TaxTMI 
TaxTMI 
2014 (2) TMI 891
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....975/- incurred by the appellant and thereby recommending an addition of Rs.33,177,975/- on that account to the appellant's income and in doing so have grossly: 2.1 erred by disregarding the ALP, as determined by the appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules. 2.2 erred by holding that the transactions are covered under intra group services and by doing so have grossly erred by: 2.2.1 not appreciating that the payment was made under a cost contribution agreement ('CCA') 2.2.2 not appreciating that the appellant received economic and commercial benefit from participating in the CCAs and the services received were not incidental or duplicate. 2.3 erred in holding that the benchmarking done by the appellant in respect of transaction relating to payment of management cost contributions is not in accordance with the law and have grossly erred by: 2.3.1 not appreciating that payment of management cost contributions is closely linked to the manufacturing function of the appellant and erred in analysing the transaction separately for the determination of ALP 2.3.2 rejecting Transactional Net Marg....
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....f the case and in law, the AO has erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act mechanically and without recording any adequate reasons for such initiation. That the above grounds and sub grounds of objections are without prejudice to each other. The appellant craves leave to alter, amend or withdraw all or any fo the Grounds of objections herein or add any further grounds as may be considered necessary and to submit such statements, documents and papers as may be considered necessary either before or during the hearing." 2. The relevant facts qua the issue are that the assessee who as per para 2 of the assessment order is stated to be formed in 1993 with the merger of M&T Harshaw, a supplier of general metal finishing chemistry and process for printed circuit board manufacturing and Electroplating Division of Schering AG, a manufacturer of printed circuit board chemistry, general metal finishing chemistry and equipment for the same. The combination of these companies is stated to have produced a leading electroplating chemicals and equipment supply company in the world with overall research and development, analytical and production ca....
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....nsfer pricing approach adopted by the assessee was summed up by the TPO in the following manner:- "4. Transfer pricing approach adopted by the assessee: 4.1 The assessee company has selected Transactional Net Margin Method (TNMM) with Operating Profit Margin (OP/Sales) as the most appropriate method and profit level indicator respectively to determine the arm's length price of the international transactions mentioned at Sl. No. 1 to 6. For the purpose of Transfer pricing analysis the assessee company has been chosen as tested party as it has been held that it is a less complex entity in comparison to its Associated Enterprises. The profit analysis of Atotech India for the year ended March 31, 2006 has been submitted at Appendix - F of the transfer pricing report. Particulars 31-Mar-07 Amount in Rs. Sales/Operating income 737,613,896 Less; Total Costs 620,650,453 Operating Profit 1,16,463,443 Add: Other income 7,56,894 Less: Other non operating expenses . N.5W.T1 Profit for the year 109,120,366 OP/Sales 15.86% 2.3. The functions performed risks undertaken and assets utilized by the assessee addressed by the TPO is....
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....under this agreement were stated to include :- Product Management Global management functions Network Administration General joint administration functions 3.1. In addition to the above, the Company it was stated was also availing the benefits from European Regional Cost Sharing Agreement ('EU-RCSA') entered into by it with effect from January 1, 2004. The record shows that the assessee tried to justify the ALP of the transaction arguing that the Transactional Net Margin Method (hereinafter referred as to "TNMM") was the most appropriate method. We may refer that in the course of the arguments advanced before the Bench, Ld. AR, Sh.Rahul Kumar Mitra categorically stated that there is no doubt that CUP is the most appropriate method. Accordingly taking into consideration the stand on behalf of the assessee it is not necessary to dwell at length on the reasoning of the TPO overruling the assessee's stand before him to hold that TNMM is not the most appropriate method and infact CUP is the most appropriate method as the assessee is not contesting the issue. Accordingly for bench-marking purposes the applicability of CUP method applied by the TPO and upheld by the DRP in ....
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....are the benefits being realized from the product management functions. For example, the assessee was required to clearly show what is the revenue generated from each product in the portfolio that is being managed on a joint or on a being managed on a joint or on a shared basis. What has been the sales/profit realized from the new product introduced etc and similar quantifications which have not been furnished. Network Administration Broadly, this includes implementation and management of IT systems. It entails: IT strategy alignment Decision on global IT standards Decision on Atotech's global IT project roadmap Outstanding issue resolution IT function is by nature so localized that it seems hard to comprehend how the day to day functioning of the IT systems can be undertaken on a joint/shared basis. Even the product management function states that intranet content is being maintained. Hence, there is clear overlapping between product management and network administration. Global management functions and Regional cost Sharing (EU) These functions are undertaken and overseen by the Operation Committee (OC) comprising of key senior people such as the president, function....
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....in and hire resources and competitive advantage by access to intangibles without making a buy-in payment." 3.7. The explanation offered by the assessee was not accepted by the TPO who concluded as under:- "9. Findings on the basis of above:- 9.1. On the basis of the above following points are noticed: * The assessee has not been able to prove the benefits that it had derived from the services purportedly provided by the AE. No independent entity would pay for such services without any cost benefit analysis. * The assessee has not furnished any evidence as to the cost benefit analysis with regard to the independent suppliers. No third party would like to avail services without any cost benefit analysis with regard to AE vs Independent supplier. * The documentation produced by the assessee to support its claim for the receipt of management services is too generic. * The benchmarking done by the assessee is not in accordance with the law and therefore CUP method is required to be applied in this case. 9.2 As per the comments above it can be seen that none of the benefits are tangible or real. A mere façade has been raised to give an impressions that some....
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....e do not find that the Indian entity, the recipient, has benefited from these kind of services. "The benefit test is generally held to be met if, under comparable circumstances, an uncontrolled tax-payer would be willing to pay an uncontrolled party to perform the same or a similar activity or if the recipient would otherwise have performed the same activity or a similar for itself (incremented value standard). "(Transfer Pricing and the Arm's Length Principle in International Tax Law, Jens Witten Dorff, pg 486). US, also adopts benefit approach since 2009, from the perspective of the recipient of the service not of the service provider. Similar is the position of OECD guidelines of 1979 which provides for a benefit test from the perspective of the recipient. 4.2.7 During the course of DRP hearing the assessee was also asked to give details of costs and their allocation worldwide. The assessee has explained cost benefit, by stating that it benefited by way of increased sales and lower need to maintain and hire resources. From submission, it is clear, there is no cost benefit analysis. But cost allocation must be supported by evidence relating to rendering of services otherwise t....
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....ring /technical support and services to the world-wide group entities. Atotech India, as a joint owner, has unrestricted access to the existing R&D date, related knowledge and intellectual properties on a royalty free basis. 8. The Ld. TPO accepted the payment made towards the research and development cost sharing agreement amounting to Rs.4,90,08,527 to be at arm's length. However, the Ld. TPO determined the arm's length price of payments towards global management cost sharing and regional cost sharing agreement amounting to Rs.2,69,90,392 and Rs.61,87,583 respectively to be at Nil. 9. The MCSA involves the sharing of common general management and administrative costs (such as marketing/finance/human resource/quality control/safety and host of other critical management functions that are of global strategic importance). The function and services covered under this agreement include:- * Product Management * Global management functions * Network Administration * General joint administrative functions" 4.1. Referring to the subsequent paras which elaborate Product Management; Global Management functions; Network Administration; and General joint administrative fu....
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....tive functions 10. The General matters pertaining to management functions performed at Group level include the following: Product Management- Product management comprises of the following tasks and responsibilities- a. Creation of market introduction documentation ego product name, price guidelines, technical features etc. b. Preparation of brochures, advertisements, posters and press releases. c. Publication of technical papers and participation at conferences and tradeshows, d. Management of Atotech website, internet content. e. Publication of newsletters etc. f. Trainings/workshops for local product marketing managers It is pertinent to note that the product management functions performed by AEs are essential to the success of Atotech India's products. In the absence of the above product management functions performed by the AEs, Atotech India would not be in a position to explain the functions, utility and features of the new products to potential customers. In order to ensure the success of any new industrial product launched by the appellant, it is imperative that marketing personnel of the appellant are aware about the technical aspects of the prod....
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....Safety Data Sheet - Identification of substance, Hazardous identification, Composition information on ingredients, First aid measures, Fire fighting measures, Accidental release measures, Handling and storage, Exposure control and personal protection etc. (Refer page 1313 to 1318 of the paper book) * Legal Support documents (Refer page 1319 to 1339 of the paper book) Network Administration- Network management refers to the activities, methods, procedures, and tools that pertain to the operation, administration, maintenance, and provisioning of networked systems. In this regard the following functions are performed by group companies- a. SAP Basis Team- The basis team is in charge of running all necessary systems to run the SAP system architecture for Atotech. b. Global SAP Competence Centre Team- In charge of maintaining ,supporting and enhancing the system settings and the business processes. c. Global Lotus Notes Competence Centre Team- In charge of maintaining, supporting and enhancing the system settings. d. Global Infrastructure Competence Team- The central team is in charge of maintaining, supporting and enhancing the system settings of the relevant infrastr....
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....ts have been properly allocated among the group companies ("charge-in") according to the terms of the agreement. 13. The TPO however, did not accept the value of the payments made by the appellant towards management group cost to be t arm's length and determined the arm's length price of such payments to be NIL. 4.2. It was submitted that allocation key used by the assessee has been provided to the Revenue. For ready reference we reproduce again from the synopsis filed:- " Appellant's Contentions: 14. The contentions of the Appellant against the final order of the AO are briefly explained below: 1. Appropriate allocation key used The CCA entered into be appellant, is a functions, benefits and cost pool where Atotech group companies performed R&D, management tasks and sample tests, upon agreement for their joint benefit. The complete costs in this relation to above are gathered and allocated to the participants by Atotech Deutschland GmbH/Group Controlling Department as operator of the pool. The costs are allocated in the following manner under the cost sharing agreement: Charge-out: The entities with central functions charge central costs incurred by them to th....
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....ed by the Co-ordinate Bench vide its order dated 18.11.2011 in Cushman & Wakefield India Pvt. Ltd. vs ACIT in ITA No-3933/Del/2010 (copy placed at pages 58-93 of the paper book) and order dated 04.01.2013 in the case of M/s Festo Pvt. Ltd. vs DCIT IT(TP) (copy placed at pages 152-165). 4.5 Addressing the case of Gem Plus India cited supra relied upon by the DRP, it was his submission that in the facts of that case no details had been submitted by the assessee in respect of the nature of the services rendered whereas in the facts of the present case the assessee has supported the nature of services by filing supporting documents. 4.6 Apart from the above arguments various other arguments were advanced by the Ld. AR in support of the assessee's claim. For ready reference the relevant extract from the synopsis filed is reproduced hereunder:- "18. The appellant by way of the CCA has access to greater and global experience of the Atotech Group for all the management related activities and thus can benefit from the global best practices. This advantage is evident from the increase in sales achieved by Atotech India over the years. This sales growth was achieved, inter alia, by i....
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....Rs.5,456,424/-); and seminar and conference expenses (Rs.6,062,192/-) amounting to Rs.58,080,615/- as appearing in the profit and loss account and concluded without recording any reasons or facts that the contribution of AEs on this account is not discernible. The Ld. TPO mentioned in his order that the payment made by the appellant is in the nature of duplicate services. The Ld. TPO failed to appreciate the distinction between the above mentioned spent and the management cost contributions incurred in accordance with the CCA entered into with the AE. In this regard, the appellant would also like to state that the commercial wisdom of an appellant in making payments to their AEs under an agreement for availing services, cannot be questioned by the revenue authorities and it is not for the tax authorities to dictate the legitimate needs of a business. It is only the businessman who can judge the legitimacy of business needs and that the business man's point of view must be seen. 23. Furthermore, the Appellant would like to highlight that the cost incurred for performing shareholder's functions was not charged to CCA members (including the appellant). Accordingly, the cost allo....
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.... same or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. 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. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he ....
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....it is not for the Revenue officers to question the assessee's wisdom. The Co-ordinate Bench it was submitted has an occasion to consider the Revenue's arguments that no benefit in financial terms resulted in favour of the assessee from these services and the said argument it was submitted has been held to be an irrelevant argument. It was submitted that the Co-ordinate Bench had also considered that in the earlier years the services may have been provided on a gratuitous basis but this does not mean that the ALP of these services is NIL. In the said background it was his prayer that once the principle is settled that it is for the assessee to determine how to conduct its business and where rendering of services has not been doubted, the evidences which were relied upon before the TPO & DRP may be directed to be considered and a judicial view in the light of the settled legal principles may be taken as non-consideration of the material available on record makes the impugned order vulnerable to rejection. 5. The Ld. CIT DR on the other hand stated that the legal principles that the Revenue cannot step into the shoes of the assessee is well accepted and a settled legal principle an....
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....sity for the said payment. Accordingly the decision in Knorr-Bremse India Pvt. Ltd was heavily being relied upon for the Revenue. 6. In reply the Ld. AR inviting attention to the order of Knorr Bremse submitted that in the facts of that case the cost allocation key was not provided to the Revenue and in the absence of the same the DRPs order was upheld as such the case was distinguishable on facts. For the said purpose the following para from the said order was highlighted:- "The appellant has also assailed the addition made on account of international transactions (Rs.1,52,07,206/- towards professional consultancy and Rs.1,40,56,800/- towards management fee for support services), by determining Nil value s the ALP. The TPO found that these services provided by the AE are very general in nature and such a support is expected from AE even without payment of any such charge. The assessee argued that the authorities below are stated to have acted beyond their jurisdiction in touching upon the commercial expediency of the transactions. The DRP, however, has found that Emails brought on record merely justify presence of Ms. Rita Ricken as team leader of sales logistics, which is o....
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.... 7.1 Addressing the arguments advanced before us on the legal issue we hold that on considering the precedent laid down by the Jurisdictional High Court in the case of EKL Appliances (cited supra)that the departmental stand cannot be approved when the issue is considered from the aspect of appropriateness of the expendituring. Similarly, the need and necessity for the assessee to incur the expendituring; also cannot be held to be an acceptable criteria. Nor can the necessity of the expenditure from the benefit accrued to the assessee point of view has been approved as a relevant criteria by the Jurisdictional High Court. It would also be appropriate to consider the order of the Co-ordinate Bench in the case of Knorr Bremse which has been heavily relied upon by the Revenue. The Ld. CIT DR it is seen has made a valiant effort to show that on facts relying on the afore-mentioned order. The Revenue was justified to reject the claim. A perusal of the said order shows that the finding given by the Co-ordinate Bench, is based on a peculiar set of facts namely that the assessee in the facts of that case consistently failed to provide a cost allocation key not only before the TPO/DRP but ....