TaxTMI 
TaxTMI 
2022 (1) TMI 679
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.... adjustment of Rs. 2,73,39,569in respect of the international transactions pertaining to (a) payment for SAP license, (b) cost sharing expenses, and (c) reimbursement of expenses (expenses incurred)alleging that the same to be not at arm's length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules, 1962 ("the Rules"). 3. That on the facts and circumstances of the case and in law the LdAO/ TPO/ DRP grossly erred in computing the arm's length price at NIL in relation to payment for SAP license, cost sharing expenses, and reimbursement of expenses (expenses incurred)disregarding the provisions of Section 92C read with Rule 10D of the Rules and ignoring the methods prescribed under the Act. 4. That on the facts and circumstances of the case and in law, the LdAO/ TPO/DRP has erred in making a transfer pricing adjustment in relation to the payment for SAP license and cost sharing expenses allegedly ignoring the OECD Transfer Pricing Guidelines, other international and domestic jurisprudence. 5. That on facts and circumstances of the case and in law the Ld AO/TPO/DRP has erred in not appreciating that even after cons....
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....he appellant company in connection with determination of the cost sharing expenses. 8. That on facts and circumstances of the case and in law the Ld DRP has not taken cognizance of the responses filed against the remand report placed on record even after a rectification being filed by the appellant under Rule 13 of the Income Tax (Dispute Resolution Panel) Rules, 2009. 9. That on the facts and in circumstances of the case the Ld AO has erred in initiating penalty proceedings against the appellant company. Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant." 3. The assessee has further filed additional grounds as under : 1:0 Re.: SAP software and cost sharing expenses: 1:1 That on facts and circumstances of the case and in law Ld DRP had erred in brushing aside the additional evidences filed by the appellant company documenting the benefits derived by it from the implementation of SAP software, even while passing the rectified Dispute Resolutions Panel ('DRP') directions dated 30 October 2012 ('rectified DRP directions'). 1:2 That on facts and circumstances of the case and in law Ld DR....
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....ional benefit by using software like SAP as the business activity of the assessee is simple which can be performed easily by simple accounting software. Using costly software like SAP can be requirement of the parent company of the assessee which is collecting and collating data received from AEs situated worldwide. The assessee has not demonstrated as to how, there is value addition to its business by using SAP license. In a third party situation, no company would pay for services which are not beneficial for its business. The use of SAP licence is imposed by parent company of the assessee for the benefit of parent company. Therefore, ALP of a service provided by AE which is beneficial to it but not beneficial to the assessee cannot be more than nil. Without prejudice to the above, for sake of argument, if we accept that the assessee has got some utility of the SAP software. In that case, the assessee is required to furnish following details/evidences- i. Evidence of incurring expenditure by the parent company- to support this the assessee has furnished only copy of agreement and no detail working of total cost incurred by the parent company has been furnished. ii. Evidence of....
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....ed by the parent company have to be allocated among all the AE's and parent company. These costs are to be allocated irrespective of any benefit. The main natures of expenses for cost sharing are R&D expenses, Central support like - marketing and development, common administrative expenses, etc. The assessee has also furnished cost-sharing agreements. While making the comparative analysis with last year, the assessee has stated that there is increase in allocation of expenses by the parent company during the year in comparison to last year. It has been further stated by the assessee that detailed working of this is not available with the local entity. On being asked, vide order sheet dated 11/8/2011, the AR stated that, the assessee is not in a position to provide working of share of assessee out of total cost of the group incurred by parent company. What revenues were earned by the assessee by incurring these costs was also not provided by the assessee. Therefore, the assessee was asked to show-cause why the ALP of this transaction should not be taken as nil. In response, the AR appeared on 29-8-2011. However, no reply was furnished on this issue. In the absence of evidenc....
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....ost allocation cannot be determined among the AEs, the objection on the ground that the TPO has erred in disallowing the cost expenses is rejected. Hence, the point no (c) of the objection is rejected." 8. Against this order the assessee is in appeal before the ITAT. 9. We have heard both the parties and perused the records. 10. Ld. Senior Counsel for the assessee has summarized his arguments in following written synopsis. Synopsis of the arguments made by the Appellant during the course of the hearing: Nature of business: PPG Coatings India Pvt. Ltd. ['PPG Coatings' / 'the Appellant'] is engaged in the business of trading in marine and protective paints (refer para No. 3 at page No. 01 of the Assessment Order dated 25 October 2012). International transactions undertaken during the year under consideration: During the year under consideration, the Appellant has entered into the following international transactions with its Associated Enterprises ['AEs'] - refer page No. 02 of the TPO's Order dated 27 October 2011 Nature of transaction Value of International transaction (in Rs.) Method adopted for the purposes of benchmarking Purchase of ....
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....tracts of the TP Order are given hereunder: Accordingly, as discussed above the assessee has failed to demonstrate additional benefits from the SAP license, cost of which has been imposed by the parent company on it. Further, the assessee has also failed to demonstrate that the allocation of SAP license expense was fair between AEs and parent company. Hence, the ALP of transaction is proposed to be determined at Rs. NIL. Accordingly an adjustment of Rs. 12,80,079/- is made. * Further, the following details were also submitted before the Assessing Officer vide a letter dated 15 December 2011 (post receipt of the TP Order) in respect of the impugned transaction (refer page 101 / 103 of the paperbook): o Comparative details of allocation of SAP License cost charged to the Appellant with a comparison with the SAP price list. o that the aforesaid transaction alongwith the other transactions under dispute, were debited to the Profit and Loss Account. The Appellant had benchmarked other transactions viz. purchase of goods, sale of goods and commission income using TNMM method. The net margin of the Appellant is higher than . that of the comparables (after including all the aforesa....
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....ual findings issued by PricewaterhouseCoopers certifying the cost allocation methodology in connection with the cost sharing agreement -refer page 124 to 129 of the paperbook o Detailed working of cost sharing expenses - refer page 130 to 132 of the paper book. * That the aforesaid transaction along with the other transactions under dispute, were debited to the Profit and Loss Account. The Appellant had benchmarked other transactions viz. purchase of goods, sale of goods and commission income using TNMM method. The net margin of the Appellant is higher than that of the comparables (after including all the aforesaid expenses), and accordingly it was submitted that the transaction is at Arms Length Price under TNMM as well. Re.: Reimbursement of expenses - Rs. 3,64,670/-: * During the year under consideration, certain expenses were incurred by the AE's on the Appellant's behalf and were subsequently reimbursed by the Appellant. * The said expenses were reimbursed on a cost to cost basis from the Appellant. * The transaction was benchmarked under CUP, as the expenses were reimbursed on a cost to cost basis. * However, the TPO has determined the ALP of the said tr....
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....perbook, inter-alia submitting: that allocation key of cost sharing expenses has already been submitted before the TPO vide letter dated 15 December 2011 - tabulated hereunder: Particulars Allocation Key Central support Sales ratio (based on sales of the entire PPG Group) Marketing Support service for Protective Coating and Marine Sales ratio (based on sales for Protective Coating and Marine) Research & Development for Protective Coating and Marine Sales ratio (based on sales for Protective Coating and Marine) Centralised IT Services Actual hours spent on the individual charge out rate. brief summary of the email correspondences and the benefits derived by the Appellant - refer page Nos. 392 to 401 of the paperbook. that the cost allocation expenses have been certified by a third party consultant Price Waterhouse Coopers (refer page Nos. 124 to 132 of the paperbook) Despite submitting such voluminous data before the AO / TPO / DRP, and providing each and every detail, the DRP in its Directions dated 09 August 2012 (to be read as 06 September 2012 as per the rectification Order passed by the DRP subsequently), has upheld the Order of the TPO for stating that no ....
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....he DRP, the Appellant filed a rectification application dated 11 October 2012, to consider the evidences filed by it, however, the DRP vide its ratification Order dated 30 October 2012 has once again failed to consider the evidences so filed - refer page nos. 407 to 410 of the paperbook for the said application. Aggrieved by Order of the DRP, the Appellant has filed an appeal before the Hon'ble Income-tax Appellate Tribunal ['ITAT']. 1. As mentioned hereinabove, complete details vis-a-vis agreements, benefits derived, sample copy of email correspondences, allocation keys have been submitted before the AO / TPO and DRP. 2. However, the evidences have been out rightly rejected by the lower authorities without providing any cogent reasons thereto and the action of the TPO in determining the ALP as Nil has been upheld. 3. In this connection, it is submitted and the action of the AO / TPO / DRP of determining the ALP of a transaction as Nil, without considering the evidences and without applying any of the six methods prescribed under the TP regulations, is misconceived, erroneous and deserves to be deleted. 4. Reliance in this regard is placed on the following dec....
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....ibunal in the case of Eaton Fluid Power Ltd. v. Asstt. CIT reported in [2018] 92 taxmann.com 158 (Pune - Trib.) (refer page Nos. 93 to 110 of this compilation); A copy of the said decision(s) are also attached herewith for your Honour's ready reference - refer "Appendix - B". Prayer: In view of the above it is submitted and it will be appreciated that the action of the AO / TPO / DRP in determining the ALP of an international transaction a.s Nil, without applying the 6 "methods prescribed under law, that too when complete details vis-a-vis agreements, sample copy of email correspondences, benefits derived by the Appellant, allocation key has been submitted is misconceived, erroneous and illegal and accordingly, the adjustment ought to be deleted. Further, the AO / TPO / DRP have not found any defect in the evidences submitted by the Appellant, and therefore determining ALP of an international transaction at Nil is incorrect, erroneous, illegal and deserves to be deleted. 11. Per contra Ld.DR relied upon the orders of authorities below. 12. First of all, we note that the TPO has applied benefit test in dealing with the issue of ALP of payment for SAP license. The TPO has e....
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....hird party licenses have been allocated based on the number of users. Comparative details of allocation of SAP license cost charged to the assessee with a comparison with the SAP price list was also submitted. 13. We have gone through the same and we find ourselves in agreements with the submissions of the Ld. Counsel of the assessee that requisite details were submitted and authorities below have failed to consider the same and have held that proper details were not submitted after having held that there was no benefit to the assessee from the said license. For all these reasons as discussed above, we set aside the orders of the authorities below and decide the issue in favour of the assessee. 14. As regards the issue of cost sharing, the observations of the authorities below that the details have not been submitted is similar to the one on the issue of documentation of SAP discussed as above. Our observation as above is applicable here also. We are in agreement the details were in fact submitted and authorities below have erred in ignoring the same. In this regard, the submissions before the AO/TPO summarized as under:- It was submitted that assessee has availed following serv....