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TMI Blog2019 (4) TMI 1304X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the assessee in these two appeals are as follows: (1) Whether the associated enterprises (AE) can be considered as a tested party as per Indian Transfer Pricing Regulation? (2) Accepting the audited segmental analysis for the transaction of purchase of finished goods, receipt of commission and sale of finished goods by the assessee from the Associated Enterprises (AE). (3) Administrative supports services and IT support services received by the assessee from the Associated Enterprises (AE) wrongly treated to be in the nature of stewardshipfunctions. 4. At the time of hearing, the ld. Counsel for the assessee informs the Bench that the assessee does not want to press ground Nos. 1, 4 and 6 of ITA No.726/Kol/2017, for A.Y.2012-13. The assessee also does not press ground Nos.1 and 4 of ITA No.2361/Kol/2017, for A.Y. 2013-14.Learned Departmental Representative for the Revenue, does not object therefore,we treat these grounds to be dismissed as not pressed. 5. Ground No.6 raised by the assessee in ITA No.2361/Kol/2017, for A.Y. 2013- 14 and ground No.7 raised by the assessee in ITA No.726/Kol/2017, for A.Y.2012-13, relate to initiation of penalty proceedings under section 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (AEs). Nature of services Amount (Rs.) Purchase of raw material 88,41,91,807/- Purchase of traded or finished goods 6,03,35,496/- Sale of finished goods 18,56,380/- Commission received 1,13,61,927/- Support services - Availed 5,06,94,589/- The arm's length price of the international transactions representing different functions with associate enterprises(A.E), the method and the profit level indicator (PLI) used for bench marking such transaction are summarized in the table below: Nature of services Method Purchase of Refractories TNMM Export of refractories TNMM Receipt of Agency Commission TNMM The assessee has benchmarked the above transaction on entity level by applying TNMM as Most appropriate method (MAM) and Operating Profit on Sales as the profit level indicator (PLI). The PLI of the entity is arrived at 2.92% while that of the comparable uncontrolled transaction was calculated at 10.48%. The assessee has justified the above transaction by working out the average weighted adjusted working capital of the comparable for the three years i.e. F.Ys 2009-10, 2010-11 and 2011-12 at 7.34%. Even though the PLI of the comparable is more than the PLI of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (AE) to be the tested party. These two grounds read as under: 1. That on the facts and circumstances of the case, the Ld. TPO and accordingly the Ld. AO failed to provide due cognizance to the fact that in relation to the purchase of raw materials, the assessee was engaged in manufacturing operations which entails entrepreneurial function and related risks, whereas, the AEs were mere suppliers of the products based on orders from the assessee. 2. That on the facts and circumstances of the case, with regard to the manufacturing function, the Ld. TPO and accordingly the Ld. AO failed to provide due cognizance to the assessee's functional, asset and risk profile, thereby selected the assessee as the least complex entity and consequently the tested party thereby, benchmarked the profitability earned by it which is in contravention to the arm's length principle. The assessee submitted before the ld. DRP, the following documents and evidences to demonstrate that Associate Enterprise (AE) should be the tested party. (i) The summary of functions, assets, risk driver of the assessee to demonstrate it as more complex entity, which are placed on paper book at page nos. 708 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take their AEs as the tested party. The arm's length approach of the assessee in considering the profit of its foreign. AEs for the purposes of comparison with profit of comparables (foreign), to determine the ALP of transaction between the assessee and its foreign AEs is patently an unacceptable position having no sanction of the Indian transfer pricing law. The undersign would like to highlight that in the following Tribunal rulings it has been held that overseas entity should not be considered as tested party for the analysis. They are: (i).CybertechSystems & Software Ltd. Vs. Assistant Commissioner of Income Tax reported in (2013) 33 Taxman.com 371 (Mumbai- Tribunal) (ii).AurionproSolutions Pvt. Ltd. Vs. Assistant Commissioner of Income Tax, Range- 4(3), (Mumbai) I.T.A. No. 7872 (Mumbai) of 201l. (iii). Onward technologies Limited Vs DCIT 35 taxmann.com 584 wherein it was held as under: In the case of Cybertech Systems & Software Limited Vs. ACIT (33 taxmann.com 371) 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 Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in appeal before us. 13.Ld Counsel for the assessee, Shri J.P. khaitan, begins by pointing out that assessee company is more complex entity and the same can be ascertained from Function, Assets and Risks ( FAR profile) of the assessee company. The ld Counsel submitted thatassociate enterprise (AE), which is least complex entity should be selected as tested party. Before the hon`ble DRP, the assessee submitted that associate enterprise (AE) with respect to their segmental data for the activity undertaken, should be the tested party, as it is a least complex entity. The ld Counsel further submitted that taking into account the summary of functions, Assets and Risks profile of the assessee company which is given in paper book page No.683 to 601, clearly demonstrates that assessee company is a more complex entity hence it should not be selected as a tested party.The assesseecompany bears the credit risk, warranty risks, product liability risks, foreign exchange risks and inventory risks therefore it is more complex entity whereas the Associate Enterprise (AE) do not bear these risks hence it is a least complex entity.The OECD guidelines and Guidance Note issued by the ICAI recomme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixation is done by the assessee company with the following customers ( for the sake of example): (a)IFGL Ltd, paper book page 528-536. (b) Tata Refractory Ltd.paper book page538 to 547. (c ) TRLCrosaki Ltd.paper book page548 to 555. (d).The credit risks are borne by the assessee company (vide paper book page nos. 556 to 577). (e). The assessee company bears warranty risk and product liability risk. (f)The assessee company handles the complaints from the customers, vide paper book page 578 to 593. (g) The assessee company bears the foreign exchange risk. (i) The assessee company also bearsthe inventory risk. Having gone through the functions, assets and risks profile (FAR analysis) of the assessee company and other risks borne by the assessee company, as mentioned above, the ld Counsel claimed that the assessee company is a more complex entity therefore it should not be considered as a tested party. However, we have gone through the FAR profile of associated enterprises (AE), and we find that the associated enterprises (AE) is not so complex as the assessee company, hence based on the factual position narrated above, the associate enterprise (AE) can be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... least complextested party is to be selected. Therefore, the TPO as well as the DRP should take into consideration such a plea before them, provided, it is demonstrated as to why the change in the tested party will produce better or more appropriate ALP on facts of the case. Therefore, we reject the contention of the ld. DR and also the observation of the TPO that the AE can not be a tested party. We note that the associate enterprise (AE) has the following characteristics: (i).Performs simpler functions; (ii).Assumes minimal risks; (iii). Does not own valuable intangibles / unique assets; and (iv). Reliable data regarding uncontrolled comparable companiesis available. Therefore, the assessee pleaded before the Ld. Panel to consider the functional analysis provided above, to select the AEs as the tested party being the least complex entities. The assessee urged, the Ld. Panel to rely on the information presented above which is due to some information coming to the knowledge of the assessee tax payer which reflects facts contrary to the facts captured in the TP study. In this context, we rely on the case of Deputy Commissioner of Income- tax v. Quark Systems (P.) Ltd. ([201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Rules do not restrict taking an overseas entity/AE of an enterprise as the tested party. The two sub-rules provide the yardsticks for comparability of an international transaction with an uncontrolled transaction. It may kindly be noted that in order to establish the ALP, determination of the 'tested party' plays a very important and key role since one needs to identify comparables and compare the same with tested party. In this regard, the Ld. Panel's kind attention is also drawn to para 3.18 and para 3.19 of the TP Guidelines issued by Organisation for Economic Cooperation and Development ('OECD TP Guidelines') that also highlight the above point. Para 3.18 states that: When applying a cost plus, resale price or transactional net margin method as described in Chapter 11, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regulations prescribe mandatory annual filing requirements as well as maintenance of contemporaneous documentation by the taxpayer in case international transactions between associated enterprises cross a threshold and contain stringent penalty implications in case of noncompliance. The primary onus of proving the arm's length price of the transaction lies with the taxpayer. The Indian transfer pricing administration prefers Indian comparables in most cases and also accepts foreign comparables in cases where the foreign associated enterprise is the less or least complex entity and requisite information is available about the tested party and comparables." (emphasis added) 20. We note that the landmark ruling by the Coordinate Bench, Kolkata Tribunal, in the case of Landis + Gyr Limited (ITA Nos I.TA No. 37/Kol/2012, Assessment Year: 2007-08, & I.TA No. 1623/Ko1/2012, Assessment Year: 2008-09) spoke about overseas party as a tested party. Relevant findings are given below: 5.2.11. We find that the concept of overseas tested party and foreign comparable companies is well recognized and acknowledged by Indian Revenue as could be seen from India's commentary in United Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the assessee by selecting GMDAT as 'tested party' as directed above, this issue is restored on the files of the TPO. It is ordered accordingly. (emphasis added) 22.Further, the Coordinate Bench of Kolkata Tribunal in the case of Development Consultants Private Limited [2008-TII-03-ITAT-KOL-TP] affirmed that in order to select the most appropriate method for determining the arm's length price, it is first necessary to select the tested party, which will be least complex of the controlled tax payers engaged in the transaction and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. The relevant extract has been given below: "5 However, in order to determine the most appropriate method for determining the arm's length price, it is first necessary to select the tested party'. The transfer pricing legislation in India does not provide any discussion or mention of the concept of 'tested party'. In order to understand the concept of tested party we need to refer to the transfer pricing legislations of developed countries where the principles of transfer pricing have been in use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial uncontrolled comparables " (emphasis added) Typically, the "tested party" would be the least complex of the transacting entities, i.e. the simpler entity in terms of intensity of functions performed and risks assumed; and would also not own valuable or non-routine intangibles. Accordingly, this entity would also typically earn routine but steady returns. As a general rule, entrepreneurs should not be considered as "tested parties" and accordingly benchmarked, since, by virtue of their complex functional and risk profiles, their margins fluctuate heavily with the vagaries of the economy, thus making comparability analysis extremely difficult and unreliable. Further, the financial results of theentrepreneur, being the ultimate fallout of third party businesses, often depend on external economic factors in the market; and not on the internal pricing policies of the MNC group. This concept of "tested party" is fundamental to transfer pricing. Based on the above analysis of the functions and risks assumed by both the parties, it can be reasonably concluded that Almatis India is engaged in operation that entails entrepreneurial function and related risks.The AE, on the other ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, we have gone through the foreign associated enterprises and its profile and we find that the foreign associated enterprises can be treated as a tested party because it is the least complex party. For that our views are fortified by the following judgments of the Co-ordinate Benches of Kolkata and Delhi which are already discussed above in detail: i) Landys + Gyr (Kolkata) (supra) page 21 para 5.2.11 ii) Ranbaxy Laboratories Ltd. vs. ACIT (supra) (110 ITD 28) (ITAT Delhi) We note that Indian Transfer Pricing guidelines issued by the Institute of Chartered Accountant of India vide guidance noted on report u/s 92E by ICAI and transfer pricing guidelines issued by the OECD and considering the united nation practical manual of transfer pricing for developing country, we note that in the assessee`s case under consideration, the Associate Enterprise(AE) can be selected as a tested party. Therefore, we direct the ld. TPO / Assessing Officer to treat the foreign associated enterprises as a tested party and compute the arms' length price adjustmentaccordingly. 27. Ground no. 2 raised by the assessee relates to accepting the audited segmental analysis for the transaction of pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee on the ground that the same was without any basis, far-fetched and not audited. The finding of the ld. TPO during the remand proceedings are given below for ready reference: "B. Additional Ground No. 3 That on the facts and circumstances of the case, the Ld. TPO and accordingly the Ld AO failed to provide due cognizance to the fact that in relation to the purchase of finished goods, receipt of commission and sale of finished goods, the assessee was engaged in trading functions and on the contrary selected a set of comparables having different functional profile, Assessee's Submission The assessee has submitted that it performs trading activities wherein it buys finished products from its AEs for resale in the Indian market. Further, certain products which are not in the product repertoire of Almatis India are directly sold by AE to third parties, in India. Alrnatis India provides certain support for such sale made by the AE in the form of liaison and administrative services. AE pays a commission to Almatis India for such support rendered. In addition, Almatis India has made a sporadic sale of traded goods to its AE in China which is due to immediate requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the grounds are dismissed wholesale." 33. We note that in order to justify the transfer pricing adjustment the segmental results should be considered. We note that the assessee has not submitted the segmental reports before the TPO, however, the assessee has submitted during the DRP proceedings which has not been considered by the ld. DRP. At the cost of repetition, we would like to state that in subsequent assessment year vide assessment year 2013-14 and A.Y 2014-15 (vide page no. 4 of the ld. DRP order) wherein the ld. DRP held that the adjustment can be made only on the basis of transaction and not on aggregation and accepted the segmental analysis of the assessee based on the same facts and circumstances and there is no change in law. Therefore, it is abundantly clear, thatld DRP in subsequent years have accepted the segmental analysis of the assessee. The assessee's audited segmental analysis submitted before the Bench is placed on paper book page 915 to 916. We note that where segmental results are available, the adjustment can be made only on the basis of transaction and not on aggregation,for that we rely on the following judgments of Coordinate Benches: (i).M/s Synive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable and that the subsidiary in India incurred a loss due to which the entire investment as well as recoverable advance had been fully provided for in the books of account. Being so it is not comparable with the assessee company. 35. We have considered the arguments of both the parties. In our considered view for computing the net margin of the assessee for the purpose of transfer pricing only the cost related to the transaction with the AEs has to be considered and accordingly, we agree with the argument that segmental financial data is to be considered for the purpose of arriving at the net margin on an international transaction with the assessee's enterprises in respect of transactions carried on by the assessee. This view of ours is also supported by the order of the Hyderabad Bench of the Tribunal in the case of Foursoft Ltd. vs. DCIT (62 DTR 308) (Hyd). Same view has been taken by the Tribunal in various cases stated by the assessee." Therefore, respectfully following the findings of the Co-ordinate Benches in the above noted two judgments we direct the ld. TPO/Assessing Officer to consider the assessee's audited segmental results to compute arm`s length price (ALP). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a observed as follows: "20. Aggrieved by the order of the AO incorporating the directions given by the DRP in the fair assessment order, the Revenue has preferred appeal being ITA No.283/Kol/2016. The grounds of appeal raised by the Revenue before the Tribunal reads thus: "1.Whether on the facts and in the circumstances of the instant case, the ld DRP has erred in not evaluating the cost benefit analysis, in respect of such services without evaluation of comparable cost for such services, if procured from independent unrelated services, before concluding that payments made under the head management & IT Services were at arm`s length." The Almatis India (Assessee), has filed the Cross Objections, vide CO.No.23/K/2016 wherein the solitary grievance of the assessee is that the services received by assessee is not in the nature of Stewardship Services and therefore the assessee defended the order passed by the DRP. The assessee has raised eight grounds of Cross Objections but we are not reproducing them for the sake of brevity, as we have already noted the solitary grievance of the assessee in these cross objections. Since common issue is involved in Revenue appeal and cross obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one or more members of that group of related entities. The OECD Guidelines also concur with this view in paragraph 7.5: "There are two issues in the analysis of transfer pricing for intra-group services. One issue is whether intra-group services have in fact been provided. The other issue is what the intra-group charge for such services for tax purposes should be in accordance with the arm's length principle. " (emphasis added) 24. The Assessee does not have a full capacity to provide a range of services to its business and to the personnel working for it. In the interests of economy and efficiency the assessee desired to obtain these services from its associated enterprise Almatis-Germany. Almatis-Germany has expert resources in commercial, financial, accounting and other matters which would be employed for the benefit of the Almatis India. The Almatis India would have access to the resources and would pay appropriate consideration which would be commensurate with the amount paid to third party service providers. These support services relate to certain functional categories which have set out in the earlier part of this order and hence, we do no wish to repeat the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld otherwise be incurred if they were borne by the individual Almatis India. It is not disputed by the TPO that had the assessee not received such support from Almatis Germany, it would need to perform the functions in-house, or hire experienced and trained service providers. Such services are thus not in the nature of simply oversight functions, which have been performed by AlmatisGermany to protect its investment in the company. With regard to the services received from Almatis Germany, the company has submitted detailed evidences to the Ld. TPO in the form of emails, communications and reports which evidence the rendering of services and the ensuing benefits. Nature of service i.e. Information Technology, Human Resource, Operations, Purchasing, Marketing Support, Finance and Planning has been evidenced by way of such communication/ documents. It was neither disputed by the TPO that apart from services which are received in the form of emails, reports, documents etc. from Almatis Germany, the assessee also received constant and continuous information over calls, audio-video conferences, personal visits etc. Therefore, the benefits received in the above form ought to have been gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Almatis India to AlmatisGermany are held to be at Arm's Length. Consequently, we confirm the order passed by the ld DRP and the appeal of the Revenue ITA No. 283/Kol/2016 is dismissed." 40. We also note that in subsequent assessment year 2014-15, the ld DRP, in assessee`s own case ( vide page 6-7), based on the same facts and circumstances, deleted the addition made by ld TPO on account of administrative supports services and IT support services received by the assessee from the Associated Enterprises (AE), which was wrongly treated by ld TPO to be in the nature of stewardship functions. 41. As the issue is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench , in assessee's own case (supra) and there is no change in facts and law and the revenue is unable to produce any material to controvert the aforesaid findings of the Co-ordinate Bench in assessee's own case, for assessment year 2011-12 (supra), we find that the issue is squarely covered in favour of the assessee and therefore we allow the ground no. 3 raised by the assessee. 42. In the result, boththe appeals of the assessee in ITA No.726/Kol/2017 for A.Y.2012-13 and ITA No.2361/Kol/2017 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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