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2018 (5) TMI 900 - AT - Income TaxTPA - International transaction involving of export of printed circuit boards ( PCBs ) by the appellant to its Associated Enterprise ( AE ) - sale of finished goods by the assessee to its AE AT & S AG(Europe) for further sale of the same to individual customers in Europe at the same price and in the same quantity - TPO held that the TNMM method should be applied to determine the ALP of the assessee s transactions - comparable selection criteria - Held that - In the assessee s case under consideration there are independent customers, and the price is fixed by the Principal (Assessee), the product design and specification is decided by the assessee. The Associated Enterprise, the AT & S AG (AE) plays a limited role, that is, it collect the money on behalf of the assessee and remits the same to assessee, for that AE is paid commission. Even commission and warranty expenses are determined and decided by the assessee (Principal). The AT & S AG (AE) does not do any value addition in the goods manufactured by the assessee. Therefore, in this scenario, the stand of the ld DR that CUP Method is not applicable to the assessee, is not acceptable. Tested party - Held that - The Indian TP regulation per chapter X of the Income Tax Act 1961 is an anti-evasion tool to prevent adverse profit shifts. The materiality of examination of the International Transactions has to be in this light. Therefore, the testing has to be done in order to examine if the Indian entity is offering its profits to lawful taxation in India. In order to determine the correct profits by ascertaining correct ALP, the transactions have to be examined by keeping the Indian entity in primary focus. Therefore, keeping the AE as a tested party would fundamentally defeat the basic purpose of the TP regulations. In the facts and circumstances of the case, the assessee Indian Company is justified to be taken as the tested party. TPA addition to be deleted. International transactions involving payments made by the assessee in respect of purchase, order handling services and sales services - Held that - at exercise off actual verification would be left to the AO under section 37 of the Act. The AO could, therefore, determine under Section 37 of the Act that the expenditure claimed was not for the benefit of the business, and thus, disallow that amount. This does not restrict or in any way bypass the functions of the TPO. The jurisdiction of the TPO is specific and limited i. e. to determine the arm s length price of an international transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the lncome Tax Rules. Therefore, we are of the view that the assessee has derived benefits from these services as per CCA agreement and hence the arguments advanced by the ld DR for the Revenue is not acceptable. Hence, we direct the AO/TPO to delete the arm s length price adjustment in respect of the international transactions involving payments made by the assessee in respect of purchase, order handling services and sales services.
Issues Involved:
1. Arm's length price adjustment for export of printed circuit boards (PCBs) to Associated Enterprise (AE). 2. Disallowance of payments made to AE for purchase and order handling services and sales services. Detailed Analysis: Issue 1: Arm's Length Price Adjustment for Export of PCBs to AE The main grievance of the assessee was the adjustment of ?90,32,40,004 to the total income concerning the international transaction involving the export of PCBs to its AE. The assessee argued that the transaction was at arm's length under the Comparable Uncontrolled Price (CUP) Method, as confirmed by the Jurisdictional Tribunal for AY 2011-12. The Transfer Pricing Officer (TPO) characterized the assessee as a contract manufacturer rather than a full-fledged manufacturer, leading to the adjustment. The TPO's characterization was based on the observation that 92.33% of the assessee’s production was sold to the AE, and a significant portion of raw materials and spare parts were imported from the AE. The TPO applied the Transactional Net Margin Method (TNMM) instead of the CUP method, leading to the adjustment. The Dispute Resolution Panel (DRP) confirmed the TPO's stand, stating that the AE performed significant functions beyond mere distribution, making the CUP method inapplicable. The DRP noted that the AE retained its commission while making remittances to the assessee, indicating that the AE was not a mere pass-through entity. Upon appeal, the Tribunal noted that the identical issue was covered in favor of the assessee by the Jurisdictional Tribunal in AY 2011-12, where the CUP method was deemed appropriate. The Tribunal emphasized the principle of consistency and found no change in facts or law. Therefore, the Tribunal directed the deletion of the arm's length adjustment of ?90,32,40,004. Issue 2: Disallowance of Payments for Purchase and Order Handling Services and Sales Services The second issue involved the disallowance of ?9,97,50,264 made by the TPO for payments to the AE for purchase and order handling services and sales services. The TPO determined the arm's length price of these services at NIL, alleging that they were shareholder activities and that the assessee failed to satisfy the benefit test. The DRP upheld the TPO's decision, stating that the services did not result in tangible benefits to the assessee and were routine in nature. The DRP emphasized that the assessee failed to provide sufficient evidence to demonstrate the benefits derived from these services. The Tribunal noted that the TPO/AO determined the arm's length price without applying any of the methods prescribed under section 92C(1) of the Act, violating the provisions of section 92C(3). The Tribunal referred to the decision in NLC Nalco (India) Ltd. vs. DCIT, where the TPO's determination of NIL value based on the benefit test without applying any prescribed method was deemed incorrect. The Tribunal also considered the principle of consistency, noting that no adjustments were made by the TPO in the previous three assessment years (AY 2009-10, AY 2010-11, and AY 2011-12) on the same facts and circumstances. The Tribunal emphasized that the AO did not make any adverse comments under section 37 of the Act regarding the services received, indicating that the services were indeed beneficial. The Tribunal concluded that the assessee had provided sufficient evidence to demonstrate the benefits derived from the services and directed the deletion of the arm's length price adjustment of ?9,97,50,264. Conclusion: The Tribunal allowed the appeal filed by the assessee, directing the deletion of the arm's length price adjustments for both the export of PCBs and the payments for purchase and order handling services and sales services. The Tribunal emphasized the principles of consistency and the necessity to apply prescribed methods under section 92C of the Act.
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