2016 (5) TMI 145 - HC - Income Tax

Transfer pricing adjustment - most appropriate method - Held that - A purchaser of goods or of services is not concerned with the price at which its vendor of goods or supplier of services in turn acquired the same. This, at the highest, would be a factor while negotiating the purchase of goods or the acquisition of services. Even if the vendor or supplier acquired the assets or the know-how as a gift, it would be irrelevant as far as the onward sale thereof is concerned. The purchaser determines the price it is willing to pay for the goods or services independent of what the same cost its vendor/service provider. The TPO, therefore, proceeded on an entirely erroneous basis while computing the arm s length price. We have with respect disagreed partly with the approach adopted and the legal principles applied by the authorities while computing the arm s length price. We have also disagreed with Mrs. Suri s contention that the TNM method ought to be applied to the various transactions merely because each of them aided and resulted in the manufacture of the assessee s final product. It is not possible to assess the weightage given to each of these questions by the authorities while determining the arm s length price. There is nothing on record that indicates the same. It is not necessary that each aspect would have been given the same weightage. Further, this would be so not merely in computing the quantum but also the very question as to whether the services were rendered by the AEs and availed of by the assessee. These are issues of fact which must, in the first instance at least, be determined by the authorities under the Act. As we are remanding the matter, it is not necessary to deal with the voluminous evidence produced and relied upon by the assessee. The authorities have come to the conclusion that the same did not reflect that any valuable services were in fact rendered. As we are remanding the matter, we do not wish to make any observation in this regard, least it prejudices either of the parties while considering the matter upon remand. Suffice it to state that the assessee has relied upon voluminous evidence which cannot be ignored. The same must be considered and analyzed. It cannot by any stretch of imagination be held that the evidence is irrelevant. For instance, the assessee has produced all the invoices and proof of payments including in respect of services rendered by the employees of the AE s. The assessee has also established that such employees of the AE had actually visited India. Mrs. Suri also relied upon the tax structure in Germany and in India in support of her contention that the transactions were genuine. It is also difficult to understand the basis on which it was held that some of the services rendered were only shareholder activities. The nature of the services prima facie at least does not indicate that the said four transactions, which have been separated and segregated and the ALP whereof was determined by the CUP Method, were shareholder activities. In view of our findings on the questions of law in the assessee s appeal, it would be necessary for the authorities to consider this matter afresh in the light of those observations as well. It would be necessary upon remand for the authorities under the Act to consider whether the transactions ought to be separately benchmarked or whether the TNM Method ought to be adopted in respect of the same as well.

Issues Involved:
1. Adjustment to the declared value of international transactions.
2. Application of the CUP Method vs. TNMM for benchmarking transactions.
3. Determination of the arm's length price (ALP) of international transactions.
4. Rejection of the assessee's aggregation approach.
5. Evaluation of the benefit received from services.
6. Commercial expediency and genuineness of transactions.
7. Reassessment and remand of the matter.

Issue-Wise Detailed Analysis:

1. Adjustment to the Declared Value of International Transactions:
The Tribunal upheld adjustments to the declared value of professional consultancy and management fee for support services. The assessee's contention that these services were inextricably linked to its manufacturing and distribution functions was rejected. The authorities determined that these transactions required separate analysis under the CUP Method.

2. Application of the CUP Method vs. TNMM for Benchmarking Transactions:
The Tribunal supported the TPO's decision to apply the CUP Method to specific transactions, despite the assessee's use of the TNMM for its overall operations. The TPO segregated certain services and analyzed them separately, concluding that the CUP Method was more appropriate for these transactions. The Tribunal agreed that the TNMM could not be applied selectively and that the CUP Method was suitable for the specific services in question.

3. Determination of the Arm's Length Price (ALP) of International Transactions:
The TPO determined the ALP for professional consultancy, management fee for support services, and SAP consultancy charges at nil, citing a lack of evidence for tangible benefits and independent party willingness to pay for such services. The Tribunal upheld this determination, emphasizing the need for the assessee to demonstrate the actual benefits received from these services.

4. Rejection of the Assessee's Aggregation Approach:
The assessee's approach of aggregating closely linked transactions was rejected by the authorities. The Tribunal found that the transactions in question were distinguishable and required separate benchmarking. The assessee failed to demonstrate that the transaction-by-transaction approach was not feasible or that the available data of comparable transactions was unreliable.

5. Evaluation of the Benefit Received from Services:
The authorities and the Tribunal focused on whether the services provided by the AEs resulted in tangible benefits for the assessee. The TPO and the Tribunal concluded that the assessee had not substantiated the benefits received, leading to the determination of the ALP at nil for the specified services. The Tribunal noted that the evidence provided by the assessee did not conclusively establish the delivery of services or the benefits derived therefrom.

6. Commercial Expediency and Genuineness of Transactions:
The Tribunal and the TPO questioned the commercial expediency and genuineness of the transactions. The TPO held that the services provided by the AEs could have been obtained locally in India and that the assessee had not demonstrated the necessity of availing these services from the AEs. The Tribunal agreed with this assessment, emphasizing the need for the assessee to prove the arm's length nature of the transactions.

7. Reassessment and Remand of the Matter:
The High Court found that the authorities' approach in determining the ALP was partly erroneous and required reconsideration. The Court emphasized that the absence of profit does not necessarily indicate that the transactions were not at an arm's length price. The matter was remanded to the Tribunal for fresh consideration, with instructions to reassess the evidence and determine the ALP based on the Court's observations.

Conclusion:
The High Court remanded the matter to the Tribunal for fresh consideration, emphasizing the need to reassess the evidence and determine the ALP based on relevant factors. The Court disagreed with the authorities' approach of linking profitability to the arm's length nature of transactions and highlighted the importance of evaluating each transaction on its own merits. The Tribunal was directed to consider whether the transactions should be benchmarked separately or under the TNMM, and to reassess the evidence provided by the assessee.

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