PPG COATINGS INDIA P.LTD (NOW MERGED WITH PPG ASIAN PAINTS P.LTD),MUMBAI vs. DCIT - 9(2), MUMBAI

This appeal by the assessee is against the order of the Assessing Officer dated 12.12.2011 pursuant to direction of Dispute Resolution Panel (DRP) dated 9.8.2012 pertaining to assessment year 2008-09.

read as under :

1. That on facts and circumstances of the case and in law the Ld AO erred in assessing the income of the Appellant under the normal provisions of the Act at Rs 6,72,57,997 against returned income of Rs 3,99,18,428based on the directions received from Hon'ble Dispute Resolution Panel ("DRP") upholding the adjustment to the transfer price proposed by the learned Transfer Pricing Officer ("Ld TPO").

2. That on facts and circumstances of the case and in law the Ld AO/TPO erred in proposing and the Hon'ble DRP further erred in upholding an adjustment of Rs 2,73,39,569in respect of the international transactions pertaining to (a) payment for SAP license, (b) cost sharing expenses, and (c) reimbursement of expenses (expenses incurred)alleging that the same to be not at arm's length in terms of the provisions of Sections 92C(1) and 2 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.)

92C(2) of the Act read with Rule 10D of the Income-tax Rules, 1962 ("the Rules").

4. That on the facts and circumstances of the case and in law, the LdAO/ TPO/DRP has erred in making a transfer pricing adjustment in relation to the payment for SAP license and cost sharing expenses allegedly ignoring the OECD Transfer Pricing Guidelines, other international and domestic jurisprudence.

5. That on facts and circumstances of the case and in law the Ld AO/TPO/DRP has erred in not appreciating that even after considering payment of SAP license (depreciation), cost sharing expenses and the reimbursement of expenses (expenses incurred) the appellant's margin on a whole entity basis on the application of Transactional Net Margin Method ("TNMM") was higher than the margin earned by the comparable companies.

6. That on facts and circumstances of the case and in law Ld AO/TPO/ DRP has also erred in confirming the payment for SAP license as revenue in nature and disallowing the entire payment cost.

6.1 That on facts and circumstances of the case and in law Ld AO/ DRP had failed to appreciate the business and commercial need by appellant company for implementation of SAP software and erred in upholding the TPO's contention that the cost of SAP license was merely imposed by parent company on the appellant.

6.2That on facts and circumstances of the case and in law Ld AO/TPO/ DRP had erred in brushing aside the additional evidences filed by the appellant company documenting the benefits derived by it from the implementation of SAP software.

6.3 That on facts and circumstances of the case and in law Ld AO/ TPO/ DRP erred in not considering the details of cost incurred by the Parent Company, the basis of cost allocation and the third party supporting evidences placed on record by the appellant company in connection with the purchase of SAP license.

7. That on facts and circumstances of the case and in law Ld AO/TPO/ DRP failed to appreciate the business and commercial need for the appellant for availing the cost sharing services.

3 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.)

7.1 That on facts and circumstances of the case and in law the Ld AO/TPO/DRP has failed to take cognizance and has merely brushed aside the additional documentary evidences which have been placed on record by the appellant for the cost sharing expenses clearly demonstrating that intra group services have been received by the appellant company and the consequent benefit from availing the services.

7.2 That on facts and circumstances of the case and in law the Ld AO/ DRP has failed to appreciate that the cost recharge was determined based on scientific allocation keys and as per the cost sharing agreements entered into between the appellant and its associated enterprises ("AEs"). 7.3 That on facts and circumstances of the case and in law the Ld AO/ DRP had erred in ignoring the detailed cost allocation workings placed on record by the appellant company in connection with determination of the cost sharing expenses.

8. That on facts and circumstances of the case and in law the Ld DRP has not taken cognizance of the responses filed against the remand report placed on record even after a rectification being filed by the appellant under Rule 13 of the Income Tax (Dispute Resolution Panel) Rules, 2009.

9. That on the facts and in circumstances of the case the Ld AO has erred in initiating penalty proceedings against the appellant company.

Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant.”

3. The assessee has further filed additional grounds as under :

1:0 Re.: SAP software and cost sharing expenses:

1:1 That on facts and circumstances of the case and in law Ld DRP had erred in brushing aside the additional evidences filed by the appellant company documenting the benefits derived by it from the implementation of SAP software, even while passing the rectified Dispute Resolutions Panel ('DRP') directions dated 30 October 2012 ('rectified DRP directions').

1:2 That on facts and circumstances of the case and in law Ld DRP had erred in not considering the details of cost incurred by the Parent company, the basis of cost allocation and the third party supporting evidences placed on record by the appellant company in connection with the purchase of SAP license, even while passing the rectified DRP directions.

1:3 That on facts and circumstances of the case and in law Ld DRP has failed to take cognizance and has merely brushed aside the additional documentary evidences which have been placed on record by the appellant for the cost sharing expenses clearly demonstrating the intra group services have been received by the appellant company and the consequent benefit from availing the services, even while passing the rectified DRP directions.”

4 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.)

International transactions:-

During the relevant previous year, the assessee has entered into the following international transactions.

Transaction Amount of Method used for determining transaction Rs. the ALP Purchase of Finished Goods 5,46,98,678 TNMM Sale of Finished Goods 82,66,617 TNMM Commission Income 18,22,651 TNMM Purchase of SAP License 12,80,079 CUP Purchase of Furniture 23,733 CUP

Advance received 5,68,05,006.57 CUP from customers Cost Sharing 2,56,94,820 Actual cost without mark up

Expenses Incurred 3,64,670 Actual expense

5. The TPO noted that the assessee has purchased SAP license and paid a sum of Rs. 12,80,079/- to Sigmakalon BV (parent company). The Assessing Officer disallowed the same primarily on the ground that same was not required and was not beneficial to the assessee. Further he also drew adverse inference that the details of purchase cost which was done by the parent company was not produced. The observation of the TPO in this regard are as under :-

5 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.)

“Before examining the share allocated to the assessee, let us examine the benefit of SAP license to the assessee. The assessee company is engaged in the business of trading in paints. For trading business there is no additional benefit by using software like SAP as the business activity of the assessee is simple which can be performed easily by simple accounting software. Using costly software like SAP can be requirement of the parent company of the assessee which is collecting and collating data received from AEs situated worldwide. The assessee has not demonstrated as to how, there is value addition to its business by using SAP license. In a third party situation, no company would pay for services which are not beneficial for its business. The use of SAP licence is imposed by parent company of the assessee for the benefit of parent company. Therefore, ALP of a service provided by AE which is beneficial to it but not beneficial to the assessee cannot be more than nil. Without prejudice to the above, for sake of argument, if we accept that the assessee has got some utility of the SAP software. In that case, the assessee is required to furnish following details/evidences- i. Evidence of incurring expenditure by the parent company- to support this the assessee has furnished only copy of agreement and no detail working of total cost incurred by the parent company has been furnished. ii. Evidence of allocation key among different AEs including the parent company for sharing of the cost. The assessee has not furnished detail of allocation key among different AEs on the basis of which it can be seen that the allocation among AEs was justifiable. Evidence of allocation of total cost among AEs and the parent company on the basis of allocation key.

In the absence of these evidences, it is not possible to examine whether the transaction was fairly allocated among AEs including parent company.

Accordingly, as discussed above the assesses has failed to demonstrate additional benefits from the SAP license, cost of which has been imposed by the parent company on it. Further, the assessee has also failed to demonstrate that the allocation of SAP license expense was fair between AEs and parent company. Hence, the ALP of transaction is proposed to be determined at Rs. NIL. Accordingly an adjustment of Rs. 12,80,079/- is made.”

“The assessee sought to present additional evidences before the Panel A letter was sent to TPO-II(8), Mumbai for his comments on the additional evidences. The TPO has replied that the statement of the assessee that the expenses

6 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.) were benchmarked under TNMM is factually incorrect. As per revised report the assessee has benchmarked the purchase of SAP license under CUP method.

The Panel has considered the submissions of the assessee and the observations of the TPO, The total cost incurred by the parent company for getting SAP license has not been produced by the assessee. Also, the basis of cost being allocated to the assessee has not been produced by the assessee. No evidence has been produced by the assessee regarding the evidence of incurred expenditure by the parent company and also for allocation of sharing of the cost among the AEs including the parent company. In view of this the observation of the TPO that the cost of the SAP license has been imposed on the assessee by the parent company, is upheld.”

Apropos cost sharing expenses:-

On this issue TPO observed as under :-

“The assessee company has paid an amount of Rs. 2,56,94,820/- on account of cost sharing to Sigmakalon BV (Parent company). The assessee is stated that it is the group policy that the common costs incurred by the parent company have to be allocated among all the AE's and parent company. These costs are to be allocated irrespective of any benefit. The main natures of expenses for cost sharing are R&D expenses, Central support like - marketing and development, common administrative expenses, etc. The assessee has also furnished cost-sharing agreements. While making the comparative analysis with last year, the assessee has stated that there is increase in allocation of expenses by the parent company during the year in comparison to last year. It has been further stated by the assessee that detailed working of this is not available with the local entity.

On being asked, vide order sheet dated 11/8/2011, the AR stated that, the assessee is not in a position to provide working of share of assessee out of total cost of the group incurred by parent company. What revenues were earned by the assessee by incurring these costs was also not provided by the assessee. Therefore, the assessee was asked to show-cause why the ALP of this transaction should not be taken as nil. In response, the AR appeared on 29-8-2011. However, no reply was furnished on this issue.

In the absence of evidences which proves that actually some cost was incurred by the parent company and services were provided to the assessee and the costs so incurred have been fairly allocated among the group entities, neither it is possible to examine whether any such expense was incurred nor that the value of such expense was fairly allocated among AEs including parent company.

The assessee has failed to prove that actually some services were requested by the assessee to its AE. The assessee has also failed to establish that any service was received by the assessee from AE for these payments. The 7 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.) assessee has also failed to even prove that any cost was incurred by the parent company. Further, the assessee failed to demonstrate any utilization of services in its business of trading from the cost sharing which has been imposed by the parent company on it. Further, the assessee has also failed to demonstrate that the allocation of so called costs was on some basis and that the basis of allocation was fair between AEs and parent company. Hence, the ALP of transaction is proposed to be determined at Rs. NIL, Accordingly an adjustment of Rs. 2,56,94,820 /- is made."

5.2 The assessee had stated before me DRP that the AE. has not made appropriate representations before the TPO. The TPO on reference to this point has made the observation that this ground is without any basis. In view of above discussion, that the cost allocation cannot be determined among the AEs, the objection on the ground that the TPO has erred in disallowing the cost expenses is rejected. Hence, the point no (c) of the objection is rejected.”

Synopsis of the arguments made by the Appellant during the course of the hearing:

Nature of business: PPG Coatings India Pvt. Ltd. ['PPG Coatings' / 'the Appellant'] is engaged in the business of trading in marine and protective paints (refer para No. 3 at page No. 01 of the Assessment Order dated 25 October 2012).

8 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.)

International transactions undertaken during the year under consideration: During the year under consideration, the Appellant has entered into the following international transactions with its Associated Enterprises ['AEs'] - refer page No. 02 of the TPO's Order dated 27 October 2011 Nature of transaction Value of International Method adopted for the transaction (in Rs.) purposes of benchmarking 5,46,98,678 Purchase of Finished Transactional Net Margin Method [TIMMM'J Goods Sale of Finished Goods 82,66,617 TNMM 18,22,651 TNMM Commission Income Purchase of SAP License 12,80,079 Comparable Uncontrolled Pricing Method [CUP] Purchase of Furniture 23,733 CUP 5,68,05,006 CUP Advance received from customers Cost sharing 2,56,94,820 Actual cost without mark-up 3,64,670 Expenses Incurred Actual expense Total: 14,89,56,254 Ground Nos. 01 to 08 - Adjustment of Rs. 2,73,39,569/- :in respect of payment for SAP license, cost sharing expenses and reimbursement of expenses made to AEs: The aforementioned grounds of appeal challenge the adjustment of Rs. 2,73,39,569/- made by the Assessing Officer [AO' / Transfer Pricing Officer [TPO'J and confirmed by the Dispute Resolution Panel [DRP'] in respect of payment for SAP license, cost sharing expenses and reimbursement of expenses made to AEs. Before the AO / TPO: Re.: Purchase of SAP Licenses (Rs. 12,80,079/-): • The SAP licenses were purchase by the AE viz. Sigmakalon BV from a third-party SAP Nederland BV in bulk quantities. • A copy of the agreement entered into between Sigmakalon BV with the third-party viz. SAP Nederland BV alongwith a copy of the debit note raised by the AE viz. Sigmakalon BV was submitted by the Appellant to the TPO vide letter dated

25. July 2011 (refer page No. 76 to 92 of the paperbook). • The rationale behind the purchase of SAP license by Sigmakalon BV was to avail volume discounts from such purchases, since if the assessee would have purchased this from the open market from a third party the cost incurred would have been higher. • Out of the bulk purchase of SAP licenses made by Sigmakalon BV, the Appellant was allotted

11. SAP professional licenses and one employee user license.

9 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.)

• The said transaction was benchmarked under'Comparable Uncontrolled Price' ['CUP'] method, since the cost of the 3rd party licenses have been allocated based on the number of users. However, without considering the aforesaid details, the TPO determined the Arm's Length Price ['ALP'] of the transaction at Nil, on the ground that the Appellant had failed to demonstrate the additional benefits from the SAP license, cost of which has been imposed by the AE on it - refer page No. 3 and 4 of the TP Order - the relevant extracts of the TP Order are given hereunder: Accordingly, as discussed above the assessee has failed to demonstrate additional benefits from the SAP license, cost of which has been imposed by the parent company on it. Further, the assessee has also failed to demonstrate that the allocation of SAP license expense was fair between AEs and parent company. Hence, the ALP of transaction is proposed to be determined at Rs. NIL. Accordingly an adjustment of Rs. 12,80,079/- is made. • Further, the following details were also submitted before the Assessing Officer vide a letter dated 15 December 2011 (post receipt of the TP Order) in respect of the impugned transaction (refer page 101 / 103 of the paperbook): o Comparative details of allocation of SAP License cost charged to the Appellant with a comparison with the SAP price list. o that the aforesaid transaction alongwith the other transactions under dispute, were debited to the Profit and Loss Account. The Appellant had benchmarked other transactions viz. purchase of goods, sale of goods and commission income using TNMM method. The net margin of the Appellant is higher than . that of the comparables (after including all the aforesaid expenses), and accordingly it was submitted that the transaction is at ALP under TNMM as well. Re.: Cost sharing expenses - Rs. 2,56,94,820/-: • The Appellant had availed the following services from the AE under the cost sharing expenses: o Central Support Services o Research and Development Service for protective coating and marine o Marketing and support service for protective coating and marine o Centralised IT service.

The said services were availed by the Appellant to facilitate management and conduct of its business more efficiently. The cost allocated to the Appellant was based on the application of scientific allocation keys and was governed by the relevant agreements. The transaction was benchmarked under CUP, as the expenses were reimbursed on a cost to cost basis. Copies of the relevant cost sharing agreements were also submitted to the TPO (refer pages 93 and 104 to 123 of the paperbook).

However, without considering the aforesaid details, the TPO determined the ALP of the transaction at Nil, on the reason that the Appellant had failed to prove that any services were actually rendered by the AE, failed to prove whether any cost was actually incurred by the AE and as how the cost allocation was made - refer page 04 to 05 of the TP Order - the relevant extracts of the TP Order are given hereunder:

The assessee has failed to prove that actually some services were requested by the assessee to its AE. The assessee has also failed to establish that any service was received by the assessee from AE for these payments. The assessee has also failed to even prove that any cost was incurred by the parent company. Further, the assessee failed to demonstrate any utilization of services in its business of trading from the cost sharing which has been imposed by the parent company on it. Further, the assessee has also failed to demonstrate that the allocation of so called costs was on some basis and that the basis of allocation was 10 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.) fair between AEs and parent company. Hence, the ALP of transaction is proposed to be determined at Rs. NIL. Accordingly an adjustment of Rs. 2,56,94,820/-is made. Further, the following details were also submitted before the Assessing Officer vide a letter dated 15 December 2011 (post receipt of the TP Order) in respect of the impugned transaction (refer page 101 to 103 of the paperbook): o A report of factual findings issued by PricewaterhouseCoopers certifying the cost allocation methodology in connection with the cost sharing agreement -refer page 124 to 129 of the paperbook o Detailed working of cost sharing expenses - refer page 130 to 132 of the paper book. • That the aforesaid transaction along with the other transactions under dispute, were debited to the Profit and Loss Account. The Appellant had benchmarked other transactions viz. purchase of goods, sale of goods and commission income using TNMM method. The net margin of the Appellant is higher than that of the comparables (after including all the aforesaid expenses), and accordingly it was submitted that the transaction is at Arms Length Price under TNMM as well. Re.: Reimbursement of expenses - Rs. 3,64,670/-:

• During the year under consideration, certain expenses were incurred by the AE's on the Appellant's behalf and were subsequently reimbursed by the Appellant. • The said expenses were reimbursed on a cost to cost basis from the Appellant. • The transaction was benchmarked under CUP, as the expenses were reimbursed on a cost to cost basis. • However, the TPO has determined the ALP of the said transaction at Nil as under -refer page No. 5 of the TP Order: The assessee has failed to produce evidences to prove that any services were availed by the assessee for these expenses and any such expense were incurred by the AE at all. Hence, it is not possible to examine whether any such expenses were incurred at all. * Aggrieved by the Order dated 27 October 2011 passed by the TPO, the Appellant filed its objections before the Dispute Resolution Panel ['DRP'], Before the DRP: • All the above details / evidences filed before the AO / TPO relating to the TP adjustments made by the TPO on all the aforesaid 3 issues were once again filed before the DRP. • In addition to the above, additional evidences were filed before the DRP with respect to cost sharing expenses and SAP under cover letter dated 04 July 2012 (filed on 09 July 2012) - refer page Nos. 137 to 376 of the paperbook), to in order to enable the Hon'ble Panel appreciate the details of the transaction. The details of the additional evidences is as under: o Transfer Pricing Report on the benchmarking of the cost sharing expenses -refer page No. 138 to 376, which inter-alia contains: the documentation of the benefits received by the Appellant from the said expenses: • Central support services - refer page nos. 157 to 163 of the paperbook; • Research and development services - refer page nos. 164 to 171 of the paperbook; • Marketing and support services - refer page nos. 172 to 186 of the paperbook; • Centalised IT services - refer page Nos. 188 of the paperbook • Emails correspondences alongwith the relevant documents (refer page 208 to 376 of the paperbook) • Details of the marketing material provided. • Summary of the Benefits obtained (refer page 194 of the paperbook).

11 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.)

• Further, in support of the additional evidence(s), the Appellant also submitted an affidavit from the Finance Manager of the Appellant- refer page no. 133 to 136 of the paperbook. The DRP called for a remand report from the AO / TPO, which was submitted by the AO / TPO vide a communication dated 13 August 2012 - refer page nos. 402 to 406 of the paperbook.

In the said remand report the TPO had made various unsubstantiated allegations which were rebutted by the Appellant vide a letter dated 27 August 2012 (filed in the DRP's office on 10 September 2012) - refer page nos. 377 to 406 of the paperbook, inter-alia submitting: that allocation key of cost sharing expenses has already been submitted before the TPO vide letter dated 15 December 2011 - tabulated hereunder:

Particulars Allocation Key

Central support the Sales ratio (based on sales of entire PPG Group) for Marketing Support service for Sales ratio (based on sales Protective Coating and Protective Coating and Marine) Marine for Research & Development for Sales ratio (based on sales Protective Coating and Marine Protective Coating and Marine)

Centralised IT Services Actual hours spent on the individual charge out rate. brief summary of the email correspondences and the benefits derived by the Appellant - refer page Nos. 392 to 401 of the paperbook. that the cost allocation expenses have been certified by a third party consultant Price Waterhouse Coopers (refer page Nos. 124 to 132 of the paperbook) Despite submitting such voluminous data before the AO / TPO / DRP, and providing each and every detail, the DRP in its Directions dated 09 August 2012 (to be read as 06 September 2012 as per the rectification Order passed by the DRP subsequently), has upheld the Order of the TPO for stating that no evidences have been filed by the Appellant -relevant extracts of the Directions of the DRP are given hereunder; 4.3 The panel has considered the submissions of the assessee and the observations of the TP. The tool cost incurred by the patent company for getting SAP license has not been produced by the assessee. Also, the basis of cost being allocated to the assessee has not been produced by the assessee- No evidence has been produced by the assessee regarding the evidence of incurred expenditure by the parent company and also for allocation of sharing of cost among the AEs including the parent company. In view of this the observation of :=>e TPO that the cost of the SAP license has been imposed on the assessee by the parent company, is upheld. The points (a) and (b) of objection No. 1 are rejected.

12 PPG Coatings India Pvt. Ltd. (Now merged with PPG Asian Paints Pvt. Ltd.)

It has also been observed that the cost allocation cannot be fairly determined among the group entities, so neither it is possible to examine whether any such expense was incurred nor that the value of such expense was fairly allocated among AEs including parent company. 5.2 The assessee had stated before the DRP that the AR. has not made appropriate representations before the TPO. The TPO on reference to this point has made the observation that this ground is without any basis. In view of above discussion, that the cost allocation cannot be determined among the AEs, the objection on the ground that the TPO has erred in disallowing the cost expenses is rejected. Hence, the point no (c) of die objection is rejected. 5.3 The other two grounds of the objection stern out from the previous points. As the earlier 3 points have been rejected, the other two points, being consequential in nature of the It will not be out of place to mention here that, against the Directions of the DRP, the Appellant filed a rectification application dated 11 October 2012, to consider the evidences filed by it, however, the DRP vide its ratification Order dated 30 October 2012 has once again failed to consider the evidences so filed - refer page nos. 407 to 410 of the paperbook for the said application.