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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by assessee is against order of ACIT, Circle-10, Pune, dated 28.01.2016 relating to assessment year 2011-12 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’).
The assessee has raised the following grounds of appeal:- 1. Ground 1: Transfer pricing matters The Ld. AO under the directions of Hon’ble DRP have erred in holding that the arm's length value of the international transaction pertaining to payment of Management Service Fee to be Nil. While doing so the Ld. AO / Hon’ble DRP have erred in:
ITA No.523/PUN/2016 2 M/s. Walter Tools India Pvt. Ltd.
- determining the arm's length value of the transaction pertaining to payment of Management service fee as Nil without undertaking any analysis for selection of most appropriate method and search for comparable uncontrolled transaction to compute arm's length price as prescribed by Indian Transfer Pricing Regulations, thereby violating the provisions of Section 92C(3) of the Act. - in not taking cognizance of the submissions made by the appellant covering substantive documentary evidences demonstrating the receipt of management services and benefits derived therefrom. - in rejecting the benchmarking analysis conducted by the appellant by considering the overseas AE as the tested party. The Appellant prays that the transfer pricing adjustment pertaining to Management Service Fee be deleted.
The issue raised in the present appeal is against transfer pricing adjustment made in the hands of assessee by treating arm’s length value of international transactions pertaining to payment of management service fees at Nil.
Briefly, in the facts of the case, the assessee had furnished the return of income declaring Nil income. The assessee was a domestic company engaged in the distribution of cutting and drilling tools, especially tungsten carbide tools. The assessee was importing finished goods i.e. cutting and drilling tools from overseas Walter Group entities for the purpose of resale in India under the brand name of ‘Prototyp’ and ‘Walter’. The assessee also procures ‘Titex’ brand machine tools from Sandvik Asia Pvt. Ltd. for the purpose of resale to third party Indian customers. Upto financial year 2005-06, the assessee was also engaged in manufacturing of machine tools and parts. However, post October, 2005, manufacturing operations were discontinued and the assessee was engaged purely in the distribution of finished goods locally purchased / imported from group companies. In view of the international transactions undertaken by the assessee, reference was made to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act. The TPO in the show cause
ITA No.523/PUN/2016 3 M/s. Walter Tools India Pvt. Ltd.
notice asked the assessee to explain as to why arm's length price of management service fees paid should not be treated at Nil. The assessee filed the explanation. The TPO pointed out that in this segment two issues were involved i.e. reasonableness of management service fees paid and determination of arm's length price by considering Sandvik AB as tested party. As far as the first issue was concerned, the TPO observed that elaborate discussions were made in the previous year and there was no change in the facts and circumstances. Hence, management service fees paid by the assessee were considered at Nil for the current year also. The TPO also notes that the assessee had brought on record certificate issued by the auditor. However, in the said certificate, the auditor had not provided any documentary evidence about tangible advantages allowed to the assessee company. In view of assessee not establishing the payments being commensurate to the volume and quality of services hence, the proposition of assessee that cost of services rendered was at arm's length price, was not accepted and the value of said services was taken at Nil and an upward adjustment of ₹ 1,04,98,188/- was proposed. The TPO further held that without prejudice to the upward adjustment proposed in its order, issue of selecting Sandvik AB as tested party cannot be accepted as it was rendering management services, while assessee was receiving management services, therefore FAR of both the parties do not match. The Assessing Officer issued draft assessment order to the assessee, who filed objections before the Dispute Resolution Panel (DRP), which were rejected and the Assessing Officer passed final assessment order by making an upward adjustment of ₹ 1.05 crores, against which the assessee is in appeal.
The learned Authorized Representative for the assessee pointed out that the assessee was engaged in two activities i.e. import of tools from its
ITA No.523/PUN/2016 4 M/s. Walter Tools India Pvt. Ltd.
associated enterprises, which were sold in the domestic market and it also paid management service fees to its associated enterprise i.e. Sandvik AB. The transaction of import of tools has been accepted to be at arm's length price, however, the payment of management service fees of ₹ 1.05 crores to associated enterprise has not been accepted. The TPO was of the view that since no benefit arose to the assessee and also because of reason that Sandvik AB could not be the tested party, the arm's length price was taken at Nil. Then the learned Authorized Representative for the assessee took us through the order of DRP, wherein from page 11 onwards after referring to the list of services, the DRP talks of the benefit test and points out that in para 2.3.6 that no documents were filed by the assessee in support of its claim for receipt of management services. Further, in paras 2.3.7 and 2.3.8, the DRP holds the benefit test has to be satisfied. In para 2.3.18 at page 17, the DRP observed that services were not rendered by Sandvik AB but rendered by Walter AG. The learned Authorized Representative for the assessee pointed out that Walter AG, Germany was the holding company of assessee and ultimate holding company of both was Sandvik AB, Sweden. He further pointed out that documentation of various services given by Walter AG were filed before the Assessing Officer and DRP. However, the DRP vide para 2.3.6 at page 13 of the order observed that no documents were filed, which is totally incorrect. He further pointed out that there was discrepancy in the order of DRP, wherein in para 2.3.18, the DRP observed that the documents of providing services were by Walter AG and not Sandvik AB. The learned Authorized Representative for the assessee pointed out that no payment had been made to Walter AG, since the assessee had entered into agreement with Sandvik AB, which was the ultimate holding company and payment was made to it. Our attention was drawn to Management Services Agreement between Sandvik AB and
ITA No.523/PUN/2016 5 M/s. Walter Tools India Pvt. Ltd.
assessee, which was placed at pages 361 to 374 of Paper Book and at page 363 of Paper Book, it is mentioned that services could be provided by all or some of the concerns of Sandvik group. He again reiterated that Walter AG was part of Sandvik group and Sandvik AB was the conduit, which raised the bills also. The learned Authorized Representative for the assessee then referred to the order of Tribunal in Sandvik Asia Pvt. Ltd. Vs. ACIT in ITA No.1750/PUN/2013 and cross appeal in ITA No.1804/PUN/2013 relating to assessment year 2005-06, order dated 14.06.2017, wherein similar agreement was existing between the parties and the issue was decided in favour of assessee on the basis of services availed by the said concern. On without prejudice basis, the learned Authorized Representative for the assessee pointed out that at entity level, all the transactions have to be aggregated including the payment of management service fees i.e. the said payments have to be aggregated with the transaction of imports and the margins of assessee after such aggregation were 6.95% and was at arm's length price when compared with the margins of comparables finally selected at 5.60%.
The learned Departmental Representative for the Revenue placed heavy reliance on the observations of DRP at pages 11 to 17 of order. He further pointed out that in the absence of any services being received by assessee and further, no benefit arising to the assessee, there is no merit in the claim of assessee and orders of authorities below needs to be upheld.
We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against transfer pricing adjustment made in the hands of assessee by treating the payment of management services to associated enterprise at Nil. Briefly, in the facts of the case, the assessee’s main activity of operation was import of cutting and drilling tools from its
ITA No.523/PUN/2016 6 M/s. Walter Tools India Pvt. Ltd.
associated enterprise and selling the same in domestic market. The said international transaction has been accepted to be at arm's length price in the hands of assessee. In addition, the assessee had also paid management service fees to associated enterprise i.e. Sandvik AB. The first plea of assessee before us is that there is no merit in the orders of authorities below in applying the benefit test and holding that the transaction is not at arm's length price and by adopting the arm's length price at Nil. The next plea of assessee is that against the finding of DRP that no services have been rendered by Sandvik AB and hence, no merit in the claim of assessee of payment of management services to its associated enterprise. The case of learned Departmental Representative for the Revenue was that where services have been provided by Walter AG, then there is no merit in making any payment to Sandvik AB. Another stand of authorities below is the absence of documentation of provision of various services before them. The case of assessee on the other hand, is that the aforesaid management service fees are being paid as per the terms of agreement entered into between the assessee and Sandvik AB, under which the said services have been paid from year to year. Further, the assessee explains that no doubt Walter AG, Germany was the holding company of assessee but the ultimate holding company of both the concerns was Sandvik AB, Sweden. Our attention was drawn to clauses of agreement, wherein it is specifically provided that Sandvik AB through its associate would be providing the services to assessee. The provision of services cannot be doubted though in para 2.3.6, the DRP states that no documents were filed by assessee in support of its claim of receiving the said services. However, in para 2.3.18 at page 17 of its order, the DRP specifically comments that the services are not rendered by Sandvik AB but by Walter AG. So, the findings of DRP in para 2.3.6 are not correct. Once the DRP refers to
ITA No.523/PUN/2016 7 M/s. Walter Tools India Pvt. Ltd.
the documents of Walter AG on provision of services, then the documentation of provision of services is duly available on record.
The question which needs adjudication is whether the payments made to Sandvik AB, the holding company is on account of provision of services by Walter AG, Germany. It is no doubt that Walter AG, Germany is part of Sandvik group of concerns. Sandvik AB is the ultimate holding company as mentioned earlier and was the concern which raises the bills on all the entities of Sandvik group, to which it is providing services. First, we may refer to the copy of agreement, dated 11.04.2005 which is placed at pages 361 to 374 of Paper Book. In Preamble itself, it is mentioned that Providing Party i.e. Sandvik AB had specific knowledge in the field of commercial, management, financial, marketing, technical and administrative management techniques and it was desirable that the assessee benefits from such specialized knowledge. Under the definition clause, ‘Providing Parties’ are defined to be all or some of the Sandvik companies, which provide management services. In other words, the agreement though executed by Sandvik AB with the assessee but the services shall be provided by the providing parties, which includes associates of Sandvik AB from time to time. The scope of services is clearly defined in clause 2 of the agreement and clause 3 deals with payment terms. It may be mentioned that the said agreement is in place in 2005 and it was put to the learned Authorized Representative for the assessee as to what was the fate of transfer pricing adjustment, if any in earlier years. The learned Authorized Representative for the assessee replied that in all the other years, the said issue became academic as because of technical aspects, the assessment orders passed by the Assessing Officer / TPO had been annulled. The assessee had explained before the TPO that the said service fees consisted of cost pertaining to services within ambit of marketing management, general administration, human
ITA No.523/PUN/2016 8 M/s. Walter Tools India Pvt. Ltd.
resources and information technology. The said interactions were happening on day-to-day basis and documentations were voluminous. However, sample copies of documents, e-mails, advise visits reports, etc. were filed before the authorities below. The copies of same are available at pages 382 to 419 of Paper Book. Further, the assessee had also filed certificate from the auditor of Sandvik AB, which is placed at pages 420 to 423 of Paper Book, under which they have certified the cost allocated by Sandvik AB to the assessee. Regarding the year 2011, cost included mark up of 4% on services provided by Sandvik AB and allocation was based in accordance with criteria set out in the service agreement between the two parties. It may again be reiterated that availment of services has been accepted by authorities below, but the adjustment has been made on account of provision of management service fees on the ground that the said services are not provided by Sandvik AB with whom the assessee had entered into agreement but by Walter AG, Germany, the holding company of assessee. We have already referred to the terms of agreement, wherein Sandvik AB is referred to as ‘Providing Party’ and the services are to be provided by the providing party, which is defined in clause 1.1 include all or some of Sandvik companies, which provide management services. The concern Walter AG, Germany is part of Sandvik group of companies, which is also not doubted and once the services were provided by Walter AG, Germany, which in turn, as part of Sandvik group of companies, which is headed by Sandvik AB, Germany, then there is no merit in the orders of authorities below in holding that no services have been provided by Sandvik AB to whom the management fees has been paid.
Another aspect which also needs to be kept in mind is that Sandvik AB through its group companies was providing similar services to all the group companies and allocation key is adopted for allocating the cost to the individual
ITA No.523/PUN/2016 9 M/s. Walter Tools India Pvt. Ltd.
companies, which is clearly mentioned in the report of auditor, which is placed at pages 420 to 423 of Paper Book. The authorities below cannot sit in judgment over the decision of assessee in availing the services and there is no question of providing documentation to specify the benefit test. We have already held in series of cases that businessman is the best judge for conducting its business and while doing so, it is his decision to avail services from the holding company and or to make payments for services cannot be doubted. The only thing which needs to be considered is whether the services have been provided. However, in the facts of present case, the same is not doubted as the authorities below have time and again referred to the services being provided by Walter AG, Germany, but the adjustment has been made in the hands of assessee on the ground that services are not provided by Sandvik AB with whom the assessee has entered into an agreement. Where the management services have actually been rendered, may be by Sandvik entity i.e. Walter AG, Germany, then arm's length price of such transaction cannot be taken at Nil. However, we find no merit in the orders of authorities below.
Similar issue has been decided by the Tribunal in the case of Sandvik Asia Pvt. Ltd. Vs. ACIT (supra), wherein the said concern had paid management service fees of ₹ 4.41 crores to Sandvik AB, Sweden based on the terms of agreement entered into. The relevant findings of Tribunal are from paras 45 to 52 of the said order. We find no merit in the orders of authorities below in adopting the arm's length price of international transactions pertaining to payment of management service fees at Nil. The order of Assessing Officer / DRP in this regard is thus, reversed and the issue raised by assessee is thus, allowed.
ITA No.523/PUN/2016 10 M/s. Walter Tools India Pvt. Ltd.
Before parting, we also refer to the alternate plea raised by assessee i.e. where the assessee is carrying on two activities i.e. one, importing of tools from associated enterprise and also paying management service fees to Sandvik AB for carrying on its business; the second transaction being inter-linked, are to be aggregated in the hands of assessee and the margins of assessee on aggregation is 6.95%, which is higher than the mean margins of comparables finally selected in the hands of assessee at 5.60%. Accordingly, no adjustment on account of arm's length price can be made in the hands of assessee on such aggregation of two transactions. Accordingly, the grounds of appeal raised by assessee are thus, allowed.
In the result, the appeal of assessee is allowed.
Order pronounced on this 29th day of April, 2019.
Sd/- Sd/- (D.KARUNAKARA RAO) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 29th April, 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 DIT (TP/IT), Pune; 4. The DR ‘A’, 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