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Income Tax Appellate Tribunal, “C” BENCH, PUNE
Before: SHRI R.K. PANDA & MS. ASTHA CHANDRA
The appeal filed by the assessee is directed against the order dated 22.01.2024 passed by the Additional/Joint/Deputy/Assistant Commissioner of Income Tax/Income Tax Officer, National e-Assessment Center, Delhi (“Ld. AO”) in pursuance of the directions issued by Dispute Resolution Panel-3, Mumbai (“Ld. DRP”) dated 26.12.2023 u/s 144C(5) of the Income Tax Act, 1961 (the “Act”) pertaining to Assessment Year (“AY”) 2016-17.
This is a second round of proceedings before the Tribunal. Briefly stated, the facts of the case are that the assessee, Lear Automotive India Private Limited (“Lear India”) is a wholly owned subsidiary of Lear Corporation (Mauritius) Limited which in turn is a wholly owned subsidiary of Lear USA. The assessee company is primarily engaged in the manufacture and assembly of automotive seating and electrical systems. It also provides design and engineering support services to its group companies and customers in the automotive industry, particularly in relation to automotive seating systems and interiors. All the factories operated by the assessee are cumulatively referred to as the „manufacturing segment‟ and the engineering centers are referred to as India (IEC) segment or „service segment‟.
First round of assessment proceedings: 2.1 For AY 2016-17, the assessee filed its return of income on 17.10.2016 declaring total income of Rs.27,72,90,010/-. The case of the assessee was selected for scrutiny under CASS. During the relevant AY, the assessee had entered into various international transactions with its Associated Enterprises (“AEs”) and therefore the case was referred to the Ld. Transfer Pricing Officer (“TPO”). In the first round of the assessment proceedings, the Ld. TPO vide his order dated 31.10.2019 made transfer pricing adjustment of Rs.109,99,25,961/- with respect to the following transactions : (i) International transaction related to manufacturing segment; (ii) Allocation of Regional Headquarter Charges (RHQ Charges) and (iii) Payment of Global Software Charges. Pursuant to the said order of the Ld. TPO, the Ld. Assessing Officer (“AO”) passed the draft assessment order u/s 144C(13) of the Income Tax Act, 1961 (the “Act”) dated 22.12.2019 against which the assessee filed objection before the Ld. Dispute Resolution Panel (“DRP”). However, the assessee‟s objections were rejected by the Ld. DRP vide its order dated 22.03.2021. Pursuant thereto, the final assessment order was passed by the Ld. AO u/s 143(3) r.w.s. 144C(13) of the Act on 08.05.2021 at assessed income of Rs.137,72,15,970/- by making addition of Rs.109,99,25,961/- on account of transfer pricing adjustment to the income of Rs.27,72,90,010/- returned by the assessee. The assessee challenged the said addition before the Tribunal by filing an appeal in ITA No. 213/PUN/2021. The Tribunal vide its order dated 04.08.2021 set aside the impugned order of the Ld. AO passed on 08.05.2021 and directed the Ld. TPO/AO to restrict the transfer pricing adjustment only in respect of transactions with AEs under the manufacturing activity, after allowing opportunity of hearing to the assessee.
Second round of assessment proceedings/remand back proceedings : 2.2 On fresh reference to the Ld. TPO by the Ld. AO pursuant to the order of the Tribunal dated 04.08.2021, the Ld. TPO passed an order u/s 92CA(3) r.w.s. 254 dated 30.03.2023 readjusting the value of international transactions to Rs.14,31,80,980/- as against Rs.109,99,25,961/-. The remand proceedings pursuant to the order of the Tribunal resulted into following adjustments : (i) Manufacturing Segment - Adjustment of Rs.2,69,00,000/- made by the Ld. TPO in accordance with the directions of the Tribunal by restricting the transfer pricing adjustment only in respect of the transactions with the AEs under the manufacturing segment; (ii) Allocation of the RHQ Charges - Adjustment of Rs.11,18,90,980/- and (iii) Payment of Global Software Charges - Adjustment made in the first round of proceedings deleted by the Ld. TPO in the remand proceedings in accordance with the directions of the Tribunal and after considering the submissions made by the assessee.
Accordingly, the income of the assessee was reassessed at Rs.42,04,70,990/- by the Ld. AO vide draft assessment order passed u/s 143(3)/254 r.w.s. 144B r.w.s. 144C(1) dated 31.03.2023 which was challenged by the assessee by filing objections before the Ld. DRP.
2.3 Before the Ld. DRP, the assessee raised the following objections pertaining to allocation of RHQ charges : 1. “6.1. Issue: On the facts and in circumstances of the case, and in law, the Ld. AO/TPO erred in computation of the proportionate adjustment (INR 3,12,90,000) in relation to the manufacturing segment wherein the Ld. TPO/AO did not reduce the value of RHQ charges from the cost base of manufacturing segment even though there is a separate adjustment on the transaction of RHQ charges, thereby leading to a double adjustment on RHQ charges.” The assessee contended that the value of RHQ charges should be reduced from the cost base of the manufacturing segment to eliminate the effect of double adjustment. After considering the submission of the assessee, the Ld. DRP did not find any merit in the claim of the assessee that the entire cost of RHQ charges should be removed from the operating cost as it will give skewed picture. The Ld. DR accordingly directed that no interference is called for in the working of the PLI on this count. 2. “7.1 Issue: On the facts and in circumstances of the case, and in law, without prejudice to the above ground, the Assessee wishes to submit that while computing the adjustment on the manufacturing segment, the Ld. TPO/AO erroneously considered the value of RHQ charges as INR
223,781,961 in the cost base. In doing so, the Ld. TPO disregarded the value of the RHQ charges at INR 11,18,90,980 computed and considered at ALP in the TP Order itself.” The assessee contended to consider the value of RHQ charges considered as ALP by the Ld. TPO/AO i.e. INR 11,18,90,980 in the cost base for computing adjustment for manufacturing segment. After considering the submissions of the assessee and the stand of the Ld. TPO in this regard, the Ld. DRP accepted the assessee‟s objections and directed the Ld. TPO to take the adjusted figure of Rs.11,18,90,980/- as RHQ cost while working out the proportionate adjustment in manufacturing segment. The Ld. DRP further observed that in case the higher appellate authorities alter or amend the transfer pricing adjustment, the Ld. TPO shall rework the adjustment by incorporating the altered amount. 3. “8.1 Issue: On the facts and in circumstances of the case, and without prejudice to the other grounds of objections, the Ld. TPO/AO erred in computing the adjustment of INR 11,18,90,980 in relation to the RHQ charges thereby disregarding that the service segment of the Assessee is already at ALP and not disputed. Accordingly, the Assessee submits that the adjustment pertaining to RHQ charges should be restricted to the disputed amount only i.e., the amount allocated to the manufacturing segment.”
The assessee contended that while computing the adjustment on RHQ charges, the amount of RHQ charges which is allocated to the services segment should be excluded from the adjustment amount considering that it is already at ALP. The Ld. DRP rejected this contention of the assessee observing that no interference is required for, in considering the amount of RHQ fees already considered by the Ld. AO/TPO as no such specific directions have been issued by the Tribunal to exclude the said amount from the overall RHQ charges. 4. “9.1 Issue: On the facts and in circumstances of the case and in law, without prejudice to the other grounds, the Assessee would like to highlight that the manufacturing segment is separately tested and adjusted whereby the RHQ charges allocated to manufacturing segment form part of the cost base while calculating the adjustment. Hence, the impact of the adjustment of the RHQ fees is already considered in the manufacturing segment. Accordingly, the Assessee humbly submits that the adjustment pertaining to the RHQ fees be deleted to avoid a double adjustment on it. Further, without prejudice to the above contentions by the Assessee, it is submitted that the Ld. TPO has violated the transfer pricing regulations by applying an addition-hoc proportion of 50% while making an adjustment on the transaction of RHQ charges.”
The assessee contended that the entire adjustment made by the Ld. TPO/AO on allocation of RHQ charges should be deleted as it is already forming part of the adjustment proposed in the „manufacturing segment‟. After considering the submissions of the assessee, the Ld. DRP upheld the benchmarking of the transaction by the Ld. TPO with respect to the transaction of payment for RHQ fees observing that in the absence of specific details regarding the costs, determination of ALP by the TPO using the other method wherein 50% of costs allocated to the assessee is found to be at Arm‟s Length as any comparable entity would have only paid the same amount for the services rendered.
The Ld. DRP vide its order dated 26.12.2023 thus directed the Ld. AO to give effect to the aforesaid findings and directions, pursuant to which the Ld. AO passed the final assessment order on 22.01.2024 u/s 143(3) r.w.s. 254 read with section 144B of the Act.
Aggrieved by the adjustment sustained with respect to the allocation of RHQ charges, the assessee has preferred the present appeal before the Tribunal in this second round of proceedings by raising the following grounds of appeal : “Ground No.
1. On the facts and in the circumstances of the case and in law, the final assessment order passed under section 143(3) r.w.s. 254 r.w.s. 144B of the Act dated
22. January 2024 is had in law, illegal and ought to be quashed. General ground Ground No.
2. On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP erred in making Transfer pricing (TP) adjustment amounting to INR 13,87,90,980 by holding that the following international transactions are not at arm's Length Price ('ALP') as envisaged under the Act: international transactions pertaining to Appellant's manufacturing activity; and allocation of Regional Head Quarter (RHQ) charges from the AE to the Appellant. Further, the Ld. TPO erred in not following the directions given by of the Hon'ble Income Tax Appellant Tribunal (Tribunal) vide order dated
04. August 2021, thereby not providing relief as adjudicated by the Hon'ble Tribunal. Prayer The Appellant prays that the transfer price of the aforesaid international transactions be accepted as the ALP of the said international transactions and accordingly, the adjustment proposed by the Ld. AO/Ld. TPO and confirmed by the Ld.DRP ought to be deleted. The Appellant prays that the ad-hoc adjustment computed by the Ld. TPO ought to be deleted as the same is not in compliance with the provisions of section 92C of the Act. Ground No. 3 On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP erred in computing the Profit level indicator (PLI) and consequent TP adjustment for the manufacturing segment without reducing the value of RIHQ fees from the cost base of the manufacturing segment, which is already benchmarked separately, leading to a double adjustment. Prayer The Appellant prays that the Ld. AO be directed to reduce the value of RHQ charges from the cost base of the manufacturing segment while computing PLI, to eliminate the effect of double adjustment. Ground No. 4 On the facts and in the circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP erred in making an ad-hoc adjustment of 50% of the value of RHQ charges in an arbitrary manner, which is in contravention to the principles of section 92C of the Act. While doing so, the Ld. AO/Ld. TPO/Ld. DRP have erred in not appreciating: - The Hon'ble Tribunal has categorically accepted the rendition of the services - The fresh benchmarking submitted by the Appellant (vide the additional evidence submitted before the Ld. DRP) as per the directions of the Hon'ble Tribunal which demonstrates the computation of the ALP in an independent scenario by taking Appellant as the Tested Party Prayer The Appellant prays that the ad-hoc adjustment computed by the Ld. TPO ought to be deleted as the same is not in compliance with the provisions of section 92C of the Act. Ground No. 5 On the facts and in the circumstances of the case and in law, without prejudice to the above the Ld. AO/Ld. TPO/ Ld. DRP erred in making double adjustment with respect to allocation of RHQ fees i.e. while benchmarking the same under manufacturing segment and also independently benchmarking the said international transaction. Prayer The Appellant prays that the aforesaid transaction cannot be benchmarked twice since same is against the principles of transfer pricing. Ground No. 6 On the facts and in the circumstances of the case and in law, the Ld. AO erred in proposing to initiate penalty proceedings u/s 274 r.w.s. 271(1)(c) of the Act.
Prayer The Appellant prays that the initiation of penalty proceedings u/ 274 r.w.s. 271(1)(c) of the Act by the Ld. AO is not warranted and hence the Ld. AO should be directed to drop the penalty proceedings. The above grounds are independent of and without prejudice to each other. The Appellant craves leave to add, to amend, to alter, to substitute and to withdraw the above grounds of appeal at any stage of the proceedings.”
The Ld. AR reiterated the contentions raised before the Ld. DRP. Giving the factual background of the case, the Ld. AR explained that the company has two segments viz. „manufacturing segment‟ and „services segment‟. As per the segmental bifurcation, RHQ charges are allocated to the „manufacturing segment‟ and balance charges are forming part of the „services segment‟ of the assessee. The assessee requested the Ld. TPO to accept the aggregation approach for benchmarking the impugned transaction by taking the assessee as a tested party. He submitted that the manufacturing segment of the assessee has already been benchmarked separately by the Ld. TPO and thus, the adjustment made in relation to the manufacturing segment already considered the impact of the RHQ charges. He further submitted that the portion of RHQ charges forming part of the service segment is accepted to be at ALP by the Ld. TPO and therefore no separate adjustment is required to be made.
5.1 He further argued that the “Other Method” has been arbitrarily applied by the Ld. AO as the most appropriate method for the impugned transaction as the Ld. AO has failed to bring on record a suitable comparable uncontrolled transaction and the price charged therein (“CUP”) to justify the applicability of the “Other Method” as per the requirement of Rule 10AB of the Income Tax Rules, 1962 (“the Rules”) r.w.s. 92C(1) of the Act.
5.2 The Ld. AR submitted that there is no other way to benchmark the impugned transaction as against the benchmarking method applied by the assessee since either all the other prescribed methods for computation of ALP are not possible to apply or they are not applicable to the impugned transaction. Referring to the transfer pricing study report for AY 2016-17, he submitted that the assessee had duly analyzed the facts of the impugned transaction and accordingly selected the most appropriate method (“MAM”) by rejecting the other methods for the reasons provided therein, the relevant extract of which is reproduced below (pages 692 to 693 of the paper book refers) : “9.4.2. Most appropriate method The most appropriate method is that method which, under the facts and circumstances of the transaction under review, provides the most reliable measure of an arm's length result. Because the selection of the most appropriate method involves a test of relative merit, a method that may not be perfect is not considered inappropriate unless some other method can be shown to be more reliable or provide a better estimate of an arm's length result. 9.4.3. Selection of most appropriate method 9.4-3.1. Comparable uncontrolled price method In case of international transactions of payment of fees for availing RHQ services from Lear Shanghai, CUP has not been considered as the most appropriate method. The reasons for the same are tabulated below: Table 15: Applicability of CUP Class of transactions Reasons Payment of RHQ fees Internal CUPS Lear India do not avail similar services from any third party in India. Lear Shanghai also does not render similar services to any third parties. Hence internal CUP has not been considered for these transactions. External CUPs Information on the prices and the conditions at which third parties transact is not available in public domain for the similar transactions. Hence, external CUP cannot be applied.
9.4.3.2. Resale price method With regard to the payment for RHQ services, Lear Shanghai is a service provider, not a distributor and therefore, RPM is not considered as the most appropriate method to determine the arm's length operating results of international transaction pertaining to payment of RHQ fees to Lear Shanghai. 9.4.3.3. Cost plus method Reliability of the CPM may be adversely affected by factors such as cost structures, business, management efficiency and lack of reliable external comparable data. Owing to the accounting conventions followed, there may be differences across enterprises in the treatment of costs that affect the computation of gross profit mark-up. Due to the unavailability of reliable information pertaining to gross profit mark-up for such transactions the CPM has not been considered as an appropriate method to determine the arm's length operating results of international transaction pertaining to payment of RHQ fees to Lear Shanghai.
9.4.3.4. Profit split method Lear Shanghai does not own any non-routine intangibles and further the operations of Lear Shanghai can be independently evaluated. Therefore, the PSM is not considered as an appropriate method to determine the arm's length operating results in case of international transaction pertaining to payment of RHQ fees to Lear Shanghai. 9.4-3.5. Transactional net margin method Taking into consideration, the fact that none of the other methods were applicable and considering the fact that relevant data for application of the TNMM was available, TNMM has been considered as the most appropriate method to determine the arm's length operating result of international transaction pertaining to payment for RHQ services to Lear Shanghai. 9.4.3.6. Such other method as may be prescribed by the Board Considering that no transactional level information with respect to uncontrolled transactions is available, such method has not been considered as the most appropriate method. 9.4.4. Application of the most appropriate method After reviewing all of the transfer pricing methods discussed, we concluded that, given the fact and circumstances, the TNMM provides the most reliable measure of an arm's length result for Lear India's international transaction pertaining to payment of RHQ fees.”
5.3 In support of the above contentions, the Ld. AR relied on the following decisions of the jurisdictional High Court and Tribunal : i. CIT Vs. Johnson & Johnson Ltd., of 2014 (Bom. HC); ii. DCIT Vs. IAC International Automotive India Private Limited, (Pune-Trib.); iii. Rehau Polymers Private Limited Vs. ACIT, ITA No. 658/PUN/2022 (Pune-Trib.)
5.4 Additionally, the Ld. AR also placed reliance on the following cases : i. CIT v. Lever India Exports Ltd. [ITA No. 1306, 1307 & 1349 of 2014 (Bom. HC) (2014)] ii. CIT v. Merck Limited [ITA No. 272 of 2014 (Bom. HC)] iii. Mondelez India Foods (P.) Ltd. v. ACIT [ITA No.1240/Mum/2016 & 1518/Mum/2017 (Mum. Trib.)] iv. Firmenich Aromatics India P. Ltd. v. DCIT [ITA No. 2590/Mum/2017 (Mum. Trib.)] v. Ariston Group India Private Limited v. NFAC [ITA No. 1680/Pun/2024(Pune Trib.)] vi. East West Seeds India Private Limited v. ACIT [ITA No. 469/Pun/2016 (Pune Trib.)] vii. Unilever India Exports Ltd. v. ACIT [ITA No. 4301/Mum/2024 (Mum. Trib.)]
The Ld. DR heavily relied on the order of the Ld. TPO/AO and Ld. DRP. He submitted that the Ld. TPO has not given the proper effect to the directions given by the Tribunal in the first round of proceedings and thus, prayed that the matter may be set aside to the file of the Ld. TPO/AO to decide the issue afresh.
We have heard the Ld. Representatives of the parties, perused the material available on record and paper book(s) filed by the Ld. AR on behalf of the assessee as well as various judicial precedents cited by the Ld. AR. The only grievance of the assessee in the present appeal pertains to the adjustment sustained with respect to the allocation of RHQ charges paid by the assessee to its AE. The facts relating to this issue are that during the relevant AY 2016-17, the assessee, Lear India received certain support services from Lear Corporation (Shanghai) Limited (“Lear Shanghai”) for which it paid cost plus 5% markup as per the inter-company agreement. The assessee used “Transactional Net Margin Method” (“TNMM”) to benchmark the aforesaid transaction by taking the Foreign AE as a Tested Party. During the first round of assessment proceedings, the Ld. TPO alleged that the assessee had failed to demonstrate that such services were actually received by the assessee. In absence of any proof of services being rendered to the assessee by Lear Shanghai, the Ld. TPO held that the charges paid for RHQ services were not at arm's length and computed the ALP of the international transaction of allocation of RHQ charges as NIL without applying any of the method prescribed u/s 92C of the Act (para 7.6 of the TPO‟s order on page 415 of the appeal set refers). Accordingly, the Ld. TPO made an adjustment of Rs.22,37,81,961/- which was incorporated by the Ld. AO in the final assessment order against which the assessee filed an appeal before the Tribunal. The Tribunal in the first round of appeal held that the assessee has indeed received services from its AE and the benefit test applied by the Ld. TPO has no relevance (para 6 of the Tribunal‟s order on page 177 of the appeal set refers). The Tribunal rejected the use of Foreign AE as a Tested party for benchmarking the impugned international transaction and directed the Ld. TPO to conduct a benchmarking analysis by taking the assessee/Lear India as a Tested party. The relevant extract of the decision of the Tribunal is reproduced as under: "33... Reverting to the international transaction in totality, we have found above that the RHQ services were actually availed and hence NIL ALP determination by the TPO is incorrect. Insofar as the benchmarking of this transaction is concerned, the assessee benchmarked it by taking Foreign/AE as tested party, which has been found to be incorrect. Thus, the international transaction of receipt of RHQ services is required to be benchmarked by taking the assessee as the Tested Party. We, therefore, set-aside the impugned order and remit the matter to the file of the TPO/AO for re- determining the ALP of the international transaction of receipt of RHQ services under the most appropriate method by taking the assessee as tested party. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in this regards."
During the course of remand proceedings in light of the Tribunal‟s specific directions (supra) the assessee submitted the segmental bifurcation of the RHQ charges to highlight that approximately 95% of the RHQ charges are allocated to the „manufacturing segment‟ and balance charges are forming part of the service segment of the assessee (page 947 of the paper book refers). These RHQ charges are closely interlinked to the business of the assessee and hence allocated between the manufacturing segment and the services segment. Accordingly, the assessee requested the Ld. TPO to accept the aggregation approach for benchmarking the impugned transaction by taking the assessee as a Tested party. It is the contention of the Ld. Counsel for the assessee that since the RHQ charges forms part of the cost base of the manufacturing and the service segments, and the manufacturing segment of the assessee has already been benchmarked separately by the Ld. TPO, the adjustment made in relation to the manufacturing segment already considers the impact of the RHQ charges and accordingly, no separate adjustment regarding the RHQ charges ought to be made. Further, the Ld. TPO has not made any separate adjustment with respect to service segment, hence, the portion of RHQ charges forming part of the service segment ought to be accepted to be at arm's length and no separate adjustment is required.
We have perused the orders of the Ld. TPO and DRP. We find that the Ld. TPO rejected the assessee‟s contention of accepting the aggregation approach, stating that jurisdiction of the Ld. TPO is limited with determination of ALP only in respect of the transaction pertaining to RHQ charges. Additionally, the Ld. TPO held that there was no mandate in the order of the Tribunal to consider all the transactions afresh with aggregation approach (para 3.5 of the TPO‟s order on page 161 of the appeal set refers). Pursuant to the directions of the Tribunal, the Ld. TPO held that he had attempted to find out comparable companies to benchmark the aforementioned international transaction, using the assessee as the tested party, but failed to bring out any comparable company due to limitation of available databases (para 3.5 of the TPO‟s order on page 162 of the appeal set refers). Consequently, the Ld. TPO determined the ALP using “Other method” as per Rule 10AB of the Rules and made an ad-hoc adjustment of 50% of the charges paid by the assessee to the AE resulting in a transfer pricing adjustment of INR 11,18,90,980/-. On objection being raised by the assessee, the Ld. DRP did not accept the contentions of the assessee with respect to adoption of aggregation approach for benchmarking the allocation of RHQ fees by observing as under : “9.3.1. In the first part of this ground of objection, the assessee claims that as the manufacturing segment has already been found to be at ALP, no further adjustment should be made to the ALP of the transaction of RHQ fee payments. This ground does not emanate from the Hon'ble ITAT order. Further, it is seen that the assessee has separately benchmarked the transaction using the foreign AE as the tested party. It was not the case of the assessee while undertaking the transfer pricing analysis that the transaction has to be aggregated with the manufacturing activity and ALP to be determined together. The Honble ITAT has also analysed the issue threadbare and there is no discussion on the issue of aggregation of the transaction with that of the manufacturing activity. Rather, the Ho'ble ITAT has given clear direction to benchmark the transaction separately using the assessee as the tested party and to use the MAM. Hence the first part of ground of objection of the assessee is dismissed.
The Ld. DRP also observed that as both the Ld. TPO and the assessee could not find suitable CUP, the most accurate method should be considered and thus upheld the ad-hoc adjustment made by Ld. TPO i.e. 50% of the charges paid by the assessee to its AE. The Ld. DRP however, directed the Ld. TPO to reduce the amount of RHQ charges which were held to be at arm's length and recompute the adjustment with respect to manufacturing segment. Accordingly, the transfer pricing adjustment with respect to the manufacturing segment was recomputed at INR 2,69,00,000/- after reducing the amount of RHQ charges which were held to be at ALP.
In light of the above background, we have carefully considered the arguments advanced by the Ld. AR in respect of the impugned issue in hand. One of the contentions of the Ld. AR is that an ad-hoc approach adopted by the Ld. TPO to benchmark the international transaction of allocation of RHQ charges cannot be sustained in the guise of „Other Method‟. We find some force in the contention of the Ld. AR that the adoption of the „Other Method' as per Rule 10AB of the Rules require the Ld. TPO to bring on record a suitable CUP to justify the applicability of the method employed.
The relevant extract of the Rule 10AB of the Rules reads as under: “10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts."
On analyzing the instant case in line with the above Rule, we find that the Ld. TPO has failed to bring on record a suitable comparable uncontrolled transaction and the price charged therein, while adopting the 'Other Method‟ as the most appropriate method for benchmarking the impugned transaction. Further, without bringing any such comparable on record, the Ld. TPO arbitrarily made an ad hoc adjustment of the 50% of the RHQ charges paid by the assessee to its AE, Lear Shanghai. Thus, in our considered view, the aforesaid benchmarking exercise conducted by the Ld. TPO is not in accordance with Rule 10AB of the Rules and hence, unsustainable in the law. The Ld. TPO has not compiled with the provisions of the Act read with the relevant Rule to determine the ALP of the international transaction by applying one of the methods prescribed under section 92C of the Act.
From perusal of the various judicial precedents (supra) cited by the Ld. AR, we find that this issue is no more res-integra. It is now a settled position in law that the determination of the ALP of the international transaction on an ad-hoc basis de hors section 92C of the Act by merely asserting that the „Other Method‟ is applied cannot be sustained as held by various Courts and Tribunals. In the case of CIT v. M/s. Johnson & Johnson Ltd. (supra), the Hon‟ble Jurisdictional Bombay High Court held as under : "4(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 108 of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical know how 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 know-how 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 know-how royalty by the TPO was ad hoc and arbitrary as held by the CIT(A) and the Tribunal. (e) In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained. "...
In the case of DCIT vs. IAC International Automotive India Private Limited (supra), the Pune Tribunal held as under : “7.1 In our considered view, the Ld. CIT(A) has rightly held that mere assertion of adoption of the "Other method" under the rule 10AB of the Rules, is not sufficient for a valid transfer pricing adjustment. The Ld. CIT(A) has correctly concluded that, in accordance with Rule 10AB, the assessee or the transfer pricing officer is required to bring on record a comparable uncontrolled transaction to justify the applicability or reliability of the method applied."... 7.3 In view of the above statutory provisions, we find the Ld. TPO has not complied with the requirements enshrined in Rule 10AB while adopting "other method and rejecting the ALP of the international transaction of managements fee in accordance with the TP analysis conducted by the assessee. The Ld. TPO has applied "other method" without any reference to the actual uncontrolled comparable transaction and the price charged therein. It is a settled position of law that ad-hoc determination of ALP by the TPO dehors section 92C of the Act read with the applicable Rule thereunder, cannot be sustained."...
In the case of Rehau Polymers Private Limited v. ACIT (supra), the Pune Tribunal held as under : “25. However, in the instant case, although the TPO has made a reference of CUP method in para 32, page 23 of his order which was selected in the earlier year, however, the TPO has not carried out any such exercise for the price charged or paid for the property transferred or the services provided in a comparable uncontrolled transaction. As per Rule 10B of the Income Tax Rules, CUP method is a method, wherein the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction is identified. Thereafter, the said price is adjusted to account for differences, if any and the said price is taken to be the Arm's Length Price. Thus, as per the said rule, for applying CUP method, the price charged for property transferred or services provided is required to be identified. However, in the present case, the TPO has not carried out any such exercise.
Therefore, simply referring to CUP method without any reference to the actual uncontrolled transaction and the price charged therein clearly indicates that no CUP method is adopted by him. Under these circumstances, we agree with the contention of the Ld. Counsel for the assessee that no method has been adopted by the TPO for determining the ALP. The observations of the DRP that the TPO has adopted the Other method as the most appropriate method in our opinion is incorrect since there is no reference to any such method as the TPO has not specifically mentioned the Other method as the most appropriate method. Thus, the question that is to be answered is as to whether any adjustment of ALP is in accordance with law if no method has been adopted by the TPO for determination of the ALP. ………..
The various other decisions relied on by the Ld. Counsel for the assessee also supports his case to the proposition that in absence of any of the prescribed methods for the determination of the ALP, such TP adjustment is not sustainable in law. Since the TPO in the instant case has not adopted any of the prescribed methods for determination of the ALP, therefore, respectfully following the decisions cited (supra), we hold that the addition made by the Assessing Officer/TPO/DRP is not in accordance with law for which the same has to be deleted. We accordingly set aside the order of the Assessing Officer and direct him to delete the adjustment of Rs.6,71,58,603/-. The grounds raised by the assessee are accordingly allowed."
Another contention of the assessee is that the aggregation approach taking the assessee as the Tested Party ought to be adopted to benchmark the impugned transaction. We find that the Tribunal in the first round of appeal had specifically directed the Ld. TPO to freshly benchmark the international transaction of allocation of RHQ charges by adopting the most appropriate method taking the assessee as the Tested party. Post remand proceedings, the manufacturing segment of the assessee is benchmarked by adopting TNMM as the MAM and taking the assessee as a Tested Party resulting into an adjustment of Rs.2,69,00,000. It is the submission of the Ld. Counsel for the assessee that the RHQ charges are incurred by the assessee in the course and furtherance of its business activities which are broadly divided into manufacturing and services segment. Accordingly, these charges are inextricably linked to the business of the assessee and aggregation approach ought to be adopted for benchmarking this transaction. Further, the benchmarking analysis conducted by the assessee for benchmarking the service segment using TNMM as the most appropriate method taking the assessee as a Tested Party is not disputed by the Ld. TPO. The RHQ charges allocated to both the segments are forming part of the cost base of these segments respectively and by adopting the aggregation approach, these charges are benchmarked using TNMM taking the assessee as a Tested Party, which is in accordance with the specific directions of the Tribunal. However, the adoption of the aggregation approach may result into a slight increase in the adjustment pertaining to the manufacturing segment but the same would still be in line with the directions of the Tribunal in the first round of proceedings. We find some force in the above contentions of the Ld. AR. It is the plea of the assessee that all the other prescribed methods under section 92C of the Act could not be adopted for the following reasons and thus pursuant to the direction of the Tribunal in the first round of proceedings, adoption of aggregation approach and TNMM is the only most appropriate method for benchmarking the impugned transaction : i. Comparable Uncontrolled Price (CUP) Method: Similar comparable transactions are not available, ii. Resale Price Method: Generally adopted in case of a distributor, hence, fails in the present case, iii. Cost Plus Method: Reliable information pertaining to the gross profit mark-up in case of similar transactions is unavailable. iv. Profit Split Method: Generally adopted in case where unique and valuable intangibles are involved, fails in the present case. v. Other Method: No such comparable uncontrolled transaction is available in public domain.
As already observed above, the Ld. TPO has failed to adopt any of the prescribed methods in accordance with the provisions of the Act and his benchmarking is in contravention of the specific directions of the Tribunal. Further to reiterate the Ld. TPO applied „other method‟ without bringing any suitable comparable on record which in our considered view, is in contravention of the relevant provisions of the Act/Rules.
Based on the factual matrix of the case and the legal position set out above, in our considered view, the assessee‟s plea for benchmarking the international transactions of allocation of RHQ charges applying TNMM as the MAM as per the aggregation approach adopted by the assessee, deserves to be accepted. The transfer pricing adjustment is made by the Ld. AO/TPO without following the statutory provisions of the Act/Rules and such ad-hoc adjustment cannot be sustained in law. Resultantly, the entire transfer pricing adjustment in relation to the allocation of RHQ charges ought to be deleted. The Ld. DR has not brought on record any material/judicial precedents on record in rebuttal of the contentions raised by the Ld. AR so as to enable us to take a different view. We, therefore, direct the Ld. TPO to delete the transfer pricing adjustment pertaining to the allocation of RHQ charges. Accordingly, the effective grounds of appeal No. 2, 3, 4 and 5 are allowed. Grounds No. 1 is general in nature. Ground No. 6 relating to initiation of penalty proceedings u/s 274 r.w.s. 271(1)(c) of the Act is pre-mature.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 10th October, 2025.