TaxTMI 
TaxTMI 
2023 (8) TMI 1638
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....the order of the learned Transfer Pricing Officer (hereinafter referred to as ' Ld. TPO') passed u/s 92CA(3) of the Income-tax Act, 1961, (hereinafter referred to as ('the Act'), subsequently confirmed by the Hon. Dispute Resolution Panel (hereinafter referred to as 'Hon. Panel') and consequently incorporated by the learned Deputy Commissioner of Income-tax (hereinafter referred to as 'Ld. AO') in the assessment order passed u/s 143(3) read with section 144C(13) of the Act, is erroneous on facts and bad in law. 2. On the facts of the case and in law, the Hon. Panel erred in confirming the adjustment of Rs. 30,26,00,000/- to the international transactions of the Assessee with its Associated Enterprises (hereinafter referred to as 'AEs'). 3. On the facts of the case and in law, the Ld. TPO/AO erred in concluding that the Assessee is acting as a contract manufacturer when actually the Assessee is a manufacturer bearing all normal risks w.r.t to 'export of goods for resale' and 'payment of sales margin' having failed to understand the business model of the Assessee with regard to 'export of goods for resale' and 'payment of sales margin' and erroneously concluded that....
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....and its arm's length pricing. 11. On the facts of the case and in law, the Ld. TPO/AO have erred in categorizing the transaction of Export support services' received from its AE to be in the nature of stewardship services and determining the arm's length price of such services to be Rs. Nil even after the Assessee established the nature of 'Export support services', the ensuing benefits and its arm's length pricing. 12. On the facts of the case and in law, the Ld. TPO/AO have erred in categorizing the transaction of 'Management services' received from its AE to be in the nature of stewardship services and determining the arm's length price of such services to be Rs. Nil even after the Assessee established the nature of 'Management services', the ensuing benefits and its arm's length pricing. 13. On the facts of the case and in law, the Ld. TPO/AO have erred in not appreciating the economic analysis undertaken by the Assessee for using the AEs as tested party with respect to the international transactions pertaining to 'payment of sales margin', 'receipt of IT support services', 'receipt of export support services' and 'receipt of management services'. ....
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....al transactions of the Assessee. 21. The Assessee craves leave to add to and/ or amend, alter, modify or rescind the grounds hereinabove before or at the time of hearing of the appeal." 3. The Assessee has raised following grounds of Appeal before Tribunal for AY 2015-16: "1. On the facts of the case and in law, the order of the learned Transfer Pricing Officer (hereinafter referred to as 'Ld. TPO') passed u/s 92CA(3) of the Income-tax Act, 1961, (hereinafter referred to as ('the Act'). subsequently confirmed by the Hon. Dispute Resolution Panel (hereinafter referred to as 'Hon. Panel') and consequently incorporated by the learned Deputy Commissioner of Income-tax (hereinafter referred to as 'Ld. AO') in the assessment order passed u/s 143(3) read with section 144C(l3) of the Act, is erroneous on facts and bad in law. 2. On the facts of the case and in law, the Hon. Panel erred in confirming the adjustment of Rs. 30,74,59,780/- to the international transactions of the Assessee with its Associated Enterprises (hereinafter referred to as ' AEs'). 3. On the facts of the case and in law, the Ld. TPO/AO erred in concluding that the ....
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....erred in categorizing the transaction of Export support services' received from its AE to be in the nature of stewardship services and determining the arm's length price of such services to be NiI even after the Assessee established the nature of 'Export support services', the ensuing benefits and its arm's length pricing. 10. On the facts of the case and in law, the Ld. TPO/AO have erred in categorizing the transaction of 'Management services' received from its AE to be in the nature of stewardship services and determining the arm's length price of such services to be Nil even after the Assessee established the nature of 'Management services', the ensuing benefits and its arm's length pricing. 11. On the facts of the case and in law, the Ld. TPO/AO have erred in not appreciating the economic analysis undertaken by the Assessee for selecting the AEs as tested party with respect to the international transactions pertaining to 'payment of sales margin', 'receipt of IT support services', 'receipt of export support services' and 'receipt of management services'. 12. On the facts of the case and in law, the Ld. TPO/AO have erred in alleging that no tangibl....
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....ance of capital work in progress written off relating to abandoned project 20,201,473 NIL 6. We first take up the common issue relating to adjustment made towards disallowance of payment for intra group services, namely, IT services, export support services, management support services, which have been paid to its AE, TDK Electronic Components S.A. ('TDK Malaga'). For the purpose of adjudication, we will take up the facts for Assessment Year 2014-15 and since the issue remains same for Assessment Year 2015-16, our adjudication shall apply mutatis mutandis. 7. During the year under consideration, when the case was being scrutinised by the Assessing Officer during the scrutiny proceedings, he observed that the assessee has claimed expenses for the payments made for intra group services to TDK Malaga towards IT Services, export services and management support services. The transactions falling under the category of international transaction, the ld. Assessing Officer referred the same to the ld. TPO for the purposes of calculating ALP of the said transactions. The ld. TPO while examining the said transactions rejected the benchmarking analogy adopted by the assessee and he....
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....eby TDK AG and TDK Malaga procures services from third party service provider as well as deploys its in-house dedicated resources. 9.2. With the objective of leveraging on the rich business experience of TDK AG and TDK Malaga of dealing in passive electronic components, the Assessee along with other group entities has entered globally into Framework Services Agreement ('FSA') with TDK AG for receipt of certain specialized services. 9.3. The Ld. Counsel invited our attention to the fact that in today's technology driven business environment, it is very important for the Assessee to have a systematic IT infrastructure in place, which helps Assessee in conducting its business in an effective manner. Further, considering the small team of IT personnel (i.e. 3 employees) employed by the Assessee, it becomes necessary to avail IT support from TDK AG as well to manage the wide network operations and the IT infrastructure. Further, considering the Assessee has significant export revenue, there exists a need for dedicated product marketing team comprising of skillful resources who are constantly involved in analyzing market conditions for the Assessee in terms of technology changes, p....
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....nt were in the nature of stewardship services. The TPO did not apply any of the six methods prescribed under sub-section (1) read with subsection (2) of Section 92C of the I.T. Act for the purpose of determining the arm's length price of the international transaction at Nil. He did not bring on record any comparable uncontrolled transaction for the purpose of determining the arm's length price of the international transaction at Nil. 10. The ld. Counsel for the assessee placed reliance on the decision of this Tribunal in the case of AT&S India Private Limited (I.T.A. No. 1311/Kol/2018), wherein also similar issue was for consideration before the Tribunal and the judgement of the Hon'ble Supreme Court in the case of DIT (International Tax) vs. Morgan Stanley and Co. Inc. (and vice versa) reported in [2007] 292 ITR 416 (SC), has been discussed and also reference has been made to the decision of this Tribunal in the case of Akzo Nobel India Ltd vs. DCIT reported in [2017] 81 taxmann.com 366 (Kolkata - Trib.). 11. Referring to these decisions, it is submitted that all the intragroup services, are very much beneficial for carrying out the business activity of the assessee company ....
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....,467/-. 15. Now, first we need to examine that what type of services have been provided by the AE to the assessee. Learned Counsel for the assessee has claimed that the assessee company in order to avail an effective network development and high productivity service standards the assessee is in continuous need of said services in the nature of product marketing as well as information technology, management support etc. The Assessee has also filed the written submission before us wherein it has explained in detail the need and consequent receipt as well as benefit derived from availing such services and the same is reproduced below: 1) IT Support Services ('ITSS') a) NEED FOR ITSS In today's technology driven business environment, it is very important for TDK India to have a systematic IT infrastructure in place, which helps TDK India in conducting its business in an effective manner. Further, considering the small team of IT personnel (i.e. 3 employees) employed by TDK India, it becomes necessary for TDK India to avail IT support from TDK AG as well to manage the wide network operations and the IT infrastructure. b) RECEIPT & BENEFIT ....
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....ce vendors on behalf of all the TDK group entities, ensuring right quality of services, maintain group's data security etc. Therefore, one cannot conclude that TDK AG is only acting as a pass-through entity for allocating third party costs to other TDK group companies. Hence, TDK AG is required to be remunerated appropriately for such third-party costs. Moreover, the IT department in TDK India comprises of only three people at local level. This only demonstrates the level of coordination and management handled by TDK AG the group level so as to ensure smooth flow of continuous IT support. Such dedicated IT support service in place ensures access to highly specialized talent and resources as and when a company requires. It also helps in maximizing a company's efficiency, saving business costs in the long run and provides access to latest technology. The fact that the company is in receipt of various application licenses to undertake its business operations could be verified from the fact that it has been using those licenses in its day to day business operation and without any separate cost being incurred by it. Further, the IT cost allocated to TDK India ....
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....rt controls. Therefore, there could be no denial from the fact that services have been received and benefits have been derived by TDK India from receipt of services in relation to Export support. 3) Management Support Services ('MSS') a) NEED FOR MSS Differing high value services like consulting, financial advisory, supply chain & logistics, human resource management helps an organization in focusing on core business. MSS helps in strengthening the competitive position by logical approach to analyze the complex and the strategic management issues. It brings value and measurable performance improvement by saving entity's valuable time and cost significantly. MSS are specialized for crafting solution to complex financial and strategic challenges of a multilateral enterprise. b) RECEIPT & BENEFIT OF MSS The regional HQ of each business division (i.e. TDK Malaga for TDK India's business division) collates details at micro level from each entity and then forwards it to TDK AG at group level, for planning the further plan of action. In order to establish oneself as an efficient enterprise, overseeing overall growth o....
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....eceived by the Assessee from its AE, the rationale/need for services so received vis-à-vis the business of the Assessee, benefit received by the Assessee, the benchmarking approach adopted by the Assessee from recipient's perspective and also from the service provider's perspective, manner of allocation of costs by the service provider vis-à-vis the Assessee. He also explained the meaning of nature of stewardship services and as to how the payment made by the Assessee to its AE, are not in the nature of stewardship services. He drew our attention to certain cases of Hon'ble High Courts in India and various Benches of Income Tax Appellate Tribunal on the approach that should be adopted in determining ALP in cases of intra group services received from group companies (AE). We will make a reference to these decisions later. 18. The observation of the Revenue authorities is not specific but general in nature that the assessee has failed on the benefit test but nowhere any specific instances have been given to show that the so-called services taken by the assessee company from its AE under various agreements are not related to the nature of business carried on by the as....
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....the most appropriate method. However, the TPO, in the instant case, determined the arm's length price of the international transaction at Nil without applying any of the methods prescribed under sub- sections (1) and (2) of section 92C of the I.T. Act. We find that the principle enunciated by the Hon'ble High Court of Bombay in the aforesaid case is squarely applicable on the facts of the present case. Hence, we find that the aforesaid action of the TPO (that is, the determination of the ALP of the international transaction under consideration at nil) is without jurisdiction and it goes against the basic tenet of the Indian Transfer Pricing Regulation. 21. In our opinion the facts brought to our notice by the Ld Counsel for the Assessee clearly show that the Assessee has a prima facie case. In respect of the payments made for various intra group services, the evidence regarding benefit received by the Assessee have not been considered by the Ld. TPO / DRP. 22. We therefore conclude that the Assessee has established the nature of services including quantum of services received from AE, that services were provided in order to meet specific need of the assessee for such services....
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....n the instant case, determined the arm's length price of the international transaction at Nil value without applying any of the methods prescribed under subsections (1) and (2) of section 92C of the I.T. Act. The AO, in the instant case, had not disallowed the expenditure under section 37 of the I.T. Act but only adopted the ALP determined by the TPO in his order. We find that the principle enunciated by the Hon'ble High Court of Bombay in the aforesaid case is squarely applicable on the facts of the present case. Hence, we find that the aforesaid action of the TPO (that is, the determination of the ALP of the international transaction under consideration at nil value) is without jurisdiction and it goes against the basic tenet of the Indian Transfer Pricing Regulation. 24. We have noted that the term 'stewardship activity' has not been defined by the I.T. Act. The Hon'ble Supreme Court has defined the term 'stewardship activity' in the matter of DIT (International Tax) vs. Morgan Stanley and Co. Inc. (and vice versa) reported in [2007] 292 ITR 416 (SC). In this connection, we wish to clarify that the ruling in the aforesaid decision, in our view, has no applicati....
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....puted the arm's length price of intra-group services received by assessee from Nalco Pacific under the aforesaid agreements at 'nil' value without applying any of the transfer pricing methodologies prescribed under section 92C of the Act read with rule 10B and 10C of the Rules. Accordingly, the action of the TPO in arriving at the arm's length price of the relevant international transactions at 'nil' value without application of any transfer pricing methodology, was without any basis and hence, was not sustainable. In the instant case, TPO was authorised to determine, by order in writing, the arm's length price of an international transaction in accordance with section 92C (3) of the Act. We find that the TPO did not make any adverse comments in his order upon the arm's length analysis carried out by assessee under the TNMM as per section 92C of the Act read with rule 10B of the Rules. Accordingly, we feel that TPO made proper enquiry and applied his mind to the details brought on record by assessee. He had agreed with the assessee that the international transactions covered by the TNMM analysis (including the intra-group service charge paid....
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....ird party customers. It was submitted that the sale of ferrites for consumption is miniscule to the total sales to AEs. Assessee applied Comparable Uncontrolled Price Method considering the third party price or price quotations received by the AEs from their existing vendors / suppliers. Since the sale price of the goods by Assessee is either equal to or more than the third party price, the transaction is concluded to be at arm's length. 32. Aggrieved the assessee is now in appeal before this Tribunal. 33. The ld. Counsel for the assessee submitted that the sale price of the goods by the assessee is either equal to or more than the third party price, therefore, the transactions were concluded at arm's length price only. It is also submitted that operating margin earned by assessee from sale of ferrites to AEs (i.e. -25.27%) is more than that of sales to Non AEs (i.e. 25.47%) on the domestic sale to 3rd parties. The assessee has rightly applied Comparable Uncontrolled Price method, for the purpose of evaluating the ALP of the said transactions. The TP adjustment proposed by the ld. TPO on this issue at Rs. 2,57,10,000/- has been confirmed by the ld. DRP and thus addition was m....
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....that the profit margin from sales to Associate Enterprises is better than the one from the sale to the third parties. Though it is an admitted fact that for the year under consideration the operating profit margin is (-) 25.27% whereas in the subsequent years it has scaled down to -6.94% for Assessment Year 2016-17 and a positive rate of 2.73% for Assessment Year 2017-18. We, however, failed to find any merit in the submissions made by the ld. Counsel for the assessee, because the only argument from its side is that its profit margin from the export sales to AEs, is better than export sales to domestic as well as to third parties but this ground in itself is not sufficient to brush aside the finding of the ld. Assessing Officer based on the proposed adjustment by the ld. TPO. Before us it has been accepted by the assessee that TDK Malaga, manufactures the ferrite goods for its AEs only on the basis of confirmed orders and specifications. The quantity of goods sold through export sale and domestic sales has not been placed before us. Only mentioning the profit margin will in itself not solve the purpose unless and until the quantity of goods exported in the domestic market are almos....
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.... accounting principles. However, if obsolete inventory written off relates to day-to-day consumables/inventory of stock, the write off is to be treated as revenue expenses on actual basis. Such write off cannot be allowed to be as revenue expense on estimate basis. The assessee has not submitted the details of the inventory written off as obsolete except for debiting in the P&L account. The AO is directed to examine such inventory details submitted to him/her and give specific finding as per directions contained herein above and to take the correct figure of Rs 1,32,00,000/-." 43. However, in the final assessment order under section 143(3) of the Act, the ld. Assessing Officer disallowed the provision for slow-moving and non-moving inventory. 44. Aggrieved the assessee is now in appeal before this Tribunal. 45. Firstly, the ld. Counsel for the assessee submitted that Ld. AO proposed to disallow Rs. 13,20,00,000 in the draft order u/s 143(3) r.w.s. 144C(1) of the Act on an adhoc basis treating the provision to be contingent in nature and not allowable as per the Act. Before the Hon'ble DRP, the assessee duly highlighted that the Ld. AO has erroneously disallowed Rs. 13,20,0....
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....e Ground No. 16 is allowed. 51. The last issue for our consideration is Ground No. 17, for Assessment Year 2014-15 relating to claim of loss towards capital work in progress written off at Rs. 2,02,01,473/- 52. Facts in brief are that in view of the fast-growing demand of new series of transformers in the year 2010, assessee company planned to establish a plant for manufacturing of the series of transformers. Certain expenses were incurred for the said plant but in the year 2013, due to low demand of the aforesaid series of transformers, and shifting of the market to automotive and high current transformer applications, assessee decided to close the transformer plant at Kalyani and the same was shut down. Expenses incurred on the said plant appearing in the capital work in progress at Rs. 2,02,01,473/-, was claimed as deduction. The ld. Assessing Officer treated the same as capital expenditure in the draft assessment order and the same was upheld by the ld. DRP stating that the assessee had not submitted any detail of capital work in progress. The ld. Assessing Officer passed the final assessment order in conformity to the directions of the ld. DRP. 53. Aggrieved the asses....