2017 (6) TMI 1392 - AT - Income Tax

TP Adjustment - Global Sale and Marketing Activity Fees and MAM applied by the TPO - HELD THAT - The international transactions of the assessee involve charges for raw material and components, sales and manufacturing goods, reimbursement of expenses, payment towards royalty and management fees, charges of capital equipment, payment of intra-goods services, charges of material, commission income, rendering of software services, reimbursement of expenses and Global Sale and Marketing Activity Fees. The TPO has accepted all other transactions except the international transactions regarding Global Sale and Marketing Activity Fees. International transactions of the assessee are comprising of revenue receipt from the AE as well as revenue payment to the AE. Therefore in these facts and circumstances of the case, we find that when the other international transactions regarding revenue receipt from the AE are tested under the TNMM analysis then the transaction of fee payment by the assessee towards the services rendered by the AE should not be separately tested but all the international transactions having receipt from the AE and payment to the AE shall be clubbed together and then has to be analysed under TNMM. DRP has directed the TPO to determine the ALP in respect of the Global Sale and Marketing Activity Fees instead of considering the ALP at NIL. Therefore in principle we do not find any error or illegality in the directions of the DRP however having regard to the peculiar facts and circumstances of the case wherein the assessee is having multiple and diversified international transactions involving receipt as well as payment, we are of the considered view that the payment in respect of management fees as well as Global Sale and Marketing Activity Fees shall be considered as operating cost and has to allocated in the ratio of turnover of the other international transactions and then the ALP of the other international transactions has to be determined under TNMM analysis. Thus we set aside the entire issue of determination of ALP and TP Adjustment to the record of the TPO/A.O. for carrying out fresh exercise of determination of ALP in respect of international transactions by considering the payment in respect of management fees and Global Sale and Marketing Activity Fees as part of the operating cost and allocating the same in the ratio of the turnover of the other international transactions. Foreign tax credit and TDS credit not granted despite the directions of the DRP - assessee has also filed a petition under Section 154 of the Act which is pending disposal before the TPO/A.O - HELD THAT - There is no quarrel on the point that the AO is bound to follow the directions of the DRP and pass the final order in pursuant to the directions of the DRP. Accordingly, we direct the AO to strictly give effect to the directions of the DRP and dispose of the petition filed by the assessee u/s 154 of the Act.

Summary

Issues:
1. Transfer Pricing Adjustment in respect of Global Sale and Marketing Activity Fees
2. Most Appropriate Method (MAM) applied by the TPO
3. Foreign tax credit and TDS credit not granted by the Assessing Officer

Transfer Pricing Adjustment in respect of Global Sale and Marketing Activity Fees:
The case involved cross-appeals against the assessment order under the Income Tax Act, 1961 for the Assessment Year 2010-11. The TPO proposed an adjustment for Global Sale and Marketing Activity Fees paid by the assessee to its Associated Enterprise (AE). The TPO held that the ALP of these fees was NIL and proposed an adjustment of the entire amount. The DRP disagreed with the TPO's approach, stating that the TPO exceeded its jurisdiction by examining the necessity of the payment. The DRP directed the TPO to determine the ALP using recognized methods under the Act. There was also a dispute regarding the Most Appropriate Method (MAM) applied by the assessee (TNMM) and the TPO (CUP). The Tribunal set aside the issue for fresh determination, considering the fees as part of operating costs and allocating them based on turnover for other international transactions.

Most Appropriate Method (MAM) applied by the TPO:
The TPO applied the Comparable Uncontrolled Price (CUP) method as the MAM, while the assessee used the Transactional Net Margin Method (TNMM). The DRP directed the TPO to analyze relevant case law and provide comparability analysis for identifying comparables. The Tribunal did not find any error in the DRP's directions but set aside the issue for a fresh determination, suggesting that the fees should be considered as operating costs and allocated based on turnover for other international transactions.

Foreign tax credit and TDS credit not granted by the Assessing Officer:
The assessee raised concerns about the Assessing Officer not granting foreign tax credit and TDS credit despite DRP's directions. The Tribunal emphasized that the Assessing Officer must follow DRP's directions and grant the credits accordingly. A petition under Section 154 of the Act was pending, and the Tribunal directed the Assessing Officer to give effect to the DRP's directions and dispose of the pending petition.

In conclusion, the Tribunal allowed the revenue's appeal for statistical purposes and partly allowed the assessee's appeal, emphasizing the need for a fresh determination of ALP for international transactions involving Global Sale and Marketing Activity Fees and proper grant of foreign tax credit and TDS credit as per DRP's directions.