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2016 (4) TMI 202 - ITAT BANGALORE

2016 (4) TMI 202 - ITAT BANGALORE - TMI - Transfer pricing adjustment - MAM - Held that:- To determine the ALP of the international transaction pertaining to payment of intra-group services, TNMM has to be applied following the aggregation approach as the transactions are closely linked and integral to the manufacturing operations of the assessee and therefore the determination of ALP on an aggregate basis would be more appropriate.

Adjustment in connection with notional interest - He .....

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N, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER For The Appellant : Shri K.R. Vasudevan, Advocate For The Respondent : Shri Sanjay Kumar, CIT-III(DR) ORDER Per Asha Vijayaraghavan, Judicial Member This appeal by the assessee is directed against the order dated 24.12.2014 of the Assessing Officer passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [hereinafter referred to as "the Act"]. 2. The assessee company is in the business of manufacturing and/or trading of .....

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The case was referred to the TPO for determination of the arm s length price (ALP) u/s. 92CA of the Act. As per the order of the TPO dated 30.01.2014, draft assessment order was passed on 24.2.2014 against which objections were filed by the assessee before the DRP. The ld. DRP upheld the draft assessment order and final assessment order was passed by the AO on 24.12.2014. 4. The TPO made a TP adjustment of ₹ 1,64,44,290 to the returned income of the assessee in view of determination of AL .....

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appeal before us on the following grounds:- 1) The learned Assessing Officer ( AO ), the learned Joint Commissioner of Income Tax (Transfer Pricing Officer - II), Bangalore ( Transfer Pricing officer or TPO ) and the Honorable Dispute Resolution Panel ( DRP ) have erred in law and facts of the case in proposing a transfer pricing adjustment under section 92CA of the Income-tax Act, 1961 ( the Act ) amounting to ₹ 1,53,40,000 on account of payment of cost contribution charges by the Appell .....

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le of aggregation of closely linked transactions is a well-established rule prescribed by the Organisation for Economic Co-Operation and Development guidelines ( OECD Guidelines ) and referred to for guidance in various rulings of Income Tax Appellate Tribunals ( ITAT ). 1.3. The learned TPO, AO and the Hon ble DRP erred in selecting Comparable Uncontrolled Price Method ( CUP ) as the most appropriate method in determining the arm s length price of payment towards management fees to AE despite t .....

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ting notional interest on the outstanding receivables amounting to Rs.. 11,04,290/- from the AEs and while doing so: 2.1. The learned TPO, AO and the Hon ble DRP erred in imputing interest on the outstanding receivables from the AEs ignoring the fact that the assessee followed the same policy of not charging any interest on trade receivables from both AEs as well as Non-AEs. 2.2. Without prejudice, the learned TPO and AO ought to have been netted off the outstanding payables pertaining to the du .....

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,793. 2.4. The learned TPO, AO and the Hon ble DRP having accepted the Transactional Net Margin Method ( TNMM ) as the most appropriate method had failed to appreciate that the operating margin of the assessee is higher than the arithmetic mean operating margin of comparable companies even after working capital adjustment which provides ample evidence that the additional compensation if any, required towards the credit period is already factored in the pricing of the goods sold/services rendered .....

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erred in granting a credit for TDS to the extent of ₹ 5,92,70,316 as against ₹ 6,05,12,937 claimed by the assessee in the revised return of income, thus resulting in a short credit of ₹ 12,42,621. 4) Interest under Section 234B - The learned AO has erred in levying interest under section 234B of the Act amounting to ₹ 2,31,864. The appellant craves to leave/to add to/to alter/to amend/to rescind/to modify the grounds herein above or produce further documents, facts and ev .....

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s. Accordingly, with the application of TNMM, the international transactions have been concluded by the assessee to be at arm s length. 7. It is now submitted before us that the TPO and the DRP erred in making a TP adjustment of ₹ 1,53,40,000 on account of payment of cost contribution charges by the assessee. The brief facts with regard to this issue are that the assessee received services from its AE in the area of Administration, Finance, Treasury, Tax and Strategy etc. These services ar .....

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ected as prior period item in the audited financial statements of FY 2009-10). 8. Accordingly, the learned TPO has proposed the TP adjustment in connection with the cost contribution charges made pertaining to both the periods mentioned above. Cost contribution towards intra-group services (Ground No.1.1) 9. The ld. counsel for the assessee further submitted that lower authorities erred in treating the arm s length price (ALP) of the cost towards management fees to be Nil holding that there is n .....

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from its AE in the area of Information Technology, Administration, Human Resource, Finance, Legal, Tax, and Strategy etc. These services are utilized by IRIL to undertake its business operations in India. Ingersoll Rand Company USA 2,57,42,489 a. Global IT Support ensures the efficient and effective operation of the Group's Information Systems Operating Platform. It gives access to basic computer systems, software packages, etc. to group companies globally. This includes development of globa .....

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s activities related to IT viz., update on any issues on usage of various software including, email server, intra mart, file server etc. b. The provision of Human Resources support aims at developing global HR strategy, policies and procedures, guidance for structuring the organisation, recruitment support, global training and learning programs etc. These policies help the Appellant in establishing a world class working culture which is also in compliance with the regional norms. c. The Central .....

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itted that the payments amounting to ₹ 2,57,42,489 towards cost contribution charges is reflective of an arm s length charge. It was further submitted that the assessee received services from its AE in the area of Administration, Finance, Treasury, Tax and Strategy etc. and these services are utilized by assessee to undertake its business operations in India. It was stated that the lntra-group charges are incurred centrally by the AE and allocated to the various group affiliates including .....

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ted that the OECD Guidelines recognize that whilst the direct charge method may be the most practically convenient method, such a method might be difficult to apply in practice in many cases for MNE groups. The Guidelines recognize that under such circumstances MNE groups may find they have few alternatives but to use cost allocation and apportionment methods which often necessitate some degree of estimation or approximation, as a basis for calculating an arm s length charge. The OECD Guidelines .....

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to turnover, while the allocation of the stand-by costs of priority computer back-up could be allocated in proportion to relative expenditure on computer equipment by the group members. 13. It was submitted that the assessee has, in accordance with the stipulations as mentioned in the OECD Guidelines, adopted a rational, systematic and logical methodology for the payment of cost contribution charges. It was pointed out that the methodology of allocation followed is standard, uniform, harmonized .....

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h all the concerned affiliates in respect of the allocation of costs. It was further submitted that an analysis of the facts as set out in the aforementioned paragraph would provide ample evidence to the fact that the allocation of intra group charges by the AE to the assessee adheres to the tenets of the indirect allocation mechanism provisions as stipulated under Paragraph 7.25 of the OECD Guidelines. It was pointed out that the AE has charged only the actual costs incurred and there is no mar .....

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ions . 16. It was therefore emphasized that the AE in the capacity of a centralized service provider provides an element of cost saving to the Group as a whole, of which the assessee is also an integral part. This being the case, the costs cross charged by the AE would in itself be demonstrative of an arm s length charge. Aggregation approach with the application of TNMM and selection of most appropriate method (Ground Nos. 1.2 and 1.3) 17. It was submitted on behalf of the assessee that the lea .....

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an be applied in instance case, as he has not identified any uncontrolled comparable transactions to enable the application of CUP Method. It was submitted that considering the maturity of the databases, nature and type of information available as well as the nature of the international transactions, it would be extremely cumbersome, if not impossible to obtain comparable data on an independent basis. Hence conducting a benchmarking analysis to determine the ALP of the international transactions .....

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o. 1.4) 19. It was submitted by the assessee that the lower authorities have erred in ignoring the evidences submitted by the assessee to prove that it was in need of services and services were actually rendered and benefit was derived from the services obtained from the AE. Further, the guidance, advice and support obtained from the experienced and knowledgeable team of the AE helped in management of the operational and corporate activities reducing significantly the level of senior personnel r .....

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ded by the AE would not likely be obtainable from third party service providers, and it may not be prudent from a business as well as commercial perspective to avail some of the services provided by the AE s, directly from third party service providers; • It is practically and financially not possible for the assessee to employ such experienced personnel on a stand-alone basis. Further, procuring such assistance from third party consultants would have proven to be extremely costly for the a .....

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ntion and IT platforms) and to promote opportunities of cross selling to maximise revenues; • Reduced costs - Many functions can be carried out centrally for the benefit of the entire Group, by reducing duplication, providing dedicated resources and the benefits of economies of scale. • Ingersoll Group has a brand name and reputation in the market because of the level and quality of the services provided to the clients. Therefore, lack of support from Ingersoll group may adversely impa .....

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ring the assessment proceedings:- • Detailed description of the intra-group services rendered by the AE (Page 99 of the paper book) • Cost Contribution Agreement entered between IRIL and Ingersoll Rand Company dated January 1, 2009 (Page 349 of the paper book) • Ledger extracts along with sample copy of invoice in connection with the Intra-group services (Page 355 of the paper book) • The detailed working providing the allocation of costs by Ingersoll Rand Company to various .....

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ed below: a. Global IT Support ensures the efficient and effective operation of the Group's Information Systems Operating Platform - Conference Call Details and Presentation on Interim Forecast Process in HFM (Page 362 and 363 of the paper book) b. Headcount Improvement Meeting - These policies help the Appellant in establishing a world class working culture which is also in compliance with the regional norms. (Page 431 of the paper book) c. Accounts Receivable Dashboard - AE also support in .....

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n behalf of the assessee that it is reasonable to view that the payment made towards cost contribution amounting to ₹ 2,57,42,489 is as per the internationally accepted transfer pricing principles and accordingly reflective of an arm s length charge. Reliance was placed on the following decisions:- 1. Festo Controls (P) Ltd. [IT(TP)A 969/Bang/2011]. 2. McCann Erikson (P) Ltd. [ITA No.5871/De;/2011]. 22. We find that the Mumbai Bench of the Tribunal in the case of Dresser Rand India Pvt. Lt .....

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for auditing and management consultancy; it is not for the revenue officers to question assessee s wisdom in doing so. • Whether a particular expense on services received actually benefits an assessee in monetary terms or not is not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm s length price of that service. • The real question which is to be determined in such cases is whether .....

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. • There is no objective way in which use of services can be measured and as is the commercial practice even in market factors driven situation, the costs are shared in accordance with some objective criterion, including sales revenues and number of employees. • In any case, the assessee has adopted TNMM as most appropriate method, and the revenue authorities have neither made an effort to show as to how this method is not appropriate to the facts of this case, nor shown as to which o .....

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hat Rule 10B(1)(a) stipulates comparable and uncontrolled transactions while applying the CUP method. Only a general observation was made by the TPO that no independent party would have made payment in uncontrolled circumstances. 24. In view of the above decisions of the Delhi Bench of the Tribunal in the case of Dresser Rand India Pvt. Ltd. and AWB India Pvt. Ltd. (supra), we delete the addition of ₹ 1,53,40,000 towards TP adjustment on account of payment of cost contribution charges made .....

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t the end of the financial year. The TPO in his order argued that outstanding receivables (amounting to ₹ 74,91,793) for a period exceeding 6 months take the characterisation of a loan transaction for which interest is chargeable. Further, he observed that if interest had been charged by the assessee on its AEs for the outstanding balance, it would have been included in the profit of the assessee. 27. Accordingly, the TPO determined the credit rating of the AEs as BB on adhoc basis and the .....

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tional interest before us as follows:- Particulars Amounts (In INR) Receivables from the AEs exceeding 6 months 74,91,793 Arm's length price of interest chargeable at 14.74% being the CUP 11,04,290 Interest charged NIL Transfer pricing Adjustment u/s 92 CA 11,04,290 30. The ld. counsel for the assessee submitted that while proposing the notional interest on receivables outstanding from AE, the TPO has tried to bring within the ambit of Section 92, a transaction that is non-existent. It was s .....

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tion 92 of the Act does not arise. 31. Section 92(1) of the Act provides that, Any income arising from an international transaction shall be computed having regard to the arm s length price . Further, Section 92B(1) of the Act defines an international transaction as under: For the purposes of this section and sections 92, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, .....

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one or more of such enterprises to mean the ALP in length price under section 92C (emphasis supplied) 32. It was submitted by the ld. counsel for the assessee that the above definition implies that there should be a real transaction between two AE s, i.e., a transaction involving actual exchange of goods/services to constitute an international transaction . It does not seek to cover any hypothetical transaction which has not taken place between the AEs. 33. The ld. counsel for the assessee subm .....

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visions which have a deeming fiction on income that could be subject to tax, e.g. Section 115JB (minimum alternate tax). It can be construed that the Act provides for taxing only real income whether received or accrued under the normal provisions and specifically provides for taxation of presumptive income. Reliance was placed on the decision of Vodafone India Services Pvt. Ltd. v. UOI (W.P. No.871 of 2014) Ltd. v.. Union of India (Writ Petition No.871 OF 2014) and the decision of the Mumbai Ben .....

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.1529/Bang/2010 vide order dated 24.04.2015 while dealing with an identical issue, has held as follows:- 11.2.2 On the first issue of taxability of notional income, the assessee submitted that the TPO has tried to bring within the ambit of Section 92, a transaction that is non-existent and in the absence of any provision in the Act, the tax-payer cannot be subjected to tax in respect of hypothetical income . In the case on hand, since no income has been earned or can be said to have been earned .....

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ed realisations even in the case of Non-AE transactions. It was submitted that the debts were outstanding with both the AEs and Non-AEs for a period exceeding the credit period purely because of business reasons and that this is a common business practice prevailing in the industry and the delay if any in the payment is not due to extension of credit period by the assessee to its AEs. In this regard, the assessee placed reliance on the decision of the Hon'ble High Court of Bombay in the case .....

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from AEs outstanding for more than 6 months. (ii) It was submitted that if at all any adjustment had to be made, the notional interest is to be computed on the net receivables after netting off payables to all the AEs and not only to the holding company, as taken by the TPO. (iii) It was submitted that the TPO has erred in adopting an interest rate of 14% by stating that in terms of the financial health, the AEs of the assessee are not considered fit to be returned even as BBB (Moderate Safety) .....

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d placed reliance upon. We find that the decision of the ITAT, Mumbai Bench, in the case of Evonik Degussa P. Ltd. V ACIT - OSD, Circle 3(1), Mumbai (ITA No.7653/Mum/2011, dt.21.11.2012) of ITAT, Mumbai Bench is squarely applicable to the facts of the case in the case on hand. In this decision the ITAT, Mumbai Bench at para 28 thereof has held as under : 28. After carefully considering the rival submissions and the orders of the TPO as well as the direction of the DRP, we find that the assessee .....

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unt of late payment by the AEs only. Moreover, the T.P. Adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income. Thus, on the facts and circumstances of the case, we are of the opinion that addition an account of notional interest relating to alleged delayed payment in collection of receivables from the AEs is uncalled for on the facts of the present case and is, accordingly, deleted. 11.4.2 .....

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ropriate to remand this issue back o the file of the Assessing Officer / TPO for examination as to whether there was any agreement for charging interest on late payments or not and if it is found that there was no such agreement, then the T.P. Adjustment made in this regard requires to be deleted. As this issue has been decided, in principle, in favour of the assessee by placing reliance on the aforesaid decision of the ITAT, Mumbai Bench (supra), it is not necessary for us to adjudicate on the .....

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