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TMI Blog2022 (9) TMI 1453X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of section 92C - AO, in the instant case, had not disallowed the expenditure under section 37 of the I.T. Act but only adopted the ALP determined by the TPO in his order. We find that the principle enunciated by the Hon ble High Court of Bombay [ 2017 (2) TMI 120 - BOMBAY HIGH COURT ] is squarely applicable on the facts of the present case. Hence, we find that the aforesaid action of the TPO (that is, the determination of the ALP of the international transaction under consideration at nil value) is without jurisdiction and it goes against the basic tenet of the Indian Transfer Pricing Regulation. We have noted that the term stewardship activity has not been defined by the I.T. Act. As respectfully following the above binding precedent, uphold the order of the CIT(A) for the assessment year 2014-15 [ 2022 (10) TMI 836 - ITAT KOLKATA ] and the contention of the assessee and we delete the ALP adjustment made by the AO/TPO. ALP adjustment in respect of the international transaction involving sale of finished goods by the assessee to associated enterprise - assessee applied the CUP Method in order to substantiate the arm s length nature of the international transaction involving sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in concluding that the intra-group services provided by the AE under the head of IT services are not in the nature of stewardship activities, ignoring the details of the IT services provided by the AE, which clearly indicates that the services were meant for exercising overall control and supervision over the assessee company and in the nature of stewardship activities. 4. That on the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in concluding that the payment for intra-group services was at arm's length without examining the cost of such service provider and without examining mark-up element incorporated in the quantum of service fee charged by the AE. 5. That on the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition made by the AO/TPO by simply relying on the assessee's own cases in earlier years, but ignoring that the revenue is in appeal against the said impugned orders and the matter has not been finalized yet. 6. That on the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid international transaction at Nil value solely based on the allegation that the intra-group activities performed under the aforesaid agreement were in the nature of stewardship services. The TPO did not apply any of the six methods prescribed under sub-section (1) read with sub-section (2) of section 92C of the I.T. Act for the purpose of determining the arm's length price of the international transaction at Nil value. He did not bring on record any comparable uncontrolled transaction for the purpose of determining the arm's length price of the international transaction at Nil value. 5. As the order of the TPO was binding on the AO, the AO disallowed the expenditure of Rs. 4,10,08,010/- in the assessment order. The CIT(A) examined the facts of the case and the documentary evidences of receipt of IT products and common IT services which were submitted by the assessee to the TPO and directed to delete the aforesaid disallowance. Aggrieved by the order of the CIT(A), inter alia, in respect of the aforesaid disallowance, the Revenue has preferred an appeal before us. 6. The Ld. DR placed reliance on the order of the TPO for the relevant assessment year. The Ld. DR alleged th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... G (being administrator of the cost contribution arrangement made under the aforesaid agreement) with independent IT companies such as IBM, Microsoft, T-Systems. (ii) Copies of invoices (sample) raised by independent IT companies such as IBM, TSystems, Antares Netlogix, Cimnet Systems BV and SAP on AT&S AG (being administrator of the cost contribution arrangement made under the aforesaid agreement): Brief content of invoices Sl. No. Name of Service Provider Invoice no. and date Nature of product / service as mentioned in invoice Total Invoice Value 1 IBM Osterreich Gesellschaft m.b.H 718235 dated 17/09/2013 10.000 SAPs (Power), 40 GB RAM, 18TB Disk, 76.8 Stk. Zusätzliche (i.e., Additional) Managed 1000 SAPS, System Power (4 GB Memory), 275 Stk. Zusätzliche 1 GB Memory), System Power, 8.8 Stk. Zusätzliche Managed 1000 SAPS, Blade Center (4GB Memory), 2749 Stk. Zusätzliche Managed storage GB inkl. Datensicherung (i.e. data back-up), 12.5 Stunden Installation SAP Fiori H. Lagger Euro 42171.35 2 T-Systems Austria GesmbH 9030 153968 dated 27/03/2013 Services for Nanjangud (AT&S India): Serial No. 80: Service to Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the common IT services received by the assessee under this agreement could be classified into two categories such as: (a) IT desktop services and (b) IT-business process consulting (SAP) services (as documented in page no. 13 to 15 of the TPO's order). a) IT-desktop services 'IT-desktop services' inter alia included the following sub-categories of services such as follows: (i) 'Standard Workplace Provision And Operation', (ii) 'Production Workplace Provision And Operation', (iii)'Provision & Operation of Blackberry Devices', (iv) 'IP Telephony - Provision & Operation', (v) 'Provision & Operation of SAP Solution', (vi) 'File Space' and (vii) 'Customer Support'. 'Standard Workplace Provision and Operation': This sub-category of services interalia included a network connection, adequate server-capacity, print-capacity and storage-capacity (including backup), customer support, provision and execution of the underlying Office IT-Solutions and infrastructure based on the defined service levels. Applications within this package were SAP GUI, Lotus Notes Client 7.x.x, MS Office 2003 - SP3, MS Internet Explorer 7.0, BGInfo, RealPlayer, PDF Creator, Adobe Acrobat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standard workplace. The capacities were amount of CPU-Seconds and maintenance from IBM. The charging unit was CPU minute (allocation key). 'File Space': Additional file space could be ordered to fulfil the needs of the daily work. This category of services also includes the archiving and backup of the saved data. The precondition to get this category of services was a functional standard/production workplace. The charging unit was 'gigabyte' (i.e. 'GB') (allocation key). 'Customer Support': It constituted professional support for the solution of problems in the field of I.T. The services were structured in three different levels viz., 1st level, 2nd level and 3rd level in accordance with the degree of complexity of the problems. At the 1st level and 2nd level, the local I.T. team provided support for the solution of I.T. related problems. However, at the 3rd level, the assessee received professional support for the solution of problems under the CCA. The charging unit at the 3rd level was man-hour (allocation key). b) 'IT- Business Process Consulting (SAP) services' IT- Business Process Consulting (SAP) Services inter alia included the following sub-categories of servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the allocation keys used for the purpose of allocation of cost to the individual group companies including the assessee. The Ld. AR invited our attention to the matter that the TPO determined the arm's length price of the international transaction under consideration at Nil value solely based on the allegation that the services received under the aforesaid agreement were in the nature of stewardship services. 13. The Ld. AR invited our attention to the matter that in response to the notice issued by the AO under section 142(1) of the I.T. Act, the assessee, vide petition dated 14th December, 2017, as per the direction of the AO, submitted the documentary evidences of receipt of IT services to the AO. The AO did not make any adverse comment in the assessment order dated 30th January, 2018, regarding the aforesaid documentary evidences under section 37 of the I.T. Act. That is to say, the AO did not raise any issue as to whether the aforesaid expenditure was incurred by the assessee wholly and exclusively for the purposes of business. As the order of the TPO under section 92CA(3) of the I.T. Act was binding on the AO, the AO made an ALP adjustment of Rs. 4,10,08,010/- in this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed enterprise (administrator of CCA) during the relevant financial year. …….. 5. The DRP-2, New Delhi vide its order dated 21.12.2015 on para 9 to 9.2 held as follows:- "9.0. Finding: 9.1. "DRP has duly examined the issue. The TPO has determined ALP of payments made under CCA at NIL by observing that services are in nature of stewardship activity for which an independent enterprise shall not make any payment. 9.2. The panel has noted that AT&S Austria has arranged IT services from IBM, Microsoft and T-Systems etc. which shall be available to various group companies and charged as per allocation keys mentioned in CCA itself. TPO has not commented upon appropriateness of allocation keys but has observed that services are in nature of stewardship activity. The panel is not inclined to buy the argument of the TPO that IT services are in nature of stewardship activity. In modern era, it is not possible to administer the business without using IT services. Therefore, it cannot be denied that IT services utilised by the assessee are for its own business purpose and an independent enterprise would have asked and paid for such services. Therefore, DRP directs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Income Tax Act, 1961 (in short "Act") should be construed on its terms, without drawing any analogy from foreign statues and from the decision of foreign Courts. (b) The TPO has not complied with the relevant provision of Chapter X of the Act and specifically to sub-section 1,2,3 of section 92CA r.w.s. sub-section (3) of section 92C. It was submitted that the TPO is authorised to proceed to determine the ALP in relation to the international transactions, only when any circumstances mentioned in Clause (a) to (d) of section 92C (3) of the Act is satisfied. Reliance is placed on the following decisions: - (i) NLC Nalco (India) Ltd. vs DCIT, Circle-10, Kolkata [2016] 71 taxmann.com 57 (Kolkata Tirb.) (ii) CIT vs EKL Appliances [2012] 24 taxmann.com 199 (Delhi) (c) Reliance was also placed on the judgement of Hon'ble Delhi High Court in the case of CIT-I vs Cushman & Wakefield (India) P. Ltd. [2014] 46 taxmann.com 317 (Delhi) and it was argued that the authority of the TPO is to conduct a transfer pricing analysis to determine the arm's length price and not to determine as to whether the services in question is for the benefit of the assessee or not and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity on the same. Services were rendered and the assessee received benefits. Hence, we hold that the order of Ld. CIT(A) for AY 2009-10 & 2010-11 and Ld. DRP of AY 2011-12 are upheld. 16. Coming to the submissions of the Ld. DR that the issue should be remanded back to the file of the TPO for fresh adjudication, we find that the payment in question was admittedly reimbursement of cost. When the issue of deduction of tax at source on the very same payments had come up before the Tribunal in the assessee's own case for AY 2002-03 and the subsequent years, it was held that these were reimbursement of actual cost and hence no tax may be deducted at source on these payments. 17. Moreover, the conditions specified in section 92CA r.w.s 92C(3) are not complied with the TPO. Hence, no purpose could be served in restoring the issue back to the file of TPO for fresh adjudication for determination of ALP ……… ………………………………………… 22. The proposition of law laid down in these case laws apply to the facts of this case. Hence, in view of the above finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arm`s length price (ALP) of the assessee. Hence considering the provisions of section 92C of the Act, it is safely concluded that the AO/TPO cannot ignore these six methods which is prescribed in the statute to determine the arm`s length price (ALP). Besides, section 92CA (3) also advocates that AO/TPO should not deviate from the six methods prescribed in section 92C(1), the relevant provisions of sub-section (3) of section 92CA are given below: "Section 92CA: Reference to Transfer Pricing Officer (3) On the date specified in the notice under sub-section (2), or as soon thereafter as may be, after hearing such evidence as the assessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm's length price in relation to the international transaction or specified domestic transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to which the TPO has not raised any objection. In this connection, we place reliance on the following decisions wherein it is held that if a ground has not been agitated at all before the lower income tax authorities, such a ground cannot be taken up before the Tribunal and the Tribunal has no jurisdiction to permit the same. (i) Decision of the Hon'ble High Court of Bombay in the matter of CIT vs. Hazarimal Nagji & Co. [1962] 46 ITR 1168 (Bom) (ii) Decision of the Hon'ble Hyderabad Tribunal in the matter of Apps Labs Technologies (P.) Ltd [2014] 42 taxmann.com 11 In view of the above, we are of the considered view that the aforesaid allegation raised by the Revenue has no valid basis. The copies of the aforesaid decisions are placed on record. 21. It was alleged by the Revenue that the CIT(A) erred in allowing the claim of the assessee without getting the facts verified by the AO from the respective records. We find no strength in this contention of the Revenue. In response to the notice issued by the AO under section 142(1) of the I.T. Act, the assessee, vide petition dated 14th December, 2017, as per the direction of the AO, submitted the documentary evidences of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules. The determination of the ALP by the respondent assessee of its advertisement expenses has not been disputed on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT (A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained." 23. In the instant case, the AO, while examining the evidences of receipt of IT services, did not make any adverse comment under section 37 of the I.T. Act but he only adopted the ALP adjustment of Rs. 4,10,08,010/- directed by the TPO because the order of the TPO was binding on him. As per the aforesaid decision of the Hon'ble High Court of Bombay, the jurisdiction of the TPO is specific and limited, i.e., to determine the arm's length price of an international transaction by applying any of the methods prescribed under sub-sections (1) and (2) of section 92C of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. 25. We see no reason to take any view of the matter other than the view taken by the Division Bench of this Tribunal in assessee's own case for the assessment years 2009-10, 2010-11, 2011-12 and 2013-14. As the issue is squarely covered in favour of the assessee by the decisions of the Division Bench in the assessee's own case (supra) and there is no change in facts and law, we, respectfully following the above binding precedent, uphold the order of the CIT(A) for the assessment year 2014-15 and the contention of the assessee and we delete the ALP adjustment of INR 4,10,08,010/- made by the AO/TPO. Hence, the ground nos. (1), (2), (3), (4) and (5) are dismissed. 26. Ground nos. 6, 7 and 8 taken by the Revenue are against the action of the CIT(A) in deleting the ALP adjustment of Rs. 38,71,000/- in respect of the international transaction involving sale of finished goods by the assessee to associated enterprise. 27. The brief facts are as that the assessee, incorporated in India under the erstwhile Companies Act 1956, is engaged in the business of manufacturing and sale of printed circuit boards (PCB). The assessee entered into a distribution arrangement with AT&S AG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined the copies of the aforesaid back-to-back invoices and he did not make any adverse comment on the genuineness of the transactions documented therein. However, the TPO rejected the CUP Method in paragraph no. 6.4 of the order of the TPO based on the allegation that the appropriate CUP was absent because the international transaction involving Indian assessee's sale to foreign associated enterprise could be benchmarked under the CUP Method with reference to similar sales transaction to unrelated party. The TPO applied the Transactional Net Margin Method (TNMM) at the entity level considering AT&S India as tested party and accordingly, directed an ALP adjustment of Rs. 38,71,000/- in respect of sale of finished goods to associated enterprise. The CIT(A) examined the facts of the case and the documentary evidences submitted by the assessee to the TPO. He accepted the CUP Method and directed to delete the ALP adjustment of Rs. 38,71,000/-. Aggrieved by the order of the CIT(A), inter alia, in respect of the aforesaid addition to income, the Revenue preferred an appeal before us. 31. The Ld. DR placed reliance on the order of the TPO. The Ld. DR argued that the CUP Method would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aracteristics of PCBs (indicated by product identification number) sold by the assessee to AT&S AG were exactly the same as the specific characteristics of PCBs sold by AT&S AG to independent customers in back to back transactions. The prices at which PCBs were sold by the assessee to AT&S AG were exactly equal to the prices at which PCBs were sold by AT&S AG to independent customers in back to back transactions. The quantities in which PCBs were sold by the assessee to AT&S AG were exactly equal to the quantities in which PCBs were sold by AT&S AG to independent customers in back to back transactions. The controlled transactions as well as uncontrolled transactions took place in Europe i.e. in the same geographical location as disclosed in the copies of back to-back invoices submitted to the TPO/DRP on sample basis. For administrative convenience, AT&S AG retained distribution commission and warranty expense out of the sale proceeds collected from the independent customers and remitted the balance to the assessee. Therefore, the CUP method is suitable for the assessee. Apart from this, the ld. counsel for the assessee submitted before us that this identical issue is fully cover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of any TP method for benchmarking international transactions comparison has to be with uncontrolled transactions. Further, the assessee's reliance on the decision of DCIT v. Calance Software (P.). Ltd. reported in 82 taxmann.com 390 (Delhi - ITAT) is misplaced, as facts are different but for back to back transactions of software development services at the same price. Therefore, the ld DR pointed out the followings: 1. The assessee is a manufacturer whereas the AE is a distributor. Hence, functions are different. 2. In the referred case, there is no issue of tested party. 3. Once the tested party issue comes into existence, the scenario changes and the mechanism of TP has to be applied to the tested party. 4. As explained above, as per Indian TP regulations as well as OECD guidelines uncontrolled transactions should be taken into account for comparability. 5. The referred cases has assumed that the transactions entered by AE with third parties can be considered as comparables, which is not defined either in Indian TP regulations or in OECD guidelines. 6. Even in the case of Ghardia Chemicals on which Hon'ble Kolkata has relied upon, the assessee namely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary internal or external comparables for examination by TPO. 16. We have given a careful consideration to the rival submissions and perused the material available on record, we note that ld DR for the Revenue submitted before us about the applicability of Comparable Uncontrolled Price Method (CUP-Method) and explained the circumstances where the CUP method may not be applicable. He explained the internal CUP and external CUP and relied on certain judgments of the Tribunal, which are given in para 15 of this order. We note that all these are theoretical and academic exercise. The ld DR failed to bring on record any cogent evidence or material which can prove that CUP method is not suitable for the assessee. Why and how the uncontrolled price does not exist in the assessee's case under consideration? The main focus of the ld DR for the Revenue is that since the assessee is a manufacturer whereas the associated enterprise (AE) is a distributor, hence, functions are different, therefore CUP method is not applicable to the assessee. We note that under the Distribution Agreement, the assessee has grant to AT & S AG (AE), the exclusive right to market, distribute and sell the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee by the Jurisdictional Tribunal in assessee's own case in ITA No.179/Kol/2016, for Assessment Year 2011-12, (supra) and there is no change in facts and in law and the Revenue is unable to produce any material to controvert the aforesaid findings. Therefore, we are of the view that the arm's length price computed by the DRP/TPO needs to be deleted. Accordingly, we delete the arm's length adjustment to the tune of Rs. 90,32,40,004/-." 34. The Ld. AR invited our attention to the order of this Tribunal in assessee's own case for the assessment year 2011-12 (bearing ITA No. 179 (Kol.) of 2016). The relevant portion of the order reads as under:- "11. We have heard the rival contentions of both the parties and perused the materials available on record. From the foregoing discussion we find that the TPO has made an upward adjustment for Rs. 69,30,53,397/- of the goods exported to the AE. ……………………. In the instant case, the transactions involving sale of PCBs by the appellant to AE during the financial year 2010-11 stood as controlled transactions, whereas the transactions involving sale of exactly the same PC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the parties and carefully gone through the written submissions put forth by both the parties. We have perused the facts of the case including the findings of the TPO/AO and the CIT(A) and other materials brought on record. We have also perused the orders of this Tribunal in assessee's own case for the assessment years 2011-12, 2012-13 and 2013-14. 37. We see no reason to take any view of the matter other than the view taken by the Division Bench of this Tribunal in assessee's own case for the assessment years 2011-12, 2012-13 and 2013-14. As the issue is squarely covered in favour of the assessee by the decision of the Division Bench in the assessee's own case (supra) and there is no change in facts and law, consistent with the view taken by the Tribunal, uphold the order of the CIT(A) for the assessment year 2014-15 and the contention of the assessee and delete the ALP adjustment of INR 38,71,000/- made by the AO/TPO. Hence, Ground nos. (6) and (7) are dismissed. 38. In Ground no. (8), it was alleged that the foreign comparable companies selected by the assessee were located in different countries of Europe viz., the United Kingdom, Italy, France etc. and those are engaged in ..... 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