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2016 (1) TMI 933 - ITAT DELHI

2016 (1) TMI 933 - ITAT DELHI - TMI - Transfer pricing adjustment - whether the services received by the assessee should be considered to be armís length under TNMM - Held that:- With regard to PSM and RIS segments, the markup charged by the AEs is within the +/-5% range, allowed under second proviso to section 92C of the Indian Income Tax Act, 1961. Accordingly, these services can be considered to be at armís length And with regard to of GVP services, VIPFS services and Ticketing Hub Services, .....

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osely linked to the core business operation. Principle of aggregation, is a well-established rule in transfer pricing analysis. This principle seeks to combine all closely linked transactions wherein armís length price can be determined for a number of transactions taken together. The OECD Guidelines recommends an aggregate benchmarking approach, in situations where, the underlying transactions are closely linked to the core business operations.

The assessee is predominantly a manufac .....

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ocure raw materials at lower costs. Accordingly, the impact of such support services is received by the assessee in the form of lower direct costs.

We observe that there exists a direct nexus between the revenue earned/cost incurred by the Assessee and the majority intra-group services received, it would be incorrect to analyze the intra-group service received as a single element of cost in isolation. In this regard, the Assessee would like to place reliance on the following rulings, .....

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Shri Tarun Arora, CA, Sh. Gyan P. Srivastava, Adv For The Respondent : Smt. Susan D. George, Sr. DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER: These are cross appeals for assessment years 2007-08 arising out of the CIT(A) s order dated 06.06.2014. The brief facts as recorded by the Ld.AO are as under; 2. The assessee is a company and has electronically filed its return on 30.09.2009 for A.Y. 2008-09 declaring income of ₹ 10,80,36,110/-. The assessee is a manufacturer and seller of the Group .....

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loss account towards payment of service charges. The entity wise breakup of this payment is as below: Name of the Company Amount (in Rs.) Avery Dennison Hong Kong B.V. 2,84,54,549 Dennison Manufacturing Company, USA 1,73,73,433 3. The assessee has been considered as the tested party, to test the Arms Length Price ( ALP ) of the service charges paid for the support services received from Avery Dennison USA, and Avery Dennison Manufacturing Company Co.USA. For the purpose of bench marking the Inte .....

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rt of software TNMM 1,930,084 5. Service fee paid TNMM 45,827,982 6. Service income TNMM 278,280 7. Reimbursement of expenses TNMM 9,684,926 The assessee has received services from its AE s, in lieu of which it had made a payment of ₹ 45,827,982/-. The Services and the benefits claimed to have been received by the assessee from its AE s include the following; S.No. Description of Service Benefits derived 1. Marketing Services Increase in sales due to customized solutions and customer relat .....

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is; Access to high quality training manuals which help the employees in operating the complex software/platforms 4. Ticketing Hub Services Access to critical software/platform that are used for printing and order processing. Without such software/platform, the assessee would not be able to operate; Ability to effectively and efficiently manage vast amount of variable data that is required for undertaking production of tags/labels; 5. Material Division- Marketing Services Received ASTM support fo .....

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y and rectify the reasons for the variations; Improved efficiencies and lowering of cost leading to increased margins; 7. Financial Services High level support services from industry experts who are able to manage ADIPL s finances efficiently on a need basis; Cost savings in terms of loan/insurance facilities due to higher bargaining power of AEs; Identify areas where cost escalation is happening and suggesting strategies for lowering product cost including renegotiation with vendors, suggesting .....

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zards and their timely rectification; Reduction in cost of sourced raw materials and freight services due to higher bargaining power of the AEs through global vendor relationships; Ensuring timely supply of raw material; The assessee had determined the mean OP/TC at 3.89% in the TP Study on the basis of 14 comparable companies selected by it. However, as assessee achieved an operating profit at 8.82% for the relevant year, it was concluded by the assessee, in its TP Study that the international .....

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of such service in uncontrolled circumstances. The Ld.TPO held that CUP is the most appropriate method(MAM) for arriving at the arm s length of the above transaction for payment of service fee. The Ld.TPO determined the ALP at -NIL-, by applying CUP, as in his view, such services does not result in any benefit to the assessee, and he determined the TP adjustment of ₹ 4,58,27,982/-. 6. On the basis of the ld.TPO s order, the Ld.AO, passed final assessment order u/s. 143(3) r.w.144C(3) of th .....

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efit derived by the assessee. In respect of remaining services being Ticketing Hub services, GVP services, Accounting and Administration services and Financial services, the ld. CIT(A) held that the assessee has received services and determined the service fee at ₹ 2,03,11,243/-. He restricted the TP adjustment to ₹ 1,23,53,192/-. S.No. Nature of Service A.Y. 2007-08 A.Y. 2008-09 TPO CIT(A) TPO CIT(A) 1. Marketing support services disallowed allowed allowed (25%) allowed 2. Operation .....

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owed allowed 9. GVP services disallowed disallowed disallowed disallowed 10. VIPFS services disallowed allowed allowed (25%) allowed 8. Aggrieved by the order of the ld. CIT(A) the assessee as well as the Revenue is in appeal before us. 9. The effective grounds raised in this appeal by the Revenue as well as the assessee are as follows: 1. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in benchmarking transactions pertaining to Marketing service (RVL-Sell) VIPFS serv .....

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e or during the hearing of this appeal. 10. The grounds of appeal in assessee s appeal for A.Y. 2007-08 are as under: 1. That the Hon ble Commissioner of Income Tax (Appeals) erred in fact and law by upholding the order of the ld. Assessing Officer (AO)/ Ld. Transfer Pricing Officer (TPO) wherein the AO/TPO has held the Appellant s international transaction of Receipt of Services with its Associated Enterprises ( AEs ) does not satisfy the arm s length principle envisaged under the Act and there .....

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ble uncontrolled transactions/data for the computation of the ALP; 1.3. failing to appreciate that based on the acceptance of whole entity approach selected by the Appellant for application of the most appropriate method for benchmarking the international transactions, which has also been accepted by the ld. TPO (for all the other international transactions), the margins earned by the Appellant have been determined including international transaction of Receipt of Services; 1.4. ignoring suffici .....

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erred in law by upholding the reference made by the AO to the TPO by not appreciating that such a reference suffers from jurisdictional error as the AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was necessary or expedient to refer the matter to the TPO for computation of the arm s length price ( ALP ), as is required u/s 92CA(1) of the Act. 3. The CIT(A) has erred in law by upholding the adjustment made by the TPO/AO thereby by not appre .....

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by the assessee. ITA no.4869/Del/2014 12. The ld. AR for the assessee contended before us that: • The ld. CIT(A) s approach is against the well settled TP principles as on the one hand, he has accepted the overall TNMM analysis using aggregation approach conducted by the assessee and on the other hand, has rejected one element of cost which is also a part of the overall TNMM analysis, thereby adopting a contradictory approach. 13. The ld. AR vehemently argued that in the assessee s case TNM .....

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received from them. 15. It is submitted by the ld. AR that the services received from the AE s have helped the assessee in increasing its sales, increasing its customer base, increase in higher selling price received assistance towards the order processing provided to the customers, capturing customer data etc. The services from the AEs have also lead to the reduction in the cost incurred towards purchase of raw materials and logistics etc. It has been submitted by the Ld.AR that, the receipt of .....

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ies undertaken by the assessee under these two segments are closely linked with each other and played a critical role for delivering the intra group services received from the AE s in the business operations of the segments. 17. The AR placed his reliance on the jurisdictional Delhi High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd., reported in TS-96-HC-2015(DEL)-TP. 18. The Ld.DR on the other hand relied on the orders passed by the authorities below. She argued that co .....

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ge payments have been made to AE without any rhyme or reason and that no assesse would have made such payments to unrelated parties. 19. We have heard the rival contentions. On a careful consideration of the facts and circumstances of the case and perusal of the papers on record and the orders of the authorities below and case law cited, we hold as follows. The issues before us are; • A. Whether on the facts and circumstances of the case, the Ld. CIT(A) is right in holding that the services .....

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he AE s are not interlinked and cannot be aggregated? 20. During the relevant year under consideration we notice that the assessee had entered into an Intercompany Service Agreement with its AE s being Dennison Manufacturing Company, USA and Avery Dennison Hong Kong B.V to carry out International Transactions being Purchase of Raw Material, Sale of finished goods, Import of printers/cutter/Slitter, Import of software-MFG PRO, Service fee paid, Service income, Reimbursement of expenses. 21. The a .....

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the services received to arrive at the ALP. It is observed that the ld. CIT(A) accepted that the contentions of the assessee that intra group services were received by the assessee as per the agreement, and that these are critical and linked to the core business operations of the assessee. However, the Ld.CIT(A) has rejected the agreement in part i.e; that relating to services. All the services received are part of composite contracts/agreements which in our view cannot be unbundled. Hon ble De .....

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ht to be applied, must have reference to the strength and weaknesses of the TNM Method or the applicable method. Aggregation of transactions is desirable and not merely permissible, if the nature of transactions taken as a whole is so inter-related that it will be more reliable means of determining the arm s length consideration for the controlled transactions. There are often situations where separate transactions are intertwined and linked or are continuous that they cannot be evaluated adequa .....

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f the assessee that royalty thus paid by the assessee to SMC constitute a single/inserverable/ indivisible contract/package which provided assessee the exclusive right and license to manufacture and to sell the licensed product for a specified limited duration. All others rights vested in the license agreement including technology, technical know how and trade mark are linked to the core right to manufacture and sell licensed products…. 13…….we place reliance upon the decisi .....

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urpose of computing the arm s length price, The TPO has re-written the agreement/transaction undertaken by the assessee by artificially segregating the single transaction of payment of royalty into two transactions of payment of royalty for use of brand name and for use of technology. We agree with such re-writing of transaction undertaken by the assessee is inconsistent with the factual realities of the case and is also contrary to the various judicial pronouncements. In this regard, the follow .....

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arrive at the ALP in respect of certain services received by the assessee and in the same breath has rejected the analysis undertaken by the assessee under the TNMM method in respect of other services. We are informed by the assessee that, the authorities have accepted TNMM as MAM in the subsequent years. 25. The OECD guidelines as quoted by the ld. TPO in the draft assessment order by the Ld.TPO, states that, for ascertaining the ALP of intra-group services, either CUP method or cost plus meth .....

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tted that the services received by the assessee are charged by the AE s as below; • Cost Plus Method may be adopted for arriving at the ALP in the assessee s case. The AE in respect of the PSM segment of services being marketing, accounting and administration, financial services product research and development and operations and logistics have charged the service fees by allocating the full cost incurred in providing support service. The allocation is based on budgeted sales and the AE app .....

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d Ticketing Hub Services, which has not been disputed by the Revenue. 28. We are of the considered opinion that, with regard to PSM and RIS segments, the markup charged by the AEs is within the +/-5% range, allowed under second proviso to section 92C of the Indian Income Tax Act, 1961. Accordingly, these services can be considered to be at arm s length; And with regard to of GVP services, VIPFS services and Ticketing Hub Services, the service charges paid by the Assessee, represents the actual c .....

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l-established rule in transfer pricing analysis. This principle seeks to combine all closely linked transactions wherein arm s length price can be determined for a number of transactions taken together. The OECD Guidelines recommends an aggregate benchmarking approach, in situations where, the underlying transactions are closely linked to the core business operations. 31. The assessee is predominantly a manufacturer and the services received by the assessee from its AEs are intrinsically linked .....

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