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TMI Blog2019 (1) TMI 1351X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, of the considered view that the arms length determined by the Ld. TPO is not in accordance with the provisions of the Act and the ratio of law laid down by the Hon’ble jurisdictional High Court. On the other hand the intra group services are closely linked to the business of the assessee and the assessee’s benchmarking approach is based on TNMM. Whether the legal infirmity in the impugned order can be cured by restoring the issue to the Ld. TPO? - Held that:- We hold that since the TPO has not made the transfer pricing adjustment by following the mandatory provisions of the law and determined the same on estimation basis, action of the Ld. DRP in upholding the TP adjustment so made by the TPO is bad in law. So far as the cases relied upon by the Ld. DR is concerned, we are of the considered view that the facts of the said cases are different from the facts of the present case. Since, the Ld. TPO has not determined the arm’s length price in accordance with the provisions of law, there is no reason to hold that the TNMM method applied by the assessee is not the most appropriate method within the meaning of section 92C of the Act. - Assessee appeal allowed. - ITA No. 1182 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 273,52,15,790/- as against the returned income of ₹ 129,91,09,122/-. 4. Aggrieved by the directions of Ld. DRP, the assessee has preferred this appeal before the Tribunal on the following effective grounds:- 1. On the facts and circumstances of the case and in law, the learned Transfer Pricing Officer (TPO)/the learned AO/Hon ble DRP erred in assessing the total income of the appellant at ₹ 273,52,15,790. 2. On the facts and circumstances of the case and in law, the learned TPO/ learned AO/Hon ble DRP erred in rejecting the Transfer Pricing ( TP ) analysis undertaken by the Appellant. 3. On the facts and circumstances of the case and in law, the learned TPO/ learned AO/Hon ble DRP has erred in proposing/upholding an adjustment to the Arm s Length Price (ALP) determined by the Appellant in respect of the international transactions in connection with availing of intra-group services by the Appellant from its Associated Enterprises ( AE s). In doing so, the learned TPO/learned AO/Hon ble DRP has erred in law and in facts by: 3.1 Rejecting Transactional Net Method ( TNMM) as the Most Appropriate Method ( MAM) for the determination of the ALP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the assessee s transaction is arms length whereas the conclusion of Ld. TPO that the AEs have rendered 10000 hours of service and the assessee has paid @ ₹ 3000/- per hour is not based on any comparable uncontrolled transaction. The Ld. counsel further contended that in fact the Ld. TPO has not followed any of the prescribed methods to benchmark the transaction and as per the settled law any addition made under chapter X of the Act has to be based on the method prescribed under it, failing which such additions are liable to deleted. The Ld. counsel relied on the following cases to substantiate the said arguments:- 1. Knorr-Bremese India (P.) Ltd. v. ACIT [ 2017] 77 taxmann.com 101 (Delhi Trib). 2. AWB India Pvt. Ltd. v. ACIT [ITA No. 4454/Del/11) 3. AWB India Pvt. Ltd. v. DCIT [2014] 50 taxmann.com 323 (Del-Trib). 4. DCIT v. Danisco (I) P. Ltd. [2015] 63 taxmann.com 174 (Del-Trib) 5. Ingersoll Rand (India) Ltd. v. DCIT [2016] 67 taxmann.com 328 (Bang-Trib). 6. BG Exploration and Production India Ltd. v. JCIT [2017] (4) TMI 1145-ITAT Delhi] 7. DDIT v. BG Exploration Production India Ltd. [2017] 80 taxmann.com 393 (Delhi-Trib). 8. Sabic Innovative P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of intra group services had been incurred by the companies taken as comparables by the assessee. Hence, the Ld. DRP has rightly rejected the objection of the assessee and upheld the findings of Ld. TPO. The Ld. DR further submitted that the services rendered by the AEs are general and the assessee has failed to adduce any reliable evidence to substantiate that the AEs incurred a particular cost in rendering services to the assessee. In respect of international sales trading and support, the foreign institutional Investors are client of the assessee and if some revenue is generated, the same is on account of membership of the group and the same would not result in payment for such services in a third party uncontrolled situation. The communication received on day today basis from AEs would be in the nature of shareholder activity for effective management of the group entities. Emails in respect of group services were found to be day today correspondence in which the legal work was prepared by the assessee company and it was sent to the AE for a review, which again is in the nature of share holder service. Moreover, the assessee has not provided details of actual cost of servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action by considering the AEs as the tested party and based on comparable companies margin justified that the markup charged by the AE s are at arm s length. 11. Since, CLSA India had paid ₹ 129,30,35,428/- to CLSA Hong Kong and ₹ 17,37,07,356/- to CLSA Singapore for providing operational support to CLSA affiliates including the assessee during the year relevant to the assessment year under consideration, the Ld. TPO asked the assessee to submit the details of Intra Group Services and substantiate the ALP for the same along with the relevant supporting documents. The assessee was further asked to show cause as to why similar adjustment should not be made particularly in the light of the fact that similar adjustment on Intra Group payments was confirmed by the Ld. DRP in the A.Y. 2011-12 under the similar set of facts. 12. In response to the said query, the assessee submitted that it has entered into separate service level agreements with the CLSA service providers, pursuant to which the following services were rendered by them during the year relevant to the assessment year under consideration:- Broking Management, Client Management, CLSA U, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. Secondly, the Ld. TPO held that under the transfer pricing provisions, each international transaction has to be benchmarked separately. 15. We further notice that the assessee has benchmarked the transaction by using foreign comparable companies i.e., by using AE as tested party. As pointed out by the Ld. counsel for the assessee, the assessee has separately benchmarked its various international transactions including the transaction of payment of intra group services. The assessee has submitted transfer pricing study report which is available at page 43 to 74 of the paper book submitted by the assessee. The transfer pricing study report reveals that the net profit margins of the identified comparable companies range between -2.88 and 25.13% and the arithmetic mean of the NPMs of comparable companies is 10.40%. On the other hand, the net profit margin of the assessee company for the financial year ended March 31, 2011 at entry level was 26.09%. In the light of the aforesaid facts, there is no merit in the findings of the Ld. TPO that the margin earned by the assessee at an entry level is not in accordance with the provisions of section 92C(2) of the Act. Under these circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in their order dated 06.11.2015 have held as under:- 43 It follows, therefore, that if the TPO had correctly come to the conclusion that the said five items were not connected to the rest, he was justified in determining the arm s length price thereof separately from and independent of the others. It would be neither logical nor rational in that event to club several independent and unconnected transactions for the purpose of determining the arm s length price. If, on the other hand, it is established that the sale of various goods and/or the provision of services formed one composite indivisible transaction, TNM method cannot be applied selectively to some of the component and the CUP or any other method to the remaining component. 44 in the present case, all the items tabulated above were not provided by the same entity. They were provided by different entities. That these entities were all part of the same group is not determinative of the issue whether they were part of a single international transaction. Each party to the group is a separate legal entity. We do not rule out the possibility of these being a single international transaction where goods are sold and/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y-transaction basis is to see whether the transaction can be evaluated adequately on a separate basis. Though the ITAT has not answered the question aggregation of transactions in this case but emphasis has been laid on preference for separate benchmarking. 1.4. Further, Delhi High Court in Sony Ericsson s case in ITA No. 16/2014 in the order dated 16.03.2015 has clearly laid down the criteria for aggregation of the different transactions. P H High Court also in their order dated 06.11.2015 in the case Knorr-Bremse India Pvt. Ltd. ITA No. 172 182 of 2013 have clearly laid down the criteria for aggregation of different transaction and also for bench marking of intra-group services. It has been held in this case, that intra group services cannot be benchmarked applying entity level TNMM but it has to be benchmarked applying CUP. Therefore, on facts of this case the transactions cannot be aggregated. Hence, objections regarding rejection of entity level TNMM and application of CUP are rejected. 17. The Ld DRP has upheld the transfer pricing adjustment made by the Ld. TPO in the light of the judgments of the Hon ble High Court of Delhi in Sony Ericsson s case (supra) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 774477979 52.80 These three departments constitutes 80% of allocation, 8000 man hours are estimated 2. Regional Research 248699719 16.96 3. Management 16213236 11.05 4. Information Technology 109448954 7.46 Rest of departments constitutes 20% allocation, so 2000 man hours are estimated. 5. Broking Management 37815450 2.58 6. Legal 32086984.3 2.19 7. Events Marketing 18507639.4 1.26 8. Client Management 14499282.2 0.99 9. CLSA U 12405574.2 0.85 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undersigned, regarding the services being rendered by the AE to the assessee. However after considering the evidence filed by the assessee, as a matter of abundant precaution, the undersigned proceeds to make a reasonable estimate, of whatever little services that can be said to have been rendered in the facts and circumstances of this case. Having regard to the nature of services which are claimed to have been rendered in the instant case, the undersigned estimates the salary for such an employer at ₹ 3000 per hour. To the best of my judgment, the number of man hours rendered by the employees towards rendering of these services to the assessee, is estimated earlier at 10,000 Hours at para 5.8.2 20. From the observations of the Ld. TPO, it is clear that TPO has made the transfer pricing adjustment purely on estimation basis without any supporting material. Though the Ld. TPO has mentioned that arms length price has determined by applying CUP method but in fact the Ld. TPO has not come up with any comparables to justify the application of cup method. The Ld. TPO has not brought on record any material to substantiate that the AE provided the similar services to an indepe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. As regards to the application of method for determining the Arm s Length Price, we are of the view that the method to be used to determine arm s length price for intra-group services should be in accordance with the guidelines in Chapter- I, II III ECD Transfer Pricing Guidelines which provides the various methods to be applied and the CUP method is likely to be a most appropriate method where there is a comparable service provided between independent enterprises in the recipient s market or by the AEs providing the services to an independent enterprise in comparable circumstances. In the present case, the TPO although applied the CUP method but nothing was brought on record to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. He also did not bring on record any instance where comparable services were provided to an independent enterprise in the recipient market. Therefore, in our opinion, in the assessee s case the CUP method was not the most appropriate method. On the contrary, the assessee rightly applied the TNMM method as most appropriate method because it was difficult to apply the CUP method or the cost p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue to the Ld. TPO? On the said issue the Ld. counsel for the assessee heavily relied on the judgment of the Hon ble Jurisdictional High Court, delivered in CIT vs. Kodak India Pvt. Ltd.,(supra) in which the coordinate Bench had declined to restore the issue similar to the present case to the file of TPO holding that the methods as prescribed by the legislature are mandatory and not directory and when the mandatory provision is either superseded or ignored it affects the jurisdiction. Since, the TPO did not adhered to the prescribed methods consciously, another innings to rectify the mistake cannot be allowed. The Hon ble High court held that the Tribunal has rightly declined to restore the similar issue to Assessing Officer for re-determining ALP by adopting one of the methods as listed out in section 92C of the Act. The relevant paras of the order of the Hon ble Court reads as under:- 10. We must also record the fact that the ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under section 92C of the Act. The method to determine the ALP adopted was not one of the prescribed methods for computing the ALP. It was not eve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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