TMI Blog2023 (10) TMI 300X X X X Extracts X X X X X X X X Extracts X X X X ..... e Appellant to its AEs by rejecting the TP documentation maintained by the Appellant and arbitrarily determining arm s length price as Nil by applying Comparable Uncontrolled Price Method( CUP ) Method - HELD THAT:- Before us, Revenue has not placed any material on its record pointing out any distinguishing feature in the facts of the case for the year under consideration and that of earlier year nor has placed any contrary binding decision in its support. Thus, respectfully following the order of this tribunal in the own case of assessee [ 2022 (12) TMI 542 - ITAT AHMEDABAD] we hereby set aside the finding of the DRP and direct the AO/TPO to delete the enhancement of income on account TP adjustment in the transaction as discussed above i.e. Data Management Fees. Hence, the ground of appeal of the assessee is hereby allowed. Purchase of fixed assets and payment of Trademark Fee by aggregating the same with the transaction of purchase of Raw Materials and components - Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of the earlier year nor has placed any contrary binding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld, AO/ Learned Transfer Pricing Officer ( Ld. TPO ) without providing any cogent reasons for the same. 3. That on the facts and circumstances of the case and in law, the Ld. AO / Ld, TPO/ Ld. DRP erred in enhancing the income of the Appellant by 1NR 9.22,28,801 pertaining to purchase of raw materials and components that do not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in: 3.1. erroneously rejecting the economic analysis undertaken by the Appellant in the Transfer Pricing ( TP ) documentation maintained by it in terms of section 92D of the Income-tax Act, 1961 (the Act ) read with Rule 10D of the Income-tax Rules, 1962 (''Rules ); 3.2. erroneously rejecting the selection of foreign associated enterprise ( AE ) as tested party for calculation of the arm's length price by the Appellant in the TP documentation maintained by it in terms of section 92D of che Act read with Rule 10D of the Rules; 3.3. not appreciating the functional, asset and risk profile of the Appellant with respect to impugned international transaction of purchase of raw material and components' (licensed manufacturing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action pertaining to purchase of raw material and equipment'1. In doing so, the Ld. TPO/ Ld. DRP have grossly erred in rejecting the economic analysis carried out by the Appellant in its TP documentation wherein the transactions were separately benchmarked using other method' . 6. That on facts and circumstances of the case and in law, the Ld. TPO /Ld. DRP have erred in enhancing the income fay (NR 43,01,134 in relation to payment of trademark fees . In doing so, the Ld. TPO/ Ld. DRP have grossly erred in: 6.1. Alleging that the Appellant has incurred double expenses by paying trademark fees and being involved in the activities of advertisement^marketing and promotion, which contribute to the brand name of 'Schneider'; 6.2. Benchmarking the international transaction of payment of trademark fees by aggregating the same with international transaction of ''purchase of raw materials . Accordingly, the Ld. TPO/ Ld. DRP have grossly erred in rejecting the economic analysis carried out by the Appellant in its TP documentation wherein the transactions were separately benchmarked using comparable uncontrolled price method ; and 7. That on fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... region was stated that it imported more than 90% from that region only hence comparables were selected from that region. The PLI of the tested party was calculated taking the base of operating profit divided by total cost formula. The assessee thus worked out the margin of the tested party at 5% and reached out at ALP (i.e. cost plus mark-up 5%). The assessee in this regard submitted that the cost plus 5% mark-up was followed up uniformly across the various Schneider Group Entities as specified in Schneider Group Transfer Pricing Policy. 6. The TPSR submitted by the assessee as discussed above was rejected by the TPO for the reason summarized as under: a- That the assessee in its TPSR mentioned that 5% mark-up charged on cost of raw material by AEs is the group policy. But the assessee has not furnished the Group Transfer Pricing Policy during proceedings. b- That the assessee has purchased the raw materials and components from 30 entities spread all over the world whereas to determine the ALP, only two tested parties were selected (i.e. Germany and France) from where the assessee was procuring the raw materials and components to the tune of 60% out of 100% of raw materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of contract manufacturing segment. l- That the assessee has not maintained the requisite documents as specified in section 92D read with rule 10DA of the Income Tax Rules. 6.1 The assessee before the TPO also furnished alternate working of TPSR by the treating itself as tested party. The TPO rejected the same by holding that the working of fresh search conducted by the assessee after treating itself as tested party was furnished at the fag-end of assessment period i.e. 29-07-2021 where time limit was expiring on 31-07-2021. Further, in the fresh working the activity of certain comparables did not match with the activity of the assessee. The process of search and accept-reject matrix was also not demonstrated. 6.2 The assessee in the submission before TPO also requested to provide working capital adjustment but the same was also rejected by the TPO. In this regard the TPO noted that the assessee itself has not made such adjustment while computing ALP of the other transaction such as sale of finished goods. The sudden realization that certain adjustment on account of working should be made in this particular transaction only is after thought to bring margin shown by it cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Asia, Australia, US, etc without providing reasonable reasons. The TPO observed that the assessee had selected codes of dissimilar businesses to find comparables. The TPO observed that certain companies were rejected on the basis of unclear shareholder criteria. The TPO observed that turnover filter of less than $ 10 million was applied in connection with the assessee's turnover, when the tested parties were the AES The TPO observed that the assessee had not given accept/ reject matrix. The TPO observed that the assessee did not demonstrate search process with the data base to derive comparables. The TPO further observed that sale of finished goods the assessee had taken the Indian entity as the tested party to decide the arm's length price of the sales with TNMM. The TPO, therefore, wanted to change the benchmarking of the international transactions of purchase of raw material and components. On the other hand, the assessee defended its TPSR. The TPO responded point wise with reasons for rejection of each argument in defence of the TPSR by the assessee, in para 5.2 to 5.12 of the TPO's order. The assessee also made a fresh search considering itself as the tested part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and perused the materials available on record. The facts of the case have been elaborated in the preceding paragraph which are not in dispute. Therefore, for the sake of brevity and convenience, we are not inclined to repeat the same. Admittedly, the assessee has treated the foreign AEs as the tested party to benchmark the transactions for its purchase of raw materials and components from the AE s which was not accepted by the authorities below. Thus the 1st controversy that arises for our adjudication whether the foreign AE s can be treated as the tested party in the given facts and circumstances. 10.1 In this regard we note that the selection of the tested party is a matter of dispute since beginning of the introduction of transfer pricing under the Act. It is for the reason that the Act does not define the concept of Tested Party . 10.2 However, OECD has defined in detail the concept of tested party in its guidelines for Multinational Enterprises and Tax Administration. Further the same has also been defined in UN Manual. 10.3 The OECD Guidelines defines tested party as the one to which a transfer pricing method can be applied in the most reliable manner and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh the assessee has furnished the FAR Analysis of the foreign AE s viz a viz of the assessee in the TPSR but same is not enough to decide the tested party until and unless the reliable data is brought on record. In other words, the financial data reflecting the transaction is equally important to determine the PLI of the tested party viz a viz the comparables. 10.5 In holding so, we also draw support and guidance from the order of the coordinate bench of this tribunal in the case of General Motors India (P.) Ltd. vs. Deputy Commissioner of Income-tax / Assistant Commissioner of Income-tax reported in 37 taxmann.com 403 where it was held that tested party should be the least complex entity for which reliable data in respect of itself and in respect of comparables is available. The Tribunal accepted that tested party could be the local entity or a foreign associate enterprise (AE). Thus, once the foreign AE s have been rejected to be treated as the tested party, the assessee should be treated as the tested party to determine the ALP of the transactions representing the import of raw material and components from the associated enterprises. The assessee accordingly has worked out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtract of the submission of the assessee is reproduced as under: Section V: Incorrect application of benchmarking analysis used for sale of finished goods to determine the ALP for the transaction pertaining to purchase of raw material At the outset, the Assessee would like to humbly submit that your goodself has grossly erred in adopting the benchmark analysis of sale of finished goods for benchmarking the international transaction of purchase of raw materials. While doing so, your goodself has failed to appreciate that the Assessee has been characterized as a contract manufacturer for transaction of sale of finished goods. On the other hand, the Assessee has been performing the functions of a licenced manufacturer with respect to raw material and components procured from its AEs. In lights of the above, the Assessee humbly submits that the benchmarking analysis of both the transaction cannot be similar and separate and distinct benchmarking analysis ought to be performed for benchmarking international transaction of purchase of raw materials, in order to substantiate the said argument, the Assessee would now like to detail difference in functional, asset and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L procures raw materials and components for the manufacturing of power distribution automation equipment. SEIL is responsible for maintaining the inventory. The functions performed in this regard includes scheduling, warehousing, maintenance of stock as per forecasting and requirement of customers etc. As the manufactured products produced by SEIL are sold to end-customers, SEIL faces the entire price risk. SLIL owns and utilizes its manufacturing facilities, distributing infrastructure, office premises, warehousing facilities, plant equipment communication facilities, furniture and fixtures etc. for the purpose of its business. Contract Manufacturer Produces goods for a manufacturing principal. Principal bears demand and final customer pricing risk. Earns an arm's-length mark-up on iota! costs. Bears limited risks associated with holding finished goods and selling them. SEIL manufactures products for its AEs only. Sales are made to AEs at inter-Company prices, which are generally based on cost plus mark-up on a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly similar to a licensed manufacturer, the relevant filters to be applied would generally include selecting comparable companies having inventory/sales 15%, selecting comparable companies having net fixed assets/ sales 15% and selecting comparable companies having research and development expenses/ sales 5%. Therefore, the Assessee humbly submits that both the aforesaid transactions are not identical in nature. 10.9. In view of the above, the action taken by the TPO which was subsequently confirmed by the Ld. DRP is not maintainable in the given facts and circumstances. 10.10 Now the aspect that emerges is this whether the TPO was right in rejecting the comparables selected by the assessee with respect to its transactions of purchases of raw materials and components from the AE s. In this connection we note that the assessee has given the necessary details during the assessment proceedings. This fact be verified from the pages 66 to 89 of the order of the ld. DRP. In the absence of any specific defect pointed out by the authorities below with respect to comparable selected by the assessee, we are not in agreement with the decision of the authorities below for selecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re there were no material produced by the assessee to establish the functional risk assumed by the foreign AEs. The material was available before the TPO but the TPO non-suited the assessee on the ground that such contention by referring to the foreign AEs as tested party was not part of TP documentation. This finding is incorrect. Interestingly in the case of in the case on hand the TPO rejected the data placed by the assessee in their TP documentation and undertook a fresh search for external comparables and arrived at a final list of 12 comparables. Therefore, when the TPO himself has not attached any sanctity to the TP documentation as submitted by the assessee, could not have foreclosed the assessee from canvassing the issue that the subsidiaries are least complex entities which should be taken note of. 10.13 Applying the above principle in the case on hand, we note that, the assessee before the Ld. DRP has taken internal TNMM method and compared the margin of AE segment with non-AE segment under license manufacturing. The assessee regarding this has placed the reliance on Rule 10B(1)(e) of the Rules. The relevant submission of the assessee before the DRP is extracted on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Sub clause (ii) provides that net profit realized from uncontrolled transactions shall be computed. The profit from uncontrolled transactions can be realized by the (i) enterprise or (ii) unrelated enterprise from comparable uncontrolled transaction. Thus the Rules recognize and accept the adoption of net profit realized by the enterprise from comparable uncontrolled transaction. Such a result should be preferred over net profit realized by unrelated parties from comparable uncontrolled transaction. This is because, such analysis is more meaningful as the relevant data, facts and features of both the segments are available and are more reliable. On the following decisions, it has been held that internal comparables are to be preferred:- a. Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxmann.com 27 (Delhi) - held that internal CPM is better than external TNMM b. Asstt. CIT v. Schlafhorst Marketing Co. Ltd. [2011] 13 taxmann.com 104/47 SOT 120 (Mum.)(URO) - held that internal TNMM to be adopted c. Asstt. CIT v Birla Soft Ltd. [2011] 12 taxmann.com 31/46 SOT 437 (Delhi) - internal TNMM accepted d. Destination of the World (Subcontinent) (P.) Ltd. v Asstt. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to preference to be given to internal comparable uncontrolled transactions vis- -vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis- vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, inp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction shown by the assessee for the import of raw materials and components at the arm length price, no adjustment with respect to other transactions aggregated with the transactions in dispute is required to be made. In other words, the impugned transactions discussed above have to be treated at arm length price as applicable for the purchase of raw materials and components. 10.24 Without prejudice to the above, it was also contended before us by the learned AR for the assessee that whatever adjustments needs to be made by the revenue authorities should be with respect to the international transactions with the AE which are in dispute. As such the revenue cannot consider all the transactions for the purpose of making the addition taking the rate of the ALP. We find force in the argument of the learned AR for the assessee and accordingly direct the revenue to make the adjustments with respect to the international transactions with the AE s which are in dispute. However, we are conscious to the fact that the direction at this stage will not make any difference to the assessee for the reason that the appeal has been decided in favour of the assessee. However, we have recorded t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y adopting certain allocations method. Accordingly, all the service receiver entities reimburse the cost to the service provider entity along with markup of 6%. 15. However, the AO found that assessee failed to establish based on evidence that it has received services from AE against the impugned payment. The 4 images provided by the assessee in support of receipt of services which were also provided in the immediate previous assessment year. Further, these images are in the form of screen shots derived by simple web search, home page of assessee website. Hence, these images were not evidence that it had received any services. The TPO further found that the assessee has not provided details of cost incurred by the AEs in providing impugned services what were the cost actually incurred. There was no basis for allocating the cost and the markup of 6% provided. Thus, the TPO in the absence of necessary details rejected the ALP working provided by the assessee to determine the ALP of impugned services at Rs. NIL. Accordingly, the proposed an upward adjustment of Rs. 14,97,50,987/- to the total income of the assessee. 16. The Aggrieved assessee raised the objection before the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der consideration. Therefore, respectfully following the directions of the DRP in AY 2017-18, the ground of objection no. 3(sub grounds 3.1 to 3.3) is dismissed. 17. Being aggrieved by the order of the ld. DRP/TPO/AO, the assessee is in appeal before us. 18. The learned AR before us contended the Tribunal in the own case of the assessee in the immediately preceding assessment year has decided the issue in favour of the assessee. Accordingly, it was prayed by the learned AR that the issue on hand raised by the assessee should be decided in its favour. 19. On the other hand, learned DR before us could not controvert the arguments advanced by the learned AR for the assessee but vehemently supported the order of the authorities below. 20. We have heard the rival contentions of both the parties and perused the material available on record. At the outset, we note that the issue raised by the assessee in the current appeal is identical to the issue raised by the assessee in the own appeal for AY 2017-18 bearing ITA No. 64/Ahd/2022. The relevant ground of appeal of the assessee for A.Y. 2017-18 has been decided by this tribunal vide order dated 07-12-2022 in favor of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailed by the assessee and if so, whether the mark-up of 6% can be considered as comparable with the market averages. Culling from the details filed and arguments of both the parties, we find that there is no dispute about availing of the services. The evidences include the invoices, agreements along with details of cost allocation submitted at page nos. 509 to 528 of the paper book. Hence, it cannot be said that the services have not been provided to the assessee. With regard to the mark-up of 6% paid by the assessee, we find that the economic analysis submitted by the assessee in TPSR available in the paper book is acceptable. Hence, we hold that no adjustment is called for while determining the ALP on account of payment for Intra Group Services in the form of Data Management and Other Related Services. 20.1 Before us, no material has been placed on record by the Revenue demonstrating that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Before us, Revenue has not placed any material on its record pointing out any distinguishing feature in the facts of the case for the year under consideration and that of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions for the purpose of making the addition taking the rate of the ALP. We find force in the argument of the learned AR for the assessee and accordingly direct the revenue to make the adjustments with respect to the international transactions with the AE s which are in dispute. However, we are conscious to the fact that the direction at this stage will not make any difference to the assessee for the reason that the appeal has been decided in favour of the assessee. However, we have recorded this observation for the statistical purposes. 10.25 In view of the above and after considering the facts in totality we reverse the finding of the learned DRP and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. 23. Before us, no material has been placed on record by the Revenue demonstrating that the decision of the Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts of the case for the year under consideration and that of the earlier year nor has placed any contrary b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred certain expenses in a nature of travel, lodging, employee cost, communication etc. on behalf of the AES amounting to Rs. 3,36,97,775/-, which were reimbursed to it by the AEs. The TPO observed that there would have been various other costs that would have been incurred by the assess in order to perform the activities for which the expenses had been incurred on behalf of the AEs. The assessee defended its claim. The TPO in para 8.3 to 8.5 narrated his reasoning for charging 5% markup for benchmarking the reimbursements. We have considered all the material on record and we do not find any reason to interfere with the finding of the TPO in this regard. Therefore, the ground of objection no. 6 is dismissed. 23. We are of the considered view that the material facts and circumstances as well as the applicable have not undergone any change when compared to the earlier year where the DRP had an occasion to 27. Being aggrieved by the order of the ld. DRP/TPO/AO, the assessee is in appeal before us. 28. The learned AR before us fairly submitted that Tribunal in the own case of the assessee in the immediately preceding assessment year has decided the issue against the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benchmarked. A nonassociated party will not incur any cost without having any benefit from the party. Indeed, the assessee must have employed its resources in providing administrative services to the AE and therefore we are of the view that the assessee should have charged some amount of fees on account of such transaction. However, the assessee in the given case has not determined the ALP of the transaction in hand, therefore the same was benchmarked by the AO/TPO on reasonable basis. As such it was the onus upon the assessee to bench-mark the transactions in hand but it failed to do so. Hence, we do not find any infirmity in the order of the authorities below. Thus, the ground of appeal of the assessee is hereby dismissed. 31. Before us, no material has been placed on record by the learned AR for the assessee that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Before us, learned AR has not placed any material on record pointing out any distinguishing feature in the facts of the case for the year under consideration and that of earlier year nor has placed any contrary binding decision in its support. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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