Schneider Electric Infrastructure Ltd, Vadodara V. The Add./Jt. DCIT/ITO Natonal e-Assessment Centre, Delhi

ITA 64/AHD/2022

AI Insights

The case involves Schneider Electric Infrastructure Ltd challenging the transfer pricing adjustments made by the Assessing Officer and upheld by the Dispute Resolution Panel. The adjustments pertained to the purchases of raw materials and components from associated enterprises and payments for trademark fees and other services, which were considered not at arm's length by the tax authorities. The Tribunal examined the methods used for benchmarking these transactions, including the selection of tested parties and the application of the TNMM. The Tribunal found that the assessee's approach was appropriate and that the adjustments made by the tax authorities were not justified.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 134559 (ITAT-AHMEDABAD)
• Duration Of Justice: 2020 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-12-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Next Hearing Date: 06-09-2022
• Assessment Year: misc
• Appeal Filed On: 03-02-0002
• Other Referred Cases: IL Jin Electronics India (P) Ltd. vs. ACIT, Circle-11(1) (2010-TII-07-ITAT-MUM-TP), General Motors India (P.) Ltd. vs. Deputy Commissioner of Income-tax / Assistant Commissioner of Income-tax, Sulzer Pumps India Ltd, Mumbai V. Addl CIT 10(3), Mumbtii, Birla Soft Ltd. vs. ACIT, Destination of the World (Subcontinent) (P.) Ltd. vs. Asstt. CIT, Tecnimont ICB (P.) Ltd. vs. Addl. CIT, Virtusa Consulting Services Pvt. Ltd. Vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Working capital adjustments; Bad and doubtful debts; Corroborative evidences; Arm length price
• Section: 143(3); 92D; 10B; 13; 22

Judgement Text

आयकर अपीलीय अिधकरण, अहमदाबाद ᭠यायपीठ ‘डी’ अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD ] ] BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER AND SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER ITA No. 64/Ahd/2022 Assessment Year : 2017-18 Schneider Electric Infrastructure Limited, Milestone 87, Vadodara Halol Highway, Village Kotambi, PO Jaroad, Vadodara-391510 PAN : AAPCS 6078 Q Vs D.C.I.T, Circle-2(1)(1), Vadodara. अपीलाथᱮ/ (Appellant) ᮧ᭜ यथᱮ/ (Respondent) Assessee by : Shri Rohit Tiwari, AR Revenue by : Shri Alok Kumar, CIT-DR सुनवाई कᳱ तारीख/Date of Hearing : 07/09/2022 घोषणा कᳱ तारीख /Date of Pronouncement: 07/12/2022 आदेश/O R D E R PER WASEEM AHMED, AM : 1. By way of this appeal, the assessee-appellant has challenged the correctness of the order dated 4 th February, 2022 passed by the Assessing Officer under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 [“the Act” in short], for the Assessment Year 2017-18. 2. The assessee has raised the following grounds of appeal:- 1. That on the facts and circumstances of the case and in law, the order passed by the Ld. AO under Section 143(3) read with section 144C(13) read with section 144B of the Act is bad in law and liable to be quashed to the extent it confirms the additions / disallowances made in the assessment order. 2. That the Learned Dispute Resolution Panel ("Ld. DRP") ignored the judicial pronouncements and erred in dismissing the grounds of objections raised by the ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 2 Appellant and upholding the adjustment proposed by the Ld. AO/ Learned Transfer Pricing Officer ("Ld. TPO") without providing any cogent reasons for the same. 3. That on the facts and circumstances of the case and in law, the Ld. AO / Ld. TPO/ Ld. DRP erred in enhancing the income of the Appellant by INR 1,370,919,013 pertaining to purchase of raw materials and components that do not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in: 3.1. erroneously rejecting the economic analysis undertaken by the Appellant in the Transfer Pricing ("TP") documentation maintained by it in terms of section 92D of the Income-tax Act 1961 ("the Act") read with Rule 1OD of the Income-tax Rules, 1962 ("Rules"); 3.2. erroneously rejecting the selection of foreign associated enterprise ("AE") as tested party for calculation of the arm's length price by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules; 3.3. not appreciating the functional, asset and risk profile of the Appellant with respect to impugned international transaction of "purchase of raw material and components" (licensed manufacturing segment) vis-a-vis international transaction of "sale of finished goods" (contract manufacturing segment); 3.4. erroneously benchmarking the impugned international transaction of "purchase of raw material and components" by adopting the benchmarking approach used in the TP report for the international transaction of "sale of finished goods". In doing so, the Ld. AO / Ld. TPO / Ld. DRP erred in not appreciating that the Appellant operates as a contract manufacturer in the "sale of finished goods" transaction; 3.5. not appreciating the application of Internal Transactional Net Margin Method for comparing the margin earned by the Appellant in license manufacturing AE segment visa-vis margin earned by the Appellant in license manufacturing Non-AE segment; 3.6. rejecting the fresh search furnished by the Appellant by selecting itself as the tested party on a without prejudice basis; 3.7. disregarding the updated/ corrected margin computation of the Appellant submitted before the Ld. TPO during the assessment proceedings; 3.8. disregarding various economic adjustments i.e. working capital adjustment and foreign exchange adjustment in determining the arm's length profit margin; and 3.9. without prejudice to the above grounds, the Ld. AO / Ld. TPO / Ld. DRP erred in computing TP adjustment with respect to international transaction of "purchase of raw material and components" on the entire cost (i.e. related party cost as well as third party cost) instead of applying it proportionately to only related party cost. Thus, the Ld. AO/ Ld. TPO/ Ld. DRP erred in not applying the principles enunciated by the Hon'ble Income-tax Appellate Tribunal ("Hon'ble ITAT") in the matter of IL Jin Electronics India (P) Ltd. vs. ACIT, Circle-11(1) (2010-TII-07-ITAT-MUM-TP) and other relevant judicial pronouncements on the issue. 4. That on facts and circumstances of the case and in law, the Ld. TPO/ Ld. DRP have erred in enhancing the income by INR 218,597,391 in relation to receipt of data management and other related service fees paid by the Appellant to its AEs by ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 3 rejecting the TP documentation maintained by the Appellant and arbitrarily determining arm's length price as 'Nil' by applying Comparable Uncontrolled Price Method (“CUP”) Method. In doing so, Ld. TPO/ Ld. DRP have grossly erred in: 4.1. considering the data management charges paid by the Appellant as "receipt of management support services": 4.2. disregarding the documentary evidences submitted by the Appellant to demonstrate the actual receipt of data management and other related services and the benefits arising thereof; 4.3. erroneously rejecting the economic analysis undertaken by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Rules; and 4.4. challenging the commercial/ business wisdom of the Appellant in relation to payment in respect of data management and other related services. 5. That on facts and circumstances of the case and in law, the Ld. TPO /Ld. DRP have erred in enhancing the income by INR 102,686,415 and INR 44,956,472 in relation to "purchase of fixed assets" and "purchase of intangible assets" respectively, and proposed to benchmark the same by aggregating them with the international transaction pertaining to "purchase of raw material and equipment". In doing so, the Ld. TPO/ Ld. DRP have grossly erred in rejecting the economic analysis carried out by the Appellant in its TP documentation wherein the transactions were separately benchmarked using "other method". 5.1. The Ld. TPO/ Ld. DRP also erred in not computing the TP adjustment proportionately to only related party cost of the impugned transactions pertaining to purchase of fixed and intangible assets wile aggregating the same with license manufacturing segment for the purpose of benchmarking. 6. That on facts and circumstances of the case and in law, the Ld. TPO /Ld. DRP have erred in enhancing the income by ITMR 150,838,054 in relation to "payment of trademark fees". In doing so, the Ld. TPO/ Ld. DRP have grossly erred in: 6.1. Alleging that the Appellant has incurred double expenses by paying trademark fees and being involved in the activities of advertisement, marketing and promotion, which contribute to the brand name of' Schneider'; 6.2. Benchmarking the international transaction of "payment of trademark fees" by aggregating the same with international transaction of "purchase of raw materials". Accordingly., the Ld. TPO/ Ld. DRP have grossly erred in rejecting the economic analysis carried out by the Appellant in its TP documentation wherein the transactions were separately benchmarked using "comparable uncontrolled price method"; and 6.3. Not computing the TP adjustment proportionately to only related party cost of the impugned transaction pertaining to payment of trademark fees while aggregating the same with license manufacturing segment for the purpose of benchmarking. 7. That on facts and circumstances of the case and in law, the Ld. TPO/ Ld. DRP erred in enhancing the income of the Appellant by INR 1,684,889 pertaining to reimbursement of expenses received from the AEs by recharacterizing "reimbursement of expenses received" as "provision of support services" thereby imputing a markup of 5% on the cost of the reimbursements without providing any detailed/cogent reasons for the same. ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 4 8. That the Ld. AO also erred in proposing to initiate penalty proceedings under section 274 r.w.s. 270A & 271AA of the Act mechanically on the additions made.” 3. The 1 st and 2 nd issues raised by the assessee in its grounds of appeal are general in nature. Therefore, the same don’t require any separate adjudication. Thus, we dismiss the same as infructuous. 4. The 3 rd issue raised by the assessee is that the Ld. DRP erred in confirming the proposed downward adjustment amounting to Rs. 137,09,19,013/- made by the AO/TPO on account of raw materials and components purchased from the AEs which was not in accordance to the arm’s length principles. 5. The facts in brief are that the assessee is a limited company and engaged in the business of manufacturing of power distribution equipments. The assessee has divided its business operation into various segments namely license Manufacturing, Contract manufacturing, Service Segment and Trading segment. 5.1 As per the assessee, under the license manufacturing segment, it produces goods under a license agreement such as agreement for the purpose of using intangibles like trade mark, know how, manufacturing process etc. owned by the licensor and licensee manufacturer pays royalty to use such intangibles. Here, the licensee manufacturer buys raw materials and semi-finished goods on its own account and bears the risk associated with it such as holding the inventory as well as selling finished goods including demand and pricing risk. 5.2 On the other hand, in the contract manufacturing the contract manufacturer produces the goods for manufacturer principal where manufacturing principal provides the guarantee to purchase the goods if the goods are produced as per the principal’s product and quality specification. Here the risk associated with holding finished goods and selling them is less as compared to license manufacturing due to the reason that the principal manufacturer provides assurance to buy the goods. ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 5 6. The assessee during the year under consideration has reported the international transactions entered with its various AEs amounting to Rs. 271,54,67,221/- in Form 3CEB report. The details of the international transactions entered by the assessee are available on pages 2 to 9 of AO/TPO order. The International transactions with the AE’s, in dispute, are detailed as under: Regarding Imports of Raw Materials and Components; 6.1 The assessee has imported the raw materials and components from its AEs amounting to Rs. 157,51,70,571/- only. The assessee has classified/shown the purchases of raw materials and components under the segment of License Manufacturing for the reason that such purchases were directly connected to license manufacturing segment. In other words such purchases were not associated with respect to Contract Manufacturing. As such, the assessee was under the obligation/risk for the sale of finished goods, marketing etc. out of such raw materials and components. 6.2 The assessee has used the TNMM method as most appropriate method to benchmark the transactions entered for the purchase of raw materials and components amounting to Rs. 157,51,70,571/- from its AE’s. The assessee has selected the foreign companies as tested parties. The PLI of the tested party was calculated taking the base of operating profit divided by total cost formula. The assessee, thus worked out the margin of the tested party at 5% and reached out at ALP (i.e. cost plus mark-up 5%). The assessee in this regard submitted that the cost plus 5% mark-up was followed up uniformly across the various Schneider Group Entities as specified in Schneider Group Transfer Pricing Policy. In this regard, the assessee also presents a picture of the same i.e. Schneider Group Transfer Pricing Policy during the assessment proceedings to substantiate its claim before the TPO. 6.3 The assessee has selected mainly its two AEs based in France and Germany as tested parties from where it was procuring the raw materials and components ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 6 to the tune 42.2% and 17.9% i.e. aggregating approximately to 60% of its total purchase of raw materials and components from the AE’s. However, the comparable companies were selected based in European region only due to developed market economies. The assessee further stated that 92% of raw materials and components were procured from AEs based in Europe while 8% were procured from other AEs spread in APAC (Asia Pacific) and American Region. 6.4 The assessee also claimed that the foreign AEs were considered as least complex based on FAR analysis. Therefore, the foreign parties were chosen as the tested party for determining the ALP of the raw materials and components procured by the assessee in the year under consideration. 6.5 The assessee has selected the comparable companies by using Amadeus database after adopting the search criteria as detailed under: a- Selection based on NACE Codes- to extract the similar business operation companies. b- Selection based on Shareholder- to exclude the Government companies and the companies which are formed in the public interest. c- Selection based on turnover- to exclude the companies which have turnover less than $ 10 million. 6.6 The assessee after following the process of search criteria as discussed above has selected 17 comparable companies based in Europe to determine the ALP of raw materials and components procured by it (the assessee) in the year under consideration from its AE’s. The details of the same along with PLI, median and 35 th percentile and 65 th percentile are as under: ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 7 6.7 Based on the above, the assessee has submitted that the mark-up of 5% earned by the AE on its total cost which is the cost of raw materials and components in the hands of the assessee is within the range of 35 th and 65 th percentile. Therefore, the transactions entered with AEs for purchase of raw materials and components was based on ALP as per the provisions of rule 10CA of Income Tax Rules and thus no adjustment whatsoever is required. 6.8 However, the AO/TPO rejected the ALP determined by the assessee by observing as under: a- That the assessee in its TPSR mentioned that 5% mark-up charged on cost of raw material by AEs is the group policy. But the assessee has not furnished the Group Transfer Pricing Policy during the course of assessment proceedings as well as the presentation in the form of picture submitted ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 8 was not even containing the name of the assessee to substantiate the statement/claim. b- That the assessee has purchased the raw materials and components from 24 entities spread all over the world whereas to determine the ALP, only two tested parties were selected (i.e. Germany and France) from where the assessee was procuring the raw materials and components to the tune of 60% out of 100% of raw materials and components procurement. c- The assessee has not brought anything on record like financial statements, auditor’s report evidencing that the selection of tested parties being foreign AEs based on FAR analysis are least complex. d- That the assessee has not provided the data relating to the calculation of PLI of any of the tested parties and cost incurred by the AEs towards the raw materials and components on which 5% mark-up was added. e- That the assessee was unable to demonstrate the matrix of acceptance and rejection of comparable companies with reasoning as well as the basis of selecting the foreign companies as comparable companies to determine the ALP of the transaction in dispute. f- The data used by the assessee in selecting the comparable companies was for calendar year and not for the financial year as followed in India as well as the data with respect to half of the comparable companies was not of the latest year. g- The business codes selected by the assessee to extract the comparable companies was not similar to the business of it (the assessee) and rejection of the companies which are functionally dissimilar based on qualitative analysis during the search process for selection of comparable companies was not justified based on any reason as how the companies are functionally dissimilar. h- The assessee has excluded the Government companies along with Type C– Industrial Companies by applying the search criteria based on shareholders but no justification for not considering Type C- Industrial companies was furnished. ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 9 i- The assessee has applied the search criteria of turnover considering the SEIL to reject the companies which has turnover less than $ 10 million whereas the tested parties are foreign AEs. Thus, the rejection of the comparables cannot be done taking into consideration of the financials of SEIL. Further, the assessee has not furnished details of the turnover of the AEs for the financial year in dispute. j- The margin worked out by the assessee of comparable companies was doubtful as the financials of such comparable companies were not furnished. k- The categorization made by the assessee between license manufacturing and contract manufacturing segment was only to mislead as the tangible and intangible assets were the same for both the functions and also paid the trademark fees to the AEs which cannot be possible in case of contract manufacturing segment. l- That the assessee has not maintained the requisite documents as specified in section 92D read with rule 10DA of the Income Tax Rules. 6.9. The AO/TPO, thus, in the absence of data and other details of AEs, proposes to treat the assessee itself as tested party and required the assessee accordingly to benchmark the transactions to determine the ALP. 6.10 The assessee, therefore, during the assessment proceedings has submitted the fresh search process by treating itself as tested party. The assessee has worked out its margin as 2.24% after making certain adjustments with respect to provision for doubtful debts and unascertained liabilities, adjustments of working capital and advances as well as adjustment of forex exchange. The assessee to benchmark the transactions of purchase of raw materials and components from its AEs, has extracted 11 comparable Indian companies from the database Prowess IQ and Capitaline Plus which are as detailed under: ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 10 6.11 Based on the above, the assessee has submitted that the margin of 2.24% worked out is within the range of 35 th and 65 th percentile. Therefore, the transactions entered with AEs for purchase of raw materials and components was on ALP as per the provisions of rule 10CA of Income Tax Rules. However, the AO also rejected the fresh search process submitted by the assessee by observing as detailed under: i- The comparable companies selected by the assessee also included the companies which were not engaged in the same activity in which the assessee was engaged. ii- The assessee has not demonstrated the basis adopted of search process during the assessment proceedings. iii- The assesse has not provided the Accept and reject matrix of the comparable companies before selecting the final comparables. iv- More than 800 companies were rejected by the assessee based on Qualitative Criteria. However, the assessee did not provide the ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 11 justification and details of the companies which were rejected from the list of comparables. 6.12 The AO/TPO, thus, in the absence of proper details and documents after adopting the assessee as tested party and compared the margin of the assessee with the companies selected by the assessee with respect to the transactions for sale of finished goods to its AEs (i.e. for contract segment). However, the AO/TPO has computed the PLI of the comparables by following the formula OP/OR which is available on pages 12 to 14 of TPO order. 6.13 The TPO, thus, computed 35 th percentile at 4.76% and 65 th percentile at 7.60% with Median at 5.70% only of the comparable companies. The AO/TPO has further observed that the margin of the assessee in License manufacturing AE segment without considering the adjustment of provision for doubtful debts and unascertained liabilities, working capital, advances and forex exchange is -12.73% which was not falling within the range of 35 th and 65 th percentile. Therefore, the median at 5.70% was selected as margin of the assessee. 6.14 The AO/TPO also noted that the assessee while working out the operating profit margin for benchmarking the sale of finished goods in case of contract manufacturing has not considered the above said adjustment. Therefore, it is not necessary to make adjustment for this particular transaction. Thus, the AO/TPO has worked out the proposed downward adjustment amounting to Rs. 137,09,19,013/- pertaining to purchase of raw materials components. The relevant observation of the TPO is available on pages 56 and 57 of TPO order. Regarding Purchase of Fixed and Intangible Assets: 6.15 The assessee in the year under consideration has made payments amounting to Rs. 11,79,85,539/- and Rs. 5,16,54,482/- towards the purchase of tangible fixed assets and intangible assets respectively from the AE. The details of the assets purchased are as under: ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 12 Purchase of Fixed Asset Name of AE Description of transaction Amount paid/payable (in INR) Schneider Electric Industries SAS Purchase of fixed asset 115,938,006 Schneider Electric Protection et Controle SAS Purchase of fixed asset 1,992,792 Schneider Electric Sachsenwerk GmbH Purchase of fixed asset 54,741 Total 117,985,539 Purchase of Fixed Asset Name of AE Description of transaction Amount paid/payable (in INR) Schneider Electric Industries SAS Purchase of intangible asset 51,654,482 Total 51,654,482 6.16 The assessee to benchmark the aforesaid transactions to determine the ALP has applied the other method as most appropriate method and submits that depreciation charged on fixed assets as well as on intangible assets has been allocated to all the segments and the margin earned by various segment satisfies the ALP criteria. Therefore, the cost incurred towards the fixed assets and intangible assets comply the ALP. The assessee also submits that the price of the fixed assets imported by it were duly accepted by the custom authorities and accordingly satisfies the ALP. 6.17 However, the AO/TPO was of the view that the custom authorities has only verified the under valuation of the invoices whereas transfer pricing officer has to look the over invoicing of the imports. The AO/TPO, therefore, disregarded the valuation given by the custom authorities. 6.18 The AO/TPO also noted that the assessee in its TPSR has not benchmarked the above said transactions. Therefore, the benchmarking of the said transaction was done in aggregation of the transaction of purchase of raw materials and components. Thus, the AO/TPO has worked out the proposed downward adjustment amounting to Rs. 10,26,86,415/- and Rs. 4,49,56,472/- pertaining to purchase of fixed assets and Intangible assets respectively. The necessary observation of the TPO is available on pages 56 and 57 of his order. ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 13 Regarding payment of trade mark 6.19 The assessee during the year under consideration has made payments to its AE Schneider Belgium amounting to Rs. 22,32,90,000/- on account of trade mark fees. The value of trade mark was calculated by the assessee at 2% on the value of third party sales. 6.20 The assessee to benchmark the transaction for payment of trademark fees at ALP has applied CUP method as most appropriate method. The assessee has extracted 9 comparable agreement from the Royalty state database and worked out the 35 th percentile as 3% whilst 65 th percentile as 4% with a median of 3%. The assessee thus was of the view that the license fees of 2% on sale is under the range of 35 th and 65 th percentile. Therefore, the transactions entered with AEs for payment of trademark was on ALP as per the provisions of rule 10CA of Income Tax Rules. 6.21 The assessee in addition to trademark fees also claimed that the expenses incurred for advertisement, marketing and promotion have been shown in its profit and loss account. 6.22 The assessee during the assessment proceedings submits that the trademark fees were paid to the AE to use the brand name of the Group whereas the AMP expenses were incurred to promote the business such as presentation to various customers in relation to products manufactured, participating in trade shows, distributing handouts and pamphlets etc. 6.23 The AO/TPO, on the other hand, noted that the assessee has claimed the double deduction in its profit and loss account on account of trade mark fees paid to its AE and another on account of expenses incurred towards advertisement, marketing and promotion. Thus the AO/TPO was also of the view that the both the payments i.e. payment of trademark as well as AMP expenses incurred by the ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 14 assessee were for building the brand name of Schneider. The AO/TPO also noted that the assessee itself categorized for sale of finished goods as contract manufacturer. Therefore, the situation for the payment of trade mark does not arise at all. 6.24 The AO/TPO further noted that the books of account of the assessee was showing huge loss. Therefore, the claim of the assessee that the payment of trademark has been provided for the benefit through increase its business is not correct. The AO/TPO therefore considered the ALP as worked out in the case of purchases of raw materials and components. Thus, the AO/TPO has worked out the proposed downward adjustment amounting to Rs. 15,08,38,054/- pertaining to payment for trademark. The necessary observation of the TPO is available on pages 56 and 57 of his order. 6.25 Aggrieved assessee raised the objection before the Ld. DRP and submitted that it had performed detailed economic and methodology analysis as specified in TPSR while selecting the tested parties as well as to select the comparable parties. Regarding Imports of Raw Materials and Components: 6.26 The assessee also submitted that it had imported 92% of raw materials and components from AEs based in Europe whereas 8% were imported from other region and therefore, it had selected all AEs as tested parties for benchmarking the transactions based in Europe. 6.27 The assessee further submitted that if it has to be selected as tested party then to benchmark the transactions with respect to import of raw materials and components from AEs, the internal TNMM analysis can be chosen and compare the margin earned from business with AEs and Non-AEs as the operation in license manufacturing segment has divided between AE and Non-AEs and also the manufacturing activities performed by it for both AEs as well as Non-AEs are ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 15 same. The assessee regarding this submits the details of margin earned after considering the provision for non-operating expenses and works out the income from the operation of license manufacturing segment as 2.29% and 2.58% from AEs business and Non-AEs business respectively. The assessee also furnished the original margin without considering the adjustment with respect to non-operating income or expenses which works out as –12.73% and –12.45% for AEs business and Non-AEs business respectively under the segment of license manufacturing. 6.28 The assessee thus was of the view that the ALP range was falling within the +/- 3% variation. Therefore, international transactions entered for imports of raw materials and components was at ALP as per the third proviso to section 92C(2) of the Act. 6.29 The assessee also submitted that the proposed adjustments made by the TPO in TP order for purchase of raw materials and components, purchase of fixed assets, purchase of intangible assets and payment for trade mark fees are factually incorrect as the adjustment should be made only the cost attributable to license manufacturing segment alone. 6.30 However, the Ld. DRP after considering the order of the AO/TPO rejects the contention of the assessee by observing as under: “7. We have perused the draft assessment order/ TPO's order, We have considered the written and oral submissions of the assessee. Briefly stated the facts relating to objection no. 2 are that the assessee entered into multiple international transactions with AEs. The objection no. 2 pertains to purchase of raw material and components from AEs amounting to Rs. 157,51,70,571/-. The assessee adopted TNMM to benchmark the transaction with the foreign AEs as tested parties. The TPO observed that as per the TPSR, the AEs charged 5% markup on the cost of raw material components based on 'claimed' 'global transfer pricing policy’. The TPO stated that the impugned 'global transfer pricing policy' was not furnished to support the TPSR. The TPO observed that the assessee had taken the AEs based in France and Germany as tested parties because it had imported 42.2% and 17.9% of raw material and components from them, disregarding the other AEs based in Europe, Asia, Australia, US, etc. without providing reasonable reasons. The TPO observed that the assessee had selected codes of dissimilar businesses to find comparables. The TPO observed that certain companies were rejected on the basis of unclear shareholder criteria. The TPO observed that turnover filter of less than $ 10 million was applied in connection with the assessee's turnover, when the tested parties were the AEs. The TPO observed that the assessee had not given accept/ reject matrix. The TPO observed that the assessee did not demonstrate ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 16 search process with the data base to derive comparables. The TPO further observed that sale of finished goods the assessee had taken the Indian entity as the tested party to decide the arm's length price of the sales with TNMM. The TPO, therefore, wanted to change the benchmarking of the international transactions of purchase of raw material and components. On the other hand, the assessee defended its TPSR, The TPO responded point wise with reasons for rejection of each argument in defence of the TPSR by the assessee, in para 5.2 to 5.12 of the TPO's order. The assessee also made a fresh search considering itself as the tested party. The TPO found defects in the fresh search in para 5.10 of the TPO's order. After perusing the reasons given by the TPO and the arguments of the assessee before the TPO as well as the DRP, we are of the considered opinion that the approach of the TPO has merits. Therefore, the ground of objection no. 2 (sub-grounds 2.1 to 2.8) is dismissed.” Regarding Purchase of Fixed and Intangible Assets: 6.31 The assessee before the Ld. DRP reiterated the submission as made before the AO/TPO and further stated that detailed economic analysis were made with respect to benchmark the transactions for purchase of Fixed Assets and Intangible Assets as specified in TPSR. The assessee also submitted that it had entered into various types of international transactions with its AEs and benchmarked each transaction separately to reach out at ALP whilst the AO/TPO to benchmark the transactions for purchase of fixed and intangible assets has aggregated with transaction pertaining to purchase of raw material and components. 6.32 The assessee further submitted that the value assigned by the custom authorities on import of goods are not arbitrary as they use scientifically formulated methods. 6.33 However, the Ld. DRP after considering the order of the AO/TPO rejects the contention of the assessee by observing as under: “13. We have perused the draft assessment order /TPO’s order and also considered the written and oral submissions of the assessee in this regard. Briefly stated the facts of the issue are that the assessee had purchased fixed assets amounting to Rs.11,79,85,539/- and intangible assets amounting to Rs.5,16,54,482/-. The TPO observed that the assessee had used different method i.e. ‘other method’ for benchmarking the transaction, whereas the transactions of purchase of raw material and components was benchmarked using markup of 5% on cost. The TPO observed that the assessee had purchased the machineries from loss making licensed manufacturing AEs with claim of corresponding depreciation showing losses. The TPO observed that the assessee had shown OP/OR at (-) 12.73% instead of 5.70% shown in benchmarking of the transactions of purchase of raw material and components. The ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 17 assessee defended its benchmarking before the TPO as well as the DRP. The assessee claimed that the prices of the machineries has been accepted by the custom authorities, therefore, the same should be acceptable to the TPO. The TPO responded that acceptance by custom authorities is altogether different matter. After considering all the material available on record and the reasonings given by the TPO juxtaposed with the arguments of the assessee, we are of the considered opinion that the TPO has dealt the matter in proper perspective in para 7 and 10 of the TPO’s order and there is no reason for us to interfere with the findings of the TPO. Therefore, the ground of objection no.4 is dismissed. ” Regarding payment of trade mark 6.34 The assessee before the Ld. DRP reiterated the submission as made before the AO/TPO and further submitted that detailed economic analysis were made with respect to benchmark the transactions for payment of trademark fees paid to AE as specified in TPSR whilst the AO/TPO has rejected the same without providing any material and cogent reason. 6.35 The assessee also submitted that it had entered into various types of international transactions with its AEs and benchmarked each transaction separately to reach out at ALP whilst the AO/TPO to benchmark the transactions for trade mark has aggregated with the transaction pertaining to purchase of raw materials and components. 6.36 However, the Ld. DRP after considering the order of the AO/TPO rejected the submission of the assessee by observing as under: “16. We have perused the draft assessment order /TPO’s order and also considered the written and oral submissions of the assessee in this regard. Briefly stated the facts of the issue are that the assessee had paid Rs. 22,32,90,0007- to Schneider Belgium at 2% on the value of the third part sale. The TPO observed that the assessee has paid for advertisement, marketing and promotion, contributing towards enhancement in the brand value of 'Schneider'. The TPO also observed that the licensed manufacturing segments (both AE and non-AE) were showing huge losses. The TPO observed that the assessee has entered into double expenses of trademark fees as well as its own expenses on brand value enhancement. The TPO observed that the assessee had shown OP/ OR at (-) 12.73% instead of 5.70% shown in benchmarking of the transactions of purchase of raw material and components. On the other hand, the assessee defended its case before the TPO as well as the DRP. The TPO did not agree with the arguments of the assessee. ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 18 We have considered all the material on record. The TPO has dealt with the matter in detail in para 9 (para 9.3 to 9.7) and 10 of the TPO's order. We find no merit in the objection of the assessee. Therefore, the ground of objection no. 5 is dismissed.” 7. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 8. The learned AR before us filed three paper books (volume I, II & III) running from pages 1 to 508, 509 to 1045 & 1046-1490 besides the written submission running into 30 pages and contended that the foreign associated enterprises are least complex therefore the same should be considered as the tested party. It was also pointed out by the learned AR that there are certain unascertained liabilities in the nature of provision for doubtful debts/litigation expenses which ought to have been considered as non-operating expense. After eliminating these non-operative expenses, the assessee has carried out the transaction with AE at the ALP and therefore, no adjustment is warranted. The learned AR also requested for providing the working capital adjustment as per the provisions of law. 8.1 With respect to the selection of internal TNMM for benchmarking licensed manufacturing segment, the learned AR contended that the margin earned by the assessee under license manufacturing segment from the AE should be compared with the margin earned by the assessee from the non-AE. 8.2 The learned AR also contended that the basis adopted for determining the ALP by the AO/TPO is misplaced insofar the comparables adopted for the contract manufacturing cannot be considered in the given set of facts. 8.3 There was no defect pointed out by the AO/TPO in the transfer pricing report which was prepared considering the assessee as the tested party and therefore the margin determined by the assessee should be adopted as at ALP. ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 19 9. On the other hand, the learned DR before us submitted that the assessee has not furnished the basis of bifurcating is manufacturing division into license and contract manufacturing division. Similarly, there was no rational provided by the assessee by further subdividing the licensed manufacturing into AE and Non-AE segment. Furthermore, there was no detail provided by the assessee whether the assessee was procuring the raw materials and its components for its AE and non- AE divisions. Accordingly the learner DR contended that the TP report submitted by the assessee cannot be relied upon and vehemently supported the order of the authorities below. 10. We have heard the rival contentions of both the parties and perused the materials available on record. The facts of the case have been elaborated in the preceding paragraph which are not in dispute. Therefore, for the sake of brevity and convenience, we are not inclined to repeat the same. Admittedly, the assessee has treated the foreign AEs as the tested party to benchmark the transactions for its purchase of raw materials and components from the AE’s which was not accepted by the authorities below. Thus the 1 st controversy that arises for our adjudication whether the foreign AE’s can be treated as the tested party in the given facts and circumstances. 10.1 In this regard we note that the selection of the tested party is a matter of dispute since beginning of the introduction of transfer pricing under the Act. It is for the reason that the Act does not define the concept of ‘Tested Party’. 10.2 However, OECD has defined in detail the concept of tested party in its guidelines for Multinational Enterprises and Tax Administration. Further the same has also been defined in UN Manual. 10.3 The OECD Guidelines defines ‘tested party’ as “the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparable can be found, i.e. it will most often be the one that has the ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 20 less complex functional analysis.” UN Manual defines tested party in the similar manner. A Tested party should have the following attributes: 1- Available of reliable and accurate data for comparison 2- Least Complex (amongst the parties to the transaction) 3- Data available can be used with minimal adjustments. 10.4 In the light of the aforesaid discussion, we analyze the facts of the present case and note that the assessee has carried the detailed economic analysis while benchmarking the transactions entered with its AEs. This fact can be verified from the necessary details of TPSR placed on pages 22 to 34 of the paper book. Under this economic analysis, the assessee also claims that the group i.e. SEIL charges 5% markup on the cost of raw material supplied by the AEs as the group policy and further furnishes the details of 17 comparables in the form of the tables containing the financial data in the form of percentages for different years i.e. 2014, 2015 and 2016. However, we find that this economic analysis was suffering from certain defects which has been highlighted by the TPO in his order and the same has already been elaborated in the preceding paragraph. As such we find that the assessee has failed to furnish sufficient documentary evidence in the form of financial statements of the relevant year of the foreign AE’s to substantiate the margin. There was no group transfer policy furnished by the assessee. The assessee has considered the financial statements of 2 AEs based in Germany and France wherefrom it was procuring the raw material and components to the tune of 60% only. It implies that the financials of other AE’s based in different regions including the Europe were not considered. Thus the TPO disagreed with the contention of the assessee for treating the foreign AE’s as the tested party which was subsequently confirmed by the Ld. DRP. Even at the time of hearing, the learned AR appearing on behalf of the assessee has not brought anything on record contrary to the finding of the authorities below. In view of the above and in the absence of necessary informations, we disagree with the contentions of the Ld. AR for the assessee that foreign parties were the least complex parties and were fit to be selected as tested party. Though the assessee has furnished the FAR Analysis of the foreign AE’s viz a viz of the assessee in the TPSR but same is not enough to decide the tested party until and unless the reliable data is brought ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 21 on record. In other words, the financial data reflecting the transaction is equally important to determine the PLI of the tested party viz a viz the comparables. 10.5 In holding so, we also draw support and guidance from the order of the co- ordinate bench of this tribunal in the case of General Motors India (P.) Ltd. vs. Deputy Commissioner of Income-tax / Assistant Commissioner of Income-tax reported in 37 taxmann.com 403 where it was held that tested party should be the least complex entity for which reliable data in respect of itself and in respect of comparables is available. The Tribunal accepted that tested party could be the local entity or a foreign associate enterprise (AE). Thus, once the foreign AE’s have been rejected to be treated as the tested party, the assessee should be treated as the tested party to determine the ALP of the transactions representing the import of raw material and components from the associated enterprises. The assessee accordingly has worked out its PLI at 2.29% after making the adjustment of the following items: a- Provision for doubtful debts and the litigation expenses b- Provision for the forex losses c- Adjustment of working capital. 10.6 The assessee PLI was compared with the PLI of comparables which was selected by the assessee as elaborated in the preceding paragraph. The PLI of the assessee was falling within the range of 35 th and 65 th percentile (i.e. -0.23% and 4.76%) of the comparables thus it was alleged by the assessee that the difference between the PLI of the assessee viz a viz of the comparables as discussed above is within the range as prescribed under the Act. Thus it was contended by the assessee that it has carried out the transactions for the purchase of raw material and components at the Arm Length Price and therefore no adjustment of whatsoever is warranted. 10.7 However, the TPO has rejected the contention of the assessee and has adopted the comparables selected by the assessee for its contract manufacturing activity and determine the PLI of the comparables at 5.7%. As such the PLI of the ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 22 assessee viz a viz of the comparable companies have all been elaborated in the preceding paragraph. 10.8 The question arises whether the action of the TPO was correct to adopt the comparable selected by the assessee for its contract manufacturing activity for the purpose of comparing the margin with the PLI of the assessee to determine the ALP. The answer stands in negative. It is for the reason that the comparable selected by the assessee were based on the import of raw materials whereas the comparable used by the TPO were based on sale of finished goods. As such the basis/methodology for selection of comparables with respect to purchase of raw materials and components viz a viz sale of finished goods cannot be the same. Thus, the entire basis adopted by the TPO for comparing the PLI of the assessee with respect to the import of purchases of raw materials and components viz a viz sales of finished goods is baseless and devoid of any merit. It is for the reason that both the transactions are different and independent to each other and therefore no nexus of whatsoever between them could be established. This fact was very much brought to the notice of the TPO during the assessment proceedings by the assessee vide letter dated 25 th January, 2021. The relevant extract of the submission of the assessee is reproduced as under: “Section V: Incorrect application of benchmarking analysis used for sale of finished goods to determine the ALP for the transaction pertaining to purchase of raw material At the outset, the Assessee would like to humbly submit that your goodself has grossly erred in adopting the benchmark analysis of sale of finished goods for benchmarking the international transaction of purchase of raw materials. While doing so, your goodself has failed to appreciate that the Assessee has been characterized as a contract manufacturer for transaction of sale of finished goods. On the other hand, the Assessee has been performing the functions of a licenced manufacturer with respect to raw material and components procured from its AEs. In lights of the above, the Assessee humbly submits that the benchmarking analysis of both the transaction cannot be similar and separate and distinct benchmarking analysis ought to be performed for benchmarking international transaction of purchase of raw materials, in order to substantiate the said argument, the Assessee would now like to detail difference in functional, asset and risk profile of a contract manufacturer vis-a-vis licensed manufacturer thereby justifying the fact that separate and distinct benchmarking analysis ought to be performed. Licensed manufacturer ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 23 A licensed manufacturer produces goods under a licence agreement, using manufacturing intangibles owned by the licensor, such as patents, product designs, manufacturing process and know-how. The licenced manufacturer pays royalties for the use of the licenced intangibles, typically buys raw materials and semi-finished goods on its own account and holds inventories of the raw materials and finished goods. Therefore, it bears the risks associated with both holding inventories and selling products, including demand and pricing risk. The licenced manufacturer typically owns plant and equipment necessary for manufacturing operations and invests in training its labour force. Figure 1 – Licensed Manufacture Contract manufacturer A contract manufacturer on the other hand assumes lesser risks than a typical licenced manufacturer. The contract manufacturer produces goods for a manufacturing principal that directly bears demand and final customer pricing risk. The contract manufacturer is compensated by the principal typically through a return to enable the contract manufacturer to earn an arm's-length mark-up on total costs. In addition, it is submitted that if the products made by the contract manufacturer comply with the principal's product and quality specifications, the principal usually guarantee to purchase the goods. Therefore, the contract manufacturer may bear relatively limited risks associated with holding finished goods and selling them, compared with a licenced manufacturer. Figure 2: Contract manufacturer ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 24 Table 1: Categorization of SEIL Characterization Description SEIL's functions Licensed Manufacturer  Produces goods under a licence agreement.  Pays royalty for using manufacturing intangibles owned by the licensor.  Bears the risks associated with both holding inventories and selling products. including demand and pricing risk.  Typically owns plant and equipment necessary for manufacturing operations and invests in training its labour force-  SEIL procures raw materials and components for the manufacturing of power distribution & automation equipment.  SEIL is responsible for maintaining the inventory. The functions performed in this regard includes scheduling, warehousing, maintenance of stock as per forecasting and requirement of customers etc.  As the manufactured products produced by SEIL are sold to end-customers, SEIL faces the entire price risk.  SLIL owns and utilizes its manufacturing facilities, distributing infrastructure, office premises, warehousing facilities, plant & equipment communication facilities, furniture and fixtures etc. for the purpose of its business.  Contract Manufacturer  Produces goods for a manufacturing principal.  Principal bears demand and final customer pricing risk.  Earns an arm's-length mark-up on iota! costs.  Bears limited risks associated with holding  SEIL manufactures products for its AEs only.  Sales are made to AEs at inter-Company prices, which are generally based on cost plus mark-up on a per unit basis.  The AEs sells its products in the open market and bears ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 25 finished goods and selling them. the competitive pricing pressures and risks. The Assessee would further like to place reliance on Sulzer Pumps India Ltd, Mumbai V. Addl CIT 10(3), Mumbtii [ITA 1453/MUM/2014], wherein the Mumbai ITAT upheld the distinction between a contract manufacturer and a licensed manufacturer. "9. We heard the parties and perused the record. We notice that the tax authorities have considered the assessee as a "Contract Manufacturer" and accordingly disallowed the Royalty and Technical know how expenses. In the written submissions, the assessee has demonstrated llmt the purpose of obtaining approval for sales from its AE is to avoid competition between the AEs. The assessee has also submitted that out of the total export sales of Rs.87.63 crores. the exports made to AEs was only Rs.37.70 crores and the remaining exports have been made to non-AEs. Had the assessee been a contract manufacturer, it could nol have sold the goods to non-AEs. Accordingly, it was submitted that the restrictions placed by the AE In the agreement entered with the assessee was with the objective of ensuring smooth business operations. We find merit in the said contentions of the assessee. If the assessee was really a contract manufacturer as considered by the tax authorities, it would be getting only a fixed amount of profit and further it would not be able to export goods on its own account. The facts available on record would show that the assessee has been selling goods to Non-AEs also. Accordingly we hold that the assessee should be considered as a Licence Manufacturer in the facts and circumstances of the case." (Emphasis supplied) In this regard, the Assessee submits that all the finished goods manufactured by the assessee are sold directly to its AEs, thereby bear relatively limited / no risks, indicating that with respect to the sales transactions, the Assessee is a contract manufacturer. Whereas as a licensed manufacturer, the Assessee has two segments, viz. AE and Non-AE (refer Page 148 of the TP study submitted vide submission dated June 10, 2019) and undertaking the functions of a licence manufacturer. Further, the economic analysis undertaken to benchmark both categorizations also vary significantly. Such as, while conducting a search for compatibles functionally similar to a licensed manufacturer, the relevant filters to be applied would generally include selecting comparable companies having inventory/sales >15%, selecting comparable companies having net fixed assets/ sales >15% and selecting comparable companies having research and development expenses/ sales <5%. Therefore, the Assessee humbly submits that both the aforesaid transactions are not identical in nature.” 10.9. In view of the above, the action taken by the TPO which was subsequently confirmed by the Ld. DRP is not maintainable in the given facts and circumstances. 10.10 Now the aspect that emerges is this whether the TPO was right in rejecting the comparables selected by the assessee with respect to its transactions of purchases of raw materials and components from the AE’s. In this connection we note that the assessee has given the necessary details during the assessment ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 26 proceedings. This fact be verified from the pages 66 to 89 of the order of the ld. DRP. In the absence of any specific defect pointed out by the authorities below with respect to comparable selected by the assessee, we are not in agreement with the decision of the authorities below for selecting the other comparable which were chosen by the assessee for its sale of finished goods of its contract manufacturing unit. In holding so, we draw support and guidance from the judgment of Hon’ble Delhi ITAT in the case of Frigoglass India (P.) Ltd.vs.Deputy Commissioner of Income-tax reported in 45 taxmann.com 101 where it was held as under: “Once assessee has given a methodology for working of ALP on selection of a particular method supported by appropriate comparables, the working can be dislodged by TPO on the basis of cogent reasons and objective findings. In this case except theoretical assertions and generalized observations, no objective findings have been given to come to a reasoned conclusion that assessee's adoption of CPM for manufacturing segment and RPM for trading segment was factually and objectively not correct. Thus the rejection of methods by TPO as adopted by assessee is bereft of any cogency and objectivity. The same is a work of guessing and conjectured. Similarly the TNM method applied by the TPO suffers from the same inherent aberrations as mentioned above. In these circumstances the assessee methods of CPM and RPM respectively worked by applying appropriate comparables is to be upheld. Thus the ALP working returned by the assessee is upheld. [Para 5]” 10.11 Moving further, admittedly the assessee has categorized its segments in four compartments which have been discussed in the preceding paragraph. The assessee further has made two compartments under the category of license manufacturing which was based on the basis of purchases for raw materials and components from associated enterprise and non-associated enterprise. 10.12 All these segments were duly reported under the transfer pricing study report and this fact can be verified from the page 148 of the paper book. This fact was also accepted by the TPO in his order that there exists a separate AE Segment under license manufacturing. As per the judgment of Hon’ble Madras High Court in the case of Virtusa Consulting Services Pvt. Ltd. Vs. DCIT reported in 124 taxmann.com 309, the transfer pricing report is considered as one of the authentic document which cannot be ignored while determining the ALP until and unless some adverse material is available on record. The relevant extract of the order is reproduced below: ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 27 “As already pointed out, it is not a case where there were no material produced by the assessee to establish the functional risk assumed by the foreign AEs. The material was available before the TPO but the TPO non-suited the assessee on the ground that such contention by referring to the foreign AEs as tested party was not part of TP documentation. This finding is incorrect. Interestingly in the case of in the case on hand the TPO rejected the data placed by the assessee in their TP documentation and undertook a fresh search for external comparables and arrived at a final list of 12 comparables. Therefore, when the TPO himself has not attached any sanctity to the TP documentation as submitted by the assessee, could not have foreclosed the assessee from canvassing the issue that the subsidiaries are least complex entities which should be taken note of.” 10.13 Applying the above principle in the case on hand, we note that, the assessee before the Ld. DRP has taken internal TNMM method and compared the margin of AE segment with non-AE segment under license manufacturing. The assessee regarding this has placed the reliance on Rule 10B(1)(e) of the Rules. The relevant submission of the assessee before the DRP is extracted on pages 59 to 66 in the order. 10.14 However, we note that the Ld. DRP without considering the selection of internal TNMM by the assessee and without pointing out any defect therein has upheld the order of the TPO. Therefore, first we need to understand whether selection of internal TNMM by the assessee is in accordance to the provisions of rule 10B of the rules. 10.15 Before going to the particular issue, we feel to refer the provisions of rule 10B(1)(e) of the rules which reads as under: 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a)============ (b)===== (e)transactional net margin method, by which,— (i)the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii)the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii)the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 28 if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv)the net profit margin realised by the enterprise and referred to in sub- clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v)the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; 10.16 Sub-clause (i) provides that first net profit realized by the enterprise from an international transaction should be computed. Sub clause (ii) provides that net profit realized from uncontrolled transactions shall be computed. The profit from uncontrolled transactions can be realized by the (i) enterprise or (ii) unrelated enterprise from comparable uncontrolled transaction. Thus the Rules recognize and accept the adoption of net profit realized by the enterprise from comparable uncontrolled transaction. Such a result should be preferred over net profit realized by unrelated parties from comparable uncontrolled transaction. This is because, such analysis is more meaningful as the relevant data, facts and features of both the segments are available and are more reliable. On the following decisions, it has been held that internal comparables are to be preferred:- a. Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxmann.com 27 (Delhi) - held that internal CPM is better than external TNMM b. Asstt. CIT v. Schlafhorst Marketing Co. Ltd. [2011] 13 taxmann.com 104/47 SOT 120 (Mum.)(URO) - held that internal TNMM to be adopted c. Asstt. CIT v Birla Soft Ltd. [2011] 12 taxmann.com 31/46 SOT 437 (Delhi) - internal TNMM accepted d. Destination of the World (Subcontinent) (P.) Ltd. v Asstt. CIT [2011] 12 taxmann.com 310/47 SOT 1 (Delhi) - held that preference should be given to internal comparison. 10.17 In the latest order of the Mumbai Tribunal in the case of Tecnimont ICB (P.) Ltd. v. Addl. CIT [2012] 138 ITD 23/24 taxmann.com 28 (Mum.)(TM), the Hon'ble Third Member was considering the following issue on a difference of opinion:- ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 29 "Whether in the facts and circumstances of the case, the net margin realized from a transaction with an Associated Enterprise (AE) found and accepted at Arm's Length Price (ALP) can be taken as a comparable being an internal comparable for computation of (sic- arm) ALP of an international transaction with another AE?" 10.18 The Hon'ble Third Member observed that the internal uncontrolled transaction/comparable is to be given preference to the external comparables. The relevant finding of the Hon'ble Tribunal at para 10 reads as follows:- "10. Clause (i) of Rule 10B(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The 'base' of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to 'the net profit margin realized by the enterprise...... from a comparable uncontrolled transaction' and the other part talks of 'the net profit margin realized ....... by an uncontrolled enterprise from a comparable uncontrolled transaction'. It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin from an external comparable uncontrolled transaction. Thus it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word 'comparable' may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-à-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-à- vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-à-vis its counterpart i.e. external comparable". 10.19 In the instant case, the assessee, has applied the internal TNMM method as most appropriate and from the aforesaid rule we note that the rule 10B of the rules has to be apply to select the method for the purpose to determine the ALP and TNMM method could be applied as internal as well as external. ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 30 10.20 At this juncture, we are also inclined to deal with one more situation i.e. whether the margin shown by the assessee under the contract manufacturing can be compared with the license manufacturing. In this regard, we find that the risk involved under contract manufacturing is less and the assessee is also not required to maintain the inventory at its own risk whereas in the case of license manufacturing the assessee has to maintain its own inventory and greater risk is attached under this segment. Thus, we are of the view that the profit margin of the contract manufacturing segment cannot be compared with the license manufacturing. As such an apple can be compared with another apple that is the underlying theory/ concept of the transfer pricing provisions. In this connection we draw our attention to the order of ITAT Chandigarh in the case of ACIT Vs. Ishwar Manufacturing Co. Pvt. Ltd. reported 67 taxmann.com 152 wherein it was held that For making a comparative analysis, apples are to be compared with apples and not with oranges. 10.21 In view of the above, we are not convinced with the order of the authorities below for adopting the margin of the contract manufacturing as comparable to determine the ALP with respect the purchase of raw materials from the AE’s under the activity of license manufacturing. 10.22 Before parting, we note that the authorities below have aggregated the following transactions for the purpose of determining the ALP: i. Purchase of raw materials and components ii. Purchase of fixed assets iii. Purchase of intangible assets iv. Payment of trademark fees 10.23 Once we have accepted the transaction shown by the assessee for the import of raw materials and components at the arm length price, no adjustment with respect to other transactions aggregated with the transactions in dispute is required to be made. In other words, the impugned transactions discussed above ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 31 have to be treated at arm length price as applicable for the purchase of raw materials and components. 10.24 Without prejudice to the above, it was also contended before us by the learned AR for the assessee that whatever adjustments needs to be made by the revenue authorities should be with respect to the international transactions with the AE which are in dispute. As such the revenue cannot consider all the transactions for the purpose of making the addition taking the rate of the ALP. We find force in the argument of the learned AR for the assessee and accordingly direct the revenue to make the adjustments with respect to the international transactions with the AE’s which are in dispute. However, we are conscious to the fact that the direction at this stage will not make any difference to the assessee for the reason that the appeal has been decided in favour of the assessee. However, we have recorded this observation for the statistical purposes. 10.25 In view of the above and after considering the facts in totality we reverse the finding of the learned DRP and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. 11. The 4 th issue raised by the assessee is that the Ld.TPO/Ld. DRP have erred in enhancing the income by INR 218,597,391 in relation to receipt of data management and other related service fees paid by the Appellant to its AEs by rejecting the TP documentation maintained by the Appellant and arbitrarily determining arm’s length price as ‘Nil’ by applying Comparable Uncontrolled Price Method(“CUP”) Method. 12. The assessee in the year under consideration has made payment amounting to Rs. 21,85,97,391/- with respect to the services availed in relation to data management and other related services from Schneider Electric Industries SAS, France an AE. The assessee further submits that the services availed were in the nature of Information Technology Services such as support for online, web ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 32 based tools, software licenses, assistance in smooth functioning for IT products and database etc. 12.1 The assessee during the assessment proceedings submits that the AE for rendering the services, charged Cost plus 6% mark up. The assessee also submits that the cost incurred by the various group entities in providing the data management services within the group gets centralized and adopted a methodology to allocate the cost to the recipient of services on global basis. The assessee further submits that it followed the TNMM method as most appropriate method to benchmark the transaction. The assessee therefore selected 17 comparable independent companies from AMADEOUS database and worked out Arithmetic mean 5.66%, 35 th percentile 2.55%, 65 th percentile 7.09% with median 5.44%. 12.2 The assessee thus noted that the mark-up of 6% on cost paid to AE for rendering the services of data management and other related services is within the range of 35 th and 65 th percentile. Therefore, the transactions entered with AE for payment of data management and other related services was on ALP as per the provisions of rule 10CA of Income Tax Rules. 12.3 The assesse during the assessment proceedings also submits the screen shot of the services received from Schneider Electric Industries SAS France and furnished few invoices in respect to the services availed by it. 12.4 However, the AO/TPO disregarded the contentions of the assessee by observing as under; a- That the assessee has not provided the cost incurred by the AEs towards rendering the services as well as on what basis 6% mark-up was added to the cost. b- The assessee did not furnish any supporting evidence on what basis the cost was allocated between the intra group entities. ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 33 c- The images provided by the assessee was not evidencing that it had received any services and the invoice furnished by the assessee was issued by Schneider Electric India Private Limited which was a completely different entity. 12.5 The AO/TPO, thus, was of the view that the assessee has not received any services therefore the arm’s length price with respect to the receipt of data management and other related services adjusted to nil. The AO/TPO thus proposes to make downward adjustment of Rs. 21,85,97,391/- on account of payment of data management services and related services. 13. Aggrieved, assessee raised the objection before the Ld. DRP and submits the list of services availed from its AEs as well as details about the benefit from the services availed and reiterated the submission as made before the AO/TPO. 13.1 The assessee further submitted that detailed economic analysis were made with respect to benchmark transactions for payment of availing the services from AE as specified in TPSR whilst the AO/TPO has rejected the same without providing any material and cogent reason. 13.2 The assessee also submitted that the AO/TPO has not followed any method/process as prescribed under section 92C(1) of the Act to determine the ALP in respect to the cost for data management and other related services. 14. However the Ld. DRP rejected the contention of the assessee by observing as under: 10. We have perused the draft assessment order/ TPO's order. We \ have also considered the written and oral submissions of the assessee in \ this regard. Briefly stated the facts of the issue are that the assessee has claimed to have received data management and other related services from M/s. Schneider Electric Industries SAS, France (the AE), which are in the nature of information technology services such as support for online or web-based tools, software licences, assistance and smooth functioning for IT products and data base, etc. The AE charged markup of 6%. The TPO observed that the assesses did not provide basis of cost to the AE and receipt of services by the assessee. The TPO observed that the assessee provided only four images as the evidence for the receipt of services, to which the TPO stated that these were not sufficient to prove the existence of receipt of services. The TPO further pointed out that the invoice ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 34 submitted for claim of the services received/ rendered was in fact from M/s. Schneider Electric India Pvt. Ltd., which was entirely different entity than the claimed service provider, i.e., the AE. The TPO pointed out that the assessee could not produce any worthwhile evidence to support its claim. On the other hand, the assessee, defended its claim of receipt of the impugned services before the TPO as well as the DRP. After considering all the material on record and the reasoning of the TPO which are recorded in para 6 (6.1 to 6.6) of his order, we are of the considered opinion that there is no reason deviate from the findings of the TPO Therefore, the ground objection no. 3 is dismissed. 15. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 16. The learned AR before contended that the assessee has incurred cost towards the management services received from the group companies and the same cannot be determined at nil value. 17. On the other hand, the learned DR before us vehemently supported the order of the authorities below. 18. We have heard the rival contentions of both the parties and perused the materials available on record. The assessee in the instant has availed the services of data management and other related services from its AEs which are in the nature of IT related services. The assessee to substantiate the service availed has submitted the relevant documents and information which is discussed in the preceding paragraph and also furnished the break-up of cost as well as allocation of cost incurred by the AEs before the Ld. DRP. The assessee has applied the TNMM method as MAM to determine the ALP for the aforesaid transaction and found the ALP as cost plus 6% markup. Further, the assessee has contended that the TPO has applied CUP method as most appropriate method for determination of ALP of the said services, without giving any cogent reasons and has determined the ALP of management support and other related services received by the assessee at NIL, taking the view that no independent party would have made the payment in the uncontrolled circumstances. The assessee has submitted that the said action of the TPO is arbitrary and is not in line with rule 10B(1)(a) of the ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 35 Rules which lays down the need for 'comparable uncontrolled transactions' while applying the CUP method. 18.1 It is pertinent to mention here that there is no dispute on the legal proposition that if the TPO finds that the method applied by the assessee is not appropriate, it can carry out his own analysis however he has to follow the methodology as provided in Chapter-X of the Income-tax Act. 18.2 It may further be noted that the starting point for applying the CUP method as per the transfer pricing provisions is availability of the price of the same product or service in uncontrolled conditions and according to that the ALP of the product or service can be ascertained. Thus, the action of the TPO of applying CUP method and at the same considering the value of such transaction as Nil in absence of comparable uncontrolled transactions, is in itself contradictory and without any basis/logic. Therefore, the contention of the TPO to apply CUP method as MAM is not tenable under the law. 18.3 Moving further we note that the entire grounds consists of two issues, whether in fact the services were rendered and availed by the assessee and if so, whether the mark-up of 6% can be considered as comparable with the market averages. Culling from the details filed and arguments of both the parties, we find that there is no dispute about availing of the services. The evidences include the invoices, agreements along with details of cost allocation submitted at page nos. 509 to 528 of the paper book. Hence, it cannot be said that the services have not been provided to the assessee. With regard to the mark-up of 6% paid by the assessee, we find that the economic analysis submitted by the assessee in TPSR available in the paper book is acceptable. Hence, we hold that no adjustment is called for while determining the ALP on account of payment for Intra Group Services in the form of Data Management and Other Related Services. ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 36 19. The 7 th issue raised by the assessee is that the Ld. TPO/Ld. DRP erred in enhancing the income of the Appellant by INR 16,84,889 pertaining to reimbursement of expenses received from the AEs by re-characterizing “reimbursement of expenses received” as “provision of support services” thereby imputing a markup of 5% on the cost of the reimbursements without providing any detailed/cogent reason for the same. 20. The assessee during the year under consideration has incurred certain expenditures amounting to Rs. 3,36,97,775/- towards the travel, lodging, employee cost, communication etc. on behalf of its AEs. The particulars of the expenses incurred are detailed as under: Sr.No. Name of AE Amount(INR) 1 EPS Electrical Power Distribution Boards & Swithchgear Ltd. 1,026,044 2 Schneider Electric (Australia) Pty. Limited 130,609 3. Schneider Electric Canada Inc. 207,280 5. Schneider Electric Industries SAS 25,824,134 6. Schneider Electric Korea Ltd (ex-Samwha EOCR Co. Ltd) 146,506 7. Schneider Electric Ltd 715,594 8. Schneider Electric Protection et Controle SAS 2,971,444 9. Vamp OY 1,843,605 10. Schneider Electric Logistics Asia Pte. Ltd. 265,457 11. Schneider Electric O.M. LLC 355,719 Total 33,697,775 20.1 The assessee regarding this submits that the cost incurred by it on behalf of the AEs were recovered/reimbursed on cost to cost basis as the expenses were incurred only to provide administrative assistance. 20.2 However, the AO/TPO was of the view that the assessee while performing the activities on behalf of its AEs, will incur the additional cost in the nature of administrative cost, employee cost etc. Thus, the AO/TPO was also of the opinion that the assessee is engaged in providing the support services to its AEs therefore, benchmarked the said transaction and charged a reasonable mark-up of 5% on reimbursement of expenses. The AO/TPO thus proposes the upward adjustment of ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 37 Rs. 16,84,889/- (Rs. 3,36,97,775 * 5%) on account of recovery/reimbursement of expenses. 21. Aggrieved assessee raised the objection before the Ld. DRP and submitted that the AEs can directly incur such type of expenses to avail the services. However it incurred the expenses only to facilitate the AEs. 22. However, the Ld. DRP rejected the contention of the assessee by observing as under: We have perused the draft assessment order/TPO’s order and considered the written and oral submissions in this reagard. Briefly stated facts of the issue are that the assessee had incurred certain expenses in a nature of travel, lodging, employee cost, communication etc. on behalf of the AEs amounting to Rs.3,36,97,775/- which were reimbursed to it by the AEs. The TPO observed that there would have been various other costs that would have been incurred by the assess in order to perform the activities for which the expenses had been incurred on behalf of the AEs. The assessee defended its claim. The TPO in para 8.3 to 8.5 narrated his reasoning for charging 5% markup for benchmarking the reimbursements. We have considered all the material on record and we do not find any reason to interfere with the finding of the TPO in this regard. Therefore, the ground of objection no.6 is dismissed. 23. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 24. The learned AR before contended that the assessee has not rendered any services to the AE except incurring the cost which was in the nature of travelling, lodging communication on behalf of the AE which was actually reimbursed on cost basis. Had the cost not been incurred by the assessee, the same would have been incurred by the AO. As such there was no element of services in the cost incurred by the assessee and therefore no adjustment with respect to the same can be made in the given facts and circumstances. 25. On the other hand, the learned DR before us submitted that the transaction in dispute represents the international transaction which cannot be completed between 2 unconnected entities without having some markup. But the assessee ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 38 has not done any markup on the cost incurred on behalf of the AE. The learned DR vehemently supported the order of the authorities below. 26. We have heard the rival submissions of both the parties and perused the materials available on record. The issue in the present ground is with respect to the adjustment made on account of reimbursement of cost. Before us, it is an assessee's submissions that the expenses which were reimbursed of all expenditure which were inter-alia incurred by the assessee on behalf of the AEs and the same have been reimbursed to the third parties and for which no value addition has been done by the assessee. It is further assessee's submissions that the reimbursement are on cost to cost basis and transactions were undertaken only to provide administrative assistance to the AEs. The aforesaid contentions of the AR have not found to be false as the relevant details for the expenses incurred and reimbursed of expenses has been furnished before the authorities. As per the assessee, no mark-up is warranted on pass through costs which are inter alia incurred by the assessee and are reimbursement of primary third party expenses initially incurred by the assessee for which no value addition is done by the assessee and which are subsequently reimbursed by the AEs on cost to cost basis. Before us no material has been placed by Revenue to demonstrate that value addition has been done by the assessee and is not in the nature of reimbursement of primary third party expenses which were initially incurred by the assessee. Admittedly, there was no value addition done by the assessee by incurring the cost on behalf of the AE which was subsequently reimbursed. However, such transaction falls within the definition of international transaction with the AE and therefore the same needs to be benchmarked. A non- associated party will not incur any cost without having any benefit from the party. Indeed, the assessee must have employed its resources in providing administrative services to the AE and therefore we are of the view that the assessee should have charged some amount of fees on account of such transaction. However, the assessee in the given case has not determined the ALP of the transaction in hand, therefore the same was benchmarked by the AO/TPO on reasonable basis. As such it was the onus upon the assessee to bench-mark ITA No. 64/Ahd/2022 Schneider Electric Infrastructure Ltd Vs. DCIT AY : 2017-18 39 the transactions in hand but it failed to do so. Hence, we do not find any infirmity in the order of the authorities below. Thus, the ground of appeal of the assessee is hereby dismissed. 27. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on 07/12/ 2022 at Ahmedabad. Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad, Dated 07/12/2022