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2019 (5) TMI 1897 - AT - Income TaxTP Adjustment - adjustment made on account of purchase and sale of raw material/finished goods - HELD THAT - Adjustment made on account of purchase and sale of raw material/finished goods after the direction of the DRP does fall within the /-5% range. The PLI of the comparables works out to 5.64% whereas the assessee had shown profit margin of 1.44% and the difference in the PLI thus comes to 4.20%. From the working as incorporated above it is seen that arm s length operating cost is 14, 48, 42, 460/- as against actual operating cost of the assessee which is 15, 23, 12, 562/-. The difference of 74, 70, 102/- has been added. The impugned international transaction i.e. purchase of raw material consumables and spares affecting the cost side of the profit and loss is 7, 66, 61, 153/- and if the percentage of the impugned international transaction affecting the cost side of the P L account is worked out then it comes to 50.33% which gives the proportionate arm s length operating cost allocated to the impugned international transaction at 7, 29, 01, 341/-. PLI after the proportionate TP adjustment within ( )/(-) range falls to 4.90%. Even at the entity level computation which has been done by the TPO is taken into account then again same falls within ( )/(-) range which works out at 4.90%; and hence the difference of 4.20% falls within the ALP range. Accordingly no adjustment is required to be made in view of second proviso to Section 92C Intra group services - assessee had entered into agreement with Bucher Management AG Switzerland for receipt of management services. Bucher Industries AG is the main shareholder of the assessee and ultimate parent company of the Bucher Industries Group - HELD THAT - From a bare perusal of the international transaction as recorded by the assessee it is seen that assessee has separately shown management fees for which no separate benchmarking has been done on the ground that these management fees paid to AE is part and parcel of over all transactions taken by the AE. Such a contention of the assessee cannot be sustained on the facts of the present case for the reason that the main transaction undertaken by the assessee with its AE is with regard to the purchase of raw material consumables and spares and sale of finished goods and purchase of finished goods. Besides this there is one license on sale to third parties. On the other hand management fee is arising out of altogether separate agreement with the AE with regard to management services. Service fee has been calculated based on actual cost plus profit margin of 10% and the split of the cost have been worked out by certain allocation keys. Accordingly it cannot be held that such a payment for management fees (IGS) is directly linked with the other international transaction which has been benchmarked under TNMM therefore such a contention of the assessee on the facts of the present case cannot be accepted. Application of benefit test - it cannot be held that the management services provided by the AE have not benefitted the assessee for reducing its cost. What is required to be seen in such cases whether there is any economic and commercial value in such kind of services and whether an independent enterprises in such circumstances would have been willing to pay for activity if performed for it by an independent enterprises or would have perform the activity in house for itself. The TPO cannot decide the benefit derived by such services and what is required to be seen whether the services were actually rendered by the AE to the assessee or not. The assessee has highlighted tangible benefit derived from services and such service has to be evaluated to examine the overall benefit and the cost savings due to management services provided by the AE. If TPO has segregated this transaction to be benchmarked separately then it was incumbent for him to analyze the said transaction by comparing similar services with uncontrolled comparable transactions. He simply cannot determine at Nil without carrying out any benchmarking analysis. Thus we agree with the learned counsel that ALP for the management services cannot be determined at Nil. The TPO is however directed to verify the working of tangible benefit derived from the services as given by the assessee and he should examine how such services have given benefit to the assessee overall and if such benefits are demonstrated then no adjustment should be made. With this direction this ground is treated as partly allowed for statistical purposes.
Issues Involved:
1. Adjustment on Arm's Length Price (ALP) for intra-group services and purchase/sale of raw materials/finished goods. 2. Disallowance of adjustment on brought forward business loss and unabsorbed depreciation. 3. Interest charged under Sections 234B and 234C. Issue-wise Detailed Analysis: 1. Adjustment on Arm's Length Price (ALP) for Intra-group Services and Purchase/Sale of Raw Materials/Finished Goods: The assessee challenged an addition of ?84,86,175/- made on account of ALP adjustments, which included ?10,16,073/- for intra-group services and ?74,70,102/- for purchase and sale of raw materials/finished goods. The assessee applied the Transactional Net Margin Method (TNMM) using operating profit/operating income as the Profit Level Indicator (PLI). The TPO initially made an adjustment of ?2,19,93,409/-, which was reduced to ?84,86,175/- after the Dispute Resolution Panel (DRP) directions. The TPO rejected two comparables selected by the assessee and introduced one new comparable, resulting in a final operating margin of 5.64% for the comparables, while the assessee's margin was 1.44%. The difference of 4.20% fell within the permissible +/-5% range, leading to the deletion of the addition of ?74,70,102/- as it fell within the arm's length range. 2. Intra-group Services Adjustment: The TPO determined the ALP for intra-group services at 'Nil' using the Comparable Uncontrolled Price (CUP) method, arguing that the assessee failed to substantiate the actual rendering and benefit of the services. The assessee contended that the services were indeed rendered and provided a cost-benefit analysis demonstrating tangible benefits such as cost savings and enhanced commercial position. The Tribunal found that the TPO's application of the benefit test without comparable uncontrolled transactions was incorrect. The Tribunal directed the TPO to verify the working of tangible benefits derived from the services and examine the overall benefit to the assessee. If the benefits were demonstrated, no adjustment should be made. 3. Disallowance of Adjustment on Brought Forward Business Loss and Unabsorbed Depreciation: The Assessing Officer was directed to verify the disallowance of carry forward loss and depreciation from the records and allow the same in accordance with the law. 4. Interest Charged under Sections 234B and 234C: The interest charged under Sections 234B and 234C was noted as consequential in nature and dependent on the final assessed income. Conclusion: The appeal was partly allowed. The addition of ?74,70,102/- on account of ALP adjustment for purchase/sale of raw materials/finished goods was deleted as it fell within the permissible arm's length range. The adjustment for intra-group services was remanded back to the TPO for verification of tangible benefits. The disallowance of carry forward loss and depreciation was directed to be verified and allowed as per law. Interest under Sections 234B and 234C was deemed consequential.
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