TMI Blog2021 (11) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... said expenditure has no application to present issue on hand. There is no error in reasons given by ld. TPO/DRP in making TP adjustments for payment of managerial services fee to its AE. Therefore, we are inclined to uphold findings of the learned DRP and reject grounds taken by the assessee. TDS deducted on interest paid to AE on External Commercial Borrowings - disallowance of grossed up portion of TDS on payment of interest on external commercial borrowings - HELD THAT:- From the conditions of agreement between parties, it is very clear that tax liability, if any, on interest paid to lender is responsibility of lender. However, the assessee should deduct applicable tax deducted at source as per law, remit the same to Govt. treasury and furnish proof to lender. In this case, the assessee has deducted TDS on interest payment. But, instead of reducing it from payment made to the AE, has grossed up TDS portion to interest paid to AE and claimed as deduction. In our view, procedure followed by the assessee for grossing up of interest is contrary to agreement between the parties and also contrary to provisions of law. Therefore, we are of the considered view that there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was no rejection of the Transfer Pricing ( TP ) documentation of the Appellant as required under section 92C(3) of the Act; without appreciating that the management services transaction undertaken by the Appellant was closely interlinked with its primary operations, thus necessitating aggregation approach for the purposes of TP in accordance with section 92C of the Act read with Rule 10B of the Income- tax Rules, 1962 ( the Rules ) and the relevant OECD guidelines; without adopting one of the mandatory methods prescribed for determination of ALP under section 92C of the Act read with Rule 10B of the Rules; without considering several judicial precedents which have held that the Ld. TPO cannot determine the ALP of a said transaction to be at NIL. Without prejudice to the above grounds, the Ld. DRP, the Ld. TPO and the Ld. AO erred in making a downward adjustment amounting to 1NR 1,72,49,410/-, which includes the grossed up amount of TDS, as against the net amount of INR 15,52,45,113. 3. Brief facts of the case are that M/s. Lite-on Mobile India Pvt. Ltd. is wholly owned subsidiary of Perlos Oyj, Finland, is engaged in the business of manufacture a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 17,24,94,523/- in respect of management fees paid to its AEs. The assessee has challenged draft assessment order passed by the Assessing Officer before the DRP-2, Bengaluru and filed objections for making adjustment for management fees paid to its AEs and argued that when the assessee has demonstrated and justified payment of management fees with necessary evidences, including agreement with its AEs, invoices raised by AEs for rendering services and also other evidences including e-mail correspondence between the assessee and its AEs, the TPO has erred in determining Nil arm's length price for management fees on the ground that the assessee has not demonstrated with evidences necessity of availing services from its AEs. 6. The ld. DRP vide its directions dated 04.11.2016 issued u/s. 144C(5) of the Income Tax Act, 1961, rejected arguments taken by the assessee and confirmed additions made by the Assessing Officer by holding that on the basis of evidences filed by the assessee, including agreement between parties dated 12.12.2011, it is difficult to imagine that such services as indicated could have been discussed verbally by two parties have been availed. The ld. DRP ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y link between the services actually rendered and fees paid. Even if no such service is rendered by the service provider, the assessee has to pay the fee as the service provider will send invoice based on the cost worked out on basis of allocation key plus its mark up. No two parties operating at arm's length would enter into such an agreement, where they have to pay even if no services are rendered to it. Clause 2.7 of' the agreement provides that the cost of the HQ Management Services would be substantiated by documents evidencing trips carried out, meeting held arid, more general!'., work performed for the benefit of' the Beneficiary and involving LOM personnel and that those documents would he provided to the beneficiary. However, despite being given opportunity by the TPO, no such documents were produced by the assessee before him. So even if the agreement is considered to be genuine, the assessee has never tried to verify the correctness of the cost allocation done by the service provider. In an arm's length case a person would verify the costs having been incurred by the service provider, if the payments are agreed to be on cost plus basis. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailing such services. The learned A.R further submitted that it is well settled principles of law by the decisions of various courts, including decision of the Hon'ble Delhi High Court in the case of M/s. Magneti Marelli Powertrain India Pvt. Ltd., vs. DCIT 389 ITR 469, where the Hon'ble High Court made it very clear that the TPO cannot question necessity of incurring of particular expenditure and further he cannot question cost benefit ratio of any particular expenditure incurred by the assessee. It is for the assessee to decide whether particular expenditure is required to be incurred or not. But what is to be seen is whether said expenditure is supported by necessary evidence or not. In this case, the TPO has not doubted genuineness of payment, however disputed payment only on the ground that such payment was made for services, which are not required to be obtained from its AE. The AR further submitted that the TPO has accepted international transactions of the assessee with its AE are at arm's length price and has not made any adjustment in TP proceedings. However, the TPO disputed one element of international transactions and has made Nil adjustment by holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s AE. A careful examination of agreement dated 12.12.2011 shows that agreement is general one, which specifies various need based services to be provided by its AEs to its group company without any specific services that required by the assessee. We further noted from agreement between parties that agreement does not have any clause to protect beneficiary from deficiency in services provided by service provider. From the above, what we understand is agreement between parties is only refers to various services to be provided by its AEs, but not specific document of rendering actual services to the assessee. Further, Appendix III to agreement gives allocation keys for determining fees for various services. The allocation is based mainly on percentage of external sales against group total sales. Therefore, from the above, what we understand is charges are fixed in relation to most of the services on the basis of sales without any reference to what services that are required by AE and their technical specification. Further, clause 2.7 of agreement provides that cost of HO management services would be substantiated by documents evidencing trips carried out, meeting held and more general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure. But, fact remains that the AO/TPO is having all powers to examine whether particular expenditure incurred is genuine in nature and further it is supported by necessary evidence. In this case, on the basis of facts brought out by the authorities below clearly indicate that the assessee has failed to file any evidence to justify payment of management fees. In fact, the assessee has failed to file any evidence except few e-mail correspondence and agreement between parties. Further, no other credible evidences were filed to justify payment of management fees. 11. As regards arguments of the assessee that it has tested its international transactions with its AE by adopting TNMM as most appropriate method and the Assessing Officer has accepted TP study conducted by the assessee without any adjustment, we find that whether particular expenditure is incurred or not has to be tested with reference to evidences placed on record. The operating margin of the assessee and method adopted for testing arm's length price does not prove fact of rendering services and payment of management fees. Therefore, in our considered view, payment of management fees has to be examined, qua, evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfer Pricing 2. The Ld. DRP, Ld. AO and the Ld. TPO erred in re-characterising the Appellant as a cor manufacturer executing work orders as per the directions of the AEs, thereby concluding the requirement for availing management services did not arise. 3. The Ld. DRP, the Ld. AO and the Ld. TPO have erred in determining the arm's length value of management services to be 'NIL': By questioning the commercial wisdom of the Appellant without merely restricting him the determination of the Arm's Length Price; By concluding that there were no evidences filed towards receipt of services completely disregarding the information/documents/clarifications provided to substantiate that the services were in fact received. Despite accepting the aggregation approach of benchmarking adopted by the Appellant in its TP documentation; By adopting a transaction - by - transaction approach with respect to the transaction of payment of management fee alone though there was no rejection of the Transfer Pricing ( TP ) documentation of the Appellant as required under section 92C(3) of the Act; Without appreciating that the management service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 478/Chny/2017 for assessment year 2012-13. The reasons given by us in preceding paragraphs shall mutatis mutandis shall apply to this appeal as well. Therefore, for similar reasons, we are inclined to uphold findings of the ld. DRP and reject ground taken by the assessee. 17. The next issue that came up for our consideration from ground no. 5 of assessee appeal is disallowance of grossed up portion of TDS on payment of interest on external commercial borrowings amounting to ₹ 78,15,435/-. The assessee has availed ECB loan from related parties and provided interest of ₹ 4,93,04,021/-. The assessee has grossed up interest payment for TDS portion amounting to ₹ 78,15,435/-.The TPO has disallowed grossing up of TDS amounting to ₹ 78,15,435/- on the ground that TDS deducted on payment made to AE was liability of AE which the assessee has met and thus, same cannot be allowed as deduction u/s. 40A(2) of the Income Tax Act, 1961. It was explanation of the assessee before the Assessing Officer that as per agreement between the assessee and AE, beneficiary is required to bear and pay withholding taxes and all other applicable taxes attracted on services re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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