MERCK SPECIALITIES P. LTD,MUMBAI vs. DCIT RG 6(3), MUMBAI

Aforesaid appeal by assessee for Assessment Year [in short referred to as ‘AY’] 2009-10 contest the final assessment order dated 31/01/2014 passed by Ld. Dy. Commissioner of Income Tax- 6(3), Mumbai [AO] u/s 143(3) r.w.s 144C(13) pursuant to the directions of Ld. Dispute Resolution Panel-I, Mumbai, [DRP] u/s 144C(5) dated 30/12/2013. The Grounds raised by assessee reads as under: - M/s Merck Specialties Private Limited Assessment Year: 2009-10 Grounds In the facts and circumstances of the case and in law, the Learned Assessing Officer (AO) / Hon'ble Dispute Resolution Panel (DRP) / Transfer Pricing Officer (TPO)(as the case may be) erred in - 1.1 Passing the impugned order U/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the Act) making huge additions, disallowances and making transfer pricing adjustments based on surmises, conjectures, presumptions and assumptions by merely following the stand taken in the immediately preceding assessment year and without considering the papers and documents submitted as also submissions made during the course of assessment proceedings and the proceedings before the Hon'ble Dispute Resolution Panel. 1.2 Transfer Pricing Issues: 1.2.1 Addition in respect of technical know-how fees of Rs. 1,12,36,000 On the facts and in the circumstances of the case, and in law, the Learned TPO erred in proposing and the Hon'ble DRP / AO further erred in confirming the adjustment of Rs. 1,12,36,000 in respect of technical consultancy fees paid by the Appellant to its AE without specifying any method. a) The Ld. DRP and consequently the Ld. AO erred in not considering the Transfer Pricing Methodology adopted by the appellant to justify the arm's length nature of the technical know-how fees paid to the AE; b) The Learned DRP and consequently the Learned AO erred in not understanding and appreciating the essence of the inter-company agreement, i.e. Technical and Consultancy Agreement (the agreement) and with preconceived notion proceeded to conclude that the arm's length price to be Nil; c) Erred in wrongly concluding with a preconceived notion and without any basis that no benefit has been received by the appellant even though various documents / papers evidencing the receipt of the technical knowhow services were submitted; d) Without prejudice, the Ld. DRP and consequently the Ld. AO erred on facts and in law in upholding the Ld. Transfer Pricing Officer's stance of making an adjustment towards the service tax component paid to the government of Rs. 12,36,000 charged on receipt of the aforesaid services on the basis that the payment made towards the technical know-how fees itself has been disallowed.

Other issues: The Learned DRP and consequently the Learned AO in the facts and circumstances of the case of the appellant and in law, erred in - 2.1 Disallowing Rs.1,16,197/- U/s.14A of the Act read with Rule 8D of the Income Tax Rules instead and in place of Rs.1,13,793/- as determined by the appellant; 2.1.1 Not disallowed any amount u/s. 14A of the Act as the appellant had not incurred any expenditure in connection with earning any tax-free income. 2.1.2 Not restricting the disallowance u/s. 14A read with Rule 8D at Rs.1 lakh. 2.2. Disallowing Rs.9,24,21,875/- in respect of depreciation on intangible assets purchased by the appellant in the earlier year calculated at 25% on their written down value of Rs.36,96,87,500/-; 2.3 Applying the provisions of Section 145A of the Act, though however, the appellant follows "net method of accounting".

It is humbly prayed that the reliefs as prayed for hereinabove and/or such other reliefs as may be justified by the facts and circumstances of the case and as may meet the ends of justice should be granted.

We find that there is a clear contradictions in the findings of the authorities below. On one hand, the stand of the authorities below is that no services are rendered, and, on the other hand, there are categorical findings that the services rendered are so general in nature that even an employee of the assessee could have rendered the same. In the event of no services actually having been rendered, there cannot be any occasion for the same services being rendered by a person without specialized knowledge. On one hand, it is held that arm’s length price of these services is zero value, and, in the same breath, it is held that “there would hardly be any substantial payment” for these services. Clearly, services are rendered on the facts of the present case. There is sufficient material on record to show that the assessee was, under the agreement, entitled to receive a package of services on as and when required basis. The emails and other documentary evidences show that the assessee was in receipt of these services. Just because these services were too general, in the perception of the authorities below, or just because the assessee did not need these services from the outside agencies, cannot be reason enough to hold that the services were not rendered at all. We have perused the material before us, and, in our considered view, the assessee has reasonably established rendition of services. The assessee may not have received all the services under the agreement but essentially the assessee had right to receive all these services, as and when required, under the agreement. The payment is made for the rights accruing to the assessee for the bundled services under the contract and not for each service on ala carte basis. The reason that the assessee did not use a particular service cannot justify holding that no payment was warranted for such services. To give an example from day to day life, if an assessee is paying for having right to view a bouquet of television channels, which come as a package, he does not decline to pay the consideration for the bouquet of television channels because he did not view a particular television channel. The example may seem to be so simplistic but it does hammer the massage, as we would like to, that not availing a particular service under a contract does not mean that no payments are required to be made for all the services bundled under the contract. The other thing M/s Merck Specialties Private Limited Assessment Year: 2009-10 is the benefit test. We do not think benefit test has too much relevance in the arm’s length price ascertainment. When evaluating the ALP 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. In case TPO can demonstrate that the consideration for similar services, under the CUP method, is NIL, he can very well do so. That’s not, however, his case. He only states that these services are not worth the amount paid by the assessee. Such band statements and sweeping generalizations cannot help the case of the revenue authorities. The assessee has benchmarked the transaction on TNMM basis, and unless the revenue authorities can demonstrate that some other method of ascertaining the arm’s length price on the facts of this case will be more appropriate a method of ascertaining the arm’s length price, the TNMM cannot be discarded. Dealing with almost a similar situation, as we are in seisin of, a coordinate bench of this Tribunal, in the case of AWB India Pvt Ltd VS DCIT [(2015) 152 ITD 570 (Del)], has observed as follows: 11. In ground nos. 5 to 9, which we will take up together, the assessee has raised the following grievances: 5. That, on the facts and circumstances of the case, the DRP and TPO/AO have failed to appreciate the business model and business realities of the appellant and role of its AE, while conducting the economic analysis, and concluding that no service is received or no benefit, and/or services received are duplicative in nature.

That, on the facts and circumstances of the case, the DRP and TPO/AO erred in presumptively holding that the revenue authorities are empowered to question the commercial decision of the appellant and in not appreciating the jurisprudence that the DRP and the AO/TPO cannot go beyond their powers to question the business decision of the company.

That, on the facts and circumstances of the case, the DRP has erred in confirming that the TPO has discharged his statutory onus by establishing the conditions specified in (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm’s length price determined by the appellant and proceeding to decide the arm’s length price himself.

That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in conducting economic analysis of the international transactions without relying on any comparable transaction/companies using inappropriate method.

That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in determining the arm’s length price of international transactions consisting of cost and profit margin at ‘nil’.

So far as these grievances of the assessee are concerned, the relevant material facts are as follows. The assessee is engaged in the business of trading in food grains. It is a part of AWB group Australia and its 99.999% equity is held by AWB Australia Limited and the balance .001% equity is held by another group company, namely AWB Investments Limited. One of the international transactions that the assessee entered into with its AEs was M/s Merck Specialties Private Limited Assessment Year: 2009-10 payment of Rs 58,20,571 towards ‘management services’. On an analysis of the details of the payments made under this head, the TPO was of the view that the benefit of some of the services availed under the head ‘management services’ was not commensurate with the payments made for the same. He was also of the view that as against the use of TNMM by the assessee in benchmarking, the right course of action will be to follow CUP method because the value under CUP method will be best indicator of the value of these services. It was in this background that the TPO made certain adverse inferences against the assessee. The TPO was of the view that while the assessee has made a payment of Rs 20,35,907 towards financial management and reporting services, “but the services rendered are negligible compared to the cost incurred”. The TPO was also of the view that “a minor clarification or seeking of certain guidance on verify basic issue does not call for a payment of Rs 20 lakhs. Therefore, the ALP of these services was taken as ‘NIL’. He further noted that while the assessee has made a payment of Rs 1,23,476 towards human resources services, the assessee has “not furnished any specific input on training and development of human resources and it is also noticed that these services are of routine nature and duplicate at best”. Accordingly, the TPO also treated ALP of these services as ‘NIL’. As regards the payment of Rs 96,355 towards ‘legal services’, the TPO did take note of the services that the assessee was entitled to under these arrangements but as there is no evidence of any services having been actually rendered by the AE, the TPO concluded that it does not have any value in an arm’s length situation. The value of this service was also taken as NIL. The same was the case with respect to the payments for other services. Accordingly, no arm’s length value was assigned to these services also. In respect of these cases TNMM was rejected and CUP was applied- though, even under CUP method, value assigned was nil as, in the opinion of the TPO, these services were worthless.

When Assessing Officer proposed to make disallowance in respect of payments for the above services, arm’s length value of which was taken at ‘zero’, aggregating to Rs 31,23,325, as against total management fees of Rs 58,20,571 paid by the assessee, assessee carried the matter before the DRP but without any success. The DRP confirmed the stand so taken by the TPO, Accordingly, an ALP adjustment of Rs 31,23,325 was made by the Assessing Officer. The assessee is aggrieved and is in appeal before us.

We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

One of the very basic pre condition for use of CUP method is availability of the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are M/s Merck Specialties Private Limited Assessment Year: 2009-10 rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon’ble jurisdictional High Court in the case of CIT Vs EKL Appliances Limited (345 ITR 241), “Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same”.

The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO’s case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions.

As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as ‘nil’ just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments.

We are also of the considered view that in the absence of prerequisites for application of CUP methods being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO’s impugned action cannot meet our judicial approval.

For the detailed reasons set out above, we uphold the grievance of the assessee and direct the AO to delete the impugned ALP adjustment of Rs.31,23,325. The assessee gets the relief accordingly.

We see no reasons to take any other view of the matter than the view so taken by the coordinate bench.

In the present case, though a finding is given to the effect that no services are rendered, in the light of the contradictions in this finding and the observations above, it is clear that in effect commercial expediency of this payment is questioned. That exercise, in our considered view- particularly in the light of Hon’ble Delhi High M/s Merck Specialties Private Limited Assessment Year: 2009-10 Court’s judgment in the case of EKL Appliances (supra), cannot be conducted in the course of ascertaining the arm’s length price.

In view of the above discussions, as also bearing in mind entirety of the circumstance, it is clear that the impugned ALP adjustment is contrary to the scheme of the Act. The authorities below have been swayed by the considerations which were not germane to the issue. We, therefore, uphold the grievances of the assessee and direct the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technical services. The assessee gets the relief accordingly.