TaxTMI 
TaxTMI 
2023 (3) TMI 1600
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.... AO/TPO/DRP erred in not appreciating the business operations of the Appellant and its AEs, and disregarding the allocation of functions, risks and assets as adopted by the Appellant and the AE. 3 2 That the Id. AO/TPO/DRP erred in disregarding the approach adopted by the Appellant in the TP Report and further erred in rejecting the search carried out by the Appellant in selecting foreign comparable companies while benchmarking the overseas AE as the tested party 3 3. That the Id. AO/TPO/DRP erred in not appreciating that TP adjustment cannot exceed the total profit made by the Appellant Group from the international transactions entered into." 4. The ld. A.R. for the assessee submitted that the details of functions performed and risks assumed by each of the entity are detailed as follows:- 4.2 Entity Characterisation: The ld. A.R. submitted that with respect to the data content services of Unilog, Unilog India may be characterized as an Entrepreneur bearing normal market risk, Unilog LLC and Unilog Australia could be characterized as limited risk support service provider in relation to marketing, sales and front end liaising to Unilog India. 4.3 According....
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....nd marketing activities. The consolidated profits of Unilog Group is lower than the adjustment proposed 4.7 The ld. A.R. further submitted that since Unilog India is the ultimate holding company of the Group, as per the Indian Accounting Standards, Unilog India is required to prepare and maintain consolidated financial statements of the Group, including all its subsidiaries i.e., Unilog LLC and Unilog Australia. 4.8 The Consolidated Financial Statements of Unilog Group are provided below: 4.9 Basis the same, the ld. A.R. stated that the consolidated operating margins of the Group for FY 2017-18, for both the segments and for all the entities (including Unilog LLC and Unilog Australia), put together is as under: 4.10 In this regard, the total profits earned by the Group as a whole, from its external customers and incurring third party expenses is only 4.53% {on the operating cost). There is no element of intercompany / related party transaction in arriving at the aforesaid margin, and hence, the aforesaid results are not tainted. The aforesaid margins purely reflect the results of a third-party independent business operating in the market. 4.11 Hence, in a situatio....
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....rformed, risks assumed and assets employed by it. Hence, Unilog LLC and Unilog Australia is also ought to be appropriately remunerated for its operations and therefore, the profits earned by Unilog India is appropriate. Acceptance of Unilog LLC and Unilog Australia as Tested Parties 4.18. Basis the functional profile captured in the TP study report, the ld. A.R. submitted that Unilog India is the entrepreneurial entity and Unilog US and Unilog Australia are characterised as limited risk support service providers in relation to the marketing, sales and front-end liaising services provided. 4.19 As per Para 3.18 of the OECD TP Guidelines provides that "The tested party is usually the participant in a transaction for which profitability can be ascertained most reliably and for which reliable data on comparables can be found. The tested party will also typically be the party with the least intangibles," 4.20 For the class of international transactions under consideration, the AEs i.e., Unilog LLC and Unilog Australia have been chosen as the tested party due to the fact that the AEs do not own any significant intangibles, they are the least complex entities and the profitabi....
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....re of its international transactions under the Content Services segment is justified and needs to be accepted. 5. The TPO on examination of the TP document noticed following defects:- "5.2 From the examination of the TP document, the following defects have been found in the TP analysis carried on by the tax payer. i) The Unilog India's transactions being under review, in the absence of details of AEs, it becomes imperative to apply TNMM method over India entity rather than separately applying on US and Australian entities. The tested party should be less complex and financials and other factors like analysis of economic situation should be considered while choosing the tested party. In backdrop of this Indian entity is more suitable as tested party than the foreign AEs. ii) With regard to taxpayers' methodology to benchmark transactions with Unilog LLC USA, there is no information provided about the search parameters, keywords used, search matrix, parameters on which other comparables are rejected, neither the financials of the US entity are shared with the computation of the PLI margin. In backdrop of this, it cannot be assured that comp....
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....ccordingly, the ld. DRP rejected this ground of appeal of the assessee in its directions. Consequently, AO passed final assessment order. Against this, the assessee is in appeal before us. 6. We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in the case of M/s. Atmecs Technologies Pvt. Ltd. in IT(TP)A No.187/Bang/2021 for the assessment year 2016-17 vide Tribunal order dated 20.12.2021 wherein observed as follows:- 28. The next issue that requires consideration is the plea of the assessee that selecting foreign AE as a tested party was an appropriate method of determining ALP and the Revenue authorities were not justified in rejecting the plea of the assessee. On this issue, the contention of the learned Counsel for the assessee was that as per Section 92C(1) of the Act, the ALP of an international transaction is required to be determined using any of the prescribed methods, being the most appropriate method, having regard to the nature of transaction or class of transaction. However, in order to determine the most appropriate method for determining the arm's length price, it ....
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....price of the transaction lies with the taxpayer. Indian transfer pricing administration prefer Indian comparables in most of the cases and also accept foreign comparables in cases where foreign associated enterprises is less or least complex entity and requisite information are available about tested party and comparables." Based on the above, he submitted that even the Indian Government's stated / declared position on the issue is that the foreign AE can be considered as the tested party when the foreign AE is the less / least complex entity and requisite informati:-available about the tested party and the comparable. He submitted that based on the above, the following four conditions that need to be evaluated while concluding upon a party as 'tested party': ● The party that is the least complex in terms of functions performed, assets employed and risks undertaken should be selected as the 'tested party' i.e., the party to the international transaction whose functions are simpler to evaluate, which does not own valuable non routine intangible assets and does not undertake substantial business risks. ● Reliable information ....
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....rement analysis agreed with the client. Further, ATMECS India is responsible for the quality of the services rendered by it. ATMECS India undertakes the initial testing during the development process, and also on completion of the development, to ensure that the service meets the specification/ requirements of the project as agreed with the client. ● ATMECS India recruits, trains and retains skilled technical professionals and is responsible for reviewing and approving the overall plan/ strategy of resource allocation/ utilization. Retaining the talent and resources is a significant driver to maintain the quality of delivery. ● Further, the Intellectual Property Rights ('IPR') developed is generally owned by the client. ATMECS India perform functions as per requirements of clients, using its IPR. ● ATMECS US involvement in the performance and execution of the service and delivery is very negligible. It acts as a client facing entity for contracting purposes and helps ATMECS India establish its business in the US region. It merely acts as a distributor/ marketer for the offshore services delivered and does not have any valuable, u....
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....levant rules and provisions, basis which considering only party (i.e Assessee) as the relevant party would tantamount to reading something which is neither written nor intended by the legislation. The Indian TP regulation could be constructively construed to allow considering both Indian Assessee as well as overseas AE in the periphery of tested party. Even if Indian TP regulations were silent on this issue, it would be in line with common judicial position that international guidelines (such as OECD & UN TP Guidelines) could be restored to for interpreting local regulation unless they are expressly repugnant to each other. Thus, the term 'Enterprise' under TNMM and all other methods could include both the Assessee as well the AE being the other related party to the international transaction. 31. In support of his contention as above, the learned counsel for the Assessee, relied on the decision of ITAT, Bangalore in the case of IMS Health Analytics Services Pvt. Ltd. v. DCIT [2021] 124 taxmann.com 251 (Bangalore - Trib.) where it was held that where the functions and risks of the assessee are more complex in nature and numerous adjustments would have to be made, th....
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....g Associates Employed. This vital material has not been considered by the TPO but the assessee has been precluded from canvassing the said issue on the ground that the stand taken during the course of TP proceedings was not what was the subject matter of the TP documentation/TP study of the assessee. The question would be whether this could be the reason for rejecting the assessee's plea. This issue has been considered by the Tribunal in several decisions. 25. In Yamaha Motor (P.) Ltd., the question arose as to whether the word 'Associated Enterprise' can be given a restrictive meaning to mean the other party to whom the assesee has sold or purchased goods. It was held that under the Act and the Rules, the words 'Enterprise' and 'Associated Enterprise' have been used interchangeably and the arguments that the Enterprise will mean the assessee and the Associated Enterprise will mean the other party to whom the assessee has sold or purchased goods is incorrect. As could be seen from the definition of Enterprise given in section 92F(iii) and Associated Enterprise as defined in section 92A of the Act, it is evidently clear that the statute does not ....
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....titled to. In fact the TPO was rightly aware of his role when he has made an observation in paragraph 17.2 of the order dated 29-1-2015, wherein he would state that his office is responsible to ensure sufficiency of information/data and accordingly cannot be precluded to conduct a fresh search. However, when such is the legal position, as rightly understood by the TPO, the assessee should not have been foreclosed. Therefore, we are of the clear view that the findings rendered by the TPO, DRP and the Tribunal foreclosing the assessee's claim to refer to the foreign AEs as tested party is legally not sustainable." 34. The facts of the Assessee's case is similar to the case decided by the Hon'ble Madras High Court in as much as the Assessee had in its Transfer Pricing Study chosen the foreign AE as a tested party and the TPO refused to examine the said claim. The decision of the Hon'ble Madras High Court being the only decision available on the issue of a High Court, judicial discipline requires us to follow the same in preference to the decisions of Tribunal to the contrary. Following the aforesaid decision of the Hon'ble Madras High Court, we remand the issue with regar....
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....ate guarantee received from its arm's length be granted. In para 2.9 of the said direction of DRP as under : " 2.9 As far as the argument of corporate guarantee received by the taxpayer is concerned the same carries merit. In the interest of fairness, the TPO is directed to provide adjustment for the value of corporate guarantees received by the taxpayer form its AEs after verification of individual transactions." Accordingly, we set aside this issue to the record of the A.O./TPO to recomputed the ALP by considering the arm's length guarantee fees at 0.5% and further by providing appropriate adjustment for corporate guarantee received by the assessee from its A.E.." 8.1 In view of this, we remit this issue to the file of TPO to pass order in conformity with the above order of the Tribunal cited (supra). This ground of appeal is partly allowed. 9. Next Ground Nos.5 to 5.4 of the appeal, which reads as follows: "5 That the Hon'ble DRP erred both on facts and in law by imputing notional interest on the trade receivables and in doing so the Hon'ble DRP has grossly erred in agreeing with the Learned TPO's action of: 5.1 No....
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.... applicable for year under consideration that worked out to 3.3758% on receivables that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main ....
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.... it was stated that Hon'ble Delhi Bench in this case noted a decision of the Hon'ble Bombay High Court in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law: "(c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?" 23.6. Ld. CIT.DR submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/undercharging of interest on excess period of credit allowed to AEs for realiza....
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....v. DCIT [2017] 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions." 23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law." 36. Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon'ble Karnataka High Court in PCIT v. AMD (India)....