DCIT, NEW DELHI vs. M/S. BSI MANAGEMENT SYSTEMS INDIA PVT. LTD., NEW DELHI

year 2007-08 against the order of the Ld. Commissioner of Income Tax (A)-XX, New Delhi.

i) Provision of professional services to AEs - Rs. 33,54,886/- ii) Receipt of professional services from AEs – Rs. 40,65,043 & 80/Del/2014 Assessment year 2007-08 iii) Reimbursement of expenses to AEs – Rs. 8,81,945/- iv) Recovery of expenses from AEs – Rs. 63,31,899/- v) Receipt of Management Services from AEs – Rs. 97,65,454/- 2.1 The assessee had applied CUP Method for determining the Arm’s Length Price (ALP) for the above transactions except for the receipt of management services from AEs for which it had used the Cost Plus Method. On a reference being made to the Transfer Pricing officer (TPO), the TPO accepted the international transactions as being at arm’s length except receipt of management services from AEs amounting to Rs. 97,65,454/-.

The assessee had submitted a transfer pricing study before the TPO and pertaining to BSI-UK wherein cost plus 5% had been held as appropriate. The TPO, however, determined the ALP of the transaction pertaining to receipt of management services from AEs at nil by applying CUP by taking the AE as the tested party on the ground that these services did not result in any benefit to the assessee and that there was no evidence of receipt of these services. Some of the services were also held to be in the nature of shareholder services. & 80/Del/2014 Assessment year 2007-08 2.2 Aggrieved, the matter was carried by the assessee to the office of the Ld. First Appellate Authority. The assessee filed additional evidences before the Ld. Commissioner of Income Tax (A) which were admitted by the Ld. Commissioner of Income Tax (A) after duly calling for the comments of the Assessing Officer on the same. Thereafter, the Ld. Commissioner of Income Tax (A) directed the Assessing Officer/TPO to restrict the disallowance/ALP adjustment to Rs. 36,13,723/-.

2.3 Now, both the department and the assessee are before the ITAT and have challenged the action of the Ld. Commissioner of Income Tax(A) by raising the following grounds of appeal:-

ITA 104/Del/2014 - Assessee’s appeal “Disallowance on account of arm's length price - INR 36,13,723 The addition amounting to INR 36,13,723 in connection to Management/ Business Support Services confirmed by the Hon'ble Commissioner of Income-tax (Appeals) - XX, New Delhi ["the Ld. CIT(A)"] vide order dated October 28, 2013 (served on the Appellant on November 8, 2013) passed under section 250 of the Act is not in accordance with the law and therefore not sustainable. In this regard, the Learned CIT (A) erred by: 1.1 Failing to discharge statutory obligation of providing reasons/ supporting evidence/ data/ information to justify the conclusion that 30 percent of the Management/ Business Support Services were duplicative/ incidental or shareholder (stewardship) in nature which is in violation to Section 250(6) of the Act. 1.2 Misconstruing the Appellant's business model and by conveniently overlooking the supporting evidence that the 4 & 80/Del/2014 Assessment year 2007-08 Appellant filed /adduced during the course of the proceedings to support the 'real benefits' it received in return for the Management/ Business Support Services Payment, and consequently arriving at a conclusion which is divorced from the underlying facts and is based purely on his own conjectures and surmises. In this regard, the observations made by the Ld. CIT(A) (in para. 3.5, 3.6 and 3.9 of the CIT(A) Order) are perverse on facts and based on misplaced notions owing to, but not limited to, the following: a. The CIT(A) failed to appreciate the certificates issued by Independent Chartered Accountant on methodology followed (including details on exclusion of UK specific costs) to appropriately allocate total cost pool to the Appellant and other BSI Group entities, observation made with respect to SAP, Cognos, etc. based on which it was concluded that the cost allocation methodology followed by BSI Group is consistent with the OECD TP Guidelines, etc.; b. By misconstruing management systems division support as shareholder activity (stewardship expenses) without appreciating the underlying nature of services and tangible operating benefits derived by the Appellant therefrom; c. By conveniently overlooking relevant evidence produced by the Appellant during the course of proceedings, including the fact that the Appellant has minimal staff in the Management/ Business Support area in which it availed assistance from the associated enterprise ("AE"); d. By reaching an erroneous conclusion that only allocation of actual cost qualified the arm's length test. While taking the disputed position, the Ld. CIT(A) also overlooked the well established market practice wherein third party service providers enter into arrangements based on budgeted estimates also; e. Notwithstanding and without prejudice to point #d, the Ld. CIT(A) has erroneously used forex rate of 1 £ = INR 126.472 to compute the excess amount invoiced to BSI India due to AE policy of allocating cost on budgeted vis-a-vis actual basis, when BSI India was invoiced during the year on forex rate of 1 £ = INR 77.21; and f. Notwithstanding and without prejudice to point #d, the Ld. CIT(A) erred by not reckoning the disallowance made in point # e, while computing the value of 'ad- hoc' 30 percent of Management/ 5 ITA No.104/Del/2014 & 80/Del/2014 Assessment year 2007-08 Business Support Service Charges that are alleged to be duplicative or shareholder (stewardship) in nature. Thus, leading to double disallowance. 1.3 Not providing the Appellant a reasonable opportunity of being heard or to place corroborative/ additional evidence on record to challenge the 'ad hoc' basis adopted to confirm the transfer pricing adjustment, which is against the 'principle of natural justice'. 1.4 Confirming interest under section 234B and 234D of the Act. 1.5 Initiating penalty proceedings under section 271(l)(c) of the Act. The above 'Grounds of Appeal

' are all independent and without prejudice to one and another. The Appellant craves leave to supplement, to cancel, amend, add and/or otherwise alter/modify any or all the grounds of the appeal stated hereinabove.” Department’s appeal “1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in restricting the addition made u/s 92CA(3) to Rs. 61,51,731/- ignoring that: (i) The cost allocation has been made on estimate basis only & no specific allocation has been made. No independent party would make payment on estimated basis. (ii) Many of the services for which payment has been made are in the nature of shareholder services. (iii) The assessee failed to produce documentary evidence to substantiate its claims with documentary evidence that training cost was incurred for specialized training. (iv) The services provided by the A.E. of the assessee for which payment was made were nothing but duplicate of assessee’s work like projection of revenue, future performance, comparison with targets etc.

3. The Ld. AR submitted that the assessee was in receipt of services from its AE in terms of service agreement dated 19th January, 2006. It was submitted that the BSI Group followed a & 80/Del/2014 Assessment year 2007-08 consistent transfer pricing policy to change its overseas subsidiaries for the bouquet of common services that fell within the scope of Management Services Agreement. It was further submitted that during the year under consideration, affiliates and subsidiaries in 23 countries were the beneficiaries of these common services. The Ld. AR submitted that the assessee had filed voluminous evidence running into approximately 2800 pages before the Ld. Commissioner of Income Tax (A) to demonstrate the rendering of services by the AE. The Ld. AR also submitted that the assessee had requested BSI-UK to appoint an external agency to carry out an independent audit of its books of accounts and certify the basis on which the service invoices had been raised on the assessee and the external auditor had issued the findings in the form of two reports namely Cost Allocation Methodology Report and Factual Findings Report and these reports very much supported the allocation of GBP 112,000 raised on the assessee through the service invoices.

3.1 The Ld. AR also submitted that the services were rendered strictly in terms of Management Services Agreement and the department has not doubted the fact that services have been received by the assessee from its AE. It was also submitted that & 80/Del/2014 Assessment year 2007-08 the department cannot challenge the incurrence of any expenditure from the viewpoint of commercial expediency.

3.2 Ld. AR also submitted that the Ld. Commissioner of Income Tax (A) had relied on the extensive evidence placed on record before him for the first time and it included the reports by the External Auditor appointed by BSI-UK and had granted 70% relief to the assessee but had sustained 30% adjustment on an erroneous belief that services invoices included an element of shareholder services of approximately 20% and by further holding that the services were duplicative in nature to the extent of 10%. Ld. AR further submitted that the allegation raised by the Ld. Commissioner of Income Tax (A) that 20% of the service invoices include an element of shareholder costs was incorrect.

Our attention was drawn to page 176 of Paper Book Volume 1 wherein the methodology applied was elaborated. It was submitted that as part of the methodology itself, the costs incurred by the Corporate Centre have been excluded at the very threshold from the cost pool eligible for allocation to beneficiary affiliates/subsidiaries. Reference was also made to page 190 of Paper Book Volume 1 wherein accounting head wise deconstruction of corporate office and central administrative & 80/Del/2014 Assessment year 2007-08 costs was stated. It was submitted that out of the total amount of GBP 9,756,000 incurred during the relevant accounting period, an amount of GBP 6,878,158 pertaining to governance and shareholder activity has been excluded for the purpose of cost allocation. It was submitted that the excluded percentage of 70.50% was far greater than 20% disallowance made by the Ld. Commissioner of Income Tax (A).

3.3 With respect to the action of the Ld. Commissioner of Income Tax (A) in sustaining disallowance of 10% on the allegation of the services being duplicative in nature, it was submitted that as part of the services under the Management Services Agreement, BSI-UK provides necessary training from time to time to upgrade the skill-sets of trainers/assessors within the assessee’s organisation to enable them to successfully audit management standards at the time of issuing renewal certificates or to enable the trainers/assessors to launch/introduce new standards in the market place. Our attention was drawn to page 175 of the Paper Book Volume 1 containing the Cost Allocation Methodology Report. It was also submitted that there was no overlap between training expenses appearing in the financial statements and training services received by the assessee under & 80/Del/2014 Assessment year 2007-08 the terms of Management Services Agreement.

3.4 Ld. AR submitted that both these adjustments sustained by the Ld. Commissioner of Income Tax (A) deserve to be deleted.

3.5 With respect to the department’s appeal, the Ld. AR placed extensive reliance on the findings of the Ld. Commissioner of Income Tax (A).

4.1 Coming to the department’s appeal, the Ld. Sr. DR read out extensively from the order of the TPO and submitted that the Ld. Commissioner of Income Tax (A) had erred in allowing relief to the assessee because the cost allocation had been made on an estimate basis only without any specific calculation having been made. It was also submitted that the assessee had failed to produce documentary evidences to substantiate the claim to establish that training cost had been incurred for specialised training. Ld. Sr. DR also reiterated that many of the services for which the payment had been made was in the nature of & 80/Del/2014 Assessment year 2007-08 shareholder services and further there was duplication in the services. It was prayed that the assessee’s appeal should be dismissed and the department’s appeal be allowed.

Thereafter, the Ld. Commissioner of Income Tax (A) has observed that the central administrative costs also have element of shareholder services and, thereafter, the Ld. Commissioner of Income Tax (A) has made the estimation that 20% of management services is in the nature of shareholder services and 10% of the same is in the nature of duplication of services/incidental services. Thus, it is seen that the Ld. Commissioner of Income Tax (A) has sustained the adjustment of Rs. 36,13,723/- on an estimate basis without considering the Cost Allocation Methodology Report which was very much before him. The Ld. Commissioner of Income Tax (A) has not given any basis for arriving at the figure of 20% adjustment required to be & 80/Del/2014 Assessment year 2007-08 made towards shareholder costs and 10% towards duplication of services/incidental services. In such a situation, we are unable to concur with the findings of the Ld. Commissioner of Income Tax (A) in this regard and we are of the considered opinion that in the interest of justice, the issue should be re-examined by the Ld. Commissioner of Income Tax (A) so as to reach a conclusion after duly considering the explanation of the assessee along with the Cost Allocation Methodology Report and the evidences filed by the assessee in this regard. Accordingly, we restore the grounds raised by the assessee to the file of the Ld. Commissioner of Income Tax (A) with the direction to adjudicate the issue on merits and quantify the adjustment, if any, after considering the various evidences furnished by the assessee in this regard and after giving a proper opportunity to the assessee to present its case.

5. Accordingly, the assessee’s appeal stands allowed for statistical purposes.

However, a perusal of the order of the Ld. Commissioner of Income Tax (A) shows that the basis for deleting the ALP adjustment of Rs. 61,51,731/- is not spelt out in the impugned order in clear terms. The Ld. Commissioner of Income Tax (A) has not discussed the reasons for reaching the conclusion that except for 30% of the expenses, why the remaining 70% of the ALP adjustment needed to be deleted. Thus, it is our considered opinion that the Ld. Commissioner of Income Tax (A) has not specified in clear terms the reasons for his allowing the impugned relief to the assessee. We have already restored the assessee’s appeal challenging the sustenance of 30% of the ALP adjustment to the file of the Ld. Commissioner of Income Tax (A) for re-adjudication and it will be in the fitness of things if the & 80/Del/2014 Assessment year 2007-08 grounds raised in the department’s appeal are also restored to the file of the Ld. Commissioner of Income Tax (A) for re- adjudication after providing an adequate opportunity to the assessee. Accordingly, we restore the grounds raised by the revenue to the file of the Ld. Commissioner of Income Tax (A) with the direction to re-adjudicate the issue on merits by passing a speaking order and after duly giving the reasons behind a particular adjudication. Needless to say, the assessee will be provided adequate opportunity to present its case.

Order is pronounced in the open court on 31st May, 2018.