TMI Blog2019 (7) TMI 1726X X X X Extracts X X X X X X X X Extracts X X X X ..... Act does not expand the scope of the main provision, but only clarifies it and brings to the fore the intention of the legislature for enacting such provision. Identical view was expressed by the tribunal also in case of M/s. Hamon Shriram Cottrell Pvt. Ltd. v/s ITO [ 2014 (1) TMI 69 - ITAT MUMBAI] . In our view, the aforesaid decisions of the Tribunal clearly clinch the issue in favour of the Revenue. In view of the aforesaid, we hold that learned DRP has validly exercised its power under section 144C(8) of the Act. Ground no.2.2 is dismissed. Whether the internal TNMM, as applied by learned DRP to determine the arm's length price of the export of HPC and beverages to the AEs, is the most appropriate method? - On a perusal of learned DRP's directions, it appears, learned DRP has not at all considered the objections of the assessee in an objective manner. In fact, the segmental results of AE and non-AE segments furnished by the assessee have been rejected by learned DRP on the flimsy ground that the auditor's certificate showing such segmental results is not acceptable since he had not initially audited the books of account of the assessee. What was required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm's length price on account of payment of royalty/fee for services - HELD THAT:- While examining the royalty payment in case of Hindustan Unilever Ltd. in assessment year 2013-14, the Transfer Pricing Officer has accepted royalty paid to the AE to be at arm's length. Similarly, in the order passed under section 92CA(3) of the Act in respect of AE, the Transfer Pricing Officer has accepted the royalty payment to be at arm's length. That being the case, the arm's length price of royalty payment at the hands of the assessee cannot be determined at nil. In any case of the matter, it is not disputed that the assessee is remunerated by the AE on cost plus mark-up basis. That being the case, royalty paid to the AE forms part of the cost base of the assessee on which it has charged mark-up @ 9%. In the aforesaid circumstances, if the payment of royalty to the AE is disallowed by determining the arm's length price at nil, then logically the income of the assessee also should be reduced. This is the view expressed in Mercer Consulting Pvt. Ltd. [ 2016 (8) TMI 62 - ITAT DELHI] . Thus adjustment made by determining the arm's length price of royalty payment at nil dese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transaction with AEs. Sr. no. Nature of Transaction Amount Method Used 1. Import of raw materials ₹ 450436398 TNMM 2. Export of manufactured HPC products ₹ 4930372273 TNMM 3. Export of beverages ₹ 2601936315 TNMM 4. Payment of royalty fees technical documentation, information and know how ₹ 100884408 CUP 5. Payment of royalty fees for trademarks ₹ 15373005 CUP 6. Payment of royalty fees for services ₹ 4626216 CUP 7. Receivables. Not reported as a separate transaction 5. After verifying all the details, the Transfer Pricing Officer ultimately proposed adjustment in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8) of the Act, proposing to enhance the income. In the said notice, learned DRP called upon the assessee to explain why external Transactional Net Margin Method (TNMM) selected by it to benchmark the transaction relating to export of HPC and beverages should not be rejected and such transaction should not be benchmarked by applying internal Comparable Uncontrolled Price(CUP) / TNMM. In response to the aforesaid show cause notice, assessee made elaborate submissions objecting to the proposed enhancement. It was submitted by the assessee, learned DRP has no power to enhance the income of the assessee in respect of a transaction where no variation has been proposed and the assessee has not raised any objection. Further, the assessee also submitted, in the given facts and circumstances, internal TNMM cannot be applied as the non-AE transactions cannot be compared with the AE transactions because of various factors. However, learned DRP did not find merit in any of the submissions made by the assessee. Learned DRP observed, section 144C(8) r/w its Explanation empowers it to enhance the income even if the assessee has not raised any objection with regard to such variation. Having held so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... introduction of Explanation to section 144C(8) of the Act, the power of enhancement is only with reference to a variation made by the Transfer Pricing Officer and not challenged by the assessee before the DRP. To buttress his submission, learned Sr. Counsel drew our attention to section 251 of the Act and submitted, unlike Explanation to section 144C(8) of the Act, the power of the first appellate authority is much wider as it is not confined to variation in income by the Assessing Officer. He submitted, the power of enhancement under section 144C(8) of the Act is much narrower than the power of enhancement under section 251 of the Act. Thus, he submitted, the action of learned DRP in enhancing the income has to be declared as without jurisdiction, hence, invalid. 10. As regards the merits of the disputed addition, learned Sr. Counsel submitted, under no circumstances internal TNMM can be applied to benchmark the transaction. He submitted, the Transfer Pricing Officer has not found any fault with the external TNMM applied by the assessee to benchmark the transaction. He submitted, even, learned DRP has not specifically pointed out any flaw in the benchmarking of the assessee. Dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon the observations of learned DRP. 12. In rejoinder, though, learned Sr. Counsel for the assessee agreed that in the decisions of the Tribunal, the issue has been decided against the assessee, however, he submitted, in the said decisions the Tribunal had no occasion to deal with the argument advanced by him to the effect that the Explanation cannot expand the scope of main provision. 13. We have considered rival submissions and perused the material on record. Undisputedly, the international transaction with the AEs relating to export of HPC and beverages was benchmarked by the assessee applying external TNMM. Admittedly, the Transfer Pricing Officer has not proposed any adjustment/variation to the arm's length price of the aforesaid transaction shown by the assessee. That being the case, there is no scope for any objection being raised by the assessee before learned DRP with regard to the said transaction. It is a fact on record that while dealing with the objections raised by the assessee in relation to some other variations/additions, learned DRP, in exercise of power conferred under section 144C(8) of the Act, has made enhancement/adjustment to the arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner (Appeals) in the matter of enhancement are much wider than that of the DRP. If we accept the proposition that power of enhancement with the Commissioner (Appeals) is wider than that of the DRP, it will lead to a anomalous situation, where, in respect of an assessee opting for Commissioner (Appeals) route, power of enhancement in respect of any income, whether challenged by the assessee or not, can be exercised without any fetters. Whereas, in respect of an assessee availing the DRP route, power of enhancement would be restricted only to the variations objected to by the assessee. In our humble opinion, this cannot be the intention of the legislature while enacting the provision of section 144C(8) of the Act. The power of enhancement conferred upon the DRP under section 144C(8) of the Act cannot be interpreted in a manner to restrict it only to the variations objected by the assessee. In our view, any interpretation of section 144C(8) of the Act leading to curtailment of DRP's power of enhancement would defeat the purpose for which section 144C(8) was enacted. Thus, in our view, the Explanation brought to section 144C(8) of the Act does not expand the scope of the main p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done but omitted to do. If the language of the provision is read as disabling the DRP to exercise the power of enhancement in the circumstances as are obtaining in the instant case, as has been canvassed on behalf of the assessee, it would amount to diluting the power, which the statute has expressly granted. 11. Sub-section (7) of section 144C makes it clear that the DRP, before issuing any final directions under sub-section (5), may either (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. In the instant case, the DRP has impliedly taken recourse to clause (b) of sub- section (7) by causing the further enquiry to be made by the TPO before issuing direction u/s 144C(5). In view of the foregoing discussion, it is clear that no exception can be taken to the course adopted by the DRP in making the enhancement. 16. Identical view was expressed by the tribunal also in case of _ M/s. Hamon Shriram Cottrell Pvt. Ltd. v/s ITO (supra). In our view, the aforesaid decisions of the Tribunal clearly clinch the issue in favour of the Revenue. In view of the aforesaid, we hold th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly, bears limited risk as the major risk is taken by the AEs. The marketing and distribution are performed by the AE who source the products. Whereas, in case of non-AE segment, the entire risk and reward is with the assessee, as, it not only has to explore the market but has to promote its products. It has to appoint distributors and incur various other expenditures including advertisement, sales promotion, etc. Similarly, for A.E. segment, any new capacity is required to support supplies, the AE underwrites the capital spends. Further, any cost incurred by the assessee with regard to plant and machinery, moulds, etc., will be amortized over the period of three years. Whereas, in case of non-AE segment, the assessee has to add new capacity in anticipation of growing demand and any risk relating to unutilized capacity is borne by the assessee and cannot be recovered from customer in any eventuality. Further, while in case of AE business, the assessee manufactures the products in accordance with the requirement of the AEs. However, in case of non-AEs, business innovations have to be on the basis of assessee's own requirement and looking at market condition/competition, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by learned DRP deserves to be deleted. 18. Having held so, it is necessary to observe, learned DRP has not at all gone into the aspect of acceptability of external TNMM applied by the assessee. However, it is evident, before the Transfer Pricing Officer, the assessee has furnished all documentary evidences to support its benchmarking under external TNMM. Of course, the Transfer Pricing Officer has not made any discussion on the issue and has simply accepted assessee's benchmarking. In view of the aforesaid, though, we hold that external TNMM applied by the assessee has to be treated as the most appropriate method in the given facts and circumstances of the case, however, since neither the Transfer Pricing Officer nor learned DRP have examined the acceptability or otherwise of the comparables selected by the assessee, we restore the issue to the Assessing Officer to examine this aspect and determine the arm's length price accordingly after due opportunity of being heard to the assessee. Grounds no.2 to 3.5, except ground no.2.2, are allowed for statistical purposes. 19. In grounds no.4 5, the assessee has challenged addition made of ₹ 2,06,00,671, on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In support of such contention, he relied upon the following decisions:- i) CIT v/s Kusum Healthcare Pvt. Ltd., ITA no.765/2016, order dated 25.04.2017 (Del. HC); PCIT v/s Bechtel India Pvt. Ltd. ITA no.379/2016, dated 21.07.2016 (Del. HC); and ii) Bechtel India Pvt. Ltd. v/s DCIT, ITA no.1478/Del./2015, dated 21.12.2015. 23. The learned Departmental Representative strongly relying upon the observations of learned DRP and the Transfer Pricing Officer submitted, the AE and the non-AE transactions cannot be compared for determining the arm's length price of the interest on overdue receivables. 24. We have considered rival submissions and perused the material on record. No doubt, there is a delay in respect of receivables from the AEs. However, so is the case with receivables from non-AEs. The learned Sr. Counsel for the assessee has demonstrated before us that the average delay on overdue receivables form the AEs works out to 26.70 days, as against average delay on receivables from non-AEs at 35.61 days. Thus, from the aforesaid facts, it is clear that as a matter of policy, the assessee does not charge any interest on overdue receivables either from the AEs or non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act in case of Unilever PLC and Hindustan Unilever Ltd., for the assessment year 2013-14. The learned Sr. Counsel submitted, the assessee is a contract manufacturer, hence, has to avail certain services from the AE. Further, the royalty paid to the AE also forms part of assessee's cost base on which it gets mark- up of 9%. He submitted, if the arm's length price of royalty payment to the AE is determined at nil, then it has to be removed from the cost base of the assessee thereby reducing the income of the assessee to that extent. Further, he submitted, in the transfer pricing study report, the assessee had benchmarked the arm's length price of royalty payment by applying CUP method. If the Assessing Officer had any doubt with regard to the benchmarking done by the assessee, he should have determined the arm's length price of royalty payment by applying any one of the prescribed methods, which is not the case. Thus, he submitted, the adjustment made should be deleted. In support of such contention, he relied upon the following decisions:- i) Mercer Consulting India Pvt. Ltd. v/s DCIT, ITA no.1085/Del./ 2016, dated 25.07.2016; ii) CIT v/s Liver India Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of royalty payment at nil deserves to be deleted. Accordingly, we do so. Grounds are allowed. 31. In the result, assessee's appeal is partly allowed. ITA no.2096/Mum./2017 Assessee's Appeal 32. Ground no.1, is general in nature, hence, does not require adjudication. 33. Grounds no.2 to 9, are on the issue of adjustment made to the arm's length price of exports of HPC products and beverages to the AEs. 34. These grounds are identical to ground no.2 to 3.5, raised by the assessee in its appeal being ITA no.6648/Mum./2017. The only factual difference in the impugned assessment year is, the Transfer Pricing Officer has himself determined the arm's length price by applying internal TNMM as against external TNMM applied by the assessee. However, while dealing with the objections of the assessee, learned DRP, taking note of assessee's submissions that in assessment year 2013-14 the Transfer Pricing Officer has accepted the benchmarking of the assessee by applying external TNMM, directed the Assessing Officer/Transfer Pricing Officer to verify assessee's claim and delete the adjustment. Notably, in assessment year 2013-14, learned DRP while dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges to the AEs by applying internal TNMM. In fact, while doing so, the Transfer Pricing Officer proposed adjustment of ₹ 85,94,39,962. After the directions of learned DRP on the issue, the Transfer Pricing Officer again made identical adjustment by stating that the assessee did not furnish any evidence to demonstrate that facts involved in the impugned assessment year are identical to assessment year 2013-14. While making the aforesaid adjustment, the Transfer Pricing Officer also made adjustment to the arm's length price of royalty paid on documentation, technical knowhow, as well as provisions of business service on without prejudice basis. However, it is observed, no addition on the aforesaid adjustments was either made in the draft assessment order or even in the final assessment order. Therefore, the issues raised in grounds no.12 to 16 are of mere academic importance as the assessee cannot have any grievance in the absence of any addition made in this regard in the final assessment order. Therefore, it is not necessary to adjudicate these grounds. However, the issues raised in these grounds are left upon for adjudication if they arise in future. These grounds are ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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