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TaxTMI 
TaxTMI 
TaxTMI 
2015 (7) TMI 41
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....ration for the design and construction of a tunnel between Green park and Saket Station of Delhi. The assessee reported following international transactions during the year under consideration:- (a) Purchase of Assets and Spare parts - Rs. 2.28 crores (CUP method) (b) Reimbursement of Direct expenses - Rs. 3.56 crores (CPM method) (c) Head office overheads - Rs. 14.98 crores (CPM method) It was submitted that the assessee did not have required infrastructure and assets to execute the project undertaken by it and hence all the members of AOP have contributed assets and spare parts; incurred expenses on behalf of the assessee. All these expenses including the cost of assets and spare parts have been reimbursed by the assessee. The transactions entered with the three foreign entities have been reported as International transactions in the T.P. Study. 3. The TPO accepted the ALP of transactions relating to Purchase of Assets and Spare parts and Reimbursement of Direct expenses. However, he did not accept the transactions relating to "reimbursement of Head office overheads" and accordingly determined the ALP of the same as NIL. Accordingly the entire amount of Rs. 14.98 crore....
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....and upon the receipt of the auditor's certificate the excess/shortage was adjusted. The assessee has explained the amount charged as "Head officer overheads" by the foreign members by way of following table:- Name of Members Share in JV Overheads allowed to be charged as per JV Agreement (8.5% of Revenue) % of HO overhead actually charged Overheads actually charged in books Arm/s Length Price TP Adj. in Return of Income Dywidag International GmbH 29% 82,329,705 7.04% 68,188,367 60,342,830 7,845,537 Samsung Corporation (Samsung) 26% 73,812,840 7.30% 63,392,203 63,392,203 - Shimizu Corporation (Shimizu) 9.5% 26,970,076 8.23% 26,113,377 26,113,377 - Total 183,112,621 157,693,947 149,848,410 7,845,537 A perusal of the above said table would show that the amount of Head office overheads recovered by M/s Dywidag from the assessee was Rs. 6.81 crores, but the amount to be reimbursed as per the auditor's certificate actually worked out to Rs. 6.03 crores. Hence the assessee itself disallowed a sum of 0.78 crores in its return of income. At the time of argument, the Ld A.R contended that the disallowance of 0.78 crores made by the assessee....
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....see. (h) The assessee has not given bifurcation and nature of services rendered by the AEs under various heads within the overhead costs and also did not submit the amounts paid in respect of each of such services provided by the AE. (i) The assessee did not show the utility of services rendered and quantification of the same in an arm's length condition. Hence the charges are not linked to actual service. The TPO has summarized his view point on this issue as under:- "First of all, the assessee has to prove that the services are rendered. The assessee did not prove the same substantially. The second aspect of intra group services is the quantification of such services in terms of actual expenditure incurred and commensurate benefits derived there from. This aspect is also not adequately proved by the assessee. Even if we assume that the above services are incurred, the quantum of such services would not be to the extent of Rs. 14.98 crores. Moreover, when the expenditure is incurred for the benefit of the group as a whole, no charging of such expenditure is required as such expenditure is not incurred in connection with any individual member of the group and the benefit of suc....
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....e noted that there is no similarity in the expenses included under the head indirect expenses in these two companies and hence the calculation of percentage of indirect cost to sales cannot be said to be under the same base. Thus the calculation submitted by the appellant is defective and hence the same cannot be relied upon. iii) Further in the case of Shimizu Corporation it is noted that the net indirect expenses include selling general and administrative expenses and also non operating expenses. It is again different from the above mentioned two companies. It would be relevant here to mention that the auditors of these three companies are not same and hence they have adopted a different approach in working out the percentage of indirect costs which have been subsequently allocated to the appellant company. In view of these facts the contention of the appellant that allocation of overheads was carried out in a scientific and systematic manner is not factually correct and hence this contention of the appellant is not acceptable. iv) The appellant in its submissions has admitted that by its nature the overhead expenses cannot be directly related to specific activities/income as t....
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....ure of the said disallowance is discussed by us in paragraph 5 supra.). (b) the assessee has bench marked this transaction with the certificate issued by the auditors. (c) the identical reimbursement made in the immediately preceding year has been accepted by the assessing officer. (d) the foreign entities are bound to incur indirect expenses when they are supplying assets & spares and further when they are incurring indirect expenses. (e) the identical disallowance made in the case of another company named M/s International Metro Civil Contractors (wherein the present members of the assessee are also the members with identical profit sharing ratio) has been deleted by the co-ordinate bench of Tribunal, vide its order dated 26.9.2014 passed in ITA No. 8160/Mum/2010. (f) the TPO was not justified in disallowing the entire expenditure by determining the ALP as NIL. 9. With regard to the observation made by the TPO that the foreign entities should not have allocated any indirect expenses at all to the assessee, the Ld A.R submitted that it is not in the domain of the TPO to examine the prudence of the assessee or necessity to incur expenditure. In this regard, he placed reliance....
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....pared the same with any independent comparables in its T.P study. Hence the assessee has not proved that the Head officer overheads reimbursed by it to its AEs are at arms length. Hence the methodology adopted by the assessee cannot be considered to be Cost plus method. He submitted that the allocation of expenses should have been on the basis of Functions performed or services provided by the AEs to the assessee and the same should have been bench marked with other independent comparables, i.e., what any other independent party would have charged had it provided same kind of services to the assessee. Since the assessee has failed to do so and since the assessee has failed to furnish any other details, the TPO had no other option but to determine the ALP as NIL. He further submitted that the Hon'ble ITAT has not considered all the above said factors in the case of M/s International Metro Civil Contractors and hence the same cannot be relied upon by the assessee. He further submitted that this bench of Tribunal also need not follow the decision rendered by the co-ordinate bench in view of the decision rendered by Hon'ble Supreme Court in the case of Distributors (Baroda) Pvt Ltd Vs.....
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....e rendered. In our view, there is some merit in the said contentions. 14. However, we have noticed that the AEs have adopted the methodology to ascertain the indirect expenses as a percentage of the revenue, i.e., the proportion of indirect expenses incurred by the Head officer over the Revenue earned by it. It was agreed between the members of assessee AOP that the said percentage should not exceed 8.5%. However, the tax authorities have pointed out that the said percentage has been ascertained for Calendar year 2008 in two cases and the financial year 2007-08 in one case, where as the financial year under consideration is 2008-09. Thus, there is mismatch of the period and the same vindicates the stand of the revenue that the AEs have charged the assessee on estimated basis and not on actual basis. 15. At the same time, there is also some merit in the contentions of the assessee that the AEs have to necessarily incur indirect expenses or head office overheads in order to supply assets & spares and to incur direct expenses. This is for the reason that the AEs have to maintain infrastructure, establishment and other paraphernalia in order to supply assets & spares and to incur dir....
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.... 1,20,00,000 Upper ceiling @ 8.5% of T.O 17,00,000 17,00,000 17,00,000 17,00,000 17,00,000 Accordingly, each of the members of JV would be charging Rs. 17.00 lakhs upon the Joint Venture. If we examine the first table given in the example, we may notice that "E" has not provided any service to the JV, but still it would be charging Rs. 17.00 lakhs upon the JV. The value of services provided by A are ten times of D, five times of C and two times of B, but still all the four persons would be charging Rs. 17.00 lakhs each. Thus it is seen that the quantum of 'Head officer overheads' charged by each of the members is disproportionate to the value of services rendered by each of them. This example highlights the fallacy in the approach adopted by the assessee and its members. Hence charging of Head office overheads as a percentage of their respective turnover, in our view, may give misleading result. A perusal of the above said example would also show that the indirect expenses charged should depend upon value of services (value of assets & spares + value of indirect expenses incurred) that is provided. This is one aspect of the issue under consideration. 17. Another issue is wi....
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...., who, crucially, did not say that the ALP was lower than the amount claimed. He, instead disallowed the expenditure altogether on the ground that there were no services rendered to begin with. The ITAT overruled the TPO on that limited ground, but did not concern itself with a transfer pricing analysis as contemplated under Section 92; to the contrary, it accepted the assessee's stated return (absent any benchmarking) as the true and correct value under an implicit (and incorrect) understanding of Section 92(3)." 18. Vide paras 36 and 37, the Hon'ble High Court has further observed as under: "36. In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this Court, must question the commercial wisdom of the assessee, or replace its own assessment of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client interaction with IBM on behalf of the assessee - activities for which, according to the assessee's claim - interaction with IBM's regional offices in Singapore and the United States was necessary. The....