TP adjustment relating to intra-group services unjustified as benefit derived thereof duly demonstrated

Lord India Private Limited Vs ACIT (ITAT Mumbai)

ITAT Mumbai held that transfer pricing (TP) adjustment relating to intra-group services unjustified as assessee duly demonstrated objective analysis of intragroup services rendered and kind of qualitative and quantitative benefit.

Facts- Assessee is a wholly owned subsidiary of Lord Corporation, USA and is engaged in the manufacture and sale of adhesives for construction, automotive and electronic industries.

In transfer pricing documentation, the transactions of availing of technical services from Lord Asia Pacific Ltd. (LAPL) has been benchmarked by aggregating the same with the international transactions of purchase of raw materials and purchase of finished goods for the purpose of arm’s length analysis.

The assessee has availed intra-group services from its AE, LAPL which functions primarily as a regional headquarters providing intra-group services to nine Lord Group entities in the Asia Pacific region.

The assessee has also provided the basis of allocation keys (i.e. turnover of the LORD group companies availing services from LAPL) based on which costs are allocated to LORD group companies along with annual reports of LORD group companies for details of turnover.

TPO held that assessee was required to prove what were the services rendered by the AE to the assessee, nature of such services and the comparable international transaction of independent parties and if assessee is unable to show the services have been received, ALP has to be taken at Nil. He further observed that assessee was given opportunities to prove the receipt of service and the benefit derived alongwith documentary evidences on the cost incurred by the AE and the cost under each head of services. Assessee claims to have received however, the same were not produced and accordingly, he held that ALP of the transactions will be determined at ‘Nil’ and accordingly, upward adjustment of the entire payment of Rs.1,05,96,650/- was made.

DRP confirmed the TP adjustment. Being aggrieved, the present appeal is filed.

Conclusion- Held that the assessee had clearly established the need and the benefit derived from each and every services and also produced huge documentary evidences for actual rendition of services. Thus, it cannot be held that either there was no rendition of services or there is no benefit derived by the assessee from these services. It is not necessary for the assessee to prove that for each and every benefit except for proving prima facie, what benefit has been derived for carrying out the activities and the need of such services. If these are proved and substantiated by the documentary evidences, then it cannot be held that the entire payment made for receiving such services is to be adjusted holding that transaction should be ‘Nil’. Assessee had also demonstrated objective analysis of each of the Intragroup services rendered and resulting into some kind of qualitative and quantitative benefit. Even the cost allocation i.e. charging method is also appears to be based on proper allocation key which too demonstrated with the actual cost. Accordingly, the entire adjustment which has been made by the ld. TPO/ AO is directed to be deleted.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid appeal has been filed by the assessee against assessment order dated 19/01/2017, passed u/s. 143(3) r.w.s. 144C(13) of the Act in pursuance of directions given by the DRP vide order dated 23/11/2016 for the A.Y.2012-13.

2. In various grounds of appeal, assessee has challenged the transfer pricing adjustment of Rs.1,05,96,650/- on account of availing of technical services from its AE.

3. Brief facts are that Assessee is a wholly owned subsidiary of Lord Corporation, USA and is engaged in the manufacture and sale of adhesives for construction, automotive and electronic industries. It has a sales office in Mumbai and a manufacturing plant in Nashik. It markets around 30 grades of adhesives, of which it manufactures 14 grades in India.

4. In the transfer pricing study report, assessee had stated that its activities undertaken have been categorized as under:-

Manufacturing activities – Purchase of certain intermediate chemical products from its AEs for processing into finished chemical products for sale to end customers in India and Sri Lanka.

Trading activities – Import of finished goods from its AES for repacking into smaller packs and sale in the Indian markets

Services rendered- In the nature of co-ordination activities with respect to the Aviation sector Services rendered are very miniscule as compared to other activities.

5. It has reported following international transactions undertaken with its AE which have been summarized in the following manner:-

6. In transfer pricing documentation, the transactions of availing of technical services from Lord Asia Pacific Ltd. (LAPL) has been benchmarked by aggregating the same with the international transactions of purchase of raw materials and purchase of finished goods for the purpose of arm’s length analysis. It was stated that, since Lord Asia Pacific Limited (‘LAPL’) and the assessee are engaged and doing varying degrees in the business of developing, manufacturing and marketing adhesives and vibration and noise control devices, therefore, the assessee has a continuing need for services in the areas of marketing and sales, human resources, finance, data processing, quality control, engineering, purchasing, business development and related areas. Accordingly, the assessee approached LAPL for availing of such services for smooth functioning of its business activities.

7. The assessee has availed intra-group services from its AE, LAPL which functions primarily as a regional headquarters providing intra-group services to nine Lord Group entities in the Asia Pacific region. For this purpose, it has entered into a service agreement dated 01/06/2008 for availing intra-group services in the following areas –

Production / Corporate Strategy: Corporate strategy functions include those activities that provide guidance to the enterprise on how to organize and control its activities, react on sudden demand changes, and change in regulations. The corporate strategy function of the Asia Pacific region is conducted by LAPL which is responsible for corporate decision and implementation strategies that affect LORD’s regional operations.

• Operations: LAPL oversees the operations for the production and distribution activities undertaken by the LORD group companies operating in Asia Pacific region, LAPL is also responsible for overseeing the quality control function.
• Human resources: LAPL established HR policies hiring strategies, supporting and administering payroll and benefit functions, designing employee retention policies etc. Further, LAPL is also responsible for developing and co-ordinating employee training activities
• Sales and marketing: LAPL perform the marketing function for the Asia Pacific region by setting the strategy for sales growth in the region. LAPL assists LORD Group companies in production of sales proposals, sales plans and sales modeling. Further LAPL conducts appropriate marketing studies and analysis of the results from time to time and provides appropriate guidance to the LORD group companies.
• Finance: LAPL is responsible for corporate reporting and accounting, budgeting as well as credit and collection. LAPL performs finance services including various financial analyses such as product costing margin analysis, internal management financial reporting, accounting, and regional lead and co-ordination for controls and compliance, banking and cash management LAPL also provides business management system services such as procedures and policies for general accounting and budgetary purposes. LORD group companies in the Asia Pacific region have local finance employees engaged in the management of billing and ensure corporate finance policies are properly followed at the local level.
• Management Information Systems (IT services): LAPL performs IT services, including a broad range of IT support for both the infrastructure and software applications used by LORD group companies operating in Asia Pacific region in their day-to-day conduct of business. These support services include enterprise resource planning, network operations, server operations, as well as the operation of management information systems.
• Legal: LAPL is responsible for providing enforcements and opinions and other legal services to LORD group companies operating in Asia Pacific. In performing the legal services, LORD Corporation, USA’s legal department is responsible for coordinating, managing and implementing worldwide legal strategies/or assisting LAP with legal matters that might arise, including enforcement in the USA which impacts the various foreign affiliates Because LORD APAC does not directly contract third party counsel within the Asia Pacific region, LORD Corporation’s legal department is contacted for assistance.

8. It has been stated that LAPL is engaged into similar agreement for provision of services with the various other AEs. The details of which have also been provided in the paper book. Under the said agreement LAPL aggregates cost on monthly basis and the share of costs of each group company shall be calculated in the following way:-

• All the direct and indirect costs incurred in rendering the services shall be identified, including all-costs of personnel travel and depreciation of equipment, all expenses paid to third parties and overhead expenses.
• On the aggregated cost pool, a mark-up of 4% shall be added. The share of costs shall be allocated to the group company by multiplying the total service cost by a fraction the numerator of which shall be the net sales value of the group company itself and the denominator of which shall be aggregate net sales.

9. The assessee has also provided the basis of allocation keys (i.e., turnover of the LORD group companies availing services from LAPL) based on which costs are allocated to LORD group companies along with annual reports of LORD group companies for details of turnover. Further, the expense wise break-up of the services availed is submitted vide letter dated 09/11/2016.

10. The ld. TPO after referring to certain paragraphs of OECD guidelines and certain judgments of the Tribunal held that assessee was required to prove what were the services rendered by the AE to the assessee, nature of such services and the comparable international transaction of independent parties and if assessee is unable to show the services have been received, ALP has to be taken at Nil. He further observed that assessee was given opportunities to prove the receipt of service and the benefit derived alongwith documentary evidences on the cost incurred by the AE and the cost under each head of services. Assessee claims to have received however, the same were not produced and accordingly, he held that ALP of the transactions will be determined at ‘Nil’ and accordingly, upward adjustment of the entire payment of Rs.1,05,96,650/- was made.

11. Before the DRP assessee filed various additional evidences pertaining to the international transactions of availing of technical services vide letter dated 12/09/2016 and the list of entire additional evidences have also been placed before us from pages 140-674 of the paper book. The DRP remanded the matter to the ld. TPO for examination of the additional evidences and in pursuance thereof, ld. TPO had submitted this remand report on 11/11/2016. It has been stated that assessee prepared the rejoinder to the remand report on 21/12/2016 and to file it, however the same could not be filed physically due to circumstances beyond the control of the assessee. The DRP upheld the entire transfer pricing adjustment made by the ld. TPO. Assessee then filed rectification application to consider the rejoinder submission filed by the assessee; however, the same too has been rejected by the ld. DRP.

12. Before us, ld. Counsel for the assessee has given detailed summary of benefit received for the services availed and also drew our attention to the documentary evidences which was submitted before the authorities below before the DRP during the remand proceedings. The details of these evidences are as under:-

13. From the perusal of the records, it is seen that the ld. TPO in the remand report has commented in the documentation maintained for various heads of expenses and commented that assessee had failed to produce the following documents:-

• Amount paid to AE for availing of services
• Documentary evidence to support the services
• The commercial benefit received by availing of the service
• Whether the assessee would have paid to the third party any amount for availing above services
• How much the comparable independent services recipients under comparable circumstances would be willing to pay for that service.
• Whether any economic and commercial benefit is sufficiently direct and substantial
• Whether the arm’s length entity is prepared to pay for such services in comparable circumstances.
• Whether the entity availing the services can reasonably perform the services by itself.
• Whether any expenditure is in the nature of stewardship or shareholder activity

14. Against such comment, assessee had tried to file rejoinder before the ld. DRP which has not been entertained and therefore, the same have been filed before us. In sum and substance, the summary of benefit received by the assessee vis-à-vis various services provided have been elaborated before us in the following manner:-

15. In so far as the issue of cost allocation, the ld. Counsel submitted that assessee during the remand proceedings before the ld. TPO had submitted the following documents:-

15.1 Apart from that, assessee also submitted copy of inter­company invoices in connection with the availing of services alongwith the working for computation of intra-group services on a monthly basis. Thus, he submitted that in view of these documentary evidences, assessee has demonstrated not only the benefit test but also need and rendition test and accordingly, no adjustment should be made on account these IGS.

16. On the other hand, ld. DR strongly relied upon the comments of the ld. TPO in the remand report and the various observations given by the ld. DRP and submitted that assessee could not justify the payment made for availing of services from its AE and therefore, adjustment has rightly been made by the ld. TPO.

17. We have heard both the parties at length and also perused the relevant material referred to before us at the time of hearing. What is required to be seen while analyzing the arm’s length analysis of intra-group services that it needs to satisfy prima facie following tests, broadly: i) need test; ii) rendition test; iii) benefit test; iv) duplicative services test; and v) shareholders activity test. In the transfer pricing study report assessee has given not only given the detailed business overview and the activities carried out by the assessee but also what were the services which were required for carrying out those activities. First of all, the services availed by the assessee is purely for the purpose of business as it is seen from the records and the nature of services rendered and they are not in the nature of any kind of shareholder’s activities. There is also no comment or any material brought on record that there is any kind of duplicative services, i.e., the assessee is carrying out similar services from its own employees and same activity and services are being rendered by the AE. In so far as allocation of services charged by the AE, there are enough documentary evidences which were filed to substantiate the cost allocation methodology adopted by the LAPL which included the details of the cost incurred by it and the amount allocated to the assessee in support of the financial statements of LAPL was filed alongwith the work of basis of allocation which was taken on the basis of monthly sales for apportionment of cost incurred by the LAPL among various Lord group entities. Apart from that, financial statements of various Lord Group entities to whom cost has been allocated by LAPL have also been filed on sample basis.

18. If we analyse the various services which have been provided, the details of which have been incorporated in the foregoing paragraphs, we find that under various heads, assessee had categorically stated how the benefits have been derived which are being duly supported by documentary evidences. Before us a huge list of descriptive of documentary evidence has been highlighted which are based on documents submitted before us in the paper book which for the sake of bulkiness are not been incorporated.

19. In sum and substance, it is seen that the assessee had clearly established the need and the benefit derived from each and every services and also produced huge documentary evidences for actual rendition of services. Thus, it cannot be held that either there was no rendition of services or there is no benefit derived by the assessee from these services. It is not necessary for the assessee to prove that for each and every benefit except for proving prima facie, what benefit has been derived for carrying out the activities and the need of such services. If these are proved and substantiated by the documentary evidences, then it cannot be held that the entire payment made for receiving such services is to be adjusted holding that transaction should be ‘Nil’. Assessee had also demonstrated objective analysis of each of the Intragroup services rendered and resulting into some kind of qualitative and quantitative benefit. Even the cost allocation i.e. charging method is also appears to be based on proper allocation key which too demonstrated with the actual cost. Accordingly, the entire adjustment which has been made by the ld. TPO/ AO is directed to be deleted.

20. In the result, appeal of the assessee is allowed.

Order pronounced on 21^st August, 2023.