AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (4) TMI 202
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.... 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 by the TPO, the assessee is in appeal before us on the following grounds:- "1) The learned Asse....
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....ff 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/services rendered to its AEs. 2.5. The learned TPO, AO and the Hon'ble DRP erred in determining the credit rating of the AEs as 'BB' on adhoc basis and thereby imputin....
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....atements 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 its AE in the area of Information Technology, Administration, Human Resource, Finance, Legal, Tax, and Strategy etc. These services are utilized by IRIL to undertake its business operations in India. Ingersoll Rand Company USA 2,57,....
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.... 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 7.22 & 7.23 of OECD Guidelines]. In this regard the relevant paragraph 7.25 of the OECD Guidelines was pointed out which is reproduced below:- "The allocation might be based on turnover, or staff employed, or some other basis. Whether the allocation met....
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....g 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 Method. It was submitted that considering the maturity of the databases, nature and type of information available as well as the nature of the international transactions, it would be extremely cumbersome, if not impossible to obtain comparable data on an independent basis. Hence cond....
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....rdination 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 or unexpected rise in the cost of the business. Evidence to demonstrate that the services are indeed rendered by the AE 20. It was submitted by the assessee that with a view to substantiate that it has indeed obtained the services of AE, the following information/documents were provided to the learned TPO during the assessment proceeding....
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.... 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 actually benefits an assessee in monetary terms or not is not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. * The real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. * Similarly, whether the AE gave th....
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....PO 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 was obtained from CRISIL under section 133 (6) of the Act. 28. Therefore, the TPO made the transfer pricing adjustment of Rs. 11,04,290 towards notional interest on the receivables from AE. 29. The ld. counsel for the assessee submitted the computation of notional interest before us as follows:- Particulars Amounts (In INR) Receivables from the AEs exceeding 6 months 74,91,793 Arm's length price of interest chargeable at 14.74% being the CUP 11,04,290 Interest charged NIL Transfe....
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....y 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 specifically provides for taxation of presumptive income. Reliance was placed on the decision of Vodafone India Services Pvt. Ltd. v. UOI (W.P. No.871 of 2014) Ltd. v.. Union of India (Writ Petition No.871 OF 2014) and the decision of the Mumbai Bench of the Tribunal in the case of Evonik Degussa India P. Ltd. v. ACIT (ITA No.7653/Mum/2011) in support of its claim. 34. The ld. counsel for the assessee submitted that ITAT Bangalore Bench in the assessee's own case for the A.Y. 2006-07 deleted the addition on account of notional interest rela....
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....er 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, the learned Departmental Representative supported the orders of the authorities below. 11.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision cited and placed reliance upon. We find that the decision of the ITAT, Mumbai Bench, in the case of Evonik Degussa P. Ltd. V ACIT - OSD, Circle 3(1), Mumbai (ITA No.7653/Mum/2011, dt.21.11.2012) of ITAT, Mumbai Bench is squarely applicable to the facts of the case in the case on hand. In this decision the ITAT, Mumbai Bench at para 28 thereof has held as under : "28. After care....