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Income Tax Appellate Tribunal, DELHI BENCH “I-2”, NEW DELHI
Before: SHRI R. K. PANDA & SHRI KULDIP SINGH
O R D E R
PER R. K. PANDA, AM :
This appeal filed by the assessee is directed against the order dated 09.12.2016 passed by the ACIT, Central Circle- 20, New Delhi u/s 143(3) r.w.s. 144C(1) of the I.T. Act for the assessment year 2012-13.
Facts of the case, in brief, are that the assessee is a company incorporated under the Indian Companies Act, 1956 and is engaged in the business of distribution of mobile handset and accessories. It is a subsidiary of M/s Brightpoint Netherlands which, in turn, is a wholly owned subsidiary of M/s Brightpoint Inc.. M/s Brightpoint Netherlands held 85% of the paid up share capital of M/s Brightpoint India and balance 15% held by M/s Persequor Limited. M/s Brightpoint India commenced its operations from June 2003 and is engaged in the business of distribution of mobile handsets and accessories and also provides after sales services to its customers by undertaking warranty and non-warranty claim processing for various brands. Brightpoint group is engaged in the business of distribution of wireless voice and data products and a supplier of outsourced services worldwide. The assessee filed its return of income on 29.11.2012 showing total income of Rs.3,51,38,534/-. The Assessing Officer referred the matter to the TPO to determine the arm’s length price u/s 92CA(3) in respect of the international transactions entered into by the assessee.
2.1 The TPO, during the course of TP assessment proceedings, observed that the assessee has reported the following international transactions :-
Nature of the transaction Method Value (Rs.) Sale of mobile handsets TNMM using 105,33,54,438 Receipt of IT & software maintenance services Operating profit as a PLI 5,32,21,360 Operating cost Receipt of management support services 4,49,25,556 Purchase of hardware 30,91,862 Provision of services 30,77,244 Payment of interest on external commercial CUP 40,22,969 borrowing Reimbursement of expenses to AEs 1,39,81,268 Reimbursement received from AEs 41,55,207
The TPO issued a show-cause notice asking the assessee to furnish various details in response to which, the assessee filed the requisite details.
From the various details furnished by the assessee, the TPO observed that the assessee has benchmarked the transactions relating to Intra Group Services (IGS) availed from its AE using combined transaction approach considering TNMM as the most appropriate method. However, the TPO rejected the TNMM qua IGS and instead applied the CUP method. However, while applying the CUP method, no comparable was put on record and arm’s length price was taken as Nil and accordingly the TPO made an upward adjustment of Rs.4,49,25,556/-. The Assessing Officer passed the draft assessment order. The assessee approached the DRP, who upheld the adjustment made by the TPO.
Accordingly, the Assessing Officer completed the assessment by enhancing the income of the assessee by Rs.4,49,25,556/- and determined the total income of Rs.8,00,64,090/-.
Aggrieved with such order of the Assessing Officer/TPO, the assessee is in appeal before the Tribunal by raising the following grounds :-
“Appeal under Section 253(1) of the Income Tax Act, 1961 ("Act") against the order dated 09 December 2016 (received on 16 December 2016) passed under Section 143(3) read with section 144C of the Act ("impugned order"), by the ld. Assistant Commissioner of Income Central Circle - 20, New Delhi ("AO"). Following grounds are without prejudice to each other: GROUNDS OF APPEAL 1.That on the facts and circumstances of the case and in law, Assessing Officer ("Ld. AO") erred in assessing the income of the Appellant at INR. 8,00,64,090/- as against the returned income of INR. 3,51,38,534/-.
2. That on the facts and circumstances of the case and in law, the Final Assessment order passed under section 143(3) read with section 144C of the Income Tax Act, 1961 ("the Act") by the Ld. AO is bad in law as the same do not consider complete and relevant facts, are not in accordance with provisions of law and principles of law as laid down by Hon'ble courts. TRANSFER PRICING GROUNDS 3. That on the facts and circumstances of the case and in law, Ld. TPO/ Ld. AO / Hon'ble Dispute Resolution Panel ("DRP") have erred in not accepting economic analysis of the Appellant, for determination of the arm's length price (‘ALP') in connection with the impugned international transaction pertaining to payment of management support services.
4. The Ld. TPO/ Hon'ble DRP have grossly erred in rejecting the combined transaction approach of benchmarking adopted by the Appellant in its transfer pricing documentation analysis, and by rejecting Transactional Net Margin Method ('TNMM') as the most appropriate method ('MAM') for determining the arms' length price (‘ALP') of payment for business service charges paid to its associated enterprises ('AEs') in accordance with the Act, Income Tax Rules, 1962 ('Rules') and the generally accepted OECD guidelines.
5. The Ld. TPO/ Hon'ble DRP erred in not appreciating that the receipt of various business services are closely linked to the overall business activities of the Appellant and erred in analyzing the transaction separately for the determination of ALP. 6. That the Ld. TPO/ Hon'ble DRP erred in not conducting the analysis of selecting the MAM as prescribed under Rule 10C of the Rules and accordingly not documented the same as prescribed under Rule 10D of the Rules. 7. The Ld. TPO/ Hon'ble DRP erred in law by determining the ALP of the international transaction using Comparable Uncontrolled Price ('CUP') method without following the manner of applying the CUP method prescribed under Rule 10B(1)(a) of the Rules. 8. The Ld. TPO/ Hon'ble DRP has failed to consider the objections made on the applicability and suitability of Comparable Uncontrolled Price Method to the facts of the case and case laws cited including those of jurisdictional High Court and rendered findings without a reasoned order on such objections. 9. The Ld. TPO/ Hon'ble DRP have erred in upholding the adoption of CUP method as the most appropriate method for determining the arm's length price in respect of the impugned international transaction without identifying any comparable uncontrolled transaction(s) for the computation of the ALP as prescribed in Section 92F(ii) of the Act. 10.That the basis to disallow the payments made for management services by considering CUP as Nil is based purely on surmises and conjectures and has no basis in facts and in law. 11. The Ld. TPO/ Hon'ble DRP erred in passing an order that is perverse in law by ignoring the relevant submissions, information and documents provided by the Appellant including but not limited to email exchanges, cost allocation documents, service agreement, invoices etc. to substantiate the receipt of business services, and based on a preoccupied mind reached at an inappropriate conclusion that the arm's length value of the impugned transactions should be Nil. 12.The Ld. TPO/ Hon'ble DRP erred erred in arriving at various unwarranted and erroneous conclusions unsupported by any material and have also failed to consider, specifically rebut the various material and evidences adduced and the submission made by Appellant to substantiate the arm's length nature of transaction relating to payment of management support charges. 13. The Ld. TPO/ Hon'ble DRP has erroneously relied on the Base Erosion and Profit Shifting ('BEPS') report released in 2015 to reject the objections of the Appellant without considering the reports in their entirety and in ignoring the binding protection and applicable provisions of the Act and the Rules. 14. The Ld. TPO/ Hon'ble DRP erred in questioning the commercial rationale of the legitimate business expenses incurred by the taxpayer and not restricting the scope of assessment under section 92CA to determining the arm's length price of the international transaction by adopting one of the prescribed methods only.
15. The finding of the Hon'ble DRP that the payment may be alternatively disallowed under Section 37(1) is erroneous and contrary to the finding that the commercial expediency has not been doubted by Ld. TPO & AO.
16. The Ld. TPO/ Hon'ble DRP erred in disregarding the documentary evidence submitted by the Appellant and questioning the need and actual receipt of services by the Appellant. 17.The Ld. TPO/ Hon'ble DRP erred in disregarding the documentary evidence submitted by the Appellant and concluding that no benefit has been received by the Appellant by receipt of impugned services without appreciating that the same is irrelevant for the computation of arm's length price.
18. The Ld. TPO/ Hon'ble DRP erred in facts and in law by concluding the following, without providing any material on record to substantiate the basis of concluding that - i. services rendered by the AEs are duplicative in nature for which no separate payment needs to be made; ii. services rendered by the AEs are incidental services or shareholder activity for the benefit of the group; iii. supporting documents provided by the assessee before Ld. TPO/ Hon'ble DRP are generic in nature iv. no independent enterprise would have made such payments for similar services rendered by another enterprise; v. no details provided in connection to the costs incurred and cost allocation mechanism implemented to allocate the costs to the Appellant by its AE Initiation of penalty proceedings 19. That on facts and circumstances of the case, the Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act.
20. The Appellant craves to leave to add, withdraw, alter, modify, amend or vary the above grounds of appeal
before or at the time of hearing.
21. The Appellant has preferred a rectification application u/s 154 in connection to the inadvertent mistakes by the Ld. AO. The Appellant craves leave to add to, alter or amend the above Grounds of Appeal as and when advised.”
Grounds of appeal no.1 and 2 being general in nature were not pressed by the ld. counsel for the assessee for which ld. DR has no objection. Accordingly, these grounds are dismissed as not pressed.
6. So far as grounds no.3 and 4 are concerned, it is grievance of the assessee that the benchmarking of transaction through the combined transaction approach by applying of TNMM was wrongly rejected.
7. Ld. counsel for the assessee submitted that the TPO disregarded the combined transaction approach on the ground that the transaction are separate in nature as according to him export commission, royalty and model fee are separate in nature. He submitted that there is no specific findings by the DRP on this issue. He submitted that the combined transaction approach is well accepted as per the provisions of section 92C(1) of the I.T. Act which speaks about “nature of transaction or class of transaction”. Further, the term ‘transaction’ itself is defined in Rule 10A(d) of the I.T. Rules, 1962 to include a number of ‘closely linked transactions’. The OECD transfer pricing guidelines at para 3.9 and 3.11 recognize that if certain transactions are closely linked then they can be benchmarked together. He submitted that the basis of separate analysis for export commission, royalty and model fee is completely perverse and does not relate to the facts of this case. There is no export commission, royalty and model fee paid in the present case. In absence of such transaction the very basis of rejection of TNMM is illusory and the same should have been accepted. He submitted that the TNMM has been adopted for five transaction using the combined transaction approach as these activities are closely linked to the main activity i.e. sale and distribution of handsets in a highly competitive market and after sales services, which are of technical nature. Further, the basis adopted in the TP report for adopting TNMM has not been rebutted. The TPO has failed to indicate any reasons for rejection of TNMM as the most appropriate method. Referring to the decision of the Tribunal in the case of Avery Denison vs. ACIT reported in (2016) 65 taxmann.com 188, he submitted that the Tribunal in the said decision has held that a single transaction cannot be isolated for applying CUP method. He submitted that the above decision of the Tribunal has been upheld by the Hon’ble Delhi High Court. He accordingly submitted that since the order of the Assessing Officer/TPO is completely perverse the grounds raised by the assessee should be allowed.
8. So far as grounds no.6 to 10 are concerned, the same relate to application of CUP method as the most appropriate method for determination of arm’s length price for the transaction between the assessee and its AE.
Ld. counsel for the assessee submitted that as per the TPO, IGS rendered are not at arm’s length price. According to him, no uncontrolled enterprise would have paid any amount for services not amounting to IGS and without any benefits. Therefore, arm’s length price was calculated by him by applying CUP method as Nil, which has been upheld by the DRP. He submitted that the TPO/DRP have incorrectly applied the CUP method without bringing out any comparable on record and, therefore, approach of the TPO/DRP is contrary to Rule 10B(2) of the I.T. Rules, 1962 and the judicial precedents. For the above proposition, he relied on the following decisions :-
a. AWB India P. Ltd. vs. DCIT, (2014) 50 taxmann.com 323. b. Frigogolas India (P.) Ltd. vs. DCIT, (2016) 68 taxmann.com 370. c. Mitsui Prime Advanced Composite India (P.) Ltd. vs. DCIT, (2016) 70 taxmann.com 123. d. Knorr Bremse vs. ACIT, (2017) 77 taxmann.com 101.
He accordingly submitted that the above grounds should be allowed.
So far as grounds no.5, 16 and 17 are concerned, the same relate to the failure of the TPO/DRP to appreciate that benefit has been received by the assessee.
Ld. counsel for the assessee referring to the above grounds submitted that as per the TPO, no documentary evidences were produced to establish that the Intra Group Services were needed by the assessee and the services are merely duplicative in nature and they do not amount to IGS. The DRP held that the assessee failed to demonstrate that services were actually needed. According to them, the assessee has failed to prove that services are not duplicative and payment was made at arm’s length price. According to the DRP, the evidence filed by the assessee does not satisfy the need test and fail to demonstrate that services were actually received. He submitted that the TPO has rendered contradictory findings i.e. on one hand he has disputed the receipt of services and on the other hand he has stated that services received are incidental and duplicative. He submitted that since the assessee has made TDS on payments to its AEs, the same indicates that services were actually received for which payment was made. Further, the assessee had filed voluminous documents to substantiate that the services have in-fact been rendered. Referring to page 301 of the Paper Book (Volume – I) he submitted that independent auditor’s certificate given to BP Australia proves that services have been rendered by the AE and received by the assessee. Referring to page 212 to 235 of the Paper Book (Volume – I), he submitted that the invoices show that employee cost has been shared and taxes have been deducted by the assessee. Referring to page 240 to 300 of the Paper Book (Volume – I), he drew the attention of the Bench to the sample email correspondence. Referring to page 685 of the Paper Book (Volume – I), he drew the attention of the Bench to the reasons for availing services as indicated in the Management Cross Charge report. He submitted that BIPL has no team for internal audit and these services are performed by the AE. Referring to page 563 to 682 of the Paper Book (Volume – II), he drew the attention of the Bench to the detailed submission before the DRP including evidence for provision of services. He submitted that the services are not duplicative in nature and the Assessing Officer has incorrectly gone on cost benefit. Relying on the following decisions, he submitted that benefit from a transaction need not be proved :-
a. Knorr Bremse vs. ACIT, 380 ITR 307. b. E.I. DuPont India (P.) Ltd. vs. DCIT, (2016) 72 taxmann.com 215. c. Sony Ericson Mobile Communications India (P.) Ltd. vs. CIT, 374 ITR 118. d. CIT vs. Cushman and Wakefield India (P.) Ltd., 367 ITR 730. e. Dresser Rand India (P) Ltd. vs. Addl.CIT, (2011) 13 taxmann.com 82.
Referring to the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT vs. Max India reported in (2016) 75 taxmann.com 268, he submitted that the receipt of service is established on balance of probabilities and the agreement for services may be oral or written. He accordingly submitted that the above grounds raised by the assessee should be allowed.
So far as grounds no.14 and 15 are concerned, the same relate to action of the TPO/DRP in questioning the commercial expediency of the transactions entered into by the assessee.
Ld. counsel for the assessee referring to the decision in the case of EKL Appliances reported in (2012) 24 taxmann.com 199 submitted that it is well- established principle that the Department cannot question the commercial expediency of a transaction.
So far as ground no.13 is concerned, the same relates to the order of the DRP/TPO in relying on the BEPS report without considering the reports in their entirety and by ignoring binding provisions of the Act and decisions of the Tribunal.
Ld. counsel for the assessee submitted that the BEPS report, if read in entirety, clearly provides that centralized services, services on call as IGS ought to be considered for determining the arm’s length price and cannot be rejected as merely shareholder services. BEPS report in-fact supports the case of the assessee for determining arm’s length price using TNMM. He accordingly submitted that the grounds raised by the assessee should be allowed.
17.1 The remaining other grounds were not pressed by the ld. counsel for the assessee being general/argumentative/supportive in nature for which ld. DR has no objection. Accordingly, these grounds are dismissed as not pressed.
Ld. DR on the other hand strongly relied on the order of the Assessing Officer/TPO/DRP and submitted that the Revenue authorities have correctly appreciated the facts and passed the order by making an upward adjustment of Rs.4,49,25,556/- and, therefore, the same should be upheld. In his alternate contention, he submitted that he has no objection if the matter is restored to the file of the Assessing Officer/TPO for adjudication of the issues afresh in the light of the various decisions relied on by the ld. counsel for the assessee.
We have considered the rival arguments made by both the sides and perused the orders of the authorities below. We find the assessee in the instant case is engaged in the business of distribution of mobile handset and accessories. It also provides after sales services to its customers through its services centres. The assessee has availed certain Intra Group Services from its AE and in order to ascertain the arm’s length price of these transactions, the assessee benchmarked these transactions using the combined transaction approach considering TNMM as the most appropriate method. We find the Assessing Officer/TPO rejected the TNMM for the IGS and instead applied CUP method which has been upheld by the DRP. It is the submission of the ld. counsel for the assessee that the combined transaction approach is well accepted as per the provisions of section 92C(1) which speaks about ‘nature of transaction or class of transaction’. It is also his submission that the term ‘transaction’ itself is defined in Rule 10A(d) of the I.T. Rules, 1962 to include a number of ‘closely linked transactions’. It is also his argument that the finding of the Assessing Officer/TPO that the basis of separate analysis is ‘export commission, royalty and model fee’ is completely perverse since the assessee has not received any export commission, royalty or model fee. It is also his argument that the TNMM has been adopted for five transactions using the combined transaction approach as these activities are closely linked to the main business activity i.e. sale and distribution of handsets. It is also his submission that the Assessing Officer/TPO has not rebutted the basis adopted in the TP report for adopting TNMM and they failed to indicate the reasons for rejecting the TNMM as the most appropriate method. Further, they have been incorrectly applied the CUP method without bringing out any comparable on record. It is contrary to Rule 10B(2) of the I.T. Rules, 1962. Similarly, it is also his arguments that the assessee had filed voluminous documents to establish that the IGS were needed by the assessee and are not duplicative in nature. All those details filed before the TPO/DRP were completely ignored. It is also his argument that the Department cannot question the commercial expediency of the transactions. In our opinion and considering the totality of the facts of the case, the matter requires a fresh adjudication at the level of the Assessing Officer/TPO in the light of the various evidences produced before them and in the light of the decisions relied on by the ld. counsel for the assessee before us.
We, therefore, restore the entire issue to the file of the Assessing Officer/TPO with a direction to decide the issue afresh in accordance with law after giving due opportunity of being heard to the assessee. We hold and directly accordingly. The grounds raised by the assessee are accordingly allowed for statistical purposes.
In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open Court on this 04th day of December, 2017.