Income Tax Appellate Tribunal - Chennai
Gates Unitta India Company Private ... vs Ito Corporate Ward 2(4), Chennai on 6 April, 2018
आयकर अपील
य अ धकरण, 'डी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH, CHENNAI
ी एन.आर.एस. गणेशन, या यक सद य एवं
ी अ ाहम पी.जॉज&, लेखा सद य केसम)
BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
आयकर अपील सं./ITA No.2745/Chny/2017
नधा&रण वष& / Assessment Year : 2013-14
M/s Gates Unitta India Company
Private Limited, The Income Tax Officer,
F-19, SIPCOT Industrial Park, v. Corporate Ward - 2(4),
Pondur A, Sriperambudur, Chennai - 600 034.
Kanchipuram - 602 105.
PAN : AABCG 7107 J
(अपीलाथ./Appellant) (/0यथ./Respondent)
अपीलाथ. क1 ओर से/Appellant by : Sh. B. Ramakrishnan, CA
/0यथ. क1 ओर से/Respondent by : Sh. Vijay Kumar Punna, Standing Counsel
सन
ु वाई क1 तार
ख/Date of Hearing : 07.03.2018
घोषणा क1 तार
ख/Date of Pronouncement : 06.04.2018
आदे श /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Assessing Officer dated 28.09.2017, consequent to the direction of Dispute Resolution Panel dated 22.08.2017, for the assessment year 2013-14.
2 I.T.A. No.2745/Chny/17
2. The issue arises for consideration is determination of arm's length price in relation to management service fee. The assessee has taken one more ground with regard to reversal of service tax and delayed payment of R&D cess. Moreover, the assessee is also challenging the levy of interest under Section 234A and 234B of the Income-tax Act, 1961 (in short 'the Act').
3. Sh. B. Ramakrishnan, the Ld. representative for the assessee, submitted that the DRP made downward adjustment in respect of international transaction relating to management service fee holding that the arm's length price of the management service fee paid to Associated Enterprise to be NIL. According to the Ld. representative, when the services rendered by the Associated Enterprise were supported by invoices, the Transfer Pricing Officer and the Dispute Resolution Panel are not justified in determining the arm's length price to NIL. According to the Ld. representative, the assessee adopted Transaction Net Margin Method as most appropriate method. The Profit Level Indicator of the assessee is much higher than the comparable companies selected by the assessee. Therefore, according to the Ld. representative, the Dispute Resolution Panel is not justified in determining the arm's length price at NIL.
4. Sh. B. Ramakrishnan, the Ld. representative for the assessee, further submitted that the Dispute Resolution Panel adopted Comparable 3 I.T.A. No.2745/Chny/17 Uncontrolled Price method as most appropriate method. According to the Ld. representative, the services rendered by Associated Enterprise are in the nature of sourcing, procurement, quality control, identification of new market, etc. The Associated Enterprise provided services to other entities as well. According to the Ld. representative, the Transfer Pricing Officer rejected the entity level approach adopted by the assessee under Transaction Net Margin Method and considered Comparable Uncontrolled Price method as most appropriate method for determination of arm's length price for management services rendered by the Associated Enterprise. While selecting Comparable Uncontrolled Price as most appropriate method, the TPO as well as the DRP have not selected or compared any comparable cases. According to the Ld. representative, without any comparable cases, the DRP cannot make any adjustment in the arm's length price determined by the assessee.
5. Sh. B. Ramakrishnan, the Ld. representative for the assessee, further submitted that an additional ground was also raised by the assessee before this Tribunal. Referring to the additional ground, the Ld. representative submitted that the benefit test is not a pre-condition to hold that the transaction is at arm's length price. According to the Ld. representative, the TPO and the DRP exceeded their jurisdiction to determine the commercial expediency of the assessee while availing the services from Associated Enterprise. According to the Ld. 4 I.T.A. No.2745/Chny/17 representative, it is for the assessee to decide which service has to be availed from which entity. If the additional ground of the appeal is decided, according to the Ld. representative, there may not be any transfer pricing adjustment.
6. On the contrary, Shri Vijay Kumar Punna, the Ld. Standing counsel, submitted that the additional ground raised by the assessee is not available before the Transfer Pricing Officer as well as the Dispute Resolution Panel. Therefore, according to the Ld. Standing counsel, they had no occasion to consider the same. Hence, according to the Ld. Standing counsel, the matter may be remitted back to the Assessing Officer and TPO to consider the issue afresh in the light of the additional ground raised by the assessee.
7. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee adopted Transaction Net Margin Method as most appropriate method. However, the Transfer Pricing Officer adopted CUP method as most appropriate method. While adopting CUP method as most appropriate method, the TPO as well as DRP have not taken any comparable companies for determination of arm's length price. Rule 10B(1) of Income-tax Rules, 1962 says that the method should be selected in a following manner. For the purpose of convenience, we are reproducing Rule 10B(1):-
5 I.T.A. No.2745/Chny/17
10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :-
(a) comparable uncontrolled price method, by which,-
(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ;
(ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ;
(iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in international transactions or specified domestic transactions ;
(b) resale price method, by which,-
(i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified ;
(ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions ;
(iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services ;
(iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the 6 I.T.A. No.2745/Chny/17 enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market ;
(v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise ;
(c) cost plus method, by which,-
(i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined ;
(ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined ;
(iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market ;
(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii) ;
(v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise ;
(d) profit split method, which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so inter-related that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which-
(i) the combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined ;
(ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of 7 I.T.A. No.2745/Chny/17 the functions performed, assets employed or to be employ-ed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances ;
(iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause
(ii) ;
(iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction :
Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction or specified domestic transaction in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction ;
(e) transactional net margin method, by which,-
(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ;
(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ;
(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering 8 I.T.A. No.2745/Chny/17 into such transactions, which could materially affect the amount of net profit margin in the open market ;
(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ;
(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.
(f) Any other method as provided in rule 10AB
8. From the above, it is obvious that for selecting a Comparable Uncontrolled Price method, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transaction is to be identified. In this case, admittedly, no such companies were identified by the TPO or DRP. Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the authorities below. Moreover, the additional ground also needs to be reconsidered by the authorities below. Accordingly, the orders of all the authorities below are set aside and the entire issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall refer the matter once again to Transfer Pricing Officer. The Transfer Pricing Officer shall select the comparable companies and thereafter decide the most appropriate method and then find out whether any adjustment is required for the international transaction. After the Transfer Pricing Officer's order, the Assessing Officer shall follow the procedure provided in Section 144C of the Act. 9 I.T.A. No.2745/Chny/17
9. In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced on 6th April, 2018 at Chennai.
sd/- sd/-
(अ ाहम पी.जॉज&) (एन.आर.एस. गणेशन)
(Abraham P. George) (N.R.S. Ganesan)
लेखा सद य/Accountant Member या यक सद य/Judicial Member
चे नई/Chennai,
8दनांक/Dated, the 6th April, 2018.
Kri.
आदे श क1 / त9ल:प अ;े:षत/Copy to:
1. अपीलाथ./Appellant
2. /0यथ./Respondent
3. Principal CIT-2, Chennai
4. आयकर आय< ु त/CIT (TP), Chennai
5. ACIT(HQ), DRP-2, Bangalore
5. :वभागीय / त न ध/DR
6. गाड& फाईल/GF.