TMI Blog2020 (10) TMI 1240X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer selects CUP as the most appropriate method to benchmark the transaction, it is his duty to find out and bring on record price charged for uncontrolled transactions carried out under similar circumstances. If, suitable comparable uncontrolled transaction is unavailable, CUP method cannot be applied. As further noticed, during the year under consideration assessee had sold 34 different products to both overseas AES as welt as domestic unrelated parties. Out of the 34 products sold, Transfer Pricing Officer has accepted the price of 16 products sold to AES to be at arm's length, since, the price charged to AES is more than the price charged to non-AEs. In case of 18 products only She Transfer Pricing Officer has made adjustment as the price charged to AES is less than the price charged to non-AEs. Thus, it appears, the Transfer Pricing Officer has adopted a very selective approach while applying CUP. Transfer Pricing Officer has only allowed volume adjustment on purely ad-hoc basis, that too, only in respect of a single product while ignoring various other products wherein volume difference between AE and non-AE transaction is substantial. Similarly, assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not in terms with the provisions contained under section 92C r/w rule 10B, hence, opposed to law. Transfer Pricing Officer has simply estimated the arm's length price of the transaction on estimate basis without applying any one of the approved methods. This cannot be accepted. There is umpteenth number of judicial precedents, wherein, it has been held that determination of arm's length price has to be done by applying any one of the methods prescribed under section 92C r/w rule 10B. Thus adjustment made by the Transfer Pricing Officer to the arm's length price of payment made towards Intra-group services is unsustainable. In view of the aforesaid, we have no hesitation in deleting the addition made by the Assessing Officer on account of the aforesaid adjustment. Grounds are allowed. Levy of interest under section 234A - As per assessee since the return of income was filed within the time prescribed under section 139(1) of the Act there is no question of levy of interest under the aforesaid provision - HELD THAT:- We direct the Assessing Officer to verify the facts and if it is found that the return of income for the impugned assessment year was filed within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty 12,975,330 TNMM 13,378,881 TNMM 4. Import of finished goods for resale 1,797,950,387 TNMM 1,643,213,846 TNMM 5. Export of finished goods 10,291,379 TNMM 34,424,560 TNMM 6. Receipt of indenting commission 39,959,428 TNMM 30,059,320 TNMM 7. Provision of engineering services 283,912,698 TNMM 234,642, 544 TNMM 8. Payment for marketing, administrative and logistics support service 54,060,839 Cost allocation 54,348,946 Cost allocation 9. Payment of information technology services 38,171,286 Cost allocation 22,452,796 Cost allocation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TNMM. Referring to the order passed by the Transfer Pricing Officer in assessment year 2010-11, he observed that except furnishing the segmental benchmarking of AE transactions and some other documents like screen shots, the assessee could not furnish any credible evidence to show the rendering of service by the AE and the benefit availed by the assessee. Thus, he rejected the benchmarking done by the assessee on cost allocation basis and proceeded to estimate the quantum of arm's length price by devising his own method. Insofar as the payment made towards marketing, administrative and logistic services are concerned, by estimating salary of an employee on man-hour basis, he determined the arm's length price at 60 lakh thereby suggesting an adjustment of ₹ 4,86,06,839. Insofar as payment made towards information technology services is concerned, adopting a similar method of estimation, he determined the arm's length price @ 30% of the total payment made by the assessee of ₹ 3,81,71,286. Thereby, proposing an adjustment of ₹ 1,14,51,385. The adjustments proposed by the Transfer Pricing Officer were added back to the income of the assessee while framing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts. Thus, he submitted, once TNMM is accepted as the most appropriate method, it cannot be rejected in case of few transactions relating to sale of finished products. He submitted, the assessee has three segments viz. manufacturing, trading and engineering and all these segments were separately benchmarked applying TNMM which were submitted before the Revenue authorities. He submitted, when TNMM is accepted in case of import of goods, royalty, etc., it cannot be rejected only in case Of sales of finished products to the AE. He submitted, CUP cannot be applied as the most appropriate method in view of geographic, volume and timing difference. He submitted, sales made to the overseas AE and sales made to non-AEs in domestic market cannot be comparable at all. He submitted, the Transfer Pricing Officer has picked-up for adjustment the products only where the price charged to AES is less than the price charged to the non-AEs. Whereas, goods for which the price charged to the AES is higher than the non-AEs have been ignored. He submitted, CUP method can only be applied when the transaction takes place under similar circumstances. He submitted, in the present case, neither the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee impact CUP. Further, the learned Departmental Representative submitted, whatever adjustment on account of volume and marketing/allied cost were allowable to the assessee have been allowed by the Transfer Pricing Officer and the DRP. Finally, the learned Departmental Representative submitted, while deciding identical issue in assessment year 2010-11 in assessee's own case, the Tribunal has restored it to the DRP for fresh adjudication. Therefore, he submitted, if deemed appropriate, the issue may be restored to the DRP. 14. In rejoinder, the learned Counsel for the assessee submitted, the assessee has submitted the segmental benchmarking under TNMM. Thus, it will be incorrect to say that the assessee has applied TNMM at entity level. With regard to the applicability of CUP, the learned Counsel submitted, since the Transfer Pricing Officer has applied CUP, the burden is on him to find sale transactions which are comparable the sales made to the AEs. He submitted, because of geographic, volume and time difference, it is difficult to apply CUP as it is not possible to compute the effect of all the differences. Alternatively, the learned Counsel submitted, if at all CU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to both overseas AES as welt as domestic unrelated parties. Out of the 34 products sold, Transfer Pricing Officer has accepted the price of 16 products sold to AES to be at arm's length, since, the price charged to AES is more than the price charged to non-AEs. In case of 18 products only She Transfer Pricing Officer has made adjustment as the price charged to AES is less than the price charged to non-AEs. Thus, it appears, the Transfer Pricing Officer has adopted a very selective approach while applying CUP. Even, while applying CUP, the Transfer Pricing Officer has not properly looked into assessee's claim of various adjustments on account of geographical location, volume and timing difference. The Transfer Pricing Officer has only allowed volume adjustment on purely ad-hoc basis, that too, only in respect of a single product while ignoring various other products wherein volume difference between AE and non-AE transaction is substantial. Similarly, assessee's contention that the price of products insofar as sales made to the AE and non-AE would vary due to timing difference has not been properly considered. The various adjustments which are required to be made have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate basis. Though in his order, the Transfer Pricing Officer has not mentioned in any specific terms the exact method applied by him to determine the arm's length price of the intra-group services, however, learned DRP in Para-5.5.3. has observed that the Transfer Pricing Officer has applied CUP method. 20. The learned Counsel for the assessee submitted, the adjustment made by the Transfer Pricing Officer is not legally sustainable as he has not followed any one of the methods prescribed under section 92C(3) of the Act for determining the arm's length price. The learned Counsel submitted, there cannot be any doubt regarding availing of services by the assessee as it has furnished all the evidences, such as, service agreement, screen shots of the websites maintained by the IT support service providing AE, screen shots of the virtual private network (VPN) maintained by the IT support service AE, the invoices raised by the AE, certificate demonstrating that the assessee had no IT personnel, details of various projects undertaken by the IT support service providing AE along with auditor's certificate. 21. As regards marketing, administrative and logistic services, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on benefit received by the assessee is also untenable as cost contribution on a pre-determined basis has been judicially accepted in various decisions. In this context he relied upon the following decisions:- i) CITv/s Merck Ltd., 389 ITR 70 (Bom.); ii) AWB India v/s DCIT, 152 ITD 770 (Bom.); and iii) U. T. Worldwide India Pvt. Ltd. v/s DCIT, 103 taxmann.com 422. 24. He submitted, the terms of the agreement specifically provided that there will be no allocation of cost that benefits any one specific entity. Without prejudice, he submitted, once the transaction has been bench marked using segmental TNMM, the method of allocation of cost becomes irrelevant. He further submitted, the allocation keys adopted by the assessee for allocation of common cost are close to the benefit received. In this context, he drew our attention to the allocation keys applied for cost allocation. He submitted, the allegation of the revenue that allocation of cost was not substantiated with evidences is baseless as the allocation sheet was file before the Transfer Pricing Officer and before the DRP, the assessee filed additional evidences in the form of CPA certificate. He submitted, the rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arm's length price by applying either CUP or any other approved method. Had the benchmarking been done under CUP method, the Transfer Pricing Officer should have brought on record at least a few comparable uncontrolled transactions to demonstrate that the payment made by the assessee towards intra- group services is not at arm's length. Whereas, the Transfer Pricing Officer has not brought on record even a single comparable uncontrolled transaction to demonstrate that the price charged by the assessee is not at arm's length. on the contrary, it is tell-tale from the order of the Transfer Pricing Officer that he has proceeded to benchmark the transaction purely on estimate basis by applying man- hour salary rate of a single employee in case of marketing, administrative and logistic services. Similar is Vie situation in case of IT services, wherein, the Transfer Pricing Officer has estimated the arm's length price at 30% of the amount paid. 26. The aforesaid method of estimating the arm's length price is not in terms with the provisions contained under section 92C r/w rule 10B, hence, opposed to law. Though, both the Transfer Pricing Officer and learned DRP ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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