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TMI Blog2021 (11) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the principles of equity and natural justice, contrary to law, without appreciating the facts and circumstances of the case. 2. The Ld. DRP, Ld. AU and the Ld. TPO erred in recharacterising the assessee as a contract manufacturer executing work orders as per the directions of the AEs, thereby concluding that the requirement for availing management services did not arise. 3. The Ld. DRP, the Ld. AU 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 assessee without merely restricting himself to the determination of the Arm's Length Price; * by concluding that there were no evidences filed towards the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and during the course of assessment proceedings, a reference was made to the TPO to determine arm's length price of international transactions of the assessee with its AEs. During transfer pricing proceedings, the TPO has accepted TP study conducted by the assessee by adopting Transactional Net Margin Method in respect of all international transactions. However, in respect of procurement of management services, determined Nil arm's length price by holding that the assessee did not bring any evidence on record to suggest that it was in need for services for which it has paid to its AEs. The TPO had also observed that the assessee did not bring any evidence to prove the AE has rendered services for which it was paid. Therefore, he has determined arm's length price of management fees paid to its AE at Rs. Nil. 5. Consequent to TP adjustment, as suggested by TPO vide his order dated 25.01.2016 u/s. 92CA(3) of the Act, the Assessing Officer has passed draft assessment order u/s. 144C(1) of the Income Tax Act, 1961 on 30.03.2016 and proposed transfer pricing adjustment of Rs. 17,24,94,523/- in respect of management fees paid to its AEs. The assessee has challenged draft as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the services sere never ever rendered. The two pages appendix I to the agreement gives detailed description of the categories of services. It is difficult to imagine that such services as indicated should have been discussed verbally by the two parties and such agreement continued fir almost one year. before the above referred agreement was signed. A careful examination of the agreement dated 12 December 2011 itself shows that no two parties operating at arm's length would enter into such an agreement. The agreement does not have any clause to protect the beneficiary from deficiency in services provided by the service provider. So. even if there is deficiency in service, the assessee still has to make payments to the service provider at the agreed rate and there isn't any scope of imposing penalty on the service provider. 'Appendix III gives the allocation keys for determining fees for various services. The allocation is based mainly on % of external sales against group total sales'. Thus, in relation to most of the services, there isn't any link between the services actually rendered and fees paid. Even if no such service is rendered by the service provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee was obliged to deduct tax at source on the above said payments, so the actual cost of the services to it is Rs. 17,24,94,523/-, of which it has deposited Rs. 1,72,49,410/- as tax deducted at source and the balance amount has been remitted to the AE. Since the tax deducted at source is a payment made on behalf of the AE so it was a liability which the assessee has met. Tax deducted is income of the person from whose payment the tax has been deducted. Any credit for such TDS can be claimed by the AE, if it is eligible to do so. Considering above, the objection of the assessee is not accepted." 7. The learned A.R for the assessee submitted that the ld. DRP has erred in sustaining additions made by the TPO/Assessing Officer towards TP adjustments on management fees paid to its AE without appreciating fact that the TPO/AO had never disputed fact that the assessee has justified payment of management fees with necessary evidences, but has disputed payment only on the ground that the assessee has not demonstrated with evidence necessity of availing such services. The learned A.R further submitted that it is well settled principles of law by the decisions of various courts, including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces including proof of rendering of services by its AE. The assessee has paid periodical payments on monthly basis without any justification for making payment to its AE. The TPO as well as ld. DRP has brought out clear facts to the effect that the assessee is shifting profit to its AE in the guise of payment of management fees without any justification for making such payment. Therefore, there is no merit in arguments taken by the assessee that the TPO has made adjustment to management fees only on the basis of necessity of availing such services. 9. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The assessee is in the business of contract manufacturing of moulded components for mobile phones had entered into managerial services agreement with its AE for rendering various services. As per agreement between parties dated 12.12.2011, which is made applicable from 01.01.2011, the assessee has listed out various services to be provided by its 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagerial services from its AE. Therefore, we are of the considered view, that the assessee has made periodical payment to its AE in the guise of managerial fee without any justification for such payment and further without any evidence on record to suggest that services were actually rendered. 10. Another important aspect of the issue is that, the assessee is contesting findings of the TPO in respect of cost benefit analysis of expenditure incurred by the assessee. No doubt, the TPO has made a specific observation of necessity of availing such services by the assessee. But, fact remains that disallowances made by the TPO is on cumulative ground, including necessity of services and want of evidence to justify payment of management fees. It is well settled principle of law by the decisions of various courts, including decision of the Hon'ble Delhi High Court in the case of CIT vs Ekl Appliances Ltd., 345 ITR 241, that the Assessing Officer cannot question wisdom of businessman to incur a particular expenditure. 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 ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices and question of cost benefit analysis of said expenditure has no application to present issue on hand. 12. In this view of the matter and considering facts and circumstances of the case, we are of the considered view that 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. 13. In the result, appeal filed by the assessee for assessment year 2012-13 is dismissed. ITA No. 3194/Chny/2017 (A.Y. 2013-14): 14. The assessee has raised following grounds of appeal:- 1. The orders of the learned Assessing Officer ("Ld. AO"), the Transfer Pricing Officer ("Ld. TPO") the Honourable Dispute Resolution Panel ("Ld. DRP"), to the extent prejudicial to the interests o Appellant, are passed in violation of the principles of equity and natural justice, contrary to without appreciating the facts and circumstances of the case. 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of disallowing the amounts in question, when the applicability of the subject provision for the issue did not arise; * Not appreciating that, such grossed up portions of TDS, represent discharge of liability incurred which the assessee had undertaken to pay as part of the terms and conditions of the ECB contract; and * Not appreciating Court and Tribunal rulings which have allowed grossed up portions of TDS borne on behalf of the payee on account of contractual obligations." 15. The facts and issues involved in this appeal are identical to facts and issues, which we had considered in ITA No. 478/Chny/2017 for assessment year 2012-13. 16. The first issue that came up for our consideration from ground no. 2 to 4 of assessee's appeal is TP adjustment made by the TPO and confirmed by the Ld. DRP in respect of managerial fees paid by the assessee to its AE. An identical issue has been considered by us in preceding paragraphs in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of taxes required to be withheld and deposit same to credit of Indian Govt. treasury. The borrower will provide lender with a certificate evidencing deposit of such taxes. Therefore, 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 error in the reasons given by the learned TPO/DRP in disallowing grossed up portion of TDS deducted on interest paid to AE on External Commercial Borrowings. Hence, we are inclined to uphold findings of the learned DRP and reject ground taken by the assessee. 21. In the result, appeal filed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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