TaxTMI 
TaxTMI 
TaxTMI 
2021 (6) TMI 71
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....ale and trading of automotive seating systems. The return was filed declaring total income of Rs. 60.60 crores. The assessee reported certain international transactions and Specified Domestic Transactions (SDTs). The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of such transactions. In this appeal, we are concerned only with the SDT of ―Service charges paid' to TACO amounting to Rs. 5,95,39,429. The assessee applied the Comparable Uncontrolled Price (CUP) method for demonstrating this transaction to be at ALP. In doing so, the assessee chose 13 agreements from Royaltstat and Ktmine database of Buying & sales agent, Distribution, Sales representative, Marketing & advertising with the average fee paid at 5.43% as against its payment for the services at 1% only. The TPO required the assessee to tender evidence of availing the services from TACO. After entertaining the evidence submitted by the assessee, the TPO held that there was no worthwhile evidence of receipt of the services and even if some services were availed, those were only either general or in the nature of the shareholders' activities. He further held t....
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....rce, Group policies/Databases, Marketing and sales, Finance and Legal & taxation advisory services. A detailed chart has been placed at pages 434 onwards of paper book indicating the description of various services under the above referred broad categories of services availed. Under Marketing and sales support services, the assessee has referred to the services received from TACO team whose details have been provided at pages 449 to 527 of paper book. The first document at page 449 onwards is recommendation of the price strategies and other commercial terms by TACO team which provided assistance to the assessee by circulating ―SIAM Monthly Monitor-Commodity Prices', a guideline on price trends of various commodities which may influence the automobile industry. The next document is the TACO team assisting the assessee in evaluating various production and sales report on yearly basis of General Motors with production schedule of the relevant models. The next document is sharing of cumulative details of production of passenger vehicles, commercial vehicles, two wheelers and three wheelers in the market with a view to help the assessee in analyzing the overall market trend and pl....
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....om the services. In our considered opinion, what is relevant is to consider the availing of the services and not the resultant benefit arising there from. Every expenditure incurred by a businessman cannot necessarily lead to swelling the profit. If the proposition of the TPO is taken to a logical conclusion, then it would mean that no business would ever incur loss, which is not a reality. The important consideration is the incurring of bona fide expenditure and availing of service, which may or may not lead to the increased income. Application of the benefit test is not warranted. Enquiry in this regard should come to an end as soon as the factum of availing the services for the business purpose is established. We have noticed above that the assessee did avail the services from TACO for running its business operations. As such, there was no need to look beyond that and search for some benefit accruing to the assessee as a pre-condition for allowing the deduction. 4.3. The TPO also held that the services, if any, availed by the assessee were in the nature of shareholders services, not requiring payment of any consideration. Suffice to say, shareholder or stewardship services tak....
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....eements from foreign databases which were in the field of Marketing only. Rule 10B(2) provides that for the purposes of sub-rule (1), `the comparability of an international transaction or a specified domestic transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions;.....'. Thus it is evident that the specific characteristics of the services provided must be similar while benchmarking a SDT. Since the CUP method seeks comparison on the basis of price charged or paid, as opposed to profit rate in most other methods, the functional similarity between the transaction under consideration and that of the comparables assumes fundamental importance. The nature of services/properties received/ transferred must be quite similar, if not identical with the transaction under consideration. The level of similarity between the comparable transaction(s) and the transaction to be benchmarked needs to ....
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....nd thus determined nil ALP under this method. 7.2. Rule 10AB provides that: "For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.' A bare perusal of the rule makes it graphically clear that the `other method' is the one which not only encompasses the price actually charged or paid for benchmarking but also the price which would have been charged or paid in a comparable uncontrolled transaction. Any potential price which could be charged or paid for similar goods/services, even though not actually transacted, can also be accepted for benchmarking the SDT under consideration. In principle, no fault can be found with the TPO in interpreting the rule in the way he did. However, the steps following such an interpretation went awry as he determined the Ni....
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....ct, 2017. The assessment year under consideration is 2013-14 and accordingly clause (i) is applicable, which requires determining the ALP of the SDT of payment to TACO for availing the services. It goes without saying that the criteria for determining the ALP under Chapter X is entirely different from examining the reasonableness of expenditure u/s 40A(2). Had the position been similar, there was no need to include section 40A(2) disallowance cases within the purview of the transfer pricing provisions. Section 40A(2) simply provides for making disallowance of any expenditure which is excessive or unreasonable having regard to the fair market value of the goods or services, etc. On the other hand, Chapter X contemplates determining the ALP strictly as per one of the methods prescribed in Income-tax rules. Further, primary responsibility of demonstrating that the specified domestic transactions is at ALP is that of the assessee as against the responsibility of the AO to prove that the expenditure was excessive u/s 40A(2). The concept of 'reasonableness' u/s 40A(2) is alien to Chapter X that simply requires determination of the ALP under one of the methods prescribed as per section 92....
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....ed for the benchmarking exercise. 7.6. Indisputably, all the transactions cited as evidence of `reasonableness' are between the associated enterprises and hence controlled transactions. When the legislature specifically provided for considering transactions only between non-associated enterprises, it is absolutely unwarranted to consider any transaction between two associated enterprises for determining the ALP under rule 10AB. We, therefore, jettison the contention advanced on behalf of the assessee in this regard and hold that the transactions between two related enterprises cannot be construed at ALP on the basis of reasonableness of the amount per se. C. TNM Method 8.1. During the course of the hearing before the TPO, the assessee put forth a without prejudice argument of adopting the TNMM as most appropriate method for showing the SDT at ALP. The assessee did this exercise by aggregating the SDT with other international / specified transactions, which approach came to be abrogated by the TPO by holding that the payment for the `Administrative service charges' could not be aggregated with all other transactions. The ld. AR re-emphasized the same argument before the Tribunal.....
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....e, where each component was priced differently, but they are inextricably linked in such a way that one cannot survive without the other. The Hon'ble High Court held that merely because purchase of goods and acceptance of services leads to manufacture of final product, it does not follow that they are dependent transactions requiring aggregation. We find that the extant case is not covered any of the three situations. The Hon'ble Delhi High Court in Magneti Marelli Powertrain India Pvt. Ltd. vs. DCIT (2016) 389 ITR 469 (Delhi) held that Royalty and technical assistance fee did not form part of a composite transaction and have to be treated as two separate transactions for computing arm's length price. 8.4. On an examination of the nature of the SDT of payment of service charges by assessee to TACO, it turns out that the same is entirely different and not at all inter-related with other transactions that the assessee aggregated with. It is just elementary that intra-group services cannot be clubbed with the manufacturing or trading transactions undertaken by the assessee justifying aggregation. We, therefore, hold that the TPO was justified in repelling the assessee's aggregation a....