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TMI Blog2024 (8) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... red at Nil . Such arbitrary exercise by the DRP without showing any application of mind cannot be countenanced in any manner. The directions made are neither clear nor implemented by the TPO and TP adjustment earlier made was mechanically reiterated. DRP directions are required to be set aside and the adjustment made by the TPO on account of intra group services are liable to be cancelled and reversed. The value of transactions towards management charges under TNMM methodology adopted by assessee thus stands reinstated. The adjustments made towards payment of management services in question are quashed. TP Adjustment - imputed interest on delayed receivables beyond the period of 60 days - HELD THAT:- Recently, the Delhi Bench of the Tribunal in the case of ERM India (P) Ltd. vs. National e-assessment Centre [ 2021 (9) TMI 1422 - ITAT DLEHI] after following the judgment of Kusum Healthcare [ 2017 (4) TMI 1254 - DELHI HIGH COURT] held that once the working capital adjustment is given, it subsumes the interest on receivable and no separate benchmark is to be made. DRP in the instant case has already directed the TPO/AO to allow working capital adjustment. One of the main features of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 70,15,519/- in relation to imputed interest on outstanding receivables. Based thereon, the AO issued a draft assessment order dated 22.09.2021 under Section 144C of the Act incorporating adjustments recommended by the TPO under Section 92CA of the Act. In response to draft assessment order dated 22.09.2021, the assessee filed objections before the Dispute Resolution Panel-I, New Delhi (DRP). The DRP issued directions under Section 144C(5) of the Act to the AO for the purposes of framing the final assessment order. 3. The DRP however did not find any infirmity in the TPOs order and thus declined to interfere therewith on both the issues noted above. In pursuance of the directions of the DRP, the AO passed final assessment order dated 31.08.2022 by making the adjustments on account of management charges to its AE, i.e., Intra Group Services and outstanding receivables. The income was accordingly assessed at Rs. 84,09,03,040/-. 4. Aggrieved by the final assessment order passed in pursuance of the directions of the DRP, the assessee is in appeal before the Tribunal. 5. We shall deal with each issue hereunder. 6. The first issue concerns adjustment on account of management charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs represents day to day advices from parent group and its AEs in the various field such as Supply Chain Management, Manufacturing Support and Services; Sales and Operation Planning; Marketing Strategy; Day to Day Administration; Human Resources; Quality Control; Information Technology Services and its implementation; Safety and Environment; Technical and Research Development Services; Plant Efficiency and Product Development etc. (d) the cost of services received from its AEs are cost efficient as compared to independent parties and also eliminates a risk of leakage of confidential information technology. The costs borne by the assessee are as per the terms and conditions of the group. The basis for allocation of management charges as encapsulated in the intercompany agreement is that where the services directly benefits the assessee-company, 100% of actual costs (along with 3% markup) will be allocated to the assessee-company and in case of indirect benefit arising to the assessee, the cost will be suitably allocated as attributable to the assessee along with 3% markup thereon. The allocation rate is dependent upon the efforts put in by the Headquarter staff in respect of variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Same principle has been reiterated in the case of Magneti Marelli Power Train India vs. CIT, 389 ITR 469. In this case, the assessee adopted TNMM method for all the services collectively. The TPO accepted the TNMM method for such services except payment made for technical assistance fees and worked out the ALP of technical assistance fee on entirely different method. In such circumstances, the Hon ble Delhi High Court held that once the TPO accepted the TNMM method applied by the assessee as most appropriate method in respect of international transaction, the TPO ought not to dispute the application of TNMM method for payment of technical assistance fee and replace it by CUP method on standalone basis. The ld. counsel submits that in the light of the observations made in Magneti Marelli (supra), the TNMM method accepted by the TPO/AO in respect of other international transactions with AEs, could not be seen with disfavour in respect of management charges incurred by the assessee. Similar view has been taken by the Co-ordinate Benches in many cases. (iv) The ld. counsel next contends that in assessee s own case for Assessment Years 2010-11, 2011-12 and 2012-13, the assessee had simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the members as done in the case of the assessee on a consistent basis. In such low value adding intragroup services, the tax administration should refrain from challenging the benefit test when the simplified approach is adopted. In such low value adding services, the tax payer need only to demonstrate that the assistance were provided to it and for that purpose an invoice describing category of services should be taken as sufficient. In such cases, evidence of individual acts performed is difficult to corroborate on many occasions. The service provider in the instant case has provided a very small profit markup to the cost at 3% as against markup upto 5% of the cost is taken as plausible as per the OECD guidelines. (ix) The assessee in the instant case has filed various contemporaneous evidences in the form of emails and agreement in relation to such services and such an agreement gives reference to cost plus markup of 3% which is miniscule. (x) In the TP study, the assessee evaluated the Arm s Length Price by applying the cost based TNMM method which is described as most appropriate method for intra-group services as per OECD Guidelines. In the TP study, the net margins based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for intra-group services on collective basis but segregated the management fee from such collective services and then benchmarked it at Nil under CUP in the absence of any benefit derived by that assessee. In such identical facts situation, the Co-ordinate Bench held that the TPO while selecting the CUP method has not identified any comparable uncontrolled transaction which is the precondition for applying CUP method. The Co-ordinate Bench remitted the matter back to the file of the Assessing Officer with a direction to select the comparable company and thereafter decide the most appropriate method and then find out whether any adjustment is required or not. In the remand proceedings thereafter, the Assessing Officer accepted the TNMM method adopted by the sister concern while benchmarking intra-group services /transactions as most appropriate method and ultimately no adjustment was made. 8. The ld. counsel thus submits in conclusion that the management services should not be segregated from the rest of the intra-group services and all the services should be considered in aggregation on combined basis for which the cost based TNMM method has been adopted by the assessee and no de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivered by the ITAT in the case of International Flavours Fragrances India (P) Ltd. vs. DCIT, 152 taxmann.com 196 (2023) (Chny) for the proposition that aggregation approach claimed by the assessee for all services including intra group services would be permitted only if the transactions were closely linked to each other and transactions belong to a particular class of transactions. In the absence of similar genre, the TPO would be justified to benchmark the transactions of payment of management services separately under CUP method regardless of TNMM method adopted for other services received from AEs. A reference was also made to the decisions rendered by the Pune Tribunal in the case of A Raymond Fasteners India (P.) Ltd. vs. ACIT, 142 taxmann.com 248 (2022) to assert segregation of transactions and to contend that it is only in the case of intra group transactions that one can process them on aggregate basis. If it is found that the international transactions of intra group services are totally different from other transactions executed with AE, the Revenue would be justified in segregating such services and processing it separately by applying Most Appropriate Method for ALP de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Akzo Nobel India Pvt. Ltd., 137 taxmann.com 369 which was confirmed by the Hon ble Delhi High Court in the case of Akzo Nobel India Pvt. Ltd. vs. ACIT reported in 145 taxmann.com 468 (Del.). Similar decision has been rendered in Safran Engineering Services India Pvt. Ltd., 89 taxmann.com 77 (Bangaluru). The ld. CIT-DR also pointed out that OECD guidelines clearly provides for applicability of benefit test for the payment of intra group services. The ld. CIT-DR submitted that no interference with the directions of the DRP is called for in the facts of the case. 10. We have weighed the extensive submissions from both sides and perused the material referred to and relied upon in the course of hearing. We have also perused the decisions cited by both sides. 11. The assessee is engaged in the business manufacturing and marketing of rubber hose and hose assembly on its own facilities. The Assessee is a part of the Gates Group having worldwide operations in different countries. The assessee during the year under review availed multiple services from its Associated Enterprise (AE) namely Gates Industrial Singapore Pte Ltd. The nature of the services availed are broadly liste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts included Service Agreement invoices, e-mail communications as illustrated. The requisitions were raised and the benefits were received as a corollary from the services. The assessee thus contends that on the basis of the records it is manifest that services were indeed rendered and received by the assessee. As a corollary, the services availed have benefitted the assessee by way of increased efficiency of business operations. 12.2 As per the Inter-Company Agreement entered into by the assessee with its AE for impugned services, host of low key services of routine nature were seamlessly rendered by the Assessee to carry out day to day operations. The AE primarily acts as a global hub for rendering such services. Based on the terms contained in the Agreement, the AE charges a mark up at 3% on the total cost [Direct costs + allocated costs] incurred by the AEs for rendering such services. The cost allocation mechanism over the services and mark up charged for rendering services is also specified in the agreement together with methodology of cost allocation and cost allocation sheets. The assessee also contends that costs incurred by the assessee to avail management services from it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m) held that benefit test does not have much relevance in the Arm s Length Price ascertainment and it is wholly irrelevant as to whether the assessee derives benefits from such expenses or not. It is thus the case of the assessee that it is not necessary for the assessee to show the necessity of incurring legitimate expenditure and the benefit flowing to the assessee there from. In the instant case, on the other hand, the assessee has demonstrable evidences in the form of consistent increase in revenue and profits by virtue of such services. The agreement, the email communication, invoices, payments, increase in profitability etc. when seen together, gives justifiable reason to endorse the plea of the assessee towards bona fides of the expenditure in question. The assessee, in the instant case, has applied TNMM method at entity level for all services including management charges. No reasonable justification in the facts of the case, can be perceived to carve out one of the many services availed and substitute MAM qua management charges from TNMM to CUP method. Noticeably, the operating margin (OP/OC) of the assessee at 22.58% compares far superior with the comparables operating mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be substituted for the price in the controlled transaction. The TPO cannot ordinarily benchmark a transaction value at Nil under the guise of CUP method on the basis of alleged absence of benefit derived by the assessee from such intra group transactions for two reasons; (i) CUP method cannot be invoked without bringing the comparable services without first identifying the price charged or paid for the similar services provided in a comparable uncontrolled transaction. In the instant case, admittedly, no such comparable has been brought on record by the revenue. (ii) The test of presence of commercial benefit or no benefit is essentially in the domain of Section 37 of the Act. The jurisdiction vested under transfer pricing provisions to the TPO is only to find out whether the prices paid by the services are at Arm s Length Price or not, as held in Sony Ericson Mobile Communication vs. CIT, 374 ITR 118; CIT vs. EKL Appliances, (2012) 345 ITR 241 (Del) and many other decisions. We further note that Co-ordinate Bench in DCIT vs. Apollo Gleneagles Hospital Ltd., (2013) 150 taxmann.com 210 (Kol), it was held for the purposes of determination of analyzing the benefit test has no great r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt reiterated the same principle in relation to various intra-group and interlinked services. In the case of Magneti Mareli, the said assessee had received various intra-group services which were interlinked with the production and sale of the product. Such services/transactions were in the nature of import of raw materials, sub-assemblies and components, payment of technical assistance, payment of royalty of software and purchase of fixed assets. All these were categorized under one head viz. manufacturing of automotive components for arms length purpose. The assessee invoked the TNM method for all the services collectively. However, the TPO accepted the TNM method for such services except the payment made for technical assistance fee and worked out the ALP for technical assistant fee on an entirely different method. In such facts and circumstances, the Hon'ble Delhi High Court held that once the TPO accepted the TNM method applied by the assessee as the most appropriate method, then it was not open to the TPO to work out the ALP in respect of one element, i.e. payment of technical assistance fee on entirely different method, i.e. CUP method. Similar view has been taken on ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tely swayed with the adjustment made by the TPO without objectively examining the factual matrix and applicability of CUP method in the light of judicial precedents and treating the value of services rendered at Nil . Such arbitrary exercise by the DRP without showing any application of mind cannot be countenanced in any manner. The directions made are neither clear nor implemented by the TPO and TP adjustment earlier made was mechanically reiterated. 23. In the peculiar facts of the case and legal position analysed, the DRP directions are required to be set aside and the adjustment made by the TPO on account of intra group services are liable to be cancelled and reversed. The value of transactions towards management charges under TNMM methodology adopted by assessee thus stands reinstated. 24. The adjustments made towards payment of management services in question are quashed. 25. We now advert to second issue which involves Transfer Pricing Adjustment of Rs. 70,15,569/- on account of imputed interest on delayed receivables beyond the period of 60 days. 25.1 During the year under consideration, the assessee has inter alia made sales amounting to Rs. 112.81 crore to its AE. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO nor the AO allowed the same despite the directions of the DRP. Notwithstanding, even after allowing the working capital adjustment on the point, PLI is still better (22.58%) than the uncontrolled comparables (6.13% median) as demonstrated in preceding paras. 25.4 Identical issue cropped up before Hon ble High Court of Delhi in the case of Pr. CIT vs. Kusum Healthcare Pvt. Ltd. in 398 ITR 66 (Del) and Avenue Asia Business Advisors (P) Ltd. vs. DCIT. The Honble Jurisdictional High Court held that every receivable appearing in the accounts would not automatically be characterized as an international transaction. There may be delay in collection of moneys even beyond the agreed period due to variety of factors. It may be on account of commercial compulsion and its impact on the working capital has to be studied. However, if the working capital adjustment is already given and the net margin is still better than the comparables, no further adjustment is required to be made because working capital adjustment already factored and subsumed in profitability. 25.5 Recently, the Delhi Bench of the Tribunal in ITA No. 513/Del/2021 dated 28th September 2021 reported in 192 ITD 11 in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X
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