TMI Blog2016 (8) TMI 950X X X X Extracts X X X X X X X X Extracts X X X X ..... cy at Nil. On the contrary, the assessee explained the benefits received by it on account of the services received from AE. As regards to the application of method for determining the Arm’s Length Price, we are of the view that the method to be used to determine arm’s length price for intra-group services should be in accordance with the guidelines in Chapter-I, II & III of the “OECD Transfer Pricing Guidelines” which provides the various methods to be applied and the CUP method is likely to be a most appropriate method where there is a comparable service provided between independent enterprises in the recipient’s market or by the AEs providing the services to an independent enterprise in comparable circumstances. In the present case, the TPO although applied the CUP method but nothing was brought on record to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. He also did not bring on record any instance where comparable services were provided to an independent enterprise in the recipient market. Therefore, in our opinion, in the assessee’s case the CUP method was not the most appropriate method. On the contrary, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-after referred to as DRP'). The appeal is preferred on the following grounds: On the facts and in the circumstances of the case and in law, the learned AO based on directions of DRP: General 1. erred in assessing the total income at ₹ 153,342,630/- as against total income of ₹ 124,680,920/- computed by the Appellant. 2. The AO, based on the order passed by the Additional Commissioner of Income Tax, Transfer Pricing Officer-I(3) ('here-in-after referred to as 'learned TPO') under section 92CA(3) of the Income Tax Act, 1961 ( the Act ), erred on the facts and circumstances of the case and in law in making adjustment of ₹ 34,967,980 to the total income of the appellant (before providing credit of ₹ 6,306,274, pursuant to DRP's directions, on account of the professional consultancy charges and management fees suo-moto disallowed by the Appellant in the computation of income) under section 92CA(4) of the Act. The AO made the aforesaid adjustment on account of adjustment in arm's length price of the international transaction involving receipt of professional consultancy services, management services an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Price ('CUP') method as the most appropriate method for determining the arm's length price in respect of the appellant's international transaction without identifying any comparable uncontrolled transaction(s) for the computation of the ALP. 8. erred in law by upholding the determination the ALP of the international transaction as NIL without following the manner of applying the CUP method prescribed under Rule 10B(1)(a) of the Income Tax Rules, 1962. Transfer pricing adjustment based on incorrect assumptions 9. erred in passing an order that is perverse in law when he ignored the relevant submissions, information and documents provided by the Appellant to substantiate the receipt of services, and based on a preoccupied mind reached at an inappropriate conclusion that the arm's length value of the impugned transactions should be Nil. 10. erred in questioning the commercial rationale of the legitimate business expenses incurred by the taxpayer and not restricting the scope of assessment under section 92CA to determining the arm's length price of the international transaction by adopting one of the prescribed methods only. 11. er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92CA(1) of the Act. Subsequently, the TPO passed the order u/s 92CA(3) of the Act on 31.10.2011 by proposing an adjustment of ₹ 3,63,83,675/- attributable to difference in Arm s Length Price of the international transactions entered by the assessee with AEs. The TPO noticed that various international transactions undertaken by the assessee with its AEs were as under: - No. Nature of Transaction Amount (Rs, in Crores) Method of Benchmarking Received/ Receivable Paid/ Payable 1 Purchase of raw material consumables 193,900,264 Transactional Net Margin Method ('TNMM') 2 Sale of finished goods 131,609,573 3 Purchase of finished goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin of six comparable companies using three years financial data at 3.96% and claimed that the major international transactions were at Arm s Length Price. For reimbursement of expenses, the assessee stated that those were actual cost incurred by group companies and the same were reimbursed to the group companies on the basis of actual cost. The assessee linked the payment of professional consultancy to the manufacturing segment and benchmarked under TNMM. As regards to the import of capital items, the assessee stated that the depreciation charge with respect to those items was included as operating expenses in respective manufacturing/distribution segment and the transaction had been benchmarked under TNMM as the most appropriate method. The assessee also claimed the transaction relating to payment of License fees in advance in the nature of advance which had not been bench marked. As regards to the payment of SAP charges, it was stated that the said amount was with respect to provision of training charges in connection with SAP through employees of the assessee and those transactions had been included in capital work-in-progress which did not impact the income/expenses of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke a claim that its clientele has actually increased pursuant to the payment of Business Service . He accordingly proposed the following additions: Professional consultancy 16,637,947 Debited to Profit Loss Account Management feefor support services 16,206,492 SAP consultancy charges and other expenses 3,539,236 Capitalized in Fixed asset schedule Total 3,63,83,675 8. On the basis of the order of the TPO the AO passed draft assessment order by making an addition of ₹ 3,28,44,439/- on account of professional consultancy and management fee for support services. However, the AO in respect of SAP consultancy charges proposed by the TPO allowed 60% depreciation and disallowed a sum of ₹ 21,23,541/- (60% of SAP consultancy charges and other expenses amounting to ₹ 35,39,236/- paid to AEs). The assessee being aggrieved by the draft assessment order filed an application before the ld. DRP and submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultancy charges paid on account of management fee for support services. 11. Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the assessee during the course of hearing before the TPO, explained each and every issue raised by him and submitted not only explanation but also evidences in support of the services availed by it on account of professional as well as management from its AEs. But the TPO despite the comprehensive details and evidences still drew adverse inference and proposed the impugned adjustment. It was further submitted that the assessee again before the ld. DRP clarified each and every issue on which the TPO had drawn adverse inference but the ld. DRP not only ignored the explanation and evidences but also clarification on each and every issue, given by the assessee in respect of both the services. A reference was made to page nos. 44 to 56 of the appeal folder filed by the assessee in respect of the management support services. It was contended that the assessee by availing the services from the AE was benefited as per following details: Increase in Exports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said order dated 06.11.2015 was furnished which is placed on record). It was also pointed out that the cost paid by the assessee in relation to the services under consideration was nothing but the cost for improvement of its production processes and had it availed such services from third party, it would have incurred almost the same costs and if the assessee would have engaged its own employees to do such work, it would have paid them atleast the specific cost attributable to such services. It was stated that the AE, in fact, was merely recovering the cost from the assessee and had not earned any mark-up. Therefore, the observation of the TPO that there was no increase in the profit of the assessee by making the payment for these services was not correct because there was a regular increase in the gross profit of the assessee. It was stated that the assessee had clearly established that there had been any increase of over 600% in the export sales from 2007 to 2009 and gross margin of the assessee had also doubled during this period and the said increase of 600% in exports and 100% in the profits, could not have been said to be normal by any stretch of imagination as alleged by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following case laws: M/s Gem Plus India Pvt. Ltd. Vs ACIT reported at (2010) TII 55 ITAT (Bang) (TP) Cranes Software International Ltd. Vs DCIT (2014) 52 Taxmann.com 19 (Bang. Trib.) CIT Vs M/s Cushman and Wakefield in ITA 475/2012 order dated 23.05.2014 Bombardier Transportation India Pvt. Ltd. Vs DCIT in ITA No. 1626/Del/2015 order dated 04.11.2015 14. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is not in dispute that the assessee made the payments to its AE for the services on account of professional consultancy management fee for support services. The assessee also purchased raw material and consumable, finished goods and imported capital items. The TPO proposed the adjustment on account of Arm s Length Price in professional consultancy and management fee. The claim of the assessee was that the service charges were paid in respect of the services availed from the AE which were the actual expenditure incurred by the AE and no element of profit was involved. The assessee furnished the various details relating to segmental account, detail of recovery of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent business models, theories and ventures. The aim indeed is to further the business, to enhance their profits. So long as that is the aim, it is sufficient for the purpose of the Income Tax Act. In a given case, profit may not even be the motive. Even so it would not indicate that the transactions in question are not at an arm s length price. Whether a transaction is entered into at an arm s length price or not must depend upon the facts of each case relating to the transaction per se, i.e., the transaction itself. Profit is only a possibility and a desired result with or without the aid of an international transaction. Every business venture is not necessarily profitable or successful. All business ventures do not succeed equally or uniformally. Indeed, if an assessee is able to establish financial or other commercial benefits arising from a transaction, it would further strengthen its case. But if it cannot do so, it does not weaken it. 16. From the above observation it is clear that as to whether a transaction is entered into at an Arm s Length Price or not must depend upon the facts of each case relating to the transaction per-se, that is the transaction itself and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from its Associated Enterprises in respect of its projects with Indian Railways and Metro. It was explained that the assessee company does not have any in- house research team and does not have the requisite knowhow and accordingly sought support of its Associated Enterprises in respect of following:- a) To avoid derailing of rails which was a challenge being faced by the India Railway. b) Oil free compressor project which it has obtained from its Associated Enterprises for Indian Railways. The assessee company has also submitted evidences substantiating receipt of localization support and the allocation of the cost. Therefore, the internal data was very helpful particularly when the allocation key was based on cost accounting system. The assessee explained that there was strong co-relation between the creation of the profit and the time spent by the employees of the AE. The assessee also furnished task sheets to the TPO to substantiate that the services were provided by the AE with a vision to decrease direct purchases cost of the assessee which is evident from the submissions of the assessee dated 04.08.2011 (copies of which are placed at page nos. 76 to 166 of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of arm s length value of professional consultancy at Nil. On the contrary, the assessee explained the benefits received by it on account of the services received from AE. 18. As regards to the application of method for determining the Arm s Length Price, we are of the view that the method to be used to determine arm s length price for intra-group services should be in accordance with the guidelines in Chapter-I, II III of the OECD Transfer Pricing Guidelines which provides the various methods to be applied and the CUP method is likely to be a most appropriate method where there is a comparable service provided between independent enterprises in the recipient s market or by the AEs providing the services to an independent enterprise in comparable circumstances. In the present case, the TPO although applied the CUP method but nothing was brought on record to substantiate that the AE provided the similar services to an independent enterprise in comparable circumstances. He also did not bring on record any instance where comparable services were provided to an independent enterprise in the recipient market. Therefore, in our opinion, in the assessee s case the CUP method w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Bombardier Transportation India Pvt. Ltd. Vs DCIT (supra), the assessee just explained in generic nature about the benefits vis- -vis the intra-group services payment to its AEs and the adjustment made was upheld by. In the present case, the assessee had not explained the services provided by the AEs in generic nature rather the assessee filed detailed evidence and explained about the specific services provided by the AEs alongwith evidences. Therefore, this case is also distinguishable 22. The next issue vide Ground Nos. 3, 4 5 relates to the adjustment of ₹ 21,23,541/- on account of 60% depreciation on the SAP consultancy and other expenses. 23. The facts related to this issue in brief are that the assessee claimed 60% depreciation on SAP consultancy charges and other expenses amounting to ₹ 35,39,236/- paid to its associated enterprises. The assessee capitalized the SAP consultancy fees and other expenses. The assessee also filed the details regarding the SAP logistic and services vide submission dated 18.10.2010, 19.10.2010 and 22.06.2011. The TPO observed that since the depreciation was being claimed and charged to P L A/c by the assessee, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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