TMI Blog2016 (1) TMI 933X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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. The assessee is predominantly a manufacturer and the services received by the assessee from its AEs are intrinsically linked to the core business operations of the assessee, in the following form: i. Based on the support provided by the AEs in terms of marketing services and strategic services, the assessee is able to achieve higher sales, both in terms of higher sales quantity and sale prices. ii. Based on the support provided by the assessee in terms of operations and logistics the assessee has been able to procure 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 serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee, with Operating Margin ( OP/TC ), as the profit level indicator to determine the ALP. 4. The assessee had entered into following International Transactions with its AE during the relevant financial year: S.No. Description of transaction Method Value (in Rs.) 1. Purchase of Raw Material TNMM 360,685,178 2. Sale of finished goods TNMM 116,790,945 3. Import of fixed assets TNMM 4,979,919 4. Import 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 paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 alternative materials etc. 8. Product Research And Development High level support services from technical experts who are able to resolve the technical issues faced by the appellant or its customers on a need basis 9. Operations and Logistic Support High value operational support services from personnel of the AEs who have significant experience in handling the similar operations in various jurisdictions, worldwide on a need basis; Reduction in cost by way of identification of safety/quality hazards and their timely rectification; Reduction in cost of sourced raw materials and freight services due to higher bargaining power of the AEs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO CIT(A) TPO CIT(A) 1. Marketing support services disallowed allowed allowed (25%) allowed 2. Operations Logistics Support disallowed allowed allowed 3. Product R D/Technical assistance services disallowed allowed allowed (50%) allowed 4. Accounting Administration services disallowed disallowed disallowed disallowed 5. Management Information Systems disallowed disallowed disallowed disallowed 6. Labour Law Employee relations disallowed disallowed disallowed disallowed 7. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Further, the AO/TPO/CIT(A) grossly erred by applying comparable uncontrolled price ( CUP ) method without providing any comparable 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 sufficient evidences provided by the appellant and thereby, based on his own conjectures and surmises, concluding that the services availed by the Appellant from its AE were in nature of duplicate and shareholder services which have not conferred any commercial benefit upon the Appellant. 1.5. by not considering that the cost allocation methodology adopted by the AEs for allocation of costs with respect to rendering of services was in line with internationally accepted methodologies. 2. The CIT(A) has erred in law by upholding the reference made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw materials and logistics etc. It has been submitted by the Ld.AR that, the receipt of services was not disputed by the ld. CIT(A)/AO/TPO. The ALP was determined at NIL by adopting CUP as the MAM, on the ground that no benefit has accrued to the assessee due to those services. The Ld.AR submitted that such rejection is not in accordance with law. 16. The Ld.AR submitted that the international transactions entered into by the assessee are intrinsically linked to the business operations of the two segments of the assessee. The ld. AR further submitted that the nature of the activities 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 cost has been allocated in a blanket fashion on the basis of the sales without any specific nexus to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of 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 Delhi High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd. (supra) has observed as under; 93 ..These anomalies arise on account of fact that there was no apportionment and division of the transactional compensation, but the packaged transaction has been bifurcated and divided into two. This position is not acceptable as it is irrational and unsound. 137. The question of aggregation and disaggregation of transactions when the TNM Method or even in other methods is sought 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) Hon ble Delhi High Court decision in the case of Sony India (P) Ltd. vs. DCIT (ITA No. 1189/D/2005) ii) Hon ble Delhi High Court decision in the case of CIT vs. EKL Appliances (ITA No. 1068/2011 and 1070/2011). (Emphasis supplied) From the above discussion we to take a view that the agreement to be an intrinsic one and that it is wrong to split the same. 24. The Ld.CIT(A) accepted TNM Method to 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 method should be applied. The ld.AR submits that, CUP method would be applicable where there is a comparable service provided between independent enterprises, or by the AE, providing the services to an independent enterprise. 26. In the absence of such information, alternatively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 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 to the core business operations of the assessee, in the following form: i. Based on the support provided by the AEs in terms of marketing services and strategic services, the assessee is able to achieve higher sales, both in terms of higher sales quantity and sale prices. ii. Based on the support provided by the assessee in terms of operations and logistics the assessee has been able to procure raw materials at lower costs. Accordingly, the impact of such support services is received by the assessee in the form of lower direct costs. 32. 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 reli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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