TMI Blog2019 (9) TMI 609X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO / DRP, the amount received by assessee from its parent company Nalco, USA was a capital receipt in the hands of assessee and hence, was not taxable in its hands. Treatment of said amount while determining the PLI of assessee - assessee claims that the amount is to be taken as operating income since the said receipt was to make good losses incurred by assessee in earlier years and also current year - HELD THAT:- Once the subsidy of ₹ 65.19 crores was credited, there was profit of ₹ 2.03 crores. In other words, profit during the year was attributable to subvention amount of ₹ 65.19 crores and hence, it cannot be held that the amount was not operational in nature. The item of receipt was undoubtedly, an exceptional item of income but was not an extraordinary item of income. The assessee was also compensated for additional revenue expenses incurred by it for transferring its establishment from Kolkata to Pune and then running the same at Pune. Such onetime payment received by assessee is thus, operating in nature. The learned Authorized Representative for the assessee had pointed out that the subvention amount related to two years. We hold that amount relatab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment needs to be made on this account. Further, in any case, where when in the hands of Nalco US the services have been taxed as fees for included services, then corollary which follows is that the arm's length price of payment made for such services cannot be determined at Nil. Accordingly, we reverse the order of Assessing Officer/TPO/DRP and the grounds of appeal are thus, allowed Adjustment made vis- -vis international transactions pertaining to royalty - whether CUP method was the most appropriate method to benchmark the aforesaid transaction of payment of royalty? - HELD THAT:- Applying the rule of consistency which has been applied by the TPO himself in earlier years and also where the rate of payment of royalty at 6% had been approved by RBI for the earlier years and also for the part of year, then the same should not have been disturbed. The second aspect of issue is whether the rate of payment of royalty which has been approved by the Government of India i.e. RBI would constitute CUP data and the same could be applied for holding the transactions to be at arm's length. This proposition has been applied by the Hon ble Bombay High Court in CIT Vs. SGS Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatistical purposes. Transfer pricing adjustment vis- -vis in proportion with the value of international transactions - HELD THAT:- Issue now stands settled in CIT Vs. Hindustan Unilever Ltd. [ 2018 (10) TMI 1611 - SC ORDER] and CIT Vs. Firestone International P. Ltd. [ 2015 (6) TMI 1123 - BOMBAY HIGH COURT] . The benchmarking on account of transfer pricing adjustment, if any, has to be done for associated enterprises transactions only and not the entire turnover. Accordingly, we direct the Assessing Officer to carry out the said exercise after verifying the computation of proportionate adjustment filed by assessee before us and also after calculating the margins of assessee in line with our directions in the paras above. Use of multiple year data stands decided against the assessee, hence the same is dismissed. Non-granting of benefit of +/- 5% range - decided against the assessee and hence, the same is dismissed. Charging of interest under section 234B of the Act, which is consequential, hence the same is also dismissed. - ITA No.742/PUN/2017 - - - Dated:- 6-9-2019 - ANIL CHATURVEDI, ACCOUNTANT MEMBER AND SUSHMA CHOWLA, JUDICIAL MEMBER Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of headquarter common expenses and allocation of management assistance related fees. 5. On the facts and in the circumstances of the case and on the law prevailing on the subject, the learned AO/ TPO, pursuant to the directions of the Hon'ble DRP, has erred in determining the arm's length price of the international transactions of payment of headquarter common expenses and allocation of regional management assistance fees, by the Appellant to its Associated Enterprises, as 'Nil', without applying any specific method as prescribed by law and without carrying out any comparability analysis. 6. On the facts and in the circumstances of the case and on the law prevailing on the subject, the learned AO/ TPO pursuant to the directions of the Hon'ble DRP, has erred in holding that the Appellant has not demonstrated the need and the receipt of services under the headquarter common expenses and the allocation of regional management assistance, ignoring substantive documentary evidences submitted by the Appellant before the learned TPO/additional evidences submitted before the Hon'ble DRP, demonstrating the need, actual receipt of the serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. On the facts and in circumstances of the case and on the law prevailing on the subject, the learned AO/ TPO, pursuant to the directions of the Hon'ble DRP, has erred by not restricting the transfer pricing adjustment in proportion to the quantum of the international transactions. Subsidy received 11. Without prejudice to Ground No.2, on facts and in the circumstances of the case and on the law prevailing on the subject, the learned AO/ TPO, pursuant to the directions of the Hon'ble DRP, has erred in treating the amount of subsidy received from its AE as 'non-operating income'. Use of multiple year data 12. On the facts and in circumstances of the case and on the law prevailing on the subject, the learned AO/ TPO, pursuant to the directions of the Hon'ble DRP, has erred in considering the single year data for the comparables i.e. data for FY 2011-12 only and in disregarding multiple year data, which was considered by the Assessee in accordance with the provisions of Rule 10B(4) of the Income-tax Rule, 1962. Non-granting of benefit of +/- 5% 13. The learned AO/TPO e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses and the allocation of regional management assistance as well as royalty separately, ought not to consider the same while determining the operating margin of the manufacturing and Contract R D segment. In the alternative, while computing the proportionate adjustment for the segments, if any, the headquarter common expenses and the allocation of regional management assistance as well as royalty amount should not be considered, since the headquarter common expenses and the allocation of regional management assistance as well as royalty amount are tested separately 5. Various issues have been raised in the present appeal and the parties were heard at length on each of them and we would refer to the facts, arguments and reliances placed upon by the assessee in respect of each of the said grounds of appeal, as we decide the said issues. 6. Briefly, in the facts of the case, the assessee company was engaged in the business of manufacturing and trading in water treatment chemicals, oilfield chemicals and industrial additives and equipments. For the year under consideration, the assessee had furnished return of income declaring total income at Nil. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olkata to Pune. During the year under consideration, the assessee received an operational subsidy / subvention fees of ₹ 65.19 crores based on an arrangement between it and Nalco, USA. The subsidy was provided for limited purpose so as to ensure that the assessee does not become sick company. The assessee had offered the said subsidy as taxable in its hands and there is no dispute about the same. Further, revenue expenses relating to relocation were debited to Profit and Loss Account. The assessee claims that the subsidy which was received by it was for expenses incurred in the normal course of carrying on of its business and hence, the same is to be considered as operating in nature, in the absence of any extraordinary nature of the same. On the other hand, the assessee also pointed out that expenditure on relocation was operating in nature for calculation of operating margins. The Transfer Pricing Officer (TPO) on the other hand, held that the subsidy received by it could not be considered as operating in nature as it was not an amount earned during the course of business of selling products / services and it was also held that it had no direct nexus with the business activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y specific item of revenue expenses. Hence, the arguments of assessee in this regard were not accepted. The DRP upheld the order of TPO in holding that subsidy received from associated enterprises could not be treated as item of operating income as it was an exceptional item which could not be considered as having arisen during the course of normal business operations. The approach of TPO in this regard was thus, upheld. 10. Coming to next plea of assessee that the object of granting subsidy was towards compensating the lower profits derived by assessee on account of international transactions carried out with its associated enterprises, the DRP referred to decision of Mumbai Bench of Tribunal in the case of UPS Jetair Express Pvt. Ltd. in ITA No.1166/MUM/2014, relating to assessment year 2009-10, order dated 28.08.2015. The Tribunal in the said decision had held that while subvention income was not in the nature of operating income but it had to be considered that lower profit as per transfer pricing had been made up to the extent such subvention income has been offered to tax. The Tribunal further held that additional income offered to tax by way of subvention income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to be made and secondly, having made TP adjustment, then no further adjustment needs to be made. He stressed that subvention income had filled up the whole of profits of business of assessee, then the TP adjustment must be made, whether filled up amount was taxable or not would not matter. The second issue which needs to be addressed is whether subvention income was not operating overall it was capital receipt, then the second step to be decided is what must follow in so far as TP adjustment was concerned. He stressed that same should be treated as operating income of assessee and in case it is held so, then nothing more survives. He stressed that as a matter of law, this must be adjusted to TP adjustment even if it is held that subvention was capital receipt. 12. On the next date of hearing, the learned Authorized Representative for the assessee pointed out that the assessee company in earlier years was in losses and the parent company gave subvention, which was to be treated as operating income. However, the Assessing Officer/TPO/DRP does not accept it as operating in nature. The learned Authorized Representative for the assessee stressed that the next issue of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Hon'ble Supreme Court had held that voluntary payments made by parent company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of assessee company. It was further held that if that is so, then the payment in question could not be held to be revenue receipts, hence they were capital receipts in the hands of assessee. Similar proposition has been laid down by the Hon ble High Court of Kolkata and Hon ble Delhi High Court in different decisions. 16. Applying the said proposition to the facts of present case, where the assessee had received the alleged subvention amount or the subsidy as referred to by the Assessing Officer / TPO / DRP, the amount received by assessee from its parent company Nalco, USA was a capital receipt in the hands of assessee and hence, was not taxable in its hands. 17. Coming to the next aspect of treatment of said amount while determining the PLI of assessee, the assessee claims that the amount is to be taken as operating income since the said receipt was to make good losses incurred by assessee in earlier years and also current year. The assessee has tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions of DRP in this regard. We in the final analysis hold that subvention income is capital receipt in the hands of assessee, hence not taxable. Further, we hold that the said subvention amount is operating in nature and has to be included as operating income while computing PLI in the hands of assessee restricted to the amount relatable to the instant assessment year. Thus, ground of appeal No.2 raised by assessee against taxability of subvention income is allowed and ground of appeal No.11 also stands allowed in favour of assessee. 19. Now coming to ground of appeal No.3, the issue which is raised is the depreciation on assets installed at the customers premises. 20. The issue stands covered in favour of assessee by the decision of Kolkata Bench of Tribunal in assessee s own case for assessment year 2008-09 in ITA No.2111/Kol/2013, vide para 9 of order dated 05.04.2017. Following the same parity of reasoning, we allow this claim of assessee. However, for the sake of brevity, the said para 9 is not being reproduced. The ground of appeal No.3 raised by assessee is thus, allowed. 21. Now, coming to the next issue raised vide grounds o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were not sufficient to support the case of assessee that services were rendered. In this regard, the learned Authorized Representative for the assessee placed reliance on the ratio laid down by Pune Bench of Tribunal in Emerson Climate Technologies (India) P. Ltd. Vs. DCIT (2018) 100 taxmann.com 478 (Pune-Trib.) and Eaton Fluid Power Ltd. Vs. ACIT (2018) 92 taxmann.com 158 (Pune-Trib.). The learned Authorized Representative for the assessee further pointed out that the issue vis- -vis payment of regional management and assistance fees to Nalco Singapore has been held to be at arm's length price by the Tribunal in assessee s own case for assessment years 2003-04 and 2004-05 reported in (2016) 71 taxmann.com 57 (Kol). The learned Authorized Representative for the assessee further pointed out that no adjustment was made vis- -vis management fees paid to Nalco Singapore for assessment years 2005-06 to 2008-09. He thus, stressed that payment of regional management and assistance fees paid to Nalco Singapore does not require any adjustment in the year under consideration. 24. Coming to next intra-group service charges paid by assessee to Nalco US, it was pointed out t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Ltd. Vs. ACIT (2018) 90 taxmann.com 357. 26. The learned Departmental Representative for the Revenue referred to the order of DRP with special reference to para 6.3 at page 21 and para 6.8 at page 22 of the order. He further stated that first of all, there should be need for availing the services and second and third issue was whether contemporaneous documents were available and fourth part of the issue was whether there was tangible and direct benefit to the assessee. He stated that before the DRP additional evidences were filed with regard to services made available. He then referred to the remand report of Assessing Officer at para 6.10 items (i) to (vi) and para 6.13 of DRP order at pages 26 and 27 and stated that there was no request by the assessee for the said services, hence it was case of no need of services. Further, no details of representatives visiting India and other regions were filed by assessee. He stressed that no evidence of services availed was available on record. It was further pointed out by the learned Departmental Representative for the Revenue that reliance of learned Authorized Representative for the assessee on Emerson Climate Technologi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thodology was adopted for allocating the cost entity-wise and allocation of costs were further certified by an independent accountant. The said certificate is placed at pages 798 to 802 of Paper Book. In respect of services availed from Nalco Singapore, the assessee had paid sum of ₹ 25.70 crores to Nalco Singapore and had claimed that the said intra-group services provided to it along with other group companies of Nalco in Asia Pacific Region were at arm's length. The assessee before us has filed evidences in support of services which in turn, were filed before the Assessing Officer/TPO/DRP at pages 145 to 783 of Paper Book. The TPO on the other hand, had determined the arm's length price of intra-group fees at Nil on the ground of lack of evidences. We find no merit in the plea of authorities below in this behalf especially where the assessee had demonstrated the availment of intra-group services and in support filed copy of agreement, under which it had availed the said services and had further furnished e-mails exchanged and other documents to establish its case of availment of services from its associated enterprises and also the benefits arising therefrom. In su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 any case. 20. Another aspect of the issue which needs to be kept in mind is the developing scenario of carrying on the business in the country. The said business is carried on by the entities which have presence outside India and have certain standards, which are attached to its brand name. In order to maintain its brand value, arrangements are made with different entities across the globe by holding companies, so that different entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 accurately measure these benefits in terms of money separately. The said principle laid down by the Hon ble High Court has been applied by the Delhi Bench of Tribunal in McCann Erickson India P. Ltd. Vs. Addl.CIT (supra) to hold whether the benefits derived by the assessee, in view of the evidences in respect of management service charges and client coordination fees, cannot be found fault with. 29. The Tribunal also adjudicated the argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he concerns providing similar services, were taken as comparable. Under the transfer pricing provisions, it is incumbent upon both the assessee and the authorities to select the most appropriate method to benchmark the international transactions. The Indian Tax provisions provided various methods for benchmarking the international transactions but it is the most appropriate method, which has to be selected for benchmarking international transactions. The assessee had picked up the TNMM method as most appropriate method since in the present case, the foreign associated enterprise was providing similar services to different entities and was taken as tested party. The said associated enterprise was allocating cost to all entities to which it was rendering services. The role of assessee in such scenario was to show whether the marginal support services provided to it were at arm's length price. The role of the TPO in this regard was also to determine that the price paid by the assessee for availing support services was at arm's length price. Secondly, the assessee has referred to the information filed before the TPO/Assessing Officer under which the allocation of cost on the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntra-group fees paid by assessee to Nalco US for providing services such as information technology, engineering support services, business development services, supply chain services. The assessee had grouped the said services under the head headquarter common expenses . As in the case of Nalco Singapore, similarly, in the case of Nalco US also, the services were provided by associated enterprises not only to the assessee but also to all other entities in Asia Pacific Group of Nalco group. The assessee has placed the evidences of availment of services both before the TPO and DRP and also before us. The assessee has filed the details of expats visited India for providing various services at pages 1014 and 1027 to 1037 of Paper Book. Further communication via e-mails containing details of Nalco US employees assisting Nalco India are placed at pages 1062 and 1063 of Paper Book, which were by way of engineering support services. 35. Coming to the next limb of services i.e. business development, the assessee had furnished various documents at pages 1072 onwards and at pages 709 to 711, 768 to 773 of Paper Book. In the IT support segment, the assessee had received presentat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y adopted by US company for recovering the expenditure from all entities under Nalco group and the same cannot be disturbed in the hands of assessee. The payment made by assessee was thus, at arm's length price and no adjustment needs to be made on this account. Further, in any case, where when in the hands of Nalco US the services have been taxed as fees for included services, then corollary which follows is that the arm's length price of payment made for such services cannot be determined at Nil. Accordingly, we reverse the order of Assessing Officer/TPO/DRP and the grounds of appeal No.4 to 6 are thus, allowed. 36. The issue raised vide ground of appeal No.7 is against adjustment made vis- -vis international transactions pertaining to royalty. 37. Brief facts relating to the issue are that the assessee had applied CUP method for benchmarking payment of royalty of ₹ 12,79,33,000/- to Nalco IP Holder LLC in its transfer pricing report. The assessee had entered into Technology and License Agreement with Nalco US and royalty was paid under the said agreement to Nalco IP Holder LLC, which was the intellectual property holding company of Nalco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue pointed out that the issue raised vide ground of appeal no.7 was against rejection of CUP method for determining the arm's length price of royalty payments. In this regard, reliance was placed on the order of DRP. 40. We have heard the rival contentions and perused the record. The issue which arises vide ground of appeal No.7 is for determining the arm's length price of payment of royalty to Nalco US of ₹ 12.79 crores. The assessee for benchmarking its transactions of payment of royalty had applied CUP method. The aforesaid payment was made to Nalco IP Holder LLC in terms of Technology and License Agreement entered into by the assessee with Nalco US. Nalco IP Holder LLC was the intellectual property holding company of Nalco US. The rate of payment of royalty was 6% for the period 01.04.2011 to 31.12.2011 which was approved by the Government of India for the period starting 01.01.2009 ending 31.12.2011;for the balance period i.e. 01.01.2012 to 31.03.2012, the rate of payment of royalty was 4%. The assessee had applied CUP method and compared the transactions with the rate of commission paid to other concerns and the arithmetic mean of the said wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to determine arm's length price of royalty payments made during the year. Accordingly, we reverse the order of Assessing Officer in holding that royalty payment is to be benchmarked with that of payment of raw material and other goods bought. The said transaction of royalty payment is to be benchmarked independently by applying CUP method and since the rates of commission paid to other concerns is at arm's length, no adjustment on this account is warranted in the hands of assessee. Accordingly, the TPO is directed to re-calculate the PLI of assessee by excluding the payment of royalty out of PLI determined for the segment of payment for raw materials and other goods bought. Consequently, ground of appeal No.7 raised by assessee is allowed. 44. The ground of appeal No.8 raised by assessee is not pressed and hence, the same is dismissed as not pressed. 45. Now, coming to ground of appeal No.9, the assessee is aggrieved by benchmarking analysis applied by authorities below while using TNMM method for benchmarking the international transactions pertaining to manufacturing segment. The assessee is also aggrieved by the set of comparables which are f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein he had finally selected different set of comparables, the mean margins worked out to 14.01%. The assessee s margins were also re-computed at (-) 1.37%. However, before the DRP, the assessee filed list of additional comparable companies and after the directions of DRP, finally selected comparables totaled 18 and the mean margins of comparables works out to 8.92%. The margins of assessee were re-computed at (-) 3.52% excluding intra-group service charges. In this regard, he pointed out that (a) margins of assessee would depend on whether subvention amount is operating or not; (b) whether intra-group services are to be allowed out of operating margins, if at arm's length; (c) whether royalty to be reduced in case no adjustment and all this would have bearing on operating margins. 48. Coming to second step, the learned Authorized Representative for the assessee filed tabulated details before us and pointed out that in respect of 9 comparables, there was no dispute and the same may be selected for final benchmarking. However, in respect of balance concerns, the learned Authorized Representative for the assessee pointed out that because of extraordinary events and ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating margins of assessee and thereafter to look into the objections raised by assessee vis- -vis the comparables finally selected and also the comparables which have not been finally selected. The assessee shall furnish complete details in this regard and the Assessing Officer shall decide the issue of final selection of comparables after taking into consideration the settled position on the issues after appreciating the facts relating to each of the comparables and in accordance with law. Hence, the ground of appeal No.9 raised by assessee is allowed for statistical purposes. 51. The next issue which was argued was ground of appeal No.10 and corrected additional ground of appeal No.2 i.e. in respect of second segment of import of raw materials and components of manufacturing segments. The first plea raised by assessee vide ground of appeal No.10 is against the order of Assessing Officer / DRP in not restricting TP adjustment to the value of international transactions. 52. The learned Authorized Representative for the assessee pointed out that the issue stands covered by the decision of Hon'ble Supreme Court in CIT Vs. Hindustan Unilever Ltd. (2 ..... 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