Indian Kanoon - Search engine for Indian Law

was not most appropriate method for benchmarking such complex transactions, which as per him were designed to escape the legitimate taxation in India and which have been made with the sole intent of tax evasion. He thus, proposed that Profit Split Method was the best method to benchmark transactions undertaken by assessee with its AE's and the profits earned by them. He was of the view that not only the transactions were complex but its correct profitability in India could not be ascertained by using TNMM method as most appropriate method. He thus, proposed to benchmark international transactions of assessee by using Profit Split Method as most appropriate method. He referred to para 2.108 of Chapter II of OECD Guidelines, which provides the basics of Profit Split Method and also referred to para 2.111 and para 3.9 referred on para 2.108 of OECD guidelines and vide para 15.6 notes that provisions of Profit Split Method (PSM) under Income Tax Rules (in short 'the Rules'). The assessee in this regard was thus issued separate show cause notice for the individual assessment years and was asked to state as to why TNMM method should not be rejected as the most appropriate method and why PSM method should not be treated as most appropriate method for the transactions entered into by the assessee. In the show cause notice, the TPO referred to Rule 10AB of the Rules, on without prejudice basis, and pointed out that the alternate method which was known as safe method was also proposed to be applied to the transactions and under this method, 97% of profits of AEs were proposed to be adjusted in international transactions of assessee.

17. The TPO then rejected TNMM method and thought it appropriate to benchmark the transactions by treating Profit Split Method as most appropriate method. During the course of TP proceedings, the assessee had submitted the copies of financials of AEs and also the detailed working of PLI of assessee and its AEs were also given. The TPO again observed that actual control and management of affairs of AEs was situated wholly in India, wherein the AEs had not incurred any further amount either of management or sale and marketing of the goods procured from India. In view of the findings, during the course of proceedings, the profit of assessee and AEs was proposed to be combined and split according to their functions, using Profit Split Method. The TPO then went on to observe that since the AEs had almost done no functions except receipt of sale proceeds and sending it to the assessee, ITA Nos.1062 to 1068/PUN/2017 Sava Healthcare Ltd.

trading activities involving the global procurement, logistics, global marketing, etc.

26. The Panel then considered background facts of the case as noted by TPO and vide paras 5.2.1 to 5.3.2 decided the issue of benchmarking all the transactions. The Panel was of the view that the TPO had examined business model of assessee group, development and upgradation of software JadePharma Ver.1.0, JadePharma Ver.2 and concluded that Profit Split Method was the most appropriate method to benchmark international transactions. Based on various evidences in his possession, the TPO had also rebutted objections of assessee raised during proceedings. It was further noted that TPO had also held that no activity was carried out at Dubai and also that AE's in Singapore and Mauritius were not playing any role other than payment of godown rent. Based on all these, the TPO concluded that entire control and management of affairs of assessee group is situated wholly in India. Further, based on low employee cost in Dubai, nil employee at Mauritius and high employee cost for Pune based company, the TPO concluded that all the activities of assessee group were carried out in India and therefore the affairs of assessee in Mauritius and Dubai need to be treated together as one since the brain and functions of group are in India and only minuscule work of receiving and sending money was done by AE's at UAE and Singapore. Vide para 5.2.4, the DRP notes that based on this, the TPO has lifted the corporate veil and held the entire group to be operating from India. Accordingly, the TPO applied Profits Split Method as most appropriate method to benchmark the transactions, attributed 3% of global profits to AE's and determined balance 97% of profits as the ALP of transactions undertaken including unreported transactions by Indian companies of group involved. Vide para 5.3, the Panel ITA Nos.1062 to 1068/PUN/2017 Sava Healthcare Ltd.

ITA Nos.1062 to 1068/PUN/2017 Sava Healthcare Ltd.

56. The order of TPO is dated 29.01.2016 i.e. after the findings of Settlement Commission vide order dated 27.08.2015. The TPO has held that entire business model is brainchild of Shri Vinod Jadhav, despite the findings of Settlement Commission that profits of foreign entities could not be taxed in the hands of Shri Vinod Jadhav. The TPO further goes on to hold that entire operations are managed by assessee company after holding that the business model is of brainchild of an individual Shri Vinod Jadhav. It may be mentioned herein itself that the DRP has not upheld the findings of TPO in this regard. The AE entities which were held to be sham / shell companies by the TPO has been reversed by DRP in para 10.3.4 vide order dated 31.12.2016, wherein it has been held that AE entities cannot be held as sham and they were genuine, legal entities. The DRP in line with this, attributes certain part of global profits to AE parties. Both the TPO and DRP have applied the Profit Split Method to benchmark the international transactions of global profits of assessee and the alleged group concerns. As mentioned earlier, the TPO had held that 97% of entire global profits were to be assessed in the hands of assessee, but the modalities adopted for application of Profit Split Method by DRP is modified, wherein the Panel says in the first step, calculate the global profits, then derive the routine profits of assessee company and exclude the same. Further, derive the routine profits of AE parties and spread them in particular manner. The residuary profits are derived and thus, residuary profits are then allocated to the assessee company with 69% of world profits to the assessee and 31% to AEs in the residuary profits. Consequently, 70% of world profits have been added in the hands of assessee. The Ld. AR has challenged the modality adopted by DRP while applying PSM method i.e. it has failed to consider any external comparables while adopting aforesaid modality in the hands of assessee. We shall deal with that aspect at the relevant time.