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2020 (11) TMI 171
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....t of I.T. Services. The assessee has also raised an additional ground reading as under: "The assessee submits that the determination of ALP at Rs. NIL by the learned TPO in respect of Intra Group Services without adopting any of the prescribed method is not justified and hence, the addition made of Rs. 26,87,68,644/- may kindly be deleted." 3. Since the additional ground involves a legal issue and is connected with the first main issue espoused in the memorandum of appeal, and that no further verification of fresh facts is warranted, we admit the same in the light of judgment of the Hon'ble Supreme Court in National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC) wherein the Hon'ble Apex Court has observed that "the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law". The additional ground will be dealt with at appropriate stage. 4. Succinctly, the factual panorama of the case is that the assessee is an Indian company engaged in the manufacturing of Goodyear branded Medium, Commercial truck tyres, Wire built tyres, Road tyres and Rear farm tyres. Return of incom....
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....rather than the rendition of the services. In para 9.4 of the TPO's order, he observed that the assessee was charged for the services for which it would not have paid as an independent enterprise. Further in para 9.5, he observed that the charges levied on the assessee were for the services which did not provide any commercial benefit to it. From the e-mail correspondence, the TPO noticed that the addresses were not identifiable as specifically relating to the assessee. He further noticed that the assessee claimed to have received critical support regarding the production of state of art Radial Tyres for Passenger Cars under "Production Tyre performance/Product Resolution", for which it started paying Technological Know-how fees separately w.e.f. 01-01-2011 for providing services that were akin to those described under Production and the Performance/Product Resolution under the regional services. After considering the entire material, the TPO came to hold that the payment of Rs. 26,87,68,644/- was not at ALP. He adopted Nil value as ALP of the international transaction and accordingly recommended transfer pricing adjustment of equal amount. The AO accordingly passed the Draft order....
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....any regional services, they relied on the orders for the earlier years. Since such orders have been overturned, it becomes vivid that the fact of rendition of the Regional services for the year under consideration can be possibly but not conclusively inferred. Be that as it may, the question of rendering of services is independent every year, which has to be proved on the basis of positive evidence. Simply because the assessee was found to have availed services in the preceding year, the same per se would not lead to inference that the services were also received in the current year. The factum of availing services needs to be established independently every year. 8. Notwithstanding the fact that the question of rendition of services in earlier years is similar to that of the year under appeal, still, there is an important aspect which calls for a de novo examination of the issue. This crucial aspect is the deviation in the selection of the most appropriate method for the instant year. For the A.Y. 2012-13, the assessee aggregated the international transaction of payment of RSC along with certain other international transactions under the Transactional Net Margin Method (TNMM....
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....evidence for establishing the ALP of the transaction. - Most of the services for which the Assessee has been charged by the AE with either performed by the Assessee itself or by the other resident group entity, i.e. Goodyear India Ltd. under a cost sharing arrangement with the said resident company. It is seen that many of the services for which the Assessee is being charged by the AE are being provided by the resident group entity also under a cost sharing arrangement. - The AE has charged the Assessee for "Legal Services" which is covered under the head "General/Administration Services". However, the Assessee itself has debited an amount of Rs. 127 lakhs under the head "Legal & Professional" expenses in its books of account. - The duplication in the services being rendered is also reflected in the payments made to the same AE in USA, in pursuance of a separate Technical Assistance and License Agreement entered into with the said entity. On perusal of the said agreement, it is noticed that the services provided by AE are similar to the services provided by the AE under the head 'Production & Tyre Performance/Product Resolution" in pursuance of the Region....
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....at considerable onus was on the Assessee to show that actual services were rendered by its subsidiaries." 10. To sum up, the findings of the TPO on Nil ALP determination are founded either on the ground that there was no evidence of receipt of services by the assessee; or it was a case of duplicate services; or the assessee did not receive any benefit from such services; or there was no need for services; or these were shareholder services; or though the certificate by the auditor on cost allocation was correct but there was no documentary evidence for establishing the ALP. 11. Section 92(1) of the Act provides that: "Any income arising from an international transaction shall be computed having regard to the arm's length price." Computation of ALP has been dealt with in section 92C which provides that: "The arm's length price in relation to an international transaction or ... shall be determined by one of the following methods, being the most appropriate method...'. The mechanism for determining the ALP under these methods has been given in Rule 10B. Insofar as the intra-group services under consideration are concerned, the determination of ALP primarily requires examination ....
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....specific services. "Sales/Marketing" services have been given in Exhibit C. It talks of assistance to be provided by the assessee's AEs in establishing and maintaining top level contact with the management of existing and potential customer; Sales activities in accordance with the policies; Assistance in Advertising and Sale Promotion activities; Support in collection and analysing local marketing information and Assistance in providing marking information etc. "Production and Tire performance/Issue Resolution" services have been given in Exhibit E, with sub-heads of Production and Tire performance/Issue Resolution. "Purchasing and Material Management" services have been set out in Exhibit F. It has two sub-heads, namely, Purchasing and Material Management (Supply chain coordination/assistance). There is further bifurcation of the nature of services under both the sub-heads. Clause 5 of the Agreement with heading `Personnel' provides that Goodyear USA, at its option, may obtain assistance from sub-contractors including its affiliates or any other concerns in rendering services to the assessee. Definition of the term "Affiliate" has been given in Clause 1.2 of the Agreement to me....
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....ming certain tests and seeking clarification from the local team regarding the shipping status of the tyres sent for testing. In this way, texts of all the e-mails deal with Production and Tyre performance. In respect of "Procurement and Material Management" services, the assessee has placed summary of emails on pages 239 to 242 of the paper book, again on representative basis. Text of such e-mails have been placed at pages 459 to 619 of the paper book. From such e-mails, it can be again noticed that these have been exchanged between Regional team from abroad and the assessee's employees in India. In such e-mails, there is discussion about various aspects of procurement and material management, such as, coding higher volume of materials from global suppliers; planning the global negotiation process; pricing policy adopted by a supplier, planning of procurement strategy efficiently; and issuing the prices of materials etc. Selective e-mail communications in respect of third category of services, namely, `Sales and Marketing' have been summarised on pages 243 to 245 of the paper book. Text of such e-mails have been placed at pages 620 to 698 of the paper book. Such e-mails talk about....
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....he assessee in its Profit and loss account are towards specific services availed in India from third parties. The TPO referred to separate Technical Assistance and License Agreement entered into with Goodyear USA vis-a-vis the payment for Technical services under Regional Services. We find that the Technical Knowhow Agreement dated 01-01-2011 was entered into by the assessee (copy placed at page 171 of the paper book) for obtaining Technical information and know-how regarding "Covered products". Royalty was to be paid @5% of each calendar year on the assessee's net sales. In lieu of receipt of such technical assistance, the assessee paid a sum of Rs. 38.43 crore by declaring this international transaction at Sl. No. 14 on page 3 of the TPO's order, which has been accepted by the TPO at ALP. On the other hand, the payment for technical regional services in dispute refers to such technical guidance/resolution which the assessee received on day-to-day basis on the issues during the manufacturing activity. To accentuate on the duplication of services, the TPO referred to the payment of Rs. 1.27 crore under the head `Legal & Professional' expenses debited to the Profit and loss account,....
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....expenses incurred by Goodyear, either directly or indirectly in providing the Services, including but not limited to wages, salaries and benefits to the persons providing the services, amounts paid to sub-contractors, administrative expenses, expenses associated with the use of physical space (including rent and utilities), amortization and depreciation of assets used by Goodyear, any fee required to obtain the accountants' certificate referred to in section 8.2" Clause 3 of the Agreement deals with allocation of costs. Sub-clause (a) states that the assessee "will only receive, and be obligated to pay for, those services that pertain to its business and are provided by Goodyear. Clause 3(b) states that: "The Recipient (that is, the assessee) would be allocated, restricted to the services mentioned under this Agreement to proportionate cost viz-a-viz such services being rendered to other Affiliates in an equitable and appropriate manner." Manner of Allocation of costs has also been set out in the Agreement itself. Clause 3.2 of the Agreement states that the assessee agrees to share the general/administrative costs for such services at 50% on the basis of Net Sales and 50% on the ba....
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....te Limited Assessment Year 2014-15 ANNEXURE 1C - COST ALLOCATION WORKING Month Base amount invoiced by Goodyear Singapore to Goodyear US Mark-up charged by Goodyear Singapore while raising invoice GST charged by Goodyear Singapore while raising invoice to Goodyear US Total amount invoiced by Goodyear Singapore to Goodyear US Mark-up charged by Goodyear US of 7.5% removed while invoicing IT costs incurred by GTRC Pertaining to GSATL Retained in GTRC ledger Total amount invoiced by Goodyear US to GSATL Total amount invoiced By Goodyear US to GSATL (USD) (USD) (USD) (USD) (USD) (USD) (USD) INR (A) (B) (C) (D) = (A+B+C) (E) (F) (G) (H)=(D-E+FG) April-13 445,497 2,292 3,370 451,159 6,783 4,175 448,551 24,076,821 May-13 445,497 2,292 3,370 451,159 6,783 4,252 448,628 25,349,064 June-13 445,497 2,292 3,370 451,159 6,922 6,230 450,467 26,752,996 July-13 445,497 2,292 3,370 451,159 6,829 2,031 446,361 26,949,260 Au....
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....he terms of the Agreement. This brings us to the point that the assessee was allocated Rs. 30.22 crore as Regional Service charges on the basis of actual costs incurred by Goodyear USA and other Goodyear affiliates on which only three Goodyear entities, namely, Goodyear Singapore, Goodyear Shanghai and Goodyear Thailand added mark-up of 5% while Goodyear USA eventually and other entities not adding any mark-up. (iii) Whether the payment by the assessee is at ALP? 23. The next issue is to determine if the payment made by the assessee is at arm's length? In this regard, it is observed that the assessee claimed to have benchmarked this transaction under the CUP method by submitting before the TPO, as has been recorded on page 3 para 5 of his order, that: "costs pertaining to RSC are reimbursed to Goodyear USA on cost-to-cost basis. It is further stated that the Goodyear USA aggregates the services provided by other Goodyear affiliates and compensates them on an arm's length basis. Accordingly, the transaction was claimed to be compliant with arm's length principle". What is pertinent from the benchmarking exercise undertaken by the assessee is that in determining the ALP, it too....
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.... later necessarily ought to have been a comparable uncontrolled transaction. In other words, the actual transaction has also been taken as a comparable uncontrolled transaction, which position is apparently contrary to the law. Since the assessee did not consider any comparable uncontrolled transaction, we desist from according our imprimatur to the manner in which the CUP method was applied by the assessee. 27. Similar is the position with the TPO also, who went on to determine Nil ALP without resorting to any method. Referring to rule 10AB applicable from A.Y. 2012-13 providing for adoption of any method other than the five specified methods in section 92C(1), the ld. DR submitted that the TPO adopted any other method. We do not find any substance in the argument of the ld. DR that the TPO applied `any other method'. Firstly, the TPO has nowhere mentioned in his order that he was applying such `any other method' in terms of rule 10AB. Secondly, the TPO has not determined the ALP in any manner. He simply wrote in para 10.2 of his order that: "the arm's length price of the balance amount of Rs. 26,87,68,644/- is taken as Nil and accordingly an adjustment of Rs. 26,87,68,644/- is....
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....uch decisions and set aside the TPO's ALP determination based on no method. But acceptance of such an argument in the instant case will lead to burying the ALP determination of an international transaction with an admitted mark-up, which position is contrary to the prescription of the Chapter-X of the Act. The additional ground urging to set aside the transfer pricing addition on this count, in the prevailing facts is, ergo, not allowed. 30. Having seen that neither the ALP determination of the assessee nor the Revenue is as per law, the next thing is to find out if the payment by the assessee in respect of regional services was at ALP? One of the recognized methods as per section 92C(1) of the Act is the `Cost plus method'. This method is ordinarily employed, inter alia, in the case of provision of services. The manner of determination of the ALP as per this method is enshrined in Rule 10B(1)(c). Under this method, the direct and indirect costs incurred by the enterprise in respect of services provided to an associated enterprise are determined. Such costs are increased by the amount of normal gross profit arising from similar uncontrolled transaction. The resultant amount is t....
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....agnetized and the case gets governed by the second proviso. Suffice to say, if there is only one comparable, second proviso to section 92C(2) will apply providing for +-3% tolerance range; and if there are more than one comparables, rule 10CA will apply providing for either arm's length range or simple average with +- 3% tolerance range depending upon whether the number of comparables are six or more on one hand or between 2 to 5 on the other. The logic behind providing for this cushion of +-3% or arm's length range, as the case may be, is to rationalize the ALP determination inasmuch as price in two identically placed transactions may sometimes genuinely vary depending upon the bargaining power or the financial conditions along with a host of factors. Presently, we do not have two or more comparable uncontrolled transactions. Thus rule 10CA does not apply and the case will be governed by the second proviso to section 92C(2) with tolerance range of +-3%. 33. It is simple and plain that, ordinarily, arm's length margin in rendition of services cannot be less than zero per cent in an uncontrolled transaction. However, it may go up to any level depending upon the facts and circu....
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.... 56,223 (7,243) 49,98,686 2.22% 2.38% Note : 1. The amount referred in Column D tallies with the amount mentioned in Column A on page 226 of the paper book. This amount is inclusive of the mark-up charged by Goodyear USA, Goodyear, Shanghai and Goodyear Thailand but does not include the mark-up charged by Goodyear Singapore. 2. The amount referred in Column K tallies with the amount mentioned in Column H on page 226 of the paper book 35. It can be seen from the above calculation given on behalf of the assessee and duly verified by the ld. DR that the mark-up on actual costs incurred by the Goodyear entities in rendering regional services to the assessee is 2.22% on total value of services invoiced. This calculation is based on taking all the six regional services together. As the IT services are not to be considered for our purpose, the ld. AR pointed out that even if such services are considered as without any mark-up, the mark-up on aggregate basis in respect of the remaining five services will be 2.52%. Such mark-up is within the tolerance range of 3%. In other words, even if presume that the comparable uncontrolled transaction is at ze....
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.... were duplicate in nature or unwarranted or shareholders service or no benefit was derived. It is on such basis that the TPO came to hold that the assessee did not receive regional services. Here, it is again pertinent to mention that the assessee availed regional services in the same manner as for the preceding year. Relevant evidence in support of availing the services have been placed on record. The ld. DR did not dispute that the evidence for the instant year is similar to that of the preceding year. Following the view taken for the A.Y. 2014-15, we hold that the assessee did avail regional support services from Goodyear USA and other affiliates. 40. Coming to the second aspect as to whether the costs were rightly allocated to the assessee, again we find that the position remains the same. The ld. DR did not dispute the correctness of the allocation of costs. 41. Turning to the last aspect as to whether the payment by the assessee was at ALP, here we find that the assessee has placed on record a chart giving detail of mark-ups charged by the Group companies, which is reproduced as under: Sr. No. Name of the Company Base Value of services Mark-Up GST Tota....