2018 (4) TMI 1837 - AT - Income Tax

TP Adjustment - arm s length price in respect of international transactions of Intra group services relating to external commercial borrowings - action of the DVO in upholding the 20% of agency fee and interest income earned by the overseas branch - receipt of sales credited relating to derivatives on cost plus margins of 72.94% earned by assessee, which was more than 25% earned by comparable price - HELD THAT - As decided in own case the Appellant has made a proper transfer pricing study and has applied TNM method. As could not find any grounds to reject the Transfer Pricing Study made by the Appellant. It is also to be appreciated that the prices are fixed on the basis of the Global Transfer Policy - cost plus mark for the services rendered is far higher than the comparable transactions. My predecessor has considered the issue in assessment year 2004-05, 2005-06 and 2006-07 and has deleted the addition recommended by the TPO. The same ground has also been upheld by my order for AY 2007-08 - price charged by the Appellant's branch in India is at arm's length price. No reason to deviate from my earlier order and hence, the TP adjustments made by the AO with regard to the derivative products are deleted. The AO is directed to delete the addition made in this regard. - Decided in favour of assessee. Transaction relating to money deposits by placing reliance on I.T. Rules 10A(d) - while applying CUP method of ALP determination each such transaction could be evaluated/ benchmarked separately - HELD THAT - As decided in Audco India 2010 (11) TMI 769 - ITAT MUMBAI keeping in view that the difference between the sale of L T LLC and Arm's Length Price is only 3.35% which is well within the limit of 5%, we are inclined to uphold the finding of the ld. CIT(A) in deleting the addition made by the Assessing Officer. The ground taken by the revenue is, therefore, rejected

Summary

Issues Involved:

1. Arm's Length Price (ALP) for agency fees and interest income earned by overseas branches.
2. ALP for receipt of sales credit relating to derivatives.
3. Aggregation of transactions relating to money deposits.

Issue-wise Detailed Analysis:

1. Arm's Length Price (ALP) for agency fees and interest income earned by overseas branches:

The primary issue in the assessee's appeal for AY 2008-09 revolves around the CIT(A)'s decision to uphold the DVO's action of attributing 20% of agency fees and interest income earned by the overseas branches of the assessee for computing the ALP in respect of international transactions related to external commercial borrowings (ECB). The assessee contested this, arguing that the rate was arbitrary and resulted in an addition of ?82,383,516. The CIT(A) had relied on previous decisions for AYs 2006-07 and 2007-08, where a 20% rate was deemed justified due to the foreign branch bearing the entire risk on credit (ECB). The Tribunal's decision in the assessee's own case for AY 2006-07 and 2007-08 had directed that only 20% of the agency fee should be attributed to the assessee, and the interest attributed to its income should be deleted. The Tribunal upheld this view, partly allowing the assessee's appeal for AY 2008-09 and AY 2009-10.

2. ALP for receipt of sales credit relating to derivatives:

The first issue in the Revenue's appeal for AY 2008-09 concerns the CIT(A)'s deletion of the addition made by the TPO on account of receipt of sales credit relating to derivatives. The TPO had used a cost-plus margin of 72.94%, which was more than the 25% earned by comparable companies, to make an addition of ?1,628,474,794. The CIT(A) had deleted this addition, noting that the assessee's activities were limited to marketing, and the AE's were concluding the transactions. The Tribunal had previously upheld the CIT(A)'s decision for AY 2006-07 and 2007-08, finding that the TPO's method was fundamentally flawed and violated the principles of natural justice. The Tribunal confirmed the CIT(A)'s order for AY 2008-09 and AY 2009-10, dismissing the Revenue's appeal.

3. Aggregation of transactions relating to money deposits:

The second issue in the Revenue's appeal for AY 2009-10 pertains to the CIT(A)'s direction to aggregate various transactions relating to money deposits. The TPO had noted variations in the actual rate vis-a-vis the LIBOR rate and made an adjustment of ?80,45,517 for short interest received/excess interest paid. The CIT(A) deleted this addition, observing that the assessee had rightly aggregated the transactions and that the TPO had selectively picked transactions for adjustment. The CIT(A) relied on decisions of the Mumbai ITAT, which supported aggregation of closely linked transactions. The Tribunal upheld the CIT(A)'s decision, noting that the Tribunal consistently favored aggregation for determining the ALP. The Revenue's appeal on this issue was dismissed.

Conclusion:

In summary, the Tribunal partly allowed the assessee's appeals for AY 2008-09 and AY 2009-10 regarding the ALP for agency fees and interest income, confirming that only 20% of the agency fee should be attributed to the assessee. The Tribunal dismissed the Revenue's appeals for AY 2008-09 and AY 2009-10 concerning the ALP for receipt of sales credit relating to derivatives and the aggregation of transactions relating to money deposits, upholding the CIT(A)'s decisions in favor of the assessee.