TaxTMI 
TaxTMI 
2026 (9) TMI 1231
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.... In response, ld. AR of the assessee attended and submitted relevant information as called for from time to time. 3. During the year under consideration, assessee has entered into international transactions. Accordingly, a reference was made to Transfer Pricing Officer (TPO) u/s 92CA of the Act. Various transfer pricing documents containing functional and economical analysis were submitted and placed on record. BACKGROUND OF THE ASSESSEE AND ITS GROUP ARE AS UNDER : 4. McCain Foods Limited ("McCain Canada") was founded in 1957 and began with the production facility in Florenceville, New Brunswick, Canada. McCain Foods has become one of the world's largest manufacturers of frozen French fries and potato specialties. McCain Canada, together with its affiliates worldwide has been referred to as the McCain Group. The product portfolio of the Group comprises fries, dollar chips, wedges, and potato patties and pancakes. It also provides pizzas with various toppings, such as pepperoni and beef along with a range of desserts, including cakes, fruit and cream pies. Its beverage section covers lemon iced tea and orange and grape juices. In addition, the Group offers a variety of....
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....996. McCain Foods (India) is a wholly owned subsidiary of McCain Foods Limited, Canada. McCain India has been engaged in business of trading and manufacturing of frozen french fries and potato specialties in India and subcontinent countries. 9. The broad business segments of the McCain India have been encapsulated below: • Trading: Since its incorporation in 1996, McCain India has been engaged in the trading of frozen French fries and potato specialties. The Company imports French fries and other products from its respective associated enterprises and sells the same to various institutional buyers including McDonald's, KFC, Pizza Hut, Oberoi Group, Taj Group, etc. throughout the country. McCain India also exports frozen French fries and potato specialties to South East Asian countries. • Manufacturing: In the year 2007, the McCain India had setup a manufacturing facility in Mehsana in Gujarat engaged in manufacturing of French fries and potato specialties, potato flakes and Idli. The manufacturing segment of the McCain India is highly dependent upon the availability of specific varieties of potatoes. Ownership Structure 10. The ownership struc....
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.... available nor the detailed calculation of the PLI in the documents was submitted by the assessee. The assessee has considered the average margin of the comparable identified at 7.05% for US region and 5.97% for UK region. In respect of the case of the comparables selected by the assessee, neither sufficient details are available to ascertain profitability nor sufficient details are available in public domain to carry out comparable analysis. Accordingly, he rejected the submissions of the assessee. TPO proceeded to benchmark by carrying out fresh TP study by employing fresh research and TPO proceeded to determine the ALP for trading segment as under :- COGS of the assessee 664,603,893 Net Sales as per assessee 438,918,760 Gross profit as per assessee -225,685,133 Arm's length profit *8.33% 36,561,933 Difference 262,247,066 International transaction related to import of finished goods excluding purchases in respect of high sea sales of Rs. 165,086,041/- 160,934,070 % of transaction with AE excluding high sea sales 24.22% Proportionate Adjustment 65,503,221 13. With regard to benchmarking of manufacturing segment, TPO observed that ....
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....ted the submissions and method adopted by the assessee to benchmark the same, proceeded to benchmark at nil and proceeded to make the whole payment of intra group services as TP adjustment. 15. On receipt of the TPO order, the draft assessment order was forwarded to the assessee on 25.12.2017 and as per the record, assessee received the same on 21.01.2018. When the assessee was contacted, assessee submitted that it has opted to file appeal before ld. CIT (A), accordingly, the assessment order u/s 143(3) of the Act was completed and final assessment order was passed u/s 143(3)/144Cr.w.s. 92CA(3) of the Act. 16. Based on the TP adjustment and while finalizing the final assessment order, the AO observed during the proceedings that assessee has claimed an amount of Rs. 10,90,814/- under the head 'agronomy expenses'. When the assessee was asked to justify the above claim and why it should not be treated as capital expenditure like in earlier years. In response, assessee has submitted as under:- "During the year the assessee has incurred expenses relating to agronomy activities amounting to Rs. l0,90,814/-. The assessee is in the business of manufacturing and trading in fr....
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....ods for manufacturing of finished goods. He held that these expenses are clearly in the nature of capital expenditure. With the above observations, the AO further observed that the issue under consideration was decided by the ITAT in favour of the assessee and Revenue is in appeal before the Hon'ble Delhi High Court. With the above observation, he proceeded to disallow the above-said expenditure. 18. Aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A)-44, New Delhi. After considering the detailed submissions of the assessee, ld. CIT(A) partly allowed the grounds raised by the assessee and TP adjustments as under :- Particulars Adjustments as per TP order CIT (A) findings Adjustment on Management fees : (Ground 1 to 1.3 of appeal 176,868,703 70% of the addition was sustained on an ad-hoc basis. Trading Segment : Sale of manufactured goods (Ground 2 to 2.4 of appeal) 63,503,221 Upheld the Ld. TPO's approach. Manufacturing segment : Sale of manufactured goods (Ground 3 to 3.4 of appeal) 26,727,793 Partly allowed (inclusion/exclusion of comparables) 19. Aggrieved with the above order, both assessee and Revenue ar....
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....than the manufacturing activities of its AEs (a position that is inconsistent with the Ld. CIT(A)'s treatment of the Appellant as the tested party when it manufactures finished goods for its AEs); 2.3 rejecting the Appellant's application of the TNMM based on irrelevant considerations (e.g., that the Appellant did not provide the annual reports of the com parables), rather than the relative merits of the methodology; and 2.4 without prejudice to the Appellant's other contentions, applying the resale price method without making appropriate adjustments to improve the comparability of the analysis, in contravention of the Indian TP Regulations', a Guidance Note issued by the ICAI as well as the OECD Guidelines : SALE OF FINISHED GOODS 3. The Ld. CIT(A) erred on facts and in law in substantially confirming the additions made by the Ld. AO/ Ld. TPO to increase the income of the Appellant by INR 26,727,793 relating to its sale of finished goods to its AEs. In particular, the Ld. CIT(A) applied the TNMM in an unreliable manner that is inconsistent with the Rule 10B of the Rules and the OECD Guidelines including: 3.1 applying the....
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....company owns certain intangibles in the form of trade mark when the TPO has established functional similarity and creation of brand value is not on account of marking but because of superior services. The order of Ld. CIT(A) is without giving due cognizance TPO order? 3. Whether the order of the Ld. CIT(A) is perverse on facts in rejecting the comparable Balaji Wafers Pvt. Ltd. on the ground that these comparable company is not functionally similar and also the fact that annual report is available in ACE TP data base. The order of Ld. CIT(A) is without giving due cognizance TPO order? 4. Whether, on the facts and circumstances of the case, the Ld CIT (A) is justified in deleting the addition of Rs. 10,90,184/- on account of Agronomy activities ignoring the fact that the same is capital in nature, resulting in enduring benefit to the assessee in the form of agricultural produce? 20. The assessee has filed the aforesaid Additional Grounds No.5 & 6 on the direction of the Bench during the course of the hearing on November 9, 2023. After hearing both the sides, the same are admitted. 21. At the time of hearing, ld AR of the assessee submitted as under :- ....
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....up, the transaction should be considered to meet the arm's length standard as embodied in the Indian TP Regulations. Further, as a secondary analysis, the Appellant aggregated the transaction of payment of management fee with other principal transactions under manufacturing segment using TNMM as the most appropriate method for benchmarking the manufacturing segment. The Appellant has maintained appropriate documentation and evidence to support the payment of management charges and IT support charges. Further, the Appellant contends that it is not within the powers of the tax officer to question the commercial decisions of the Appellant as to whether the services are required to be availed. Besides this, it may also be noted that the provision of services by related enterprises to each other to leverage on the expertise available within the related enterprises is a common practice amongst the Indian corporate groups as well. It may be noted that such Indian corporate groups pay for such services, while at the same time maintaining their own administrative set up. Hence, the payment for these services complies with the arm's length standard prescribed u....
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....Rule 10B of the Rules, Indian jurisprudence, and the OECD Guidelines. Under the Indian TP regulations, the initial onus has been cast upon the Appellant to substantiate that its international transactions satisfy the arm's length standard. Once satisfied, the burden shifts to revenue authorities, who must satisfy the conditions prescribed under law before proceeding to reject or disturb the Appellant's arm's length analysis carried out in its TP study. However, once the Appellant has discharged its obligations, the AO need not intervene unless conditions mentioned in clauses (a) to (d) of section 92C(3) of the Act are satisfied. Without specifying the method and the comparable transaction(s), the proposed approach of considering the ALP as '30%' would be tantamount to the disallowance of expenses rather than the determination of an ALP, which is not in accordance with the TP provisions. Commercial expediency of the Appellant cannot be questioned The Hon'ble CIT(A)/Ld. TPO in his order has questioned the commercial judgment of the Appellant in undertaking the transaction pertaining to payment of management fees. In this regard, we wish to submit t....
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....r infrastructure for processing of good quality frozen food, cold storage facilities and transport facilities, etc. As mentioned earlier, McCain Canada is well equipped and has relevant expertise in all the areas of frozen food industry. The guidance, advice and support obtained from the experienced and knowledgeable team of McCain Canada helped McCain India's management of the operational and corporate activities reducing the level of staff required locally. Without these services, McCain India would have had to perform the services itself (and hire additional staff to do so), or outsource the services to a third party. The services provided by McCain Canada also facilitated increased sales by McCain India, as well as greater and more efficient use of the manufacturing assets of the receiving entities. Please refer page number 461 to 671of the paperbook for submission dated July 24, 2018 for detailed description of the benefits received and page 814 to 1509 of the paperbook for documentary evidence for these services. In addition, the Appellant submits that McCain Canada does not charge any mark-up on the costs allocated to various group companies for th....
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....to specialties) from AEs (i.e McCain Canada, McCain USA)which were used by McCain India for distribution to wholesalers and customers in Indian territory. The AEs manufacture finished goods and sell to McCain India at a mark-up of 5% on total. The impugned transaction of imported finished goods was benchmarked by the Appellant using the TNMM as the MAM with Operating Profit / Operating Cost ('OP/TC') as the Profit Level Indicator ("PLI") and the AEs as the tested party. The McCain Group's TP policy of charging a mark-up of 5% on the cost of finished products sold to the AEs was lower than the net margin earned in comparable uncontrolled transactions (5.89% in case of European region and 7.04% in case of US/Canada region), thereby demonstrating the arm's length nature of McCain India's subject international transaction. However, the Ld. TPO/Hon'ble CIT(A) enhanced the income of the Appellant by INR 63,503,221 by holding that the Appellant's international transaction pertaining to the trading segment do not satisfy the arm's length principle envisaged under the Act. Approach followed by the Ld. TPO/Hon'ble CIT(A) The approach adopted by the Ld. TPO....
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....d assurance ✓ (limited) Marketing in India X ✓ Selling and distribution in India X ✓ Pricing X ✓ Risk analysis The risk analysis for the said transaction is provided below: Particulars AEs McCain India Market risk X ✓ Product/ service liability risk X ✓ Credit risk X ✓ Inventory risk X ✓ Foreign Exchange risk X Only to the extent of the difference between the respective foreign currency and the rupees conversion rates at the date of invoice payment Based on the above facts, it is clear that for the subject international transaction of import of finished goods by the Appellant, the Appellant operates as an entrepreneurial risk bearing entity, which bears all associated risks in relation to the operations. On the other hand, the AEs function as limited risk bearing manufacturing entities. The TNMM was applied by the Appellant using its AEs as tested parties, given they perform relatively simple functions, own assets easily comparable to third party benchmarks, and bear proportionately fewer risks than....
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....€¢ Landis + Gyr Limited vs DCIT (I.T.A No. 37/Koli2o12 and I.T.A No. 1623/K01/2012) • Tata Motors European Technical Centre Plc ITA No 7630/Mum 2012 and ITA No 1698/Mum/2014 • Global Vantedge (P.) Ltd vs DCIT (ITA NO's. 1432, 2321, 2763 AND 2764/Del/2009 II. Contention with respect to adjustments relating to custom duty, wharfages, insurance, etc. (Without prejudice) (with reference to Ground 2.4). At the outset, it is submitted that without prejudice to the Appellant's contention that the AEs should be considered as the tested party with respect to import of trading goods, the Appellant submits that even if the Appellant was to be considered as tested party, adjustments to its margin must be made in order for it to be considered comparable with the companies selected by the Ld. TPO. In this regards, the Appellant wishes to highlight that since its incorporation in 1996, it has been engaged in the trading of frozen French fries and potato specialties. It imports French fries and other products from its respective associated enterprises and sells the same to various institutional buyers including McDonald's, KFC, Pizza....
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....RPM), a suitable adjustment is warranted to improve the reliability of the result and to determine the correct arm's length price. Your Honors would appreciate that the import related charges have eventually been paid to the government/third parties, and not to the AE. Therefore, not making adjustment to account for such difference would tantamount to result in a conclusion that it is part of sale proceeds of the AE, which would be an incorrect inference. To understand the methodology of application of the RPM, the ICAI Guidance note has illustrated the computation of the Arm's Length Price with a detailed analysis of adjustment required to be made to arrive at arm's length price while using RPM. In the illustration, the tested party had incurred freight inward charges in the international transaction but the similar charges were not incurred in comparable uncontrolled transaction. Therefore, the adjustment was made in respect of such freight inward charges by adding it to the price arrived at after following the first three steps mentioned in Rule 10B(i)(b) of the Rules above in order to arrive at the arm's length purchase price. ....
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....sted party, the Appellants correct margin with respect to the trading segment should be considered. It is brought to Your Honor' knowledge that the Ld. TPO/Hon'ble CIT(A) has considered the cost of goods sold from the audited financial statements for computing TP adjustment. However, the audited financial statements do not reflect the segment wise data and hence the Appellant has filed the audited segmental financial statements before the Hon'ble CIT(A), which provides the segment wise profit and loss account of McCain India (please refer page no. 19-25 of the paperbook). The 'Purchase of frozen food products' amounting to INR 616,906,463, considering by the Ld. TPO in the TP order contains the following costs which is incorrect. While the correct computation is shown in the segmental profit and loss account (please refer page no. 19-25 of the paperbook), the same is summarized below: Therefore, the corrected cost of goods sold to be considered for computation of the relevant international transaction is: Particulars Amount (INR) as per TP Order Corrected as per the Appellant Remarks Purchase of finished Goods (other than high seas sales) ....
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....hird-party customers in India as well as outside India. The impugned transaction of the sale of finished goods to AEs was benchmarked by the Appellant using an internal TNMM as the Appellant sells finished goods to third parties and AEs. Further, a supplementary analysis was conducted by the Appellant using an external TNMM as the MAM with EBITDA/ Operating Cost as the PLI and the Appellant as tested party. The PLI earned by the Appellant in the international transaction (29.94%) was higher than the PLI earned in uncontrolled transaction (5.08%), thereby demonstrating the arm's length nature of McCain India's subject international transaction. Approach followed by the Ld. TPO/Hon'ble CIT(A) The approach adopted by the Ld. TPO in the TP order is provided below: • Rejected internal transactional net margin analysis undertaken by the Appellant in the TP study. • Rejected the supplementary economic analysis undertaken by the Appellant in the TP study using external TNMM as the MAM with EBITDA/ Operating Cost as the PLI and the Appellant as tested party; • Undertook a modified economic analysis, after applying certain qua....
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....India (please refer page no. 19-25 of the paperbook). Further, the sales to AEs forms only 6.43% of the Appellant's total sales were made to AEs. The remaining 93.57% of sales were made to unrelated parties in India. Hence, the entity level margins are heavily influenced by functions, which are not performed by the Appellant with respect to sales to AEs. These functions include sales, marketing, and customer service functions, which are not required with respect to sales to AEs. In this regard, the Appellant submits the summary of arm's length margin as per the Appellant and the Ld. TPO is provided below for your Honor's ready reference: Segment Appellant's OP/Sales margin (Entity Level) as considered by the Ld. TPO in the TP Order Appellant's OP/Sales margin as per segmental P/L (sale to AE) Arm's Length operating margin (OP/Sales) as determined by the Ld. TPO in TP Order Arm's Length operating margin (OP/Sales) as determined by Hon'ble CIT(A) Manufacturing activity -6.01% 16.07% 10.00% 4.16% II. Contention with respect to exclusion of comparable selected by the Ld. TPO/Hon'ble CIT(A) (with reference to ground 3.....
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....n on account of marketing intangibles on the other hand McCain India is engaged in contract manufacturing of potato products while making sales to its AEs is has not incurred any advertising and marketing relating expenditure and hence, is not comparable to the Appellant. As per the website of the company, it is engaged in production of natural food ingredients. It is engaged in production of various diversifies products like herbs, fruits, vegetables, mushroom, pickle etc. (Please refer https://www.flexfoodsltd.com/index.php#about) (Please refer https://www.flexfoodsltd.com/index.php#about) III. Contention with respect to considering cash profits as the PLI (with reference to 3.2 and 3.5) The Appellant wishes to reiterate the fact that McCain India had set up a new production line in FY 2013-14, adding a production output of 7.5 Tonne to the total manufacturing capacity of McCain India, hence, there is higher depreciation charge in Profit and Loss Statement during the relevant year in comparison to the comparable entities. Further, the new production line for the manufacturing facility set by McCain India is state of the art and much better and exp....
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....general terms which do not give clear picture on the aspect of need test, he heavily relied on the detailed findings of the TPO and he pointed out that TPO held clearly that there is no specific item of services pointed out by the assessee which were absolutely and urgently needed by it, which was provided on time to immensely benefit in it business and not supported by proper documentation. 23. With regard to ground no.4 raised by the Revenue, he fairly accepted that the issue under consideration is in favour of the assessee. 24. Considered the rival submissions and material available on record. We shall deal with the issues raised by both the parties. First, with regard to management fee and IT support fees paid by the assessee to its AE, we observed that the AE provides various services like Integrated supply chain services, Scientific research services, Management support services, Marketing support services, Global information services, Financial and operational planning services, Pension and risk management services, Human resource services, Legal support services, and other miscellaneous services including internal audit assurance, taxation, and global coordination. Ho....
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....issue to the file of AO/TPO with the direction to the assessee to file the relevant debit notes and relevant calculations before the AO/TPO, at the same time we direct the AO/TPO to appreciate the documents which will be submitted by the assessee in due course as directed above. In the result, grounds raised by both the parties are allowed for statistical purpose. 25. With regard to trading segment, we observed that the assessee is importing finished goods from its AE from the inception and marketed the same to various wholesalers and other vendors in India. After commencement of manufacturing facility in India, it has started to sell manufactured goods to local vendors and to the intercompany. During the year under consideration, the assessee had benchmarked the transaction using TNMM as the MAM with OP/TC as the PLI and selected the AE as the tested party. The assessee submitted that the AE charges 5% margin on the finished goods and sells the same to the assessee, the AE had earned 5.89% and 7.04% from the European and US/Canada regions respectively, as the mark up of 5% charged by the AE is less than the mark up earned in the uncontrolled transaction by the AE. Considering t....
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.... to its customers was by importing finished goods from its AE. There are no third parties that can provide the Assessee with the same quality McCain finished products as the AEs. It is clear from the above submission that primarily it was supplying finished goods by import and after having its own manufacturing facility, it does not depend on its AEs. Just because there was no manufacturing capacity, it cannot supply the same. It is fact on record that the assessee would not have supplied its primary customers when there was no manufacturing capacity, without incurring import and related costs, it is part of procurement cost. That being the case, on top of the cost of purchase (includes the accepted margin of its AE's of 5%) and procurement cost, it would have added its own margin on top of the above total cost. From the profit and loss statement, we observed that the assessee had declared huge loss due to supply to its primary customers by procuring the finished goods from its AEs. In our view, it is not adding up, the assessee procures the raw material within India and manufactures the goods to supply to its prime customers. The pricing of imported goods and their own selling pri....
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....but for the manufacturing of the same goods, how the same are so much variance, there may some special ingredients to supply to its AEs, it can never have such different result, almost 550% variance. This is not acceptable and explanation is not acceptable. It indirectly suggests that it charges premium to its own AEs. There is no material brought on record to suggest such pricing. Therefore, we are inclined to reject the submissions made by the assessee in this regard. 28. Further, we observed that the TPO had proceeded to bench mark the transaction adopting TNMM as MAM for this segment and proceeded to select various comparables, accordingly bench marked the manufacturing segment on the basis of filters and selected comparables. However, the Ld CIT(A) made certain adjustments in the selection of comparables. 29. After consideration were the nature of the business, the assessee in the earlier years, the business was heavily dependent upon the supply from the AEs and it only supplies the finished goods to its primary customers and manufacturing risks was always with the AEs and the assessee was making profits on top of the margin of its AEs which was predetermined at 5%. In t....
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....al Area, P. O. Resham Majri, Haridwar Road, Dehradun (Utarakhand). Flex Foods Ltd., a 100% Export Oriented Unit, is engaged mainly in the business of cultivation and processing of Mushrooms, Herbs, Fruits & Vegetables in Freeze Dried, Air Dried and Individually Quick Frozen form. The world class state-of-the art facilities are located at Dehradun in the state of Uttarakhand. Flex Foods Ltd. has been selling its products mainly to the European and US markets, and has gained respectable status in the international market. (Rs. in Lacs) Particulars For the Year Ended 31.03.2014 For the Year Ended 31 03 2013 Product-wise Details of Revenue from sale of Manufactured Products i) Frecze Dried Mushroom, Herbs, Vegetables & Fruits 3,392.47 2,613.23 1) Processed Food Viz Mushroom Fresh & Processed (Including Canned) 1,194.15 893.59 ili) Fmzon / Individually Quick Frozen Fruits, 1,64R 60 1,725.58 Vegetables, Mushroom & Herbs iv) Air Dried Fruits, Vegetables, Mushroom & 339.24 463.32 Herbs Total 6,574.46 5,195.72 Document 3 ADMINISTRATION & SELLING EXPENSES Power & Fuel (Cold Storage) 106.57 Insurance charges 40.20 Postago & Tolophono Exponcos 20.95 Vehicle Hire, Run....
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....is Management Procedure 885-892 d. Appendix 4- crisis management communication plan 893-901 e. Appendix 5- McCain GAP training module 902-977 f. Appendix 6- Articles on 'Potato farming in Gujarat" 978-995 g- Appendix 7- Engineering bulletin on 'Odor Elimination - Preheaters', 'Odor Elimination - Sliver, Nubbin & Cube System, including flumes & tanks' and 'Auto valve check feature for Tegra G6 Stores' 996-1015 h. Appendix 8- Copy of the environment policy to manage managing regulatory risks and compliance requirements 1016 L Appendix 9- Presentation on operating status of major energy consuming systems/equipment and tool for prioritizing and scheduling plant energy initiatives. 1017-1028 j. Appendix 10- Presentation is provided by McCain Canada that contains the new and improved specialty process design model for manufacturing / processing of McDonald's hash brown patty 1029-1032 k. Appendix 11- Presentation provided by McCain Canada to provide policies and procedures to map the value stream in terms of total downtime, total cost of waste and total hours paid while manufacturing the products 1033-1053 L Appendix 12- Samples o....