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TMI Blog2022 (3) TMI 649X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. TP adjustments should be restricted to the value of the international transactions only . See NALCO WATER INDIA LIMITED[ 2019 (9) TMI 609 - ITAT PUNE] Erroneous computation of transfer pricing adjustment in the manufacturing segment - Selection of comparable - HELD THAT:- Neither the assessee nor the T.P.O. applied any such filter at the time of the Transfer pricing study or the TP assessment. The selection of 18 comparables by the TPO is without any such filter. We appreciate that there is a marked difference in the profit earned from export and domestic sales of similar goods because of foreign market conditions and export incentives allowed by the Government of India. In such a scenario, some sort of export to sales filter is warranted. There is no foundation for the assessee seeking 15% filter of export sales to total sales of the segment. In fact, there is no statutory mandate of any specified percentage. Giving due importance to this filter in the facts and circumstances of the extant case, we are of the considered opinion that filter of 25% of export sales to sales of the segment will be in order. We order accordingly. Our view is fortified by the judicially accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 144C (13) of the Income-tax Act, 1961 ("the Act") in pursuance of the directions of the Hon'ble Dispute Resolution Panel, Mumbai ("DRP") for the Assessment Year ("AY") 2014-15 on the following grounds: 1. General a. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/Transfer Pricing Officer ("TPO"), pursuant to the directions of the Hon'ble DRP, has erred in making transfer pricing adjustments totaling to INR 32,37,89,951 to the value of various international transactions. b. The AO has also erred in disallowing depreciation of INR 1,75,34,827 on the assets installed at the premises of the Appellant's customers, by holding that the same were not used for the purpose of its own business. c. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/TPO, pursuant to the directions of the Hon'ble DRP, has erred in not providing reasons to demonstrate that either of the conditions prescribed under clauses (a) to (d) of Section 92C(3) of the Act are satisfied for rejecting/disregarding the transfer pricing study prepared by the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rge amount should not be considered, since tested separately. 5. Erroneous determination of arm's length price of intra-group service fee ("payment of headquarter common expenses and allocation of management assistance related fees") of INR 18,15,39,759 as NIL a. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AOI TPO, pursuant to the directions of the Hon'ble DRP, has erred in rejecting the methodology adopted by the Appellant (by aggregating this transaction with the other international transactions and benchmarking the international transactions using the transactional net margin method) for benchmarking the international transactions of payment of headquarter common expenses and allocation of management assistance related fees. b. On the facts and in the circumstances of the case and on the law prevailing on the subject, the AO/TPO, pursuant to the directions of the Hon'ble DRP, has erred in not applying any of the six methods for determining the arm's length price of the international transactions of payment of headquarter common expenses and allocation of regional management assistance fees, by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant requests that the benefit of +/- 3% range as per the proviso to Section 92C(2) of the Income Tax Act, should be granted while calculating the transfer pricing adjustment, if any. 8. Levying of interest The AO, has erred on the facts and in law by levying interest under Section 234A and 234B of the Act, on account of the unanticipated transfer pricing adjustment made by the TPO and disallowance made by the AO. 9. Initiation of penalty proceedings The AO, erred on the facts and in law in initiating penalty proceedings under section 271(1) (c) of the Act. Each one of the above grounds of appeal is without prejudice to the other. The Appellant requests the Hon'ble members a right to amend, alter, substitute or add to the grounds of appeal at any time before or at the time of hearing of the appeal so as to allow the Hon'ble Tribunal to decide this appeal according to law. Prayer The Appellant claims relief on the above grounds and additional grounds/additional evidences that may be submitted during the course of the hearing of this appeal and thereby prays for deletion of adjustments made by the AO in the final assessment order." 2. At the outset, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had prayed that no disallowance for the claim of the above depreciation should be made in respect of the plant and machinery installed at the customer's premises for carrying out the business by the assessee company." 4. Thereafter, the learned A.O. at para 4.4 of his order held that the claim of the assessee cannot be accepted since on similar grounds, the same has been disallowed by the Department in earlier years. Hence, in order to maintain consistency with the earlier years order, the claim of the assessee for depreciation of ₹ 1,75,34,827 was disallowed for similar reasons as mentioned for A.Ys. 2008-09, 2009-10, 2010-11 and 2011-12 and added to the total income of the assessee. Therefore, the A.O. for A.Y. 2014-15 had relied on the earlier assessment years order and made the addition. 5. The ld. D.R.P. at para 10.3 of their findings upheld the observations of the A.O. stating that the A.O. has not erred in disallowing depreciation of ₹ 1,75,34,827/- on the plant and machinery since the same have been installed in customer's premises and so have not been 'put to use' in the business of the assessee. The learned D.R.P. confirmed the disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the business premises of the clients cannot be the basis to disallow the claim of the assessee for deduction on account of depreciation. The decision of the Hon'ble Supreme Court in the case of ICDS Ltd. vs. CIT clearly supports the claim of the assessee in this regard. It is clear from the perusal of the order of AO that the AO's objection was that since the equipments in question had not been installed at the assessee's factory premises, it cannot be said that the equipments were used for the purpose of assessee's business. This reason given by the AO for disallowing the claim of the assessee for depreciation cannot be sustained in view of the factual and legal position discussed as above. We therefore are of the view that CIT (A) was fully justified in deleting the addition made by the AO in this regard. Order of CIT (A) does not call for any interference." 8. Respectfully following the aforesaid decision on the same parity of reasoning, ground No. 2 of the assessee is allowed. 9. In ground No. 3, the assessee submits that as per the various decisions of the Tribunal, the transfer pricing adjustments, if any, should be restricted to the value of the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 14,22,50,192/- in the manufacturing segment. The learned counsel submitted, referring to the order of the T.P.O. at para 3 onwards wherein the facts are enshrined as to the nature of business of the assessee. Thereafter at para 4, the T.P.O. listed the transactions. It is manufacturing segment which is in dispute. At para 5 of the T.P.O's order, there are financials of the assessee as per T.P. study report. The learned counsel further submitted that the PLI is not disputed. What is disputed is only the selection of comparable companies. At page 284, the TPO had earlier calculated the PLI at 5.75% and thereafter at page 286 he calculates current PLI at 1.02%. While re-adjusting the PLI at 1.02%, the TPO makes protective adjustment of ₹ 3.04 crores, then finally TPO arrives at the TP adjustment made at ₹ 32.61 crores. The relevant paras 12 and 13 of TPO's order are extracted as follows: "12. Accordingly the total adjustment is as follows Sr.No. Particulars Substantial adjustment Protective adjustment Amount (in Rs.) Amount (in Rs.) 1. Management services 18,15,39,759 18,15,39,759 2. Manufacturing segment 14,46,13,160 30,42,10,447 13. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Government of India. In such a scenario, some sort of export to sales filter is warranted. There is no foundation for the assessee seeking 15% filter of export sales to total sales of the segment. In fact, there is no statutory mandate of any specified percentage. Giving due importance to this filter in the facts and circumstances of the extant case, we are of the considered opinion that filter of 25% of export sales to sales of the segment will be in order. We order accordingly. Our view is fortified by the judicially accepted related party transactions (RPT) filter of 25% in several cases. Both the sides agreed to such a filter during the course of hearing. We, therefore, set aside the impugned order and remit the matter to the file of the AO/TPO to undertake the selection of comparables afresh in the light of the above filter and re-adjudicate the issue as per law after complying with the principles of natural justice. Therefore, ground No. 4 is allowed for statistical purposes. 14. In ground No. 5, the assessee contends erroneous determination of A.L.P. of intra-group service fee of ₹ 18,15,39,759/- as NIL. The T.P.O. has discussed this issue from para 7.1.2 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the similar uncontrolled transactions with or between non-associated enterprises, under similar circumstances, the price will be definitely zero. Thus ALP for the management services fee will be zero. xiii) The reliance is placed on the decision in the case "Gem plus India Ltd.". Wherein, the Taxpayer entered into a services agreement with its AE for receipt of services in marketing and sales support, customer service. Support, finance, accounting and administration support and legal support. The TPO observed that there was no clear proof that such services had actually been rendered by the AE. There was no specific benefit derived by the Indian entity. The taxpayer had not established the necessity for availing these services from the AE and had already incurred expenses towards professional and consultancy services and employed qualified personnel in India for rendering similar services. The volume and quality of services were disproportionate to the amount paid, and the charge was based on cost apportionment amongst the group entities on a mutually agreed basis and not on the basis of actual services rendered. The Appellate Tribunal decided the case in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oo i.e. AY 2014-15, the undersigned has concluded only after going through comprehensive scrutiny and discussion on each and every aspect of the issues pertaining to intra group services. Hence, the contention of the assessee is stand rejected. Since the assessee has failed to prove the receipt of above mentioned services and tangible benefit derived from such a services, the ALP of transactions related to said services treated NIL and an adjustment of ₹ 18,15,39,759/- is made for AY 2014-15." 15. The ld. D.R.P. held at para 3.3 of their findings regarding the aforesaid that the assessee has failed to prove tangible benefits derived from the services received and that the evidences produced were generic and theoretical in nature as a result of which the benefit received cannot be quantified from it. It was also seen that the T.P.O. has correctly held that the bench marking approach used by the assessee was not as per law and they had applied CUP. Thus, the adjustment of ₹ 18,15,39,759/- was confirmed by the D.R.P. Thereafter, the D.R.P. refers to its earlier order for A.Y. 2012-13 in respect of the assessee. That accordingly for this year, the ld. D.R.P. held as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in allegation that the benefits claimed to have been received by the assessee from Nalco Pacific under the agreement would not be ones for which an independent enterprise would be willing to pay. In this connection Ld. Counsel referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances [2012] 24 taxmann.com 199 (Delhi), wherein the Hon'ble High Court has examined the issue as to whether the TPO has power to restrict the value of an international transaction to nil when he was supposed to have determined the arm's length price of the international transaction. The Hon'ble High Court after examining the facts of the case held as under: "19...... In CIT v. Walchand & Co. etc. [1967] 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. 14 ITA Nos. 529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003-04 & 2004-05 22. Even Rule 10B(1)(a) does not authorize disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the expenditure was unremunerative. The Hon'ble High Court has further held that the quantum of expenditure can be examined by the TPO as per law and so long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. But in the present case before us, the TPO judged the reasonableness of the aforesaid intra-group service 15 ITA Nos. 529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003-04 & 2004-05 charge and computed the arm's length price of the international transactions under review at 'NIL' value based on his main allegation that the benefits claimed to have been received by the assessee from Nalco Pacific under the aforesaid agreement would not be ones for which an independent enterprise would be willing to pay. The CIT(A) also confirmed his order. 21. Attention was further invited to the decision of Hon'ble Delhi Tribunal of McCann Erickson India (P.) Ltd. vs. Addl. CIT [2012] 24 taxmann.com 21 (Delhi), wherein the Tribunal, following the aforesaid decision of the Hon'ble Delhi High Court, has inter alia he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act read with rule 10B and 10C of the Rules. In this connection, Co-ordinate bench decision of Mumbai Tribunal in the matter of DCIT vs. Diebold Software Services (P.) 16 ITA Nos. 529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003-04 & 2004-05 Ltd. [2014] 48 taxmann.com 26 (Mumbai - Trib) was referred, wherein the principle laid down by Tribunal along with brief facts are as under: • The assessee received information technology (in short, 'I.T.') services from its associated enterprise and paid service charge to the latter. The assessee clubbed the aforesaid international transaction together with other international transactions, applied the TNMM as the most appropriate method and selected a set of external comparables. As per this analysis, the international transactions covered under the TNMM, were at arm's length. The aforesaid analysis by assessee was not disputed by the TPO. • The assessee was called upon by TPO to provide the basis of pricing of these transactions. The assessee was also required by the TPO to provide necessary details along with allocation keys and basis of calculation of payment made for I.T. support services. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad attended the office of the TPO from time to time and filed details as requisitioned by the TPO which were placed on records. The TPO had examined the details filed by assessee and based on such examination, he held in his order that the pricing of the aforesaid agreements was 17 ITA Nos. 529/K/2008 & ITA No. 1256/K/2009 NLC Nalco India Ltd. AY 2003-04 & 2004-05 justified by assessee on the basis of the TNMM. We find that the TPO did not make any adverse comments in his order upon the arm's length analysis carried out by assessee under the TNMM as per section 92C of the Act read with rule 10B of the Rules. Accordingly, we feel that TPO made proper enquiry and applied his mind to the details brought on record by assessee. He had agreed with the assessee that the international transactions covered by the TNMM analysis (including the intra-group service charge paid/payable to Nalco Pacific) adhered to the arm's length principle Transfer Pricing Regulation. 24. Further, it is also a fact that the aforesaid intra-group service charge was allowed as deduction by TPO for the assessment years 2005-06, 2006-07, 2007-08 and 2008-09. In this connection, Ld. Counsel referred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-216, 243, 249-252 of the assessee's paper book. The assessee also filed explanations in regard to the nature of the aforesaid services in page No. 10 of its first submissions. 25. In the instant case, Nalco Pacific operated as the regional headquarters company in relation to Nalco Asia Pacific group of companies including assessee. It functioned as a group service centre and recruited regional employees, though located in Singapore, exclusively for the purpose of rendering services to Nalco Asia Pacific group of companies including assessee. Nalco Pacific incurred expenses for the payment of salaries & other benefits to the regional employees. We find that the services rendered by Nalco Pacific to assessee under the agreement were similar to the services mentioned in paragraph No. 7.14 of the DECD Guidelines. In view of this, we appreciate that the services rendered by Nalco Pacific to assessee were intra group services for which independent enterprises would have been willing to pay for or to perform in-house for themselves and hence, the value of the aforesaid services in comparable uncontrolled transactions could not be 'nil'. The paragraph No. 7.12 of the OECD G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... granted while calculating the transfer pricing adjustments, if any. It is seen that similar ground was raised by the assessee in A.Y. 2012-13 and while dealing with the same, the Tribunal vide its order in ITA No. 742/PUN/2017 has rejected this ground. Respectfully following the same on the same set of facts and circumstances and on same parity of reasoning, ground No. 7 is dismissed. 20. Ground No. 8 is regarding levy of interest u/s. 234A and 234B of the Act on account of unanticipated transfer pricing adjustment made by the TPO and disallowance made by the A.O. That at the time of hearing, the learned counsel for the assessee fairly submitted that this issue may be remanded to the file of the A.O/TPO for verification and then re-adjudicate as per law. The learned D.R. conceded to the submissions of the assessee. Having heard the parties, in the interest of justice, we remand this issue to the file of the A.O/T.P.O. for re-adjudication as per law while complying with the principles of natural justice. Ground No. 8 of the assessee's appeal is allowed for statistical purposes. 21. Ground No. 9 is with regard to initiation of penalty proceedings u/s. 271(1)(c) of the Act, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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