2019 (9) TMI 609
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....arned AO has also erred in disallowing depreciation of INR 64,09,577 on the assets installed at the premises of the Appellant's customers, by holding that the same were not used for the purpose of its own business. Corporate Taxation 2. 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 DRP has erred in holding that the amount of INR 65,19,47,000 received by the Appellant during the year under consideration as subvention money is a "revenue receipt" exigible to tax. 3. On the facts and in the circumstances of the case and on the law prevailing on the subject, learned AO pursuant to the directions of the DRP erred in disallowing depreciation of INR 64,09,577 on plant and machinery on the ground that the plant and machinery were installed at customer's premises and hence were not 'put to use' in the business of the Appellant. Transfer Pricing Considering the value of Management charges paid to Associated Enterprises at Rs. Nil: 4. 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 dir....
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....the law prevailing on the subject, the learned AO, pursuant to the directions of the Hon'ble DRP, has erred, in considering the aggregate of specialty chemicals and equipment segments for the purposes of computation of the Profit Level Indicator ('PLI') for the purposes of computation of the arm's length price for the international transactions of the Appellant pertaining to the manufacturing segment. 9. 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 modifying the benchmarking analysis, as conducted by the Appellant, using Transactional Net Margin Method for benchmarking its international transactions pertaining to manufacturing segment and thereby modifying the set of comparables. In doing so, the learned AO / TPO / DRP has erred in: i. adding / rejecting certain companies in the final set of comparables which were functionally not similar to the Appellant's manufacturing segment, and ii. rejecting the fresh search submitted as additional evidence. Not restricting the transfer pricing adjustment to the value of "international....
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....ot similar to the Appellant's R&D segment. 2. The Appellant submits that the AO / TPO / DRP, having tested the arm's length price of the international transaction pertaining to payment of headquarter common expenses and the allocation of regional management assistance 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 amount should not be considered, since the headquarter common expenses and the allocation of regional management assistance amount is tested separately. 4. The assessee on a later date filed corrected additional ground of appeal No.2, which reads as under:- 1. The Appellant submits that the AO / TPO / DRP, having tested the arm's length price of the international transaction pertaining to payment of headquarter common expenses 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 an....
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.... pursuant to directions of DRP had erred in treating the said subvention amount received from its associated enterprises as non-operating income. 9. Brief facts relating to the issue are that the assessee was part of Nalco group headquartered in USA. Nalco US was a leading global provider of water treatment and process improvement services, chemicals and equipment programs for industrial and institutional applications. Nalco US was the parent company of Nalco group of companies operating throughout the world. The assessee was a subsidiary of Nalco in India and was primarily engaged in the business of manufacturing and selling specialty chemicals such as water treatment chemicals, industrial additives, oilfield chemicals and de-mineralized water. The registered office of Nalco India was situated at Kolkata (West Bengal) and the manufacturing plants were situated at various parts in India. The assessee relocated its operations from Kolkata to Pune. During the year under consideration, the assessee received an operational subsidy / subvention fees of Rs. 65.19 crores based on an arrangement between it and Nalco, USA. The subsidy was provided for limited purpose so as to ensure that t....
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....e terms used for the payment was "onetime promotional allowance". In the Profit and Loss Account, the assessee had shown subsidy of Rs. 65.19 crores as an exceptional item of income. It was further noted by DRP that the assessee had incurred loss of Rs. 63.16 crores before this exceptional item of income and had shown net profit of Rs. 2.03 crores, after considering this exceptional item of income. The DRP agreed with the contention of assessee that subsidy income of Rs. 65.19 crores was thus offered to tax by assessee in return of income. However, the DRP did not accept the contention of assessee that subsidy was granted for additional revenue expenses incurred for relocation of operations from Kolkata to Pune, in the absence of any evidence in this regard. Though the internal Memo stated that the amount was paid for preventing the assessee from becoming sick company, but there was no reference to any 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 coul....
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.... it has been held that subvention received by assessee was capital receipt. He further placed reliance on the decision of Hon'ble High Court of Calcutta in Pr.CIT Vs. State Fisheries Development Corporation Ltd. (2018) 94 taxmann.com 466 (Cal) and on the decision of Hon'ble High Court of Delhi in CIT Vs. Handicrafts and Handlooms Export Corporation of India Ltd. (2014) 360 ITR 130 (Del). The learned Authorized Representative for the assessee thus stressed that where the said amount is to be treated as capital receipt, referring to decision in the case of UPS Jetair Express Pvt. Ltd. (supra), the learned Authorized Representative for the assessee pointed out that rationale of the said decision was that where profitability gap was filled up, then whether it was filled up by the taxable receipt or non taxable receipt is questionable. He stressed that first step was the TP adjustment 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....
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....mputing PLI for the year under consideration. The assessee was a subsidiary of Nalco, USA and since it was incurring losses, the parent company allowed promotional allowance to prevent the assessee from becoming sick company. This is evident from the Memo placed at page 139 of Paper Book and also from consequential Memo for approval of subvention and relevant e-mails and relevant documents thereto. The assessee received sum of Rs. 65,19,47,000/- towards subvention. The assessee had offered the said amount as taxable in its hands initially but before the DRP, it was pleaded that the same was not taxable in its hands. The issue vis-à-vis its taxability i.e. receipt of subvention from parent company now stands settled by recent decision of Hon'ble Supreme Court in Siemens Public Communication Network (P.) Ltd. Vs. CIT (supra). 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....
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....computing PLI of the assessee. We direct the Assessing Officer to carry out the said exercise. As far as reliance on the decision of Mumbai Bench of Tribunal in the case of UPS Jetair Express Pvt. Ltd. (supra) is concerned, wherein the proposition laid down was since the subvention income had been offered to tax, then the same would be available to the assessee for set off against TP adjustment proposed by TPO. The said proposition will not be applicable to the issue raised before us since the Hon'ble Apex Court has decided the taxability of subvention income to be capital in nature and hence, the said income is not taxable in the hands of assessee and same would not be available as set off as against TP adjustment made by Assessing Officer/TPO. Accordingly, there is no merit in the 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 ....
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....e us and raised grounds of appeal No.4 to 6 in this regard. The assessee is aggrieved by orders of authorities below in holding that the assessee had not demonstrated the need and receipt of services under 'headquarter common expenses' and the allocation of regional management assistance. 23. The case of assessee before us is that it had provided substantive documentary evidences before the TPO and also submitted additional evidences before the DRP demonstrating the need, actual receipt of services and benefit thereon. The learned Authorized Representative for the assessee further points out that the TPO had not applied any proper method to benchmark the aforesaid transactions and had erred in holding that evidences 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 th....
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.... attention was drawn to written submissions placed at page 1036 onwards of Paper Book and also evidences filed at pages 1027 to 1037, 1062 to 1063 and 1079 to 1081 of Paper Book. The learned Authorized Representative for the assessee here stressed that the Assessing Officer/TPO/DRP had no jurisdiction to determine the benefit test. It was also pointed out that where DRP does not doubt the services rendered especially where the Indian company had only 700 employees and all IT support services were given by Nalco US, then there was no merit in treating the arm's length price of said services at Nil. Further, reliance was placed on the ratio laid down by Kolkata Bench of Tribunal in the case of Philips India 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 sta....
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....ic IT team in setting up of IT facility of new office at Pune and evidence in this regard is placed at pages 357 to 362 of Paper Book. Further support was also received from global team in errors faced in accounting in Vendor account in SAP and tracking payments and the evidences are placed at pages 591 and 592 of Paper Book. Further, the assessee has also received HR support by way of e-mails between Global HR and Indian HR on account of increments, salary hikes and also technical training conducted in Dubai, evidences in this regard are placed at pages 496 to 504 of Paper Book. The associated enterprise was providing such support services to all entities in the Asia Pacific Region and methodology 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 Rs. 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....
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....eds to avail the said services. The answer to the same is 'No'. Each businessman is the best judge to come to decision as to whether 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 ....
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....e is no merit in the order of TPO in holding that as to whether the said concerns have given services or whether they are qualified to 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 ....
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....n hours basis plus mark up, which was at same level, then the same cannot be questioned. The allocation key applied by AE to allocate cost of services provided to different entities i.e. on man hour basis is one of the accepted methods and the same could not be brushed aside without bringing on record any adverse evidence. Now coming to the issue of bench working the said transaction. The assessee in the present case had taken the associated enterprise as tested party and had pointed out that the remuneration of support services was at arm's length price by applying the TNMM method, where the 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....
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....that there is no merit in the observations of TPO in holding that the assessee had not availed any services, hence the arm's length price of transactions was to be adopted at Nil. We reverse the findings of authorities below in this regard. 33. Another aspect which needs to be also considered in the case of assessee is that the Tribunal in assessee's own case in assessment years 2005-06 to 2008-09 (supra) has held that no adjustment is to be made vis-à-vis management fees paid to Nalco Singapore. 34. Now, coming to second part of intra-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 expa....
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....ind support from the ratio laid down by Pune Bench of Tribunal in the case of Emerson Climate Technologies (India) P. Ltd. Vs. DCIT (supra) and Eaton Fluid Power Ltd. Vs. ACIT (supra) and hold that TPO cannot benchmark the said transaction of availment of intra-group services at Nil on the ground of doubting whether any services were availed or not. In the present case, the aforesaid services were availed, payment for which was made at cost without any markup and such cost was attributed to the assessee on the basis of particular methodology 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 v....
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....4 and ITA No.1327/PUN/2014, relating to assessment year 2009-10, order dated 10.0.2017, which principle has been applied by the Tribunal in assessment years 2010-11 and 2011-12. In such facts and circumstances and following the rule of consistency and where the royalty rates had been approved by RBI, the learned Authorized Representative for the assessee stated that CUP method was the appropriate method to benchmark the arm's length price. 39. The learned Departmental Representative for the 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 Rs. 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 ....
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....Royalty and the order of TPO holding that the assessee had not derived any benefit under the said Agreement was beyond the scope of TPO while benchmarking the international transaction for the purpose of determining arm's length price. Accordingly, we reverse the order of Assessing Officer / TPO / DRP and hold that in the present set of facts where the royalty rates were approved by RBI, CUP method was the most appropriate method to be applied 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....
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....ment applying the ratio laid down in the case of UPS Jetair Express Pvt. Ltd. (supra). Hence, he did not decide the taxability of said amount being infructuous. He then, referred to the second aspect of the case and pointed out that the margins of assessee declared by it were 1.54% and the mean margins of comparables were 3.44%, as per transfer pricing report. However, as per the order of TPO, wherein 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....
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....line with our decision in respect of various issues raised which affect the operating margins of assessee, the need would come to look at the margins of comparables. Our decision on the inclusion / exclusion of comparables at this stage would be an academic exercise. In such facts and circumstances of the case, we first direct the Assessing Officer to re-work the operating margins of assessee and thereafter to look into the objections raised by assessee vis-à-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 b....