Income Tax Appellate Tribunal - Ahmedabad
Tudor India Limited,, Sabarkantha vs The Acit.,Gandhinagar Circle,, ... on 7 September, 2018
ITA No. 381/Ahd/2015
Tudor India Pvt Ltd Vs. ACIT
Assessment year: 2010-11
Page 1 of 16
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "D" BENCH, AHMEDABAD
[Coram: Pramod Kumar, AM and Ms. Madhumita Roy, JM]
ITA No. 381/Ahd/2015
Assessment Year: 2010-11
Tudor India Private Limited ..............................Appellant
(formerly known as Tudor India Limited),
A-704, Synergy, Opp: Commerce House,
Near Vodafone, Corporate Road,
Prahlad Nagar, Ahmedabad-380015
[PAN : AAACT 1681 R]
Vs.
Asstt. Commissioner of Income-tax ...........................Respondent
Gandhinagar Circle, Gandhinagar
Appearances by:
Sanjay R Shah, for the Appellant
Vasundhara Upmanyu, for the Respondent
Date of concluding the hearing : 08.06.2018
Date of pronouncing the order : 07.09.2018
O R D E R
Per Pramod Kumar, AM:
1. By way of this appeal, the assessee-appellant has challenged correctness of the order dated 10th December 2014 passed by the Assessing Officer under section 143(3) r.w.s. 144C of the Income-tax Act, 1961, for the assessment year 2010-11.
2. The grievances raised by the appellant in ground nos. 1, 2 & 3 are as follows:-
"1. The order passed by the Learned AO, wherein an upward adjustment of Rs.3,50,13,068/- in respect of the international transactions of the Appellant has been calculated, is erroneous and contrary to the provisions of law, facts and circumstances of the case and therefore requires to be suitably modified.
2. The Learned AO/TPO erred in making upward adjustment in relation to payment made on account of allocation of management fee by Associated Enterprises amounting to Rs.3,47,66,541. In the facts and circumstances of the case where appellant received certain services which helped it in its operations, the Learned AO/TPO ought to have accepted the arm's length price declared by the appellant. It is submitted it be so held now.ITA No. 381/Ahd/2015
Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 2 of 16 2.1 The Learned AO/TPO erred in concluding that the services provided to the Appellant, towards the efficient running and management of the business, was a shareholder activity.
2.2 The Learned AO/TPO erred in concluding that the appellant failed to establish 'benefit test' for allocation of management fee in ignorance of due factual evidence submitted by the Appellant in this regard.
2.3 The Learned AO/TPO has erred in disallowing the whole of the amount of management fees on a gross basis without deploying any basis for considering the arm's length price to be NIL for the concerned transaction.
3. The Learned AO/TPO erred in making upward adjustment in relation to payment made towards allocation of insurance cost to an Associated Enterprise amounting to Rs.2,46,527.
3.1 The Learned AO/TPO erred in assuming that there was duplication of insurance payment for public liability.
3.2 The Learned AO/TPO has erred in disallowing the whole of the amount of insurance cost allocation on a gross basis without deploying any basis for considering the arm's length price to be NIL for the concerned transaction."
3. Briefly stated, relevant material facts are as follows. The assessee, a subsidiary of CMP Batteries Ltd UK and part of Exide Technologies Group USA, is engaged in the business of manufacturing and marketing of storage batteries for different applications. The assessee had a number of international transactions with its associated enterprises. A reference was made by the Assessing Officer, for examination of arm's length price, to the Transfer Pricing Officer. During the course of this examination, the Transfer Pricing Officer noticed that the assessee had paid management fee of Rs.3,47,66,51 and insurance expenses of Rs.2,46,527 to its AEs. It was in this backdrop and on perusal of details filed by the assessee that the Transfer Pricing Officer issued a show cause notice dated 17.12.2013 to the assessee. This show-cause notice, inter alia, stated as follows:-
"Management Fees:-
3. From the perusal of the details submitted in respect of management fees, it is seen that this allocation represents the proportionate share of the assessee company out of the expenditure incurred on business administration of various entities under the group i.e. EXIDE group, of which the assessee company is a part. The expenditure incurred is the operational expenses for running the office of President-Asia Pacific, including his salary who is appointed by the parent to oversee the business of the group entities, including assessee company. As per the expenses sharing agreement submitted during the course of proceedings, the total expenditure incurred is to be allocated to the group entity on the basis of time spent, which is to be estimated and determined by President-Asia Pacific himself. The expenses so allocated were then to be shared in accordance with fixed ratio being 11.72% for the assessee company. The assessee was asked to adduce evidence in ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 3 of 16 support of the basis for taking the figure of allocation at 11.72% and to provide the basis of the estimation of time spent by President-Asia Pacific for supervising the operations of the group entities. It was further asked if any subsequent reconciliation of the actual time spent vis-a-vis the figure 11.72% was made. The assessee submitted written replies dated 29.10.2013 and 11.11.2013. The replies are insufficient to support the claim of APL of the management fee. No details were submitted to support of the estimation of time spent by the President-Asia Pacific and no basis was submitted for taking the figure of 11.72% (other than sales and marketing) and 26.27% (Sales and marketing) except submitting that the same corresponds to the turnover of the company out of the total group's turnover. No evidences were submitted to substantiate if any reconciliation exercise was done. It is also not clear that the how the taxpayer was benefited by these expenses. In absence of any documentary evidences to justify the receipt of benefit by the assesses from the payment of such management fees (through non submission of evidence to show that President-Asia Pacific had indeed devoted time for supervising the operations) and in absence of any documentary evidence to justify the arm's length nature of this payment (through non-submission of the basis of 11.72% and 26.27% and no reconciliation), you are required to show-
cause why it should not be assumed that the activities of President-Asia Pacific were in nature of share-holding activities for the parent group company in the absence of any evidence produced by you and consequently the arm's length price of this payment should not be treated as NIL, being payment made in spite of non receipt of any benefit. Similarly, management fee charged by Exide Technologies Inc. USA is also not justified by you. Your submission dated 29.10.2013 is insufficient and to not provide evidences of necessity and the genuine utility of the services availed by you. In the absence of any documentary evidences to justify the receipt of benefit by the assesses from the payment of such management fees (through non submission of evidence to show that Exide Technologies Inc. USA had indeed provided services) and the absence of any documentary evidence to justify the arm's length nature of this payment , you are required to show-cause as to why the arm's length price of this payment should not be treated as NIL, being payment made in spite of non receipt of any benefit.
Insurance Payment:-
4. From the perusal of details submitted by you, it is seen that the payment for insurance was made to cover up liability arising on account of defective products, which was taken at the global level by the associate enterprise and then allocated to the assessee on its turnover. No evidence has been produced which can prove that the insurance policy was taken at the behest of the assessee or there was any requirement to seek this insurance cover for which the payments have been made. In the respect, you are directed to show-cause why the insurance cost allocation of Rs 2,46.527/- should not be treated at NIL, in the absence of any evidence which could show a necessity of payment being made. Further from the perusal of audited accounts submitted by the assessee, it is seen that total amount of insurance paid by the company is Rs.24,94,609/- which include the amount paid to the associate enterprise. The ratio of payment made to AE on total insurance comes to 9.86%, while the ratio of export sale to total sale comes to only 4.33%. Even if it is assumed that the entire amount of insurance payment is for insurance of ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 4 of 16 products sold by the assessee (which still needs to be substantiated by you), it is clear that excess insurance payment has been made to the AE. You are also directed to produce the detailed bifurcation of insurance paid for covering the products sold in the domestic market."
4. It was explained by the assessee that the assessee had entered into cost sharing agreement with 7 other group entities in Asia Pacific Region to have common set up at regional level which would monitor, manage and administer the business and operations of various group entities. The appointment of Mr. Luke Lu as President - Asia Pacific was to provide strategic management support to the companies as it gets the benefit of higher cadre personnel having requisite international exposure. It was also pointed out that the evidence for direct involvement of President Asia Pacific in assessee's business was already furnished to the Transfer Pricing Officer, as also copies of transfer pricing questionnaire prepared by various cost centres of Asia Pacific group entities in question. The assessee further pointed out that working of cost allocation is based on the agreement and various time estimates in respect of cost centres, the details of which were duly furnished. As regards the common corporate costs charged back by Exide Technologies Inc., it was explained by the assessee that various departments of Exide US had duly extended support to the assessee company, in terms of the agreement with the assessee and participating group companies. The attention was drawn to transfer pricing questionnaires prepared by various cost centres within US, and details of services rendered, time estimates. The assessee further pointed out detailed nature of services, evidence of services rendered and basis of cost allocation as time estimates. It was submitted that the nature of services availed by the assessee was in the domain of various core management areas, and not shareholder activities. A reference was also made to paragraph 7.10 of OECD Transfer Pricing Guidelines to demonstrate that only costs of juridical structure of the parent company, its reporting requirement compliance costs and costs of raising funds for acquisition of participants could normally be rendered in the shareholder services, which is clearly distinct from the core management support services. As regards insurance cost, it was submitted that the public liability insurance undertaken by the assessee does not cover product liability, but the same will be covered by Master Policy taken by Exide US wherein, by the virtue of assessee being a subsidiary, will be covered. It was on the strength of these submissions that the Transfer Pricing Officer was urged to hold that payments in question are arm's length payments to the AEs.
5. None of these submissions, however, impressed the Transfer Pricing Officer. He was of the view that the services rendered by the "President - Asia Pacific" of Exide group were "in the nature of supervising activities being undertaken on behalf of the parent company, rather than any activity which could benefit the assessee"
and "therefore, it can be seen that activities being undertaken by Mr. Lu (President - Asia Pacific, Exide Group) are more in the nature of shareholding activities for the parent group and thus no charge for the same needs to be levied". The TPO further added that "further, the assessee could not justify if such services were indeed required by it or they were simply piled upon since it was a group entity". It was also noted that while Asia Pacific expenses were to be shared on the basis provided i.e. GNB-H : 2.42%, Exide China - 13.86%, Exide Singapore - 10.29%, GNB Japan- 2.40%, Exide Australia - 44.91%, Exide NZ - 10.46%, GNB India - 3.94% and assessee - 11.72%, this was based on time estimation by Mr. Lu (Asia Pacific President) himself and it had no scientific basis. As regards the TP documentation ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 5 of 16 for China, the TPO was of the view that it is not clear whether such documentation is accepted by Chinese authorities, but, in any event, it is not relevant in the context of Indian transfer pricing assessment proceedings. It was also noted that while agreement is dated 03.12.2009, it is brought in force with retrospective effect. The TPO was of the view that expenses incurred prior to signing of agreement cannot be allocated under this agreement. It was also noted that there is a contradiction in agreement inasmuch as, on one hand, it provides for allocation of expenses on time basis, and, on the other hand, it has fixed allocation ratio basis for next two years. As regards payment to Exide US, the TPO was of the view that the date of agreement is 17.03.2010 while it is made effective from 01.04.2009. Once again it was noted that the cost allocation is on time basis, but 1% allocation assessee is fixed under the CCA, and that while agreement refers to services rendered without mentioning "what benefits were obtained by the assessee". On this basis, so far as allocation of management costs were concerned, the TPO concluded as follows:-
"6.4.1 Therefore, on the basis of the facts mentioned above, it is clear that since there was no requirement for such payment and the assessee somehow wanted to make such payment, it was made on an ad-hoc basis. Thus, the assessee fails on both the counts i.e. substantiation of the requirement for such payment with direct and substantial benefit arising out of the same and substantiation of the basis of payment. As a result of the above, the submissions of the assessee are insufficient and to not provide evidences of necessity and the genuine utility of the services availed by it. In the absence of any documentary evidences to justify the receipt of benefit by the assessee from the payment of such management fees, the Arms length price of the management fees paid by the assessee to US entity is also taken as NIL."
6. As regards the insurance payment, the TPO was of the view, inter alia, that "there was a duplication of insurance payment for public liability", and that "the assessee has not been able to substantiate the requirement". He also observed that "the assessee could not produce conclusive evidence to substantiate that this expenditure was indeed required to be incurred by it or was simply piled on to it". The TPO thus proceeded to make ALP adjustments by treating the ALP as NIL. While doing so, he observed as follows:-
"7. Accordingly, in view of the facts of the case, the ALP for the payment for management allocation for both AEs and insurance allocation amounting to Rs.3,47,66,541/- and Rs.2,46,527/- respectively are taken at NIL. Thus, an adjustment of Rs 3,50,13,068/- is proposed to be made to the total income of the assessee in order that the international transactions undertaken by the company are at arm's length. Consequence to this adjustment, the tolal income of the assessee is revised upwards by Rs 3,50,13,068/-."
7. When the Assessing Officer thus proposed to make ALP adjustments as above, the assessee raised the grievance before the DRP but without any success. The DRP confirmed the stand at the assessment level and observed as follows:-
"6.4.1 Therefore, on the basis of the facts mentioned above, it is clear that since there was no requirement for such payment and the assessee somehow wanted to make such payment, it was made on an ad-hoc basis. Thus, the assessee fails on both the counts i.e. substantiation of the requirement for ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 6 of 16 such payment with direct and substantial benefit arising out of the same and substantiation of the basis of payment. As a result of the above, the submissions of the assessee are insufficient and to not provide evidences of necessity and the genuine utility of the services availed by it. In the absence of any documentary evidences to justify the receipt of benefit by the assessee from the payment of such management fees, the Arms length price of the management fees paid by the assessee to US entity is also taken as NIL.
Before us more or less similar arguments have been made as were made before the AO. The details furnished show that much emphasis has been laid on the functioning of Mr. Lu. But we are in agreement with the TPO that he was acting in a supervisory capacity on behalf of the AEs. His activity has therefore rightfully been considered as share holder activity or stewardship activity which do not call for any payment from the subsidiary. Further the retrospective operation of the agreement also suggests that agreement was drafted to make a claim for the management fee. Though the cost sharing is claimed to be based on time sharing, allocating a predetermined share to each AEs is contradictory. Further the agreements with different AES for different services mention the same % of time to be charged to the assessee. This cannot be coincidence, but looks like a deliberate planning. The AO has pointed out many such lacunae in the clams of the assessee. The management fee payment does not satisfy the benefit test because though the turnover of the assessee went down from 126.59 cr to 62.95 cr over the last two years the management fee has gone up from 1.62 cr to 4.73 cr over the same period. The profitability has decreased substantially over the same period.
It was explained that the US AE was very helpful in delisting related compliances. It is seen from the annual report of the company that assessee company shares were delisted from May 2009 whereas the agreement with the US AE is dated 3/12/2009. Thus the claim does not look genuine that the payment in pursuance of the agreement was with respect to delisting.
Having considered all the facts and circumstances of the case we reject the assessee's objection and approve the adjustment proposed by the TPO.
......
......
However neither the actual policy document or its copy were produced before us to show that the AE had taken out the insurance covering the assessee's risk and not only AEs risk though arising through the assessee. Further it is also not clarified as to whether insurance against public liability covers claims arising from defective or malfunctioning of products. It is for these reasons only that the TPO had considered the payment to the AE as not required by the assessee's business, duplicate in nature. We agree with the AO and reject the objection raised by the assessee."
8. It was in this backdrop that the assessment was finalized with the ALP adjustments mentioned above. The assessee is aggrieved and is in appeal before us.
ITA No. 381/Ahd/2015Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 7 of 16
9. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. We have also duly considered a detailed written note dated 9th May, 2018 filed by the TPO. This note mainly reiterates the stand of the TPO's earlier stand as set out in his order at the assessment stage.
10. We find that the main issue in appeal is broadly covered by an order dated 28.12.2017 in assessee's own case for the assessment year 2008-09, wherein the co-ordinate bench has observed as follows:-
"24. We have heard the rival contentions and perused the record placed before us. Without reiterating the fact discussed in the preceding paras we directly come to the issue relating to allocation of management fees being the share of the assessee of the total common cost incurred by the associate concerns relating to the services provided by Asia Pacific head.
25. From perusal of the records we observe that Mr. Luke Lu president of Asia Pacific carried out activities in the nature of supervising various activities undertaken on behalf of appellant rather than the activity resulting in benefit to appellant. It is true that assessee had provided following documents to substantiate it claim of management fees allocated to the assessee company:-
(i) Cost Sharing Agreement;
(ii) The educational credentials of Mr. Luke Lu;
(iii) Press note released by Exide Technologies while appointing him as Asia Pacific leader for the Group;
(IV) Copy of letter from President & Chief Executive Officer of Exide Technologies;
(v) Email containing itinerary during his visit to India which also demonstrated his involvement in the business activities, issues, etc. was submitted vide Annexure-3 to the submission dated 28th September, 2011 to TPO;
(vi) A copy of media report (a report published in a reputed Indian business newspaper "Hindu - Business Line"), which substantiated that Mr. Luke Lu was instrumental in driving the said project for the appellant company, i.e. to increase the annual capacity from 6,00,00 to 10,00,000 annually, was submitted vide Annexure-4 to the submission dated 28th September, 2011 to TPO;
(vii) The appellant also provided copies of sample e-mails, as Annexure-Stosubmission dated 28th September, 2011 to TPO, evidencing that Mr. Lu was overseeing the said expansion project in addition to the strategic guidance being provided to the appellant company on other business activities during the year under consideration;
26. However both the lower authorities denied the assessee claim by observing that Mr. Luke Lu was instrumental to increase the annual production capacity and if at all such expenses should have allocated to India ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 8 of 16 then they are in the nature of capital expenses. It transpires from the finding of both the lower authorities that they have not disputed that some common expenses incurred by the President Asia Pacific relates to assessee company also. Rather they have denied the benefit for not submitting estimates as well as working as to how allocation has been arrived.
27. At this juncture we like to reproduce the finding of the Co-ordinate Bench in the case of Schneider Electric Pvt. Ltd. (supra) wherein Co-ordinate Bench has decided in favour of assessee relating to the issue of arm's length price adjustment in respect of management fees holding as follows:-
7.We have heard the rival contentions, perused the material on record and duly \ considered facts of the case in the light of the applicable legal position.
8. As we begin to deal with this issue, we find that in a materially identical situation in the case of Merck Limited Vs DCIT [(2016) 139 DTR 1(Mum)J, a coordinate bench, speaking through one of us i.e. the Accountant Member, has observed, inter alia, as follows:
9. We find that there is a clear contradiction in the findings of the authorities below. On one hand, the stand of the authorities below is that no services are rendered, and, on the other hand, there are categorical findings that the services rendered are so general in nature that even an employee of the assessee could have rendered the same.
In the event of no services actually having been rendered, there cannot be any occasion for the same services being rendered by a person without specialized knowledge. On the one hand, it is held that arm's length price of these services is zero value, and, in the same breath, it is held that "there would hardly be any substantial payment" for these services. Clearly, services are rendered on the facts of the present case. There is sufficient material on record to show that the assesses was, under the agreement, entitled to receive a package of services on as and when required basis. The emails and other documentary evidences show that the assessee was in receipt of these services. Just because these services were too general, in the perception of the authorities below, or just because the assessee did not need these services from the outside agencies, cannot be reason enough to hold that the services were not rendered at all. We have perused the material before us, and, in our considered view, the assessee has reasonably established rendition of services. The assessee may not have received all the services under the agreement but essentially the assessee had right to receive all these services, as and when required, under the agreement. The payment is made for the rights accruing to the assessee for the bundled services under the contract and not for each service on a/a carte basis. The reason that the assessee did not use a particular service cannot justify holding that no payment was warranted for such services. To give an example from day to day life, if an assessee is paying for having right to view a bouquet of television channels, which come as a package, he does not decline to pay the consideration for the bouquet of television channels because he did not view a particular television channel. The example may seem to be a bit too simplistic but it does hammer the massage, as we would like to, ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 9 of 16 that not availing a particular service under a contract does not mean that no payments are required to be made for all the services bundled under the contract. The other thing is the benefit test. We do not think benefit test has 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 paid for the same, in case TPO can demonstrate that the consideration for similar services, under the CUP method, is NIL, he can very well do so. That's not, however, his case. He only states that these services are not worth the amount paid by the assessee. Such band statements and sweeping generalizations cannot help the case of the revenue authorities. The assessee has benchmarked the transaction on TNMM basis, and unless the revenue authorities can demonstrate that some other method of ascertaining the arm's length price on the facts of this case will be more appropriate a method of ascertaining the arm's length price, the TNMM cannot be discarded. Dealing with almost a similar situation, as we are in seisin of, a coordinate bench of this Tribunal, in the case of AWB India (P.) Ltd v. Dy. CIT [2015] 152 ITD 770, has observed as follows:
"11. In ground nos. 5 to 9, which we will take up together, the assessee has raised the following grievances:
5. That, on the facts and circumstances of the case, the DRP and TPQ/AO have failed to appreciate the business model and business realities of the appellant and role of its AE, while conducting the economic analysis, and concluding that no service is received or no benefit, and/or services received are duplicative in nature.
6. That, on the facts and circumstances of the case, the DRP and TPO/AO erred in presumptively holding that the revenue authorities are empowered to question the commercial decision of the appellant and in not appreciating the jurisprudence that the DRP and the AO/TPO cannot go beyond their powers to question the business decision of the company.
7. That, on the facts and circumstances of the case, the DRP has erred in confirming that the TPO has discharged his statutory onus by establishing the conditions specified in (a) to
(d) of Section 92C(3) of the Act have been satisfied before disregarding the arm's length price determined by the appellant and proceeding to decide the arm's length price himself.
8. That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in conducting economic analysis of the international transactions without relying on any comparable transaction/companies using inappropriate method.
9. That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in determining the arm's length price of ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 10 of 16 international transactions consisting of cost and profit margin at 'nil'.
12. So far as these grievances of the assessee are concerned, the relevant material facts are as follows. The assessee is engaged in the business of trading in food grains. It is a part of AWB group Australia and its 99.999% equity is held by AWB Australia Limited and the balance. 001% equity is held by another group company, namely AWB Investments Limited. One of the international transactions that the assessee entered into with its AEs was payment of Rs 58,20,57/ towards 'management services'. On an analysis of the details of the payments made under this head, the TPO was of the view that the benefit of some of the services availed under the head 'management services' was not commensurate with the payments made for the same. He was also of the view that as against the use of TNMM by the assessee in benchmarking, the right course of action will be to follow CUP method because the value under CUP method will be best indicator of the value of these services. It was in this background that the TPO made certain adverse inferences against the assessee. The TPO was of the view that while the assessee has made a payment of Rs 20,35,907 towards financial management and reporting services, "but the services rendered are negligible compared to the cost incurred". The TPO was also of the view that "a minor clarification or seeking of certain guidance on verify basic issue does not calf for a payment of Rs 20 lakhs. Therefore, the ALP of these services was taken as 'NIL'. He further noted that while the assessee has made a payment of Rs 1,23,476 towards human resources services, the assessee has "not furnished any specific input on training and development of human resources and it is also noticed that these services are of routine nature and duplicate at best". Accordingly, the TPO also treated ALP of these services as 'NIL'. As regards the payment of Rs 96,355 towards 'legal services', the TPO did take note of the services that the assessee was entitled to under these arrangements but as there is no evidence of any services having been actually rendered by the AE, the TPO concluded that it does not have any value in an arm's length situation. The value of this service was also taken as NIL. The same was the case with respect to the payments for other services. Accordingly, no arm's length value was assigned to these services also. In respect of these cases TNMM was rejected and CUP was applied-- though, even under CUP method, value assigned was nil as, in the opinion of the TPO, these services were worthless.
13. When Assessing Officer proposed to make disallowance in respect of payments for the above services, arm's length value of which was taken at 'zero', aggregating to Rs 31,23,325, as against total management fees of Rs 58,20,57/- paid by the assessee, assessee carried the matter before the DRP but without any success. The DRP confirmed the stand so taken by ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 11 of 16 the TPO, Accordingly, an ALP adjustment of Rs 31,23,325 was made by the Assessing Officer. The assessee is aggrieved and is in appeal before us.
14. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
15. One of the very basic pre-condition 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, the application of CUP is dependent on the market value of the arrangements under 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 Limited (345 ITR 241), "Even Rule 10B(1)(a) does not authorise 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 payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions.
17. As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 12 of 16 agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments.
18. We are also of the considered view that in the absence of prerequisites for application of CUP methods being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO's impugned action cannot meet our judicial approval.
19. For the detailed reasons set out above, we uphold the grievance of the assessee and direct the AO to delete the impugned ALP adjustment of Rs. 31,23,325. The assessee gets the relief accordingly."
25. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench.
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 technical services. The assessee gets the relief accord
9. We are in considered agreement with the views so expressed by the coordinate bench and the impugned addition must stand deleted for this short reason alone. In our considered view, the facts of the case before us are materially similar inasmuch as the services are indeed rendered by the SEI-F, as evident from the documentary evidences on record and yet its arm's length value is held to be NIL only because, according to the authorities below, these services were worthless, these services were not required by the assessee, the assessee could have performed these services on its own and the services were not rendered by the group entity. The TPO has rejected the determination of arm's length price on the basis of TNMM, at ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 13 of 16 entity level, but then he has not adopted 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 indeed state that "Stewardship activities covered a range of activities by a shareholder that may include provision for services to other group members, for example services that would be provided by a coordinating centre", that "These latter type of non- shareholder activities could include detailed planning services for particular operations, management or technical advice (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 alf 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 to the TPO to reject a method of ascertaining the arm's length price without fining a legally permissible method to substitute for the method of ascertaining ALP as adopted by the assessee. To hold that the arm's length price of these services was NIL under the CUP method, the TPO had to necessarily to demonstrate that the same services, whatever be its intrinsic worth, were available for NIL ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 14 of 16 consideration in an uncontrolled situation; that is not, and that cannot be, the case. It is also not the case of the authorities below that the arm's length price of these services, under any other legally permissible method is, NIL. There is thus no legally sustainable foundation for the impugned ALP adjustment.
10. We have also noted that the managerial services, availed by the assessee under the same cost contribution arrangement, have been allowed all these years and have been accepted to be at an arm's length transaction. While there is indeed no res judicata in tax proceedings, its important to bear in mind the observations of Hon'ble Supreme Court in the case of Radhasoami Satsang Vs CIT [(1992) 193 ITR 321 (SC)], to the effect that "where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year". For this reason also, the stand of the authorities below is unsustainable in law. In the light of these discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of Rs 1,51,83,140. The assessee gets the relief accordingly.
28. We observe that the issue raised in this ground is covered to a wide extent by this decision of Tribunal as the facts before us are quite similar to the facts adjudicated in the above decision of the Tribunal. However on examining the facts of the instant appeal in the light of the decision of Tribunal quoted above we are of the view that in the instant appeal the alleged allocation of managerial fees was both in the nature of Revenue and capital expenditure because the time and suggestions given by the president Asia Pacific Mr. Luke Lu was helpful to the assessee to day to day business activity as well as expansion and increase in the installed capacity. Therefore as far as the view taken by both the lower authorities of calculating of managerial fees at Nil does not seems to be on sound footing and it would be fair enough if the alleged managerial fees is divided into capital and receipt nature of expenses in the ratio of 60:40. We accordingly allow the claim of allocation of managerial expenses at Rs. 7,11,638/- and confirm the remaining disallowance of Rs. 10,67,457/-. Accordingly appeal of the assessee is partly allowed."
11. We find that the issue is a covered issue by co-ordinate bench for assessment year 2008-09 though there is a difference on facts inasmuch as expenditure to the extent of 60% was held to be capitalized on the ground that during that year the expenses of Asia Pacific headquarters were also aimed at increasing the installed capacity from 6 lakhs units p.a. to 10 lakhs units p.a. That aspect of the matter, however, is no longer relevant, and that is not even revenue's case before us. We have also noted that there is no dispute about the rendition of services, but, as in the last year, the dispute is about the services being in the nature of shareholder services. That plea, in our considered view, is wholly unsustainable in law. A core management support service, under a cost contribution arrangement, is inherently outside the limited scope of shareholder services. These services are required for ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 15 of 16 effective administration and management of the assessee company on day-to-day basis. Whether assessee needs these services or not or whether assessee derives "substantial benefit" from these services or not is not really relevant. That should be best left to the commercial wisdom of the assessee. What is material is whether the services were rendered or not, and whether or not the cost allocation was on a fair and reasonable, even if not wholly precise and accurate, basis and both of these tests are clearly satisfied on the facts of this case. It is also not a case in which benefits are so trivial or illusory that it can be said that the assessee did not derive any benefit from these services at all. The emails, correspondence and other corroborative details clearly show rendition of services, and the allocation being on approximate time basis show reasonableness in allocation of costs. As for the fact that the date of agreement is a date subsequent to commencement of work under the agreement, nothing really turns on it inasmuch as the existence of a formal agreement is not even a sine qua non for a cost contribution arrangement. It is not the case of the revenue that the agreement is not a sham agreement. The agreement may have been formally entered into on a later date but it covers the entire period and there is no dispute about rendition of services. In our considered view, in the light of these discussions and respectfully following the co-ordinate bench decision in assessee's own case for the assessment year 2008-09, we are unable to see any legally sustainable merits in the impugned arm's length price adjustments in respect of management fees. As regards the arm's length price adjustment in respect of insurance premium share, we find that this issue is also covered by the co-ordinate bench decision in assessee's own case for the assessment year 2008-09 wherein the co-ordinate bench has, inter alia, observed as follows:-
"11. Ground No. 2 & 3 of Revenue's appeal challenges the order of Ld. CIT(A) deleting the upward adjustment of Rs. 5,04,702/- in relation to payment of allocation of insurance expenditure.
12. Ld. D.R. supported the order of Ld. A.O. and Ld. counsel for the assessee relied on the fining of Ld. CIT as well as the submissions made before the First Appellate Authority.
13. We have heard the rival contentions and perused the record placed before us. We find that the assessee which is also dealing in sale of batteries manufactured by other companies needs to take insurance policy. There are two types of liability namely public liability and product liability and insurance needs to be taken to cover up both these liability. Public liability, gets covered by global insurance policy. We further observe that during the course of proceedings before the lower authorities assessee has submitted the copy of sample insurance and also provided the basis of allocation which is the turnover of the respective subsidiaries.
14. We further appreciate the finding of Ld. CIT(A) accepting the basis of turnover as a proper allocation key to proportionately allocate the insurance charges in relation to master insurance policy taken by Exide Technology which takes care of the product liability claim.
15. We therefore in the given facts and circumstance of the case are of the view that there was no error on the part of assessee claim the allocation of insurance cost and further there was no duplication of insurance expenditure ITA No. 381/Ahd/2015 Tudor India Pvt Ltd Vs. ACIT Assessment year: 2010-11 Page 16 of 16 because they were meant to cover up two types of insurances namely public liability insurance and product liability insurance. We therefore uphold the finding of Ld. CIT(A) and dismiss ground No. 2 & 3 raised by the Revenue."
12. We see no reasons to take any other view of the matter than the view so taken by the co-ordinate bench. Respectfully following the same, we are unable to see any legally sustainable merits in the impugned arm's length price adjustments in respect of insurance premium share as well.
13. The assessee has also raised grievances, by way of ground no. 4, in respect of levy of interest under section 234A, B, C & D but learned counsel fairly accepts that this ground of appeal seeks only consequential relief and does not, therefore, need any independent adjudication.
14. Ground no.4 is thus dismissed as infructuous.
15. In the result, the appeal is partly allowed in the terms indicated above. Pronounced in the open court today on the 7th September, 2018 Sd/- Sd/-
Ms. Madhumita Roy Pramod Kumar
(Judicial Member) (Accountant Member)
Ahmedabad, the 7th day of September, 2018
**bt
Copies to: (1) The appellant
(2) The respondent
(3) Commissioner
(4) CIT(A)
(5) Departmental Representative
(6) Guard File
By order
TRUE COPY
Assistant Registrar
Income Tax Appellate Tribunal
Ahmedabad benches, Ahmedabad
1. Date of dictation: ...order prepared as per the 15 pages manuscripts of Hon'ble AM which are enclosed with appeal file. - 04.09.2018..................
2. Date on which the typed draft is placed before the Dictating Member: .04.09.2018......
3. Date on which the approved draft comes to the Sr. P.S./P.S.: ...07.09.2018.....
4. Date on which the fair order is placed before the Dictating Member for Pronouncement:
.07.09.2018 .
5. Date on which the file goes to the Bench Clerk : . .07.09.2018 .......
6. Date on which the file goes to the Head Clerk : ..................................
7. The date on which the file goes to the Assistant Registrar for signature on the order: ....
8. Date of Despatch of the Order: ........................