TaxTMI 
TaxTMI 
2024 (12) TMI 195
X X X X Extracts X X X X
X X X X Extracts X X X X
....hereinafter referred to as the 'Hon'ble DRP'). On the facts and in the circumstances of the case and in law, the learned AO/ Deputy Commissioner of Income-tax - Transfer Pricing - 3(2)(1) (hereinafter referred to as the 'learned TPO)/ Hon'ble DRP has: General 1. erred in assessing the total income at INR 266,05,70,867 as against the returned income of INR 259,01,37,940 disclosed in the revised return of income filed; Transfer pricing adjustment - Payment to the AEs for availing of intra-group services: 2. erred in making an adjustment of INR 7,04,32,927 to the total income of the Appellant under Section 92CA(3) of the Act, by treating the Arm's Length Price ('ALP') of international transaction of Payment of Management fee under an intercompany service agreement entered into with its Associated Enterprise ('AE') i.e., M/s. Otis International Asia Pacific Pte. Ltd as NIL; Disregarding the benchmarking and economic analysis without cogent reasons: 3. erred in not accepting the economic analysis conducted by the Appellant in accordance with the provisions of the Act read with the Rules, without recording any reasons to show that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e grounds are without prejudice to each other and the Appellant craves leave to add, alter, modify or delete such other objections before or during the course of hearing before the Hon'ble Panel, so as to enable the Panel to decide on the objections raised by the Appellant, as per law." 3. The representatives of both the sides were heard at length. Case records carefully perused and the relevant documentary evidence duly considered in light of Rule 18(6) of the ITAT Rules, 1963. 4. Briefly stated, the facts of the case are that the assessee company is primarily engaged in the business of manufacture, erection, installation and maintenance of elevators, escalators and other lifting & handling equipment, etc. Return of income for the year under consideration was filed on 13/02/2021 returning total income of Rs. 2,59,01,37,940/-. The return was selected for scrutiny assessment and accordingly, statutory notices were issued and served upon the assessee. The Transfer Pricing assessment proceedings were initiated in order to determine the Arm's length price in relation to the international transactions entered into by the assessee with its AE. The assessee has entered the following int....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... brought on record. 5.3 It is also claimed that assessee has benchmarked the International transaction of management fee, which has been allocated to assessee as a Cost-plus mark up of 5%. However, no evidences of AE's Cost have been furnished despite specifically asked for. 6. As regards methodology for allocation of Management Fee, it was stated to be divided into 3 step process. 1. Segmentation of Activities 2. Method of allocation 3. Allocation of Costs 6.2 In respect of segmentation - it was submitted that - "the activity segmentation keys used were based on efforts incurred and head count". It is not ascertainable, as to how - the "efforts incurred" can be quantified in an objective manner. 6.3 In respect of Method of allocation - it was submitted that - "after each departments expenses were segmented by activity, each activity and its related costs were identifies as either allocable to Otis-WHQ or the Otis APAC operating entities. This determination was made by applying the allocation keys based on the descriptions of each activity. Allocable Expenses to Otis-WHQ The US Transfer Pricing Regulations delineate specific situations in which an acti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....contracts, and (7) ECO. iv. Service, Field Operations and Environmental, Health and Safety ('EHS'): The primary activities are related to (1) EHS, (2) Field, and (3) Service. v. Information Technology ('IT'): The primary activities are related to (1) infrastructure, compliance and governance, (2) transformation projects and Project Management Office ('PMO"), and (3) IT operations and finance. vi. Operation: The primary activities are related to (1) engineering, (2) supply chain, and (3) Quality/ACE and Product Safety Officers ('PSO'"). vii. New Equipment ('NE')/Business Development ('BD'/Marketing: The primary activities are related to (1) product strategy, (2) marketing support, (3) planning and reporting, (4) major projects and (5) BD. viii. Management: The primary activities are related to the role of the President." 6.2. To substantiate the markup of 5% charged by the AE, the assessee had undertaken the benchmarking analysis which validated the arm's length nature of the mark-up on the costs for intra-group services (IGS). The AEs (Foreign parties) were considered as tested parties for primary analysis to demonstrate that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red 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. [Para 21] 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 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 been far better, had he not incurred such expenditure. These are irrelevant considerations for the purpose of rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no autho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. 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. As provided in the OECD guidelines, he is expected to examine the int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o no comment or any material brought on record that there is any kind of duplicative services, i.e., the assessee is carrying out similar services from its own employees and same activity and services are being rendered by the AE. In so far as allocation of services charged by the AE, there are enough documentary evidences which were filed to substantiate the cost allocation methodology adopted by the LAPL which included the details of the cost incurred by it and the amount allocated to the assessee in support of the financial statements of LAPL was filed alongwith the work of basis of allocation which was taken on the basis of monthly sales for apportionment of cost incurred by the LAPL among various Lord group entities. Apart from that, financial statements of various Lord Group entities to whom cost has been allocated by LAPL have also been filed on sample basis. 18. If we analyse the various services which have been provided, the details of which have been incorporated in the foregoing paragraphs, we find that under various heads, assessee had categorically stated how the benefits have been derived which are being duly supported by documentary evidences. Before us a huge list....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed any other permissible method for determination of arm's length price. Such a course of action, as noted above, is not permissible in law. Just because these services are worthless in the eyes of the revenue authorities, the arm's length price of these services cannot be held to be NIL. Similarly, the findings that no services were rendered and that the assessee could have performed these services on its own are contradictory. If no services were rendered, which services the authorities below hold that the assessee could have performed on its own. There is also evidence for visits by the representatives of the group entity, i.e SEI-F, for rendition of these services. The cost allocation agreement and detailed documentation support for the services availed under the cost contribution arrangement were placed before us at pages 106 to 258, and, upon perusal of the same, we have no doubts about the actual rendition of services and bonafides of arrangement. As for the TPO's observation that ""if the services are in the nature of stewardship activities or shareholder activities, the same need not be charged by the AEs of the assessee", OECD Transfer Pricing Guidelines indee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....axmann.com 364, had the occasion to consider a similar situation where the ALP of management fee paid was determined at Nil as according to the revenue, no services were rendered. The relevant findings of the Co-ordinate Bench, read as under:- "...... 26. In the present case, though a finding is given to the effect that no services are rendered, in the light of the contradictions in this finding and the observations above, it is clear that in effect commercial expediency of this payment is questioned. That exercise, in our considered view- particularly in the light of Hon'ble Delhi High Court's judgment in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241, cannot be conducted in the course of ascertaining the arm's length price. 27. In view of the above discussions, as also bearing in mind entirety of the circumstance, it is clear that the impugned ALP adjustment is contrary to the scheme of the Act. The authorities below have been swayed by the considerations which were not germane to the issue. We, therefore, uphold the grievances of the assessee and direct the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technica....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dvice (trouble shooting) or in some cases assistance in day to day management" but make it clear that while shareholder activities, i.e. the activities which are performed solely on account of ownership interests, "would not justify a charge to the recipient entities", In other words, consideration is not required to be charged for the shareholder activities, while other stewardship activities can, and must, be compensated. Nothing, therefore, turns in favour of the revenue on account of the services rendered by the SEI-F being in the nature of stewardship activities which is a term of much broader connotation than shareholder activities. Not charging for the rendition of shareholder activities can be justified but not for all the stewardship activities. Coming to the question of business expediency, which has been questioned by the authorities below, in our considered view it was also not for the TPO to bother about business expediency of these services; all he was to see was what would be arm's length services of these services in an uncontrolled situation. That has to be done on the basis of a permissible method of ascertaining the arm's length price. It cannot be open t....