HAMMOND POWER SOLUTIONS PRIVATE LIMITED,HYDERABAD vs. DCIT., CIRCLE 2(1), HYDERABAD

The brief facts of the case are that the assessee is engaged in the business of manufacturing of electrical distribution and power transformers. It also provides installation, commission, and maintenance services to its customers. The assessee company is a subsidiary of Hammond Power Solutions Inc., Canada. During the financial year relevant to the assessment year under consideration, the assessee company paid management fee and technical fee to its Associated Enterprise amounting to Rs. 1,72,22,586/- and Rs. 59,12,994/-, respectively. The assessee had benchmarked payment of management fee and technical fee by selecting the other method as most appropriate method and claimed that, the payment made to the Associated Enterprise were commensurate with the services rendered during the course of business. The assessee filed the return of income for A.Y. 2021-22 on 10.03.2022, declaring total income of Rs. Nil. The case was selected for scrutiny and during the course of assessment proceedings, a reference under Section 92CA of the Act, has been made to the learned Transfer Pricing Officer for determination of arm's length price in respect of the international transactions of the assessee company.

During the transfer pricing proceedings, by notice dated 18.08.2023, the learned TPO called upon the assessee to furnish documentary evidence to demonstrate that the payment made towards management fee and technical fee is commensurate with the benefits to the taxpayer and satisfied the benefit test. In response, the assessee filed a detailed note on the management services and technical services availed from AE along with a copy of the agreement entered into with AE, basis of allocation/charging of fee by AE, supporting documentary evidence, copy of back-to-back invoices, and explained that the Indian entity does not have strategic level personnel in marketing, IT, and business development department in its payroll. The operational level employees of the assessee company work under the guidance and supervision of Hammond Power Solutions Inc., Canada, and the cost incurred by the AE towards salary cost of managerial persons has been allocated on cost-to- cost basis without any mark-up on the basis of total number of hours spent on Indian operations. The assessee had also furnished supporting evidence like email correspondence between the Indian entity and Canadian company along with emails, video conferencing/web meetings and other supporting documents.

The Ld. TPO, after considering the submissions of the assessee and also taking into account the OECD guidelines for benchmarking intra-group services, observed that, in order to justify the claim of payment of management services or intra- group services, the assessee is able to prove that the services were actually rendered by the AE for which the above payments were said to be made. Further, as a result of such payment, the taxpayer should get economic or commercial value to enhance its commercial position, and the expected benefit must be sufficiently direct and substantive. The learned TPO further noted that, as seen from the submissions of the taxpayer, the assessee has simply described/narrated the services received, the benefit derived. But there is no information/ evidence as to the benefit derived by specific services provided by the AE, date- wise, during the year, and corresponding computation of cost of such services. Although the assessee has enclosed evidence in the form of emails, video conferencing, etc., but from the said evidences, it is difficult to ascertain the exact nature of services rendered by the AE and the benefit derived by the assessee company. Therefore, observed that the assessee has failed to justify the payment of management fee and technical fee to the AE, as an independent enterprise dealing at arm's length would not have made payment for similar services in the absence of evidence regarding the services rendered and the benefits derived. Therefore, rejected the explanation of the assessee and made a TP adjustment of Rs. 1,72,22,586/- in respect of payment for management services and further a sum of Rs. 59,12,994/- in respect of payment of technical services under Section 92CA of the Act. The Ld. TPO also made a TP adjustment of Rs. 59,117/- towards interest on delayed trade receivables from the AE by taking into account the amount receivable at the end of the financial year, by adopting the SBI short-term deposit rate and allowing a credit period of 60 days for the purpose of computing the arm's length interest.

In pursuant to the directions of the Ld. TPO, vide order under Section 92CA(3) of the Act, dated 16.10.2023, the A.O. passed a draft order under Section 144C(1) of the Act on 11.12.2023, and proposed the TP adjustment as suggested by the Ld. TPO in respect of payment of management fee and technical fee for Rs. 1,72,22,586/- and Rs.59,12,994/- respectively, and also TP adjustment of Rs. 59,117/- towards interest on trade receivables from AE. The assessee has filed objections before the Ld. DRP-1, Bangalore, against the draft assessment order passed by the A.O., and raised various objections on TP adjustment suggested by the Ld. TPO in respect of payment of management fee and technical fee, and also interest on trade receivables. The Ld. DRP, for the reasons stated in their directions issued under Section 144C(5) of the Act, rejected the objections filed by the assessee and upheld the TP adjustment in respect of management fee and technical fee, and also computation of interest on trade receivables from AE. In pursuant to the directions of the Ld. DRP issued under Section 144C(5) of the Act, the A.O. passed the final assessment order under Section 143(3) r.w.s. 144C(13) of the Act on 07.10.2024, and determined total income of the assessee at Rs. 2,14,78,192/- by making addition towards TP adjustment of Rs. 2,31,94,697/- in respect of payment of management fee and technical fee, and also interest on trade receivables from AE.

Aggrieved by the final assessment order, the assessee is now in appeal before the Tribunal.

The first issue that came up for our consideration from Ground Nos. 2 to 5 is TP adjustment of Rs. 2,31,94,697/- in respect of payment of management fee and technical fee. The learned counsel for the assessee submitted that the Ld. TPO and the Ld. DRP erred in making 100% disallowance of payment of management fee and technical fee without appreciating the fact that the assessee had justified payment of management fee and technical fee by filing relevant evidences, including agreement with AE, bill submitted by AE, basis of allocation of cost, and also supporting evidences like email correspondence and video conferencing, etc., to prove the availing of services.

The learned counsel for the assessee, Shri P.V.S.S. Prasad, further submitted that the assessee is a subsidiary of Canadian company, which is engaged in the business of manufacturing electrical distribution and power transformers and in the business, it has availed various services, including supporting the manufacturing operations, and administrative services, human resources, financial support from its AE. The learned counsel for the assessee further submitted that the assessee company does not have any managerial level employees on its own, and all managerial and technical services were availed from the employees of the AE. The AE has allocated cost incurred on salaries paid to employees who had spent time on Indian operations, and the basis for allocation of cost has been furnished to the A.O./TPO. The assessee had also filed various evidences, including email correspondence between the employees of Indian entity and also Canadian entity, and also proof of video conferencing and conducting various meetings throughout the year. The amount of cost incurred by the assessee company is less than 2% of the total revenue generated from Indian operations. If we consider the amount of cost incurred to the revenue, it is very minimum, and therefore, the A.O./TPO cannot question the benefit derived from services availed from the AE, because whether a particular service is required to be obtained from AE or not, is within the knowledge of the businessman, and the A.O./TPO cannot sit in the armchair of a businessman and decide what services are required to be obtained and what compensation has to be paid for the services. taxmann.com 328 (Chennai- Trib.), the decision of the Hon'ble Delhi High Court in the case of CIT Vs. EKL Appliances Ltd., reported in (2012) 24 taxmann.com 199 and also the decision of the Hon'ble Supreme Court in the case of Principal CIT vs. Pragati Glass India Private Limited, (Tax Appeal No. 149 of 2019 dated 23.07.2019). Therefore, he submitted that the TP adjustment made by the Ld. TPO and confirmed by the Ld. DRP should be deleted.

The learned CIT-DR, Shri Waseem UR Rehman, on the other hand, supporting the order of the Ld. TPO and the Ld. DRP, submitted that the assessee had failed to justify the services rendered by the AE and payment made to such services as commensurate with the services provided by the AE. The assessee had also failed to file relevant documentary evidence, except filing email correspondence and proof of video conferencing between the assessee employees and AE employees. The assessee company had also failed to bring on record any comparable case of similar nature to prove that any independent enterprise would make payment for services where neither any services had been received nor any economic or commercial benefit had accrued. Since the assessee had failed to prove the rendering of services by the AE, the Ld. TPO has rightly made TP adjustment in respect of management fee and technical fee of Rs. 1,72,22,586/- and 59,12,994, respectively. The learned CIT-DR further submitted that, the decision is covered against the assessee by the decision of ITAT Hyderabad in assessee's own case for A.Y. 2017-18 in IT(TP)A No. 76 of 2022, where, under identical payment of management fee and technical fee, TP adjustment suggested by the Ld. TPO has been upheld by the Tribunal. The Ld. DRP, after considering the relevant facts, has rightly upheld the TP adjustment suggested by the Ld. TPO. Therefore, the order passed by the Ld. TPO and the Ld. DRP should be upheld.

We have heard both parties, perused the material on record and have gone through the orders of the authorities below. The assessee has paid a management fee of Rs. 1,72,22,586/- and a technical fee of Rs. 59,12,994/- to its AE, Hammond Power Solutions Inc., Canada, in terms of the agreement entered into with the AE as applicable for the financial year 2020-21. As per the agreement between the assessee company and the AE, the assessee has availed various services from its AE in respect of stewardship services, that is, management services, in respect of support in managing operations and administrative activities, human resources, finance support. The assessee company has also explained the reasons for availing services from its AE. As per the explanation of the assessee, the Indian entity does not have strategic senior level personnel in marketing, IT, and business development departments in its payroll. The operational level personnel employed by the assessee company work under the guidance and supervision of Hammond Power Solutions Inc., Canada. From the nature of services defined in the agreement between the assessee and its AE, and the explanation offered by the assessee, in our considered view, the explanation of the assessee is bona fide and backed by evidences, going by the financial statement of the assessee, where the cost incurred on payment of management fee and technical fee is less than 2% of the revenue, which any enterprise can incur for these kinds of services. Further, upon perusal of the relevant financial statement, we find that, the assessee does not have any stratagic managerial level employees in its payroll, which is evident from the amount of salary expenditure incurred for the year under consideration. Further, the assessee has also furnished various evidences, including a copy of back-to-back invoices submitted by the AE, with description of services, basis of allocation, and charging of cost by the AE and supporting documentary evidences.

We have gone through the relevant evidences submitted by the assessee, including email correspondence between the Indian entity and Canadian AE and proof of conducting meetings through video conferencing, and upon perusal of the relevant evidences, we find that, there are lot of deliberations and discussions between the Indian entity and Canadian entity in respect of manufacturing activity, management and technical services. From the evidences filed by the assessee, it clearly shows that there are clear evidences for providing services by the AE to the assessee on which the assessee has paid the management fee and technical fee. Also, the A.O. has not disputed the fact that the assessee has furnished various evidences, including the basis for allocation of salary paid to certain employees of the Head Office on cost-to-cost basis and also supporting evidences like email and video conference proof. But the Ld. TPO opined that the evidences submitted by the assessee is not sufficient enough to prove that the assessee has availed services and such services should benefit the assessee company. Therefore, in our considered view, the Ld. TPO has grossly erred in coming to the conclusion that each and every service availed by the entity should yield some results, because any service availed by the enterprise may or may not yield results immediately. However, whether such services required to be obtained for the purpose of business operations is within the knowledge of the entity which seeks services from any entity, including the AE, and the A.O. cannot sit in the armchair of the businessman and question the relevancy of any services and payment made against such services. We further note that, the Ld. TPO does not have any role in questioning the benefit derived from any services availed from any company, and this principle is supported by the decision of the Hon'ble Delhi High Court in the case of CIT Vs. EKL Appliances Ltd., (supra), where it has been clearly held that even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same, or that in the view of the Revenue, the expenditure is unremunerative, or that in view of the continuous loss suffered by the assessee in his business. It is the assessee who has better knowledge about such services and the relevancy of such services. Therefore, the A.O. cannot question the relevancy of services and also the benefit derived from such services. This principle is also supported by the guidelines issued by the OECD, where it has been clearly stated that an Indian enterprise, in need of a service, may acquire the services from a service provider, who supplies that type of services or may perform the services for itself. In a similar way, a member of a multinational group in need of service may acquire the same from an independent enterprise or from one or more Associated Enterprises in the same MNE group. Intra-group services often include those that are typically available externally from independent enterprises, in addition to those that are ordinarily performed internally by the enterprise for itself, etc. From the above, it is very clear that there is no bar in availing services from AE and the only requirement is the assessee should prove the availment of services from AE and the payment made for such services is commensurate with the services rendered by the AE.

In the present case, going by the evidences filed by the assessee, there is no dispute with regard to the fact that the assessee has availed various services as listed in the agreement between the assessee company and the AE in the area of manufacturing services, human resources development services, and financial services. The assessee has also proved the relevancy of the services by filing various evidences and proved that the assessee is not having strategic level managerial employees in its payroll, and all those services to be performed by the managerial level employees have been availed from the AE. To prove this contention, supporting evidence like email and video conferencing and proof of meetings conducted through video conferencing has been furnished. Therefore, in our considered view, the Ld. TPO and the Ld. DRP erred in determining the ALP of the management fee and technical fee at Nil and consequently making a 100% TP adjustment.

In so far as the case laws referred to by the learned CIT-DR in the assessee's own case for A.Y. 2017-18 on the very same issue, we find that although the Tribunal had decided the issue against the assessee and upheld the TP adjustment as suggested by the Ld. TPO in respect of payment of management fee and technical fee, in our considered view, the above case laws cannot be considered for the year under consideration because whether the assessee has availed any services and further the payment made by the assessee for such services is commensurate with the services rendered by the AE or not, is a pure question of fact, and it depends upon evidences filed by the assessee for each assessment year. Therefore, the observation of the Tribunal in the earlier years may not be a relevant criteria to decide whether the assessee has availed such services for the year under consideration and the payment made by the assessee is commensurate with the services rendered by the AE or not. Therefore, the case laws relied upon by the learned CIT-DR in the assessee's own case for the earlier assessment year is not considered.

In this view of the matter and considering the facts of the case, we are of the considered view that, the assessee has proved the services availed from the AE, in respect of stewardship services and technical services by filing various evidences, including the agreement between the AE and the assessee company, and the basis for allocation of cost, justification for availing such services, and also reasonableness of payment made against such services by filing supporting evidences like email correspondence and video conferencing evidence, and therefore, in our considered view, the Ld. TPO erred in making the TP adjustment of Rs. 2,31,94,697/- in respect of payment of management fee and technical fee. The Ld. DRP, without appreciating the relevant facts, simply sustained the addition made by the A.O. Thus, we direct the learned A.O./TPO to delete the TP adjustment made in respect of payment of management fee and technical fee for Rs. 1,72,22,586/- and Rs.59,12,994/-, respectively.

The next issue that came up for our consideration from Ground Nos. 6 to 8 of the assessee's appeal is TP adjustment of Rs. 59,117/- in respect of interest on trade receivables from AE.

The learned counsel for the assessee restricted his argument to the extent of rate of interest adopted by the A.O./TPO and the credit period allowed while computing interest on trade receivables from AE, and argued that this issue is covered in favour of the assessee by the decision of ITAT, Hyderabad in a number of cases, where the Tribunal consistently adopted LIBOR plus 200 basis points as appropriate rate for benchmarking interest receivable on outstanding trade receivables. Therefore, a direction may be given to the Ld. TPO to adopt LIBOR plus 200 BPS for computing interest on trade receivables.

The learned CIT-DR, on the other hand, supporting the order of the Ld. TPO, submitted that the rate of interest for computing interest on receivables from AE is the Indian rate of interest provided by commercial banks because the opportunity cost or benefits lost by the assessee because of allowing the excess credit period should be measured in terms of income to be earned in India, and if we go by the above logic, the SBI short-term deposit rate adopted by the Ld. TPO is appropriate. Therefore, he submitted that the order of the Ld. TPO and the Ld. DRP should be upheld.

We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. The issue involved in this ground of appeal raised by the assessee is no longer res integra and the Coordinate Bench of the Tribunal, Hyderabad, in the case of M/s. Kantar GDC India BPS for computing interest on outstanding trade receivables from AE. Therefore, by respectfully following the decision of the Coordinate Bench of the ITAT, Hyderabad in the case of M/s. A.O./TPO to compute interest on outstanding trade receivables from the AE by adopting LIBOR plus 200 basis points and also by allowing credit period of 60 days.

In the result, the appeal filed by the assessee is partly allowed.

The Principal Commissioner of Income Tax, (IT & TP), Hyderabad.

The Disputes Resolution Panel-1, Bangalore 5. नवभधगीयप्रनतनिनर्, आयकर अपीलीय अनर्करण, हैदरधबधद / DR, ITAT, Hyderabad 6. गधर्ाफ़धईल / Guard file आदेशधिुसधर / BY ORDER