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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 ..... 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 directed to first apply CUP using some comparable instances following Rule 10B(1)(a)(i) and in the eventuality the TPO comes to the conclusion that the relevant data is not available, he is free to select any appropriate method for fresh determination of ALP after hearing the assessee. Similarly, qua the R&D expenses etc. the Co-ordinate Bench remanded the issue back. The appeal of the assessee is allowed for statistical purposes. - ITA No.-1461/Del/2015 - - - Dated:- 12-10-2018 - Smt Diva Singh, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Assessee : Shri Ravi Sharma, Advocate, Shri Rishabh Malhotra, AR For the Revenue : Shri Sanjay I Bara, CIT-DR ORDER PER DIVA SINGH, JUDICIAL MEMBER : The present appeal has been filed by the assessee assailing the correctness of the order of the assessing officer under section 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication of CUP method in contravention of the provision of Rule l0B of the Rules merely based on presumptions without furnishing details of price charged in any comparable uncontrolled transaction 3.7 erred in ignoring the report obtained by the participants of the CCA (including the Appellant) from the independent auditors documenting the quantum, manner and methodology for computing the contribution to be made by each participating entity while applying CUP method. 3.8 erred in holding that the Appellant has not been able to establish the need for the services received from AKs based on the premises that no cost benefit analysis was undertaken with regard to cost of services and benefit received from AEs vis-a-vis independent parties. 3.9 erred in not appreciating that the Appellant derived significant benefits from the CCA and the cost relating thereto was allocated on the basis of prudent, reasonable and appropriate allocation keys. 3.10 erred in disregarding judicial pronouncements in India on the issues involved. 2. The relevant facts of the case are that the assessee company is a wholly owned subsidiary of Atotech B.V., a company incorporated in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Regional) Product Management 2,69,85,288 7,10,80,573 Intellectual properties 1,24,69,229 Regional Management 7,14,430 Global Management 1,50,60,117 Network Administration 83,69,192 Regional Cost Sharing (EU) 74,82,317 Total 17,60,55,082 2.4 The TPO recharacterized the transactions relating to payment of management cost contributions under the CCA under intra group services and determined the ALP of these payments as nil after reducing networking administrative charges of ₹ 83,69,192/- from management group cost. The TPO proposed an addition of ₹ 6,27,11,181/-. 3. Assessee carried the issue before the DRP by filing various objections. The DRP relied upon the past position taken by the said Forum and held that the TPO was justified in adopting CUP as a method and the assessee s submissions on the objections posed to the TPO were dismissed for the reasons se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Atotech India (Holding 6 shares) Individuals (6) Nominees of Atotech B.V The company is engaged in manufacturing and marketing of electroplating chemicals in India. It caters primarily to the domestic market with export sales constituting less than 5% of its sales revenue. 6.1 The profile of the assessee and its holding company of the Atotech Group as per the record is as under :- 3. Nature of business of the assessee and the group: 3.1 Atotech Group: The Atotech Group was formed in 1993 with the merger of M T Harshaw, operations of ELF Atochem group, (a supplier of General Metal Finishing ('GMF'), chemistry and processes/Chemistry for Printed Circuit Board ( PCB ) manufacturing) and the Electroplating Division of Schering AG, (a manufacturer of PCB Chemistry, GMF chemistry and equipment for the same). The Atotech Group is present in around 40 countries and employs over 3200 people across five continents. The Global Research and Development ( R D ) centre is mainly located in Berlin (Germany). Rock Hill (South Carolina, USA) and Yokohama (Japan) are the other two centers). 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 intangibles such as goodwill, Intellectual Property Rights and non-compete fees, it does notundertake any significant R D on Its account that leads to the development of non-routine intangibles. However it contributes to the Atotech Group's R D costs, it uses the trademarks, process, knowhow, technical data software, operating/quality standards etc. developed/owned by Atotech Group, 4.2 Functions performed with respect to Cost sharing Arrangements: 4.2.1 Cost Sharing Arrangements: In order to bring synergies in research activities, worldwide technologies, technical support, knowhow and management activities, Atotech India has entered into the following agreements (collectively referred to as 'CSA') vide the Contract of Accession effective from 1 January 2002 which replaces the old versions valid since 1 February 1993, with Atotech GmbH, representing the Atotech Group worldwide: Research Develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cience 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 and only to a small extent the cost of the products which are not yet being launched. Interne Leistungs Verrechung ('ILV'): This represents the technical support from the Technical Centers and functions for the products already being launched. These functions comprise in particular sample testing required by the local customer. 6.3 The Cost Sharing Agreement entered into by the assessee is explained before the TPO as per record in the following manner :- 4.2.3 MSCA MCSA has been executed to provide general management expertise and guidance for carrying out the business by each of the participants in a smooth manner and sharing the globally available management expertise and best practices. Under this agreement services such as strategic and general management, strategic business development, development of worldwide quality standards, training and aid of highly qualifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rator 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 external sales to all CSA members The costs recharged relating to the skills and facilities maintained by the AEs rendering R DTSS are made according to the ratio of proprietary chemical sales in the different product groups to third parties of the parties to the R DTSS agreement. The allocation of R D costs is done on a sales basis for the reason that in the long run, sales is a good reflection of how the value of R D efforts have been used by the group companies. The cost to be charged are increased by a mark-up of 5% which covers any costs not already covered. As per the agreement, costs for rendering management services are allocated to the Group companies in the ratio of the sales to third parties performed by each member of the receiving Group company and the charging company to the total sales to third parties of all these companies along with a mark-up of 5% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 participation at conferences and tradeshows. d. Management of Atotech website, internet content. e. Publication of newsletters etc. f. Trainings/workshops for local product marketing managers Network Administration- Network management refers to the activities, methods, procedures, and tools that pertain to the operation, administration, maintenance, and provisioning of networked systems. In this regard the following functions are performed by group companies a. SAP Basis Team- The basis team is in charge of running all necessary systems to run the SAP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, 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 documentary evidences demonstrating that benefit has been received from the payment of cost charges before the DRP were canvassed in the following manner :- 7.3.2 Documentary evidences demonstrating the benefit received from the payment of cross charges The assessee by way of the CCA has access to greater and global experience of the Atotech for the management related activities and thus can benefit from the global best practices. Furthermore, to demonstrate the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 transaction so entered into has been entered in a bonafide manner or not or was it sham transaction and has only been entered into for the purpose of diverting the profits. 6.10 It is also pertinent to note that the Co-ordinate Bench also noticed that the TPO had applied CUP method and taking note of the decision of the Hon ble High Court in Knorr-Bremse India P. Ltd. (supra) the Coordinate Bench observed that the Court has held that where number o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 indirectly through the medium of normal profit arising in a comparable uncontrolled transaction. Further, the CUP method is a transaction specific method which strives to determine the ALP of an international transaction on a micro level, thereby lending more credibility to the ALP of a transaction. 14. Considering the decision in Knorr-Bremse (supra) and the view taken by the Tribunal in assessee s own case as discussed above, we set aside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 directed to first apply CUP using some comparable instances following Rule 10B(1)(a)(i) and in the eventuality the TPO comes to the conclusion that the relevant data is not available, he is free to select any appropriate method for fresh determination of ALP after hearing the assessee. Similarly, qua the R D expenses etc. the Co-ordinate Bench remanded the issue back. Accordingly, in terms of the above, the issues are remanded with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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