TaxTMI 
TaxTMI 
2023 (8) TMI 1638
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.... (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 the Assessee is acting as a contract manufacturer. 4. On the....
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....ng 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'. 14. On the facts of the case and in law, the Ld. TPO/AO have erred in alleging that no tangible or direct benefit was derived by the A....
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....eal." 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 Assessee is acting as a contract manufacturer when actually the Assessee is a manufacturer bearing all normal risks w.r.t to 'export of good for resale' and 'payment of sales margin' having failed to understand t....
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.... 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 tangible or direct benefit was derived by the Assessee from receipt of the IT support services, receipt of export support services and receipt of management services and in holding that the Assessee failed to furnish adequate evidences to demonstrate that the services were actually....
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....laga'). 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 held it to be a stewardship activity which the AE was bound to provide the assessee. Therefore, the arm's length price (ALP) of the said transactions of intragroup services was calculated at Rs. Nil. However, the ld. TPO did not apply any method and merely for providing the services a stewardship services calculated the Nil value of the said transactions. When the matte....
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....A') 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, product variation etc. Keeping the above in mind, the assessee has availed varied category of services, also submitted, and evidenced, (being IT, management, corporate sales, product marketing, finance, quality audit, etc.), as and when requested vide different agreements entered into between the parties. 9.4. The Ld. AR submitted that the relevant details of the above stated s....
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....ngth 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 and secondly TDK Malaga is not providing all these services but it helps in locating companies which can provided these services in India to the assessee company and other group concerns located in other parts of the world and only a minor amount is charged by TDK Malaga for its services. It was also submitted that the facts of the assessee are distinguishable to the facts of the case de....
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....gy, 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 OF ITSS Within TDK-EPCOS group, TDK AG employs a central IT department that renders IT services to all TDK-EPCOS group subsidiaries including TDK India. The IT systems and resources are used by all TDK-EPCOS group subsidiaries and thus, also facilitate the core business functions and processes of TDK India. With years of operating in the industry, TDK AG has been able to create an in-house pool of specialized and skilled re....
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....t 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 include 81.66% of the third-party cost and very minimal cost incurred by TDK AG itself i.e. 18.34%. This clearly suffices that there has been actual receipt of IT support as majority of the support services has been received from third parties. 2) Export Support Services ('ESS') a) NEED FOR ESS During FY 2013-14, approx. 55.54% (i.e. INR 3,840 / 6,914 million) and during FY 2014-15, approx. 55.18% (i.e. INR 3,546 / 6,426 million) of the total revenue of TDK India is from export activities. Therefore, it is necessary ....
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....aluable 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 of the group becomes pivotal. Accordingly,. The services availed by TDK India from TDK Malaga under MSS are in the nature of R&D Services, Quality management services, Internal audit services and other support services. TDK India is able to access best practices and develop efficiency through various types of reporting to regional HQ. Such incidental benefits cannot be directly linked with any tangible outcome It derives various benefits in the nature of daily check on operational performance of TDK India; alignment of TDK India's sales strategy with the Group strategy and adoption of global best practices, minimise production costs, etc. Based on the above, it can be concluded ....
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.... 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 assessee. It is not the case that the assessee which is carrying on manufacturing of electronic business has paid the intra group service charges for some other unrelated business activity. 19. 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 application to the facts of the present case. In the case of DIT (International Tax) vs. Morgan Stanley (supra), firstly, the observations were ren....
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....or 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, the economic and commercial benefits derived by the Assessee from intra group services. The Ld. TPO has not disputed any of the documentary evidences including the cost allocation. 23. In this regard, the Ld. Counsel also referred to the recent decision of Kolkata ITAT wherein on similar facts, the determination of IGS at ALP Nil was deleted by the Hon'ble bench in the case of AT&S India Private Limited (I.T.A. No. 1311/Kol/2018), wherein this Tribunal dealing with similar issue held as follows:- "It was alleged by the Revenue that the Ld. CIT(A) erred in concluding that the payment for intra-group services was at arm's length without examining the cost of such service provider and without examining mark-up element incorp....
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....cing 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 application to the facts of the present case. In the case of DIT (International Tax) vs. Morgan Stanley (supra), firstly, the observations were rendered in the context of an admitted factual position by the applicant before the Authority for Advance Ruling (AAR) that certain services were in the nature of stewardship services. Secondly, the observations were made by the Hon'ble Supreme Court as to whether stewardship activity rendered by the holding company for the Indian subsidiary in India would constitute a Permanent Establishment (PE) within the meaning of Article 5(2)(1) of the DTAA between India and USA. However, in the present case, the factual dispute is as to whether the IT services received by the assessee under the aforesaid agreement was in the nature of stewards....
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....e 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 /payable to Nalco Pacific) adhered to the arm's length principle Transfer Pricing Regulation Accordingly, We are of the view that the first ground for confirming disallowance by CIT (A) that no independent documentary evidence had been furnished by assessee to show that the fact of actual services having been rendered to assessee and Nalco Pacific too could not substantiate the claim for provision of actual services with documentary evidence, has no leg to stand." 25. Similar view was also taken by this Tribunal in the case of Akzo Nobel India Limited [TS-379-ITAT-2017(Kol)-TP], Almatis Alumina (P.) Ltd. [TS-302-ITAT-2019(Kol)-TP], etc. wherein the documentary evidences has been considered and the adjustment has been deleted. 26. In view of our conclusion that the Ld. TPO and Hon'ble DRP we....
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....5.27%) 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 made in the final assessment order. It is also submitted that the Hon'ble DRP for subsequent Assessment Years i.e., Assessment Year 2015-16 to 2017-18, has accepted the CUP method adopted by the assessee for calculating the ALP of the similar transaction of sale to its AEs. 33.1. On the other hand, ld. D/R submitted that ld. TPO and ld. DRP has rightly applied the transaction net margin method (TNMM) and has rightly proposed adjustment and, therefore, the same should be confirmed. 34. We have heard rival contentions and perused the material available on record. The assessee sells ferrites for consumption to its AEs. Ferrites are required in the process of manufacturing as an input material. Assessee has sold ferrites to AEs for resale and for consumption and also to domestic third party customers, however, sale of ferrites....
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....laga, 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 almost at par to the export sales to the AEs, and then only this contention of profit margin formula can be accepted. No such quantitative details have been filed at any stage. 37. Under these given facts and circumstances we restore this issue to the file of the Assessing Officer/TPO who shall call for the details from the assessee to examine the quantitative details of the export sales vis-àvis domestic sales and only if both are reasonably at par (i.e., +/- 10%), then only the internal TNMM method can be resorted to. For this, reasonable opportunity to file the all necessary documents shall be provided to the assessee. And, if it is found that the profit margin on export sales is better than the domestic sales then under such circumstances no adjustments will be called for. 38. Accordingly, Ground Nos. 7 & 8 for Assessment Yea....
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....see 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. 13,20,00,000 as against Rs. 1,32,00,000, who corrected the figure. As regards the provisions made for slow-moving item it is submitted that the assessee has already provided the manner of creation of aforesaid provision and justification for claiming deduction for the said sum on provision basis before the Hon'ble DRP and also submitted the details of such inventory on which provision was created in last 4 years. The Hon'ble DRP, however, directed the Ld. AO to examine such inventory details and consider the correct figure of Rs. 1,32,00,000 thereby upholding the approach of Ld. AO. 46. Being aggrieved with the order of Ld. AO pursuant to direction of Hon'ble DRP, the Assessee preferred an appeal before us for this transaction. 47. In this regard, the Ld. Counsel invited our attention to written submission filed by assessee before us wherein it has explained the ....
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.... 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 assessee is now in appeal before this Tribunal. 54. The Ld. Counsel for the assessee submitted that the Assessee had been incurring expenses for construction of an asset which was being debited under the head CWIP. The Ld. Counsel highlighted that on account of technological advancement, the division for which such expenditure had been incurred got obsolete and CWIP pertaining to the same was written-off and the same was inextricably linked to the business of the assessee, hence the same should be allowed as a business loss. 55. The Ld. Counsel drew our attention to the fact that the Ld. AO, in the draft assessment order, proposed to disallow the aforesaid claim lodged by the assessee holding it as capital loss not entitled for deduction as revenue expense which was also upheld by Hon'ble DRP by erroneously stating that the Assessee had not submitted the details of CWIP and th....