TMI Blog2018 (5) TMI 900X X X X Extracts X X X X X X X X Extracts X X X X ..... P Method is not applicable to the assessee, is not acceptable. Tested party - Held that:- The Indian TP regulation per chapter X of the Income Tax Act 1961 is an anti-evasion tool to prevent adverse profit shifts. The materiality of examination of the International Transactions has to be in this light. Therefore, the testing has to be done in order to examine if the Indian entity is offering its profits to lawful taxation in India. In order to determine the correct profits by ascertaining correct ALP, the transactions have to be examined by keeping the Indian entity in primary focus. Therefore, keeping the AE as a tested party would fundamentally defeat the basic purpose of the TP regulations. In the facts and circumstances of the case, the assessee Indian Company is justified to be taken as the tested party. TPA addition to be deleted. International transactions involving payments made by the assessee in respect of purchase, order handling services and sales services - Held that:- at exercise off actual verification would be left to the AO under section 37 of the Act. The AO could, therefore, determine under Section 37 of the Act that the expenditure claimed was not for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firmed by the Hon'ble Jurisdictional Tribunal in appellant's own case for AY 2011-12 on the same facts and circumstances of the case. Payments made to AE for purchase and order handling services and sales services. 4. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in disallowing the payments aggregating to INR 9, 97, 50, 264/- made by the appellant to its AE for receiving purchase and order handling services and sales services from the AE. 5. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in not appreciating that the aforesaid disallowance leads to violation of the 'Rule of Consistency' enunciated by the Hon'ble Supreme Court in various decisions, as the payments made by the appellant for the aforesaid services have been allowed as deduction for AY 2009-10, AY 2010-11 and AY 2011-12 on the same facts and circumstances of the case. 6. That on the facts and in the circumstances of the case and in law, the Ld. Assessing Officer has erred in making the aforesaid disallowance without applying any of the methods prescribed under sub-section (1) read with sub-section (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of printed circuit boards ('PCBs') by the appellant to its Associated Enterprise ( AE ), [AT S AG(Europe)]. 5. The brief facts qua the issue are that M/s AT S India Private Limited, ( hereinafter referred to as the assessee ), is incorporated in India under the erstwhile Companies Act 1956. The assessee is a wholly owned subsidiary of AT S Austria Technologie Sustemtechnik Aktiongesellschaft( hereinafter referred to as AT S AG). The assessee is engaged into the business of manufacturing and sale of printed circuit boards. The main issue of transfer pricing adjustment of ₹ 90, 32, 40, 004/-, which is made, in respect of sale of finished goods by the assessee to its AE [AT S AG(Europe)] for further sale of the same to individual customers in Europe at the same price and in the same quantity. The assessee entered into international transaction with its AE during the year and the Assessing Officer made a reference to the Transfer Pricing Officer ( TPO ) u/s 92CA(1) for the purpose of determination of arm s length price ( ALP ) in respect of the transactions entered into by the assessee company with its AE. In view of the provisions of sub-section 4 of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k customers for the products manufactured by the assessee outside the specified territory or establish branch or maintain any distribution depot for the products of the assessee outside the specified territory or establish branch or maintain any distribution depot for the products of the assessee outside the specified territory in countries where the assessee has no exclusive distributors. The assessee also explained to the TPO that AT S AG (AE) is entitled to get commission as per the Distribution agreement and from time to time and the commission may be reviewed by the assessee. The assessee paid commission to AT S AG (AE) @ 6% of gross distributor s price for carrying out distribution activities in the specified territory. As per the Distribution agreement, the AT S AG (AE) further deducts preliminary warranty guarantee @ 2% of the gross distributor s price out of the aforesaid sale proceeds for the purpose of incurring warranty expenses arising from further sale of PCB s to independent customers. The assessee also explained to the ld TPO that AT S AG (AE) remitted the sale proceeds collected by it from independent customers in the open market under uncontrolled conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. 09 Operating Expenses 3721. 07 Operating Profit (-) 754. 64 OP/TC (PLI) (-) 20. 28% OP/OR (-) 25. 44% 10. The ld TPO observed that an amount of ₹ 13, 38, 31, 918/- was in the nature of stewardship services, as computed in para 7 of this order, hence its arm s length price was held to be Nil. The TPO calculated the profitability of the company after reducing the amount of ₹ 133. 83 Million, as follows: Description Amount (Rs. ) Million Net operating revenue 2966. 43 Operating Revenue 2966. 43 Expenses debited to profit and loss account 3728. 16 Less: Loss on sale of fixed assets 7. 09 Less: Amount determined to be Nil 133. 83 Operating Expenses 3587. 24 Operating Profit (-) 620. 81 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05% 12. Thereafter, the arm's length price of the international transaction related to provision of service provided to A. E was calculated by the ld TPO as follows: Particulars Amount in million Operating Cost (As per para 10 of this order) 3587. 24 Arm s Length margin (%) [as per para 11 of this order) 9. 05% Arm s Length margin (Rs. ) [ ₹ 3587. 24 + 9. 05% of ₹ 3587. 24] 3911. 88 Arm s Length price received for selling of goods to AE( para 10) 2966. 43 Short fall [ ₹ 3911. 88 ₹ 2966. 43] 945. 45 Percentage of material sold to AE to total revenue 92. 33% Proportionate difference for which adjustment is required to be made is : ( 92. 33% of ₹ 945. 45) 872. 9 This way, the ld TPO determined the arm s length price of the said transaction by applying the TNMM at the entity level considering the appellant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submission. The assessee has omitted to state that though the AE supplies at the same price as received from the assessee but retains its commission while making the remittance to the assessee. There is hence no back to back supplynor is there a case for a mere pass through entity. The AE performs significant functions in terms of development of market/clients procuring orders apart from technological development and designing of the PCBs. CUP would not be applicable here as the AE not only supplies product but also undertakes to care for fault rectification and other related services. CUP can be invoked by comparing the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. The facts here are that the AE is supplying a mix of the product and services and renders complete service matrix (including pricing, supply, QC and replacement apart from owning the intangibles). The applicability of CUP would yield spurious results in this scenario. The panel is hence not in agreement with the Ld AR submissions in this regard. The objectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. AR and DR we find that the action of lower authorities with regard to the selection of tested party is correct in the light of following judgments. Onward technologies Limited Vs DCIT 35 taxmann. com 584 wherein it was held as under: A conjoint reading of the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such international transaction is required 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 include 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 compared with the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. The modus operandi of determining ALP of an international transaction under this method is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on' u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible. The requirement under our 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 adhered to as prescribed. This contention, is therefore, repelled. Reliance is also placed in another decision of Hon'ble Mumbai Bench in the case of Cybertech Systems software limited Vs. ACIT (33 taxmann. com 371) wherein the assessee had tried to justify the arm's length value of the transaction on the ground that the overseas AE had been incurring losses on the margin retained from the assessee. On appeal, the Tribunal rejected the assessee's argument that such transactions have to be considered at arm's length on ground that there is no shifting of profits. The Tribunal categorically held that the assessee i. e. , the Indian party has to be taken as the tested party and the TNMM method is to be followed. Recently the Delhi Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction] ; The term 'comparable uncontrolled transaction' has not been defined in the Act and the Rule. As per clause of rule 10A of the Rules, an uncontrolled transaction means a transaction between enterprises other than associated enterprises, whether resident or non-resident. The term 'comparable uncontrolled transaction' has been defined in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration, July 2010 (hereinafter referred to as the 'OECD Guidelines), which inter-alia reads as under: Comparable uncontrolled transaction A comparable uncontrolled transaction is a transaction between two independent parties that is comparable to the controlled transaction under examination. It can be either a comparable transaction between one party to the controlled transaction and an independent party ( internal comparable ) or between two independent parties, neither of which is a party to the controlled transaction ( external comparable'). The OECD Guidelines inter alia defines the CUP Method as follows: Comparable uncontrolled price (CUP) method A transfer pricing method that compares the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of AE submitted by the assessee was rejected by the TPO without assigning any specific reasons and defects in the report. We therefore inclined to treat the price charged by the assessee of the goods exported to AE as ALP as the same price was charged by the AE from the other customers. 11. 2 We also find that in Form No. 3CEB for the previous year under consideration the assessee mentioned the method of determining arm's length price as 'TNMM' in respect of export of PCBs valued INR 197, 55, 10, 000/- with regard to the commission and preliminary warranty guarantee. Transfer Pricing Study was silent about the method for benchmarking the gross prices receivable by the appellant from AE for export of PCBs. But the DRP identified the aforesaid export as a separate transaction ('Sale') and confirmed the application of the TNMM at the entity level. However, we find that the DRP should have applied the method which is the most appropriate and in the instant we have already held that the CUP method as the most appropriate method. 11. 3 In this connection, we rely in the decision of the Hon'ble Mumbai Tribunal in the matter of Mattel Toys (I) (P. ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ALP) or not. Accordingly, even if an assessee has adopted TNMM as the most appropriate method in the transfer pricing report, then also it is not precluded from raising the contentions/objections before the assessment authorities and the appellant Courts that such a method was not an appropriate method and is not resulting into proper determination of ALP and some other method should be resorted. In view of the principle enunciated by the Hon'ble Mumbai Tribunal in the aforesaid case, we apply the CUP Method in respect of the international transaction involving export of printed circuit boards and accordingly delete the adjustment of INR 69, 30, 53, 397/- made in the assessment order. 11. 4 We also find that various Hon'ble Court have held that the CUP Method being preferred over the profit based methods. In this connection we rely in the decision of the Hon'ble Delhi Tribunal in the matter of Hughes Systique India (P. ) Ltd vs. ACIT reported in [2013] 36 taxmann. com 41 (Delhi - Trib. ), wherein the Hon'ble Tribunal inter alia held that: 6. 5 The CUP method provides the most direct comparison for the purpose of determining the arm's length pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit method. In the case of SNF (Australia) Pty. Limited, it has been held that the focus is on the market in which products are acquired. The ratio of this case is applicable mutatis- mutandis to the facts of the case as the focus is on the market in which products are sold. Internal CUP method envisages comparing the uncontrolled transactions of the appellant itself with other unrelated parties so as to determine the ALP with the AE. HoweverIn the case of Gharda Chemicals Ltd. (supra), the Hon'ble Income Tax Appellate Tribunal held that internal comparable should be preferred over external comparables. The relevant extract of the judgment is furnished here in below: Internal CUP method envisages comparing the uncontrolled transactions of the appellant itself with other unrelated parties so as to determine the ALP with the AE. However the External CUP method disregards the price charged or paid by the appellant to or from its unrelated parties and contemplates the comparison of the price so charged from or paid to its AE with some external independent reliable price data under similar circumstances of transactions with AE. Ordinarily the Internal CUP metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrolled transaction with the price in an uncontrolled transaction * Requires strict comparability in products, contractual terms, economic terms, etc. There are two kinds of third party transactions. * Firstly, a transaction between the taxpayer and an independent enterprise (internal CUP) * Secondly, a transaction between two independent enterprises (External CUP) The below example shows the difference between the two type s of CUP Methods: Shareholder Internal CUP Third Party Associated Controlled Transaction Associated Distributor Distributor manufacturer Third Party Manufacturer External CUP Third Party Distributor With the help of the above diagram, the ld DR Explained the Bench that in order to apply CUP method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Kolkata has relied upon, the assessee namely ghardia chemicals has sold dicamba to third parties. In addition to the above, it should be noted that for the application of the CUP method in general, a high degree of comparability is needed between the transaction under review and the comparable uncontrolled transaction. In this respect, the OECD guidelines have listed five comparability factors that should be taken into consideration when determining if uncontrolled transaction is comparable to a controlled transaction Viz: characteristics of the product or service, functional analysis, contractual terms, economic circumstances and business strategies. The ld DR also pointed out that in order to apply the CUP Method, the following factors should be taken into consideration: * As explained above, the functions will be different for a manufacturer and for a distributor, itself explanatory. * Contractual terms, (e. g. , scope and terms of warranties provided, sales or purchase volume, credit terms, transport terms). * The assessee as per the distribution agreement, is paying commission and warranty, whereas the AE is not charging such commission and warranty to third par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in the specified territory (Europe). The assessee, as a principal, has the full authority to sell the products manufactured by it as per own business decision, therefore, the assessee has functioned as a full-fledged manufacturer of its product and AT S AG (AE) functioned as a distributor of the assessee. The AT S AG (AE), with the prior written agreement of the assessee, can seek customers for the products manufactured by the assessee outside the specified territory or establish branch or maintain any distribution depot for the products of the assessee outside the specified territory in countries where the assessee has no exclusive distributors. The AT S AG (AE) is entitled to get commission as per the Distribution agreement and from time to time the commission may be reviewed by the assessee. The assessee paid commission to AT S AG (AE) @ 6% of gross distributor s price for carrying out distribution activities in the specified territory. As per the Distribution agreement, the AT S AG (AE) further deducts preliminary warranty guarantee @ 2% of the gross distributor s price out of the aforesaid sale proceeds for the purpose of incurring warranty expenses arising fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ascertaining correct ALP, the transactions have to be examined by keeping the Indian entity in primary focus. Therefore, keeping the AE as a tested party would fundamentally defeat the basic purpose of the TP regulations. In the facts and circumstances of the case, the assessee Indian Company is justified to be taken as the tested party. 18. We note that as the issue (including tested party) is squarely covered in favour of the assessee by the Jurisdictional Tribunal in assessee s own case in ITA No. 179/Kol/2016, for Assessment Year 2011-12, (supra) and there is no change in facts and in law and the Revenue is unable to produce any material to controvert the aforesaid findings. Therefore, we are of the view that the arm s length price computed by the DRP/TPO needs to be deleted. Accordingly, we delete the arm s length adjustment to the tune of ₹ 90, 32, 40, 004/-. 19. Issue No. 2 raised by the assessee relates to arm s length price adjustment to the tune of ₹ 9, 97, 50, 264/- made by the TPO/Assessing Officer in respect of payments made by the assessee to its AE for receiving purchase and order handling services and sales services from the AE. This covers the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sample basis in support of its contention. The assessee filed the aforesaid explanations and documentary evidences on sample basis to the DRP for their verification. The ld TPO determined the arm's length price of the aforesaid international transactions at NIL value based on the allegation that the said services were shareholder activity in nature. The ld DRP also held that the services were not stewardship in nature but the assessee primarily failed to satisfy benefit test and hence, the arm's length price of the aforesaid international transactions would be NIL. 21. When the matter was referred to ld TPO by the Assessing Officer, the Ld. TPO alleged that the intra-group services rendered under the CCA were shareholder activity. Therefore, the TPO determined the arm s length price of the aforesaid international transactions at NIL value without applying any of the methods prescribed under sub section (1) and (2) of section 92CA of the Act, read with rule 10B of the I. T. Rules, 1962. The observations of the TPO are given below: 5. 12 Based on the above discussions, the undersigned is of the view that due cognizance needs to be given to the substance of the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther break -up of ₹ 9, 97, 50, 264/-, which relates to purchase order handling services and sales services are as follows: (i) Amount attributed to Sales Services ₹ 6, 51, 37, 895 (ii) Amount attributed to purchase order handling ₹ 3, 46, 12, 369 Total ₹ 9, 97, 50, 264 23. Aggrieved by the order of Ld TPO/AO, the assessee filed the objections before the Hon ble Dispute Resolution Panel. The Dispute Resolution Panel alleged that the services did not meet benefit test, that is, the assessee failed to satisfy benefit test. Therefore, ld. Dispute Resolution Panel confirmed the arm s length price of the aforesaid international transaction as determined by the Ld TPO/AO as Nil value without applying any of the methods prescribed under sub-section (1) and (2) of section 92C of the Act r. w. r. 10B of the Rules. The relevant observations of the DRP are given below: These objections are same in terms of issues concerned, hence taken up together. The assessee has participated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. Further, the assessee has to meet the rigors of the benefit test as laid down in the recent judgment of Delhi ITAT in case of BOMBARDIER TRANSPORTATION INDIA PVT LTD reported in 2015-TII-473-ITAT-DEL-TP. It has been observed here as under: Intra Group services vis-a-vis Benefit test It is seen that in the present A. Y, there is clear finding by the TPO and the DRP that the assessee has not given the details of the total costs incurred by the AE on a particular services. In fact, the assessee could not establish how the said cost was incurred and on what basis the said cost was placed upon the assessee, Thus, the assessee s contentions of the benefit given in A. Y. 2008-2009 and 2010-2011 be taken into consideration, does not survive. The payment for Intra Group Services to AEs is separate international transaction independent of fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the parties with reference to material on record, we find that the authorities below have not conclusively held that the assessee could not enter into such a transaction nor had they disallowed the same by holding that such an expenditure is not assessee's business expenditure. The DRP as well as the authorities below have merely elucidated that the payments are reimbursement in respect of Ms. Rita Ricken and other personnel's case to serve the interest of share holders. By saying so they have only described the circumstance under which the international transaction has been entered by the appellant, so as to test the benefit that can be said to have reached the assessee. It, therefore, cannot be said to have questioned the commercial expediency of such transactions entered by the appellant. The I. T. rules contain exhaustive detail regarding nature of information and documents which are required to be maintained by the, assessee. Rule 10D(I) of the I. T. Rules, 1962 also mandates the maintainability of record of uncontrolled transactions to be taken into account in analyzing the comparability of the international functions entered into by the assessee. It, therefore, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Commissioner of Income Tax, Delhi IV, Appellant(s) versus M/s. Dalmia Promoters Devels (P) Ltd. Respondent(s) reported in (2015) 5 ITR-OL 277 (SC). The counsel submitted before us the copies of Form No. 3CEB for AY 2009-10 (pb no. 1354), AY 2010-11 (pb no 1363) and AY 2011-12 (pb no 1372) to substantiate that no adjustments were made by the TPO in respect of the aforesaid transactions for A. Y. 2009-10, AY 2010-11 and AY 2011-12 on the same facts and circumstances of the case. 25. Regarding the fact that the DRP/TPO did not dispute the CUP method applied by the appellant in determining the arm s length price of sales services and purchase and handling services, the counsel submitted that the DRP/TPO determined the ALP of the said transactions at NIL value without applying any of the methods prescribed under sub-section (1) and sub-section (2) of section 92C of the Act which leads to violation of the provision of sub-section (3) of section 92CA of the Act read with sub-section (3) of section 92C of the Act. In this connection, reliance is primarily placed on the decision of the Hon ble Jurisdictional Tribunal in the matter of NLC Nalco (India) Ltd. vs DCIT (ITA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences of receipt of purchase services, order handling services and sales services filed by the assessee and detailed submission filed by the assessee on benefits received by it from the said services from the AE. The amount of ₹ 9, 97, 50, 264/- relates to purchase order handling services and sales services. The break -up of ₹ 9, 97, 50, 264/-, which relates to purchase order handling services and sales services are as follows: (i) Amount attributed to Sales Services Rs. 6, 51, 37, 895 (ii) Amount attributed to purchase order handling ₹ 3, 46, 12, 369 Total ₹ 9, 97, 50, 264 The ld Counsel for the assessee submitted before us a brief submissions by way of the following chart to prove the benefit test. This chart explains the nature of services, main functions, and documentary evidences for receipt of services along with paper book reference. This chart also explains the relevant para of the Cost Contribution Agreement (CCA). The assessee received the purchase order handling serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CCA receives enquiry or annual contracts from global customers and starts the quotation processing exercise. In this connection, they requested the employees of the appellant to calculate price quotes for their products and send the same to them for finalisation with the global customers. 4. We are enclosing copies of ten chains of emails (page no 1179 to 1273) along with clarification thereon (page 1023 to 1027). In the aforesaid e-mails, the employees of the appellant communicate to the CCA team that they have completed the calculation of prices of products offered against various purchase orders received from global customers and requested the CCA team to complete the quotation processing exercise for global customers. Sales Engineerin g Sales engineers are sales persons with technical knowledge of the products and their markets worldwide. They contribute significantly in marketing / selling the products manufactured by the appellant 1, 90, 807 PF / CAM Product engineering (PE) and computer aided Engineering (CAM) teams consist of persons who have comprehensive knowled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y three chains of e-mails (page no 1103 to 1077) along with clarification thereon (page no 1019 to 1022). It is found that the CCA team deals with such matters as delay in delivery date, allocating new order to the appellant, entries made in material master created in SAP software, shipment of products, taking up quality confirmatory tests, approval 3, 99, 976(3 02316+97 660) customer forecast in SAP software from customer for additional speed up cost and other matters of order handling Purchase Services Purchasing Please refer to Page No. 528 to 530 of the paper book for description of services. Main Functions: 1. Procurement of raw materials at reasonable price for all the ground companies on global basis; 2. Selection of suitable suppliers of raw materials; 3. Supplier rating and supplier development in order to improve supplier s performance for attaining defined levels of cost, quality and delivery lead times; Audit of global suppliers i. e. evaluation of suppliers to ensure that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any further guidance on the approach to be followed while benchmarking intragroup services. The Ld. DR placed reliance on the international tax practices followed in the UN TP Manual, OECD Guidelines, the United States Transfer Pricing regulations etc, both by the taxpayer and the Revenue while undertaking the compliance and the audit exercise respectively. The test for an intra-group service generally involves examination of the following factors: * The nature of activities; * The associated need and benefits; * Documentary evidence in support of the transaction; * The charge-out mechanism; and * The ALP of the transaction. The Ld DR explained that it is essential to draw a line of distinction between a business activity and a service. Essentially, the guiding principle that goes in determining the existence of an intra-group service iswhether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. An in-depth analysis, following the aforementioned conceptual difference between business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MNE group receiving some centrally provided services, for instance, to gain economies of scale through the concentration of activities. These services may vary from being very simple administrative functions to more complex industry specific functions. The decision to provide certain services centrally may also be determined by the need to have the best practices implemented across geographies. Therefore, the needs and benefits of Intra-group service arrangements is driven by the necessity to achieve operational efficiency, improve business operations, standardize policies, procedures and controls that are conducive to the MNE group s business operations. 29. In addition to this, the ld. DR for the Revenue has relied on the judgement of Hon ble Mumbai Tribunal, in the case of Tata Motors European Technical Centre Plc. Vs. Assistant Director of Income Tax(IT)(2)(2) in [2014] 52 taxmann. com 411 (Mumbai-Trib. )wherein it was held as follows: The Indian Transfer Pricing Regulations while selecting comparable companies lays emphasis on FAR analysis, and conditions prevailing in the markets in which the parties operate for carrying out the comparability analysis. If such compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the tested party is TMETC, whose operating profit is to be benchmarked by carrying out functional analysis of its controlled transactions for which reliable data for its comparability is available in the country where it is located, then such comparables has to be taken into account for carrying out the comparability analysis for the purpose of Transfer Pricing and benchmarking the Arm's Length Price. The TMETC for the purpose of rendering services in India is incurring all its cost in UK like direct costs, employee costs, legal and professional fees, rent and other operating expenses, then for the purpose of computation of PLI, these costs have to be taken into consideration for determining the profit margin. Since all the main costs attributable to the PE are based on cost incurred in UK, then it can be very well-said that PE is influenced by the economic and financial conditions of UK, as against the Indian economic factors. The Indian economic factors are not at all influencing the cost or margin of the assessee, hence it cannot be held that Indian comparables can be used to benchmark the TMETC transaction and the price with Tata Motors. For this reason, the finding of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0B(2) of Income Tax Rules, provides the comparability of the transaction with uncontrolled transaction which has to be judged with reference to specific characteristics of the property transferred or services provided; FAR analysis; contractual terms; conditions prevailing in the markets, that is, economic conditions in which respective parties transact or operate including geographical locations, size etc. Thus, comparison of attributes of the transaction is carried which would affect conditions in Arm s length dealing. Rule 10B (3) specifically provides as under:- An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if- ( i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or ( ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences . This, Rule specifically recognizes that reasonably accurate adjustment should be made to eliminate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enetration strategy. Thus, business strategies, market penetration, increase or save its market share are relevant and material factors determining prices and profit. All these factors have to be taken into consideration while eliminating the material effects which warrants some kind of reasonable accurate adjustments. 31. Before us the material factors relating to principle of consistency, which have been pointed out by the assessee is that on the same facts and circumstances of the case, no ALP adjustments were directed by the Ld TPO in respect of international transactions involving payments made by the assessee under the Cost Contribution Agreement (CCA) for receiving purchase services, order handling services and sales services for last three assessment years i. e. AY 2009-10, AY 2010-11 and AY 2011-12. Though there was no change in the facts and circumstances of the case for the previous year relevant to the assessment year 2012-13, the TPO/DRP determined the arm's length price of the said transactions at NIL value thereby violating the rule of consistency enunciated by the Hon'ble Supreme Court in the matter of Commissioner of lncome Tax, Delhi-lV versus M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices, order handling services and sales services for last three assessment years i. e. AY 2009-10, AY 2010-11 and AY 2011-12, remain same and the Ld. DR for the Revenue is unable to produce any material to controvert the aforesaid facts in CCA agreement. Therefore, the Revenue has to have some consistency in its views and it cannot blow hot and cold at its sweet-will and hence the assessee succeeds on this score. 32. On the next objection of the ld Counsel of the assessee, we note that the action of the TPO/AO in determining the arm's length price of the international transactions under consideration without applying any of the methods prescribed under sub-section (1) and sub-section (2)of section 92C of the Act, which leads to violation of the provision of sub-section(3) of section 92CA of the Act read with sub-section (3) of section 92C of the Act. The relevant provisions of section 92C are given below for ready reference: Section 92C: Computation of arm s length price. ( 1) The arm s length price in relation to an international transaction [or specified domestic transaction] shall be determined by any of the following methods, being the most appropriate me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be entitled to exercise the option as referred to in the said proviso. ( 2B) Nothing contained in sub-section (2A) shall empower the Assessing Officer either to assess or reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year the proceedings of which have been completed before the 1st day of October, 2009. ( 3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- ( a) the price charged or paid in an international transaction [or specified domestic transaction] has not been determined in accordance with sub-sections (1) and (2); or ( b) any information and document relating to an international transaction [or specified domestic transaction] have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or ( c) the information or data used in computation of the arm s length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee may produce, including any information or documents referred to in sub-section (3) of section 92D and after considering such evidence as the Transfer Pricing Officer may require on any specified points and after taking into account all relevant materials which he has gathered, the Transfer Pricing Officer shall, by order in writing, determine the arm s length price in relation to the international transaction [or specified domestic transaction] in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee. Therefore, it is abundantly clear that the TPO has to compute the arm s length price (ALP), by applying the provisions of sub-section (3) of section 92C of the Act. It means the TPO can not apply his own method to compute the arm s length price (ALP) of the assessee. That is, the statute does not give right to the TPO/AO to adopt their own developed methods. The most appropriate method (MAM) has to be selected by the TPO/AO out of the six methods prescribed by the statute. He has to select any one method as MAM, out of the six methods prescribed in section 92C (1) of the Act to compute the arm s length pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase under consideration, the TPO/AO has not selected any method (out of six methods), therefore, the arm s length price (ALP) computed by the AO/TPO is not in accordance with the provisions of section 92C (1) of the Act, hence we direct the TPO/AO to delete the addition. 33. Now, we address the issue relating to Benefit Test . The ldDR for the Revenue alleged that the assessee had failed to satisfy the benefit test in respect of payments made by the assessee under the CCA( Agreement) for receiving purchase services, order handling services and sales services. We note that the assessee has submitted before the ld. TPO, the detailed nature of the aforesaid services and copies of documentary evidences of receipt of services on sample basis. We note that the ld Counsel for the assessee submitted before us a brief chart which is mentioned in para 27 of this order to prove the benefit test. This chart explains the nature of services, main functions, and documentary evidences for receipt of services along with paper book reference. This chart also explains the relevant para of the Cost Contribution Agreement (CCA). The assessee received the purchase order handling services and sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business or profession. We note that the Hon'ble High Court of Bombay in the matter of CIT vs. Lever lndia Exports Ltd. [2017] 78 taxmann. com 88 (Bom) wherein the Hon'ble High Court has held as follows: 7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales. Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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