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TMI Blog2012 (11) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... uncontrolled price method ( CUP method), for the subject transactions being most direct method for determining arm's length price and chosen as most appropriate method in this case by TPO, therefore, cannot be faulted with. We, therefore, do not find any error in rejecting the TNMM method applied by the assessee and determination of ALP by applying CUP method for Benchmarking international transactions in a case like this. The DRP also cannot be said to have erred in approving the CUP method adopted by the TPO for Benchmarking international transactions with the AE. Professional Consultancy Management fee for support services - Held that:- The impugned transactions are found to be distinguishable and separate international transactions, carried by the assessee with its Associate Enterprise. Each and every transaction was required to be bench marked separately. The appellant did not compute net profit margin realized from each such transaction nor laid any material on record to show that the available data of comparable transactions, if any, is unreliable or inadequate. These transactions are also not shown to be closely linked with each other. In fact in India no guidanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e closely linked transactions for the purpose of benchmarking such transactions thereby making an adjustment of Rs. 56,157,877 by determining the arm's length price ("ALP") of the following international transactions of the appellant as NIL; i. Payment of management fee; ii. Payment of professional fee; and iii. Payment of SAP implementation fee. Selection of method 4. Erred in rejecting the transfer pricing documentation maintained by the appellant and upholding the non-acceptance of Transactional Net Margin Method ('TNMM') adopted by the appellant for determination of its arm's length price in connection with its international transaction; 5. Erred in upholding the adoption of comparable uncontrolled price ('CUP') determining the arm's length price in respect of appellant's international transaction without providing any comparable uncontrolled transaction(s) for the computation of the ALP; Scope of transfer pricing adjustment 6. Erred in not following one of the prescribed methods for computing the arm's length price in relation to international transaction, without appreciating that the scope of transfer pricing adjustment is restricted to computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee with its AE by passing an order dated 27-10-2010, which contained detailed reasoning for making the adjustment by application of CUP method and by determining ALP in respect of following transactions at Nil: Professional consultancy 15,207,206 Debited to Profit Loss Account Management fee for support services 14,056,800 -do- SAP consultancy charges and other Expenses 26,893,871 Capitalized in fixed asset schedule. Total 56,157,877 3.1 The AO thereafter made a draft assessment order u/s 144C(5) of the Act on 20-12-2010 proposing to assess the returned income of Rs. 1,71,64,832/- to Rs. 6,25,65,161/-. In this income, the adjustment suggested by TPO was incorporated without any alteration or adjustment. 3.2 Thereafter the assessee carried the dispute before the Dispute Resolution Panel-I, New Delhi ("DRP" in short), by way of filing his objections in prescribed form no. 35A on 25-1-2011. The DRP after affording effective opportunity of being heard to the assessee and after considering entire facts as brought before it by the assessee found ( as noted in para 3.1 of their order) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Knorr Bremse India Private Limited ("KB India" or "The assessee") had entered into multiple international transactions with its Associated Enterprises ("AEs") during the year, including the following - purchase of raw material and consumables; receipt of testing services; purchase of finished goods; sale of raw material and consumables; purchase of capital items; payment of SAP license and software licenses fees; reimbursement and recovery of transactions; and three other transactions, the arm's length value of which was determined to be 'NIL' by the TPO ("impugned transactions") - receipt of professional services; receipt of management services; and receipt of SAP consultancy services. (ii) The assessee in the transfer pricing report maintained by it, adopted transactional Net Margin Method ("TNMM") as the most appropriate method for various international transactions aggregated together under the two business segments - "manufacturing" and "trading". The approach used by the assessee was in accordance with Rule 10A (d) of the Income Tax Rules, 1962, which defines the term transaction to include a "number of closely linked transactions". (iii) The various transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions themselves. There was no information or material on record that may lead to such conclusion. - Even as the TPO used the CUP method, he failed to apply the available CUP information for the SAP implementation services transaction provided by the assessee. For the SAP implementation services, the assessee had provided the fee quoted by third party services provider in India. Even the DRP failed to correct this anomaly. 4.2 The TPO erred in determining 'Nil' value as the arm's length price for the receipt of management support services KB India has entered into a service agreement with its AE for the receipt of Marketing, HR, IT and other business related support services to KB India. Details of information submitted to the TPO Nature of services Provided vide submission dated 18 October 2010 Evidence for receipt of services HR services - Copies of emails wherein the details and schedule for regional HR manager summit have been discussed. Further, the letter of invitations issued to the specified employees were also submitted (pg 148-151 of paper book, Page 68 - 70) Accounting and financial support - KB India submitted emails wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation to the business development services - "However, no tangible benefits have been demonstrated by the Assessee in this respect' In relation to the Human Resources Services - "This services that the AE has provided, if at all, is for the group. The assessee should not be expected to make a payment for the same." In relation to the Accounting, financial support and controlling services - "the assessee has sufficient local help to allow it to overcome the legal challenges at the local level, if any. The kinds of services that the assessee speaks of are at best duplicate services for which the assessee need not make any separate payment." In relation to the IT services - "the assessee has not been able to provide any proof as to what are the complex problems that the AE has solved, which the assessee would have been unable to do. The problems solved by the AE have been created only because of the implementation of SAP. Further, the implementation of hotline services and ongoing support is expected from the AE without any charge" 4.4 From the above, it seems clear that the TPQ has not questioned the actual receipt of services by KB India rather he has disregarded the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices and ongoing support services" - The TPO has not placed any material on record to substantiate that the Accounting, financial support and controlling services provided by the AE are "duplicate". 4.8 TPO erred in determining 'Nil' value as the arm's length price for the receipt of Professional Services. 4.9 During the relevant assessment year KB India had made payment for the salary cost of three employees, one of which was seconded to KB India and was on payroll of KB India. The services rendered by these employees to KB India include assistance in planning, expansion of production facilities, provision of technical support to the sourcing team, supplier identification and coordination of maintenance activities. The actual costs incurred by the AE in relation to provision of these services have been charged as professional consultancy services. Details of information submitted by the assessee Nature of services Provided vide submission dated 19 October 2010 providing details of visits of the employees of AE and description of various activities performed by these employees of the AE (page 165-166) Evidence for receipt of services KB India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n how to run its business and whether to provide training to its employees on the job or vide some other manner. 4.13 Sufficient back-up documents evidencing the receipt of such services are already provided. 4.14 The cost incurred by the AE is provided by the assessee. The professional services charges are mere reimbursement of expenses wherein the salary cost of the three personnel is reimbursed by the assessee. 4.15 TPO erred in determining 'Nil' value as the arm's length price for the receipt of SAP consultancy services 4.16 During the relevant assessment year SAP was implemented by KB India in place of the earlier used Fox-pro. KB India had made payment for the services received in connection with the implementation of SAP and with respect to data migration from the earlier used system to SAP. Details of information submitted by the assessee Nature of services Provided vide submission dated 19 October 2010 (page 165-196) Evidence for receipt of services KB India has submitted the following evidences in respect of these services:- ( a ) E-mails evidencing provision of SAP support services and training workshops/programmes on SAP. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - the TPO has again questioned the commercial wisdom of KB India to select the service provider from which it wants to avail these services. In this regard, as submitted above, there are various judicial precedents wherein it has been held that such an act on the part of TPO is not permitted under the provision of the Act. Further, the TPO has failed to appreciate that had KB India availed such services from a third party service provider, it would have paid a higher sum to the third party service provider than what it actually paid to the AE. 4.19 TPO cannot disregard a transaction merely by stating that services are of a very general nature. 4.20 The DRP in its order merely confirmed the findings of the TPO without considering the merits of the case. In this relation, the DRP provided its finding in a few lines merely focusing on one transactions relating of receipt of professional services. In this relation, the DRP order mentions - "The assessee has furnished letter of appointment of Ms Rita Ricken as team leader sales logistics. The email enclosed in submission dated 24.01.2011 before DRP do not however on perusal show any sales logistics work. She seems to be merely coo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rked all its transactions after aggregating them. According to the assessee, these transactions relating to professional consultancy and management fee for support service and SAP consultancy charges and other expenses amounting in all to Rs. 5,61,57,877/- are so closely interlinked with other transactions that the same were aggregated under TNMM. The aggregation of separate, distinct and distinguishable transactions is not permitted as per Indian TP legislation. Under TNMM, each international transaction entered into with an AE, is to be bench marked separately. 5.3 Rule 10B(1)(e) of the Income-tax Rules, 1962 reads as follows: "10B(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner namely: ** ** ** (e) Transactional net margin method, by which, __ (i) The net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h they were not at ALP in respect of each transaction so carried by him. The element of "cross subsidisation" is not permitted under Indian Income Tax Legislation. The assessee cannot take a plea of set off of the higher price paid (over and above ALP) in one international transaction with lower price paid (below the ALP) in another identical transaction, and vice versa. 5.5 In this connection reliance is placed upon order of the Appellate Tribunal in DCIT v. Ankit Diamonds [2011] 8 ITR (Trib) 487 (Mum.) dated 26-11-2010. The relevant portion in para 21 of the order is as under: "In our view, these submissions of the assessee are the correct legal position. The Assessing Officer himself states that, he finds some merit and force in the submission of the assessee, but in view of the directions of the Transfer Pricing Officer and as the assessment is getting time barred, he made the addition in question. The submission of the assessee that the Transfer Pricing Officer is not authorized to determine the net operational profits at the enterprise level and thereby determine the total income of the assessee, but that he shall determine only the arm's length price of the international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct as each transaction has not been benchmarked separately. 5.8 The assessee has challenged that CUP method was not the most appropriate method in this case. It is pointed out that the assessee, by not bench marking each transaction separately did not discharge its burden of proof. The TPO has noticed that CUP was the most suitable method for bench marking these transactions. It has been pointed out buy the TPO on page 19 of his order as follows: (a) The assessee has not been able to provide any basis of this payment made to the AE. (b) The assessee has not been able to provide any separate benchmarking for the payments of these services. The assessee should have been able to demonstrate that any independent party would also have made this payment in similar circumstances, it has not been able to do so. (c) The assessee has not been able to give the details of cost incurred by AE on account of various services. (d) The assessee has not been able to provide any documentary proof of tangible benefit received on account of these services. Some document had been provided in its submission of 18.10.2010 and 19-10-2010. They were evaluated it was found that they are simples ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Only the ALP was determined. It was the Assessing Officer who computed the income by adopting the ALP decided by the TPO at "nil". 5.11 The Appellate Tribunal further goes on to state in para 45 of its order and concluded as under: "45. In our view, under similar circumstances a uncontrolled comparable company would not incur such expenditure. Hence, the ALP is rightly determined at "nil". As no expenditure would have been incurred, there is no necessity to apply a particular method to arrive at such conclusion. In fact, by all the five methods or any one of them, when applied to the fact that there is no necessity of payment, the result of "nil" ALP will come." 5.12 Reference has also been made to the judgment by Bangalore Bench of the ITAT in the case of M/s Gemplus India Pvt. Ltd. v. ACIT 2010-TLL-55-ITAT-Bang-TP dated 21-10-2010. 5.13 The ld. Counsel of the assessee has raised a plea that the separate payments for each service have been made by the appellant and these payments have gone to benefit the assessee in conducting his business and the same are not shown to have been paid for any exteneous reasons. The assessee may argue that the services have benefited i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has suffered continuous losses". Earlier to this they have observed that Revenue cannot disallow any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in view of the Revenue the expenditure was unremunerative. Looking into observations of their Lordships, it has to be held that reasonableness of an expenditure has not been excluded from determination." 5.15 The principle stated in MC Ericsion v. ACIT (ITA no. 5871/Del/11 dated 8-6-2012) is on the issue of commercial expediency. Though it does not need any deliberation, the applicability of principle of arm's length test of international transactions has not been done away with. The expenditure incurred in an international transaction has necessarily to pass the test of ALP. 5.16 Further more, it has been contended that the expenditure which is the subject matter of adjustments by the TPO ought to have been allowed in the same manner as the expenditure is allowable u/s 37(1) of the Act. This plea of the assessee however cannot be allowed for the simple reason that the provisions of sec. 37(1) and proviso to sec. 92 operate in different field and thus the argument be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Upon perusal of entire material on record, we find ourselves in agreement with the TPO, as the approach of the appellant does not conform to the transfer pricing regulations. Chapter X of the Income-tax Act, 1961, makes special provisions relating to avoidance of tax. The transfer pricing regulations under this Chapter is a code in itself. Section 92(1) of the Act and Explanation thereunder as reproduced herein below, are relevant for computation of income from international transactions: "92(1) Any income arising from an international transaction shall be computed having regard to the arm's length price. Explanation - For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price." 7.1 The aforesaid Explanation provides that allowance for any expense or interest, arising from an international transaction, shall be determined having regard to the arm's length price. The CBDT in its Circular no. 9 of 27-8-2002 have explained that the intention in laying the provision is to prevent avoidance of tax by subjecting taxable income to a jurisd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case like this. The DRP also cannot be said to have erred in approving the CUP method adopted by the TPO for Benchmarking international transactions with the AE. The assessee's ground on this count being devoid of any merit stands rejected. 8. The assessee has assailed the impugned order with respect to TPO's action in determining Nil value as the ALP for the receipt of SAP consultancy charges and thereby making addition of Rs. 2,68,93,871/- to the income of the assessee for entering into international transaction with its AE. 8.1 Having heard the parties and after perusal of the entire material on record as well as the impugned order, we find that the DRP has recorded a finding that SAP license and MS office have been purchased at a lower rate and to that extent benefit test for the recipient is clear and assessee must be given benefit. Accordingly, it was of the opinion that the TPO is to verify and recompute ALP, if any. In the same breath it, however, has found logic in the conclusion of TPO and decided not to interfere in the conclusion of TPO. 8.2 Having heard parties with reference to material on record and since the DRP, upon perusal of facts on record, reached a f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then makes suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorized." 9.2 After hearing the parties with reference to material on record, we find that the authorities below have not conclusively held that the assessee could not enter into such a transaction nor had they disallowed the same by holding that such an expenditure is no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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