Assistant Commissioner of Income-tax, Pune V. M/s. Nalco Water India Ltd., Pune

ITA 1218/PUN/2017

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 4827 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 28-01-2021
• Assessment Year: 2009-2010
• Appeal Filed On: 15-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: IS DIRECTED AGAINS T PASSED
• Keywords: Transfer pricing; International transaction
• Section: 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH, C PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER . / ITA NO.1218/PUN/2017 / ASSESSMENT YEAR : 2009-10 ACIT, CIRCLE-2, PUNE VS. M/S.NALCO WATER INDIA LIMITED, S.NO.238/239, 3 RD FLOOR, QUADRA-1, PANCHSHIL, MAGARPATTA ROAD, SADE SATRA NALI, PUNE 411 028 PAN : AAACO4994N APPELLANT RESPONDENT / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER PAS SED BY THE LD. CIT(A)-22, KOLKATA ON 08-02-2017 IN RELATION TO TH E ASSESSMENT YEAR 2009-10. 2. GROUND NO.1 RAISED BY THE REVENUE READS AS UNDER : ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED ON HOLDING THAT INTRA GROUP ACTIVITIES PERFORMED BY NALCO USA UNDER SA AND BY NALCO PACIFIC UNDER THE TAMA CONSTITUTE INTRA GROUP SERVICES AND THE SAID ACTIVITIES ARE NOT IN THE NATURE OF STEWARDSHIP ACTIVITY. 3. BRIEFLY STATED, THE FACTUAL MATRIX OF THE CASE IS THAT THE A SSESSEE IS A PART OF THE NALCO GROUP HEADQUARTERED IN THE USA. NALC O USA IS A LEADING GLOBAL PROVIDER OF WATER TREATMENT AND PROCESS ASSESSEE BY SHRI KETAN VED REVENUE BY SHRI JAGDISH P. CHANDRAKER DATE OF HEARING 29-09-2021 DATE OF PRONOUNCEMENT 30-09-2021 ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 2 IMPROVEMENT SERVICES, CHEMICALS AND EQUIPMENT PROGRAMS FO R INDUSTRIAL AND INSTITUTIONAL APPLICATIONS THROUGHOUT THE WORLD. THE ASSESSEE IS AN INDIAN SUBSIDIARY OF NALCO, USA. IT IS PR IMARILY INTO THE BUSINESS OF MANUFACTURING AND SELLING SPECIALITY CHEMICALS, SUCH AS, WATER TREATMENT CHEMICALS, INDUSTRIAL ADDITIVES, OILFIELD CHEM ICALS AND DE-MINERALIZED WATER. THE ASSESSEE FILED ITS RETURN DEC LARING TOTAL INCOME OF RS.3,42,70,000/-. TWO INTERNATIONAL TRANSACTIONS WERE REPORTED IN FORM NO. 3CEB. THE ASSESSING OFFICER (AO) M ADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERM INING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS. THE INTERNATIONAL TRANSACTIONS ARE RECEIPT OF HEADQUARTER SERVICES FROM NALCO, USA AMOUNTING TO RS.10,21,74,000/- AND RECEIPT OF TECHNICAL CONSULTANCY SERVICES FROM NALCO PACIFIC PTE LTD., SINGAPORE AMOUNTING TO RS.3,37,87,000/-. IN ORDER TO DEMONSTRATE THA T THE INTERNATIONAL TRANSACTIONS WERE AT ALP, THE ASSESSEE APPLIED THE TRANSACTIONAL NET MARGIN METHOD (TNMM). THE TPO OBSERVED THAT THE SERVICES AVAILED BY THE ASSESSEE WERE PURSUANT TO TWO SEPARATE AGREEMENTS VIZ., ONE WITH NALCO COMPANY, USA (SERVICES AGREEMENT OR SA) AND ANOTHER WITH NALCO PACIFIC PTE LTD., SINGAPORE (TECHNICAL AND MANAGEMENT ASSISTANCE AGREEMENT OR TAMA). THE TPO TOOK NOTE OF THE RELEVANT CLAUSES OF THE TW O ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 3 AGREEMENTS FOR ASCERTAINING THE TRUE NATURE OF SERVICES. H E SHOW CAUSED THE ASSESSEE AS TO WHY THE SERVICES, CLAIMED AS IN TRA GROUP SERVICES, BE NOT TREATED AS STEWARDSHIP ACTIVITY CARRIED OUT BY THE AES. THE ASSESSEE FILED EXHAUSTIVE REPLY TO THE TPOS SHOW CAUSE NOTICE, GIVING DETAILS OF BENEFITS DERIVED FROM SUCH SERVICES . THE TPO COUNTERED SUCH REPLY AND HELD THAT THE SERVICES PERFOR MED BY THE AES WERE IN THE NATURE OF STEWARDSHIP ACTIVITY. IN REACH ING THIS CONCLUSION, HE RELIED ON DIT(IT) VS. MORGAN STANLEY AND COMPANY INC. (2007) 292 ITR 416 (SC) . THE TPO, THEREAFTER, DETERMINED NIL ALP OF THE TRANSACTIONS, WHICH LED TO PROPOSING TRANSFER PRICIN G ADJUSTMENT OF RS.13,59,61,000/-. THE ASSESSMENT ORDER WAS FINALIZED, INTER ALIA, WITH THE ABOVE TRANSFER PRICING ADDITION. THE LD. CIT(A) GOT CONVINCED WITH THE ASSESSEES SUBMISSIONS AND H ELD THAT THE SERVICES RECEIVED WERE NOT IN THE NATURE OF STEWARDSHIP ACTIVITY. SINCE THE TPO DID NOT APPLY ANY PARTICULAR METHOD FOR DETERMININ G THE ALP, THE LD. CIT(A) HELD THAT THE ALP DETERMINED BY THE ASSESSEE DID NOT WARRANT ANY INTERFERENCE. AGGRIEVED THE REBY, THE REVENUE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. IT IS SEEN THAT THE ASSESSEE AVAILED HEADQUARTER SERVICES FROM NALCO, USA UNDER THE SERVICE AG REEMENT ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 4 AND TECHNICAL AND MANAGEMENT ASSISTANCE SERVICES FROM NALC O PACIFIC PTE LTD., SINGAPORE UNDER THE TECHNICAL AND MANAGEMEN T ASSISTANCE AGREEMENT. THE ASSESSEE AGGREGATED THESE SE RVICES AND SHOWED THEM AT ALP IN ITS TRANSFER PRICING STUDY REPORT. THE TPO CAME TO HOLD THAT THE NATURE OF SERVICES AVAILED BY THE ASSE SSEE WERE STEWARDSHIP ACTIVITY AND HENCE, NO COMPENSATION WAS REQUIRED TO BE PAID. THE POINT IN CONTROVERSY IS DETERMINATION OF THE NATURE OF SERVICES AVAILED BY THE ASSESSEE. THE SERVICE AGREEMENT EN TERED INTO WITH NALCO, USA PROVIDES FOR RENDITION OF HEADQUARTER SERVIC ES. THE LIST OF SERVICES HAS BEEN GIVEN UNDER EXHIBIT-A, AS RE PRODUCED ON PAGES 4 AND 5 OF THE TPOS ORDER. THE ASSESSEE SUBMITTE D COPIOUS DETAILS OF THE SERVICES AVAILED BY IT FROM NALCO, USA THAT HAVE BEEN REPRODUCED ON PAGE 29 ONWARDS OF THE TPOS ORDER, WHO DEALT WITH THE ASSESSEES REPLY ON PAGE 115 ONWARDS OF HIS ORDER. 5. WE ESPOUSE SOME OF THE SERVICES ON REPRESENTATIVE BASIS FOR ASCERTAINING THEIR TRUE CHARACTER. THE FIRST ITEM IS `COMMUNIC ATION SERVICES. THE ASSESSEE SUBMITTED RELEVANT DOCUMENTS PUTTING FORTH THAT THE SERVICES WERE IN THE NATURE OF TRANSLATION AND MEDIA CENTRE. BENEFIT DERIVED FROM SUCH SERVICES WAS ALSO GIVEN TO BE THE TRANSLATION SERVICES MEANT FOR ETHICAL SPEAKING POLICY IN CHINESE LANGUAGE FOR ASIA PACIFIC REGION AND THE BACK-UPS INCLUDING P OLICY ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 5 PROCEDURE; INFORMATION ON NALCO GROUP AND NALCO, US; AND ENERGY AUDITS AND TECHNICAL CONSUMPTION ETC. THE TPO GAVE HIS REMA RKS THAT THE TRANSLATION COSTS CANNOT BE ALLOCATED ON THE BASIS OF REGION OR GLOBAL SALES AND FURTHER THAT THE CONTENTS WERE GENERAL IN NA TURE. THE NEXT SERVICES AVAILED BY THE ASSESSEE FROM NALCO, USA IS ` ENERGY SERVICES. THE ASSESSEE INDICATED BENEFIT FROM IT TO BE IN TH E NATURE OF DEVELOPING GROWTH MODIFIER PROGRAM WHICH WAS DONE IN COLLABORATION WITH NALCO, RUSSIA AND HELPED IT IN CREATING OVERALL TECHNICAL AND OPERATIONAL BENEFIT FOR THE MANUFACTURING PROCES S. THE TPO REJECTED THE ASSESSEES CONTENTION BY OBSERVING THAT NO DIRECT BENEFIT WAS RECEIVED. THE NEXT SERVICE IS `FACILITIES MANAGEM ENT IN RESPECT OF WHICH THE ASSESSEE SUBMITTED THAT IT OBTAINED LOGO F ILES WHICH INCLUDED SPECIFICATIONS OF SIGN TYPES, ILLUMINATION STANDARD S, MATERIALS, TYPOGRAPHY STYLE, VIEWING ANGLES ALL OF WHICH WERE VITAL AND FORMED AN INTEGRAL PART OF THE IDENTIFICATION OF THE NALC O GROUP ENTITIES. THE ASSESSEE FURTHER SUBMITTED THAT THE SAID SIGNAGE WAS ESSENTIAL AND APPLIED BY IT IN ITS FACTORIES AND CORPORATE OFFIC ES WHICH HELPED IN MAINTAINING GLOBAL IMAGE OF THE COMPANY VIS--VIS ITS CUSTOMERS AND EMPLOYEES. THE TPO AGAIN REJECTED THIS BY OBSERVING THAT IT WAS ALREADY COVERED BY SEPARATE AGREEMENT BETWEEN THE ASSESSEE AND NALCO, USA. UNDER THE `FINANCE CONTROLLER SE RVICES, ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 6 THE ASSESSEE SUBMITTED THE BENEFIT OF COMPLETE DOCUMENT ON PROCESSES FOR IMPLEMENTATION OF SARBANES OXLEY PROVIDING FO R THE PROCESS SCOPE, PROCESS BACKGROUND AND THE NARRATIVE PR OCESS. IT WAS ALSO EMPHASIZED THAT SUCH SERVICES WERE AVAILED FROM A P ERSPECTIVE OF IMPLEMENTATION OF GLOBALLY ACCEPTED SARBANES OXLEY WITHIN TH E ACCOUNTING AND FINANCIAL SYSTEM OF NALCO INDIA AS IT GAVE AN EDGE OVER ITS COMPETITORS. THE TPO REJECTED THIS CONTENTION BY HOLDIN G THAT IT PERTAINED TO CREATION OF ACCOUNTS AND LEDGER HEADS. T HE NEXT SERVICE IS OF `HUMAN RESOURCES. THE ASSESSEE INDICATED THE BENEFIT IN THE FORM OF DOCUMENT TALKS EXPLICITLY ON KEY FACTS ABOUT THE GLOBAL HUMAN RESOURCES PRACTICE AND KEY BENEFITS DERIVED BY VAR IOUS NALCO ENTITIES. THE POLICY DOCUMENTS LAID DOWN GUIDELINES AND RULES IN RELATION TO PREVENTION OF SUBSTANCE ABUSE BY THE WORKERS EN GAGED IN MANUFACTURING PROCESS DURING THE WORK HOURS. THE POLICY TALKED ABOUT THE REFERRAL SCHEME FOR EMPLOYEES LOCATED ANYWHER E AT THE GLOBAL LEVEL, WHEREIN MONETARY REWARD WAS GIVEN FOR ANY R EFERRAL BEING A SUCCESSFUL HIRE. THE TPO REJECTED THE SAME BY H OLDING THAT NO DIRECT BENEFIT WAS RECEIVED BY THE ASSESSEE. THE NEX T ITEM IS `INFORMATION TECHNOLOGY SERVICES IN RESPECT OF WHICH THE A SSESSEE STATED THAT PRESENTATION ON THE NEW INITIATIVES TAKEN FOR IMPLEMENTATION OF VARIOUS IT PROGRAMS WAS ESSENTIAL FOR ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 7 MANUFACTURING PROCESS FOCUSED ON WATER, ENERGY AND ITS B USINESS UNITS. IT ALSO INCLUDED ESTIMATES FOR SUPPLY CHAIN, ERP COMP LIANCE, FINANCE, AUTOMATION, HR ETC. SUCH SERVICES WERE FOR PROV ISION OF SUPPORT SERVICES IN CASE OF TROUBLESHOOTING. A DETAILED LIST OF THE BENEFITS DERIVED FROM SUCH SERVICES WAS ALSO GIVEN. THE TPO AGAIN KNOCKED DOWN THE ASSESSEES CONTENTION BY GIVING IDENTICAL R EASONS. SIMILAR IS THE POSITION ABOUT OTHER SERVICES FOR WHICH THE ASS ESSEE GAVE A DETAILED ACCOUNT OF THE BENEFITS DERIVED, ALL OF WHICH WERE REPELLED BY THE TPO WITH SIMILAR REASONS. 6. NOW WE TURN TO THE SECOND AGREEMENT ENTERED INTO BY THE ASSESSEE WITH NALCO PACIFIC PTE LTD., SINGAPORE. THIS AGREE MENT PROVIDES THAT NALCO PACIFIC PTE LTD., SINGAPORE WOULD FURNISH TO NALCO INDIA THE TECHNICAL ASSISTANCE SERVICES IN THE FOLLOWING FORMS, WHICH ARE SUMMARIZED HEREIN FOR BREVITY : A. COMMERCIAL ADVICE AND TECHNICAL ASSISTANCE ON AN ASIA/PACIFIC MARKET SEGMENT APPROACH TO THE RESOLUTION OF INDUSTRIAL PROBLEMS IN SUCH SECTORS. B. ADVICE AND TECHNICAL ASSISTANCE IN ADAPTING TO NALCO IND IA NEEDS THE HIGHEST TECHNOLOGY APPLIED BY OTHER NALCO ASIA/PACIFIC GROUP COMPANIES. C. PROVIDING CENTRALIZED FINANCIAL PLANNING SERVICES AND ADVICE ON BANKING; INVESTMENTS AND EXCHANGE POSITIONS ETC. D. ADVICE AND ASSISTANCE REGARDING BUDGET CONTROL SYSTEMS A ND PROCEDURE, PRODUCTION COST CONTROLS, REPORTING MECHANISM ETC . ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 8 E. ADVICE ON THE ESTABLISHMENT AND ENHANCEMENT OF COMPUTER SYSTEMS. F. ADVICE AND ASSISTANCE WITH RESPECT TO THE PRODUCTION PLANNING OF NALCO INDIA. G. ADVICE ON PROCUREMENT OF RAW MATERIALS FROM SUPPLIERS I N ASIA/PACIFIC IN THE MOST EFFICIENT AND ECONOMICAL MANNER. H. ADVICE ON ASIA/PACIFIC RISK ANALYSIS, ASIA/PACIFIC INSURANCE PROTECTION AND ASIA/PACIFIC PRODUCT LIABILITY CONSIDERATION. I. ADVICE AND ASSISTANCE REGARDING COMPLIANCE WITH ASIA/PACIFIC NORMS FOR TRANSPORTATION, HANDLING AND LABELING OF PRODUCTS. J. ADVICE AND ASSISTANCE ON LOCAL RESEARCH GOALS AND PLANNING. K. ADVICE REGARDING HANDLING OF HAZARDOUS MATERIALS AND MAKING AVAILABLE EXPERTISE IN PREVENTING OF HANDLING CATASTROPHE SITUATIONS. L. PROMOTING THE EFFECTIVE INTERCHANGE OF INFORMATION AND INTERPLAY OF MANAGERS AND TECHNICIANS BETWEEN NALCO INDIA AN D THE VARIOUS COMPANIES OF THE NALCO ASIA/PACIFIC GROUP. 7. THE ASSESSEE ELABORATED THE BENEFITS DERIVED BY IT FROM THE SERVICES RENDERED BY THE NALCO PACIFIC PTE LTD., SINGAPORE. T HE TPO HAS TABULATED THE BENEFITS CLAIMED TO HAVE BEEN DERIVED BY TH E ASSESSEE AND HIS REMARKS ON PAGE 126 ONWARDS OF HIS O RDER. FOR EXAMPLE, THE FIRST CATEGORY IS `FINANCE AND ACCOUNTING. TH E ASSESSEE GAVE DESCRIPTION OF THE BENEFITS DERIVED BY IT FROM SUCH SERVICES IN A STRUCTURED MANNER CATERING TO EXPENSE CLAIM ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 9 REIMBURSEMENT SYSTEM; CASH COLLECTION & CREDIT CONTROL TRAINING; EXPENSE REIMBURSEMENT SYSTEM; BUDGETING PROCESS AND TIME TABLE; INDIA BUSINESS CONTRACT AND TAX TRAINING; TRAINING FOR ASIA P ACIFIC SALES IMPROVEMENT SO ON AND SO FORTH. THE ASSESSEE SU BSTANTIATED THE RECEIPT OF SUCH SERVICES WITH THE HELP OF CORRESPONDING E-MAILS AND OTHER DOCUMENTS. THE TPO NEGATIVED THE ASSESSEES CO NTENTION BY SIMPLY HOLDING THAT NO DIRECT BENEFIT WAS RECEIVED OR THES E WERE DUPLICATE SERVICES. SIMILAR IS THE POSITION QUA OTHER SERVICES, NAMELY, `WPS AND WATER SERVICES FOR WHICH THE ASSESSEE STATED THE BENEFIT IN THE NATURE OF INTEGRATED WATER MANAGEMENT TRAINING WORKSHOP; INTEGRATED WATER MANAGEMENT PRESENTATION; COST ASPE CTS OF VARIOUS UNITS, TECHNICAL WATER TREATMENT PROPOSAL AFTER SITE VISIT; TECHNICAL AUDIT REPORT ETC. THE TPO REJECTED THE ASSESSEES CLAIM AGAIN BY HOLDING THAT NO DIRECT BENEFIT WAS RECEIVED. SIMILAR POSITION PREVAILED FOR OTHER SERVICES AVAILED BY THE ASSESSEE FRO M NALCO PACIFIC PTE LTD., SINGAPORE FOR WHICH COMPLETE DETAILS, BACKED BY THE CORRESPONDING E-MAILS AND OTHER DOCUMENTS, WERE SUBMITTED TH AT HAVE BEEN SET OUT BY THE TPO IN HIS ORDER IN THE TABULAR FOR M. ALL SUCH CONTENTIONS DID NOT CONVINCE THE TPO, WHO REJECTED THE SAME BY SIMPLY HOLDING THAT NO DIRECT BENEFIT WAS RECEIVED. ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 10 8. ON A CAREFUL PERUSAL OF THE SERVICES RECEIVED BY THE A SSESSEE FROM NALCO, USA AND NALCO PACIFIC PTE LTD., SINGAPORE, IT BECOM ES ABUNDANTLY CLEAR THAT THE SERVICES FACILITATED THE CARRYING ON THE BUSINESS OPERATIONS BY THE ASSESSEE IN A MORE EFFICIENT AN D EFFECTIVE MANNER BY ADHERING TO THE INTERNATIONAL STANDARDS IN A GLOBALLY UNIFORM MANNER. 9. THE MOOT QUESTION IS WHETHER THE SERVICES UNDER CON SIDERATION ARE IN THE NATURE OF STEWARDSHIP ACTIVITY AS HAS BEEN HELD BY THE TPO OR CORE BUSINESS INTRA-GROUP SERVICES AS CLAIMED BY THE A SSESSEE? IN ORDER TO APPRECIATE THE CONTROVERSY, IT IS SINE QUA NON TO FIRST COMPREHEND THE TERM `STEWARDSHIP, WHICH HAS NOT BEEN DE FINED EITHER IN THE INCOME-TAX ACT, 1961 OR IN THE INCOME-TAX RU LES, 1962. IN COMMERCIAL PARLANCE, STEWARDSHIP ACTIVITIES ARE THOSE WHICH ARE UNDERTAKEN BY AN ENTERPRISE TO PROTECT ONES OWN INTEREST. WHEN Y ENGAGES X FOR RENDITION OF SOME SERVICE, ANY ACTIVITY OF Y TO ENSURE THAT THE WORK ASSIGNED TO X IS PERFORMED AS PER ITS SPECIFIC ATIONS, CONSTITUTES A STEWARDSHIP ACTIVITY. ON THE OTHER HAND, IF AN ACTIVITY/SERVICE OF THE RENDERER COMPANY PRODUCES SOME EF FECT ON THE RECIPIENT COMPANY, WHETHER OR NOT RESULTING INTO A TANGIBLE BENE FIT TO THE RECIPIENT, THE SAME, IN OUR CONSIDERED OPINION, CEASES TO BE A STEWARDSHIP ACTIVITY. ONE OF THE FORMS OF STEWARDSHIP ACTIVITIES IS A ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 11 SHAREHOLDER ACTIVITY, WHICH TAKES PLACE WHEN SOME ACT OR SE RVICE IS DONE BY A SHAREHOLDER TO THE COMPANY IN ORDER TO ENSURE THAT HIS INVESTMENT IN THE SHARES IS SAFE AND FURTHER SUCH AN ACT O R SERVICE DOES NOT PRODUCE ANY EFFECT TO THE COMPANY RECEIVING IT. F OR EXAMPLE, IF COMPANY X IS A SHAREHOLDER IN COMPANY Y AND IT DOES SOME ACTIVITY TO PROTECT ITS INVESTMENT THEREIN, AND THE EFFECT OF SUCH AN ACTIVITY IS CONFINED TO IT ALONE, THE SAME WOULD BE CONSTRUED AS SHAREHOLDER ACTIVITY. A STEWARDSHIP ACTIVITY IN GENERAL OR A SHAREHOLDER ACTIVITY IN PARTICULAR IN THE CASE OF TWO RELATED COMPANIES, IS QUITE DIFFERENT FROM A NORMAL INTRA-GROUP SER VICE, WHICH IS RENDERED FOR THE PURPOSE OF THE RECIPIENT COMPAN Y. EFFECT OF A NON-SHAREHOLDER ACTIVITY IS RENDERED TO THE COMPANY RECE IVING IT, WHICH IS IN SHARP CONTRAST TO THE EFFECT BEING RENDERED TO A COMPANY RENDERING SUCH SERVICE IN THE CASE OF A STEWARDSHIP OR SH AREHOLDER ACTIVITY. IF WE EXPAND THE SCOPE OF SHAREHOLDER ACTIVITY TO P RODUCING SOME DIRECT OR INDIRECT EFFECT TO THE RECIPIENT COMPANY WITH TH E CONSEQUENCE OF HIGHER PROFITS TO IT AND THE RESULTANT HIGHE R DIVIDENDS TO THE RENDERER OR THE SHAREHOLDER COMPANY, THEN PROBABLY MOST OF THE ACTIVITIES, INCLUDING EVEN OPERATIONAL ACTIVITIES, WOULD FALL WITHIN THE SWEEP OF SHAREHOLDER ACTIVITY, WHICH IS AN ABSURD PROPO SITION. IN OUR OPINION, STEWARDSHIP ACTIVITY OR SHAREHOLDER ACTIVITY EXCLUD ES ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 12 SUCH ACTIVITIES WHICH PRODUCE ANY EFFECT TO THE RECIPIENT COMPA NY. 10. IT WAS IN 1968 THAT SECTION 482 REGULATIONS OF THE USA TREASURY REGULATIONS ON INTRA-GROUP SERVICES PROVIDED THE FIRST U.S. TRANSFER PRICING RULES ON SERVICES. NEW SERVICE REGULATIONS WERE PRO POSED IN 2003, WHICH TOOK THE FORM OF TEMPORARY REGULATIONS IN 2006 , AND EVENTUALLY FINAL REGULATIONS FOR TREATMENT OF SERVICES UNDER S ECTION 482 (USA REGULATION 2009) WERE ISSUED. THE FINAL REGULATIONS ARE EFFECTIVE FOR TAXATION YEARS BEGINNING AFTER 31.7.2009. IT HAS BEEN MENTIONED IN THE 2009 REGULATION THAT: `SECTION 1.482-9T(1)(3)( IV) OF THE 2006 TEMPORARY REGULATIONS PROVIDES THAT AN ACTIVITY IS A SHAREHOLDER ACTIVITY IF THE SOLE EFFECT OF THAT ACTIVITY IS EITHER TO PROTECT THE RENDERERS CAPITAL INVESTMENT IN THE RECIPIENT OR IN OTHER MEMBERS OF THE CONTROLLED GROUP OR TO FACILITATE COMPLIANCE BY THE RENDERER WITH REPORTING, LEGAL OR REGULATORY REQUIREMENTS APP LICABLE SPECIFICALLY TO THE RENDERER, OR BOTH. THERE WAS SOME DEB ATE AS TO WHETHER THE `SOLE EFFECT LANGUAGE SHOULD BE EMPLOYED TO BRAND ANY ACTIVITY AS A SHAREHOLDER ACTIVITY OR IT SHOULD BE SUBSTITUTED WITH THE `PRIMARY EFFECT. IN OTHER WORDS, IF THE PRIMARY EFFE CT OF THE ACTIVITY OR SERVICE IS PRODUCED TO THE RENDERER COMPANY BUT SOME INCIDENTAL EFFECT ALSO FLOWS TO THE RECIPIENT COMPANY, THEN ALSO IT SHOULD BE CATEGORIZED AS SHAREHOLDER ACTIVITY. AFTER CONSIDERING ALL THE ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 13 OPINIONS, THE TREASURY DEPARTMENT AND THE IRS BELIEVED THAT : `THE SOLE EFFECT LANGUAGE IS APPROPRIATE . IT WAS NOTICED THAT : `THE PRIMARY EFFECT LANGUAGE IN THE 2003 PROPOSED REGULATIONS COULD INAPPROPRIATELY INCLUDE ACTIVITIES THAT ARE NOT TRUE SHAREHOLDER ACTIVITIES AND MAY EVEN CONSIST OF SUBSTANTIAL ACTIVITIES THAT ARE NO N- SHAREHOLDER ACTIVITIES. THUS, IT EXPLAINED: SHAREHOLDER ACTIVITIES . - AN ACTIVITY IS NOT CONSIDERED TO PROVIDE A BENEFIT IF THE SOLE EFFECT OF THAT ACTIVITY IS EITHER TO PROTECT THE RENDERERS CAPITAL INVESTMENT IN THE RECIPIENT OR IN OTHER MEMBERS OF THE CONTROLLED GROUP, O R TO FACILITATE COMPLIANCE BY THE RENDERER WITH REPORTING, LEGAL, OR REGULATORY REQUIREMENTS APPLICABLE SPECIFICALLY TO THE RENDERER, OR BOTH. ACTIVITIES IN THE NATURE OF DAY TO DAY MANAGEMENT GENERALLY DO NOT RELATE TO PROTECTION OF THE RENDERERS CAPITAL INVESTMENT . CERTAIN EXAMPLES HAVE BEEN GIVEN FOR ASCERTAINING WHETHER O R NOT AN ACTIVITY IS A SHAREHOLDER ACTIVITY. EXAMPLE 13, WHICH IS RELEVAN T IN OUR CONTEXT, IS - `COMPANY X ESTABLISHES DETAILED PERSONNE L POLICIES FOR ITS SUBSIDIARIES, INCLUDING COMPANY Y. COMPANY X ALSO RE VIEWS AND APPROVES THE PERFORMANCE APPRAISALS OF COMPANY YS EXECUTIVES, MONITORS LEVELS OF COMPENSATION PAID TO ALL COMPA NY Y PERSONNEL, AND IS INVOLVED IN HIRING AND FIRING DECISIONS RE GARDING THE SENIOR EXECUTIVES OF COMPANY Y. BECAUSE THIS PERSONNEL-R ELATED ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 14 ACTIVITY BY COMPANY X INVOLVES DAY-TO-DAY MANAGEMENT OF COMPANY Y, THIS ACTIVITY DOES NOT RELATE SOLELY TO COMPANY XS ROLE AS AN INVESTOR OF CAPITAL OR A SHAREHOLDER OF COMPANY Y, AND THEREFORE DOES NOT CONSTITUTE A SHAREHOLDER ACTIVITY. THUS IT E MERGES EVEN FROM THE USA TREASURY REGULATIONS THAT AN ACTIVITY WILL BE CONSIDERED AS A SHAREHOLDER ACTIVITY IF ITS ` SOLE EFFECT IS EITHER TO PROTECT THE RENDERERS CAPITAL INVESTMENT IN THE RECIPIENT ETC. OR TO FACILITATE COMPLIANCE BY THE RENDERER WITH ITS OWN REPORTING, LEGA L, OR REGULATORY REQUIREMENTS. IT IS FURTHER MANIFESTED THAT ACTIVITIES IN THE NATURE OF DAY TO DAY MANAGEMENT CANNOT BE CONSIDERED AS PROTECTION OF THE RENDERERS CAPITAL INVESTMENT AND HENCE THEY CEAS E TO BE STEWARDSHIP OR SHAREHOLDER ACTIVITY. 11. WE HAVE NOTICED THE DESCRIPTION OF SERVICES PERFORMED BY NALCO, USA UNDER THE BROADER HEADS OF INSURANCE & RISK MANAGEMENT; TREASURY; MARKETING; CREDIT AND COLLECTIONS; OPERATIONS PLANNING; SUPPLY CHAIN; PROCUREMENT; SAFETY, HEALTH & ENVIRONMENTAL; INFORMATION TECHNOLOGY; CUSTOMER SERVICE; HUMA N RESOURCES ETC. WE HAVE ALSO NOTICED SUPRA THE PORTRAYAL OF SERVICES PERFORMED BY NALCO, SINGAPORE UNDER THE BROADER HEADS O F COMMERCIAL ADVICE; ADVICE AND TECHNICAL ASSISTANCE; CENTRALIZED FINANCIAL PLANNING SERVICES; ADVICE AND ASSISTANCE REGARDING BUDGET ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 15 CONTROL SYSTEMS; ADVICE ON THE ESTABLISHMENT AND ENHANCEMEN T OF COMPUTER SYSTEMS; ADVICE AND ASSISTANCE WITH RESPECT TO THE PRODUCTION PLANNING; ADVICE ON PROCUREMENT OF RAW MATERIALS ; AND ADVICE ON ASIA/PACIFIC RISK ANALYSIS ETC. IT GETS VIVID ON SUCH A PERUSAL THAT THE SERVICES ARE IN THE NATURE OF REGULAR BUSIN ESS SERVICES PERFORMED BY THE GROUP ENTITIES WITH A VIEW TO ENABLE THE ASSE SSEE TO CARRY ON ITS BUSINESS OPERATIONS, THEREBY CAUSING EFFECT ON IT. AS SUCH, THESE DO NOT QUALIFY AS `STEWARDSHIP ACTIVITIES. 12. IT IS FURTHER RELEVANT TO ACCENTUATE THE DEFINITION OF `COSTS IN THE SERVICE AGREEMENT WITH NALCO, USA, GIVEN AS PER CLAUSE 1( A) TO MEAN THE ACTUAL COSTS INCURRED BY PARENT TO PROVIDE THE SE RVICES DEFINED HEREIN AND THE OVERHEAD ALLOCATED TO THE SERVICES INCU RRED BY PARENT, IN EACH CASE FOR THE RELEVANT CALENDAR YEARS. AC TUAL COSTS AND OVERHEAD FOR THIS PURPOSE SHALL NOT INCLUDE COSTS FOR STEWAR DSHIP. ON GOING THROUGH THE ABOVE DEFINITION, IT BECOMES OBVIOUS THA T THE ACTUAL COSTS INCURRED BY NALCO, USA ALONG WITH THE OVERHEAD ALLOCATED IN THE PROVISION OF SERVICES HAVE BEEN INCLUDED IN THE COST BASE BY EXPRESSLY PROVIDING THAT ACTUAL COSTS AND OVERHEAD FOR THIS PURPOSE SHALL NOT INCLUDE COSTS FOR STEWARDSHIP. IN OTHE R WORDS, THE COSTS INCURRED BY THE PARENT COMPANY IN PERFORMING STEWARDS HIP ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 16 ACTIVITIES DO NOT FORM PART OF THE COST BASE FOR INCLUSION IN TH E OVERALL COSTS IN RENDITION OF THE SERVICES UNDER THE AGREEMENT. 13. THE TPO RELIED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF MORGAN STANLEY AND COMPANY (SUPRA) FOR BRINGING HOME HIS POINT OF VIEW. THE ISSUE IN THAT CASE WAS WHETHER THE PE RMANENT ESTABLISHMENT OF THE ASSESSEE WAS CREATED IN INDIA? THE HO NBLE APEX COURT, AFTER ANSWERING THE QUESTION BEFORE IT, FURTHER OBSERVED THAT A PERSON MAY INSIST ON QUALITY CONTROL AND CONFIDENTIALITY FRO M THE SERVICE PROVIDER AND THE SERVICE PROVIDER MAY ALSO BE REQUIRED TO ACT ACCORDING TO THE QUALITY CONTROL SPECIFICATION IMPOSED BY ITS CUSTOMER. IT WENT ON TO DISCUSS THE NATURE OF STEWARDSHIP ACTIVITIES TO POINT OUT THAT: `STEWARDSHIP ACTIVITIES INVOLVE BRIEFING OF THE MSAS STAFF TO ENSURE THAT THE OUTPUT MEETS THE REQUIREMENTS OF THE MSCO. THESE ACTIVITIES INCLUDE MONITORING OF THE OUTSOURCING OPERATIONS AT MSAS. THE OBJECT IS TO PROTECT THE INTEREST OF THE MSCO. THESE STEWARDS ARE NOT INVOLVED IN DAY TO DAY MANAGEMENT OR IN AN Y SPECIFIC SERVICES TO BE UNDERTAKEN BY MSAS. THE STEWARDSHIP ACTIVITY IS BASICALLY TO PROTECT THE INTEREST OF THE CUSTOMER.. IN SUCH A CASE IT CANNOT BE SAID THAT MSCO HAS BEEN RENDERING THE S ERVICES TO MSAS. IN OUR VIEW MSCO IS MERELY PROTECTING ITS OWN INTERESTS IN THE COMPETITIVE WORLD BY ENSURING THE QUALITY AND CONFIDENTIALITY O F ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 17 MSAS SERVICES. ON GOING THROUGH THE DECISION IN MORGAN STANLEY (SUPRA) , IT GETS GRAPHICALLY CLEAR THAT THE STEWARDSHIP ACTIVITIES ARE CONFINED TO PROTECTING ONES OWN INTEREST RATHER THAN RENDE RING BENEFIT TO THE OTHER COMPANY. 14. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE OBSE RVE THAT THE RENDITION OF SERVICES BY NALCO, USA AND NALCO PACIFIC PTE LTD ., SINGAPORE HAS GIVEN EFFECT ONLY TO THE ASSESSEE AND HAS, IN NO MANNER, RESULTED IN PROTECTING THE INDIVIDUAL INTERESTS OF SUCH COMPANIES. ALL THE SERVICES RENDERED BY THEM FACILITATED THE CARRYING ON OF THE ASSESSEES BUSINESS. IN SUCH CIRCUMSTANCES , WE ARE SATISFIED THAT THE RELIANCE OF THE AO ON THE DECISION IN MORGAN STANLEY (SUPRA) IS MISCONCEIVED. WE, THEREFORE, ACCORD OUR IMPRIMATUR TO THE CONCLUSION DRAWN BY THE LD. CIT(A) THAT THE SERVICES RENDER ED BY THE TWO COMPANIES WERE IN THE NATURE OF INTRA GROUP SERVICES AND NOT STEWARDSHIP ACTIVITY. 15. ORDINARILY, AFTER ANSWERING THE CHARACTER OF THE SER VICES, THE NEXT POINT WOULD HAVE BEEN TO DETERMINE THE ALP OF THE INTR A GROUP SERVICES. WE HAVE NOTICED ABOVE THAT THE TPO DETERMINED NIL A LP BY HOLDING THAT THE SERVICES PROVIDED BY NALCO, USA AND NALC O PACIFIC PTE LTD., SINGAPORE WERE IN THE NATURE OF STEWARDSHIP ACTIVITY. THE LD. CIT(A) OVERTURNED THE TPOS VIEW ON THIS SC ORE ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 18 AND FURTHER HELD THAT THE TRANSACTED VALUE OF THE INTRA GROUP SERVICES WAS AT ALP, ALBEIT WITHOUT CARRYING OUT ANY ANALYSIS. THE GROUND TAKEN BY THE REVENUE, AS REPRODUCED ABOVE, IS CONFINED ONLY TO CHALLENGING THE DECISION OF THE LD. CIT(A) IN CONSTRUING THE SE RVICES AS INTRA GROUP SERVICES. THERE IS NO CHALLENGE TO THE DECIS ION OF THE LD. CIT(A) ON THE SECOND ASPECT OF THE INTERNATIONAL TRANSAC TION BEING AT THE ALP. WE, THEREFORE, REFRAIN FROM GOING INTO THE AS PECT OF THE ALP DETERMINATION, FOR WHICH NO GROUND HAS BEEN RAISED. IN THE ULTIMATE ANALYSIS, THE GROUND RAISED IN THE APPEAL IS NOT ALLOW ED. 16. THE NEXT ISSUE RAISED IN THIS APPEAL THROUGH GROUND NOS. 2 AND 3 IS AGAINST RESTRICTING THE DISALLOWANCE OF TRAVELLING AND CONVEY ANCE TO 5%. THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSE E CLAIMED TRAVELLING EXPENSES AMOUNTING TO RS.8,48,41,601/-, WHICH IN CLUDED A SUM OF RS.38,67,746/- AS REIMBURSEMENT OF TRAVELLING TO EMPLOYEES. ON BEING CALLED UPON TO EXPLAIN THE NATURE OF SUCH REIMBU RSEMENT, THE ASSESSEE SUBMITTED THAT THE EXPENSES INCURRED BY THE EM PLOYEES WERE REIMBURSED BY THE COMPANY. FOLLOWING THE VIEW TAKEN BY HIM FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, THE AO DISA LLOWED RS.38,67,746/-. THE LD. CIT(A) DELETED THE DISALLOWANCE B Y RELYING ON THE ORDER PASSED BY HIM FOR THE EARLIER YEAR. ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 19 17. HAVING HEARD BOTH THE SIDES AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT THE LOWER AUTHORITIES HAV E GONE WITH THEIR RESPECTIVE VIEWS TAKEN FOR THE IMMEDIATELY PRECEDIN G YEAR. THE MATTER CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL FOR THE A.Y. 2008-09. VIDE ITS ORDER (ITA NO.2111/KOL/2013) DATED 05-04- 2017, THE TRIBUNAL DISMISSED THE REVENUES GROUND BY HO LDING THAT THE APPROACH ADOPTED BY THE LD. CIT(A) DID NOT WARRANT IN TERFERENCE. RELEVANT DISCUSSION HAS BEEN MADE IN PARA 16 OF THE ORDE R. AS THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE MUTATIS MUTANDIS SIMILAR TO THOSE OF THE IMMEDIATELY PRECEDING YEAR, RESPECTFULLY FOLLO WING THE PRECEDENT, WE UPHOLD THE IMPUGNED ORDER ON THIS SCOR E. 18. IN THE RESULT, THE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH SEPTEMBER, 2021. SD/- SD/- ( S.S. VISWANETHRA RAVI ) (R.S.SYAL) JUDICIAL MEMBER VIC E PRESIDENT PUNE; DATED : 30 TH SEPTEMBER, 2021 ITA NO.1218/PUN/2017 NALCO WATER INDIA LIMITED 20 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE CIT(A)-22, KOLKATA 3. THE PR.CIT-4, KOLKATA 4. 5. DR, ITAT, C BENCH, PUNE / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 29-09-2021 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 30-09-2021 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *