TaxTMI 
TaxTMI 
2018 (6) TMI 1843
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.... length price 'ALP' adjustment of Rs.16,24,110/-, pertaining to international transaction in the nature of royalty payments made to associate enterprise 'AE', in the impugned assessment year. 3.1. This taxpayer is a company manufacturing commercial explosives as well as ancillary items & systems. It paid royalty sum of Rs. 15,64,201/- to its AE M/s Orica International PTE Limited (Singpore). The impugned assessment year appears to be the first year of the payment in question. The Assessing Officer made Section 92CA reference for determination of 'ALP' thereof. The Transfer Pricing Officer 'TPO' took up consequential proceedings. He issued section 92CA (2), notice dated 18/9/2013 interalia pointing out the arithmetic discrepancy in the impugned payment of Rs.1 5,64,201/- in Form 3CEB shown as Rs.16,24,110/- in Form 3CD relevant to the royalty agreements dated 27/6/2007 and 02/11/2008 as well as the corresponding price in question. 3.2. The TPO's order dated 29/01/2014 (pages 904 to 931) compiled in case records suggests that he thereafter examined assessee's trademark license agreement(s) dated 29/9/1999, 27/06/2005, 02/01/2008 and lastly dt. 14/12/2009. He formed his opinion in q....
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....said trade mark from year 2005. such use was without any payment of royalty till the year 2009. However, in the year 2009, Orica informed the assessee that the assessee had to pay royalty @ 5% of sale done using the trade mark. Accordingly, the assessee passed a Board resolution in December, 2009 and. started payment of royalty. It has been informed by the assessee in the course of hearing that Orica, Singapore (to whom intellectual property rights were transferred from Orica, Australia) had conducted a third party valuation of its intellectual property based on which it is considered it proper to levy a charge for use of Orica trade mark. However, as pointed out by the TPO, the brand value of the products of the assessee in India was long established. The products were earlier identified with the reputed ICI name. On the contrary, the brand name 'Orica' was not well established in India. Therefore, benefit accruing to the assessee by using name Orica is nebulous. It has been claimed by the assessee, that, Orica, Australia transferred" its intellectual properties to Orica, Singapore, which got them valued, based on which the charge was levied. However, it has not been clari....
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....gineering India (P.) Ltd. [2014] 43 taxmann.com 299 (Hyderabad - Trib.), Dresser-Rand India (P.) Ltd. v. Additional Commissioner of Income-tax, Range - 6(2), Mumbai [2011] 13 taxmann.com 82 (Mumbai) interalia conclude that Chapter-X, provisions in the Act do not require the tax payer to prove any expenditure to have been incurred out of necessity or for the purpose of business or that it should actually result in profits, an ALP cannot be NIL amount where the TPO's order nowhere records that the relevant conditions incorporated in section 92C(3) of the Act, are satisfied, the TPO would not sit in judgement on a taxpayers business expediency so as to conclude its ALP of international transactions as unreasonable thereby adopting nil ALP and that it is wholly irrelevant that these are no corresponding benefit since the real question in transfer pricing regime is as to what would be the price to be paid by an independent enterprise vis-à-vis the one shown by the concerned tax payer; respectively. The very legal position is reiterated in tribunal's other decisions in Merck Ltd. vs. DCIT 2016 139 DTR 1 (Mum.), as well as in L.K. India Pvt. Ltd. vs Dy.Cit, Circle-1(2)in ITA No. 20....
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....ssing Officer to keep the instant issue in abeyance to be decided after the hon'ble apex court's final verdict in the department's appeal hereinabove. This second substantive ground is taken as allowed for statistical purposes. 7. The assessee's next substantive grievance challenges correctness of the lower authorities action in disallowing a sum of Rs.12,12,157/-, claimed as commission charges on the ground that the same is raised on accrual basis without any details being submitted. 8. The learned Counsel for the assessee vehemently contends that the payees in question have issue their respective bills in later assessment years. He relies on assessee's mercantile system of accounting to stress the point that the impugned commission expenses is very much allowable on accrual basis. It thus transpires that the dispute herein is that of year of allowability than genuineness. Learned Departmental Representative, fails to dispute that the assessee's stand throughout is of having filed all the relevant details before the Assessing Officer. We therefore conclude that in absence of any material doubting accrual of the impugned expenditure in the relevant previous year, the same has to ....
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....e sale prices charges in each cases in the months of August and January and the fact that instances of lower prices in question stood at around 1% vis-à-vis, those compared in case of third parties. It filed a comparative chart as well. The TPO rejected all the said pleas in his order as follows:- "It needs to be mentioned here that within India, the geographical differences are not be taken into account as carriage and transportation are considered separately as would be the case when considering the carriage to the port in case of FOB prices for exports. As mentioned above, the assessee does no export to its non-AEs. Secondly, any supply to its AEs, a controlled transaction, is at the request of the AE and in uncontrolled conditions needs to be at the price which the assessee extracts from independent parties. Accordingly, taking the data for prices in the month of transaction and arriving at the ALP of the product by taking the average of the uncontrolled prices pertaining to the month of transaction under the CUP Method, it is seen that in some instances the arm's length price of the transactions is different from the amount reflected in the books of the assessee. This....
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....f this case. On this aspect of the matter, the dispute is confined to even narrower a question, i.e. whether or not CPM is the most appropriate method on the facts of this case, because neither revenue authorities have justified any other method of determining the ALP, nor is it in dispute that, if the CPM fails, the TNMM, as canvassed by the assessee, is the only method which can be applied. 15. Rule 10B(1)(c) defines the cost plus method, i.e. CPM, as follows: Cost plus method, by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international tr....
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....respect of sales promotion, both Wrigley India and the AEs carry out this function in their respective market". What in effect, thus, assessee does is that the assessee manufactures the products and sells those products to the AEs but sales promotion is required to be done by the respective AE in its respective market. To this extent, there is no dispute whatsoever on factual aspects by the parties before us. 18. The question that arises is whether these transactions can be compared with the sales of similar product to distributors or other entities in the domestic market and particularly in a situation in which not only the market is geographically different but also entire business model is different vis -à-vis transactions with the AEs, inasmuch as the sales in domestic market necessitates substantial expenditure by the assessee for marketing support and sales promotion strategy. In other words, whether "export price of product simplictor, without any marketing support in the related market" can have a "comparable uncontrolled transaction" in "domestic sale price of a product in a situation in which entire marketing function and sales promotion is seller's responsi....
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....en profitability levels in two business situations, due to significant differences in FAR profiles of two situations, are expected to be different, such transactions cease to be comparable transactions for the purposes of transfer pricing analysis. 20. In OECD Transfer Pricing Guidelines, this aspect of the matter, so far as comparability analysis is concerned, has been explained thus: 1.47 The functions carried out (taking into account the assets used and the risks assumed) will determine to some extent the allocation of risks between the parties, and therefore the conditions each party would expect in arm's length transactions. For example, when a distributor takes on responsibility for marketing and advertising by risking its own resources in these activities, its expected return from the activity would usually be commensurately higher and the conditions of the transaction would be different from when the distributor acts merely as an agent, being reimbursed for its costs and receiving the income appropriate to that activity. Similarly, a contract manufacturer or a contract research provider that takes on no meaningful risk would usually expect only a limited return. ....
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....ined to the first segment itself, i.e. characteristic of the property transferred. Undoubtedly, the product comparability is an important factor but its certainly not the sole or decisive factor. The assessee was producing the same products for its AEs as it was producing for independent enterprises but that was all so far as similarities were concerned. The FAR profile was not the same, the contract terms were not the same, the economic circumstances were not the same and the business strategies were not the same. Viewed thus, necessary precondition for application of CPM, i.e. finding normal mark up of profit in comparable uncontrolled transactions, could not have been fulf illed. When uncontrolled transactions were not comparable, the normal mark up on profit on such transactions could not have been relevant either. 23. In view of the above discussions, in our considered view, the authorities below were not justified in holding that the cost plus method was the most appropriate method on the facts of this case. One of the necessary ingredient for application of CPM, i.e. normal mark up of profit in the comparable uncontrolled transactions- whether internal or external, was no....