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TMI Blog2021 (2) TMI 378X X X X Extracts X X X X X X X X Extracts X X X X ..... h a tested party. The revenue cannot compare the case of the assessee with that of the assessee who fails to claim in his return of income a deduction or a benefit which he would be otherwise entitled to. In fact the TPO was rightly aware of his role when he has made an observation in paragraph 17.2 of the order dated 29.01.2015, wherein he would state that his office is responsible to ensure sufficiency of information/data and accordingly cannot be precluded to conduct a fresh search - When such is the legal position, as rightly understood by the TPO, the assessee should not have been foreclosed. Therefore, we are of the clear view that the findings rendered by the TPO, DRP and the Tribunal foreclosing the assessee's claim to refer to the foreign AEs as tested party is legally not sustainable. Tax case appeal is allowed, the orders passed by the Tribunal, DRP and the TPO are set aside. The issue regarding the assessee's plea to consider foreign AE as tested party to determine the Arm's Length nature of the underlying international transaction stands remanded to the Transfer Pricing Officer for a fresh decision on merits and in accordance with law having due re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 10A of the Act based on the overall profit margin of the appellant in the absence of a proven arrangement to evidence that the assessee had booked extraordinary profits in the 10A units ? vi.Whether, under the facts and circumstances of the case, the first respondent is right in recomputing the deduction claimed under Section 10AA of the Act based on the overall profit margin of the appellant in the absence of a proven arrangement to evidence that the assessee had good extraordinary profits in the 10AA units ? And vii.Whether, under the facts and circumstances of the case, the first respondent was right in not granting the deduction under Sections 10A and 10AA of the Act on the enhanced income, which has arisen due to disallowance made under Section 14A of the Act ? 3.The appellant/assessee is a Multinational Company based in India engaged in the business of software development services globally. For the assessment year under consideration [AY 2011-12], the assessee filed its return of income declaring a taxable income of ₹ 83,00,45,031/- under the normal provisions after claiming deduction of ₹ 84,42,86,994/- under Section 10A of the Act and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation with weighted average operating profit/operating cost of 13.60%. Subsequently, when the transfer pricing assessment proceedings were being carried on, the assessee revised its segmentation and provided profitability of all the three segments as below: S.No Particulars Subsidiary Segment Citi Segment Third Party Segment Total 1 Revenue 2,64,58,84000 5,85,71,50,000 5,25,66,11,000 13,75,96,45,000 2 Foreign exchange gain 4,38,80,119 9,71,36,698 8,71,77,183 22,81,94,000 3 Total Operating revenue [1+2] 2,66,97,64,119 5,95,42,86,698 5,34,37,88,183 13,98,78,39,000 4 Software development expenses including depreciation 1,82,18,39,413 4,35,45,25,929 3,89,00,65,659 10,06,64,31,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th overseas subsidiaries and Citi bank entities. The TPO revised the segment provided by the assessee. Further, the TPO rejected transfer pricing analysis undertaken by the assessee and undertook a fresh search for external comparables and arrived at a final list of 12 comparable companies with average operating margin of 18.94%. The TPO compared the operating margin of Subsidiary Segment, i.e. 3.51% with average operating margin of external comparables, i.e. 18.94% and made adjustment of ₹ 39,43,73,743/-. 6.Aggrieved by such order, the assessee filed its objections before the Dispute Resolution Panel [DRP]. By order dated 30.12.2015, the DRP while issuing directions upheld the adjustment made by the TPO of ₹ 39,43,73,743/- with respect to international transactions undertaken with overseas subsidiaries. Accordingly, final assessment order was passed by the Assessing Officer dated 29.01.2016 under Section 143(3) r/w. 144C(13) of the Act. Aggrieved by the same, the assessee preferred an appeal to the Tribunal. In the appeal, the assessee approached the matter with two different approaches. In the first approach, the assessee contended that their overseas subsidiaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide on-site software support and related services in the local geography under the instruction and supervision of the assessee and given the least complex nature, the overseas subsidiaries should be considered as tested party for benchmarking the international transactions with overseas subsidiaries. 8.The learned counsel referred to various documents to demonstrate the substantial least complex nature of the overseas subsidiaries. The learned counsel contended that the Tribunal committed a serious error in rejecting the ground canvassed by the assessee to consider foreign AEs as tested party to determine the ALP despite their least complex nature in the supply chain by ignoring the various evidences/documents furnished by the assessee to the said effect. Further, the Tribunal did not consider that the TPO in the assessee's own case for the subsequent assessment years, i.e. AY 2012-13, AY 2013-14 and AY 2014-15 accepted the assessee's approach on considering the foreign AEs as tested party under similar facts and circumstances. Further, it is submitted that the Tribunal did not adjudicate the other contentions despite very detailed submissions made by the assessee duly r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the tested party. The concept of tested party will apply only when Cost Plus Method [CPM] or Re-sale Price Method [RPM] or TNMM is applied. In this regard, the assessee referred to Rule 10B(1) of the Income Tax Rules, 1962 ['the Rules' for brevity]. Further, it was submitted that the decision relied on by the assessee in the case of General Motors India Private Limited vs. DCIT/ACIT [2013 (27) ITR(T) 373 (Ahm-Trib.)] and Ranbaxy Laboratories Limited vs ACIT [2016 (68) Taxman.com 322 (Delhi-Trib.)] were relied on by the assessee which were not properly construed by the Tribunal. 10.It is submitted that the Tribunal though referred to the decision in Ranbaxy Laboratories Limited held that the decision is on the basis of OECD guidelines only and does not taken income tax provisions into consideration. It is submitted that the Indian Regulations do not laid down any specific procedure or guidelines for the choice of tested party. However, it would be relevant to refer Section 92 and Rule 10B(1)(e) of the Rules which uses the term 'enterprise' for application of TNMM. It was further submitted that Section 92F of the Act defines the term 'enterprise' as a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted by the Ld. TPO resulted in 27.75% of the selling, administrative and other general overheads getting allocated to the AE segment vis-a-vis 12.81% to the Citi and third party segment thereby leading to a clear anomaly in the allocation mechanism. 5.The Learned TPO/AO and the Hon ble DRP have erred, in law and in facts by rejecting the detailed transfer pricing analysis prepared by the Appellant in accordance with the provisions of the Income-tax Act, 1961 (the Act) without appreciating the fact that the margins earned by the Appellant in the subsidiary segment [20.25 percent] were higher than those even earned by the third party comparables [18.94 percent] chosen by the Ld. TPO. 6.The learned TPO / AO and the Hon ble DRP failed to appreciate the business model adopted by the Appellant with its subsidiaries wherein the entire revenue and cost of the overseas subsidiaries were pulled back into the books of the Appellant by way of a back-to-back arrangement after leaving only an arm s length profit for the onsite support services provided by the overseas subsidiaries in majority of the cases. 26.The learned AO and the Hon ble DRP have erred in restricting the exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking the overseas subsidiaries as tested parties. The DRP while issuing directions observed that it is not known as to why the subsidiaries were not taken as tested parties in the TP documentation, therefore, the stand of the assessee cannot be accepted. It is submitted that this finding of the DRP is erroneous and therefore the assessee would pray for a remand to the TPO for considering afresh the issue relating to tested party. 13.Further the learned counsel referred to the affidavit filed before the Tribunal in support of the miscellaneous application which contains a tabulated statement pointing out the issues which were not considered by the Tribunal and therefore, those issues may be remanded to the Tribunal for fresh consideration. It is further submitted that the definition of 'Enterprise' and 'Associated Enterprise' in the Act nowhere indicates that the Enterprise shall mean the assessee and the Associated Enterprise will mean other than the assessee and that these words have been used interchangeably and the finding of the Tribunal that the Enterprise will mean the assessee and Associated Enterprise will mean the other party to whom the assessee has s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. In this regard, reliance was placed on the decision in Mattel Toys India Private Limited vs. DCT [MANU/IU/0886/2013 (ITAT, Mumbai Bench)]. For the same proposition, reliance was placed on the decision of the Income Tax Appellate Tribunal, 'C' Bench, Kolkata in the case of Almatis Alumina Private Limited vs. DCIT in I.T.A.No.726 2361/Kol/2017 dated 16.04.2019. 15.M/s.R.Hemalatha, learned senior standing counsel for the revenue elaborately referred to the order passed by the Tribunal and in particular the arguments which were advanced by the learned senior counsel for the assessee before the Tribunal which has been recorded by the Tribunal in paragraph Nos.20, 21 and 22. Further, it is submitted that in terms of Rule 10D, the information and documents are to be kept and marked and the assessee in their return of income had stated that they treated themselves as the tested party and without filing a revised return, there cannot be a change of stand. In this regard, the learned counsel referred to Rule 10E and the report of the auditor which is required to be submitted in Form No.3CED. Therefore, it is submitted that when the assessee in their TP documentation has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en adjudicated by the Tribunal and therefore, it is prayed that the matter may be remanded to the Tribunal to adjudicate the issues which have been specifically raised by the assessee. The arguments of the learned senior standing counsel stems from the finding recorded by the Tribunal in the impugned order, more particularly, the observation in paragraph 24 of the impugned order, wherein the Tribunal observes that the only issue that arises for consideration is whether the assessee Company has to be taken as tested party for the purpose of determination of Arm's Length Price or by applying the least complex theory, the AE outside the Country has to be taken as the tested party. The Tribunal further observes in paragraph 18 of the impugned order that even though the assessee has raised many issues before the Tribunal, the learned senior counsel for the assessee confined himself only to the selection of tested parties. The assessee filed miscellaneous application before the Tribunal on 28.09.2017 after the impugned order was passed in which a specific plea has been raised, duly supported by an affidavit of the Senior Manager, Direct Tax of the assessee, wherein they have stated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, we are of the opinion that the Tribunal should and shall adjudicate all such issues which have been raised before it by the assessee in the grounds and more specifically pointed out in the miscellaneous application. Therefore, we accept the arguments made on behalf of the assessee that the Tribunal should consider the issues which were raised before it rather foreclosing the assessee from canvassing those points based upon the alleged concession which would not bind the assessee. 20.Now, we move on to consider the issue as to whether the assessee has to be taken as tested party for the purpose of determination of ALP or by applying the least complex theory, the AE outside the Country has to be taken as tested party. The Tribunal while considering the said question proceeded to examine the scheme of transfer pricing as provided under the Act. It referred to section 92B which defines 'International transaction', section 92A which defines 'Associated Enterprise', Rule 10D which deals with the most appropriated method for determination of ALP and Rule 10B(1)(e) which provides the method for determination of ALP by adopting TNMM. After referring to these statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal as well as the grounds which were canvassed before the TPO and specifically raised in the objections filed before the DRP. 22.The Tribunal had distinguished the decision in Ranbaxy Laboratories Limited on the ground that the Delhi Bench of the Tribunal has proceeded on the basis of the OECD guidelines. However, we find in paragraph 25 of the judgment of the Tribunal the principles that emerge in selection of tested party has been culled out wherein it has been held that the tested party normally should be the least complex party to the controlled transaction and that there is no bar for selection of tested party either local or foreign party and neither the Act nor the guidelines on transfer pricing provides so and the selection of tested party is to further the object of comparability analysis by making it less complex and requiring fewer adjustment. Therefore, we do not agree with the reasons given by the Tribunal for not considering the decision in Ranbaxy Laboratories Limited. 23.Furthermore from the grounds canvassed in the miscellaneous application filed before the Tribunal on 28.09.2017, after the impugned order was passed by the Tribunal, would clearly show tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Enterprise' and 'Associated Enterprise' have been used interchangeably. Therefore, the conclusion of the Tribunal in this regard is not sustainable. 26.The Tribunal was largely guided by the decision in Aurionpro Solutions Limited. The learned senior counsel for the assessee has referred to various decisions of the Tribunal which were rendered subsequently, more particularly, the decision of the Ahemdabad Tribunal in the case of General Motors India Private Limited, which had taken note of the decision of the Mumbai Tribunal in Aurionpro Solutions Limited and noted the facts of the said case and held that the said decision cannot be applied as the main issue in Aurionpro Solutions Limited was the percentage of interest to be calculated on the loan advanced by the assessee to its AE. Thus, on facts the decision in Aurionpro Solutions Limited could not have been applied to the facts of the assessee's case before us. As already pointed out, it is not a case where there were no material produced by the assessee to establish the functional risk assumed by the foreign AEs. The material was available before the TPO but the TPO non-suited the assessee on the ground that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) The Learned TPO/AO and the Hon ble DRP have erred, in law and in facts by rejecting the detailed transfer pricing analysis prepared by the Appellant in accordance with the provisions of the Income-tax Act, 1961 (the Act) without appreciating the fact that the margins earned by the Appellant in the subsidiary segment [20.25 percent] were higher than those even earned by the third party comparables [18.94 percent] chosen by the Ld. TPO. (iii) The learned TPO / AO and the Hon ble DRP failed to appreciate the business model adopted by the Appellant with its subsidiaries wherein the entire revenue and cost of the overseas subsidiaries were pulled back into the books of the Appellant by way of a back-to-back arrangement after leaving only an arm s length profit for the onsite support services provided by the overseas subsidiaries in majority of the cases. (iv) The learned AO and the Hon ble DRP have erred in restricting the exemption as claimed by the Assessee to INR 48,47,11,120 (as against the claim INR 84,42,86,994 in the return of income) for 10A Units and to INR 6,40,45,234 (as against the claim INR 15,40,15,372 in the return of income) in respect of the 10AA Unit. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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