2021 (11) TMI 678 - AT - Income Tax

TP Adjustment managerial fees paid by the assessee to its AE - selection of MAM - HELD THAT - No doubt once aggregate transactions of the assessee with its AEs has been tested by applying TNMM as most appropriate method then the Assessing Officer/TPO cannot pick few transactions and apply different method to determine arm s length price. We are fully in agreement with said proposition. Whether payment made by the assessee to its AE for managerial services is in fact incurred wholly and exclusively for the purpose of business and further said expenditure is supported by necessary evidence or not ? - On perusal of facts available on record and on the basis of facts brought out by authorities below we are of the considered view that the assessee has failed to bring on record any evidences to justify payment of management fees. Therefore we are of the considered view that case laws relied upon by the assessee on the issue of necessity of availing services and question of cost benefit analysis of said expenditure has no application to present issue on hand. There is no error in reasons given by ld. TPO/DRP in making TP adjustments for payment of managerial services fee to its AE. Therefore we are inclined to uphold findings of the learned DRP and reject grounds taken by the assessee. TDS deducted on interest paid to AE on External Commercial Borrowings - disallowance of grossed up portion of TDS on payment of interest on external commercial borrowings - HELD THAT - From the conditions of agreement between parties it is very clear that tax liability if any on interest paid to lender is responsibility of lender. However the assessee should deduct applicable tax deducted at source as per law remit the same to Govt. treasury and furnish proof to lender. In this case the assessee has deducted TDS on interest payment. But instead of reducing it from payment made to the AE has grossed up TDS portion to interest paid to AE and claimed as deduction. In our view procedure followed by the assessee for grossing up of interest is contrary to agreement between the parties and also contrary to provisions of law. Therefore we are of the considered view that there is no error in the reasons given by the learned TPO/DRP in disallowing grossed up portion of TDS deducted on interest paid to AE on External Commercial Borrowings. Hence we are inclined to uphold findings of the learned DRP and reject ground taken by the assessee.

Issues Involved:

1. Recharacterization of the assessee as a contract manufacturer.
2. Determination of arm's length value of management services.
3. Disallowance of grossed-up TDS on external commercial borrowings.

Issue-wise Detailed Analysis:

1. Recharacterization of the Assessee as a Contract Manufacturer:

The assessee, a wholly-owned subsidiary engaged in manufacturing moulded components for mobile phones, was recharacterized by the TPO as a contract manufacturer executing work orders as per the directions of its AEs. This recharacterization led to the conclusion that the requirement for availing management services did not arise. The assessee argued that the TPO, AO, and DRP erred in this recharacterization, which was prejudicial to its interests and contrary to law.

2. Determination of Arm's Length Value of Management Services:

The TPO determined the arm's length value of management services to be 'NIL', questioning the commercial wisdom of the assessee and the necessity of availing such services. The TPO's determination was based on the lack of evidence provided by the assessee to substantiate the receipt of services. The assessee contended that the TPO erred by not merely restricting himself to the determination of the arm's length price and by disregarding the information and documents provided. The DRP upheld the TPO's findings, stating that the agreement between the parties did not substantiate the actual rendering of services and that no arm's length parties would enter into such an agreement where payment is made without actual services being rendered. The DRP further noted that the assessee failed to provide credible evidence to justify the payment of management fees, such as technical specifications of services rendered, personnel deployed, and other supporting documents.

3. Disallowance of Grossed-up TDS on External Commercial Borrowings:

The assessee had availed ECB loans from related parties and grossed up the interest payment for the TDS portion, which was disallowed by the TPO. The TPO argued that the TDS deducted on payments made to the AE was the liability of the AE, not the assessee. The assessee contended that as per the contractual arrangement, it was liable to deposit the TDS applicable on the payment, and thus, it should be allowed as a deduction. The DRP upheld the TPO's disallowance, stating that the procedure followed by the assessee for grossing up of interest was contrary to the agreement between the parties and the provisions of law.

Conclusion:

The appeals filed by the assessee for assessment years 2012-13 and 2013-14 were dismissed. The tribunal upheld the findings of the TPO and DRP on all issues, including the recharacterization of the assessee as a contract manufacturer, the determination of the arm's length value of management services as 'NIL', and the disallowance of grossed-up TDS on external commercial borrowings.

Order Pronounced:

The order was pronounced in the open court on 3rd November 2021.

← Previous Next →