EUROTHERM INDIA PVT. LTD., CHENNAI V. ACIT (OSD), CORPORATE RANGE-2, CHENNAI

ITTPA 21/CHNY/2020

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The case involves M/s. Eurotherm India Pvt. Ltd., which appealed against the orders of the Ld. Commissioner of Income Tax (Appeals)-5, Chennai, and the Ld. Transfer Pricing Officer (TPO). The dispute centered on the transfer pricing adjustments made for IT support and management services paid by the assessee to its Associated Enterprises (AE). The TPO initially proposed an adjustment of Rs.61.53 Lacs, which was later enhanced by the CIT(A) to Rs.100 Lacs, categorizing the assessee as a service provider. The Tribunal, however, found that the assessee had been incorrectly classified and that the services were received, not provided, leading to the deletion of the adjustments.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 134064 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 29-11-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 16-11-2022
• Assessment Year: 2012-2013
• Appeal Filed On: 31-08-2020
• Other Referred Cases: M/s Diab Core Materials Pvt. Ltd. vs. DCIT, Siemens Gamesa Renewable Power (P.) Ltd.
• Laws Referred To: Income Tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 92C

Judgement Text

आयकर अपीलीय अिधकरण ’डी’ ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI माननीय ,ी वी. द ु गा2 राव, ाियक सद4 एवं माननीय ,ी मनोज कु मार अ9वाल ,लेखा सद4 के सम;। BEFORE HON’BLE SHRI V. DURGA RAO, JUDICIAL MEMBER AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपील सं./ IT (T P )A No .2 1 / Ch n y/2 0 2 0 (िनधा2रण वष2 / A sse s s m e n t Ye a r: 2 0 1 2 -1 3 ) M/s. Eurotherm India Pvt. Ltd. SP Plot No.16-19 & 20 A Ground, Taramani Tech Park, Thiru Vika Industrial Estate Inner Ring Road, Guindy, Chennai-600 032. बनाम/ V s. The ACIT (OSD), Corporate Range -2 Chennai-600 034. थायीलेखासं./जीआइआरसं./PAN/GIR No. AAAC E -6 4 5 8 -R (अपीलाथ /Appellant) : ( !थ / Respondent) अपीलाथ कीओरसे/ Appellant by : Shri Sandeep Bagmar (Advocate)- Ld. AR !थ कीओरसे/Respondent by : Dr. S. Palanikumar -Ld. CIT सुनवाईकीतारीख/ Date of Hearing : 17-11-2022 घोषणाकीतारीख / Date of Pronouncement : 30-11-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2012-13 arises out of the order passed by Ld. Commissioner of Income Tax (Appeals)-5, Chennai [CIT(A)] dated 11-03-2020 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143(3) r.w.s 144C(3) of the Act on 22-04-2016. Since the assessee carried out 2 IT(TP)A No.21/Chny/2020 certain international transactions with its Associated Enterprises (AE), the same were referred to Ld.TPO for determination of Arm’s Length Price (ALP). The Ld. TPO passed an order u/s 92CA(3) on 29.01.2016 proposing an adjustment of Rs.61.53 Lacs on account of IT support services and management services paid by the assessee to its AE. Upon further appeal, Ld. CIT(A) held that the assessee should have, in fact, received such charges and accordingly, made an enhancement against which the assessee is in further appeal before us. The concise grounds raised by the assessee read as under: - Grounds relating to Transfer Pricing Adjustments INR 1,61,53,268 On the facts and in the circumstances of the case and in law, the Ld. TPO, Ld. AO and the Ld. CIT(A): IT Support and Management Services 2.1. Erred in law and on facts in disregarding the transfer pricing analysis conducted by the Appellant for IT Support Services and Management Service Fees, under the Transactional Net Margin Method ('TNMM') without providing cogent reasons and determining the Arm's Length Price ('ALP') as 'Nil' as against INR 47,29,394 and INR 14,23,874 respectively. 2.2. Erred in not applying any of the prescribed transfer pricing methods in accordance with section 92C of the Income Tax Act, 1961 ('the Act') read with Rule l0B of the Income Tax Rules, 1962 ('the Rules'). Erred in law and on facts in questioning the commercial expediency of the taxpayer and disregarding the submissions made by the Appellant establishing the need-benefit and proof of receipt of services. Alleged Service Income 2.3. Erred in not appreciating the fact that no services were provided by the Appellant to its Group entities and inappropriately applying the CUP method and making an ad hoc transfer pricing adjustment of INR 1 Crore on account of alleged international transaction of provision of services by Appellant to its Group. 2.4. Erroneously recharacterizing the Appellant as 'Service Provider', and not considering the signed addendum to the Centralized Business Services Agreement ('the agreement') submitted by the Appellant rectifying the inadvertent error in nomenclature and failed to appreciate that there is no bar in law that estops the Appellant from rectifying an inadvertent error in the agreement. 2.5. Erred in not providing any comparable uncontrolled transaction or the basis of arriving at the said ad hoc transfer pricing adjustment, thereby violating the provision of Chapter X of the Act. Prayer The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto.” 3 IT(TP)A No.21/Chny/2020 2. The Registry has noted delay of 114 days in the appeal, the condonation of which has been sought by the assessee. Considering the fact that impugned order was passed during lock down period arising out of Covid-19 Pandemic, we condone the delay and admit the appeal for adjudication on merits. The assessee being resident corporate assessee is stated to be wholly owned subsidiary of Invensys group and is engaged in the business of assembly / sale / processing of factory automation equipment and caters primarily to manufacturing and process industries. The assessee operates under control of Invensys group. 3. The Ld. AR assailed the determination of Arm’s Length Price (ALP) as Nil by Ld. TPO and also assailed the findings of Ld. CIT(A) that the assessee was service provider and not a service recipient. To support the same, our attention has been drawn to various documents etc. and reliance has been placed on certain judicial decisions. The copies of the same have been placed on record. The Ld. CIT-DR, on the other hand, controverted the arguments of Ld. AR and submitted that the assessee failed to demonstrate procurement of services from its AE. The basis of payment as well as the services for which payment was made was not explained. Having heard rival submissions, the appeal is disposed-off as under. Proceedings before Ld. TPO 4.1 The assessee carried out transactions of purchase of goods, provision of services and receipt of services aggregating to Rs.1715.90 Lacs. The same were benchmarked using entity level Transactional Net Margin Method (TNMM) method. The Ld. TPO arrived at assessee’s Profit Level Indicator (PLI) at 6.20% as against PLI of 7.13% reflected by 4 IT(TP)A No.21/Chny/2020 7 comparable entities and therefore, held that no further adjustment was required. 4.2 However, Ld. TPO proceeded to benchmark the IT support services of Rs.47.29 Lacs as paid by the assessee to its AE namely M/s Eurotherm Ltd. (UK) and management services charges for Rs.14.21 Lacs as paid to another entity namely BTR Industries Ltd. The assessee was issued a show cause notice with respect to the same wherein Ld. TPO proposed to determine the Arm’s Length Price (ALP) of the same as Nil. 4.3 It transpired that the assessee made payment of Rs.47.29 Lacs for IT support services and payment of Rs.14.23 Lacs for management services pursuant to contractual terms. The IT support services were primarily related to cost of third-party licenses / softwares, ERP maintenance and database management etc. These costs were stated to be incurred by the AEs and subsequently charged at actuals without any mark up on the basis of number of users in India. The nature of services received by the assessee was also elaborated. 4.4 Similarly, the management services were stated to be relating to external resources deployed for providing finance support services such as accounts receivables and payments management, general ledger accounting and MIS. The need and benefit of services was also demonstrated in the reply. The services charges were stated to be paid on cost-to-cost basis. Since the transactions were benchmarked using entity level TNMM, no further adjustments were to be made. Accordingly, the assessee assailed the determination of ALP as Nil. 4.5 However, rejecting the same, Ld. AO held that the assessee did not demonstrate the need for receipt of these services and the assessee did 5 IT(TP)A No.21/Chny/2020 not comment on the allocation drivers and the reasonableness of the same. The comparable information with regard to transactions was not identifiable. Therefore, ALP was determined at Nil and adjustment of Rs.61.53 was proposed in the order. 4.6 The said adjustment was incorporated in draft assessment order dated 22.03.2016 and the assessee did not prefer objections before Ld. DRP. Accordingly, assessment order was passed on 22.04.2016 which was subjected to further appeal before Ld. CIT(A). First Appellate proceedings 5. During appellate proceedings, the assessee furnished a copy of Centralized Business Services Agreement dated 20.01.2010 pursuant to which the impugned payments were made. The Ld. CIT(A) held that as per the terms of the agreement, no services were to be received by the assessee from other group companies but the assessee was to receive money for the services rendered under the agreement. The assessee did not disclose any revenue against rendering of such services and accordingly, Ld. CIT(A) estimated income of Rs.100 Lacs against the same. The assessee controverted the observations and submitted that there was inadvertent typographic error wherein instead of mentioning the assessee as service recipient, it was included in the list of service providers. The assessee has not rendered any services to its AE and the error in the agreement was corrected by way of an addendum duly signed by both the parties. The copy of the addendum was also furnished. However, rejecting the same, the Ld. CIT (A) upheld the action of Ld. TPO in determining the ALP of the transactions as Nil and made further estimated adjustment of Rs.100 Lacs under CUP method. Aggrieved, the assessee is in further appeal before us. 6 IT(TP)A No.21/Chny/2020 Our findings and Adjudication 6. From the facts, it emerges that the assessee has carried out several transactions of purchase of goods, provision of services and receipt of services aggregating to Rs.1715.90 Lacs. All these transactions have been benchmarked using entity level Transactional Net Margin Method (TNMM) method which is broad based comparability analysis. It could be seen that the assessee’s PLI has been determined as 6.20% which is similar to PLI of 7.13% reflected by comparable entities. Even if the ALP of impugned transactions is determined as Nil, the assessee’s overall PLI would still be in the range of + 5% and therefore, all these transactions, on aggregate basis would still be in the acceptable range and no further adjustment would be warranted. 7. Proceeding further, it could be seen that the impugned payment for IT and management support charges has been paid by the assessee pursuant to contractual agreement which had inadvertent typographical error which stood rectified by way of addendum, the copy of which has already been furnished by the assessee during appellate proceedings. The same would dispel the concern of Ld. CIT(A) that the assessee was a service provider and not a service recipient. The same is also fortified by the fact that the assessee has paid such charges during last 10 years starting from AY 2010-11 which would show that the assessee was only a service recipient and not a service provider. The details of such payments have been placed before us vide submissions dated 18.11.2022. Therefore, there is no justification of enhancement of adjustment by Ld. CIT(A). 7 IT(TP)A No.21/Chny/2020 8. For the same very reasons, determination of ALP as Nil is also not justified. The payments have been made pursuant to contractual terms and the same are being incurred by the assessee since AY 2010-11. The opinion of lower authorities that the services should be need based or the same should bring benefits to the assessee has no logic since the requirement of the services has to be assessed from assessee’s point of view. The basis of allocation of such expenditure has already been furnished before lower authorities as well as before us. Therefore, the ALP of the transactions could not be determined as Nil on mere presumptions. The decision of Chennai Tribunal in M/s Diab Core Materials Pvt. Ltd. vs. DCIT (ITA No.2176/Chny/2017 order dated 18.05.2022) as well as in Siemens Gamesa Renewable Power (P.) Ltd. (92 Taxmann.com 330) support the case of the assessee. Accordingly, we delete the impugned adjustment of Rs.161.53 Lacs and allow the corresponding grounds raised by the assessee. 9. The appeal stand allowed in terms of our above order. Order pronounced on 30 th November, 2022. Sd/- (V. DURGA RAO) ाियक सद4 /JUDICIAL MEMBER Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद4 / ACCOUNTANT MEMBER चे3ई / Chennai; िदनांक / Dated : 30-11-2022 EDN/- आदेश की Vितिलिप अ 9ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकर आयु (अपील)/CIT(A) 4. आयकर आयु /CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF