TaxTMI 
TaxTMI 
TaxTMI 
2019 (7) TMI 1314
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....ransaction 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 the impugned international transaction with the comparable uncontrolled transaction. The Appellant p....
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.... 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 to determine the ALP of the impugned international transaction. The Appellant prays that the aforesaid adjustment be deleted. 5. Group. cLNo. 5 - Adjustment in relation to employees' contribution to Provident Fund 5.1. On....
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....an 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 calling for various details were issued and served on the assessee. In response to the notices, the authorised representative of the assessee appeared from time to time and filed various details, as called for. During the course of assessment proceedings, a reference u/s 92CA(1) of the Income-tax Act, 1961 was made to the Additional Commissioner of Income-tax (TPO). The TPO, vide his order dated October 20, 2017, after considering submissions of....
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....f 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 consideration from ground 1 of the appeal is transfer pricing adjustment in relation to export of finished goods. The facts with regard to the impugned dispute are that the assessee has exported finished goods to its AE. The assessee has benchmarked its transactions with AE in respect of sale of finished goods by applying TNMM as most appropriate method. The AO has rejected TP study conducted by the assessee and applied two methods for benchmarking international transactions on export of fin....
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....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 brought out by the AO and rule 10B of I.T. Rules, 1962 and held that while considering the issue of comparability with an uncontrolled transaction, the condition prevailing in the market for which the respective parties to the transaction operate, including the geographical location alongwith other factors relevant to decide which method is suitable for benchmarking transaction. "7.We have considered rival submissions and perused material on record. As far as the primary facts are ....
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....rability 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 Aromatics Production (India) Pvt. Ltd., in ITA no.7145/ Mum./2017, dated 13th November 2018, had an occasion to deal with identical issue relating to comparability of the price charged to AEs and non-AEs situated in different geographical locations. The Tribunal held that in such circumstances CUP cannot be applied as the most appropriate method. In this regard, the detailed finding of the Co-ordinate Bench is reproduced here under:- "7. We have considered rival submissions and perused materi....
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....l 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 relating to assessee's sister concern viz. Firmenich Aromatics Production (India) Pvt. Ltd., in ITA no.7145/ Mum./2017, dated 13th November 2018, had an occasion to deal with identical issue relating to comparability of the price charged to AEs and non-AEs situated in different geographical locations. The Tribunal held that in such circumstances CUP cannot be applied as the most appropriate method. In this regard, the detailed finding of the Co-ordinate Bench is reproduced hereunder:- "8. First of all it is....
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....ecause 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 the Non-AE. Sr.No in TPO Order Material Description Quantity in KG sold to Non AE's Quantity in KG sold to AE's Addition Value (INR) AE sales times of Non AE sales 59 Neobutenone Alpha 25 32,343 490,680,563 1,294 56 Damascenone Total 25 19,734 490,873,437 789 45 Great Heart 28,080 303,840 95,340,394 11 55 Aldehyde Supra 245 38,528 96,920,377 157 57 Damascone Alpha 2,175 33,610 84,185,258 15 60 Norlimbanol 250 10,825 73,314,292 43 1,331,314,321 Thus, we find from the facts of the case that the quantities so....
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.... 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 price or cost charged or paid or the profit arising from such transaction in the open market. Therefore, it is essential to adjust for the above mentioned differences in order to create level paying filed ie.. in order to ensure like by like comparison. Since, the TPO was unable to quantify the same, the CUP should not be used as the most appropriate method. 12. We find that this issue is covered by the decision of the Coordinate Bench of this ITAT in the case of M/s. Amphenol Interconnect India Pvt. Ltd., in ITA No. 477/Pun/2015 [TS-201ITAT-2014(PUN)-TP], wherein it is held as under: "8. In this regard, the Ld. Counsel for the assessee brought our attention to the DRP's order dated 24-12-2014 and read out the contents of Para Nos....
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....arlier 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 directed not to make any adjustment with regard to the Export of finished goods and Import of raw materials." 9. From the above, we find in principle the facts are the same. In those years too, Transfer Pricing adjustments were made to the transactions with Associated Enterprises with reference to the Export of goods and Import of the raw materials. Appropriateness of the TNMM method was also the issue in those years. Tribunal decided the issue in favour of the assessee and dismissed the appeal of the revenue on those issues. After hearing both the ITA No.477/PUN/2015 sides and perusing the contents of the DRP, we are of the opinion that the order passed by the DRP with reference to the most appropriate accounting method for TP study, is fair and reasonable and same does not call for any interference. Accordingly, the ground raised by the Rev....
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....sions 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 manufacturing process used by it. Further, the TPO held that since the assessee was paying royalties since 1997, it is not required to be paid any more, because the assessee no more needs technical know how from the AE. He, further observed that the AE has not collected any royalty for technical know how from another subsidiary in India. Thus, on the basis of the aforesaid reasons, the TPO finally concluded that the assessee having failed to make out a case that the payment of royalty to the AE is for the purpose of business, and it has to be allowed u/s 37(1) of the Act. The Ld.DRP has confirmed TP adjustment suggested by the TPO in respect of payment of royalty for use of technical know how. 13. 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 of the ITAT, Mumbai Bench "....
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.... "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 be seen from the facts on record, the assessee is availing technical knowhow from its AE in Switzerland since past so many years and paying royalty for the services availed. For this purpose, the assessee has entered into a license agreement with the AE from the very inception of carrying out the manufacturing activity of industrial flavours and fragrances, which has been renewed from time-to-time. The transactions in the impugned assessment year were under a license agreement executed on 1st April 2009. Though, the assessee was required to pay royalty @ 5% on local sales and @ 8% on export sales, net of Indian taxes, however, there is no major change in the terms of the contract, except for the fact that the in the impugned assessment year, the assessee has paid royalty on the gross sales instead of net sales as was done in the preceding assessment years. In the transfer pricin....
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.... 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 at arm's length price. Section 92C of the Act provides for determination of arm's length price of an international transaction by applying the most appropriate method having regard to the nature of transaction for class of transaction or functions performed, etc. The most appropriate method prescribed are as under:- i) Comparable Uncontrolled Price Method; ii) Resale Price Method; iii) Cost Plus Method; iv) Profit Split Method; v) Transactional Net Margin Method; and vi) Such other methods, as may be prescribed by the Board. 12. Rule 10B of Income Tax Rules, 1962 (for short "the Rules"), provides the mechanism for determination of arm's length price under the aforesaid methods prescribed under section 92C of the Act. If the Assessing Officer in course of assessment proceedings finds that the assessee has entered into international t....
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....d 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 respondent assessee. This determination of ALP of technical know how royalty by the TPO was ad-hoc and arbitrary as held by the CIT(A) and the Tribunal." 13. The Tribunal, Hyderabad Bench in R.A.K. Ceramics India Pvt. Ltd. (supra) while dealing with identical nature of dispute relating to determination of arm's length price of royalty payment by estimation held as under:- "7. We have considered the submissions made by learned counsels from both the sides and perused the orders of departmental authorities as well as other materials on record. We have also carefully examined the decisions placed before us. At the outset, it needs to be mentioned, the only dispute arising for consideration before us is determination of ALP of royalty at 2% by TPO as against 3% claimed by assessee. Undisputedly, assessee on 01/04/2009 has entered into a royalty agreement with its AE, RAK, UAE. As per clause 1.1 of the agreement, RAK,....
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.... 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's analysis under CUP method is concerned, TPO has rejected it citing following reasons:- i) it is an alternate analysis ii) database used is for US based companies iii) copies of agreements not furnished; and iv) bench marking has to be done for Indian companies in similar trade making royalty payment. 9. Further, it is evident from TP order, though, TPO has not brought any material to controvert assessee's claim of receiving pecuniary benefit from the technical know-how provided by AE, in terms of sizeable sales, garnering of creditable market share, minimal product recalls, low after sales maintenance cost etc. but he tried to overcome it by observing that such increase in sale is as a result of increase in advertisement & marketing expenses and also on payment of commission and discount. TPO observed, upgradation in technical expertise of AE is as a result of inputs by the assessee with regard to market trends in India....
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....y 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 benefit test, in our view, is not only in complete violation of TP provisions but against the settled principles of law. ITAT, Mumbai Bench in case of Castrol India Ltd. (supra) while examining identical issue of determination of ALP at 'Nil' by applying the benefit test held as under: "11. We have considered the rival submissions and perused the relevant material on record. It is observed that the impugned royalty was paid by the assessee company to its AE namely Castrol Ltd. UK at 3.5 % of the net exfactory sale price of products manufactured and sold in India as per the technical collaboration agreement. This internatio-nal transaction involving payment of royalty to its AE was bench-marked by the assessee by following CUP method in its TP study report and since average rate of royalty of three comparables selected by it was higher at 4.67% than the rate at which royalty was paid by the assessee to its AE, the transaction involving payment of royalty was claimed to....
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....s 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%. Unfortunately, ld. DRP has approached the entire issue in rather mechanical manner without examining whether approach of the TPO is in accordance with statutory mandate. Therefore, determination of ALP of royalty at 2% cannot be supported, hence, deserves to be struck down. Moreover, theory of benefit test applied by TPO also falls flat considering the fact that TPO does not question the necessity of paying royalty but only objects to the quantum. Further, quantum increase in sale with no apparent increase in production, minimal product recalls, low after sales maintenance cost certainly goes to prove assessee's claim that these could be achieved due to utilization of advanced technical know-how transferred by AE. The TPO has not been able disprove these facts with any sound argument. Considering the totality of facts and circumstances, we are of the opinion, reduction of rate of royalty by TPO from 3% to 2% is without any basis, hence, cannot be accepted. Accordingly, we delete the additi....
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....n 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 the Revenue that the assessee entered into a royalty agreement with the A.E. and the assessee claimed benefit from such agreement, in the form of quantum increase in sales with no apparent increase in production, minimal product recalls and low after sales maintenance cost, and consequently paid royalty in terms thereof, it was not for the TPO to determine as to what would be the other reasons for increase in the assessee's sales and profit. Above all, there is no explanation forthcoming as to why the TPO decided upon 2% instead of the contractual rate of 3% for payment of royalty. No reason is offered by the TPO for picking on 2%. This whimsical fixation by the TPO amounts to an arbitrary and unbridled exercise of power. In consequence, we find that the TPO having rejected the comparables cited by the assessee, did not take the trouble to examine alternate comparables so as to justify reduction of the rate of payment of royalty and by applying a wholly inapplicable methodology of determining the benefit from paymen....
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....im 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. However, the fact on record reveal that during the transfer pricing proceedings, in response to a show cause notice issued by the Transfer Pricing Officer, the assessee has specifically objected to the comparables proposed by the Transfer Pricing Officer by stating that none of the comparable are functionally similar to the assessee since all of them related to asset purchase agreement and further all the parties relating to such agreement are located outside India, hence, are not governed by Indian rules and regulations. The aforesaid objection of the assessee has neither been dealt with nor controverted by the Transfer Pricing Officer. Thus, when the comparable proposed by the Transfer Pricing Officer are in different geographical location we do not understand how they can be compared to the assessee. It is further necessary to observe that the payment of royalty by the assessee in the preceding assessment years, though, identical in nature but they have been accepted by the Transfer Pricing Officer in course of Transfer Pricing procee....
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....R, 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 method. 18. 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 arm's length price of the interest to be charged on the ECB loan availed from the AE has to be determined at six months USD LIBOR rate (+) 300 basis points. The Ld.DR, on the other hand, fairly accepted that this issue is also covered in favour of the assessee by the decision of ITAT for AY 2013-14. 19. 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 2013-14 in ITA No.7330/Mum/2017 had considered an identical issue and by following its earlier decision in the case of ION Exchange India Ltd vs ADIT in ITA No.5109/Mum/2013 held that arm's length price of the interest to be charged on....
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....coordinate bench of the ITAT, Mumbai Bench "K" in assessee's own case for AY 2012-13 had considered an identical issue. We further noted that the Tribunal in assessee's own case for AY 2013-14, after considering relevant facts, held that the TPO was erred in not following any one of the most appropriate method prescribed under the statute to determine arm's length price of international transactions of the assessee with its AE, but made adjustment on an adhoc or estimate basis without any valid reasons. The relevant finding of the Tribunal are as under:- "30. We have considered rival submissions and perused material on record. Undisputedly, the Transfer Pricing Officer has made an adjustment to the arm's length price of the payment made towards information services to the AE by following the same reasoning on the basis of which he has made similar adjustment in assessment year 2012-13. Moreover, it is evident, the adjustment made by the Transfer Pricing Officer is not by following anyone of the most appropriate methods prescribed under the statute but on an ad-hoc or estimate basis. In fact, learned DRP has upheld the adjustment made by the Transfer Pricing Officer simply re....
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....ermined by him even on estimate basis. The estimation of service charges on so called man hour basis is without any supporting material. Similarly, the estimation of cost of software at Rs.. 1 crore is without any basis. Thus, it is very much clear that the determination of arm's length price by the Transfer Pricing Officer is not as per any one of the methods prescribed under section 92C of the Act r/w rule 10B. As discussed elsewhere in this order, such determination of arm's length price on ad-hoc / estimation basis is not permissible under the scheme of the Act as the Transfer Pricing Officer is duty bound to determine the arm's length price by following any one of the most appropriate method prescribed under the statute. It is relevant to observe, the DRP has approved the determination of the arm's length price by the Transfer Pricing Officer without properly appreciating the implication of the relevant statutory provisions. As regards the observations of the DRP regarding the report of the KPMG, it is necessary to observe that the KPMG report is not an audit report but was furnished by the assessee to support the attribution of cost. Therefore, it cannot be sa....
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....ion to section 36(1)(viia) of the Act. 27. The Ld.AR for the assessee submitted that this issue is squarely covered in favour of the assessee by the decision of Hon'ble Bombay High Court in the case of CIT vs Ghatge Patil Transport 368 ITR 793 (Bom) where it was held that employees contribution to PF, even if made beyond the due date prescribed under the relevant Act is liable for deduction u/s 43B of the I.T. Act, 1961, if the same is paid on or before the due date of filing the return of income u/s 139(1) of the Act. The Ld.AR further submitted that the assessee, although remitted employees contribution to PF beyond the due date specified under the respective Act, but such payment has been made on or before the due date for filing return of income u/s 139(1) of the Act and hence, in view of specific provisions of section 43B, if such payment is made before due date of filing return of income, no disallowance could be made. 28. We have heard both the parties and perused the material available on record. There is no dispute with regard to the fact that although the assessee has remitted employees contribution to PF beyond the due date prescribed under the PF and miscellaneous A....