TaxTMI 
TaxTMI 
TaxTMI 
2018 (10) TMI 583
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.... owned subsidiary of AT &S Austria Technologie & Systemtechnik Aktiongesellschaft ('AT &S Austria') and is primarily engaged into the business of manufacture and sale of printed circuit boards. AT &S Austria undertakes distribution of PCB manufactured-by AT &S India and earns commission for distribution functions. 1.1 The assessee filed e-return of income for the previous year relevant to the assessment year 2011-12 on 29th November, 2011 declaring total loss of INR 74,11,66,860/-. During FY under consideration, the assessee reported international transactions representing payment made towards CCA for services, purchase of raw material and sale of finished goods. 1.2 For purposes of benchmarking international transactions of purchase/ sale, the assessee adopted AT &S Austria as tested party and TNMM as MAM with OP/Sales as PLI. Using AMADEUS database, the assessee selected certain companies as corn parables based in different jurisdictions in Europe and worked out average profit margin of 2.79% as against profit margin of 2.57% in case of AT &T Austria, thereby demonstrating that foreign AE has drawn less profit from Indian entity. For benchmarking amount paid/received ....
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.... Particulars 1. IBM e-business Hosting and e- business Hosting Centers provide the Web hosting services to the AT&S group worldwide (including the assessee). For the purpose receiving the aforesaid service, IBM installs various information technology products (hardware and software) at the premises of the group companies. List of IBM products installed (Windows, i5/OS, AIX) as mentioned in page no. 317 of the paperbook List of software and other information technology products installed (Worldwide Tool Set, Operating System, back-up and recovery media services, media and storage extension, Performance Tools Manager, Application Development Manager, etc.) as mentioned in page no. 318 of the paperbook. 2. IBM helps manage and monitor the IBM products, SAP products and Microsoft products installed at AT&S group companies (including the assessee) List of information technology products [SAP enterprise, BW (SAP), SCM (SAP), DB2.90 (IBM), Windows 2003 Server (Microsoft)] managed and monitored by IBM as mentioned in page no. 319 of the paperbook. 3. IBM System Software Products installed A detailed list of IBM System Software products installed is provided in page no. 320 of th....
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.... Volume Licencing Agreement (sample) and the nature of support received under the aforesaid agreements for the group companies (including the assessee) are described in nutshell below: Sl.No. Particulars Paperbook page reference Microsoft Premier Support Agreement 1. Support Account Management Software 386 2. Premiere Online Website: AT&S group companies are Microsoft Premier Online user. 389 3. Support Webcast Software: Operations guide for Microsoft Windows Server Update Services 389 4. Infrastructure Support Assistance Software Development Support Assistance Software for training programmes, workshop and laboratories 390 5. Customer Support manager 394 6. System Management/Security Software 394 7. Preferred support team from Microsoft 395 Microsoft Volume Licencing Agreement 1. The select licensed program 399 (Simple Google Translation Enclosed) 2. Licensing-What accession companies can make use of 3. What product use rights find application 4. Ordering product licence 5. Production of product copies and re-imaging 6. Transfer and renewal of licence B). Nature of support received from SAP AT&S Austria has entered into 'SAP Business....
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....his category of service includes provision of video conferencing facility at the office premise. F). Help Tickets The assessee under the CCA received IT services from independent serviceproviders viz., Siemens and ATOS during the relevant financial year. The AT&S AG, in order to resolve day- to-day IT related problems (e.g. Lotus Note related problems, SAP related problems etc.), entered into service contracts with Siemens (for example, 'SAP Application Management Framework Contract' signed with Siemens) and ATOS. The assessee enclosed sample copies of help tickets. Independent Auditor's Certificate The assessee enclosed independent auditor's certificate on benefit received and allocation of cost under the CCA. The independent auditor PwC Wirtschaftsprufung GmbH certified that the allocation keys used for distributing total costs to the individual AT&S subsidiaries adequately reflect the benefits obtained by the individual AT&S subsidiaries from the underlying services." 5. The DRP-2, New Delhi vide its order dated 21.12.2015 on para 9 to 9.2 held as follows:- 9.0. Finding: 9.1. "DRP has duly examined the issue. The TPO has determined ALP of payments ma....
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....s prescribed under sub-section (l) read with sub-section (2) of section 92C of the Act for determining the arm's length price of the aforesaid international transactions at NIL value. My aforesaid view has been confirmed by the Hon'ble Kolkata Tribunal in the case of NLC Nalco (India) Ltd (supra)." 7. Aggrieved, the Revenue is in appeal before us on the following grounds:- 1) "Where the Ld DRP has erred in law and in facts in concluding that the intra-group services provided by the AE under the head of IT services are not in the nature of stewardship activities, ignoring the details of IT services provided by the AE, which clearly indicate that the services were meant for exercising overall control and supervision over the assessee company and in the nature of stewardship activities. 2) Whether the Ld. DRP has erred in law and in facts in concluding that the payment for intra-group services was at arm's length without examining the cost of such services if the same was procured from any independent services provider and without examining mark-up element incorporated in the quantum of service fee charged by the AE. 3) The appellant craves leave to add, alter or mo....
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....n of foreign Courts. (b) The TPO has not complied with the relevant provision of Chapter X of the Act and specifically to sub-section 1,2,3 of section 92CA r.w.s. subsection (3) of section 92C. It was submitted that the TPO is authorised to proceed to determine the ALP in relation to the international transactions, only when any circumstances mentioned in Clause (a) to (d) of section 92C(3) of the Act is satisfied. Reliance is placed on the following decisions:- (i) NLC Nalco (India) Ltd. vs DCIT, Circle-10, Kolkata [2016] 71 taxmann.com 57 (Kolkata Tirb.) (ii) CIT vs EKL Appliances [2012] 24 taxmann.com 199 (Delhi) (c) Reliance was also placed on the judgement of Hon'ble Delhi High Court in the case of CIT-I vs Cushman & Wakefield (India) P.Ltd. [2014] 46 taxmann.com 317 (Delhi) and it was argued that the authority of the TPO is to conduct a transfer pricing analysis to determine the arm's length price and not to determine as to whether the services in question is for the benefit of the assessee or not and that such an exercise would fall within the domain of the AO u/s 37(1) of the Act. (d) That the assessee has furnished all the documentation including the agreements, ....
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....ion Agreement' ('CCA') the detailed terms and conditions of which are mentioned in the Ld. TPO's order. On perusal of this agreement, it is noted that all the parties to the aforesaid agreement combined together and contributed to a common fund for financing the object of arranging various services including the information technology ('IT') services for all the parties to the said agreement. It is further noted that the price of the globally rendered services under the CCA was calculated on the basis of the total costs of each service on actual basis divided by applicable allocation keys as agreed under the CCA and no profit element was added to the costs incurred under the CCA for the purpose of allocation of the same to the parties of the agreement. As per the CCA, AT&S HK, having been one of the parties to the CCA, acted as administrator to the periodical cost allocation process agreed under the CCA and collected payments from the contributing companies that received services under the CCA. 3. I have carefully noted that the appellant submitted the detailed nature of IT services to the Ld. TPO along with evidences of receipt of services on sample basis....
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....er Pricing Regulation, various judicial precedents in the USA and OECD guidelines/reports/commentaries. In this connection, the appellant placed reliance on the decision of the Hon'ble Supreme Court in the matter of Hon'ble Supreme Court of India in the matter of CIT v. A. Gajapathy Naidu reported in [1964] 53 ITR 114 wherein the Court interalia held that the provisions of the Indian Income-tax Act shall be construed on their own terms without drawing any analogy from English statutes whose terms may superficially appear to be similar but on a deeper scrutiny may reveal differences not only in the wording but also in the meaning a particular expression has acquired in the context of the development of law in that country. The appellant had placed reliance on the decision of the Hon'ble Supreme Court in the case of World Wide Agencies Pvt. Ltd. And Anr. Vs. Mrs. Margarat T. Desor And Ors. [1990 AIR 737] wherein the Court interalia held that the decision of the English Courts are not binding in the courts of India. 7. In this connection, the appellant further placed reliance on the decision of the Ahmedabad Tribunal in the matter of Micro Ink Ltd vs. Additional Commissi....
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..... 10. In rebuttal of the allegation that the intra-group activity performed under the CCA constituted 'stewardship activity', the Ld A.R for the appellant further submitted as under: "Your kindself may please note that the TPO wrongfully applied the principle enunciated Group) is one of the world's largest diversifying financial services companies. Morgan Stanley and Co., USA (hereinafter referred to as 'MSCo ') is an investment bank engaged in the business of providing financial advisory services, corporate lending and securities underwriting. One of the group companies of Morgan Stanley, namely, Morgan Stanley Advantages Services Pvt Ltd. India (hereinafter referred to as "MSAS') entered into an agreement with MSCo for providing certain support services to the MSCo. MSCo sent its own employees (stewards) to MSAS for monitoring the activities performed by MSAS in India. The Hon'ble Supreme Court interalia held that stewardship activities involved briefing of the MSAS staff to ensure that the output met the requirements of MSCo. These activities included monitoring of the outsourcing operations at MSAS. The object was to protect the interest of the M....
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.... does not apply on the facts of the appellant's case and hence, the services rendered under the CCA cannot be termed as stewardship activities." 11.It was further the contention of the appellant that the AO/TPO allowed the payment made by the appellant for receipt of shared IT services under the CCA for the previous year relevant to the assessment year 2008-09. Thus the AO/TPO violated the 'principle of consistency' enunciated by the Hon'ble Supreme Court of India in the case of Radhasoami Satsang v. CIT reported in [1992] 193 ITR 321/60 Taxman 248 and DIT (International Taxation) v. Morgan Stanley and Co. Inc. reported in [2007] 292 ITR 416 (SC) and also in the case of Commissioner of Income Tax, Delhi-IV, Appellant (s) versus M/s. Dalmia Promoters & Devels. (P) Ltd Respondent(s) reported in [2015] 5 ITR-OL 277 (SC). The consistency principle has been confirmed by the Hon'ble Kolkata Tribunal in the matter of AT&S India (P.) Ltd vs. DCIT reported in[2016] 72 taxmann.com 324 (Kolkata - Trib.). 12.It was further the contention of the appellant that the Dispute Resolution Panel ("DRP') deleted the adjustments made by the AO for the AY 2011-12 and 2012-13 i....
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.... in [2015] 59 taxmann.com 105 (Bombay). The assessee was a foreign company engaged in shipping business. It had three agents in India to book cargo. In order to help them in the business, the assessee had procured and maintained a global telecommunication facility called Maersk Net against some payments by agents which were treated as reimbursement of expenses. The Assessing Officer field that the amounts paid by these three agents to the assessee were considerations / fees for technical services rendered by the assessee and, accordingly, held them to be taxable in India. The Hon'ble High Court interalia held that there was no profit elements in the pro rata costs paid by the agents of the assessee to the assessee and accordingly, the amounts paid by the agents to the assessee could not be brought to tax. Attention is further invited to the decision of the Hon'ble Chennai Tribunal in the case of Cairn Energy India (P) Ltd. vs ACIT (ITA. Nos. 208 to 211 (Mds.)/2006, Assessment Year 1996-97 to 1999-2000), wherein it was Interalia held that no income accrued or had arisen to the parent company from the payments made by way of reimbursement of expenses. Hence, the provision o....
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....Computation provision / machinery provision cannot replace or substitute the charging provisions. It is pertinent to note that the Income Tax Department did not file any appeal against the decision rendered by the Hon'ble Bombay High Court in the higher forum. In the instant case, since the costs recovered by the associated enterprise from the appellant did not constitute income chargeable to tax in India in the hands of the associated enterprise, the same had not attracted the computation provision / machinery provision contained in Chapter X of the Income-tax Act, 1961, for determination of arm's length price of an international transaction. In view of this, we humbly pray to your kindself to delete the adjustment of INR 4,31,39,000/- made by the AD in respect of the international transaction involving payment of shared IT service cost by the appellant to its associated enterprise. Principle of Mutuality Attention is invited to the decision of the Hon'ble Supreme Court in the case of CIT vs. Bankipur Club Ltd reported in [1997] 92Taxmann 278 (SC), wherein the Hon'ble Apex Court, by taking a cue from Halsbury Laws of England, has enunciated the following prin....
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....fied by the independent auditor of the parent company of the appellant, namely, PwC Wirtschaftsprufung GmbH for the relevant year. In view of our above submissions, it may please be appreciated that in the instant case, the three conditions for applicability of the principle of mutuality, as directed by the Hon'ble High Court of Delhi in the case of Delhi Gymkhana Club Ltd (supra), are satisfied. Hence, the sum of INR 4,31,39,000/- paid by the appellant for receipt of IT shared services satisfies the above principle of mutuality and the same does not constitute income chargeable to tax in the hands of the associated enterprise in India. Since the aforesaid receipt does not attract any of the charging sections, the relevant computation provision / machinery provision contained in Chapter X of the Act for determination of arm's length price would not be attracted. In view of this, we humbly pray to your kindself to delete the adjustment made by the AO in respect of the international transaction involving payment of shared IT service cost by the appellant to its associated enterprise. 13. At para 14 at page 25, he concluded as follows:- 14. "I have considered the entire ....
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....not find any infirmity on the same. Services were rendered and the assessee received benefits. Hence, we hold that the order of Ld.CIT(A) for AY 2009-10 & 2010-11 and Ld. DRP of AY 2011-12 are upheld. 16. Coming to the submissions of the Ld.DR that the issue should be remanded back to the file of the TPO for fresh adjudication, we find that the payment in question was admittedly reimbursement of cost. When the issue of deduction of tax at source on the very same payments had come up before the Tribunal in the assessee's own case for AY 2002-03 and the subsequent years, it was held that these were reimbursement of actual cost and hence no tax may be deducted at source on these payments. 17. Moreover, the conditions specified in section 92CA r.w.s 92C(3) are not complied with the TPO. Hence, no purpose could be served in restoring the issue back to the file of TPO for fresh adjudication for determination of ALP. 18. Section 92CA r.w.s 92C(3)of the Act is extracted for ready-reference:- 3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- ....
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.... applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. 22. Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was un-remunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule l0B. Whether or not to enter into the transaction is for the assessee to decide........ So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning ..." 20. Ld. Counsel also relied on the case of CIT v. Walchand& Co. etc. [1967] 65 ITR 381, the Hon'ble Apex Court has held that in applying the test of commercial expediency for determinin....
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....e decision of Hon'ble Delhi Tribunal of McCann Erickson India (P.) Ltd vs. Addl. CIT [2012] 24 taxmann.com 21 (Delhi), wherein the Tribunal, following the aforesaid decision of the Hon'ble Delhi High Court, has interalia held that: "9. We have heard both sides and have also gone through the orders of the AO, TPO and DRP.... The evidences have been submitted before the authorities below showing rendering of the certain services against the payments made to the associated enterprises. In the arena in which the assessee company is functioning, it will be difficult to imagine a successful business entity in the global environment without receipt of the services which carries huge intrinsic and creative value. In our considered view, it is only a particular business expert who can evaluate the true intrinsic and creative value of such services. In view of these facts, it shall be just to avoid any guesswork to evaluate or judge value of these services in isolation or individually. In any case, the value of these services cannot be taken at nil which the AO as well as TPO originally sought to do......... The term "benefit" to a company in relation to its business has a very wid....
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....essary details along with allocation keys and basis of calculation of payment made for I.T. support services. According to TPO, the assessee, however, failed to comply with these requirements and the ALP of the relevant transactions therefore was determined by TPO at 'nil ' value. * The CIT(A) held that the action of TPO in arriving at the ALP of the relevant international transactions at "nil" was without any basis and accordingly he deleted the addition made on account of the transfer pricing adjustments made by A.O./TPO holding the same to be unsustainable. * The Tribunal observed that the exercise of benchmarking made by the assessee to show that the price charged by its associated enterprise for providing IT support services was at arm's length had not been disputed by TPO. It was also observed by the Tribunal that the arm's length price of the international transaction under review was determined by the TPO at "nil" without applying any of the prescribed methods and the entire payment made by the assessee for availing the IT support services from its associated enterprise was added as TP adjustment. * In view this, the Tribunal had given the decision tha....
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....sion of the Hon'ble Calcutta High Court in the case of CIT vs Britannia Industries Ltd. [2002] 257 ITR 225/[2003] 132 taxman 16, wherein Hon'ble Calcutta High Court has held that the Department cannot take a. contrary view in respect of any issue which has been accepted by the Department for succeeding assessment year based upon the similar set of facts. Thus, by following the above principle laid down by the Hon'ble Calcutta High Court, we feel that the action of TPO in making disallowance of the intra group service charge paid/payable by assessee to Nalco Pacific for the assessment year 2004-05, after allowing the same for the assessment years 2005-06, 2006-07, 2007-08 and 2008-09 based on the same facts, has no leg to stand. Ld. Counsel referred to the relevant information in the tabular format: Intra-group Service Charges Assessment Year Associated Enterprise Intra-group Service Charge allowed as deduction(Rs. '000) 2005-06 Nalco Pacific Pte Ltd. 19,543 2006-07 Nalco Pacific Pte Ltd. 31,128 2007-08 Nalco Pacific Pte Ltd 27,157 2008-09 Nalco Pacific Pte Ltd 28,120 We also find 6om the records that assessed submitted various evidences ....
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....e are some cases where an intra-group service perforated by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members. Examples could be analysing the question whether to recognise the group, to acquire new members, or to terminate a division. These activities may constitute intragroup services to the particular group members involved, for example those members who will make the acquisition or terminate one of their divisions, but they may also produce economic benefits for other group members not involved in the object of the decision by increasing efficiencies, economies of scale, or other synergies. The incidental benefits ordinarily would not cause these other group members to be treated as receiving intra-group services because the activities producing the benefits would not be ones for which an independent enterprise ordinarily would: be willing to pay. But in the instant case no such benefits such as those mentioned in paragraph no. 7. 12 of the OEC]) Guidelines accrued to assessed under the agreement and hence, no incidental benefits accrued under the agreement. 26. Accordingly,....
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.... not sustainable as it was not permissible under Transfer Pricing Regulation to make TP adjustment on account of any international transaction without applying any one of the prescribed methods. Reliance on this regard was placed by the Tribunal on the case of Mccan Ericson (India) (P.) Ltd. V. Addl. CIT [2012] 24 taxmann.com 21 (Delhi) wherein the TP adjustment made by the A.O./TPO by taking value of certain services at "nil" was held to be unsustainable by the Tribunal. Keeping in view these decisions of co-ordinate Bench of this Tribunal and having regard to all the relevant facts of the case as summarized by the Id. CIT(A) in his impugned order, we hold that the addition made by the A.O./TPO on account of TP adjustments in respect of the international transactions of the assessed company with its AE involving availing of IT support services was not sustainable either in law or on the facts of the case and the Id. CIT(A) was fully justified in deleting the same. We, therefore, uphold the impugned order of the Id. CIT(A) giving relief to the assessed and dismiss this appeal filed by the Revenue." 21. Similar is the decision of ITAT, Ahmedabad Bench in the case of Schneider Ele....
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....ces for particular operations, management or technical advice (trouble shooting) or in some cases assistance in day to day management" but make it clear that while shareholder activities, i.e. the activities which are performed solely on account of ownership interests, "would not justify a charge to the recipient entities", in other words, consideration is not required to be charged for the shareholder activities, while other stewardship activities can, and must, be compensated. Nothing, therefore, turns in favour of the revenue on account of the services rendered by the SEl-F being in the nature of stewardship activities which is a temp of much broader connotation than shareholder activities. Not chalking for the rendition of shareholder activities can be justified but not for all the stewardship activities. Coming to the question of business expediency, which has been questioned by the authorities below, in our considered view it was also not 6or the TPO to bother about business expediency of these services; all he was to see was what would be arm's length services of these servicing in an uncontrolled situation. That has to be done on the basis of a permissible method of asc....