TaxTMI 
TaxTMI 
2020 (11) TMI 171
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....d 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 income was furnished declaring total income of Rs. 75.83 crore.....
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....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 making adjustment of Rs. 26.87 crore on this score. The a....
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....ears. 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), whereas for the year under consideration, the assessee adopted the ....
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....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 Regional Services Agreement. - No primary documentation or backup data was submitted by the Assessee in support of its....
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.... 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 of three factors as to (i) Whether the services were actually availed? (ii) Whether the costs are rightly allocated to the assessee? (iii) Whether the pay....
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....ith 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 mean "any other legal entity that, directly or indirectly, is 50% or more owned by, or otherwise controls or is controlled by, such party". On perusal of the above referred clauses of the Se....
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....formance. 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 various aspect of Sales and Marketing, such as, identification of the correct code against a customer Suzuki; Developing different sizes of Tyres; Regional Team Guiding the assessee as to how the ....
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....oodyear 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, which was in addition to the legal charges paid under the regional services. Here again, we find that the separate payment debited to the Profit & Loss account is towards availing the services of the ....
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....s, 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 basis of personnel employed. Insofar as the Financial services are concerned, the assessee agreed to share the costs for such services at 50% on the basis of total assets reported in the balance sheet and 50% on the b....
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....r 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 Aug-13 268,492 772 1,134 270,398 9,731 10,403 (7,243) 278,313 18,285,986 Sep-13 445,497 2,292 3,370 451,159 6,829 18,493 462,823 28,980,798 Oct-13 445,497 2,292 3,370 451,159 6,829 (12,264) 432,066 26,570,696 Nov-13 265,917 167 246 266,330 12,189 4,580 258,722 16,156,973 Dec-13 507,424 2,017 2,9....
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....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 took the actual transaction with its AE itself as a benchmark for comparison. The benchmarking even under the CUP method became more relevant when the assessee itself admitted before the TPO that other Goodyear affiliates were compensated on an arm's length basis. This implies, as has been noticed above, that certain Goodyear entities charged mark-up and it was not a case of mere cost reimbursements. Once it was undisputed that some of the Goodyear entities were compensated with a certain mark-up, then it was all the more vital to show that such mark-u....
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....iding 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 made to the value of international transactions of payment of Regional service charges made to the AE". This indicates that the TPO did not determine the ALP under any method much less `any other method'. In such circumstances, we cannot countenance the argument of the ld. DR, which is just in the air and does not emanate from the TPO's order. 28. Thus, it is seen that like the assessee who did not conduct any benchmarking and straightway treated the transaction at ALP under the CUP method without comparing it with any other comparable uncontrolled transaction, the TPO also d....
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.... 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 taken as an arm's length price in relation to provision of services by the enterprise. 31. Adverting to the facts of the case, it is found that the independent auditor issued certificate as to allocation of actual costs incurred by various Goodyear entities in providing services to the assessee as per the Agreement. The TPO has also not disputed the correctness of such a certificate. This can help us in determining the figure of direct and indirect costs incurred by the AEs in rendering services to the assessee. The next step is determination of the normal gross profit mark-up on suc....
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....s 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 circumstances of each case. Let us proceed with the lowest arm's length margin of zero percent in a hypothetical comparable uncontrolled transaction. Going by the command of second proviso to section 92C(2), if the variation between the arm's length price so determined (which is equal to the costs incurred by the Goodyear entities in rendering services with zero mark-up on costs) and price at which the international transaction has actually been undertaken (which is actual costs incurred plus mark-up on such costs) does not exceed three per cent of the transacted value, the price at which the....
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....d 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 zero mark-up, still the value of the international transaction is within the notified tolerance range. In that view of the matter, the case gets covered by the second proviso to section 92C(2) of the Act not warranting any transfer pricing addition. We, therefore, order to delete the addition of Rs. 26.87 crore and odd. 36. No other ground was pressed by the ld. AR. Such grounds, therefore, stand dismissed. A.Y. 2015-16 : 37. The only issue pressed in this appeal raised through Ground Nos. 1 to 6 and additional ground is against the addition of Rs. 32,06,19,150/- made by the AO on account of transfer pricing adjustment towards the payment of Regional Service Charges. 38. Briefly, the factual matrix of the case is that the assessee filed return declaring total income of Rs. 99.31 crore, declaring certain international transactions in Form No.3CEB. The AO m....
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....1. 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 Total amount including mark-up Mark-up charged by Singapore GST on Singapore mark-up Mark-up of USA (Removed) Net Mark up IT Cost incurred by Goodyear USA Amount retained by Goodyear USA Total Value of services Markup% (Total Value of services) Markup% (Base Value) (A) (B) (C) (D) (E) (F) (G) (H) (I) (J) (K) (L=H/K) (M=H/A) 1 Goodyear Shanghai 18,32,238 91,612 1,15,431 20,39,280 - - - 91,612 - - 20,39,280 4.49% 5.00% 2 Goodyear USA 21,32,675 1,13,534 - 22,46,209 - - (1,13,534) - 75,601 83,585 21,24,691 0.00% 0.00% 3 Goodyear Singapore 5,20,600 - - 5,20,600 25,550 37,556 - 25,550 - - 5,83,706 4.38% 4.91% 4 Goodyear Thailand 99,983 4,999 7,349 1,12,331 - - - 4,999 - - 1,12,331 4.45% 5.00% 5 Others 11,15,343 - - 11,15,343 - - - - - - 11,15,343 0.00% 0.00% Total 57,00,8....