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TMI Blog2021 (2) TMI 1009X X X X Extracts X X X X X X X X Extracts X X X X ..... eere India Pvt. Ltd. [ 2019 (5) TMI 97 - ITAT PUNE ] the order of CIT(A) is upheld and direct the Assessing Officer to exclude the Asian Business Exhibition Conference Ltd. from the list of comparables. Addition made on account of payment of royalty - HELD THAT:- This Tribunal in assessee s own case in A.Y. 2010-11 examined the details of payment of royalty on total sales made to Renishaw group entities in detail and held the payment of royalty @ 2% is in accordance with the agreement dated 01-04-2006 which is being renewed from time to time since then involving the year under consideration also and directed the Assessing Officer to accept the arm s length price adopted by the assessee.. In view of the above as there was no order contrary to the view taken by this Tribunal brought on record by the Revenue, we direct the Assessing Officer to accept the ALP computed by the assessee by adopting TNMM on account of payment of royalty. - Shri R.S. Syal, Vice President And Shri S.S. Viswanethra Ravi, Judicial Member For the Assessee : S/Shri Ajit Kumar Jain Tushar Patil For the Revenue : Shri A.M. Krishnan Madhavan ORDER PER S.S. VISWANETHRA RAVI, JM : Both these cross appeals by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, it does not any way support the contention of assessee that management services has been availed from the said person. According to TPO the taxpayer to establish that the payments were made commensurate to the volume, quality of services and such costs are comparable with evidences of details of expenses incurred but no such evidences filed by the AE. Further, that expenses were apportioned by the AE among different country-centres on the basis of their own agreements and it has no relevance with the actual services rendered to individual units, the payment terms of the management services are independent of the nature or volume of services and expenses. Thus, the TPO rejected the contention of the assessee and treated the value of management services fee as Nil in the absence of supporting evidence of availing such services. 9. The CIT(A) in its order at page No. 46 observed that the assessee furnished scanned illegible images in a very small font size of its invoices and image of some computation sheet interspersed in the text of its written submission. The said images being illegible, constitute no evidence in support of assessee s claim of receipt of management services a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el issues including general recruitment with particular focus on sales and marketing manager. 13. Likewise, Robert Green was in India for 9 hrs. given finance training to one by name Ms Swati and had various meetings with Avinash. Further, he had arbitration with Mr Suhas and Mr Avinash regarding payment problem. Further had meeting with Rob Mac/Alan Searle on corporate issues. The contention of ld. AR is that having all these evidences the details of persons visited India, timesheet and the details of issues attended by them, the finding of AO/DRP that no services were availed by assessee is incorrect. In page No. 662, we find that the details of advice, assistance and services provided by Brian Lyall in the department of business system and corporate services division where it shows that he visited IT Infrastructure of Renishaw MSPL, Pune for 56 hours. In page Nos. 663 and 664 the copy of passport and Visa are provided wherein the Visa has been given from 20-01-2011 to 19-01-2012. He visited India during 14-02-2011 to 18-02-2011, number of hours shown in the timesheet against Brian Lyall, in our opinion, provided services to assessee for 56 hours supporting the submissions of ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. The TPO has benchmarked the cost of services as nil on various grounds such as:- i. Analysis of comparable uncontrolled transactions not furnished to substantiate its claim ii. Payments made by assessee to AE are in the nature of duplicate services iii. No independent party would have made such payment in uncontrolled circumstances iv. No benefit derived 16. He submits that the reasons discussed by TPO were not considered by Hon'ble ITAT before rejecting TPO's view. 17. The ld. DR submits that the Hon'ble ITAT has mainly emphasized that benefit test cannot be applied by TPO while determining ALP of the transaction and TPO cannot disallow the expense made by assessee only on the ground that there was no need of these services. In this matter it is submitted that various case laws discussing the issue of benefit derived from the services rendered are relating to section 37 of the Act. It is true that fact of benefit derived or not from the expenditure incurred is an irrelevant consideration for the allowance of the expenditure u/s. 37. The facts and considerations for TPO are totally different and TPO has to determine what will be the price of the transaction in unco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g provisions are 'Special Provisions relating to avoidance of Tax' and override general provisions. Once there is an international transaction, then the TP provisions shall prevail over the other regular provisions governing the deductibility or taxability of an amount from such transaction. The Special Bench of ITAT in the case of M/s. LG Electronics India Pvt. Ltd. reported in [2015] 153 ITD 591 (Delhi-Trib.) (Annexure B) has held that the ambit of Transfer pricing provisions are wider than not only section 37 but also section 40A(2)(b). The Special Bench held that the section 37(1) only requires that the expenditure should be incurred wholly exclusively for the purpose of business but the transfer pricing provisions require that the price paid (quantum of expenditure) to the AE should be commensurate with the services received and is at Arm's Length Price i.e. the price which would have been paid to the independent third party. Further, the Special Bench also held that section 40A(2) only determines as to whether the quantum of a particular expenditure is reasonable or not whereas TP provisions test whether the claim of expenditure is at ALP or not. Further while sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entical facts this Tribunal in assessee s own case for A.Y. 2009-10 reversed the order of DRP and directed the AO to accept the value of management services as claimed by the assessee. Similarly, this Tribunal in A.Y. 2010-11 also taking into consideration the findings of Tribunal in A.Y. 2009-10 allowed ground No. 3 raised therein and directed the AO to accept the value of management services as claimed by the assessee by reversing the order of DRP vide order dated 29-01-2020. The relevant portion in ITA No. 623/PUN/2015 for A.Y. 2010-11 is reproduced here-in-below : 12. Ground No. 3 raised by the assessee challenging the action of DRP in confirming the transfer pricing adjustment in respect of management services of ₹ 1,27,37,577/-. 13. Heard both parties and perused the material available on record. We find the issue raised in ground No. 3 is similar to the issue raised by the assessee in ground No. 3 for A.Y. 2009-10 in assessee s own case. On perusal of the same we find the transfer pricing adjustment was made basing on same identical facts and said variance in amounts. The Tribunal vide its order dated 12-09-2019 discussed the facts, evidences, submissions of ld. AR and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rders of authorities below. 18. We have heard the rival contentions and perused the record. The issue which arises vide ground of appeal No.3 is against arm's length price of transaction of payment for managerial services availed from associated enterprise. The agreement which has been entered into by assessee with its associated enterprise was w.e.f. 01.04.2006. The assessee is availing managerial services under the same agreement from year to year. In assessment year 2007-08, no issue in this regard was raised; in assessment year 2008-09, the TPO accepted the arm's length price but the Assessing Officer held that the said payment was not to be allowed under section 37(1) of the Act. The DRP deleted the addition, against which no appeal has been filed by the Revenue. In assessment year 2009-10 i.e. instant assessment year, no disallowance has been made by Assessing Officer under section 37(1) of the Act, but the TPO had held the arm's length price at Nil. The TPO in final analysis holds the assessee not to have received any services and also holds that there was no need to avail any services. 19. We have in series of decisions already decided similar issue of payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g amount of segmental liabilities, total cost incurred to acquire segment assets, the total amount of charge for depreciation reflected in the financial statements for the year ended on 31-03-2010. Further, he refers to Annual Report regarding commission and service fees and submitted the commission and service fees represent income to the company from jobs completed on behalf of clients. The commission in respect of advertisements, where the company performs only creative work, is recognised in the period during which the advertisement is published or aired, based company s estimates/statements received from client. Further, he stated that the retainer fees are accounted on accrual basis over the period of contract. He vehemently argued that it is evident that Quadrant Communication Ltd. earns revenue from commission and service fees in respect of advertising. The Profit and Loss Account of Quadrant Communication Ltd. shows that 100% of the operating revenue comes from commission and service earned by providing advertisement. The said service provided by the Quadrant Communication Ltd. include full service advertising agency, providing clients with 360 degree marketing communicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ications by holding that it is functionally comparable with the assessee. 8. Renishaw plc is incorporated in England and Renishaw Metrology Systems Private Ltd. is incorporated in India. We find functions involved in marketing support services of assessee i.e. Renishaw Metrology Systems Private Ltd. (RMSPL) entered into an affiliate authorized sales representative agreement on 01-04-2005 with its AE Renishaw plc which is place at page No. 149 of the paper book, wherein it reveals that the background of agreement that Renishaw plc agreed to grant RMSPL a non-exclusive right to provide support services with regard to sale and repair of the products described in Schedule 1. The primary functions of RMSPL in relation to marketing support services such as bring to the notice of customers, the general conditions of sales as documented by Renishaw plc to effectively communicate the complaints or observations made by the customers in India to Renishaw plc and provide information to Renishaw plc, in relation to the competitors and their activities in India. For providing the above mentioned services the RMSPL would be compensated at 9% of the net sale price of the products sold in India. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the margins (return on assets, operating income to sales and other measures of net profit) are less affected by transactional differences. Further, he submits that the net margins also may be more than gross profit margins and geographical differences are not considered for determining comparability in TNMM method. Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Enterprises may have a wide range of gross profit margins but still earn broadly similar levels of net profits. He vehemently supported the order of TPO s view in pursuance of DRP directions for inclusion of Asian Business Exhibition Conference Ltd. as comparable as it conducts exhibition and events which are broadly similar to services of assessee in respect of marketing support services. 33. The ld. AR, Shri Ajit Kumar Jain referred to page No. 614 of the paper book regarding the revenue determination policy of Asian Business Exhibition Conference Ltd. and submitted that the said company recognizes its revenue from sale of stall space in exhibition and events. Sale of stall space is also achieved through media insertions in publications. Both these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Tribunal passed in M/s. John Deere India Pvt. Ltd. wherein the Revenue challenged directions of DRP for exclusion of Asian Business Exhibition Conference Ltd. from the list of comparables. The Tribunal rendered the detailed discussion and held the DRP is justified in directing to exclude the said company from the comparables. We note that the Asian Business Exhibition Conference Ltd. is engaged in organizing exhibition and conference. 11. The Tribunal examined the profit and loss accounts of the said company and held the direct income of said company is from exhibition and events. Therefore, as we discussed in the aforementioned paragraphs the agreement between Renishaw plc and RMSPL is an internal affiliate agreement of the said two companies to co-ordinate and exchange the communication and correspondence between them relating to the clients based in India. We note that the financial statements for the period ended on 31-03-2010 placed at page No. 19 wherein the sales and services income of ₹ 45,02,00,743/- out of which the marketing support services is only ₹ 5,14,37,962/-. Therefore, bifurcation of sales and service income the income earned from marketing suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts are made for these to be sourced locally as far as is practicable. Renishaw India had entered into a technical collaboration agreement with Renishaw Plc. under which Renishaw Plc. provides Renishaw India, the right to use technical know-how, patents and trademarks. Such technical know-how, patents and trademarks are used by Renishaw India in its manufacturing process. The primary market risk resides with the AE. Renishaw India does not bear market risk as it renders manufacturing activity only to its AEs. and Renishaw India does not bear any contract risk. The AEs directly contracts with its customers in the territory and the credit risk vis- -vis the end customer is borne by the AEs which clearly shows the Renishaw India does not bear any credit risk. The Renishaw India is only responsible to its AEs with regard to product quality and warranty. Regarding capacity utilization risk the Renishaw India s production schedules are dependent on the orders placed by its AEs and bears the capacity utilization risk. Further, Renishaw India bears the foreign exchange fluctuation risk in respect of import of raw materials consumables and export of finished goods due to fluctuation in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia pays a royalty of 2% of the net export sales for use of such technical know-how, patents and trademarks. It is also explained that the payment of royalty for the use of technical know-how owned by the Renishaw Plc. does not relate to the sales made to Renishaw Plc. and that the payment of royalty has been made only towards the net sales made to Renishaw s entities. 42. We note that the relevant details of net sales made to its entities are at page No. 896 of the paper book which are as under : Sr. No. Associated Enterprises Total Sales (In INR) Payment of Royalty @2% of Sales (In INR) 1 Renishaw (Hong Kong) Limited 156,855,160 3,137,103 2 Renishaw (Ireland) Limited 110,091 2,202 3 Renishaw AG 4,894,790 97,896 4 Renishaw GmbH 10,389,082 207,782 5 Renishaw Inc. 10,837,924 216,758 6 Renishaw KK 153,367,882 3,067,358 7 Renishaw SAS 1,686,904 33,738 Total 338,141,834 6,762,837 43. We find that all the entities under the Renishaw group which are separate legal entities and they operate independent of each other in their business process. It was contended the sale of goods to group entities by using the technical know-how owned by Renishaw Plc. warrants the payment of royalty to Reni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The manufacturing activity is predominantly manual assembly, aided by some computerized semi-automated processes. Further, training of Indian engineers is undertaken in the UK and Ireland prior to the transfer of production to India. Materials and components required for production assembly operations were initially sourced from the parent company as well as local market. Regarding technical collaboration, the assessee has right to use technical know-how, patents and trademarks, owned by its associated enterprise Renishaw plc in its manufacturing process. The bare reading of the functions of assessee on account of royalty under an agreement clearly shows that the assessee is availing technical know-how, patents and trademarks owned by the its associated enterprise in its manufacturing services for the products which are supplied to entire Renishaw group. 16. Further, the TPO discussed various risks faced by the assessee and held that the assessee is a contract manufacturer and the arm s length price of international transactions on account of royalty is treated at Nil. The assessee challenged the same before the DRP under sub-clause (1)(b) of sub-section (2) of section 144C of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13,313/- and ₹ 4,46,69,492/- where no royalty was paid under the transactions had with its associated enterprise. That means to say the assessee paid royalty on the sales effected to its affiliates and no royalty paid to the sales effected to Renishaw plc. Supporting the statement at page 560 the calculation of royalty for the year under consideration is placed at page No. 579 of the paper book wherein it clearly shows that no royalty paid to the Renishaw plc on the sale of manufactured goods and supplied to it. Further, in supporting payment of royalty to Renishaw plc the assessee claims that the Renishaw plc continuously innovates and improves the technology of manufacturing used by the assessee. The new and improved technology helps the RMSPL in minimizing its risk of producing sub-standard products and maintaining the highest manufacturing quality. The assessee does not incur any expenses on the research and development and no expenditure was debited to profit and loss accounts as on 31-03-2010. It is observed from the pages Nos. 587 and 589 of the paper book that the research and development which reveals that the Renishaw it incurred huge cost for updation of the techno ..... X X X X Extracts X X X X X X X X Extracts X X X X
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