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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI VIKAS AWASTHY & SHRI RAJESH KUMAR
आदेश/ ORDER
PER VIKAS AWASTHY,JM:
This appeal by the assessee is directed against the assessment order dated 13/10/2012 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ( in short ‘the Act’), for the assessment year 2013-14.
The brief facts of the case assessee emanating from records are: The assessee is a wholly owned subsidiary of Dow Corning Enterprise Inc.USA. The assessee is engaged in the business of manufacturing and distribution of silicone based Chemicals & Lubricants and providing Engineering Designs & Other Services. During the period relevant to assessment year under appeal, the assessee entered into various international transaction with its Associated Enterprises(AE). The assessee applied Transactional Net Margin Method (TNMM) as the most appropriate method to benchmark its following transactions:
(i) Import of raw material for manufacturing. , (ii) Export of manufactured finished goods, (iii)Payment of Royalty, (iv) Import of finished goods for resale. (v) Export of finished goods. (vi) Receipt of Indenting commission, (vii)Provision of Engineering Services. The Transfer Pricing Officer(TPO) rejected the TNMM as the most appropriate method and instead applied CUP.
2.1 Further, the TPO rejected benchmarking of international transaction in respect of payments made by the assessee to its AE with respect to marketing, administrative and logistic support services and payments made in respect of Information Technology Services.
Thus, the TPO made following adjustments:
(i) Adjustment on account of Exports Rs.1,19,73,148/- (ii) Adjustment on account of marketing, Administrative, logistic support services & IT Services Rs.3,79,69,985/- Total: Rs.4,99,43,133/- In line with the order of TPO dated 31/10/2016 passed under section 92CA(3) of the Act, the Assessing Officer passed draft assessment order on 13/12/2016. Against the said draft assessment order the assessee filed appeal before the Dispute Resolution Panel (DRP). The DRP vide directions dated 22/09/2017 rejected the objections of the assessee in toto.
Shri Nishant Thakkar, appearing on behalf of the assessee submitted that the adjustments made in the impugned assessment year are identical to the one made in assessee’s own case in assessment year 2011-12. The ld.Authorized Representative of the assessee submitted that in assessment year 2011-12 as well the TPO rejected the Arm’s Length Price (ALP) determined by the assessee by applying TNMM and instead adopted CUP as most appropriate method to benchmark the international transactions. The ld.Authorized Representative of the assessee pointed that the assessee carried the issue in appeal before the Tribunal in ITA No.991/Mum/2016. The Tribunal vide order dated 23/10/2020 restored the issue back to the file of Assessing Officer for fresh examination in accordance with the directions/observations of the Tribunal.
3.1 The ld.Authorized Representative of the assessee submitted that grounds No.3 to 8 of appeal are similar to the one raised in assessment year 2011-12, therefore, these grounds can be restored back to the file of Assessing Officer with similar direction.
3.2 The ld.Authorized Representative of the assessee submitted that in grounds No.9 to 17 of the appeal, the assessee has assailed adjustment in respect of marketing, administrative, logistic support and IT services. The facts in the impugned assessment year are similar to the facts in assessment year 2011-12. The Tribunal in assessee’s appeal in deleted the adjustment. Facts being identical, the adjustment may be deleted.
3.3 The ld.Authorized Representative of the assessee stated at the Bar that he is not pressing ground No.18 raised in the appeal.
3.4 In respepct of grounds No.20 and 21, the ld.Authorized Representative of the assessee submitted that the assessee is seeking directions to the Assessing Officer for recomputation of interest under section 234C of the Act on returned income instead of assessed income.
Shri Anand Mohan, representing the Department vehemently supported the impugned assessment order. However, he fairly admitted that the issues raised in the present appeal by the assessee are similar to the issues raised in the appeal by assessee for assessment year 2011-12 before the Tribunal.
Both sides heard, orders of authorities below examined. Both sides are unanimous in admitting that the facts germane to the grounds raised in the appeal are similar to the one adjudicated by Co-ordinate Bench of the Tribunal in appeal by the assessee in (supra).
The grounds No.1 and 2 of the appeal are general in nature, hence, requires no adjudication.
In grounds No.3 to 8 of the appeal, the assessee has assailed application of CUP as most appropriate method to benchmark international transactions undertaken by assessee during the period relevant to the assessment year under appeal whereas the assessee had applied TNMM to benchmark the same transaction. We find that similar issue had come up in appeal by assessee for assessment year 2011-12 before the Tribunal.The Co-ordinate Bench of the Tribunal after considering the facts held as under:
“ 15. We have considered rival submissions in the light of decisions relied upon and perused the material on record. The basic dispute between the parties is with regard to the most appropriate method for benchmarking the export of finished goods to the AEs. While the assessee has applied TNMM on segmental basis, the Transfer Pricing Officer has applied CUP to determine the arm's length price of the transaction. From the material placed on record, it is very much clear that the sales made to the non-AEs situated in India have been applied as CUP to determine the arm's length price of export made to the AEs. It is the case of the assessee that no comparable export sales to non-AEs are available to apply as CUP. The aforesaid factual position has not been controverted by the Revenue. Therefore, the moot point which arises for our consideration is, whether the domestic sales can be applied as CUP for determining the arm's length price of export sales. It is fairly well settled, CUP method requires strict comparability. It cannot be denied that the pricing of a product varies on the basis of geographical location. Thus, primarily, the price of products sold in domestic market cannot be compared with the price of the product sold in foreign country due to various factors. Therefore, if the Transfer Pricing Officer selects CUP as the most appropriate method to benchmark the transactions, it is his duty to find out and bring on record price charged for uncontrolled transactions carried out under similar circumstances. If, suitable comparable uncontrolled transaction is unavailable, CUP method cannot be applied.
16. It is further noticed, during the year under consideration assessee had sold 34 different products to both overseas AEs as well as domestic unrelated parties. Out of the 34 products sold, Transfer Pricing Officer has accepted the price of. 16 products sold to AEs to be at arm's length, since, the price charged to AEs is more than the price charged to non-AEs. In case of 18 products only theTransfer Pricing Officer has made adjustment as the price charged to AEs is less than the price charged to non-AEs. Thus, it appears, the Transfer Pricing Officer has adopted a very selective approach while applying CUP. Even, while applying CUP, the Transfer Pricing Officer has not properly looked into assessee's claim of various adjustments on account of geographical location, volume and timing difference. The Transfer Pricing Officer has only allowed volume adjustment on purely ad-hoc basis, that too, only in respect of a single product while ignoring various other products wherein volume difference between AE and non-AE transaction is substantial. Similarly, assessee's contention that the price of products insofar as sales made to the AE and non-AE would vary due to timing difference has not been properly considered. The various adjustments which are required to be made have been demonstrated before us by the learned counsel for the assessee by furnishing charts. In our view, all these factors have to be taken into consideration, even, while applying CUP method. One more submission of the assessee is that the DRP has allowed adjustment on account of marketing/allied cost. However, while computing such adjustment, the Assessing Officer has not taken note of marketing personnel cost. We find substantial merit in the aforesaid submission of the learned Counsel. At Page-1104 of the paper book, the assessee has furnished the break-up of the marketing personnel cost. If the Revenue is having any doubt on the aforesaid claim of the assessee, the assessee may furnish a break-up certified by an auditor. However, the claim of the assessee has to be examined without any bias. Thus, in our view, the matter needs to be restored to the Assessing Officer for examining afresh keeping in view our observations hereinabove. Thus, with the aforesaid observations, the issue is restored back to the Assessing Officer for fresh adjudication after providing due opportunity of being heard to the assessee. These grounds are allowed for statistical purposes” 9. Since, there is no dispute about the facts being identical in assessment year 2011-12 and impugned assessment year , we deem it appropriate to restore this issue to Assessing Officer with similar directions. Thus, ground No. 3 to 8 of the appeal are allowed for statistical purpose.
In ground No.9 of the appeal, the assessee has assailed action of DRP in not accepting additional evidences and in grounds No.10 to 17 the assessee has assailed the adjustment made by TPO in respect of marketing, administrative, logistic support services and IT services from AE. The TPO rejected assessee’s benchmarking of international transaction on the ground that the assessee has not furnished complete details viz. Number of working hours, per hour cost, etc. The TPO in order to determine arms length price of the transaction made some estimations of the salary and man hours and computed manhour rate. The TPO purportedly applied CUP and arrived at ALP of transaction i.e. payment for marketing, administration and logistic support services and payment of I.T Services at Rs.1,20,00,000/- as against Rs.4,99,69,985/- (Rs.2,10,21,018/- + Rs.2,89,48,967/-) determined by assessee. Though, the TPO has mentioned that CUP has been applied to benchmark the transaction but in effect the calculations have been made by TPO on mere estimations. The procedure as envisaged under section 92C of the Act for computation of ALP has not been followed. We find that in assessment year 2011-12 in assessee’s own case adjustment was made in respect of same services in similar manner on estimations and by adopting ad-hoc rate. The Co-ordinate Bench rejected TPO’s method of computing ALP and deleted the adjustment. The Co- ordinate Bench after examining the facts in assessment year 2011-12 decided the issue in favour of assessee by observing as under:-
“25. We have considered rival submissions and perused the material on record. Undisputedly, the assessee has entered into two separate agreements with group entities for availing marketing, administrative and logistic services as well as information technology services. It is the contention of the assessee that the services were essentially required not only for carrying on the business activities but overall growth of the business. Initially, in course of proceedings before the Transfer Pricing Officer, the assessee has claimed the payment made towards intra-groups services to be at arm's length by benchmarking them on cost allocation basis to the three different segments i.e., manufacturing, engineering and trading. However, at the stage of DRP proceedings, the assessee has furnished segmental benchmarking under TNMM which Included the cost allocated towards the Intra-group services. Apparently, neither the Transfer Pricing Officer nor learned DRP have accepted the benchmarking done by the assessee. The Transfer Pricing Officer has observed that the assessee was unable to prove the availing of specific services and also the benefit derived from such services and has thereafter proceeded to determined the arm's length price purely on estimate basis by applying the man-hour salary rate of one employee in respect of marketing administrative and logistic services and at the ad-hoc rate of 30% in respect of IT services, learned DRP has more or less agreed with the aforesaid benchmarking of the Transfer Pricing Officer, Though, learned DRP has observed that the Transfer Pricing Officer has benchmarked the payment made towards intra-group services by applying CUP method, however, a careful scrutiny of the order passed by the Transfer Pricing Officer does not reveal any such observation by him. The Transfer Pricing Officer has simply proceeded to benchmark the transaction on a purely ad-hoc/estimate basis without following any one of the methods prescribed under section 92C of the Act It is patent and obvious from the order passed by the Transfer Pricing Officer that he has not determined the arm's length price by applying either CUP or any other approved method. Had the benchmarking been done under CUP method, the Transfer Pricing Officer should have brought on record at least a few comparable uncontrolled transactions to demonstrate that the payment made by the assessee towards intra-group services is not at arm's .length. Whereas, the Transfer Pricing Officer has not brought on record even a single comparable uncontrolled transaction to demonstrate that the price charged by the assessee is not at arm's length. On the contrary, it is telltale from the order of the Transfer Pricing Officer that he has proceeded to benchmark the transaction purely on estimate basis by applying man-hour salary rate of a single employee in case of marketing, administrative and logistic services. Similar is situation in case of IT services, wherein, the Transfer Pricing Officer has estimated the arm's length price at 30% of the amount paid.
The aforesaid method of estimating the arm's length price is not in terms with the provisions contained under section 92C r/w rule 10B, hence, opposed to law. Though, both the Transfer Pricing Officer and learned DRP have alleged that the assessee has not substantiated the fact that the services were actually rendered and benefit accrued to the assessee, however, the very fact that the Transfer Pricing Officer has allowed a part of the payment made towards intra group services, though on estimate basis, clearly indicates that even the Revenue accepts that services indeed were received by the assessee and the assessee also benefited from them. It is a fact on record that in course of proceedings before learned DRP, the assessee had furnished segmental benchmarking under TNMM which included allocation of cost towards intra-group services. Thus, it Is a fact on record that the assessee has benchmarked the transaction by applying one of the approved methods. If the Transfer Pricing Officer was not satisfied with the benchmarking done by the assessee under TNMM, he should have independently benchmarked the transaction by applying one of the approved methods. However, that is not the case in the facts of the present case, The Transfer Pricing Officer has simply estimated the arm's length price of the transaction on estimate basis without applying any one of the approved methods. This cannot be accepted. There is umpteenth number of judicial precedents, wherein, it has been held that determination of arm's length price has to be done by applying any one of the methods prescribed under section 92C r/w rule 10B. In this context, we may refer to the following decisions:- I) CIT v/s Merck Ltd., [2016] 73 taxmann.com 23 (Bom.);
ii) Firmenich Aromatics India Pvt. Ltd. v/s DCIT, ITA no.2590/Mum./2017, dated 23,07.2018; and iii) Emerson Climate Technologies India Ltd. v/s DOT, [2018] 90 taxmann.com 125; 27. Therefore, if we apply the ratio laid down in the aforesaid decisions to the facts of the present case, the inescapable conclusion would be that the adjustment made by the Transfer Pricing Officer to the arm's length price of payment made towards Intra-group services is unsustainable. In view of the aforesaid, we have no hesitation in deleting the addition made by the Assessing Officer on account of the aforesaid adjustment. Grounds are allowed.”
Both sides admitted that the facts in impugned assessment year are identical to the facts in assessment year 2011-12. Taking into consideration entirety of facts the grounds No.9 to 17 of appeal are allowed for parity of reasons.
The ground No.18 of appeal is in respect of non-grant of foreign tax credit. The ld.Authorized Representative of the assessee stated at Bar that he is not pressing this ground. The ground No.18 of appeal is dismissed as not pressed.
In ground No.19 of appeal the assessee has assailed levy of interest under section 234B of the Act . Charging of interest under section 234B of the Act is mandatory and consequential, accordingly ground No.19 of the appeal is dismissed.
In grounds No.20 and 21 of the appea, the assessee has assailed action of the Assessing Officer in charging interest under section 234C of the Act on assessed income instead of returned income. The Assessing Officer is directed to recomputed interest under section 234C of the Act on returned income, in accordance with law. The ground No.20 and 21 of appeal are allowed for statistical purpose.
In ground No.22 of the appeal, the assessee has assailed initiation of penalty proceedings under section 271(1)(c) of the Act. Challenge to penalty proceedings at this stage is premature, hence, ground No.22 of the appeal is dismissed.
In the result, appeal by the assessee is partly allowed in the terms aforesaid.
Order pronounced in the open court on Monday the 22nd day of February, 2021.