TaxTMI 
TaxTMI 
2016 (7) TMI 1396
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.... 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 that either there was no need to avail them or t....
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....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 benefited by these services (benefit test). When we a....
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....f 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 paid twice for similar service. Once the services are ac....
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....nsaction 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 applies to income of an enterprise from an international transacti....
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....een 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 employed or to be employed by the enterprise or having regard to any other relevant base, which is then co....
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....m 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. Essence of the matter is that it is the profit margin of the Indian enterprise and not that of the foreign....
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....national 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 by the assessee as comparable for the international transaction of intra group services. There is a chart containing na....
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....ed 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 companies does not conform to the comparability of the intra group services received by the assessee and this data is not reliable and accurate for comparison as discussed above. It is, therefore, palpable that the contention raised by the ld. AR in this regard, for whatever merit it may have, fails even on his own touchstone. 18. In the ultimate analysis, we hold that the argument of the ld. AR for selection of foreign AE as a tested party is neither legally sustainable nor accepta....
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....er 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 & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of the international transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee and the AO made the addition without examining the applicability of section 37(1) of the Act, we fin....
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....nd 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 depreciation. 23. We have heard the rival submissions and perused the relevant material on record. It is noticed that this issue came up for consideration before the Tribunal for the first time in relation to the assessment years 2000-01 and 2002-03. Vide its order dated 21.6.2013, a copy of which is available on page 2883 onwards of the paper book, the Tribunal considered the contention of the assessee about the applicability of the judgment of the Hon'ble Supreme Court in the case of IC....