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TMI Blog2023 (10) TMI 845X X X X Extracts X X X X X X X X Extracts X X X X ..... even after provision of these services, no amount was charged by the associated enterprises. Benchmarking of the transaction - The assessee has benchmarked using the transactional net margin method computed is not rocket margin at 9.47%, which is found to be, higher than the arithmetic mean of net profit margin of comparable companies. Against this, the learned transfer-pricing officer has adopted the other method and computed the arm s-length price of this international transaction at nil. Further, when the issue reached before the learned dispute resolution panel, the learned dispute resolution panel abdicated its duty to benchmark the international transaction and merely followed its own direction in earlier years. As the intra-group services utilized by the assessee are supporting the core activities of the assessee, we do not find any infirmity in the assessee adopting transactional net margin method as the most appropriate method. In view of this, we do not find any reason to sustain the transfer pricing adjustment made by the lower authorities. Also perused the orders of the coordinate bench of earlier years wherein the transfer pricing adjustment has been delete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dingly the interest is correctly charged - HELD THAT:- In fact the assessing officer should have passed the draft of the assessment order complete involve respect wherein even the computation of tax should have been made, if that is not made therefore such issue has arisen. However, in the present case it has happened due to the mentioning of the wrong assessment year by the assessee. In view of this we set-aside the whole issue back to the file of the learned assessing officer with a direction to the assessee to 1st get the assessment year corrected in the challan and then learned assessing officer should grant credit of the same. There is no claim with respect to the interest under section 234C though mentioned in ground number 5. Accordingly, ground number 5 of the appeal of the assessee with respect to dividend distribution tax is allowed with above direction. Short grant of tax deducted at source - As this issue was not before the learned assessing officer at the time of passing of the draft assessment order, we restore this issue back to the file of the learned assessing officer with a direction to the assessee to reconcile form number 26AS with the tax return, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpete with time and hence the use of information technology is crucial to efficiently manage the business and its competitiveness. It was stated that the group of company provides the infrastructure for an internet presence to the several customers. The assessee also demonstrated capital investment made by the service provider by showing the consolidated financial statement. The assessee also explained that the technology provided permits to the assessee to track the shipment as well as required for performing various activities. For the receipt of service and benefit test, the assessee submitted that illustrative list of samples of IT technology, information received from the AE along with user guides and user manuals. The assessee also submitted that these services provided to the assessee are intangible in nature. It was further stated that all these advance management technical and technical knowhow are used in the day-to-day business activities. This technology is relevant and used for real time tracking of shipment, to manage schedule of delivery, account creation etc. The assessee also submitted several presentations and updates. Accordingly, the assessee submitted it fulfil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, any mark up the assessee has flouted the transfer pricing rules. According to him, no independent party would have agreed to bear these transactions without mark up. Accordingly, the ld. TPO held that as the margin of comparable companies is 3.34%, the mark up on the detail expenditure requires an adjustment of ₹ 74,78,465/- of total expenditure of ₹ 22.39 crore, the order u/s 92CA(3) was passed on 21.07.2021 by the ACIT transfer pricing 4(2)(1) Mumbai. 5. Consequent to that draft of assessment order was made on 27.09.2021 determining total income of the assessee at ₹ 71,76,61,874/- against the returned of income of ₹ 55,09,95,353/- making an adjustment on account of arm s length price of international transaction as per the TP order of ₹16,66,66,521/-. 6. The assessee preferred objection before the Ld. Dispute Resolution Panel (DRP). The Ld. DRP issued direction on 01.06.2022 wherein both the transfer pricing adjustment was upheld. The learned dispute resolution panel in paragraph number 6 of its direction held that identical issue came for direction before the DRP in assessment year 2017 18 wherein it was held that material facts remaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical license agreement placed at page no. 193 of the paper book and referred to Para No. 2 and No. 3 of that agreement. He further referred the presentation made before the Ld. DRP on the various objection of determination of arm s length price at ₹ Nil. He further extensively referred to his paper book volume 2 which consists of letter dated 09.07.2021 submitted before the Ld. TPO containing 980 pages demonstrating the need test, the receipt and benefit test and also why the arm s length price approach adopted by the assessee taking the transactional net margin method is most appropriate method and international Transactions are at arm s length price. According to him, the international transaction of payment of technical knowhow is made inextricably linked and is wholly necessary for the business of the assessee and therefore it is required to be aggregated with other business transactions. In the end, He submitted that the determination of arm s length price by the AO/TPO is not proper. 11. The learned departmental representative supported the order of the learned TPO and the direction of the learned dispute resolution panel. It was further stated that as the material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a technology license agreement on 30 October 2000 with United Parcel Service of America incorporation wherein that company has granted assessee in a) to use the technical information in India. According to that agreement it was stated that the licensor possesses valuable advanced management technique and technology and know-how relating to international integrated transportation services including the technical information and other materials such as business travel up and techniques of marketing and business development analysis systems, proactive notification systems, customer service and telephone centre systems, security and international shipment resolution group such as full visibility tracking system, automated delivery information system, total track system, package claim report system, incident report system. With respect to the industrial engineering operation it provided FDC/RS and ITS key entry systems, IAS PS and OPSYs operation system, DIAD, HHDC, with respect to the finance and accounting services such as general ledger accounts payable enterprise billing system etc. therefore such services as per the agreement were to be provided with application programs, data c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. As per annexure, 2A details were provided of capital investment made by the UPS group and information technology over a period of years starting from year 2008 to 2017. With respect to each year there is an exhibit providing the details in support of the same. For year, 2017 capital investment in information technology segment was US$ 560 million and in 2008, it was $ 277 million. In annexure 2B the summary of I software licenses of UPS group over a period of years are provided with supporting documents. Gross carrying amount for year 2008 was US$ 1775 million and for 2017, it is US$ 3387 million. 17. As it is an intra group services provided by the associated enterprises to the assessee is necessary for the assessee to establish before the transfer pricing officer as well as in its transfer pricing study report that assessee has requirement of the above technical services (need test), such services have been rendered by the associated enterprises as per the agreement (rendition test), by obtaining such services they assessee has been benefited in its business operations by utilizing those services (benefit test) and those services are not which assessee is already having ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making regularly scheduled stops along such route. Customers with urgent shipments can call UEPL for On-Call Air Pickup or schedule a pick-up online. Using communication technology tool, On-Call Air dispatchers locate the nearest package car and electronically dispatch it to the customer location for just in time pickup. The driver likely uses a hand-held computer device, called a Delivery Information Acquisition Device ( DIAD ), to electronically capture information about each package picked up. ii. A hub is the central sort operation responsible for the unloading, sorting and re-loading of packages received from package centers or other sort locations. At hub, thousands of packages are sorted by postal zip code and consolidated. UPS Tundra is a web-based pick up/ delivery scanning software application used in the electronic scanning devices. This application is used by UEPL s operation department at various pick-up and delivery Hubs. The details scanned through this application such as address, arrival / departure date and time, exceptions, etc. automatically gets uploaded in the UPS systems. This also helps to create and/or edit a pick-up and delivery manifests. iii. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2017-18: Global deployment of UPS Tundra update and Beta schedule with additional user-friendly functionality. Various other trainings were conducted during the year for up gradation of technology. For instance, training conducted in July 2017 in relation to Enhancement made in Tundra Pick- up and Delivery System to incorporate new service and to fix defects in services provided to the customers. Training invite, presentations and manuals related to the trainings conducted for up gradation of technology by UPS was also produced. To improve the customer experience, UPS (including India) has introduced a contractual solution known as Worldwide Express Freight Time of Day that allows provides a guaranteed, end of day delivery service via UPS Small Package. The presentation shared by UPSAI giving an overview of the enterprise release and steps to navigate this new feature is attached as Annexure 7C. During FY 2017-18, various operational upgrades were undertaken to improve customer experience/services and increase revenue; such as introduction amid day commit time of delivery, the dimension length for acceptance of courier /small packages were changed, additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29% 26. It was also the claim of the assessee that if such information technology and services were not provided by UPSAI, UEPL would have been required to use external third parties to procure similar services / IT systems, or alternatively to hire appropriately qualified personnel to undertake similar services or develop similar IT system, themselves. It was further stated that assessee has not paid any amount to its associated enterprises during the years wherein the assessee incurred the operating losses. 27. On carefully looking at the submission of the assessee, we find that assessee has submitted adequate evidences to show that the services were required for the business of the assessee and those services were rendered by the associated enterprises coupled with the benefit received by the assessee in financial terms as well as in the operational terms. 28. In the submission before the learned that lower authorities, the assessee substantiated that for carrying out business of the assessee, and as assessee is part of MNE, which is providing such services worldwide, to remain in sync with that, the assessee would have needed the identical platform, struc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling in that year considering the economic conditions. Therefore, the findings of the previous year will have only persuasive value, if any, while deciding the transfer pricing adjustment for any year. 36. Accordingly, ground number 1 of the appeal of the assessee is allowed. 37. Ground number 2 of the appeal is against the incorrect computation of the markup of 3.34% of ₹ 7,478,465 on recovery of expenses by the appellant from its associated enterprises. Assessee has made payment to 3rd parties on behalf of its associated enterprises amounting to ₹ 22,39,06,124/ which are in the nature of airline payments, export facilitation et cetera. The assessee did not benchmark the impugned transaction as it was claimed that it is on cost-to-cost basis. The learned transfer-pricing officer questioned the same and stated that no independent party would have made such payment on behalf of any person and therefore the assessee should have benchmarked this transaction with the margin. The learned transfer-pricing officer found that cost plus markup should have been charged at 3.34% wherein the margin of the comparable was also found to be at arm s-length price at 3.34%. Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, if yes, to specify the head(s) under which it is shown, If no, specify as to why such expenditure should not be included as part of the Assessee's operating cost and thus for mark-up. According to the TPO, the Assessee did not offer any comments. Therefore, the TPO presumed that the reimbursement of expenses received is not routed through profit and loss account and these expenses are incurred in connection with rendering software development services. According to the TPO, no independent party would render such services without any mark up. The TPO therefore added the reimbursement of expenses (received) of ₹ 2,32,47,077/- to the operating revenues as well as the operating costs for the purpose of aggregation of transactions and determining arm's length price under TNMM. Further, the TPO observed that the reimbursement of expenses pertaining to each segment is not available. He proceeded to apportion the expenses between the software development and ITES segments in the ratio of segment turnover (67.48%: 32.52%). Thus the reimbursement of expenses were added to the revenues and costs in the above ratio i.e. ₹ 1,56,87,128/- in the software development segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and, where applicable, the quantum of the mark-up, requires careful consideration of factors such as: - the nature of the activity; - the significance of the activity to the group; - the relative efficiency of the service supplier; and - any advantage that the activity creates for the group. For example, the relative efficiency of arm's length service suppliers may not be comparable to the intra-group services where the intra-group services ore offered as a convenience to the group and not as an ordinary and recurrent activity. 165. As discussed in paragraph 7.36 of the OECD Guidelines, it is important to distinguish between the situation of a taxpayer who renders services for the other members of a group; and a taxpayer who acts solely as an agent on behalf of the group to acquire services from an arm's length party. In the latter situation, the arm's length compensation would be limited to rewarding the agency role. In such a case, it would not be appropriate to determine an arm's length charge by referring to a markup on the cost of the services acquired from an arm's length party. Whether a taxpayer is providing a service or merely acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arability analysis under TNMM as was done by the TPO and direct the TPO to compute the ALP after such exclusion. Ground No. 36 is accordingly allowed. 9.1. Respectfully following the said decision, we direct the ld. AO/TPO to delete the ALP adjustment made on recovery of expenses. The other arguments made by the ld. AR and DR on inclusion/exclusion of comparables are not adjudicated herein as the relief is granted on preliminary issue. Accordingly, the Ground No. 2.1 raised by the assessee is allowed. 38. The learned authorized representative further submitted an affidavit from the director confirming the nature of recovery of expenses wherein it is submitted that line howl charges of ₹ 22,12,53,003 and 93 in the nature of hair freight, appellate shipping charges, accident and facilitation fees of custom mount package is paid on behalf of its associated enterprises to the third parties. Further sum of ₹ 2,652,731 is with respect to the Visa charges, conveyance etc of the employees seconded. Further sum of ₹ 55,375,000 is an income tax paid on behalf of its associated enterprises. It is claimed that the learned transfer-pricing officer has not considered th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the rival contention and also perused the order of the coordinate bench in assessee s own case for earlier year. We find that repeatedly for several assessment years, the coordinate benches have deleted the addition with respect to the markup on reimbursement of expenditure. Naturally, it needs to be tested whether independent party would have incurred these expenditure or not. 41. However, because of the concurrent finding by the coordinate benches in assessee s own case for earlier years, we are constrained to take the similar view. In view of this, respectfully following the decision of the coordinate bench, we also direct the learned TPO to delete the above adjustment. 42. Though, the arguments led by the learned departmental representative have some force in that, however even if the alternative argument is accepted of benchmarking this transaction in the transactional net margin method, even then no adjustment could have been made as the assessee has better margins compared to the comparable companies. 43. Accordingly, ground number 2 of the appeal of the assessee is allowed. 44. Ground number 3, 4 were not pressed before us therefore those are dismissed. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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