AVO Carbon India Private Limited Vs DCIT (ITAT Chennai)
Summary: Chennai ITAT allowed AVO Carbon India Private Limited’s appeal for AY 2015-16, holding that a downward transfer-pricing adjustment of ₹3,77,07,304 relating to management service charges paid to its associated enterprise was unjustified. The final assessment order was dated 17 October 2019 and the Tribunal pronounced its decision on 27 June 2024.
The assessee submitted that management services relating to purchases and research and development had been accepted at arm’s length in several earlier years and, for R&D services, in AY 2016-17. It relied on the Chennai Tribunal’s coordinate-bench decision in its own case for AY 2012-13.
The earlier decision recorded that the assessee used entity-level TNMM for interlinked international transactions, whereas the TPO separately tested certain finance and general-management services using a proposed CUP approach and determined their arm’s length price as Nil. The coordinate bench found that agreements, debit notes and correspondence evidenced receipt of services.
The earlier bench also reasoned that a TPO must determine arm’s length price through a prescribed method rather than substitute a subjective view of business necessity. It distinguished Bombardier Transportation India and Gem Plus India, and referred to Flakt (India) Ltd. The Department had accepted comparable management-service payments in earlier years.
Finding the AY 2015-16 dispute materially similar, the Tribunal followed its earlier decision, rejected the ₹3,77,07,304 adjustment and allowed the assessee’s appeal.
Cases Discussed
- AVO Carbon India Private Limited — coordinate-bench order for AY 2012-13 (appeal number not stated in supplied judgment)
- Flakt (India) Ltd. Vs DCIT, ITA No.1032/Mds/2014
- Bombardier Transportation India Pvt. Ltd. Vs DCIT, ITA No.1626/Del/2015
- Gem Plus India Pvt. Ltd. Vs ACIT, ITA No.352/Bang/2009
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the assessee is directed against the order dated 17.10.2019 passed by the Assessing Officer under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 [“Act” in short] challenging the final assessment order in determining and quantifying downward adjustment of ₹.3,77,07,304/- to the value of international transaction relating to the payment of management service charges by the assessee.
2. The only issue emanates for consideration is that the Assessing Officer/DRP/TPO erred in disallowing the payment made towards management services rendered by the Associated Enterprise (AE) in the assessment year 2015-16.
3. The ld. AR Shri S.P. Chidambaram, Advocate submits that the Assessing Officer/TPO failed to take cognizance of the payment made towards purchase related management services which were accepted to be at arm’s length price [ALP] by the TPO for the assessment years 2012-13 and 2013-14. However, the Assessing Officer/TPO failed to take cognizance of the payment made towards research and development related management services which were accepted to be at ALP by the TPO for AY 2011-12, 2012-13 and 2013-14 and also in subsequent assessment year 2016-17. The ld. AR drew our attention to the order of the TPO and argued that on the same issues, the Assessing Officer/TPO accepted the payment made towards management services and no disallowance made thereon. Further, he drew our attention to the order of this Tribunal for AY 2012-13 in assessee’s own case and submits that similar issue basing on identical facts, the Coordinate Bench of this Tribunal deleted the addition made by the Assessing Officer on account of payment made towards management services rendered by the AE.
4. The ld. DR Shri A. Sasikumar, CIT did not dispute the same. On perusal of the said order of the Coordinate Bench of this Tribunal, we find that the issue decided therein are similar to the case in hand. For ready reference, relevant portions are reproduced herein below:
4.1 The material facts are that the assessee being resident corporate assessee is stated to be engaged in manufacturing of carbon brushes. Since the assessee entered into various international transaction with its Associated Enterprises (AE), the same were referred to Ld. Transfer Pricing Officer 1(1), Chennai [TPO] u/s. 92CA(1) of the Act for determination of Arm’s Length Price (ALP). These transactions are detailed in para-4 of Ld. TPO’s order. The assessee, in its Transfer Pricing (TP) study report, aggregated all these transactions and benchmarked the same using entity level Transactional Net Margin Method (TNMM). Since assessee’s margin was stated to be higher than the mean margin of comparable entities, no TP adjustment was proposed by the assessee.
4.2 One of the transactions carried out by the assessee was payment of Rs.392.53 Lacs paid by the assessee to one of its AE i.e. M/s AVO Carbon Holdings, LLC to procure management services. These services include payment of Rs.89.12 Lacs towards finance and general management/ administration services. The services were availed by the assessee under an agreement with its AE. The Ld. TPO proposed to benchmark this transaction separately using Comparable Uncontrolled Price (CUP) method which was opposed by the assessee on the ground that in the absence of comparable data, CUP method could not be applied. Further, these transactions were inter-related and inter-linked and related to manufacturing operations undertaken by the assessee. Therefore, the determination of ALP on TNMM would be most suitable method. However, the same could not convince Ld. TPO. The Ld. TPO also noted that the assessee was required to make payment prior to its receiving of services and the need to avail such service may not arise during the normal course of business of the assessee. Though the other services arising out of same agreement translated into certain benefits to the assessee, however, the assessee could not submit separate evidences as proof of receipt of finance, general management /administration services and therefore, it could not substantiate that the amount paid for these services were commensurate with the services received. Further, the payment of these services reflected substantial increase from Rs.47.81 Lacs in AY 2011-12 to Rs.89.18 Lacs during this year. Also, these services were in the nature of stewardship services. Finally the ALP of this transaction was determined to be Nil and TP adjustment of Rs.89.18 Lacs was proposed which was incorporated by Ld. AO in the draft assessment order.
5. Though the assessee raised objection before Ld. DRP, however, the same could not convince Ld. DRP. The Ld. DRP, vide para-2.6 of the direction, held that the nature of services was part of shareholder’s activity which do not justify any charges to be paid to the recipient. Accordingly, ALP was rightly determined as Nil. Pursuant to these directions, final assessment order was passed by Ld. AO incorporating this adjustment. Aggrieved, the assessee is in further appeal before us.
6. Going by the factual matrix as enumerated in preceding paragraphs, it could be seen that the assessee has availed bundle of services from its AE and made payment pursuant to the terms of the agreement. These payments are recurring in nature and are determined by applying specific allocation keys. However, Ld. TPO, while accepting that all the other services benefitted the assessee, termed the services of finance/general management to be in the nature of stewardship services and alleged that the assessee did not submit any evidence of the receipt of services disregarding the fact that these services were emanating from the same agreement. The rendering of services was duly evidenced by the agreement as well as debit notes issued against the assessee. The copies of email / correspondences to support the receipt of services were duly furnished (43 to 88 of paper book). Another observation of Ld. TPO is that the assessee may not be requiring these services in the normal course of business. The same, in our opinion, is not correct approach since the role of Ld. TPO was limited to determine the ALP of the transactions and not to adjudge the same at the threshold of business needs / requirements of the assessee. Also, though Ld. TPO observed that the transaction was to be benchmarked applying CUP method, however, no effort has been made to determine the ALP of the transaction using CUP method. Simply determining the ALP to be nil on the basis that the services were not required to be availed and not determining ALP without applying any of the prescribed method is not in accordance with statutory mandate. The TP provisions mandate application of any of the prescribed method to arrive at Arm’s Length Price of the international transactions. Our view is duly fortified by the decision of this Tribunal in Flakt (India) Ltd. V/s DCIT (ITA No.1032/Mds/2014) wherein it was held that in the absence of any comparison of the transaction with transaction carried out in uncontrolled market, Ld. TPO could not independently come to conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The estimation of the services rendered and costs of such service was outside the scope of transfer pricing adjustment. The Ld. CIT-DR has referred to the decision of Delhi Tribunal in Bombardier Transportation India Pvt. Ltd. V/s DCIT (ITA No.1626/Del/2015 dated 04-11-2015) which is factually distinguishable since in that case the assessee could not file sufficient documentary evidences and the adjustment was partially confirmed. Similarly, the case of Gem Plus India Pvt. Ltd. V/s ACIT (ITA No.352/Bang/2009 dated 21-10-2010), as referred to by Ld. CIT-DR is factually distinguishable since in that case Ld. TPO has observed that the terms prescribed in the agreement in respect of payment to be made by the assessee company was independent of the nature and volume of services. These are not the findings here. In fact, all the other services availed by the assessee under the agreement has been accepted to be at Arm’s Length Price.
7. Lastly, it is an uncontroverted fact that the assessee has paid for these services in earlier years also which has been accepted by the revenue and this is the first year in which such an adjustment has been proposed. Therefore, the value of impugned transactions, in our considered opinion, could not be taken to be nil in this year.
5. On examination of the relevant portion as reproduced above, we find that the issues raised therein in the AY 2012-13 are similar to the issue raised in the appeal for the year under consideration. The Coordinate Bench discussed the issue in detail, particularly vide para 7 of the order, it was observed that the assessee has paid for the services in the earlier years, which were accepted by the Revenue by holding that the Assessing Officer/DRP/TPO could not be taken as NIL on account of management services charges, which supports the submissions of the ld. AR in accepting the ALP determined by the assessee. Therefore, in view of the facts and circumstances of the case and findings of the Coordinate Bench, we hold that the downward adjustment as made by the Assessing Officer in the final assessment order dated 17.10.2019 passed under section 143(3) r.w.s. 144C(13) of the Act is not justified. Thus, the grounds raised by the assessee are allowed.
6. In the result, the appeal filed by the assessee is allowed.
Order pronounced on 27th June, 2024 at Chennai.
