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TMI Blog2019 (6) TMI 1371X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transactions to the Transfer Pricing Officer (TPO). The TPO noticed that the assessee declared eleven international transactions including Import of raw material, components & consumables; SAP, Software and IT Costs; Import of traded goods; and Services received with transacted value of Rs. 10,00,02,560/-. In the present appeal, we are concerned only with the international transaction of the `Services received', more specifically, with a part of it pertaining to the payment of `Fees for receipt of management services' to the tune of Rs. 5,65,53,971/-. The assessee aggregated this transaction with other international transactions in its two business segments, namely, Manufacturing Segment and Trading Segment. By applying the Transactional Net Margin Method (TNMM) as the most appropriate method, the assessee claimed that this transaction was also at ALP when considered along with other international transactions falling under the respective Manufacturing and Trading segments. The TPO did not approve the aggregation of the international transaction of payment of `Fees for Management services' with other international transactions. He opined that such transaction was requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act, 1961 (hereinafter also called `the Act') provides that: 'Any income arising from an international transaction shall be computed having regard to the arm's length price.' The procedure for computation of arm's length price has been set out in section 92C. Sub-section (1) of section 92C provides that: 'The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method .....'. A bare reading of section 92C(1) brings out that the ALP is required to be determined of 'an' international transaction. The term 'international transaction' has been defined in section 92B to mean : `a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, .....'. It is discernible from the above definition of the `international transaction' given in section 92B that it refers to 'a transaction' between two or more associated enterprises. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) from the first transaction with the potential income arising from the second transaction (arm's length income minus transacted income). When we consider more than one separate transaction under the combined umbrella of TNMM, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one or more of the international transactions may be grabbed by the income from another international transaction giving higher income on transacted value. 8. The Hon'ble Punjab & Haryana High Court in Knorr Bremse India (P) Ltd. Vs. ACIT (2016) 380 ITR 307 (P&H) considered the question of aggregation of international transactions. Their Lordships held that several transactions between two or more AEs can form a single composite transaction if they are closely linked transactions and the onus is always on the assessee to establish that such transactions are part of an international transaction pursuant to an understanding between various members of a group. The Hon'ble High Court observed that in case of a package deal where each item is not separately valued but all are given a composite price, these are one international transaction. It went on to hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the assessee, thereby affirming the view of the Tribunal that aggregation of the transaction of payment of Technical fees with other international transactions under the common TNMM was not correct. Restoring the matter to the TPO/AO, it held that the TNMM should be separately applied for determining the ALP of the international transaction of payment of Technical fee. We note that the facts of the instant case are rather on a weaker wicket. In that case, the Hon'ble High Court did not approve clubbing of `Technical fees' with other transactions under the Manufacturing segment as without technical know-how even the production could not have been possible. Extantly, we are dealing with a situation in which the assessee is trying to club the transaction of payment of Fees for Management services with others, which is a step further away from technical knowhow, in the process of manufacturing. 11. In view of the foregoing discussion, it is held that the international transaction of payment of Fees for Management services cannot be clubbed with other international transactions for showing the same at ALP. It needs to be benchmarked separately as has been held by the authorities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement') with Schaeffler Holding (China) Co., Ltd, Shanghai, China (hereinafter also called `Schaeffler China') for receipt of Management services, a copy of which has been placed at page 239 onwards of the paper book. Preamble of the Agreement provides that Schaeffler China established a Regional Headquarter (HQ) for the Asia- Pacific-region with responsibility for the group activities therein performing group specific services as well as coordinating and supervising the economic activities of the operating companies in the region. The assessee agreed to avail the services that have been set out under "Article-1-Scope of Service". Para-1 of this Article provides that Schaeffler China agreed to provide Finance and Controlling services; Human Resources services; Purchasing/Procurement services; Quality Assurance services; Supply Chain Management Services (incl. Logistics services and Business Integration services); Business Development Services; Business Operations services; and Coco-services. Annexure-1 to the Agreement provides a further elaboration of nature of services under above broader heads of Services. For example, `Finance & Controlling services' services include - Suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hain management services', it has been mentioned that: "In respect of these areas of cost effective or cost reductions measures, various trainings were carried out with supply chain personnel to develop the system of reduction in Inventory lead time, online stock facility at depot and distributors place. In this respect, the assessee requested the AE for development of software for slow mover analysis, top inventory, Non-mover analysis in view to effective and optimized cost of supply chain management." It further provides that: "During the year under consideration, a software was developed by the AE called PL 14 backlog Analyzer and reconciliation for proper order management and analysis of slow mover, top inventories and non-moving /slow moving Inventory analysis". Apart from that, the assessee has also given the nature of services under this head and benefit arising therefrom. 17. Under the head "Business Operation Services", the assessee, inter alia, stated that : "The AE provided support in the area of corporate engineering, the project of MOVE, development of capacity calculation tool in the Process operations for optimization of Quality, cost, Delivery reliability of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eads of services also, the assessee has given detailed description of nature of services provided and also the benefits which resulted to it as a result of the receipt of such services. All these things have been recorded in the TPO's order, who has virtually not disputed the factum of receipt of such services. From page 76 onwards of his order, the TPO, has analyzed the submissions of the assessee on receipt of such services and under the column `Analysis of the documents supplied and remarks', he simply observed in respect of all the services that : `The AE providing services to provide third party business to assessee and to align the business with group business strategies'. Under the column ` Remarks', again for all the services, he noted : `Control and supervisory functions of the provider - as a distributor, the assessee is not directly concerned - services leading to direct and proximate benefit to the provider'. Sum and substance of the TPO's observations, which he also emphatically stated in other parts of his order, is that services rendered by Schaeffler China to the assessee were in the nature of stewardship activities or shareholders services, for which no payment was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clauses Act, 1897. The Hon'ble Bombay High Court in Abdulgafar A. Nadiadwala vs. ACIT & Ors. (2004) 267 ITR 488 (Bom) has laid down that in case a term is not defined in the Act, same should be interpreted according to its plain dictionary meaning. As such, we will have to appreciate the meaning of the term `stewardship' from dictionary, which defines it as: `the job of supervising or taking care of something, such as an organization or property'. To put it simply, it means an act of overseeing or taking care. In commercial context, stewardship activities are the activities undertaken by an enterprise to protect one's own interest. When company A has been engaged by company B for rendering some service to it, if company B does some activity to ensure that the work assigned to company A is being done as per its specifications and standards, it is construed as a stewardship activity. On the other hand, if an activity/service of the renderer company produces some effect on the recipient company, whether or not resulting into a tangible benefit to the recipient, the same, in our considered opinion, ceases to be a stewardship activity. One of the forms of stewardship activities is a sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars beginning after 31.7.2009. It has been mentioned in the 2009 Regulation that: `Section 1.482-9T(1)(3)(iv) of the 2006 temporary regulations provides that an activity is a shareholder activity if the sole effect of that activity is either to protect the renderer's capital investment in the recipient or in other members of the controlled group or to facilitate compliance by the renderer with reporting, legal or regulatory requirements applicable specifically to the renderer, or both.' There was some debate as to whether the `sole effect' language should be employed to brand any activity as a shareholder activity or it should be substituted with the `primary effect'. In other words, if the primary effect of the activity or service is produced to the renderer company but some incidental effect is also produced to the recipient company, then also it should be categorized as shareholder activity. After considering all the opinions, the Treasury Department and the IRS believed that : `the "sole effect" language is appropriate.' It was noticed that : `The "primary effect" language in the 2003 proposed regulations could inappropriately include activities that are not true shareholder ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew to enable the assessee to carry out its business operations producing effect on the assessee company. In our opinion, these do not qualify as `stewardship activities'. The impugned order is overturned pro tanto. 25. The next question to be decided is whether the international transaction of payment of Fees for Management support services to the tune of Rs. 5,65,53,971/- was at ALP? We have noticed supra that the assessee aggregated this international transaction with Manufacturing and Trading Segments and determined the ALP under TNMM on an aggregate basis. The TPO segregated this international transaction and went on to determine its ALP independently. Primarily, he held such services to be stewardship activity for which no charge was warranted. Without prejudice to his above view, he noted on the last but one page of his order in para 8.10 that the assessee did not produce any cost benefit analysis or details in respect of determination of payment made to its AE, nor it gave any basis for the rate of different services agreed to by it, which is as high as 325 USD per hour. He rejected the contentions of the assessee in para 8.11. Then in a three-lined para no. 8.12 on the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ends only to determining the ALP. The TPO determines the ALP of the transactions by carrying out FAR (functions performed, assets employed and risks undertaken) analysis and deploying one of the prescribed methods. It means that the TPO has to simply examine the international transaction and then determine its ALP. In the context of an existing agreement for receipt of service from an AE, the TPO may come across two broader situations, viz., one, the service has been rendered and two, the service itself has not been rendered. If there is an agreement for rendering service, and the assessee has paid pursuant to such an agreement, but no service has been actually performed by the AE, in that scenario, no functions would stand performed for the assessee, which would lead to ALP determination by the TPO at Nil. In the instant case, we are not concerned with such a situation in which the TPO claims that no service was rendered by the AE. The TPO has held that the services were rendered, but the same were in the nature of stewardship or shareholder service. In the second aforestated broader situation where service is actually rendered by the AE, there may be further subsituations, such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into his shoes for examining such aspects and then concluding that since the service was not required etc., its ALP becomes Nil. This exercise falls in the exclusive domain of the AO. Such an exercise, if undertaken by the TPO, thwarts the determination of the ALP. The Hon'ble Delhi High Court in CIT VS. Cushman And Wakefield (India) Pvt. Ltd. (2014) 367 ITR 730 (Del) has held that the TPO's authority extends to determining ALP u/s. 92 rather than determining whether such services exist or benefit have accrued to the assessee. Eventually, the Hon'ble High Court restored the matter for fresh determination in this regard. On the other hand, we find that the Hon'ble jurisdictional High Court in CIT Vs. Lever India Exports Ltd. (2017) 292 CTR 393 (Bom) has also held that the TPO's jurisdiction is to only determine the ALP of an International Transaction. It is not a part of the TPO's jurisdiction to consider whether or not the expenditure passed the test of Section 37 of the Act and/or genuineness of the expenditure, which has to be done by the AO. However, in this case, the Hon'ble jurisdictional High Court ordered to delete the addition based on the Nil ALP determination by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .92C(1) of the Act, then such a determination of ALP frustrates the transfer pricing addition. Since the methods prescribed for determining the ALP are statutory prescription, it is absolutely essential for the TPO to compute the ALP by adhering strictly to one of such methods. 29. The Hon'ble jurisdictional High Court in CIT (Large Tax Payer Unit) vs. Johnson & Johnson Ltd. (2017) 247 Taxman 136 (Bom) vide its judgment dated 3rd April, 2017 has held that transfer pricing adjustment is refuted if the TPO does not follow any of the prescribed method. Similar view has been taken by the Hon'ble Bombay High Court in CIT Vs. Johnson & Johnson Ltd. (2017) 297 CTR 480 (Bom) vide its judgment dated 07.03.2017. On going through the above two judgments of the Hon'ble jurisdictional High Court it becomes patent and the ratio decidendi squarely applies to the instant case as well since the TPO did not follow any of the prescribed methods for determining the ALP. He simply held that : "Based on the above, arm's length price of the services provided to the assessee by AE is held to be NIL.". The transfer pricing addition deserves to be deleted on this count as well. 30. Notwithstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X
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