TaxTMI 
TaxTMI 
2017 (6) TMI 287
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....inter alia that :- "1. That the assessing officer erred on facts and in law in completing the assessment under section 144C read with section143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 6,11,08,644 as against the income of Rs. 3,77,44,037 returned by the appellant. 2. That the assessing officer erred on facts and in law in making an adjustment of Rs. 2,33,64,607 allegedly on account of the difference in the arm's length price of the international transactions undertaken by the appellant on the basis of the order passed under section 92CA(3) of the Act by the TPO. 3. That the DRP/TPO erred on facts and in law in making an adjustment of Rs. 39,89,080 to the arm's length price of the 'international transaction' of receipt of administration and support services on the basis of the order passed under section 92CA(3) of the Act by the TPO. 3.1 That the DRP/TPO erred on facts and in law in determining the arm's length price of the transaction of payment of administration and support services fee to the associated enterprise without providing any cogent reasons and basis. 3.2 That the DRP/TPO erred on facts and in law in hold....
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....set for provision of agency services and same employees engaged in the distribution segment perform the necessary functions for provision of agency services. 4.4 That the DRP/TPO erred on facts and in law in allocating common expenses to the agency segment in the ratio of sales, resulting in disproportionate allocation of expenses not appreciating that such expenses ought to have been allocated in the gross profit ratio. 4.5 That the DRP/TPO erred on facts and in law in using inappropriate quantitative filters which are not based on any rational or reasonable basis. 4.6 That the DRP/TPO erred on facts and in law in selecting the following companies which are functionally dissimilar to the appellant as comparable companies for the purpose of benchmarking analysis: a) Cybermedia Online Ltd. b) Global Procurement Consultant Limited c) HCCA Business Services Pvt. Ltd. d) TSR Darshaw Ltd. 4.7 That the DRP/TPO erred on facts and in law in rejecting the following comparable companies identified by the appellant for the purpose of benchmarking analysis: S. No. Name of the company Reasons for rejection 1. Educational Consultants India Ltd. Functiona....
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....ual average yield of corporate bonds prevailing during the financial year 2009-10 as the arms length rate of interest to be charged on delay in receipt of receivables without appreciating that such rate is applicable on loans availed in India in domestic currency. 5.4 Without prejudice, the DRP/TPO erred on facts and in law in further adding a markup of 300 bps to the PLR of SBI, on account of adjustment for security and transaction cost, without providing cogent reasons and on the basis of his surmises and conjecture. 5.5 Without prejudice, the DRP/TPO erred on facts and in law in disregarding the fact that since the receivables outstanding from the associated enterprises were denominated in foreign currency, interest rate computed on the basis of UBOR rates shall be applied being applicable on loan available in the international market. 5.6 Without prejudice, the DRPITPO erred on facts and in law in incorrectly imputing the interest on receivables for a period beginning from the date of invoice till the realization date, without appreciating the fact that interest is to be computed upto 31.03.2010. 5.7 Without prejudice, the DRPITPO erred on facts and in law in not se....
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....transaction approach adopted by the assessee and treated the administrative and support services as a separate class of transaction to benchmark the international transaction and applied the "principle of benefit test" and proceeded to apply CUP as the most appropriate method and thereby benchmarked the international transaction of intra group services at nil and proposed the addition of Rs. 39,89,079/-. 4. TPO noticed with regard to commission income that the assessee has aggregated the same with import of product and treated it as closely linked transaction and benchmarked the same by using TNMM. Again, TPO rejected the combined transaction approach and treated it as a separate international transaction and by treating the functional similarity with commission income with market service commission, he benchmarked the same by selecting comparables in the market support service segment and thereby proposed an adjustment of Rs. 1,64,90,548/-. 5. TPO also noticed that the payment received by the assessee from AE was not as per the terms of the service agreement and consequently held that the taxpayer had provided benefits to its AEs by advancing interest free loan under the gar....
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....ssessee by relying upon the decision of Delhi Bench of the ITAT in the case of GE Money Financial Services Pvt. Ltd. vs. ACIT (ITA No.5882/Del/2010) contended that the "principle of benefit test" applied by the ld. TPO is to be seen from the standpoint of assessee and businessman and not from the view point of the Revenue. 12. However, ld. DR for the Revenue in support of order passed by TPO / DRP contended that in the earlier years, no such payment was made by the assessee as is evident form Agreement operative w.e.f. 01.01.2010 with only 2 AEs whereas the payment during the year under assessment has been made to 4 AEs and further contended that prior to 01.01.2010, the assessee was not availing these services form 4 AEs and was in a position to perform these services itself nor the assessee has furnished any details regarding corresponding reduction of its expenses w.e.f. 01.01.2010 and as such, the TPO has correctly segregated the aforesaid transactions for the purpose of benchmarking transactions and relied upon Knorr-Bremse India (P.)Ltd. vs. ACIT, Circle I, Faridabad - (2015) 63 taxmann.com 186 (P&H). 13. However, TPO at page 125 of the order observed that the assessee ....
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....g analysis done at the time of entering into the agreement so as to compare the payment of intra-group services to the AE vis-a-vis an independent party under similar circumstances. (vii) Tangible and direct benefits derived. by the taxpayer company from the use of such intra-group services. (viii) Details and documentary evidence of cost incurred by the AE for rendering each type of services purportedly received by the taxpayer company." 16. Ld. DRP agreeing with the TPO held that since the taxpayer has just explained in generic nature about the benefits vis-à-vis the intra group services payment, the TPO was right in holding the value of services to be as 'Nil' and thus proposing the adjustment. 17. However, assessee used TNMM as the most appropriate method and brought on record evidence of receipt of services in the shape of agreement, available at pages 261 to 265 of the paper book, Annexure 1 available at page 264 of the Paper Book, service charge summary available at page 265, second agreement available at page 266, invoice raised by the AE available at page 271 onwards, the complete detail is given in the table reproduced in the succeeding para no.31 of th....
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....ng consciousness is difficult to prove as that is not tangible in nature. Likewise, for the advise given by various group centers to the group companies in day-to-day manner is difficult to place on record by way of concrete evidence but the way business is conducted, one can perceive the same. Assessee has given a detailed write-up as well as the services provided and benefit obtained which were not contradicted. The Assessing Officer did not believe the same in the absence of concrete evidence. Unless the Assessing Officer steps into assessee's business premises and observes the role of these companies/assessee's business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations. What sort of evidence satisfies the AO is also not specified. Assessee has already placed lot of evidence in support of claims. Therefore, on that count, we are not in agreement with the Assessing Officer and TPO that services were not rendered by the group companies to assessee." Hence in view of the overwhelming evidence placed by the assessee for receipt of services and following the decision of coordinate bench respectfully, we are of the view ....
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....("FTE") dedicated to service the particular service availing entity. The payment terms as agreed between the appellant and the associated enterprises is provided in clause 4, "Annual Service Costs" and Exhibit A to Annexure 1 of the Shared Service Agreement. Invoice - Page 271 - 273 Shared Service Agreement Page 261 - 265 Mails - Page 385 - 388 Mail - Page 394 - 395 (allocation) Corning Development Inc. Singapore Human resource support services and training services 1,160,239 Associated enterprise allocates only 35% of the actual monthly cost incurred on an estimated basis. Corning, Singapore does not allocate 100% of the cost incurred for providing services to the appellant. Thereafter, 5% mark-up is added to the cost in terms of the Shared Service agreement entered with Corning, Singapore. Invoice - Page 296 - 297 Agreement - Page 266 - 270 Mails - Page 389 - 393 Corning Display Technology, Taiwan IT Support services including setting up of systems technical assistance etc. 549,725 Corning, Taiwan is remunerated on a cost plus 5 percent markup wherein cost includes all direct and indirect cost incurred in provision of the services Invoices - Page ....
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....s. Further, if each group entity is expected to contract with local vendors themselves, the group's operations as a whole will not only become far more expensive but also inefficient since each group entity would be replicating the same work and multiple third party vendors shall be involved in processing the same transactions. Recently, Delhi Bench of the Tribunal in the case of GE Money Financial Service Pvt. Ltd. vs. ACIT (supra), held that benefit test for determination of ALP is to be seen from the perspective of the assessee and businessman and not from the perspective of revenue. 3. The TPO, in the impugned order, allegedly held that the services were not actually needed by the assessee. As per the group policy, all Corning Group entities have a mandate to avail support function services from the respective shared service centers to avail the benefit of low cost, specialization and confidentiality. Delhi Bench of the Tribunal in the case of GE Money Financial Services Pvt. Ltd. vs. ACIT (supra), held that the assessee pays for the services only if it receives benefit from the services. Reliance is also placed on the following decisions: i. M/s. Control ....
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....segregated the above transaction for the purpose of benchmarking in view of the fact that Receipt of Administrative Support Services are not inextricably linked with the other International Transacti.ons. Reliance is placed on the judgement of Hon'ble Punjab and Haryana High Court in case of Knorr-Bremse India(P.) Ltd. v. Assistant Commissioner of Income-tax, Circle-I, Faridabad (2015) 63 taxmann.com 186 (Punjab & Haryana) wherein the Hon 'ble High Court has held that the closely linked transactions can, in a given situation, be components of a single composite transaction but the assessee would, however, have to prove that although each sale and each provision of service is priced separately, they were all provided under one composite agreement which constitutes an international transaction. The Hon'ble ITAT Delhi has followed the above judgment in case of Gruner India (P.) Ltd. [2016] 70 taxmann.com 240 (Delhi - Trib.). Even in case of assessee itself it has been held by the Hon'ble ITAT in the earlier assessment years that distribution business cannot be aggregated with the commission business. TPO has adopted CUP for benchmarking which....
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....ansfer Pricing Officer is justified in making an adjustment under the arm's length price. 38. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at "nil" keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at "nil". ' The Hon'ble ITAT Delhi has held in case of GE Money Financial Services (P.) Ltd. [2016] 69 taxmann.com 420 (Delhi - Trib.) after considering the judgment of Hon'ble Delhi High Court in case of Cushman and Wakefield [ 2014 ] 46 taxrnann.com 317 (Delh....
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....d to be remanded back to the file of the concerned AO, for an ALP assessment by the TPO, followed by the AO's assessment order in accordance with law (refer para 45 and 46 of the above order of the jurisdictional High Court)." 23. No doubt, under section 92 (2) of the Act, transfer price of cost or expenses allocated or apportioned to such enterprise or contributed by such enterprise shall be determined having regard to arms length price of such benefit, service or facility received by the enterprise and as such, "the benefit test" is necessary for determination of arms length price of any international transaction. In other words, services are need based and no fee shall be paid if services were not rendered. Furthermore, if the services though required and are rendered but are not needed / beneficial to the receiver then independent parties need not to pay for such services. 24. In other words, an independent party would not require to pay services in case services are not required; if they are not rendered if they do not pass the benefit test or if the services are not needed by the assessee. 25. We have considered the contentions raised by the ld. Representatives o....
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....h other independent entity; the price of goods transferred or services provided and conditions of the transfer or provisions ordinarily are determined by market forces. Therefore, when AEs transact with each other, for the purpose of transfer pricing they must replicate the dynamics of market forces, as there is no concept of free lunch in business dealings. The benefit test which is well recognized by OECO and other developed countries Tax regime have to be seen for allowing the payment in case of Intra-group services. The expected benefit must be sufficiently direct and substantial so that an independent entity in similar circumstances, would be prepared to pay for it. If no benefits have been provided (or was expected to be provided), then the services cannot be charged for. In view of the above, since the taxpayer has just explain in generic nature about the benefits vis-a-vis the intra-group' services' payment, hence this DRP holds that TPO is right in holding the value of services to be as "Nil" and thus proposing the adjustment." (ii) that furthermore, the assessee has brought on record the evidences as to the receipts of the services in the forms of agreeme....
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....e ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of th....
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....r agreement dated 01.01.2010 available at pages 266 to 269 of the PB, it is proved on record inter alia that prior to 01.01.2010, the assessee company was either not availing any such services or it was availing such services from other sources, details of which are not on the file, that the assessee was availing services from 4 AEs and in these circumstances, "benefit test" is required to be applied. 30. However, as discussed in the preceding paras, Hon'ble Delhi High Court in judgment cited as EKL Appliances Ltd. (supra) held that the assessee was not required to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in the subsequent year. Similarly, Hon'ble Punjab & Haryana High Court in the judgment in M/s. Knorr-Bremse India Pvt. Ltd. (supra) also held that the assessee is not required to establish that it has benefited from the international transactions by taking services from its AE. So, in these circumstances, contentions raised by ld. DR are not sustainable. 31. So far as question of absence of agreement prior to 01.01.2010 as raised by ld. DR is concerned, the ser....
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....e 389 - 393 Corning Display Technology, IT Support services including 549,725 Corning, Taiwan is remunerated on a cost plus 5 percent markup Invoices - Page 300 - 301 Taiwan setting up of systems technical assistance etc. wherein cost includes all direct and indirect cost incurred in provision of the services 33. The contention raised by the ld. AR for the assessee that the need for entering into an agreement dated 01.01.2010 with its AE arises only when the assessee moved to "People's Software" is sustainable because it is brought on record by the assessee that the services availed were need based. Even otherwise, it was beyond the purview of TPO to examine the need for such services and to apply the benefit test. Moreover, when services availed of by the assessee are need based the same may be availed of even without having any agreement. 34. Ld. AR contended that as a group policy Corning group entities are mandated to avail support services from respective share service centers to avail the low cost, specialization and confidentiality and as such administrative support services were taken from the AEs. This contention raised by ....
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.... benefits. That aspect of the exercise is left to the AO. This distinction was made clear by the ITAT in Dresser-Rand India Pvt. Ltd. v. Additional Commissioner of Income Tax, 2012 (13) ITR (Trib) 422: "8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an Assessee and wha....
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.... extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise - of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot - after a consideration of the facts - state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO. This aspect was made clear by the ITAT in Delloite Consulting India Pvt. Ltd.v. Deputy Commissioner of Income Tax, [2012] 137 ITD 21 (Mum) : "37. On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at "nil", we find that the Bangalore Bench of the Tribunal in Gemplus India P. Ltd. 2010- TII-55-ITAT-BANG-TP, held that the assessee has to establish before the Transfer Pricing Officer that the payments made were commensurate to t....
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....discussed at length and para 12 of the judgment cited as M/s. Volvo India Private Limited (supra) relied upon by ld. DR is distinguishable from the facts and circumstances of the case because, in the instant case, issue as to rendering the services has already been admitted by the DRP. So, the TPO has erred in determining the ALP at nil by holding that the services were actually not rendered nor such services were needed by the assessee company nor any benefit has been accrued to the assessee company by availing such services from its AE. 40. Now, the next question arises for determination in this case is :- "as to whether intra group services (IT Support Services, Accounting Services, Human Resources Services, etc.) from AEs at mark-up of cost plus 5% are to be clubbed together with other international transactions i.e. import of ROBs and life science products and commission income for the purpose of benchmarking or the administrative or the administrative support services are to be segregated for the purpose of benchmarking as has been done by the TPO?" 41. The ld. AR for the assessee by relying upon the decision rendered by Hon'ble jurisdictional High Court in case of M....
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....ightly clubbed intra group services transactions with other international transactions for the purpose of determination of ALP. So, the question framed in preceding para 37 is replied in favour of the assessee. 44. Ld. DR contended that the commission services fee cannot be aggregated with import of ROB. However, in view of the decision rendered by Hon'ble High Court in case of Magneti Marelli Powertrain India Pvt. Ltd. (supra), aggregation of principal of services has been approved and is duly applicable to the facts and circumstances of the case. 45. TPO while determining the ALP of intra group services at nil by using CUP method has not brought on record any comparable. Moreover the transactions are interlinked and the TPO himself aggregated the agency services and marketing support services and benchmarked the operating result of such combined activity, therefore, in these circumstances, we are of the considered view that the TNMM may be used for determining the ALP of intra group services. Accordingly, this issue is restored to the TPO to decide afresh in the light of the findings recorded herein above. Grounds No.3 TO 3.6 IN ITA NO.548/DEL/2015, Grounds No.4 TO 4.3 IN I....
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....n of expenses is concerned it is noted that TPO had identified indirect expenses common to both the functions at Rs. 1,93,29,321/- details of which are as under: Particulars Amount (In Rs.) Salaries 42,72,231/- Advertisement 30,78,570/- Insurance 3,77,758/- Repairs and maintenance 8,24,105/- Professional fee 28,31,227/- Rent 12,57,636/- Communication 5,93,240/- Travelling & Conveyance 33,79,299/- Misc. 12,32,610/- Depreciation 14,82,645/- Total (A) 1,93,29,321/- 27. The CIT(A) has held that out of the aforesaid sum of Rs. 30,78,570/- and Rs. 3,77,758/- pertaining to advertisement and insurance have no nexus with the agency function. 28. We find merit in the said conclusion as no material has been lead to discredit the above conclusion. Thus we hold that aggregate indirect expenses common to both the functions are of Rs. 1,58,72,993/- (Rs. 1,93,29,321/- - Rs. 30,78,570/- - Rs. 3,77,758/-). The CIT(A) further more held that allocation of such expenses should be done on the basis of gross margin of distribution function and commission income receipts and not on the basis of sales, as adopted by the....
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....al conclusion we uphold the action and reject the grounds raised by the revenue. Ground 1 thus stands dismissed. 16. So, there being no dispute that the issue in controversy has been squarely covered in assessee's own case vide order dated 28.08.2015 (supra) qua AY 2003-04 which has been further validated up to AY 2006-07, by following the order passed by the coordinate Bench, we direct the TPO to allocate the expenses on the basis of gross margin in the agency segment and not in the ratio of sales for the purpose of computing the ALP of the international transactions as the TPO/DRP/AO have erred in making adjustment by clubbing commission income with market support services in allocating expenses to the agency segment in the ratio of sales. So, ground no.2.2 is determined in favour of the assessee. GROUNDS NO.2.3, 2.4, 2.5, 2.6 & 2.7 17. TPO, after clubbing marketing support segment and agency services activities, selected 10 comparables for benchmarking the international transactions having average OP/OC at 22.12%. However, DRP excluded 2 comparables, namely, RITES Limited and Vapi Waste and Effluent Management Co. Ltd. and enhanced the average margin of 23.21% and made ....
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....ncy commission and marketing support services fee at Rs. 1,98,16,836/-, which has been restricted to Rs. 1,64,90,548/- by the ld. DRP by allowing the working capital adjustment to the assessee. 51. However, we are of the considered view that since the basis for allocating the expenses to the agency segment is ordered to be changed, it would be futile to examine the suitability of the comparables considered by the TPO for benchmarking the international transactions as it would change the entire scenario and for that purpose, fresh TP study analysis is required to be done by the TPO. Consequently, we direct the TPO to make fresh TP study analysis after providing an opportunity of being heard to the assessee company to benchmark the international transaction undertaken by the assessee. Grounds No.4 to 4.12 in ITA NO.548/DEL/2015, Grounds No.3 to 3.9 in ITA NO.816/DEL/2017 and Grounds No.3 to 3.8 in ITA NO.817/DEL/2017 are determined in favour of the assessee. GROUNDS NO.5 TO 5.8 IN ITA NO.548/DEL/2015 GROUNDS NO. 5 TO 5.3 IN ITA NO.817/DEL/2017 52. The assessee challenged the adjustment of Rs. 4,42,792/- (reduced from Rs. 28,84,979/- vide rectification order dated 20.02.20....