Case Law Details

Case Name : Dow Corning India Pvt. Ltd. Vs. ITO (ITAT Mumbai)
Appeal Number : ITA No.1963/M/2017
Date of Judgement/Order : 13/01/2021
Related Assessment Year : 2012-13

Dow Corning India Pvt. Ltd. Vs. ITO (ITAT Mumbai)

Undisputedly, the assessee has entered into two separate agreements with group entities for availing marketing, administrative and logistic services as well as information technology services. It is the contention of the assessee that the services were essentially required not only for carrying on the business activities but overall growth of the business, initially, in course of proceedings before the Transfer Pricing Officer, the assessee has claimed the payment made towards intra- groups services to be at arm’s length by benchmarking them on cost allocation basis to the three different segments i.e., manufacturing, engineering and trading. However, at the stage of DRP proceedings, the assessee has furnished segmental benchmarking under TNMM which included the cost allocated towards the Intra- group services. Apparently, neither the Transfer Pricing Officer nor learned DRP have accepted the benchmarking done by the assessee. The Transfer Pricing Officer has observed that the assessee was unable to prove the availing of specific services and also the benefit derived from such services and has thereafter proceeded to determined the arm’s length price purely on estimate basis by applying the man- hour salary rate of one employee in respect of marketing administrative and logistic services and at the ad-hoc rate of 30% in respect of IT services, learned DRP has more or less agreed with the aforesaid benchmarking of the Transfer Pricing Officer, Though, learned DRP has observed that the Transfer Pricing Officer has benchmarked the payment made towards intra-group services by applying CUP method, however, a careful scrutiny of the order passed by the Transfer Pricing Officer does not reveal any such observation by him. The Transfer Pricing Officer has simply proceeded to benchmark the transaction on a purely ad-hoc/estimate basis without following any one of the methods prescribed under section 92C of the Act. It is patent and obvious from the order passed by the Transfer Pricing Officer that he has not determined the arm’s length price by applying either CUP or any other approved method. Had the benchmarking been done under CUP method, the Transfer Pricing Officer should have brought on record at least a few comparable uncontrolled transactions to demonstrate that the payment made by the assessee towards intra-group services is not at arms length. Whereas, the Transfer Pricing Officer has not brought on record even a single comparable uncontrolled transaction to demonstrate that the price charged by the assessee is not at arm’s length. On the contrary, it is telltale from the order of the Transfer Pricing Officer that he has proceeded to benchmark the transaction purely on estimate basis by applying man-hour salary rate of a single employee in case of marketing, administrative and logistic services. Similar is the situation in case of IT services, wherein, the Transfer Pricing Officer has estimated the arm’s length price at 30% of the amount paid.

 The aforesaid method of estimating the arm’s length price is not in terms with the provisions contained under section 92C r/w rule 10B, hence, opposed to law. Though, both the Transfer Pricing Officer and learned DRP have alleged that the assessee has not substantiated the fact that the services were actually rendered and benefit accrued to the assessee, however, the very fact that the Transfer Pricing Officer has allowed a part of the payment made towards Intra group services, though on estimate basis, clearly indicates that even the Revenue accepts that services indeed were received by the assessee and the assessee also benefited from  It is a fact on record that in course of proceedings before learned DRP, the assessee had furnished segmental benchmarking under TNMM which included allocation of cost towards intra-group services. Thus, it is a fact on record that the assessee has benchmarked the transaction by applying one of the approved methods. If the Transfer Pricing Officer was not satisfied with the benchmarking done by the assessee under TNMM, he should have independently benchmarked the transaction by applying one of the approved methods. However, that is not the case in the facts of the present case. The Transfer Pricing Officer has simply estimated the arm’s length price of the transaction on estimate basis without applying any one of the approved methods. This cannot be accepted. There is umpteenth number of judicial precedents, wherein, it has been held that determination of arm’s length price has to be done by applying any one of the methods prescribed under section 92C r/w rule 10B. In this context, we may refer to the following decisions:-

i) CITv/s Merck , [2016] 73 taxmann.com 23 (Bom.);

ii) Firmenich Aromatics India Ltd. v/s DCIT, ITAno.2590/Mum./2017, dated 23.07.2018; and

iii) EmersonClimate Technologies India  v/s DCIT, [2018] 90 taxmann.com 125;

Therefore,if we apply the ratio laid down in the aforesaid decisions to the facts of the present case, the inescapable conclusion would be that the adjustment made by the Transfer Pricing Officer to the arm’s length price of payment made towards Intra-group services is  In view of the aforesaid, we have no hesitation in deleting the addition made by the Assessing Officer on account of the aforesaid adjustment.

FULL TEXT OF THE ITAT JUDGEMENT

Per Rajesh Kumar, Accountant Member: 

The present appeal has been preferred by the assessee against the order dated 13.12.2016 of the Dispute Resolution Panel [DRP] relevant to assessment year 2012-13.

2. The assessee has raised the following grounds of appeal :

“Based on the facts and circumstances of the case, Dow Corning India Private Limited (hereinafter referred to as ‘the Appellant’) respectfully craves to prefer an appeal against the order issued by the Income – tax Officer, Range 14(1 )(3), Mumbai [hereinafter referred to as the ‘Assessing Officer’] under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (‘the Act’) in pursuance of the directions issued by the Hon’ble Dispute Resolution Panel-l, (hereinafter referred to as the ‘Hon’ble DRP’) on the following grounds, each of which are without prejudice to one another.

On the facts and in the circumstances of the case and in law, the learned AO/ Additional Commissioner of Income-tax (Transfer Pricing) – 1 (2) (‘TPO’) on fact and in law has:

General

1. erred in assessing the total income at Rs 28,42,18,200 as against returned income of Rs 23,12,12,830 computed by the

TRANSFER PRICING ADJUSTMENTS

General

2. erred in making following adjustments to the total income of the Appellant under Section 92CA(3) of the Act on account of adjustment in the arm’s length price of the international transaction, using Comparable Uncontrolled Price (‘CUP’) as the most appropriate method:

a) of Rs 39,20,644 vis-a-vis the transaction of export of finished goods to AEs

b) of Rs 4,90,84,731 vis-a-vis the transaction of payment for marketing,administrative, logistics support and information technology services availed from

I. EXPORTOFFINISHED GOODS TO ASSOCIATED ENTERPRISES (‘AEs’)

Rejection of the economic analysis undertaken by the Appellant

3. erred in rejecting the economic analysis undertaken by the Appellant using theTransactional Net Margin Method (TNMIvT), in accordance with the provisions of the Act read with the Income-tax Rules, 1962 (‘the Rules’), and instead using CUP as the most appropriate method for the determination of the arm’s length price of the international transaction of export of finished goods, without providing any cogent ”

3. At the outset, the Ld. Counsel of the assessee submittedthat ground No.1 is covered by the decision of the co-ordinate bench of the Tribunal in assessee’s own case in ITA 991/M/2016 A.Y.2011-12 vide order dated 23.10.2020 wherein the identical issue has been restored to the file of the AO to decide the same after taking into account certain observations made by the Bench. The Ld. A.R. prayed before the Bench that the said ground may kindly be decided on the same lines.

4. The D.R. also fairly conceded that the issue has been decided by the co-ordinate bench of the Tribunal in the earlier year as submitted by the ld AR however relied on the ground of appeal.

5. After hearing both the parties and perusing the material onrecord and also the decision of the co-ordinate bench of the Tribunal as mentioned above, we observe that the identical issue has been restored by the Tribunal to the file of the AO in assessee’s own case  A.Y.  2011-12  with  certain  observations. The operative part is reproduced as under:

“15. We have considered rival submissions in the light of decisions relied upon and perused the material on record. The basic dispute between the parties is with regard to the most appropriate method for benchmarking the export of finished goods to the AEs. While the assessee has applied TNMM on segmental basis, the Transfer Pricing Officer has applied CUP to determine the arm’s length price of the transaction. From the material placed on record, it is very much clear that the sales made to the non-AEs situated in India have been applied as CUP to determine the arm’s length price of export made to the AEs. It is the case of the assessee that no comparable export sales to non-AEs are available to apply as CUP. The aforesaid factual position has not been controverted by the Revenue. Therefore, the moot point which arises for our consideration is, whether the domestic sales can be applied as CUP for determining the arm’s length price of export sales. It is fairly well settled, CUP method requires strict comparability. It cannot be denied that the pricing of a product varies on the basis of geographical location. Thus, primarily, the price of products sold in domestic market cannot be compared with the price of the product sold in foreign country due to various factors. Therefore, if the Transfer Pricing Officer selects CUP as the most appropriate method to benchmark the transaction, it is his duty to find out and bring on record price charged for uncontrolled transactions carried out under similar circumstances. If, suitable comparable uncontrolled transaction is unavailable, CUP method cannot be applied.

16. It is further noticed, during the year under consideration assessee had sold 34 different products to both overseas AEs as well as domestic unrelated parties. Out of the 34 products sold, Transfer Pricing Officer has accepted the price of 16 products sold to AEs to be at arm’s length, since, the price charged to AEs is more than the price charged to non-AEs. In case of 18 products only the Transfer Pricing Officer has made adjustment as the price charged to AEs is less than the price charged to non-AEs. Thus, it appears, the Transfer Pricing Officer has adopted a very selective approach while applying CUP. Even, while applying CUP, the Transfer Pricing Officer has not properly looked into assessee’s claim of various adjustments on account of geographical location, volume and timing difference. The Transfer Pricing Officer has only allowed volume adjustment on purely ad-hoc basis, that too, only in respect of a single product while ignoring various other products wherein volume difference between AE and non-AE transaction is substantial. Similarly, assessee’s contention that the price of products insofar as sales made to the AE and non-AE would vary due to timing difference has not been properly considered. The various adjustments which are required to be made have been demonstrated before us by the learned counsel for the assessee by furnishing charts. In our view, all these factors have to be taken into consideration, even, while applying CUP method. One more submission of the assessee is that the DRP has allowed adjustment on account of marketing/allied cost. However, while computing such adjustment, the Assessing Officer has not taken note of marketing personnel cost. We find substantial merit in the aforesaid submission of the learned Counsel. At Page-1104 of the paper book, the assessee has furnished the break up of the marketing personnel cost. If the Revenue is having any doubt on the aforesaid claim of the assessee, the assessee may furnish a break-up certified by an auditor. However, the claim of the assessee has to be examined without any bias. Thus, in our view, the matter needs to be restored to the Assessing Officer for examining afresh keeping in view our observations here in above. Thus, with the aforesaid observations, the issue is restored back to the Assessing Officer for fresh adjudication after providing due opportunity of being heard to the assessee. These grounds are allowed for statistical purposes.”

6. Since the facts before us are materially same, We are, therefore, respectfully following the decision of the co-ordinate bench of the Tribunal restore this matter to the file of the AO to decide the same afresh keeping in view of the observations of the co-ordinate bench of the Tribunal in the above order. The AO is directed to decide the issue afresh after providing the reasonable opportunity of hearing to the  The ground no. 1 is allowed for statistical purpose.

7. In ground II, the assessee  has  challenged  the adjustment made on account of payment made towards intra group services in respect of marketing, administrative, logistic support and information technology services.

8. The Counsel of the assessee submitted that the identical issue has been decided by the co-ordinate bench of the Tribunal in assessee’s own case for A.Y. 2011-12 in ITA No.991/M/2016 and therefore the current issue may also be decided on the same line.

9. The Ld. D.R. fairly agreed to the arguments of the Ld. A.R.however relied on the orders of authorities

10. We have heard the rival submissions of  both  the  parties and perused the material on record. We find that the identical issue has been decided by the co-ordinate bench of the Tribunal in ITA 991/M/2016 (supra) in assessee’s own case in A.Y. 2011-12 vide para No.25, 26 & 27 which are reproduced  as under:

“25. We have considered rival submissions and perused the material on record. Undisputedly, the assessee has entered into two separate agreements with group entities for availing marketing, administrative and logistic services as well as information technology services. It is the contention of the assessee that the services were essentially required not only for carrying on the business activities but overall growth of the business, initially, in course of proceedings before the Transfer Pricing Officer, the assessee has claimed the payment made towards intra- groups services to be at arm’s length by benchmarking them on cost allocation basis to the three different segments i.e., manufacturing, engineering and trading. However, at the stage of DRP proceedings, the assessee has furnished segmental benchmarking under TNMM which included the cost allocated towards the Intra- group services. Apparently, neither the Transfer Pricing Officer nor learned DRP have accepted the benchmarking done by the assessee. The Transfer Pricing Officer has observed that the assessee was unable to prove the availing of specific services and also the benefit derived from such services and has thereafter proceeded to determined the arm’s length price purely on estimate basis by applying the man- hour salary rate of one employee in respect of marketing administrative and logistic services and at the ad-hoc rate of 30% in respect of IT services, learned DRP has more or less agreed with the aforesaid benchmarking of the Transfer Pricing Officer, Though, learned DRP has observed that the Transfer Pricing Officer has benchmarked the payment made towards intra-group services by applying CUP method, however, a careful scrutiny of the order passed by the Transfer Pricing Officer does not reveal any such observation by him. The Transfer Pricing Officer has simply proceeded to benchmark the transaction on a purely ad-hoc/estimate basis without following any one of the methods prescribed under section 92C of the Act. It is patent and obvious from the order passed by the Transfer Pricing Officer that he has not determined the arm’s length price by applying either CUP or any other approved method. Had the benchmarking been done under CUP method, the Transfer Pricing Officer should have brought on record at least a few comparable uncontrolled transactions to demonstrate that the payment made by the assessee towards intra-group services is not at arms length. Whereas, the Transfer Pricing Officer has not brought on record even a single comparable uncontrolled transaction to demonstrate that the price charged by the assessee is not at arm’s length. On the contrary, it is telltale from the order of the Transfer Pricing Officer that he has proceeded to benchmark the transaction purely on estimate basis by applying man-hour salary rate of a single employee in case of marketing, administrative and logistic services. Similar is the situation in case of IT services, wherein, the Transfer Pricing Officer has estimated the arm’s length price at 30% of the amount paid.

26. The aforesaid method of estimating the arm’s length price is not in terms with the provisions contained under section 92C r/w rule 10B, hence, opposed to law. Though, both the Transfer Pricing Officer and learned DRP have alleged that the assessee has not substantiated the fact that the services were actually rendered and benefit accrued to the assessee, however, the very fact that the Transfer Pricing Officer has allowed a part of the payment made towards Intra group services, though on estimate basis, clearly indicates that even the Revenue accepts that services indeed were received by the assessee and the assessee also benefited from  It is a fact on record that in course of proceedings before learned DRP, the assessee had furnished segmental benchmarking under TNMM which included allocation of cost towards intra-group services. Thus, it is a fact on record that the assessee has benchmarked the transaction by applying one of the approved methods. If the Transfer Pricing Officer was not satisfied with the benchmarking done by the assessee under TNMM, he should have independently benchmarked the transaction by applying one of the approved methods. However, that is not the case in the facts of the present case. The Transfer Pricing Officer has simply estimated the arm’s length price of the transaction on estimate basis without applying any one of the approved methods. This cannot be accepted. There is umpteenth number of judicial precedents, wherein, it has been held that determination of arm’s length price has to be done by applying any one of the methods prescribed under section 92C r/w rule 10B. In this context, we may refer to the following decisions:-

i) CITv/s Merck , [2016] 73 taxmann.com 23 (Bom.);

ii) Firmenich Aromatics India Ltd. v/s DCIT, ITAno.2590/Mum./2017, dated 23.07.2018; and

iii) EmersonClimate Technologies India  v/s DCIT, [2018] 90 taxmann.com 125;

27. Therefore,if we apply the ratio laid down in the aforesaid decisions to the facts of the present case, the inescapable conclusion would be that the adjustment made by the Transfer Pricing Officer to the arm’s length price of payment made towards Intra-group services is  In view of the aforesaid, we have no hesitation in deleting the addition made by the Assessing Officer on account of the aforesaid adjustment. Grounds are allowed.”

11. Since the facts of the present case are similar to one as decided by the co-ordinate  bench of the Tribunal in the earlier, we ,therefore, respectfully following the same set aside the order of DRP on this issue and direct the  AO  to  delete  the

12. The other issue raised by the assessee on various other grounds of appeal are not pressed and  therefore  are  dismissed as not being

13. In the result, the appeal of the assessee is partly allowed for statistical

Order pronounced in the open court on 13.01.2021.

Download Judgment/Order

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