9911796707
TMI Blog2016 (8) TMI 950X X X X Extracts X X X X X X X X Extracts X X X X ..... hi ('here-in-after referred to as "DRP'). The appeal is preferred on the following grounds: On the facts and in the circumstances of the case and in law, the learned AO based on directions of DRP: General 1. erred in assessing the total income at Rs. 153,342,630/- as against total income of Rs. 124,680,920/- computed by the Appellant. 2. The AO, based on the order passed by the Additional Commissioner of Income Tax, Transfer Pricing Officer-I(3) ('here-in-after referred to as 'learned TPO') under section 92CA(3) of the Income Tax Act, 1961 ("the Act"), erred on the facts and circumstances of the case and in law in making adjustment of Rs. 34,967,980 to the total income of the appellant (before providing credit of Rs. 6,306,274, pursuant to DRP's directions, on account of the professional consultancy charges and management fees suo-moto disallowed by the Appellant in the computation of income) under section 92CA(4) of the Act. The AO made the aforesaid adjustment on account of adjustment in arm's length price of the international transaction involving receipt of professional consultancy services, management services and the alleged inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmining the arm's length price in respect of the appellant's international transaction without identifying any comparable uncontrolled transaction(s) for the computation of the ALP. 8. erred in law by upholding the determination the ALP of the international transaction as NIL without following the manner of applying the CUP method prescribed under Rule 10B(1)(a) of the Income Tax Rules, 1962. Transfer pricing adjustment based on incorrect assumptions 9. erred in passing an order that is perverse in law when he ignored the relevant submissions, information and documents provided by the Appellant to substantiate the receipt of services, and based on a preoccupied mind reached at an inappropriate conclusion that the arm's length value of the impugned transactions should be Nil. 10. erred in questioning the commercial rationale of the legitimate business expenses incurred by the taxpayer and not restricting the scope of assessment under section 92CA to determining the arm's length price of the international transaction by adopting one of the prescribed methods only. 11. erred in facts and in law by concluding the following, without providing any material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 3,63,83,675/- attributable to difference in Arm's Length Price of the international transactions entered by the assessee with AEs. The TPO noticed that various international transactions undertaken by the assessee with its AEs were as under: - No. Nature of Transaction Amount (Rs, in Crores) Method of Benchmarking Received/ Receivable Paid/ Payable 1 Purchase of raw material & consumables 193,900,264 Transactional Net Margin Method ('TNMM') 2 Sale of finished goods 131,609,573 3 Purchase of finished goods 100,980,196 4 Import of capital items 55,345,423 5 Provision of SAP Development Support Services 12,787,704 6 Provision of Design Assistance Services 3,492,000 TNMM 7 Provision of Technical Assistance Services 1,727,455 8 Receipt of Management and other services 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this transaction had not been bench marked. The TPO noticed that the assessee had made certain payments to its AE under the following heads: Professional consultancy Rs.16,206,492 Management fee for support services Rs.16,637,947 Purchase of raw materials and consumables Rs.193,900,264 Purchase of finished goods Rs.100,980,196 Import of capital items Rs.55,345,423 Total Rs.383,070,322 7. The assessee aggregated the above said transactions under TNMM and stated that as this transaction was closely linked with other transactions, the same were aggregated under TNMM. However, the TPO was of the view that each class of transactions had to be examined independently having reference to the Arm's Length Principle by applying the most appropriate method and the assessee cannot choose method which does not provide the most reliable measure of an arm's length price in relation to the international transaction. The TPO was also of the view that the TNMM cannot actually prove that the services have been received and that this method certainly does not put a value to the services, it only compares the margin of tested party with other such comparables engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken a view that no independent person would be making such a payment, without analyzing whether the payment was at Arm's Length or not. 9. The ld. DRP after considering the submissions of the assessee observed that intra group services are considered on the following broad parameters: "1. Evidence that services have been rendered. 2. Whether the assessee has benefitted from them. 3. Are they duplicate in nature? 4. Whether the assessee would have paid the same charges to an unrelated party?" The ld. DRP pointed out that the TPO had considered the reply of the assessee and concluded as under: "The assessee has stated that these services payments have contributed to the improved client services and profitability of the assessee. The assessee has however not been above to substantiate that the payment for these services has actually increased the profits of the assessee. The assessee should have been able to show that the level of increase in profit post these services agreement in April 2006 has increased. It has been unable to do that. The assessee has only mentioned that the gross profit has increased. Regular increases in profits are a normal incidence in busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee submits that it is unable to understand that for the services rendered in relation to improvement of production processes and development of better procedures to make the products sellable in international markets, what other benefits should have accrued to the assessee." 12. The ld. Counsel for the assessee submitted that the assessee by merely spending Rs. 1,62,06,492/- was able to achieve an increase in exports of Rs. 7,22,50,646/- in just one year and earned a margin of 9.26% on the operating revenue and therefore, by virtue of increase in exports alone, the benefit accruing to the assessee in just two years was at Rs. 68,34,911/- which was effectively 42% of the cost of the services. It was pointed out that an increase in gross margin of Rs. 11,96,34,039/- in financial year 2007-08 and Rs. 5,51,39,337/- in financial year 2008-09 further substantiated that the decision of availing the services was correct and the increase in gross margin was joint result of a better and transparent vendor policy which reduced the cost of purchases and increased the sales in domestic business due to better quality. It was further submitted that in the light of the quantum of ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that as per clause 7.29 of OECD Transfer Pricing Guidelines dated 22.07.2010 issued for determining the Arm's Length Price in relation to intra-group services, the matter should be considered both from the perspective of the service provider and from the perspective of the recipient of the service and in this respect, the relevant considerations include the value of the service to the recipient and it is to be seen that how much charge would have been made and accepted between independent enterprises in comparable circumstances, as well as the costs to the service provider. It was further submitted that it is necessary to consider not only the minimum impact of a service but also its long term effect, bearing in mind that some costs will never actually produce the benefits that were reasonably expected when they were incurred and the taxpayer should have been prepared to demonstrate the reasonableness of its charges to AEs in such cases. The ld. DR further submitted that in an Arm's Length transaction, an independent enterprises normally would see to charge for services in such a way as to generate profit rather than providing the services merely at cost and that the econom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dated 06.11.2015, their lordships in paras 20 to 23 observed as under: "20. A reading of the orders of the TPO, the DRP and of the Tribunal makes it clear that one of the main reasons for not accepting the assessee's case was that the assessee had not been able to substantiate that the payment for the services had actually increased its profits. As we noted earlier, the TPO, in fact, further held that the assessee should have been able to show the level of increase in profit post the said transactions. 21. We are unable to agree with this finding. The answer to the issue whether a transaction is at an arm's length price or not is not dependent on whether the transaction results in an increase in the assessee's profit. This would be contrary to the established manner in which business is conducted by people and by enterprises. Business decisions are at times good and profitable and at times bad and unprofitable. Business decisions may and, in fact, often do result in a loss. The question whether the decision was commercially sound or not is not relevant. The only question is whether the transaction was entered into bona fide or not or whether it was sham and only for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport as well as in gross margin, therefore, the decision of availing the services from the AE was correct decision for betterment of the business. In the present case, nothing was brought on record to substantiate that the assessee incurred the expenses on the services received from the AE's at a higher rate than the similar facilities available from other persons. The submissions of the assessee that the AE had not earned any mark-up and the cost paid by the assessee in relation to these services was nothing but the cost of improvement of its production processes and what had been incurred was almost the same which could have been incurred for availing the similar services from a third party had not been rebutted. The Hon'ble Punjab & Haryana High Court in the aforesaid referred to case of the assessee vide para 23 of the order dated 06.11.2015 held that if an assessee is able to establish financial or other commercial benefits arising from a transaction, it would further strengthen its case but if it cannot do so it does not weaken it. 17. In the present case, the assessee had established that there had been an increase in the export sales from the financial year 2007-08 to 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transfer pricing provisions can be inferred only if there is a related party payment, but in the present case, the expenses incurred by the assessee were paid to the third party employees although those employees were the employees of the AE. In the instant case, the assessee was in need of employees which were provided by its AEs, without any charge of profit accruing to the AE itself. Therefore, it should have been treated in the nature of third party business expenses incurred by the assessee. Moreover, the revenue was earned by the assessee through joint contribution of all the resources and personnel employed by an organization. Therefore, it was not possible to attribute revenues to each and every employee to demonstrate the cost benefit of each employee. In the present case, the employee of the AE provided on job training to the staff of the assessee and they were also engaged in knowledge sharing with the existing employees during the meetings, minutes of which were furnished by the assessee before the authorities below. The AE charged the actual cost of services rendered by the specific employee and to substantiate the same, the assessee furnished invoices as documentar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted TNMM as most appropriate method and the tested party margin had been computed at 15.21% as compared to average margin of 6 comparables using 3 years financial data at 3.96% and the international transactions were claimed at arm's length. We, therefore, keeping in view the aforesaid discussion are of the view that the impugned addition made by the AO on account of the adjustment made in the receipt of professional consultancy services and management support services rendered by the employees of the AE, was not justified. In that view of the matter we delete the impugned addition. 20. As regards to the decisions of the various benches of the ITAT is concerned, it is noticed that those decisions are distinguishable on facts, in the case of Cranes Software International Ltd. Vs DCIT, Circle-11(2), Bangalore, the ALP was taken at Nil because the assessee had not been able to bring anything on record that the services had been actually rendered by AE. However, in the present case, there is no allegation either by the TPO/AO or the DRP that the services had not been actually rendered by the AE, similar was the position in the case of M/s Gemplus India Pvt. Ltd. Vs ACIT, Circle-11(4), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an amount of Rs. 21,23,541/- (60% of SAP consultancy charges and other expenses amounting to Rs. 35,39,236/- paid to its AEs) was added to the business income of the assessee. 24. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that no such expenditure was incurred on SAP consultancy charges by the assessee during the year under consideration and that the TPO had copied the order from the preceding year and substituted the figure with the figure of the reimbursement of the expenses. It was stated that there being no expenditure on account of SAP consultancy charges incurred during the year under consideration, therefore, the adjustment was factually incorrect. 25. In his rival submissions the ld. CIT DR strongly supported the orders of the authorities below. 26. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is not clear as to whether the SAP consultancy charges which were alleged to be capitalized were incurred by the assessee during the year under consideration or those pertained to the earlier years. Therefore, this issue requires a fresh adjudication at the level of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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