TaxTMI 
TaxTMI 
2018 (11) TMI 794
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.... assessee filed a detailed reply furnishing relevant documentary evidences which were considered by the TPO. The TPO was of the opinion that in order to examine the Arm's Length Price [ALP] of intra-group services received by one of the AE, following essential information should be available: 1. Whether the assessee has actually received Intra group services? 2. What are the: economic and commercial benefits derived by the recipient of intra group services? 3. In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs. 4. Whether a comparable independent enterprise would have paid for the services in comparable circumstances? 5. The cost of intra group services should be benchmarked using either CUP or Cost Plus Method." 4. The TPO was of the opinion that the assessee has not identified the services by its AE for which costs were reimbursed to its AE. The TPO was of the further opinion that the assessee has not been able to specify the services received from i....
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...., provides element of cost saving to the group as a whole of which the assessee is also an integral part. 9. The ld. AR further explained that the relevant information/ documents were provided to the Assessing Officer during the assessment proceedings to substantiate that the assessee has indeed obtained the services of AE. The ld. AR concluded by stating that the TPO/DRP erred in making adjustment in respect of payment of corporate management charges to the AE. 10. Per contra, the ld. DR strongly supported the findings of the lower authorities. It is the say of the ld. DR that the assessee has grossly failed in substantiating services actually received from the AE. 10. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below qua the issue. The facts on record show that to substantiate that the assessee has actually obtained services of AE, the assessee has furnished detailed description of intra group services rendered by the AE, copy of ledger account of corporate management charges, month-wise chart of corporate management charges and allocation chart for the assessment year 2008-09. In our considered opinion, it....
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....an international transaction is determined under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B. The following three steps have been prescribed: - "(a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub- clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction;" 16. The Organization for Economic Co-operation and Development („OECD‟, for short) has laid down "transfer pricing guidelines" for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm's length price principle and explains article 9 of the OECD Model....
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....interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevert....
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.... 19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., (1967) 65 ITR 3....
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....arily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B(1)(a) does not authorise 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 unremunerative 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 10B. Whether or not to en....
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.... spare parts CUP 35,25,858 3. Royalty payment - 2,51,96,680 4, Provision ofisourcing services TNMM 58,f5,965 5. Provision of designing services TNMM 2,66,23,479 6. Repayment bf loan - 2,60,16,000 7. Corporate management charges - 1,10,22,586 8. Reimbursement of consultancy CUP 21,92,171 9, Reimbursement of Expenses CUP 30,87,040 10. Recovery ofj Expenses CUP 84,07,138 11. issue of Share Capital - 15,99,19,610 18. In its business support services segment, the assessee has shown margin of 7% on cost for provision of business sourcing services provided to its AEs. The TPO examined the filter used by the assessee, which can be understood from the following chart: N DescriptionI of Remarks of this office o1 . fitter Reject companies having financial data available only up to February 201)7, Also reject companies for which no financial data was available. This is an appropriate filter. However, the data is to be seen with reference to current financial year i. e. FY 2008-09. 2, Reject companies that have....
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.... is an appropriate fitter. However, the correct bcriteria for rejection of companies would be negative net worth and not persistent negative net worth as the company having negative net worth would also be oincurring losses in the past so as to erode its positive rnet worth which is the norm for companies in IT mindustry as discussed in detail in the filter for apersistent operating tosses. 19. Based on the above, the TPO examined the comparables used by the assessee with his remarks as under: No. Company Nam e Remarks of TPO 1 Cyber Media India Online Limited This company is not functionally comparable as it is Providing software support and maintenance to the clients 2 Indiacom Limited This company Is not functionally comparable and current year data not available in function domain. 3 MCS Limited Fails employee cost filter. Employee cost is 15% to total cost. 4 TSR Darashaw Limited It is a good comparable. 5 IDC (I) Ltd New name of this company is Cyber Media Research Ltd. It Is a good comparable. 6 Times Innovative Media Ltd Fails employee cost filter. Employee cost is 6.35% to total cost. 20....
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....comparable. 3 CSS Technergy Ltd. This company is not functionally comparable. 4 KLG Systei Ltd. This company is not functionally comparable. 5 Mahindra Consulting Engineers Ltd This company is functionally comparable. 6 Neil Soft Ltd. This company is not functionally comparable. 7 Tata Elxi UcL Ltd This company is not functionally comparable. 8 Varna Industries Ltd. This company is not functionally comparable. 23. Some new comparables for technical support services were used which are as under: No. Company Na Remarks of TPO 1 ArchohmCons This company was not available In your search matrix. The company qualifies all quantitative filters and is functionally comparable. 2 Engineers India This company has been rejected by stating that it has identified its business activity into two business segments i.e. Consultancy & Engineering Projects and Lump sum Turnkey Projects. However, the company has given segmental results. In Consultancy & Engineering projects segment, the company mainly provides consultancy. Hence, this segment has been considered as comparable for technical support function. 3 IB1 ....
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.... there is insufficient The NTA/MDA/DR/AR are not available for any of the years in Prowess. (The latest available NTA/DR/AR are for the year 2036) The NTA/MDA/DR/AR are not available for any of the years in Capitaline. (The latest available NTA/DR/AR are for the year 2004)" The company has been rejected stating that there is insufficient Information about their operations and products. However, website/ annual report (AR) of the company clearly showed that the company is providing business service. Relevant segment has been considered as comparable to technical support function. 10 Semac Ltd This company was not available in your search matrix. The company qualifies all quantitative filters and is functionally comparable 11 TCE Consulting Engineers Ltd. The company has been rejected stating that there is insufficient information about their operations and products. However, website/annual report (AR) of the company clearly showed that the company is providing business service. 12 WAPCOS Ltd This company has been rejected by stating- The NTA/MDA/DR is not available for the years 2008/2007 The company has been rejected stating that there is insufficient inf....
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....in relation to sourcing the components from vendors/ suppliers in India. In our considered opinion, this company is functionally different as it is engaged in providing full fledged procurement and financial management support services. Moreover, this company was taken as comparable in assessment year 2011-12 by the TPO but has been rejected by the DRP as comparable. Considering these facts, we direct for exclusion of this comparable. Kellick Agencies & Marketing Ltd 29. The annual report of this company shows that it is acting as agent for various foreign principals for sale of dredgers, dredging equipment, steerable rudder, propulsions, maritime and aviation lighting, acoustic communication. In fact, this company is a commission agent which is evident from the profit and loss account where it can be seen that this company has received commission income for providing agency services. Moreover, the TPO has applied a revenue service filter of 7%% and rejected the companies whose income from comparable activity does not constitute at least 75% of the total revenue. 30. This company's comparable revenue comes to 27.7% only. Thus, fails the filter applied by the TPO himself. F....
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....ws that the company is into trading and received commission income as an agent from trading. This in itself shows that this company is functionally different from the appellant company and deserves to be excluded. We direct accordingly. 41. Next quarrel is in respect of exclusion of comparable selected by the assessee in designing segment. 42. The following comparables were excluded by the TPO: 1. CSS Technergy Ltd. 2. KLG Systel Ltd. 3. Neilsoft Ltd. 4. Tata Elxsi Ltd. 5. Varna Industries 43. Before us, the ld. counsel for the assessee has argued in respect of Neilsoft Ltd, Tata Elxsi Ltd and Vama Industries. Neilsoft Ltd 44. The annual report of this company shows that the company is engaged in Software Engineering Services which is similar to the assessee's designing services. Therefore, it is incorrect to say that this company is functionally different from the appellant company looking to the functional profile of this company, in our considered opinion, this company deserves to be included in the final list of comparables. We, accordingly, direct for inclusion of this company. Tata Elxsi Ltd. 45. This company h....