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TMI Blog2022 (1) TMI 679X X X X Extracts X X X X X X X X Extracts X X X X ..... t was expounded that TPO is mandated by law to determine the ALP by following one of the methods prescribed u/s. 92C read with rule 10B. When No such exercises is carried out by the TPO, the determination at Nil of the ALP was held to be not sustainable. The above said case laws are fully applicable on the fact of the case. Thus we hold that authorities below have fatally erred in applying the benefit test as rightly contended by the Ld. Counsel of the assessee. Furthermore, it has been submitted that after applying the benefit test authorities below have brushed aside the details submitted by the assessee. We are in agreement that authorities below have erred in holding the ALP at nil on the ground that relevant documents have not been submitted. In our considered opinion, the assessee has discharged the onus caste upon it. The case laws as referred above are duly applicable on this issue also. The determination of ALP at nil in this regard also is not sustainable on the touchstone of the aforesaid case laws as the determination of ALP at nil without following one of the methods prescribed u/s. 92C r.w.Rule 10B has been held to be non sustainable. Accordingly, we set aside the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red) the appellant's margin on a whole entity basis on the application of Transactional Net Margin Method ("TNMM") was higher than the margin earned by the comparable companies. 6. That on facts and circumstances of the case and in law Ld AO/TPO/ DRP has also erred in confirming the payment for SAP license as revenue in nature and disallowing the entire payment cost. 6.1 That on facts and circumstances of the case and in law Ld AO/ DRP had failed to appreciate the business and commercial need by appellant company for implementation of SAP software and erred in upholding the TPO's contention that the cost of SAP license was merely imposed by parent company on the appellant. 6.2That on facts and circumstances of the case and in law Ld AO/TPO/ DRP had erred in brushing aside the additional evidences filed by the appellant company documenting the benefits derived by it from the implementation of SAP software. 6.3 That on facts and circumstances of the case and in law Ld AO/ TPO/ DRP erred in not considering the details of cost incurred by the Parent Company, the basis of cost allocation and the third party supporting evidences placed on record by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st allocation and the third party supporting evidences placed on record by the appellant company in connection with the purchase of SAP license, even while passing the rectified DRP directions. 1:3 That on facts and circumstances of the case and in law Ld DRP has failed to take cognizance and has merely brushed aside the additional documentary evidences which have been placed on record by the appellant for the cost sharing expenses clearly demonstrating the intra group services have been received by the appellant company and the consequent benefit from availing the services, even while passing the rectified DRP directions." 4. Brief facts are as under : SigmaKalon Marine & Protective Coatings BV, Hollands is holding company of the assessee. Sigma Coatings BV Hollands holds directly or indirectly, shares carrying not less than 26% of the voting power in SigmaKalon India Private Limited and other Sigma group entities. Thus these 21 companies became associated enterprise of the assessee company u/s. 92A(2) of the LT. Act. International transactions:- During the relevant previous year, the assessee has entered into the following international transactions. Transaction Amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has not furnished detail of allocation key among different AEs on the basis of which it can be seen that the allocation among AEs was justifiable. Evidence of allocation of total cost among AEs and the parent company on the basis of allocation key. In the absence of these evidences, it is not possible to examine whether the transaction was fairly allocated among AEs including parent company. Accordingly, as discussed above the assesses has failed to demonstrate additional benefits from the SAP license, cost of which has been imposed by the parent company on it. Further, the assessee has also failed to demonstrate that the allocation of SAP license expense was fair between AEs and parent company. Hence, the ALP of transaction is proposed to be determined at Rs. NIL. Accordingly an adjustment of ₹ 12,80,079/- is made." 6. Before DRP the assessee sought to submit additional evidence. Learned DRP proceeded to confirm the action of the learned TPO. Learned DRP held as under :- "The assessee sought to present additional evidences before the Panel A letter was sent to TPO-II(8), Mumbai for his comments on the additional evidences. The TPO has replied that the stateme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were provided to the assessee and the costs so incurred have been fairly allocated among the group entities, neither it is possible to examine whether any such expense was incurred nor that the value of such expense was fairly allocated among AEs including parent company. The assessee has failed to prove that actually some services were requested by the assessee to its AE. The assessee has also failed to establish that any service was received by the assessee from AE for these payments. The assessee has also failed to even prove that any cost was incurred by the parent company. Further, the assessee failed to demonstrate any utilization of services in its business of trading from the cost sharing which has been imposed by the parent company on it. Further, the assessee has also failed to demonstrate that the allocation of so called costs was on some basis and that the basis of allocation was fair between AEs and parent company. Hence, the ALP of transaction is proposed to be determined at Rs. NIL, Accordingly an adjustment of ₹ 2,56,94,820 /- is made." 7. Against this order the assessee is in appeal before DRP. Learned DRP confirmed the same by observing as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sale of Finished Goods 82,66,617 TNMM Commission Income 18,22,651 TNMM Purchase of SAP License 12,80,079 Comparable Uncontrolled Pricing Method [CUP] Purchase of Furniture 23,733 CUP Advance received from customers 5,68,05,006 CUP Cost sharing 2,56,94,820 Actual cost without mark-up Expenses Incurred 3,64,670 Actual expense Total: 14,89,56,254 Ground Nos. 01 to 08 - Adjustment of ₹ 2,73,39,569/- :in respect of payment for SAP license, cost sharing expenses and reimbursement of expenses made to AEs: The aforementioned grounds of appeal challenge the adjustment of ₹ 2,73,39,569/- made by the Assessing Officer [AO' / Transfer Pricing Officer [TPO'J and confirmed by the Dispute Resolution Panel [DRP'] in respect of payment for SAP license, cost sharing expenses and reimbursement of expenses made to AEs. Before the AO / TPO: Re.: Purchase of SAP Licenses (₹ 12,80,079/-): • The SAP licenses were purchase by the AE viz. Sigmakalon BV from a third-party SAP Nederland BV in bulk quantities. • A copy of the agreement entered into between Sigmakalon BV with the third-party viz. SAP Nederland BV alongwith a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the transaction is at ALP under TNMM as well. Re.: Cost sharing expenses - ₹ 2,56,94,820/-: • The Appellant had availed the following services from the AE under the cost sharing expenses: o Central Support Services o Research and Development Service for protective coating and marine o Marketing and support service for protective coating and marine o Centralised IT service. The said services were availed by the Appellant to facilitate management and conduct of its business more efficiently. The cost allocated to the Appellant was based on the application of scientific allocation keys and was governed by the relevant agreements. The transaction was benchmarked under CUP, as the expenses were reimbursed on a cost to cost basis. Copies of the relevant cost sharing agreements were also submitted to the TPO (refer pages 93 and 104 to 123 of the paperbook). However, without considering the aforesaid details, the TPO determined the ALP of the transaction at Nil, on the reason that the Appellant had failed to prove that any services were actually rendered by the AE, failed to prove whether any cost was actually incurred by the AE and as how the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction at Nil as under -refer page No. 5 of the TP Order: The assessee has failed to produce evidences to prove that any services were availed by the assessee for these expenses and any such expense were incurred by the AE at all. Hence, it is not possible to examine whether any such expenses were incurred at all. * Aggrieved by the Order dated 27 October 2011 passed by the TPO, the Appellant filed its objections before the Dispute Resolution Panel ['DRP'], Before the DRP: • All the above details / evidences filed before the AO / TPO relating to the TP adjustments made by the TPO on all the aforesaid 3 issues were once again filed before the DRP. • In addition to the above, additional evidences were filed before the DRP with respect to cost sharing expenses and SAP under cover letter dated 04 July 2012 (filed on 09 July 2012) - refer page Nos. 137 to 376 of the paperbook), to in order to enable the Hon'ble Panel appreciate the details of the transaction. The details of the additional evidences is as under: o Transfer Pricing Report on the benchmarking of the cost sharing expenses -refer page No. 138 to 376, which inter-alia contains: the docu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has upheld the Order of the TPO for stating that no evidences have been filed by the Appellant -relevant extracts of the Directions of the DRP are given hereunder; 4.3 The panel has considered the submissions of the assessee and the observations of the TP. The tool cost incurred by the patent company for getting SAP license has not been produced by the assessee. Also, the basis of cost being allocated to the assessee has not been produced by the assessee- No evidence has been produced by the assessee regarding the evidence of incurred expenditure by the parent company and also for allocation of sharing of cost among the AEs including the parent company. In view of this the observation of :=>e TPO that the cost of the SAP license has been imposed on the assessee by the parent company, is upheld. The points (a) and (b) of objection No. 1 are rejected. 5. The assessee had submitted that it has availed the following services from it? AE: Central support services, R 8 D services for protective coatings and marine, Marketing and support services for protective coatings and marine and Centralized IT services. The cost allocated to the assessee was based on the application of scientif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Reliance in this regard is placed on the following decisions wherein the adjustment has been deleted in cases where ALP has been determined as Nil without following the prescribed six methods for determining the ALP of an international transaction: a. Decision of the jurisdictional Bombay High Court in the case of CIT v/s. Lever India Exports Ltd. reported in [2017] 78 taxmann.com 88 (refer page Nos. 09 to 12 of this compilation); b. Decision of the jurisdictional Bombay High Court in the case of CIT v/s. Johnson & Johnson Ltd. reported in [2017] 80 taxman 337 (refer page Nos. 13 to 24 of this compilation); c. Decision of the jurisdictional Bombay High Court in the case of CIT v/s. Merck Ltd. reported in [2016] 73 taxmann.com 23 (refer page Nos. 25 to 29 of this compilation); d. Decision of the jurisdictional Bombay High Court in the case of CIT v/s. SI Group-India Ltd. [ITA No. 447 of 2017] (refer page Nos. 30 to 33 of this compilation); e. Decision of the jurisdictional Bombay High Court in the case of CIT v/s. Kodak India Pvt. Ltd. reported in [2017] 79 taxmann.com 362 (refer page Nos. 34 to 36 of this compilation); f. Decision of the Mumbai Bench of the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied benefit test in dealing with the issue of ALP of payment for SAP license. The TPO has elaborated that assessee did not need this software like SAP. That it was unnecessarily using costly software. That assessee has not demonstrated as to how there is value addition to its business by using SAP license. We find that all the aforesaid discussions by the TPO are not at all sustainable in the context of determination of ALP in Transfer Pricing Adjustment. This has been held by Hon'ble jurisdictional High Court in several case laws as referred by the Ld. Counsel of the assesse in the submissions as above. Furthermore, determination of ALP as nil by applying the benefit test without resorting to the methodology of determining ALP as per the methodology set out in Chapter X of the Act and the relevant Rules has also been held to unsustainable. In these circumstances, the determination of ALP as nil has been held to be not sustainable in the case laws from Hon'ble Bombay High Court as above including CIT vs.Lever India Exports Ltd. [2017] 78 taxmann.com 88 and CIT vs Johnson & Johnson Ltd.[2017] 80 taxmann 337. In these case laws, it was expounded that TPO is mandated by law to deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the AO/TPO summarized as under:- It was submitted that assessee has availed following services from the AE under the cost sharing expenses: Central Support Services, Research and Development Services for protective coating and marine, Marketing and support service for protective coating and marine, Centralized IT service. It was submitted that the said services were availed by the assessee to facilitate management and conduct of its business more efficiently. The cost allocated to the assesse was based upon the application of scientific allocation keys and was governed by the relevant agreements. The transaction was benchmarked under CUP, as the expenses were reimbursed on a cost to cost basis. Copies of relevant cost sharing agreements were also submitted to the TPO. A report of factual findings issued by the Price Water house coopers certifying the cost allocation methodology in connection with the cost sharing agreement was also submitted. Hence, adequate details of working of cost sharing expenses were submitted before the authorities below. 15. We have examined the submission and the records, We are in agreement that authorities below have erred in holding the ALP at nil ..... X X X X Extracts X X X X X X X X Extracts X X X X
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