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TMI Blog2018 (9) TMI 1880X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of management fee by Associated Enterprises amounting to Rs. 3,47,66,541. In the facts and circumstances of the case where appellant received certain services which helped it in its operations, the Learned AO/TPO ought to have accepted the arm's length price declared by the appellant. It is submitted it be so held now. 2.1 The Learned AO/TPO erred in concluding that the services provided to the Appellant, towards the efficient running and management of the business, was a shareholder activity. 2.2 The Learned AO/TPO erred in concluding that the appellant 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 Rs. 2,46,527. 3.1 The Learned AO/TPO erred in assuming th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e group entities. It was further asked if any subsequent reconciliation of the actual time spent vis-a-vis the figure 11.72% was made. The assessee submitted written replies dated 29.10.2013 and 11.11.2013. The replies are insufficient to support the claim of APL of the management fee. No details were submitted to support of the estimation of time spent by the President-Asia Pacific and no basis was submitted for taking the figure of 11.72% (other than sales and marketing) and 26.27% (Sales and marketing) except submitting that the same corresponds to the turnover 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% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantiated by you), it is clear that excess insurance payment has been made to the AE. You are also directed to produce the detailed bifurcation of insurance paid for covering the products sold in the domestic market." 4. It was explained by the assessee that the assessee had entered into cost sharing agreement with 7 other group entities in Asia Pacific Region to have common set up at regional level which would monitor, manage and administer the business and operations of various group entities. The appointment of Mr. Luke Lu as President - Asia Pacific 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 fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the basis provided i.e. GNB-H : 2.42%, Exide China - 13.86%, Exide Singapore - 10.29%, GNB Japan- 2.40%, Exide Australia - 44.91%, Exide NZ - 10.46%, GNB India - 3.94% and assessee - 11.72%, this was based on time estimation by Mr. Lu (Asia Pacific President) himself and it had no scientific basis. As regards the TP documentation for China, the TPO was of the view that it is not clear whether such documentation is accepted by Chinese authorities, but, in any event, it is not relevant in the context of Indian transfer pricing assessment proceedings. It was also noted that while 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; The DRP confirmed the stand at the assessment level and observed 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 requirement for such payment with direct and substantial benefit arising out of the same and substantiation of the basis of payment. As a result of the above, the submissions of the assessee are insufficient and to not provide evidences 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered facts of the case in the light of applicable legal position. We have also duly considered a detailed written note dated 9th May, 2018 filed by the TPO. This note mainly reiterates the stand of the TPO's earlier stand as set out in his order at the assessment stage. 10. We find that the main issue in appeal is broadly covered by an order dated 28.12.2017 in assessee's own case for the assessment year 2008-09, wherein the co-ordinate bench has observed as follows:- "24. We have heard the rival contentions and perused the record placed before us. Without 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relating to the issue of arm's length price adjustment in respect of management fees holding as follows:- 7.We have heard the rival contentions, perused the material on record and duly \ considered facts of the case in the light of the applicable legal position. 8. As we begin to deal with this issue, we find that in a materially identical situation in the case of Merck Limited Vs DCIT [(2016) 139 DTR 1(Mum)J, a coordinate bench, speaking through one of us i.e. the Accountant Member, has observed, inter alia, as follows: 9. We find that there is a clear contradiction in the findings of the authorities below. On one hand, the stand of the authorities below is that no services are rendered, and, on the other hand, there are categorical findings that the services rendered are so 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 hardl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount paid by the assessee. Such band statements and sweeping generalizations cannot help the case of the revenue authorities. The assessee has benchmarked the transaction on TNMM basis, and unless the revenue authorities can demonstrate that some other method of ascertaining the arm's length price on the facts of this case will be more appropriate a method of ascertaining the arm's length price, the TNMM cannot be discarded. Dealing with almost a similar situation, as we are in seisin of, a coordinate bench of this Tribunal, in the case of AWB India (P.) Ltd v. Dy. CIT [2015] 152 ITD 770, has observed as follows: "11. In ground nos. 5 to 9, which we will take up together, the assessee has raised the following grievances: 5. That, on the facts and circumstances 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication or seeking of certain guidance on verify basic issue does not calf for a payment of Rs. 20 lakhs. Therefore, the ALP of these services was taken as 'NIL'. He further noted that while the assessee has made a payment of Rs. 1,23,476 towards human resources services, the assessee has "not furnished any specific input on training and development of human resources and it is also noticed that these services are of routine nature and duplicate at best". Accordingly, the TPO also treated ALP of these services as 'NIL'. As regards the payment of Rs. 96,355 towards 'legal services', the TPO did take note of the services that the assessee was entitled to under these arrangements but as there 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions. 17. As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its own and the services were not rendered by the group entity. The TPO has rejected the determination of arm's length price on the basis of TNMM, at entity level, but then he has not adopted any other permissible method for determination of arm's length price. Such a course of action, as noted above, is not permissible in law. Just because these services are worthless in the eyes of the revenue authorities, the arm's length price of these services cannot be held to be NIL. Similarly, the findings that no services were rendered and that the assessee could have performed these services on its own are contradictory. 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 observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is thus no legally sustainable foundation for the impugned ALP adjustment. 10. We have also noted that the managerial services, availed by the assessee under the same cost contribution arrangement, have been allowed all these years and have been accepted to be at an arm's length transaction. While there is indeed no res judicata in tax proceedings, its important to bear in mind the observations of Hon'ble Supreme Court in the case of Radhasoami Satsang Vs CIT [(1992) 193 ITR 321 (SC)], to the effect that "where a fundamental aspect permeating through the different assessment years has been found 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 Rs. 1,51,83,140. The assessee gets the relief accordingly. 28. We observe that the issue raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 these discussions and respectfully following the co-ordinate bench decision in assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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