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TMI Blog2021 (6) TMI 1111X X X X Extracts X X X X X X X X Extracts X X X X ..... tment in an amount of Rs. 361,32,20,620 is not sustainable in law. 3. That the TPO / DRP erred on facts and in law in disregarding the economic analysis performed by Appellant and rejecting the Transactional Net Margin method ('TNMM') adopted by Appellant in relation to provision of marketing support services, thereby making an upward adjustment of Rs. 361,32,20,620. 4. Without prejudice, that the TPO / DRP erred on facts and in law in not benchmarking the international transaction of provision of market support services using CUP method, adopting the internal comparable in the form of third party agreement between Saudi Basic Industries Corporation ('SABIC') with an unrelated party namely EURL Maghreb Petrochemicals Company ('MAPECO'), accepted by DRP during AY 2015-16. 5. That the TPO / DRP erred in facts and in law in applying Other Method using CUP approach as the Most Appropriate Method ('MAM') without giving any reasons / justification in support thereof. 5.1. That the TPO / DRP erred in facts and in law in benchmarking the international transaction of provision of market support services adopting the following comparables : a) 6245 Zbigniew Torkaz, b) 17964 Atage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not enter into contracts with the customers and does not take title to inventory. The products are sold an: invoiced directly by Sabic and SAPPL to the third party customers. Accordingly, SABIC India does not book sales revenue in its books, either, since it does not act as a buy-sell organization. 6. The details of the international transaction entered by the assessee with its AE during the year under consideration are as follows :- S. No. Description of the transactions Amount (In INR) i. Provision of marketing support services 87,92,14,730/- ii. Training and SAP related expense 14,75,826/- 7. The assessee has used TNMM to benchmark its international transactions pertaining to provision of marketing support services. The assessee has also paid Training and SAP related expenses to its AE and the international transaction relating to the same has been considered as closely linked to the marketing support activities and hence no separate benchmarking is undertaken by the assessee. 8. Justifying the adoption TNMM as the most appropriate method the assessee contended that it is engaged facilitation of sales to its AE's and accordingly characterized as a support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is equally pertinent to mention that TNMM has been accepted as the most appropriate method in assessment year 2009-10 to 2014-15. 12. We find that the TPO has discarded the TNMM method adopted by the assessee summary. We further find that without assigning any specific reason the TPO proceeded by using the "other method" as the most appropriate method and finally came to the set of following comparables for making the ALP adjustment :- S. No. Ref. Agreement Title Agreement Type Industry Cost Base Exclusivity Rate 1 L22581 Non Compete Agreement Asset Purchase, Patent, technology, trademark Chemicals Net Sales Exclusive 5.00% 2 L291 Distribution Agreement Distribution Business Services Net Sales Unknown 5.00% 3 L23918 Distribution Agreement Distribution, Trademark, Trade Name Educational Services, Business Services Net Sales Exclusive 15.00% 4 L17961 Technology Assistance and Marketing Support Agreement Services, Technology Chemicals Net Sales Unknown 3.75% 5 L11144 Exclusive Sales and Distributorship Agreement Distribution Chemicals Net Sales Exclusive 10% 6. L6245 License Agreement Know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and its financial commitment and risk were inconsiderable." 35. One of the principal issues before the Tribunal concerned the applicability of TNMM with Berry ratio as the PLI, as the most appropriate method. Mr Aggarwal had sought to contend before us that the TPO had rejected the PLI of Berry ratio but had not rejected the TNMM as the most appropriate method and, therefore, it was incumbent upon him to replace the PLI with whichever ratio he considered appropriate as had been done in the preceding years. He contended that on principles of consistency, he was required to follow the TNMM method. There is much merit in the contention that a method once considered appropriate should be consistently applied unless for good reasons, the TPO decides otherwise. However, this is a salutary guiding principle and would not fetter the TPO from independently examining the transfer pricing approach reported by the Assessee. The purpose of imputing ALP to international transactions is to ensure that the real income of the Assessee in respect of international transactions (and with effect from 1st April, 2013 certain domestic transactions) are charged to tax under the Act. It is thus, implic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is apparent, Berry ratio has limited applicability; it can be used effectively only in cases where the value of goods have no role to play in the profits earned by an Assessee and the profits earned are directly linked with the operating expenditure incurred by the Assessee. In other words, the operating expenditure incurred by the Assessee effectively captures all functions performed and risks undertaken by the Assessee. Thus, in cases where an Assessee uses intangibles as a part of its business, Berry ratio would not be an apposite PLI as the value of such tangibles would not be captured in the operating cost and, therefore, it would not be appropriate to compute the ALP based on net profit margin having regard to the operating cost as a relevant base. Similarly, Berry ratio would not be an appropriate PLI for determining ALP in cases of Assessees who have substantial fixed assets since the value added by such assets would not be captured in Berry ratio." 20. In another case the Hon'ble High Court of Delhi in Li and Fung India Private Limited 40 taxmann.com 300 had the occasion to consider a similar quarrel wherein the assessee had strongly contended that no such adjustment wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances, considering all the relevant facts. The various data which may possibly be used for comparability purposes could be: (a) Third party quotations/ invoices; (b) Valuation reports; (c) Tender/Bid documents; (d) Documents relating to the negotiations; (e) Standard rate cards; (f) Commercial & economic business models; etc. 6.57 It is relevant to note that the text of Rule 10AB does not describe any methodology but only provides an enabling provision to use any method that has been used or may be used to arrive at price of a transaction undertaken between non AEs. Hence, it provides flexibility to determine the price in complex transactions where third party comparable prices or transactions may not exist. The wide coverage of the Other Method would provide flexibility in establishing arm's length prices, particularly in cases where the application of the five specific methods is not possible due to reasons such as difficulties in obtaining comparable data due to uniqueness of transactions such as intangibles or business transfers, transfer of unlisted shares, sale of fixed assets, revenue allocation/splitting, guarantees provided and received, etc. However, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited ('SGL') with 51% shareholding and balance shares are held by SABIC Asia Padfic Pte Ltd. ('SAPPL). Companies engaged in trading operations cannot be considered as comparable to the service provider earning commission income. We wish to submit that while undertaking the benchmarking analysis of the international transactions entered with the AEs, we had also performed a search of comparable companies who were service providers and engaged in the provision of services. However, the learned TPO has completely ignored the alternate, benchmarking analysis conducted in the TP report. Refer page no,27Q of the paper book for alternate benchmarking analysis submitted to TPO In the absence, of reliability and correctness, the benchmarking process of the Assessee company is being rejected by the undersigned. (Para 8, Page 5 of the TP order given at page 23 of the Paperbook) While undertaking the search process, this office has selected the keywords for Industry of Business Services, Chemicals, Oil & Gas and Wholesale Trade etc to arrive at the true comparables. (Para 12, Page 11 of the TP order given at page 29 of the Paperbook) The learned TPO has not provided any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded. The Panel has considered the submission. The agreement is not similar to the serial no 1 but to L6245 Zbigniew Torkaz, an individual and Trustee and Polymer Energy LLC. The Panel, accordingly, rejects the objection and upholds the action of the TPO. L22581 Dow Coming Corp. & Advanced Polymer, Systems Inc Rate-5% 3.4.5 The assessee has submitted that this agreement is not similar to the assessee's agreement it is essentially, and agreement for sale, transfer and assignment of certain worldwide patents in respect of certain products. Thus, according to the assessee, the agreement is an Asset Purchase agreement. The Panel does not find the argument acceptable as this agreement also relates to patent, technology and trademark. L291 Equipmart Inc. and Collegiate Pacific Inc. Rate-5.00% 3.4.6 This agreement is sought to be distinguished by the assessee on the ground that the distributor is required to pay royalty of 5 % of Net Sales in respect of products sold by him, whereas the assessee is said to be earning marketing support fee and not making any payment to our AEs. According to the assessee, consideration also involves combination of lump sum fees in the form of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X
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