COOK INDIA MEDICAL DEVICES PVT. LTD.,CHENNAI vs. JCIT (OSD),, CHENNAI

आदेश /O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

The assessee has filed the appeal against the order of the Assessing Officer passed under Section 143(3) r.w.s.144C(1) r.w.s.

92CA of the Act dated 29.01.2016 passed in pursuance to the directions of the DRP, Bangalore dated 06.06.2016.

2. The assessee has raised the sole substantive grounds:

3. The Ld. AO/TPO/DRP has erred, in laws and facts, by not considering the documentary evidences as submitted by the Appellant towards receipt of support services from its AEs i.e. Cook Asia Ltd., Hong Kong ("Cook Hong Kong"), William Cook Australia, Cook Medical Australia and Cook Pan Pacific Pty. Limited (collectively referred as "Cook Group Australia").

4. The Ld. AO/TPO/DRP has erred, in laws and facts, by considering the receipt of support services as "stewardship / duplicative services" in nature.

5. The Ld. AOIDRP has erred, in laws and facts, by considering the arm's length price ("ALP") of the support services as NIL.

6. The Ld. AOITPO/DRP has erred in laws and facts, by concluding that documentary evidences submitted for information technology and regional sales support and product management services pertain only to services rendered by Cook Hong Kong and not from Cook Group Australia.

General Grounds

The assessee company filed the Return of income on 17.12.2012 with total income of Rs.68,06,580/-. Subsequently the case was selected for scrutiny under CASS and notice u/s. 143(2) of the Act was issued. In compliance to the notice, the Ld. AR of the assessee appeared and submitted the details. The Ld. AO found that the assessee company having international transactions with its Associated Enterprises (AEs) and the matter was referred to the Transfer Pricing Officer (TPO). The Ld. TPO vide order dated 29.12.2015 has made downward adjustment towards the support services fees paid to AEs Rs.2,65,83,539/- and the Ld. AO passed draft assessment order. Aggrieved, the assessee has filed objections with the Dispute Resolution Panel (DRP) on 04.03.2016.

The DRP vide its order dated 06.06.2016 had eliminated certain payments made towards Information Technology services, Regional sales support & Project management services of Rs.63,299/- and Rs.38,25,188/-and the same was excluded from the total downward adjustment of Rs.2,65,83,539/- and directed the Ld. AO to make adjustment to the extent of Rs.2,26,95,052/-. The Ld. AO with these observations made addition of Transfer Pricing Adjustment of Rs.2,65,83,539/- to the Return of Income and passed order u/s. 143(3) r.w.s. 144C(1) r.w.s. 92CA of the Income Tax Act.

4. Aggrieved by the order of the Ld. AO passed in pursuance of the DRP, the assessee company has filed an appeal before the Tribunal. Before us, the Ld. AR submitted that the AO and the TPO are not justified in benchmarking of support services without appreciating the facts and further the assessing authorities have not considered the documentary evidence submitted in support of the services of M/s. Cook Asia Ltd., Hong Kong, William Cook Australia, Cook Medical Australia and Cook Pan Pacific Pty. Limited. The Ld. AR explained that the Ld. AO in pursuance to the directions of the DRP has erred in considering the support services at no value. The facts being the assessee company has applied the transaction net margin method (TNMM) as the most appropriate method in respect of international transactions, whereas the Ld. TPO has applied the Comparable Uncontrolled Price (CUP) method. The Ld. AR relied on the decisions of the co-ordinate bench of the Tribunal and emphasized that the CUP method cannot be applied as the assessee has made transaction net margin study and supported the submissions with the decisions as under: i) M/s. AB Mauri India Pvt. Ltd. v. ACIT dated 05.05.2016, ii)ITA No.1032/Mds/2014, DCIT v. M/s. Flakt (India) Ltd dated 09.06.2016, iii) ITA No.1433/Del/2009, Abhishek Auto Industries Ltd v. DCIT dated 12.11.2010 and iv) Ranbaxy Laboratories Ltd v. ACIT, 68 taxmann.com 322 (Delhi-Trib). Further The Ld. AR relied on the co-ordinate bench decision of similar issue in M/s.Control Techniques India Pvt. Ltd. v. JCIT in ITA No.2575/Mds/2016 dated 16.12.2016 and prayed for deletion of addition and allow the appeal.

Contra, the Ld. DR relied on the order of the DRP and explained the facts in respect of receipt of services and submitted that the assessee company has made payment for support services to M/s. Cook Australia Group and Cook, Hong Kong and was bench marked and adopted TNM method as the most appropriate method for both the Associated Enterprises as the tested parties. The DRP has pegged down the addition from Rs.2.65 crores to Rs.2.25 crores. The Ld. DR explained that the TPO has extracted the rule of most appropriate method to be chosen keeping in mind the factors which have been prescribed in the rules. The assessee cannot chose a method which does not provide the most reliable measure of Arms Length Price in relation to the international transaction and the method adopted by the assessee being TNM method cannot prove that services have been received and it certainly does not put a value to them. Further comparables may not have made payments for the receipt of said services and the TNM method does not measure the ALP of international transactions for receipt of services and whereas the Ld. TPO has rightly adopted the CUP method as the most appropriate method for determining the ALP of service fees paid and the different support services filed by the assessee are in the nature of Human Resource, Marketing Services, Finance Services, IT Services and Regional Sales Support and Project Management Services. The Ld. DR filed submissions supporting his views and prayed for dismissal of the appeal.

on record and judicial decisions relied by the assessee. The sole crux of the issue being the downward adjustment made by the Ld.

TPO in respect of the international transactions, we find the assessee had international transactions with Associated

Enterprises in respect of receipt of services with M/s. Cook,

Australia and M/s. Cook Asia Limited, Hong Kong and the Ld. TPO has considered the TP study of the assessee and worked out the margins, where the assessee is in the import of medical equipments and the assessee has adopted TNM method as a most appropriate method and certain filters were applied and the assessee has provided five comparables and their adjusted arithmetic mean PLI(OP/OI) which worked out to 0.09% as against the PLI of 3.49% and the Ld. TPO has dealt exclusively on the Support Service Fees, Choice of tested party and came to a conclusion that the most appropriate method to be applied is CUP method and made downward adjustment of Rs.2,65,83,539/- which was subsequently pegged down by the DRP on submission of evidence to the extent of Rs.2,26,95,052/-. The Ld. DR has submitted that the assessee company could not substantiate 85% of its expenditure and relied on the order of the DRP. The DRP find the Ld. TPO has examined the various documents,

Agreements produced by the assessee to justify its claim for having received services from Associated Enterprises, whereas it was observed that many of the services were duplicative in nature as the assessee failed to explain how payments were made to its employees as well as its Associated Enterprises. The DRP emphasized that the assessee company has failed to produce any documents to substantiate the claims and the Ld. TPO has consider the information and observed that the assessee has not cooperated in submitting the correct data. The contention of the Ld.TPO that services availed, but actually not rendered and the payments were made by the assessee at ALP and the assessee has not utilized the opportunity provided before the Ld. TPO.

Further the DRP substantiated that the assessee in the proceedings could not support their claims whether services are actually received or that the services were not in the nature of steward services and the contention of the assessee to substantiate the entire claim of expenditure will put the assessee undue in hardship. The Ld. DRP found that the assessee failed to substantiate its claim to the extent of Rs.2,26,95,052/- which being in relation to the Associated Enterprises services. We found that the assessee though submitted the details, agreements, written submissions the DRP was not satisfied with the evidence and made a categorical finding that the assessee has to maintain sufficient records to prove its claim before Income-Tax authorities.

The submissions of the assessee that guidance was received through telephone calls and they were not documented, the Ld.

DRP after considering the information technology regional sales support and project management services, which are in the arm length, directed the Ld.TPO to exclude this expenditure from the downward adjustment. The Ld.AR submitted that the documents are genuine and the services have been received by the assessee and therefore transactions are in the nature of business. The Ld.AR relied on the order of co-ordinate bench in the case of DCIT v. Flakt (India) Ltd., (supra) dealt at para No.9 as follows:

“The Transfer Pricing Officer has not taken any pain to identify uncontrolled transaction between two independent entities. In the absence of any comparison of the transaction with transaction carried out in a uncontrolled market, this Tribunal is of the considered opinion that the Transfer Pricing Officer cannot independently come to a conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The matter may be totally different if the Transfer Pricing Officer was able to identify the uncontrolled transaction between the enterprises entering into such transaction which would materially affect the price in the open market. In this case, such an exercise was not made by the Transfer Pricing Officer. The Dispute Resolution Panel has, therefore, rightly found that the method adopted by the Transfer Pricing Officer for disallowing the claim of the assessee was not justified. As rightly observed by the Dispute Resolution Panel, the Transfer Pricing Officer has not brought on record the base on which he estimated the Arm's Length Price at 25%, when Rule 10B(c) provides for method of determining the Arm's Length Price. This Tribunal is of the considered opinion that estimation of the services rendered and costs for such services may be outside the scope of transfer pricing adjustment. Without identifying the comparable cases, this Tribunal is of the considered opinion that estimation of the disallowance without any base is not called for. Therefore, the Dispute Resolution Panel has rightly upheld the transfer pricing study made by the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.”

5.1 Similarly, on the disputed issue in the case of M/s. AB Mauri

India Pvt. Ltd. supra which has held at page 4 para 5 as under:

“We have considered the rival submissions on either side and perused the relevant material available on record. For making adjustment in transfer pricing matter, five methods prescribed under Rule 10B of Income-tax Rules, 1962 have to be followed. In the case before us, the Assessing

Officer has not followed any method. Though the assessee claimed that the Transaction Net Margin Method is the most appropriate method, the Transfer Pricing Officer has not discussed in her order with regard to appropriate method and she simply found that since there was no improvement in the revenue, the payment of management fees is not justified. This Tribunal is of the considered opinion that when the assessee claims that management fee was paid in respect of the services provided by the Associate Enterprise outside the country, the payment made by the assessee has to be compared with similarly placed companies in India and whether the payment made by the assessee is at arm’s length. The Transfer Pricing Officer and the Dispute Resolution Panel are expected to compare the payment with that of the comparable companies in India on the basis of method prescribed under Rule 10B. Unfortunately, both the Transfer Pricing Officer and the Dispute Resolution Panel have not taken such pain in comparing the payment made by the assessee with that of the comparable companies in India by applying provisions of Rule 10B. Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of the lower authorities are set aside and the issue of payment of management fee is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter to the Transfer Pricing Officer for reconsideration. The Transfer Pricing Officer shall compare the payment made by the assessee with that of payment made by comparable companies in India and point out whether the payment made by the assessee is really at arm’s length. The Transfer Pricing Officer shall examine the issue in the light of the method prescribed under Rule 10B for the purpose of determination of the Arm's Length Price.”

5.2 We are in consonance with the facts that the Associated

Enterprises rendered services and the payments have been made by the assessee company though assessee could not substantiate it due to various reasons on the claim, we find strength in the arguments of the Ld. AR, that these expenditure being genuine and incurred wholly and exclusively for the purpose of business and we are of the opinion that if the assessee produced the details of expenditure for availing the services from the Associated

Enterprises and prove the genuineness of transaction,. We found similar issue dealt by the co-ordinate bench of this Tribunal in the case of M/s. Control Techniques India Pvt. Ltd. v. JCIT on 16.12.2016 at page 5, para 4 & 5

“33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 1 OA(d) of the ITAT Rules defines ‘transaction’ as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. ft cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cafinot be considered and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the dzfference in the PU of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range.

been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits. ft also falls within the limits of payment of royalty in the auto mobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in ‘Ekia Appliances’ (supra) and in ‘Ericsson India Pvt. Ltd. vs. DCIT’, 2012-TII-48-ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm’s length principle or not. That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of the benefit test, is unsustainable in law.

5. Further, he drew our attention to case of CIT Vs. EKL APPLIANCES LTD.in [2012] 345 ITR 241 (Del) wherein the Hon’ble Delhi High Court had occasion to consider an issue of disallowance of royalty by TPO because the assessee in that case had been suffering losses; the Delhi High Court, while holding that so long as the expenditure or payment by assessee has been demonstrated to have been incurred or laid out for the purpose of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. Thus, according to the ld.A.R, the AO has no jurisdiction to nullify the transaction, when the expenditure was incurred for the purpose of business and operating margin of assessee higher than the arithmetic mean of the operating margin of the comparables. In principle, we agree with the argument of the ld.A.R. However, we find from the order of lower authorities that TPO wanted the assessee to show that services were actually rendered to the assessee and payment was made for the same, also it was noted by the DRP that the invoices submitted by the assessee pertaining to the fees paid by the assessee to its AE for registration of patents developed by AE in their own country with hardly anything to show as to how the assessee benefitted from the same in its business. Similarly, in relation to invoice for MIS, the same had been pertained to the year under consideration and assessee failed to substantiate its claim of service were actually received or that services are not in nature of stewardship services. Further, DRP observed that the TPO had discussed in detail the nature of various services, claimed to have been received the assessee from its A.E. Hence, the DRP directed the AO for disallowance of ₹78,57,058/-. In our opinion, if the assessee produces the particulars of actual expenditure for availing these services, then it is to be allowed. With this observation, we remit the issue to the file of AO for fresh consideration.”

5.3 We having considered the factual aspects, judicial decisions and also the facts of claim of expenditure by the assessee and cannot be overlooked and an opportunity may be provided to substantiate the claim supporting the details of expenditure in the nature of management fees paid to the Associated Enterprises. In the interest of justice, we provide an 16 opportunity to the assessee and remit the disputed issue to the file of the DRP which has considered these facts in its order and further direct the assessee to produce the claim of expenditure with supporting evidence and accordingly the assessee appeal is allowed for statistical purposes.

Order pronounced on the 30th March, 2017 at Chennai.