Loading judgment…
No AI summary yet for this case.
Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद� राजे� के अनुसार PER RAJENDRA, AM- Challenging the order,dated 31.12.2015,of the Assessing Officer(AO),passed u/s.143 (3)r.w.s.144C (13) of the Act,the assessee has filed various grounds of appeal.Assessee-company,engaged in the business of providing business support services to its parent company in the form of assisting in booking of shipments, freight collection, transportation of containers etc.,filed its return of income on declaring income of Rs.4,58,57,900 /-.The AO made a reference to the Transfer Pricing Officer(TPO)to determine the Arm’s length Price(ALP)of the international transaction,entered into by it with its Associated Enterprises (AEs),as per the provisions of Section 92 of the Act.Finally,he made an adjustment of Rs.68,56,53,420/-to the total income of the assessee for the service rendered under the head ‘business support services’.
2.During the course of hearing representatives of both the sides agreed that the identical issue has been decided by the Tribunal,while adjudicating the appeals for the AY.s.2008-09&2009-10(ITA/7771/Mum/2012,&ITA/1374/Mum/ 2014). We find that the Tribunal has deliberated upon the issue at length while deciding the appeals of the above AY.s.We would like to reproduce the relevant portion of the order of the Tribunal and same reads as under:
427/16(11-12)Hapag-Lloyd “These two appeals by the assessee are directed against the assessment orders passed u/s. 144C(13) of the Income tax Act, 1961 (the Act) in pursuant to the directions of the DRP u/s. 144C(5) for the assessment year 2008-09 and 2009-10 respectively.
For the assessment year 2008-09 the assessee has raised various grounds. However, the only issue arising for our consideration and adjudication is whether in the facts and circumstances of the case the AO/TPO/DRP has erred in making the adjustment of Rs.18.37 crores in respect of the international transaction pertaining to the transaction of business support services. 2.1 The assessee is a 100% subsidiary of Hapag Lloyd AG (HLAG) and is a captive unit engaged in providing business support services to its parent company. The assessee company assisted in booking shipments requirements required to be moved from one location to another. The assessee has entered into a shipping agency agreement with HLAG, according to which it was appointed as the agent for HLAG. The assessee was also authorized to appoint sub-agents with prior written approval of HLAG. As per the agreement the assessee is entitled to receive cost plus(+) 10%. The assessee has reported the international transactions, interalia, provision of business support services of Rs.39,63,61,566/-. The assessee selected TNMM as the most appropriate method and used OP/TC as PLI and work out the margin of the comparables at 8.78% in comparison to 10% of the assessee. Accordingly, the assessee claimed the price charged from the AE as arms-length. The TPO noted that the assessee had paid commission of Rs.17.93 crores. The assessee was asked to give the name of earlier agent who was managing the business of HLAG in India. The agents name was searched by the TPO from the internet being German Express Shipping Agency Pvt. Ltd. (GESA). The assessee was asked to file copy of agreement between GESA and HLAG. The assessee submitted that the same is not available with the assessee as there was a fire in which the documents were destroyed. The TPO issued summons u/s.131 of the Income tax Act to GESA, to file both the agreements. The copies of the agreements were filed. Consequently, the TPO issued a show-cause to the assessee as to why an internal CUP in the form of sub-agency between the assessee and GESA should not be applied for the purpose of determination of ALP. The assessee contended before the TPO that the sub-agency agreement cannot be applied as CUP as it was not the agreement between the GESA and HLAG. The TPO did not accept the assessee’s submission and adopted CUP as most appropriate method by considering the fact that before the appointment of assessee as an agent, 2
427/16(11-12)Hapag-Lloyd GESA was sole agent of whole territory of India and after sub agent agreement, sub- agent was performing exactly the same services to AG for the territory including India and Nepal but excluding the territory of the assessee. Accordingly the TPO proposed the adjustment of Rs.18,37,36,236/- on the basis of the ALP determined at Rs.38,28,51,634/- by applying CUP as most appropriate method.
The assessee filed objections before DRP and contended that CUP is not the most appropriate method as stringent comparability is required under this method. The agency agreement between GESA and HLAG is not appropriate CUP as it was already terminated on 31st December 2006. Similarly sub agency agreement between GESA and the assessee is not an appropriate CUP. It was contended that business decision cannot be questioned by the Income tax authorities. The DRP did not accept the contention of the assessee and confirmed the action of the AO/TPO. XXXXXXXXXXXX 6. We have considered the rival submissions as well as relevant material on record. Upto 31/12/2006 GESA was providing the services for booking shipments to HLAG under agency agreement of 1993. GESA was charging a certain percentage on the freight turnover as commission apart from fixed charges @ US$ 10 per inland box. Other fee is as per RBI guidelines as well a fee for consignment delivery and bill of lading. 6.1 On the other hand the assessee was appointed as agent w.e.f. 01/01/2007 and is remunerated for the services rendered to AE at cost plus 10% mark-up. The assessee was also authorized by the AE HLAG to appoint GESA as sub-agent for providing services for certain territories of India and the entire territory of Nepal. The sub-agent is remunerated on the same basis as it used to receive the commission under 1993 agreement. The assessee benchmarked its international transactions by adopting TNMM as most appropriate method. The TPO did not accept TNMM method and applied internal CUP being the price/commission received by GESA from HLAG under 1993 agreement, as well as under sub-agency agreement dated 27/02/2007 w.e.f. 01/01/2007. It is pertinent to note that after the termination of agreement between HLAG and GESA w.e.f. 31/12/2006, GESA was not providing services to HLAG, but under the sub agency agreement, the services are being provided to the assessee. The question arises whether the price charged for services by GESA to HLAG upto 31.12.2006 can be considered as internal CUP for the purpose of determination of ALP for the services provided by the assessee to AE during the FY 3
427/16(11-12)Hapag-Lloyd 2007-08 onwards. The TPO supported his action by referring Rule 10B(4) and took the old price to compare with the current years price. It appears that the TPO misunderstood the proviso to Rule 10B(4) of the Income tax Rules. In ordinary situation only current year/contemporaneous data can be used for comparing uncontrolled price with the controlled price. Only in the case of exceptional circumstances, the data relating to earlier years but not more than two years prior to the current year, can be used, if, such data reveals facts which can have an influence on the determination of arms-length-price in relation to the international transaction. Therefore, the two years prior data can be used along with the current year data. The situation under which the older data can be used is illustrated under proviso to Rule 10D(4) as under :- ” 10D(4) The information and documents specified under sub-rule (1) and (2), should, as far as possible, be contemporaneous and should exist latest by the specified date referred to in clause (iv) of section 92F: Provided that where an international transaction continue to have effect over more than one previous year, fresh documentation need not be maintained separately in respect of each previous year, unless there is any significant change in the nature of terms of the international transaction, in the assumptions made, or in any other factor which could influence the transfer price, and in the case of such significant change, fresh documentation as may be necessary under sub-rules (1) and (2) shall be maintained bring out the impact of the change on the pricing of the international transaction.” 6.1.1 Therefore, the use of earlier data is an exception and cannot be applied in exclusion of current year data. In other words, in the case of existence of exceptional circumstances the prior two years data along with current year data can be used. Once the GESA ceases to be agent of HLAG w.e.f. 31.12.2006, then in the absence of current/contemporary data / uncontrolled price, the price of prior year cannot be considered for determination of ALP in relation to international transaction entered in current year.
6.2 The another aspect of considering the said price between GESA and assessee as internal CUP is that it does not satisfy the basic ingredient of a transaction 4
427/16(11-12)Hapag-Lloyd between an unrelated party and associate enterprise of the assessee in the parity of the services provided by the assessee to the AE. United Nations Practical Manual on Transfer Pricing for Developing Countries has discussed the comparable uncontrolled price (CUP) in para-6.2.1.1 as under :- “6.2.1.1 The comparable Uncontrolled Price (CUP) Method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. The CUP method may also sometimes be used to determine the arm’s length royalty for the use of an intangible asset. CUPs may be based on either “internal” comparable transactions or on “external” comparable transactions. Figure 6.1 below explains this distinction in the context of a particular case study. Figure 6.1 Comparable Uncontrolled Price Method 6.2.1 In the case of the assessee, GESA does not provide services to HLAG . Therefore, it cannot be considered as internal CUP. Moreover, the assessee is providing the services to the AE and receiving the remuneration and in turn getting part of the job done through sub agent GESA and remunerating it by paying the commission as per sub agency agreement. Out of the total services provided by the assessee a part is performed through sub-agent and the remaining is performed by the assessee itself. It is like export of goods partly manufactured by the assessee and 5
427/16(11-12)Hapag-Lloyd partly purchased from third party. However, purchase price of the goods exported cannot be applied as CUP for sale price charged to the AE. Accordingly considering the price received by GESA as CUP is contrary to the transfer pricing regulation. We do not rule out the CUP as most appropriate method for determination of ALP of international transaction in question. However, the comparable uncontrolled price must be a proper uncontrolled price in compliance of provisions of transfer pricing. 6.2.2 There is one more fallacy in the TPO’s order regarding bifurcating the international transactions into two segments for determining the ALP. The TPO accepted the price charged by the assessee in respect of services provided through sub-agency, but while computing the ALP it had ignored the CUP and took the price charged by the assessee as ALP. Further, the services provided by the assessee on its own were compared with CUP. Therefore, two separate ALP were determined by the TPO for the same service provided by the assessee to AE. Even if the CUP is adopted as most appropriate method ALP cannot be more than price received by GESA. Whereas the TPO has taken into consideration the price charged by the assessee with 10% mark-up. Hence, the computation of ALP is otherwise not based on correct uncontrolled price. 6.2.3 We may clarify that the international transaction in question should be considered as one and price received by the assessee in total has to be compared with the ALP. The assessee received the price for providing the service as per the agency agreement. Therefore, the service provided by the assessee to the AE are closely interlinked and price of one part is dependent on the price of the other part. Therefore, the entire services provided by the assessee has to be treated as one international transaction for the purpose of determining the ALP. 6.2.4 In view of the above discussion, as well as the facts and circumstances of the case, we set aside the issue to the record of TPO/AO, to decide the same afresh, by considering in the light of the above observation as well as the decision of this Tribunal in the case of UCB India Pvt. Ltd. vs. ACIT dated February 06, 2009 (2009-TII-02-ITAT-MUM-TP) & 429/Mum/2007 for assessment years 2002-03 and 2003-04(supra).
For the assessment year 2009-10 the assessee has raised the following grounds :- XXXXXXXXXX 7.1 Ground No.1 to 3 regarding transfer pricing adjustment. 6
427/16(11-12)Hapag-Lloyd 7.1.1 The issue involved in these grounds is identical and common to the issue involved in assessment year 2008-09. In view of our finding on this issue for the assessment year 2008-09 this issue is set aside to the record of AO/TPO for fresh consideration on the same terms.” 3.We further find that the Tribunal had followed the above decision,while adjudicating the appeal of the AY.2010-11(ITA/1134/Mum/2015,dtd.27.02. 2015).Considering the above,we are restoring back the matter to the file of the TPO/AO for fresh adjudication.He is directed to follow the direction appearing in the paragraph 6.2.4 of the order for the AY.2008-09.Effective ground of appeal is decided in favour of the assessee,in part.