TaxTMI 
TaxTMI 
2012 (11) TMI 1
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....ransfer Pricing Officer ("TPO") to the Appellants income, is without appropriate application of mind and in undue haste. 1.1 The assessment order passed by the learned Assessing Officer pursuant to the directions of learned DRP is bad in law and void ab initio. 1.2 The reference made by the learned Assessing Officer suffers from jurisdictional errors as the learned Assessing Officer has not recorded any reasons in the assessment order based on which he reached the conclusion that it was 'necessary or expedient' to refer the matter to the learned Transfer Pricing Officer for computation of the Arm's Length Price ("ALP") as is required under section 92CA(1) of the Act 1.3 The learned Assessing Officer pursuant to the directions of the learned DRP erred on facts and in law in enhancing the income of the appellant by Rs. 31,34,48,369/- holding that the international transactions pertaining to the provision of secondment related services do not satisfy the arm's length principle envisaged under the Act and in doing so have grossly erred by: 1.3.1 not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the pre....
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.... to independent customers, marketing of telecommunication equipment manufactured by group companies, construction, assembly and installation and support/technical services related to telecommunication systems and development of telecommunication software. A reference u/s 92CA was made by the Assessing Officer to Transfer Pricing Officer (TPO) after obtaining approval from the Commissioner The TPO examined the international transactions entered into by the assessee-company during the relevant period and passed order u/s 92CA(3) of the Act on 25th October, 2010. After analyzing the details of international transactions entered into by the assessee with its associate enterprises, learned TPO found that Arm's Length price with regard to the services availed by the assessee "Second line support including software related errors" was to be determined at Rs. 31,34,48,369/- as against nil reported by the assessee. The Assessing Officer relying upon that order of TPO asked the assessee as to why the aforementioned addition should not be made to the income of the assessee. Finding that no objection was raised by the assessee during the initial course of assessment proceedings vide which draf....
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....en drawn by the TPO for hardware repair scheme mentioned at S. No. 1 of the aforementioned table. The only objection of the TPO is regarding "Second Line Support including Software Related Errors'' which is an amount of Rs. 31,34,48,369/-. According to TPO the assessee was not required to pay such amount to its AEs. The learned TPO has described various factors, according to which the assessee was not needed to pay the aforementioned amount of Rs. 31,34,48,369/- to its AEs for Second Line Support. The factors enumerated by the TPO in the order are as under: "1. The assessee claims that where it has a back to back warranty from its AE, its risk is reduced. 2. The assessee claims that it does not face technology risk, 3. The assessee pays Rs. 211,666,073/- for the consultancy that the AE provides for the installation and commissioning of the equipment 4. The assessee pays Rs. 15,348,506/- on account of the repair services that the AE provides. 5. The assessee pays Rs. 59,480, 756/- for the training services that the AE provides. 6. The assessee pays Rs. 165,605,613/- for the hardware repair services. ....
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....ustomers at every stage of the life cycle of the telecom network cycle. This involves installation and commissioning of the telecom network, providing post-sales support/maintenance of the network, if required by the customer and upgrading the network to incorporate new technologies as and when the need arises. The assessee referred to the life cycle of the telecom network which includes 4 stages; (i) Supply of telecom network (ii) Installation of telecom network (iii) Maintenance of telecom network (iv) Upgradation of telecom network 10. It was submitted that post-sales support is provided in cases where the warranty of the equipment supplied by the assessee has expired. Post-sales support services are provided to the telecom services providers as part of an Annual Maintenance Contract (AMC) entered into by the assessee with the telecom services provider/customer. At the most basic level maintenance services consist of network performance checks, ensuring that the network is operating to its full potential. At its most complex level, this service area extends to complete management of an outsourced network - from side acquisition to full end ....
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...., then the rectification request is forwarded to the product line maintenance team who tries to resolve the error and in case the problem is not resolved by them then the same is finally sent to the product design team who had actually designed the product and error is rectified. Such process gives the customer complete transparency of the error rectification process and it knows exactly what is the escalation level of its error. This generates a lot of trust in the minds of the customer who knows that the error would be rectified by the concerned person. 13. It may be mentioned that the assessee is receiving separate revenue in respect of Annual Maintenance Contract (AMC) and the gross revenue of the assessee on this account, as per page 208 of the paper book, is a sum of Rs. 118,94,04,863/- and after reducing the expenditure incurred thereon of Rs.101,59,98,248/- {which includes aforementioned amount of Rs.31,34,48,369), the operating profit from this segment is Rs.17,34,06,615/- and OP/TC is 17%. 14. After narrating all the aforementioned facts, the learned AR submitted before us that as a part of support services, the assessee provides post-sales support to telecom servic....
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.... the figures the assessee has earned 17% income out of the gross receipts as against 6.59% as computed by mean margin of comparables. He in this regard referred to para 6 of the order of TPO according to which the list of comparable was submitted to TPO, the mean margin was computed at 6.59% against 17% shown by the assessee. Thus, it was submitted by learned AR that the assessee's payment made to its AEs of Rs.31,34,48,369/-should be considered at Arm's Length. He submitted that allegations of the TPO which have been affirmed by Dispute Resolution Panel are as under: "1. During the Transfer Pricing assessment proceedings, learned TPO disallowed the international transaction of receipt of Second Line Support services of Rs. 31,34,48,369/- from the AEs. 2. The learned TPO in support of his argument for non-chargeability of second line support services alleged that the Appellant has been unable to show any tangible economic or commercial benefit that it has derived from these services. 3. The learned TPO stated that these services were routine services which could not be classified as shareholder services. Further, in support his argument the lea....
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....ly technical in nature without which the Appellant would not be in a position to provide AMC to its customers. Therefore, these services are not auxiliary but main/primary in nature. 3. The learned TPO also ignored the fact that these services were received by the Appellant on a cost to cost basis without a mark-up and these costs have been passed on by the Appellant to the telecom service providers/customers under the AMC. Thus the Appellant has not absorbed these costs but has recovered the same from the telecom service provider/customer 4. Further, since only cost allocation is being made by the AEs for rendering of second line support services without a mark-up therefore question of the arm's length transfer price does not arise. Therefore, what needs to be seen is whether the right allocation of cost has been or not 5. Further, as the learned TPO rejected the Appellant's primary approach of determination of arm's length margin. The Appellant during the TP assessment proceedings had further suggested an alternative approach on a without prejudice basis wherein the Appellant demonstrated that it had earned an Operating Profit/Total Co....
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.... were required by the assessee or not. In this regard learned AR has placed reliance on the unreported decision of Bombay Bench of ITAT in the case of Dresser Rand India (P.) Ltd. v. Addl. CIT [2011] (Mum.) wherein it is held that it is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the Revenue authorities to decide that what is necessary for an assessee and what is not. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer; when evaluating the Arm's Length price of a service; it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. 18. The learned AR further referred to the decision of ITAT Delhi Bench in the case of Cushman & Wakefield India (P.) Ltd. v. Asstt. CIT [2012] 135 ITD 242 in which case also, according to learned AR, it was decided that whether the assessee is onl....
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....emonstrated to have been incurred or laid out for the purpose of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. 20. He further submitted that under the entire company contracts, only the cost without any mark up, is apportioned to it for receiving the SLS services. The apportionment of cost is done on a scientific basis under which the cost of the SLS centres are allocated to the various Ericsson entities across the world based on the number of CSRs escalated for Second Line Support and also on the revenue earned by various Ericsson entities from providing post-sales support services to telecom service provider/customer. Such method was applied by AEs for apportionment of cost as fault rectification is an ongoing process and it is not possible to keep a track of the time spent by the employees of the AEs for rectifying the faults across the world, including India. 21. To demonstrate that AMC did not relate to warranty period, learned AR referred to the agreement of the assessee with M/s Aircell Cellular Limited wherein telecom equipment were sold to third party customers which is an agreement dated 01/07/2005 wherein as per clause 19.2....
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....e the services specified in the contract for the existing GSM system as well as the new system of ACL For removal of doubts, its is expressly understood between the parties that the scope or responsibilities and obligations of the contractor under this contract in respect of the entire systems shall be in addition to the scope of warranty originally provided by the supplier of the system........" 22. Thus, it was submitted by learned AR that it is clear from the above that AMC contract is entered into with the third party customer once the warranty period has expired. During such warranty period, no payment is made to the AEs for any SLS services that may be received. Thus learned AR concluded his arguments and contended that addition has wrongly been made. There being no mark up in the amount charged by AEs and only cost has been reimbursed therefore, the impugned transaction should be considered to be at arm's length. 23. The formula, according to which the aforementioned payment has been made by the assessee to its AEs, has been described at page 224 of the paper book which is as under: "PRICING" The annual fee for Support Services provided under this agreement shall....
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....order of the TPO wherein it has been mentioned that for determining arm's length price in intra group services, those should be determined as per Chapters I, II and III and according to OECD; guidelines, application of CUP or cost plus method of intra group services is a proper method and on the basis of that TPO has framed four questions. These questions have already been described in the above part of this order. Referring to these observations of the TPO, he submitted that the assessee has not been able to prove that actual services have been received of some value which were required to make such huge payment. The services rendered are at best shared service or stewardship activities of the AE for which no separate payment was needed to be made. The assessee does not undertake the responsibility of goods that are procured from its AE. Therefore, the assessee should not be expected to pay for product failure and it has no role to play in that Thus, it was submitted by learned D.R. that arm's length price of the alleged services availed by the assessee from its AE has rightly been determined at nil by the TPO and learned DRP has rightly upheld this action of the TPO therefore, ap....
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....of cost, the amount paid by the assessee should be considered to be at arm's length price. 27. It may be mentioned here that while the matter was concluded, the learned AR was required to submit the actual calculations made in the formula, according to which the said payment of Rs. 31,34,48,369/- is made and the hearing was concluded on 12/04/2012. 28. On 24/04/2012, the learned AR has submitted letter dated 20/04/2012, a copy of which has also been stated to be given to learned D.R. It has been mentioned that an amendment to the SLS agreement was entered into between assessee and its AE on 12th September, 2006 onwards. The copy of the said amendment is being filed. It is submitted that the amendment provides 60% weightage to the number of Customer Service Request (CSRs) escalated to the AEs and 40% weightage to the number of nodes (telecom equipments) installed in India for the purpose of allocation costs incurred by the AEs for providing SLS. It is also submitted that under the previous model the cost of SLS incurred by the AE was allocated to the various service recipients, including the assessee, based on their respective support service revenues ([Annual Maintenance Cont....
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....n Netherlands on India on account of support fees reporting period: 1st April 06-31" March 07 S.NO. Invoice Number Invoice in reporting currency Invoice in document currency Currency Posting date 1. 9019052064 74,558,700 1,653,553 USD 10/30/2006 2. 9019052545 74,291,610 1,654,048 USD 11/14/2006 3. 9019045844 4,831,640 1,104,326 USD 07/31/2006 4. 9019044044 75,873,274 1,653,553 USD 06/27/2006 5. 9019042660 403,043 8,949 USD 06/28/2006 6. 9019042599 31,725 705 USD 04/28/2006 7. 9019056045 4,464,360 100,334 USD 12/11/2006 8. 9019056678 2,810,479 62,838 USD 12/15/2006 9. 9019059469 76,183,537 1,753,764 USD 03/27/2007 313,448,369 6,992,069 29. We have carefully considered the rival submissions in the light of material placed before us. The facts have already been discussed in detail in the above part of this order. Mainly it is the case of the Revenue that assessee does not require to make any payment with regard to Second Line Support (SLS) obtained by it from ....
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....t the level of the assessee's own staff available with as the said staff may not be having the skill upto the level which requires to resolve complicated problem and in turn assessee adopted a mode according to which it is ensured that all the problems arising in the functioning of the instrument are efficiently resolved. That decision of the assessee is business expediency of the assessee so that the customers to whom the instruments have been supplied remain satisfied about the functioning of the equipment. Therefore, we find no force in the claim of the Revenue that for availing these services the assessee was not required to make any payment. The assessee has the right to enter into an arrangement according to which its business interests are protected and for protection of such interests of the business of the assessee, it has entered into an agreement with its AE. To hold that is the prerogative of the assessee to see and decide the business expediency, the reference can be made to the decision of Hon'ble Delhi High Court referred to by learned AR in the case of EKL Appliances Ltd. (supra) wherein their Lordships have observed that even Rule 10B(1)(a) does not authorize disal....
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....sessee. At the same time it has also to be seen that whether the price paid by the assessee is at arm's length. The term 'arm's length price' has been defined in section 92F which means a price which is applied or proposed to be applied in the transactions between the persons other then Associate Enterprises in uncontrolled conditions. It is only because of that their Lordships in the aforementioned decision have observed that "the quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses." Earlier to this they have observed that Revenue cannot disallow any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative. Looking into observations of their Lordships, it has to be held that reasonableness of an expenditure has not been excluded from determination. Here it can be mentioned that the formula, which was placed before the Assessing Officer, TPO, and DRP....