TMI Blog2013 (2) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... to substantiate the price that is paid to its AE as at Arm's Length within one of the methods so prescribed. As already noticed, the TP study of the assessee is not in tune with the provisions of section 92C. As in the course of hearing, it was suggested that the cost of providing SAP charges by Festo, Germany to all entities of the Festo group worldwide and the basis of allocation of cost by Festo, Germany to various group entities across the world should be submitted by the assessee with a view to enable the TPO to ascertain as to whether there has in fact been any profit element involved or was it a case of mere reimbursement of actual cost incurred for the Assessee by the parent company. The stand of the assessee has been that the payment was merely reimbursement of cost and in this regard attention was drawn to invoices raised by Festo, Germany on other group entities in other parts of the world. The assessee has also sought to file a chart regarding the benefits that the assessee received by paying the SAP charges and also that the payment was reimbursement of cost. Thus these submissions require a fresh consideration by the TPO in the light of the observations made a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plying the Comparable Uncontrollable Price ("CUP") method for determining the ALP of the impugned international transaction and in not providing the Appellant with an opportunity for evaluating the results of the new economic analysis undertaken before passing the transfer pricing order. 7. The learned AO/TPO have erred, in law and in facts, by concluding that the impugned international transaction is merely a means to siphon off profits from India. 8. The learned AO erred in levying interest of Rs. 112,245 and Rs. 840,878 u/s 234C and 234D of the Act respectively. 9. The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law. 3. The assessee is a company. It is engaged in the business of manufacture and trading of pneumatic equipment. The assessee entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices by Festo Germany could be classified as a form of "intra-group service" provided by Festo Germany to Festo India. The Indian transfer pricing provisions indicate that provision of intra-group services should be on an arm's length basis. The provisions, however, do not provide any specific guidance no the factors that need to be considered in determining the arm's length price for intra group services. The OECD Guidelines indicate that in an arm's-length transaction, an independent enterprise normally would seek to charge for services in such a way as to generate profit, rather than providing the services merely at cost. Nonetheless, there are circumstances in which an independent enterprise may not realize a profit from the performance of service activities alone. In such a situation, the Guidelines recognize that an arm's length price need not always result in a profit for an associated enterprise that is performing an intra-group service. There may be other reasons for the absence of profit to the service provider to satisfy arm's-length requirements. The market value of intra-group services might, for example, not be greater than the costs incurred by the service provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the taxpayer with the AE regarding the SAP services, the taxpayer is obliged to pay only those costs that are incurred for providing SAP implementation services. But, the taxpayer already paid for these services during the earlier year i.e. FY 2004-05. 4. The taxpayer could not produce the details and quantum of expenditure spent by the AE in rendering services to the taxpayer in connection with SAP services even though he was asked specifically. 5. Just by describing various services, it will not suffice to justify the price charged in intra group services. The taxpayer is only describing various services rendered by the taxpayer, but did not give the actual amount spent in respect of these services; as such dealing between two independent parties would invariably boils down to the actual expenditure incurred in connection with such services and mark-up thereon. 6. First of all, the taxpayer has to prove that the services are rendered. The taxpayer did not prove substantially. The second aspect of intra group services is the quantification of such services in terms of actual expenditure incurred and commensurate benefits derived there from. This aspect is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid which is the subject matter of this appeal. SAP charges with which we are concerned in this appeal is a maintenance charges paid by the assessee to meet the cost of providing the use of SAP software by the assessee. Reference is being made to this aspect of the matter, because the TPO in his order has taken the payments made for SAP modules by non-related parties for the purpose of comparison. In our view, the comparison so taken by the TPO are on a misapprehension that the payment made by the assessee to Festo, Germany for SAP charges is equivalent to payment for SAP modules, which is not correct. 10. As already seen, the TPO proceeded on the assumption that no services were rendered by Festo, Germany for which SAP charges were paid by the assessee. For this reason and also for the reason that no comparable instances have been provided by the assessee, the TPO treated the entire payment as not at arm's length. The DRP confirmed the order of the AO rejecting the stand of the assessee that the TPO has no jurisdiction to go into the question as to whether the tax payer received services for which a payment has been made by the tax payer. 11. Before us, the ld. counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05-06 and 2006-07. It is noted that no convincing or sound basis has been given by the learned CIT(Appeals) therein in support of the 50% cost allocation accepted by him and such estimate has been made purely on adhoc basis. In our opinion, the exercise of ascertaining ALPs has to be done by the TPO keeping in view the well laid down scheme in the relevant provisions of the Act and addition, if any, on account of TP adjustment, has to be made only after doing such exercise. We, therefore, restore this issue to the file of the AO/TPO with a direction to do such exercise and make addition, if any, on this issue after completing such exercise in accordance with law. Ground No.2 of the assessee's appeal is accordingly treated as allowed for statistical purposes." 12. Our attention was also drawn to the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd. [2012]. In the aforesaid decision, the assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/ brand had not benefited the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cannot consider the ALP as NIL. We hold accordingly. 16. As far as the determination of ALP is concerned, we have already reproduced in the earlier part of this order that the TP study done by the assessee in support of the ALP. We are of the view that the TP study so done by the assessee does not give out any comparable instances of similar transactions between the unrelated parties. As far as the determination of ALP under the Act is concerned, the provisions lay down that the assessee has to adopt one of the methods laid down in section 92C(1) of the Act. The assessee has to substantiate the price that is paid to its AE as at Arm's Length within one of the methods so prescribed. As already noticed, the TP study of the assessee is not in tune with the provisions of section 92C of the Act. Multinationals have a long-standing practice of providing certain services from a central point to one or more affiliates. The parent company provides centralized services or one affiliate provides services on a central basis to several other affiliates. In these situations, cost contribution (or shared-service) arrangements can be constructed to charge the costs of the service providers to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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