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TMI Blog2024 (8) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was referred to Transfer Pricing Officer (TPO) under Section 92CA(1) for determination of Arm's Length Price (ALP) of the international transactions undertaken by the assessee during Financial Year 2017-18 relevant to Assessment Year 2018-19. The TPO, New Delhi vide order dated 30.07.2021, made Transfer Pricing Adjustment of Rs. 8,73,00,969/- in relation to payment of management charges to its Associate Enterprises (AEs). The TPO also made an adjustment of Rs. 70,15,519/- in relation to imputed interest on outstanding receivables. Based thereon, the AO issued a draft assessment order dated 22.09.2021 under Section 144C of the Act incorporating adjustments recommended by the TPO under Section 92CA of the Act. In response to draft assessment order dated 22.09.2021, the assessee filed objections before the Dispute Resolution Panel-I, New Delhi (DRP). The DRP issued directions under Section 144C(5) of the Act to the AO for the purposes of framing the final assessment order. 3. The DRP however did not find any infirmity in the TPOs order and thus declined to interfere therewith on both the issues noted above. In pursuance of the directions of the DRP, the AO passed final asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied the same to all intra-group transactions except the management charges claimed in question. The TPO segregated the management services from other services/transactions which were considered by the assessee on combined basis while computing Arm's Length. (c) Before the TPO, the assessee objected to the proposed action of the TPO and filed its submissions vide letter dated 26th July 2021 and submitted that the management services received by the assessee from its AEs represents day to day advices from parent group and its AEs in the various field such as Supply Chain Management, Manufacturing Support and Services; Sales and Operation Planning; Marketing Strategy; Day to Day Administration; Human Resources; Quality Control; Information Technology Services and its implementation; Safety and Environment; Technical and Research Development Services; Plant Efficiency and Product Development etc. (d) the cost of services received from its AEs are cost efficient as compared to independent parties and also eliminates a risk of leakage of confidential information technology. The costs borne by the assessee are as per the terms and conditions of the group. The basis for allocation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not bar or prohibit clubbing of closely connected or interwinded or continuous transactions. The ld. counsel submitted that in the light of the observations in Sony Ericson (supra), the TNMM method adopted by the assessee on aggregate basis was justified and ought not to have been replaced by CUP method. (ii) The action of TPO / AO to treat management services as separate international transaction without bifurcation/ segregation would lead to unusual and incongruous results. (iii) Same principle has been reiterated in the case of Magneti Marelli Power Train India vs. CIT, 389 ITR 469. In this case, the assessee adopted TNMM method for all the services collectively. The TPO accepted the TNMM method for such services except payment made for technical assistance fees and worked out the ALP of technical assistance fee on entirely different method. In such circumstances, the Hon'ble Delhi High Court held that once the TPO accepted the TNMM method applied by the assessee as most appropriate method in respect of international transaction, the TPO ought not to dispute the application of TNMM method for payment of technical assistance fee and replace it by CUP method on standalone basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparable circumstances available. (vii) The AO without finding any deficiency in the cost based TNMM method substituted such method by applying the CUP method in contravention of the ratio deductible from various Tribunal decisions. (viii) The intra-group services provided to the assessee are low value adding services and thus a simplified approach should be adopted and all low value adding services cost incurred in supporting the business of MNE group members should be allocated amongst the members as done in the case of the assessee on a consistent basis. In such low value adding intragroup services, the tax administration should refrain from challenging the 'benefit test' when the simplified approach is adopted. In such low value adding services, the tax payer need only to demonstrate that the assistance were provided to it and for that purpose an invoice describing category of services should be taken as sufficient. In such cases, evidence of individual acts performed is difficult to corroborate on many occasions. The service provider in the instant case has provided a very small profit markup to the cost at 3% as against markup upto 5% of the cost is taken as plausib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nless the expenditure has been incurred as held in CIT vs. EKL Appliances, 345 ITR 241 (Del). The benefit test thus has no relevance. (xiii) In the case of sister concern of the assessee, namely, M/s. Gates Unitta (India) Co. Pvt. Ltd., Kanchipuram which is in the same line of business and also have adopted the benchmarking of the intra-group services/transactions on cost based TNMM method which includes payment of management fees similar to that of assessee. The TPO although accepted the cost based TNMM method for intra-group services on collective basis but segregated the management fee from such collective services and then benchmarked it at 'Nil' under CUP in the absence of any benefit derived by that assessee. In such identical facts situation, the Co-ordinate Bench held that the TPO while selecting the CUP method has not identified any comparable uncontrolled transaction which is the precondition for applying CUP method. The Co-ordinate Bench remitted the matter back to the file of the Assessing Officer with a direction to select the comparable company and thereafter decide the most appropriate method and then find out whether any adjustment is required or not. In the reman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has not demonstrated such facts by the documents towards receipt of services as well as cost allocation keys as how the charges are determined and how such services are treated at arm's length have not been submitted by the assessee before the TPO or DRP. The ld. CIT-DR further pointed out that most of the so called management services stated to be received from AE are performed by the assessee-company also and all risks are assumed by the Assessee-Company only. 9.2 The ld. CIT-DR relied upon the decision delivered by the ITAT in the case of International Flavours & Fragrances India (P) Ltd. vs. DCIT, 152 taxmann.com 196 (2023) (Chny) for the proposition that aggregation approach claimed by the assessee for all services including intra group services would be permitted only if the transactions were closely linked to each other and transactions belong to a particular class of transactions. In the absence of similar genre, the TPO would be justified to benchmark the transactions of payment of management services separately under CUP method regardless of TNMM method adopted for other services received from AEs. A reference was also made to the decisions rendered by the Pune T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s payment of similar type in earlier year made to different entities, by no stretch of imagination can be said to be the same transaction continuing from year to year. The ld. CIT-DR thus exhorted that principles of consistency has no applicability in the facts of the assessee and there is no res judicata in the tax proceedings. 9.5 The ld. CIT-DR contended that the rendering of service is a question of fact and therefore, the assessee has to establish the rendition of services for which year as held by the Co-ordinate Bench in the case of Akzo Nobel India Pvt. Ltd., 137 taxmann.com 369 which was confirmed by the Hon'ble Delhi High Court in the case of Akzo Nobel India Pvt. Ltd. vs. ACIT reported in 145 taxmann.com 468 (Del.). Similar decision has been rendered in Safran Engineering Services India Pvt. Ltd., 89 taxmann.com 77 (Bangaluru). The ld. CIT-DR also pointed out that OECD guidelines clearly provides for applicability of benefit test for the payment of intra group services. The ld. CIT-DR submitted that no interference with the directions of the DRP is called for in the facts of the case. 10. We have weighed the extensive submissions from both sides and perused the materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bber hose at its own facilities in the automobile sector. Management services in question are integral and crucial to carry out manufacturing process. All the transactions as entered with AEs are so interwined and inextricably liked with efficient working of the business as a whole. It is incumbent for the assessee to avail these low value management services of routine nature together with other services to complete all related activities. The detailed evidences to substantiate the nature of receipt of services were placed before the lower authorities and have been placed in the paper book. These documents included Service Agreement invoices, e-mail communications as illustrated. The requisitions were raised and the benefits were received as a corollary from the services. The assessee thus contends that on the basis of the records it is manifest that services were indeed rendered and received by the assessee. As a corollary, the services availed have benefitted the assessee by way of increased efficiency of business operations. 12.2 As per the Inter-Company Agreement entered into by the assessee with its AE for impugned services, host of low key services of routine nature were se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia, (2015) 56 taxmann.com 134 (Del) which observed that the expenditure should be for the purposes of business and not earning the income. 12.5 Besides, in CIT vs. Cushman & Wakefield (India) Pvt. Ltd., 46 taxmann.com 317 (Del) it was held that it is not the authority of the TPO to determine whether it is service or not and whether tax payer has derived relative benefits for availing such services. It is trite that the commercial wisdom of the assessee cannot be questioned by the revenue and the revenue is not entitled to replace its own assessment of commercial viability of the transaction. Likewise, the Co-ordinate Bench in the case of Merck Ltd. vs. DCIT, 69 taxmann.com 45 (Mum) held that benefit test does not have much relevance in the Arm's Length Price ascertainment and it is wholly irrelevant as to whether the assessee derives benefits from such expenses or not. It is thus the case of the assessee that it is not necessary for the assessee to show the necessity of incurring legitimate expenditure and the benefit flowing to the assessee there from. In the instant case, on the other hand, the assessee has demonstrable evidences in the form of consistent increase in revenue and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the CUP method. Without bringing any comparable uncontrolled transaction, the application of CUP method is not possible and in the absence of any instances of comparable uncontrolled transactions, no adjustment can be made. 13. The CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. If there is any difference between the two prices, this may indicate that the conditions of the commercial and financial relations of the AEs are not at arms' length and that the prices in the uncontrolled transaction may need to be substituted for the price in the controlled transaction. The TPO cannot ordinarily benchmark a transaction value at 'Nil' under the guise of CUP method on the basis of alleged absence of benefit derived by the assessee from such intra group transactions for two reasons; (i) CUP method cannot be invoked without bringing the comparable services without first identifying the price charged or paid for the similar services provided in a comparable uncontrolled transaction. In the instant case, admitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenditure but relates to determination of ALP/cost of an international transaction between two associated enterprises. It also relates to income or receipt and also expense and interest, but in a different context. Section 37(1) of the Act and Chapter X provisions operates in different field. 16.2 While construing the Transfer Pricing provisions, the Delhi High Court further observed that TNM method is equally effective and reliable when applied to closely linked and continuous transactions. Clubbing of closely linked and continuous transactions is permissible and not ostracize. 17. In the case of Magneti Marelli Power Train India vs. CIT in 389 ITR 469 at page 487, the Jurisdictional Delhi High Court reiterated the same principle in relation to various intra-group and interlinked services. In the case of Magneti Mareli, the said assessee had received various intra-group services which were interlinked with the production and sale of the product. Such services/transactions were in the nature of import of raw materials, sub-assemblies and components, payment of technical assistance, payment of royalty of software and purchase of fixed assets. All these were categorized under o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch reads as under: "4.2.3 The Panel has considered the rival averments as above. The Panel does not find any infirmity in the IPO's order and hence, is not inclined to intervene with it. Accordingly, the assessee's objections are rejected and the TPO's action is upheld. However, the TPO is directed to consider the assessee's contention that disregarding prior years favourable TP orders passed in Assessee's own case with respect to payment of management charges as the TPO has not recorded any observations on this issue in the order; by passing a speaking order." 22. Ostensibly, no independent reasons whatsoever have been cited by the DRP while upholding the action of the TPO. The DRP is completely swayed with the adjustment made by the TPO without objectively examining the factual matrix and applicability of CUP method in the light of judicial precedents and treating the value of services rendered at 'Nil'. Such arbitrary exercise by the DRP without showing any application of mind cannot be countenanced in any manner. The directions made are neither clear nor implemented by the TPO and TP adjustment earlier made was mechanically reiterated. 23. In the peculia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod. The PLI was worked out as OP/OC. Thus, once the sales made to the AEs has already been benchmarked by applying TNMM method in a combined manner and the PLI so worked out was greater than the comparable uncontrolled independent entities, no separate adjustments on this score is called for. The profits embedded in the sales have already been factored while determining the ALP of the combined transactions under the TNMM method. Besides, the assessee has never charged interest on delay in realisation of outstanding receivables even to third parties and thus a different treatment is not expected on transactions with AE. The DRP had directed to allow working capital adjustment before working out the ALP but neither the TPO nor the AO allowed the same despite the directions of the DRP. Notwithstanding, even after allowing the working capital adjustment on the point, PLI is still better (22.58%) than the uncontrolled comparables (6.13% median) as demonstrated in preceding paras. 25.4 Identical issue cropped up before Hon'ble High Court of Delhi in the case of Pr. CIT vs. Kusum Healthcare Pvt. Ltd. in 398 ITR 66 (Del) and Avenue Asia Business Advisors (P) Ltd. vs. DCIT. The Honble J ..... X X X X Extracts X X X X X X X X Extracts X X X X
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