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2015 (7) TMI 41 - ITAT MUMBAI

2015 (7) TMI 41 - ITAT MUMBAI - TMI - Transfer pricing adjustment - CIT(A) confirming the ALP adjustment made by determining the ALP of Head office overheads at NIL - Held that:- With regard to the comment of the TPO that there was no necessity for the AEs to charge Head office overheads to the assessee, we agree with the contentions of Ld A.R that 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 v .....

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be charging ₹ 17.00 lakhs upon the JV. The value of services provided by A are ten times of D, five times of C and two times 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 ov .....

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he 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 that were charged by the AEs. Admittedly, this kind of study has not been carried out by the assessee. In our view, the Ld D.R has correctly submitted that the primar .....

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pes of overheads that is required to be considered and they have given certificates with qualifications.

In any case, the certificate issued by the auditors only spell out the percentage of overheads over the revenue and hence it is only a factual aspect of internal figures. In Transfer pricing study, what is required to be done is to validate the said claim with an external comparable.

TPO has disallowed the entire claim and accordingly held the ALP as NIL, i.e., he has al .....

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N, JJ. For The Appellant : Shri F V Irani For The Respondent : Shri N K Chand ORDER Per B.R.BASKARAN, Accountant Member: The appeal filed by the assessee is directed against the order dated 03-12-2014 passed by Ld CIT(A)-57, Mumbai and it relates to the assessment year 2009-10. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the ALP adjustment of ₹ 14.98 crores made by determining the ALP of Head office overheads at NIL. 2. The facts relating to the issue are stated in .....

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l 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 membe .....

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ting to reimbursement of Head office overheads and accordingly determined the ALP of the same as NIL. Accordingly the entire amount of ₹ 14.98 crores claimed by the assessee was added by the AO. The said addition was also confirmed by the Ld CIT(A) and hence the assessee has filed this appeal before us. 4. The facts relating to the claim of Head office overhead expenses needs further elaboration. The three foreign entities viz., M/s Dywidag International, M/s Samsung Corporation and M/s Sh .....

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to supply of assets & spare parts and incurring of direct expenses, the MOU provided that the members are entitled to charge indirect expenses named Head office overheads on the basis of the Overhead Absorption Rate certificate issued by the their respective Auditors, subject to an upper cap of 8.5% of the Revenue (Gross receipts of the assessee) attributable to the share of the respective member. The assessee has offered following explanations to substantiate this claim:- Since the assesse .....

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per the agreed formula. 5. We notice that the formula agreed between the parties is that each of the members would compute the percentage of 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 i .....

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% 82,329,705 7.04% 68,188,367 60,342,830 7,845,537 Samsung Corporation (Samsung) 26% 73,812,840 7.30% 63,392,203 63,392,203 - Shimizu Corporation (Shimizu) 9.5% 26,970,076 8.23% 26,113,377 26,113,377 - Total 183,112,621 157,693,947 149,848,410 7,845,537 A perusal of the above said table would show that the amount of Head office overheads recovered by M/s Dywidag from the assessee was ₹ 6.81 crores, but the amount to be reimbursed as per the auditor s certificate actually worked out to S .....

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wance of amount which is in excess of ALP. 6. The TPO, however, rejected the claim of Head office overheads for the following reasons:- (a) There is no objective basis on which the head office overheads up to 8.5% could be allocated to the assessee. (b) The foreign members have raised debit notes upon the assessee in respect of Head officer overheads, which in turn are based upon the certificate issued by the Auditors. Hence the members are charging the overheads in an arbitrary manner without a .....

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oup. (d) The assessee has not shown as to how such services would be valued by an independent entity dealing in similar circumstances. (e) From the Transfer Pricing 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) Th .....

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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 assessee did not show the utility of services rendered and quantification of the same in an arm s length condition. Hence the charges are not linked to actual .....

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vices would not be to the extent of ₹ 14.98 crores. Moreover, when the expenditure is incurred for the benefit of the group as a whole, no charging of such expenditure is required as such expenditure is not incurred in connection with any individual member of the group and the benefit of such expenditure would be available to all members of the group. Accordingly the TPO determined the ALP of Head office overheads at NIL and hence the entire payment of ₹ 14.98 crores was treated as a .....

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cates issued by the auditor. A copy of these certificates has been produced during the appellate proceedings. On perusal of the computation of overheads in the case of Samsung Corporation it is noted that the rate has been applied @ 7.30% for allocation of the overhead expenses. This has been calculated by taking a percentage of selling and administrative expenses for the year ended 31.12.2008. Here it would be relevant to mention that the appellant's accounting year is from 1st April to 31s .....

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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, travell .....

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cannot be relied upon. iii) Further in the case of Shimizu Corporation it is noted that the net indirect expenses include selling general and administrative expenses and also non operating expenses. It is again different from the above mentioned two companies. It would be relevant here to mention that the auditors of these three companies are not same and hence they have adopted a different approach in working out the percentage of indirect costs which have been subsequently allocated to the app .....

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to any specific job or unit v) The appellant contended that the services were actually rendered which is supported by the expenses mentioned in the certificate of the auditor. In this regard it is mentioned that there is no mention of any services have actually been rendered by the AEs. The auditor certificate is with reference to the formula of calculation of the indirect cost to be allocated to the appellant as discussed in preceding paragraphs. This contention of the appellant is therefore no .....

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he appellant contended that in earlier year the overhead costs have been examined and same was found to be at Arm's length price. This contention of the appellant is not correct since no such discussion is available in the order of the Assessing Officer and also since the quantum of international transaction 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 .....

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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 made in the immedi .....

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ide its order dated 26.9.2014 passed in ITA No. 8160/Mum/2010. (f) the TPO was not justified in disallowing the entire expenditure by determining the ALP as NIL. 9. With regard to the observation made by the TPO that the foreign entities should not have allocated any indirect expenses at all to the assessee, the Ld A.R submitted that it is not in the domain of the TPO to examine the prudence of the assessee or necessity to incur expenditure. In this regard, he placed reliance on the following ca .....

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(A) has pointed out in clear terms that the auditors of each of AEs have adopted different criteria to determine the indirect expenses and hence, there is no uniformity in their approach. Further, the auditor s certificate pertained to the calendar year 2008 for M/s Samsung Corporation and M/s Dywidag International, where as the certificate given in the case of M/s Shimizu Corporation pertains to the financial year 2007-08. He submitted that the year under consideration is 1.4.2008 to 31.3.2009 .....

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hould 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 .....

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overheads reimbursed by it to its AEs are at arms length. Hence the methodology adopted by the assessee cannot be considered to be Cost plus method. He submitted that the allocation of expenses should have been on the basis of Functions performed or services provided by the AEs to the assessee and the same should have been bench marked with other independent comparables, i.e., what any other independent party would have charged had it provided same kind of services to the assessee. Since the ass .....

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ered by Hon ble Supreme Court in the case of Distributors (Baroda) Pvt Ltd Vs. Union of India (1985 AIR 1585), wherein the Hon ble Supreme court has observed as under:- The doctrine of stare decisis should not deter the Court from overruling an earlier decision, if it is satisfied that such decision is manifestly wrong or proceeds upon a mistaken assumption in regard to the existence or continuance of a statutory provision or is contrary to another decision of the Court. The Ld D.R further place .....

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dingly, submitted that the assessee has failed to ascertain ALP of the Head overheads reimbursed by the assessee in an uncontrolled situation and hence the tax authorities are justified in determining the ALP as NIL. 12. We have heard the rival contentions and perused the record. With regard to the comment of the TPO that there was no necessity for the AEs to charge Head office overheads to the assessee, we agree with the contentions of Ld A.R that the TPO is not entitled to comment upon the pru .....

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.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, t .....

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two cases and the financial year 2007-08 in one case, where as the financial year under consideration is 2008-09. Thus, there is mismatch of the period and the same vindicates the stand of the revenue that the AEs have charged the assessee on estimated basis and not on actual basis. 15. At the same time, there is also some merit in the contentions of the assessee that the AEs have to necessarily incur indirect expenses or head office overheads in order to supply assets & spares and to incur .....

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lia and since the expenses thereon are incurred in common to all the projects undertaken by them, in our view, it has to be understood that the overheads have been incurred for all the projects and hence it would be difficult to link a particular expenditure to any particular project. For example, if the AE has hired a building on rent and operates from there, then the rent expenditure cannot be identified with any particular project and hence it is necessary to allocate them on some equitable b .....

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th an example. Let us presume that five persons are 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% .....

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1,20,00,000 Upper ceiling @ 8.5% of T.O 17,00,000 17,00,000 17,00,000 17,00,000 17,00,000 Accordingly, each of the members of JV would be charging ₹ 17.00 lakhs upon the Joint Venture. If we examine the first table given in the example, we may notice that E has not provided any service to the JV, but still it would be charging ₹ 17.00 lakhs upon the JV. The value of services provided by A are ten times of D, five times of C and two times of B, but still all the four persons would be .....

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ged should depend upon value of services (value of assets & spares + value of indirect expenses incurred) that is provided. This is one aspect of the issue under consideration. 17. Another issue is with regard to the determination of ALP of the transaction. This aspect has been discussed at length by the Hon ble Delhi High Court in the case of CIT V/s Cushman and Wakefield (India) (P.) Ltd.(supra). The assessee therein had reimbursed certain costs and expenses to its AEs named CWS and CWHK f .....

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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 Sectio .....

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ould be the same as the AEs in this case. It may be greater (in which case Section 92(3) would clearly apply), or lower. This cannot be a matter of speculation. Nor is the application of Section 92(3) a logical inference from the fact that CWS and CWHK 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 assessee did not benchmark .....

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rn (absent any benchmarking) as the true and correct value under an implicit (and incorrect) understanding of Section 92(3). 18. Vide paras 36 and 37, the Hon ble High Court has further observed as under: 36. In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this Court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the tr .....

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ivity is a matter that lies within the assessee's exclusive domain, and cannot be second-guessed by the Revenue. 37. At this point, it is noteworthy that the circumstance that the assessee had market research facilities in India does not correspond to the performance of services abroad, especially in relation to 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 .....

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ered till date. This must be provided, in addition to a consideration of the ALP vis-à-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 .....

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