TMI Blog2015 (7) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... imes of B, but still all the four persons would be charging ₹ 17.00 lakhs each. Thus it is seen that the quantum of ‘Head officer overheads’ charged by each of the members is disproportionate to the value of services rendered by each of them. This example highlights the fallacy in the approach adopted by the assessee and its members. Hence charging of Head office overheads as a percentage of their respective turnover, in our view, may give misleading result. A perusal of the above said example would also show that the indirect expenses charged should depend upon value of services (value of assets & spares + value of indirect expenses incurred) that is provided. In the instant case the assessee has not conducted any Transfer pricing study with regard to the Head officer over heads. The contention of the Ld A.R that the assessee has bench marked the transaction with the certificates issued by the auditors, in our view, is not acceptable for reasons pointed by Ld D.R as well as discussed below. In the T.P study, what is required to be seen is whether any other independent entity would have charged or the independent entity receiving the services would have paid to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us of AOP . Out of the five members, M/s Larson Toubro and M/s IRCON are Indian entities and the other three are foreign entities. It was formed for the purpose of executing a contract awarded by Delhi Metro Rail Corporation for the design and construction of a tunnel between Green park and Saket Station of Delhi. The assessee reported following international transactions during the year under consideration:- (a) Purchase of Assets and Spare parts - ₹ 2.28 crores (CUP method) (b) Reimbursement of Direct expenses - ₹ 3.56 crores (CPM method) (c) Head office overheads - ₹ 14.98 crores (CPM method) It was submitted that the assessee did not have required infrastructure and assets to execute the project undertaken by it and hence all the members of AOP have contributed assets and spare parts; incurred expenses on behalf of the assessee. All these expenses including the cost of assets and spare parts have been reimbursed by the assessee. The transactions entered with the three foreign entities ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overhead expenses incurred by the Head Office over the Sales revenue reported by Head office. The rate so arrived at would be applied on the revenue attributable to the share of each of the member, subject to a maximum of 8.5%. Since the percentage of over heads over the revenue could be computed only at the end of the year, the members have recovered the indirect expenses from the assessee on some basis and upon the receipt of the auditor s certificate the excess/shortage was adjusted. The assessee has explained the amount charged as Head officer overheads by the foreign members by way of following table:- Name of Members Share in JV Overheads allowed to be charged as per JV Agreement (8.5% of Revenue) % of HO overhead actually charged Overheads actually charged in books Arm/s Length Price TP Adj. in Return of Income Dywidag International GmbH 29% 82,329,705 7.04% 68,188,367 60,342,830 7,845,537 Samsung Corporation (Samsung) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing Point of View, activities conducted by a parent company, even if with the help of foreign group entities, are not always such that a charge should be made to the assessee. This is because they might be performed for the benefit of the parent company in its role as share holder, rather than to provide value to the subsidiaries. (f) The assessee did not adduce any primary evidence to show that the payment made is only to the extent of benefit derived by it or to the extent that is charged between independent parties dealing at arm s length. Though the nature of services provided by the head office of the members of JV was described, yet no evidence was furnished to support the said claim. (g) Under arm s length condition, the payment is not only a function of service provider s willingness to receive certain price but also a function of service recipient s willingness to pay. This aspect has not been addressed by the assessee. (h) The assessee has not given bifurcation and nature of services rendered by the AEs under various heads within the overhead costs and also did not submit the amounts paid in respect of each of such services provided by the AE. (i) The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been upheld by Hon'ble ITAT Pune bench in the case of Honeywell Automation India Ltd (in ITA No.4/PN/08 order dated 10/2/2009). Also in the case of Wellwin Industry Ltd, the Hon'ble ITAT Pune upheld the TPO's view that different accounting year data cannot be used. In view of these judicial pronouncements the contention of the appellant is rejected. ii) Further it is noted that in the case of Samsung Corporation selling and administrative expenses and interest expenses only been considered to arrive the percentage of 7.30% while in the case of Dywidag International GmBH general overheads include personal expenses, design calculation and acquisition expenses, legal consulting and audit fees, rent and lease expenses, office operating expenses, travelling expenses, expenses for raw materials and engineering materials, technical equipments, insurance financial expenses, advertisement and representation cost, fees/taxes and others. Thus it may be noted that there is no similarity in the expenses included under the head indirect expenses in these two companies and hence the calculation of percentage of indirect cost to sales cannot be said to be under the same base. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action was negligible. viii) The appellant has also relied upon the decision of the CIT(A) in the case of Metro Civil contractors. In this regard it is mentioned that the facts of the two cases are different particularly with reference to auditor s certificates as discussed above. ix) In view of the above facts and the legal position as discussed, adjustment made by the TPO/AO is upheld. x) Accordingly, this ground of appeal is dismissed Aggrieved by the order of Ld CIT(A), the assessee has filed this appeal before us. 8. The main contentions of the Ld A.R are that (a) the assessee has duly bench marked its international transaction with regard to Head Officer Overhead charges against the certificate issued by the auditors. The assessee has adopted Cost plus method for determining the ALP. But the reimbursements have been made on actual basis, without any markup. The assessee itself has disallowed a sum of 0.78 crores out of the reimbursements. (However the nature of the said disallowance is discussed by us in paragraph 5 supra.). (b) the assessee has bench marked this transaction with the certificate issued by the auditors. (c) the identical reimbursement m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certificate (mentioned as letter ) is intended solely for the information and use of the board of directors and the management and should not be used for any other purpose. He further submitted that the percentage of overheads over the sales has been estimated by the auditors and the same does not prove the nature of services rendered by the AEs to the assessee. He further submitted that the AEs have not furnished their respective financial statements or the break-up details of overheads charged by them. Further, the auditors have included selling expenses as part of Head officer overheads, whereas the same is nothing to do with the services provided by them to the assessee. 11. The Ld D.R further submitted that the initial burden to undertake Transfer pricing study lies upon the assessee. He submitted that the assessee has claimed to have adopted Cost Plus Method for reimbursing expenses, but the AEs have raised debit notes upon the assessee on estimated basis. Further, the assessee has not compared the same with any independent comparables in its T.P study. Hence the assessee has not proved that the Head officer overheads reimbursed by it to its AEs are at arms length. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO is not entitled to comment upon the prudence of the assessee or the necessity to incur the expenses. The said view is also supported by the various decisions relied upon by the assessee. We further notice that the Hon ble Delhi High Court has also expressed the same view in the case of CIT V/s Cushman and Wakefield (India) (P.) Ltd. (supra), which was relied upon by Ld D.R. 13. Now the question that is contested before us is whether the tax authorities are justified in determining the ALP of the Head office overheads as NIL. The Ld A.R contended that the TPO, having accepted that the AEs have incurred direct expenses, should not have rejected the claim of allocation of indirect expenses, i.e., according to Ld A.R, the supply of assets spares and incurring of direct expenses are possible only if the AEs maintain proper establishment and infrastructure and hence it is essential to allocate a portion of indirect expenses to the assessee, when the direct expenses incurred and/or other services are rendered. In our view, there is some merit in the said contentions. 14. However, we have noticed that the AEs have adopted the methodology to ascertain the indirect expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e members of a Joint Venture. The quantum of assets spares supplied and direct expenses incurred are taken as under:- PARTICULARS A B C D E Assets Spares supplied 10,00,000 5,00,000 2,00,000 1,00,000 0 Direct Expenses incurred on behalf of JV 10,00,000 5,00,000 2,00,000 1,00,000 0 Turnover of respective companies. 10 crores 5 crores 2 crores 1 crore 20 crores % of Over heads over the Turnover of ₹ 2 crores each 6% 8% 10% 12% 6% Now let us examine the hypothetical situation given in the table above. Let us presume that in this example also, the members have agreed to cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by the Tribunal. The Hon ble High Court has dealt with this matter as under: 29. The argument in this case is that the assessee only paid for the cost incurred, while an uncontrolled transaction would involve an additional element of profit, thus leading to a greater claim for reimbursement. If true, this would no doubt place this transaction within Section 92(3). However this cannot be the case. Undoubtedly certain amounts were charged by the AEs as reimbursement for actual costs incurred. Nevertheless, whether a third party - in an uncontrolled transaction with the assessee would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, CWS and CWHK has to perforce be tested under the various methods prescribed in Section 92C of the Act. The question thus required to be addressed -and determined, is whether an independent entity - for the same liasioning and client interaction services as were provided by CWS and CWHK - charges an amount less than or equal to or more than SGD 74,330/- and SGD 281,265/-. An independent entity would quite possibly include a mark-up over and above the cost, and thus, exceed the value charged by the AEs in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... client interaction services located outside India - albeit for ultimately sourcing them into the Indian market. The e-mails considered by the ITAT from Mr. Braganza and Mr. Choudhary so far as they deal with specific interaction with IBM by those persons, and relate it to benefits obtained by the assessee, provide a sufficient basis to hold that benefit accrued to the assessee. However, this determination remains unclear and inchoate. The devil here lies in the details. The details of the specific activities for which cost was incurred by both CWS and CWHK (for the activities of Mr. Braganza and Mr. Choudhary), and the attendant benefit to the assessee, have not been considered till date. This must be provided, in addition to a consideration of the ALP vis- -vis the total cost claimed by these AEs. To this extent, for the consideration of ALP in respect of these transactions, the matter is remanded back to the file of the concerned AO, for an ALP assessment by the TPO, followed by the AO's assessment order in accordance with law. 19. In the instant case also, in our view, the assessee has not conducted any Transfer pricing study with regard to the Head officer over heads. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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