AI Drafter 
TaxTMI 
TaxTMI 
2025 (4) TMI 326
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....of TP study [Ground No.3] (ii) Adoption of Comparable Uncontrolled Price (hereinafter, the 'CUP') method instead of TNMM for benchmarking international transactions [Ground Nos. 4 to 7] (iii) Issues relating to Indian & Foreign Associate Enterprises (hereinafter, the 'AE') [Ground Nos. 8 to 11]. 3.1 Ground Nos. 1, 2, 12 and 13 being general, don't require specific adjudication. Hence, these are dismissed as such. Ground Nos. 14 and 15 are consequential and premature in nature; hence, these are also dismissed. 3.2 The Revenue has raised following grounds: - "1. Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in holding that the TPO has re-characterized the Intra Group Services Transaction? 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in not appreciating that TPO has not disallowed the Intra Group Services merely on the issue of non-substantiation of commercial expediency by the assessee but on several factors? 3. Whether Ld. CIT(A) was right in making lumpsum adjustment to the extent of 50% of Intra Group Services without using any of the transfer pricing method prescri....
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.... by the assessee were addressed by the Ld. TPO as evident from his order. The assessee raised the issue of multiyear data as against current years' data. However, the Ld. TPO, emphasizing on the Rule 10B(4) of the Income Tax Rules, had held that the multiyear data could be used only when the assessee had demonstrated that the data of current year were dependent on specific abnormal factors and thus, unreliable. However, the assessee had not brought on the record any evidence justifying such factors not only before us but also before the authorities below. The Ld. TPO had also held that the Rule 10B(4) of the Income Tax Rules did not mandate the use of multiyear data in general and that is why the Rule contains the word 'may' instead of 'shall'. The Ld. TPO took the current year data placing reliance on following case laws: - a. Aztec Software Technology [294 ITR (AT) (32) (Bang) (SB)] b. Honeywell Ltd. [2009-TIOL-104-ITAT-Pune] c. Customer Services India (P) Ltd. [2009-TIOL-424-ITAT-Del] d. Schefenacker Motherson Ltd. [2009-TIOL-376-ITAT-Del] e. Geodis Overseas (P) Ltd. [2011-TII-34-ITAT-Del-TP] f. TNT India Pvt. Ltd. [2011-TII-....
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....gy used for the application of CUP. The assessee has entered into an international transaction of receipt of services. It has exchanged a price with the AEs, for this transaction. That price is nestled under the head of 'law charges and other expenses under the expense head of 'operating expenses' (schedule 16 to profit and loss account). This is a fact and not a figment of the TPOs imagination. 23. We now have an international transaction and we have a price. It just happens that the price appears as a cost in the assessee's accounts. The TPO has compared this price that the assessee has paid with the price that has been paid by the comparables. This completely fulfils the requirement of CUP under Rule 108(1). The TPO has not compared the price in absolute terms as that would not have been reasonable. The TPO has compared the price paid as a ratio of sales. 24. Therefore the use of CUP for benchmarking this class of international transactions is appropriate. It has already been brought out earlier in this order that the benchmarking approach that has been followed by the assessee, while suffering from some serious fallacies, does not in substance ....
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.... 31. The argument that the assessee has taken that the benefit that it receives through these services need not be quantifiable in numbers. Such an argument does not belong to the world of arm's length behavior. It can be said with reasonable certainty that no independent party would make a payment of Rs. 76 Crores unless there was a visible benefit. The assessee has quoted some portions of the OECD transfer pricing guidelines, 2010 (OECD TPG) to support its contention. Let us examine what the OECD TPG has to say about this. 32. Para 7.23 of the OECD TPG reads as below. 7.23 In such cases, MNE groups may find they have few alternatives but to use cost allocation and apportionment methods which often necessitate some degree of estimation or approximation, as a basis for calculating an arm's length charge following the principles in Section B.2.3 below. Such methods are generally referred to as indirect-charge methods and should be allowable provided sufficient regard has been given to the value of the services to recipients and the extent to which comparable services are provided between independent enterprises. These methods of calculating charges would g....
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....or performed, should be ignored. (Emphasis supplied) 1.6.10. If a direct charge method is difficult to apply, the MNE may apply the charge indirectly by cost sharing, by incorporating a service charge or by not charging at all. Such methods would usually be accepted by the tax authorities only if the charges are supported by foreseeable benefits for the recipients of the services, the methods are based on sound accounting and commercial principles and they are capable of producing charges or allocations that are commensurate with the reasonably expected benefits to the recipient. In addition, tax authorities might allow a fixed charge on intra-group services under safe harbour rules or a presumptive taxation regime, for instance where it is not practical to calculate an arm's length price for the performance of services and tax accordingly [Emphasis supplied] 35. As can be seen the UN TP manual also accepts the possibility of such an international transaction existing only in the face of benefit flowing to the entity that receives the service. 36. The judicial decisions that the assessee has cited have been rendered in scenario's where th....
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....e an overall margin of 5% against 24% made by Kotak. Therefore, the analysis that this office set out to make, that is, to arrive at an arm's length level of expenditure to earn a margin as much as the assessee, can be made using Kotak as a comparable. Calculation of the arm's length level of expenditure 43. The assessee has sought that the expenditure under the head of other expenditure in the case of Kotak also be include to arrive at the arm's length level of expenditure. That is accepted as the assessee's IGS expense is also accounted for under this head. The amended calculation is given below. S. N. Name Operating Income (INR) Law charges and Professional charges (INR) Other expense (INR) Law and professional charges/Sales (%) A B C D=(B+C/A) 1. Kotak Mahindra Bank Ltd. 61,414,352,000 1,796,162,000 2,464,593,000 6.93 Transfer pricing proceedings of AE 44. The assessee has made a plea that since no transfer pricing adjustment has been made in one of the AEs providing the service, namely, American Express Services India Ltd (AESIL), the transactions with that A....
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....at the assessee failed to corroborate its claim vis-à-vis services rendered by its AEs along with the basis of working the arm's length margin of such transactions. 8. At the outset, the Ld. Counsel submitted that the assessee's income did not consist mainly of interest income as in the case of Kotak Mahindra Ltd. (hereinafter, the 'Kotak'. It was further submitted that the Kotak's unadjusted arm's length margin worked out at loss of (-) 76.47% on operating revenue of AY 2011-12, whereas it was profit in the present case. It was also submitted that the assessee's case of AY 2009-10 were factually different than the present case; hence, the Ld. CIT(A) erred in placing reliance on the finding of the AY 2009-10. It was contended that the material brought before the Ld. TPO and the Ld. CIT(A) were enough to conclude that the assessee had received services from its AEs and made payments in lieu thereof only. It was contended that the Ld. CIT(A) erred in concluding that there was enough material on record to infer that some services were availed by the assessee. However, the Ld. TPO had held otherwise on same sets of facts and documents. Such contradictions clearly demonstrated....
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.... result of services provided by its AEs. The Ld. CIT-DR further submitted that the assessee failed to bring any evidence before the Income Tax Authorities to show direct nexus between payment made in lieu of service provided to it and actual services provided by its AEs along with the costing thereof. Thus, in such circumstances, the Ld. TPO had rightly taken the cost of the services at NIL as against 50% held by the Ld. CIT(A), argued the Ld. CITDR. 9.1 The Ld. CIT-DR submitted that the assessee had received very generic service, if any, from its AEs as the assessee failed to demonstrate that it would had not performed had it not received such services. It was claimed by the assessee that the services received by it were broadly categorized as Technology Services, Risk Information Management, Head Quarter & Back Office support services etc. However, the assessee had not furnished any supporting documentary evidence establishing the receipt of the specific services from the AEs. The Ld. CIT-DR vehemently argued that the Ld. CIT(A) had not given any specific justification for allowing 50% relief. The impugned order could be termed as non-speaking order as it did not contain any c....
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....-rendering of similar services to third parties by the assessee, non-receipt of similar services by AEs of the assessee from third parties and nonavailability of information of prices charged in independent transactions of similar or identical nature in public domain. The Ld. TPO has compared the price that the assessee paid for receipt of services from its AEs with the price paid by the indigenous comparables. Since TP Study of the assessee was rejected by the Ld. TPO; therefore, the Ld. TPO applied CUP method for benchmarking particularly when the assessee failed to bring anything on the records suggesting alternative benchmarking approach. The Ld. TPO has categorically held that he has not applied the principle of Bright Line Test in the guise of CUP method. The Ld. TPO has done comparison between the ratio of Intra Group Services payment to sales of the assessee with the ratio of similar expenses to sales of the comparables. Here, the Ld. TPO has done comparison of the prices paid by the unrelated parties for rendering/receiving similar services amongst them. It is not a case of internal CUP. 11.1 We have perused the orders of authorities below, material on the records and a....