Appeal details
Counselvise Citation
[2023] 103 COUNSELVISE.COM (IT) 4613 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
1 year(s) 6 month(s) 8 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
31-01-2023
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
C
Next Hearing Date
30-01-2023
Assessment Year
2016-2017
Appeal Filed On
22-07-2021
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “C”, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER ITA No.300 /PUN/2021 िनधा रण वष / Assessment Year: 2016-17 M/s. Franke Faber India Private Limited, 1086/1/2, Nagar Road, Sanaswadi, Shirur, Pune 412 208 PAN : AAACF4002G Vs. DCIT, TP-1(2), Pune Appellant Respondent आदेश / ORDER PER R.S.SYAL, VP : This appeal by the assessee assails the correctness of the final assessment order dated 10-05-2021 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) read with section 144B of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2016-17. 2. The only issue raised in this appeal is against the making of transfer pricing adjustment amounting to Rs.2,89,83,401/- in the Assessee by: Shri M.P. Lohia Revenue by: Shri J.P. Chandraker & Shri Suhas Kulkarni Date of hearing 31-01-2023 Date of pronouncement 01-02-2023 ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 2 international transaction of ‘Payment of Management fees’ with transacted value of Rs.10,79,64,616/-. 3. Briefly stated, the facts of the case are that the assessee is engaged in manufacturing kitchen appliances like kitchen hoods, gas hobs, cook tops, cooking range, sinks and other kitchen related accessories and is a wholly owned subsidiary of Faber S.p.A. A revised return was filed declaring current year’s loss at Rs.18,93,87,541/-, duly accompanied by Form No.3CEB containing details of certain international transactions. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of the international transactions. In this appeal, we are concerned only with the international transaction of ‘Payment of Management fees’ for a sum of Rs.10.79 crore. The assessee determined the ALP of the transaction on segregate basis with the Transactional Net Margin Method (TNMM) as the most appropriate method, using Operating Profit to Operating Cost as Profit Level Indicator (PLI). The assessee shortlisted 18 comparable companies having arm’s length range of profit between 4.15% to 8.78%. The Associated Enterprise (AE) was ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 3 selected as Tested Party, whose PLI of 5% was declared as falling between the arm’s length range. The TPO noticed that the ALP of similar transaction in the proceedings for the A.Yrs. 2011-12 to 2015-16 was determined at Nil on the ground that the assessee could not show any tangible benefit having been derived from such services. For the year under consideration, the TPO changed the track and did not proceed with the determination of Nil ALP as was done in earlier years. Rather, he examined the working of the allocation of Management Fees paid by the assessee to its Associated Enterprise (AE) under various heads, such as, Group CEO; Group legal; Group Human Resources; Group Corporate Finance; Group Corporate Information Services; Division Strategic decision; Support, Division Finance and Controlling; Division Human Resources etc. He noted that the AE allocated costs to various group companies under different sub-heads including the Group CEO by using certain keys, such as, 1/3 rd of average total assets; 1/3 rd of total third party sales and 1/3 rd of average full time equivalent head count. He opined that allocation on the basis of head count was not appropriate. In his opinion, head count could not be a ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 4 determinative factor as there may be certain high level management persons and employees working in different countries. He further noticed that the assessee incurred its own separate costs at Rs.13.36 crore in addition to payment to its AE towards Management Services fee of Rs.10.79 crore. He proceeded to `allow’ or `disallow’ the Management Fee under each sub-head. In this exercise, he accepted the cost allocation on the basis of average total assets and third party sales, but refused to accept allocation done on the basis of head count. The portion of expenses charged to the assessee under various heads on the basis of head count was re-determined by adopting sales ratio. In this way, he worked out management costs allowable at Rs.7.89 crore and costs not allowable at Rs.2.89 crore on the basis of a table drawn at pages 20 to 25 of his order. That is how, the adjustment of Rs.2.89 crore was proposed in this transaction. The AO made the transfer pricing adjustment in the draft order. No relief was allowed by the Dispute Resolution Panel, which led to the making of the above addition in the final assessment order. ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 5 4. We have heard the rival submissions and gone through the relevant material on record. At the outset, it is befitting to note that though the TPO referred to certain earlier years in which adjustment was made under this head of expenditure, some of which are still pending at the level of CIT(A), the ld. AR submitted that the issue in such earlier years has no bearing on the issue in the year under consideration and it can be decided independently because for the earlier years, the TPO determined Nil ALP of the expenditure on the ground of the assessee not getting any benefit, as against such stand having been deserted for the year, where the adjustment has been made on the basis of allocation of part of the costs charged under this head. The ld. DR fairly conceded the stated factual matrix. 5. It is seen that the assessee computed the ALP of the international transaction of ‘Payment of Management Fees’ worth Rs.10.79 crore in its Transfer Pricing Study Report, showing the transaction at ALP. A copy of the T.P. study report has been placed on record and the relevant discussion regarding determination of the ALP of the receipt of Management Support Services is given at pages 88 to 93. For decoding the transaction ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 6 at ALP, the assessee took certain comparables; computed their margins and the arm’s length range for demonstrating that the operating profit of its AE, which was treated as tested party, was at ALP. 6. The TPO went ahead with the break-up of total costs of Rs.10.79 crore under various sub-heads and did not accept the allocation done on a part of such costs done by the assessee on the basis of head count. Though the TPO mentioned in the order that he was reworking out the cost allocation on the basis of costs incurred rather than head count, but actually he determined the allowable portion of costs on the basis of sales ratio. For example, allocation of Group CEO costs has three components, namely, 1/3 rd of average total assets, 1/3 rd of total third party sales; and 1/3 rd of average full time equivalent head count. The TPO accepted the allocation of 1/3 rd of average total assets, at 1.38%; and 1/3 rd of total third party sales, at 1.38%. He, however, reduced cost allocation at 1/3 rd of average full time equivalent head count from 4.95% to 1.38% by applying the turnover ratio as applied for the above two sub-heads of Group CEO. Similar is the position regarding costs incurred by the ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 7 Associated Enterprise charged to the assessee under sub-heads Group Legal, Group Human Resources and Group Corporation Finance etc. In this process, the TPO determined total amount of “costs allowed” at Rs.7,89,81,215/- and “costs disallowed” at Rs.2,89,83,401/-. The amount of “costs disallowed” at Rs.2.89 crore was given the nomenclature of ‘total adjustment’. Thus, it is vivid from the entire exercise carried out by the TPO that he simply analyzed the break-up of the transacted value of the expenditure and found out the amount, which, in his opinion, was not correctly allocated on the basis of head count. 7. Before proceeding further, it would be apt to have a quick look at the relevant provisions of Chapter X of the Act, dealing with “Special provisions relating to avoidance of tax”. First section of the chapter is Section 92 with the marginal note of “Computation of income from an international transaction having regard to arm’s length price”. Sub-section (1) of section 92 provides that : “Any income arising from an international transaction shall be computed having regard to the arm’s length price”. Explanation to this sub-section further provides that the allowance for an expense or interest arising from an international ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 8 transaction shall also be determined having regard to the arm’s length price. The other relevant section is 92C dealing with “Computation of arm’s length price”. Sub-section (1) of section 92C provides that the ALP in relation to an international transaction etc. shall be determined by any of the following methods, namely, (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. It can be seen that five specific methods have been prescribed in section 92C(1) for determining the arm’s length price. Modus operandi of the ALP determination under these methods has been given in Rule 10B(1) (a) to (e). The sixth non-specific method given in section 92C(1) has since been prescribed as `Other method of determination of arm’s length price’ in Rule 10AB applicable from the A.Y. 2012-13 onwards. On an overview of the above provisions of Chapter X read in conjunction with the relevant Rules, it transpires that any income arising from or expense paid to AE has to be determined in the hands of the Indian entity as per its ALP calculated under any one of the methods and given ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 9 effect in the computation of total income accordingly. To put it simply, if there is an international transaction of sale, say, of Rs.100/-, whose ALP under one of the methods comes to Rs.110/-, then the total income of the Indian entity needs to be computed having regard to such ALP by taking Rs.110/- instead of Rs.100/-. Similarly, if there is some expenditure, say of Rs.100/- paid by the assessee to its foreign AE, whose ALP under one of the prescribed methods comes to Rs.90/-, deduction will be allowed in computing the total income of the Indian entity for a sum of Rs.90/- only. Thus, it gets ostensible that the procedure for computing total income is to first, ascertain the value of the international transaction; then, determine its ALP under any of the six methods; and thereafter to make transfer pricing adjustment representing excess of ALP over the transacted value of income or excess of transacted value over the ALP of the expenditure. 8. Adverting to the facts of the extant case, it is discernible that the TPO simply dissected the transacted value of the international transaction of payment of Management Fees. The “Total amount disallowed” was computed by substituting a part ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 10 of expense allocated by the assessee on the basis of head count with ratio of turnover. This is the beginning and the end of the transfer pricing exercise done by the TPO for recommending the transfer pricing adjustment. No ALP was determined of the international transaction of ‘Payment of Management Fees’ under any of the prescribed methods. All these methods talk of computing the ALP by considering por una parte the value or profit from the international transaction and por otra parte the value or profit from transaction(s) in a comparable uncontrolled situation. To simply put, the price charged or paid by the assessee to its Associated Enterprise in an international transaction is compared with the price charged or paid in a comparable uncontrolled transaction for finding out the price that ought to have been charged or paid between the related parties in the international transaction. Here is a classic case in which the TPO did not compute the ALP of the international transaction but simply proposed the transfer pricing adjustment on the basis of some working done by him to the value of international transaction. The course of action adopted by the TPO has no sanction of law inasmuch as it is mandatory to ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 11 determine the ALP under one of the six prescribed methods for ascertaining if the international transaction was at ALP. Further, a common thread running through all the six methods is that the benchmark always has a reference to the comparable uncontrolled transactions. The TPO dispensed with the adoption of any of the methods. Neither any comparison of the Payment of Management Fee in an uncontrolled situation was made nor even the allocation of the third component on the basis of head count was done by considering any comparable uncontrolled instance. Such a course of action adopted by the TPO is contrary to the mandatory statutorily stipulated procedure and hence, cannot be countenanced. If the working of the TPO, which is not in accordance with the law, is removed from the scene, what remains is the ALP determination done by the assessee of the international transaction at pages 88 to 93 of its Transfer pricing study report. Such determination has not been adversely commented upon by the TPO, which, ergo has to be accepted as correct. The ALP determined by the assessee in its Transfer pricing study report deciphers that the transaction was carried out at the ALP. We, therefore, set-aside the impugned order on ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 12 this score and order to delete the addition of Rs.2.89 crore made in the international transaction of ‘Payment of Management Fee’. 9. In the result, the appeal is allowed. Order pronounced in the Open Court on 01 st February, 2023 Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 01 st February, 2023 Satish आदेश की ितिलिप अ ेिषत/Copy of the Order is forwarded to: 1. अपीलाथ / The Appellant; 2. थ / The Respondent; 3. The CIT(A) concerned 4. 5. The Pr.CIT concerned िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे “C” / DR ‘C’, ITAT, Pune 6. गाड फाईल / Guard file आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune ITA No.300/PUN/2021 M/s. Franke Faber India Private Limited 13 Date 1. Draft dictated on 31-01-2023 Sr.PS 2. Draft placed before author 01-02-2023 Sr.PS 3. Draft proposed & placed before the second member JM 4. Draft discussed/approved by Second Member. JM 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *
AI Insights
The case involves M/s. Franke Faber India Private Limited, which appealed against the final assessment order passed by the Assessing Officer (AO) concerning a transfer pricing adjustment of Rs.2,89,83,401 related to 'Payment of Management Fees' amounting to Rs.10,79,64,616 for the assessment year 2016-17. The TPO had reallocated costs based on different criteria, rejecting the initial allocation by the assessee based on headcount. The Tribunal noted that the TPO did not determine the ALP under any of the prescribed methods but merely adjusted the costs based on his analysis, which was found to be legally unsustainable.
