TMI Blog2018 (11) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has made a payment of ₹ 1,10,22,586/- to its Associated Enterprise [AE] for availing of services. The TPO asked the assessee to furnish details of payment of Corporate Management Charges. The assessee filed a detailed reply furnishing relevant documentary evidences which were considered by the TPO. The TPO was of the opinion that in order to examine the Arm s Length Price [ALP] of intra-group services received by one of the AE, following essential information should be available: 1. Whether the assessee has actually received Intra group services? 2. What are the: economic and commercial benefits derived by the recipient of intra group services? 3. In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs. 4. Whether a comparable independent enterprise would have paid for the services in comparable circumstances? 5. The cost of intra group services should be benchmarked using either CUP or Cost Plus Method. 4. The TPO was of the opinion that the assessee has not id ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred in providing the above services to its group entities. It is the say of the ld. counsel for the assessee that the AE in the capacity of centralized service provider, provides element of cost saving to the group as a whole of which the assessee is also an integral part. 9. The ld. AR further explained that the relevant information/ documents were provided to the Assessing Officer during the assessment proceedings to substantiate that the assessee has indeed obtained the services of AE. The ld. AR concluded by stating that the TPO/DRP erred in making adjustment in respect of payment of corporate management charges to the AE. 10. Per contra, the ld. DR strongly supported the findings of the lower authorities. It is the say of the ld. DR that the assessee has grossly failed in substantiating services actually received from the AE. 10. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below qua the issue. The facts on record show that to substantiate that the assessee has actually obtained services of AE, the assessee has furnished detailed description of intra group services rendered by the AE, copy of ledger acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) re-sale price method, (iii) cost plus method, (iv) profit split method and (v) transactional net marginal method (TNMM). The manner by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B. The following three steps have been prescribed: - (a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub- clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; 16. The Organization for Economic Co-operation and Development ( OECD‟, for short) has laid down transfer pricing guidelines for Multi-National Enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act . It was further held in this case that it is not nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly, necessarily and exclusively for the purposes of business in order to merit deduction. Pursuant to public protest, the word necessarily was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. 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 or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action Method used by assessee Amount {in crores) 1. Purchase of raw material and components and spare parts CUP 2,84,01,145 2. Purchase of spare parts CUP 35,25,858 3. Royalty payment - 2,51,96,680 4, Provision ofisourcing services TNMM 58,f5,965 5. Provision of designing services TNMM 2,66,23,479 6. Repayment bf loan - 2,60,16,000 7. Corporate management charges - 1,10,22,586 8. Reimbursement of consultancy CUP 21,92,171 9, Reimbursement of Expenses CUP 30,87,040 10. Recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave ratio of service income to total income of 75% or more in the current financial year. This will or more in the current financial year. This wifi ensure that only service companies are selected. 6. R and D greater i than sales turnover [ This is an inappropriate filter. If the filter of selecting companies with ratio of service income to total income egreater then 75% is applied correctly, this filter wilt xnot be required. That apart, R D expenses does not pchange the functional profile of a company, if it is eprimarily a support service provider, it remains so. nTherefore, this fitter has no relevance. s 7. Operates in service/industry Indicating differences the functional The filter is an appropriate filter however the same has not been Correctly applied as the functions of comparables have not been correctly analyzed in the TP report. 8. Controlled party transaction This is an appropriate filter. 9. Insufficient information This is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le In public domain and the company is providing procurement services. Since TNMM is being used, different verticals of business services and smali functional difference are not being ignored while selecting comparables. 3 Kjllick Agencies Mktg. Ltd. The company has been rejected stating that the company is engaged in the business of construction and earth moving machinery and equipment. However, website/ annual report (AR) of the company clearly showed that the company is providing business service-Agent for various foreign principals for sale and after sales services. In fact, it closest to functions performed by you for your AE. 21. Finally, for business /market support services segment, the following comparables were used: Company Name Sales NW Lnt /TC% Service% Emp% RPT% OP/OC OP/OC (w/o Fx) Basiz Fund Service Pvt. Ltd 3.74 4.30 0.32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Varna Industries Ltd. This company is not functionally comparable. 23. Some new comparables for technical support services were used which are as under: No. Company Na Remarks of TPO 1 ArchohmCons This company was not available In your search matrix. The company qualifies all quantitative filters and is functionally comparable. 2 Engineers India This company has been rejected by stating that it has identified its business activity into two business segments i.e. Consultancy Engineering Projects and Lump sum Turnkey Projects. However, the company has given segmental results. In Consultancy Engineering projects segment, the company mainly provides consultancy. Hence, this segment has been considered as comparable for technical support function. 3 IB1 Chematur This company was not available in your search matrix. The company qualifies all quantitative filters and is functionally comparable. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Traction Motors(AC/DC. Sys.) and Others The company has been rejected stating that there is insufficient The NTA/MDA/DR/AR are not available for any of the years in Prowess. (The latest available NTA/DR/AR are for the year 2036) The NTA/MDA/DR/AR are not available for any of the years in Capitaline. (The latest available NTA/DR/AR are for the year 2004) The company has been rejected stating that there is insufficient Information about their operations and products. However, website/ annual report (AR) of the company clearly showed that the company is providing business service. Relevant segment has been considered as comparable to technical support function. 10 Semac Ltd This company was not available in your search matrix. The company qualifies all quantitative filters and is functionally comparable 11 TCE Consulting Engineers Ltd. The company has been rejected stating that there is insufficient information about their operations and products. However, website/annual report (AR) of the company clearly showed that the company is providing business service. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 Rites 582.84 609,75 0.19 100.00 40.37 6.12 24.83 24.83 10 Semac Ltd. 34.68 14.60 0.22 97.31 43.22 N/A 25.22 25.22 11 TCE Consulting Engineers Ltd. 319.05 e 116.47 0.66 98,29 50,10 0.05 27.20 27.20 25. Quarrel is the inclusion of new comparables in the business services support segment. 26. Two comparables are under dispute : (1) Global Procurement Consult. Ltd (2) Kellick Agencies Marketing Ltd Global Procurement Consult. Ltd 27. This comparable has been included on the ground that it is engaged in providing procurement support services. Since procurement support services are in the nature of business services, it is a correct comparable. 28. The nature of business in the Annual Report for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employee cost to total cost filer less than 25%. 36. In our considered opinion, since these two companies do not pass filter test adopted by the TPO and accepted by the assessee, we do not find any merits in the contention of the ld. counsel for the assessee and these companies will remain excluded failing filter test. 37. Coming to the comparable relating to designing service segment, the dispute is in relation to inclusion of new comparables by the TPO, namely, Archohm Consults Pvt Ltd and Zipper Trading Enterprises. The TPO has included these two comparables by holding that they are in similar line of business as that of the assessee. Archohm Consults Pvt Ltd 38. The Annual report of this company shows that this company is providing architect services. Whereas the assessee is engaged in designing, development of new product and computer aided designing, a business support services which is totally different from the functions performed by comparable company. We are of the opinion that this company is functionally different and therefore, cannot be a good comparable. We direct for exclusion of this company. Zipper Trading Enterprises 39. The TPO has in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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