TaxTMI 
TaxTMI 
2011 (9) TMI 261
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....g Officer 9TOP) and the AO erred, and the DRP further erred in confirming the additions on cost contribution (Rs.10,55,00,000) and field supervision charges (Rs.4,70,009) under section 92CA(3) of the Act by disregarding the documentation maintained under section 92D of the Act read with Rule 10D of the Income tax Rules, 1962(the rules) and not appreciating the factual details, submissions and various documentary evidences demonstrating benefits to the appellant under the cost contribution agreement. 2.2 The appellant submits that the TOP, the AO and the DRP failed to appreciate the computation of arm's length price in accordance with the Transactional Net Margin Method prescribed under section 92C(1) of the Act read with Rule 10B(1)(e) of the Rules. 2.3 The appellants prays that the Transfer Pricing adjustments made under section 92CA (3) of the Act are erroneous, unwarranted and be deleted. Ground No.3 -Alternative disallowance on account of allocation of cost contribution charges paid to Dresser Rand US of Rs.10,55,00,000 under section 37(1), section 40A(2)(b) and Section 40(a)(i) of the Act. 3.1 On the facts and in the circumstances of the case a....
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....re of Rs 10,54,98,908 towards cost contribution allocation by Dresser Rand USA. As all the international transactions entered into by the assessee were referred to the Transfer Pricing Officer for determination of arm's length price, this cost contribution allocation also came up for examination by the Transfer Pricing Officer. In the course of proceedings before the Transfer Pricing Officer, it was noticed that the assessee had entered into a 'cost contribution agreement' with its parent company, and in terms of the said agreement, (a) the assessee should compensate on an equitable basis for the expenses incurred by the holding company on its resources which are being shared with the assessee and other affiliates(article-1); (b) the allocation of the cost contribution to various affiliates of the Group (including the assessee) depends on two allocation keys, i.e. based on number of headcount, and based on sales proportion (article 4.2); (c) all the direct and indirect costs, including overheads and termination costs incurred by Dresser Rand Group Inc with respect to the resources shall be computed as cost contribution -(article 4.1); and (d) the resources include strategy, adminis....
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....p; C. While the assessee had claimed cost contribution allocation of US $ 6,37,070 towards 'global business oversight', which were said to be towards 'guidance provided by the global leadership team for efficient management for India operations', the assessee has not furnished any precise details or evidence of the exact services received by the assessee. It was also noted that the assessee's staff members also include several experts in the field of business management, production and marketing operations, and, as such, the assessee did not really need any services for global business oversight. D. The assessee did not incur any such costs in the preceding period, and the agreement was entered into on 15.12.2005, but with retrospective effect from 1st June 2005. The assessee's relationship with the AE remained the same before the cost sharing agreement was entered into. All these facts indicate that the cost sharing agreement was an afterthought for the purpose of shifting profits. E. An analysis of sales, expenses and profitability of the assessee, for last three years, indicates that the cost sharing agreement is not a genuine business arrangement. This co....
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.... on reciprocal basis. However, the TPO held that the since assessee has allowed discount to the AEs, to that extent, the price of services rendered is not an arm's length price. Accordingly, an upward adjustment in ALP was recommended to the extent of discount allowed, which worked out to Rs 10,70,089. 5. In the course of proceedings before the Assessing Officer, the assessee once again submitted that the conclusions arrived at by the TPO are incorrect, that the TPO has ignored factual details submitted explaining the nature of services and benefits received under CCA, that the TPO has ignored evidence submitted to demonstrate that the services were actually received, that the TPO ignored the fact that similar services were availed in the earlier years also, but were not specifically paid for in those years, that the TPO has incorrectly assumed and interpreted details relating to employees of the assessee and that the TPO has incorrectly and inappropriately analyzed past financial results of the assessee. None of these submissions found favour with the Assessing Officer either. The Assessing Officer was of the view that the TPO had given enough opportunities to the assess....
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....tent. ......Since the assessee could not prove to the have received the services from its AE, the action of the AO in invoking provisions of Section 40A (2)(b) is as per law, and, accordingly, confirmed, .......It is claimed by the assessee that no tax was required to be deducted under section 195 of the Income Tax Act, from the cost sharing paid to its AEs, and relied upon Article 12 and 7 of India- USA Treaty. Since the payment has been made within India, the assessee was liable to deduct tax. Hence, the action of the AO in invoking the provisions of Section 40(a)(ia) are justified. 6. Pursuant to these directions of the DRP, the Assessing Officer made ALP adjustment of Rs 10,55,00,000 in the arm's length price of services received under the cost contribution arrangement, and of Rs 4,70,009 in respect of field services rendered to three associated enterprises abroad. The assessee is aggrieved and is in appeal before us. 7. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 8. We find that the basic reason of the Transfer Pricing Officer's dete....
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....s to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is no evidence of services having been rendered at all, the arm's length price of these services is 'nil'. The Dispute Resolution Panel has also confirmed these findings of the Transfer Pricing Officer and the Assessing Officer. However, we have noted that vide letter dated 25th January 2010 (acknowledged to have been received in DRP office on 28th January 2010), the assessee has filed a huge compilation of papers, running into almost three hundred pages, including copies of reports, emails and other documents evidencing the rendering of services. Yet, the DRP simply brushed asid....
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.... filed by the assessee. That exercise is clearly not done. In the case of Vodafone Essar Limited Vs Dispute Resolution Panel (240 CTR 263), Hon'ble Delhi High Court has observed that, "When a quasi judicial authority (like the DRP) deals with a lis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter. And further, the same also facilitates appreciation when the order is called in question by the superior forum". Yet, more often than not, the orders passed by the Dispute Resolution Panels, like one before us, are not only wanting in terms of their analysis of facts and law and lacking in reasons for arriving at conclusions, these orders also offer us no assistance in any manner at all. In this view of the matter, we deem it fit and proper to remit the matter to the file of the Assessing Officer for fresh adjudication on the question, of services having been actually rendered, in the light of evidences filed by the assessee. 10. In case the Assessing Officer comes to the conclusion that the assessee has indeed received the services from the AE the next question which we have to decide is as to what is the arm's ....
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....next adjustment of Rs 4,70,000, on the ground that the assessee ought not to have allowed discount of 10% to AEs, is also equally devoid of any merits. We have noted that the assessee has followed the TNMM for determination of ALP and the Assessing Officer has not even disputed TNMM being most appropriate method on the facts of this case. The question of applying CUP, even if that be so, can only arise when TNMM is rejected. Even under CUP method, it is not necessary that all sales must take at the same price. There can always be variations of prices for the same product or services on valid grounds, such as quantum of business, risk factors, marketing efforts needed etc. When assessee is dealing with an AE, at least there are no commercial risks, no marketing costs and there could be several other factors as well justifying a normal discount as the assessee could indeed go to many important customers. It hardly needs to be emphasized that even in independent business situations granting discount is a normal occurrence, and unless the Assessing Officer demonstrates that the discount so allowed would not have been allowed in an arm's length situation, ALP adjustment cannot be made i....
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....ducted under section 195 of the Income Tax Act, from the cost sharing paid to its AEs, and relied upon Article 12 and 7 of India-USA Treaty" but the it proceeds to summarily reject the same in the immediately following sentences by observing that "Since the payment has been made within India, the assessee was liable to deduct tax. Hence, the action of the AO in invoking the provisions of Section 40(a)(ia) are justified". Clearly, this is a case of non application of mind by the Assessing Officer as also by the Dispute Resolution Panel. The issue before the DRP was that since the recipient does not have the primary liabilities to pay tax on these receipts, tax withholding requirements do come into play at all. However, it appears that not only the DRP completely missed the argument, it made some irrelevant observations about tax withholding requirements from payments made within India. That is not the issue here. The issue is whether any tax was deductible from these payments to non residents. Just because a payment is made to non resident, tax withholding requirements under section 195 donot come into play. We find that, as held by Hon'ble Supreme Court in the case of GE India Tech....
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....business profits so earned, even if any. The only other situation in which these payments can be taxed in India is when these payments are treated as 'fees for included services' under Article 12 of India US Double Taxation Avoidance Agreement, but then since these services prima facie are not covered by the 'make available' clause of Article 12(4)(b), the payment so made cannot be taxed as 'fees for included services' either. In any event, the Assessing Officer has not even made out the case for taxability of the impugned payments in India. Accordingly, we see no substance in Assessing Officer's invoking the disallowance under section 40(a)(i) either. 15 In view of the above discussions, as also bearing in mind entirety of the case, we partly uphold the grievance of the assessee so far as ALP adjustments in respect of payments under cost contribution arrangements, and in respect of service charges from AEs are concerned, to the extent indicated above. 16. Ground Nos. 2 and 3 are thus partly allowed for statistical purposes in the terms indicated above. 17. In the first ground of appeal, the assessee has raised the following grievance : 1. De....