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TMI Blog2018 (4) TMI 1837X X X X Extracts X X X X X X X X Extracts X X X X ..... VO in upholding the 20% of agency fee and interest income earned by the overseas branch of the assessee for computing arm's length price in respect of international transactions of Intra group services relating to external commercial borrowings. For this assessee has raised the following ground No. 1: - "1. In applying/upholding an adhoc and arbitrary rate of 20 percent to the agency fees and interest income earned by the overseas branches of the Appellant, thereby amounting to an addition of Rs. 82,383,516 for the purpose of computing the arm's length price in services rendered by the not relating to External Commercial Borrowing (ECB)." 3. At the outset, the learned Counsel for the assessee took us through the order of CIT(A) and TPO, wherein CIT(A) has relied on the earlier years decision for AY 2006-07 and 2007-08 whereby he in Para 7.5 of order adjudicated the issue and the relevant portion of the Para referred by the learned Counsel reads as under:- "......I find that the same issue arose for adjudication before my learned predecessors for A.Ys.2002-03, 2003-04, 2004-05, 2005-06, 2006-07 and my' order of 2007-08. My predecessor has fixed the rate at 20 percent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the assessee has not contributed to the loan amount then as regards the income of interest, the same cannot be attributed to the assessee for providing the services of the financial analysis of the borrowers, market condition and regulatory environment in India. Since the assessee has provided certain services for that arms length charges can be determined as per the provisions of transfer pricing regulation. The TPO as well as CIT(A) has not brought out any comparable for determination of the arms length price but look the total income comprising interest as well as other fees charged by the foreign branches for allocation/attribution to the assessee. In this case, the ALP has not been determined by taking into consideration uncontrolled similar transaction. In our view, the interest cannot be taken info account for attribution of income towards service charges/fees and, therefore, in the facts and circumstances of the case only the fee charged by the foreign branches can be taken into consideration for making adjustment under transfer pricing provisions. The above decision of the Tribunal was upheld by the Hon'ble Bombay High Court in ITA No. 1781 of 2014.Considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave heard the rival submissions and perused the material before us.We find that one of the divisions of the assessee i.e. Barclays Capital would handle the global derivative operations, that same included foreign exchange,interest rate, equity, commodity and credit derivatives, that the activities of the assessee were limited to marketing activities,that the AE.s were concluding the sale-transaction,that for the year under consideration the assessee was compensated at the rate of 24%(approximately)of the estimated day-1profit/loss from the said deals in accordance with the GTPP of the group,that the TPO had rejected the TNMM applied by the assessee and had used PSM for benchmarking the transaction of marketing of derivative products,that he concluded that risk relating to the derivative business remained partly in India and partly outside India and that the key assets in derivative were its people,that one of the foreign bank branch was being compensated at the rate of 60% for the same derivative business, that he made an addition of Rs. 51.12 crores,that the FAA granted relief to the assessee.We find that the TPO had accepted,in principle,that the functional role of the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India should not have been compared with the assessee case,because the above said branch of the foreign bank itself was dealing with its another AE.In short,we hold that the methodology adopted by the TPO,for determining the ALP of INPV of the derivative transactions,was incorrect from the very beginning and was fundamentally wrong.We would like to refer to the case of Technimont ICB(P.)Ltd.(supra) and it reads as under: "14. What is an 'uncontrolled transaction' has been clearly defined under Rule 10A(a) to mean 'a transaction between enterprises other than associated enterprises whether resident or nonresident'. A plain reading of the meaning given to the expression 'uncontrolled transaction1 leaves no room for any doubt that it is a transaction between two non-associated enterprises. If the transaction is between two associated enterprises, it goes out of the ambit of' uncontrolled transaction' under Rule 10A.When section 92C is read along with Rules 10B(e), and 10A, it becomes abundantly clear that in computing ALP under the transaclional net margin method, a comparison of the assessee's net profit margin from international transactions wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Net Profit derived by the AE from the international transactions is to be considered. However, the TPO has made the adjustment by taking 60% of Day 1 INPV, which is a hypothetical value representing the gross surplus cash.In the matter of Johnson & Johnson Ltd. (247 Taxman 136) the Hon'ble Bombay High Court has held that the TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of the Act,that the determination of the ALP has to be done only by following one of the method prescribed under the Act.We are also agreeable to the argument submitted by the assessee that the PSM can never be applied for benchmarking marketing support service functions. As per Rule 10B(d),PSM is applicable "mainly in IT.s involving transfer of unique intangibles or in multiple IT.s which are so inter-related that they cannot be evaluated separately for the purpose of determining the ALP of any one transaction. 5.6. We are not inclined to refer the matter to the file of the TPO. We would like to refer to the case of Kodak India(P)Ltd.(155TTJ697) wherein the Tribunal has held as under: "69. We also cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further investigation, however, is not apart of the procedure, but is substantive and is beyond the purview of the Tribunal "" Considering the above discussion and the peculiar facts and circumstances of the case, we are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity. So, confirming the same, we decide the effective ground of appeal against the AO." 9. When this was confronted to the learned Sr. Departmental Representative he only relied on the TPO's order but could not differentiate the facts. We find from the order of CIT(A) that he has also relied on the earlier order of TPO for AYs 2006-07 and 2007-08 and considering earlier year of CIT(A)'s order deleted the addition by observing in Para 8.7 as under: - "8.7 Further, as pointed out by Appellant, methods and statistical models for calculation of INPV of one bank may vary with those of another bank. Further, the extent of services done for marketing and arranging derivative deals may differ from one bank to another. In view of this, I am of the view that it would not be appropriate to compare INPV base of one foreign bank with another bank, as the same are not "comparable tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, the CIT(A) has erred in directing the AO/ TPO to aggregate the transactions and thereby directing to delete the adjustment/ addition of Rs. 80,45,571/- in a case where the ALP of each transaction could be arrived at separately." 13. Briefly stated facts are that the TPO after going through the Transfer Pricing study in the case of assessee noted that even though the assessee has used LIBOR rate as indicative rate to Bench mark the transaction on interest on money market loans and deposits received from or paid to Associated Enterprise (AE's). According to the TPO, there is variation in the actual rate vis-a-vis the LIBOR rate. The assessee explained before the AO about variation and stated that it has worked out the interest rate arising from such fluctuations of the LIBOR rates in respect of money market deposits and loans transactions and computed the same by aggregating all the parties. However, according to AO/ TPO there is excess payment of interest by the assessee on one hand and there is short receipt of interest by assessee on the other hand. And Hence, the TPO has not accepted the explanation of the assessee and made an adjustment of amount of Rs. 80,45,517/- for sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e addition on account of adjustment by the TPO u/s. 92CA(3), the TPO has ignored all such international transactions pertaining to this area wherein the appellant has derived excess interest in comparison with LIBOR method. I find force in appellant's this submission that the TPO cannot do the adjustment merely on account of his personal decision to pick up one transaction and not the other. The appellant has filed a detailed chart as per 'Annexure 7' of Paper Book through which it is evident that if the same norms is adopted as LIBOR in working out the interest liability/ interest receipt, the appellant still has a better profit margin which is positive amounting to Rs. 1,11,44,768/-. The appellant has relied on the following decisions of jurisdictional ITAT, Mumbai as under: (i) Essar Steel Ltd. (ITA No. 3727/Mum/2011) (ii) Audco India Ltd. (ITA No. 2642/Mum/2009) (iii) Boskalis International - Dredging International CV (ITA 4862/Mum/2008) Having taken note to the above decisions of the ITAT, Mumbai, referred by the appellant in its submission dated 22.01.2015, I find that the contention so made by the appellant is justified and hence, adjustment so made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the TPO as well as at the appellate stage that the prices realized from unrelated parties for an item is not uniform but higher or lower than the prices charged to related party (L&T LLC). That is to say that there are transactions for which data has been furnished, which shows that the appellant has charged higher rates from its AE as compared to third party uncontrolled transactions. The TPO while making the adjustments took only those figures in which valves were sold at the lower prices to the USA based AE while ignoring those figures and data where the same were sold at the higher price. Thus while making the adjustments, he disregarded the fact that the appellant has also sold valves to its AE at prices higher as compared to the average charged to the third unrelated parties. It would have been fair and reasonable on the part of the TPO to consider the aggregate of the sales made to the AE and then compare it with third parties as against the individual items considered by him. He has been selective in his approach and made the order arbitrary. Had the aggregate of sales made to the AE and that to the third parties been taken into account then the appellant's case sq ..... X X X X Extracts X X X X X X X X Extracts X X X X
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