SIEMENS GAMESA RENEWABLE POWER PRIVATE LIMITED,CHENNAI vs. DCIT, CORPORATE CIRCLE 2(1), CHENNAI

The assessee has filed concise grounds of appeal on 17-03-2023 which read as under:- “For that the order of the Learned Assessing Officer u/s. 143(3) r.w.s.144C(13) of the Income Tax Act, 1961 is opposed to law/facts and circumstances of the case. Issue No 1: Transfer Pricing Adjustments in respect of Royalty: 2.For that the Learned Assessing Officer, based on the directions issued by the Dispute Resolution Panel ("DRP") erred in making the downward adjustment to the tune of Rs.8,62,92,000/- on payment of Royalty to Associated Enterprise ("AE") for use of Technical Know-how for manufacture of Wind operated Electric Generator as suggested by the Transfer Pricing Officer, ("TPO") stating that the same pertains to the bought-out components. 3.For that the Learned Assessing Officer, based on the directions issued by theDRP erred in determining the ALP of Royalty paid to AE on income from Development of Land and on Erection and Commissioning income amounting to Rs.3,95,11,305/- as 'NIL' Issue No 2: Transfer Pricing Adjustments in respect of Management Service Fee: 4.For that the Learned Assessing Officer and the TPO based on the directions issued by the DRP erred in determining the Arm's Length Price of Management service amounting to Rs.2,86,86,007/- as 'Nil', as suggested by the Transfer Pricing Officer without providing any cogent reason in this regard. Issue No 3: Transfer pricing adjustment at entity level 5.The DRP erred in confirming the action of TPO in making an entity level adjustment with respect to International Transactions amounting to Rs. 23,02,16,000/- Issue No 4: Disallowance under section 36(1)(va) of the Act: 6.For that the Learned Assessing Officer based on directions issued by the DRP erred in disallowing the contribution made to Provident Fund and Employee State Insurance amounting to Rs.21,848/- under section 36(1)(va) r.w.s 2(24)(x) of the Act without appreciating the fact that the same has been remitted before the due date under Section 139(1) of the Income Tax Act, 1961. Issue No 5: Disallowance under section 14A of the Act read with Rule 8D: 7.For that the Learned Assessing Officer based on directions issued by the Dispute Resolution Panel erred in disallowing Rs. 50,24,616/- under section 14A of the Act read with Rule 8D without considering the facts and circumstances of the case. 7.1 The Learned Assessing Officer and DRP erred in disallowing Rs.50,24,616/- computed under section 14A of the Act, in computation of Book Profits under section 115JB(2) of the Act, stating that the same pertains to expenditure attributable to earning exempt income. Issue No. 6: Transfer Pricing Adjustment at entity level made without considering the parity basis: 8.Without prejudice to ground No. 2 to 5, the Dispute Resolution Panel having confirmed the adjustment on account of Royalty and Management Service Fee, the Learned Transfer Pricing Officer and the Assessing Officer, have while giving effect to the directions issued by DRP, erred in making the entity level adjustment at Rs.23,02,16,000/- wherein the Operating Cost includes the amount of downward adjustment made in respect of Royalty and Management Service fee and thereby failed to consider the entity level adjustment on Parity Basis as against the observation made in the TPO Order.” As is evident, the assessee is aggrieved by confirmation of certain Transfer Pricing (TP) Adjustments on account of royalty, management fees and entity level TP adjustments. The assessee is also aggrieved by confirmation of disallowance u/s 36(1)(va) as well as confirmation of disallowance u/s 14A.

The Ld. AR placed on record issue wise charts and assailed the impugned additions. Our attention has been drawn to earlier orders of Tribunal in assessee’s own case. The Ld. CIT-DR controverted the submissions of Ld. AR and supported the final assessment order. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in manufacturing of wind turbines. The assessee also provides operation and maintenance service for wind turbine generators (WTG). The assessee is an Indian Subsidiary of Gamesa Spain.

Transfer Pricing Adjustment 4.1 The international transactions carried out by assessee include purchase of raw material, sale of components, payment of royalty and management fees which were benchmarked using Transactional Net Margin Method (TNMM). The assessee also purchased fixed assets and reimbursed certain expenses which were benchmarked using other method. The assessee characterized itself as manufacturer assuming normal business risk. The assessee used Operating Profit / Operating Revenue (OP/OR) as Profit Level Indicator (PLI) while benchmarking under TNMM method. The assessee submitted that its own margin of 7.85% as pitied against mean margin of 3.17% as reflected by 4 comparable entities were quite high and therefore, no adjustment was offered by the assessee in its TP study report. 4.2 The Ld. TPO disturbed PLI of the assessee and held that interest income, misc. income, profit on sale of fixed assets and ‘provisions for warranties no longer required written back’ could not be considered as operating income since these do not constitute income from operations. Excluding these items, the assessee’s revised margins worked out to be -18.96%. The assessee submitted that misc. income of Rs.380 Lacs could not be treated as non-operating in nature since these items represent insurance claim recoveries, support services provided to AE, product sales and recovery from suppliers etc. However, Ld. TPO held that product sales could not be accepted as operating in nature since no information was made available. The administrative service charges received from AE with mark up of 7% were also held to be non-operating in nature. Regarding provision for warranties, the assessee submitted that it was computing such provisions based on technical estimates considering the sales including unbilled revenue made during the year. However, the assessee excluded unbilled revenue for the purpose of computing warranty provision for the year since the liability for warranty arose only on actual sales affected by it. The same has resulted into write back of warranty provisions. Since the adjustment was in ordinary course of business, the same would be operating in nature. However, Ld. TPO held that it was notional income on the basis of reversal of excess provisions made in earlier year and does not create any cash flow for the assessee. Therefore, the same was also considered as non- operating in nature. 4.3 The assessee claimed certain costs to be non-operating in nature which are listed in para-9 of TPO’s order. The Ld. TPO held that bank charges and provision for impairment of fixed assets would form part of operating cost. The assessee claimed depreciation adjustment for unutilized capacity on the ground that it operated at 48% of installed capacity whereas the comparabale did not suffer any capacity underutilization. However, the same was rejected by Ld. TPO. The assessee also claimed depreciation impact on new factory installations on the ground that the new factory did not commence its operations. However, in the absence of any satisfactory evidences, this plea was rejected. The plea to exclude obsolete material was also rejected. The assessee claimed custom duty adjustment. However, the same was rejected in the absence of any satisfactory evidences. The assessee claimed underutilization adjustment which was also rejected.

ALP of Management Fees The assessee is stated to have paid an amount of Rs.286.86 Lacs as management fees to its AE i.e., Gamesa Corporation Technologica, Spain. The same was paid on quarterly basis at fixed rates. In earlier years also, the assessee had paid for such services and the service agreement had not undergone a change. The assessee claimed to have received managerial / professional consultancy from its AE and submitted that had the assessee not availed the services, it would have incurred more cost. The assessee submitted hourly allocation table indicating time / cost available to the Indian entity and submitted that some portion was regarded as shareholders’ and stewardship functions and balance was allocated to affiliates for specific services rendered to them. The assessee submitted that it paid effective man hour rate in USD @213 per USD as against third party main hour rate of 250 USD per hour. However, Ld. TPO held that the assessee failed to pass need- benefit-evidence test. It failed to substantiate the nature of services received and failed to demonstrate as to how the said services were received. Since the assessee failed to establish the transaction itself, the Arm’s Length Price (ALP) of such services was determined at ‘Nil’ and TP adjustment of Rs.286.86 Lacs was proposed by Ld. TPO on this count.

ALP of Royalty 6.1 The assessee paid royalty to Spain AE ranging between 4% & 4.5% on turnover as compensation for technology component involved in the manufacturing of WTG. The Ld. TPO noted that the assessee’s revenue consisted of three different streams. The turnover forms the basis of calculation of royalty. However, in the absence of clear proof of application of technology, the revenue arising out of erection and commission charges and development revenue do not qualify for payment of royally. The other issue would be quantification of turnover from sale of WTG. This requires to be adjusted for the value of bought out components from AE as there would be already technology embedded therein and on which AE would have recovered cost together with mark-up. The aggregate royalty paid by the assessee aggregated to Rs.3984.69 Lacs. The Ld. TPO also noted that the assessee imported material from its AE for Rs.19176.43 Lacs which has been detailed in the order. The Ld. TPO proposed adjustment of royalty on account of standard bought out components, royalty on development revenue and royalty on erection and commissioning and held an opinion that royalty would not be payable on these components. 6.2 The assessee submitted that royalty paid as percentage of sales was just measure for payment of royalty for technology received by them. The technology was used for manufacture and supply of WTG, erection and installation of WTG etc. However, rejecting the same, Ld. AO held that ALP of royalty on bought out components would be ‘Nil’ which has been paid by the assessee @4.5%. The same resulted into adjustment of Rs.862.92 Lacs. The Ld. TPO proposed similar adjustment of royalty on revenue from erection, commissioning and development revenue. The Ld. TPO, after going through sample agreement entered into by the assessee with its customers with respect to scope of work, observed that AE was willing to transfer technology for specific model of WTG and the transfer of technology was for specific purpose of manufacturing, selling, installing, commissioning and carrying out O&M activities. Finally, it was held that royalty payment on development revenue and erections and commissioning income was not for the purpose of technology and not in accordance with the terms of agreement which specifies that transfer of technology was for manufacturing of product sold which is nothing but the value of WTG. Therefore, there was no need to pay royalty on these components. The same resulted into another adjustment of Rs.395.11 Lacs in the hands of the assessee. 6.3 The Ld. TPO held that since entity level loss computed by him include transactions of royalty claim on bought out components, royalty claim of erection and commissioning revenue and land development revenue and management fees for which separate adjustment was proposed, the entity level adjustment of Rs.2542.87 Lacs would stand correspondingly revised to Rs.1863.90 Lacs. Finally, the adjustments as proposed by Ld. TPO were as under: - No. Nature of Adjustment Amount (Rs.) 1. TNMM Adjustment 1863.90 Lacs 2. Royalty claims on bought out components 862.92 Lacs 3. Royalty claims of erection and commissioning 395.11 Lacs revenue and land development revenue 4. Management Fees 286.86 Lacs Incorporating the aforesaid adjustment, a draft assessment order was passed by Ld. AO on 30-12-2016 which was subjected to assessee’s objections before Ld. DRP.

Proceedings before DRP 7.1 The Ld. DRP substantially confirmed the findings of Ld. TPO while disposing-off assessee’s objection. Regarding administrative service charges received from AE with a mark-up of 7%, Ld. DRP held that the same could not be treated as part of operating income. However, Ld. TPO was directed to exclude corresponding costs from operating costs while determining PLI. 7.2 The assessee also pleaded for inclusion of one entity i.e., M/s Global Wind Power Ltd. which was rejected since financial data could not be furnished by the assessee. The assessee’s objection that ALP of royalty and management fees could not be determined separately by Ld. TPO since aggregation approach was accepted by Ld. TPO, was also rejected. Regarding royalty payment, it was observed by Ld. DRP that royalty was to be calculated by the assessee on the basis of net ex- factory sale price of the product exclusive of excise duties minus the cost of standard bought out components and landed cost of components, irrespective of the source of procurement, including ocean freight insurance, customs duties etc. However, the assessee had not done so. Therefore, plea regarding royalty on bought out components was rejected. The findings of Ld. TPO that royalty was not to be paid on revenue from erection and commissioning and development of land was also confirmed since the assessee could not show as to how the transfer of technology was linked to sale of products and how the same has been used for sale of its products. Similarly, how separate technology for O & M activities is required when the assessee had already got the entire technology for the manufacturing of the product. The assessee could not explain as to how the technology could have been transferred without technical documents, drawings, type certificates etc. 7.3 Regarding management fees, Ld. DRP held that quantum of management fees was being decided more on the basis of profits to be shifted outside India rather than any services actually provided to the assessee. Since the assessee was having lesser profits / losses in this year and therefore, management fees were shown at a very small amount. Further, the agreement entered into by the assessee was very general and non-specific in nature. The agreement did not have any clause to protect the beneficiary from deficiency in services and the assessee still had to make payment to the service provider at the agreed rate and there was not any scope of imposing penalty on the service provider. There was not any clause in the agreement which would enable the assessee to inspect the books of account of AE to verify as to whether the costs attributed to it for the purpose of determining the fees payable. Therefore, the agreement could not be considered as reliable document to ascertain the actual delivery of the services or ALP of the services. The assessee never attempted to cross verify the charges levied by AE and the invoices had been accepted as such on their face value. The assessee merely referred to services agreement, summary of cost allocation amongst various service providers and copies of invoices, debit notes, credit notes etc. The assessee paid cost on actual basis. However, computation thereof was not placed on record. Accordingly, the action of Ld. TPO, in this regard was upheld. Considering DRP’s directions, the proposed TP adjustments were reduced by Ld. TPO to Rs.3847.05 Lacs as against Rs.4087.77 Lacs as proposed in the original order. Aggrieved as aforesaid the assessee is in further appeal before us. Our findings and Adjudication 8. The Ld. AR has tabulated the TP issues in the shape of chart. The first plea of Ld. AR is adjustment of royalty payment of Rs.862.92 Lacs on bought out components. The lower authorities have determined the ALP of the same as Nil. We find that this issue has been adjudicated by Tribunal in assessee’s own case for AYs 2011-12 and 2012-13, & 376/Mds/2017 dated 13-11-2017. The bench in, para 6.6 to 6.8 adjudicated this issue as under: - 6.7 Further, it is to be noted that there cannot be any restriction on payment of royalty on bought out components which were subject to further processing by the assessee and which was not sold on as is basis to end customers. This view of ours is fortified by the decision of the Tribunal in the case of Akzo Nobel Chemicals (India) Ltd. (supra) wherein held in para -23 that what is liable to be considered as standard bought out components are such material on which no further processing is required and are directly fitted into the final product; and, cost of such material only needs to be deducted from the sale price to compute the royalty payable. Applying the said clarification to the present situation, considering the manufacturing process explained, it cannot be construed that the so-called constituent material are merely fitted into the final product; on the contrary, it is a case where such material

The second issue raised by Ld. AR is against royalty adjustment on turnover pertaining to development of land, substation development and erection and commissioning. We find that this issue is also covered by the cited decision of Tribunal in assessee’s own case as under: - 11.1 It is brought to our notice that the TPO himself has agreed that such activities required technology support. The only contention raised by the TPO is that such activity did not require any technology, which is available in India. In other words, the contention of the TPO is that required technology for this activity is available in India. In our opinion, it is not the prerogative of TPO to decide whether the assessee should have used the technology provided by its AE or not. It is to be noted that assessee developed wind farms, installed and commissioned WGS on the basis of input provided by its AE. The AE has vast experience in implementing such projects across global and therefore, the assessee obtained expertise knowledge from AE in order to ensure better quality to its customers. In our opinion, the TPO cannot question commercial expediency of incurring any expenditure by the assessee as held by the following judgments:— (a) In the case of Hive Communication (P.) Ltd. (supra) (b) In the case of EKL Appliances Ltd. (supra) (c) In the case of Computer Graphic Ltd. (supra) 11.2 Further, once the TNMM has been applied for the transaction and it covered under its ambit the royalty transaction in question. A separate analysis and consequent deletion of royalty payment is unwarranted. Placing reliance in the case of Magneti Marelli Powertrain India (P.) Ltd. (supra) wherein held that:— 17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs.38,58,80,000 only for which Comparable Uncontrolled Price ("CUP") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too. 11.3 A similar view was taken by Co-ordinate Bench of Hyderabad in the case of Air Liquid Engg. India (P.) Ltd. (supra) wherein held that:— '20. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company's transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion of the Royalty payments by the TPO in the instant case seems erroneous. We draw support from the Hon'ble Mumbai ITAT decision, Cadbury India Ltd. v. ACIT (ITA No. 7408/Mum/2010 and dated 13-11-2013) wherein the Hon'ble ITAT upheld the use of TNMM for Royalty as well as relied on many of the above decisions to hold adjustment by TPO was erroneous: "33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 1OA(d) of the ITAT Rules defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales, it cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a stand-alone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the difference in the PU of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range.

The decision of the Tribunal in 'Ekla Appliances', 2012- TH-01-HCDel- TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in pari materia with those of the assessee's case. However, therein also, the benefit test had been applied by the TPO, as in the present case. The matter was carried in appeal before the Hon'ble High Court. The Hon'ble Delhi High Court has held that the so-called benefit test cannot be applied to determine the ALP of royalty payment at nil and that the TPO could apply only one of the methods prescribed under the law. A similar view has been taken in 'Sona Okegawa Precision Forgings Ltd.' case (supra) and in 'KHS Machinery Pvt. Ltd. v. ITO' 53 SOT 100 (Ahm) (URO).

It is, thus, seen that the royalty payment @ 3% by the assessee is at arm's length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits, it also falls within the limits of payment of royalty in the automobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in 'Ekla Appliances' (supra) and in 'Ericsson India Pvt. Ltd. v. DCIT', 2012-TII- 48-ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of the benefit test is unsustainable in law.

Keeping in view all the above factors, the disallowance made on account of royalty is found to be totally uncalled for and it is deleted as such...."

Hence, following the ratio of the Hon'ble Delhi High Court in EKL Appliances (supra) and various other decisions as noted above and given the facts and circumstances of the instant case, we hold that the addition made by the TPO and upheld by the DRP is unsustainable and is to be deleted. Hence Ground No. 2 is held in favour of the assessee. Hence, the appeal of the Revenue is dismissed and Assessee's appeal in ITA No. 1159/Hyd/2011 is allowed.' 11.4 Being so, in our opinion, there is no question of downward adjustment towards on royalty payment to AE on the ground that no royalty is allowable on turnover pertained to development of land, substation development and erection and commissioning. This ground of assessee in both the appeals is allowed.

The third issue is qua management fees. This issue has been decided by Tribunal in assessee’s own case as under: - 21. However, for the A.Y 2012-13, though the assessee was asked to explain as to how the cost of allocation for the management fee was done. The assessee had submitted vide letter dated 20-3- 2017 a copy of application filed with Centre for Wind Energy Technology which was rejected by the DRP stating that no cognizance is required to be taken of these documents submitted after the hearing were completed. Regarding copy of correspondence with the AE for allocation of cost, it was observed by the DRP that no such document was furnished by the assessee. However, before us the assessee filed additional evidences for the A.Y 2012-13 as discussed in earlier para elsewhere in the order and we are in-principle agree with the contention of the assessee regarding the allowability of management fees and there is no requirement of transfer pricing adjustment on this issue, subject to verification of availing of actual services and allocation of its cost to the assessee. For the A.Y 2011-12, it was stated that all the relevant evidences were already available with the Assessing Officer/TPO and on that basis; it is required to be verified with regard to availing actual services and its allocation of cost to the assessee. Accordingly, this ground relating to Management fees is remitted to the file of ld. Assessing Officer for fresh consideration for both the assessment years and the Assessing Officer after going through the evidences filed by the assessee decide the issue fresh as indicated above. This ground is partly allowed for statistical purposes for both the assessment years.

The next issue raised by Ld. AR is qua computation of PLI, economic adjustments and selection of comparable entities. The Ld. AR assailed the action of Ld. TPO for economic adjustment and computation of PLI. The Ld. AR also sought exclusion of M/s Hitech Hi-Rel Power Ltd. on the ground that this entity was functionally different. The Ld. AR sought inclusion of M/s Global Wind Power Ltd. and submitted that the financial information of this entity is very much available in public domain. The Ld. AR further submitted that PLI of the assessee has been determined by Ld. TPO post considering the royalty and management fees and therefore, making entity level adjustment again would amount to double jeopardy.

We are of the considered opinion that our adjudication on royalty and management fees would directly impact computation of entity level TNMM adjustment and the same would have material bearing on the approach of determination of ALP of remaining transactions. Considering this fact, we deem it fit to restore the matter of determination of entity level TNMM adjustment back to the file of Ld. TPO / AO to re-adjudicate the issue of computation of PLI, economic adjustment and selection of comparable entities. The assessee is directed to substantiate its case with evidences. Needless to add that adequate opportunity of hearing shall be granted to the assessee. The corresponding ground stands allowed for statistical purposes.

Disallowance u/s 36(1)(va) 13.1 The assessee deposited Employees’ Contribution to ESI & PF for Rs.0.21 Lacs belatedly as noted in para 7.1 of final assessment order. The same was disallowed by Ld. AO and confirmed by Ld. DRP. Aggrieved, the assessee is in further appeal before us. 13.2 Considering the decision of Hon’ble Supreme Court in the case of Checkmate Services P. Ltd. Vs CIT (Civil Appeal No.2833 of 2016 dated 12.10.2022), this disallowance is confirmed. The corresponding grounds stand dismissed.

Disallowance u/s 14A 14.1 The assessee made investment in equity shares which were capable of yielding exempt income. The assessee debited finance cost and Ld. AO proposed disallowance u/s 14A. The Ld. AO, applying Rule 8D, computed aggregate disallowance of Rs.50.24 Lacs which was interest disallowance u/r 8D(2)(ii) for Rs.44.11 Lacs and indirect expense disallowance u/r 8D(2)(iii) for Rs.6.13 Lacs. The same was added under normal provisions as well as while computing Book Profits u/s 115JB. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 14.2 The Ld. AR has submitted that the assessee has not earned any exempt income during the year and therefore no such disallowance could have been made as per the decision of Hon’ble High Court of Madras in the case of Chettinad Logistics Pvt. Ltd. (248 Taxman 55).