Case Law Details
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
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