2019 (4) TMI 1304 - AT - Income Tax

TP adjustment - foreign associated enterprises (AE) consideration as a tested party - HELD THAT - Indian Transfer Pricing guidelines issued by the Institute of Chartered Accountant of India vide guidance noted on report u/s 92E and transfer pricing guidelines issued by the OECD and considering the united nation practical manual of transfer pricing for developing country, we note that in the assessee s case under consideration, the Associate Enterprise(AE) can be selected as a tested party. Therefore, we direct the ld. TPO / Assessing Officer to treat the foreign associated enterprises as a tested party and compute the arms length price adjustment accordingly. Consideration of Audited segmental analysis of Associated Enterprises (AE) by DRP - submitted first time before DRP - in respect transaction of purchase of finished goods, receipt of commission and sale of finished goods by the assessee from the AE - assessee purchased finished goods from the AEs for sale to third parties - HELD THAT - In order to justify the transfer pricing adjustment the segmental results should be considered. We note that the assessee has not submitted the segmental reports before the TPO, however, the assessee has submitted during the DRP proceedings which has not been considered by the ld. DRP. DRP in subsequent years have accepted the segmental analysis of the assessee. We note that where segmental results are available, the adjustment can be made only on the basis of transaction and not on aggregation . See M/S. SYNIVERSE MOBILE SOLUTIONS PRIVATE LIMITED VERSUS DY. COMMISSIONER OF INCOME-TAX CIRCLE 16(2), HYDERABAD 2015 (3) TMI 9 - ITAT HYDERABAD and M/S. BRIGADE GLOBAL SERVICES PVT. LTD. VERSUS THE INCOME TAX OFFICER WARD-1(1) HYDERABAD 2014 (9) TMI 143 - ITAT HYDERABAD . Thus we direct the ld. TPO/Assessing Officer to consider the assessee s audited segmental results to compute arm s length price (ALP). Administrative supports services and IT support services received by the assessee from the Associated Enterprises (AE) wrongly treated to be in the nature of stewardship functions - HELD THAT - In subsequent assessment year 2014-15, the ld DRP, in assessee s own case based on the same facts and circumstances, deleted the addition made by ld TPO on account of administrative supports services and IT support services received by the assessee from the Associated Enterprises (AE), which was wrongly treated by ld TPO to be in the nature of stewardship functions. As the issue is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench , in assessee s own case (supra) we find that the issue is squarely covered in favour of the assessee and therefore we allow the ground no. 3 raised by the assessee.

Summary

Issues Involved:
1. Whether the associated enterprises (AE) can be considered as a tested party as per Indian Transfer Pricing Regulation.
2. Accepting the audited segmental analysis for the transaction of purchase of finished goods, receipt of commission, and sale of finished goods by the assessee from the Associated Enterprises (AE).
3. Administrative support services and IT support services received by the assessee from the Associated Enterprises (AE) wrongly treated to be in the nature of stewardship functions.

Detailed Analysis:

Issue 1: Whether the associated enterprises (AE) can be considered as a tested party as per Indian Transfer Pricing Regulation.
The assessee, Almatis Alumina Private Limited, argued that the associated enterprises (AE) should be considered as the tested party because they are the least complex entities. The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) rejected this argument, asserting that under Indian Transfer Pricing regulations, the Indian entity should be the tested party. The Tribunal, however, found that the assessee's functional, asset, and risk profile (FAR analysis) indicated that the assessee was more complex than its AEs. The Tribunal noted that the OECD guidelines, US TP regulations, and various judicial precedents support the selection of the least complex entity as the tested party. Therefore, the Tribunal directed the TPO to treat the foreign associated enterprises as the tested party for determining the arm's length price (ALP).

Issue 2: Accepting the audited segmental analysis for the transaction of purchase of finished goods, receipt of commission, and sale of finished goods by the assessee from the Associated Enterprises (AE).
The assessee argued that the segmental results should be considered for transfer pricing adjustments. The TPO rejected the segmental analysis as it was not audited and seemed far-fetched. However, the Tribunal noted that in subsequent assessment years, the DRP accepted the segmental analysis of the assessee. The Tribunal also cited various judicial precedents that support considering segmental financial data for transfer pricing analysis. Therefore, the Tribunal directed the TPO to consider the assessee's audited segmental results to compute the ALP.

Issue 3: Administrative support services and IT support services received by the assessee from the Associated Enterprises (AE) wrongly treated to be in the nature of stewardship functions.
The TPO treated the arm's length price of administrative and IT support services received by the assessee from its AEs as NIL, arguing that the benefits of these services were not proven and were in the nature of stewardship activities. The DRP upheld this view. However, the Tribunal referred to its earlier decision in the assessee's own case for the assessment year 2011-12, where it was held that the services received were not stewardship services but were essential for the assessee's operations. The Tribunal found that the assessee had provided sufficient evidence to demonstrate the benefits derived from these services. Therefore, the Tribunal allowed the assessee's appeal on this ground, holding that the charges paid for these services were at arm's length.

Conclusion:
The Tribunal allowed both appeals filed by the assessee for the assessment years 2012-13 and 2013-14, directing the TPO to treat the foreign AEs as the tested party, accept the audited segmental analysis, and recognize the administrative and IT support services as genuine services rather than stewardship functions.