TaxTMI 
TaxTMI 
2017 (6) TMI 1357
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.... law, the Ld. Transfer Pricing Officer ('TPO')/ Ld. Assessing Officer ('AO'.) / the Hon'ble Dispute Resolution Panel ('DRP') erred in not providing adequate opportunity of being heard and substantially increasing the additions proposed by acting in arbitrary and adhoc manner to determine 'the adjustment. * 2. On the facts and circumstances of the case and in law, the Hon'ble DRP erred in upholding the action of the Ld. TPO/ AO in making an adjustment of Rs. 22,18,86,367/- on account of allocation of alleged location savings in respect to the provision of facilitation and coordination services provided by the Appellant to the Associated Enterprise for performing clinical trials in India. 2.1 On the facts and circumstances of the case and in law, the Ld. TPO/ AO erred in treating the alleged location savings to the Appellant as an international transaction as per Section 92B of the Income-tax Act, 1961 ('Act'). 2.2 Without prejudice to Ground No. 2.1, the Ld. TPO/AO did not follow any of the method prescribed by the Act. 2.3 On the facts and circumstances of the case and in law, "the TPO/AO and the Hon....
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....ost savings and not appreciating the fact that the adjustment, if any to be computed only with regard additional profit, if at all, earned by the AE; 4.4 erroneously considering pass through costs while computing the adjustment; 4.5 incorrectly using Profit Split Method for determining quantum of adjustment on account of location savings; and 4.6 arbitrarily attributing location savings in the ratio of 50:50 between the Appellant and the AEs by disregarding their functional and risk profiles. 5. On the fact and the circumstance of the case and in law, the Ld. AO erred in levying interest u/s. 234B and 234C of the Act. 6. It is therefore prayed that the aforesaid adjustment on account of alleged location savings be deleted. The Appellant submits that each of the above grounds of appeal are without prejudice to each other. The Appellant craves leave to add to, alter, omit or substitute any or all of the above grounds of appeal, at any time before or at the time of the appeal. 3. The only issue raises in these appeals by the assessee is regarding determination of Arm's Length Price (ALP) and consequently Transfer Pr....
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....ed to be allocated 50:50 between the assessee and the AE. The Assessing Officer accordingly issued a show cause notice to the assessee for furnishing the entire details of cost in conducting the clinical trial and research. The assessee objected to the show cause notice by filing a detailed reply and contended that when the assessee has bench marked its international transactions with uncontrolled comparable prices then the location saving is embedded in the margins of the assessee as well as com parables. Further it was contended that location saving adjustment can only be on the amount of location rent and not on full amount of cost saving. The Assessing Officer/TPO did not accept the contentio~ and explana_tion of the* assessee and proceeded to apply the location saving split between the assessee and AE. The Assessing Officer/TPO worked out the location saving of Rs. 29,78,341 per clinical trial in respect of the clinical trial conducted in India in comparison to US. The difference of Rs. 29,78,341 was multiplied by the clinical trial site of the assessee i.e. 149. Accordingly the total cost saving was determined by the TPO/Assessing Officer at Rs. 44,37,72,734. The said saving ....
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..../Mum/2014; 560/Mum/2015 & 147/Mum/2016 has reiterated the view taken by the Tribunal in the case of Watson Pharma Pvt. Ltd. (supra). 6. On the other hand, the learned Departmental Representative has submitted that the TPO has specifically recorded in the order that the assessee has failed to discharge its onus to provide complete details of information regarding the clinical trials and locations of the assessee. The DRP has also taken note of the fact that the assessee has not provided the requisite information. He has referred to para 5.1 and 6.5 of the TPO order in support of his contention. Further the TPO as well as DRP has given a finding that in the business model of the assessee the location saving do exist and therefore the TPO is justified in applying the method of profits splitting between assessee and AE. The case law relied upon by the learned Authorised Representative are not applicable in the case of the assessee because as per the learned Departmental Representative the business .and functions of Watson Pharma Pvt. Ltd. as well as Syngenta India Limited are altogether different from the assessee. He has referred to the paras 6 & 7 of the Tribunal order in the case....
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....tions which are entered into with the sole purpose of avoidance of tax and* treaty shopping. To deal with such transactions between related parties the transfer pricing provisions has been introduced in the statute and are applied for determination of ALP. Therefore the location savings and advantages are very much relevant in the cross border transaction but for limited purpose of carrying out exercise of examination and investigation of the transaction and not as a basis for determining the ALP and consequently adjustment. We find that the Mumbai Bench of the Tribunal in the case of Watson Pharma Pvt. Ltd. Vs. DCIT (supra) has dealt with this aspect and held that when the local comparables are available then instead of going to the location saving as a basis of adjustment, the TNMM shall be preferred. Similar view was taken by the Tribunal in the case of Syngenta India Ltd. Vs. DCIT (surpa) in paras 17 to 20 as under: "17. We have heard the rival submissions and perused the relevant finding given in the impugned orders qua the issue of Transfer Pricing adjustment on account of locational savings. The TPO noted that, one unit of the assessee is captive manufacturer which ....
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.... "9.148 Location savings can be derived by an MNE group that relocates some of its activities to a place where costs (such as labour costs, real estate costs, etc.) are lower than in the location where the activities were initially performed, account being taken of the possible costs involved in the relocation (such as termination costs for the existing operation, possibly higher infrastructure costs in the new location, possibly higher transportation costs if the new operation is more distant from the market, training costs of local employees, etc.). Where a business strategy aimed at deriving location savings is put forward as a business reason for restructuring, the discussion at paragraphs 1.59-1,63 is relevant; 9.149 Where significant location savings are derived further to a business restructuring, the question arises of whether and if so how the location savings should he shared among the parties. The response should obviously depend on what independent parties would have agreed in* similar circumstances. The conditions that would be agreed between independent parties would normally depend on the functions, assets and risks of each party and on their respecti....
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....e is very well known for its high quality standard. It charges a fee to its independent clients based on a fixed-hourly rate that compares with the hourly rate charged by competitors for similar services*in the; same market. Suppose that the wages for qualified engineers in Country X are high. The enterprise subsequently opens a subsidiary in Country Y * where it hires equally qualified engineers for substantially lower wages, and subcontracts a large part of its engineering work to its subsidiary in Country Y, thus deriving significant location savings for the group formed by the enterprise and its subsidiary. Clients continue to deal directly with the enterprise in Country X and are not necessarily aware of the sub- contracting arrangement. For some period of time, the well known enterprise in Country X can continue to charge its services at the original hourly rate despite the significantly reduced engineer costs. After a certain period of time, however, it is forced due to competitive pressures to decrease its hourly rate and pass on part of the location savings to its clients. In this case also, the question arises of which party/ies within the MNE group should be attributed t....
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....have been illustrated under "Action 8". These guidelines recommend that, while determining how the locational savings are to be shared between two or more Associated Enterprises then M the threshold it is necessary to consider, firstly, whether location savings exists; secondly, the amount of any net location savings; thirdly. the extent to which locational savings are either retained by a Member or Members of the MNE Group or are passed on to independent customers or suppliers; and lastly, where locational savings are not fully passed on to independent customers or suppliers, the manner in which independent enterprises operating under the similar circumstances would allocate any retained net location savings. Guidelines farther states that, suitable comparability adjustment is to be made to account for location savings advantage giving rise to location savings, when function analysis shows that location savings are not passed on to customers or suppliers and there is no local market comparables then, adjustment can be made based on analysis of all the relevant facts and circumstances including functions performed, risk assumed and assets used of the relevant associated enterprises....
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....ins of the comparable companies. The TPO or the DRP have not carried out any comparability analysis with an uncontrolled transaction to show that such a factor materially affects the price/profit margin of the transaction. Such a comparability analysis with the uncontrolled transaction is sine- qua-non for the determination of Ami's Length Price by choosing any of the prescribed method. If such an exercise has not been carried out, then such kind of TP adjustment should not be permitted to be made. If the revenue's case is that, though not canvassed before us, such an adjustment is being made under Rule 10B(3) to eliminate the material effect of a difference between the transactions which is being compared, then the onus is heavily upon the revenue to bring on record that, due to location savings, the comparability with the local comparables has failed to yield the Arm's Length results. The TPO has made the adjustment by comparing the cost per employee globally with cost of per employee in India. The method by which TPO has made the adjustment lacks merits because comparison of the employees of the AE working in the economic conditions at the location of the AE are comp....