TaxTMI 
TaxTMI 
2019 (8) TMI 1119
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....the learned representatives at the outset state that the revenue's former two substantive grounds seek to revive the Transfer Pricing Officer( The TPO)'s action making upward adjustment of Project Management (Pre-operative) service fees of Rs. 3,00,00,000/- and pre-operating management fee paid/ payable of Rs. 1,50,00,000/-; respectively. Both the learned representatives take us to the learned CIT(A)'s identical findings on both the issues read as under:- " 04. Ground No.1 arises on account of the action of the Ld. AO / TPO in making an upward adjustment of INR 3,00,00,000 to the total income of the appellant in respect of pre­operating management fees paid/payable by the appellant to Gleneagles Management Services Pte Ltd., Singapore (hereinafter referred to as 'GMSPL') tinder the 'Joint Venture Agreement' (hereinafter referred to as 'JVA') for the alleged reason that the activities performed by GMSPL during the relevant previous year are merely in the nature of shareholder activities for which no independent enterprise would have paid anything in an arm's length situation and hence, according to the Ld.AO/ TPO, the arm's length price o....
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....ngth situation). The TPO has further held that no services have been rendered hence the entire payment has been disallowed. 5.2 As it has been recognized by the TPO in his order under section 92 CA (3) and also as the appellant has contended in its TP report, in order to determine whether a payment to associated enterprises for management services is at arm's length it is necessary to determine­ a. whether any services were rendered by the associated enterprise to the appellant? and if yes, b. whether the assessee would have paid the same amount to an independent enterprise in an arm's length scenario for similar services? 5.3 The appellant firmly believes that both the above tests have been satisfied in relation to the payment of pre­commissioning management fees and hence the payment should be treated to be at arm's length in toto and thus believes that the TPO's order (and consequently, the AO's order) in this regard are erroneous in law and is based on a misconstrued understanding of facts and hence should be reversed by your kindself. 5.4 The TPO seems to be of an understanding that since Apollo Hospitals....
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....nstallation of a computer system, both as to hardware and software, suitable for the Hospital's management information system; and * Generally review and recommendations on all aspects of the planning, design, construction and completion of the hospital; Review and recommendations on the policies and procedures in the areas of human resources, finance, marketing, quality management, materials management, fire safety; plant operations, information systems, medical records, nursing administration, intensive care units, diagnostic imaging, laboratory, accident and emergency unit, cardiovascular laboratory, operating theatre, outpatient clinics and patient wards of the Hospital; * Review and recommendations on the selection of key management staff, nurses and medical doctors; and * Review and recommendations on the organization chart of staff positions for the personnel to be employed in connection with the operation of the Hospital. Taking cue from above mentioned OECD guidelines and comparing them with the project management (pre­operative) services provided by GMSPL it can be inferred that the services received by the appellant are more in....
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....al transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assessee under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. 5.10 The Ld. AR of the appellant while making detailed submissions during the course of appellate proceedings has pointed out that the TPO/AO failed to demonstrate in his order that any of the circumstances as mentioned in clause (a), (b), (c) and (d) of sub­section (3) of section 92C of the Act existed in the instant case necessitating the TPO/AO's intervention in determining the arm's length price of the international transaction. Further, the TPO did not comply with the provision of subsection (1) and (2) of section 92C of the Act while computing the arm's length price of the aforesaid international transaction at 'NIL' value. In this regard the appellant has relied upon the decision of the Hon'ble Kolkata Tribunal in the case of N L C Nalco India Ltd. vs. Deputy Commissioner of Income­tax Circle ­ 10, Ko/kata [2016] 71 taxmann.comS7 (Kolkata ­ Trib.) / [2016] 177 TT) 156 (Kolkata ....
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....s length price of an international transaction. It is further noted that the Ld. TPO had not applied any of the methods prescribed under sub­section (1) read with sub­section (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 N L C Nalco India Ltd. vs. DCIT Circle ­ 10. 3. In view of the above, and considering the judicial view of the Hon'ble Jurisdictional ITAT in the cases referred, as discussed above, the Ld. AO is directed to delete the impugned addition of Rs. 3,00,00,000. It is also pertinent to bring on record here that the appellant­company has accepted the treatment given by the Ld.AO in respect of "Project Document Charges" in the Assessment order as being Capital in nature. In my considered view the treatment of the Pre­ commissioning Management Fees should also be similar, and accordingly the above amount is to be treated as Capital expenditure, on which the relevant depreciation is also to be allowed to the appellant­assessee. The aforesaid grounds o....
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....)(b) is also attracted. The expenditure is not allowable u/s. 37. This is nothing but withdrawal of the capital employed in a round about way. The assessee cannot get the benefit of deduction for taxation purpose on this entire sum of Rs. 4,50,00,000. 08. During the course of the appeal hearing, the appellant / Ld. A.Rs for the appellant have submitted as under: 8.1 The entire pre­commissioning Project Management Fees paid to GMSPL and Apollo Hospitals Enterprises Ltd. (AHEL) the Joint Venture Partners were disallowed by the Learned Officer in its order. While disallowing the payments made to AHEL the Learned Officer has contended that the logic followed in the TP Order also applies to the payments made to AHEL. Further the learned officer has also contended in the order that no independent company would have undertaken such payments to any. unrelated party and the payment were made without any proper business expediency. The Ld. AR has also submitted that the disallowances have been made under two different sections of the I. T.Act, Section 92 in case of international transaction where arms­length are required to be determined and section 40A(2) ....
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....e the necessary expertise that they possess for setting up the project of this size and capacity . 8.5. The appellant also hereby refutes the view taken by the learned officer that this is nothing but withdrawal of capital. In this regard the appellant hereby submits that the Project Management Fees were onetime fees that were paid to AHEL and GMSPL for setting up the project. The project management (pre­operative) services received by the appellant are pre­ commissioning consultancy services related to preoperating period and are in the nature of unique services to the business of the appellant. The pre­commissioning services cover an essential range of support, without which the setting up of the hospital would be almost impossible. The appellant has submitted earlier that the services provided by experts in their respective fields cannot be linked to as shareholders activity and as such any sum paid as fees to any expert (even though a shareholder) cannot be construed as repayment of capital invested by the shareholder. 8.6 The Ld. AR also submitted during appellate proceedings that in the case of McCann Erickson India (P.) Ltd. v. Addl. CI....
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....pport from the experts in the field. This was the result of the expertise made available by the two giants of Health Care Industry that the hospital project in Kolkata came to the completion and is experiencing gradual growth thereafter. c. The services have "genuinely" and "actually" been provided and as per the various evidences and supporting provided it has been established that nature of services provided were highly valuable for the existence and growth of hospital project a d commands remuneration. d. Based on the extent of involvement, magnitude of the project, the expertise required and provided for a project and other dynamics, the charges paid in case of appellant was not unreasonable. The services were provided at reasonable cost. Costs incurred for such services as per the comparative study submitted was found to be higher than the costs incurred by the Company. 8.10 The appellant therefore refutes the basis of disallowance that expenses incurred were without considering the business expediency. Such practice is prevalent in Health Care Industry and given the fact that in case of the Company all these are essential to obtain such services, it....
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....r but from the view point of a businessmen. (vi) In CIT v/s Dayalal Meghji Tobacco Products Pvt. Ltd. (CC No. 3685 of 1998: G.I (1998)233 ITR (St.) 1 (Se), their Lordship of the Supreme Court have, by an order dated 01­05­1998, dismissed the special leave petition filed by the Department against the judgement dated 22­9­1997 of the Madhya Pradesh High Court in ITR No. 95 of 1996, whereby the High Court rejected the reference application of the Department on the question, whether the Tribunal in law in holding that the assessee company was entitled to deduction of Rs. 12,05,118 disallowed by the assessing officer under section 40A (2) from out of conversion charges paid to a person specified in Section 40A(2). 8.12 The appellant hereby prays your kindself that services obtained by the Company were quite essential and inevitable for putting up the Hospital project and these by no stretch of imagination were unreasonable and unnecessary. There is no question of evasion of tax in the assessee's case and payments made have been bonafide and genuine in all respect. Recipients are established market leaders in their field of operation. Mere fact that ....
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....' action making the impugned upward transfer pricing adjustments of Rs. 3,00,00,000/- and Rs. 1,50,00,000/- in respect of pre-operating management fees paid to M/s. Gleneagles Management Services Pt. Ltd., Singapore (hereinafter referred to as 'GMSPL') and M/s. Apollo Hospital Enterprises Ltd (hereinafter referred to as 'AHEL'). And that the Transfer Pricing Officer, in short 'TPO' had rightly concluded in very clear terms that both the impugned heads are in the nature of shareholders activity requiring any payments at all. More so, when recipient of services is the assessee i.e associate enterprise of the payees. It further emphasizes that the " T.P.O" had rightly determined the impugned market price at Nil. More particularly when the 'T.P.O' has held that the assessee' shareholders/associate enterprises had not rendered any such services. We find that the Revenue's identical plea in support of adjustment of such payments arising out of arm's length price being determined at Nil stands declined by the tribunal's coordinate bench in NLC Nalco India Ltd V/s. DCIT in ITA Nos. 529/Kol/08 & 1256/Kol/09 dt. 03-02-2016 in (2016) 71 taxmann.com 57 as under:- "19. We have gone thr....
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....de 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 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. The essence is that a businessman himself is the best judge in determining the reasonableness / usefulness / benefit of an expenditure which is wholly and exclusively laid out for the purpose of business. The Revenue has no role to play in determining the reasonableness / usefulness / benefit of a business expenditure. However, in the instant case, the TPO had judged the reasonableness of the aforesaid intra­group service charge (regarding which there was no dispute that the same was incurred wholly and exclusively for the purpose of business) from his own point of view and....
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....lue. 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 wide connotation. It is difficult to accurately measure these benefits in terms of money value separately. Therefore, we find no justification to sustain any addition in this regard on this issue. We direct to delete the addition and this ground is allowed. 22. We have gone through the case of McCann Erickson India (P.) Ltd (supra), the Delhi Tribunal has held that it is only a particular business expert who can evaluate the true intrinsic and creative value of intra­group services and in any case, the value of these services cannot be taken at nil. However, in the instant case, the TPO judged the reasonableness of the aforesaid intra­group service charge and computed the arm's length price of....
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....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 that the addition made by A.O./TPO on account of TP adjustments in respect of the international transactions of the assessee company with its AE involving availing of IT support services was not sustainable either in law or on the facts of the case. The Tribunal upheld the order of CIT(A). 23. According to assessee the aforesaid decision is squarely applicable to the case of assessee. In the instant case, TPO computed the arm's length price of intra­group services received by assessee from Nalco Pacific under the aforesaid agreements at 'nil' value without applying any of the transfer pricing method....
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....e to Nalco Pacific for the assessment year 2004­05, after allowing the same for the assessment years 2005­06,2006­07,2007­08 and 2008­09 based on the same facts, has no leg to stand. Ld. Counsel referred to the relevant information in the tabular format: Intra­group Service Charges Assessment Year Associated Enterprise Intra­group Service Charge allowed as deduction (Rs. '000) 2005­06 Nalco Pacific Pte Ltd 19,543 2006­07 Nalco Pacific Pte Ltd 31,128 2007­08 Nalco Pacific Pte Ltd 27,157 2008­09 Nalco Pacific Pte Ltd 28,120 We also find from the records that assesse submitted various evidences of receipt of intra­ group services to the TPO which are enclosed in page no. 7179, 103­124, 129­132, 133­ 138, 139­140, 143­144 and 157­162 of the assessee's paper book. The assesse also furnished explanation in regard to the nature of the aforesaid services in page no. 9, nand 12 of its first submissions. Further, in appeal before CIT(A)also assesse submitted a certificate of services dated 01.09.2008, issued by LiawHinHao, Finance Director, Nalco NLC ....
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....oup 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 NLC Nalco India Ltd.AY 2003­04& 2004­05 these other group members to be treated as receiving intra­group 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 OECD Guidelines accrued to assessee under the agreement and hence, no incidental benefits accrued under the agreement. 26. Accordingly, We are of the view that the first ground for confirming disallowance by CIT (A) that o independent documentary evidence had been furnished by assesse to show that the fact of actual ices having been rendered to assessee and Nalco Pacific too could not substantiate the claim for provision of actual services with document....
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.... made by the Ld. AO on basis of an understanding that the success fees for roping in Gleneagles Group in the project of the appellant as a joint promoter and major capital contributor, is not at all revenue in nature and the payment of Rs. 112,85,608 for an introduction of Rs. 600,00,000 as capital is hugely excessive and were not allowed as revenue item. 11.2 The appellant hereby refutes the view taken by the leamed officer that the payment of Success Fees to HSBC is hugely excessive and not allowed as revenue item. In this regard as submitted earlier, to identify a new partner HSBC was appointed as consultant and an agreement dated 21.04.1995 was entered with them by the appellant company. 11.3 The scope of work as per para 2 of the aforesaid agreement was as follows: (a) identifying and approaching potential joint venture partners for Duncans; (b) assisting Duncans in dealing with requests for information form potential join partners; (c) assisting Duncans in the appointment of other professional advisers ( such as lawyers and accountants) as may be necessary to conclude the transaction; (d) co­ordinating thework of such ....
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.... 12. DECISION: 1. I have carefully considered the entire facts and circumstances of the case and the submissions filed by the Ld. AR of the appellant against the action of the Ld. AO in making the impugned addition. 2. There can be no doubt, in my considered view that the services were provided by the HSBC and was required to be remunerated for the work done by them for the appellant. As regards the reasonableness of the fees, the Ld. AO did not show clearly that the payment was in excess of the legitimate business needs of the assessee. The discretion given to the ITO under section 40A is not an untrammelled discretion. It is true that the ITO is not bound independently to collect evidence and decide that the allowance claimed is excessive or unreasonable but when the assessee, in the instant case, proved that the actual services had been rendered by the recipient of the fee amount and that such services had benefited the assessee, the decision of the Ld. AO to hold that the payment was excessive or unreasonable, could not be said to be warranted by facts. I have also considered the decisions of the cases as provided under Ground No. 2 upon which reliance has ....
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.... Chennai was not for any revenue earning, rather it was a premium payment for severing the tie, so that Gleneagles group can enter and the company can use the name 'Gleneagles' which is an intellectual property as well as trade name of the Gleneagles group. Therefore, this payment is not a revenue item." 14. During the course of the appeal hearing, the appellant / Ld. A.Rs for the appellant have submitted as under: 14.1 The issue is the disallowance of severance fees amounting to Rs. 58,72, 410 paid to AHEL. The disallowance of Rs. 58,72,410 has been made by the Ld. AO on basis of an understanding that the severance paid to AHEL was not for any revenue earning, rather it was a premium payment for severing the tie so that Gleneagles group can enter and the company can use the name "Gleneagles" which is an intellectual property as well a trade name of the "Gleneagles" group. Therefore, this payment is not a revenue item. 14.2 The appellant hereby refutes the view taken by the learned officer that the payment of Severance Fees to AHEL is not a revenue item. In this regard the appellant has humbly submitted earlier in the history of the Group that the....
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.... claimed in the computation of income for the Assessment Year 2004­05. 14.6 The appellant hereby also submits that the fees were paid to AHEL for severance its ties. Had the payment been made to Gleneagles for obtaining that right it could have still been construed to be acquisition of a right to use the word Gleneagles. By paying severance fees to AHEL the appellant company has not obtained that right to use the word Gleneagles. The appellant therefore believes that the learned officers contention that the expenses has led to the acquisition of right to use trade name Is erroneous in law and Is based on a misconstrued understanding of facts and hence should be reversed by your klndself. 15. DECISION: 1. I have considered the entire facts and circumstances of the case and the submissions filed by the Ld. AR of the appellant against the action of the Ld. AO In making the Impugned addition. The fact that the fees were paid to AHEL for severance its ties as Project Consultant and by paying such amount to AHEL the appellant company has not at all got the right to use trade name Gleneagles. 2. Further, as these expenses are not directly r....