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TMI Blog2016 (3) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... st basis. As regards the purchase of software and subscription fee the software was purchased by the AE for the entire group i.e., Alcatel Lucent group. These softwares were purchased from third parties based on “combined global requirement” of the group. It is a common practice that when there is a bulk purchase or for multiple number of users the negotiated rates will be cheaper than the isolated purchases. The cost of this software was shared by the Indian entity. The assessee had given the details of comparison of the software purchased. The TPO in her remand report has also not raised any objection to the submission of the assessee except stating that “the claim of the assessee appears to be verifiable. In view of this, we see no reason why adjustment should be made on account of sharing of software expenses with the AE. The TPO has also not given any reason to treat the subscription value as nil. Therefore, in the absence of any reason to hold otherwise, the subscription paid should not be disallowed. We accordingly, do not find any infirmity in the findings of the ld. CIT(A) while directing the AO to delete the addition made under these heads - Decided against revenue - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benchmark the international transaction. The assessee has submitted two certificates, before the TPO, one from Alcatel Lucent France and other from Alcatel Lucent Deutschland AG certifying that all the equipments supplied to the assessee company have been supplied at cost without charging any markup. They have further stated that the costs have been computed on the following basis: Direct costs - Actual cost R D costs - 8% of actual cost Management cost - 3% of actual cost Fixed and variable cost coverage - 9% of actual cost CSC - 1.2% of actual cost They have further certified that the same methodology was applicable in determining the intra-group transfer pricing for all the group entities. The TPO issued show cause notice to the assessee and after considering the response to the show cause notice computed to the arm s length price of the international transaction as below : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O has not given any reason to treat the subscription value (amounting o ₹ 52,718/-) as nil. Therefore, in absence of any reason to hold otherwise the subscription paid should not be disallowed. AO/TPO is directed to delete the addition made under these heads. Unquote (Emphasis supplied) (B) Ground no. 2: Regarding the Purchase of Equipments 1. During the captioned Assessment Year, the Company purchased base station equipment, modems, CPE cards, Cables, etc. from its AEs. The Ld. TPO arbitrarily identified prices of certain equipments and alleged that the same were comparable to the equipments being imported by the Company from its Associated Enterprises (AEs). 2. In this regard, the Respondent humbly submits that the equipments being imported were not purchased by the AEs from third parties but manufactured by the AEs themselves. Further, the Respondent has also not imported similar/ same equipment from any unrelated party in the same financial year. 3. As the equipments had been developed in-house by the AEs, price details/ data of similar equipment are also not available in the Public Database. The equipment is utilized by the Respondent for it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government. Reliance in this regard is placed on the decision of the Hon'ble Supreme Court in Apollo Tyres Ltd. (reported in 255 JTR 273). In this case, the Apex Court has held that the accounts of a company must be accepted as authentic and binding if the same have been maintained in a manner provided by the Companies Act, 1956 and have been audited and scrutinized and certified by the statutory auditors of the Company. Further, they have been approved by the company in its general meeting and also filed with the Registrar of Companies (RoC). The Court held that where the above have been complied with, the accounts must be accepted as authentic and binding. The relevant portion of the judgment is quoted below: Quote While so looking into the accounts of the company, an Assessing Officer under the Income Tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for your Honour's reference: Quote 6. The next question to be considered is whether this price variation noticed by the TPO should be taken as the basis for making adjustment in the transfer pricing. The grievance of the assessee is that the comparable price has been obtained by the TPO from the customs authorities and the valuation of the customs authorities need not necessarily be realistic as that department is more interested in collecting import duties. We should state without fear of contradiction that the customs authorities are assigning values to the imported goods on the basis of scientifically formulated methods and they are responsible for making a fair assessment value of the imported goods. The valuation made by the customs authorities is not an arbitrary exercise. But on the other hand, it depends upon large volume of international data classified according to internationally accepted protocol. Therefore, it is not possible to say that the credibility of the price rate furnished by customs authorities needs to be discounted. 7. It is always possible for an assessee to establish its case for a different price other than the customs price provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO is flawed and contrary to the provisions of the Indian Transfer Pricing regulations. In this regard, the Assessee would like to quote the provisions as laid down under Rule 106(4) of in the Income Tax Rules, 1962 (the Rules), for your Honour's ease of reference: Quote 10B(4) The data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in ivhich the international transaction has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. Unquote (Emphasis supplied) a. It is clear from the above that the intention of the law makers is to compare the controlled data with the uncontrolled data which pertains to the same financial year. The only exception to the above, as mentioned in the rule above, is that data for two prior years may be used, only if based on facts it can be ascertained that it had an influence on the prices for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the same products from third parties has been summarized in the table below for your Honour's ease of reference: Product Description as per customs documents Model Number Product Description as per AE s Quantity Price charged by AE s to CDOT (in Euro) Total Value Average Price Charged by AE s to third parties (in Euro) +5% of range of the price Base Station Receiver 3BK 27506 AAAA Model Wimax Base Station A9116WBSA25- 2 1 12,112 12,112 12,499* 12693 -DO- -DO- Wimax Base Station A9116WBSA25- 2 1 12,112 12,112 12,499* 12693 Transciever Zyxel Wimax CPE PCMIA Card N.A. Zyxel Wimax CPE PCMIA Card 2 136 272 191* N.A. *Refer Annexure 4 of Submission dated October ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kit, as explained above, is a highly technical device, which forms the primary- component to a Base Station Transceiver. Accordingly, the comparative analysis undertaken by the Ld. TPO in the impugned Transfer Pricing order is flawed. Further, with regard to the price of NEMO Kit as charged by the AE from the Respondent, the Respondent would like to submit that the said product is a proprietary' product of the group, which is sold as a part of a Base Station Transceiver to the customers. The NEMO Kit, being the primary and core component of the final product is not sold in isolation in the open market. Accordingly, the market price of the component is not available in the public domain. Furthermore, as the Respondent is a research organization, engaged in undertaking research and development in the area of wireless broadband technology, this component was provided to the Respondent on a sporadic basis for undertaking research work. The component purchased was purely provided to the Respondent for non-commercial use and thus the market price of the same cannot be ascertained but for the cost certificates provided by the AEs that the said equipment was sold on a cost to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO while negating the cost certificates provided by the Respondent has stated that the Respondent has not been able to substantiate the cost by way of the actual cost calculation. In this regard, the Respondent has now been able to secure the standard cost list that was applicable during the relevant assessment year for the two balance equipment/ components, namely Base Station Transceiver (I Section) and Modem Indoor I DIV 2.5 Ghz (refer Annexure 5 of the submission to CIT(A) dated October 8, 2012 )(PB 108). From the perusal of the standard cost list alongwith the formula as mentioned in the cost certificates provided by the AEs, we can arrive at the price at which the Respondent purchased the equipment/ component from its AE. The calculation of the same has been given below: Nature of cost Formula Station Trariiseeiver (I Section) (WBSA25-1 as per pricelist) Modem Indoor I DIV 2.5 Ghz ( A9100 2.5 Ghz CPE simple indoor EU power as per price list) Direct Cost* A 6935.24 216.67 R D Cost B = A*8% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayer of the entities buys the similar quantities in comparable quantities and in similar terms from the associate parties in the comparable markets (internal comparables). 10. An ALP Party buys the particular goods, in comparable quantities and in the similar terms from the other arm s length associate party in similar markets (external comparable). 11. In addition to this, while determining the ALP of an international transaction, under Rule 10C(2)(d), it is mandatory to judge with reference, among other things to the condition prevailing in the market, the overall economic development, the level of competition and whether the markets are wholesale or retail 12. The assessee has submitted the cost certificate from its AEs. The cost certificates duly certify the assessee s claim that only the actual cost component had been charged from the assessee. The customs Valuation Certificates were also submitted before the lower authorities which state that the value of the imported equipment has been declared truthfully. 13. The decision of Chennai Bench in the case of Coastal Energy Pvt. Limited in ITA No. 2099/Mds/2010 dated 13th July, 2011, quoted by the assessee is for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... *Refer Annexure 4 of Submission dated October 8, 2012 for third party rates and average computation 15. The assessee is a research organization engaged in undertaking research and development in the area of wireless broadband technology. This component was provided to the assessee on a sporadic basis for undertaking research work. The component purchased was purely provided to the assessee for non-commercial use and thus the market price of the same cannot be as ascertained. The cost certificates provided by the AEs certify that the said equipment was sold on a cost to cost basis. 16. As regards the purchase of software and subscription fee of ₹ 52,718/-, the software was purchased by the AE for the entire group i.e., Alcatel Lucent group. These softwares were purchased from third parties based on combined global requirement of the group. It is a common practice that when there is a bulk purchase or for multiple number of users the negotiated rates will be cheaper than the isolated purchases. The cost of this software was shared by the Indian entity. The assessee had given the details of comparison of the software purchased. The TPO in her remand report has also no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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