TaxTMI 
TaxTMI 
2018 (3) TMI 1900
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.... consider domestic brand owners as comparable for the purpose of computing bright line limit in the context of addition on account of transfer pricing adjustment in Advertisement, marketing and promotion (AMP) expenses. Ground No.2 of the assessee's appeal is against addition of Rs. 5,58,24,315/- made by the AO on account of transfer pricing adjustment in the international transaction of AMP expenses. 4. Succinctly, the factual matrix of the case is that the assessee is engaged in the business of import and sale of all types of refrigeration equipments and accessories. During the year, the assessee was also in the process of setting up its manufacturing plant for manufacture and sale of such goods in India. The assessee is a subsidiary of Daikin Japan, which holds 99.9999% of its share capital, leaving the remaining 0.0001% for Daikin Indus Management Service Asia (Pte) Ltd., Singapore. The assessee reported six international transactions in Form No.3CEB. The AO made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The TPO, on the basis of the elaborate discussion made by him in his order dated 29.01.20....
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.... Rs. 7,94,14,638/-. The assessee aggregated the international transaction of `Payment of consultancy charges' with its international transactions under the `Manufacturing segment' and benchmarked the same using the Transactional Net Margin Method (TNMM) as the most appropriate method on entity level. The TPO did not accept the aggregation of the transaction of `Payment of consultancy fee' with the international transactions of the `Manufacturing segment' and applying the TNMM on entity level. He opined that payment of `Consultancy charges' amounting to Rs. 7.94 crore should be benchmarked separately under the Comparable Uncontrolled Price (CUP) Method. By applying the CUP method, he determined the ALP of this international transaction at Nil and, accordingly, proposed transfer pricing adjustment of Rs. 7.94 crore. The assessee assailed this issue before the DRP, which considered the nature of services provided by the consultants, as reproduced on pages 40 to 44 of its directions. It was found that most of the payments made to expatriate consultants were in connection with setting up of manufacturing unit of the assessee, in progress during the year under consideration. Such a findi....
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.... manufacturing unit. We have gone through the order of the DRP in which details of consultancy services rendered by foreign experts have been given on pages 40 to 44 of its direction. First is payment of Rs. 41.15 lac to Hiroyuki Nakabayashi. Under the column 'Nature of work undertaken', it has been mentioned as 'Preparation of all legal licenses, approvals, registrations for factory set up' etc. Under the benefit column against this payment, it has been mentioned: 'Assistance in setting up of manufacturing facility in India', 'Seeking all necessary approvals'. Then, there is payment of Rs. 43,74,421/- to Yuichi Tateoka. Under the column 'Nature of work undertaken', it has been mentioned as 'Equipment local content Result check.'. Next is payment of Rs. 37,75,485/- to Kazuya Orita and the nature of work has been given as : 'Discuss about specification of equipment.' A sum of Rs. 59,30,109/- has been shown to have been paid to Toshio Masuda and the nature of work has been mentioned as 'Meeting with accounting section; Factory CS and Budget' and `Production equipment order.' In this way, details have been given in respect of 12 payments which apparently show that most of the services....
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....ent'. Primarily, it is seen that the assessee did not undertake any manufacturing activity as the manufacturing unit was being set up during the year. In such a case, there could have been no reason to aggregate the transaction of `Payment of Consultancy fee' with the `Manufacturing segment'. Secondly, both the transactions do not have any close connection and are independent of each other and, hence, cannot be aggregated for the purpose of benchmarking. Once the international transaction of `Payment of consultancy fee' is segregated from the international transactions of `Manufacturing segment', the former transaction under consideration needs to be separately benchmarked. Considering the nature of the international transaction of receipt of consultancy services, the same, in our considered opinion, needs to be more appropriately benchmarked on a comparison with another similar transaction of service under the CUP method rather than on profit level under the TNMM. We, therefore, approve the application of the CUP as the most appropriate method for determining the ALP of the remaining amount of consultancy expenses paid after excluding the amount to be capitalized as relating to th....
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....djustment, inter alia, by holding that no benefit was received by the assessee and hence no payment on this score was warranted. The TPO further noted on page 44 of his order that : `the assessee has not submitted the details regarding the services availed and the consequent benefits received despite the fact that in the show cause letter, it was told specifically to identity each of the services actually received from the AEs for which the amount has been paid. Instead it has given general description for the so-called services and their benefits without linking these two aspects." It has also been reiterated on the same page that the assessee did not file any specific/concrete details regarding receipt of services in lieu of payment of consultancy fee to its AE. In the concluding para 17 of his order, the TPO has recorded that : `the assessee has not been able to show that any services have actually received by it.' He further held that : `no independent party would have made a similar payment in uncontrolled circumstances'. The AO in his draft order has taken the ALP of the international transaction at Nil on the basis of such recommendations of the TPO without carrying out any ....
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....d an international transaction of 'Receipt of training and consultancy services' with transacted value of Rs. 9,77,68,737/-. The TPO determined Nil ALP of this international transaction, which resulted into the recommendation of transfer pricing adjustment of Rs. 9.77 crore. The DRP echoed the action of the TPO in determining Nil ALP. This led to an addition of Rs. 9.77 crore on this transaction, against which the assessee has come up in appeal before the Tribunal. 20. We have heard both the sides and perused the relevant material on record. The TPO has noticed on page 65 of his order: 'that the assessee has not been able to prove that he has actually received services of some value that can call for cost allocation.' Then, again, he recorded on page 66 of his order that: 'the taxpayer has not been able to show as to when and how the various services were requisitioned from the AEs, whether the services were actually needed by it, whether the same were actually received by it by producing contemporaneous documentary evidence at the time of entering into agreement or at the time of availing the service (if actually availed).' He summed up his analysis in para 5.13 of his order as u....
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....ransaction. It is thus seen that the material facts and circumstances of this ground, in so far as they concern with treating Nil ALP of the non-capital Consultancy services expenditure, are essentially similar to those of the preceding year. We have dealt with this issue in earlier paras. We have discussed above the judgment of the Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. and noticed how the orders of the A.O./TPO are not in consonance with the ratio laid down in the said decision and eventually sent the matter back for a fresh determination. Following the view taken hereinabove, we hold that payment of consultancy fee is a separate international transaction, which is required to be benchmarked separately under the CUP method. The AO/TPO is directed to follow the mandate given by us hereinabove while disposing of similar ground for the immediately preceding year and determine afresh the ALP of the international transaction of `Payment of consultancy and training charges'. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such proceedings. 24. The only other effective issue which survives in this appeal is ....
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....o in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction." 26. Sub-clause (i) in the process of determination of the ALP under the TNMM talks of the computation of net operating profit margin realized by the assessee from an international transaction. Sub-clause (ii) is the computation of net operating profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction. This refers to determining the operating profit margin of comparables with the same base as that of the assessee. Sub-clause (iii) provides that the net profit margin realized by a comparable company, determined as per sub-clause (ii) above, 'is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, ..... which could materially affect the amount of net profit margin in the open market.' It is this adjusted net profit margin of the unrelated transactions or of the comparable companies, as determined under subclause (iii), which is used for the purposes of making comparison with the net profit ....
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....e by one, in the operating profit of comparables by adjusting their respective operating costs. Operating costs can be either fixed or variable or semi-variable. One needs to split semi-variable costs into the fixed part and variable part. In so far as the variable costs and the variable part of the semi-variable costs are concerned, these remain unaffected due to any under or over utilization of capacity. Accordingly, such variable operating costs remain unchanged. The adjustment is called for only in respect of the fixed operating costs and fixed part of semivariable costs. Such costs are scaled up or down by considering the percentage of capacity utilization by the assessee and such comparable. It can be illustrated with the help of a simple example. Suppose the fixed costs incurred by a comparable (say, A) are Rs. 100 and it has capacity utilization of 50% as against the capacity utilization of 25% by the assessee. The above percentages show that the assessee has incurred full fixed costs with 25% of the utilization of its capacity, as against A incurring full fixed costs with 50% of its capacity utilization. This divulges that the assessee has incurred relatively more fixed co....