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2015 (5) TMI 344 - ITAT BANGALORE

2015 (5) TMI 344 - ITAT BANGALORE - TMI - Transfer pricing adjustment - determination of armís length price[ALP] in the case of cost contribution agreement - whether intra group services are duplication of services for which the AE has already paid in addition to what is paid by way of allocation is also to be looked into? - Held that:- As decided in Dresser Rand India Pvt.Ltd. Vs. ACIT [2011 (9) TMI 261 - ITAT MUMBAI ]Even cost contribution arrangement should be consistent with armís length pri .....

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that the above description alone would not suffice. As we have already seen the TPO had specifically called upon the Assessee to give details of the services rendered and how the same were utilized by the Assessee and its relevance for the Assesseeís 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 .....

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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 general without reference to the material filed by the Assessee. The findings are purely on surmises and cannot be sustained in the absence of any material on the basis of wh .....

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ivities 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. - Decided in favour of assessee for statistical purpose - SP 107/Bang/2014, IT(TP)A No.148/Bang/2014 - Dated:- 10-4-2015 - Shri N.V. Vasudevan And Shri Abraham P.George JJ. For the Appellant : Shri S. Ramasubramanian, C.A. For the Respondent : Shri Farahat Hussain Qureshi, CIT-II(DR) ORDER Per N.V. Vasudevan, Judicial .....

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the transaction of providing technical and management services by the AE were entered into by the assessee with the AE only with a view to siphon off the profits and was a colourable device; and (iii) consequently making an addition of ₹ 7,27,57,135 to the total income of the assessee by way of adjustment consequent to determination of arm s length price (ALP). 3. The assessee is a company. The assessee is a member of JMH, FZ, Dubai Group and is a subsidiary of M/s. Fosroc International Lt .....

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ial 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 .....

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aid for the international transactions by the assessee to AE were at arm s length. The assessee further submitted it was in the business of manufacture of construction chemicals and was operating only in one segment viz., manufacture and sale of construction chemicals. The transaction for payment of technical and management cost and royalty payment to the AE were all in connection with manufacture of construction chemicals. The assessee also pointed out that purchase of trading goods from AE wer .....

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ssessee that all the international transactions are integrally connected with the manufacturing business of the assessee. The assessee therefore submitted that it adopted TNMM at the entity level to justify ALP of the international transaction with AE. 7. The TPO, to whom the question of determination of ALP was referred to by the AO, was of the view that the payment made by the assessee for technical and management cost of ₹ 7,27,57,135 to the AE was an independent international transacti .....

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nd 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 whi .....

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it derived by the assessee by making such payment? (iv) Whether the activity performed could have been performed by the assessee himself? (v) The apportionment of cost based on the turnover by the parent company would be equivalent to the cost which the assessee would have paid to an unrelated party. (vi) Evidence to show that services were actually rendered by the AE to the assessee. (vii) When the parent company incurs expenses for the benefit of the group as a whole, there was no need to char .....

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ee and Fosroc International Ltd. U.K., dated 31.10.2003. In clause 9.2 of the said agreement, the expenses are not quantified and it is stated that it shall be paid as mutually agreed by and between the parties from time to time. The TPO therefore called upon the assessee to explain as to why the license agreement had not quantified the amount to be paid to the AE. The TPO also wanted the assessee to furnish the apportionment of management and technical services fees made between various group e .....

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see submitted that :- (a) the jurisdiction of the TPO was only to determine the ALP of the transaction and that the queries raised by the TPO are such that the TPO wants to sit in judgment over the business decision of assessee to receive services for which the payment has been made. 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 w .....

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mitted 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 can attempt a similar .....

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idence to show that services have been actually rendered by the AE. The assessee also enclosed copies of invoices raised by the AE and the ledger account of the technical and management cost as appearing in the books of account of the assessee. The assessee claimed that the evidence so furnished would prove the nature of services rendered and the tangible direct benefits received by the assessee. The assessee also brought to the notice of the TPO that the reasons for adopting a combined transact .....

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ssessee also furnished sample copies of invoices raised by the parent company charging similar fees to another subsidiary company in Malaysia. 12. The assessee also pointed out that the ALP cannot be determined at NIL when the TPO has not determined the ALP under CUP method. Though, the notice states that the CUP method is the most appropriate method, there is no proposal to determine the ALP by following the procedure laid down in Rule 10B(1)(a) of Income Tax Rules. Even the preliminary step of .....

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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 a .....

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ety environment, supply chain management, project training, finance support, general management, sales support planning etc. The documents submitted by the taxpayer are as follows: • Copies of invoices raised by the AE and the ledger account • Photocopies of e mail regarding visit of personnel of the AE. As can be seen from the above that, the alleged services are general in nature and the documents submitted by the taxpayer do not prove that services have actually been rendered and th .....

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capable of getting these services locally or on its own. 9.2 The taxpayer did not prove with evidences that services have been actually rendered by the AE for which said payment of management and technical costs have been made. At arm s length, the parties dealing in similar circumstances would have such evidence in possession. 9.3 No cost benefit analysis has been furnished by the taxpayer to show that, the taxpayer has benefited out of the alleged services and the payment is commensurate to th .....

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of technical and management costs of ₹ 7,27,57,135/-. Consequently, the taxpayer did not prove the arms length nature of management fees paid to its AE. 9.6 In view of the discussions made above, the TPO holds that the taxpayer has failed to prove that arm s length nature of the payment of technical and management costs of ₹ 7,27,57,135/- paid by it to its AE. Hence, the arm s length price of such technical and management costs paid is treated as Rs. Nil due to inadequacy of the tax .....

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y 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 clos .....

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ee. It is also relevant to point out that before the DRP, the assessee brought to the notice of the DRP that in A.Y. 2008-09, identical issue was raised by the TPO accepted the claim of assessee regarding services rendered by the AE and that the price paid by the assessee to AE was at arm s length. The assessee also pointed out that in A.Y. 2007-08, identical reasons were given by the TPO for making an addition by way of adjustment to the ALP, which was subject matter of challenge before the ITA .....

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whether the licence agreement provides for making of any payment to the AE for the management services rendered by it or is it only required to reimburse the expenses of the personnel visiting the sites in India? As far as clause 9.2 of the licence agreement is concerned, we find that it be for the services rendered by the AE as enumerated in clause 6.2 and 6.7 of the licence agreement that the payments are to be made by the assessee and those payments shall also include the living expenses, tr .....

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expenses and the TPO has 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 page .....

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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 & 1070/2011 whether or not to enter into a transaction is for the assessee to decide and the TPO can only examine and compute the quantum of ALP, but he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuou .....

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ming to erroneous conclusion with the said clause authorises the assessee to only reimburse the expenses, we hold that the said clause requires the assessee to make the payment over and above the reimbursement of expenses. Further, as regards the quantification of the expenses and the commensurate benefit is concerned, we hold that the TPO cannot go into the fact whether the assessee is actually benefited from such expenditure. As held by the Hon ble Gujarat High Court in the case of Veer Gems ( .....

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tion of expenditure on the basis of turnover is justified. Since these findings of the TPO on the rendering of services and allocation of expenses are erroneous, we set aside the matter to the TPO with a direction to recompute the ALP by taking into consideration the allocated expenses by the AE to assessee. Further, it is also to be observed that the revenue authorities have to adopt a uniform and consistent approach in the case of the assessee on the same set of facts for each year. Though, th .....

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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 i .....

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ices Panels Opinion Health Safety and Environment (HSE) Establishing and maintaining a HSE manual, providing support in implementation of the HSE standards, providing support in reducing frequency and severity of accidents at work The assessee is established in India as per Indian companies Act 1956. The company being an Indian company is governed by the Environment (Protection) Act 1956, the factories Act 1948 and various health Acts. The company spends ₹ 1,31,49,079/- only on staff welfa .....

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t manager but in most cases these two professionals have joint responsibility for leading a project. The is having its own project engineer and Project manager. The mentoring etc is only in the interest of the A.E. Manufacturing technology Defining standard design and operation packages, collation ofmonthly asset optimization data and identification of the areas of improvement, assistance in setting of factory costs key performance etc. All the above functions are performed by the assessee itsel .....

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and verification 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 .....

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orted services were more in the nature of commands to the shareholder with a controlling interest to take care of its own interest in the assessee company, rather than to meet the identified needs of the assessee. The DRP also observed that the assessee would have got some incidental benefits but such incidental benefits cannot mean that the assessee has received technical and management services from its AE. The DRP also was of the view that the acceptance by the Revenue on same facts that serv .....

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red by the ITAT will not be applicable. 20. With regard to the action of the assessee in aggregating all the international transactions with the AE and applying TNMM at the entity level to justify ALP, the DRP was of the view that the individual transaction should be benchmarked separately, unless the transactions are similar in nature or closely interlinked transactions. The DRP in para 10.8 of its directions, observed that the assessee has not established that the various transactions were clo .....

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22. The directions given by the DRP were incorporated by the AO in the fair assessment order. 23. Aggrieved by the addition made in the fair assessment order on account of determination of ALP, the assessee has filed the present appeal before the Tribunal. 24. The learned counsel for the Assessee submitted before us that the Assessee is in the business of manufacture and selling of construction chemicals and this is the only segment. The Assessee in addition, purchases certain goods and resells .....

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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 .....

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ver, the OECD Guidelines further provide that a "Combined Transaction Approach" can be adopted in case the transactions are closed linked or continuous and they cannot be evaluated adequately on an individual basis. In such a situation, rather than assessing the arm's length terms of the transactions individually, these transactions could be evaluated together using the most appropriate method. The relevant observations are extracted hereinbelow: "Ideally, in order to arrive a .....

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line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing or manufacturing know-how and the supply or vital components to an associated manufacturer,' it may be more reasonable to assess the arm's length terms {or the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method or methods". (emphasis supplied) 27. The learned co .....

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h the manufacturing activity as well as the trading activity of the Assessee and therefore all the profit of all the elements should be 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 (h .....

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ich 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 be accepted. 29. The learned DR reiterated the stand of the revenue as contained in the order of the DRP and the TPO. 30. We have given a very car .....

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a cost contribution agreement with its parent company pursuant to which it paid a sum of ₹ 10.55 crores as its share of the costs. The TPO, AO & DRP disallowed the expenditure on the ground that the ALP was Nil as no real services had been availed by the assessee and the arrangement was not genuine. On further appeal by the Assessee, the Tribunal held as follows: 8. We find that the basic reason of the Transfer Pricing Officer s determination of ALP of the services received under cost .....

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experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of ou .....

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ervations 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 .....

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ich we have to decide is as to what is the arm s length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm s length principle, which, in plain words, requires that assessee s share of overall contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. .. .....

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ts claimed by the AEs, has to perforce be tested under the various methods prescribed under the Indian TP provisions. Further, the Hon ble High Court opined that concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activi .....

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facts and circumstances are identical in the present assessment year and therefore the order of the AO is set aside and the issue remanded to the TPO/AO with identical directions as was given in Assessee s own case in AY 07-08. In a case where expenses are actually reimbursed with no mark-up, than as observed by the Hon ble Delhi High Court, the transaction being an expense transaction, the tax base erosion can happen only if the costs said to have been reimbursed are inflated. In such a situat .....

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ded 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. Dete .....

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o whether intra group services are duplication of services for which the AE has already paid in addition to what is paid by way of allocation is also to be looked into. If the AE charges a mark-up for the services rendered, than the ALP of such mark-up will have to be determined. 35. The Assessee has in the present case filed material before the TPO to demonstrate the nature of services rendered. In the paper book filed before us the index of the paper book gives a description of the service. We .....

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ssessee 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 b .....

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f 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 Tech .....

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