9911796707
TMI Blog2018 (9) TMI 1851X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment Year 2013-14, the assessee filed its return of income on 18.11.2013 declaring income of Rs. 43,62,66,300. The case was taken up for scrutiny and on the basis of international transactions reportedly entered into, the Assessing Officer made a reference under Section 92CA of the Income Tax Act, 1961 (in short 'the Act') to the Transfer Pricing Officer ('TPO') for determination of the Arm's Length Price ('ALP') thereof. The TPO passed an order under Section 92CA of the Act on 28.10.2016 proposing an adjustment of Rs. 10,52,95,928; comprising of Rs. 5,05,29,393 towards License Fee for use of know how and Rs. 5,47,66,535 in respect of management fees. The Assessing Officer accordingly completed the assessment under Section 143(3) r.w.s. 144C of the Act vide order dt.5.1.2017 wherein the assessee's income was determined at Rs. 56,73,98,890 in view of the following additions/disallowances :- (i). (i) Transfer Pricing Adjustment (License Fees/Management Fees) Rs. 10,52,95,928. (ii). Provision for doubtful advances Rs. 42,80,810 (iii). Loss on sale of asset Rs. 4,42,017 (iv). Reimbursement of expenses without TDS Rs. 13,47,737 (v). Dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 5.3 In not considering the fact that the license fee payment involved in procuring technical know-how which was essential for the manufacture and export of the products. 5.4 In holding that the payment of license fees does not satisfy market conditions without appreciating that the Appellant is a joint venture entity. 5.5 In not appreciating the contention of the Appellant that the license fee is recovered as part of the sales price. 5.6 The LAO and Learned TPO erred in not appreciating that in respect of the export sales to third parties, no licence fee is paid on account of the difference in arrangement with the third party vis-a-vis the AE. 5.7 In not considering all the relevant facts submitted by the Appellant. The Hon. CIT(A) erred in affirming the orders above by not correctly appreciating the facts and the judicial precedents on the above. 6. The LAO and the Learned TPO erred in not appreciating the totality of the facts of the Appellant and erred in holding that the ALP of the management fee is 'nil' and consequently erred in treating the entire management fee payment of Rs. 5,05,29,393/- as a transfer pricing adjustment under section 92CA of the Act. Mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground No.2 (supra) is adjudicated, grounds 3 to 6 (supra) would become academic in nature. 5.2.2 The learned Authorised Representative submitted that the transactions of payment of License Fees and Management Fees were inter-linked with the primary activity of the assessee and cannot by separately bench marked, but are to be aggregated. The learned Authorised Representative prayed that the matter be decided on the basis of the decision of the co-ordinate bench in the assessee's own case for Assessment Years 2009-10 & 2010-11 (supra). 5.3 Per contra, the learned Departmental Representative supported the orders of the authorities below. 5.4.1 We have heard the rival contentions, perused and carefully considered the material on record, including the judicial pronouncement cited. The issue for consideration before us is whether OR not the License Fees and Management Fees paid by the assessee were inter-linked, inter-related OR inter-connected with the primary activity of the assessee. We also observe that the facts and circumstances in the current year are identical to the earlier assessment year 2012-13, which has been reiterated by the learned CIT (Appeals) at page 10 of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not it is intended to be enforceable by legal proceedings. Rule 10A in clause (d) states that "for the purpose of this Rule and Rules 10AB and 10E", the term 'transaction' would "include a number of closely linked transactions". This Rule in positive terms declares that the legislative intent is not to deviate from the generic rule that singular includes plural. The meaning or definition of the expression 'transaction' in clause (d) to Rule 10A read with sub-section (1) to Section 92C, therefore, does not bar or prohibit clubbing of closely connected or intertwined or continuous transactions. This is discernible also from sub-rule (2) to Rule 10B quoted above. The sub-rule refers to 'services provided', 'functions performed', 'contractual terms (whether or not such terms are formal or in writing) of the transactions' which lay down explicitly or impliedly the responsibilities, risks and benefits to be divided between the respective parties to the transactions. Use of plurality by way of necessity and legislative mandate is evident in the said Rule. 81. Similarly, sub-rule (3) to Rule 10B refers to transactions being compared or comparison of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n.com 53 (Pune - Trib.) wherein it was held as under "24. The first issue arising in the present appeal is whether in view of the OECD guidelines and the Indian Transfer Pricing provisions, aggregation of transactions could be made or not. We find that Pune Bench of the Tribunal in Demag Cranes & Components (India) (P.) Ltd. (supra) had elaborately considered the OECD guidelines under Chapter - III and also the guidance Notes issued by the Institute of Chartered Accountants of India on transfer pricing in para 13.7 and had held as under:- 30. We have carefully considered the rival submissions. Section 92B of the Act provides the meaning of expression "international transaction" as a transaction between two or more associated enterprises. Rule 10A(d) of the Rules explains the meaning of the expression "transaction" for the purposes of computation of ALP as to include a number of closely linked transactions. Rule 10B of the Rules prescribes the manner in which the ALP in relation to an international transaction is to be determined by following any of the methods prescribed. Shorn of other details, it would suffice to observe that on a combined reading of Rule 10A(d) and 10B of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be aggregated for the purposes of bench marking with comparable uncontrolled transactions, such an approach can be said to be well established in the transfer pricing regulation having regard to Rule 10A(d) of the Rules. Though it is not feasible to define the parameters in a water tight compartment as to what transactions can be considered as 'closely linked', since the same would depend on facts and circumstances of each case. So however, as per an example noted by the Institute of Chartered Accountants of India (in short the 'ICAI') in its Guidance Notes on transfer pricing in para 13.7, it is stated that two or more transactions can be said to be 'closely linked', if they emanate from a common source, being an order or contract or an agreement or an arrangement, and the nature, characteristic and terms of such transactions substantially flow from the said common source. The following extract from the said Guidance Notes is worthy of notice:- "13.7 The factors referred to above are to be applied cumulatively in selecting the most appropriate method. The reference therein to the terms 'best suited' and 'most reliable measure' indicates th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not contain any specific guidelines on Intra-group service payments (management fees and license fee etc). In many cases the TPO has arrived at an ALP as Nil, by arriving at a conclusion that no benefit has been obtained by the assessee from such intra-group service payments. While OECD guidelines seem to indicate the "Benefit test" to be actual rendition of services which provides economic or commercial value, the Indian TPOs insist on positive demonstration of actual benefit accruing to the service recipient from the services rendered. In our considered opinion the Revenue could not decide what was necessary for a taxpayer and what was not. The requirement of services should have been judged from the view point of the taxpayer as a businessman; As per section 92(2) of the Act, the ALP of transactions are in the nature of cost or expenses allocation, or apportioned to an enterprise or contributed by an enterprise, shall be determined having regard to the arm's length price of such benefits, service and facility. This section also covers intra-group service transactions, as often the charge for the services were based on cost allocation/ apportionment. Therefore, the benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment. Wholesale disallowance is not authorised And further in Dresser Rand, Mumbai Tribunal, 13 taxmann.com 82 (Mumbai) it was held as (1) TPO/AO cannot question the commercial wisdom of the taxpayer (2) How an assessee conducts his business is his prerogative and it is not for revenue authorities to decide what is necessary for an assessee and what is not (3) 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 no stretch of logic, it can have a role in determining the ALP of that service. (4) When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not. The real question is whether the price of this service is what an independent enterprise would have paid for the same 20. In view of the above and as well as in view of finding recorded herein above that all these international transactions are linked to the main business being carried on by the assessee and such closely linked transactions are to be analysed in aggregate to determine the arm's length price. Moreover it is dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made the addition for Rs. 165592899/- on the protest that there is no requirement for the assessee to pay for the Management fees and further it was mentioned that no evidence/proof for a) commercially need/ expediency of the requirement of service such services b) whether it is a normal market business practice to involve parties as in the present case . The assessee has furnished the details of the services available by the assessee from Medreich to the assessing officer as mentioned at pages 22-23 of the transfer pricing order . The TPO had mentioned the reply pursuant to the show cause notice in his order and the assessee has concluded "it is further submitted that after factoring in cost of all related party transaction the company has earned and operating margin of 22.53% which is significantly higher than 9.05% earned by the comparable companies thus establishing all the underlying transaction including the transaction for payment of licence fee and Management fee are at arm's length ........." (page 40 of TPO order). TPO had the recorded the contradiction findings inasmuch as it was mentioned that that there was duplication of services as alleged there was no evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he services under the agreement but essentially the assessee had right to receive all these services, as and when required, under the agreement. The payment is made for the rights accruing to the assessee for the bundled services under the contract and not for each service on ala carte basis. The reason that the assessee did not use a particular service cannot justify holding that no payment was warranted for such services. To give an example from day to day life, if an assessee is paying for having right to view a bouquet of television channels, which come as a package, he does not decline to pay the consideration for the bouquet of television channels because he did not view a particular television channel. The example may seem to be a bit too simplistic but it does hammer the massage, as we would like to, that not availing a particular service under a contract does not mean that no payments are required to be made for all the services bundled under the contract. The other thing is the benefit test. We do not think benefit test has too much relevance in the arm's length price ascertainment. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s using inappropriate method. 9. That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in determining the arm's length price of international transactions consisting of cost and profit margin at 'nil'. 12. So far as these grievances of the assessee are concerned, the relevant material facts are as follows. The assessee is engaged in the business of trading in food grains. It is a part of AWB group Australia and its 99.999% equity is held by AWB Australia Limited and the balance. 001% equity is held by another group company, namely AWB Investments Limited. One of the international transactions that the assessee entered into with its AEs was payment of Rs. 58,20,571 towards 'management services'. On an analysis of the details of the payments made under this head, the TPO was of the view that the benefit of some of the services availed under the head 'management services' was not commensurate with the payments made for the same. He was also of the view that as against the use of TNMM by the assessee in benchmarking, the right course of action will be to follow CUP method because the value under CUP method will be best indicator o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT v. EKL Appliances Limited (345 ITR 241), "Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, though a finding is given to the effect that no services are rendered, in the light of the contradictions in this finding and the observations above, it is clear that in effect commercial expediency of this payment is questioned. That exercise, in our considered view- particularly in the light of Hon'ble Delhi High Court's judgment in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241, cannot be conducted in the course of ascertaining the arm's length price. 27. In view of the above discussions, as also bearing in mind entirety of the circumstance, it is clear that the impugned ALP adjustment is contrary to the scheme of the Act. The authorities below have been swayed by the considerations which were not germane to the issue. We, therefore, uphold the grievances of the assessee and direct the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technical services. The assessee gets the relief accord.' 22. We are in considered agreement with the views so expressed by the coordinate bench and the impugned addition must stand deleted for this short reason alone. In our considered view, the facts of the case before us are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gally sustainable foundation for the impugned ALP adjustment. However, we observe that the comparability analysis in the TP study carried out by the assessee by aggregation of transactions adopting TNMM as the most appropriate method has not been examined by either of the authorities below who have merely concentrated merely on the issue of aggregation/segregation of transactions. The CIT (A) has mechanically accepted the results of the assessee to be at arm's length by accepting the operating profit / operating cost of the assessee as 25.49% as against non-AE at 5.26%. In that view of the matter, we deem it appropriate to remand the issue to the file of the CIT (A) for examining the correctness of the ALP at the entity level by applying the TNMM as the most appropriate method by aggregating the transactions. The CIT (A) is directed to take the remand report from the TPO in this regard and afford the assessee adequate opportunity of being heard in the matter. .Thus Ground nos.3, 4, 5 & 6 of revenue appeal are allowed for statistical purposes. 23. With respect to the alternative ground i.e no. 7 we may record, that the authority of the TPO is to conduct a transfer pricing analy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case for Assessment Year 2012-13 in its order in IT(TP)A No.125/Bang/2017 dt.3.8.2018, following the earlier decision of the co-ordinate bench dt.31.1.2018 (supra) at para 5 thereof has held as under: " 5. We find that as per this para No. 22 reproduced from the Tribunal order in assessee's own case for Assessment Years 2009-10 and 2010-11, the matter was restored back to the file of CIT(A) for examining the correctness of ALP at the entity level by applying the TNMM as the most appropriate method by aggregating the transactions. In the present year, the matter has come to the Tribunal against the assessment order because the assessee preferred to chose the DRP route and not CIT(A) route. Therefore, by respectfully following this Tribunal order in assessee's own case for earlier years, we set aside the assessment order on this issue and restore the matter back to the file of DRP for fresh decision with similar directions as were given by the Tribunal in earlier years as per para 22 of the Tribunal order reproduced above. Accordingly, ground nos. 1 to 5 of assessee's appeal are allowed for statistical purposes." 5.4.3 Respectfully following the decision of the co-ordin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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