2010 (10) TMI 184 - AT - Income Tax

Arm s length price - The assessee is an Indian company and wholly owned subsidiary of Gemplus SA France. Gemplus is a multi national engaged in providing smart card solution for telecommunication industry financial services and other e-business segment - The TPO held that if at all any benefit is accrued as a result of the services said to be rendered by the Gemplus Singapore the benefit was accrued to the Gemplus Singapore group as a whole and exclusively to the individual company Gemplus India - TPO held that the payment of Rs. 1, 44, 98, 000/- was not justified and held that the said amount is adjustable u/s 92CA TPO has observed that the terms prescribed in the agreement in respect of the payments to be made by the assessee company are independent of the nature and volume of services if any rendered by the Singapore Associate. de by the assessee company are independent of the nature and volume of services if any rendered by the Singapore Associate. This is a vital observation made by the TPO which goes to the root of the issue. The function of the TPO is to compare the payments made by the assessee company for services received if any and to see whether those payments are comparable. In a given scenario the TPO has to examine whether the payments were ALP conducive. Therefore it is very imperative on the part of the assessee to establish before the TPO that the payments were made commensurate to the volume and quality of services and such costs are comparable. The payment terms as pointed out by the TPO are independent of the nature or volume of services. The assessee has defeated in this primary examination itself. The TPO is also justified in making a pertinent observation that the expenses are apportioned by Singapore affiliate among different country centers on the basis of their own agreements and not on the basis of the actual services rendered to the individual units. It is in addition to the above fundamental flaw that the TPO has made a clear findings that there are no details available on record in respect of the nature of services rendered by Singapore affiliate to the assessee company. Therefore we are of the considered view that the TPO is justified in holding that the assessee has not proved any commensurate benefits against the payments of service charges to the Singapore affiliate. Therefore the TPO is justified in making the adjustment of ALP under sec. 92CA of the Income-tax Act 1961.

Summary

Issues:
Determining the ALP adjustment for management services fees paid to a foreign associate.

Analysis:
1. The appeal was filed by the assessee against the order of the Commissioner of Income-tax (Appeals)-IV at Bangalore for the assessment year 2003-04, challenging the ALP adjustment made by the Transfer Pricing Officer (TPO) under section 92CA of the Income-tax Act, 1961.
2. The TPO observed that while certain transactions of the assessee company with its Singapore associate were at Arms Length, the payment made towards management services was not justified. The TPO found that the payment for management services was less than 5% of the cost or sales, and the comparables identified by the assessee did not pay any management service fees. The Transactional Net Margin Method (TNMM) analysis by the assessee was rejected by the TPO.
3. The assessee argued that the payment for management services was justified as per the agreement with the Singapore associate, providing services in marketing, sales, customer service, finance, accounting, administration, and legal support. However, the TPO found discrepancies in the explanations provided by the assessee regarding the nature and benefits of these services.
4. The TPO concluded that the assessee did not derive specific benefits from the management services, as the services were more beneficial to the Singapore group as a whole rather than exclusively to the Indian company. Therefore, the TPO held the payment of Rs. 1,44,98,000/- was not justified and adjustable under section 92CA.
5. The TPO's adjustment was the only addition made by the Assessing Officer, leading to the dismissal of the first appeal and subsequent second appeal before the ITAT, Bangalore.
6. After hearing detailed arguments from both sides, the ITAT upheld the TPO's decision, stating that the assessee failed to prove the commensurate benefits against the payments made for the services, as the payment terms were independent of the nature and volume of services rendered. The ITAT affirmed the addition made by the Assessing Officer, dismissing the appeal filed by the assessee.

This judgment highlights the importance of establishing the arm's length pricing of transactions, especially concerning management services fees paid to foreign associates. The ITAT's decision underscores the necessity for clear documentation and evidence to support the justification of such payments, ensuring they are commensurate with the services received and in line with transfer pricing regulations.