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TMI Blog2024 (7) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... les, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this court in CIT v. EKL Appliances Ltd [ 2012 (4) TMI 346 - DELHI HIGH COURT] TP Adjustment - payment of management fee - whether payment made for Intra Group Services[IGS] was for commercial expediency? - assessee had not undertaken any benchmarking exercise in respect of IGS - HELD THAT:- We find that the TPO has essentially doubted those payments on the anvil of commercial expediency. In our considered opinion, this issue has been correctly answered by the Tribunal and which drew sustenance for its conclusions bearing in mind the decision rendered by this Court in Commissioner of Income-tax v. EKL Appliances Ltd [ 2012 (4) TMI 346 - DELHI HIGH COURT] as held So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the Transfer Pricing Officer to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied in law in deleting the addition made by the TPO by holding that the payment made for Intra Group Services was for commercial expediency? 2.2 Whether in the facts and circumstances of the case, ld. ITAT was right in not appreciating that TPO has not disallowed the Intra Group Services merely on the issue of non-substantiation of commercial expediency by the Assessee but after considering several other factors? 2.3 Whether in the facts and circumstances of the case the ld. IT AT was justified in law to deleted entire interest on receivable without considering the fact that the ld. CIT(A) has given details reasons to apply interest rate equivalent to 14.77% being SBI PLR+200 basis point in the FY 2008-09? 2. For the purposes of evaluating the challenge which stands raised, we deem it apposite to take note of the following essential facts. A.T. Kearney Ltd., the respondent-assessee, is stated to be a management consulting subsidiary engaged in providing consultancy services to industry and its activities extend to consultancy and advisory services being provided to diverse multinational enterprises. It established a branch office in India in 1997 which for the purposes of brevity s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so attend the public events and assists in sales efforts if it helps ATK in securing an assignment or a client relationship. Professional Development Services comprises of the training services such as coordination of web based training and senior management training for partners and principals as well as elite program for high performing, high-potential managers and principals. Further, these services also comprise of the management of technical platform for Web based training and other trainings related to IT solutions The key terms of the management fee agreement entered into between ATK US and its affiliates is enumerated below. Associated Enterprise Value of transaction for year ended 31 March, 2009 Nature Terms of the Inter-company agreement ATKUS Rs. 53,224,798 The agreement has been entered into by and between ATK US and its Affiliates for availing of management support services which is effective from January 1, 2008. Services provided by ATK US shall include services as mentioned in Para 4.3 above. Charges for the provision of services to ATK BO shall include cost and a profit mark-up equal to ten percent. Costs shall mean all direct and indirect costs related to provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 1. Whether the AE has received intra group services? 2. What are the economic and commercial benefits derived by the recipient of intra group services? 3. In order to identify the charges relating to services, there should be mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs. 4. Whether a comparable independent enterprise would have paid for the services in comparable circumstances? 9. Upon consideration of the submissions which were addressed before it, the TPO came to record the following conclusions: 6.2.3 After carefully consideration of submission s filed by assessee in response to the show cause and in support of its contentions, it is seen that the contentions raised by the assessee in this regard cannot be accepted on following grounds: There is no evidence that the services have actually been provided. The assessee has failed miserably to demonstrate the need for these services as also the receipt of the same. Even if it is considered that some sort of services have been provided by the designated persons, there is no evidence that those persons have not pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from rendering services to third parties as well. It is apparent, as has been mentioned above, that services of such nature are being performed by the assessee itself during its normal course of business. Under arm s length circumstances no independent enterprise would be willing to pay for services which are a part of its routine business performed by it and would not engage it to receive such incidental services for a payment, even at cost. Moreover, it is not disputed that the activities for which it is paying are also performed by itself. Under the OECD guidelines, 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. Moreover, even if it is presumed without conceding that business exigencies do permit third party involvement inspite of its own endeavor, in no case is there is scope for duplicity of services. Moreover, the cost of such services, if any, would need to be identified to prove that it has not overpaid its AE than what would have been paid under arm s length circumstances. 10. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship between the parties rather than be determined by normal commercial conditions as may have been structured by the tax payer to avoid or minimize tax. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily based on the transactions it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transaction. 14. It has been held by various courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. The question whether decision was commercially sound or not is not relevant. The Hon'ble High Court in the judgment cited as EKL Appliances [Supra] has held that the assessee was not required to show that any expenditure incurred by him for the purpose of business carried on by him has actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xhibits in the paper book, we do not find any merit in the transfer pricing adjustments made by DRP/TP/ Assessing Officer on this count and the same is directed to be deleted. 11. Insofar as the identification of an appropriate rate of interest is concerned, it took note of the fact that the TPO had rejected the Arm s Length Price [ALP] suggested by the assessee and required interest being charged at the rate of 14.88%. In appeal the rate of interest was brought down by the CIT(A) to 13.88%. 12. An identical issue appears to have been urged in A.Y. 2008-09. That aspect came to be disposed of by the Tribunal as would be evident from the following observations appearing in its order for that year: 13. After hearing both the sides, we find identical issue had come up before the Tribunal in assessee's own case in A.Y. 2008-09. We find, the Tribunal, vide ITA No.6249/Del/2012, order dated 21st May, 2018, has decided the issue in favour of the assessee, by observing as under:- 21. The next issue relates to the adjustment made on the interest received from 8.46% to 17.26% which was reduced by the DRP to 13.38%. 22. This relates to the interest received by the assessee from ATK Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the impact this would have on the working capital of the assessee will have to be studied. In other words, there has to be a proper inquiry by the Transfer Pricing Officer by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an associated enterprise, the arrangement reflects an international transaction intended to benefit the associated enterprise in some way. 11. The court finds that the entire focus of the Assessing Officer was on just one assessment year and the figure of receivables in relation to that assessment year can hardly reflect a pattern that would justify a Transfer Pricing Officer concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this court in CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at an unrelated party would not have undertaken the same in usual course of business. More importantly it is wholly impermissible for the TPO to doubt commercial soundness of the expenditure that may be incurred. 16. Furthermore, it would also not be permissible for the TPO to engage in the restructuring of a transaction, unless the economic substance of a transaction differed from its form and if the form and substance of the transaction were the same but the arrangements relating to the transaction when viewed in totality differed from that which would have been adopted by independent enterprises acting in a commercially rational manner. This position has been duly affirmed by the decision rendered by this Court in Sony Ericsson Mobile Communication India P. Ltd. v. Commissioner of Income-tax 2015 SCC OnLine Del 8083 where it was observed as follows:- 147. The tax authorities examine a related and associated parties' transaction as actually undertaken and structured by the parties. Normally, the tax authorities cannot disregard the actual transaction or substitute the same for another transaction as per their perception. Restructuring of legitimate business transaction would ..... 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