TMI Blog2016 (1) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 TPO’s observation that foreign exchange loss in financial transactions cannot be considered as ‘service charge’ for the intra group and therefore, we after considering the facts of the case, restrict the amount to the actual management fees charged by the DQE Mauritius along with other cost of administration and audit and mark up at 5%. - I.T.A. No. 62/HYD/2013 - - - Dated:- 30-10-2015 - SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For The Assessee : Shri P.V.S.S. Prasad, 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, considered two items for his detailed analysis i.e : i. Payment of Management Consultation Fee of ₹ 3,19,23,085/- to its holding company DQ Entertainment (Mauritius) Ltd., on account of management consultancy services availed. TPO examined the intra group service aspect and also the decisions of/approach followed by other countries like USA, Australia, Canada and Germany etc., while examining the payments made for intra group services and OECD guidelines. Based on the above aspects and considering 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 ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 management and supporting services quarterly on the last day of each month. DQE will settle these invoices in US Dollars within thirty days. The invoices 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. Interest at a rate of 1% per month may be charged on that part of the invoices which is not paid within thirty days. Thus, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (Ground No. 4) that assessee has preferred an application u/s. 154 and the same is also pending. Assessee wants direction to the AO to delete the amount. It was submitted that the actual amount of Management Consultancy Fee was only ₹ 3,19,23,085/-, whereas, the TPO included the reimbursement amount of ₹ 73,62,023/- so as to make it to ₹ 3,92,85,108/-. Even though DRP has given clear directions and as seen from the order of TPO, he was only discussing about the ALP of Management Consultancy 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 view of this, Ground No.4 is considered allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Festo Controls (P) Ltd., DCIT Bangalore [30 Taxmann.com 16]; ix. LG Polymers (P) 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 and examined the documents placed on record and orders of the authorities. There is no dispute with reference to the fact that assessee has availed intra group services from the DQ Mauritius which in turn has entered into another agreement with DQE, Plc, Isle of Man. There are two issues in the analysis of transfer pricing for the intra group services. First issue is whether intra group services have in fact been provided? The other issue is what could be the intra group charge for such services for tax purposes should be in accordance with the Arm s Length principle? As far as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities Ltd Nomad retainership 22 3 Bell Pottinger PR Retainership 24 4 Grant Thornton UK LLP VAT services 5 5 Hemscott Group 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 allocated across DQ 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 Mauritius will invoice DQE India for the management and supporting services quarterly on the last day of each month. DQE India will settle these invoices in u/s. Dollars within thirty days. The invoices 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 foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d party costs which are pertaining to management and consultancy services. The details of the costs incurred by AE, Isle of Man, are again reproduced below: Sl. No. Name of the supplier Nature of cost US$ in '000 1 Equity Limited Administration services 8 2 Equity Limited Administration services 1 3 Deloitte Touche 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by these experts or consultants to the taxpayer, DQ Entertainment India, in support of its contention that the expenses passed on the taxpayer were in fact incurred for 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 para of the certificates signed by Method Animation SAS is as under: Method Animation SAS : Method Animation and Board of Directors of DQ Entertainment Plc have had been jointly interacting on various productions. This relationship was made strong by way of the agreement entered into between Method Animation and DQ Entertainment Plc whereby Method Animation agreed to make first offer to DQ Entertainment International Limited before entering into Production Service Agreement for any project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, passive association should be distinguished from active promotion of the MNE group s attributes that positively enhances the profit making potential of particular members of the group. Each case must be determined according to its own facts and circumstances. 15. The taxpayer has not filed any supporting document as was discussed by the Hon'ble DRP in the directions issued u/s. 144C vide its order 14.09.2012. The relevant portion of the order is as under: Thus, detailed budgeting and documentation needs to be maintained for the services being rendered by the AE. These records, if produced before the TPO would throw more 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 states the following- 7.18. The fact that a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bservation of the TPO in para 8.3 of his letter dt. 08-11-2012, that foreign 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 agreement, all the costs incurred by the DQE Mauritius with 5% markup had to be charged to assessee. Therefore, as per the details furnished by assessee before the TPO, the actual management fee of US$ 4,27,000 with administration charges of US$ 14000 and markup of 5%, at the exchange value as on the date of 31-03-2008, can be considered as service charges for the intra group services rendered. This can be taken as ALP. Therefore, modifying the order of TPO, we determine the Management Consultancy Fee as detailed above and AO is directed to modify the order accordingly. 7. In arriving at the above, we have considered t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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