TaxTMI 
TaxTMI 
2017 (12) TMI 1568
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.... ITA No.2182/PUN/2013 has raised the following grounds of appeal:- Transfer Pricing Grounds 1. On the fact and circumstances of the case, and in law, the Ld Assessing Officer (AO') under the directions of Ld Dispute Resolution Panel ('DRP') erred in confirming the addition of Rs. 10,83,09,022/- to the total income of the Appellant on account of the transfer pricing ('TP') adjustment under section 92CA(3) of the Income-tax Act, 1961 ('the Act) by rejecting the transfer pricing analysis conducted by the Appellant. The Appellant prays that the transfer pricing analysis conducted by the Appellant be accepted and consequently the TP adjustment of Rs. 10,83,09,022/- be deleted. 2. On the facts and circumstances of the case, and in law, the Ld DRP and Ld AO (following the directions of the Ld DRP) erred in determining the arm's length price of the transaction pertaining to payment of fees for advisory and other services by the Appellant to its associated enterprises ('AEs') as 'Nil' as against Rs. 10,27,42,744 determined by the Appellant and thereby making a TP adjustment of Rs. 10,27,42,744. The Appellant prays that the book value of ....
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....ich has been assessed in the hands of assessee by the Assessing Officer after dismissal of objections raised before the Dispute Resolution Panel (DRP). 6. Briefly, in the facts of the case, the assessee for the year under consideration had furnished return of income declaring total income of Rs. 43,99,42,521/-. The assessee company was incorporated under the Companies Act, was 51:49 joint venture between Kirloskar Brother Limited (KBL) and Copeland Corporation. The assessee was formed as a result of technical cum financial collaboration between the two companies, to carry on the activities of planning, developing, manufacturing, assembling, marketing and selling compressors and parts of various types, models and varieties. Subsequently, on 26.07.2006, Copeland Corporation, USA bought over stake of KBL. Copeland Corporation was wholly owned subsidiary of Emerson Electric Co., USA. The said company was engaged in the manufacture and sale of compressors and related components in the domestic and export markets and trading in the domestic market of goods procured from its group companies. The main business activities of the assessee during the year under consideration were manufacture....
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....at it had received services in the field of Human Resources, Marketing and Product, Finance, Business Development and Management and other services. The TPO noted that as regards evidence of services rendered, copies of certain documents were submitted, perusal of which show that they were e-mails and copies of some presentations. The TPO further noted that some of communications were quarterly operations review and some others related to financial reporting and compliance with group HP policies. The TPO was of the view that the reply given by the assessee was general and the assessee had not shown any evidence as to quantification of benefits. 7. The next issue raised by the TPO was the basis for charging of cost allocation, under which certain working was given by the assessee, where same expenses were allocated to different group entities. The TPO noted that the same was based on extract from accounts of Emerson Electric (Asia) Ltd. However, the details of expenses incurred and purpose of expenses were not verifiable in the absence of relevant details. The TPO observed that once questioned the basis for allocation, the assessee stated that the same were based on estimates made ....
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....associated enterprises. The assessee was thus, show caused as to why the arm's length price be taken at NIL and accordingly, adjustment of Rs. 10,27,42,744/- be made. 9. The assessee filed written submissions and explained that when the assessee was joint venture between KBL and Copeland Corporation, operational responsibilities were primarily taken care of by KBL i.e. Indian partner in the joint venture. However, post June, 2006, when KBL exited joint venture and the assessee company became wholly owned subsidiary of Copeland Corporation, there was need to provide operational, strategic and advisory support to the assessee to ensure that it benefits from the best in class manufacturing and operational processes followed by Emerson group of companies worldwide. In order to achieve the objectives, operational, strategic and advisory services were provided to the assessee by Emerson Electric (Asia) Ltd. ('Emerson HK') and Emerson Electric (Thailand) Ltd. ('Emerson TH'). Prior to October, 2007, though some services were provided by associated enterprises but no charges were levied by the group entities. But post October, 2007, consistent with international TP prin....
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....p entities. Since the billing was based on time cost basis, then charging of fees for services would be based on estimated time spent entity- wise. The assessee also referred to the cost allocation working for Emerson HK and Emerson TH, which was filed earlier and pointed out that allocation of cost on the basis of time spent had been consistently applied to all the group entities availing services and was not specific to the assessee. Further, reliance was placed on OECD Guidelines which also recommended indirect charge approach for intra group services under certain circumstances. Reference was also made to the concept of cost allocation recognized by section 92(2) of the Act, wherein it was stated that if reasonable allocation key has been applied, then the same should be accepted. It was stressed by the assessee before the TPO that expenses incurred could not be questioned and mere absence of direct correlation of cost with services availed could not be the basis for determining arm's length price at Nil. Further submission made in this regard was that the fact that cost could not be identified on direct basis did not infer that the said transaction was not in accordance wi....
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....espect of associated enterprises and the comparables selected, the associated enterprises could not be considered to be a proper tested entity in the case. Accordingly, the assessee was selected as tested party. It was further pointed out by the TPO that the transaction was not closely and intrinsically linked with any other international transactions undertaken by the assessee during the year. Hence, it is not to be aggregated with the other transactions for evaluating arm's length price. The TPO thus, concluded holding that this transaction could not be aggregated and benchmarked under the umbrella of TNMM method. Most appropriate method for determination of transaction, as per the TPO, was CUP method. The TPO then, referred to the services agreement entered into by the assessee and pointed out that remuneration was on cost plus and appropriate mark up; and even the mark up was not specified in the agreement. Further, reference was made to different clauses of agreement and the TPO was of the view that no details were provided as to the basis for invoice raised. Further, the assessee had not even asked for any clear identification of allocation keys or documentation that woul....
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....s or visit of the group personnel with any cost that was included by the associated enterprises in the billing for management fees to the assessee. Though certain strategic information was sought for but these were held to be not in respect of new products launched in India. Similarly, for exports, the assessee had separately paid the commission and it was also claimed that no royalty or technical fees were paid by the assessee company. Out of total Rs. 10.27 crores claimed as fees for managerial services for the first time, the TPO held that it comprised of Rs. 6.84 cores for assessment year 2009-10 and Rs. 3.42 crores for assessment year 2008-09, wherein the assessee had shown sum of Rs. 80,35,788/- as payable to Emerson TH and Rs. 9.47 crores as payable to Emerson HK. The TPO concluded holding that in the absence of any evidence available as to expertise of the two concerns in respect of services claimed to be received from them and since no reasons were furnished as to why the amounts claimed to be pertaining to the preceding year were not reported as international transactions in assessment year 2008-09, in case the agreements were already entered into, there was no basis for ....
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....reement and second issue which had been raised by the TPO was whether the associated enterprises was capable of providing services, then the TPO goes on to refer to various e-mails. The learned Authorized Representative for the assessee referred to the documents/e-mails placed at pages 333 and 334 of the Paper Book and pointed out that the advice was too technical in respect of particular project. The same advice was shared with Copeland Corporation in North America. The learned Authorized Representative for the assessee here questioned that how could the TPO invalidate the services which were hyper technical? He further stated that in any case the observations of the TPO were not relevant where the mere fact that the services were given was established, then the arm's length price of said transactions had to be benchmarked. He further referred to the minutes of meeting recorded, which were also about the technical issue. However, the TPO in three pages say that no services were received by assessee. In this regard, it was emphasized that the TPO has failed to consider the evidence which was filed and further evidence which was available with the assessee. He stressed that ther....
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....wn in the preceding year. In this regard, the learned Authorized Representative for the assessee pointed out that the amount for earlier years was charged for the first time during the year under consideration; hence there was no opportunity to disclose the payments due for the initial year in the preceding year. The learned Authorized Representative for the assessee in this regard pointed out that similar issue arose before the Mumbai Bench of Tribunal in Dresser-Rand India (P.) Ltd. v. Addl.CIT[2011] 13 taxmann.com 82/[2012] 53 SOT 173 and the Bangalore Bench of Tribunal in Ingersoll Rand (India) Ltd. v. Dy. CIT[2016] 67 taxmann.com 328. He referred to the facts before the Hyderabad Bench of Tribunal in TNS India (P.) Ltd. (supra) and pointed out that similar as in the case of assessee on identical facts, the issue was decided in favour of the assessee. The learned Authorized Representative for the assessee further referred to the order of TPO in applying CUP method by taking transactional value at Nil. In this regard, it was pointed out by the learned Authorized Representative for the assessee that TNMM method was applied as most appropriate method as the foreign company i.e. as....
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....ditor had applied TNMM method by taking foreign company as tested party and analyzed the transaction and compared the same with six external concerns. In this regard, the learned Authorized Representative for the assessee pointed out that since the associated enterprise was giving managerial services to the assessee, it had selected similar concerns providing managerial services. The TPO however, looked into the same but rejected as according to him, complete details were not filed. The assessee stressed that the assessee had filed the details which were relevant to determine the arm's length price, hence no merit in the action of TPO in this regard. In respect of Emerson HK Company, it was pointed out that the said associated enterprise was providing services only to group companies and because of confidential details, the same cannot be shared with third party. Hence, he stressed that there was no basis for applying CUP method. In respect of claiming expenditure for earlier year, he pointed out that since the invoice was received in the month of September, 2008, then the entire expenditure was claimed in this year. For this, he placed reliance on ratio laid down by the Bangal....
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....ce 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 said objectives, the assessee availed services from its associated enterprises. In this regard, the assessee had furnished various documentary evidences before the TPO, which were in the form of e- mails/presentation, details of visit of personnel of associated enterprises to India, purposes of visit, etc. The assessee has placed on record the said evidences at pages 323 to 898 of the Paper Book i.e. copies of e-mails/presentations and summary containing detailed explanation of the same at pages 911 to 938 of the Paper Book. The assessee had summarized about 100 e-mails justifying the receipt and benefit of services from associated enterprises and filed the same separately with reference to the page nos. of paper book, where these were enclosed. In addition to the same, the assessee had enlisted certain key benefits, which were derived by it on account of payment of fees for advisory and other services ....
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....y 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 services have been provided stands established. Once the same is established by way of assessee producing several evidences before the TPO, which were in the form of contemporaneous data, then the TPO is precluded from commenting upon the same and holding that the assessee had not received any services and also there was no need for making any payments for such services, as the services provided were not upto the mark. In any case, the perusal of various evidences filed by the assessee i.e. contemporaneous data available on record shows that it is highly technical and the same has been used by the assessee for carrying on its business activities, such evidence cannot be brushed aside being not upto the mark. The TPO had referred to part of the data and drew conclusion, which is not warranted in any case. 20. Another aspect of the issue which needs to be kept in mind is th....
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....termine 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 (P.) Ltd. v. CIT[2011] 12 taxmann.com 287/201 Taxman 99/[2013] 353 ITR 200, wherein it has been held that the legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It was further held by the Hon'ble High Court that it was not for the Assessing Officer to dictate what the business needs of the company should be; it is businessman who can only judge the legitimacy of the business needs of the company from the point of view of prudent businessman. Hence, the benefit derived and accruing to the company must also be considered from the angle of prudent businessman. The Hon'ble High Court clearly held that the term "benefit" to a company in relation to its business has a very wide connotation and it was difficult to accurately measure these benefits in terms of money separat....
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....(P) Ltd. (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 completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by so stretch of logic, it can have any role in determining ALP of that service. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. 25. Accordingly, we hold that the TPO while benchmarking the transactions has to determine whether the price paid by the assessee for the services availed is what an independent enterprise would have paid for the same services. The analysis done by the TPO of the nature of services and benefits arising to the assessee on availing such servic....
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....hich the allocation of cost on the basis of time spent on a particular project had been worked out and cost allocated to different countries. The said details for Emerson HK concern are at page 941 and for Emerson TH at page 1017 of the Paper Book. The said details were filed by the assessee before the TPO. However, he rejected the same as complete financials of total operations of said entities were not filed. The assessee pointed out that certified details of relevant services rendered were given, wherein both the entities were engaged in other business operations, which were not relevant for deciding the issue of support services received by the assessee, hence complete details were not relevant. However, the TPO brushed aside the same on the ground that complete details had not been given. 27. The assessee also pointed out that the companies were providing information of complex nature to the assessee for carrying on the business and when there is certain amount of confidentiality in the same, the same cannot be shared with the third party, as the business model of the assessee was at stake. In such scenario, where the entity is providing similar services to various entities a....
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.... CUP method is availability of the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place.The assessee has applied TNMM method and made comparison with the margins of concerns selected from foreign data base and had shown that the margins shown by the assessee were higher than the margins shown by comparable companies. In such scenario, we find no merit in the order of the TPO in applying CUP method as the most appropriate method. The findings of TPO in this regard are thus, reversed. Accordingly, we hold that the TNMM method is most appropriate method appropriate method to be applied to benchmark the international transactions undertaken by the assessee. The assessee had selected the foreign AEs as the tested party and the same may be taken as the tested party. The international transactions of fees paid for advisory and another services is thus to be benchmarked by comparing the margins of the tested party i.e. the foreign AE with the margins of external comparables selected by the asse....
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....declared by the assessee, in the said year. The assessee explained that it had received invoices after close of the year in September, 2008 which was for earlier year and also for the year under consideration. Since the invoice was received in the year under consideration, the assessee had book the expenditure during the year. In view thereof, where the invoices for services charged were raised by the associated enterprises in the month of September, 2008 and where the books of account of assessee for the financial year 2007-08 had already been closed, then the transaction for earlier year could not be accounted for or be reported during the earlier year. Accordingly, there is no merit in the contention of AO/TPO in this regard. Thus, the ground of appeal No.2 raised by the assessee is allowed. 31. The issue which is raised vide ground of appeal No.3 is against transfer pricing adjustment made by the TPO/Assessing Officer of Rs. 55,66,278/- with respect to international transactions of payment of fees for designing and consultancy services. The assessee claims that no disallowance was to be made as it had suo motu disallowed the payment under section 40(a)(ia) of the Act. The lear....
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....ed as income of the assessee by way of disallowance made by the assessee in its computation of income for violation of provisions of section 40(a)(ia) of the Act, we hold that once the addition has been made in the year under consideration, then the offer of income in the subsequent year by the assessee of Rs. 55,66,278/-, which is discount allowed to the assessee needs to be reduced from the income of succeeding year. The appeal for succeeding year is also fixed before us and accordingly, we hold that direction of exclusion of Rs. 55,66,278/- is relatable to assessment year 2010-11 and the Assessing Officer is thus, directed to reduce the income of assessee in assessment year 2010-11. The ground of appeal No.3 raised by the assessee is thus, decided as judicated above. 36. The issue in ground of appeal No.4 is in respect of payment of commission to associated enterprises. The assessee pointed out that the limited issue which arises is that during the year under consideration, the assessee had paid commission of Rs. 10,78,51,033/- to its associated enterprises, out of which sum of Rs. 1,80,44,460/- has been reversed in the subsequent financial year. The assessee pointed out that t....
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....in the next year. The Assessing Officer allowed the expenditure of Rs. 8.38 crores, however, disallowed balance provision of Rs. 6.27 crores as contingent in nature. The DRP did not interfere with the order of Assessing Officer and the Assessing Officer in the final assessment order held the provision of Rs. 6.27 crores to be capital in nature. The assessee filed rectification application under section 154 of the Act to consider the disallowance of Rs. 6.27 crores due to contingent nature of expenditure. The Assessing Officer passed the rectification order and sustained the disallowance on account of contingent nature of expenditure. 43. However, in the year under consideration i.e. assessment year 2009-10, the assessee received supporting documentation in respect of Rs. 6.27 crores that the amount has been paid to the concerned party and the same was claimed as deduction in assessment year 2009-10. The assessee claims that it had filed details before the Assessing Officer during the year under consideration. However, the claim of assessee was rejected being contingent and capital in nature. The Assessing Officer had failed to consider the rectification order passed under section ....