TaxTMI 
TaxTMI 
2018 (5) TMI 900
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....AE') 2. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in making adjustment of INR 90, 32, 40, 004/- to the total income of the appellant in respect of the international transaction involving of export of printed circuit boards ('PCBs') by the appellant to its AE for further sale to independent customers at same prices. 3. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in not appreciating that the aforesaid international transaction is at arm's length under the Comparable Uncontrolled Price Method, as confirmed by the Hon'ble Jurisdictional Tribunal in appellant's own case for AY 2011-12 on the same facts and circumstances of the case. Payments made to AE for purchase and order handling services and sales services. 4. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in disallowing the payments aggregating to INR 9, 97, 50, 264/- made by the appellant to its AE for receiving purchase and order handling services and sales services from the AE. 5. That on the facts and in the circumstances of the case and in la....
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....) Ld. Assessing Officer/TPO has erred in disallowing the payments aggregating to INR 9, 97, 50, 264/- made by the assessee to its AE for receiving purchase and order handling services and sales services from the Associated Enterprise(' AE'). This covers the revised ground Nos. 4 to 8 of the Assessee. 4. We shall take up additions challenged on account of transfer pricing adjustment as has been raised by the assessee in Ground Nos. 2 & 3, stating that the Ld. Assessing Officer/TPO has erred in making adjustment of Rs. 90, 32, 40, 004/- to the total income of the assessee in respect of the international transaction involving of export of printed circuit boards ('PCBs') by the appellant to its Associated Enterprise ('AE'), [AT & S AG(Europe)]. 5. The brief facts qua the issue are that M/s AT & S India Private Limited, ( hereinafter referred to as the 'assessee'), is incorporated in India under the erstwhile Companies Act 1956. The assessee is a wholly owned subsidiary of AT & S Austria Technologie & Sustemtechnik Aktiongesellschaft( hereinafter referred to as AT &S AG). The assessee is engaged into the business of manufacturing and sale of printed circuit boards. The mai....
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..... " Therefore, the assessee submitted before the TPO that under the Distribution Agreement, the assessee has grant to AT & S AG (AE), the exclusive right to market, distribute and sell the products manufactured by the assessee in the specified territory (Europe). The assessee, as a principal, has the full authority to sell the products manufactured by it as per own business decision, therefore, the assessee has functioned as a full-fledged manufacturer of its product and AT & S AG (AE) functioned as a distributor of the assessee. The assessee submitted that AT & S AG (AE), with the prior written agreement of the assessee, can seek customers for the products manufactured by the assessee outside the specified territory or establish branch or maintain any distribution depot for the products of the assessee outside the specified territory or establish branch or maintain any distribution depot for the products of the assessee outside the specified territory in countries where the assessee has no exclusive distributors. The assessee also explained to the TPO that AT & S AG (AE) is entitled to get commission as per the Distribution agreement and from time to time and the commission may....
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....x Rs. 14, 49, 49, 549). 8. The ld TPO calculated the profitability of the assessee company as per its annual report as follows: Description Amount (Rs. ) Million Net operating revenue 2966. 43 Operating Revenue 2966. 43 Expenses debited to profit and loss account 3728. 16 Less: Loss on sale of fixed assets 7. 09 Operating Expenses 3721. 07 Operating Profit (-) 754. 64 OP/TC (PLI) (-) 20. 28% OP/OR (-) 25. 44% 10. The ld TPO observed that an amount of Rs. 13, 38, 31, 918/- was in the nature of stewardship services, as computed in para 7 of this order, hence its arm's length price was held to be Nil. The TPO calculated the profitability of the company after reducing the amount of Rs. 133. 83 Million, as follows: Description Amount (Rs. ) Million Net operating revenue 2966. 43 Operating Revenue 2966. 43 Expenses debited to profit and loss account 3728. 16 Less: Loss on sale of fixed assets 7. 09 Less: Amount determined to be Nil 133. 83 Operating Expenses 3587. 24 Operating Profit (-) 620. 81 OP/TC (PLI) (-) 17. 30% OP/OR (-) 20. 92% Therefor....
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....ned the arm's length price of the said transaction by applying the TNMM at the entity level considering the appellant as a tested party. Therefore, The ld TPO worked out total adjustment for sale of finished goods at Rs. 872. 90 Millions and treated as Transfer Pricing Adjustment. 13. Aggrieved by the order of the TPO/Assessing Officer, the assessee filed petition before the Dispute Resolution Panel ('DRP'). The Hon'ble DRP gave the direction confirming the stand taken by the TPO as follows: "The assessee has applied CUP method in respect of the sale of finished goods. The assessee undertakes sale of the PCB chips to its AE. The AE gets the clients and the orders and also determines the price of such supplies. The AE then sources such products from any subsidiary including the assessee to supply the product, The TPO is to examine the International transaction entered by the assessee with its AE and the TPO is not authorized to examine or adjust the transaction of the AE with its clients. The latter leg is not in the purview of the TPO. The TPO can however consider and peruse the complete chain of transaction if it helps in realistic determination of ALP between the asse....
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....ous results in this scenario. The panel is hence not in agreement with the Ld AR submissions in this regard. The objection is accordingly dismissed. " 14. Aggrieved by the order of the ld. DRP/Assessing Officer, the assessee is in appeal before us. The ld. counsel for the assessee at the outset submitted before us that suitable method for the assessee company is only Comparable Uncontrolled Price (CUP) method. The CUP method for computing arm's length price of the assessee's sale of finished goods to its AE is suitable, as the specific characteristics of PCBs (indicated by product identification number) sold by the assessee to AT&S AG were exactly the same as the specific characteristics of PCBs sold by AT&S AG to independent customers in back to back transactions. The prices at which PCBs were sold by the assessee to AT&S AG were exactly equal to the prices at which PCBs were sold by AT&S AG to independent customers in back to back transactions. The quantities in which PCBs were sold by the assessee to AT&S AG were exactly equal to the quantities in which PCBs were sold by AT&S AG to independent customers in back to back transactions. The controlled transactions as well as unco....
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....ncontrolled transaction. The modus operandi of determining ALP of an international transaction under this method is that firstly, the profit rate earned by the assessee from a transaction with its AE is determined (say, profit A), which is then compared with the rate of profit of comparable cases (say, profit B) for ascertaining as to whether profit A is at arm's length vis-à-vis the profit B. If it is not, then the transfer pricing adjustment is made having regard to the difference between the rates of profit A and profit B. The rate of profit of comparable cases (profit B) may be computed from internally or externally comparable cases, depending upon the FAR analysis and the facts and circumstances of each case. Thus the calculation of profit B may undergo change with the varying set of comparable cases. However, in so far as calculation of profit A is concerned, there cannot be any dispute as the same has to necessarily result only from the transaction between two or more associated enterprises, as is the mandate of sections 92 read with 92B in juxtaposition to rule 10B. The natural corollary which, thus, follows is that under no situation can the calculation of '....
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....ssee i. e. , the Indian party has to be taken as the tested party and the TNMM method is to be followed. Recently the Delhi Bench of ITAT in the case of Ranbaxy Lab Ltd. vs. Addl CIT (AY 2004-05) rejected the assessee's case since it had taken the foreign AEs as 'tested parties' and calculated its ALP. The ITAT agreed with the AO's contention that such benchmarking is not in consonance with the Income Tax rules. Besides the above the AE cannot be treated as tested party because its accounts are based on Austria GAAP which is different from Indian GAAP. Accordingly the method of accounting, allocation of costs, recognition of revenue etc. differ for making the comparison. In the instant case we need to determine the ALP of the transaction between the assessee and AE for the export of the PCB. Therefore the tested party will be the Indian Party. In view of above we find no reason to interfere in the order of DRP. Hence the assessee has rightly been treated as tested party. With regard to the TNMM method adopted by the lower authorities for the computation of ALP we find that the various courts have held to adopt the CUP method in the aforesaid facts and circu....
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....nter alia defines the CUP Method as follows: "Comparable uncontrolled price (CUP) method A transfer pricing method that compares the price for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. " 11. 1 We also find support from the decision of the Hon'ble Mumbai Tribunal in the matter of DCIT vs. Isagro (Asia) Agrochemicals (P. ) Ltd reported in [2013] 31 taxmann. com 388 (Mumbai - Trib. ), wherein the Hon'ble Tribunal interalia held that : "various benches of the Tribunal including Asstt. CIT v. MSS India (P. ) Ltd. [2009] 32 SOT 132 (Pune) and Philips Software Centre (P. ) Ltd. v. Asstt. CIT ITA No. 179/Kol/2016 A. Y 2011-12 [2008] 26 SOT 226 (Bang. ) have preferred the following of CUP method. It is obvious that when the price of similar goods or services as sold or provided to the non-AEs is available, such a price constitutes the best guide to find out whether the price charged or paid to the AEs is at ALP or not. It is more so when such comparable uncontrolled transactions is internal. When similar goods a....
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....s the most appropriate method. 11. 3 In this connection, we rely in the decision of the Hon'ble Mumbai Tribunal in the matter of Mattel Toys (I) (P. ) Ltd vs. Deputy Commissioner of Income-tax, Circle - 6(3) reported in [2013] 34 taxmann. com 203 (Mumbai - Trib. ), wherein the Hon'ble Tribunal inter alia held that: "41. Now coming to the argument of the learned Departmental Representative that once the assessee itself has chosen TNMM as most appropriate method in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the most appropriate method in the transfer pricing report, then also it is not precluded from raising the contentions/objections before the TPO or the appellate Courts that such a met....
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....n the Hon'ble Tribunal inter alia held that: "6. 5 The CUP method provides the most direct comparison for the purpose of determining the arm's length price of international transactions and is to be preferred over the other profit based methods. Reliance is placed in this regard on the following decisions: - Aztec Software & Technologies Services Ltd. v. Asstt. CIT [2007] 107 ITD 141/162 Taxman 119 (Bang. ) (SB) - UCB India (P. ) Ltd. v. Asstt. CIT [2009] 30 SOT 95 (Mum. ) - Gharda Chemicals Ltd. v. Oy. CIT [2010] 35 SOT 406 (Mum. ) - Intervet India (P. ) Ltd. v. Asstt. CIT [2010] 39 SOT 93 (Mum. ) - Asstt. CIT v. Dufon Laboratories [2010] 39 SOT 59 (Mum. ) 11. Reliance in this regard is also placed on the decision of Hon'ble Mumbai Tribunal in the case of Serdia Pharmaceuticals (India) (P. ) Ltd. v. Asstt. CIT reported in [2011] 44 SOT 391/9 taxmann. com 13 wherein the Hon'ble Tribunal while dealing with the priority of applications of methods for the determination of ALP, has held as under: "64. . . as long as CUP method can be reasonably applied in determining the arm's length price of an....
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....son of the price so charged from or paid to its AE with some external independent reliable price data under similar circumstances of transactions with AE. Ordinarily the Internal CUP method should be preferred over the External CUP method as it neutralizes several distinguishing factors, such as the local factors and the economies available or unavailable to the appellant in particular, having bearing over the comparison of price charged from unrelated parties and AE. " 11. 5 In view of the above judicial precedents, we find that the CUP method provides the most direct comparison for the purpose of determining the arm's length price of international transactions and is to be preferred over the other profit based methods. Accordingly in the instant case internal CUP method should be preferred over the external CUP method. Hence, we hold that in the instant case, the CUP Method (internal) is the most appropriate method in determining the arm's length price of the international transaction involving export of PCBs by the assessee to AE and accordingly, delete the adjustment of INR 69, 30, 53, 397/- made in the assessment order. " 15. On the other hand, the ld DR fo....
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....les are 10B (2), 10B (3), 10B (4) of the Income Tax Rules. Therefore, to apply the CUP method, the transaction entered into by the tested party should be compared with uncontrolled transaction and such uncontrolled transactions do not include transactions between the associated enterprises. Indian TP regulations prescribe that most appropriate method has to be identified for benchmarking on international transaction and comparison has to be done with uncontrolled transactions and not controlled transactions to arrive at the arm's length price. Accordingly, the approach of bench marking the transaction pertaining to sale by AE by comparing the same with controlled transaction of assessee itself does not fall under any of the methods prescribed under the provisions of section 92C of the Act. lt is contrary to Indian TP regulations and not acceptable under the lndian TP regulations. Similar view has been taken by ITAT in case of Skodo Auto lndia Pvt. Ltd. Vs. ACIT (122TTJ 699), M. S. S. India Pvt. Ltd. (123 ITJ 657) and Bechtellndia Pvt. Ltd. Vs. DCIT (136TTJ 212). The ld DR pointed out that as per Para 2. 6 of OECD TP guidelines, it is obvious that for application of anyTP m....
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.... * Level of the market (i. e. , wholesale, retail, etc. ): The assessee is a manufacturer and as such selling products on wholesale basis to AE, whereas AE is distributing by catering to different parties on retail basis. * Geographic market in which the transaction takes place. The transaction between assessee and AE is between India and Austria while AE is selling internally only. * Foreign currency risks. * Inventory risks * Delivery terms means sales AT FOB basis or CIF basis * Insurance and transportation costs * Market conditions and competition in the market * Alternatives realistically available to the buyer and seller In view of the above factual matrix, the ld DR for the Revenue requested the Bench to relook into the issue of applicability of CUP method. The ld DR stated that there are Supreme Court decisions where it was held that coordinate benches of tribunal can take different view if the application of law and facts have not been properly appreciated in the previous judgments. Therefore, ld DR submitted that the order of DRP and TPO may be upheld or sent back to TPO with a direction to assessee ....
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....of incurring warranty expenses arising from further sale of PCB's to independent customers. The AT & S AG (AE) remitted the sale proceeds collected by it from independent customers in the open market under uncontrolled conditions, to the assessee company, which was recorded in the books of accounts of the assessee company as "sales". Therefore, in the assessee's case under consideration there are independent customers, and the price is fixed by the Principal (Assessee), the product design and specification is decided by the assessee. The Associated Enterprise, the AT & S AG (AE) plays a limited role, that is, it collect the money on behalf of the assessee and remits the same to assessee, for that AE is paid commission. Even commission and warranty expenses are determined and decided by the assessee (Principal). The AT & S AG (AE) does not do any value addition in the goods manufactured by the assessee. Therefore, in this scenario, the stand of the ld DR that CUP Method is not applicable to the assessee, is not acceptable. 17. Now we deal with the issue of 'tested party'. The Tested party is one to which a transfer pricing method con be applied in the most reliable manner....
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....les services from the AE. This covers the revised ground Nos. 4 to 8 of the Assessee. 20. Grounds of appeal Nos. 4 to 8 are closely linked. These grounds are directed against the ALP adjustments made by the AO / DRP in respect of payments made by the appellant for receiving purchase and order handling services and sales services based on the allegation made by the ORP in their order that the appellant failed to satisfy benefit test in respect of the said expenses incurred as per the Cost Contribution Agreement (CCA). Briefly stated, the relevant material facts are as follows. The AT&S group of companies were engaged in manufacture of PCBs and hence, those companies had similar and comparable needs for services in terms of arrangements required to be made in connection with purchase of raw materials, efficient handling of orders placed by customers and sale of products in the global market. In order to secure economies of scale and optimization of global business opportunities, the AT&S group of companies combined together under the CCA and contributed to a common fund for financing global purchase services, global order handling services, global sales services and other servi....
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.... needs to be given to the substance of the transaction, and not just the form. Since the majority of the raw materials and spares are supplied by suppliers controlled by the AE and almost the entire production is sold to the AE, the assessee undertakes simply manufacturing functions and bears only the risk relating to product quality. Hence, the assessee needs to be characterized as a contract manufacturer, and not a full-fledged manufacturer. 6. Since, the assessee has been characterized as contract manufacturer the payment for services received are in the shareholder activity and the all the services provided to the A. E are geared towards to the identified needs of the A. E i. e supply of Finished goods to its Customer after getting manufactured from the Assessee. 7. Hence, the payment in respect of the below mentioned service to the extent of 92. 3% are held to be Nil. Purchase and order handling charges- 3, 74, 87, 673 Payment for sales service 7, 05, 49, 004 Payment for shared information technology service 3, 69, 12, 872 14, 49, 49, 549/- 8. Hence the 92. 33 % of the above amount paid in respect of various servi....
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....t of IT activities. The same is upheld in view of similar nature of services and the facts of the case, the directions in respect of the other services are as below: The assessee has allocated costs in terms of the alleged services received. It has to be seen in the context of these services as to whether these result in some tangible benefit to the assessee or not. The services as they appear are routine services and it may be just to standardize the output of the assessee. Further, the production by the Indian entity may be as per specification from the parent, but this cannot extend to the office and market operations of the sourcing etc of the assessee. It has been contended by the Ld Counsel that the assessee is a risk bearing manufacturer in this context, it is quite illogical that the entity is magnifying its costs by availing of services which at best can be duplicate in nature and content. The examination of financials of the assessee leads to this conclusion. The service content does not appear to be of the nature of stewardship nature. The TPO is well within his statutory domain to determine ALP for the intra group services rendered apparently per force to the a....
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.... received hardware/software from third parties directly and the billing was also raised by those third parties on the assessee. Only the said transaction was routed through the AE, those invoices were to the tune of Rs. 13, 87, 84, 117/- and invoices amounting to Rs. 97, 99, 091/- which was raised by the third parties on the AE for the services rendered by them to the assessee. Thus, the DRP rightly directed the TPO to examine these invoices and allowability of the same as expense to be decided. From the review of the services and benefit report and the supporting documents submitted by the assessee, it can be seen that the assessee company is benefited from the supervision and guidance of the group's functional experts. Though, the annexure show that the assessee was benefitted significantly from the intra-group services received from its AEs, it failed to give the supporting evidence such as invoice, confirmation from parties to prove the same. The assessee has also undertaken a detailed cost benefit analysis in order to demonstrate the cost savings achieved by it by availing the said services from the AEs. Therefore, when AEs transact with each other, for the purpos....
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....nt case is also not shown to be willing to pay any amount for such services, if it were, so provided by an independent enterprise or if the same would have been performed in house. The DRP is found to have considered these services as non-beneficial for the recipient and did not take it as chargeable services. The perusal of e-mails and other contemporaneous record only goes to reveal that incidental and passive association benefit has been provided by the associate enterprise. In this view of the matter there could neither be any cost contribution or cost reimbursement nor payment for such services to the AE. The TPO, therefore, has rightly adopted Nil value for benchmarking the arm's length price in respect of both these services. Wetherefore, do not find any reason to interfere with the well-reasoned conclusion reached by the AO on this count. The grounds raised in appeal in this respect, therefore, stand rejected. " Basis above, the panel holds that the services are not of the nature of stewardship in nature, but also not meeting the benefit test so as to merit allowance of the same. The ALP determined by the TPO is accordingly upheld, though not as stewardship ser....
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....n of the Hon'ble Delhi High Court in the matter of CIT v EKL. Appliances reported in (2012) 24 taxmann. com 199 (Delhi). In this connection, the Hon'ble High Court referred to the decision of the Hon'ble Supreme Court in the matter of CIT v Walchand& Co. etc. reported in (1967) 65 ITR 381. * Decision of the Hon'ble Delhi Tribunal in the matter of McCann Erickson India (P) Ltd. v Addl. CIT reported in (2012) 24 taxmann. com 21. * Decision of the Hon'ble Mumbai Tribunal in the matter of DIT vs Diebold Software Services (P) :Ltd. reported in (2014) 48 taxmann. com 26/151 ITD 463. 26. The ld Counsel, Rituparna Sinha, submitted before us that the assessee furnished before the A. O. the evidences of receipt of purchase services, order handling services and sales services (please refer to page No. 190 (3rd and 4th paragraphs) of the paper book). After examining the details, the A. O. did not make any adverse comment in his order under section 37(1) of the Act. In this connection, the appellant places reliance on the decision of the Hon'ble High Court of Bombay in the matter of CIT vs Lever India Exports Ltd reported in (2017) 78 taxmann. com 88 (Bombay) and the order ....
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....on processing services. In order to support the plea ( that assessee derived benefits from these services as per CCA agreement), the ld Counsel placed reliance on the judgment of the Hon'ble Kolkata Tribunal in the matter of DCIT Vs. Landis +Gyr ltd reported in [2017] 86 taxmann. com109 (Kol-trib). Services under the CCA TP Ajustment as disclosed in page no 398 (INR) Segments Nature of Services Documentary evidences of receipt of services along with paper book reference Costs allocated to AT&S India Pvt. Ltd. as per certificate issued by PWC Austria (no 997 to 999) (EUR) Sales Services 92. 33% of INR Sales Please refer to Page No. 535 to 537 of the paper 1. We are enclosing job description sheets of the employees of AT&S group of companies on 8, 47, 288 7, 05, 49, 004 (i. e. INR 6, 51, 37, 895) book for description of services. Main Functions: 1. Securing global customers for printed circuit boards manufactured by group companies (participants of CCA). 2. Price negotiation with the global customers. 3. Customer Care 4. To contribute in the creation of customer statistics. 5. Quotation processing services. sample ba....
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.... processes of order handling 5. To introduce necessary escalation steps in case of deviations from the given plans / processes: 6. To monitor overall stock situations according to defined targets. 7. To maintain global customer contact and correspondence 8. Reclamation handling 9. To create sales order 10. To monitor order statistics and 11. To maintain global 1. We are enclosing job description of the employees of AT&S group of companies on sample basis who are engaged in provision of order handling services under the CCA: Susanne Bucht (page no 596), Nicole Follmer (page no 600), Heike Zimmermann (page no 603). 2. We are further enclosing job description sheets of the employees of AT&S group of companies on sample basis who are engaged in provision of order handling services under the CCA; Alexander Macht (page no 881 to 882). Scholar Reinhard (page no 883 to 884). Ritz Romana (page no 885 to 886), Paukawits Michael (page no 887 to 888), Melbinder Petra (page no 889 to 890). Gether Silvia (page no 891 to 892). 3. We are enclosing copies of ten chains of emails (page no 826 to 879) along with clarification thereon (page no 805 to 811). It is found that the order handling team u....
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....enclosing copies of eighteen chains of e-mails (page no 927 to 949) along with clarification thereon (page no 815 to 820). It is found that the CCA team, with its strong bargaining power has made remarkable achievement in securing price reduction in the matter of bulk purchase of raw materials for all the group companies including the appellant. This leads to substantial cost saving for the appellant. 4. We are enclosing copies of seven chains of emails (page no 1079 to 1101) along with clarification thereon (page no 1018 to 1019). The contents of the said e-mails indicate price reduction and resultant cost saving for the appellant, introduction of technical procurement roadmap and other related issues. 1, 93, 553 28. On the other hand, the Ld. DR for the Revenue, strongly relied upon the directions of the DRP as well as order of the TPO and submitted before us that the assessee failed to satisfy the benefit test in respect of sales services, purchase and handling services. He pointed out that Indian Transfer Pricing regulations explicitly cover the transactions in the nature of provision of services, including provision of market research, market development, marketing manag....
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....d never make payment for receiving the same service twice since the incremental benefit is lost. Keeping this in mind, an activity leading to duplication of benefits cannot be construed as a service and therefore does not require any remuneration. The ld DR pointed out that it is necessary to identifythe incremental economic or commercial value that has arisen to the services recipient. A direct nexus between the services received and corresponding value created should be established. An intra-group service should be analyzed to see how it helps the service recipient make gains through increased profitability be it by increasing sales or by reducing costs. In order to understand the value creation aspect of intra-group services, it is necessary to break the same into bits and pieces and analyze it further. The value of an intra-group services can segregate into its reference value and its differential value. The reference value of an intra-group service would necessarily constitute the price of the next best alternative. Whereas, the differential value of the service is essentially the net benefit it delivers to the recipient over and above those rendered by competitive referenc....
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....es which provides that non-domestic comparables should not be automatically rejected and it has to be seen on case by case basis by the reference to the extent to which they satisfy the comparability factors. [Para 9] If the tested party has been selected consistent with the functional analysis of the controlled transaction and is a least complex party to the controlled transaction, then even if it is a foreign party, the same should be taken as the basis for carrying out comparability analysis with the uncontrolled transaction by taking into account the business environment in the country where the tested party is being benchmarked. Internationally, it has been recognized that choice of the tested party should be such having least complexity and should be the party in respect of which most reliable data for comparability is available. In Chapter 10, of the UN Manual, Indian Transfer Pricing Regulation have accepted the foreign comparables in cases where the foreign AE is the least complex entity and requisite information about the tested party and comparables are available. Thus, the Indian Transfer Pricing does not reject the concept of foreign comparables, if t....
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....king the Arm's Length margin of the assessee's transactions with its AE and the selection of the Indian comparables by the TPO is not accepted. Since the TPO has not carried out any comparability analysis or FAR analysis in respect of UK comparables chosen by the assessee, therefore, he is directed to carry out such analysis and benchmark the assessee's margin. If such comparables do not stand the test of comparability then, TPO may search other comparable after confronting to the assessee. In that case, for the search of comparability assessee will provide necessary assistance to the TPO. With this direction, the matter of transfer pricing adjustment is restored back to the file of the TPO/Assessing Officer. [Para 11]" 30. We have given a careful consideration to the rival submissions and perused the material available on record, we note that the cornerstone of Transfer Pricing principle is the comparability analysis of a controlled transaction with an uncontrolled transaction which is substratum of arriving at Arm's length price. The controlled and uncontrolled transactions are comparable if none of the differences between the transactions materially affect the fac....
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....e reproduced hereunder: "Para 1. 60 of the Guidelines states as under: "Business strategies also could include market penetrate schemes. A taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. Furthermore, a taxpayer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs (e. g. due to start-up costs or increased marketing efforts) and hence achieve lower profit levels than other taxpayers operating in the same market". Further, para 1. 62 of the OECD Guidelines states as under: "When evaluating a taxpayer's claim that it was following a business strategy that temporarily decreased profits in return for higher long-run profits, several factors should be considered. Tax administrations should examine the conduct of the parties to determine if it is consistent with the professed business strategy. Another factor to consider is whether the nature of the relationship between the parties to the controlled transaction would be consistent with the ta....
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....2, therefore we do not agree with the stand taken by the TPO in the current assessment year under consideration, by following the Rule of consistency. For that we rely on the order of the Hon'ble Supreme Court in RadhasoamiSatsang vs. CIT 193 ITR 321 (SC), wherein it was held as follows: "We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of lncome-tax in the earlier proceedings, a different and contradictory stand should ....
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....al transaction [or specified domestic transaction] has actually been undertaken [ does not exceed such percentage not exceeding three percentage of the latter, as may be notified] by the Central Government in the Official Gazette in this behalf] the price at which the international transaction [or specified domestic transaction] has actually been undertaken shall be deemed to be the arm's length price. Provided also that where more than one price is determined by the most appropriate method, the arm's length price in relation to an international transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply. ] Explanation. -For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009. (2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2) Act, 2009, is applicable in respect of an interna....
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...., (2) and (3) of section 92C, as explained above, that AO/TPO should determine the arm's length price (ALP) by applying the six methods prescribed in subsection (1) of section 92C of the Act. Normally, the arm's length price is to be determined by applying the five methods Viz: (a) comparable uncontrolled price method; (b) resale price method;(c) cost plus method;(d) profit split method;(e) transactional net margin method. However, the sixth method may be prescribed by the CBDT. Therefore, the arm's length price (ALP) has to be computed by applying only these six methods and the AO/TPO cannot ignore these methods. Therefore, the AO/TPO cannot say at any point of time that none of the methods prescribed in section 92C(1) are applicable to the assessee. The AO/TPO has to apply the appropriate method to find the arm's length price (ALP) of the assessee. Hence considering the provisions of section 92C of the Act, it is safely concluded that the AO/TPO cannot ignore these six methods which is prescribed in the statute to determine the arm's length price (ALP). Besides, section 92CA (3) also advocates that AO/TPO should not deviate from the six methods prescribed in section 92C(1), th....
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....lkata Tribunal in the matter of NLC Nalco (India) Ltd vs. DCIT [2016] 71 taxmann. com 57 (Kol. - Trib. ). ln the aforesaid case, the assessee received technical and management assistance from its AE. The TPO determined the arm's length price of the international transaction at 'NlL' value based on benefit test and without applying any of the methods prescribed under sub-section (1) read with sub-section (2) of section 92C of the Act. On first appeal, the CIT (A) upheld the order passed by the AO/TPO, On second appeal, the Hon'ble Tribunal noted that nothing was found in the TPO's order which was indicative of the existence of any of the circumstances prescribed under (a) to (d) of section 92C(3) of the Act which would necessitate intervention of the Assessing Officer/TPO for determination of arm's length price of the international transactions under review at 'NlL' value solely based on the allegation that the benefits claimed to have been received by the assessee from the AE under the controlled service agreement would not be ones for which an independent enterprise would be willing to pay. The Tribunal noted that the TPO did not apply any of the method....
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....r that we rely of the judgment of the coordinate bench Kolkata in the case of DCIT Vs. Landis + Gyr Ltd. [2017] 86 Taxmann. com, 109 (Kol. trib. ), wherein it was held that the assessee had derived commercial benefits out of rendering of intra group services by AE and payment made thereon were in the nature of third party, which would willing to pay. 34. We note that Ld. AO in the draft assessment order under section 143(3) read with 144C (1)of the Act, has not made any adverse comment under section 37 of the Act in respect of the services received under the CCA, for purchase services, order handling services and sales services. During the course of scrutiny assessment proceedings, the assessee submitted before the AO the same evidences of receipt of purchase services, order handling services and sales services as those submitted to the TPO, as per the direction of the AO. lt is pertinent to note that the AO, after examining the aforesaid details, did not make any adverse comment under section 37 of the Act. As per the provision of sub-section (1) of section 37 of the Act, the AO is authorized to examine whether an expenditure (not being expenditure of the nature described in se....