TaxTMI 
TaxTMI 
2019 (9) TMI 609
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....rtain international transactions of the Appellant do not meet the arm's length test. The learned AO has also erred in disallowing depreciation of INR 64,09,577 on the assets installed at the premises of the Appellant's customers, by holding that the same were not used for the purpose of its own business. Corporate Taxation 2. On the facts and in the circumstances of the case and on the law prevailing on the subject, the learned AO / TPO pursuant to the directions of the DRP has erred in holding that the amount of INR 65,19,47,000 received by the Appellant during the year under consideration as subvention money is a "revenue receipt" exigible to tax. 3. On the facts and in the circumstances of the case and on the law prevailing on the subject, learned AO pursuant to the directions of the DRP erred in disallowing depreciation of INR 64,09,577 on plant and machinery on the ground that the plant and machinery were installed at customer's premises and hence were not 'put to use' in the business of the Appellant. Transfer Pricing Considering the value of Management charges paid to Associated Enterprises at Rs. Nil: ....
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....utation of arm's length price of the international transactions pertaining to the manufacturing segment. 8. On the facts and in the circumstances of the case and on the law prevailing on the subject, the learned AO, pursuant to the directions of the Hon'ble DRP, has erred, in considering the aggregate of specialty chemicals and equipment segments for the purposes of computation of the Profit Level Indicator ('PLI') for the purposes of computation of the arm's length price for the international transactions of the Appellant pertaining to the manufacturing segment. 9. On the facts and in the circumstances of the case and on the law prevailing on the subject, the learned AO/ TPO, pursuant to the directions of the Hon'ble DRP, has erred in modifying the benchmarking analysis, as conducted by the Appellant, using Transactional Net Margin Method for benchmarking its international transactions pertaining to manufacturing segment and thereby modifying the set of comparables. In doing so, the learned AO / TPO / DRP has erred in: i. adding / rejecting certain companies in the final set of comparables which were functionally not similar to th....
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....ternational transactions relating to Contract Research and Development ("Contract R&D") segment and thereby modifying the set of comparables. In doing so, the learned AO / TPO / DRP has erred in adding / rejecting certain companies in the final set of comparables which were functionally not similar to the Appellant's R&D segment. 2. The Appellant submits that the AO / TPO / DRP, having tested the arm's length price of the international transaction pertaining to payment of headquarter common expenses and the allocation of regional management assistance separately, ought not to consider the same while determining the operating margin of the manufacturing and Contract R&D segment. In the alternative, while computing the proportionate adjustment for the segments, if any, the headquarter common expenses and the allocation of regional management assistance amount should not be considered, since the headquarter common expenses and the allocation of regional management assistance amount is tested separately. 4. The assessee on a later date filed corrected additional ground of appeal No.2, which reads as under:- 1. The Appellant submits that the AO / TPO / DRP, ....
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.... by assessee is against orders of authorities below in holding that sum of Rs. 65,19,47,000/- received by assessee as subvention money was revenue receipt exigible to tax. The assessee has also raised ground of appeal No.11 on without prejudice basis to ground of appeal No.2 that the Assessing Officer / TPO, pursuant to directions of DRP had erred in treating the said subvention amount received from its associated enterprises as non-operating income. 9. Brief facts relating to the issue are that the assessee was part of Nalco group headquartered in USA. Nalco US was a leading global provider of water treatment and process improvement services, chemicals and equipment programs for industrial and institutional applications. Nalco US was the parent company of Nalco group of companies operating throughout the world. The assessee was a subsidiary of Nalco in India and was primarily engaged in the business of manufacturing and selling specialty chemicals such as water treatment chemicals, industrial additives, oilfield chemicals and de-mineralized water. The registered office of Nalco India was situated at Kolkata (West Bengal) and the manufacturing plants were situated at various par....
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....ch was raised was that while computing operating income, only extraordinary income needed to be excluded; whereas exceptional items of income such as subsidy received from associated enterprises were not required to be excluded as per the said rules. The DRP noted that in the Internal Memo dated 07.03.2012, the terms used for the payment was "onetime promotional allowance". In the Profit and Loss Account, the assessee had shown subsidy of Rs. 65.19 crores as an exceptional item of income. It was further noted by DRP that the assessee had incurred loss of Rs. 63.16 crores before this exceptional item of income and had shown net profit of Rs. 2.03 crores, after considering this exceptional item of income. The DRP agreed with the contention of assessee that subsidy income of Rs. 65.19 crores was thus offered to tax by assessee in return of income. However, the DRP did not accept the contention of assessee that subsidy was granted for additional revenue expenses incurred for relocation of operations from Kolkata to Pune, in the absence of any evidence in this regard. Though the internal Memo stated that the amount was paid for preventing the assessee from becoming sick company, but the....
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....ch arises is whether the said amount is taxable in the hands of assessee. In this regard, the learned Authorized Representative for the assessee stated that the issue stands covered by the decision of Hon'ble Supreme Court in Siemens Public Communication Network (P.) Ltd. Vs. CIT (2017) 390 ITR 1 (SC), wherein it has been held that subvention received by assessee was capital receipt. He further placed reliance on the decision of Hon'ble High Court of Calcutta in Pr.CIT Vs. State Fisheries Development Corporation Ltd. (2018) 94 taxmann.com 466 (Cal) and on the decision of Hon'ble High Court of Delhi in CIT Vs. Handicrafts and Handlooms Export Corporation of India Ltd. (2014) 360 ITR 130 (Del). The learned Authorized Representative for the assessee thus stressed that where the said amount is to be treated as capital receipt, referring to decision in the case of UPS Jetair Express Pvt. Ltd. (supra), the learned Authorized Representative for the assessee pointed out that rationale of the said decision was that where profitability gap was filled up, then whether it was filled up by the taxable receipt or non taxable receipt is questionable. He stressed that first step was the TP adj....
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....st treatment of subvention / subsidy received by assessee from its parent company Nalco, USA. The second issue which is raised on without prejudice basis vide ground of appeal No.11 is whether the said subvention amount is operating in nature and the same has to be includable as receipt in the hands of assessee while computing PLI for the year under consideration. The assessee was a subsidiary of Nalco, USA and since it was incurring losses, the parent company allowed promotional allowance to prevent the assessee from becoming sick company. This is evident from the Memo placed at page 139 of Paper Book and also from consequential Memo for approval of subvention and relevant e-mails and relevant documents thereto. The assessee received sum of Rs. 65,19,47,000/- towards subvention. The assessee had offered the said amount as taxable in its hands initially but before the DRP, it was pleaded that the same was not taxable in its hands. The issue vis-à-vis its taxability i.e. receipt of subvention from parent company now stands settled by recent decision of Hon'ble Supreme Court in Siemens Public Communication Network (P.) Ltd. Vs. CIT (supra). The Hon'ble Supreme Court ha....
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....lishment from Kolkata to Pune and then running the same at Pune. Such onetime payment received by assessee is thus, operating in nature. The learned Authorized Representative for the assessee had pointed out that the subvention amount related to two years. We hold that amount relatable to the year, need to be considered for computing PLI of the assessee. We direct the Assessing Officer to carry out the said exercise. As far as reliance on the decision of Mumbai Bench of Tribunal in the case of UPS Jetair Express Pvt. Ltd. (supra) is concerned, wherein the proposition laid down was since the subvention income had been offered to tax, then the same would be available to the assessee for set off against TP adjustment proposed by TPO. The said proposition will not be applicable to the issue raised before us since the Hon'ble Apex Court has decided the taxability of subvention income to be capital in nature and hence, the said income is not taxable in the hands of assessee and same would not be available as set off as against TP adjustment made by Assessing Officer/TPO. Accordingly, there is no merit in the directions of DRP in this regard. We in the final analysis hold that subvention ....
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.... allocation of management assistance related fees and determined the same at Nil. The Assessing Officer passed draft assessment order, against which the assessee filed objections before the DRP. The DRP upheld the same, against which the Assessing Officer passed final assessment order, against which the assessee is in appeal before us and raised grounds of appeal No.4 to 6 in this regard. The assessee is aggrieved by orders of authorities below in holding that the assessee had not demonstrated the need and receipt of services under 'headquarter common expenses' and the allocation of regional management assistance. 23. The case of assessee before us is that it had provided substantive documentary evidences before the TPO and also submitted additional evidences before the DRP demonstrating the need, actual receipt of services and benefit thereon. The learned Authorized Representative for the assessee further points out that the TPO had not applied any proper method to benchmark the aforesaid transactions and had erred in holding that evidences were not sufficient to support the case of assessee that services were rendered. In this regard, the learned Authorized Representative for ....
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.... for technical services or royalty in the hands of associated enterprise, then it was incorrect on the part of TPO that the nature of payment was different in the hands of assessee by placing reliance on the benefit test. It was also stressed that there is no merit in the case of TPO that no details were filed of visits of persons. Our attention was drawn to written submissions placed at page 1036 onwards of Paper Book and also evidences filed at pages 1027 to 1037, 1062 to 1063 and 1079 to 1081 of Paper Book. The learned Authorized Representative for the assessee here stressed that the Assessing Officer/TPO/DRP had no jurisdiction to determine the benefit test. It was also pointed out that where DRP does not doubt the services rendered especially where the Indian company had only 700 employees and all IT support services were given by Nalco US, then there was no merit in treating the arm's length price of said services at Nil. Further, reliance was placed on the ratio laid down by Kolkata Bench of Tribunal in the case of Philips India Ltd. Vs. ACIT (2018) 90 taxmann.com 357. 26. The learned Departmental Representative for the Revenue referred to the order of DRP with specia....
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....ic support, human resources services, regional finance services, regional procurement services, research and development services, etc. The appropriation was made under the Asia Pacific Procurement Policy, copy of which is placed at pages 167 to 176 of Paper Book. Further, the assessee had also received support services from the Asia Pacific IT team in setting up of IT facility of new office at Pune and evidence in this regard is placed at pages 357 to 362 of Paper Book. Further support was also received from global team in errors faced in accounting in Vendor account in SAP and tracking payments and the evidences are placed at pages 591 and 592 of Paper Book. Further, the assessee has also received HR support by way of e-mails between Global HR and Indian HR on account of increments, salary hikes and also technical training conducted in Dubai, evidences in this regard are placed at pages 496 to 504 of Paper Book. The associated enterprise was providing such support services to all entities in the Asia Pacific Region and methodology was adopted for allocating the cost entity-wise and allocation of costs were further certified by an independent accountant. The said certificate is pl....
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....also explained the need for services being in field of operational, strategic and advisory support services. The first aspect which arises in the present appeal is whether the TPO while ascertaining whether price paid for the services is at arm's length price or not, can enter the field of businessman, who is the best judge as to whether it needs to avail the said services. The answer to the same is 'No'. Each businessman is the best judge to come to decision as to whether it needs the said support services or not. Secondly, once such a decision has been taken by the businessman and it provides the evidence of services received by it from its associated enterprises, then the TPO cannot question the same by commenting upon the nature of services provided, where in any case, information is hyper technical. First of all, where the TPO has referred to the services provided and pointed out defects in the services provided, the first step that services have been provided stands established. Once the same is established by way of assessee producing several evidences before the TPO, which were in the form of contemporaneous data, then the TPO is precluded from commenting upon the same ....
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....HK and Emerson TH and not the whole activities undertaken by the said two concerns worldwide. The assessee had put on record that not only the assessee but many other concerns were availing same services from the two entities and even the basis for remuneration to the said concerns was the same in respect of all the countries. In such circumstances, there is no merit in the order of TPO in holding that as to whether the said concerns have given services or whether they are qualified to give the services and the cost incurred by AEs. First of all, this is outside the domain of TPO. Under the Transfer Pricing Regulations what the TPO has to determine is whether the services which have been provided by associated enterprises are at arm's length price. Accordingly, we find no merit in this part of the order of TPO. 21. In this regard, we find support from the ratio laid down by the Hon'ble High Court of Delhi in Hive Communication Pvt. Ltd. in Income Tax Appeal No.306/2011, wherein it has been held that the legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It....
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....lar services from the said two entities. The assessee had filed on record the copies of agreement with the said concerns and when compared with terms of agreement with the assessee, the same were at par. In such scenario, where the benefit of services was availed by different entities which in turn, were remunerated by different entities on the basis of cost worked out on man hours basis plus mark up, which was at same level, then the same cannot be questioned. The allocation key applied by AE to allocate cost of services provided to different entities i.e. on man hour basis is one of the accepted methods and the same could not be brushed aside without bringing on record any adverse evidence. Now coming to the issue of bench working the said transaction. The assessee in the present case had taken the associated enterprise as tested party and had pointed out that the remuneration of support services was at arm's length price by applying the TNMM method, where the concerns providing similar services, were taken as comparable. Under the transfer pricing provisions, it is incumbent upon both the assessee and the authorities to select the most appropriate method to benchmark the int....
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....r the same is at arm's length price when compared with similar transactions undertaken by external entities or internal comparables." 32. In the facts and circumstances of the present case before us, which are similar to the facts and circumstances in the case of Emerson Climate Technologies (India) P. Ltd. Vs. DCIT (supra) and Eaton Fluid Power Ltd. Vs. ACIT (supra), we hold that there is no merit in the observations of TPO in holding that the assessee had not availed any services, hence the arm's length price of transactions was to be adopted at Nil. We reverse the findings of authorities below in this regard. 33. Another aspect which needs to be also considered in the case of assessee is that the Tribunal in assessee's own case in assessment years 2005-06 to 2008-09 (supra) has held that no adjustment is to be made vis-à-vis management fees paid to Nalco Singapore. 34. Now, coming to second part of intra-group fees paid by assessee to Nalco US for providing services such as information technology, engineering support services, business development services, supply chain services. The assessee had grouped the said services under the head 'headquarter commo....
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....e said fees for included services were taxable in the hands of US entity. The said US entity is in appeal before the authorities but the question which arises is that whether in such circumstances also can the payment made by assessee for availing intra-group services, while benchmarking the international transactions can be taken at Nil. The answer to the same is 'No'. First of all, we find support from the ratio laid down by Pune Bench of Tribunal in the case of Emerson Climate Technologies (India) P. Ltd. Vs. DCIT (supra) and Eaton Fluid Power Ltd. Vs. ACIT (supra) and hold that TPO cannot benchmark the said transaction of availment of intra-group services at Nil on the ground of doubting whether any services were availed or not. In the present case, the aforesaid services were availed, payment for which was made at cost without any markup and such cost was attributed to the assessee on the basis of particular methodology adopted by US company for recovering the expenditure from all entities under Nalco group and the same cannot be disturbed in the hands of assessee. The payment made by assessee was thus, at arm's length price and no adjustment needs to be made on this accou....
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....in such circumstances, the royalty benchmarking methodology under CUP method with the same set of comparable agreement be adopted. It was further pointed out that payment of royalty at 6% had been approved by the Government of India for the period 01.01.2009 to 31.12.2011. Further, reliance was placed on the decision of Pune Bench of Tribunal in Spicer India Ltd. Vs. ACIT in ITA No.251/PUN/2014 and ITA No.1327/PUN/2014, relating to assessment year 2009-10, order dated 10.0.2017, which principle has been applied by the Tribunal in assessment years 2010-11 and 2011-12. In such facts and circumstances and following the rule of consistency and where the royalty rates had been approved by RBI, the learned Authorized Representative for the assessee stated that CUP method was the appropriate method to benchmark the arm's length price. 39. The learned Departmental Representative for the Revenue pointed out that the issue raised vide ground of appeal no.7 was against rejection of CUP method for determining the arm's length price of royalty payments. In this regard, reliance was placed on the order of DRP. 40. We have heard the rival contentions and perused the record. The issu....
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....s associated enterprise @ 6% / 4% is to be considered at arm's length rate and no adjustment is warranted in the hands of assessee. 43. The said proposition has also been laid down by Pune Bench of Tribunal in Spicer India Ltd. Vs. ACIT, order dated 10.02.2017 (supra), wherein it has further been held that in any case the jurisdiction and power of TPO is to determine arm's length price of Royalty and the order of TPO holding that the assessee had not derived any benefit under the said Agreement was beyond the scope of TPO while benchmarking the international transaction for the purpose of determining arm's length price. Accordingly, we reverse the order of Assessing Officer / TPO / DRP and hold that in the present set of facts where the royalty rates were approved by RBI, CUP method was the most appropriate method to be applied to determine arm's length price of royalty payments made during the year. Accordingly, we reverse the order of Assessing Officer in holding that royalty payment is to be benchmarked with that of payment of raw material and other goods bought. The said transaction of royalty payment is to be benchmarked independently by applying CUP method ....
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....here the assessee had kept its margins at low, to be market effective and in such scenario, where Nalco US had given subvention amount, then the additional amount received from holding company was part of operating margins. He pointed out that the assessee initially had taken the said receipt as taxable and operating in nature. The DRP however, decided the chargeability to tax but reduced it from TP adjustment applying the ratio laid down in the case of UPS Jetair Express Pvt. Ltd. (supra). Hence, he did not decide the taxability of said amount being infructuous. He then, referred to the second aspect of the case and pointed out that the margins of assessee declared by it were 1.54% and the mean margins of comparables were 3.44%, as per transfer pricing report. However, as per the order of TPO, wherein he had finally selected different set of comparables, the mean margins worked out to 14.01%. The assessee's margins were also re-computed at (-) 1.37%. However, before the DRP, the assessee filed list of additional comparable companies and after the directions of DRP, finally selected comparables totaled 18 and the mean margins of comparables works out to 8.92%. The margins of assess....
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....les finally selected. Though the learned Authorized Representative for the assessee has taken us through the list of comparables, which have been finally selected and also comparables which have not been selected, which as per the assessee needs to be selected, we are of the view that at this juncture, the said exercise would be a futile exercise. It is only after the PLI / margins of assessee are re-worked in line with our decision in respect of various issues raised which affect the operating margins of assessee, the need would come to look at the margins of comparables. Our decision on the inclusion / exclusion of comparables at this stage would be an academic exercise. In such facts and circumstances of the case, we first direct the Assessing Officer to re-work the operating margins of assessee and thereafter to look into the objections raised by assessee vis-à-vis the comparables finally selected and also the comparables which have not been finally selected. The assessee shall furnish complete details in this regard and the Assessing Officer shall decide the issue of final selection of comparables after taking into consideration the settled position on the issues after ....