TaxTMI 
TaxTMI 
2016 (5) TMI 277
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....e assails the TP adjustment of Rs. 1,13,68,945/- for A. Y. 2006-07 and Rs. 91,85,559/- for A. Y. 2007-08. 04. Facts apropos are that assessee engaged in the business of manufacture and trading of oil seals, had international transactions reported in form 3 CEB filed for the impugned assessment years, as under : A. Y. 2006-07 : Manufacturing Rs. Import of Raw materials 53,03,080 Expori of raw materials 1,88,263 Export of finished goods 10,84,75,954 Trading Import of finished goods For trading 10,56,65,603 Others Rs. Import of capital goods 48,35,102 Test certification fees received 91.700 Professional charges received 38,37,608 Group IT Services paid 23,53,757 Technical Fees paid 90,15,188 Reimbursement of expenses paid 7,88,007 A. Y. 2007-08 : Transactions Amounts in Rs. Import of raw materials 97,91,164 Export of raw materials 2,95,611 Export of finished goods 15,40,10,598 Import of finished goods 13,87,70,814 Import of capital goods 1,08,76,107 Payment for Group IT Services 74,32,059 Technical Fee paid 17,53,500 Reimbursement o....
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....a's books of accounts for the Financial Year 2005-06. Response The copies of the invoices raised by each of the AEs along with the ledger extracts are attached along with the submission as Annexure-I. Heading Reference in the notice-2.3 In respect of each type of expenses under the Intra group services rendered by the Associated Enterprises, the basis of such quantification of services or costs involved. Also justify mark-up in each category of expenses as mentioned above. Response None of the intra group services that are rendered by the Associated Enterprises to SKF India embed a mark-up on costs. The compensation for such activities are on a pure cost basis. Heading Reference in the notice-2.5 Whether such payments are made by any independent concern or entity in any other country through which the SKF Group carries on similar business as that of you. If yes, copies of the agreements for such services and also the basis on which such payments are paid. Response No such payments are made by any independent concern or entity in any other country through which the SKF Group carries on simi....
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.... from. 3.9 Whether the charges paid by the taxpayer for intra group services reflect the same charges for the services that would have been, or would reasonably be expected to be, levied between independent parties dealing at arm's length for comparable services under comparable circumstances. 4.4 Please also clarify as to whether usage transfer of the said technical assistance was by way of package (bundled) price purchase contract. 4.5 The rotes and method of commission of such fees finer technical services that are paid payable to the RFT S. Pun suavity few fees substitutions because in other countries for manufacturing same or similar products under the following categories: 4.6 The rates and method of computation of such fees for technical services in respect of those countries wherein the RFT S.p.a., Italy/your AEs manufactures its products through unrelated parties under the following heads: (a) To & fro transport cost (b) Preparation allowance (c) Hotel stay charges (d) Instruction fee (e) Daily allowance and diet charges (f) Any other fee Pleases file the copies of releva....
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....e was not able to show any proof for having received any services either in regard to the fee paid for technical services or any IT services. According to him, the payments made by the assessee were a tribute by a subsidiary to a holding company and not relatable to any tangible services rendered by the holding company to the assessee. He treated it as an ex-gratia payment. The ALP of the technical services and IT fees were taken at zero. Result was that an adjustment equaling to the total payments alleged to have been made by the assessee to its AE was recommended for u/s.92CA of the Act. 10. When draft assessment orders on the above mentioned lines were issued, assessee preferred to move the DRP. Assessee assailed the rejection of TNMM applied by it on the aggregate of transactions. Assessee also assailed the finding of the TPO that no services were rendered by the AE to the assessee. As per the assessee, technical service fee could not be tested in isolation since technology to manufacture the oil-seals were proprietary to its AE and closely inter linked to the manufacturing process. Assessee once again relied on the agreement entered with its M/s. RFT S. P. A, Italy. It also....
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....d offices of the AE; (3) Teleconferences; and (4) Inputs through emails 14. Ld. AR pointed out that assessee filed a declaration from AE that there was no mark-up on the charges incurred by it while raising the bills on the assessee. Vis-a-vis reimbursement for IT related services, rendered by to M/s. SKF Data Services AB, Sweden, Ld. AR submitted that M/s. SKF Data Services AB, Sweden acted as a centralised facilitator for EDP services. Ld. AR pointed out that services rendered by them for which reimbursement was made on cost basis inter alia included the following : 1 Developing and maintaining common (SKI-' Group) applications as well as FT systems specific to the assessee in India : 2 Providing computer operation capacity and run applications concerning the business of the 3 Providing the assessee with telecommunication, electronic data interchange and electronic mail services; 4 Purchasing software & software licenses using the purchasing power of central acquisition in all service categories as may be necessary or helpful for the development, expansion and improvement of the business of the assessee; 5 Prov....
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.... Claim of the assessee is that it had received technical services relating to its manufacturing line from its AE in Italy, namely RFT S.P.A. As per the assessee payments made to the said company were for said technical services and taxes were duly deducted thereon . In so far as intra-group payments to AE in Sweden are concerned, claim of the assessee is that it was on cost-sharing basis for centralised DTP services done by such subsidiary in Sweden. As per the assessee, the former could not be considered on a stand alone basis since it was closely related to the knowhow for the manufacturing operations of the assessee. Vis-a-vis the latter, claim of the assessee was that there was no profit element for the AE since the allocations were done on appropriate keys. Another argument of the assessee is that in relation to the latter, there was no technology made available by the AE. TPO had on the other hand aggregated the two set of transactions and came to a conclusion that no services were rendered by the AEs namely, one in Italy and the other in Sweden. With regard to the alleged payment of technical services, assessee had an agreement dt.06.04.2005, with RFT S.P.A, Italy. Clauses (....
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.... 6. In addition to the furnishing of technical documents and drawings in accordance with article 5 hereof, RFT will use reasonable efforts to supply, from time to time, appropriate explanations and data to CR India's questions being relevant to know-how and to any other technical information relating to manufacture of Oil seals. Payment 7. For the technical assistance under this agreement, CR India snail pay to RFT, an amount not exceeding 165,000 Euros as technical fee. This technical fee of 165,000 Euros, shall, however, be reduced by the actual cost incurred/reimbursed by CR India towards Traveling and Accommodation expenses of technical personnel sent by RFT and also subject to deduction of applicable Income Tax prevailing on the date of payment and only the balance shall be paid as technical fee. RFT to raise separate invoice for technical assistance fee and debit note for reimbursement of expenses with necessary documents. For the purpose of this clause, any Income Tax deducted at the time of payment, shall be followed by a Tax Deduction Certificate at the end of each quarter following the payment. 8. All payments made to RFT hereunder shal....
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....r the sharing of cost in relation to the IT services. In a similar situation, Hon'ble Delhi High Court in the case of CIT v. Cushman & Wakefield India P. Ltd [(2015) 367 ITR 730] held as under at paras 29 to 46 of its judgment as under : 29. The argument, in this case, is that the assessee only paid for the cost incurred, while an uncontrolled transaction would involve an additional element of profit, thus leading to a greater claim for reimbursement. If true, this would no doubt place this transaction within section 92(3). However this cannot be the case. Undoubtedly certain amounts were charged by the associated enterprises as reimbursement for actual costs incurred. Nevertheless, whether a third party-in an uncontrolled transaction with the assessee would have charged amounts lower, equal to or greater than the amounts claimed by the associated enterprises, CWS and CWHK has to perforce be tested under the various methods prescribed in section 92C of the Act. The question thus required to be addressed-and determined, is whether an independent entity-for the same liaisoning and client interaction services as were provided by CWS and CWHK-charges an amount less than or....
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....on $ US$ India 3037398 82. 44 percent. 1122093 2 42.7 percent. 173990 30031 203931 72.5 150.360 China 369000 10.01 percent. 5859619 22.3 percent. 2 1126 15682 36809 13.1 146.243 Hong Kong 120065 3.26 per cent. 4292851 16.3 percent. 6874 11489 18363 6.5 124.770 Korea 24252 0.66 per cent. 3244992 12.4 percent. 1389 8685 10073 3.6 47.784 Singapore 133782 3.63 per cent. 1655239 6.3 per cent. 7659 4430 12089 4.3 47.926 C & W Asia 3684497 100 per cent. 26273633 100 per cent. 210949 70316 281265 100 percent. 517.083 31. As explained, for 82.44 per cent. share of the revenue from the services of the Client Solution Group, the relatable cost allocation was 72.5 per cent. The precise activities conducted by the Client Solutions Group for the benefit of the assessee out of the entire range of activities conducted by it, and the cost applicable to such activities have not been provided. Instead a broad-brush approach at flatly "equating" the costs relatable to the revenue generated has been pro....
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....fit from that relationship. The Transfer Pricing Officer further noted that no independent enterprise would be willing to engage a third party for such a transaction, and in any case, the associated enterprises means to conduct market research vis-Ã -vis the Indian market was questionable in the absence of any evidence to the contrary. Moreover, the Transfer Pricing Officer noted that the assessee itself had many offices in India which conducted market research, and in that sense, this was merely a duplication of services. The Income-tax Appellate Tribunal reversed this finding (page 63 of 17 ITR(Trib)) : "The assessee has been shown to have earned substantial revenues from IBM and that cannot be the result of only incidental benefit received by the assessee from old business relationship between the holding company of the assessee and IBM. If one wants to obtain revenue upon dealing in real estate, certain work has to be done. All the primary facts were submitted to the Assessing Officer as well as the Transfer Pricing Officer. The names of the parties were mentioned. Without examining any such details, it cannot be said that the revenue earned by the assessee was ....
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.... the Assessing Officer. We do not approve this approach of the Revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrel evant, because whether a particular expense on services received actually benefits an assessee in monetary terms or 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 the arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not ; 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 associated enterprises gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The associated enterprises may have given the same service on gra....
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.... Transfer Pricing Officer is justified in making an adjustment under the arm's length price. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at 'nil' keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at 'nil'." This is a slender yet the crucial distinction that restricts the authority of the Transfer Pricing Officer. Whilst the report of the Transfer Pricing Officer in this case ultimately noted that the arm's length price was 'nil', since a ....
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....cerned Assessing Officer, for an arm's length price assessment by the Transfer Pricing Officer, followed by the Assessing Officer's assessment order in accordance with law. 38. The second issue which arises in these proceedings concerned the disallowance of referral fees paid by the assessee to various associated enterprises, for the referral of clients in the real estate business to the assessee. This was referred by the Assessing Officer to the Transfer Pricing Officer, who in this report stated that "no adverse inference is drawn". The assessee had-in its own transfer pricing analysis-conducted a benchmarking for these transactions, through the comparable uncontrolled prices ("CUP") method, with which the Transfer Pricing Officer found no infirmity. The Assessing Officer subsequently, however, found that no services were actually rendered for which referral fees was to be paid. The findings of the Assessing Officer are extracted below : "4.5 Repeatedly during the course of the hearings, the assessee- company bad been asked to match each transaction in the list to work done by the group entity specifically in relation to the property trans action done bu....
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.... done directly ; secondly, on the merits, the Income-tax Appellate Tribunal held that "the assessee has submitted ample evidence to support the expenditure and it was shown that such expenditure is incurred with respect to revenue earned by the assessee on property transaction referred to the assessee by its associate enterprises". 40. On the first ground, this court notes that the jurisdiction of the Assessing Officer, under section 37, and the Transfer Pricing Officer, under section 92CA, are distinct. A referral by the Assessing Officer to the Transfer Pricing Officer is only for the limited purpose of determining the arm's length price, based on a prima facie view that such a referral is necessary. It does not imply a concrete view as to the existence of services, or the accrual of benefit (such that allowance under section 37 must be permitted). This very argument was considered and rejected by the Incometax Appellate Tribunal in Deloitte (supra) (page 401 of 19 ITR (Trib)) : "The second argument of learned counsel that the Transfer Pricing Officer is not empowered to disallow the expenditure and that the very reference to the Transfer Pricing Officer by ....
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....is perfectly pos sible that, independent of the circular, the Assessing Officer might still 'consider it necessary or expedient' to refer an international trans action of such value to the Transfer Pricing Officer for determination of the arm's length price. At the same time it is not as if the trans actions of the value of less than Rs. 5 crores cannot be referred to the Transfer Pricing Officer by the Assessing Officer. Ultimately, any exercise of discretion by the Assessing Officer is bound to be judicially reviewed by the statutory appellate authorities as well as by the courts. Therefore, it is not as if there is no check on the exercise of discretion by the Assessing Officer." The Assessing Officer can, therefore, determine under section 37 that the expenditure claimed (in this case, the referral fees) was not for the benefit of the business, and thus, disallow that amount. This does not restrict or in any way bypass the functions of the Transfer Pricing Officer. Quite to the contrary, it represents the correct division of jurisdiction between the two entities. 41. On the merits, the court notes that the referral fees was paid according to "inter....
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....ty of the Assessing Officer under section 37 curtailed in any manner by a reference under section 92C. This distinction is crucial in order to maintain the statutory authority of the Assessing Officer to assess the stated income as against the provisions of the Act, rather than accept the assessee's assertions by foreclosing the enquiry. The finding of the Income- tax Appellate Tribunal that the Assessing Officer could not have gone into the matter of whether the referral actually took place (based on evidence provided by the assessee) after referring the matter to the Transfer Pricing Officer is thus incorrect. The Assessing Officer can and indeed should conduct that exercise, lest correctly priced deductions based on non-existent paper transactions funnel through section 37. 43. In view of the above discussion and analysis of the statutory provisions, two issues on the merits of the Assessing Officer's assessment assume importance. Firstly, having regard to the Transfer Pricing Officer's stamp of approval to the fees charged for the stated (though still not proven) referral transactions, the Assessing Officer was bound to accept that finding ; it is, post-200....
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....other entity. There is no evidence submitted regarding the services provided by the group entities to merit the referral fee. Copies of some invoices are also given but again raising invoices does not substantiate or gives proof of the work done by the group entities. 4.9 The assessee has not been able to demonstrate as to how the Indian entities from whom income was generated on account of rendering off services, etc., is linked to the associate enterprise of the assessee to whom referral fee is paid. In simpler words the link between the clients based in India and the associate enterprises of the assessee-company which could enable their referral in the first instance has not been established. The assessee's case is a pure and simple case of tax planning otherwise." (emphasis supplied) Based on the evidence provided by the assessee, the Assessing Officer found that there was no underlying referral that justified the payment of fees (which, if the transactions were genuine, would have been at the arm's length as per the Transfer Pricing Officer) and, thus, the expenditure was not for a business purpose. This clearly lies within the Assessing Officer's....
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....rm's length price assessment by the Transfer Pricing Officer, followed by the Assessing Officer's assessment order in accordance with law. On the question of referral fees, the report of the Transfer Pricing Officer validating the arm's length price of the transactions is binding on the Assessing Officer, who may verify the transactions and assess the deductions under section 37 of the Act in accordance with law. For these reasons, the appeal is partly allowed. There shall be no order as to costs. 19. In our opinion, there is no doubt that assessee has to establish receipt of benefits on account of services rendered by its AEs and these were compensated on a level comparable to payments that would have been made if similar services were received from unrelated parties or in an uncontrolled transaction. At the same time, it is not open for the TPO to consider that there was no benefit whatever received by the assessee without verifying the documentation submitted by the assessee. As per the assessee, it had evidence to show that there was considerable correspondence between the AE and itself which could amply prove rendering of services by the AEs to the assessee . Th....
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....ces, Sweden, to the assessee in terms of DTAA. 22. Per contra, Ld. DR supported the orders of lower authorities. 23. We have perused the orders and heard the rival contentions. AO had in the draft assessment order noted that assessee had not deducted tax at source on payments effected to SKF Data Services, Sweden. As per the AO no supporting evidence was filed by the assessee to show that these were reimbursement of expenditure. AO also noted that assessee was selling its entire product line in India and there could not be any services rendered by M/s. SKF Data Services in Sweden, for such business operations. According to him, payments were unrelated to business of assessee in India. What we find is that none of the lower authorities had carefully looked into the "make available" clause in Article 12(4) of the DTAA between India and Canada which was called into operation by the assessee. Lower authorities did not look into the applicability of the DTAA in relation to the alleged cost sharing passed on by M/s. SKF Data Services, Sweden, to the assessee for the IT related services. Question whether any technical services were rendered by M/s. SKF Data Services, Sweden, to the ....