BURCKHARDT COMPRESSION INDIA PVT. LTD.,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX,, PUNE

आयकर अपीलीय अिधकरण, पुणे �यायपीठ “ए” पुणे म� IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “A”, PUNE सु�ी सुषमा चावला, �याियक सद�य एवं �ी डी. क�णाकरा राव, लेखा सद�य के सम� BEFORE MS. SUSHMA CHOWLA, JM AND SHRI D. KARUNAKARA RAO, AM आयकर अपील सं. / ITA No.221/PUN/2016 िनधा�रण वष� / Assessment Year : 2011-12 Burckhardt Compression India Pvt. Ltd., Gat No.304, Village: Kondhapuri, Pune – Nagar Road, Tal: Shirur, Pune-412209. अपीलाथ�/Appellant PAN : AADCB2058D …. Vs. DCIT, Circle-1(1), …. ��थ� / Respondent Pune. Assessee by : Shri Abhay Avchat Revenue by : Ms. Amrita Mishra सुनवाई क� तारीख / घोषणा क� तारीख / Date of Hearing : 27.06.2019 Date of Pronouncement: 19.08.2019 आदेश / ORDER PER D. KARUNAKARA RAO, AM : This appeal is filed by the assessee against the order of the DRP/TPO/Assessing Officer for the assessment year 2011-12. 2. The grounds raised by the assessee are as under :- The learned Assessing Officer has erred in making addition of “1. Rs.2,08,64,219/- on account of adjustment made to international transaction of payment of management services and the Hon’ble Dispute Resolution Panel erred in directing the disallowance. The Assessee Company has made payment to its Associated 2. Enterprise of Rs.2,08,64,219/- towards manufacturing service fees and there is error of considering in assessment an arm’s length price of this expenditure as ‘nil’. 3. The order under section 143(3) of the Income Tax Act 1961 in pursuance of directions of the Dispute Resolution Panel, dated 23.12.2015 of the AO in case of the assessee is bad in law. 4. The appellant craves leave to add, amend, alter, omit or substitute any of the grounds of appeal.”

2 ITA No.221/PUN/2016 3. Briefly stated the relevant facts include that the assessee is a wholly owned subsidiary company of Burckhardt Compression AG Switzerland (BC-AG). During the year under consideration, the assessee filed the return of income originally declaring the total income of Rs.15,53,07,342/-. Subsequently, the assessee revised the return disclosing total income of Rs.14,49,37,980/- only due to claim of amortization of goodwill in the revised return of income. Management Fee - International Transactions: The assessee 4. reported the international transactions with AEs worth of Rs.20,16,68,928/-. Acting on the same, Assessing Officer referred to the TPO for benchmarking the same. Among the many, Assessing Officer identified the international transaction of payment of Management Fee to the BC-AG of Rs.2,08,64,219/-. The TPO proposed adjustment of entire payment of Rs.2,08,64,219/-. TPO: The TPO noted that assessee – Burckhardt Compression (India) 5. Private Limited (BC-India) is the subsidiary company of Burckhardt Compression AG Switzerland (BC-AG). The assessee company is engaged in the business of manufacturing of “wide range of standard high pressure air and gas compressor and technology solutions”. The assessee has two segments i.e. (i) Compressor segment and (ii) Spares/Component segment. The compressor segment is for manufacturing and selling of compressors to third parties in India/abroad and (ii) the spares/component segment is for manufacturing and selling of components/spares to its AEs. BC-AG has presence in Switzerland, Canada, South Africa, German (UK), Italy, Japan, France, Middle East, Pakistan, Bangladesh, etc. The list of transactions by

3 ITA No.221/PUN/2016 the BC-India with these entities is given in para 4 of his order and the total of such international transaction works out to Rs.20,16,68,928/-. For TPO, the transaction of payment of Management Services Fee (MSF) of Rs.2,08,64,219/- with BC-AG is the solitary transaction for TP adjustments. 6. The assessee paid this amount to BG-AG towards reimbursement/recovery of actual cost incurred by the BC-AG. 7. In TP study by assessee, the TNMM is the Most Appropriate Method (MAM). The PLI i.e. OP/Sales for compressor segment and OP/OR for spares segment at 10.65% and 14.82% are worked out respectively. The PLI of the comparables for compressors segment and for spares segment are 10.68% and 9.77% respectively. As per the assessee, all the said international transaction with AEs are at ALP. 8. During the TPO proceedings, on finding that no specific benchmarking is done by the assessee with respect to the Management Services Fee (MSF), the TPO raised this issue with assessee and required the details. In the show-cause notice, TPO asked the assessee to demonstrate the twin test i.e. (i) ‘tangible benefit test’ and (ii) the evidences for the rendering of Management Services to the assessee. 9. In reply to the show cause notice, assessee stated in writing that the transaction of Management Services Fee with BC-AG was benchmarked by the assessee in its TP study by using TNMM as the MAM. In the note extracted in para 7 of TPO’s order, assessee argued that BC-AG developed the said Management Services package for its AEs including for BC-India

4 ITA No.221/PUN/2016 and on supply of the same to the group concerns, the expenses were recovered for BC-AG from the group companies. Rs.2,08,64,219/- is allocated to the BC-India and the same was duly paid by the assessee. As per the assessee, the BC-AG incurred the expenditure in developing the Management Services – package and served the group companies in the area of (i) Management Attention & Support and (ii) Technical Support and recovered the said expenditure. Details of the other said services include (i) Technical Support and (ii) Marketing Support. 10. The TPO examined the claim of the assessee and found that the assessee’s reply is very general. No specific details on the claim of receipt of services from the BC-AG or on the list benefits derived from the so called services, were submitted. Further, the TPO observed negatively that the comparables picked up by the assessee for benchmarking of Management Services Fee are engaged in manufacturing lines of business. Further, analyzing each of the said services, commenting on the Marketing Services Fee vide para 8 of his order, the TPO held that the assessee himself reported spending of huge sum of Rs.1,79,56,886/- during the year on account of marketing only. As per the TPO, when assessee spent the said amount for marketing support, wherein the need for payment of Rs.2,08,64,219/- to the BG-AG. Therefore, considering the absence of clarity on the nature of services rendered by the BC-AG on account of technical/marketing/training supports, i.e. failure to discharge the onus, evidences by the assessee, the TPO took an adverse view on this international transaction of Management Services Fee with the AE. Eventually, the TPO rejected the assessee’s e-mail correspondence copies

5 ITA No.221/PUN/2016 with the BC-AG due to its general nature of the correspondence and held that the same do not constitute an evidence. Relevant lines from para 8 of the order of the TPO dated 29.01.2015 are extracted as follows :- “From these e-mails produced by the assessee it is not clear as to what kind of management support has been received by the assessee company.  In the said submission, the assessee has also submitted PowerPoint Presentation which relates to analysis of cylinder nitrite by Alpha Heat Tech. From the submission made, it is not clear as to how the analysis constitutes management support. In view of the above discussion, as no evidence of services received by the assessee or any tangible effects received by the assessee in demonstrated by the assessee, Arms Length Price of the management services fees transaction is treated as NIL. 09. In view of the above, a total adjustment of Rs.2,08,64,219/- is made to the international transaction relating to manufacturing service fees and as a consequence of the adjustments income of the assessee shall be increased by Rs.2,08,64,219/-. The other international transactions are found to be at arm’s length price.” 11. Giving effect to the same, the Assessing Officer passed a draft assessment order dated 23.03.2015. Acting on the said revised return of income in the said draft assessment order, Assessing Officer quantified the total income at Rs.16,58,02,200/- after adding the TP adjustment of Rs.2,08,64,219/-. Before DRP: Aggrieved, the assessee filed an application before the 12. DRP for directions on the adverse decision of the TPO/Assessing Officer on the issue of MSF taken at NIL. The DRP passed the direction dated 10.12.2015 rejecting the assessee objection. Relevant finding/direction on Management Services Fee is given in para 2.3 and its subparagraphs of his order. The DRP analyzed on the twin test of (a) rendering of services test and (b) the benefit to the assessee test. The list of issues considered by the DRP includes (i) absence of formal agreement between the BC-India and BC-AG, (ii) oral understanding, (iii) applicability of section 37(1) of the Act,

6 ITA No.221/PUN/2016 (iv) absence of direct and clinching evidences in support of claim of rendering of services as well as the benefits to assessee on the areas of technical/training/marketing etc. support services. The e-mail copies were found to be very general and unrelated to the assessment year 2011-12 under consideration. Per contra, the assessee contented that the claim of rendering of services by BC-AG and the genuineness of the payment cannot be questioned. Further, as per the assessee, the ALP, in principle, cannot be NIL TP studies. The DRP rejected the said arguments. DRP relied on various judgements i.e. (i) Petro Araldite (P) Ltd. vs. DCIT, 31 taxmann.com 281 (Mum); (ii) Cisco Systems Capital (India) Pvt. Ltd. vs. Addl. CIT [IT(TP) No.1558/Bang/2012 dated 19.09.2014; and, (iii) Cranes Software International Ltd. vs. DCIT [IT(TP) No.1594/Bang/2012 dated 26.09.2014. 13. Further, the DRP relied on para 7.5 of the OECD Guidelines on the providing of ‘intra-group services’ by the parent company. The DRP also relied on the provisions of section 92D and Rule 10D on the need for maintaining the supporting documents by the assessee in matter of TP studies. Further, commenting on the ‘benefit test’, DRP mentioned that there is no payment in an uncontrolled situation, when benefits are not received. In this regard, DRP relied on para 7.6 of the OECD Transfer Pricing Guidelines, 2010 and held that the ‘benefit test’ is implicit in the ‘concept of services’ rendered. Further, relying on the definition of ‘benefit test’, ‘indirect benefit’ and ‘remote benefit’ etc. of US Regulations No.1.482- 9(1)(3)(i), DRP confirmed the conclusion of the TPO/Assessing Officer. DRP upheld the need for the assessee to evidence the services rendered by BC- AG and the benefit of such services for the assessee (Para 2 to 2.3.14 of

7 ITA No.221/PUN/2016 DRP’s order). For the sake of completeness, the operational para 2.3.14 is extracted hereunder :- “2.3.14 Therefore, the assessee’s contention that the Transfer Pricing provisions do not require the assessee to demonstrate benefits derived by it or that the TPO cannot enquire into the commercial expediency of the services is found to be not acceptable.” 14. Further, referring to the direct charge method for allocation of the cost towards Management Services Fee to the BC-India, DRP again relied on the relevant provisions of OECD Transfer Pricing Guidelines vide para 7.23 and held that any payment of Management Services Fee to BC-AG is justified only in the event of rendering of services to the BC-India. The quantum of fee is relatable to the services received by assessee. The basis of adhocism based on mutual discussion, turnover or headcount i.e. total GST no. of group companies etc, is not a sustainable basis for quantifying the MSF payable to the BC-AG. 15. Eventually, DRP confirmed the addition of Rs.2,08,64,219/- made by the Assessing Officer/TPO. The contents of para 2.3.19 to 2.3.21 of the DRP’s order are relevant and the same are extracted hereunder :- “2.3.19 In this case, it is observed that the allocation of cost incurred by Burckhardt Compression AG in providing management services to the assessee has been made based on some basis of headcount, turnover etc. As can be seen from the OECD Guidelines mentioned above, though indirect charge method can be followed for allocation of costs in providing intra group services, the method used for the same should be capable of producing charges or allocation of costs that are commensurate with the actual or reasonably expected benefits to the recipient of service. The allocation key deployed for the allocation of the costs should be appropriate to the nature of services and should result in allocation of the cost commensurate to the benefits derived by each group entity. In the present case, the allocation has been done on an ad hoc basis after mutual discussion and therefore not at all reliable. 2.3.20 Further, the assessee failed to furnish details and evidences of the cost incurred by the AE in providing the management services to the group entities and the computation made by the AE for allocation of the cost to the assessee and other group entities. In the absence of such information, it cannot be ascertained whether the payment made towards the

8 ITA No.221/PUN/2016 management services justifies the quality and the volume of services received by it, if any. Further, accepting the cost allocation made by the AE without obtaining and examining the relevant details and evidences regarding the cost incurred and the allocation of the cost to the assessee and other group entities does not happen in an uncontrolled situation where such services are received from an independent party. The payment made under such circumstances cannot be justified from the transfer pricing perspective. 2.3.21 In view of the detailed discussion above, we hold that the assessee failed to establish the receipt of services and the benefits derived from the services with relevant supporting documentary evidences. Having regard to the facts of the case, the Indian Transfer Pricing Regulations and the OECD TP Guidelines, we hold that the action of the TPO of determining the arm’s length price of receipt of management services at NIL is proper and justified. We therefore reject the objection of the assessee and confirm the adjustment of Rs.2,08,64,219/- made to the international transaction of payment of management services fee.” Final Assessment Order: Giving effect to the said direction of the 16. DRP, the Assessing Officer passed the final assessment order dated 23.12.2015 computing the total income at Rs.16,58,02,200/- as proposed in the draft assessment order. Before the Tribunal 17. Aggrieved with the above unfavourable order of the Assessing Officer/TPO/DRP, assessee filed the present appeal before us. The issue raised in the grounds relate to the said addition of Management Services Fee of Rs.2,08,64,219/- treating the MSF transaction with BC-AG at ‘Nil’. AR’s Argument: Ld. AR for the assessee filed Paper Books running 18. into 268 pages. These documents contain not only details of the Management Services Agreement dated Nil between the assessee and BC- AG but also include the TP study papers and copy of e-mails/correspondence etc. Ld. AR argued that the TPO failed to consider the said Management Services Agreement on one side and the genuineness of the transaction of payments of Rs.2,08,64,219/- on the other. Further,

9 ITA No.221/PUN/2016 relying on the profits reported by the assessee in the year under consideration, ld. AR argued that the same is possible with the support services of the BC-AG on the spheres of management, technical, training etc. The decisions of TPO/DRP in applying the “services to benefit” test holding the assessee failed to evidence the fact of receiving of services from the BC-AG and consequential benefits are unsustainable. Further, referring to the benchmarking exercise of TPO resulting in determination of NIL – Management Services Fee payable, ld. AR submitted that the same does not constitute an appropriate. The international transactions with AE can never be NIL and therefore, TP adjustment can never lead to the denial of entire claim of payment made by the assessee. 19. Referring to the Service Agreement placed in the Paper Book, ld. AR submitted that the failure to consider the Management Services Agreement (supra) lead to the adverse conclusion by the Assessing Officer. Accordingly, ld. AR submitted that if another opportunity is granted before the Assessing Officer/TPO, assessee shall demonstrate the fact of receiving of services justifying the payment of Rs.2,08,64,219/- and the test of benefits derived by the assessee in lieu of the services. In this regard, ld. AR filed a chart showing the details of services/facilities availed by the assessee and the benefits derived by the assessee in the process. The chart contains the evidences, the dates of the e-mails correspondence, copies of agreement dated 19.09.2008 and 20.07.2009, copies of the board’s resolution and copies of sales invoices etc. In the remand proceedings, the ld. AR seeks the direction to the Assessing Officer/TPO to consider the said Management Services Agreement, the services enlisted therein, copy of the

10 ITA No.221/PUN/2016 e-mails, payment details, the issues raised in the additional grounds filed before the DRP regarding the determination of the TP adjustment and treating the Management Services Fee transaction at Nil etc. DR’s Arguments: At the outset, ld. DR relied heavily and dutifully on 20. the orders of the DRP/TPO/Assessing Officer. Referring to the contents of para 2.3.2, ld. DR submitted that there is no formal agreement between the assessee and BC-AG on the said Management Services Fee. Referring to the details of services received by the assessee against the payments of Rs.2,08,64,219/-, ld. DR submitted that the assessee failed to file the details of the tangible services rendered by the BC-AG. Ld. DR argued that with the general/unspecified type of services and the benefits discussed by the assessee, the claim of the assessee is not allowable. Thus, ld. DR justified the orders of the Assessing Officer/TPO/DRP. Finding of the Tribunal 21. We heard both the parties and perused the orders of DRP/TPO/Assessing Officer. The Paper Books filed before us are also perused. It is an undisputed fact that the genuineness of the payment of Rs.2,08,64,219/- is not doubted. TPO/Assessing Officer are of the view the onus is ultimately on the assessee in TP matters and need for maintaining the documents is needed to demonstrate these aspects. In this regard, we perused the of the orders of the Assessing Officer/DRP/TPO which do not contain a speaking order on each of the services rendered to the assessee and the benefits derived by the assessee. The onus is on assessee to

11 ITA No.221/PUN/2016 demonstrate the same. The services agreement was not properly appreciated by the TPO/Assessing Officer. The services-cum-benefits issues are required to be examined more clearly by the authority. The Assessing Officer/DRP is directed to pass a speaking order in this regard and giving an ascertainable finding of facts on each of the services received/benefits derived by the assessee. On the issue of services agreement, we find there is conflicting fact on its existence and use. While the Revenue mentions about the non-existence of any service agreement between the assessee and BC-AG, the assessee filed the copy of the agreement before us. In any case, it is prayer of ld. AR before us, for remanding the issue to the file of the TPO/Assessing Officer. Thus, the Assessing Officer is directed to examine the correctness of the said agreement, pass a speaking order on the benefit specific services availed by assessee under the said contractual agreement. We order accordingly. 22. Regarding the basis of determining the sum of Rs.2,08,64,219/- payable by the assessee for the year under consideration to the BC-AG, we are of the opinion that there is no clarity with reference to the basis for determining whether the same refers to actual payment or it refers to services rendered by the parent company. The OECD TP Guidelines as discussed above are relevant in this regard. The Assessing Officer is directed to apply the same in accordance with law. Regarding the TPO/DRP/Assessing Officer’s decisions in determining the international transactions with AE at Nil on account of Management Services Fee, we are of the opinion, the same is appropriate only if the payments are not genuine, services are not rendered and the benefits are not derived by the assessee. So benchmarking has to be done in accordance with the TP

12 ITA No.221/PUN/2016 provisions of the Act and the Assessing Officer/TPO/DRP is directed to examine this issue afresh. 23. Therefore, we are of the opinion, keeping all the issues open with reference to the Management Services Fee transactions, the issues raised in the grounds should be remanded to the file of the Assessing Officer for fresh adjudication. TPO/Assessing Officer shall grant reasonable opportunity of being heard to the assessee in accordance with set principles of natural justice. Accordingly, the relevant grounds raised by the assessee on this issue are allowed for statistical purposes. 24. In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced on 19th day of August, 2019. Sd/- Sd/- (SUSHMA CHOWLA) (D. KARUNAKARA RAO) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER पुणे / Pune; �दनांक Dated : 19th August, 2019. Sujeet आदेश क� �ितिलिप अ�ेिषत/Copy of the Order is forwarded to : अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The DRP-3, Mumbai; 4. The CIT (DRP-3), Mumbai; िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “ए” / DR ‘A’, 5. ITAT, Pune; गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER, स�यािपत �ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune