AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (10) TMI 1994
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....tances of the case and in law, the Ld. DRP erred in confirming the ALP adjustment of INR 42,45,62,079/- in respect of export of finished goods by the appellant to its parent company for further sale to independent customers at same prices. 3. That on the facts and in the circumstances of the case and in law, the Ld. TPO / Ld. DRP erred in rejecting the arm's length price analysis undertaken by the appellant under the Comparable Uncontrolled Price (CUP) Method in respect of the aforesaid international transaction. 4. That on the facts and in the circumstances of the case and in law, the Ld. TPO / Ld. DRP erred in not appreciating that the application of the CUP Method on the same facts and circumstances of the case was confirmed by the Hon'ble Jurisdictional Tribunal in appellant's own case for the assessment years 201 1-12 and 2012-13. Payment for Information Technology ('IT') Service Cost 5. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in disregarding the direction of the Ld. DRP to delete the ALP adjustment of INR 3, 58, 02,269/- in respect of payment of IT service cost, though the dire....
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.... section 92C of the Act which led to violation of the relevant provisions of the Act. 13. That on the facts and in the circumstances of the case and in law, the Ld. DRP erred in not appreciating that the TPO determined the ALP of the said transaction at Nil value by exceeding his own jurisdiction and unlawfully assuming the jurisdiction of the Ld. AO under section 37(1) of the Act. 14. That on the facts and in the circumstances of the case and in law, the Ld. DRP erred in confirming the aforesaid disallowance without appreciating that the Ld. AO in the draft assessment order under section 143(3) read with 144C(1) of the Act did not make any adverse comment under section 37 (1) of the Act in respect of the said transaction after examining the details of the said transaction submitted by the appellant to the Ld. TPO and subsequently to the Ld. AO as per his direction. Without prejudice to what we have stated in ground no. (1 1) to (14): 15. That on the facts and in the circumstances of the case and in law, the Ld. DRP erred in confirming the adjustment of INR 40,04,924/- based on benefit test without duly considering the evidence of receipt of serv....
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....s of PCBs sold by AT&S AG to independent customers in back to back transactions. The prices at which PCBs were sold by the assessee to AT&S AG were exactly equal to the prices at which PCBs were sold by AT&S AG to independent customers in back to back transactions. The quantities in which PCBs were sold by the assessee to AT&S AG were exactly equal to the quantities in which PCBs were sold by AT&S AG to independent customers in back to back transactions. The controlled transactions as well as uncontrolled transactions took place in Europe i.e. in the same geographical location as disclosed in the copies of back to-back invoices submitted to the TPO/DRP on sample basis. For administrative convenience, AT&S AG retained distribution commission and warranty expense out of the sale proceeds collected from the independent customers and remitted the balance to the assessee. Therefore, the CUP method is suitable for the assessee. Apart from this, the ld. counsel for the assessee submitted before us that this identical issue is fully covered by the Hon'ble Jurisdictional Tribunal in assessee's own case in ITA No.179/Kol/2016, for Assessment Year 2011-12, order dated 03.08.2016, whe....
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....ts and circumstances of each case. Thus, the calculation of profit B may undergo change with the varying set of comparable cases. However, in so far as calculation of profit A is concerned, there cannot be any dispute as the same has to necessarily result only from the transaction between two or more associated enterprises, as is the mandate of sections 92 read with 92B in juxtaposition to rule 10B. The natural corollary which, thus, follows is that under no situation can the calculation of 'profit A' be substituted with anything other than from the international transaction, that is, a transaction between the associated enterprises. So, it is the profit actually realized by the Indian assessee from the transaction with its foreign AE which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate customers for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. The scope of TP adjustment under the Indian taxation law is limited to transaction between the assessee....
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....on. In the instant case we need to determine the ALP of the transaction between the assessee and AE for the export of the PCB. Therefore, the tested party will be the Indian Party. In view of above we find no reason to interfere in the order of DRP. Hence the assessee has rightly been treated as tested party. With regard to the TNMM method adopted by the lower authorities for the computation of ALP we find that the various courts have held to adopt the CUP method in the aforesaid facts and circumstances. At this juncture it is important to understand the CUP method as per the provisions of clause (a) of sub-rule (1) of rule 10B of the Income-tax Rules (hereinafter referred to as the 'Rules'), which inter alia reads as follows: "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) The price charged or paid for property transferred or services provided in a ....
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....OT 132 (Pune) and Philips Software Centre (P.) Ltd. v. Asstt. CIT ITA No.179/Kol/2016 A.Y 2011-12 [2008] 26 SOT 226 (Bang.) have preferred the following of CUP method. It is obvious that when the price of similar goods or services as sold or provided to the non-AEs is available, such a price constitutes the best guide to find out whether the price charged or paid to the AEs is at ALP or not. It is more so when such comparable uncontrolled transactions is internal. When similar goods as traded with AEs constituting international transactions are traded with Non-AEs, it always proper to consider the price of goods traded with non- AEs, for benchmarking price of good traded with AEs. In our considered opinion the Id. CIT(A) was justified in upholding the preference of CUP method over TNMM. " In the instant case, the transactions involving sale of PCBs by the appellant to AE during the financial year 2010-11 stood as controlled transactions, whereas the transactions involving sale of exactly the same PCBs in the same quantity as those transacted between the appellant and AE and by AE (i.e. one of the parties to the controlled transaction) to independent customers in Europe dur....
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....nto proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to justify its ALP. Thus, even if the assessee had adopted TNMM as the most appropriate method in the transfer pricing report, then also it is not precluded from raising the contentions/objections before the TPO or the appellate Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. The ultimate aim of the transfer pricing is to examine whether the price or the margin arising from an international transactions with the related party is at ALP or not. The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropriate ALP can be determined, the assessment authorities as well as the appellate Courts should take into consideration such a plea before them provided, it is demo....
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.... Reliance in this regard is also placed on the decision of Hon'ble Mumbai Tribunal in the case of Serdia Pharmaceuticals (India) (P.) Ltd. v. Asstt. CIT reported in [2011] 44 SOT 391/9 taxmann.com 13 wherein the Hon'ble Tribunal while dealing with the priority of applications of methods for the determination of ALP, has held as under: "64... as long as CUP method can be reasonably applied in determining the arm's length price of an international transaction in a particular fact situation, and unless another method is proven to be more reliable a method vis-a-vis the fact situation of that particular case, the CUP method is to be preferred. The reason is simple. When associated enterprises enter into a transaction at such conditions in commercial and financial terms, which are different from commercial and financial terms imposed in comparable transaction between independent enterprises, the difference in these two sets of conditions in financial and commercial terms re-attributed to inter relationship between the associated enterprises that is sought to be neutralized by the transfer pricing regulations. As long as CUP method can be reliably applied on the ....
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....e most appropriate method in determining the arm's length price of the international transaction involving export of PCBs by the assessee to AE and accordingly, delete the adjustment of INR 69,30,53,397/- made in the assessment order." 15. On the other hand, the ld DR for the Revenue submitted before us that the OECD Guidelines defines 'tested party' as "the one to which a transfer pricing method con be applied in the most reliable manner and for which the most reliable comparable can be found, i.e. it will most often be the one that has the less complex functional analysis." UN Manual defines tested party in the similar manner. A Tested party should have the following attributes on bases of theses definitions * Available of reliable and accurate data for comparison * Least Complex (amongst the parties to the transaction) * Data available can be used with minimal adjustments Thus, it is clear from the above that, tested party is the one to which TP method can be easily applied. This means, in this case INDIAN COMPANY being the TESTED PARTY, the TP provisions or method shall be purely with reference to Indian Company only. ....
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....ia Pvt. Ltd. Vs. ACIT (122 TTJ 699), M.S.S. India Pvt. Ltd. (123 ITJ 657) and Bechtel India Pvt. Ltd. Vs. DCIT (136 TTJ 212). The ld DR pointed out that as per Para 2.6 of OECD TP guidelines, it is obvious that for application of any TP method for benchmarking international transactions comparison has to be with uncontrolled transactions. Further, the assessee's reliance on the decision of DCIT vs. Calance Software (P). Ltd. reported in 82 Taxman. Com 390 (Delhi ITAT) is misplaced, as facts are different but for back to back transactions of software development services at the same price. Therefore, the ld DR pointed out the followings: 1. The assessee is a manufacturer whereas the AE is a distributor. Hence, functions are different. 2. In the referred case, there is no issue of tested party. 3. Once the tested party issue comes into existence, the scenario changes and the mechanism of TP has to be applied to the tested party. 4. As explained above, as per Indian TP regulations as well as OECD guidelines uncontrolled transactions should be taken into account for comparability. 5. The referred cases has assumed that the transacti....
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.... can take different view if the application of law and facts have not been properly appreciated in the previous judgments. Therefore, ld DR submitted that the order of DRP and TPO may be upheld or sent back to TPO with a direction to assessee to provide necessary internal or external comparables for examination by TPO. 16. We have given a careful consideration to the rival submissions and perused the material available on record, we note that ld DR for the Revenue submitted before us about the applicability of Comparable Uncontrolled Price Method ( CUP- Method) and explained the circumstances where the CUP method may not be applicable. He explained the internal CUP and external CUP and relied on certain judgments of the Tribunal, which are given in para 15 of this order. We note that all these are theoretical and academic exercise. The ld DR failed to bring on record any cogent evidence or material which can prove that CUP method is not suitable for the assessee. Why and how the uncontrolled price does not exist in the assessee`s case under consideration? The main focus of the ld DR for the Revenue is that since the assessee is a manufacturer whereas the associated enterpr....
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....the stand of the ld DR that CUP Method is not applicable to the assessee, is not acceptable. 17. Now we deal with the issue of 'tested party'. The Tested party is one to which a transfer pricing method con be applied in the most reliable manner and for which the most reliable comparable can be found. The selection of tested party depends on the following factors: (i) Least Complex (amongst the parties to the transaction) (ii) Data available can be used with minimal adjustments Therefore, it is abundantly clear from the above that, a tested party is the one to which TP method can be easily applied. This means, in this case Indian Company being the tested party and the TP provisions or method shall be purely with reference to Indian Company only. The Transfer Pricing analysis has to be under taken for the transaction undertaken by Indian Company with foreign independent customers. Besides, the Coordinate Bench of ITAT Mumbai has held in case of Aurionpro Solution Limited (ITA No 7872 of 2011) that for the purpose of determining the ALP, tested party can be the assessee. The Indian TP regulation per chapter X of the Income Tax Act 1....
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....sessee, Ms. Rituparna Sinha, invited our attention to the order dated 11.05.2018, passed by the Division Bench of this Tribunal in assessee's own case in ITA No. 77/Kol/2017, A.Y. 2012-13, whereby the issue of arm's length price adjustment in respect of payment of Information Technology (IT Service Cost) has been dealt with and adjudicated and the issue relating to arm's length price adjustment of Rs.40,04,924/- made in respect of payment of technical support service cost is also identical and similar. Ms. Rituparna Sinha, the learned counsel for the assessee submitted before the Bench that both these issues are squarely covered by the aforesaid order of the Tribunal, a copy of which was placed before the Hon'ble Bench. 10. The learned departmental representative for the revenue did not have much to say but he nevertheless relied on the order of the authorities below. 11. We see no reason to take any other view of the matter other than the view so taken by the Division Bench of this Tribunal in assessee's own case, vide ITA No. 77/Kol/2017 for A.Y. 2012-13 order dated 11.05.2018. In this order the Tribunal as inter alia observed as follows: "30. We have given a caref....
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....ough adjustments. The factors governing the price or profit in a transaction may depend upon business strategies, market conditions, competitions, market penetration schemes, geographical locations, climatic conditions, etc. Guidelines issued by OECD also recognized the business strategies adopted by the companies which have a bearing on profitability levels. Para 1.60 and 1.62 of OECD guidelines for the sake of ready reference are reproduced hereunder: "Para 1.60 of the Guidelines states as under: "Business strategies also could include market penetrate schemes. A taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. Furthermore, a taxpayer seeking to enter a new market or expand (or defend) its market share might temporarily incur higher costs (e.g. due to start-up costs or increased marketing efforts) and hence achieve lower profit levels than other taxpayers operating in the same market". Further, para 1.62 of the OECD Guidelines states as under: "When evaluating a taxpa....
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....Department has been consistently accepting the assessee`s transfer pricing documentation on the same facts and circumstances of the case, and no ALP adjustments were directed by the Ld TPO in respect of international transactions involving payments made by the assessee under the Cost Contribution Agreement (CCA) for receiving purchase services, order handling services and sales services for last three assessment years i.e. AY 2009-10, AY 2010-11 and AY 2011-12, therefore we do not agree with the stand taken by the TPO in the current assessment year under consideration, by following the Rule of consistency. For that we rely on the order of the Hon'ble Supreme Court in Radhasoami Satsang vs. CIT 193 ITR 321 (SC), wherein it was held as follows: "We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not b....
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....d. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction [or specified domestic transaction] has actually been undertaken [ does not exceed such percentage not exceeding three percentage of the latter, as may be notified] by the Central Government in the Official Gazette in this behalf] the price at which the international transaction [or specified domestic transaction] has actually been undertaken shall be deemed to be the arm's length price. Provided also that where more than one price is determined by the most appropriate method, the arm's length price in relation to an international transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed an....
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.... of such material or information or document available with him: Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer" We note that it is abundantly clear from the provisions of sub-sections (1), (2) and (3) of section 92C, as explained above, that AO/TPO should determine the arm`s length price (ALP) by applying the six methods prescribed in sub-section (1) of section 92C of the Act. Normally, the arm`s length price is to be determined by applying the five methods Viz: (a) comparable uncontrolled price method; (b) resale price method;(c) cost plus method;(d) profit split method;(e) transactional net margin method. However, the sixth method may be prescribed by the CBDT. Therefore, the arm`s length price (ALP) has to be computed by applying only these six methods and the AO/TPO cannot ignore these methods. Therefore, the AO/TPO cannot say at any point of time that none of the methods prescribe....
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.... & order handling services and sales services under the CCA and hence, the DRP confirmed the action of the TPO in determining the arm's length price of the said services at NIL value. It is pertinent to note that the aforesaid actions of the DRP and the TPO go against the basic tenet of the Indian Transfer Pricing Laws and violate the provision of sub-section (3) of section 92CA of the Act read with subsection (3)of section 92C of the Act. For that we rely of the decision of the Coordinate Bench Kolkata Tribunal in the matter of NLC Nalco (India) Ltd vs. DCIT [2016] 71 taxmann.com 57 (Kol. - Trib.). ln the aforesaid case, the assessee received technical and management assistance from its AE. The TPO determined the arm's length price of the international transaction at 'NIL' value based on benefit test and without applying any of the methods prescribed under sub-section (1) read with sub-section (2) of section 92C of the Act. On first appeal, the CIT (A) upheld the order passed by the AO/TPO, On second appeal, the Hon'ble Tribunal noted that nothing was found in the TPO's order which was indicative of the existence of any of the circumstances prescribed under....
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....eived benefit from these services. The ld DR for the Revenue has not disputed that these services have not been received by the assessee, he disputed only the 'Benefit Test', that assessee did not get the benefit out of these services. We are of the view that assessee has proved that he had received the benefit from these services, by way of submitting a brief chart containing the services obtained, which is mentioned in para 27 of this order. Therefore, we note that the assessee has satisfied the 'benefit test', and for that we rely of the judgment of the coordinate bench Kolkata in the case of DCIT Vs. Landis + Gyr Ltd. [2017] 86 Taxmann.com, 109 (Kol. trib.), wherein it was held that the assessee had derived commercial benefits out of rendering of intra group services by AE and payment made thereon were in the nature of third party, which would willing to pay. 34. We note that Ld. AO in the draft assessment order under section 143(3) read with 144C (1)of the Act, has not made any adverse comment under section 37 of the Act in respect of the services received under the CCA, for purchase services, order handling services and sales services. During the course of scrutiny a....
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....t expenses. The jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an International Transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules. The determination of the ALP by the respondent assessee of its advertisement expenses has not been disputed on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT (A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained." We note that in the assessee`s case under consideration, the AO has not disallowed the benefit of services received by the assessee under the Cost Contribution Agreement. The authority of the TPO would be to conduct a transfer pricing analysis to determine the arm's length price ('ALP') and not to determine whether there is a service or not from which the assessee benefits. That exercise off actual verification would be left to the AO under ....