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TMI Blog2023 (11) TMI 804X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions including the transaction relating to intragroup services. Thus, it is not a case where the TPO has entirely disbelieved assessee s claim that the transactions are closely linked transactions. Therefore, in our view, the approach adopted by the TPO to segregate this payment made towards intra-group services is unsustainable. In the present case, the assessee has clubbed all the transactions together and adopted TNMM for benchmarking. Even otherwise also, assuming that the payment made towards intra-group services has to be benchmarked separately, it needs to be examined whether the approach of TPO in determining the ALP at nil by apply CUP method is acceptable. The main reasoning of the TPO to discard assessee s benchmarking under TNMM is, the assessee has failed to prove the need test and the benefit test. As could be seen from the materials placed on record, there is an agreement between the group entities for intra-group services. Further, in course of proceedings before the TPO, the assessee has furnished voluminous evidences, which demonstrate that the assessee has received various services such as planning services, safety and environment services, information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any factual dissimilarity between the earlier years and the impugned assessment year. In any case of the matter, the approach of the TPO and learned Commissioner (A) in determining the ALP is not in accordance with the transfer pricing provisions. Therefore, we are inclined to delete the adjustment. - Shri Saktijit Dey, Vice-President And Dr. Brr Kumar, Accountant Member For the Assessee : Sh. Himanshu S. Sinha, Adv., Sh. Bhuwan Dhoopar, Adv. For the Revenue : Sh. Rajesh Kumar, CIT-DR ORDER Captioned appeal by the assessee arises out of order dated 13.12.2016 of learned Commissioner of Income-tax (Appeals)-44, New Delhi pertaining to assessment year 2010-11. 2. Ground Nos. 1 2 are general in nature, hence, do not require adjudication. 3. In ground No. 3, the assessee has challenged addition of Rs. 72,27,543/- being the transfer pricing adjustment on account of payment made towards intra-group services. 4. Briefly, the facts relevant to this issue are, the assessee, a resident corporate entity, is stated to be engaged in the business of manufacturing automobile components including fuel pumps, fuel injectors, idle speed control valves, electronic c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h. 7. While examining the benchmarking done by the assessee, the TPO accepted assessee s approach in respect of all transactions except two, which are payments made towards intra-group services amounting to Rs. 72,27,543/- and payment made towards import of capital goods amounting to Rs. 12,40,40,466/-. 8. In so far as the transactions relating to payment for intra-group services is concerned, the TPO was of the view that since, it is an altogether separate transaction, it cannot be clubbed with other transactions, but has to be benchmarked independently. Having come to such conclusion, the TPO issued show cause notice to the assessee to furnish various information/details relating to the payment made towards intra-group services. 9. In response to the show cause notice, the assessee furnished a detailed reply vide letter dated 15.10.2013 with information/details called for. In the said reply, the assessee also justified the aggregate approach adopted for benchmarking under TNMM. The TPO, however, was not convinced with the submissions of the assessee. He was of the view that in terms of section 92B of the Income-tax Act, 1961, different classes of transactions have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncontrolled situation, there cannot be any comparable uncontrolled transaction. Thus, he held that by applying CUP method, the ALP has to be determined as nil. Accordingly, he proposed the entire payment made towards intra group services as transfer pricing adjustment to be made at the hands of the assessee. 11. In terms with the order passed by the TPO, the Assessing Officer made addition while framing draft assessment order. The assessee contested the aforesaid addition before learned first appellate authority. However, learned first appellate authority upheld the adjustment. 12. Before us, learned counsel appearing for the assessee has submitted as under : It is submitted that Ld. TPO/CIT(A) erred in applying CUP to benchmark the international transactions of 'Payment for receipt of services'. For application of CUP method, the first step that is required is the determination of the price of comparable uncontrolled transaction. Such price is then compared with the value of the international transaction to arrive at the arm s length price. Relevant extract of Rule 10B(1) of the Income Tax Rules, 1962 ( the Rules ) reads as under: (a) comparable uncontrolled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of planning services, safety and environment support, procurement support, information system support and HR support which are integral and significant for the operational efficiency of the Appellant . These services directly aid the Appellant in increasing its efficiency, reduce its risks and costs and improve its revenues. Accordingly, the receipt of services are closely and intrinsically linked with core business activity of the Appellant i.e. manufacturing of automobile components. Thus, as provided in the TP documentation, for the economic analysis, an aggregation approach has been adopted where all transactions have been grouped together. 6.3 It is submitted that the Ld. TPO/ CIT(A) failed to take into cognizance the circumstances under which the services were received by the Appellant. The Ld. CIT(A) rejected the aggregation approach because according to CIT(A), the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ( OECD Guidelines ) , provide that it is preferable to benchmark each international transaction separately. That may be so, however, this is not the complete picture. OECD Guidelines in Para 3.9 provide that, 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterlinked to the main business activity of the Appellant, they should be benchmarked together by adopting TNMM. 6.5 The action of the Ld. TPO/CIT(A) in disregarding the bundled approach followed by the Appellant to determine the value of the transaction at arm s length and determining the arm s length price of the transaction as NIL is completely erroneous and unreasonable. This is especially so in view of the fact that the Appellant s net profit margin (on which income tax has been paid) is significantly higher than that of the comparables (around 8 times). In fact the profit margin of the Appellant is even higher than OEMs like Maruti Suzuki which is a market leader having significant market share and dominance. Neither the Ld. TPO or the Ld. CIT(A) have disturbed or commented on the high profit margin of the Appellant. 6.6 It is relevant to note that during the previous financial years also the Appellant had entered into similar transactions with its AEs. During these years, the Ld. TPO accepted the transfer price of these international transactions to be ALP and had no adverse findings on the same. Further, it is pertinent to note that there has been no change either i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) - Dresser Rand India Pvt Ltd v ACIT: [2011] 13 taxmann.com 82 (Mumbai-Trib) - Hive Communications (P) Ltd vs CIT: [2012] 353 ITR 200(Del HC) - CIT v Lumax Industries Ltd [ITA No. 102/2014, order dated 28.10.2015] Without prejudice argument: copious evidence was furnished which was unjustifiably disregarded by the Ld. TPO 6.10 It is submitted thatthe Appellant has availed services from its AE(s)amounting to Rs. 72,27,543/-to conduct its business efficiently and effectively. To avail these services, the Appellant entered into an entrustment agreement with its AE (Pages 1044 to 1050 of the paper book Vol-III) under which it availed various services/training ranging from planning, procurement, human resources and information systems in India. These services are utilized by the Appellant in its overall operations and serve as a business generating and maintaining tool for it.The Appellant has not received any similar services from any third party in or outside India. 6.11 The AE(s) renders such services to all group companies within Asia region. As mentioned in the entrustment agreement the AE(s) charge for these services on cost-plus 4% basis. The cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Description of services and tangible benefits received to the extent possible to quantify Documents/Information Reference in paperbook Planning Services Services relating to the business planning in region, as: a. Strengthen and improve regional management system b. Organize and run meetings and try to resolve the common issue among group companies. Benefits received: a. Cash improvement and profit improvement b. Increase in turnover c. Effective execution of business d. Access to skill and expertise a. Minutes and the Agenda of the Asia Presidents conference. These also contain the names of the senior personnel who had attended the planning meeting. b. Quarterly reports sent by the AEs to the Appellant mentioning the services provided, performance evaluated and suggested measures for improvement Refer pages 575 to 579 of paperbook Volume III Safety and environment Develops serious disaster prevention activity, support to establish of safety, health and environment management system, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t function b. Management of KPI and progress of important activities resulting in cost saving in millions c. Material cost down and savings in material cost a. Quarterly reports sent by the AEs to the Appellant mentioning the services provided, performance evaluated and suggested measures for improvement Refer pages 546 to 574 and 657 to 696 of paperbook Volume III Human resource Establish system for local management, plan and run management training programs for expatriates and local management, promote global HR program, support on training at each group company regarding improvement facilities preparation of training material, selection of internal instructor and selection of employees to attend each training and run globally common training etc. Benefits received: a. Human Resource development b. Recruitment of suitable candidate and cost saving by avoiding consultant c. Identify and Implementing further improvements in compensation structure d. Human resource development and recruitment of suitable talent e. Effective compliance with labour laws f. Less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of services. Mere examination of Appellant s profit loss account no conclusion in this regard can logically be drawn. Thus, the CIT(A) has given unsubstantiated findings that there is duplication of services. (Refer pages 290 and 297-298 of paperbook Volume II for P L account) 6.17 The Ld. CIT(A) has erred in giving a finding that the services availed are shareholder services. It is humbly submitted that the activities performed cannot be regarded as shareholder activities. As regards the shareholder activities, the OECD Guidelines have provided the following guidance, 7.9. A more complex analysis is necessary where an associated enterprise undertakes activities that relate tomore than one member of the group or to the group as a whole. In a narrow range of such cases, an intragroup activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay forit were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company)performs solely because of its ownership interest in one or more other group members, i.e. in its capa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have made bald assertions that the services are for group benefit without substantiating the findings with any sort of evidence and hence this finding should be set aside. 13. Learned Departmental Representative submitted, the assessee in course of proceedings before the departmental authorities has failed to furnish any cogent evidence to establish actual rendition of services by the AE and the cost benefit to the assessee. He submitted, few email correspondence and invoices are of general nature and do not provide any insight into the nature of services availed by the assessee. Drawing our attention to the TP study report of the assessee placed in the paper book, he submitted that as per the operational structure of the group, the assessee has to perform local manufacturing, local sales and marketing and after sales support. He submitted, as per the organisation structure of the assessee given in the TP study report, it is fully manned with Managing Directors, Directors, General Managers, Sr. General Manager heading various teams. Thus, he submitted, the assessee itself is fully capable and has the requisite personnel to perform all kinds of services including the services s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st, payment of training fees, cost allocation from group companies, is there any necessity to segregate these two transactions including payment towards intra-group services ? In our view, the TPO was not justified in selectively picking of only a couple of transactions for different treatment. As discussed earlier, the assessee has entered into 12 transactions with AE. Except one transaction, rest eleven transactions have been benchmarked by the assessee under TNMM by adopting the aggregate approach. While the TPO has accepted assessee s approach in respect of nine transactions, he has segregated two transactions including the transaction relating to intragroup services. Thus, it is not a case where the TPO has entirely disbelieved assessee s claim that the transactions are closely linked transactions. Therefore, in our view, the approach adopted by the TPO to segregate this payment made towards intra-group services is unsustainable. 16. Though, learned Departmental Representative has relied upon the decision of the coordinate Bench in case of International Flavours and Fragrances (India) Pvt. Ltd. (supra) to emphasise that aggregate approach is not acceptable, however, in our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id any unfair legal cost/penalty, lesser health issues of employees enabling them to perform regular work throughout the year, lesser quality issues etc. It has also helped in reduction of compensation cost to employees. Under the information system services, the assessee was helped to develop and maintain a common system, upgrade and maintain server, upgrade IT environment, internet gateway management, internet web access control, anti-virus software updating and maintenance support and remote access gateway management etc. The receipt of such services was also supported by documentary evidences placed in the paper book. These services have benefited the assessee in reducing fixed cost and enhancement in quality, reducing man hours and inventory amount, clear IT issues and counter measure, centrally managed server, free of cost platforms/software, automated processes, economies of scale etc. In the procurement services, the assessee received services including assistance in selecting the materials and parts supplier to reduce purchase cost by order volume for the group companies, assistance in new material, help in negotiating the price of material centrally, assistance in standar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Ltd.(supra), the Bench has recorded a categorical finding of fact that the assessee failed to furnish substantive evidence to prove rendition of services. However, the facts are different in the present case, as the assessee has furnished cogent evidence to prove rendition of services by the AE. In view of the aforesaid, we hold that the transfer pricing adjustment suggested by the TPO and addition made by the Assessing Officer in pursuance thereof, is unsustainable. 20. In ground No. 4, assessee has challenged the addition made on account of TP adjustment made to the price paid for purchase of fixed asset. 21. Briefly, the facts are, as discussed earlier, in the year under consideration, the assessee had paid an amount of Rs. 12,40,40,466/- towards import of the capital goods from the AE. The assessee has benchmarked the transaction by clubbing it to various other transactions under TNMM. The TPO segregated these transactions and proceeded to benchmark it independently by applying CUP method. While doing so, he determined the ALP of the transaction at nil. The reason being, according to the TPO, the mark-up of 11% applied to the sale price of the capital goods is with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peed Cameras etc. Denso (Thailand) Co. Ltd. 32,14,959 Denso Wave Inc. 6,076 Denso International Asia Pte Ltd. 41,590 Denso (Guangzhou Nansha) Co. Ltd. 1,85,48,592 Denso Tool Die (Thailand) Co. Ltd. 8,77,661 Total 124,040,466 TNMM approach should be respected: on merits, as well as on principles of consistency and reasonableness 7.3 The Appellant has benchmarked the said international transaction by using entity level TNMM with OP/OC as PLI calculating to 16.23% which is much higher than the working capital adjusted arm s length margin of comparable companies i.e. OP/OC of 2.12%. 7.4 As discussed above, the Appellant had multiple international transactions during the year which are closely and intrinsically linked with core business activity of manufacturing of automobile components and accordingly, by applying the aggregation approach were benchmarked together on entity level basis using TNMM. (Please refer paras 6.4 to 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous years. Summary of TPO s approach in Appellant s own case in earlier years Nature of International Transaction Summary of TPO s approach in earlier years Page reference Purchase of fixed assets Transfer price was accepted at arm s length by TPO in AY 2006-07, AY 2008-09 and AY 2009-10. Refer pages 250-255 of paperbook Volume II 7.9 Reliance is placed on Hon ble Supreme Court s judgement in Radhasoami Satsang vs. CIT (193 ITR 321) where the principle of res judicata/ rule of consistency was laid down. Further, reliance in this regard is also placed on decisionscitedin Para 6.21 of this synopsis. Without prejudice argument: Appellant has provided a secondary analysis as well 7.10 Even though, this international transaction was benchmarked under TNMM by clubbing the same with other transactions, the Appellant had also submitted a secondary benchmarking analysis before the Ld. CIT(A). In this benchmarking, the Appellant has done a secondary analysis by taking the foreign AEs as the tested party and accordingly benchmarked the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... small and minuscule part of the overall consumption of fixed assets by the Appellant. 23. Whereas, learned Departmental Representative submitted that these are all used goods, hence, there is no rationale in charging mark-up by the AE. 24. Having considered rival submissions and perused materials on record, we find that the fact that assessee has purchased certain capital goods has not been disputed or denied by the departmental authorities. In fact, the TPO has determined the ALP at the cost of the goods purchased while disallowing the mark-up. While doing so, the TPO has not benchmarked the transaction under any one of the available methods. Whereas, learned Commissioner (Appeals) has allowed 2% mark-up on the written down value of the expenses. Thus, as could be seen, the approach adopted both by TPO and learned Commissioner (Appeals) is purely adhoc and not in accordance with Rule 10B. The fact that similar transaction was accepted by the TPO in past assessment years has not been countered by the department, though they have simply stated that each assessment, being a separate unit, the decision taken in earlier assessment years would not be applicable. The departmental ..... X X X X Extracts X X X X X X X X Extracts X X X X
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