TMI Blog2018 (10) TMI 1994X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of payment of technical support service cost. Assessee appeal allowed. - ITA No. 69/Kol/2018 - - - Dated:- 10-10-2018 - Shri S.S. Godara, JM And Dr. A.L. Saini, AM For the Appellant : Shri Anup Sinha Ms. Rituparna Sinha, AR. For the Revenue : Shri P.K. Srihari, CIT, DR. ORDER PER DR. ARJUN LAL SAINI, AM: The captioned appeal filed by the assessee, pertaining to Assessment Year 2013-14, is directed against a fair assessment order passed by the DCIT, Circle 11(1), Kolkata (Assessing Officer) under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 ( hereinafter referred to as the Act ) dated 06.12.2017, which incorporates the directions given by the Dispute Resolution Panel (DRP)-2, New Delhi, order dated 19.09.2017. 2. Grievances raised by the Assessee are as follows: 1 . That on the facts and in the circumstances of the case and in law, the Ld. AO erred in making the arm's length price ('ALP') adjustment of INR 46,43,69,272/- Sale of Finished Goods 2. That on the facts and in the circumstances of the case and in law, the Ld. DRP erred in confirming the ALP adjustment of INR 42,45,62,079/- i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xamining the details in connection therewith submitted by the appellant to the Ld. TPO and subsequently, to the Ld. AO as per his direction. Without further prejudice to what we have stated in ground no. (7), (8) and (9): 10. That on the facts and in the circumstances of the case and in law, the Ld. TPO erred in directing an adjustment of INR 3,58,02,269/- based on benefit test without duly considering evidences of receipt of services submitted by the appellant to the Ld. TPO and subsequently to the Ld. A.O. and Ld. DRP. Payment for Technical Support Service Cost 11. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in disallowing the payment of technical support service cost amounting to INR 40,04,924/-. 12. That on the facts and in the circumstances of the case and in law, the Ld. DRP erred in not appreciating that the TPO determined the ALP of the said transaction at Nil value without applying any of the methods prescribed under sub-section (1) read with sub-section (2) of section 92C of the Act which led to violation of the relevant provisions of the Act. 13. That on the facts and in the circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which was also placed before the Hon ble Bench. 5. The learned departmental representative for the Revenue, did not have much to say but he nevertheless relied on the orders of the authorities below. 6. We see no reason to take any other view of the matter other than the view so taken by the Division Bench of this Tribunal in assessee s own case, vide ITA No. 77/Kol/2017, for A.Y. 2012-13, order dated 11.05.2018. In this order the Tribunal as inter alia observed as follows: 14. Aggrieved by the order of the ld. DRP/Assessing Officer, the assessee is in appeal before us. The ld. counsel for the assessee at the outset submitted before us that suitable method for the assessee company is only Comparable Uncontrolled Price (CUP) method. The CUP method for computing arm s length price of the assessee s sale of finished goods to its AE is suitable, as the specific characteristics of PCBs (indicated by product identification number) sold by the assessee to AT S AG were exactly the same as the specific characteristics of PCBs sold by AT S AG to independent customers in back to back transactions. The prices at which PCBs were sold by the assessee to AT S AG were exactly equal t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base, which is then compared with the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. The modus operandi of determining ALP of an international transaction under this method is that firstly, the profit rate earned by the assessee from a transaction with its AE is determined (say, profit A), which is then compared with the rate of profit of comparable cases (say, profit B) for ascertaining as to whether profit A is at arm's length vis- -vis the profit B. If it is not, then the transfer pricing adjustment is made having regard to the difference between the rates of profit A and profit B. The rate of profit of comparable cases (profit B) may be computed from internally or externally comparable cases, depending upon the FAR analysis and the facts and circumstances of each case. Thus, the calculation of profit B may undergo change with the varying set of comparable cases. However, in so far as calculation of profit A is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ground that the overseas AE had been incurring losses on the margin retained from the assessee. On appeal, the Tribunal rejected the assessee's argument that such transactions have to be considered at arm's length on ground that there is no shifting of profits. The Tribunal categorically held that the assessee i.e., the Indian party has to be taken as the tested party and the TNMM method is to be followed. Recently the Delhi Bench of ITAT in the case of Ranbaxy Lab Ltd. vs. Addl CIT (AY 2004-05) rejected the assessee's case since it had taken the foreign AEs as 'tested parties' and calculated its ALP. The ITAT agreed with the AO's contention that such benchmarking is not in consonance with the Income Tax rules. Besides the above the AE cannot be treated as tested party because its accounts are based on Austria GAAP which is different from Indian GAAP. Accordingly, the method of accounting, allocation of costs, recognition of revenue etc. differ for making the comparison. In the instant case we need to determine the ALP of the transaction between the assessee and AE for the export of the PCB. Therefore, the tested party will be the Indian Party. In v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e either a comparable transaction between one party to the controlled transaction and an independent party ( internal comparable ) or between two independent parties, neither of which is a party to the controlled transaction ( external comparable'). The OECD Guidelines inter alia defines the CUP Method as follows: Comparable uncontrolled price (CUP) method A transfer pricing method that compares the price for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. 11.1 We also find support from the decision of the Hon'ble Mumbai Tribunal in the matter of DCIT vs. Isagro (Asia) Agrochemicals (P.) Ltd reported in [2013] 31 taxmann.com 388 (Mumbai - Trib.), wherein the Hon'ble Tribunal interalia held that : various benches of the Tribunal including Asstt. CIT v. MSS India (P.) Ltd.[2009] 32 SOT 132 (Pune) and Philips Software Centre (P.) Ltd. v. Asstt. CIT ITA No.179/Kol/2016 A.Y 2011-12 [2008] 26 SOT 226 (Bang.) have preferred the following of CUP method. It is obvious that when the price of similar goods or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a separate transaction ('Sale') and confirmed the application of the TNMM at the entity level. However, we find that the DRP should have applied the method which is the most appropriate and in the instant we have already held that the CUP method as the most appropriate method. 11.3 In this connection, we rely in the decision of the Hon'ble Mumbai Tribunal in the matter of Mattel Toys (I) (P.) Ltd vs. Deputy Commissioner of Income-tax, Circle - 6(3) reported in [2013] 34 taxmann.com 203 (Mumbai - Trib.), wherein the Hon'ble Tribunal inter alia held that: 41. Now coming to the argument of the learned Departmental Representative that once the assessee itself has chosen TNMM as most appropriate method in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, the TPO or the appellate authorities can very well hold that why a particular method can be applied for getting proper determination of ALP or the assessee can demonstrate a particular method to j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred over the profit based methods. In this connection we rely in the decision of the Hon'ble Delhi Tribunal in the matter of Hughes Systique India (P.) Ltd vs. ACIT reported in [2013] 36 taxmann.com 41 (Delhi - Trib.), wherein the Hon'ble Tribunal inter alia held that: 6.5 The CUP method provides the most direct comparison for the purpose of determining the arm's length price of international transactions and is to be preferred over the other profit based methods. Reliance is placed in this regard on the following decisions: - Aztec Software Technologies Services Ltd. v. Asstt. CIT [2007] 107 ITD 141/162 Taxman 119 (Bang.) (SB) - UCB India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 95 (Mum.) - Gharda Chemicals Ltd. v. Oy. CIT [2010] 35 SOT 406 (Mum.) - Intervet India (P.) Ltd. v. Asstt. CIT [2010] 39 SOT 93 (Mum.) - Asstt. CIT v. Dufon Laboratories [2010] 39 SOT 59 (Mum.) 11. Reliance in this regard is also placed on the decision of Hon'ble Mumbai Tribunal in the case of Serdia Pharmaceuticals (India) (P.) Ltd. v. Asstt. CIT reported in [2011] 44 SOT 391/9 taxmann.com 13 wherein the Hon'ble Tribunal while dealing with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparison of the price so charged from or paid to its AE with some external independent reliable price data under similar circumstances of transactions with AE. Ordinarily the Internal CUP method should be preferred over the External CUP method as it neutralizes several distinguishing factors, such as the local factors and the economies available or unavailable to the appellant in particular, having bearing over the comparison of price charged from unrelated parties and AE. 11.5 In view of the above judicial precedents, we find that the CUP method provides the most direct comparison for the purpose of determining the arm's length price of international transactions and is to be preferred over the other profit based methods. Accordingly, in the instant case internal CUP method should be preferred over the external CUP method. Hence, we hold that in the instant case, the CUP Method (internal) is the most appropriate method in determining the arm's length price of the international transaction involving export of PCBs by the assessee to AE and accordingly, delete the adjustment of INR 69,30,53,397/- made in the assessment order. 15. On the other hand, the ld DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above diagram, the ld DR Explained the Bench that in order to apply CUP method either internal or external, the CUP is necessary and for that the relevant Rules are 10B (2), 10B (3), 10B (4) of the Income Tax Rules. Therefore, to apply the CUP method, the transaction entered into by the tested party should be compared with uncontrolled transaction and such uncontrolled transactions do not include transactions between the associated enterprises. Indian TP regulations prescribe that most appropriate method has to be identified for benchmarking on international transaction and comparison has to be done with uncontrolled transactions and not controlled transactions to arrive at the arm s length price. Accordingly, the approach of bench marking the transaction pertaining to sale by AE by comparing the same with controlled transaction of assessee itself does not fall under any of the methods prescribed under the provisions of section 92C of the Act. It is contrary to Indian TP regulations and not acceptable under the Indian TP regulations. Similar view has been taken by ITAT in case of Skodo Auto lndia Pvt. Ltd. Vs. ACIT (122 TTJ 699), M.S.S. India Pvt. Ltd. (123 ITJ 657) and Bechtel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement, is paying commission and warranty, whereas the AE is not charging such commission and warranty to third parties. Level of the market (i.e., wholesale, retail, etc.): The assessee is a manufacturer and as such selling products on wholesale basis to AE, whereas AE is distributing by catering to different parties on retail basis. Geographic market in which the transaction takes place. The transaction between assessee and AE is between India and Austria while AE is selling internally only. Foreign currency risks. Inventory risks Delivery terms means sales AT FOB basis or CIF basis Insurance and transportation costs Market conditions and competition in the market Alternatives realistically available to the buyer and seller In view of the above factual matrix, the ld DR for the Revenue requested the Bench to relook into the issue of applicability of CUP method. The ld DR stated that there are Supreme Court decisions where it was held that coordinate benches of tribunal can take different view if the application of law and facts have not been properly appreciated in the previous judgments. Therefore, ld DR submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anty guarantee @ 2% of the gross distributor`s price out of the aforesaid sale proceeds for the purpose of incurring warranty expenses arising from further sale of PCB`s to independent customers. The AT S AG (AE) remitted the sale proceeds collected by it from independent customers in the open market under uncontrolled conditions, to the assessee company, which was recorded in the books of accounts of the assessee company as sales . Therefore, in the assessee`s case under consideration there are independent customers, and the price is fixed by the Principal (Assessee), the product design and specification is decided by the assessee. The Associated Enterprise, the AT S AG (AE) plays a limited role, that is, it collect the money on behalf of the assessee and remits the same to assessee, for that AE is paid commission. Even commission and warranty expenses are determined and decided by the assessee (Principal). The AT S AG (AE) does not do any value addition in the goods manufactured by the assessee. Therefore, in this scenario, the stand of the ld DR that CUP Method is not applicable to the assessee, is not acceptable. 17. Now we deal with the issue of 'tested party& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange in facts and law and the Revenue is unable to produce any material to controvert the aforesaid findings of the Division Bench, in assessee`s own case (supra). Respectfully following the above binding precedent, we uphold the contention of the assessee and we delete the ALP adjustment of Rs.42,45,62,079/- made by ld TPO/AO, hence the ground Nos. 2, 3 and 4 raised by the assessee are allowed. 8. Ground Nos. 5 to 10 raised by the assessee are directed against the arm s length price adjustment of Rs.3,58,02,269/-made in respect of payment of Information Technology (IT Service Cost), and Ground Nos. 11 to 15 raised by the assessee are directed against arm s length price adjustment of Rs. 40,04,924/- made in respect of payment of technical support service cost. Both the issues are identical and similar therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. 9. When this appeal was called out for hearing, the learned counsel for the assessee, Ms. Rituparna Sinha, invited our attention to the order dated 11.05.2018, passed by the Division Bench of this Tribunal in assessee s own case in ITA No. 77/Ko ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences . This, Rule specifically recognizes that reasonably accurate adjustment should be made to eliminate the material effects of differences, if any. Sub-rule (2) lays down the factors for determining comparability whereas; sub-rule (3) lays down the standard of comparability. The standard comparability not necessarily entails complete identity between the two transactions but sufficient similarity. It can be held to be sufficient similar if the differences between them is not material so as to effect price or profit in the open market and if there is one such thing, then such a material difference needs to be eliminated through adjustments. The factors governing the price or profit in a transaction may depend upon business strategies, market conditions, competitions, market penetration schemes, geographi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... handling services and sales services for last three assessment years i.e. AY 200910, AY 2010-11 and AY 2011-12. Though there was no change in the facts and circumstances of the case for the previous year relevant to the assessment year 2012-13, the TPO/DRP determined the arm's length price of the said transactions at NIL value thereby violating the rule of consistency enunciated by the Hon'ble Supreme Court in the matter of Commissioner of income Tax, Delhi-IV versus M/s. Dalmia Promoters Devels. (P) Ltd, reported in [2015] 5 ITR-OL277 (SC). ln the aforesaid decision, the Hon'ble Supreme Court has held that: We are not going into this issue in as much as this appeal can be disposed of on the ground that consistency does demand that there being no change in circumstances, the income for the year 1993-94 would also have to be treated business income as for the previous three years. Accordingly, the appeal is dismissed. We note that the Department has been consistently accepting the assessee`s transfer pricing documentation on the same facts and circumstances of the case, and no ALP adjustments were directed by the Ld TPO in respect of international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92C of the Act, which leads to violation of the provision of sub-section(3) of section 92CA of the Act read with sub-section (3) of section 92C of the Act. The relevant provisions of section 92C are given below for ready reference: Section 92C: Computation of arm s length price. (1) The arm s length price in relation to an international transaction [or specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely: (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm s length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction [or specified domestic transaction] has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction [or specified domestic transaction] have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm s length price in relation to the said international transaction [or specified domestic transaction] in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him: Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm s length price should not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 92C of the Act. It means the TPO can not apply his own method to compute the arm`s length price (ALP) of the assessee. That is, the statute does not give right to the TPO/AO to adopt their own developed methods. The most appropriate method (MAM) has to be selected by the TPO/AO out of the six methods prescribed by the statute. He has to select any one method as MAM, out of the six methods prescribed in section 92C (1) of the Act to compute the arm`s length price (ALP). We note that in the assessee`s case under consideration, the TPO/AO determined the arm's length price of the international transaction under consideration at NIL value, without applying any of the methods prescribed under sub-section (1) read with sub-section (2) of section 92C of the Act, as explained above. The DRP alleged that the assessee failed to satisfy benefit test in respect of purchase order handling services and sales services under the CCA and hence, the DRP confirmed the action of the TPO in determining the arm's length price of the said services at NIL value. It is pertinent to note that the aforesaid actions of the DRP and the TPO go against the basic tenet of the Indian Transfer Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt of services on sample basis. We note that the ld Counsel for the assessee submitted before us a brief chart which is mentioned in para 27 of this order to prove the benefit test. This chart explains the nature of services, main functions, and documentary evidences for receipt of services along with paper book reference. This chart also explains the relevant para of the Cost Contribution Agreement (CCA). The assessee received the purchase order handling services and sales services and documented them properly. The assessee also submitted the certificate issued by PWC Austria (pb.no. 997 to 999), about the Costs allocated to AT S India Pvt. Ltd. The copies of 78 chains of e-mail, job description sheets of 10 individual employees of the CCA team, evaluation reports of 6 global customers and flow chart of quotation processing services prove that assessee has received benefit from these services. The ld DR for the Revenue has not disputed that these services have not been received by the assessee, he disputed only the Benefit Test , that assessee did not get the benefit out of these services. We are of the view that assessee has proved that he had received the benefit from these s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO's determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. The jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an International Transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules. The determination of the ALP by the respondent assessee of its advertisement expenses has not been disputed on the parameters ..... X X X X Extracts X X X X X X X X Extracts X X X X
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