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2016 (8) TMI 62 - ITAT DELHI

2016 (8) TMI 62 - ITAT DELHI - TMI - Transfer pricing adjustment - intra group services - ALP adjustment - Held that:- In the light of the factual position coupled with the relief granted by the DRP on the ALP adjustment in the mark-up rate of the cost plus basis billing to the AE in respect of revenues for the IT enabled services, and in the light of the provisions of section 92(3), the transfer pricing provisions cannot be invoked in respect of intra group services, which admittedly form part .....

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not permit computation of income on the basis of armís length price in such a situation; as a matter of fact, it prohibits application of armís length principle in such a situation. - Decided in favour of assessee. - I.T.A. No. 1085/Del/2016 - Dated:- 25-7-2016 - Pramod Kumar AM And Beena A Pillai JM Nageshwar Rao and Sandeep S Karthik for the appellant Amrendra Kumar, for the respondent ORDER Per Pramod Kumar, AM: 1. This appeal, filed by the assessee, is directed against the order dated 27th .....

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the sake of completeness, however, grounds of appeal, as set out in the memorandum of appeal, are as follows: 1 That on facts and in law, the order passed by the Additional Commissioner of Income Tax, Transfer Pricing Officer-2(2), New Delhi ('Learned TPO'), the final assessment order passed by the Deputy Commissioner of Income Tax, Circle 16(2), New Delhi ('Learned AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel -1, New DRP ("Hon'ble DRP&quo .....

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rm's Length Price ('ALP') of the international transactions pertaining to receipt of management support services ("impugned transaction"). 4 That on facts of the case and in law, the DRP/TPO/AO have erred in benchmarking the impugned transaction on an standalone basis and rejected the combined transaction approach adopted by the Appellant to benchmark the said impugned transaction wherein the Appellant considered the Transactional Net Margin Method ('TNMM') as the m .....

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ated enterprises and arbitrarily determined the arm's length price of payment of intra group services to certain associated enterprises as 'Nil . d. by contending that an independent service recipient would be willing to pay for a service only upon receipt of certain tangible benefit. e. by disregarding last year approach of accepting the TP analysis carried out by the Appellant for the same transactions in AY 2010-11 f. in failing to understand that payment made to associated enterprise .....

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rposes of business and directing the learned AO to alternatively disallow such expenditure under section 37(1) of the Act arbitrarily and without providing any opportunity of being heard to the Appellant. 7 That on facts of the case and in law, the AO/DRP/TPO erred in not upholding detailed economic analysis carried out in appellant's TP study relating to various international transactions and rejecting/ substituting /adding new basis and process, without citing valid reasons. 8 The DRP/TPO/ .....

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utory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length price. 10 That on facts of the case and in law, the AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act in relation to transfer pricing adjustment. 11 That on the facts and circumstances of the case and in law, .....

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e in appeal lies in a rather narrow compass of material facts. The assessee before us is a company incorporated in India and is a wholly owned subsidiary of Mercer Mauritius Limited. The assesse is rendering various IT enabled services to its AEs. During the relevant previous year, the assessee entered into several international transactions with its AEs, including the receipt of management support services for which a consideration of ₹ 8,40,95,610 was paid by the assessee. As we deal wit .....

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1.20 from its AE. Coming back to the proceedings before the Transfer Pricing Officer, the TPO made the ALP adjustment, inter alia, for the IT enabled services by adopting an ALP margin of 29.53% as against margin of 20% adopted by the assessee. The adjustment so made out was quantified at ₹ 13,24,13,508. The TPO also concluded that so far as the intra group services received by the assessee are concerned, the ALP value of the same was NIL. Accordingly, an ALP of ₹ 8,40,95,610 was mad .....

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s the DRP observed that the taxpayer s objection that intragroup services having been reduced to zero should be reduced from the operational cost in computing OP/TC margin is valid, and the TPO is directed to compute the margin consistently with the treatment accorded to intragroup services and added that however, this is subject to the caveat that should the appellate authorities, subsequently, allow the intra group services as operational cost, the OP/OC margin need to be revisited and consequ .....

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rused the material on record and duly considered facts of the case in the light of the applicable legal position. 5. As a corollary to the ALP of the intra group services received by the assessee being treated as NIL, the price paid for these intra group services is required to be taken out from the computation of remuneration receivable in respect of IT enabled services rendered by the assessee. This is so for the reason that the pricing of IT enabled services is on the cost plus 20% basis, whi .....

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, due to increase in the mark-up rate, ALP of the services rendered could still be higher vis-àvis the amount chargeable after including intra group services in the cost base. Once DRP deletes the adjustment in the mark-up rate on cost plus basis, such a possibility ceases to exist. Therefore, in the present circumstances, any ALP adjustment in the consideration for intra group service, which is includible in the cost base, paid by the assessee will actually result in erosion of tax base. .....

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ite clear and categorical in this regard. It states that (t)he provisions of this section shall not apply in a case where the computation of income under sub-section (1)…………has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into . Section 92(1), in turn, states that (a)ny incom .....

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group service at NIL value does lower the profits of the assessee inasmuch as the revenue of the assessee from the IT enabled services will reduce correspondingly, and infact 20% more than the adjustment- as a result of loss of mark up as well. The ALP adjustment of ₹ 8,40,95,610 by the revenue authorities is, therefore, essentially required to be coupled with reduction of 10,09,14,732. That would erode our tax base, rather than augmenting it. The computation of income from international .....

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