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2016 (5) TMI 862 - ITAT MUMBAI

2016 (5) TMI 862 - ITAT MUMBAI - TMI - Rejection of CUP as most appropriate method for determining ALP - Held that:- 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. - Decided against revenue

Adjustment on account of allocation of e-connectivity cost - TPA - Held that:- The assessee .....

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ed 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 .....

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der combined transaction approach was at armís 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 running of its business without creating any asset and therefore same is allowable as revenue expenditure. - Decided in favour of assessee - I. T. A. 1218/ .....

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manufacturing and trading of pharmaceutical products, filed its return of income on 30. 9. 2007, declaring total income of ₹ 18. 47 crores. During the assessment proceedings, the AO found that the assessee had entered into International Transactions (IT. s)with its Associated Enterprises(AE). So, he made a reference to the Transfer Pricing Officer (TPO) to determine the Arm s Length Price(ALP) of such transactions. After receiving the order of the TPO the AO issued a draft order to the ass .....

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B SA, Belgium, that it had imported API. s(including Piracetam)from its AE. s for manufacture and sale of (Finished Drug Formula - tion) FDF. s in India, that it had benchmarked the transaction using transactional net margin method(TNMM), that the value of IT was ₹ 5. 80 crores, that the operating margin on revenue was claimed to be at 16. 53%, that the operating margin of the comparables claimed to be at 16. 31%. The assessee claimed that the operating margin was higher than that of the c .....

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e 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 .....

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a product that was the same and identical in all respects to the IT being compared, that the sample invoice obtained by the TPO, u/s. 133(6) of the Act, did not disclose crucial parameters such as purity standards, quantity of production and sales manufacturing process and efficacy of products etc. so as to enable a valid comparison. After considering the submission of the assessee and the order of the TPO/AO the DRP held that the TPO had not made available any information about the uncontrolled .....

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03-04 had rejected the similar CUP adopted by the department, that the Tribunal had found that the TNMM applied by the assessee at the entity level was not correct, that for the period under consideration it had conducted its TP study at the Segmental level, that the observation of the TPO that the facts for the period under appeal were different to those of the earlier years was not appropriate, that the patent of the API had expired even before AY. 2002-03, that the assessee had placed relian .....

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he 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 .....

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. 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 Central Nervous System Disorders, that it is manufactured from the API Piracetam which is purchased by the assessee only from its AE, that the AE does not sell Piracetam to any other entity in India, that the assessee benchmarked its IT. s by following TNMM for computation of ALP, that the Profit Level Indicator(PLI .....

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PI i. e. Piracetam from a Chinese manufacturer at average price of 423. 53 per Kg as against assessee s import price of 1, 334. 59 /kg. Accordingly, the TPO computed the difference and proposed an adjustment of ₹ 2. 58 crores, that the assessee objected that adoption of external CUP, that the DRP directed to delete the adjustment proposed by the TPO. Whether MLL was similar to the assessee as per the FAR analysis was not proved by him. The quality, potency and other parameters of purchase .....

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nd accurate adjustment. If the method is unable to achieve the said goal, it has to be rejected. In the case of Aztec Software And Technology(107 ITD 141), the Tribunal has dealt the issue of use of CUP method as under: 116. Meaning of Arm's Length Price is given in Clause (ii) of Section 92F as under: 92F (ii)"Arm's Length Price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled condition .....

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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, f .....

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there might not be a possibility of adjustment. This is a very subjective exercise and fact based. XXXXXXXXXXXXXXXXX 119. The various methods are now discussed hereunder: (a) Comparable uncontrolled price method (CUP): CUP is described in Rule 10B(a) as follows: (a) Comparable uncontrolled price method, by which, - (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price .....

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service. This is essentially comparison of prices charged for the property or services transferred in a controlled transaction to a price charged for property or services transferred in a comparable uncontrolled transaction. The bedrock of this method is the identification of an identical transaction, in a situation where a price is charged for products or services between unrelated parties. While applying CUP the comparability between controlled and uncontrolled transactions should not be only .....

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P is the price that the assessee has paid/charged in a comparable uncontrolled transaction with an independent party 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 .....

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gth 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 controlled and uncontrolled transactions. If there are such differences between transactions taken for comparison, which are likely to affect the price or cost charge etc in the open market then reasonable and accurat .....

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ropriate method would be the method which provides most reasonable results having regard to the data available for determining arm's length price. If there are more than one ALPs determined on the application of most appropriate method then arithmetical mean of such prices or price at option of the assessee within 5% variation is to be adopted (Proviso to section 92C(2) ). XXXXXXXXXXXXXXXXX 166. Regarding application of CUP method, OECD reports in para 303 of International Transfer Pricing, .....

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se of this method, possibly working with data prepared for CUP purposes supplemented by other appropriate methods. The extent of the OECD's support for the CUP method can be seen from the comment that 'every effort should be made to adjust the data so that it may be used appropriately in a CUP method'. 167. In the same publication and with reference to OECD reports, the various difficulties which are felt while making adjustment or adjustments are made impossible are stated to be on .....

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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 yea .....

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rovided by the AE to the assessee (pg-121-125 of the PB)ii)Incident Log providing list of company received by the employee of the assessee (PB126-136);(iii) certificate from the auditor, verifying the allocation Key and cost allocated to the assessee(pg. 137- 143PB). The DRP sent those evidences to the TPO for examination. During the remand proceedings the assessee made further submissions before him. The assessee filed rebuttal before the DRP after receiving a copy of the Remand Report. The DRP .....

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centralise the acquisition of the concerned services by the AE, that the cost of such acquisition was allocated to all the entities of the ground based on uses of such services made by each of them, that the pricing of intra group services were fixed as per the OCED guidelines, that the operating margin earned by the assessee was at arm s length, that the cost allocated to it by its AE would also come within the category of being arm s length. The DRP directed the AO to delete the TP adjustment .....

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AE. s to the assessee on the basis of number of users, that the Operating margin of the assessee from all other transaction was higher than of the comparables, that the assessee claimed that transaction was at Arm s Length because of the 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 h .....

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ds. 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/2009: 10. Solitary ground of appeal raised by the assessee deals w .....

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me should be capitalised in the books of account he allowed depreciation @ 60% and treated the expenses as being incurred for acquisition of software. The DRP, while dealing with the objections upheld the order of the TPO. 11. Before us, the AR contended that the expenditure incurred by the assessee enabled the profit-making structure to work more efficiently leaving the source of profit-making structure untouched, that the expenditure was a revenue expenditure, that fine tuning business operati .....

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ent company annually for providing the e-connectivity and system services i. e. SAP services, e-connectivity services and People Soft services, that the AO held that the said expenditure was incurred for acquisition of software, he futher held that the assessee was not in the business of software and that it was acquiring of the connectivity and information system service to support its pharmaceutical business, that it was a capital expenditure, that he allowed depreciation at the rate of 60% on .....

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f 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 .....

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able Delhi High Court and same reads as under: It is now somewhat trite to say that the test of enduring benefit is not a certain or a conclusive test which the Courts can apply almost by rote. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation of fixed capital for the assessee. It is important to bear in mind that what is required to be seen is not whether the advantage obtained lasts forever but whether the expense incu .....

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ofitably, leaving the fixed assets untouched would be an expenditure in the nature of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage would thus collapse in such like cases. It would be only truer in cases which deal with technology and software application, which do not in any manner supplant the source of income or add to the fixed capital of the assessee. The Tribunal, which is decidedly the final fact-finding authority ha .....

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e. The Tribunal classified the said expenses as being recurring in nature to upgrade and/or to run the system. In the background of the aforementioned findings, it cannot be said that the expenses brought about an enduring benefit to the assessee. The AO was perhaps swayed by the fact that in the succeeding financial year, i. e. , 1997-98 (asst. yr. 1998- 99), the amount spent was large. First of all, the extent of the expenditure cannot be a decisive factor in determining its nature. …. .....

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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 expen .....

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