×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
These are the latest case laws decided by various Income Tax Appellate Tribunals (ITAT) of India on Income Tax which have been published recently. The case laws are open for discussion and we invite expert comments from our members on its applicability and effect on relevant issues.
11-03-2019, Dow Chemical International, Section 92CA(1), Tribunal Mumbai
All these appeals filed by the assessee are pertaining to AYs. 2011-12 to 2013-14 and they are directed against the orders passed by the Assessing Officer u/s 143(3) r.w.s 144C(13) of the Income Tax Act (Act), in pursuance of directions given by Ld. Dispute Resolution Panel (DRP). Since an identical issue is urged in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience.
The assessee also filed Stay Application for the AY. 2013-14.
2. The main ground urged by the assessee in all these three years relate to the Transfer Pricing Adjustment in respect of payments made to Associated Enterprises (AE) for availing various types of services.
3. The facts relating to the above said issue are stated in brief. The assessee herein is a subsidiary company of M/s Dow Chemical Pacific (Singapore) Pte Ltd. It is engaged in the business of manufacturing and trading in chemicals. During the years under consideration, the assessee had entered into various international transactions with its AEs. The assessee benchmarked all the transactions under Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) accepted the ALP of all transactions except the payments made by the assessee to various AEs for availing various types of services like, Corporate information technology support, Engineering, Logistic Support Services etc.
4. We shall take up the AY. 2011-12 as lead case. In that year, the assessee paid a sum of Rs.5732.51 lakhs to various Associated Enterprises for availing the services
5. In respect of payments made for availing “Engineering Services”, the assessee selected its foreign AE as tested party and applied TNMM method for determining ALP of transactions. The operative margin of comparable companies in US region was found to be 6.81%. The A.E was charging the assessee @ cost plus 10% mark up on provision of engineering services. Since the margin of foreign AE fell within the tolerance range of +/- 5%, the assessee submitted that its transactions are at arms length.
6. The assessee was having different segments, viz., manufacturing, trading and other service segments. The assessee was also maintaining segmental results. The payments made for other types of services, viz., corporate information technology, logistic support etc., were allocated between various segments, viz., manufacturing, trading and other service segments. These assessee benchmarked the results of each of the segments under TNMM method under each of the segment. The Ld DRP has extracted the details of assessee’s margin and the margin of comparable companies in paragraph 1.4 of its order passed for AY 2011-12. The same is extracted below, for the sake of convenience:-
For the payments made for availing engineering services, the assessee also carried out secondary analysis under TNMM method by assigning the payment to Engineering Services segment. The margin declared by the assessee in each of the segment was more than the margins of comparable companies. Accordingly it was contended that the payments made by it for availing various types of services are at arm’s length.
7. The TPO, however, took the view that the TNMM is not appropriate method for benchmarking intra-group services. He was of the view that CUP method is the most appropriate method. The relevant observations made by TPO are extracted below:-
“In the TP Report, the assessee has just fied the payment of management charges on the ground that the said transaction is benchmarked by TNMM by treating AE as the tested party and contended that the transactions may be taken at arms length, As the Management charges are a class of its own, the same is proposed to be analysed under CUP method. TNMM is not most appropriate method because in intra-group services, the first requirement is to see whether the services have actually being rendered and cost benefit analysis of the services rendered. This is not possible under TNMM. In the TNMM, where the AE is tested party, it is assumed that the services have actually been rendered and the cost base on which markup has been charged is correct. As the financials of the AE are not available with the TPO and the assessee did not provide the details of the cost base of the AE. Therefore when cost base is doubtful and the cost benefit of the services rendered is also not established, the TNMM under such circumstances is not the most appropriate method.”
Then the TPO referred to the OECD guidelines on intra-group services with the observation that the said guidelines have persuasive value. The TPO observed that the OECD guidelines are based on the principles of willingness to pay for an activity