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TMI Blog2022 (8) TMI 562X X X X Extracts X X X X X X X X Extracts X X X X ..... ational business - the assessee company is taking regular service through the personnel of AE-CPA to get guidelines on various fronts including the marketing, commercial management, corporate sales, invoicing, finance, other connected issues on various courses. For day to day smooth and effective working of business and for trying to keep an error free working environment, such management support services have been taken. In the past also, during the assessment year 2010-11 and 2011-12 such services have been taken and have been consistently charged in the books of account. The observation of the Revenue authorities is not specific but general in nature that the assessee has failed on the benefit test but nowhere any specific instances have been given to show that the so-called services taken by the assessee company from its AE under various agreements are not related to the nature of business carried on by the assessee. It is not the case that the assessee which is carrying on forwarding chain business has paid the management services for some other unrelated business activity. The nature of business of the assessee company is directly linked to the nature of services and bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom various enterprises including its Associated Enterprise (in short the AE ) Cargo Partner GmBH Austria (in short CPA ). For the assessment year 2012-13, the assessee e-filed its return of income on 29.11.2012 disclosing loss at Rs. 6,45,739/-. Case selected for scrutiny through CASS. Notice under Section 143(2) of the Act issued on 28.07.2015. The assessee having entered into the international transaction with its AE, for determination of Arm's Length Price (in short the ALP ), assessment proceedings were carried out and Transfer Pricing Adjustment of Rs. 5,92,76,125/- was made on account of sale and purchase of services at Rs. 2,69,70,409/- and payment of management/technical services fee at Rs. 3,23,05,716/-. The proposed adjustments by AO-TPO were objected by the assessee before the Dispute Resolution Panel (in short the DRP ) raising various grounds. After considering the submissions of the assessee, for the type of services received by the assessee from its AE-CPA, learned DRP came to the conclusion that the services received by the assessee company are not of the nature of stewardship in nature, but failed to meet the benefit test. The learned DRP partly upheld the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agents and 'receipt of freight/forwarding services' from third party agents for determination of arm's length price. 4. On the facts and in the circumstances of the case, the Ld. TPO/AO and subsequently the Ld. Panel have erred in rejecting the certified copy of segmental financial statement for comparing appellant's profitability' from 'rendering freight/forwarding services' to AEs vis- -vis. third party agents and 'receipt of freight/forwarding services' from AEs vis- -vis. third party agents. 5. On the facts and circumstances of the case, the appellant having established the nature of services, evidences of services, ensuing benefits and pricing of services received from its AE, the Ld. TPO/Ld. AO have erred in determining the arm's length price of management service fees (other than information technology services) to be Rs. Nil. 6. On the facts and circumstances of the case, the Ld. TPO/AO and subsequently the Ld. Panel erred by stepping into the shoes of the businessman (taxpayer) and concluding that service charge does not commensurate with the benefits received and not restricting the scope of assessment under section 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... twork with the clients, and international cooperation with other independent partners who are market leaders in their respective countries. Local operational excellence, delivered by the best logistics professionals, and innovative systems and solutions, create competitive advantages for the customers, through optimised cargo and information flow. Thus, in order to have a competitive edge, it is highly imperative that there exists an organisational framework, innovative IT software, transport, and industry-market know-how, network development, and high business productivity service standards, coordinated and centrally driven. Being a flexible medium-sized business, the appellant needs to have a competitive advantage in the potential of regional management to provide ample room for customer-oriented solutions. The appellant is passionate about solving problems, finding efficient solutions, and achieving success in cooperation with customers; and in order to have an effective network development and high productivity service standards, it has availed management support services from its AE, CPA. 9.2. Further, the appellant, being in a freight forwarding business, has to comply wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE has entered into similar agreements with other group companies, where the similar services provided are charged on the same principle as that for the appellant (Refer pages 1739-1920, 1921-1941 of part 3 of Paperbook). Thus, it can be concluded that management service arrangement between the appellant and the AE is not exclusive in nature, and that the AE acts as a centralised service provider to other group entities, recovering costs from them on a similar basis. Therefore, the appellant humbly submits that there are various decisions which hold that how an appellant conducts its business is entirely its prerogative and it is not for the revenue authorities to decide what is needed by the appellant and what is not. Further whether a particular expense on services received actually benefits an appellant in monetary term or not is not even a consideration for its being allowable as a deduction from the computation of income and thus it cannot even have any role in determining the arm's length price of that service. The appellant humbly submits that the Ld. TPO had rejected the benchmarking analysis adopted by the appellant. However, it failed to provide its own benchmarking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NLC Nalco India Private Limited, TS-36-ITAT-2016(Kol). 11. To conclude, it is submitted that the management services are necessary for the smooth running and the survival of the business in the competitive market. A direct linkage between the services and the revenue of the company cannot be drawn relating to services dependent on the hours spent by the personnel of CPA in running since the services are dependent on the business requirement of the company. It was further stated by the learned Counsel for the assessee that the entire amount towards management charges paid by the appellant to its AE-CPA for the said assessment year has also been offered to tax in India and the alleged management charges are even less than 2% of the total revenue of the appellant. 12. Per contra, learned D/R vehemently argued supporting the orders of both the lower authorities as well as the learned DRP stating that the assessee has failed to prove the nexus of the revenue earned during the year with the alleged management charges and since the live linkage is missing, such charges cannot be allowed as a business expenditure. 13. We have heard rival contentions and perused the records placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd improvements of the websites, 3 updates a week, main content is developed by the CPA marketing department. Development of sales supporting booklets: country specific image booklets, product booklets, partly internal hand-out booklets. In average, 100 new product booklets per year Intranet Newsletter: 70% of the articles are created and layout modified by the CPA Without the services of the central marketing department, the assessee would have been less popular in India. The central purchase of advertising materials also benefits the assessee in marketing of its services. Moreover, the assessee does not have its own marketing department. If CP did not perform the activities, the assessee would have to perform the activities by itself or buy them in addition. The services performed by CPA aims at gaining hew customers as well as to keep the relationship with the existing ones. The benefits of the service corporate design e.g. are that the assessee does not have to develop any kind of new design. They receive any kind of templates they need to improve their customer relationship from CPA. Additionally, the assessee benefits from the pooling of know-how due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re cargo-partner has no own subsidiaries Develop and expand the business with the ABC agent network Define and implement sales campaigns in cooperation with the, local route management Business Process Management: Harmonize and optimize the operational processes Develop and optimize the IT systems in cooperation with the IT department Training of standard procedures and group directives The assessee benefits from the implementation and optimization of business processes and IT-tools which makes the processing of transport orders easier and faster. It also benefits from the larger access to vendors in different countries through CPA vendor management relationships. (iv) Consulting The Consulting department provides the following services: General legal consulting for the Group companies Drawing and checking of contracts and agreements Legal actions for the foundation and change in affiliated/related companies (entry in commercial register, appointment/dismissal of Managing Directors and authorized signatories ( Prokuristen ), registration of capital increase etc.) Consulting in court claims concerning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e services Controlling and Revision. In the following, the description of the performed services of the Controlling department distinguishes between Controlling services and Revision services. Controlling services: Review of finance/controlling processes and monthly results Provide know-how and support in the area of accounting, controlling and cash management to the local finance departments Provide proposals and trainings to the local finance and controlling departments to improve efficiency and quality Support in the daily use of SAP (FI, CO, BW, SEMZBCS) and AS400 for accounting and controlling purposes in cooperation with the ASP team Support in SAP implementation projects in cooperation with the ASP team Assist in administration and charging of intercom any transactions Revision services: Review of operational, sales and personnel processes Provide proposals to improve efficiency and profitability Detect illegal and criminal acts The assessee benefits from the Controlling services as they support the local, finance departments in the efficient and effective accounting operation and to provide reliable fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trix function) The assessee benefits from the services resulting in new responsible qualified personnel without having to develop new processes on their own in this regard. Furthermore, the assessee benefits from the personnel department's activities because those are meant to enable the local entities to work more qualified and efficiently on a high level. The local entities themselves are too small to have the capacity to work on personnel policy. The personnel policy is a key factor to make growth possible and therefore necessary for the assessee. Further, the agreement states that the services costs for the aforesaid services shall be allocated towards the group companies based on the number of weighted total costs per country. 15. We observe that the above described type of management services which the assessee is availing is not only from the AE-CPA but from other companies also and the payment to such other companies are not disputed by the Revenue. On one hand, Revenue has accepted the claim of management services paid to other companies but has doubted only with regard to payment made to AEs. We find that the alleged management services are merely 2% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. 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. 18. Recently, the coordinate Bench of Kolkata Tribunal has also adjudicated the issue in question in the case of NLC Nalco India Private Limited, TS-36-ITAT-2016(Kol) and M/s. Bata India Ltd. [TS-149-ITAT-2016(kol)]. In the judgment rulings, the coordinate Bench of the Tribunal has held as under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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