TMI Blog2021 (10) TMI 550X X X X Extracts X X X X X X X X Extracts X X X X ..... nley [ 2007 (7) TMI 201 - SUPREME COURT ] it gets graphically clear that the stewardship activities are confined to protecting one's own interest rather than rendering benefit to the other company. We observe that the rendition of services by Nalco, USA and Nalco Pacific Pte Ltd., Singapore has given effect only to the assessee and has, in no manner, resulted in protecting the individual interests of such companies. All the services rendered by them facilitated the carrying on of the assessee's business. In such circumstances, we are satisfied that the reliance of the AO on the decision in Morgan Stanley [ 2007 (7) TMI 201 - SUPREME COURT ] is misconceived. We, therefore, accord our imprimatur to the conclusion drawn by the ld. CIT(A) that the services rendered by the two companies were in the nature of intra group services and not stewardship activity. Ordinarily, after answering the character of the services, the next point would have been to determine the ALP of the intra group services. We have noticed above that the TPO determined Nil ALP by holding that the services provided by Nalco, USA and Nalco Pacific Pte Ltd., Singapore were in the nature of stewardshi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oughout the world. The assessee is an Indian subsidiary of Nalco, USA. It is primarily into the business of manufacturing and selling speciality chemicals, such as, water treatment chemicals, industrial additives, oilfield chemicals and de-mineralized water. The assessee filed its return declaring total income of ₹ 3,42,70,000/-. Two international transactions were reported in Form No. 3CEB. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions. The international transactions are receipt of Headquarter services from Nalco, USA amounting to ₹ 10,21,74,000/- and receipt of Technical Consultancy services from Nalco Pacific Pte Ltd., Singapore amounting to ₹ 3,37,87,000/-. In order to demonstrate that the international transactions were at ALP, the assessee applied the Transactional Net Margin Method (TNMM). The TPO observed that the services availed by the assessee were pursuant to two separate agreements viz., one with Nalco Company, USA (Services Agreement or SA) and another with Nalco Pacific Pte Ltd., Singapore (Technical and Management Assistance Agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices on representative basis for ascertaining their true character. The first item is 'Communication Services'. The assessee submitted relevant documents putting forth that the services were in the nature of Translation and Media centre. Benefit derived from such services was also given to be the translation services meant for ethical speaking policy in Chinese language for Asia Pacific region and the back-ups including Policy procedure; Information on Nalco Group and Nalco, US; and Energy Audits and Technical consumption etc. The TPO gave his remarks that the translation costs cannot be allocated on the basis of region or global sales and further that the contents were general in nature. The next services availed by the assessee from Nalco, USA is 'Energy Services'. The assessee indicated benefit from it to be in the nature of developing growth modifier program which was done in collaboration with Nalco, Russia and helped it in creating overall technical and operational benefit for the manufacturing process. The TPO rejected the assessee's contention by observing that no direct benefit was received. The next service is 'Facilities Management' in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down the assessee's contention by giving identical reasons. Similar is the position about other services for which the assessee gave a detailed account of the benefits derived, all of which were repelled by the TPO with similar reasons. 6. Now we turn to the Second Agreement entered into by the assessee with Nalco Pacific Pte Ltd., Singapore. This Agreement provides that Nalco Pacific Pte Ltd., Singapore would furnish to Nalco India the technical assistance services in the following forms, which are summarized herein for brevity: A. Commercial advice and technical assistance on an Asia/Pacific market segment approach to the resolution of industrial problems in such sectors. B. Advice and technical assistance in adapting to Nalco India needs the highest technology applied by other Nalco Asia/Pacific group companies. C. Providing centralized financial planning services and advice on banking; investments and exchange positions etc. D. Advice and assistance regarding budget control systems and procedure, production cost controls, reporting mechanism etc. E. Advice on the establishment and enhancement of computer systems. F. Advice and assistance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that have been set out by the TPO in his order in the tabular form. All such contentions did not convince the TPO, who rejected the same by simply holding that no direct benefit was received. 8. On a careful perusal of the services received by the assessee from Nalco, USA and Nalco Pacific Pte Ltd., Singapore, it becomes abundantly clear that the services facilitated the carrying on the business operations by the assessee in a more efficient and effective manner by adhering to the international standards in a globally uniform manner. 9. The moot question is whether the services under consideration are in the nature of stewardship activity as has been held by the TPO or core business intra-group services as claimed by the assessee? In order to appreciate the controversy, it is sine qua non to first comprehend the term 'stewardship', which has not been defined either in the Income-tax Act, 1961 or in the Income-tax Rules, 1962. In commercial parlance, stewardship activities are those which are undertaken by an enterprise to protect one's own interest. When Y engages X for rendition of some service, any activity of Y to ensure that the work assigned to X i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 also flows 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 activities and may even consist of substantial activities that are non-shareholder ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Advice and assistance regarding budget control systems; Advice on the establishment and enhancement of computer systems; Advice and assistance with respect to the production planning; Advice on procurement of raw materials; and Advice on Asia/Pacific risk analysis etc. It gets vivid on such a perusal that the services are in the nature of regular business services performed by the group entities with a view to enable the assessee to carry on its business operations, thereby causing effect on it. As such, these do not qualify as 'stewardship activities'. 12. It is further relevant to accentuate the definition of 'Costs' in the Service Agreement with Nalco, USA, given as per Clause 1(a) to mean The actual costs incurred by Parent to provide the Services defined herein and the overhead allocated to the Services incurred by Parent, in each case for the relevant calendar years. Actual costs and overhead for this purpose shall not include costs for Stewardship . On going through the above definition, it becomes obvious that the actual costs incurred by Nalco, USA along with the overhead allocated in the provision of Services have been included in the cost base by expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the ld. CIT(A) that the services rendered by the two companies were in the nature of intra group services and not stewardship activity. 15. Ordinarily, after answering the character of the services, the next point would have been to determine the ALP of the intra group services. We have noticed above that the TPO determined Nil ALP by holding that the services provided by Nalco, USA and Nalco Pacific Pte Ltd., Singapore were in the nature of stewardship activity. The ld. CIT(A) overturned the TPO's view on this score and further held that the transacted value of the intra group services was at ALP, albeit without carrying out any analysis. The ground taken by the Revenue, as reproduced above, is confined only to challenging the decision of the ld. CIT(A) in construing the services as intra group services. There is no challenge to the decision of the ld. CIT(A) on the second aspect of the international transaction being at the ALP. We, therefore, refrain from going into the aspect of the ALP determination, for which no ground has been raised. In the ultimate analysis, the ground raised in the appeal is not allowed. 16. The next issue raised in this appeal through grou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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