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TMI Blog2023 (2) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... of international transactions in respect of "advisory services": 1:1 The Commissioner of Income-tax (Appeals) ["CIT(A)"] has erred in confirming the view of the Assessing Officer ["AO"]/the Transfer Pricing Officer ("TPO") that the international transactions entered into by the Appellant with its Associated Enterprise ("AE") in respect of "receipt of advisory services" is not at an arm's length and in thereby, holding that the ALP thereof is only Rs. 35,48,420/- as against the amount of Rs. 4,10,33,751/- paid by the Appellant and determined to be the ALP thereof. 1:2 The Appellant submits that considering the facts and circumstances of the case and the law prevailing on the subject the value of international transactions pertaining to "receipt of advisory services" is Rs. 4,10,33,751/-, and the CIT(A) ought to have held as such. 1:3 Without prejudice to the aforesaid, and on the facts and circumstances of the case and on the law prevailing on the subject the transaction vis-à-vis "advisory services" should also be aggregated under "manufacturing activity" (along with aggregating other international transactions being receipt of research and development services and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 The learned TPO during the transfer pricing assessment proceedings observed that in the A.Y. 2008-09, the Appellant had rejected the CUP method as the most appropriate method for benchmarking the international transaction of the receipt of advisory services. The Appellant in its Transfer Pricing Study Report of the A.Y. 2008-09 reasoned that it rejected the CUP method because the AE did not enter into similar comparable transactions with other independent parties. Hence, similar comparable transactions were not available for the comparison under the CUP method. En the A.Y. 2009-10, the Appellant had used the CUP method to benchmark this international transaction for the reason that the AE had provided similar services to the other group companies on similar terms and conditions. However, during the year under consideration, the Appellant has used the TNMM as the most appropriate method for benchmarking, its international transactions of the receipt of advisory services, which has been clubbed under the-manufacturing segment. 2.2.3 Further, the learned TPO stated that just because the TNMM is applied at the enterprise level and other international transactions are accepted to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * Document No. 6, 7, 8, and 9 out of 19 documents submitted not pertaining to the relevant period. 2.2.7 Further, I find that the Appellant has not furnished the break-up of the payment of Rs. 4,10,33,751 made for availing different services under the head of advisory services. The facts of the year under consideration being similar to the facts of the A.Y. 2009-10, I direct the learned AO to work out the amount of the ALP of the international transaction of the receipt of advisory services by following my directions in the Appellant's appellate Order of the A.Y. 2009-10. The learned AO is directed to obtain the break-up of the payment of Rs. 4,10,33,751 from the Appellant for this purpose. Accordingly, the learned AO is directed to work out the amount paid for availing services, which are not authorized by the Appellant's service agreement with AE or not mentioned in the Appellant's transfer pricing study report, ascertain the amount of the payment for the services for which, no evidence is furnished by the Appellant and quantify the amount of the payment made for duplication of services. Out of the remaining payment, ALP should be determined @ 50% of the remaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determining arm's length price "ALP" thereof. 5. It emerges from a perusal of TPO's order dated 10.01.2013 that so far as the sole issue before us involving arm's length price adjustment relating to "Receipt of Advisory Services" is concerned, the assessee had paid Rs. 3,66,82,446/- to its spanish associated enterprise M/s. Grupo Antolin Irausa. The TPO's order makes it clear that the assessee's transfer pricing report (Form 3CEB) had claimed that the recipient AE hereinabove charged "a portion of total expenditure incurred on account of these techno commercial services to its group companies. The said amount is increased by supplementary 5% profit margin. Usually this charging is based on the turnover as budgeted by the group companies at the start of the year". It had further benchmarked the foregoing transaction in "Receipt of Advisory Segment" by using the comparable uncontrolled price "CUP" method thereby declaring that "as per the information available with the company, AEs provide similar services to its other group of company based on similar terms and conditions and therefore have entered into comparable transactions with other group companies which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to aggregate the assessee's three transactions involving "Receipt of Advisory Services", "Payment of Telephone Charges" and "Receipt of R&D" in manufacturing with Profit Level Indicator "PLI" as "OP/OR". Mr. Yadav could hardly dispute that the TPO's order in para 36 page 18 initially arrived at transfer pricing adjustment of Rs. 27,58,88,444/- by using the Transactional Net Margin Method "TNMM" only. This adjustment figure fail to inspire the TPO's confidence. He observed that this sum turned out to be much more than the assessee's gross value of transaction in both manufacturing as well as computation aided design "CAD" segment (supra). We find that the learned TPO went further to compute the impugned nil arm's length price of assessee's advisory services by once again following CUP method only. 9. We note that TPO's detailed discussion from 41 onwards considered the assessee's service agreement dated 02.10.2003 comprising various stipulations involving definition in "i to ix" clauses regarding administrative support services vis-a-vis the list of cost incurred for implementation thereof. He next compared the assessee's international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee to associated enterprises. The TPO in the final analysis has only commented that since unadjusted margins of assessee are (-) 11.56% and that of comparables are at 6.39%, hence TNMM analysis used for benchmarking was not correct and further held the advisory services were not at arm's length price and hence, taken at Nil. We find no merit in the stand of TPO in this regard, which has been upheld by DRP. In any case, we have already allowed the claim of adjustment to be made on account of extraordinary cost to be reduced while arriving at operating margins of assessee and the same would work out to 7.13%." 11. Mr. Yadav sought to draw distinction in A.Y. 2008-09 vis-a-vis A.Y. 2009-10 on the ground that although the assessee therein had proved receipt of services in the said former assessment year but it could not demonstrate the actual benefits flowing therefrom whereas the facts in the instant latter assessment year raise the dispute of actual rendering of services itself. He pinpointed the fact that the assessee has not filed any evidence in support of its "Advisory Services" claim throughout except that involving various e-mails which are only self-serving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds certain email exchanges between the assessee and the Indian entity, whose copies have been placed in the paper book. Pages 231 to 234 demonstrate e-mail exchanges between the assessee and the Indian entity discussing the stiffness of HDL's with Expanded foam having an acceptable strength. The assessee informing the Indian entity that the test was conducted and it was eventually found that fogging as per Tata specs was OK but for GM specs was not OK. Pages 240 and 241 are again email exchanges between the assessee and Indian entity concerning with the running trials of materials AB 4235/50 and AB NS by the Indian entity on its Plant. The assessee responded by stating that it wants an urgent feedback for this issue as the samples were sent in mail and there was no feedback till November, by specifically mentioning that "this situation is absolutely unacceptable". To this, the Indian entity responded that it took trial on the above adhesive which is giving good bonding but was facing air gap in the package tray packet area. They requested the assessee for further input. Pages 242 to 243 deal with the Indian entity communicating to the assessee that they have got Canon G-300 ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and Indian entity in connection with the IT services, discussing about difference in the information under SAP system and the report by which the Indian entity was questioned and called upon to change the information in SAP and report in uniform manner. Pages 270 and 271 again deal with e-mail exchanges between Indian entity and assessee. The Indian entity attached monthly cost reduction plan duly updated for May 2009 for information of the assessee. The assessee required it to submit all information in new format which was attached in the e-mail. Similar is the position regarding other e-mail exchanges placed on record. 5.4. With the above understanding of the nature of services, we now proceed to determine the taxability of the amount under the Act, which encompasses consideration, inter alia, for managerial, consultancy or technical services. The term 'manage' in the context of business, connotes administering and supervising the affairs of a business, encompassing Planning, Execution and Performance evaluation. Ex consequenti, the term 'Managerial services' contemplate services in connection with administration and supervision of the business, starting with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee's service agreement has remained the same throughout since 2003 onwards (supra). We therefore conclude in this factual backdrop that the assessee has sufficiently proved to have received "advisory services" from its group entity(ies) and the learned lower authorities have erred in law and on facts in rejecting the same in entirety. We, accordingly, delete the impugned adjustment of Rs. 3,35,16,306/- in these peculiar facts and circumstances. The assessee succeeds in its first and foremost grievance." 6. We further note that for academic purposes, the only distinction herein is stated that to be correctness of assessee's Comparable Uncontrolled Price "CUP" method is nowhere in dispute in A.Y. 2011-12, whereas in the preceding assessment year 2009-10, the Transfer Pricing Officer "TPO" had adopted the Transactional Net Margin Method ("TNMM). This is indeed coupled with the fact that his findings in para 25 page 23 have nowhere completely ruled out the assessee having actually availed services to "certain extent". Be that as it may, we adopt judicial consistency in the absence of any clinching distinction in both these assessment years involving the very issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ageing of stock and realizable, price. In support of its contention that such provision is allowable, the Appellant has placed reliance on the decision of the honourable Delhi ITAT in the case of Tupperware India Pvt. Ltd., of the honourable Karnataka high Court in the case of IBM India Ltd. and of the honourable Pune ITAT in the case of Atlas Copco (India) and of the honourable Rajasthan High Court in the case of Wolkem India Ltd. 2.3.5 I have gone through, the copy of the document furnished by the Appellant, which is stated to be the basis of the creation of the provision of slow moving inventory. The Appellant has submitted the copy of the 'Approval Note' dated 13.03.2013 in which, the Appellant's Finance Department has recommended that a provision of Rs. 24,74,561 be created towards the slow moving inventory. However, it is seen that the Appellant has created a provision of Rs. 29,81,185. Therefore, I do not find any correlation between the amount stated to be the basis of the creation of provision and the amount of the created provision. Further, the Appellant has also not furnished the history or the basis of the provision created in the earlier years on this gr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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