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TaxTMI 
TaxTMI 
TaxTMI 
2018 (11) TMI 1545
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....d Hon'ble DRP erred on facts and in law in disregarding the Gross Profit based profit approach for benchmarking the Appellant's international transactions relating to the manufacturing segment based on erroneous reasons and instead, applying Net Profit based approach by selecting Transactional Net Margin Method ('TNMM') as the most appropriate method. 3. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in indentifying Blue Star Limited as comparable to the Appellant disregarding the fact that the same was inappropriate comparable owing to differences in FAR profile ('Function performed, Assets utilized and Risk assumed') 4. The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in cherry picking Frick India Limited and Rexnord Electronics & Controls Limited as comparables to the Appellant in the Transfer Pricing ('TP') order dated 27 October 2016, which were not mentioned in the show cause notice dated 23 September 2016, with a prejudiced intention of making an addition to the returned income of the Appellant, without appreciating the fact that the same were functionally incomparable to the functions performed by the....
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....o explain and justify the same. The reply of the assessee dated 14/10/2016 was not accepted by the TPO who primarily held that the assessee failed on the touchstone of the "benefit test" and determined the ALP of the transaction at Rs. "Nil" and made the addition. It was submitted that similar expenses were incurred in 2014-15 Assessment Year. However the AE agreed to waive these expenses in 2015-16 Assessment Year. Accordingly, on account of this fact, the entire amount was written back i.e; from 2013-14 to 2014-15 Assessment Year and keeping the requirement of Section 41(1) of the Act the amount was offered for tax in 2015-16 Assessment Year. Accordingly an appropriate direction was sought. Further relying on the judicial precedent as available in order dated 9.8.2017 in ITA No.5165/Del/2014 in the case of M/s Caparo Maruti Ltd. it was submitted that considering a near identical issue, the ITAT in para 10 to 12 accepted a similar prayer of the assessee. Similar request was prayed for in the present proceedings also. The relevant extract from the aforesaid decision relied upon is reproduced hereunder : "10. The facts apropos this issue are that the assessee claimed deduction tow....
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.... segment, it was the submission of the learned AR that the assessee as contrary to what has been understood by the TPO has not taken RPM as the most appropriate method. The assessee has applied the "other method" which has been prescribed and the TPO without giving valid reasons in an arbitrary manner has deemed it necessary to substitute the same with TNMM as the most appropriate method. Having so held it was argued the TPO was duty bound to make the adjustments permissible under the said method. These were warranted and brought to the notice of the TPO who should have been done. The allowability of the to adjustments sought qua the comparables, it was submitted, are on record in the synopsis filed and were agitated before the DRP also which Forum has whimsically brushed aside the submissions. Referring to the record it was submitted the TPO refused to address those stating that the data was not robust. Having so held, it was argued the selection of TNMM as the most appropriate method (hereinafter referred to as MAM) becomes questionable as there were sufficient reasons on record brought out by the TPO himself that TNMM as a method to be applied for the transactions of the assesse....
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....97, 493/Bang/2015. Accordingly it was his prayer that relief was maintainable to the assessee on this ground also. 7. It was his vehement argument that the assessee was not a fly by night operator only booking losses and is a genuine player in the market a new entrant with full intention to stay the long haul. The relevant charts relied upon are reproduced hereunder: Period Total capacity units) installed p.a (in Actual production p.a (in units) Utilization % Supporting document FY 2012-13 700,000 58,677 8.38 Tax Audit Report for FY 12-13 attached as Annexure 3A FY 2013-14 700,000 196,506 28.07 Tax Audit Report for FY 12-13 (relevant pages) attached as Annexure 3b Cost Audit Report attached as Annexure C FY 2014-15 697,500 246,547 35.35 Tax Audit Report for FY 14-15 attached as Annexure 3D FY 2015-16 697,500 270,736 40.11 Cost Audit report FY 1516 attached as Annexure 3E 717,500 345,195 48.11 Cost Audit Report FY 1617 8. Accordingly, it was his submission that firstly the method selected by the assessee has been accepted by the TPO in the immediately preceding assessment year hence, it deserves to....
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....n areas of its operations evident from page 9 of the Annual Report. Addressing his arguments for exclusion of Rexnord Electronics & Controls Ltd. it was submitted that this company was also functionally dissimilar as it was engaged in manufacturing of fans, motors, blades and their accessories. The requirement of these products, it was submitted, is almost for the entire year unlike the assessee's product which has a limited seasonal requirement. Thus, it was argued, there was no comparison. Referring to the record, it was submitted, the Assessee manufactures copper heat exchanger coils which are assembled along with compressors, electric motors, blowers etc. which are assembled for air-conditioners. 13. The DRP's order, accordingly without addressing the facts upholding the TPO's action was contrary to judicial precedent notwithstanding the further arguments that they did not meet the functional requirements. 14. The ld. CIT-DR submitted that he relies upon the order of the DRP. 15. We have heard the rival submissions and gone through the material available on record. The assessee in the facts of the present case is a joint venture between Carrier and Midea. Amongst the var....
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.... 17. Having so formulated the issues which fall for our consideration, we deem it appropriate to refer to some relevant facts. It is seen from the record that the assessee is engaged in the manufacturing and trading of light commercial air conditioning systems. The TPO picks up the above two international transactions entered by the assessee with its AEs. The TPO noted that for bench marking international transactions relating to manufacturing operations, "the assessee has rejected RPM and applied other method". The TPO observed that for availing of management charges the said exercise has been done without demonstrating how independent third party would have paid or would be willing to pay for such services. The TPO in Part A of his 30 paged order deals with payment for availing of management services and in Part 'B' considers the transfer pricing adjustments qua the manufacturing operations. The manufacturing operations are addressed at pages 20 to 30 of the order. Since heavy reliance is placed upon the nature of queries raised by the TPO in the course of the assessment proceeding and in the detailed show cause notice issued, the relevant extract from the order is reproduced h....
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....rmed or risks assumed by the controlled parties and the comparable uncontrolled parties. It requires a set of closer comparables as it uses 'gross cost margins' concept for its analysis, which is more susceptible to differences in functions and risks assumed between the lasted party and the comparables. The RPM is generally used in case of a distributor. In oilier words, RPM could be applied in cases where one enterprise obtains goods and services and sells the same to unrelated party without «any value addition. Since. CMI is not engaged in purchase and resale of tangible property without adding any substantial value to the product, the RPM does not appear to be the most appropriate method." In view of the above, RPM applied by the taxpayer is rejected. The onus is on the taxpayer to carry out suitable adjustments to improve comparability. However, the taxpayer has failed to discharge the onus. Therefore, RPM is rejected and TNMM is accepted as the most appropriate method." 19. The relevant discussions at pages 23 to 25 on facts is reproduced hereunder: "The key advantage of the TNMM is that there is often available data in the public domain about the net p....
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....idelines advocate use of TNMM method as it allows comparability of the functions rather than strictly focusing on product/ service comparability as in the case of CPLM, Resale Price Method and CUP. Further, even developed nations like the US under its Transfer Pricing Regulations (§ 1. 482-5) advocate use of TNMM as it compares functions rather than on products/ services and hence TNMM is more tolerant to differences that may arise from product differentiations: "Because operating profit usually is less sensitive than gross profit to product differences, reliability under the comparable profits method (akin to Transactional Net Margin Method) is not as dependent on product similarity as the resale price or cost plus method' Taking into account aforementioned discussion, TNMM method shall be applied for benchmarking the international transaction relating to manufacturing operation of the taxpayer." 23. On the international transactions pertaining to the management charges, the other international transaction picked up by the TPO, the detailed show cause notice issued by the TPO is as under: Part A: Payment for availment of management services Part B: Transfer pr....
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....ises have specifically dedicated service centers for the taxpayer The AE was not prohibited from rendering services to third parties as well. It is apparent, as has been mentioned above, that services of such nature are being performed by the taxpayer itself during its normal course of business. Under arm's length circumstances no independent enterprise would be willing to pay for services which are a part of its routine business performed by it and would not engage it to receive such incidental services for a payment, even at cost. * Moreover, it is not disputed that the activities for which it is paying, are also performed by itself Under the OECD guidelines, no intra-group service should be found for activities undertaken by one group member that merely duplicate a service that another group member is performing for itself, or that is being performed for such other group member by a third party. Moreover, even if it is presumed without conceding that business exigencies do permit third party involvement in spite of its own endeavor, in no case is there is scope for duplicity of services Moreover, the cost of such services, if any, would need to be identified to prove that....
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....ime of entering into agreement. Whether any benchmarking analysis was done by the taxpayer so as to compare the amount which he would have paid to an independent person under similar circumstances. d. Whether an independent person would have paid such amount in comparable circumstances e. Whether the expected benefit commensurate with the payment f. Whether the taxpayer has separately incurred any expenditure on similar services and if so the necessity of making further payment to the AE for the same activity or it is a duplicate payment. g. Whether the payment is in the nature of shareholder's activity or largely for the benefit of the AE. h. Whether the AE is rendering such services to other AEs or independent parties and if so the rate / amount charged from such persons. i. The cost incurred by the AE for providing such services and the basis of allocation key j. If the AE has charged any mark-up on such payments the arm's length margin is also examined. In the present case to any of the transactions the taxpayer could not show that these above mentioned criteria were fulfilled The taxpayer has not been able to show as to when and how the various serv....
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.... Co Vs US 435,US 561,573(1978) the Hon ble US Supreme Court observed, "In applying the doctrine of substance over form, the court has looked to the objective economic realities of a transaction rather than to the, particular form the parties employs." "In the field of taxation administrators of law and the courts are concerned with substance, relations and formal written documents are not rigidly binding." (Helvery Vs Lazanus & Go. 308 US(252)." 27. In the said background, as has been specifically highlighted by the learned CIT DR, the assessee was required to furnished details of services etc. The relevant extract from page 11 & 12 of the TPO's order is reproduced hereunder: The OECD also recognizes this reality in its guidelines of 2010. The relevant portions are reproduced below: "The taxpayer was inter alia asked to furnish details of services received by him from the expatriates along with details of tangible and direct benefits accruing from their service. The assess in his reply has given vague answer without clarifying the actual receipt of service from them, the need for such service or the evidence of any tangible and direct benefits accruing out of the aforesaid....
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....ysis was done particularly when a huge payment has been made by it to the AEs. In an arm's length situation, before availing any service, an independent person would consider the nature of services required by it and would make the payment which commensurate with the nature of the service and the expected benefit derived there from." As can be seen from the reply of the taxpayer as stated above he was unable to give a clear reply along-with documentary evidence on any of the following issues: 1. Contemporaneous documentary evidence to show that these services have actually been 2. Need for the receipt of such services for which payment has been made 3. Documentary evidence as to when and how these services were requisitioned from the AEs. 4 Basis of determination of rate or payment for IGS at the time of entering in to the agreement 5. Details of cost benefit analysis vis a vis the expected benefit from the IGS and the payment made for the same 6. Details of benchmarking analysis done at the time of entering into the agreement so as to compare the payment of IGS to the AE vis a vis an independent party under similar circumstances 7. Tangible and direct benef....
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....e being allocated: -Examples to illustrate those benefits. -any documentation in support of justification of the fee for the services rendered, e.g. copies of time sheets or cost centre reports, any letters, manuals, instructions, proof of -visits, written advice, periodic activity reports which could establish full details of services rendered over the period covered by the charge, confirmation that the fee calculation agrees with the service contract and any other documents supplied by the payee. 27.1 On the basis of these detailed queries the TPO concluded as under: "Findings on the basis of above; On the basis of the above following points are noticed: - The taxpayer has not been able to prove the benefits that it had derived from the services purportedly provided by the Expats. No independent entity would pay for such services without any cost benefit analysis, * The taxpayer has not furnished any evidence as to the cost benefit analysis with regard to the independent local employees. No third party would like to avail services without any cost benefit analysis with regard to Expats vs. independent employees. No documentation has been produced by the taxp....
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....the MNE as a whole, and such alterations may even be made retroactively. In such instances tax administrations would have to determine what the underlying reality is behind a contractual arrangement in applying the arm's length principle 1.68 In addition, tax administrations may find it useful to refer to alternatively structured transactions between independent enterprises to determine whether the controlled transaction as structured satisfies the arm's length principle. Whether evidence from a particular alternative can be considered will depend on the facts and circumstances of the particular case, including the number and accuracy of the adjustments necessary to account for differences between the controlled transaction and the alternative and the quality of any other evidence that may be available. In view of the foregoing, the discussion already made above is summed up as follows: * In this case, the taxpayer has failed to substantiate that services have actually been rendered to it and benefit has actually been derived by it on the basis of documentary evidence. In support of its contention, the taxpayer has merely furnished copies of certain mails exchanged bet....
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....nditure without independently ascertaining the value of the goods/services intended to be availed, in the market and that too at the best negotiated prices. No such effort has been demonstrated to be made at the end of the taxpayer, which weighs heavily against the normal practices of business prudence, * The contention of the assessee that the payment of intra group services is a business decision which cannot be questioned is based on wrong appreciation of the transfer pricing legislation. The decision of LG Electronics India Pvt. Ltd. (ITA NO.5140/Del/2O11) is applicable in this case. The interplay between Section 37(1) i.e. 'for the purpose of business' and Section 92 has been elaborately discussed and decided in the case of LG Electronics (supra). Therefore, there is no merit in the argument of the assessee that the expenses were incurred for its activity. Section 92 is applicable on an independent footing. The TPO has to undertake an exercise of finding an arm's length price of the underlying international transaction u/s 92(1) of the Income Tax Act. The principle of arm's length price mandates the TPO to compare the uncontrolled transaction with independent partie....
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....xpertise on various plant operations globally and had better understanding on process improvements and its benefits. In order to improve die manufacturing efficiency, the services of AE were indispensable for the Appellant because of the above-mentioned support provided by AE. Based thereon, it was reasonable to conclude that the above services availed by the Appellant are as such that independent enterprises in the ordinary course of business would be willing to pay for it. 2.3 The above-mentioned services were specifically provided to the Appellant and as such there is no cost allocation mechanism which typically exists when a common cost pool is allocated amongst several subsidiaries of an MNC group. 2.4 Following are the sample evidences that help in demonstrating that services were rendered by AE to the Appellant: (i) . Preparing manuals: AE assisted Appellant in preparing various manuals. The assistance provided by AE to the Appellant is as under: * detailing the specification and technicalities of the various air conditioners; * detailing the various features included in each of these air conditioners; * Specification of the brand trademark, color, font, al....
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....that on same set of facts, the TPO in the manufacturing segment has in 2014-15 assessment year accepted the same PLI i.e. G.P. to Sales ratio thus, in the very first year when manufacturing activity started, selection of most appropriate method should not have been arbitrarily interfered with. However, if adjustments as permissible under TNMM are considered, he ultimately conceded that the issue of selection of most appropriate method may be left open for adjudication in some other year recording the assessee's objections to tinkering with the most appropriate method without any justification. Having thus considered the facts and circumstances alongwith the submissions of the parties, we leave the issue of selection of the most appropriate method open to be considered in another year. We note that the TPO while upsetting the most appropriate method selected by the assessee has admittedly not considered the facts fully and infact appears to have confused himself with the method selected by the assessee. Since in view of the relief maintainable to the assessee even in the method selected by the TPO the issue of most appropriate method in terms of the concession of the assessee be....
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....work out the profit margin of the relevant segment of this comparable the inclusion of the said comparable is upheld on the said condition. However in case the TPO is unable to obtain the relevant details then the comparable is directed to be excluded. Needless to say that a reasonable opportunity of being heard shall be granted to the assessee in the eventuality of the information is claimed and utilised by TPO. 32. The issue which is next left for consideration is the capacity utilisation benefit which the assessee prays for. The relevant details we notice were not available to the tax authorities though the arguments we see have been advanced. It is further noticed that the relief as prayed for was not granted as the data was considered to be not robust and as we seen it was not even demonstrated. We have seen that the assessee as per the details which have also been compiled in the form of a chart made available has demonstrated the fact that admittedly the claims of under utilization of the assessee's capacity are borne out from record wherein admittedly the manufacturing activity started in September 2012. We have seen that the assessee has shown that after reaching a thresh....
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....the position on facts remains identical. We find that though the legal position is well settled by the decision of the Delhi High Court in the case of CIT versus EKL 345 ITR 241 and in the case of Cushman Wakefield, however, considering the judicial precedent in assessee's own case wherein on similar set of facts and circumstances the TPO himself has made no addition in 2014-15 assessment year we accordingly deem it appropriate to set aside the issue to the TPO to verify whether there was any services availed by the assessee during the year or not. The factum of payment made in the year under consideration stands offered in 2015-16 Assessment Year as argued i.e. has it been included in the taxable income of the assessee in terms of section 41 (1) of the Act has no relevance in this case. Subject to verification the TPO is directed to examine the issue afresh and decide the issue in accordance with the law. 34. Accordingly in view of the detailed reasons given hereinabove the issue set out in a) is not being adjudicated upon and has been left open in view of the concession of the assessee. The issues are kept alive noting the objections of the assessee that the TPO has arrived at a....