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GE Money Financial Services Pvt. Ltd., Versus DCIT, Circle-12 (1) , New Delhi.

2016 (7) TMI 1396 - DELHI HIGH COURT

TPA - computation of ALP - transactions of intra-group services - Held that:- Obligation under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly determined as stipulated. The contention, that the foreign AE be considered as a tested party and then foreign companies be considered as comparable for determining the ALP of the international transaction, having no statutory sanction, is sans merit .....

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rect that the assessee itself should be considered as a tested party. - In doing the exercise of determination of the ALP, the TPO/AO, having due regard to the discussion made above, will first adopt the assessee as tested party and then decide about the most appropriate method after considering the availability of the relevant data. Needless to say, the assessee will be allowed a reasonable opportunity of being heard. - Disallowance by denying depreciation in respect of vehicles given o .....

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Gautam Swarup And Shri Siddhartha Singh, Advocates For the Department : Shri H.K. Choudhary, CIT, DR ORDER PER R.S. SYAL, AM: This appeal by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called the Act ) on 09.01.2014 in relation to the assessment year 2009-10. 2. The first issue is against addition of ₹ 25,79,63,344/- on account of transfer pricing adjustment. .....

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value of ₹ 47,32,071/-. The assessee applied Transactional Net Margin Method (TNMM) as the most appropriate method and chose foreign AE as a tested party. That is how, it was shown that these international transactions were at arm s length price (ALP). The Assessing Officer (AO) referred the determination of ALP of the international transactions to the Transfer Pricing Officer (TPO), who held that the assessee should have taken itself as a tested party instead of foreign AE and further th .....

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ld that either there was no need to avail them or they were either duplicate or of no benefit to the assessee. The TPO also did not approve the assessee s selection of its foreign AE as tested party and use of foreign comparables. By relying on certain decisions, the TPO held that the CUP method was to be applied as the most appropriate method instead of the TNMM and since there was either no benefit to the assessee or such services were either not rendered or amounted to duplication, the ALP of .....

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the ld. AR submitted that similar additions were made by the AO in his orders for the assessment years 2006-07 to 2008- 09 pursuant to the TPO computing Nil ALP of the international transaction of intra group services. Taking us through the relevant parts of the Tribunal order for these years, the ld. AR contended that the Tribunal has accepted that the assessee received the services from its AEs which were duly rendered and there was no duplication of any services. He submitted that the Tribun .....

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ted party and selection of the CUP as the most appropriate method is in order. 5. We have heard the rival submissions and perused the material on record. The first question is about the determination of the fact as to whether any services were received by the assessee for which the payment was made. In this regard, it is noticed that the assessee entered into an Agreement dated 1.1.2006 with its AE, a copy of which is available from page 743 onwards of the paper book, under which it received Acc .....

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services. These three Agreements entered into by the assessee with its AEs in earlier years remained operative for the preceding three years and the instant year as well. The Tribunal in its order for the A.Ys. 2006-07 to 2008-09 has analysed the services received by the assessee pursuant to these three Agreements and has come to the conclusion that these services were required by the assessee (need test); these services were rendered by the AEs (rendition test); these services were not duplicat .....

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received by the assessee in immediately preceding three assessment years, for which the Tribunal has held that the assessee availed the services which were required and were not duplicative in nature. The ld. DR could not point out that the documents contained in four paper books detailing the services received and other relevant aspects concerning the receipt of services were different from the earlier years, on whose strength the Tribunal has admitted the fact of rendition of services by the A .....

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called benefit test is totally irrelevant in this context. Once the factum of receipt of services is proved, the TPO/AO cannot correlate it with the benefit actually derived. It is not necessary that every service availed must give concrete benefit to the assessee. Sometimes, a businessman also incurs losses, which is a normal feature. The AO cannot say that since the assessee suffered losses in carrying on business or no significant benefit was derived, he will not allow deduction of the expen .....

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e is availed from foreign AE as well. To illustrate, if the assessee is maintaining its accounts in India and similar accounts are also got maintained by the foreign AE for and on behalf of the assessee, then, of course, the maintenance of accounts by the foreign AE will be a duplicate service, which will require the determination of ALP at Nil. If on the other hand, the assessee, despite the availability of accounting service in India, opts to get its accounts maintained by the foreign AE and p .....

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it does not assume the character of a duplicate service. To put it simply, before characterizing any payment for duplicate service, the TPO/AO must expressly and positively prove that the assessee paid twice for similar service. Once the services are actually availed by the assessee in a bona fide manner, which are not duplicate as discussed above, the only thing which the AO/TPO can do is to find out if the quid pro quo for such payment is commensurate with the payment for similar services mad .....

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cannot countenance the action of the authorities below. In view of the foregoing discussion, we hold that the assessee did avail the services for which it made payment to its AE. 7. Having held that the assessee received intra-group services from its AEs, the next question is the determination of their ALP. There are certain aspects concerning the determination of the ALP of such intra group services in the instant case, namely, selection of tested party, selection of the most appropriate metho .....

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e TPO. However, the ld. AR insisted that the selection of tested party be decided independently in the current proceedings. It was submitted that similar services were provided by the foreign AE to other AEs across the globe, hence, the foreign AE should be considered as a tested party having undertaken the least complex transaction. Crux of the argument is that the assessee is following the TNMM as the most appropriate method and since the profit rate earned by its foreign AE from the services .....

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nder these international transactions was at ALP. As can be noticed from the Transfer pricing study report, the relevant parts of which have been reproduced in the order of the TPO, that the assessee is harping on selection of its AE as tested party. We have to decide as to whether the selection of the foreign AE as tested party is correct in the Indian context. 10. For this purpose, we need to visit the provisions of the Chapter X of the Act with the caption "Special Provisions Relating to .....

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tion between two or more associated enterprises, either or both of whom are non-residents, in the nature of …. or provision of services, or ………….. . The methodology for computation of arm s length price of an international transaction has been set out in section 92C(1) to be as per any of the prescribed methods, including the TNMM method. This method was used by the assessee as the most appropriate method, which has been disputed by the TPO. Sub-section (3) of .....

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action in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him . Rule 10B dealing with the determination of arm s length price under section 92C provides through sub-rule (1) that for the purposes of sub-section (2) of section 92C, the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method. The mechanism for determining ALP under TNMM has .....

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s is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and ref .....

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red to be determined at ALP; thirdly, the ALP in respect of such international transaction should be determined by one of the prescribed methods, which also includes the TNMM. Under this method, the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base, which is then compa .....

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the profit B. If it is not, then, an addition on account of transfer pricing adjustment, subject to other provisions, is made in the hands of the assessee having regard to the difference between the rates of profit A and profit B. The rate of profit of comparable cases (profit B) may be computed from internally or externally comparable cases, depending upon the FAR analysis and the facts and circumstances of each case. Thus the calculation of profit B may undergo change with the varying set of c .....

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transaction, that is, a transaction between the associated enterprises. So, under the TNMM, it is the profit margin realized by the Indian assessee from the transaction with its foreign AE, which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise with the profit realized by the foreign AE for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. Scope of tran .....

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ch fact is ensured by determining ALP of the international transaction. If foreign AE has in fact charged more, then its profit rate will shoot up and the corresponding profit of the Indian enterprise will be squeezed. In that situation, a comparison of the profit rate of the foreign AE will run contrary to the mandate of the provisions. Whereas, we were required to determine if the profit charged by the foreign AE is not more than that charged by uncontrolled comparables by seeing the profit ra .....

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matter is that it is the profit margin of the Indian enterprise and not that of the foreign AE, which should be compared with the comparables to see if any increase in the total income of the enterprise chargeable to tax in India, is warranted on account of transfer pricing adjustment. The contention of the ld. AR for considering the profit of the foreign AE as profit A for the purposes of comparison with profit of comparables, being profit B , to determine the ALP of transaction between the as .....

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12. The Hon ble jurisdictional High Court in ChrysCapital Investment Advisors (India) P. Ltd. VS. DCIT (2015) 376 ITR 183 (Del) has held that : Thus, the Courts are primarily bound by the law on the subject in India; if the law is clear and unambiguous, there is no question of resorting to extrinsic sources. The only rider is that if the terms of such conventions or treaties are similar to the law applicable in India, courts may consider precedents in that regard; however those are only of pers .....

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the provisions of the Act are supreme and hence should not be compromised. 13. Coming back to the context, we find that the obligation under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly determined as stipulated. The contention, that the foreign AE be considered as a tested party and then foreign companies be considered as comparable for determining the ALP of the international transactio .....

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rm in which it was put forth before us. He submitted that the transaction of foreign AE is least complex as the data of foreign comparables companies is accurate for comparison which can be used with minimal adjustments. On a pointed query, the ld. AR took us through page 360 of the paper book, which is a part of its transfer pricing report, indicating that the foreign AE charged mark-up between 3.70% to 11% depending upon the nature of services. On a further query, he took us through page 385 o .....

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Diamond Management & Technl 2007 11.24% 7. Duff & Phelps Corp 2007 0.64% 8. Franklin Cnvey Co. 2007 2.17% 9. FTI Consulting Inc. 2007 22.97% 10. Hackett Group Inc. 2007 3.74% 11. Huron Consulting Group Inc. 2007 18.04% 12. ICF International Inc 2007 10.74% 13. Inforte Corp 2007 1.85% 14. LECG Corp 2007 9.67% 15. Navigant Consulting Inc. 2007 12.48% 16. Resources Connection Inc. 2007 13.38% 17. Sierra Systems Group Inc. 2007 6.45% 18. SM & A Corp. 2007 21.56% 19. Thomas Group Inc. 200 .....

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ered comparable to the consulting services provided by the providing entities. These companies may not have appeared in the initial set for consulting services comparable search. This is because these companies may be classified under SIC codes that were not considered comparable for the consulting services search. However, we found no such companies. 17. On going through the mechanism for screening of foreign companies adopted by the assessee as comparable, it clearly emerges that the assessee, .....

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n companies considered as comparable by the assessee are lacking comparability. It is further noticed that the data taken for the 20 companies chosen by the assessee is for the year 2007, whereas we are dealing with the assessment year 2009-10. Further, the ld. AR failed to point out as to how ROTC of these 20 companies was worked out with the mean of 13.23%. Thus, it is evident that apart from making a contention that the foreign AE should be considered as a tested party because of the least co .....

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. AR for selection of foreign AE as a tested party is neither legally sustainable nor acceptable on the yardstick of his own contention. We, therefore, direct that the assessee itself should be considered as a tested party. 19. The next issue is determination of the ALP of such transactions. In the light of the foregoing discussion it is manifest that the view point of the AO/TPO that the assessee did not receive any services or these were not required or were duplicate in nature and hence the A .....

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d foreign companies as comparable, is also vitiated. Under such circumstances, the only course which remains is to direct the TPO/AO to recompute the ALP of the international transaction in terms of the discussion made above. 20. At this juncture, we consider it appropriate to consider the ratio of the judgment in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730 (Del), wherein it has been held that the authority of the TPO is limited to conducting transfer pricing analysis for .....

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ctivities for which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee were not considered, the Hon'ble High Court remanded the matter to file of concerned AO for an ALP assessment by TPO, followed by AO's assessment order in accordance with law considering the deductibility or otherwise as per section 37(1) of the Act. 21. When we advert to the facts of the instant case, it turns out that the TPO proposed the transfer pri .....

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his addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi in Cushman & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of the international transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in .....

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risdictional High Court in the case of Cushman & Wakefield (India) (P.) Ltd.(supra). In doing the exercise of determination of the ALP, the TPO/AO, having due regard to the discussion made above, will first adopt the assessee as tested party and then decide about the most appropriate method after considering the availability of the relevant data. Needless to say, the assessee will be allowed a reasonable opportunity of being heard. 22. The next issue raised in this appeal is against the disa .....

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ctions were, in fact, financial transactions, the assessee relied on the judgment of the Hon ble Supreme Court in the case of ICDS Ltd. vs. CIT (2013) 350 ITR 527 (SC) to contend that it would be entitled to claim depreciation. The AO perused the relevant clauses of lease agreement entered into by the assessee with lessors and found that the vehicles were directly delivered to the lessees who were bearing the insurance and holding warranty and also retaining the right to the exclusion of even th .....

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e assessee failed to establish that depreciation was not claimed by the lessees on the vehicles leased to them and the assessee was evasive on this account and did not disclose the truthful picture despite the fact that various lessees were the assessee s related companies. In reaching this conclusion, the DRP also took into consideration the observations made by the Tribunal in its order passed in the assessee s own case for the AYs 2001-02 and 2002-03, in which the matter was remitted to the f .....

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first time in relation to the assessment years 2000-01 and 2002-03. Vide its order dated 21.6.2013, a copy of which is available on page 2883 onwards of the paper book, the Tribunal considered the contention of the assessee about the applicability of the judgment of the Hon ble Supreme Court in the case of ICDS Ltd. (supra) and held in para 8.2: that the covenants are not identical to the agreement as was under consideration in ICDS Ltd. by Hon ble Supreme Court. Further, we find that Hon ble S .....

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h. The assessee filed miscellaneous application against the order passed by the Tribunal. Vide a detailed order dated 13.1.2014 passed u/s 254(2) in MA No.81 & 82/Del/2013, a copy of which is available at page 2989 onwards, the Tribunal, rejected the assessee s contention that the issue should have been directly decided in the assessee s favour instead of restoration to the AO for examining the claim of depreciation in the hands of the lessees. After the dismissal of the miscellaneous applic .....

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the paper book, dismissed the assessee s contention by holding that the ITAT has eventually remanded the question whether the benefit of depreciation is permissible in law. The contention of the ld. AR about the finding given by the Tribunal in relation to the decision in ICDS Ltd. was also left open to be taken up before the AO in the case of remand proceedings. That is how, the proceedings for the A.Ys. 2000-01 and 2002-03 attained finality. Once again, similar issue came up for consideration .....

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