Cook India Medical Devices Pvt. Ltd., CHENNAI V. JCIT (OSD), CHENNAI

ITA 2546/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7362 (ITAT-CHENNAI)
• Duration Of Justice: 6 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 10-01-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 31-08-2016
• Court: TRIBUNAL
• Department Lawyers: MILIND MADHUKAR BHUSARI
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Corroborative evidences
• Section: 143(3); 234B; 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ ITA NO.: 2546/MDS/2016 / ASSESSMENT YEARS : 2012-13 M/S. COOK INDIA MEDICAL DEVICES PRIVATE LIMITED, 4/249A, RASIM ENCLAVE, POONAMALLEE HIGH ROAD, NEAR SAVITHA DENTAL COLLEGE, GOPARASANALLUR, KATTUPAKKAM, CHENNAI 600 056. PAN: AACCC7628P V. THE JOINT COMMISSIONER OF INCOME TAX (OSD), CORPORATE CIRCLE 1(2), CHENNAI. ( /APPELLANT) ( /RESPONDENT) /APPELLANT BY : SHRI NAGESWAR RAO, ADVOCATE /RESPONDENT BY : SHRI MILIND MADHUKAR BHUSARI , CIT / DATE OF HEARING : 10.01.2017 / DATE OF PRONOUNCEMENT : 30.03.2017 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE ASSESSEE HAS FILED THE APPEAL AGAINST THE ORD ER OF THE ASSESSING OFFICER PASSED UNDER SECTION 143(3) R.W.S .144C(1) R.W.S. 2 I.T.A. NO. 2546/MDS/2016 92CA OF THE ACT DATED 29.01.2016 PASSED IN PURSUANC E TO THE DIRECTIONS OF THE DRP, BANGALORE DATED 06.06.2016. 2. THE ASSESSEE HAS RAISED THE SOLE SUBSTANTIVE GRO UNDS: 1. THE LD. AO/ TRANSFER PRICING OFFICER ('TPO')/ DRP H AS ERRED, IN LAWS AND FACTS, BY NOT ACCEPTING THE ECONOMIC ANALY SIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, WITH RESPECT TO THE INTERNATIONAL TRANSA CTION PERTAINING TO SUPPORT SERVICES ('IMPUGNED TRANSACTION') PROVIDED BY THE ASSOCIATED ENTERPRISES ('AES') TO THE APPELLANT AND FURTHER HO LDING THAT THE IMPUGNED TRANSACTION IS NOT AT ARM'S LENGTH AND HEN CEFORTH MAKING AN UPWARD TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS. 2,26,95,052. 2. LD. AO/TPO/DRP FAILED TO APPRECIATE THAT SEPARATE B ENCHMARKING OF SUPPORT SERVICES USED IN THE CONTEXT OF OVERALL DIS TRIBUTION BUSINESS IS NOT JUSTIFIED IN LAW. WITHOUT PREJUDICE, SUBMISSION OF SECONDARY ANALYSIS TO SUPPORT FINDING CANNOT RESULT IN ESTOPP EL AGAINST APPELLANT AND BENCHMARKING CONTRARY TO FACTS AND LAW CANNOT B E JUSTIFIED ON THAT BASIS. 3. THE LD. AO/TPO/DRP HAS ERRED, IN LAWS AND FACTS, BY NOT CONSIDERING THE DOCUMENTARY EVIDENCES AS SUBMITTED BY THE APPEL LANT TOWARDS RECEIPT OF SUPPORT SERVICES FROM ITS AES I.E. COOK ASIA LTD., HONG KONG ('COOK HONG KONG'), WILLIAM COOK AUSTRALIA, CO OK MEDICAL AUSTRALIA AND COOK PAN PACIFIC PTY. LIMITED (COLLEC TIVELY REFERRED AS 'COOK GROUP AUSTRALIA'). 4. THE LD. AO/TPO/DRP HAS ERRED, IN LAWS AND FACTS, BY CONSIDERING THE RECEIPT OF SUPPORT SERVICES AS 'STEWARDSHIP / DUPLI CATIVE SERVICES' IN NATURE. 5. THE LD. AOIDRP HAS ERRED, IN LAWS AND FACTS, BY CON SIDERING THE ARM'S LENGTH PRICE ('ALP') OF THE SUPPORT SERVICES AS NIL. 6. THE LD. AOITPO/DRP HAS ERRED IN LAWS AND FACTS, BY CONCLUDING THAT DOCUMENTARY EVIDENCES SUBMITTED FOR INFORMATION TEC HNOLOGY AND 3 I.T.A. NO. 2546/MDS/2016 REGIONAL SALES SUPPORT AND PRODUCT MANAGEMENT SERVI CES PERTAIN ONLY TO SERVICES RENDERED BY COOK HONG KONG AND NOT FROM COOK GROUP AUSTRALIA. 7. THE LD. AOITPO/DRP, HAS ERRED IN LAW AND FACTS BY C ONSIDERING THE APPELLANT AS TESTED PARTY FOR BENCHMARKING THE IMPU GNED TRANSACTION INSTEAD OF FOREIGN AES, AS DETERMINED BY THE APPELL ANT. 8. THE LD. AOITPO/DRP HAS ERRED, IN LAWS AND FACTS, BY REJECTING TRANSACTION NET MARGIN METHOD AS THE MOST APPROPRIA TE METHOD ('MAM') FOR DETERMINATION OF THE ALP FOR THE IMPUGN ED TRANSACTION. THE LD. AOIDRP HAS ERRED IN UPHOLDING LD. TPO'S APP LICATION OF COMPARABLE UNCONTROLLED PRICE CUP AS THE MAM FOR TH E PURPOSES OF DETERMINATION OF THE ALP OF THE OF THE IMPUGNED TRA NSACTION AS NO CORROBORATIVE ANALYSIS HAS BEEN UNDERTAKEN BY THE L D. TPO. GENERAL GROUNDS 9. THE LD. AO HAS ERRED, IN LAW AND IN FACTS, BY NOT P ROVIDING ADVANCE TAX CREDIT AMOUNTING TO RS. 5,00,000 AND SUBSEQUENT LY HAS ERRONEOUSLY COMPUTED THE TAX AND INTEREST LIABILITY UNDER SECTION 234A AND 234B OF THE ACT. 10. THE LEARNED AO HAS ERRED, IN LAW AND IN FACTS, IN I NITIATING PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT; 3. THE BRIEF FACTS OF THE CASE THAT THE ASSESSEE IS A WHOLLY OWNED SUBSIDIARY OF COOK GROUP INC, USA WHICH PROVI DES MEDICAL EQUIPMENT SERVICES FOR ITS PARENT COMPANY. COOK IN DIA IS ENGAGED IN THE ACTIVITY OF DISTRIBUTION OF MEDICAL DEVICES IN THE INDIAN MARKET. THE ASSESSEE COMPANY FILED THE RETURN OF INCOME ON 17.12.2012 WITH TOTAL INCOME OF RS.68,06,580/-. SUBSEQUENTLY T HE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND NOTICE U/S. 14 3(2) OF THE ACT 4 I.T.A. NO. 2546/MDS/2016 WAS ISSUED. IN COMPLIANCE TO THE NOTICE, THE LD. A R OF THE ASSESSEE APPEARED AND SUBMITTED THE DETAILS. THE L D. AO FOUND THAT THE ASSESSEE COMPANY HAVING INTERNATIONAL TRAN SACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) AND THE MATTER WAS REF ERRED TO THE TRANSFER PRICING OFFICER (TPO). THE LD. TPO VIDE O RDER DATED 29.12.2015 HAS MADE DOWNWARD ADJUSTMENT TOWARDS THE SUPPORT SERVICES FEES PAID TO AES RS.2,65,83,539/- AND THE LD. AO PASSED DRAFT ASSESSMENT ORDER. AGGRIEVED, THE ASSESSEE HA S FILED OBJECTIONS WITH THE DISPUTE RESOLUTION PANEL (DRP) ON 04.03.2016. THE DRP VIDE ITS ORDER DATED 06.06.2016 HAD ELIMINA TED CERTAIN PAYMENTS MADE TOWARDS INFORMATION TECHNOLOGY SERVIC ES, REGIONAL SALES SUPPORT & PROJECT MANAGEMENT SERVICE S OF RS.63,299/- AND RS.38,25,188/-AND THE SAME WAS EXCL UDED FROM THE TOTAL DOWNWARD ADJUSTMENT OF RS.2,65,83,539/- A ND DIRECTED THE LD. AO TO MAKE ADJUSTMENT TO THE EXTENT OF RS.2,26, 95,052/-. THE LD. AO WITH THESE OBSERVATIONS MADE ADDITION OF TRA NSFER PRICING ADJUSTMENT OF RS.2,65,83,539/- TO THE RETURN OF INC OME AND PASSED ORDER U/S. 143(3) R.W.S. 144C(1) R.W.S. 92CA OF THE INCOME TAX ACT. 4. AGGRIEVED BY THE ORDER OF THE LD. AO PASSED IN P URSUANCE OF THE DRP, THE ASSESSEE COMPANY HAS FILED AN APPEAL B EFORE THE 5 I.T.A. NO. 2546/MDS/2016 TRIBUNAL. BEFORE US, THE LD. AR SUBMITTED THAT THE AO AND THE TPO ARE NOT JUSTIFIED IN BENCHMARKING OF SUPPORT SERVIC ES WITHOUT APPRECIATING THE FACTS AND FURTHER THE ASSESSING AU THORITIES HAVE NOT CONSIDERED THE DOCUMENTARY EVIDENCE SUBMITTED IN SU PPORT OF THE SERVICES OF M/S. COOK ASIA LTD., HONG KONG, WILLIAM COOK AUSTRALIA, COOK MEDICAL AUSTRALIA AND COOK PAN PACIFIC PTY. LI MITED. THE LD. AR EXPLAINED THAT THE LD. AO IN PURSUANCE TO THE DI RECTIONS OF THE DRP HAS ERRED IN CONSIDERING THE SUPPORT SERVICES A T NO VALUE. THE FACTS BEING THE ASSESSEE COMPANY HAS APPLIED THE TR ANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD IN RESPECT OF INTERNATIONAL TRANSACTIONS, WHEREAS THE LD. TPO HAS APPLIED THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD. THE LD . AR RELIED ON THE DECISIONS OF THE CO-ORDINATE BENCH OF THE TR IBUNAL AND EMPHASIZED THAT THE CUP METHOD CANNOT BE APPLIED AS THE ASSESSEE HAS MADE TRANSACTION NET MARGIN STUDY AND SUPPORTED THE SUBMISSIONS WITH THE DECISIONS AS UNDER: I) ITA NO. 1970/MDS/2011, M/S. AB MAURI INDIA PVT. LTD. V. ACIT DATED 05.05.2 016, II)ITA NO.1032/MDS/2014, DCIT V. M/S. FLAKT (INDIA) LTD DA TED 09.06.2016, III) ITA NO.1433/DEL/2009, ABHISHEK AUTO INDUSTRIES LTD V. DCIT DATED 12.11.2010 AND IV) RANBAXY LABORATORIES LTD V . ACIT, 68 TAXMANN.COM 322 (DELHI-TRIB). FURTHER THE LD. AR RELIED ON THE 6 I.T.A. NO. 2546/MDS/2016 CO-ORDINATE BENCH DECISION OF SIMILAR ISSUE IN M/S. CONTROL TECHNIQUES INDIA PVT. LTD. V. JCIT IN ITA NO.2575/M DS/2016 DATED 16.12.2016 AND PRAYED FOR DELETION OF ADDITION AND ALLOW THE APPEAL. CONTRA, THE LD. DR RELIED ON THE ORDER OF THE DRP A ND EXPLAINED THE FACTS IN RESPECT OF RECEIPT OF SERVICES AND SUBMITT ED THAT THE ASSESSEE COMPANY HAS MADE PAYMENT FOR SUPPORT SERVI CES TO M/S. COOK AUSTRALIA GROUP AND COOK, HONG KONG AND W AS BENCH MARKED AND ADOPTED TNM METHOD AS THE MOST APPROPRIA TE METHOD FOR BOTH THE ASSOCIATED ENTERPRISES AS THE TESTED P ARTIES. THE DRP HAS PEGGED DOWN THE ADDITION FROM RS.2.65 CRORES TO RS.2.25 CRORES. THE LD. DR EXPLAINED THAT THE TPO HAS EXTR ACTED THE RULE OF MOST APPROPRIATE METHOD TO BE CHOSEN KEEPING IN MIND THE FACTORS WHICH HAVE BEEN PRESCRIBED IN THE RULES. T HE ASSESSEE CANNOT CHOSE A METHOD WHICH DOES NOT PROVIDE THE MO ST RELIABLE MEASURE OF ARMS LENGTH PRICE IN RELATION TO THE INT ERNATIONAL TRANSACTION AND THE METHOD ADOPTED BY THE ASSESSEE BEING TNM METHOD CANNOT PROVE THAT SERVICES HAVE BEEN RECEIVE D AND IT CERTAINLY DOES NOT PUT A VALUE TO THEM. FURTHER COM PARABLES MAY NOT HAVE MADE PAYMENTS FOR THE RECEIPT OF SAID SERV ICES AND THE TNM METHOD DOES NOT MEASURE THE ALP OF INTERNATIONA L TRANSACTIONS FOR RECEIPT OF SERVICES AND WHEREAS TH E LD. TPO HAS 7 I.T.A. NO. 2546/MDS/2016 RIGHTLY ADOPTED THE CUP METHOD AS THE MOST APPROPRI ATE METHOD FOR DETERMINING THE ALP OF SERVICE FEES PAID AND THE DI FFERENT SUPPORT SERVICES FILED BY THE ASSESSEE ARE IN THE NATURE OF HUMAN RESOURCE, MARKETING SERVICES, FINANCE SERVICES, IT SERVICES AND REGIONAL SALES SUPPORT AND PROJECT MANAGEMENT SERVI CES. THE LD. DR FILED SUBMISSIONS SUPPORTING HIS VIEWS AND P RAYED FOR DISMISSAL OF THE APPEAL. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIALS ON RECORD AND JUDICIAL DECISIONS RELIED BY THE ASSE SSEE. THE SOLE CRUX OF THE ISSUE BEING THE DOWNWARD ADJUSTMENT MAD E BY THE LD. TPO IN RESPECT OF THE INTERNATIONAL TRANSACTIONS, W E FIND THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS WITH ASSOCI ATED ENTERPRISES IN RESPECT OF RECEIPT OF SERVICES WITH M/S. COOK, AUSTRALIA AND M/S. COOK ASIA LIMITED, HONG KONG AND THE LD. TPO HAS CONSIDERED THE TP STUDY OF THE ASSESSEE AND WOR KED OUT THE MARGINS, WHERE THE ASSESSEE IS IN THE IMPORT OF MED ICAL EQUIPMENTS AND THE ASSESSEE HAS ADOPTED TNM METHOD AS A MOST APPROPRIATE METHOD AND CERTAIN FILTERS WERE AP PLIED AND THE ASSESSEE HAS PROVIDED FIVE COMPARABLES AND THEIR AD JUSTED ARITHMETIC MEAN PLI(OP/OI) WHICH WORKED OUT TO 0.09 % AS AGAINST 8 I.T.A. NO. 2546/MDS/2016 THE PLI OF 3.49% AND THE LD. TPO HAS DEALT EXCLUSIV ELY ON THE SUPPORT SERVICE FEES, CHOICE OF TESTED PARTY AND CA ME TO A CONCLUSION THAT THE MOST APPROPRIATE METHOD TO BE A PPLIED IS CUP METHOD AND MADE DOWNWARD ADJUSTMENT OF RS.2,65,83,5 39/- WHICH WAS SUBSEQUENTLY PEGGED DOWN BY THE DRP ON SUBMISSI ON OF EVIDENCE TO THE EXTENT OF RS.2,26,95,052/-. THE LD. DR HAS SUBMITTED THAT THE ASSESSEE COMPANY COULD NOT SUBST ANTIATE 85% OF ITS EXPENDITURE AND RELIED ON THE ORDER OF THE D RP. THE DRP FIND THE LD. TPO HAS EXAMINED THE VARIOUS DOCUMENTS , AGREEMENTS PRODUCED BY THE ASSESSEE TO JUSTIFY ITS CLAIM FOR HAVING RECEIVED SERVICES FROM ASSOCIATED ENTERPRISE S, WHEREAS IT WAS OBSERVED THAT MANY OF THE SERVICES WERE DUPLICA TIVE IN NATURE AS THE ASSESSEE FAILED TO EXPLAIN HOW PAYMENTS WERE MADE TO ITS EMPLOYEES AS WELL AS ITS ASSOCIATED ENTERPRISES. TH E DRP EMPHASIZED THAT THE ASSESSEE COMPANY HAS FAILED TO PRODUCE ANY DOCUMENTS TO SUBSTANTIATE THE CLAIMS AND THE LD. TP O HAS CONSIDER THE INFORMATION AND OBSERVED THAT THE ASSE SSEE HAS NOT COOPERATED IN SUBMITTING THE CORRECT DATA. THE CON TENTION OF THE LD.TPO THAT SERVICES AVAILED, BUT ACTUALLY NOT REND ERED AND THE PAYMENTS WERE MADE BY THE ASSESSEE AT ALP AND THE A SSESSEE HAS NOT UTILIZED THE OPPORTUNITY PROVIDED BEFORE TH E LD. TPO. 9 I.T.A. NO. 2546/MDS/2016 FURTHER THE DRP SUBSTANTIATED THAT THE ASSESSEE IN THE PROCEEDINGS COULD NOT SUPPORT THEIR CLAIMS WHETHER SERVICES ARE ACTUALLY RECEIVED OR THAT THE SERVICES WERE NOT IN THE NATURE OF STEWARD SERVICES AND THE CONTENTION OF THE ASSESSEE TO SUBSTANTIATE THE ENTIRE CLAIM OF EXPENDITURE WILL P UT THE ASSESSEE UNDUE IN HARDSHIP. THE LD. DRP FOUND THAT THE ASSE SSEE FAILED TO SUBSTANTIATE ITS CLAIM TO THE EXTENT OF RS.2,26,95, 052/- WHICH BEING IN RELATION TO THE ASSOCIATED ENTERPRISES SERVICES. WE FOUND THAT THE ASSESSEE THOUGH SUBMITTED THE DETAILS, AGREEMEN TS, WRITTEN SUBMISSIONS THE DRP WAS NOT SATISFIED WITH THE EVID ENCE AND MADE A CATEGORICAL FINDING THAT THE ASSESSEE HAS TO MAINTAIN SUFFICIENT RECORDS TO PROVE ITS CLAIM BEFORE INCOME -TAX AUTHORITIES. THE SUBMISSIONS OF THE ASSESSEE THAT GUIDANCE WAS R ECEIVED THROUGH TELEPHONE CALLS AND THEY WERE NOT DOCUMENTE D, THE LD. DRP AFTER CONSIDERING THE INFORMATION TECHNOLOGY RE GIONAL SALES SUPPORT AND PROJECT MANAGEMENT SERVICES, WHICH ARE IN THE ARM LENGTH, DIRECTED THE LD.TPO TO EXCLUDE THIS EXPENDI TURE FROM THE DOWNWARD ADJUSTMENT. THE LD.AR SUBMITTED THAT THE DOCUMENTS ARE GENUINE AND THE SERVICES HAVE BEEN RECEIVED BY THE ASSESSEE AND THEREFORE TRANSACTIONS ARE IN THE NATURE OF BUS INESS. THE 10 I.T.A. NO. 2546/MDS/2016 LD.AR RELIED ON THE ORDER OF CO-ORDINATE BENCH IN T HE CASE OF DCIT V. FLAKT (INDIA) LTD., (SUPRA) DEALT AT PARA NO.9 A S FOLLOWS: THE TRANSFER PRICING OFFICER HAS NOT TAKEN ANY PAI N TO IDENTIFY UNCONTROLLED TRANSACTION BETWEEN TWO INDEPENDENT EN TITIES. IN THE ABSENCE OF ANY COMPARISON OF THE TRANSACTION WITH TRANSACTI ON CARRIED OUT IN A UNCONTROLLED MARKET, THIS TRIBUNAL IS OF THE CONSID ERED OPINION THAT THE TRANSFER PRICING OFFICER CANNOT INDEPENDENTLY COME TO A CONCLUSION THAT VOLUME AND QUALITY OF SERVICES WAS DISPROPORTIONATE TO THE PAYMENT MADE BY THE ASSESSEE. THE MATTER MAY BE TOTALLY DIFFEREN T IF THE TRANSFER PRICING OFFICER WAS ABLE TO IDENTIFY THE UNCONTROLLED TRANS ACTION BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTION WHICH WO ULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET. IN THIS CASE, SUCH AN EXERCISE WAS NOT MADE BY THE TRANSFER PRICING OFFICER. THE DISPUTE RESOLU TION PANEL HAS, THEREFORE, RIGHTLY FOUND THAT THE METHOD ADOPTED BY THE TRANSFER PRICING OFFICER FOR DISALLOWING THE CLAIM OF THE ASSESSEE W AS NOT JUSTIFIED. AS RIGHTLY OBSERVED BY THE DISPUTE RESOLUTION PANEL, T HE TRANSFER PRICING OFFICER HAS NOT BROUGHT ON RECORD THE BASE ON WHICH HE ESTIMATED THE ARM'S LENGTH PRICE AT 25%, WHEN RULE 10B(C) PROVIDE S FOR METHOD OF DETERMINING THE ARM'S LENGTH PRICE. THIS TRIBUNAL I S OF THE CONSIDERED OPINION THAT ESTIMATION OF THE SERVICES RENDERED AN D COSTS FOR SUCH SERVICES MAY BE OUTSIDE THE SCOPE OF TRANSFER PRICI NG ADJUSTMENT. WITHOUT IDENTIFYING THE COMPARABLE CASES, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT ESTIMATION OF THE DISALLOWANCE WITHOUT ANY BASE IS NOT CALLED FOR. THEREFORE, THE DISPUTE RESOLUTION PANEL HAS RI GHTLY UPHELD THE TRANSFER PRICING STUDY MADE BY THE ASSESSEE. THIS T RIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUT HORITY AND ACCORDINGLY THE SAME IS CONFIRMED. 5.1 SIMILARLY, ON THE DISPUTED ISSUE IN THE CASE OF M/S. AB MAURI INDIA PVT. LTD. SUPRA WHICH HAS HELD AT PAGE 4 PARA 5 AS UNDER: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. FOR MAKING ADJUSTMENT IN TRANSFER PRICING MATTER, FIVE METHODS PRESCRIBED UNDER RULE 10B OF INCOME-TAX RULES, 1962 HAVE TO BE FOLLOWED. IN THE CASE BEFOR E US, THE ASSESSING 11 I.T.A. NO. 2546/MDS/2016 OFFICER HAS NOT FOLLOWED ANY METHOD. THOUGH THE AS SESSEE CLAIMED THAT THE TRANSACTION NET MARGIN METHOD IS THE MOST APPRO PRIATE METHOD, THE TRANSFER PRICING OFFICER HAS NOT DISCUSSED IN HER O RDER WITH REGARD TO APPROPRIATE METHOD AND SHE SIMPLY FOUND THAT SINCE THERE WAS NO IMPROVEMENT IN THE REVENUE, THE PAYMENT OF MANAGEME NT FEES IS NOT JUSTIFIED. THIS TRIBUNAL IS OF THE CONSIDERED OPIN ION THAT WHEN THE ASSESSEE CLAIMS THAT MANAGEMENT FEE WAS PAID IN RES PECT OF THE SERVICES PROVIDED BY THE ASSOCIATE ENTERPRISE OUTSIDE THE CO UNTRY, THE PAYMENT MADE BY THE ASSESSEE HAS TO BE COMPARED WITH SIMILA RLY PLACED COMPANIES IN INDIA AND WHETHER THE PAYMENT MADE BY THE ASSESS EE IS AT ARMS LENGTH. THE TRANSFER PRICING OFFICER AND THE DISPUTE RESOLU TION PANEL ARE EXPECTED TO COMPARE THE PAYMENT WITH THAT OF THE CO MPARABLE COMPANIES IN INDIA ON THE BASIS OF METHOD PRESCRIBED UNDER RU LE 10B. UNFORTUNATELY, BOTH THE TRANSFER PRICING OFFICER AN D THE DISPUTE RESOLUTION PANEL HAVE NOT TAKEN SUCH PAIN IN COMPAR ING THE PAYMENT MADE BY THE ASSESSEE WITH THAT OF THE COMPARABLE CO MPANIES IN INDIA BY APPLYING PROVISIONS OF RULE 10B. THEREFORE, THIS T RIBUNAL IS OF THE CONSIDERED OPINION THAT THE MATTER NEEDS TO BE RECO NSIDERED. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE A ND THE ISSUE OF PAYMENT OF MANAGEMENT FEE IS REMITTED BACK TO THE FILE OF T HE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL REFER THE MATTER TO THE TRANSFER PRICING OFFICER FOR RECONSIDERATION. THE TRANSFER PRICING OFFICER SHALL COMPARE THE PAYMENT MADE BY THE ASSESSEE WITH THAT OF PAYMENT M ADE BY COMPARABLE COMPANIES IN INDIA AND POINT OUT WHETHER THE PAYMEN T MADE BY THE ASSESSEE IS REALLY AT ARMS LENGTH. THE TRANSFER P RICING OFFICER SHALL EXAMINE THE ISSUE IN THE LIGHT OF THE METHOD PRESCR IBED UNDER RULE 10B FOR THE PURPOSE OF DETERMINATION OF THE ARM'S LENGTH PR ICE. 5.2 WE ARE IN CONSONANCE WITH THE FACTS THAT THE AS SOCIATED ENTERPRISES RENDERED SERVICES AND THE PAYMENTS HAVE BEEN MADE BY THE ASSESSEE COMPANY THOUGH ASSESSEE COULD NOT S UBSTANTIATE IT DUE TO VARIOUS REASONS ON THE CLAIM, WE FIND STR ENGTH IN THE ARGUMENTS OF THE LD. AR, THAT THESE EXPENDITURE BEI NG GENUINE AND INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS 12 I.T.A. NO. 2546/MDS/2016 AND WE ARE OF THE OPINION THAT IF THE ASSESSEE PROD UCED THE DETAILS OF EXPENDITURE FOR AVAILING THE SERVICES FROM THE A SSOCIATED ENTERPRISES AND PROVE THE GENUINENESS OF TRANSACTIO N,. WE FOUND SIMILAR ISSUE DEALT BY THE CO-ORDINATE BENCH OF THI S TRIBUNAL IN THE CASE OF M/S. CONTROL TECHNIQUES INDIA PVT. LTD. V. JCIT ON 16.12.2016 AT PAGE 5, PARA 4 & 5 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE MAIN PLEA OF THE ASSESSEE IS THAT THE T PO ANALYSES THE ASSESSEES PROFITABILITY AND ARRIVED OPERATION MARG INS OF THE ASSESSEE AT 13.96% AS AGAINST THE ARITHMETIC MEAN OF THE OPERATING MARGIN OF 13 COMPARABLES AT 7.02%. AFTER TESTING T HAT THE OPERATING MARGIN OF THE ASSESSEE IS ON HIGHER SIDE, HE STEPPED INTO THE BENCH MARKED THE MANAGEMENT SERVICES FEE BY APP LYING THE CUP METHOD OVERWHELMING THAT TNMM IS NOT MOT APPROP RIATE METHOD. ACCORDING TO HIM, THE TPO IS NOT AN ASSESS ING OFFICER AND HE IS CONCERNED WITH ONLY IN RESPECT OF T.P ADJUSTM ENTS AND HE CANNOT HAVE JURISDICTION TO DECIDE ALLOWABILITY OF EXPENDITURE U/S.37 OF THE ACT. FURTHER, HE RELIED ON THE JUDGEMENT OF HYDERABAD TRIBUNAL IN THE CASE OF DCIT VS. M/S.AIR LIQUID ENG INEERING IN ITANO.1040/HYD./2011 & OTHERS VIDE ORDER DATED 13.0 2.2014 WHEREIN HELD THAT:- 20. FURTHERMORE, WE ARE OF THE OPINION THAT ONCE TN MM HAS BEEN APPLIED TO THE ASSESSEE COMPANYS TRANSACTION, IT C OVERS UNDER ITS AMBIT THE ROYALTY TRANSACTIONS IN QUESTION TOO AND HENCE SEPARATE ANALAYSIS AND CONSEQUENT DELETION OF THE ROYALTY PA YMENTS BY THE TPO IN THE INSTANT CASE SEEMS ERRONEOUS. WE DRAW SU PPORT FROM THE HONBLE MUMBAI ITAT DECISION, CADBURY INDIA LTD . VS. ACIT (ITA NO 7408/MUM/2010 AND ITA NO.7641/MUM/2010 DATE D 13- 11-2013) WHEREIN THE HONBLE ITAT UPHELD THE USE OF TNMM FOR ROYALTY AS WELL AS RELIED ON MANY OF THE ABOVE DECI SIONS TO HOLD ADJUSTMENT BY TPO WAS ERRONEOUS: 13 I.T.A. NO. 2546/MDS/2016 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS REGARD, IT I S SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMINED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY LINKE D WITH THESE ACTIVITIES. IN THE ABSENCE OF PRODUCTION AND SALE O F PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARDING PAYMENT OF A NY ROYALTY. RULE 1 OA(D) OF THE ITAT RULES DEFINES TRANSACTION AS A NUMBER OF CLOSELY LINKED TRANSACTIONS. ROYALTY, THEN, IS A TRANSACTION CLOSELY LINKED WITH PRODUCTION AND SALES. FT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTERPRISE, BEING EMBED DED THEREIN. THAT BEING SO, ROYALTY CAFINOT BE CONSIDERED AND EX AMINED IN ISOLATION ON A STANDALONE BASIS. ROYALTY IS TO BE C ALCULATED ON A SPECIFIED AGREED BASIS, ON DETERMINING THE NET SALE S WHICH, IN THE PRESENT CASE, ARE REQUIRED TO BE DETERMINED AFTER E XCLUDING THE AMOUNTS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SI NCE SUCH NET SALES DO NOT STAND RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THEREFORE, IT IS OUR CONSIDERED OPINION TH AT THE ASSESSEE WAS CORRECT IN EMPLOYING AN OVERALL TNMM FOR EXAMIN ING THE ROYALTY. THE TPO WORKED OUT THE DZFFERENCE IN THE P U OF THE OUTSIDE PARTY (THE ASSESSEE) AT 4.09% AND THE COMPA RABLES AT 7.05%. THIS HAS NOT BEEN SHOWN TO FALL OUTSIDE THE PERMISSIBLE RANGE. 34. THE DECISION OF THE TRIBUNAL IN EKLA APPLIANCE S, 2012-TH-01- HCDE1- TP, HAS BEEN SOUGHT TO BE DISTINGUISHED BY T HE TPO, OBSERVING THAT THE FACTS IN THAT CASE ARE NOT IN PA N MATENA WITH THOSE OF THE ASSESSEES CASE. HOWEVER, THEREIN ALSO , THE BENEFIT TEST HAD BEEN APPLIED BY THE TPO, AS IN THE PRESENT CASE. THE MATTER WAS CARRIED IN APPEAL BEFORE THE HONBLE HIG H COURT. THE HONBLE DELHI HIGH COURT HAS HELD THAT THE SO-CALLE D BENEFIT TEST CANNOT BE APPLIED TO DETERMINE THE ALP OF ROYALTY P AYMENT AT NIL AND THAT THE TPO COULD APPLY ONLY ONE OF THE METHOD S PRESCRIBED UNDER THE LAW. A SIMILAR VIEW HAS BEEN TAKEN IN SO NA OKEGAWA PRECISION FORGINGS LTD. (SUPRA) AND IN KHS MACHIN ERY PVT. LTD. VS. ITO, 53 SOT 100 (AHM) (URO). 35. IT IS, THUS, SEEN THAT THE ROYALTY PAYMENT @ 3% BY THE ASSESSEE IS AT ARMS LENGTH. THE TECHNICAL COLLABOR ATION AGREEMENT STANDS APPROVED BY THE GOVERNMENT OF INDI A. THE ROYALTY PAYMENT HAS BEEN ACCEPTED BY THE DEPARTMENT AS HAVING 14 I.T.A. NO. 2546/MDS/2016 BEEN MADE BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FO R ITS BUSINESS PURPOSES. FOR ASSESSMENT YEARS 2004-05 AND 2005-06, SUCH PAYMENT OF ROYALTY HAS BEEN ALLOWED BY THE CIT (A). AS PER THE FEMA REGULATIONS, ROYALTY CAN BE PAID ON NET SALES @ 5% ON DOMESTIC SALES AND @ 8% ON EXPORT SALES. THE ROYALT Y PAYMENT BY THE ASSESSEE FALLS WITHIN THESE LIMITS. FT ALSO FALLS WITHIN THE LIMITS OF PAYMENT OF ROYALTY IN THE AUTO MOBILE SEC TOR, AS PER THE MARKET TREND. THIS PAYMENT OF ROYALTY IS AT THE SAM E PERCENTAGE AS THAT PAID BY OTHER AUTO ANCILLARIES IN THE AUTOM OTIVE INDUSTRY. THEN, IN EKIA APPLIANCES (SUPRA) AND IN ERICSSON INDIA PVT. LTD. VS. DCIT, 2012-TII-48-ITAT-DEL-TP, IT HAS BEEN HEL D THAT ROYALTY PAYMENT CANNOT BE DISALLOWED ON THE BASIS OF THE SO -CALLED BENEFIT TEST AND THE DOMAIN OF THE TPO IS ONLY TO EXAMINE A S TO WHETHER THE PAYMENT BASED ON THE AGREEMENT ADHERES TO THE A RMS LENGTH PRINCIPLE OR NOT. THAT BEING SO, THE ACTION OF THE TPO IN THE PRESENT CASE, TO MAKE THE DISALLOWANCE MAINLY ON TH E GROUND OF THE BENEFIT TEST, IS UNSUSTAINABLE IN LAW. 36. KEEPING IN VIEW ALL THE ABOVE FACTORS, THE DISA LLOWANCE MADE ON ACCOUNT OF ROYALTY IS FOUND TO BE TOTALLY UNCALL ED FOR AND IT IS DELETED AS SUCH. ... . 21. HENCE, FOLLOWING THE RATIO OF THE HONBLE DELHI HIGH COURT IN CIT VS. EKL APPLIANCES (SUPRA) AND VARIOUS OTHER DE CISIONS AS NOTED ABOVE AND GIVEN THE FACTS AND CIRCUMSTANCES O F THE INSTANT CASE, WE HOLD THAT THE ADDITION MADE BY THE TPO AND UPHELD BY THE DRP IS UNSUSTAINABLE AND IS TO BE DELETED. HENCE GR OUND NO. 2 IS HELD IN FAVOUR OF THE ASSESSEE. HENCE, THE APPEAL O F THE REVENUE ITA.NO.1040/HYD/2011 IS DISMISSED AND ASSESSEES AP PEAL IN ITA.NO.1159/HYD/2011 IS ALLOWED. 5. FURTHER, HE DREW OUR ATTENTION TO CASE OF CIT V S. EKL APPLIANCES LTD.IN [2012] 345 ITR 241 (DEL) WHEREIN THE HONBLE DELHI HIGH COURT HAD OCCASION TO CONSIDER A N ISSUE OF DISALLOWANCE OF ROYALTY BY TPO BECAUSE THE ASSESSEE IN THAT CASE HAD BEEN SUFFERING LOSSES; THE DELHI HIGH COURT, WH ILE HOLDING THAT SO LONG AS THE EXPENDITURE OR PAYMENT BY ASSESSEE H AS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSE OF 15 I.T.A. NO. 2546/MDS/2016 BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW T HE SAME ON ANY EXTRANEOUS REASONING. THUS, ACCORDING TO THE LD.A.R , THE AO HAS NO JURISDICTION TO NULLIFY THE TRANSACTION, WHEN THE E XPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINESS AND OPERATING MARGIN OF ASSESSEE HIGHER THAN THE ARITHMETIC MEAN OF THE OPE RATING MARGIN OF THE COMPARABLES. IN PRINCIPLE, WE AGREE WITH THE AR GUMENT OF THE LD.A.R. HOWEVER, WE FIND FROM THE ORDER OF LOWER AU THORITIES THAT TPO WANTED THE ASSESSEE TO SHOW THAT SERVICES WERE ACTUALLY RENDERED TO THE ASSESSEE AND PAYMENT WAS MADE FOR T HE SAME, ALSO IT WAS NOTED BY THE DRP THAT THE INVOICES SUBMITTED BY THE ASSESSEE PERTAINING TO THE FEES PAID BY THE ASSESSEE TO ITS AE FOR REGISTRATION OF PATENTS DEVELOPED BY AE IN THEIR OWN COUNTRY WIT H HARDLY ANYTHING TO SHOW AS TO HOW THE ASSESSEE BENEFITTED FROM THE SAME IN ITS BUSINESS. SIMILARLY, IN RELATION TO INVOICE FOR MIS, THE SAME HAD BEEN PERTAINED TO THE YEAR UNDER CONSIDERATION AND ASSESSEE FAILED TO SUBSTANTIATE ITS CLAIM OF SERVICE WERE ACTUALLY RECEIVED OR THAT SERVICES ARE NOT IN NATURE OF STEWARDSHIP SERVICES . FURTHER, DRP OBSERVED THAT THE TPO HAD DISCUSSED IN DETAIL THE N ATURE OF VARIOUS SERVICES, CLAIMED TO HAVE BEEN RECEIVED THE ASSESSE E FROM ITS A.E. HENCE, THE DRP DIRECTED THE AO FOR DISALLOWANCE OF 78,57,058/-. IN OUR OPINION, IF THE ASSESSEE PRODUCES THE PARTIC ULARS OF ACTUAL EXPENDITURE FOR AVAILING THESE SERVICES, THEN IT IS TO BE ALLOWED. WITH THIS OBSERVATION, WE REMIT THE ISSUE TO THE FI LE OF AO FOR FRESH CONSIDERATION. 5.3 WE HAVING CONSIDERED THE FACTUAL ASPECTS, JUDI CIAL DECISIONS AND ALSO THE FACTS OF CLAIM OF EXPENDITUR E BY THE ASSESSEE AND CANNOT BE OVERLOOKED AND AN OPPORTUNIT Y MAY BE PROVIDED TO SUBSTANTIATE THE CLAIM SUPPORTING THE D ETAILS OF EXPENDITURE IN THE NATURE OF MANAGEMENT FEES PAID T O THE ASSOCIATED ENTERPRISES. IN THE INTEREST OF JUSTICE , WE PROVIDE AN 16 I.T.A. NO. 2546/MDS/2016 OPPORTUNITY TO THE ASSESSEE AND REMIT THE DISPUTED ISSUE TO THE FILE OF THE DRP WHICH HAS CONSIDERED THESE FACTS IN ITS ORDER AND FURTHER DIRECT THE ASSESSEE TO PRODUCE THE CLAIM OF EXPENDITURE WITH SUPPORTING EVIDENCE AND ACCORDINGLY THE ASSESS EE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 6. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THE 30 TH MARCH, 2017 AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ) (G. PAVAN KUMAR) /JUDICIAL MEMBER /CHENNAI, /DATED, THE 30 TH MARCH, 2017. JR. /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ( )/CIT(A 4. /CIT 5. /DR 6. /GF.