TaxTMI 
TaxTMI 
2016 (1) TMI 451
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....red 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 transactions as under: S. No. Transaction AE Amount Method applie....
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....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 rendered, the direction of DRP is as under: "The memorandum of understanding between itself and the AE discussed about the payment of remuneration f....
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....hat, 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 determination of Nil value is not correct and shall not be given effect to by adding it to the taxable income of the assessee. This will have impact only on the Balance Sheet of the assessee. For want of detailed informatio....
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....ss 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 Tractors Ltd., [231 ITR 849 (Mum)]; iv. Social Media India Ltd., Vs. ACIT (ITA No. 1711/Hyd/2012, Hyderabad Bench); v. Thyssen Krupp Industries India (P) Ltd., Vs. ACIT Mumbai [27 Taxmann.com 334 (Mum)]; vi. Castrol India Ltd., Vs. ACIT [29....
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.... 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 Nomad retainership 22 3 Bell Pottinger PR Retainership 24 4 Grant Thornton UK LLP VAT services 5 5 Hemscott Group Ltd Website maintenance 1 6 Berwin Leighton Paisner LLP Legal Relationship 4 7 London Stock Exchange Plc RNS Services 2 8 Deloitte Touche Tohmatsu Adudit Fee 60 9 Equity Limited Administration services 8 10 Equity Limited Administration services 1 11 Board meeting expenses Board meeting exp....
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....al 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 which the mark up is to be applied". 10.1 As per the MOU signed between the two, the management consultancy fees payable to AE DQ Entertainment (Mauritius) Ltd., Mauritius is contingent on the following: * DQ Entertainment (Mauritius) Ltd., Mauritius will identity the costs of its officers and consultancy services who are involved in providing the services to the taxpayer. * DQ Entertainment (Mauritius) Ltd., Mauritius will pass through at cost in major items of their party expenses to which it has not added value. 10.2 As is evident from the MOU above, it is necessary that the AE DQ Entertainment (Mauritius) Ltd., Mauritius invoic....
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.... 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 Retainership 4 14 Evolution securities Ltd Nomad retainership 22 15 Evolution securities Ltd Nomad retainership 3 16 Bell Pottinger PR Retainership 24 17 Director's fee Director's fee 230 Total 406 Add: 5% 20 Total 427 11.3 In the above table, the items of expenses at Srl. No. 1 to 10 are routine administrative expenses which are in no way related to management and consultancy. For instance, expenses at serial no. 1 & 2 are administrative expenses, at serial no. 3 is audit expenses, 4 and 5 are banking charges and board meeting expenses. Similarly the expenses at serial no. 6 to 10 are routine administrative expenses are not related to any management consultancy. The other expenses at serial no. 11 to 17 are pertaining to retainership fee etc paid to legal....
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....ve 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 clients. 13. It is important to note here the DQ Entertainment Plc, Isle of Man is the ultimate holding company of the taxpayer and the services provided by the services, if any, provided by the Directors of DQ Entertainment Plc, Isle of Man, to the taxpayer are nothing but part of the shareholder activity. It is but natural that any holding company and its Directors will provide advice and guidance to its step down subsidiary. Such services do not form part of the 'intragroup services' as per the OECD Guidelines. The taxpayer has no doubt benefitted from its passive association with the holding companies. However, no documentary evidence has been submitted before the TPO to show that taxpayer benefitted from any direct service provided by the AEs to the taxpayer. 14. In this context, it is pertinent to refer to para 7.13 of the OECD Guidelines which is reproduced below- 7.13 Similarly, an associated enterprise should not be considered to receive an intra-group s....
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....uritius, 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". 6.2. As can be seen from the above, the TPO analysed the accounts of DQ Entertainment Plc and DQE Mauritius in analyzing the nature of payment. Out of the total amount of US$ 7,99,000 paid, the actual Management Consultation Charges were only US$ 4,27,000 along with administrative and audit fee of US$ 14,000. As per the agreement, there is a markup of 5%. This expenditure only can be considered, in our view, as the Management Consultancy Service Fee, whereas the foreign exchange loss of US$ 3,21,000 cannot be considered as intra group service. We notice from the documents placed on record that instead of quarterly bills being raised as per the agreement, DQE Mauritius has raised only one bill for the whole of the year, which was placed at page 170 of the Paper Book. As can be seen from the details of payments made, placed at page 171 of the Paper Book, the amount of US$ 799,174 charged on 31-03-08 was paid in three installments of US$ 3,00,000 on 14-09-2010, US $ 1,99,174 on 25-10-2010 and US$ 3,00,000 on 04-0....