TaxTMI 
TaxTMI 
2016 (8) TMI 950
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....tions issued by Dispute Resolution Panel -I New Delhi ('here-in-after referred to as "DRP'). The appeal is preferred on the following grounds: On the facts and in the circumstances of the case and in law, the learned AO based on directions of DRP: General 1. erred in assessing the total income at Rs. 153,342,630/- as against total income of Rs. 124,680,920/- computed by the Appellant. 2. The AO, based on the order passed by the Additional Commissioner of Income Tax, Transfer Pricing Officer-I(3) ('here-in-after referred to as 'learned TPO') under section 92CA(3) of the Income Tax Act, 1961 ("the Act"), erred on the facts and circumstances of the case and in law in making adjustment of Rs. 34,967,980 to the total income of the appellant (before providing credit of Rs. 6,306,274, pursuant to DRP's directions, on account of the professional consultancy charges and management fees suo-moto disallowed by the Appellant in the computation of income) under section 92CA(4) of the Act. The AO made the aforesaid adjustment on account of adjustment in arm's length price of the international transaction involving ....
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.... as the most appropriate method 7. erred in upholding the adoption of Comparable Uncontrolled Price ('CUP') method as the most appropriate method for determining the arm's length price in respect of the appellant's international transaction without identifying any comparable uncontrolled transaction(s) for the computation of the ALP. 8. erred in law by upholding the determination the ALP of the international transaction as NIL without following the manner of applying the CUP method prescribed under Rule 10B(1)(a) of the Income Tax Rules, 1962. Transfer pricing adjustment based on incorrect assumptions 9. erred in passing an order that is perverse in law when he ignored the relevant submissions, information and documents provided by the Appellant to substantiate the receipt of services, and based on a preoccupied mind reached at an inappropriate conclusion that the arm's length value of the impugned transactions should be Nil. 10. erred in questioning the commercial rationale of the legitimate business expenses incurred by the taxpayer and not restricting the scope of assessment under section 92CA to determining the ar....
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.... meaning of Section 92B of the Act, the AO referred the case to the Transfer Pricing Officer (TPO) as per the provisions of Section 92CA(1) of the Act. Subsequently, the TPO passed the order u/s 92CA(3) of the Act on 31.10.2011 by proposing an adjustment of Rs. 3,63,83,675/- attributable to difference in Arm's Length Price of the international transactions entered by the assessee with AEs. The TPO noticed that various international transactions undertaken by the assessee with its AEs were as under: - No. Nature of Transaction Amount (Rs, in Crores) Method of Benchmarking Received/ Receivable Paid/ Payable 1 Purchase of raw material & consumables 193,900,264 Transactional Net Margin Method ('TNMM') 2 Sale of finished goods 131,609,573 3 Purchase of finished goods 100,980,196 4 Import of capital items 55,345,423 5 Provision of SAP Development Support Servic....
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....nsaction relating to payment of 'License fees in advance' in the nature of advance which had not been bench marked. As regards to the payment of SAP charges, it was stated that the said amount was with respect to provision of training charges in connection with SAP through employees of the assessee and those transactions had been included in capital work-in-progress which did not impact the income/expenses of the assessee. Therefore, this transaction had not been bench marked. The TPO noticed that the assessee had made certain payments to its AE under the following heads: Professional consultancy Rs.16,206,492 Management fee for support services Rs.16,637,947 Purchase of raw materials and consumables Rs.193,900,264 Purchase of finished goods Rs.100,980,196 Import of capital items Rs.55,345,423 Total Rs.383,070,322 7. The assessee aggregated the above said transactions under TNMM and stated that as this transaction was closely linked with other transactions, the same were aggregated under TNMM. However, the TPO was of the view that each class of transactions had to be examined independently having reference to the Arm's Length Princip....
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....nces submitted by the assessee company. It was further stated that the TPO failed to provide any instance where a service provider was sending its employees, incurring travel costs and other overheads and still the third party service provider did not pay anything. It was further stated that the TPO while applying CUP method, instead of identification of the price charged or paid for property transferred or services provided in comparable uncontrolled transaction, has taken a view that no independent person would be making such a payment, without analyzing whether the payment was at Arm's Length or not. 9. The ld. DRP after considering the submissions of the assessee observed that intra group services are considered on the following broad parameters: "1. Evidence that services have been rendered. 2. Whether the assessee has benefitted from them. 3. Are they duplicate in nature? 4. Whether the assessee would have paid the same charges to an unrelated party?" The ld. DRP pointed out that the TPO had considered the reply of the assessee and concluded as under: "The assessee has stated that these services payments have contributed to t....
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....d by 196% in March 2007, increased by 59% in March 2008 and further increased by 50% in March 2009, thus, resulting in overall increase of 606% over a period of 3 years. Therefore, the benefit of the professional services accrued to the assessee over a period of times resulting in increase in exports. * Increase in Gross Margin The gross margin of the assessee from the manufacturing segment also increased. Year ending Gross Margin (INR) Mar-07 209,961,271 Mar-08 329,595,310 Mar-09 384,734,647 The assessee submits that it is unable to understand that for the services rendered in relation to improvement of production processes and development of better procedures to make the products sellable in international markets, what other benefits should have accrued to the assessee." 12. The ld. Counsel for the assessee submitted that the assessee by merely spending Rs. 1,62,06,492/- was able to achieve an increase in exports of Rs. 7,22,50,646/- in just one year and earned a margin of 9.26% on the operating revenue and therefore, by virtue of increase in exports alone, the benefit accruing to the assessee in just two years was a....
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....ecision of the ITAT Hyderabad Bench in the case of TNS India Pvt. Ltd. in ITA No. 944/Hyd/2007, ITA No. 194/Hyd/2008, ITA No. 74/Hyd/2008 and ITA No. 793/Hyd/2009 reported at 2014(2) TMI 894. 13. In his rival submissions the ld. DR reiterated the observations made by the authorities below and strongly supported the impugned order passed by the AO. It was further submitted that the assessee made the payments for the services to its AE but no cost benefit analysis or independent benchmarking of the transaction was done by the assessee. It was further submitted that as per clause 7.29 of OECD Transfer Pricing Guidelines dated 22.07.2010 issued for determining the Arm's Length Price in relation to intra-group services, the matter should be considered both from the perspective of the service provider and from the perspective of the recipient of the service and in this respect, the relevant considerations include the value of the service to the recipient and it is to be seen that how much charge would have been made and accepted between independent enterprises in comparable circumstances, as well as the costs to the service provider. It was further submitted that it is necessary to co....
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....opy of which are place at page nos. 251 to 365 of the assessee's paper book). The assessee explained the various issues raised by the TPO during the course of hearing before him and furnished the evidences in support of professional as well as management services availed by it from its AE which is evident from the various documents placed in the assessee's paper book at page nos. 44 to 168. 15. An identical issue was a subject matter of adjudication before the Hon'ble Jurisdictional High Curt in assessee's own case in ITA No. 182/2013 for the assessment year 200708 wherein vide order dated 06.11.2015, their lordships in paras 20 to 23 observed as under: "20. A reading of the orders of the TPO, the DRP and of the Tribunal makes it clear that one of the main reasons for not accepting the assessee's case was that the assessee had not been able to substantiate that the payment for the services had actually increased its profits. As we noted earlier, the TPO, in fact, further held that the assessee should have been able to show the level of increase in profit post the said transactions. 21. We are unable to agree with this finding. The answer to the issue whether a ....
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....196% for the year ending 31.03.2007 and gross margin at Rs. 20,99,61,271/-. It further increased by 59% in March 2008 and the gross margin to Rs. 32,95,95,310/-. Thereafter, for the year ending on 31st March, 2009, the increase in export turnover was 50% while the gross margin increased to Rs. 38,47,34,647/- which clearly shows that the assessee was benefited by getting the services from its AE. In the present case, the expenses incurred by the assessee for availing the services were at Rs. 1,62,06,494/- while the increase in the export was of Rs. 7,22,50,646/-. Since the assessee achieved increase in the export as well as in gross margin, therefore, the decision of availing the services from the AE was correct decision for betterment of the business. In the present case, nothing was brought on record to substantiate that the assessee incurred the expenses on the services received from the AE's at a higher rate than the similar facilities available from other persons. The submissions of the assessee that the AE had not earned any mark-up and the cost paid by the assessee in relation to these services was nothing but the cost of improvement of its production processes and what had b....
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....intenance of CNG machines and technical support to the assessee. For that purpose the AE charged only the salary and related costs of the employees but no mark-up had been charged by the AEs on the said transaction. Therefore, eventually the payment made by the assessee traveled back to the employees who were a third party. As such, the transaction was in the nature of reimbursement of expenses. In the present case, the AE provided the employees to the assessee without any charge or profit accruing to the AE itslef. Therefore, the expenses incurred by the assessee were its business expenses. It is well settled that the transfer pricing provisions can be inferred only if there is a related party payment, but in the present case, the expenses incurred by the assessee were paid to the third party employees although those employees were the employees of the AE. In the instant case, the assessee was in need of employees which were provided by its AEs, without any charge of profit accruing to the AE itself. Therefore, it should have been treated in the nature of third party business expenses incurred by the assessee. Moreover, the revenue was earned by the assessee through joint contribu....
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....lus method. Therefore, the TNMM was the most appropriate method in the absence of a CUP which is applicable where the nature of the activities involved, assets used, and risk assumed are comparable to those undertaken by an independent enterprise. 19. In the present case, the assessee divided its operation in the manufacturing and distribution segment. In the manufacturing segment, the net profit margin (OP/Sales) was disclosed at 9.26%, assessee has selected 5 comparable companies and using three years financial data margin of comparables had been computed at 8.40%. In the distribution segment, the assessee has selected TNMM as most appropriate method and the tested party margin had been computed at 15.21% as compared to average margin of 6 comparables using 3 years financial data at 3.96% and the international transactions were claimed at arm's length. We, therefore, keeping in view the aforesaid discussion are of the view that the impugned addition made by the AO on account of the adjustment made in the receipt of professional consultancy services and management support services rendered by the employees of the AE, was not justified. In that view of the matter we delete the i....