TaxTMI 
TaxTMI 
2020 (10) TMI 451
X X X X Extracts X X X X
X X X X Extracts X X X X
.... services, which is not in accordance with Rule 108(1)(a) of the Income Tax Rules, 1962 ("the Rules"). 4. The Ld. CIT(A) as well as TPO has erred in law by disregarding provisions of the Income tax Act, 1961, which provide that the condition precedent for claiming a business expense is that it should be incurred wholly and exclusively for the purpose of the business regardless of extent of benefit derived. Further, the Ld. TPO has jurisdiction only to determine the arm's length price of expenditure and not to disallow whole expense even if he is of the opinion that the expense is not necessary for business. 5. The Ld. CIT(A) failed to appreciate the fact that the Company is not guided by any motive to evade taxes and has in accordance with the provisions of the Income Tax Act adequately deducted taxes from payments made to AE's for services availed. 6. That the Ld. CIT(A) as well as Ld. TPO erred on facts in treating the Management Services as Shareholder Services." 3. The issue raised in the present appeal is against the TP adjustment made on account of payment of management charges. 4. Briefly in the facts of the case the assessee had file....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the turnover had increased over period of years. The assessee also pointed out that it had conducted benchmarking analysis for the intra group services as part of its transfer pricing documentation. The assessee had selected itself as tested party and compared its margins with selected concerns. The assessee had applied Transactional Net Margin Method and transaction was at arm's length. 6. The TPO vide para 9 has commented on the business of the assessee and pointed out that the assessee had failed to provide service-wise details and has observed as under:- 9. Remarks of the TPO (i) "I have gone through the submissions of the assessee. The assessee has failed to provide service wise details of payments. Only a broad outline of the nature of services have been filed. No contemporaneous documentary evidence has been submitted which may indicate that these services have actually been received by the assessee. In the name of evidence only some debit notes from the AE has been submitted. Since the services have been specified, the quantum of payment vis-à-vis the service received remains unexplained. The assessee has failed to specify the services ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the reply of the assessee is general in nature and not backed by specific documentary evidence. It has tried to make out a case for the arm's length nature of the transaction by stating that it has gained in the form of higher sales and profit. However, the assessee has not been able to provide an empirical data that can draw a connection between increase in sales, or higher profits and the payment that it has made to the AE for the specific services rendered........". 9. The TPO also noted that the assessee had incurred cost of Rs. 21,64,317/- on legal and professional charges. At the same time, it has also availed corporate tax advice and legal service. This indicates duplication of work as it has not been specified how the services rendered were different. The TPO was of the view that payment made on account of management services had to be separately analyzed to see whether the transaction was at Arm's Length Price or not. Reliance was placed on various decisions and TPO held that the TNMM method applied by the assessee was not been able to benchmark the international transactions relating to payment of IGS. The TPO also observed that "the arguments of the assessee t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing to Rs. 1,94,75,937 made by the assessee company to Its AEs was for any services or for any liability of the assessee company." 12. The TPO thus applying Comparable Uncontrolled Price method determined the Arm's Length Price of the transaction at NIL and proposed an upward adjustment of Rs. 1,94,75,937/-. 13. The Assessing Officer passed the assessment order u/s 144C(iv)/143(3) of the Act dated 10.05.2013 making the aforesaid adjustment of Rs. 1,94,75,937/-. The CIT(A) upheld the order of Assessing Officer/TPO against which the assessee is in appeal before us. 14. The Ld.AR took us through the order of the TPO and the CIT(A) and pointed out that the assessee had two segments i.e. trading segment and manufacturing segment. He further pointed out that the management services availed were bifurcated between the two segments. He pointed out that as far as aggregating approach of various international transaction is concerned, the same was accepted and only payment of IGS was disturbed. The question which arises was whether services were actually rendered and what benefit did the assessee derive from such availment of services. It was pointed out by the Ld.AR that the ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ur attention was drawn to the order of CIT(A) where in the Remand Report, the TPO stated that the services are incidental in nature. 16. The Ld.AR for the assessee stressed that where the expenses were intrinsically on the part of trading and manufacturing segments; the same has to be aggregated with other international transactions. Reliance was placed on the decision of Hon'ble Delhi High Court in case of CIT vs Sony Ericson Mobile Communication India Pvt. Ltd., reported in [2015] 55 taxmann.com 240 (Del.). Our attention was drawn to the order of CIT(A) and it was pointed out that there was self contradiction in his order, first he states that there was no rendition of services; and then he says it can either be shareholder expenditure or is duplicating in nature. As far as professional and traveling expenses were concerned, the Assessing Officer had disallowed 30% of the same, but he CIT(A) allowed in entirety. The Ld.AR for the assessee stressed that there is no merit in the order of TPO in holding that there is duplication of services. It was stressed that the services were rendered by arrangement through common pool and costs allocated through allocation key; since the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y the assessee. The assessee claimed that as it was part of an international group and in order to maintain international standards, certain Intra Group Services were availed by it out of common pool, wherein specialized services were provided by selected entities. The Ld.AR for the assessee has drawn our attention to the details of the services availed under the head "administrative services", sales support service and technical services & support, in this regard. It is the case of the assessee that the payment has been made on cost to cost basis for availment of such services. Further, the cost has been allocated out of the total cost incurred by AEs applying suitable allocation key. The assessee had filed evidences in support before the lower authorities in this regard and even before us, which are pointed to in paras above. 19. The first issue which has been raised before us is that where the services have been availed by it and they are connected to the main activities, then whether availment of services is to be benchmarked on standalone basis and not aggregated with the other international transactions undertaken by the assessee? The second issue which is arising befor....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... been actually rendered and the second contrary aspect is that there is duplication of services. The Assessing Officer/TPO cannot sit in judgment over the manner in which business have to be carried on by the businessman. The domain of the TPO is limited to check whether services have been availed. The assessee referred to the evidences filed in this regard to availment of services. The cost allocation sheet for availment of admin services is placed at pages 136 to 137 of the Paperbook. Out of the total cost of Danisco Group of amount in DKK 423165, assessee's share is at DKK 1111. The details of technical support services and its availment are placed at pages 138 to 141 of the Paperbook alongwith supports at pages 142 to 153 of the Paperbook. Similarly the assessee has furnished the details with regard to the sales and support services availed which are tabulated at pages 154 & 155 of the Paperbook alongwith support at pages 166 to 220 of the Paperbook. Further the corporate services availed by the assessee are tabulated at pages 222 to 226 of the Paperbook alongwith supports at pages 227 to 360 of the Paperbook. In the present set of facts, the assessee has filed extensive evi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... agreement with Emerson HK, Emerson TH, various entities of other countries had entered into such agreements. The terms of the agreement are similar for providing services, wherein a particular formula is designed by the person providing the services i.e. the basis for remuneration is the cost incurred by way of man hours charged to the entity with mark up of 5.8%. Such method of charging and remunerating was identical in the case of all the entities which were availing the services from Copeland Corporation through Emerson HK and Emerson TH. The assessee had also furnished on record the basis for charging cost by the two entities from the assessee. No doubt, the complete details of operations of the said concerns worldwide had not been filed, but that had no relevance to the activities or services availed by the assessee. There is no merit in the order of TPO in rejecting the segmental details of AEs filed by the assessee vis-à-vis services availed by it. What is to be considered in the hands of assessee is the services it had availed from Emerson HK and Emerson TH and not the whole activities undertaken by the said two concerns worldwide. The assessee had put on r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... all, this is outside the domain of TPO. Under the Transfer Pricing Regulations what the TPO has to determine is whether the services which have been provided by associated enterprises are at arm's length price. Accordingly, we find no merit in this part of the order of TPO. 21. In this regard, we find support from the ratio laid down by the Hon'ble High Court of Delhi in Hive Communication Pvt. Ltd. in Income Tax Appeal No.306/2011, wherein it has been held that the legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It was further held by the Hon'ble High Court that it was not for the Assessing Officer to dictate what the business needs of the company should be; it is businessman who can only judge the legitimacy of the business needs of the company from the point of view of prudent businessman. Hence, the benefit derived and accruing to the company must also be considered from the angle of prudent businessman. The Hon'ble High Court clearly held that the term "benefit" to a company in relation to its business has a very wide connotation and it was diffic....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... services where the assessee has shown losses during the year. 24. The Mumbai Bench of Tribunal in Dresser-Rand India (P) Ltd. Vs. Addl.CIT (supra) had held that We have further noticed that the TPO has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by so stretch of logic, it can have any role in determining ALP of that service. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. 25. Accordingly, we hold that the TPO while benchmarking the transactions has to determine whether the price paid by the assessee for the services availed is what an independent enterprise would ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the price paid by the assessee for availing support services was at arm's length price. Secondly, the assessee has referred to the information filed before the TPO/Assessing Officer under which the allocation of cost on the basis of time spent on a particular project had been worked out and cost allocated to different countries. The said details for Emerson HK concern are at page 941 and for Emerson TH at page 1017 of the Paper Book. The said details were filed by the assessee before the TPO. However, he rejected the same as complete financials of total operations of said entities were not filed. The assessee pointed out that certified details of relevant services rendered were given, wherein both the entities were engaged in other business operations, which were not relevant for deciding the issue of support services received by the assessee, hence complete details were not relevant. However, the TPO brushed aside the same on the ground that complete details had not been given. 27. The assessee also pointed out that the companies were providing information of complex nature to the assessee for carrying on the business and when there is certain amount of confidenti....