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TMI Blog2017 (6) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... ccounting 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 alignment of strategies and operations and helps in' achieving corporate objectives by aligning workforce and organizational obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - I.T.A No. 531/Kol/2014, And I.T.A No. 335/Kol/2014 - - - Dated:- 3-5-2017 - Sri N.V.Vasudevan, JM And Dr.Arjun Lal Saini, AM For The Assessee : Shri S.P.Singh Shri Manoneet Dalal (AR) For The Department : Shri G.Mallikarjuna, CIT(DR) ORDER Per N.V.Vasudevan, JM ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 subsidiaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, international 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 H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delines for Multinational Enterprises and Tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicant before the Authority for Advance Ruling (AAR) that certain 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attain functiona1 excellence in the area of Human Resource and assisting in maintaining 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee s paper book. The gist of the services and the category in which those services fall, 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 Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in the nature of stewardship services/activities and therefore no consideration was payable for such services 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 aspec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to as the 'Act'), subsequently confirmed in part by the Dispute Resolution Panel, Kolkata (hereinafter referred 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ival submissions. As per the OECD Guidelines paragraph 7.2: Nearly every MNE group must arrange for a wide scope 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 OEC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r more group members by another group member should depend on whether the activity provides a respective group member with economic 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tewardship Para 84 Visiting the subsidiary's clients, on the spot supervision -Do- Para 86 Making presentations for getting new business; getting third parties to give business to subsidiaries in particular markets -Do- Para 88 To make certain that the various offices maintained plaintiff's production standards and that the subsidiaries perform their duties to their client's satisfaction -Do- Para 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm ought to have been given due consideration. Hence, for the purpose of demonstration and explanation, the assessee has submitted documents evidencing the regular flow of valuable commercial services. From the above details submitted by the assessee it has been amply demonstrated that the benefits generated by the said services during the relevant financial year have undeniably added economic / commercial value to enhance the commercial position of the assessee and such services are received by the assessee on a continuous basis across its operational areas. Hence it is erroneous to classify the services to be in the nature of stewardship services. 30. The TPO in his observations on each of the items of service set out in Annexure A to this order 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as established the nature of services including quantum of services received from ANPAP, that services were provided in order to meet specific need of the assessee for such services, the economic and commercial benefits derived by the assessee from intra group services. In its submission dated 5.11.2012 filed before the TPO, the Assessee filed report dated 30.6.2009 of Pricewaterhouse Coopers LLP, Chartered Accountants. In such a report a search for similar independent service providers providing services that were provided by ANPAP under SLA was identified and it was found on such analysis that similar services provided by and to unrelated parties were at an average margin of cost + 5.1% and it was opined that the cost + 5% margin for similar services paid 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement 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 costs or costs incurred by ANDC. As per the agreement, the costs are recorded, categorised and recharged based on principles which can be summarised as given below. Schedule 1 - Expensed Costs These costs include deployment specific costs and operational IT support cost. Schedule 2 - Capitalized Costs These costs include kernel enhancing assets or assets on which the system operates and are deemed to be global in nature and not able to be assigned directly to an individual country/ deployment. From the date of go-live the costs are allocated for a period of 5 years on a per user basis 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group. 37. Before DRP the Assessee reiterated submissions made before the TPO. In particular, it was highlighted that the following services were provided by ANDC to the assessee, viz., : - Resources - Deployment of SAP for the users of the assessee including establishing a central deployment team and training of local resources to provide support at hand to the assessee. Training - The AE also conducts training of users to enable them to adapt to the new system once it is implemented. Infrastructure support - Once the SAP system is implemented i.e. from the 'Go live' date the AB provides support in setup and maintenance of software infrastructure. Improvement in functionality - A team is setup comprising of technical and business resources 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions made before it, the DRP deleted the addition made by the TPO for the following reasons: 2.5.1 The assessee through execution of this agreement, has subscribed to a cost effective means of implementation of SAP Platform: which would lead to an increase in its operational accounting and. management 'reporting efficiencies. 2.5.2 The assessee has submitted, evidences of communications, training manuals and other documents shared which evidence; the valuable assistance provided by ANDC as well as the nature of services received' under the framework. 2.5.3 Further, the assessee submitted that it runs SAP hosted through the head office at Gurgaon. The SAP system is used by the following teams of the assessee spread across India: 1. 60 depots: of the assessee, 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvation of the TPO that SAP is not feasible for the assessee considering its turnover' is very subjective and not supported by any criteria. Nor he mentioned the level of turnover which would justify the implementation of SAP. 2.5.7 Further, reference is drawn to paragraph 7.9. of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations OECD Guidelines - Chapter on Intra-group services), which provides that: In a narrow range of such cases, an intra group activity may be performed relating to group members even though those group members do not need the activity (and would not be; willing to pay for it were they independent enterprises), Such an activity would be one that a group member (usually the parent company or a regional holding company) performs 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. Gr.No.3 raised by the Revenue reads as follows: 3. That is the facts and in law of the case the Ld. Members of the DRP erred in admitting the fact that the support services received by the assessee company from its associated groups located in USA had no untoward adjustment made by the TPO. In the second adjustment as well, the ld. Members of the DRP had failed to provide sound reasons behind the deletion of TP adjustment of ₹ 3,75,20,000/-which is beyond doubt that the TPO had classified every details of the support services with subtlety. 42. The learned DR relied on the order of the TPO. The learned counsel for the Assessee reiterated submissions made before DRP and relied on the order of the DRP and drew our attention to the evidence in support of benefits received by the Assessee, manner 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanning and manufacturing processes; 2. Approval processes 3. Application of Lotus Notes workflow tool All the above systems are seamlessly integrated with each other through a set of complex interface programs, which run automatically without any manual intervention in most of the cases. It is also not disputed that the Assessee also receives constant and continuous information over calls, audio-video conferences, personnel visits, etc. The Ld. TPO did not consider the plethora of facts, justifications, details and arguments as presented by the Assessee and proceeded on the basis that because the Group decided to implement SAP, the Assessee had to bear the cost allocated to it and thus implementation of SAP is part of quality control, supervision and monitoring function of the Group (through group entities) which integrates 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 tabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income which does not form part of the total income. Sec.14-A of the Act provides that no expenditure which is incurred for the purpose of earning income which does not form part of the total income under the Act, shall be allowed as a deduction in computing total income. Rule 8D of the Income Tax Rules, 1962 (Rules) provides the manner in which disallowance u/s.14A of the Act has to e made. The Assessee made a suo-moto disallowance of ₹ 2,41,131/- in the computation of total income as expenditure incurred in earning income which does not form part of the total income under the Act. The disallowance was made by the Assessee on the basis of its estimate of proportionate manpower cost and operating cost incurred during the relevant previous year. The Assessee estimated it s operating Cost at ₹ 20,000/- per month on stationery, fax, postage, telephone, conveyance etc., at made disallowance of ₹ 2,40,000/-. For computation of proportionate manpower cost, the Assessee estimated total manpower cost at ₹ 17,36,078/-. Thereafter, assessee has computed average of opening and closing of total investments and similarly average of investments yielding exempt income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.03.2008 6.75% Government of India Tax free bonds 6,204,630 ICICI Bank Limited 2,135,410 2,135,410 Total 2,135,410 8,340,040 Average Investments 5,237,725 48. Since total expenses disallowable under section 14A works out to ₹ 29,74,601/- (Rs.29,36,078 under Rule 8D(2)(i), + ₹ 12,334/- under Rule 8D(2)(ii) + and ₹ 26,189/- under Rule 8D(2)(iii)) and since assessee has already suo motto disallowed ₹ 2,41,131/- the balance amount of ₹ 27,33,470/- was disallowed by the AO and added to the total income of the Assessee. 49. Before the DRP the assessee submitted that there was no borrowed funds on which interest was paid that was used to make investments which yielded tax payable income and that the entire investments were made out of assessee s own funds. The assessee accordingly prayed that there can be no disallowance of interest expenses in terms of Rule 8D(2)(i) (ii) of the Rules. As far a disallowance of expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 53. As far as ground no.2 raised by the revenue is concerned the facts are that the assessee claimed deduction on account of bad debts written off of a sum of ₹ 3,24,04,575/-. The assessee filed party-wise break up of the bad debts written off during the previous year. The AO however disallowed the claim of the assessee for deduction on account of bad debts for the reason that the assessee failed to provide the evidence in support of write off of bad debts. In other words, the AO was of the view that the debt in question has not been established by the assessee to have become bad and therefore deduction on account of bad debts written off cannot be allowed. 54. On objections by the assessee against the above order of the AO, the DRP allowed the claim of the assessee observing as follows :- 6.2. With the amendment to 36(1)(vii) and 36(2) vide Direct tax laws (Amendment) Act, 1987, there is no more requirement to prove that the debt has actually gone bad. It is enough in case the debts are written off as bad in the account of the assessee. 6.3. Further, attention is invited toward Circular No.551 dated 23-01-1990 (1990) 183 ITR St 37 issued by CBDT wherein the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer pricing issues in the earlier part of this order. 57. As far as the additional ground of appeal raised by the revenue is concerned the facts are that the Assessee sold its Rubber Chemical business to M/s PMC Rubber Chemicals on slump sale basis during the previous year relevant to AY 2006-07. However, in the order passed u/s 143(3) for AY 2006-07, the Assessing Officer did not accept that there was a slum sale and treated the sale as an item wise sale of assets u/s 41(2) of the Act. Consequently, the Assessing Officer did not accept the value of opening written down value (wdv) of block of assets as claimed by the Assessee, which he determined at a lower figure consequent to his finding that there was itemised sale of assets and not a slump sale. The action of the AO resulted in disallowance of depreciation in AY 2006-07 and consequently the WDV of the depreciable assets also was shown at a lesser figure. The depreciation claimed by the Assessee in this year as per the return of income was also substantially reduced because of the lower WDV on which depreciation was to be allowed as a consequence of the action of the AO in AY 2006-07. This resulted in lower allowance of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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