TMI Blog2015 (5) TMI 344X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to give details of the services rendered and how the same were utilized by the Assessee and its relevance for the Assessee’s business. The evidence filed by the Assessee in this regard is in the form of e-mails between parties, reports etc. As to how the evidence filed by the Assessee was actually useful in its business has also to be highlighted as the Assessee will be the best person to know these facts which are within its knowledge. It is only if such a stand is taken by the Assessee can the TPO take the issue forward to arrive at a proper conclusion. In our opinion filing of voluminous correspondence, reports etc., would not be a proper way of discharge of Assessee’s burden to establish the ALP of expenditure in question. We would therefore direct the Assessee to comply with the queries raised by the TPO in his show cause notice which has been set out in his order u/s.92CA of the Act. The Assessee has also given the breakup of costs incurred by the parent company and the basis of apportionment. The same has not been considered at all by the TPO. The findings of the DRP with regard to the nature of services as given in a chart in the earlier part of this order are gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oring products, water proofing products. The principal customers are construction companies/contractors and retail stockists/applicators primarily in the domestic market. The technical knowhow is supplied by M/s Fosroc International Ltd. U.K., as per the technical collaboration agreement with it. 4. The financial results of the assessee for the F.Y. 2008-09 as per the profit loss account is as under:- Particulars Amount (Rs.) Operating Revenue 196,58,01,056 Operating Expenditure (excluding provision for doubtful debts) 163,76,55,782 Operating Profit 32,81,45,274 OP/OC 20.03% 5. The assessee company has entered into the following international transactions with its Associated Enterprises (AEs) during the financial year 2008-09:- International transaction Payment (Rs.) Purchase of raw materials 1,66,93,593 Purchase of trading goods from AE 2,15,68,237 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply CUP method in respect of payment of technical and management cost made by the assessee to its AE. It is relevant to point out that M/s. Fosroc International Ltd., U.K., markets its products through subsidiaries worldwide. M/s. Fosroc International Ltd., U.K. provides technical and management services to various group entities across the globe. The cost incurred by M/s. Fosroc International Ltd. U.K., are apportioned to the various group entities to whom technical and management services are rendered. The basis of apportionment by Fosroc International Ltd., U.K., is turnover of the group entities. 8. In the show cause notice, the TPO was of the view that for determining the ALP, the following aspects were relevant:- (i) Whether the charges paid by the assessee to AE which is in the nature of intra-group services would have been paid, had the AE and the assessee were not related parties? (ii) The assessee had to substantiate that it got economic or commercial value to enhance its commercial position by reason of the payment of technical and management fee. According to the TPO, the benefit must be direct and substantial and that an independent recipient of such benefit w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade. In particular, the assessee pointed out that the TPO cannot require the assessee to justify as to why such a transaction was entered into or whether such services could have been obtained locally from a non-AE. It was submitted that these matters are beyond the purview of section 92CA of the Income-tax Act, 1961 (Act). For instance, in subparagraph (d), one of the criteria is said to be whether entity receiving services would have performed the activity itself. It was submitted that this is not a correct test. Just because a transaction is entered into with an AE, it cannot be viewed with suspicion. In subparagraph (e), there is a reference to quantification of benefits received by the assessee. It was submitted that quantification of benefit in respect of services rendered cannot be made in terms of money. For instance, if a technical advice is given or an internal audit is carried on to ensure all the prescribed procedures have been carried out, how would one quantify such services in terms of money? If the learned TPO has quantified benefits in any given case in respect of services, it was prayed that the quantification methodology may kindly be given so that the Assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficient documentary evidence that the services have been rendered by FIL UK and the fees paid are in accordance with arm s length. Referring to the documents furnished by the Assessee along with its reply, the Assessee submitted that the benefits received by Fosroc India due to the services rendered by FIL UK were highlighted therein. It was also emphasized that the TPO accepted the assessee s contentions for the AY 2008-09. It was submitted that the TPO may kindly accept that the services have been rendered, the assessee has received benefits and the transactions have been entered at arm s length. The TNMM adopted by the assessee has to be accepted. Hence, it was prayed that the management fees has been paid at arm s length. 14. The TPO after considering the above reply, observed as follows:- 8.4 It is seen from the submission that, the taxpayer has submitted certain documents vide Annexure-1 and Annexure-2 for proving that services have actually been rendered by the AE. It is submitted that the nature of services rendered are generally in the nature of sales and marketing support, technical knowledge, health safety environment, supply chain management, project training, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs paid is treated as Rs. Nil due to inadequacy of the taxpayer s argument and the entire payment technical and management costs of ₹ 7,27,57,135/- is treated as an adjustment u/s 92CA of the Income-tax Act, 1961. 9.7. The other international transactions entered into by the taxpayer with its associated enterprises are treated at arm s length in the absence of any adverse inference, based on the facts submitted by the taxpayer before the TPO. 16. Aggrieved by the aforesaid order of the TPO which was incorporated in the draft order of assessment by the AO, the assessee preferred objections before the DRP. These objections are identical to the reply given by the assessee to show cause notice of the TPO and therefore are not being repeated. However, the following objections are worth noticing:- The assessee drew attention of the Hon ble DRP to certain observations of the Hon ble Special Bench in LG Electronic India Pvt. Ltd. Vs. ACIT (22) ITR (Trib.) In page 90 paragraph 139, the Hon ble Special Bench held that if the transactions are closely linked, then, they can be justified under enterprise level TNMM. Hon ble Bench held that when the transactions are unrelated, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not made any adjustment as far as the said reimbursement of the expenses is concerned. When the assessee has reimbursed the expenses of travel, living etc., of the personnel of the AE on their visit to India, then it is established that the AE personnel have visited India and might have rendered their services to the assessee. 9.1 Now whether any services have been rendered by the AE to the assessee company is to be examined. The assessee has drawn our attention to pages 61 to 67 of the paper book which consists of the emai1s between the assessee and the personnel of the AE and also reports of the personnel of AE who have visited India which are at pages 61-523. We find that the TPO has brushed aside these documents perfunctorily stating that there are only e-mails and are not evidence of the services rendered. We are of the opinion that the TPO ought to have considered the documents in proper perspective to see whether the assessee has received any services. The documents purportedly are advices given by the AE to the assessee on various issues concerning its business. As held by the Hon ble Delhi High Court in the case of CIT Vs E.K.L Appliances Ltd (In ITA Nos. 1068/2011 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment till the AY: 2006-07 and even for the subsequent AY: 2008-09 where the assessee has received the services from its AE. Once the TPO has accepted the ALP computed by the assessee by virtue the very same licence agreement dated 31-10-2003 (as per which the assessee has been receiving services year after year), it cannot take a contrary view only for the assessment year 2007-08 holding that the assessee is not receiving any services. In view of the same, we deem it fit and proper to remand the issue to the file of the TPO for recomputing of the ALP without insisting upon the quantification of each of the services received by the assessee and the commensurate benefit that has accrued to the assessee. The entire payment made by the assessee towards management services shall be taken as the aggregate payment for all the services rendered by the AE. The TPO is also directed to again reconsider the issue on the adoption of the most appropriate method and shall arrive at the ALP before making the adjustment after taking the appropriate comparables, as even for computation of ALP by adopting CUP method, identifying comparables is essential. 18. The DRP however did not agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rification Establishing and maintaining a comprehensive set of HSE standards and ensuring their implementation Already discussed in HSE above. Product technical support Communicating Fosroc s range of products to the market place, assistance in negotiations with clients From the perusal of profit and Loss Account we found that the company has debited 34,85,691/- as advertisement and publicity expenses, ₹ 24,11,855/- as Free sample and Trials expenses, 84,47,838 as Trade expenses and ₹ 1,62,53,378/- as commission on sales. Hence, the above expenses is significant enough to for communicating Fosroc s range of products to market place and negotiations with its clients which are domestic. This does not require the expertise of the A.E. or its officials who are not well versed in market conditions o India. 19. The DRP thus gave its finding that no services were rendered to the assessee by the AE in the nature of technical and management cost. According to the DRP, the purported services were more in the nature of commands to the shareholder with a controlling interest to take care of its own int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , does trading of certain goods purchased from its AE. The items that are resold are normally used in combination with the goods manufactured by the Assessee that are used by the customers at their site. The traded goods are normally added to the manufactured goods and the end user of the manufactured goods uses the traded goods at the site and not before. The example of a paint being mixed with thinner before use was again quoted before us. It was thus his submission that the sale of manufactured goods and the traded goods are integrally connected. 25. His further submission was that though in its TP study the Assessee had not explained as to how the various independent international transactions are inter linked and connected in its objection before the DRP in paragraphs 10.2 to 10.5 Annexure-1 to Form 35A the Assessee had made elaborate submissions with regard to the integral nature of the transactions. 26. The learned counsel for the Assessee pointed out that Organisation for Economic Co-operation and Development (OECD) in its Commentary on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereinafter referred as OECD Guidelines for shor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evaluated together. According to him the services rendered by the AE for which payment of technical and management costs was made by the Assessee was utilized in the trading as well as manufacturing segment of the Assessee. The Assessee also pointed out adopting a combined transaction approach was in accordance with Rule 1O A( d) of the Income Tax Rules, 1962 (hereinafter referred as Rules for short) which defines transaction to include a number of closely linked transactions. Linked means something which is connected. It was submitted that the definition does not provide that the transactions should be identical or similar. Once the transactions are connected, they can be evaluated together. 28. The learned counsel for the Assessee further submitted that payment of technical and management costs is an expense transaction for which the test of ALP cannot be done by applying transaction net margin method. In such a situation CUP would be the most appropriate method. Since there is lack of data CUP method cannot also be applied. Therefore determination of ALP in respect of individual transaction is not possible. Hence, adopting TNMM at the entity level was justified and had to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee s decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm s length price of that service. When evaluating the arm s length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. 9 .. 10. In case the Assessing Officer comes to the conclusion that the assessee has indeed received the services from the AE t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction, the tax base erosion can happen only if the costs said to have been reimbursed are inflated. In such a situation the question would be to determine as to whether the costs claimed to have been apportioned between the various group companies has not been inflated or whether they are allocated on a proper basis. As a first step the TPO generally considers following aspects in order to identify intra group services requiring arm s length remuneration: * Whether services were received from related party. * Nature of services including quantum of services received by the related party. * Services were provided in order to meet specific need of recipient of the services. * The economic and commercial benefits derived by the recipient of intra group services. * In comparable circumstances an independent enterprise would be willing to pay the price for such services? * An independent third party would be willing and able to provide such services? 33. The answers to above questions would enable to determine if the Assessee has received intra group services which requires arms length remuneration. Determination of the arm s length price of intra-group services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be sustained in the absence of any material on the basis of which such conclusions were arrived at being set out in the DRP s directions. 36. As to the Most Appropriate Method for determination of ALP, the transaction as far as the Assessee is concerned is an expense transaction and therefore profit methods would not be the MAM. In such cases, generally CUP would be the MAM. The Assessee in the present case has chosen TNMM at the entity level and has not provided any other method for determination of ALP in respect of the transaction of Payment of Technical and Management cost individually. This will take us to the question as to whether the TNMM at the entity level will be the MAM or should the ALP determined using CUP. This will again depend on the question whether all the activities manufacture and trading etc., carried on by the Assessee is closely linked so that benchmarking its overall results with comparable company using TNMM would be appropriate. 37. We are of the view that the justification furnished by the Assessee for aggregation of transactions of manufacturing and trading transactions with AE is acceptable. Can be extended to the intra group services received ..... X X X X Extracts X X X X X X X X Extracts X X X X
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