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TMI Blog2017 (6) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... officer erred on facts and in law in completing the assessment under section 144C read with section143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 6,11,08,644 as against the income of Rs. 3,77,44,037 returned by the appellant. 2. That the assessing officer erred on facts and in law in making an adjustment of Rs. 2,33,64,607 allegedly on account of the difference in the arm's length price of the international transactions undertaken by the appellant on the basis of the order passed under section 92CA(3) of the Act by the TPO. 3. That the DRP/TPO erred on facts and in law in making an adjustment of Rs. 39,89,080 to the arm's length price of the 'international transaction' of receipt of administration and support services on the basis of the order passed under section 92CA(3) of the Act by the TPO. 3.1 That the DRP/TPO erred on facts and in law in determining the arm's length price of the transaction of payment of administration and support services fee to the associated enterprise without providing any cogent reasons and basis. 3.2 That the DRP/TPO erred on facts and in law in holding that arm's length price of the 'inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in the distribution segment perform the necessary functions for provision of agency services. 4.4 That the DRP/TPO erred on facts and in law in allocating common expenses to the agency segment in the ratio of sales, resulting in disproportionate allocation of expenses not appreciating that such expenses ought to have been allocated in the gross profit ratio. 4.5 That the DRP/TPO erred on facts and in law in using inappropriate quantitative filters which are not based on any rational or reasonable basis. 4.6 That the DRP/TPO erred on facts and in law in selecting the following companies which are functionally dissimilar to the appellant as comparable companies for the purpose of benchmarking analysis: a) Cybermedia Online Ltd. b) Global Procurement Consultant Limited c) HCCA Business Services Pvt. Ltd. d) TSR Darshaw Ltd. 4.7 That the DRP/TPO erred on facts and in law in rejecting the following comparable companies identified by the appellant for the purpose of benchmarking analysis: S. No. Name of the company Reasons for rejection 1. Educational Consultants India Ltd. Functionally different 2. Indian Tourism Development Corporation Ltd. Functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest to be charged on delay in receipt of receivables without appreciating that such rate is applicable on loans availed in India in domestic currency. 5.4 Without prejudice, the DRP/TPO erred on facts and in law in further adding a markup of 300 bps to the PLR of SBI, on account of adjustment for security and transaction cost, without providing cogent reasons and on the basis of his surmises and conjecture. 5.5 Without prejudice, the DRP/TPO erred on facts and in law in disregarding the fact that since the receivables outstanding from the associated enterprises were denominated in foreign currency, interest rate computed on the basis of UBOR rates shall be applied being applicable on loan available in the international market. 5.6 Without prejudice, the DRPITPO erred on facts and in law in incorrectly imputing the interest on receivables for a period beginning from the date of invoice till the realization date, without appreciating the fact that interest is to be computed upto 31.03.2010. 5.7 Without prejudice, the DRPITPO erred on facts and in law in not setting off the amount of payables outstanding from the receivables. 5.8 Without prejudice, the DRPITPO erred on fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal transaction and applied the "principle of benefit test" and proceeded to apply CUP as the most appropriate method and thereby benchmarked the international transaction of intra group services at nil and proposed the addition of Rs. 39,89,079/-. 4. TPO noticed with regard to commission income that the assessee has aggregated the same with import of product and treated it as closely linked transaction and benchmarked the same by using TNMM. Again, TPO rejected the combined transaction approach and treated it as a separate international transaction and by treating the functional similarity with commission income with market service commission, he benchmarked the same by selecting comparables in the market support service segment and thereby proposed an adjustment of Rs. 1,64,90,548/-. 5. TPO also noticed that the payment received by the assessee from AE was not as per the terms of the service agreement and consequently held that the taxpayer had provided benefits to its AEs by advancing interest free loan under the garb of delay of receipt of receivable which is an international transaction u/s 92B(1) read with Explanation (i)(c). So, TPO after using CUP method and by taking cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of benefit test" applied by the ld. TPO is to be seen from the standpoint of assessee and businessman and not from the view point of the Revenue. 12. However, ld. DR for the Revenue in support of order passed by TPO / DRP contended that in the earlier years, no such payment was made by the assessee as is evident form Agreement operative w.e.f. 01.01.2010 with only 2 AEs whereas the payment during the year under assessment has been made to 4 AEs and further contended that prior to 01.01.2010, the assessee was not availing these services form 4 AEs and was in a position to perform these services itself nor the assessee has furnished any details regarding corresponding reduction of its expenses w.e.f. 01.01.2010 and as such, the TPO has correctly segregated the aforesaid transactions for the purpose of benchmarking transactions and relied upon Knorr-Bremse India (P.)Ltd. vs. ACIT, Circle I, Faridabad - (2015) 63 taxmann.com 186 (P&H). 13. However, TPO at page 125 of the order observed that the assessee has not received any services of some value that call for cost allocation by making following observations :- "5.6 On the basis of above, it can be seen that in order to examine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd direct benefits derived. by the taxpayer company from the use of such intra-group services. (viii) Details and documentary evidence of cost incurred by the AE for rendering each type of services purportedly received by the taxpayer company." 16. Ld. DRP agreeing with the TPO held that since the taxpayer has just explained in generic nature about the benefits vis-à-vis the intra group services payment, the TPO was right in holding the value of services to be as 'Nil' and thus proposing the adjustment. 17. However, assessee used TNMM as the most appropriate method and brought on record evidence of receipt of services in the shape of agreement, available at pages 261 to 265 of the paper book, Annexure 1 available at page 264 of the Paper Book, service charge summary available at page 265, second agreement available at page 266, invoice raised by the AE available at page 271 onwards, the complete detail is given in the table reproduced in the succeeding para no.31 of this order. 18. The coordinate Bench in GE Money Financial Services Pvt. Ltd. (supra) determined the identical issue as to whether administrative support services fee is liable to be determined at nil for b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of concrete evidence but the way business is conducted, one can perceive the same. Assessee has given a detailed write-up as well as the services provided and benefit obtained which were not contradicted. The Assessing Officer did not believe the same in the absence of concrete evidence. Unless the Assessing Officer steps into assessee's business premises and observes the role of these companies/assessee's business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations. What sort of evidence satisfies the AO is also not specified. Assessee has already placed lot of evidence in support of claims. Therefore, on that count, we are not in agreement with the Assessing Officer and TPO that services were not rendered by the group companies to assessee." Hence in view of the overwhelming evidence placed by the assessee for receipt of services and following the decision of coordinate bench respectfully, we are of the view that rendering of services must be seen from the view point of the assessee and further assessee cannot be asked to keep and maintain evidences of services rendered by AE higher than which is expected from a busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Service Agreement. Invoice - Page 271 - 273 Shared Service Agreement Page 261 - 265 Mails - Page 385 - 388 Mail - Page 394 - 395 (allocation) Corning Development Inc. Singapore Human resource support services and training services 1,160,239 Associated enterprise allocates only 35% of the actual monthly cost incurred on an estimated basis. Corning, Singapore does not allocate 100% of the cost incurred for providing services to the appellant. Thereafter, 5% mark-up is added to the cost in terms of the Shared Service agreement entered with Corning, Singapore. Invoice - Page 296 - 297 Agreement - Page 266 - 270 Mails - Page 389 - 393 Corning Display Technology, Taiwan IT Support services including setting up of systems technical assistance etc. 549,725 Corning, Taiwan is remunerated on a cost plus 5 percent markup wherein cost includes all direct and indirect cost incurred in provision of the services Invoices - Page 300 - 301 1. The TPO, in the impugned order, determined the value of international transaction of payment of administrative and support fees at 'nil' allegedly holding that no services were actually received by the assessee. It would be ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e third party vendors shall be involved in processing the same transactions. Recently, Delhi Bench of the Tribunal in the case of GE Money Financial Service Pvt. Ltd. vs. ACIT (supra), held that benefit test for determination of ALP is to be seen from the perspective of the assessee and businessman and not from the perspective of revenue. 3. The TPO, in the impugned order, allegedly held that the services were not actually needed by the assessee. As per the group policy, all Corning Group entities have a mandate to avail support function services from the respective shared service centers to avail the benefit of low cost, specialization and confidentiality. Delhi Bench of the Tribunal in the case of GE Money Financial Services Pvt. Ltd. vs. ACIT (supra), held that the assessee pays for the services only if it receives benefit from the services. Reliance is also placed on the following decisions: i. M/s. Control Techniques India Pvt Ltd. vs. JCIT (ITA No. 2575/Mds/2016) ii. CIT vs. Max India Ltd. (ITA No. 186/2013) (P&H HC) iii. CIT vs. EKL Appliances Ltd. 345 ITR 241 iv. Ericsson India Pvt. Ltd. vs. DCIT (ITA No. 5141/De1l2011) v. Dresser Rand India Pvt. Ltd. vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Knorr-Bremse India(P.) Ltd. v. Assistant Commissioner of Income-tax, Circle-I, Faridabad (2015) 63 taxmann.com 186 (Punjab & Haryana) wherein the Hon 'ble High Court has held that the closely linked transactions can, in a given situation, be components of a single composite transaction but the assessee would, however, have to prove that although each sale and each provision of service is priced separately, they were all provided under one composite agreement which constitutes an international transaction. The Hon'ble ITAT Delhi has followed the above judgment in case of Gruner India (P.) Ltd. [2016] 70 taxmann.com 240 (Delhi - Trib.). Even in case of assessee itself it has been held by the Hon'ble ITAT in the earlier assessment years that distribution business cannot be aggregated with the commission business. TPO has adopted CUP for benchmarking which is also the Most Appropriate Method under the circumstances. TPO has discussed in detail that assessee was not able to substantiate receipt of any services from the AE. The assessee also failed to establish the need for such services. The TPO further held that the services provided were duplicate in nature and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at "nil". ' The Hon'ble ITAT Delhi has held in case of GE Money Financial Services (P.) Ltd. [2016] 69 taxmann.com 420 (Delhi - Trib.) after considering the judgment of Hon'ble Delhi High Court in case of Cushman and Wakefield [ 2014 ] 46 taxrnann.com 317 (Delhi) that- "The TPO can compute NIL ALP after conducting benefit test, need test and rendition lest. The benefit test is necessary part of determining arm's length price of any international transaction. This is so because if there is no need of any services (i.e. need Test), it would not be paid by the independent parties. Similarly if the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termined having regard to arms length price of such benefit, service or facility received by the enterprise and as such, "the benefit test" is necessary for determination of arms length price of any international transaction. In other words, services are need based and no fee shall be paid if services were not rendered. Furthermore, if the services though required and are rendered but are not needed / beneficial to the receiver then independent parties need not to pay for such services. 24. In other words, an independent party would not require to pay services in case services are not required; if they are not rendered if they do not pass the benefit test or if the services are not needed by the assessee. 25. We have considered the contentions raised by the ld. Representatives of the parties to the appeal, case laws relied upon and provisions contained under the Act and came to the conclusion inter alia :- (i) that so far as question of receipt of services by the assessee from its AE is concerned, ld. DRP in para 11.3 of its order admitted that the assessee has received services but the explanation given about the benefit derived by the taxpayer are too generic in nature in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... countries Tax regime have to be seen for allowing the payment in case of Intra-group services. The expected benefit must be sufficiently direct and substantial so that an independent entity in similar circumstances, would be prepared to pay for it. If no benefits have been provided (or was expected to be provided), then the services cannot be charged for. In view of the above, since the taxpayer has just explain in generic nature about the benefits vis-a-vis the intra-group' services' payment, hence this DRP holds that TPO is right in holding the value of services to be as "Nil" and thus proposing the adjustment." (ii) that furthermore, the assessee has brought on record the evidences as to the receipts of the services in the forms of agreements available at pages 261 to 265 and 266, Annexure 1 available at pave 264 and invoices raised available at page 271 onwards. 26. When it is not in dispute that the services were actually received by the assessee, the second question arises for determination is :- "as to whether assessee has failed to provide rationale or need for receipt of such services as held by ld. DRP?" 27. The ld. AR relied upon decisions rendered by Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised." 28. Furthermore, Hon'ble High Court of Punjab & Haryana in the judgment in M/s. Knorr- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, Hon'ble Delhi High Court in judgment cited as EKL Appliances Ltd. (supra) held that the assessee was not required to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in the subsequent year. Similarly, Hon'ble Punjab & Haryana High Court in the judgment in M/s. Knorr-Bremse India Pvt. Ltd. (supra) also held that the assessee is not required to establish that it has benefited from the international transactions by taking services from its AE. So, in these circumstances, contentions raised by ld. DR are not sustainable. 31. So far as question of absence of agreement prior to 01.01.2010 as raised by ld. DR is concerned, the services can be taken by the assessee from its AE even without agreement and even otherwise the factum of receipt of services is not disputed by the DRP as discussed in the preceding paras. So far as question of requirement of such services as contended by the ld. DR is concerned, again we are of the considered view that the requirement has to be seen with the standpoint of businessman and not the TPO/AO. Assessee has otherwise demonstrated details of hour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved to "People's Software" is sustainable because it is brought on record by the assessee that the services availed were need based. Even otherwise, it was beyond the purview of TPO to examine the need for such services and to apply the benefit test. Moreover, when services availed of by the assessee are need based the same may be availed of even without having any agreement. 34. Ld. AR contended that as a group policy Corning group entities are mandated to avail support services from respective share service centers to avail the low cost, specialization and confidentiality and as such administrative support services were taken from the AEs. This contention raised by ld. AR is sustainable as the decision to run the business in a particular manner is to be taken by the businessman and not the Revenue. So, the "benefit test" for determination of ALP is to be seen from the standpoint of assessee and businessman and not from the standpoint of Revenue. 35. So far as the question that the assessee has not actually needed the services as raised by ld. DR is concerned when the services are being taken as per policy of the group company to avail the benefit of low cost, specialization and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his work. For example, the Transfer Pricing Officer had pointed out that the assessee 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 to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO. This aspect was made clear by the ITAT in Delloite Consulting India Pvt. Ltd.v. Deputy Commissioner of Income Tax, [2012] 137 ITD 21 (Mum) : "37. On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at "nil", we find that the Bangalore Bench of the Tribunal in Gemplus India P. Ltd. 2010- TII-55-ITAT-BANG-TP, held that the assessee has to establish before the Transfer Pricing Officer that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price. 38. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at "nil" keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40. Now, the next question arises for determination in this case is :- "as to whether intra group services (IT Support Services, Accounting Services, Human Resources Services, etc.) from AEs at mark-up of cost plus 5% are to be clubbed together with other international transactions i.e. import of ROBs and life science products and commission income for the purpose of benchmarking or the administrative or the administrative support services are to be segregated for the purpose of benchmarking as has been done by the TPO?" 41. The ld. AR for the assessee by relying upon the decision rendered by Hon'ble jurisdictional High Court in case of Magneti Marelli Powertrain India Pvt. Ltd. vs. DCIT (ITA 350/2014 dated 25.10.2016) contended that when the TPO has accepted TNMM applied by the assessee as most appropriate method in respect of other international transaction the aggregation of other international transaction like fee for intra group services is permissible. 42. Hon'ble jurisdictional High Court decided the issue in Magneti Marelli Powertrain India Pvt. Ltd. (supra) in favour of the assessee by determining the following findings :- "17. As far as the second question is conce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 45. TPO while determining the ALP of intra group services at nil by using CUP method has not brought on record any comparable. Moreover the transactions are interlinked and the TPO himself aggregated the agency services and marketing support services and benchmarked the operating result of such combined activity, therefore, in these circumstances, we are of the considered view that the TNMM may be used for determining the ALP of intra group services. Accordingly, this issue is restored to the TPO to decide afresh in the light of the findings recorded herein above. Grounds No.3 TO 3.6 IN ITA NO.548/DEL/2015, Grounds No.4 TO 4.3 IN ITA No.816/DEL/2017 and Grounds No.4 TO 4.4 IN ITA No.817/DEL/2017 are determined in favour of the assessee. GROUNDS NO.4 TO 4.12 IN ITA NO.548/DEL/2015 GROUNDS NO.3 TO 3.9 IN ITA NO.816/DEL/2017 GROUNDS NO. 3 TO 3.8 IN ITA NO.817/DEL/2017 46. During the year under assessment, the assessee entered into 5 international transactions with its AE and the ALP of which is determined by applying TNMM treating itself to be a tested party and by taking OP/OC as PLI as under :- 47. Assessee in its TP study determined the ALP of aforesaid transactions by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Rs. 3,77,758/- pertaining to advertisement and insurance have no nexus with the agency function. 28. We find merit in the said conclusion as no material has been lead to discredit the above conclusion. Thus we hold that aggregate indirect expenses common to both the functions are of Rs. 1,58,72,993/- (Rs. 1,93,29,321/- - Rs. 30,78,570/- - Rs. 3,77,758/-). The CIT(A) further more held that allocation of such expenses should be done on the basis of gross margin of distribution function and commission income receipts and not on the basis of sales, as adopted by the TPO. Here too, we do not find any infirmity in the approach adopted by the CIT(A). The CIT(A) has correctly held that allocation of expenses in proportion to sales would amount to give equal weightage in terms of functions performed, assets utilized and risks assumed to both distribution function as well as agency service activity, which otherwise involves much lesser functions and utilization of assets and risk. The CIT(A) has held as under: "It would not be correct to allocate expenses attributed to purchase/sale of finished goods, warehousing and handling of inventory etc., to the agency service activity, wherein s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket support services in allocating expenses to the agency segment in the ratio of sales. So, ground no.2.2 is determined in favour of the assessee. GROUNDS NO.2.3, 2.4, 2.5, 2.6 & 2.7 17. TPO, after clubbing marketing support segment and agency services activities, selected 10 comparables for benchmarking the international transactions having average OP/OC at 22.12%. However, DRP excluded 2 comparables, namely, RITES Limited and Vapi Waste and Effluent Management Co. Ltd. and enhanced the average margin of 23.21% and made ALP adjustment at Rs. 1,40,30,553/-. Assessee company, by relying upon the order passed by the Tribunal in assessee's own case of AY 2002-03 that allocation of expenses to the agency segment in the ratio of sales cannot be made, as has been held by the Bench in the preceding paras, sought to exclude three comparables, namely, Aptico Ltd., Choksi Laboratories Ltd. and Wapcos Ltd. and also sought to include three comparables, namely, Educational Consultants India Limited, India Tourism Development Corporation Limited and In House Productions Limited for benchmarking the international transaction and considered its international transactions at arm's length. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n opportunity of being heard to the assessee company to benchmark the international transaction undertaken by the assessee. Grounds No.4 to 4.12 in ITA NO.548/DEL/2015, Grounds No.3 to 3.9 in ITA NO.816/DEL/2017 and Grounds No.3 to 3.8 in ITA NO.817/DEL/2017 are determined in favour of the assessee. GROUNDS NO.5 TO 5.8 IN ITA NO.548/DEL/2015 GROUNDS NO. 5 TO 5.3 IN ITA NO.817/DEL/2017 52. The assessee challenged the adjustment of Rs. 4,42,792/- (reduced from Rs. 28,84,979/- vide rectification order dated 20.02.2005 passed by the TPO) made by the TPO on account of delay in proceed of receipts of AEs beyond 30 days by treating the same to be unsecured loans being not sustainable on the grounds inter alia that interest on receivables on the amount outstanding with AE is not an international transaction; that they are not charging interest on overdue balances which is outstanding to non- AEs; that rejection of labor for computation and that the interest should be calculated from the date of issue of invoice till to the end and not till the date of realization beyond 31.03.2010. 53. The coordinate Bench in case cited as Nimbus Communications Ltd. vs. ACIT (2012) 16 ITR (Trib) 477 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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