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2016 (6) TMI 557 - ITAT CHENNAI

2016 (6) TMI 557 - ITAT CHENNAI - TMI - Transfer pricing adjustment - relevancy of method adopted by the Transfer Pricing Officer for disallowing the claim of the assessee - adoption of transfer pricing study made by the assessee - Held that:- Transfer Pricing Officer called for the details relating to services rendered by the Associate Enterprise item-wise along with costs incurred by the Associate Enterprise. Without examining further the services rendered by the Associate Enterprise, the Tran .....

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s. In the absence of any comparison of the transaction with transaction carried out in a uncontrolled market, this Tribunal is of the considered opinion that the Transfer Pricing Officer cannot independently come to a conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The matter may be totally different if the Transfer Pricing Officer was able to identify the uncontrolled transaction between the enterprises entering into such transaction whic .....

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10B(c) provides for method of determining the Arm's Length Price. This Tribunal is of the considered opinion that estimation of the services rendered and costs for such services may be outside the scope of transfer pricing adjustment. Without identifying the comparable cases, this Tribunal is of the considered opinion that estimation of the disallowance without any base is not called for. Therefore, the Dispute Resolution Panel has rightly upheld the transfer pricing study made by the assessee. .....

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nue is directed against the order of the order of the Assessing Officer, consequent to the direction of the Dispute Resolution Panel, Chennai, dated 20.12.2013 and pertains to assessment year 2009-10. 2. Smt. Vijayalakshmi, the Ld. Departmental Representative, submitted that the assessee is engaged in the business of manufacturing and sale of industrial fans. Flakt Woods (Luxembourg) is the holding company of the assessee-company. The ultimate holding company of the group is Stromboli Investment .....

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found that the management fee paid by the assessee, consisting of several subclassification, which needs to be analysed item-wise for determination of arm's length price, which method involves study of technical services received by the assessee and also analysis whether such services demand huge payment. After considering the reply given by the assessee to show cause notice issued, the Transfer Pricing Officer found that the CUP method may the most appropriate method for making transfer pri .....

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icing Officer found that only 25% of total amount paid towards management fee could be allowed. Accordingly, the Ld. D.R. submitted that the Transfer Pricing Officer found a sum of 2,05,11,061/- was to be disallowed and accordingly a downward adjustment of 6,15,33,183/- was made. 3. The Ld. Departmental Representative further submitted that when the matter was referred to the Dispute Resolution Panel, the Dispute Resolution Panel found that though theoretically Transaction Net Margin Method was .....

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g to the Ld. D.R., the Transfer Pricing Officer has rightly disallowed 25% of the payment. The Ld. D.R. has also placed her reliance on the Delhi Bench of this Tribunal in Knorr Bremse India Ltd. (56 SOT 349). 4. On the contrary, Shri Kapil Hirani, the Ld. representative for the assessee, submitted that the services rendered by the Associate Enterprise to the assessee-company is not in dispute. In fact, this was accepted by the Transfer Pricing Officer and the Dispute Resolution Panel. The only .....

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Resolution Panel. According to the Ld. representative, determination of Arm's Length Price should be based on comparison with comparable uncontrolled price. The value of the service rendered by Associate Enterprise should be determined based on comparison of comparable services and there is no question of estimation of the value. The Transfer Pricing Officer has not made clear how he was able to estimate the management service fee at 25% of the claim made by the assessee. According to the L .....

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record. Rule 10B of Income-tax Rules, 1962 provides for method of determining the arm's length price under Section 92C of the Income-tax Act, 1961 (in short 'the Act'). The assessee has adopted Transaction Net Margin Method as most appropriate method for the purpose of transfer pricing adjustment. For the purpose of Transaction Net Margin Method, the net profit margin realized by the enterprises from international transaction entered with Associate Enterprise, is computed in relatio .....

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ferred or services provided in a comparable uncontrolled transaction or a number of such transactions identified has to be compared with the price paid by the assessee for the services rendered by the Associate Enterprise. Such a price is adjusted to account for differences, if any, between international transaction and comparable uncontrolled transaction or between the enterprises entering into such transactions which will materially affect the price in the open market. The adjusted price so ar .....

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. 7. In the case of Transaction Net Margin Method also, the net profit margin realized by the enterprise or by an unrelated enterprise in an uncontrolled transaction has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transaction, which could materially affect the amount of net profit margin. Therefore, in both the cases, the comparison has to be made with uncontrolled transaction identified with regard to similar .....

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t by adopting CUP method, the Transfer Pricing Officer has not taken any pain for identifying the comparable uncontrolled transaction. Without identifying the comparable uncontrolled transaction, the Transfer Pricing Officer simply found that the quality and volume of the services received by the assessee would not commensurate with the payment made by the assessee. For making this observation, the Transfer Pricing Officer placed his reliance on the decision of Bangalore Bench of this Tribunal i .....

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e along with costs incurred by the Associate Enterprise. Without examining further the services rendered by the Associate Enterprise, the Transfer Pricing Officer has simply observed that the services rendered are advice and discussion in nature, therefore, volume and quality of services are disproportionate to the payment made by the assessee. It is not known how the Transfer Pricing Officer came to know that the volume and quality of services received by the assessee was disproportionate to it .....

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