EMERSON NETWORK POWER (INDIA) PVT. LTD.,THANE vs. DCIT CIR. 1, THANE

आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeals had been filed by the assessee against separate impugned final assessment order dated 28/01/2016 passed u/s. 143(3) r.w.s. 144C (13) for the A.Y.2011-12 in pursuance of directions given by the DRP on

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

2. In both the years, common issue involved is transfer pricing adjustment in relation to management services of Rs. 5,08,73,628/- for the A.Y. 2011-12 and Rs. 4,14,51,215/-for the A.Y. 2012-13. Apart from that, assessee has also raised issue of rejecting of claim of retention money of Rs. 8,50,14,696/- for A.Y.2011-12; and Rs.7,12,50,940/- for A.Y.2012-13. Assessee also raised ground that ld. AO has erred in not giving correct credit of taxes / TDS reflected in form 26AS. Since the issues involved in both the years are common arising out of identical set of facts and similar findings, therefore, same were heard together and are being disposed of by way of this consolidated order. We will take up the appeal for A.Y.2011-12 and our finding given therein will apply mutatis mutandis in the appeal for A.Y.2012-13 also.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

Malaysia and Singapore. The loaded cost base of all cost centers are pooled into Emerson Network Power Australia Pty Limited CENPA/AE) and thereafter charged to various Asia Pacific entities by ENPA.

7. During the assessment year, the assessee had made payment to its AE, i.e., ENPA for receipt of management services in view of the service agreement dated 26/09/2007 entered into with its AE. The agreement provides for the provision of 9 services by ENPA to the assessee as under:- o Human Resources & Training; o Sales & Solutions, Information Technology; o Logistic, o Pricing, Marketing & Product Support; o Service, Shared Services Management, o Finance; o Telecom Management; Of the above, the assessee had availed following 5 services during the captioned assessment year: o Human Resource & Training Sales, Solutions & KAM o Information Technology o Logistic o Finance 8. In its Transfer Pricing Study Report (the TPSR) the assessee benchmarked the transaction following TNMM the most appropriate method and treating AE as tested party with mark- up of 5.8%. The TPSR also provides for the types of services rendered and benefit availed by the assessee from such services.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

Cost-centre Cost incurred — to be Total (in allocated indirectly Rupees) (USD) Direct Indirect HR & Training 1,81,059 - 53,89,134 Finance 4,10,642 - 1,87,19,752 Logistics 23,771 - 10,84,674 Solutions and KAm 4,05,858 18,500 1,93,40,920 Information Technology - 1,18,203 53,89,134 Total 10,21,300 136,703 5,27,86,128

9. The ld. TPO and ld. DRP had rejected the benchmarking analysis, payment for aforesaid services and has made upward adjustment after making various observations, which in sum and substance are elaborated as under:-  The documentary proofs /e-mails tendered by the Appellant do not demonstrate any tangible and direct benefit is derived by the Appellant. The e-mails are general in nature and at the most can be said the Appellant derives incidental benefits.  Service rendered are in nature of stewardship services.  The certificate relied by the Appellant does not provide for how the cost is allocated to other countries of region stated therein.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

 Certificate is prepared on basis of information provided by Regional Finance director, which is based on meeting of Regional Finance Director with each cost center leader for estimation of time-spent for servicing ENP companies in Asia including India. Thus, demonstrating cost allocated is very high on estimated basis i.e., adhoc basis.  Relying on Clause of the agreement and customary disclaimer given by the auditors treating the same as qualification.  Finally, the TPO made addition on estimation Le ad-hoc basis, taking average working days per month at 22 and 8 working hours per day and man hours rate of Rs.8.500 per hour, the cost estimated is as under:- Services Man Hours

Sales and solutions 50 Human resource 75 Finance 50 Logistics 50 Total 225 Rate per hour (estimated) 8,500 Arm's length Price ('ALP') as 19,12,500 per the TPO

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

The TPO proposed adjustment for the balance amount of Rs. 5,08,73,628/-.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

 Time-spent -time-spent on providing the service.  For determining the time spent, Regional finance director, Asia had meetings with each cost center leader, in order, to understand the proportion of time spent for each of the ENP companies.

12. The direct service cost allocation - cost-centre (service) wise is tabulated as under: Cost-centre Cost incurred — to be allocated indirectly (USD) FY2O1O FY20H IT 111,168 1,12,278 Key Account management ('KAM') 16,068 18,904 Total Cost base directly 1,27,236 131,182 allocated to the Appellant Total 2,58,418 12.1 The indirect service cost allocation - Source country wise was tabulated as under: Source Country Cost incurred — to be allocated indirectly (USD) FY 2O1O FY2O11 Australia 1844,442 20,25,662

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

Hong Kong 27,84,056 - Malaysia - - Singapore 74,295 30,33,302 Total Cost base for indirect 47,02,793 50,58,964 allocation Total 97,61,757 12.2 The indirect service cost allocation - cost-centre (service) wise was tabulated as under: Cost-centre Cost incurred — to be allocated indirectly (USD) FY201O FY 2011 HR & Training 13,29,073 15,22.802 Finance 15,07,640 15,54,384 Logistics 3,33,557 4,76,300 Solutions 15,32,523 15,05,4/8 Total Cost base for indirect 47,02,793 50,58,964 allocation Total 97,61,757 12.3 The above cost (direct and indirect) is further allocated based on estimate of time-spent by each business function which are tabulated below

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

Cost-centre Cost incurred — to be allocated indirectly (USD) FY 2010 FY 2011 HR & Training 12.4% n.6% Finance 25.4% 25-3% Logistics 7.2% 4.4% Solutions 24.3% 26.2%

14. Besides this, ld. Counsel also submitted that similar addition of Intragroup services paid to its AE has been evaluated in assessee’s group concern case M/s. Emerson Climate Technologies (India) Limited vs. DCIT in wherein similar mark-up of cost plus 5.8% has been upheld.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

15. Apart from that Ld. Counsel has also given point-wise rebuttal of ld. TPO’s allegations alongwith benefits derived from services which was already given in the TP study report. Further, he also drew our attention to e-mail communications presentation and highlighting of nature of services received in relation to Solutions & KAM, Finance, Human Resource and training, IT services and supply chain & logistics. It was also filed before the ld. TPO and ld. DRP. In short, the illustrative services rendered by the AE and the key benefits derived by the assessee has been tabulated in the following manner:-

Sr Nature of Clause under the Benefit derived from services No. Service Agreement 1. Solution's & - Key Account Executive meeting between KAM relationship Emerson & IBM: maintenance and Emerson Singapore had by event planning meeting with IBM to discuss and customer future potential to expand meetings. market in Asia Pacific. This - Formulation of has resulted in bringing in Business agreement project IBM - Daksh in India. with Global The benefit in terms of customer increase in revenue is received over years.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

3- Solution's & Design tools to Smart Solutions: KAM configure required Presentation provided for Network building of smart aisle infrastructure, concept in respect to ! including racks, creating a global power, cooling, identity and positioning for monitoring the family of Emerson and accessories Network 4. Human Selection and Candidate for HR position: Resource training of top The candidate biodata was management, accessed by Katie Chui from middle the search agency data which management and was made available to India. other employees Subsequently, 3 employees were recruited 5. Human Selection and To reduce the attrition Resource training of top rates, the corporate approval management, was required for granting middle retention bonus. management and other employees 6. Human Advisory services Mail correspondence Resource concerning requesting the management personnel team of Emerson India to practices, policies, customize the headcount and administration and attrition report as per the industrial relations organizational structure matters.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd. regarding hardware happens from overseas office laptop model which may not be possible in case of a difference. 11. Information Guidance and CRM discussion Technology implementing Bulk purchase of Oracle common Asia license as an entire group, Pacific IT will reduce cost of license and initiatives/Projects sharing of implementation cost between group. Training by group compatriot (for K2 Training)

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd. helped in Emerson India's inventory management - through liquidating of obsolete stock and minimizing of procurement shortage of materials in times of high market demand.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd. and cost effective. He pointed out that on perusal of the emails referred above, it can be noticed that the services provided by the AE are primarily in the nature of supervisory or review of work done by the employees of the assessee. The role of ENPA is to ensure that the work done by the assessee is in line with the policies of Emerson Network Group at group level and there is no deviation. This is to ensure that the policies and guidelines formulated by the brand- Emerson Network arc applied properly and correctly.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

/ shareholder activities. In support, he relied upon the decision of the Hon’ble Pune Tribunal in the case of INA Bearings India Pvt. Ltd. vs. DCIT. In so far as allegation is that certificate relied by the assessee does not provide how the cost is allocated to the other countries of region. Ld. Counsel submitted that ld. TPO has failed to take cognizance of the fact that the certificate of the external consultant is in relation to the management service fees charged to Emerson Network Power (India) Pvt. Ltd. i.e. the assessee by Emerson Australia Pty Ltd. for the period under review. The certificate is specifically for the costs to be allocated to the Indian entity i.e. the assessee. He further pointed out that the auditor in its certificate has evaluated the special purpose financial report of the AE, obtained the data of the ENPA to verify the management service fee with its breakup cost centre wise. The auditor had also had meeting with the regional director of Asia of each cost centre regarding the intercompany support/processing services so as to arrive the cost-base to be allocated. This fact is also clearly spelled out by the auditor in its certificate as 'Procedures performed and findings.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd. wisdom, has arrived at allocation key basis the time spent by the concerned employees.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

are required for the business of the assessee, which although can’t be measured accurately, but what should be the extent of the benefit cannot be the measured nor can it be questioned by the revenue.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd. investment. The descriptions of services are normally business services performed with a view to enable assessee to carry out its business operation in line with global standards of the brand and also for its day to day operations. Thus, these activities cannot be reckoned to be in the nature of shareholder activity.

assessee has been able to establish the need and the benefit test for each and every services. Thus, we hold that no adjustment can be made on account of said services.

Findings on maintenance of brand value and standardization: "20. Another aspect of the issue which needs to be kept in mind is the developing scenario of carrying on the business in the country. The said business is carried on by the entities which have presence outside India and have certain standards, which are attached to its brand name. In order to maintain its brand value, arrangements are made with different entities across the globe by holding companies, so that different entities operating in 2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd. different parts of the world adhere to specific rules and regulations while carrying on business under the said brand." Findings on allocation of costs The terms of the agreement are similar for providing services, wherein a particular formula is designed by the person providing the services Le, the basis for remuneration is the cost incurred by way of man hours charged to the entity with mark up of 5.8% Such method of charging and remunerating was identical in the case of all the entities which were availing the services from Copeland Corporation through Emerson HK and Emerson TH. The assessee had also furnished on record the basis for charging cost by the two entities from the assessee. No doubt, the complete details of operations of the said concerns worldwide had not been filed, but that had no relevance to the octivities or services availed by the assessor. There is no merit in the order of TPO in rejecting the segmental details of AEs filed by the assesseest a-vis services quailed by it. What is to be considered in the hands of assessee is the services it had availed from Emerson HK and Emerson TH and not the whole activities undertaken by the said two concerns worldunde. The assessee had put on record that not only the assessee but many other concerns were availing same services from the nuo entities and even the basis for remuneration to the said concerns was the same in respect of all the countries. In such circumstances, there is no merit in the order of TPO in holding that as to whether the said concerns have given services or whether they are qualified to give the services and the cost incurred by AEs. First of all, this is outside the domain of TPO. Under the Transfer Pricing Regulations what the TPO has to determine is whether the services which have been provided by associated enterprises are at arm's length price. Accordingly, we find no merit in this part of the order of TPO." > Findings on the need and benefits of the services 23. The next stand of the TPO is two-fold; as to what benefits have been received by the assessee against the said support services and intricacy value of services given by the associated

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd. enterprises. The said aspect is linked to the issue of whether there is any need for services and in the absence of its establishing the same, whether the TPO/ Assessing Officer is correct in determining the arm's length price of transactions at Nil. The assessee had entered into an agreement with its associated enterprises for availing the services because of business benefits arising from such an understanding. Law does not require the assessee to demonstrate the need for availing the services. The assessee is best person to arrange its affairs to conduct the business in the manner it wants and Revenue cannot step into the shoes of businessman to decide what is necessary for the businessman and what is not. The TPO is not empowered to question the decision of assessee to avail support services from the associated enterprises. The decision taken by the assessee in the course of carrying on its business is commercial decision and the TPO cannot question such commercial wisdom of assessee's decision. The second linked issue which has been raised is that the assessee did not benefit from such support services where the assessee has shown losses during the year......

Findings on rendition of services: First of all, where the TPO has referred to the services provided and pointed out defects in the services provided, the first step that services have been provided stands established. Once the same is established by way of assessee producing several evidences before the TPO which were in the form of contemporaneous data, then the TPO is precluded from commenting upon the same and holding that the assessee had not received any services and also there was no need for making any payments for such services, as the services provided not upto the mark. In any case, the perusal of various evidences filed by the assessee i.e. contemporaneous data available on record shows that it is highly technical and the same has used by the assessee for carrying on its business activities, such evidence cannot be held aside being not upto the mark. The TPO had referred to part of the data and drew confusion, which is not warranted in any case."

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.

Findings on TNMM: The assessee has applied TNMM method and made comparison with the margins of concerns selected from foreign data base and had shown that the margins shown by the assessee were higher than the margins shown by comparable companies. In such scenario, we find no merit in the order of the TPO in applying CUP method as the most appropriate method. The findings of TPO in this regard are thus reversed. Accordingly, we hold that the TNMM method is most appropriate method appropriate method to be applied to benchmark the international transactions undertaken by the assessee. The assessee had selected the foreign AES as the tested party and the same may be taken as the tested party. The international transactions of fees paid for advisory and another services is thus to be benchmarked by comparing the margins of the tested party i.e. the foreign AE with the margins of external comparables selected by the assessee. The assessee points out that the said foreign comparables were also engaged in providing similar advisory and related services to its entities and the financial details were filed before TPO. Accordingly, we are in conformity with the exercise undertaken by the assessee in this regard. However, for the limited purpose of verification that the margins shown by the tested party ie. the foreign AE is at arm's length to the margins shown by the comparables, which were selected by the assessee, the AO/TPO is directed to verify the claim of assessee in this regard and decide the issue, accordingly. Reasonable opportunity of hearing shall be given to assessee by the AO/TPO."

by the assessee are allowed.

31. Lastly, coming to the issue of rejection of the claim of retention of money, it has been admitted that this issue has been decided against the assessee by the Tribunal in its own case in 2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd. various years’ right from A.Y.1994-95 to 2001-02. The relevant observation of the Tribunal reads as under:- “13.1 Whatever has been stated by us hereinbefore is also supported by the AS-9, relating to revenu recognition, issued by ICAI wherein it has been provided that in respect of a transaction involving sale of goods, the revenue should be recognized when the seller has transferred the property in goods to the buyer for a consideration and the transfer of property in goods, in most cases, results in or coincides with the transfer of significant risks and rewards of ownership to the buyer. In the present case, we have already held that when the goods have been delivered to the buyer by the assessee, the property in goods has been transferred to the buyer in terms of provisions of Sales of Goods Act, 1930, hence, the revenue has to be recognized in the period when such delivery has been made. In the Accounting Standard, it has also been provided that the recognition of revenue can be postponed if there exists uncertainties regarding the ultimate collection, however, in the present case the assessee has already received the amount of sole consideration though it has provided the bank guarantee for satisfactory performance and compliance with the terms and conditions of the contract and which cannot be said to have resulted into any uncertainty as regards the timing of recognition of revenue, hence, the total revenue from the sale transaction has to be recognized at the time of delivery of goods. As regards the case law relied on by the assessee are concerned, we find that the decision of the Tribunal in the case of Associated Cables (P) Ltd. (supra) which has been approved by the Hon'ble jurisdictional High Court, the assessee was billing only for 90 per cent of the value of the goods manufactured, despatched and delivered with the exception that 100 per cent of excise and sales tax were charged at that time and the balance 10 per cent was payable to the assessee only subsequently and if the assessee required its customer to pay this 10 per cent amount before, then, it could receive the same only on receipt and acceptance of goods at purchaser's site, submission of all final technical documentation, submission of performance and workmanship bank guarantee, hence, in that case, if the assessee required the payment of 10 per cent

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd. amount before the agreed period, then, it had to comply with certain terms and conditions and also to exclude some more activities and in that situation, it was held that there were attached certain additional conditions for getting that sum, hence, it could not be said that the retention money had accrued to the assessee before compliance of those conditions. Whereas in the present case, as stated earlier, goods have already been delivered and accepted and other obligations are only of the nature of warranty which do not in any way effect the right of the assessee to receive the amount, hence, the decision of the Hon'ble Bombay High Court and the Tribunal in that case are not applicable on the facts of this case. It is also noted that in that case the assessee was manufacturing only against specific orders whereas in the present case the assessee is dealing in standard products as a manufacturer as well as trader, hence, facts of both cases are different in this manner also. Similarly, the facts of the case of Simplex Concrete Piles (India) (P) Ltd. (supra) are also different inasmuch as in that case the assessee was a contractor and not a supplier which is a predominant situation in the case on hand and payment in that case was based upon different milestones, hence, the ratio of that decision is also not applicable to the present case. As regards the reliance placed by the assessee on the decision of Hon'ble Gujarat High Court in the case of Anup Engineering Ltd. (supra), we find that there was a dispute between the suppher and the customer as regards to quality/configuration of product/material supplied and which is not the case here, hence, the ratio of that decision is also not applicable. Thus, on merits, the assessee does not have any case. As far as the technical ground of rejection is concerned, which is involved only in one year, the same stands covered in favour of the assessee by the decision of the Tribunal in the case of Chicago Pneumatic India Ltd. (supra), hence, we hold that the order of the learned CIT(A) is not correct to that extent.

matching which requires the assessee to match cost with revenue and vice versa. Further, there is accounting concept of periodicity which requires the financial statement to be prepared for a definite accounting period and which is also recognized under the provisions of the IT Act as the assessees are required to file return of income for a previous year. There is a concept of accrual which is the basis of mercantile system of accounting wherein the effect of transaction and other events are recognized when those occur and those are recorded in the account records, and reported in the financial statements of the period to which those relate and not when the money received or paid. All these accounting concepts/principles i.e., periodicity, accrual and matching work together for income measurement and recognition of the assets and liabilities and profit and this can be depicted as follows: Periodic Profit = Periodic revenue (-) matched expenses.

2286/Mum/2017 M/s. Emerson Network Power (India) Pvt. Ltd.