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TMI Blog2018 (6) TMI 1266X X X X Extracts X X X X X X X X Extracts X X X X ..... That on facts and circumstances of the case and in law the Ld AO/TPO erred in proposing and the Hon‟ble DRP further erred in upholding an adjustment of Rs. 3,85,48,147 in respect of the international transactions pertaining to (a)manufacturing activities of the Appellant and (b) IT services availed, alleging t the same to be not at arm‟s length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules, 1962 ("the Rules"). 3. That on facts and circumstances of the case and in law the Ld AO/DRP/TPO erred in splitting up the Appellant‟s operations into manufacturing and trading segments, and benchmarking the manufacturing activity separately, despite the fact that the manufacturing and trading activities are closely interlinked, thereby rejecting the methodology as per the transfer pricing study conducted by the Appellant. 4. That on the facts and circumstances of the case and in law, Ld. AO/TPO/DRP ought to have appreciated that even if the business of the Appellant was not to be viewed as a composite business and the profitability of the manufacturing activity were to be separately evaluated; the arm‟s le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une. The assessee was wholly owned subsidiary of Eaton Corporation, which was globally diversified manufacturer of fluid power systems, electrical power products, electrical distribution and control products, automotive engine air management and fuel economy products and intelligent truck systems for fuel economy and safety. The assessee had entered into various international transactions with its associated enterprises and reference under section 92CA(1) of the Act was made to the Transfer Pricing Officer (TPO). The TPO noted that the assessee in the TP study report had applied TNNM method as the most appropriate method and had selected certain external companies. The assessee had also aggregated the purchase of raw material and export of finished goods and trading activities. The TPO computed the arm's length price in respect of international transactions entered into by the assessee with its associated enterprises. The TPO noted that the assessee had bifurcated its activities into trading and manufacturing. In the manufacturing sector, the assessee had bifurcated the sales into two parts; one part was the sale to third party where the entire purchases were from the third par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT services would be treated at arm's length price only when it is proved substantially by the assessee that such services were actually received and further proving that such received services have benefited it. Vide para 14, the TPO at page 30 observed as under:- "14. During the course of TP proceedings, the assessee was requested to furnish the information regarding the need of the said services, basis of charge, how the base cost is determined, evidences for receipt of services and the details of benefit derived from such services. However, in the present case except copy of shared service agreement effective from January 1, 2005 and a certificate obtained from the AE, the assessee could not produce any other information in support of its claim." 5. The assessee in the TP study repot had mentioned the nature of services availed by it which are reproduced under para 15 at page 31 of the TPO's order and the TPO thus, concluded as under:- "16. The shared service agreement, which is claimed to be the agreement for IT services availed, was between Eaton (China) investment company Ltd. and the assessee. The said agreement was made on November 16, 2009, and effective date is 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g up the assessee's operations into manufacturing and trading segment and benchmarking the same separately, despite the fact that both the activities were closely inter-linked. Further, the assessee is aggrieved that in case the profitability of manufacturing activity was to be separately evaluated, the arm's length price should have been computed on the basis of internal comparables and not external comparables. The next objection of the assessee is in respect of rejection / selection of certain external comparables. The assessee is also aggrieved by the order of Assessing Officer / TPO in rejecting the multiple year data and also in applying the adjustment on the entire cost based of the relevant segment. By way of ground of appeal No.8, the assessee is aggrieved by the upholding of transfer pricing adjustment of Rs. 50,45,303/- pertaining to the payment made to associated enterprises for availing IT services by determining the arm's length price of such transactions at Nil. 8. The learned Authorized Representative for the assessee pointed out that the assessee was engaged in the procurement of raw material and export of finished goods and also manufacturing activities w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed enterprises was at 6.40% ad with the third parties, it was 0.06%. However, the TPO rejected the plea of assessee and benchmarked the international transactions by selecting the list of comparables and proposed upward adjustment to the arm's length price of international transactions at Rs. 4.88 crores. 11. We find that similar issue of adoption of internal TNNM method arose before the Tribunal in ITA No.1623/PN/2011, relating to assessment year 2007-08. The Tribunal vide order dated 27.02.2015 has noted the factual aspects and the arguments of both the learned Representatives and held as under:- "12. We have carefully considered the rival submissions. The dispute on this aspect relates to a plea put-forth by the assessee during the course of the proceedings before the TPO whereby assessee canvassed that the international transactions in the Manufacturing segment be benchmarked by using internal TNM Method. No doubt, in the Transfer Pricing Study carried out by the assessee initially it had adopted the external comparability on an aggregated segment of Manufacturing plus Trading activities. The TPO had rejected the aggregation of the two activities and benchmarked the Manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at an arm's length price. 13. In-fact, the internal comparables do have a more direct and closer relationship to the tested transactions rather than the external comparables. In other words, the profitability of an assessee from the controlled transactions can be benchmarked more meaningfully with reference to the assessee‟s profitability from similar transactions carried out in uncontrolled conditions, i.e. with third parties. In the present case, assessee pointed out that the associated enterprises segment and the third parties segment were functionally comparable and therefore the third parties segment was a good uncontrolled comparable available to benchmark the international transactions entered with the associated enterprises. 14. Pertinently, assessee also undertook similar analysis with regard to its Trading segment before the TPO. In the Trading segment also, assessee tabulated the associated enterprises segment and the third parties segment and pointed out that the operating margin in the associated enterprises segment was higher than the operating margin in the third parties segment. The said calculation is a part of the Tabulation furnished to the TPO, a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'TNMM') requires a functional similarity rather than product similarity. Thus, under both the aforesaid segments, there is a functional similarity viz. manufacturing function though the product may not be identical. In view of the above, the internal comparability of profit from sale of manufactured products under AE and Non-AE segment would be the most appropriate method to benchmark the international transactions pertaining to manufacturing segment." 15. The aforesaid shows that the segmentation of Manufacturing segment into associated enterprises segment and Third parties segment was done by the assessee on product basis, i.e. the associated enterprises segment reflect profitability on products which require consumption of raw material and components from associated enterprises whereas the Third parties segment reflects profitability from products which do not entail purchases of raw materials and components from associated enterprises. The TPO has pointed out that the sale of finished goods in the associated enterprises segment includes a component of sale of Rs. 8,37,000/- of products which do not consume any raw material or component purchased from associated enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t) would be benchmarked against the comparable operating margin derived from the third party transactions (covered in the AE segment). The operating margin derived from the international transaction pertaining to sale of finished products to AEs (forming a part of in the AE segment) would be benchmarked against the comparable operating margin derived from the third party transactions (covered in the AE segment)." 17. On the basis of the aforesaid fact analysis, which has not been controverted by the TPO, we find that in the present case internal comparison of the operating margins using internal TNM Method is liable to be upheld in order to compute arm's length for the international transactions of purchase of raw material and components from associated enterprises as well as sales of finished goods effected to the associated enterprises. On the basis of the aforesaid benchmarking, the profitability of international transactions under the associated enterprises segment computed at 3.25% is higher than the profitability of transactions under the Third parties segment computed at 2.80%. Hence, the international transactions entered with the associated enterprises unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices by the assessee from its associated enterprises at Nil. The learned Authorized Representative for the assessee in this regard, pointed out that the Assessing Officer first assessed the allowability of expenses and made the reference to the TPO. He placed reliance on the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. M/s. Lever India Exports Ltd. in Income Tax Appeal No.1306 of 2014, Income Tax Appeal No.1307 of 2014 & Income Tax Appeal No.1349 of 2014, judgment dated 23.01.2017. He further stated that the TPO had to apply most appropriate method to benchmark the international transactions and the provisions of section 37(1) of the Act could not be applied by the TPO. The learned Authorized Representative for the assessee placed reliance on following decisions:- i) The Hon‟ble Bombay High Court‟s decision in CIT Vs. M/s. Kodak India Pvt. Ltd. in Income Tax Appeal No.15 of 2014, judgment dated 11.07.2016; ii) The Hon‟ble High Court of Judicature at Hyderabad in the case of M/s. R.A.K. Ceramics India Pvt. Ltd., in ITTA No.595 of 2016, judgment dated 23.12.2016; 17. The second issue raised by the assessee was whether the TPO can verify whether se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present facts, benefit to assessee is not clear. In case of the assessee, no services were rendered and in such cases, no party shall pay, hence, provisions can be applied impliedly. In this regard, he placed reliance on the ratio laid down by the Bangalore Bench of Tribunal in Cranes Software International Ltd. Vs. DCIT (2014) 52 taxmann.com 19 (Bangalore - Trib.), wherein against no services provided, arm's length price was taken at Nil. He placed reliance on the ratio laid down in the following decisions:- i) CIT Vs. Cushman and Wakefield (India) (P.) Ltd. (2014) 46 taxmann.com 317 (Delhi) ii) M/s. Rockwell Automation India Pvt. Ltd. Vs. DCIT in ITA No.567/Del/2015, relating to assessment year 2010-11, order dated 31.03.2015 19. He then distinguished the facts of each of the case law relied upon by the learned Authorized Representative for the assessee. He further pointed out that the issue is decided against the assessee by the ratio laid down by the Bangalore Bench of Tribunal in M/s. Gemplus India Pvt. Ltd. Vs. ACIT (supra) and in Deloitte Consulting India Pvt. Ltd. Vs. DCIT (2012) 137 ITD 21 (Mum), which have been relied by the TPO. 20. The learned Authorized Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of Bangalore Bench of Tribunal in M/s. Gemplus India Pvt. Ltd. Vs. ACIT in ITA No.352/Bang/2009, relating to assessment year 2003-04. The learned Authorized Representative for the assessee before us has furnished additional evidence including copies of e-mail correspondence on sample basis evidencing the receipt of information technology services and related support services such as accounting / finance / human resources, etc. from Eaton, China for the year under consideration. The learned Authorized Representative for the assessee also referred to page 120 of Paper Book at para 4.3.22, where the details of services availed were filed before the authorities below. He further pointed out that services were routed through website, against which debit notes were raised by Eaton China and also JV vouchers by the assessee for credit to account of Eaton China and debiting expenses. The learned Authorized Representative for the assessee pointed out that even if the agreement is ignored, the TP study talked of services availed and also raising JVs and debit notes i.e. action of assessee proved the arrangement between the parties. He stressed that where the services were rendered by E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of segregation. He further referred to provisions of section 92B of the Act. 23. The learned Departmental Representative for the Revenue on the other hand, placed reliance on written submissions earlier filed. 24. We have heard the rival contentions and perused the record. The issue raised by way of ground of appeal No.8 is with regard to transaction of Informed Technologies availed. The assessee had entered into following international transactions with its associated enterprises:- Sr. No. Description of International transaction Amount (Rs.) Method used 1 Import of raw materials, trading goods & components 44,76,55,384 TNMM 2 Export of finished goods 3,43,15,281 3 Income from services 41,855 4 Information Technology services availed 50,45,303 5 Reimbursement of expenses to AE 1,02,81,768 6 Allocation of expenses (received) 5,24,833 - 7 Recovery of expenses from AE 16,71,578 CUP Total 49,96,36,002 25. The first five transactions i.e. import of raw material, trading goods and components; export of finished goods; income from services; information technology services availed and reimbursement of expenses to associated enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Eaton China and any other Eaton entities. The services were routed through website. 27. The assessee also during the course of assessment proceedings filed certificate dated 22.04.2011 issued by Eaton China certifying the factum of provision of services by it to the assessee and the charge for services comprised of cost plus 5% markup. Eaton China also confirmed that other Eaton group companies availing same services were also charged on the same basis as the assessee. This information was filed before the TPO to establish first the case of availment of services from Eaton China and the basis for charging for such services by Eaton China on cost plus 5% markup. 28. The question which arises is whether in the given circumstances, the assessee can be held to have availed services from its associated enterprises, for which it had paid sum of Rs. 50,45,303/-. Before adjudicating the admissibility of claim of assessee, it may be pointed out that during the course of TP proceedings, the assessee also filed copy of shared service agreement dated 16.11.2009 which was between the assessee and Eaton China describing the nature of services rendered and basis of charge for services. The agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the manufacturing and operational processes followed by Emerson Group of Companies worldwide. The said support services were provided by Emerson HK and Emerson TH, for which the assessee entered into agreement/s with both the parties separately. The aim of providing support services to the assessee was to achieve the following objectives:- Development of new products for the Indian market; Implementation of cost effective and advanced manufacturing processes; Improvement of the financial performance and accounting processes; Establishing robust control and governance processes; Establish best in class HR practices followed throughout the Globe; Develop strong global customer business; and Differentiate itself in the Indian market. 18. In order to achieve the said objectives, the assessee availed services from its associated enterprises. In this regard, the assessee had furnished various documentary evidences before the TPO, which were in the form of e-mails/presentation, details of visit of personnel of associated enterprises to India, purposes of visit, etc. The assessee has placed on record the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther the TPO while ascertaining whether price paid for the services is at arm's length price or not, can enter the field of businessman, who is the best judge as to whether it needs to avail the said services. The answer to the same is „No‟. Each businessman is the best judge to come to decision as to whether it needs the said support services or not. Secondly, once such a decision has been taken by the businessman and it provides the evidence of services received by it from its associated enterprises, then the TPO cannot question the same by commenting upon the nature of services provided, where in any case, information is hyper technical. First of all, where the TPO has referred to the services provided and pointed out defects in the services provided, the first step that services have been provided stands established. Once the same is established by way of assessee producing several evidences before the TPO, which were in the form of contemporaneous data, then the TPO is precluded from commenting upon the same and holding that the assessee had not received any services and also there was no need for making any payments for such services, as the services provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther concerns were availing same services from the two entities and even the basis for remuneration to the said concerns was the same in respect of all the countries. In such circumstances, there is no merit in the order of TPO in holding that as to whether the said concerns have given services or whether they are qualified to give the services and the cost incurred by AEs. First of all, this is outside the domain of TPO. Under the Transfer Pricing Regulations what the TPO has to determine is whether the services which have been provided by associated enterprises are at arm's length price. Accordingly, we find no merit in this part of the order of TPO. 21. In this regard, we find support from the ratio laid down by the Hon‟ble High Court of Delhi in Hive Communication Pvt. Ltd. in Income Tax Appeal No.306/2011, wherein it has been held that the legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It was further held by the Hon‟ble High Court that it was not for the Assessing Officer to dictate what the business needs of the company should be; it is busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question the decision of assessee to avail support services from the associated enterprises. The decision taken by the assessee in the course of carrying on its business is commercial decision and the TPO cannot question such commercial wisdom of assessee‟s decision. The second linked issue which has been raised is that the assessee did not benefit from such support services where the assessee has shown losses during the year. 24. The Mumbai Bench of Tribunal in Dresser-Rand India (P) Ltd. Vs. Addl.CIT (supra) had held that We have further noticed that the TPO has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by so stretch of logic, it can have any role in determining ALP of that service. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f availment of said services in the field of information technology. In addition, the assessee has also filed certificate from its associated enterprise dated 22.04.2011 i.e. during the course of TP proceedings, under which there is certification of factum of provision of services by Eaton China to the assessee and also basis for charging of such charge i.e. cost plus 5% markup. It was also confirmed by Eaton China that similar services were availed by other Eaton group companies and they were charged on the same basis as in the case of assessee. The assessee had also filed on record copies of debit notes and other JV vouchers raised during the year under consideration justifying its case of availing the said services and payment in lieu thereof. 31. In the above said facts and circumstances in the issue involved, we hold that there is no merit in observations of TPO in holding that the assessee had not availed any services, hence the arm's length price of international transactions is to be adopted at Nil. 32. The learned Departmental Representative for the Revenue had placed heavy reliance on the ratio laid down by Hon'ble High Court of Delhi in Cushman and Wakefield (India) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent assessee is an Indian subsidiary of M/s. Eastman Kodak Co. USA (EKC). During the previous year relevant to the assessment year the respondent assessee sold its imaging business to one M/s. Carestream Health India Pvt. Ltd. The buyer company i.e. M/s. Carestream Health India Pvt. Ltd. was a Indian subsidiary of M/s. Carestream Inc. an USA company. The case of the respondent assessee was that the transaction of sale of imaging business by the respondent assessee to M/s. Carestream Health India Pvt. Ltd. was a transaction between the two domestic non Associated Enterprises. Hence, the provision of Chapter X of the Act would have no application. Thus, had not even declared this transaction in its 3 CEB report. 4. However the Transfer Pricing Officer (TPO) while examining another Transfer Pricing issue came across the impugned transaction. It held on the basis of Section 92B(2) of the Act that even if the transaction between Kodak India Pvt. Ltd. and M/s. Carestream Health India Pvt. Ltd. was between two domestic non Associated Enterprises, yet it would still be considered to be an International transaction and Chapter X of the Act would be applicable. This on the basis that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales. Further, it must be emphasized that the TPO‟s jurisdiction was to only determine the ALP of an International transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO‟s jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and / or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO‟s determination of ALP of the advertisement expenses. Therefore, the issue for examination in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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