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Facts
The assessee, engaged in geo-intelligent and asset integrity solutions, reported international transactions including management fees and R&D fees paid to its associated enterprises (AEs). The TPO and DRP made upward adjustments by treating these payments as Nil, citing lack of evidence for services rendered and benefit received.
Held
The Tribunal found that the assessee had provided sufficient evidence for the management and R&D expenses, and that the TPO had not followed prescribed methods for benchmarking. The DRP's disallowance was also found to be based on general observations without proper examination of evidence.
Key Issues
Whether the TPO and DRP erred in disallowing management and R&D fees paid to AEs for lack of evidence, and if the prescribed methods under Section 92C were correctly applied.
Sections Cited
143(3), 144C(13), 144B, 92D, 10D, 92CA, 37(1), 195, 270A, 144C(8), 92C
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PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by assessee is directed against the additions made in assessment order passed under section 143(3) read with section 144C(13) dated 18.09.2024, passed in pursuance of direction of Dispute Resolution Panel (DRP) dated 30.11.2023 for assessment year (AY) 2021-22.The assessee has raised the following grounds of appeal:
1. Ground no. 1 The Assessment order passed by assessing officer (AO) in pursuance of direction of dispute resolution panel (DRP) under section 143 (3) read with section 144B of the act proposing an addition of ₹ 7,87,90,767/- (tax impact of ₹ 1,98,30,061) is erroneous and bad in law and in facts.
2. Ground No.
2. The assessing officer /transfer pricing officer and the DRP have erred in law and in fact in computing the apart transfer pricing adjustment of ₹ (AY 2021-22) Fugro Survey (India) Private Limited 7,87,90,767 /-with regard to arm’s-length price (ALP) of international transactions undertaken by appellant by disregarding the methodology adopted by the appellant in its transfer pricing (TP) documentation maintained in accordance with section 92D of the act read with Rule 10D of the Income tax Rules and the detailed arguments calibrate submission made by the appellant during the course of assessment proceeding before the learned TPO and honourable DRP.
3. Ground No.3: With respect to the international connection of payment of R & D fees to its AE, the AO and the learned TPO and honourable DRP have erred in law and facts by concluding the said international connection to be at non-arm’s length and computing an upward transfer pricing adjustment of ₹ 3,27,07,848/- on the same.
4. Ground no. 4: with respect to the international connection of payment of management fees to its AEs the AO and the TPO and honourable DRP have erred in law and facts by concluding the said international transaction to be at non-arms length and computing and apart transfer pricing adjustment of ₹ 4,60,82,919 /-.
5. Ground No. 5: with respect to the international transaction of payment of our and the fee and management fees to its AEs, the AO, TPO and honourable DRP have erred in law and facts by concluding on a faulty assumption of service non- rendition and held that appellant failed to demonstrate recipient of R & D and management services, despite the appellant providing detailed factual information, email is proof of services, arguments, explanation and evidence supporting the provision of proof of service for our and the fee and management fee payment to its AEs.
6. Ground No. 6: with respect to the international transactions of payment of R and D fees and management fees, the AO, TPO and honourable DRP have erred in law and facts by failing to appreciate that cost allocation methodology adopted by the appellant for locating our and the fees and management fees were based on scientific allocation keys adopted consistently across the globe group companies.
(AY 2021-22) Fugro Survey (India) Private Limited
7. Ground No.7: The AO, TPO and honourable DRP have erred in law and facts by holding that the appellant has only submitted legal and theoretical replies and fails to establish the business nexus, actual case of service in incurrence and renderance. Further the AO, TPO and honourable DRP have erred in law and facts to state that the appellant has not received any benefit /utility from the claimed cost contribution for R & D fees and management fees.
8. Ground no. 8: The AO, TPO and honourable DRP have erred in law and facts by holding that the evidence submitted does not give any details or description of actual services rendered or its nature or cost/valuation.
9. Ground no. 9: The AO, TPO and honourable DRP have erred in law and facts by determining the arm’s-length price of the transaction as ‘Nill’ and loosely mentioned AOM which is in contravention of the provisions of Rule 10B, merely based on presumption, without furnishing details of the price charged in any comparable uncontrolled transaction. 10. Ground No. 10: The AO, TPO and honourable DRP have erred in law and facts by ignoring the benchmarking undertaken in relation to payment of R & D fees and management fees under AOM with corroborative benchmarking on the entity level by application of TNMM. 11. Ground No 11 :The learned AO, TPO and honourable DRP have erred in law and facts by not appreciating that due taxes at source were paid on the international transaction of R &D fees and management fees in the form of withholding taxes that were withheld and charged to tax at gross on the said payments under section 195 of the Act. 12. Ground No 12:The honourable DRP has erred in law and facts in directing the TPO AO by ignoring the additional evidence brought on the record by the appellant and simply giving by the premises undertaken by the TPO and holding the transaction fails ‘Failure of service rendition and receipt test’. 13. Ground No 13: The honourable DRP has erred in law and facts directing the TPO/ AO to use any other method without rejecting the appropriateness of the method used by the appellant. Further the honourable DRP has erred in law and facts that the use of any other method does the power the determination of arm’s-length price to Nill.
(AY 2021-22) Fugro Survey (India) Private Limited
Ground No 14, the honourable DRP has erred in law and facts in directing the TPO/ AO after restricting themselves that additional evidence filed in the nature of email, screenshots, invoices, tax invoices, policy document and correspondences and other documents with reference to R & D fees as an international transaction and still held that such proof are no evidence of actual service rendition.
Ground No 15: The Honourable DRP has erred in law and facts in directing the TPO/AO that no detailed information, explanation, valuation was provided; absence of Arms length valuation of the service or non-provision of comparable cases during the assessment proceedings.
Ground No. 16: The honourable DRP has erred in law and facts in directing the TPO/AO that the cost incurred by the group are towards standardisation(including R&B innovation and management fees) and should be viewed as HO/HQ activities needs to be treated as intragroup activities and accordingly, charged to the appellant. 17. Ground No 17: The honourable DRP and AO have erred in law and on facts bydisallowing the deduction claimed under section 37(1) of the Act, failing to appreciate that expenditure was incurred wholly and exclusively for the purpose of the taxpayers business. The disallowance disregards the principle of commercial expediency and the taxpayer’s legitimate business rational for incurring the expenditure, which is beyond the scope of adjudication by honourable DRP and AO. 18. Ground No. 18:The AO, TPO and honourable DRP have erred in law and facts by questioning the commercial expediency of the appellant and basis his opinion on incorrect assumption of no service rendition. 19. Ground No. 19: The AO has erred in facts and in law by initiating penalty proceeding under section 270A of the Act mechanically for underreporting and misreporting without recording any adequate satisfaction for such initiation. Vide application dated 10thApril 2025, the assessee has raised following additional grounds of appeal
20. Additional ground No. 20: On the facts and circumstances of the case and in law, honourable DRP has erred in issuing directions violating the mandatory 4 (AY 2021-22) Fugro Survey (India) Private Limited provision of section 144C(8) of the Act, read with explanation there to. Accordingly, directions of honourable DRP are bad in law and ought to be quashed. Consequently the final assessment order dated September 18, 2024, is bad in law and ought to be quashed.
21. Additional ground No 21: On the facts and circumstances of the case and in law, the learned TPO has erred in determining arm’s-length price of payment of management fees and R&D expenses without applying one of the prescribed method as mandated by section 9 C of the Act., Accordingly, TPO order dated 25th October 2023, is bad in law and ought to be quashed.
22. Additional ground No. 22: On the facts and in the circumstances of the case and in law, the learned DRP have erred in mentioning ‘other method’ for determining arm’s-length price of payment of management fees and R&D expenses without bringing on record any comparable uncontrolled transaction on record as mandated under section 92C of the Act. Accordingly, the DRP direction dated 30th August 2024, is bad in law and ought to be quashed. Consequently, the final assessment order dated September 18,2024, is bad in law and ought to be quashed.
Brief facts of the case as put before us, is that assessee is engaged in the providing of geo-intelligent and asset integrity solution of large construction, infrastructure and natural resources. The assessee filed its return of income for A.Y. 2021-22 on 14.03.3022 declaring total income of Rs. 2.97 Crore. Along with the return of income, the assessee furnished report in Form 3CEB reporting various international transactions with its associated enterprises (AEs).
Consequent upon reporting of various international transactions, the assessing officer made reference to Transfer Pricing Officer (TPO) under section 92CA for determination of arm’s length price of such international transactions. The assessee in Form-3CD reported to have paid Rs. 4.60 Crore on account of Management fees and Rs. 3.27 Crore on account of Research & Development (R (AY 2021-22) Fugro Survey (India) Private Limited & D) fee to its Associated Enterprises (AEs). The TPO in its order dated 31.03.2021 passed under section 92CA(3) treated both the payments as Nill, thereby suggested adjustment of Rs 7.87 Crore (Rs. 4.60 Crore + Rs. 3.27 Crore). The TPO made such upward adjustment by taking view that the assessee failed to demonstrate that it has received services or that the benefited from such services as claimed. The assessee has not provided the details of the cost incurred for various services rendered by its AEs, the basis of allocation of cost to the assessee. The assessing officer on the basis of order / report of TPO made such adjustment in draft assessment order dated 30.11.2023. Copy of draft assessment order 30.11.2023 was served upon the assessee. The assessee exercised its option in filing objection before DRP. Before DRP, the assessee filed detailed written submission. The ld. DRP after considering the report of TPO, and the submission of assessee, confirmed the action of TPO in its direction dated 30.08.2024.
The ld DRP during the hearing before them also issued show cause notice to the assessee as to why both the payment of management fee and R & D should not be disallowed under section 37. The assessee contested such show cause notice by filing reply dated 06.08.2024 and also furnished justification and also filed evidences to substantiate the facts that such services were rendered by its AE and payments were made against thereof. The assessee also furnished copy of agreement with its AEs, copy of correspondence in the from of e-mails and evidence of payments and details of TDS made on such payments.The DRP (AY 2021-22) Fugro Survey (India) Private Limited disregarded such explanation, despite the fact that ld DRP sought remand report form AO, but no remand report was furnished by AO.On receipt of direction of DRP, the assessing officer passed final assessment order dated 18.09.2024 by making adjustment of management fee of Rs. 4,60,82,919/- and adjustment on account of R & D expenses of Rs. 3,27,07,848/-which is challenged in the present appeal sbefore this Tribunal.
We have heard the submissions of learned authorised representative (AR) of the assessee and the learned senior departmental representative (Sr DR) for the revenue. Though, the assessee has raised multiple grounds of appeal including additional ground of appeal, however, the substantial grounds of appeal relates to arm’s length price (ALP) with regard to research and development fees (R&D Fees) and management services fees. The ld AR of the assessee has made any specific submissions on each and every ground of appeal. The ld. AR of the assessee submits that assessee is primarily involved in onshore and offshore surveys, navigation services, for oil and gas industry. The assessees group i.e. its associated enterprises (AEs) owns a number of navigation and processing software which are used in accurate positioning of vessels, barges etc. and processing marine and land data mainly used in Oil and Gas Industries. Fugro N.V. (AE of assessee) has its own R&D facility for continuous improvement and to keep in place with industriesdemand in the above services. The AEs of assessee provides services in the nature of technical support, software licenses and assistance to the operating subsidiaries of group. The proprietary software and (AY 2021-22) Fugro Survey (India) Private Limited hardware owned by AEs are used to provide services such as positioning and survey services, Gio physical data, login and analysis software, data processing software, hardware and software for the precise inspection of subsea pipelines, hardware and software for the precise positioning and installation support of the topsides of oil and gas pipelines. During the relevant Financial Year, the assessee has paid an amount of Rs. 3.27 crore to its AE for availing such services. The AEs of assessee has charged for such services based on management estimates prevalent during the time of provision of such services. Based on this, the international transaction for payment of R&D fees by assessee to its AE is at ALP based on any other method. This transaction was also further corroborated and tested under transaction net margin method (TNMM) with entity level profit.
Based on independent search, operating profit / operating income (OP/OI) margin of independent comparable was in the range of 9.52%, 15.80%, 9.52% being the 35th data point and 15.80% being the 65th data point with a maiden of 14.49%. The OP/OI margin of assessee is 12.27% which is within the arm’s length range of independent comparable companies, the transaction between assessee and its AE is at ALP. All such details are available at page no. 47 and 78 of paper book.
So far as management fees is concerned, the AEs of assessee that is Fugro N.V. and Fugro Survey (Middle East) Limited provide management assistance and support services to the assessee in order to maintain and expand the market position and to promote and increase the efficiency in its internal operations.
(AY 2021-22) Fugro Survey (India) Private Limited Such assistance has impact on the profitability of the business. During the relevant financial year, the assessee paid Rs. 3.12 crore to Fugro N.V. and Rs. 1.48 crore to Fugro Survey (Middle East) for availing such services. Fugro Survey (Middle East) is the regional management office of the Middle East and India region of the assessee group which provides to services in the region. Fugro Survey (Middle East) Ltd. used its pool of senior staff possessing in-depth knowledge of assessee’s group business operations, industry and market developments, client network systems, processing and procedures to provide such services. They have charged such services based on management estimate prevalent during the time of provision of such services. Based on this, the international transactions of payment of management fees by assessee to its both the AEs are at ALP based on any other method (AOM). This transaction were also corroborated and tested under TNMM with entity level profit. Based on independent search, the OP/OI margin of independent comparable were between 9.52% and 15.80%, 9.52% being the 35th data point and 15.80% being the 65th data point with a maiden of 14.49%. The OP/OI margin of assessee is 12.27% which is within the arm’s length range of independent comparable companies, the transaction between assessee and its AE is at ALP. All such details are available at page no. 47, 76 and 77 of paper book. The TPO while determining the ALP of both the payments of the transactions at Nil. The TPO determined such ALP without applying any method prescribed in section 92C.
The bench marking analysis of comparable companies were not disputed by TPO.
(AY 2021-22) Fugro Survey (India) Private Limited Before DRP, the assessee submitted additional evidence on 24.07.2024 which includes copy of agreement, for R&D expenses, sample details of employees employed by AEs, who have worked for innovation activities during the calendar year. Calculation of ratio of assessee’s revenue for A.Y. 2021-22 to its group consolidated turnover (1.00%) for calendar year 2020 and the ratio of assessee’s R&D cost to the groups R&D costs (1.00%). List of software and hardware for use for assessee along with their descriptions and the number of installations by assessee with snapshots of software and hardware used by assessee with annual report of assessee’s group for F.Y. 2000 & F.Y. 2021. On the management fees, the assessee filed detail of employees, who worked for Fugro N.V. (Middle East) for calendar year 2000, calculation of ratio of management fees paid by assessee, trends analysis of the revenue and profit of assessee during the period under consideration. Further, while second additional evidence before DRP, the assessee provided details of project, name of vessels, software used and their usage in these vessels during the period. Sample results of software output along with brief description of photograph. The copies of TDS challans for Q4 (quarter four). Return of income of Furgo N.V. and Furgo Survey (Middle East) with their Form 3CEBs.
The ld AR of the assessee submits that ld DRP during hearing before penal issued show cause notice as to why payment of R&D fees and management fees should not be disallowed under section 37 of Income tax Act. The assessee in response to such show cause notice filed reply on 06.08.2024 and provided (AY 2021-22) Fugro Survey (India) Private Limited justification with respect to disallowance under section 37 of said international transaction.All the additional evidences and submissions of the assessee were forwarded to assessing officer for his remand report on 25.07.2024. But no remand report was furnished by assessing officer till passing of directions of DRP, though the reminder was issued to him.
The ld AR of the assessee submits that show cause notice issued by DRP for disallowance under section 37 was in violation of provisions of section 144C(8) of the Act. After explaining all the aforesaid factual back ground of the case, the ld AR of the assessee submits that no method as prescribed under section 92C was applied by TPO for determination of ALP of R & D and management fee. The application of method prescribed under section 92C is mandatory as has been held in various judicial precedents. To support such view, the ld AR of the assessee relied on the following case laws; CIT Vs Lever India Export Limited in Tax Appeal No. 1306,1307 & 1308 of 2014 (Bombay High Court)/ (2017) 78 taxmann.com 88 (Bom), Merek Limited in Tax Appeal No. 272 of 2014(Bombay High Court), Kodak India Limited in Tax Appeal No.15 of 2014, CIT Vs Johnson & Johson Limited in Tax Appeal No. 1292 of 2014 (Bombay High Court)/ (2017) 80 taxmann.com 269 (Bombay), INEOS Styrolution India Limited Vs DCIT in dated 11.10.2022.
The assessee has also placed following documents on record,
Particulars Page Nos. 1 Financial statements of assessee for FY 2020-21 1-40 2 Transfer pricing report (TPRS) for FY 2020-21 41-199 3 Form 3 CEB of assessee for FY 2020-21 200-211 11 (AY 2021-22) Fugro Survey (India) Private Limited 4 Computation of income for FY 2020-21 212-214 5 Submissions before TPO dated 27.01.2023 215-217 6 Submissions before TPO dated 13.10.2023 218-221 7 Reply to SCN-1, filed on 13.10.2023 before TPO 222-356 8 Reply to SCN-2, filed on 23.10.2023 before TPO 357-408 9 Additional submissions before DRP on 24.07.2024 409-428 10 429-682 Additional submissions before DRP on 01.08.2024 in response to show cause/ letter dated 26.07.2023 12 683-688 Additional submissions before DRP on 06.08.2024 in response to their letter dated 26.07.2024
On the other hand, the ld CIT-DR for the revenue supported the order of lower authorities. The ld CIT-DR for the revenue submits that during TPO in his order has categorically held that the assessee has not filed any evidence about availing management services or any benefits from R & D services form AEs. As no such evidences was furnished before TPO, so he treated the payments against such transactions at nill. The ld DRP also disallowed such payments under section 37 by holding that there is no sufficient evidence of such services or such services were rendered by the AEs of assessee for the purpose of its business.
10.We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case laws relied by the ld AR of the assessee. We find that TPO suggested upward adjustment of management fee and R&D payments to its AEs by taking view that assessee has not provided adequate documentation with regard to management fees and R & D expenses. The ld DRP confirmed the action of TPO/AO. We find that before ld DRP the assessee filed additional submissions and also filed copy of agreements with its AEs for availing (AY 2021-22) Fugro Survey (India) Private Limited management fee. The assessee also furnished various evidences in the form of correspondence with its AEs to substantiated the proof of availing such services.
On filing such additional evidence, the DRP called remand report of assessing officer / TPO. However, no such remand report was furnished by assessing officer / TPO as recorded in para 6.6.3 at page no. 124 of order of DRP.
11.We find that Hon’ble Jurisdictional High Court in CIT Vs Lever India Exports Limited (supra) held that TPO has no jurisdiction to consider whether or not expenditure incurred has passed the test of section 37 of the Act. In CIT Vs Johnsons & Johnsons Limited (supra), the jurisdictional High Court held that where the TPO has not followed prescribed method under section 92C to benchmark international transaction and TP adjustment was made solely on the basis of assumption that expenditure was incurred for sales promotion of parent company was on higher side, and said TP adjustment was de hors provisions of Chapter -X of the Act and the appeal of revenue was dismissed. We find that Bangalore Tribunal in AXA Technologies Shared Services (P) Ltd. vs. DCIT (2016)
76 taxmann.com 102 (Bangalore –Tribunal) held that where the assessee paid certain management fee to its AE, it was paid under agreement and there was no finding by TPO that management services were availed by assessee separately by third party and book expenditure in Profit & Loss Account, then determination of ALP on payment in question at Nil was not acceptable.
We find that before DRP, the assessee filed adequate evidence in support of management fees as well as expenditure incurred on research and development.
(AY 2021-22) Fugro Survey (India) Private Limited The additional evidence was accepted by DRP and matter was remanded back to the AO / TPO for remand report. However, despite repeated reminder, no remand report was furnished before DRP. Still, the DRP in taking adverse view and proceeded to examine such evidences as recorded on page no. 127 of its order.
The DRP held that most of the evidences comprised of emails and invoices, agreements, screen shot, programme details, package extracts with working and invoices. There is no other evidence of R & D support services fees. There is no other document for rendition or receipts of services. These documents are general in nature. The DRP also held that there is no evidence of request to avail such services. In our view, all the observation of DRP are general observation.
The DRP also disallowed management fees and R & D expenses under section 37 by taking view that mere payments by itself would not entitle the assessee for said expenditure unless the same is proved to be paid for commercial consideration. As noted above, the Hon’ble Jurisdictional High Court in CIT Vs Lever India Exports Limited (supra) held that TPO has no jurisdiction to consider whether or not expenditure incurred has passed the test of section 37 of the Act.
We find that assessee has filed sufficient evidence on record which prima facie substantiate the payment of management fees as well as R & D expenses are arm’s length price, though such evidences has not been examined by TPO nor the TPO computed the adjustment as per prescribed method simply holding that sufficient evidence is not filed before him. Moreover, no remand report was furnished by AO / TPO on the direction of DRP. The DRP also made a general (AY 2021-22) Fugro Survey (India) Private Limited observation regarding various additional evidences furnished by assessee.