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2016 (3) TMI 215 - ITAT MUMBAI

2016 (3) TMI 215 - ITAT MUMBAI - [2016] 157 ITD 1022 - Transfer pricing adjustment - most appropriate method - method of ascertaining the ALP - Held that:- What the TPO has done is to reject the benchmarking done by the assessee and make adhoc ALP additions in the value of international transactions. Such a course of action is not permissible under the scheme of transfer pricing law. Even when a method of ascertaining the ALP is, for good and sufficient reasons, rejected by the TPO, he has to se .....

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gth price on the basis of a method, method if it can be said to be, not recognized under the scheme of transfer pricing envisaged by the statute. Learned CIT(A) was in error in not reversing the action of the Transfer Officer. In view of the above discussions, and bearing in mind entirety of the case, we vacate the orders of the authorities below on this point, and direct the Assessing Officer to delete the impugned ALP adjustments - Decided in favour of assessee - Addition of interest @14% .....

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ame, and, in such a situation, ALP adjustment cannot be made for delay in realization of monies from the AE. The consideration as to how the assessee would have received interest if money was given to an outsider is irrelevant because it is not a case of extending loan or placing deposit, rather it is a case of amount becoming due as a result of commercial transaction. In any event, when international transactions have been benchmarked on the basis of TNMM, and interest on delay in realization o .....

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he question of software expenses being in the nature of capital asset is relevant only when the payment is for acquiring the software. That is not the case here. It is a payment for the annual licence fees, and not the software itself. The expense is, therefore, clearly revenue in nature. We, accordingly, delete the impugned disallowance. As the relief has been allowed as revenue expenditure, the assessee will not be entitled to any depreciation on software - Decided in favour of assessee - I.T. .....

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we will take up together, the assessee has raised the following grievance: 1. The Learned Commissioner of Income Tax (Appeals) - 15 [CIT (A)] erred in conforming the adjustments made by the Assistant Director of Income Tax (International Taxation) - 1 (2) [ADIT (IT)] as proposed by the Deputy Commissioner of Income Tax (TP) - 1(8) [TPO] amounting to ₹ 95,04,121/- u/s. 92 CA(3) being 20% of the payments made under service level agreements amounting to ₹ 4,75,20,603/- to the head offic .....

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nt further submits that the CIT (A) erred in not considering the profits earned by the IT unit of head office and stating that the appellant is comparing the global profit of the Norway company while the adjustment has been made by the TPO with reference to particular transaction relating to the appellant" Your appellant submits that the CIT(A) should have considered the profits earned by the IT Unit of the Head office while computing the arm's length price in respect of payments made u .....

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d be considered at arm's length price and should not be subjected to any adjustment. Your appellant further submits that the CIT(A) ought to have accepted the contention of the appellant that the adjustment in regional head office expenses should be made on net expenditure (regional head office expense less regional head office income) incurred by the appellant and not on the gross regional head office expenses incurred by the appellant. 3. So far as these grievances of the assessee are conc .....

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th price, in respect of international transactions entered into with its associated enterprises, to the Transfer Pricing Officer. The Transfer Pricing Officer noted that the assessee has adopted TNMM for showing its international transactions to be at an arm e length and that, as per transfer pricing study on the basis of inputs from Prowess database, PLI (PBT/Income) for comparable companies have average of 19.65% whereas the same PLI (PBT/Income) for assessee is 19.77% . It was also noted that .....

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, in the arm s length price, for the services received by the assessee under the Service Level Agreement, on the basis of following reasoning: The submission of the assessee reflects that the annual accounts of the assessee is based on merely forecasting's. In this method the incomes as well as the expenses of the assessee are forecasted. Every year the budgeted expenses are being decided by the DNV group and being allocated to the assessee based on the method adopted by them. • No any .....

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age are based on the number of the users • It is seen during the course hearing that the assessee has submitted that it has more user of software during the F.Y. 07-08 than the payment was made for usage. Accordingly the assessee is saying that it has paid actually less amount for the above services and accordingly no excess payment was made. • However it is seen that assessee was not able to prove that if the charges are based on the users using the software then the payment was how r .....

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itself contradictory. If the pricing model is per user charge for software use then it can be decided/ reconciled with the forecasted and actual usage vice versa. But the assessee has failed to demonstrate the same. • The assessee has tried to establish the basis of charging of the software charges/expenses but has totally failed to reconcile the differences arising out every year. It reflects that the annual accounts prepared by the assessee are not reflecting the true picture of its affai .....

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g of regional office expenses, on the basis of the following reasoning: • In this segment the assessee pays to regional office @ 6.2% to its external revenue to Dubai for availing services in Maritime segment and 5% to Malaysia in Energy segment. But what is external revenue. What is the quantity of the external revenue? What was the budgeted figure earlier? What was the actual charge paid on this account in the previous year is not yet decided by the assessee. No reconciliation has been pr .....

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ccordingly the expenses as well as income on this head are also appearing to estimation only. The AR of the assessee has tried to explain the methodology of charging regional office expenses during the course of hearing which can be stated as under: .' There is Dubai Regional office. Under it there are several other country who are availing services from this office. The total forecasted revenue of all country is taken by the DNV Group. Then the expense (estimated only) of the Dubai office i .....

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repared taking Figure from April to March which includes 9 months for the 2007 and 3 month for the year 2008." • The pricing in terms of currency of the country concerned has been done this year for the 3 months January, 2008 to March, 2008). The assessee has not been able to explain that the same price was charge for these three months from all the country concerned. The assessee has not furnished any calculation of prices (through conversion of foreign currency in rupee) of the other .....

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t been given by the taxpayer. Whether the charges paid by the India was lesser or higher in terms of services availed has not been quantified by the assessee. • The assessee has also not submitted as to how it has reconciled the differences between previous year's estimated/forecasted expenses and the actual expenses. • In view of the above it is apparently clear that the assessee has not been able to successfully explain that the prices paid by the India was for the actual service .....

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ring of regional office expenses. Aggrieved by the adjustments so made, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us. 8. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable legal position. 9. We have taken note of the fact that the assessee has benchmarked the international transactions on TNMM basis and the .....

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t permissible under the scheme of transfer pricing law. Even when a method of ascertaining the ALP is, for good and sufficient reasons, rejected by the TPO, he has to select the most appropriate method, out of the recognised methods under rule 10AB and 10B, and then apply the same. Such an exercise has not been carried out on the facts of this case. The Transfer Pricing Officer has simply made adhoc adjustments, but then, as we have stated earlier, such adhoc adjustments are not permissible. Not .....

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authorities below on this point, and direct the Assessing Officer to delete the impugned ALP adjustments of ₹ 95,04,121 and ₹ 16,31,771 10. Ground nos, 1 and 2 are thus allowed. 11. In the third ground of appeal, the assessee has raised the following grievance: 3. The Learned CIT(A) erred in confirming the adjustment made by the ADIT (IT) as proposed by the TPO amounting to ₹ 7,20,110/- being interest @14% p.a computed on the delayed realization of amounts of trade debts receiv .....

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in realization of debts recoverable from the AEs of the assessee. The assessee s stand was that it is assessee s standard policy not to charge interest in respect of delays in realization. It is not charged from anyone- AE or non AE. The TPO was of the view that non recovery of outstanding dues from the AEs has resulted in business funds of the assessee being blocked with the related parties, thereby resulting in loss of revenue that could have been earned by utilizing it for the purpose of busi .....

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compensation on such delays. It was in this backdrop that the Transfer Pricing Officer recommended, and the Assessing Officer made, an ALP adjustment of ₹ 7,20,110 on account of interest for delay in realization of receivables. The reasoning adopted by the TPO was as follows: 10.3 The explanation of the assessee was considered but not found acceptable. The assessee failed to get any satisfactory explanation for the delay and only submitted that generally payments are received in time and .....

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y for earning revenue. Had the taxpayer given this amount to an unrelated person, it would have charged interest thereon. 10.4. Since the taxpayer has not recovered the dues from the AE within a reasonable time, it amounts to allowing the AE to use the taxpayer's money. In normal conditions such a transaction between two unrelated parties would have involved levy of interest on the delayed payments. In view of this fact, the international transaction representing outstanding debts without ch .....

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lar situations. Since the tested party is tax payer, the prevalent interest that could have been earned by the tax payer on outstanding debts from an unrelated party in India with the same credit rating as that of the tax payer's AE is considered. 10.5. In view of the above, in view of the above discussion, the interest rate of 14% p.a. (average yield on unrated bonds for the FY 2007-08) was proposed to be adopted as the uncontrolled interest rate to arrive at the interest charged at arm' .....

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h price of an international transaction with the associated enterprises, the real issue for consideration is as to what would have been the situation in an arm s length situation i.e. in respect of delay in realization of similar debt from an independent enterprises in this case. Once the assessee has contended that the interest is not being charged from anyone, including, of course, the non AEs, and that contention is not disputed to be factually incorrect, it cannot be open to the TPO to make .....

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event, when international transactions have been benchmarked on the basis of TNMM, and interest on delay in realization of amounts is only incidental to such transactions rather than a standalone transaction, such an adjustment cannot be made independently. For this proposition, we find support from a coordinate bench decision in the case of Micro Ink Vs ACIT [(2015) 63 taxmann 353 (Ahd)]. In the light of the above discussions, and bearing in mind entirety of the case, we deem it fit and proper .....

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