AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (10) TMI 300
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....llowances made in the assessment order. 2. That the Learned Dispute Resolution Panel ("Ld. DRP") ignored 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 1NR 9.22,28,801 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 10D 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 term....
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.... 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 22,25,141 in relation to "purchase of fixed assets" and proposed to benchmark the same by aggregating them with the international transaction pertaining to "purchase of raw material and equipment'1. 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 transactions were separately benchmarked using "other method'". 6. That on facts and circumstances of the case and in law, the Ld. TPO /Ld. DRP have erred in enhancing the income fay (NR 43,01,134 in relation to "payment of trademark fees". In doing so, the Ld. TPO/ Ld. DRP have grossly erred in: 6.1. Alleging that the Appellant has incurred double expenses by paying trademark fees and being involved in the activities of advertisement^marketing and promotion, which contribute to the brand name of 'Schneider'; 6.2. Benchmarking the international transaction of "payment of trademark fees" by aggregating the same with int....
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.... as the most appropriate method to arm length the transaction. The AEs based in France & Germany from whom the assessee made imports of raw material to the tune of 24.33% & 33.49% respectively were selected as tested party and comparables were selected from European region. The reason for selecting the comparables from the European region was stated that it imported more than 90% from that region only hence comparables were selected from that region. The PLI of the tested party was calculated taking the base of operating profit divided by total cost formula. The assessee thus worked out the margin of the tested party at 5% and reached out at ALP (i.e. cost plus mark-up 5%). The assessee in this regard submitted that the cost plus 5% mark-up was followed up uniformly across the various Schneider Group Entities as specified in Schneider Group Transfer Pricing Policy. 6. The TPSR submitted by the assessee as discussed above was rejected by the TPO for the reason summarized as under: a- That the assessee in its TPSR mentioned that 5% mark-up charged on cost of raw material by AEs is the group policy. But the assessee has not furnished the Group Transfer Pricing Policy durin....
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.... the assessee of comparable companies was doubtful as the financials of such comparable companies were not furnished. k- The categorization made by the assessee between license manufacturing and contract manufacturing segment was only to mislead as the tangible and intangible assets were the same for both the functions and paid the trademark fees to the AEs which cannot be possible in case of contract manufacturing segment. l- That the assessee has not maintained the requisite documents as specified in section 92D read with rule 10DA of the Income Tax Rules. 6.1 The assessee before the TPO also furnished alternate working of TPSR by the treating itself as tested party. The TPO rejected the same by holding that the working of fresh search conducted by the assessee after treating itself as tested party was furnished at the fag-end of assessment period i.e. 29-07-2021 where time limit was expiring on 31-07-2021. Further, in the fresh working the activity of certain comparables did not match with the activity of the assessee. The process of search and accept-reject matrix was also not demonstrated. 6.2 The assessee in the submission before TPO also requested to ....
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....n the cost of raw material components based on claimed global transfer pricing policy. The TPO stated that the impugned 'global transfer pricing policy was not furnished to support the TPSR. The TPO observed that the assessee had taken the AES based in France and Germany as tested parties because it had imported 42.2% and 17.9% of raw material and components from them, disregarding the other AES based in Europe, Asia, Australia, US, etc without providing reasonable reasons. The TPO observed that the assessee had selected codes of dissimilar businesses to find comparables. The TPO observed that certain companies were rejected on the basis of unclear shareholder criteria. The TPO observed that turnover filter of less than $ 10 million was applied in connection with the assessee's turnover, when the tested parties were the AES The TPO observed that the assessee had not given accept/ reject matrix. The TPO observed that the assessee did not demonstrate search process with the data base to derive comparables. The TPO further observed that sale of finished goods the assessee had taken the Indian entity as the tested party to decide the arm's length price of the sales with TNM....
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....ed by the assessee in the current appeal is identical to the issue raised by the assessee in its own appeal for A.Y. 2017-18 bearing ITA No. 64/Ahd/2022. The relevant ground of appeal of the assessee for A.Y. 2017-18 has been decided by this tribunal vide order dated 07-12-2022 in favour of the assessee. The relevant finding of the Tribunal in this regard reads as under: 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 pric....
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....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 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 dat....
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....aring 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 25^th January, 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 pe....
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....s 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. * 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. ....
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.... 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 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 assessmen....
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....xmann.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 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....
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.... (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 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 C....
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....ternal 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 (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 whi....
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....w 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. 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....
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....s, assistance in smooth functioning for IT products and database etc. 14. The assessee further submitted that such services are also provided by the various group entities to other group entities. It is the group policy that the cost incurred by the service provider entities in the process of providing impugned services to the group companies gets centralized subsequently the impugned cost allocated to the service receiver entities/AEs by adopting certain allocations method. Accordingly, all the service receiver entities reimburse the cost to the service provider entity along with markup of 6%. 15. However, the AO found that assessee failed to establish based on evidence that it has received services from AE against the impugned payment. The 4 images provided by the assessee in support of receipt of services which were also provided in the immediate previous assessment year. Further, these images are in the form of screen shots derived by simple web search, home page of assessee website. Hence, these images were not evidence that it had received any services. The TPO further found that the assessee has not provided details of cost incurred by the AEs in providing impugned ser....
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.... 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." 11. We are of the considered view that the material facts and circumstances as well as the applicable law have not undergone any change when compared to the earlier year where the DRP had an occasion to decide the issue under consideration. Therefore, respectfully following the directions of the DRP in AY 2017-18, the ground of objection no. 3(sub grounds 3.1 to 3.3) is dismissed. 17. Being aggrieved by the order of the ld. DRP/TPO/AO, the assessee is in appeal before us. 18. The learned AR before us contended the Tribunal in the own case of the assessee in the immediately preceding assessment year has decided the issue in favour of the assessee. Accordingly, it was prayed by the learned AR that the issue on hand raised by the assessee should be decided in its favour. 19. On the other hand, learned DR before us could not controvert the arguments advanced by the learned AR for the assessee but vehemently supported the order of the auth....
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....r service can be ascertained. Thus, the action of the TPO of applying CUP method and at the same considering the value of such transaction as Nil in absence of comparable uncontrolled transactions, is in itself contradictory and without any basis/logic. Therefore, the contention of the TPO to apply CUP method as MAM is not tenable under the law. 18.3 Moving further we note that the entire grounds consists of two issues, whether in fact the services were rendered and availed by the assessee and if so, whether the mark-up of 6% can be considered as comparable with the market averages. 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 accou....
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....equired 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. 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....
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....also perused the draft assessment order. It is to be mentioned that the issue involved in the ground of objection no. 6 also came up for directions before the DRP in AY 2017-18. The DRP have considered the issue and gave directions. The relevant portion of the directions in AY 2017-18 is reproduced as under: "19. We have perused the draft assessment order/ TPO's order and considered the written and oral submissions in this regard. Briefly stated facts of the issue are that the assessee had incurred certain expenses in a nature of travel, lodging, employee cost, communication etc. on behalf of the AES amounting to Rs. 3,36,97,775/-, which were reimbursed to it by the AEs. The TPO observed that there would have been various other costs that would have been 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. Therefo....
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.... the AEs on cost to cost basis. Before us no material has been placed by Revenue to demonstrate that value addition has been done by the assessee and is not in the nature of reimbursement of primary third party expenses which were initially incurred by the assessee. Admittedly, there was no value addition done by the assessee by incurring the cost on behalf of the AE which was subsequently reimbursed. However, such transaction falls within the definition of international transaction with the AE and therefore the same needs to be benchmarked. A nonassociated party will not incur any cost without having any benefit from the party. Indeed, the assessee must have employed its resources in providing administrative services to the AE and therefore we are of the view that the assessee should have charged some amount of fees on account of such transaction. However, the assessee in the given case has not determined the ALP of the transaction in hand, therefore the same was benchmarked by the AO/TPO on reasonable basis. As such it was the onus upon the assessee to bench-mark the transactions in hand but it failed to do so. Hence, we do not find any infirmity in the order of the authorities b....