TaxTMI 
TaxTMI 
2026 (7) TMI 1804
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....t. 2. The Ld. AO/Ld. TPO/Ld. DRP erred in law arid on facts in concluding the Arm's Length Price (ALP) in relation to international transaction pertaining to payment of Sales Commission (hereinafter referred to as "procurement of intra group services") paid by Appellant to its associated enterprise ("AE") as "NIL" and thus erred in making an adjustment of INR 10,84,14,434. 3. The Ld. AO/Ld. TPO/Ld. DRP erred in law and on facts by not accepting the economic analysis undertaken by the Appellant is in accordance with the provisions of the Act read with the Rules for the determination of the arm's length price in relation to international transaction pertaining to procurement of intra group services without giving any cogent basis and without demonstrating the inadequacy or infirmity in the analysis so conducted by the Appellant and making modifications to this analysis in a subjective and arbitrary manner. 4. The Ld. AD/ Ld. TPO/ Ld. DRP erred in making the TP adjustment on account of procurement of intra group services without appreciating the fact that such services have been rendered by the AE to the Appellant based on an intercompany agreement b....
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....e business rationale for procurement of intra-group services i.e., sales support and represeritation services availed from the AE. 11. Without prejudice to the above, the Ld. AO/Ld. TPO/Ld. DRP erred on facts and in law, by failing to recognize that the procurement of intra-group services availed from the AE to the extent it pertains to sales made to third parties, ought to be allowed. 12. The Ld. AD/Ld. TPO/ Ld. DRP erred on facts and in law in confirming an adjustment amounting to INR 42,97,034/-on account of notional interest relating to the alleged delay in recovery of outstanding receivables pertaining to sales made to its AEs; 13. Without prejudice, the Ld. AO/Ld. TPO/Ld. DRP erred on facts and in law by failing to appreciate that in the facts of the case there was no cause or motive for the Appellant to shift profits out of India by not charging Interest on outstanding receivables of its AEs. 14. The Ld. AO/Ld. TPO/Ld. DRP erred on facts and in law in not appreciating that notional interest on receivables does not constitute an international transaction so as to invoke provisions of section 92 of Act. 15. That the Ld. AO/Ld. TPO/ ....
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....Transfer Pricing Method, as defined under the Act, by arbitrarily considering credit period of 60 days while computing interest on delay in realization of outstanding balances from AEs. 23. That the Ld. AO erred in Initiating penalty proceedings alleging underreporting of income under Section 270A of the Act. 24. Without prejudice to the above, the appellant respectfully submits that it has duly complied with the requirement to pre-deposit 20% of the disputed demand, demonstrating bona fide intent and willingness to cooperate with the appellate process. Recognizing the Appellant's compliance through the pre-deposit of 20% of the disputed demand, the appellant humbly prays for a stay order on the recovery of the remaining demand amount and keep the balance in abeyance until the final disposal of the appeal. This is to mitigate undue hardship and ensure fair adjudication of the matter. 3. The brief facts of the case are that the assessee is engaged in the business of manufacturing and supplying engineered seating solutions, including seat structures and wire frames, latches and hinges, wire seat suspensions and visor rod mechanisms used in passenger cars and ....
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....ions under the Transactional Net Margin Method ("TNMM") and claimed that the transaction was at arm's length. The TPO, however, rejected the benchmarking analysis adopted by the assessee. According to the TPO, the assessee had failed to establish the necessity of services, actual rendition of services and benefits derived therefrom. The TPO further held that no independent party would make such payment under similar circumstances. Accordingly, the TPO segregated the transaction, applied "Any Other Method" as the Most Appropriate Method and determined the ALP of the transaction at NIL, resulting in adjustment of Rs. 10,84,14,434/-. 5.1 The Ld. DRP confirmed the action of the TPO vide order dated 27.09.2024. The detailed findings recorded by the Ld. DRP on this issue are as follows:- "4.3 TPOs finding: "6. .....TPO's Comments on the issue of Intro Group Services: 6.1 The assessee's submission is discussed below in 4 sections nature of services, evidence of requisition, evidence of rendition and cost. 6.2 Nature of Services The assessee has submitted that it has availed the sales support and representation services (amounting....
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....essee. In this regard, reliance is placed on the judgment of Goodyear South Asia Tyres (P.) Ltd. vs. ACIT [2021] 123 taxmann.com 259 (Pune - Trib.) dt. 22 Oct., 2020 in which the Hon'ble ITAT has gone into the details of Intra group services and its allowability. The relevant portion of the judgment is being reproduced as under: "11. 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." Computation of ALP has been dealt with in section 920 which provides that: "The arm's length price in relation to an international transaction or... shall be determined by one of the following methods, being the most appropriate method... The mechanism for determining the ALP under these methods has been given in Rule 108. Insofar as the intra-group services under consideration are concerned, the determination of ALP primarily requires examination of three factors as to 1. Whether the services were actually availed? 2. Whether the costs are rightly allocated to the assessee? 3. Whether the payment by the assessee is at ALP?" The assesse....
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....he Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities." The undersigned is in full compliance with the above decision of the Hon'ble High Court. 6.7 After considering all the evidence, it is noted that the assessee has failed to provide the following information: i. A comprehensive break-up of various intra-group services that have been paid for ii. Any evidence of requisition or rendition of the service iii. Any evidence of basis of charge by the AE iv. Any evidence of how the AE's cost is distributed across various entities Including India In the absence of these crucial details, it is impossible to determine the benchmarking for the payments made for intra-group services. An Independent third party would not pay for services without having these details in its possession, 6.8 The OECD TP Guidelines offer a useful perspective on benchmarking IGS. The relevant portions ....
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....method are generally referred to as indirect-charge methods and should be allowable provided sufficient regard has been given to the value of the services to recipients and the extent to which comparable services are provided between Independent enterprises. These methods of calculating charges would generally not be acceptable where specific services that form a main business activity of the enterprise are provided not only to associated enterprises but also to third parties. While every attempt should be made to charge fairly for the service provided, any charging has to be supported by an Identifiable and reasonably foreseeable benefit. Any indirect-charge method should be sensitive to the commercial features of the individual case (e.g., the allocation key makes sense under the circumstances), contain safeguards against manipulation and follow sound accounting principles, and be capable of producing charges or allocations of costs that are commensurate with the actual or reasonably expected benefits to the recipient of the service. 7.29 In trying to determine the arm's length price In relation to intragroup services, the matter should be considered both from the pe....
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....um)], it was held by Mumbai Bench of the Hon'ble ITAT thot for determining the arm's length price each of the assessee's independent activities should be segregated. iii. The Chandigarh Branch of Hon'ble ITAT in the case of Anti-Infectives India Ltd. vs. Addl. CIT [TS-241-ITAT-2014(CHANDI)-TP) accepted TPO's reliance on Star India (supra) and further relied on Mumbai Bench ruling In UCB India Pvt. Ltd. [TS-8-ITAT-2009 (Mum)-TP] and held that "the TPO is empowered to apply appropriate method for each of the international transactions and as the service fee paid by the assessee was a separate class of transactions, the same is to be analysed separately.". iv. The Hon'ble Delhi High Court held in the case of Denso India Ltd. vs. ACIT (ITA No. 443/2013 and 351/2013) rejected aggregation of import transaction under TNMM, since facts of the case demonstrated that the arrangements made in relation to the transaction, when viewed in their totality, differed from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The Hon'ble High court upheld the approach of the TPO to scrutinize and benchm....
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....Representation Services. a) Appointment. Subject to the terms and conditions hereof, Service Recipient hereby appoints Sales Representative and its designated employees, contractors or consultants as a sales representative to act, and Soles Representative hereby agrees to act, in promoting and supporting the sale (the "Services") by Service Recipient to purchasers of its Products in the Territory. Sales Representative agrees to engage in the promotion and development of sales of Products, to maintain the necessary organization in connection with such activity, Including the financing requirements and proposals for such procurements, and to keep Service Recipient advised of Products' performance and any maintenance problems in the Territory. 4.5 In the TP documentation, it is stated that AAPL is making payment of sales commission fee to the AE for following purposes: Payment of Sales Commission Fees During the year under consideration, the Company has received certain Intra Group Services ("IGS") in the nature of Sales Support and representation services from its AE viz. P & C Group 1, Inc. ("P & C Inc."), that helps the Company in overall bus....
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....o provide the AE with a fixed flow of funds from Its Indian operations. 4.8 In the TP documentation, it is stated that the Business development and commercial activities are performed by the AE towards sale of assessee's products to the OEMs. Thus, in this transaction, significant role is delineated for the AE, yet, no satisfactory evidence of rendition of services has been filed by the assessee. 4.9 During the course of proceeding before the Panel, assessee furnished additional evidence regarding rendition of services in payment of commission transaction. The same being critical and going to the root of the matter is hereby admitted, to be decided on merits. The additional evidence furnished by the assessee towards rendition of intra group service is as under- "2. Set of Documentary Evidence (containing copy of Third-Party Purchase Order, Export Invoices raised by the Assessee, Shipping Bills and Supply instructions issued by AE.) Further, the assessee wishes to humbly submit, a brief summary of the set of documentary evidence submitted before the Hon'ble DRP as additional evidence (refer page no. 238 to 319 of the Additional Evidence Pa....
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.... Export Invoice Shipping Bill - Supply Instruction) 1. Yanfeng Adient (Wuhan) Seating Co. Ltd ("Yanfeng Wuhan") - Third Party 2. Camaco LLC/Camaco Inc. ("Camaco") - Group entity 3. Amvian Automotive Private Limited ("AAPL") - assessee 4. P & C Group 1 Inc. ("P & C Inc.") - AE 5. CS Nook For the purpose of the same, the assessee is submitting the PO No. D2UC-Amvian, which is issued by Third Party i.e. Yanfeng Adient (Wuhan) Seating Co. Ltd. In respect of this PO, P & C Inc., issues supply instructions to AAPL and specifying the notify party as ComacO In furtherance to the above, AAPL exports the products as per the supply instructions and PO specifications directly to the third party le, Yanfeng Wuhan and also notified Camaco in relation to the same. For the purpose of the same, AAPL has raised Invoice No. AMM127/20-21 for export of the required goods to Yanfeng Wuhan, which has been exported through Shipping Bill No. 6178596. 4 Set 4 'Lear Automotive System (Jiaxing) Co. Ltd' (Consisting of: - Purchase Order - Export Invoice - Shipping Bill -Supply Instruction) 1. Lear Automotive System (Jiaxing) Co. Ltd ("Lear Jiaxing") - ....
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....cturing facility to supply part of automotive components, by referring the supply order to the Indian entity, AE is furthering its own business interest. As per the details enumerated above, the AE is to be paid commission, for services rendered, post the receipt of the supply order from third-party by the assessee. While no such evidence has been furnished, reliance on these documents helps the assessee's cause in no manner whatsoever. At one place in the documents discussed supra, it is mentioned that APL would requisition the service from AE, the additional evidence of third-party purchase orders, discussed above, shows to the contrary. 4.12 In conclusion, the Panel would like to state that assessee has failed to furnish any satisfactory evidence that AE has rendered services to the assessee in lieu of commission payment. In such a transaction, the assessee should have been able to file documents such as e-mails to support requisition and rendition of services related to identification of new customers, status of Indian manufacturing facility specially in view of Covid lockdown, collection mechanism, negotiation for successful execution of the work order etc. Howeve....
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.... overseas markets. The Ld. AR contended that the AE assisted the assessee in procuring export business, managing customer relationships and facilitating execution of export orders. The Ld. AR drew our attention to the documentary evidence placed on record comprising purchase orders from overseas customers, supply instructions issued by the AE, export invoices and shipping documents to demonstrate the involvement of the AE in securing and coordinating export transactions. The Ld. AR also submitted that the TPO had erred in determining the arm's length price at Nil without applying any recognized transfer pricing methodology. 8. The Ld. DR, on the other hand, relied upon the orders of the lower authorities and submitted that the assessee failed to discharge the primary burden of proving actual rendition of services by the AE. The Ld. DR submitted that the documents relied upon by the assessee merely reflected execution of export transactions and did not establish that the AE had rendered services warranting payment of commission at 7.5% of sales. Accordingly, the adjustment made by the TPO and sustained by the DRP deserved to be upheld. 9. We have considered the rival submi....
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....1.85% A detailed discussion in this regard has been made in para 6.1 and 6.3 of the TPO order dated 27.07.2023. The assessee has submitted that the assessee is involved in the selling of goods/ services mainly to its independent customers and also to its AEs. The assessee doesn't charge interest on receivables from the unrelated customers while providing the same services as to provide to its AEs. As under transfer pricing guidelines the companies are assessed on the basis of the arm's length price which can be compared to an unrelated party scenario. Thus, considering the third-party arrangement in Assessee's case, there is no interest charged on the receivables. It has been further submitted that the assessee has not paid any interest on the outstanding payables to its AEs. Therefore, the assessee does not have any negative receivable position with its AEs. Hence, no separate adjustment is warranted in case of receivables. 5.4 The DRP has considered the submissions of the assessee and the order of the TPO. Under sub-clause (c) of clause (i) of Explanation to section 928 read with section 92F(v) and Rule 108(2)(c) of the IT, Rules 1962, any arrangement between....
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....t is warranted in regard to late realization of proceedings from receivables. The assessee's reliance as noted earlier, is on the decisions in its own cases for assessment years 2010- 11 and 2011-12. The issue has been elaborately considered in the case of Ameriprise India (P.) Ltd. (supra) and, again, in of Mckinsey Knowledge Centre (P.) Ltd. (supra). of Techbooks India International (P.) Ltd. (supra), taking note of the Explanation inserted by the case In the case Finance Act, 2012 to Section 928, it was observed that there remained no doubt that apart from any short-term or long-term borrowing, etc., or even advance payments or deferred payments, 'any other debt arising during the course of business' had also been expressly recognized as an international transaction. In the said decision, the 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 was also considered, wherein Hon'ble Bombay High Court set aside the view taken by the Tribunal in view of amendment to section 928. The decision in the case of Kusum Healthcare (P.) Ltd. (supra) was duly considered in the case of Ameriprise ....
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....ains no doubt that apart from any long-term or short-term lending or borrowing, etc., or any type of advance payments or deferred payments, 'any other debt arising during the course of business has also been expressly recognized as an international transaction. That being so, the payment/non-payment of Interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned In this clause of the Explanation, also become international transactions, requiring the determination of their ALP. If the payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to its ALP. The expression 'debt arising during the course of business' in common parlance encompasses, Inter alia, any trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debt arising during the course of business, it is liable to be visited with the TP adjustment on....
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....s AEs for late realization of invoices beyond such stipulated period is a separate international transaction. Allowing working capital adjustment in the international transaction of rendering of services can have no impact on the determination of ALP of the international transaction of interest on receivables from AEs beyond the stipulated period allowed as per agreement. In the case of Mckinsey Knowledge Centre (P.) Ltd. (supra), again, the Tribunal reiterated this reasoning and, inter alia, observed that: "...... In our considered opinion, whereas, the international transaction of purchase/sale of goods from/to AE contemplates comparison of the price charged/paid for such goods by impliedly including the interest for the period allowed for realization of invoices as per the terms of the agreement, the international transaction of charging interest on late recovery of trade receivable covers the period which starts with the termination of the period of credit allowed under the agreement, which is subject matter of the international transaction of purchase/sale of goods." 20. The Tribunal also explained that if an invoice is raised during the year and the proceeds....
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....and not the earlier decision of AY 2010-11. The assessee's reliance on the Delhi High Court's decision in PCIT v Kusum Health Care (P) Ltd (2018) 99 taxmann.com 431 (Delhi) is quite misplaced as in that case, the assessee had already factored in the impact of receivables on its pricing/ profitability by way of undertaking working capital adjustment to comparable companies' profit margins and any further adjustment for outstanding receivables would have distorted the picture and re-characterized the transaction. Further, the assessee's pattern of sales realization in that case did not indicate any arrangement of parking receivables with the AE. In the case at hand, no such analysis of pattern of receivables of different years have been given and under the circumstances the huge delay in receiving the receivables will partake the character of 'international transaction' for the purpose of transfer pricing benchmarking. 5.8 Further, in Kusum Health Care (P) Ltd cited supra, an important aspect of the matter was not brought to the notice of their lordships that this new explanation to section 928 was specifically inserted to reiterate the fact ....
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....ociated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets or such enterprises at the time of the transaction or at any future date. This amendment will take effect retrospectively from 1st April, 2002 and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent assessment years." 5.9 Thus, the context of incorporating the explanation to section 928 was to specifically bring Interest on delayed receivables within the purview of TP regulations. This aspect has not been considered in Kusum Health Care (P) Ltd cited supra. it is a fundamental rule of interpretation of an explanation to a provision that it must be interpreted on its own terms and tenor. A Constitution Bench of the Supreme Court has illustrated this principle of interpretation in Burmah Shell Oil Storage And Distributing Co. of India v CTO, 1962 SCR Supl. (1) 242, wherein Hidayatullah J, speaking for the court, observed as follows: "Now, the Explanation must be interpreted according to its own tenor, and it is meant to explain el. (1) (a) of the Article and not vice versa. It is an error to explain the Explanation with the aid of t....
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....) to section 92B, outstanding receivables constitute a separate international transaction requiring independent benchmarking. The Ld. DR also submitted that delayed realization of receivables amounts to a financing benefit extended to the AEs and, therefore, the adjustment made by the TPO, as modified by the DRP, was justified. 13. We have considered the rival submissions and perused the material available on record. The issue under consideration relates to transfer pricing adjustment of Rs. 42,97,034/- made on account of alleged delay in realization of receivables from AEs. We find that the assessee had benchmarked its international transactions under TNMM and its operating margin has been accepted by the TPO. It is also an undisputed fact that the receivables arise from the principal transaction of sale of goods to AEs. We have gone through the decisions substantiating the plea that once the tested party's margins are found to be at arm's length under the TNMM, and adequate working capital adjustment is made, there is no scope for a further separate adjustment on account of notional interest on delayed receivables from AEs: 1. Kusum Healthcare Pvt. Ltd. v. Pr. CIT [(2....