TaxTMI 
TaxTMI 
2025 (7) TMI 601
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....uck applications viz. instrument panels/cockpits, door panels, headlines, carpet and acoustic systems, bumpers, centre consoles, pillars and interior trim parts etc. For AY 2013-14, the assessee fled its return of income on 26.11.2013 declaring a total income at Rs. Nil along with Form 3CEB. The case of the assessee was selected for scrutiny under CASS. Accordingly, statutory notice(s) u/s 143(2)/142(1) of the Income Tax Act, 1961 (the "Act") along with questionnaire were issued and served on the assessee. In response thereto, the assessee furnished the necessary details/information/ explanation as called for from time to time. 2.1 Since, the assessee entered into certain international transactions with its foreign Associated Enterprises ("AEs") during the relevant AY, the case was referred to the Ld. Transfer Pricing Officer ("TPO") under the provisions of section 92CA(1) of the Act in order to determine the Arm"s Length Price ("ALP") in respect of such international transactions. 2.2 The assessee undertook the following international transactions with its AEs during AY 2013-14 and benchmarked each transaction by selecting the Most Appropriate Method ("MAM") mentioned in the....
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....tion of management fees with IAC Shanghai, vide his order dated 18.10.2016 passed u/s 92CA(3) of the Act for the reasons cited in para 8.1 to 8.6 and para 10 of his TP order. The gist of the reasons cited by the Ld. TPO are as under : (A) Rejecting the economic analysis documented by the assessee in its TP study report of considering TNMM as the MAM by selecting AE as the tested party by concluding that there are following issues:- (i) Financial statement of the AE is for the accounting year ended December 2012 and there is no linkage between the amounts appearing in the TP study report vis-à-vis financial statement of the AE. (ii) Comparable companies identified in the TP study report are not functionally comparable to the AE. (iii) Comparable data pertains to the financial year 2012-13 as against the year ending of the tested party which is December 2012. (Refer para 8.1 of the TP order) (B) Concluding that the mark-up earned by the AE is more than 5% as the TDS liability has been borne by the assessee. (Refer para 8.2. of the TP order) (C) Rejecting the cost allocation working submitted by the assesse....
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....t services using TNMM. The comparable companies in the Asia pacific region earned a mean PLI of 7.14%. The AE earned a PLI of 5% from provision of business support services to the appellant. At the end of transfer pricing proceedings, the Learned TPO undertook the TP adjustment by rejecting the choice of tested party. One of the reasons given by the TPO for rejecting the tested party is the different Financial Year adopted by the AE. It is seen from the details that the AE in China like many countries have adopted the calendar year as financial year rather than 1st April to 31st March, in practice in India. The appellant furnished the financial statements for both 2012 and 2013 and also given the calculation of its PLI as follows: Particulars 2013 2012 Operating Income 34,408,096 23,867,040 Non-operating income 145,953 72,714 Total Revenue (A) 34,554,049 23,939,754 Operating Cost 32,769,892 18,947,811 Business taxes and surcharges 73,408 39,454 General and administrative - 2,195,320 Financial expenses 295,495 1,628,366 Non-operating expenses 9,115 4,249 Total Cost (B) 33,147,910 22,815,200 ....
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....y the appellant. While recomputing the ALP of payment of management fee to nil, he has not done any comparability analysis other than quoting other method as per Rule 10AB. The learned TPO did not conduct any comparability analysis to determine the ALP and also not followed any method. This has been frowned upon by many ITAT decisions quoted by the appellant including the jurisdictional ITAT, Pune. 3.5 The learned TPO has also concluded that the services received by the appellant are routine services and hence fall under shareholder activity. This is against the concept of shareholder activity as per Para 7.10 of the OECD guidelines extracted by the appellant above in page 24. I agree with the appellant's submission that management services received enable the appellant to leverage on the vast knowledge and experience of the AE and to operate in an efficient and effective manner. Therefore, the payment of management fees cannot be regarded as 'shareholder's activity'. The learned TPO has also concluded that the appellant has failed to demonstrate the actual receipt of services and the benefit derived from such services. He is also not satisfied with the pro....
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...." 4. Dissatisfied by such order of the Ld. CIT(A), the Revenue is in appeal before this Tribunal raising the following grounds of appeal : "1) Whether in the facts and circumstances of the case, the Ld CIT(A) is correct in accepting the transfer pricing analysis conducted by the Assessee and for computing the arm's length price of the Assessee's international transaction pertaining to payment of management fees at Rs. 3,32,21,272/ taking AE as tested party with TNMM selected as most appropriate method to compute arm's length price without appreciating the facts that: a. The comparable companies considered by the assessee ore functionally different from the tested party. b. The accounting year of the tested party is different from that of the comparables considered by the assessee. c. The PLI is computed for tested party for accounting year ending with March 2013 whereas annual financial statements pertain to accounting year ending with December 2012. 2) Whether the transaction would be considered at Arm's Length Price, when the Ld CIT(A) has also agreed that the cost has been allocated arbitrarily (para 3.4). ....
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....tions in para 8.6 of the TP order as regards the receipt of services by the assessee from IAC Shanghai, the Ld. DR submitted that the assessee has failed to prove with sufficient and reliable documentation and evidence, the actual rendition of services by the AE and the benefit derived by the assessee from receipt of such services. The assessee has simply given the description of services rendered by the AE via exchange of emails. However, these are not sufficient to justify the price charged by the AEs. Since the assessee has not proved with proper documentation and credible evidence that the services were actually rendered by IAC Shanghai to the assessee and the payment is commensurate with the benefits derived therefrom, the Ld. TPO was very well justified in determining the ALP to be "Nil". In support thereof, the Ld. DR placed reliance in the case of - (i) Gemplus India (P.) Ltd. Vs. ACIT, (2010) 3 taxmann.com 755 (Bangalore-Trib.); and (ii) Yanfeng India Automotive Interior Systems (P.) Ltd. Vs. JCIT(OSD), (2023) 148 taxmann.com 332 (Ahmedabad-Trib.). 5.4 Accordingly, the Ld. DR prayed that the Ld. TPO"s order may be confirmed. Alternatively, the matter may be set aside to....
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....AC Shanghai has assisted IAC India in getting the potential Client i.e. Nissan by meeting the key decision maker of Nissan in Japan and gave him the perspective of India's operation and facilities. 2 17/09/2012 Company profile IAC Shanghai has provided support to IAC India for preparing the company presentation for Toyota pitch. 3 11/10/2012 Request for meeting with Dan Griffin Dan Griffin, who has been appointed as VP sales and program Management has visited India to meet concerned personnel of Mahindra and Mahindra as a courtesy meeting. 4 23/10/2012 Smart Foil - replacing paint option IAC Shanghai has helped IAC India. by arranging the support for replacing the paint option with Smart Foil option which has helped in a huge of cost savings by switching from soft-touch paint to smart foil on the Mahindra IP program. IAC Shanghai has requested the Fritz in Germany to visit to IAC India and study the product and provide assistance by directing the team down the investigation path. 5 11/06/2012 Any word on that Fiat contacts Danial Griffin has helped in pitching the potential client for IAC India 6 24/07/2012 Kick-Off Meeti....
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....ts. 5 24/07/2012 CI Card System CI-A4 The technique of CI cards has been developed at Chakan for systematic addressal of any CI project which would protect any process change approvals or enhance an evaluation for any investment approvals if required for the team to make the project successful. IAC Shanghai has provided its comments on the CI card and has helped to make it the best practice. 6 27/08/2012 Next trip Mr. Shawn has planned a visit to India for supervising the plant and to trouble shoot the queries and problems faced by India. 7 06/10/2012 Laser scoring machine IAC India has developed some SRS logo for low cost solution to cater multiple programs. IAC Shanghai team has review and suggested the changes for the LOGO. IAC International Automotive India Private Limited TP Assessment AY 2013-14 Summary of mail communication_HR and EHS support Sr. No. Date Subject Benefits derived 1 11/06/2012 IAC Asia Safety Audit IAC Shanghai has prepared and send the details of 3-round safety audit program to all IAC sites and links to access the detailed corporate safety standards and the audit criteria....
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....ewed and assisted with the creation of PARs for capital spending 7 15/01/2013 Staff meeting Invite for weekly staff meeting 6.3 So far as the benefits derived from the services are concerned, the Ld. AR demonstrated the same by showing the trend of increasing revenue and decreasing management fees in subsequent years. 6.4 Referring to page 40 of the paper book containing the litigation history in assessee's case before the lower authorities, the Ld. AR submitted that the impugned issue i.e. management fees paid by the assessee to its AE, IAC Shanghai is a recurring issue every year and in none of the subsequent AYs, any TP adjustment on this account has been made. He submitted that it is only in the relevant AY 2013-14 under consideration where the TP adjustment has been made. However, in the subsequent AYs where the assessee's case has been picked up for scrutiny, no such TP adjustment has been made by the Ld. TPO including the latest AY 2020-21. The relevant extract of the litigation history provided on page 40 of the paper book is as under : 2) Litigation history The litigation history of the appellant is given in the table below: Sr No. ....
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....hmark, all of which must be derived from comparable uncontrolled transactions. The TPO has demonstrably failed to do this. 3. It is further submitted that the TPO has exceeded his statutory jurisdiction by delving into the question of whether services were actually received or whether any benefit accrued therefrom. This constitutes a clear usurpation of the role of the Assessing Officer (AO). The Hon'ble Delhi High Court in CIT e. EKL Appliances Ltd. ((2012) 345 ITR 241 (Del)) has unequivocally held that the TPO's role is confined to determining the ALP and not to assess the necessity or benefit of an expense from a business perspective. 4. The TPO's conclusion that the services received by the Appellant constitute "routine shareholder activities" is a finding based on conjecture, devoid of any objective economic analysis or functional examination. This not only contravenes the settled principles of transfer pricing but also reflects a fundamental misunderstanding of the scope of the TPO's authority. 5. The Appellant had furnished voluminous and credible evidence in support of the receipt and allocation of intra-group services, including: ....
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....ities without searching for similar uncontrolled transaction between non-associated enterprises, straightaway treated the value of the international transaction to be at NIL. In this regard, it is relevant to note following observations of Hon'ble Delhi High Court in Cushman and Wakefield (India) Put. Ltd., [2014] 367 ITR 730 (Del.): 35. The TPO's Report is, subsequent to the Finance Act 2007. binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot-after a consideration of the facts-state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure." 23. As noted above, in the present cas....
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....enses has not been disputed on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT (A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained." 25. In view of the above, we are of the considered opinion that TPO as well as learned DRP were not justified in treating the value of international transaction of Payment of Corporate IT Support Services' to be NIL, in the present case. Accordingly, ground No. 2, including grounds no. 2.1 to 2.3, raised in assessee's appeal are allowed. Rehau Polymers Private Limited (ITA 658/PUN/2022) - 23. We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case has paid an amount of Rs. 6,71,58,603/- to its AEs for ....
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.... a method, wherein the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction is identified. Thereafter, the said price is adjusted to account for differences, if any and the said price is taken to be the Arm's Length Price. Thus, as per the said rule, for applying CUP method, the price charged for property transferred or services provided is required to be identified. However, in the present case, the TPO has not carried out any such exercise. Therefore, simply referring to CUP method without any reference to the actual uncontrolled transaction and the price charged therein clearly indicates that no CUP method is adopted by him. Under these circumstances, we agree with the contention of the Ld. Counsel for the assessee that no method has been adopted by the TPO for determining the ALP. The observations of the DRP that the TPO has adopted the Other method as the most appropriate method in our opinion is incorrect since there is no reference to any such method as the TPO has not specifically mentioned the Other method as the most appropriate method. Thus, the question that is to be answered is as to whether any adjustment of ....
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.... the ALP. It was not even any method prescribed by the Board. At the relevant time, i.e. for A.Y. 2008-09 Section 92C of the Act did not provide for other method as provided in Section 92C(1) (f) of the Act. The impugned order of the Tribunal holds that the method adopted by the Revenue to determine the ALP was alien to the methods prescribed under Section 92C of the Act. In the above circumstances, the Tribunal declined to restore the issue to the Assessing Officer for re-determining the ALP by adopting one of the methods as listed out in Section 92C of the Act. This finding of the Tribunal has also not been challenged by the Revenue." 29. We find the Pune Bench of the Tribunal in the case of INA Bearings India Pvt. Ltd. (supra) has held as under: "27. Now we turn to the second issue by which the TPO determined Nil ALP of the international transaction without applying any specific method. In this regard, section 92(1) of the Act provides that "Any income arising from an international transaction shall be computed having regard to the arm's length price". Section 92C of the Act deals with the computation of ALP. Sub-section (1) of 92C, at the material time, pr....
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....ctional High Court it becomes patent and the ratio decidendi squarely applies to the instant case as well since the TPO did not follow any of the prescribed methods for determining the ALP. He simply held that: "Based on the above, arm's length price of the services provided to the assessee by AE is held to be NIL.. The transfer pricing addition deserves to be deleted on this count as well. 30. Notwithstanding the above, we now proceed to examine if the ALP of the international transaction of payment of 'Management support services fees', is at ALP? 31. The assessee has placed on record a benchmarking analysis for provision of Management services by Ernst & Young (China) advisory limited, China for the financial year ending on 31st December, 2009. There is another Cost Verification Procedure Report by Ernst & Young for the financial years ending 31 December, 2009 to 2011, a copy of which is available at page 1326 onwards of the paper book. This Cost Verification Procedure Report also covers the year under consideration. It has been mentioned in this report that the services fee charged to INA India is determined based on hourly rates and time taken for....
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....td. (supra) while deleting the addition on account of TP adjustment on account of adoption of any of the prescribed methods has observed as under: "8. Heard both parties and perused the material available on record. We note that the TPO discussed the issue of Management Service Fees in its page 9 at para 10 and a show cause notice issued to the assessee as to why payment made towards management fees should not be treated as Nil. As pointed out by the ld. AR the assessee submitted that the details of services were furnished to the TPO vide Point No. 9 to 15 vide letter dated 29-10-2014 but however we note that the AO/TPO made upward adjustment regarding the segment management service fees of Rs. 5,08,05,398/- mainly basing on the issue arose for A.Ys. 2009-10 and 2010-11. Further, we note that the above said adjustment was made without following any prescribed method contemplated under the provisions of section 92C of the Act. We note that at Point No. 7 vide its reply the assessee is stated that the appeals for A.Ys. 2009-10 and 2010-11 were pending before the CIT(A). Therefore, it is clear that the TPO made the said adjustment without following the due procedure contempla....
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....u/s. 92C(1) of the Act, then such a determination of ALP frustrates the transfer pricing addition and deleted the transfer pricing addition made thereon by holding the methods prescribed for determining the ALP are statutory prescription, it is absolutely essential for the TPO to compute the ALP by adhering strictly to one of such methods. Thus, adjustment made in Research and Development fees and Management fees without following prescribed method under law is deleted. Therefore, ground Nos. 1 to 2.5 raised by the assessee are allowed." 31. The various other decisions relied on by the Ld. Counsel for the assessee also supports his case to the proposition that in absence of any of the prescribed methods for the determination of the ALP, such TP adjustment is not sustainable in law. Since the TPO in the instant case has not adopted any of the prescribed methods for determination of the ALP, therefore, respectfully following the decisions cited (supra), we hold that the addition made by the Assessing Officer/TPO/DRP is not in accordance with law for which the same has to be deleted. We accordingly set aside the order of the Assessing Officer and direct him to delete the adju....
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....eived by the respondent-assessee in respect of the 3 services which it had availed from its AE before holding that the ALP in this case is Rs. 40 lacs. The Tribunal further held that "consideration payable for the services availed of by the respondent-assessee to determine the ALP was not carried out". On appeal by the Revenue, the Hon'ble Bombay High Court held that: "Consequently, the finding of the Assessing Officer attributing nil value to nine of the services listed in the agreement which were not availed of by the Respondent-Assessee in the present facts was not justified. Moreover, not adopting one of the mandatorily prescribed methods to determine the ALP in respect of fees of technical services payable by the Respondent-Assessee to its AE, make the entire Transfer pricing Agreement unsustainable in law." In M/s Johnson & Johnson Ltd. (supra), the Tribunal allowed the respondent-assessee's appeal before it by deleting the addition of Rs. 200.82 lacs being the transfer pricing adjustment on account of sales promotion and publicity expenses being payable by the respondent-assessee's parent M/s Johnson & Johnson, USA. This on the ground that the T....
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....issions, it is most respectfully prayed that this Hon'ble Tribunal may be pleased to uphold the order of the learned Commissioner of Income Tax (Appeals), wherein it has been rightly held that a mere assertion of the adoption of the "Other Method" under Rule 10AB of the Income-tax Rules, 1962, is not sufficient for a valid Transfer Pricing adjustment. The learned CIT(A) has correctly concluded that, in accordance with Rule 10AB, the assessee or the Transfer Pricing Officer is required to bring on record a comparable uncontrolled transaction to justify the applicability and reliability of the method employed. Accordingly, it is prayed that the appeal of the Revenue be dismissed and the well-reasoned order of the learned CIT(A) be sustained in the interest of justice and equity." 7. We have heard the Ld. Representatives of the parties, perused the material available on records, paper book filed by the Ld. AR on behalf of the assessee as well as various judicial precedents relied upon by the Ld. AR and DR. The facts of the case are not in dispute. During the relevant AY under consideration, the issue pertaining to management fee paid by the assessee to its AE, IAC Shag....
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....ee's selection of AE as a tested party is not incorrect. Perusal of the Ld. TPO"s order reveals that the Ld. TPO, by merely making a mention of "other method" without bringing on record any comparable uncontrolled transaction, in an arbitrary manner, held the ALP of the international transaction of management fees paid by the assessee to its AE to be "Nil". We therefore find some force in the arguments put forth by the Ld. Counsel for the assessee that the approach of the Ld. TPO is fundamentally flawed in terms of adherence to the procedure laid down under Rule 10AB of the the Income-tax Rules, 1962 (the "Rules") as he has failed to demonstrate the adoption of "other method" as against TNMM adopted by the assessee for benchmarking the impugned transaction without brining on record any comparable uncontrolled transaction to substantiate the ALP determined by him to be NIL. We find that the Ld. CIT(A) has passed a detailed speaking order as per fact and law on each and every issue raised by the Ld. TPO. The Ld. CIT(A) has deleted the impugned addition by giving a very elaborate and reasoned finding consistent with both the statutory provisions under the Act/ Rules as well as judicia....
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....ents can be made to eliminate the material effects of such differences. The data used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. However the Rules allow usage of data relating to maximum of two years prior to the financial year, if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 7.3 In view of the above statutory provisions, we find the Ld. TPO has not complied with the requirements enshrined in Rule 10AB while adopting "other method" and rejecting the ALP of the international transaction of managements fee in accordance with the TP analysis conducted by the assessee. The Ld. TPO has applied "other method" without any reference to the actual uncontrolled comparable transaction and the price charged therein. It is a settled position of law that ad-hoc determination of ALP by the TPO dehors section 92C of the Act read with the applicable Rule thereunder, cannot be sustained. 7.4 We have also perused the judicial pr....