TMI Blog2018 (9) TMI 1880X X X X Extracts X X X X X X X X Extracts X X X X ..... That should be best left to the commercial wisdom of the assessee. What is material is whether the services were rendered or not, and whether or not the cost allocation was on a fair and reasonable, even if not wholly precise and accurate, basis and both of these tests are clearly satisfied on the facts of this case. It is also not a case in which benefits are so trivial or illusory that it can be said that the assessee did not derive any benefit from these services at all. The emails, correspondence and other corroborative details clearly show rendition of services, and the allocation being on approximate time basis show reasonableness in allocation of costs. As for the fact that the date of agreement is a date subsequent to commencement of work under the agreement, nothing really turns on it inasmuch as the existence of a formal agreement is not even a sine qua non for a cost contribution arrangement. It is not the case of the revenue that the agreement is not a sham agreement. The agreement may have been formally entered into on a later date but it covers the entire period and there is no dispute about rendition of services. In our considered view, in the light of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant failed to establish benefit test for allocation of management fee in ignorance of due factual evidence submitted by the Appellant in this regard. 2.3 The Learned AO/TPO has erred in disallowing the whole of the amount of management fees on a gross basis without deploying any basis for considering the arm s length price to be NIL for the concerned transaction. 3. The Learned AO/TPO erred in making upward adjustment in relation to payment made towards allocation of insurance cost to an Associated Enterprise amounting to ₹ 2,46,527. 3.1 The Learned AO/TPO erred in assuming that there was duplication of insurance payment for public liability. 3.2 The Learned AO/TPO has erred in disallowing the whole of the amount of insurance cost allocation on a gross basis without deploying any basis for considering the arm s length price to be NIL for the concerned transaction. 3. Briefly stated, relevant material facts are as follows. The assessee, a subsidiary of CMP Batteries Ltd UK and part of Exide Technologies Group USA, is engaged in the business of manufacturing and marketing of storage batteries for different applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the company out of the total group's turnover. No evidences were submitted to substantiate if any reconciliation exercise was done. It is also not clear that the how the taxpayer was benefited by these expenses. In absence of any documentary evidences to justify the receipt of benefit by the assesses from the payment of such management fees (through non submission of evidence to show that President-Asia Pacific had indeed devoted time for supervising the operations) and in absence of any documentary evidence to justify the arm's length nature of this payment (through non-submission of the basis of 11.72% and 26.27% and no reconciliation), you are required to showcause why it should not be assumed that the activities of President-Asia Pacific were in nature of share-holding activities for the parent group company in the absence of any evidence produced by you and consequently the arm's length price of this payment should not be treated as NIL, being payment made in spite of non receipt of any benefit. Similarly, management fee charged by Exide Technologies Inc. USA is also not justified by you. Your submission dated 29.10.2013 is insufficient and to not provide evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ific was to provide strategic management support to the companies as it gets the benefit of higher cadre personnel having requisite international exposure. It was also pointed out that the evidence for direct involvement of President Asia Pacific in assessee s business was already furnished to the Transfer Pricing Officer, as also copies of transfer pricing questionnaire prepared by various cost centres of Asia Pacific group entities in question. The assessee further pointed out that working of cost allocation is based on the agreement and various time estimates in respect of cost centres, the details of which were duly furnished. As regards the common corporate costs charged back by Exide Technologies Inc., it was explained by the assessee that various departments of Exide US had duly extended support to the assessee company, in terms of the agreement with the assessee and participating group companies. The attention was drawn to transfer pricing questionnaires prepared by various cost centres within US, and details of services rendered, time estimates. The assessee further pointed out detailed nature of services, evidence of services rendered and basis of cost allocation as tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement is dated 03.12.2009, it is brought in force with retrospective effect. The TPO was of the view that expenses incurred prior to signing of agreement cannot be allocated under this agreement. It was also noted that there is a contradiction in agreement inasmuch as, on one hand, it provides for allocation of expenses on time basis, and, on the other hand, it has fixed allocation ratio basis for next two years. As regards payment to Exide US, the TPO was of the view that the date of agreement is 17.03.2010 while it is made effective from 01.04.2009. Once again it was noted that the cost allocation is on time basis, but 1% allocation assessee is fixed under the CCA, and that while agreement refers to services rendered without mentioning what benefits were obtained by the assessee . On this basis, so far as allocation of management costs were concerned, the TPO concluded as follows:- 6.4.1 Therefore, on the basis of the facts mentioned above, it is clear that since there was no requirement for such payment and the assessee somehow wanted to make such payment, it was made on an ad-hoc basis. Thus, the assessee fails on both the counts i.e. substantiation of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of necessity and the genuine utility of the services availed by it. In the absence of any documentary evidences to justify the receipt of benefit by the assessee from the payment of such management fees, the Arms length price of the management fees paid by the assessee to US entity is also taken as NIL. Before us more or less similar arguments have been made as were made before the AO. The details furnished show that much emphasis has been laid on the functioning of Mr. Lu. But we are in agreement with the TPO that he was acting in a supervisory capacity on behalf of the AEs. His activity has therefore rightfully been considered as share holder activity or stewardship activity which do not call for any payment from the subsidiary. Further the retrospective operation of the agreement also suggests that agreement was drafted to make a claim for the management fee. Though the cost sharing is claimed to be based on time sharing, allocating a predetermined share to each AEs is contradictory. Further the agreements with different AES for different services mention the same % of time to be charged to the assessee. This cannot be coincidence, but looks like a deliberate planni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reiterating the fact discussed in the preceding paras we directly come to the issue relating to allocation of management fees being the share of the assessee of the total common cost incurred by the associate concerns relating to the services provided by Asia Pacific head. 25. From perusal of the records we observe that Mr. Luke Lu president of Asia Pacific carried out activities in the nature of supervising various activities undertaken on behalf of appellant rather than the activity resulting in benefit to appellant. It is true that assessee had provided following documents to substantiate it claim of management fees allocated to the assessee company:- (i) Cost Sharing Agreement; (ii) The educational credentials of Mr. Luke Lu; (iii) Press note released by Exide Technologies while appointing him as Asia Pacific leader for the Group; (IV) Copy of letter from President Chief Executive Officer of Exide Technologies; (v) Email containing itinerary during his visit to India which also demonstrated his involvement in the business activities, issues, etc. was submitted vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o general in nature that even an employee of the assessee could have rendered the same. In the event of no services actually having been rendered, there cannot be any occasion for the same services being rendered by a person without specialized knowledge. On the one hand, it is held that arm's length price of these services is zero value, and, in the same breath, it is held that there would hardly be any substantial payment for these services. Clearly, services are rendered on the facts of the present case. There is sufficient material on record to show that the assesses was, under the agreement, entitled to receive a package of services on as and when required basis. The emails and other documentary evidences show that the assessee was in receipt of these services. Just because these services were too general, in the perception of the authorities below, or just because the assessee did not need these services from the outside agencies, cannot be reason enough to hold that the services were not rendered at all. We have perused the material before us, and, in our considered view, the assessee has reasonably established rendition of services. The assessee may not have received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances of the case, the DRP and TPQ/AO have failed to appreciate the business model and business realities of the appellant and role of its AE, while conducting the economic analysis, and concluding that no service is received or no benefit, and/or services received are duplicative in nature. 6. That, on the facts and circumstances of the case, the DRP and TPO/AO erred in presumptively holding that the revenue authorities are empowered to question the commercial decision of the appellant and in not appreciating the jurisprudence that the DRP and the AO/TPO cannot go beyond their powers to question the business decision of the company. 7. That, on the facts and circumstances of the case, the DRP has erred in confirming that the TPO has discharged his statutory onus by establishing the conditions specified in (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm's length price determined by the appellant and proceeding to decide the arm's length price himself. 8. That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in conducting economic analysis of the international transactions witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no evidence of any services having been actually rendered by the AE, the TPO concluded that it does not have any value in an arm's length situation. The value of this service was also taken as NIL. The same was the case with respect to the payments for other services. Accordingly, no arm's length value was assigned to these services also. In respect of these cases TNMM was rejected and CUP was applied- though, even under CUP method, value assigned was nil as, in the opinion of the TPO, these services were worthless. 13. When Assessing Officer proposed to make disallowance in respect of payments for the above services, arm's length value of which was taken at 'zero', aggregating to ₹ 31,23,325, as against total management fees of ₹ 58,20,57/- paid by the assessee, assessee carried the matter before the DRP but without any success. The DRP confirmed the stand so taken by the TPO, Accordingly, an ALP adjustment of ₹ 31,23,325 was made by the Assessing Officer. The assessee is aggrieved and is in appeal before us. 14. We have heard the rival contentions, perused the material on record and duly considered facts of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments. 18. We are also of the considered view that in the absence of prerequisites for application of CUP methods being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO's impugned action cannot meet our judicial approval. 19. For the detailed reasons set out above, we uphold the grievance of the assessee and direct the AO to delete the impugned ALP adjustment of ₹ 31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ictory. If no services were rendered, which services the authorities below hold 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. The cost allocation agreement and detailed documentation support for the services availed under the cost contribution arrangement were placed before us at pages 106 to 258, and, upon perusal of the same, we have no doubts about the actual rendition of services and bonafides of arrangement. As for the TPO's observation 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 , OECD Transfer Pricing Guidelines indeed state that Stewardship activities covered a range of activities by a shareholder that may include provision for services to other group members, for example services that would be provided by a coordinating centre , that These latter type of nonshareholder activities could include detailed planning services for particular operations, management or technical advice (trouble shooting) or in some cases assistance in day to day m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year . For this reason also, the stand of the authorities below is unsustainable in law. In the light of these discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of ₹ 1,51,83,140. The assessee gets the relief accordingly. 28. We observe that the issue raised in this ground is covered to a wide extent by this decision of Tribunal as the facts before us are quite similar to the facts adjudicated in the above decision of the Tribunal. However on examining the facts of the instant appeal in the light of the decision of Tribunal quoted above we are of the view that in the instant appeal the alleged allocation of managerial fees was both in the nature of Revenue and capital expenditure because the time and suggestions given by the president Asia Pacific Mr. Luke Lu was helpful to the assessee to day to day business activity as well as expansion and increase in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent to commencement of work under the agreement, nothing really turns on it inasmuch as the existence of a formal agreement is not even a sine qua non for a cost contribution arrangement. It is not the case of the revenue that the agreement is not a sham agreement. The agreement may have been formally entered into on a later date but it covers the entire period and there is no dispute about rendition of services. In our considered view, in the light of these discussions and respectfully following the co-ordinate bench decision in assessee s own case for the assessment year 2008-09, we are unable to see any legally sustainable merits in the impugned arm s length price adjustments in respect of management fees. As regards the arm s length price adjustment in respect of insurance premium share, we find that this issue is also covered by the co-ordinate bench decision in assessee s own case for the assessment year 2008-09 wherein the co-ordinate bench has, inter alia, observed as follows:- 11. Ground No. 2 3 of Revenue's appeal challenges the order of Ld. CIT(A) deleting the upward adjustment of ₹ 5,04,702/- in relation to payment of allocation of insuranc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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