TMI Blog2016 (5) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... h copy of the agreement or any proof of requesting for such services, that he further held that assessee did not demonstrate as to how the cost benefited it, that it did not provide any proof of any exact number of users and their allocation, that the DRP called for a remand report from the TPO after admitting additional evidence, that DRP directed the TPO/AO to delete the proposed adjustment. We are of the opinion that TPO is not empowered to determine the ALP of an IT at NIL, that in the case under consideration he had made adjustment without adopting any of the prescribed methods. It is a fact that the assessee had satisfied all the necessary tests for the purpose of availing services from its AE. In these circumstances, we hold that the approach of the assessee in benchmarking the transaction under the head availing e-connectivity services under combined transaction approach was at arm’s length. Considering the above, we confirm the order of the DRP and decide ground against the revenue. Treatment to expenditure incurred for e-connectivity - Revenue or capital expenditure - Held that:- The expenditure incurred by the assessee on econnectivity is incurred for day-to-day runni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P of import price of the same API. s. He collected data from the competitors of the assessee. The difference between the weighted average purchase price the competitors and that paid by UCB to its AE was added to the total income of the assessee. As a result, following adjustments were made: Active Ingredient Qty. Purchased Rate of purchase (Rs. /Kg) Comparable price(Rs. /Kg) Difference(Rs. /Kg) Adjustemt(Rs. ) Piracetam 28, 334 1, 334. 59 423. 45 911. 06 2, 58, 14, 134 2, 58, 14, 134 The AO incorporated the said figure in its draft assessment order. 3. Aggrieved by the order of the AO and the TPO, the assessee filed objections before the DRP. Before it, the assessee argued that the AO/TPO erred in not accepting the TNMM as most appropriate method(MAM), that they had wrongly adopted the CUP method to determine the ALP in connection with the import of API, that inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uantify the TP adjustment on such verification. 4. During the course of hearing before us, the Deparmental Representative(DR) argued that the TPO had decided the issue after collecting data of MLL, that the benchmarking done by him was based on a valid comparable, that there was no justification for rejecting the method adopted by him. The Authorised Representative(AR) contended that commercial arrangement for services availed could not be questioned while benchmarking international transaction, that TP adjustment could only be made by adopting one of the five methods, that bundled approach under TNMM can be used for benchmark - ing, that while deciding the appeal for AY. s. 2002-03 and 2003-04(ITA/428-429/ Mum/2007)the Tribunal had rejected the CUP and considered segmental TNMM as the most appropriate method, that the DRP had rejected the CUP and considered Segmental TNMM as the MAM for the AY. s 06-07, 08-09 and 09- 10, that the TPO had not made any adjustment while deciding the subsequent AY. s 2010-11 to 2012-13. 5. We have heard the rival submissions and perused the material before us. We find that the assessee manufactures FDF. s Nootropil for use in the treatment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length price under section 92C, these criteria, as specified in the Act and the Rules have to form a basis of judging the comparability. Thus there should be a proper analysis of such transactions with respect to, the functions performed, the assets employed and the risk assumed by the respective parties with reference to the transaction in question. This can be termed as functional, asset, risk analysis i. e. FAR analysis. All the three ingredients of FAR have direct bearing on the pricing of products / services. The provision also provides scope for carrying out adjustments in cases where there are some differences or variations to make two transactions commercially comparable, for the purpose of benchmarking. In other words, an uncontrolled transaction selected for benchmarking should be adjusted by employing certain techniques like FAR analysis, to be selected on its peculiar factual matrix, for the purpose of enabling comparison of the same with a controlled international transaction so that the differences or variations are ironed out or minimized. The underlying principle being that only likes can be compared with like. The adjustments are suggested to achieve the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty when compared to the price paid / charged in a controlled transaction. External CUP is a price charged in comparable uncontrolled transactions between third parties when compared to the price of a controlled transaction. However, where CUP method is to be applied on the basis of public data, it is provided in Regulation 1. 482- 3(b)(5) that following requirements must be met : The data is widely and routinely used in ordinary course of business in the industry to negotiate prices for uncontrolled sales. The data is used to set prices in the controlled transaction in the same way that it is used by uncontrolled taxpayers in the industry; and The amount charged in the controlled transaction is adjusted to reflect product and service variations. XXXXXXXXXXXXXXXXX 135. On consideration of the relevant provisions, it is evident that in the process of determining Arm's Length Price, the first important factor to consider is the specific characteristics of services rendered both in the international transaction as also in the uncontrolled transaction. Next important aspect required to be considered is amount of assets employed, risk involved, both in contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket; and differences in the amount and type of intangible property involved in the sale. We find that while adjudicating the appeals for the assessment years 2002-03 and 2003 -04, the Tribunal had rejected the cup method adopted by the TPO, that he had not proposed adjustment in the subsequent years i. e. assessment years 2010-11 to 2012-13. Ground no. 1 is decided against the AO. 6. Next effective Ground of appeal pertains to adjustment on account of allocation of e-connectivity cost. During the course of TP proceedings the TPO found that an amount of ₹ 4, 73, 59, 894/- was debited to the P L A/c towards e-connectivity charges. He directed the assessee to spell out the nature of the expenses and also to reason out as to why the same was not to be treated as capital in nature. The assessee contended that in the earlier years the AO had disallowed expenditure on e-connectivity by treating the same as acquisition for computer software and therefore, capital in nature, that the said expenditure were neither in nature of expenses for acquisition of software nor was it a capital expenditure. 7. Aggrieved by the order of the AO/TPO the assessee filed objections before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost allocation methodology adopted by AE, that the TPO made an adjustment of ₹ 4. 73 crores by determining the ALP as Nil, that he held that the assessee did not furnish copy of the agreement or any proof of requesting for such services, that he further held that assessee did not demonstrate as to how the cost benefited it, that it did not provide any proof of any exact number of users and their allocation, that the DRP called for a remand report from the TPO after admitting additional evidence, that DRP directed the TPO/AO to delete the proposed adjustment. We are of the opinion that TPO is not empowered to determine the ALP of an IT at NIL, that in the case under consideration he had made adjustment without adopting any of the prescribed methods. It is a fact that the assessee had satisfied all the necessary tests for the purpose of availing services from its AE. In these circumstances, we hold that the approach of the assessee in benchmarking the transaction under the head availing e-connectivity services under combined transaction approach was at arm s length. Considering the above, we confirm the order of the DRP and decide ground No. 2 against the AO. ITA/1422/Mum/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ope of contract and reads as under: UCB shall exit the station performed development work on software or new functionalities which shall be offered to UCB company. . A perusal of the above clause of the agreement makes it clear that the assessee had not get any owner s right to any software, server, processes or connections, that the assessee would merely receive services related to the software, that it would costs/charges for uses of the leased line separately, that the parent company would provide the services to the assessee as any other party would provide. We find that the allocation of expenses by the parent company has not been challenged by the AO, that the AO and the DRP had not been able to prove that the expenses were not in nature of periodic charges(annual charges) and were one-time costs. It is also a fact that in case of failure to pay the costs it would not be able to have the benefit of the services. cumulatively, all these facts prove that the assessee had neither acquired any enduring benefit nor did any capital asset came into existence. Here, we would like to refer to the case of Asahi Safety Glass Ltd (346 ITR 329) believed by the Honorable Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all, the extent of the expenditure cannot be a decisive factor in determining its nature. . the rationale supplied by the AO in support of its order which found resonance in submissions of the counsel for the Revenue is, flawed and, hence it would have to be rejected. What the assessee acquired through AA was an application software which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance. The fact that the application software would have to be updated from time to time based on the requirements of the assessee in the context of the advancement of its business and/or its diversification, if any, the changes brought about due to statutory amendments by law or by professional bodies like the ICAI, which are given the responsibility of conceiving and formulating the Accounting Standards from time to time, and perhaps also, by reason of the fact that expenses may have to be incurred on account of corruption of the software due to unintended or intended ingress into the system-ought not give a colour to the expenditure incurred as one expended on capital account. Given the fact that there are myriad factors which may call for expenses to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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