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2018 (10) TMI 1112 - AT - Income TaxTransfer pricing - determination of ALP - comparable selection - selection of MAM - application of CUP method as against TNMM - R&D activities and and providing related engineering and technical support and services - determining the arm s length price ( ALP ) of the Appellant s international transactions pertaining to payment of management cost contributions (after allowing network administration costs) to its Associated Enterprise (AE) - TP documentation - Held that - the rise in profit is definitely not a relevant factor and hence not determinative of the issue - a business decision, may at times turn out bad and unprofitable for various reasons as necessarily all business decisions cannot always meet with success. Accordingly, the question whether the decision was commercially sound or not was consequently held to be not relevant for deciding the issue. Referring to views followed in 2009-10 and 2012-13 AYs the issues are remanded back to the file of the TPO directing that qua the claim of management cost, the TPO shall, considering the past history to decide the issues in terms of the directions first determining the nature of transaction whether the payment made in terms of the Cost Contributing Agreement were cost sharing arrangement or in the nature of intra-group services and thereafter determine the issue of selection of most appropriate method which the Co-ordinate Bench has directed to first apply CUP using some comparable instances following Rule 10B(1)(a)(i) and in the eventuality the TPO comes to the conclusion that the relevant data is not available, he is free to select any appropriate method for fresh determination of ALP after hearing the assessee. Similarly, qua the R&D expenses etc. the Co-ordinate Bench remanded the issue back. The appeal of the assessee is allowed for statistical purposes.
Issues Involved
1. Legality and correctness of the order passed by the AO/TPO and upheld by the DRP. 2. Addition of ?6,27,11,181/- to the income of the appellant on account of international transaction of payment of management cost contributions. 3. Determination of the arm's length price (ALP) of the appellant's international transactions pertaining to payment of management cost contributions. 4. Disregarding the ALP determined by the appellant in the TP documentation. 5. Classification of transactions under intra-group services versus Cost Contribution Arrangement (CCA). 6. Consideration of documentary evidence provided by the appellant. 7. Identification and bifurcation of payment for each service separately. 8. Classification of services received as shareholder services. 9. Application of Comparable Uncontrolled Price (CUP) method. 10. Ignoring the report from independent auditors. 11. Establishing the need for services received from AE. 12. Benefits derived from the CCA. 13. Disregarding judicial pronouncements in India. Detailed Analysis Legality and Correctness of the Order The appellant challenged the legality and correctness of the order passed by the AO/TPO and upheld by the DRP, claiming it to be "bad in law and erroneous." The appellant argued that the order did not appropriately consider the facts and circumstances of the case. Addition to Income The AO, following the DRP's directions, made an addition of ?6,27,11,181/- to the appellant's income on account of international transactions related to management cost contributions. The appellant contended that this addition was made without proper justification and was erroneous. Determination of ALP The AO/TPO determined the ALP of the appellant's international transactions pertaining to payment of management cost contributions as Nil, against the sum of ?6,27,11,181/- incurred by the appellant. The appellant argued that this determination was incorrect and did not follow the proper transfer pricing guidelines. Disregarding ALP in TP Documentation The AO/TPO disregarded the ALP determined by the appellant in the TP documentation maintained under section 92D of the Income Tax Act, 1961, read with Rule 10D of the Income Tax Rules, 1962. The appellant maintained that their TP documentation was accurate and should have been considered. Classification of Transactions The AO/TPO classified the transactions under intra-group services, while the appellant argued that the payments were governed by a Cost Contribution Arrangement (CCA) and not an agreement for rendering intra-group services. Documentary Evidence The AO/TPO ignored the submissions and documents submitted by the appellant during the assessment proceedings, holding that the appellant had not furnished sufficient evidence to demonstrate the benefits received from the AE. The appellant contended that adequate documentary evidence was provided. Identification and Bifurcation of Payments The AO/TPO held that the appellant had not identified payment for each service separately and that it was necessary to bifurcate the different services to benchmark the payment under CCA. The appellant argued that such bifurcation was not required under the CCA. Classification as Shareholder Services The AO/TPO classified the services received by the appellant as shareholder services, implying no payment was warranted. The appellant disputed this classification, asserting that the services were beneficial and necessary for their operations. Application of CUP Method The AO/TPO applied the CUP method inappropriately, determining the ALP of the transaction to be Nil without furnishing details of price charged in any comparable uncontrolled transaction. The appellant argued that this application was incorrect and did not comply with Rule 10B of the Rules. Ignoring Independent Auditors' Report The AO/TPO ignored the report obtained by the participants of the CCA from independent auditors, which documented the quantum, manner, and methodology for computing the contribution by each participating entity. The appellant argued that this report should have been considered. Establishing Need for Services The AO/TPO held that the appellant had not established the need for the services received from AEs, based on the premise that no cost-benefit analysis was undertaken. The appellant contended that the need for services was evident and justified. Benefits Derived from CCA The appellant argued that they derived significant benefits from the CCA and that the costs were allocated on a prudent, reasonable, and appropriate basis. The AO/TPO did not appreciate this argument. Judicial Pronouncements The appellant contended that the AO/TPO disregarded judicial pronouncements in India on the issues involved, which should have been considered in their assessment. Conclusion The ITAT remanded the issues back to the AO/TPO for fresh determination, directing them to first decide whether the payments made under the Agreement were in the nature of Cost Sharing payments or Intragroup Services. The ITAT emphasized the need to apply the CUP method correctly and to consider comparable uncontrolled instances as per Rule 10B(1)(a)(i). If the CUP method could not be applied, the AO/TPO was instructed to use any appropriate method for fresh determination of ALP after hearing the appellant. The appeal was allowed for statistical purposes, and the order was pronounced on 12.10.2018.
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