TaxTMI 
TaxTMI 
2023 (11) TMI 804
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....assessee had purchased and sold products such as, 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 ....
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....to obtain specific services or the rendition of actual services. Thus, he observed that in absence of such crucial 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 ther....
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....ffect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken at arm's length price in respect of the property transferred or services 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.co....
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....have to be separately benchmarked but if the transactions are so closely interlinked that they cannot be evaluated adequately on a separate basis, they can be aggregated. TNMM is the most appropriate method to benchmark the aggregated transactions. In this regard, the 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 packa....
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.... of paperbook Volume III 6.7 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 placed on following decisions wherein the Hon'ble Tribunal have held similarly 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 ....
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....r, and is better equipped to provide more efficient, effective and economical support services across functions, whether technical/ engineering or administrative. Denso International Asia Co. Ltd. ('DIAT') is the regional entity responsible for providing continuous support to all Denso entities operating in the APAC region including India for providing various services ranging from planning services, safety and environment support, 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 provide....
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....ironmental performance. c. Co2 Basic unit result (Energy Saving Data): Documents the analysis done to help reduce the usage of energy. d. Denso Eco Factory data (DECO) Factory Data. Refer pages 580 to 602 of paperbook Volume III Information System Develop and maintain a common system, upgrade and maintain Server, upgrade IT environment, internet gateway management, internet web access control, Anti-virus software updating and maintenance support and remote access gateway management. Benefits received: a. 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,....
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..... TPOin his order has recorded that since the Appellant itself has incurred personnel expenses amounting to Rs. Rs. 22,75,69,660/- and legal and professional expenses amounting to Rs. 1,99,31,437, the services received from its AE are duplicative in nature. It is submitted that this finding of Ld. TPO/CIT(A) is not correct for the simple reason that the nature of services received from the AE and services performed by the Appellant are completely different and there is no overlap between them. The cost of intra-group services pertains to services availed from overseas employees of the AE who are specialists in their field and assist all the group companies in the region. These are specialized services provided by Appellant's AE to all 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 m....
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....e those costs); . d) Costs relating to compliance of the parent company with the relevant tax laws; e) Costs which are ancillary to the corporate governance of the MNE as a whole" The Hon'ble ITAT in GE Money Financial Services (P.) Ltd. v. ACIT [2016] 69 taxmann.com 420 (Delhi-Trib.)has also defined the shareholder activities as follows in Para 37: "f....Generally shareholder services are those services which are not a. required by the assessee i.e. does not fulfill the need test but are required by the ownership for the purposes of maintaining and safeguarding its own interest. b. which are not actually received by the assessee and those services are received by the owner for safeguarding ownership interest. c. which does not have any potential possible and foreseeable 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, ....
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....s failed to prove such fact. He submitted, when various transactions entered by the assessee are not closely linked, the aggregate approach cannot be adopted. Thus, he submitted, the TPO was justified in proceeding under CUP method and since, there could not have been any comparable uncontrolled transaction in similar situation, he has taken the ALP at nil. In support of such contention, he relied upon the following decisions : (i). International Flavours and fragrances (India) P. Ltd. vs. DCIT, (2023) 152 taxmann.com 196. (ii). Akzo Nobel India Ltd. vs. Addl. CIT (2022) 136 taxmann.com 369. (iii). Akzo Nobel India Ltd. vs. Addl. CIT (2022) 145 taxmann.com 468 (Delhi). 14. We have considered rival submissions and perused materials on record. As discussed earlier, the assessee has entered into various international transactions with its AE during 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 tran....
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....est. As could be seen from the materials placed on record, there is an agreement between the group entities for intra-group services. Further, in course of proceedings before the TPO, the assessee has furnished voluminous evidences, which demonstrate that the assessee has received various services such as planning services, safety and environment services, information system, procurement services, human resource services. Under the planning services, the assessee has received services relating to business planning so as to strengthen and improve regional management system and to organize and run meetings and try to resolve the common issue among group companies. In this context, the assessee has placed on record the minutes and agenda of the Asia Presidents conference containing the name of the senior personnel who had attended the planning meeting. Assessee has also placed on record 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 busi....
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....bally common training etc. Such services have benefited the assessee in human resource development, recruitment of suitable candidates and cost saving by avoiding consultant, identify and implementing further improvements in compensation structure, human resource development and recruitment of suitable talent, effective compliance with labour laws, lesser rate of attrition thereby saving time and cost etc. 18. Thus, as can be seen from the aforesaid facts, not only the assessee has received services from AE, the services have resulted in tangible benefit to the assessee. In fact, both the Assessing Officer and learned first appellate authority to some extent have agreed that the assessee had received certain services from AE. However, they have rejected assessee's claim by observing that such services are general in nature and may fall within shareholders activity. In our view, the 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 t....
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....granted partial relief to the assessee by allowing a mark-up of 2% on the written down value on account of expenses. 22. Before us, learned counsel appearing for the assessee has submitted as under : 7.1 "The Appellant purchased certain small value capital goods worth Rs. 124,040,466 from its AEs which were utilized by the Appellant for the purposes of manufacture of automotive components. During the year, the Appellant has purchased around 300 items from its AEs. These were mostly in the nature of tools to be used as part of machines. These goods were supplied by the AEs on cost plus a markup of 11%. 7.2 These capital goods are proprietary items which are specific to Denso Group. They are either manufactured by Denso Corporation, Japan or any of the other Denso Group entities . Accordingly, the nature, specifications, quality etc. of the fixed assets under consideration is unique to 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 2....
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....IT(A) instead of benchmarking the transaction and comparing it with an uncontrolled transaction, simpliciter disallowed a certain percentage of the markup charged by the AEs. This failure of Ld. TPO/CIT(A) to apply any method to benchmark the said transaction is violation of Section 92C r.w. Rule 10B of the Rules. For this, reliance is placed on EKL Appliances (supra), and the decisions cited in Para 6.10 of this synopsis. 7.6 Furthermore, the Ld. TPO and Ld. CIT(A) while disturbing the ALP of two international transactions, have accepted TNMM for the remaining 8 transactions of the manufacturing business. As held by the Hon'ble Delhi HC in Magnetti Marelli (supra), it is not open for the tax authorities to accept TNMM for a segment as a whole and then subject one individual item of expense to another method (like CUP). 7.7 It is pertinent to note that the value of fixed assets purchased by the Appellant has been accepted by the customs authorities ( Special Valuation Branch 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 accep....
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....nalysis by stating that the selected comparable companies are engaged in manufacturing while the Denso group entities are not engaged in manufacturing the goods that were imported by the Appellant. . Herein the CIT(A) has erred by: - Erroneously ignoring the fact that all the assets imported are Denso's proprietary assets and are manufactured within Denso Group. - principal business activity of AEs is also manufacturing. 7.15 These facts are clearly recorded in the FAR analysis of the transfer pricing report of the Appellant. The Ld. CIT(A) has also erred by ignoring the evidence furnished by the Appellant by way of backup working of expense incurred by the AE on account of supply of these capital assets (on sample basis). (Refer page 191 of of paperbook Volume II) 7.16 It may also be noted that the total value of these purchases amounts to only 1.67% of the turnover of the Appellant i.e., Rs. 7,107,941,517/-. Even when these purchases are compared to the gross value of fixed assets, then also these comprise only 3.43% of the total value of fixed assets owned by the Appellant, i.e., Rs. 3,613,067,013/-. Thus, all the purchases pertain to items re....