Loading judgment…
Facts
Humboldt Wedag India Pvt. Ltd., engaged in manufacturing and supply of equipment for cement plants, availed supervision and central services from its Associated Enterprises (AEs) for AY 2020-21. The TPO/AO disallowed the mark-up charged by the AEs on these international transactions, making adjustments of Rs. 29,28,315 for supervision services and Rs. 74,15,640 for central services.
Held
The tribunal held that identical issues regarding the disallowance of mark-up on intra-group services had been consistently decided in the assessee's favor by co-ordinate benches in previous assessment years (2014-15, 2016-17, 2017-18, 2018-19). The Tribunal found no change in facts and circumstances and concluded that the AO erred in not following the DRP directions and past decisions, thereby allowing the mark-up charged by the AEs as being at arm's length.
Key Issues
Whether the mark-up charged by Associated Enterprises (AEs) on supervision and central services availed by the assessee should be allowed as being at arm's length.
Sections Cited
143(3), 144C(13), 144B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCHES : I : NEW DELHI
Before: SHRI PRADIP KUMAR KEDIA & SHRI ANUBHAV SHARMA
Assessment Year: 2020-21 Humboldt Wedag India Pvt. Ltd., Vs Addl. CIT, A-36, Mehtab House, Circle-10(1), Mohan Co-op. Estate, Delhi. Mathura Road, Delhi – 110 044. PAN: AAACH7474G (Appellant) (Respondent) Assessee by : Shri Siddhesh Chaugule, CA & Ms Hemlata Sharma, CA Revenue by : Shri Dharm Veer Singh, CIT-DR Date of Hearing : 20.11.2024 Date of Pronouncement : .12.2024 ORDER PER ANUBHAV SHARMA, JM:
This appeal is preferred by the Assessee against the final assessment order dated 29.05.2024 passed u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) by the Assessment Unit, Income Tax Department (hereinafter referred to as the Ld. AO) for AY 2020-21.
Heard and perused the record. The Appellant is mainly engaged in the business of designing, fabricating, manufacturing and supply of equipment plants & machinery for cement manufacturing companies. During FY 2019-20, the Appellant entered into various international transactions with its associated enterprises (‘AEs’). All other international transactions of the Appellant have been accepted to be at arm’s length and no adverse inference has been drawn by the TPO, except for the two and for which the tax authorities below have disregarded the economic analysis carried out by the Appellant in relation to the following two transactions and made the following adjustment:
2.1 Availing of supervision services. These services were in the nature of inspection of goods, supervision of commissioning, installation and erection of cement plants. In lieu of these services, the AE charges at fixed per hour rates that included a net profit mark-up of 4% on costs incurred, on the basis of number of hours spent by its personnel in providing such services to the appellant. The transaction value was Rs. 7,61,36,192. Analysis carried out in the TP documentation was that per hour rate charged by the AEs from third party customer for similar services is higher than the rate charged from HW India. The TPO observed that service fee to the extent of cost is allowed by the however, the mark-up charged thereon by the AE is disallowed. Accordingly adjustment was made of Rs. 2,92,81,315 (as per the TPO order giving effect to DRP directions dated May 22, 2024 adjustment was reduced to Rs. 29,28,315).
2.2 Availing of central services. During FY 2019-20, the Appellant availed central services from its overseas AEs amounting to Rs.15,57,28,456. These services were in the nature of: i. Legal and Professional services of Rs. 5,45,01,988: Support provided for both the operative business and the administrative area of HW India which includes management support, legal and tax services, finance and treasury etc. ii. Global Quality Management Services of Rs. 10,12,26,468: These services are more focused on the core business activities of the Appellant which includes certain quality management services in the nature of global quality management, global sales support, global IT CAD etc.
2.3 As per the inter-company arrangement for providing central services, the AE incurs such costs for all Group companies and subsequently allocates them to the respective service recipients including HW India. The amount paid/ payable by HW India in respect of these services represents the proportionate share of HW India in the total cost incurred by the AE in providing these services plus 5% profit mark-up applied on internal cost while third party costs are charged on cost to cost basis. The transaction value was Rs 155,728,455/-. Analysis carried out in the TP documentation was Method: Cost Plus Method (‘CPM’)Tested Party NCPM:5%; Arm’s length NCPM: 3.47% - 6.56% (median: 4.64%). Service fee to the extent of cost is allowed by the TPO/AO however, the mark up charged thereon by the AE is disallowed. Adjustment made: Rs. 74,15,640.
The DRP noted that identical issues were adjudicated in favour of the Appellant by this Tribunal vide order dated August 18, 2021 for AYs 2014-15 and 2016-17 respectively and November 10, 2022 for AY 2018-19. Accordingly, for the AY under consideration i.e. AY 2020-21, the DRP directed the AO/TPO to inquire whether an appeal has been preferred by the Revenue against the order of this ITAT before the Hon’ble Delhi High Court and if such appeal was indeed preferred before the Hon’ble Delhi High Court, the DRP directed the AO to sustain the aforesaid adjustment/ additions.
We observe that there is no change in the facts and circumstances of the case as compared to the previous years under litigation. Thus on principle of consistency, the AO should have examined the issue but same was not done. A summary of litigation history on the subject transaction as provided by the ld. AR is reproduced below: AY Service costs Mark-up 2007-08 Allowed by Ld. TPO 2008-09 Allowed by Ld. TPO 2009-10 Allowed by Ld. TPO Allowed by 2010-11 Allowed by Ld. DRP the Hon’ble 2011-12 ITAT 2012-13 Allowed by Ld. TPO 4 2013-14 Not picked up for scrutiny Allowed by 2014-15 Allowed by Ld. TPO the Hon’ble 2015-16 Not picked up for scrutiny Allowed by Ld. TPO Allowed by 2016-17 the Hon’ble 2017-18 2018-19 ITAT 2019-20 Not picked up for scrutiny
Then, in the Assessee’s own case for AY 2014-15, AY 2016-17.2017-18 and 2018-19 the co-ordinate benches have considered the issue of mark and have held that the mark-up charged by the AE for the services provided should be allowed and deleted the entire adjustment made on this account. The relevant part of the decision in AY 2014-15, paras 5 to 8, are reproduced below:- “5. The markup of 4% and 5% has been disallowed by the TPO and accordingly enhanced the income of the assessee based on the ld. DRP observations for the year 2010-11. For the sake of ready reference, the same is reproduced as under: “3.3.2. In the assessee’s case, the intra- group services relate to general administration, finance and accounting, coordination, general management, corporate and project financing, recruitment and education. It is noted that the assessee is an entrepreneur in its own right and is engaged in engineering, procurement and commissioning projects for the third party clients. It procured orders on independent basis and also carried out the project on its own. It is hardly operating as an extension of AE or catering exclusively to the AE. It virtually undertakes all the risks associated with rendering services, marketing and performs various complex roles. Therefore, the ratio of Supreme Court decision in the case of Morgan and Stanley & Co. hardly applies on the facts of the assessee’s case. The assessee has also provided substantial evidence in form of e-mails and correspondence with the AE in respect of the services rendered by the AE. On going through the same, it clearly comes out that the AE was rendering services which were beneficial for the assessee in conducting its business. No doubt, some benefit of the services may have accrued to overall group also. But the primary beneficiary was definitely the assessee. Under these circumstances, it would not be proper to term the services rendered by the AE as stewardship activity. 3.3.3. Corning to the quantum of payment for the services, it is seen that from the total cost of services, cost of stewardship activity services/duplicate services is first removed. The remaining cost is allocated to different organizations of the group. The assessee pays the cost of services allocated to it plus ore-agreed mark up. In the course of hearing, the assessee was asked to justify the mark up. However, no detailed justification was provided in this regard. It was only stated that since the AE was providing the services, it was entitled to earn some margin on the same. However, as discussed earlier, while the primary beneficiary of the services is the assessed, there are also some incidental benefits accruing to the group. The parent company gets benefited by better synergies, scale of economy, better coordination and reporting. Considering this, the AE, in our opinion, was not justified in charging any mark up on the cost of services. The arm’s length price of the services is therefore decided at the actual cost. The adjustment is therefore sustained to the extent of mark up only. The TPO is directed to reduce the adjustment accordingly.”
6. The main argument of the ld. AR was that these transactions are benchmarked by using TNMM and furnished that TP documentation whereas the TPO did not follow any prescribed method and the entire markup is disallowed without giving any reasons. The observation of the revenue that the parent company gets benefited by better synergies, scale of economy, better coordination and reporting cannot be accepted.
7. While the assessee avails supervision services from its AEs and pays markup charges, it also provides such services to the AEs for their third party contracts and receives markup charges. The pricing basis and the results arising from the same have been accepted by the TPO. Disallowing the mark-up on receipt of services while in-principle accepting the provision of similar services rendered having similar intent and basis of pricing cannot be valid ground to disallow the markup. It is not out of contest to note that no such disallowance has been made on the markup in the case of the assessee AY 2007-08 to 2012-13 and AY 2015-16.
8. Hence, keeping in view, the entire facts and circumstances, the contention of the revenue that the AE invariably derives some benefit and hence no markup should be charged, cannot be accepted.”
In AY 2018-19, the co-ordinate bench in which one of us, the Hon’ble Accountant Member, was also in quorum has concluded that the issue of mark up being at arm’s length is no more res integra, and the relevant part of order is reproduced below:- “5. In the light of the submissions made on behalf of the assessee, the issue is no longer res integra. The issue has been either endorsed by the Revenue itself or has been ruled in favour of the assessee by the Co- ordinate Bench in assessee’s own case in Assessment Years 2014-15, 2016- 17 and 2017-18. A reference is made in this regard to the decision of the Co-ordinate Bench in order dated 27.04.2022 relevant to Assessment Year 2017-18 and order dated 18.08.2021 concerning Assessment Year 2014-15.”
Thus the AO has definitely fallen in error in not following the directions of DRP to benefit the assessee of the decisions in favour of assessee in assessee’s own cases.
Hence, Ground Nos.1 to 11 are sustained. Ground No.12 and 13 are consequential while ground No.14 stands dismissed as not pressed. Accordingly, the appeal of the assessee is allowed.