DSM NUTRITIONAL PRODUCTS INDIA PRIVATE LIMITED, MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX-9(3)(1), MUMBAI

ITA 2076/MUM/2016

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 8361 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 31-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M C OMI NIGSHEN
• Assessee Lawyers: DHANESH BAFNA MS CHANDNI SHAH
• Keywords: Transfer pricing; International transaction; Question of law; Commercial expediency
• Section: 92C; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K , BENCH MUMBAI BEFORE SHRI M. BALAGANESH, AM & SHRI RAVISH SOOD, JM IT (TP) A NO. 2076 /MUM/201 6 ( ASSESSMENT YEAR : 2011 - 12 ) M/S. DSM NUTRITIONAL PRODUCTS PVT. LTD., 401, 4 TH FLOOR, WINDSOR HOUSE NEAR BKC, KAL INA SANTACRUZ, MUMBAI 400 098 VS. DEPUTY COMMISSIONER OF INCOME TAX - 9(3)(1) MUMBAI PAN/GIR NO. AACCR3973J (APPELLANT ) .. (RESPONDENT ) ASSESSEE BY SHRI DHANESH BAFNA / MS. CHANDNI SHAH REVENUE BY SHRI M C. OMI NIGSHEN DATE OF HEARING 10 / 07 /2019 DATE OF PRONOUNCEMENT 04 / 10 /2019 / O R D E R PER M. BALAGANESH (A.M) : THIS APPEAL IN ITA NO. 2076/MUM/2016 FOR A.Y. 2011 - 12 PREFERRED BY THE ORDER AGAINST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER DATED 28/01/201 6 U/S.143(3) R.W.S.144C(13) OF THE INCOME TAX ACT, HEREINAFTER REFERRED TO AS ACT, PURSUANT TO THE DIRECTIONS OF THE LD. DISPUTE RESOLUTION PANEL (DRP IN SHORT) U/S.144C(5) OF THE ACT DATED 03/12/2015 FOR THE A.Y.2011 - 12. IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 2 2. THE ONLY EFFECTIVE ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD DRP WAS JUSTIFIED IN CONFIRMING THE ACTION OF THE LD TPO IN DETERMINING THE ARMS LENGTH PRICE (ALP) IN RESPECT OF PAYMENT FOR E - CONNECTIVITY SERVICES AVAILED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISES (AE) AT NIL INSTEAD OF RS 52,83,464/ - AS DETERMINED BY THE ASSESSEE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE BRIEF FACTS AS REPORTED IN THE ORDER OF THE LD TPO ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF PROVIDING MARKETING SUP PORT SERVICES TO ITS AES IN THE NATURE OF ASSISTING THE AES IN PROVIDING INFORMATION ABOUT CUSTOMERS, PROVIDE ASSISTANCE IN MAINTAINING CUSTOMER RELATIONSHIPS AND PROVIDE INFORMATION ABOUT MARKETS. DURING THE YEAR, THE ASSESSEE HAD IMPORTED ANIMAL HEALTH A ND NUTRITION PRODUCTS FROM ITS AE FOR DISTRIBUTION IN INDIAN MARKETS ALONG WITH MINOR SALES TO AES. THE LD TPO OBSERVED THAT THE ASSESSEE HAD MADE PAYMENT FOR E - CONNECTIVITY CHARGES TO ITS AE OF RS 52,83,464/ - AND HAD REPORTED THE SAME AS AN INTERNATIONAL TRANSACTION IN FORM 3CEB. THE ASSESSEE APPLIED COMPARABLE UNCONTROLLED PRICE (CUP) METHOD ON COST ALLOCATION BASIS AS THE MOST APPROPRIATE METHOD (MAM). THE ASSESSEE SUBMITTED BEFORE THE LD TPO VIDE SUBMISSION DATED 28.10.2014 THAT DURING THE YEAR, IT HA D AVAILED INFORMATION COMMUNICATION AND TECHNOLOGY SERVICES FROM ITS AE. THESE ARE COSTS IN THE NATURE OF INFORMATION, COMMUNICATION AND TECHNOLOGY SUPPORT WHICH HAVE BEEN CHARGED TO THE ASSESSEE ON A COST TO COST BASIS, WITHOUT ANY MARK UP. COPIES OF IN VOICES FOR THE SERVICE CHARGES WERE FURNISHED BEFORE THE LD TPO. THE ASSESSEE ALSO SUBMITTED A LETTER FROM THE AE SPECIFYING THE SERVICES AVAILED BY THE ASSESSEE AND CONFIRMING THAT EXPENSES CROSS CHARGED TO THE ASSESSEE FOR SUCH SERVICES ARE ON COST TO CO ST BASIS WITHOUT CHARGING ANY MARK UP. THE LD TPO ASKED THE ASSESSEE TO PRODUCE THE BASIS FOR ALLOCATION, IF INVOICES ARE BACK TO BACK AND TO IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 3 PRODUCE THE EVIDENCE FOR AES COST AND TO PROVIDE COST - BENEFIT ANALYSIS ON 18.12.2014. THE LD TPO OBSERVED THAT THE ASSESSEE COULD NOT PRODUCE THE BASIS FOR ALLOCATION OF COST BY ITS AE TO IT AND ALSO UNABLE TO EXPLAIN THE BENEFITS DERIVED. ACCORDINGLY, THE LD TPO CONCLUDED THAT THE SERVICES RENDERED ARE ROUTINE IN NATURE FROM AE TO THE ASSESSEE AND HENCE THERE IS NO NEED TO MAKE ANY PAYMENT FOR THE SAME AND ACCORDINGLY DETERMINED THE ALP OF THE SAID TRANSACTION AT NIL. 4. THE LD DRP OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MARKETING OF VITAMIN, VITAMIN PRODUCTS, FEED SUPPLEMENT, NUTRITIONAL PRODUC TS, COSMETIC INGREDIENTS AND OTHER FINE CHEMICALS. THE ASSESSEE SUBMITTED THAT DSM NUTRITIONAL PRODUCTS GROUP IS THE WORLDS LEADING SUPLPLIER OF VITAMINS, CAROTENOIDS AND OTHER FINE CHEMICALS TO THE FEED, FOOD, PHARMACEUTICAL AND PERSONAL CARE INDUSTRIES . THE ASSESSEE STATED THAT IT HAD AVAILED INFORMATION COMMUNICATION AND TECHNOLOGY SERVICES (E - CONNECTIVITY SERVICES) FROM ITS AE AND HAD PAID CHARGES TO ITS AE BASED ON THE ACTUAL COST INCURRED BY ITS AE WITHOUT ANY MARK UP AND ALLOCATED TO THE ASSESSEE BASED ON COST ALLOCATION KEYS I.E ON PER USER BASIS. THE FOLLOWING SERVICES WERE AVAILED BY THE ASSESSEE FROM ITS AE: - A) INFORMATION AND COMMUNCIATION TECHNOLOGY (AURORA) B) SERVER MAINTENANCE C) INTRANET SERVICES D) ACCESS TO DSM FROM NON DSM LOCATIONS E) PUSHMAIL ON TABLETS & SMARTPHONES F) APPLICATIONS LIKE DOMINO AND QUICKPLACE 4.1. THE LD DRP OBSERVED THAT THE ASSESSEE HAD NOT ELABORATED THAT HOW MUCH BENEFIT IT HAD DERIVED FROM THE NATURE OF SUCH APPLICATIONS PROVIDED TO IT BY THE AE. THE LD DRP O BSERVBED THAT NEITHER ANY EVIDENCE HAS BEEN IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 4 PRODUCED EVIDENCING THE RECEIPT OF SERVICES NOR ANY EVIDENCE HAS BEEN PRODUCED REGARDING DETERMINATION OF COST OF SUCH SERVICES. THE ASSESSEE HAS MERELY PRODUCED A LETTER FROM AE STATING THAT COSTS HAVE BEEN ALLO CATED WITHOUT ANY MARK UP AND BILLS FILED BY THE ASSESSEE ONLY SHOW THAT RATES HAVE BEEN CHARGED ON THE BASIS OF NUMBER OF USERS. IN A TRANSFER PRICING SCENARIO, IT IS NOT ONLY TO BE ESTABLISHED THAT ANY SERVICES HAVE BEEN OBTAINED BUT WHAT HAS TO BE ESTA BLISHED IS THAT SUCH SERVICES WERE AT ARMS LENGTH VIS A VIS A THIRD PARTY UNCONTROLLED TRANSACTION. UNLESS THIS EXERCISE IS CARRIED OUT (WHICH ACTUALLY HAS NOT BEEN CARRIED OUT BY THE ASSESSEE), IT CANNOT BE ESTABLISHED THAT THE BENEFITS IF ANY, DERIVED F ROM SUCH TOOLS AND SERVICES WERE AT ARMS LENGTH. THE LD DRP OBSERVED THAT NO COMPARABILITY ANALYSIS HAS BEEN CARRIED OUT RATHER ALL THE TRANSACTIONS HAVE BEEN BUNDLED AND THE TNMM HAS BEEN APPLIED. THE SUM AND SUBSTANCE OF LD DRP OBSERVATION IS THAT TH E ASSESSEE HAD NOT PROVIDED THE EVIDENCES REGARDING RECEIPT OF SERVICES , THE BENEFITS DERIVED FROM SUCH SERVICES OR COST INCURRED TOWARDS SUCH SO CALLED SERVICES. WITH THESE OBSERVATIONS, THE LD DRP UPHELD THE ACTION OF THE LD TPO. 5. AGGRIEVED, THE A SSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS : - EACH OF THE GROUNDS AND/ OR SUB - GROUNDS OF THE APPEAL ARE INDEPENDENT AND WITHOUT PREJUDICE TO THE OTHERS. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. DISPUTE RESOLUT ION PANEL ('DRP') ERRED IN CONFIRMING THE ACTION OF THE LD. TRANSFER PRICING OFFICER ('TPO') IN DETERMINING THE ARM'S LENGTH PRICE OF THE APPELLANT'S INTERNATIONAL TRANSACTION OF PAYMENT FOR E - CONNECTIVITY SERVICES AVAILED FROM ITS ASSOCIATED ENTERPRISE AS NIL INSTEAD OF RS. 52,83,464 AS DETERMINED BY THE APPELLANT. 2. IN DOING SO, THE HONTDLE DRP/ LD. TPO HAS GROSSLY ERRED IN : A) IGNORING THAT THE APPELLANT HAD SUPPORTED THE VALUE OF E - CONNECTIVITY CHARGES PAID WITH APPROPRIATE EVIDENCES; IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 5 B) CHALLENGING THE COMMERCIAL RATIONALE AND EXPEDIENCY OF AVAILING SERVICES BY THE APPELLANT; C) IGNORING THAT THE APPELLANT IS NOT REQUIRED TO ESTABLISH THE BENEFIT ARISING OUT OF THE SAID SERVICES; D) REJECTING THE COMPARABILITY ANALYSIS CARRIED OUT BY THE APPELLANT TO DEMONSTRATE ALP IN THE TRANSFER PRICING STUDY THE APPELLANT THEREFORE PRAYS THAT THE ADDITION MADE BY THE LD. AO OF RS. 52,83,464 UNDER SECTION 143(3) READ WITH SECTION 144(0(5) OF THE ACT ON THE BASIS OF THE DIRECTIONS PROVIDED BY THE DR P BE DELETED. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO ERRED IN LEVYING INTEREST UNDER SECTION 2340 OF THE ACT AMOUNTING TO RS. 3,84,159 . THE APPELLANT CRAVES LEAVE TO ADD, OMIT OR ALTER GROUNDS OF APPEAL BE FORE OR DURING THE HEARING OF AFORESAID MATTER. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE ASSESSEE HAD MADE PAYMENT TO DSM BUSINESS SERVICES BV (I.E AE) IN RELATION TO CORPORATE INFORMATION A ND COMMUNICATION TECHNOLOGY (AURORA) CHARGES FOR THE PERIOD 1.4.2010 TO 31.3.2011 PURSUANT TO COST ALLOCATED IN THE SUM OF EURO 87461.01 TO THE ASSESSEE. WE FIND THAT THE ASSESSEE HAD FILED A CONFIRMATION LETTER DATED 21.10.2014 FROM ITS AE BEFORE THE LD TPO WHEREIN THE AE HAD SPECIFICALLY CONFIRMED RENDERING OF SERVICES TO THE ASSESSEE FOR WHICH CHARGES WERE ALLOCATED TO THE ASSESSEE ON COST TO COST BASIS WITHOUT ANY MARK UP. THE CHARGES REPRESENT DSM INFORMATION AND COMMUNICATION TECHNOLOGY (ICT) COST INCURRED BY DSM BUSINESS SERVICES BV TOWARDS, INTER ALIA, THE FOLLOWING SERVICES AVAILED BY ASSESSEE : - INFORMATION & COMMUNICATION TECHNOLOGY (AURORA): OPERATION, MAINTENANCE AND UPDATE OF ICT ON WORKPLACES, INCLUDES COMMUNICATION VIA NETWORKS AND O FFICE APPLICATIONS AS WELL AS CONFERENCING SYSTEM. SERVER MAINTENANCE CHARGES: IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 6 OPERATION, MAINTENANCE AND EXECUTION MONITORING OF DATA / APPLICATION SERVERS FOR DATA STORAGE AND APPLICATION EXECUTION. INCLUDES MONITORING OF ACCESS RIGHTS TO FOLDERS ON SERVERS. INTRANET SERVICES: SECURE ACCESS TO DSM OWNED INTERNAL DATA FROM ALL ICT WORKPLACES. INCLUDES SYSTEM TO SHARE STRUCTURED INFORMATION AND DATA FROM ALL DSM LOCATIONS AND PREMISES. ACCESS TO DSM FROM NON DSM LOCATIONS: DATA CONNECTION COS TS FROM OUTSIDE DSM CONNECTION POINTS INTO DSM OWNED NETWORK. PUSHMAIL ON TABLETS &. SMART PHONES: EMAIL EXCHANGE BETWEEN DSM ICT'S EMAIL SYSTEM AND TABLET COMPUTERS A ND SMART PHONES OPERATION COSTS OF DEDICATED APPLICATIONS LIKE DOMINO AND QUICK PLAC E 6.1. WE FIND THAT THE ASSESSEE HAD FURTHER ELABORATED IN DETAIL VIDE ITS LETTER DATED 12.1.2015 BEFORE THE LD TPO , THE VARIOUS SERVICES PROVIDED BY THE AE AND THE BENEFITS DERIVED BY THE ASSESSEE PURSUANT TO RENDERING OF SUCH SE RVICES AT GLOBAL LEVEL BY THE AE IN THE TABULAR FORM AS UNDER: - SERVICE NATURE BENEFIT TO ASSESSEE INFORMATION & COMMUNICATION TECHNOLOGY (AURORA) OPERATION, MAINTENANCE AND UPDATE OF I CT' ON WORKPLACES, INCLUDES COMMUNICATION VIA NETWORKS AND OFFICE A PPLICATIONS AS WELL AS CONFERENCING SYSTEM. INSTALLATION OF DSM CUSTOMIZED OPERATING SYSTEM, INSTALLED ON SPECIFIC HARDWARE MANUFACTURED BY DELL ONLY MID ITS UPDATES NEEDED BY USERS WITHIN DNP INDIA WHICH MAKES A SECURED DSM INTRANT - 1 (CALLED DSM AURORA). COMMUNICATION WITHIN DSM EMPLOYEES VIA LIVE MEETING AND CONFERENCING. WITHOUT THIS DSM EMPLOYEE CANNOT WORK WITHIN DSM NETWORK (THIS IS BASIC SERVICES TO BY PART OF DSM). NO ACTIVITY LIKE MAIL COMMUNICATION / DATA STORAGE ETC IS POSSIBLE IN THIS INTRANET IF IT IS NOT UNDER AURORA ENVIRONMENT SERVER OPERATION, MAINTENANCE STORAGE OF ALL DOCUMENTS IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 7 MAINTENANCE AND EXECUTION, MONITORING OF DATA / APPLICATION SERVERS FOR DATA STORAGE AND APPLICATION EXECUTION. INCLUDES MONITORING OF ACCESS RIGHTS TO FOLDERS ON SERVERS. PRODUCED OR RECEIVED BY EMPLOYEES WITHIN DNP INDIA AT SAFE AND SECURE DATA STORAGE LOCATIONS INCLUDING BACKUPS AND RESTORE FACILITIES. OPERATION OF APPLICATIONS TOR DNP INDIA AT APPLICATION SERVERS PLACED IN SAFE AND SECURE LOCATIONS INCLUDING S UPPORT IN CASE OF FAILURE AND DISTURBANCES. INTRANET SERVICES SERVICE ACCESS IN DSM OWNED INTERNAL DATA FROM ALL - 1CT WORKPLACES. INCLUDES SYSTEM IN SHARE STRUCTURED INFORMATION AND DATA FROM ALL DSM LOCATIONS AND PREMISES. IT PROVIDES A SECURED PLATFORM WHERE ONP INDIA EMPLOYEES CAN ACCESS THE INFORMATION WHEREIN NO OUTSIDER HAS ACCESS TO GET THE INFORMATION. IMPORTANT AND ACTUAL INFORMATION ABOUT BELONGINGS OF THE DSM COMPANY CAN BE EXTRACTED TO DO THE DAILY WORK. ACCESS TO DSM FROM NON DSM LOCATIONS D ATA CONNECTION FROM OUTSIDE DSM CONNECTION POINTS INTO DSM OWNED NETWORK IT PROVIDES FACILITY TO ALL THE EMPLOYEES OF DNP INDIA PARTICULARLY SALES AND MARKETING TEAM WORKING FROM OUTSIDE DNI' INDIA ENVIRONMENT TO ACCESS MAILS AND INTERNET WHEN THEY ARE TRA VELLING OR WORKING FROM HOME. PUSHMAIL ON TABLETS AND SMARTPHONES E - MAIL SYSTEM ON TABLET COMPUTERS AND SMARTPHONES ALL EMAIL EXCHANGE, CONTACT LISTS AND TIME PLANNING IS MADE AVAILABLE AT TABLES AND / OR SMARTPHONES FOR THE EMPLOYEES WHICH ARE ON TRAVEL OR OUTSIDE THE DNP INDIA PREMISES APPLICATION LIKE DOMINO AND QUICKPLACE ACCESS TO APPLICATIONS LIKE DOMINO AND QUICKPLACE IT PROVIDES ACCESS TO DNP EMPLOYEE TO IMPORTANT APPLICATIONS LIKE DOMINO AND QUICKPLACE REQUIRED FOR BUSINESS OPERATIONS. 6 .2. W E ARE CONVINCED WITH THE ARGUMENTS ADVANCED BY THE LD AR THAT THE AFORESAID SERVICES ARE EXTREMELY CRITICAL TO ENSURE THE SMOOTH FUNCTIONING OF DAY TO DAY BUSINESS OF THE ASSESSEE IN INDIA. WE FIND THAT THE WHOLE PURPOSE OF HAVING A CENTRALIZED IT - SET UP W ITHIN THE GROUP WAS TO AVOID IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 8 DUPLICATION OF EFFORTS AND TO MAKE THE ARRANGEMENT ADMINISTRATIVELY CONVENIENT AND COST EFFECTIVE. ACCORDINGLY, WE HOLD THAT THE SAID SERVICES ARE SUCH THAT AN INDEPENDENT ENTERPRISE IN COMPARABLE UNCONTROLLED CIRCUMSTANCES WOU LD HAVE BEEN WILLING TO PAY FOR THE ACTIVITY IF PERFORMED FOR IT BY AN INDEPENDENT ENTERPRISE. 6.3. WE FIND LOT OF FORCE IN THE ARGUMENT OF THE LD AR THAT THE E - CONNECTIVITY SERVICES AVAILED BY THE ASSESSEE FORM PART OF THE COST BASE OF THE FOLLOWING M AIN ACTIVITIES OF THE ASSESSEE : - A) MARKETING SUPPORT SERVICES WHEREIN AS PER THE AGREEMENT FOR PROVISION OF MARKETING SUPPORT SERVICES BETWEEN THE ASSESSEE AND THE AE, THE ASSESSEE IS COMPENSATED ON COST PLUS BASIS ( I.E AGREED OPERATING EXPENSES PLUS AGREED MARGIN) FOR ITS ACTIVITY OF PROVISION OF MARKETING SUPPORT SERVICES. HENCE THE PAYMENT OF E - CONNECTIVITY CHARGES TO ITS AE ON COST ALLOCATION BASIS FORM PART OF THE COST BASE AND IS ALREADY RECOVERED BY THE ASSESSEE WITH A MARK UP FROM ITS AE. B ) DISTRIBUTION ACTIVITY - WHEREIN AS PER THE DISTRIBUTION AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS AE , THE PURCHASE PRICE OF THE PRODUCTS FOR THE ASSESSEE SHALL BE ARRIVED AT AFTER REDUCING THE EXPECTED OPERATING EXPENSES AND THE ARMS LENGTH OPER ATING MARGIN FROM THE EXPECTED NET SALES PRICE OF THE PRODUCTS TO THE CUSTOMER. IT IS NOT IN DISPUTE THAT THE PAYMENT OF E - CONNECTIVITY CHARGES TO ITS AE ON COST ALLOCATION BASIS FORM PART OF THE COST BASE. THE PRICING POLICY OF THE DISTRIBUTION ACTIVITY O F THE ASSESSEE IS SUCH WHERE THE ASSESSEE PAYS THE AE AFTER RETAINING A MARGIN ON REVENUE AND RECOVERING ITS OPERATING COSTS INCLUDING E - CONNECTIVITY CHARGES FROM THE REVENUE EARNED FROM CUSTOMERS IN INDIA. THERE IS NO DISPUTE BEFORE US THAT THE PAYMENT O F E - CONNECTIVITY CHARGES BEING ON REVENUE ACCOUNT, ITS IMPACT WOULD BE DIRECTLY ON THE IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 9 OPERATING MARGIN. THEREFORE ALONG WITH OTHER OPERATING COSTS , E - CONNECTIVITY CHARGES IS ALSO REDUCED FROM THE SALES TO DETERMINE THE AMOUNT TO BE PAID BY THE ASSESSEE TO ITS AE. 6.4. WE FIND THAT THE ASSESSEE HAD PROVIDED THE BASIS OF ALLOCATION OF COST BEFORE THE LD TPO VIDE LETTER DATED 12.1.2015 BY PRIMARILY STATING THAT THE COSTS INCURRED BY AES IN PROVIDING THE SERVICES TO THE VARIOUS AES ALONG WITH THIRD PARTY COSTS ARE POOLED TOGETHER AND THEN ALLOCATED TO THE DIFFERENT AES ON A PER USER BASIS. THEREFORE THE ALLOCATION BASIS IS USAGE. WE FIND THAT THE ALLOCATION KEY USED IN THE INSTANT CASE IS USAGE AND THE ASSESSEE HAD PLACED RELIANCE ON PARA 7.20 TO 7.24 OF OECD TP GUIDELINES WHEREIN DIRECT CHARGE METHOD AND INDIRECT CHARGE METHOD ARE PRESCRIBED. IN THE INSTANT CASE, WE FIND THAT THE COST HAS BEEN ALLOCATED BY THE AE TO THE INDIAN ENTITY (I.E ASSESSEE HEREIN) BY APPLYING INDIRECT CHARGE METHOD BA SED ON THE USAGE. THE LD AR STATED THAT EACH DSM GROUP ENTITY AVAILING THE SERVICES FROM THE AE WILL GIVE THE AE THE PROJECTED NUMBER OF USERS FOR EACH SERVICE AND BASED ON THAT THE AE WILL DETERMINE THE PER USER COST. THE TOTAL COST IS ACCUMULATED WITH RESPECT TO EACH SERVICE AND PER USER COST IS CALCULATED BY DIVIDING THE TOTAL COST BY NUMBER OF BUDGETED USERS. 6.5. WE FIND THAT THE LD TPO AGREED TO THE FACT THAT THE SERVICES WERE INDEED RENDERED BY THE AE TO THE ASSESSEE HEREIN, BUT CONCLUDED THAT T HE NATURE OF SERVICES RENDERED ARE ROUTINE IN NATURE. HAVING ACCEPTED THE FACT THAT SERVICES WERE RENDERED BY AE, THEN THERE IS NO REASON TO DISBELIEVE THE PAYMENT INCURRED THEREON ON COST TO COST BASIS WITHOUT ANY MARK UP. WE FIND THAT THE LD TPO IN HIS ORDER CONCEDED THE FACT OF RENDERING OF SERVICES BY THE AE TO THE ASSESSEE BUT STATED THAT THEY WERE ONLY ROUTINE IN NATURE NOT WARRANTING ANY PAYMENT OF COST. WHEREAS THE IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 10 LD DRP OBSERVED THAT NO SERVICES WERE INDEED RENDERED BY THE AE TO THE ASSESSEE WAR RANTING ANY PAYMENT OF COST AND ADDITIONALLY THE LD DRP STATED THAT THE ASSESSEE HAD NOT PROVED THE BENEFITS DERIVED BY IT FROM THE SERVICES AVAILED FROM AE. WE FIND THAT THE LD DR VEHEMENTLY RELIED ONLY ON THE ORDER OF THE LD DRP. IT IS NOW WELL SETTLED T HAT THE LD TPO CANNOT QUESTION THE COMMERCIAL EXPEDIENCY OF THE TRANSACTION CARRIED OUT BY THE ASSESSEE AS IT FALLS WITHIN THE EXCLUSIVE DOMAIN OF THE LD AO. WE HAVE ALREADY HELD HEREINABOVE THAT VARIETY OF SERVICES RENDERED BY THE AE TO ALL THE GROUP ENT ITIES INCLUDING THE ASSESSEE HEREIN TOGETHER WITH THE RELATED BENEFITS DERIVED BY THE ASSESSEE THEREIN. WE FIND THAT THE COST ALLOCATION KEY USED IS PER USER BASIS BY THE AE FOR ALLOCATION OF COST WITHOUT ANY MARK UP. THE INVOICES RAISED BY THE AE ON T HE ASSESSEE IN THIS REGARD ALSO GOES TO PROVE THAT THE SAME ARE ON COST TO COST WITHOUT ANY MARK UP. ALL THESE FACTS ARE CONFIRMED BY THE AE VIDE SEPARATE LETTER DATED 21.10.2014 FILED BEFORE THE LOWER AUTHORITIES. MOREOVER, WE HAVE ALREADY HELD THAT THE PAYMENT OF E - CONNECTIVITY CHARGES FORMS PART OF THE COST BASE (I.E OPERATING COST IN BOTH MARKETING SUPPORT SERVICES AND DISTRIBUTION ACTIVITY) AND THE ENTIRE OPERATING COSTS HAD BEEN RECOVERED WITH ARMS LENGTH MARGIN FROM THE AE. HENCE THERE IS NO REA SON TO DETERMINE THE ALP OF THE SAID INTERNATIONAL TRANSACTION AT NIL BY THE LD TPO WHICH HAS BEEN WRONGLY UPHELD BY THE LD DRP. 6.6. WE FIND THAT THE LD TPO FOR THE ASST YEAR 2010 - 11 (IMMEDIATELY PRECEDING ASSESSMENT YEAR), HAD ACCEPTED THE CLAIM OF THE ASSESSEE FOR PAYMENT FOR E - CONNECTIVITY CHARGES IN THE SUM OF RS 41,48,949/ - WHEREIN CUP METHOD WAS FOLLOWED BY THE ASSESSEE FOR MAKING PAYMENT TO AE ON COST TO COST BASIS WITHOUT ANY MARK UP , U/S 92CA(3) OF THE ACT DATED 29.1.2014 WHICH IS PLACED ON REC ORD BEFORE US. WE FIND THAT THE ASSESSEE HAD ALSO PLACED ON RECORD A LETTER DATED 8.1.2014 FILED FOR THE ASST YEAR IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 11 2010 - 11 BEFORE THE LD TPO GAVE THE SAME REPLY AS WAS GIVEN FOR ASST YEAR 2011 - 12. WHEN THE SAME REPLY WAS ACCEPTED BY THE LD TPO IN ASST Y EAR 2010 - 11, THERE IS NO REASON TO TAKE A DIVERGENT STAND IN ASST YEAR 2011 - 12 ESPECIALLY WHEN THERE IS ABSOLUTELY NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. WE ALSO FIND THAT THE LD TPO HAD ALSO ACCEPTED THE PAYMENT OF E - CONNECTIVITY CHARGES T O BE AT ARMS LENGTH IN THE TRANSFER PRICING ASSESSMENT COMPLETED U/S 92CA(3) OF THE ACT DATED 8.1.2016 FOR THE ASST YEAR 2012 - 13, A COPY OF WHICH IS PLACED ON RECORD. 6.7. FINALLY WE HOLD THAT THE LD TPO HAD DETERMINED THE ALP OF PAYMENT FOR E - CONNECTIV ITY CHARGES AT NIL WITHOUT RESORTING TO ANY OF THE METHODS PRESCRIBED IN THE STATUTE. WE HOLD THAT ONCE A REFERENCE IS RECEIVED BY THE LD. TPO U/S.92CA(1) OF THE ACT FROM THE LD. AO, THE LD. TPO IS REQUIRED TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSAC TION AS PER THE PROVISIONS CONTAINED IN SECTION 92C AND 92CA OF THE ACT READ WITH RELEVANT RULES THEREON. FROM THE CONJOINT READING OF THE RELEVANT SECTIONS AND THE RELEVANT RULES, WE FIND THAT THE DUTY OF THE LD. TPO IS RESTRICTED ONLY TO THE DETERMINATIO N OF THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION BETWEEN TWO RELATED PARTIES BY APPLYING ANY OF THE METHODS PRESCRIBED U/S.92C OF THE ACT READ WITH RULE 10B OF THE RULES. THUS, THERE IS NO PROVISION MADE IN THE STATUTE EMPOWERING LD. TPO FOR DET ERMINING THE ALP ON A PARTICULAR INTERNATIONAL TRANSACTION AT NIL WITHOUT RESORTING TO ANY OF THE METHODS PRESCRIBED. WE FIND THAT THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. JOHNSON & JOHNSON LIMITED IN ITA NO.1030 OF 2014 DATED 07/03/201 7 HAD HELD AS UNDER: - 4. REGARDING QUESTION (D) : (A) THE RESPONDENT ASSESSEE PAID TO ITS ASSOCIATED ENTERPRISES (AE), TECHNICAL KNOW HOW ROYALTY OF 2%. THE TRANSFER PRICING OFFICER (TPO) BY ORDER DATED 24 TH MARCH, 2005 RESTRICTED THE TECHNICAL KNOW HOW R OYALTY PAID BY THE RESPONDENT ASSESSEE TO ITS AE AT 1% INSTEAD OF 2%, AS CLAIMED. IN TERMS OF THE DETERMINATION DATED 24 TH MARCH, 2005 OF THE TPO ON THE IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 12 ABOVE ISSUE AMONGST OTHERS, AN ASSESSMENT ORDER DATED 28 TH MARCH, 2005 FOR THE SUBJECT ASSESSMENT YEAR WAS PASSED BY ASSESSING OFFICER UNDER SECTION 143(3) OF THE ACT. (B)BEING AGGRIEVED WITH THE ORDER DATED 28 TH MARCH, 2005 OF THE ASSESSING OFFICER, THE RESPONDENT ASSESSEE PREFERRED AN APPEAL TO THE COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)]. BY AN ORDE R DATED 22 ND MARCH, 2007, THE APPEAL OF THE RESPONDENT ASSESSEE ON THE ISSUE OF ROYALTY PAYABLE ON TECHNICAL KNOW HOW, ALLOWED THE APPEAL. IT INTER ALIA HELD THAT RESTRICTING THE ROYALTY PAID ON ACCOUNT OF TECHNICAL KNOW HOW TO 1% WAS ARBITRARY AND AD HOC. IN AS MUCH AS, THERE WERE NO REASONS JUSTIFYING THE RESTRICTION OF THE TECHNICAL KNOW HOW ROYALTY PAID BY THE RESPONDENT ASSESSEE TO ITS AE AT 1%. MOREOVER, IT ALSO RECORDS THE FACT THAT THE TPO DID NOT DETERMINE THE ALP OF THE TECHNICAL KNOW HOW ROYALTY B Y ADOPTING ANY OF THE METHODS PRESCRIBED UNDER SECTION 92C OF THE ACT. (C) BEING AGGRIEVED, THE REVENUE CARRIED THE ISSUE IN APPEAL TO THE TRIBUNAL. BY THE IMPUGNED ORDER DATED 20 TH AUGUST, 2013 THE TRIBUNAL DISMISSED THE REVENUE'S APPEAL INTER ALIA UPHOLDI NG THE ORDER OF THE CIT(A). (D)WE FIND THAT THE IMPUGNED ORDER OF THE TRIBUNAL UPHOLDING THE ORDER OF THE CIT(A) IN THE PRESENT FACTS CANNOT BE FOUND FAULT WITH. THE TPO IS MANDATED BY LAW TO DETERMINE THE ALP BY FOLLOWING ONE OF THE METHODS PRESCRIBED IN SECTION 92C OF THE ACT READ WITH RULE 10B OF THE INCOME TAX RULES. HOWEVER, THE AFORESAID EXERCISE OF DETERMINING THE ALP IN RESPECT OF THE ROYALTY PAYABLE FOR TECHNICAL KNOW HOW HAS NOT BEEN CARRIED OUT AS REQUIRED UNDER THE ACT. FURTHER, AS HELD BY THE C IT(A) AND UPHELD BY THE IMPUGNED ORDER OF THE TRIBUNAL, THE TPO HAS GIVEN NO REASONS JUSTIFYING THE TECHNICAL KNOW HOW ROYALTY PAID BY THE ASSESSING OFFICER TO ITS ASSOCIATED ENTERPRISE BEING RESTRICTED TO 1% INSTEAD OF 2%, AS CLAIMED BY THE RESPONDENT ASS ESSEE. THIS DETERMINATION OF ALP OF TECHNICAL KNOW HOW ROYALTY BY THE TPO WAS AD HOC AND ARBITRARY AS HELD BY THE CIT(A) AND THE TRIBUNAL. (E)IN THE ABOVE VIEW, THE QUESTION AS PROPOSED DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. THUS, NOT ENTER TAINED. 6.7.1. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF HONBLE JURISDICTIONAL HIGH COURT, THE ACTION OF THE LD TPO IN DETERMINING THE ALP OF PAYMENT FOR E - CONNECTIVITY CHARGES AT NIL WITHOUT RESORTING TO ANY OF THE METHODS PRESCRIBED UNDER THE S TATUTE DESERVES TO BE DISMISSED. IT (TP) A NO .2076/MUM/2016 M/S. D SM NUTRITIONAL PRODUCTS PVT LTD. 13 6.8. IN VIEW OF THE AFORESAID OBSERVATIONS, WE HAVE NO HESITATION IN DIRECTING THE LD TPO/ LD AO TO ACCEPT THE CLAIM OF PAYMENT FOR E - CONNECTIVITY CHARGES IN THE SUM OF RS 52,83,464/ - TO BE AT ARMS LENGTH. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE ARE ALLOWED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 04 / 10 /201 9 SD/ - ( RAVISH SOOD ) SD/ - (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 04 / 10 / 2019 KARUNA , SR.PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. // TRUE COPY//