TMI Blog2018 (3) TMI 1900X X X X Extracts X X X X X X X X Extracts X X X X ..... ne with the directions given by the Tribunal for the preceding three years. The ld. DR did not raise any objection to it. Addition on account of transfer pricing adjustment - `Payment of consultancy expenses in relation to its Distribution operations - HELD THAT:- Details have been given in respect of 12 payments which apparently show that most of the services provided by the expats are in connection with the setting up of the factory. At the same time, it is also vivid that some services have been rendered by the expats qua the running business of Distribution, which are of the revenue nature. It goes without saying that an expenditure incurred in relation to setting up manufacturing unit cannot be considered as of revenue nature and the same has to be capitalized. Since complete details of such amount are not available, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of Assessing Officer/TPO. We order accordingly and direct him to examine each and every item of payment of consultancy fee and, then, capitalize such amounts as relate to the setting up of man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /TPO for deciding it afresh. Addition on account of `Payment of consultancy and training expenses treating the same as not at ALP - not allowing `Capacity adjustment in the `Manufacturing segment - HELD THAT:- We find that complete financials of all the comparable companies are not available on record. Thus, it is not possible at our end to work out the amount of capacity adjustment in the manner discussed. Ergo, we set aside the impugned order and direct the TPO/AO to work out the amount of capacity utilization adjustment afresh in terms of our above observations. It is made clear that the capacity adjustment will be considered in the hands of the comparables by taking into account `Installed capacity vis- -vis the actual production and not the `Licensed capacity vis- -vis the actual production. Further, the production on double shift or triple shift basis in case of certain comparables also needs to be suitably adjusted. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. - ITA Nos. 2536/Del/2014 &1207/Del/2015, ITA No. 2547/Del/2014 - - - Dated:- 19-3-2018 - Shri R.S. Syal, Vice President And Shri Kuldip Sing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition of ₹ 5,58,24,315/- on AMP expenses. The assessee is aggrieved against the addition. 5. We have heard both the sides and perused the relevant material on record. It is observed that similar issue came up for consideration before the Tribunal in the assessee s own case for the immediately preceding three assessment years, namely, 2006-07 to 2008-09. Vide order dated 17.04.2017, the Tribunal, on the assessee s request, remitted the matter to the file of Assessing Officer/TPO for taking a fresh decision on the existence or otherwise of the international transaction of AMP expenses and, then, determining the ALP of such international transaction of AMP expenses, if it is found to exist. The Tribunal further directed that selling expenses should not be considered within the ambit of AMP expenses. The ld. AR fairly conceded that the issue of AMP expenses for the instant year may also be restored to the file of Assessing Officer/TPO for taking a fresh decision in line with the directions given by the Tribunal for the preceding three years. The ld. DR did not raise any objection to it. Respectfully following the precedent, we set aside the impugned order on this score and rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction to the assessee to furnish details of expat personnel visiting India for facilitation of setting up of the manufacturing unit. The TPO was directed to treat such amount as capital expenditure. Giving effect to the directions of the DRP, the TPO proposed a fresh transfer pricing adjustment on account of consultancy charges at ₹ 8,44,864/- treating Nil ALP in relation to the distribution segment. The Assessing Officer treated a sum of ₹ 4,96,20,173/- as capital expenditure relating to the setting up of manufacturing unit. This is how, the assessee is aggrieved on two counts on this issue. 8. We have heard the rival submissions and perused the relevant material on record. It is seen that the assessee reported an international transaction of Receipt of consultancy and training services amounting to ₹ 7.94 crore. The ld. AR explained that the DRP deleted the addition of ₹ 25 lac towards payment made for `Training services , leaving the remaining amount at ₹ 7.86 crore. He further submitted that a sum of ₹ 2.64 crore out of such total amount was suo motu capitalized by the assessee and the Assessing Officer has made a further capitalizatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of Distribution, which are of the revenue nature. It goes without saying that an expenditure incurred in relation to setting up manufacturing unit cannot be considered as of revenue nature and the same has to be capitalized. Since complete details of such amount are not available, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of Assessing Officer/TPO. We order accordingly and direct him to examine each and every item of payment of consultancy fee and, then, capitalize such amounts as relate to the setting up of manufacturing unit. Since the DRP has simply directed the TPO/A.O. to capitalize the expenditure relating to manufacturing unit and the ALP of the same has neither been directed to be nor actually determined by the TPO/A.O., we cannot enlarge the controversy by directing the authorities to determine the ALP of the amount to be capitalized. 10. Now, we espouse the remaining sum of ₹ 8,44,864/-, whose ALP has been determined by the authorities at Nil. We have noticed above that the assessee benchmarked the international transaction of `Payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not show any service having been actually received by it and, further, no independent party would have made a similar payment in uncontrolled similar circumstances. While applying the CUP method, it was obligatory upon him to bring on record some comparable uncontrolled instance(s) as per the mandate of rule 10B(1)(a)(i). Not even a single comparable instance has been brought on record to facilitate a comparison between the price for the service vis- -vis that paid by other comparables in similar uncontrolled circumstances. In the same breath, the assessee has also not placed on record any comparable uncontrolled transaction which could enable the determination of ALP of the transaction. 14. Be that as it may, it is noticed that the action of the TPO in determining Nil ALP of the international transaction on the ground that no benefit accrued to the assessee and then the AO making addition simply on the basis of recommendation of the TPO, is not in accordance with the judgment of the Hon ble Delhi High Court in CIT v. Cushman Wakefield (India) (P.) Ltd. (2014) 367 ITR 730 (Del), in which it has been held that the authority of the TPO is limited to conducting transfer pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi of Cushman Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of the international transaction, unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case determined Nil ALP by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) of the Act, we find the actions of the AO/TPO running in contradiction with the ratio laid down in Cushman Wakefield (supra). In these circumstances, we set aside the impugned order on this score and send the matter to the file of AO/TPO for deciding it in conformity with the above discussion and the law laid down by the Hon'ble Delhi High Court in the aforenoted case. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such proceedings. These two grounds are, therefore, allowed for statistical purposes. 16. Other grounds of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entary evidence on any of the following issues: 1. Contemporaneous documentary evidence to show that these services have actually been received. 2. Need for the receipt of such services for which payment has been made 3. Documentary evidence as to when and how these services were requisitioned from the AEs. 4. Basis of determination of rate of payment for IGS at the time of entering into the agreement. 5. Details of cost benefit analysis vis a vis the expected benefit from the IGS and the payment made for the same. 6. Details of benchmarking analysis done at the time of entering into the agreement so as to compare the payment of IGS to the AE vis a vis an independent party under similar circumstances. 7. Tangible and direct benefits derived by the assessee company from the use of such IGS. 8. Details and documentary evidence of cost incurred by the AE for rendering each type of services purportedly received by the assessee company. 21. Thereafter, it was noticed that: the assessee has not been able to demonstrate, based on any contemporaneous documentary evidence that it received any services performed by the expatriates. As against the above findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capacity adjustment in the `Manufacturing segment before the TPO vide its submission dated 10.01.2014. The Officer observed that in some of the comparables, production was done on a single shift basis while in others, the figures were given on double/triple shift basis. It was still further observed that the assessee took up figures of `Licensed capacity instead of `Installed capacity for computing the percentage of capacity utilization by the six comparables under this segment. In the absence of the availability of any reliable data and lack of uniformity in its application on all the comparables, the TPO refused to grant any capacity utilization adjustment. The DRP did not interfere in the draft order on this score. That is how, the assessee s claim for grant of capacity utilization adjustment was turned down, against which the assessee has come up in appeal before the Tribunal. 25. After considering the rival submissions and perusing the material on record, we find that the assessee employed the TNMM for benchmarking the international transaction of manufacturing segment. Modus operandi for calculation of the ALP under the TNMM has been prescribed in Rule 10B(1)(c) as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i). 27. Sub-rule (2) of Rule 10B provides that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to certain factors which have been enumerated therein. Rule 10B(3) states that an uncontrolled transaction shall be comparable to an international transaction, if either there are no differences between the two or a reasonably accurate adjustment can be made to eliminate the material effects of such differences. When we read sub-clauses (ii) (iii) of Rule 10B(1)(e) in juxtaposition to sub-rules (2) (3) of rule 10B, the position which emerges is that the net operating profit margin of comparable companies calls for adjustment in such a manner so as to bring both the international transaction and comparable cases at the same pedestal. In other words, if there are no differences in these two, then the average of the net operating profit margin of the comparable companies becomes a benchmark. However, in case there are some differences between the comparables and the assessee, then the effect of such differences should be ironed out by making suitable adjustment to the operating profit margin of comparables. That i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises a need to obliterate the effect of this difference in capacity utilizations. It can be done by proportionately scaling up the fixed costs incurred by A so as to make it fully comparable with the assessee. This we can do by increasing the fixed costs of A to ₹ 200 (₹ 100 into 50/25) as against the actually incurred fixed costs by it at ₹ 100. When we compute operating profit of A by substituting the fixed costs at ₹ 200 with the actually incurred at ₹ 100, it would mean that the fixed costs incurred by the assessee and A are at the same capacity utilization. There can be converse situation as well. Suppose the fixed costs incurred by a comparable (say, B) are ₹ 100 and it has capacity utilization of 25% as against the capacity utilization of 50% by the assessee. The above percentages show that the assessee has incurred full fixed costs at 50% of the utilization of its capacity, as against B incurring full fixed costs at 25% of the capacity utilization. This deciphers that the assessee has incurred relatively lower fixed costs and B has incurred higher costs. This difference in capacity utilizations can be eliminated by proportionately scaling ..... 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