Income Tax Appellate Tribunal - Hyderabad
M/S Dq Entertainment, Hyderabad vs Assessee on 30 October, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
I.T.A. No. 62/HYD/2013
Assessment Year: 2008-09
M/s. DQ Entertainment Asst. Commissioner
(International) Ltd, Vs of Income Tax,
HYDERABAD Circle-1(2),
[PAN: AACCD8731C] HYDERABAD
(Appellant) (Respondent)
For Assessee : Shri P.V.S.S. Prasad, AR
For Revenue : Shri Konda Ramesh, DR
Date of Hearing : 09-09-2015
Date of Pronouncement : 30-10-2015
ORDER
PER B. RAMAKOTAIAH, A.M. :
This is an appeal preferred by assessee against the orders of Assessing Officer (AO) u/s. 143(3) r.w.s. 144C (5) of the Income Tax Act [Act] consequent to the directions issued by Dispute Resolution Panel [DRP], Hyderabad. Assessee has raised the following three grounds:
:- 2 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., "2. The Ld AO/TPO/DRP are not justified in treating the Arms Length Price as Nil in respect of management consultancy fees paid to its Associated Enterprise by questioning commercial wisdom of the assessee's decision to incur the expenditure for Rs. 3,19,23,085/-. The Ld AO/TPO/DRP ought to have considered the tangible and direct benefit derived by the assessee by incurring management consultancy services fee and allowed the same.
3. The Learned AO/TPO/DRP erred in concluding that the assessee did not file any detailed documentation in respect of management consultancy fees when detailed note and other supporting evidence was given explaining the benefits received against such fees paid.
4. The Ld AO/TPO is not justified in not acting upon the application for rectification filed under Section 154 of the Act, against the order of TPO for disallowing the amount of Rs. 73,62,023/- in the nature of "reimbursement of commission" which was not debited to profit and loss account and was routed only through the Balance Sheet affecting the share premium and share capital account".
Ground Nos. 1 & 5 are general in nature and does not require any adjudication.
2. Assessee is one of the leading producers of animation, visual effects, game art and entertainment content for India as well as global media and entertainment industry. Assessee-company filed its return of income on 29-09-2008 admitting NIL income after claiming exemption u/s. 10A of the Act. A reference u/s 92CA of the Act was made to the Addl. CIT (Transfer Pricing) (TPO), as assessee has reported international transactions as under:
S. Transaction AE Amount Method
No. applied
1 Payment of DQ 3,19,23,085 TNMM
Management Entertainment
Consultancy Services (Mauritius)
Fees Ltd., Mauritius
2 Reimbursement of DQ 2,70,57,703 CUP
Travel and Other Entertainment
expenses Plc, Isle of
Man, IM1 1LB
:- 3 -: I.T.A. No. 62/Hyd/2013
M/s. DQ Entertainment (International) Ltd., 3 Reimbursement of DQ 73,62,023 CUP Commission Entertainment (Mauritius), Mauritius 4 Equity Participation DQ 106,94,55,220 CUP Entertainment (Mauritius), Mauritius 2.1. While accepting some transactions, the TPO after rejection of TP study made by assessee, considered two items for his detailed analysis i.e :
i. Payment of Management Consultation Fee of Rs.
3,19,23,085/- to its holding company DQ Entertainment (Mauritius) Ltd., on account of management consultancy services availed. TPO examined the intra group service aspect and also the decisions of/approach followed by other countries like USA, Australia, Canada and Germany etc., while examining the payments made for intra group services and OECD guidelines. Based on the above aspects and considering assessee's objections, the TPO came to the conclusion that assessee could not substantiate the queries raised by him and could not prove the services rendered by the Associated Enterprise (AE). Applying the benefit test, he determined the Arm's Length Price (ALP) value of the services at NIL.
ii. The second aspect which the AO considered is with reference to reimbursement of commission at Rs. 73,62,023/-. Even though, assessee submitted that this amount was not charged to P&L A/c and was reduced from the consideration paid to certain erstwhile shareholders, as a result of an :- 4 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., agreement by the shareholders to bear part of the IPO expenses for the purpose of listing of DQ Entertainment PLC in London Stock Exchange. TPO however, was of the view that no tangible and direct benefit could be obtained by assessee, accordingly treated the same as NIL.
TPO suggested additions of the above amounts and AO served draft order accordingly on assessee
3. Before the DRP, assessee made various objections with reference to treatment of ALP at NIL on both the issues taken up by the TPO. As far as the payment of Management Consultancy Fees is concerned, after considering the explanation of assessee with necessary documents in support thereof, the DRP accepted that there are certain services rendered by the DQ Entertainment (Mauritius) Ltd. In coming to the above, the DRP also took into consideration the decision of the Co-ordinate Bench of ITAT, Delhi in the case of McCann Erickson India P. Ltd., in ITA No. 5871/Del/2011 dt. 08-06-2012. The decision of the DRP is as under:
"Taking into consideration the facts and information submitted by the assessee as well as the confirmation from a major customer and a certificate from a domain expert, this panel of the view that it is not possible to hold that no services have been received by the assessee from its AE. Hence, applying the principle of benefit test, its ALP value cannot be taken to be Nil and it is certainly above zero. This is also in line with the decision of the Hon'ble ITAT, Delhi in the case of McCann Erickson India P Ltd (ITA No. 5871/Del/2011) dated 08-06-2012".
Thus, the DRP accepted that DQ Entertainment (Mauritius) Ltd., has rendered certain services to assessee. With reference to ALP determination, however, the DRP restored the matter to the TPO :- 5 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., again for examining the detailed budgeting and documentation maintained for the services being rendered, the direction of DRP is as under:
"The memorandum of understanding between itself and the AE discussed about the payment of remuneration for services to be rendered as under:
In consideration for the management and supporting services, which DQE Mauritius will provide to DQE India, they agree to pay a management service fee. This fee is to be calculated as follows:
• DQE Mauritius will identify those costs of its officers and consultants who are chiefly involved in providing services to DQE India • Their agreed, budgeted fully loaded costs for the coming financial year will form the eligible cost base for the purpose of the management charge calculation • Their costs will be allocated across DQE Mauritius and DQE India based on shares of agreed budgeted sales for the coming financial year • DQE Mauritius will pass through at cost any major items of third party expenses to which it has not added value • All costs will be marked up with a profit element of 5% DQE Maintenance will invoice DQE India for the management and supporting services quarterly on the last day of each month. DQE will settle these invoices in US Dollars within thirty days. The invoices will be supported by an analysis made at the start of the financial year of the agreed budgeted costs to be incurred by DQE Mauritius and the costs to which the mark up is to be applied. Interest at a rate of 1% per month may be charged on that part of the invoices which is not paid within thirty days.
Thus, it is seen that DQE Mauritius will identify those costs of its officers and consultants who are chiefly involved in providing management and supporting services to DQE India. Their costs will be allocated across DQE Mauritius and DQE India based on shares of agreed budgeted sales. DQE Mauritius will pass through at cost any major items of third party expenses to which it has not added value. All costs will be marked up with a profit element of 5%.
Thus, detailed budgeting and documentation needs to be maintained for the services being rendered by the AE. These records, if produced before the TPO would throw more clarity and proof for the actual rendering of services. Therefore, this panel :- 6 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., directs that the TPO shall call for those appropriate records for which the assessee shall extend full cooperation and then come to a determination whether the sum paid of Rs. 3,19,23,085 to its holding company, DQ Mauritius on account of management consultancy services is at arm's length or it should be less".
Consequent to that, TPO examined the issues again in detail and however, came to the same conclusion of NIL ALP.
4. With reference to the reimbursement of commission of Rs. 73,62,023/-, the DRP accepted assessee's contentions as under:
"The TPO disallowed the entire amount of Rs. 73,62,023/- stating that Intra group services which are not deriving any tangible and direct benefit should be treated as 'NIL'. The nature of services relating to this payment and actual receipt of the same have not been gone into by the TPO. In this regard, the assessee filed a rectification letter u/s. 154 dated 22-12-2012 requesting not to disallow the reimbursement of commission of Rs. 73,62,023/- as it was not charged to the P&L A/c. However, it is claimed that the same was not considered by the TPO.
In view of the above explanations, the DRP is of the opinion that the payment relates to a capital item and not Intra group services. Moreover, it is not charged to P&L account. Therefore, the determination of Nil value is not correct and shall not be given effect to by adding it to the taxable income of the assessee. This will have impact only on the Balance Sheet of the assessee. For want of detailed information on factual aspects, the merits of determining the value at Nil are not gone into".
Even though, the DRP accepted assessee's objections, it seems the AO has not given effect to the same and disallowed the amount by including the same in the total TP adjustment. It was the ground raised by assessee (Ground No. 4) that assessee has preferred an application u/s. 154 and the same is also pending. Assessee wants direction to the AO to delete the amount. It was submitted that the actual amount of Management Consultancy Fee was only :- 7 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., Rs. 3,19,23,085/-, whereas, the TPO included the reimbursement amount of Rs. 73,62,023/- so as to make it to Rs. 3,92,85,108/-. Even though DRP has given clear directions and as seen from the order of TPO, he was only discussing about the ALP of Management Consultancy Services, it seems that TPO wrongly took the amount at Rs. 3,92,85,108/- which included the above amount which was not charged to P&L A/c. Since DRP has already directed it to be excluded, we direct the TPO/AO to delete the above amount and consider the management fee paid at only Rs. 3,19,23,085/- which was charged to P&L A/c as stated by assessee in various submissions, which can also be verified as Appendix-B to Form No. 3CEB placed in Page 71 of the Paper Book. In view of this, Ground No.4 is considered allowed.
5. Coming to Ground Nos. 2 & 3 on the issue of Management Consultancy Fees paid to AE, We have heard both Ld. Counsel and Ld. DR in detail.
5.1. It was the submission of Ld. Counsel that assessee submitted before TPO that Board of Directors of DQ Entertainment, Plc has been instrumental in bringing in a number of projects with imparting customers. These projects valued at approximately Rs. 64 Crores have been executed by DQ India over a period from 2007-08 upto 2010-11. Further, a strategic decision was taken to invest in Method Animation SARL which lead to an agreement between the above company and DQ India for production of projects valued approximately at Rs. 105 Crores. Inspite of DRP satisfying with the benefit test, the TPO however, again rejected assessee's contentions and determined the ALP at NIL, without having any comparable cases even though the method :- 8 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., selected was TNMM. It was submitted that test of commercial expediency for determining whether the expenditure was necessary and reasonable has to be adjudged from the point of view of the business men and not of the Revenue. It was further submitted that expenditure can never be linked to the income earning ability or the value addition. Ld. Counsel relied on the decision of Hon'ble Delhi High Court in the case of CIT Vs. EKL Appliances [24 Taxmann.com 199] (Delhi) to submit that 'Department cannot dictate to the taxpayer whether or not to incur any expenditure'. Ld. Counsel also relied on the decision of Ericsson India Pvt. Ltd., Vs. DCIT [25 Taxmann.com 472] (Delhi) to submit that 'It is prerogative of the taxpayer to avail services from its AE and the Revenue cannot question the commercial expediency of such a decision'. Revenue cannot disallow any expenditure merely on the ground that it was not required by the taxpayer. Ld. Counsel also relied on the following decisions:
i. Dresser - Rand India Pvt. Ltd., Vs. Addl. CIT [47 SOT 423 (Mum)];
ii. Sasson J. David and Co., Pvt. Ltd., [118 ITR 261]; iii. CIT Vs. Kirloskar Tractors Ltd., [231 ITR 849 (Mum)]; iv. Social Media India Ltd., Vs. ACIT (ITA No. 1711/Hyd/2012, Hyderabad Bench);
v. Thyssen Krupp Industries India (P) Ltd., Vs. ACIT Mumbai [27 Taxmann.com 334 (Mum)];
vi. Castrol India Ltd., Vs. ACIT [29 Taxmann.com 62 (Mum)]; vii. SC Enviro Agro India Ltd., Vs. DCIT Mumbai [34 Taxmann.com 127];
viii. Festo Controls (P) Ltd., DCIT Bangalore [30 Taxmann.com 16];
:- 9 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., ix. LG Polymers (P) Ltd., Vs. Addl. CIT [48 SOT 269/15 Taxmann.com 79];
x. Quintiles Research (India) Private Ltd Vs. Deputy Commissioner of Income Tax (1605/Bang/2012); xi. Atotech India Limited Vs. ACIT (ITA No. 104/Del/2012); and xii. AWB India Pvt. Ltd., Vs. ACIT (ITA No. 4454/Del/2011) 5.2. Ld. DR however, referred to the order of TPO and submitted that assessee has not furnished complete details and justification of the payment was not made. He relied on the orders of the TPO.
6. We have considered the issue and examined the documents placed on record and orders of the authorities. There is no dispute with reference to the fact that assessee has availed intra group services from the DQ Mauritius which in turn has entered into another agreement with DQE, Plc, Isle of Man. There are two issues in the analysis of transfer pricing for the intra group services.
• First issue is whether intra group services have in fact been provided?
• The other issue is what could be the intra group charge for such services for tax purposes should be in accordance with the Arm's Length principle?
As far as the issue whether intra group services have in fact been provided, there is no dispute with reference to same as the DRP has accepted that there are intra group services. To that extent, there is no dispute and Revenue is not aggrieved on the DRP's :- 10 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., opinion/direction. What the DRP did not decide is the other issue- intra group charges for such services.
6.1. The issue, as stated above by extracting the order of DRP, was referred to the TPO for determining in accordance with the Arm's Length principle. Thereafter the TPO has examined the issue by giving an opportunity and obtaining the details from assessee. In the letter addressed to the AO by the TPO consequent to that analyses the issue in different parts. The same is extracted for the sake of our consideration which is as under:
"8. TPO's analysis:
Having carefully gone through the submissions of the taxpayer, the TPO has analysed the international transaction in the following manner.
8.1 The taxpayer is the wholly owned subsidiary of its AE M/s. DQ Entertainment (Mauritius) Ltd., Mauritius which in turn is the wholloy owned subsidiary of DQ Entertainment Pic, Isle of Man.
8.2.1 The management consultancy service fees of Rs.
3,92,85,108/- paid by the taxpayer to its AE is calculated in the following manner:
Sl. No. Nature of cost US$ in '000 1 Foreign exchange loss 321 2 Administration charges 9 3 Audit fee 4 4 Management consultancy 427 charges Add: 5% Total: 761 38 Total: 799
8.2.2 In the above table, the management consultancy service fees of US$ 427,000/- is actually the expenditure incurred by DQ Entertainment Plc, Isle of Man. The break up of the same is given as under:
:- 11 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., Sl. Name of the supplier Nature of cost US$ in '000 No. 1 Hemscott Group Ltd Website maintenance 10 2 Evolution securities Nomad retainership 22 Ltd 3 Bell Pottinger PR Retainership 24 4 Grant Thornton UK VAT services 5 LLP 5 Hemscott Group Ltd Website maintenance 1 6 Berwin Leighton Legal Relationship 4 Paisner LLP 7 London Stock RNS Services 2 Exchange Plc 8 Deloitte Touche Adudit Fee 60 Tohmatsu 9 Equity Limited Administration 8 services 10 Equity Limited Administration 1 services 11 Board meeting Board meeting 5 expenses expenses 12 Computer share Registrar services 3 13 Bank Charges Bank Charges 2 14 Grant Thornton India Interim results review 13 15 Evolution Securities Nomad Retainership 3 Ltd 16 Director's fee Director's fee 230 17 Marsh Limited Insurance 13 Total 406 Add: 5% 20 Total 427 8.3 The expenditure which are purely related to the A.E. DQ Entertainment (Mauritius) Ltd., Mauritius are only two, i.e., (i) The administration charges of US$ 9,000/- and (ii) Audit fee of US$ 4000/-. The foreign exchange loss of US$ 321000/- pertains to re- evaluation of the foreign currency loan taken by the AE, Mauritius from AE, Isle of Man. Therefore, the expenses which pertain to the AE, Mauritius are only US$ 13000/- which include administration charges of US$ 9000/- and audit fee of US$ 4000/-. Since the foreign exchange loss of US$ 321000/- does not pertain to any management and consultancy services, it cannot be allowed to be included in the total expenses under the heading 'management consultancy services'. The balance amount of 'management and consultancy services' is analysed in the subsequent paras.
9. It is therefore clear that the DQ Entertainment (Mauritius) Ltd., Mauritius has not incurred any expenditure pertaining to management or consultancy services. The entire management :- 12 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., consultancy charges pertain to expenditure incurred by DQ Entertainment Plc. As per the Memorandum of Understanding between the taxpayer and DQ Entertainment (Mauritius) Ltd., Mauritius, the remuneration payable by the taxpayer to the AE DQ Entertainment (Mauritius) Ltd., Mauritius on account of management and consultancy services is discussed in the following words:
"REMUNERATION In consideration for the management and supporting services, which DQE Mauritius will provide to DQE India, they agree to pay a management service fee. This fee is to be calculated as follows:
• DQE Mauritius will identify those costs of its officers and consultants who are chiefly involved in providing services to DQE India.
• Their agreed, budgeted fully loaded costs for the coming financial year will form the eligible cost base for the purpose of the management charge calculation.
• Their costs will be allocated across DQ Mauritius and DQE India based on shares of agreed budgeted sales for the coming financial year.
• DQE Mauritius will pass through at cost any major items of third party expenses to which it has not added value. • all costs will be marked up with a profit element of 5%.
DQE Mauritius will invoice DQE India for the management and supporting services quarterly on the last day of each month. DQE India will settle these invoices in u/s. Dollars within thirty days. The invoices will be supported by an analysis made at the start of the financial year of the agreed budgeted costs to be incurred by DQE Mauritius and the costs to which the mark up is to be applied".
10.1 As per the MOU signed between the two, the management consultancy fees payable to AE DQ Entertainment (Mauritius) Ltd., Mauritius is contingent on the following:
• DQ Entertainment (Mauritius) Ltd., Mauritius will identity the costs of its officers and consultancy services who are involved in providing the services to the taxpayer. • DQ Entertainment (Mauritius) Ltd., Mauritius will pass through at cost in major items of their party expenses to which it has not added value.
10.2 As is evident from the MOU above, it is necessary that the AE DQ Entertainment (Mauritius) Ltd., Mauritius invoices the taxpayer for the following two main services and the associated expenses:
:- 13 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd.,
(i) Services rendered by its own officers and consultants and
(ii) Any third party expenses to which the AE DQ Entertainment (Mauritius) Ltd., Mauritius has not added value will be passed through at cost to the taxpayer.
10.3 As regards the expenses totaling to US$427,000/- the AE DQ Entertainment (Mauritius) Ltd., Mauritius has not added any value whatsoever. The entire value of DQ Mauritius US$ 406,000/- is basically currency conversion of GBP2,13,793/- charged by DQ Entertainment Plc, Isle of Man to DQ Entertainment (Mauritius) Ltd., Mauritius.
10.4 It is noteworthy that there are only the following 3 persons working in the DQ Entertainment (Mauritius) Ltd., Mauritius -
(i) Mr. Tapaas Chakravarti, Chairman and Chief Executive Officer,
(ii) Mr. Kam Young - Member of the ACCA in charge of the finance and accounts, audit and foreign exchange transactions management, budgeting and MIS etc.
(iii) Mr. Maro Eddy - Level 1 ACCA : He is the in-charge of book keeping and accountancy, computation, filing of VAT returns, IT returns etc., It is noteworthy.
10.5 Sri Tapas Chakravarti, Chairman & Chief Executive Officer, is also a Director in the taxpayer's company as well as in DQ Entertainment Plc, Isle of Man. In the table containing the list of expenses incurred by DQ Entertainment Plc, Isle of Man, there is no expense associated with him. In other words, there are only third party expenses. With respect to the third party expenses, the MOU signed between the taxpayer and the AE mentions the following:
• DQE Mauritius will pass through at cost any major items of third party expense to which it has not added value.
11.1 Since, the third party expenses are only pass-through costs, no mark up of five percent can be allowed on these expenses.
11.2 Now, let us analyse the third party costs which are pertaining to management and consultancy services. The details of the costs incurred by AE, Isle of Man, are again reproduced below:
Sl. Name of the supplier Nature of cost US$ in '000 No. 1 Equity Limited Administration services 8 2 Equity Limited Administration services 1 3 Deloitte Touche Audit fee 60 :- 14 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., Tohmatsu 4 Bank Charges Bank Charges 2 5 Board Meeting Board meeting 5 expenses expenses 6 Marsh Limited Insurance 13 7 Grant Thornton India Interim results review 13 8 Grant Thornton UK VAT services 5 LLP 9 London Stock RNS Services 2 Exchange Plc 10 Computer share Registrar services 3 11 Hemscott Group Ltd Website maintenance 10 12 Hemscott Group Ltd Website maintenance 1 13 Berwin Leighton Legal Retainership 4 Paisner LLP 14 Evolution securities Nomad retainership 22 Ltd 15 Evolution securities Nomad retainership 3 Ltd 16 Bell Pottinger PR Retainership 24 17 Director's fee Director's fee 230 Total 406 Add: 5% 20 Total 427 11.3 In the above table, the items of expenses at Srl. No. 1 to 10 are routine administrative expenses which are in no way related to management and consultancy. For instance, expenses at serial no. 1 & 2 are administrative expenses, at serial no. 3 is audit expenses, 4 and 5 are banking charges and board meeting expenses.
Similarly the expenses at serial no. 6 to 10 are routine administrative expenses are not related to any management consultancy. The other expenses at serial no. 11 to 17 are pertaining to retainership fee etc paid to legal advisiors, PR consultants etc. The Evolution Securities Ltd is an international investment banker, Berwin Leighton Paisner LLP is a Legal Fir, and Bell Pottinger is in public relations. The total expenses from serial no. 11 to 17 are US$ 294000/-. Thus, it is evident that only US$ 294000/- purportedly pertains to management and consultancy services whereas the balance US$ 133000/- are routine administrative expenses which are pertaining to the AE, DQ Entertainment, Isle of Man.
12.1 Now, the next question arises is whether the US$ 294000/- incurred by DQ Entertainment, Isle of Man, represent any services provided by these experts or consultants to the taxpayer, DQ :- 15 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., Entertainment India, in support of its contention that the expenses passed on the taxpayer were in fact incurred for the benefit of the taxpayer, the taxpayer has submitted two certificates, one from Mr. Nicolas Goldstein and the other from Method Animation SAS. The relevant para of the certificates signed by Mr. Nicolas Goldstein is as under:
Mr. Nicolas Goldstein:
"I have seen direct guidelines, advise and support given by Board of Directors of DQ Entertainment Plc resulting in the DQ Entertainment (International) Limited having finalized various projects over a number of years since 2007".
12.2 The relevant para of the certificates signed by Method Animation SAS is as under:
Method Animation SAS:
"Method Animation and Board of Directors of DQ Entertainment Plc have had been jointly interacting on various productions. This relationship was made strong by way of the agreement entered into between Method Animation and DQ Entertainment Plc whereby Method Animation agreed to make first offer to DQ Entertainment International Limited before entering into Production Service Agreement for any project started by Method Animation SAS being initiated, developed and produced by the company as delegate producer, and for which the company is in charge of the fabrication".
12.3 In the first certificate is is mentioned that with the advice and guidance of Directors of DQ Entertainment Plc, Isle of Man, the taxpayer could finish certain projects. This statement is vague and does not mention any specific business or project bagged by the taxpayer on the basis of managerial support given by the Directors of DQ Entertainment Plc, Isle of Man. It is stated in the second Certificate mentioned above that the Board of Directors of DQ Entertainment, Plc, Isle of Man, have interacted with prospective clients resulting in the DQ Entertainment Plc, Isle of Man, and the taxpayer company getting business form the clients.
13. It is important to note here the DQ Entertainment Plc, Isle of Man is the ultimate holding company of the taxpayer and the services provided by the services, if any, provided by the Directors of DQ Entertainment Plc, Isle of Man, to the taxpayer are nothing but part of the shareholder activity. It is but natural that any holding company and its Directors will provide advice and guidance to its step down subsidiary. Such services do not form part of the 'intra- group services' as per the OECD Guidelines. The taxpayer has no :- 16 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., doubt benefitted from its passive association with the holding companies. However, no documentary evidence has been submitted before the TPO to show that taxpayer benefitted from any direct service provided by the AEs to the taxpayer.
14. In this context, it is pertinent to refer to para 7.13 of the OECD Guidelines which is reproduced below-
7.13 Similarly, an associated enterprise should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and no to any specific activity being performed. For example, no service would be received where an associated enterprise by reason of its affiliation along has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefitted from the group's reputation deriving from global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group's attributes that positively enhances the profit making potential of particular members of the group. Each case must be determined according to its own facts and circumstances.
15. The taxpayer has not filed any supporting document as was discussed by the Hon'ble DRP in the directions issued u/s. 144C vide its order 14.09.2012. The relevant portion of the order is as under:
"Thus, detailed budgeting and documentation needs to be maintained for the services being rendered by the AE. These records, if produced before the TPO would throw more clarity and proof for the actual rendering of services".
16. The taxpayer has not filed any detailed budgeting or documentation by either the taxpayer or any of the two AE i.e., DQ Entertainment (Mauritius) Ltd., Mauritius or DQ Entertainment Plc, Isle of Man to show how and what part of the Director's Fees incurred by the DQ Entertainment Plc, Isle of Man, should be considered as management and consultancy services provided to taxpayer. In this regard the para 7.18 of the OECD Guidelines states the following-
7.18. The fact that a payment was made to an associated enterprise for purported services can be useful in determining whether services were in fact provided, but the mere description of a payment as for example, 'management fees' should not be expected to be treated as prima facie evidence that such services have been rendered. At the same time, the absence of payments or contractual agreements does not automatically lead to the conclusion that no intra-group services have been rendered.
:- 17 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd.,
17. Therefore, in view of the above discussion, the arm's length price of the management consultancy services paid by the taxpayer to its AE, DQ Mauritius, is held as Rs. NIL. Accordingly, the amount of the fee for management consultancy services of Rs. 3,92,85,108/- is held as excess paid being adjustment u/s. 92CA".
6.2. As can be seen from the above, the TPO analysed the accounts of DQ Entertainment Plc and DQE Mauritius in analyzing the nature of payment. Out of the total amount of US$ 7,99,000 paid, the actual Management Consultation Charges were only US$ 4,27,000 along with administrative and audit fee of US$ 14,000. As per the agreement, there is a markup of 5%. This expenditure only can be considered, in our view, as the Management Consultancy Service Fee, whereas the foreign exchange loss of US$ 3,21,000 cannot be considered as intra group service. We notice from the documents placed on record that instead of quarterly bills being raised as per the agreement, DQE Mauritius has raised only one bill for the whole of the year, which was placed at page 170 of the Paper Book. As can be seen from the details of payments made, placed at page 171 of the Paper Book, the amount of US$ 799,174 charged on 31-03-08 was paid in three installments of US$ 3,00,000 on 14-09-2010, US $ 1,99,174 on 25-10-2010 and US$ 3,00,000 on 04-01-2011. It is noticed that even though invoice was raised on 31-03-2008 for whole year instead of quarterly billing, the payments were made from September, 2010 to January, 2011 with substantial delay. The reasons for such delayed payments were not explained. Therefore, we are of the view, that in the given circumstances, the foreign exchanges losses or gains in the hands of DQE Mauritius cannot be considered as services rendered by the DQE Mauritius to assessee which should be on it's own account. To the extent of the above amount, we are in agreement with the observation of the TPO in para 8.3 of his :- 18 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., letter dt. 08-11-2012, that foreign exchange loss does not pertain to any management and consultancy services. To that extent his order has to be approved.
6.3. What the TPO has missed is with reference the amounts other than foreign exchange loss. In the absence of any comparable figures and in the absence of any further enquiry and having the fact that services have been rendered to assessee as accepted by DRP also, TPO cannot take the amount of ALP at NIL, ignoring the payment by assessee of US$ 4,27,000. As per the agreement, all the costs incurred by the DQE Mauritius with 5% markup had to be charged to assessee. Therefore, as per the details furnished by assessee before the TPO, the actual management fee of US$ 4,27,000 with administration charges of US$ 14000 and markup of 5%, at the exchange value as on the date of 31-03-2008, can be considered as 'service charges' for the intra group services rendered. This can be taken as ALP. Therefore, modifying the order of TPO, we determine the Management Consultancy Fee as detailed above and AO is directed to modify the order accordingly.
7. In arriving at the above, we have considered the OECD Transfer Pricing guidelines 2010, Chapter-VII pertaining to 'special considerations for intra group services'. Considering the assessee's agreement with DQE Mauritius which in turn has an agreement with DQ Entertainment Plc, and the reimbursement of cost from one company to another, we agree with the TPO's observation that foreign exchange loss in financial transactions cannot be considered as 'service charge' for the intra group and therefore, we after considering the facts of the case, restrict the amount to the :- 19 -: I.T.A. No. 62/Hyd/2013 M/s. DQ Entertainment (International) Ltd., actual management fees charged by the DQE Mauritius along with other cost of administration and audit and mark up at 5%.
8. We have also kept in mind the various principles laid down by the Co-ordinate Benches and also Hon'ble High Courts as relied on by assessee in arriving at the above conclusions. Suffice to say that principles laid down by the various orders/judgments have been kept in mind in arriving at the above conclusions. With these observations and directions, we allow the grounds raised by assessee (Ground Nos. 2 & 3) partly as stated above.
9. In the result, appeal is partly allowed.
Order pronounced in the open Court on 30th October, 2015 Sd/- Sd/-
(P. MADHAVI DEVI) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 30th October, 2015
TNMM
:- 20 -: I.T.A. No. 62/Hyd/2013
M/s. DQ Entertainment (International) Ltd., Copy to :
1. M/s. DQ Entertainment (International) Ltd., 644, Aurora Colony, Road No.3, Banjara Hills, Hyderabad.
C/o. Prasad & Prasad Chartered Accountants, Flat No. 301, MJ Towers, 8-2-698, Road No. 12, Banjara Hills, Hyderabad.
2. Asst. Commissioner of Income Tax, Circle-1(2), Hyderabad.
3. Dispute Resolution Panel (DRP), Hyderabad.
4. The Director of Income Tax, International Taxation, Income Tax Towers, Hyderabad.
5. The Addl. Commissioner of Income Tax (Transfer Pricing), Hyderabad.
6. D.R. ITAT, Hyderabad.
7. Guard File.