TaxTMI 
TaxTMI 
2018 (10) TMI 1112
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....ibutions (after allowing network administration costs) undertaken by the Appellant. 3. The Ld. AO/TPO erred on facts and law in determining the arm's length price ('ALP') of the Appellant's international transactions pertaining to payment of management cost contributions (after allowing network administration costs) to its Associated Enterprise ('AE') as Nil- against the sum of Rs. 6,27,11,181/- incurred by the Appellant and thereby making an addition of Rs. 6,27,11,181/- on that account to the Appellant's income and in doing so have grossly: 3.1 erred in disregarding the ALP, as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Income Tax Act, 1961 ("the Act") read with Rule l0D of the Income Tax Rules, 1962 ("the Rules"). 3.2 erred in holding that the transactions are covered under intra group services without appreciating that the payment made to Atotech Group was governed by a Cost Contribution Arrangement ("CCA") and not under an agreement for rendering intra-group services. 3.3 erred in ignoring the submissions and documents submitted by the Appellant during the a....
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....ded two underlying Cost-Sharing Agreements ('CSAs') / CCAs, effective January 01, 2002 (revised on January 01, 2007), namely Global Research & Development and Technical Sales Services Cost Sharing Agreement ('R&DTSS-CSA') and Global Management Group Cost Sharing Agreement ('MCSA'), The R&DTSS-CSA involved the sharing of R&D arid technical sales service support costs. The agreement required from Atotech Group to maintain laboratories, product development centres, technical centres and a staff of experts, engineers and scientists to conduct R&D and provide related engineering and technical support and services to the world-wide group entities. The essence of the agreement, it was stated, was that each member country, instead of investing and doing the R&D and technical sales service everywhere locally by themselves, should benefit out of the combined R&D and technical sales service functions. 2.1 The MCSA, on the other hand, involved the sharing of common general management and administrative costs (such as marketing / finance / human resource / quality control safety and host of other critical management functions that are of global strategic importance). ....
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....er of the assessee for a remand to the TPO with similar directions. 6. We have heard the submission and perused the material available on record. It is seen that in the facts of the present case, the issue of selection of most appropriate method itself has been remanded back vide order dated 11.05.2018 with the direction to first decide whether the payments made under the Agreement are in the nature of Cost Sharing payments or Intragroup Services. The said direction in order dated 12.08.2016 was repeated in order dated 11.05.2018. Accordingly, in the absence of any change in fact or law, we remand the issue to the file of the AO/TPO with similar direction. While so directing, it is necessary to note that the Co-ordinate Bench has directed the AO/TPO to go through the Agreement on the records and determine whether the nature of the transaction is Cost Sharing Agreement or were these payments in the nature of intra group services for the sake of completeness so as to bring out the issues on record in the year under consideration, we deem it appropriate to briefly address the background of the case by first addressing the ownership structure of the assessee in the TP Study :- ....
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....expanded its operations into the General Metal Finishing segment in the second year of its operations and started manufacturing GMF plating chemicals used primarily in the automotive and construction industry. As part of its strategy to exit non-core businesses, Max India Limited sold its equity stake in Max Atotech to Atotech B.V. in July 2001." 6.2 The functions performed for the purposes of FAR analysis carried out by the assessee in its TP Study claiming its transactions to be at arm's length in its TP Study noticed by the TPO are as under:- 4. FAR Analysis: 4.1 Summary of Functions performed, Risks undertaken and Asset utilized for manufacturing: Atotech India, the assessee is a routine manufacturer and marketer of specialty chemicals & compounds used for general metal finishing and production of printed circuit boards. It carries out routine functions and. assumes normal risks associated with carrying out such business. It is also involved in the commissioning of certain chemicals and capital equipments to certain customers in India. As a part of this arrangement, the assessee also provided after sales service to the customers for the ch....
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....rom the transfer of its part in the IP back to Atotech Deutschiand which coordinates the CSA for the Atotech Group for and on behalf of all remaining CSA member companies. Atotech Group companies which have joined these agreements have the same rights and obligations. Here the development of technology is carried out for the joint benefit. By virtue of CSAs, Atotech India has got access to, as well as joint ownership of all Atotech Group know-how, technologies and intellectual property rights owned by the Atotech Croup. Presently, Atotech India does not perform any R&D activities. "Client to Confirm» Such R&D activities are carried out primarily in the U.S.A., Germany and Japan. Local Atotech companies always use global strategies and other global management know-how jointly developed under the CSA agreements. The R&D and TSS Agreement has been executed to carry out R&D activities and thereafter, provide technical sales service support to all the participants in connection with the proprietary chemicals- being developed under it. The objective of this agreement is to maintain during the term of the agreement laboratories, product development centres and tech....
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.... Business Unit Vice Presidents (GMF, Electronics, Wafer, Electronic Material) and the Regional Vice Presidents (Europe, Far East, Americas). Product Management: This has been divided into two segments i.e. GMF and EL, Here responsibility for the product development, product marketing, trademark, customer services, treatment of customer requests, and corporate communication activities is ensured. Network Administration Costs: Considering the steadily increasing importance of network administration costs the updated contract of 2007 includes additional location rules such as general IT costs according to the number of PCs. As per the scheme of the CSA, all actual costs under R&D and general management costs of each individual constituents of the CSA are pooled together and allocated to individual constituents based on the sales ratio i.e. sales of individual constituents of the CSA, to the total worldwide sales. The fact that the costs are pro-rated amongst the AEs on the basis of turnover does not change the character of these transactions as it is only an appropriate method of apportionment. The costs also include a 5% mark-up to meet the overhead costs o....
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....ost. Therefore it bears the risk associated with the success/failure of R&D efforts of other Atotech Group companies. The Atotech Group engages in significant complex R&D for developing new, improved products/technologies. Accordingly, they are significantly exposed to this risk. Credit Risk: This is the risk arising from , non- payment of dues by customers. Atotech India does not bear this risk with respect to the sharing of cost under the CSA. The AEs receive payments from Atotech India and hence bear limited risk on this account. Foreign Exchange Risk: This risk relates to the potential impact on profits that may arise because of changes in foreign exchange rates Atotech India does not bear foreign exchange risk as cost recharges to/from the AEs are invoices in INR The AEs are exposed to foreign currency risk to a limited extent as they raise invoices in INR Legal and Sttutory Risk : This risk primarily arises on non compliance with any legal/contractual/statutory provisions Atotech India does not bear the risk for compliance in India The AEs bear all the risk for compliance with legal matters relating to this activity 6.5 It is seen that for jus....
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.... c. Quality control d. Customer and Pricing development" 6.6 The appropriateness of allocation keys used and the expectation of mutual benefit on the incurring of the expenditure has been explained in the following manner :- "7.3.1 Appropriateness of allocation keys used The costs are allocated in the following" manner under the cost sharing agreement: Charge-out: The entities with central functions charge central costs incurred by them to the CSA pool administered by the group controlling department. Charge-in: Group Controlling Department allocates the total central costs to all the group entities including the charge out parties in the proportion of costs Incurred to total external sales. Furthermore, the assessee submitted that the" audit report contains, inter-alia quantum, cost, allocation methodology and the allocation keys for computing the contribution to be made by each participating group entity and accordingly, such analysis cannot be rejected without detailed reasons: It is submitted that the following factors distinguish a CCA from the rendering of Intra-Group services- • Expectation of mu....
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....g the nature of the functions performed by the AE and costs allocations charged to the assessee in lieu thereof." 6.8 However, the DRP has dismissed the submissions relying on the past history. 6.9 In the said background, it is seen that the issue first come up for consideration before the ITAT in 2011-12 AY wherein relying upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Cushman Wakefield (India) P. Ltd.-46 Taxmann.com 317 (DEL), the coordinate Bench remanded the matter to the TPO to determine after going through the record whether the payments made were under the cost sharing arrangements or were they in the nature of intra-group services. It is further seen that the coordinate Bench vide its consolidated order pertaining to 2008-09. 2009-10 & 2012-13 AYs had an occasion to consider the aforesaid order of the ITAT for 2011-12 AY and noticed that in fact there were no directions therein qua the selection of the most appropriate method itself which was also an issue. Considering the position of law as laid down by Hon'ble Punjab & Haryana High Court in the case of Knorr-Bremse India P. Ltd. vs. ACIT - (2016) 380 ITR 307 (P&H) it was concluded that the Cour....
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.... differently, there was nothing to show that there was an understanding that the pricing was dependent upon the assessee accepting all together. Further, the assessee was also found to have not shown any facts or evidences to demonstrate that the transactions were inextricably linked so as to demonstrate that one did not survives without the other. Accordingly, the view of the TPO rejecting the aggregation approach adopted by the assessee was upheld. Noticing the fact that the assessee had applied TNMM as the MAM on aggregate basis and taking note of the fact that management cost has been held separate, the coordinate Bench taking note of the past history wherein the ITAT had approved CUP as MAM relying on the concession given by the assessee and taking note of the fact that in the facts of the present case i.e. 2008-09 AY, there was no such concession, further taking note of the fact that in 2011-12 AY, the issue of most appropriate method had not been adjudicated upon proceeded to direct the TPO to first apply CUP as the most appropriate method and supplemented it with the direction that some comparable uncontrolled instance be cited in terms of the mandate of Rule 10B(1)(a)(i). ....
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....PO finds that the CUP method cannot be applied either due to non-availability of the relevant data or for some other genuine reasons, he is free to apply any other appropriate method for a fresh determination of the ALP of the international transaction of `Management Group cost'. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings." 6.11 It is seen that the said view was followed in 2009-10 and 2012-13 AYs wherein note was taken of the international transaction of R&D and management cost, the relevant para is extracted hereunder :- "20. Here, again, both the sides agree that the facts and circumstances of this appeal are similar to those of preceding years dealt with above except that in this year the TPO, apart from determining Nil ALP of the international transaction of payment of 'Management group cost', also recommended transfer pricing adjustment in respect of 'R&D assistance cost.' The Tribunal has passed an order for the immediately preceding year restoring the fresh determination of the ALP of `R&D assistance cost' and `Management group cost' to the file of the AO/TPO. Following the view taken in such an or....