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Facts
Tupperware India Pvt. Ltd., engaged in manufacturing and distribution of plastic kitchenware, appealed against transfer pricing adjustments for AY 2014-15. The adjustments concerned Advertisement, Marketing and Promotion (AMP) expenses, royalty payments, management service fees, and disallowances under Section 40(a)(i) for reimbursements and software charges.
Held
The tribunal, following its previous decision for AY 2013-14, set aside the AMP expenditure issue to the AO/TPO for reconsideration in light of judicial precedents rejecting the Bright Line Test. It directed the inclusion of specific comparables for benchmarking royalty payments, and remanded the issues of management service fees and software/interest charges back to the AO for fresh verification and decision.
Key Issues
Whether transfer pricing adjustments for AMP expenses using the Bright Line Test, royalty payments, and management service fees were correctly applied; and whether disallowances under Section 40(a)(i) for reimbursements and software charges were justified.
Sections Cited
Section 143(3), Section 144C, Chapter X of the Income Tax Act, Section 40(a)(i), Section 274, Section 271(1)(c), Section 92CA, Rule 10B, Article 12 of the India-USA DTAA, Explanation 9(1)(vi) of the Income Tax Act
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Income Tax Appellate Tribunal, DELHI BENCH, ‘I’: NEW DELHI
Order
: 25.07.2024 ORDER
PER SHAMIM YAHYA, ACCOUNTANT MEMBER :
This appeal filed by the assessee is directed against the order of the Assessing Officer dated 26.10.2018 pursuant to the directions issued by the ld. DRP for the Assessment Year 2014-15.
Grounds of appeal taken by the assessee read as under :-
“1. That on the facts and circumstances of the case and in law, the order passed by the Learned Joint Commissioner of Income Tax ("Ld. AO") under section 143(3) read with section 144C of the Act is bad in law to the extent of adjustment on account of transfer pricing ("TP") and INR 21,15,04,079 made in the impugned assessment order.
2. That on the facts and circumstances of the case and in law, the Ld. AO (following the directions of Ld. DRP) erred in assessing the returned income of the Appellant of INR 56,14,77,860 at INR 77,29,81,939. TRANSFER PRICING GROUNDS: 3. That the Ld. AO [following the directions of Hon'ble Dispute Resolution Panel ("Hon'ble DRP")] erred in proposing to assess the income of the Appellant at INR 77,29,81,940 as against the returned income declared by the Appellant at INR 56,14,77,860 by making an addition of INR 19,71,83,230 holding that the Appellant's international transactions do not satisfy the arm's length principle envisaged under the Act.
4. That the Hon'ble DRP/Learned Assistant Commissioner of Income Tax, Transfer Pricing Officer- 3(2)(1) ("Ld. TPO")/ Ld. AO (following the directions of Hon'ble DRP) erred on facts and in law in enhancing the income of the Appellant by INR 12,63,24,385 on account of Advertisement, Marketing and Promotion ("AMP") expenses by: 4.1 not appreciating the characterization of the Appellant, that it functions in the capacity of a licensed manufacturer and is entitled to appropriate share of residual profit/loss arising in the business; 4.2 not appreciating that in the case of an entrepreneurial entity, if the payment of royalty is demonstrated to be at arm's length and appropriate share of residual profits reside in India, having regard to the functional, asset and risk analysis of the Appellant, the question of any adjustment on account of AMP expenses does not arise; 4.3 not appreciating that the Appellant is the economic owner of marketing intangibles commensurate with the functions performed in India; 4.4 not appreciating the fact that application of bright line test ("BLT") is not permissible in the light of the judicial precedents on the issue; 4.5 not providing any reason / documentary evidence to demonstrate that the AMP expenses incurred by the Appellant constitute an international transaction; and 4.6 arbitrarily applying a mark-up of 15.54% on the alleged AMP expenses.
5. That the Hon'ble DRP/Ld. Assessing Officer/Ld. TPO have erred in arbitrarily applying BLT to make transfer pricing adjustment amounting INR 12,63,24,385 on protective basis, without appreciating that BLT has been expressly rejected by the several judicial pronouncements of Hon'ble Delhi High Court, thus, the order is bad in law and void ab-initio.
6. That on the facts and circumstances of the case and in law, the Ld. Assessing Officer/Ld. TPO have grossly erred in determining AMP adjustment amounting to INR 12,63,24,385 on protective basis, not appreciating that such adjustment has no statutory mandate.
7. That the Hon'ble DRP/Ld. Assessing Officer/Ld. TPO have erred in not appreciating the analysis by application of contribution profit split method furnished by the Appellant during the course of proceedings before Ld. TPO to demonstrate that payment of royalty is at arm's length and appropriate share of residual profits belong to Tupperware India.
8. That the Hon'ble DRP/Ld. Assessing Officer/Ld. TPO have erred in not appreciating the analysis by application of residual profit split method submitted by the Appellant on a without prejudice basis during the course of proceedings before Ld. TPO stating the same has been undertaken based on assumptions, approximations and insufficient evidences.
9. That the Hon'ble DRP/Ld. Assessing Officer/Ld. TPO have, erred in rejecting the transfer pricing documentation maintained by the Appellant and arbitrarily determining arm's length royalty rate as 2% of the sales of the Appellant. In doing so, Hon'ble DRP/Ld.AO/Ld. TPO have erred by: 9.1. assuming that 'no benefit' has been conferred on the Appellant from the use of trademarks and know-how for which royalty was paid by the Appellant. The Ld. TPO has erred in not giving due cognizance to the information and documents submitted by the Appellant; 9.2. arbitrarily determining the royalty rate of 2% relying on the guidelines issued by Reserve Bank of India ("RBI") for determining arm's length royalty rate; 9.3. disregarding the economic analysis performed by the Appellant, thereby rejecting the comparable agreements selected by the Appellant in the transfer pricing documentation on account of product dissimilarities; and 9.4. arbitrarily determining the royalty rate of 2% based on the fresh search undertaken by the Ld. TPO during the course of proceedings by adopting the methodology similar to that adopted by the Appellant in the transfer pricing documentation.
That on the facts and circumstances of the case and in law, the Hon'ble DRP and Ld. AO (following the directions of the Ld. DRP, erred in holding that the Appellant has also made payment for the use of technology received from associated enterprises. In doing so, the Ld. TPO/ Hon'ble DRP have grossly erred in not appreciating that the Appellant has paid royalty only for the use of 'licensed trademarks and marketing information' as evident from the license agreement entered between Appellant and associated enterprises.
That the Hon'ble DRP/Ld. Assessing Officer/Ld. TPO have erred in rejecting the transfer pricing documentation maintained by the Appellant in respect of payment of management service fees and arbitrarily determining arm's length price as 'Nil' by applying Comparable Uncontrolled Price Method ("CUP") Method. In doing so, Hon'ble DRP/Ld. AO/Ld. TPO erred by: 11.1. ignoring/rejecting the economic analysis undertaken by the Appellant without providing any cogent reasons for the same; 11.2. disregarding the documentary evidences submitted by the Appellant to demonstrate the actual receipt of management services and the benefits arising thereof; and 11.3. not giving cognizance to the detailed cost benefit analysis submitted by the Appellant and concluding the same to be vague and inconsequential.
That on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO have erred in proposing an adjustment of INR 1,54,02,547 on account of payment of management services. In doing so, the Hon'ble DRP/Ld. TPO/Ld. AO erred in applying CUP method in contravention of the provisions of Rule 10B of the Rules and determining the arm's length price as 'Nil' in relation to aforesaid international transaction.
That on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. Assessing Officer/Ld. TPO have erred in proposing an adjustment of INR 19,71,83,230 on account of payment of royalty and payment of management services. In doing so, the Ld. Assessing Officer/Ld. TPO erred by challenging the commercial/business wisdom of the Appellant in relation to payment of royalty and payment of management services.
That on the facts and circumstances of the case, the additions determined by the Ld. Assessing Officer/Ld. TPO on account of AMP expenses, royalty and management service fee are leading to economic absurdity. CORPORA TE TAX GROUNDS: 15. That on the facts and circumstance of the case, and in law, the Ld. AO (following the directions of Hon'ble DRP) erred in making disallowance under section 40(a)(i) of the Act in respect of reimbursements of expenses amounting to INR 1,43,20,849 made by the Appellant to Dart Industries Inc. ("Dart") by erroneously holding that the Royalty under Article 12 of the India-USA Double tax avoidance agreement ("DT AA") as well as Explanation 9 (1)(vi) of the Act.
That on the facts and circumstances of the case, and in law, the Ld. AO / Hon'ble DRP erred in making a disallowance under section 40(a)(i) of the Act without appreciating that no disallowance under section 40(a)(i) of the Act can be applied in the facts of the present case in view of the provisions of the India- USA DTAA.
17. That on the facts and circumstances of the case, and in law, the Ld. AO (following the directions of Hon'ble DRP) erred in disregarding the submission of the Appellant that the amount in question are pure reimbursements of expenses based upon proper allocation key and without any mark up. While doing so, the Hon'ble DRP has not appreciated the additional evidences furnished before it on account of third party invoices and al1ocation methodology.
Without prejudice to Ground No. 15 to 17, that on the facts and circumstances of the case, and in law, the Ld. AO (following the directions of Hon'ble DRP) failed to appreciate that the amounts in question are held not liable to be taxed in the hands of Dart for the year under consideration, thereby disallowance under section 40(a)(i) of the Act unwarranted and liable to be deleted.
19. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 274 read with section 271 (1)(c) of the Act. That the above grounds of appeal are without prejudice to each other.”
Brief facts of the case are that Tupperware India Private Limited, the assessee was incorporated on May I, 1996, and is a wholly owned subsidiary of Tupperware Asia-Pacific Holdings Private Limited, Mauritius, and ultimately held subsidiary of Tupperware Corporation USA. During the year under consideration, the assessee was engaged in manufacturing and distribution of moulded plastic kitchenware products and other plastic products, carrying out manufacturing activities from its plant located at Dehradun, in addition to the manufacturing carried out by Indian contract manufacturers. The assessee also operates 11 warehouses/godowns across India, and a sales office in Gurgaon. Tupperware India's product mix comprises a wide array of dry storage, food preparation, food serving, microwave, water bottles, refrigeration and freezer range products.
3.1 International transactions undertaken by the assessee during the year under consideration are as under: S.No. Nature of Transaction Method Amount (Rs.) 1 Purchase of raw materials 18,86,01,031 2 Purchase of finished goods 16,58,32,533 3 Sale of finished goods 13,83,65,623 TNMM Payment of mold rental expenses 4,60,29,364 4 Purchase of machinery, tools and 3,17,901 supplies 6 Payment of service fees 1,54,02,547 7 Reimbursement of expenses (paid) 2,21,82,563 8 Payment made against bank Other Guarantee received from the Method ASSESSEE 9 Payment of royalty CUP 28,11,16,599 10 Recovery of Expenses CUP 2,48,75,995 3.2 The TPO has proposed adjustment as under :-
S.No. Nature of international transaction Adjustment amounts (INR) 1 Advertisement, Marketing and Sales Promotion 12,63,24,385 expenses (Bright Line Method) 2 Payment of management services fee 154,02,547 3 Payment of royalty 18,17,80,683 Total (excluding AMP adjustment on Protective Basis) 19,71,83,230 3.3 In addition, the AO in the draft assessment order has proposed disallowance under section 40(a)(i) of the Income-tax Act, 1961 (for shot Act’) on account of non-deduction tax for payment towards software charges, intranet & IT cost reimbursements aggregating to Rs.143,20,849/-
Upon assessee’s objection, ld. DRP upheld the TPO’s order.
Against the assessment order passed in this case, assessee has filed this appeal before us. We have heard both the parties and perused the records.
6. Ld. Counsel for the assessee submitted that all the issues raised are squarely covered in favour of the assessee in assessee’s own case by the decision of the ITAT in for AY 2013-14 vide order dated 01.08.2022.
Ld. DR for the Revenue did not dispute the aforesaid proposition and agreed that the issues are covered by the said order of ITAT.
8. Upon careful consideration and perusing the records, we find that all the issues are covered in favour of the assessee by the decision of the ITAT in assessee’s own case (supra).
8.1 As regards AMP expenditure, the ITAT in the aforesaid order dated 01.08.2022 (supra) has held as under :-
10. We have considered the rival submissions of the parties, perused the material on record and judicial precedents relied upon by the assessee in the context of application of BLT. We find force in the submissions of the assessee. Considering the overall approach for making adjustment on account of AMP expenditure, we note that the Ld. TPO has only BLT. There is no agreement, understanding or arrangement between the assessee and its AE for the expenditure to be incurred on AMP which has been brought on record by the Revenue and hence it cannot be presumed that an international transaction exists. The application of BLT for the purpose of undertaking an adjustment under transfer pricing provisions is not permissible under chapter X of the Act. The Hon’ble Delhi High Court has struck down the application of BLT for making adjustment on account of AMP expenses as an international transaction in Maruti Suzuki India Ltd.’s case (supra). In the context of application of BLT, the Hon’ble Delhi High Court in the decision (supra) observed as under :-
70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that since it is not an ALP, an 'adjustment' has to be made. The burden is on the Revenue to first show the existence of an international transaction. Next, to ascertain the disclosed 'price' of such transaction and thereafter ask whether it is an ALP. If the answer to that is in the negative the TP adjustment should follow. The objective of Chapter X is to make adjustments to the price of an international transaction which the AEs involved may seek to shift from one jurisdiction to another. An 'assumed' price cannot form the reason for making an ALP adjustment.
Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evidencing the existence of an international transaction involving the AE. The quantitative determination forms the very basis for the entire TP exercise in the present case.
As rightly pointed out by the Assessee, while such quantitative adjustment involved in respect of AMP expenses may be contemplated in the taxing statutes of certain foreign countries like U.S.A., Australia and New Zealand, no provision in Chapter X of the Act contemplates such an adjustment. An AMP TP adjustment to which none of the substantive or procedural provisions of Chapter X of the Act apply, cannot he held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable Chapter X as a whole, does not permit such an adjustment.” 10.1 Similar view has been taken by the Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. (supra) wherein the Hon’ble Delhi High Court observed as under “127. We agree and accept the position in the portion reproduced above in bold and italics. The object and purpose of Transfer Pricing adjustment is to ensure that the controlled taxpayers are given tax parity with uncontrolled taxpayers by determining their true taxable income. There should be adequate and proper compensation for the functions performed including AMP expenses. Thus, we disagree with the Revenue and do not accept the overbearing and orotund submission that the exercise to separate 'routine ' and 'nonroutine' AMP or brand building exercise by applying bright line test' of non-comparables and in all case, costs or compensation paid for AMP expenses would be ‘NIL or at best would mean the amount or compensation expressly paid for AMP expenses. Unhesitatingly, we add that in a specific case this criteria and even zero attribution could be possible, but facts should so reveal and require. To this extent, we would disagree with the majority decision in L.G.. Electronics India Pvt. Ltd. (supra).” 10.2 Based on the above, it is amply clear that BLT as an approach is not permissible for undertaking any addition on account of AMP expenses incurred by the assessee. We, therefore, set aside this issue to the file of the Ld. AO/ TPO to decide it afresh in light of the decisions of the Hon’ble Delhi High Court in the case of Maruti Suzuki India Ltd. (supra) and Sony Ericsson Mobile Communications India Pvt. Ltd. (supra) after giving reasonable opportunity of hearing to the assessee. 11. Before us, the assessee has prayed that if the AMP adjustment is determined at Rs. NIL by application of jurisdictional High Court decisions (supra) the issue whether this is an international transaction would become academic and thus the assessee will not press this ground. However, leave may be granted to the assessee to argue this issue in the subsequent assessment years if so required. We have no objection and allow the assessee to argue on this issue in future.” 8.2 With regard to royalty rate as 2% of the sales of the assessee, the ITAT in the aforesaid order (supra) has held as under :-
“16. We have heard the rival submissions of the Ld. Representative of the parties and perused the material available on records. The Ld. TPO as well as the Hon’ble DRP has upheld CUP as the most appropriate method for benchmarking transactions with respect to payment of royalty. Since the application of CUP is not disputed either by Ld. AR or DR, we hold CUP to be the most appropriate method for benchmarking the payment of royalty. The issue thus remaining for our consideration is with respect to inclusion / exclusion of comparables. 16.1 We note that in the transfer pricing study report, the payment of royalty has been benchmarked by the assessee using CUP method. The benchmarking was done on the basis of the search conducted using the RoyaltyStats online database which resulted into selection of 10 comparable agreements in the final set of comparables. However, the benchmarking analysis of the assessee was rejected by the Hon’ble DRP who proceeded to uphold the ALP determined by the Ld. TPO at 2% of sales. The Ld. TPO in para 26 of his order dated 31.10.2016 recorded his finding as under:- “26. The assessee submitted its reply vide various submissions dated as per order sheet. The same has been studied carefully and issues were discussed with the AR, After considering all the facts of the case and adequate opportunity of being heard duly provided to the Assessee including oral hearing, it was apparent that the license agreement signed by the assessee was only to transfer profit to its foreign AEs. As already discussed in earlier paragraphs that the assessee has failed to provide the comparable Royalty payment data of the Group Entities. The assessee has also not provided the CUP analysis of comparable companies in India having similar FAR as that of the assessee, which can establish that the transaction is at Arm’s Length. Such comparables MANUFACTURING PLASTIC KITCHENWARE PRODUCTS need to have similar royalty transactions originating in India providing the royalty to the AEs or Non-AEs in USA where the AE of the assessee is situated. As per the conditions of allowable Royalty Payment laid down by the Reserve Bank of India and the Foreign Investment Promotion Board, in cases where the BRAND is used is around 1% to 2%, As already discussed in earlier paragraphs, the assessee has not received any technical knowhow from its AEs, rather it has used the Brand of its AE the "Tupperware". However, considering the various contentions and functions of the Assessee, and in absence of any reliable comparable analysis or the data submitted by the assessee, the undersigned is having view that royalty of 2% of the sales is justifiable in the case of the Assessee, being Arm's Length of Royalty payment, Therefore, the undersigned proposes to make an adjustment against excess royalty being paid by the Assessee Company to its foreign based AEs with the purpose of tax evasion u/s 92CA. Computation of Arm’s Length Price: Particulars Amount (In INR) Sales of the Assessee Company (A) 483,79,01,881 Royalty Allowable [B=A*2%] 9,67,58,038 Total Royalty paid to AE [C] 25,33,48,790 Adjustment u/s 92CA [D=C-B] 5,65,90,752 16.2 We find force in the contention of the assessee that royalty agreements operating in different geographical regions can be applied as a filter as the Ld. TPO himself has accepted royalty agreements operating in foreign jurisdictions. While the primary objection of the Hon’ble DRP in respect of comparability analysis is that the comparable selected by the assessee are from a different geographical region (i.e. USA), we observe that the three comparables considered by the Ld. TPO in the remand report are from the same geographical location (i.e. USA) and hence in our view the objection relating to difference in geographical region does not hold good. 16.3 So far as the objection of the Hon’ble DRP on the product dissimilarity is concerned, it is observed from the perusal of the description of the agreements as provided in the Royaltstat database, all the three comparables selected by the Ld. TPO and the comparables selected by the assessee belong to same industry i.e. “kitchenware and home furnishing items” and hence these are valid comparables. 16.4 The License agreement which is already on record adequately proves that the payment of royalty made by the assessee is for the use of trademark as well as marketing information provided by Tupperware USA and the same is evident from the relevant clauses of the License Agreement reproduced below:- “WHEREAS, LICENSOR and LICENSEE recognize that LICENSOR has rights that relate to marketing information and know-how that may expand the LICENSEE’S product line; and WHEREAS, LICENSEE desires to utilize the marketing information and know-how of LICENSOR; and 3. Rights Granted (b) The nonexclusive right to use, in connection with the marketing of Licensed Products, all the Marketing Information provided to LICENSEE under Article 6 hereof.
Marketing Information and Assistance LICENSOR will furnish from time to time to LICENSEE, insofar as it is within the possession and control of LICENSOR, and insofar as LICENSOR has developed said information into formal programs or reports, commercial and marketing know-how and information and assistance (collectively, the "Marketing Information"), including without limitation marketing manuals and sales and marketing information which are necessary or desirable for the most advantageous marketing of Licensed Products. In the event that LICENSOR shall provide LICENSEE with Marketing Information specially developed for use in the Licensed Territory which required extraordinary or particularly time consuming LICENSOR, LICENSEE Shall compensate LICENSOR for all of LICENSOR’S actual costs associated therewith, plus an additional amount calculated to cover reasonable allocable overhead expense. For the purpose of this- Agreement, time of the LICENSOR or of its designee which exceeds twenty man days per fiscal year will be considered to be extraordinary.
9. Payments (a) In consideration of the license and rights granted hereunder, LICENSEE agrees to pay a royalty of five percent (5%) of the net sales proceeds of the Licensed Products manufactured and sold by LICENSEE in India, in connection with which LICENSEE utilizes any of the Licensed Trademarks or the Marketing Information, or any part of anyone or more thereof. 1n this connection, the net sales proceeds shall be the gross sales proceeds of the Licensed Products marketed and sold under this Agreement minus the following: (1) sales discounts including any sales rebates; (2) sales returns; and (3) indirect taxes (value added tax, etc.) on sales of goods.” 16.5 Coming to the issue whether the set of comparables selected by the assessee are appropriate for benchmarking the payment of royalty or not, we note that the assessee selected ten comparables in the transfer pricing study (refer para 12.2 above), however, all of them were rejected by the Ld. TPO/Hon’ble DRP. Before us, the assessee is contending inclusion of five comparables out of ten comparables selected in the transfer pricing study and inclusion of all three comparables analysed by the Ld. TPO in the remand report proceedings (refer para 13.2 above). Therefore, the assessee’s submission before the Tribunal is to consider eight comparables, three of the Ld. TPO and five from the TP study which will result into the payment of royalty at ALP. The assessee submitted a chart of eight comparables which showing the arithmetic mean for royalty rate at 6% viz. a viz. 5.56% paid by the assessee to Tupperware USA which is reproduced below:- S. Licensor Royalty Industry Product Geography No. Rates 1 Amen Wardy, Sr.; 2.00% Kitchenware Kitchenware USA Amen Wardy, Jr. & home (dishware,flatware, furnishing stemware, cookware) items 2 Mikasa Inc.; 5.00% Kitchenware Kitchenware USA American & home (dinnerware, giftware, Commercial Inc.; furnishing stemware) Mikasa Licensing items Inc.; ARC International, SA 8.00% 3 Oneida Ltd. Kitchenware Kitchenware USA & home (cookware, bakeware, furnishing glassware, items hollowware, stemware, serve ware, and storage accessories)
4 Smith & Wesson 7.00% Kitchenware Kitchenware (cutlery USA Corp. & home and cutlery gift sets) furnishing items 5 Harrow 5.00% Kitchenware Kitchenware USA & home (glassware, Enterprises Inc. furnishing dinnerware and items tableware) 6 Colonial Downs, L.P 7.00% Kitchenware Kitchenware (plastic USA and Stansley Racing & home bottles, coolers, drink Corp. furnishing holders) items 7 FAR-B Acquisition 5.00% Kitchenware Kitchenware USA Corp. & home (cookware, bakeware) furnishing USA 8 Genius items Products, Inc. 8 Genius Products, Inc. 9.00% Kitchenware Kitchenware (juice USA & home cap bags, bottle bags) furnishing items 6.00% Arithmetic mean
Perusal of the above chart shows that five comparables selected by the assessee are from same geography i.e. USA and the same industry i.e. "Kitchenware and home furnishing items” as the comparables considered by the Ld. TPO. The Ld. TPO rejected two of his own comparables i.e. Mikasa Inc. and Oneida Ltd. by holding that these two comparables are providing know-how whereas the assessee is not obtaining know-how which in our considered view is incorrect as evident from the license agreement as well as other documentary evidence submitted by the assessee. The assessee has paid royalty for use of trademark and marketing information /marketing know-how. All the eight comparables listed in the chart in para 16.5 above are from the same geography and same industry and hence are valid comparables to that of the assessee. Accordingly, the Ld. AO/TPO is directed to include the aforesaid eight comparables in the final set of comparable agreements for the purpose of benchmarking the payment of royalty by the assessee. Ground No. 6 and 9 are thus allowed.” 8.3 As regards payment of management services fee, the ITAT in the aforesaid order (supra) has held as under :-
“18. Ground No. 10, 11 and 12 relate to payment of management services fee. The Ld. TPO held that the assessee could not submit any evidence that management support services had actually been received and also failed to demonstrate the need for such services. The ALP was determined at ‘NIL’ by using CUP and an adjustment of Rs.1,90,95,017/-. The Hon’ble DRP confirmed the addition made by the Ld. TPO. 18.1 At the outset, the Ld. AR submitted that the similar issue arose for consideration of the Hon’ble Tribunal in AY 2012-13 with a similar fact pattern with regard to payment of management services fee to the AE Hon’ble Tribunal remanded the matter back to the file of Ld. TPO. Hence this issue is squarely covered by the decision of the coordinate bench in assessee’s own case for AY 2012-13. The Ld. DR conceded. 18.2 We have perused the order dated 24.11.2021 of the coordinate bench in for AY 2012-13. The relevant observations and findings of the Hon’ble Tribunal in its order (supra) are as under:- “7. With regard to ground No. 1 and 2 the assessee has submitted the only dispute of determination of ALP of Management services, he referred to Paper Book-II and shows us the various kinds of services covered in the management service agreement. He referred to Appendix-K which is page No. 133A of the transfer pricing study report where the type of services rendered and received by the assessee is shown along with basis of the allocation, details of services availed, manner in which services rendered and details of benefit derived is mentioned. He further referred to page No. 250 of the paper book which are bills for the services availed by the assessee. He referred to Page No. 251 of whereby complete details are submitted of the services received. In view of this, he submitted that the additions confirmed by the Ld. CIT(A) deserves to be deleted.
The Id DR submitted that if in a service any 3ld party would make a payment then such services should satisfy the following test. Firstly such services should be required. Such services should also be rendered, such services should also be having the same benefit to the assessee and those services should not be duplicative in nature. He submitted that the assessee has failed to show any evidence with respect to the receipt of services by the assessee. He submitted that the agreement is a document where both party agree to perform in a particular manner. It does not show actual performance. Further, in absence of actual performance according to that agreement the Id TPO has correctly decided the ALP at Rs. Nil. He supported the orders of the lower authorities.
We have carefully considered the rival contentions and perused orders of the lower authorities. In the present case the assessee has made a payment of Rs. 90,49,787/- to its associated enterprises. The assessee benchmarked the same under the Transactions Net Margin Method clubbing the same with other transactions. The Id TPO accepted the arms length price of the other international transactions however, the question the assessee with respect to the management services charges paid by the assessee. The assessee could merely show the agreement as well as copies of the bills. Copy of the management services agreement is not at all disputed by the lower authorities. The copy of the existence of the bill is also not disputed. The only objection of the Id TPO which is threshold of examination of any services rendered is only whether the services have been rendered or not. We agree with the Id DR that the some agreement as well as the mere production of the bill do not show that services have been rendered to the assessee. Coming to the argument, we have perused page No. 133A of the Paper Book. On perusal of the same we find that these are mere methodology without showing actual evidence of the rendition of the services. Coming to the bills produced by the assessee at page No. 250 of the paper book we find that the same is supported by Annexure from Page No. 251 to 258. The Annexures shows that it has the names of the certain persons who have been deputed and have allegedly performed certain services. The details of number of test is devoid by them is also tabulated and same is multiplied by the rate of services each day. This is the supporting attached with the bills of services. Coming to the agreement which is placed at page No. 242 to 249 of the Paper Book. The clause NO. 2 shows that the rate of compensation which would be @ times spent by the service provider employed in rendering the service. It has also given the charge out rate as per annexure B. However, as the charge out rate are attached for the period April 2002 to March 2006. No such charge out rates are available for FY 2011-12. In view of this the supporting of rendition of the service at page No. 251 to 260 required verification along with rates for this year. Further, it was also not known whether the services are rendered from Hong Kong or from US. This, is so because the rate of the employees are different for this region. Further, merely the annexure at page No. 252 onwards does not show evidence of the rendition of the services, it is merely a breakup of the invoice. In view of this fact, we set aside the whole issue back to the file of the Id TPO with a direction to the assessee to show the actual data, person involved, actual rate as per agreement, rate paid by the assessee as per invoices, technological competence of the persons rendering services to show that services were actually rendered and benefit derived by the assessee. The assessee is also required to show that 3ul party would pay for such services and they are not duplicative in nature. On assessee providing all these details, the Id TPO is directed to examine the same and decide the arms length price of such transaction afresh. The need and benefit test should be left to the wisdom of the assessee. In the result ground No. 1 and 2 of the appeal are allowed with above direction.
Respectfully following the decision of the coordinate bench in assessee’s own case for AY 2012-13, we set aside this issue to the file of the Ld. AO with a direction to the assessee to furnish the required information / document / details of payment etc. in support of its claim that services were actually rendered and benefit was derived by the assessee and the Ld. TPO is directed to verify the same and decide the ALP afresh after giving reasonable opportunity to the assessee. Accordingly, ground Nos. 10, 11 and 12 are allowed subject to the above directions.
8.4 With regard to payment of software charges & interest charges, the ITAT in the aforesaid order (supra) has held as under :-
“24. The issue whether the software supplied by Dart to the assessee is standard/off-the-shelf software or customized software needs verification in the light of observations made by the Hon’ble DRP. We, therefore, deem it fit to restore this issue to the file of the Ld. AO for verification. Needless to say, the assessee will be given adequate opportunity of hearing before the Ld. AO. If, on verification it is found that the software supplied by Dart is standard software without any customization being done by Dart, the Ld. AO shall reconsider this issue in light of the decision of the Hon’ble Supreme Court in Engineering Analysis Centre of Excellence P. Ltd. (supra) and modify the assessment accordingly.
As an alternate argument the assessee has also contended that being pure reimbursement in nature and no element of income embedded, the payment made by the assessee to Dart is not liable to tax in India. Since both the Ld. AO / Hon’ble DRP have decided this issue against the assessee holding such payment in the nature of royalty which is yet to be determined based on the directions above, we refrain from adjudicating upon the alternate plea taken by the assessee.”
9. In view of the foregoing and following the precedent, we decide the issues in favour of the assessee as per the directions of earlier order for AY 2013-14 (supra) and the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on this 25th day of July, 2024.