Case Law Details
Brief of the case:
1. The ITAT Delhi in the above cited case held that the need, rendition and benefit test for services availed by the assessee from associated enterprises should be applied having regard to the assessee’s business and not in a generic manner. TPO should have given due thought to the requirements, benefits and manner of rendition of services by AEs before jumping to the conclusion that services not provided and no benefit accrued to assessee.
2. Further, the department cannot guide question the wisdom of assessee in availing services for its business.
Facts of the case:
1. The assessee filed return of income declaring a total income of Rs. 1,00,22,48,054/- on 30.11.2006. This return of income was revised on 28.03.2008 to Rs.99,70,75,767/-. Assessee was engaged in the business of consumer and automobile finance, had entered into the international transaction with its associated enterprise (AE). Reference was made to Transfer Pricing Officer (TPO).
2. Among other transactions with AEs assessee incurred Rs. 70,322,844/- , Rs. 30,068,780/- and Rs. 111,659,90 for consulting , administrative and IT services received from its AEs. –GECC, GECF Inc., GECT. Such expenditure aggregating to Rs 21,20,48,533/- was added to the total income by TPO.
3. TPO added the same holding that :
i) Assessee could not establish whether such services were needed by the assessee (i.e. Need Test)
ii) Whether such services are rendered to the assessed by AE (i.e. Rendition test)
iii) Whether the assessee has derived any economic or commercial benefit from these services (i.e. Benefit test)
iv) These services are duplicative in nature
v) There is only incidental benefit from these services.
4. DRP also accepted the view taken by TPO except that the services werenot rendered by AE and not received by assessee and confirmed addition. Aggrieved assessee is in appeal before ITAT.
Held by ITAT Delhi:
1. Court observed that in an international transaction where two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to be converted by any such enterprise shall be determined having regard to the arm’s length price of such benefit, service or facility.
2. Regarding the need test i.e. requirement of services of AE , assessee has vast business operations and for managing operations of such a business effectively, specialized and experienced services are required across all the departments like HR, legal, Finance, Risk compliance, IT, etc. Therefore, for running the business expeditiously, various services from the AEs in the nature of consultancy, administrative and IT are required by the assessee.
3. Assessee explained in detailed why the various services like Finance, HR, IT, Communication, Sales etc. are required by it. On appreciation of the same facts it is apparent that looking to the size of the business of the assessee and also for the continuous growth assessee has justified that such services are required. It is pertinent to note that requirement of the services should be judged from the viewpoint of the appellant as a businessman.Therefore in this regard we are of the view that assessee has substantiated that these services are required by it.
4. For the purposes of substantiating the services rendered by the AE it has submitted the details of all the service rendered by the AE to the assessee as in the paper book same are placed on sample basis. Therefore, assessee has placed substantial material evidencing the receipt of the services. Assessee has furnished the details of various policies, procedures and control guidelines issued by the AE for the smooth conduct of business processes and for effective decision-making.
5. Further, rendering of services must be seen from the view point of the assessee and assessee cannot be asked to keep and maintain evidences of services rendered by AE higher than which is expected from a businessman receiving services from an unrelated provider.In view of above we are of the view that assessee has justified the receipt of services and satisfied the rendition test.
6. Regarding the benefit, the assessee submitted a detailed benefit analysis with respect toeach services. The TPO does not have right to question the wisdom of the assessee and he is not required to see whether the assessee is getting direct, tangible, substantial benefit from the services .
7. Therefore it is apparent that assessee cannot be asked to demonstrate it with 100 % mechanical precision. If assessee has expected potential benefits out of his business prudence at the time of receipt of services which he can demonstrate from commercial point of view, according to us that satisfies the benefit test.
8. Since the case of the assessee satisfy all tests viz need , rendition and benefit tests the amount paid for administrative , consulting and IT services received from AE cannot be disallowed under transfer pricing provisions.
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