TMI Blog2019 (12) TMI 1282X X X X Extracts X X X X X X X X Extracts X X X X ..... such services ; that SMSL is a special purpose vehicle existing for the sole purpose of pooling of costs ; that no costs for rendering of any shareholder/stewardship services are charged under the Shared Resources Allocation Agreement and that no costs for rendering any exclusive group company specific services are charged under the Shared Resources Allocation Agreement. PO has accepted the segmentals so prepared. This demonstrates that the ld TPO agrees that the support and assistance under the Shared Resources Allocation Agreement are integral to rendition of the Market Research Services. Further when the TPO had accepted the receipts and payments towards the Market Research Services (rendered and received) by the assessee to be at arm's length by applying Internal TNMM, and when, the segmental margin have been arrived at after debiting the payments under Shared Resources Allocation Agreement, which segmentals have been accepted by the ld TPO for benchmarking the Market Research Services and accepting the same to be at arm's length , we find that automatically the payments under the Shared Resources Allocation Agreement also stand benchmarked. It is therefore improper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer, dated 14.03.2016 for the assessment year 2012-2013. 2. Though the assessee has raised various grounds of appeal before us, we find that the only effective issue to be adjudicated in this appeal is with regard to adjustment made in the sum of ₹ 7,50,68,892/- to Arms Length Price (in short ALP ) in respect of shared services at Rs.Nil. 3. Brief facts as recorded in the order of ld. TPO are that the assessee is a market research company. The assessee submitted that during the year under consideration it was part of Aegis Group PLC, U.K. Aegis Group PLC is the parent company of Aegis Media and Synovate. Aegis Media is an independent media communication network, and Synovate is a global market research company. Synovate employs about 6000 staff across 80 countries. The assessee (i.e. erstwhile Synovate India Pvt Ltd) merged with IPSOS Research Pvt. Ltd with effect from 01/04/2012 vide order of the Hon ble Bombay High Court dated 03/05/2013. This is the last year of operation of the assessee. The details of international transaction entered into by the assessee during the year are as follows :- Sl.No Particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rkup charged by SMSL on shared resources for the year ended 31 st December, 2009 is 6% and the same is at arm s length based on an external comparability study performed by Ceteris, US LLC in 2007. 4. Ld.TPO directed the assessee to justify the payment made for management charges in respect of cost contribution arrangement by furnishing the following details :- a. List the various categories of services? b. Describe the nature of each service category in detail? c. List all the beneficiaries from each of the service? d. What is the total cost base? e. Furnish the break-up of total cost base into various categories of intra-group services? f. What are the keys used to allocate cost base within service recipient group members? What is the basis of cost allocation/contribution? g. Submit the details of other group entities to whom costs are allocated? h. Need test - Explain the rationale for the provision of services within the context of the business of the MNE? I. Evidence test - Have the services been actually provided in order to meet the specific need of the recipient of the services (assessee)? j. Benefit test - Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for Indian assessee? Are there any dedicated employees in AEs who are rendering these services to assessee? Submit evidence of time-sheets in this regard? y. Furnish supporting documentation to substantiate ALP of the Cost Contribution arrangement? The assessee furnished written submission in response to the aforesaid queries. The assessee also stated that the shared services resources agreement was entered into for the first time with effect from 01.01.2008 and the cost thereon was accepted to be at arm s length from the assessment year 2008-2009 onwards. The main crux of the arguments of the assessee was that the assessee pays cost of shared services with markup of 6% to its AE for receiving services from the concerned AE. These transactions are routed through a central/common coordinating company i.e. SMSL, wherein the assessee will raise a bill/debit note on SMSL in respect of cost plus 6% under the shared services agreement and SMSL in turn would bill the concerned AE which has delivered services actually to the assessee with the same amount of cost plus 6%. In other words, the SMSL will not make any profit on the said transaction and is merely a pass-through enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services rendered to the Non Associate Enterprise-Domestic (Source: 543,438,083 (Annexure B-4) 257,820,154 (Annexure B-4) 285,617,929 (Annexure B-4) 232,818,764 (Above Table) 52,799,165 9.72% Total 862,040,498 391,203,647 470,836,850 369,313,837 101,523,014 11.78% 5. The assessee submitted that after allocation of Shared Resources Allocation Fees paid to SMSL, the margins earned on AE Transactions are significantly higher than the margins earned from Non AE transactions and domestic transactions. The profit earned by SIPL from receiving market research services from AEs on which SIPL conducted further analysis and sold the same to the local third parties in India (after allocating proportionate-support services cost) can be compared to the profit margin earned by SIPL from providing market research services to local third parties in India (after allocating proportionate support services cost) as shown below :- Segment Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of time sheets and on the basis of sales and documentation supporting any review of the applicability of the chosen mechanism. Submit adequate records to permit verification of such costs. c) Documents supporting the selection of keys for apportionment among several associated enterprises, including reasons why particular keys were considered the most appropriate in the circumstances of the case; d) Documentation created in the undertaking of a functional analysis of the various group members providing and receiving services to establish the relationship between the relevant services and the members' activities and performance. Ld. TPO observed that the assessee failed to provide the above mentioned documents which form the heart for the basis of allocation management charge. 8. The ld. DR in its written submission filed before us has submitted as under : Argument of the Assessee- 1. The assessee has mainly argued that the intra group services were utilised in the business for commercial expedience. Exact quantification of services is neither possible nor required and it was not necessary to allow the deductions for the costs incurred for such servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t). 7.12 There are some cases where an intra-group service performed by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members. The incidental benefits ordinarily would not cause these other group members to be treated as receiving an intra-group service because the activities producing the benefits would not be ones for which an independent enterprise ordinarily would be willing to pay. 7.13 Similarly, an associated enterprise should not be considered to receive an intragroup service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. 7.23 While every attempt should be made to charge fairly for the service provided, any charging has to be supported by an identifiable and reasonably foreseeable benefit. Any indirect-charge method should be sensitive to the commercial features of the individual case (e.g. the allocation key makes sense under the circumstances), contain safeguards against manipulation and follow sound accounting principles, and be capable of producing charges or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidence thereof have not been furnished. At most some services that assessee might have received under the Agreements can be termed as shareholder activities or stewardship services. No payment is required to be made for such services to independent third parties. 3. The application of the arm's length pricing under inter group services is to see whether the charges paid by the assessee reflect the same charges for the services that would have been paid between independent parties dealing at arm's length for comparable services under comparable circumstances. An arm's length entity would be willing to pay for an activity only to the extent that the activity confers on it a benefit of economic or commercial value. 4. The expected benefit must be sufficiently 'direct and substantial so that an independent recipient, in similar circumstances, would be prepared to pay for it. If no benefit has been provided (or was expected to be provided) or the benefit is so remote, the service cannot be charged for. 5. The assessee's level of documentation and evidences should be such that it should clearly reflect the services actually rendered by the AEs to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ALP of an International Transaction. Therefore, the argument and the case laws, related to business necessity are irrelevant to determine the ALP of Intra Group Services. 3. Before the DRP, the assessee has taken the stand that it had demonstrated benefits from the receipt of services with documentation on sample basis. Further in its submissions the assessee states that it is not possible to produce entire and concrete evidence for the receipt of services. The DRP has correctly held that this is against the provisions of law which mandates that proper documentation has to be maintained by the assessee to justify the ALP. If the assessee does not follow the law, the consequences will follow. 4. The assessee has not bench marked the international transactions of Intra Group Services claimed to be received, which is clearly violation of law. It has not shown how the various transactions are closely linked and how they cannot be evaluated adequately on a separate basis. The allocation of cost was to be done on the basis of the equivalent cost in the Indian market conditions as evident from Rule 10B(2)(d). It is well settled principle that in the domain of intra group se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir own agreements and not on the basis of the actual services rendered to the individual units. It is in addition to the above fundamental flaw that the TPO has made a clear findings that there are no details available an record in respect of the nature of services rendered by Singapore affiliate to the assessee company. Therefore, we are of the considered view that the TPO is justified in holding that the assessee has not proved any commensurate benefits against the payments of service charges to the Singapore affiliate. Therefore, the ITO is justified in making the adjustment of ALP under sec. 92CA of the Income-tax Act 1961. 5.2 Further, attention is also invited to the decision of M/s Deloitte Consulting India Pvt. Ltd. in ITA no. 579, 1272, 1273/Mum./2011, wherein the following has been held: 39. On the issue as to whether the TPO is empowered to determine the ALP at nil , we find that the Bangalore Bench of the Tribunal in Gem plus India Pvt. Ltd. (supra), held that the assessee has to establish before the TPO that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the authorities below have not conclusively held that the assessee could not enter into such a transaction nor had they disallowed the same by holding that such an expenditure is not assessee's business expenditure. The ORP as well as the authorities below have merely elucidated that the payments are reimbursement in respect of Ms. Rita Rieken and other personnel's case to serve the interest of share holders. By saying so they have only described the circumstance under which the international transaction has been entered by the appellant, so as to test the benefit that can be said to have reached the assessee. It, therefore, cannot be said to have questioned the commercial expediency of such transactions entered by the appellant. The I. T. rules contain exhaustive detail regarding nature of information and documents which are required to be maintained by the assessee. Rule 100(1) of the I. T. Rules, 1962 also mandates the maintainability of record of uncontrolled transactions to be taken into account in analysing the comparability of the international functions entered into by the assessee. It, therefore, is obligatory on part of the appellant to maintain such recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Nature of services including quantum of services received by the related party. Services were provided in order to meet specific need of recipient of the services. The economic and commercial benefits derived by the recipient of intra group services. In comparable circumstances an independent enterprise would be willing to pay the price for such services? An independent third party would be willing and able to provide such services? 33. The answers to above questions would enable to determine if the Assessee has received intra group services which requires arms' length remuneration. Determination of the arm's length price of intra-group services would thus involve:- I. Identification of the cost incurred by the group entity in providing intra group services to the related party. II. Understanding the basis for allocation of cost to various related parties i.e., nature of allocation keys. III. Whether intra group services will require reimbursement of expenditure along with markup. IV. Identification of arm's length price of markup for rendering of services. 34. Question as to whether intra gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has failed to demonstrate that it has received services or that it benefited from such services as claimed. It has further failed to demonstrate the incurrence of cost by the AE as well as its allocation among the various group entities. In the instant case, the TPO has not questioned the commercial expediency of such transaction entered into by the assessee, rather, has only worked out the arms length price of the purported service. The perusal of the (e-mails and other contemporaneous record only goes to show that incidental and passive association benefits have been provided by the AE. In this view of the matter, there could neither be any cost contribution nor payment for such service to the AE. Further, as no expenditure would have been incurred, there is no necessity to apply, a particular method to arrive at such conclusion. Hence, the orders of the TPO and DRP deserved to be upheld. 9. We have heard the rival submissions and perused the materials available on record on the impugned issue and also the judicial pronouncements that were relied upon by both the sides at the time of hearing. We find that the benchmarking study conducted by the assessee based on Funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed only demonstrates services rendered were in the nature of shareholder/stewardship activities. (c) that the assessee had failed to show and quantify the benefits derived pursuant to incurrence of cost contribution charges and (d) the assessee has failed to demonstrate what an independent entity would be willing to pay for the services. 9.3. We find that during the course of the assessment proceedings, the assessee has filed the following details as called for :- a. Vide letter dated 23.12.15 - Explaining its TP analysis in general and filing of TP Study, benefits chart, etc. which is enclosed in Page 523 of Paper Book Volume 2. b. Vide letter dated 12.01.2016, the ld TPO's enquiry into the income earned from services rendered under the Shared Resources Allocation Agreement was replied. c. Vide letter dated 18.1.16, the assessee filed a reply as to why ALP on Shared Resources Allocation Agreement payments should not be taken at Nil as showcaused by the ld TPO. The said reply is enclosed in page 779 of the Paper Book Volume 4. d. Documentary evidences for rendering of services were filed before the ld TPO, which are enclosed in Pages 544 to 778 of Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement was executed on 31.12.08 with effect from 01.01.08. We find that the background and necessity of entering into this agreement is detailed in the recitals A to J of the said agreement at Pages 99 and 100 of Paper Book Volume 1. We find that as per the said agreement, each group company had agreed to provide services to each other vide Clause 5 thereon. The details of services that gets covered within the ambit of said Shared Resources Allocation Agreement are enclosed in Schedule 1 at Page 108 of Paper Book Volume 1. We find from the perusal of Clause 6 of the said agreement , it specifically excludes from within its ambit, the services which are in the nature of shareholder services or services which have been provided by the group company to another for the exclusive benefit of the other. Hence the argument of the revenue that the services rendered are in the nature of shareholder activities cannot be accepted as the same is without any basis. We find that as per Clauses 11 and 12 of the said agreement, SMSL is appointed as a pooling entity for all costs incurred by each of the group companies in rendering the shared services and thereafter to allocate the same to the va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the client at the local, regional and global level. A detailed description can be found in the Global TP study at Page 168 of Paper Book Volume 1 and in the assessee s TP study at Page 470 of Paper Book Volume 2. (b) Similarly, the working of Censydiam Institute which provides training and accreditation to Synovate group staff on the Censydiam approach, developed by the Institute, a detailed description of the functions of Censydiam Institute and its benefits can be found in the Global TP study at Page 172 of Paper Book Volume 1 and in the assessee s TP study at Page 471 of Paper Book Volume 2. 9.8. We find considerable force in the arguments of the ld AR that there is a binding agreement between parties to render services and contribute costs ; that there is a recognition by all group entities of the need for such services ; that SMSL is a special purpose vehicle existing for the sole purpose of pooling of costs ; that no costs for rendering of any shareholder/stewardship services are charged under the Shared Resources Allocation Agreement and that no costs for rendering any exclusive group company specific services are charged under the Shared Resources Allocation Agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither by rendering services under Global contracts or under referrals from group companies. i. Annexure B-3 to the TP Study gives a list of the Foreign Offices of MNCs to whom the assessee has rendered services during the year. The assessee has earned ₹ 12.11 Crores (being approximately 14.05% of total sales) , evidences enclosed in Pages 488 to 489 of Paper Book Volume 2. ii. Annexure B-4 to the TP Study gives a list of the Indian Offices of both domestic companies as well as MNCs to whom the assessee has rendered services during the year. During the course of the hearing, Annexure B-4 was handed over highlighting in grey the MNCs included in Annexure B-4 to identify services being rendered to them owing to global relations. Income from such MNCs during the year under consideration aggregates ₹ 40.86 Crores (being approximately 47.41 % of total sales) as is evident in Pages 490 to 495 of Paper Book Volume 2. iii. Examples of Global Contracts entered into with MNCs, resulting into the aforementioned services being rendered were filed before the TPO and are as below: 1. Global contract with Unilever PLc. a. Agreement at Pages 794 to 867 of Paper Book Volume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submit any evidence. We find that the ld AR drew the specific attention of the Bench to the observation of the ld TPO wherein the ld TPO had drawn an adverse inference of non-rendition of service by citing that no evidence has been filed with respect to the service head Global Motor . The ld AR in this regard, submitted that since no services were rendered to the assessee for the year under consideration, no costs have been allocated to the assessee, and hence it was not possible for the assessee to file any evidence. We appreciate the contention of the ld AR in this regard that there has been no allocation of costs under the head Global Motor to the assessee as could be seen by comparing the cost centres listed at Page 131 of Paper Book Volume 1 with the cost allocation sheet at Page 269 of Paper Book Volume 1. 9.12. With regard to the conclusion drawn by the ld TPO that the services rendered fall in the category of shareholder activity, the ld AR submitted that none of the group companies which have rendered services under the Shared Resources Allocation Agreement are shareholders of the assessee company. To support this factual position, the ld AR submitted at the time of h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ld TPO for benchmarking the Market Research Services and accepting the same to be at arm's length , we find that automatically the payments under the Shared Resources Allocation Agreement also stand benchmarked. It is therefore improper of the ld TPO to then once again separately benchmark payments under Shared Resources Allocation Agreement and subject them to a CUP analysis. 9.14. We further find that the co-ordinate bench of this tribunal in assessee s own case for the Asst Year 2008-09 , being the first year of operation of Shared Resources Allocation Agreement, had upheld the method of benchmarking adopted by the assessee. It is well settled that Internal TNMM based on segmental data would always be preferable over Extenal TNMM. On applying Internal TNMM , the margin from services rendered to international AEs is 22.04% , whereas the margin from services rendered to other international Non-AEs is 4.29%; and hence no adjustment is required to be made with respect to payments made under the Shared Resources Allocation Agreement. 9.15. In any case, we find that the ld TPO ought not to have determined the ALP of the payment made under the Shared Resources Alloc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the following reasons; The findings in paragraph 7.2-7.5 have been given by placing reliance on the decision of the Special Bench in the case of LG Electronics India Pvt. Ltd. [2013] 29 taxmann.com 300 (Delhi) (see para 7.2) insofar as impermissibility of a bundled approach to benchmarking is concerned. The decision of the Special Bench in LG Electronic India Pvt. Ltd. (supra) insofar as it rejected applicability of bundled approach to AMP expenses is no longer good law in view of the Hon'ble Delhi High Court in the case of Sony Erricsson Mobile Communications India P, Ltd. [2015] 374 ITR 118 in paragraph 82 observes thus: 82. There is considerable tax literature and text that CUP Method, i.e. Comparable Uncontrolled Price Method, RP Method, i.e. Resale Price Method and CP Method, i. e. Cost Plus Method can be applied to a transaction or closely linked, of continuous transactions. Profits Split Method and TNM Method grouped as 'transactional profit methods', can be equally effective and reliable when applied to closely linked or continuous transactions. Thus, it would be inappropriate to proceed with the arm's length computation methods, with a pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 212 Safran Engineering Services India Pvt Ltd [IT(TP)A No. 451/Bang/2015] The decisions in the case of Gemplus India Pvt Ltd (see para 20), Deloitte Consulting India Pvt. Ltd., (see para 45), Herbalife International India Pvt Ltd [1T(TP)A No. 1406/Bang/2010 and IT(TP)A No. 924/Bang/2012] (see para 11), Volvo India Pvt Ltd (see para 12), Cranes Software International Ltd (see para 9), Safran Engineering Services India Pvt Ltd (see para 11), and were all cases where the Tribunal had come to a finding of fact that no services had indeed been rendered to the Assessee by its Associated Enterprises therein and it was in those circumstances that the tribunal came to conclusion that in the absence of the assessee establishing that services were indeed received, the Transfer Pricing Officer was justified in taking the arm's length price as Nil . In the case of Madura Coats Pvt. Ltd. (2017) 77 taxmann.com 104(Para 21), Fosroc Chemicals India (P.) Ltd (2015) 58 taxmann.com 85 (Para 35), Cook India Medical Devices (P.) Ltd. (2017) 81 taxmann.com 187(Para 5.2 5.3). and Control Techniques India Pvt. Ltd.(2017) 77taxmann.com 212(Para 5) the Tribunal held ..... 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