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TMI Blog2019 (6) TMI 1371X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one or more of the international transactions may be grabbed by the income from another international transaction giving higher income on transacted value. In the case of Magneti Marelli Powertrain India Pvt. Ltd. vs. DCIT [ 2016 (11) TMI 123 - DELHI HIGH COURT] , the Hon ble High Court did not approve clubbing of `Technical fees with other transactions under the Manufacturing segment as without technical know-how even the production could not have been possible. Extantly, we are dealing with a situation in which the assessee is trying to club the transaction of payment of Fees for Management services with others, which is a step further away from technical knowhow, in the process of manufacturing. It is held that the international transaction of payment of Fees for Management services cannot be clubbed with other international transactions for showing the same at ALP. It needs to be benchmarked separately as has been held by the authorities below. Any services were actually availed by the assessee - Each monthly invoice runs into several pages with complete descripti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be done by the AO. Respectfully following the judgment of the Hon ble jurisdictional High Court , we hold that the transfer pricing addition based on the Nil ALP determination by the TPO by treating the services rendered by the AE as shareholder services, is vitiated. The authorities below have not disputed the correctness of the invoices raised by Schaeffler China. Though no separate ALP determination of the international transaction of payment of Management services fees is available for the year under consideration, but one thing which is clear is that the payment of ₹ 5,65,53,971/- and odd to Schaeffler China is towards actual expenses incurred plus 5% mark-up, which is in the nature of Cost plus method prescribed under rule 10B(1)(c) of the I.T. Rules. Even if, we proceed with the assumption that the mark up of 5% is not at ALP, which should be as low as 1% or even less than that, still the difference arising on account of such mark-up going even up to 0% in a comparable uncontrolled situation, would be within +/-5% range, not requiring any transfer pricing adjustment. It is held that the assessee entered into an agreement with Schaeffler Holding (China) Co., Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices to the tune of ₹ 5,65,53,971/-. The assessee aggregated this transaction with other international transactions in its two business segments, namely, Manufacturing Segment and Trading Segment. By applying the Transactional Net Margin Method (TNMM) as the most appropriate method, the assessee claimed that this transaction was also at ALP when considered along with other international transactions falling under the respective Manufacturing and Trading segments. The TPO did not approve the aggregation of the international transaction of payment of `Fees for Management services with other international transactions. He opined that such transaction was required to be benchmarked separately. He recomputed profit margins under the Manufacturing and Trading segments by excluding payment of Fees of Management services. The resultant profit margin of the assessee under these two segments was found to be at ALP, for which no transfer pricing adjustment was proposed. 3. As regards the payment of Fees for Management services, the assessee was show caused to produce documentary evidence establishing the requisition of such services from the Associated Enterprises (AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . . A bare reading of section 92C(1) brings out that the ALP is required to be determined of an international transaction. The term international transaction has been defined in section 92B to mean : ` 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, .. . It is discernible from the above definition of the `international transaction given in section 92B that it refers to a transaction between two or more associated enterprises. The term transaction has been defined in section 92F(v) and also in Rule 10A(d) of the Income-tax Rules, 1962. The Rule defines the term transaction to include: a number of closely linked transactions. On going through the above provisions, it becomes palpable that the arm s length price is essentially determined on transaction-by-transaction approach for each international transaction separately; and for that purpose, a transaction in singular also inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transaction giving higher income on transacted value. 8. The Hon ble Punjab Haryana High Court in Knorr Bremse India (P) Ltd. Vs. ACIT (2016) 380 ITR 307 (P H) considered the question of aggregation of international transactions. Their Lordships held that several transactions between two or more AEs can form a single composite transaction if they are closely linked transactions and the onus is always on the assessee to establish that such transactions are part of an international transaction pursuant to an understanding between various members of a group. The Hon ble High Court observed that in case of a package deal where each item is not separately valued but all are given a composite price, these are one international transaction. It went on to hold that where a number of transactions are priced differently but on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e. either take all or leave all), then it is also one international transaction. But it will be on the assessee to prove that although each is priced separately, but they are provided under one composite agreement. It still further held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical fee. We note that the facts of the instant case are rather on a weaker wicket. In that case, the Hon ble High Court did not approve clubbing of `Technical fees with other transactions under the Manufacturing segment as without technical know-how even the production could not have been possible. Extantly, we are dealing with a situation in which the assessee is trying to club the transaction of payment of Fees for Management services with others, which is a step further away from technical knowhow, in the process of manufacturing. 11. In view of the foregoing discussion, it is held that the international transaction of payment of Fees for Management services cannot be clubbed with other international transactions for showing the same at ALP. It needs to be benchmarked separately as has been held by the authorities below. We, therefore, countenance the view canvassed by the TPO in rejecting the aggregation approach adopted by the assessee. 12. Having held that the ALP of the international transaction of payment of Fees for Management services cannot be aggregated with others, the next question is the determination of its ALP in a segregated manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lished a Regional Headquarter (HQ) for the Asia- Pacific-region with responsibility for the group activities therein performing group specific services as well as coordinating and supervising the economic activities of the operating companies in the region. The assessee agreed to avail the services that have been set out under Article-1-Scope of Service . Para-1 of this Article provides that Schaeffler China agreed to provide Finance and Controlling services; Human Resources services; Purchasing/Procurement services; Quality Assurance services; Supply Chain Management Services (incl. Logistics services and Business Integration services); Business Development Services; Business Operations services; and Coco-services. Annexure-1 to the Agreement provides a further elaboration of nature of services under above broader heads of Services. For example, `Finance Controlling services services include - Support in accounting finance matter; Support in controlling related matters (e.g. country OPO- support); Support in reporting issues (monthly reports, daily issues in terms of reporting); Support in the matters of company and mid-term planning (also supporting outlook and Contingent P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tem of reduction in Inventory lead time, online stock facility at depot and distributors place. In this respect, the assessee requested the AE for development of software for slow mover analysis, top inventory, Non-mover analysis in view to effective and optimized cost of supply chain management. It further provides that: During the year under consideration, a software was developed by the AE called PL 14 backlog Analyzer and reconciliation for proper order management and analysis of slow mover, top inventories and non-moving /slow moving Inventory analysis . Apart from that, the assessee has also given the nature of services under this head and benefit arising therefrom. 17. Under the head Business Operation Services , the assessee, inter alia , stated that : The AE provided support in the area of corporate engineering, the project of MOVE, development of capacity calculation tool in the Process operations for optimization of Quality, cost, Delivery reliability of the product. It further stated: Under the project of MOVE, the assessee has been enabled to analyze various process, production area, machines used in the productions, manpower, energy required in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult of the receipt of such services. All these things have been recorded in the TPO s order, who has virtually not disputed the factum of receipt of such services. From page 76 onwards of his order, the TPO, has analyzed the submissions of the assessee on receipt of such services and under the column `Analysis of the documents supplied and remarks , he simply observed in respect of all the services that : `The AE providing services to provide third party business to assessee and to align the business with group business strategies . Under the column ` Remarks , again for all the services, he noted : `Control and supervisory functions of the provider as a distributor, the assessee is not directly concerned services leading to direct and proximate benefit to the provider . Sum and substance of the TPO s observations, which he also emphatically stated in other parts of his order, is that services rendered by Schaeffler China to the assessee were in the nature of stewardship activities or shareholders services, for which no payment was required to be made. 21. Pages 306 onwards of the paper book are copies of monthly invoices raised by Schaeffler China on the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... la vs. ACIT Ors. (2004) 267 ITR 488 (Bom) has laid down that in case a term is not defined in the Act, same should be interpreted according to its plain dictionary meaning. As such, we will have to appreciate the meaning of the term `stewardship from dictionary, which defines it as: `the job of supervising or taking care of something, such as an organization or property . To put it simply, it means an act of overseeing or taking care. In commercial context, stewardship activities are the activities undertaken by an enterprise to protect one s own interest. When company A has been engaged by company B for rendering some service to it, if company B does some activity to ensure that the work assigned to company A is being done as per its specifications and standards, it is construed as a stewardship activity. On the other hand, if an activity/service of the renderer company produces some effect on the recipient company, whether or not resulting into a tangible benefit to the recipient, the same, in our considered opinion, ceases to be a stewardship activity. One of the forms of stewardship activities is a shareholder activity, which takes place when some act or service is done by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned in the 2009 Regulation that: `Section 1.482-9T(1)(3)(iv) of the 2006 temporary regulations provides that an activity is a shareholder activity if the sole effect of that activity is either to protect the renderer s capital investment in the recipient or in other members of the controlled group or to facilitate compliance by the renderer with reporting, legal or regulatory requirements applicable specifically to the renderer, or both. There was some debate as to whether the `sole effect language should be employed to brand any activity as a shareholder activity or it should be substituted with the `primary effect . In other words, if the primary effect of the activity or service is produced to the renderer company but some incidental effect is also produced to the recipient company, then also it should be categorized as shareholder activity. After considering all the opinions, the Treasury Department and the IRS believed that : `the sole effect language is appropriate . It was noticed that : `The primary effect language in the 2003 proposed regulations could inappropriately include activities that are not true shareholder activities and may even consist of subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w to enable the assessee to carry out its business operations producing effect on the assessee company. In our opinion, these do not qualify as `stewardship activities . The impugned order is overturned pro tanto. 25. The next question to be decided is whether the international transaction of payment of Fees for Management support services to the tune of ₹ 5,65,53,971/- was at ALP? We have noticed supra that the assessee aggregated this international transaction with Manufacturing and Trading Segments and determined the ALP under TNMM on an aggregate basis. The TPO segregated this international transaction and went on to determine its ALP independently. Primarily, he held such services to be stewardship activity for which no charge was warranted. Without prejudice to his above view, he noted on the last but one page of his order in para 8.10 that the assessee did not produce any cost benefit analysis or details in respect of determination of payment made to its AE, nor it gave any basis for the rate of different services agreed to by it, which is as high as 325 USD per hour. He rejected the contentions of the assessee in para 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP of the international transaction and consequently, jurisdiction of the TPO also extends only to determining the ALP. The TPO determines the ALP of the transactions by carrying out FAR (functions performed, assets employed and risks undertaken) analysis and deploying one of the prescribed methods. It means that the TPO has to simply examine the international transaction and then determine its ALP. In the context of an existing agreement for receipt of service from an AE, the TPO may come across two broader situations, viz., one, the service has been rendered and two, the service itself has not been rendered. If there is an agreement for rendering service, and the assessee has paid pursuant to such an agreement, but no service has been actually performed by the AE, in that scenario, no functions would stand performed for the assessee, which would lead to ALP determination by the TPO at Nil. In the instant case, we are not concerned with such a situation in which the TPO claims that no service was rendered by the AE. The TPO has held that the services were rendered, but the same were in the nature of stewardship or shareholder service. In the second aforestated broader situation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove, such as, not needed or duplicate service etc. The TPO cannot usurp the power of the AO and step into his shoes for examining such aspects and then concluding that since the service was not required etc., its ALP becomes Nil. This exercise falls in the exclusive domain of the AO. Such an exercise, if undertaken by the TPO, thwarts the determination of the ALP. The Hon ble Delhi High Court in CIT VS. Cushman And Wakefield (India) Pvt. Ltd. (2014) 367 ITR 730 (Del) has held that the TPO s authority extends to determining ALP u/s. 92 rather than determining whether such services exist or benefit have accrued to the assessee. Eventually, the Hon ble High Court restored the matter for fresh determination in this regard. On the other hand, we find that the Hon ble jurisdictional High Court in CIT Vs. Lever India Exports Ltd. (2017) 292 CTR 393 (Bom) has also held that the TPO's jurisdiction is to only determine the ALP of an International Transaction. It is not a part of the TPO's jurisdiction to consider whether or not the expenditure passed the test of Section 37 of the Act and/or genuineness of the expenditure, which has to be done by the AO. However, in this case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transaction can be determined only by applying one of the prescribed methods given under section 92C(1) of the Act. If the ALP is determined by TPO by not applying any method at all or by choosing a method which is not prescribed u/s.92C(1) of the Act, then such a determination of ALP frustrates the transfer pricing addition. Since the methods prescribed for determining the ALP are statutory prescription, it is absolutely essential for the TPO to compute the ALP by adhering strictly to one of such methods. 29. The Hon'ble jurisdictional High Court in CIT (Large Tax Payer Unit) vs. Johnson Johnson Ltd. (2017) 247 Taxman 136 (Bom) vide its judgment dated 3rd April, 2017 has held that transfer pricing adjustment is refuted if the TPO does not follow any of the prescribed method. Similar view has been taken by the Hon ble Bombay High Court in CIT Vs. Johnson Johnson Ltd. (2017) 297 CTR 480 (Bom) vide its judgment dated 07.03.2017. On going through the above two judgments of the Hon'ble jurisdictional High Court it becomes patent and the ratio decidendi squarely applies to the instant case as well since the TPO did not follow any of the prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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