TMI Blog2017 (6) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the assessee could have performed on its own. There is also evidence for visits by the representatives of the group entity, i.e SEI-F, for rendition of these services. Consideration is not required to be charged for the shareholder activities, while other stewardship activities can, and must, be compensated. Nothing, therefore, turns in favour of the revenue on account of the services rendered by the SEI-F being in the nature of stewardship activities which is a term of much broader connotation than shareholder activities.Not charging for the rendition of shareholder activities can be justified but not for all the stewardship activities. Coming to the question of business expediency, in our considered view it was also not for the TPO to bother about business expediency of these services; all he was to see was what would be arm s length services of these services in an uncontrolled situation. That has to be done on the basis of a permissible method of ascertaining the arm s length price. It cannot be open to the TPO to reject a method of ascertaining the arm s length price without fining a legally permissible method to substitute for the method of ascertaining ALP as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee before us is a part of Schneider Electric Group, stated to be a specialist in electrical distribution products, with headquarters in France and worldwide presence in around 150 countries across the globe. The assessee is engaged in the business of manufacturing and sale of switches, outlets and other electrical products, and while its DTA unit is manufacturing products for the domestic market, its EOU unit is exclusively manufacturing goods, on contract basis, for its AEs abroad. During the relevant previous year, the assessee had paid ₹ 1,51,83,140, under a cost sharing arrangement, to its parent company SEI-F. In the annexure to form 3CEB, in addition, the assessee justified arm s length price of the services by adding that the assessee has availed management services from Schneider Electric Industries SAS France. A copy of the said agreement is enclosed. As per the group policy, the costs incurred by the said company, for services rendered, is allocated to the group entities . The Central Cost Allocation Agreement, which, inter alia, set out the details of these services as also the allocation keys, was duly filed by the assessee. The assessee had applied TNMM at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me need not be charged . The TPO also added that if the services are in the nature of stewardship activities or shareholder activities, the same need not be charged by the AEs of the assessee and that the AE might be in a position to provide a number of services but it has to be shown that such services were actually required by the assessee for its business during the assessment year 2007-08 . Armed with this analysis and understanding of the legal position, the TPO proceeded to deal with the facts of the case before him and observed that the assessee is not correct in benchmarking entire transactions, at entity level, on the basis of transactional net margin method (TNMM). He was of the view that no separate benchmarking has been done for the rendition of management services availed under the cost sharing arrangement, and the assessee has simply followed TNMM at the entity level. It was in this backdrop that the TPO proceeded to conclude that the arm s length price of these management services is NIL, and, while doing so, he justified the said conclusion as follows: 6.3.6 . this international transaction was required to be benchmarked separately. The assessee did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, it is seen that these functions are not at all required to be performed by the assessee. Therefore, the payment for these functions need not be made by the assessee. In respect to communication department, it is seen that the services allegedly referred includes articulation of general policies of the group and activities related to creating and maintaining the image of Schneider brands. Again such functions are not required to be performed by the assessee. Similarly, the services allegedly received from the other departments are also of such nature which is not required to be performed by the assessee, in relation to the FAR analysis, which includes customer satisfaction services, implementation of general directives, managing world wide purchase functions, Therefore, the requirement of rendering of such services by the AE to the assessee is also not fulfilled. 6.3.9 The assessee further submitted that since as per global transfer price policy of the group, the assessee is being reimbursed costs with a markup of 4%, the payment for such fees would not make any difference to the margin of the assessee as the same is received through the sale price received from the AE. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees, MO documentary evidence is submitted to justify whether the payment was commensurate to such type of payments made by independent entities. In the absence of such documentary evidence, the assertion cannot be accepted on face value. The Honourable tribunal in the case of Knorr Bremse (Supra) held that the taxpayer is required to substantiate the assertion regarding the arm's length nature of the management fees, by reducing evidence us required by the IT rules. The relevant portion of the judgement is reproduced below for convenience. The I.T. rules contain exhaustive detail regarding nature of information and documents which are required to be maintained by the assesses. Rule 10D(1) of the IT. Rules, 1962 also mandates the maintainability of record of uncontrolled transactions to be taken into account in analyzing the comparability of the international functions entered into by the assessee. It, therefore, is obligatory on part of the appellant to maintain such record and produce the same before the TPO to show that it has benchmarked the international transaction at.ALP. This obligation, however, has not been discharged by the assessee. 9.3 The ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Length Price for comparable services under comparable circumstances. This query remains to be replied. There is nothing on record to show that the charges paid by the appellant for Intra Group Services reflects the same charges for the services that would have been, or would reasonably be expected to be levied between independent parties dealing at Arm's Length Price. Such comparable cases under the comparable circumstances have not been brought by the appellant on record. In this regard the argument of the AR is that it was not possible to obtain a record of uncontrolled transactions for the purpose of analyzing their comparability with the international transaction entered into. It is submitted by the AR that LK India has set up exclusive facility to cater the requirement of LK India and other Group Companies and there are no manufacturer of the products exported by LK India in India and further the major competitor for the said product i.e. Legrand does not manufacture said products in India and further the information pertaining to the sourcing/manufacturing of the said product by Legrand would not be available from the market/data base since it is a proprietary informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility management and sustainable development etc. by the Schneider Electric Industries. But merely filing of copy of this central cost allocation agreement does not serve the purpose so far as filing of details of specific services rendered by the professionals/experts in above specific areas and also documentary evidences in respect of such specific services actually rendered are concerned. The AR has also attached the list of the person with his submission who had visited the Vadodara Plant along with the attendance sheet for meeting/consulting/training conducted at Vadodara Plant as per Annexure-6. However, on perusal of Annexure-6 it is found that there are 3 persons namely Alai Lai, Lim Ah Hawai and Joyce Chung whose names are mentioned in the list and period of their visits are shown in the month of September, January, July and February 2008. First of all, no any documentary evidences are furnished at all by the AR to show that they have actually visited Vadodara. The specific periods of their visits are not mentioned. It is not mentioned in the list that in what capacity they have visited Vadadara on behalf of Schneider Electric Industries. It is not explained as to in what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices of professionals and experts in different areas like finance, treasury, human resources, corporate quality, globalization and industrialization etc. and whereas as per Training Record Book very few topics are shown to have been covered. If someone goes by the particulars or details of services rendered in various business aspects as reproduced in earlier paragraphs, then it can be seen that a very few topics are shown to have been covered as per Training Record Books as compared to the list of services claimed to have been received by the appellant from the professionals. In my opinion the TPO is fully correct in holding that the appellant has to prove with proper documentation and evidences that the services were actually rendered by the specialists and payment was in commensurate with the benefit derived there from. This vital aspect has to be replied with specifically by filing documentary evidences. The TPO is correct in opining that the expected benefit must be sufficiently direct and substantial so that an independent recipient, in similar circumstance, would be prepared to pay for it. It is also not explained as to how the charges paid for services claimed to have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r reference. 4.13 The TPO has further mentioned in his order that the appellant produced the TP report in which all the transactions were bench marked by taking TNMM as the most appropriate method on an entity level. However/ the TPO has held this method as incorrect in view of the reasons as mentioned in his order u/s 92CA(3). The TPO has made detailed discussions in this regard in his order u/s 92CA(3). As per the TPO the Indian Transfer Pricing Regulation as well as OECD guidelines state that the international profit method should ideally be applied on a transaction to transaction basis, but in appropriate situation transactions may be grouped or aggregated. The TPO has referred to Rule 10A(d) as per which transaction includes a number of closely linked transactions. As per the TPO the transactions can only be taken to be closely interlinked if its separate evaluation/ profitability is not possible. As per the TPO if the approach adopted by the appellant is to be given any credence, then in case of any enterprises all its international transactions would be closely interlinked because ail the transactions of an enterprise in one way or the other are connected to overall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elated to global contracts, special litigation, intellectual property, cash position of the assessee etc. As per the TPO from the FAR analysis, it was seen that these functions were not at all required to be performed by the appellant. As per the TPO therefore, the payment for these functions was not to be made by the appellant. In respect to communication department, it is seen that the services legally allegedly referred includes articulation of general policies of the group and activities related to creating.and maintaining the image of Schneider brands. Again such functions are not required to be performed by the appellant. Similarly, the services allegedly received from the other department are also of such nature which is not required to be performed by the assessee, in relation to the FAR analysis, which includes customer satisfaction services, implementation of general directives, managing worldwide purchase functions. Therefore, the requirement of rendering of such services by the AE to the appellant is also not fulfilled. These findings of the TPO are found to be convincing in view of the fact that if claim of any expenditure is made by the appellant, then it is required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct then there was no need for incurring of the expenditure. ! further agree with the view of the TPO that no documentary evidence is submitted to justify whether the payment was commensurate to such type of payments made by the independent entities and in absence of such documentary evidences the assertion of the appellant cannot be accepted on face value. The TPO has rightly held that the tax payer is required to substantiate the assertion regarding Arm's - Length nature of management fees by way of adducing evidences. 4.17 In view of the discussions as made in preceding paragraphs, it is held that the ALP for the payment for management fees amounting to ₹ 1,51,83,140/- has correctly been taken by the TPO at nil and adjustment of ₹ 1,51,83,1407- has correctly been proposed to be made to the total income of the appellant. Further, based on order u/s 92CA(3) of the Act dated 21/01/2013 of the TPO, the Assessing Officer, i.e. DCIT Circle-l(2), Baroda in his assessment order u/s 143(3) of the Act dated 12/03/2013 has correctly adjusted the income of the appellant by an amount of ₹ 1,51,83,140/- and has correctly added back the same to the total income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hts accruing to the assessee for the bundled services under the contract and not for each service on ala carte basis. The reason that the assessee did not use a particular service cannot justify holding that no payment was warranted for such services. To give an example from day to day life, if an assessee is paying for having right to view a bouquet of television channels, which come as a package, he does not decline to pay the consideration for the bouquet of television channels because he did not view a particular television channel. The example may seem to be a bit too simplistic but it does hammer the massage, as we would like to, that not availing a particular service under a contract does not mean that no payments are required to be made for all the services bundled under the contract. The other thing is the benefit test. We do not think benefit test has too much relevance in the arm's length price ascertainment. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th price of international transactions consisting of cost and profit margin at 'nil'. 12. So far as these grievances of the assessee are concerned, the relevant material facts are as follows. The assessee is engaged in the business of trading in food grains. It is a part of AWB group Australia and its 99.999% equity is held by AWB Australia Limited and the balance. 001% equity is held by another group company, namely AWB Investments Limited. One of the international transactions that the assessee entered into with its AEs was payment of ₹ 58,20,571 towards 'management services'. On an analysis of the details of the payments made under this head, the TPO was of the view that the benefit of some of the services availed under the head 'management services' was not commensurate with the payments made for the same. He was also of the view that as against the use of TNMM by the assessee in benchmarking, the right course of action will be to follow CUP method because the value under CUP method will be best indicator of the value of these services. It was in this background that the TPO made certain adverse inferences against the assessee. The TPO was of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT v. EKL Appliances Limited (345 ITR 241), Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same . 16. The very foundat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices are rendered, in the light of the contradictions in this finding and the observations above, it is clear that in effect commercial expediency of this payment is questioned. That exercise, in our considered view - particularly in the light of Hon'ble Delhi High Court's judgment in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241, cannot be conducted in the course of ascertaining the arm's length price. 27. In view of the above discussions, as also bearing in mind entirety of the circumstance, it is clear that the impugned ALP adjustment is contrary to the scheme of the Act. The authorities below have been swayed by the considerations which were not germane to the issue. We, therefore, uphold the grievances of the assessee and direct the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technical services. The assessee gets the relief accord 9. We are in considered agreement with the views so expressed by the coordinate bench and the impugned addition must stand deleted for this short reason alone. In our considered view, the facts of the case before us are materially similar inasmuch as the services are in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lder activities, while other stewardship activities can, and must, be compensated. Nothing, therefore, turns in favour of the revenue on account of the services rendered by the SEI-F being in the nature of stewardship activities which is a term of much broader connotation than shareholder activities. Not charging for the rendition of shareholder activities can be justified but not for all the stewardship activities. Coming to the question of business expediency, which has been questioned by the authorities below, in our considered view it was also not for the TPO to bother about business expediency of these services; all he was to see was what would be arm s length services of these services in an uncontrolled situation. That has to be done on the basis of a permissible method of ascertaining the arm s length price. It cannot be open to the TPO to reject a method of ascertaining the arm s length price without fining a legally permissible method to substitute for the method of ascertaining ALP as adopted by the assessee. To hold that the arm s length price of these services was NIL under the CUP method, the TPO had to necessarily to demonstrate that the same services, whatever be it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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