TaxTMI 
TaxTMI 
2018 (5) TMI 900
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....ces 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 law, the Ld. AO has erred in not appreciating that the aforesaid disallowanc....
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....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 main issue of transfer pricing adjustment of Rs. 90, 32, 40, 004/-, which is made, in respect of sale of finished goods b....
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....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 be reviewed by the assessee. The assessee paid commission to AT&S AG (AE) @ 6% of gross distributor's price for carrying out di....
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.... (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% Therefore, the ld TPO noted that in the assessee's case under consideration, admittedly neither CUP method nor Profit Split Method is applicable. ln CPM and RPM, ALP is determined by adding an appropriate gross profit margin to an AE's ....
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.... 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 assessee and the AE. The assessee has submitted making out a case for applicability of CUP method: "Your kindself may please note that in the instant case, the transactions involving sale of PCBs by the assessee to AT& S AG in Austria (Europe) during the financial year 201l-12 stood as controlled transactions, whereas the transactions involving sale of exactly th....
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....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 uncontrolled transactions took place in Europe i. e. in the same geographical location as disclosed in the copies of back to-back invoices submitted to the TPO/DRP on sample basis. For administrative convenience, AT&S AG retained distribution commission and warranty expense out of the sale proceeds collected from the independent customers and remitted the balance to the....
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....grave;-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 'profit A' be substituted with anything other than from the international transaction, that is, a transaction between the associated enterprises. So, it is the profit actually realized by the Indian assessee from the transaction with its foreign AE which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterpri....
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....t 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 circumstances. At this juncture it is important to understand the CUP method as per the provisions of clause (a) of sub-rule (1) of rule 10B of the Income-tax Rules (hereinafter referred to as the 'Rules'), which inter alia reads as follows: "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specifie....
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....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 as traded with AEs constituting international transactions are traded with Non- AEs, it always proper to consider the price of goods traded with non- AEs, for benchmarking price of good traded with AEs. In our considered opinion the Id. CIT(A) was justified in upholding the preference of CUP method over TNMM. " In the instant case, the transactions involving sale of PCBs by the appellant to AE during the financial year 2010-11 stood as controlled transactions, ....
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....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 method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. The ultimate aim of the transfer pricing is to examine whether the price or the margin arising from an international transactions with the related party is at ALP or not. The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of....
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....da 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 international transaction in a particular fact situation, and unless another method is proven to be more reliable a method vis-a-vis the fact situation of that particular case, the CUP method is to be preferred. The reason is simple. When associated enterprises enter into a transaction at such conditions in commercial and financial terms, which are different from commercial and financial terms imposed in comparable transaction between independent enterprises, the difference in these two sets of conditions in financial and commercial terms re attr....
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....t 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 for the Revenue submitted before us thatthe OECD Guidelines defines 'tested party' as "the one to which a transfer pricing method con be applied in the most reliable manner and for which the most reliable comparable can be found, i. e. it will most often be the one that has the less complex functional analysis. " UN Manual defines tested party in the similar manner. A Tested party should have the following attributes on bases of theses definitions * Available of reliable and accurate data for comparison * Least Complex (amongst the parties to the transaction) * Da....
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....ssessee 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 method for benchmarking international transactions comparison has tobe with uncontrolled transactions. Further, the assessee's reliance on the decision of DCIT vs. Calance Software (P). Ltd. reported in 82 Taxman. Com 390 (Delhi ITAT) is misplaced, as facts are different but for back to back transactions of software development services at the same price. Therefore, the ld DR pointed out the followings: 1. The assessee is a manufacturer whereas the AE is a distributor. Hence, functions are different. 2. In the referred case, there is no issue of tested party. 3. Once the tested party issue comes into existence, the scenario changes and the mechanism of TP has to be applied to the t....
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....lity 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 to provide necessary internal or external comparables for examination by TPO. 16. We have given a careful consideration to the rival submissions and perused the material available on record, we note that ld DR for the Revenue submitted before us about the applicability of Comparable Uncontrolled Price Method ( CUP- Method) and explained the circumstances where the CUP method may not be applicable. He explained the internal CUP and external CUP and relied on certain judgments of the Tribunal, which are given in para 15 of this order. We note that all these are theoretical and academic exercise. The ld DR failed to bring on record any cogent evidence or material which can prove that CUP method is not suitable for the assessee. Why and how the uncontrolled price does not exist in the assessee's case under consideration....
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....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 and for which the most reliable comparable can be found. The selection of tested party depends on the following factors: (i) Least Complex (amongst the parties to the transaction) (ii) Data available can be used with minimal adjustments Therefore, it is abundantly clear from the above that, a tested party is the one to which TP method can be easily applied. This means, in this case Indian Company being the tested party and the TP provisions or method shall be purely with reference to Indian Company only. The Transfer Pricing analysis has to be under taken for the transaction undertaken by Indian Company with foreign independent customers. Besides, the Coordinate Bench of ITAT Mumbai has held in case of Aurionpro Solution Limited (ITA No 7872 of 2011) that for the purpose of determining the ALP, tested party can be th....
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....stomers 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 services. The costs incurred under the CCA was allocated to the parties to the aforesaid agreement using appropriate allocation keys mentioned in the CCA without adding any profit element thereto. The team formed under the CCA taking staff from all the group companies, was responsible for development of market / customer base for the group globally, procurement of order for PCBs from the customers globally, handling of customer orders globally in efficient manner, selection of suitable suppliers of raw materials globally and so forth. The assessee made separate payments to AT&S Asia Pacific Ltd Hong Kong (administrator of CCA) for receiving (i) sales services, (ii) purchase and order handling services and (iii) shared information technology services under the CCA during the relevant financial year. As the aforesaid transactions constituted reimbursem....
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....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 services purported to be received is taken as NIL i. eRs. 13, 38, 31, 918/- is taken at Nil. 22. Based on the order of the ld TPO, the Assessing Officer made the addition in the fair assessment order. The total upward adjustment of Rs. 100, 67, 30, 000/- was made in the draft assessment order passed on 17. 03. 2016, consisting ALP in respect of export of printed Circuit Board(PCBs) and on account of receiving of purchase and handling services and sales services. Later, as per the direction of ld DRP, New Delhi dated 27. 09. 2016, the assessee company has submitted the calculation of revised total TP adjustment. As per the direction of ld DRP, the assessee company got relief of Rs. 37, 39, 732/- and the TP adjustment to the extent of Rs. 100, 29, 90, 268/- ( that is, Rs. 100, 67, 30, 000 - Rs. 37, 39, 732) was sustained in the hand of the assessee. Out of total TP adjustment, the amount of Rs....
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....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 assessee. Hon'ble Delhi High court has held in EKL Appliances ([2012] 24 Taxmann. com 199 Delhi/ 345 ITR 241 Delhi): 22. Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the 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 un-remunerative 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 consideration for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure con 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 financi....
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.... 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 purpose of transfer pricing, they must replicate the dynamics of market forces, as there is no concept of free lunch in business dealings. Thus, the DRP rightly held that the benefit test which is well recognized by OECD 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 anindependent entity in similar circumstances, would be prepared to pay for it. If nobenefits have been provided, then the services cannot be charged for. Since the assessee, just explained in generic nature about the benefits vis-a-vis the intra-group services payment to its AEs, therefore, we uphold the orders of the DRP as well as the TPO. " A reference may also be made to the judgment of Hon'ble Delhi ITAT in Knorr Bremse India P Limited (ITA no. 5097/Del/2011) Asstt. Yr: 2007-08- "9. 2. After hearing the parties with reference to material on ....
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....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 service. The assessee fails on the benefit test primarily. This objection is disposed of as above. 24. Aggrieved by the order of theld DRP/TPO, the assessee is in appeal before us. The assessee has raised Ground Nos. 4 to 8 in respect of arm's length price adjustment to the tune of Rs. 9, 97, 50, 264/- against payment made by the assessee to its AE for receiving purchase and order handling services and sales services from the AE. These grounds are common and identical; therefore, these have been taken altogether. Before us, Ld. Counsel, Rituparna Sinha, as regards thepurchase and order handling services and sales services from the AE, submitted thatas no adjustment was directed by the TPO in respect of the aforesaid transactions for A. Y. 2009-10, AY 2010-11 and AY 2011-12 on the same facts and circumstances of the case, therefore, the TPO violated the rule of consistency enunciated by the Hon'ble Supreme Court in the case of Commissioner of Income Tax, Delhi - IV, Appel....
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....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 of the Hon'ble High Court of Delhi in the matter of Commissioner of Income tax - IV. Cushman and Wakefield (India) (P) Ltd reported in (2014) 46 taxmann. Com 317 (Delhi). The Hon'ble High Courts held that the authority of the TPO would be to conduct a transfer pricing analysis to determine the arm's length price and not to determine whether there is a service or not from which the assessee got benefits. That exercise of factual verification would be left to the A. O. under section 37 of the Act. It is pertinent to note that in the instant case, the A. O. on verification of the aforesaid details, became satisfied and did not make any adverse comment under section 37(1) of the Act in the assessment order: 27. Coming to the Ld Counsel's other limb of contention on 'Benefit Test', she submitted before us that the Ld. AO/ld. DRP was wrong in alleging that the appellant fails to satisfy the 'benefit test', without duly considering the evidences of receipt of purchase services, order handling services an....
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....obal customers. 3. Customer Care 4. To contribute in the creation of customer statistics. 5. Quotation processing services. sample basis who are engaged in provision of sales services under the CCA: Susanne Bucht (page no 596 - 597), Katharina Bost (page 598), Nicole Follmer (page no 599 - 600). Heike Zimmermann (page no. 602 - 603) 2. We are considering a flow chart of the quotation processing exercise undertaken by CCA team - (page no 581 and page no 983 to 994) 3. We are enclosing copies of ten chains of emails (page no 606 to 633) along with clarification thereon (page no 582 to 588). In the aforesaid e-mails, it is mentioned that the global sales service team under the CCA receives enquiry or annual contracts from global customers and starts the quotation processing exercise. In this connection, they requested the employees of the appellant to calculate price quotes for their products and send the same to them for finalisation with the global customers. 4. We are enclosing copies of ten chains of emails (page no 1179 to 1273) along with clarification thereon (page 1023 to 1027). In the aforesaid e-mails, the employees of the appellant communicate to the CCA team that they hav....
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.... 826 to 879) along with clarification thereon (page no 805 to 811). It is found that the order handling team under the CCA allocates orders received from global customers to the appellant and deal with the matters of shipment / delivery of the ordered items. The CCA team functions as a coordinator between the appellant and global customers in the matter of technical specifications of the products ordered, delivery schedule, sample quantity and so forth. 4. We are enclosing copies of twenty three chains of e-mails (page no 1103 to 1077) along with clarification thereon (page no 1019 to 1022). It is found that the CCA team deals with such matters as delay in delivery date, allocating new order to the appellant, entries made in material master created in SAP software, shipment of products, taking up quality confirmatory tests, approval 3, 99, 976(3 02316+97 660) customer forecast in SAP software from customer for additional speed up cost and other matters of order handling Purchase Services Purchasing Please refer to Page No. 528 to 530 of the paper book for description of services. Main Functions: 1. Procurement of raw materials at reaso....
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....es, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service, within the ambit of Transfer Pricing provisions. However, assessee failed to provide any further guidance on the approach to be followed while benchmarking intragroup services. The Ld. DR placed reliance on the international tax practices followed in the UN TP Manual, OECD Guidelines, the United States Transfer Pricing regulations etc, both by the taxpayer and the Revenue while undertaking the compliance and the audit exercise respectively. The test for an intra-group service generally involves examination of the following factors: * The nature of activities; * The associated need and benefits; * Documentary evidence in support of the transaction; * The charge-out mechanism; and * The ALP of the transaction. The Ld DR explained that it is essential to draw a line of distinction between a business activity and a service. Essentially, the guiding principle that goes in determining the existence of an intra-group service iswhether an independent enterprise in com....
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....bove those rendered by competitive reference service providers i. e. the value over and above the reference value. It is that part of the economic value which is attributed to its difference over alternatives. It is very common to find an Indian subsidiary of an MNE group receiving some centrally provided services, for instance, to gain economies of scale through the concentration of activities. These services may vary from being very simple administrative functions to more complex industry specific functions. The decision to provide certain services centrally may also be determined by the need to have the best practices implemented across geographies. Therefore, the needs and benefits of Intra-group service arrangements is driven by the necessity to achieve operational efficiency, improve business operations, standardize policies, procedures and controls that are conducive to the MNE group's business operations. 29. In addition to this, the ld. DR for the Revenue has relied on the judgement of Hon'ble Mumbai Tribunal, in the case of Tata Motors European Technical Centre Plc. Vs. Assistant Director of Income Tax(IT)(2)(2) in [2014] 52 taxmann. com 411 (Mumbai-Trib. )wherein it was....
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....eign comparables, if the tested party is foreign AE. The blanket assumption by the TPO and DRP that foreign comparables cannot be accepted at all, is not correct. [Para 10] In the instant case, there can be no dispute with regard to the fact that the tested party is TMETC, whose operating profit is to be benchmarked by carrying out functional analysis of its controlled transactions for which reliable data for its comparability is available in the country where it is located, then such comparables has to be taken into account for carrying out the comparability analysis for the purpose of Transfer Pricing and benchmarking the Arm's Length Price. The TMETC for the purpose of rendering services in India is incurring all its cost in UK like direct costs, employee costs, legal and professional fees, rent and other operating expenses, then for the purpose of computation of PLI, these costs have to be taken into consideration for determining the profit margin. Since all the main costs attributable to the PE are based on cost incurred in UK, then it can be very well-said that PE is influenced by the economic and financial conditions of UK, as against the Indian economic factors. The ....
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....t the factor being examined in a given methodology, whether determination of prices or for profit margin and for such determination a reasonable accurate adjustment can be made to eliminate the material effects of any such differences. Rule 10B(2) of Income Tax Rules, provides the comparability of the transaction with uncontrolled transaction which has to be judged with reference to specific characteristics of the property transferred or services provided; FAR analysis; contractual terms; conditions prevailing in the markets, that is, economic conditions in which respective parties transact or operate including geographical locations, size etc. Thus, comparison of attributes of the transaction is carried which would affect conditions in Arm's length dealing. Rule 10B (3) specifically provides as under:- "An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the....
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....ness strategy. For example, in arm's length dealings a company acting solely as a sales agent with little or no responsibility for long-term market development would generally not bear the costs of a market penetration strategy. " Thus, business strategies, market penetration, increase or save its market share are relevant and material factors determining prices and profit. All these factors have to be taken into consideration while eliminating the material effects which warrants some kind of reasonable accurate adjustments. 31. Before us the material factors relating to principle of consistency, which have been pointed out by the assessee is that on the same facts and circumstances of the case, no ALP adjustments were directed by the Ld TPO in respect of international transactions involving payments made by the assessee under the Cost Contribution Agreement (CCA) for receiving purchase services, order handling services and sales services for last three assessment years i. e. AY 2009-10, AY 2010-11 and AY 2011-12. Though there was no change in the facts and circumstances of the case for the previous year relevant to the assessment year 2012-13, the TPO/DRP determined the arm'....
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.... cited precedents on principle of consistency are squarely applicable to the assessee under consideration, as the facts under the Cost Contribution Agreement (CCA) for receiving purchase services, order handling services and sales services for last three assessment years i. e. AY 2009-10, AY 2010-11 and AY 2011-12, remain same and the Ld. DR for the Revenue is unable to produce any material to controvert the aforesaid facts in CCA agreement. Therefore, the Revenue has to have some consistency in its views and it cannot blow hot and cold at its sweet-will and hence the assessee succeeds on this score. 32. On the next objection of the ld Counsel of the assessee, we note that the action of the TPO/AO in determining the arm's length price of the international transactions under consideration without applying any of the methods prescribed under sub-section (1) and sub-section (2)of section 92C of the Act, which leads to violation of the provision of sub-section(3) of section 92CA of the Act read with sub-section (3) of section 92C of the Act. The relevant provisions of section 92C are given below for ready reference: "Section 92C: Computation of arm's length price. (1) The arm....
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....ch such transaction has actually been undertaken exceeds five per cent. of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso. (2B) Nothing contained in sub-section (2A) shall empower the Assessing Officer either to assess or reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year the proceedings of which have been completed before the 1st day of October, 2009. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction [or specified domestic transaction] has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction [or specified domestic transaction] have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the ....
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....tion (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm's length price in relation to the international transaction [or specified domestic transaction] in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee. Therefore, it is abundantly clear that the TPO has to compute the arm's length price (ALP), by applying the provisions of sub-section (3) of section 92C of the Act. It means the TPO can not apply his own method to compute the arm's length price (ALP) of the assessee. That is, the statute does not give right to the TPO/AO to adopt their own developed methods. The most appropriate method (MAM) has to be selected by the TPO/AO out of the six methods prescribed by the statute. He has to select any one method as MAM, out of the six meth....
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....the ALP adjustment made by the AO/TPO. We note that in the assessee's case under consideration, the TPO/AO has not selected any method (out of six methods), therefore, the arm's length price (ALP) computed by the AO/TPO is not in accordance with the provisions of section 92C (1) of the Act, hence we direct the TPO/AO to delete the addition. 33. Now, we address the issue relating to 'Benefit Test'. The ldDR for the Revenue alleged that the assessee had failed to satisfy the 'benefit test' in respect of payments made by the assessee under the CCA( Agreement) for receiving purchase services, order handling services and sales services. We note that the assessee has submitted before the ld. TPO, the detailed nature of the aforesaid services and copies of documentary evidences of receipt of services on sample basis. We note that the ld Counsel for the assessee submitted before us a brief chart which is mentioned in para 27 of this order to prove the benefit test. This chart explains the nature of services, main functions, and documentary evidences for receipt of services along with paper book reference. This chart also explains the relevant para of the Cost Contribution Agreement (CCA)....
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....utation of the income chargeable under the head "Profits and gains of business or profession. We note that the Hon'ble High Court of Bombay in the matter of CIT vs. Lever lndia Exports Ltd. [2017] 78 taxmann. com 88 (Bom) wherein the Hon'ble High Court has held as follows: "7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales. Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure....