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TMI Blog2016 (5) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... before the DRP. In pursuance of the directions of the DRP, the AO passed an order u/s. 143 (3)r. w. s. 144C(5) of the Act on 27. 12. 2013. ITA/1218/Mum/2014: 2. First effective ground of appeal, raised by the AO, is about rejection of CUP as most appropriate method for determining the Arms Length Price of transaction of import of Active Pharmaceutical Ingredient (API). During the TP proceedings, the TPO found that the assessee-company is a 100% subsidiary of M/s. UCB SA, Belgium, that it had imported API. s(including Piracetam)from its AE. s for manufacture and sale of (Finished Drug Formula - tion) FDF. s in India, that it had benchmarked the transaction using transactional net margin method(TNMM), that the value of IT was Rs. 5. 80 crores, that the operating margin on revenue was claimed to be at 16. 53%, that the operating margin of the comparables claimed to be at 16. 31%. The assessee claimed that the operating margin was higher than that of the comparable companies, the transactions were at Arm's Length. However, the TPO held that the bench - marking analysis conducted by the assessee was not showing proper results. So, adopting CUP method, he determined ALP of import pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal had found that the TNMM applied by the assessee at the entity level was not correct, that for the period under consideration it had conducted its TP study at the Segmental level, that the observation of the TPO that the facts for the period under appeal were different to those of the earlier years was not appropriate, that the patent of the API had expired even before AY. 2002-03, that the assessee had placed reliance on an internal CUP, that the AE had sold the API to the parties in Pakistan and Indonesia at a price higher than those of its sale to the assessee, that those geographies and market conditions were comparable to the IT of the AE with the assessee, that in any TP analysis internal CUP would be preferable over an external CUP, that the CUP was not MAM considering the facts of the case. The DRP directed the AO/TPO to verify the segmental analysis done by the assessee under TNMM and to quantify the TP adjustment on such verification. 4. During the course of hearing before us, the Deparmental Representative(DR) argued that the TPO had decided the issue after collecting data of MLL, that the benchmarking done by him was based on a valid comparable, that there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons best known to him. Provisions of Rule 10 B of the Rules indicates that a comparison of price of a controlled transaction could be made with a price of a comparable uncontrolled transaction. As per the settled principles governing cup the comparable should be perfect or realistic and if not it should allow reasonable and accurate adjustment. If the method is unable to achieve the said goal, it has to be rejected. In the case of Aztec Software And Technology(107 ITD 141), the Tribunal has dealt the issue of use of CUP method as under: 116. Meaning of Arm's Length Price is given in Clause (ii) of Section 92F as under: 92F (ii)"Arm's Length Price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions; 117. Thus whatever methodology is chosen for the purpose of determination of arm's length price under section 92C, these criteria, as specified in the Act and the Rules have to form a basis of judging the comparability. Thus there should be a proper analysis of such transactions with respect to, the functions performed, the assets employed and the risk assumed by the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is the identification of an identical transaction, in a situation where a price is charged for products or services between unrelated parties. While applying CUP the comparability between controlled and uncontrolled transactions should not be only judged from the point of product comparability, but should also take into consideration the effect on price of other broader business functions. Even minor differences in contractual terms or economic conditions, geographical areas, risks assumed, functions assumed etc. could affect the amount charged in an uncontrolled transaction. Comparability under this method depends on close similarities with respect to various factors. (emphasis added) The CUP can be internal or external. The internal CUP is the price that the assessee has paid/charged in a comparable uncontrolled transaction with an independent party when compared to the price paid / charged in a controlled transaction. External CUP is a price charged in comparable uncontrolled transactions between third parties when compared to the price of a controlled transaction. However, where CUP method is to be applied on the basis of public data, it is provided in Regulation 1. 482 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriately comparable transactions. In response to this, the OECD report suggests that multinationals and tax authorities should take a more adaptable approach to the use of this method, possibly working with data prepared for CUP purposes supplemented by other appropriate methods. The extent of the OECD's support for the CUP method can be seen from the comment that 'every effort should be made to adjust the data so that it may be used appropriately in a CUP method'. 167. In the same publication and with reference to OECD reports, the various difficulties which are felt while making adjustment or adjustments are made impossible are stated to be on account of the following differences: differences in the quality of the products; differences in the geographic markets; differences in the level of the market; and differences in the amount and type of intangible property involved in the sale. " We find that while adjudicating the appeals for the assessment years 2002-03 and 2003 -04, the Tribunal had rejected the cup method adopted by the TPO, that he had not proposed adjustment in the subsequent years i. e. assessment years 2010-11 to 2012-13. Ground no. 1 is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry of being arm's length. The DRP directed the AO to delete the TP adjustment of 7. 3 crores. 8. Before us, the DR supported the order of the TPO. The AR contended that all the material was made available to the TPO, that there was no doubt about availing of services of the AE, that allocation was on scientific basis. 9. We find that the assessee had entered into agreement with its AE for econnectivity, dt. 1. 1. 2004, to received SAP services, e-connectivity services and people soft services, that in the TP study the cost incurred by the AE in providing services by the AE. s to the assessee on the basis of number of users, that the Operating margin of the assessee from all other transaction was higher than of the comparables, that the assessee claimed that transaction was at Arm's Length because of the cost allocation methodology adopted by AE, that the TPO made an adjustment of Rs. 4. 73 crores by determining the ALP as Nil, that he held that the assessee did not furnish copy of the agreement or any proof of requesting for such services, that he further held that assessee did not demonstrate as to how the cost benefited it, that it did not provide any proof of any exact number ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing the e-connectivity and system services i. e. SAP services, e-connectivity services and People Soft services, that the AO held that the said expenditure was incurred for acquisition of software, he futher held that the assessee was not in the business of software and that it was acquiring of the connectivity and information system service to support its pharmaceutical business, that it was a capital expenditure, that he allowed depreciation at the rate of 60% on the said expenditure holding the same as being incurred for acquisition of software, that the DRP following the order for the AY. by 2008-09 upheld the finding of the AO that the expenses were being incurred for acquisition of software. Here, we would like to refer to the Para 1. 1 of the contract which deals with the scope of contract and reads as under: "UCB shall exit the station performed development work on software or new functionalities which shall be offered to UCB company. . " A perusal of the above clause of the agreement makes it clear that the assessee had not get any owner's right to any software, server, processes or connections, that the assessee would merely receive services related to the soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h included licence fee, annual technical support fee, professional charges, data entry operator charges, training charges and travelling expenses. The final figure was a consolidation of expenses incurred under these sub-heads. The Tribunal rightly came to the conclusion that none of these resulted in either creation of a new asset or brought forth a new source of income for the assessee. The Tribunal classified the said expenses as being recurring in nature to upgrade and/or to run the system. In the background of the aforementioned findings, it cannot be said that the expenses brought about an enduring benefit to the assessee. The AO was perhaps swayed by the fact that in the succeeding financial year, i. e. , 1997-98 (asst. yr. 1998- 99), the amount spent was large. First of all, the extent of the expenditure cannot be a decisive factor in determining its nature. .... the rationale supplied by the AO in support of its order which found resonance in submissions of the counsel for the Revenue is, flawed and, hence it would have to be rejected. What the assessee acquired through AA was an application software which enabled it to execute tasks in the field of accounting, purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X
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