2015 (8) TMI 1082 - AT - Income Tax

Addition on account of difference in arm s length price (ALP) of international transaction - CIT(A) deleted the addition - Held that - CIT(Appeals) has rightly followed the decision of Mumbai Bench of the ITAT in the case of Dresses Rand India (Pvt.) Ltd. (2011 (9) TMI 261 - ITAT MUMBAI) holding that while evaluating the arm s length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Under these circumstances, we are of the view that the Learned CIT(Appeals) has keeping in mind the preponderance of the probability to run the business of assessee has rightly accepted the claimed expenditure on the nature of the services required to run the business of the assessee with the direction to the Assessing Officer to allow the same. The Hon ble jurisdictional High Court of Delhi in the case of Hive Communication Pvt. Ltd. (2011 (7) TMI 82 - DELHI HIGH COURT) followed by the Delhi Benches of the ITAT in the case of Ericson India Pvt. Ltd. (2012 (11) TMI 1 - ITAT, DELHI) has held that the legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of a prudent businessman. It was held that the it is not for the Assessing Officer to dictate what the business needs of the company could be. It is the businessman who can only judge the legitimacy of the business need of the company from the point of a view of a prudent businessman. The term benefit to a company in relation to its business has a very wide connotation. It was further held that it is not feasible to evaluate the price of each service in financial term in isolated and stand alone manner for each such service or part of the service and hence TNMM at entity is acceptable. The First Appellate Order on the issue is well supported by the decisions cited by the Learned AR and hence we are not inclined to interfere therewith. - Decided against revenue.

Issues Involved:
1. Justification of deletion of addition made by Assessing Officer/TPO on account of difference in arm's length price (ALP) of international transaction.

Detailed Analysis:

1. Justification of deletion of addition made by Assessing Officer/TPO on account of difference in arm's length price (ALP) of international transaction:

The Revenue challenged the First Appellate Order questioning whether the Learned CIT(Appeals) was justified in deleting the addition of Rs. 61,62,871 made by the Assessing Officer/TPO due to a difference in the arm's length price (ALP) of an international transaction.

The assessee, a wholly-owned subsidiary of Danisco A/S, Denmark, engaged in manufacturing and marketing food and non-food ingredients, had several international transactions with its associated enterprises during the year. The transactions included the purchase of raw materials, finished goods, commission received, allocation of IT costs, and reimbursement of expenses, all evaluated using the Transactional Net Margin Method (TNMM).

The TPO disagreed with the assessee's approach of aggregating all transactions and benchmarking them at the entity level. Instead, the TPO benchmarked the international transactions individually and issued a show-cause notice to the assessee to justify the payments made towards the allocation of IT costs. The TPO concluded that no services were actually received, as no evidence was provided, and determined the arm's length price of the transaction to be nil under the CUP Method. The TPO added the payment made by the assessee to its AE to the arm's length price charged by the assessee. However, the Learned CIT(Appeals) deleted this disallowance.

The Learned Senior DR argued that the decision of the ITAT in the case of Dresser Rand India Pvt. Ltd. followed by the Learned CIT(Appeals) was not applicable. He cited several other decisions to support his contention. Conversely, the Learned AR justified the First Appellate Order, stating that the necessary cost to run the business was not disputed by the TPO. The expenses claimed for IT costs were reasonable considering the turnover of the assessee and were essential for day-to-day operations. The costs were allocated without any markup based on the number of head counts using specific IT services.

The Learned AR contended that the TPO did not follow the required steps for applying the CUP method and that the expenses incurred by the assessee formed part of the cost base in calculating the PLI (OP/TC). He relied on several decisions to support his arguments.

The tribunal found that no payment for IT costs was made to any other party and that the TPO had previously accepted similar payments in the assessment year 2006-07. The detailed description of the services utilized by the assessee in its operations and their benefits were provided. The Learned CIT(Appeals) found that the invoices produced clearly mentioned the purpose of the payments and that the allocation key was reasonable. The tribunal agreed with the Learned CIT(Appeals) that the claimed expenditure was necessary for the business operations and that the arm's length price of such services could not be determined to be nil.

The tribunal upheld the First Appellate Order, finding it well-supported by the decisions cited by the Learned AR. The tribunal concluded that the legitimate business needs of the company must be judged from the viewpoint of the company itself and that it is not for the Assessing Officer to dictate the business needs of the company. The appeal was dismissed.

Order pronounced in the open court on 17.08.2015

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