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2016 (7) TMI 245 - AT - Income TaxDetermination payment of royalty - whether the issue as to the payment on account of other group charges made by the assessee to its associated enterprise for services rendered was to be determined by the Transfer Pricing Officer/Dispute Resolution Panel or it was to be determined by the Assessing Officer under section 37(1) of the Act ? - Held that - The instant case is squarely covered by the judgment in CIT v. Cushman and Wakefield (India) Pvt. Ltd. 2014 (5) TMI 897 - DELHI HIGH COURT because in the instant case the Transfer Pricing Officer has exceeded his power by determining that the assessee has not received services from its associated enterprise, thus failed the benefit test and further held that the assessee had not furnished any evidence to any visit of the employee of its associated enterprise in connection with the services rendered entailing payment of group charges by the assessee. We are of the considered view that since the payment made by the assessee to its associated enterprise for services rendered was basically an expenditure incurred for the purposes of business, the same are to be determined under section 37(1) of the Act, if allowable or not and this issue is in the exclusive domain of the Assessing Officer to be determined. Now, adverting to the assessment order passed by the Assessing Officer which is in consonance with the direction issued by the Transfer Pricing Officer/Dispute Resolution Panel, vide which group charges to the tune of ₹ 1,89,53,444 have been treated as adjustment in the arm s length price. The Assessing Officer has neither examined nor returned any findings whatsoever if the payment to the tune of ₹ 1,89,53,444 made to the associated enterprise for availing of services from its associated enterprise is an expenditure incurred for the purposes of business under section 37(1) of the Act rather passed the assessment order in a mechanical manner in consonance with the directions issued by the Transfer Pricing Officer/ Dispute Resolution Panel. Moreover, when the Transfer Pricing Officer has not disputed that the services were availed of by the assessee from its associated enterprise, the question of determining the arm s length price of group charges to the tune of ₹ 1,89,53,444 does not arise because it was to be done by the Assessing Officer only.
Issues Involved:
1. Transfer Pricing Adjustment of ?1,89,53,444. 2. Engineering Services availed from Associated Enterprises (?1,46,21,403). 3. Administrative Support Services (?43,32,041). 4. Benchmarking Analysis. 5. Economic Analysis for Benchmarking Engineering Services. 6. Determination of Arm's Length Price (ALP) of Group Charges. 7. Jurisdiction of Transfer Pricing Officer (TPO) vs. Assessing Officer (AO). Detailed Analysis: 1. Transfer Pricing Adjustment of ?1,89,53,444: The appellant sought to set aside the impugned order dated October 19, 2011, passed by the Dispute Resolution Panel (DRP), Transfer Pricing Officer (TPO), and Assessing Officer (AO) for the assessment year 2007-08. The addition of ?1,89,53,444 by the AO was challenged on the grounds that it was not in accordance with the law. The DRP confirmed the adjustment without considering the appellant's objections on their merits, relying solely on the TPO's order. 2. Engineering Services availed from Associated Enterprises (?1,46,21,403): The DRP misconstrued the appellant's business model, overlooking the supporting evidence and arguments provided. The DRP erroneously concluded an overlap between royalty payments and charges for engineering services, failing to appreciate the distinct purposes of these payments. The engineering services were availed primarily at the tender stage (OTO stage), where no sales were generated, thus negating any overlap with the license agreement. The DRP also disregarded the project-specific nature of the engineering services. 3. Administrative Support Services (?43,32,041): The DRP incorrectly concluded that administrative support services availed by the appellant formed part of engineering services. This conclusion was deemed prima facie incorrect and not sustainable. 4. Benchmarking Analysis: The TPO and DRP summarily disregarded the evidence, including an independent auditor's certificate, supporting the appropriateness of costs allocated for engineering services. They also rejected the 'cost plus method' identified by the appellant as the most appropriate method under section 92C(1) of the Act. 5. Economic Analysis for Benchmarking Engineering Services: The TPO and DRP rejected the appellant's economic analysis for benchmarking outbound engineering services, disregarding the segmental approach adopted by the appellant in accordance with rule 10B(e) of the Income-tax Rules, 1962. They relied on data from the financial year 2006-07, overlooking the accounting practices and functional characterization of the appellant as an EPC contractor and the market conditions for long-term contracts. 6. Determination of Arm's Length Price (ALP) of Group Charges: The TPO determined the ALP of the payment made towards intragroup charges of ?1,89,53,444, concluding that the appellant failed to demonstrate the actual receipt of services and benefits derived therefrom, thus failing the 'benefit test.' The DRP directed to enhance the income of the appellant by ?1,89,53,444, as the appellant failed to bring on record evidence regarding the payment of group charges. 7. Jurisdiction of Transfer Pricing Officer (TPO) vs. Assessing Officer (AO): The TPO assumed the powers of the AO by determining that the appellant had not received services from its associated enterprise, thus failing the benefit test. The jurisdiction of the AO under section 37(1) and the TPO under section 92CA is distinct. The TPO's role is to conduct a transfer pricing analysis to determine the ALP, not to determine whether there is a service from which the appellant benefits. Conclusion: The matter is restored to the AO to determine the issue of payment of group charges afresh after providing an opportunity of being heard to the appellant. The AO must examine if the payment of ?1,89,53,444 made to the associated enterprise for availing services is an expenditure incurred for business purposes under section 37(1) of the Act. The appeal is allowed for statistical purposes.
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