TaxTMI 
TaxTMI 
2021 (2) TMI 378
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....sidering foreign associated enterprises as tested party based on the available supporting material and evidences, which clearly demonstrate the least complex nature of the appellant's overseas subsidiaries ? ii.Whether, under the facts and circumstances of the case and in law, the impugned order of the Tribunal is improper and erroneous for not having dealt with the grounds of appeal (transfer pricing as well as corporate tax) raised, submissions made and arguments placed during the hearing by the Senior Legal Counsel, thereby resulting in violation of the principles of natural justice in the absence of cogent reasons ? iii.Whether, under the facts and circumstances of the case and in law, the Transfer Pricing Officer was justified in not resorting to internal TNMM (transactional net margin method) over external TNMM for benchmarking the international transactions with overseas subsidiaries ? iv.Whether, under the facts and circumstances of the case and in law, the Transfer Pricing Officer was justified in not restricting the quantum of transfer pricing adjustment in subsidiary segment to the actual profits retained by overseas subsidiaries from the u....
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....y Segment Provision of software development services to overseas subsidiaries Receipt of development from subsidiaries software services overseas 258,52,55,650 199,97,48,610 Transactional Net Margin Metthod (TNMM) at subsidiary segment level 38.68% (Tested Party) vs 13.60% (External comparables) 2. Citi Segment Provision of software development services to Citibank and group entities 138,41,31,011 Comparable Uncontrolled Price [CUP] Method US$472.30 [Citibank] vs. US$ 467.38 [third party] 3. Others transactions Reimbursement of expenses received and paid 34,62,76,975 At actuals 4.The assessee considered the Transactional Net Marginal Method [TNMM] as the Most Appropriate Method [MAM] and for application of TNMM, the assessee considered itself to be tested party and operating profit/operating cost as the profit level indicator. The assessee selected 22 comparable companies in the transfer pricing documentation with weighted average operating profit/operating cost of 13.60%. Subsequently, when the transfer pricing assessment proceedings were being carried on, the assessee revised its segmentation and provided profitability of ....
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....ransactions undertaken with overseas subsidiaries and Citi bank entities. The TPO revised the segment provided by the assessee. Further, the TPO rejected transfer pricing analysis undertaken by the assessee and undertook a fresh search for external comparables and arrived at a final list of 12 comparable companies with average operating margin of 18.94%. The TPO compared the operating margin of Subsidiary Segment, i.e. 3.51% with average operating margin of external comparables, i.e. 18.94% and made adjustment of Rs. 39,43,73,743/-. 6.Aggrieved by such order, the assessee filed its objections before the Dispute Resolution Panel [DRP]. By order dated 30.12.2015, the DRP while issuing directions upheld the adjustment made by the TPO of Rs. 39,43,73,743/- with respect to international transactions undertaken with overseas subsidiaries. Accordingly, final assessment order was passed by the Assessing Officer dated 29.01.2016 under Section 143(3) r/w. 144C(13) of the Act. Aggrieved by the same, the assessee preferred an appeal to the Tribunal. In the appeal, the assessee approached the matter with two different approaches. In the first approach, the assessee contended that their overs....
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....redominantly provide on-site software support and related services in the local geography under the instruction and supervision of the assessee and given the least complex nature, the overseas subsidiaries should be considered as tested party for benchmarking the international transactions with overseas subsidiaries. 8.The learned counsel referred to various documents to demonstrate the substantial least complex nature of the overseas subsidiaries. The learned counsel contended that the Tribunal committed a serious error in rejecting the ground canvassed by the assessee to consider foreign AEs as tested party to determine the ALP despite their least complex nature in the supply chain by ignoring the various evidences/documents furnished by the assessee to the said effect. Further, the Tribunal did not consider that the TPO in the assessee's own case for the subsequent assessment years, i.e. AY 2012-13, AY 2013-14 and AY 2014-15 accepted the assessee's approach on considering the foreign AEs as tested party under similar facts and circumstances. Further, it is submitted that the Tribunal did not adjudicate the other contentions despite very detailed submissions made by th....
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....een and not who is the tested party. The concept of tested party will apply only when Cost Plus Method [CPM] or Re-sale Price Method [RPM] or TNMM is applied. In this regard, the assessee referred to Rule 10B(1) of the Income Tax Rules, 1962 ['the Rules' for brevity]. Further, it was submitted that the decision relied on by the assessee in the case of General Motors India Private Limited vs. DCIT/ACIT [2013 (27) ITR(T) 373 (Ahm-Trib.)] and Ranbaxy Laboratories Limited vs ACIT [2016 (68) Taxman.com 322 (Delhi-Trib.)] were relied on by the assessee which were not properly construed by the Tribunal. 10.It is submitted that the Tribunal though referred to the decision in Ranbaxy Laboratories Limited held that the decision is on the basis of OECD guidelines only and does not taken income tax provisions into consideration. It is submitted that the Indian Regulations do not laid down any specific procedure or guidelines for the choice of tested party. However, it would be relevant to refer Section 92 and Rule 10B(1)(e) of the Rules which uses the term 'enterprise' for application of TNMM. It was further submitted that Section 92F of the Act defines the term 'enterpr....
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....location procedure adopted by the Ld. TPO resulted in 27.75% of the selling, administrative and other general overheads getting allocated to the AE segment vis-a-vis 12.81% to the Citi and third party segment thereby leading to a clear anomaly in the allocation mechanism. 5.The Learned TPO/AO and the Hon'ble DRP have erred, in law and in facts by rejecting the detailed transfer pricing analysis prepared by the Appellant in accordance with the provisions of the Income-tax Act, 1961 (the Act) without appreciating the fact that the margins earned by the Appellant in the subsidiary segment [20.25 percent] were higher than those even earned by the third party comparables [18.94 percent] chosen by the Ld. TPO. 6.The learned TPO / AO and the Hon'ble DRP failed to appreciate the business model adopted by the Appellant with its subsidiaries wherein the entire revenue and cost of the overseas subsidiaries were pulled back into the books of the Appellant by way of a back-to-back arrangement after leaving only an arm's length profit for the onsite support services provided by the overseas subsidiaries in majority of the cases. 26.The learned AO and the Hon'ble DRP ha....
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....ith its subsidiaries is at arm's length by taking the overseas subsidiaries as tested parties. The DRP while issuing directions observed that it is not known as to why the subsidiaries were not taken as tested parties in the TP documentation, therefore, the stand of the assessee cannot be accepted. It is submitted that this finding of the DRP is erroneous and therefore the assessee would pray for a remand to the TPO for considering afresh the issue relating to tested party. 13.Further the learned counsel referred to the affidavit filed before the Tribunal in support of the miscellaneous application which contains a tabulated statement pointing out the issues which were not considered by the Tribunal and therefore, those issues may be remanded to the Tribunal for fresh consideration. It is further submitted that the definition of 'Enterprise' and 'Associated Enterprise' in the Act nowhere indicates that the Enterprise shall mean the assessee and the Associated Enterprise will mean other than the assessee and that these words have been used interchangeably and the finding of the Tribunal that the Enterprise will mean the assessee and Associated Enterprise will ....
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....ting the foreign AEs to be taken as tested parties. In this regard, reliance was placed on the decision in Mattel Toys India Private Limited vs. DCT [MANU/IU/0886/2013 (ITAT, Mumbai Bench)]. For the same proposition, reliance was placed on the decision of the Income Tax Appellate Tribunal, 'C' Bench, Kolkata in the case of Almatis Alumina Private Limited vs. DCIT in I.T.A.No.726 & 2361/Kol/2017 dated 16.04.2019. 15.M/s.R.Hemalatha, learned senior standing counsel for the revenue elaborately referred to the order passed by the Tribunal and in particular the arguments which were advanced by the learned senior counsel for the assessee before the Tribunal which has been recorded by the Tribunal in paragraph Nos.20, 21 and 22. Further, it is submitted that in terms of Rule 10D, the information and documents are to be kept and marked and the assessee in their return of income had stated that they treated themselves as the tested party and without filing a revised return, there cannot be a change of stand. In this regard, the learned counsel referred to Rule 10E and the report of the auditor which is required to be submitted in Form No.3CED. Therefore, it is submitted that when....
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....ds which have been listed out supra have not been adjudicated by the Tribunal and therefore, it is prayed that the matter may be remanded to the Tribunal to adjudicate the issues which have been specifically raised by the assessee. The arguments of the learned senior standing counsel stems from the finding recorded by the Tribunal in the impugned order, more particularly, the observation in paragraph 24 of the impugned order, wherein the Tribunal observes that the only issue that arises for consideration is whether the assessee Company has to be taken as tested party for the purpose of determination of Arm's Length Price or by applying the least complex theory, the AE outside the Country has to be taken as the tested party. The Tribunal further observes in paragraph 18 of the impugned order that even though the assessee has raised many issues before the Tribunal, the learned senior counsel for the assessee confined himself only to the selection of tested parties. The assessee filed miscellaneous application before the Tribunal on 28.09.2017 after the impugned order was passed in which a specific plea has been raised, duly supported by an affidavit of the Senior Manager, Direct ....
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.... before it rather foreclosing the assessee from canvassing those points based upon the alleged concession which would not bind the assessee. 20.Now, we move on to consider the issue as to whether the assessee has to be taken as tested party for the purpose of determination of ALP or by applying the least complex theory, the AE outside the Country has to be taken as tested party. The Tribunal while considering the said question proceeded to examine the scheme of transfer pricing as provided under the Act. It referred to section 92B which defines 'International transaction', section 92A which defines 'Associated Enterprise', Rule 10D which deals with the most appropriated method for determination of ALP and Rule 10B(1)(e) which provides the method for determination of ALP by adopting TNMM. After referring to these statutory provisions, the Tribunal would observe that the main object is to compute the net profit margin realised by the enterprise from the international transaction; the comparison shall be with regard to the transaction of unrelated enterprise from comparable uncontrolled transaction. Thus the Tribunal opined that the net profit margin of the enterpri....
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....e judgment of the Tribunal the principles that emerge in selection of tested party has been culled out wherein it has been held that the tested party normally should be the least complex party to the controlled transaction and that there is no bar for selection of tested party either local or foreign party and neither the Act nor the guidelines on transfer pricing provides so and the selection of tested party is to further the object of comparability analysis by making it less complex and requiring fewer adjustment. Therefore, we do not agree with the reasons given by the Tribunal for not considering the decision in Ranbaxy Laboratories Limited. 23.Furthermore from the grounds canvassed in the miscellaneous application filed before the Tribunal on 28.09.2017, after the impugned order was passed by the Tribunal, would clearly show that all materials were available on file. Therefore, to non-suit the assessee stating that they miserably failed to establish functional risk is incorrect. If such is the conclusion which we have to arrive at, we have no hesitation to set aside the order of the Tribunal and we shall do so. 24.Before doing so, we may point out the following. The asse....
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....rendered subsequently, more particularly, the decision of the Ahemdabad Tribunal in the case of General Motors India Private Limited, which had taken note of the decision of the Mumbai Tribunal in Aurionpro Solutions Limited and noted the facts of the said case and held that the said decision cannot be applied as the main issue in Aurionpro Solutions Limited was the percentage of interest to be calculated on the loan advanced by the assessee to its AE. Thus, on facts the decision in Aurionpro Solutions Limited could not have been applied to the facts of the assessee's case before us. As already pointed out, it is not a case where there were no material produced by the assessee to establish the functional risk assumed by the foreign AEs. The material was available before the TPO but the TPO non-suited the assessee on the ground that such contention by referring to the foreign AEs as tested party was not part of TP documentation. This finding is incorrect. Interestingly in the case of in the case on hand the TPO rejected the data placed by the assessee in their TP documentation and undertook a fresh search for external comparables and arrived at a final list of 12 comparables. Th....
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....higher than those even earned by the third party comparables [18.94 percent] chosen by the Ld. TPO. (iii) The learned TPO / AO and the Hon'ble DRP failed to appreciate the business model adopted by the Appellant with its subsidiaries wherein the entire revenue and cost of the overseas subsidiaries were pulled back into the books of the Appellant by way of a back-to-back arrangement after leaving only an arm's length profit for the onsite support services provided by the overseas subsidiaries in majority of the cases. (iv) The learned AO and the Hon'ble DRP have erred in restricting the exemption as claimed by the Assessee to INR 48,47,11,120 (as against the claim INR 84,42,86,994 in the return of income) for 10A Units and to INR 6,40,45,234 (as against the claim INR 15,40,15,372 in the return of income) in respect of the 10AA Unit. (v) The learned AO and the Hon'ble DRP have failed to understand the profitability computation of 10A and non10A units. (vi) The learned AO and the Hon'ble DRP failed to appreciate the fact that the 10A units and non 10A units are operating at a consistent profitability for the past two years. (vii) The le....