TaxTMI 
TaxTMI 
2016 (7) TMI 1396
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....ion services (from AE in the US)' with value of Rs. 25,68,31,273/- and the second international transaction as 'Availing Consulting, IT and administration services (from AE in Asia)' with a transacted value of Rs. 47,32,071/-. The assessee applied Transactional Net Margin Method (TNMM) as the most appropriate method and chose foreign AE as a tested party. That is how, it was shown that these international transactions were at arm's length price (ALP). The Assessing Officer (AO) referred the determination of ALP of the international transactions to the Transfer Pricing Officer (TPO), who held that the assessee should have taken itself as a tested party instead of foreign AE and further the Comparable Uncontrolled Price (CUP) method should have been applied as the most appropriate method instead of the TNMM. The TPO noticed that the assessee claimed to have availed intra group services, through these international transactions, in Finance, Human resources, IT and system support, Legal and compliance, Group and central risk management, Quality consultation and training, Sales and marketing, Business development, CEO office and operations. He discussed each of these services and held t....
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....opy of which is available from page 743 onwards of the paper book, under which it received Accounting and financial support services, Human resources services, e-commerce, Consulting, legal and compliance services, etc. The assessee also entered into another Agreement dated 1.1.2006 with the same AE whose copy is available on page 770 of the paper book, for receiving IT and system support services. In addition, the assessee entered into still one more Agreement dated 1.4.2005 with GECF Asia Ltd., another AE, whose copy is available at page 795 onwards of the paper book for receiving the services. These three Agreements entered into by the assessee with its AEs in earlier years remained operative for the preceding three years and the instant year as well. The Tribunal in its order for the A.Ys. 2006-07 to 2008-09 has analysed the services received by the assessee pursuant to these three Agreements and has come to the conclusion that these services were required by the assessee (need test); these services were rendered by the AEs (rendition test); these services were not duplicative in nature; these were not shareholders' services to safeguard their interest; and the assessee was ....
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....ce is availed from foreign AE as well. To illustrate, if the assessee is maintaining its accounts in India and similar accounts are also got maintained by the foreign AE for and on behalf of the assessee, then, of course, the maintenance of accounts by the foreign AE will be a duplicate service, which will require the determination of ALP at Nil. If on the other hand, the assessee, despite the availability of accounting service in India, opts to get its accounts maintained by the foreign AE and pays, then it does not fall in the category of duplicate services. Before coming to the conclusion as to the duplicate services availed from the AE, it is incumbent upon the TPO/AO to specifically record a finding and demonstrate that the assessee availed similar service twice and that is the reason for not granting any deduction for payment of intra group services. If on the other hand, the assessee avails service only from its foreign AE and does not avail and pay for the same service in India, it does not assume the character of a duplicate service. To put it simply, before characterizing any payment for duplicate service, the TPO/AO must expressly and positively prove that the assessee p....
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....companies rendering similar services, the international transaction between the assessee and its AEs should be considered at ALP. This refers to the foreign AE as a tested party. 9. The assessee has employed the TNMM as the most appropriate method. It compared the profit rate earned by its foreign AE with the profit rate of other foreign comparable companies to claim that the price paid by the assessee under these international transactions was at ALP. As can be noticed from the Transfer pricing study report, the relevant parts of which have been reproduced in the order of the TPO, that the assessee is harping on selection of its AE as tested party. We have to decide as to whether the selection of the foreign AE as tested party is correct in the Indian context. 10. For this purpose, we need to visit the provisions of the Chapter X of the Act with the caption "Special Provisions Relating to Avoidance of Tax" dealing with the computation of income from international transactions having regard to ALP. Section 92(1) of the Act provides that : 'Any income arising from an international transaction shall be computed having regard to the arm's length price'. Thus, this provision a....
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....en the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.' 11. A conjoint reading of the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such international transaction is required to be determined at ALP; thirdly, the ALP in respect of such international transaction should be determined by one of the prescribed methods, which also includes the TNMM. Under this method, the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets empl....
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....ng object of the transfer pricing provisions is, inter alia, to see that there is no profit shifting from the Indian taxation base by means of the foreign AE charging more than comparable independent cases, which fact is ensured by determining ALP of the international transaction. If foreign AE has in fact charged more, then its profit rate will shoot up and the corresponding profit of the Indian enterprise will be squeezed. In that situation, a comparison of the profit rate of the foreign AE will run contrary to the mandate of the provisions. Whereas, we were required to determine if the profit charged by the foreign AE is not more than that charged by uncontrolled comparables by seeing the profit rate of the Indian enterprise, we will end up doing a futile exercise of rather viewing the profit rate of the foreign AE. Suppose the foreign AE has charged more, then its profit rate will turn out to be higher, which when compared with the lower rate of profit margin of foreign comparables, will show the transaction at ALP, calling for no transfer pricing adjustment. This exercise is not only off the mark, but runs counter to the rule and spirit of the transfer pricing provisions....
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....ered as a tested party and then foreign companies be considered as comparable for determining the ALP of the international transaction, having no statutory sanction, is sans merit and hence jettisoned. 14. To sum up, we hold that the methodology adopted by the assessee for computation of ALP in respect of its international transactions of intra-group services by choosing foreign AE as a tested party is completely unfounded and deserves to be and is hereby rejected in entirety. 15. Notwithstanding the above legal position and to provide completeness to our order, we will also deal with the argument made by the ld. AR in the form in which it was put forth before us. He submitted that the transaction of foreign AE is least complex as the data of foreign comparables companies is accurate for comparison which can be used with minimal adjustments. On a pointed query, the ld. AR took us through page 360 of the paper book, which is a part of its transfer pricing report, indicating that the foreign AE charged mark-up between 3.70% to 11% depending upon the nature of services. On a further query, he took us through page 385 of the paper book showing a list of foreign companies chosen b....
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....companies adopted by the assessee as comparable, it clearly emerges that the assessee, inter alia, received routine administrative and IT services, but could not find any comparable and, hence, comparables for such services remained altogether absent. The above extracted para completely belies the ld. AR's contention about the availability of reliable data of foreign companies, inasmuch as there is no company providing routine administrative and IT services, as were also availed by the assessee from its AE, in the finally selected list of companies. This manifests that the foreign companies considered as comparable by the assessee are lacking comparability. It is further noticed that the data taken for the 20 companies chosen by the assessee is for the year 2007, whereas we are dealing with the assessment year 2009-10. Further, the ld. AR failed to point out as to how ROTC of these 20 companies was worked out with the mean of 13.23%. Thus, it is evident that apart from making a contention that the foreign AE should be considered as a tested party because of the least complex transaction, there is no material to substantiate the same as the data chosen by the assessee of 20 compa....
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....ies for which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee were not considered, the Hon'ble High Court remanded the matter to file of concerned AO for an ALP assessment by TPO, followed by AO's assessment order in accordance with law considering the deductibility or otherwise as per section 37(1) of the Act. 21. When we advert to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment equal to the stated value of transaction with Nil ALP by holding that no benefit etc. was received by the assessee because of the intra-group services received by it and hence no payment on this account was warranted. The AO in his draft order has taken ALP of this international transaction at Nil on the basis of recommendation of the TPO without carrying out any independent investigation as to the deductibility or otherwise of such payment in terms of section 37(1) of the Act. This addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi in Cushman & Wa....
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....in the name of the assessee-lessor, the AO held that in substance it was a case of finance lease. After considering certain judgments and following the view taken by him in preceding years, the AO disallowed the claim of depreciation on leased cars amounting to Rs. 24.81 crore. The assessee also remained unsuccessful before the Dispute Resolution Panel (DRP) which observed that the assessee failed to establish that depreciation was not claimed by the lessees on the vehicles leased to them and the assessee was evasive on this account and did not disclose the truthful picture despite the fact that various lessees were the assessee's related companies. In reaching this conclusion, the DRP also took into consideration the observations made by the Tribunal in its order passed in the assessee's own case for the AYs 2001-02 and 2002-03, in which the matter was remitted to the file of the AO for deciding this issue afresh, after taking cognizance of the fact of claim of depreciation by the lessees and difference in covenants to the agreement in the case of the tax payer and ICDS Ltd. The AO made the disallowance vide the impugned order. The assessee is aggrieved against the disallowance of....
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....ding given by the Tribunal in relation to the decision in ICDS Ltd. was also left open to be taken up before the AO in the case of remand proceedings. That is how, the proceedings for the A.Ys. 2000-01 and 2002-03 attained finality. Once again, similar issue came up for consideration before the Tribunal in the assessee's own case for the A.Ys. 2006-07, 2007-08 and 2008-09. Vide its order dated 2.5.2016, the Tribunal restored the matter to the file of AO for denovo decision in the light of the judgment of the Hon'ble Supreme Court in the case of ICDS Ltd. (supra). In view of the decisions of the Tribunal for both the sets of the years, namely, the AYs 2000-01 and 2002-03 por una parte and the A.Ys. 2006-07 and 2008-09 por otra parte, it is clear that the issue of depreciation of leased vehicles requires restoration to the file of AO. However, the detailed directions given by the Tribunal for examination in its order for the A.Ys. 2000-01 and 2002-03 should be scrupulously followed by the AO as the same have been upheld by the Hon'ble Delhi High Court. This ground is, therefore, allowed for statistical purposes. 24. The next ground is against the addition of Rs. 21,58,87,262/- ....