TMI Blog2022 (8) TMI 1341X X X X Extracts X X X X X X X X Extracts X X X X ..... personnel in regard to strategic guidance, series of invoice copies showing third party charges such as Verizon charges in regard to technical software and systems support and also furnished IOCL bid documents in regard to the business and administrative support services. According to us, the Assessee in the present case is able to prove with evidences the services rendered by the Associated Enterprises for which the Assessee has paid management fee for availing various support services pursuant to the management service agreement entered with its AE. We reverse the order of the lower authorities on this issue and allow the claim of deduction claimed by the Assessee on account of the management fee paid to its AE. Thus, this issue in the Assessee s appeal is allowed TDS u/s 195 - royalty - Disallowance of expenditure incurred towards off-the-shelf software - Assessee now argued that the expenditure incurred towards its share of software cost which are in the nature of off-the-shelf software products such as of Microsoft Office [MS Office], IBM Lotus Notes, AVEVA, Auto CAD, etc - HELD THAT:- This issue stands now covered by the decision in the case of Engineering Analysis C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble DRP and the Ld. TPO erred disregarding the fact that the management charges formed a part of the cost base for arriving at the mark-up. 2.4 The Hon'ble DRP and the Ld. TPO erred in determining the arm's length price of payment of management charges as 'NIL' without adopting one of the mandatory methods prescribed for determination of arm's length price under section 92C of the Income-tax Act read with Rule 10B of the Rules and erred in seeking need-benefit analysis which is not a requirement under law. 3. The brief facts are that the AO referred the matter to the TPO to ascertain the arm s length price of management service rendered by the assessee to it s A.E. The TPO i.e., Dy. Commissioner of Income Tax, Transfer Pricing Officer-1(2), Chennai vide F. No.F-103/TPO- 1(2)/A.Y. 2012-13 order dated 29.01.2016 passed u/s. 92CA(3) of the Act determined the ALP of transaction at Nil and suggested upward transfer pricing adjustment of the value of adjustment at Rs. 1,90,50,727/-. The TPO noted the following: The Assessee has not demonstrated the need and benefits of the services received by the Assessee. The assessee has also not s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the part of the TPO. It is not the claim of the TPO that the assessee has not availed any services, but the issue is the arm's length value of such services. The agreement between related parties and the invoices raised there on cannot be considered adequate and sufficient evidence of service performance. 3.3 Even if the benefit test applied by the TPO is not accepted, considering the stand in the judicial decisions cited that the TPO cannot sit in judgment over the taxpayer's mode of doing business, it is observed that, the basic evidence to support the claim of costs incurred at the AE's end are not available for verification. This is the very minimum that the TPO is required to investigate to establish whether the cost allocated as per predetermined keys is reasonable/legitimate or not. No evidence from the books of the AE with regard to its costs, both direct and indirect, and the primary documents maintained by the AE in support of this claim in its books, has been produced by the assessee either before the TPO or before this Panel for verification of this important and key ingredient in the TP analysis. Thus the taxpayer has not been able to substantiate i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and business and administrative support. For the above services, the assessee entered into management services agreement with FWL and in term of that agreement, the assessee availed the services of management and accordingly, charges were paid. 7. The Ld. Counsel for the assessee took us through the TP s study conducted by the assessee and the relevant functional and economic analysis carried out and as reported in TP study was pointed out, which reads as under: However, FWIPL was awarded a project with IOCL for providing FEED services, in October, 2011. It was a contract for 8 months. FWIPL involved its AE for support to deliver the project. Accordingly, certain portion of the work was subcontracted to FW Iberia. FW Iberia was contracted to perform consultancy services for the preparation of FEED, including carrying out studies to collect site specific data for FEED viz. marine studies or technical studies for 5 MMTPA capacities LNG Import, storage and regas and send out terminal with associated marine facilities and utilities at/near Ennore, in Tamil Nadu. 8. The Ld. Counsel for the assessee took us through Page 241 of assessee s paper book, wherein the management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited license to FWIPL to use such software. 4.4 FWL shall also assist FWIPL in obtaining the right to use any relevant third party proprietary computer software systems or standards which are licensed to FWL by such third party and normally used by FWL, to the extent such software, systems or standards are required for the work performed by FWIPL. Where applicable FWL may arrange for the extension of FWIPL of licences held by FWL or by FWEL. Clause 5 : Business and Administrative Support: 5.1 FWL shall provide (or arrange for FWEL to provide) advice and assistance to FWIPL in the commercial operation of the company, including proposals, legal/commercial insurance, risk management, quality assurance, accounting, treasury, taxation and IT services and support. Such support shall be provided outside India. The type and extent of such services shall be approved from time to time by the Board of Directors of FWIPL. 5.2 FWL shall provide (or arrange for FWEL to provide) assistance to FWIPL in bidding for contracts to be undertaken by FWIPL for third parties, including preparation of proposals and contract organization. 10. The Ld. Counsel argued that these c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conduct its business, which is the prerogative of the Assessee and not of the Revenue. He also argued the arbitrary determination of the ALP, i.e. Nil ALP cannot be the business of these services. 12. On the other hand, the Revenue was represented by the learned CIT-DR, Dr. S. Palani Kumar and he relied on the order of the Transfer Pricing Officer and that of the DRP. He also relied on the decision of the Co-ordinate Bench of this Tribunal in the case of M/s. Lite-on Mobile India Private Limited, Kancheepuram Vs. The Deputy Commissioner of Income Tax, Chennai in I.T.A. Nos.3194 and 478/Chny/2017, dated 03.11.2021 wherein the Tribunal has exactly on identical facts considered the agreement between the parties and noted that the agreement does not have any Clause to protect the beneficiary from deficiencies in the services provided by the service provider and moreover the agreement between the parties is only a reference to the various services to be provided by its Associated Enterprise but not of the specific documents of rendering actual service to the Assessee. He referred to the findings of the Tribunal that even the allocation is based on the percentage of extraordinary s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R, once the Assessee is unable to prove the services rendered, actually for which the management service fees are paid, the Assessee is not entitled to claim the same as deduction and that the TPO has rightly made an upward adjustment in the transfer pricing adjustment. Hence, he supported the order of the TPO and that of the DRP. 13. We have heard the rival contentions and had gone through the facts and circumstances of the case. We noted from the above facts that the Assessee during the impugned assessment year paid the management fee of Rs.1,90,50,727/- to its Associated Enterprise, i.e. FWL for availing various support services pursuant to the management service agreement with its Associated Enterprises. We noted that the Assessee has filed the details such as the invoice payments through banking channels and the names of the Directors, etc., who has rendered the services. The nature of services rendered by the Associated Enterprises FWL is broadly in four categories, i.e. Strategic Guidance, Technical Support, Systems and Software and Business and Administrative Support. We noted that the management fee paid by the Assessee which is about 2% of the overall cost which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer with respect to the same issue in the Appellant s own case in the earlier Assessment Year, wherein similar payments were allowed as a deduction after considering the submissions of the Appellant. 3.4 The Hon ble DRP and learned Assessing officer erred in nonconsideration of the Appellant s alternative prayer, on the notwithstanding basis, that the provisions of section 9(1)(vi) of the Act was amended vide Finance Act, 2012 with retrospective effect from April 01, 1976, to include software license fee within the purview of royalty and therefore, there exists impossibility of performance on the part of the Appellant as on date of incurrence of such expenditure to deduct tax on such payments made during the subject Assessment Year. 3.5 The Hon ble DRP and the learned Assessing Officer erred in non-consideration of the Appellant s alternative prayer, on a notwithstanding basis, that even assuming without admitting that the said payments are characterized as royalty under the provisions of the Act, to the extent the source for the said royalty is from export sales, i.e. a source outside India, the same should not be taxable in India as they are excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aggrieved, the Assessee is in appeal before the Tribunal. 16. We noted that during the year 2011 2012 relevant to the Assessment Year, the Assessee debited an amount of Rs.7,79,78,139/- under computer software and maintenance. According to the Assessing Officer, the Assessee has to deduct Tax Deducted at Source [TDS] and under the Domestic Law the above payment is treated as Royalty and is taxable in India u/s.9(1) Explanation (vi)(b) of the Act and the Assessing Officer on the directions of the Dispute Resolution Panel had made the addition of this computer software and maintenance payment considering the same as Royalty . 17. The learned Counsel for the Assessee now argued that the expenditure incurred towards its share of software cost which are in the nature of off-the-shelf software products such as of Microsoft Office [MS Office], IBM Lotus Notes, AVEVA, Auto CAD, etc. It was contended that the above said expenses were negotiated and incurred at a group level with the third-party vendors by the overseas Associated Enterprises [AE] on behalf of all the group entities and the corresponding cost was recharged to the various entities on a cost-tocost basis without an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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