IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-2 : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND MS SUCHITRA KAMBLE, JM
ITA No.5739/Del/2011
Assessment Year : 2007-08
Avon Beauty Products India Pvt. Ltd., Vs. ACIT,
4th Floor, Tower-C, Circle 1(1),
Global Business Park, New Delhi.
Mehrauli Gurgaon Road,
Gurgaon.
PAN: AAACA5282H
(Appellant) (Respondent)
Assessee By : Shri Nageswar Rao &
Shri Shailesh Kumar, Advocates
Department By : Shri Anand Kumar Kedia, CIT, DR
Date of Hearing : 12.11.2015
Date of Pronouncement : 13.11.2015
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee is directed against the final assessment
order passed by the Assessing Officer (AO) on 24.10.2011 u/s 144C
ITA No.5739/Del/2011
read with section 143(3) of the Income-tax Act, 1961 (hereinafter called
`the Act') in relation to the assessment year 2007-08.
2. All the grounds taken in this appeal are against the addition of
Rs.1,26,78,625/- made by the AO on account of transfer pricing
adjustment.
3. Briefly stated, the facts of the case are that the assessee is a
subsidiary of Avon International Operations, which is, in turn, a
subsidiary of Avon Products Inc., USA. Another Avon group company,
namely, Avon Overseas Capital Corporation holds the remaining 10%
shares of the assessee company. The assessee, an Indian company, is
primarily engaged in the business of marketing , sale and distribution of
Avon Beauty Products in India. Its activity is being done by direct sale
of cosmetics, beauty products, toiletries and fragrance products to
customers in India. The assessee has also entered into contract
manufacturing agreements with local third party manufacturers, who
manufacture the finished products, such as, cosmetics, beauty products,
toiletries and fragrance products for the assessee. Seven international
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transactions were reported by the assessee in its Audit report in Form
No.3CEB, which include Import of beauty products for resale;
Rendering of professional support services; Payment of royalty; and
Availing of professional services. The assessee used different methods
for demonstrating that its international transactions were at arm's length
price (ALP). For example, the international transaction of Import of
beauty products for resale was processed for transfer pricing purposes
under `Resale Price Method'; Payment of royalty was done under the
`CUP' method; Rendering of professional support services was done
under the TNMM; and the Availing of professional services was, again,
done under TNMM. The controversy in the instant appeal is only on the
determination of the ALP of the international transaction of `Availing of
professional services' with transacted value at Rs.1,26,78,625/-. The
assessee used the TNMM, with its Foreign AE as a tested party, to
indicate that this transaction was at ALP. On a reference made by the
AO to the Transfer Pricing Officer (TPO), the latter required the
assessee to give details of the international transaction of `Availing of
professional services.' In response, the assessee submitted that it has
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availed Financial management services, Human resources services,
Legal services, Marketing services and Security services. A further
break-up of these services was given to the TPO. After considering the
submissions advanced on behalf of the assessee, the TPO noticed that
there were two broader issues in the analysis of transfer pricing of these
intra-group services, the first being whether intra-group services were, in
fact, provided and, second, whether charges for such services were at
ALP. He dealt with the first question first to determine whether any
intra-group services were rendered. After entertaining the assessee's
submissions, he came to hold that the claim of the assessee to have
received services was not acceptable inasmuch as the services so availed
were either in the nature of incidental benefits or duplication of services.
In the penultimate page of his order, the TPO observed that payment for
such services can be treated at ALP only when it is proved that the
services were actually received and that such received services benefited
the assessee. Further, rejecting the assessee's application of TNMM as
the most appropriate method, the TPO pressed into service the CUP
method for determining the ALP of this international transaction. Since
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such services were not required by the assessee in the opinion of the
TPO, he determined the ALP of this international transaction at Nil and
proposed transfer pricing adjustment for the full value of transaction. In
this process, he did not consider any comparable case. The AO, in the
draft order dated 23.12.2010, which runs into two pages, incorporated
the final decision of the TPO in determining the ALP of this
international transaction at Rs. Nil. That is how, an addition of Rs. 1.26
crore was proposed. The assessee objected to the draft order before the
Dispute Resolution Panel (DRP), but, without any success. The AO in
his final assessment order made an addition of Rs.1.26 crore by noticing
the decision taken by the TPO in proposing transfer pricing adjustment
to this extent. The assessee is aggrieved against this addition.
4. We have considered the rival submissions and perused the relevant
material on record. It is observed that the TPO has computed the ALP
of the international transaction of `Availing of professional services' at
Nil by holding that the assessee did not avail any benefit of such services
and the services provided by the foreign AE were either incidental or
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ITA No.5739/Del/2011
duplicate and hence unwarranted. In doing so, he rejected the assessee's
adoption of TNMM as the most appropriate method and followed the
CUP method. Since, in his opinion, the assessee failed to provide any
evidence about the services rendered by the AE necessitating the
payment of such professional charges, he computed the ALP of this
international transaction at Rs. Nil. The AO in the draft order as well as
the final assessment order, has simply incorporated the conclusion of
the TPO in determining the ALP of this international transaction at Nil
without carrying out any independent analysis or evaluation as to
whether or not such intra-group services were required/availed by the
assessee.
5. The Hon'ble Delhi High Court in the case CIT v. Cushman &
Wakefield (India) (P.) 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.
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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 with law considering the deductibility or
otherwise as per section 37(1) of the Act.
6. When we advert to the facts of the instant case, it is found that the
TPO proposed the transfer pricing adjustment with Nil ALP of the
international transaction of payment made for `Availing of professional
services' on the ground that no evidence was furnished about any
services rendered by the foreign AE and further no cost benefit analysis
on account of such services was brought to his notice and as such the
services were not required by it. The AO in his draft order/final
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assessment order dated 23.12.2010/24.10.2011 has taken the ALP at Nil
on the basis of recommendation of the TPO without carrying out any
independent investigation in terms of the deductibility or otherwise of
such payment in terms of section 37(1) of the Act. As per the ratio
decidendi of Cushman & Wakefield India (P.) Ltd. (supra), 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.
7. Since the authorities below have acted in contradiction to the ratio
laid down in Cushman & Wakefield (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 & Wakefield (India)
(P.) Ltd. (supra).
8. Before parting with this appeal, we want to make it clear that we
have desisted from examining the correctness of any aspect of
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determination of ALP of this international transaction, such as, the most
appropriate method and comparables etc. because the matter is being
sent to the AO/TPO for redoing in accordance with the judgment in the
case of Cushman & Wakefield (India) (P.) Ltd. (supra). Now the ball is
in the court of the lower authorities to independently do the needful as
per this judgment.
9. In the result, the appeal is allowed for statistical purposes.
The order pronounced in the open court on 13.11.2015.
Sd/- Sd/-
[SUCHITRA KAMBLE] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated,13th November, 2015.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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