TaxTMI 
TaxTMI 
TaxTMI 
2022 (3) TMI 649
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....TPO"), pursuant to the directions of the Hon'ble DRP, has erred in making transfer pricing adjustments totaling to INR 32,37,89,951 to the value of various international transactions. b. The AO has also erred in disallowing depreciation of INR 1,75,34,827 on the assets installed at the premises of the Appellant's customers, by holding that the same were not used for the purpose of its own business. c. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/TPO, pursuant to the directions of the Hon'ble DRP, has erred in not providing reasons to demonstrate that either of the conditions prescribed under clauses (a) to (d) of Section 92C(3) of the Act are satisfied for rejecting/disregarding the transfer pricing study prepared by the Appellant. Corporate Taxation 2. Erroneous disallowance of depreciation of INR 1,75,34,827 on plant and machinery On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO pursuant to the directions of the DRP erred in disallowing depreciation of INR 1,75,34,827 on plant and machinery on the ground that the plant and machinery were installed at custo....
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....he directions of the Hon'ble DRP, has erred in rejecting the methodology adopted by the Appellant (by aggregating this transaction with the other international transactions and benchmarking the international transactions using the transactional net margin method) for benchmarking the international transactions of payment of headquarter common expenses and allocation of management assistance related fees. b. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/TPO, pursuant to the directions of the Hon'ble DRP, has erred in not applying any of the six methods for determining the arm's length price of the international transactions of payment of headquarter common expenses and allocation of regional management assistance fees, by the Appellant to its Associated Enterprises. Further, no comparability analysis is carried out by the AO/TPO for determining the arm's length price of this international transaction as NIL. b. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/TPO, pursuant to the directions of the Hon'ble DRP, has erred in determining the arm's length pr....
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....owance made by the AO. 9. Initiation of penalty proceedings The AO, erred on the facts and in law in initiating penalty proceedings under section 271(1) (c) of the Act. Each one of the above grounds of appeal is without prejudice to the other. The Appellant requests the Hon'ble members a right to amend, alter, substitute or add to the grounds of appeal at any time before or at the time of hearing of the appeal so as to allow the Hon'ble Tribunal to decide this appeal according to law. Prayer The Appellant claims relief on the above grounds and additional grounds/additional evidences that may be submitted during the course of the hearing of this appeal and thereby prays for deletion of adjustments made by the AO in the final assessment order." 2. At the outset, the learned counsel for the assessee submitted that Ground No. 1 is general in nature. Hence no adjudication is required. 3. Ground No. 2 deals with erroneous disallowance of depreciation of Rs. 1,75,34,827/- on plant and machinery. The grievance of the assessee is that the A.O. pursuant to the directions of D.R.P. has erred in disallowing depreciation of Rs. 1,75,34,827/- on plant and machinery on the g....
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....rlier years. Hence, in order to maintain consistency with the earlier years order, the claim of the assessee for depreciation of Rs. 1,75,34,827 was disallowed for similar reasons as mentioned for A.Ys. 2008-09, 2009-10, 2010-11 and 2011-12 and added to the total income of the assessee. Therefore, the A.O. for A.Y. 2014-15 had relied on the earlier assessment years order and made the addition. 5. The ld. D.R.P. at para 10.3 of their findings upheld the observations of the A.O. stating that the A.O. has not erred in disallowing depreciation of Rs. 1,75,34,827/- on the plant and machinery since the same have been installed in customer's premises and so have not been 'put to use' in the business of the assessee. The learned D.R.P. confirmed the disallowance on the ground also that such was made in consonance with the same issues in the past assessment years as has been brought on record by the learned A.O. Accordingly, the learned D.R.P. confirmed the addition. 6. At the time of hearing, the learned counsel for the assessee submitted that this issue stands covered in favour of the assessee by the order of Pune Bench of the Tribunal in assessee's own case for A.Y. 201....
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....y premises, it cannot be said that the equipments were used for the purpose of assessee's business. This reason given by the AO for disallowing the claim of the assessee for depreciation cannot be sustained in view of the factual and legal position discussed as above. We therefore are of the view that CIT (A) was fully justified in deleting the addition made by the AO in this regard. Order of CIT (A) does not call for any interference." 8. Respectfully following the aforesaid decision on the same parity of reasoning, ground No. 2 of the assessee is allowed. 9. In ground No. 3, the assessee submits that as per the various decisions of the Tribunal, the transfer pricing adjustments, if any, should be restricted to the value of the international transactions only. Similar issue came up for consideration before the co-ordinate Bench of this Tribunal in assessee's own case in ITA No. 742/PUN/2017 for A.Y. 2012-13 dated 6-9-2019, wherein vide para 54 of its order it has observed and held as follows: "We have heard the rival contentions and perused the record. The issue of transfer pricing adjustment vis-à-vis in proportion with the value of international transactions n....
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....he PLI is not disputed. What is disputed is only the selection of comparable companies. At page 284, the TPO had earlier calculated the PLI at 5.75% and thereafter at page 286 he calculates current PLI at 1.02%. While re-adjusting the PLI at 1.02%, the TPO makes protective adjustment of Rs. 3.04 crores, then finally TPO arrives at the TP adjustment made at Rs. 32.61 crores. The relevant paras 12 and 13 of TPO's order are extracted as follows: "12. Accordingly the total adjustment is as follows Sr.No. Particulars Substantial adjustment Protective adjustment Amount (in Rs.) Amount (in Rs.) 1. Management services 18,15,39,759 18,15,39,759 2. Manufacturing segment 14,46,13,160 30,42,10,447 13. In view of the facts of the case, submissions of assessee, economic analysis carried out discussion made above, Arm's Length Price of transactions as reported by the assessee company is altered and an adjustment of Rs. 32,61,52,919/- is made in respect of international transaction entered by the assessee." 12. The D.R.P. has given their findings at para 5.3 which are as follows: "5.3 Findings: Objection No. 4, 5 and 6 are disposed off as under: It ....
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....ngly. Our view is fortified by the judicially accepted related party transactions (RPT) filter of 25% in several cases. Both the sides agreed to such a filter during the course of hearing. We, therefore, set aside the impugned order and remit the matter to the file of the AO/TPO to undertake the selection of comparables afresh in the light of the above filter and re-adjudicate the issue as per law after complying with the principles of natural justice. Therefore, ground No. 4 is allowed for statistical purposes. 14. In ground No. 5, the assessee contends erroneous determination of A.L.P. of intra-group service fee of Rs. 18,15,39,759/- as NIL. The T.P.O. has discussed this issue from para 7.1.2 onwards in great detail as per observations brought on record. Thereafter, at para (x) the T.P.O. decides while holding that the assessee has not been able to prove the benefits that it had derived from the services purportedly provided by the related parties. The assessee has also not furnished any evidence as to the cost benefit analysis with regard to the independent service provider. It was also observed by the T.P.O. that the documentation produced by the assessee to support its claim ....
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....port. The TPO observed that there was no clear proof that such services had actually been rendered by the AE. There was no specific benefit derived by the Indian entity. The taxpayer had not established the necessity for availing these services from the AE and had already incurred expenses towards professional and consultancy services and employed qualified personnel in India for rendering similar services. The volume and quality of services were disproportionate to the amount paid, and the charge was based on cost apportionment amongst the group entities on a mutually agreed basis and not on the basis of actual services rendered. The Appellate Tribunal decided the case in favour of Revenue. This ruling has laid down some vital and necessary principles applicable for service transactions, which would in fact apply to any transactions involving intra group services or intangibles. Simply put, to satisfy the arm's-length standard, a charge for intra group services or intangibles must at least meet the following conditions: The need for intra group services or intangibles is established. The intra group intra group services or intangibles have actually been received. The ben....
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....ld. D.R.P. held at para 3.3 of their findings regarding the aforesaid that the assessee has failed to prove tangible benefits derived from the services received and that the evidences produced were generic and theoretical in nature as a result of which the benefit received cannot be quantified from it. It was also seen that the T.P.O. has correctly held that the bench marking approach used by the assessee was not as per law and they had applied CUP. Thus, the adjustment of Rs. 18,15,39,759/- was confirmed by the D.R.P. Thereafter, the D.R.P. refers to its earlier order for A.Y. 2012-13 in respect of the assessee. That accordingly for this year, the ld. D.R.P. held as follows: "(iv) It is seen that the facts and circumstances are identical in this year also. It is also seen that the TPO has confirmed the same issue for A.Y. 2013-14 and the assessee has preferred appeal before CIT (A). So, we see no reason to differ from DROP's finding in A.Y. 2012-13. (v) Thereafter, in para 7.1.3-7.1.4 (at page No. 20-21 of his order), TPO has discussed in length the issue of protective adjustment and made the adjustment accordingly on protective basis in lieu of the litigation history of N....
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....determined the arm's length price of the international transaction. The Hon'ble High Court after examining the facts of the case held as under: "19...... In CIT v. Walchand & Co. etc. [1967] 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. 14 ITA Nos. 529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003-04 & 2004-05 22. Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was un-remunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide ........ So long as the expenditure or payment has been demonstrate....
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.... charge and computed the arm's length price of the international transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assessee from Nalco Pacific under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. The CIT(A) also confirmed his order. 21. Attention was further invited to the decision of Hon'ble Delhi Tribunal of McCann Erickson India (P.) Ltd. vs. Addl. CIT [2012] 24 taxmann.com 21 (Delhi), wherein the Tribunal, following the aforesaid decision of the Hon'ble Delhi High Court, has inter alia held that: "9. We have heard both sides and have also gone through the orders of the AO, TPO and DRP.... The evidences have been submitted before the authorities below showing rendering of the certain services against the payments made to the associated enterprises. In the arena in which the assessee company is functioning, it will be difficult to imagine a successful business entity in the global environment without receipt of the services which carries huge intrinsic and creative value. In our considered view, it is only a particular business....
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.... clubbed the aforesaid international transaction together with other international transactions, applied the TNMM as the most appropriate method and selected a set of external comparables. As per this analysis, the international transactions covered under the TNMM, were at arm's length. The aforesaid analysis by assessee was not disputed by the TPO. * The assessee was called upon by TPO to provide the basis of pricing of these transactions. The assessee was also required by the TPO to provide necessary details along with allocation keys and basis of calculation of payment made for I.T. support services. According to TPO, the assessee, however, failed to comply with these requirements and the ALP of the relevant transactions therefore was determined by TPO at 'nil' value. * The CIT(A) held that the action of TPO in arriving at the ALP of the relevant international transactions at "nil" was without any basis and accordingly he deleted the addition made on account of the transfer pricing adjustments made by A.O./TPO holding the same to be unsustainable. * The Tribunal observed that the exercise of benchmarking made by the assessee to show that the price charged by its ....
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....les. Accordingly, we feel that TPO made proper enquiry and applied his mind to the details brought on record by assessee. He had agreed with the assessee that the international transactions covered by the TNMM analysis (including the intra-group service charge paid/payable to Nalco Pacific) adhered to the arm's length principle Transfer Pricing Regulation. 24. Further, it is also a fact that the aforesaid intra-group service charge was allowed as deduction by TPO for the assessment years 2005-06, 2006-07, 2007-08 and 2008-09. In this connection, Ld. Counsel referred to the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Britannia Industries Ltd. 257 ITR 225, wherein Hon'ble Calcutta High Court has held that the Department cannot take a contrary view in respect of any issue which has been accepted by the Department for succeeding assessment year based upon the similar set of facts. Thus, by following the above principle laid down by the Hon'ble Calcutta High Court, we feel that the action of TPO in making disallowance of the intra-group service charge paid/payable by assessee to Nalco Pacific for the assessment year 2004-05, after allowing the sa....
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.... & other benefits to the regional employees. We find that the services rendered by Nalco Pacific to assessee under the agreement were similar to the services mentioned in paragraph No. 7.14 of the DECD Guidelines. In view of this, we appreciate that the services rendered by Nalco Pacific to assessee were intra group services for which independent enterprises would have been willing to pay for or to perform in-house for themselves and hence, the value of the aforesaid services in comparable uncontrolled transactions could not be 'nil'. The paragraph No. 7.12 of the OECD Guidelines provides that there are some cases where an intra-group service performed by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members. Examples could be analysing the question whether to recognise the group, to acquire new members, or to terminate a division. These activities may constitute intra-group services to the particular group members involved, for example those members who will make the acquisition or terminate one of their divisions, but they may also produce economic benefits for other group m....