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TMI Blog2023 (5) TMI 155X X X X Extracts X X X X X X X X Extracts X X X X ..... tablished the arm's length nature of the management fee transaction by benchmarking its OP/OC by taking TNMM as the MAM against average industry mark-up of eight independent comparable companies. On this benchmarking exercise of the assessee duly furnished before the ld. TPO, he has not pointed out any defect in the said benchmarking exercise forming part of the Transfer Pricing document. TPO resorted to CUP method without applying the process of arriving at the same as the most appropriate method by showing any independent comparable transaction in order to apply CUP. As per the Rule 10B(1)(a), while applying the CUP Method, as a starting point, price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, has to be identified. TPO has not identified any such similar transactions while resorting to CUP method. We do not ascribe to such an adhoc approach adopted by the ld. TPO in the present case which is not in accordance with the prescribed regulations. No justification by the ld. TPO has been provided based on comparable data analysis to discard the TNMM arrived at by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rawal, Hon ble Accountant Member For the Assessee : Ms. Vandana Bhandari, FCA and Shri Saibal Mukherjee, A/R For the Revenue : Shri G. Hukuga Sema, CIT, D/R ORDER PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: Both these appeals are filed by the Revenue against two separate orders of the Learned Commissioner of Income Tax (Appeals) - 22, Kolkata, (hereinafter referred to as ld. CIT(A) ), against the two separate assessment orders passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter the Act ) dated 25.05.2016 for AY 2012-13 and dated 31.03.2016 for AY 2013-14 by ld. JCIT/DCIT, Circle 9(1), Kolkata. 2. The issues involved in both these appeals are identical except for variation in quantum. Hence, they were heard together and are being disposed off by way of this common order. 3. We take up appeal in ITA No. 1501/Kol/2019 for Assessment Year 2012-13 to understand the facts of the case and the findings of the same would apply mutatis mutandis to the appeal for Assessment Year 2013-14. 4. Grounds of appeal for Assessment Year 2012-13 are reproduced as under:- 1. Whether the CIT(A) is justified in facts and law in the circumstances of the case in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name of Apollo Gleneagles Hospitals Ltd i.e. the assessee. As per clause 18 of this agreement, it was agreed between the parties that 5% of gross revenue generated from the hospital and diagnostic center shall be paid to AHEL and GDPL in equal proportion (i.e. 2.5% to each) by the Hospital Company as management fee. The said clause is extracted below for ease of reference: Clause 18: Management of the Hospital 18.1 The parties have discussed and envisaged that the operations of the Hospital will be carried out by the Board of Directors, who shall have the authority to delegate any or all of their powers and functions to any committee or to any officer or officers of the Company. The Company if required shall enter into a suitable management agreement with AHEL GDPL for the managerial expertise to be rendered by them to the hospital and Diagnostic Centre. It is agreed between the parties that 5% of the gross revenue generated from the hospital and Diagnostic Centre shall be paid to AHEL and GDPL in equal proportion by the Company as management fee under the above contract. The other terms of the proposed management contract will be decided between the parties in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the goodwill associated with Apollo and Gleneagles names and to maintain the quality of assessee's healthcare services, GMSPL and AHEL will review and provide services (including but not limited to following) as referred in clause 2.5 of the said agreement, which is reproduced as under:- i. new areas of health care services, designing layout, finalizing requirements of equipment's and personnel and any other matters relating to such new services. ii. procurement of appropriate medical equipment and equipment suppliers and co-ordination of pre-installation and installation activities. iii. technical support required in respect of training etc. of Doctors and other health personnel. iv. the operation of accident and emergency services; disaster planning; environmental requirement; intensive care units; medical records; information system; policies and procedures development; professional relations; quality assurance; and any other aspect of the operation of the Hospital which is linked to the quality of service being offered. v. operating policies affecting the appearance, maintenance, standards of operation, quality of service an / or appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Payment of management fee for advisory services and use of brand name Gleneagles @ 2.5% of gross operating revenue 5,14,96,223 5.4. Arm's length benchmarking exercise of above international transaction was carried out by assessee contained in its Transfer Pricing Study Report (TPSR). Assessee applied Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM), using Profit Level Indicator of Operating Profit / Operating Cost i.e. PLI of OP/OC. Assessee identified eight independent comparable companies for benchmarking. The OP/OC of assessee was 15.23% against industry average of 11.23 %. Hence, international transaction of management fee expenses was established at arm's length, as claimed by the assessee. 5.5. Ld. Transfer Pricing Officer (TPO) without pointing out any defect in the transfer pricing documents furnished by assessee, the comparables used and the benchmarking exercise carried out by assessee, went on to apply Comparable Uncontrollable Price (CUP) method. Assessee contested that since Ld. TPO could not find out even a single comparable hospital in India with foreign tie ups and therefore, CUP could not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of Audit Com Board Meeting 06 Aug,2012 7 Training Certificates on Robot of AGHL Surgeons (ACM ATR 06 Aug,2012) 8 Status Report on Robot Surgeries (ACM ATR 06 Aug,2012) 9 Status Report on Pet CT (BM ATR 06 Aug,2012) 10 Extract Audit Com 16th Novemner,2012 11 Expansion Plan (ACM Agenda 16 Nov,2012) 12 Status Report on Robot Surgeries (ACM Agenda 16 Nov,2012) 13 Extract of Audit Com 01 Mar 2013 14 Gastro Expansion Proposal 15 ONCO Expansion Proposal 16 Email Communication for Evaluation of Project by GMSPL/Parkway (April2013) 17 Project Approval Mail 18 Parkway audit report Ops Finance (Dated 02-12-2011) 19 Parkway audit report IT (dated 05-12-2011) 5.8. In respect of services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n based on the presumption that no services and benefit have been availed by the assessee. This alone, in my considered view cannot be the basis for such disallowance. The jurisdiction of Ld. TPO is to conduct transfer pricing analysis to determine ALP, by applying one of the five methods prescribed by law u/s 92C1) and not to determine whether the service or benefit has been availed by the assessee. I observe that the Ld. TPO has exceeded his jurisdiction by disallowing the entire management fee/brand royalty on the ground that no service was rendered/no benefit was received and treating its ALP at NIL. During the course of appellate proceedings, the appellant has submitted the necessary evidence of receipt of services and the detailed clarification thereon regarding the nature of benefit received by the appellant-company in relation to its business. In the factual matrix emerging in the case, in my considered view of the matter, the services rendered by GMSPL to the appellant-company are those for which independent enterprises would have been willing to pay for or to perform inhouse for themselves and hence, the value of the aforesaid services in comparable uncontrolled transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO are noted as under i. whether services are received as claimed and consequent benefits availed by the assessee from these services; and ii. the rate at which uncontrolled parties would have transacted for similar nature of services following CUP method. 8.1. In addition to above, ld. TPO also noted that no brand valuation report has been submitted to substantiate the value of brand of GMSPL (AE) to justify the charge. Also, there is heavy increase in advertising, marketing and promotion (AMP) expenses. 8.2. Ld. TPO thus concluded that the transaction with GMSPL is not at arm s length, that there is no evidence for receipt of any services and consequent benefits and that no pricing analysis has been produced to substantiate payment of management fee @ 2.5%. Ld. TPO thus made a downward adjustment of Rs.5,14,96,223/- by taking the management fee expense at Nil under CUP method. 9. After going through the above narrated factual matrix of the present case and perusal of the material placed on record and submissions made before us, we note that ld. TPO exceeded his jurisdiction by questioning whether or not services were received and whether or not assessee derived b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's length price on the facts of this case will be more appropriate method of ascertaining the arm's length price, the TNMM cannot be discarded. 9.3. Assessee has established the arm's length nature of the management fee transaction by benchmarking its OP/OC by taking TNMM as the MAM against average industry mark-up of eight independent comparable companies. On this benchmarking exercise of the assessee duly furnished before the ld. TPO, he has not pointed out any defect in the said benchmarking exercise forming part of the Transfer Pricing document. 9.4. Further, ld. TPO resorted to CUP method without applying the process of arriving at the same as the most appropriate method by showing any independent comparable transaction in order to apply CUP. On this aspect, assessee submitted comparative agreements entered into by AHEL and GMSPL in India with their respective third parties for charging royalty at similar rates as charged from the assessee, though relating to AY 2013-14. Ld. TPO did not accept them as not being contemporaneous in nature. However, it is important to note that ld. TPO could not bring any uncontrolled comparable on record to substantiate the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stewardship services which issue has nowhere been raised in the proceedings before the ld. TPO, ld. AO and the ld. CIT(A). In the course of hearing, ld. Counsel for the assessee explained the shareholder/stewardship services which means, services in the nature of simply oversight function in order to protect the investment in the company. Further, shareholder activity means, activities relating to juridical structure of parent company such as parent company shareholder meetings, issuing shares in parent company, and supervisory board costs, costs relating to reporting requirements of parent company etc. In the present case, the services received by the assessee are in no way akin to shareholder/stewardship services as explained above. Therefore, it is factually and legally erroneous to label these services as stewardship services/shareholder activity. These expressions of shareholder/stewardship services have been subject matter of discussion before the coordinate bench of ITAT Kolkata in the case of Akzo Nobel India Ltd v. DCIT [2017] 81 taxmann.com 366 (Kol) wherein para 10 and para 11 dealt with shareholder activities and stewardship activities, respectively. The same are repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n.com 506 (Kol), held as follows:- 23. In the instant case, the AO, while examining the evidences of receipt of IT services, did not make any adverse comment under section 37 of the I.T. Act but he only adopted the ALP adjustment of Rs. 4,10,08,010/- directed by the TPO because the order of the TPO was binding on him. As per the aforesaid decision of the Hon'ble High Court of Bombay, the jurisdiction of the TPO is specific and limited, i.e., to determine the arm's length price of an international transaction by applying any of the methods prescribed under sub-sections (1) and (2) of section 92C of the I.T. Act, being the most appropriate method. However, the TPO, in the instant case, determined the arm's length price of the international transaction at Nil value without applying any of the methods prescribed under sub-sections (1) and (2) of section 92C of the I.T. Act. The AO, in the instant case, had not disallowed the expenditure under section 37 of the I.T. Act but only adopted the ALP determined by the TPO in his order. We find that the principle enunciated by the Hon'ble High Court of Bombay in the aforesaid case is squarely applicable on the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at nil .' This is a slender yet crucial distinction that restricts the authority of the TPO. Whilst the report of the TPO in this case ultimately noted that the ALP was 'nil', since a comparable entity would pay 'nil' amount for these services, this Court noted that remarks concerning, and the final decision relating to, benefit arising from these services are properly reserved for the AO. 10.3. On arriving at CUP as the MAM by the TPO and its preconditions by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments. 18. We are also of the considered view that in the absence of prerequisites for application of CUP method being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO's impugned acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained. 8. In the above view, the question as proposed does not give rise to any substantial question of law. 10.5. The issue when no royalty was charged by the associated enterprise in the earlier years cannot be an estoppel against charging a fair or arm's length rate of royalty in the subsequent years as well as issue relating to shareholder/stewardship activities, were dealt by the coordinate Kolkata Bench of ITAT in the case of DCIT vs. Bata India Ltd. reported in [2016] 69 taxmann.com 120 (Kolkata-Trib.), which held as under:- 43.5 The plea of the Assessee with reference to the above conclusion of the TPO was that the fact that no royalty was charged by the associated enterprise in the earlier years cannot be an estoppel against charging a fair or arm's length rate of royalty in the subsequent years. Reliance was placed in this regard on the decision of the judgment of Hon'ble Supreme Court in the case of Shahzada Nand Sons v. CIT [1977] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Accounts cannot be regarded as provided by the associated enterprise in the capacity of a shareholder. 44. We have given a careful consideration to the rival contentions. None of the reasons given by the TPO for disregarding the contentions put forth by the Assessee can be sustained. As rightly contended by the learned counsel for the Assessee, the fact that no remuneration was paid for similar services rendered by the AE in the past is no ground to reject payment in a later financial year as for non-business consideration. The activities performed by the AE were not in the capacity of a shareholder and for specific services. The conclusions of the TPO therefore that the activities performed by the AE were more in the nature of shareholder activity cannot be sustained. We therefore hold that Information system services were in fact provided by the AE to the Assessee. 11. In view of our above discussion on the factual matrix of the case, material placed on record, submissions made by both the parties and considering plethora of judicial precedents, we do not find any reason to interfere with the finding given by the ld. CIT(A) and uphold the arm s length price determina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the action of the Ld. A.O is found to be unsustainable, and the disallowance under Section 14A is directed to be deleted. The ground stands allowed. 3. Further, the Ld. AO has added the above disallowances while computing the book profits under section 115JB of the Act despite the fact that the said section provides only specific adjustments to be made to the book profits of the company. In view of the adjudication as above, such action of the Ld. A.O, as a corollary also stands deleted, and the Ld. A.0 is directed to exclude such disallowance while computing the Book Profits under section 115JB of the Act. 4. The aforesaid grounds of appeal are allowed in favour of the appellant-company. 13. Considering the above factual finding given by the ld. CIT(A) on which nothing was brought on record to controvert the same by the ld. CIT(DR) in the course of hearing before us, we do not find any reason to interfere with the same. Accordingly, ground no. 7 taken by the Revenue in this respect is dismissed. 14. In the result, appeal of the Revenue for AY 2012-13 is dismissed. Since similar facts and issues are involved in the appeal for AY 2013-14 as aforesaid, our observa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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