9911796707
TMI Blog2019 (12) TMI 1282X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. TPO are that the assessee is a market research company. The assessee submitted that during the year under consideration it was part of Aegis Group PLC, U.K. Aegis Group PLC is the parent company of Aegis Media and Synovate. Aegis Media is an independent media communication network, and Synovate is a global market research company. Synovate employs about 6000 staff across 80 countries. The assessee (i.e. erstwhile Synovate India Pvt Ltd) merged with IPSOS Research Pvt. Ltd with effect from 01/04/2012 vide order of the Hon'ble Bombay High Court dated 03/05/2013. This is the last year of operation of the assessee. The details of international transaction entered into by the assessee during the year are as follows :- Sl.No Particulars Amount in INR Method applied 1. Market research services rendered to Associate Enterprises. 19,75,13,974 TNMM (Internal) 2. Market research services received from AEs 6,81,63,101 TNMM (Internal) 3. Cost contribution arrangement 7,50,68,892 TNMM (Internal) 4. Reimbursement of expenses from AE(Received) 18,12,43,341 At Cost + markup 5. Reimbursement of expenses to AE(Paid) 40,87,318 At Cost From the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the details of other group entities to whom costs are allocated? h. Need test - Explain the rationale for the provision of services within the context of the business of the MNE? I. Evidence test - Have the services been actually provided in order to meet the specific need of the recipient of the services (assessee)? j. Benefit test - Provide a description of the benefits derived from each category of services? What are the economic and commercial benefits derived from each category of services? Furnish quantification of such benefits? k. Allocation Keys - Describe the selected allocation keys and the reasons justifying that such allocation keys produce outcomes that reasonably reflect the benefits received? I. Submit written contracts or agreements for the provision of services identifying the entities involved, the nature of the services, and the terms and conditions under which the services are provided? m. Furnish the documentation and calculations showing the determination of the cost pool and of the mark-up applied thereon, in particular a detailed listing of all categories and amounts of relevant costs? n. Submit the calculations showing the application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of cost plus 6% under the shared services agreement and SMSL in turn would bill the concerned AE which has delivered services actually to the assessee with the same amount of cost plus 6%. In other words, the SMSL will not make any profit on the said transaction and is merely a pass-through entity/a special purpose vehicle/common coordinating company among various AEs across the country for global coordination. The assessee also submitted that this cost plus 6% charges has been subsumed in the final sale value of services rendered to the AEs and proceeds towards sale of services from AEs were received accordingly and the said proceeds of sale of services from AE has been accepted by the ld. TPO to be at arm's length. In other words, the amount paid by the assessee pursuant to shared services agreement with SMSL has been observed as a cost in the final sale value of services received from AE. It is the case of the assessee that once the sale value of services from AE has been accepted to be at arm's length, the cost plus 6% markup paid to AE under shared services agreement alone cannot be considered to be at ALP. The assessee further stated that it receives support services fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices received from AE and further sold to Third Party (Source: 35,631,407 (AnnexureD-1) 14,693,516 (Annexure D-1) 20,937,891 (Annexure B-3) 15,265,143 (Above Table) 5,672,748 15.92% Services rendered to third party without importing service from AE (Source: 579,824,365 (Annexure D-2) 265,302,243 (Annexure D-2) 314,522,122 (Annexure D-2) 248,407,310 (Above Table) 66,114,813 11.40% 8112,969,747 349,363,651 463,606,096 348,291,034 115,315,062 Note: General Overheads & Intra group service cost include support services from SMSL 6. The assessee submitted that as can be seen from above, after allocation of Shared Resource Allocation Fees paid to SMSL, the margins earned on AE Import transactions are significantly higher than the margins earned from Non AE Import transactions & domestic transactions. Accordingly, the assessee pleaded that the consideration paid by it to SMSL for receiving the support services from SMSL could be said to meet with the arm's length principle. 7. Ld.TPO asked the assessee to produce the following documents :- a) Documents supporting the calculation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these issues is discussed below. B.1 Determining whether intra-group services have been rendered 7.6 Under the arm's length principle, the question whether an intra group service has been rendered when an activity is performed for one or 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 in house 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. 7.11 In general no intra-group service should be found for activities undertaken by one group member that merely duplicate a service that another group member is performing for itself, or that is being performed for such other group member by a third party. An exception may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstrate any benefit received- The TPO and DRP have closely examined the evidences of intra group services as produced and determined the ALP of the services at Rs. NIL. No further evidence is produced. The reasons arriving at the conclusion are- 1. The nature of services as claimed in the e-mails/documents/evidence as filed in the Paper Book, are actually general correspondences between the assessee and its AE. On perusal of the contents of these e-mails. It is clear that these are general notes and exchange of information. The nature of communication in these e-mails is of the nature which would be entered into between the group entities of any group. They do not show any specific and distinct services rendered by the AE, for which any separate charge needs to be paid by the assessee to its AE. In other words, on perusal of these e-mails it is clear that it cannot be considered as services rendered for which entity acting on arm's-length basis, would agree to make any payment. 2. None of the evidences provided by the assessee demonstrate the benefits received by the assessee from such services. Quantification of services is necessary to justify the price paid in an arm&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup entities, as held in various judicial decisions. Unless it is shown that tangible and direct benefit is derived by such payment or that the payment made is commensurate with the benefit that is derived or expected to be derived when parties deal with each other at arm's length, the arm's length price of such payment for intra group services would be treated as either Rs. Nil or to the extent it is shown that the benefit actually derived from such payment. 2.3 Further, even if for argument sake, it is taken that these documents show that some services have been rendered, whether these had some value and if yes, the cost incurred for that and the benefit received have not been established by the assessee. The assessee has also not demonstrated that the price paid was such that an independent entity would have paid for such services for the benefits (if any) received by it. Further the details of total cost incurred for rendering of the service by the AE, the number of entities in the group to whom such cost has been allocated, entity wise details of the allocation key (say the quantum of time spent on each of the entity to whom the cost has been allocated) and the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paper book filed by the assessee company running in to 390 pages. The necessary facts of the case have already been discussed in paragraphs above. On examination of the facts and circumstances of the case and the terms of the agreement entered into by the assessee and its Singapore associate, the TPO has come to certain pertinent observations in her order. She has observed that the terms prescribed in the agreement in respect of the payments to be made by the assessee company are independent of the nature and volume of services, if any rendered by the Singapore Associate This is a vital observation made by the TPO which goes to the root of the issue. The function of the TPO is to compare the payments made by the assessee company for services received if any and to see whether those payments are comparable. In a given scenario, the TPO has to examine whether the payments were ALP conducive. Therefore it is very imperative on the part of the assessee to establish before the TPO that the payments were made commensurate to the volume and quality of services and such costs are comparable. The payment terms as pointed out by the TPO are independent of the nature or volume of services. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular method to arrive at such conclusion. In fact, by all the five methods or anyone of them, when applied to the fact that there is no necessity of payment, the result of "nil" ALP will come." 5.3 Further, attention is also invited to the decision of MIs Knorr-Bremse India Pvt. ltd. in ITA no. ITA no. 5097/DeI/2011, wherein the following has been held 7.2. The appellant in the present case also did not demonstrate as to how the transaction by transaction approach in his case is not possible. It has also not been shown as to whether there has been any real or tangible benefit by carrying such international transactions with the AEs. The comparable uncontrolled price method ("CUP" method), for the subject transactions being most direct method for determining arm's length price and chosen as most appropriate method in this case by TPO, therefore, cannot be faulted with. We, therefore, do not find any error in rejecting the TNMM method applied by the assessee and determination of ALP by applying CUP method for Benchmarking international transactions in a case like this. The DRP also cannot be said to have erred in approving the CUP method adopted by the TPO for Benchm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to inter/ere with the well reasoned conclusion reached by the AO on this count. The grounds raised in appeal in this respect, therefore, stand rejected." 5.4 ITAT Bangalore in the case of M/s Fosroc Chemicals India Private Limited (supra) has held as under: 32. In fact in Assessee's own case the Tribunal on identical facts remanded the issue of determination of ALP to the TPO. The direction of the Tribunal has already been extracted in the earlier part of this order. The facts and circumstances are identical in the present assessment year and therefore the order of the AO is set aside and the issue remanded to the TPO/AO with identical directions as was given in Assessee's own case in A Y 07-08. In a case where expenses are actually reimbursed with no mark-up, than as observed by the Hon'ble Delhi High Court, the transaction being an expense transaction, the tax base erosion can happen only if the costs said to have been reimbursed are inflated. In such a situation the question would be to determine as to whether the costs claimed to have been apportioned between the various group companies has not been inflated or whether they are allocated on a proper basis. As a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as the Assessee will be the best person to know these facts which are within its knowledge. It is only if such a stand is taken by the Assessee can the TPO take the issue forward to arrive at a proper conclusion. In our opinion filing of voluminous correspondence, reports etc., would not be a proper way of discharge of Assessee's burden to establish the ALP of expenditure in question. We would therefore direct the Assessee to comply with the queries raised by the TPO in his show cause notice which has been set out in his order u/s.92CA of the Act. The Assessee has also given the breakup of costs incurred by the parent company and the basis of apportionment. The same has not been considered at all by the TPO. The findings of the DRP with regard to the nature of services as given in a IT(TP)A No.148/Bang/2014 & SP No.107/Bang/2014 Page 27 of 29 chart in the earlier part of this order are general without reference to the material filed by the Assessee. The findings are purely on surmises and cannot be sustained in the absence of any material on the basis of which such conclusions were arrived at being set out in the DRP's directions. 6. Conclusion- In view of the judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, client liasoning, planning, financing, accounting, legal and personnel matters, communication, branding and public affairs etc. The agreement further states that the group companies nominated SMSL to aggregate the full costs and then share these costs among group companies on a continuing basis. It is agreed that SMSL may charge a mark up percentage on the total actual cost. The assessee had submitted a letter from Deloitte LLP, UK that the mark up charged by SMSL on shared resources for the year ended 31.12.2009 was 6% and the same was at Arm's Length based on an external comparability study performed by Ceteris, US LLC in 2007. 9.1. We find from the audited segmental data submitted before the ld TPO , the margin from services rendered to International AE's is 22.04%, whereas the margin from services rendered to other international Non-AEs is 4.29%. Even at entity level, the margin of the assessee is 11.78% and the Comparable Average Margin is (-) 0.54%. 9.2. We find that in respect of Cost Contribution Agreement Charges paid to SMSL, the ld TPO disagreed with the contentions of the assessee and held that the ALP of Rs. 7.50 crores paid to SMSL should be NIL on the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without receipt of the services which carries huge intrinsic and creative value. The ld AR vehemently argued that the assistance of the group companies of the assessee is necessary for providing the market research services, thereby making the assistance provided under the Shared Resources Allocation Agreement. He drew our attention that to Pages 432 to 435 of Paper Book Volume 2 comprising of TP study report proving the fact of inter-dependence. He submitted that owing to international presence of the assessee group, it would be imperative that the assessee maintains uniformity in quality in the services rendered and unless there is such uniformity in quality, it would be impossible for its group companies to rely on the services rendered by it or such group companies vouch for the quality to its MNC clients on behalf of its other group companies including the assessee. We find lot of force in the said argument of the ld AR in as much as in order to main uniformity in quality of services rendered, the assistance of group companies is necessary under Centralised Sharing of Services Agreement and by consolidating all the services among the group entities, it results in avoiding dup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng at the conclusion that ALP for the services rendered under the Shared Resources Allocation Agreement is Nil, the ld TPO had stated that the assessee had failed to demonstrate that any independent person would be willing to pay a price for such services and that the assessee had failed to show a valid CUP. This statement of the ld TPO clearly establishes the fact that the services were indeed rendered by SMSL to the assessee. 9.7. We find that the ld AR vehemently submitted that for the purposes of accounting, the services mentioned in Schedule 1 of Shared Resources Allocation Agreement, have been divided into various segments and sub segments as listed in detail in the Global TP study at Pages 131 to 230 of Paper Book Volume 1 and in the assessee's TP study for the year under consideration at Page 457 to 475 of Paper Book Volume 2. Both the Global TP study as well as the assessee's TP study for the year under consideration give, not only a detailed functional analysis but also explain how such shared service is beneficial to the group companies. For example: (a) Under the head Global Client Relationships (OCR), a global team manages client relationship at global level. Thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from the services received from SMSL. The relevant operative portion of the aforesaid judgements are not reiterated herein for the sake of brevity. We find that the ld AR also submitted that the services rendered under the Shared Resources Allocation Agreement are in the nature of advice, guidance, assistance, troubleshooting, maintaining of client relations, etc and the benefits derived out of these services cannot be quantified in monetary terms. 9.10. We find that the ld AR also drew the attention of the Bench to pages 486 to 495 of the Paper Book Volume 2 comprising composition of income of the assessee as under:- Income from rendering Market Research Services (a) To its AEs (group companies, who have subcontracted work to the assessee): i. A detailed list of AEs to whom services have been rendered during the year is an annexure to the TP Study of the assessee enclosed in Annexure B-2 at Page 487 of the Paper Book Volume 2. ii. As per Annexure B-2, the assessee has earned Rs. 19.75 crores during the year from rendition of services to its AEs and this constitutes 22.91% of total sales (viz. Rs. 86.20 crores) during the year. (b) To MNCs owing to Global Relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of the assessee is from and on account of Global Relations. Rendition of services and this business would not be possible unless there was support of the group AEs under the Shared Resources Allocation Agreement. We find that these facts and figures are staring on us and cannot be summarily swept under the carpet. We hold that these figures clearly demonstrate the need, necessity of taking services from SMSL together with the benefits derived by the assessee under the Shared Resources Allocation Agreement. 9.11. Apart from the above, the ld AR filed a Benefit Chart marked as Annexure C stating the description of services, how they were rendered, summary of evidence filed in support and its benefits to the assessee. The said chart also lists down the comments of the ld TPO on the evidence filed as contained in his order (Table 1 Pg. 15 to 24 of the ld TPO's order), enabling its comparison with the material filed and demonstrating that findings/claims of the ld TPO are ex facie incorrect. A perusal of the chart demonstrates that except in the case of services rendered under 2 heads viz. the head Global Finance and Group Legal, the ld TPO has summarily rejected the materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from Page 435 and 507 of Paper Book Volume 2. The aforesaid international transactions have been benchmarked using Internal TNMM and have been accepted by the ld TPO to be at ALP. We find that while benchmarking the aforesaid international transactions, in the segmentals drawn up by the assessee, the amount paid under the Shared Resources Allocation Agreement has been debited to the respective segments in the ratio of the turnover. The workings for the same is attached to the TP Study Report at Page 486 of Paper Book Volume 2. We find that the assessee had duly submitted these segmental workings duly audited before the lower authorities. We find that the ld TPO has accepted the segmentals so prepared. This demonstrates that the ld TPO agrees that the support and assistance under the Shared Resources Allocation Agreement are integral to rendition of the Market Research Services. Further when the TPO had accepted the receipts and payments towards the Market Research Services (rendered and received) by the assessee to be at arm's length by applying Internal TNMM, and when, the segmental margin have been arrived at after debiting the payments under Shared Resources Allocation Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the TPO for fresh adjudication (see Para 52). In fact on remand similar addition was made by the TPO which was the subject matter of adjudication of the Hon'ble ITAT in its decision reported in Knorr Bremse India P. Ltd vs ACIT [(2017) 77 taxmann.com 101]. copy of which is at Sr.No. 15 of the compilation of case laws filed by the Appellant. It is most pertinent to note here that the Hon'ble ITAT has infact deleted the entire addition made on intra group services by upholding the application of TNMM in the absence of any reliable CUP put forth by the TPO. It is therefore submitted that the decision of the Punjab & Haryana High Court does not help the Revenue and infact Order of the Hon'ble Tribunal on remand supports the case of the Appellant. LG Electronics India Pvt. Ltd. [(2014) 52 taxmann.com 240] Insofar as the decision in the case of LG Electronics India Pvt. Ltd. (2014) 52 taxmann.com 240] Revenue has placed reliance on the findings in Para 7.2-7.5 to contend that CUP is the most appropriate method and TNMM cannot be used. It is submitted that the said findings cannot be applied for the following reasons; * The findings in paragraph 7.2-7.5 have been given b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demonstrated with evidence that services have been rendered and moreover the decision has been rendered before the decision of the jurisdictional High Court in the case of CIT v/s. Lever India Exports Ltd. [2017] 292 CTR 393 and hence the findings in the aforesaid paragraph to the extent they are contrary to the decision of the jurisdictional High Court in the case of Lever India Exports Ltd. (Supra) are no longer good law. * Gemplus India Pvt Ltd [ITA No. 352/Bang/2009]. * Deloitte Consulting India Pvt. Ltd. [ (2012) 22 taxmann.com 107] * Herbalife International India Pvt Ltd [IT(TP)A No. 1406/Bang/2010 and IT(TP)A No. 924/Bang/2012] * Madura Coats Pvt. Ltd. [(2017) 77 taxmann.com 104] SKF Technologies [(2016) 68 taxmann.com 318] * Fosroc Chemicals India (P.) Ltd [(2015) 58 taxmann.com 85] * Volvo India Pvt Ltd [(2017) 77 taxmann.com 207] * Cranes Software International Ltd [(2014) 52 taxmann.com 19] * Cook India Medical Devices (P.) Ltd. (2017) 81 taxmann.com 187 * Control Techniques India Pvt. Ltd. (2017) 77 taxmann.com 212 * Safran Engineering Services India Pvt Ltd [IT(TP)A No. 451/Bang/2015] The decisions in the case of Gemplus India Pvt Ltd (see para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iderable correspondence to prove the rendition of services then the TPO must consider the same and matter was remanded back by the Tribunal. This decision in fact supports the case of the Appellant. Hence it could be safely concluded that the case laws relied upon by the ld DR are factually distinguishable as detailed supra. 9.18. In any case, it would be pertinent to note here that the payment made under Shared Resources Allocation Agreement had been duly subjected to deduction of tax at source, except an amount of Rs. 73.81 lakhs which was suo moto disallowed by the assessee for failure to deduct tax at source, and that no refunds have been claimed by the recipients thereon. Hence the actual claim by the assessee for the year under consideration is Rs. 6.77 crores only and therefore it is erroneous to make an addition of the entire amount of Rs. 7,50,68,892/-. This is only made as a passive observation by us as we direct the ld TPO to delete the entire adjustment of Rs. 7,50,68,892/- made towards payment of cost contribution charges pursuant to Shared Resources Allocation Agreement. 10. In the result, the appeal of the assessee is allowed. Order pronounced ..... X X X X Extracts X X X X X X X X Extracts X X X X
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