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TMI Blog2025 (2) TMI 326X X X X Extracts X X X X X X X X Extracts X X X X ..... a tested party. TPO may examine that the tested party selected by the assessee gives a reliable method and computation of arm's-length price or not. Thereafter, after giving assessee an opportunity of hearing, determine the arm's-length price of the international transaction of trading segment. Transaction of intragroup services - arm's-length price of which is determined by the learned TPO at rupees Nil, because assessee has failed to substantiate that services were rendered by AE which resulted into benefit to the assessee and are not shareholder services - HELD THAT:- Arm's-length price of an intragroup services could be determined considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily cannot be considered as an intra-group service under the arm's length principle. Therefore, the process to be adopted by the assessee or by the TPO is on the principle of need, rendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer pricing officer as appropriate rate credit period. The assessee's only objection was that it cannot be a separate international transaction and further even if it is to be considered as an international transaction the use of LIBOR to be made as the invoices are made in foreign currency. In view of this ground number 21 - 24 of the appeal are dismissed. Disallowance of store closure expenses - HELD THAT:- When the nature of the expenditure based on the examination of the simple details and the Ledger accounts clearly shows that the expenses are incurred wholly and exclusively for the purposes of the business during the business, no disallowance should have been made. The assessee himself states that it is a voluminous detail and looking at the operation and the nature of the expenditure, assessee submitted sample details before the learned AO and further additional details before the learned dispute resolution panel. None of the authorities asked the assessee to produce the complete details. None of the authorities have held that any of the expenditure which is incurred by the assessee for which details are produced before them are not wholly and exclusively incurred by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f non-utilization of brought forward losses. Transfer Pricing ("TP") Grounds: Rejection of transfer pricing documentation maintained with respect to trading segment, payment of intra group services and trade receivables 3. The Ld. AO /TPO /DRP erred in not accepting the transfer pricing analysis undertaken by the Appellant in accordance with the provision of the Act read with Income-tax Rules, 1962 ("the Rules") and holding that the Appellant's impugned international transactions pertaining to trading segment, payment of intra group services and trade receivables are not at arm's length. Adjustment on account of trading segment 4. The Ld. AO /TPO /DRP erred by not accepting a foreign Associated Enterprise ("AE") as the tested party, being the least complex of the transacting entities. Further, the learned AO/TPO erred in categorizing the Appellant as the tested party without appreciating the functional and risk profile, and the complexity of operations of the Appellant, who is a risk bearing distributor. 5. The Ld. AO /TPO /DRP erred, in law and facts, by not appreciating the business operations of the Appellant and its AEs, and disregarding the allocation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowing intra-group services i.e., payment of information technology ("IT") support charges of INR 33,24,39,508 and determining the ALP as NIL. 14. The Ld. AO /TPO /DRP, erred in exercising power beyond his jurisdiction to determine the necessity and prudency of availing intra-group services from its AEs and concluding that the Appellant has not derived any benefit which provides economic and commercial value from the services received from its AE. 15. The Ld. AO /TPO /DRP, erred in disregarding the submission / information / documents made by the Appellant wherein a clear distinction in respect of services received as a part of IT support service from the AEs, tangible and direct benefit received by the Appellant from such services was explained. 16. The Ld. AO /TPO /DRP, erred in disregarding the genuineness of the arrangement of the Appellant with its AE's, despite furnishing the legal and contractually binding agreements with respect to the transaction in appeal to establish that the services have been rendered and the benefit has been received by the Appellant. 17. The Ld. AO /TPO /DRP, erred in holding that the impugned transaction is a shareholder/duplicative/inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losure expenses incurred during the relevant year. 26. The Ld. AO /DRP, erred in making additions to the total income of INR 7,75,00,000 in respect of store closure expenses (which includes expenses such as professional/ legal fees for closure of store or settlement of dispute, painting/ restoration charges, dismantling charges, rental charges, etc) incurred by the Appellant in relation to its non-performing stores without appreciating that such expenses are incidental to the business of the Appellant and revenue in nature, thus allowable under section 37(1) of the Act 27. The Ld. AO /DRP, failed to consider and verify the relevant factual details and documentary evidence produced by the Appellant in relation to the store closure expenses incurred by the Appellant during the assessment proceedings 28. The Ld. AO /DRP, passed the final assessment order which is bad and erroneous in as much as the same is without considering the decision of various Courts and Tribunals which have allowed the deduction of premature termination expenses (which can be considered as similar to store closure expenses) Non-utilization of brought forward losses 29. The Ld. AO has erred, in law an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase of Rs 2118788/-]. Assessee selected the Transactional Net Margin Method [TNMM] as the Most Appropriate Method selecting Desipro (foreign entity) as a tested party, from whom 99 % of Purchases are made, stating that operations performed by it are less complex. For this, in the TP Study Report (TPSR) page 32, assessee has given the details of functions performed by the assessee as well as foreign AEs at page 34. It has also given a risk matrix. Further on page 5.2.1 of the TPSR wherein Desipro has been the least complex entity and was selected as a tested party. The transaction with Desipro was tested and comparability analysis was performed by using Oriana database and search for companies that performed similar activities as performed by Desipro was carried out. In the search process, the geographic criteria were adopted for identifying companies located in the same country with similar market conditions as tested parties and applied to the middle East and Central Asia. The search was also carried out by adopting the activities as 'agents involved in the sale of textile, clothing, footwear, leather goods, etc.'. The ownership criteria were also applied and ownership above 50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficiently available for comparability analysis. Assessee also objected that AE is not a manufacturer at all, therefore the tested party is correctly taken as foreign AE. 9. The ld. TPO rejected the explanation of the assessee and rejected foreign AE as tested party in absence of reliable information and availability of more information about the assessee, proceeded with taking assessee as tested party, made an adjustment in trading segment amounting to Rs. 126,77,22,887 by taking the taxpayer's PLI of Operating Profit/Revenue at 0.66%, whereas the margin of the comparable of 3 entities was computed at 3.83% and accordingly above adjustment was made. 10. Assessee has also availed shared services being intra-group services amounting to Rs. 33,24,39,508. Assessee has entered into an IT service agreement and licensing agreement with Decathlon France with respect to Amazon and Google servers, accounting and other internal tools provided by Oracle, tools enabled by salesforce, as AP tools. It also provided IT support services to the assessee such as often as capital of software and software packages according to the needs of the assessee, Grant and non-exclusive license of software to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO's order mentioned only a few evidence on the services provided by the assessee. The assessee in response to the show cause notice where the learned assessing officer asked for the various information, the taxpayer only provided a very brief note on the services received by it from associated enterprises. Assessee submitted that services are related to helpdesk assistance, local centres, hardware leasing and network leasing for which it charged a markup of 5%. No other details have been provided by the taxpayer and no breakup of cost or workings regarding the amount booked under each of the above-mentioned heads were provided. The taxpayer only provided a total figure of the amount paid that has been booked as a professional support services. The assessee also, according to the learned TPO, could not provide any evidence about the rendition of the services. Therefore, in absence of that there was no way to qualitatively and quantitatively explain how the total cost of professional support services incurred by the associated enterprises was allocated to the taxpayer amongst the other group entities. The assessee also could not provide the total cost incurred by the associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP adjustment of Rs. 160,21,51,485 and disallowance of Rs. 7.75 crores were made, and total income of assessee was proposed to be assessed at Rs. 167,96,51,485. 17. The assessee aggrieved with the same, preferred objections before the ld. DRP, who gave its directions on 20.6.2024. 18. On transfer pricing issue, with respect to trading segment adjustments, the ld. DRP confirmed the rejection of the tested party as foreign entity in absence of sufficient information regarding that entity, least complex, etc. Accordingly, it upheld the order of the ld. AO. In this trading segment, the assessee objected to selection of comparable as Metal Toy India Pvt. Ltd. On functional comparability, the same was rejected. With respect to the 2nd comparable of Stone Sapphire India Pvt. Ltd. and its PLI computation was also rejected. 19. With respect to the intra-group charges of Rs. 33.94 crores, the ld. DRP upheld the contention of the TPO that the same cannot be aggregated and inter-linked with other IT services transaction in absence of details filed by the assessee, the ALP of such transaction is rightly held to be at Rs. NIL. 20. With respect to ALP of advance receivable, the ld. DRP upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on matrix, risk matrix mentioned in the TPSR. Therefore, according to him, it was submitted that foreign AE should be considered as tested party. TPO and the ld. DRP could not be proper. 28. However, he referred to application for admission of additional evidence dated 28.10.2024 wherein the assessee submits the audited financial statements of AE, Desipro with respect to ground nos. 4 to 6 for the year ending 31.12.2019. Further a TP documentation of Desipro was also submitted with respect to Singapore TP Documentation requirement. He further stated that the database used by the assessee selecting the foreign AE as the tested party has also given enough comparables and therefore the approach of the ld. TPO is not correct. This evidence is also in relation to ground nos. 4 to 6 of the appeal. It was submitted by the ld. AR that Desipro was taken as a tested party in benchmarking the trading segment of assessee. It was submitted that the conclusion reached by the ld. TPO for AE as the most complex entity is not correct. Therefore, to show that foreign AE is the least complex entity, these annual accounts are placed as additional evidence. 29. The ld. CIT(DR) vehemently submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s performed, risks assumed, assets employed assessee concluded that assessee can be characterised as a risk bearing distributor of the capital on sports goods, etc. 31. The OECD guidelines provides that when applying transactional net margin method, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. Generally, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparable can be found, i.e. it will most often be the one that has the least complex functional analysis. 32. Assessee has chosen a Singapore entity as the least complex so far as the functions and risks involved in the transaction of purchase of goods by the assessee from Singapore entity. The functional analysis prepared at page number 32 of the transfer pricing study report relates to the managerial function, establishment of stores, research and development functions, operational functions, sales functions etc. and it concluded th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplex and is also having higher risk. 36. Therefore, there is no dispute on the most appropriate method where assessee and the learned TPO agreed on transactional net margin method. The only dispute is whose margin is to be compared with the comparable companies. Both the parties have determined the complexity of assessee as well as the associated enterprises without looking at the functional, risk and asset profile of the associated enterprises. Naturally, unless FAR with respect to the assessee and associated enterprises are determined properly, transfer pricing methods cannot be applied in most reliable manner by selecting the most reliable comparable. As the annual accounts of the associated enterprises are placed before us for the first time as additional evidence, which is the most important document along with the agreement between the parties to determine the FAR, it needs a deeper examination. 37. The learned dispute resolution panel in paragraph number 2.1 has rejected the foreign AE as a tested party because when the entity being evaluated for transfer pricing purposes is a foreign entity, sufficient information regarding that entity is necessary to ensure the chosen m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto the balance sheet of the associated enterprise and holding whether the assessee or the foreign AE is least complex. Obviously, there is no bar in selecting a foreign entity as a tested party if the arm's-length price of international transaction by selecting reliable method and reliable comparability analysis can be made. 40. Both the parties have placed before us judicial precedent that foreign AE can be taken as a tested party, but all the decisions have held the tested party only could be the party on which the transfer pricing methods can be applied in the most reliable manner and for which most reliable comparables can be found. 41. Therefore, in view of above discussion, we restore ground numbers 4 - 11 back to the file of the learned transfer pricing officer with a direction to the assessee to substantiate the arm's-length price of the transaction of trading segment by showing with sufficient data about the foreign AE as a tested party. The learned TPO may examine that the tested party selected by the assessee gives a reliable method and computation of arm's-length price or not. Thereafter, after giving assessee an opportunity of hearing, determine the arm's-length pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee the assessee has submitted the intercompany agreement for receipt of IT services where the complete description of the services is mentioned. He further referred that the price allocation and method of assessee is also provided along with an appropriate allocation key and further the invoices are issued monthly and payable at 45 days from the receipt of the invoice. He further referred to the fact that that the requirement of intragroup services cannot be determined by the revenue authorities and therefore even the benefit test cannot be applied. The learned authorised representative further stated that the adoption of the comparable uncontrolled price method by the learned transfer pricing officer is also devoid of any merit. 44. However, the learned authorised representative stated that assessee has produced evidence before the learned transfer pricing Officer, but they have not been appreciated in the proper manner. He therefore also stated that if the issues are restored back to the file of the learned transfer pricing officer, the assessee would be able to substantiate the various parameters for benchmarking of the above international transaction. 45. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the services the assessee has referred to page number 1484 of the paper book which is also the agreement only. Against this the transfer pricing officer has given a categorical finding that a show cause notice dated 27/6/2023 was issued to the assessee but taxpayer did not provide any submission regarding payment of the above services mentioned in paragraph number 19.4 of the order of the learned TPO. The assessee merely described what are the services. It also did not give any evidence with respect to the actual cost incurred by the associated enterprise and cost allocation to the assessee along with the allocation key. The learned DRP has also dealt with the whole issue in paragraph number 2 point 4 while discussing the ground of objection number 4 with relation to intragroup charges and held that in absence of any specific information provided by the assessee, the learned transfer pricing officer is correct in determining the arm's-length price of the services at rupees Nil. 48. Naturally in case of an intragroup services nobody would pay to a third-party if those services are not required, if required were not rendered, even if required and rendered but did not give any comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action and therefore could not be benchmarked separately and further the benefit of circular dated 1/4/2020 issued by the reserve bank of India providing a collection of nine months which is extended to 15 months due to Covid 19 pandemic should be granted to the assessee and further the rate adopted by the learned transfer pricing officer of LIBOR at the rate of 2.317% +450 basis points is without providing any rational. It was further contended before us that the normal credit considered by the learned TPO is merely 30 days and in fact there is no evidence with respect to the same. 52. The learned departmental representative vehemently stated that intragroup services agreement provides of 45 days of credit and therefore 30 days of credit adopted by the learned TPO is correct. 53. We have carefully considered the rival contention and perused the orders of the learned lower authorities. The transaction of the overdue receivable from associated enterprises is neither an interlinked transaction nor closely linked with the transaction of the provision of services etc. Even the transfer pricing document also does not give any reason for the same. In view of this this is a separate int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in nature and allowable under section 37(1) of the act. 55. The learned assessing officer noted that assessee has provided a comprehensive explanation regarding the classification and deductibility of these expenditure allowable under section 37(1) of the act however those have not been substantiated the claim with supporting documentary evidence. The learned assessing officer noted at page number 9 of the draft order that as the assessee has taken a lot of time in providing this information, though the claim on the principle and explanation is allowable, in absence of documentary evidence the disallowance was made. 56. The learned dispute resolution panel noted in paragraph number 2.5 point 2 that assessee has submitted the invoices of professional fees on the simple basis in relation to the store foreclosure expenses. The panel was of the view that assessee has claimed multiple items under the head closure expenses like professional fees paid towards settlement of disputes, project management charges, and other provisions. However, details of all these expenses were not provided before the AO in completeness. Before the learned dispute resolution panel also the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation the stores are closed what kind of expenses the assessee has incurred. The letter dated 28 August 2023 submitted by the assessee clearly gives nature of expenditure, and the purpose of such expenditure. In the draft assessment order passed by the learned assessing officer on 1 September 2023 stated that assessee has not submitted the complete details but completely agree that such expenditure is not disallowable. The only reason of the disallowance is non-submission of the complete details before the learned AO. Before the learned dispute resolution panel assessee further submitted the evidence of such expenditure but the learned DRP stated that unless complete details of these expenses are furnished, submission of the sample invoices etc. will not serve the purpose and the disallowance was confirmed. We find that when the nature of the expenditure based on the examination of the simple details and the Ledger accounts clearly shows that the expenses are incurred wholly and exclusively for the purposes of the business during the business, no disallowance should have been made. The assessee himself states that it is a voluminous detail and looking at the operation and the natu ..... 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