2018 (10) TMI 583 - AT - Income Tax

TPA - ALP adjustment - methods prescribed under the Act for determination of the ALP of these inter-group services - determination of ALP of the international transaction of payments made under CCA at NIL by the TPO - Held that - The factual findings of the Ld. DRP that I.T. services were utilized by the assessee for its own business purpose and any independent enterprise would have to ask and pay for such services is not disputed. We agree with the view of the Ld.CIT(A) that there services are not stewardship services. The arguments and facts have been analysed in details. We do not find any infirmity on the same. Services were rendered and the assessee received benefits. Hence we hold that the order of Ld.CIT(A) for AY 2009-10 & 2010-11 and Ld. DRP of AY 2011-12 are upheld. Coming to the submissions of the Ld.DR that the issue should be remanded back to the file of the TPO for fresh adjudication we find that the payment in question was admittedly reimbursement of cost. When the issue of deduction of tax at source on the very same payments had come up before the Tribunal in the assessee s own case for AY 2002-03 and the subsequent years it was held that these were reimbursement of actual cost and hence no tax may be deducted at source on these payments. Moreover the conditions specified in section 92CA r.w.s 92C(3) are not complied with the TPO. Hence no purpose could be served in restoring the issue back to the file of TPO for fresh adjudication for determination of ALP. As decided in case of NALCO INDIA 2016 (3) TMI 639 - ITAT KOLKATA The paragraph no. 7. 12 of the OECD Guidelines provides that there are some cases where an intra-group service perforated by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members.he incidental benefits ordinarily would not cause these other group members to be treated as receiving intra-group services because the activities producing the benefits would not be ones for which an independent enterprise ordinarily would be willing to pay. But in the instant case no such benefits such as those mentioned in paragraph no. 7. 12 of the OEC ) Guidelines accrued to assessed under the agreement and hence no incidental benefits accrued under the agreement. Accordingly we are of the view that the first ground for confirming disallowance by CIT(A) that no independent documentary evidence had been furnished by assessed to show that the fact of actual services having been rendered to assessed and Nalco Pacific too could not substantiate the claim 6or provision of actual services with documentary evidence has no leg to stand. Also in SCHNEIDER ELECTRIC INDIA PRIVATE LIMITED VERSUS DY. COMMISSIONER OF INCOME TAX CIRCLE 1 (2) VADODARA 2017 (6) TMI 392 - ITAT AHMEDABAD held it cannot be open to the TPO to reject a method of ascertaining the arm s length price without fining a legally permissible method to substitute for the method of ascertaining ALP as adopted by the assessee. To hold that the arm s length price of these services was NIL under the CUP method. the TPO had to necessarily to demonstrate that the same services. whatever be its intrinsic worth. were available for NIL consideration in an uncontrolled situation that is not. and that cannot be. the case. It is also not the case of the authorities below that the arm s length price of these services under any other legally permissible method is NIL There is thus no legally sustainable foundation for the impugned ALP adjustment. - decided against revenue

Summary

Issues Involved:
1. Determination of Arm’s Length Price (ALP) for intra-group services under Cost Contribution Agreement (CCA).
2. Classification of IT services as stewardship activities.
3. Application of Transfer Pricing Regulations and methods prescribed under Indian Income Tax Act, 1961.
4. Consistency in the application of tax principles across different assessment years.
5. Reimbursement of costs and its tax implications.

Detailed Analysis:

1. Determination of Arm’s Length Price (ALP) for intra-group services under Cost Contribution Agreement (CCA):
The assessee, AT & S India Private Ltd., entered into a CCA with its associated enterprises for sharing the costs of global IT services. The assessee used the Transactional Net Margin Method (TNMM) and the Comparable Uncontrolled Price (CUP) method for benchmarking the international transactions. The Transfer Pricing Officer (TPO) rejected the economic analysis and determined the ALP of the payments made under CCA as NIL, proposing adjustments. The Dispute Resolution Panel (DRP) and the Commissioner of Income Tax (Appeals) [CIT(A)] found that the IT services were for the assessee’s business purposes and directed the deletion of the adjustments.

2. Classification of IT services as stewardship activities:
The TPO classified the IT services as stewardship activities, which are typically not chargeable. However, both the DRP and CIT(A) disagreed, stating that in the modern era, IT services are essential for business operations and cannot be considered stewardship activities. They concluded that the services were indeed for the business purposes of the assessee and that an independent enterprise would have paid for such services.

3. Application of Transfer Pricing Regulations and methods prescribed under Indian Income Tax Act, 1961:
The TPO did not apply any of the prescribed methods under section 92C of the Income Tax Act for determining the ALP and relied on foreign regulations and benefit tests. The DRP and CIT(A) emphasized that the Indian Income Tax Act should be construed on its terms without drawing analogies from foreign statutes. The TPO’s determination of ALP at NIL was found to be invalid as it did not comply with the provisions of Chapter X of the Act.

4. Consistency in the application of tax principles across different assessment years:
The CIT(A) noted that the TPO had allowed the payment for shared IT services under the CCA in previous assessment years, thereby violating the principle of consistency. The DRP and CIT(A) highlighted that similar facts and circumstances were prevailing for the assessment years in question, and thus, the principle of consistency should be maintained.

5. Reimbursement of costs and its tax implications:
The payments made by the assessee were considered as reimbursement of actual costs without any profit element. The CIT(A) and DRP noted that such reimbursements do not constitute income chargeable to tax in India. The Tribunal upheld this view, referencing various judicial precedents that support the non-taxability of reimbursements of actual expenses.

Conclusion:
The Tribunal upheld the orders of the DRP and CIT(A), concluding that the determination of ALP at NIL by the TPO was incorrect. The IT services received under the CCA were for the assessee’s business purposes and not stewardship activities. The Tribunal emphasized the importance of applying the Indian Income Tax Act’s provisions and maintaining consistency across different assessment years. The appeals filed by the Revenue were dismissed, confirming that the payments made under the CCA were at arm’s length and constituted reimbursements of actual costs.