TaxTMI 
TaxTMI 
2023 (5) TMI 155
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....501/Kol/2019 for Assessment Year 2012-13 to understand the facts of the case and the findings of the same would apply mutatis mutandis to the appeal for Assessment Year 2013-14. 4. Grounds of appeal for Assessment Year 2012-13 are reproduced as under:- "1. Whether the CIT(A) is justified in facts and law in the circumstances of the case in deleting the addition made by the AO for international transaction of payment of management fee of Rs. 5,14,96,223/-. 2. Whether the CIT(A) is justified in facts and law in the circumstances of the case in accepting that Assessee Company has received services from its AE during the F.Y. 2012-13 against payment for the management fee. 3. Whether the CIT(A) is justified in facts and law in the circumstances of the case to acknowledge that services are stewardship in nature and under an independent arrangement Assessee would never pay for such services to third party. 4. Whether the CIT(A) is justified in facts and law in the circumstances of the case to appreciate that assessee has not provided adequate evidence to demonstrate receipt of services 5. Whether the CIT(A) is justified in facts and law in the circumstances of the case in igno....
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....greed between the parties that 5% of the gross revenue generated from the hospital and Diagnostic Centre shall be paid to AHEL and GDPL in equal proportion by the Company as management fee under the above contract. The other terms of the proposed management contract will be decided between the parties in discussions and negotiations that are to be held at a later date. 18.2. The pharmacy at the hospital management and at the Diagnostic Centre shall be set up and run by AHEL on its own. It is agreed that AHEL shall pay 5% of the gross revenue of the pharmacy to the Company. 5.2. Pursuant to clause 18.1 referred above, a tripartite agreement was entered into, effective from 01.07.2011 between the assessee, AHEL and Gleneagles Management Services Pvt Ltd (for short "GMSPL"). The broad terms and conditions relevant to the present appeal are extracted below from the tripartite agreement:- a) assessee is granted a non-exclusive right to use and display licensed trademarks "Apollo" and "Gleneagles" respectively, together right to use "Apollo Gleneagles" upon or in relation to the name of Hospital. In this respect the relevant clauses from the said agreement are reproduced for ease ....
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....onal relations; quality assurance; and any other aspect of the operation of the Hospital which is linked to the quality of service being offered. v. operating policies affecting the appearance, maintenance, standards of operation, quality of service an / or appropriateness of the administrative policies and procedures and any other matter affecting the Hospital. vi. the capabilities and credentials of all the administrators of the Hospital from time to time, make recommendations to the Board with respect to its organization and personnel (including medical and other professional staff); vii. Make recommendations on the Hospital's requirements for medical and surgical supplies, consumables and medical equipment. viii. Review and recommend to the Hospital with respect to nature, type, amount, Insurance Company etc. for insurance policy required against malpractice suits, loss or damage by fire, impact, explosion, storm, tempest and other insurable risks in the name of the Company in respect of the ownership and the operation of the Hospital ix. Advise the Hospital as to the setting up of a risk management and maintenance system to maintain and keep the Hospital in good ....
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....thod. Assessee contested that since Ld. TPO could not find out even a single comparable hospital in India with foreign tie ups and therefore, CUP could not be applied due to lack of comparable. Assessee has noted in its TP document that CUP cannot be applied as Most Appropriate Method in the given case because of lack of data of comparable uncontrolled transactions and lack of data of Hospitals having foreign tie ups. 5.6. According to the assessee, ld. TPO did not apply any of the six methods prescribed in Rule 10D of the Income Tax Rules, 1962 (the Rules) to arrive at CUP method as the 'most appropriate method' and could not show any uncontrolled transaction for comparison and instead in the guise of CUP method, he questioned the commercial expediency of management fee expense and benefit derived by the assessee therefrom. Ld. TPO instead of benchmarking the international transaction of management fee, disallowed the same on the grounds of commercial expediency/no benefit received/no evidence furnished for services received. 5.7. Assessee provided details on the nature of management services received both, before the ld. TPO and ld. AO. In this respect, in the course of hearing....
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....d treatments carried in the Hospital. The AE also conducts Clinical Audit, helps in framing organization policies and devising strategies from time to time. Further, they train the hospital staff and managers for improved operational excellence. Also, at strategic level, GMSPL helps in developing Annual Operational Plan, budget, strategies on revenue generation and bringing in Clinical Excellence. It also conducts regular IT and Business Analytics audits to improve organizational performance. 5.9. Assessee paid management fee @ 2.5% of the Gross Operating Revenue to AHEL which has been accepted for similar nature of services received by the assessee from AHEL. 5.10. Assessment order was passed u/s 143(3) wherein entire management fee expense paid to GMSPL was determined by the ld. TPO at 'Nil' as a downward adjustment and the same was disallowed by the ld. AO while completing the assessment u/s 143(3) of the Act. 6. Assessee went in appeal against the above order before the ld. CIT(A) who allowed the appeal of the assessee. The observations and findings given by ld. CIT(A) while giving relief to the assessee are extracted as under:- "1. I have carefully considered the entire f....
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.....0 on the same set of evidences of receipt of services as those submitted to the Ld. TPO, as per the direction of the Ld. A.O. It is pertinent to note that the Ld. AO has not made any adverse Comment under section 37 of the Income Tax Act, 1961. I have also examined the agreement and the nature of services availed for which the assessee has paid Rs.5,14,96,223/- towards use of the "brand Gleneagles" and for various other management services which were necessary to maintain the quality, standards, operating procedures, equipments and services associated with the brand. Therefore, in my considered view the assessee has availed the services and derived benefit out of it and hence the conclusion drawn by the Ld. AO for making the additions is not sustainable. 3. The above views has also been confirmed and endorsed by the Hon'ble Jurisdictional Kolkata Tribunal in A T& S India (P.) Ltd V Deputy Commissioner of Income-tax [IT Appeal No. 77 (Kol.) of 2017] and Chryso India (P.) Ltd v Assistant Commissioner of Income Tax, Circle- 10 (2), Kolkata [IT Appeal No. 112 (Kol.) of 2017]; Hon'ble Bombay High Court in Commissioner of Income-tax, (Large Tax Payer Unit) v Johnson & Johnson ....
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....e International Transaction / SDT. Also, in section 92CA(3), the TPO is required to 'determine the arm's length price' in relation to the International Transaction / SDT and send a copy of his order to the Assessing Officer / assessee. 9.1. We have perused the material before us and in our considered view, assessee has reasonably established rendition of services by its AE. Further, we find that there is a clear contradiction in the finding of the authorities below. On one hand, it is held that arm's length price of these services is 'Nil' since no evidence of services received and benefits derived therefrom has been furnished by the assessee and on the other hand, a ground has been raised vide ground no. 3 that the services received by the assessee are in the nature of shareholder activity/stewardship. 9.2. Also, in our considered view, 'benefit test' does not have too much relevance in the arm's length price ascertainment. 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 p....
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....vided based on comparable data analysis to discard the TNMM arrived at by the assessee as MAM for benchmarking its international transaction with AE and adopt CUP method based on comparable data. One of the very basic pre-conditions for use of CUP method is availability of the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, application of CUP is dependent on the market value of the arrangements under which the present payments have been made. We are of considered view that in the absence of prerequisites for application of CUP method, it was not open for the ld. TPO to disregard TNMM employed by the assessee as MAM. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, impugned action of ld. TPO does not meet our judicial approval. 9.6. It is also noted that management fee expense @ 2.5% of Gross Operating Revenue paid by the assessee to AHEL under the same tripartite agreement has been acce....
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....activities relating to the juridical structure of the parent company itself, such as parent company shareholder meetings, issuing shares in the parent company and supervisory board costs; costs relating to reporting requirements of the parent company, including the consolidation of reports; and costs of raising funds for acquisition by its participants 11. Furthermore, in relation to activities which concern more than one enterprise of an MNE, the OECD Guidelines state that shareholder activities should be distinguished from the broader concept of stewardship activities which include the following: Stewardship activities cover a range of activities by a shareholder that may include the provision of services to other group members, for example services that would be provided by a coordination centre. These latter types of non- shareholder activities could include detailed planning services for particular operations, emergency management or technical advice (troubleshooting), or in some cases assistance in day to-day management. Thus, in the case of central coordination and control activities, the focus has changed from the nature of the activity to the willingness to pay in ....
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....nduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. This distinction was made clear by the ITAT in Dresser-Rand India (P.) Ltd. v. Addl. CIT [2011] 47 SOT 423/13 taxmann.com 82 (Mum.): "8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is ent....
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....ort is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise - of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot - after a consideration of the facts - state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO. This aspect was made clear by the ITAT in Delloite Consulting India (P.) Ltd. v. Dy. CIT/ITO [2012] 137 ITD 21/22 taxmann.com 107 (Mum): '37. On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at "nil", we find that the Bangalore Bench of the Tribunal in Gemplus India (P.) Ltd. v. Asstt. CIT [IT....
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....der which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 (Delhi), "Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". 16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO's case that the paym....
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.... by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales. Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO's determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. ....
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....rvice on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'." It was further submitted that such services can, by no stretch of imagination, be regarded as shareholder services. 43.6 In particular attention was drawn to the OECD Transfer Pricing Guidelines which defines the shareholder activity as under: "Shareholder activity An activity which is performed by a member of an MNE group (usually the parent company or a regional holding company) solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder." Further attention was drawn to para 7.10 of the OECD Transfer Pricing Guidelines further provides the following examples of shareholder activity: "7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6: (a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board; (b) Costs relating to reporting ....
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....assessee which was accepted in the assessment. There is no exempt income earned by the assessee during the year. The findings given by the ld. CIT(A) are reproduced as under:- "1. I have carefully considered the entire facts and circumstances of the case and the submissions filed by the Ld. ARs for the appellant-company against the action of the Ld. AO in making the impugned additions. I have also carefully perused the reasons recorded by the Ld. AO while making the impugned additions. In the case of the assessee under consideration, I find that the appellant has invested into debt mutual funds as evident from The Schedule of Current Investments reported in Note No.2.4 to the financial statement of the Company relevant for the subject Financial Year 2010-11. 2. It is to be noted that income earned on such investments are not exempt, and accordingly it is seen that the same has been offered to tax under the head "Short -Term Capital gains". The above is evident from the Return of Income filed by the appellant for the subject Assessment Year; it appears that such a finding has escaped the attention of the Ld. A.O. In the factual matrix emerging from the above, in my considered vi....