TaxTMI 
TaxTMI 
2016 (4) TMI 202
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....n 12.12.2013. 3. The information called for was furnished on 23.12.2013 and examined by the Assessing Officer. The case was referred to the TPO for determination of the arm's length price (ALP) u/s. 92CA of the Act. As per the order of the TPO dated 30.01.2014, draft assessment order was passed on 24.2.2014 against which objections were filed by the assessee before the DRP. The ld. DRP upheld the draft assessment order and final assessment order was passed by the AO on 24.12.2014. 4. The TPO made a TP adjustment of Rs. 1,64,44,290 to the returned income of the assessee in view of determination of ALP as follows:- Summary of TP adjustments (Rs.) Payment of Management Fees 1,53,40,000 Interest charged on AE debts outstanding exceeding six months 11,04,290 Total 1,64,44,290 Computation of Total Income Returned income (as per revised return): Rs.78,77,81,515 Add: Difference of ALP determined by the TPO u/s. 92CA(4) of the Act : Rs. 1,64,44,290 Total Taxable Income Rs.80,42,25,805 5. Aggrieved by the final order passed by the AO adopting the TP adjustment made b....
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.... any interest on trade receivables from both AEs as well as Non-AEs. 2.2. Without prejudice, the learned TPO and AO ought to have been netted off the outstanding payables pertaining to the dues owed by the assessee from the outstanding receivables from AEs before proposing transfer pricing adjustment in connection with notional interest on outstanding receivables from AEs. 2.3. Without prejudice, the learned TPO, AO and the Hon'ble DRP has erred in not providing the reasonable period as interest free period for which no interest has to be determined by calculating the notional interest for the entire year (for 12 months) on outstanding receivables from AEs amounting to Rs. 74,91,793. 2.4. The learned TPO, AO and the Hon'ble DRP having accepted the Transactional Net Margin Method ('TNMM') as the most appropriate method had failed to appreciate that the operating margin of the assessee is higher than the arithmetic mean operating margin of comparable companies even after working capital adjustment which provides ample evidence that the additional compensation if any, required towards the credit period is already factored in the pricing of the goods sold/ser....
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....ting to following periods: - Pertaining to FY 2009-10 - Rs. 1,53,40,000 - Pertaining to FY 2008-09 - Rs. 1,04,02,489 (This payment is reflected as prior period item in the audited financial statements of FY 2009-10). 8. Accordingly, the learned TPO has proposed the TP adjustment in connection with the cost contribution charges made pertaining to both the periods mentioned above. Cost contribution towards intra-group services (Ground No.1.1) 9. The ld. counsel for the assessee further submitted that lower authorities erred in treating the arm's length price (ALP) of the cost towards management fees to be "Nil" holding that there is no justification for the above mentioned payments and doubting whether the services were actually rendered in connection with the business of the assessee. 10. It was submitted that during the year assessee has paid its AE a total sum of Rs. 2,57,42,489 as cost contribution charges in connection with intra-group services. The nature of service/ benefits derived by assessee has been provided below:- Particulars Name of the associated enterprise Amount (INR) The Appellant has received services from i....
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....s stated that the lntra-group charges are incurred centrally by the AE and allocated to the various group affiliates including assessee on the basis of headcount and the annualized sales and the costs represent the actual costs incurred by the AE in the capacity of a centralized service provider and are allocated amongst the concerned affiliates on a rational, logical and systematic basis. 12. The ld. counsel for the assessee highlighted the guidelines postulated by the Organisation for Economic Cooperation and Development ("OECD") with respect to the allocation of costs in respect of intra-group services. It was submitted that the OECD Guidelines recognize that whilst the direct charge method may be the most practically convenient method, such a method might be difficult to apply in practice in many cases for MNE groups. The Guidelines recognize that under such circumstances MNE groups may find they have few alternatives but to use cost allocation and apportionment methods which often necessitate some degree of estimation or approximation, as a basis for calculating an arm's length charge. The OECD Guidelines also provide illustrative basis for the allocation methodology [Para ....
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....Cost may represent an arm's length charge in such situations'. 16. It was therefore emphasized that the AE in the capacity of a centralized service provider provides an element of cost saving to the Group as a whole, of which the assessee is also an integral part. This being the case, the costs cross charged by the AE would in itself be demonstrative of an arm's length charge. Aggregation approach with the application of TNMM and selection of most appropriate method (Ground Nos. 1.2 and 1.3) 17. It was submitted on behalf of the assessee that the learned TPO in the transfer pricing order has rejected the aggregation of international transaction made by the assessee by using the TNMM as most appropriate method and proposed to apply Comparable Uncontrolled Price ("CUP") Method for determining the ALP of the international transaction pertaining to payment of intra-group services. It was submitted that though the learned TPO has provided that CUP should be considered as the most appropriate method, he has failed to substantiate how CUP method can be applied in instance case, as he has not identified any uncontrolled comparable transactions to enable the application of CUP Meth....
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.... * Further, due to the direct involvement of administrative and executive management teams, the level of staff and management required at the recipient entity levels get reduced. This further provides for a higher degree of coordination of the activities among the foreign affiliates. This greater degree of coordination in turn facilitates increased sales and more efficient use of the resources; * Provide operational efficiencies (e.g. better training, staff recruitment and retention and IT platforms) and to promote opportunities of cross selling to maximise revenues; * Reduced costs - Many functions can be carried out centrally for the benefit of the entire Group, by reducing duplication, providing dedicated resources and the benefits of economies of scale. * Ingersoll Group has a brand name and reputation in the market because of the level and quality of the services provided to the clients. Therefore, lack of support from Ingersoll group may adversely impact the ability of IRIL to provide quality services to the client. Further, failure to have correct/appropriate policies could lead to control risks further arising leading to loss of revenue o....
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....f of the assessee that it is reasonable to view that the payment made towards cost contribution amounting to Rs. 2,57,42,489 is as per the internationally accepted transfer pricing principles and accordingly reflective of an arm's length charge. Reliance was placed on the following decisions:- 1. Festo Controls (P) Ltd. [IT(TP)A 969/Bang/2011]. 2. McCann Erikson (P) Ltd. [ITA No.5871/De;/2011]. 22. We find that the Mumbai Bench of the Tribunal in the case of Dresser Rand India Pvt. Ltd. [ITA No.8753/Mum/2010] upheld the payment of cost contribution charges and deleted the additions made by the AO observing as follows:- * 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 what is necessary for an assessee and what s not. * An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so. * Whether a particular expense on services received a....
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....ith respect to the objection of the assessee in making TP adjustment in connection with notional interest of Rs. 1,104,290 on outstanding receivables from AEs. 26. The brief facts are that the during the assessment proceedings, the assessee submitted the details of the receivables with its AEs and Non AEs for more than 6 months and less than 6 months. The TPO observed that there are certain receivables from the AEs which are due exceeding six months at the end of the financial year. The TPO in his order argued that outstanding receivables (amounting to Rs. 74,91,793) for a period exceeding 6 months take the characterisation of a loan transaction for which interest is chargeable. Further, he observed that if interest had been charged by the assessee on its AEs for the outstanding balance, it would have been included in the profit of the assessee. 27. Accordingly, the TPO determined the credit rating of the AEs as 'BB' on adhoc basis and thereby imputing interest on the outstanding receivables (beyond 6 months) from the AEs at a rate of 14.74% which was derived based on the annual average yield for 'BB' rated bond for 5 year or more term at 12.28% plus adhoc 20% premium which w....
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....ion 92C" (emphasis supplied) 32. It was submitted by the ld. counsel for the assessee that the above definition implies that there should be a 'real transaction' between two AE's, i.e., a transaction involving actual exchange of goods/services to constitute an 'international transaction'. It does not seek to cover any hypothetical transaction which has not taken place between the AEs. 33. The ld. counsel for the assessee submitted that to examine the transactions that could be subject to tax under the Act, it would be necessary to understand the concept of 'income' under the Act. Section 2(24) of the Act defines 'income'. The definition of 'income' under the Act is of an inclusive nature, i.e., apart from the items listed in the definition, any receipt which satisfies the basic condition of being income is also to be treated as income and charged to income tax accordingly. Additionally, the Act also contains specific provisions which have a deeming fiction on income that could be subject to tax, e.g. Section 115JB (minimum alternate tax). It can be construed that the Act provides for taxing only real income whether received or accrued under the normal provisions and specif....
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....lowing submissions :- (i) The TPO had mentioned, in his order under Section 92CA of the Act, that debts outstanding for more than 6 months is considered for making the T.P. Adjustment towards notional interest. However, the actual adjustment has been made on the total amount of receivables. In this regard, it was submitted by the learned Authorised Representative that there were no receivables from AEs outstanding for more than 6 months. (ii) It was submitted that if at all any adjustment had to be made, the notional interest is to be computed on the net receivables after netting off payables to all the AEs and not only to the holding company, as taken by the TPO. (iii) It was submitted that the TPO has erred in adopting an interest rate of 14% by stating that in terms of the financial health, the AEs of the assessee are not considered fit to be returned even as BBB (Moderate Safety) as per CRISIL rating. Having so stated, the TPO arbitrarily concluded that the interest rate for BBB rated corporate Bond rates at 11.45% and with an upward adjustment of 20% to arrive at the conclusion that the rate of interest of 14% is reasonable. 11.3 Per contra,....