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2022 (5) TMI 1468 - AT - Income TaxTP Addition - international transaction of Professional Charges paid - segregating the international transaction under consideration - Payment under the international transaction of Professional Charges Paid to its AE in France is a quid pro quo for the receipt of intra-group services availed by the assessee from its AEs - Whether aggregation approach in the instatnt case is correct? - HELD THAT - On an overview of the nature of intra-group services availed by the assessee vis- -vis the transactions of Purchase of raw materials and spare parts etc., along with Royalty, it gets overt that the international transaction under consideration is not closely linked with other transactions that the assessee aggregated with. The contention of the ld. AR that the intra-group services should be clubbed with the other transactions as the Manufacturing was not possible without availing intra-group services is farfetched and cannot be accepted. If we accept the contention of the ld. AR for aggregation on the basis of some nexus between the receipt of intragroup services and the manufacturing activity, then each and every international transaction would require consolidation because all the transactions ultimately aim at carrying on the business activity. The aggregation can be justified in the case of closely linked transactions and not remotely linked transactions. Acceptance of the AR s argument would set at naught the judicial decisions discussed above, which have countenanced the segregation approach. We, therefore, hold that the DRP was justified in upholding the view of the TPO in segregating the international transaction of Professional Charges paid to be processed independent of other international transactions. TPO determined NIL ALP on the ground that the assessee did not furnish evidence of receipt of services and further no benefit was established by the assessee from receipt of services - Whether Intra- group service were availed? - HELD THAT - In our opinion, the relevant consideration is the incurring of bona fide expenditure and availing the services, which may or may not lead to increase in revenue. Application of benefit test is not warranted in determining the ALP of an international transaction of payment for intra-group services. There are series of e-mails under the heading Production Purchasing, Manufacturing delving into Plant Manager training Programme, Logistics, Welding Time plan, Control plan, Engineering functional milestone checklist etc. Similarly, there are e-mails under the heading Quality , which talk about Health, Safety and Environment Review Document, Quality Specifications, Quality self-assessment and Environment diligence assessment report. Turning to the Cost Sharing Agreement, there are e-mails about Presentation- Design, Change proposal to solve S/R issue on Suzuki YN recliner assembly Latch modification. There are e-mails concerning change in Design recliner and latch lock for all Faurecia customers; details of changes made in the design and approval; SMC approval for change in latch design presentation. Then, there are e-mails regarding Securitization Rate (SR) training; Visit Report; Presentation-FAS Suzuki G2 pumping command cam broken; Manesar Layout workshop; Feedback on SMC query; YP test reports, etc. The above description of the necessary documents and e-mail communications running into more than 1000 pages of the paper book amply prove that the assessee availed services under the Service Agreement and Cost Sharing Agreement. The TPO referred to e-mails in a generalized manner without going into their contents. In our considered opinion, the detailed e-mail communications between the assessee and its AEs abundantly prove that the AEs rendered services to the assessee under the two Agreements, which the assessee undoubtedly availed. We, therefore, hold that the authorities below were not justified in coming to the conclusion that the assessee did not avail any services. ALP determination - assessee applied the TNMM on aggregate basis for showing that the international transaction under consideration was also at ALP - We are not confronted with a situation in which the TPO did not apply any of the specified methods for determining the ALP of the transaction, which would have otherwise vitiated his order. He expressly invoked the CUP method and then determined the Nil ALP because the assessee, in his opinion, did not prove the receipt of services. We have held hereinabove that the assessee did avail services. Once it is established that the assessee availed intragroup services, then the next step is to determine its ALP. No details about comparables of the international transaction were either provided by the assessee or taken note of by the TPO. In these circumstances, we set aside the impugned order on this count and direct the AO/TPO to determine the ALP of the international transactions of Professional Charges paid afresh in accordance with law. It is hereby clarified that all the methods for determination of the ALP are open before the TPO, who is competent to adopt anyone of them. Similar is the position about the selection of tested party. After the advent of Virtusa Consulting Services Private Ltd. 2021 (2) TMI 378 - MADRAS HIGH COURT an assessee or its AE can be taken as a Tested Party depending upon the fact that which out of the two is a least complex party to the controlled transaction and facilitates the ALP determination in a proper manner. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh determination of the ALP of the international transaction. Assessee appeal is allowed for statistical purposes.
Issues Involved:
1. Aggregation approach in determining the Arm's Length Price (ALP) of international transactions. 2. Whether intra-group services were availed by the assessee. 3. Determination of the ALP of the transaction. Issue-wise Detailed Analysis: I. Aggregation Approach in Determining the ALP: The primary question was whether the Transfer Pricing Officer (TPO) was justified in segregating the international transaction of "Professional Charges paid" from other transactions. The assessee had aggregated this transaction with others under the Transactional Net Margin Method (TNMM). The TPO, however, determined the ALP independently using the Comparable Uncontrolled Price (CUP) method. The court noted that Section 92(1) of the Income-tax Act mandates computing income from 'an international transaction' at its arm's length price. Rule 10A(d) defines a 'transaction' to include a number of closely linked transactions. The court cited the Punjab & Haryana High Court's ruling in Knorr-Bremse India P. Ltd. vs. ACIT, which outlined three scenarios where aggregation is permissible: package deals, transactions priced dependently, and inextricably linked transactions. The court concluded that the professional charges were not closely linked with other transactions like the purchase of raw materials and royalty payments. Thus, the TPO was justified in segregating the transaction. II. Whether Intra-Group Services Were Availed: The TPO determined a NIL ALP on the grounds that the assessee did not furnish evidence of receipt of services and no benefit was established from such services. The court emphasized that the relevant consideration is the bona fide incurrence of expenditure and availing of services, irrespective of revenue increase. The court examined the Service Agreement and Cost Sharing Agreement, which listed various services availed by the assessee, such as General Management, Sales and Marketing, Accounting, Control and Tax, Legal, Insurance and Real Estate, Human Resources, Production Purchasing, Manufacturing, and Quality. The assessee provided detailed descriptions and email communications proving the receipt of these services. The court held that the authorities were not justified in concluding that no services were availed. III. Determination of the ALP of the Transaction: The TPO rejected the TNMM on aggregate basis and applied the CUP method, determining a NIL ALP due to the perceived lack of evidence of services availed. The court found that the TPO did apply a specified method (CUP) but erred in determining NIL ALP after establishing that the services were indeed availed. The court directed the AO/TPO to determine the ALP afresh, allowing the use of any method and selection of the tested party, depending on which is least complex and facilitates proper ALP determination. The court emphasized providing the assessee a reasonable opportunity of hearing in this fresh determination. Conclusion: The appeal was allowed for statistical purposes, and the case was remanded to the AO/TPO for fresh determination of the ALP of the "Professional Charges paid" transaction, ensuring compliance with the law and providing the assessee an opportunity for a hearing. Order Pronouncement: The order was pronounced in the Open Court on 20th May, 2022.
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