2018 (11) TMI 1543 - AT - Income Tax

Tribunal directs re-examination of management service fee disallowance under Income-tax Act

The Tribunal partly allowed the appeal filed by the assessee, directing the Assessing Officer to re-examine the disallowance of management service fees ... Determination of arm’s length price in relation to Management support services - Held that:- As decided in assessee’s own case, we hold that the benefit is not a precondition for justifying arm’s length price. Under Rule 10B of the Income-tax Rules, 1962 which deals with ‘Determination of the arm’s length price’. There is no mention of the ‘benefit test’ being adopted for the purpose of determining such arm’s length price. It is not a precondition to conclude that the payment is within arm’s length. In other words, the TPO cannot apply the benefit test for determining ALP as he cannot assess the benefit derived by assessee in a particular transaction. Accordingly, ground No.3 raised by the assessee is allowed. TDS u/s 195 - Management services categorized as ‘Fees for Included Services’ - taxabilty in India as per the DTAA between India and United States of America - Held that:- As decided in assessee's own case [2018 (8) TMI 1264 - KERALA HIGH COURT] Management service cannot be characterized as ‘fees for included services’, and hence, not taxable in India as per the Double Taxation Avoidance Agreement (DTAA) between India and USA - disallowance u/s 40(a)(i) is not justified. Management services paid to the AE of the assessee disallowed u/s 37 - Held that:- DRP has only given a general direction based on the finding of the TPO that there was no benefit accrued to the assessee on payment of management fees and hence ALP of said international transaction is to be determined at ‘Nil’. The fact that the above expenditure, whether it is business expenditure, which can be claimed as deduction u/s 37 of the I.T.Act, was never examined. Therefore this issue is also restored to the A.O. to test the reasonableness of the claim of deduction u/s 37 of the I.T.Act. - decided in favour of assessee for statistical purposes. Issues Involved:1. Determination of Arm’s Length Price (ALP) in relation to Management Support Services.2. Classification of Management Services as ‘Fees for Included Services’ under the Double Taxation Avoidance Agreement (DTAA) between India and the USA.3. Disallowance of Management Service Fees under Section 37 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Determination of Arm’s Length Price (ALP) in relation to Management Support Services:The Tribunal considered an identical issue in the assessee's own case for the assessment years 2012-2013 and 2011-2012, where it was held that the Transfer Pricing Officer (TPO) has no jurisdiction to question the reasonability of payment of management service fees and hence no transfer pricing adjustment can be made by him. The Tribunal referenced the Chennai Bench's decision in the case of M/s. Siemens Gamesa & Renewable Power Private Limited, which stated that once the arm's length criterion is tested at the entity level, the TPO cannot examine the need, benefit, etc., in relation to each transaction. The Delhi High Court's decision in the case of Magnetic Marelli Powertrain India (P.) Ltd. further supported this view, emphasizing that the TPO cannot subject only one element of a transaction to a different method once the TNMM (Transactional Net Margin Method) is accepted as the most appropriate method. The Tribunal concluded that the TPO cannot determine the ALP of management service fees at Nil in the absence of a valid comparable and that the adjustment made by the TPO as a disallowance of expense could not be upheld. Accordingly, the Tribunal allowed Ground No.3 raised by the assessee.2. Classification of Management Services as ‘Fees for Included Services’ under the DTAA between India and the USA:The Tribunal noted that this issue was covered in favor of the assessee by the judgment of the Hon’ble High Court in the assessee’s own case for the assessment year 2007-2008. The High Court held that management services cannot be characterized as ‘fees for included services’ and hence are not taxable in India as per the DTAA between India and the USA. The High Court's conclusion was that the interpretation of the DTAA provisions was not correctly carried out by the Tribunal, and it directed the Assessing Officer to consider the claim of expenditure afresh without applying Section 195(1) of the Income-tax Act, as there was no requirement to deduct tax at source. Consequently, the Tribunal held that the disallowance under Section 40(a)(i) was not justified and allowed Ground No.4 raised by the assessee.3. Disallowance of Management Service Fees under Section 37 of the Income-tax Act, 1961:The Tribunal observed that the Assessing Officer (AO) did not make a protective disallowance under Section 37 in the draft assessment order. However, the Dispute Resolution Panel (DRP) directed that the expenditure be disallowed protectively under Section 37, as the assessee failed to substantiate that any services were actually rendered by the AE and whether the expenditure was incurred wholly and exclusively for business purposes. The Tribunal noted that the AO and the DRP had not examined whether the management service fees were incurred wholly and exclusively for the purpose of business. Therefore, the Tribunal restored this issue to the AO to test the reasonableness of the claim of deduction under Section 37. The AO was directed to examine whether the management service fees paid by the assessee to its AE were incurred wholly and exclusively for the purpose of business and could be allowed as a deduction under Section 37. Accordingly, Ground No.5 was allowed for statistical purposes.Conclusion:The appeal filed by the assessee was partly allowed for statistical purposes, with specific directions for the AO to re-examine the disallowance under Section 37. The Tribunal's order was pronounced on November 14, 2018.