GOODYEAR SOUTH ASIA TYRES PRIVATE LIMITED,,AURANGABAD vs. ASSISTANT COMMISSIONER OF INCOME-TAX,, AURANGABAD

आदेश / ORDER

PER SUSHMA CHOWLA, JM:

Both the appeals filed by assessee are against separate orders of ACIT, Circle-1, Aurangabad, dated 22.03.2016 and 25.01.2017 relating to assessment years 2011-12 and 2012-13 passed under section 143(3) r.w.s. 92C & 144C of the Income-tax Act, 1961 (in short „the Act‟).

ITA No.1068/PUN/2016 3 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

The Appellant prays that the book value of the international transaction be accepted to be the arm's length price of the said transaction. Ground No.3 3. On the facts and in the circumstances of the case, and in law, the Ld. DRP and Ld. AO, following the directions of the Ld. DRP, erred in determining the arm's length price of the international transaction of payment of RSC as 'Nil', without identifying any valid comparable uncontrolled transaction. The Appellant prays that the method selected by the Appellant ought to be accepted, and the TP adjustment made by the Ld. AO and confirmed by the Ld. DRP, without any (reference to comparable uncontrolled transaction ought to be deleted. Ground No.4 4. On the facts and in the circumstances of the case, and in law, the Ld. DRP and the Ld. AO, following the directions of the Ld. DRP, erred in making the TP adjustment on account of payment of RSC ignoring that: 4.1. The Appellant had supported the claims with appropriate evidences; 4.2. The Appellant had submitted the write-ups on nature of services received and benefits derived therefrom; 4.3. The Appellant had submitted cost allocation working along with certificate issued by Independent accounting firm confirming that the cost allocation was as per RSC agreement; 4.4. There was commercial rationale and expediency in availing the services from the AEs; and 4.5. The Appellant is not required to establish the benefits arising out of the said services. The Appellant therefore prays that the TP adjustment made by the Ld. AO and confirmed by the Ld. DRP, ought to be deleted. Ground No. 5 5. On the facts and in the circumstances of the case, and in law, the Ld. DRP and the Ld. AO, following the directions of the Ld. DRP, have erred in disregarding the fact that the transaction of payment of RSC has been accepted to be at arm's length in the prior years, and by adopting a contrary approach in the current assessment year without bringing on record any new facts to support the change in the treatment. The Appellant therefore prays that a consistent approach be followed considering that there are no changes in the facts of the case, and accordingly, the TP adjustment made by the Ld. AO and confirmed by the Ld. DRP, ought to be deleted.

ITA No.1068/PUN/2016 4 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

Ground No.6 6. On the facts and the circumstances of the case, the Ld. AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the penalty proceedings ought to be dropped.

ITA No.1068/PUN/2016 5 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

associated enterprises, had reported the transaction of payment of RSC to the tune of ₹ 16.55 crores to its associated enterprises. The assessee was asked by the TPO to substantiate the need and benefit of services received by it. The assessee claimed that vide agreement effective from 01.04.2006, it was availing the aforesaid services. The assessee also filed copies of monthly invoices raised by associated enterprises along with Notes of six heads of services provided under the head „Global Services‟ along with alleged benefits received by the assessee. In support, it also filed e-mail correspondence and also certificate issued by an independent Auditor certifying that allocation of cost was as per the terms of agreement. The TPO on perusal of the same observed that most of the services charged by associated enterprises were either performed by assessee itself or by other resident Goodyear entity, Goodyear India Ltd. The assessee was compensating Goodyear India Ltd. for the cost incurred for providing services to assessee. The assessee was show caused to explain as to why arm's length price of transactions, be not re- computed. The TPO after going through submissions of assessee and details placed on record, tabulated financial year-wise details of Regional Service Charges paid by assessee to associated enterprises under different heads, he was of the view that the nature of services and the benefits alleged to be provided under various heads were repetitive. He made reference to the Notes of accounts in this regard and was of the view that the allocation of common costs between Goodyear Akron and Goodyear India Ltd. was on account of different services. On the perusal of details, the TPO came to the conclusion that alleged services for which the assessee was paying RSC were already being performed by assessee or Goodyear India Ltd., which was being compensated by assessee as per terms of agreement between two Indian

ITA No.1068/PUN/2016 6 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

entities. He further observed that duplication in the nature of services were also reflected in the payments made to Goodyear Akron once in the name of technical licenses and then also in the name of payment for Production and Tire Performance. The assessee had paid technical assistance and license fees amounting to ₹ 6.64 crores (approx.) to its associated enterprise Goodyear Akron. Since the nature of services mentioned were similar to those mentioned in technical assistance and license agreement entered into on 01.11.2011 by and between Goodyear South Asia Tyres Pvt. Ltd. and Goodyear Akron, the TPO then show caused the assessee as to why arm's length price of technological knowhow fees should not be treated at Nil and adjustment of ₹ 6.64 crores be not made. Further, the TPO also show caused as to why arm's length price of international transactions pertaining to Global Service charges be restricted to ₹ 3.68 crores being the amount allocated to services in respect of Production and Tire Performance / Product Resolution. The assessee explained that operating margins of assessee at 8.5% had been benchmarked with operating margins of external comparables which worked out to 2.62% and further pointed that the proposition to re-compute arm's length price of RSC excluding Production and Tire Performance activities at Nil was not in accordance with law. The assessee stressed that none of the services received were duplicative in nature. It was also pointed out that costs were being allocated by separate teams and their separate responsibilities for each of the activities, where Goodyear Akron had a system of identifying costs and the same were then allocated to various group entities using the consistent basis of charge. It was also pointed out that every associated enterprise of assessee had also paid RSC which in turn, confirmed the commercial necessity of availing these regional services. The Regional Service Charges paid by

ITA No.1068/PUN/2016 7 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

assessee comprised only 2% to 3% of the global charges for regional services. The assessee also submitted certificate from the global independent accountant certifying the allocation of RSC to assessee vide submissions dated 16.07.2014. It was also pointed out that similar transaction in the past year had been accepted by Revenue authorities. The TPO observed that the assessee had aggregated international transactions related to payment of RSC and benchmarked it on entity level using TNMM method as most appropriate method. However, the action of assessee in clubbing the payment of service charges and technical fees, with other transactions was not in accordance with provisions of law. He was of the view that each class of transaction had to be examined having regard to the arm's length principle, since the payment made in the form of service charges was class of its own, as per the TPO it requires separate analysis. Relying on several decisions, the TPO was of the view that international transactions for the payment of RSC were to be benchmarked separately. Then, he commented on the nature of documents submitted by assessee for substantiating the nature and benefit of services rendered. He acknowledged that nearly 6 box files were submitted but pointed out that documents were mostly copies of presentations and e-mails, wherein the evidences were more in the nature of delivery or exchange of information than that of services rendered to the assessee. Further, from the e-mails, it was not clear where e-mails were addressed to the employees of assessee or Goodyear India Ltd. The TPO also observed that most of the documents contained general description of services and benefits allegedly received by assessee. Referring to OECD guidelines, the TPO observed that there were two main issues that need to be addressed when evaluating intra- group services i.e. whether intra-group services have in fact been provided and

ITA No.1068/PUN/2016 8 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

what the intra-group charge for such services for tax purposes should be in accordance with the arm's length principle. In respect of first aspect, vide para 16 onwards, the TPO observed that on perusal of documents filed, it was clear that on numerous instances, the assessee was charged for services for which it would not have paid as an independent enterprise. The TPO observed that charges levied on the assessee were for services which do not provide any commercial benefit to it and were also not arising from assessee‟s need. It was further observed from the perusal of correspondence that instead of receiving the alleged benefits on account of global services, the Indian entity had to incur losses / extra expenses which could have been avoided. Further, the charges charged by associated enterprise for sales and marketing services were also not correct as no expenditure under the head „Marketing‟ was debited in the books of account of assessee. Similar was the remark with regard to charges for legal services. The TPO also reiterated that w.e.f. 01.11.2011, the assessee had also started charging technological knowhow fees separately for providing services akin to those described under Production & Tire Performance / Production Resolution and hence, in the absence of any primary documentation or backup data, for substantiating the claim, the submission of assessee that it was charging only for charges which were beneficial to its business was not accepted. The plea of assessee that there was no markup and hence, the payment should be considered to be arm's length price, was also not accepted. The TPO concluded by holding that the assessee had implemented various SAP modules for improving its organizational efficiency. Hence, an amount of ₹ 2.70 crores paid under the head „IT services‟ was at arm's length price, out of total payments of ₹ 16.55 crores. Further, it was also held that payment of license fees of ₹ 6.64 crores was considered to be at

ITA No.1068/PUN/2016 9 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

arm's length price and the arm's length price of Production & Tire Performance/ Product Resolution fees of ₹ 3.68 crores was taken at Nil and an adjustment of ₹ 13.80 crores was made on account of payment of intra group service charges.

ITA No.1068/PUN/2016 10 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

assessee was one of them. The learned Authorized Representative for the assessee stresses that TPO at one end says no services were provided excluding voluminous documents filed by assessee, which evidenced the receipt of services by assessee. Our attention was drawn to documents placed at page 298 to 1556 and 1659 to 2097 of Paper Book and further, copies of e-mails and presentations placed at pages 2168 to 2253 of Paper Book in this regard. On the other hand, the TPO though admits that six box files were submitted by assessee but documents were mostly copies of presentations and e-mails and were in the nature of exchange of information and not rendering of services. In this regard, he further stated that Assessing Officer of service provider states that it was a case of services being rendered and technology made available and for the instant year i.e. assessment year 2011-12, the assessment order was passed in the case of M/s. Goodyear Tire & Rubber Company holding it to be fees for technical services and chargeable in the hands of service provider. He fairly pointed out that in the hands of Goodyear India Ltd., no adjustment on account of transfer pricing was made. The learned Authorized Representative for the assessee further explained that the agreement was from 2006, copy of which is placed at pages 263 to 281 of Paper Book, which was renewed in 2010 on the same terms and conditions, copy of the same was filed during the course of hearing. Our attention was also drawn to invoices raised for service-wise, which were for the month of April, 2010 and are placed at pages 1559 to 1564 of Paper Book and for May, 2010 at pages 1565 onwards of Paper Book. He pointed out that varying figures were charged for each of the month depending on the services rendered. Our attention was also drawn to auditor‟s certificate placed at pages 296 and 297 of Paper Book, under which the allocation was made entity-wise

ITA No.1068/PUN/2016 11 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

and which was in turn certified by the accountant. The entity-wise allocation is placed at page 2160 of Paper Book. The learned Authorized Representative for the assessee then referred to pages 2300 to 2305 of Paper Book, which gave list of summary of services rendered and the supporting evidences placed at different pages, which we have referred above. The learned Authorized Representative for the assessee further in this regard vehemently stressed that there is no merit in the order of TPO in taking the value of RSC charges at Nil. He placed reliance on the decision of Pune Bench of Tribunal in the case of Emerson Climate Technologies (India) Limited Vs. DCIT in ITA Nos.2182/PUN/2013, relating to assessment year 2009-10 and in ITA No.211/PUN/2015, relating to assessment year 2010-11, order dated 29.12.2017, Sandvik Asia (P.) Ltd. Vs. ACIT (2017) 85 taxmann.com 112 (Pune), Delhi Bench of Tribunal in AWB India Pvt. Ltd. Vs. DCIT in ITA No.6480/Del/2012, relating to assessment year 2008-09, order dated 13.10.2014.

ITA No.1068/PUN/2016 12 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

payment of technical and license fees were benchmarked using CUP method. The case of assessee was that the operating margins earned by it in the manufacturing segment (aggregated) were higher than the arithmetic mean of margins of comparable companies, hence at arm's length. The assessee had paid RSC of ₹ 16.55 crores to its associated enterprise Goodyear Rubber & Tyre, USA for availing following services:-

Sr. Nature of services Amount (Rs.) No. 1 General / administration services 37,516,536 2 Financial services 27,464,163 3 Sales & marketing services 18,090,419 4 Purchasing & materials management 18,629,974 services 5 IT services 27,036,994 6 Production & tyre performance / product 36,806,684 resolution 165,544,770

ITA No.1068/PUN/2016 13 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

reimbursed on cost to cost basis i.e. without any markup. It may be pointed out at this juncture itself that similar services were provided to all participating Goodyear affiliates and based on appropriate allocation key, in turn, depending on the nature of services availed by each of them, allocation of cost was made. As per clause 5 of agreement, associated enterprise may provide the services by obtaining assistance from sub-contractors, including affiliates or any other source, which may be due and appropriate to render the services. However, the associated enterprise would be the beneficial owner of payments made by the assessee for services of sub-contractors engaged by it. In order to prove its case of availment of services from associated enterprise, its affiliates and sub-contractors, the assessee during the course of TP proceedings and even before the DRP and before us has submitted voluminous documents. The assessee has also filed summary of documentary evidences submitted before the TPO at pages 2300 to 2305 of Paper Book. In the said chart, the assessee has referred to various documents, e-mails, category-wise in order to prove its case of availment of services. The assessee has further pointed out that evidences in support are placed at pages 298 to 1556 of Paper Book, thereafter at pages 1659 to 2097 and 2168 to 2253 of Paper Book. In addition, the assessee has referred to invoices raised for the month of April, 2010 placed at pages 1559 to 1564 of Paper Book and for May, 2010 at pages 1564 onwards. The said invoices clearly reflect that the quantum of payment varies from invoices to invoices. The associated enterprise was raising monthly service- wise invoices and the assessee was accordingly booking the expenditure. The services which were availed by assessee from its associated enterprise were part of the services availed by Asia Region entities of Goodyear group. It was explained by the learned Authorized Representative for the assessee before us

ITA No.1068/PUN/2016 14 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

that the Indian entities execute the policies, which in turn, were formulated by associated enterprise and cost in this regard was then allocated to 15 entities and the assessee was one of them. At page 2160 of Paper Book, entity-wise allocation of expenditure is tabulated. Further, in order to explain the nature of services, in support, the assessee produced six box files to the TPO, In such scenario, where voluminous documentary evidence in the form of e-mails, presentations, etc. have been filed by assessee, it cannot be held that no services have been availed by assessee. The supporting documents clearly prove the case of assessee of having availed the services from its associated enterprise, subsidiaries and other affiliates. It is not only the assessee but other entities in the Asia Pacific Region which were availing similar services and the allocation key was used for apportionment of cost by associated enterprise to the respective entities. This exercise was further strengthened by auditor‟s certificate, which is placed at pages 296 and 297 of Paper Book. In such background, the conclusion of TPO that the assessee had submitted various documents but evidences were more in the nature of delivery or exchange of information than that of services rendered to the assessee cannot stand. Where the documents evidenced the actual receipt of services, may be in the form of delivery or exchange of information, as held by TPO, there is no merit in computing arm's length price of transactions at Nil.

ITA No.1068/PUN/2016 15 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

associated enterprise Goodyear Tire & Rubber Co. for assessment year 2011- 12 under section 143(3) r.w.s. 144C(1) of the Act and has held that service charges received by it were taxable as fees for technical services or alternatively as royalty, both under the provisions of Income Tax Act as well as under the provisions of Indo-USA DTAA. Without going into merits of the facts whether the same is taxable or not in the hands of associated enterprises, we hold that fall out is that the payment made by assessee on account of RSC was for services availed from associated enterprise and there is no merit in the order of Assessing Officer in holding that no services have been availed by assessee in this regard.

ITA No.1068/PUN/2016 16 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

“19. The assessee thus, filed documentary evidence to demonstrate that it had availed services in the field of Human Resources, Marking and Product, Finance, Business Development and Management and other services i.e. support for new product, marketing material, training material and technical support. The assessee has also explained the need for services being in field of operational, strategic and advisory support services. 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‟. Each businessman is the best judge to come to decision as to whether it needs the said support services or not. Secondly, once such a decision has been taken by the businessman and it provides the evidence of services received by it from its associated enterprises, then the TPO cannot question the same by commenting upon the nature of services provided, where in any case, information is hyper technical. 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 were 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 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.”

ITA No.1068/PUN/2016 17 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by so stretch of logic, it can have any role in determining ALP of that service. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. 25. Accordingly, we hold that the TPO while benchmarking the transactions has to determine whether the price paid by the assessee for the services availed is what an independent enterprise would have paid for the same services. The analysis done by the TPO of the nature of services and benefits arising to the assessee on availing such services was beyond the scope of transfer pricing provisions and hence, we find no merit in the same.”

ITA No.1068/PUN/2016 18 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

associated enterprise. The said technology now made available to assessee for carrying on its manufacturing activities and in the absence of said technology / know-how being developed and licensed by associated enterprise, the assessee was not in a position to manufacture the tyres in India, hence, the payment made in this regard. As far as the payments of RSC for Production and Tire Performance / Product Resolution were concerned, these were towards reimbursement of cost incurred by regional entities in providing assistance to the assessee with regard to engineering, quality assurance, safety, etc. and the same was not towards technology, know-how being made available to the assessee by associated enterprise. The assessee had also submitted the list of personnel at the Region engaged in providing the aforesaid services in different countries of Asia Pacific Region, where the group did not have any R&D / Innovation center. On the other hand, the technical assistance and license fees were for know-how developed by R&D Center located in Akron, USA and Luxemburg, Europe. In other words, there was no similarity in the nature of payments made under technical assistance and license agreement and under the service agreement for Production and Tire Performance / Product Resolution. Hence, there is no merit in the observations of TPO in this regard and we reverse the same.

ITA No.1068/PUN/2016 19 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

ITA No.1068/PUN/2016 20 ITA No.684/PUN/2017 Goodyear South Asia Tyres Pvt. Ltd.

Order pronounced on this 4th day of September, 2019.

Sd/- Sd/- (D.KARUNAKARA RAO) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 4th September, 2019. GCVSR आदेश की प्रयिलऱपप अग्रेपषि/Copy of the Order is forwarded to : The Appellant; 1. The Respondent; 2. The DRP-3, Mumbai; 3. The concerned CIT, Aurangabad; 4. The DR ‘C’, ITAT, Pune; 5. Guard file. 6. आदेशािुसार/ BY ORDER, सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण ,ऩुणे/ ITAT, Pune