M/S. SANDVIK ASIA PRIVATE LIMITED,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE -10, PUNE

Both the appeals relating to same assessee on similar issue were heard together and are being disposed of by this consolidated order for the sake of convenience.

The assessee in ITA No.172/PUN/2017, relating to assessment year 2012-13 has raised the following grounds of appeal:- 1. Ground 1: On the facts and in the circumstances of the case and in law, the Hon'ble DRP / Ld. AO / Ld. TPO have erred in proposing to enhance the income of the assessee by Rs.33,86,30,016 by holding that the arm's length value of international transaction pertaining to payment of Management Service Fee ('MSF') and Regional Management Fee ('RMSF') to be 'Nil'. While doing so, the Hon'ble DRP / Ld. AO / Ld. TPO have erred: - in rejecting the benchmarking analysis conducted by the Appellant by considering the Associated Enterprises ('AEs') as the tested party under Transactional Net Margin Method (‘TNMM') as the most appropriate method; - in challenging the commercial business needs and decisions of the Appellant with respect to availing the services from AEs;

The assessee is aggrieved by the orders of authorities below against transfer pricing adjustment made in its hands in respect of international transactions pertaining to payment of Management Services Fees and Regional Management Fees at Nil and thereby enhancing income by ₹ 33,86,30,016/-. The second issue raised in both the appeals is against disallowance of payment made to Sandvik Machining Solutions AB of

The learned Authorized Representative for the assessee at the outset pointed out that the issue raised in the present appeal stands covered by the orders of Tribunal relating to different years in the case of assessee.

The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below.

We have heard the rival contentions and perused the record. We find that the issue of transfer pricing adjustment on account of Management Service Fees has been raised and decided in favour of assessee. The learned Authorized Representative for the assessee pointed out that the lead year in which addition was made was assessment year 2005-06. However, in assessment years 2006-07 to 2008-09, the transaction was accepted to be at arm's length price. Further in assessment years 2009-10 and 2010-11, transfer pricing adjustment was made by taking the value of transaction at Nil. Similar was the position in assessment year 2011-12. The learned Authorized Representative for the assessee pointed out that appeals relating to the aforesaid years have been decided in favour of assessee by the Tribunal by separate orders. Our attention was drawn to latest order relating to assessment year 2011-12. The learned Authorized Representative for the assessee stressed that the same ground of appeal in respect of transfer pricing adjustment was raised and the Tribunal vide paras 7 to 14 has dealt with the

Now, coming to the facts of present case, wherein though the assessee has made payments for availment of management services to Sandvik AB as in earlier years but the TPO in the present case has noted that the services were rendered by two entities and he goes on to benefit test. The assessee had furnished sample invoices before the TPO, whereas the case of DRP was that the assessee has not furnished evidences of second concern i.e. Sandvik Middle East FZE, UAE. The learned Authorized Representative for the assessee has pointed out that all these evidences were submitted before the authorities below which were not entertained. Our attention was drawn to page 34 onwards of Paper Book. It was also pointed out that in assessment year 2011-12, services were rendered by same parties as in the present assessment year and there was no dispute regarding rendering of services. We find merit in the plea of assessee in this regard.

The Tribunal in assessee’s own case in ITA No.491/PUN/2016 and cross appeal in ITA No.533/PUN/2016, vide order dated 08.03.2019 has considered the factual aspects of the case in para 7 onwards and has also referred to the treatment of TPO in treating the arm's length price of management services fees at Nil. Further, vide para 9, the Tribunal has taken note of the receipt of management services from two concerns i.e. Sandvik AB and Sandvik Middle East FZE, UAE. The case of Revenue was that e-mails show that these were not receipts from Sandvik AB, Sandvik Middle East FZE, UAE and from other group companies. The case of assessee was that these payments were being made since 2002 to Sandvik AB and from assessment year 2005-06 to Sandvik Middle East FZE, UAE. The payment of management service fees were benchmarked at Nil on the ground that services were rendered by different entities of Sandvik group. The Tribunal after taking note of the pleadings of assessee had held that where as per the terms of agreement between the assessee and Sandvik AB, it is provided that the payment of management service fees would be to Sandvik AB on account of services which may be rendered by various group concerns of Sandvik group and also then arm's length price of such transaction cannot be taken at Nil, since the assessee has proved the rendering of management services by associated enterprises, for which the payment has been made by the assessee. The Tribunal did not accept the benefit test applied by the Assessing Officer as not relevant and allowed the claim of assessee on the ground that where the services have been actually rendered though by group concern of Sandvik group, then the payment made to Sandvik AB and Sandvik Middle East FZE, UAE cannot be taken at Nil and had held that no addition is warranted in the hands of assessee on account of such transfer pricing adjustment. Following the same parity of reasoning and strongly relying on the

Now, coming to ground of appeal No.2 raised by assessee. Brief facts relating to the issue are that the assessee had made payments to its associated enterprise Sandvik Machining Solutions Sverige AB (previously known as Sandvik Tooling Sverige AB) of ₹ 57,39,119/-. The explanation of assessee was that the said payment was made for limited access to systems such as GSS, PSS and related softwares, applications and related software (costing, production and marketing related) services to tooling division. The Assessing Officer was of the view that the said amount was taxable in the hands of assessee being royalty both under the provisions of Income Tax Act and Article 12 of DTAA. The case of assessee that the payments were for use of copyrighted article and not the copyright in the article, was not accepted by the Assessing Officer and in view of retrospective amendment to section 9(1)(vi) of the Act, under which Explanations 4 to 6 were added, it was held that the said expenditure was disallowable in the hands of assessee for non deduction of tax at source under section 40(a)(i) of the Act. The learned Authorized Representative for the assessee pointed out that the issue of making payment to Sandvik Machining Solutions Sverige AB arose in earlier year and the DRP allowed the claim of assessee. The Tribunal while deciding the appeal of Revenue considered the ground of appeal No.4 raised by Revenue. In this regard vide para 23 onwards and in turn, relying on the ratio

We find that the issue of payment for access to application software has also been considered at length by the Tribunal in John Deere India Pvt. Ltd. Vs. DDIT (IT) (supra) and it has been held that in view of the definition of ‘royalty’ not being amended under DTAA, there is no question of treating the said payment as ‘royalty’ in the hands of assessee. Vis-a-vis application of provision of section 9(1)(vi) of the Act, it was held that since DTAA provisions being more beneficial, override the same, are not to be applied. Following the same parity of reasoning, we hold that the aforesaid payment to Sandvik Machining Solutions Sverige AB does not attract the tax deduction at source and for such non deduction of tax at source, payment cannot be disallowed in the hands of assessee. Accordingly, direction is given to allow the claim of assessee. The grounds of appeal raised by assessee are thus, allowed.

Now, coming to appeal of assessee in assessment year 2013-14. The learned Authorized Representative for the assessee pointed out that ground of appeal No.1 raised by assessee is against transfer pricing adjustment made by taking arm's length value of international transactions pertaining to payment of management service fees at Nil. It was also pointed out that during the year the management service fees paid to Sandvik AB was ₹ 36.37 crores as against total payment of ₹ 40.27 crores. He further stated that remaining ₹ 3.89 crores was paid to four different associates enterprises by the assessee. Referring to the order of TPO, he pointed out that arm's length price of

On perusal of record, we find that during the year, the assessee had paid management service fees to Sandvik AB of ₹ 36.37 crores. This payment to Sandvik AB stands squarely covered by the order of Tribunal and as referred by us in the paras hereinabove while deciding the appeal relating to assessment year 2012-13.

Now, coming to balance payment of ₹ 3.89 crores, the TPO though had made no such adjustment, but the DRP was of the view that Regional Management Services fees of ₹ 1.87 crores and operational service fees of ₹ 2.01 crores has been paid by assessee, which also needs to be taken at Nil, in the absence of any evidence being filed relating to availing of such services. The findings of DRP were vis-a-vis benefit accruing to the assessee, we have in series of decisions held that the Revenue authorities cannot sit in the judgment of decision of businessman to avail services and consequently the benefit test is not to be satisfied by the assessee. The DRP refers to the evidences filed in Annexure 4B in respect of operational services and goes on to comment that the said evidences does not establish that the assessee has in

Now, coming to ground of appeal No.2 raised by assessee, wherein it has been pointed out that the assessee was due to make certain TDS payments in assessment year 2009-10, which were not paid and hence, disallowance under section 40(a)(i) of the Act. However, TDS was paid in assessment year 2013-14 and hence, the assessee asked for adjustment, but the order of Assessing Officer has been quashed in assessment year 2009-10 and hence, there is no disallowance. Hence, the issue in present appeal becomes academic, in view of concession of the learned Authorized

In the result, both the appeals of assessee are allowed.