TaxTMI 
TaxTMI 
2019 (4) TMI 1304
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.... masse. 3. The common grounds of appeal raised by the assessee in these two appeals are as follows: (1) Whether the associated enterprises (AE) can be considered as a tested party as per Indian Transfer Pricing Regulation? (2) Accepting the audited segmental analysis for the transaction of purchase of finished goods, receipt of commission and sale of finished goods by the assessee from the Associated Enterprises (AE). (3) Administrative supports services and IT support services received by the assessee from the Associated Enterprises (AE) wrongly treated to be in the nature of stewardshipfunctions. 4. At the time of hearing, the ld. Counsel for the assessee informs the Bench that the assessee does not want to press ground Nos. 1, 4 and 6 of ITA No.726/Kol/2017, for A.Y.2012-13. The assessee also does not press ground Nos.1 and 4 of ITA No.2361/Kol/2017, for A.Y. 2013-14.Learned Departmental Representative for the Revenue, does not object therefore,we treat these grounds to be dismissed as not pressed. 5. Ground No.6 raised by the assessee in ITA No.2361/Kol/2017, for A.Y. 2013- 14 and ground No.7 raised by the assessee in ITA No.726/Kol/2017, for A.Y.2012-13, rela....
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....ollowing international transactions with its Associated Enterprises (AEs). Nature of services Amount (Rs.) Purchase of raw material 88,41,91,807/- Purchase of traded or finished goods 6,03,35,496/- Sale of finished goods 18,56,380/- Commission received 1,13,61,927/- Support services - Availed 5,06,94,589/- The arm's length price of the international transactions representing different functions with associate enterprises(A.E), the method and the profit level indicator (PLI) used for bench marking such transaction are summarized in the table below: Nature of services Method Purchase of Refractories TNMM Export of refractories TNMM Receipt of Agency Commission TNMM The assessee has benchmarked the above transaction on entity level by applying TNMM as Most appropriate method (MAM) and Operating Profit on Sales as the profit level indicator (PLI). The PLI of the entity is arrived at 2.92% while that of the comparable uncontrolled transaction was calculated at 10.48%. The assessee has justified the above transaction by working out the average weighted adjusted working capital of the comparable for the three years i.e. F.Y....
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....re the Dispute Resolution Panel (DRP), the assessee has raised two additional grounds pertaining to associated enterprises (AE) to be the tested party. These two grounds read as under: 1. That on the facts and circumstances of the case, the Ld. TPO and accordingly the Ld. AO failed to provide due cognizance to the fact that in relation to the purchase of raw materials, the assessee was engaged in manufacturing operations which entails entrepreneurial function and related risks, whereas, the AEs were mere suppliers of the products based on orders from the assessee. 2. That on the facts and circumstances of the case, with regard to the manufacturing function, the Ld. TPO and accordingly the Ld. AO failed to provide due cognizance to the assessee's functional, asset and risk profile, thereby selected the assessee as the least complex entity and consequently the tested party thereby, benchmarked the profitability earned by it which is in contravention to the arm's length principle. The assessee submitted before the ld. DRP, the following documents and evidences to demonstrate that Associate Enterprise (AE) should be the tested party. (i) The sum....
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....zed as entrepreneur. The AEs have been characterized as the least complex parties for which audited profitability statements have been provided. However, the assessee failed to point out the provisions wherein an entity is allowed to take their AEs as the tested party. The arm's length approach of the assessee in considering the profit of its foreign. AEs for the purposes of comparison with profit of comparables (foreign), to determine the ALP of transaction between the assessee and its foreign AEs is patently an unacceptable position having no sanction of the Indian transfer pricing law. The undersign would like to highlight that in the following Tribunal rulings it has been held that overseas entity should not be considered as tested party for the analysis. They are: (i).CybertechSystems & Software Ltd. Vs. Assistant Commissioner of Income Tax reported in (2013) 33 Taxman.com 371 (Mumbai- Tribunal) (ii).AurionproSolutions Pvt. Ltd. Vs. Assistant Commissioner of Income Tax, Range- 4(3), (Mumbai) I.T.A. No. 7872 (Mumbai) of 201l. (iii). Onward technologies Limited Vs DCIT 35 taxmann.com 584 wherein it was held as under: In the case o....
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.... view they have a tenuous link with the primary grievance of the "A" relating to the variations made by the Assessing Officer/TPO in the returned income of the "A". For want of objectivity and precision the grounds are dismissed wholesale." 12. Aggrieved by the order of the ld. DRP/AO, the assessee is in appeal before us. 13.Ld Counsel for the assessee, Shri J.P. khaitan, begins by pointing out that assessee company is more complex entity and the same can be ascertained from Function, Assets and Risks ( FAR profile) of the assessee company. The ld Counsel submitted thatassociate enterprise (AE), which is least complex entity should be selected as tested party. Before the hon`ble DRP, the assessee submitted that associate enterprise (AE) with respect to their segmental data for the activity undertaken, should be the tested party, as it is a least complex entity. The ld Counsel further submitted that taking into account the summary of functions, Assets and Risks profile of the assessee company which is given in paper book page No.683 to 601, clearly demonstrates that assessee company is a more complex entity hence it should not be selected as a tested party.The assesseecompany ....
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....). (iv). Assets employed by the assessee company is more than its associate enterprise (AE). (v).The risk profile of the assessee company is more than its associate enterprise (AE). (vi).Theassessee company is engaged in the function of negotiation with customers and fix the price with customers. The negotiation and price fixation is done by the assessee company with the following customers ( for the sake of example): (a)IFGL Ltd, paper book page 528-536. (b) Tata Refractory Ltd.paper book page538 to 547. (c ) TRLCrosaki Ltd.paper book page548 to 555. (d).The credit risks are borne by the assessee company (vide paper book page nos. 556 to 577). (e). The assessee company bears warranty risk and product liability risk. (f)The assessee company handles the complaints from the customers, vide paper book page 578 to 593. (g) The assessee company bears the foreign exchange risk. (i) The assessee company also bearsthe inventory risk. Having gone through the functions, assets and risks profile (FAR analysis) of the assessee company and other risks borne by the assessee company, as mentioned....
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....ed himself as a tested party, then also assesssee is not precluded from raising the contention before the DRP or appellate court that it`s AE can be a tested party, as it is least complex entity. The ultimate aim of the TPO/DRPis to examine whether the price or the margin arising from an international transaction with a related party is at ALP or not. The determination of the ALP is the key factor for which the least complextested party is to be selected. Therefore, the TPO as well as the DRP should take into consideration such a plea before them, provided, it is demonstrated as to why the change in the tested party will produce better or more appropriate ALP on facts of the case. Therefore, we reject the contention of the ld. DR and also the observation of the TPO that the AE can not be a tested party. We note that the associate enterprise (AE) has the following characteristics: (i).Performs simpler functions; (ii).Assumes minimal risks; (iii). Does not own valuable intangibles / unique assets; and (iv). Reliable data regarding uncontrolled comparable companiesis available. Therefore, the assessee pleaded before the Ld. Panel to consider the ....
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....k, credit risk and forex risk * AE is primarily engaged in manufacture and supply of goods to Almatis India based on Almatis India's specific requirement * AE primarily assume manufacturing (quality risk) and is absolved of all other risk Selection of tested party Based on the above, it is apparent that the AE assumes lesser complex functions and bears lower level of risks as compared to that of Almatis India. It may kindly be noted that sub-rules (2) and (3) of Rule 10B of the Rules do not restrict taking an overseas entity/AE of an enterprise as the tested party. The two sub-rules provide the yardsticks for comparability of an international transaction with an uncontrolled transaction. It may kindly be noted that in order to establish the ALP, determination of the 'tested party' plays a very important and key role since one needs to identify comparables and compare the same with tested party. In this regard, the Ld. Panel's kind attention is also drawn to para 3.18 and para 3.19 of the TP Guidelines issued by Organisation for Economic Cooperation and Development ('OECD TP Guidelines') that also highligh....
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....phasis added) 18. By virtue of the above guidance, it can be reasonably concluded that the tested party should be the one, which has the following characteristics: * Performs simpler functions; * Assumes minimal risks; * Does not own valuable intangibles / unique assets; and * In respect of which, reliable data regarding uncontrolled comparable companies is available. 19. Almatis India would also place strong reliance on the United Nation's Practical Manual on Transfer Pricing for Developing Countries, 2013, India Chapter wherein it was stated as follows: "10.4.1.3. The regulations prescribe mandatory annual filing requirements as well as maintenance of contemporaneous documentation by the taxpayer in case international transactions between associated enterprises cross a threshold and contain stringent penalty implications in case of noncompliance. The primary onus of proving the arm's length price of the transaction lies with the taxpayer. The Indian transfer pricing administration prefers Indian comparables in most cases and also accepts foreign comparables in cases where the foreign associated enterprise is the ....
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....oreign AE should be considered as the tested party being the least complex of the transacting entities and has relied on the UN TP Manual and various judicial precedents on this issue. The relevant extract of the order has been given below: "Taking all the above facts and circumstances of the issue as discussed in the foregoing paragraphs, in consonance with the case laws quoted (supra) and also the United Nation's Practical Manual on transfer pricing, we direct the TPO to adopt GMDAT as the 'tested party' for analysing the inter- company transactions of the assessee for both the AYs under consideration. To facilitate the TPO to analyse the inter-company transactions in the case of the assessee by selecting GMDAT as 'tested party' as directed above, this issue is restored on the files of the TPO. It is ordered accordingly. (emphasis added) 22.Further, the Coordinate Bench of Kolkata Tribunal in the case of Development Consultants Private Limited [2008-TII-03-ITAT-KOL-TP] affirmed that in order to select the most appropriate method for determining the arm's length price, it is first necessary to select the tested party, which will be leas....
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.... revenue. It is also true that generally least of the complex controlled taxpayer should be taken as a tested party" (emphasis added) 24. We would also make a passing reference to the judgment of the Coordinate Bench of Ahmedabad Tribunal, in the case of Mastek Limited v. Addl. CIT (ITA NO.3120/Ahd/2010), wherein the selection of overseas AE as tested party was not disputed by the Bench and it was held as follows: "we are of the view that in order to determine the most appropriate method for determining the arm's length price, first it is necessary to select the 'tested party' and such a selected party should be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparables " (emphasis added) Typically, the "tested party" would be the least complex of the transacting entities, i.e. the simpler entity in terms of intensity of functions performed and risks assumed; and would also not own valuable or non-routine intangibles. Accordingly, this entity would also typically earn routine but steady returns. As a general rule, entrepreneurs should not be considered as "tested parties....
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....e said approach has been made considering all relevant facts and circumstances and is well supported by judicial precedents cited above and transfer pricing regulations mentioned above. Therefore, the overseas AEs, being the least complex transacting entities be selected as the tested party and the margin earned by them should be tested from arm's length perspective, as the AE performed simpler functions and do not assume any significant risks contrary to the assessee. Having gone through the functions, assets and risks profile (FAR analysis) of the assessee company and other risks borne by the assessee company, as mentioned above, we noticed that the assessee company is a more complex entity therefore it should not be considered as a tested party. However, we have gone through the foreign associated enterprises and its profile and we find that the foreign associated enterprises can be treated as a tested party because it is the least complex party. For that our views are fortified by the following judgments of the Co-ordinate Benches of Kolkata and Delhi which are already discussed above in detail: i) Landys + Gyr (Kolkata) (supra) page 21 para 5.2.11 ....
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....reads follows: 3. That on the facts and circumstances of the case, the Ld. TPO and accordingly the Ld. AO failed to provide due cognizance to the fact that in relation to the purchase of finished goods, receipt of commission and sale of finished goods, the assessee was engaged in trading functions and on the contrary selected a set of comparables having different functional profile. The assessee submitted before the ld. DRP, a written note about bench mark results of trading activities of the assessee, search for comparables and business description of comparables. 31. After getting the submissions of the assessee, the ld. DRP sent the submissions of the assessee to the ld. TPO for its examination. The ld. TPO after going through the assessee's submission rejected the segmental analysis of the assessee on the ground that the same was without any basis, far-fetched and not audited. The finding of the ld. TPO during the remand proceedings are given below for ready reference: "B. Additional Ground No. 3 That on the facts and circumstances of the case, the Ld. TPO and accordingly the Ld AO failed to provide due cognizance to the fact that in relation to....
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.... that in subsequent assessment year vide assessment year 2013-14 and A.Y 2014-15 (vide page no. 4 of the ld. DRP order) wherein the ld. DRP held that the adjustment can be made only on the basis of transaction and not on aggregation and accepted the segmental analysis of the assessee. The assessee's audited segmental analysis submitted before the Bench is placed on paper book page 915 to 916. However, we note that the ld. DRP without assigning any valid reasonsrejected the assessee`s submission and dismiss the ground with a cryptic observation which is given below: "All the above grounds in our view bear the same texture and complexion. In our considered view they have a tenuous link with the primary grievance of the "A" relating to the variations made by the Assessing Officer/TPO in the returned income of the "A". For want of objectivity and precision the grounds are dismissed wholesale." 33. We note that in order to justify the transfer pricing adjustment the segmental results should be considered. We note that the assessee has not submitted the segmental reports before the TPO, however, the assessee has submitted during the DRP proceedings which has not been....
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....essee but rejected by Learned CIT (Appeals) as well as TPO on the ground that nosegmental details were available. Whereas the fact remains that the assessee had furnished the segmental data. The Mumbai Tribunal in the case of Addl. CIT v. Technimont ICB India (P) Ltd. 148 TTJ (Mumbai) (TM) 547 had held that where the segmental data was furnished rejection of such cases as comparable is not justified. It was further held by both the lower authorities that bad debts written off cannot be allowed as operating cost. The Assessee respectfully submits that bad debts written off forms part of operating cost. In this connection, reliance is placed on the decision of Tribunal in the cases of CA Computer Associates (P.) Ltd. v. Dy. CIT [2010] 37 SOT 306 (Mum. Tribunal) and Dy. CIT v. Vertex Customer Services India (P.) Ltd. [2009] 34 SOT 532 (Delhi). 34. The DR submitted that segmental total cost not available and that the subsidiary in India incurred a loss due to which the entire investment as well as recoverable advance had been fully provided for in the books of account. Being so it is not comparable with the assessee company. 35. We have considered the arguments of bot....
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.... 09.06.2017, passed by the division bench of this Tribunal in assessee's own case in I.T.A. No. 283/Kol/2016, for assessment year 2011-12, whereby the issue of administrative supports services and IT support services received by the assessee from the Associated Enterprises (AE), has been discussed and adjudicated in favour of assessee. The ld. Counsel for the assessee also submitted that the present issue is squarely covered by the aforesaid order of the tribunal, a copy of which was also placed before the Bench. 38. The ld. DR for the Revenue has primarily reiterated the stand taken by the ld TPO/Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. 39. We see no reason to take any other view of the matter then the view so taken by the division bench of this Tribunal in assessee's own case vide order dated 09.06.2017.In this order, the Tribunal has inter alia observed as follows: "20. Aggrieved by the order of the AO incorporating the directions given by the DRP in the fair assessment order, the Revenue has preferred appeal being ITA No.283/Kol/2016. The grounds of appeal raised by the Revenue b....
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....ilable to its members, in particular administrative, technical, financial and commercial services. Such services may include management, coordination and control functions for the whole group." (emphasis added) The U.S. regulations define an intra-group service in the following manner (Treas. reg. § 1-482-9(1)(1)): "Controlled services transaction - (i) In general. A controlled services transaction includes any activity (as defined in paragraph (1)(2)of this section) by one member of a group of controlled taxpayers (the renderer) that results in a benefit (as defined in paragraph (1)(3) of this section) to one or more other members of the controlled group (the recipient(s))." Thus, as per this definition of services, first there should be an activity performed by one of the members of a group of related parties which lies within the ambit of definition of activity (the 'activity test') and second, that activity should result in a benefit (the 'benefit test') to one or more members of that group of related entities. The OECD Guidelines also concur with this view in paragraph 7.5: "There are two issues in the ....
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....ovides a respective group member with economic or commercial value to enhance its commercial position: This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity inhouse for itself. If the activity is not one for which the independent enterprise would have been willing to Pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm's length principle. " (emphasis added) 25. As far as the services rendered by Almatis Germany, are concerned, expertise in the field of HR, Operations and Purchasing, IT, Marketing, Finance and Planning areas have been developed and with a view to enable the Almatis India to have full access to this extensive knowledge and expertise. Almatis Germany provides these services to Almatis India. Besides expertise, there has been substantial savings in total costs when compared with those which would otherwise be incurred if they were borne by the individual Almatis India. It is not disputed by the TPO that had t....
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....med in General Service Agreement (GSA), @ 9.6% is less than 11.24% therefore, all the transactions are at arm`s length. The TPO has not disputed the above cost allocation as well as the fact that the comparative cost charged by unrelated parties for similar services was at a margin of 9.6% of the cost. Besides, in this case the TP study report as well as comparables selected by the assessee to compute the arm`s length price @ 9.6% were available before the TPO and DRP. Neither TPO nor the DRP has objected the comparables selected by the assessee to compute the ALP @9.6%. Had the TPO not been agreed then he would have appeared in the course of hearing before the DRP and could object the ALP and comparables selected by the Almatis India. Therefore, we are of the view that DRP as well as TPO, both had agreed with the ALP computed by the Almatis India and comparables selected by the Almatis India. In view of our conclusion, the TPO were in error in holding that the nature of services rendered by Almatis Germany, were in the nature of stewardship activity. The charges paid by the Almatis India to AlmatisGermany are held to be at Arm's Length. Consequently, we ....