Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI I-1 BENCH, NEW DELHI
This appeal, filed by the assessee, is directed against the order dated 27th 1. January 2016 passed by the Assessing Officer, in the matter of assessment under section 143(3) r.w.s. 144C of the Income Tax Act, 1961, for the assessment year 2011-12.
Grievance of the assessee, in substance, is that, on the facts and in the circumstances of the case, the Assessing Officer was not justified in making an arm’s length price adjustment of Rs 8,40,95,610, in respect of the management
Assessment year: 2011-12 Page 2 of 7 support service that the assessee received from its associated enterprises (AE) abroad. For the sake of completeness, however, grounds of appeal, as set out in the memorandum of appeal, are as follows:
1 That on facts and in law, the order passed by the Additional Commissioner of Income Tax, Transfer Pricing Officer-2(2), New Delhi ('Learned TPO'), the final assessment order passed by the Deputy Commissioner of Income Tax, Circle 16(2), New Delhi ('Learned AO') pursuant to the directions of the Hon'ble Dispute Resolution Panel -1, New DRP ("Hon'ble DRP") are bad in law and void- ab-initio. 2 That on facts and in law, the Learned AO has erred in computing the total income of the Appellant at INR 84,184,840 as against the returned income of INR 89,230 by making an upward adjustment of INR 84,095,610 with respect to transfer pricing ("TP"). Transfer Pricing Grounds 3 That on facts of the case and in law, the DRP/TPO/AO have erred in making an addition of INR 84,095,610 to the total income of the Appellant on account of adjustment in Arm's Length Price ('ALP') of the international transactions pertaining to receipt of management support services ("impugned transaction"). 4 That on facts of the case and in law, the DRP/TPO/AO have erred in benchmarking the impugned transaction on an standalone basis and rejected the combined transaction approach adopted by the Appellant to benchmark the said impugned transaction wherein the Appellant considered the Transactional Net Margin Method ('TNMM') as the most appropriate method. 5 That DRP/TPO/AO have erred in determining the arm's length price of the impugned transaction as 'NIL' : a. by completely ignoring relevant facts and circumstances of case. b. by determining the Comparable Uncontrolled Price ("CUP") method as the most appropriate method to determine the arm's length price of the international transaction. c. by assuming that no benefits has been derived by the Appellant from the expenses reimbursed to the associated enterprises and arbitrarily determined the arm's length price of payment of intra group services to certain associated enterprises as 'Nil’. d. by contending that an independent service recipient would be willing to pay for a service only upon receipt of certain tangible benefit. e. by disregarding last year approach of accepting the TP analysis carried out by the Appellant for the same transactions in AY 2010-11
Assessment year: 2011-12 Page 3 of 7 f. in failing to understand that payment made to associated enterprises were duly recovered by the Assessee from the associated enterprises as a part of service fee for provision of IT enabled services alongwith a mark-up of 20 percent g. in failing to understand that the adjustment is contrary to the provisions of Section 92(3) of the Act and Circular 14 of 2001 as the same results in reduction of overall tax incidence in India. 6 The learned DRP has erred in holding that payment by the Appellant for such services is not wholly and exclusively incurred for the purposes of business and directing the learned AO to alternatively disallow such expenditure under section 37(1) of the Act arbitrarily and without providing any opportunity of being heard to the Appellant. 7 That on facts of the case and in law, the AO/DRP/TPO erred in not upholding detailed economic analysis carried out in appellant's TP study relating to various international transactions and rejecting/ substituting /adding new basis and process, without citing valid reasons. 8 The DRP/TPO/AO has erred both on facts and in law and has vitiated the principles of natural justice by a. not giving due cognizance to the detailed analysis and technical arguments submitted by the appellant in response to the show cause issued by the learned TPO; and b. issuing the final TP order after relying on completely new facts without giving the Assessee a proper opportunity of being heard 9 That on facts of the case and in law, the DRP/AO has erred in confirming that AO/TPO has discharged his statutory onus by establishing that the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have been satisfied before disregarding the arm's length price determined by the Appellant and proceeding to determine the arm's length price. 10 That on facts of the case and in law, the AO has grossly erred in initiating penalty proceedings under section 271(1)(c) of the Act in relation to transfer pricing adjustment. 11 That on the facts and circumstances of the case and in law, the learned AO has grossly erred in charging interest under section 234A, 234B, and section 234D of the Act. The above grounds of appeal are mutually exclusive & without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case.
Assessment year: 2011-12 Page 4 of 7
The issue in appeal lies in a rather narrow compass of material facts. The assessee before us is a company incorporated in India and is a wholly owned subsidiary of Mercer Mauritius Limited. The assesse is rendering various IT enabled services to its AEs. During the relevant previous year, the assessee entered into several international transactions with its AEs, including the receipt of management support services for which a consideration of Rs 8,40,95,610 was paid by the assessee. As we deal with determination of ALP of this service, we may note that the approach adopted by the assessee. The assessee has recovered operating cost plus 20% from its AEs, in respect of rendition of its IT enabled services, and the management support services in question also form part of its cost base as these are linked to its main transaction of rendition of IT enabled services. Therefore, for each rupee of expense, including in respect of these management support services, the assessee has recovered Re 1.20 from its AE. Coming back to the proceedings before the Transfer Pricing Officer, the TPO made the ALP adjustment, inter alia, for the IT enabled services by adopting an ALP margin of 29.53% as against margin of 20% adopted by the assessee. The adjustment so made out was quantified at Rs 13,24,13,508. The TPO also concluded that so far as the intra group services received by the assessee are concerned, the ALP value of the same was NIL. Accordingly, an ALP of Rs 8,40,95,610 was made in this respect as well. However, when the matter was carried before the DRP, while the DRP deleted the adjustment of Rs 13,24,13,508 on account of rendition of IT enabled services, the DRP confirmed the ALP adjustment of Rs 8,40,95,610 in respect of intra group services by upholding action of the TPO in treating ALP of these services at NIL. Interestingly, the DRP also seems to have suggested that the said expense will have to be removed from the cost base of the assessee inasmuch as the DRP observed that “the taxpayer’s objection that intragroup services having been reduced to zero should be reduced from the operational cost in computing OP/TC margin is valid, and the TPO is directed to compute the margin consistently with the treatment accorded to intragroup services” and added that “however, this is subject to the caveat that should the appellate authorities, subsequently, allow the intra group services as operational cost, the OP/OC margin need to be Assessment year: 2011-12 Page 5 of 7 revisited and consequential action taken by the TPO”. Accordingly, the Assessing Officer proceeded to make the impugned ALP adjustment of Rs 8,40,95,610 in respect of intra group services. For the reasons we will set out in a short while, it is not really necessary to go to the other facts of the case or to the developments leading to this appeal before us. Suffice to note that aggrieved by the ALP adjustment of Rs 8,40,95,610, the assessee is in appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
As a corollary to the ALP of the intra group services received by the assessee being treated as NIL, the price paid for these intra group services is required to be taken out from the computation of remuneration receivable in respect of IT enabled services rendered by the assessee. This is so for the reason that the pricing of IT enabled services is on the cost plus 20% basis, which has been upheld to be at arm’s length price by the DRP, and, therefore, anything removed from the cost will also have to be removed from the computation of amount receivable for the IT enabled services rendered by the assessee. Of course, as far as TPO is concerned, the action at that level was, from this perspective, could have been justifiable inasmuch as the ALP margin was taken at 29.53%, as against 20% taken by the assessee, and, therefore even after removing something from the cost base, due to increase in the mark-up rate, ALP of the services rendered could still be higher vis-à- vis the amount chargeable after including intra group services in the cost base. Once DRP deletes the adjustment in the mark-up rate on cost plus basis, such a possibility ceases to exist. Therefore, in the present circumstances, any ALP adjustment in the consideration for intra group service, which is includible in the cost base, paid by the assessee will actually result in erosion of tax base. The reduction in ALP of consideration for such intra group services by Rs 100 will also result in under- realization of revenue for IT enabled service by Rs 120 ( i.e. recovery of cost of Rs 100 plus profit mark up of Rs 20). In effect thus, the taxability in the hands of the assessee, in such a situation, will go up by Rs 100 as an ALP adjustment, but then income of the assessee, from IT enabled service revenue, will also stand reduced by Assessment year: 2011-12 Page 6 of 7 Rs 120. Section 92(3) is quite clear and categorical in this regard. It states that “(t)he provisions of this section shall not apply in a case where the computation of income under sub-section (1)…………has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into”. Section 92(1), in turn, states that “(a)ny income arising from an international transaction shall be computed having regard to the arm's length price”. What follows is thus that when, as a result of computation of income on the basis of arm’s length price, the income of the assessee is lowered or the loss is increased, the provisions of computation of income on the basis of arm’s length price do not come into play. Viewed in this perspective, when we examine the facts of the present case, we find that the determination of ALP of the intra group service at NIL value does lower the profits of the assessee inasmuch as the revenue of the assessee from the IT enabled services will reduce correspondingly, and infact 20% more than the adjustment- as a result of loss of mark up as well. The ALP adjustment of Rs 8,40,95,610 by the revenue authorities is, therefore, essentially required to be coupled with reduction of 10,09,14,732. That would erode our tax base, rather than augmenting it. The computation of income from international transactions on the basis of arm’s length price, in the given situation, would result in lowering the income of the assessee vis-à-vis the income “computed on the basis of entries made in the books of accounts in respect of the previous year in which the transactions were entered into”. In the light of this factual position coupled with the relief granted by the DRP on the ALP adjustment in the mark-up rate of the cost plus basis billing to the AE in respect of revenues for the IT enabled services, and in the light of the provisions of section 92(3), the transfer pricing provisions cannot be invoked in respect of intra group services, which admittedly form part of the cost base of the assessee, availed by the assessee. This is a case in which transfer pricing provisions cannot be applied because the application of ALP adjustment will indeed result in erosion of Indian tax base- as visualized by the scheme of Section 92(3) inasmuch for every rupee of ALP adjustment in intra group service, the revenue of the assessee, on the basis of application of arm’s length price, will stand
Assessment year: 2011-12 Page 7 of 7 reduced by one and one fifth times of the ALP adjustment. Section 92(3) does not permit computation of income on the basis of arm’s length price in such a situation; as a matter of fact, it prohibits application of arm’s length principle in such a situation. The plea of the assessee, as specifically taken up in ground no. 5 (g), is thus indeed well taken and merits our acceptance.
In view of the fact that we have upheld the above fundamental and preliminary ground of the assessee, we see no need to address ourselves to larger issue about determination of ALP in the case of intra group services said to have been availed by the assessee. That aspect of the matter, which is of much wider and general application, is academic on the facts of this case. We, therefore, need not deal with the same.