TMI Blog2014 (2) TMI 891X X X X Extracts X X X X X X X X Extracts X X X X ..... HI HIGH COURT] followed - The departmental stand cannot be approved when the issue is considered from the aspect of appropriateness of the expendituring - the need and necessity for the assessee to incur the expendituring also cannot be held to be an acceptable criteria - Nor can the necessity of the expenditure from the benefit accrued to the assessee point of view has been approved as a relevant criteria - the finding given by the Co-ordinate Bench, is based on a peculiar set of facts namely that the assessee in the facts of that case consistently failed to provide a cost allocation key not only before the TPO/DRP but even before the Tribunal - the issue pertained to direct expenses which admittedly are easier to demonstrate and verify - the expenses are not direct expenses however the order of the Co-ordinate Bench in Dresser Rand's has considered indirect expenses which position apparently has not been upset by any Higher Forum - in the absence of any serious discussion on facts specifically addressing the detailed documentation placed on record by the assessee, it would be appropriate to restore the issue back to the TPO – Thus, the matter remitted back to the TPO for fresh ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost contributions 2.3.3 applying CUP method in contravention of the provisions of Rule 10B of the Income Tax Rules, 1962 2.3-4 ignoring the report obtained by the participants of the CCA from the independent auditors documenting the quantum, manner and the methodology for computing the contribution to be made by each participating group entity while applying CUP method 2.3.5 considering the ALP of the transaction to be Nil by inappropriate application of CUP method merely based on presumptions without furnishing details of price charged in any comparable uncontrolled transaction erred in holding that the appellant has not identified payment for each and every service and asserting that identification of separate payment for each service is necessary to determine arm's length nature of the transaction. 2.4. erred in holding that the appellant has not identified payment for each and every service and asserting that identification of separate payment for each service is necessary to determine arm's length nature of the transaction. 2.5. erred by ignoring the submissions and documents submitted by the appellant during the assessment proceedings and holding that the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return of income of Rs.10,62,69,389/- which was subjected to scrutiny assessment after the issuance of notice etc. The A.O referred the issue to the Transfer Pricing Officer (hereinafter referred as to "TPO") to determine the Arm's Length Price (hereinafter referred as to "ALP") in respect of the international transaction undertaken by the assessee. A perusal of the record shows that the TPO vide his order dated 15.10.2010 placed at pages 55-72 of the appeal set in his order u/s 92CA(3) made the following observations in regard to the profile of the assessee and the international transactions disclosed in Form -3CEB by the assessee:- "Profile of the Assessee 2.1 Atotech India Limited is a wholly owned subsidiary of Atotech BV, a company incorporated in the Netherlands. Prior to this, Atotech India was operating in India as Max Atotech Limited, a 50:50 joint venture between Atotech BV and Max India Limited. Atotech India was incorporated in March 1996 to meet the requirements for plating chemicals in the country. As part of its strategy to exit non-core business, Max India Limited sold its equity stake in Max Atotech to Atotech BV in July 2001. 2.2 Atotech India Limited is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilized by the assessee addressed by the TPO is extracted from his order and reads as under :- "Summary of Functions performed, Risks undertaken and Asset utilized: 4.2 Atotech India, the assessee is a routine manufacturer and marketer of specialty chemicals compounds used for general metal finishing and production of printed circuit boards. It carries out routine functions and assumes normal risks associated with carrying out such business. It also involved in the commission of certain chemicals and capital equipments to certain customers in India. As a part of this arrangement, the assessee also provided after sales service to the customers for the chemicals commissioned. At present, however this activity forms a very small portion of the total income. Atotech India utilizes its manufacturing facilities, distributing infrastructure, office premises, warehousing facilities, communication facilities etc. for the purpose of its business. On account of acquisitions, it has come to acquire certain routine intangibles such as goodwill, Intellectual Property Rights and non-compete fees. It does not undertake any significant R D on its account that leads to the development of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied by the TPO and upheld by the DRP in view of the stand of the Ld. AR is confirmed. 3.2 A perusal of para 7.4 of the TPO's order shows that the rendering of the services has not been doubted by the Revenue. The assessee's claim has been rejected on the ground that the assessee had not identified the payment for each and every service. The stand of the TPO was that unless the value of a particular service is not known it cannot be determined as to what should be the arm's length price of that service. The following extract from his order addresses the TPO's stand :- " 7.4. It can be seen from the above that the nature of services received by the assessee are of different kinds, however the payment has been clubbed by the assessee in four different heads. The assessee has not identified payment for each and every service which it was required to furnish. In fact in order to benchmark the payment for receipt of each and every service it is necessary to know as to what are the different services and what is the payment made for that particular service. Unless it is known as to what is the value of a particular service that the assessee has paid to the AE, it cannot be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tee (OC) comprising of key senior people such as the president, functional heads, the business unit vice presidents and regional vice presidents. The functions include: - Credit control (setting credit lines, minimizing credit risk etc) - Liquidity function - Other finance functions such as treasury monitoring and steering - Corporate HR services (recruiting, succession planning, career development) - Global HR services (assistance in job description, personnel policies, training and recruitment etc) At the outset, these functions appear to be extremely vague and general in nature. The assessee has in place an arrangement for global sharing and over and above that it has also entered into a regional cost sharing arrangement but the assessee has not been able clearly demarcate who does what or what was the need to enter into both such arrangements when they both relate to management. For example the Corporate HR services and the Global HR services both appear to be doing more or less the same function of human resource management. Clearly there is an immense overlap/duplication of services that is happening here. 3.4. The TPO also as per para 8-8.8 did not accept the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fa ade has been raised to give an impressions that some vital benefit has passed to the assessee, which is actually not the case. Related parties are quite likely to give a form that will give an impression that a real service is being rendered by one to another. But the necessity to look beyond the veil is recognized across tax jurisdictions. IN the above circumstances the payment of service fee is only an arrangement to change tax base without any economic substance in the transaction." 3.8. In support of the said conclusion on facts, reliance was placed upon various decisions and OECD Guidelines. We do not propose to refer to these in the present proceedings as it would be more appropriate to specifically address the arguments advanced by the parties before the Bench as these would be referred to subsequently. However, for the purposes of the present proceedings for the sake of completeness, it would be first appropriate to set out how the issue was considered by the DRP. For ready reference the same is extracted hereunder:- "4.2.4. On analysis, the DRP finds that the services availed can be grouped, as done by assessee, under the following heads: 1) Product Management 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to rendering of services otherwise the underlying assumption would be that services have not been provided. In fact no evidence has been put on record to show these services were needed and hence provided. There is no cost allocation key with reference to Individual indirect costs either. So we find that the TPO has rightly rejected the economic analysis of the assessee and applied CUP and taking ALP at NIL, computed the Arms Length Price from the perspective of recipient. So the objection is rejected." 4. Aggrieved by the finding which led to the passing of the final assessment order pursuant to the DRP's directions, the present appeal has been filed by the assessee before us. The Ld. AR right at the outset submitted that the assessee concedes that the most appropriate method is not TNMM and CUP method which position is agreed to and no longer disputed on behalf of the assessee. It was his argument that however the relevant facts have not been taken into consideration. The facts it was his submission have to be taken into consideration in the light of the settled legal principles on the issue where Management Cost charges have been taken into consideration by various d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and General joint administrative functions it was submitted that these are elaborated and the documentary evidence qua the same has been copiously relied upon before the department qua each of these and none of it has not been taken into consideration and the issue has been concluded against the assessee ignoring the relevant facts. The documentation and facts ignored has been elaborated in the synopsis, the same is reproduced hereunder:- Payment of Cost Sharing Expenses under the Cost Contribution Agreement 6. The appellant had executed three Contracts of Accession with its AE, Atotech DeutschlandGmBH, wherein the appellant concluded three underlying Cost-Sharing Agreements('CSAs'CCAs. , namely regional cost sharing agreement (pg 66 to 76), research and development cost sharing agreement (pg 78 to 88) and management group cost sharing agreement (pg 78 to 80 89to99), submitted to the Ld. TPO as Annexure 1 to the submission dated 06 September2010.TheR Dand management group cost sharing agreements are effective January2002whereas,theregionalcost sharing agreement is effective January 2004. 7. The R DTSS-CSA involves the sharing of R D and technical sales service support costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spects of the product. It is also important to note that Atotech India does not have its own R D department. The company has a very thin product management team which works closely with Atotech Business Technology Teams for dealing in more than 500 products and over 1000 customers spanning the whole of India and SAARC countries. Rather it receives marketing materials from the central marketing departments of Atotech,group-in the form of newsletters, promotional literature, quarterly magazines, journals and the like. If these product management, marketing and promotional activities were not carried out in the centralized departments, then Atotech India would definitely need to employ several functions. Nonetheless it would not be possible to effectively achieve the required global standards. Documentary Evidence The appellant submitted the following documents before the TPO on a sample basis evidencing the receipt of economic benefit by the appellant from the product management activity performed by the AE: List of trainings and workshops attended by employees of appellant Company overseas which were conduct Global Product Management Team of AE during the Financial Year 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture to assure a proper working of all users. In addition the team is in charge of developing new concepts and evaluating new features and tools to assure the necessary level of security and standardization. In addition to the above Atotech India receives certain network administration andIT security services from the Total Group also. Documentary Evidence The appellant submitted the following documents before the TPO on a sample basis evidencing the receipt of economic benefit by the appellant from the network administration function performed by the AE: Documentation pertaining to Nomate kid solution forming part of IT support services towards introduction of secured network access (Refer page 1135 to 1225 of the paper book. Technical guidance on implementing Access Control System in India (Refer Page 1243 to 1312 of the paper book) Regional Cost Sharing:- Payment towards regional cost sharing involves costs towards the following:- a. Worldwide purchasing for ensuring optimum pricing for input material. b. Logistics and inventory management. c. Quality control It is respectfully submitted tht the actual cost incurred by the AEs for performance of above funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by Group Controlling Department. Charge-in: Group Controlling Department allocates the total central costs to all the group entities including the charge out parties in the proportion of costs incurred to total external sales. 15. The DRP commented that there is no cost allocation key with reference to individual indirect costs. However, the audit reports issued by independent auditors, clearly confirm the cost allocation methodology with the CCA entered between parties. (placed at pages 1341 to 1394 of the paper book). 16. Furthermore, the appellant humbly submits that the audit report contains, inter-alia quantum, cost allocation methodology and the allocation keys for computing the contribution to be made by each participating group entity and accordingly, such analysis cannot be rejected without details reasons." 4.3 The cost allocation methodology with the CCA entered between the parties, it was stated is available at pages 1341-1394 of the paper book. It was his submission that the evidence placed before the TPO and the Agreements available were not considered and discussed by the TPO, as he had proceeded on the footing that there was duplication of payments and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the management services received. 19. As submitted above, the appellant has placed on record various supporting documents (placed at pages 160 to 1339 of paper book), evidencing the receipt of economic benefit by the appellant from its AE by entering into CCA, 20. In view of the above, the costs incurred by the appellant to avail the management group benefits are commensurate with the benefits received by the appellant, considering the nature of the functions performed by the AE and costs allocations charged to the appellant in lieu thereof. However, the Ld. TPO failed to appreciate and ignored the documents submitted by the appellant with respect to the management cost contributions while accepting the ALP of transaction relating to R D cross charges. In this regard, the Appellant would also like to place reliance on the ITAT rulings in the following cases wherein the payments made by the appellant to the AEs towards cost sharing have been held to be at arm's length based on the documentary evidences furnished by the appellant. Also, it has been stated that the commercial wisdom of an appellant in entering into a transaction cannot be questioned by the revenue authorities: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re incurred for performing management functions which are not in the nature of shareholder's functions. The same has been submitted before the Ld. TPO in our submission dated 20 September 2010. (Placed at page 94 to 95 of the paper book)." 4.7. Specific attention was invited to the decision of the Jurisdictional High Court in the case of EKL Appliances [TS-206-HC-2012 (Del)] (copy placed at pages 94- 118 of the paper book). Inviting specific attention to pages 115-117 and paragraph 21,22 of the same, it was his submission that the approach of the Revenue is not legally correct as the Jurisdictional High Court considering the relevant rule i.e Rule 10B (1) (a)holds that it does not authorize the disallowance of any expense on the ground that it was not necessary or prudent for the assessee to have incurred the same; or that in view of the Revenue the expense was unremunerative; or that in view of the continued losses suffered by the assessee in his business he could have fared better had he not incurred the said expense. It was his submission that on all these grounds, the Jurisdictional High Court has held that the Revenue cannot disallow even considering the said Rule and all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorized." 4.8. Inviting attention to the order of the CO-ordinate Bench in the case of Ericson India Pvt. Ltd. (copy placed at pages 119-151 of the paper book) in ITA No- 5141/Del/2011 (TS 319 ITAT) it was submitted that the judgement in the case of EKL Appliances of the Jurisdictional High Court has been followed by the Co- ordinate Bench as would be evident from Page 148 of the compilation of case laws before the Bench. Based on the principle laid down it was submitted that the Co- ordinate Bench held that there was no force in the Revenue's claim in holding that for availing the services the assessee was not required to make any payment. It was his submission that no doubt in the facts of that case there were direct expenses which were being considered by the Co-ordinate Bench however the legal principle considering Rule 10B(1)(a) addressing the necessity of the expenditure on the part of the assessee for incurring the same was a legal principle followed. 4.9 Inviting further attention to the compilation of case law reliance was fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliance was placed by the Revenue it was stated that no doubt rendering of services has not been doubted by the Revenue however the assessee is faulted on the ground that firstly the assessee has not bench-marked the transaction and as per its TP study provided has provided a combined TNMM as the most appropriate method. Since the said issue had already been conceded by the Ld. AR on behalf of the assessee, the Ld. CIT DR was required to address his arguments in the light of the assessee's stand. Resuming his arguments from the point that CUP has been conceded by the assessee as the most appropriate method which is in line with the conclusion of the TPO upheld by the DRP. Addressing the other arguments of the assessee it was his submission that the assessee's case deserves to be dismissed. Reliance in support of the impugned order was placed upon the order of the Co-ordinate Bench in the case of Knorr Bremse India Pvt. Ltd. 2012-TII-138-ITAT-Del-TP rendered by the Co- ordinate Bench vide its order dated 31.10.2012 in ITA No.-5097/Del/2011. Addressing the judgment of the Jurisdictional High Court relied upon by the Ld. AR in the case of EKL Appliances Ltd. it was his submission that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is safeguarding group interest/shareholder interest. The TPO has analysed each service and benefit received by assessee in detail. No cost allocation key has been furnished to the DRP either which confirmed the addition made for both such services claimed by the assessee." 7. We have heard the rival submissions and perused the material available on record. On a consideration of the same and in the light of the submissions advanced by the parties before the Bench and considering the legal principles laid down in the orders and decisions relied upon, we would first for the sake of completeness re- address the facts qua the issue briefly. The record shows that the issue before the TPO and the DRP as far as the assessee is concerned has been contested in the light of the stand taken that TNMM was the most appropriate method. It is also seen that assailing the TPO's stand before the DRP that CUP is the most appropriate method the assessee did lead evidence and arguments and documentation in order to justify that no adjustment was required to be done even if CUP is taken as the most appropriate method. It is seen that the relevant documentation Agreements etc. for deciding the issue h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e finding arrived at in these peculiar facts does not detract from the legal position as considered by the Jurisdictional High Court in the case of EKL Appliances. It may be relevant to keep in mind the fact that before the Hon'ble High Court the issue pertained to direct expenses which admittedly are easier to demonstrate and verify. In the facts of the present case the expenses are not direct expenses however the order of the Co-ordinate Bench in Dresser Rand's has considered indirect expenses which position apparently has not been upset by any Higher Forum. Accordingly, in these peculiar facts and circumstances in the absence of any serious discussion on facts specifically addressing the detailed documentation placed on record by the assessee, we deem it appropriate to restore the issue back to the TPO setting aside the impugned order with the direction that the TPO shall adjudicate the issue afresh by way of a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. 9. In the result, the appeal of the assessee is allowed for statistical purposes. The order is pronounced in the open court on 10th of January 2014. - - TaxTMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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