TaxTMI 
TaxTMI 
2016 (1) TMI 451
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....allowed the same. 3. The Learned AO/TPO/DRP erred in concluding that the assessee did not file any detailed documentation in respect of management consultancy fees when detailed note and other supporting evidence was given explaining the benefits received against such fees paid. 4. The Ld AO/TPO is not justified in not acting upon the application for rectification filed under Section 154 of the Act, against the order of TPO for disallowing the amount of Rs. 73,62,023/- in the nature of "reimbursement of commission" which was not debited to profit and loss account and was routed only through the Balance Sheet affecting the share premium and share capital account". Ground Nos. 1 & 5 are general in nature and does not require any adjudication. 2. Assessee is one of the leading producers of animation, visual effects, game art and entertainment content for India as well as global media and entertainment industry. Assessee-company filed its return of income on 29-09-2008 admitting NIL income after claiming exemption u/s. 10A of the Act. A reference u/s 92CA of the Act was made to the Addl. CIT (Transfer Pricing) (TPO), as assessee has reported international transa....
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....RP accepted that there are certain services rendered by the DQ Entertainment (Mauritius) Ltd. In coming to the above, the DRP also took into consideration the decision of the Co-ordinate Bench of ITAT, Delhi in the case of McCann Erickson India P. Ltd., in ITA No. 5871/Del/2011 dt. 08-06-2012. The decision of the DRP is as under: "Taking into consideration the facts and information submitted by the assessee as well as the confirmation from a major customer and a certificate from a domain expert, this panel of the view that it is not possible to hold that no services have been received by the assessee from its AE. Hence, applying the principle of benefit test, its ALP value cannot be taken to be Nil and it is certainly above zero. This is also in line with the decision of the Hon'ble ITAT, Delhi in the case of McCann Erickson India P Ltd (ITA No. 5871/Del/2011) dated 08-06-2012". Thus, the DRP accepted that DQ Entertainment (Mauritius) Ltd., has rendered certain services to assessee. With reference to ALP determination, however, the DRP restored the matter to the TPO again for examining the detailed budgeting and documentation maintained for the services being render....
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....ome to a determination whether the sum paid of Rs. 3,19,23,085 to its holding company, DQ Mauritius on account of management consultancy services is at arm's length or it should be less". Consequent to that, TPO examined the issues again in detail and however, came to the same conclusion of NIL ALP. 4. With reference to the reimbursement of commission of Rs. 73,62,023/-, the DRP accepted assessee's contentions as under: "The TPO disallowed the entire amount of Rs. 73,62,023/- stating that Intra group services which are not deriving any tangible and direct benefit should be treated as 'NIL'. The nature of services relating to this payment and actual receipt of the same have not been gone into by the TPO. In this regard, the assessee filed a rectification letter u/s. 154 dated 22-12-2012 requesting not to disallow the reimbursement of commission of Rs. 73,62,023/- as it was not charged to the P&L A/c. However, it is claimed that the same was not considered by the TPO. In view of the above explanations, the DRP is of the opinion that the payment relates to a capital item and not Intra group services. Moreover, it is not charged to P&L account. Therefore, the de....
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....e cases even though the method selected was TNMM. It was submitted that test of commercial expediency for determining whether the expenditure was necessary and reasonable has to be adjudged from the point of view of the business men and not of the Revenue. It was further submitted that expenditure can never be linked to the income earning ability or the value addition. Ld. Counsel relied on the decision of Hon'ble Delhi High Court in the case of CIT Vs. EKL Appliances [24 Taxmann.com 199] (Delhi) to submit that 'Department cannot dictate to the taxpayer whether or not to incur any expenditure'. Ld. Counsel also relied on the decision of Ericsson India Pvt. Ltd., Vs. DCIT [25 Taxmann.com 472] (Delhi) to submit that 'It is prerogative of the taxpayer to avail services from its AE and the Revenue cannot question the commercial expediency of such a decision'. Revenue cannot disallow any expenditure merely on the ground that it was not required by the taxpayer. Ld. Counsel also relied on the following decisions: i. Dresser - Rand India Pvt. Ltd., Vs. Addl. CIT [47 SOT 423 (Mum)]; ii. Sasson J. David and Co., Pvt. Ltd., [118 ITR 261]; iii. CIT Vs. Kirloskar....
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....s as under: "8. TPO's analysis: Having carefully gone through the submissions of the taxpayer, the TPO has analysed the international transaction in the following manner. 8.1 The taxpayer is the wholly owned subsidiary of its AE M/s. DQ Entertainment (Mauritius) Ltd., Mauritius which in turn is the wholloy owned subsidiary of DQ Entertainment Pic, Isle of Man. 8.2.1 The management consultancy service fees of Rs. 3,92,85,108/- paid by the taxpayer to its AE is calculated in the following manner: Sl. No. Nature of cost US$ in '000 1 Foreign exchange loss 321 2 Administration charges 9 3 Audit fee 4 4 Management consultancy charges 427 Add: 5% Total: 761 38 Total: 799 8.2.2 In the above table, the management consultancy service fees of US$ 427,000/- is actually the expenditure incurred by DQ Entertainment Plc, Isle of Man. The break up of the same is given as under: Sl. No. Name of the supplier Nature of cost US$ in '000 1 Hemscott Group Ltd Website maintenance 10 2 Evolution securities Ltd N....
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....on for the management and supporting services, which DQE Mauritius will provide to DQE India, they agree to pay a management service fee. This fee is to be calculated as follows: * DQE Mauritius will identify those costs of its officers and consultants who are chiefly involved in providing services to DQE India. * Their agreed, budgeted fully loaded costs for the coming financial year will form the eligible cost base for the purpose of the management charge calculation. * Their costs will be allocated across DQ Mauritius and DQE India based on shares of agreed budgeted sales for the coming financial year. * DQE Mauritius will pass through at cost any major items of third party expenses to which it has not added value. * all costs will be marked up with a profit element of 5%. DQE Mauritius will invoice DQE India for the management and supporting services quarterly on the last day of each month. DQE India will settle these invoices in u/s. Dollars within thirty days. The invoices will be supported by an analysis made at the start of the financial year of the agreed budgeted costs to be incurred by DQE Mauritius and the costs to w....
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....y major items of third party expense to which it has not added value. 11.1 Since, the third party expenses are only pass-through costs, no mark up of five percent can be allowed on these expenses. 11.2 Now, let us analyse the third party costs which are pertaining to management and consultancy services. The details of the costs incurred by AE, Isle of Man, are again reproduced below: Sl. No. Name of the supplier Nature of cost US$ in '000 1 Equity Limited Administration services 8 2 Equity Limited Administration services 1 3 Deloitte Touche Audit fee 60 Tohmatsu 4 Bank Charges Bank Charges 2 5 Board Meeting expenses Board meeting expenses 5 6 Marsh Limited Insurance 13 7 Grant Thornton India Interim results review 13 8 Grant Thornton UK LLP VAT services 5 9 London Stock Exchange Plc RNS Services 2 10 Computer share Registrar services 3 11 Hemscott Group Ltd Website maintenance 10 12 Hemscott Group Ltd Website maintenance 1 13 Berwin Leighton Paisner LLP Legal....
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....d of Directors of DQ Entertainment Plc have had been jointly interacting on various productions. This relationship was made strong by way of the agreement entered into between Method Animation and DQ Entertainment Plc whereby Method Animation agreed to make first offer to DQ Entertainment International Limited before entering into Production Service Agreement for any project started by Method Animation SAS being initiated, developed and produced by the company as delegate producer, and for which the company is in charge of the fabrication". 12.3 In the first certificate is is mentioned that with the advice and guidance of Directors of DQ Entertainment Plc, Isle of Man, the taxpayer could finish certain projects. This statement is vague and does not mention any specific business or project bagged by the taxpayer on the basis of managerial support given by the Directors of DQ Entertainment Plc, Isle of Man. It is stated in the second Certificate mentioned above that the Board of Directors of DQ Entertainment, Plc, Isle of Man, have interacted with prospective clients resulting in the DQ Entertainment Plc, Isle of Man, and the taxpayer company getting business form the client....
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....yer or any of the two AE i.e., DQ Entertainment (Mauritius) Ltd., Mauritius or DQ Entertainment Plc, Isle of Man to show how and what part of the Director's Fees incurred by the DQ Entertainment Plc, Isle of Man, should be considered as management and consultancy services provided to taxpayer. In this regard the para 7.18 of the OECD Guidelines states the following- 7.18. The fact that a payment was made to an associated enterprise for purported services can be useful in determining whether services were in fact provided, but the mere description of a payment as for example, 'management fees' should not be expected to be treated as prima facie evidence that such services have been rendered. At the same time, the absence of payments or contractual agreements does not automatically lead to the conclusion that no intra-group services have been rendered. 17. Therefore, in view of the above discussion, the arm's length price of the management consultancy services paid by the taxpayer to its AE, DQ Mauritius, is held as Rs. NIL. Accordingly, the amount of the fee for management consultancy services of Rs. 3,92,85,108/- is held as excess paid being adjustment u/s. 92CA".....