TMI Blog2022 (9) TMI 1453X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 37 of the I.T. Act but only adopted the ALP determined by the TPO in his order. We find that the principle enunciated by the Hon ble High Court of Bombay [ 2017 (2) TMI 120 - BOMBAY HIGH COURT ] is squarely applicable on the facts of the present case. Hence, we find that the aforesaid action of the TPO (that is, the determination of the ALP of the international transaction under consideration at nil value) is without jurisdiction and it goes against the basic tenet of the Indian Transfer Pricing Regulation. We have noted that the term stewardship activity has not been defined by the I.T. Act. As respectfully following the above binding precedent, uphold the order of the CIT(A) for the assessment year 2014-15 [ 2022 (10) TMI 836 - ITAT KOLKATA ] and the contention of the assessee and we delete the ALP adjustment made by the AO/TPO. ALP adjustment in respect of the international transaction involving sale of finished goods by the assessee to associated enterprise - assessee applied the CUP Method in order to substantiate the arm s length nature of the international transaction involving sale of PCBs by the assessee to AT S AG in Europe - HELD THAT:- As in assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. That on the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in concluding that the intra-group services provided by the AE under the head of IT services are not in the nature of stewardship activities, ignoring the details of the IT services provided by the AE, which clearly indicates that the services were meant for exercising overall control and supervision over the assessee company and in the nature of stewardship activities. 4. That on the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in concluding that the payment for intra-group services was at arm s length without examining the cost of such service provider and without examining mark-up element incorporated in the quantum of service fee charged by the AE. 5. That on the facts and the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting addition made by the AO/TPO by simply relying on the assessee s own cases in earlier years, but ignoring that the revenue is in appeal against the said impugned orders and the matter has not been finalized yet. 6. That on the facts and the circumstances of the case and in law, the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined the arm s length price of the aforesaid international transaction at Nil value solely based on the allegation that the intra-group activities performed under the aforesaid agreement were in the nature of stewardship services. The TPO did not apply any of the six methods prescribed under sub-section (1) read with sub-section (2) of section 92C of the I.T. Act for the purpose of determining the arm s length price of the international transaction at Nil value. He did not bring on record any comparable uncontrolled transaction for the purpose of determining the arm s length price of the international transaction at Nil value. 5. As the order of the TPO was binding on the AO, the AO disallowed the expenditure of Rs. 4,10,08,010/- in the assessment order. The CIT(A) examined the facts of the case and the documentary evidences of receipt of IT products and common IT services which were submitted by the assessee to the TPO and directed to delete the aforesaid disallowance. Aggrieved by the order of the CIT(A), inter alia, in respect of the aforesaid disallowance, the Revenue has preferred an appeal before us. 6. The Ld. DR placed reliance on the order of the TPO for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements (on sample basis) entered into between AT S AG (being administrator of the cost contribution arrangement made under the aforesaid agreement) with independent IT companies such as IBM, Microsoft, T-Systems. (ii) Copies of invoices (sample) raised by independent IT companies such as IBM, TSystems, Antares Netlogix, Cimnet Systems BV and SAP on AT S AG (being administrator of the cost contribution arrangement made under the aforesaid agreement): Brief content of invoices Sl. No. Name of Service Provider Invoice no. and date Nature of product / service as mentioned in invoice Total Invoice Value 1 IBM Osterreich Gesellschaft m.b.H 718235 dated 17/09/2013 10.000 SAPs (Power), 40 GB RAM, 18TB Disk, 76.8 Stk. Zus tzliche (i.e., Additional) Managed 1000 SAPS, System Power (4 GB Memory), 275 Stk. Zus tzliche 1 GB Memory), System Power, 8.8 Stk. Zus tzliche Managed 1000 SAPS, Blade Center (4GB Memory), 2749 Stk. Zus tzliche Managed storage GB inkl. Datensicherung (i.e. data back-up), 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nanda Kishore 10.07.2013 Implement six new released SAP notes related to India Form 16 Siemens 7 R. Sudheendra 11.07.2013 Creation of new tax code CA with description Siemens 8 Ajay B Mallya 11.07.2013 Creation of new tax code for Service Tax VATABLE Siemens 9 S.K. Prasad 11.07.2013 Creation of new tax code Siemens 10 R V Prasad 30.08.2013 Creation of new tax code Siemens 11 R V Prasad 11.09.2013 Creation of new tax code Siemens 12 Peter Ding 14.09.2013 India notes 1835787 apply Siemens 13. Ajay B Mallya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, Symantec Endpoint Protection, Java 1.5.x, .NET Framework 3.0 Redistributable and CA CMS Agent. Maximum file server space allotted to each employee was 300 MB and maximum mail-space was 300 MB desktop / 600 MB Laptop. Hardware was chosen from the existing AT S HW-Standard. The charging unit was standard workplace (allocation key). Production Workplace Provision and Operation : This sub-category of services (i.e. stable IT infrastructure for production) inter alia included a network connection, customer support, provision operation of the underlying production IT infrastructure (hardware, network and operating systems) based on the defined service levels. Applications within this package were BGInfo, Windows XP SP3, Symantec Endpoint Protection and Java 1.5.x. Hardware could be chosen from the existing AT S HW-Standard. The charging unit was networking port ( NW Port ) (allocation key). Provision Operation of Blackberry Devices : This sub-category of services inter alia included provision and configuration of mobile devices including Push Mails . The provision of hardware was not included within this category of services. The charging unit was blackberry devic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) SAP Maintenance Services Business Process Consulting Services : This sub-category of services inter alia included process design consulting, purchasing / customising of new IT solutions including project management, management of application portfolio and functional qualitative and quantitative enhancements and coordination and administration of external consulting services. The charging unit was man-hour (allocation key). SAP Maintenance Services : This sub-category of service included maintenance of SAP licence. The assessee paid maintenance fee for SAP licence. The charging unit was weighted SAP user (allocation key). 11. The Ld. AR invited our attention to the fact that the assessee vide petition dated 29th August, 2017, submitted to the TPO a copy of the cost allocation certificate dated 17th April, 2014, issued by PwC Wirtschaftspr fung GmbH, being the independent auditor of AT S group (enclosed in the paper book). The allocation of cost under the cost contribution arrangement made by virtue of the aforesaid agreement to the individual AT S group companies (including the assessee), without adding any mark-up / profit element to the cost, was veri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O did apply any of the six methods prescribed under sub-section (1) read with sub-section (2) of section 92C of the I.T. Act for the purpose of determining the arm s length price of the international transaction under consideration at Nil value. Further, the TPO could not bring on record any comparable uncontrolled transaction for the purpose of determining the arm s length price of the international transaction under consideration at Nil value. The Ld. AR stated that the TPO had violated the provision of section 92CA(3) read with section 92C(3) of the I.T. Act. 15. The Ld. AR invited our attention to the matter that the issue under consideration is covered in favour of the assessee by the decisions rendered by this Tribunal in assessee s own cases on the same facts for the assessment years 2009-10, 2010-11 and 2011-12 (single order) and for the assessment year 2013-14 (assessee s appeal) which have been enclosed by the assessee in the paper book filed with us. 16. We have heard both the parties and carefully gone through the written submissions put forth on behalf of the appellant and the respondent (assessee). We have perused the facts of the case including the findings of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed. 6. Similarly, Ld. CIT(A) at para 13 at page 25 of his order held as follows:- 13. I have carefully considered the entire gamut of the facts and circumstances of the case and the submissions filed by the authorised representative of the appellant against the action of the Ld. AO/TPO in making the impugned additions. I have also considered the case laws cited by the Ld. ARs for the appellant in favour of his contention. I have recorded my findings in details hereinabove. It is pertinent to mention that the appellant submitted detailed nature of IT services received during the relevant financial year and various documentary evidences of receipt of IT services on sample basis in support thereof. The appellant substantiated the arm's length nature of the international transaction under consideration by applying the CUP Method. On the other hand, the TPO had determined the arm's length price of the international transaction under consideration at 'NIL' value solely based on benefit analysis. Further, nothing was found in the TPO's order which was indicative of the existence of any of the circumstances prescribed under clause (a) to (d) of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. (d) That the assessee has furnished all the documentation including the agreements, copies of the IT agreements on sample basis, copies of help tickets on sample basis and cost allocation certificate issue by independent statutory auditors. (e) That the DRP has specifically noted that the TPO had not disputed the cost allocation keys used for determination of the amount payable by the assessee to its Associate Enterprise (in short AE ) under the cost contribution agreement and that the TPO has also not rejected the CUP method applied by the assessee for determination of the international transaction. (f) That the Ld. CIT(A) has given a finding that TPO's order has not indicated the existence of any of the circumstances described under clause a to d to section 92C(3) of the Act so as to necessitate intervention by the AO/TPO for determination of the ALP. Thus it was submitted that the issue cannot be set aside to the file of the TPO for fresh adjudication. (g) That the Tribunal in the assessee's own case for the AY 2002-03 and subsequent AYs, under the same facts and circumstances, confirmed that the payment made by the assessee was reimbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment years 2009-10, 2010-11 and 2011-12, this Tribunal placed reliance on the following decisions arising from similar issue: NLC Nalco (India) Ltd. v. Dy. CIT [2016] 71 taxmann.com 57 (Kolkata Tribunal) [In this case, this Tribunal, while rendering decision, placed reliance on the decision of the Hon ble Supreme Court in the matter of CIT vs. Walchand Co. [1967] 65 ITR 381 and the decision of the Hon ble Delhi High Court in the matter of CIT v. EKL Appliances [2012] 24 taxmann.com 199 (Delhi).] McCann Erickson India (P.) Ltd vs. Addl. CIT [2012] 24 taxmann.com 21 (Delhi Tribunal) DCIT vs Diebold Software Services (P.) Ltd. [2014] 48 taxmann.com 26 (Mumbai Tribunal) Schneider Electric India (P.) Ltd. Vs DCIT [2017] 82 taxmann.com 364 (Ahmedabad Tribunal) 19. The Ld. AR further submitted to us a copy of the order of this Tribunal in assessee s own case on the same facts for the assessment year 2013-14 (ITA No. 69/Kol/2018), the relevant extract wherefrom is produced below. 8. Ground Nos. 5 to 10 raised by the assessee are directed against the arm's length price adjustment of Rs.3,58,02,269/- made in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t apply his own method to compute the arm s length price (ALP) of the assessee. That is, statute does not give right to the TPO/AO to adopt their own developed methods. The most appropriate method (MAM) has to be selected by the TPO/AO out of the six methods prescribed by the statute. He has to select any one method as MAM, out of the six methods prescribed in section 92C (1) of the Act to compute the arm s length price. .. We note that in the assessee's case under consideration, the TPO/AO has not selected any method (out of six methods), therefore, the arm`s length price (ALP) computed by the AO/TPO is not in accordance with the provisions of section 92C (1) of the Act, hence we direct the TPO/AO to delete the addition. 20. It was alleged by the Revenue that the Ld. CIT(A) erred in concluding that the payment for intra-group services was at arm s length without examining the cost of such service provider and without examining mark-up element incorporated in the quantum of service fee charged by the AE. In this connection, it is noted that as per the I T Cost Pooling Agreement , total cost was allocated to the AT S group companies using appropri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by the assessee wholly and exclusively for the purposes of business. As the order of the TPO under section 92CA (3) of the I.T. Act was binding on the AO, the AO made an ALP adjustment of Rs. 4,10,08,010/- in this regard. In view of the above, we are of the considered view that the aforesaid allegation raised by the Revenue has no valid basis. 22. In this connection, we place reliance on the decision of the Hon ble High Court of Bombay in the case of CIT vs. Lever India Exports Ltd reported in [2017] 78 taxmann.com 88 (Bombay). The relevant extract from the aforesaid order is produced hereunder. 7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales. Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case, had not disallowed the expenditure under section 37 of the I.T. Act but only adopted the ALP determined by the TPO in his order. We find that the principle enunciated by the Hon ble High Court of Bombay in the aforesaid case is squarely applicable on the facts of the present case. Hence, we find that the aforesaid action of the TPO (that is, the determination of the ALP of the international transaction under consideration at nil value) is without jurisdiction and it goes against the basic tenet of the Indian Transfer Pricing Regulation. 24. We have noted that the term stewardship activity has not been defined by the I.T. Act. The Hon ble Supreme Court has defined the term stewardship activity in the matter of DIT (International Tax) vs. Morgan Stanley and Co. Inc. (and vice versa) reported in [2007] 292 ITR 416 (SC). In this connection, we wish to clarify that the ruling in the aforesaid decision, in our view, has no application to the facts of the present case. In the case of DIT (International Tax) vs. Morgan Stanley (supra), firstly, the observations were rendered in the context of an admitted factual position by the applicant before the Authority for Advance Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO directed an ALP adjustment of Rs. 38,71,000/- in respect of the sale of PCB by the assessee to associated enterprise. 27. In this connection, AT S India agreed to pay commission at agreed rate to AT S AG for receiving distribution service from the latter in Europe. However, for administrative convenience, AT S AG agreed to deduct the aforesaid commission out of the customer sales price before remitting the customer sales price to the assessee. 28. The assessee applied the CUP Method in order to substantiate the arm s length nature of the international transaction involving sale of PCBs by the assessee to AT S AG in Europe. In this connection, the international transactions involving sale of PCBs by the assessee to AT S AG in Europe during the financial year 2013-14 stood as controlled transactions, whereas the corresponding transactions involving sale of exactly the same PCBs in the same quantities and at the same prices by AT S AG (i.e., one of the parties to the controlled transactions) to independent customers in Europe during the relevant financial year stood as comparable uncontrolled transactions under the CUP Method. The prices at which PCBs were sold by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, their respective functions were different. The Ld. DR argued that the assessee functioned as a manufacturer and it sold PCBs to associated enterprise on wholesale basis, whereas the associated enterprise sold PCBs to the independent customers on retail basis. He stated that there might be differences between the international transaction and corresponding uncontrolled transaction in terms of foreign currency risk, inventory risk, delivery terms, insurance and transportation cost, market condition and competition in the market and alternatives realistically available to buyer and seller. 32. The Ld. AR invited our attention to matter that the issue under consideration is covered in favour of the assessee by the decisions rendered by this Tribunal in assessee s own cases on the same facts for the assessment years 2011-12, 2012-13 and 2013-14. The Ld. AR further invited our attention to the matter that the Hon ble High Court of Calcutta had dismissed the appeal filed by the Revenue before the Hon ble High Court against the order passed by this Tribunal on the same issue for the assessment year 2011-12. In this connection, we have noted that the ALP adjustment deleted by this Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olled price method - Rule 10B(1)(a) Compares the price charged in a controlled transaction with the price in an uncontrolled transaction Requires strict comparability in products, contractual terms, economic terms, etc. There are two kinds of third party transactions. Firstly, a transaction between the taxpayer and an independent enterprise (internal CUP) Secondly, a transaction between two independent enterprises (External CUP) The below example shows the difference between the two types of CUP Methods: Shareholder Internal CUP Third Party Distributor Associated Controlled Transaction Associated Distributor manufacturer Third Party External CUP Third Party Manufacturer Distributor] With the help of the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther in Indian TP regulations or in OECD guidelines. 6. Even in the case of Ghardia Chemicals on which Hon'ble Kolkata has relied upon, the assessee namely ghardia chemicals has sold dicamba to third parties. In addition to the above, it should be noted that for the application of the CUP method in general, a high degree of comparability is needed between the transaction under review and the comparable uncontrolled transaction. In this respect, the OECD guidelines have listed five comparability factors that should be taken into consideration when determining if uncontrolled transaction is comparable to a controlled transaction viz: characteristics of the product or service, functional analysis, contractual terms, economic circumstances and business strategies. The ld DR also pointed out that in order to apply the CUP Method, the following factors should be taken into consideration: As explained above, the functions will be different for a manufacturer and for a distributor, itself explanatory. Contractual terms, (e.g., scope and terms of warranties provided, sales or purchase volume, credit terms, transport terms). The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, therefore CUP method is not applicable to the assessee. We note that under the Distribution Agreement, the assessee has grant to AT S AG (AE), the exclusive right to market, distribute and sell the products manufactured by the assessee in the specified territory (Europe). The assessee, as a principal, has the full authority to sell the products manufactured by it as per own business decision, therefore, the assessee has functioned as a full-fledged manufacturer of its product and AT S AG (AE) functioned as a distributor of the assessee. The AT S AG (AE), with the prior written agreement of the assessee, can seek customers for the products manufactured by the assessee outside the specified territory or establish branch or maintain any distribution depot for the products of the assessee outside the specified territory in countries where the assessee has no exclusive distributors. The AT S AG (AE) is entitled to get commission as per the Distribution agreement and from time to time the commission may be reviewed by the assessee. The assessee paid commission to AT S AG (AE) @ 6% of gross distributor's price for carrying out distribution activities in the specified t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial year 2010-11 stood as controlled transactions, whereas the transactions involving sale of exactly the same PCBs in the same quantity as those transacted between the appellant and AE and by AE (i.e. one of the parties to the controlled transaction) to independent customers in Europe during the relevant financial year stood as comparable uncontrolled transactions. The prices at which PCBs were sold by the Assessee to AE are equal to the prices at which PCBs were sold by AE to independent customers. Thus the international transaction involving sale of finished goods by the assessee to AE adheres to the arm's length principle embodied in the Indian Transfer Pricing Regulation under the CUP Method. Besides the above the assessee has submitted back to back invoices and on which no adverse comment has been passed by the lower authorities on its genuineness. It was also observed that the financial distribution segment report of AE submitted by the assessee was rejected by the TPO without assigning any specific reasons and defects in the report. We therefore inclined to treat the price charged by the assessee of the goods exported to AE as ALP as the same price was charged by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent countries of Europe viz., the United Kingdom, Italy, France etc. and those are engaged in distribution of large variety of electronic components including PCB, telecommunication parts and equipment but not solely the PCB. In this connection, the Ld. DR invited our attention to the matter that the assessee, as an alternative to the CUP Method analysis which was presented by the assessee before the TPO, had documented in the transfer pricing study report a foreign benchmarking analysis under the TNMM in relation to the international transaction under consideration considering AT S AG as tested party and foreign companies as comparables. The TPO rejected the foreign benchmarking analysis and applied the TNMM considering AT S India as tested party and Indian companies as comparables. 39. We have noted that this Tribunal, on the same facts, for the immediately preceding assessment years 2011-12, 2012-13 and 2013-14, accepted that the international transaction under consideration was at arm s length under the CUP Method. We have further noted that there is no change in facts and law for the assessment year under consideration. We therefore see no reason to take any view of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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