Adjustment in the arm’s length price on international transaction to avail intra-group services of associated enterprises

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH: A: NEW DELHI

BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER

AND

SHRI A.N. PAHUJA, ACCOUNTANT MEMBER

ITA No.5730/Del/2011

Assessment Year: 2007-08

Bentley Systems India Pvt. Ltd.,

203, 2nd Floor,

Okhla Industrial Estate,

Phase III,

New Delhi.

PAN: AABCB5645E

(Appellant)

Vs.

ACIT,

Circle-2(1),

New Delhi.

 (Respondent)

Assessee by: Shri Vijay Iyer, CA

Revenue by: Mrs. Anusha Khurana, Sr. DR

ORDER

PER A.D. JAIN, JUDICIAL MEMBER

This is an appeal filed by the assessee for Assessment Year 2007-08, taking the following grounds:-

“That on the facts and circumstances of the case and in law,

1. the Assessing Officer (‘A.O.’)/Dispute Resolution Panel (‘DRP’) has erred in making an addition of Rs.34,780,481/- to the total income of the Appellant on account of adjustment in the arm’s length price of the international transaction pertaining to availing of intra-group services by the Appellant from its associated enterprises.

2. the TPO/A.O. has erred by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962 (‘the

Rules’)

3. the Transfer Pricing Officer (‘TPO’)/A.O. has erred in rejecting the combined transaction approach undertaken by the Appellant and in the process wrongly segregated the international transaction pertaining to the availing of intra-group services from the international transaction pertaining to distribution of software products.

4. the TPO/A.O. has erred, in law and in fact, in determining the Comparable Uncontrolled Price method as the most appropriate method to benchmark the international transaction pertaining to availing of intra-group services.

5. the TPO/A.O. has erred by assuming that ‘no benefit’ has been conferred on the Appellant from availing of intra-group services from its associated enterprises.”

2. Addressing ground Nos. 4 and 5 first, the ld. counsel for the assessee has contended that apropos the assessee’s objection against the action of the TPO in determining the Comparable Uncontrolled Price or CUP method as the most appropriate method to benchmark the international transaction pertaining to availing of intra-group services and assuming that no benefit has been conferred on the assessee from availing of intra-group services from its AE, the ld. DRP has gone wrong in observing that in the absence of adequate data, considering the facts and circumstances of the case, the position put forth by the TPO was being accepted, despite the fact that complete data was provided by the assessee, which has not been taken into consideration by the ld. DRP and so, the matter required to be sent back to the ld. DRP to re-decide it again on taking into consideration the date so provided by the assessee.

3. The Ld. DR, on the other hand, has placed strong reliance on the DRP’s order in this regard.

4. In this regard, it is seen that as per the TPO’s order, the assessee remained unable to prove the benefits that it had derived from the services purportedly provided to it by its AE; that no independent entity would pay for such services without any cost benefit analysis; that the assessee did not furnish any evidence as to the cost benefit analysis with regard to independent suppliers; that no third party would like to avail services without any cost benefit analysis with regard to AE versus independent supplier; that no contemporaneous documentation was produced by the assessee to support its claim for the receipt of management services; and that so, the benchmarking done by the assessee was not in accordance with the law, due to which, the CUP method was required to be applied.

5. The assessee, on the other hand, maintained before the DRP that the benefit derived by it from availing of management services outweigh the cost incurred in receiving such services; that if the similar services were availed by the assessee from a third party, the cost would have been much higher than that actually incurred by the assessee in availing such services from its AE; that there is no legal requirement for a person or company to necessarily undertake a cost benefit analysis and absence of such analysis should not lead to a preconceived notion that no benefit has been received; that determination of ALP without using methods prescribed under the Act is against the law; that the details of benefits derived by the assessee from availing of management services from its AE were also duly provided by the assessee before the TPO; and that therefore, the ALP of the international transaction involving availing of management services should not be considered as ‘nil’, based simply on an assumption that an independent person would not be making such a payment in uncontrolled services.

6. The data provided by the assessee to the TPO, it is seen, is as per the assessee’s written submissions dated 27.04.2010 [copy at pages 241-243 of the assessee’s paper book (‘APB’ for short)] and the  assessee’s written submissions dated 13.05.2010 (copy at ‘APB’ 244-247), filed before the TPO, is as follows:-

“27 April 2010

Office of the Additional Commissioner of Income tax

Transfer Pricing Officer – I(1)

Room No. 315, 3rd Floor

Drum Shaped Building

Indraprastha Estate,

New Delhi - 110001

For the attention of Mr. Ajit Kumar Jain

Dear Sir,

Re: Bentley Systems India Private Limited (“Bentley India” or “the Assessee”)

Notice u/s 92CA (2) of the Income Tax Act, 1961 (“Act”)

Assessment Year (“AY”) 2007-08

We refer to our previous hearing and discussion held on 16 March 2010 in connection with the ongoing transfer pricing assessment for AY 2007-08 of our above mentioned client, wherein you had requested to furnish information before your goodself. In this regard, on behalf and under instruction from our client, we wish to submit following information for your favourable consideration:

1. Nature of corporate services availed

During financial year (“FY”) 2006-07, Bentley India received services from its associated enterprises (“AEs”). The services can be categorized under the following broad heads:

• Corporate marketing;

• Management;

• Human resources (“HR”);

• Legal; and

• Accounting/ Finance.

Corporate marketing

Bentley India benefits from corporate marketing services provided by its AEs. These services pertain to analyzing market opportunities for products and positioning them appropriately; organizing and carrying out global marketing campaigns; assuring leads from marketing activities flow smoothly to worldwide sales group; providing content and design for company web sites; preparing and publishing corporate background, PowerPoint presentations, and annual report; developing solution messaging and materials; publishing company newsletter and magazine; planning and conducting user conferences; design and placing print and web advertisements; issuing press releases; maintaining contact with media; setting visual branding standards; engaging consultants as necessary to assist with provision of such marketing services. These services help Bentley India in marketing its products in a more effective manner. Management

The management services provided to Bentley India include advise on overall strategic management direction; advice, analysis and modeling with respect to strategic direction; advice on transfer pricing documentation; engaging consultants, including economists, as necessary, assisting with the provision of such other services; advise on development and reporting of annual budgets and forecasting; gathering and furnishing information relating to worldwide economic and market trends; coordinating regional internal audit activities and monitor audit results; engaging consultants as necessary to assist with provision of such management and financial guidance.

HR

The HR services provided to Bentley India include recruitment (Hiring and/or dismissal of employees through Bentley’s PAF System); orientation training; maintenance of training records & certifications; personnel file maintenance; engaging of subcontractors; compensation & benefits management; service award administration; relocations, etc.

Legal

The legal services provided to Bentley India include assistance in litigation and dispute resolution management including disputes with customers, resellers, and employees; negotiation of commercial sales and project services contracts with customers; assistance on company secretarial and compliance matters; negotiation of reseller agreements and other partner and vertical relationship contracts; creation of standard default sales and services contracts; work on anti-piracy matters; advice on export control regulations and other regulatory and policy issues; and assisting with trademark or other intellectual property registrations or challenges.

Accounting/Finance

Bentley India receives accounting support on an ongoing basis in all matters relating to day to day procedures including, when necessary, the posting of journal entries into SAP. Further, specific accounting assistance was also received by Bentley India in the determination requirements for reporting of taxes on sales invoices in India in order to correctly implement it in SAP and enable Bentley India move towards using SAP as the exclusive accounting system in India in line with Bentley’s global implementation of SAP.

The main benefit arising from the use of SAP was to bring cost efficiencies to the accounting procedures by simplifying procedures and tightening controls.

The implementation of a uniform accounting system for Bentley India has resulted in reduction of any ‘rework’ cost. Bentley India also receives regular assistance in review of accounting control procedures and timely financial reporting for both management and statutory purposes.

2. Availing of corporate services from third parties We wish to submit that Bentley India has not availed same or similar services from third parties.

We hope you would find the above in order and to your satisfaction. The Assessee is in the process of preparing a detailed response to your remaining queries.

Further, in case your goodself proposes to determine the arm’s length price for the international transactions of Bentley India which is different from the price determined by Bentley India as the arm’s length price, we request your goodself to provide us with an opportunity to make further submissions in support of the determination of the arm’s length price by Assessee.

Yours faithfully,

Sd/-

Authorised representative”

 “13 May 2010

Office of the Additional Commissioner of Income tax

Transfer Pricing Officer – I(1)

Room No. 315, 3rd Floor

Drum Shaped Building

Indraprastha Estate,

New Delhi - 110001

For the attention of Mr. Ajit Kumar Jain

Dear Sir,

Re: Bentley Systems India Private Limited (“Bentley India” or “the Assessee”)

Notice u/s 92CA(2) of the Income Tax Act, 1961 (“Act”)

Assessment Year (“AY”) 2007-08

We refer to our previous discussions in connection with the ongoing transfer pricing assessment for AY 2007-08 of our above mentioned client, wherein you had requested to furnish information before your goodself. In this regard, on behalf and under instruction from our client, we wish to submit the following information for your favourable consideration:

3. Supporting document for corporate service allocation During financial year (“FY”) 2006-07, Bentley India received various corporate services from its associated enterprises (“AEs”). The services can be categorized under the following broad heads:

• Corporate marketing;

• Management;

• Human resources (“HR”);

• Legal; and

• Accounting/ Finance.

These services benefit Bentley India and the same has been explained in the submission dated 27 April 2010 submitted with your office.

Kindly note that the transaction pertaining to availing of corporate services is closely linked and complementary to the distribution of software products activity of Bentley India. All international transactions related to distribution of software products are benchmarked using the Transactional Net Margin Method (“TNMM”) and the same amply demonstrates the arm’s length nature of Bentley India’s international transaction pertaining to availing of corporate services.

Further, corporate service charges have been allocated to Bentley India based on revenue earned by Bentley India and the global revenue of the Bentley group and is done based on the arm’s length criteria and principle.

During FY 2006-07, Bentley India has paid USD 826,299.86 as corporate service charge to its AE. In this regard, please find attached as Annexure 1, a letter from Bentley Systems Inc. evidencing computation of the cost allocation charge.

4. Waiver of corporate charges

With respect to waiver of corporate charges, please note that the cost relating to wavier of corporate charges is borne by Bentley Systems Inc. Also refer Annexure 1, a letter from Bentley Systems Inc. clarifying that the waiver cost is borne by Bentley Systems Inc.

We hope you would find the above in order and to your satisfaction. We request you to take the above on record. We shall be pleased to provide you with any further information/clarification that you may require in this regard. Further, in case your goodself proposes to determine the arm’s length price for the international transactions of Bentley India which is different from the price determined by Bentley India as the arm’s length price, we request your goodself to provide us with an opportunity to make further submissions in support of the determination of the arm’s length price by Assessee.

Yours faithfully,

Sd/-

Authorised representative

Encl: a/a

5th May, 2010

TO WHOMSOEVER IT MAY CONCERN

We hereby confirm the following in respect of the corporate charges slevied by Bentley Systems Inc. to Bentley Systems India Private Limited (“Bentley India”) pursuant to agreement in accordance with which Bentley India has availed corporate services during the period 1 April 2006 to 31 March 2007.

_ Services rendered to Bentley India are in the nature of corporate marketing, management, human resources, legal and accounting/finance.

_ Total amount allocated to Bentley India during the period 1 April 2006 to 31st March 2007 was USD 826,299.86. A detailed computation for this allocation is enclosed as Annexure A.

_ The amount allocated to Bentley India above represents and is intended to recover only actual costs incurred by Bentley Systems Inc. in this connection and does not include any profit element. For Bentley Systems Inc.

Sd/-

David Hollister

Chief Financial Officer

Annexure A

Computation of corporate service charge

The corporate service charges have been allocated to Bentley Systems India Private Limited (“Bentley India”) based on revenue earned by Bentley India and the global revenue of Bentley group. The detailed computation of corporate service charges allocated to Bentley India is as follows:

7. A perusal of the above contents of the written submissions filed by the assessee before the TPO shows that the data was provided by the assessee before the TPO concerning the international transaction pertaining to availing of intra group services by the assessee from its associate enterprises. As to how this data is inadequate , has not been made clear by the ld. DRP and it has merely been observed that considering the facts and circumstances of the case the position put forth by the TPO was being accepted in the absence of adequate data. The assessee’s objections in this regard were, as such, rejected without passing a speaking order.

8. In the aforementioned circumstances, we deem it proper to remit this matter to the file of the ld. DRP, to be decided afresh in accordance with law on considering the aforesaid data provided by the assessee before the TPO.

9. The decision on ground Nos.1 to 3 raised herein would depend directly on the decision by the DRP on ground Nos.4 and 5.

10. In the result, for statistical purposes, the appeal filed by the assessee is allowed.

The order pronounced in the open court on 05.09.2012.

                                                         Sd/-                           Sd/-

                                               [A.N. PAHUJA]         [A.D. JAIN]

                                 ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated, 05.09.2012.

dk

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT(A)

5. DR, ITAT

TRUE COPY

By Order,

Deputy Registrar,

ITAT, Delhi Benches