2014 (2) TMI 891 - AT - Income Tax

Transfer Pricing Adjustment - Determination of ALP - Method for benchmarking the transaction for payment of management cost contributions Held that - The record shows that the issue before the TPO and the DRP as far as the assessee is concerned has been contested in the light of the stand taken that TNMM was the most appropriate method - assailing the TPO s stand before the DRP that CUP is the most appropriate method the assessee did lead evidence and arguments and documentation in order to justify that no adjustment was required to be done even if CUP is taken as the most appropriate method - the relevant documentation Agreements etc. for deciding the issue have not been considered either by the TPO or by the DRP as the focus of the department s attention necessarily has remained assailing the assessee s stand that TNMM is the most appropriate method - The department justifying its stand and assailing the stand of the assessee has accordingly remained focused on the position that CUP is the most appropriate method. The decision in CIT Versus EKL APPLIANCES LTD 2012 (4) TMI 346 - DELHI HIGH COURT followed - The departmental stand cannot be approved when the issue is considered from the aspect of appropriateness of the expendituring - the need and necessity for the assessee to incur the expendituring also cannot be held to be an acceptable criteria - Nor can the necessity of the expenditure from the benefit accrued to the assessee point of view has been approved as a relevant criteria - the finding given by the Co-ordinate Bench, is based on a peculiar set of facts namely that the assessee in the facts of that case consistently failed to provide a cost allocation key not only before the TPO/DRP but even before the Tribunal - the issue pertained to direct expenses which admittedly are easier to demonstrate and verify - the expenses are not direct expenses however the order of the Co-ordinate Bench in Dresser Rand s has considered indirect expenses which position apparently has not been upset by any Higher Forum - in the absence of any serious discussion on facts specifically addressing the detailed documentation placed on record by the assessee, it would be appropriate to restore the issue back to the TPO Thus, the matter remitted back to the TPO for fresh adjudication Decided in favour of Assessee.

Issues Involved:
1. Validity of the assessment order.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Rejection of Transactional Net Margin Method (TNMM) and application of Comparable Uncontrolled Price (CUP) method.
4. Adequacy of documentation and evidence provided by the assessee.
5. Allegation of duplication of services.
6. Initiation of penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order dated 31.10.2011, claiming it was "bad in law and void-ab-initio." However, the judgment does not provide a detailed analysis or ruling on this specific ground, suggesting that the primary focus was on the substantive issues related to the determination of ALP and the methods used.

2. Determination of Arm's Length Price (ALP) for International Transactions:
The assessee's international transactions, particularly the payment of management cost contributions to its Associated Enterprise (AE), were scrutinized. The AO/TPO determined the ALP as Nil against the claimed amount of Rs.33,177,975/-. The TPO's reasoning included:
- The assessee failed to identify payments for each service.
- The documentation provided was too generic.
- No cost-benefit analysis was conducted.
- The TPO found the transactions to be duplicative and not at arm's length.

3. Rejection of Transactional Net Margin Method (TNMM) and Application of Comparable Uncontrolled Price (CUP) Method:
The TPO rejected the TNMM adopted by the assessee and applied the CUP method instead. The assessee conceded that CUP was the most appropriate method. However, the TPO's application of CUP was criticized for being based on presumptions and not providing details of price charged in comparable uncontrolled transactions.

4. Adequacy of Documentation and Evidence Provided by the Assessee:
The assessee provided various documents to justify the management cost contributions, including:
- Contracts of Accession and Cost-Sharing Agreements.
- Details of services received under various heads like Product Management, Network Administration, and Global Management Functions.
- Audit reports supporting the cost allocation methodology.
The TPO and DRP, however, found these documents insufficient, generic, and not demonstrating tangible benefits to the assessee.

5. Allegation of Duplication of Services:
The TPO alleged that the services for which the assessee made payments were duplicative, considering the expenses already claimed in the Profit & Loss account (e.g., Personnel Expenses, Legal and Professional Expenses). The assessee argued that these were distinct from the management cost contributions under the CCA.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The AO proposed to initiate penalty proceedings under section 271(1)(c) mechanically, without recording adequate reasons. The judgment does not provide a detailed ruling on this issue, indicating that the primary focus was on the substantive issues of ALP determination and method application.

Conclusion and Directions:
The Tribunal found that the relevant documentation and agreements were not adequately considered by the TPO or DRP. It highlighted that the assessee had conceded to the CUP method but argued that the specific facts and evidence should be reconsidered. The Tribunal set aside the impugned order and restored the issue back to the TPO for fresh adjudication with a direction to issue a speaking order, taking into account the detailed documentation and agreements provided by the assessee. The appeal was allowed for statistical purposes, emphasizing the need for a thorough and fair reassessment.

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