considered by the Hon'ble Supreme Court in the case of TRF Ltd. Vs CIT 323 ITR 397 (SC) and it was held by the Hon'ble Supreme Court that w.e.f. 01.04.1987 it is no longer necessary for a claim for deduction on account of bad debts written off that the assessee should establish that the debt in question has become ..... X X X X Extracts X X X X X X X X Extracts X X X X
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