TMI Blog2018 (11) TMI 255X X X X Extracts X X X X X X X X Extracts X X X X ..... of said transaction could not be taken at Nil. We find no merit in the approach adopted by TPO in this regard. Accordingly, we hold that there is no merit in disallowance made by TPO, which was upheld by CIT(A) Selection of comparables by assessee / TPO - Held that:- Referring to functions performed by assessee of providing marketing support services companies functionally dissimilar with that of assessee need to be deselected from final list. Where the comparables selected are not functionally comparable to the tested party, then the margins of such concern cannot be utilized for determining the arm's length price of international transactions undertaken by tested party. In view thereof, we direct the TPO to exclude margins of Agrima Consultants International Ltd. while benchmarking international transactions of assessee in both the segments pertaining to marketing and business support services and computer the arm's length price of international transactions after including Times Innovative Media Ltd. in market support services segment. The additional ground of appeal raised by assessee is thus, allowed. Non granting due credit of advance tax paid - rectification applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited' as a comparable, as used by the Appellant in its transfer pricing analysis holding that the same is functionally not comparable. 3.2 That on the facts and circumstances of the case and in law, the CIT(A) erred in rejecting the use of multiple year data for the purposes of transfer pricing analysis, ignoring the provisions of Rule 10B(4) of the Income Tax Rules, 1962 ( Rules ) which allow use of multiple year data of comparable companies for the purpose of determination of the arm's length price. 3.3 That on the facts and circumstances of the case and in law, CIT(A) erred in not appreciating the Functional, Asset and Risk ('FAR') profile of the appellant and consequently denying appropriate risk adjustments. Tax credit of advance tax paid 4. That on the facts and circumstances of the case and in law, CIT(A) erred in not granting the due credit of advance tax paid of INR 9,00,000. 3. The assessee has also raised additional ground of appeal which reads as under:- (i) That on the facts and circumstances of the case and in law, the CIT(A) ought to have excluded Agrima Consultants International Ltd from the comparable set for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is the issue raised before us. Further, in respect of balance services, complete results have been accepted and no addition has been made. The TPO was of the view that benchmarking done and arm's length price in the case of transactions relating to business support services and marketing support services were liable for TP adjustment and hence, show cause notice was issued to the assessee. The assessee for analysis of its international transactions, had taken segmental operating profit / total cost as its PLI and had selected five external comparables. The PLI in the case of assessee company was 8% and for computing PLI of comparables data of three years was taken and weighted average was arrived at 11.06%. The assessee was asked to provide single year profitability ratio of selected companies, in response to which details were furnished and mean margins worked out to 16.15%. The TPO thus, show caused the assessee and also pointed out that the concern Times Innovative Media Ltd. was functionally different company, hence the same needs to be excluded and the mean margins of comparables worked out to 20.68% and bringing adjustment to the tune of ₹ 8.8 crores. Show caus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had not resulted any adverse impact on the assessee but on the other hand, the assessee had taken undue advantage. Consequently, the TPO then considered the nature of expenses and observed that the assessee could not demonstrate by any evidence / document that it had received any corresponding services from its associated enterprises during the year, hence the said transaction was valued at Nil. Accordingly, the value of transaction amounting to ₹ 2.70 crores entered into with its associated enterprise was taken at Nil and the income of assessee was increased by ₹ 2.70 crores (approx.). Thereafter, the Assessing Officer passed final assessment order after including the adjustment on account of international transaction amounting to ₹ 2,93,60,140/-. 7. The CIT(A) first dealt with the issue of payment made to associated enterprise on account of pre-operative expenses. The CIT(A) was of the view that the assessee has not established its case of receiving services. However, since the assessee had disallowed ₹ 1,04,71,740/-, adjustment was restricted to balance amount of ₹ 1,66,22,982/-. 8. Coming to the next adjustment to business support services, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee on Oracle Software implementation. He pointed out that TPO was not sure what were the services and benchmarking was done. The learned Authorized Representative for the assessee pointed out that margins of assessee at 29.05% were accepted but the TPO says that no rendition of services, hence has taken at Nil and adjustment was made on account of arm's length price at ₹ 2.70 crores, out of which, since the assessee had already added back sum of ₹ 1.04 crores, balance sum of ₹ 1.66 crores was added by CIT(A). The learned Authorized Representative for the assessee stressed that main segment of services had been accepted to be at arm's length price i.e. on account of engineering design services, no addition has been made in the hands of assessee. He further pointed out that the assessee was using Oracle provided by associated enterprise and giving services to its group concerns and was remunerated at cost plus. The second transaction was held to be at arm's length price but first transaction was taken at Nil. The learned Authorized Representative for the assessee placed reliance on the decision of Pune Bench of Tribunal in Eaton Industries Manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the claim, the Tribunal had considered evidences furnished but in assessee s case, no such evidences of giving any services has been furnished. In respect of exclusion of Times Innovative Media Ltd., the learned Departmental Representative for the Revenue placed reliance on the observations of CIT(A) in para 2.3.7. In respect of Agrima Consultants International Ltd., the learned Departmental Representative for the Revenue pointed out that it was a new ground raised by way of additional ground of appeal. 13. The learned Authorized Representative for the assessee in rejoinder pointed out that information of Oracle are placed at pages 70 to 79 of Paper Book and thereafter, at pages 98 to 117 of Paper Book and also the copy of Share / Services Agreement was filed on record. 14. We have heard the rival contentions and perused the record. The ground of appeal No.1 raised by assessee being general, is dismissed. The second issue raised vide ground of appeal No.2 is against TP adjustment made on account of reimbursement of payments. The case of Revenue is that the assessee had failed to establish receipt of services from its associated enterprises, for which the aforesaid payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , UK was the provider and assessee was participant. It was acknowledged that Eaton Ltd., UK provided certain shared services to certain members of Eaton group and it had agreed with the participant with respect to certain shared services provided by it to the assessee, hence, agreement was entered into. The term services was to include services set forth in Appendix-A to the agreement. It was agreed that the assessee shall pay Eaton Ltd., UK for estimated fees together with markup rate relating to all services rendered by Eaton Ltd., UK. Other terms were agreed upon between the parties for providing services. Appendix-A enlisted the services, which include range of shared services under three departments i.e. International Systems, Finance, International Systems Applications and the Office of Program Leadership. It was specifically provided that applications team, designs and develops reports and customized applications using Oracle and other IT tools. The outcome of said works was used by the financial processing sub-departments in Eaton SSC and Eaton s plants. The services included problem solving, designing, development and application support. The assessee in support has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Eaton Ltd., UK. The Oracle system was used by assessee for providing its services and the expenditure incurred by assessee is to be considered as part of cost based operations. The assessee had aggregated the international transactions relating to operating of APSSC business, wherein this transaction of availing Oracle services was also aggregated and benchmarked by testing net margins vis- -vis third party comparables at entity level. The TPO has not disturbed the benchmarking of international transactions using entity level of APSSC segment. Once the margins have been accepted, then cost incurred could not be disturbed. In any case, the TPO has to benchmark the transaction and has to examine whether or not the method adopted by assessee to determine its arm's length price was most appropriate method. The second stage was to compare the margins of assessee with mean margins of comparables selected and it was not the jurisdiction of TPO to consider whether the payments made by assessee or cost incurred by the assessee for the shared services was justified or not. In case, such exercise has to be done, then the same has to be carried on by Assessing Officer. 17. We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In order to achieve 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r it needs the said support services or not. Secondly, once such a decision has been 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 TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... give the services and the cost incurred by AEs. First of all, this is outside the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it from such support services where the assessee has shown losses during the year. 3 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rging of such charge i.e. cost plus 5% markup. It was also 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 v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry of M/s. Carestream Inc. an USA company. The case of the respondent assessee 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 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 determinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disturbed the margins of assessee but on the other hand has disallowed cost incurred by assessee to be not at arm's length price. In order to make earnings, the corresponding costs have to be allowed; the assessee had incurred cost on Oracle Implementation provided by Eaton Ltd., UK and said Oracle platform was used by assessee to integrate its operations of APSSC unit in order to provide back office accounting services to Eaton entities. Once the transaction is closely and intrinsically linked to the business operations carried on by the assessee, then the same cannot be segregated and arm's length price of said transaction could not be taken at Nil. We find no merit in the approach adopted by TPO in this regard. We further find support from the ratio laid down by Pune Bench of Tribunal in assessee s group concern in Eaton Industries Manufacturing GmbH Vs. DCIT (supra), wherein it was held as under:- 16. In the present set of facts where the assessee is rendering procurement services to its principal and which in turn is being compensated on cost plus 18.8% mark-up; where the entire cost incurred by the assessee has been remunerated with a mark-up which is being offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial price decision and transacting. Further, under the umbrella of marketing support services rendered, the assessee pointed out that it undertook promotional activities in India and also liaisoned with the distributors and the sales representatives in India to facilitate the marketing and sale of Eaton Corporation products in India. It also identified customers in India and was responsible for managing the finance treasury, legal, pay roll and accounting performance. The assessee on the said basis claimed that since it was providing promotional activities in India, then its margins should be compared with Times Innovative Media Ltd., which was engaged in the business of organizing events for companies for advertising and marketing. The assessee had considered the events segment for the purpose of its analysis being comparable to marketing functions. We find no merit in the plea of assessee in this regard. The concern Times Innovative Media Ltd. was an event management concern and the functions performed by it were different from the functions performed by assessee of providing marketing support services. The nature of activities performed by assessee was marketing the products, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und of appeal raised by assessee. 25. Now, coming to merits of the issue raised, wherein the assessee is engaged in marketing support services and is also providing business support services to its associated enterprises. The concern which has been picked up during TP study report was Agrima Consultants International Ltd. on the premise that it was functionally comparable, but it was engaged in providing financial consultancy. 26. We find that the Tribunal in Dover India (P.) Ltd. Vs. DCIT (supra) has already held that Agrima Consultants International Ltd. was engaged in providing financial consultancy and the said company could not be said to be functionally comparable to a concern providing marketing support services. Where the comparables selected are not functionally comparable to the tested party, then the margins of such concern cannot be utilized for determining the arm's length price of international transactions undertaken by tested party. In view thereof, we direct the TPO to exclude margins of Agrima Consultants International Ltd. while benchmarking international transactions of assessee in both the segments pertaining to marketing and business support services ..... X X X X Extracts X X X X X X X X Extracts X X X X
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