Appeal Details
Counselvise Citation
[2016] 131 COUNSELVISE.COM (IT) 9278 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 10 month(s) 25 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
26-10-2016
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
A
Next Hearing Date
19-10-2016
Assessment Year
2007-2008
Appeal Filed On
01-12-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER IT(TP)A NO.1192/BANG/2011 ASSESSMENT YEAR : 2007-08 DMG MORI SEIKI INDIA MACHINES AND SERVICES PVT. LTD., [ERSTWHILE DMG DECKEL MAHO GILDEMEISTER (INDIA) PVT. LTD.], NO.3/1, 3 RD MAIN ROAD, KIADB, PEENYA 1 ST STAGE, BANGALORE 560 058. PAN: AABCD 0003E VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI VIKRAM VIJAYARAGHAVAN, ADVOCATE RESPONDENT BY : SHRI KAMALADHAR, STANDING COUNSEL DATE OF HEARING : 19.10.2016 DATE OF PRONOUNCEMENT : 26.10.2016 O R D E R PER SUNIL KUMAR YADAV, JUDICIAL MEMBER THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST THE ORDER OF DRP/AO INTER ALIA ON VARIOUS GROUNDS, WHICH ARE AS UNDER:- THE GROUNDS STATED HEREUNDER ARE INDEPENDENT OF, A ND WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT SUBMITS AS UNDER: 1 ASSESSMENT AND REFERENCE TO TRANSFER PRICING O FFICER ARE BAD IN LAW IT(TP)A NO.1192/BANG/2011 PAGE 2 OF 13 A) THE ORDER ISSUED BY THE DEPUTY COMMISSIONER OF INCO ME-TAX - CIRCLE 11(1) ['AO'], IS BAD ON FACTS AND IN LAW A ND IS IN VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE. WITHOUT PREJUDICE TO THE TO THE GENERALITY OF THE A BOVE, THE ORDER ISSUED BY THE AO IS BAD IN LAW INSOFAR AS THE FACT THAT THE AO DID NOT ISSUE TO DMG MORI SEIKI INDIA MACHIN ES AND SERVICES PRIVATE LTD ('THE APPELLANT OR 'THE COMPAN Y'), A SHOW CAUSE NOTICE AS PER PROVISO TO SECTION 92C(3) OF TH E INCOME- TAX ACT, 1961 ['THE ACT']. B) THE AO HAS ERRED IN LAW IN MAKING A REFERENCE T O THE ASSISTANT COMMISSIONER OF INCOME-TAX (TRANSFER PRIC ING) - I ['TPO'], INTER ALIA, SINCE HE HAS NOT RECORDED AN OPINION THAT ANY OF THE CONDITIONS IN SECTION 92C(3) OF THE ACT, WERE SATISFIED IN THE INSTANT CASE. THE AO ALSO ERRED IN NOT FOLLOWING THE PROVISION CONTAINED IN SECTION 92CA( I) OF THE ACT. 2 THE TPO HAS ERRED IN JUSTIFYING THE MOTIVE OF SHIFTING OF PROFITS A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED TPO ERRED IN NOT DEMONSTRATING THAT THE MOTIVE OF THE APPELLANT WAS TO SHIFT PROFITS OUTSIDE INDIA BY MANIPULATING THE PRICES CHARGED IN THE INTERNATIONA L TRANSACTION, WHICH IS A PRE-REQUISITE CONDITION TO MAKE ANY ADJUSTMENT UNDER THE PROVISION OF CHAPTER X OF THE ACT. 3 DETERMINATION OF ARM'S LENGTH PRICE OF 'MANAGEM ENT FEE' A) THE AO/TPO ERRED ON FACTS IN DETERMINING THE ARM'S LENGTH PRICE OF MANAGEMENT FEES AS 'NIL'. IN SUBSTITUTION TO THE ARM'S LENGTH PRICE DETERMINED BY THE APPELLANT. B) THE AO/TPO ERRED ON FACTS IN CONCLUDING THAT THE A PPELLANT DID NOT DERIVE ANY COMMERCIAL BENEFIT FROM SUCH SER VICES. C) THE AO/TPO ERRED ON FACTS IN NOT APPRECIATING THAT THE NET MARGIN OF THE APPELLANT AFTER CONSIDERING THE PAYME NT OF MANAGEMENT FEE IS MORE THAN THE ARITHMETICAL MEAN O F THE NET IT(TP)A NO.1192/BANG/2011 PAGE 3 OF 13 MARGINS OF THE COMPARABLE COMPANIES. D) THE AO/TPO ERRED ON FACTS IN NOT GIVING COGNISA NCE TO THE BACK-UP DOCUMENTS AND SUPPORTING PAPERS IN RELATION TO THE MANAGEMENT FEES, BEFORE ARRIVING AT AN ARM'S LENGTH PRICE OF THE MANAGEMENT FEES. 4 REJECTION OF THE MOST APPROPRIATE METHOD APPLIED BY THE APPELLANT A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED AO/TPO ERRED IN DISREGARDING THE BENCHM ARKING ANALYSIS AND COMPARABLE TRANSACTIONS SELECTED BY TH E APPELLANT IN THE TRANSFER PRICING STUDY REPORT MAIN TAINED AS PER SECTION 92D OF THE ACT READ WITH RULE 10D OF TH E INCOME- TAX RULES, 1962 ['THE RULES']. B) THE AO/TPO ERRED ON FACTS AND IN LAW IN REJECTING O NE METHOD ['TNMM'] AND SELECTING ANOTHER METHOD ['CUP' ] AS THE MOST APPROPRIATE METHOD WITHOUT PROVIDING REASO NS TO THE APPELLANT FOR REJECTING THE METHOD ADOPTED BY THE A PPELLANT. C) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED AO/TPO ERRED IN LAW IN CONCLUDING THAT PAYMENT OF MANAGEMENT FEE IS A SEPARATE SEGMENT. 5 VARIATION OF 5% FROM THE ARITHMETIC MEAN THE AO/TPO ERRED IN LAW IN NOT GRANTING THE BENEFIT S OF PROVISO TO SECTION 92C(2) OF THE ACT AVAILABLE TO T HE APPELLANT. 6 INTEREST UNDER SECTION 234B OF THE ACT A) THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 2348 OF THE ACT AMOUNTING TO RS 7,689,648. B) THE LEARNED AO HAS ERRED IN LEVYING EXCESS INTERES T UNDER SECTION 2348 OF THE ACT AMOUNTING TO RS 428,855. 7 INTEREST UNDER SECTION 234D OF THE ACT THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234D OF THE ACT AMOUNTING TO RS 14,240. IT(TP)A NO.1192/BANG/2011 PAGE 4 OF 13 8 PENALTY UNDER SECTION 271(L)(C) THE LEARNED AO HAS ERRED IN INITIATING PENALTY PROC EEDINGS UNDER SECTION 271 (I)(C) OF THE ACT. 9 RELIEF A) THE APPELLANT PRAYS THAT DIRECTIONS BE GIVEN TO GRA NT ALL SUCH RELIEF ARISING FROM THE ABOVE GROUNDS AND ALSO ALL RELIEF CONSEQUENTIAL THERETO. B) THE APPELLANT CRAVES LEAVE TO ADD TO OR ALTER, BY D ELETION, SUBSTITUTION, MODIFICATION OR OTHERWISE, THE ABOVE GROUNDS OF APPEAL, EITHER BEFORE OR DURING THE HEARING OF THE APPEAL. C) FURTHER, THE APPELLANT PRAYS THAT THE ADJUSTMENT I N RELATION TO TRANSFER PRICING MATTERS MADE BY THE LEARNED AOITPO AND UPHELD BY HONOURABLE DRP IS BAD IN LAW AND IS LIABL E TO BE DELETED. 2. THOUGH VARIOUS GROUNDS ARE RAISED BY THE ASSESSE E, BUT THE MAIN CONTROVERSY REVOLVES WITH REGARD TO PAYMENT OF MANA GEMENT FEE AT ARMS LENGTH PRICE (ALP) BY THE ASSESSEE TO ITS AE ON A CCOUNT OF MANAGEMENT SERVICES RENDERED BY THE AE. 3. THE FACTS IN BRIEF BORNE OUT FROM THE RECORD ARE THAT ASSESSEE WAS INCORPORATED IN INDIA ON 31.3.1999. IT IS A WHOLLY OWNED SUBSIDIARY OF DMG VERTRIEBS UND SERVICE GMBH, GERMANY [HEREINAFTER RE FERRED TO AS DMG GERMANY]. DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAS ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH DMG GERMANY (THE ASSOCIATED ENTERPRISE OR AE). IT(TP)A NO.1192/BANG/2011 PAGE 5 OF 13 PARTICULARS AMOUNT IMPORT OF SPARES AND TOOLS 1,55,86,880/- PURCHASE OF ALIGNMENT CARBON, TOOLS, DIGITAL SPIRIT LEVEL AND ACCESSORIES 2,06,829/- COMMISSION FOR PROVIDING MARKETING SERVICES MACHI NES 8,54,62,930/- INCOME FROM WARRANTY SERVICES 3,64,87,879/- MANAGEMENT FEES 3,64,87,879 REIMBURSEMENT OF EXPENSES (RECEIVABLES) 10,06,662/ - RETENTION MONEY PAYABLE ON BEHALF OF INDIAN CUSTOME R TO AE 2,99,446/- REIMBURSEMENT OF EXPENSE (PAYABLE) 5,97,276/- UNEARNED COMMISSION & ACCRUED COMMISSION FOR INSTAL LATION, TRAINING ANY OTHER SERVICES 2,65,37,548/- 4. THE AO REFERRED THESE INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE IN THE AUDIT REPORT U/S. 92E FILED ALONG W ITH THE RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR TO THE TPO FOR DET ERMINATION OF ALP U/S. 92CA. WHILE EXAMINING JUSTIFICATION IN PAYMENT OF MANAGEMENT FEES AT ARMS LENGTH PRICE, THE TPO HAS OBSERVED THAT THE A SSESSEE STARTED OPERATIONS IN INDIA WAY BACK IN 1999 AND SINCE THEN THE ASSESSEE DID NOT PAY ANY MANAGEMENT FEES TILL FY 2005-06. THIS IS T HE FIRST YEAR THE ASSESSEE PAID AN AMOUNT OF RS.3,64,87,879 AS MANAGE MENT FEES TO ITS AE. IN THE FYS 2004-05 & 2005-06, NO MANAGEMENT FE ES WAS PAID BY THE ASSESSEE TO ITS AE. THE TPO DID NOT FIND PAYMENT O F MANAGEMENT FEES AT ARMS LENGTH PRICE AND THEREFORE THE TPO IN HIS ORD ER PROPOSED AN ADJUSTMENT OF RS.3,64,87,879. THE AO ACCORDINGLY IN CORPORATED THIS ADJUSTMENT IN THE DRAFT ASSESSMENT ORDER AGAINST WH ICH THE ASSESSEE PREFERRED AN APPLICATION BEFORE THE DISPUTE RESOLUT ION PANEL (DRP). IT(TP)A NO.1192/BANG/2011 PAGE 6 OF 13 5. BEFORE THE DRP, THE ASSESSEE HAS MADE DETAILED SUBMISSIONS WHICH WAS SUMMARIZED BY THE DRP AT PAGE NOS.13 TO 1 5 OF ITS ORDER AND FOR THE SAKE OF REFERENCE, WE EXTRACT THE SAME AS U NDER:- INTERNATIONAL TRANSACTIONS DURING THE PREVIOUS YEAR RELEVANT TO AY 2007-08, [I .E. FY 2006-07], THE ASSESSEE HAD INTER ALIA, PAID AN AMOUNT OF RS.36,487,879 TO ITS AES FOR AVAILING THE MANAGEMENT SUPPORT SERVICES. COMPARABILITY ANALYSIS FOR THE PURPOSE OF DETERMINING THE ARM'S LENGTH PRI CE OF THE AFORESAID INTERNATIONAL TRANSACTION, THE ASSESSEE HAD USED TH E PROWESS DATABASE TO CONDUCT A SEARCH FOR COMPARABLE COMPANIES. THE A SSESSEE USED THE TNMM AS THE MOST APPROPRIATE METHOD WITH A PLI OF O PM. BASED ON THE COMPARABILITY ANALYSIS, THE ARITHMETIC AL MEAN OF THE OPM MARGINS OF THE COMPARABLE COMPANIES WAS 9.58% VIS-A -VIS 10.05% EARNED BY DMG INDIA. SINCE THE NET PROFIT MARGIN OF DMG INDIA (AFTER CONSIDERING THE PAYMENT OF MANAGEMENT FEES) , WAS HIGHER THAN THAT OF COMPARABLE COMPANIES, IT WAS CONCLUDED THAT THE INTERNATIONAL TRANSACTION RELATING TO THE MARKET-SUPPORT SERVICES ARE AT ARM'S LENGTH. FACTS SUBMITTED FOR MANAGEMENT FEES FOR THE PAYMENT OF MANAGEMENT FEES' DMG INDIA ENTER ED INTO A COST ALLOCATION AGREEMENT WITH REGARD TO THE PROVISION O F MANAGEMENT SUPPORT SERVICES AVAILED FROM DMG GMBH. AS PER THE AGREEMENT, DMG GMBH SHALL PROVIDE 'GENERAL SERVICES AND SPECIFIC SERVICES'. THE ASSESSEE IN THE PAPER BOOK FILED BEFORE THE DRP ALONG WITH FORM 35A HAS GIVEN THE DESCRIPTION OF THE NATURE OF MANA GEMENT SERVICES AVAILED FROM THE AE. THE ASSESSEE HAS SUBMITTED THA T IT HAS AVAILED SERVICES IN VARIOUS FIELDS SUCH AS INFORMATION TECH NOLOGY, FINANCE, MARKETING AND DISTRIBUTION, PERSONAL SUPPORT INVENT ORY MANAGEMENT. THE ASSESSEE HAS SUBMITTED THAT IT WOULD BE RELEVAN T TO NOTE THAT ASSESSEE COMPANY DOES NOT HAVE ANY IT SUPPORT DEPAR TMENT. THUS, IT DEPENDS ON DMG GMBH FOR ANY SUPPORT RELATING TO IT PRODUCTS AND RELATED INFRASTRUCTURE. REGARDING FINANCIAL SERVICE S THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE SUBMITS THAT THE SERVIC ES MENTIONED ABOVE HELP DMG INDIA WITH DAY-TO-DAY FINANCIAL MANAGEMENT AND ENSURE THAT IT(TP)A NO.1192/BANG/2011 PAGE 7 OF 13 FINANCIAL DECISIONS ARE TAKEN IN AN APPROPRIATE AND TIMELY MANNER FOR THE COMPANY. FURTHER, IF THE FINANCE SERVICES WERE NOT MADE AVAILABLE FROM DMG GMBH, THE ASSESSEE HAD TO EITHER EMPLOY FI NANCE PERSONNEL TO UNDERTAKE SUCH WORK OR ENGAGE THIRD-PA RTY CONSULTANTS TO PERFORM THE REQUIRED TASKS AND ENSURE EFFICIENT MAN AGEMENT OF ITS SERVICES. ASSESSEE ALSO WRITES THAT IN ADDITION TO THE ABOVE, VARIOUS MARKETING ANALYSIS ARE UNDERTAKEN BY DMG GMBH, WHIC H INCLUDE QUOTE ANALYSIS, COCKPIT ANALYSIS, LOST ORDER ANALYS IS, STUDY OF MARKET POTENTIAL AND DISTRIBUTION OF CLIENTS ETC. THE AFOR ESAID SERVICES HELP DMG THE ASSESSEE IN IDENTIFYING AND TAPPING POTENTI AL NEW CLIENTS IN INDIA. THE ASSESSEE HAS ALSO SUBMITTED THAT THE ASS ESSEE ALSO OBTAINS PUBLIC RELATION SERVICES, WHICH INCLUDES PRESS, SPO NSORING, PUBLIC RELATIONS WORK AND WORK WITH TRADE ASSOCIATIONS. RE GARDING HUMAN RESOURCE MANAGEMENT SERVICES THE ASSESSEE HAS SUBMI TTED THAT IT ENABLED THE ASSESSEE TO FOCUS ON ITS CORE ACTIVITY (I.E. MARKETING SUPPORT SERVICES), WHILE THE HR ACTIVITIES OF RECRUITING AN D TRAINING OF EMPLOYEES ARE UNDERTAKEN BY DMG GMBH. IN THE ABSENC E OF AVAILING THESE SERVICES, THE ASSESSEE WOULD HAVE TO EITHER R ECRUIT HR MANAGERS TO RENDER ALL THE AFORESAID ACTIVITIES; OR OUTSOURC E THE PERSONNEL SUPPORT WORK TO THIRD-PARTY SERVICE PROVIDERS IN. INDIA. HE NCE, BY AVAILING THE SAME SERVICES FROM DMG GMBH, THE ASSESSEE IS ENSURI NG COST OPTIMISATION AND IMPROVING THE EFFECTIVENESS OF THE IR CORE ACTIVITIES. IN RESPECT TO INVENTORY MANAGEMENT SERVICES THE ASSESS EE SAYS THAT THE ASSESSEE AVAILS INVENTORY MANAGEMENT SERVICES FROM DMG GMBH WHICH INCLUDE OBTAINING OF INFORMATION POOL, MAKING THE DESIRED INFORMATION READILY AVAILABLE TO DMG INDIA AND CO-O RDINATION OF INVENTORY. THE ASSESSEE HAS FURTHER SUBMITTED THAT ALL THE AFORESAID SERVICES WERE RENDERED BY PERSONNEL OF DMG GMBH EIT HER VIA CORRESPONDENCES, TELEPHONE, TELE-FAX, E-MAILS AND P ERIODIC VISITS OF THE PERSONNEL OR THROUGH ANY OTHER MEANS AS AGREED BETW EEN THE ASSESSEE AND DMG GMBH FROM TIME-TO-TIME. TO RENDER THE AFORE SAID SERVICES, VARIOUS PERSONNEL FROM DMG GMBH HAVE VISITED INDIA DURING FY 2006-07. THE WRITES ABOUT THE BILLING FOR MANAGEMEN T FEES BY THE AE THAT FOR THE AFORESAID SERVICES, DMG GMBH FOLLOWS A CONSISTENT INTER- COMPANY TRANSFER PRICING POLICY ACROSS ALL GROUP EN TITIES AVAILING SUCH MANAGEMENT SERVICES. AS PER THE POLICY, DMG GMBH CH ARGES A 'BUDGETED COST' PLUS 'AN ARM'S LENGTH MARKUP'. AFTER IDENTIFICATION OF THE BASIC COSTS, AN APPROPRIATE ALLOCATION FORMULA IS APPLIED TO ALLOCATE SUCH BASIC COSTS. THE ALLOCATION FORMULA IS REFLECT IVE OF THE TOTAL EXPECTED BENEFITS FOR EACH OF THE GROUP ENTITIES. T HEREFORE, THE FEES FOR SERVICES PROVIDED BY PERSONNEL OF DMG GMBH ARE CALC ULATED ON A COST IT(TP)A NO.1192/BANG/2011 PAGE 8 OF 13 PLUS A MARK-UP BASIS. THE ASSESSEE ALSO SUBMITS THA T DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, DETAILED WORKINGS, I NVOICES, AGREEMENTS ETC. WERE PROVIDED TO THE TPO WHICH CLEARLY ESTABLI SHED THAT THE ASSESSEE HAS RECEIVED SERVICES FROM ITS AE DURING F Y 2006-07. HOWEVER, THE TPO DID NOT CONSIDER ANY OF THE DOCUME NTS FILED AND MADE A TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF TH E SUPPORT SERVICE FEE PAID. FOR THE SAID SERVICES, AE IS COMPENSATED ON A COST PLUS 5% MARK-UP. IN RESPECT TO THE TPO'S COMMENT THAT THE SERVICES H AVE BEEN TAKEN BY THE ASSESSEE FROM THE AE WITHOUT CAREFULLY CONSIDERING WHETHER THE SERVICES RENDERED BY THE AE ARE WORTH T AKING OR NOT THE ASSESSEE WRITES IN THE PAPER BOOK THAT IN THIS REGA RD, IT WOULD BE RELEVANT TO NOTE THAT DMG INDIA HAD BEEN AVAILING S UCH SERVICES SINCE JANUARY 2004. SINCE THE COST ALLOCATION AGREEMENT W AS DULY AGREED AND SIGNED ON 8 JANUARY 2007, THE AGREEMENT WAS EFFECTI VE RETROSPECTIVE FROM 1 JANUARY 2004. THEREFORE, DMG INDIA HAD ENTER ED INTO THE AGREEMENT ONLY AFTER AVAILING SUCH SERVICES FOR A P ERIOD OF 2 YEARS. CONSIDERING DMG INDIA HAS AVAILED SUCH SERVICES, PR IOR TO ENTERING INTO THE AGREEMENT, THE ASSESSEE HAS EVALUATED THE QUALITY AND BENEFITS OF SUCH SERVICES. THE TPO IN HIS ORDER HAS MENTIONE D THAT NO ECONOMIC/TANGIBLE BENEFITS HAVE ACCRUED TO THE ASSE SSEE BY AVAILING SUCH SUPPORT SERVICES. IN THE ABOVE CONTEXT, THE ASSESSEE HAS SU BMITTED THAT THE TURNOVER OF DMG INDIA HAS BEEN INCREASING SINCE FY2006-07. THIS HAS BEEN POSSIBLE ONLY DUE TO THE SUPPORT SERV ICES AVAILED BY DMG INDIA. IN VIEW OF THE ABOVE, THE ASSESSEE WOULD LIKE TO S UBMIT THAT THE CONCLUSIONS DRAWN BY THE TPO ARE ERRONEOUS AND WITH OUT CONSIDERING THE FACTS OF THE CASE. THE ASSESSEE HAS THEREFORE R EQUESTED THIS PANEL THAT THE TRANSFER PRICING ORDER MUST BE QUASHED. 6. HAVING EXAMINED THE EVIDENCE AND SUBMISSIONS OF THE ASSESSEE IN THIS REGARD, THE DRP HAS OBSERVED THAT THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE REGARDING THE SERVICES AVAILED BY THE ASSE SSEE IN FY 2004-05 & 2005-06. EVEN IN THE CURRENT ASSESSMENT YEAR, EVID ENCE WAS NOT FILED WITH REGARD TO MANAGERIAL SERVICES RENDERED BY THE AE F OR THE ASSESSEE. THE IT(TP)A NO.1192/BANG/2011 PAGE 9 OF 13 DRP ACCORDINGLY CONFIRMED THE ACTION OF THE TPO. T HE RELEVANT OBSERVATIONS OF THE DRP IS EXTRACTED HEREIN FOR THE SAKE OF REFERENCE:- WE FIND THAT THE ASSESSEE HAS NOT PRODUCED ANY EVI DENCE REGARDING THE SERVICES AVAILED BY THE ASSESSEE IN F Y 2004-05 & 2005-06. THE ASSESSEE SAYS THAT THE AE HAS RENDERED THE SERVICES DURING THESE TWO YEARS. BUT NO EVIDENCE WHATSOEVER HAS BEEN PRODUCED WHICH MAY EXPLAIN TO OUR SATISFACTION THAT THE AE RENDERED SERVICES AND THE SERVICES WERE FOUND SATIS FACTORY BY THE ASSESSEE AND THEREFORE THE ASSESSEE AGREED TO AVAIL THESE SERVICES IN FY 2006-07. WITHOUT ANY CONTRACT IN ADVANCE IN R ESPECT TO SUCH SERVICES IN FY 2004-05 ITSELF, WE DON'T FIND T HE ARGUMENT OF THE ASSESSEE THAT THE SERVICES WERE RENDERED BY THE AE AND THE ASSESSEE WAS AVAILING THEM FOR CONTINUOUSLY TWO YEA RS PRIOR TO FY 2006-07, AS CONVINCING. FURTHER, IF THE SERVICES WERE RENDERED ON TRIAL BASIS FOR LAST TWO FYS THEN WHY THE BILL W AS RAISED FOR SUCH TRAIL SERVICES AND ALSO DEBITED IN THE PROFIT AND LOSS ACCOUNT FOR FY 2006-07 BY THE ASSESSEE. THOUGH WE ARE OF A FIRM BELIEF THAT THE SERVICES HAVE NOT BEEN RENDERED BY THE AE IN FY 2004- 05 & 2005-06, BUT EVEN IF IT IS ACCEPTED FOR A MOME NT THAT SERVICES WERE RENDERED HOW THE BILLS CAN WE RAISED FOR SUCH TEST SERVICES AND THAT TOO POST-FACTO AND DEBITED IN P&L FOR FY 2006- 07 AND CLAIMED FOR THREE YEARS IN AY 2007-08. IN AN Y CASE THE AMOUNT RELATED TO LAST TWO FYS DESERVE TO BE EXCLUD ED IN THIS YEAR. REVERTING TO THE ISSUE OF RENDERING OF SERVIC ES BY THE AE IN THE RELEVANT PREVIOUS YEARS FOR THE ASSESSMENT YEAR UNDER CONSIDERATION WE MAY SAY THAT EXCEPT INVOICES RAISE D BY THE AES AND THE CHART OF ALLOCATION OF COSTS AMONG USERS OF SERVICES NO OTHER DOCUMENTS HAVE BEEN PRODUCED BY THE ASSESSEE BEFORE THE TPO. ALL THE FACTS BROUGHT TO OUR KNOWLEDGE, AND EA RLIER BEFORE THE TPO, WOULD SHOW THAT THE PRINCIPLE HAS INTRODUC ED SERVICES WORLDWIDE FOR THE INTRODUCING COMMON PRACTICES FOR THE WHOLE GROUP. HOW MUCH INDIVIDUAL MEMBER ENTERPRISES IN TH E GROUP ARE BENEFITTED IS NOT KNOWN. HOWEVER, IT IS CERTAIN THA T DUE TO THESE PRACTICES DMG GMBH DEFINITELY IS BENEFITTED. ON OTH ER MEMBERS SUCH SERVICES HAVE BEEN IMPOSED WITHOUT CARING AS T O WHETHER ON A STAND ALONE BASIS SUCH SERVICES WERE REALLY CALLE D FOR. IT IS NOT PROVED THAT SUCH SERVICES WERE REALLY REQUIRED BY T HE ASSESSEE AND HOW MUCH THE ASSESSEE WAS INVOLVED IN DECISION MAKI NG WHILE INTRODUCING THESE SERVICES. THIS PANEL HOLDS THE VI EW THAT ONCE THESE SERVICES HAVE BEEN INTRODUCED BY THE PRINCIPA L DMG IT(TP)A NO.1192/BANG/2011 PAGE 10 OF 13 GMBH, OTHERS FELL IN LINE AND STARTED BEARING THE C OST AS THE AUTHORITIES IN THE TAX JURISDICTION WHERE DMG GMBH IS LOCATED WOULD NOT BE AGREEING THAT DMG GMBH DEBIT THE ENTIR E COST IN ITS ACCOUNTS. IN OUR VIEW, THE BENEFIT MAY BE INDIR ECT BUT INDIRECT BENEFIT IS NOT CONSIDERED AS THE RIGHT CRITERION TO ALLOW THE EXPENDITURE AS AT ARM'S LENGTH IN THE CASE OF THE A SSESSEE. IN OUR VIEW THE BENEFIT MUST BE DIRECT, MUST CORRESPOND TO THE COST INCURRED, BENEFICIARY MUST TAKE A CONSCIOUS DECISIO N TO AVAIL THESE SERVICES NOT UNDER THE INFLUENCE OF OTHERS BU T IN VIEW OF THE REQUIREMENTS OF ITS OWN BUSINESS. IN THE CIRCUMSTAN CES EXISTING IN THE CASE OF THE ASSESSEE, WE FIND IT DIFFICULT TO A GREE WITH THE ASSESSEE THAT EVERYTHING IS RIGHT IN THIS CASE AND THE DECISION OF THE TPO IS WRONG AND THEREFORE THE DIRECTION MAY BE ISSUED BY THE DRP TO ACCEPT THE PRICE OF THE MANAGEMENT FEES DETERMINED BY THE ASSESSEE IN THE TRANSFER PRICING DOCUMENTS. WE ON THE OTHER HAND FIND THAT EVERYTHING IS NOT RIGHT IN THI S CASE. WHY THE CHOICE FELL ON THE GROUP COMPANY? WHETHER OTHER SER VICE PROVIDERS WERE CONSIDERED AND IF YES, THEN WHY OTHE R SERVICE PROVIDERS WERE RULED OUT AND ON WHAT CRITERION? THE SE AND MANY OTHER ISSUES NEED TO BE REPLIED BY THE ASSESSEE. TH ERE ARE SOME EVIDENCES ENCLOSED BY THE ASSESSEE IN SUPPORT OF IT S CLAIM THAT THE SERVICES WERE ACTUALLY AVAILED. WE, HOWEVER, FIND T HAT THESE SERVICES WERE RENDERED BY THE DMG GMBH FOR THE DIRE CT BENEFIT OF DMG GMBH. THEREFORE, THAT DOES NOT CALL FOR DIST RIBUTION OF COST AMONGST THE GROUP MEMBERS. THE ARGUMENTS OF TH E ASSESSEE THAT THESE COST WERE DISTRIBUTED IN PROPORTION TO T HE SERVICES AVAILED IS OF NO AVAIL AND WE CANNOT AGREE WITH THE ASSESSEE THAT IT SHOULD BE ALLOWED AS THE ALLOCATION OF COSTS HAS BE EN DONE ON RATIONALE BASIS AND THE MARKUP OF 5 % IS ALSO REASONABLE. THE DISALLOWANCE IS BASED MAINLY ON THE FACT THAT THE C OST DOES NOT BELONG TO THE ASSESSEE. THE BENEFIT ACCRUING TO THE ASSESSEE IS INDIRECT BENEFIT AS THE DIRECT BENEFIT HAS REACHED TO DMG GMBH WHO HAS IMPOSED THESE SERVICES ON THE GROUP ENTITIE S, INCLUDING THE ASSESSEE. THEREFORE, IT IS NOT SIMPLY THE MARK UP ALONE, RATHER THE ENTIRE COST DEBITED TO THE P&L ACCOUNT IN AY 20 07-08 DESERVE TO BE DISALLOWED. THEREFORE THE ACTION OF T HE TPO IS CONSIDERED AS FULLY JUSTIFIED AND HENCE, UPHELD BY US. 7. NOW THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNA L WITH THE SUBMISSION THAT ON ACCOUNT OF FINANCIAL POSITION TH E ASSESSEE HAS NOT PAID IT(TP)A NO.1192/BANG/2011 PAGE 11 OF 13 THE MANAGEMENT FEES TO ITS AE IN 2004-05 AND 2005-0 6, THOUGH AE HAS RENDERED MANAGERIAL SERVICES FOR THE ASSESSEE. IN SUPPORT OF HIS CONTENTIONS THAT THE AE HAS RENDERED SERVICES FOR T HE ASSESSEE, THE LD. COUNSEL FOR THE ASSESSEE HAS MOVED AN APPLICATION F OR ADMISSION OF ADDITIONAL EVIDENCE ON THE GROUND THAT THIS ADDITIO NAL EVIDENCE IS BEING FILED TO ESTABLISH HOW MUCH SERVICES WERE RENDERED BY THE AE FOR THE ASSESSEE. THIS ADDITIONAL EVIDENCE COMPRISE OF E-M AILS AND CORRESPONDENCE EXCHANGED BETWEEN THE ASSESSEE AND T HE AE AND ALSO INVOICES RAISED BY THE AE. ALL THESE EVIDENCE WAS NOT SOUGHT FOR BY THE DRP DURING THE COURSE OF HEARING. THE ASSESSEE WAS OF THE IMPRESSION THAT WHATEVER EVIDENCE WAS FILED BY HIM WAS SUFFICI ENT TO CONVINCE THE DRP WITH REGARD TO SERVICES RENDERED BY THE AE. 8. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTEND ED THAT IT IS NOT CORRECT ON THE PART OF DRP IN OBSERVING THAT THE AS SESSEE HAS NOT FILED ANY EVIDENCE REGARDING THE SERVICES AVAILED BY THE ASSE SSEE. THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT SINCE ADDIT IONAL EVIDENCE IS VERY MATERIAL AND GOES TO THE ROOT OF THE CASE IN DECIDI NG THE QUANTUM AND NATURE OF SERVICES RENDERED BY THE AE FOR THE ASSES SEE, THEREFORE, THE SAME MAY BE ADMITTED AND MATTER BE RESTORED TO THE DRP OR THE TPO TO EXAMINE THESE DETAILS IN ORDER TO DETERMINE THE ALP OF THE MANAGEMENT FEES. IT(TP)A NO.1192/BANG/2011 PAGE 12 OF 13 9. THE LD. STANDING COUNSEL FOR THE REVENUE FORMERL Y OPPOSED THE ADMISSION OF ADDITIONAL EVIDENCE, BUT LATER ON HE H AS AGREED THAT IN CASE ADDITIONAL EVIDENCE IS RELEVANT AND IS REQUIRED TO BE EXAMINED, THE MATTER MAY BE RESTORED TO THE TPO/AO TO EXAMINE THE NATURE OF SERVICES RENDERED BY THE AE FOR THE ASSESSEE. IF IT IS ESTABLISHED T HAT AE HAS RENDERED SERVICES FOR THE ASSESSEE ON ACCOUNT OF WHICH MANAG EMENT FEES IS REQUIRED TO BE PAID BY THE ASSESSEE TO ITS AE, THE TPO WILL DETERMINE THE MANAGEMENT FEE AT ALP. 10. HAVING CAREFULLY EXAMINED THE ORDERS OF AUTHORI TIES BELOW IN THE LIGHT OF RIVAL SUBMISSIONS AND ADDITIONAL EVIDENCE FILED BEFORE US, WE FIND THAT THIS ADDITIONAL EVIDENCE IS QUITE RELEVANT TO DECID E THE NATURE AND QUANTUM OF SERVICES RENDERED BY THE AE FOR THE ASSESSEE IN ORDER TO DETERMINE THE ALP OF THE MANAGEMENT FEES PAID BY THE ASSESSEE. O UR ATTENTION WAS ALSO INVITED TO THE WRITTEN SUBMISSIONS FILED BEFORE THE TPO IN WHICH A REFERENCE TO COST ALLOCATION AGREEMENT FOR MANAGEMENT FEES WA S MADE. OUR ATTENTION WAS ALSO INVITED TO THE INVOICE, BUT DATE OF ISSUAN CE OF INVOICE IS NOT CLEAR. A COPY OF SERVICE AGREEMENT IS ALSO FILED, WHERE SE RVICE AGREEMENT WAS DATED 8.1.2007. THOUGH LD. COUNSEL FOR THE ASSESSE E HAS ADVANCED HIS ARGUMENT THAT IN THIS AGREEMENT, REFERENCE WAS MADE WITH REGARD TO SERVICE RENDERED FROM JANUARY, 2004, BUT IT IS NOT CLEAR AS TO HOW THIS AGREEMENT IS EFFECTIVE FROM 1.1.2004 WHEN IT WAS EX ECUTED IN 2007. ALL THESE ASPECTS REQUIRE PROPER EXAMINATION. THEREFOR E, IN THE INTEREST OF JUSTICE, WE ARE OF THE VIEW THAT THIS ISSUE REQUIRE S FRESH ADJUDICATION IN THE IT(TP)A NO.1192/BANG/2011 PAGE 13 OF 13 LIGHT OF ADDITIONAL EVIDENCE FILED BY THE ASSESSEE. WE, THEREFORE, SET ASIDE THE ORDER OF AO PASSED IN CONSEQUENCE TO THE ORDER OF DRP IN THIS REGARD AND RESTORE THE MATTER TO THE TPO/AO TO ADJUDICATE THE ISSUE OF MANAGEMENT FEES PAID BY THE ASSESSEE TO ITS AE AND IF IT IS ESTABLISHED THAT THE AE HAS RENDERED SOME SERVICES FOR THE ASSE SSEE FOR WHICH MANAGEMENT FEES ARE REQUIRED TO BE PAID, THE AO/TPO WOULD DETERMINE THE ALP OF THE MANAGEMENT FEES PAID BY THE ASSESSEE , AFTER MAKING NECESSARY ADJUSTMENTS, IF NECESSARY. ACCORDINGLY, THE APPEAL OF THE ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 26 TH DAY OF OCTOBER, 2016. SD/- SD/- ( S. JAYARAMAN ) (SUNIL KUMAR YA DAV ) ACCOUNTANT MEMBER JUDIC IAL MEMBER BANGALORE, DATED, THE 26 TH OCTOBER, 2016. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT( A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.
