TaxTMI 
TaxTMI 
2018 (10) TMI 1994
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....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 direction of the Ld. DRP was binding on Ld. AO as per law. 6. That on the facts and in th....
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....nd 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 service submitted by the appellant to the Ld. TPO and subsequently, to the Ld. AO and Ld. DRP. 16. That the appellant craves leave to add to and / or amend, alter, modify or ....
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....e 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, wherein the Hon'ble Tribunal held as follows: "11. We have heard the rival contentions of both the parties and perused the materials available on record. From the foregoing discussion we find that th....
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....ispute 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 and its foreign AE. It can neither call for also roping in and taxing in India the margin from the activities undertaken by the foreign AE nor can it curtail the profit arising out of transaction between the In....
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....rfere 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 comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) Such price is adjusted to account for differences, if any, between the international transaction [or the specified domestic transaction] and the co....
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....nstitutes 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 during the relevant financial year stood as comparable uncontrolled transactions. The prices at which PCBs were sold by the Assessee to AE are equal to the prices at which PCBs were sold by AE to independent customers. Thus, the international transaction involving sale of finished goods by the assessee ....
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....thod 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 demonstrated as to how a change in the method will produce better or more appropriate ALP on the facts of the case. Accordingly, we reject the contentions of the learned Departmental Representative and also the observations of the Assessing Officer and the learned Commissioner (Appeals) that the assessee cannot resort to ....
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.... 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 facts of a case, it does offer most direct method of neutralizing the impact of inter- relationship between AEs on the price at which the transactions have been entered into by such AEs. " Relying on the decision of Serdia Pharmaceuticals India (P.) Ltd. (supra), the Hon'ble Delhi Tribunal in the case of Clear Plus India (P.) Ltd. v. Dy. CIT reported in [2011] 10 taxman....
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....ethod 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. Further to make things more clear the TP analysis has to be under taken for the transaction undertaken by Indian Company with foreign AE. In order to apply CUP method to the assessee's case, it is relevant to examine as to whether conditions required exist or not. The ld DR explains the provisions of Rule 10B (1) (a), in the context of the assessee under consideration as follows: Comparable uncontrolled price method - Rule 10B(1)....
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.... 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 transactions entered by AE with third parties can be considered as comparables, which is not defined either in Indian TP regulations or in OECD guidelines. 6. Even in the case of Ghardia Chemicals on which Hon'ble Kolkata has relied upon, the assessee namely ghardia chemicals has sold dicamba to third parties. In addition to the above, it should be noted that for the application of the CUP method in general, a high degree of comparability is needed between the transaction under review and the comparable uncontrolled transaction. In this respect, the OECD gui....
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..... 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 enterprise (AE) is a distributor, hence, functions are different, therefore CUP method is not applicable to the assessee. We note that under the Distribution Agreement, the assessee has grant to AT & S AG (AE), the exclusive right to market, distribute and sell the products manufactured by the assessee in the specified territory (Europe). The assessee, as a principal, has the full authority to sell the products manufactured by it as per own business decision, therefore, the assessee has functioned as a full-fledged manufacturer of its product and AT & S AG (AE) functioned as a distributor of the assessee. The AT& S AG (AE), with the prior written ....
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....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 1961 is an anti-evasion tool to prevent adverse profit shifts. The materiality of examination of the International Transactions has to be in this light. Therefore, the testing has to be done in order to examine if the Indian entity is offering its profits to lawful taxation in India. In order to determine the correct profits by ascertaining correct ALP, the transactions have to be examined by keeping the Indian entity in primary focus. Therefore, keeping the AE as a tested party would fundamentally defeat the basic purpose of the TP regulations. In the facts and circumstances of the case, the assessee Indian Company is justified to be taken as the tested party. 18. We note tha....
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....laced 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 careful consideration to the rival submissions and perused the material available on record, we note that the cornerstone of Transfer Pricing principle is the comparability analysis of a controlled transaction with an uncontrolled transaction which is substratum of arriving at Arm's length price. The controlled and uncontrolled transactions are comparable if none of the differences between the transactions materially affect the factor being examined in a given methodology, whether determination of prices or for profit margin and for such determination a reasonable accurate adjustment can be made to eliminate the material effects of any such differences. Rule 10B(2) of Income Tax Rules, provides the compar....
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....n 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 taxpayer's claim that it was following a business strategy that temporarily decreased profits in return for higher long-run profits, several factors should be considered. Tax administrations should examine the conduct of the parties to determine if it is consistent with the professed business strategy. Another factor to consider is whether the nature of the relationship between the parties to the controlled transaction would be consistent with the taxpayer bearing the costs of the business strategy. For example, in arm's length dealings a company acting solely as a sales agent with little or no responsibility for long term market development would generally not bear the costs of a market penetration strategy." Thus, business strategies, market penet....
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.... 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 be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter - and, if there was no change, it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-tax in the earlier proceedings, a different and contradictory stand should have been taken." We are of the view that the above cited precedents on principle of consistency are squarely applicable to the assessee under consideration, as the facts under the Cost Contribution Agreement (CCA) for receiving purchase services, order handling services and sales services for last three assessment yea....
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....'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 and accordingly the first and second proviso shall not apply.] Explanation. -- For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009. (2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2) Act, 2009, is applicable in respect of an international transaction for an assessment year and the variation between the arithmetical mean referred to in the said proviso and the price at which such transaction has actually been undertaken exceeds five per cent. of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the said proviso. (2B) Nothing contained in sub-section (2A) shall empower the As....
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....ethod 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 prescribed in section 92C(1) are applicable to the assessee. The AO/TPO has to apply the appropriate method to find the arm`s length price (ALP) of the assessee. Hence considering the provisions of section 92C of the Act, it is safely concluded that the AO/TPO cannot ignore these six methods which is prescribed in the statute to determine the arm`s length price (ALP). Besides, section 92CA (3) also advocates that AO/TPO should not deviate from the six methods prescribed in section 92C(1), the relevant provisions of sub- section (3) of section 92CA are given below: "Section 92CA: Reference to Transfer Pricing Officer. (3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may requ....
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....l, 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 (a) to (d) of section 92C(3) of the Act which would necessitate intervention of the Assessing Officer/TPO for determination of arm's length price of the international transactions under review at 'NIL' value solely based on the allegation that the benefits claimed to have been received by the assessee from the AE under the controlled service agreement would not be ones for which an independent enterprise would be willing to pay. The Tribunal noted that the TPO did not apply any of the methods prescribed under sub-section (1) read with sub-section (2) of section 92C of the Act, and primarily based on the above observations, the Tribunal allowed the assessee's appeal and directed to delete the ALP adjustment made by the AO/TPO. We note that in the assessee's case under consideration, the TPO/AO has not selected any method (out of six methods), therefore, the arm`s length price (ALP) computed by the AO/TPO is not in accordance with the ....
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....t, 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 assessment proceedings, the assessee submitted before the AO the same evidences of receipt of purchase services, order handling services and sales services as those submitted to the TPO, as per the direction of the AO. It is pertinent to note that the AO, after examining the aforesaid details, did not make any adverse comment under section 37 of the Act. As per the provision of sub-section (1) of section 37 of the Act, the AO is authorized to examine whether an expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) is incurred by an assessee wholly and exclusively for the purposes of the business in the matter of computation of the income chargeable under the head "Profits and gains of business or profession. We note that the Hon'ble High Court of Bombay in the matter of CIT vs. Lever India Exports Ltd.[2017] 78 taxmann.com 88 (Bom) wherein the Hon'ble H....