TATA MOTORS EUROPEAN TECHNICAL CENTRE, PLC, MUMBAI V. ADIT (IT) 2(2), MUMBAI

ITA 7630/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84618 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 12-08-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 26-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S D SRIVASTAVA
• Assessee Lawyers: R R VORA NIKHIL TIWARI
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Arm length price
• Section: 234B; 10B

Judgement Text

. T.A.NO.7630 AND 1698/MUM/2012 1 , IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE S/SHRI N.K.BILLAIYA, (AM) AND AMIT SHUKLA, (JM) . . , , ./I.T.A.NO.7630/MUM/2012 I.T.A.NO.1698/MUM/2014 ( ! '# $' / ASSESSMENT YEARS: 2008-09 AND 2009-10) TATA MOTORS EUROPEAN TECHNICAL CENTRE PLC, C/O THIRD FLOOR, NANAVATI MAHALAYA, 18, HOMI MODY STREET, HUTATMA CHOWK, MUMBAI-400001. / VS. ASSISTANT DIRECTOR OF INCOME TAX (IT)(2(2), ROOM NO.116, 1 ST FLOOR, SCINDIA HOUSE, BALLARD PIER, MUMBAI-400038 % ./ & ' ./PAN/GIR NO. : AACCT7506K ( %( / APPELLANT) .. ( )* %( / RESPONDENT) %( + / ASSESSEE BY : S/SHRI R R VORA, NIKHIL TIWARI AND MANOJ ANCHALIA )* %( , + /REVENUE BY : SHRI S D SRIVASTAVA - , . / DATE OF HEARING : 29.9.2014 /0$# , . /DATE OF PRONOUNCEMENT : 22.12.2014 / O R D E R PER AMIT SHUKLA(JM) THE AFORESAID APPEALS HAVE BEEN FILED BY THE ASSESSEE AGAINST THE TWO SEPARATE IMPUGNED FINAL ASSESSMENT ORDERS D ATED 25.12.2011 FOR THE ASSESSMENT YEAR 2008-09 AND 30.1 .2014 FOR THE ASSESSMENT YEAR 2009-10, PASSED IN PURSUANCE OF DI RECTIONS BY THE DISPUTE RESOLUTION PANEL (DRP). SINCE ISSUE INVOLVE D IN BOTH THE . T.A.NO.7630 AND 1698/MUM/2012 2 THESE APPEALS ARE COMMON, ARISING OUT OF SIMILAR FA CTS, THEREFORE, WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER, FOR THE SAKE OF CONVENIENCE. 2. TO UNDERSTAND THE IMPLICATIONS OF FACTS AND ISS UES INVOLVED, WE WILL TAKE UP THE APPEAL FOR THE ASSESSMENT YEAR 2 008-09, VIDE WHICH FOLLOWING GROUNDS OF APPEAL HAVE BEEN TAKEN:. 1. A) THE TRANSFER PRICING OFFICER (TPO) / ASSESSI NG OFFICER (AO) HAS ERRED IN LAW AND ON FACTS IN MAKIN G ADDITION OF RS.8,04,58.874/- BY ADOPTING INDIAN COMPARABLES AS COMPARABLES FOR BENCHMARKING INTERNATIONAL TRANSACT IONS OF PROVISIONING OF SERVICES TO TATA MOTORS LTD. ('TML' ). B) THE TPO / AO OUGHT TO HAVE ACCEPTED BENCHMARKING CARRIED OUT BY THE ASSESSEE AND SELECTION OF UK COM PANIES AS COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS OF THE COMPANY CONSIDERING THE FACTS OF THE CASE OF TH E APPELLANT. C) THE TPO/ AO HAS ERRED IN LAW AND ON FACTS IN DISREGARDING THAT IN THE PREVIOUS ASSESSMENT YEAR, DEPARTMENT HAS ACCEPTED AND CONSIDERED UK COMPANIES AS COMPARA BLES FOR THE PURPOSE OF BENCHMARKING OF INTERNATIONAL TR ANSACTIONS AND HENCE THE AO/ TPO SHOULD HAVE FOLLOWED THE SAME AS THERE IS NO CHANGE IN THE FACTS OF THE CASE. 2. WITHOUT PREJUDICE TO GROUND NO. 1 ABOVE,: A) THE TPO/ AO HAS ERRED IN LAW AND ON FACTS IN CHE RRY PICKING 7 INDIAN COMPANIES AS COMPARABLES WHICH ARE FUNCTIONALLY NOT COMPARABLE WITH THE APPELLANT. B) THE TPO/ AO HAS ERRED IN LAW AND ON FACTS IN PIC KING UP COMPANIES WITH HIGH MARGIN INSTEAD OF FOLLOWING DET AILED, SYSTEMATIC AND METHODICAL SEARCH PROCESS. C) THE LEARNED TPO/ AO HAS ERRED IN LAW AND ON FACT S IN NON GRANTING OPPORTUNITY OF CROSS EXAMINING THE COM PARABLES SELECTED BY THE TPO/ AO. . T.A.NO.7630 AND 1698/MUM/2012 3 3. THE LEARNED TPO / AO HAS ERRED IN LAW AND ON FAC TS IN NOT GRANTING CREDIT OF TDS OF RS. 11,79,35,990/- OU T OF TOTAL TDS CREDIT OF RS.12.06.64,360. 4. THE LEARNED TPO / AO HAS ERRED IN LAW AND ON FAC TS IN LEVYING INTEREST UNDER SECTION 23413 OF THE ACT OF RS. 1,77,76,885. THE LEARNED TPO / AO HAS ERRED IN LAW AND ON FACTS IN LEVYING INTEREST UNDER SECTION 234C OF THE ACT OF RS.10,878 /- 3. BRIEF FACTS QUA THE ISSUE RELATING TO TRANSFER PRICING ADJUSTMENT OF RS.8,04,58,878/- ARE THAT, THE ASSESSEE, TATA MOTOR EUROPEAN TECHNICAL CENTRE PLC (TMETC) IS INCORPORATED IN THE UNITED KINGDOM (UK) AND IS RESIDENT OF UK. THE ASSESSEE I S HAVING TECHNICAL EXPERTISE OF AUTOMOTIVE INDUSTRIES OF EUR OPEAN STANDARDS, AND IS WHOLLY OWNED SUBSIDIARY OF TATA MOTORS LT D (TML). THE TML ENTERED INTO DESIGN AND ENGINEERING SERVICE AGREEM ENT WITH THE ASSESSEE FOR PROVIDING DESIGN, ENGINEERING, TESTIN G AND VALIDATION, RESEARCH AND DEVELOPMENT OF AUTOMOBILES, INCLUDING PROGRMME MANAGEMENT FOR THE AUTOMOTIVE AND AEROSPACE INDUSTR IES. FOR RENDERING THESE SERVICES FOR THE TML, THE ASSESSEE SENT ITS EMPLOYEES IN INDIA BY DEPUTING ENGINEERS AND TECHNI CAL PERSONNEL AT TMLS FACTORY/ESTABLISHMENT IN INDIA. THUS, THE AS SESSEE HAD A SERVICE PE IN INDIA. THE ASSESSEE, FOR RENDERING DE SIGN AND ENGINEERING SERVICES FOR TML DURING THE YEAR, HAD RECEIVED AN . T.A.NO.7630 AND 1698/MUM/2012 4 AMOUNT OF RS.31,98,72,720/- AND THE OPERATING PROF IT FOR THE YEAR WAS SHOWN IN THE FOLLOWING MANNER : IN THE TP STUDY REPORT, FOR THE PURPOSE OF BENCHMAR KING ITS TRANSACTION AND THE MARGIN, THE MAIN FACTORS WHICH WERE TAKEN INTO ACCOUNT WERE THAT, THE DESIGN AND ENGINEERING SERVI CES FOR AUTOMOTIVE INDUSTRIES IS HIGHLY SPECIALIZED SERVICE S AND CONSIDERING THE NATURE OF AUTOMOTIVE INDUSTRIES IN TERMS OF GL OBAL STANDARDS, COMPETITION AND GROWING COMPLIANCE REQUIREMENTS T OWARDS SAFETY AND ENVIRONMENTAL NORMS, THE PARALLELS ARE NOT AVA ILABLE IN INDIA. THE OTHER FACTORS FOR CONSIDERATION WERE THAT, AS A GAINST THE OPERATION COST INCURRED BY THE PE, THE MAJOR PORTION WAS TOW ARDS THE SALARY OF THE EMPLOYEES WHO HAD SPECIAL SKILLS AND KNOWLEDGE AND WERE PAID SALARY IN UK ONLY. THE PE DID NOT HAD ANY INDEPEN DENT BUSINESS IN INDIA AND IT DOES NOT ENTER INTO ANY CONTRACT WITH OUTSIDE PARTY IN INDIA. CONSIDERING THESE FACTORS AND FAR ANALYSIS WHICH WAS EFFECTED BY DEMOGRAPHIC AND ECONOMIC FACTORS IN UK, THE ASSESSEE SEARCHED FOR UK COMPARABLES RENDERING SIMILAR KIND OF SERVICES IN UK. THUS TMETC (I.E THE ASSESSEE) WAS TAKEN AS TES TED PARTY FOR TOTAL OPERATING INCOME RS. 31,98,72,720 TOTAL OPERATING COST RS.29,27,04,244 OPERATING PROFIT RS.2,71,68,476 OP/TC% 9.28% . T.A.NO.7630 AND 1698/MUM/2012 5 BENCHMARKING THE ALP. BASED ON FAR ANALYSIS AND BY ADOPTING TNMM AS THE MOST APPROPRIATE METHOD AND PLI AS OP/T C, THE ASSESSEE SELECTED FOUR OVERSEAS COMPARABLES LOCATED IN UK TO BENCHMARK THE ARM LENGTH PRICE OF THE TRANSACTION S WITH THE AE I.E TML, WHICH WERE AS UNDER : S.NO. NAME OF THE COMPARABLES 2007 % 2006 % 2005% 3 YEAR WEIGHTED AVG.(%) 1 DYTCNA LIMITED 4.17 6.74 4.86 5.26 2 RICARDO PLC 8.34 10.11 6.90 8.47 3 ONLINE DESIGN AND ENGINEERING LTD. 6.98 5.85 5.47 6.22 4 ACTEON GROUP LTD 21.87 19.63 10.60 18.31 AVERAGE 10.34 10.59 6.96 9.57 ASSESSEES PROFIT MARGIN 9.28% SINCE, FOR THE YEAR 2007 THE AVERAGE PROFIT MARGIN OF THE COMPARABLES WAS ARRIVED AT 10.34%; THEREFORE, THE ASSESSEES PROFIT MARGIN BEING AT 9.28%, WAS STATED TO BE AT ARMS LENGTH RANG E. 4. THE TRANSFER PRICING OFFICER (TPO) THOUGH ACCEPT ED THE TNMM METHOD AND THE PLI EMPLOYED BY THE ASSESSEE FOR DET ERMINING THE ALP OF ITS INTERNATIONAL TRANSACTIONS, HOWEVER, COM PLETELY DISAGREED WITH THE SELECTION OF FOREIGN COMPARABLES BASED IN UK, AS HE HELD THAT IT IS NOT TENABLE UNDER THE INDIAN TRANSFER PR ICING RULES AND . T.A.NO.7630 AND 1698/MUM/2012 6 PROVISIONS. HIS OTHER REASONING WAS THAT, THAT SINC E THE PE OF THE ASSESSEE IS LOCATED IN INDIA AND CARRYING OUT IT S BUSINESS WITHIN THE INDIAN TERRITORY, THEREFORE, IT SHOULD BE TREATED A S BUSINESS ENTITY IN INDIA, AKIN TO THE OTHER CORPORATE ENTITIES DOING B USINESS IN INDIA. FURTHER ASSESSEES DIRECT AND INDIRECT COST ARE IN CURRED IN AND IN CONNECTION WITH BUSINESS TRANSACTIONS IN INDIA AND THEREFORE, INDIAN COMPARABLES SHOULD BE SELECTED FOR BENCHMARKING THE ASSESSEES MARGIN. THE TPO, HENCE SELECTED 7 INDIAN COMPARABLE S HAVING AVERAGE MEAN MARGIN OF 36.77% WHICH ARE AS UNDER : S.NO. COMPANY NAME OT /TC 1 MAHINDRA CONSULTING ENGINEERS LTD 28.96% 2 ALPLANGEO (INDIA) LTD. 41.58% 3 STUP CONSULTANTS PVT LTD. 36.72% 4 SEMAC LTD 49.65% 5 MITCON CONSULTANCY SERVICES LTD. 41.21% 6 KIRLOSKAR CONSULTANTS LTD 21.29% 7 COMPUTRONICS FINANCIAL 38.02% AVERAGE MEAN 36.77% IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE GAVE DETAILED SUBMISSIONS JUSTIFYING THE SELECTION OF FOREIGN COM PARABLES, WHICH HAVE BEEN INCORPORATED BY THE TPO AT PARA 8 OF HIS ORDER. ASSESSEE CONTENTION HAS BEEN REJECTED BY HIM IN DETAIL, AS PER THE DISCUSSIONS APPEARING AT PAGES 5 TO 9 OF THE ORDER AND ACCORDINGLY, HE BENCHMARKED THE ASSESSEES MARGIN WITH THE ME AN PROFIT . T.A.NO.7630 AND 1698/MUM/2012 7 MARGIN OF THE 7 INDIAN COMPARABLES AND MADE ADJUSTM ENT OF RS.8,04,58,874/- IN THE FOLLOWING MANNER: TOTAL OPERATING INCOME RS.31,98,72,720/- TOTAL OPERATING COST RS.29,27,04,244/- OPERATING PROFIT RS.2,71,68,476/- PROFIT MARGIN OF ASSESSEE 9.28% ARM LENGTH PROFIT MARGIN (36.77% OF OC) RS.10,76, 27,350/- ARMS LENGTH VALUE OF TRANSACTIONS RS.40,03,31,594 /- 95% OF ARMS LENGTH VALUE RS.38,03,15,014 DIFFERENCE BEING SHORTFALL IN OP BEING ADJUSTMENT RS.8,04,58,874/- 5. ONE OF THE MAIN OBJECTION OF THE ASSESSEE BEFORE THE DRP WAS THAT, IN THE IMMEDIATELY PRECEDING YEAR I.E. IN TH E ASSESSMENT YEAR 2007-08, ON IDENTICAL INTERNATIONAL TRANSACTIONS, T HE TPO HAS ACCEPTED THE UK COMPARABLES, SELECTED FROM FOREIG N DATA FOR BENCH MARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSES SEE AND THEREFORE, IN THIS YEAR ALSO THE TPO SHOULD HAVE ACCEPTED THE FOREIGN COMPARABLES. THE DRP REJECTED THE ASSESSEES CONTEN TIONS AND OTHER OBJECTIONS ON THE GROUND THAT THE TESTED PART Y IS THE INDIAN PE, WHO IS WORKING IN THE INDIAN BUSINESS ENVIRONMENT A ND THE MERE FACT THAT THE EMPLOYEES GET PAID IN EUROPEAN OR UK CU RRENCY WILL NOT DECIDE THE SELECTION OF FOREIGN COMPARABLES. FOR THE PURPOSE OF INCOME TAX, THE PE HAS TO BE TREATED AS DISTINCT AN D SEPARATE ENTERPRISE OF THE FOREIGN COMPANY AND THEREFORE, TH E TPO HAS RIGHTLY SELECTED INDIAN COMPANIES AS COMPARABLES. FOR OTHER OBJECTIONS . T.A.NO.7630 AND 1698/MUM/2012 8 ALSO, THE DRP REJECTED THE ASSESSEES CONTENTION AN D UPHELD THE ORDER OF THE TPO. 6. BEFORE US, LD. COUNSEL SHRI RAJAN VORA, SUBMIT TED THAT THE ASSESSEE BEING UK BASED COMPANY HAVING ITS PRINCI PAL BUSINESS IN UK FROM WHERE IT MANAGES THE SERVICES PROVIDED T O TML MOTORS AND ALL ITS EMPLOYEES ARE UK NATIONALS HAVING TECH NICAL KNOWLEDGE OF AUTOMOTIVE INDUSTRIES AND ECONOMIC ENVIRONMENT OF EUROPEAN COUNTRIES AND THEREFORE, BASED ON THE NATURE OF BUS INESS AND GEOGRAPHICAL FACTORS, THE COMPARABILITY ANALYSIS C AN BE DONE ONLY THROUGH SELECTION OF UK COMPARABLES ENGAGED IN THE SIMILAR ACTIVITIES, FOR THE PROPER DETERMINATION OF ALP. THE TMETC-PE IS NOT INFLUENCED BY THE INDIAN ECONOMIC/FINANCIAL ENVIRON MENT AND THERE ARE NO INDIAN EMPLOYEES. ALL THE COSTS CONSIDERED FOR ATTRIBUTION OF PLI ARE INCURRED BY TMETC IN UK ONLY. EVEN UNDER T HE INDIAN TRANSFER PRICING REGULATIONS, COMPARABILITY ANAL YSIS BASED ON FAR IS THE MOST CRUCIAL PART FOR BENCH MARKING THE ARM S LENGTH PRICE, WHICH IS MAINLY BASED ON SELECTION OF COMPARABLES H AVING SIMILAR KIND OF BUSINESS, FUNCTIONS AND ENVIRONMENT. IN SUP PORT OF HIS PROPOSITION, FOR THE SELECTION OF FOREIGN COMPARABL ES HE RELIED UPON THE FOLLOWING TRIBUNAL DECISIONS: A) GLOBAL VANTEDGE PVT LTD (2010) TIOL-24-ITAT-DEL ) AND . T.A.NO.7630 AND 1698/MUM/2012 9 B) RANBAXY INDIA LTD (299 ITR (AT) 175 (DEL) HE FURTHER SUBMITTED THAT OECD GUIDELINES, AND UN PRACTICAL MANUAL ON TRANSFER PRICING FOR THE DEVELOPING COUN TRIES HAVE RECOGNIZED THAT FOREIGN COMPARABLES CAN BE TAKEN IN TO CONSIDERATION, IF THE TESTED PARTY HAS BEEN CHOSEN AS THE FOREIGN COMPANY. THE AFORESAID DECISIONS OF THE TRIBUNAL HAVE TAKEN I NTO COGNIZANCE SUCH OECD GUIDELINES AND UN MANUAL. THUS, HE SUBMITTED THAT SELECTION OF FOREIGN COMPARABLES FOR THE PURPOSES OF COMPARAB ILITY ANALYSIS AND BENCH MARKING THE ARMS LENGTH PRICE SHOULD BE TAKE N INTO CONSIDERATION. WITHOUT PREJUDICE TO THE ABOVE, HE A LSO MADE DETAILED SUBMISSIONS WITH REGARD TO THE 7 COMPARABLES CHOSEN BY TPO, TO DEMONSTRATE THAT THERE ARE NO ACTUAL COMPARABLES HAVING SIMILAR PROFILE AND FUNCTIONS WITH THAT OF THE ASSESSEE A ND THEREFORE, NO COMPANY IN INDIA CAN BE CONSIDERED AS COMPARABLE W ITH THE ASSESSEE. HE ALSO FILED WRITTEN SYNOPSIS, WITH REGA RD TO EACH COMPARABLES, TO SHOW, HOW THEY ARE FUNCTIONALLY NO T COMPARABLE WITH THE ASSESSEE. 7. ON THE OTHER HAND, THE LD. CIT DR STRONGLY RELIE D UPON THE ORDER OF TPO AND THE DIRECTION GIVEN BY DRP AND SUBMITT ED THAT, IF THE PE OF THE ASSESSEE HAS BEEN CONSIDERED AS INDIAN E NTITY, FUNCTIONING IN INDIA AND ALL ITS SERVICES ARE BEING RENDERED I N INDIA, THEN ITS . T.A.NO.7630 AND 1698/MUM/2012 10 MARGIN FOR THE INDIAN TRANSACTION HAVE TO BE BENCH MARKED WITH THE INDIAN COMPARABLES. THUS, THE TPO HAS RIGHTLY ADOPT ED INDIAN COMPARABLES FOR BENCH MARKING THE ALP OF THE ASSE SSEE FOR ITS SERVICES RENDERED TO TATA MOTORS. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT FINDINGS OF THE TPO AS WELL AS DIRECTIONS OF DRP A ND ALSO MATERIAL PLACED ON RECORD. THE ASSESSEE, TMETC IS UK BASED COMPANY WHICH IS WHOLLY OWNED SUBSIDIARY OF TATA MOTORS LTD , INDIA. ITS BUSINESS ACTIVITIES PRIMARILY INVOLVED PROVIDING OF AUTOMOBILE DESIGN AND ENGINEERING SERVICES TO THE TML AND FOR RENDER ING THESE SERVICES THE TMETC-UK SENDS ITS EMPLOYEES/ENGINEER S TO INDIA. IT IS IN THIS BACKGROUND, THE TMETC HAS BEEN CONSIDE RED AS HAVING A SERVICE PE IN INDIA AND THEREFORE, ITS PROFIT FROM INDIAN OPERATION IS TAXABLE IN INDIA. FOR THE PURPOSES OF TP ANALYSI S, THE ASSESSEE HAS SELECTED TMETC AS THE TESTED PARTY, SINCE ALL ITS OPERATING COST ARE INCURRED IN UK, HAVING EMPLOYEES BASED IN UK, THE REFORE, IT HAS SELECTED COMPARABLE COMPANIES FROM UK HAVING SIMIL AR KIND OF FUNCTIONS AND RENDERING SIMILAR SERVICES. IT HAS SELECTED FOUR UK BASED COMPARABLES HAVING AVERAGE ARITHMETIC MEAN OF 10.3% FOR THE YEAR 2007, AND THEREFORE, IT WAS STATED THAT ITS MARGIN OF 9.8% (OP/TC) IS AT ARMS LENGTH RANGE. . T.A.NO.7630 AND 1698/MUM/2012 11 9. THE SOLE ISSUE BEFORE US IS, WHETHER THE ASSESSE E WAS JUSTIFIED IN CARRYING OUT COMPARATIVE ANALYSIS ON THE BASIS O F UK BASED COMPARABLES, RATHER THAN BY SELECTING INDIAN COMPA RABLES. THE TPOS MAIN OBJECTION IS THAT, SINCE THE INDIAN PE IS PERFORMING ITS FUNCTION IN INDIA AND RENDERING SERVICES TO INDIAN COMPANY, THEREFORE, MARGINS FOR THE INDIAN OPERATION HAS TO BE BENCH M ARKED WITH THE INDIAN COMPARABLES. INDIAN TRANSFER PRICING REGUL ATIONS SPECIFICALLY RULE 10B OF THE INCOME TAX RULES, 1962 DOES NOT SP ECIFY THAT THE COMPARABILITY ANALYSIS OF INTERNATIONAL TRANSACTION S HAS TO BE STRICTLY WITH THE INDIAN COMPANIES BUT, IT ONLY LAYS DOWN T HAT COMPARABILITY WITH UNCONTROLLED TRANSACTIONS HAS TO BE CHOSEN W ITH REFERENCE TO : (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: (A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSF ERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; (B ) T HE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RES PECTIVE PARTIES TO THE TRANSACTIONS; (C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS AR E FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENE FITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANS ACTIONS; (D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE R ESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVE RNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITI ON AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. . T.A.NO.7630 AND 1698/MUM/2012 12 THUS, THE INDIAN TRANSFER PRICING REGULATIONS WHILE SELECTING COMPARABLE COMPANIES LAYS EMPHASIS ON FAR ANALYSIS, AND CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE PARTIES OPERATE FOR CARRYING OUT THE COMPARABILITY ANALYSIS. IF SUCH CO MPARABILITY ANALYSIS COULD NOT BE DONE PROPERLY WITH THE INDIAN COMPAR ABLES LOOKING TO THE CHARACTERISTICS AND NATURE OF THE FUNCTIONS PER FORMED AND SERVICES RENDERED THEN, IT HAS TO BE SEEN FROM THE ANGLE WHO IS SELECTED AS TESTED PARTY AND BASED ON THAT, COM PARABLES ARE TO BE CHOSEN FROM THE ECONOMIC FACTORS AND THE FUNCTION S PERFORMED IN THE CONDITIONS PREVALENT OF THE TESTED PARTY. IF TH E TESTED PARTY ITSELF IS FOREIGN BASED AND THE SERVICES RENDERED BY IT IS V ERY SPECIFIC, FOR WHICH THE INDIAN COMPARABLES ARE NOT AVAILABLE OR FUNCTIONALLY NOT COMPARABLE THEN, IT CANNOT BE HELD THAT FOREIGN COM PARABLES CANNOT BE SELECTED FOR BENCHMARKING THE ARMS LENGTH PRICE OR MARGIN. INDIAN TRANSFER PRICING REGULATION DOES NOT PUTS A NY FETTERS ON SELECTION OF FOREIGN COMPARABLES, IF CONDITIONS ARE AS SUCH, THAT THE INDIAN COMPARABLES DO NOT STAND THE TEST OF COMPARA BILITY WITH THE TESTED PARTY. ANSWER TO THIS HAS BEEN GIVEN IN THE OECD TRANSFER PRICING GUIDELINES WHICH PROVIDES THAT NON-DOMEST IC COMPARABLES SHOULD NOT BE AUTOMATICALLY REJECTED AND IT HAS TO BE SEEN ON CASE BY CASE BASIS BY THE REFERENCE TO THE EXTENT TO WH ICH THEY SATISFY . T.A.NO.7630 AND 1698/MUM/2012 13 THE COMPARABILITY FACTORS. THE RELEVANT PARAGRAPH OF THE OECD GUIDELINES READS AS UNDER : A.4.3.2 FOREIGN SOURCE OR NON DOMESTIC COMPARABL ES 3.5 TAXPAYERS DO NOT ALWAYS PERFORM SEARCHES FOR COMPARABLES ON A COUNTRY-BY-COUNTRY BASIS, E.G. IN CASES WHERE THERE ARE INSUFFICIENT DATA AVAILABLE A T THE DOMESTIC LEVEL AND/OR IN ORDER TO REDUCE COMPLIANCE COSTS WHERE SEVERAL ENTITIES OF AN MNE GROUP HAVE COMPARABLE FUNCTIONAL ANALYSES. NON-DOMESTIC COMPARABLES SHOULD NOT BE AUTOMATICALLY REJECTED JU ST BECAUSE THEY ARE NOT DOMESTIC. A DETERMINATION OF WHETHER NON- DOMESTIC COMPARABLES ARE RELIABLE HAS TO BE MADE ON A CASE-BY-CASE BASIS AND BY REFERENCE TO THE EXTENT TO WHICH THEY SATISFY THE FIVE COMPARABI LITY FACTORS. WHETHER OR NOT ONE REGIONAL SEARCH FOR COMPARABLES CAN BE RELIABLY USED FOR SEVERAL SUBSID IARIES OF AN MNE GROUP OPERATING IN A GIVEN REGION OF THE WORLD DEPENDS ON THE PARTICULAR CIRCUMSTANCES IN WHICH EA CH OF THOSE SUBSIDIARIES OPERATES. SEE PARAGRAPHS 1.57-1. 58 ON MARKET DIFFERENCES AND MULTI-COUNTRY ANALYSES. DIFF ICULTIES MAY ALSO ARISE FROM DIFFERING ACCOUNTING STANDARDS 10. IF THE TESTED PARTY HAS BEEN SELECTED CONSISTEN T WITH THE FUNCTIONAL ANALYSIS OF THE CONTROLLED TRANSACTION AND IS A LEAST COMPLEX PARTY TO THE CONTROLLED TRANSACTION, THEN E VEN IF IT IS A FOREIGN PARTY, THE SAME SHOULD BE TAKEN AS THE BAS IS FOR CARRYING OUT COMPARABILITY ANALYSIS WITH THE UNCONTROLLED TRANSA CTION BY TAKING INTO ACCOUNT THE BUSINESS ENVIRONMENT IN THE COUNT RY WHERE THE TESTED PARTY IS BEING BENCH MARKED. INTERNATIONALLY , IT HAS BEEN RECOGNIZED THAT CHOICE OF THE TESTED PARTY SHOULD BE SUCH HAVING LEAST COMPLEXITY AND SHOULD BE THE PARTY IN RESPECT OF WHICH MOST . T.A.NO.7630 AND 1698/MUM/2012 14 RELIABLE DATA FOR COMPARABILITY IS AVAILABLE. THE UN MANUAL ON TRANSFER PRICING, IN CHAPTER 5 ENVISAGES THE SELECT ION OF TESTED PARTY IN THE FOLLOWING MANNER : 5. 3. 3. SELECTION OF THE TESTED PARTY 5.3.3.1. WHEN APPLYING THE COST PLUS METHOD, RESALE PRICE METHOD OR TRANSACTIONAL NET MARGIN METHOD (SEE FURT HER CHAPTER 6) IT IS NECESSARY TO CHOOSE THE PARTY TO T HE TRANSACTION FOR WHICH A FINANCIAL INDICATOR (MARK-U P ON COSTS, GROSS MARGIN, OR NET PROFIT INDICATOR) IS TESTED. T HE CHOICE OF THE TESTED PARTY SHOULD BE CONSISTENT WITH THE FUNCTION AL ANALYSIS OF THE CONTROLLED TRANSACTION. ATTRIBUTES OF CONTRO LLED TRANSACTION(S) WILL INFLUENCE THE SELECTION OF THE TESTED PARTY (WHERE NEEDED). THE TESTED PARTY NORMALLY SHOULD BE THE LESS COMPLEX PARTY TO THE CONTROLLED TRANSACTION AND SHO ULD BE THE PARTY IN RESPECT OF WHICH THE MOST RELIABLE DATA FO R COMPARABILITY IS AVAILABLE. IT MAY BE THE LOCAL OR THE FOREIGN PARTY. IF A TAXPAYER WISHES TO SELECT THE FOREIGN A SSOCIATED ENTERPRISE AS THE TESTED PARTY, IT MUST ENSURE THAT THE NECES- SARY RELEVANT INFORMATION ABOUT IT AND SUFFICIENT D ATA ON COMPARABLES IS FURNISHED TO THE TAX ADMINISTRATION AND VICE VERSA IN ORDER FOR THE LATTER TO BE ABLE TO VERIFY THE SELECTION AND APPLICATION OF THE TRANSFER PRICING METHOD. IT IS VERY PERTINENT TO NOTE HERE THAT IN CHAPTER 10, OF THE UN MANUAL, IN PARA 10.4.1.3, INDIAN TRANSFER PRICIN G REGULATION HAVE ACCEPTED THE FOREIGN COMPARABLES IN CASES WHERE THE FOREIGN AE IS THE LEAST COMPLEX ENTITY AND REQUISITE INFORMATION ABOUT THE TESTED PARTY AND COMPARABLES RE AVAILABLE. THE RELEVANT P ARAGRAPH READS AS UNDER :- 10.4.1.3 THE REGULATIONS PRESCRIBE MANDATORY A NNUAL FILING REQUIREMENT AS WELL AS MAINTENANCE OF CONTEMPORANEO US . T.A.NO.7630 AND 1698/MUM/2012 15 DOCUMENTATION BY THE TAX PAYER IN CASE INTERNATIONA L TRANSACTIONS BETWEEN ASSOCIATED ENTERPRISES CROSS A THRESHOLD AND CONTAIN STRINGENT PENALTY IMPLICATION IN CASE O F NON- COMPLIANCE. THE PRELIMINARY ONUS OF PROVING THE ARMS LENGTH PRICE OF THE TRANSACTION LIES WITH THE TAXPAYER, T HE INDIAN TRANSFER PRICING ADMINISTRATION PREFERS INDIAN COM PARABLES IN MOST CASES AND ALSO ACCEPTS FOREIGN COMPARABLES IN CASES WHERE THE FOREIGN ASSOCIATED ENTERPRISES IS THE LES S OR LEAST COMPLEX ENTITY AND REQUISITE INFORMATION IS AVAILAB LE ABOUT THE TESTED PARTY AND COMPARABLES. THUS, THE INDIAN TRANSFER PRICING DOES NOT REJECT T HE CONCEPT OF FOREIGN COMPARABLES, IF THE TESTED PARTY IS FOREIGN AE. THE BLANKET ASSUMPTION BY THE TPO AND DRP THAT FOREIGN COMPAR ABLES CANNOT BE ACCEPTED AT ALL, IS NOT CORRECT. SIMILARLY, US T P REGULATIONS FOR THE PURPOSE OF BENCH MARKING UNDER COMPARABLE METHOD HAS LAID DOWN THE FOLLOWING CRITERION FOR SELECTION OF TESTED PAR TY: (2) TESTED PARTY (I) IN GENERAL. FOR PURPOSES OF THIS SECTION, THE TESTED PARTY WILL BE THE PARTICIPANT IN THE CO NTROLLED TRANSACTION WHOSE OPERATING PROFIT ATTRIBUTABLE TO THE CONTROLLED TRANSACTIONS CAN BE VERIFIED USING THE MOST RELIABL E DATA AND REQUIRING THE FEWEST AND MOST RELIABLE ADJUSTMENTS, AND FOR WHICH RELIABLE DATA REGARDING UNCONTROLLED COMPARAB LES CAN BE LOCATED. CONSEQUENTLY, IN MOST CASES THE TESTED PAR TY WILL BE THE LEAST COMPLEX OF THE CONTROLLED TAXPAYERS AND W ILL NOT OWN VALUABLE INTANGIBLE PROPERTY OR UNIQUE ASSETS THAT DISTINGUISH IT FROM POTENTIAL UNCONTROLLED COMPARABLES.' FURTHER PARA 1.482-1 (C) VIZ, RELEVANT FACTORS FO R COMPARABILITY OF UNCONTROLLED COMPANIES IS REPRODUC ED AS UNDER: (II) DIFFERENT GEOGRAPHIC MARKETS('A) IN GENERAL U NCONTROLLED CORN PARABLES ORDINARILY SHOULD BE DERIVED FROM THE GEOGRAPHIC MARKET IN WHICH THE CONTROLLED TAXPAYER OPERATES, B ECAUSE . T.A.NO.7630 AND 1698/MUM/2012 16 THERE MAY BE SIGNIFICANT DIFFERENCES IN ECONOMIC CO NDITIONS IN DIFFERENT MARKETS. IF INFORMATION FROM THE SAME MAR KET IS NOT AVAILABLE, AN UNCONTROLLED COMPARABLE , DERIVED FROM A DIFFERENT GEOGRAPHIC MARKET MAY BE CONSIDERED IF ADJUSTMENTS ARE MADE TO ACCOUNT FOR DIFFERENCES BETWEEN THE TWO MARKETS. IF INFORMATION PERMITTING ADJUSTMENTS FOR SUCH DIFFERE NCES IS NOT AVAILABLE, THEN INFORMATION DERIVED FROM UNCONTROLL ED COMPARABLES IN THE MOST SIMILAR MARKET FOR WHICH RE LIABLE DATA IS AVAILABLE MAY BE USED, BUT THE EXTENT OF SUCH DI FFERENCES MAY AFFECT THE RELIABILITY OF THE METHOD FOR PURPOS ES OF THE BEST METHOD RULE. FOR THIS PURPOSE, A GEOGRAPHIC MARKET IS ANY GEOGRAPHIC AREA IN WHICH THE ECONOMIC CONDITIONS FO R THE RELEVANT PRODUCT OR SERVICE ARE SUBSTANTIALLY THE S AME, AND MAY INCLUDE MULTIPLE COUNTRIES, DEPENDING ON THE EC ONOMIC CONDITIONS. 11. HERE IN THIS CASE, THERE CAN NO DISPUTE WITH REGARD TO THE FACT THAT THE TESTED PARTY IS TMETC, WHOSE OPERATING PR OFIT IS TO BE BENCH MARKED BY CARRYING OUT FUNCTIONAL ANALYSIS O F ITS CONTROLLED TRANSACTIONS FOR WHICH RELIABLE DATA FOR ITS COM PARABILITY IS AVAILABLE IN THE COUNTRY WHERE IT IS LOCATED, THEN SUCH COM PARABLES HAS TO BE TAKEN INTO ACCOUNT FOR CARRYING OUT THE COMPARABIL ITY ANALYSIS FOR THE PURPOSE OF TRANSFER PRICING AND BENCH MARKING THE ARMS LENGTH PRICE. THE TMETC FOR THE PURPOSE OF RENDERING SERV ICES IN INDIA IS INCURRING ALL ITS COST IN UK LIKE DIRECT COSTS, EM PLOYEE COSTS, LEGAL AND PROFESSIONAL FEES, RENT AND OTHER OPERATING EXP ENSES, THEN FOR THE PURPOSE OF COMPUTATION OF PLI, THESE COSTS HAV E TO BE TAKEN INTO CONSIDERATION FOR DETERMINING THE PROFIT MARGIN. S INCE ALL THE MAIN COSTS ATTRIBUTABLE TO THE PE ARE BASED ON COST IN CURRED IN UK, THEN IT CAN BE VERY WELL SAID THAT PE IS INFLUENCED BY THE ECONOMIC AND . T.A.NO.7630 AND 1698/MUM/2012 17 FINANCIAL CONDITIONS OF UK, AS AGAINST THE INDIAN ECONOMIC FACTORS. THE INDIAN ECONOMIC FACTORS ARE NOT AT ALL INFL UENCING THE COST OR MARGIN OF THE ASSESSEE, HENCE IT CANNOT BE HELD THA T INDIAN COMPARABLES CAN BE USED TO BENCH MARK THE TMETC TRA NSACTION AND THE PRICE WITH TATA MOTORS. FOR THIS REASON, THE FI NDING OF THE TPO AS WELL AS DRP THAT PE IS AN INDIAN ENTERPRISE, WORK ING IN INDIA AND THEREFORE, ITS MARGIN IS TO BE BENCH MARKED WITH I NDIAN COMPARABLES IS NOT ACCEPTED. THE PE IN INDIA IS A SERVICE PE, H AVING NO ESTABLISHMENT IN INDIA, NOR INCURRING ANY COSTS, DE PLOYED ANY ASSETS, THEREFORE, CANNOT BE HELD THAT IT IS AN INDEPENDENT INDIAN ENTERPRISE. NOTHING HAS BEEN BROUGHT ON RECORD THAT ASSESSEES PLI IS INFLUENCED BY THE ECONOMIC FACTORS IN INDIA, VIZ, A TTRIBUTION OF COSTS, ASSETS OR OTHER FACTORS RELEVANT FOR DETERMINATION OF PROFITS ARE BASED IN INDIA. THUS, IN OUR OPINION, THE TRANSFER PRICI NG OFFICER AND DRP WERE NOT CORRECT IN HOLDING THAT UK COMPARABLES CA NNOT BE TAKEN INTO CONSIDERATION FOR THE PURPOSES OF COMPARATIVE ANALYSIS AND BENCH MARKING THE ASSESSEES MARGIN. ACCORDINGLY, WE HOLD THAT UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE FOREIGN COMPARABLES I.E. UK COMPARABLES CAN BE TAKEN INTO A CCOUNT FOR CARRYING OUT FAR ANALYSIS AND BENCH MARKING THE AR MS LENGTH MARGIN OF THE ASSESSEES TRANSACTIONS WITH ITS AE AND THE SELECTION OF THE INDIAN COMPARABLES BY THE TPO IS NOT ACCEP TED. SINCE THE . T.A.NO.7630 AND 1698/MUM/2012 18 TPO HAS NOT CARRIED OUT ANY COMPARABILITY ANALYSIS OR FAR ANALYSIS IN RESPECT OF UK COMPARABLES CHOSEN BY THE ASSESSE E, THEREFORE, HE IS DIRECTED TO CARRY OUT SUCH ANALYSIS AND BENC HMARK THE ASSESSEES MARGIN. IF SUCH COMPARABLES DO NOT STAN D THE TEST OF COMPARABILITY THEN, TPO MAY SEARCH OTHER COMPARABLE AFTER CONFRONTING TO THE ASSESSEE. IN THAT CASE, FOR TH E SEARCH OF COMPARABILITY ASSESSEE WILL PROVIDE NECESSARY ASS ISTANCE TO THE TPO. WITH THIS DIRECTION, THE MATTER OF TRANSFER PR ICING ADJUSTMENT IS RESTORED BACK TO THE FILE OF THE TPO/AO. THE GROUN D NO.1 AS RAISED BY THE ASSESSEE IS THUS TREATED AS PARTLY ALLOWED F OR STATISTICAL PURPOSES. 12. IN VIEW OF THE DECISION AS GIVEN IN GROUND NO. 1, GROUND NO.2 HAS BECOME PURELY ACADEMIC AND THEREFORE NO ADJUDIC ATION IS REQUIRED. 13. GROUND NO.3 RAISED BY THE ASSESSEE IS NOT PRESS ED, THEREFORE, SAME IS DISMISSED AS NOT PRESSED. 14. IN GROUND NO.4, THE ASSESSEE HAS CHALLENGED TH E LEVY OF INTEREST U/S 234B OF THE ACT OF RS.1,77,76,885/- 15. IN THIS REGARD, THE LD. AR SUBMITTED THAT THIS ISSUE IS SQUARELY . T.A.NO.7630 AND 1698/MUM/2012 19 COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION). VS. NGC NETWORK ASIA(2009 ) 313 ITR 187(BOM). ACCORDINGLY, WE DIRECT THE AO TO FOLLOW THE DECISION OF JURISDICTIONAL HIGH COURT (SUPRA), IF THE RATIO IS APPLICABLE ON THE FACTS OF THE CASE. 16. IN GROUND NO.5, THE ASSESSEE HAS CHALLENGED THE LE VY OF INTEREST U/S 234C OF THE ACT OF RS.10.878/- 17. BEFORE US, THE LD. COUNSEL SUBMITTED THAT NO I NTEREST U/S 234C SHOULD LEVIED AS THE SAME IS LEVIABLE ON THE RETURN ED INCOME. ACCORDINGLY, WE DIRECT THE AO TO CHARGE INTEREST U /S 234C ON THE RETURNED INCOME. 18. THUS, THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 19. THE ASSESSEE HAS ALSO RAISED THE FOLLOWING AS ADDITIONAL GROUNDS: 6. WITHOUT PREJUDICE TO THE ALL OTHER GROUNDS , THE HONBLE DRP SHOULD HAVE DIRECTED FRESH COMPARABILITY ANALYS IS TO SELECT INDIAN COMPARABLES WHICH ARE FUNCTIONALLY COMPARABL E TO APPELLANT, AS COMPARABLES CHOSEN BY THE AO/TPO TO BENCHMARK THE TRANSITION ARE FUNCTIONALLY DIFFERENT ;. 7. WITHOUT PREJUDICE TO THE ALL OTHER GROUNDS , THE LD. TPO/AO HAS ERRED IN NOT CONSIDERING THE CORRECT OP ERATING . T.A.NO.7630 AND 1698/MUM/2012 20 MARGIN OF THE APPELLANT I.E. 27.61% (I.E. OP/OC), W HILE COMPUTING THE ARMS-LENGTH PRICE OF APPELLANTS INTE RNATIONAL TRANSACTIONS AND INSTEAD OF CONSIDERING 9.28% AS O PERATING MARGIN OF THE APPELLANT 20. IN THE ASSESSMENT YEAR 2009-10 ALSO THE ASSESS EE HAS RAISED EXACTLY SIMILAR GROUND. HOWEVER, IN VIEW OF THE DE CISION GIVEN IN RESPECT OF GROUND NO.1, THE ADDITIONAL GROUNDS HAVE BECOME PURELY ACADEMIC AND THE SAME IS DISMISSED AS INFRUCTUOUS. ITA NO.1698/MUM/2014 (AY-2009-10) 22. THE SOLE ISSUE RAISED IN THIS APPEAL BY THE AP PELLANT IS THAT THE AO HAS ERRED IN MAKING ADDITION ON ACCOUNT OF TRAN SFER PRICING ADJUSTMENT OF RS.5,38,24,761/- BY SELECTING THE IN DIAN COMPANIES AS COMPARABLES, INSTEAD OF FOREIGN COMPANIES FOR BENC HMARKING THE INTERNATIONAL TRANSACTION OF PROVISION OF SERVICES, WITH THE AE . 23. SINCE THE ISSUE RAISED IS SIMILAR TO GROUND RAI SED IN THE APPEAL OF ASSESSEE FOR THE ASSESSMENT YEAR 2008-09 VIDE GROUND NO.1, ON SIMILAR SET OF FACTS, THEREFORE, FINDING GIVEN THER EIN WILL APPLY MUTATIS MUTANDIS TO THIS GROUND ALSO IN THIS YEAR. THEREFORE, GROUN D RAISED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED FOR STAT ISTICAL PURPOSES. . T.A.NO.7630 AND 1698/MUM/2012 21 24. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND DEC,2014 , /0$# 1 2 3 22 ND DEC, 2014 0 , 4- SD/- SD/- ( . . !'# /N.K.BILLAIYA) ( /AMIT SHUKLA) $ % / ACCOUNTANT MEMBER & % / JUDICIAL MEMBER - MUMBAI : ON THIS 22 ND DEC, 2014 . . ./ SRL , SR. PS ' (&)*+ ,+-) / COPY OF THE ORDER FORWARDED TO : 1. %( / THE APPELLANT 2. )* %( / THE RESPONDENT. 3. ( ) / THE CIT(A)- 4. / CIT 5. 56 4 )7! , . 7!# , - / DR, ITAT, MUMBAI 6. 4 8' 9 - / GUARD FILE. / BY ORDER, TRUE COPY : & (ASSTT. REGISTRAR) . 7!# , - /ITAT, MUMBAI