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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI AMARJIT SINGH & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the assessee challenging the impugned final assessment order dated 31/07/2022, passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 ("the Act"), pursuant to the directions dated 22/06/2022 issued by the learned Dispute Resolution Panel–1, Mumbai–1, [“learned DRP”], under section 144C(5) of the Act for the assessment year 2018–19.
In its appeal, the assessee has raised the following grounds:–
Ingredion India Pvt. Ltd. ITA no.2532/Mum./2022 “Transfer Pricing Grounds 1. General ground: Transfer Pricing addition of INR 9,55,98,734 1.1 On the facts and circumstances of the case and in law, the learned Transfer Pricing Officer (TPO)/ the learned AO/ Hon'ble DRP erred in making an upward adjustment of INR 9,55,98,734 to the total income of the Appellant, under section 92CA(3) of the Act in respect of the international transaction of payment of regional service fees made to its Associated Enterprises (AEs) during the year ended 31 March 2018. 1.2 On the facts and circumstances of the case and in law, the learned TPO/ learned AO/ Hon'ble DRP has erred in rejecting the Transfer Pricing (TP) analysis undertaken by the Appellant.
2. Re.: Transfer Pricing adjustment of INR 9,55,98,734 in respect of Payment of Regional Service Fees 2.1 On the facts and circumstances of the case and in law, the learned TPO/ learned AO/ Hon'ble DRP has erred in proposing/ upholding an adjustment to the Arm's Length Price (ALP) determined by the Appellant in respect of the international transaction of payment of regional service fees by the Appellant to its AES. In doing so, the learned TPO/ learned AO/ Hon'ble DRP has erred in law and in facts by: a. determining the ALP of the international transaction for payment of regional service fees at NIL value without providing any cogent reasons and not appreciating the facts of the case in their proper perspective; b. disregarding the detailed substantial documentary evidence maintained and furnished by the Appellant under section 92D of the Act read with Rule 100 of the Income-tax Rules, 1962 (the Rules') and not appreciating the factual details, submissions and various documentary evidences demonstrating benefits to the Appellant from payments made towards regional service fees; c. not giving due consideration to the additional evidence filed and the explanations provided in the reply to the remand report filed before the Hon'ble DRP in relation to payment of regional service fees; d. not considering the benefits derived from service availed by the Appellant and questioning the commercial expediency of the transaction; e. not appreciating that the international transaction of payment of regional service fees is interlinked to other international transactions and thereby disregarding the aggregation of transactions for the purpose of benchmarking the international transaction of payment of regional service fees; f. rejecting Transactional Net Margin Method ('TNMM') as the Most Appropriate Method ("MAM') for the determination of the ALP; and g. not appropriately applying any of the prescribed methods as per Section 92C(1) of the Act. Page | 2
Ingredion India Pvt. Ltd. ITA no.2532/Mum./2022 Corporate Tax Grounds 3. Re.: Erroneous computation of total income for the year under consideration 3.1 The learned AO erred in considering the starting point for computing the total assessed income of the Appellant in the final assessment order as income as per intimation issued under section 143(1) of the Act at INR 2,07,90,823 instead of INR 1,43,07,190 as per the draft assessment order and also the return of income filed by the Appellant. 3.2 The learned AO erred in not granting an opportunity of being heard by issuing a show cause notice in respect of the addition made in terms of the intimation issued u/s. 143(1) of the Act. 3.3 The Appellant submits that the Learned AO be directed to delete the adjustment so made by him and to re-compute its total income and tax thereon accordingly.
Re.: Disallowance of additional customs duty paid of INR 64,83,632 4.1 The learned AO erred in disallowing INR 64,83,632 pertaining to additional custom duty paid on the count of alleged mismatch in the amounts reported in Form No. 3CD and Form No. ITR-6. 4.2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject amount has been paid/ deposited, and hence, the same is allowable under section 43B of the Act and the stand taken by the Assessing Officer in this regard is misconceived, illegal, erroneous and incorrect. 4.3 The Appellant submits that the learned AO ought to be directed to delete the disallowance so made by him and to re-compute its total income and tax thereon accordingly.
5. Re.: Excessive Levy of interest u/s, 234B, 234C and 234D of the Act 5.1 The learned AO has erred in levying interest u/s. 234B of the Act while computing the tax payable by the Appellant. 5.2 The learned AO has erred in levying excessive interest u/s. 234C of the Act while computing the tax payable by the Appellant. 5.3 The learned AO has erred in levying interest u/s. 234D of the Act while computing the tax payable by the Appellant. Others 6. The learned AO erred in initiating penalty proceedings under section 270A of the Act. The Appellant claims relief on the above grounds and thereby deleting the adjustments made by the learned AO in the final assessment order. Page | 3
Ingredion India Pvt. Ltd. ITA no.2532/Mum./2022
The Appellant craves for leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Income-tax Appellate Tribunal to decide this appeal according to law. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the Appellant requests that the appeal be allowed as prayed.”
3. The issue arising in grounds no.1 and 2, raised in assessee’s appeal, is pertaining to transfer pricing adjustment on account of payment of Regional Service Charges.
4. The brief facts of the case pertaining to this issue are: The assessee is a company and is engaged in the business of trading of modified and other forms of starches. It is also engaged in rendering sales services to its group company. The assessee is a part of the Ingredion Incorporated group. For the year under consideration, the assessee filed its return of income on 30/11/2018 declaring a total income of Rs.1,43,07,190. During the transfer pricing assessment proceedings, pursuant to the reference made by the Assessing Officer (“AO”), the assessee submitted that in respect of the international transaction pertaining to availing of Regional Services, Ingredion Singapore (i.e. its associated enterprise) functions as the regional headquarters for Ingredion’s APAC operations, provided significant level of strategy and operational direction to the assessee, and controls key entrepreneurial risks in relation to assessee’s operations. The entrepreneurial risks controlled by the associated enterprise are largely driven by the overall strategy and high-value technical services it provides to the assessee. This requires the use of special knowledge, skill, and expertise present with the Ingredion India Pvt. Ltd. ITA no.2532/Mum./2022 associated enterprise in order to provide the high-value services, which help drive assessee’s operational success. The assessee also submitted some emails and slide decks to substantiate the payment made to the associated enterprise in respect of regional services. The Transfer Pricing Officer (“TPO”) vide order dated 29/07/2021 passed under section 92CA(3) of the Act did not agree with the submissions of the assessee and held that Regional Service Agreement does not enumerate the basis for pricing particular service, allocation keys. Further, the benefit received by the assessee from such services is also not evident and the same appears to be only incidental benefits. It was also held that the assessee has failed to furnish evidence that such services have been rendered and received during the year. Accordingly, the TPO treated the arm’s length price of this transaction at Nil and proposed an upward adjustment of Rs.9,55,98,734. In conformity, the AO passed the draft order under section 144C of the Act determining the total income of the assessee at Rs.10,99,05,924. The assessee filed detailed objections before the learned DRP against the transfer pricing adjustment proposed by the TPO/AO. Vide its directions dated 22/06/2022 issued under section 144C(5) of the Act, the learned DRP rejected the objections filed by the assessee and held that the description of services is in most general terms and the benefits said to have accrued have a theoretical tone instead of practical, realistic and demonstrable benefits. The DRP further held that the services for which a payment is claimed are in the nature of shareholder services only and nothing is placed to demonstrate any benefit received by the assessee from the services rendered for which the payment is claimed. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order under Page | 5
Ingredion India Pvt. Ltd. ITA no.2532/Mum./2022 section 143 (3) r/w section 144C(13) of the Act. Being aggrieved, the assessee is in appeal before us.
During the hearing, the learned Authorised Representative (“learned AR”) submitted that the assessee filed material which was not looked into either by the TPO or by the learned DRP. The learned AR further submitted that no specific defect has been pointed out in the evidence so furnished by the assessee. Accordingly, the learned AR prayed that the matter may be restored to the file of the learned TPO to consider the evidence furnished by the assessee afresh. In this regard, the learned AR also placed reliance upon the decision of the coordinate bench of the Tribunal in assessee’s own case in the preceding assessment year.
On the other hand, the learned Departmental Representative vehemently relied upon the orders passed by the lower authorities.
We have considered the submissions of both sides and perused the material available on record. We find that while deciding a similar issue of transfer pricing adjustment on account of payment made to the associated enterprise for regional services, the coordinate bench of the Tribunal in assessee’s own case in Ingredion India Pvt. Ltd. vs ITO, in ITA No. 2156/Mum./2017, vide order dated 20/10/2022, for the assessment year 2012-13 remanded the issue to the file of the learned TPO with a direction to the assessee to demonstrate the requisite test for intra-group services as well as the need and benefit of the services from the associated enterprises. The Ingredion India Pvt. Ltd. ITA no.2532/Mum./2022 relevant findings of the coordinate bench of the Tribunal, in the aforesaid decision, are as under:-
“010. We have carefully considered the rival contentions as well as the orders of the lower authorities. The assessee is in the business of importing modified food starch from the affiliate companies and selling the same in Indian market. It caters to the FMCG food sector and precisely processed food segments. Assessee has paid payment of regional fees of ₹ 71,60,700/- to its Singapore associated enterprise as per the agreement, it was stated that the company has only 10 individuals to manage its India operation and out of that 5 employees were involved in food sales, 1 employee in industrial starch sales and 1 employee in finance and administration etc showing that it did not have adequate human resources to perform the functions for which services of AE is availed. It was stated that assessee does not have dedicated staff for the various services included therein. The assessee has listed six kind of services which were provided for by the Singapore office to the assessee. Further, assessee has also incurred headqarter management fees amounting to ₹18,60,449/- to its AE which performs central corporate and administrative services for the benefit of all its foreign affiliates. The claim of the assessee is with that these services are also 7 different kindsof services and are not duplicative in nature. These are also backed by an agreement. The assessee has benchmarked services under transactional net margin method. We find that both these services are in the nature of intra group services. To prove that an independent third party would have paid for the services, assessee need to establish and demonstrate by reasonable level of evidence and documentation that these services were required (need test), those were rendered (rendition test), resulted into benefit to the assessee (benefit test) and also are not duplicative in nature. Further, any third independent party would not have paid for these services only if same were shareholders’ activity. Neither the TPO nor the assessee made any effort to demonstrate the same eiher in TPSR or in TP order. Therefore, both these services are required to be looked into from this angle. 011. ......
12. The assessee benchmarked all these above three transactions on an aggregate basis using transactional net margin method as the most appropriate method. The claim of the assessee is that net operating margin of the assessee is higher than the comparable companies and therefore it is at arm’s length. The learned TPO has determined ALP of royalty at ₹ Nil. The assessee claims that the MNE group has a global royalty policy which is common across all regions. The agreement entered into is also containing standard clauses. Picking one of the standard clause from that agreement cannot be used against the assessee. The royalty payment by using trademark and patent is only for the sale of the product. As assessee is engaged in FMCG food sector, the assessee would require know how about the product information, product specification, application and formulation for its customers. Assessee also stated that, without trademark the assessee would not earn such a markup.
The learned TPO has determined the ALP of royalty and other two IGS at ₹Nil. As of these three international transactions have not been benchmarked Page | 7
Ingredion India Pvt. Ltd. ITA no.2532/Mum./2022 properly, we set aside them back to file of the learned TPO with direction to the assessee to demonstrate the requisite test for intra group services and as well as the need and benefit of the use of trademark and patent involved in payment of royalty. The learned TPO may verify the evidence –documentation produced by the assessee and then determined arm’s length price of these three transactions.”
Since in the present case also, the determination of arm’s length price of a similar international transaction is involved and both the parties have made similar submissions, therefore, we deem it appropriate to remand this issue to the file of the learned TPO with similar directions as rendered by the coordinate bench in the preceding assessment year. Accordingly, the impugned order on this issue is set aside. As a result, grounds no.1 and 2 raised in assessee’s appeal are allowed for statistical purposes.
The issue arising in ground no.3 and 4, raised in assessee’s appeal is pertaining to an erroneous computation of total income for the year under consideration. As per the assessee, while computing the assessed income in the final assessment order, the AO considered the income processed under section 143(1) of the Act, as the starting point, instead of the returned income, which was considered in the draft assessment order. As per the assessee, the difference is on account of the additional customs duty paid/deposited before filing the return of income, which is allowable under section 43B of the Act, and in this regard the assessee has also filed a rectification applications dated 19/08/2022 before the AO, which is pending disposal. Therefore, in view of the above, we deem it appropriate to restore this issue to the file of the AO for computation of the total income, as per law, after necessary verification. As a result, grounds no.3 and 4 raised in assessee’s appeal are allowed for statistical purposes. Page | 8
Ingredion India Pvt. Ltd. ITA no.2532/Mum./2022
Ground no.5, raised in assessee’s appeal, is pertaining to the levy of interest under sections 234B, 234C, and 234D of the Act, which is consequential in nature. Accordingly, ground no.5 is allowed for statistical purposes.
Ground no.6 is pertaining to the initiation of penalty proceedings, which is premature in nature and therefore is dismissed.
In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 28/04/2023