DCIT vs. M/S 3M INDIA LTD.,, BANGALORE

The Transfer Pricing Officer (TPO), to whom the determination of ALP was referred to by the AO under the provisions of section 92CA of the Act, called for several details in his letter dated 16.2.2010 viz., documentation and evidence to show that the above services were actually rendered by the AE to the Assessee, evidence to show that tangible and IT(TP)A Nos.780 and 796/Bang/2013 direct benefit derived by the Assessee in paying the above amounts to the AE, valuation of such services if rendered between two independent parties under similar circumstances, invoices raised by AE on the assessee, ledger account of the services in books of assessee, basis of apportionment of cost by the AE for provision of Intra-Group Services [IGS] to the assessee as well as other group companies, the basis on which the cost of providing IGS was arrived at, copy of agreement for rendering IGS, invoices to show that IGS were actually rendered and other details.

The assessee in reply to the aforesaid letter of the TPO dated 16.02.2010, furnished reply dated 11.3.2010 along with enclosures. Enclosures are debit note raised by the AE for providing business support services, agreements with AE for rendering IGS dated 1.1.2003 between Assessee and 3M Asia Pacific Pvt.Ltd. (3M APAC) ( also referred to as “3M Singapore”), basis of cost allocation by the company providing IGS to the various entities across the world. The reply of the Assessee dated 11.3.2010 and annexures thereto are at page 298 to 562 of the Assessee’s paper book. It was the plea of the Assessee that the following documentary evidence supports its plea for substantiating the price paid to the AE for IGS, viz.,

The TPO gave the following findings on the submissions filed by the Assessee: (i) The invoices raised by the Assessee did not speak about the nature of services rendered. The taxpayer only mentioned about various services with support of invoices without any primary evidence to show that such services were actually rendered. (ii) The TPO analysed the business model and operation of the Assessee and noticed that the Assessee is a manufacturer and marektere of a wide variety of products catering to the industrial, automotive, speciality material, healthcare, traffic and safety, consumer and office and construction markets. The TPO noticed that the Assessee was importing raw materials from the AE besides importing finished products for resale and these constituted 59% and 51% respectively in the trading and manufacturing segments respectively. The TPO also observed that the Assessee sends significant portion of its revenues on research and Development and had invocation centre in Bangalore. The growth momentum of the Assessee was due to general economic growth and various sectors in which it was dealing and therefore the benefit that accrues to the Assessee has to be judged keeping in mind the factors mentioned above. (iii) The TPO thereafter noticed that the claim of the Assessee that services were rendered by the AE was based on visits of certain personnel to India and he found that the Assessee failed to give cogent evidence to show that the expenditure incurred in connection with visits really materialized into the Assessee getting the benefit of the personnel who visited India. (iv) With reference to Information Technology

The conclusion of the TPO on the payments made towards IGS to the AE has been summarized by the TPO in his order at paragraph-4.5 of the order u/s.92CA of the Act and the gist of the same is as under:

The addition suggested by the TPO in his order was incorporated in the draft order of assessment passed by the AO. The Assessee did not prefer any objection before the Dispute Resolution Panel (DRP) u/s.144C of the Act, against the draft order of Assessment but preferred appeal before CIT(A) against the final order of assessment passed by the AO wherein the addtition suggested by the TPO on account of determination of ALP was added to the total income of the Assessee.

Before CIT(A), the Assessee gave a detailed break-up of the sum of Rs.8,68,88,000/- which was as follows:

Before the CIT(A), the Assessee furnished copies of the Taxpayers Counterfoil for the payment of withholding tax of Rs. 1,23,72,310/- and challan for payment of service tax of Rs. 74,83,673/-. The Assessee firstly contended that the actual cost alongwith the 10% mark-up charged by 3M Singapore was only Rs. 6,11,41,118. It was contended that that only the said sum should be considered for determination of ALP. It was further pointed out that out of the total amount debited of Rs. 8,68,88,000/- the Assessee itself added back provision of Rs. 2,50,00,000/- made in its books for the period January 2007- March 2007. This sum also cannot be considered as payment for IGS and be subject matter of determination of ALP.

The CIT(A) agreed with the plea of the Assessee as above and held that out of the total amount debited of Rs. 8,68,88,000/- the Assessee itself added back the provision of Rs. 2,50,00,000/- made in its books for the period January 2007- March 2007. Out of the remaining Rs.6,18,88,000/-, Rs. 1.99 crores (Rs. 1.24 lakhs +0.75 ]akhs) comprises of withholding tax/service tax and that no TP adjustment is required on the provision made and the withholding and service tax paid. To this extent the Assessee was allowed relief by the CIT(A).

As regards the remaining sum that was paid as IGS, the assessee reiterated that administration and business support fees were allocated to IT(TP)A Nos.780 and 796/Bang/2013 all the 3M group globally pooled in all the IT and related costs to 3M Singapore which was in turn allocated to the group companies. The basis for cost allocation made by 3M Singapore along with the allocations to 3M India was provided by the Assessee as under:-

As regards, IT support services provided by 3M Singapore, they were broadly captured under three main categories as under:-

With regard to Sales & Marketing Support Services the CIT(A) wanted primary evidence with regard to the contention of the Assessee that services were rendered by the two personnel Wai Peng Poon and Chizzy Nnamchi. The Assessee in it’s written submission dated 11-03-20913 had contended that they had visited India for meeting prospective clients and that Chizzy Nnamchi was involved in rendering certain sales/ marketing and business support related services during AY 2007-08 for the Assessee and that his responsibilities included strategic planning, business planning and marketing, training on oil and gas industry processes, products and application training, training on business process tools such as key account mapping and management, channel selection and customer visits. It also included developing AFE process for CPP plant in Ahmedabad. It was IT(TP)A Nos.780 and 796/Bang/2013 contended that Chizzy Nnamchi had visited India during AY 2007-08 to also carry out customer visits to ONGC, IDT, Halliburton, 67, Schlumberger and Reliance and also provide training to the new person and also sales team for cementing.

The CIT(A) was not satisfied with the claim of the Assessee and he held that rendering of services had not been proved by the Assessee. The following were the conclusion of the CIT(A) in this regard:

With regard to the payment for provision of support services received in relation to laboratory and technical from 3M Singapore, the Assessee claimed that those services can be bifurcated into the following a) Technical service/sales service b) Production services a) Significant product and process modification for the improvement of existing business b) Product and process development for related new business c) Product and process development for unrelated new business d) Basic and applied research/technology building e) Service to R&D The details of the services rendered in each of the above mentioned categories was claimed to be provided by the AE.

The CIT(A) was not satisfied with the claim of the Assessee and he held as follows:

One of the finding of the TPO for not regarding the price paid as at Arm’s length was the decline in assessee's profitability due to increase in administrative and business support service fee. This finding was challenged by the Assessee in the appeal before CIT(A). The CIT(A) accepted the Assessee's contention that the TPO had erred in concluding that the increase in administrative and business support service fee had not resulted in higher profitability, as the fee paid constituted only a miniscule percentage of the overall costs and other business factors were ignored. Consequently, Ground 6 raised by the Assessee in this regard was allowed by the CIT(A).

The Assessee also challenged before CIT(A) that the TPO's conclusion that the transaction had been undertaken by the Assessee to shift profits to other jurisdictions. The CIT(A) held that there was no motive to evade tax and the transfer pricing documentation and arm's length price is arrived at in good faith, without any intention of avoidance of tax in India. The CIT(A) also held that as held in the case of Dresser - Rand India Private Limited (ITA No. 8753/Mum/2010) and in Abhishek Auto Industries Limited Vs. DCIT (2010-TII-54-ITAT-DEL-TP) the TPO cannot intervene on the commercial expediencies involved in the arrangements between AEs. Ground 7 raised by the Assessee in this regard was also allowed by the CIT(A).

The Assessee also challenged the findings of the TPO that the AE need not be additionally compensated for the administrative and business support services in Ground No.8 raised by the Assessee before CIT(A). The Assessee had undertaken a separate transfer pricing analysis for the payment of administrative and business support service charges to the AE and had not aggregated this transaction with any other international transaction (of import of raw materials for manufacture and import of finished goods for trading etc.) However the TPO rendered a finding that large amount of imports from AEs sufficiently compensate for any value addition received from AE and need not be paid additionally for the administrative and business support services. On the above finding of the TPO, the CIT(A) agreed with the plea of the Assessee that when the TPO has accepted the price paid to the AEs for the raw materials consumed and the finished goods as arm's length, there can be no basis to hold that the AE had been overcompensated by way of higher import price. The CIT(A) also found force in the contention of the Assessee that in the event the TPO combines the transaction with that of import, the same would be at arm's length since the margin as per TNMM is much higher than the margin of comparable companies.

Aggrieved by the order of CIT(A) in sustaining addition on account of Sales and marketing support services, Laboratory and technical support services and sales and marketing services, the Assessee is in appeal before the Tribunal. The revenue is aggrieved by the order of the CIT(A) in allowing relief in so far as provision of IT support services and is in appeal before the Tribunal.

Before us, the gist of grounds of challenge to the order of the CIT(A) by the Assessee is that the learned CIT(A) has erred in law and facts, by upholding the addition of Rs. 3,64,11,750 made by the learned Assessing

The gist of the grounds of appeal

The ld. DR, on the other hand, placed strong reliance on the order of the TPO and the grounds of appeal of the revenue in so far as the appeal of the revenue is concerned and the directions of the CIT(A) in so far as the appeal of the Assessee is concerned. According to the learned DR, even the evidence filed by the Assessee does not establish the requirement of law that services were rendered by the AE to assessee for which the assessee made payment. She laid emphasis on the fact that there is no evidence brought on record to show what was cost incurred by the AE for providing IGS and merely filing the key allocation to various entities worldwide would not be of any significance. According to the learned DR, the assessee has also not explained the basis of allocation of IGS expenses. He submitted that what is the basis of cost to 3M Singapore has not been explained in the TP analysis.

We have given a careful consideration to the rival submissions. Multinational groups use Intragroup services transactions to shift profits from a country, where lower income tax rate exists. Therefore, the intragroup transactions have caught the interest of the tax authorities and are being constantly monitored. In respect of IGS, the requirement of law as laid down in several judicial pronouncements has to be first seen. 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 dated 23.5.2014 367ITR 730 (Del), held that whether a IT(TP)A Nos.780 and 796/Bang/2013 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.

The following aspects would require consideration in order to identify intra group services requiring arm’s length determination:

Keeping in mind the principles emanating from the aforesaid decisions, we shall now proceed to examine the material on record to see the nature of services received by the Assessee and as to whether the same were at Arm’s Length.

We have examined the evidence filed by the assessee in respect of the claim that the assessee received IGS from AE for which it made payment. The TPO called upon the Assessee to describe the nature of IGS provided by the AE and evidence to show that services were actually rendered by the AE to the Assessee. The TPO also wanted the Assessee to provide evidence to show tangible and direct benefits desired by the Assessee, the basis of quantification of the sum payable by the Assessee to the AE and whether the payments by the Assessee to the AE for IGS would be the same between independent parties, i.e., whether the payment for services would be at Arms Length under the Corporative Uncontrolled Price (CUP) method of determining ALP.

The Assessee vide its letter dated 11.03.2010 (a copy of which together with annexures thereto are at pages 298 to 562 of the Assessee’s Paper Book) gave details. These details i.e., the description of these documents have already been given in the earlier part of this order. In paragraph 1.1 of its reply dated 11.03.2010 submitted that the following as the list of specific services which the Assessee received from AE.

The evidence in support of the Assessee having received services from the AE is in the form of emails (copies at pages 375 to 378, 397-399, 400, 404, 405, 406, 488 and 489). The documents at pages 330-334 and 335 to 339 are agreements for rendering services. The document at pages 340-343 and 344-374 are details of common costs and its allocation to various group entities. The document at pages 379 to 396 is Agreements for rendering IT services. These documents do not establish or show the nature of services rendered by the AE to the Assessee.

The emails at page 379 are exchange of mails and are with reference to period March 2018. Its relevance to previous year relevant to Assessment Year 2007-08 is not explained. The emails at pages 379 to 378 are general mails and do not show or can be said to be evidence of services having been rendered by the AE. The email at pages 397 to 399 are dated March, 2010 and make a reference to IT services for the period 2004 to 2007. There is reference to nature of service rendered by the AE with reference to IT services. There is no material brought on record to show that these services were actually rendered by the AE to the Assessee.

The emails at pages 400 to 406 also do not throw any light on the nature of services rendered and how they were relevant to the business of the Assessee. At page 401 there is a reference to Indian Agenda August, 2006 in a mail by WP Poona of Singapore to Grace which is forwarded to the Assessee’s office in India. The Agenda at Page 405 is vague and lacks details on relevance of the meeting with reference to the business of the Assessee and supporting documents. The email at Page 406 is by Chizzy Nnamchi of Singapore to Assessee’s Office in India. It has six attachments. Again the relevance of these documents to the business of the Assessee and how it benefitted the Assessee with supporting documents are not given. The mails at Pages 488 to 489 by the very same person also suffers from similar infirmities. The other documents are about business prospect reports and their relevance and benefit to the business of the Assessee are not spelt out anywhere.

The assessee has also given an overall summary of evidence of services received from the AE. Details Brief Explanation of the Sl. No. content of the Annexure Cost Allocation Details Details of cost allocated A2 from APAC Singapore to 3M India, which includes cost actually incurred by 3M Singapore and allocated to all the APAC countries and recharge from other APAC countries to India. B1 Email for IT Support Copy of e-mail received Service Fee agreement from APAC Singapore 2006. explaining the details of IT related support services rendered during 2006.

Trip Reports if any of APAC personnel visit to India for imparting Training / organizing Seminars etc./launch of new products /expansion of business etc .

Product Catalogues /Training Manual etc . evidencing the same B9 3M Hollow Glass Document prepared for Spheres Model India explaining compatibility of HDS for Oil & Gas. B10 Flyer for Oil & Gas Document prepared for Markets India explaining answers for the requirements for Oil & Gas Markets. B11 Flyer for best practice Flyer explains the best application for oil & practice application for Oil Gas Markets & Gas markets

As far Sl.No.A2 of the aforesaid chart is concerned, is the cost allocation basis of costs incurred by AE globally and allocation to the Assessee for India but there is no evidence to substantiate rendering of such services by the AE to the Assessee nor benefit that the Assessee derived from such services. As far as Sl.No.B1 & B2 of the chart above is concerned, it relates Information Technology Services which is stated to be claimed under an agreement to render service but existence of such agreement without evidence to substantiate services rendered is not of much significance. Sl.No.B3 of the chart given above refers to implementation of FIFO Inventory for IT Project. Again the supporting documents to show rendering of services is absent. Sl.No.B4 to 14 is IT(TP)A Nos.780 and 796/Bang/2013 concerned, we have already referred to these documents in the earlier paragraphs and given our conclusions thereon. As far as document in Sl.No.15 is concerned, it relates to ICAP Project. From this document, it is difficult to decipher as to what services were rendered by the AE. From this one cannot say that the services stated therein were in fact rendered by the AE and other aspects regarding the cost to the AE and the benefit the Assessee received. Therefore the Assessee has to show as to how the services referred to in the chart were in fact rendered by the AE. On the evidence on record, we cannot say that the payment by the Assessee for IGS is at Arm's Length or to say that it is not at Arm's Length. The Assessee has to establish and show that it satisfies the parameters as laid down in judicial pronouncements referred in the earlier paragraphs of this order. The CIT(A) in our view allowed relief to the Assessee in so far as it relates to rendering of IT services without any evidence whatsoever.

We have already set out the arguments of assessee on the aforesaid services. We find that these documents are general in nature and do not prima facie establish the requirements for testing the payment as at Arm’s Length in the light of the parameters laid down in the decisions referred in the earlier paragraph. However, we are of the view that the Assessee should be given an opportunity to demonstrate ALP as per the parameters laid down in the decisions referred in the earlier paragraphs. In fact the case of the Assessee in the present AY 2007-08 is similar to AY 2006-07 and on almost identical facts, we remanded the issue to the AO/TPO for decision afresh. In the given facts and circumstances, we deem it fit and proper to remand the issue of determination of ALP to the TPO/AO afresh. We are of the view that the Assessee should be directed to let in cogent evidence and explain the evidence already on record or any other evidence to show the rendering of IGS by the AE and other parameters that need to be satisfied to establish the ALP of the price paid for IGS as laid down in IT(TP)A Nos.780 and 796/Bang/2013 judicial pronouncements referred to in the earlier part of the order. We accordingly set aside the impugned order and remand the issue to the TPO/AO for consideration afresh. However the decision of the CIT(A) with regard to exclusion of TDS paid and Service tax as payments made by the Assessee for IGS is acceptable and we confirm the said conclusion. The decision of the CIT(A) holding that the payment for IT services are at ALP is set aside for consideration afresh.

In the result, the appeal of the assessee is treated as allowed for statistical purpose and that of the Revenue partly allowed for statistical purpose.