Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
ORDER PER GAGAN GOYAL, A.M: This appeal by assessee is directed against the order of Commissioner of Income Tax (DRP-2), Mumbai-1 (for short ‘CIT’) dated 13.01.2022 under section 143(3) r.w.s. 144C(5) of the Income Tax Act, 1961 (for short ‘the Act’) for A.Y. 2017-18. The assessee has raised the following grounds of appeal:
“The grounds stated here under are independent of, and without prejudice to one another. Ground No. 1- Transfer pricing adjustment in respect of Technical know-how fees of INR. 12, 66, 61,410/- paid by Appellant to its Associated Enterprise (AE) 1.1 On the facts and circumstances of the case and in law, the learned Transfer Pricing Officer (TPO) / Assessing Officer (AO)/National Faceless Assessment Centre (NFAC), Delhi erred in holding, and the Hon’ble Dispute Resolution Panel (DRP) further erred in directing, that the arm's length price in respect of Technical know- how fees of INR 12, 66, 61,410/- paid by the Appellant to its AE was "NIL" 1.2 On the facts and circumstances of the case and in law, the learned TPO/AO/NEAC erred and the Hon'ble DRP further erred in not accepting the computation of arm's length price carried out by the Appellant which was in accordance with the Transactional Net Margin Method (TNNM) prescribed under Section 920 (1) of the Income-tax Act, 1961 (the Act) read with Rule 10B (I) (e) of Income-tax Rules, 1962 ("the Rules). 1.3 On the facts and circumstances of the case and in law, the learned TPO/AO/NFAC erred and the Hon'ble DRP farther erred by following Other Method prescribed under Section 92C(1) of the Act for benchmarking the said international transaction. 1.4 Without prejudice, on the facts and circumstances of the case and in the law, the learned TPO/AO/NFAC erred and the Hon'ble DRP further erred in considering hypothetical Other Method as against TNMM adopted by the Appellant for determination of arm's length price wherein the learned TPO/AO/NFAC and Hon'ble DRP held that the third party will not pay anything for these services. 1.5 On the facts and circumstances of the case and in law, the learned TPO AO erred and the Hon'ble DRP further erred in making certain observations and findings which are based on incorrect interpretation/understanding and without appreciating the intricacies of the facts of the case. 1.6 On the facts and in the circumstances of the case and in law, the learned AO/NFAC/TPO and the Hon'ble DRP erred in disallowing the payment of Technical know-how fees, by the Appellant, and questioning the need of availing such services from its AE, thereby further questioning the commercial expediency of the services availed The Appellant prays that the said international transaction be considered to be at arm's length. Ground No. 2--Incorrect imputation of mark-up of 4.46 percent (INR 7,929,76m) on recovery of expense by Appellant from its AE On the facts and circumstances of the case and in law, the learned TPO/AO/NFAC erred in holding, and the DRP further erred in directing, that the Appellant provides services to its AE throughout the year and thereby levying a mark-up on recovery of expenses. The Appellant prays that the said international transaction be considered to be at arm's length. Grand No. 3-The transactions with JV entities are inherently at arm's length. On the facts and circumstances of the case and in law, the learned TPO AO/NFAC and the Hon'ble DRP erred by going the fact that the two independent parties had an equity stake in the Appellant and commercially both the parties would be inclined to ensure that the prices charged for services rendered even try other group companies to the Appellant are not more than arm's length rates. Ground No. 4- Initiation of penalty proceedings the learned AO/NFAC, based on the facts of the case and in law, has erred in initiating penalty proceeding under Section 270(A) of the Act.
Ground 5-Levy of additional interest under Section 234C of the Act and interest on Dividend Distribution Tax (DDT) liability The Ld. AO/NFAC, based on the facts of the case and in law, has erred in levying interest under Section 234C of the Act and interest on Dividend Distribution Tax (DDT) liability. On the facts and circumstances of the case and in law, the learned AO/NFAC be directed to grant consequential relief of interest under Section 234C of the Act and interest on DDT liability.
6. Ground 6-Short grant of TDS credit On the facts and in the circumstances of the case, the Learned AO/NFAC has erred in granting shot TDS credit of INR 25,86,907/- The TDS credit granted in the Computation Sheet was also incorrect in the Intimation dated 29 March 2019 issued under Section 143(1) of the Act. The Appellant had already filed a rectification application dated. 10 April 2019 which was pending disposal and the same was not considered. The Appellant prays that the Learned AO/NFAC be directed to grant correct TDS credit. The Appellant craves leave to add, alter, amend and/or withdraw any of the above grounds of appeal
and to submit such statements, documents and papers as may be considered necessary either at or before the hearing of this appeal.”
2. Brief facts of the case are that assessee filed its ITR on 30-11-2017 declaring total income of Rs. 49,95,97,800/-. Case of the assessee was selected for complete scrutiny and relevant notices were issued. Since, international transaction in respect of intangible property were involved, the case was referred to TPO u/s. 92CA (1). TPO in his order u/s 92CA (3) passed the order and upward adjustment of Rs. 13, 45, 91,170/- was recommended. In turn AO passed the draft order u/s 144(C) considering the TP order u/s 92CA (3). Against this draft assessment order assessee filed objections before the DRP-2, Mumbai-1. DRP-2 followed its earlier decisions in the case of the assessee for AY 2013-14, 2014-15 and 2016-17, sustained the draft assessment order passed u/s 144(C). directions of DRP are mandatory to be followed by AO hence, he passed the final assessment order u/s 144(3) r.w.s. 144(C)(13) and 144(B), assessing total income at Rs. 63,41,88,970/- against the returned income of Rs. 49,95,97,800/-.
3. Assessee is a joint venture entity between UPS (USA) and Jet Air Pvt Ltd (India) in the ration of 60:40. The assessee is engaged in providing express delivery services for the international delivery of documents/parcels and packages. Assessee is also engaged in the business of logistics, supply chain management and e-commerce by combining flow of goods, information and funds. During the year assessee entered into the international transaction with its AE with reference to payment of fee for technical knowhow amounting to Rs 12,66,61,410/- and recovery of expenses amounting to Rs 17,77,97,318/-. An upward adjustment is recommended at the rate of 100% on payment of fee technical knowhow and at the rate of 4.46% on recovery of expenses.
The transfer pricing study as adopted by the assessee and reported in form 3CEB is based on transactional net margin method (TNMM) as the most appropriate method (MAM) for both the items of adjustments. Whereas, TPO adopted other method under rule 10AB and determined the ALP of the impugned transaction relating to payment of fee for technical assistance by the assessee to its AE as NIL and make an adjustment of Rs 12,66,61,410/-. In case of recovery of expenses TPO applied the basis of cost- plus mark-up of uncontrolled comparable and applied ALP margin of 4.46.
5. Assessee being aggrieved with the final assessment order based on adjustments recommended by TPO in his order u/s 92CA (3) and direction of DRP- 2 u/s. 144(C) (5), preferred this appeal before ITAT. Ground no. 1 and 2 with its sub grounds are substantive ground needs our adjudication. Once these two grounds settled either way Ground no.3 will become academic in nature and need not be adjudicated.
Ground no.4 pertains to institution of penalty proceedings and the same is pre mature to be decided. Hence, same is dismissed.
Ground no.5 pertains to levy of additional interest u/s 234C and interest on dividend distribution tax liability. On this ground we allow the ground raised by the assessee w.r.t levy of additional interest u/s 234C as the same can’t be disturbed and has to be applied only on returned income whatever it may be and can’t be fluctuated based on assessed income. As far as interest on dividend distribution tax is concerned, we restore the matter back to the file of AO for a fresh verification considering the submissions and arguments of the assessee and keeping in view the past record of the assessee. In view of this, Ground no. 5 is allowed for statistical purposes.
Ground no.6 pertains to short grant of TDS amounting to Rs 25,86,907/-.It is submitted that assessee has already filed a rectification application dated 10- 04-2019, which is still pending for disposal. On this ground we direct the AO to dispose of the aforesaid application of the assessee within six months from the date of receipt of this order. In view of this, Ground no. 6 is allowed for statistical purposes.
We have considered the order of TPO, order of AO in compliance to DRP directions and submissions of the assessee along with paper-book relied upon. It is further observed that facts of the case are similar since almost 10 years and DRP is simply relying upon its own directions for earlier years. Whereas co- ordinate benches of ITAT decided the issue in favour of assessee. it is further noted that during the hearing department was not able to bring on record any new fact which can be considered by this bench to take another view in contrast to the earlier views taken by co-originate benches of ITAT. The issue is recurring in nature and there is no finding on record against the order of co-ordinate bench of ITAT either by honourable jurisdictional high court or honourable Supreme Court. In the light of above relying upon the earlier orders of co-ordinated benches of ITAT as a matter of judicial discipline and consistency we also follow the same ration laid down by co-ordinate bench of ITAT earlier and observation relevant to ground No. 1 with its sub grounds are as under A.Y. 2013-14 in assessee’s own case with reference to ALP of Technical Knowhow Fee at NIL:
“6. We have heard rival submissions. We find that the ld. DRP had merely followed the decision taken by them in A.Y.2010-11 and 2012-13 in assessee's own case. Against the said orders of the ld. DRP, assessee had preferred appeals before us and the same are pending to be heard. We find that the appeal for A.Y.2013-14 alone was taken up for hearing as it was a Stay granted matter, on out of turn basis. Hence, this issue though recurring in nature, needs to be adjudicated for A.Y.2013-14. We find that the preliminary issue that is to be decided in the instant case is whether the ld. TPO was justified in determining the ALP of technical knowhow fees at Rs. Nil without following the benchmarking analysis provided in any one of the prescribed methods as provided in the statute read with relevant rules thereon. In this regard, we find that assessee had carried out benchmarking analysis by applying TNMM to substantiate that the transaction for payment of technical knowhow fees was included with arm's length principle under independent transfer pricing regulations. The details of benchmarking carried out by the assessee have been explained hereinabove. The ld. TPO however, ignored the benchmarking analysis carried out by the assessee and determined the arm's length principle for payment of technical knowhow fees at Rs. Nil by not following any of the methods prescribed u/s.92C(1) of the Act read with Rule 10B of the Rules. Rule 10B of Income Tax Rules, 1962 (for short "the Rules"), provides the mechanism for determination of arm's length price under the aforesaid methods prescribed under section 92C of the Act. If the Ld AO in course of assessment proceedings finds that the assessee has entered into international transactions with its AE, he may with the previous approval of the authority concerned make a reference to the Ld TPO under section 92CA(1) of the Act to compute the arm's length price of the international transaction by applying any of the methods prescribed under section 92C of the Act. After receiving such a reference from the AO, the TPO is required to determine the arm's length price of the international transaction as per the provisions contained under section 92C and 92CA of the Act read with relevant rules. Thus, as could be seen from the reading of the aforesaid provisions, the duty of the Ld TPO is restricted only to the determination of arm's length price of an international transaction between two related parties by applying any of the methods prescribed under section 92C of the Act r/w rule 10B of the Rules. Thus, there is no provision under the Act empowering the Ld TPO to determine the arm's length price on estimation basis, that too, by entertaining doubts with regard to the business expediency of the payment and in the process stepping into the shoes of the Ld AO for making disallowance under section 37(1) of the Act. This, in our considered opinion, it is not in conformity with the statutory provision, hence, unacceptable. The Ld TPO is duty bound to determine the arm's length price of the international transaction by adopting one of the method prescribed under the statute and cannot deviate from the restrictions / conditions imposed under the statute. The Hon'ble Jurisdictional High Court in CIT v/s Johnson & Johnson Ltd., dated 7th March 2017, while dealing with identical issue of determination of arm's length price of royalty by resorting to estimation by the Ld TPO had held as under:- "(d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical knowhow royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical knowhow royalty by the TPO was ad- hoc and arbitrary as held by the CIT (A) and the Tribunal.” 6.1. We find that the ld. TPO having not determined the ALP in conformity with the statutory provision and in the process having failed to demonstrate that ALP shown by the assessee is incorrect, the contentions of the ld. DR to restore the issue to the file of the ld. TPO for fresh determination of the ALP, is unacceptable. Respectfully following the aforesaid decision, we hold that there is no provision made in the statute empowering the ld. TPO for determining the ALP of a particular international transaction at Nil without resorting to any methods prescribed. Since, the relief is granted to the assessee on the preliminary issue of the ld. TPO not following the prescribed methods as provided in the statute for determination of ALP, the other arguments advanced by the ld. AR and the ld. DR on merits of ALP adjustment are left open and not adjudicated herein. Accordingly, the ground Nos.1.1 to 1.3 raised by the assessee is allowed.”
Similarly Ground No. 2 with its sub grounds were also dealt with as under vide ITA No. 6318/Mum/2017, A.Y. 2013-14 in assessee’s own case with reference to mark up on recovery of expenses by the assessee from its AEs:
“We have heard rival submissions. The primary facts are that the transaction being recovery of expenses from AE by the assessee, is not in dispute and hence, the same are not reiterated herein for the sake of brevity. It is not in dispute that the entire transaction of recovery of expenses is a pass through transaction which had been categorically accepted by the ld. TPO in his order. Once, it is a pass through transaction, it is only a balance sheet item for the assessee. Hence, there cannot be any mark-up on the same. We find that assessee also reimburses certain expenses incurred by the AE without any mark-up. These facts are also accepted categorically by the ld. TPO. We hold that there cannot be any mark-up on income side of the transaction alone as contemplated by the ld. TPO. Hence, the entire issue herein is only academic. We find that the Co-ordinate Bench decision of Bangalore Tribunal in the case of Tesco Hindustan Service Centre Pvt. in IT (TP)A No.1317/Bang/2010 for A.Y.2006-07 dated 26/05/2015 in the context of ALP adjustment on reimbursement had held as under:- "29. We have already seen that the Assessee received a sum of Rs.2,32,47,077/- from its AE and the same has been shown as an international transaction with AE by the Assessee in the report u/s.92CE of the Act. According to the TPO, the Assessee did not give any details with regard to reimbursement of expenses (received) to the extent of Rs. 2,32,47,077/-. According to the TPO, the Assessee only took a stand that the transfer pricing provisions do not provide any detailed guidelines or framework on the method of computation of ALP in respect of reimbursement. The TPO therefore called upon the Assessee vide letter dated 22- 07-2009, to give nature of reimbursement of expenses and also clarify whether such expenses are routed through the profit and loss account, if yes, to specify the head(s) under which it is shown, If no, specify as to why such expenditure should not be included as part of the Assessee's operating cost and thus for mark-up. According to the TPO, the Assessee did not offer any comments. Therefore the TPO presumed that the reimbursement of expenses received is not routed through profit and loss account and these expenses are incurred in connection with rendering software development services. According to the TPO, no independent party would render such services without any mark up. The TPO therefore added the reimbursement of expenses (received) of Rs. 2, 32, 47,077/- to the operating revenues as well as the operating costs for the purpose of aggregation of transactions and determining arm's length price under TNMM. Further the TPO observed that the reimbursement of expenses pertaining to each segment is not available. He proceeded to apportion the expenses between the software development and ITES segments in the ratio of segment turnover (67.48%: 32.52%). Thus the reimbursement of expenses were added to the revenues and costs in the above ratio i.e. Rs. 1, 56, 87,128/- in the software development segment and Rs. 75, 59,948 in the ITES segment for comparability analysis under TNMM.
Before DRP, the Assessee submitted that the reimbursement of expense received are nothing but expenses incurred on behalf of related parties for administrative convenience. The Assessee pointed out that during the previous year; it had paid expat tax for the employees deputed by Tesco Stores Limited, UK (parent company) to work as part of various projects conducted by the assessee. The assessee also paid a certain amount as interest for the delay in the payment of Tax Deducted at Source (TDS). All these expenses were cross charged by the assessee to Tesco Stores Limited, UK who reimbursed the same at cost, without any mark up.
The ledger entries pertaining to the abovementioned transactions were provided as Appendix 25A to the objections filed before the DRP. The challans in support of the payment of the abovementioned expat tax and the interest on delayed payment of TDS were also provided as Annexure to the objections before the DRP. Sample invoice copies of the reimbursements received were also provided as Annexure to the objections filed before the DRP.
The assessee also placed reliance on Circular no. 87-2R dated 27 September 1999 of the Canada Customs and Revenue Agency wherein it has been stated that often the price the recipient is willing to pay for the service does not exceed the cost of supply to the service supplier. "Arm's length service suppliers would usually expect to recover their costs plus an element of profit. However, in determining an Arm's Length charge for service, one must also take into account the economic alternatives available to the recipient of the service. Often, the price the recipient is willing to pay for the service does not exceed the cost of supply to the service supplier." The above has been explained by means of an example: "For example, in many cases, the services provided through intra-group arrangements are administrative or ancillary in nature, and the participants would only have been prepared to centralize the activity if they could share in the cost savings. Cost may represent an arm's length charge in such situations. Determining whether a mark-up is appropriate and, where applicable, the quantum of the mark-up requires careful consideration of factors such as: - the nature of the activity; - the significance of the activity to the group; - the relative efficiency of the service supplier; and - any advantage that the activity creates for the group. For example, the relative efficiency of arm's length service suppliers may not be comparable to the intra- group services where the intra-group services are offered as a convenience to the group and not as an ordinary and recurrent activity." "As discussed in paragraph 7.36 of the OECD Guidelines, it is important to distinguish between the situation of a taxpayer who renders services for the other members of a group; and a taxpayer who acts solely as an agent on behalf of the group to acquire services from an arm's length party. In the latter situation, the arm's length compensation would be limited to rewarding the agency role. In such a case, it would not be appropriate to determine an arm's length charge by referring to a mark- up on the cost of the services acquired from an arm's length party. Whether a taxpayer is providing a service or merely acting as an agent on behalf of the group is a question of fact."
The DRP however did not agree with the submissions of the Assessee and held as follows: "The reason why the TPO has considered a mark up is that arm's length service suppliers would usually expect to recover their cost plus element of profit. Therefore, in determining arm's length charge for service one must also take into account the economic alternatives available to the recipient of the service. We agree with the reasoning of the TPO."
Aggrieved by the order of the DRP, the Assessee has raised Ground No.36 before the Tribunal. We have heard the rival submissions. The learned counsel for the Assessee reiterated submissions made before the DRP. The learned DR relied on the order of the DRP.
We have considered the rival submissions. As observed in the OECD commentaries referred to in the Circular of the Canada Customs and Revenue Agency, it is important to distinguish between the situation of a taxpayer who renders services for the other members of a group; and a taxpayer who acts solely as an agent on behalf of the group to acquire services from an arm's length party. In the latter situation, the arm's length compensation would be limited to rewarding the agency role. In such a case, it would not be appropriate to determine an arm's length charge by referring to a mark-up on the cost of the services acquired from an arm's length party. Whether a taxpayer is providing a service or merely acting as an agent on behalf of the group is a question of fact.
In the present case, the details given before the DRP clearly shows that what the Assessee received as reimbursement from the AE is nothing but the expat tax paid and interest paid on delay in the payment of TDS. There can be no element of service in such payment. The taxpayer should be considered as having acted solely as an agent on behalf of the group to acquire services from an arm's length party. In such cases, it would not be appropriate to determine an arm's length charge by referring to a mark-up on the cost of the services acquired from an arm's length party. We therefore hold that the reimbursement of expenses be excluded from the revenues and costs in the ratio i.e. Rs.1,56,87,128/- in the software development segment and Rs. 75,59,948 in the ITES segment for comparability analysis under TNMM as was done by the TPO and direct the TPO to compute the ALP after such exclusion. Ground No.36 is accordingly allowed." 9.1. Respectfully following the said decision, we direct the ld. AO/TPO to delete the ALP adjustment made on recovery of expenses. The other arguments made by the ld. AR and DR on inclusion / exclusion of comparables are not adjudicated herein as the relief is granted on preliminary issue. Accordingly, the Ground No. 2.1 raised by the assessee is allowed.”
Based on above Ground no.1 and 2 with their sub grounds are allowed. Department is not able make out the case in their favour in terms of facts and law of the case. It’s a matter judicial indiscipline as ITAT consistently on the same set of facts has been allowing the appeal of the assessee, still authorities below are not following the directions of ITAT.
In the result, appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 2nd day of January, 2023.