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2022 (1) TMI 679
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....osing and the Hon'ble DRP further erred in upholding an 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....
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....nd circumstances of the case and in law the Ld AO/ DRP had erred in ignoring the detailed cost allocation workings placed on record by the 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 Disput....
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....under :- "Before examining the share allocated to the assessee, let us examine the benefit of SAP license to the assessee. The assessee company is engaged in the business of trading in paints. For trading business there is no additional 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/evi....
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....eld." Apropos cost sharing expenses:- On this issue TPO observed as under :- "The assessee company has paid an amount of Rs. 2,56,94,820/- on account of cost sharing to Sigmakalon BV (Parent company). The assessee is stated that it is the group policy that the common costs incurred 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 ....
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.... value of such expense was fairly allocated among AEs including parent company. 5.2 The assessee had stated before me DRP that the AE. has not made appropriate representations before the TPO. The TPO on reference to this point has made the observation that this ground is without any basis. In view of above discussion, that the cost 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 consi....
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....rice' ['CUP'] method, since the cost of the 3rd party licenses have been allocated based on the number of users. However, without considering the aforesaid details, the TPO determined the Arm's Length Price ['ALP'] of the transaction at Nil, on the ground that the Appellant had failed to demonstrate the additional benefits from the SAP license, cost of which has been imposed by the AE on it - refer page No. 3 and 4 of the TP Order - the relevant extracts 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 ....
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....by the parent company on it. Further, the assessee has also failed to demonstrate that the allocation of so called costs was on some basis and that the basis of allocation 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. 2,56,94,820/-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 to 103 of the paperbook): o A report of factual 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 co....
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....k) * Details of the marketing material provided. * Summary of the Benefits obtained (refer page 194 of the paperbook). * Further, in support of the additional evidence(s), the Appellant also submitted an affidavit from the Finance Manager of the Appellant- refer page no. 133 to 136 of the paperbook. The DRP called for a remand report from the AO / TPO, which was submitted by the AO / TPO vide a communication dated 13 August 2012 - refer page nos. 402 to 406 of the paperbook. In the said remand report the TPO had made various unsubstantiated allegations which were rebutted by the Appellant vide a letter dated 27 August 2012 (filed in the DRP's office on 10 September 2012) - refer page nos. 377 to 406 of the paperbook, 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 fo....
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....rred nor that the value of such expense was fairly allocated among AEs including parent company. 5.2 The assessee had stated before the DRP that the AR. has not made appropriate representations before the TPO. The TPO on reference to this point has made the observation that this ground is without any basis. In view of above discussion, that the cost 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 die objection is rejected. 5.3 The other two grounds of the objection stern out from the previous points. As the earlier 3 points have been rejected, the other two points, being consequential in nature of the It will not be out of place to mention here that, against the Directions of the 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 Appell....
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.... h. Decision of the Mumbai Bench of the Tribunal in the case of Jabil Circuit India Pvt. Ltd. v/s. ACIT [ITA No. 2200/Mum2017 and 867/Mum/2018] (refer page Nos. 56 to 86 of this compilation). A photocopy of the aforementioned decisions is attached herewith for your Honours ready reference - refer "Appendix - A".. 5. Reliance in this regard is also placed on the following decisions where it has been held that TPO cannot sit in the judgment of business module of assessee and its intention to avail or not to avail any services from its associated enterprises. The role of TPO is to determine the arm's length price of international transactions: * Decision of the Pune Bench of the Tribunal in the case of Emerson Climate Technologies (India) (P.) Ltd. v. Dy. CIT reported in [2018] 100 taxmann.com 478 (Pune - Trib.) (para 32) (refer page Nos. 87 to 92 of this compilation); * Decision of the Pune Bench of the Tribunal 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 refer....
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....d in applying the benefit test as rightly contended by the Ld. Counsel of the assessee. Furthermore, it has been submitted that after applying the benefit test authorities below have brushed aside the details submitted by the assessee. In this regard elaborate submissions in paper book have been given. These submissions before the TPO/AO are summarized as under: It was submitted that SAP license was purchased by the AE at Netherland in bulk quantities. A copy of the agreement entered into between the said AE and the third party along with the copy of the debit note raised by the AE was submitted. It was submitted that purchase of SAP license by the AE was to avail volume discounts. Out of the bulk purchase of SAP license made by the AE, the assessee was allotted 11 SAP professional licenses and one employee user license. It was submitted that the said transaction was benchmarked under Comparable Uncontrolled Price [CUP] method, since the cost of the third 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 th....