HAFELE INDIA PVT. LTD.,MUMBAI vs. ASST. COMMISSIONER OF INCOME TAX CIRCLE 15(2)(1), MUMBAI

order

: 10.02.2023 O R D E R

Per Rahul Chaudhary, Judicial Member:

2. The Appellant has raised following grounds of appeals:

1. On the facts and in the circumstances of the case, the Ld. AO [Asst. CIT 15(2)(1)], based on the Directions issued by the DRP-1, (Mumbai), has erred in confirming the Order TPO [ Dy. CIT(TP)-2(2)(1)] of enhancing the income of the Appellant by Rs. 3,70,91,170/- by determining the Arm‟s Length Price of the international transactions pertaining to payments made to Associated Enterprise (AE) for payment of Distribution rights, payment for IT Support Services & payment for marketing consulting and support services as Nil. In doing so the AO has erred in: 1.1) Considering payment of distribution rights as intra group services. 1.2) Not appreciating that the Appellant has submitted various evidences in relation to provision of intra group services, the economic and commercial benefit derived by it and back-up supporting workings and therefore, the determination of ALP of the said transactions as Nil was not justified. The Appellant prays that the book value of International Transactions be accepted to be the ALP of the said transaction and the methodology adopted by the Appellant should be accepted deleting the adjustment made by the Ld. A.O.”

Assessment Year: 2014-15 4. The Appellant filed its return of income for the Assessment Year 2014-15 on 30.11.2014 declaring total income of INR 10,33,41,530/-. The case of the Appellant was selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that the Appellant had entered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm‟s Length Price (ALP) under Section 92CA(1) of the Act. The TPO vide order dated, 25.10.2017, passed under Section 92CA(3) of the Act proposed upward transfer pricing adjustment of INR 3,70,91,170/-

9.1. The facts, in brief, relevant to adjudication of the grounds raised in appeal are that the Appellant had adopted Transaction Net Margin Method (TNMM) for determining the ALP in respect of (a) Payment towards availing Distribution Rights, (b) Payment for IT Consulting & Support Services, (c) Payment of Marketing Consultancy Fee, (d) Receipt of Commission (e) Sale of Hafele Diary, (f) Payment of Logistic Charges, (g) Interest on delayed payments and (h) payment of dividend. However, the TPO did not accept the approach adopted by the Appellant in respect of (a) payment of INR 2,47,90,050/- made to Hafale GmBH & Co. K.G. towards Distribution Rights, (b) Payment of INR 77,06,608/- made to Hafale GmBH & Co. K.G. as Marketing Consultancy Fee for Marketing Consultancy & Support Services, and (c) payment of INR 45,94,512/- made to Hafale GmBH & Co. K.G. towards IT Consulting & Support Services. Rejecting the TNMM adopted by the Appellant as the most appropriate method, the TPO issued show cause notice, dated 18.10.2017. According to the TPO, no reply was received from the Appellant, and therefore, TPO determined the ALP of the aforesaid three transactions as „Nil‟ holding that the Appellant has failed to satisfy the need/benefit of the intra-group services, and rendition thereof. The TPO, thus, made transfer pricing addition of INR 3,70,91,170/- vide order dated 25.10.2017. However, in the Draft Assessment Order, dated 27.12.2017, transfer pricing adjustment of INR 2,47,90,050/- was proposed. During the course of hearing it was stated by the Ld. Authorised Representatives that the aforesaid error has been corrected. Nothing has been placed

4. Assessment Year: 2014-15 on record in support of the same. However, since in the grounds of appeal, the Appellant has challenged the transfer pricing addition of INR 2,47,90,050/-, we take it that the error has been corrected.

9.2. The Appellant filed objections before DRP contending, inter alia, that the transfer pricing adjustment has been proposed by the TPO giving proper/sufficient opportunity to the Appellant. The Appellant also filed additional evidence to establish that payments were made to the AEs for the services which were needed by the Appellant and that arm‟s length payment has been made by the Appellant for services rendered which have benefitted the Appellant. In relation to the payments made by the Appellant for intra-group services, the Appellant submitted as under:

(a) IT Consulting & Support Services: The Appellant had availed various types of IT consulting and supporting services from its Parent Company (M/s. Hafele GmbH & Co.) The Parent Company being, an experienced entity in its industry had an IT base as well as the technical support staff which helped other Hafele group companies such as the Appellant with their IT issues. The charges paid by the during the year of INR 45,94,512/- pertained to software licenses and other payments with respect to the aforesaid IT consulting & support services.

(b) Marketing Consulting and Support Services: Appellant availed various marketing consulting services from its AE and made payments aggregating to INR 77,06,608/- for the same. Hafele group had a strong presence in Assessment Year: 2014-15 furniture industry, therefore, based on the past experiences in the industry, Hafele Holding GmbH provided consultancy and guidance services to the sales and marketing teams of all the other Hafele group companies including the Appellant, which helped them to increase the sales and promote the Hafele products at a larger scale. This has also helped Appellant maintaining good market share in India.

(c) Distribution Rights: The Appellant has entered into an agreement with its AE for selling of distribution rights. In order to obtain the exclusive distributorship rights in India to sell the Hafele products, the Appellant had made payment of distribution rights to its AE. Similar payments were made during the precious years. The amount incurred by the Appellant on account of distribution Rights during the relevant assessment year stood at INR. 2,47,90,050/-.

9.3. The Appellant also filed Note relating to all the above payments made to AEs along with the supporting agreements, documents, cost computation etc. before the DRP. Since some of the documents/evidence provided by the Appellant to DRP was in the nature of additional evidence, the TPO was called upon by the DRP to submit a Remand Report on the additional evidences. The TPO filed Remand Report, dated 27.08.2018. In the Remand Report, the TPO admitted that during the hearing held on 18.10.2017, the Appellant was asked to produce details in respect of intra group services by 27.10.2017. However, since the Appellant failed to furnish the same by 27.10.2017, the transfer pricing addition was proposed on the basis of Assessment Year: 2014-15 material on record. According to the TPO, sufficient time was granted to the Appellant and therefore, he objected to admission of the additional evidence. However, without prejudice to the aforesaid objections, the TPO provided following comments in the Remand Report, dated 27.08.2018 in relation to the additional evidences:

“1. Marketing Consultancy and Support Services: I have gone through the additional evidences submitted by the assessee in this regard. It is observed that there is central server for marketing. But it is not established that what is tangible and direct benefit received by assessee from AE. The services rendered but benefit is not established.

3. Payment of Distribution Right: The assessee has not produced any additional supporting document in respect of payment of distribution rights. Therefore adjustment made is justifiable. In view of the above, adjustment made by the TPO are justifiable.” 9.4. The DRP, after taking into consideration the additional evidence and the Remand Report from the Assessing Officer, confirmed the transfer pricing addition proposed in the Draft Assessment Order in its Directions, dated 12.09.2018. Consequently, the Assessing Officer passed Final Assessment Order under Section 143(3) read with Section 144C(13) of the Act on 12.10.2018 making the transfer pricing addition.

9.5. In appeal before us, the first grievance highlighted by the Learned Authorised Representative for the Appellant was that 7 Assessment Year: 2014-15 the TPO has rejected the method adopted by the Appellant without assigning any reason and without granting sufficient opportunity to the Appellant. The contention of the Ld. Authorised Representative for the Appellant was that the method adopted by the Appellant for benchmarking the transactions under consideration has been followed in the preceding year and has been accepted. The Appellant had applied the Transaction Net Margin Method (TNMM) at the entity level for benchmarking these transactions. However, the TPO rejected TNMM as the most appropriate method in relation to some of the transactions and computed ALP at „Nil‟ without considering the reply/submission and the supporting documents filed before the TPO. The Ld. Authorised Representative for the Appellant contended that sufficient opportunity was not granted by the TPO to the Appellant. He submitted that first notice was issued by TPO on 04.10.2016. On 24.02.2017, reply to the aforesaid notice was filed by the Appellant. Thereafter, on 17.04.2017 the Appellant filed segmental profitability statement along with other documents/details. Thereafter, another letter was filed on 08.05.2017, containing, inter alia, details/submissions relating to distribution rights. Thereafter, on 09.07.2017 and 12.10.2017 the case was discussed, however, there was change of the incumbent TPO. Thereafter, on 16.10.2017, another submission was filed by the Appellant. On 18.10.2017, notice was issued to the Appellant asking for information in respect of international transaction of payment towards distribution rights, IT Support Services, and Marketing Support & Services. The aforesaid notice was sent to the e-mail of the authorized representative of the Appellant and in effect Assessment Year: 2014-15 provided only two normal working days to furnish the required details/documents as there were festival, holidays and Sunday in between. Therefore, the Ld. Authorised Representative for the Appellant requested for hearing after three to four days. However, the TPO did not consider the aforesaid request and passed the transfer pricing order on 25.10.2017. The Learned Authorised Representative for Appellant submitted that even before DRP, the Appellant had contended that methodology adopted by the Appellant should be accepted. However, the DRP also rejected the objection without assigning any reasons. 9.6. In response the submission of the Ld. Departmental Representative was that the Appellant had not provided any reasoning for adopting aggregation approach for clubbing the transactions. She submitted that the Transfer Pricing Study Report (TPSR) did not provide any rationale for adopting the aggregated approach or for adopting TNMM as the most appropriate method. She vehemently contended that by following segregated transaction approach and by selecting Comparable Uncontrolled Price (CUP) Method, the TPO had adopted the correct approach for determination of ALP. The Appellant had failed to establish the need, rendition and benefit of intra-group services under consideration, and therefore, the TPO had correctly applied CUP Method to arrive at „Nil‟ ALP for the same which has been approved/confirmed by the DRP even after considering the additional evidence even after taking into consideration additional evidence. 9.7. We have given thoughtful consideration to the rival contentions and have perused the material on record. We find merit in the contentions advanced by the Ld. Authorised Representative for the Appellant that neither the Assessing Officer nor the DRP 9 Assessment Year: 2014-15 has provided any reasoning for rejecting the TNMM which has been followed by the Appellant consistently and has been accepted for earlier years.

9.8. A perusal of order, dated 25.10.2017, passed by the TPO would show that TPO has rejected the TNMM as most appropriate method by holding as under: “The assessee had benchmarked all the above payment for Intra group service under TNMM. The benchmark done by the assessee is not found accepted. The assessee is required to justify payment by producing following details to justify ALP of the payment made for Intra group service:

1) The service as actually rendered 2) The AE has actually paid for the services rendered. The same is required to be supported by back to back bills raised by third party to AE. 3) If it is allocation, key of allocation of expenses attributable to Indian entity. 4) Proof of benefits derived by Indian entity i.e. benefit test etc None of the above details were produced by assessee to justify ALP of above payments…..” (Emphasis Supplied)

9.9. A perusal of the directions issued by DRP on 12.09.2018 would show that in Ground No. 2 the Appellant has contended that the methodology adopted by the Appellant be accepted. The submission made by the Appellant in support of the aforesaid ground are recorded by the DRP at page 9 and 10 of the order which read as under: “Rejection of method adopted by assessee for computation of arm‟s length price of IT Support Services, Marketing & support services and payment of distribution rights In Transfer Pricing Study for FY 2013-14, the assessee had aggregated the international transactions pertaining to Assessment Year: 2014-15 payment of distribution rights, commission income, payment of IT support services, marketing consultancy & support services, sale of diaries, logistic charges and payment of dividend. The assessee has compared the net margin earned with net margins of third party comparable companies and evaluated the arm's length price for these transactions.

The TPO has erred in disregarding the aggregation of abovementioned international transactions with other international transactions entered into by the assessee with its AES. The TPO further erred in rejecting TNMM as most appropriate method for these transactions and computing "Nil'arm's length price for these transactions without mentioning any method as most appropriate method for computation of arm's length price.

It may be noted that the TPO has accepted the TP methodology adopted by the assessee for other international transactions i.e. TNMM, however, rejected TNMM as most appropriate method in respect of these international transactions.

Further the assessee submits that the assessee had entered into similar international transactions in previous years and there has been no change in the nature of these services. The assessee had adopted TNMM as most appropriate method for computation of arm's length price of these transactions in previous years, which has been accepted in previous Transfer Pricing assessments.”

9.10. We note that the DRP has rejected the contention/submissions of the Appellant as follows: “5.3.3 It is settled law that ALP of each International transaction is to be determined separately and a composite approach is not permitted. TNMM at entity level cannot be applied to justify the ALP of intra group services….” (Emphasis Supplied)

9.11. In addition to the above reference to the selection of most appropriate method can be found only in paragraph 5.3.14 of the directions issued by the DRP. In the aforesaid paragraph 11 Assessment Year: 2014-15 while discussing the benchmarking of Marketing Consultancy & Support Services and IT Support Services, the DRP has stated that the Appellant has not benchmarked the transaction and has failed to show how the transactions are related.

9.12. From the above it can be seen that no reasoning is given by the TPO and/or DRP while rejecting TNMM method and concluding that CUP Method is the most appropriate method.

9.13. The Appellant had adopted TNMM method for a number of transactions/payments. While the TPO accepted TNMM in respect of some of the transactions/payments, the TPO rejected TNMM as most appropriate method for payment for Distribution Rights, Marketing Consultancy & Support Services, and IT Support Services (hereinafter referred to as „Intra-Group Services‟). The Appellant had placed on record copy of the policy document for Intra-Group Pricing Transaction (at page 118 to 171 of the Paper-Book-I) in support of the approach adopted by the Appellant which clearly provides that these services are provided by GmBH & Co. K.G (hereinafter referred to as „HDE‟) to its subsidiaries including the Appellant as part of the strategic management function. In the process HDE also receives services which are invoiced to the AEs receiving the service from HDE on the basis of actual work hours at a set hourly rate. It is admitted position that while computing the ALP at „Nil‟ for Intra-Group Services, the TPO did not take into any account the documents/details furnished by the Appellant. The Appellant had also filed additional evidence to support need/benefit/rendition of Intra-Group Services. In relation to IT Consultancy & Support Services, table summarizing computation of total cost and per hour cost incurred by Hafele Assessment Year: 2014-15 Germany, Certificate of Statutory auditors of Hafele Germany certifying actual personnel costs incurred, Bifurcation of payments and copy of invoices and Sample copy of tickets, emails and SS regarding IT services. In relation to Marketing Consultancy & Support Services, the Appellant filed Summary of cost of allocation working, Summary of actual costs incurred by AE, Copy of invoice, and Marketing strategy Manual. In relation to Distribution Rights the Appellant filed Agreement of grant of Distribution Rights of Hafele Products in India, Summary of commission income earned along with copy of sample invoices, and Bifurcation of payment of Distribution Rights along with invoices and its reconciliation.

9.14. The TPO opposed admission of the additional evidence filed by the Appellant before DRP. However, without prejudice to the aforesaid, in the Remand Report the TPO had, after considering the additional evidence, stated (a) that the Appellant had failed to show the benefit received from Marketing Consultancy Support Services, (b) that the Appellant had failed to establish that IT Support Services were actually rendered to the Appellant, and (c) that the Appellant had failed to submit additional supporting documents for payment towards distribution rights. In our view, there is lack of coherence in the order passed TPO and the DRP. While rejecting objection raised by the Appellant, the DRP had concluded that the Appellant has failed to establish, both, the rendition of all the intra-group services the as well as the benefit derived by the Appellant from the same. Thus, there is disconnect in the reason given by the TPO for determining ALP of Intra-Group Services at „Nil‟ and the reasons given by the DRP for rejecting Assessment Year: 2014-15 the objections. Further, as regards, the payment towards distribution rights, the Appellant has place on record the Agreement for Grant of Distribution Rights. The aforesaid agreement entitled the Appellant to receive commission from AEs in respect direct sales made by such AEs in India. The Appellant had also placed on record details of commission income earned in respect of products sold by third parties in India which has been offered to tax by the Appellant. The Commission received by the Appellant has also been accepted to be at arm‟s length by the TPO. These aspects have not been considered by the TPO/DRP. Similarly, the DRP has also observed that the Appellant had failed to provide the details of cost incurred in relation to the service and allocation of the same to the Appellant. However, the DRP has failed to consider the certificate from statutory auditors submitted along with the Note on IT Consulting & Support Services as well as the summary of actual cost incurred filed along with the Note on Marketing Consultancy and Support Services.

9.15. In view of the above, we hold that the DRP has failed to consider and/or appreciate the material on record. In the facts and circumstances of the present case, we deem it appropriate and in the interest of justice to remand the issue back to Assessing Officer/TPO for determination of ALP afresh. Accordingly, we accept the request of the Appellant to remand the issue relating to determination of ALP to Assessing Officer/TPO. The transfer pricing addition made in the Final Assessment Order is set aside and the Assessing Officer/TPO is directed to determine the ALP of Intra-Group Services afresh after taking into consideration all the documents/details including the additional evidence filed by the Appellant before 14 Assessment Year: 2014-15 the TPO/DRP to meet the requirements of need/rendition/benefit of the Intra-Group Service under consideration. It is clarified that the onus would be on the Appellant to show that the TNMM is the most appropriate method for benchmarking the payments made by the Appellant towards distribution rights, payment for Marketing Consultancy & Support Services, and IT Support Services, and that the same are at arm‟s length. The Assessing Officer/TPO would grant sufficient opportunity of being heard to the Appellant. In view of the aforesaid, Ground No. 1 raised by the Appellant is allowed for statistical purposes.

In the result, the present appeal is allowed for statistical purposes.