TaxTMI 
TaxTMI 
2019 (7) TMI 1314
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....Arms' Length Price ('ALP') of the international transaction of export of finished goods at Rs. 10,35,77,048 instead of Rs. 7,16,95,346 thereby, computing a TP adjustment of Rs. 3,18,81,702. 1.2. While doing so, the Hon'ble DRP/ Ld. AO/ Ld. TPO erred in: (a) Disregarding the aggregation approach adopted by the Appellant thereby, rejecting the application of entity level Transactional Net Margin method ('TNMM') as the Most Appropriate Method ('MAM'); (b) Applying Comparable Uncontrolled Price ('CUP') Method as the MAM vis-a-vis the products sold to both Associated Enterprises ('AEs') and Non-AEs; and (c) Applying two methods i.e., CUP and TNMM for benchmarking the impugned international transaction. 1.3. Without prejudice to point 1.1. and 1.2., the Hon'ble DRP/ Ld. AO/ Ld. TPO while applying CUP, erred in: (a) Comparing the prices of products exported to AEs with the prices of products sold to Non-AEs, domestically; and (b) Ignoring the differences on account of geographical market, volume of transactions, functional and risk profile and level of market while comparing ....
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....ive rate of interest paid by the appellant is lower than the SBI Prime Lending rate ('PLR') for the relevant year. The Appellant prays that the aforesaid adjustment be deleted. 4. Ground_No_. 4 - TP adjustment in relation to availing of Information Systems ('IS') services 4.1. On the facts and circumstances of the case and in law, the Hon'ble DRP erred in upholding the action of the Ld. AO/ Ld. TPO in determining the ALP of the international transaction of payment of IS service charge at Rs. 8,24,93,129 instead of Rs. 10,46,55,437 thereby disallowing the claim pertaining to internal cost of IS charge amounting to Rs. 2,21,62,308, 4.2. While doing so, the Hon'ble DRP/ Ld. AO/ Ld. TPO grossly erred in: (a) Determining the ALP of the international transaction of payment of internal cost of IS charge as 'Nil' purportedly applying 'Other method' as per the provisions of Rule loAB of the Income-tax Rules, 1962; (b) Ignoring that the Appellant had supported the claim with appropriate evidences; and (c) Rejecting the comparability analysis conducted by the Appellant in the TP study report....
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....ansactions F.Y. 2013-14 Method used by taxpayer (i) Import of raw materials 883,266,845 Transactional Net Margin Method ("TNMM") (II) Sale of finished goods 71,695,346 TNMM (iii) Payment of Royalty 240,653,880 TNMM (iv) Commission received 15,315,067 TNMM (v) Payment of interest on ECB loan 10,784,304 Other Method (vi) Payment for Software charges (S3 and IS charges) 104,655,437 Other method (vii) Recovery of expenses 11,680,908 Other method (viii) Reimbursement of Expenses 6,129,335 Other method (ix) Dividend paid 77,457,379 Other method Total 1,42,15,38,501 10 Purchase of raw materials 122,057,695 TNMM 11 Payment of Rent 2,820,000 Other Method 12 Payment of managerial remuneration / professional fee 21,146,231 Other Method Total 146,023,926 3. The assessee has filed its return of income for AY 2014-15 declaring total income of Rs. 16,20,01,320. The case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act, alongwith questionnaire call....
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....Similarly, the DRP has rejected objections filed by the assessee insofar as disallowance of employees contribution to PF u/s 36(1)(viia) on the ground that although the issues had been covered in favour of the assessee by the decision of Hon'ble Supreme Court in the case of CIT vs M/s Alstorm Extrusions Ltd 319 ITR306 (SC), but since the decision of the DRP is binding upon the revenue and further appeal cannot be preferred against the same, it would be prejudicial to the stand of the revenue if the decision of the Supreme Court is not awaited because the revenue has challenged the order of the High Court before the Hon'ble Supreme Court in the case of CIT vs Jaipur Vidyut Vitran Nigam Ltd and such SLP filed by the revenue is pending before the Supreme Court for final decision. As regards disallowance of other expenses, the Ld.DRP rejected objections filed by the assessee on the ground that the assessee has not been able to produce any correspondence with the landlords or with its own employees on the issue of forfeiture or adjustment of deposits. 6. Aggrieved by the directions of the DRP, the assessee is in appeal before us. 7. The first issue that came up for our considerati....
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....UP method applied by the TPO to determine the arm's length price of the price charged for sale of finished goods to the AEs is incorrect. 9. The Ld.DR, on the other hand, fairly admitted that the issue is covered in favour of the assessee by the decision of ITAT in assessee's own case for earlier years. But, fact remains that while deciding the issue, the Tribunal has followed the decision o the Tribunal in assessee's sister concern's case. However, the facts of present case may not be at par with the case considered by the Tribunal in assessee's sister concern's case, because the Indian entity may not be paying royalty; hence, business model is different from the assessee. Therefore, the TPO as well as the DRP were right in benchmarking its international transactions by applying CUP as most appropriate method and, therefore, their order should be upheld. 10. We have heard both the parties, perused the materials available on record and gone through the orders of the revenue authorities. We find that the coordinate bench of ITAT, Mumbai Bench "K" in assessee's own case for AY 201314 in ITA No.7330/Mum/2017, had an occasion to consider an identical issue in light of the facts b....
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....f finished products made to overseas AEs. One of the conditions of rule-10B(2) of the I.T. Rules, 1962, is, while considering the issue of comparability with an uncontrolled transaction, the conditions prevailing in the markets in which the respective parties to the transaction operate including the geographical location along with other factors have to be examined. Therefore, geographical location of the party to whom sales were made is a crucial factor to be weighed in while making comparability analysis. Undisputedly, in the facts of the present appeal, the Transfer Pricing Officer has compared the price charged to non-AEs located in India with the price charged to AEs in foreign countries. Therefore, the AEs and non-AEs being situated in different geographical locations, there may be various factors/reasons which could have influenced the price charged by the assessee to the AEs and non-AEs. Hence, the price charged to non-AEs cannot be considered to be a CUP to determine the arm's length price of the price charged for sale of finished products to the AEs. 3. The Co-ordinate Bench, while deciding an appeal relating to assessee's sister concern viz. Firmenich Aromat....
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....r determining the arm's length price of the sales of finished products made to overseas AEs. One of the conditions of rule- 10B(2) of the I.T. Rules, 1962, is, while considering the issue of comparability with an uncontrolled transaction, the conditions prevailing in the markets in which the respective parties to the transaction operate including the geographical location along with other factors have to be examined. Therefore, geographical location of the party to whom sales were made is a crucial factor to be weighed in while making comparability analysis. Undisputedly, in the facts of the present appeal, the Transfer Pricing Officer has compared the price charged to non-AEs located in India with the price charged to AEs in foreign countries. Therefore, the AEs and non-AEs being situated in different geographical locations, there may be various factors/reasons which could have influenced the price charged by the assessee to the AEs and non-AEs. Hence, the price charged to non-AEs cannot be considered to be a CUP to determine the arm's length price of the price charged for sale of finished products to the AEs. 8. The Co-ordinate Bench, while deciding an appeal rel....
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....aphical locations / markets, as these prices are factor of buying power, market sensitivity and local competitions etc. Thus it would not be economically right to compare export prices of different market of locations. 9. According to us, the price at which finished products were sold to AEs are not comparable with prices at which they have been sold to Non-AEs for the below mentioned reasons:- i). Differences in volume of both the transactions - It is general knowledge that volumes commands the prices. Purchase or sale of lower quantities are expensive, this is usually because of cost of transportation for deliveries and administration cost involved in handling smaller deliveries. The assessee is engaged in manufacturing of aromatic ingredients, natural and synthetic perfumery, flavoring and derivatives. Specific and majority of the products manufactured are sold to the group companies. However, in the circumstances where the group entities do not want a product then it is sold in the market at a price best negotiated by the assessee. In the table below, the assessee has provided the details of the quantitative differences in respect of Sales made to the AE and t....
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.... India Brazil, China, Singapore 96,920,377 56 Damascenone Total India Switzerland, Singapore 490,873,437 59 Neobutenone Alpha India Switzerland, Singapore 490,680,563 60 Norlimbanol India Brazil, China, Singapore 73,314,292 11. Further, with respect to the DRP observations on geographical differences, we find from the facts of the case that the adjustment made with respect to sales made @ item No 55, the majority of the sales are made to an AE in Switzerland. Out of the total AE sales of 38,528 kgs of sales made, 23,310 kgs of sales is made to Firmench SA in Switzerland which comprises of 61% of sales to AE. According to us the TPO erred in simply comparing the prices of common products sold to both AEs and Non-AEs without appreciating that the two transactions are not comparable owing to differences on account of volume, geography, functions performed and risks assumed while transacting with AEs and non-AEs.Also, sub-rule (3) of rule 10B provides that, uncontrolled transaction would not be regarded as being comparable unless any of the differences between the transactions if compared are likely to materially affect the pr....
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.... order of the TPO. We have also considered the order dated 30th May, 2014 of the ITAT, Pune for the earlier assessment years 2006-07, 2007-08 and 2008-09. In the earlier assessment years, the issues involved before the ITAT were adjustments made by the TPO to some of the transactions in respect of exports and imports and payment of Commission by the assessee to its AE. The ITAT has dealt with all the three issues and given its finding in favour of the assessee. The assessee has submitted before us a note on the ITAT order and Points of similarity with the facts of the assessee's case in the current AY 2010-11. Upon going through the same, we find that the issues involved before the DRP in the current assessment year relate to adjustments made by the TPO in relation to some of the exports and imports on reasoning similar to the earlier assessment years which have now been adjudicated by the ITAT, Pune in favour of the assessee. In the circumstances, respectfully following the ratio laid down by the Hon'ble ITAT, Pune in the assessee's own case for the earlier assessment years, the assessee's objection is allowed. Accordingly, the Assessing Officer is directe....
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....e of the considered view that the TPO as well as the Ld.DRP were erred in applying CUP as most appropriate method to determine the arm's length price of transactions of the assessee with its AEs for sale of finished goods. Accordingly, we direct the AO / TPO to delete TP adjustment of Rs. 3,18,81,702 in relation to export of finished goods. 12. The next issue that came up for our consideration from ground 2 is TP adjustment of Rs. 3,96,903,06 in relation to payment of royalties for use of technical know how. The brief facts of the impugned dispute are that in the course of transfer pricing proceedings, on examination of the TP study conducted by the assessee, the TPO noticed that the assessee has aggregated all international transactions and benchmarked it at entry level by applying TNMM as the most appropriate method. Further, the TPO, after considering submissions of the assessee, held that royalty payment to the AE was not justified due to reasons that the assessee has not submitted any documentary evidence regarding transfer of technical know how by the AE which should have been used by the assessee in the manufacturing process and also the assessee has failed to explain the....
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....purpose of business has to be disallowed under section 37(1) of the Act. However, ultimately, he has allowed, on ad-hoc basis, 10% of the amount paid by the assessee to the AE towards royalty. Of course, referring to certain agreements between unrelated parties, which according to him can be used as external CUP, the Transfer Pricing Officer has concluded that 1% of the net value added sales can be determined as the arm's length price of the royalty paid to the AE. It is very much clear, while coming to such conclusion, the Transfer Pricing Officer has wholly relied upon the order passed by him in assessee's own case for assessment year 2012-13. It is relevant to observe, while deciding identical issue arising in assessee's own case for assessment year 2012-13, the Tribunal in ITA no.2590/Mum./2017, dated 23rd July 2018, has decided the issue in the following manner:- "11. We have carefully considered the rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon by both the parties. The dispute in this ground relates to determination of arm's length price of the royalty paid by the assessee to its AE. As could ....
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....ts to run his manufacturing plan, he is required to pay 10% of the royalty paid to the AE during the year. Accordingly, he determined the arm's length price of the royalty payment at Rs. 2,01,19,124 as against the amount of Rs. 18,10,72,120 actually paid by the assessee. Thus, it is evident that the Transfer Pricing Officer has determined the arm's length price of royalty payment by making an ad-hoc adjustment purely on estimate basis without following any approved method for determination of arm's length price as prescribed under the statutory provisions. Thus, the primary issue which arises for consideration is, whether the Transfer Pricing Officer has power under the statute to determine the arm's length price of international transaction on estimate basis by weighing in the business expediency factor. In our considered opinion the legal principle on the issue is quite clear. As could be seen from the scheme of the Income Tax Act, 1961, Chapter-X contains special provisions relating to avoidance of tax with regard to international transaction between related parties. Section 92 of the Act provides for computation of income arising from international transaction a....
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.... international transaction by adopting one of the method prescribed under the statute and cannot deviate from the restrictions / conditions imposed under the statute. The Hon'ble Jurisdictional High Court in CIT v/s Johnson & Johnson Ltd., ITA no.1030/2014, dated 7th March 2017, while dealing with identical issue of determination of arm's length price of royalty by resorting to estimation by the Transfer Pricing Officer has held as under:- "(d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical know how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by the respon....
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....th on domestic and export sales. Department has not denied existence of royalty agreement nor the fact that payment of royalty at 3% is as per the terms of the agreement. TPO has also not disputed the fact that there is transfer of technical know-how and assistance from the AE to assessee. What the TPO disputes is the quantum of royalty paid. As can be seen from the TP report of the assessee as well as other materials on record, assessee has benchmarked ALP of royalty paid to AE by applying TNMM. As average margin of comparables selected was 4.32% as against assessee's margin of 11.69%, payment of royalty was found to be within arm's length. Assessee also undertook alternative analysis under CUP method. Assessee has searched Royalstat database which yielded three companies as comparables with average royalty paid of 3.65% on net sales as against 3% by assessee. Therefore, even under CUP method also payment of royalty at 3% was found to be within arm's length. The TPO did not accept assessee's TP analysis under TNMM by observing that payment of royalty being an intangible transaction should not have been aggregated with tangible transactions. As far as, assessee'....
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....visions. Rule 10B(1)(a) lays down the procedure for determining ALP under CUP method. As per the said provision, TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions. Thereafter, making necessary adjustments to such price, on account of differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market, TPO will determine the ALP. It is patent and obvious from TPO's order, the determination of ALP at 2% is not at all in conformity with Rule 10B(1)(a). The TPO has not brought even a single comparable to justify arm's length percentage of royalty at 2% either under CUP or TNMM method. On the contrary, observations made by TPO gives ample scope to conclude that adoption of royalty at 2% is neither on the basis of any approved method nor any reasonable basis. Rather it is on adhoc or estimate basis, hence, not in accordance with statutory provisions. The approach of TPO in estimating royalty at 2% by applying the ben....
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....d other income were to the extent of Rs. 1118.70 crores and the royalty paid thereon at Rs. 24.38 crore being less than the rate of 3.5% approved by SIA, there was no case of any excess payment made of royalty by assessee than approved by SIA to justify its disallowance by way of TP adjustment. In our opinion, the ld. CIT (A) could not appreciate these infirmities in the order of the TPO despite the same were specifically brought to his notice on behalf of the assessee and confirmed the TP adjustment made by the TPO in respect of royalty payment which was totally unjustified. We therefore, delete the addition made by the AO/TPO and confirmed by the ld. CIT on account of TP adjustment in respect of royalty payment and allow ground no. 3 of the assessee's appeal." 11. Similar view has also been expressed in the other decisions relied upon by ld. AR. At the cost of repetition, it needs reiteration, assessee has benchmarked the royalty payment by bringing comparables both under TNMM as well as CUP. Whereas, TPO has rejected the analysis done by assessee under both the methods without any reasonable basis nor has brought a single comparable to justify ALP of royalty at 2%. ....
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....ing is without legal basis of law as it is not for the TPO to decide the best business strategy for the assessee. In WALCHAND AND CO. PRIVATE LTD. the Supreme Court observed in the context of the Income-tax Act, 1922 that when a claim is made for an allowance by the assessee, the income tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. The Supreme Court pointed out that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively for the purpose of business, it has to be adjudged from the point of view of the businessmen and not of the revenue. The Supreme Court concluded that it is open to the revenue to come to the conclusion that the alleged payment was not real or that it had not been incurred by the assessee in the character of a tender or that it was not laid out exclusively for the purpose of the business so as to disallow it but it is not the function of the revenue to determine what remuneration should be paid to an employee by the assessee. Applying the same logic to the case on hand, once it is admitted by th....
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....or paying royalty to the AE. More so, when the Department accepts availing of technical knowhow while allowing a part of royalty even on estimate basis. Therefore, keeping in view the relevant statutory provisions and the principles laid down in the judicial precedents discussed herein above, we hold that determination of arm's length price @ 10% of the amount paid by the assessee on mere assumption and presumption and without any reasonable basis cannot be upheld. Unfortunately, the DRP has not examined the issue in proper perspective keeping in view the relevant statutory provisions. Having held so, it is necessary to deal with the Transfer Pricing Officer's alternative bench marking under CUP method. Though, DRP has not dealt with this issue, however, we deem it appropriate to render our finding with regard to the alternative benchmarking suggested by the Transfer Pricing Officer. As could be seen from the order passed by the Transfer Pricing Officer, referring to three agreements / comparables stated to have been selected by him on search of a particular data base, he found that the arm's length price of the royalty payment to the AE should be @ 1% of the net sales. How....
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....ext issue that came up for our consideration from ground 3 is TP adjustment of Rs. 51,74,209 in relation to payment of interest on external commercial borrowings (ECB) loan. The facts with regard to the impugned dispute are that the assessee has availed external commercial borrowings with the permission of RBI. The assessee has paid interest on the basis of LIBOR (+) 300 basis points, and such rate of interest has been determined on the basis of circular issued by RBI. The TPO rejected the arm's length interest rate paid by the assessee on the basis of LIBOR (+) 300 bps. The AO has determined arm's length interest rate on the basis of data available in bloomberg data base where interest on the ECB rate has been taken USD LIBOR (+) 143.62 basis. Accordingly, determined arm's length interest rate. The Ld.DRP has confirmed TP adjustment suggested by AO / TPO on the ground that the assessee was required to carry out an economic analysis and submit the TPSR after due diligence in order to benchmark interest paid to its AE. However, even in the TPSR, the assessee has merely relied on the RBI letter and hence, the same cannot be termed as TP study and the TPO was free to choose his own me....
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.... an amount of Rs. 10,46,55,347, the differential amount of Rs. 2,21,62,308 has been adjusted in relation to availing of information system services. 22. The Ld.AR for the assessee, at the time of hearing submitted that this issue is also covered in favour of the assessee by the decision of the ITAT, Mumbai Bench "K" in assessee's own case for AY 2013-14 in ITA No.7330/Mum/2017, where under identical set of facts, the Tribunal held that, where the assessee placed on record details of employees rendering IS service, complete details of documents raised during the year and the quantum of internal and external cost was duly certified by the external auditors, the disallowance of IS charge was not sustainable. 23. The Ld.DR, on the other hand, though agreed that the issue has been decided by the Tribunal in favour of the assessee for AY 2013-14; however, he relied upon the observation of the TPO and DRP. 24. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. We find that the coordinate bench of the ITAT, Mumbai Bench "K" in assessee's own case for AY 2012-13 had considered an identical issue. We further not....
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....s not furnished the necessary details is not totally correct. In any case of the matter, non-furnishing of certain documentary evidences, as alleged by the Transfer Pricing Officer, does not empower him to embark upon determining the arm's length price of the international transaction on estimation basis. Further, a reading of the Transfer Pricing Officer's order makes it clear that his finding on the issue is contradictory. On the one hand, he has observed that the assessee has failed all the three tests, including, whether the services have actually been provided, on the other hand, he has accepted that the AE has provided the software. Thus, ultimately, what the Transfer Pricing Officer disbelieves is the quantum of payment. Accordingly, he has proceeded to estimate the price of the services rendered by the AE at Rs. 1,62,05,000. Though, the Transfer Pricing Officer has observed that he has applied CUP method for determining the arm's length price, however, he has not brought on record even a single comparable to support the arm's length price determined by him even on estimate basis. The estimation of service charges on so called man hour basis is without any suppor....
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.... "Facts relating to the disputed issue being identical in the impugned assessment year, respectfully following the decision of the Co-ordinate Bench in assessee's own case, we delete the addition made on account of adjustment to the arm's length price of payment made to the AE towards availing of information system services. Ground raised is allowed." 25. In this view of the matter and consistent with the view taken by the coordinate bench, we direct the AO / TPO to delete TP adjustment of Rs. 2,21,62,308 in relation to availing of information system services. 26. The next issue that came up for our consideration from ground 5 of assessee's appeal is disallowance of Rs. 14,19,805 in respect of employees contribution to provident fund. The AO has disallowed employees contribution to PF u/s 36(1)(viia) on the ground that the assessee has made delayed payment of employees contribution to PF and accordingly, he held that employees contribution to PF beyond the due dates specified under the respective Act is income of the assessee u/s 2(24)(x) r.w. Explanation to section 36(1)(viia) of the Act. 27. The Ld.AR for the assessee submitted that this issue is squarely cov....
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....PF u/s 43B, even though such payment has been made on or before due date of filing return of income u/s 139(1) of the Income-tax Act, 1961. Hence, we direct the AO to delete addition made towards disallowance of employees contribution to PF. 29. The next issue that came up for our consideration from ground 6 of assessee's appeal is disallowance of other miscellaneous expenses relating to write off of rent deposits. The Ld.AR for the assessee, at the time of hearing submitted that due to smallness of amount, the assessee does not want to presss this ground. Therefore, the same is dismissed, as not pressed. 30. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 07 -06-2019. ============= Document 1 "23. We have considered rival submissions and perused material on record. At the outset, we must address the issue relating to the admission of additional grounds raised by the assessee. In this context, we must observe, the issues raised in the additional grounds were never raised by the assessee at any stage and have only been raised in course of appeal hearing before us. The assessee has not even claimed ....