TMI Blog2023 (2) TMI 1209X X X X Extracts X X X X X X X X Extracts X X X X ..... [ 2010 (10) TMI 184 - ITAT, BANGALORE] the assessee has to prove the actual rendition of various services by the AEs. We direct the learned Assessing Officer accordingly. - SHRI RAMA KANTA PANDA, ACCOUNTANT MEMBER AND SHRI K.NARASIMHA CHARY, JUDICIAL MEMBER For the Assessee by: Shri Deepak Chopra Shri Pratishtha Singh Shri Nitin Narang, ARs For the Revenue by: Shri Jeevan Lal Lavidiya, CIT-DR ORDER PER K. NARASIMHA CHARY, JM: Aggrieved by the final assessment orders passed consequent to the directions of Hon'ble Dispute Resolution Panel, Bengaluru ( DRP ), in the case of Zuari Cement Limited ( the assessee ) for the assessment years 2016-17 2017-18, under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (for short the Act ) assessee filed these appeals. Since the facts involved in both these assessment years are similar and mostly the grounds of appeal, we, therefore, deem it just and convenient to dispose of these appeals by way of this common order, taking the appeal in ITA No. 249/Hyd/2021 for the assessment year 2016-17 as a lead case. 2. Briefly stated relevant facts are that the assessee is engaged in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 5466091 OM 11 Ciments Francais SA Recovery of expenses 7982827 OM 12 Suez Cement Company SAE Recovery of expenses 5080156 OM 13 Asia Cement Recovery of expenses 1049162 OM 4. For the purpose of TP analysis, the assessee has aggregated the transactions, namely, purchase of raw materials, sales of clinker and cement, receipt of technic knowhow, sub-license fee paid, procurement commission paid, IT services fee paid, e-procurement consultancy services fee paid, sales commission paid, trade payables and trade receivables under the manufacturing function stating that the same are inter-linked with the main function of manufacturing, by choosing itself as a tested party. Assessee applied TNMM as the Most Appropriate Method (MAM), adopted OP/TS as PLI, to reach its PLI at 7.46% whereas the PLI of the comparable entities with a median of 7.77%. Assessee thereby stated that its PLI is within Arm s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er submitted that the findings of the Co-ordinate Bench of this Tribunal for the assessment year 2009-10 were followed in 2011-12 to 2014-15. He also filed a copy of the order dated 04/05/2022 in support of his contention that while giving effect to the directions of the Co-ordinate Bench of this Tribunal, the learned Assessing Officer accepted the contentions of the assessee and accepted the TNMM as the MAM thereby proposing no TP adjustment. Basing on this, he further submitted that in this peculiar situation, all other grounds raised in this appeal including the specific ground relating to the sales commission are subsumed in the ground relating to the adoption of MAM, and such grounds become academic. 9. Per contra, learned DR vehemently opposed the relief sought in this appeal, stating that in the earlier assessment years, the Co-ordinate Bench of this Tribunal missed the point that the expenses claimed by the assessee like technical knowhow, sub-license fee, procurement commission, IT services, e-procurement consultancy, consultancy services towards sales commission, interest on delayed receivables etc., are independent transactions and are termed as intergroup services an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties at the same time and it has the ability to demonstrate a separate basis for charge; whereas the indirect charge method is applicable only if similar services are not rendered to independent parties; certain cost allocation and apportionment methods which necessitate some degree of estimation or approximation are adopted which must be sensitive to commercial features of individual case. Having said so, he argues that the crux of business in an uncontrolled situation, the assessee would resort to said transaction or not, and, therefore, the query goes to the basic question, whether these services solicited/rendered in an uncontrolled situation, if so whether these services have been actually rendered or not. According to him, this situation imperates the assessee to prove that these services were rendered without which the assessee is not justified the payments. 13. Learned DR adverted to the fact of italcementi group started its business in India by acquiring Yerraguntla Cement Plant on the basis of 50:50 joint venture with KK Birla Group in the financial year 2000-2001, its subsequent acquisition of full control of assessee through cements francais SA, which is the immed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sues: 7. Assessee being a wholly owned subsidiary of a foreign company, has various transactions with its AEs which were reported as the international transactions in 3CEB report. The TPO noted them in Page 2 of the order and after excluding non-operating items, both revenue and expenditure, arrived at (operating cost / operating revenues) at 27.12%, whereas (operating profits / operating cost) was arrived at 33.37%. Assessee in its 3CEB report claimed Transaction Net Margin Method [TNMM] as the most appropriate method, analysed its transactions and compared two sets of comparable companies. Under the first set of comparables as noted down by TPO in Page 4 of the order, it compared 11 companies which are in cement business whose average operating profit/operating cost was at 18.59% as against assessee's operating margin 29.36%. It also had another set of comparables wherein the average net margin on sale was at 21.67% as against assessee's margin of 29.36%. Assessee's TP study was rejected by TPO stating that just because the operating margin of the taxpayer is comparable with the operating margin of certain comparables, it cannot be said that all the transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable companies was at 0.91% of net sales. Therefore, based on these two internal and external CUP analysis, TPO determined the payable royalty at 0.91% which comes to Rs.10.87 Crores. The additional amount of Rs.1,65,64,219/- was disallowed as an excess payment and was adjusted u/s.92CA. 8. Next item analysed by TPO was with reference to payment of Rs.6,26,62,000/- to Ciments Francais S.A., towards sub-license agreement. Ciments Francais S.A., an affiliated company of Italcementi Group is having sub-license agreement to use the trade mark. As per the agreement, royalty at 1% of net sales of licensed products has to be paid to Ciments Francais S.A., on quarterly basis. AO analysed the same under the CUP method and noticed that there is no need for paying any amount to Italcementi Group for use of trade mark as assessee's own trade mark of ZCL was well established. He analysed the evolution of ZCL brand equity and noticed that assessee itself had entered into an agreement with M/s. Jindal Vijayanagar Ltd., for a fixed license of Rs.1,00/- per metric tonne for using the trade mark and accordingly, assessee has received amounts. Therefore, commercial exploitation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n nature that reflects the characteristics of the services provided by the AEs to the assessee. It was further submitted that neither assessee nor AEs provide similar services under comparable circumstances to any independent third party. Therefore, application of CUP method is not tenable and given the facts of the case will not give reliable results. Assessee relied on the orders of the ITAT in Air Liqauide Engineering India Pvt. Ltd., in ITA No.1040/H/2011 and Lumax Industries in ITA No.7408 and 7641/Mum/2010. With reference to the T.P. adjustment of Rs.1,65,64,219/- relating to fee paid for technical services, it was contended that SVCL i.e., Sri Vishnu Cements Ltd., was a subsidiary of assessee, as a part of BIFR package from FY.2002-03. Before that, it was independent sick company and having acquired by the company, being sick, no royalty was charged to SVCL during the period 2002-03 to 2006-07 w.e.f. January 2007. The said SVCL was merged with assessee-company under the order of Hon'ble High Court of AP. Therefore, comparing with costs occurred about three years prior to the impugned period, was also not correct. Further, it was contended that TPO has taken a wrong infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, it was contended that Italcementi Group trade mark was being used from AY.2006-07 onwards and therefore, AO was wrong in taking the market expenses after that period also. With reference to the incorrect methodology for valuation of Zuari trade mark, it was further contended that transfer of trade mark will not happen year after year and TPO/ DRP has made a similar approach in AY.2008-09 and made the adjustment of Rs.31.74 Crores and in AY.2009-10, the adjustment was Rs.41.60 Crores. Therefore, the action of the TPO/DRP is irrational on the reason that proposing the transfer pricing adjustment for transfer of Zuari trade mark year after has no basis, without appreciating the fact that the transfer can take place only once. With reference to the consultancy fees for manufacturing a new plant, first objection was that the amount was not claimed as expenditure in the P L A/c and was capitalized. While supporting the payment by way of services being provided by the AE in procuring the equipment for the new plant and also the necessity for taking various procurement services for a fee, it was the submission that TPO erred in ignoring the evidences and determining the ALP at NIL. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered or discussed either by the TPO or by the DRP. Therefore, on the basis of an external CUP ALP of 0.91% itself is not correct. Therefore, the entire exercise undertaken by the TPO on this issue is erroneous and cannot be justified. 14. Leave alone that amount, even the sub license fee for the use of trade mark is also faulty. Under the guise of TPO provisions, the TPO cannot determine the ALP at NIL as held by the Hon'ble Delhi High Court in the case of CIT Vs. EKL Applicances Ltd., (supra). Therefore, rejecting the entire payment without there being any analysis on the CUP method cannot be accepted. In the guise of analyzing the transactions in the CUP method, the TPO has not brought any evidence on record to reject the 1% payment made to Italcementi Group. Moreover, while determining the price at NIL on the issue, the TPO surprisingly holds that assessee has transferred its 'Zuari Brand' to 'Italcementi Group'. We are unable to understand this logic. Italcementi Group never obtained, acquired or used Zuari Brand anywhere in the world, so that this cannot be considered for Transfer Pricing analysis. It is the Italcementi Group brand which is used by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter reply from the assessee, accepted the contentions of the assessee to adopt TNMM and thereby did not make any TP adjustment. The action of the learned Assessing Officer pursuant to the order dated 27/06/2022 in ITA No. 616/Hyd/2016 and batch for the assessment years 2011-12 to 2014-15 is not known. 17. In these circumstances, we are of the considered opinion that it would be in the fitness of things to set aside the impugned order for this year also with a direction to the learned Assessing Officer to determine the MAM first and to analyse the transaction under the TP provisions. Needless to say that in view of the decision of the Co-ordinate Bench of Bangalore Tribunal in the case of Gemplus India (P) Ltd., (supra), the assessee has to prove the actual rendition of various services by the AEs. We direct the learned Assessing Officer accordingly. Grounds No. 4 5 are accordingly treated as allowed for statistical purposes. 18. In view of the fact that the impugned order is set aside with a direction to have a fresh look as to the adoptability of MAM and to analyse the transactions under the TP provisions, all other grounds remains academic and need not specifically adjudi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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