TaxTMI 
TaxTMI 
2023 (11) TMI 804
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....s, oxygen sensors, diesel injections and variants of fuel pumps, fuel injectors etc. As sated, the assessee is a wholly owned subsidiary of DENSO, Japan. The Transfer Pricing Officer (TPO) has further stated that the assessee is a routine manufacturer of automobile components and uses all the valuable intellectual property rights, know-how, copyrights and other commercial or marketing intangibles such as brand names, trademarks etc. owned by the DENSO group. 5. In the year under consideration, the assessee entered into various international transactions with its overseas associated enterprises (AEs). The details of which are as under : Nature of International Transaction Amount in INR Import of raw material and components 205,23,60,236 Import of finished goods 172,84,07,356 Import of capital goods 12,40,40,466 Export of finished goods 4,22,25,268 Payment of royalty 10,63,39,944 Payment for technical services 1,43,31,239 Payment of application cost 4,11,32,802 Payment for receipt of services 72,27,543 Payment of training fees 41,25,616 Provision of services 1,81,905 Cost allocation from group companies 27,62,398 Cost recharges to group companies 48,87,986....
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....rucial information, assessee's contention that specific services have been received, for which it did not have expertise or logistics, is not tenable. He further observed that even if some services were received, the assessee failed to demonstrate that it resulted in actual benefit to the assessee. Thereafter, referring to OECD guidelines and various judicial precedents, the TPO concluded as under : * "The taxpayer has not been able to prove the benefits that ithad derived from the services purportedly provided by the Expats. No independent entity would pay for such services without any cost benefit: analysis. * The taxpayer has not furnished any evidence as to the cost benefit analysis with regard to the independent local employees. No third party would like to avail services without any cost benefit analysis with regard to Expats vs. independent employees. * No documentation has been produced by the taxpayer to support its claim for the receipt of services. * The benchmarking done by the taxpayer is not in accordance with the law and therefore CUP method is required to be applied in this case." 10. The TPO observed, though the assessee might have been benefited from serv....
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....ervices provided in the international transaction or the specified domestic transaction." 6.1 It is submitted that the Ld. TPO and Ld. CIT(A) determined the arm's length price at Nil on an assumption that no third party would agree to pay for these services and failed to bring on record any uncontrolled transaction.. The Hon'ble Delhi Income Tax Appellate Tribunal "(ITAT") in the case of AWB India Pvt Ltd (ITA No. 4454/Del/2011)has held that TPO cannot discard TNMM and apply CUP method to determine the arm's length price without stipulating the comparable uncontrolled transaction. A general observation by the TPO that no independent party would have made payment in such uncontrolled transaction does not give TPO a valid ground to apply CUP method. Reliance is also placed on the following judgments where similar views have been expressed by the Tribunal: - CWT India (P) Ltd v ACIT: [2019] 109 taxmann.com 182 (Mumbai - Trib.) - Bright Point India (P) Ltd vs ACIT: [2017] 89 taxmann.com 182 (Delhi- Trib.) - DCIT v Danisco (India) Pvt Ltd: [2015] 63 taxmann.com 174 (Del- Trib.) - Metalsa India Private Limited v. DCIT [2022] 134 taxmann.com 160 - Dow Chemical International (P....
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.... Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. V. CIT [2015 55 taxmann.com 240 (Delhi) had made the following observations: "91. In case the tested party is engaged in single line of business, there is no bar or prohibition from applying the TNM Method on entity level basis. The focus of this method is on net profit amount in proportion to the appropriate base or the PLI. In fact, when transactions are inter-connected, combined consideration may be the most reliable means of determining the arm's length price. There are often situations where closely linked and connected transactions cannot be evaluated adequately on separate basis. Segmentation may be mandated when controlled bundled transactions cannot be adequately compared on an aggregate basis. Thus, taxpayer can aggregate the controlled transactions if the transactions meet the specified common portfolio or package parameters." 6.4 It is submitted that after having accepted TNMM as the most appropriate method for transactions aggregated together, it is not open to the TPO to cherry pick and single out a transaction (intra group services in the present case) and benchmark it using ....
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....arly in the context of ALP determination: - Honda Siel Power Products Ltd (ITA No: 5713/Del/2011) - Brintons Carpets Asia P Ltd. Vs. Dy. CIT Circle 1(1) Pune (ITA No.1296/PN/10) - Humboldt Wedag India Pvt Ltd [TS-242-ITAT-2022(DEL)-TP] - Avery Dennison (India) P Ltd [TS-514-ITAT-2021(DEL)-TP] Ld. TPO does not have the power to make a wholesale disallowance to NIL and ask for a cost-benefit analysis: 6.8 It is submitted that Ld. TPO has erred in disallowing the entire expenditure incurred by the Appellant for availing the services from AEs on the assumption that no benefit accrued to the Appellant in lieu of the services availed and business needs of a company must be viewed from a business perspective. It is settled law, that TPO does not have power to adjudicate on allowance/disallowance of an expenditure claimed by the Appellant. The powers of the TPO are governed by Chapter X of the Act under which he can only make an adjustment to arrive at the arm's length price of an international transaction. The Hon'ble Delhi High Court in the case of CIT v EKL Appliances [2012] 345 ITR 241(Para 22)has held that Rule 10B(1) of the Rules does not give TPO the power to disallow an....
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....rt, procurement support, information system support and HR support. 6.13 The Appellant receives above-mentioned support in planning for optimizing the resources engaged in the India operations and staying competitive by having access to top-of-the-line and state-of-the-art technology available with the Denso Group/AEs.The receipt of these services helps the Appellant to bring synergies in its overall operations, and in order to maintain a high level of efficiency and quality in the manufacturing activity. These are enabling support services because of which the Appellant is provided updated knowledge, information, best practices that are required for its business operations. 6.14 The Appellant has received benefits from the services provided by the group company according to their business requirement. The AE(s) sharequarterly reports to all group companies including the Appellant, mentioning the services provided, performance evaluated and suggested measures for improvement in that particular quarter (Refer pages 546 to 574 and 657 to 696 of paperbook Volume III).Copy of the invoices along with backup (on sample basis) have also been submitted by the Appellant. (Refer pages 52....
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....Reduced fixed cost and enhancement in quality b. Reduced man hours and inventory amount i.e. Time and cost saving c. Clear IT issue and counter measure d. Centrally managed server e. Free of cost Platforms / software's f. Automated processes g. Economies of scale a. Documents in relation to the server monitoring provided by the AEs. b. Supporting WSUS (Windows Security Update Service) c. Configuring VPN Tunnel for region Note Server India d. Copy of presentation for the India IS meeting e. Presentation for the Regional Data Centre, E-mail services, E-mail policy & Operational Rules etc. Refer pages 637 to 655 and 985 to 1014 of paperbook Volume III Procurement Assists in selecting the "materials and parts supplier" to reduce purchase cost by order volume for the group companies, assists in new material, help in negotiating the price of material centrally, assists in standardizing cost calculation method. Benefits received: a. Strengthen cost effectiveness, supplier basement and procurement function b. Management of KPI and progress of important activities resulting in cost saving in millions c. Material cost down and savings in material cost a. Quarterly....
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....l its affiliates in ASEAN region including the Appellant. On the other hand, the personnel expenditure and legal and professional expenses are purely local expenses incurred on local personnel and professionals.. To understand the meaning of duplicative activities, reliance is placed on Para 7.11 of OECDGuidelines, 2022, which provides that: "In general, no intra-group service should be found for activities undertaken by one group member that merely duplicate a service that another group member is performing for itself, or that is being performed for such other group member by a third party" Therefore, what needs to be seen is whether the Appellant has performed the services independently it has availed from its AE. The authorities below have not found any evidence or provided any basis to show that there is any such duplication of services. Mere examination of Appellant's profit &loss account no conclusion in this regard can logically be drawn. Thus, the CIT(A) has given unsubstantiated findings that there is duplication of services. (Refer pages 290 and 297-298 of paperbook Volume II for P&L account) 6.17 The Ld. CIT(A) has erred in giving a finding that the services availe....
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....le benefit likely to accrue to the assessee as it gives benefit to the owner." It is submitted that the services availed in the present set of facts do not either fall within the scope and exam-les of shareholder activities given in OECD Guidelines or the scope as defined by the Hon'ble Tribunal. The services pertain to planning, HR, IT and procurement support which are solely concerned with the business operations of the Appellant. The service provider being a group entity, being fully aware of the business operation of the appellant, is better equipped to provide more efficient, and effective support services. The direct benefit of having centralized services is the certainty that such services will be available when required and that the quality of services is consistent. The authorities have made bald assertions that the services are for group benefit without substantiating the findings with any sort of evidence and hence this finding should be set aside." 13. Learned Departmental Representative submitted, the assessee in course of proceedings before the departmental authorities has failed to furnish any cogent evidence to establish actual rendition of services by the AE....
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.... the year. Except the transactions relating to cost recharges to group companies, the assessee has aggregated all other transactions and benchmarked them by applying TNMM. Undisputedly, the Assessing Officer has accepted assessee's benchmarking under TNMM in respect of all the transactions except two of the transactions, viz., import of raw materials and components and payment for receipt of services. In respect of these two transactions, the TPO has applied CUP method and determined the ALP at nil. 15. The issue arising for consideration is, when assessee's aggregate approach under TNMM has been accepted by the TPO in respect of other transactions, such as, import of finished goods, import of capital goods, payment for royalty, payment for technical services, payment for application cost, payment of training fees, cost allocation from group companies, is there any necessity to segregate these two transactions including payment towards intra-group services ? In our view, the TPO was not justified in selectively picking of only a couple of transactions for different treatment. As discussed earlier, the assessee has entered into 12 transactions with AE. Except one transaction, rest ....
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....ord quarterly reports sent by the AEs to the assessee mentioning the services provided, performance evaluated and suggested measures for improvement. The assessee has also demonstrated the benefits received by way of cash improvement and profit improvement, increase in turnover, effective execution of business and access to skill and expertise. Under safety and environment services, the assessee has received various services to develop serious disaster prevention activity, support to establish safety, health and environment management system, support function improvement. Necessary supporting evidence towards receipt of such services have been placed on record. Assessee has also demonstrated the benefits received from such services regarding compliance with industry safety norms, avoid any unfair legal cost/penalty, lesser health issues of employees enabling them to perform regular work throughout the year, lesser quality issues etc. It has also helped in reduction of compensation cost to employees. Under the information system services, the assessee was helped to develop and maintain a common system, upgrade and maintain server, upgrade IT environment, internet gateway management,....
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....he conclusion drawn by the departmental authorities are not based on materials on record, but more on conjectures and surmises. When the assessee has furnished evidences to demonstrate that services indeed were received from AEs, the departmental authorities cannot ignore such evidences. In any case of the matter, the TPO could not have determined the ALP at nil under CUP method without bringing on record any comparable uncontrolled transaction. 19. So far as the decisions relied upon by the learned Departmental Representative, on carefully going through them, we are of the view that they have been decided on their own facts, hence, not applicable to the present case. Both in case of International Flavours and Fragrances (India) Pvt. Ltd. (supra) as well as in case of Akzo Nobel India Ltd.(supra), the Bench has recorded a categorical finding of fact that the assessee failed to furnish substantive evidence to prove rendition of services. However, the facts are different in the present case, as the assessee has furnished cogent evidence to prove rendition of services by the AE. In view of the aforesaid, we hold that the transfer pricing adjustment suggested by the TPO and addition m....
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.... Denso Group. Detailed break-up of all the fixed assets purchased from each of its AEs:(Refer pages 118 to 125, 176 to 182 of paperbook Volume II). Copies of invoices along with bills of entry on sample basis have been submitted during the course of proceedings, refer pages 193 to 249 of paperbook Volume II. Name of AE Amount in INR Nature of asset purchased Denso Corporation 10,13,51,588 Injectors, LCR Meters, ACProject-ECUs, EFC-ACConnectors, UC Inj-mmd-Lasers, Relief Valve Heat Caulking M/Cs, Terminal Glue Application M/Cs, Hot Plate Welding M/Cs, Air Leak Inspection M/Cs, EFC-Eng-ECUs, Wet-Leak-Tester-Modif, UC Injector Projects, 942l-IMVDiesels, High Speed Cameras etc. Denso (Thailand) Co. Ltd. 32,14,959 Denso Wave Inc. 6,076 Denso International Asia Pte Ltd. 41,590 Denso (Guangzhou Nansha) Co. Ltd. 1,85,48,592 Denso Tool & Die (Thailand) Co. Ltd. 8,77,661 Total 124,040,466 TNMM approach should be respected: on merits, as well as on principles of consistency and reasonableness 7.3 The Appellant has benchmarked the said international transaction by using entity level TNMM with OP/OC as PLI calculating to 16.23% which is much higher than the working capi....
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....h order). 7.8 It is relevant to note that during the previous financial years also the Appellant had entered into similar transaction with its AEs. During these years, the Ld. TPO accepted the transfer price of the international transaction to be ALP and had no adverse findings on the same. Further, it is pertinent to note that there has been no change either in the function-asset-risk profile in AY 2010-11 from the previous years. Summary of TPO's approach in Appellant's own case in earlier years Nature of International Transaction Summary of TPO's approach in earlier years Page reference Purchase of fixed assets Transfer price was accepted at arm's length by TPO in AY 2006-07, AY 2008-09 and AY 2009-10. Refer pages 250-255 of paperbook Volume II 7.9 Reliance is placed on Hon'ble Supreme Court's judgement in Radhasoami Satsang vs. CIT (193 ITR 321) where the principle of res judicata/ rule of consistency was laid down. Further, reliance in this regard is also placed on decisionscitedin Para 6.21 of this synopsis. Without prejudice argument: Appellant has provided a secondary analysis as well 7.10 Even though, this international transaction was benchmarked under T....