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2016 (1) TMI 451 - ITAT HYDERABAD

2016 (1) TMI 451 - ITAT HYDERABAD - TMI - Transfer pricing adjustment - TPO take the amount of ALP at NIL - determination of Management Consultancy Fee - mark up computation - Held that:- What the TPO has missed is with reference the amounts other than foreign exchange loss. In the absence of any comparable figures and in the absence of any further enquiry and having the fact that services have been rendered to assessee as accepted by DRP also, TPO cannot take the amount of ALP at NIL, ignoring .....

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he order of TPO, we determine the Management Consultancy Fee as detailed above and AO is directed to modify the order accordingly.

In arriving at the above, we have considered the OECD Transfer Pricing guidelines 2010, Chapter-VII pertaining to ‘special considerations for intra group services’. Considering the assessee’s agreement with DQE Mauritius which in turn has an agreement with DQ Entertainment Plc, and the reimbursement of cost from one company to another, we agree with the TP .....

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rasad, AR For The Revenue : Shri Konda Ramesh, DR ORDER PER B. RAMAKOTAIAH, A.M. : This is an appeal preferred by assessee against the orders of Assessing Officer (AO) u/s. 143(3) r.w.s. 144C (5) of the Income Tax Act [Act] consequent to the directions issued by Dispute Resolution Panel [DRP], Hyderabad. Assessee has raised the following three grounds: 2. The Ld AO/TPO/DRP are not justified in treating the Arms Length Price as Nil in respect of management consultancy fees paid to its Associated .....

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plaining the benefits received against such fees paid. 4. The Ld AO/TPO is not justified in not acting upon the application for rectification filed under Section 154 of the Act, against the order of TPO for disallowing the amount of ₹ 73,62,023/- in the nature of reimbursement of commission which was not debited to profit and loss account and was routed only through the Balance Sheet affecting the share premium and share capital account . Ground Nos. 1 & 5 are general in nature and doe .....

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nt Method applied 1 Payment of Management Consultancy Services Fees DQ Entertainment (Mauritius) Ltd., Mauritius 3,19,23,085 TNMM 2 Reimbursement of Travel and Other expenses DQ Entertainment Plc, Isle of Man, IM1 1LB 2,70,57,703 CUP 3 Reimbursement of Commission DQ Entertainment (Mauritius), 73,62,023 CUP 4 Equity Participation Mauritius DQ Entertainment (Mauritius), Mauritius 106,94,55,220 CUP 2.1. While accepting some transactions, the TPO after rejection of TP study made by assessee, conside .....

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g assessee s objections, the TPO came to the conclusion that assessee could not substantiate the queries raised by him and could not prove the services rendered by the Associated Enterprise (AE). Applying the benefit test, he determined the Arm s Length Price (ALP) value of the services at NIL. ii. The second aspect which the AO considered is with reference to reimbursement of commission at ₹ 73,62,023/-. Even though, assessee submitted that this amount was not charged to P&L A/c and w .....

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objections with reference to treatment of ALP at NIL on both the issues taken up by the TPO. As far as the payment of Management Consultancy Fees is concerned, after considering the explanation of assessee with necessary documents in support thereof, the DRP accepted that there are certain services rendered by the DQ Entertainment (Mauritius) Ltd. In coming to the above, the DRP also took into consideration the decision of the Co-ordinate Bench of ITAT, Delhi in the case of McCann Erickson Indi .....

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is also in line with the decision of the Hon'ble ITAT, Delhi in the case of McCann Erickson India P Ltd (ITA No. 5871/Del/2011) dated 08-06-2012 . Thus, the DRP accepted that DQ Entertainment (Mauritius) Ltd., has rendered certain services to assessee. With reference to ALP determination, however, the DRP restored the matter to the TPO again for examining the detailed budgeting and documentation maintained for the services being rendered, the direction of DRP is as under: The memorandum of .....

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ts for the coming financial year will form the eligible cost base for the purpose of the management charge calculation • Their costs will be allocated across DQE Mauritius and DQE India based on shares of agreed budgeted sales for the coming financial year • DQE Mauritius will pass through at cost any major items of third party expenses to which it has not added value • All costs will be marked up with a profit element of 5% DQE Maintenance will invoice DQE India for the managemen .....

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hose costs of its officers and consultants who are chiefly involved in providing management and supporting services to DQE India. Their costs will be allocated across DQE Mauritius and DQE India based on shares of agreed budgeted sales. DQE Mauritius will pass through at cost any major items of third party expenses to which it has not added value. All costs will be marked up with a profit element of 5%. Thus, detailed budgeting and documentation needs to be maintained for the services being rend .....

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ed the issues again in detail and however, came to the same conclusion of NIL ALP. 4. With reference to the reimbursement of commission of ₹ 73,62,023/-, the DRP accepted assessee s contentions as under: The TPO disallowed the entire amount of ₹ 73,62,023/- stating that Intra group services which are not deriving any tangible and direct benefit should be treated as NIL . The nature of services relating to this payment and actual receipt of the same have not been gone into by the TPO. .....

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is not correct and shall not be given effect to by adding it to the taxable income of the assessee. This will have impact only on the Balance Sheet of the assessee. For want of detailed information on factual aspects, the merits of determining the value at Nil are not gone into . Even though, the DRP accepted assessee s objections, it seems the AO has not given effect to the same and disallowed the amount by including the same in the total TP adjustment. It was the ground raised by assessee (Gr .....

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onsultancy Services, it seems that TPO wrongly took the amount at ₹ 3,92,85,108/- which included the above amount which was not charged to P&L A/c. Since DRP has already directed it to be excluded, we direct the TPO/AO to delete the above amount and consider the management fee paid at only ₹ 3,19,23,085/- which was charged to P&L A/c as stated by assessee in various submissions, which can also be verified as Appendix-B to Form No. 3CEB placed in Page 71 of the Paper Book. In .....

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riod from 2007-08 upto 2010-11. Further, a strategic decision was taken to invest in Method Animation SARL which lead to an agreement between the above company and DQ India for production of projects valued approximately at ₹ 105 Crores. Inspite of DRP satisfying with the benefit test, the TPO however, again rejected assessee s contentions and determined the ALP at NIL, without having any comparable cases even though the method selected was TNMM. It was submitted that test of commercial ex .....

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penditure . Ld. Counsel also relied on the decision of Ericsson India Pvt. Ltd., Vs. DCIT [25 Taxmann.com 472] (Delhi) to submit that It is prerogative of the taxpayer to avail services from its AE and the Revenue cannot question the commercial expediency of such a decision . Revenue cannot disallow any expenditure merely on the ground that it was not required by the taxpayer. Ld. Counsel also relied on the following decisions: i. Dresser - Rand India Pvt. Ltd., Vs. Addl. CIT [47 SOT 423 (Mum)]; .....

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Ltd., Vs. Addl. CIT [48 SOT 269/15 Taxmann.com 79]; x. Quintiles Research (India) Private Ltd Vs. Deputy Commissioner of Income Tax (1605/Bang/2012); xi. Atotech India Limited Vs. ACIT (ITA No. 104/Del/2012); and xii. AWB India Pvt. Ltd., Vs. ACIT (ITA No. 4454/Del/2011) 5.2. Ld. DR however, referred to the order of TPO and submitted that assessee has not furnished complete details and justification of the payment was not made. He relied on the orders of the TPO. 6. We have considered the issue .....

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such services for tax purposes should be in accordance with the Arm s Length principle? As far as the issue whether intra group services have in fact been provided, there is no dispute with reference to same as the DRP has accepted that there are intra group services. To that extent, there is no dispute and Revenue is not aggrieved on the DRP s opinion/direction. What the DRP did not decide is the other issueintra group charges for such services. 6.1. The issue, as stated above by extracting th .....

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rnational transaction in the following manner. 8.1 The taxpayer is the wholly owned subsidiary of its AE M/s. DQ Entertainment (Mauritius) Ltd., Mauritius which in turn is the wholloy owned subsidiary of DQ Entertainment Pic, Isle of Man. 8.2.1 The management consultancy service fees of ₹ 3,92,85,108/- paid by the taxpayer to its AE is calculated in the following manner: Sl. No. Nature of cost US$ in '000 1 Foreign exchange loss 321 2 Administration charges 9 3 Audit fee 4 4 Management .....

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roup Ltd Website maintenance 1 6 Berwin Leighton Paisner LLP Legal Relationship 4 7 London Stock Exchange Plc RNS Services 2 8 Deloitte Touche Tohmatsu Adudit Fee 60 9 Equity Limited Administration services 8 10 Equity Limited Administration services 1 11 Board meeting expenses Board meeting expenses 5 12 Computer share Registrar services 3 13 Bank Charges Bank Charges 2 14 Grant Thornton India Interim results review 13 15 Evolution Securities Ltd Nomad Retainership 3 16 Director's fee Direc .....

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000/- which include administration charges of US$ 9000/- and audit fee of US$ 4000/-. Since the foreign exchange loss of US$ 321000/- does not pertain to any management and consultancy services, it cannot be allowed to be included in the total expenses under the heading management consultancy services . The balance amount of management and consultancy services is analysed in the subsequent paras. 9. It is therefore clear that the DQ Entertainment (Mauritius) Ltd., Mauritius has not incurred any .....

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nt and supporting services, which DQE Mauritius will provide to DQE India, they agree to pay a management service fee. This fee is to be calculated as follows: • DQE Mauritius will identify those costs of its officers and consultants who are chiefly involved in providing services to DQE India. • Their agreed, budgeted fully loaded costs for the coming financial year will form the eligible cost base for the purpose of the management charge calculation. • Their costs will be allocat .....

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will be supported by an analysis made at the start of the financial year of the agreed budgeted costs to be incurred by DQE Mauritius and the costs to which the mark up is to be applied . 10.1 As per the MOU signed between the two, the management consultancy fees payable to AE DQ Entertainment (Mauritius) Ltd., Mauritius is contingent on the following: • DQ Entertainment (Mauritius) Ltd., Mauritius will identity the costs of its officers and consultancy services who are involved in providin .....

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nment (Mauritius) Ltd., Mauritius has not added value will be passed through at cost to the taxpayer. 10.3 As regards the expenses totaling to US$427,000/- the AE DQ Entertainment (Mauritius) Ltd., Mauritius has not added any value whatsoever. The entire value of DQ Mauritius US$ 406,000/- is basically currency conversion of GBP2,13,793/- charged by DQ Entertainment Plc, Isle of Man to DQ Entertainment (Mauritius) Ltd., Mauritius. 10.4 It is noteworthy that there are only the following 3 persons .....

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ve Officer, is also a Director in the taxpayer s company as well as in DQ Entertainment Plc, Isle of Man. In the table containing the list of expenses incurred by DQ Entertainment Plc, Isle of Man, there is no expense associated with him. In other words, there are only third party expenses. With respect to the third party expenses, the MOU signed between the taxpayer and the AE mentions the following: • DQE Mauritius will pass through at cost any major items of third party expense to which .....

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uche Audit fee 60 Tohmatsu 4 Bank Charges Bank Charges 2 5 Board Meeting expenses Board meeting expenses 5 6 Marsh Limited Insurance 13 7 Grant Thornton India Interim results review 13 8 Grant Thornton UK LLP VAT services 5 9 London Stock Exchange Plc RNS Services 2 10 Computer share Registrar services 3 11 Hemscott Group Ltd Website maintenance 10 12 Hemscott Group Ltd Website maintenance 1 13 Berwin Leighton Paisner LLP Legal Retainership 4 14 Evolution securities Ltd Nomad retainership 22 15 .....

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e expenses at serial no. 6 to 10 are routine administrative expenses are not related to any management consultancy. The other expenses at serial no. 11 to 17 are pertaining to retainership fee etc paid to legal advisiors, PR consultants etc. The Evolution Securities Ltd is an international investment banker, Berwin Leighton Paisner LLP is a Legal Fir, and Bell Pottinger is in public relations. The total expenses from serial no. 11 to 17 are US$ 294000/-. Thus, it is evident that only US$ 294000/ .....

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the benefit of the taxpayer, the taxpayer has submitted two certificates, one from Mr. Nicolas Goldstein and the other from Method Animation SAS. The relevant para of the certificates signed by Mr. Nicolas Goldstein is as under: Mr. Nicolas Goldstein: I have seen direct guidelines, advise and support given by Board of Directors of DQ Entertainment Plc resulting in the DQ Entertainment (International) Limited having finalized various projects over a number of years since 2007 . 12.2 The relevant .....

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ed by Method Animation SAS being initiated, developed and produced by the company as delegate producer, and for which the company is in charge of the fabrication . 12.3 In the first certificate is is mentioned that with the advice and guidance of Directors of DQ Entertainment Plc, Isle of Man, the taxpayer could finish certain projects. This statement is vague and does not mention any specific business or project bagged by the taxpayer on the basis of managerial support given by the Directors of .....

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ectors of DQ Entertainment Plc, Isle of Man, to the taxpayer are nothing but part of the shareholder activity. It is but natural that any holding company and its Directors will provide advice and guidance to its step down subsidiary. Such services do not form part of the intragroup services as per the OECD Guidelines. The taxpayer has no doubt benefitted from its passive association with the holding companies. However, no documentary evidence has been submitted before the TPO to show that taxpay .....

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by reason of its affiliation along has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefitted from the group s reputation deriving from global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group s attributes that positively enhances the pro .....

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ore clarity and proof for the actual rendering of services . 16. The taxpayer has not filed any detailed budgeting or documentation by either the taxpayer or any of the two AE i.e., DQ Entertainment (Mauritius) Ltd., Mauritius or DQ Entertainment Plc, Isle of Man to show how and what part of the Director s Fees incurred by the DQ Entertainment Plc, Isle of Man, should be considered as management and consultancy services provided to taxpayer. In this regard the para 7.18 of the OECD Guidelines st .....

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n rendered. 17. Therefore, in view of the above discussion, the arm s length price of the management consultancy services paid by the taxpayer to its AE, DQ Mauritius, is held as Rs. NIL. Accordingly, the amount of the fee for management consultancy services of ₹ 3,92,85,108/- is held as excess paid being adjustment u/s. 92CA . 6.2. As can be seen from the above, the TPO analysed the accounts of DQ Entertainment Plc and DQE Mauritius in analyzing the nature of payment. Out of the total amo .....

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QE Mauritius has raised only one bill for the whole of the year, which was placed at page 170 of the Paper Book. As can be seen from the details of payments made, placed at page 171 of the Paper Book, the amount of US$ 799,174 charged on 31-03-08 was paid in three installments of US$ 3,00,000 on 14-09-2010, US $ 1,99,174 on 25-10-2010 and US$ 3,00,000 on 04-01-2011. It is noticed that even though invoice was raised on 31-03-2008 for whole year instead of quarterly billing, the payments were made .....

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oreign exchange loss does not pertain to any management and consultancy services. To that extent his order has to be approved. 6.3. What the TPO has missed is with reference the amounts other than foreign exchange loss. In the absence of any comparable figures and in the absence of any further enquiry and having the fact that services have been rendered to assessee as accepted by DRP also, TPO cannot take the amount of ALP at NIL, ignoring the payment by assessee of US$ 4,27,000. As per the agre .....

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