TMI Blog2018 (11) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... ost appropriate methods being backed by supporting material. Without complying to the statutory provisions, the Transfer Pricing Officer certainly cannot determine the arm's length price on ad-hoc / estimation basis. Thus we delete the adjustment made to the arm's length price of payment made towards availing information system services from AE - decided in favour of assessee. - ITA No. 7145/Mum/2017 - - - Dated:- 13-11-2018 - SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM For The Appellant : Shri Percy J Pandiwala And Madhur Agarwal,ARs For The Respondent : Shri Jayant Kumar CIT DR And Manoj Kumar, JCIT ORDER PER MAHAVIR SINGH, JM: This appeal by the assessee is arising out of the order of Despite Resolution Panel-I, Mumbai [in short DRP], dated 21.11.2013. The Assessment was framed by the Income Tax Officer ward-9(3)(2), Mumbai (in short ITO/TPO) for the A.Y. 2013-14 vide order dated 11/09/2017 under section 143(3) of the Income Tax Act, 1961 (hereinafter the Act ). 2. The first issue in this appeal of assessee is against the order of DRP, Mumbai upholding the action of the AO/TPO in determining the Arm s Length Price (ALP) of the internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.10 5. Freight reimbursement 11.27 6. Subscription of equity shares 50.00 7. Availing of recurrent and specific service (S3 IS expenses) 11.50 The assessee selected the Transactional Net Margin method ( TNMM ) as the most appropriate method for determining the arm slength price of the aforesaid international transactions with Profit Level Indicator ( PLI ) of Operating Profit ( OP ) / Operating Cost ( OC ). The assessee s PLI was at 16.8% and comparables were at 6.9% (5 comparables selected and PLI computed on multiple year data basis). During the transfer pricing assessment proceeding, originally the show cause notice was issue by the Transfer Pricing Officer ( TPO ) asking the assessee to show cause as to why the deduction under section 10AA of the Act should not be reduced on the ground that the profit earned on the transactions with Associated Enterprise ( AE s) are excessive. The assessee vide letter dated 08.09.2016 explained that adjustment should not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upheld the order of the TPO. Aggrieved, assessee came in appeal before Tribunal. 5. We have heard rival contentions and gone through facts and circumstances of the case. Before us Ld Counsel for the assessee argued in respect to adjustment made on account of export of finished products. He stated that it is not open to the TPO to select two different method for interconnected transactions. For this he narrated the facts that the TPO has selected two methods i.e., TNMM and CUP as the most appropriate method for benchmarking the export finished products, out of total AE sales of INR 446.19 crores, the common sales to AEs and non-AEs was only amounting to INR 136.08 crores, i.e. only 30% of the products were sold to AEs and non-AEs,. Thus, TPO applied CUP for such 30% of the transactions and TNMM for rest of the transactions, which eventually leads to application of two methods for the same nature of transaction. He also submitted that TPO having accepted TNMM as the most appropriate method for 70% of the Transactions, it is not open to the TPO to select another method for balance transactions. He explained that all the transactions of sale of goods are inter connected and, hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e value chain. The Appellant sells manufactured products to third parties who are in the last step of the entire value chain vis- -vis group companies who are in the second last step of the value chain. Functional differences Appellant is not required to undertake marketing functions, distribution and other sales related functions vis- -vis sales to third parties, where the intensity of such functions are very high. Risks differences The market risk, business risk, inventory risk and capacity utilization risk (on account of large orders) and credit risk (supply to group company) in case of transactions with AE s are significantly lower as compared to the transactions with third parties. Therefore, considering the risk differences, the prices charged to third parties are higher than the prices charged to AEs in certain cases. Volume differences High volume (large bulk orders catering the group s requirement results better management of production supply chain and resource management. Lower volume (small order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60 Norlimbanol 250 10,825 73,314,292 43 1,331,314,321 Thus, we find from the facts of the case that the quantities sold to Non-AEs is significantly lower as compared with sales made to AEs. In fact the difference in quantities is to the extent of 1,294 times to 11 times. It is noteworthy that the CUP analysis of common products sold to AE and Non-AE, one of the example taken from the facts of the case is that w.r.t. product Damascenone Total , the assessee had sold 25 kg to a Non-AE at the rate of INR 38,000 per kg and sold 1,260 kg and 16,299 kg at the rate of INR 9,800 and INR 9,664 respectively to its AE namely, Firmenich Aromatics (China) Company Limited and Firmenich SA. Similarly, the assesee has sold 50 kg of the same product at the rate of INR 36,408 to other AE. Thus, TPO erred in comparing small; quantities with large quantities, thereby ignoring the volume difference. We also noted that when the quantity sold to a Non-AE is higher than that sold to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice or cost charged or paid or the profit arising from such transaction in the open market. Therefore, it is essential to adjust for the above mentioned differences in order to create level paying filed ie.. in order to ensure like by like comparison. Since, the TPO was unable to quantify the same, the CUP should not be used as the most appropriate method. 12. We find that this issue is covered by the decision of the Coordinate Bench of this ITAT in the case of M/s. Amphenol Interconnect India Pvt. Ltd., in ITA No. 477/Pun/2015 [TS-201-ITAT- 2014(PUN)-TP], wherein it is held as under: 8. In this regard, the Ld. Counsel for the assessee brought our attention to the DRP's order dated 24-12-2014 and read out the contents of Para Nos. 3.15 to 3.17 which read as under : 3.15 The assessee submitted that the TPO also disregarded and ignored Tribunal rulings which have laid down principles that the transactions will not be considered as similar for the purpose of benchmarking transactions under CUP method merely on account of similar products sold to AEs to third parties. These rulings are as under: Intervet India Private Limited Vs ACIT (ITA No.3185/Mum/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterials. 9. From the above, we find in principle the facts are the same. In those years too, Transfer Pricing adjustments were made to the transactions with Associated Enterprises with reference to the Export of goods and Import of the raw materials. Appropriateness of the TNMM method was also the issue in those years. Tribunal decided the issue in favour of the assessee and dismissed the appeal of the revenue on those issues. After hearing both the ITA No.477/PUN/2015 sides and perusing the contents of the DRP, we are of the opinion that the order passed by the DRP with reference to the most appropriate accounting method for TP study, is fair and reasonable and same does not call for any interference. Accordingly, the ground raised by the Revenue is dismissed . 13. Further, Hon ble Bombay High Court dismissed the appeal of the Department filed by the Department against the ITAT s order and noted that in this case, since the finished goods are customized goods and the geographical differences, volume differences, timing differences, risk differences and functional differences, the CUP method would not be the most appropriate method to determine the ALP. It upheld the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S3-ERP software and availing services pertaining to IS S3 from its AE i.e. Firmench SA. The assessee had switched over from the old accounting software, stock maintenance software and software for other purposes into S3-ERP being SAP software in AY 2011-12 which was developed / acquired by AE for all its entities around the world. The TPO, relied on the previous year s order for AY 2012-13 wherein based on estimates of man hours of services and salary, an ALP of INR 1,62,05,000 was determined. The TPO in AY 2013-14, followed the same mechanism (considering the same man hours and salary) and determined the same ALP of INR 1,62,05,000. This resulted in an adjustment of INR 9,88,26,934 (i.e. INR 11,50,31,934/- minus INR 1,62,05,000). At the outset it is stated by Ld. Counsel that this issue squarely covered by Tribunal decision in assessee s group company in case of ITA No. 2590/Mum/2017 (A.Y.2012-13) Firmenich Aromatics India Pvt.Ltd Vs Dy. Commissioner of Income Tax, dated 23.07.2018, Wherein the Tribunal held as under: 21. We have considered rival submissions and perused materials on record in the light of decisions relied upon. Though, the Transfer Pricing Officer has al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer is duty bound to determine the arm's length price by following any one of the most appropriate method prescribed under the statute. It is relevant to observe, the DRP has approved the determination of the arm's length price by the Transfer Pricing Officer without properly appreciating the implication of the relevant statutory provisions. As regards the observations of the DRP regarding the report of the KPMG, it is necessary to observe that the KPMG report is not an audit report but was furnished by the assessee to support the attribution of cost. Therefore, it cannot be said that it is a qualified report. It is further relevant to observe, the material submitted before us, which also forms part of the Transfer Pricing Officer's record, indicates that the cost of the software has been allocated to 40 group companies across the globe who are using the software and related services and assessee's share in cost allocation works out to 2.3%. Moreover, when the Transfer Pricing Officer himself agrees that the AE has provided software and certain services, there is no reason for not accepting the payment made to the AE to be at arm's length in the absence of any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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