TaxTMI 
TaxTMI 
2025 (11) TMI 401
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....y of Lear USA. The assessee company is primarily engaged in the manufacture and assembly of automotive seating and electrical systems. It also provides design and engineering support services to its group companies and customers in the automotive industry, particularly in relation to automotive seating systems and interiors. All the factories operated by the assessee are cumulatively referred to as the "manufacturing segment" and the engineering centers are referred to as India (IEC) segment or "service segment". First round of assessment proceedings: 2.1 For AY 2016-17, the assessee filed its return of income on 17.10.2016 declaring total income of Rs. 27,72,90,010/-. The case of the assessee was selected for scrutiny under CASS. During the relevant AY, the assessee had entered into various international transactions with its Associated Enterprises ("AEs") and therefore the case was referred to the Ld. Transfer Pricing Officer ("TPO"). In the first round of the assessment proceedings, the Ld. TPO vide his order dated 31.10.2019 made transfer pricing adjustment of Rs. 109,99,25,961/- with respect to the following transactions : (i) International transaction related to manufac....
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.... order passed u/s 143(3)/254 r.w.s. 144B r.w.s. 144C(1) dated 31.03.2023 which was challenged by the assessee by filing objections before the Ld. DRP. 2.3 Before the Ld. DRP, the assessee raised the following objections pertaining to allocation of RHQ charges : 1. "6.1. Issue: On the facts and in circumstances of the case, and in law, the Ld. AO/TPO erred in computation of the proportionate adjustment (INR 3,12,90,000) in relation to the manufacturing segment wherein the Ld. TPO/AO did not reduce the value of RHQ charges from the cost base of manufacturing segment even though there is a separate adjustment on the transaction of RHQ charges, thereby leading to a double adjustment on RHQ charges." The assessee contended that the value of RHQ charges should be reduced from the cost base of the manufacturing segment to eliminate the effect of double adjustment. After considering the submission of the assessee, the Ld. DRP did not find any merit in the claim of the assessee that the entire cost of RHQ charges should be removed from the operating cost as it will give skewed picture. The Ld. DR accordingly directed that no interference is called for in the working of the PL....
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.... is separately tested and adjusted whereby the RHQ charges allocated to manufacturing segment form part of the cost base while calculating the adjustment. Hence, the impact of the adjustment of the RHQ fees is already considered in the manufacturing segment. Accordingly, the Assessee humbly submits that the adjustment pertaining to the RHQ fees be deleted to avoid a double adjustment on it. Further, without prejudice to the above contentions by the Assessee, it is submitted that the Ld. TPO has violated the transfer pricing regulations by applying an addition-hoc proportion of 50% while making an adjustment on the transaction of RHQ charges." The assessee contended that the entire adjustment made by the Ld. TPO/AO on allocation of RHQ charges should be deleted as it is already forming part of the adjustment proposed in the "manufacturing segment". After considering the submissions of the assessee, the Ld. DRP upheld the benchmarking of the transaction by the Ld. TPO with respect to the transaction of payment for RHQ fees observing that in the absence of specific details regarding the costs, determination of ALP by the TPO using the other method wherein 50% of costs allo....
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....the cost base of the manufacturing segment, which is already benchmarked separately, leading to a double adjustment. Prayer The Appellant prays that the Ld. AO be directed to reduce the value of RHQ charges from the cost base of the manufacturing segment while computing PLI, to eliminate the effect of double adjustment. Ground No. 4 On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP erred in making an ad-hoc adjustment of 50% of the value of RHQ charges in an arbitrary manner, which is in contravention to the principles of section 92C of the Act. While doing so, the Ld. AO/Ld. TPO/Ld. DRP have erred in not appreciating: - The Hon'ble Tribunal has categorically accepted the rendition of the services - The fresh benchmarking submitted by the Appellant (vide the additional evidence submitted before the Ld. DRP) as per the directions of the Hon'ble Tribunal which demonstrates the computation of the ALP in an independent scenario by taking Appellant as the Tested Party Prayer The Appellant prays that the ad-hoc adjustment computed by the Ld. TPO ought to be dele....
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....ed to bring on record a suitable comparable uncontrolled transaction and the price charged therein ("CUP") to justify the applicability of the "Other Method" as per the requirement of Rule 10AB of the Income Tax Rules, 1962 ("the Rules") r.w.s. 92C(1) of the Act. 5.2 The Ld. AR submitted that there is no other way to benchmark the impugned transaction as against the benchmarking method applied by the assessee since either all the other prescribed methods for computation of ALP are not possible to apply or they are not applicable to the impugned transaction. Referring to the transfer pricing study report for AY 2016-17, he submitted that the assessee had duly analyzed the facts of the impugned transaction and accordingly selected the most appropriate method ("MAM") by rejecting the other methods for the reasons provided therein, the relevant extract of which is reproduced below (pages 692 to 693 of the paper book refers) : "9.4.2. Most appropriate method The most appropriate method is that method which, under the facts and circumstances of the transaction under review, provides the most reliable measure of an arm's length result. Because the selecti....
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....the arm's length operating results in case of international transaction pertaining to payment of RHQ fees to Lear Shanghai. 9.4-3.5. Transactional net margin method Taking into consideration, the fact that none of the other methods were applicable and considering the fact that relevant data for application of the TNMM was available, TNMM has been considered as the most appropriate method to determine the arm's length operating result of international transaction pertaining to payment for RHQ services to Lear Shanghai. 9.4.3.6. Such other method as may be prescribed by the Board Considering that no transactional level information with respect to uncontrolled transactions is available, such method has not been considered as the most appropriate method. 9.4.4. Application of the most appropriate method After reviewing all of the transfer pricing methods discussed, we concluded that, given the fact and circumstances, the TNMM provides the most reliable measure of an arm's length result for Lear India's international transaction pertaining to payment of RHQ fees." 5.3 In support of the above contentions, the Ld. AR relied on the following de....
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....assessee by Lear Shanghai, the Ld. TPO held that the charges paid for RHQ services were not at arm's length and computed the ALP of the international transaction of allocation of RHQ charges as NIL without applying any of the method prescribed u/s 92C of the Act (para 7.6 of the TPO's order on page 415 of the appeal set refers). Accordingly, the Ld. TPO made an adjustment of Rs.22,37,81,961/- which was incorporated by the Ld. AO in the final assessment order against which the assessee filed an appeal before the Tribunal. The Tribunal in the first round of appeal held that the assessee has indeed received services from its AE and the benefit test applied by the Ld. TPO has no relevance (para 6 of the Tribunal's order on page 177 of the appeal set refers). The Tribunal rejected the use of Foreign AE as a Tested party for benchmarking the impugned international transaction and directed the Ld. TPO to conduct a benchmarking analysis by taking the assessee/Lear India as a Tested party. The relevant extract of the decision of the Tribunal is reproduced as under: "33... Reverting to the international transaction in totality, we have found above that the RHQ services were actu....
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....rtaining to RHQ charges. Additionally, the Ld. TPO held that there was no mandate in the order of the Tribunal to consider all the transactions afresh with aggregation approach (para 3.5 of the TPO's order on page 161 of the appeal set refers). Pursuant to the directions of the Tribunal, the Ld. TPO held that he had attempted to find out comparable companies to benchmark the aforementioned international transaction, using the assessee as the tested party, but failed to bring out any comparable company due to limitation of available databases (para 3.5 of the TPO's order on page 162 of the appeal set refers). Consequently, the Ld. TPO determined the ALP using "Other method" as per Rule 10AB of the Rules and made an ad-hoc adjustment of 50% of the charges paid by the assessee to the AE resulting in a transfer pricing adjustment of INR 11,18,90,980/-. On objection being raised by the assessee, the Ld. DRP did not accept the contentions of the assessee with respect to adoption of aggregation approach for benchmarking the allocation of RHQ fees by observing as under : "9.3.1. In the first part of this ground of objection, the assessee claims that as the manufacturing segment ha....
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....specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts." On analyzing the instant case in line with the above Rule, we find that the Ld. TPO has failed to bring on record a suitable comparable uncontrolled transaction and the price charged therein, while adopting the 'Other Method" as the most appropriate method for benchmarking the impugned transaction. Further, without bringing any such comparable on record, the Ld. TPO arbitrarily made an ad hoc adjustment of the 50% of the RHQ charges paid by the assessee to its AE, Lear Shanghai. Thus, in our considered view, the aforesaid benchmarking exercise conducted by the Ld. TPO is not in accordance with Rule 10AB of the Rules and hence, unsustainable in the law. The Ld. TPO has not compiled with the provisions of the Act read with the relevant Rule to determine the ALP of the international transaction by applying one of the methods prescribed under section 92C of the Act. 1....
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....ordance 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."... 14. In the case of Rehau Polymers Private Limited v. ACIT (supra), the Pune Tribunal held as under : "25. However, in the instant case, although the TPO has made a reference of CUP method in para 32, page 23 of his order which was selected in the earlier year, however, the TPO has not carried out any such exercise for the price charged or paid for the property transferred or the services provided in a comparable uncontrolled transaction. As per Rule 10B of the Income Tax Rules, CUP method is 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 applyi....
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.... of the Ld. Counsel for the assessee that the RHQ charges are incurred by the assessee in the course and furtherance of its business activities which are broadly divided into manufacturing and services segment. Accordingly, these charges are inextricably linked to the business of the assessee and aggregation approach ought to be adopted for benchmarking this transaction. Further, the benchmarking analysis conducted by the assessee for benchmarking the service segment using TNMM as the most appropriate method taking the assessee as a Tested Party is not disputed by the Ld. TPO. The RHQ charges allocated to both the segments are forming part of the cost base of these segments respectively and by adopting the aggregation approach, these charges are benchmarked using TNMM taking the assessee as a Tested Party, which is in accordance with the specific directions of the Tribunal. However, the adoption of the aggregation approach may result into a slight increase in the adjustment pertaining to the manufacturing segment but the same would still be in line with the directions of the Tribunal in the first round of proceedings. We find some force in the above contentions of the Ld. AR. It is....