TMI Blog2018 (6) TMI 1266X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee during the year and the same has to be benchmarked applying internal TNMM method as in the case of other international transactions. Further, we also reverse the order of TPO in holding that the assessee has not availed any services in view of various documents filed by the assessee and also certificate of Eaton China, which was filed during the course of TP proceedings evidencing not only the availment of services but also the basis of cost for such services. Similar services were availed by other Eaton group entities from Eaton China and its certificate that the same has also charged at the same rates as charged to the assessee. In the entirety of the above said facts and circumstances, we reverse the order of TPO / Assessing Officer in taking the value of international transactions of Information Technology Services availed at Nil and delete the adjustment made. Allowing the claim of assessee, the ground of appeal No.8 raised by the assessee is thus, allowed. - ITA No.45/PUN/2013 - - - Dated:- 12-3-2018 - Ms. Sushma Chowla, JM And Shri Anil Chaturvedi, AM Appellant by : Shri Percy.J.Pardiwala Shri Vishal Kalra Respondent by : Shri Rajeev Kumar, CIT, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing an incorrect set of comparables disregarding the quantitative and qualitative and criteria applied by the assessee in this regard. 6. That on the facts and circumstances of the case and in law, the Ld. AO/DRP/TPO erred in applying the adjustment on the entire cost base of the relevant segment and not applying it proportionately in ratio of the imports consumed from associated enterprises to total consumption for the said segment. 7. That on the facts and circumstances of the case and in law, Ld. AO/DRP/TPO erred in rejecting the multiple year data as used by the appellant in its transfer pricing analysis, thereby ignoring the provisions of Rule 10B(4) of the Rules which allows use of multiple year data of comparable companies for the purposes of determination of the arm‟s length price as define under section 92F of the Act. 8. That on facts and circumstances of the case and in law the Ld AO/ TPO erred in proposing and the Hon‟ble DRP further erred in upholding the transfer pricing adjustment of ₹ 5,045,303, pertaining to payments made to associated enterprise for availing Information technology services, by determining the arm‟s length price of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions between the assessee and its associated enterprises. The TPO was of the view that internal comparability was possible since in the case of sale of gear pumps and cylinders, the entire material was sourced from the third parties and sale was made to associated enterprises as well as non-associated enterprises. However, this was also rejected as the sales to associated enterprises were only at ₹ 1.34 crores as against the sales to non-associated enterprises at ₹ 34.48 crores. The next issue which was raised by the assessee was comparison of the operating margins of the manufacturing segment with external comparables, when internal comparables were available, was found to be not appropriate. The next objection raised by the assessee was to the rejection of external comparables selected as per the TP study report and acceptance of certain new companies, which was not part of set of comparables. The TPO thereafter, considered the functional comparability or otherwise of the different companies under para 6.3.2 of his order. The assessee had proposed use of multiple year data instead of single year s data which was rejected by the TPO. The TPO thus, drew up the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 15 above and services to be rendered as per the said service agreement are totally different. 6. The TPO thus, held that where the assessee had failed to prove the receipt of services and benefits derived from services with supporting evidence, the arm's length price of transactions was treated as Nil and hence, adjustment of ₹ 50,45,303/- was proposed to be made to the arm's length price. In this regard, reliance was placed on the decision of Bangalore Bench of Tribunal in M/s. Gemplus India Pvt. Ltd. Vs. ACIT in ITA No.352/Bang/2009, relating to assessment year 2003-04. The Assessing Officer in the draft assessment order passed added the said upward adjustment to the international transactions pertaining to both the manufacturing activities and the IT services availed totaling ₹ 5,38,68,455/-. The assessee filed objections to the Dispute Resolution Panel (DRP), which in turn, directed the Assessing Officer / TPO to exclude the comparable Asco Numatics (India) Pvt. Ltd., whose margin was 40.82% and arithmetic mean of the PLI of comparables was worked out to 14.22%. The DRP also directed the adjustment to cost base as arm's length price of the service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tudy report had selected certain external companies but before the TPO, it was pointed out that internal TNNM method may be applied since the margins of assessee were higher than the margins with others. The learned Authorized Representative for the assessee pointed out that the Tribunal while deciding the appeal of assessee in assessment year 2007-08 had directed the application of internal TNNM method as the most appropriate method. Our attention was drawn to the reasoning of TPO in this year and pointed out that the same was identical to the TPO s order in assessment year 2007-08. He further referred to the page 224 of the Paper Book, wherein bifurcation of receipts and outcomes i.e. actual and allowability is provided and the transactions with associated enterprises were to the extent of 6.40% and third party transactions were at 0.06%. 9. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the written note filed during the course of hearing, which talks of findings of TPO and DRP, which we have referred to in paras hereinabove. 10. We have heard the rival contentions and perused the record. The first issue raised by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufactured by assessee consumed various raw materials and components, which were procured domestically from third parties as well as imported from associated enterprises and overseas third parties. Assessee segregated the products which did not consume raw material and components procured from associated enterprises from those products which consumed such raw material and components. Similarly, assessee separately identified the sales of these products. Primarily, assessee identified sales of products which neither had any consumption of raw material and components procured from associated enterprises and nor sold to the associated enterprises. This segment comprised of gear pumps and cylinders and it was accordingly considered as Third party segment. The operating margin in the said segment was determined at 2.80% in terms of the Tabulation which is placed in the Paper Book at page 114. The balance sales comprising of other products, namely, vane/piston, pumps, power units, cylinders control valves, etc. which entailed consumption of raw material and components purchased from associated enterprises were identified as the associated enterprises segment. This segment also included ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng segment are concerned, the TPO was satisfied that they are at an arm's length price as no adjustment has been proposed by him. However, similar approach taken by the assessee with respect to the Manufacturing segment has not been accepted by the TPO. In our considered opinion, the grounds taken by the TPO to reject the assessee‟s plea for internal TNM comparable are neither germane and nor justified, apart from being inconsistent with his stand relating to similar situation in the Trading segment. We find from a copy of submissions dated 14.09.2010 addressed to the TPO, a copy of which has been placed in the Paper Book at pages 599 to 603 that assessee had explained the manner in which the bifurcation of Manufacturing segment was done into associated enterprises segment and the non-associated enterprises segment. The following averments made by the assessee are worthy of notice :- As explained during the hearing held on August 31, 2010, the Company manufactures certain products which do not entail consumption of any raw material imported from AEs. Thus, further split of manufacturing segment into AE and Non-AEY segment was done on a product basis i.e. products, man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded in the associated enterprises segment to ensure comprehensive benchmarking of international transaction of sales to the associated enterprises. In our considered opinion, the said minor transaction does not vitiate the segmentation of Manufacturing segment into associated enterprises segment and Third parties segment done by the assessee for the purpose of internal TNM Method. 16. On the basis of the aforesaid, we find that the bifurcation of Manufacturing segment into associated enterprises and the third parities done by the assessee is fair and apt. The TNM Method does not envisage an absolute product similarity but rather emphasizes on functional similarity. Quite clearly, in the associated enterprises segment as well as the third party segment in the Manufacturing segment there is a functional similarity and therefore the internal TNM Method comparable professed by the assessee was wrongly rejected by the TPO. Before we parting on this issue, we would also refer to the following analysis of the segmentation in Manufacturing segment canvassed by the assessee before the TPO vide communication dated 28.10.2010 :- The profitability of the international transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee and accordingly, the Ground of Appeal No.2 raised by the assessee is allowed. 12. The facts and issue arising in the present grounds of appeal Nos.2 to 6 are identical to the issue before the Tribunal in earlier years. The assessee in the present case has also applied internal TNMM method of comparison of operating margins for international transactions of purchase of raw material and components from associated enterprises as well as sale of finished goods effected to associated enterprises. On the basis of aforesaid benchmarking, the profitability under the AE segment was 6.31% which was higher than profitability of transactions under third party segment. Accordingly, we hold that no adjustment on account of arm's length price is required to be made in the hands of assessee. The grounds of appeal No.2 to 6 raised by the assessee are thus, allowed. 13. The ground of appeal No.1 raised by the assessee is general and hence, the same is dismissed. 14. The ground of appeal No.7 raised by the assessee is not pressed and hence, the same is dismissed as not pressed. 15. The issue in ground of appeal No.8 is against the order of TPO in valuing the arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trib); ii) TNS India (P.) Ltd. Vs. ACIT (2014) 48 taxmann.com 128 (Hyderabad Trib); iii) Merck Ltd. Vs. DCIT (2016) 69 taxmann.com 45 (Mumbai Trib.); and iv) Durr India (P.) Ltd. Vs. ACIT (2017) 78 taxmann.com 50 (Chennai Trib.) 18. The learned Departmental Representative for the Revenue in reply, pointed out that the issue is in respect of management fees and in the submissions filed at page 31 of the Paper Book, the assessee had provided the nature of services availed by it. Our attention was drawn to the Annexure A to the agreement entered into between the assessee and Eaton (China) which is placed at page 167 of the Paper Book which enlists the services to be provided. The learned Departmental Representative for the Revenue stressed that the nature of services do not match i.e. what has been availed by the assessee and what is provided in the agreement. He further referred to the para 16 at page 31 of the order of TPO and pointed out that the agreement was dated 16.11.2009 with effective date of 01.01.2005. The learned Departmental Representative for the Revenue pointed out that the agreement is effected from back date. He further referred to the page 160 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Revenue is that no services have been provided, hence, no transaction between the assessee and its associated enterprises, then no CUP method could be applied, as the said method postulates comparison of transactions. In the absence of any transaction, there is no merit in the plea of learned Departmental Representative for the Revenue. Referring to the ratio laid down by the Bangalore Bench of Tribunal in Cranes Software International Ltd. Vs. DCIT (supra) and the Hon ble High Court of Delhi in Cushman and Wakefield (India) (P.) Ltd. (supra), he pointed out that the Bangalore Bench of Tribunal has not suggested any method to be applied. He further pointed out that the assessee had applied TNNM method. 21. The matter was re-fixed for clarification in view of submissions of learned Departmental Representative for the Revenue vis- -vis Agreement which was entered into between the parties on 16.11.2009 but effective date from 01.01.2005 i.e. by an Agreement of later date, the assessee has entered into an Agreement with retrospective effect. On the next date of hearing, the plea of assessee was that it was engaged in manufacturing and trading of hydro gear boxes and pump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were furnished to establish whether any services were rendered. He referred to page 63 of Paper Book to point out the related party transactions schedule and also at page 64 of Paper Book for information received from Eaton, China. The learned Authorized Representative for the assessee referring to page 43 of Paper Book pointed out that total turnover was ₹ 173 crores and where all services were intermingled, then the same should not be segregated. Another point which was raised was since the working of group has closed group of companies, hence there is need to avail the services and because of their exposure and expertise, such services were provided for effective working of the group. Here, he also stressed that there was similar transaction in the last year but no TP adjustment was made. The learned Authorized Representative for the assessee then referred to the reliance of learned Departmental Representative for the Revenue on the ratio laid down by the Hon ble High Court of Delhi in CIT Vs. Cushman and Wakefield (India) (P.) Ltd. (supra) to point out that both Assessing Officer and TPO could go into the nature of transactions. He placed reliance on the ratio laid dow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 49,96,36,002 25. The first five transactions i.e. import of raw material, trading goods and components; export of finished goods; income from services; information technology services availed and reimbursement of expenses to associated enterprises were benchmarked together by using TNMM method. The case of assessee that all these transactions need to be aggregated as they are inter-dependent on each other while benchmarking international transactions to be at arm's length price or not. The assessee is engaged in two separate limbs of transactions i.e. import of raw material, trading goods and components at ₹ 44.76 crores, export of finished goods at ₹ 3.43 crores along with other transactions of income from services at ₹ 41,855/- and reimbursement of expenses to associated enterprises at ₹ 1.03 crores has been aggregated. However, the transaction of information technology services availed has been segregated by the TPO. The assessee claims that the said information technologies services have been availed by it from Eaton China Investments Ltd. for Information Technology ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 50,45,303/-. Before adjudicating the admissibility of claim of assessee, it may be pointed out that during the course of TP proceedings, the assessee also filed copy of shared service agreement dated 16.11.2009 which was between the assessee and Eaton China describing the nature of services rendered and basis of charge for services. The agreement which was entered into in 2009 was made effective from 01.01.2005. The terms of said agreement were at variance with the terms earlier agreed upon by the parties and the TPO on such analysis was of the view that no services were availed by the assessee. The stand of assessee in relying on the aforesaid agreement dated 16.11.2009 to establish its case of availing services in financial year 2007-08 is misplaced. The agreement was entered into much after the close of accounting period and even after the due date of filing the return of income for assessment year 2008-09 and hence, the terms of said agreement cannot be relied upon to establish the case of availment of services by the assessee from Eaton China. Accordingly, we find no merit in the stand of assessee and Revenue in relying on the said agreement and we ignore the same for adjud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieve the said objectives, the assessee availed services from its associated enterprises. In this regard, the assessee had furnished various documentary evidences before the TPO, which were in the form of e-mails/presentation, details of visit of personnel of associated enterprises to India, purposes of visit, etc. The assessee has placed on record the said evidences at pages 323 to 898 of the Paper Book i.e. copies of e-mails / presentations and summary containing detailed explanation of the same at pages 911 to 938 of the Paper Book. The assessee had summarized about 100 e-mails justifying the receipt and benefit of services from associated enterprises and filed the same separately with reference to the page nos. of paper book, where these were enclosed. In addition to the same, the assessee had enlisted certain key benefits, which were derived by it on account of payment of fees for advisory and other services in support of which documentary evidence was filed, which are as under:- Key benefits derived Page No. Development of New Products Aluminium Motor, Product Sr. No.CR 72 333 336 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een taken by the businessman and it provides the evidence of services received by it from its associated enterprises, then the TPO cannot question the same by commenting upon the nature of services provided, where in any case, information is hyper technical. First of all, where the TPO has referred to the services provided and pointed out defects in the services provided, the first step that services have been provided stands established. Once the same is established by way of assessee producing several evidences before the TPO, which were in the form of contemporaneous data, then the TPO is precluded from commenting upon the same and holding that the assessee had not received any services and also there was no need for making any payments for such services, as the services provided were not upto the mark. In any case, the perusal of various evidences filed by the assessee i.e. contemporaneous data available on record shows that it is highly technical and the same has been used by the assessee for carrying on its business activities, such evidence cannot be brushed aside being not upto the mark. The TPO had referred to part of the data and drew conclusion, which is not warranted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e domain of TPO. Under the Transfer Pricing Regulations what the TPO has to determine is whether the services which have been provided by associated enterprises are at arm's length price. Accordingly, we find no merit in this part of the order of TPO. 21. In this regard, we find support from the ratio laid down by the Hon‟ble High Court of Delhi in Hive Communication Pvt. Ltd. in Income Tax Appeal No.306/2011, wherein it has been held that the legitimate business needs of the company must be judged from the view point of the company itself and must be viewed from the point of view of a prudent businessman. It was further held by the Hon‟ble High Court that it was not for the Assessing Officer to dictate what the business needs of the company should be; it is businessman who can only judge the legitimacy of the business needs of the company from the point of view of prudent businessman. Hence, the benefit derived and accruing to the company must also be considered from the angle of prudent businessman. The Hon‟ble High Court clearly held that the term benefit to a company in relation to its business has a very wide connotation and it was difficult to accur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has shown losses during the year. 24. The Mumbai Bench of Tribunal in Dresser-Rand India (P) Ltd. Vs. Addl.CIT (supra) had held that We have further noticed that the TPO has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by so stretch of logic, it can have any role in determining ALP of that service. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. 25. Accordingly, we hold that the TPO while benchmarking the transactions has to determine whether the price paid by the assessee for the services availed is what an independent enterprise would have paid for the same services. The ana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so confirmed by Eaton China that similar services were availed by other Eaton group companies and they were charged on the same basis as in the case of assessee. The assessee had also filed on record copies of debit notes and other JV vouchers raised during the year under consideration justifying its case of availing the said services and payment in lieu thereof. 31. In the above said facts and circumstances in the issue involved, we hold that there is no merit in observations of TPO in holding that the assessee had not availed any services, hence the arm's length price of international transactions is to be adopted at Nil. 32. The learned Departmental Representative for the Revenue had placed heavy reliance on the ratio laid down by Hon ble High Court of Delhi in Cushman and Wakefield (India) (P.) Ltd. (supra), which in turn, has also taken into consideration the decision of Mumbai Bench of Tribunal in Delloite Consulting India (P.) Ltd. Vs. DCIT (2012) 137 ITD 21 (Mum). In the facts of the case before the Tribunal, the TPO had determined arm's length price of international transactions at Nil keeping in view the factual position as to whether in a comparable case, simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was that the transaction of sale of imaging business by the respondent assessee to M/s. Carestream Health India Pvt. Ltd. was a transaction between the two domestic non Associated Enterprises. Hence, the provision of Chapter X of the Act would have no application. Thus, had not even declared this transaction in its 3 CEB report. 4. However the Transfer Pricing Officer (TPO) while examining another Transfer Pricing issue came across the impugned transaction. It held on the basis of Section 92B(2) of the Act that even if the transaction between Kodak India Pvt. Ltd. and M/s. Carestream Health India Pvt. Ltd. was between two domestic non Associated Enterprises, yet it would still be considered to be an International transaction and Chapter X of the Act would be applicable. This on the basis that the holding companies of both the respondent assessee as well as M/s. Carestream Health India Pvt. Ltd. had entered into a global agreement for sale of its business. This global agreement was prior in point of time to the sale of imaging business by the respondent assessee to M/s. Carestream Health India Pvt. Ltd. The Assessing Officer passed a draft Assessment order under section 144C of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO‟s determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. The jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an International transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules. The determination of the ALP by the respondent assessee of its advertisement expenses has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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