Carrier Midea India Pvt. Ltd., Gurgaon V. DCIT, Circle- 2(1), Gurgaon

ITA 7675/DEL/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 1811 (ITAT-DELHI)
• Duration Of Justice: 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Assessment Year: 2013-2014
• Appeal Filed On: 21-12-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction
• Section: 234B; 14A; 37(1); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 1 NEW DLEHI BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER I.T.A. NO.7675/DEL/2017 ASSESSMENT YEAR: 2013 - 14 M/S CARRIE R MIDEA INDIA P. LTD. V S DY. COMMISSIONER OF INCOME - TAX, PLOT NO.51, 1 ST FLOOR, PEARL TOWER CIRCLE 2(1), GURGAON. SECTOR 31, INSTITUTIONAL AREA, GURGAON. (PAN:AAECC5616R) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI VED JAIN, ADVOCATE R ESPONDENT BY : SHRI SANJAY I. BARA, CIT DR DATE OF HEARING: 23.08. 2018 DA TE OF PRONOUNCEMENT: 22/11/ 2018 ORDER PER DIVA SINGH , JM THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE ASSAILING THE CORRECTNESS OF THE ORDER DATED 11.10.2017 PASSED BY THE DY. COMMISSIONER OF INCOME - TAX, CIRCLE - 2, GURGAON, PURSUANT TO THE DIRECTIONS OF THE LEARNED DRP DATED 30 TH AUGUST,2017 ON THE FOLLOWIN G GROUNDS: MANUFACTURING SEGMENT 1. THE LEARNED ASSESSING OFFICER ('LD. AO') [ALONG WITH THE LEARNED TRANSFER PRICING OFFICER ('LD. TPO')] - UNDER THE DIRECTIONS OF HON'BLE DISPUTE RESOLUTION PANEL ('HON'BLE DRP ') ERRED ON FACTS AND IN LAW, IN MAKING THE ITA 7675/DEL/2017 PAGE 2 OF 38 ADJUSTMENT OF INR 155,155,954 TO THE INCOME OF THE APPELLANT UNDER SECTION 92CA(3) IN RELATION TO THE INTERNATIONAL TRANSACTION PERTAINING TO MANUFACTURING SEGMENT OF THE APPELLANT. 2. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FACTS AND IN LAW IN DISREGARDING THE GROSS PROFIT BASED PROFIT APPROACH FOR BENCHMARKING THE APPELLANT'S INTERNATIONAL TRANSACTIONS RELATING TO THE MANUFACTURING SEGMENT BASED ON ERRONEOUS REASONS AND INSTEAD, APPLYING NET PROFIT B ASED APPROACH BY SELECTING TRANSACTIONAL NET MARGIN METHOD ('TNMM') AS THE MOST APPROPRIATE METHOD. 3. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FACTS AND IN LAW IN INDENTIFYING BLUE STAR LIMITED AS COMPARABLE TO THE APPELLANT DISREGARDING THE FACT THAT THE SAME WAS INAPPROPRIATE COMPARABLE OWING TO DIFFERENCES IN FAR PROFILE ('FUNCTION PERFORMED, ASSETS UTILIZED AND RISK ASSUMED') 4. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FACTS AND IN LAW IN CHERRY PICKING FRICK INDIA LIMITE D AND REXNORD ELECTRONICS & CONTROLS LIMITED AS COMPARABLES TO THE APPELLANT IN THE TRANSFER PRICING ('TP') ORDER DATED 27 OCTOBER 2016, WHICH WERE NOT MENTIONED IN THE SHOW CAUSE NOTICE DATED 23 SEPTEMBER 2016, WITH A PREJUDICED INTENTION OF MAKING AN ADD ITION TO THE RETURNED INCOME OF THE APPELLANT, WITHOUT APPRECIATING THE FACT THAT THE SAME WERE FUNCTIONALLY INCOMPARABLE TO THE FUNCTIONS PERFORMED BY THE APPELLANT. 5. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FACTS AND IN LAW VIOLATING THE PROVISIONS OF RULE 10B(3) OF THE RULES BY DENYING THE BENEFIT OF VARIOUS ECONOMIC ADJUSTMENTS TO THE APPELLANT. AVAILING OF MANAGEMENT SERVICES 6. THE LD. TPO AND THE LD. AO UNDER THE DIRECTIONS OF THE HON'BL E DRP ERRED ON FACTS AND IN LAW IN DETERMINING THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION PERTAINING TO PAYMENT OF MANAGEMENT AND BUSINESS SUPPORT SERVICES TO GD MIDEA AIR - CONDITIONING EQUIPMENT CO., LTD AT 'NIL' AS AGAINST INR 26,911,388 AS DETE RMINED BY THE APPELLANT, THEREBY PROPOSING AN ADJUSTMENT OF INR 26,911,388. 7. THE LD. TPO, LD. AO AND HON'BLE DRP ERRED ON FACTS AND IN LAW IN APPLYING THE 'COMPARABLE UNCONTROLLED PRICE' METHOD AS PRESCRIBED UNDER RULE 10B(L)(A) FOR DETERMINING T HE ARM'S LENGTH PRICE FOR MANAGEMENT SERVICES, IN THE ABSENCE OF ANY FINDING OF 'THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION.' ITA 7675/DEL/2017 PAGE 3 OF 38 8. THE LD. TPO AND THE LD. AO UNDER THE DIRECTIONS OF THE HON'BLE DRP ERRED ON FACTS AND IN LAW IN UPHOLDING THE ADJUSTMENT OF INR 26,911,388 BY IGNORING THE FACTS AND CIRCUMSTANCES OF THE CASE THAT THE MANAGEMENT AND SUPPORT CHARGES CLAIMED BY THE ASSESSEE DURING AY 2013 - 14 WERE SUBSEQUENTLY REVERSED DURING AY 2015 - 16. THE ACTION OF THE LD. AO RESULTED INTO DOUBLE TAXATION TO THE INCOME OF THE APPELLANT. MISCELLANEOUS GROUNDS 9. THE LD. AO ERRED ON FACTS AND IN LAW IN LEVYING THE INTEREST UNDER SECTION 234A, 234B AND 234C OF THE ACT. 10. THE LD. AO ERRED ON FACTS AND IN LAW IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(L)(C) OF THE ACT, WITHOUT APPRECIATING THE FACT THAT THE APPELLANT HAS NEITHER CONCEALED PARTICUARS OF INCOME NOR FURNISHED INACCURATE PARTICULARS. THE ABOVE 'GROUNDS OF APPEALS' ARE ALL INDEPENDENT AND WITHOUT PREJUDICE TO ONE AND ANOTHER. THE APPELLANT ALSO CRAVES LEAVE TO SUPPLEMENT, TO CANCEL, AMEND, ADD AND/ OR OTHERWISE ALTER OR MODIFY, ANY OR ALL, GROUNDS OF THE APPEAL STATED HEREINABOVE. 2. THE LEARNED AR INVITING ATTENTION TO THE GROUNDS RAISED SUBMITTED THAT HE WOULD BRIEFLY ADDRESS THE LAST ISSUE FIRST WHEREIN VIDE GROUND NO. 6 TO 8 HE IS MERELY SEEKING DIRECTION TO VERIFY THE ASSESSEES CLAIM AND ALLOW RELIEF FOR THE MANAGEMENT SERVICES AVAILED. THE TPO REQUIRED THE ASSESSEE TO EXPLAIN AND JUSTIFY THE SAME. THE REPLY OF THE ASSESSEE D ATED 14/10/2016 WAS NOT ACCEPTED BY THE TPO WHO PRIMARILY HELD THAT THE ASSESSEE FAILED ON THE TOUCHSTONE OF THE BENEFIT TEST AND DETERMINED THE A L P OF THE TRANSACTION AT RS. NIL AND MADE THE ADDITION. IT WAS SUBMITTED THAT S IMILAR EXPENSES WERE INCURRED IN 2014 - 15 ASSESSMENT YEAR. HOWEVER THE AE A GREED TO WAIVE THESE EXPENSES IN 2015 - 16 ASSESSMENT YEAR . A CCORDINGLY , ON ACCOUNT OF THIS FACT, THE ENTIRE AMOUNT WAS WRITTEN BACK I.E; FROM 2013 - 14 TO 2014 - 15 ASSESSMENT YEAR AND KEEPING THE REQUIREMENT OF SECTION 41(1) OF THE ACT THE AMOUNT WAS ITA 7675/DEL/2017 PAGE 4 OF 38 OFFERED FOR TAX IN 2015 - 16 ASSESSMENT YEAR. ACCORDINGLY AN APPROPRIATE DIRECTION WAS SOUGHT . FURTHER RELYING ON THE JUDICIAL PRECEDENT AS AVAILABLE IN ORDER DATED 9.8.2017 IN ITA NO.5165/DEL/2014 IN THE CASE OF M/S CAPARO MARUTI LTD. IT WAS SUBMITTED THAT CONSIDERING A NEAR IDENTICAL ISSUE, THE ITAT IN PARA 10 TO 12 ACCEPTED A SIMILAR PRAYER OF THE ASSESSEE. S IMILAR REQUEST WAS PRAYED FOR IN THE PRESENT PROCEEDINGS ALSO. THE RELEVANT EXTRACT FROM THE AFORESAID DECISION RELIED UPON IS REPRODUCED HEREUNDER : 10. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE CLAIMED DEDUCTION TOWARDS INTEREST (PRIOR PERIOD ITEM) IN THE COMPUTATION O F INCOME FOR THE ABOVE REFERRED TWO SUMS. THE ASSESSING OFFICER DID NOT ALLOW THE DEDUCTION. THE ID. CIT(A) CONFIRMED THE ADDITION BY OBSERVING THAT THE INTEREST LIABILITY WAS IN RESPECT OF PAYMENT OF DUES TO HSIDC FOR PLOTS OF THE LAND PURCHASED BY THE AS SESSEE FOR THE PURPOSE OF SETTING UP NEW PLANT AT BAWAI AND HENCE CAPITAL IN NATURE. THE ASSESSEE IS AGGRIEVED AGAINST THE SUSTENANCE OF ADDITION. 11. AT THE OUTSET, THE ID. AR CANDIDLY ADMITTED THAT THIS INTEREST DISALLOWED BY THE ASSESSING OFFICER RELATE D TO THE LANDS PURCHASED BY THE ASSESSEE FOR THE PURPOSE OF SETTING UP NEW PLANT AT B AWAL. SINCE THE INTEREST RELATES TO THE PERIOD BEFORE THE USE OF THE ASSET, IT WAS FRANKLY ADMITTED THAT SUCH INTEREST OUGHT TO HAVE BEEN TREATED BY THE ASSESSEE AS CAPITA L EXPENDITURE. WE, THEREFORE, APPROVE THE VIEW TAKEN BY THE ID. CIT(A) IN SUSTAINING THE DISALLOWANCE OF RS.55,92,096/' - AND RS.12,828/ - . 12. THE ID. AR HAS BROUGHT TO OUR NOTICE THAT SUCH AMOUNT WAS SUO MOTU ADDED BY THE ASSESSEE IN ITS COMPUTATION OF TOT AL INCOME FOR THE IMMEDIATELY SUCCEEDING YEAR, NAMELY, A.Y. 2011 - 12. IT WAS SUBMITTED THAT A DIRECTION MAY BE GIVEN TO DELETE SUCH SUO MOTU ADDITION. IN VIEW OF THE FACT THAT WE HAVE UPHELD THE ADDITION OF RS.55,92,096/ - AND RS. 12,828/ - IN THE INSTANT YEA R, IF THESE AMOUNTS WERE, IN FACT, SUO MOTU ADDED BY THE ASSESSEE IN THE COMPUTATION OF TOTAL INCOME FOR SUCCEEDING YEAR, THEN, THE SAME SHOULD BE DELETED. WE DIRECT THE ASSESSING OFFICER TO VERIFY THE ASSESSEES CONTENTION IN THIS REGARD AND, IF THE SAME IS FOUND TO BE TRUE, ITA 7675/DEL/2017 PAGE 5 OF 38 THEN, THE CORRESPONDING RELIEF SHOULD BE GIVEN IN THE ASSESSMENT OF THE SUCCEEDING YEAR. 3. ALTERNATIVELY, IT WAS HIS SUBMISSION THAT ALTHOUGH SUFFICIENT JUSTIFICATION HAS BEEN GIVEN BEFORE THE DRP THAT NO ALP WAS WARRANTED, HOWEVER, IN TERMS OF THE DECISION IN THE CASE OF THE OF THE ASSESSEE ITSELF TAKEN IN ASSTT. YEAR 2015 - 16 WHEREIN THE TPO ON SIMILAR GROUNDS DID NOT MAKE ANY ALP ADJUSTMENT, ACCORDINGLY, THE SAID GROUND OF THE ASSESSEE IN TERMS O F THE SAID PRAYER MAY BE ALLOWED . 4. THE PR. CIT DR OBJECTED TO THE PRAYER IN TERMS OF THE DECISION OF CAPARO GEMENI STATING THAT THE DECISION WAS NOT IN THE CONTEXT OF ALP AND THUS HAS NO PRECEDENT VALUE. IT WAS SUBMITTED, THE CONSEQUENCES OF TPOS ACT ION IN 2015 - 16 MAY BE CONSIDERED. 5. ADDRESSING THE MANUFACTURING SEGMENT, IT WAS THE SUBMISSION OF THE LEARNED AR THAT THE ASSESSEE AS CONTRARY TO WHAT HAS BEEN UNDERSTOOD BY THE TPO HAS NOT TAKEN RPM AS THE MOST APPROPRIATE METHOD. THE ASSESSEE HAS APPL IED THE OTHER METHOD WHICH HAS BEEN PRESCRIBED AND THE TPO WITHOUT GIVING VALID REASONS IN AN ARBITRARY MANNER HAS DEEMED IT NECESSARY TO SUBSTITUTE THE SAME WITH TNMM AS THE MOST APPROPRIATE METHOD . HAVING SO HELD IT WAS ARGUED THE TPO WAS DUTY BOUND T O MAKE THE ADJUSTMENTS PERMISSIBLE UNDER THE SAID METHOD . THESE WERE WARRANTED AND BROUGHT TO THE NOTICE OF THE TPO WHO SHOULD HAVE BEEN DONE. THE ALLOWABILITY OF THE TO ADJUSTMENTS SOUGHT QUA THE COMPARABLES, IT WAS SUBMITTED, ARE ON RECORD IN THE SYNOPS IS FILED AND WERE AGITATED BEFORE THE DRP ALSO WHICH FORUM HAS ITA 7675/DEL/2017 PAGE 6 OF 38 WHIMSICALLY BRUSHED ASIDE THE SUBMISSIONS . REFERRING TO THE RECORD IT WAS SUBMITTED THE TPO REFUSED TO ADDRESS THOSE STATING THAT THE DATA WAS NOT ROBUST. HAVING SO HELD , IT WAS ARGUED THE SELECTION OF TNMM AS THE MOST APPROPRIATE METHOD (HEREINAFTER REFERRED TO AS MAM ) BECOMES QUESTIONABLE AS THERE WERE SUFFICIENT REASONS ON RECORD BROUGHT OUT BY THE TPO HIMSELF THAT TNMM AS A METHOD TO BE APPLIED FOR THE TRANSACTIONS OF THE ASSESSEE WA S INAPPROPRIATE. ARGUING FOR THE RELIEF OF CAPACITY UTILIZATION, IT WAS HIS SUBMISSION THAT THE YEAR UNDER CONSIDERATION WAS THE FIRST YEAR OF ITS OPERATION CONSEQUENTLY THE ASSESSEE COULD ADMITTEDLY NOT MEET ITS OVERHEAD COSTS. THE MANUFACTURING ACTIVITY HAD ADMITTEDLY STARTED IN THE PART OF THE YEAR AND THE ASSESSEE WAS WORKING WAY BELOW ITS CAPACITY. SINCE RELEVANT FACTS AND EVIDENCE QUA THE SAID CLAIM WERE NOT READILY AVAILABLE, THE LEARNED AR THOUGH CONCLUDED HIS ARGUMENT S , HOWEVER TIME WAS SOUGHT TO FILE WRITTEN SUBMISSIONS SHRI SANJAY I. BORA, CIT DR, HAVING THE BENEFIT OF THE SUBMISSIONS CARRIED OUT US THROUGH THE REASONS AND OBSERVATIONS OF THE TPO WHICH HAVE BEEN UPHELD BY THE LEARNED DRP. RELYING ON THE SAME, IT WAS HIS SUBMISSION THAT NO FURTHE R RELIEF O N FACTS EITHER ON THE METHOD APPLIED OR COMPARABLES SELECTED BY TPO AND UPHELD BY DRP WERE WARRANTED. 6 . SUBSEQUENT TO THESE PRELIMINARY ARGUMENTS, THE LD. AR O N THE NEXT DATE OF HEARING, INVITED ATTENTION TO THE TWO PAGE SYNOPSIS FILED ALONG WIT H THE ANNEXURE REITERATING THE SUBMISSIONS ADVANCED ON THE EARLIER DATE . C ARRYING US THROUGH THE FINDINGS OF THE TPO AS WELL AS THE DRP ITA 7675/DEL/2017 PAGE 7 OF 38 INVITED ATTENTION TO PAPER BOOK PAGE 5 SO AS TO HIGHLIGHT THAT IN THE YEAR UNDER CONSIDERATION . T HE ASSESSEE , IT WAS SUB MITTED, PRODUCED 58677 UNITS AND THUS WAS UTILIZING 8.38% OF ITS CAPACITY IN THE FIRST YEAR . IN THE SUBSEQUENT YEAR, THE ASSESSEE PRODUCED 1,96,506 UNITS, THE CAPACITY UTILIZED WAS 28.07% IN FINANCIAL YEAR 2013 - 14 AND ONLY IN FINANCIAL YEARS 2014 - 15 AND 20 15 - 16, THE ASSESSEE STARTED UTILIZING ITS CAPACITY TO THE EXTENT OF 35.35% AND 40.11% RESPECTIVELY. CONSEQUENTLY, IT WAS HIS SUBMISSION THAT IN THE YEAR UNDER CONSIDERATION ON A TOTAL SALES OF RS.86,31,92,428/ - , THE ASSESSEE MADE A LOSS OF 46.60% WHICH W AS REDUCED TO - 1.41% ON THE SALES OF RS.3,965,363,540/ - AND ONLY FROM AYS 2014 - 15 AND 2015 - 16 ONWARDS THE ASSESSEE MADE A TURN AROUND AND SHOWED A PROFIT OF 5.80%, 7.64% AND 9.17% ON THE SALES OF RS.624 CRORES, RS.685 CRORES AND RS.834 CRORES RESPECTIV ELY. IT WAS ARGUED THAT JUDICIAL PRECEDENT FOR RELIEF ON THE GROUND WAS AVAILABLE. REFERENCE WAS MADE TO DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V. PETRO ARALDITE PVT. LTD. IN ITA NO. 1540 OF 2014 DATED 26.04.2018. ATTENTION WAS ALSO INVITE D TO ORDER DATED 06.11.2015 IN THE CASE OF BIESSE MANUFACTURING CO. PVT. LTD. V. ACIT IN ITA NO. 97, 493/BANG/2015 . ACCORDINGLY IT WAS HIS PRAYER THAT RELIEF WAS MAINTAINABLE TO THE ASSESSEE ON THIS GROUND ALSO. 7. IT WAS HIS VEHEMENT ARGUMENT THAT THE ASSESSEE WAS NOT A FLY BY NIGHT OPERATOR ONLY BOOKING LOSSES AND IS A GENUINE PLAYER IN THE MARKET A NEW ENTRANT WITH FULL INTENTION TO STAY THE LONG HAUL. THE RELEVANT CHARTS RELIED UPON ARE REPRODUCED HEREUNDER: ITA 7675/DEL/2017 PAGE 8 OF 38 PERIOD TOTAL IN STALLED CAPACITY P.A (IN UNITS) ACTUAL PRODUCTION P.A (IN UNITS) UTILIZATION % SUPPORTING DOCUMENT FY 2012 - 13 700,000 58,677 8.38 TAX AUDIT REPORT FOR FY 12 - 13 ATTACHED AS ANNEXURE 3A FY 2013 - 14 700,000 196,506 28.07 TAX AUDIT REPORT FOR FY 12 - 13 (RELEVANT PAGES) ATTACHED AS ANNEXURE 3B COST AUDIT REPORT ATTACHED AS ANNEXURE C FY 2014 - 15 697,500 246,547 35.35 TAX AUDIT REPORT FOR FY 14 - 15 ATTACHED AS ANNEXURE 3D FY 2015 - 16 697,500 270,736 40.11 COST AUDIT REPORT FY 15 - 16 ATTACHED AS ANNEXURE 3E 717,500 345,195 48.11 COST AUDIT REPORT FY 16 - 17 FY CAPACITY UTILISED (%) PROFIT SALES PROFIT/SALES (%) 2012 - 13 8.38 402,235,012 863,192,428 - 46.60 2013 - 14 28.07 55,797,888 3,965,363,540 - 1.41 2014 - 15 35.35 362,130,544 6,246,302,542 5.80 2015 - 16 40.11 523,552,004 6,852,888,576 7.64 2016 - 17 48.11 765,700,171 8,348,151,449 9.17 8. ACCORDINGLY, IT WAS HIS SUBMISSION THAT FIRSTLY THE METHOD SELECTED BY THE ASSESSEE HAS BEEN ACCEPTED BY THE TPO IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR HENCE, IT DESERVES TO BE ACCEPTED. SECONDLY, IN SUPPORT OF THE METHOD APPLIED, IT WAS HIS SUBMISSION THAT WHILE CHOOSING TO INTERFERE WITH IT, THE TPO INFACT FAILED TO UNDERSTAND THAT THE TAXPAYER HAD SELECTED OTHER METHOD TAKING PLI OF GP/SALES AS IT WAS MOST SUITABLE KEEPING THE NATURE OF THE ACTIVITY AS THE ASSESSEE HAD NOT TAKEN RPM AS THE MOST APPROPRIATE METHOD AS WRONGLY UNDERSTOOD BY THE TPO. THIS REASONING FOR UPSETTING THE SAME FOR THE JUSTIFICATIO N AS GIVEN IN PAPER 20 OF HIS ORDER WAS ASSAILED. ALTERNATELY IT WAS HIS PRAYER ITA 7675/DEL/2017 PAGE 9 OF 38 WITHOUT CONCEDING THE ISSUE THAT IN CASE THE METHOD TAKEN BY THE TPO AS THE MOST APPROPRIATE METHOD IS TO BE ACCEPTED , THEN THE RELIEF IN THE COMPARABLES SELECT ED RELYING ON J UDICIAL PRECEDENT CANNOT BE DENIED. THE TPO, IT WAS SUBMITTED, WITHOUT UNDERSTANDING THE METHOD, ARBITRARILY REJECTED IT . 9 . REFERRING TO THE RECORD, IT WAS SUBMITTED, THAT THE TPO HAD PROPOSED 5 NEW COMPARABLES, THE ASSESSEES OBJECTIONS THERETO WERE INVITED BY HIM . THESE WERE PARTLY ACCEPTED AND 4 COMPARABLES SUGGESTED BY HIM WERE CONSEQUENTLY NOT INCLUDED AND BLUE STAR LTD. WAS RETAINED OVERRULING THE O BJECTION S OF THE ASSESSEE . THE SAID ISSUE , IT WAS SUBMITTED, IS AGITATED VIDE GROUND NO. 3 IN THE PRESENT PROCEEDINGS. 10. RELYING ON THE CONSISTENT ARGUMENTS FOR SE EKING ITS EXCLUSION, THE LD. AR FURTHER SUBMITTED THAT THE INCLUSION OF THE OTHER TWO COMPARABLES NAMELY F RICK INDIA LTD. AND REXNORD ELECTRONICS & CONTROL CHALL ENGED VIDE GROUND NO. 4 IN THE PRESENT PROCEEDINGS IS ASSAILED AMONGST VARIOUS OTHER ARGUMENTS ON THE GROUND THAT NO SHOW CAUSE NOTICE WAS ISSUED BY THE TPO FOR THEIR INCLUSION. THE EXERCISE OF POWERS IN AN ARBITRARY MANNER, IT WAS SUBMITTED, IS AN ISSUE WHICH IS AGITATED ON BEHALF OF THE ASSESSEE. 11. REFERRING TO THE PAPER BOOK, IT WAS ARGUED THAT FRICK INDIA LTD. BEING AN EQUIPMENT MANUFACTURER WAS KNOWN IN BUSINESS AS TURN - KEY PROVIDER FOR INDUSTRIAL REFRIGERATION IN INDIA AND THERE WAS NO COMPARISON WITH ASSESSEE'S LINE OF BUSINESS. ITA 7675/DEL/2017 PAGE 10 OF 38 12. THE PRODUCTS OF FRICK INDI A , IT WAS SUBMITTED, INCLUDE COMPRESSORS AND PACKAGE CONDENSER USED IN FOOD/CHEMICAL INDUSTRY AND THUS, THIS COMPARABLE WAS ALSO FUNCTIONALLY DISSIMILAR. ATTENTION WAS INVITED TO PAGE 515 ONWARDS OF THE PAPER BOOK FOR REFERRING TO SUPPORTING DOCUMENTS . IT WAS FURTHER ARGUED THAT THIS COMPANY IN THE YEAR UNDER CONSIDERATION HAD UNDERTAKEN SEVERAL RESEARCH AND DEVELOPMENT ACTIVITIES IN AREAS OF ITS OPERATIONS EVIDENT FROM PAGE 9 OF THE ANNU AL REPORT. ADDRESSING HIS ARGUMENTS FOR EXCLUSION OF REXNORD ELECTRONICS & CONTROLS LTD. IT WAS SUBMITTED THAT THIS COMPANY WAS ALSO FUNCTIONALLY DISSIMILAR AS IT WAS ENGAGED IN MANUFACTURING OF FANS, MOTORS, BLADES AND THEIR ACCESSORIES. THE REQUIREMENT OF THESE PRODUCTS , IT WAS SUBMITTED, IS ALMOST FOR THE ENTIRE YEAR UNLIKE THE ASSESSEE'S PRODUCT WHICH HAS A LIMITED SEASONAL REQUIREMENT. THUS, IT WAS ARGUED, THERE WAS NO COMPARISON. REFERRING TO THE RECORD, IT WAS SUBMITTED, THE ASSESSEE MANUFACTURES C OPPER HEAT EXCHANGER COILS WHICH ARE ASSEMBLED ALONG WITH COMPRESSORS, ELECTRIC MOTORS, BLOWERS ETC. WHICH ARE ASSEMBLED FOR AIR - CONDITIONERS. 13. THE DRPS ORDER , ACCORDINGLY WITHOUT ADDRESSING THE FACTS UPHOLDING THE TPOS ACTION WAS CONTRARY TO JUDICIA L PRECEDENT NOTWITHSTANDING THE FURTHER ARGUMENTS THAT THEY DID NOT MEET THE FUNCTIONAL REQUIREMENTS. 14. THE LD. CIT - DR SUBMITTED THAT HE RELIES UPON THE ORDER O F THE DRP. ITA 7675/DEL/2017 PAGE 11 OF 38 15 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE IN THE FACTS OF THE PRESENT CASE IS A JOINT VENTURE BETWEEN C ARRIER AND MIDEA . AMONGST THE VARIOUS INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS A E , THE TPO PICKED UP THE TRANSACTIONS OF THE I) IMPORT OF RAW MATERIAL FOR MANUFACTURING OPERATION ; AND II) PAYMENT FOR INTER GROUP SERVICES. 16. IT IS SEEN THAT T HE RETURNED LOSS OF THE ASSESSEE OF RS. 17 CRORES ODD PURSUANT TO THE DRPS ORDER WAS CONVERTED TO A POSITIVE INCOME OF RS. 1.20 CRORES BY THE ASSESSING OFFICER IN HIS FINAL ASSESSMENT ORDER UNDER CHALLENGE IN THE PRESENT PROCEEDINGS . AGGRIEVED BY THE ADJUSTMENTS UPHELD, THE ASSESSEE IS IN APPEAL ON THE AFOREMENTIONED G ROUNDS. 16 .1 ON GOING THROUGH THE RECORD AFTER CONSIDERING THE GROUNDS RAISED AND THE ARGUMENTS ADVANCED , WE DEEM IT APPROPRIATE TO FORMULATE THE ISSUES, WHICH ARISE FOR OUR CONSIDERATION FOR GREATER CLARITY IN THE FOLLOWING MANNER: (A) WHETHER THE TPO IN THE PECULIAR FACTS WAS JUSTIFIED IN TINKERING WITH THE ASSESSEE'S SELECTION OF MOST APPROPRIATE METHOD ; (B) WHETHER ON THE BASIS OF THE CONCESSION OF THE ASSESSEE, TNMM AS THE MOST APPROPR IATE METHOD SELECTED BY THE TPO, CAN THE FOLLOWING P RAYERS BE ALLOWED : (I) WHETHER THE ADJUSTMENTS FOR C APACITY UTILIZATION FOLLOWING JUDICIAL PRECEDENT BE ALLOWED TO THE ASSESSEE ; II) WHETHER IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE , THE COMPARABLES NOT INCLUDED IN THE SHOW CAUSE NOTICE BY THE TPO BE R ETAINED; ITA 7675/DEL/2017 PAGE 12 OF 38 III) W HETHER THE COMPARABLES SELECTED BY THE TPO WITH OR WITHOUT ISSUING SHOW CAUSE NOTICE UNDER CHALLENGE IN THE PROCEEDINGS BE RETAINED. (C ) IN CASE THE ASSESSEE FAILS ON THE ISSUE FRAMED UNDER (A) ABOVE AND SUCCEEDS PARTLY OR COMPLETELY ON THE ISSUES FRAMED UNDER (B) THEN CAN THE ISSUE OF SELECTION OF THE MOST APPROPRIATE METHOD BE LEFT OPEN FOR ADJUDICATION IN SOME OTHER YEAR ; ALTERNATELY WHETHER THE DECISION ON THE ISSUE OF MOST APPROPRIATE METHOD BASED ON THE CONCESSION OF THE ASSESSEE BE LEF T OPEN OR WOULD IT FORM A BINDING PRECEDENT FOR THE PARTIES TO BE FOLLOWED IN SUBSEQUENT YEARS; (D) WHETHER IN VIEW OF THE WAIVER BY THE AE ( GP MIDEA ) FOR PAYMENT OF MANAGEMENT AND BUSINESS SUPPORT SERVICES BE REMANDED BACK DIRECTING TPO TO VERIFY THE FACTS FOLLOWING THE PRECEDENT NAMELY WHETHER THE AMOUNT STANDS OFFERED TO TAX IN SUBSEQUENT YEAR AND WHETHER SIMILAR POSITION ON FACTS HAS BEEN ACCEPTED BY THE TPO IN ASSESSEE'S OWN CASE. THE REQUEST MADE IN THE CIRCUMSTANCES IS WITHOUT CONCEDING THE FACT THAT SERVICES WERE MADE AVAILABLE. 1 7. HAVING SO FORMULATED THE ISSUES WHICH FALL FOR OUR CONSIDERATION, WE DEEM IT APPROPRIATE TO REFER TO SOME RELEVANT FACTS. IT IS SEEN FROM THE RECORD THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURING AND TRADING OF LIGHT COMMERCIAL AIR CONDITIONING SYSTEMS. THE TPO PICKS UP THE ABOVE TWO INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS AES. THE TPO NOTED THAT FOR BENCH MARKING INTERNATIONA L TRANSACTIONS RELATING TO MANUFACTURING OPERATIONS, THE ASSESSEE HAS REJECTED RPM AND APPLIED OTHER METHOD. THE TPO OBSERVED THAT FOR AVAILING OF MANAGEMENT CHARGES THE SAID EXERCISE HAS BEEN DONE WITHOUT DEMONSTRATING HOW INDEPENDENT THIRD PARTY WOULD HAVE PAID OR WOULD BE WILLING TO PAY FOR SUCH SERVICES. THE TPO IN PART A OF HIS 30 PAGE D ORDER DEALS WITH PAYMENT FOR AVAILING OF MANAGEMENT SERVICES AND IN ITA 7675/DEL/2017 PAGE 13 OF 38 PART B CONSIDERS THE TRANSFER PRICING ADJUSTMENT S QUA THE MANUFACTURING OPERATIONS. THE MANUF ACTURING OPERATIONS ARE ADDRESSED AT PAGES 20 TO 30 OF THE ORDER. SINCE HEAVY RELIANCE IS PLACED UPON THE NATURE OF QUERIES RAISED BY THE TPO IN THE COURSE OF THE ASSESSMENT PROCEEDING AND IN THE DETAILED SHOW CAUSE NOTICE ISSUED, THE RELEVANT EXTRACT FR OM THE ORDER IS REPRODUCED HEREUNDER: PART B: TRANSFER PRICING ADJUSTMENT RELATING TO INTERNATIONAL TRANSACTIONS PERTAINING TO MANUFACTURING OPERATION OF THE ASSESSEE DURING TRANSFER PRICING ASSESSMENT PROCEEDINGS, FOLLOWING SCN WAS SERVED UPON THE ASSES SEE FOR INTERNATIONAL TRANSACTIONS RELATING TO AVAILMENT OF MANAGEMENT CHARGES: AS PER TP STUDY, RESALE PRICE METHOD HAS BEEN REJECTED WHILE SELECTING THE MOST APPROPRIATE METHOD AND OTHER METHOD' HAS BEEN SELECTED AS MOST APPROPRIATE METHOD FOR BENCHMARKING INTERNATIONAL TRANSACTION RELATING TO MANUFACTURING SEGMENT. HOWEVER, WHILE APPLYING OTHER METHOD' PLI OF GP/ SALES HAS BEEN USED. THE ABOVE APPROACH AS APPLIED IN TP STUDY IS NOT ACCEPTABLE. IN THIS REGARD, YOU ARE REQUEST TO PROVIDE FOLLOWING INFORMATIONS: 1. NET LEVEL PROFIT MARGIN OF THE ASSESSEE FROM MANUFACTURING ACTIVITIES; 2 NET LEVEL MARGIN COMPUTATION OF COMPARABLES SELECTED IN TP STUDY TO BENCHMARK INTERNATIONAL TRANSACTIONS RELATING TO MANUFACTURING SEGMENT. 3 ALSO PROVIDE NET MARGIN COMPUTATION OF FOLLOWING COMPARABLES AND WHY THE SAME SHOULD NOT BE CONSIDERED AS COMPARABLES FOR BENCHMARKING. A. M V L INDUSTRIES LTD. B. MOSER BAER INDIA LTD. C. BLUE STAR LTD D. CROMPTON GREAVES LTD. E. PHILIPS ELECTRONICS INDI A LTD YOUR COMPLETE REPLY TO THE INFORMATION SOUGHT BY THE UNDERSIGNED AND OBJECTIONS, IF ANY, TO THE PROPOSALS OF ADJUSTMENT AT PARAGRAPHS ABOVE AND THE COMPLETE WRITTEN SUBMISSIONS/INFORMATION IN SUPPORT OF SUCH OBJECTIONS SHOULD BE SUBMITTED ON OR BEFOR E 07/10/2016. SOFT COPY OF THE ITA 7675/DEL/2017 PAGE 14 OF 38 SUBMISSIONS MAY ALSO BE FILED YOU ARE REQUESTED TO ADHERE TO THE TIME LIMIT AS IT MAY NOT BE POSSIBLE TO GIVE AN ADJOURNMENT, IT BEING A TIME BARRING MATTER. 18 . IT IS SEEN THAT ON THE ISSUE OF SELECTION OF T HE MOST APPROP RIATE METHOD, THE FOLLOWING DISCUSSION OF THE TPO FOR REJECTION OF THE ASSESSEES METHOD, HEAVILY RELIED UPON BY THE R EVENUE IS EXTRACTED HEREUNDER: THE TAX PAYER HAS SELECTED OTHER METHOD BY CONSIDERING THE PLI OF GP/SALES, WHICH IS NOTHING E4LSE BU T RESALE PRICE METHOD (RPM). FURTHER THE ASSESSEE IN ITS REPORT ITSELF HAS REJECTED THE RM BY MENTIONING FOLLOWING PARAGRAPHS: THE RPM IS ORDINARILY USED IN CASES INVOLVING THE PURCHASE AND RESALE OF TANGIBLE PROPERTY AND SERVICES IN WHICH THE RESELLER HAS NOT ADDED SUBSTANTIAL VALUE TO THE PRODUCTS OR SERVICES. THE RPM DEPENDS ON COMPARABILITY OF FUNCTIONS PERFORMED OR RISKS ASSUMED BY THE CONTROLLED PARTIES AND THE COMPARABLE UNCONTROLLED PARTIES. IT REQUIRES A SET OF CLOSER COMPARABLES AS IT USES 'GR OSS COST MARGINS' CONCEPT FOR ITS ANALYSIS, WHICH IS MORE SUSCEPTIBLE TO DIFFERENCES IN FUNCTIONS AND RISKS ASSUMED BETWEEN THE LASTED PARTY AND THE COMPARABLES. THE RPM IS GENERALLY USED IN CASE OF A DISTRIBUTOR. IN OILIER WORDS, RPM COULD BE APPLIED IN C ASES WHERE ONE ENTERPRISE OBTAINS GOODS AND SERVICES AND SELLS THE SAME TO UNRELATED PARTY WITHOUT ANY VALUE ADDITION. SINCE. CMI IS NOT ENGAGED IN PURCHASE AND RESALE OF TANGIBLE PROPERTY WITHOUT ADD I NG ANY SUBSTANTIAL VALUE TO THE PRODUCT, THE RPM DOES NOT APPEAR TO BE THE MOST APPROPRIATE METHOD.' IN VIEW OF THE ABOVE, RPM APPLIED BY THE TAXPAYER IS REJECTED. THE ONUS IS ON THE TAXPAYER TO CARRY OUT SUITABLE ADJUSTMENTS TO IMPROVE COMPARABILITY. HOWEVER, THE TAXPAYER HAS FAILED TO DISCHARGE THE ONUS. TH EREFORE, RPM IS REJECTED AND TNMM IS ACCEPTED AS THE MOST APPROPRIATE METHOD. 19 . THE RELEVANT DISCUSSIONS AT PAGES 23 TO 25 ON FACTS IS REPRODUCED HEREUNDER: ITA 7675/DEL/2017 PAGE 15 OF 38 THE KEY ADVANTAGE OF THE TNMM IS THAT THERE IS OFTEN AVAILABLE DATA IN THE PUBLIC DOMAIN ABOUT THE NET PROFITS THAT COMPARABLE INDEPENDENT BUSINESSES EARN FROM THEIR ACTIVITIES IN COM PARABLE MARKETS WITH OTHER THIRD PARTIES AS SUCH, THE TNMM OFTEN PROVES EASIER TO APPLY THAN, SAY, TH E COST PLUS OR RPM METHODS, AND TNMM IS LESS SENSITIVE TO MINOR DIFFERENCES IN THE PRODUCTS BEING SOLD. THE RULES PROVIDE THAT, UNDER THE TNMM , THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION IS TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. TNMM EVALUATES WHETHER THE AM OUNT CHARGED IN A CONTROLLED TRANSACTION IS ARMS LENGTH BASED ON OBJECTIVE MEASURES OF PROFITABILITY (PROFIT LEVEL INDICATORS) DERIVED FROM UNCONTROLLED TAXPAYERS THAT ENGAGE IN SIMILAR BUSINESS ACTIVITIES UNDER SIMILAR CIRCUMSTANCES. 20 . THE ASSESSEE IN ORDER TO ARGUE THAT THE SELECTION OF TNMM AS THE MOST APPROPRIATE METHOD AS A PRECEDENT MAY NOT BE ACCEPTED, HAS VARIOUSLY AND REPEATEDLY ARGUED THAT THE SELECTION OF THE METHOD IS ARBITRARY AND CONTRARY TO FACTS AND RULES APPLICABLE THERETO. HOWEVER, I T IS ARGUED WITHOUT CONCEDING THAT IF THE ADJUSTMENTS PERMISSIBLE UNDER LAW IN TNMM AS A METHOD IS GIVEN, THERE IS NOT MUCH IMPACT. 21. REVERTING TO THE FACTS, IT IS SEEN THAT IT HAS BEEN ARGUED THAT ONCE THE TPO HOLDS THAT THE ADJUSTMENTS REQUESTED WERE INCAPABLE OF BEING GRANTED DUE TO LACK OF ROBUST DATA , THEN THE TPO, IT HAS BEEN ARGUED HAS HIMSELF DEMONSTRATED THE INAPPLICABILITY OF THE SAID METHOD. 22 . HOWEVER, THE RECORD SHOWS THAT T HE TPO AFTER REFERRING TO PARA 3.27 OF OECD GUIDELINES AND DECISIO N OF THE ITAT IN THE CASE OF MERCK LIMITED (ITA NO. 925/MUM/2007) AND DIAGEO INDIA P.L LTD. (ITA NO.7932/MUM/2011) OBSERVED AS UNDER: ITA 7675/DEL/2017 PAGE 16 OF 38 FROM THE ABOVE IT IS EVIDENT THAT THE L EVE L OF COMPARABILITY REQUIRED FOR THE ANALYSIS IS DIFFERENT FOR DIFFERENT METHODS. THUS, AS A METHODOLOGY, UNDER THE TNMM THE STANDARD OF COMPARABILITY IS RELAXED RELATIVE TO THE OTHER METHODS AND REQUIRES SIMILARITY OF FUNCTIONS. THIS FINDS SUPPORT EVEN IN THE OECD GUIDELINES WHICH PROVIDES THAT WHERE EXACT COMPARABLES (IN TERMS OF PRO DUCT OR PRICE) ARE NOT AVAILABLE, TNMM IS THE MOST 'PREFERRED' METHODOLOGY IN ANALYZING TRANSACTIONS (AT THE NET LEVEL) AS IT IS MORE TOLERANT TO DIFFERENCES BETWEEN THE TESTED PARTY AND COMPARABLE UNCONTROLLED TRANSACTIONS . IT IS EVIDENT FROM THE ABOVE TH AT OECD GUIDELINES ADVOCATE USE OF TNMM METHOD AS IT ALLOWS COMPARABILITY OF THE FUNCTIONS RATHER THAN STRICTLY FOCUSING ON PRODUCT/ SERVICE COMPARABILITY AS IN THE CASE OF CPLM, RESALE PRICE METHOD AND CUP. FURTHER, EVEN DEVELOPED NATIONS LIKE THE US UNDE R ITS TRANSFER PRICING REGULATIONS ( 1. 482 - 5) ADVOCATE USE OF TNMM AS IT COMPARES FUNCTIONS RATHER THAN ON PRODUCTS/ SERVICES AND HENCE TNMM IS MORE TOLERANT TO DIFFERENCES THAT MAY ARISE FROM PRODUCT DIFFERENTIATIONS: 'BECAUSE OPERATING PROFIT USUALLY IS LESS SENSITIVE THAN GROSS PROFIT TO PRODUCT DIFFERENCES, RELIABILITY UNDER THE COMPARABLE PROFITS METHOD (AKIN TO TRANSACTIONAL NET MARGIN METHOD) IS NOT AS DEPENDENT ON PRODUCT SIMILARITY AS THE RESALE PRICE OR COST PLUS METHOD TAKING INTO ACCOUNT AF OREMENTIONED DISCUSSION, TNMM METHOD SHALL BE APPLIED FOR BENCHMARKING THE INTERNATIONAL TRANSACTION RELATING TO MANUFACTURING OPERATION OF THE TAXPAYER. 2 3. ON THE INTERNATIONAL TRANSACTIONS PERTAINING TO THE MANAGEMENT CHARGES, THE OTHER INTERNATIONAL TRANSACTION PICKED UP BY THE TPO, THE DETAILED SHOW CAUSE NOTICE ISSUED BY THE TPO IS AS UNDER: PART A: PAYMENT FOR AVAILMENT OF MANAGEMENT SERVICES PART B: TRANSFER PRICING ADJUSTMENT RELATING TO INTERNATIONAL TRANSACTIONS PERTAINI NG TO MANUFACTURING OPERATION OF THE ASSESSEE PART A - SHOW CAUSE NOTICE (SCN) DURING TRANSFER PRICING ASSESSMENT PROCEEDINGS, FOLLOWING SCN WAS SERVED UPON THE ASSESSEE FOR INTERNATIONAL TRANSACTIONS RELATING TO AVAILMENT OF MANAGEMENT CHARGES: ITA 7675/DEL/2017 PAGE 17 OF 38 'IT HAS BEEN OBSERVED THAT THE COMPANY HAS PAID FEE FOR MANAGEMENT AND BUSINESS SUPPORT SERVICES OF I NR 26,911,388 TO ITS AES. IN THIS REGARDS, PLEASE JUSTIFY PAYMENT OF ROYALTY ALONG THE FOLLOWING LINES: - A) BASIS FOR PAYMENT OF MANAGEMENT AND BUSINESS S UPPORT SERVICES. B) REASONS NECESSITATING PAYMENT OF SUCH MANAGEMENT AND BUSINESS SUPPORT SERVICES. C) WHAT BENEFIT HAS THE ASSESSEE AVAILED ON ACCOUNT OF THIS MANAGEMENT AND BUSINESS SUPPORT SERVICES. D) PLEASE JUSTIFY HOW MANAGEMENT AND BUSINESS SUPPORT SERVICES HAS HELPED THE ASSESSEE IN IMPROVING ITS MANUFACTURING PROCESS AND TRADING ACTIVITY, WITH EVIDENCE. E) PLEASE JUSTIFY HOW MANAGEMENT AND BUSINESS SUPPORT SERVICES HAS HELPED THE ASSESSEE IN REDUCING ITS OPERATIONAL LOSS. F) WHETHER ANY COS T BENEFIT ANALYSIS HAS BEEN PERFORMED BY THE ASSESSEE FOR MANA GEMENT AND BUSINESS SUPPORT SERVICES. PLEASE PROVIDE COMPLETE DETAILS WITH EVIDENCE NECESSITATING THE MANAGEMENT AND BUSINESS SUPPORT SE R VICES, FAILING WHICH, BASED ON BENEFIT, TEST THE ARM'S LENGTH PRICE THEREOF WOU L D BE TREATED AS RS. NIL' 24 . CONSIDERING THE RESPONSE OF THE ASSESSEE WHICH HAS BEEN SPECIFICALLY RELIED UPON BY THE CIT DR, THE TPO REFUSED TO ACCEPT THE CONTENTIONS ON THE FOLLOWING REASONINGS: AFTER CAREFULLY CONSIDERATION OF THE SUBMISSIONS FILED BY THE TAXPAYER IN RESPONSE TO THE SHOW - CAUSE AND IN SUPPORT OF ITS CONTENTIONS, IT IS SEEN THAT THE CONTENTIONS RAISED BY THE TAXPAYER IN THIS REGARD CANNOT BE ACCEPTED ON FOLLOWING GROUNDS: THERE IS NO EVIDENCE THAT THE SERVICES HAVE ACTUALLY BEEN PROVIDED. THE TAXPAYER HAS FAILED MISERABLY TO DEMONSTRATE THE NEED FOR THESE SERVICES AS ALSO THE RECEIPT OF THE SAME. MOREOVER, NO COST ALLOCATION BASIS HAS BEEN PROVIDED BY THE ASSESSEE FOR PAY MENT OF SUCH SERVICES TO ITS AES ITA 7675/DEL/2017 PAGE 18 OF 38 THE TAXPAYER HAS FAILED TO ESTABLISH ANY DIRECT NEXUS, WHATSOEVER, OF ANY KIND, WHICH MAY HELP ITS CASE OF HAVING RECEIVED THE BUSINESS FROM ITS AE AS A RESULT OF SERVICES PROVIDED BY THE AE. THE TAXPAYER HAS FAILED TO E STABLISH THAT ITS ASSOCIATED ENTERPRISES HAVE SPECIFICALLY DEDICATED SERVICE CENTERS FOR THE TAXPAYER THE AE WAS NOT PROHIBITED FROM RENDERING SERVICES TO THIRD PARTIES AS WELL. IT IS APPARENT, AS HAS BEEN MENTIONED ABOVE, THAT SERVICES OF SUCH NATURE ARE BEING PERFORMED BY THE TAXPAYER ITSELF DURING ITS NORMAL COURSE OF BUSINESS. UNDER ARM'S LENGTH CIRCUMSTANCES NO INDEPENDENT ENTERPRISE WOULD BE WILLING TO PAY FOR SERVICES WHICH ARE A PART OF ITS ROUTINE BUSINESS PERFORMED BY IT AND WOULD NOT ENGAGE IT TO RECEIVE SUCH INCIDENTAL SERVICES FOR A PAYMENT, EVEN AT COST. MOREOVER, IT IS NOT DISPUTED THAT THE ACTIVITIES FOR WHICH IT IS PAYING, ARE ALSO PERFORMED BY ITSELF UNDER THE OECD GUIDELINES, NO INTRA - GROUP SERVICE SHOULD BE FOUND FOR ACTIVITIES UNDERTAKEN BY ONE GROUP MEMBER THAT MERELY DUPLICATE A SERVICE THAT ANOTHER GROUP MEMBER IS PERFORMING FOR ITSELF, OR THAT IS BEING PERFORMED FOR SUCH OTHER GROUP MEMBER BY A THIRD PARTY. MOREOVER, EVEN IF IT IS PRESUMED WITHOUT CONCEDING THAT BUSINESS EXI GENCIES DO PERMIT THIRD PARTY INVOLVEMENT IN SPITE OF ITS OWN ENDEAVOR, IN NO CASE IS THERE IS SCOPE FOR DUPLICITY OF SERVICES MOREOVER, THE COST OF SUCH SERVICES, IF ANY, WOULD NEED TO BE IDENTIFIED TO PROVE THAT IT HAS NOT OVERPAID CIRCUMSTANCES. 25 . AFT ER CONSIDERING THE OECD GUIDELINES, WE NOTICE THE TPO CONSIDERS THE SUBMISSIONS OF THE ASSESSEE AND FINDS THEM INSUFFICIENT . SINCE THESE OBSERVATIONS UPHELD BY THE DRP HAVE ALSO BEEN RELIED UPON BY THE CIT DR , THEY ARE CONSEQUENTLY EXTRACTED HEREUNDER FOR THE SAKE OF COMPLETENESS : ON THE BASIS OF ABOVE IT CAN BE SEEN THAT IN ORDER TO EXAMINE THE ARMS LENGTH PRICE OF INTRA GROUP SERVICES RECEIVED BY ONE OF THE ASSOCIATED ENTERPRISES FOLLOWING ESSENTIAL INFORMATION SHOULD BE AVAILABLE: 1. WHETHER THE AE HAS RECEIVED INTRA GROUP SERVICES? 2. WHAT ARE THE ECONOMIC AND COMMERCIAL BENEFITS DERIVED BY THE RECIPIENT OT INTRA GROUP SERVICES? 3. IN ORDER TO IDENTIFY THE CHARGES RELATING TO SERVICES, THERE SHOULD BE A MECHANISM IN PLACE ITA 7675/DEL/2017 PAGE 19 OF 38 WHICH CAN IDENTIFY (I ) THE COST INCURRED BY THE AE IN PROVIDING THE INTRA GROUP SERVICES AND (II) THE BASIS OF ALLOCATION OF COST TO VARIOUS AES. 4 WHETHER A COMPARABLE INDEPENDENT ENTERPRISE WOULD HAVE PAID FOR THE SERVICES IN COMPARABLE CIRCUMSTANCES? FROM THE DETAILS AVAI LABLE IT IS CLEAR THAT THE TAXPAYER HAS NOT BEEN ABLE TO PROVE THAT HE HAS ACTUALLY RECEIVED SERVICES OF SOME VALUE THAT CALL FOR COST ALLOCATION. THE ISSUE REGARDING INTRA GROUP PAYMENTS AMONG RELATED PARTY TRANSACTIONS HAS ATTRACTED ATTENTION OF ALL THE TAX JURISDICTIONS ACROSS THE GLOBE. SUCH PAYMENTS BEING BETWEEN RELATED PARTIES NEED MUCH CLOSER AND DEEPER EXAMINATION. THESE CANNOT BE EXAMINED MERELY IN THE LIGHT OF PROVISIONS CONTAINED IN 37(1) OF THE ACT BUT ALSO HAVE TO BE EXAMINED UNDER THE SPECIAL PROVISIONS CONTAINED IN CHAPTER X OF THE ACT THE FOLLOWING ARE THE CRUCIAL ISSUES TO BE SEEN IN SUCH RELATED PARTY TRANSACTIONS: THE TAXPAYERS AGREEMENT WITH THE ASSOCIATED ENTERPRISES RELATED TO INTRA GROUP SERVICES IS TO BE EXAMINED TO SEE AS TO WHAT K IND OF SERVICES WERE TO BE PROVIDED BY THE AE TO THE TAXPAYER. AS NORMALLY SUCH AGREEMENTS REFER TO A LARGE NUMBER OF SERVICES WHICH COULD BE RENDERED BY THE AE, THE TAXPAYER HAS TO SPECIFY THE SERVICE(S) WHICH IS ACTUALLY RECEIVED BY IT FOR WHICH THE PAYM ENT IS MADE. B. WHETHER THE TAXPAYER REALLY NEEDED SUCH SERVICES OR NOT. IF SO, WHAT DIRECT OR TANGIBLE BENEFIT IT HAS DERIVED C. CONTEMPORANEOUS INFORMATION ON THE BASIS OF WHICH RATE OR PAYMENT FOR THE SERVICE IS DETERMINED THIS INCLUDES THE COST BENEFIT ANALYSIS DONE BY THE TAXPAYER AT THE TIME OF ENTERING INTO AGREEMENT. WHETHER ANY BENCHMARKING ANALYSIS WAS DONE BY THE TAXPAYER SO AS TO COMPARE THE AMOUNT WHICH HE WOULD HAVE PAID TO AN INDEPENDENT PERSON UNDER SIMILAR CIRCUMSTANCES. D. WHETHER AN INDEP ENDENT PERSON WOULD HAVE PAID SUCH AMOUNT IN COMPARABLE CIRCUMSTANCES E. WHETHER THE EXPECTED BENEFIT COMMENSURATE WITH THE PAYMENT F. WHETHER THE TAXPAYER HAS SEPARATELY INCURRED ANY EXPENDITURE ON SIMILAR SERVICES AND IF SO THE NECESSITY OF MAKING FURTHER PAYMENT TO THE AE FOR THE SAME ACTIVITY OR IT IS A DUPLICATE PAYMENT. G. WHETHER THE PAYMENT IS IN THE NATURE OF SHAREHOLDERS ACTIVITY OR LARGELY FOR THE BENEFIT OF THE AE. H. WHETHER THE AE IS RENDERING SUCH SERVICES TO OTHER AES OR INDEPENDENT P ARTIES AND IF SO THE RATE / AMOUNT CHARGED FROM SUCH PERSONS. I. THE COST INCURRED BY THE AE FOR PROVIDING SUCH SERVICES AND THE BASIS OF ALLOCATION KEY J. IF THE AE HAS CHARGED ANY MARK - UP ON SUCH PAYMENTS THE ARM'S LENGTH MARGIN IS ALSO EXAMINED. ITA 7675/DEL/2017 PAGE 20 OF 38 IN THE PRESENT CASE TO ANY OF THE TRANSACTIONS THE TAXPAYER COULD NOT SHOW THAT THESE ABOVE MENTIONED CRITERIA WERE FULFILLED THE TAXPAYER HAS NOT BEEN ABLE TO SHOW AS TO WHEN AND HOW THE VARIOUS SERVICES WERE REQUISITIONED FROM THE AES, WHETHER THE SERVICES WERE ACTUALLY NEEDED BY IT, WHETHER THE SAME WERE ACTUALLY RECEIVED BY IT BY PRODUCING CONTEMPORANEOUS DOCUMENTARY EVIDENCE AT THE TIME OF ENTERING INTO AGREEMENT OR AT THE TIME OF AVAILING THE SERVICE (IF ACTUALLY AVAILED) WHAT BENCHMARKING ANALYSIS WAS DONE, WHAT COST BENEFIT ANALYSIS WAS DONE PARTICULARLY WHEN A HUGE PAYMENT HAS BEEN MADE BY IT TO THE AES, IN AN ARM'S LENGTH SITUATION, BEFORE AVAILING ANY SERVICE, AN INDEPENDENT PERSON WOULD CONSIDER THE NATURE OF SERVICES REQUIRED BY IT AND WOULD MAKE THE P AYMENT WHICH COMMENSURATE WITH THE NATURE OF THE SERVICE AND THE EXPECTED BENEFIT DERIVED THERE FROM. THE FACTS OF THE CASE CLEARLY SHOW THAT WHETHER OR NOT THE TAXPAYER NEEDED THESE SERVICES OR WHETHER OR NOT SUCH SERVICES WERE MAINLY FOR ITS DIRECT BENEF IT OR WHETHER OR NOT SUCH SERVICES WERE ACTUALLY AVAILED BY IT, THE TAXPAYER HAD TO SHARE THE COSTS ON THE BASIS OF SOME ALL LOCATION KEYS NO INDEPENDENT PERSON IN SIMILAR CIRCUMSTANCES WOULD PAY SUCH AMOUNT. THESE ARE CLEARLY SHAREHOLDERS SERVICES, WITHOU T ANY BASIS OTHER THAN THE FACT THAT THE TAXPAYER IS PART OF A GROUP AND THESE EXPENSES HAVE BEEN ALLOCATED TO IT. 26 . RELYING UPON THE DECISION OF M /S N HAVA S HEVA I NTERNATIONAL C ONTAINER T ERMINAL P VT L TD (2O10 - TII - 49 - ITAT - M UM - TP; ( II ) M/ S G AMPLUS I NDIA P VT L TD. (2 010 - TII - 55 - ITAT - B ANG TP) THE ITAT ;(III) P ATNI C OMPUTER S YSTEMS L TD (2011 - TII - 79 - ITAT P UNE - TP); VVF LTD. (2010 - TIOL - 55 - ITAT - MUM);PEROT SYSTEMS TSI(INDIA) LTD. (2010 - TIOL - 51 - I T AT - DEL); AND ( VI) MARUTI SUZKI INDIA LTD. (2010 TII - 01 - HC - DE L - TP) , T HE TPO CONCLUDED THAT BENEFIT OR EXPECTED BENEFIT IS NECESSARY. HE WAS OF THE VIEW THAT THERE NOT ONLY HAS TO BE AN EVIDENCE IN SUPPORT OF THE RECEIPT OF THE SERVICE BUT ALSO THAT THE PAYMENT SHOULD COMMENSURATE WITH THE BENEFIT. HE WAS OF THE VIEW THAT THE BENEFIT TO THE TAXPAYER SHOULD BE DIRECT AND TANGIBLE AND NOT INDIRECT OR INCIDENTAL. RELIANCE WAS PLACED UPON THE ITA 7675/DEL/2017 PAGE 21 OF 38 FOLLOWING DECISIONS AVAILABLE IN VARIOUS DEVELOPED COU NTRIES . SPECIFIC MENTION WAS MADE TO THE FOLLOWING DECISIONS: IN SAVIANO VS COMMISSIONER 765F. 2D 643,654 (7 TH CIR 1985) IT WAS OBSERVED, 'THE FREEDOM TO ARRANGE ONE'S AFFAIRS TO MINIMIZE TAXES DOES NOT INCLUDE THE RIGHT TO ENGAGE IN FINANCIAL FANTASIES WITH THE EXPECTATION THAT THE INTERNAL REVENUE SERVICE AND THE COURTS WILL PLAY ALONG.' IN FRANK LYON CO VS US 435,US 561,573(1978) THE HON BLE US SUPREME COURT OBSERVED, IN APPLYING THE DOCTRINE OF SUBSTANCE OVER FORM, THE COURT HAS LOOKED TO THE OBJECTIVE ECONOMIC REALITIES OF A TRANSACTION RATHER THAN TO THE, PARTICULAR FORM THE PARTIES EMPLOYS.' 'IN THE FIELD OF TAXATION ADMINISTRATORS OF LAW AND THE COURTS ARE CONCERNED WITH SUBSTANCE, RELATIONS AND FORMAL WRITTEN DOCUMENTS ARE NOT RIGIDLY BINDING.' (HELVERY VS LAZANUS & GO. 308 US(252). 27 . IN THE SAID BACKGROUND, AS HAS BEEN SPECIFICALLY HIGHLIGHTED BY THE LEARNED CIT DR, THE ASSESSEE WAS REQUIRED TO FURNISHED DETAILS OF SERVICES ETC. THE RELEVANT EXTRACT FROM PAGE 11 & 12 OF THE TPOS ORDER IS REPRODUCED HEREUNDER: THE OECD ALSO RECOGNIZES THIS REALITY IN ITS GUIDELINES OF 2010. THE RELEVANT PORTIONS ARE REPRODUCED BELOW: 'THE TAXPAYER WAS INTER ALIA ASKED TO FURNISH DETAILS OF SERVICES RECEIVED BY HIM FROM THE EXPATRIATES ALONG WITH DETAILS OF TANGIBLE AND DIRECT BENEFITS ACCRUING FROM THEIR SERVICE. THE ASSESS IN HIS REPLY HAS GIVEN VAGUE ANSWER WITHOUT CLARIFYING THE ACTUAL RECEIPT OF SERVICE FROM THEM, THE NEED FOR SUCH SERVICE OR THE EVIDENCE OF ANY TANGIBLE AND DIRECT BENEFITS ACCRUING OUT OF THE AFORESAID SERVICE PROVIDED BY THE EXPATRIATES IT MAY BE MENTIONE D THAT AS ALREADY STATED ABOVE THE FOLLOWING ARE CRUCIAL ISSUES TO BE SEEN IN SUCH RELATED PARTY TRANSACTIONS: A. THE TAXPAYER'S AGREEMENT WITH THE ASSOCIATED ENTERPRISES RELATED TO MTRA GROUP SERVICES IS TO BE EXAMINED TO SEE AS TO WHAT KIND OF SERVICES W ERE TO BE PROVIDED BY THE AE TO THE TAXPAYER. AS NORMALLY SUCH AGREEMENTS REFER TO A LARGE NUMBER OF SERVICES WHICH COULD BE RENDERED BY THE AE, THE TAXPAYER HAS ITA 7675/DEL/2017 PAGE 22 OF 38 TO SPECIFY THE SERVICE(S) WHICH IS ACTUALLY RECEIVED BY IT FOR WHICH THE PAYMENT IS MADE. B. W HETHER THE TAXPAYER REALLY NEEDED SUCH SERVICES OR NOT. IF SO, WHAT DIRECT OR TANGIBLE BENEFIT IT HAS DERIVED. C. CONTEMPORANEOUS INFORMATION ON THE BASIS OF WHICH RATE OR PAYMENT FOR THE SERVICE IS DETERMINED. THIS INCLUDES THE COST BENEFIT ANALYSIS DONE BY THE TAXPAYER AT THE TIME OF ENTERING INTO AGREEMENT. WHETHER ANY BENCHMARKING ANALYSIS WAS DONE BY THE TAXPAYER SO AS TO COMPARE THE AMOUNT WHICH HE WOULD HAVE PAID TO AN INDEPENDENT PERSON UNDER SIMILAR CIRCUMSTANCES, D. WHETHER AN INDEPENDENT PERSON W OULD HAVE PAID SUCH AMOUNT IN COMPARABLE CIRCUMSTANCES E. WHETHER THE EXPECTED BENEFIT COMMENSURATE WITH THE PAYMENT F. WHETHER THE TAXPAYER HAS SEPARATELY INCURRED ANY EXPENDITURE ON SIMILAR SERVICES AND IF SO THE NECESSITY OF MAKING FURTHER PAYMENT TO TH E AE FOR THE SAME ACTIVITY OR IT IS A DUPLICATE PAYMENT. G. WHETHER THE PAYMENT IS IN THE NATURE OF SHAREHOLDER'S ACTIVITY OR LARGELY FOR THE BENEFIT OF THE AE H. WHETHER THE AE IS RENDERING SUCH SERVICES TO OTHER AES OR INDEPENDENT PARTIES AND IF SO THE R ATE / AMOUNT CHARGED FROM SUCH PERSONS. I. THE COST INCURRED BY THE AE FOR PROVIDING SUCH SERVICES AND THE BASIS OF ALLOCATION KEY J. IF THE AE HAS CHARGED ANY MARK - UP ON SUCH PAYMENTS THE ARM'S LENGTH MARGIN IS ALSO IN THE PRESENT CASE FOR ANY OF THE TRANSACTIONS THE TAXPAYER COULD NOT SHOW THAT THE ABOVE MENTIONED CRITERIA WERE FULFILLED. THE TAXPAYER HAS NOT BEEN ABLE TO SHOW AS TO WHEN AND HOW THE VARIOUS SERVICES WERE REQUISITIONED FROM THE AES, WHETHER THE SERVICES WERE ACTUALLY NEEDED BY IT, WHET HER THE SAME WERE ACTUALLY RECEIVED BY IT BY PRODUCING CONTEMPORANEOUS DOCUMENTARY EVIDENCE, AT THE TIME OF ENTERING INTO AGREEMENT OR AT THE TIME OF AVAIL ING THE SERVICE (IF ACTUALLY AVAILED) WHAT BENCHMARKING ANALYSIS WAS DONE, WHAT COST BENEFIT ANALYSI S WAS DONE PARTICULARLY WHEN A HUGE PAYMENT HAS BEEN MADE BY IT TO THE AES. IN AN ARMS LENGTH SITUATION, BEFORE AVAILING ANY SERVICE, AN INDEPENDENT PERSON WOULD CONSIDER THE NATURE OF SERVICES REQUIRED ITA 7675/DEL/2017 PAGE 23 OF 38 BY IT AND WOULD MAKE THE PAYMENT WHICH COMMENSURATE WITH THE NATURE OF THE SERVICE AND THE EXPECTED BENEFIT DERIVED THERE FROM. AS CAN BE SEEN FROM THE REPLY OF THE TAXPAYER AS STATED ABOVE HE WAS UNABLE TO GIVE A CLEAR REPLY ALONG - WITH DOCUMENTARY EVIDENCE ON ANY OF THE FOLLOWING ISSUES: 1 . CONTEMPORANEOUS DOCUMENTARY EVIDENCE TO SHOW THAT THESE SERVICES HAVE ACTUALLY BEEN 2. NEED FOR THE RECEIPT OF SUCH SERVICES FOR WHICH PAYMENT HAS BEEN MADE 3. DOCUMENTARY EVIDENCE AS TO WHEN AND HOW THESE SERVICES WERE REQUISITIONED FROM THE AES. 4 BASIS OF DETERMINATIO N OF RATE OR PAYMENT FOR IGS AT THE TIME OF ENTERING IN TO THE AGREEMENT 5. DETAILS OF COST BENEFIT ANALYSIS VIS A VIS THE EXPECTED BENEFIT FROM THE IGS AND THE PAYMENT MADE FOR THE SAME 6. DETAILS OF BENCHMARKING ANALYSIS DONE AT THE TIME OF ENTERING INTO THE AGREEMENT SO AS TO COMPARE THE PAYMENT OF IGS TO THE AE VIS A VIS AN INDEPENDENT PARTY UNDER SIMILAR CIRCUMSTANCES 7. TANGIBLE AND DIRECT BENEFITS DERIVED BY THE TAXPAYER COMPANY FROM THE USE OF SUCH IGS. 8. DETAILS AND DOCUMENTARY EVIDENCE OF COST IN CURRED BY THE AE FOR RENDERING EACH TYPE OF SERVICES PURPORTEDLY RECEIVED BY THE TAXPAYER COMPANY THUS AS CAN SEEN FROM ABOVE, THE TAXPAYER HAS NOT BEEN ABLE TO DEMONSTRATE, BASED ON ANY CONTEMPORANEOUS DOCUMENTARY EVIDENCE, THAT IT RECEIVED ANY SERVICES. THE TAXPAYER HAS ALSO FAILED TO PROVIDE A COST - BENEFIT ANALYSIS TO JUSTIFY THE PAYMENTS MADE. SUCH AN ANALYSIS SHOULD HAVE BEEN CARRIED OUT BY THE TAXPAYER COMPANY BEFORE ENTERING INTO ANY SUCH AGREEMENT. RULE 10D (1)(H) ALSO REQUIRES THE TAXPAYER TO KEE P AND MAINTAIN A RECORD OF THE ANALYSIS PERFORMED TO EVALUATE COMPARABILITY OF UNCONTROLLED TRANSACTIONS WITH THE RELEVANT INTERNATIONAL TRANSACTION THE RELEVANT PART OF THE RULE IS REPRODUCED BELOW; 10D. (1) EVERY PERSON WHO HAS ENTERED INTO AN INTERNATIO NAL TRANSACTION SHALL KEEP AND MAINTAIN ITA 7675/DEL/2017 PAGE 24 OF 38 (H) A RECORD OF THE ANALYSIS PERFORMED TO EVALUATE COMPARABILITY OF UNCONTROLLED TRANSACTIONS THE TAXPAYER SHOULD HAVE ANALYZED AS TO WHAT THE COST OF SERVICES PERFORMED BY SUCH EXPATS WOULD BE, IF THE SERVICES WERE BEING PERFORMED BY IOCAL EMPLOYEES THE TAXPAYER HAS FAILED TO GIVE DOCUMENTATION IN TERMS OF - THE INTRA - GROUP SERVICES RECEIVED AND THE BENEFITS RECEIVED BY THE SERVICE RECIPIENT - THE TAXPAYER FAILED TO ANSWER CERTAIN BASIC QUESTIONS WITH DOCUMENTATION INCLUDING - ' WHO IS DOING WHAT AND FOR WHOM; V WHERE ARE THEY DOING IT; - WHY ARE THEY DOING IT; S HOW ARE THEY DOING IT; AND - WHAT PROPERTY IS BEING USED OR TRANSFERRED IN CONNECTION THEREWITH. - A WRITTEN, BINDING SERVICE CONTRACT BETWEEN THE PAYER AND PAYEE COMPANIES, I.E. THE C BARTER OF THE COMPANY WHICH ILLUSTRATES WHAT POLICIES HAVE BEEN ADOPTED, WHAT SERVICES ARE TO BE PROVIDED, WHAT COSTS ARE TO BE INCLUDED AND WHAT IS TO BE EXCLUDED, ETC. THE TAXPAYER WAS UNABLE TO PROVIDE ANY CONTRACT AGREEMENT DETAILING AT THE MINIMUM: FULL DETAILS OF THE NATURE AND EXTENT OF SERVICES PROVIDED BY AE, V THE BASIS FOR DETERMINING THE FEES TO BE CHARGED; THE TAXPAYER UNABLE TO PROVIDE ANY OF THE FOLLOWING DETAILS - PROOF BEYOND A REASONABLE DOUBT OF THE PROVISION OF THE INTRA - GROUP SERVICE, - A COMPREHENSIVE AND COMPLETE DESCRIPTION OF THE BENEFITS DETAILING THE FOLLOWING: DESCRIPTION OF THE BENEFITS PROVIDED BY EACH BUSINESS UNIT THE COSTS OF WHICH ARE BEING ALLOCATED: - EXAMPLES TO ILLUSTRATE THOSE BENEFITS. - AN Y DOCUMENTATION IN SUPPORT OF JUSTIFICATION OF THE FEE FOR THE SERVICES RENDERED, E.G. COPIES ITA 7675/DEL/2017 PAGE 25 OF 38 OF TIME SHEETS OR COST CENTRE REPORTS, ANY LETTERS, MANUALS, INSTRUCTIONS, PROOF OF - VISITS, WRITTEN ADVICE, PERIODIC ACTIVITY REPORTS WHICH COULD ESTABLISH FULL DETAILS OF SERVICES RENDERED OVER THE PERIOD COVERED BY THE CHARGE, CONFIRMATION THAT THE FEE CALCULATION AGREES WITH THE SERVICE CONTRACT AND ANY OTHER DOCUMENTS SUPPLIED BY THE PAYEE. 27 .1 ON THE BASIS OF THESE DETAILED QUERIES THE TPO CONCLUDED AS UNDE R: FINDINGS ON THE BASIS OF ABOVE ; ON THE BASIS OF THE ABOVE FOLLOWING POINTS ARE NOTICED: - THE TAXPAYER HAS NOT BEEN ABLE TO PROVE THE BENEFITS THAT IT HAD DERIVED FROM THE SERVICES PURPORTEDLY PROVIDED BY THE EXPATS. NO INDEPENDENT ENTITY WOULD PAY FOR SUCH SERVICES WITHOUT ANY COST BENEFIT ANALYSIS, THE TAXPAYER HAS NOT FURNISHED ANY EVIDENCE AS TO THE COST BENEFIT ANALYSIS WITH REGARD TO THE INDEPENDENT LOCAL EMPLOYEES. NO THIRD PARTY WOULD LIKE TO AVAIL SERVICES WITHOUT ANY COS T BENEFIT ANALYSIS WITH REGARD TO EXPATS VS. INDEPENDENT EMPLOYEES. NO DOCUMENTATION HAS BEEN PRODUCED BY THE TAXPAYER TO SUPPORT ITS CLAIM FOR THE RECEIPT OF SERVICES. * THE BENCHMARKING DONE BY THE TAXPAYER IS NOT IN ACCORDANCE WITH THE LAW AND THEREFORE CUP METHOD IS REQUIRED TO BE APPLIED IN THIS CASE. AS PER THE COMMENTS ABOVE, IT CAN BE SEEN THAT NONE OF THE BENEFITS ARE TANGIBLE OR REAL. A MERE FACADE HAS BEEN RAISED TO GIVE AN IMPRESSION THAT SOME VITAL BENEFIT HAS PASSED TO THE TAXPAYER, WHICH IS A CTUALLY NOT THE CASE RELATED PARTIES ARE QUITE LIKELY TO GIVE A FORM THAT WILL GIVE AN IMPRESSION THAT A REAL SERVICE IS BEING RENDERED BY ONE TO ANOTHER BUT THE NECESSITY TO LOOK BEYOND THE VEIL IS RECOGNIZED ACROSS TAX JURISDICTIONS. IN THE ABOVE CIRCUMS TANCES THE PAYMENT OF SERVICE FEE IS ONLY AN ARRANGEMENT TO CHANGE THE TAX BASE WITHOUT ANY ECONOMIC SUBSTANCE IN THE TRANSACTION. THIS IS INTERNATIONALLY NOT ACCEPTED, AS EVIDENT FROM THE FOLLOWING JUDGMENTS: IN SAVIANO VS COMMISSIONER 765F. 2D 643,654 (7 TH CIR. 1985) IT WAS OBSERVED, THE FREEDOM TO ARRANGE ONE'S AFFAIRS TO MINIMIZE TAXES DOES NOT INCLUDE THE ITA 7675/DEL/2017 PAGE 26 OF 38 RIGHT TO ENGAGE IN FINANCIAL FANTASIES WITH THE EXPECTATION THAT THE INTERNAL REVENUE SERVICE AND THE COURTS WILL PLAY ALONG, IN FRANK LYON CO. VS US 435.US 561,573(1978) THE HON'BLE US SUPREME COURT OBSERVED, IN APPLYING THE DOCTRINE OF SUBSTANCE OVER FORM, THE COURT HAS LOOKED TO THE OBJECTIVE ECONOMIC REALITIES OF A TRANSACTION RATHER THAN TO THE PARTICULAR FORM THE PARTIES EMPLOYS.' IN THE FIEL D OF TAXATION ADMINISTRATORS OF LAW AND THE COURTS ARE CONCERNED WITH SUBSTANCE, RELATIONS AND FORMAL WRITTEN DOCUMENTS ARE NOT RIGIDLY BINDING ' {FTELVERY VS LAZANUS & CO. 308 US (252)}. THE OECD ALSO RECOGNIZES THIS REALITY IN ITS GUIDELINES OF 2010. THE RELEVANT PORTIONS ARE REPRODUCED BELOW: 1.67 ASSOCIATED ENTERPRISES ARE ABLE TO MAKE A MUCH GREATER VARIETY OF CONTRACTS AND ARRANGEMENTS THAN CAN INDEPENDENT ENTERPRISES BECAUSE THE NORM AL CONFLICT OF INTERNS 1 WHICH WOULD EXIST BETWEEN INDEPENDENT PARTIES IS OFTEN ABSENT. ASSOCIATED ENTERPRISES MAY AND FREQUENTLY DO CONCLUDE ARRANGEMENTS OF A SPECIFIC NATURE THAT ARE NOT OR ARE VERY RARELY ENCOUNTERED BETWEEN INDEPENDENT PARTIES. THIS MA Y BE DONE FOR VARIOUS ECONOMIC, LEGAL, OR FISCAL REASONS DEPENDENT ON THE CIRCUMSTANCES IN A PARTICULAR CASE. MOREOVER, CONTRACTS WITHIN AN MNE COULD BE QUITE EASILY ALTERED, SUSPENDED, EXTENDED, OR TERMINATED ACCORDING TO THE OVERALL STRATEGIES OF THE MNE AS A WHOLE, AND SUCH ALTERATIONS MAY EVEN BE MADE RETROACTIVELY. IN SUCH INSTANCES TAX ADMINISTRATIONS WOULD HAVE TO DETERMINE WHAT THE UNDERLYING REALITY IS BEHIND A CONTRACTUAL ARRANGEMENT IN APPLYING THE ARMS LENGTH PRINCIPLE 1.68 IN ADDITION, TAX ADM INISTRATIONS MAY FIND IT USEFUL TO REFER TO ALTERNATIVELY STRUCTURED TRANSACTIONS BETWEEN INDEPENDENT ENTERPRISES TO DETERMINE WHETHER THE CONTROLLED TRANSACTION AS STRUCTURED SATISFIES THE ARM'S LENGTH PRINCIPLE. WHETHER EVIDENCE FROM A PARTICULAR ALTERNA TIVE CAN BE CONSIDERED WILL DEPEND ON THE FACTS AND CIRCUMSTANCES OF THE PARTICULAR CASE, INCLUDING THE NUMBER AND ACCURACY OF THE ADJUSTMENTS NECESSARY TO ACCOUNT FOR DIFFERENCES BETWEEN THE CONTROLLED TRANSACTION AND THE ALTERNATIVE AND THE QUALITY OF AN Y OTHER EVIDENCE THAT MAY BE AVAILABLE. IN VIEW OF THE FOREGOING, THE DISCUSSION ALREADY MADE ABOVE IS SUMMED UP AS FOLLOWS: IN THIS CASE, THE TAXPAYER HAS FAILED TO SUBSTANTIATE THAT SERVICES HAVE ACTUALLY BEEN RENDERED TO IT AND BENEFIT HAS ACTUALLY BE EN DERIVED BY IT ON THE ITA 7675/DEL/2017 PAGE 27 OF 38 BASIS OF DOCUMENTARY EVIDENCE. IN SUPPORT OF ITS CONTENTION, THE TAXPAYER HAS MERELY FURNISHED COPIES OF CERTAIN MAILS EXCHANGED BETWEEN THE PERSONNEL OF THE GROUP. NONE OF THE ABOVE REPRODUCED E - MAIL EXCHANGES BETWEEN THE EMPLOYEE S ESTABLISH THE REQUIREMENT/SPECIFIC NEED OF THE TAXPAYER FOR THEIR SERVICES, THE BENEFIT WHICH HAS ACCRUED TO THE TAXPAYER, OR THAT AN INDEPENDENT PARTY WOULD HAVE BEEN WILLING TO PAY ANOTHER INDEPENDENT PARTY FOR THE SERVICES PURPORTED TO BE RECEIVED BY THE TAXPAYER. THE SERVICES RECEIVED ARE INCIDENTAL BEING IN NATURE OF LONG ASSOCIATION IT IS EVIDENT FROM FACTS STATED ABOVE THAT THE TAXPAYER DID NOT FILE ANY EVIDENCE TO SUPPORT A CLAIM THAT THESE SERVICES WERE ACTUALLY PROVIDED TO THE TAXPAYER AT IT S REQUEST TO MEET THE SPECIFIC NEED OF THE TAXPAYER AND THAT CERTAIN TANGIBLE AND CONCRETE BENEFITS HAVE ACTUALLY ACCRUED TO THE TAXPAYER. UNDER UNCONTROLLED CIRCUMSTANCES ANY INDEPENDENT ENTERPRISE HAVING SKILLED AND SUFFICIENTLY TRAINED MANPOWER WOULD NOT HAVE BEEN WILLING TO PAY ANY THIRD PARTY TO DO SO IN MY OPINION, SERVICES WHICH ARE INCIDENTAL OR MERE DUPLICITY DO NOT FALL IN THE CATEGORY OF INTRA GROUP SERVICES. HOWEVER, WITHOUT PREJUDICE TO THE ABOVE DISCUSSION, IT MAY NOT BE IMPOSSIBLE, HOWEVE R, FOR A GROUP MEMBER TO BENEFIT INCIDENTALLY FROM SERVICES BEING PROVIDED TO ONE OR MORE FELLOW AFFILIATES, FOR EXAMPLE IN THIS CASE, THE TAXPAYER MIGHT BE BENEFITED FROM SERVICES RENDERED BY AE IN GENERAL TO ITS OTHER AES. HOWEVER, SUCH INCIDENTAL BENEFI TS DO NOT GIVE RISE TO INTRA GROUP SERVICES AND CANNOT BE REGARDED AS GIVING RISE TO ARRANGEMENT SUBJECT TO ARMS LENGTH PRICING AS STIPULATED IN OECD TP GUIDELINES PARAGRAPH 7 13 UNDER CHAPTER VII. THESE FINDINGS LEAD TO AN IRRESISTIBLE CONCLUSION THAT PA YMENTS FOR LIAISON SERVICES ALLEGEDLY PROVIDED BY THE AES ARE NOT AT ARM'S LENGTH PRICE. MOREOVER, IT IS SEEN FROM THE DETAILS CONTAINED IN THE TRANSFER PRICING REPORT OF THE TAXPAYER SUBMITTED UNDER RULE 10D THAT THE TAXPAYER HAD NOT CONDUCTED FAR ANALYSIS IN REGARDS TO THESE ALLEGED SERVICES AND HAD FAILED TO JUSTIFY THE FUNCTIONS PERFORMED BY THE AE FOR THESE PAYMENTS. THIS IS PROBABLY A REASON THAT THE RECEIPT OF ALLEGED SERVICES HAVE NOT BEEN BENCHMARKED UNDER ANY OF THE FIVE METHOD PRESCRIB ED UNDER THE ACT IN THE .TRANSFER PRICING REPORT. FURTHERMORE, THE TAXPAYER HAS AT THE TIME OF REQUISITIONING THE SO - CALLED SERVICES, NOT CARRIED OUT ANY COST - BENEFIT ANALYSIS AT ITS END. NO INDEPENDENT PARTY WOULD AGREE TO INCUR EXPENDITURE WITHOUT IND EPENDENTLY ASCERTAINING ITA 7675/DEL/2017 PAGE 28 OF 38 THE VALUE OF THE GOODS/SERVICES INTENDED TO BE AVAILED, IN THE MARKET AND THAT TOO AT THE BEST NEGOTIATED PRICES. NO SUCH EFFORT HAS BEEN DEMONSTRATED TO BE MADE AT THE END OF THE TAXPAYER, WHICH WEIGHS HEAVILY AGAINST THE NORMAL PR ACTICES OF BUSINESS PRUDENCE, THE CONTENTION OF THE ASSESSEE THAT THE PAYMENT OF INTRA GROUP SERVICES IS A BUSINESS DECISION WHICH CANNOT BE QUESTIONED IS BASED ON WRONG APPRECIATION OF THE TRANSFER PRICING LEGISLATION. THE DECISION OF LG ELECTRONICS IND IA PVT. LTD. (ITA NO.5140/DEL/2O11) IS APPLICABLE IN THIS CASE. THE INTERPLAY BETWEEN SECTION 37(1) I.E. 'FOR THE PURPOSE OF BUSINESS AND SECTION 92 HAS BEEN ELABORATELY DISCUSSED AND DECIDED IN THE CASE OF LG ELECTRONICS (SUPRA). THEREFORE, THERE IS NO M ERIT IN THE ARGUMENT OF THE ASSESSEE THAT THE EXPENSES WERE INCURRED FOR ITS ACTIVITY. SECTION 92 IS APPLICABLE ON AN INDEPENDENT FOOTING. THE TPO HAS TO UNDERTAKE AN EXERCISE OF FINDING AN ARMS LENGTH PRICE OF THE UNDERLYING INTERNATIONAL TRANSACTION U/S 92(1) OF THE INCOME TAX ACT. THE PRINCIPLE OF ARM'S LENGTH PRICE MANDATES THE TPO TO COMPARE THE UNCONTROLLED TRANSACTION WITH INDEPENDENT PARTIES TO THE INTERNATIONAL TRANSACTION OF THE ASSESSEE. IN CASE A SIMILAR TRANSACTION CANNOT BE HAPPEN BETWEEN IND EPENDENT PARTIES UNDER UNCONTROLLED SITUATION, THEN, THE TPO IS CORRECT IN TREATING THE VALUE OF SUCH TRANSACTION AS NIL. IN THE CASE OF GEMPLUS INDIA PVT. LTD. ACIT, BANGALORE IN ITA NO. 352/BANG/2009 (2010 - TII 55 - ITAT - BANG - TP) IT HAS BEEN HELD AS FOL LOWS: 'THEREFORE IT IS VERY IMPERATIVE ON THE PART OF THE ASSESSEE TO ESTABLISH BEFORE THE TPO THAT THE PAYMENTS WERE MADE COMMENSURATE TO THE VOLUME AND QUALITY OF SERVICES AND SUCH COSTS ARE COMPARABLE. THE PAYMENT TERMS AS POINTED OUT BY THE TPO ARE I NDEPENDENT OF THE NATURE OR VOLUME OF SERVICES. THE ASSESSEE HAS DEFEATED IN THIS PRIMARY EXAMINATION ITSELF. THE TPO IS ALSO JUSTIFIED IN MAKING A PERTINENT OBSERVATION THAT THE EXPENSES ARE APPORTIONED BY SINGAPORE AFFILIATE AMONG DIFFERENT COUNTRY CENTE RS ON THE BASIS OF THEIR OWN AGREEMENTS AND NOT ON THE BASIS OF THE ACTUAL SENDEES RENDERED TO THE INDIVIDUAL ANILS. IT IS IN ADDITION TO THE ABOVE FUNDAMENTAL FLAW, THAT THE TPO HAS MADE A CLEAR FINDINGS THAT THERE ARE NO DETAILS AVAILABLE ON RECORD IN RE SPECT OF THE NATURE OF SERVICES RENDERED BY SINGAPORE AFFILIATE TO THE ASSESSEE COMPANY. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE TPO IS JUSTIFIED IN HOLDING THAT THE ASSESSEE HAS NOT PROVED ANY COMMENSURATE BENEFITS AGAINST THE PAYMENTS OF SERVIC E CHARGES TO THE SINGAPORE AFFILIATE THEREFORE, THE TPO IS JUSTIFIED IN MAKING THE ADJUSTMENT OF ALP UNDER SEC. 920A OF THE INCOME - TAX ACT 1961.' ITA 7675/DEL/2017 PAGE 29 OF 38 28 . THE LD. AR THOUGH PRAYING FOR REMAND AS NOTED HAS STATED THAT THE ASSESSEE CLAIMS THAT SERVICES WERE NECESSARY AND WERE RECEIVED THE SUPPORTING ARGUMENTS EXTRACTED FROM THE SYNOPSIS FILED IS REPRODUCED HEREUNDER FOR THE SAKE OF COMPLETENESS : MANAGEMENT AND BUSINESS SUPPORT SERVICES DURING FY 2 12 - 13, THE APPELLANT AVAILED A NUMBER O F MANAGEMENT AND BUSINESS SUPPORT SERVICES FROM GD MIDEA AIR - CONDITIONING EQUIPMENT CO., LTD. ('GD MIDEA/ AE) AS MENTIONED BELOW: ( I ) SUPPORT ON ENGINEERING AND MANUFACTURING PROCESS ( II ) ASSISTANCE IN NEW PRODUCT DESIGNS AND SPECIFICATIONS ( III ) INFORMATION PER TAINING TO TECHNOLOGICAL ADVANCEMENTS AND PRODUCT INNOVATION ( IV ) TRAINING TO EMPLOYEES ETC. THE APPELLANT REQUIRED THESE SERVICES FOR SMOOTH AND EFFICIENT RUNNING OF ITS DAY TO DAY OPERATIONS. THE AE HAD THE DETAILED UNDERSTANDING AND EXPERTISE O N VARIOUS PLANT OPERATIONS GLOBALLY AND HAD BETTER UNDERSTANDING ON PROCESS IMPROVEMENTS AND ITS BENEFITS. IN ORDER TO IMPROVE DIE MANUFACTURING EFFICIENCY, THE SERVICES OF AE WERE INDISPENSABLE FOR THE APPELLANT BECAUSE OF THE ABOVE - MENTIONED SUPPORT PROV IDED BY AE. BASED THEREON, IT WAS REASONABLE TO CONCLUDE THAT THE ABOVE SERVICES AVAILED BY THE APPELLANT ARE AS SUCH THAT INDEPENDENT ENTERPRISES IN THE ORDINARY COURSE OF BUSINESS WOULD BE WILLING TO PAY FOR IT. 2.3 THE ABOVE - MENTIONED SERVICES WERE SPE CIFICALLY PROVIDED TO THE APPELLANT AND AS SUCH THERE IS NO COST ALLOCATION MECHANISM WHICH TYPICALLY EXISTS WHEN A COMMON COST POOL IS ALLOCATED AMONGST SEVERAL SUBSIDIARIES OF AN MNC GROUP. 2.4 FOLLOWING ARE THE SAMPLE EVIDENCES THAT HELP IN DEMONSTR ATING THAT SERVICES WERE RENDERED BY AE TO THE APPELLANT: (I) . PREPARING MANUALS: AE ASSISTED APPELLANT IN PREPARING VARIOUS MANUALS. THE ASSISTANCE PROVIDED BY AE TO THE APPELLANT IS AS UNDER: DETAILING THE SPECIFICATION AND TECHNICALITIES OF THE VARIOUS AIR CONDITIONERS; DETAILING THE VARIOUS FEATURES INCLUDED IN EACH OF THESE AIR CONDITIONERS; SPECIFICATION OF THE BRAND TRADEMARK, COLOR, FONT, ALIGNMENT TO BE USED IN THESE BROCHURES; ITA 7675/DEL/2017 PAGE 30 OF 3 8 AE REVIEW AND VERIFY ALL THE TECHNICAL SPECIFICATIONS AND PARAMETERS AND PROVIDE ITS GO AHEAD BEFORE THE FINAL MANUAL NEED TO BE PRINTED A COPY OF SAMPLE MANUAL IS ATTACHED AS ANNEXURE 4A. II. CONDUCTING TRAININGS: EMPLOYEES OF AE VISITED INDIA FOR A SHORT PERIOD TO PROVIDE VARIOUS TRAININGS AND SUPERVISING THE PLANT WORK THAT HELPS IN SMOOTH AND EFFICIENT RUNNING OF THE PLANT. TIRE EMAIL CORRESPONDENCE WHEREIN EMPLOYEES OF AE VISITED INDIA IS ATTACHED AS ANNEXURE 4B (CHINESE AND ITS ENGLISH TRANSLATION VERSION IS ATTACHED FOR YOUR REFERENCE). 28 .1 RELIANCE HAD BEEN WAS PLACED ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF MAX INDIA LTD. VS CIT FOR THE PROPOSITION THAT IT RECOGNIZES THE FACT THAT THE NATURE OF SERVICES WOULD NOT NECESSARILY BE RECORDED IN WRITING AS ADVISED, INTRODUCTION; INF ORMATION MAY WELL BE COMMUNICATED ORALLY. APART FROM THE ABOVE, THE FOLLOWING SUBMISSIONS AND FACTS RELIED UPON IN THE SYNOPSIS FILED ARE ALSO EXTRACTED HEREUNDER : 2.6. FURTHER, DURING AY 2015 - 16, AE AGREED TO WAIVE OFF THE ENTIRE LIABILITY AMOUNTING TO I NR 26,911,388 (ACCRUED IN AY 2013 - 14) AND INR 17,530,527 (ACCRUED IN AY 2014 - 15). CONSIDERING THE PROVISIONS OF SECTION 41(1) OF THE ACT, THE ENTIRE AMOUNT WAS WRITTEN BACK AND OFFERED TO TAX IN SUBSEQUENT YEAR (AY 2015 - 16). 2.7.WHERE DISALLOWANCE PROPOSED BY THE LD. TPO (I.E. IN AY 2013 - 14), HAS ALREADY BEEN GIVEN EFFECT IN THE COMPUTATION OF TAXABLE INCOME (I.E. IN AY 2015 - 16), THE SAME WOULD RESULT IN DOUBLE TAXATION. ACCORDINGLY, THE APPELLANT WOULD BE GRAVELY AFFECTED IF SUCH DISALLOWANCE IS IMPOSED. 2 .8. - SIMILAR CONTENTION WAS ALSO RAISED BY THE APPELLANT DURING THE TRANSFER PRICING ASSESSMENT PROCEEDINGS FOR AY 2014 - 15. THE SAME WAS ACCEPTED BY THE LD. TPO; CONSEQUENTLY, NO TP ADJUSTMENT WAS MADE ON THIS TRANSACTION IN AY 2014 - 15. 2.9.WITHOUT PREJUDIC E, THE APPELLANT WISHES TO SUBMIT THAT IN CASE NO RELIEF IS PROVIDED IN THE SUBJECT AY ON ACCOUNT OF THE DISALLOWANCE MADE BY THE LD. TPO THEN NECESSARY DIRECTION MAY BE GIVEN TO THE LD. AO TO DELETE SUCH SUO - MOTO ADDITION AND ACCORDINGLY A CORRESPONDING R ELIEF SHOULD BE PROVIDED IN THE ASSESSMENT OF THE SUBJECT YEAR, I.E. AY 2015 - 16. ITA 7675/DEL/2017 PAGE 31 OF 38 29 . HAVING THUS, ADDRESS ED THE FACTUAL BACKGROUND, WE REVERT TO ADDRESSING THE ISSUES WHICH WE HAVE FORMULATED. WE NOTE THAT THE ASSESSEE HAVING ARGUED THAT ON SAME SET OF F ACTS, THE TPO IN THE MANUFACTURING SEGMENT HAS IN 2014 - 15 ASSESSMENT YEAR ACCE P TED THE SAME PLI I.E. G.P. TO SALES RATIO THUS, IN THE VERY FIRST YEAR WHEN MANUFACTURING ACTIVITY STARTED, SELECTION OF MOST APPROPRIATE METHOD SHOULD NOT HAVE BEEN ARBITRARILY INTERFERED WITH. HOWEVER, IF ADJUSTMENTS AS PERMISSIBLE UNDER TNMM ARE CONSIDERED, HE ULTIMATELY CONCEDE D THAT THE ISSUE OF SELECTION OF MOST APPROPRIATE METHOD MAY BE LEFT OPEN FOR ADJUDICATION IN SOME OTHER YEAR RECORDING THE ASSESSEE'S OBJECTIONS TO T INKERING WITH THE MOST APPROPRIATE METHOD WITHOUT ANY JUSTIFICATION . HAVING THUS CONSIDERED THE FACTS AND CIRCUMSTANCES ALONGWITH THE SUBMISSIONS OF THE PARTIES, WE LEAVE THE ISSUE OF SELECTI O N OF THE MOST APPROPRIATE METHOD OPEN TO BE CONSIDERED IN ANOTHE R YEAR. WE NOTE THAT THE TPO WHILE UPSETTING THE MOST APPROPRIATE METHOD SELECTED BY THE ASSESSEE HAS ADMITTEDLY NOT CONSIDERED THE FACTS FULLY AND INFACT APPEARS TO HAVE CONFUSED HIMSELF WITH THE METHOD SELECTED BY THE ASSESSEE. SINCE IN VIEW OF THE RELIE F MAINTAINABLE TO THE ASSESSEE EVEN IN THE METHOD SELECTED BY THE TPO THE ISSUE OF MOST APPROPRIATE METHOD IN TERMS OF THE CONCESSION OF THE ASSESSEE BECOMES ACADEMIC THE SAME ACCORDINGLY IS LEFT OPEN. 30. ADDRESSING THE PRAYER FOR EXCLUSION OF COMPARABLE S, W E NOTE THAT THE ASSESSEE PRAYS FOR EXCLUSION OF REXNORD ELECTRONICS AND FRICK INDIA ON THE GROUNDS THAT NO SHOW CAUSE NOTICE MENTIONING THESE TWO SPECIFIC ITA 7675/DEL/2017 PAGE 32 OF 38 COMPANIES WAS ISSUED BY THE TPO. T HE SAID OBJECTION WE NOTE HAS BEEN DISMISSED BY THE DRP HOLDING IT TO BE AN ACADEMIC OBJECTION AS THE OBJECTIONS WERE BEING CONSIDERED BY THE DRP. WE FIND THAT THE SAID APPROACH OF THE DRP IS INCORRECT AS THE TPO UNDER THE ACT IS NOT PERMITTED TO ACT ARBITRARILY AND IS MANDATORILY REQUIRED TO PROCEED IN THE DISCHARGE OF HIS DUTIES ADHERING TO ACCEPTED JUDICIAL STANDARDS AND PROCEDURES A LEGAL POSITION WHICH SHOULD HAVE BEEN MADE CLEAR BY THE DRP TO THE TPO. WE FURTHER FIND THAT ON MERITS THESE TWO COMPARABLES FAIL THE FUNCTIONALITY TEST. WE HAVE SEEN THE RELEVANT PAG ES IN THE PAPER BOOKS FILED AND SEEN THAT WHEREAS FRICK INDIA LIMITED IS A TURNKEY PROVIDER FOR INDUSTRIAL REFRIGERATION WHERE ITS COMPRESSORS MANUFACTURED AND PACKAGED CONDENSERS ARE USED IN FOOD AND CHEMICAL INDUSTRIES AND AS PER FINANCIALS ON RECORD THE COMPANY HAS UNDERTAKEN SEVERAL RESEARCH DEVELOPMENTAL ACTIVITIES. IN THE CASE OF REXNORD ELECTRONICS AND C ONTROLS LTD ., THE SAID COMPARABLE AS NOTED ALSO FAILS ON FUNCTIONALITY TEST AS THE PRODUCT MANUFACTURED IS AN ALL YEAR ROUND PRODUCT AS IT IS AS IT I S MANUFACTURING FANS, MOTORS, BLADES AND ACCESSORIES UNLIKE THE TAXPAYER WHO IS MANUFACTURING PRODUCTS WHICH ARE ASSEMBLED IN THE MANUFACTURING OF AIR CONDITIONERS . T HE REJECTION OF THE OBJECTIONS T O THE ASSESSEE TO THE INCLUSION OF THE SE COMPARABLE S BY THE DRP IN A MECHANICAL MANNER WITHOUT ADDRESSING THE FACTS CANNOT BE UPHELD . 31 . CONSIDERING THE COMPARABLES SELECTED, WE NOTE THAT THE ASSESSEE HAS ALSO ASSAILED THE INCLUSION OF BLUE STAR AS A COMPARABLE. THE SAID COMPARABLE HAS BEEN INCLUDED BY THE TPO AND THE OBJECTION OF THE ITA 7675/DEL/2017 PAGE 33 OF 38 ASSESSEE BEFORE THE TPO WAS DISMISSED AND FURTHER CHALLENGE BEFORE THE DRP HAS ALSO BEEN DISMISSED WE FIND SANS REASONING. IT IS SEEN THAT THE SAID COMPARABLE UNDERTAKES RESEARCH AND DEVELOPMENTAL ACTIVITIES WHICH POSITION IS NOT DISPUTED BY THE TAX AUTHORITIES. IT IS ALSO SEEN THAT BLUE STAR HAS VARIOUS OTHER SEGMENTS WHEREIN ASSEMBLY OF AIR CONDITIONERS IS ALSO ONE OF THE SEGMENTS. ON A CONSIDERATION OF FACTS WE DEEM IT APPROPRIATE TO REMAND THE ISSUE AND DIRECT THE TPO TO W ORK OUT THE PROFIT MARGIN OF THE RELEVANT SEGMENT OF THIS COMPARABLE THE INCLUSION OF THE SAID COMPARABLE IS UPHELD ON THE SAID CONDITION. HOWEVER IN CASE THE TPO IS UNABLE TO OBTAIN THE RELEVANT DETAILS TH EN THE COMPARABLE IS DIRECTED TO BE EXCLUDED. NEED LESS TO SAY THAT A REASONABLE OPPORTUNITY OF BEING HEARD SHALL BE GRANTED TO THE ASSESSEE IN THE EVENTUALITY OF THE INFORMATION IS CLAIMED AND UTILISED BY TPO . 3 2. THE ISSUE WHICH IS NEXT LEFT FOR CONSIDERATION IS THE CAPACITY UTILISATION BENEFIT WHICH THE ASSESSEE PRAYS FOR. THE RELEVANT DETAILS WE NOTICE WERE NOT AVAILABLE TO THE TAX AUTHORITIES THOUGH THE ARGUMENTS WE SEE HAVE BEEN ADVANCED. IT IS FURTHER NOTICED THAT THE RELIEF AS PRAYED FOR WAS NOT GRANTED AS THE DATA WAS CONSIDERED TO BE NOT ROBUST A ND AS WE SEEN IT WAS NOT EVEN DEMONSTRATED. WE HAVE SEEN THAT THE ASSESSEE AS PER THE DETAILS WHICH HAVE ALSO BEEN COMPILED IN THE FORM OF A CHART MADE AVAILABLE HAS DEMONSTRATED THE FACT THAT ADMITTEDLY THE CLAIMS OF UNDER UTILIZATION OF THE ASSESSEE S CA PACITY ARE BORNE OUT FROM RECORD WHEREIN ADMITTEDLY THE MANUFACTURING ACTIVITY STARTED IN SEPTEMBER 2012. WE HAVE SEEN THAT THE ASSESSEE HAS SHOWN THAT AFTER ITA 7675/DEL/2017 PAGE 34 OF 38 REACHING A THRESHOLD OF CERTAIN MANUFACTURING ACTIVITY LEVEL THE ASSESSEE HAS FINALLY BROKEN EVEN AND HAS ALSO RETURNED PROFITS. THE CHART AND FIGURES MADE AVAILABLE IN THE COURSE OF THE HEARING BASED ON DOCUMENTS IN PUBLIC DOMAIN ADMITTEDLY DEMONSTRATE THE FACT. IT IS WELL ACCEPTED THAT IN THE PECULIAR CASE LIKE THAT OF THE ASSESSEE, THE MANUFACTURI NG COSTS WOULD NECESSARILY HAVE CERTAIN FIXED OVERHEADS AND THE SE COST S WOULD BE MET ONLY WHEN MANUFACTURING ACTIVITY BREACHES A CERTAIN LEVEL. THUS CONSIDERING THE PECULIAR FACTS AND CONSIDERING THE JUDICIAL PRECEDENT CITED WE DEEM IT APPROPRIATE TO RESTO RE THE ISSUE BACK TO THE TPO WITH THE DIRECTION TO GIVE NECESSARY RELIEF IN ACCORDANCE WITH LAW . N EEDLESS TO SAY THAT A REASONABLE OPPORTUNITY OF BEING HEARD SHALL BE GRANTED TO THE ASSESSEE BEFORE THE PASSING OF THE ORDER. 3 3. COMING TO THE LAST ISSUE WH ICH REMAIN FOR OUR CONSIDERATION, WE FIND THAT THE PRAYER OF THE ASSESSEE IN TERMS OF THE DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF CAPARO MARUTI THAT CONSIDERING A NEAR IDENTICAL PRAYER OF THE ASSESSEE THE ADDITION STOOD DELETED , WE HOLD CANNOT BE ACCEPTED. WE AGREE WITH THE OBJECTIONS OF CIT - DR MR. BARA WHO HAS OPPOSED THIS PRIMARY PRAYER STATING THAT THE DIRECTION GIVEN IN THE CASE OF CAPARO MARUTI WAS NOT IN THE CONTEXT OF ARMS LENGTH PRINCIPLES AND WAS A DECISION UNDER SECTION 14A OF THE A CT A ND THUS WOULD HAVE NO RELEVANCE. HOWEVER, WE FIND ON GOING THROUGH THE MATERIAL AVAILABLE ON RECORD THAT THE ASSESSEE THOUGH HAS RELIED ON SUBMISSIONS, ARGUMENTS AND SUPPORTING FACTS AND EVIDENCES REFERRED TO IN THE SYNOPSIS FILED SO AS TO CLAIM THAT THE RENDERING OF SERVICES WERE ITA 7675/DEL/2017 PAGE 35 OF 38 NECESSARY AND HAD ALSO BEEN AVAILED OF, HOWEVER REMAND IS SOUGHT RELYING ON PRECEDENT. THE ASSESSEE CLAIMS THAT IN VIEW OF THE WAIVER OF THESE PAYMENTS BY THE AE , THE AMOUNTS PAID TO THE AE IN 2013 14 AND 2014 15 ASSESSMENT YEARS HAVE BEEN OFFERED IN 2015 16 ASSESSMENT YEAR IN TERMS OF PROVISIONS OF SECTION 41 (1) OF THE ACT . THE ASSESSEE HAS CANVASSED THAT SINCE THE TPO HIMSELF DID NOT MAKE ANY SUCH ADJUSTMENT/ADDITION IN 2014 1 5 A SSESSMENT Y EAR O N IDENTICAL SET OF FACTS AND CIRCUMSTANCES EVEN THOUGH THE ISSUE WAS REFERRED TO THE TPO UNDER SECTION 92 C IN THE SAID YEAR AND HAS ACCEPTED THE REPLY OF THE ASSESSEE AS A RESULT OF WHICH NO ADDITION WAS MADE HENCE THE PRAYER . THE SUBMISSIONS WERE NOT REBUTTED BY THE REVENUE. THE ASSESSEE CLAIMS THAT THE POSITION ON FACTS REMAINS IDENTICAL . WE FIND THAT THOUGH THE LEGAL POSITION IS WELL SETTLED BY THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF CIT VERSUS EKL 345 ITR 241 AND IN THE CASE OF CUSHMAN WAKEFIELD , HOWEVER, CONSID ERING THE JUDICIAL PRECEDENT IN ASSESSEES OWN CASE WHEREIN ON SIMILAR SET OF FACTS AND CIRCUMSTANCES THE TPO HIMSELF HAS MADE NO ADDITION IN 2014 1 5 ASSESSMENT YEAR WE ACCORDINGLY DEEM IT APPROPRIATE TO SET ASIDE THE ISSUE TO THE TPO TO VERIFY WHETHER T HERE WAS ANY SERVICES AVAILED BY THE ASSESSEE DURING THE YEAR OR NOT. THE FACTUM OF PAYMENT MADE IN THE YEAR UNDER CONSIDERATION STANDS OFFERED IN 2015 - 16 ASSESSMENT YEAR AS ARGUED I.E. HAS IT BEEN INCLUDED IN THE TAXABLE INCOME OF THE ASSESSEE IN TERMS OF SECTION 41 (1) OF THE A CT HAS NO RELEVANCE IN THIS CASE . S UBJECT TO ITA 7675/DEL/2017 PAGE 36 OF 38 VERIFICATION THE TPO IS DIRECTED TO EXAMINE THE ISSUE AFRESH AND DECIDE THE ISSUE IN ACCORDANCE WITH THE LAW. 34. ACCORDINGLY IN VIEW OF THE DETAILED REASONS GIVEN HEREINABOVE THE ISSUE SET OUT IN A) IS NOT BEING ADJUDICATED UPON AND HAS BEEN LEFT OPEN IN VIEW OF THE CONCESSION OF THE ASSESSEE . THE ISSUES ARE KEPT ALIVE NOTING THE OBJECTIONS OF THE ASSESSEE THAT THE TPO HAS ARRIVED AT A CONCLUSION WITHOUT ASSIGNING VALID REASONS FO R TINKERING WITH THE OTHER METHOD CHOSEN BY THE ASSESSEE WHERE IT IS CANVASSED FIRSTLY HE HAS NOT UNDERSTOOD CORRECTLY THE METHOD SELECTED AND SECONDLY HE IGNORES THE REASONING OF THE ASSESSEE IN TAKING THE PLI AS GROSS PROFIT/SALES FOR THE INTERNATIONA L TRANSACTIONS OF PURCHASE OF RAW MATERIALS FROM THE AE IGNORING THE A RGU MENT S OF THE ASSESSEE THAT IT IS CORRECTLY CHOSEN AS IT WOULD IMPACT ONLY THE GROSS MARGINS AND WOULD NOT IMPACT THE OPERATING EXPENSES OR THE NET MARGINS. THUS IN TERMS OF THE ABOVE CONCESSION THE SELECTION OF THE MOST APPROPRIATE METHOD ISSUE IS NOT ADJUDICATED UPON BY US AND IS LEFT OPEN. 35. WE ACCORDINGLY THUS PROCEED TO THE ISSUE FRAMED IN ( B) . 35 .1 O N THE ISSUE FRAMED IN I) OF B) DEALING WITH THE PRAYER FOR CAPACITY UTILISAT ION WE HAVE REMANDED THE ISSUE TO THE TPO WITH CERTAIN DIRECTIONS . 35 .2 O N THE ISSUE FRAMED UNDER II) OF B) THE TPOS ACTION UPHELD BY THE DRP OF DIRECTING THE INCLUSION OF THE TWO COMPARABLES WHICH WERE NOT ITA 7675/DEL/2017 PAGE 37 OF 38 INCLUDED IN THE SHOW CAUSE NOTICE ISSUED, THE DRPS DIRECTION HAS NOT BEEN APPROVED OF BY US . 35 .3 O N THE ISSUE FRAMED UNDER III) OF B) THOUGH THE ASSESSEE RELYING ON JUDICIAL PRECEDENT SUCCEEDS ON II) HOWEVER EVEN ON MERITS WE HAVE DIRECT ED THAT THE TWO COMPARABLES NOT INCLUDED IN THE SHOW CAUSE NOTICE EVEN OTHERWISE BE EXCLUDED HAVING FAILED THE FUNCTIONALITY TEST . 35 .4 T HE THIRD COMPARABLE I.E. BLUE STAR WHOSE EXCLUSION IS SOUGHT BY THE ASSESSEE CONSISTENTLY BEFORE THE TPO AS WELL AS THE DRP, WE HAVE DIRECTED THE TPO TO OBTAIN SEGMENTAL DETAIL S QUA THE AIR CONDITIONING SEGMENT OF BLUE STAR AND ONLY THEN INCLUDE IT AS A COMPARABLE. 36 . ADDRESSING THE ISSUE FRAMED UNDER (C), WE NOTE THAT THE ISSUE FRAMED UNDER (A) HAS NOT BEEN ADJUDICATED UPON AND HAS BEEN LEFT OPEN. WE HAVE HELD THAT THE DECIS ION RENDERED IN THE FACE OF THE CONDITION AL CONCESSION OF THE ASSESSEE IN THE PECULIAR FACTS AND CIRCUMSTANCES SHALL NOT OPERATE AS A BINDING PRECEDENT FOR THE ASSESSEE . THE PARTIES ARE AT LIBERTY TO ADDRESS THE ISSUE OF SELECTION OF MOST APPROPRIATE METHOD IN ANY OTHER YEAR. FOR THE SAKE OF CLARITY, IT IS EMPHASIZED THE TAX AUTHORITIES SHALL NOT BE PERMITTED TO ARGUE THAT THE ISSUE HAS BEEN ADJUDICATED UPON IN THEIR FAVOUR AS THE DECISION IS GIVE N ON THE BASIS OF THE CONCESSIONS OF THE ASSESSEE AND THE DECISION, THESE SHALL NOT OPERATE AS A BINDING PRECEDENT . ITA 7675/DEL/2017 PAGE 38 OF 38 37. THE ISSUE FRAMED UNDER ( D) IS REMANDED BACK FOR VERIFICATION IN VIEW OF THE DIRECTIONS GIVEN THE ISSUE FRAMED SUBJECT TO VERIFICATION IS ANSWERED IN FAVOUR OF THE ASSESSEE. 38 . ACCORDINGLY, IN TERMS OF THE ABOVE, THE ISSUE RAISED IN GROUND NO. 2 IS LEFT OPEN . GROUND NO. 3 IS REMANDED BAC K . GROUND NO. 4 IS ALLOWED. GROUND NO. 5 IS ALLOWED FOR STATISTICAL PURPOSES. GROUND NOS. 6 TO 8 A RE REMANDED BACK FOR VERIFICATION. GROUND NO. 1 AND 9 ARE GENERAL IN NATURE AND CONSEQUENTIAL RESPECTIVELY . 39 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORD ER PRONOUNCED IN THE OPEN COURT ON 22/11/ 2018. - SD/ - - SD/ - (PRASHANT MAHARISHI) ( DIVA SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER VJ /TS/AG / POONAM COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR, ITAT BY ORDE R ASSTT. REGISTRAR ITAT DELHI