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2015 (12) TMI 1620 - AT - Income TaxTransfer pricing adjustment - services at arm s length - MAM selection - TNMM or CUP - Held that - We are of the considered opinion that the agreement is an intrinsic one and that it is wrong to split the same and hold that some services are at arm s length and some services are not. CIT(A) accepted TNMM to arrive at the ALP, in respect of certain services received by the assessee and in the same breath, has rejected the analysis undertaken by the assessee under the TNMM in respect of other services. We are informed by the assessee that, the authorities have accepted TNMM as MAM in the subsequent years. The Revenue has to be consistent in its approach. In our view, the TPO analysis of the assessee using TNMM as the MAM has to be accepted. When there is an agreement for services and certain services out of a bundle of services are undisputedly rendered, the entire agreement has to be viewed as a whole. Whether the services have actually resulted in a benefit to the assessee or not is not material. The conclusion of the Ld.TPO that the services have not resulted in any benefit and that no independent entity would have made such a payment is in the realm of surmises and conjunctures and not backed by any material. Thus the ALP determined by the assessee company is accepted and the TPO adjustment is deleted. It is stated at the Bar that, for A.Y. 2010-11, the DRP has accepted the ALP determined by the assessee, in respect of GVP services, VIPFS services and Ticketing Hub Services. Thus we are of the considered opinion that with regard to PSM and RIS segments, even if cost plus method is taken as the MAM, the markup charged by the AEs is within the /-5% range, allowed under second proviso to section 92C of the Indian Income Tax Act, 1961, these services can be considered to be at arm s length. Regarding GVP services, VIPFS services and Ticketing Hub Services, the service charges paid by the Assessee, represents the actual cost incurred by the AEs, without any markup. Hence these can be considered to be at arm s length. Thus we are of the opinion that the services received by the assessee should be considered to be arm s length. - Decided in favour of assessee.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions. 2. Most Appropriate Method (MAM) for benchmarking international transactions. 3. Aggregation of interlinked transactions. 4. Jurisdictional error in referring the matter to the Transfer Pricing Officer (TPO). 5. Initiation of penalty proceedings under sections 271(1)(c) and 271G. Detailed Analysis: Issue 1: Determination of Arm's Length Price (ALP) for International Transactions The assessee, a subsidiary of Avery Dennison Corporation, USA, engaged in manufacturing and trading, had entered into various international transactions involving purchase of raw materials, sale of finished goods, import of software, and payment of service fees. The assessee used the Transactional Net Margin Method (TNMM) to determine the ALP, claiming an operating profit margin of 10.99%, which was higher than the mean margin of 3.51% derived from 17 comparable companies. The TPO, however, disagreed and applied the Comparable Uncontrolled Price (CUP) method, determining the ALP at NIL for the service fees, leading to an adjustment of Rs. 3,69,29,533/-. Issue 2: Most Appropriate Method (MAM) for Benchmarking International Transactions The TPO's application of the CUP method was contested by the assessee, who argued that TNMM was the most appropriate method for benchmarking the transactions. The CIT(A) partially agreed with the assessee, accepting TNMM for certain services but not for others. The tribunal held that the agreement for services was intrinsic and could not be split, thereby accepting TNMM as the MAM for all services. The tribunal emphasized that the TPO's conclusion that no benefit was derived from the services was speculative and not supported by material evidence. Issue 3: Aggregation of Interlinked Transactions The tribunal noted that the transactions were interlinked and part of a composite agreement. Citing precedents, the tribunal held that it was irrational to split the agreement and evaluate transactions separately. The tribunal referenced the Delhi High Court's decision in Sony Ericson Mobile Communication India Pvt. Ltd., which supported the aggregation of transactions when they are inter-related. The tribunal concluded that the entire agreement should be viewed as a whole, and the services received should be considered at arm's length. Issue 4: Jurisdictional Error in Referring the Matter to the TPO The assessee argued that the reference to the TPO was jurisdictionally flawed as the AO did not record reasons for the necessity of the referral. The tribunal did not specifically address this issue in detail but focused on the substantive aspects of the ALP determination and the appropriateness of the methods used. Issue 5: Initiation of Penalty Proceedings under Sections 271(1)(c) and 271G The assessee also contested the initiation of penalty proceedings under sections 271(1)(c) and 271G. The tribunal's decision to accept the assessee's TNMM analysis and reject the TPO's adjustments implicitly negated the basis for penalty proceedings, although this was not explicitly discussed in the judgment. Conclusion: The tribunal allowed the assessee's appeal, accepting the TNMM as the MAM for determining the ALP of the international transactions, and dismissed the revenue's appeal. The tribunal emphasized the importance of viewing interlinked transactions as a whole and rejected the TPO's speculative conclusions regarding the benefits derived from the services. The decision underscored the need for consistency in the application of transfer pricing methods and the importance of substantial evidence in supporting adjustments.
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