TMI Blog2017 (12) TMI 1568X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transactions declared by the assessee, in the said year. The assessee explained that it had received invoices after close of the year in September, 2008 which was for earlier year and also for the year under consideration. Since the invoice was received in the year under consideration, the assessee had book the expenditure during the year. In view thereof, where the invoices for services charged were raised by the associated enterprises in the month of September, 2008 and where the books of account of assessee for the financial year 2007-08 had already been closed, then the transaction for earlier year could not be accounted for or be reported during the earlier year. Accordingly, there is no merit in the contention of AO/TPO in this regard. Thus, the ground of appeal No.2 raised by the assessee is allowed. Transfer pricing adjustment made by the TPO/Assessing Officer with respect to international transactions of payment of fees for designing and consultancy services - assessee pleaded that even if the arm's length price of said transaction is taken at ₹ 60,58,955/- and addition of ₹ 55,66,278/- is made, there would be no impact on the taxable income since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer pricing adjustment made against fees for advisory and other services - Held that:- Both the learned Authorized Representatives pointed out that the facts and issues are identical to the facts and issues in assessment year 2009-10 and following the same parity of reasoning, we hold that international transactions in respect of fees for advisory and other services is to be benchmarked applying TNM method. AO is directed to take the foreign AE as tested party and compare the margins with margin of comparables selected by assessee and benchmark the same. Commission is not to be taxed in subsequent years once it has already been offered to tax by the assessee - we direct the Assessing Officer/TPO not to tax sum of ₹ 1.80 crores in the hands of assessee in assessment year 2010-11. We have directed that sum of ₹ 55,66,278/- offered by the assessee as income for that year is not to be taxed in the hands of assessee since the said amount has already been disallowed in assessment year 2009-10. Following the same parity of reasoning, we hold that the said amount is not to be taxed in the hands of assessee in assessment year 2010-11. - IT Appeal Nos. 2182 of 2013 And 211 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd circumstances of the case, and in law, the Ld DRP and Ld AO (following the directions of the Ld DRP) erred in making a TP adjustment of ₹ 55,66,278 to the income of the Appellant with respect to international transaction of payment of fees for designing and consultancy fees without appreciating that no disallowance ought to be made since the Appellant had suo moto disallowed the payment under section 40(a)(ia) of the Act. The Appellant prays that the Ld AO be directed not to make any disallowance for ₹ 55,66,278, since the said amount has already been disallowed under section 40(a)(ia) of the Act while computing the taxable income. 4. During the year the Appellant has paid commission of ₹ 10,78,51,033 to its AEs out of which an amount of ₹ 1,80,44,460 has been reversed in the subsequent financial year. The Ld TPO has considered the arm's length price of the aforesaid transaction as ₹ 8,98,06,573 (Rs.10,78,51,033 less ₹ 1,80,44,460) with a direction that the Ld AO may give credit for this amount in subsequent financial year if the same is offered to income in that year. On the facts and circumstances of the case, the Ld AO has erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into various international transactions with its associated enterprises which are enlisted under para 4 at page 3 of the order of TPO. The TPO considered each of the international transactions entered into by the assessee with its associated enterprises. However, the issue raised vide ground of appeal No.2 before us is against the fees for advisory and other services paid at ₹ 10,27,42,744/-. Hence, we restrict our decision in respect of the said segment. In this regard, the TPO noted that the assessee had shown said sum of ₹ 10.27 crores in the nature of management service as cost allocation to associated enterprises vis- -vis Emerson Electric (Asia) Ltd., Hong Kong and Emerson Electric (Thailand) Ltd. As per agreements dated 01.10.2007 and 29.08.2007 respectively, cost allocation was made for management services. The amount which was allocated to assessee comprised of ₹ 68,48,65,712/- for assessment year 2009-10 and ₹ 3,42,76,972/- for assessment year 2008-09. The PLI chosen by the assessee was return on total cost and the associated enterprise was selected as tested party. The assessee had selected six comparables whose mean PLI was computed at 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of services received, if any, and hence, ascertaining the actual cost of rendering services was not possible. The assessee claims that it had received services in the field of Human Resources, wherein training material was provided and advice on personnel policies were received; then in the field of marketing and product, where presentation of present trends in Asia Pacific Region were received and technical material on support products were provided in the field of finance. The associated enterprises provided finance reporting packages, business review and standard of accounting practices in the field of business development and management by using business leads to APEC Region to get business of assessee company. Further, other services were also provided for giving support for new products, marketing material, training material and technical support. The TPO also questioned the assessee as to the analysis done to arrive at the cost for availing such services from other than associated enterprises, against which the assessee had replied that no such analysis was done. The TPO in this regard observed that the claim of similar arrangements having been entered into with other as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trategic and advisory services and such charge was also consistent with the policy adopted by the said two concerns for other Emerson group entities. The assessee in support filed the copies of services agreement which have been entered into between Emerson HK and other Emerson group entities i.e. Emerson US, Emerson Suzhou, Emerson Shenyang, Emerson Japan, Emerson Australia and Emerson Thailand. The assessee entered into agreement with Emerson HK on 01.10.2007 and on 29.08.2007 with Emerson TH; the assessee claimed that invoices for services charged were raised by associated enterprises only in the month of September, 2009 i.e. after closure of books of account of assessee for financial year 2007- 08. Accordingly, the said transaction has been reflected in the books of account of assessee in assessment year 2009-10. The assessee also filed the details of nature of services and identification of benefits received from the associated enterprises and also need for services in different fields of operational activities. The assessee further claimed that without prejudice to above said, it was mentioned that nowhere the law requires the assessee to demonstrate the need for availing suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation basis would not tantamount that the entire service charges were inappropriate and the approach of TPO in treating the arm's length price at Nil was not in accordance with law. The assessee further referred to the audited financial statements of associated enterprises and TP study report and pointed out that mere absence of study report of associated enterprises should not be considered in a manner that the arm's length price of transaction was taken at Nil. The mark up charged by the associated enterprises was consistent with the mark up agreed by the assessee and in view thereof, where role and responsibility of each entities was specified in the service agreement and the mark up charge at 5.8% was verifiable from the cost allocation working, the arm's length price of said transaction could not be determined at Nil. 11. The TPO after considering the submissions of assessee noted that though it was stated that operational, strategic and advisory supports were requested from Emerson HK and Emerson TH but no contemporaneous records were produced to indicate that such need was identified, which precedes the entering into agreement for such services. The mere fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure that was linked to any services received and the assessee had failed to demonstrate the value of services received; in such cases, it was held that in view of the guidelines from OECD and Transfer Pricing Guidelines, it was apparent that it supports the view that in the transfer pricing context, both for services and benefit, principles have to be applied in determining the arm's length price of transaction. The TPO reiterated that it needs to be seen whether any services had actually been provided and also that cost had been incurred for providing such services and whether the charge was based on reliable basis and had nexus to the services and commensurated to the benefits received. The TPO held that it was incumbent upon the assessee to establish before the TPO that the payments were made commensurate to the volume and quality of services and such cost was comparable; whereas in the case of assessee, as per terms of agreement, same were independent of the nature or volume of services. Relying on series of decision and in the absence of audited accounts of associated enterprises, the TPO held that it was not possible to know what activities were carried on by the asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were received and on CUP method, arm's length price of transaction was held to be at Nil. Thus, the TPO made an adjustment of ₹ 10,27,42,744/- and held that the income of assessee would be increased by such sum. 12. The Assessing Officer issued draft assessment order with proposal to make the said addition. The assessee filed objections before the DRP and the DRP found no valid reason to interfere with the draft proposed order of the Assessing Officer/TPO. Accordingly, the Assessing Officer in the order passed under section 143(3) r.w.s. 144C(13) of the Act made an upward adjustment of ₹ 10.27 crores. 13. The assessee is in appeal against the upward adjustment of ₹ 10.27 crores against payment of fees for advisory and other services. Other adjustments were also made on account of other international transactions entered into by the assessee, which we shall deal with at the appropriate time. Referring to the synopsis, it was pointed out by the learned Authorized Representative for the assessee that the advisory services were provided by Emerson HK and Emerson TH, which services were provided not only to the assessee but to other group concerns. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorized Representative for the assessee further pointed out that the law does not require the assessee to prove that it had received benefits from the services but the law requires that the assessee had incurred the expenditure for business purpose. Reliance was placed on the ratio laid down by the Delhi Bench of Tribunal in McCann Erickson India (P.) Ltd. v. Addl.CIT[2012] 24 taxmann.com 21 and the Hyderabad Bench of Tribunal in TNS India (P.) Ltd. v. ACIT [2014] 39 CCH 032. The assessee in this regard after referring to the agreement between the assessee and associated enterprises and explaining the need of services and filed about 550 pages to prove what kind of services were received from the two concerns. He referred to the agreement placed at pages 243 to 250 of the Paper Book with Emerson HK and Emerson TH at pages 251 to 258 of the Paper Book. He further referred to the agreement of Emerson HK with US, which is placed at page 943 of the Paper Book and with the Australian company at page 947 of the Paper Book. He further pointed out that the terms of agreement would show that the remuneration was consistent i.e. with all concerns it was cost plus 5.8%. He referred to anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h it was rendering services. He further stated that it was incumbent upon the assessee to show that whether marginal support services were at arm's length. The learned Authorized Representative for the assessee in this regard stressed that CUP method cannot be applied as most appropriate method. Reliance in this regard was placed on the ratio laid down by the Delhi Bench of Tribunal in AWB India (P.) Ltd. v. Dy. CIT[2014] 50 taxmann.com 323/[2015] 152 ITD 770 and the Mumbai Bench of Tribunal in Merck Ltd. v. Dy. CIT[2013] 37 taxmann.com 433/[2014] 148 ITD 513. The learned Authorized Representative for the assessee further pointed out that at pages 939 and 940 of Paper Book, basis for cost allocations i.e. expenses incurred and its allocation, is provided. At page 941 of Paper Book is allocation of cost for Emerson HK and perusal of the same would reflect that the cost has been allocated centre-wise on the basis of time spent on particular project; such cost allocated to different countries, if at arm's length price, had to be accepted. He further referred to page 1017 of the Paper Book and pointed out that for Emerson TH, cost allocation was before the TPO. However, the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. The learned Departmental Representative for the Revenue furnished written submissions and pointed out that the facts and issues and the arguments of assessee have been considered by the TPO in detail. He also pointed out that the bills were not raised and even TDS was not paid. The learned Departmental Representative for the Revenue pointed out that the basis of cost worked out was not available as to how it was arrived at to justify the cost charged. The assessee admittedly, had paid cost plus 5.78% but where the assessee had not given the breakup of cost, then there was no merit in making any such payments to associated enterprises. 16. The learned Authorized Representative for the assessee in rejoinder pointed out that associated enterprise had used scientific method of allocating the cost and the same cannot be disturbed on such basis. He thus, pointed out that there is no merit in the order of TPO. Before parting, he also pointed out that the TPO had relied on the ratio laid down in the case of Gemplus India (P.) Ltd. v. Asstt. CIT[2010] 3 taxmann.com 755 (Bang. - Trib.), relating to assessment year 2003-04, where the finding was that no services were rendered. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which are as under:- Key benefits derived Page No. Development of New Products - Aluminium Motor, Product Sr. No.CR 72 333 - 336 Access to web portals enabling significant cost reduction such as e-sourcing etc. 551 - 564 Assistance in negotiating a beneficial purchasing rate with suppliers - viz. Bao Steel 487 - 490 Cost reduction targets achieved due to e-bidding platforms implemented 533 - 534 Identifying lead for new business opportunities for ECT India - Examples of support/inputs received for Whirlpool for Indian markets 587 - 588 Identifying lead for new business opportunities for ECT India - Examples of support/inputs received for Blue Star for its Middle East markets 597 - 598 Sharing of key data related to competitors such as Mitsubishi 565 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices provided were not upto the mark. In any case, the perusal of various evidences filed by the assessee i.e. contemporaneous data available on record shows that it is highly technical and the same has been used by the assessee for carrying on its business activities, such evidence cannot be brushed aside being not upto the mark. The TPO had referred to part of the data and drew conclusion, which is not warranted in any case. 20. Another aspect of the issue which needs to be kept in mind is the developing scenario of carrying on the business in the country. The said business is carried on by the entities which have presence outside India and have certain standards, which are attached to its brand name. In order to maintain its brand value, arrangements are made with different entities across the globe by holding companies, so that different entities operating in different parts of the world adhere to specific rules and regulations while carrying on business under the said brand. The assessee is 100% subsidiary of Copeland Corporation, which admittedly, has presence in various Countries. The assessee has placed on record that besides the assessee entering into agreement with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eds of the company should be; it is businessman who can only judge the legitimacy of the business needs of the company from the point of view of prudent businessman. Hence, the benefit derived and accruing to the company must also be considered from the angle of prudent businessman. The Hon'ble High Court clearly held that the term benefit to a company in relation to its business has a very wide connotation and it was difficult to accurately measure these benefits in terms of money separately. The said principle laid down by the Hon'ble High Court has been applied by the Delhi Bench of Tribunal in McCann Erickson India P. Ltd. (supra) to hold whether the benefits derived by the assessee, in view of the evidences in respect of management service charges and client coordination fees, cannot be found fault with. 22. Similar proposition has been laid down by the Hyderabad Bench of Tribunal in TNS India Pvt. Ltd. (supra), wherein the Assessing Officer had not believed the write-up for the services provided and the benefit obtained. The Tribunal held that unless the Assessing Officer steps into assessee's business premises and observes the role of the said company or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t; 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 the same. 25. Accordingly, we hold that the TPO while benchmarking the transactions has to determine whether the price paid by the assessee for the services availed is what an independent enterprise would have paid for the same services. The analysis done by the TPO of the nature of services and benefits arising to the assessee on availing such services was beyond the scope of transfer pricing provisions and hence, we find no merit in the same. 26. Another aspect which needs to be kept in mind is that it was not only the assessee but other entities in different parts of the world which were availing similar services from the said two entities. The assessee had filed on record the copies of agreement with the said concerns and when compared with terms of agreement with the assessee, the same were at par. In such scenario, where the benefit of services was availed by different entities which in turn, were remunerated by different entities on the basis of cost worked out on man hours basis plus mark up, which was at same level, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were not relevant. However, the TPO brushed aside the same on the ground that complete details had not been given. 27. The assessee also pointed out that the companies were providing information of complex nature to the assessee for carrying on the business and when there is certain amount of confidentiality in the same, the same cannot be shared with the third party, as the business model of the assessee was at stake. In such scenario, where the entity is providing similar services to various entities and following scientific method of allocating cost and charging the same with mark up, then there is no merit in the order of Assessing Officer/TPO in rejecting the calculation and submissions filed by the assessee in this regard. The details relevant to compute the cost allocation on account of services has been certified and filed before the Assessing Officer; the same cannot be brushed aside on the ground that complete details have not been filed when the balance details were not relevant for deciding the issue; where the entities are engaged in different lines of business, then there is no merit in the stand of TPO in this regard. We thus hold that the AE in such circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, we hold that the TNMM method is most appropriate method appropriate method to be applied to benchmark the international transactions undertaken by the assessee. The assessee had selected the foreign AEs as the tested party and the same may be taken as the tested party. The international transactions of fees paid for advisory and another services is thus to be benchmarked by comparing the margins of the tested party i.e. the foreign AE with the margins of external comparables selected by the assessee. The assessee points out that the said foreign comparables were also engaged in providing similar advisory and related services to its entities and the financial details were filed before TPO. Accordingly, we are in conformity with the exercise undertaken by the assessee in this regard. However, for the limited purpose of verification that the margins shown by the tested party i.e. the foreign AE is at arm's length to the margins shown by the comparables, which were selected by the assessee, the AO/TPO is directed to verify the claim of assessee in this regard and decide the issue, accordingly. Reasonable opportunity of hearing shall be given to assessee by the AO/TPO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no merit in the contention of AO/TPO in this regard. Thus, the ground of appeal No.2 raised by the assessee is allowed. 31. The issue which is raised vide ground of appeal No.3 is against transfer pricing adjustment made by the TPO/Assessing Officer of ₹ 55,66,278/- with respect to international transactions of payment of fees for designing and consultancy services. The assessee claims that no disallowance was to be made as it had suo motu disallowed the payment under section 40(a)(ia) of the Act. The learned Authorized Representative for the assessee before us pointed out that limited directions were needed from the Tribunal to allow discount of ₹ 55,66,278/- out of total of ₹ 1.16 crores in the succeeding year as the tax was withheld on the said payment in the next year. 32. Brief facts relating to the issue are that during the year under consideration, the assessee had commenced new activity, wherein it provided cooling solutions to third party customers in India. Since the assessee did not have necessary expertise in this line of business, the assessee approached one of its associated enterprises Clive Samuels Associates Inc for relevant consultanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is thus, directed to reduce the income of assessee in assessment year 2010-11. The ground of appeal No.3 raised by the assessee is thus, decided as judicated above. 36. The issue in ground of appeal No.4 is in respect of payment of commission to associated enterprises. The assessee pointed out that the limited issue which arises is that during the year under consideration, the assessee had paid commission of ₹ 10,78,51,033/- to its associated enterprises, out of which sum of ₹ 1,80,44,460/- has been reversed in the subsequent financial year. The assessee pointed out that the TPO in this regard had considered the arm's length price of the aforesaid transaction at ₹ 8,98,06,573/- with direction that the Assessing Officer may give credit for the said amount in subsequent financial year if the same is offered to tax in that year. 37. The assessee is aggrieved by the order of Assessing Officer in not including the said direction of the TPO in the final assessment order. 38. The learned Authorized Representative for the assessee pointed out that the same may be reduced in this year but the same cannot be taxed in next year. 39. We find merit in the plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation order and sustained the disallowance on account of contingent nature of expenditure. 43. However, in the year under consideration i.e. assessment year 2009-10, the assessee received supporting documentation in respect of ₹ 6.27 crores that the amount has been paid to the concerned party and the same was claimed as deduction in assessment year 2009-10. The assessee claims that it had filed details before the Assessing Officer during the year under consideration. However, the claim of assessee was rejected being contingent and capital in nature. The Assessing Officer had failed to consider the rectification order passed under section 154 of the Act. 44. In the totality of the above said facts and circumstances and in view of rectification order, we remit this issue back to the file of Assessing Officer to consider the case of assessee after going through the details in this regard and decide the issue on verification of said documents. The assessee is directed to file the requisite evidence before the Assessing Officer in respect of its claim. In case the assessee has reimbu8rsed the amount of relocation, thus the same is neither contingent nor capital and is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
