TaxTMI 
TaxTMI 
2018 (5) TMI 946
X X X X Extracts X X X X
X X X X Extracts X X X X
....we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. 4. Facts on record reveal that the assessee has undertaken the following international transactions in the Form 3CEB: Sl. No. International Transaction Value [Rs.] 1. Import purchase of raw material 393851031 2. Import purchase of traded goods 867123659 3. Distribution Services provided to AEs 19956903 4. Royalty paid 515215 5. A reference was made for determining the ALP u/s 92CA(3) of the Act in respect of international transactions entered into by the assessee during the year under consideration. Pursuant to the reference, the TPO issued a show cause notice dated 27.08.2016 asking the assessee to explain the payment of royalty and payment for technical assistance fees and why the ALP should not be recorded as NIL by applying CUP method. The assessee filed a detailed reply which was considered by the TPO and after considering the detailed reply of the assessee, the TPO remarked as under: "5.1.1 The Assessee has failed to show any benefit arising from the Brand 'NO VAC ATE". The most appropriat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l profile of a trading concern is of a marketer who has to solicit the product. In the present case the profile of the Assessee is akin to a trading concern, as mentioned by the Assessee numerous time during the course of assessment proceedings as evident from the TP study submitted by the Assessee. Further, the contradiction is seen from the approach adopted by the Assessee elf. The Assessee has mentioned that it's the Assessee's responsibility to be aware its customers about the use of product sold by it. On the other ad, the Assessee is also a customer of the AE being a trader and therefore also the AE's responsibility to provide the Assessee with such information, Moreover, no trader would have agreed to buy a product for which it is ignorant about the use unless the principal entity informs sufficiently the trader at its cost about the use of such product, since the biggest return from such would have accrued to the principal entity only and therefore the principle entity would have agreed. Therefore, in the present case, it is only due to the related party relationship that the Assessee is paying this technical fees. Moreover, since the Assessee has adequate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l commission paid and therefore any losses were pushed down to the Assessee in 1 the previous year. However, when the market for AEs products was quite developed with 4 years of painstaking and expansive effort of the assessee, the rate of commission was decreased from 4 % to 1%. This is not tenable at all by any economic and business principle. Any third party would not have agreed to such a reduction since any person at first makes efforts in developing the market through excessive marketing even though it incurs losses or earns meager net margin in the initial years so that in future years it can reap the benefit and equalize its effective return over a span of time. Therefore, if it was an unrelated party transaction, the commission rate would have increased as now was the time to reap the benefits of hard works of previous years to increase market penetration. Moreover, the Assessee is charging a commission of 4% from other AEs and also nothing has been brought on record by the Assessee demonstrating the difference in functional profile. The TP study submitted by the Taxpayer also does not bring about any difference in the functional profile. Assessee's above....
X X X X Extracts X X X X
X X X X Extracts X X X X
....older services, duplicative services, services that provide incidental benefits, or passive benefit. The assessee was also required to show that the charges paid for these services are, what would have been paid by ari independent entity, in similar circumstances. The submissions of the assessee and the facts have been carefully considered. The copy documents filed by the assessee in his paper book have also been considered. The assessee is failed to show how they substantiate the services claimed, and are not in relation to other transactions with AEs. Filing of a voluminous paperbook containing copies of general correspondence does not meet the test of allowability discussed above. This view is supported y the decision of the Hon'ble ITAT in Fosroc Chemicals India Pvt Ltd v DCIT 2015-TIM44-ITAT- (ANG-TP. In this case, the Hon'ble ITAT observed as follows: The Assessee has in the present case filed material before the TPO to demonstrate the nature of services rendered. In the paper book filed before us the index of the paper book gives a description of the service. We are of the view that the above description alone would not suffice. As we have already s....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is of the opinion that the expenditure incurred by the assessee are not commensurate to the business of the assessee, then, there are separate and distinct provisions in the Act in which the Assessing Officer can make appropriate disallowance. 10. In our humble opinion, the said expenses cannot be the matter of dispute before the TPO in as much as the TPO is to determine whether the international transaction has been done at ALP or not. The TPO cannot go into the merits of the claim of expenditure vis a vis the business needs of the assessee. On the peculiar facts of the case in hand, we do not find it fit it restore this issue to the file of the AO to decide the claim of expenditure as it would amount to giving second innings to the AO when sufficient material was available before him on record. For this proposition, we draw support from the decision of the Hon'ble Gujarat High Court in the case of Rajesh Babubhai Damania vs Commissioner Of Income-Tax order dated 28 June, 2000 reported in 251 ITR 541 [Guj] wherein it has been held as under: "The Tribunal totally overlooked the assessment of evidence done by the Commissioner of Income-tax (Appeals) and dealt with t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 85 [DEL]. The relevant findings of the Hon'ble Jurisdictional High Court read as under: "44. Another important aspect which cannot be overlooked is that the transfer pricing documentation maintained in terms of section 92D of the Act read with rule 10B of the Income-tax Rules, determined the arm's length price of the "international transaction" of the provision of buying services applying the TNMM, by comparing operating profit margin of LFIL with that of the comparable companies, as under: Weighted average OP/OC per cent. of 26 comparable companies 4.07 per cent. OP/OC per cent. of LFIL 5.17 per cent. This exercise has not been discarded. In other words, the TPO and the appellate fora were aware that in accordance with the rules, a comparison of the profit margin of LFIL with that of other similarly functioning companies was shown, and is, at the first instance, relevant to determine the ALP. The profit margin, as well as the cost plus model adopted by LFIL, was not shown to be distorted or of such magnitude as to persuade the tax authorities into discarding the exercise altogether. Having not contradicted this comparison, the Revenue proceed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....water because the assessee has purchased raw material from one AE and paid royalty to another AE. The raw materials purchased from COIM Asia Pacific PTE Ltd whereas royalty has been paid to COIM SPA. 14. A perusal of the order of the TPO shows that the TPO has, in fact, reorganized the business of the assessee thereby putting himself in the shoes of the assessee and deciding which expenditure should be incurred by the assessee for doing its business. The DRP fell into same error by affirming the findings of the TPO. 15. In so far as the commission earned amounting to Rs. 1.99 crores is concerned, we find that in the earlier years, the rate of commission was 2% which came down to 1% from 2008. This means that since 2008 and upto 2012, the Revenue has accepted the charging of commission @1%. It is only in this year the Revenue has changed its stand and questioned the rate of commission @ 1% and changed it to 4%. This shows that the TPO has compared the rate of commission charged by the assessee with the rate of commission charged by the assessee to its other AEs. This is clearly barred by the provisions of section 92F(ii) r.w.s. 92 of the Act. What the TPO has done is he has co....