TMI Blog2020 (3) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of management services fees at ₹ 1.59 crore accounts for only 1.63% [2.66% (margin of the assessee by taking ALP of Management services fee at ₹ 1.59 crore) minus 1.03% (margin of the assessee by taking ALP of Management services fee at Nil)]. The amount of transfer pricing adjustment of ₹ 1.59 crore, representing 1.63% profit rate, is in any case less than even 1.80%, being, the cushion between the adjusted and unadjusted mean margin of the comparables. On this score alone, there was no reason to go ahead with the transfer pricing addition of ₹ 1.59 crore. TPO Justification in determining Nil ALP of the international transaction of Payment of management services fees - It is seen from a copy of Management services Agreement between Sandvik AB (the providing party) and the assessee (the receiving party), which is applicable to the year under consideration as well, that the term `Providing party has been defined as `all or some of the Sandvik companies which provide management services . Thus, it is clear that the charges by Sandvik AB were not only for the services provided by it but also some other group companies including Walter AB. The vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see arises out of the final assessment order dated 28-11-2016 passed by the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2012-13. 2. The only issue raised in this appeal is against the transfer pricing addition of ₹ 1,59,45,450/- made by the AO by treating Arms Length Price (ALP) of the international transaction of `Payment of Management Services Fees at Nil. 3. Factual matrix of the case is that the assessee is a domestic company engaged in the business of distribution of cutting and drilling tools. It imported finished goods from overseas Walter group entities for the purpose of resale in India under the brand name of Prototyp and Walter. The assessee filed a return declaring total income of ₹ 49,25,610/-. The return was accompanied by Form No. 3CEB containing details of international transactions ranging from Import of finished goods to Commission income and Payment of management services fees etc. The issue involved before us though directly relates to the international transaction of `Payment of management services fees but also has link with the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of cutting tools. Out of the total revenue from the assessee s Profit and loss account at ₹ 101.31 crore, revenue from sale of products stands at ₹ 99.30 crore. In addition, the assessee earned commission income of ₹ 4.14 lakh @ 10% of the value of sales. The Expense side of the assessee s Profit and loss account records certain operating and non-operating costs. The assessee aggregated Trading of goods and Commission income in the overall Business/Trading segment. Its PLI under the TNMM was calculated at 1.03% at pages 67 and 68 of the Transfer Pricing study report. The assessee having only one business segment, calculated its operating profit at ₹ 1.04,63,364/- by considering all the items of operating revenue and operating expenses from its P L account including Payment of management services fee at ₹ 1.59 crore. This is substantiated from the assessee s Profit and loss account, whose copy is available at page 81 of the paper book. It can be seen there from that the Net profit has been computed at ₹ 44.12 lakh. On adding up the amount of non-operating expenses of ₹ 60.50 lakh, the figure of operating profit at ₹ 1.04 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 1.59 crore and the mean margin of comparables at 7.00%, the transfer pricing adjustment would be equivalent of 5.97% (7.00% 1.03%). In another scenario of other factors remaining the same but with the ALP of management services fees at ₹ 1.59 crore taken at Nil, the profit rate of the assessee will increase from 1.03% to 2.66% requiring the transfer pricing adjustment at equivalent of 4.34% (7.00% - 2.66%). To put it simply, the suo motu transfer pricing adjustment of ₹ 6.07 crore representing additional profit equivalent of 5.97% (7.00% of comparables minus 1.03% of the assessee with the claim of payment of management services fees), in a sense, consists of two parts, namely, 4.34% towards profit in the international transaction of import of finished goods and 1.63% towards management services fees paid, if the ALP of the latter is to be taken as Nil. 6. One needs to appreciate qualitative difference between two situations viz., the first, in which the assessee itself imports the goods from its AE at such a price coinciding with arm s length margin of 7.00% and the second, in which it imports the goods at a price coinciding with profit at 1.03%, as is the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital adjusted margin, which is normally considered for the purpose. We note that there is a positive difference of 1.80% in the margin of comparables [6.99% (unadjusted margin) of the comparables minus 5.19% (adjusted margin)] between what the assessee has taken as arm s length margin and what ought to have been taken. The amount of transfer pricing adjustment made by the assessee by taking Nil ALP of the international transaction of `Payment of management services fees at ₹ 1.59 crore accounts for only 1.63% [2.66% (margin of the assessee by taking ALP of Management services fee at ₹ 1.59 crore) minus 1.03% (margin of the assessee by taking ALP of Management services fee at Nil)]. The amount of transfer pricing adjustment of ₹ 1.59 crore, representing 1.63% profit rate, is in any case less than even 1.80%, being, the cushion between the adjusted and unadjusted mean margin of the comparables. On this score alone, there was no reason to go ahead with the transfer pricing addition of ₹ 1.59 crore. 8. Without prejudice to the above discussion, we now proceed to examine if the TPO was justified in determining Nil ALP of the international transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Calculation. Against each of the above categories, there is an elaborate description of the nature of services and the persons/AE providing them. Then there are copies of e-mails from pages 523 to 537 of the paper book which demonstrate that the personnel of the AE rendered services to the assessee, that have been captured in the table given at pages 521 and 522 of the paper book. This shows that not only there was an Agreement between the assessee and its AE for rendering the services but the assessee actually availed the same. 11. Having come to the conclusion that the services were availed by the assessee, the next question is determination of the ALP of the transaction. The ld. AR drew our attention towards the order passed by the Tribunal in the assessee s own case for the immediately preceding assessment year, 2011-12, a copy of which has been placed at page 224 of the paper book. It was shown that in the identical fact situation, the Tribunal has held the transaction of Payment of management services fee at ALP. This factual assertion could not be controverted by the ld. DR. In the absence of any distinguishing feature in the facts of the immediately preceding y ..... X X X X Extracts X X X X X X X X Extracts X X X X
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