DCIT, CHENNAI vs. FLAKT (INDIA) LTD., CHENNAI

आदेश /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER:

This appeal of the Revenue is directed against the order of

the order of the Assessing Officer, consequent to the direction of the

Dispute Resolution Panel, Chennai, dated 20.12.2013 and pertains

to assessment year 2009-10.

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submitted that the assessee is engaged in the business of

manufacturing and sale of industrial fans. Flakt Woods

(Luxembourg) is the holding company of the assessee-company.

The ultimate holding company of the group is Stromboli Investments

SAS. The assessee paid management service fee to its Associate

Enterprise. The Transfer Pricing Officer acknowledged the services

rendered by the Associate Enterprise to the assessee-company.

However, he did not approve the Transaction Net Margin Method as

most appropriate method for the purpose of transfer pricing

adjustment. The Transfer Pricing Officer found that the volume and

quality of service are disproportionate to the payment made by the

assessee. The Transfer Pricing Officer further found that the

management fee paid by the assessee, consisting of several sub-

classification, which needs to be analysed item-wise for

determination of arm's length price, which method involves study of

technical services received by the assessee and also analysis

whether such services demand huge payment. After considering

the reply given by the assessee to show cause notice issued, the

Transfer Pricing Officer found that the CUP method may the most

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appropriate method for making transfer pricing adjustment in this

case. According to the Ld. D.R., the Transfer Pricing Officer has also found that as per OECD Guidelines, in order to arrive at most appropriate fair market value of the services received by the

assessee, the transaction has to be examined independently and individually. After considering the quality of the services rendered and placing reliance on the decision of Bangalore Bench of this

Tribunal in Gemplus India Pvt. Ltd. v. ACIT in I.T.A. No.352/Bang/09, the Transfer Pricing Officer found that only 25% of total amount paid towards management fee could be allowed. Accordingly, the Ld. D.R. submitted that the Transfer Pricing Officer found a sum of `2,05,11,061/- was to be disallowed and accordingly

a downward adjustment of `6,15,33,183/- was made.

when the matter was referred to the Dispute Resolution Panel, the Dispute Resolution Panel found that though theoretically Transaction Net Margin Method was the most appropriate method,

but, practically adoption of CUP method would be most appropriate. According to the Ld. D.R., when the DRP found that CUP method would be the most appropriate practical method for making transfer

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pricing adjustment, ought to have adopted CUP method for

determination of arm's length price. The Ld. D.R. further pointed out

that an inter group activity may be performed relating to group

members even though those group members do not need activity /

service. According to the Ld. D.R., the Transfer Pricing Officer has

rightly disallowed 25% of the payment. The Ld. D.R. has also

placed her reliance on the Delhi Bench of this Tribunal in Knorr

Bremse India Ltd. (56 SOT 349).

the assessee, submitted that the services rendered by the

Associate Enterprise to the assessee-company is not in dispute. In

fact, this was accepted by the Transfer Pricing Officer and the

Dispute Resolution Panel. The only dispute is with regard to

adoption of most appropriate method. The assessee adopted

Transaction Net Margin Method as most appropriate method.

However, the Transfer Pricing Officer found that CUP method can

be the most appropriate method. The Transfer Pricing Officer,

according to the Ld. representative, after analysing the case,

estimated the cost of the management service at 25% of the cost

paid by the assessee. This estimation of Transfer Pricing Officer

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was found to be improper by the Dispute Resolution Panel.

According to the Ld. representative, determination of Arm's Length

Price should be based on comparison with comparable uncontrolled

price. The value of the service rendered by Associate Enterprise

should be determined based on comparison of comparable services

and there is no question of estimation of the value. The Transfer

Pricing Officer has not made clear how he was able to estimate the

management service fee at 25% of the claim made by the

assessee. According to the Ld. representative, estimation is not

permitted while making transfer pricing adjustment. Therefore, the

application of CUP method without comparing the services of

comparable companies cannot be adopted. According to the Ld.

representative, the Dispute Resolution Panel has rightly found that

the management service fee cannot be estimated for the purpose of

making transfer pricing adjustment.

perused the relevant material available on record. Rule 10B of

Income-tax Rules, 1962 provides for method of determining the

arm's length price under Section 92C of the Income-tax Act, 1961

(in short 'the Act'). The assessee has adopted Transaction Net

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Margin Method as most appropriate method for the purpose of

transfer pricing adjustment. For the purpose of Transaction Net

Margin Method, the net profit margin realized by the enterprises

from international transaction entered with Associate Enterprise, is

computed in relation to costs incurred or sales effected or assets

employed or to be employed by the enterprises or having regard to

any other relative base, has to be taken into consideration.

Therefore, for the purpose of Transaction Net Margin Method, the

net profit margin realized by the enterprises from an international

transaction has to be taken into account to arrive at arm's length

price as provided in Rule 10B(c).

or paid for property transferred or services provided in a comparable

uncontrolled transaction or a number of such transactions identified

has to be compared with the price paid by the assessee for the

services rendered by the Associate Enterprise. Such a price is

adjusted to account for differences, if any, between international

transaction and comparable uncontrolled transaction or between the

enterprises entering into such transactions which will materially

affect the price in the open market. The adjusted price so arrived

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shall be taken to be an arm's length price in respect of the services

provided in the international transactions. Therefore, it is obvious

that for the purpose of CUP method, the services received by the

assessee have to be compared with similar services received in

India by the tested parties in an uncontrolled transaction. If there is

any difference between the two, the adjusted price arrived has to be

taken into consideration for the purpose of determining the arm's

length price.

profit margin realized by the enterprise or by an unrelated enterprise

in an uncontrolled transaction has to be adjusted to take into

account the differences, if any, between the international transaction

and the comparable uncontrolled transaction, which could materially

affect the amount of net profit margin. Therefore, in both the cases,

the comparison has to be made with uncontrolled transaction

identified with regard to similar services rendered for the purpose of

transfer pricing adjustment. In the case of CUP method, the price

paid by the assessee has to be compared with other comparable

companies entering into such transaction. Therefore, identification

of the comparable companies who are transacting in the

comparable uncontrolled transaction has to be taken into

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consideration for the purpose of determination of the most

appropriate method. In the case before us, for the purpose of

making transfer pricing adjustment by adopting CUP method, the

Transfer Pricing Officer has not taken any pain for identifying the

comparable uncontrolled transaction. Without identifying the

comparable uncontrolled transaction, the Transfer Pricing Officer

simply found that the quality and volume of the services received by

the assessee would not commensurate with the payment made by

the assessee. For making this observation, the Transfer Pricing

Officer placed his reliance on the decision of Bangalore Bench of

this Tribunal in Gemplus India Pvt. Ltd. (supra).

Bench of this Tribunal in Gemplus India Pvt. Ltd. (supra). The

Bangalore Bench, after examining the agreement between the

parties, found that the assessee has not proved any commensurate

benefits against the payment of service charges to the Associate

Enterprise. In the case before us, the Transfer Pricing Officer called

for the details relating to services rendered by the Associate

Enterprise item-wise along with costs incurred by the Associate

Enterprise. Without examining further the services rendered by the

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Associate Enterprise, the Transfer Pricing Officer has simply

observed that the services rendered are advice and discussion in

nature, therefore, volume and quality of services are

disproportionate to the payment made by the assessee. It is not

known how the Transfer Pricing Officer came to know that the

volume and quality of services received by the assessee was

disproportionate to its payment.

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

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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.

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आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. DIT (International Taxation), Chennai 4. �वभागीय ��त�न�ध/DR 5. गाड� फाईल/GF.