Case Law Details
Brinks India Private Limited Vs DCIT (ITAT Mumbai)
Section 92C(1) of the Act, contemplates that the arms length price in relation to an international transaction shall be determined by comparable uncontrolled price method; resale price method; cost plus method; profit split method; transactional net margin method or such other method as may be prescribed by the Board. Hence, the TPO is bound to determine the ALP by following one of the prescribed methods. Any ad-hoc determination of arms length price by the Ld TPO u/s section 92 de-hors section 92C(1) of the Act cannot be sustained. The contention is further supported by the judgment of the Hon’ble jurisdictional High Court in the case of Commissioner of Income Tax vs. Merck Ltd. 389 ITR 70 (Mum). In the said case the Hon’ble High Court decline to interfere with the findings of the Mumbai Bench of the Tribunal that the transfer pricing adjustment made by the TPO without following one of the prescribed methods makes the entire transfer pricing adjustment unsustainable in law. The grievance of the revenue was that the consideration paid to the AE is only attributable to the services received / availed.
Even incase the benchmarking done by an assessee is not correct, the Transfer Pricing Officer should benchmark the AE payments by applying any of the prescribed methods. However, without applying any prescribed method incase he simply determines the arm’s length price of AE payments, the approach would be considered as not being in accordance with statutory provisions, hence, unsustainable.
In the case of BRINKS INDIA PRIVATE LIMITED Vs DY. COMMISSIONER OF INCOME TAX CENTRAL [2023-VIL-189-ITAT-MUM], The international transaction which was subject matter of dispute was ‘management fees’ paid by the assessee to its AE. To benchmark the transaction the assessee relied on “other method”. The Transfer Pricing Officer (TPO) following the decision in assessment year 2012-13 and 2013- 14 applied CUP as the most appropriate method and thus, made adjustment. The DRP relied on the decision in similar issue in earlier AYs. It was decided that where TNMM method was applied and accepted in earlier years in respect of management fees paid/payable by the assessee to its AE, the TPO cannot summarily reject the TNMM and propose an adjustment under the CUP method, without benchmarking with comparable on a separate basis. Incase this is done, it would be considered that the TPO has resorted to an ad-hoc unilateral pricing of management fees, disregarding the facts and circumstances of the case.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is directed against the assessment order dated 20/07/2018 passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 [in short ‘the Act’] for the assessment year 2014-15.
2. The brief facts of the case as emanating from records are; the assessee is a 100% subsidiary of Brink’s Security International Inc. USA and Brink’s Dutch Holding BV. Thus, the assessee is part of Brink’s Global Services which provides global risk management and secure logistics for high valuables viz. diamonds, jewellery, precious metals, securities, currency, hi-tech devices, etc. During the period relevant to the assessment year under appeal, the assessee carried out various international transactions with its overseas Associated Enterprise (AE). The international transaction which is subject matter of dispute is management fees paid by the assessee to its AE Brink’s Inc. USA. The assessee had paid management fees aggregating to Rs.4,30,77,526/- during the relevant period. To benchmark the transaction the assessee relied on “other method”. The Transfer Pricing Officer (TPO) following the decision in assessment year 2012-13 and 2013-14 applied CUP as the most appropriate method and thus, made adjustment of Rs.4,08,27,526/-. The assessee filed objections before the Dispute Resolution Panel (DRP) assailing the adjustment. The DRP observed that similar issue was decided by the DRP in assessment year 2012-13 and 2013-14 and had rejected the claim of assessee. For the similar reasons, the DRP dismissed the objections raised in the impugned assessment year as well. The Assessing Officer passed the order in line with the direction of DRP, hence, the present appeal.
3. Shri Farrokh V Irani appearing on behalf of the assessee submits at the outset that the issue raised in present appeal is identical to the one adjudicated by the Tribunal in assessee’s own case in ITA No.343/Mum/2017 for assessment year 2012-13 vide order dated 27/12/2019 and in ITA No.7071/Mum/2017 for assessment year 2013-14 decided vide order dated 15/11/2022. The ld. Authorized Representative for the assessee submits that the primary issue assailing adjustment of Rs.4,08,27,526/- on account of intra-group services on account of payment of management fee is raised in ground No.1 of the appeal. The other grounds raised in the appeal are in support of ground No.1 or are argumentative. Hence, ground No.1 is the only ground for adjudication. The ld. Authorized Representative for the assessee submits that the assessee has entered into management and technical services agreement dated 01/01/2011. The assessee has paid management fee in accordance with the aforesaid agreement for the services rendered by its AE. The facts in the instant case are identical to the facts in assessment year 2012-13 and 2013-14. The reasons for making adjustment on account of payment of management fee is also identical. The TPO in para 7.2 of the order has mentioned that the facts of the case and the submissions made during the year are identical to previous year. Similarly, the DRP in para 2.5 of the directions have recorded that the assessee’s claim with respect to management services is similar to assessment year 2013-14 and the method of benchmarking in assessment year 2013-14 and 2014-15 is also same. The DRP in para 4.1 of the directions has again reiterated that there is no material change from assessment year 2013-14.
4. Ms. Samruddhi Dhananjay Hande, representing the Department vehemently defended the assessment order. However, the ld. Departmental Representative fairly submits that the solitary issue raised in the appeal has been considered by the Tribunal in assessee’s own case in the preceding assessment years.
5. Both sides heard, orders of authorities below examined. The solitary issue raised in the appeal by the assessee is with respect to adjustment of Rs.4,08,27,526/- in respect of management fee paid by the assessee to its AE. At the outset, we find that the TPO and the DRP in their respective order /directions have recorded that, the facts in the impugned assessment year are similar to the facts in assessee’s own case for assessment year 2012-13 and 2013-14.
6. The Co-ordinate Bench in assessee’s appeal in ITA No.7071/Mum/2017(supra) decided the issue in favour of assessee by placing reliance on the decision of the Tribunal in assessee’s own case in ITA No.343/Mum/2017 for assessment year 2012-13 (supra) and on the decision rendered in the case of CLSA vs. DCIT in ITA No.1182/Mum/2017 decided on 16/01/2019. For the sake of completeness the relevant extract of the Tribunal order in ITA No.7071/Mum/2017 for assessment year 2013-14 is reproduced herein below:
“5. We have considered the rival submissions and perused the material on record. We find merit in the contention of the Appellant that the Tribunal has, while disposing of appeal for Assessment Year 2012-13, rejected the basis on which addition/transfer pricing adjustment was made by the TPO. The relevant extract of the aforesaid decision of the Tribunal [ITA No. 343/Mum/2017, Assessment Year 2012-13, Pronounced on 27.12.2019] read as under:
“3. Before us, the Ld. counsel for the assessee submits that the assessee has
During the course of hearing the Ld. counsel relies on the order of the Tribunal in the case of Kellogg India Pvt. Ltd. v. DCIT (ITA No. 2866/Mum/2014) for AY 2009-10; M/s CLSA India Pvt. Ltd. v. DCIT (ITA No. 1182/Mum/2017) for AY 2012-13; Firmenich Aromatics India P. Ltd. v. DCIT (ITA No. 2590/Mum/2017) for AY 2012-13.
4. On the other hand, the Ld. Departmental Representative (DR) submits that as observed by the DRP the assessee has not benchmarked the international transactions at all, which is clearly a violation of law. It has not shown how the various transactions are closely linked and how they cannot be evaluated adequately the AE, for which payment to the extent made by it needs to be paid. Further, it is stated that nothing has been placed either before the TPO or the DRP to demonstrate any benefit received by the assessee from the services rendered for which payment is claimed. Elaborating further, the Ld. DR submits that the assessee has not submitted any details and evidence of costs actually incurred by the AE, specifically for providing the services to the assessee; it has also not been able to give separate details of costs paid for each service stated to have been availed; all that is stated is that costs incurred by AE have been reimbursed on allocation basis, however, no details of such costs incurred by AE and actual evidence thereof were furnished.
On the basis of the above arguments, the Ld. DR supports the order passed by the AO.
5. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.
In the instant case, the assessee has consistently been benchmarking all of its transactions with the AE under TNMM from the beginning, for now over seven years. In all three previous assessment years i.e. from AY 2009-10 to 2011-12, wherein its international transactions with AEs were in the scrutiny, the assessments have been completed by accepting the transactions with AE being at arm‟s length holding TNMM as the most appropriate method. The assessee had submitted before the TPO that its operating revenue is Rs.168.88 crores and the operating profit is Rs.21.78 crores; the profit level indicator i.e. OP/OR works out to 12.90% for the year under consideration. The assessee submitted working of it before the TPO. Also it submitted the arithmetic mean of the profit level indicator of the comparables which worked out to 4.86% for the year under consideration. We find that in respect of management fees paid/payable during the year under consideration, the assessee had submitted before the TPO its working, calculation, allocation, method, rational and business expediency.
In such a situation, the TPO should not have summarily rejected the TNMM in respect of management fees paid/payable by the assessee to its AE and proposed an adjustment of Rs.3,83,75,622/- under the CUP method, without benchmarking with comparable on a separate basis. It is further stated that the assessee has failed to show that specific and distinct services were rendered by uncontrolled transactions. In the instant case, the TPO has resorted to an ad-hoc unilateral pricing of management fees, disregarding the facts and circumstances of the case.
In the case of Kellogg India Pvt. Ltd. (supra), the Tribunal has rightly held that:
“Even assuming that the benchmarking done by the assessee was not correct, the Transfer Pricing Officer should have benchmarked the royalty payment by applying any of the prescribed methods. However, without applying any prescribed method he has simply determined the arm‟s length price of royalty payment at Nil. The aforesaid approach of the Transfer Pricing Officer is not in accordance with statutory provisions, hence, unsustainable.”
Similar view has been taken by the Tribunal in M/s CLSA India Pvt. Ltd. (supra) and Firmenich Aromatics India P. Ltd. (supra).
5.1 To sum up, in the instant case, the TPO has summarily rejected the TNMM followed by the assessee in respect of management fees paid/payable by it to its
AE and proposing an adjustment under CUP without benchmarking with comparable uncontrolled transactions. Also the TPO has resorted to an ad-hoc unilateral pricing of management fees, disregarding the facts of the case. In view of the above factual scenario and position of law, we delete the addition of Rs.3,83,75,622/- made by the AO as adjustment on account of transfer pricing.
6. In the result, the appeal filed by the assessee is allowed.” (Emphasis Supplied)
6. On perusal of the above order of the Tribunal, it is apparent that for the Assessment Year 2012-13, the TPO had made transfer pricing adjustment by determining ALP of Management Fee at INR 22,50,000/- (750 hours x INR 3,000/- per hour) by using CUP Method, and while doing so the TPO made an adhoc unilateral estimation by assuming that around 750 hours would have been spent for providing the aforesaid services for which remuneration of INR 3,000/- per hour was appropriate. The Tribunal deleted the addition holding that the TPO had resorted to an adhoc unilateral pricing of the Management Fee without applying any of the prescribed methods and disregarding the facts of the case by placing reliance upon the decision of the co-ordinate Bench of the Tribunal in the case of Kellogg India Pvt. Ltd. v. DCIT (ITA No. 2866/Mum/2014) for AY 2009-10; M/s CLSA India Pvt. Ltd. v. DCIT (ITA No. 1182/Mum/2017) for AY 2012-13; Firmenich Aromatics India P. Ltd. v. DCIT (ITA No. 2590/Mum/2017) for AY 2012-13.
7. We note that in the case of CLSA vs. DCIT [ITA No. 1182/Mum/2017, pronounced on 16.01.2019], relied upon by the Ld. Authorised Representative for the Appellant, the Coordinate Bench of the Tribunal has held as under:
“22. Section 92C(1) of the Act, contemplates that the arms length price in relation to an international transaction shall be determined by comparable uncontrolled price method; resale price method; cost plus method; profit split method; transactional net margin method or such other method as may be prescribed by the Board. Hence, the TPO is bound to determine the ALP by following one of the prescribed methods, however, we notice that in the present case the Ld. TPO has not followed any prescribed methods and made the transfer pricing adjustment by estimating the man hours and the cost of service per hour. We therefore, find merit in the contention of the Ld. counsel that any ad-hoc determination of arms length price by the Ld TPO u/s section 92 de-hors section 92C(1) of the Act cannot be sustained. The contention of the Ld. counsel is further supported by the judgment of the Hon’ble jurisdictional High Court in the case of Commissioner of Income Tax vs. Merck Ltd. 389 ITR 70 (Mum). In the said case the Hon’ble High Court decline to interfere with the findings of the Mumbai Bench of the Tribunal that the transfer pricing adjustment made by the TPO without following one of the prescribed methods makes the entire transfer pricing adjustment unsustainable in law. The grievance of the revenue was that the consideration paid to the AE is only attributable to the services received / availed.
23. In the light of the facts of the case, provisions of the Law and the cases – discussed in the foregoing paras, we are of the considered view that the transfer pricing adjustment made by the Ld. TPO on ad hoc basis is not sustainable in law. Since, the order passed by the TPO u/s 92 CA(3) of the Act is not sustainable, the Ld. DRP ought to allowed the objection filed by the assessee. Hence, we decide both the questions mentioned in para No 17 (supra) in negative and further hold that the assessment order passed by the AO pursuant to the directions passed by the Ld DRP u/s 144(5) of the Act, is not sustainable in law.” (Emphasis Supplied)
8. In the case before us pertaining to Assessment Year 2013-14, the TPO has determined the ALP of the transaction without following any of the prescribed methods. The transfer pricing adjustment has been made by estimating the man hours (at 750 hours) and the cost of service per hour (at INR 3000/- per hour). Identical approach adopted by the TPO stands rejected by the Tribunal in the above said decisions including in the case of the Appellant for the Assessment Year 2012-13. Thus, respectfully following the above decisions of the Tribunal, we delete the transfer pricing addition of INR 7,83,82,267/-. Ground No. I (1. to 3.) is allowed, whereas all the other grounds are disposed off as being infructuous.
9. In the result, the present appeal preferred by the Assessee is allowed.”
No contrary decision /facts have been brought to our notice, thus, on parity of facts following the order of Co-ordinate Bench in assessee’s own case for assessment year 2013-14, ground No.1 raised in the appeal is allowed.
7. The other grounds raised in the appeal are argumentative and are in support of ground No.1, hence, require no separate adjudication.
8. In the result, appeal by the assessee is allowed.
Order pronounced in the open court on Thursday the 12th day of January, 2023.
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