Almatis Alumina Private Ltd, Kolkata V. DCIT, Circle-8(1), Kolkata, Kolkata

ITA 2361/KOL/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 8162 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 4 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-04-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 21-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P K SRIHARI
• Assessee Lawyers: J P KHAITAN
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Wholly owned subsidiary; Bad and doubtful debts; Set aside
• Section: 143(3); 92F; 92A; 92E; 10B; 143(1); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C, BENC H KOLKATA BEFORE SHRI S.S.GODARA, JM &DR. A.L.SAINI, AM ./ITA NOS.726&2361/KOL/2017 ( / ASSESSMENT YEARS: 2012-13& 2013-14) ALMATIS ALUMINA PVT. LTD. KANKARIA ESTATE, 2 ND FLOOR, 6, RUSSEL STREET, KOLKATA-700071. VS. DCIT, CIRCLE-8(1), KOLKATA ./ ./PAN/GIR NO.: AACCA 2120 N (ASSESSEE) .. (REVENUE) ASSESSEE BY :SHRI J.P. KHAITAN, SR. ADVOCATE RESPONDENT BY : SHRI P.K. SRIHARI, CIT DR / DATE OF HEARING : 14/01/2019 /DATE OF PRONOUNCEMENT : 16/04/2019 / O R D E R PER DR. A. L. SAINI: THE CAPTIONED TWO APPEALS FILED BY THE ASSESSEE, PE RTAINING TO ASSESSMENT YEARS 2012-13 AND 2013-14 RESPECTIVELY, ARE DIRECTED AGAI NST THE SEPARATE FAIR ASSESSMENT ORDERS PASSED BY THE ASSESSING OFFICER U NDER SECTION 144C(13) READ WITH SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT), WHICH INCORPORATE THE DIRECTIONS GIVEN BY THE LEARNED DIS PUTE RESOLUTION PANEL-2, NEW DELHI. 2.SINCE, THE ISSUES INVOLVED IN ALL THE APPEALS ARE COMMON AND IDENTICAL; THEREFORE, THESE APPEALS HAVE BEEN HEARD TOGETHER AND ARE BEIN G DISPOSED OF BY THIS CONSOLIDATED ORDER. FOR THE SAKE OF CONVENIENCE, TH E GROUNDS AS WELL AS THE FACTS ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 2 NARRATED IN I.T.A. NO. 726/KOL/2017, FOR ASSESSMENT YEAR 2012-13, HAVE BEEN TAKEN INTO CONSIDERATION FOR DECIDING THE ABOVE APP EALS EN MASSE . 3. THE COMMON GROUNDS OF APPEAL RAISED BY THE ASSES SEE IN THESE TWO APPEALS ARE AS FOLLOWS: (1) WHETHER THE ASSOCIATED ENTERPRISES (AE) CAN BE CONSIDERED AS A TESTED PARTY AS PER INDIAN TRANSFER PRICING REGULATION? (2) ACCEPTING THE AUDITED SEGMENTAL ANALYSIS FOR TH E TRANSACTION OF PURCHASE OF FINISHED GOODS, RECEIPT OF COMMISSION AND SALE OF F INISHED GOODS BY THE ASSESSEE FROM THE ASSOCIATED ENTERPRISES (AE). (3) ADMINISTRATIVE SUPPORTS SERVICES AND IT SUPPORT SERVICES RECEIVED BY THE ASSESSEE FROM THE ASSOCIATED ENTERPRISES (AE) WRONG LY TREATED TO BE IN THE NATURE OF STEWARDSHIPFUNCTIONS. 4. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE INFORMS THE BENCH THAT THE ASSESSEE DOES NOT WANT TO PRESS GROUND NOS. 1, 4 AND6 OF ITA NO.726/KOL/2017, FOR A.Y.2012-13. THE ASSESSEE ALSO DOES NOT PRESS GROUND NOS.1 AND 4 OF ITA NO.2361/KOL/2017, FOR A.Y. 2013- 14.LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE, DOES NOT OBJECT THE REFORE,WE TREAT THESE GROUNDS TO BE DISMISSED AS NOT PRESSED. 5. GROUND NO.6 RAISED BY THE ASSESSEE IN ITA NO.236 1/KOL/2017, FOR A.Y. 2013- 14 AND GROUND NO.7 RAISED BY THE ASSESSEE IN ITA NO .726/KOL/2017, FOR A.Y.2012-13, RELATE TO INITIATION OF PENALTY PROCEE DINGS UNDER SECTION 271(1) (C ) OF THE ACT, WHICH ARE PREMATURE IN NATURE, HENCE DO NOT REQUIRE ADJUDICATION. 6. NOW WE SHALL TAKE FIRST COMMON ISSUE OF THESE TW O APPEALS, WHICH RELATES TO WHETHER THE FOREIGN ASSOCIATED ENTERPRISES (AE) CAN BE CONSIDERED AS A TESTED PARTY AS PER INDIAN TRANSFER PRICING REGULATION? ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 3 33 3 7.THE FACTS OF THE CASE WHICH CAN BE STATED QUITE S HORTLY ARE AS FOLLOWS:ALMATIS ALUMINA PRIVATE LIMITED ('ALMATIS INDIA' OR 'ASSESS EE' OR 'COMPANY') IS A 100% SUBSIDIARY OF ALMATIS HOLDINGS GMBH, GERMANY. IT IS PRIMARILY ENGAGED IN THE MANUFACTURING OF ALUMINA BASED REFRACTORY AND CERAM IC RAW MATERIALS. THE LOCAL MANUFACTURING ACTIVITY INCLUDES CRUSHING, SCREENING , GRINDING AND PACKAGING OF TABULAR ALUMINA CD (CONVERTER DISCHARGED) BALLS AND GRINDING AND PACKAGING OF CALCINED ALUMINA FOR WHICH COMPANY IMPORTS RAW MATE RIALS FROM ITS AES. DURING THE ASSESSMENT YEAR 2012-13, THE COMPANY HAD SEVERAL INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (HEREI NAFTER REFERRED TO AS THE 'AES') WHICH HAVE BEEN DISCLOSED IN THE ACCOUNTANT'S REPOR T IN FORM 3CEB REPORT FILED U/S 92E OF THE ACT ALONG WITH THE RETURN OF INCOME. THE RETURN OF INCOME WAS PROCESSED U/S 143(1) OF THE ACT AND SUBSEQUENTLY TA KEN UP FOR SCRUTINY ASSESSMENT U/S 143(3) OF THE ACT. DURING THE COURSE OF SCRUTIN Y ASSESSMENT, THE COMPANY'S CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER ( HEREINAFTER REFERRED TO AS THE 'LD. TPO') U/S 92CA OF THE ACT, FOR DETERMINATION OF ARM S' LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ITS AE S. ORDER U/S 92CA(3) WAS PASSED ON 29TH JANUARY 2016 WHICH WAS SUBSEQUENTLY INCORPO RATED IN THE DRAFT ASSESSMENT ORDER U/S 144C(1)/ 143(3) DATED 10.03.20 16. THE LD. TPO HAS MADE ADDITIONS WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE DURING THE FINANCIAL YEA R (FY) 2011-12 WITH ITS AES, AGAINST WHICH THE ASSESSEE HAS FILED OBJECTIONS BEF ORE HON`BLE DRP. THE HON`BLE DRP ISSUED DIRECTIONS UNDER SECTION 144C (5) OF THE ACT, VIDE ITS ORDER DATED 27.12.2016, WHICH WERE INCORPORATED IN THE FINAL AS SESSMENT ORDER PASSED BY AO UNDER SECTION 144C(13)/143(3) OF THE INCOME TAX ACT , 1961. 8. AS PER THE TRANSFER PRICING (TP) DOCUMENT FURNI SHED BY THE ASSESSEE FOR THE A.Y. 2012-13, THE ASSESSEECOMPANY HAS ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES). NATURE OF SERVICES AMOUNT (RS.) PURCHASE OF RAW MATERIAL 88,41,91,807/- PURCHASE OF TRADED OR FINISHED GOODS 6,03,35,496/- SALE OF FINISHED GOODS 18,56,380/- ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 4 44 4 COMMISSION RECEIVED 1,13,61,927/- SUPPORT SERVICES AVAILED 5,06,94,589/- THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS REPRESENTING DIFFERENT FUNCTIONS WITH ASSOCIATE ENTERPRISES(A.E), THE METH OD AND THE PROFIT LEVEL INDICATOR (PLI) USED FOR BENCH MARKING SUCH TRANSACTION ARE S UMMARIZED IN THE TABLE BELOW: NATURE OF SERVICES METHOD PURCHASE OF REFRACTORIES TNMM EXPORT OF REFRACTORIES TNMM RECEIPT OF AGENCY COMMISSION TNMM THE ASSESSEE HAS BENCHMARKED THE ABOVE TRANSACTION ON ENTITY LEVEL BY APPLYING TNMM AS MOST APPROPRIATE METHOD (MAM) AND OPERATING PROFIT ON SALES AS THE PROFIT LEVEL INDICATOR (PLI). THE PLI OF THE ENTITY IS ARRIVED AT 2.92% WHILE THAT OF THE COMPARABLE UNCONTROLLED TRANSACTION WAS CALCULA TED AT 10.48%. THE ASSESSEE HAS JUSTIFIED THE ABOVE TRANSACTION BY WORKING OUT THE AVERAGE WEIGHTED ADJUSTED WORKING CAPITAL OF THE COMPARABLE FOR THE THREE YEA RS I.E. F.YS 2009-10, 2010-11 AND 2011-12 AT 7.34%. EVEN THOUGH THE PLI OF THE CO MPARABLE IS MORE THAN THE PLI OF THE ASSESSEE. THE ASSESSEE HAS NOT MADE ANY ADJUSTMENT AND HAS ALSO NOT CALCULATED THE ARM'S LENGTH PRICE TO SEE WHETHER TH E SAME IS WITHIN THE +/- 5% RANGE. HOWEVER, IT WAS NOTICED THAT THE PLI OF THE COMPARABLESWAS ARRIVED BY CONSIDERING WEIGHTED AVERAGE MARGIN OF 3 YEARS DATA FOR THE A.YS 2009-10,2010- 11 AND 2011-12. FOR THE PURPOSE OF JUSTIFYING THE TRANSACTION OF SE RVICES, THE ASSESSEE HAS USEDTNMM AS MOST APPROPRIATE METHOD AND OPERATING P ROFIT ON SALES AS THE PLI. HOWEVER, THE ASSESSEE HAS ASSOCIATED ENTERPRISES AS THE TESTED PARTY. IT WAS ALSO OBSERVED THAT THE ASSESSEE HAS NOT CALCULATED THE P LI OF THE TESTED PARTY BUT USED THE COST PLUS MARKUP OF 9.6% AS THE PLI OF THE TEST ED PARTY. THUS, THE ASSESSEE HAS JUSTIFIED THE TRANSACTION TO BE AT ARM'S LENGTH BY CALCULATING THE PLI OF THE COMPARABLE AT 10.17% AND THAT OF THE COST PLUSMARKU P AT 9.6%. ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 5 55 5 9. THE ASSESSEE COMPANY IMPORTS RAW MATERIAL FROM I TS ASSOCIATED ENTERPRISES (AE) FOR THE MANUFACTURE OF ALUMINS BASED REFRACTOR Y AND CERAMIC RAW MATERIALS.IN RESPECT OF INDIAN MANUFACTURE, SO FAR, THE NATURE O F THE ACTIVITIESISCONCERNED, IT SALES THE MANUFACTURED PRODUCTS TO THIRD PARTY CUST OMERS. THEASSESSEE COMPANY HAVE THREE ASSOCIATED ENTERPRISES (AE), NAMELY:ALMA TIS LINK (USA), ALMATIS GMBH (GERMANY) AND ALMATIS BV(NETHERLAND). BEFORE T HE TPO PROCEEDINGS, THE ASSESSEE (THE ALMATIS ALUMINA PVT. LTD)HAS CONSIDER ED AS A TESTED PARTY. HOWEVER, THE ASSESSEE HAS CHANGED ITS STAND FIRST T IME BEFORE THE DRP STATING THAT ASSOCIATED ENTERPRISES (AE) WOULD BE THE TESTED PAR TY. THAT IS, ASSOCIATED ENTERPRISES (AE) WITH RESPECT TO THEIR SEGMENTAL DA TA FOR THE ACTIVITY UNDERTAKEN SHOULD BE THE TESTED PARTY.TO MAKE IT MORE CLEAR, B EFORE THE TPO PROCEEDINGS, THE ASSESSEE HIMSELF (ALMATISALUMINA PVT. LTD. ) WAS TA KEN AS TESTED PARTY AND THE TRANSFER PRICING ADJUSTMENT WAS MADE TREATING THE ASSESSEE AS A TESTED PARTY. HOWEVER, BEFORE THE LD DRP, THE ASSESSEE HAS CHANGE D ITS STAND AND ARGUED THAT ASSOCIATED ENTERPRISES (AE) WOULD BE THE TESTED PAR TY, AS IT IS A LEAST COMPLEX ENTITY. HOWEVER, THE LD DRP REJECTED THE CONTENTION OF THE ASSESSEE THEREFORE, THE ASSESSEE IS IN APPEAL BEFORE US, WITH RESPECT TO IT S SOLITARY GRIEVANCE THAT ASSOCIATED ENTERPRISES (AE) SHOULD BE THE TESTED PARTY. 10. BEFORE THE DISPUTE RESOLUTION PANEL (DRP), THE ASSESSEE HAS RAISED TWO ADDITIONAL GROUNDS PERTAINING TO ASSOCIATED ENTERPR ISES (AE) TO BE THE TESTED PARTY. THESE TWO GROUNDS READ AS UNDER: 1. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. TPO AND ACCORDINGLY THE LD. AO FAILED TO PROVIDE DUE COGNIZ ANCE TO THE FACT THAT IN RELATION TO THE PURCHASE OF RAW MATERIALS, THE ASSE SSEE WAS ENGAGED IN MANUFACTURING OPERATIONS WHICH ENTAILS ENTREPRENEUR IAL FUNCTION AND RELATED RISKS, WHEREAS, THE AES WERE MERE SUPPLIERS OF THE PRODUCTS BASED ON ORDERS FROM THE ASSESSEE. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, WITH REGARD TO THE MANUFACTURING FUNCTION, THE LD. TPO AND ACCORDINGLY THE LD. AO FAILED TO PROVIDE DUE COGNIZANCE TO THE ASSESSEE'S FUNCTIONAL , ASSET AND RISK PROFILE, ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 6 66 6 THEREBY SELECTED THE ASSESSEE AS THE LEAST COMPLEX ENTITY AND CONSEQUENTLY THE TESTED PARTY THEREBY, BENCHMARKED THE PROFITABI LITY EARNED BY IT WHICH IS IN CONTRAVENTION TO THE ARM'S LENGTH PRINCIPLE. THE ASSESSEE SUBMITTED BEFORE THE LD. DRP, THE FOLL OWING DOCUMENTS AND EVIDENCES TO DEMONSTRATE THAT ASSOCIATE ENTERPRISE (AE) SHOULD BE THE TESTED PARTY. (I) THE SUMMARY OF FUNCTIONS, ASSETS, RISK DRIVER OF TH E ASSESSEE TO DEMONSTRATE IT AS MORE COMPLEX ENTITY, WHICH ARE PL ACED ON PAPER BOOK AT PAGE NOS. 708 TO 797, WHEREIN THE ASSESSEE SUBMITTE D THAT THE ASSESSEE IS MORE COMPLEX ENTITY THEREFORE IT SHOULD NOT BE CONS IDERED AS A TESTED PARTY. (II) THE ASSESSEE HAS SUBMITTED THE WRITTEN SUBMISSIONS BEFORE THE LD. DRP FOR SELECTION OF ASSOCIATED ENTERPRISES (AE) AS A TESTE D PARTY (VIDE PAPER BOOK PAGE NOS. 656 TO 661). (III) THE ASSESSEE HAS SUBMITTED THE BENCH MARK RESULT OF THE ASSOCIATED ENTERPRISES FOR THE INTERNATIONAL TRANSACTION AND A UDITED SEGMENTAL RESULTS OF THE AE (VIDE PAPER BOOK PAGE NOS. 798 TO 801). (IV) THE ASSESSEE HAS SUBMITTED THE SEARCH FORCOMPARABL ES OF ALMATISINC WHICH IS GIVEN ON PAGE NOS. 661 TO 663 OF PAPER BOO K. (V) THE SEARCH FOR COMPARABLES OF ALMATIZGMBH(GERNMAY) AND ALMATIS BV WERE FURNISHED BY ASSESSEE (VIDE NOS. 663 TO 666). (VI) THE ASSESSEE HAS SUBMITTED BUSINESS DESCRIPTION OF THE COMPARABLES. THE LD. DRP SENT THESE DOCUMENTS FOR EXAMINATION OF THE TPO AND TO CALL A REMAND REPORT FROM HIM. THE LD. TPO SUBMITTED THE R EMAND REPORT BEFORE THE LD. DRP, WHERE TPO ACCEPTED THE ASSOCIATE ENTERPRISE(AE ) AS LEAST COMPLEX PARTY BUT THEN HE AGAIN SAID THAT THE AES CANNOT BE TREA TED AS TESTED PARTY AS PER INDIAN TRANSFER PRICING REGULATION. THE FINDINGS OF THE TPO IN THE REMAND REPORT IS GIV EN BELOW: FOREIGN EXCHANGE RISK ALMATIS INDIA ASSUMES THE RISK OF FOREIGN EXCHANGE FLUCTUATIONS AS IT IMPORTS THE GOODS FROM ITS AES IN FOREIGN CURRENCY. ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 7 77 7 BASED ON THE ABOVE THE SUPPLIER AES WERE SELECTED A S THE TESTED PARTIES AND BENCHMARKED. OUR COMMENTS THE ASSESSEE HAS SUBMITTED VARIOUS DOCUMENTS TO SUB STANTIATE THE ABOVE FUNCTIONAL AND RISK PROFILE, INCLUDING EMAILS FOR MARKET RISK, NEGOTIATION EMAILS WITH CUSTOMERS FOR PRICE RISK, EMAILS FROM THE ASSESSEE TO THE CUSTOMERS FOLLOWING UP FOR PAYMENTS SHOWING CREDIT RISK COMPLAINT EMAILS F ROM CUSTOMERS SHOWING THAT THE ASSESSEE IS RESPONSIBLE FOR PRODUCT QUALITY AND FINANCIALLY LIABLE AS WARRANTY. WE HAVE ALSO CONSIDERED THE DOCUMENTS SHOWING FOREI GN EXCHANGE RISK BORNE BY THE ASSESSEE. IT HAS BEEN SUBSTANTIATED FROM THESE DOCUMENTS THAT THE ASSESSEE PERFORMS THE ABOVE FUNCTIONS AND BEARS THE AFORESAI D RISKS. BASED ON THE ABOVE ASSESSEE IS CHARACTERIZED AS ENT REPRENEUR. THE AES HAVE BEEN CHARACTERIZED AS THE LEAST COMPLEX PARTIES FOR WHIC H AUDITED PROFITABILITY STATEMENTS HAVE BEEN PROVIDED. HOWEVER, THE ASSESSEE FAILED TO POINT OUT THE PROVI SIONS WHEREIN AN ENTITY IS ALLOWED TO TAKE THEIR AES AS THE TESTED PARTY. THE ARM'S LENGTH APPROACH OF THE ASSESSEE IN CONSIDERING THE PROFIT OF ITS FOREIGN. AES FOR THE PURPOSES OF COMPARISON WITH PROFIT OF COMPARABLES (FOREIGN), T O DETERMINE THE ALP OF TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN AE S IS PATENTLY AN UNACCEPTABLE POSITION HAVING NO SANCTION OF THE INDIAN TRANSFER PRICING LAW. THE UNDERSIGN WOULD LIKE TO HIGHLIGHT THAT IN THE FOLLOWING TRIBU NAL RULINGS IT HAS BEEN HELD THAT OVERSEAS ENTITY SHOULD NOT BE CONSIDERED AS TESTED PARTY FOR THE ANALYSIS. THEY ARE: (I).CYBERTECHSYSTEMS & SOFTWARE LTD. VS. ASSISTANT COMMISSIONER OF INCOME TAX REPORTED IN (2013) 33 TAXMAN.COM 371 (MUMBAI- TRIBU NAL) (II).AURIONPROSOLUTIONS PVT. LTD. VS. ASSISTANT COM MISSIONER OF INCOME TAX, RANGE- 4(3), (MUMBAI) I.T.A. NO. 7872 (MUMBAI) OF 2 01L. (III). ONWARD TECHNOLOGIES LIMITED VS DCIT 35 TAXMA NN.COM 584 WHEREIN IT WAS HELD AS UNDER: IN THE CASE OF CYBERTECH SYSTEMS & SOFTWARE LIMITED VS. ACIT (33 TAXMANN.COM 371) THE ASSESSEE HAD TRIED TO JUSTIFY THE ARM'S LE NGTH VALUE OF THE TRANSACTION ON THE GROUND THAT THE OVERSEAS AE HAD BEEN INCURRING LOSSES ON THE MARGIN RETAINED FROM THE ASSESSEE. ON APPEAL, THE TRIBUNAL REJECTE D THE ASSESSEE'S ARGUMENT THAT SUCH TRANSACTIONS HAVE TO BE CONSIDERED AT ARM'S LE NGTH ON GROUND THAT THERE IS NO SHIFTING OR PROFITS. THE TRIBUNAL CATEGORICALLY HEL D THAT THE ASSESSEE I.E.. THE INDIAN PARTY HAS TO BE TAKEN AS THE TESTED PARTY AND THE T NMM METHOD IS TO BE FOLLOWED. SIMILARLY, IN THE CASE OF AURIONPRO AND ONWARD FORE IGN PARTY AS TESTED PARTY HAS BEEN CATEGORICALLY REJECTED. FURTHER, THE DELHI BENCH IN THE CASE OF GE MONEY FI NANCIAL SERVICES PVT LTD [TS- 457-ITAT-2016(DEL)-TP] EXPLICITLY DISCARDED ASSESSE E'S SELECTION OF FOREIGN AE AS TESTED PARTY. WHILE ARRIVING AT ITS CONCLUSION, ITAT CATEGORICALLY HELD THAT UNDER TRANSACTIONAL NET MARGIN METHOD ('TNMM'), IT IS THE NET MARGIN EARNED BY THE INDIAN ASSESSEE AND NOT IT'S FOREIGN AE WHICH I S COMPARED WITH THAT OF THE COMPARABLE COMPANIES. THE ITAT INTERPRETED THE MEAN ING OF WORD 'ENTERPRISE' ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 8 88 8 USED IN RULE 10B(1)(E) OF THE INCOME TAX RULES, 19 62 ('RULES') (WHICH DESCRIBES THE MANNER OF APPLICATION OF TNMM) AS 'INDIAN ENTIT Y'. THE HON'BLE ITAT ALSO HELD THAT ADOPTION OF FOREIGN AE AS TESTED PARTY HA S NO LEGAL SANCTITY UNDER THE INDIAN TRANSFER PRICING REGULATIONS. THE ABOVE PRIN CIPLE WAS ALSO DISCUSSED AND ACCEPTED BY THE HON'BLE KOLKATA ITAT IN THE CASE OF AT & S INDIA PVT. LTD. VS DCIT, CIRCLE-11(1) (ITA NO.179/KOL /2016). ALSO, AS ALSO PROVIDED EARLIER, NOWHERE IN THE INDIAN TP REGULATIONS THE CONCEPT OF SELECTING THE TESTED PARTY HAS BEEN PROVIDED. THEREFORE, IT IS OBVIOUS THAT AT ALL TIMES IT IS THE INDIAN ENTITY'S PROFITABILITY FROM THE INTERNATIONAL TRANSACTION TH AT IS REQUIRED TO BE TESTED AND THE SAME HAS BEEN ENVISAGED FROM APPLICABLE TP PROVISIO NS. 11. IN RESPONSE TO THE REMAND REPORT, THE ASSESSEE HAS SUBMITTED HIS REJOINDER BEFORE THE LD. DRP, VIDE PAPER BOOK PAGE NO. 823 TO 832. HOWEVER, THE LD. DRP WITHOUT AVERTING TO THE REMAND REPORT OR THE ASSESS EES REPLY THERETO DISMISS THE GROUNDS WITH A CRYPTIC OBSERVATION WHICH IS GIVEN B ELOW: ALL THE ABOVE GROUNDS IN OUR VIEW BEAR THE SAME TE XTURE AND COMPLEXION. IN OUR CONSIDERED VIEW THEY HAVE A TENUOUS LINK WIT H THE PRIMARY GRIEVANCE OF THE A RELATING TO THE VARIATIONS MADE BY THE A SSESSING OFFICER/TPO IN THE RETURNED INCOME OF THE A. FOR WANT OF OBJECTI VITY AND PRECISION THE GROUNDS ARE DISMISSED WHOLESALE. 12. AGGRIEVED BY THE ORDER OF THE LD. DRP/AO, THE A SSESSEE IS IN APPEAL BEFORE US. 13.LD COUNSEL FOR THE ASSESSEE, SHRI J.P. KHAITAN, BEGINS BY POINTING OUT THAT ASSESSEE COMPANY IS MORE COMPLEX ENTITY AND THE SAM E CAN BE ASCERTAINED FROM FUNCTION, ASSETS AND RISKS ( FAR PROFILE) OF THE AS SESSEE COMPANY. THE LD COUNSEL SUBMITTED THATASSOCIATE ENTERPRISE (AE), WH ICH IS LEAST COMPLEX ENTITY SHOULD BE SELECTED AS TESTED PARTY. BEFORE THE HON` BLE DRP, THE ASSESSEE SUBMITTED THAT ASSOCIATE ENTERPRISE (AE) WITH RESPECT TO THEI R SEGMENTAL DATA FOR THE ACTIVITY UNDERTAKEN, SHOULD BE THE TESTED PARTY, AS IT IS A LEAST COMPLEX ENTITY. THE LD COUNSEL FURTHER SUBMITTED THAT TAKING INTO ACCOUNT THE SUMMARY OF FUNCTIONS, ASSETS AND RISKS PROFILE OF THE ASSESSEE COMPANY WH ICH IS GIVEN IN PAPER BOOK PAGE NO.683 TO 601, CLEARLY DEMONSTRATES THAT ASSES SEE COMPANY IS A MORE COMPLEX ENTITY HENCE IT SHOULD NOT BE SELECTED AS A TESTED PARTY.THE ASSESSEECOMPANY BEARS THE CREDIT RISK, WARRANTY RI SKS, PRODUCT LIABILITY RISKS, FOREIGN EXCHANGE RISKS AND INVENTORY RISKS THEREFOR E IT IS MORE COMPLEX ENTITY ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 9 99 9 WHEREAS THE ASSOCIATE ENTERPRISE (AE) DO NOT BEAR THESE RISKS HENCE IT IS A LEAST COMPLEX ENTITY.THE OECD GUIDELINES AND GUIDANCE NOT E ISSUED BY THE ICAI RECOMMEND THAT ASSOCIATE ENTERPRISE (AE) MAY BE TAK EN AS TESTED PARTY PROVIDED IT IS LEAST COMPLEX ENTITY. HENCE, LD COUNSEL PAYED THE BENCH THAT CONSIDERING THE FACTUAL POSITION EXPLAINED ABOVE, THE ASSOCIATE ENT ERPRISE (AE) SHOULD BE TREATED AS A TESTED PARTY. 14. ON THE OTHER HAND, LD. DR FOR THE REVENUE SUBMI TTED BEFORE THE BENCH THAT BEFORE THE TPO PROCEEDINGS AND IN TRANSFER PRICING STUDY REPORT, THE ASSESSEE COMPANY WAS TREATED AND SELECTED AS A TESTED PART Y. LATER, DURING THE DRP PROCEEDINGS, THE ASSESSEE TOOK U-TURN AND CHANGED I TS STAND AND PLEADED THAT ASSOCIATE ENTERPRISE (AE) IS A LEAST COMPLEX ENTITY AND THEREFORE IT SHOULD BE TESTED PARTY. THIS CLEARLY DEMONSTRATES THAT THE IN TENTION OF THE ASSESSEE IS TO EVADE THE TAX PAYMENT AND HENCE THE STAND OF THE ASSESSEE THAT AE SHOULD BE TESTED PARTY IS AN AFTERTHOUGHT AND THE SAME SHOULD NOT BE ENTER TAINED AT ANY COST. THE ASSESSEE COMPANY CAN NOT CHANGE ITS STAND AT A LATER STAGE F OR SELECTION OF TESTED PARTY AS PER ITS WISH. THE TRANSFER PRICING REGULATION DOES NOT PERMIT TO CHANGE THE TESTED PARTY AT A LATER STAGE BECAUSE IT LEADS TO TAX EVAS ION, HENCE ASSESSEE COMPANY SHOULD BE TREATED AS A TESTED PARTY. APART FROM THI S,LD DR HASASLO PRIMARILY REITERATED THE STAND TAKEN BY THE LD. TRANSFER PRIC ING OFFICER (TPO) WHICH WE HAVE ALREADY NOTED IN OUR EARLIER PARA AND IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 15. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD.WE HAVE GONE THROUGH THE FUNCTION, ASSET AND RISK PROFILE (FAR ANALYSIS) OF THE ASSESSEE COMPANY. THE LD COUNSEL SUBMITTED BEFO RE US THAT ASSESSEE COMPANY IS MORE COMPLEX AND THE SAME CAN BE ASCERTAINED FRO M THE FAR PROFILE OF THE ASSESSEE COMPANY, WHICH IS GIVEN BELOW IN BRIEF: (I). THE SUMMERY OF FUNCTIONS, ASSETS AND RISK PROF ILE OF THE ASSESSEE IS GIVEN IN PAPER BOOK PAGE 642 TO 656. (II).DETAILED EVIDENCES ABOUT FAR ANALYSIS WHICH AR E MENTIONED AT PAGE NOS. 708 TO 797 OF PAPER BOOK. ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 1 11 10 00 0 (III). THE FUNCTIONS PERFORMED BY THE ASSESSEE COM PANY IS MORE COMPLEX THAN ITS ASSOCIATE ENTERPRISE (AE). (IV). ASSETS EMPLOYED BY THE ASSESSEE COMPANY IS MO RE THAN ITS ASSOCIATE ENTERPRISE (AE). (V).THE RISK PROFILE OF THE ASSESSEE COMPANY IS MOR E THAN ITS ASSOCIATE ENTERPRISE (AE). (VI).THEASSESSEE COMPANY IS ENGAGED IN THE FUNCTION OF NEGOTIATION WITH CUSTOMERS AND FIX THE PRICE WITH CUSTOMERS. THE NEGOTIATION A ND PRICE FIXATION IS DONE BY THE ASSESSEE COMPANY WITH THE FOLLOWING CUSTOMERS ( FOR THE SAKE OF EXAMPLE): (A)IFGL LTD, PAPER BOOK PAGE 528-536. (B) TATA REFRACTORY LTD.PAPER BOOK PAGE538 TO 547. (C ) TRLCROSAKI LTD.PAPER BOOK PAGE548 TO 555. (D).THE CREDIT RISKS ARE BORNE BY THE ASSESSEE COMP ANY (VIDE PAPER BOOK PAGE NOS. 556 TO 577). (E). THE ASSESSEE COMPANY BEARS WARRANTY RISK AND P RODUCT LIABILITY RISK. (F)THE ASSESSEE COMPANY HANDLES THE COMPLAINTS FROM THE CUSTOMERS, VIDE PAPER BOOK PAGE 578 TO 593. (G) THE ASSESSEE COMPANY BEARS THE FOREIGN EXCHANGE RISK. (I) THE ASSESSEE COMPANY ALSO BEARSTHE INVENTORY R ISK. HAVING GONE THROUGH THE FUNCTIONS, ASSETS AND RISKS PROFILE (FAR ANALYSIS) OF THE ASSESSEE COMPANY AND OTHER RISKS BORNE BY THE ASSES SEE COMPANY, AS MENTIONED ABOVE, THE LD COUNSEL CLAIMED THAT THE ASSESSEE COM PANY IS A MORE COMPLEX ENTITY THEREFORE IT SHOULD NOT BE CONSIDERED AS A TESTED P ARTY. HOWEVER, WE HAVE GONE THROUGH THE FAR PROFILE OF ASSOCIATED ENTERPRISES ( AE), AND WE FIND THAT THE ASSOCIATED ENTERPRISES (AE) IS NOT SO COMPLEX AS TH E ASSESSEE COMPANY, HENCE BASED ON THE FACTUAL POSITION NARRATED ABOVE, THE A SSOCIATE ENTERPRISE (AE) CAN BE TREATED AS LEAST COMPLEX ENTITY AND THEREFORE IT S HOULD BE SELECTED AS A TESTED PARTY. 16. NOW, WE ADDRESS THE MAIN GRIEVANCE OF THE LD D R FOR THE REVENUE THAT THE ASSESSEE COMPANY CAN NOT CHANGE ITS STAND AT A LATE R STAGE FOR SELECTION OF TESTED ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 1 11 11 11 1 PARTY AS PER ITS WISH AND THE TRANSFER PRICING REGU LATION DOES NOT PERMIT TO CHANGE THE TESTED PARTY AT A LATER STAGE BECAUSE IT LEADS TO TAX EVASION, HENCE AS PER LD DR FOR THE REVENUE, THE ASSESSEE COMPANY SHOULD BE TRE ATED AS A TESTED PARTY AND NOT THE ASSOCIATE ENTERPRISE (AE). WE NOTE THAT DURING THE TPO PROCEEDINGS, THE ASSESSEE HIMSELF WAS SELECTED AS A TESTED PARTY. TH E METHOD TO COMPUTE THE ALP WHICH HAS BEEN CHOSEN BY THE ASSESSEE AS THE TESTED PARTY HIMSELF AND THEREFORE THE ASSESSEE CANNOT RESORT TO CHANGE HIS SELECTION OF T ESTED PARTY AT THE DRP PROCEEDINGS/APPELLATE STAGE, IS NOT ACCEPTABLE FOR THE REASONS GIVEN ABOVE IN PARA NO.15 OF THIS ORDER. WE HAVE ALREADY NOTED IN OUR EARLIER PARA NO.15 OF THIS ORDER THAT ASSESSEE`SFUNCTION, ASSET AND RISK PROFILE (FAR ANA LYSIS) ARE COMPLEX. THE SUMMERY OF FUNCTIONS, ASSETS AND RISK PROFILE OF TH E ASSESSEE COMPANY IS FURNISHED BY LD COUNSEL BEFORE US, WHICH IS GIVEN IN PAPER BO OK PAGE 642 TO 656. THE LD COUNSEL ALSO SUBMITTED DETAILED EVIDENCES ABOUT FA R ANALYSIS WHICH ARE MENTIONED AT PAGE NOS. 708 TO 797 OF PAPER BOOK. BE CAUSE OF THESE REASONS, THE ASSESSEE COMPANY IS MORE COMPLEX AND HENCE IT SHOUL D NOT BE ACCEPTED AS A TESTED PARTY. WE ARE OF THE VIEW THAT SUCH A CONTENTION OF LD DR CANNOT BE UPHELD BECAUSE IT IS FOUND ON THE FACTS OF THE CASE THAT ASSESSEE COMPA NY IS A MORE COMPLEX ENTITY AND HENCE TAKING THE ASSESSEE COMPANY AS A TESTED PARTY WILL NOT RESULT INTO PROPER DETERMINATION OF ALP.THE TPO OR THE APPELLATE AUTHO RITIES CAN VERY WELL HOLD THAT WHY ASSESSEE COMPANY CAN NOT BE TESTED PARTY F OR GETTING PROPER DETERMINATION OF ALP, OR THE ASSESSEE CAN DEMONSTRA TE THAT ITS AE CAN BE TESTED PARTY TO JUSTIFY ITS ALP. THUS, EVEN AFTER THE ASSE SSEE HAS SELECTED HIMSELF AS A TESTED PARTY, THEN ALSO ASSESSSEE IS NOT PRECLUDED FROM RAISING THE CONTENTION BEFORE THE DRP OR APPELLATE COURT THAT IT`S AE CAN BE A TE STED PARTY, AS IT IS LEAST COMPLEX ENTITY. THE ULTIMATE AIM OF THE TPO/DRPIS TO EXAMIN E WHETHER THE PRICE OR THE MARGIN ARISING FROM AN INTERNATIONAL TRANSACTION WI TH A RELATED PARTY IS AT ALP OR NOT. THE DETERMINATION OF THE ALP IS THE KEY FACTOR FOR WHICH THE LEAST COMPLEXTESTED PARTY IS TO BE SELECTED. THEREFORE, T HE TPO AS WELL AS THE DRP SHOULD TAKE INTO CONSIDERATION SUCH A PLEA BEFORE T HEM, PROVIDED, IT IS DEMONSTRATED AS TO WHY THE CHANGE IN THE TESTED PAR TY WILL PRODUCE BETTER OR MORE ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 1 11 12 22 2 APPROPRIATE ALP ON FACTS OF THE CASE. THEREFORE, WE REJECT THE CONTENTION OF THE LD. DR AND ALSO THE OBSERVATION OF THE TPO THAT THE AE CAN NOT BE A TESTED PARTY. WE NOTE THAT THE ASSOCIATE ENTERPRISE (AE) HAS THE FOL LOWING CHARACTERISTICS: (I).PERFORMS SIMPLER FUNCTIONS; (II).ASSUMES MINIMAL RISKS; (III). DOES NOT OWN VALUABLE INTANGIBLES / UNIQUE A SSETS; AND (IV). RELIABLE DATA REGARDING UNCONTROLLED COMPARAB LE COMPANIESIS AVAILABLE. THEREFORE, THE ASSESSEE PLEADED BEFORE THE LD. PANE L TO CONSIDER THE FUNCTIONAL ANALYSIS PROVIDED ABOVE, TO SELECT THE AES AS THE T ESTED PARTY BEING THE LEAST COMPLEX ENTITIES. THE ASSESSEE URGED, THE LD. PANEL TO RELY ON THE INFORMATION PRESENTED ABOVE WHICH IS DUE TO SOME INFORMATION CO MING TO THE KNOWLEDGE OF THE ASSESSEE TAX PAYER WHICH REFLECTS FACTS CONTRARY TO THE FACTS CAPTURED IN THE TP STUDY. IN THIS CONTEXT, WE RELY ON THE CASE OF DEPU TY COMMISSIONER OF INCOME- TAX V. QUARK SYSTEMS (P.) LTD. ([2010] 38 SOT 307 (CHD) ) WHEREIN IT WAS HELD AS FOLLOWS: '37 WHEN SUBSTANTIAL JUSTICE AND TECHNICAL CONSIDER ATIONS ARE PITTED AGAINST EACH OTHER, THE CAUSE OF SUBSTANTIAL JUSTICE DESERV ES TO BE PREFERRED. FOR THE OTHER SIDE CANNOT CLAIM TO HAVE A VESTED RIGHT IN I NJUSTICE BEING DONE DUE TO SOME MISTAKES ON ITS PART. ACCORDINGLY, ON FACTS AND CIRCUMSTANCES OF THE CASE , WE HOLD THAT TAXPAYER IS NOT ESTOPPED FROM POINTING OUT THAT DATAMATICS H AS WRONGLY BEEN TAKEN AS COMPARABLE. WHILE ADMITTING ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSESSEE TO REQUIRE US TO CONSIDER WHETHER OR NOT D ATAMATICS SHOULD BE INCLUDED IN THE COMPARABLE, WE MAKE NO COMMENTS ON MERIT EXCEPT OBSERVING THAT ASSESSEE FROM RECORD HAS SHOWN ITS P RIMA FACIE CASE. FURTHER CLAIM MAY BE EXAMINED BY THE ASSESSING OFFI CER. WE ARE INCLINED TO TAKE A RATHER LIBERAL APPROACH BY GIVING ASSESSEE A N OPPORTUNITY TO MAKE OUT ITS CASE PROPERLY AND PLACE ALL THE RELEVANT FA CTS BEFORE THE TAX AUTHORITIES SO THAT PROPER ARM'S LENGTH PRICE CAN B E DETERMINED IN ACCORDANCE WITH THE LAW THE PROCEEDINGS BEFORE THE TAXAUTHORITIES ARE NOT ADVERSARIAL PROCEEDINGS AND THE ASSESSEE SHOULD NOT , THEREFORE, BE PLACED AT UNDER ADVANTAGE BECAUSE OF HIS INADVERTENT AND B ONA FIDE MISTAKES. (EMPHASIS ADDED) IT IS THEREFORE PLEADED BEFORE THE LD. PANEL, IN OR DER TO TEST THE TRANSACTIONS UNDER ANALYSIS FROM A TRANSFER PRICING PERSPECTIVE, IT IS ESSENTIAL TO APPRECIATE THE MODUS OPERANDI OF THE OPERATIONS OF ALMADSJNDIA WHICH UND ERTEKES ENTREPRENEURIAL FUNCTION AND ASSUMES SIGNIFICANT RISKS IN COURSE OF MANUFACTURING OPERATION. TO SUMMARISE, THE BUSINESS PROFILE OF BOTH THE ASSESSE E AND AE ARE RE-SUMMARISED BELOW: ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 1 11 13 33 3 THE ASSESSEE IS ENGAGED IN BUY, MANUFACTURE AND SAL E OPERATION WITH THE OBJECTIVE OF CREATING AND RETAINING A WIDE CUSTOMER BASE IN THE COMPETITIVE MARKET IN DOING SO, THE ASSESSEE ASSUMES MARKET RISK, PRIC E RISK, CREDIT RISK AND FOREX RISK AE IS PRIMARILY ENGAGED IN MANUFACTURE AND SUPPLY OF GOODS TO ALMATIS INDIA BASED ON ALMATIS INDIA'S SPECIFIC REQUIREMENT AE PRIMARILY ASSUME MANUFACTURING (QUALITY RISK) AN D IS ABSOLVED OF ALL OTHER RISK SELECTION OF TESTED PARTY BASED ON THE ABOVE, IT IS APPARENT THAT THE AE ASSU MES LESSER COMPLEX FUNCTIONS AND BEARS LOWER LEVEL OF RISKS AS COMPARED TO THAT OF ALMATIS INDIA. IT MAY KINDLY BE NOTED THAT SUB-RULES (2) AND (3) OF RULE 10B OF THE RULES DO NOT RESTRICT TAKING AN OVERSEAS ENTITY/AE OF AN ENTERPRISE AS THE TESTE D PARTY. THE TWO SUB-RULES PROVIDE THE YARDSTICKS FOR COMPARABILITY OF AN INTE RNATIONAL TRANSACTION WITH AN UNCONTROLLED TRANSACTION. IT MAY KINDLY BE NOTED THAT IN ORDER TO ESTABLISH T HE ALP, DETERMINATION OF THE 'TESTED PARTY' PLAYS A VERY IMPORTANT AND KEY ROLE SINCE ONE NEEDS TO IDENTIFY COMPARABLES AND COMPARE THE SAME WITH TESTED PARTY. IN THIS REGARD, THE LD. PANEL'S KIND ATTENTION IS A LSO DRAWN TO PARA 3.18 AND PARA 3.19 OF THE TP GUIDELINES ISSUED BY ORGANISATION FO R ECONOMIC COOPERATION AND DEVELOPMENT ('OECD TP GUIDELINES') THAT ALSO HIGHLI GHT THE ABOVE POINT. PARA 3.18 STATES THAT: WHEN APPLYING A COST PLUS, RESALE PRICE OR TRANSACT IONAL NET MARGIN METHOD AS DESCRIBED IN CHAPTER 11, IT IS NECESSARY TO CHOOSE THE PARTY TO THE TRANSACTION FOR WHICH A FINANCIAL INDICATOR (MARK-UP ON COSTS, GROS S MARGIN, OR NET PROFIT INDICATOR) IS TESTED. THE CHOICE OF THE TESTED PART Y SHOULD BE CONSISTENT WITH THE FUNCTIONAL ANALYSIS OF THE TRANSACTION. AS A GENERA L RULE, THE TESTED PARTY IS THE ONE TO WHICH A TRANSFER PRICING METHOD CAN BE APPLIED I N THE MOST RELIABLE MANNER AND FOR WHICH THE MOST RELIABLE COMPARABLES CAN BE FOUN D, I.E. IT WILL MOST OFTEN BE THE ONE THAT HAS THE LESS COMPLEX FUNCTIONAL ANALYSIS (EMPHASIS ADDED) PARA 3. 19 STATES THAT; THIS CAN BE ILLUSTRATED AS FOLLOWS. ASSUME THAT COM PANY A MANUFACTURES TWO TYPES OF PRODUCTS, P1 AND P2 THAT IT SELLS TO COMPANY B, AN ASSOCIATED ENTERPRISE IN ANOTHER COUNTRY. ASSUME THAT A IS FOUND TO MANUFACT URE P1 PRODUCTS USING VALUABLE, UNIQUE INTANGIBLES THAT BELONG TO B AND F OLLOWING TECHNICAL SPECIFICATIONS SET BY B. ASSUME THAT IN THIS P1 TRA NSACTION, A ONLY PERFORMS SIMPLE FUNCTIONS AND DOES NOT MAKE ANY VALUABLE, UNIQUE CO NTRIBUTION IN RELATION TO THE TRANSACTION. THE TESTED PARTY FOR THIS P1TRANSACTIO N WOULD MOST OFTEN BE A. ASSUME NOW THAT A IS ALSO MANUFACTURING P2 PRODUCTS FOR WH ICH IT OWNS AND USES VALUABLE UNIQUE INTANGIBLES SUCH AS VALUABLE PATENTS AND TRA DEMARKS, AND FOR WHICH B ACTS AS A DISTRIBUTOR. ASSUME THAT IN THIS P2 TRANSACTIO N, B ONLY PERFORMS SIMPLE FUNCTIONS AND DOES NOT MAKE ANY VALUABLE, UNIQUE CO NTRIBUTION IN RELATION ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 1 11 14 44 4 TO THE TRANSACTION. THE TESTED PARTY FOR THE P2 TRA NSACTION WOULD MOST OFTEN BE B.' (EMPHASIS ADDED) 17. FURTHER, THE US TP REGULATIONS DISCUSSING THE C ONCEPT OF TESTED PARTY AT 1.482-5(B) IS PRODUCED BELOW: ' THE TESTED PARTY WILL BE THE PARTICIPANT IN THE C ONTROLLED TRANSACTION WHOSE OPERATING PROFIT ATTRIBUTABLE TO THE CONTROLLED TRA NSACTIONS CAN BE VERIFIED USING THE MOST RELIABLE DATA AND REQUIRING THE FEWE ST AND MOST RELIABLE ADJUSTMENTS, AND FOR WHICH RELIABLE DATA REGARDING UNCONTROLLED COMPARABLES CAN BE LOCATED. CONSEQUENTLY, IN MOST C ASES THE TESTED PARTY WILL BE THE LEAST COMPLEX OF THE CONTROLLED TAXPAYE RS AND WILL NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETSTHAT D ISTINGUISH IT FROM POTENTIAL UNCONTROLLED COMPARABLES.' (EMPHASIS ADDED) 18. BY VIRTUE OF THE ABOVE GUIDANCE, IT CAN BE REAS ONABLY CONCLUDED THAT THE TESTED PARTY SHOULD BE THE ONE, WHICH HAS THE FOLLOWING CH ARACTERISTICS: PERFORMS SIMPLER FUNCTIONS; ASSUMES MINIMAL RISKS; DOES NOT OWN VALUABLE INTANGIBLES / UNIQUE ASSETS ; AND IN RESPECT OF WHICH, RELIABLE DATA REGARDING UNCO NTROLLED COMPARABLE COMPANIES IS AVAILABLE. 19. ALMATIS INDIA WOULD ALSO PLACE STRONG RELIANCE ON THE UNITED NATION'S PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES , 2013, INDIA CHAPTER WHEREIN IT WAS STATED AS FOLLOWS: '10.4.1.3. THE REGULATIONS PRESCRIBE MANDATORY ANNU AL FILING REQUIREMENTS AS WELL AS MAINTENANCE OF CONTEMPORANEOUS DOCUMENTA TION BY THE TAXPAYER IN CASE INTERNATIONAL TRANSACTIONS BETWEEN ASSOCIAT ED ENTERPRISES CROSS A THRESHOLD AND CONTAIN STRINGENT PENALTY IMPLICATION S IN CASE OF NON- COMPLIANCE. THE PRIMARY ONUS OF PROVING THE ARM'S L ENGTH PRICE OF THE TRANSACTION LIES WITH THE TAXPAYER. THE INDIAN TRAN SFER PRICING ADMINISTRATION PREFERS INDIAN COMPARABLES IN MOST C ASES AND ALSO ACCEPTS FOREIGN COMPARABLES IN CASES WHERE THE FOREIGN ASSO CIATED ENTERPRISE IS THE LESS OR LEAST COMPLEX ENTITY AND REQUISITE INFORMAT ION IS AVAILABLE ABOUT THE TESTED PARTY AND COMPARABLES.' (EMPHASIS ADDED) 20. WE NOTE THAT THE LANDMARK RULING BY THE COORDIN ATE BENCH, KOLKATA TRIBUNAL, IN THE CASE OF LANDIS + GYR LIMITED (ITA NOS I.TA N O. 37/KOL/2012, ASSESSMENT ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 1 11 15 55 5 YEAR: 2007-08, & I.TA NO. 1623/KO1/2012, ASSESSMENT YEAR: 2008-09) SPOKE ABOUT OVERSEAS PARTY AS A TESTED PARTY. RELEVANT FI NDINGS ARE GIVEN BELOW: 5.2.11. WE FIND THAT THE CONCEPT OF OVERSEAS TESTED PARTY AND FOREIGN COMPARABLE COMPANIES IS WELL RECOGNIZED AND ACKNOWL EDGED BY INDIAN REVENUE AS COULD BE SEEN FROM INDIA'S COMMENTARY IN UNITED NATIONSPRACTICAL MANUAL ON TRANSFER PRICING FOR DEV ELOPING COUNTRIES WHICH WERE PLACED ON RECORD BY THE ID AR, WHEREIN, THE FOLLOWING HAS BEEN STATED:- 10.4.1. TRANSFER PRICING REGULATIONS IN INDIA 10.4.1.3. THE INDIAN TRANSFER PRICING ADMINISTRATIO N PREFERS INDIAN COMPARABLES IN MOST CASES AND ALSO ACCEPTS FOREIGN COMPARABLES IN CASES WHERE THE FOREIGN ASSOCIATED ENTERPRISE IS THE LESS OR LEAST COMPLEX ENTITY AND REQUISITE INFORMATION IS AVAILABLE ABOUT THE TE STED PARTY AND COMPARABLES. IN THE INSTANT CASE, ALL THE RECUISNE INFORMATION W AS AVAILABLE FOR UNDERTAKING OVERSEAS BENCHMARKING STUDY AND THE SAM E WAS ALSO MADE AVAILABLE TO THE ID TPO AND ID DRP'S PERUSAL. WE FI ND THAT THE RELIANCE PLACED BY THE ID AR ON THE DECISION OF THE CO-ORDIN ATE BENCH OF DELHI TRIBUNAL IN THE CASE OF RANBAXY LABORATORIES LTD VS ACIT REPORTED IN (2016) 68 TAXMANN.COM 322 (DELHI TRIB.) IS VERY WEL L FOUNDED WHEREIN THE CONCEPT OF OVERSEAS TESTED PARTY AND FOREIGN COMPAR ABLE COMPANIES FOR DETERMINATION OF ARM'S LENGTH PRICE HAS BEEN ACCEPT ED. IN VIEW OF THE ABOVE DISCUSSIONS, IN ORDER TO MEET THE ENDS OF JUSTICE IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE DEEM IT FIT AND APPROPRIATE, TO SET ASIDE THIS ISSUE TO THE FILE OF THE ID TPO / ID AO FOR DETERMINATION OF ARM'S LENGTH PRICE BASED ON TRANSACTION TO TRANSACT ION APPROACH SUBMITTED BY THE ASSESSEE TAKING THE AE AS A TESTED PARTY USI NG CPM AS THE MOST APPROPRIATE METHOD (EMPHASIS ADDED) 21. THE CONCEPT OF TESTED PARTY WAS ALSO DEALT IN D ETAIL BY COORDINATE BENCH OF ITAT AHMEDABAD, IN THE CASE OF GENERAL MOTORS INDIA PRIVATE LIMITED, IN I. T.A. NOS. 3096/AHD/2010 AND 3308/ AHD/2011, WHEREIN THE TRIBUNAL HAS CONCLUDED THAT THE FOREIGN AE SHOULD BE CONSIDERED AS THE TESTED P ARTY BEING THE LEAST COMPLEX OF THE TRANSACTING ENTITIES AND HAS RELIED ON THE UN T P MANUAL AND VARIOUS JUDICIAL PRECEDENTS ON THIS ISSUE. THE RELEVANT EXTRACT OF T HE ORDER HAS BEEN GIVEN BELOW: 'TAKING ALL THE ABOVE FACTS AND CIRCUMSTANCES OF TH E ISSUE AS DISCUSSED IN THE FOREGOING PARAGRAPHS, IN CONSONANCE WITH THE CA SE LAWS QUOTED (SUPRA) ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 1 11 16 66 6 AND ALSO THE UNITED NATION'S PRACTICAL MANUAL ON TR ANSFER PRICING, WE DIRECT THE TPO TO ADOPT GMDAT AS THE 'TESTED PARTY' FOR ANALYSING THE INTER- COMPANY TRANSACTIONS OF THE ASSESSEE FOR BOT H THE AYS UNDER CONSIDERATION. TO FACILITATE THE TPO TO ANALYSE THE INTER-COMPANY TRANSACTIONS IN THE CASE OF THE ASSESSEE BY SELECTI NG GMDAT AS 'TESTED PARTY' AS DIRECTED ABOVE, THIS ISSUE IS RESTORED ON THE FILES OF THE TPO. IT IS ORDERED ACCORDINGLY. (EMPHASIS ADDED) 22.FURTHER, THE COORDINATE BENCH OF KOLKATA TRIBUNA L IN THE CASE OF DEVELOPMENT CONSULTANTS PRIVATE LIMITED [2008-TII-03-ITAT-KOL-T P] AFFIRMED THAT IN ORDER TO SELECT THE MOST APPROPRIATE METHOD FOR DETERMINI NG THE ARM'S LENGTH PRICE, IT IS FIRST NECESSARY TO SELECT THE TESTED PARTY, WHICH W ILL BE LEAST COMPLEX OF THE CONTROLLED TAX PAYERS ENGAGED IN THE TRANSACTION AN D WILL NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS THAT DISTINGUI SH IT FROM POTENTIAL UNCONTROLLED COMPARABLES. THE RELEVANT EXTRACT HAS BEEN GIVEN BE LOW: '5 HOWEVER, IN ORDER TO DETERMINE THE MOST APPROPRI ATE METHOD FOR DETERMINING THE ARM'S LENGTH PRICE, IT IS FIRST NEC ESSARY TO SELECT THE TESTED PARTY'. THE TRANSFER PRICING LEGISLATION IN INDIA D OES NOT PROVIDE ANY DISCUSSION OR MENTION OF THE CONCEPT OF 'TESTED PAR TY'. IN ORDER TO UNDERSTAND THE CONCEPT OF TESTED PARTY WE NEED TO R EFER TO THE TRANSFER PRICING LEGISLATIONS OF DEVELOPED COUNTRIES WHERE T HE PRINCIPLES OF TRANSFER PRICING HAVE BEEN IN USE FOR A LONG TIME AND ACT AS A GUIDING FORCE FOR ALL THE DEVELOPING ECONOMIES. THE TRANSFER PRICING GUID ELINES ISSUED BY THE US INTERNAL REVENUE SERVICES UNDER SECTION 482 PROVIDE AND DISCUSS THE CONCEPT OF TRANSFER PRICING. SECTION 1.482-5 OF THE US TRANSFER PRICING REGULATIONS STATE THAT 'THE TESTED PARTY WILL BE TH E PARTICIPANT IN THE CONTROLLED TRANSACTION WHOSE OPERATING PROFIT ATTRI BUTABLE TO THE CONTROLLED TRANSACTIONS CAN BE VERIFIED USING THE MOST RELIABL E DATA AND REQUIRING THE FEWEST AND MOST RELIABLE DATA AND REQUIRING (HE FEW EST AND MOST RELIABLE ADJUSTMENTS, AND FOR WHICH RELIABLE DATA REGARDING UNCONTROLLED COMPARABLES CAN BE LOCATED. CONSEQUENTLY, IN MOST C ASES THE TESTED PARTY WILL BE THE LEAST COMPLEX OF THE CONTROLLED TAXPAYE RS AND WILL NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS THAT DISTINGUISH IT FROM POTENTIAL UNCONTROLLED COMPARABLES. THUS, IN A SENS E, THE TESTED PARTY WOULD HAVE LESSER RISK AS COMPARED TO THE OTHER TRA NSACTING PARTY OR THE REAL ENTREPRENEUR. ' (EMPHASIS ADDED) 23. THE ABOVE CONCEPT OF 'TESTED PARTY' HAS ALSO BE EN CONFIRMED BY COORDINATE BENCH OF DELHI TRIBUNAL, IN THE CASE OF RANBAXY LAB ORATORIES LTD. V. ADDITIONAL COMMISSIONER OF INCOME-TAX (110 ITD 428) WHEREIN, I T WAS HELD AS FOLLOWS: ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 1 11 17 77 7 '58 THE TESTED PARTY NORMALLY SHOULD BE THE PARTY I N RESPECT OF WHICH RELIABLE DATA FOR COMPARISON IS EASY AND READ ILY AVAILABLE AND FEWEST ADJUSTMENTS IN COMPUTATIONS ARE NEEDED. IT M AY BE LOCAL OR FOREIGN ENTITY, I. E., ONE PARTY TO THE TRANSACTION . THE OBJECT OF TRANSFER PRICING EXERCISE IS TO GATHER RELIABLE DAT A, WHICH CAN BE CONSIDERED WITHOUT DIFFICULTY BY BOTH THE PARTIES, I.E., TAXPAYER AND THE REVENUE. IT IS ALSO TRUE THAT GENERALLY LEAST O F THE COMPLEX CONTROLLED TAXPAYER SHOULD BE TAKEN AS A TESTED PAR TY' (EMPHASIS ADDED) 24. WE WOULD ALSO MAKE A PASSING REFERENCE TO THE J UDGMENT OF THE COORDINATE BENCH OF AHMEDABAD TRIBUNAL, IN THE CASE OF MASTEK LIMITED V. ADDL. CIT (ITA NO.3120/AHD/2010), WHEREIN THE SELECTION OF OVERSEA S AE AS TESTED PARTY WAS NOT DISPUTED BY THE BENCH AND IT WAS HELD AS FOLLOWS: 'WE ARE OF THE VIEW THAT IN ORDER TO DETERMINE THE MOST APPROPRIATE METHOD FOR DETERMINING THE ARM'S LENGTH PRICE, FIRST IT IS NECESSARY TO SELECT THE 'TESTED PARTY' AND SUCH A SELECTED PARTY SHOULD BE LEAST COMPLEX AND SHOULD NOT BE UNIQUE, SO THAT PRIMA FACIE CANNOT BE DISTIN GUISHED FROM POTENTIAL UNCONTROLLED COMPARABLES ' (EMPHASIS ADDED) TYPICALLY, THE 'TESTED PARTY' WOULD BE THE LEAST CO MPLEX OF THE TRANSACTING ENTITIES, I.E. THE SIMPLER ENTITY IN TERMS OF INTENSITY OF FU NCTIONS PERFORMED AND RISKS ASSUMED; AND WOULD ALSO NOT OWN VALUABLE OR NON-ROU TINE INTANGIBLES. ACCORDINGLY, THIS ENTITY WOULD ALSO TYPICALLY EARN ROUTINE BUT STEADY RETURNS. AS A GENERAL RULE, ENTREPRENEURS SHOULD NOT BE CONSIDERE D AS 'TESTED PARTIES' AND ACCORDINGLY BENCHMARKED, SINCE, BY VIRTUE OF THEIR COMPLEX FUNCTIONAL AND RISK PROFILES, THEIR MARGINS FLUCTUATE HEAVILY WITH THE VAGARIES OF THE ECONOMY, THUS MAKING COMPARABILITY ANALYSIS EXTREMELY DIFFICULT A ND UNRELIABLE. FURTHER, THE FINANCIAL RESULTS OF THEENTREPRENEUR, BEING THE ULT IMATE FALLOUT OF THIRD PARTY BUSINESSES, OFTEN DEPEND ON EXTERNAL ECONOMIC FACTO RS IN THE MARKET; AND NOT ON THE INTERNAL PRICING POLICIES OF THE MNC GROUP. THI S CONCEPT OF 'TESTED PARTY' IS FUNDAMENTAL TO TRANSFER PRICING. BASED ON THE ABOVE ANALYSIS OF THE FUNCTIONS AND RI SKS ASSUMED BY BOTH THE PARTIES, IT CAN BE REASONABLY CONCLUDED THAT ALMATIS INDIA I S ENGAGED IN OPERATION THAT ENTAILS ENTREPRENEURIAL FUNCTION AND RELATED RISKS. THE AE, ON THE OTHER HAND, BASED ON THE FUNCTIONAL AND RISK PROFILE, CAN BE CHARACTE RIZED AS A MANUFACTURER ENGAGED IN MANUFACTURING AND SUPPLY OF THE PRODUCTS BASED O N ORDERS FROM ALMATIS ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 1 11 18 88 8 INDIA.CONSIDERING THE ABOVE FUNCTIONAL AND RISK PRO FILE AND THE RESULTING CHARACTERIZATION, WE SHOULD APPRECIATE AND GIVE DUE COGNIZANCE TO THE ASSESSEE'S BUSINESS PROFILE FOR THE RELEVANT YEAR UNDER CONSID ERATION. ARM'S LENGTH ANALYSIS AND CONCLUSION DERIVED WITHOUT APPRECIATING THE BUS INESS PROFILE WOULD DEFEAT THE CARDINAL PRINCIPLES OF TRANSFER PRICING. 25. WE NOTE THAT THE ASSESSEE HAD PREPARED AND SUBM ITTED A TRANSFER PRICING STUDY REPORT IN ACCORDANCE WITH THE INDIAN TRANSFER PRICI NG PROVISIONS CONTAINED IN SECTIONS 92 AND 92A TO 92F OF THE ACT, READ WITH RU LES 10A TO 10E OF THE RULES. IN THE SAID TRANSFER PRICING STUDY REPORT, THE ASSE SSEE HAS USED THE TRANSACTIONAL NET MARGIN METHOD AND TESTED THE MARGINS OF ALMATIS IND IA. WE NOTE THAT THE ASSESSEE ADOPTED AN INCORRECT APPROACH OF CONSIDERING ALMATI S INDIA AS THE TESTED PARTY FOR ANALYSIS WITHOUT APPRECIATING THE BUSINESS PROFILE OF BOTH ALMATIS INDIA AND ITS AE BASED ON THE FUNCTIONAL AND RISK PROFILE, AND IT HA S BEEN CLEARLY DEMONSTRATED THAT THE AES ARE THE LEAST COMPLEX ENTITIES VIS-A-VIS TH E ASSESSEE COMPANY. 26. TO CONCLUDE, WE NOTE THAT THE LD COUNSEL FOR TH E ASSESSEEPLEADED BEFORE US TO ACCEPT THE AE AS THE TESTED PARTY, AS THE INITIAL A PPROACH ADOPTED BY THE ASSESSEE AND CONSEQUENTLY THE TPO, WAS A BONA FIDE MISTAKE. IN THE INTEREST OF NATURAL JUSTICE, WE NOTE THAT THE FACTS PLACED BEFORE US SH OWS THAT AE SHOULD BE TESTED PARTY. THE AE TO BE THE TESTED PARTY, AND THE SAID APPROACH HAS BEEN MADE CONSIDERING ALL RELEVANT FACTS AND CIRCUMSTANCES AN D IS WELL SUPPORTED BY JUDICIAL PRECEDENTS CITED ABOVE AND TRANSFER PRICING REGULAT IONS MENTIONED ABOVE. THEREFORE, THE OVERSEAS AES, BEING THE LEAST COMPLE X TRANSACTING ENTITIES BE SELECTED AS THE TESTED PARTY AND THE MARGIN EARNED BY THEM SHOULD BE TESTED FROM ARM'S LENGTH PERSPECTIVE, AS THE AE PERFORMED SIMPL ER FUNCTIONS AND DO NOT ASSUME ANY SIGNIFICANT RISKS CONTRARY TO THE ASSESS EE. HAVING GONE THROUGH THE FUNCTIONS, ASSETS AND RISK S PROFILE (FAR ANALYSIS) OF THE ASSESSEE COMPANY AND OTHER RISKS BORNE BY THE ASSES SEE COMPANY, AS MENTIONED ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 1 11 19 99 9 ABOVE, WE NOTICED THAT THE ASSESSEE COMPANY IS A MO RE COMPLEX ENTITY THEREFORE IT SHOULD NOT BE CONSIDERED AS A TESTED PARTY. HOWEVER, WE HAVE GONE THROUGH THE FOREIGN ASSOCIATE D ENTERPRISES AND ITS PROFILE AND WE FIND THAT THE FOREIGN ASSOCIATED ENTERPRISES CAN BE TREATED AS A TESTED PARTY BECAUSE IT IS THE LEAST COMPLEX PARTY. FOR THAT OUR VIEWS ARE FORTIFIED BY THE FOLLOWING JUDGMENTS OF THE CO-ORDINATE BENCHES OF K OLKATA AND DELHI WHICH ARE ALREADY DISCUSSED ABOVE IN DETAIL: I) LANDYS + GYR (KOLKATA) (SUPRA) PAGE 21 PARA 5.2.11 II) RANBAXY LABORATORIES LTD. VS. ACIT (SUPRA) (110 ITD 28) (ITAT DELHI) WE NOTE THAT INDIAN TRANSFER PRICING GUIDELINES ISS UED BY THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA VIDE GUIDANCE NOTED O N REPORT U/S 92E BY ICAI AND TRANSFER PRICING GUIDELINES ISSUED BY THE OECD AND CONSIDERING THE UNITED NATION PRACTICAL MANUAL OF TRANSFER PRICING FOR DEVELOPING COUNTRY, WE NOTE THAT IN THE ASSESSEE`S CASE UNDER CONSIDERATION, THE ASSOCIATE ENTERPRISE(AE) CAN BE SELECTED AS A TESTED PARTY. THEREFORE, WE DIRECT THE LD. TPO / ASSESSING OFFICER TO TREAT THE FOREIGN ASSOCIATED ENTERPRISES AS A TESTED PARTY AN D COMPUTE THE ARMS LENGTH PRICE ADJUSTMENTACCORDINGLY. 27. GROUND NO. 2 RAISED BY THE ASSESSEE RELATES TO ACCEPTING THE AUDITED SEGMENTAL ANALYSIS FOR THE TRANSACTION OF PURCHASE OF FINISHE D GOODS, RECEIPT OF COMMISSION AND SALE OF FINISHED GOODS BY THE ASSESSEE FROM THE ASSOCIATED ENTERPRISES (AE). 28. THE BRIEF FACTS QUA THE ISSUE ARE THAT THE ASSE SSEE PURCHASED FINISHED GOODS FROM THE ASSOCIATE ENTERPRISES (AES) FOR SALE TOTHI RD PARTIES. IT MAY ALSO HAVE AD- HOC SALES OF TRADED FINISHED GOODS LAYING IN STOCK TO ASSOCIATE ENTERPRISES(AE). FURTHER, THE ASSESSEE RECEIVED COMMISSION @ 3% ON A CCOUNT OF FACILITATING THE DIRECT SALES BY THE AE TO THIRD PARTIES IN INDIA. SO FAR, THE NATURE OF ACTIVITY IS CONCERNED, THEASSESSEE MADE PURCHASES ONLY FROM AES AND RECEIVED COMMISSION FROM AES. THE ASSESSEE HAVE THREE ASSOCIATE ENTERPR ISES (AES), NAMELY:ALMATISINC. USA,ALMATIS GMBH ( GERMANY) ANDA LMATIS BV (NETHERLANDS). THE TRANSFER PRICING OFFICER (TPO) T OOK THE ENTITY LEVEL MARGINS OF THE ASSESSEE AND MADE THE TRANSFER PRICING ADJUSTME NT ON THAT BASIS. THE TPO ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 20 00 0 MADE THE TRANSFER PRICING ADJUSTMENT TO THE TUNE OF RS. 22,95,822/- WHICH IS CONFIRMED BY THE LD. DRP. 29. AGGRIEVED BY THE ORDER OF THE DRP/AO, THE ASSE SSEE IS IN APPEAL BEFORE US. 30. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. BEFORE US, THE LD COUNSEL FOR THE ASSESSEE REITERAT ED THE SUBMISSIONS MADE BEFORE THE LD DRP WHEREAS LD DR FOR THE REVENUE RELIED ON THE ORDER PASSED BY THE LD TPO. WE NOTE THAT THE ASSESSEE HAS ALSO NOT RAISED THIS ISSUE DURING THE TPO PROCEEDINGS, HOWEVER THE ASSESSEE RAISED THIS ISSUE ,(PERTAINING TO SEGMENTAL ACCOUNTS), FIRST TIME BEFORE THE LD. DRP PROCEEDING S. THE ADDITIONAL GROUND NO. 3 RAISED BY THE ASSESSEE BEFORE THE LD. DRP READS FOL LOWS: 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. TPO AND ACCORDINGLY THE LD. AO FAILED TO PROVIDE DUE COGNIZ ANCE TO THE FACT THAT IN RELATION TO THE PURCHASE OF FINISHED GOODS, RECEIPT OF COMMISSION AND SALE OF FINISHED GOODS, THE ASSESSEE WAS ENGAGED IN TRAD ING FUNCTIONS AND ON THE CONTRARY SELECTED A SET OF COMPARABLES HAVING DIFFE RENT FUNCTIONAL PROFILE. THE ASSESSEE SUBMITTED BEFORE THE LD. DRP, A WRITTE N NOTE ABOUT BENCH MARK RESULTS OF TRADING ACTIVITIES OF THE ASSESSEE, SEAR CH FOR COMPARABLES AND BUSINESS DESCRIPTION OF COMPARABLES. 31. AFTER GETTING THE SUBMISSIONS OF THE ASSESSEE, THE LD. DRP SENT THE SUBMISSIONS OF THE ASSESSEE TO THE LD. TPO FOR ITS EXAMINATION. THE LD. TPO AFTER GOING THROUGH THE ASSESSEES SUBMISSION REJECTED THE SEGMENTAL AN ALYSIS OF THE ASSESSEE ON THE GROUND THAT THE SAME WAS WITHOUT ANY BASIS, FAR-FET CHED AND NOT AUDITED. THE FINDING OF THE LD. TPO DURING THE REMAND PROCEEDING S ARE GIVEN BELOW FOR READY REFERENCE: B. ADDITIONAL GROUND NO. 3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E LD. TPO AND ACCORDINGLY THE LD AO FAILED TO PROVIDE DUE COGNIZANCE TO THE FACT THAT I N RELATION TO THE PURCHASE OF FINISHED GOODS, RECEIPT OF COMMISSION AND SALE OF FINISHED G OODS, THE ASSESSEE WAS ENGAGED IN TRADING FUNCTIONS AND ON THE CONTRARY SELECTED A SE T OF COMPARABLES HAVING DIFFERENT FUNCTIONAL PROFILE, ASSESSEE'S SUBMISSION THE ASSESSEE HAS SUBMITTED THAT IT PERFORMS TRADING ACTIVITIES WHEREIN IT BUYS FINISHED PRODUCTS FROM ITS AES FOR RESALE IN THE INDIAN MARK ET. FURTHER, CERTAIN PRODUCTS WHICH ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 21 11 1 ARE NOT IN THE PRODUCT REPERTOIRE OF ALMATIS INDIA ARE DIRECTLY SOLD BY AE TO THIRD PARTIES, IN INDIA. ALRNATIS INDIA PROVIDES CERTAIN SUPPORT F OR SUCH SALE MADE BY THE AE IN THE FORM OF LIAISON AND ADMINISTRATIVE SERVICES. AE PAYS A C OMMISSION TO ALMATIS INDIA FOR SUCH SUPPORT RENDERED. IN ADDITION, ALMATIS INDIA HAS MA DE A SPORADIC SALE OF TRADED GOODS TO ITS AE IN CHINA WHICH IS DUE TO IMMEDIATE REQUIREME NT IN THE CHINA PLANT WHICH COULD BE MET FROM INDIA. FURTHER, ALMATIS INDIA DOES NOT EMPLOY ANY MAJOR AS SETS FOR THE CLASS OF TRANSACTIONS MENTIONED ABOVE. THE AES, ON THE OTHER HAND, EMPLOY THEIR MANUFACTURING AND OFFICE FACILITIES FOR THE ABOVE TRANSACTIONS. FOR THE ABOVE INTERNATIONAL TRANSACTIONS, THE AES A RE RESPONSIBLE FOR PERFORMING ALL MANUFACTURING FUNCTIONS, INCLUDING RAW MATERIAL SOU RCING, PERFORMING THE MANUFACTURING, INVENTORY AND MANPOWER PLANNING. IN CASE OF DIRECT SALE TO CUSTOMERS IN INDIA, THE AE ALSO BEARS PRICE RISK AS IT IS RESPON SIBLE FOR PRICE NEGOTIATIONS. IN BOTH CASES, THE AE IS RESPONSIBLE FOR MAINTAINING THE PR ODUCT QUALITY AND BEARS INVENTORY AND WARRANTY RISK. THE ASSESSEE HAS CONTENDED THAT FOR THE PURCHASE OF FINISHED GOODS, RECEIPT OF COMMISSION AND SALE OF FINISHED GOODS, THE ASSESSEE 'S SEGMENT SHOULD BE CONSIDERED AS THE TESTED PARTY. OUR COMMENTS WE AGREE WITH THE ASSESSEE'S CONTENTION THAT IT SHO ULD BE SELECTED AS THE TESTED PARTY FOR THESE FUNCTIONS BEING THE LEAST COMPLEX ENTITY. THE SEGMENTATION OF PROFITABILITY PROVIDED BY THE ASSESSEE HAS NO BASIS, IS FAR-FETCHED AND NO T AUDITED. BASED ON THE SAME, SINCE IT SHOULD BE SELECTED AS THE TESTED PARTY FOR ALL TRAN SACTIONS, THE ENTITY LEVEL MARGINS SHOULD BE CONSIDERED. HENCE THE SEGMENT OF THE ASSESSEE IS REJECTED. 32. THE ASSESSEE HAS SUBMITTED THE REJOINDER TO THE REMAND REPORT OF THE LD. TPO AND SUBMITTED THE AUDITED SEGMENTAL RESULT OF THE A SSESSEE VIDE PAPER BOOK PAGE NO. 915 TO 916. WE NOTE THAT IN SUBSEQUENT ASSESSME NT YEAR VIDE ASSESSMENT YEAR 2013-14 AND A.Y 2014-15 (VIDE PAGE NO. 4 OF THE LD. DRP ORDER) WHEREIN THE LD. DRP HELD THAT THE ADJUSTMENT CAN BE MADE ONLY ON TH E BASIS OF TRANSACTION AND NOT ON AGGREGATION AND ACCEPTED THE SEGMENTAL ANALYSIS OF THE ASSESSEE. THE ASSESSEES AUDITED SEGMENTAL ANALYSIS SUBMITTED BEFORE THE BEN CH IS PLACED ON PAPER BOOK PAGE 915 TO 916. HOWEVER, WE NOTE THAT THE LD. DRP WITHOUT ASSIGNING ANY VALID REASONSREJECTED THE ASSESSEE`S SUBMISSION AND DISM ISS THE GROUND WITH A CRYPTIC OBSERVATION WHICH IS GIVEN BELOW: ALL THE ABOVE GROUNDS IN OUR VIEW BEAR THE SAME TE XTURE AND COMPLEXION. IN OUR CONSIDERED VIEW THEY HAVE A TENUOUS LINK WIT H THE PRIMARY GRIEVANCE OF THE A RELATING TO THE VARIATIONS MADE BY THE A SSESSING OFFICER/TPO IN THE RETURNED INCOME OF THE A. FOR WANT OF OBJECTI VITY AND PRECISION THE GROUNDS ARE DISMISSED WHOLESALE. 33. WE NOTE THAT IN ORDER TO JUSTIFY THE TRANSFER P RICING ADJUSTMENT THE SEGMENTAL RESULTS SHOULD BE CONSIDERED. WE NOTE THAT THE ASSE SSEE HAS NOT SUBMITTED THE ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 22 22 2 SEGMENTAL REPORTS BEFORE THE TPO, HOWEVER, THE ASSE SSEE HAS SUBMITTED DURING THE DRP PROCEEDINGS WHICH HAS NOT BEEN CONSIDERED BY TH E LD. DRP. AT THE COST OF REPETITION, WE WOULD LIKE TO STATE T HAT IN SUBSEQUENT ASSESSMENT YEAR VIDE ASSESSMENT YEAR 2013-14 AND A.Y 2014-15 (VIDE PAGE NO. 4 OF THE LD. DRP ORDER) WHEREIN THE LD. DRP HELD THAT THE ADJUSTMENT CAN BE MADE ONLY ON THE BASIS OF TRANSACTION AND NOT ON AGGREGATION AND ACCEPTED THE SEGMENTAL ANALYSIS OF THE ASSESSEE BASED ON THE SAME FACTS AND CIRCUMSTANCES AND THERE IS NO CHANGE IN LAW. THEREFORE, IT IS ABUNDANTLY CLEAR, THATLD DRP IN SU BSEQUENT YEARS HAVE ACCEPTED THE SEGMENTAL ANALYSIS OF THE ASSESSEE. THE ASSESSEES AUDITED SEGMENTAL ANALYSIS SUBMITTED BEFORE THE BENCH IS PLACED ON PAPER BOOK PAGE 915 TO 916. WE NOTE THAT WHERE SEGMENTAL RESULTS ARE AVAILABLE, THE ADJUSTMENT CAN BE MADE ONLY ON THE BASIS OF TRANSACTION AND NOT ON AGGREGA TION,FOR THAT WE RELY ON THE FOLLOWING JUDGMENTS OF COORDINATE BENCHES: (I).M/S SYNIVERSE MOBILE SOLUTIONS PVT. LTD., HYDER ABAD [TS-51-ITAT-2015] (PAGE 7 TO 9) (PARA 9), WHEREIN IT WAS HELD AS FOLL OWS: 9. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS RIGHTLY SUBMITTED BY THE LEARNED COUN SEL FOR THE ASSESSEE, SEGMENTAL DETAILS TAKEN BY THE ASSESSEE IN ITS TP ANALYSIS CANNOT BE REJECTED MERELY ON THE GROUND THAT THEY ARE UNAUDITED, AS DONE BY THE TPO AND THIS POSITION DULY SUPPORTED BY SEVERAL DECISIONS OF THE TRIBUNAL IS NOT DISPUTED EVEN BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. HE HOWEVER, HAS SUBMITTED THAT THE SEGMENTAL DETAILS A ND FINANCIALS WERE REJECTED BY THE TPO NOT MERELY ON THE BASIS OF UNAUDITED ASPECT, BU T HE HAS ALSO GIVEN CERTAIN SPECIFIC REASONS, SUCH AS ASSUMPTIONS AND PRESUMPTIONS INVOL VED IN THE ALLOCATION OF VARIOUS EXPENSES BETWEEN DIFFERENT SEGMENTS. HE HAS ALSO CO NTENDED THAT THE DIFFERENT SEGMENTS OF THE ASSESSEE COMPANY ARE HETEROGENEOUS AND IN OR DER TO RELY UPON THE FINANCIALS OF SUCH SEGMENTS FOR THE TP ANALYSIS, IT IS ALWAYS BET TER TO HAVE THE SAME DULY AUDITED. HE HAS CONTENDED THAT ALTHOUGH THERE IS NO LEGAL M/S. SYNIVERSE MOBILE SOLUTIONS PRIVATE LIMITED, HYDERABAD REQUIREMENT TO GET THE SEGMENTAL FINANCIALS AUDITED, IT IS ALWAYS PREFERABLE FOR ESTABLISHING THE RELIABILITY. (II)BRIGADE GLOBAL SERVICE PVT. LTD. TS-730-ITAT 20 12 (HYD)-TP-PARAS 33 TO 38, PAGE 22 TO 25 THE AR SUBMITTED THAT, IN RESPECT OF F.I. SOFEX (I TEM NO. 11 IN THE CHART) INTRODUCED BY THE ASSESSEE BUT REJECTED BY LEARNED CIT (APPEALS) AS WELL AS TPO ON THE GROUND THAT NOSEGMENTAL DETAILS WERE AVAILABLE. WHEREAS THE FAC T REMAINS THAT THE ASSESSEE HAD FURNISHED THE SEGMENTAL DATA. THE MUMBAI TRIBUNAL I N THE CASE OF ADDL. CIT V. TECHNIMONT ICB INDIA (P) LTD. 148 TTJ (MUMBAI) (TM) 547 HAD HELD THAT WHERE THE SEGMENTAL DATA WAS FURNISHED REJECTION OF SUCH CASE S AS COMPARABLE IS NOT JUSTIFIED. IT WAS FURTHER HELD BY BOTH THE LOWER AUTHORITIES THAT BAD DEBTS WRITTEN OFF CANNOT BE ALLOWED AS OPERATING COST. THE ASSESSEE RESPECTFULL Y SUBMITS THAT BAD DEBTS WRITTEN OFF FORMS PART OF OPERATING COST. IN THIS CONNECTION, R ELIANCE IS PLACED ON THE DECISION OF ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 23 33 3 TRIBUNAL IN THE CASES OF CA COMPUTER ASSOCIATES (P. ) LTD. V. DY. CIT [2010] 37 SOT 306 (MUM. TRIBUNAL) AND DY. CIT V. VERTEX CUSTOMER SERV ICES INDIA (P.) LTD. [2009] 34 SOT 532 (DELHI). 34. THE DR SUBMITTED THAT SEGMENTAL TOTAL COST NOT AVAILABLE AND THAT THE SUBSIDIARY IN INDIA INCURRED A LOSS DUE TO WHICH THE ENTIRE INVES TMENT AS WELL AS RECOVERABLE ADVANCE HAD BEEN FULLY PROVIDED FOR IN THE BOOKS OF ACCOUNT . BEING SO IT IS NOT COMPARABLE WITH THE ASSESSEE COMPANY. 35. WE HAVE CONSIDERED THE ARGUMENTS OF BOTH THE PA RTIES. IN OUR CONSIDERED VIEW FOR COMPUTING THE NET MARGIN OF THE ASSESSEE FOR THE PU RPOSE OF TRANSFER PRICING ONLY THE COST RELATED TO THE TRANSACTION WITH THE AES HAS TO BE C ONSIDERED AND ACCORDINGLY, WE AGREE WITH THE ARGUMENT THAT SEGMENTAL FINANCIAL DATA IS TO BE CONSIDERED FOR THE PURPOSE OF ARRIVING AT THE NET MARGIN ON AN INTERNATIONAL TRAN SACTION WITH THE ASSESSEE'S ENTERPRISES IN RESPECT OF TRANSACTIONS CARRIED ON BY THE ASSESS EE. THIS VIEW OF OURS IS ALSO SUPPORTED BY THE ORDER OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF FOURSOFT LTD. VS. DCIT (62 DTR 308) (HYD). SAME VIEW HAS BEEN TAKEN B Y THE TRIBUNAL IN VARIOUS CASES STATED BY THE ASSESSEE. THEREFORE, RESPECTFULLY FOLLOWING THE FINDINGS OF T HE CO-ORDINATE BENCHES IN THE ABOVE NOTED TWO JUDGMENTS WE DIRECT THE LD. TPO/ASS ESSING OFFICER TO CONSIDER THE ASSESSEES AUDITED SEGMENTAL RESULTS TO COMPUTE ARM`S LENGTH PRICE (ALP). 34. GROUND NO. 3 RAISED BY THE ASSESSEE RELATES TO ADMINISTRATIVE SUPPORTS SERVICES AND IT SUPPORT SERVICES RECEIVED BY THE ASSESSEE FR OM THE ASSOCIATED ENTERPRISES (AE) WRONGLY TREATED TO BE IN THE NATURE OF STEWAR DSHIP FUNCTIONS. 35. BRIEF FACTS QUA THE ISSUE ARE THAT THE ASSESSEE RECEIVES, ADMINISTRATIVE AND IT SERVICES FROM ITS ASSOCIATE ENTERPRISE(AE). THE TRA NSFER PRICING OFFICER TREATED THE ARMS LENGTH PRICE, OF THE SAID TRANSACTIONS AS NIL BY OBSERVINGAS FOLLOWS: (I) BENEFIT OF SERVICES RECEIVED HAVE NOT BEEN PROV ED AND NO DOCUMENTATION PRODUCED, (II). NO EVIDENCES AS TO THE COST BENEFIT ANALYSIS, (III)BENEFITS ARE NOT TANGIBLE OR REAL, (IV).THE PAYMENT OF FEE IS AN ARRANGEMENT WITHOUT A NY ECONOMIC SUBSTANCE IN THE TRANSACTION. BASED ON THESE OBSERVATIONS THE TRANSFER PRICING AD JUSTMENT TO THE TUNE OF RS. 5,06,94,589/- WAS MADE BY LD TPO. ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 24 44 4 36. AGGRIEVED, BY THE ORDER OF THE LD TPO, THE ASSE SSEE CARRIED THE MATTER BEFORE THE LD DRP BY FILING OBJECTIONS. THE LD DRP HELD TH AT THESE ADMINISTRATIVE SUPPORTS SERVICES AND IT SUPPORT SERVICES RECEIVED BY THE ASSESSEE FROM THE ASSOCIATED ENTERPRISES (AE) ARE TO BE STEWARDSHIP A CTIVITIES AND HENCE CONFIRMED THE ORDER OF THE LD TPO. 37. AGGRIEVED BY THE ORDER OF THE LD DRP/AO, THE AS SESSEE IS IN APPEAL BEFORE US. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL AVAILABLE ON RECORD, WE NOTE THAT THE LD. COUNSEL FOR THE ASSESSEE INVITED OUR ATTENTION TO THE ORDER DATED 09.06.2017, PASSED BY THE DIVISION BENCH OF THIS TR IBUNAL IN ASSESSEES OWN CASE IN I.T.A. NO. 283/KOL/2016, FOR ASSESSMENT YEAR 201 1-12, WHEREBY THE ISSUE OF ADMINISTRATIVE SUPPORTS SERVICES AND IT SUPPORT SER VICES RECEIVED BY THE ASSESSEE FROM THE ASSOCIATED ENTERPRISES (AE), HAS BEEN DISC USSED AND ADJUDICATED IN FAVOUR OF ASSESSEE. THE LD. COUNSEL FOR THE ASSESSE E ALSO SUBMITTED THAT THE PRESENT ISSUE IS SQUARELY COVERED BY THE AFORESAID ORDER OF THE TRIBUNAL, A COPY OF WHICH WAS ALSO PLACED BEFORE THE BENCH. 38. THE LD. DR FOR THE REVENUE HAS PRIMARILY REITE RATED THE STAND TAKEN BY THE LD TPO/ASSESSING OFFICER WHICH WE HAVE ALREADY NOTED I N OUR EARLIER PARA AND THE SAME IS NOT BEING REPEATED FOR THE SAKE OF BREVITY. 39. WE SEE NO REASON TO TAKE ANY OTHER VIEW OF THE MATTER THEN THE VIEW SO TAKEN BY THE DIVISION BENCH OF THIS TRIBUNAL IN ASSESSEE S OWN CASE VIDE ORDER DATED 09.06.2017.IN THIS ORDER, THE TRIBUNAL HAS INTER AL IA OBSERVED AS FOLLOWS: 20. AGGRIEVED BY THE ORDER OF THE AO INCORPORATIN G THE DIRECTIONS GIVEN BY THE DRP IN THE FAIR ASSESSMENT ORDER, THE REVENUE HAS P REFERRED APPEAL BEING ITA NO.283/KOL/2016. THE GROUNDS OF APPEAL RAISED BY T HE REVENUE BEFORE THE TRIBUNAL READS THUS: 1.WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE INSTANT CASE, THE LD DRP HAS ERRED IN NOT EVALUATING THE COST BENEFIT AN ALYSIS, IN RESPECT OF SUCH SERVICES WITHOUT EVALUATION OF COMPARABLE COST FOR SUCH SERVICES, IF PROCURED FROM INDEPENDENT UNRELATED SERVICES, BEFORE CONCLUD ING THAT PAYMENTS MADE UNDER THE HEAD MANAGEMENT & IT SERVICES WERE AT ARM `S LENGTH. ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 25 55 5 THE ALMATIS INDIA (ASSESSEE), HAS FILED THE CROSS O BJECTIONS, VIDE CO.NO.23/K/2016 WHEREIN THE SOLITARY GRIEVANCE OF T HE ASSESSEE IS THAT THE SERVICES RECEIVED BY ASSESSEE IS NOT IN THE NATURE OF STEWARDSHIP SERVICES AND THEREFORE THE ASSESSEE DEFENDED THE ORDER PASSED BY THE DRP. THE ASSESSEE HAS RAISED EIGHT GROUNDS OF CROSS OBJECTIONS BUT WE ARE NOT REPRODUCING THEM FOR THE SAKE OF BREVITY, AS WE HAVE ALREADY NOTED THE S OLITARY GRIEVANCE OF THE ASSESSEE IN THESE CROSS OBJECTIONS. SINCE COMMON IS SUE IS INVOLVED IN REVENUE APPEAL AND CROSS OBJECTIONS, THEREFORE, THESE ARE B EING ADJUDICATED TOGETHER. 21. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATE D SUBMISSIONS MADE BEFORE THE DRP/TPO AND DREW OUR ATTENTION TO THE EVIDENCE IN S UPPORT OF THE SERVICES RECEIVED BY THE ASSESSEE FROM ITS AE-ALMATIS GERMAN Y, THE RATIONALE/NEED FOR SERVICES SO RECEIVED VIS--VIS THE BUSINESS OF THE ASSESSEE, BENEFIT RECEIVED BY THE ASSESSEE, THE BENCHMARKING APPROACH ADOPTED BY THE ASSESSEE FROM RECIPIENTS PERSPECTIVE AND ALSO FROM THE SERVICE PROVIDERS PE RSPECTIVE, MANNER OF ALLOCATION OF COSTS BY THE SERVICE PROVIDER VIS--VIS THE ASS ESSEE. HE ALSO EXPLAINED THE MEANING OF NATURE OF STEWARDSHIP SERVICES AND AS TO HOW THE PAYMENT MADE BY THE ASSESSEE TO ITS AE-ALMATIS GERMANY, ARE NOT IN THE NATURE OF STEWARDSHIP SERVICES. HE DREW OUR ATTENTION TO CERTAIN DECIDED CASES OF H ONBLE HIGH COURTS IN INDIA AND VARIOUS BENCHES OF INCOME TAX APPELLATE TRIBUNA L ON THE APPROACH THAT SHOULD BE ADOPTED IN DETERMINING ALP IN CASES OF IN TRA GROUP SERVICES RECEIVED FROM GROUP COMPANIES (AE). 22. THE LEARNED DR SUPPORTED THE ORDER OF THE TPO. ACCORDING TO HIM THE CONCLUSIONS DRAWN BY THE TPO ARE JUST AND PROPER AN D CALLS FOR NO INTERFERENCE. 23. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. AS PER THE OECD GUIDELINES PARAGRAPH 7.2: NEARLY EVERY MNE GROUP MUST ARRANGE FOR A WIDE SCO PE OF SERVICES TO BE AVAILABLE TO ITS MEMBERS, IN PARTICULAR ADMINISTRAT IVE, TECHNICAL, FINANCIAL AND COMMERCIAL SERVICES. SUCH SERVICES MAY INCLUDE MANAGEMENT, COORDINATION AND CONTROL FUNCTIONS FOR THE WHOLE GR OUP. (EMPHASIS ADDED) THE U.S. REGULATIONS DEFINE AN INTRA-GROUP SERVICE IN THE FOLLOWING MANNER (TREAS. REG. 1-482-9(1)(1)): CONTROLLED SERVICES TRANSACTION - (I) IN GENERAL. A CONTROLLED SERVICES TRANSACTION INCLUDES ANY ACTIVITY (AS DEFINED IN PA RAGRAPH (1)(2)OF THIS SECTION) BY ONE MEMBER OF A GROUP OF CONTROLLED TAX PAYERS (THE RENDERER) THAT RESULTS IN A BENEFIT (AS DEFINED IN PARAGRAPH (1)(3) OF THIS SECTION) TO ONE OR MORE OTHER MEMBERS OF THE CONTROLLED GROUP ( THE RECIPIENT(S)). THUS, AS PER THIS DEFINITION OF SERVICES, FIRST THE RE SHOULD BE AN ACTIVITY PERFORMED BY ONE OF THE MEMBERS OF A GROUP OF RELATED PARTIES WHICH LIES WITHIN THE AMBIT OF DEFINITION OF ACTIVITY (THE 'ACTIVITY TEST') AND SE COND, THAT ACTIVITY SHOULD RESULT IN A BENEFIT (THE 'BENEFIT TEST') TO ONE OR MORE MEMBERS OF THAT GROUP OF RELATED ENTITIES. ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 26 66 6 THE OECD GUIDELINES ALSO CONCUR WITH THIS VIEW IN P ARAGRAPH 7.5: THERE ARE TWO ISSUES IN THE ANALYSIS OF TRANSFER P RICING FOR INTRA-GROUP SERVICES. ONE ISSUE IS WHETHER INTRA-GROUP SERVICES HAVE IN FACT BEEN PROVIDED. THE OTHER ISSUE IS WHAT THE INTRA-GROUP C HARGE FOR SUCH SERVICES FOR TAX PURPOSES SHOULD BE IN ACCORDANCE WITH THE A RM'S LENGTH PRINCIPLE. (EMPHASIS ADDED) 24. THE ASSESSEE DOES NOT HAVE A FULL CAPACITY TO PROVIDE A RANGE OF SERVICES TO ITS BUSINESS AND TO THE PERSONNEL WORKING FOR IT. IN T HE INTERESTS OF ECONOMY AND EFFICIENCY THE ASSESSEE DESIRED TO OBTAIN THESE SER VICES FROM ITS ASSOCIATED ENTERPRISE ALMATIS-GERMANY. ALMATIS-GERMANY HAS EXP ERT RESOURCES IN COMMERCIAL, FINANCIAL, ACCOUNTING AND OTHER MATTERS WHICH WOULD BE EMPLOYED FOR THE BENEFIT OF THE ALMATIS INDIA. THE ALMATIS INDIA WOULD HAVE ACCESS TO THE RESOURCES AND WOULD PAY APPROPRIATE CONSIDERATION W HICH WOULD BE COMMENSURATE WITH THE AMOUNT PAID TO THIRD PARTY SE RVICE PROVIDERS. THESE SUPPORT SERVICES RELATE TO CERTAIN FUNCTIONAL CATEG ORIES WHICH HAVE SET OUT IN THE EARLIER PART OF THIS ORDER AND HENCE, WE DO NO WISH TO REPEAT THE SAME. AS WE HAVE ALREADY OBSERVED IN THE EARLIER PART OF THIS ORDER, THE PRACTICE OF MULTINATIONAL ENTERPRISES PROVIDING INTRA GROUP SERVICES IS A GLO BAL PRACTICE WHEREIN, VARIOUS ACTIVITIES ARE FREQUENTLY CONCENTRATED FOR THE BENE FIT OF THE ENTIRE GROUP. SINCE, THE MULTINATIONAL GROUP OPERATES GLOBALLY, SUCH CONCENT RATION IS ESSENTIAL TO BE ABLE TO REACT IN THE MOST FLEXIBLE AND COST EFFECTIVE MA NNER. ACCORDING TO THE ASSESSEE THE BENEFITS DERIVED FROM AVAILING THE ABOVE SERVIC ES OUTWEIGH THE COST INCURRED IN RECEIVING SUCH SERVICES. IT IS ALSO THE CLAIM OF TH E ALMATIS INDIA THAT WITH THE HELP OF SUCH SERVICES IT ACHIEVED SUBSTANTIAL COST EFFI CIENCIES AND HENCE IT WOULD BE INCORRECT TO CATEGORISE SUCH SERVICES TO BE IN THE NATURE OF STEWARDSHIP SERVICES. IT IS THE CLAIM OF THE ASSESSEE THAT THE ABOVE SERVICE S ARE ESSENTIAL FOR THE OPERATIONS OF THE ASSESSEE AND HAD IT NOT RECEIVED THE ACCESS TO THE ABOVE SERVICES, IT WOULD HAVE BEEN REQUIRED TO PERFORM THEM BY ITSELF (IN-HO USE) OR BY HIRING EXPERIENCED SERVICE PROVIDERS. THE OECD GUIDELINES IN THIS REGA RD (PARA 7.6) LAYS DOWN THE FOLLOWING: UNDER THE ARM'S LENGTH PRINCIPLE, THE QUESTION WHE THER AN INTRAGROUP SERVICE HAS BEEN RENDERED WHEN AN ACTIVITY IS PERFO RMED FOR ONE OR MORE GROUP MEMBERS BY ANOTHER GROUP MEMBER SHOULD DEPEND ON WHETHER THE ACTIVITY PROVIDES A RESPECTIVE GROUP MEMBER WITH EC ONOMIC OR COMMERCIAL VALUE TO ENHANCE ITS COMMERCIAL POSITION: THIS CAN BE DETERMINED BY CONSIDERING WHETHER AN INDEPENDENT ENTERPRISE IN CO MPARABLE CIRCUMSTANCES WOULD HAVE BEEN WILLING TO PAY FOR TH E ACTIVITY IF PERFORMED FOR IT BY AN INDEPENDENT ENTERPRISE OR WOULD HAVE P ERFORMED THE ACTIVITY INHOUSE FOR ITSELF. IF THE ACTIVITY IS NOT ONE FOR WHICH THE INDEPENDENT ENTERPRISE WOULD HAVE BEEN WILLING TO PAY OR PERFOR M FOR ITSELF, THE ACTIVITY ORDINARILY SHOULD NOT BE CONSIDERED AS AN INTRA-GRO UP SERVICE UNDER THE ARM'S LENGTH PRINCIPLE. (EMPHASIS ADDED) 25. AS FAR AS THE SERVICES RENDERED BY ALMATIS GE RMANY, ARE CONCERNED, EXPERTISE IN THE FIELD OF HR, OPERATIONS AND PURCHASING, IT, MARKETING, FINANCE AND PLANNING AREAS HAVE BEEN DEVELOPED AND WITH A VIEW TO ENABLE THE ALMATIS INDIA TO HAVE FULL ACCESS TO THIS EXTENSIVE KNOWLEDGE AND EXPERTISE. ALMATIS GERMANY ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 27 77 7 PROVIDES THESE SERVICES TO ALMATIS INDIA. BESIDES EXPERTISE, THERE HAS BEEN SUBSTANTIAL SAVINGS IN TOTAL COSTS WHEN COMPARED WI TH THOSE WHICH WOULD OTHERWISE BE INCURRED IF THEY WERE BORNE BY THE IND IVIDUAL ALMATIS INDIA. IT IS NOT DISPUTED BY THE TPO THAT HAD THE ASSESSEE NOT RECEI VED SUCH SUPPORT FROM ALMATIS GERMANY, IT WOULD NEED TO PERFORM THE FUNCTIONS IN- HOUSE, OR HIRE EXPERIENCED AND TRAINED SERVICE PROVIDERS. SUCH SERVICES ARE TH US NOT IN THE NATURE OF SIMPLY OVERSIGHT FUNCTIONS, WHICH HAVE BEEN PERFORMED BY A LMATISGERMANY TO PROTECT ITS INVESTMENT IN THE COMPANY. WITH REGARD TO THE SERVI CES RECEIVED FROM ALMATIS GERMANY, THE COMPANY HAS SUBMITTED DETAILED EVIDENC ES TO THE LD. TPO IN THE FORM OF EMAILS, COMMUNICATIONS AND REPORTS WHICH EV IDENCE THE RENDERING OF SERVICES AND THE ENSUING BENEFITS. NATURE OF SERVI CE I.E. INFORMATION TECHNOLOGY, HUMAN RESOURCE, OPERATIONS, PURCHASING, MARKETING S UPPORT, FINANCE AND PLANNING HAS BEEN EVIDENCED BY WAY OF SUCH COMMUNIC ATION/ DOCUMENTS. IT WAS NEITHER DISPUTED BY THE TPO THAT APART FROM SERVICE S WHICH ARE RECEIVED IN THE FORM OF EMAILS, REPORTS, DOCUMENTS ETC. FROM ALMATI S GERMANY, THE ASSESSEE ALSO RECEIVED CONSTANT AND CONTINUOUS INFORMATION OVER C ALLS, AUDIO-VIDEO CONFERENCES, PERSONAL VISITS ETC. THEREFORE, THE BENEFITS RECEIV ED IN THE ABOVE FORM OUGHT TO HAVE BEEN GIVEN DUE CONSIDERATION. HENCE, FOR THE P URPOSE OF DEMONSTRATION AND EXPLANATION, THE ASSESSEE HAS SUBMITTED DOCUMENTS E VIDENCING THE REGULAR FLOW OF VALUABLE COMMERCIAL SERVICES. FROM THE ABOVE DETAIL S SUBMITTED BY THE ASSESSEE IT HAS BEEN AMPLY DEMONSTRATED THAT THE BENEFITS GENER ATED BY THE SAID SERVICES DURING THE RELEVANT FINANCIAL YEAR HAVE UNDENIABLY ADDED ECONOMIC / COMMERCIAL VALUE TO ENHANCE THE COMMERCIAL POSITION OF THE ASS ESSEE AND SUCH SERVICES ARE RECEIVED BY THE ASSESSEE ON A CONTINUOUS BASIS. HEN CE IT IS ERRONEOUS TO CLASSIFY THE SERVICES TO BE IN THE NATURE OF STEWARDSHIP SER VICES. THE DRP IN ITS ORDER HAS NOT ACCEPTED THE FINDINGS OF THE TPO. THE DRP WAS OF THE VIEW THAT THE SERVICES WERE RENDERED BY ALMATIS GERMANY TO THE ASSESSEE AND THAT THE ASSESSEE BENEFITTED FROM SUCH SERVICES. O NCE THIS CONCLUSION IS ARRIVED AT THEN THE CASE OF THE TPO THAT THE NATURE OF SERVICE S WERE STEWARDSHIP ACTIVITY CANNOT BE SUSTAINED. 26. WE THEREFORE CONCLUDE THAT THE ASSESSEE HAS ES TABLISHED THE NATURE OF SERVICES INCLUDING QUANTUM OF SERVICES RECEIVED FROM ALMATIS GERMANY, THAT SERVICES WERE PROVIDED IN ORDER TO MEET SPECIFIC NEED OF THE ASSE SSEE FOR SUCH SERVICES, THE ECONOMIC AND COMMERCIAL BENEFITS DERIVED BY THE ASS ESSEE. ALMATIS INDIA CLAIMS THAT HIS ARM`S LENGTH PRICE CLAIMED IN GENERAL SERV ICE AGREEMENT (GSA), @ 9.6% IS LESS THAN 11.24% THEREFORE, ALL THE TRANSACTIONS ARE AT ARM`S LENGTH. THE TPO HAS NOT DISPUTED THE ABOVE COST ALLOCATION AS WELL AS THE FACT THAT THE COMPARATIVE COST CHARGED BY UNRELATED PARTIES FOR SIMILAR SERVI CES WAS AT A MARGIN OF 9.6% OF THE COST. BESIDES, IN THIS CASE THE TP STUDY REPORT AS WELL A S COMPARABLES SELECTED BY THE ASSESSEE TO COMPUTE THE ARM`S LENGTH PRICE @ 9.6% W ERE AVAILABLE BEFORE THE TPO AND DRP. NEITHER TPO NOR THE DRP HAS OBJECTED THE C OMPARABLES SELECTED BY THE ASSESSEE TO COMPUTE THE ALP @9.6%. HAD THE TPO NOT BEEN AGREED THEN HE WOULD HAVE APPEARED IN THE COURSE OF HEARING BEFORE THE D RP AND COULD OBJECT THE ALP AND COMPARABLES SELECTED BY THE ALMATIS INDIA. THER EFORE, WE ARE OF THE VIEW THAT ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 28 88 8 DRP AS WELL AS TPO, BOTH HAD AGREED WITH THE ALP CO MPUTED BY THE ALMATIS INDIA AND COMPARABLES SELECTED BY THE ALMATIS INDIA . IN VIEW OF OUR CONCLUSION, THE TPO WERE IN ERROR IN HOLDING THAT THE NATURE OF SERVICES RENDERED BY ALMATIS GERMANY, WERE IN THE N ATURE OF STEWARDSHIP ACTIVITY. THE CHARGES PAID BY THE ALMATIS INDIA TO ALMATISGER MANY ARE HELD TO BE AT ARMS LENGTH. CONSEQUENTLY, WE CONFIRM THE ORDER PASSED BY THE LD DRP AND THE APPEAL OF THE REVENUE ITA NO. 283/KOL/2016 IS DISMISSED. 40. WE ALSO NOTE THAT IN SUBSEQUENT ASSESSMENT YEA R 2014-15, THE LD DRP, IN ASSESSEE`S OWN CASE ( VIDE PAGE 6-7), BASED ON THE SAME FACTS AND CIRCUMSTANCES, DELETED THE ADDITION MADE BY LD TPO ON ACCOUNT OF A DMINISTRATIVE SUPPORTS SERVICES AND IT SUPPORT SERVICES RECEIVED BY THE AS SESSEE FROM THE ASSOCIATED ENTERPRISES (AE), WHICH WAS WRONGLY TREATED BY LD TPO TO BE IN THE NATURE OF STEWARDSHIP FUNCTIONS. 41. AS THE ISSUE IS SQUARELY COVERED IN FAVOUR OF T HE ASSESSEE BY THE DECISION OF THE CO-ORDINATE BENCH , IN ASSESSEES OWN CASE (SUPRA) AND THERE IS NO CHANGE IN FACTS AND LAW AND THE REVENUE IS UNABLE TO PRODUCE ANY MA TERIAL TO CONTROVERT THE AFORESAID FINDINGS OF THE CO-ORDINATE BENCH IN ASSE SSEES OWN CASE, FOR ASSESSMENT YEAR 2011-12 (SUPRA), WE FIND THAT THE ISSUE IS SQU ARELY COVERED IN FAVOUR OF THE ASSESSEE AND THEREFORE WE ALLOW THE GROUND NO. 3 RA ISED BY THE ASSESSEE. 42. IN THE RESULT, BOTHTHE APPEALS OF THE ASSESSEE IN ITA NO.726/KOL/2017 FOR A.Y.2012-13 AND ITA NO.2361/KOL/2017 FOR A.Y.2013-1 4 ARE ALLOWED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 16.04.2 019. SD/- ( S.S.GODARA ) SD/- (A.L.SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /KOLKATA; / DATE: 16/04/2019 ( SB, SR.PS ) ALMATIS ALUMINA PVT. LTD. ITA NOS.726&2361/KOL/2017 ASSESSMENT YEARS:2012-13&2013-14 P PP PA AA AG GG GE EE E | || | 2 22 29 99 9 / COPY OF THE ORDER FORWARDED TO : TRUE COPY BY ORDER ASSISTANT REGISTRAR, I.T.A.T, KOLKATA BENCHES, KOLKATA . 1. /THE APPELLANT ALMATIS ALUMINA PVT. LTD. 2. ! / THE RESPONDENT DCIT, CIRCLE-8(1), KOLKATA 3. ' ( ) / THE CIT(A), 4. ' / CIT 5. #$% &&'( , '( , / DR, ITAT, KOLKATA 6. %)*+ / GUARD FILE. !# &