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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 ..... iny, notice u/s 143 (2) and 142 (1) were issued and served upon the assessee. In response to the said notices, the authorized representative of the assessee appeared before the AO and submitted the details called for and discussed the case. 3. Since the assessee company had entered into international transactions with its associated enterprises (AEs), the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) for determining arm's length price of these transactions. The Ld. TPO vide order dated 27.01.2016 determined the arm's length price making upward adjustment of Rs. 143,67,42,784/-. Accordingly, the AO computed the total income of the assessee inter alia making addition of the arm's length price determined by the TPO u/s 92CA (3) of the Act as per the provisions of section 92CA (4) of the Act and passed draft assessment order u/s 143 (3) read with section 144C of the Act on 07.03.2016. The assessee filed objections against the said draft assessment order before the Ld. Dispute Resolution Penal (DRP) and the Ld. DRP after hearing the assessee dismissed the objections and passed directions u/s 144C (5) of the Act. Accordingly, the AO made an addition on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as further alleged that the Ld. TPO has determined the ALP, without applying any of the prescribed methods under section 92C(1) of the Act and rejecting the transfer pricing analysis of the assessee based on the TNMM, without appreciating the documentary evidence including details of cost incurred by the AEs , details of allocation keys used by the AEs etc., filed by the assessee and without considering the benefits derived by the assessee and without taking into consideration the commercial expediency of the assessee. 7. Before us, the Ld. counsel for the assessee submitted that the TP analysis submitted by the assessee is at arm's length based on TNMM by considering the assessee as the tested party. The Ld. counsel invited our attention to the profit and loss account of the assessee in which two major costs have been mentioned as employee cost and management fees recharge (intra group services). The intra group services are closely linked to the business of the assessee and the assessee's benchmarking approach based on TNMM by considering the assessee as the tested party may be upheld. The Ld. counsel further contended that without prejudice to the above, the assessee has also c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Kodak India (P) Ltd. v. ACIT [2013] 37 taxmann.com 233 (Mumbai-Trib). 6. Watson Pharma (P) Ltd. v. DCIT [2015] 54 taxmann.com 88 (Mumbai-Trib). 7. ITO v. Intertoll ICS India (P) Ltd. v. DCIT [2015] 71 taxmann.com 353(Mumbai-Trib). 8. ACIT v. Koch Chemical Technology Group (India) Ltd. [2015] 64 taxmann.com 464 (Mumbai-Trib). 9. CIT v. Diebold Software Services (P) Ltd. [2014], 48 taxmann.com 26 (Mumbai-Trib). 9. On the other hand, the Ld. departmental representative (DR) relying on the directions issued by the Ld DRP, submitted that the TNMM method adopted by the assessee is not an appropriate method as the intra-group services received by the assessee is a separate class of transaction which could not be aggregated with other international transactions of receipt of brokerage services, sub-advisory services, research support services etc. The Ld. DR placed reliance on the judgment of the Hon'ble Punjab and Haryana High Court in Knorr Bremse India Pvt. Ltd. vs. ACIT, [2015] 63 taxmann.com186 (P&H). The Ld DR further submitted that the assessee has failed to establish that the intra group services were inextricably linked to other international transactions. Moreover, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and domestic institutional investors (DIIs). As contended by the Ld. counsel for the assessee, since the assessee had no international sales presence or capability to maintain client relationship with FIIs on global basis or internal resources to undertake various activities like regional research or perform various back-office functions, it entered into agreements with CLSA Ltd. Hong Kong and CLSA Singapore private Ltd., which had the capacity to maintain the client relationship on global basis for providing services in the nature of international equity sales and sales trading support, dealing sport and regional research as well as a range of back-office support services. In the year relevant to the assessment year under consideration, the assessee made payment of Rs. 146,67,42,784/-for availing these intra group services. The assessee benchmarked the said international transaction using TNMM as the most appropriate method considering itself as the tested party and adopted operating profit (OP)/operating cost (OC) as the profit level indicator (PLI). Since the assessee's margin of 26.09% was better than the comparable companies margin of 10.14% the assessee claimed the transition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Management and Regional Research. The assessee also submitted description of the various services, head-wise breakup of the payments and cost allocation as per keys provided in agreement. 14. As pointed out by the Ld. counsel, the assessee has benchmarked the transaction with entry-level TNMM. It has benchmarked the transaction separately by adopting AE as tested party and using foreign data base. We notice that the arithmetic mean of the comparable companies was 10.14% and the assessee had earned net profit margin of 26.09%. As pointed out by the Ld. counsel, the margin earned by the assessee company at an entry level is in accordance with the provisions of section 92C(2) of the Act. But the Ld. TPO did not accept the entry level benchmarking of the cost contribution holding that the cost contribution constitutes a small part of the total transactions at the entry level, therefore, the profit margin at the entry level cannot be the basis for determining the ALP of the cost contribution. The profit at entry level is affected by various other factors therefore the TNMM is not the most appropriate method to benchmark the transaction of cost contribution. Secondly, the Ld. TPO held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own case for A.Y. 2011-12, by the decision of DRP-I (WZ), Mumbai holding as under:- "We have considered the facts of the case and the submissions made. As per the provisions of section 92C of the Act, the arm's length price in relation to an international transaction shall be determined by adopting any of the prescribed five methods, being the most appropriate method '(MAM) having regard to the nature of transaction or class of transactions or class of associated persons or functions performed by such persons or such other relevant factors as may be prescribed. Each transaction is to be examined separately and independently. Different transactions cannot be bundled up together. Only those transactions which are closely interlinked, interrelated, interlaced, inter-wined, inter-connected, inter-dependent and continuous can be grouped and bundled together for bench marking provided the said transactions can be evaluated and adequately compared an aggregate basis. Otherwise the bunching of independent and different transactions is not permitted. P&H High Court also in the case of Knorr Bremse India Pvt. Ltd. in ITA Nos. 182 and 172 of 2013 in their order dated 06.11.2015 have held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as per law. Hence, the TPO has rightly rejected the entity level TNMM. The same is hereby upheld. 1.2. All these transactions can be independently examined and benchmarked applying CUP. Hence, the TPO has rightly applied CUP in respect of these transactions. ITAT Mumbai in the case of Goldman Sachs (India_) Securities Private Limited v ACIT (ITA No. 7724/Mum/2011) has upheld the application of CUP in the case of brokerage transactions similar to those of the assessee. Further, ITAT Bangalore in the case of M/s Fosroc Chemicals India Private Limited in IT (TP) A No. 148/Bang/2014 for AY 2009-10 in their order dated 10.04.2015 has upheld application of CUP as MAM for benchmarking of payment for technical and management services. 1.3. ITAT Bangalore in Fosroc Chemicals India case supra has also held that aggregation of different international transactions would depend on the nature of services received by the assessee and how the different segment of the assessee benefited from the services received. The test whether to adopt a combined transaction approach or to evaluate the international transaction on a transaction-by-transaction basis is to see whether the transaction can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as determined the arm's length price of the international transactions by following one of the prescribed methods which is the most appropriate in the light of the facts and the circumstances of the case? We notice that the Ld. TPO has estimated the man hours of services rendered by the AE to the assessee at 10000 hours and applying the rate of 3000 per hours determined the arms length compensation of the services rendered by the AE to the assessee at Rs. 3,00,00,000/-. The relevant part of the order passed u/s 92CA(3) of the Act is reproduced as under: "5.8.2 Though no concrete evidence of receipt of service has been provided by the assessee as detailed above, on a without prejudice basis it is estimated that, at the very best, the AE could have devoted a maximum of the following man hours in respect of various services claimed to be availed by the assessee Sl. No. Department Total Share in % Remarks of the TPO 1. International sales and sale Trading Support 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. Informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 independent enterprise in comparable circumstances. The Ld. TPO has also not brought on record any instance where comparable services were provided to an independent enterprise in the recipient market. So in view of the fact that the Ld. TPO has, in fact, not applied the CUP method to determine the arm's length price of the transaction, there is no reason to reject the TNMM method applied by the assessee. The Hon'ble jurisdictional High Court in the case of Johnson & Johnson Ltd. (supra) while dealing with the issue of determination of arm's length price of royalty on estimation basis by the TPO held as under:- "(d) We find that the impugned order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od 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 plus method. Therefore, the TNMM was the most appropriate method in the absence of a CUP which is applicable where the nature of the activities involved, assets used, and risk assumed is comparable to those undertaken by an independent enterprise." 22. Section 92C(1) of the Act, contemplates that the arms length price in relation to an international transaction shall be determined by comparable uncontrolled price method; resale price method; cost plus method; profit split method; transactional net margin method or such other method as may be prescribed by the Board. Hence, the TPO is bound to determine the ALP by following one of the prescribed m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal 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 even any method prescribed by the Board. At the relevant time, i.e. for A.Y. 2008-09 Section 92C of the Act did not provide for other method as provided in Section 92(c)(I)(f) of the Act. The impugned order of the Tribunal holds that the method adopted by the Revenue to determine the ALP was alien to the methods prescribed under Section 92C of the Act. In the above circumstances, the Tribunal declined to restore the issue to the Assessing Officer for re-determining the ALP by adopting one of the methods as listed out in Section 92C of the Act. This finding of the Tribunal has also not been challenged by the Revenue. 11. In view of the fact that the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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