AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (12) TMI 542
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.... grounds of objections raised by the Appellant and upholding the adjustment proposed by the Ld. AO/ Learned Transfer Pricing Officer ("Ld. TPO") without providing any cogent reasons for the same. 3. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO/ Ld. DRP erred in enhancing the income of the Appellant by INR 1,370,919,013 pertaining to purchase of raw materials and components that do not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in: 3.1. erroneously rejecting the economic analysis undertaken by the Appellant in the Transfer Pricing ("TP") documentation maintained by it in terms of section 92D of the Income-tax Act 1961 ("the Act") read with Rule 1OD of the Income-tax Rules, 1962 ("Rules"); 3.2. erroneously rejecting the selection of foreign associated enterprise ("AE") as tested party for calculation of the arm's length price by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules; 3.3. not appreciating the functional, asset and risk profile of the Appellant with respect to impugned international transaction of "p....
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....erred in: 4.1. considering the data management charges paid by the Appellant as "receipt of management support services": 4.2. disregarding the documentary evidences submitted by the Appellant to demonstrate the actual receipt of data management and other related services and the benefits arising thereof; 4.3. erroneously rejecting the economic analysis undertaken by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules; and 4.4. challenging the commercial/ business wisdom of the Appellant in relation to payment in respect of data management and other related services. 5. That on facts and circumstances of the case and in law, the Ld. TPO /Ld. DRP have erred in enhancing the income by INR 102,686,415 and INR 44,956,472 in relation to "purchase of fixed assets" and "purchase of intangible assets" respectively, and proposed to benchmark the same by aggregating them with the international transaction pertaining to "purchase of raw material and equipment". In doing so, the Ld. TPO/ Ld. DRP have grossly erred in rejecting the economic analysis carried out by the Appellant in its TP documentation wherein the tr....
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....137,09,19,013/- made by the AO/TPO on account of raw materials and components purchased from the AEs which was not in accordance to the arm's length principles. 5. The facts in brief are that the assessee is a limited company and engaged in the business of manufacturing of power distribution equipments. The assessee has divided its business operation into various segments namely license Manufacturing, Contract manufacturing, Service Segment and Trading segment. 5.1 As per the assessee, under the license manufacturing segment, it produces goods under a license agreement such as agreement for the purpose of using intangibles like trade mark, know how, manufacturing process etc. owned by the licensor and licensee manufacturer pays royalty to use such intangibles. Here, the licensee manufacturer buys raw materials and semi-finished goods on its own account and bears the risk associated with it such as holding the inventory as well as selling finished goods including demand and pricing risk. 5.2 On the other hand, in the contract manufacturing the contract manufacturer produces the goods for manufacturer principal where manufacturing principal provides the guarantee to purchase the g....
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....l purchase of raw materials and components from the AE's. However, the comparable companies were selected based in European region only due to developed market economies. The assessee further stated that 92% of raw materials and components were procured from AEs based in Europe while 8% were procured from other AEs spread in APAC (Asia Pacific) and American Region. 6.4 The assessee also claimed that the foreign AEs were considered as least complex based on FAR analysis. Therefore, the foreign parties were chosen as the tested party for determining the ALP of the raw materials and components procured by the assessee in the year under consideration. 6.5 The assessee has selected the comparable companies by using Amadeus database after adopting the search criteria as detailed under: a- Selection based on NACE Codes- to extract the similar business operation companies. b- Selection based on Shareholder- to exclude the Government companies and the companies which are formed in the public interest. c- Selection based on turnover- to exclude the companies which have turnover less than $ 10 million. 6.6 The assessee after following the process of search criteria as discussed above....
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....a with respect to half of the comparable companies was not of the latest year. g- The business codes selected by the assessee to extract the comparable companies was not similar to the business of it (the assessee) and rejection of the companies which are functionally dissimilar based on qualitative analysis during the search process for selection of comparable companies was not justified based on any reason as how the companies are functionally dissimilar. h- The assessee has excluded the Government companies along with Type C- Industrial Companies by applying the search criteria based on shareholders but no justification for not considering Type C- Industrial companies was furnished. i- The assessee has applied the search criteria of turnover considering the SEIL to reject the companies which has turnover less than $ 10 million whereas the tested parties are foreign AEs. Thus, the rejection of the comparables cannot be done taking into consideration of the financials of SEIL. Further, the assessee has not furnished details of the turnover of the AEs for the financial year in dispute. j- The margin worked out by the assessee of comparable companies was doubtful as the fina....
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.... the absence of proper details and documents after adopting the assessee as tested party and compared the margin of the assessee with the companies selected by the assessee with respect to the transactions for sale of finished goods to its AEs (i.e. for contract segment). However, the AO/TPO has computed the PLI of the comparables by following the formula OP/OR which is available on pages 12 to 14 of TPO order. 6.13 The TPO, thus, computed 35th percentile at 4.76% and 65th percentile at 7.60% with Median at 5.70% only of the comparable companies. The AO/TPO has further observed that the margin of the assessee in License manufacturing AE segment without considering the adjustment of provision for doubtful debts and unascertained liabilities, working capital, advances and forex exchange is -12.73% which was not falling within the range of 35th and 65th percentile. Therefore, the median at 5.70% was selected as margin of the assessee. 6.14 The AO/TPO also noted that the assessee while working out the operating profit margin for benchmarking the sale of finished goods in case of contract manufacturing has not considered the above said adjustment. Therefore, it is not necessary to mak....
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....to purchase of fixed assets and Intangible assets respectively. The necessary observation of the TPO is available on pages 56 and 57 of his order. Regarding payment of trade mark 6.19 The assessee during the year under consideration has made payments to its AE Schneider Belgium amounting to Rs. 22,32,90,000/- on account of trade mark fees. The value of trade mark was calculated by the assessee at 2% on the value of third party sales. 6.20 The assessee to benchmark the transaction for payment of trademark fees at ALP has applied CUP method as most appropriate method. The assessee has extracted 9 comparable agreement from the Royalty state database and worked out the 35th percentile as 3% whilst 65th percentile as 4% with a median of 3%. The assessee thus was of the view that the license fees of 2% on sale is under the range of 35th and 65th percentile. Therefore, the transactions entered with AEs for payment of trademark was on ALP as per the provisions of rule 10CA of Income Tax Rules. 6.21 The assessee in addition to trademark fees also claimed that the expenses incurred for advertisement, marketing and promotion have been shown in its profit and loss account. 6.22 The assess....
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.... as the operation in license manufacturing segment has divided between AE and Non-AEs and also the manufacturing activities performed by it for both AEs as well as Non-AEs are same. The assessee regarding this submits the details of margin earned after considering the provision for non-operating expenses and works out the income from the operation of license manufacturing segment as 2.29% and 2.58% from AEs business and Non-AEs business respectively. The assessee also furnished the original margin without considering the adjustment with respect to non-operating income or expenses which works out as -12.73% and -12.45% for AEs business and Non-AEs business respectively under the segment of license manufacturing. 6.28 The assessee thus was of the view that the ALP range was falling within the +/- 3% variation. Therefore, international transactions entered for imports of raw materials and components was at ALP as per the third proviso to section 92C(2) of the Act. 6.29 The assessee also submitted that the proposed adjustments made by the TPO in TP order for purchase of raw materials and components, purchase of fixed assets, purchase of intangible assets and payment for trade mark fe....
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....sh search considering itself as the tested party. The TPO found defects in the fresh search in para 5.10 of the TPO's order. After perusing the reasons given by the TPO and the arguments of the assessee before the TPO as well as the DRP, we are of the considered opinion that the approach of the TPO has merits. Therefore, the ground of objection no. 2 (sub-grounds 2.1 to 2.8) is dismissed." Regarding Purchase of Fixed and Intangible Assets: 6.31 The assessee before the Ld. DRP reiterated the submission as made before the AO/TPO and further stated that detailed economic analysis were made with respect to benchmark the transactions for purchase of Fixed Assets and Intangible Assets as specified in TPSR. The assessee also submitted that it had entered into various types of international transactions with its AEs and benchmarked each transaction separately to reach out at ALP whilst the AO/TPO to benchmark the transactions for purchase of fixed and intangible assets has aggregated with transaction pertaining to purchase of raw material and components. 6.32 The assessee further submitted that the value assigned by the custom authorities on import of goods are not arbitrary as th....
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....ated with the transaction pertaining to purchase of raw materials and components. 6.36 However, the Ld. DRP after considering the order of the AO/TPO rejected the submission of the assessee by observing as under: "16. We have perused the draft assessment order /TPO's order and also considered the written and oral submissions of the assessee in this regard. Briefly stated the facts of the issue are that the assessee had paid Rs. 22,32,90,0007- to Schneider Belgium at 2% on the value of the third part sale. The TPO observed that the assessee has paid for advertisement, marketing and promotion, contributing towards enhancement in the brand value of 'Schneider'. The TPO also observed that the licensed manufacturing segments (both AE and non-AE) were showing huge losses. The TPO observed that the assessee has entered into double expenses of trademark fees as well as its own expenses on brand value enhancement. The TPO observed that the assessee had shown OP/ OR at (-) 12.73% instead of 5.70% shown in benchmarking of the transactions of purchase of raw material and components. On the other hand, the assessee defended its case before the TPO as well as the DRP. The TPO did no....
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.... AE divisions. Accordingly the learner DR contended that the TP report submitted by the assessee cannot be relied upon and vehemently supported the order of the authorities below. 10. We have heard the rival contentions of both the parties and perused the materials available on record. The facts of the case have been elaborated in the preceding paragraph which are not in dispute. Therefore, for the sake of brevity and convenience, we are not inclined to repeat the same. Admittedly, the assessee has treated the foreign AEs as the tested party to benchmark the transactions for its purchase of raw materials and components from the AE's which was not accepted by the authorities below. Thus the 1st controversy that arises for our adjudication whether the foreign AE's can be treated as the tested party in the given facts and circumstances. 10.1 In this regard we note that the selection of the tested party is a matter of dispute since beginning of the introduction of transfer pricing under the Act. It is for the reason that the Act does not define the concept of 'Tested Party'. 10.2 However, OECD has defined in detail the concept of tested party in its guidelines for Multinational Ente....
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....bove and in the absence of necessary informations, we disagree with the contentions of the Ld. AR for the assessee that foreign parties were the least complex parties and were fit to be selected as tested party. Though the assessee has furnished the FAR Analysis of the foreign AE's viz a viz of the assessee in the TPSR but same is not enough to decide the tested party until and unless the reliable data is brought on record. In other words, the financial data reflecting the transaction is equally important to determine the PLI of the tested party viz a viz the comparables. 10.5 In holding so, we also draw support and guidance from the order of the coordinate bench of this tribunal in the case of General Motors India (P.) Ltd. vs. Deputy Commissioner of Income-tax / Assistant Commissioner of Income-tax reported in 37 taxmann.com 403 where it was held that tested party should be the least complex entity for which reliable data in respect of itself and in respect of comparables is available. The Tribunal accepted that tested party could be the local entity or a foreign associate enterprise (AE). Thus, once the foreign AE's have been rejected to be treated as the tested party, the asse....
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....n them could be established. This fact was very much brought to the notice of the TPO during the assessment proceedings by the assessee vide letter dated 25thJanuary, 2021. The relevant extract of the submission of the assessee is reproduced as under: "Section V: Incorrect application of benchmarking analysis used for sale of finished goods to determine the ALP for the transaction pertaining to purchase of raw material At the outset, the Assessee would like to humbly submit that your goodself has grossly erred in adopting the benchmark analysis of sale of finished goods for benchmarking the international transaction of purchase of raw materials. While doing so, your goodself has failed to appreciate that the Assessee has been characterized as a contract manufacturer for transaction of sale of finished goods. On the other hand, the Assessee has been performing the functions of a licenced manufacturer with respect to raw material and components procured from its AEs. In lights of the above, the Assessee humbly submits that the benchmarking analysis of both the transaction cannot be similar and separate and distinct benchmarking analysis ought to be performed for benchmarking ....
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....EIL procures raw materials and components for the manufacturing of power distribution & automation equipment. * SEIL is responsible for maintaining the inventory. The functions performed in this regard includes scheduling, warehousing, maintenance of stock as per forecasting and requirement of customers etc. * As the manufactured products produced by SEIL are sold to end-customers, SEIL faces the entire price risk. * SLIL owns and utilizes its manufacturing facilities, distributing infrastructure, office premises, warehousing facilities, plant & equipment communication facilities, furniture and fixtures etc. for the purpose of its business. Contract Manufacturer * Produces goods for a manufacturing principal. * Principal bears demand and final customer pricing risk. * Earns an arm's-length mark-up on iota! costs. * Bears limited risks associated with holding finished goods and selling them. * SEIL manufactures products for its AEs only. * Sales are made to AEs at inter-Company prices, which are generally based on cost plus mark-up on a per unit basis. * The AEs sells its products in the open market and bears the competitive pricing pressures and ri....
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....5%, selecting comparable companies having net fixed assets/ sales >15% and selecting comparable companies having research and development expenses/ sales <5%. Therefore, the Assessee humbly submits that both the aforesaid transactions are not identical in nature." 10.9. In view of the above, the action taken by the TPO which was subsequently confirmed by the Ld. DRP is not maintainable in the given facts and circumstances. 10.10 Now the aspect that emerges is this whether the TPO was right in rejecting the comparables selected by the assessee with respect to its transactions of purchases of raw materials and components from the AE's. In this connection we note that the assessee has given the necessary details during the assessment proceedings. This fact be verified from the pages 66 to 89 of the order of the ld. DRP. In the absence of any specific defect pointed out by the authorities below with respect to comparable selected by the assessee, we are not in agreement with the decision of the authorities below for selecting the other comparable which were chosen by the assessee for its sale of finished goods of its contract manufacturing unit. In holding so, we draw support and gui....
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....ted the assessee on the ground that such contention by referring to the foreign AEs as tested party was not part of TP documentation. This finding is incorrect. Interestingly in the case of in the case on hand the TPO rejected the data placed by the assessee in their TP documentation and undertook a fresh search for external comparables and arrived at a final list of 12 comparables. Therefore, when the TPO himself has not attached any sanctity to the TP documentation as submitted by the assessee, could not have foreclosed the assessee from canvassing the issue that the subsidiaries are least complex entities which should be taken note of." 10.13 Applying the above principle in the case on hand, we note that, the assessee before the Ld. DRP has taken internal TNMM method and compared the margin of AE segment with non-AE segment under license manufacturing. The assessee regarding this has placed the reliance on Rule 10B(1)(e) of the Rules. The relevant submission of the assessee before the DRP is extracted on pages 59 to 66 in the order. 10.14 However, we note that the Ld. DRP without considering the selection of internal TNMM by the assessee and without pointing out any defect the....
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....ed transaction. Thus the Rules recognize and accept the adoption of net profit realized by the enterprise from comparable uncontrolled transaction. Such a result should be preferred over net profit realized by unrelated parties from comparable uncontrolled transaction. This is because, such analysis is more meaningful as the relevant data, facts and features of both the segments are available and are more reliable. On the following decisions, it has been held that internal comparables are to be preferred:- a. Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxmann.com 27 (Delhi) - held that internal CPM is better than external TNMM b. Asstt. CIT v. Schlafhorst Marketing Co. Ltd. [2011] 13 taxmann.com 104/47 SOT 120 (Mum.)(URO) - held that internal TNMM to be adopted c. Asstt. CIT v Birla Soft Ltd. [2011] 12 taxmann.com 31/46 SOT 437 (Delhi) - internal TNMM accepted d. Destination of the World (Subcontinent) (P.) Ltd. v Asstt. CIT [2011] 12 taxmann.com 310/47 SOT 1 (Delhi) - held that preference should be given to internal comparison. 10.17 In the latest order of the Mumbai Tribunal in the case of Tecnimont ICB (P.) Ltd. v. Addl. CIT [2012] 138 ITD 23/24 taxmann.com 28 (M....
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....(internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-àvis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comp....
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....ed above have to be treated at arm length price as applicable for the purchase of raw materials and components. 10.24 Without prejudice to the above, it was also contended before us by the learned AR for the assessee that whatever adjustments needs to be made by the revenue authorities should be with respect to the international transactions with the AE which are in dispute. As such the revenue cannot consider all the transactions for the purpose of making the addition taking the rate of the ALP. We find force in the argument of the learned AR for the assessee and accordingly direct the revenue to make the adjustments with respect to the international transactions with the AE's which are in dispute. However, we are conscious to the fact that the direction at this stage will not make any difference to the assessee for the reason that the appeal has been decided in favour of the assessee. However, we have recorded this observation for the statistical purposes. 10.25 In view of the above and after considering the facts in totality we reverse the finding of the learned DRP and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. 11....
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....was added to the cost. b- The assessee did not furnish any supporting evidence on what basis the cost was allocated between the intra group entities. c- The images provided by the assessee was not evidencing that it had received any services and the invoice furnished by the assessee was issued by Schneider Electric India Private Limited which was a completely different entity. 12.5 The AO/TPO, thus, was of the view that the assessee has not received any services therefore the arm's length price with respect to the receipt of data management and other related services adjusted to nil. The AO/TPO thus proposes to make downward adjustment of Rs. 21,85,97,391/- on account of payment of data management services and related services. 13. Aggrieved, assessee raised the objection before the Ld. DRP and submits the list of services availed from its AEs as well as details about the benefit from the services availed and reiterated the submission as made before the AO/TPO. 13.1 The assessee further submitted that detailed economic analysis were made with respect to benchmark transactions for payment of availing the services from AE as specified in TPSR whilst the AO/TPO has rejected the....
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..... 18. We have heard the rival contentions of both the parties and perused the materials available on record. The assessee in the instant has availed the services of data management and other related services from its AEs which are in the nature of IT related services. The assessee to substantiate the service availed has submitted the relevant documents and information which is discussed in the preceding paragraph and also furnished the break-up of cost as well as allocation of cost incurred by the AEs before the Ld. DRP. The assessee has applied the TNMM method as MAM to determine the ALP for the aforesaid transaction and found the ALP as cost plus 6% markup. Further, the assessee has contended that the TPO has applied CUP method as most appropriate method for determination of ALP of the said services, without giving any cogent reasons and has determined the ALP of management support and other related services received by the assessee at NIL, taking the view that no independent party would have made the payment in the uncontrolled circumstances. The assessee has submitted that the said action of the TPO is arbitrary and is not in line with rule 10B(1)(a) of the Rules which lays do....
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....as incurred certain expenditures amounting to Rs. 3,36,97,775/- towards the travel, lodging, employee cost, communication etc. on behalf of its AEs. The particulars of the expenses incurred are detailed as under: Sr.No. Name of AE Amount(INR) 1 EPS Electrical Power Distribution Boards & Swithchgear Ltd. 1,026,044 2 Schneider Electric (Australia) Pty. Limited 130,609 3. Schneider Electric Canada Inc. 207,280 5. Schneider Electric Industries SAS 25,824,134 6. Schneider Electric Korea Ltd (ex-Samwha EOCR Co. Ltd) 146,506 7. Schneider Electric Ltd 715,594 8. Schneider Electric Protection et Controle SAS 2,971,444 9. Vamp OY 1,843,605 10. Schneider Electric Logistics Asia Pte. Ltd. 265,457 11. Schneider Electric O.M. LLC 355,719 Total 33,697,775 20.1 The assessee regarding this submits that the cost incurred by it on behalf of the AEs were recovered/reimbursed on cost to cost basis as the expenses were incurred only to provide administrative assistance. 20.2 However, the AO/TPO was of the view that the assessee while performing the activities on behalf of its AEs, will incur the additional cost in the nature of administ....
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.... entities without having some markup. But the assessee has not done any markup on the cost incurred on behalf of the AE. The learned DR vehemently supported the order of the authorities below. 26. We have heard the rival submissions of both the parties and perused the materials available on record. The issue in the present ground is with respect to the adjustment made on account of reimbursement of cost. Before us, it is an assessee's submissions that the expenses which were reimbursed of all expenditure which were inter-alia incurred by the assessee on behalf of the AEs and the same have been reimbursed to the third parties and for which no value addition has been done by the assessee. It is further assessee's submissions that the reimbursement are on cost to cost basis and transactions were undertaken only to provide administrative assistance to the AEs. The aforesaid contentions of the AR have not found to be false as the relevant details for the expenses incurred and reimbursed of expenses has been furnished before the authorities. As per the assessee, no mark-up is warranted on pass through costs which are inter alia incurred by the assessee and are reimbursement of p....