TMI Blog2018 (9) TMI 1851X X X X Extracts X X X X X X X X Extracts X X X X ..... rating profit/operating cost of the assessee as 25.49% as against non-AE at 5.26%. In that view of the matter, we deem it appropriate to remand the issue to the file of the CIT (A) for examining the correctness of the ALP at the entity level by applying the TNMM as the most appropriate method by aggregating the transactions. CIT (A) is directed to take the remand report from the TPO in this regard and afford the assessee adequate opportunity of being heard in the matter. ALP adjustments in respect of the payment of fees for technical services - arm's length price of these services was NIL under the CUP method, the TPO had to necessarily demonstrate that the same services, whatever be its intrinsic worth, were available for NIL consideration in an uncontrolled situation; that is not, and that cannot be, the case. It is also not the case of the authorities below that the arm's length price of these services, under any other legally permissible method is, NIL There is thus no legally sustainable foundation for the impugned ALP adjustment. We observe that the comparability analysis in the TP study carried out by the assessee by aggregation of transactions adopting TNMM as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng services to domestic pharmaceutical companies. In this regard, the assessee was to pay AIHPL License Fee @ 8% on Net Sales and Management Fee @ 3% of Net Sales. For Assessment Year 2013-14, the assessee filed its return of income on 18.11.2013 declaring income of ₹ 43,62,66,300. The case was taken up for scrutiny and on the basis of international transactions reportedly entered into, the Assessing Officer made a reference under Section 92CA of the Income Tax Act, 1961 (in short 'the Act') to the Transfer Pricing Officer ('TPO') for determination of the Arm's Length Price ('ALP') thereof. The TPO passed an order under Section 92CA of the Act on 28.10.2016 proposing an adjustment of ₹ 10,52,95,928; comprising of ₹ 5,05,29,393 towards License Fee for use of know how and ₹ 5,47,66,535 in respect of management fees. The Assessing Officer accordingly completed the assessment under Section 143(3) r.w.s. 144C of the Act vide order dt.5.1.2017 wherein the assessee's income was determined at ₹ 56,73,98,890 in view of the following additions/disallowances :- (i). (i) Transfer Pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The LAO and the Learned TPO had erred in not appreciating the totality of the facts of the Appellant and erred in holding that the ALP of the license fee is 'nil' and consequently erred in treating the entire license fee payment of ₹ 5,47,66,535/-as a transfer pricing adjustment under section 92CA of the Act. The LAO and the Ld. TPO also erred in fact and in law: 5.1 In rejecting the transfer pricing analysis undertaken by the Appellant to substantiate the arm's length nature of the said payment. 5.2 In holding that the payment of royalty for contract manufacturing activities is not mandated. 5.3 In not considering the fact that the license fee payment involved in procuring technical know-how which was essential for the manufacture and export of the products. 5.4 In holding that the payment of license fees does not satisfy market conditions without appreciating that the Appellant is a joint venture entity. 5.5 In not appreciating the contention of the Appellant that the license fee is recovered as part of the sales price. 5.6 The LAO and Learned TPO erred in not appreciating that in respect of the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AIHPL'). 5.2.1 The learned Authorised Representative of the assessee was heard in support of the grounds raised. At the outset, the learned Authorised Representative submitted that the only issue for consideration and adjudication in this appeal was whether OR not License Fee and Management Fees are to be held to be closely linked to the international transactions of sale of pharmaceutical formulations to 'AIHPL' South Africa. AT the outset the learned Authorised Representative submitted that the issue for consideration before us is covered by the decision of a co-ordinate bench of this Tribunal in the assessee's own case for Assessment Years 2009-10 and 2010-11 in Dy. CIT v. Adcock Ingram Ltd. [2018] 90 taxmann.com 298 (Beng. - Trib.) and that once ground No.2 (supra) is adjudicated, grounds 3 to 6 (supra) would become academic in nature. 5.2.2 The learned Authorised Representative submitted that the transactions of payment of License Fees and Management Fees were inter-linked with the primary activity of the assessee and cannot by separately bench marked, but are to be aggregated. The learned Authorised Representative prayed that the matter be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e recent judgment of Hon'ble Delhi High Court in Sony Ericsson Mobile Communication India (P.) Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 wherein it was held that aggregation of such transaction is permissible and relied upon the OECD Commentary in this regard. 80. The use of expression 'class of transaction', 'functions performed by the parties' in Section 92C(1) illustrates to the contrary, that the word 'transaction' can never include and would exclude bundle or group of connected transactions. More important would be reference to meaning of the term 'transaction' in Section 92F, clause (v), which as per the said definition includes an arrangement or understanding or action in concert whether or not the same is formal or in writing, whether or not it is intended to be enforceable by legal proceedings. Rule 10A in clause (d) states that for the purpose of this Rule and Rules 10AB and 10E , the term 'transaction' would include a number of closely linked transactions . This Rule in positive terms declares that the legislative intent is not to deviate from the generic rule that singular includes plural. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce method, and CP method (i.e. cost plus method) can be applied to a transaction or a closely linked or continuous transactions . Their Lordships have, in this backdrop, put in a word of caution that thus, it would be inappropriate to proceed with the arm's length price computation methods with a preconceived notion of singularity as a statutory mandate and that clubbing of closely linked, which could include continuous transactions, may be permissible and not ostracised . Clearly, therefore, in certain situations, such aggregation of transactions is permissible for benchmarking even when the prices at which transactions are entered into are different. In principle thus aggregation of transactions can be done and is permissible ................... And coordinate bench decision in the matter of Cummins India Ltd. [2015] 53 taxmann.com 53 (Pune - Trib.) wherein it was held as under 24. The first issue arising in the present appeal is whether in view of the OECD guidelines and the Indian Transfer Pricing provisions, aggregation of transactions could be made or not. We find that Pune Bench of the Tribunal in Demag Cranes Components (India) (P.) Ltd. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis. 31. In this background, considering the legislative intent manifested by way of Rule 10A(d) read with Rule 10B of the Rules, it clearly emerges that in appropriate circumstances where closely linked transactions exist, the same should be treated as one composite transaction and a common transfer pricing analysis be performed for such transactions by adopting the most appropriate method. In other words, in a given case where a number of closely linked transactions are sought to be aggregated for the purposes of bench marking with comparable uncontrolled transactions, such an approach can be said to be well established in the transfer pricing regulation having regard to Rule 10A(d) of the Rules. Though it is not feasible to define the parameters in a water tight compartment as to what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appropriate methods for each of the above transactions when considered on a standalone basis. However, under particular circumstances, one single method maybe chosen as the most appropriate method covering all the above transactions as the same are closely linked. (Underlined for emphasis by us). 17. In view of the above we hold that the aggregation of transaction's as done by the assessee and as upheld by the CIT(A) were in accordance with law further there is no specific challenge by the Revenue before us challenging this finding of Fact that bundle approach of assessee and CIT(A) were incorrect. 18. Having held so now we are duty bound to decide the grounds raised before us in the light of the admitted position that aggregations of transactions as done by the assessee and upheld by the CIT(A) were in accordance with law. License fee 19. We may mention that Indian TP provisions do not contain any specific guidelines on Intra-group service payments (management fees and license fee etc). In many cases the TPO has arrived at an ALP as Nil, by arriving at a conclusion that no benefit has been obtained by the assessee from such intra-group s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion have been exported to it and thereafter TPO had recorded that there is a huge difference in profit margin of a related party sales and the contract manufacture . in our vie the approach of TPO was not correct as it is contrary to law laid in the case of EKL Appliances, Delhi High Court, 345 ITR 241 and Dresser Rand, Mumbai Tribunal, 13 taxmann.com 82 (Mumbai) where Hon'ble court and tribunal had held (i) Not necessary for the assessee to show that any legitimate expenditure was also incurred out of necessity (ii) Not necessary to show that any expenditure incurred for the purpose of business has actually resulted in profit or income, either in that year or subsequent years (iii) The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business (I) TPO is expected to examine the international transaction as he actually finds the same and then make suitable adjustment. Wholesale disallowance is not authorised And further in Dresser Rand, Mumbai Tribunal, 13 taxmann.com 82 (Mumbai) it was held as (1) TPO/AO cannot question the commercial wisdom of the taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was 25.49% as against the non-AE it was 5.26%. However, we observe that the comparability analysis in the TP study carried out by the assessee by aggregation of transactions adopting TNMM as the most appropriate method has not been examined by either of the authorities below who have merely concentrated merely on the issue of aggregation/segregation of transactions. The CIT (A) has mechanically accepted the results of the assessee to be at arm's length by accepting the operating profit/operating cost of the assessee as 25.49% as against non-AE at 5.26%. In that view of the matter, we deem it appropriate to remand the issue to the file of the CIT (A) for examining the correctness of the ALP at the entity level by applying the TNMM as the most appropriate method by aggregating the transactions. The CIT (A) is directed to take the remand report from the TPO in this regard and afford the assessee adequate opportunity of being heard in the matter. MANAGEMENT FEES 21. Similarly the assessing officer/TPO had made the addition for ₹ 165592899/- on the protest that there is no requirement for the assessee to pay for the Management fees and further it was mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be any occasion for the same services being rendered by a person without specialized knowledge. On the one hand, it is held that arm's length price of these services is zero value, and, in the same breath, it is held that there would hardly be any substantial payment for these services. Clearly, services are rendered on the facts of the present case. There is sufficient material on record to show that the assessee was, under the agreement, entitled to receive a package of services on as and when required basis. The emails and other documentary evidences show that the assessee was in receipt of these services. Just because these services were too general, in the perception of the authorities below, or just because the assessee did not need these services from the outside agencies, cannot be reason enough to hold that the services were not rendered at all. We have perused the material before us, and, in our considered view, the assessee has reasonably established rendition of services. The assessee may not have received all the services under the agreement but essentially the assessee had right to receive all these services, as and when required, under the agreement. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting the economic analysis, and concluding that no service is received or no benefit, and/or services received are duplicative in nature. 6. That, on the facts and circumstances of the case, the DRP and TPO/AO erred in presumptively holding that the revenue authorities are empowered to question the commercial decision of the appellant and in not appreciating the jurisprudence that the DRP and the AO/TPO cannot go beyond their powers to question the business decision of the company. 7. That, on the facts and circumstances of the case, the DRP has erred in confirming that the TPO has discharged his statutory onus by establishing the conditions specified in (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm's length price determined by the appellant and proceeding to decide the arm's length price himself. 8. That, on the facts and circumstances of the case, the DRP and TPO/AO have erred in conducting economic analysis of the international transactions without relying on any comparable transaction/companies using inappropriate method. 9. That, on the facts and circumstances of the case, the DRP and TPO/AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this service was also taken as NIL. The same was the case with respect to the payments for other services. Accordingly, no arm's length value was assigned to these services also. In respect of these cases TNMM was rejected and CUP was applied though, even under CUP method, value assigned was nil as, in the opinion of the TPO, these services were worthless. 13. When Assessing Officer proposed to make disallowance in respect of payments for the above services, arm's length value of which was taken at 'zero', aggregating to ₹ 31,23,325, as against total management fees of ₹ 58,20,571 paid by the assessee, assessee carried the matter before the DRP but without any success. The DRP confirmed the stand so taken by the TPO, Accordingly, an ALP adjustment of ₹ 31,23,325 was made by the Assessing Officer. The assessee is aggrieved and is in appeal before us. 14. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 15. One of the very basic pre-condition for use of CUP method is availability of the price of the same product and ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments. 18. We are also of the considered view that in the absence of prerequisites for application of CUP methods being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO's impugned action cannot meet our judicial approval. 19. For the detailed reasons set out above, we uphold the grievance of the assessee and direct the AO to delete the impugned ALP adjustment of ₹ 31,23,325. The assessee gets the relief accordingly. 25. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. 26. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for cost allocation based on turnover at the rate of 3 per cent. For the sake of repetition approach of the assessee as well as the Commissioner has not been challenged by the revenue before us whereby by the aggregation of transactions has been done. The computation of nil for Management services by the TPO was done on the basis of method not permissible under the laws by bringing in the comparable uncontrolled transaction by the TPO. These are at has to be done on the basis of a permissible method of ascertaining the arm's length price. It cannot be open to the TPO to reject a method of ascertaining the arm's length price without applying a legally permissible method to substitute for the method of ascertaining ALP as adopted by the assessee. To hold that the arm's length price of these services was NIL under the CUP method, the TPO had to necessarily demonstrate that the same services, whatever be its intrinsic worth, were available for NIL consideration in an uncontrolled situation; that is not, and that cannot be, the case. It is also not the case of the authorities below that the arm's length price of these services, under any other legally permissible meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have accrued. That exercise - of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot - after a consideration of the facts - state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO. Whilst the report of the TPO in this case ultimately noted that the ALP was 'nil', since a comparable entity would pay 'nil' amount for these services, this Court noted that remarks concerning, and the final decision relating to, benefit arising from these services are properly reserved for the AO. The AO can, therefore, determine under Section 37 that the expenditure claimed (in this case, the referral fees) was not for the benefit of the business, and thus, disallow that amount. This does not restrict or in any way bypass the functions of the TPO. Quite to the contrary, it represents the correct division of jurisdiction between the two entitie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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