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TMI Blog2025 (4) TMI 471X X X X Extracts X X X X X X X X Extracts X X X X ..... ises (AEs), the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions entered into by it. 3. The TPO during the course of TP proceedings noted that the assessee company had undertaken the following international transactions: S. No. Nature of transaction Amt as per 3CEB (in Rs) Method 1 Sale of Goods 96,35,736 TNMM 2 Commission earned 1,73,33,580 TNMM 3 Reimbursement of expenses received 27,11,487 CUP 4 Cost sharing charges 67,158,603 TNMM 5 Purchase of traded goods 32,51,47,883 RPM 6 Purchase of Raw material 5,68,30,646 TNMM 7 Purchase of Fixed Assets 13,92,23,545 TNMM 8 Payment towards consultancy and professional services 0 NA 9 Payment towards technical services 11,80,799 TNMM 10 Purchase of Stores, spares and sample 81,46,129 TNMM 11 Expenditure Reimbursed Paid 47,37,318 CUP 12 Guarantee Commission Paid 78,89,367 OTHER METHOD Total 63,99,95,093/- 4. While the TPO accepted the various international transactions entered into by the assessee with its AEs, however, he did not agree with the ALP of the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arketing and Administrative support to entire Asia and Australia region. 6. Since the assessee, according to the TPO, was not able to provide the details of tangible benefit and was not able to demonstrate as to what amount an independent entity would have paid for each of the supposed services and since the assessee has not availed such services from an independent party nor has the AEs have provided these services to an unrelated party, the TPO proposed an upward adjustment of Rs. 6,71,58,603/- by observing as under: "However, in the present case, assessee failed to substantiate its claim. Assessee further has not demonstrated the receipt of services and tangible benefit derived from such a services as per the principles laid down by the hon'ble ITAT Assessee has also contended that no method is selected by TPO for considering the value of transaction as NIL .. In this regard, it is stated that TPO benchmarked the transaction pertaining to intra group services separately by applying CUP. Further. Department is in appeal before the Hon'ble High Court against the decision of Hon'ble ITAT in assessee's own case for AY 2012-13 & 2013-14 on the issue of intra group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /DRP failed to appreciate that the appellant company had actually received intra group services in the form of Product, Marketing and Corporate Support Services from its AEs and hence, the payment made by the appellant to the AEs for the Intra Group Services was justified and there was no reason to determine the ALP of the said transactions at Rs. Nil. 9] The learned A.O. / DRP failed to appreciate that the assessee company had aggregated the transaction of Intra Group Services with other International Transactions entered into with the AEs and had determined the ALP by applying the TNMM and hence, there was no reason to separately benchmark the transaction of Intra Group Services to determine the ALP of the said International Transaction. 10] The learned A.O/ DRP erred in not appreciating that the appellant company had submitted various evidences to prove the receipt of Intra Group Services and the economic and commercial benefit derived by the appellant company and therefore, the determination of ALP of the said intra group services at Rs. Nil was not justified at all and the entire addition made should be deleted. 11] The learned A.O/DRP failed to appreciate that: a. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ads as under: "2.2.6 The assessee has also contended that benchmarking of international transactions / specified domestic transactions are required to be done using any of the methods prescribed under the rules and that the TPO has not determined the ALP of the transactions in question using any such prescribed method. Apparently, the TPO has used 'Other Method' for determination of ALP of the transactions. The "Other Method" was introduced in the Income Tax Act / Income Tax Rules, w.e.f. AY 2013-14, under Rule 10AB of the Income-Tax Rules, 1962 (the Rules). The Hon'ble ITAT, Mumbai Bench, in the case of Toll Global Forwarding India (P) Ltd. Vs DCIT (ITA Number 3812/Mum/2015), has stressed upon the relevance and importance of this method and treated it at par with the other standard methods for determination of the ALP. In fact, Hon'ble ITAT, Mumbai, has approved application of this method in its recent decision in similar circumstances as well, viz. in the case of CLSA India (P) Ltd .- ITA-6748/M/17, 7257/M/2018 and 7246/M/2019 dated 20/8/20." 13. Referring to the above, the Ld. Counsel for the assessee submitted that the DRP has stated that the TPO has used Oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferring to the decision of the Pune Bench of the Tribunal in the case of East West Seeds India Pvt. Ltd. vide ITA No.469/PN/60, order dated 18.08.2020, he submitted that in this case the assessee had availed Intra Group Services from its AEs and the TPO determined the ALP at Rs. NIL without applying any of the prescribed methods. The Tribunal deleted the addition made by the TPO on the ground that it is mandatory on the part of the TPO to adopt one of the prescribed methods for determining the ALP. Accordingly, the addition was deleted. 18. Referring to the decision of the Hon'ble Bombay High Court in the case of Kodak India Pvt. Ltd. [79 taxmann.com 362 (Bom)], he submitted that the Hon'ble High Court in the said decision has held in para 10 of the order that since no method was adopted by the TPO for making the adjustment the addition has to be deleted. 19. Referring to the decision of the Pune Bench of the Tribunal in the case of India Kawasaki Motors Pvt. Ltd. [141 taxmann.com 22 (Pune)], he submitted that the Tribunal in the said decision has held that since the TPO has determined the ALP at NIL without applying any of the methods, the action of the TPO is not justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. We have also considered the various decisions cited before us. We find the assessee in the instant case has paid an amount of Rs. 6,71,58,603/- to its AEs for the cost sharing charges. We find the TPO following his order for assessment years 2012-13 and 2013-14 has held that the assessee has not demonstrated the receipt of services and tangible benefit derived from such services for which he considered the ALP of the international transactions related to the said services as Nil and accordingly made an upward adjustment of Rs. 6,71,58,603/ -. We find when the assessee approached the DRP, the DRP rejected the contention of the assessee and the Assessing Officer in the final order made the addition of Rs. 6,71,58,603/ -. It is the submission of the Ld. Counsel for the assessee that although the TPO in his order at para 32, page 23 made a reference of CUP method, however, the TPO has not carried out any such exercise and therefore, simply referring to CUP method without any reference to the actual uncontrolled transaction and the price charged therein clearly indicates that no CUP method is adopted by him. Further, it is also his submission that in absence of any such reference i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entioned the Other method as the most appropriate method. Thus, the question that is to be answered is as to whether any adjustment of ALP is in accordance with law if no method has been adopted by the TPO for determination of the ALP. 26. We find the Hon'ble Bombay High Court in the case of CIT v. Johnson & Johnson Ltd. (supra) has held that the action of the TPO in determination of ALP without following any of the prescribed methods is incorrect and the addition made is to be deleted on the said reason. 27. We find the Hon'ble Bombay High Court in the case of CIT v. Merck Ltd. (supra) has held as under: "On further appeal, the impugned order of the Tribunal upheld the submission of Respondent-Assessee that in terms of the Agreement, the AE was obliged to provide technical assistance in the 12 areas listed in the Agreement. There was no obligation upon the Respondent-Assessee to obtain technical assistance in all the 12 areas listed in the Agreement The Respondent-Assessee could ask for assistance in the areas required and the AE was obliged to give it. It is for the availability of the assistance in all twelve areas that the consideration was paid. Thus, no adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deals with the computation of ALP. Sub-section (1) of 92C, at the material time, provides that: "The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely: - (a) Comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board." 28. A perusal of the provision divulges that the ALP in relation to an international transaction "shall" be determined by any one of the prescribed methods, which is most appropriate method for the transaction under consideration. The term 'shall' used in the provision gives it a status of mandatory character and it cannot be construed here as directory so as to empower the TPO to determine the ALP of an international transaction in an arbitrary manner. He has to confine himself to one of the prescrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and time taken for the services. It further provides total invoices amount includes service fees calculated above as well as business tax and surcharges. It has been mentioned in the Cost Verification Procedure Report, that "the invoices issued to INA India were determined based on the actual hours incurred and consistent with the pricing policy of the service fee charges which for the year is 5%." From the above report, it is overwhelmingly manifest, which also emanates from the Agreement between the assessee and Schaeffler China under which such services were provided, that the service fee is actual cost incurred by Schaeffler China plus a mark-up of 5%. The authorities below have not disputed the correctness of the invoices raised by Schaeffler China. Though no separate ALP determination of the international transaction of payment of Management services fees is available for the year under consideration, but one thing which is clear is that the payment of Rs. 5,65,53,971/- and odd to Schaeffler China is towards actual expenses incurred plus 5% mark-up, which is in the nature of Cost plus method prescribed under rule 10B(1)(c) of the I.T. Rules. Even if, we proceed with the assu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under law and the adjustment made thereon is liable to be deleted. 9. Coming to the decision of Hon'ble High Court of Bombay in the case of Johnson & Johnson Ltd. (supra) we find that the TPO had made transfer pricing adjustment on account of sales promotion and publicity expenses being payable by the assessee to its parent company M/s. Johnson & Johnson, USA. The TPO did not follow any method prescribed u/s. 92C(1) of the Act r.w.s. 10B made adjustment. The Hon'ble High Court of Bombay was pleased to hold that the TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in section 92C(1) of the Act and upheld the order of Tribunal in allowing assessee's appeal by deleting the addition made on account of sales promotion and publicity expenses. 10. Further, the Hon'ble High Court of Bombay in the case of Merck Ltd. (supra), the Hon'ble High Court of Bombay was pleased to hold the entire transfer pricing agreement becomes unsustainable in law in not adopting one of the mandatorily prescribed methods to determine the ALP in respect of fees of technical services payable by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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