TaxTMI 
TaxTMI 
2022 (12) TMI 542
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....red the judicial pronouncements and erred in dismissing the 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....
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....ngth price as 'Nil' by applying Comparable Uncontrolled Price Method ("CUP") Method. In doing so, Ld. TPO/ Ld. DRP have grossly 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 ....
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....he same don't require any separate adjudication. Thus, we dismiss the same as infructuous. 4. The 3rd issue raised by the assessee is that the Ld. DRP erred in confirming the proposed downward adjustment amounting to Rs. 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 inc....
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....PO. 6.3 The assessee has selected mainly its two AEs based in France and Germany as tested parties from where it was procuring the raw materials and components to the tune 42.2% and 17.9% i.e. aggregating approximately to 60% of its total 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 Governme....
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....easoning as well as the basis of selecting the foreign companies as comparable companies to determine the ALP of the transaction in dispute. f- The data used by the assessee in selecting the comparable companies was for calendar year and not for the financial year as followed in India as well as the data 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....
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....ii- The assesse has not provided the Accept and reject matrix of the comparable companies before selecting the final comparables. iv- More than 800 companies were rejected by the assessee based on Qualitative Criteria. However, the assessee did not provide the justification and details of the companies which were rejected from the list of comparables. 6.12 The AO/TPO, thus, in 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%....
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....ore, disregarded the valuation given by the custom authorities. 6.18 The AO/TPO also noted that the assessee in its TPSR has not benchmarked the above said transactions. Therefore, the benchmarking of the said transaction was done in aggregation of the transaction of purchase of raw materials and components. Thus, the AO/TPO has worked out the proposed downward adjustment amounting to Rs. 10,26,86,415/- and Rs. 4,49,56,472/- pertaining 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%. Th....
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....rom AEs based in Europe whereas 8% were imported from other region and therefore, it had selected all AEs as tested parties for benchmarking the transactions based in Europe. 6.27 The assessee further submitted that if it has to be selected as tested party then to benchmark the transactions with respect to import of raw materials and components from AEs, the internal TNMM analysis can be chosen and compare the margin earned from business with AEs and Non-AEs 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 as....
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....ssessee had taken the Indian entity as the tested party to decide the arm's length price of the sales with TNMM. The TPO, therefore, wanted to change the benchmarking of the international transactions of purchase of raw material and components. On the other hand, the assessee defended its TPSR, The TPO responded point wise with reasons for rejection of each argument in defence of the TPSR by the assessee, in para 5.2 to 5.12 of the TPO's order. The assessee also made a fresh 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 speci....
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....e the AO/TPO and further submitted that detailed economic analysis were made with respect to benchmark the transactions for payment of trademark fees paid to AE as specified in TPSR whilst the AO/TPO has rejected the same without providing any material and cogent reason. 6.35 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 trade mark has aggregated 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 o....
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....nd therefore the margin determined by the assessee should be adopted as at ALP. 9. On the other hand, the learned DR before us submitted that the assessee has not furnished the basis of bifurcating is manufacturing division into license and contract manufacturing division. Similarly, there was no rational provided by the assessee by further subdividing the licensed manufacturing into AE and Non-AE segment. Furthermore, there was no detail provided by the assessee whether the assessee was procuring the raw materials and its components for its AE and non- 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....
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....nancial statements of 2 AEs based in Germany and France wherefrom it was procuring the raw material and components to the tune of 60% only. It implies that the financials of other AE's based in different regions including the Europe were not considered. Thus the TPO disagreed with the contention of the assessee for treating the foreign AE's as the tested party which was subsequently confirmed by the Ld. DRP. Even at the time of hearing, the learned AR appearing on behalf of the assessee has not brought anything on record contrary to the finding of the authorities below. In view of the above 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 al....
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.... of raw materials whereas the comparable used by the TPO were based on sale of finished goods. As such the basis/methodology for selection of comparables with respect to purchase of raw materials and components viz a viz sale of finished goods cannot be the same. Thus, the entire basis adopted by the TPO for comparing the PLI of the assessee with respect to the import of purchases of raw materials and components viz a viz sales of finished goods is baseless and devoid of any merit. It is for the reason that both the transactions are different and independent to each other and therefore no nexus of whatsoever between 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 o....
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.... Therefore, the contract manufacturer may bear relatively limited risks associated with holding finished goods and selling them, compared with a licenced manufacturer. Figure 2: Contract manufacturer Table 1: Categorization of SEIL Characterization Description SEIL's functions Licensed Manufacturer • Produces goods under a licence agreement. • Pays royalty for using manufacturing intangibles owned by the licensor. • Bears the risks associated with both holding inventories and selling products. including demand and pricing risk. • Typically owns plant and equipment necessary for manufacturing operations and invests in training its labour force- • SEIL 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. ....
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.... in the facts and circumstances of the case." (Emphasis supplied) In this regard, the Assessee submits that all the finished goods manufactured by the assessee are sold directly to its AEs, thereby bear relatively limited / no risks, indicating that with respect to the sales transactions, the Assessee is a contract manufacturer. Whereas as a licensed manufacturer, the Assessee has two segments, viz. AE and Non-AE (refer Page 148 of the TP study submitted vide submission dated June 10, 2019) and undertaking the functions of a licence manufacturer. Further, the economic analysis undertaken to benchmark both categorizations also vary significantly. Such as, while conducting a search for compatibles functionally similar to a licensed manufacturer, the relevant filters to be applied would generally include selecting comparable companies having inventory/sales >15%, 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 acti....
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.... enterprise and non-associated enterprise. 10.12 All these segments were duly reported under the transfer pricing study report and this fact can be verified from the page 148 of the paper book. This fact was also accepted by the TPO in his order that there exists a separate AE Segment under license manufacturing. As per the judgment of Hon'ble Madras High Court in the case of Virtusa Consulting Services Pvt. Ltd. Vs. DCIT reported in 124 taxmann.com 309, the transfer pricing report is considered as one of the authentic document which cannot be ignored while determining the ALP until and unless some adverse material is available on record. The relevant extract of the order is reproduced below: "As already pointed out, it is not a case where there were no material produced by the assessee to establish the functional risk assumed by the foreign AEs. The material was available before the TPO but the TPO non-suited 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 ....
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....ional transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv)the net profit margin realised by the enterprise and referred to in subclause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v)the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; 10.16 Sub-clause (i) provides that first net profit realized by the enterprise from an international transaction should be computed. Sub clause (ii) provides that net profit realized from uncontrolled transactions shall be computed. The profit from uncontrolled transactions can be realized by the (i) enterprise or (ii) unrelated enterprise from comparable uncontrolled 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....
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....e to internal and external comparables. One part of clause (ii) refers to 'the net profit margin realized by the enterprise...... from a comparable uncontrolled transaction' and the other part talks of 'the net profit margin realized ....... by an uncontrolled enterprise from a comparable uncontrolled transaction'. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word 'comparable' may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-à-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (externa....
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....war Manufacturing Co. Pvt. Ltd. reported 67 taxmann.com 152 wherein it was held that For making a comparative analysis, apples are to be compared with apples and not with oranges. 10.21 In view of the above, we are not convinced with the order of the authorities below for adopting the margin of the contract manufacturing as comparable to determine the ALP with respect the purchase of raw materials from the AE's under the activity of license manufacturing. 10.22 Before parting, we note that the authorities below have aggregated the following transactions for the purpose of determining the ALP: i. Purchase of raw materials and components ii. Purchase of fixed assets iii. Purchase of intangible assets iv. Payment of trademark fees 10.23 Once we have accepted the transaction shown by the assessee for the import of raw materials and components at the arm length price, no adjustment with respect to other transactions aggregated with the transactions in dispute is required to be made. In other words, the impugned transactions discussed above have to be treated at arm length price as applicable for the purchase of raw materials and components. ....
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.... that it followed the TNMM method as most appropriate method to benchmark the transaction. The assessee therefore selected 17 comparable independent companies from AMADEOUS database and worked out Arithmetic mean 5.66%, 35th percentile 2.55%, 65th percentile 7.09% with median 5.44%. 12.2 The assessee thus noted that the mark-up of 6% on cost paid to AE for rendering the services of data management and other related services is within the range of 35th and 65th percentile. Therefore, the transactions entered with AE for payment of data management and other related services was on ALP as per the provisions of rule 10CA of Income Tax Rules. 12.3 The assesse during the assessment proceedings also submits the screen shot of the services received from Schneider Electric Industries SAS France and furnished few invoices in respect to the services availed by it. 12.4 However, the AO/TPO disregarded the contentions of the assessee by observing as under; a- That the assessee has not provided the cost incurred by the AEs towards rendering the services as well as on what basis 6% mark-up was added to the cost. b- The assessee did not furnish any supporting evidence on....
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....eceipt of services. The TPO further pointed out that the invoice submitted for claim of the services received/ rendered was in fact from M/s. Schneider Electric India Pvt. Ltd., which was entirely different entity than the claimed service provider, i.e., the AE. The TPO pointed out that the assessee could not produce any worthwhile evidence to support its claim. On the other hand, the assessee, defended its claim of receipt of the impugned services before the TPO as well as the DRP. After considering all the material on record and the reasoning of the TPO which are recorded in para 6 (6.1 to 6.6) of his order, we are of the considered opinion that there is no reason deviate from the findings of the TPO Therefore, the ground objection no. 3 is dismissed. 15. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 16. The learned AR before contended that the assessee has incurred cost towards the management services received from the group companies and the same cannot be determined at nil value. 17. On the other hand, the learned DR before us vehemently supported the order of the authorities below. 18. We have heard the rival conten....
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.... Culling from the details filed and arguments of both the parties, we find that there is no dispute about availing of the services. The evidences include the invoices, agreements along with details of cost allocation submitted at page nos. 509 to 528 of the paper book. Hence, it cannot be said that the services have not been provided to the assessee. With regard to the mark-up of 6% paid by the assessee, we find that the economic analysis submitted by the assessee in TPSR available in the paper book is acceptable. Hence, we hold that no adjustment is called for while determining the ALP on account of payment for Intra Group Services in the form of Data Management and Other Related Services. 19. The 7th issue raised by the assessee is that the Ld. TPO/Ld. DRP erred in enhancing the income of the Appellant by INR 16,84,889 pertaining to reimbursement of expenses received from the AEs by re-characterizing "reimbursement of expenses received" as "provision of support services" thereby imputing a markup of 5% on the cost of the reimbursements without providing any detailed/cogent reason for the same. 20. The assessee during the year under consideration has incurred certain expendi....
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....incurred by the assess in order to perform the activities for which the expenses had been incurred on behalf of the AEs. The assessee defended its claim. The TPO in para 8.3 to 8.5 narrated his reasoning for charging 5% markup for benchmarking the reimbursements. We have considered all the material on record and we do not find any reason to interfere with the finding of the TPO in this regard. Therefore, the ground of objection no.6 is dismissed. 23. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 24. The learned AR before contended that the assessee has not rendered any services to the AE except incurring the cost which was in the nature of travelling, lodging communication on behalf of the AE which was actually reimbursed on cost basis. Had the cost not been incurred by the assessee, the same would have been incurred by the AO. As such there was no element of services in the cost incurred by the assessee and therefore no adjustment with respect to the same can be made in the given facts and circumstances. 25. On the other hand, the learned DR before us submitted that the transaction in dispute represents the international tr....