AI Drafter 
TaxTMI 
TaxTMI 
2018 (6) TMI 1266
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....rned Transfer Pricing Officer ("Ld TPO"). 2. That on facts and circumstances of the case and in law the Ld AO/TPO erred in proposing and the Hon‟ble DRP further erred in upholding an adjustment of Rs. 3,85,48,147 in respect of the international transactions pertaining to (a)manufacturing activities of the Appellant and (b) IT services availed, alleging t the same to be not at arm‟s length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules, 1962 ("the Rules"). 3. That on facts and circumstances of the case and in law the Ld AO/DRP/TPO erred in splitting up the Appellant‟s operations into manufacturing and trading segments, and benchmarking the manufacturing activity separately, despite the fact that the manufacturing and trading activities are closely interlinked, thereby rejecting the methodology as per the transfer pricing study conducted by the Appellant. 4. That on the facts and circumstances of the case and in law, Ld. AO/TPO/DRP ought to have appreciated that even if the business of the Appellant was not to be viewed as a composite business and the profitability of the manufacturing activity....
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....mobile and industrial markets. The unit of the assessee was at Pune. The assessee was wholly owned subsidiary of Eaton Corporation, which was globally diversified manufacturer of fluid power systems, electrical power products, electrical distribution and control products, automotive engine air management and fuel economy products and intelligent truck systems for fuel economy and safety. The assessee had entered into various international transactions with its associated enterprises and reference under section 92CA(1) of the Act was made to the Transfer Pricing Officer (TPO). The TPO noted that the assessee in the TP study report had applied TNNM method as the most appropriate method and had selected certain external companies. The assessee had also aggregated the purchase of raw material and export of finished goods and trading activities. The TPO computed the arm's length price in respect of international transactions entered into by the assessee with its associated enterprises. The TPO noted that the assessee had bifurcated its activities into trading and manufacturing. In the manufacturing sector, the assessee had bifurcated the sales into two parts; one part was the sale t....
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....eld by the TPO that the payment for intra-group services including IT services would be treated at arm's length price only when it is proved substantially by the assessee that such services were actually received and further proving that such received services have benefited it. Vide para 14, the TPO at page 30 observed as under:- "14. During the course of TP proceedings, the assessee was requested to furnish the information regarding the need of the said services, basis of charge, how the base cost is determined, evidences for receipt of services and the details of benefit derived from such services. However, in the present case except copy of shared service agreement effective from January 1, 2005 and a certificate obtained from the AE, the assessee could not produce any other information in support of its claim." 5. The assessee in the TP study repot had mentioned the nature of services availed by it which are reproduced under para 15 at page 31 of the TPO's order and the TPO thus, concluded as under:- "16. The shared service agreement, which is claimed to be the agreement for IT services availed, was between Eaton (China) investment company Ltd. and the assessee. T....
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.... The assessee is aggrieved by the order of Assessing Officer / TPO in splitting up the assessee's operations into manufacturing and trading segment and benchmarking the same separately, despite the fact that both the activities were closely inter-linked. Further, the assessee is aggrieved that in case the profitability of manufacturing activity was to be separately evaluated, the arm's length price should have been computed on the basis of internal comparables and not external comparables. The next objection of the assessee is in respect of rejection / selection of certain external comparables. The assessee is also aggrieved by the order of Assessing Officer / TPO in rejecting the multiple year data and also in applying the adjustment on the entire cost based of the relevant segment. By way of ground of appeal No.8, the assessee is aggrieved by the upholding of transfer pricing adjustment of Rs. 50,45,303/- pertaining to the payment made to associated enterprises for availing IT services by determining the arm's length price of such transactions at Nil. 8. The learned Authorized Representative for the assessee pointed out that the assessee was engaged in the procurement ....
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....were higher than the margins of assessee with others, wherein the margin of associated enterprises was at 6.40% ad with the third parties, it was 0.06%. However, the TPO rejected the plea of assessee and benchmarked the international transactions by selecting the list of comparables and proposed upward adjustment to the arm's length price of international transactions at Rs. 4.88 crores. 11. We find that similar issue of adoption of internal TNNM method arose before the Tribunal in ITA No.1623/PN/2011, relating to assessment year 2007-08. The Tribunal vide order dated 27.02.2015 has noted the factual aspects and the arguments of both the learned Representatives and held as under:- "12. We have carefully considered the rival submissions. The dispute on this aspect relates to a plea put-forth by the assessee during the course of the proceedings before the TPO whereby assessee canvassed that the international transactions in the Manufacturing segment be benchmarked by using internal TNM Method. No doubt, in the Transfer Pricing Study carried out by the assessee initially it had adopted the external comparability on an aggregated segment of Manufacturing plus Trading activiti....
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....alysis, the international transactions of the assessee in the Manufacturing segment were at an arm's length price. 13. In-fact, the internal comparables do have a more direct and closer relationship to the tested transactions rather than the external comparables. In other words, the profitability of an assessee from the controlled transactions can be benchmarked more meaningfully with reference to the assessee‟s profitability from similar transactions carried out in uncontrolled conditions, i.e. with third parties. In the present case, assessee pointed out that the associated enterprises segment and the third parties segment were functionally comparable and therefore the third parties segment was a good uncontrolled comparable available to benchmark the international transactions entered with the associated enterprises. 14. Pertinently, assessee also undertook similar analysis with regard to its Trading segment before the TPO. In the Trading segment also, assessee tabulated the associated enterprises segment and the third parties segment and pointed out that the operating margin in the associated enterprises segment was higher than the operating margin in the third ....
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....as the reasonable allocation key. Your good self would appreciate that Transactional Net Margin Method ('TNMM') requires a functional similarity rather than product similarity. Thus, under both the aforesaid segments, there is a functional similarity viz. manufacturing function though the product may not be identical. In view of the above, the internal comparability of profit from sale of manufactured products under AE and Non-AE segment would be the most appropriate method to benchmark the international transactions pertaining to manufacturing segment." 15. The aforesaid shows that the segmentation of Manufacturing segment into associated enterprises segment and Third parties segment was done by the assessee on product basis, i.e. the associated enterprises segment reflect profitability on products which require consumption of raw material and components from associated enterprises whereas the Third parties segment reflects profitability from products which do not entail purchases of raw materials and components from associated enterprises. The TPO has pointed out that the sale of finished goods in the associated enterprises segment includes a component of sale....
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....the international transaction pertaining to purchase of raw material and components purchased from AEs (forming a part of in the AE segment) would be benchmarked against the comparable operating margin derived from the third party transactions (covered in the AE segment).  The operating margin derived from the international transaction pertaining to sale of finished products to AEs (forming a part of in the AE segment) would be benchmarked against the comparable operating margin derived from the third party transactions (covered in the AE segment)." 17. On the basis of the aforesaid fact analysis, which has not been controverted by the TPO, we find that in the present case internal comparison of the operating margins using internal TNM Method is liable to be upheld in order to compute arm's length for the international transactions of purchase of raw material and components from associated enterprises as well as sales of finished goods effected to the associated enterprises. On the basis of the aforesaid benchmarking, the profitability of international transactions under the associated enterprises segment computed at 3.25% is higher than the profitability of....
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.... that no details of service provided by the associated enterprises were available and goes on to benchmark the international transactions of availment of services by the assessee from its associated enterprises at Nil. The learned Authorized Representative for the assessee in this regard, pointed out that the Assessing Officer first assessed the allowability of expenses and made the reference to the TPO. He placed reliance on the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. M/s. Lever India Exports Ltd. in Income Tax Appeal No.1306 of 2014, Income Tax Appeal No.1307 of 2014 & Income Tax Appeal No.1349 of 2014, judgment dated 23.01.2017. He further stated that the TPO had to apply most appropriate method to benchmark the international transactions and the provisions of section 37(1) of the Act could not be applied by the TPO. The learned Authorized Representative for the assessee placed reliance on following decisions:- i) The Hon‟ble Bombay High Court‟s decision in CIT Vs. M/s. Kodak India Pvt. Ltd. in Income Tax Appeal No.15 of 2014, judgment dated 11.07.2016; ii) The Hon‟ble High Court of Judicature at Hyderabad in the case of M/s. R.A.K. Ce....
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....Referring to the case laws relied upon by the learned Authorized Representative for the assessee, he pointed out that all those case laws relate to services provided but in the present facts, benefit to assessee is not clear. In case of the assessee, no services were rendered and in such cases, no party shall pay, hence, provisions can be applied impliedly. In this regard, he placed reliance on the ratio laid down by the Bangalore Bench of Tribunal in Cranes Software International Ltd. Vs. DCIT (2014) 52 taxmann.com 19 (Bangalore - Trib.), wherein against no services provided, arm's length price was taken at Nil. He placed reliance on the ratio laid down in the following decisions:- i) CIT Vs. Cushman and Wakefield (India) (P.) Ltd. (2014) 46 taxmann.com 317 (Delhi) ii) M/s. Rockwell Automation India Pvt. Ltd. Vs. DCIT in ITA No.567/Del/2015, relating to assessment year 2010-11, order dated 31.03.2015 19. He then distinguished the facts of each of the case law relied upon by the learned Authorized Representative for the assessee. He further pointed out that the issue is decided against the assessee by the ratio laid down by the Bangalore Bench of Tribunal in M/s. Gempl....
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....provided and also that the assessee has not shown the cost analysis benefit. The TPO thus, vide para 17 determined the arm's length price of transactions at Nil relying on the decision of Bangalore Bench of Tribunal in M/s. Gemplus India Pvt. Ltd. Vs. ACIT in ITA No.352/Bang/2009, relating to assessment year 2003-04. The learned Authorized Representative for the assessee before us has furnished additional evidence including copies of e-mail correspondence on sample basis evidencing the receipt of information technology services and related support services such as accounting / finance / human resources, etc. from Eaton, China for the year under consideration. The learned Authorized Representative for the assessee also referred to page 120 of Paper Book at para 4.3.22, where the details of services availed were filed before the authorities below. He further pointed out that services were routed through website, against which debit notes were raised by Eaton China and also JV vouchers by the assessee for credit to account of Eaton China and debiting expenses. The learned Authorized Representative for the assessee pointed out that even if the agreement is ignored, the TP study tal....
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....ted but this aspect stands established and can be analyzed and benchmarked. He further stressed that when the method adopted by the assessee is analyzed on entity level, then there is no question of segregation. He further referred to provisions of section 92B of the Act. 23. The learned Departmental Representative for the Revenue on the other hand, placed reliance on written submissions earlier filed. 24. We have heard the rival contentions and perused the record. The issue raised by way of ground of appeal No.8 is with regard to transaction of Informed Technologies availed. The assessee had entered into following international transactions with its associated enterprises:- Sr. No. Description of International transaction Amount (Rs.) Method used 1 Import of raw materials, trading goods & components 44,76,55,384 TNMM 2 Export of finished goods 3,43,15,281 3 Income from services 41,855 4 Information Technology services availed 50,45,303 5 Reimbursement of expenses to AE 1,02,81,768 6 Allocation of expenses (received) 5,24,833 - 7 Recovery of expenses from AE 16,71,578 CUP Total 49....
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.... 26. In addition, the assessee was also availing quality control services. It was also reported vide para 4.3.23 that the consideration for service charged to Eaton China were as per the agreement / arrangement. The service charges were calculated at 5% of mark up on the cost incurred by Eaton China and any other Eaton entities. The services were routed through website. 27. The assessee also during the course of assessment proceedings filed certificate dated 22.04.2011 issued by Eaton China certifying the factum of provision of services by it to the assessee and the charge for services comprised of cost plus 5% markup. Eaton China also confirmed that other Eaton group companies availing same services were also charged on the same basis as the assessee. This information was filed before the TPO to establish first the case of availment of services from Eaton China and the basis for charging for such services by Eaton China on cost plus 5% markup. 28. The question which arises is whether in the given circumstances, the assessee can be held to have availed services from its associated enterprises, for which it had paid sum of Rs. 50,45,303/-. Before adjudicating the admissibility....
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....BL) and Copeland Corporation. M/s. KBL exited the joint venture in June, 2006 and the assessee became wholly owned subsidiary of Copeland Corporation. Post-exit of KBL, there was need to provide operational, strategic and advisory support to the assessee company to ensure that assessee benefit from the manufacturing and operational processes followed by Emerson Group of Companies worldwide. The said support services were provided by Emerson HK and Emerson TH, for which the assessee entered into agreement/s with both the parties separately. The aim of providing support services to the assessee was to achieve the following objectives:-  Development of new products for the Indian market;  Implementation of cost effective and advanced manufacturing processes;  Improvement of the financial performance and accounting processes;  Establishing robust control and governance processes;  Establish best in class HR practices followed throughout the Globe;  Develop strong global customer business; and  Differentiate itself in the Indian market. 18. In order to achieve the sa....
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....vices in the field of Human Resources, Marking and Product, Finance, Business Development and Management and other services i.e. support for new product, marketing material, training material and technical support. The assessee has also explained the need for services being in field of operational, strategic and advisory support services. The first aspect which arises in the present appeal is whether the TPO while ascertaining whether price paid for the services is at arm's length price or not, can enter the field of businessman, who is the best judge as to whether it needs to avail the said services. The answer to the same is „No‟. Each businessman is the best judge to come to decision as to whether it needs the said support services or not. Secondly, once such a decision has been taken by the businessman and it provides the evidence of services received by it from its associated enterprises, then the TPO cannot question the same by commenting upon the nature of services provided, where in any case, information is hyper technical. First of all, where the TPO has referred to the services provided and pointed out defects in the services provided, the first step that ....
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....ee. There is no merit in the order of TPO in rejecting the segmental details of AEs filed by the assessee vis-à-vis services availed by it. What is to be considered in the hands of assessee is the services it had availed from Emerson HK and Emerson TH and not the whole activities undertaken by the said two concerns worldwide. The assessee had put on record that not only the assessee but many other concerns were availing same services from the two entities and even the basis for remuneration to the said concerns was the same in respect of all the countries. In such circumstances, there is no merit in the order of TPO in holding that as to whether the said concerns have given services or whether they are qualified to give the services and the cost incurred by AEs. First of all, this is outside the domain of TPO. Under the Transfer Pricing Regulations what the TPO has to determine is whether the services which have been provided by associated enterprises are at arm's length price. Accordingly, we find no merit in this part of the order of TPO. 21. In this regard, we find support from the ratio laid down by the Hon‟ble High Court of Delhi in Hive Communication Pvt. ....
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....g the services because of business benefits arising from such an understanding. Law does not require the assessee to demonstrate the need for availing the services. The assessee is best person to arrange its affairs to conduct the business in the manner it wants and Revenue cannot step into the shoes of businessman to decide what is necessary for the businessman and what is not. The TPO is not empowered to question the decision of assessee to avail support services from the associated enterprises. The decision taken by the assessee in the course of carrying on its business is commercial decision and the TPO cannot question such commercial wisdom of assessee‟s decision. The second linked issue which has been raised is that the assessee did not benefit from such support services where the assessee has shown losses during the year. 24. The Mumbai Bench of Tribunal in Dresser-Rand India (P) Ltd. Vs. Addl.CIT (supra) had held that We have further noticed that the TPO has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also compl....
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....cuments and explanation furnished by it has been accepted. Further, the assessee before us has pointed out that though it is filing additional evidence but because of confidentiality clause, such information cannot be shared as it would affect the business transactions of assessee. We have gone through the additional evidence filed by the assessee and we are of the view that the assessee has established its case of availment of said services in the field of information technology. In addition, the assessee has also filed certificate from its associated enterprise dated 22.04.2011 i.e. during the course of TP proceedings, under which there is certification of factum of provision of services by Eaton China to the assessee and also basis for charging of such charge i.e. cost plus 5% markup. It was also confirmed by Eaton China that similar services were availed by other Eaton group companies and they were charged on the same basis as in the case of assessee. The assessee had also filed on record copies of debit notes and other JV vouchers raised during the year under consideration justifying its case of availing the said services and payment in lieu thereof. 31. In the above said f....
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....eld that This whimsical fixation by the TPO amounts to an arbitrary and unbridled exercise of power. Thus, the order of Tribunal rejecting the case of TPO was upheld by the Hon'ble High Court. 34. The Hon'ble Bombay High Court in CIT Vs. M/s. Kodak India Pvt. Ltd. (supra) interpreted the provisions of section 92B(2) of the Act. The facts of the case as noted by the Hon'ble Bombay High Court were as under:- "3. The respondent assessee is an Indian subsidiary of M/s. Eastman Kodak Co. USA (EKC). During the previous year relevant to the assessment year the respondent assessee sold its imaging business to one M/s. Carestream Health India Pvt. Ltd. The buyer company i.e. M/s. Carestream Health India Pvt. Ltd. was a Indian subsidiary of M/s. Carestream Inc. an USA company. The case of the respondent assessee was that the transaction of sale of imaging business by the respondent assessee to M/s. Carestream Health India Pvt. Ltd. was a transaction between the two domestic non Associated Enterprises. Hence, the provision of Chapter X of the Act would have no application. Thus, had not even declared this transaction in its 3 CEB report. 4. However the Transfer Pricing Officer (TPO) whi....
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....e same were on principal to principal basis and no reimbursement of advertisement expenses by the respondent assessee to its associated enterprises could be allowed. Consequently, he determined the arm's length price at Nil by virtue of disallowing the expenditure. The Hon'ble High Court in such circumstances observed as under:- "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 S....