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2016 (3) TMI 111 - ITAT DELHI

2016 (3) TMI 111 - ITAT DELHI - TMI - Transfer pricing adjustment - adjustment made on account of sharing of software expenses with the AE - Held that:- Provided that data relating to a period not being more than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: [Provided further that the first proviso shall not apply while analysing the comp .....

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e market price of the same cannot be as ascertained. The cost certificates provided by the AEs certify that the said equipment was sold on a cost to cost basis.

As regards the purchase of software and subscription fee the software was purchased by the AE for the entire group i.e., Alcatel Lucent group. These softwares were purchased from third parties based on “combined global requirement” of the group. It is a common practice that when there is a bulk purchase or for multiple number .....

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The TPO has also not given any reason to treat the subscription value as nil. Therefore, in the absence of any reason to hold otherwise, the subscription paid should not be disallowed. We accordingly, do not find any infirmity in the findings of the ld. CIT(A) while directing the AO to delete the addition made under these heads - Decided against revenue - ITA No. 3071/Del./2013 - Dated:- 19-1-2016 - SHRI I.C. SUDHIR, JUDICIAL MEMBER & SHRI L.P. SAHU, ACCOUNTANT MEMBER For the Appellant : Sh. .....

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that payment was made for services indeed rendered. Thus erring in deleting the disallowance of ₹ 52,718/-. 2. Whether the Ld. CIT(A) has erred in law and on facts by accepting the CUP evidence of the assessee and disregarding the arguments presented in the remand report of this office in respect of CUP evidence relating to the purchase of equipments. 3. Whether the Ld. CIT(A) has erred in law and on facts by ignoring the characteristics of similarity in goods/services is strictest in CUP .....

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e shares are held by Alcatel Lucent, France and 49% are held by CDOT, India. The assessee undertook following international transactions during the year under consideration : S.No Description of transaction Method Value (in Rs.) 1 Purchase of equipment Not benchmarked 72,26,594 2. Purchase of software CUP 15,41,724 3. Payment for subscriptions CUP 52,718 The assessee had used CUP method as the most appropriate method to benchmark the international transaction. The assessee has submitted two cert .....

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ther certified that the same methodology was applicable in determining the intra-group transfer pricing for all the group entities. The TPO issued show cause notice to the assessee and after considering the response to the show cause notice computed to the arm s length price of the international transaction as below : S. No Description Amount 1. Equipment imported Rs.46,06,181 2. Purchase of software 15,41,724 3. Subscription Rs.52,718 As a result, total addition of ₹ 42,14,855/- was made .....

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bscription fees amounting to ₹ 52,718/- The assessee avails IT services from AE, Alcatel- Lucent, France. The assessee makes payment for subscription charges in relation to availment of such services. In respect of the subscription charges for IT maintenance paid to Alcatel- Lucent, France, the transaction represents a cost to cost recharge, without any mark up, of the IT services availed from the associated enterprises. Therefore the CUP method was applied in accordance with the Indian TP .....

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helps the group in achieving economies of scale. The Ld. CIT(A) has deleted the addition of ₹ 52, 718/-. (Pg 25, Para 5.10 of the Ld. CIT(A)'s order) Quote The Ld. TPO in her remand report has not raised any objection to the submission of the Respondent except stating that, "the claim of the assessee appears to be verifiable". In view of this, I see no reason why adjustment should be made on account of sharing of software expenses with the AE. In the same way, TPO has not giv .....

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ied prices of certain equipments and alleged that the same were comparable to the equipments being imported by the Company from its Associated Enterprises (AEs). 2. In this regard, the Respondent humbly submits that the equipments being imported were not purchased by the AEs from third parties but manufactured by the AEs themselves. Further, the Respondent has also not imported similar/ same equipment from any unrelated party in the same financial year. 3. As the equipments had been developed in .....

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. Due to the absence of any profit element, the cost actually incurred acts as an uncontrolled price for the product. Accordingly, the Respondent, while applying Comparable Uncontrolled Price (CUP) method, concluded that these transactions were at arm's length. In order to substantiate its aforementioned claim that the components had been purchased at cost, the Respondent vide its submission dated August 26, 2010 (PB 143-155) also submitted the cost certificates (PB 147-148) from its AEs. Th .....

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f the Government unless such rejection is based on some concrete evidence. Reliance is placed on the following judgments: (a) ACIT vs Star India (P) Ltd. [ITA No. 3585/M/2006, Assessment Year: 2002-03 and ITA No. 3846/M/2OO6, Assessment Year; 2002-2003] wherein the Hon'ble Tribunal held as follows: Quote In the instant case the Respondent has obtained the approval from the RBI before making the payment of licence fee, as such the nature of payment cannot be out rightly rejected or doubted. I .....

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the other arm of the same Government. Reliance in this regard is placed on the decision of the Hon'ble Supreme Court in Apollo Tyres Ltd. (reported in 255 JTR 273). In this case, the Apex Court has held that the accounts of a company must be accepted as authentic and binding if the same have been maintained in a manner provided by the Companies Act, 1956 and have been audited and scrutinized and certified by the statutory auditors of the Company. Further, they have been approved by the compa .....

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ccount in a manner provided by the Companies Act and the same to be scrutinized and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act .....

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at one arm of the Government must respect the law laid down by the other arm of the same Government. It is submitted that the rationale of the aforesaid decisions in Apollo Tyres (supra) and Vadilal Chemicals (Supra) squarely applies to the facts of the Respondent's case wherein the Customs Authorities have already approved the valuation of the equipment imported by the Respondent from its AEs. (d) The Respondent would also like to place reliance on the following extract from the decision of .....

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ngth price under section 482. Unquote (Emphasis supplied) 6. In the impugned TP order, the Ld. TPO has stated that valuation by customs authorities cannot be relied upon as the underlying purpose of a custom valuation is for different purpose. Reliance has been placed on the following judgements: (a) In this regard the Respondent would like to rely upon Coastal Energy Pvt. Ltd Vs ACIT [TS-356-ITAT-2011-CHNY] wherein it is ruled that comparable prices can be used for computing arm's length pr .....

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ed in collecting import duties. We should state without fear of contradiction that the customs authorities are assigning values to the imported goods on the basis of scientifically formulated methods and they are responsible for making a fair assessment value of the imported goods. The valuation made by the customs authorities is not an arbitrary exercise. But on the other hand, it depends upon large volume of international data classified according to internationally accepted protocol. Therefor .....

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the credibility of the customs data relied upon by the TPO. Unquote (Emphasis supplied) The above decision underscores the fact that valuation undertaken for Customs' purposes can be relied upon for Transfer Pricing purposes to demonstrate that the goods have been imported at an arm's length value. 7. Without prejudice to the above, the Assessee would like to submit that in the impugned Transfer Pricing order, the Ld. TPO has undertaken an internet search to identify prices of equipments .....

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show cause notice although zero value of ALP was proposed for all the international but after thoughtful consideration of the submission of the assessee and after discussion held with the Authorised Representative of the assessee and on the facts and circumstances of the case, it has been considered that the equipments imported certainly carry some value if sold in the open market. Under the circumstances, comparable uncontrolled price for the said products have been searched in the internet. F .....

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e. FY 2010-11. The Respondent humbly submits that the aforementioned methodology adopted by the Ld. TPO is flawed and contrary to the provisions of the Indian Transfer Pricing regulations. In this regard, the Assessee would like to quote the provisions as laid down under Rule 106(4) of in the Income Tax Rules, 1962 (the Rules), for your Honour's ease of reference: Quote 10B(4) The data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction .....

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ed data with the uncontrolled data which pertains to the same financial year. The only exception to the above, as mentioned in the rule above, is that data for two prior years may be used, only if based on facts it can be ascertained that it had an influence on the prices for the current year. b. Accordingly, the Ld. TPO's approach wherein he relies upon data relating to three years after the transaction has undertaken is incorrect. Thus, the CUP analysis undertaken by the Ld. TPO should be .....

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a summary table capturing the equipments purchased during the year against which an adjustment has been made by the Ld. TPO: Table - 3 S. No. Product Description Rate at which purchased by Respondent Rate as determined by the TPO 1. Base Station Receiver - 3BK 27506 AAAA Model 12,112 9,869 2. Transciever Zyxel Wimax CPE PCMIA Card 136 103.42 3. NEMO HW2C Kit 1,970 26.97 4. Base Station Receiver (I Sector) 8,322 7,212.14* 5. Modem Indoor I DIV 2.5 GHZ 260 75.86* *The price represents on average .....

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Comparable Uncontrolled transactions undertaken by its AEs with third parties during the relevant assessment year. A comparative analysis of the price at which the products were purchased by the Respondent vis-a-vis the prices charged by the AEs for the same products from third parties has been summarized in the table below for your Honour's ease of reference: Product Description as per customs documents Model Number Product Description as per AE s Quantity Price charged by AE s to CDOT (in .....

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ts have been attached for your Honour's ease of reference as Annexure 3A and 3B of Submission dated October 8, 2012. (PB 100-103). Based on the above, it can be said that the price charged by the AEs from the Respondent was lower than the price charged from third parties. Accordingly, it can be concluded that the aforementioned international transaction undertaken by the Respondent is at arm's length. 9.2 NEMO HW2C Kit With regard to "NEMO HW2C Kit" (NEMO Kits) mentioned in Tab .....

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the transmission function while hosting an IP/Ethernet transport functionality ensuring the Layer 3/ Layer 2 transport to and from Wimax Access Controller (WAC), Operations Maintenance Centre (OMC) configuration and monitoring management, as well as to other chained base stations. This is the heart of a Base Station like Mother Board of a PC. NEMO board is the digital board of the WiMAX Base Station. It contains processors & switches. As can be seen from the above description, a NEMO Kit is .....

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e public domain has been provided below for your Honour's ease of reference2: As can be seen from the above, a "Network Mounting Kit" is merely a contraption that is utilized for holding a network device onto a wall or onto a structure. It is clearly a noncomplex and non-technical piece of equipment. On the other hand, a NEMO Kit, as explained above, is a highly technical device, which forms the primary- component to a Base Station Transceiver. Accordingly, the comparative analysis .....

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nt is not available in the public domain. Furthermore, as the Respondent is a research organization, engaged in undertaking research and development in the area of wireless broadband technology, this component was provided to the Respondent on a sporadic basis for undertaking research work. The component purchased was purely provided to the Respondent for non-commercial use and thus the market price of the same cannot be ascertained but for the cost certificates provided by the AEs that the said .....

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nder Indian Transfer Pricing regulations. However, on a without prejudice basis, even if the price of the underlying NEMO Kit was to be ascertained by the Respondent, a possible approach could be to use the relative price proportion ratio of a mother board in the personal computer for deducing the proportion of Base Station Transceiver price (which has already proved to be at arm's length in the earlier part of the submission) which can be attributed to the NEMO Kit. As mentioned above, a NE .....

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our analysis, a mother board accounts for 12% to 18% of the total cost of the personal computer (refer Annexure 4 of the submission before Ld. CIT(A) dated October 8, 2012 for details). Further, the total market price for a Base Station Transceiver, as evidenced by the CUP submitted by the Respondent in Annexure 3A of the submission to Ld. CIT(A) dated October 8, 2012 (PB 100) is 12,499 Euros and the price of a NEMO Kit is 1970 Euros. Thus, a NEMO Kit accounts for around 16% of the cost of the B .....

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stated that the Respondent has not been able to substantiate the cost by way of the actual cost calculation. In this regard, the Respondent has now been able to secure the standard cost list that was applicable during the relevant assessment year for the two balance equipment/ components, namely Base Station Transceiver (I Section) and Modem Indoor I DIV 2.5 Ghz (refer Annexure 5 of the submission to CIT(A) dated October 8, 2012 )(PB 108). From the perusal of the standard cost list alongwith the .....

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6.5001 Fixed and Variable cost coverage D = A*9% 624.172 19-5 CSC E = A* 1.2% Nil* Nil* Total F = A+B+C+D+E 8322 260 Price at which purchased by the Respondent 8322 260 #Source - Cost list *No CSC cost was added by the AEs on the aforementioned equipment/component It is clear from the above computation that only the actual cost incurred in manufacturing of the respective equipment/component has been charged by the AE. Accordingly, as no profit has been charged by the AEs, the aforementioned pur .....

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The international transactions for the relevant assessment is less then ₹ 1 cr. Therefore, the assessee is exempt from the documentation requirements stipulated under section 92D of the Act read with rule 10D of IT Rules, 1962. The ld. TPO, during the transfer pricing assessment has made adjustment in all three international transactions undertaken by the assessee whereas the assessee has justified that all the three international transactions undertaken during the relevant assessment yea .....

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uys the similar quantities in comparable quantities and in similar terms from the associate parties in the comparable markets (internal comparables). 10. An ALP Party buys the particular goods, in comparable quantities and in the similar terms from the other arm s length associate party in similar markets (external comparable). 11. In addition to this, while determining the ALP of an international transaction, under Rule 10C(2)(d), it is mandatory to judge with reference, among other things to t .....

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fully. 13. The decision of Chennai Bench in the case of Coastal Energy Pvt. Limited in ITA No. 2099/Mds/2010 dated 13th July, 2011, quoted by the assessee is for the proposition that valuation undertaken for customs purposes, can be relied upon for transfer pricing purposes to demonstrate that the goods have been imported at an arm s length value. 14. The ld. TPO has relied the equipments rates for the F.Y. 2006-07based on the internet search whereas the case pertains to F.Y. 2010-11 wherein aft .....

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tered into : Provided that data relating to a period not being more than two years prior to [the current year] may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: [Provided further that the first proviso shall not apply while analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction, entered into on or after the .....

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