SABIC INNOVATIVE PLASTICS INDIA PVT. LTD.,,VADODARA vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1)(1),, BARODA

The Learned Assessing Officer ("Ld. AO") [along with the Learned Transfer Pricing Officer ("Ld. TPO")] under the directions of Hon'ble DRP erred on facts and in law in determining the arm's length price for purchase of raw material pertaining to manufacturing activity at INR 3,874,663,557 instead of INR 4,081,684,747 under

The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in rejecting various comparable companies based on certain parameters and ignoring the that the same are functionally comparable to the Appellant.

The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in rejecting Kemrock Industries & Exports Ltd as a comparable to the Appellant on account of having a different accounting year.

The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in inappropriately considering only the PVC segment of Finolex Industries Ltd as comparable to the Appellant instead of both the "Pipes and Fittings & PVC segment".

The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in proposing to apply arbitrarily, quantitative filter in respect of import of raw material and thereby rejecting various companies which are functionally comparable to the Appellant.

The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in not granting proportionate adjustment for the value of international transactions, thereby extending the quantum of transfer pricing adjustment to transactions with the non- associated enterprises also.

The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in determining the arm's length price for payment of management services fees under the provisions of section 92CA(4) of the Act and thereby making an adjustment of INR 31,458,460 to the taxable income of the Appellant in respect of following services:.

The Ld. TPO, Ld. AO and Hon'ble DRP erred in law in determining the arm's length price at "NIL" for various services mentioned above which is against the principles laid down by various judicial precedents.

The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in disregarding the benchmarking approach of the Appellant of applying Transactional Net Margin Method ("TNMM") as the most appropriate method for determining the arm's length price of management services fees.

The Ld. TPO, Ld. AO and Hon'ble DRP erred in law, in applying the "Comparable Uncontrolled Price" method as prescribed under Rule 10B(l)(a) for determining the arm's length price for management services, in the absence of any finding of "the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction."

The Ld. TPO, Ld. AO and Hon'ble DRP erred on facts and in law in ignoring the fact that the associated enterprises filed their "return of income" in India and offered to tax their taxable income in India.

We may at the outset note that the DRP's observations justifying the impugned ALP adjustment on the ground of benefit not reaching the assessee from rendition of services, are somewhat irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining ALP of that service. When evaluating the ALP of a service the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. This process of determination of arm's length price has to be done on the basis of a recognized method of determining arm's length price, rather than on the basis of subjective perceptions, divorced from ground realities of business, of the TPO. While on this issue, we may also refer to the following observations made by a coordinate bench of this Tribunal in the case of AWB India (P.) Ltd. v. Dy. CIT [2014] 50 taxmann.com 323/[2015] 152 ITD 770 (Delhi - Trib.) and which are equally applicable in the present context:

One of the very basic pre condition for use of CUP method is availability of the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present

The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO's case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions.

As for the evidence for each of the service stated in the agreement, it is not even necessary that each of the service, which is specifically stated in the agreement, is rendered in every financial period. The actual use of services depends on whether or not use of such services was warranted by the business situations whereas payments under contracts are made for all such services as the user may require during the period covered. As long as agreement is not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because these services were not actually required by the assessee. In any case, having perused the material on record, we are satisfied that the services were actually rendered under the agreement and these services did justify the impugned payments.

We are also of the considered view that in the absence of prerequisites for application of CUP methods being absent in the present case, it was not open to the TPO to disregard the TNMM employed by the assessee. No defects have been pointed out in application or relevance of TNMM in this case. Under these circumstances, the TPO's impugned action cannot meet our judicial approval.

For the detailed reasons set out above, we uphold the grievance of the assessee and direct the AO to delete the impugned ALP adjustment of Rs. 31,23,325. The assessee gets the relief accordingly.

The only justification for taking ALP of services at NIL is under CUP but then there has to be something on record to show that in an arm's length situation these services are rendered without consideration. The worth of services cannot be decided by the TPO, nor is it open to him to question, as such an approach implicitly does, the commercial expediency of these services. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for them to decide what is necessary for an assessee and what is not. It is not for the TPO to question assessee's wisdom in making payment for the services, which, in the opinion of the TPO, are not of "much" use. The TPO has travelled much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of its AEs. The DRP is also in error, in the light of these discussions, evaluating the worth of services on the basis of benefit of these services. The very foundation of the impugned ALP adjustment was thus devoid of any legally sustainable basis.

In any case, we have carefully perused the evidence of services rendered and the nature of services in question, on random sample basis. In our considered view, there is reasonable evidence of the rendition of service and it cannot be open to TPO to proceed on the basis that the services were not rendered. The method of ascertaining the arm's length price, on the basis of TPO's subjective perception about worth of services, is not sustainable in law either. In view of these discussions, as also bearing in mind entirety of the case, we deem it fit and proper to delete the impugned ALP adjustments.