2018 (11) TMI 255 - AT - Income Tax

Appeal success: Oracle charges in cost base, Agrima excluded, tax credit granted. Times Innovative Media rejected.

Eaton Technologies Pvt. Ltd. Versus The Asst. Commissioner of Income Tax, Circle 1 (2), Pune

The appeal was partly allowed. The Tribunal permitted the inclusion of Oracle implementation charges in the cost base, directed the exclusion of Agrima ... TPA - ALP determination - disallowance of cost incurred by assessee - whether the payments made by assessee or cost incurred by the assessee for the shared services was justified or not? - Held that:- The assessee had availed services from its associated enterprises for which cost was incurred and on the other hand, the assessee had provided said services to various Eaton entities and was being remunerated on cost plus markup at 8%. The TPO had not disturbed the margins of assessee but on the other hand has disallowed cost incurred by assessee to be not at arm's length price. In order to make earnings, the corresponding costs have to be allowed; the assessee had incurred cost on Oracle Implementation provided by Eaton Ltd., UK and said Oracle platform was used by assessee to integrate its operations of APSSC unit in order to provide back office accounting services to Eaton entities. Once the transaction is closely and intrinsically linked to the business operations carried on by the assessee, then the same cannot be segregated and arm's length price of said transaction could not be taken at Nil. We find no merit in the approach adopted by TPO in this regard. Accordingly, we hold that there is no merit in disallowance made by TPO, which was upheld by CIT(A) Selection of comparables by assessee / TPO - Held that:- Referring to functions performed by assessee of providing marketing support services companies functionally dissimilar with that of assessee need to be deselected from final list. Where the comparables selected are not functionally comparable to the tested party, then the margins of such concern cannot be utilized for determining the arm's length price of international transactions undertaken by tested party. In view thereof, we direct the TPO to exclude margins of Agrima Consultants International Ltd. while benchmarking international transactions of assessee in both the segments pertaining to marketing and business support services and computer the arm's length price of international transactions after including Times Innovative Media Ltd. in market support services segment. The additional ground of appeal raised by assessee is thus, allowed. Non granting due credit of advance tax paid - rectification application before the Assessing Officer under section 154 - Held that:- AS Authorized Representative for the assessee before us has pointed out that the said rectification application has not been disposed of till now. We direct the Assessing Officer to dispose of rectification application after due verification of the claim of assessee. Issues Involved:1. Transfer pricing adjustment for reimbursement of Oracle implementation charges.2. Transfer pricing adjustment for business support services and marketing support services.3. Rejection of Times Innovative Media Ltd. as a comparable.4. Use of multiple year data for transfer pricing analysis.5. Functional, Asset, and Risk (FAR) profile and risk adjustments.6. Tax credit of advance tax paid.7. Inclusion of Agrima Consultants International Ltd. as a comparable.Detailed Analysis:1. Transfer Pricing Adjustment for Reimbursement of Oracle Implementation Charges:The assessee paid INR 2.70 crores to its Associated Enterprise (AE) for Oracle implementation charges, out of which INR 1.04 crores was disallowed as pre-operative expenses. The TPO and CIT(A) determined the arm's length price (ALP) of the remaining INR 1.66 crores as Nil, arguing that the assessee failed to establish receipt of services. The Tribunal held that the Oracle system was essential for providing back office accounting services and that the costs were justified as part of the APSSC segment. The Tribunal referenced Eaton Fluid Power Ltd. Vs. ACIT, emphasizing that the TPO cannot question the business model or necessity of services availed by the assessee. Consequently, the Tribunal allowed the assessee's claim, rejecting the adjustment of INR 1.66 crores.2. Transfer Pricing Adjustment for Business Support Services and Marketing Support Services:The TPO made adjustments of INR 13,76,666 and INR 8,88,752 for business support services and marketing support services, respectively. The CIT(A) upheld these adjustments, rejecting the use of multiple year data and excluding Times Innovative Media Ltd. as a comparable. The Tribunal found no merit in the exclusion of Times Innovative Media Ltd. and held that the nature of activities performed by the assessee was different from those of Times Innovative Media Ltd., which was engaged in event management. Thus, the Tribunal upheld the exclusion of Times Innovative Media Ltd. and dismissed the assessee's plea.3. Rejection of Times Innovative Media Ltd. as a Comparable:The TPO and CIT(A) excluded Times Innovative Media Ltd. from the list of comparables, arguing it was functionally different as it was engaged in event management. The Tribunal agreed, stating that the functions performed by Times Innovative Media Ltd. were different from the marketing support services provided by the assessee. Therefore, the exclusion was upheld.4. Use of Multiple Year Data for Transfer Pricing Analysis:The CIT(A) rejected the use of multiple year data for transfer pricing analysis, adhering to Rule 10B(4) of the Income Tax Rules, 1962, which mandates the use of data for the contemporaneous period. The Tribunal did not find any merit in the assessee's plea for using multiple year data and upheld the CIT(A)'s decision.5. Functional, Asset, and Risk (FAR) Profile and Risk Adjustments:The CIT(A) did not allow functional risk adjustments, holding that the assessee was not a risk-free entity. The Tribunal upheld this view, finding no merit in the assessee's argument for risk adjustments based on its FAR profile.6. Tax Credit of Advance Tax Paid:The assessee claimed that credit for advance tax paid of INR 9 lakhs was not granted. The CIT(A) directed the assessee to file a rectification application under section 154 of the Act. The Tribunal directed the Assessing Officer to dispose of the rectification application after verifying the claim, thus allowing this ground of appeal.7. Inclusion of Agrima Consultants International Ltd. as a Comparable:The assessee raised an additional ground of appeal for excluding Agrima Consultants International Ltd., arguing it was functionally not comparable as it provided financial consultancy. The Tribunal admitted this additional ground, referencing the decision in Dover India (P) Ltd. Vs. DCIT, and directed the TPO to exclude Agrima Consultants International Ltd. from the list of comparables for both marketing and business support services segments.Conclusion:The appeal was partly allowed. The Tribunal allowed the inclusion of Oracle implementation charges in the cost base, directed the exclusion of Agrima Consultants International Ltd. from the list of comparables, and ordered the Assessing Officer to verify and grant the tax credit. However, the Tribunal upheld the exclusion of Times Innovative Media Ltd. and the rejection of multiple year data and risk adjustments.