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Income Tax Appellate Tribunal, DELHI BENCHES : I : NEW DELHI
Before: SHRI R.S. SYAL & SHRI SUDHANSHU SRIVASTAV
per any of the prescribed methods, including the TNMM method. This method was used by the assessee as the most appropriate method, which has been disputed by the TPO. Sub-section (3) of section 92C provides that : ‘Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that--(a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2) ; or………….., the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him’. Rule 10B dealing with the determination of arm’s length price under section 92C provides through sub-rule (1) that for the purposes of sub-section (2) of section 92C, the arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method. The mechanism for determining ALP under TNMM has been enshrined in clause (e), which states that :
‘(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ;
(v) the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction.’
A conjoint reading of the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such international transaction is required to be determined at ALP; thirdly, the ALP in respect of such international transaction should be determined by one of the prescribed methods, which also includes the TNMM. Under this method, the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base, which is then compared with the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. The modus operandi of determining ALP of an international transaction under this method is that firstly, the profit rate realized or earned by the assessee from a transaction with its AE is determined (say, profit A), which is then compared with the rate of profit of comparable cases (say, profit B) so as to ascertain if profit A is at arm’s length vis-à-vis the profit B. If it is not, then, an addition on account of transfer pricing adjustment, subject to other provisions, is made in the hands of the assessee having regard to the difference between the rates of profit A and profit B. The rate of profit of comparable cases (profit B) may be computed from internally or externally comparable cases, depending upon the FAR analysis and the facts and circumstances of each case. Thus the calculation of profit B may undergo change with the varying set of comparable cases.
However, insofar as calculation of profit A is concerned, there cannot be any dispute as the same has to necessarily result only from the transaction between two or more associated enterprises, as is the mandate of sections 92 read with 92B in juxtaposition to rule 10B. The 16 natural corollary which, ergo, follows is that under no situation can the calculation of ‘profit A’ be substituted with anything other than the profit realized or earned by the enterprise from the international transaction, that is, a transaction between the associated enterprises. So, under the TNMM, it is the profit margin realized by the Indian assessee from the transaction with its foreign AE, which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise with the profit realized by the foreign AE for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. Scope of transfer pricing addition under the Indian taxation law is limited to transaction between the assessee and its foreign AE. We fail to comprehend as to how the profit realized by the foreign AE can be relevant, when the profit of the Indian enterprise is going to be ensured at ALP. The underlying object of the transfer pricing provisions is, inter alia, to see that there is no profit shifting from the Indian taxation base by means of the foreign AE charging more than comparable independent cases, which fact is ensured by determining ALP of the international 17 transaction. If foreign AE has in fact charged more, then its profit rate will shoot up and the corresponding profit of the Indian enterprise will be squeezed. In that situation, a comparison of the profit rate of the foreign AE will run contrary to the mandate of the provisions.
Whereas, we were required to determine if the profit charged by the foreign AE is not more than that charged by uncontrolled comparables by seeing the profit rate of the Indian enterprise, we will end up doing a futile exercise of rather viewing the profit rate of the foreign AE.
Suppose the foreign AE has charged more, then its profit rate will turn out to be higher, which when compared with the lower rate of profit margin of foreign comparables, will show the transaction at ALP, calling for no transfer pricing adjustment. This exercise is not only off the mark, but runs counter to the rule and spirit of the transfer pricing provisions. Essence of the matter is that it is the profit margin of the Indian enterprise and not that of the foreign AE, which should be compared with the comparables to see if any increase in the total income of the enterprise chargeable to tax in India, is warranted on account of transfer pricing adjustment. The contention of the ld. AR for considering 18 the profit of the foreign AE as ‘profit A’ for the purposes of comparison with profit of comparables, being ‘profit B’, to determine the ALP of transaction between the assessee and its foreign AE, misses the wood from the tree by making the substantive section 92 otiose and the definition of ‘international transaction’ u/s 92B and rule 10B redundant.
This is patently an unacceptable proposition having no sanction under the Indian transfer pricing law. The requirement under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to in the manner as prescribed.
The Hon’ble jurisdictional High Court in ChrysCapital Investment Advisors (India) P. Ltd. VS. DCIT (2015) 376 ITR 183 (Del) has held that : `Thus, the Courts are primarily bound by the law on the subject in India; if the law is clear and unambiguous, there is no question of resorting to extrinsic sources. The only rider is that if the terms of such conventions or treaties are similar to the law applicable in India, courts may consider precedents in that regard; however those are only of persuasive value’. In reaching this conclusion, the Hon’ble High Court took note of its earlier judgment in CIT VS. Mentor Graphics (Noida)
Pvt. Ltd. (2013) 354 ITR 586 (Delhi), wherein it has been laid down that : `In the present case, there are specific provisions of sub- rules (2) and (3) of Rule 10B of the said Rules as also of the first proviso to section 92C(2) of the said Act which apply. Therefore, the question of applying OECD guidelines does not arise at all.’ These judgments delineate that the provisions of the Act are supreme and hence should not be compromised.
Coming back to the context, we find that the obligation under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly determined as stipulated. The contention, that the foreign AE be considered as a tested party and then foreign companies be considered as comparable for determining the ALP of the international transaction, having no statutory sanction, is sans merit and hence jettisoned.
To sum up, we hold that the methodology adopted by the assessee for computation of ALP in respect of its international transactions of intra-group services by choosing foreign AE as a tested party is completely unfounded and deserves to be and is hereby rejected in entirety.
Notwithstanding the above legal position and to provide completeness to our order, we will also deal with the argument made by the ld. AR in the form in which it was put forth before us. He submitted that the transaction of foreign AE is least complex as the data of foreign comparables companies is accurate for comparison which can be used with minimal adjustments. On a pointed query, the ld. AR took us through page 360 of the paper book, which is a part of its transfer pricing report, indicating that the foreign AE charged mark-up between 3.70% to 11% depending upon the nature of services. On a further query, he took us through page 385 of the paper book showing a list of foreign companies chosen by the assessee as comparable for the international transaction of intra group services. There is a chart containing name of 20 companies with the data given for the year 2007 and ROTC at varying percentages with average of 13.23%, as under : -
S.No. Company Year ROTC 1. Accenture Ltd. 2007 14.02% 2. Advisory Board Co. 2007 26.48% 3. CBIZ Inc. 2007 8.58% 4. Corporate Executive BRD Co. 2007 26.63% 5. CRA International Inc 2007 14.10% 6. Diamond Management & Technl 2007 11.24% 7. Duff & Phelps Corp 2007 0.64% 8. Franklin Cnvey Co. 2007 2.17% 9. FTI Consulting Inc. 2007 22.97% 10. Hackett Group Inc. 2007 3.74% 11. Huron Consulting Group Inc. 2007 18.04% 12. ICF International Inc 2007 10.74% 13. Inforte Corp 2007 1.85% 14. LECG Corp 2007 9.67% 15. Navigant Consulting Inc. 2007 12.48% 16. Resources Connection Inc. 2007 13.38% 17. Sierra Systems Group Inc. 2007 6.45% 18. SM & A Corp. 2007 21.56% 19. Thomas Group Inc. 2007 23.22% 20 Watson Wyatt Worldwide Inc 2007 16.61% Mean 13.23%
Page 384 of the paper book discusses about the screening of companies. It is mentioned on this page that the companies providing dissimilar services were rejected and 20 companies were identified as providing comparable services. Next para of the transfer pricing study report reads as under :- 22
“Further, while performing the comparable searches for routine administrative and IT services, we looked for companies that could be considered comparable to the consulting services provided by the providing entities. These companies may not have appeared in the initial set for consulting services comparable search. This is because these companies may be classified under SIC codes that were not considered comparable for the consulting services search. However, we found no such companies.”
On going through the mechanism for screening of foreign companies adopted by the assessee as comparable, it clearly emerges that the assessee, inter alia, received routine administrative and IT services, but could not find any comparable and, hence, comparables for such services remained altogether absent. The above extracted para completely belies the ld. AR’s contention about the availability of reliable data of foreign companies, inasmuch as there is no company providing routine administrative and IT services, as were also availed by the assessee from its AE, in the finally selected list of companies.
This manifests that the foreign companies considered as comparable by the assessee are lacking comparability. It is further noticed that the data taken for the 20 companies chosen by the assessee is for the year 2007, whereas we are dealing with the assessment year 2009-10. Further, the ld. AR failed to point out as to how ROTC of these 20 companies was worked out with the mean of 13.23%. Thus, it is evident that apart from making a contention that the foreign AE should be considered as a tested party because of the least complex transaction, there is no material to substantiate the same as the data chosen by the assessee of 20 companies does not conform to the comparability of the intra group services received by the assessee and this data is not reliable and accurate for comparison as discussed above. It is, therefore, palpable that the contention raised by the ld. AR in this regard, for whatever merit it may have, fails even on his own touchstone.
In the ultimate analysis, we hold that the argument of the ld. AR for selection of foreign AE as a tested party is neither legally sustainable nor acceptable on the yardstick of his own contention. We, therefore, direct that the assessee itself should be considered as a tested party.
The next issue is determination of the ALP of such transactions. In the light of the foregoing discussion it is manifest that the view point of the AO/TPO that the assessee did not receive any services or these were not required or were duplicate in nature and hence the ALP of the international transactions be taken as Nil, cannot be approved. We have held above that the assessee did receive the intra group services from its foreign AEs. Ex consequenti, the working of Nil ALP by the TPO/AO becomes meaningless and is hereby set aside. We have also held supra that the AO/TPO have rightly held that the assessee should be considered as tested party. In the backdrop of such a conclusion, the working of the ALP by the assessee, based on foreign AE as a tested party and foreign companies as comparable, is also vitiated. Under such circumstances, the only course which remains is to direct the TPO/AO to recompute the ALP of the international transaction in terms of the discussion made above.
At this juncture, we consider it appropriate to consider the ratio of the judgment in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014)
367 ITR 730 (Del), wherein it has been held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. In that case, it was observed that the e-mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt with specific interaction and related to benefits obtained by assessee, providing a sufficient basis to hold that benefit accrued to assessee. As the details of specific activities for which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee were not considered, the Hon'ble High Court remanded the matter to file of concerned AO for an ALP assessment by TPO, followed by AO's assessment order in accordance with law considering the deductibility or otherwise as per section 37(1) of the Act.
When we advert to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment equal to the stated value of transaction with Nil ALP by holding that no benefit etc. was received by the assessee because of the intra-group services received by it and hence no payment on this account was warranted. The AO in his draft order has taken ALP of this international transaction at Nil on the basis of recommendation of the TPO without carrying out any independent investigation as to the deductibility or otherwise of such payment in terms of section 37(1) of the Act. This addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi in Cushman & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of the international transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee and the AO made the addition without examining the applicability of section 37(1) of the Act, we find the actions of the AO/TPO run in contradiction to the ratio laid down in Cushman & Wakefield (supra).
Respectfully following the precedent, we set aside the impugned order and remit the matter to the file of AO/TPO for deciding this issue within the broader parameters laid down by the Hon’ble jurisdictional High 27 Court in the case of Cushman & Wakefield (India) (P.) Ltd.(supra). In doing the exercise of determination of the ALP, the TPO/AO, having due regard to the discussion made above, will first adopt the assessee as tested party and then decide about the most appropriate method after considering the availability of the relevant data. Needless to say, the assessee will be allowed a reasonable opportunity of being heard.
The next issue raised in this appeal is against the disallowance of Rs.24,81,93,879/- made by the AO by denying depreciation in respect of vehicles given on lease. Succinctly, the facts of the case are that the assessee is a non-banking finance company engaged in the business of consumer and auto finance. The AO during the draft proceedings noticed that like preceding years the assessee claimed depreciation on leased out vehicles. On being called upon to explain as to why depreciation on the leased vehicles be not disallowed as the leased transactions were, in fact, financial transactions, the assessee relied on the judgment of the Hon’ble Supreme Court in the case of ICDS Ltd. vs. CIT (2013) 350 ITR 527 (SC) to contend that it would be entitled to claim depreciation. The AO perused the relevant clauses of lease agreement entered into by the assessee with lessors and found that the vehicles were directly delivered to the lessees who were bearing the insurance and holding warranty and also retaining the right to the exclusion of even the lessor. Repairs were to be carried out at the sole expense of the lessee. Though the sale invoices were raised in the name of the assessee-lessor, the AO held that in substance it was a case of finance lease. After considering certain judgments and following the view taken by him in preceding years, the AO disallowed the claim of depreciation on leased cars amounting to Rs.24.81 crore. The assessee also remained unsuccessful before the Dispute Resolution Panel (DRP) which observed that the assessee failed to establish that depreciation was not claimed by the lessees on the vehicles leased to them and the assessee was evasive on this account and did not disclose the truthful picture despite the fact that various lessees were the assessee’s related companies. In reaching this conclusion, the DRP also took into consideration the observations made by the Tribunal in its order passed in the assessee’s own case for the AYs 2001-02 and 2002-03, in which 29 the matter was remitted to the file of the AO for deciding this issue afresh, after taking cognizance of the fact of claim of depreciation by the lessees and difference in covenants to the agreement in the case of the tax payer and ICDS Ltd. The AO made the disallowance vide the impugned order. The assessee is aggrieved against the disallowance of depreciation.
We have heard the rival submissions and perused the relevant material on record. It is noticed that this issue came up for consideration before the Tribunal for the first time in relation to the assessment years 2000-01 and 2002-03. Vide its order dated 21.6.2013, a copy of which is available on page 2883 onwards of the paper book, the Tribunal considered the contention of the assessee about the applicability of the judgment of the Hon’ble Supreme Court in the case of ICDS Ltd. (supra) and held in para 8.2: “that the covenants are not identical to the agreement as was under consideration in ICDS Ltd. by Hon’ble Supreme Court. Further, we find that Hon’ble Supreme Court also took into consideration the fact recorded by the Tribunal that the lessee had not claimed any depreciation which finding is not recorded by AO in the present case”. It was, therefore, considered: “necessary that the terms of lease agreement be examined afresh in the light of the decision of the Hon’ble Supreme Court and also a specific finding is recorded by AO regarding claim of depreciation by lessees”. Eventually, the issue was restored to the file of AO for deciding it afresh. The assessee filed miscellaneous application against the order passed by the Tribunal.
Vide a detailed order dated 13.1.2014 passed u/s 254(2) in MA No.81 & 82/Del/2013, a copy of which is available at page 2989 onwards, the Tribunal, rejected the assessee’s contention that the issue should have been directly decided in the assessee’s favour instead of restoration to the AO for examining the claim of depreciation in the hands of the lessees. After the dismissal of the miscellaneous application, the assessee approached the Hon’ble Delhi High Court challenging the order passed by the Tribunal u/s 254(1) for the AYs 2000-01 and 2002-03. It was urged before the Hon’ble Delhi High Court that there was nothing on record to show that the Revenue had established whether the lessee had claimed higher depreciation or not and, hence, the remand order was 31 erroneous. The Hon’ble Delhi High Court vide its judgment dated 24.2.2014 in a copy of which is available at page 2198 of the paper book, dismissed the assessee’s contention by holding that the ITAT has eventually remanded the question whether the benefit of depreciation is permissible in law. The contention of the ld. AR about the finding given by the Tribunal in relation to the decision in ICDS Ltd. was also left open to be taken up before the AO in the case of remand proceedings. That is how, the proceedings for the A.Ys. 2000-01 and 2002-03 attained finality. Once again, similar issue came up for consideration before the Tribunal in the assessee’s own case for the A.Ys. 2006-07, 2007-08 and 2008-09. Vide its order dated 2.5.2016, the Tribunal restored the matter to the file of AO for denovo decision in the light of the judgment of the Hon’ble Supreme Court in the case of ICDS Ltd. (supra). In view of the decisions of the Tribunal for both the sets of the years, namely, the AYs 2000-01 and 2002-03 por una parte and the A.Ys. 2006-07 and 2008-09 por otra parte, it is clear that the issue of depreciation of leased vehicles requires restoration to the file of AO.
However, the detailed directions given by the Tribunal for examination 32 in its order for the A.Ys. 2000-01 and 2002-03 should be scrupulously followed by the AO as the same have been upheld by the Hon’ble Delhi High Court. This ground is, therefore, allowed for statistical purposes.
The next ground is against the addition of Rs.21,58,87,262/- made by the AO treating interest on sticky loans as income of the assessee.
The factual matrix of this ground is that the assessee, like preceding years, had not offered income amounting to Rs.21.58 crore on account of interest accrued on sticky loans and advances. Following the view taken in earlier years, the AO held such interest as chargeable to tax.
The assessee remained unsuccessful before the DRP and eventually the AO made addition for the said sum in the final order. The assessee is aggrieved against this addition.
We have heard the rival submissions and perused the relevant material available on record. It is noticed that this issue came up for consideration before the Tribunal in its order for the A.Ys. 2000-01 and 2002-03. Following the decision of the Hon’ble Supreme Court in the case of UCO Bank vs. CIT (1999) 237 ITR 889 (SC), the Tribunal held that interest on sticky loans and advances could not be charged to tax.
Similar view has been reiterated by the Tribunal in its later decision dated 2.5.2016 (supra) for the immediately preceding three years. In the absence of any distinguishing feature qua the facts for the instant year and the earlier years having been brought to our notice by the ld. DR, respectfully following the precedents, we hold that interest on sticky loans amounting to Rs.21.58 crore and odd cannot be charged to tax.
This ground is, therefore, allowed.
In the result, the appeal is partly allowed.
The order pronounced in the open court on 08.07.2016.