EMERSON NETWORK POWER (INDIA) P.LTD,THANE vs. ADDL CIT RG 1, THANE

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.

The brief facts are that assessee manufactures and markets a range of power solutions including Uninterruptible Power St (UPS) systems, Climate and Environmental systems, DC power systems, Automatic Transfer Switches CA Racks and Enclosures for TT Server protection and power distribution units. The assessee also provides certain services to support its solutions, The assessee has its headquarters in Thane, Maharashtra and two plants facilities located at Thane and Nerul.

In Form 3CEB filed for A.Y.2011-12, assessee had shown following international transactions with its AE. Value of No. Description of Transactions Transactions i Import of raw material (components, 59,51,39,128 accessories, etc.) 2 Export of raw material (UPS / AC 2,26,48,357 parts) 3 Import of finished goods (UPS, 25,23,18,144 accessories, etc.) 4 Export of finished goods (UPS, 33,87,827 switches, etc.) 5 Payment of royalty 2,16,45,306 6 Receipt of agency income 38,22,967 7 Receipt of service income 47,53,464 8 Payment for procurement support 15,39,994 9 Payment for marketing research 1,08,45,109 support 10 Technical support 3,77,994 11 Payment for management fees 5,27,86,128 12 Payment of procurement charges 1,91,66,537 13 Payment of networking charges 5,11,79,462 14 Recovery of expenses 28,43,476 15 Reimbursement of expenses 25,81,641

The assessee is a part of Emerson group and the Emerson Group has various businesses across the globe and all the different business verticals are housed in different companies like Emerson Climate Technologies, Emerson Network, Emerson Process, Emerson Electric, etc. Each of these businesses /companies has operations in majority of the countries worldwide. One such business of the group i.e., manufacturing of power-driven system referred to as Network business is housed under Emerson Network' The Emerson Network business has regional headquarters worldwide. Each of these companies (part of the Network Group), operate independently, but to have some standardization in the approach or process or conduct of the business and to achieve the efficiency as desired the network business is divided into regional zones and groupings, one such, being Asia pacific region and the assessee company, being an Indian company falls under Asia Pacific region. The Emerson Network Power Asia includes affiliates in Australia, India, South East Asia and North Asi. South-east Asia and North Asia included affiliates from Singapore, Hong Kong, Malaysia, the Philippines, Korea, Vietnam, Indonesia, Thailand, Pakistan and New Zealand.

In order to co-ordinate the activities of the Emerson Group involved in manufacture and sale of UPS, PAC systems and shelters, the management service fee mechanism was established in 2009. The management services are provided through regional service centers located in Australia, Hong-Kong, 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.

The ld. Counsel submitted that assessee has provided all contemporaneous documents for each line of services received and to substantiate its claim and to prove the need and benefit test and rendition of the management services were given in form of e-mail communications, documentary presentations before the TPO. The said details were also provided to the DRP. Besides this assessee also filed an executive summary of these emails showcasing as to who provided the services to whom it was rendered along with the nature of services and the benefit derived there from.

In the addition to the above, Ld. Counsel submitted that the assessee has also obtained a certificate from the external consultant viz. PwC Australia certifying the allocation of costs which provides the total cost incurred by the AE, the cost allocation mechanism, the procedures and safeguards followed by the auditors, the consistent mark-up charged by the AE and finally cost allocation (service wise) charged to the assessee. The cost incurred by the AEs are allocated basis two methods, namely 'direct cost' and 'indirect cost' method.  The Direct costs (Business trips, specific project and support cost etc.) are allocated on the basis of portion of services directly attributed to the beneficiary companies.  The Indirect costs are allocated on the basis of the time- spent.

Ld. Counsel submitted that, In his certificate, the external consultant has in detail analyzed the cost-base, the audited financials of the AE, financial processes, allocation methodology, review of TP policies, meetings with the regional finance director regarding intercompany support and processing service in respect of management fees in detail. Subsequently, after adhering to all the recognized auditing procedures and TP guidelines, certificate was provided only in relation to 'calculation of management service fees charged from AE to the assessee for 01/04/2010 to 31/03/2011.

Solution's & Design tools to HP Internal Requirement KAM configure required -Pritech Park Network Guidance from group in infrastructure, relation to projects planned including racks, in India by HP. Accordingly, power, cooling, was in position to monitoring provide competitive pricing and accessories 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.

Human Establishment of Mail correspondence on Resource incentive and providing guidelines to update pension plans for the Asia, ANZ and India top management, management leaders about middle the news that the annual management and review will be effective since other employees. January i, 2011 effecting the new salaries of the employees.

Finance Organizational Capex Target: planning Revised capex target fixed for Emerson India. Daniel from corporate finance team revised the capex target based on the review of the capital of Emerson India. The capex targets are revised based on review of actual numbers and forecasts and accordingly advice is provided to bridge the variance.

Finance - Analyses the Helps in guiding in the profit return on review to drive the market investment by unit towards the profit plans business and sets as defined in the proft review. direction It helps to set up cost - Provides improvement programs and assistance on the measure effectiveness of the analysis of Data programs earlier set through - Drives the 5-year actual achievements. profit review plan to assist to improve profit, provide direction 10. Information Guidance and Laptop Approval (other than Technology implementing standard) common Asia For purchasing of laptops, the Pacific IT costing of the laptop will have initiatives/Projects to be reveiwed since a corporate listing in the APAC region had been prepared to compare the prices in different market units and help in leveraging of investment done on the units. Hence, Nalakumar from APAC Phillipines highlighted the challenges if a different laptop model had to be purchased. Further, troubleshooting

Information Guidance and Mail correspondence on Technology Implementing discussion with respect to the common laptop models issued to the Asia Pacific employees IT Initiatives /Projects 13. Logistics Coordination of Mail correspondence stating supply chain the summary of the weekly process within report of the procurement of Asia Pacific various products. 14. Logistics Provides central Global Forecast tool: procurement The Group has developed a and purchasing Global Forecast tool which for all market would help all the entities to units in Asia upload their forecast in the Pacific tool on a timely manner and to update it based on the changes, if any. Training was organised by the Emerson Global Materials Data Centre to familiarize the procurement personnel with the use of the tool. The global forecast tool 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.

Logistics Provides central ABCD Analysis: procurement and Training materials and purchasing for help was provided to all market units generate ABCD analysis in Asia Pacific report in the new system implemented by Emerson India. This report provided the inventory data on raw materials and finished goods. Since there was a migration to the new ERP system, which Emerson India personnel were not well equipped to understand the functionality, a training was organised to facilitate understanding of generation of the inventory reports so as to have a better inventory management control.

Ld. Counsel further submitted that the above-mentioned services are rendered in pursuance to the agreement /arrangement of the assessee with its AE. The TPO has alleged that the nature of service rendered is duplicative services. On the contrary, the assessee submited that the whole purpose of entering into the service agreement was to avoid duplication of efforts and to make the arrangement administratively convenient 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.

Illustratively, ld. TPO in Para No.6.2 at Page 12 has inter alia held that the mail is regarding approval of bonus, reduce attrition which is services duplicative in nature. To which the assessee drew our attention to Page No. 311-313 of paper book wherein the assessee had requested concerned person of the AE to seek approval for additional increment over the approved budgeted The said request was to factor in the booming talent and upsurge of salaries across Indian market. Basis above, the he submitted that there is difference in the services rendered by the AE and work done by the employees of the assessee in India and hence there is no duplication of service. 18. Further, the determination of the ALP by the TPO (even if on ad-hoc basis) clearly supports assessee's stand and the need, benefit and rendition of the services cannot be doubted. In so far as ld. TPO’s allegation is that services are in the nature of stewardship, ld. Counsel submitted that regular and routine operation activities cannot fall within the domain of stewardship / 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.

Further allegation is that 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. He submitted that the conclusion reached by the TPO is without any cogent evidence. The auditor has considered various allocation keys and, in his wisdom, has arrived at allocation key basis the time spent by the concerned employees.

He further drew our attention to the Page 182-184 of paper book wherein, the auditor has also justified that the time spent' allocation key is an appropriate key. The auditor has also justified that the time spent allocation key is appropriate key by stating that value of each service recipient can be seen as proportional to the amount of time spent providing assistance and value received is consistent across all countries i.e., an hour of service time will provide an equal benefit regardless to country to which it is provided. The other alternate allocation of head count key was also considered but was regarded as not appropriate for the reason that time spent may be considered as more direct measure of the level of efforts required to provide the services and thereby a better indicator of benefit provided. Further, it also accounts for different circumstances of each market unit which may not be factored by head count charge. This is also explained with illustration by the auditor. The alternate allocation on the basis of head count was considered by the external consultant, on perusal of the same it can be seen that of the Total employee strength of 2,091 employees, 1,331 employees devoted time to Indian entity as against the 760 employees to other ENP countries. If the head-count key was to be considered as an appropriate key, it would have resulted into allocation of much higher amount to the assessee.

To support its stand, the auditor in its certificate has also relied on communication of European commission which provides guidelines for low value adding of intra group services. In view of the above, the assessee submitted that the allocation key used in certificate is rightly defined and considered by the Auditor in his wisdom and cannot be doubted.

Further in so far as reliance placed by the ld. TPO on the agreement that the disclaimer had been made by the Auditors that assessee was entitled to obtain details from AE, he clarified that the Clause 5 of the agreement which provides for records and reports, AE has kept record of service cost incurred and the agreement provided that if request was to make copy of details etc. would be provided. Once, independent Auditor have certified the cost charged by the AE with the details provided by the AE attributing any doubt about the said charging of cost is uncalled for and such a disclaimer by the Auditor is only customary and therefore, its reliability cannot be questioned. 23. Lastly, he submitted that adjustment of estimated and adhoc basis determined by the ld. TPO cannot be upheld. 24. On the other hand, ld. DR strongly relied upon the various observations of the ld. TPO based on analysis of the documents filed by the assessee and submitted that ld. TPO after detailed analysis and analyzing the documents have not accepted the rendition of services as well as benefits of services and therefore, adjustment has rightly been made.

We have heard both the parties and also perused the relevant finding given in the impugned orders as well as material referred to before us. What is required to be seen while analyzing the arm’s length analysis of intra-group services that it needs to satisfy prima facie following tests mainly, need test; rendition test; benefit test; duplicative services test; and shareholders activity test. From the perusal of the documents we find that assessee has proved rendition of services by filing various documents before the authorities below as well as before us. Assessee has also demonstrated prima facie need and benefit test which has been highlighted in the foregoing paragraphs against various services. Thus, there cannot be any further critical analysis for measuring benefit unless certain contrary records are found that all these documents do not lead to conclusion of any kind of benefit. If services have been rendered by the AE for the activities carried out by the assessee and assessee has provided the details of benefits of these services and analysed the same qua all the services, then how much need was there and benefit has been derived cannot be measured, TPO/AO cannot decide this was needed and there is less or no benefit. Entities operating globally at various countries in order to have global standard practice and uniformity of services and quality control do maintain centralized service centers to provide the services. Revenue has to see, whether there was prima facie need and benefits from such services which assessee has to show with proper documentation and objective analysis of each of services in its TPSR with some quantitative and qualitative benefit which 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.

Another point which needs to be analysed is, whether there was any rendering of duplicative services. The service agreement here in this case was to avoid duplication of service and to make the arrangement administratively cost effective. The services provided by the AE are primarily in the nature of supervisory or review of work done to ensure that work done by the assessee is in line with the policies of Emerson Network group at a group level and there is no deviation. This was to ensure that the policies and guidelines formatted by the brand Emerson Network are applied properly and correctly. Further, it has not been demonstrated or brought on record by the ld. TPO that the services which rendered by the employees of the assessee are exactly the same service which have been provided by the AE nor it was found that there was any kind of duplicative services. Further, these services cannot be held to be in the nature of stewardship or shareholders activity which are generally undertaken by the companies to protect their own interest. Regular and routine operational activities cannot fall within the domain of stewardship or shareholder activity which is evident from various kinds of services which has been highlighted in the earlier part of paragraphs. These activities relate to day to day management and not any kind of protection of capital 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.

Coming to the cost of allocation, the assessee has heavily relied upon certificate of external consultant in relation to the management services fee charged. The certificate specifically provides how the cost has been allocated to the assessee. The Auditor has evaluated the special purpose financial report of the AE, has obtained the data of the AE to verify the management service fee with its break-up cost center-wise. He also had a meeting with Regional Director of Asia of each cost centre regarding the inter company support / services so as to arrive the cost base to be located. Apart from that, Auditor also justified ‘time-spent’ allocation key for valuing each and every services which is not only a very logical basis to find out the correct and appropriate allocation of the cost because it has to be seen proportionately to the amount of ‘time-spent’ and providing assistance and value received is whether the consistent across all the countries. Thus, there is no infirmity in the cost allocation and it cannot be held that there is any fault in the allocation key.

Thus, apart from that ld. Counsel before us, vis-à-vis every services has given the relevant clause under the agreement, the documentary evidences furnished, benefit derived in its voluminous chart which we have gone through and found that 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.

Another important thing is that the Tribunal on exactly similar facts in the case of group concern with same intra-group services related to the same AE has analysed this issue in detail and has given following findings:- Findings of the Tribunal: Findings on whether TPO can question the commercial wisdom for entering into transaction: The first aspect which arises in the present appeal is whether the TPO while ascertaining whether price paid for the services is at arm's length price or not, can enter the field of businessman, who is the best judge as to whether it needs to avail the said services. The answer to the same is No 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 been used by the assessee for carrying on its business activities, such evidence cannot be brushed aside being not upto the mark. The TPO had referred to part of the data and drew conclusion, which is not warranted in any case.

Thus, the aforesaid judgment of the Tribunal also supports our view taken above. Accordingly, the grounds raised

Before parting with this issue, we consider it pertinent to deal with the other aspect of the issue involved Le, once the assessee is postponing the revenue recognition in such situations, in spite of following the mercantile system of accounting, the assessee is not following the principle of 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.

Since this issue has been decided against assessee and therefore, following the same precedence both these grounds of the assessee are dismissed.

In so far as short grant of TDS credit, we direct the ld. AO to verify and give benefit of TDS as reflected in Form 26AS. 34. In so far as appeal for A.Y.2012-13 as stated above, the issues and findings given by the lower authorities are exactly same, therefore, finding given above will apply mutatis mutandis and accordingly, the issue of TP adjustment is deleted and the issue of rejection claim of retention money is decided against assessee. Lastly, regarding short grant of TDS credit, we direct the ld. AO to verify Form 26AS and allow the credit of TDS.