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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
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.
Smt. Vijayalakshmi, the Ld. Departmental Representative, 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 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 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.
The Ld. Departmental Representative further submitted that 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 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).
On the contrary, Shri Kapil Hirani, the Ld. representative for 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 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.
We have considered the rival submissions on either side and 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 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).
Whereas, for the purpose of CUP method, the price charged 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 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.
In the case of Transaction Net Margin Method also, the net 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 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).
We have carefully gone through the decision of Bangalore 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 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.
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.