TMI Blog2021 (1) TMI 472X X X X Extracts X X X X X X X X Extracts X X X X ..... any jurisdiction to question the commercial expediency of the transaction carried out by the assessee with its AE, and his jurisdiction is restricted to determining of the arm s length price of the transaction Now when the TPO without following any of the methods prescribed under Sec. 92C of the Act had determined the ALP of the royalty paid by the assessee to its AE at Nil, the same, on the said count also is liable to be struck down. Alternate transfer pricing adjustment made by the TPO by selecting CUP method and considering an agreement entered into between two group companies of the assessee i.e Dow UK King Lynn Plant (Dow, UK) with Dow BV (Dow Netherland), whereby Dow, UK had paid royalty @ 3% of its domestic sales and @ 5% of its export sales for manufacture and sale of Chlorpyrifos - We are unable to persuade ourselves to accept the determining of the alternate transfer pricing adjustment of 5% of the export sales made by the TPO. Admittedly, the aforesaid transaction acted upon by the TPO for benchmarking the royalty paid by the assessee to its AE is a transaction between two AE s and hence, the same by no means could have been regarded as a valid comparable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, on account of geographical difference between the aforesaid agreements the same could not have been feasibly adopted for the purpose of comparability .Also as the products licensed under the aforesaid amendment agreement are biological granular matrix pest control as opposed to Chlorpyrifos in the case of the assessee, therefore, on account of the variance in the products also the aforesaid agreement could not have been selected for the purpose of comparability. Benchmarking the royalty paid by the assessee to its AE using CUP method - On a perusal of the orders of the lower authorities, we find that they had accepted the benchmarking analysis applying the TNM method for all other transactions. We find that the CUP method cannot be applied as the TPO has not been able to find a similar transaction which could be compared with the transaction of the assessee company. As regards the remaining methods, viz. Resale Price Method (RPM), Cost Plus Method (CPM) and Profit Split Method (PSM), the same are not applicable to the aforesaid transaction under consideration i.e payment of royalty by the assessee to its AE. As such, we are of the considered view that since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, in the backdrop of our aforesaid deliberations, the transfer pricing adjustment carried out by the TPO as regards the intra-group services received by the assessee from its AEs cannot be sustained and is liable to be struck down. Benchmarking of the intra-group services received by the assessee from its AEs by applying TNM method could not have been faulted with by the lower authorities. D.R had stated that majority of the payments were made by the assessee to a Chinese AE, which primarily comprised of a payment stated to have been made in respect of services of a person, viz. Mr. Jeorge La Roza who is stated to be responsible for overall commercial performance of the region - The details as regards the services rendered by Mr. Jeorge La Roza to the assessee, as well as the basis of the charge so raised formed part of the additional evidence that was filed by the assessee with the DRP. In fact, no adverse inference as regards the aforesaid payment made by the assessee company finds any mention in the order of the DRP. In our considered view, as there is no justifiable reason for drawing of any adverse inferences as regards the payments that were made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suance of the directions issued by the Hon'ble Dispute Resolution Panel-I, (hereinafter referred to as the Hon ble DRP') on the following grounds, each of which are without prejudice to one another. On the facts and in the circumstances of the case and in law, the learned AO/ Additional Commissioner of Income-tax (Transfer Pricing) - 1(3) ('TPO') on fact and in law has: GENERAL 1. erred in assessing the total income at ₹ 88,34,41,810 as against returned income of ₹ 80,04,98,533 computed by the Appellant. TRANSFER PRICING ADJUSTMENTS PAYMENT OF ROYALTY TO ASSOCIATED ENTERPRISE ('AE') General 2. erred in making an adjustment of ₹ 4,29,47,493 to the total income of the Appellant under Section 92CA(3) of the Act on account of adjustment in the arm's length price of the international transaction of payment of royalty. Rejection of economic analysis undertaken by the Appellant 3. erred in not accepting the economic analysis undertaken by the Appellant including the analysis using the Transactional Net Margin Method ('TN MM'), in accordance with the provisions of the Act read with the Income-tax Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een HERC products and CCT corporation as comparable agreement without giving cognizance to the validity of the agreement as well as the fact that the complete information about the agreement is not available. Variation of 5% from the arithmetic mean 13. the benefit of proviso to section 920(2) of the Act should be granted to the Appellant, if the transaction payment of royalty is within such range. II. AVAILING OF INFORMATION TECHNOLOGY SERVICES, FINANCE AND TREASURY SUPPORT SERVICES, FINANCIAL AND ACCOUNTING SUPPORT SERVICES AND LEGAL AND ADMINISTRATIVE SUPPORT SERVICES FROM AEs General 14. erred in making an adjustment of ₹ 3,99.95,779 to the total income of the Appellant under Section 92CA(3) of the Act on account of adjustment in the arm's length price of the international transaction of availing of information technology services, finance and treasury support services, financial and accounting support services and legal and administrative support services. Rejection of the economic analysis undertaken by the Appellant 15. erred in not accepting the economic analysis undertaken by the Appellant including the analysis using TNMM, in accorda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in initiating the penalty proceedings under section 274 read with section 271 (1)(c) of the Act. The Appellant craves leave to add, alter, amend, delete or withdraw any or all of the grounds of appeal at or before the hearing of the appeal so as to enable the Income tax Appellate Tribunal to decide the appeal according to law. 2. Briefly stated, the assessee company which is engaged in the business of manufacturing and trading of pesticides, agro chemicals seeds had filed its return of income for A.Y. 2010-11 on 30.09.2010, declaring its total income at ₹ 80,04,09,533/-. The return of income was initially processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. Observing that the assessee company had during the year under consideration entered into international transactions with its Associate Enterprises (for short AEs ), the A.O made a reference under Sec. 92CA(1) of the Act to the Addl. CIT, Transfer Pricing Officer-1(3), Mumbai (hereinafter referred to as TPO ) for determining the Arm s Length Price of the said transactions. The TPO vide his order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e application of the approach that was adopted by the lower authorities for benchmarking the transaction of payment of royalty. Accordingly, the DRP upheld the determining of the arm s length price of the royalty transaction by the TPO at Nil. Adverting to the alternative view of the TPO wherein using the CUP method he had considered the royalty paid by an another AE of the assessee, viz. Dow U.K to Dow Netherlands as a comparable transaction and determined the arm s length price of the royalty paid by the assessee to its AE at 5% of its net export sales, and had suggested an alternate adjustment of ₹ 1,37,57,774/- that was to be substituted in case the primary adjustment of taking the arm s length price of the royalty transaction at Nil was vacated by the appellate authorities, the DRP was of the view that as the said observation of the TPO was in conformity with the order passed by the Tribunal in the case of the assessee for A.Y. 2003-04, therefore, no infirmity could be related to the same. Accordingly, on the basis of his aforesaid observations the DRP upheld both the primary and alternate transfer pricing adjustments made by the TPO pertaining to the transaction of paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 3,99,95,779/-. 8. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. For a fair appreciation of the issues under consideration we shall briefly cull out the facts as regards the same, as under: (A). Transfer pricing adjustment as regards the royalty paid by the assessee to its AE : ₹ 4,29,47,493/- : The assessee company had entered into a Process Technology Agreement, dated 23.01.1997 with its AE, viz. Dow AgroSciences, BV (formerly known as Dow Elanco BV ) as per which the assessee was obligated to pay royalty to the aforesaid AE on manufacturing of Chlorpyrifos @ 5% and @ 8% of its net domestic sales and export sales, respectively. As stated before us, the aforesaid agreement was approved by the Secretariat of Industrial approval, Ministry of Industry (Government of India) vide its letter dated 17.09.1996. As per the approval the royalty was to be paid by the assessee for a period of 7 years during the period of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 17th September, 1996 AND 22nd January 1997, therefore, the aforesaid transaction was considered by the assessee to be at arm s length. Alternatively, the assessee aggregated the transaction of payment of royalty with its other international transactions carried out in the manufacturing segment, for the reason, that such other transactions viz. import of raw material and export of finished goods in the manufacturing segment were closely connected with the transaction of payment of royalty. Adopting TNM method as a basis for a secondary analysis the assessee benchmarked the manufacturing segment, and finding the net margin of the said segment during the year under consideration higher than the net margin of the comparables, the payment of royalty to its AE was claimed as being at arm s length. 10. Observing that the approval that was provided by the RBI did not constitute a valid CUP method since the latter while granting the approval did not take into account the transfer pricing provisions to determine the appropriate rates which could be considered as the arm s length price for the payment of royalty, the TPO rejected the benchmarking of the royalty payment carried out by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ively, for manufacture and sale of Chlorpyrifos , determined the arm s length price of the royalty paid by the assessee to its AE i.e Dow AgroSciences, BV at 5% of its export sales for the year under consideration. On the basis of his aforesaid alternate working the TPO suggested an alternate transfer pricing adjustment of ₹ 1,37,52,774/-, which however was to be invoked only in case the determination of the arm s length price at Nil was subsequently vacated by the appellate authorities. 11. As observed by us hereinabove, the DRP had upheld the view taken by the TPO both as regards the adoption of the ALP of the royalty paid by the assessee to its AE at Nil, and also, the alternate adjustment of ₹ 1,37,52,774/- that was suggested by him in case the primary adjustment was vacated by the appellate authorities. On a perusal of the order of the DRP, we find that the assessee had in the course of the proceedings submitted additional evidence to substantiate that it had during the year under consideration received technical assistance and guidance from its AE to ensure increased efficiency of its manufacturing process and improvement in the quality of the product. On be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .e (a). primary adjustment of taking the ALP of the royalty paid by the assessee to its AE at Nil AND (b). the alternate working of the ALP on the basis of an agreement between two group concerns of the assessee at ₹ 1,37,52,774/-; and (ii). the transfer pricing adjustment of the royalty transaction @2% of the export sales as was suggested by the TPO in his remand report , dated 13.11.2014. 12. We shall now deal with the sustainability of the view arrived at by the TPO/DRP as regards the determination of the ALP of the royalty paid by the assessee to its AE, viz. Dow AgroSciences BV. As observed by us at length hereinabove, the TPO/DRP were of the view that as per the Process Technology Agreement, dated 23rd January, 1997, the assessee was obligated to pay royalty to its AE viz. Dow AgroSciences BV on manufacturing of Chlorpyrifos for a period of only 7 years. Lower authorities were of the view that as per Clause 11.1 of the aforesaid agreement , the assessee after fully meeting all its obligations provided in the agreement would be vested with a fully paid, non-assignable and non-exclusive right for the process utilizing technology received prior to consummation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o extend the same. As per the agreement the licensee i.e the assessee after meeting all its obligations under the original agreement , dated 23.01.1997 would stand vested with a fully paid, non-assignable and non-exclusive right, though without any right to sub-license, and would be entitled to practice, only at the plant, the process utilizing technology that was received prior to the consummation of the said agreement. It was therein further provided that if the licensee i.e the assessee subsequent to consummation of the aforesaid agreement wished to receive from the licensor i.e its AE, viz. Dow AgroSciences BV any additional technical information related to the production of product or to use technology received under the aforesaid agreement, it would be required to negotiate a new technology license agreement with the aforesaid licensor. It is the claim of the ld. A.R that the lower authorities had erred in drawing adverse inferences as regards the royalty paid by the assessee to its AE during the year under consideration, for the reason, that they were of the view that as the assessee had not received any new technology from the AE during the year, it was, thus, not obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a fully paid, non-assignable and nonexclusive right, though without any right to sub-license, and would be entitled to practice, only at the plant, the process utilizing technology that was received during the period of the aforesaid original agreement , dated 23.01.1997, and thus, remained under no obligation to pay any royalty to its AE for use of the aforesaid technology. But then, if the assessee after the consummation of the original agreement wished to receive from the licensor i.e the AE any additional technical information related to the production of product or to use technology received under the terms of the said agreement, it was required to negotiate a new technology license agreement with the licensor. At the outset, we may herein observe that we are unable to persuade ourselves to subscribe to the construing of Clause 11.1 of the original agreement by the DRP. As observed by us hereinabove, if the assessee after the consummation of the original agreement wished to receive any additional technical information related to the production of the product or to use the technology received under the said agreement , then, it was required to negotiate a new techno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 004, i.e A.Y 2005-06 the assessee had received necessary technical know-how and assistance from its AE, which had consistently been accepted by the department upto A.Y 2009- 10, therefore, in respect of the same agreement the department could not take a contrary stand during the year under consideration and therein assail the very existence of the same. To sum up, it is the claim of the assessee that now when the department had for the period A.Y 2005-06 to A.Y 2009-10 accepted the technical know-how and assistance received by the assessee from its AE, it could not during the year in question i.e A.Y 2010-11 assail the validity of the said agreement . Admittedly, the aforesaid supplementary royalty agreement , dated 08th June, 2005 (effective from 01st June, 2004) had been accepted by the department for the period A.Y 2005-06 to A.Y 2009-10. Apropos the rejection of the supplementary royalty agreement which remains the same during the year under consideration, we are of the considered view that the department by so doing is trying to approbate and reprobate the same i.e quod approbo no reprobo , which is not permissible . On the basis of our aforesaid observations, we not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide its order, viz. M/s Coca Cola India Inc. Vs. Addl. CIT Ors. [SLP (Civil) No(s). 646/2009, dated 25.10.2010] to the file of the lower authorities before whom the proceedings were pending. Also, we find, that the Hon ble High Court of Bombay in the case of CIT Vs. SI Group India Ltd. (2019) 107 taxmann.com 314 (Bom) and CIT Vs. SGS India Pvt. Ltd. (2015) 94 CCH 338 (Bom) , had held, that where the payment made by the assessee to its AE is within the limits prescribed by the Government of India, then, the same can be considered as being at arm s length. In fact, we find that the DRP in the assessee s own case for A.Y 2012-13 by relying on the judgement of the Hon ble High Court of Bombay in the case of SGS India Pvt. Ltd. (supra) had though accepted that the issue as regards determining of the arm s length price of the royalty transaction was in favour of the assessee, however, only for the purpose of keeping the issue alive it had declined to accept the said claim of the assessee. Also, a similar view had been taken by the Tribunal in the assessee s own case for A.Y. 2004-05 to A.Y 2009-10, and it has been held that the royalty paid by the assessee to its AE having be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the backdrop of the aforesaid facts, now when the TPO without following any of the methods prescribed under Sec. 92C of the Act had determined the ALP of the royalty paid by the assessee to its AE at Nil, the same, on the said count also is liable to be struck down. 16. We shall now deal with the sustainability of the alternate transfer pricing adjustment of ₹ 1,37,52,774/- that was made by the TPO by selecting CUP method and considering an agreement entered into between two group companies of the assessee i.e Dow UK King Lynn Plant (Dow, UK) with Dow BV (Dow Netherland), whereby Dow, UK had paid royalty @ 3% of its domestic sales and @ 5% of its export sales for manufacture and sale of Chlorpyrifos . Adopting the aforesaid comparable, the TPO by considering the royalty @ 5% of the export sales as being at arm s length had suggested an alternate adjustment of ₹ 1,37,52,774/-. As per the TPO, the aforesaid alternate adjustment was to be invoked if the primary adjustment i.e determining of the ALP of royalty paid by the assessee to its AE at nil was deleted by the appellate authorities. As observed by us hereinabove, the DRP had also upheld the determinin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en two parties viz. AARC Corporation and CCT Corporation from the Royaltstat database had in his remand report , dated 13.11.2014 suggested to the DRP an alternate arm s length price for the royalty paid by the assessee to its AE @ 2% of the export sales. As such, the TPO had proposed an alternate adjustment in the event the determination of the arm s length price by him vide his order passed u/s 92CA(3) did not find favour with the appellate authorities. As observed by us hereinabove, the aforesaid view of the TPO was also approved by the DRP. 19. The ld. A.R had objected to the adoption of the royalty agreement between the aforesaid third parties, viz. AARC Corporation and CCT Corporation for benchmarking of the royalty paid by the assessee to its AE. In order to drive home his claim that the aforesaid agreement could not be considered for the purpose of benchmarking, the ld. A.R had drawn our attention to the aforesaid agreement , Page 1983 of APB. 20. We have given a thoughtful consideration to the objections raised by the ld. A.R as regards selection of the aforesaid agreement for benchmarking the royalty paid by the assessee to its AE and find favour with the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conformity with the rates prescribed in the Press Note No. 2 (2003 series) , dated 24th June, 2003, therefore, no infirmity did emerge from considering of the same for benchmarking the royalty paid by the assessee to its AE using CUP method, however, for the sake of completeness we shall deal with the sustainability of the secondary analysis carried out by the assessee following TNM method. As observed by us hereinabove, the assessee had carried out a secondary analysis to ascertain the arm s length price of the royalty paid to its AE by applying the TNM method. As stated by the assessee, since the royalty transaction is clearly linked to the manufacturing activity, it had, therefore, analyzed the same alongwith the manufacturing transaction using a combined transaction approach. As the margin earned by the assesee from the manufacturing activity (after considering the amount of expense on royalty payment) was much higher (19.09%) than the margins earned by the other comparables (10.30%), the margin earned from the manufacturing activity was held to have met the arm s length test. Accordingly, the assessee had concluded that the royalty payment being the operating cost for the man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the assessee that the lower authorities had erred in making a transfer pricing adjustment of ₹ 3,99,95,779/- as regards the Intra-Group Services received by the assessee from its AEs, viz. information technology services, financial and treasury support services, financial and accounting support services and legal and administrative support services. As observed by us hereinabove, the assessee company had received the aforementioned Intra-Group Services for which its AEs had raised a charge upon it on cost plus mark up basis. Since, the above services rendered by the AEs were used by all the business segments of the assessee company, viz. manufacturing segment, trading segment, indenting segment and technical support services segment, therefore, the cost was allocated by the assessee to all the business segments on a pro rata basis considering the revenue of each segment. As the aforesaid transaction of receipt of Intra-Group Services by the assessee from its AEs was closely connected with the other international transactions carried out with the AEs, the assessee, thus, had aggregated the same and benchmarked the same by applying TNM method for each segment. As the marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure incurred and the benefits derived there from. It was observed by the DRP that the additional evidence produced by the assessee in the form of e-mails, templates and screen shots were general in nature and did not prove the amount of contribution the AEs would have made by rendering the services to the assessee company. Also, it was observed by the DRP that the assessee had not submitted evidence relating to the cost that was incurred by the AEs and the commensurate benefit derived there from on the basis of which it could be held that the payments made by the assessee were found to be at arm s length. Further, the DRP rejected the benchmarking carried out by the assessee by applying the TNM method and upheld the determination of the arm s length price of the intra-group services received by the assessee from its AEs at Nil by the TPO. 26. On a perusal of the orders of the lower authorities and the records before us, we find that it is a matter of fact borne from records that the TPO by calling upon the assessee on 25th January, 2014 (5 days before the time limit) to furnish the details and evidence to support its claim of having received intragroup services from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be allowed to take a contrary stand while framing the assessment in the case of the assessee company. Further, it was submitted by the ld. A.R that similar services were rendered by the AEs in the earlier assessment years, i.e A.Y 2006-07, A.Y 2007-08, A.Y 2008-09 and A.Y 2009-10, and the TPO in his orders passed for the said respective years under Sec. 92CA(3) of the Act holding the services to be at arms length had not made any adjustment as regards the same. It was averred by the ld. A.R that as there was no change in the facts and circumstances of the assessee s case as in comparison to those of the preceding years, therefore, the TPO was not entitled to adopt a contrary view and draw adverse inferences during the year under consideration. It was submitted by the ld. A.R that the AEs of the assessee company had filed their returns of income and had offered the amount received from the assessee company to tax, and the same had been accepted by the department. In fact, it was submitted by the ld. A.R that in case of one of the AE, viz. Dow Chemical Singapore Pte. Ltd., the assessment and transfer pricing order was passed without making any adjustment. On the basis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration received intra-group services from its AEs. In fact, we find that both the lower authorities had admitted that intra-group services were received by the assessee from its AEs. On a perusal of the remand report , dated 13.11.2014, we find that the TPO had though accepted that services were received by the assessee from its AEs, but, had observed, that the benefit received from availing of such services had not been substantiated by the assessee company. Adopting a similar view, we find that the DRP in its order had held that though the assessee had received the services from its AEs, but then, the same were general in nature. In the backdrop of the aforesaid facts, we find that it is a matter of an admitted fact borne from records that the assessee had received intra-group services from its AEs during the year under consideration. In our considered view, now when it is an undisputed fact that services were rendered by the AEs to the assessee, it was, then, obligatory on the part of the TPO to have benchmarked the said services by adopting any of the method provided in Sec. 92C of the Act. As per the settled position of law, we are of the considered view that the lower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (ITA No. 2590/Mum/2017) Accordingly, in the backdrop of our aforesaid deliberations, the transfer pricing adjustment carried out by the TPO as regards the intra-group services received by the assessee from its AEs cannot be sustained and is liable to be struck down. 29. Although, we have struck down the transfer pricing adjustment in respect of the intra-group Services received by the assessee from its AE, however, for the sake of completeness we shall deal with the claim of the assessee that no such adjustment was even otherwise called for on the merits of the case. It is the claim of the assessee that now when the intra-group services received by its group companies in India from the aforementioned AEs had been held to be at arm s length price, therefore, a contrary stand in the case of the assessee could not have been drawn. Although, we are principally in agreement with the aforesaid claim of the assessee, however, in the absence of the relevant details which would reveal rendition of similar services by the AEs to the other group companies in India and the treatment of the same as being at arm s length by the department in the case of the said latter group concerns, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat as on the one hand, in the absence of any comparable transaction the CUP method could not have been applied, while for on the other hand the other methods i.e Resale Price Method (RPM) Cost Plus Method, (CPM) and Profit Split Method (PSM) are not applicable to the transaction under consideration, therefore, TNM was the only method that could have been applied to benchmark the aforesaid transaction. Our aforesaid view that in case the TPO is not able to bring comparables on record by applying CUP method, then, the TNM method applied by the assessee is to be accepted is supported by the following judicial pronouncements: (a) Knorr Bremse vs. ACIT (77 taxmann.com 101) (Delhi) (b) AWB India P. Ltd. vs. DCIT (50 taxmann.com 323) (c) Emerson Climate Vs. DCIT (ITA No 2182/Pun/2013) (d) Merck Ltd. Vs. DCIT (69 taxmann.com 45) (e) TNS India Vs. ACIT (48 taxmann.com 128) (f) Schneider Electric India P. Ltd. Vs. DCIT (82 taxmann.com 364) (g) Sabic Innovative Plastic India P. Ltd. Vs. ACIT (88 taxmann.com 810) Apart from that, we are also in agreement with the claim of the assessee that now when the TPO/DRP had accepted the benchmarking carried out by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich our attention was drawn by the ld. A.R, and find, that the details as regards the services rendered by Mr. Jeorge La Roza to the assessee, as well as the basis of the charge so raised formed part of the additional evidence that was filed by the assessee with the DRP. In fact, no adverse inference as regards the aforesaid payment made by the assessee company finds any mention in the order of the DRP. In our considered view, as there is no justifiable reason for drawing of any adverse inferences as regards the payments that were made by the assessee to the aforesaid person, we, thus, not being able to persuade ourselves to subscribe to the claim of the ld. D.R that there was no material available on record which would justify the basis of the costs to the AE, reject the same. 34. In the backdrop of our aforesaid deliberations, we herein vacate the transfer pricing adjustment of ₹ 3,99,95,779/- made by the AO/TPO as regards the intra-group services received by the assessee from its aforesaid AEs. The Grounds of appeal No(s).14 to 20 are partly allowed in terms of our aforesaid observations. 35. As regards the Ground of appeal No. 22 pertaining to allowing of short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has: GENERAL 1. erred in assessing the total income at ₹ 83,85,77,731 as against returned income of ₹ 73,38,86,264 computed by the Appellant. TRANSFER PRICING ADJUSTMENTS I. REFERENCE TO THE TPO 2. erred in making reference of the Appellant's case to the TPO, without applying its mind and without recording its satisfaction, merely making the entire process of referring the matter to the TPO as invalid. II. PAYMENT OF ROYALTY TO ASSOCIATED ENTERPRISE ('AE') General 3. erred in making an adjustment of ₹ 5,90,82,363 to the total income of the Appellant under Section 92CA(3) of the Act on account of downward adjustment in the arm's length price of the international transaction of payment of royalty. Rejection of economic analysis undertaken by the Appellant erred in not considering approvals received from Secretariat of Industrial Assistance (SIA'), Ministry of Industry and Reserve Bank of India (RBI') as valid CUP and rejecting the CUP analysis undertaken by the assessee as a primary analysis. 4. erred in not accepting the economic analysis undertaken by the Appellant including the analys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty paid by the appellant. 14. without prejudice to the above, erred in ignoring the fact that there exists technological differences between the technology availed by the Appellant and Dow UK (where the technology was old) and hence the same cannot be taken as comparable. 15. without prejudice to the above, even if controlled rate of royalty paid by Dow UK to Dow Netherlands is taken as CUP, appropriate adjustment should be provided on the same to eliminate the differences. Variation of 5% from the arithmetic mean 16. the benefit of proviso to section 92C(2) of the Act should be granted to the Appellant, if the transaction payment of royalty is within such range. II. PAYMENT TO AE S FOR AVAILING OF SERVICES General 17. erred in making an adjustment of ₹ 4,56,09,104 to the total income of the Appellant under Section 92CA(3) of the Act on account of downward adjustment in the arm's length price of the international transaction pertaining to availing of services. Rejection of the economic analysis undertaken by the Appellant 18. erred in not accepting the economic analysis undertaken by the Appellant including the analysis using com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. The Appellant craves leave to add, alter, amend, delete or withdraw any or all of the grounds of appeal at or before the hearing of the appeal so as to enable the Income tax Appellate Tribunal to decide the appeal according to law. 37. Briefly stated, the assessee company had filed its return of income for A.Y. 2011-12 on 28.11.2011, declaring its total income at ₹ 73,38,86,264/-. The return of income was initially processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 39. Observing that the assessee company had during the year entered into international transactions with its Associate Enterprises (for short AEs ), the A.O made a reference under Sec. 92CA(1) of the Act to the Addl. CIT, Transfer Pricing Officer-1(2), Mumbai (hereinafter referred to as TPO ) for determining the Arm s Length Price of the said transactions. The TPO vide his order passed under Sec. 92CA(3), dated 22.01.2015 made an adjustment of ₹ 10,46,91,467/- to the ALP of the international transactions of the assessee, as under: Sr. No. Particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermining of the ALP of royalty at nil by the TPO. Further, it was observed by the DRP that the issue of benchmarking of the transaction of payment of royalty by the assessee to its AE had earlier came up before the panel in the assessee s case for the preceding years i.e A.Y. 2009-10 and A.Y 2010-11 and the transfer pricing adjustment made by the TPO was confirmed. Also, it was noticed by the DRP that involving identical facts the Tribunal in the assessee s own case for A.Y. 2003-04 in ITA No. 630/Mum/2011, dated 30.01.2014 had principally upheld the application of the approach that was adopted by the lower authorities for benchmarking the transaction of payment of royalty. Accordingly, the DRP upheld the determining of the arm s length price of the royalty transaction by the TPO at Nil. Adverting to the alternative view of the TPO wherein using the CUP method he had considered the royalty paid by an another AE of the assessee, viz. Dow U.K to Dow Netherlands as a comparable transaction, and had determined the arm s length price of the royalty paid by the assessee to its AE at 5% of the net export sales, and suggested an alternate adjustment of ₹ 2,15,25,030/- that was to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Es. 42. After receiving the order passed by the DRP under Sec. 144C(5), dated 26.11.2015, the A.O framed the assessment vide his order passed under Sec. 143(3) r.w.s 144C(13), dated 08.12.2015 and determined the total income of the assessee company at ₹ 83,85,77,730/-. 43. Aggrieved, the assessee has assailed the assessment order passed by the A.O under Sec. 143(3) r.w.s 144C(13), dated 08.12.2015 in appeal before us. 44. As regards the claim of the assessee that the TPO/DRP had erred in benchmarking the transaction of royalty paid by the assessee to its AE viz. Dow AgroSciences BV, Netherland, we find that as the facts and the issue involved in the case before us for the aforementioned year i.e A.Y. 2011-12, remains the same, as were there in the case of the asesee for A.Y. 2010-11, therefore, our order therein passed shall apply mutatis mutandis for the purpose of disposal of the said issue. The Grounds of appeal Nos. 1 to 16 are dispossed off in terms of our aforesaid observations. 45. We shall now advert to the claim of the assessee that the TPO/DRP had erred in making an adjustment of ₹ 4,56,09,104/- as regards the arm s legnth price of the intra-gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concession of the ld. A.R the Ground of appeal No. 23 is dismissed as having been rendered as infructuous. 49. As stated by the ld. A.R, the A.O had erred in computing the assessee s tax liability for the year under consideration. It is stated by the assessee that for rectifying the aforesaid mistake an application under Sec. 154, dated 28.01.2016 was filed with the A.O, which, however, had not been disposed by him till date. It was submitted by the ld. A.R that the A.O be directed to rectify the aforesaid mistake. We have given a thoughtful consideration and in the backdrop of the aforesaid claim of the assessee, we direct the A.O to consider its aforesaid grievance while giving appellate effect to our order. The Grounds of appeal No(s). 26 to 28 are disposed off in terms of our aforesaid observations. 50. The appeal of the assessee is allowed in terms of our aforesaid observations. IT(TP)A. No.1528/Mum/2017 (Assessment Year: 2012-13) 51. We shall now take up the appeal of the assessee for A.Y. 2012-13. The assessee had assailed the impugned order on the following grounds of appeal before us : Based on the facts and circumstances of the case, Dow AgroS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is received by the Appellant. Inappropriately considered supplementary agreement as CUP 7. Erred in considering the supplementary agreement between HERC products and CCT corporation as comparable without giving cognizance to the validity of the agreement as well as the fact that the complete information (i.e. the master agreement) is not available. 8. Without prejudice to the above, failed to appreciate that the supplementary agreement mentions 2 different rates (i.e. 2 percent of the gross value and 5 percent of gross value on sales, based on customer) and conveniently considering the lower royalty rate for making transfer pricing adjustment (i.e. 2 percent). 9. Without prejudice to the above, erred in not considering the fact that royalty rates as mentioned in the agreement is on gross sales value and the rates at which Appellant is paying is based on net sales value. Inappropriately considering controlled transaction as CUP 10. Erred in comparing the rate of royalty paid by the Appellant to its AE [Dow AgroSciences B.V (Dow Netherlands)], with a controlled transaction i.e. the royalty rate paid by Dow UK, another AE of the Appellant, to Dow Netherlands. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of CUP method to benchmark international transaction 19. Erred in not using any of the six methods prescribed under section 92C to benchmark the international transaction of payment for availing of services. 20. Without prejudice to the above, erred in computing the arm's length price by applying some ad-hoc man hour rate to some ad-hoc number of man hours (so called CUP) which is not in accordance with the transfer pricing regulations prescribed in India. 21. Erred in not appreciating the fact that one of the basic conditions for applying CUP is availability of the price of the same service in uncontrolled condition and it cannot be hypothetical or imaginary value but real value on which similar transactions have taken place. Benefit test/ commercial expediency for availing services 22. Failed to appreciate the business model and business realities of the Assessee and the role of its AEs and thereby stating that no service is received or benefits have been availed by the Assessee. Ignored evidences submitted for service availed and benefits derived 23. Erred in stating that the services availed by the Assessee are in the nature of shareholder acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod had suggested adjustment of ₹ 89,91,752/- that was to be invoked only if the primary adjustment of taking the ALP of the royalty transaction at Nil was vacated by the lower authorities. (c). Further, the TPO on the basis of the view taken by his predecessor in the case of the assessee for A.Y 2011-12 had on the basis of an alternate benchmarking by selecting an agreement between two parties, viz. AARC Corporation and CCT corporation (HERC agreement as referred by the TPO) from the Royaltystat database and suggested a transfer pricing adjustment as regards the royalty transaction @ 2% of the export sales, that was to be invoked only if both of the aforesaid adjustments i.e the primary adjustment of taking the ALP of the royalty transaction at Nil and alternative adjustment of taking the ALP at ₹ 2,15,25,030/- were vacated by the lower authorities. 2. Adjustment to the ALP on account of Intra-Group Services ₹ 9,35,53,919/- Total ₹ 11,86,95,081/- 54. The A.O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said observation of the TPO. Further, the TPO relying on the order passed by his predecessor for A.Y 2011-12 had carried out an alternate benchmarking by selecting an agreement between two parties, viz. AARC Corporation and CCT corporation (HERC agreement as referred by the TPO) from the Royaltystat database and had suggested a transfer pricing adjustment as regards the royalty transaction @ 2% of the export sales. DRP relying on the order passed by the panel in the immediately preceding year i.e A.Y 2011-12 also approved the aforesaid alternative transfer pricing adjustment which was to be invoked only if the determination of arm s length price of the royalty transaction at Nil and ₹ 1,61,49,411/- (alternative adjustment) was vacated by the appellate authorities. Accordingly, on the basis of his aforesaid observations the DRP upheld both the primary and alternate transfer pricing adjustments made by the TPO pertaining to the transaction of payment of royalty by the assessee to its AE. As regards the objection regarding the transfer pricing adjustment of ₹ 9,35,53,919/- made by the A.O regarding the intra-group services received by the assessee from its AEs, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d intra-group services at ₹ 28,50,000/-. 60. On objection filed by the assessee, the DRP relied on the view taken by the panel in the case of the assessee for A.Y 2011-12 and thus, impliedly observed that the assessee company had received services from its AEs. Although, it was observed by the DRP that considering the facts of the case the number of hours and the rate estimated by the TPO were too low, but then, despite so observing the DRP mechanically relying on the view taken by the predecessor panel in A.Y 2011-12 confirmed the adjustment made by the TPO in context of the aforesaid issue under consideration. 61. We find that except for the fact that the TPO during the year under consideration had in the course of the proceedings before him accepted that the assessee had received intra-group services from its AEs, and therein, adopting an ad hoc method had worked out the arm s length price of the aforesaid transaction, the other facts involved in context of the said issue pertaining to determining of the arm s length price of the intra-group services during the year under consideration remains the same as were there before us in the case of the assessee for A.Y. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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