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TMI Blog2024 (9) TMI 1270X X X X Extracts X X X X X X X X Extracts X X X X ..... noticed that certain additional evidence was submitted on behalf of the assessee before Ld. DRP, but there was no finding recorded by Ld. DRP to suggest if said additional evidence was or was not considered. Appellate Tribunal also observed that in the given facts and circumstances and in the interest of justice, it was necessary that the issue with respect to determination of ALP of the international transaction of Business Support Services and Technical Support Services fee be remitted back to the file of Ld. TPO for determination of their ALP. At the same, the assessee was also directed to produce relevant details with respect to rendition of services with credible and contemporaneous evidence for impugned assessment year and also to demonstrate as to how said transactions were required to be aggregated. DRP has not discussed that any of the objections raised by the assessee, what to say of any giving any reason for confirming the views expressed and observations made by Learned TPO. From the order passed by Learned DRP, it transpires that one of the objections or contentions raised there on behalf of the assessee was that TPO had been unable to provide sufficient data of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention raised on behalf of the assessee that TPO has passed orders ignoring the earlier orders pertaining to AYs 2011-12 and 2012-13, passed by the TPOs in the case of the assessee itself as regards payments of TSS, BSS and Royalty, and that the principle of consistency stands violated in this matter. ALP as regards Royalty transactions - Notably, one of the contentions on behalf of the assessee is that Ld. TPO incorrectly computed ALP as regards royalty, without taking into consideration landed cost of imported components in the case of comparables. In the first round of litigation, same argument was put forth on behalf of the assessee before the Appellate Tribunal, and noticing this infirmity and others as pointed out by the assessee, the matter was remitted. In those proceedings, in the first round, it was submitted that assessee had paid royalty in terms of the agreement where royalty was payable @ 5% of the net sales of licensed products in India, and @ 8% of net sales of licensed products outside India. There, it was also submitted that in case of comparables, Ld. TPO had taken the rate of comparable @ 0.63 for both transaction. The assessee also stated that rate of 0.63 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Panel conducted proceedings in accordance with law and as per the directions issued by the Co-ordinate Bench of Appellate Tribunal in the first round of litigation? 3. It may be mentioned here that this is second round of litigation between the parties, before this Appellate Tribunal. 4. Initially, order under section 92CA(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) was passed on 18.12.2016. In pursuance to the directions issued by Learned Dispute Resolution Panel-1, New Delhi, (hereinafter referred to as DRP-1), on 13.9.2017, assessment order under section 143(3) of the Act was passed. The Appellate Tribunal, vide order dated 4.9.2018, set aside the assessment order dated 13.9.2017 and restored the matter to the files of TPO/AO in respect of all the three issues, which had led to making of adjustment. Consequently, vide letter dated 18.2.2019, fresh reference under section 92CA(1) of the Act came to be issued by ACIT, Circle 5(1), New Delhi. Then, fresh order under section 92CA(3) of the Act was passed on 31.12.2020, thereby making final adjustments as regards the assessee, as under: 1. Payment for business support service: Rs. 4,08,06,578/-; 2. Payment f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, has been made available at page 573 of the Paper Book-I. As per column no.2 of this table, in the Application Engineering Department, Engineering Signoff (ESO) for New Programs; Engineering Signoff for changes in Existing Programs; Global Product Manager Support and Global Chief Engineer Support were required. 3 TSS are stated to have been provided by the AEs in USA and Spain, as according to the assessee, there was need for said services as described in column No.3 of said table. Column No.2 depicts that in the Manufacturing Engineering Department, such services were provided as regards new project reviews; support for furnace and Manufacturing Engineering Signoff. Available at page 664 665 (PB-II) is Annexure 5, which depicts names of employees, with their designation, period of employment, and salary. This pertains to the FY 2012-13. BSS On the point of BSS, Ld. TPO observed that the assessee had included a number of services, for which support from AE was alleged to have been received. As observed by Ld. TPO, most of said services pertained to Marketing and some of the services pertained to Finance. Ld. TPO further observed that the assessee had failed to furnish any credib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered by the AE to the assessee. Ld. DRP upheld this view. Contentions 14. Learned AR for the appellant has submitted that in terms of the directions issued by the Appellate Tribunal, the assessee filed additional evidence before Ld. DRP, for benchmarking, but said additional evidence has been rejected, without being properly considered. It has been argued on behalf of the assessee-appellant that there was difference in the Technical Support Services received under the two agreements. In this regard, reference has also been para 3.4 of the reply submitted by the assessee to the show cause notice issued by the TPO. Learned AR for the appellant has submitted that it is not a case of duplicate services. He has pointed out that under the Licencing Agreement, the licensor was allowed to provide a reasonable or limited support of 20 man days in a year and to the extent of manufacturing and sale of parts only. As regards services under Engineering Agreement subsequently entered into between the assessee and the AE, it has been submitted on behalf of the assessee that that as per said agreement the AEs agreed to assist the company in manufacturing of EGR systems and components as per spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded that in view of the Licence agreement already arrived at between the assessee and its AE(s), there was no need at all for entering into fresh Engineering agreement as regards said services. It has also been contended that the assessee did not produce on record any invoice to prove that any of said services was ever requested or rendered. As regards the emails filed on behalf of the assessee, the contention is that none of the emails pertains to any request for any such service. Discussion 17. As noticed above, the first round of litigation between the parties came to an end vide order dated 4.9.2018 passed by Appellate Tribunal in ITA No.6840/Del/2017. Vide said order, ground No.3 of the appeal challenging addition of Rs. 9,55,07,159/and ground No.2 were set aside and matter was remanded to the files of Learned TPO/Assessing Officer to determine ALP of the impugned 3 international transactions, whereas grounds No.1,4 and 5, which were general in nature, were dismissed. Admittedly, while restoring the matters, certain directions were issued by the Appellate Tribunal to Ld. TPO/AO. In the first round of litigation, the Appellate Tribunal noticed that certain additional evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertains to certain refunds relating to the year 2012 as regards Forecasted Cash Tax Payments. From the above observations, it can safely be said that even though some emails pertained to the FY 2012-13, and many emails had copies of emails of the said year by way of annexures, but the fact remains that same were produced by the assessee before Ld. TPO and Ld. DRP. Before arriving at the conclusion that certain evidence, like emails does not establish that any such service was provided by the AE(s) to the assessee or before discarding any such piece of evidence, DRP is required to discuss said evidence, so as to show application of mind and give reasons in rejecting the same. Even otherwise, while deciding objections filed by an assessee-objector, and also while dealing with the observations made by the TPO, DRP is required to deal with each and every objection raised by the Objector and then give reasons either to uphold or set-aside the certain observations or the entire order by the TPO. Reasons are the soul of such an order. In absence of any discussion or reasons, it becomes difficult for the higher authority, like Appellate Tribunal, to appreciate as to what had weighed with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted on behalf of the assessee that the line of difference in both type of services is that under the licencing agreement, the licensor is allowed to provide a reasonable limited support i.e. 20 man days in a year to the extent of manufacturing and sale of parts only, but in case of engineering agreement, the AEs assist the company in manufacturing of EGR systems and components as per customised specification of the customer, irrespective of the limited support in terms of man hours days. Learned DRP rejected the above claim of the assessee by observing in para 4.2.3.4 that the assessee had failed to discharge its primary onus to file details of new products introduced during the year and their sales value as reasoned by TPO. Same argument has been raised by Learned AR for the assessee to highlight that there was a time limit for providing such services under the licence agreement, and this led the assessee to engage other employees having special skill, so that the services could be better utilized. To appreciate this contention, we have to refer to the agreements/contracts between the assessee and AE(s). Agreements/Contracts-between the assessee and AE(s). 22. Admittedly, initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch KnowHow would be the same as the Know How used by the licensor. 24. Coming to the Engineering Service Agreement arrived at between assessee and its AE- contractor, the contractor was to effectively provide to the assessee certain engineering and related services, described below: i) application engineering service; ii) prototypes of products being developed by the assessee; iii) manufacturing engineering service; iv) Quality control service; and v) other services requested by the assessee in writing, and which were specifically agreed to by the AE. New Projects in FY 2012-13 25. Records reveals that Ld. TPO was also of the opinion that no evidence was led by the assessee in proof of receipt of any technical support as regards the new products. Ld. TPO was also of the opinion that the assessee had failed to provide value of sale of 4 products, specified in Annexure-3 to the letter dated 27.2.2020, during the relevant previous year. Ld. TPO also observed that as per agreement for technical support service, the assessee was required to pay for TSS at 105% of the cost incurred by the supplier, which was to consist of direct cost and indirect cost, but the assessee did not provide an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above discussion, the rejection of the claim or objection raised by the assessee explaining need of entering into Engineering agreement even after having entered into licence agreement at the outset, and availing of TSS and BSS subsequently, can be said to have been done without proper enquiry and application of mind. Whether it is a case of benchmarking as per Aggregation or Segregation approach? 29. As per record, while dealing with the contention as to whether the transactions of TSS, BSS and Royalty should be benchmarked at aggregate level, as claimed on behalf of the assessee, or at segregate value, as per case of the Revenue, Learned TPO observed that for a transaction to be benchmarked at aggregate level, essential condition is that the transaction are so interlinked with other transactions that same cannot be benchmarked separately, but, the assessee was unable to prove that its TSS, BSS and Royalty transactions are so intertwined that they cannot be benchmarked separately. Learned TPO held that the assessee had failed to demonstrate that in its case Royalty, TSS or BSS could not be benchmarked separately. Contentions Learned AR for the appellant has submitted that the au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ann.com 240; Akzo Nobel India Pvt. Ltd., 137 taxmann.com 369 AT Kearney Ltd. v. DCIT, ITA No.959 960/Del/2018, decided by Co-ordinate Bench of ITAT, Delhi; and decision in MAN Diesel Turbo India (P.)Ltd., v. ACIT, (2019) 112 taxmann.com 155 (Pune-Tribunal). 32. It has been argued on behalf of the assessee, that the authorities below have erred in rejecting the aggregation approach adopted by the assessee to benchmark the international transactions in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962. Further, it has been argued that by applying segregative approach i.e. transaction by transaction, ignoring that the transactions are closely linked to each other. Discussion 33. As observed in Sony Ericsson s case, the core object and purpose for undertaking the exercise of transfer pricing analysis is to determine the fair market price of the transaction. In said proceedings, TPO is required to determine that whatever amount has been paid by the assessee to the AE for said services, is an arm length price. TPO is also to find out whether the prices paid by the assessee for availing of the services are at arms length price or not. 34. As regards applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act, relating to Transfer Pricing provide for determination of arm s length price or cost of an international transaction between two associated enterprises. In Sony Ericsson s case, Hon ble Delhi High Court has observed that TNM method is equally effective and reliable when applied to closely linked and continuous transactions. In L.G. Electronics India (P) Ltd. s case (supra), the assessee had benchmarked the international transaction of royalty by clubbing it along with the other international transactions, such as, import of raw material and components, service spares, export of finished goods along with commission, training fee, import of software services etc. All these were benchmarked ina combined manner under TNM method on an entity level. It was held that royalty is not closely linked with other international transactions and hence should be benchmarked separately. Further, it was held that evidently transaction of royalty cannot be considered as closely linked with the other international transactions as were clubbed by the assessee. In this way, the ALP of royalty payment required to be determined separately, was determined by Ld.TPO separately, justifying departure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otive companies. 2. Engineering Signoff(ESO) for changes in Existing Programs Engineering Signoff shortly called as the ESO for existing Programs to be done whenever there is any change in the Product or the raw Materials used for making the Product. Only based on this signoff the Start of Production (SOP) will be executed. 3. Global Product Manager Support Support required for assisting in the Product development and Product Engineering stages. 4. Global Chief Engineer Support Support required for assisting in the Product development and Product Engineering stages. B. Manufacturing Engineering Department 1. New Project Reviews Robust review process is required to closely monitor the New Projects and ensure that we hit the Customer Set Target/Deadlines. The New Projects with both existing and the New Customers require high technical expertise to hit the Customer Targets. BorgWarner Spain USA s robust reviews helped us to implement new Programs and Projects. The same improved the Revenue stream of the Company. 2. Support for Finance Furnace was newly installed during the Financial Year. Technical Expertise was required to run the Furnace without any Flaws. The main item of our finis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian Automotive Market. 4. Support for Negotiations with Customers Interaction with the Existing and New Customers. Established a Name with the Customers and placed BorgWarner Emissions Systems India Private Limited as a leading Manufacturer and Sale of Diesel Engine Part (Exhaust Gas Recirculation Coolers). Sl. No. Particulars of Services provided by Borg Warner Emissions Systems of MI Inc.USA Borg Warner Emissions Systems Spain S.L. Spain Need for the services Benefit Translation D Application Engineering Department 1. Engineering Signoff(ESO) for New Programs Engineering Signoff shortly called as the ESO for New Programs to be done, Only based on this Signoff the Start of Production(SOP)will be executed. The Diesel Engine Part(Exhaust Gas Recirculation Coolers) manufactured and sold by BorgWarner Emissions Systems India Private Limited is Technologically superior products and BorgWarner Spain USA has got the technical expertise in Producing the products. Thee Technical Support received from BorgWarner, Spain and USA has provided the Indian Company with the Expertise in this Technology and hence the Indian Company was able to cater to the needs of the Automotive Companies in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The Newly installed Furnace enhance the production capacity and also the quality of the output of EGR Coolers components. The Commissioning of the furnace required high Technical Expertise, the same was provided by BorgWarner, Spain. 3. Manufacturing Engineering Signoff((MSOK) Manufacturing Signoff shortly called as the MSOK for New Programs to be done. Only based on this signoff the Start of Production(SOP) will be executed. The analysis of the Manufacturing process resulted in Quality Product Output and efficient Engineering Process. This resulted in Cost Effectiveness and cost savings. Case of the appellant is that after absorbing intra group costs, the assessee has benefitted immensely, in terms of improved turnover and profitability, due to services rendered by the AEs. In this regard, reliance has been placed on the data put forth in the following table: FY Sales-Net(INR) PBT(INR) % PBT of the year 2015-16 1,22,08,37,465 22,07,95,659 18.09 2014-15 1,07,09,69,079 16,99,70,637 15.87 2013-14 1,06,01,63,277 18,39,03,116 17.35 2012-13 1,17,97,32,471 20,14,30,854 17.07 2011-12 58,33,66,087 9,35,73,107 16.04 2010-11 33,95,17,690 4,32,41,771 12.74 41. Ld. TPO, while dealing with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Order, the assessee established actual rendering of services as per agreements arrived. Having regard to the services availed of, it can safely be said that same were necessary for proper functioning of day to day business operations beneficial to the assessee. 44. In the given facts and circumstances, as regards TSS and BSS, Learned TPO was not justified in arriving at the conclusion that in this matter the assessee was not getting any real service and that it would not have paid anything if it were not controlled by the payee. Consequently, Learned TPO erred in opining that holding the arm s length price of TSS and BSS services to be NIL. 45. It is noteworthy that in the first round of litigation, the Appellate Tribunal also noticed that certain additional evidence was submitted on behalf of the assessee before Ld. DRP, but there was no finding recorded by Ld. DRP to suggest if said additional evidence was or was not considered. 46. Appellate Tribunal also observed that in the given facts and circumstances and in the interest of justice, it was necessary that the issue with respect to determination of ALP of the international transaction of Business Support Services and Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not drawn any adverse inference against the assessee. In this regard, reliance has been placed on pages 863 to 901(PB-II). For the period from AYs 2014-15 to 2017-18, learned AR has submitted that the matters were not selected for TP assessment. In support of his contentions, learned AR for the assessee has placed reliance on decision in Radhasoami Satsang v. CIT, 193 ITR 321. 50. On the other hand, Learned DR has submitted that the onus of establishing rendering of services is to be discharged by the assessee on year to year basis, and that this is a case where the assessee has failed to establish rendering of services, and as such there is no merit in this contention raised on behalf of the assessee. On this point, learned DR has placed reliance on decision in AT Kearney Ltd. s case (supra), wherein reliance was placed on a decision by Delhi Bench of ITAT, in the case of Akzo Nobel India Pvt. Ltd. s case (supra). In Avery Dennison (India) Pvt. Ltd. V. ACIT, reported in 145 taxmann.com 468, it was held that each year is a separate unit and governed by its peculiar facts. Even otherwise, assessee s claim in respect of each assessment year has to be decided in view of the evidence p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regards payments of TSS, BSS and Royalty, and that the principle of consistency stands violated in this matter. ALP as regards Royalty transactions 54. As regards Royalty transactions, in the first round, the Appellate Tribunal observed that Learned TPO had proceeded to benchmark the transaction related to Business Support Services, related to payment for Technical Support Service and payment related to Royalty separately. However, Ld. DRP had confirmed whatever ALP regarding said three transactions were determined by Ld. TPO. Arm s Length price has been defined in section 92F(ii) of the Act. It means the price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. The factors and methods incorporated in this section are not exhaustive. CBDT has been empowered to prescribe further factors and methods. Most appropriate method is to be adopted in relation to an international transaction for determination of ALP. In this regard, nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors, as prescribed by CBDT, may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of imported components in the case of comparables. In the first round of litigation, same argument was put forth on behalf of the assessee before the Appellate Tribunal, and noticing this infirmity and others as pointed out by the assessee, the matter was remitted. In those proceedings, in the first round, it was submitted that assessee had paid royalty in terms of the agreement where royalty was payable @ 5% of the net sales of licensed products in India, and @ 8% of net sales of licensed products outside India. There, it was also submitted that in case of comparables, Ld. TPO had taken the rate of comparable @ 0.63 for both transaction. The assessee also stated that rate of 0.63% in case of comparables was incorrect calculation without considering the landed costs of imported components. 57. However, record does not reveal, nor any has been pointed out, to suggest that landed cost of imported components in the case of comparables was also taken into consideration in the 2nd round. Even Ld. DRP did not consider this aspect. Therefore, there is merit in the contention raised on behalf of the assessee even on this point. Result 58. In view of the above discussion and findings, the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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