Itw India Ltd., Gurgaon vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: 'I' : NEW DELHI Before Sh. R. S. Syal, AM And Sh. A. T. Varkey, Varkey, JM ITA No. 521/Del/2013 : Asstt. Year : 2008- 2008-09 ITW India Limited, Vs Assistant Commissioner of Level 1, Lotus Plaza, 732/1, Income Tax, Circle 1(1), Mehrauli Gurgaon Road, Gurgaon Gurgaon-122001, Haryana (APPELLANT) (RESPONDENT) PAN No. AAACI4550Q AAACI4550Q Assessee by : Sh. Deepak Chopra, Chopra, Adv, Sh. Anil Kumar Gupta, CA, Mrs M. M. Bajpai & Ms. Neha Singh, Advs. Revenue by : Sh. Peeyush Jain, CIT DR

Dt. of Hearing : 28.01.2015 Dt. of Pronouncement: 30.01.2015 30.01.2015

ORDER Per R. S. Syal, AM:

This appeal by the assessee is directed against the

order passed by the Assessing Officer on 30.11.2012 u/s

143(3) r.w.s 144C of the Income-tax Act, 1961

(hereinafter also called 'the Act') in relation to the

assessment year 2008-09.

2. The first issue raised in this appeal is against the

addition on account of Transfer Pricing Adjustment from ITA No.521/Del/2013 ITW India Limited

international transaction of 'Sale of finished goods'

valued at ` 11,80,09,913/-

3. Briefly stated the facts of the case are that the

assessee is an Indian subsidiary company of Illinois Tool

Works Inc. The holding company has worldwide presence

in the field of manufacturing of highly engineered

products and specialty items. The assessee is engaged in

manufacturing and sale of steel strapping/industrial

packaging machines and consumables, quality assurance

products, mechanical systems and components and

specialty chemicals, aluminum insulation jacketing etc.

The assessee applied the Transactional Net Margin

Method (TNMM) on entity level for demonstrating that all

of its international transactions, being six in total,

including the instant transaction of 'Sale of finished

goods', were at Arm's Length Price (ALP). Profit Level

Indicator of Operating Profit/Operating cost was used. The 2 ITA No.521/Del/2013 ITW India Limited

Transfer Pricing Officer (TPO) did not accept the

application of TNMM on entity level. In so far as the

international transaction of 'Sale of finished goods' is

concerned, the TPO, after seeking objections from the

assessee, used Comparable Uncontrolled Price (CUP)

method for determining the Arm's Length Price of this set

of international transactions. In this regard, the TPO

sought information from the assessee about the

comparable uncontrolled transactions undertaken by it.

The assessee supplied such internally comparable

uncontrolled transactions data. The TPO accepted all

other transactions at ALP except ten individuals

transactions tabled on page 3 of his order. In the Table

drawn by the TPO, he recorded the Item code, Name,

Price and Number of units sold to AEs and non-AEs and

the difference. Such difference totalling Rs. 41.63 lacs

was proposed as a Transfer Pricing Adjustment. It is a

3 ITA No.521/Del/2013 ITW India Limited

matter of record that the Dispute Resolution Panel (DRP)

allowed relief of roughly Rs. 11 lacs in respect of the

second transaction of the Table. That is how, the

Assessing Officer made an addition amounting to Rs.

29,88,080/- in his final assessment order, against which

the assessee is aggrieved in the present appeal.

4. We have heard the rival submissions and perused

the relevant material on record. In so far as the

application of the most appropriate method for

determining the ALP is concerned, we find that the

assessee's adoption of combined TNMM on an entity level

in respect of six separate sets of distinct international

transactions - Purchase of raw material, Purchase of plant

& machinery, Commission expenses, Sale of finished

goods, Commission income and Reimbursement of

expenses - is not capable of acceptance. Section 92(1)

provides that : 'Any income arising from an international 4 ITA No.521/Del/2013 ITW India Limited

transaction shall be computed having regard to the arm's

length price.' The mandate of this section is to determine

the ALP of 'an' international transaction. The term

'transaction' has been defined under rule 10A(d) to mean

'a number of closely linked transactions'. It follows that

the ALP of more than one transaction can be determined

as one unit, only if they are closely linked transactions. In

such a case, the plural of international transactions shall

be considered as a singular for the purposes of

benchmarking as a single transaction. Reverting to the

facts of the instant case, we find that all the six sets of

international transactions undertaken by the assessee

can, by no standard, be considered as 'closely linked'.

We, therefore, refuse to accept the adoption of TNMM on

entity level.

5. As the assessee has no mechanism to determine the

ALP of this international transaction under the TNMM in a

5 ITA No.521/Del/2013 ITW India Limited

separate manner and the further fact that the

comparable uncontrolled data under the CUP method is

available, we feel no difficulty in holding that the CUP is

the most appropriate method for this transaction. Under

the given facts and qua the international transaction of

sale of finished goods instantly under consideration, we

hold that the TPO was justified in applying the CUP

method.

6. Adverting to the Table drawn by the TPO on page 3

of his order, we find that he has proposed the adjustment

by considering price of particular products sold to its AE

in a particular quarter by comparing it with the price at

which the same products were sold by the assessee to

non-AEs in the same quarter. In principle, we approve the

manner in which the TPO has proceeded to determine the

ALP of this international transaction.

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ITW India Limited

7. The objection of the ld. AR is restricted only to the

adoption of price charged by the assessee from non-AEs

for comparison with the international transactions given

at serial nos. 6, 7 and 9 of the Table. To explain the

assessee's objection, we are taking up the transaction at

serial no. 6. The product sold by the assessee to its AE is

STX 00016 @ ` 8264/- per unit. On the other side of the

Table, the TPO has taken comparable uncontrolled

transaction with non-AE, namely, Cmt Spinning Mills Ltd.,

Mauritius with the price at ` 9668/- per unit. That is how

difference of ` 1404/- (` 9668/- minus ` 8264/-) per unit

has been proposed as transfer pricing adjustment. Here,

it is relevant to note that the TPO has compared the price

charged by the assessee from its AE with that charged

from non-AEs within the same quarter of the year. In so

far as the transaction at serial no. 6 is concerned, we find

that the assessee sold 126 units to its AE at a uniform

7 ITA No.521/Del/2013 ITW India Limited

price of ` 8264/- per unit. As against that, it sold 10 units

of the same product in the same quarter to Aljazeera

Industrial Services, Bahrain and 48 units to Cmt Spinning

Mills Ltd., Mauritius @ ` 8264/- and ` 9668/- per unit

respectively. The TPO has considered the highest price

charged by the assessee from non-AEs in the same

quarter for making the transfer pricing adjustment. The

ld. AR contended that price charged by the assessee from

Aljazeera Industrial Services, Bahrain at ` 8264/- per unit

should have been considered. In our considered opinion

this approach of extremes as adopted by the TPO and

pleaded by the ld. AR, cannot be accepted. No side can

be allowed cherry-picking. The best course in our

considered opinion is to average the prices charged by

the assessee from its non-AEs in the same quarter and

then make its comparison with the price charged from

the AE.

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ITW India Limited

8. Section 92C deals with the computation of arm's

length price. Sub-section (1) provides that the arm's

length price in relation to an international transaction

shall be determined by any of the five specific and one

general methods, being the most appropriate method,

having regard to the nature of transaction or class of

transaction or class of associated persons or functions

performed by such persons etc. The first proviso to sub-

section (2) of section 92C provides that : 'where more

than one price is determined by the most appropriate

method, the arm's length price shall be taken to be the

arithmetical mean of such prices'. Rule 10B(1)(a) deals

with the determination of Arm's Length Price under the

CUP method. Sub clause (i) of Rule 10B(1)(a) provides

that; 'the price charged or paid for property transferred

or services provided in a comparable uncontrolled

transaction, or number of such transaction, is identified'.

9 ITA No.521/Del/2013

ITW India Limited

When we consider the mandate of section 92C in

conjunction with that of rule 10B, it transpires that if

there is a single comparable uncontrolled transaction,

then the price in such transaction is to be considered but

if there are number of such comparable uncontrolled

transactions, then the arithmetic mean of such prices

charged or paid should be identified. Neither the Revenue

can pick a single highest price from a number of

comparable uncontrolled transactions, nor the assessee

can argue for taking the lowest of such comparable

uncontrolled transactions. It, therefore, follows that the

average of the prices charged by the assessee from its

non-AEs in the same quarter should be considered for

identifying the benchmark price of the same product sold

to AE in the same quarter.

9. Reverting to the facts of the instant case, we find

that the average of the prices charged in two comparable

10 ITA No.521/Del/2013 ITW India Limited

uncontrolled transactions comes to `8966/- per unit

(`8264/- + `/-9668 = `17932/- ÷ 2). It is this price of

`8966/- per unit which should be considered for the

purpose of making comparison with the price charged by

the assessee at `8264/- per unit for working out the

transfer pricing adjustment.

10. Similar course of action needs to be adopted in

respect of transactions at serial no. 7 and 9 of the Table.

Here also, the ld. AR stated that the TPO has taken

highest price and not the lowest or average. Following

our view taken above, we hold that the average price of

the same quarter should be considered. We, therefore,

set aside the impugned order on this issue and send the

matter back to the file of AO/TPO for re-determination of

Arm's Length Price of the international transaction of

'sale of finished goods' in accordance with our above

directions concerning the items at serial nos. 6, 7 and 9 11 ITA No.521/Del/2013 ITW India Limited

of the Table given in the TPO's order. No other aspect of

the determination of the ALP of this international

transaction was challenged before us. Thus, on all other

issues, the TPO's order should be taken as final.

Commission Expenses

11. The second international transaction which is

disputed in the present appeal is commission payment by

the assessee amounting to `77,00,402/- to its AEs. The

assessee benchmarked this transaction again on entity

level under the TNMM. The TPO refused to accept the

application of the TNMM in this manner and proceeded to

determine the ALP of this transaction under the CUP

method. This transaction was considered in the nature of

intra-group service. After seeking and considering the

details from the assessee, the TPO came to the

conclusion that the ALP of this transaction was Nil

because the assessee failed to provide any evidence of

12 ITA No.521/Del/2013 ITW India Limited

an independent transaction between unrelated parties

and further the assessee could not explain with any

documentary evidence about the functions performed by

the AE necessitating the payment of such commission.

That is how, he computed the Arm's Length Price of this

international transaction price at Nil. The assessee

remained unsuccessful before the DRP and the Assessing

Officer, accordingly, made this addition amounting to

`77.00 lacs, being the entire commission paid by the

assessee to its AEs.

12. After considering the rival submissions, we find it as

an undisputed position that the TPO computed Arm's

Length Price of this transaction at Nil and the Assessing

Officer made the addition without independently

considering the deductibility or otherwise of such

expenditure in terms of section 37(1). The Hon'ble Delhi

High Court in the case CIT vs. Cushman and Wakefield

13 ITA No.521/Del/2013 ITW India Limited

India Pvt. Ltd. (2014) 367 ITR 730 (Del), has held that the

authority of the TPO is limited to conducting transfer

pricing analysis for determining the ALP of an

international transaction and not to decide if such

services exist or benefits did accrue to the assessee.

Such later aspects have been held to be falling in the

exclusive domain of the AO. In that case, it was observed

that the E-mails considered by tribunal from Mr. Braganza

and Mr. Choudhary dealt with specific interaction and

related to benefits obtained by assessee, providing a

sufficient basis to hold that benefit accrued to assessee.

Since the details of specific activities for which cost was

incurred by both AEs (for activities of Mr. Braganza and

Mr. Choudhary), and attendant benefits to assessee were

not considered, the Hon'ble High Court remanded the

matter to file of concerned AO for an ALP assessment by

TPO, followed by AO's assessment order in accordance

14 ITA No.521/Del/2013 ITW India Limited

with law considering the deductibility or otherwise as per

section 37(1) of the Act.

13. When we advert to the facts of the instant case, it is

found that the TPO proposed the transfer pricing

adjustment with the Nil ALP of the Commission

transaction on the ground that no evidence was furnished

about any services rendered by the foreign AE. The AO in

his final assessment order dated 30.11.2012 has taken

the ALP at Nil without anything further. Applying the ratio

decidendi of Cushman and Wakefield India Pvt. Ltd.

(supra) to the facts of the instant case, we find that the

TPO was required to simply determine the ALP of this

transaction unconcerned with the fact, if any benefit

accrued to the assessee and thereafter, it was for the AO

to decide the deductibility of this amount u/s 37(1) of the

Act.

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ITW India Limited

14. Since the authorities below have acted in

contradiction to the ratio laid down by the Hon'ble

Jurisdictional High Court in the case of Cushman (supra),

we set aside the impugned order on this score and remit

the matter to the file of AO/TPO for deciding it in

conformity with the law laid down by the Hon'ble

jurisdictional High Court in the case of Cushman (supra).

15. In the result, the appeal is allowed for statistical

purposes.

Order pronounced in the open Court on 30/01/2015.

Sd/- Sd/- (A.T. Varkey) (R. S. Syal) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 30/01/2015 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR

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