AI Drafter 
TaxTMI 
TaxTMI 
2019 (12) TMI 1282
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.... 3. Brief facts as recorded in the order of ld. TPO are that the assessee is a market research company. The assessee submitted that during the year under consideration it was part of Aegis Group PLC, U.K. Aegis Group PLC is the parent company of Aegis Media and Synovate. Aegis Media is an independent media communication network, and Synovate is a global market research company. Synovate employs about 6000 staff across 80 countries. The assessee (i.e. erstwhile Synovate India Pvt Ltd) merged with IPSOS Research Pvt. Ltd with effect from 01/04/2012 vide order of the Hon'ble Bombay High Court dated 03/05/2013. This is the last year of operation of the assessee. The details of international transaction entered into by the assessee during the year are as follows :- Sl.No Particulars Amount in INR Method applied 1. Market research services rendered to Associate Enterprises. 19,75,13,974 TNMM (Internal) 2. Market research services received from AEs 6,81,63,101 TNMM (Internal) 3. Cost contribution arrangement 7,50,68,892 TNMM (Internal) 4. Reimbursement of expenses from AE(Received) 18,12,43,341 At Cost + markup 5. Reimburs....
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....ost base within service recipient group members? What is the basis of cost allocation/contribution? g. Submit the details of other group entities to whom costs are allocated? h. Need test - Explain the rationale for the provision of services within the context of the business of the MNE? I. Evidence test - Have the services been actually provided in order to meet the specific need of the recipient of the services (assessee)? j. Benefit test - Provide a description of the benefits derived from each category of services? What are the economic and commercial benefits derived from each category of services? Furnish quantification of such benefits? k. Allocation Keys - Describe the selected allocation keys and the reasons justifying that such allocation keys produce outcomes that reasonably reflect the benefits received? I. Submit written contracts or agreements for the provision of services identifying the entities involved, the nature of the services, and the terms and conditions under which the services are provided? m. Furnish the documentation and calculations showing the determination of the cost pool and of the mark-u....
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....vices with markup of 6% to its AE for receiving services from the concerned AE. These transactions are routed through a central/common coordinating company i.e. SMSL, wherein the assessee will raise a bill/debit note on SMSL in respect of cost plus 6% under the shared services agreement and SMSL in turn would bill the concerned AE which has delivered services actually to the assessee with the same amount of cost plus 6%. In other words, the SMSL will not make any profit on the said transaction and is merely a pass-through entity/a special purpose vehicle/common coordinating company among various AEs across the country for global coordination. The assessee also submitted that this cost plus 6% charges has been subsumed in the final sale value of services rendered to the AEs and proceeds towards sale of services from AEs were received accordingly and the said proceeds of sale of services from AE has been accepted by the ld. TPO to be at arm's length. In other words, the amount paid by the assessee pursuant to shared services agreement with SMSL has been observed as a cost in the final sale value of services received from AE. It is the case of the assessee that once the sale value of ....
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....:- Segment Revenue Direct Cost Gross Profit General overheads & Intra group service cost Net Profit NP ratio Services rendered to the Associate Enterprise (Source: 197,513,974 (Annexure B-2) 69,367,892 (Annexure B-2) 128,146,082 (Annexure B-2) 84,618,581 (Above Table) 43,527,501 22.04% Services received from AE and further sold to Third Party (Source: 35,631,407 (AnnexureD-1) 14,693,516 (Annexure D-1) 20,937,891 (Annexure B-3) 15,265,143 (Above Table) 5,672,748 15.92% Services rendered to third party without importing service from AE (Source: 579,824,365 (Annexure D-2) 265,302,243 (Annexure D-2) 314,522,122 (Annexure D-2) 248,407,310 (Above Table) 66,114,813 11.40% 8112,969,747 349,363,651 463,606,096 348,291,034 115,315,062 Note: General Overheads & Intra group service cost include support services from SMSL 6. The assessee submitted that as can be seen from above, after allocation of Shared Resource Allocation Fees paid to SMSL, the margins earned on AE Import transactions are....
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....oup Services- The relevant Paras of the OECD guidelines on intra-group services in Chapter Vll are reproduced below: 7.5 There are two issues in the analysis of transfer pricing for intra group services. One issue is * whether intra-group services have in fact been provided. The other issue is * what the intra-group charge for such services for tax purposes should be in accordance with the arm's length principle. Each' of these issues is discussed below. B.1 Determining whether intra-group services have been rendered 7.6 Under the arm's length principle, the question whether an intra group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or commercial value to enhance its commercial position, This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in house for itself. If the activity is not one for which t....
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.... prove that the services are actually rendered and received. The second aspect of intra group services is the quantification of such services in terms of actual expenditure incurred and commensurate benefits derived there from. The third aspect is arm's length price for such services, if the same requires payment at arm's length. If the assessee fails at the first stage, the TPO will be unable to determine ALP of such Intra group transactions. 2.2 Evidences, Correspondences, e-mails fail to demonstrate any benefit received- The TPO and DRP have closely examined the evidences of intra group services as produced and determined the ALP of the services at Rs. NIL. No further evidence is produced. The reasons arriving at the conclusion are- 1. The nature of services as claimed in the e-mails/documents/evidence as filed in the Paper Book, are actually general correspondences between the assessee and its AE. On perusal of the contents of these e-mails. It is clear that these are general notes and exchange of information. The nature of communication in these e-mails is of the nature which would be entered into between the group entities of any group. They do not s....
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....rvices are actually rendered and received and that payment is commensurate with the benefit derived there from. 6. When expenditure is incurred for the benefit of the group as a whole, no charging of such expenditure is required as such expenditure is not incurred in connection with any individual member of the group and the benefit of such expenditure would be available to all the members of the group. 7. When any expenditure is incurred by the AE for stewardship or share holder activities, then the same need not be charged to other group entities, as held in various judicial decisions. Unless it is shown that tangible and direct benefit is derived by such payment or that the payment made is commensurate with the benefit that is derived or expected to be derived when parties deal with each other at arm's length, the arm's length price of such payment for intra group services would be treated as either Rs. Nil or to the extent it is shown that the benefit actually derived from such payment. 2.3 Further, even if for argument sake, it is taken that these documents show that some services have been rendered, whether these had some value and if yes, t....
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....viding such services is established. As stated in the preceding paragraphs, copies of the e-mails, standard templates or the agreement per se do not substantiate the receipt of services by the assessee. The assessee has failed to establish that the services were actually availed and that there was no duplication of services. 5. Judicial decisions relied upon- 5.1 In this Bangalore ITAT in the case of M/s Gem Plus India Private Limited in ITA number 352/Bang/2009 when in at para 20 the following has been held: "20. We heard both sides in detail and also perused the records of the case including the paper book filed by the assessee company running in to 390 pages. The necessary facts of the case have already been discussed in paragraphs above. On examination of the facts and circumstances of the case and the terms of the agreement entered into by the assessee and its Singapore associate, the TPO has come to certain pertinent observations in her order. She has observed that the terms prescribed in the agreement in respect of the payments to be made by the assessee company are independent of the nature and volume of services, if any rendered by the S....
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....se where the assessee has not determined the ALP. The burden is initially on the assessee to determine the ALP. Thus, the argument of the assessee that the TPO has exceeded his jurisdiction by disallowing certain expenditure is against the facts. The TPO has not disallowed any expenditure. Only the ALP was determined. It was the Assessing Officer who computed the income by adopting the ALP decided by the TPO at "nil". 45 In our view, under similar circumstances a uncontrolled comparable company would not incur such expenditure. Hence, the ALP is rightly determined at "nil". As no expenditure would have been incurred, there is no necessity to apply a particular method to arrive at such conclusion. In fact, by all the five methods or anyone of them, when applied to the fact that there is no necessity of payment, the result of "nil" ALP will come." 5.3 Further, attention is also invited to the decision of MIs Knorr-Bremse India Pvt. ltd. in ITA no. ITA no. 5097/DeI/2011, wherein the following has been held 7.2. The appellant in the present case also did not demonstrate as to how the transaction by transaction approach in his case is not possible. It has also....
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....ovided by an independent enterprise or if the same would have been performed in house. The ORP is found to have considered these services as non-beneficial for the recipient and did not take it as chargeable services. The perusal of e-mails and other contemporaneous record only goes to reveal that incidental and passive association benefit has been provided by the associate enterprise. In this view of the matter there could neither be any cost contribution or cost reimbursement nor payment for such services to the AE. The TPO, therefore, has rightly adopted Nil value for benchmarking the arm's length price in respect of both these services. We, therefore, do not find any reason to inter/ere with the well reasoned conclusion reached by the AO on this count. The grounds raised in appeal in this respect, therefore, stand rejected." 5.4 ITAT Bangalore in the case of M/s Fosroc Chemicals India Private Limited (supra) has held as under: 32. In fact in Assessee's own case the Tribunal on identical facts remanded the issue of determination of ALP to the TPO. The direction of the Tribunal has already been extracted in the earlier part of this order. The facts and c....
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....ed, than the ALP of such mark-up will have to be determined. 35. The Assessee has in the present case filed material before the TPO to demonstrate the nature of services rendered. In the paper book filed before us the index of the paper book gives a description of the service. We are of the view that the above description alone would not suffice. As we have already seen the TPO had specifically called upon the Assessee to give details of the services rendered and how the same were utilized by the Assessee and its relevance for the Assessee's business. The evidence filed by the Assessee in this regard is in the form of e-mails between parties, reports etc. As to how the evidence filed by the Assessee was actually useful in its business has also to be highlighted as the Assessee will be the best person to know these facts which are within its knowledge. It is only if such a stand is taken by the Assessee can the TPO take the issue forward to arrive at a proper conclusion. In our opinion filing of voluminous correspondence, reports etc., would not be a proper way of discharge of Assessee's burden to establish the ALP of expenditure in question. We would therefore dire....
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....d (Internal TNMM) as the MAM based on segmental data after rejecting Comparable Uncontrolled Price (CUP) method for want of availability of comparables, among other prescribed methods. The segmental data relied upon has been duly audited and the same was furnished before the ld TPO by the assessee during the course of transfer pricing assessment proceedings. We find that the assessee applied Internal TNMM as the MAM for justifying the mark up of 6%. The ld TPO observed in his order that the assessee vide letter dated 23.12.2015 filed the Shared Resources Allocation Agreement between SMSL and Synovate Group Companies. We find that the said agreement states that all group companies have a continuing need for shared services regarding advice and assistance in the areas of business development, client liasoning, planning, financing, accounting, legal and personnel matters, communication, branding and public affairs etc. The agreement further states that the group companies nominated SMSL to aggregate the full costs and then share these costs among group companies on a continuing basis. It is agreed that SMSL may charge a mark up percentage on the total actual cost. The assessee had sub....
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....spute on the truthfulness of the details filed by the assessee. 9.5. We find that the ld AR drew our attention to a detailed write up on how the group operates as a whole and the interplay between the various group companies, which is enclosed in Global TP Study Report by Deloitte at pages 126 to 129 of Paper Book Volume 1. He argued that from a reading of the said write-up, it becomes evident that in order to maintain efficiency and uniformity in quality, it is crucial for the group to be able to share its knowledge within the group and also seek assistance of other group companies to render services to global/multinational clientele. He submitted that due judicial notice should be taken of the fact that the arena in which the assessee 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. The ld AR vehemently argued that the assistance of the group companies of the assessee is necessary for providing the market research services, thereby making the assistance provided under the Shared Resources Allocation Agreement. He drew our attention that to Page....
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....same is earned on a cost plus 6% basis and the same has been found to be at ALP by the ld TPO. It is pertinent to note that this receipt of income had also emanated out of the very same Shared Resources Allocation Agreement. We find that the ld TPO having accepted that the income earned by the assessee under the Shared Resources Allocation Agreement of Rs. 6.41 crores is at ALP, how then can the ld TPO or the ld DRP say that no services have been rendered under the Shared Resources Allocation Agreement. This is a contradictory stand taken by the lower authorities. We also find that the ld TPO had in para 7.2 of his order had stated that no services have been rendered by SMSL and then in the sme paragraph , he had stated that services rendered are in the nature of shareholder/stewardship activity proving his contradiction. Moreover, in arriving at the conclusion that ALP for the services rendered under the Shared Resources Allocation Agreement is Nil, the ld TPO had stated that the assessee had failed to demonstrate that any independent person would be willing to pay a price for such services and that the assessee had failed to show a valid CUP. This statement of the ld TPO clearly ....
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....assessee had benefitted from the services rendered under the Shared Resources Allocation Agreement by way of earning income from group AEs as also from MNCs. We find that the ld AR argued on without prejudice basis that the ld TPO cannot sit in judgment over the benefit claimed to have been received by the assessee from the services received by placing reliance on the following decisions in support of his proposition:- (a) McCann Erickson -24 taxmann.com 21 (Del) (b) AWB India (P) Ltd. - 152 ITD 770 (Del) (c ) Schneider Electric - 82 taxmann.com 364 (Ahd) (d) Sabic Innovative Plastics India Ltd. - 186 TTJ 214 (Ahd) The ld AR drew the attention of the bench to the relevant operative portion of the aforesaid decisions to drive home the point that the ld TPO cannot sit in the judgement over the benefit claimed to have been received by the assessee from the services received from SMSL. The relevant operative portion of the aforesaid judgements are not reiterated herein for the sake of brevity. We find that the ld AR also submitted that the services rendered under the Shared Resources Allocation Agreement are in the nature of advice, guidance, assi....
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....89 and Annexure B-4 forming Part of TP Study at Pages 492,495 of Paper Book Volume 2. 2. Global Contract with Shell Inc. a. Agreement at Pages 896 to 928 of Paper Book Volume 4. b. Revenue from rendering services to various group companies of Rs. 44.38 lakhs as evidenced in Page 494 of Paper Book Volume 2. 3. Global Contract with Philip Morris is enclosed in Pages 930 to 971 of Paper Book Volume 4. 4. Global Contract with Procter & Gamble is enclosed in Pages 868 to 895 of Paper Book Volume 4. (c ) What remains after excluding the MNCs from Annexure B-4 is the local business of the assessee with Indian companies, in procurement whereof assistance of the global AEs was not necessitated. The business from such companies during the year was Rs. 13.48 Crores (being / approximately 15.63% of total sales) The above composition of income shows that approximately 85% [100 - 15.63 (earned from local business - (c ) above)] of the business of the assessee is from and on account of Global Relations. Rendition of services and this business would not be possible unless there was support of the group AEs under the Shared Resources Al....
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.... show the list of shareholders and also the fact that none of the group companies hold any shares in the assessee. 9.13. We further find that the assessee renders Market Research Services to its AEs. This typically happens when the AE has a contract with its client and under the said contract certain India related analysis is required. In such circumstances, the AE subcontracts some part of the work to the assessee. For such work, during the year under consideration, as stated earlier, the assessee has earned Rs. 19.75 crores from such services. Similarly, the assessee receives Market Research Services from its AEs. This typically happens when the assessee has a contract with its client and under the said contract certain outside India related analysis is required. In such circumstances, the assessee subcontracts some part of the work to the AE's. For such work, during the year under consideration, the assessee has paid Rs. 6.82 crores towards receipt of such services as is evident from Page 435 and 507 of Paper Book Volume 2. The aforesaid international transactions have been benchmarked using Internal TNMM and have been accepted by the ld TPO to be at ALP. We find that whi....
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....d Resources Allocation Agreement as enclosed in Page 295 of Paper Book Volume 1. The ld TPO enquired into this management fees and the assessee vide letter dated 26.11.2012 submitted its justification for incurrence of expenses under the Shared Resources Allocation Agreement. The ld TPO accepted the said payment under the Shared Resources Allocation Agreement to be at ALP as is evident from Page 312 of Paper Book Volume 1. Hence going by the principles of consistency, we hold that the ld TPO ought not to have made any adjustment towards the very same transaction when there is no change in the facts and circumstances of the case. 9.17. We find that the ld DR relied on various case laws at the time of hearing before us and the ld AR had filed a written rebuttal to the same before us as under:- Knorr Bremse India Pvt Ltd [2016] 380 ITR 307 The decision of the Punjab & Haryana High Court in the case of and Knorr Bremse India Pvt Ltd. has only remanded the matter back to the TPO for fresh adjudication (see Para 52). In fact on remand similar addition was made by the TPO which was the subject matter of adjudication of the Hon'ble ITAT in its dec....
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....by the Assessing Officer/TPO on the benchmark and the exemplar; whether such aggregation/segregation by the assessed should be interfered in terms of the four clauses stipulated in Section 92C(3) of the Act, read with the Rules. It would, among other aspects, refer to the method adopted and whether reliability and authenticity of the arm's length determination is affected or corrupted. * To the extent reliance is placed on the findings in paragraph 7.2-7.5 requiring demonstration of close connection between the international transaction for applying a bundled approach is concerned, the requirement is admittedly fulfilled in the case of the Appellant Insofar reliance is placed on the findings contained in paragraph 13 to 13.21 (in the case of LG Electronics India Pvt. Ltd. [supra]) viz. that it is incumbent on an assessee to prove rendition of service to claim deduction, is concerned, the said findings cannot be applied to the instant case for the reason that in the present case the Appellant has infact demonstrated with evidence that services have been rendered and moreover the decision has been rendered before the decision of the jurisdictional High Court in the case of ....
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....own not only the exact services rendered by each of the segments contained in Schedule 1 to the shared resources allocation agreement, but also demonstrated by way of numbers as to how such services have benefited the Appellant (see for example the revenue generated from the global contracts entered into with Unilever etc.). Further the Appellant has also demonstrated that not only has it paid for services under the SSA but has earned a sizeable income (Rs. 6.41 crores) from services it has rendered under the SSA. * More importantly, all these decisions are prior to the decision of the jurisdictional High Court in the case of Lever India Exports Ltd.(supra)which has held that it is not within the jurisdiction of the TPO to enquire into the truthfulness of the submission that services are rendered and then negating such submission hold the ALP of the services to be Nil; such an enquiry as to genuineness of the agreement comes within the scope of the AO. In the case of SKF Technologies [(2016) 68 taxmann.com 318] (Para 19), the Tribunal held that where the Assessee submitted that it has evidence to show that there was considerable correspondence to prove the rendition of services ....