Income Tax Appellate Tribunal - Bangalore
Dmg Mori Seiki India Machines And ... vs Dcit, Bangalore on 2 May, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH 'B'
BEFORE SHRI N.V VASUDEVAN, JUDICIAL MEMBER
AND
SHRI. JASON P BOAZ, ACCOUNTANT MEMBER
IT(TP)A 1617/Bang/2012
(Asst. Year - 2008-09)
DMG Mori Seiki India Machines
And Services Pvt. Ltd
( Erstwhile DMG Deckel Maho
Gildemeister (India) Pvt. Ltd.,),
No.3/1, 3rd Main Road,
KIADB, Peenya 1st Stage,
Bangalore -560058,
PAN: AABCD0003E. ....Appellant
Vs.
Deputy Commissioner Of Income Tax,
Circle 11(1), Bangalore. .....Respondent
Appellant by : Shri. Vikram Vijayaraghavan, Advocate
Respondent by : Smt. Padma Meenakshi, JCIT
Date of Hearing : 26-04-2018
Date of Pronouncement : 02-05-2018
ORDER
PER SHRI N.V VASUDEVAN, JUDICIAL MEMBER :
This is an appeal by the assessee against the order dated 16/10/2012 of Commissioner of Income-tax (Appeals ) - 4,Bangalore relating to asst. year 2008-09.
2. The assessee has raised following revised grounds before the Tribunal :-
IT(TP)A No. 1617/B/12 2 "The grounds stated hereunder are independent of, and without prejudice to one another. The Appellant submits as under:
1. Assessment and reference to Transfer Pricing Officer are bad in law
a) The order issued by the Deputy Commissioner of Income-tax - Circle I 1(1)['AO'] under section 143(3) of the Income-tax Act, 1961 ['the Act'], and the order passed by the Commissioner of Income-tax (Appeals)-IV. Bangalore ['the CIT(A)'] under section 250 of the Act, are had in law and on facts and is in violation of the principles of natural justice.
Without prejudice to the to the generality of the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to DMG Mori Seiki India Machines and Services Private Ltd ('the Appellant or 'the Company'), a show cause notice as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act'].
b) The AO has erred in law in making a reference to the Assistant Commissioner of Income- tax (Transfer Pricing) - I ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA(l) of the Act.
2.The TPO has erred in justifying the motive of shifting of profits
a) On the facts and in the circumstances of the case and in law, the learned TPO/ CIT(A) erred in not demonstrating that the motive of the Appellant was to shift profits outside India by manipulating the prices charged in the international transaction, which is a prerequisite condition to make any adjustment under the provision of Chapter X of the Act.
IT(TP)A No. 1617/B/12 3
3.Determination of arm's length price of 'management fee'
a) The AO/ TPO erred on facts in determining the arm's length price of management fees as 'Nil, in substitution to the arm's length price determined by the Appellant.
b) The AO/ TPO erred oil in concluding that the Appellant did not derive any commercial benefit from such services.
c) The AO/ TPO erred oil in not appreciating that the net margin of the Appellant after considering the payment of management fee is more than the arithmetical mean of the net margins of the comparable companies.
d) The AO/ TPO erred on facts in not giving cognizance to the back-up documents and supporting papers in relation to the management fees, before arriving at an arm's length price of the management fees.
4.Rejection of the most appropriate method applied by the Appellant
a) Oil facts and in the circumstances of the case and in law, the learned AO/ TPO erred in disregarding the benchmarking analysis and comparable transactions selected by the Appellant in the transfer pricing study report maintained as per section 92D of the Act read with Rule lOD of the Income-tax Rules, 1962 ('the Rules'].
b) The AO/ TPO erred oil and in law in rejecting one method ['TNMM'] and selecting another method ['CUP'] as the most appropriate method without providing reasons to the Appellant for rejecting the method adopted by the Appellant.
C) Oil facts and in the circumstances of the case, the learned AO/ TPO erred in law in concluding that payment of management fee is a separate segment.
5.Variation of 5% from the arithmetic mean IT(TP)A No. 1617/B/12 4 The AO/TPO erred in law in not granting the variation as per the Provision to Section 92C(2) of the Act.
6.Interest under section 234A of the Act The learned CIT(A) has erred in confirming the levy of interest under section 234A of the Act.
7.Interest under section 234B of the Act The learned CIT(A) has erred in confirming the levy of interest under section 234B of the Act.
8.Interest under section 234D of the Act The learned CIT(A) has erred in confirming the levy of interest under section 234D of the Act.
9.Initiation of Penalty Proceedings The learned CIT(A) has erred in confirming the levy of penalty under section 27l(l)(c) of the Act.
10.Relief
a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto.
b)The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal.
c)Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/ TPO and upheld by the CIT(A) is bad in law and liable to be deleted"
3. Ground Nos. 1 and 2 are grounds relating to violation of principles of natural justice and the conditions precedent for applicability of provision for Chapter X of the Income-tax Act 1961 (Act). These grounds are academic and in any event get addressed IT(TP)A No. 1617/B/12 5 while deciding the grounds on merits of the addition made by the AO and are not therefore taken up for consideration individually.
4. Ground No.5 raised by the assessee is regarding granting of 5% (+) or ( -) benefit between ALP and the prices paid in the international transactions. In view of the statutory amendment to the provision of sec. 92C(2) of the Act by insertion of second proviso, this ground is no longer available for consideration. In other words, the (+) or (-) 5% cannot be allowed as a standard deduction.
5. Ground Nos.6 to 9 regarding charging of interest and initiation of penalty proceedings are purely consequential and do not call for any adjudication. The grounds that require adjudication are ground Nos.3 and 4.
6. The facts as far as ground Nos. 3 and 4 are concerned are that the Assessee was incorporated under the Companies Act, 1956 on 3 1.3.1999. It is a wholly owned subsidiary of DMG Vertriebs and Service GmbH, Germany. Gildemeister Group, of which the Assessee as well as the holding company of the Assessee is a part, manufacture sophisticated lathe, milling, laser and ultrasonic machines. Those products are sold in India. The Assessee is engaged in marketing (including provision of warranty services and importing of machinery for display and demonstration purposes) of the products of the Gildemeister Group. The Assessee also provides after-sales support services directly to the customers. The business activities of the Assessee can be divided into the following categories • Marketing services ; and • After-sales services.
IT(TP)A No. 1617/B/12 6 Marketing services : Marketing services provided to the group involve canvassing business for Group's machines and spares, which are sold directly by the Group to their customers. The Assessee also provides warranty support services to the customers of the Group. In the course of providing marketing services, the Assessee imports machinery occasionally for display and demonstration purposes. The customers are given a demonstration of the machining, capabilities. These machines are disposed off after a certain period of time. In the course of providing warranty support services, the Assessee imports spares of the machines to supply it to the customers of its associated enterprises during the warranty period.
After-sales service : The Assessee provides after-sales services in respect of the Group's products. The services provided to the customers directly by the Assessee, mainly involve the following:
• Repairs in case of brake down / malfunction of machines;
• Preventive maintenance, servicing, check-ups , etc of the machines; • Engineering consultancy services;
• Reconditioning and refurbishing of machines ; and • Training, demonstration, design and prototype support of customers."
8. The Finance Act. 2001 had introduced a legislation with respect to transfer pricing. by substituting the erstwhile section 92 of the Act with a new and separate code or sections, namely sections 92 to 92F, with effect from 1st April. 2002. i.e. the assessment year 2002- 2003. The salient features of the legislation with respect to transfer pricing, to the extent material for the purpose of deciding the question referred to the special bench, are as follows: -
• Section 92(l) of the Act provides that any income arising from an "international transaction" shall be IT(TP)A No. 1617/B/12 7 computed having regard to the arms length price. The Explanation to the said section provides that allowance for any expense or interest arising from an international transaction hall also be determined having regard to the arm' s length price.
• The term "international transaction' has been defined in section 92B(1) or the Act to mean a transaction between two or more "associated enterprises" either or both of whom are non-residents in the nature of inter alia purchase, sale or lease of intangible property or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.
• Section 92A of the Act defines the term "associated enterprise" in relation to another enterprise, in a manner where the enterprise directly or indirectly participates in the Management, control or capital of the other enterprise.
• The term "arm's length price" has been defined in clause (ii) of section 92F of the Act, to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. Section 92C( 1) of the Act provides that the arm's length price in relation to an international transaction shall be determined by any of the several methods, specified therein, having regard to the nature of the transaction or class of transaction or class of associated person or functions performed by such persons or such other relevant factors as the Central Hoard of Direct Taxes (hereinafter referred to as "Board") may prescribe.
9. The legislative intent in introducing the new transfer pricing legislation, as available in the Memorandum explaining the provisions in the Finance Bill, 2001, which later on was enacted as the Finance Act, 2001, was as follows.
"The increasing participation of multinational groups in economic activities in the country has given rise to new and complex issues emerging from transactions entered into between two or more enterprises belonging to the same multinational group. The profits IT(TP)A No. 1617/B/12 8 derived by such enterprises carrying on business in India can be controlled by the multinational group by manipulating the prices charged and paid in such intra-group transactions, thereby, leading to erosion of tax revenues. With a view to provide a statutory framework which can lead to computation or reasonable fair and equitable profits and tax in India, in the case of such multinational enterprises, new provisions are proposed to be introduced in the Income-tax Act, " ... " [248 ITR st 181].
10. During the relevant previous year, the assessee entered into following international transactions with its Associated Enterprise (AE).
11. In this appeal, we are concerned only with the international transaction of payment of management fee by the Assessee to its AE.
The consideration paid for rendering management fee by the Assessee to its AE is Rs. 97,13,290/- and not Rs.3,64,87,879/- as mentioned in the Chart given by the Transfer Pricing Officer (TPO) in his order passed u/s.92CA of the Act. As we have already seen the Assessee renders Marketing and After-sales services for products of the group companies in India. In doing so, the Assessee is provided IT(TP)A No. 1617/B/12 9 management support services. The nature of the support services will be explained in the later part of this order. The Assessee paid consideration to its AE for rendering such services. It is not in dispute that availing of management support services and making payment for such services to the AE is an international transaction and the consideration paid by the Assessee to its AE has to pass the test of being at Arm's Length.
12. The assesse in its transfer pricing study did not do a separate bench marking with regard to the management fees that it paid to its AE. In the TP study, justifying the receipt of fees for providing marketing services and after sales services on behalf of the AE for which the assessee received consideration from the AE as at Arm's Length, the assessee considered management fees as part of the said transactions and carried out TP prices analysis by combining all the three services by adopting Transaction Net Margin Method (TNMM) method.
13. The TPO to whom the determination of ALP of the international transactions was referred to by the AO was of the view that it was not proper on the part of the assessee to have aggregated the international transaction of payment of management fees together with the international transactions of receipt of consideration by the assessee from its AE for providing marketing services and after sale services. The TPO held that the payment of management fee was an independent transaction and separate transfer price analysis has to be carried out in respect of that transactions justifying that the consideration paid by the Assessee to its AE for such services were at Arm's Length. In coming to this conclusion, the TPO made the following observation.
IT(TP)A No. 1617/B/12 10 "Aggregation of Transactions The taxpayer in its TP documentation submitted that the Cross charges have been aggregated under TNMM for each segment and thus under TNMM these transactions are treated as at arm's length. This argument is inappropriate for the following reasons.
1. As payment made in the form of intragroup transaction is a class of transaction of its own, it requires separate analysis. Thus for TP study, the intragroup transaction is analysed separately under CUP method. The Act does not preclude TPO to apply appropriate method for each class of transactions like intra group services, IT Cross Charges and also apply TNMM at the enterprise level.
2. When a taxpayer is involved in distinct activities, these have to be analyzed separately by applying the most appropriate method in each case. This issue was discussed by the ITAT, Mumbai in the case of Star India Pvt Ltd Vs ACIT (2008-TIOL-426-ITATMUM), wherein it was held that distinctive activities are to be analyzed separately
3. The aspect of aggregation by class of transactions rather than at the enterprise level is also upheld by the ITAT Mumbai in the case of UCB India Pvt Ltd (317 ITR 292 (AT) (Mumbai)
4. Thus as held above, the TPO is empowered to apply appropriate method for each class of transactions. Thus it is proper to apply CUP method for analyzing the arm's length nature of management fee paid by the taxpayer to its AE.
14. In coming to the above conclusion, the TPO made a reference to the service agreement between the assessee and its AE and after referring to the various services that were stated to have been received by the assessee for which it made payment to the AE on account of management fee, the TPO concluded as follows:-
IT(TP)A No. 1617/B/12 11 "In respect of intra-group sharing arrangements, the taxpayer has to prove the following in order to establish that payments are made arm's length i. The AE might be in a position to provide number of services but it has to be shown that such services were required by the taxpayer.
ii. Whether the associated enterprise rendered these services actually.
iii. Whether such services are required for the taxpayer's business and also whether the taxpayer is also capable of getting these services locally or on its own.
iv. Even if the services are rendered by the AE and required by the taxpayer, whether any cost benefit analysis was carried out by the taxpayer before making such payment.
v. How the payment was determined and how the same was at arm's length.
vi. The actual cost incurred by the AE in rendering such services to the taxpayer.
vii. Even when the services are actually rendered, what is the arms length price that would be paid for similar transactions between two independent parties? viii. Whether the services are duplicate in nature i.e. whether the capable of rendering such services on its own.
For a detailed analysis of these aspects, the order passed u/s 92 CA for the AY2007-08 may be referred to. The facts are exactly similar in this year and hence the same are not repeated in this order.
As in the last year's proceedings, no evidence supporting the claim that services were actually rendered was furnished by the taxpayer except i. Invoices raised by the AEs ii. Chart of allocation of costs among users of services.
iii. Copies of some of the marketing and distribution analysis and presentations prepared by DMG GmbH
1. The invoices raised and cost allocations are not primary evidence as these documents are between two related parties and thus not reliable. Some excerpts of IT(TP)A No. 1617/B/12 12 presentations by the AE do not conclusively prove that a service was being rendered by the AE on a continuous basis and the taxpayer was fully dependent on the AE on IT support, Finance, HR support and marketing and distribution support. Further, even though the taxpayer started operations in India in 1999, it did not pay any management fee till FY 2005-
06. Thus the services purported to have been rendered by the AE were not absolutely necessary without which taxpayer could not have survived. Even if some services are rendered, these services are rendered for the common benefit of the group and thus do not require separate compensation. The taxpayer did not give the justification for quantification of services under various heads in an arm's length condition . The agreement produced by the taxpayer did not have any clause on the quantification of services except saying that the same would he paid based on some allocation key.
Conclusion:-
The documents filed by the taxpayer are nothing but secondary evidence and also the correspondence between related parties. But, it did not show that the services rendered were actually rendered in connection with the business of the taxpayer in India. Even if these services are rendered, whether an independent party would pay that much amount as charged by the AE because independent party would be willing to pay for such services after evaluating alternate vendors. Unless the taxpayer submits the quantification of services in terms of actual incurred by the AE in connection with rendering services to the taxpayer on the basis of third party invoices, the arm's length price for such payments is to be treated as Rs. Nil."
15. The conclusion of the TPO was that the Assessee did not prove that services rendered by the AE for which management fee was paid by the Assessee and that even assuming that services were rendered, the Assessee has not proved that an independent third party would pay IT(TP)A No. 1617/B/12 13 the consideration which the Assessee paid to its AE for similar services. The TPO has based his conclusion basically on his own order in AY 2007-08 in Assessee's own case on identical payment of management fee. This has been shown in bold letters and underlined in the portion of the AO's extracted in the earlier paragraph of this order. Consequently, the TPO held that the entire payment of management fee had treated as adjustment u/s 92C of the Act. Accordingly, the sum of Rs.97,13,290/- paid as management fees by the assessee to the AE was added to the total income of the assessee.
16. Before the CIT(A), the assessee filed various evidence to support its case regarding services rendered. The evidence so filed are placed in a paper book 2 filed before us and contain the following documents.
17. The CIT(A) after considering the aforesaid evidence came to the following conclusions:-
IT(TP)A No. 1617/B/12 14
(i) In paragraph 32 of his order, the CIT(A) came to the conclusion that whatever evidence was filed by the assessee before him showed that all activities performed by the AE were in the nature of shareholder activities.
(ii) He was of the view that there was no convincing proof of any specific economic benefit or commercial value derived by the assessee. In this regard the CIT(A) concluded in paragraphs 32 to 35 of his order as follows:-
"32. I have carefully examined these additional documents and still find no evidence to show that these analyses did not constitute part of the group's shareholder activities. The belief that the analysis could form of shareholder activities is strengthened by the fact that most of the documents submitted are quite general in nature and address the common business needs of all group entities. The appellant could not, even at this additional hearing granted at its own request, furnish evidence of India-specific activities with timelines, invoices, manpower usage charts, etc., or cite at least one or two specific instances of sale or any other kind of benefit that resulted directly from the use of such services. I cannot but observe that no convincing proof of any specific economic benefit or commercial value derived by the appellant has been forthcoming in this case.
33.As pointed out earlier, the appellant's claim that it had availed inventory management services from DMG GmbH in the form of an information pool appears to be far-fetched. The appelant has not been able to explain the need for inventory management when it was merely engaged in providing marketing support in the capacity of a commission agent, nor make available a shred to evidence to show what inventory it had and for what IT(TP)A No. 1617/B/12 15 periods, how it was managed, or what role was played by the AE in managing the same. Further, the claim that all services were received through correspondence, telephone, telefax, emails, and periodic visits of personnel has also not been substantiated with any document related to inventory management. The claim that total costs incurred by the AE was apportioned to various group entities n a scientific and rational basis on the basis of a formula which took into account each entity's share of the total expected benefits to all is also unsupported by evidence, as no working notes or calculations were provided on this count.
34. This lends credence to the TPO's inference that even if the AE had rendered services for the appellant that merited payment of management fees, such services were for the common benefit of the group and did not require separate compensation to the AE, which had been sufficiently compensated for purchases. Ironically enough, this inference is strengthened by the appellant's own submission on page 5 of its reply to the show-cause notice that payment of management fees to the AE was not specific to the appellant, but applied to all group entities that availed management services and compensated the AE on a common cost allocation basis as specified in the agreement; The argument that the proportion of management costs apportioned to the appellant was only 1.3% of total management costs and was much lower compared to cost allocated to other entities does not help, as proportion of allocation of cost is no relevance when the appellant has been unable to prove that it received from the AE any service or commercial benefit, in addition to the commission it received.
IT(TP)A No. 1617/B/12 16
35. I do not find anything scientific or rational in the basis of apportionment of costs said to have been incurred by the AE to various group entities, on the basis of so- called 'formula'. The appellant has argued that such a formula took into account each entity's share of the total expected benefits to all parties, and was in turn worked out on the basis of an appropriate and diligent economic asses which considered all unde0ying conditions and developments that could be reasonably predicted at the time of entering into the agreement. Section o of the Cost Allocation Agreement filed as Exhibit-3 to the appellant's reply to the show-cause notice states that the allocation formula reflects each Party's share of the total expected benefits to all Parties and expected benefits are defined by an appropriate and diligent economic assessment, but the appellant has provided no evidence of any such assessment having been undertaken in relation to it. Similarly, section 10 of the Agreement provides that the Provider of Service shall draw up invoices for advance payments, but no such invoices have been produced for verification."
(iii) In paragraph 37, the CIT(A) observed as follows:-
"37. I am unable to agree with the appellant that as it did not have any IT support department, it depended on the AE for any support relating to IT products and related infrastructure, that the financial support services provided by AE helped the appellant with day-to-day financial management and ensured that financial decisions were taken in an appropriate and timely manner, and that, but for these services, the appellant had to employ personnel or engage third party consultants to perform the required tasks. There is no evidence that marketing and distribution services such as quote analysis, IT(TP)A No. 1617/B/12 17 cockpit analysis, lost order analysis, study of market potential and distribution of clients, etc., of which specimen print-outs have been filed, or that services like HR, inventory management, etc., were indeed availed from the AE in the form of an information pool through the medium of correspondence, telephone, telefax, emafls and periodic visits of personnel, or that such exercises helped the appellant in identifying and tapping potential new clients in India. Copies of emails submitted as proof of such services do not prove that such output was not produced by the appellant itself or that, if produced by the AE, that they were not intended for shareholders' purposes.,
(iv) In paragraph 39 CIT(A) observed as follows:-
"39. I do not find any force in the appellant's contention that, even after considering management fees, the appellant's net profit margin, at 28%, was above the net profit margins of comparable companies. He issue before the AO and the TPO was whether he appe an had reported its international transactions at ALP, and not what its net profit margin ought to be, or whether the level of net profit margin reported was adequate. The TPO has rightly pointed out that management fees paid in the current year were neither linked to actual services, nor is it quantified. In these facts and circumstances, I uphold the TPO's conclusion that as the appellant had not been able to show what tangible commercial benefit it had derived from payment of management fees in the current year, the ALP of such services was nil and that management fees had been claimed only to siphon off profits and minimise the incidence of tax. This ground of appeal is therefore dismissed."
IT(TP)A No. 1617/B/12 18
15. The CIT(A) also confirmed the order of the AO in concluding that payment of management fee was a separate international transaction and, therefore, the AO ought to have done separate bench marking for determination of ALP of payment of management fees. For all the above reasons, CIT(A)found. no grounds to interfere with the order of the AO.
18. Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal.
19. Over and above the evidence that was filed as an additional evidence before the CIT(A), the assessee has also filed following additional evidence before the Tribunal and sought its admission in terms of Rule 29 of the ITAT Rules.
20. When this appeal was taken up for hearing, the ld counsel for the assessee has brought to our notice that identical issue had come up for consideration in assessee's own case for the earlier assessment in IT(TP)A No. 1617/B/12 19 year viz. asst. year 2007-08 and for identical reasons as were given by the Revenue authorities, the arms length price of the payment of management fee was determined at Nil and the entire consideration paid was added to the total income of the assessee. The assessee had filed an appeal before the Hon'ble ITAT in assessment year 2007-08 and this Tribunal was pleased to set aside the orders of the Revenue authorities and remand the case to the AO for fresh consideration. In the IT(TP)A.No.1192/Bang/2011 order dated 26/10/2016, the following were the relevant observations of the Tribunal :-
"Having carefully examined the orders of authorities below in the light of rival submissions and additional evidence filed before us, we find that this additional evidence is quite relevant to decide the nature and quantum of services rendered by the AE for the assessee in order to determine the ALP of the management fees paid by the assessee. Our attention was also invited to the written submissions filed before the TPO in which a reference to cost allocation agreement for management fees was made. Our attention was also invited to the Invoice, but date of issuance of Invoice is not clear A copy of service agreement is also filed, where service agreement was dated 8.1.2007. Though Id. counsel for the assessee has advanced his argument that in this agreement, reference was made with regard to service rendered from January, 2004, but it is not clear as to how this agreement is effective from 1 1.2004 when it was executed in 2007. All these aspects require proper examination. Therefore, in the interest of justice, we are of the view that this issue requires fresh adjudication in the light of additional evidence filed by the assessee. We, therefore, set aside the order of AO passed in consequence to the order of DRP in this regard and restore the matter to the TPO/AO to adjudicate the issue of management fees paid by the assessee to its AE and if it is established that the AE has rendered some services for the assessee for which management fees are required to be paid, the AO/TPO would determine the ALP of the management fees paid by the assessee, after making IT(TP)A No. 1617/B/12 20 necessary adjustments, if necessary. Accordingly, the appeal of the assessee stands allowed for statistical purposes."
21. The ld counsel for the assessee fairly submitted that the difference between the proceedings of the earlier AY and the present AY are that in the earlier year evidence was not filed in the proceedings before the revenue authorities regarding services rendered and how the Assessee benefitted from such services whereas in the present AY such evidence was filed and considered by the CIT(A). His submission was that findings of the CIT(A) on the question of services rendered by the AE and the benefit which the Assessee would receive from such services are incorrect and based purely on surmises and conjectures. According to him, the observations of the CIT(A) in the impugned order that the services were not required are not necessary for the assessee cannot be sustained. According to him, it was business man's wisdom to incur a particular expenditure and AO cannot sit in judgment over a wisdom of business man in incurring a particular expense.
22. The law in this regard is now fairly settled. In the case of Dresser Rand India Pvt.Ltd. Vs. ACIT ITA No.8753/Mum/2010 AY 2006-07 order dated 7.9.2011, the Hon'ble Mumbai Tribunal had an occasion to examine as to what is the approach that has to be adopted for determining ALP in the case of cost contribution agreement which is akin to the arrangement in the present case between the Assessee and its parent company. The assessee in case of Dresser Rand (supra) entered into a 'cost contribution agreement' with its parent company pursuant to which it paid a sum of Rs. 10.55 crores as its share of the costs. The TPO, AO & DRP disallowed the expenditure on the ground that the ALP was 'Nil' as no real services had IT(TP)A No. 1617/B/12 21 been availed by the assessee and the arrangement was not genuine. On further appeal by the Assessee, the Tribunal held as follows:
"8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price 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.
............
9...........
10. In case the Assessing Officer comes to the conclusion that the assessee has indeed received the services from the AE the next question which we have to decide is as to what is the IT(TP)A No. 1617/B/12 22 arm's length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm's length principle, which, in plain words, requires that assessee's share of overall contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. .."
23. The Hon'ble High Court of Delhi in the case of EKL Appliances Limited [(2012) 209 Taxman 200] as well as Cushman & Wakefield India Private Limited ITA No.475/2012 dated 23.5.2014 367ITR 730 (Del), rendered similar ruling as was rendered in the case of Dresser Rand (supra). In the case of Cushman & Wakefield (supra), the Hon'ble Delhi High Court observed that whether a third party - in an uncontrolled transaction with the Taxpayer would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, has to perforce be tested under the various methods prescribed under the Indian TP provisions. In the context of cost sharing arrangement, the Hon'ble High Court opined that concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, and secondly, whether that amount meets ALP criterion.
24. The ld counsel for the assessee also brought to our notice that pursuant to the order of the Tribunal in assessment year 2007-08, the TPO gave effect to the directions of the Tribunal and concluded that the management fees paid by the assessee had to be considered as IT(TP)A No. 1617/B/12 23 arms length. In other words, the TPO himself found that the assesee did receive services from the AE and that the benefit test was satisfied. The ld counsel for the assessee therefore, submitted that the addition made by the Revenue authorities should be deleted. Alternatively, the ld counsel for the assessee prayed that the evidence filed before the CIT(A) as well as additional evidence filed before the Tribunal should be admitted as additional evidence by the Tribunal and the TPO should be directed to consider all the evidence and decide the issue denovo.
25. The ld DR while relying on the order of the CIT(A) submitted that the facts in each year will have to be examined independently and the decision rendered in asst. year 2007-08 should be considered as a decision rendered on the facts available before the revenue authority. According to the ld DR, the assessee has failed to satisfy the benefit received for which it made payment of management fee to its AE. Alternatively, the ld DR submitted that in the light of the additional evidence, the TPO should be directed to examine the issue afresh.
26. We have given a carefully consideration to the rival submissions. As far as the issue whether it was proper on the part of the assessee to have aggregated the international transaction of payment of management fees together with the international transactions of receipt of consideration by the assessee from its AE for providing marketing services and after sale services, we are of the view that the conclusions of the revenue authorities on this issue does not call for any interference. In this regard no specific arguments were also advanced before us. As far as the issue with regard to determination of ALP of the management fee paid by the assessee to its AE is concerned, we are of the view that this issue should be IT(TP)A No. 1617/B/12 24 directed to be considered by the TPO afresh. The order of the CIT(A) should be set aside. In this regard, we find that the CIT(A) has drawn various conclusions in complete disregard to the evidence filed by the assessee. As rightly contended by the ld counsel for the assesse, the CIT(A) has gone into the wisdom of the assessee having incurred expenditure toward management fee. This was not within the purview of the powers of the CIT(A) while determining the ALP of payment for intra group services. The legal position in this regard has already been explained in the several judicial pronouncements, which we have extracted in the earlier paragaraphs of this order.
27. In the light of the above legal decisions, the order passed by the CIT(A), in so far as it relates to determination of ALP at Nil, cannot be sustained. We are however of the view that entire evidence filed by the assessee needs to be considered by the TPO afresh. We, therefore, set aside the order of the CIT(A) and remand the issue with regard to determination of ALP of the international transactions of payment of management fee by the assessee to its AE to the TPO/AO de novo. The TPO will keep in mind the legal position explained in the various decisions referred to in this order. The TPO will consider all the evidence that the assesse has already filed before CIT(A) and the additional evidence filed before the Tribunal and consider the issue afresh. The assessee is also liberty to file additional evidence to support its case. The AO/TPO is directed to decide the issue afresh after affording assessee opportunity of being heard.
IT(TP)A No. 1617/B/12 25
28. In the result, appeal by the assessee is treated as allowed for statistical purposes.
Order pronounced in the open court on 2nd May, 2017.
Sd/- Sd/-
(JASON P BOAZ) (N.V VASUDEVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Vms.
Bangalore
Dated : 2 /05/2017
Copy to :
1. The Assessee
2. The Revenue
3.The CIT concerned.
4.The CIT(A) concerned.
5.DR
6.GF By order
Asst. Registrar, ITAT, Bangalore.