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TMI Blog2018 (10) TMI 1112X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaken by the Appellant. 3. The Ld. AO/TPO erred on facts and law in determining the arm's length price ('ALP') of the Appellant's international transactions pertaining to payment of management cost contributions (after allowing network administration costs) to its Associated Enterprise ('AE') as Nil- against the sum of Rs. 6,27,11,181/- incurred by the Appellant and thereby making an addition of Rs. 6,27,11,181/- on that account to the Appellant's income and in doing so have grossly: 3.1 erred in disregarding the ALP, as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Income Tax Act, 1961 ("the Act") read with Rule l0D of the Income Tax Rules, 1962 ("the Rules"). 3.2 erred in holding that the transactions are covered under intra group services without appreciating that the payment made to Atotech Group was governed by a Cost Contribution Arrangement ("CCA") and not under an agreement for rendering intra-group services. 3.3 erred in ignoring the submissions and documents submitted by the Appellant during the assessment proceedings and holding that the Appellant has not furnished/furnished only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Research & Development and Technical Sales Services Cost Sharing Agreement ('R&DTSS-CSA') and Global Management Group Cost Sharing Agreement ('MCSA'), The R&DTSS-CSA involved the sharing of R&D arid technical sales service support costs. The agreement required from Atotech Group to maintain laboratories, product development centres, technical centres and a staff of experts, engineers and scientists to conduct R&D and provide related engineering and technical support and services to the world-wide group entities. The essence of the agreement, it was stated, was that each member country, instead of investing and doing the R&D and technical sales service everywhere locally by themselves, should benefit out of the combined R&D and technical sales service functions. 2.1 The MCSA, on the other hand, involved the sharing of common general management and administrative costs (such as marketing / finance / human resource / quality control safety and host of other critical management functions that are of global strategic importance). The functions and services covered under this agreement included: * Product Management * Network Administration * Management Cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf has been remanded back vide order dated 11.05.2018 with the direction to first decide whether the payments made under the Agreement are in the nature of Cost Sharing payments or Intragroup Services. The said direction in order dated 12.08.2016 was repeated in order dated 11.05.2018. Accordingly, in the absence of any change in fact or law, we remand the issue to the file of the AO/TPO with similar direction. While so directing, it is necessary to note that the Co-ordinate Bench has directed the AO/TPO to go through the Agreement on the records and determine whether the nature of the transaction is Cost Sharing Agreement or were these payments in the nature of intra group services for the sake of completeness so as to bring out the issues on record in the year under consideration, we deem it appropriate to briefly address the background of the case by first addressing the ownership structure of the assessee in the TP Study :- "Ownership structure of Atotech India Atotech B.V. Netherlands 99.99% shares Outside India Atotech India (Holding 6 shares) Individuals (6) Nominees of Atotech B.V The company is engaged in manufacturing and marketing of elec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch B.V. in July 2001." 6.2 The functions performed for the purposes of FAR analysis carried out by the assessee in its TP Study claiming its transactions to be at arm's length in its TP Study noticed by the TPO are as under:- 4. FAR Analysis: 4.1 Summary of Functions performed, Risks undertaken and Asset utilized for manufacturing: Atotech India, the assessee is a routine manufacturer and marketer of specialty chemicals & compounds used for general metal finishing and production of printed circuit boards. It carries out routine functions and. assumes normal risks associated with carrying out such business. It is also involved in the commissioning of certain chemicals and capital equipments to certain customers in India. As a part of this arrangement, the assessee also provided after sales service to the customers for the chemicals commissioned. At present, however this activity forms a very small portion of the total income. Atotech India utilizes its manufacturing facilities, distributing infrastructure, office premises, warehousing facilities, communication facilities etc. for the purpose of its business. On account of acquisitions, it has come to acquire certain routine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as joint ownership of all Atotech Group know-how, technologies and intellectual property rights owned by the Atotech Croup. Presently, Atotech India does not perform any R&D activities. "Client to Confirm» Such R&D activities are carried out primarily in the U.S.A., Germany and Japan. Local Atotech companies always use global strategies and other global management know-how jointly developed under the CSA agreements. The R&D and TSS Agreement has been executed to carry out R&D activities and thereafter, provide technical sales service support to all the participants in connection with the proprietary chemicals- being developed under it. The objective of this agreement is to maintain during the term of the agreement laboratories, product development centres and technical centres and a staff of experts, engineers, scientists who shall conduct research, development and engineering in the science of electroplating and such other activities in which the parties are concerned. R&D: These costs can be easily identified, as every worked hour is allocated to a project. The worked hours represent a major part of cost of doing improvements to existing products and making relaunches ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dily increasing importance of network administration costs the updated contract of 2007 includes additional location rules such as general IT costs according to the number of PCs. As per the scheme of the CSA, all actual costs under R&D and general management costs of each individual constituents of the CSA are pooled together and allocated to individual constituents based on the sales ratio i.e. sales of individual constituents of the CSA, to the total worldwide sales. The fact that the costs are pro-rated amongst the AEs on the basis of turnover does not change the character of these transactions as it is only an appropriate method of apportionment. The costs also include a 5% mark-up to meet the overhead costs of Atotech Group entities carrying out the R&D and management operations. Under the CSA, costs are gathered and allocated to the participants by Atotech GmbH as operator of the pool. The following allocation rates are applied: Charge-out: entities with central functions charge central costs to the CSA pool administered by the Group Controlling Department. Charge-in: The Group Controlling Department allocates the total central costs mainly according to ratios of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange Risk: This risk relates to the potential impact on profits that may arise because of changes in foreign exchange rates Atotech India does not bear foreign exchange risk as cost recharges to/from the AEs are invoices in INR The AEs are exposed to foreign currency risk to a limited extent as they raise invoices in INR Legal and Sttutory Risk : This risk primarily arises on non compliance with any legal/contractual/statutory provisions Atotech India does not bear the risk for compliance in India The AEs bear all the risk for compliance with legal matters relating to this activity 6.5 It is seen that for justification of the payments, the assessee has offered the following information before the DRP :- "7.1 The assessee has submitted that the general matters pertaining to management functions performed at group level include the following :- Product Management : Project management comprises of the following tasks and responsibilities - a. Creation of market introduction documentation ego product name, price guidelines, technical features etc. b. Preparation of brochures, advertisements, posters and press releases. c. Publication of technical papers and participatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that the" audit report contains, inter-alia quantum, cost, allocation methodology and the allocation keys for computing the contribution to be made by each participating group entity and accordingly, such analysis cannot be rejected without detailed reasons: It is submitted that the following factors distinguish a CCA from the rendering of Intra-Group services- * Expectation of mutual benefit * Economic ownership by each participant In case of the assessee, all cost contributions are accompanied by an expectation of mutual benefit. Moreover, the assessee and the AEs also share in the costs and risks associated with each activity undertaken jointly by them, thus becoming joint economic owners of the common shared/pooled assets, services or rights developed thereby. Since both the above conditions are satisfied, the intra-group arrangements In case of the assessee qualify as CCAs. Accordingly the payments made by the assessee are covered by Chapter VIII of the GECD Guidelines (and not Chapter VII of the GECD Guidelines, which deals with 'intra-group services'). Hence there is no need to identify the amount paid for each service separately." 6.7 The docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions therein qua the selection of the most appropriate method itself which was also an issue. Considering the position of law as laid down by Hon'ble Punjab & Haryana High Court in the case of Knorr-Bremse India P. Ltd. vs. ACIT - (2016) 380 ITR 307 (P&H) it was concluded that the Court had clearly held that whether the transaction results in an increase in assessee's profit was not determinative of the question whether the transaction was at arm's length price or not. The said factor, it was noticed at best would only reflect the genuineness of the assessee's claim. Having addressed the legal position which clearly holds that the rise in profit is definitely not a relevant factor and hence not determinative of the issue. The said controversy was put to rest. The Courts are alive to the fact that a business decision, may at times turn out bad and unprofitable for various reasons as necessarily all business decisions cannot always meet with success. Accordingly, the question whether the decision was commercially sound or not was consequently held to be not relevant for deciding the issue. It has been held by the Court that what would be relevant is to determine whether the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY, the issue of most appropriate method had not been adjudicated upon proceeded to direct the TPO to first apply CUP as the most appropriate method and supplemented it with the direction that some comparable uncontrolled instance be cited in terms of the mandate of Rule 10B(1)(a)(i). It was also made clear that in case, the TPO finds that the CUP method cannot be applied either due to nonavailability of the data or due to some other reason, he was free to apply any appropriate method for fresh determination of ALP of the international transaction of "Management Group Cost". The relevant paras are extracted from the aforesaid order :- "13. By now, it is fairly settled through a catena of decisions that the CUP is the most appropriate method to determine the ALP of an international transaction because it seeks to compare the price charged or paid for property transferred or services rendered, provided proper comparables are available. It is under this method alone that the price charged or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction. The remaining four specific methods seek to make comparison of the price charged or paid indir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of 'R&D assistance cost.' The Tribunal has passed an order for the immediately preceding year restoring the fresh determination of the ALP of `R&D assistance cost' and `Management group cost' to the file of the AO/TPO. Following the view taken in such an order of the immediately preceding year and the two earlier years dealt with hereinabove, we set aside the impugned order and remit the matter to the file of Assessing Officer/TPO for a fresh determination of the ALP of the international transaction of 'Management group cost' and 'R&D assistance cost' in accordance with the observations made in our detailed order for the assessment year 2008-09 above." 6.12 Accordingly, in terms of the said decision, the issues are remanded back to the file of the TPO directing that qua the claim of management cost, the TPO shall, considering the past history to decide the issues in terms of the directions first determining the nature of transaction whether the payment made in terms of the Cost Contributing Agreement were cost sharing arrangement or in the nature of intra-group services and thereafter determine the issue of selection of most appropriate method which the Co-ordinate Bench has ..... 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