TaxTMI 
TaxTMI 
2026 (7) TMI 869
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....customers. 3. The Assessee filed its return of income for AY 2021-22 on 15.03.2022 declaring total income of Rs. 2,96,37,789/ -. The return was processed u/s. 143(1) and subsequently, the case was selected for scrutiny, and the statutory notices were duly served on the Assessee. Since the Assessee had international transactions with its Associate Enterprises (AEs), the AO made a reference to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP). The TPO proposed for TP adjustment of Rs. 4,05,32,639/- towards payment of management charges. The TPO also made downward adjustment on protective basis towards margin amounting to Rs. 1,20,22,317/ -. The AO passed a draft assessment order incorporating the TP adjustments. 4. Aggrieved by the TP order, the assessee filed its objection before the Dispute Resolution Panel (DRP). The Assessee also filed its additional evidence comprising of mail evidence before the DRP relating to management charges. The DRP seem to have called for remand report from the office of TPO and the same have been furnished. However, the DRP upheld the order TPO. The AO passed a Final Assessment Order incorporating the adjustment purs....
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....% degrowth in heavy commercial vehicles and 27% in light commercial vehicles (where Brakes India's presence is significant). 8.2 On perusal of submission made by the Assessee, we find that sale of Brake Division of Brakes India Private Limited (BIPL) in FY 2019-20 witnessed 18% decrease over previous year and resultant reduction in profitability with fixed cost remaining more or less the same. 8.3 Considering the above facts of extraordinarily recessionary year - FY 2019-20 (AY 2020-21), the TPO comparing 3 years weighted average PLI of comparable companies (where two normal years are there) with that of PLI of Brake Division of only impugned assessment years data, will not be an equitable comparison. Therefore, the TPO has to consider either weighted average of 3 years of both the comparable companies with weighted average of 3 years PLI of Brake Division or Comparing FY 2019-20 PLI of Brake Division, BIPL with that of FY 2019-20 PLI of comparable companies. 8.4 We note that the I.T Rules under Rule 10B(2) and 10B(3) require reasonable adjustments to be made to eliminate, material affects due to conditions prevailing in the market and read as follows....
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....9.10.2015 (S.O. 2860 (E)) that the concept of multiple year data and range would take care of the issue at hand. We are of the view that the Notification which in fact clearly holds in clause (2) referring to "Data set to be constructed under Rule 10C(A)" wherein it clearly states the manner of choosing previous two years has to be on the basis of there being similar comparable, uncontrolled transactions. 8.7 In the case on hand there is not similar comparable uncontrolled transactions in the previous two years and hence the data of average 3 years cannot be considered for only the comparable companies. Thus, the plain reading of the Notification itself would entitle that there has to be comparability viz a viz Rule 10B(2) and 10B(3) applications for the previous financial years to even be considered. 8.8 Therefore, the Notification supports the Assessee's contentions along with the I.T Rules under Rule 10B(2) and 10B(3) and the OECD guidelines require reasonable adjustments to be made to eliminate, material affects due to conditions prevailing in the market and capacity utilization. In the above factual matrix, we are of the considered view that the ....
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....gins used by the TPO in the TP order are not consistent with the margins calculated from the Annual Report. Further, the TPO has not given year wise margins in the TP order. Therefore, we direct that the margins from the annual report of the comparable companies have to be considered as they represent the actual figures. Further we are also of the view that the OECD guidelines and Income Tax Rules mandate adjustments to account for material differences caused by market conditions. This ensures a 'like-to-like' comparison to determine the most accurate ALP for the subject period. Therefore, following the coordinate bench decisions in the case of Brakes India Pvt. Ltd (supra) and M/s. Shibaura Machine India Pvt. Ltd (supra), we observe that to account for pandemic-related market effects and under-absorption of fixed costs, it is imperative that single year margins of the Assessee should be compared with single year average margins of comparables. Accordingly, we direct the AO/TPO to determine the ALP by comparing the Assessee's margins for AY 2021-22 with the single-year average margins of the comparable companies for AY 2021-22 to be computed on the basis of the Annual r....
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....see filed additional evidence substantiating the need cum benefit. The DRP admitted the additional evidence and called for a remand report from TPO. The TPO vide remand report dated 19.03.2024 had once again reiterated his stance and had given a report stating that the evidences are not fulfilling. Accordingly, the DRP has upheld the TP order and brushed aside the detailed need benefit documentation furnished by the Assessee. 16. The Ld.AR invited our attention to the fact that, the Assessee avails management support services under various heads viz. Nature of Service Amount in INR Management Services 98,10,010 Finance and Accounting Services 16,00,416 Human Resource Support Services 304,006 Central Technical Services 2,26,30,816 Quality Control Services 61,87,391 Total 4,05,32,639 17. The Ld.AR also clarified that only around 11% of AE cost is allocated to India basis the actual time spent for the services. The Ld.AR also mentioned that the assessee, by way of additional evidence before the DRP, has filed detailed need benefit documentation along with copies of sample e-mail evidence for every category of service availed to demonstra....
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....n identification of comparable companies. Therefore, effectively the TPO and the DRP have assumed the power of an Assessing Officer in considering whether an expense is allowable or not. The AR also placed reliance on the decision in the case of Hon'ble Delhi High Court in the case of EKL Appliances Limited and submitted that it is not open to the TPO to question commercial rationale of the Assessee's business decisions as to how the Assessee should conduct the business and incur expenditure in the interest of the business. 20. The Ld. DR, on the other hand, argued that though the Assessee has submitted mail evidence as additional evidence before the DRP, the Assessee has not substantiated that the services have indeed been availed by the Assessee. The Ld.DR relied on the remand report submitted by the TPO and, reiterated that Assessee has not been able to submit any evidence in respect of actual cost incurred by the AE and also argued that the evidence submitted by the Assessee are not strong enough to prove the receipt of services from AEs and the mails submitted are mostly in the nature of routine services and hence the payment to AEs is not warranted. 21. We have ....
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..../s Heidelberg India Pvt. Ltd., Singapore, it stated that similar such agreement is entered with 12 other constituent entities, as per Appendix 21 of the agreement. When the services are rendered to 12 other constituent entities, the basis of allocation of 50% of the cost to the Assessee is found to be unreasonable." The Assessee wishes to humbly submit that 50% of the cost incurred by the AE for provision of the services is only charged to all the beneficiaries. i.e. all the group companies. However, the TPO has erred in wrongly concluding in the remand report that 50% of the cost is allocated solely to Assessee and thereby concluded the allocation to be un-reasonable. It is pertinent to note that the TPO initially has stated that cost allocation has not been submitted by the assessee whilst on the other hand has also stated that the cost allocation made by the AE is unreasonable, which is contradicting to the TPO's own observations. The Assessee further wishes to humbly submit that detailed cost allocation sheet regarding the cost allocated to HIN by its AE was not available with the Assessee at the time of Assessment proceedings. Hence the same was submitted as ....
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.... not deriving any benefit to the Assessee. There are mail communications just giving the details of the available machinery stock which could be taken for distribution. These are just intimations of a seller to a prospective buyer. There are e-mail correspondences about ppt presentation preparation. There are e-mail correspondences with regards to a customer in Poland going bankrupt, which is not relevant to the Assessee. The COVID protocols given by the AE, were furnished. The Assessee humbly submits that more than 200 sample mail evidences were submitted towards the services received under this head of management services to prove that the Assessee has received constant support from the AE on various occasions. The actual benefits received during the year along with relevant sample evidences are as follows: (i) Discussion on sales strategy for new sales pitch and assistance in finalizing the customer presentations (Subject: Change in customer mindset Made in China product; Re: CX 92 Technical details for HIN 08 03 21 meeting. Annexure Pg 29) (ii) Updating of data by central team to the regional teams regarding the update of global project Phoenix. (Subject: Phoenix pr....
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.... by HIN during the year: (i) The regional team supports all its beneficiaries by having update calls at regular intervals and discusses topic on CAPEX, compliances, budgets credit approvals. (Subject: AP Finance Monthly Telco, Annexure 4, Pg 12- 14) (ii) The group company has extended its support in reviving the credit policy for HIN (Subject: RE Credit policy Annexure 4, Pg 12- 14) (iii) Providing legal advice on settlement with Rave Scans (Sub: RAVE Scans; Re Settlement Meeting with MD Rave Scans v1, Annexure 27-34) (iv) Discussion on EPT policy guidance and review (Subject: FW_EPT info to territories, Annexure 68-71) (v) Discussion of lost orders and update on LC for customers (Subject: RE_Printmann_Letap_Abarna - LC updates - Annexure 4, Pg 170 to 182) (vi) Discussion on revaluation of inventory, logistics cost, selling cost and admin cost planning (Subject: AOP 2022 CoS P&L Review HIN (4)) c) Human Support Services. • The Assessee submits that though HIN trains the marketing personnel locally, the TPO failed to appreciate the fact that the central team has successfully developed regional policies and scorecards which are aligned to the Grou....
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....entory Risk is with the Assessee. Further the evidences furnished by the Assessee in the form of Sales order delivery expectation and status discussion, shipment delays and discussion on delayed deliverables and requesting for discounts are in the nature of normal course of trade between a buyer and seller. In this scenario, the benefit accruing to the Assessee out of any services rendered by the AE, if at all, is questionable. It is pertinent to note from the FAR of the Assessee that the risk of overstocking/understocking of goods is borne by HIN while the AEs also bear limited risk in this regard to the extent of direct sales made by them. (i) Follow ups with regional teams with respect to orders received, shipment details and undertakes regular follow ups, analyses reasons with the team for shipment delays and provides alternate solution. (Subject: Possible shipment delays, Annexure 9, Pg 10 to 14) (ii) Detailed discussion on freight cost with all the teams. (Subject: FW_ Ocean Freight Cost Rates - current cost developments - India - switch to exw or FOB German _ European seaport, Annexure 9, Pg 15 to 21) (iv) Detailed discussion on cost control, customer retention a....
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.... sales campaign Annexure 8, Pg 5) (ii) Customer relationship and improving the business. Subject: Consumable portfolio review Annexure 8, Pg 26 to 27 (iii)Sharing details of machinery where there is delay in installation due to covid 19 for the purpose of warrant start date. (iv)Investigation on fake spare parts available in market (Annexure 9, Pg 372 to 378) (v)Discussion on abnormalities report on offset press (Annexure 9, Pg 387 to 390) Based on the mail evidences, it is clearly evident that the group has extended its support in ensuring quality control and also assisted in relationship management by circulating recent trends in the market, new policies and protocols approved by HQ, measures taken to retain global accounts, identifying gaps in existing systems and addressing the issues. f) Gathering regional customer requirement and trends The team ensures consistency in market researches, quality assurance and control for products, and share best practices. This involves achieving Competitive intelligence through gathering and analysing local and regional market information about products, customers and competitors within the industry to support strategi....
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....n allowed and hence there is no need to allow the technical support fees paid to HAP without appreciating the fact that the payment was made to two different entities and service received were also different. The description and evidences submitted by the Assessee convey that these are for post sales and pre sales support and for onsite training to sensitise about the products. The assessee is already paying the AE, Service fees and Technical support and Audit fees under the head Other Support Services of RS. 44,15,652/- and training fees of Rs. 16,08,531/-, which has been duly allowed in the order u/s. 92CA(3). Further no such evidences of travel of the employees to the manufacturing facility of the AE was furnished. (i) Discussion on sales strategy, conducting workshops on data collection and analysis, Data Management - Information Data Management Issues, Competitor Analysis (Annexure 6, Page 1 to 10) (ii) Conducting trainings and schedule being circulated to all regional entities (Subject: Further Sales Trainings in April and May Annexure 6, Pg 9 to 11) (iii) Discussion on Sales Strategy - Comparison of products and their performance for pitching (Subject: FW_ CI - 2....
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....venue cannot now be allowed to question the quality of such service. Even if we have to examine the quality of service, the nature of service rendered by the AE seems to be inextricably connected to the core business operations of the assessee and the assessee seem to have benefited from such services as the said services is in relation to operations as well as into administration. All these evidence are substantial and do not confirm the DRP and TPO allegation of the same being vague and routine expenses. Therefore, we conclude that the assessee has substantiated the benefit derived. 24. We find that the TPO while holding the ALP at Nil, has disallowed the entire expenditure incurred by the assessee. We are of the view that the jurisdiction of the TPO is confined to the determination of the ALP of an international transaction in accordance with the provisions of Chapter X of the Act read with Rules 10A to 10E. The TPO is required to examine the method employed and the comparables selected for determining the ALP and commercial expediency of any expenditure incurred by the assessee cannot be the basis for determining the ALP at Nil. In assessee's case incurring expenditure t....
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....o hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised." 25. We also refer to the jurisdictional Tribunal decision in the case of AMEC Foster Wheeler India (P.) Ltd Vs DCIT reported in (2022) 142 taxmann.com 382 (Chennai - Tib), wherein this Tribunal has held that " ... According to us, the Assessee in the present case is able to prove with evidences the services rendered by the Associated Enterprises for which the Assessee has paid Management fee for availing various support services pursuant to the Management service agreement entered with its Associated Enterprises. In view of the fac....
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....hinking. Accordingly, in respectful compliance to the same, we hold that the Assessee has rightly aggregated and benchmarked this transaction under TNMM. Accordingly, we hold that the TPO having accepted the overall TNMM analysis, was not right in excluding Global Account Management charges for separate benchmarking analysis. Accordingly, we set aside the order of lower authorities and direct the Ld.AO to delete the impugned addition of Rs. 5,08,36,826/- on account of downward adjustment of payment of management fees towards global account management charges. All the grounds of appeal raised by the Assessee on this issue are therefore allowed." 30. In the case of Bonfigioli transmissions Private Limited v. DCIT [2019] 101 taxmann.com 42 (Chennai - Trib.) had held that: "Admittedly the business of the Assessee is a consolidated one. The services referred under 'Corporate Services" are intrinsically linked to its manufacturing and sales activity. These two services cannot be separately demarcated. Corporate services are the services rendered, which has helped the Assessee ingenerating the business in respect of marketing and trading. This being so, in view of the deci....