TaxTMI 
TaxTMI 
2017 (6) TMI 123
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....siness Division (PBD) and National Starch and Chemicals Division (NSC). 3. First we shall take up for consideration issues raised by the Assessee and the Revenue arising out of application of the provisions of Sec.92 of the Income Tax Act, 1961 (Act), viz., Transfer Pricing Regulations. 4. Akzo Nobel group, of which the Assessee is a part, operates through subsidiaries in various countries. Akzo Nobel N.V. is the ultimate holding company. Akzo Nobel Paints (Asia Pacific) Pte Ltd. (hereinafter referred to as 'ANPAP') is another company belonging to the Akzo Nobel group. ANPAP provides to Akzo Nobel group companies in various countries support services in the field of human resources, marketing support, information technology and similar other areas. Under an Agreement dated 8.12.2006 which is titled as "Service Level Agreement" (hereinafter referred to as SLA) between the Assessee and ANPAP, ANPAP agreed to render services set out in Schedule to the SLA to the Assessee. The services set out in the Schedule to the Agreement relates to (i) Advise/support in the area of human resources to attain functional excellence (ii) Advise and assistance on operation relating to Plant (iii)....
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....b of payments or receipts for intra group services. Therefore it is necessary to examine MNE groups' pricing and transaction structures in respect of allocation of common costs. Section 92 (1) of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price (ALP). Sec.92(2) of the Act provides that where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. Arm's Length Price has not been defined in the Act but Section 92C(1) provides that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regar....
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....ansaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, and secondly, whether that amount meets ALP criterion. 9. The following aspects would require consideration in order to identify intragroup services requiring arm's length remuneration: - Whether services were received from related party. - Nature of services including quantum of services received by the related party. - Services were provided in order to meet specific need of recipient of the services. - The economic and commercial benefits derived by the recipient of intragroup services. - In comparable circumstances an independent enterprise would be willing to pay the price for such services? - An independent third party would be willing and able to provide such services? Whether payment made to AE meets ALP criterion will be de....
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....ver ALP has to be determined to make a reference to TPO to determine ALP of an international Transaction. The gist of all these discussion by the TPO in his order is that MNEs prefer centralising common services and costs and doing so has an economic rationale. A taxpayer should be able to show that intra group services have been rendered and that the Indian taxpayer has received an economic or commercial benefit that has enhanced commercial position of the recipient. This test, known as the benefit test, has to be satisfied. The transaction related to the provision of services would be at arm's length only where a benefit is provided to an entity by way of provision of services, and there should be a real connection between the operation of the enterprise which is providing services and the enterprise which is expected to pay for the same. In other words, the tests laid down by the Hon'ble Delhi High Court in the case of Cushman & Wakefield (supra) should be satisfied. 13. Another aspect which the TPO has highlighted in his order is the decision of the Hon'ble Supreme Court in the case of DIT (IT) Vs. Morgan Stanley & Co. (2007) 162 Taxman 165 (SC). According to the TPO the Hon....
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....nformation technology and similar other areas. According to the Assessee, such services enable the worldwide Akzo Group entities to have a full access to the extensive resources and expertise available in these specific functional areas for the benefit of the Akzo Group. Such a policy enables the Akzo Group entities to anticipate commercial developments on a global basis and to apply them effectively to business situations. In addition, it gives substantial savings in total costs when compared with those that would otherwise be incurred if they were organized by individual Akzo Group companies in various countries. The nature of the support services provided by ANPAP and their functional categories were described by the Assessee as give below: * Information Technology The assessee receives assistance in a range of services which include support in development and implementation of IT plans and strategies, monitoring of IT services, provides training to understand various IT interfaces, assist in developing contents of websites, provides onsite/ remote support services to resolve issues associated with configuring applications, antivirus and IT security from outside threats. A....
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....mplementing of marketing strategies and policies, updating on global market trends and indices, assisting on developing and conducting product awareness programmes - with implementation personnel, assisting in building up new product demand, assisting in effective designing, advertising, brand development, promotion campaigns, training and coaching programmes. * Finance and Planning The assessee is exposed to various compliance risks in the course of its ordinary activities. Its image and reputation may be adversely impacted by non-compliance with the various data privacy and product security laws. Compliance procedures have been adopted by the assessee to ensure that the use of resources is consistent with laws, regulations and policies, and that resources are safeguarded against waste, loss and misuse. Ineffective compliance procedures relating to the safeguarding of assets could have an adverse effect on the financial results. The AE provides a various services in the field of finance and planning which includes advice and assistance on reporting/ accounting, financial control and planning activities, internal audit reviews and process improvemen"21. It can be seen from th....
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....ices rendered by ANPAP to the Assessee. This certificate is at pages 792 to 801 of the Assessee's paper book. 20. The TPO has not disputed the above cost allocation as well as the fact that the comparative cost charged by unrelated parties for similar services was at a margin of 5.1% of the cost. The TPO did not consider this aspect at all because he proceeded on the basis that the nature of services rendered were in the nature of stewardship activity and therefore no charges ought to have been paid by the Assessee. He therefore held that the entire sum paid by the Assessee to ANPAP had to be added to the total income of the Assessee. The relevant observation of the TPO in this regard is found in para-21 at page-67 of his order, which reads as follows: "21. It can be seen from the above that the services performed by the AEs of the Assessee (directly or through other AEs) fall into the category of stewardship activity as defined by Hon'ble Supreme Court of India (to say nothing about the charge for such services being not in consonance with the type of services provided)." 21. Therefore, in this appeal, the question we need to decide is as to whether the services rendered ....
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....) 292 ITR 416 (SC) to discuss the nature of stewardship services. To this extent, this judicial decision is relevant to the case of the asessee though the business model may be different. 1.4.6. Thus, the services provided by Akzo Nobel Paints (Asia Pacific) Pte Ltd benefit the parent as well as the assessee in India. To the extent the services have helped the parent to exercise supervision and control over the group entities, it amounts to stewardship services. The remaining services have benefitted both the parent and the subsidiary in India. How much of the benefit can be attributed to the parent and to the unit in India is a subjective matter and the dividing line lies in between. The assessee has not even attempted to discuss this aspect of the services provided from Akzo Nobel Paints (Asia Pacific) Pte Ltd. 1.4.7. From the foregoing discussion, it is evident that the benefit out of intra group services has accrued to the assessee in India as well as to the group parent also. However, the proportion of benefits accruing to each party remains indeterminate. In view of this, we are of the opinion that no interference is called for in the determination made by the TPO. 2....
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....ant for the said transaction in accordance with the Income-tax Rules, 1962 for the determination of the Arm's Length Price Further, Learned Panel and consequently the Ld. AO erred in not giving any reason to reject the transactional level economic analysis. 6. That the appellant craves leave to add to and/ or amend, alter, modify or rescind the grounds hereinabove before or at the time of hearing of the appeal. 24. The learned counsel for the Assessee reiterated submissions made before the DRP/TPO and drew our attention to the evidence in support of the services received by the Assessee from its AE, the rationale/need for services so received vis-à-vis the business of the Assessee, benefit received by the Assessee, the benchmarking approach adopted by the Assessee from recipient's perspective and also from the service provider's perspective, manner of allocation of costs by the service provider vis-à-vis the Assessee. He also explained the meaning of nature of stewardship services and as to how the payment made by the Assessee to its AE, are not in the nature of stewardship services. He drew our attention to certain decided cases of Hon'ble High Courts in In....
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....e benefit of the individual companies of the Akzo group. The group companies would have access to the resources and would pay appropriate consideration which would be commensurate with the amount paid to third party service providers. These support services relate to certain functional categories which have set out in the earlier part of this order and hence, we do no wish to repeat the same. As we have already observed in the earlier part of this order, the practice of multinational enterprises providing intra group services is a global practice wherein, various activities are frequently concentrated for the benefit of the entire group. Since, the multinational group operates globally, such concentration is essential to be able to react in the most flexible and cost effective manner. According to the assessee the benefits derived from availing the above services outweigh the cost incurred in receiving such services. It is also the claim of the Assessee that with the help of such centralized services it achieved substantial cost efficiencies and hence it would be incorrect to categorise such services to be in the nature of stewardship services. It is the claim of the Assessee that ....
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....ses of only those activities whose sole effect is to protect the parent company's capital investment in the related corporation and/or to facilitate compliance with legal requirements applicable specifically to the parent company. The TPO has highlighted the following as stewardship activity based on the decisions of US Courts: Description Nature of service Requirements and procedures to maintain confidentiality on account of world- wide operations Stewardship activity Requiring the subsidiary/related entity to act according to the quality control specifications -Do- Briefing of the staff of the subsidiary/related entity to ensure that the output meets the requirements of the parent company/group -Do- Overall monitoring of the operations of the subsidiary/related entity (other than day-to- day management) -Do- The TPO based on the decisions of the US Courts, has also culled out list of supervisory or stewardship activities, for which the recipients should not have been charged even when they benefitted from the services. Reference Service Details Remarks Para 83 Seeing to it that the subsidiary (service recipient) develops materia....
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....isputed by the TPO that had the assessee not received such support from ANPAP, it would need to perform the functions in-house, or hire experienced and trained service providers. Such services are thus not in the nature of simply oversight functions, which have been performed by ANPAP to protect its investment in the company. With regard to the services received from ANPAP, the company has submitted detailed evidences to the Ld. TPO in the form of emails, communications and reports which evidence the rendering of services and the ensuing benefits. These have been given in Annexure-"A" to this order. Nature of service i.e. Information Technology, Human Resource, Operations, Purchasing, Marketing Support, Finance and Planning has been evidenced by way of such communication/ documents. It was neither disputed by the TPO that apart from services which are received in the form of emails, reports, documents etc. from ANPAP, the assessee also received constant and continuous information over calls, audio-video conferences, personal visits etc. Therefore, the benefits received in the above form ought to have been given due consideration. Hence, for the purpose of demonstration and explanat....
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....rvices were rendered by ANPAP to the Assessee and that the Assessee benefitted from such services. Once this conclusion is arrived at then the case of the TPO that the nature of services were shareholder activity or stewardship activity cannot be sustained. Having held so, the DRP contradicted its own finding by holding that majority of the services helped the parent company in supervising and controlling subsidiary company and therefore the services were in the nature of "Stewardship Services". The DRP has not spelt out as to what were the services that benefited the Assessee and what were the services that benefitted the parent company. The DRP also concluded that some benefit would have accrued to the Assessee as a result of such services but such services cannot be determined with certainty and therefore the conclusion of the TPO should be upheld. Without pointed out how services rendered cannot be segregated as benefiting the parent company and that benefiting the group companies, the DRP could not have come to such a conclusion. 32. We therefore conclude that the assessee has established the nature of services including quantum of services received from ANPAP, that service....
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....income as adjustment to the Arm's Length Price of the international transaction. The DRP deleted the addition made by the TPO. The issue in Revenue's appeal is as to whether the DRP was justified in coming to the conclusion that the payment made by the Asssessee to ANDC under TSA was at Arm's Length. 34. Services received by the Assessee from "ANDC": Under TSA ANDC a group company of 'AkzoNobel group' implemented SAP programme in all the participating group companies. The Assessee also participated in the said programme known as "Project Trinity". The above arrangement refers to the support received for installation of SAP ERP in the locations of the assessee and other group companies. The above arrangement i.e. SAP implementation is exclusively for Akzo Nobel N. V. group of companies and services similar to above have not been provided to any third party. In relation to SAP deployment and implementation, ANDC acts as a cost pooling and recharging centre wherein the costs are recharged to the Akzo Nobel N.V. group of companies on the basis of principles defined in the agreement for each category of cost by ANDC and under each stage from deployment of SAP to its final imp....
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.... running of the business. It improves alignment of strategies and operations and helps in achieving corporate objectives by aligning workforce and organizational objectives. Implementation of SAP leads to improved productivity and reduce costs through increased flexibility. It also helps in increased profitability, improved financial control, and management of risk: as well as optimization of IT spending. 36. The TPO determined the value of the international transaction to be nil, and held that the provision of services by ANDC were in the nature of stewardship functions. The TPO challenged the commercial expediency and wisdom of the assessee in installation of SAP software based on the legitimate business requirements of the assessee and concluded that the assessee's operation levels do not justify SAP implementation. The TPO refused to accept the plea of the Assessee that SAP implementation was meant to augment the operational efficiency of assessee and consequently concluded that the entire process is a part of quality control, supervision and monitoring function of the group. 37. Before DRP the Assessee reiterated submissions made before the TPO. In particular, it was....
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....nsaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. It was submitted that the TPO is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 39. It was submitted that evidence of communications, training manuals and other documents and evidence of valuable assistance provided by ANDC as well as the nature of services received under the framework were fully explained. The same is also given in the form of a chart and given as Annexure "B" to this order. 40. After considering the submissions made before it, the DRP deleted the addition made by the TPO for the following reasons: "2.5....
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....otus Notes based system for approvals in various areas as well as for all master data uploads e.g. customer master, material master, vendor master uploads in SAP. * The Lotus Notes workflow tool sends out mails to different people in the hierarchy and helps them in, forwarding for approval, approving or rejecting the exceptions /.blocks happening in the SAP system. It uses Lotus' Enterprise Integrator-product to pull / push data from SAP. The system is used in credit approval, material returns approval, adhocs approval and cheque dishonor workflow support for SAP. All-the above system are seamlessly integrated with each other through a set of complex interface programs, which run automatically without any manual interventions in most of the cases. 2.5.5 Thus, the top five benefits of SAP include: 1) Information available across organisation as a whole rather than 'multiple versions of the truth' 2) Better financia1 reporting:. ' 3) Less duplication' and time wasting across the board 4) Better aligned Cross-departmental processes 5) Enabling better regulatory compliance 2.5.6 The observation of the TPO that SAP is not feasible for the....
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....r uncontrolled comparable companies. The average of margins earned by functionally comparable companies is 8.29%. The profitability of the company after taking into account the payments for intra-group services is:9.54% which is as per the arm's length standard. 2.5.10. The nature of services received from the AE are in conjunction with its primary and only business segment i.e. manufacturing and selling *of paints. These services are continuous in nature to the primary and only business segment of the assessee. Owning to, this fact and business reality of the assessee it has also benchmarked the prices of this international transaction by undertaking entity level bench marking. Even after considering the payment of management service charge, the, assessee's net margin. is greater than its comparable companies. 2.5.11. In view of the above this panel holds this issue in favour of the assessee and the grounds raised in this regard are allowed. 41. Aggrieved by the order of the DRP deleting the addition made consequent to determination of ALP as above, the revenue has preferred Gr.No.3 before the Tribunal in its appeal. Gr.No.3 raised by the Revenue reads as follows:....
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....P panel has acknowledged that the Aseessee runs SAP hosted through head office at Gurgaon and that the system is used by the following teams of the Assessee spread across India: 1. 60 depots of the Assessee across India, for sales order and billing, sales return, material receipt from factories, inter depot stock transfer, etc.; 2. 4 regional sales offices for credit management, bank reconciliation, bill booking, accounts payable and journal voucher; 3. 3 factories for back-end operations like manufacturing, shop floor control, purchasing, accounts payable, etc; 4. Head office for master data management (customer, vendor, product, price). It is used for product costing and finished products stock valuation. Thus, the fact that the Assessee had used SAP software for integrating the process at the above varied locations for the business stands established. This ensures that one version of the data is available at all locations thereby providing huge benefits to accounting and manufacturing processes of the Assessee's business. Apart from above, the use of SAP by the Assessee in its business includes: 1. Planning and manufacturing processes; 2. Approval proces....
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....the case the Ld. Members of the DRP erred in not taking the fact into account that the assessee company failed to prove the identical amount claimed for bad debt which otherwise turns. squarely reverse." The Revenue has filed an application seeking to raise the following additional ground of appeal. "That in the facts and in law of the case Ld. Members of the DRP erred in consideration of sale of rubber chemical business of the company as slump sale in lieu of itemized sale of assets and thereby disallowing the adjustment of sale consideration with the block of assets and thereby lowering the WDV of the block of assets." 46. As far as ground no.1 raised by the revenue is concerned the same relates to the disallowance u/s 14A of the Act. During the relevant previous year, the Assessee earned income of Rs. 10,27,44,063/- which is not chargeable to tax under Chapter III of the Act, which deals with income which does not form part of the total income. Sec.14-A of the Act provides that no expenditure which is incurred for the purpose of earning income which does not form part of the total income under the Act, shall be allowed as a deduction in computing total income. Rule 8D o....
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....nces 2,826,000,000 3,196,300,000 13,324,900,000 11,559,500,000 Average of op and closing assets 12,442,200,000 Particulars of exempt investments 31.03.2009 31.03.2008 6.75% Government of India Tax free bonds 6,204,630 ICICI Bank Limited 2,135,410 2,135,410 Total 2,135,410 8,340,040 Average Investments 5,237,725 48. Since total expenses disallowable under section 14A works out to Rs. 29,74,601/- (Rs.29,36,078 under Rule 8D(2)(i), + Rs. 12,334/- under Rule 8D(2)(ii) + and Rs. 26,189/- under Rule 8D(2)(iii)) and since assessee has already suo motto disallowed Rs. 2,41,131/- the balance amount of Rs. 27,33,470/- was disallowed by the AO and added to the total income of the Assessee. 49. Before the DRP the assessee submitted that there was no borrowed funds on which interest was paid that was used to make investments which yielded tax payable income and that the entire investments were made out of assessee's own funds. The assessee accordingly prayed that there can be no disallowance of interest expenses in terms of Rule 8D(2)(i) & (ii) of the Rules. As fa....
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....revenue is dismissed. 53. As far as ground no.2 raised by the revenue is concerned the facts are that the assessee claimed deduction on account of bad debts written off of a sum of Rs. 3,24,04,575/-. The assessee filed party-wise break up of the bad debts written off during the previous year. The AO however disallowed the claim of the assessee for deduction on account of bad debts for the reason that the assessee failed to provide the evidence in support of write off of bad debts. In other words, the AO was of the view that the debt in question has not been established by the assessee to have become bad and therefore deduction on account of bad debts written off cannot be allowed. 54. On objections by the assessee against the above order of the AO, the DRP allowed the claim of the assessee observing as follows :- "6.2. With the amendment to 36(1)(vii) and 36(2) vide Direct tax laws (Amendment) Act, 1987, there is no more requirement to prove that the debt has actually gone bad. It is enough in case the debts are written off as bad in the account of the assessee. 6.3. Further, attention is invited toward Circular No.551 dated 23-01-1990 (1990) 183 ITR St 37 issued by CBDT w....
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....he transfer pricing issues in the earlier part of this order. 57. As far as the additional ground of appeal raised by the revenue is concerned the facts are that the Assessee sold its Rubber Chemical business to M/s PMC Rubber Chemicals on slump sale basis during the previous year relevant to AY 2006-07. However, in the order passed u/s 143(3) for AY 2006-07, the Assessing Officer did not accept that there was a slum sale and treated the sale as an item wise sale of assets u/s 41(2) of the Act. Consequently, the Assessing Officer did not accept the value of opening written down value (wdv) of block of assets as claimed by the Assessee, which he determined at a lower figure consequent to his finding that there was itemised sale of assets and not a slump sale. The action of the AO resulted in disallowance of depreciation in AY 2006-07 and consequently the WDV of the depreciable assets also was shown at a lesser figure. The depreciation claimed by the Assessee in this year as per the return of income was also substantially reduced because of the lower WDV on which depreciation was to be allowed as a consequence of the action of the AO in AY 2006-07. This resulted in lower allowance....