MERSEN INDIA PRIVATE LIMITED,BANGALORE vs. JOINT COMMISSIONER OF INCOME TAX (OSD), CIRCLE-4(1)(2), BANGALORE

1. The Transfer Pricing officer ("TPO"), the Assessing Officer ("AO") and the Dispute Resolution Panel, Bangalore ("DRP") have grossly erred in law and facts of the case in determining the Arm's length price ("ALP") of the Human resource services as NIL.

The learned TPO/AO/DRP has failed to appreciate the e-mails, policies and other documents submitted by the Assessee as evidence for receipt of the services.

The learned TPO/ AO/DRP has erred in questioning the benefits derived from the services when this cannot be challenged. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.”

The Ld.AR at the outset submitted that the issues raised by assessee hereinabove have been remanded by Coordinate Bench of this Tribunal in assessee’s own case in IT(TP)A Nos. 118 to 122/Bang/2018 by order dated 05/05/2022 by observing as under: “3. The assessee is engaged in the business of manufacture and sale of Carbon Blocks and brushes, fuses and heat exchangers and also trading in fuses. The assessee was formerly known as Carbon Lorraine India P Ltd and it is subsidiary of Le Carbone Lorraine S.A, France. The assessee has entered into several international transactions with its AE in all these years. We are concerned with the Management fee paid by the assessee to its AE. The assessee had paid to its AE for eight different types of services. The TPO, applying benefit test, determined the ALP of payment of management services as NIL. The conclusions of TPO given in AY 2009- 10 are extracted below:- “8.1 The taxpayer has not shown that the alleged services received from its AE for which payment of management fee amounting to Rs.91,51,375/- has been made, are required for the taxpayer’s business and also that the taxpayer is not capable of getting these services locally or on its own. 8.2 The taxpayer did not prove with evidences that the services have been actually rendered by the AE for which said payment of management/maintenance fees have been made. At arm’s length, the parties dealing in similar circumstances would have such evidences in possession. 8.3 No cost benefit analysis has been furnished by the taxpayer to show that, the taxpayer has benefitted out of Page 3 of 6 IT(TP)A No. 381/Bang/2022 the alleged services and the payment is commensurate to the benefit received. 8.4 The taxpayer has also not furnished any details and evidences to show how the alleged services rendered by the AE are quantified at an arm’s length condition. This shows that these management fees are not linked with actual services but a way to siphon of the profits with minimum incidence of tax. 8.5 The taxpayer did not show what is the tangible and substantial commercial benefit derived by the taxpayer from the alleged services and consequent payment of management/maintenance fees of Rs.91,51,375/- and consequently did not prove the arm’s length nature of management fees paid to its AE.”

We heard Ld D.R and perused the record. We notice that the TPO has accepted that the international transactions at "entity level" is at arm’s length. We also notice that the management fee paid by the assessee formed part of operative expenses. Hence the Ld A.R has contended that the TPO could not have benchmarked management fee paid by the assessee separately. We also notice that the TPO has determined ALP of management fee payment by applying benefit test. The Ld AR also contended that the ALP of international transactions should be determined by TPO under one of the prescribed methods only. It is also submitted by the ld A.R that the revenue has taken stand before AAR in the assessee's own case that the AEs are not only rendering managerial and consultancy services to the assessee, but also is making available to technical knowledge to the assessee. Accordingly he contended that the TPO could not have taken different view in these years.

It is well settled proposition of law that the ALP of international transactions could be determined by TPO under one of the prescribed methods only. However, in the instant case, the TPO has applied benefit test and determined ALP of payment of management services as NIL. Hence the approach of the TPO is not in accordance with the mandate of law. The Ld A.R has also raised two other contentions (i) with regard to the necessity of segregating this transaction, when the ALP had been determined at entity level aggregating the payment of management fee and (ii) with regard to not following the decision rendered by AAR in the assessee's own case in an earlier year. We notice that the Ld CIT(A) has held that the principle of res- judicata cannot be applied in income tax proceedings and accordingly refused to follow the decision rendered by AAR. We are unable to agree with the view so expressed by Ld CIT(A). When the assessee is making identical payment every year for identical services provided by AE and the revenue Page 5 of 6 IT(TP)A No. 381/Bang/2022 has taken a particular stand with regard to the services so provided by the AE, in our view, there is no scope for applying the principle of res-judicata in other years for this matter for taking different stand in others for the identical payments made by the assessee. However, it is not clear as to whether the decision rendered by AAR against the assessee has attained finality or not.

Accordingly, on a conspectus of the matter, we are of the view that the issue relating to transfer pricing adjustment in respect of three types payments referred in the table issue needs to be examined in the light of contentions of the assessee discussed supra at the end of TPO/AO. The tax authorities should first examine the contention of the assessee that there is no requirement of making separate bench marking for these services, when they are aggregated and the ALP of international transactions were accepted to be at arm’s length. The AO/TPO should also take into consideration the decision rendered by AAR in the assessee's own case, if it has attained finality. After carrying out these exercises, if the AO/TPO comes to the conclusion that the bench marking is still required to be made, then the TPO shall determine ALP of these transactions under one of the prescribed methods only. The assessee shall be given adequate opportunity of being heard.”

Admittedly, the Ld.DR did not object for the remand of the issues to the Ld.AO/TPO for denovo verification. Considering the submissions by both sides, we remit the entire issue alleged by assessee in the present appeal to the Ld.AO/TPO to be considered in accordance with the directions given by Coordinate Bench of this Tribunal in assessee’s own case (supra). In the result, the appeal filed by the assessee stands partly allowed for statistical purposes. Order pronounced in the open court on 08th August, 2022.