GRUPO ANTOLIN INDIA PRIVATE LIMITED,,PUNE vs. DEPUTY COMMISSIONER OF INCOME TAX,, PUNE

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “C”, PUNE BEFORE SHRI S. S. GODARA, JUDICIAL MEMBER AND SHRI DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER आयकर अपील सं. / ITA No.1207/PUN/2017 िनधा�रण वष� / Assessment Year: 2009-10 Grupo Antolin India Private Vs. DCIT, Circle-1(2), Pune. Limited, B 25, MIDC, Ranjangaon, Taluka: Shirur, Pune- 412220. PAN : AAACA6730G Appellant Respondent Assessee by : Shri J. D. Mistri Revenue by : Shri Piyush Kumar Singh Yadav Date of hearing : 22.09.2022 Date of pronouncement : 13.10.2022 आदेश / ORDER PER S. S. GODARA, JM: This assessee’s appeal for assessment year 2009-10 arises against the CIT(A)- 13, Pune’s order dated 10.02.2017 passed in case no. PN/CIT(A)-13/DCIT, Circle-1(2), Pune/45/2013-14/606 involving proceedings u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961; in short “the Act”. Heard both the parties. Case file perused. 2. The assessee pleads the following substantive grounds in the instant appeal :-

2 ITA No.1207/PUN/2017 “1:0 Transfer Pricing adjustment of Rs. 3,35,16,306/- while determining the Arm's Length Price ["ALP"] of international transactions in respect of "advisory services": 1:1 The Commissioner of Income-tax (Appeals) ["CIT(A)"] has erred in confirming the view of the Assessing Officer ["A0"] / the Transfer Pricing Officer ("TPO") that the international transactions entered into by the Appellant with its Associated Enterprise ("AE") in respect of "receipt of advisory services" is not at an arm's length and in thereby holding that the ALP thereof is only Rs.31,72,140/- as against the amount of Rs. 3,66,88,446/- paid by the Appellant and determined to be the ALP thereof. 1:2 The Appellant submits that considering the facts and circumstances of the case and the law prevailing on the subject the value of international transactions pertaining to "receipt of advisory services" is Rs. 3,66,88,446/-, and the CIT(A) ought to have held as such. 1:3 Without prejudice to the aforesaid, and on the facts and circumstances of the case and on the law prevailing on the subject the transaction vis-a-vis "advisory services" should also be aggregated under "manufacturing activity" (alongwith aggregating other international transactions being receipt of research and development services and purchase of raw materials) while determining the ALP of the international transactions of the Appellant. 1:4 The Appellant submits that the AO / TPO be directed to delete the transfer pricing adjustment vis-a-vis the receipt of advisory services and to re-compute its total income accordingly. Without prejudice to the grounds of appeal No. 1 raised hereinabove: 2:0 Re.: Not restricting the amount of transfer pricing adjustment to the 'transactions' between Associated Enterprises: 2:1 The CIT(A) has erred in not restricting the amount of transfer pricing adjustment to the value of international transactions. 2:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the CIT(A) ought to have held that the transfer pricing adjustment should be restricted to the value of the international transactions in dispute. 2:3 The Appellant submits that the AO / TPO be directed to the re- compute its total income after restricting the transfer pricing adjustment, if any, to the value of international transactions in dispute. 3:0 Re.: General: 3:1 The Appellant craves leave to add, alter, amend, substitute and / or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.”

3 ITA No.1207/PUN/2017 3. Learned senior counsel states that the assessee at this stage only presses for its former grievance seeking to reverse both the lower authorities’ action making arm’s length price “ALP” adjustment of Rs.3,35,16,306/- in respect of the payments to its overseas associate enterprise “AE” in lieu of “Receipt of Advisory Services” in the relevant previous year. It is in this factual background that we proceed to decide the instant former issue in succeeding paragraphs. 4. The assessee herein M/s. Grupo Antolin Pune Private Limited “GAPPL” is a company engaged in the business(es) inter alia of manufacturing of car interiors including headlines, door panels, sun visors, parcel trays etc followed by computer aided design services as well. The assessee had filed its return on 30.10.2009 disclosing loss of Rs.7,90,07,284/- which stood “summarily” processed. The Assessing Officer took up scrutiny thereafter. He came across the assessee’s international transactions amounting to Rs.17,86,29,123/- with its overseas group entities Associated Enterprises “AEs” inter alia involving purchases of raw materials/components, press machine, software license, “Receipt of Advisory Services” (issue herein), payment of telephone charges, receipt of Research & Development (R&D) services, provision for engineering, drawing & designing services, payment of maintenance charges for software

4 ITA No.1207/PUN/2017 license and paid/received reimbursement; involving varying sums, respectively. The Assessing Officer, therefore, made section 92CA(1) reference to the Transfer Pricing Officer “TPO” for determining arm’s length price “ALP” thereof. 5. It emerges from a perusal of TPO’s order dated 10.01.2013 that so far as the sole issue before us involving arm’s length price adjustment relating to “Receipt of Advisory Services” is concerned, the assessee had paid Rs.3,66,82,446/- to its spanish associated enterprise M/s. Grupo Antolin Irausa. The TPO’s order makes it clear that the assessee’s transfer pricing report (Form 3CEB) had claimed that the recipient AE hereinabove charged “a portion of total expenditure incurred on account of these techno commercial services to its group companies. The said amount is increased by supplementary 5% profit margin. Usually this charging is based on the turnover as budgeted by the group companies at the start of the year”. It had further benchmarked the foregoing transaction in “Receipt of Advisory Segment” by using the comparable uncontrolled price “CUP” method thereby declaring that “as per the information available with the company, AEs provide similar services to its other group of company based on similar terms and conditions and therefore have entered into comparable transactions with other group companies which can be compared”.

5 ITA No.1207/PUN/2017 6. The TPO went for a very elaborate discussion in his order running into 36 pages to conclude that although the assessee had paid the sum in issue of Rs.3.66 crores towards “Receipt of Advisory Services” involving M/s. Grupo Antolin Irausa, but, it could not demonstrate the actual receipt of any kind of services in tune with the terms of the service agreement dated 02.10.2003. He therefore determined arm’s length price of assessee’s advisory services to be of “nil” value in order to adjust the entire sum of Rs.3,66,82,466/-. He also appears to have taken note of Dispute Resolution Panel “DRP” directions dated 26.09.2012 in preceding assessment year 2008-09 declining the assessee very segment of advisory services taken at “Nil” price after adopting the Transactional Net Margin Method “TNMM” as per relevant discussion in para 69 page 35 of the TPO’s order before us. 7. The Assessing Officer framed his section 143(3) r.w.s. 144C(1) assessment dated 30.05.2013 in very terms making the impugned adjustment as per the TPO’s findings. The assessee preferred appeal. We note that although the assessee had filed its relevant documents which already formed part of the case file, the CIT(A) sought for the field authorities’ remand report on 18.07.2014 directing the Assessing Officer to determine arm’s length price of assessee’s advisory services in issue. The said

6 ITA No.1207/PUN/2017 remand report came to be filed vide TPO’s letter dated 26.06.2014. The CIT(A)’s detailed discussion running into 43 pages has thereafter granted relief of Rs.31,72,140/- i.e. 50% of estimation qua cost allocation regarding the assessee’s payment of Rs.63,44,281/- made to its foregoing AE thereby confirming the impugned adjustment of Rs.3,35,08,058/- in other words. This is what leaves the assessee’s aggrieved. 8. We have heard rival arguments/submissions. Learned senior counsel first of all took us to the TPO’s order; and more particularly, page 2 para 4 to paragraphs 10, 13, 18, 26, 35, 47, 63 and 68 dealing with instant issue of “Receipt of Advisory Services”. He invited our attention to the fact that the assessee had used “CUP” method only sole in A.Y. 2008-09 as well as A.Y. 2009-10 before us. And that the TPO had rejected the assessee’s CUP in the impugned assessment year as per para 18 page 12 therein. He thereafter choose to aggregate the assessee’s three transactions involving “Receipt of Advisory Services”, “Payment of Telephone Charges” and “Receipt of R&D” in manufacturing with Profit Level Indicator “PLI” as “OP/OR”. Mr. Yadav could hardly dispute that the TPO’s order in para 36 page 18 initially arrived at transfer pricing adjustment of Rs.27,58,88,444/- by using the Transactional Net Margin Method “TNMM” only. This adjustment figure fail to

7 ITA No.1207/PUN/2017 inspire the TPO’s confidence. He observed that this sum turned out to be much more than the assessee’s gross value of transaction in both manufacturing as well as computation aided design “CAD” segment (supra). We find that the learned TPO went further to compute the impugned nil arm’s length price of assessee’s advisory services by once again following CUP method only. 9. We note that TPO’s detailed discussion from 41 onwards considered the assessee’s service agreement dated 02.10.2003 comprising various stipulations involving definition in “i to ix” clauses regarding administrative support services vis-a-vis the list of cost incurred for implementation thereof. He next compared the assessee’s international transactions of Rs.14,19,46,657/- with the impugned payment amounting to Rs.3,66,82,446/- (totalling to Rs.17.86 crores) to observe that the latter constituted almost 25% of the former gross value which; in his opinion, carried no clarity at all. Faced with this situation, the TPO rejected the assessee’s evidence submitted involving various e-mails correspondence(s) with the group/recipient entity by observing that the same hardly proved any specific instance of actual rendering of services by the latter. He also invoked “benefit test” as well as to conclude “nil” price represented the value before going receipt of advisory services. He accordingly made the impugned transfer pricing

8 ITA No.1207/PUN/2017 adjustment representing the entire sum of Rs.3.66 crores which stands upheld in the CIT(A)’s order. 10. We have given our thoughtful consideration to vehement arguments against and in support of the impugned addition. Learned senior counsel explained the assessee’s arrangement with its group entities in light of the service agreement dated 02.10.2003 as well as the various nitty-gritty(ies) thereof involving definition clauses, services and cost allocation and stipulations incorporated therein. We note that there is hardly need for us to delve that deeper in the relevant factual matrix. Suffice to say, we wish to reiterate here that the very issue had arisen between the parties in A.Y. 2008- 09 (supra) as well wherein the learned co-ordinate bench’s order in assessee’s own appeal in ITA No.299/PUN/2013 dated 17.10.2018 has rejected Revenue’s stand as follows :- “17. Another aspect of the issue which has to be kept in mind is that while applying TNMM method which has been applied by both the Assessing Officer and TPO, percentage of margins of assessee is to be compared with the margins of comparables and the advisory fees paid by assessee cannot be taken at Nil especially ignoring the evidences filed by assessee during the course of proceedings. The TPO has failed to come to a finding in this regard as to whether advisory services have been availed by the assessee or not but has gone to take the value of same at Nil. Where an expenditure or payment has been incurred for the purpose of business, the same cannot be disallowed on any extraneous reasoning. The TPO cannot determine arm's length price at Nil without going into merits of rendition of services by the assessee to associated enterprises. The TPO in the final analysis has only commented that since unadjusted margins of assessee are (-) 11.56% and that of comparables are at 6.39%, hence TNMM analysis used for benchmarking was not correct and further held the advisory services were not at arm's length price and hence, taken at Nil. We find no merit in the stand of TPO in this regard, which has been upheld by DRP. In

9 ITA No.1207/PUN/2017 any case, we have already allowed the claim of adjustment to be made on account of extraordinary cost to be reduced while arriving at operating margins of assessee and the same would work out to 7.13%.” 11. Mr. Yadav sought to draw distinction in A.Y. 2008-09 vis-a-vis A.Y. 2009-10 on the ground that although the assessee therein had proved receipt of services in the said former assessment year but it could not demonstrate the actual benefits flowing therefrom whereas the facts in the instant latter assessment year raise the dispute of actual rendering of services itself. He pinpointed the fact that the assessee has not filed any evidence in support of its “Advisory Services” claim throughout except that involving various e-mails which are only self-serving in nature. Learned senior counsel at this stage invited our attention to the assessee’s voluminous box file containing all the e-mails regarding information technology, technical support, quality check, extra/miscellaneous heads, indexation relating to pricing and account support etc to buttress the point that the assessee had indeed availed the said services from its associated enterprise. Faced with this situation, we find merit in the assessee’s instant arguments. This is more so in light of the learned co-ordinate bench very recent order in the recipient entities M/s. Groupo Antolin Irausa S.A.’s case ITA No.1442/PUN/2017 dated 28.07.2022 wherein it has been

10 ITA No.1207/PUN/2017 held that the corresponding e-mails duly proved rendering of managerial/technical services; as the case may be, as follows :- “5.2. In order to decide the taxability or otherwise of the amount under the Act, it would be paramount to first consider the precise nature of services rendered. The services comprise `General services’ of formulating the group’s internal audit plan and assistance in implementation of the same; `Financial services’ of providing assistance in formulation of financial policies and strategies, managing financial operations at group level; `Legal services’ of providing legal assistance in litigious issues; `Human resources services’ of providing performance evaluation procedures and forms with administrative support; `Quality and environment related services’ of defining, managing and supervising the quality and environment strategy of the entire group; `Marketing services’ of developing marketing policy, providing of new market data; `Research services’ of defining and supervising research procedures and policies; `Purchase services’ of defining, implementing and supervising purchase policy and procedures of the group; and `I.T. Support services’ of defining the policy of group information system. From the above description of the services from the Agreement, it turns out that they refer to rendition of services by the assessee to its world-wide group entities and such services are aimed at formulating plans and policies in different spheres of the business to be followed by its world-wide entities so as to have consistency in approach. 5.3. Our attention has been drawn by the ld. AR towards certain e- mail exchanges between the assessee and the Indian entity, whose copies have been placed in the paper book. Pages 231 to 234 demonstrate e-mail exchanges between the assessee and the Indian entity discussing the stiffness of HDL’s with Expanded foam having an acceptable strength. The assessee informing the Indian entity that the test was conducted and it was eventually found that fogging as per Tata specs was OK but for GM specs was not OK. Pages 240 and 241 are again e-mail exchanges between the assessee and Indian entity concerning with the running trials of materials AB 4235/50 and AB NS by the Indian entity on its Plant. The assessee responded by stating that it wants an urgent feedback for this issue as the samples were sent in mail and there was no feedback till November, by specifically mentioning that “this situation is absolutely unacceptable”. To this, the Indian entity responded that it took trial on the above adhesive which is giving good bonding but was facing air gap in the package tray packet area. They requested the assessee for further input. Pages 242 to 243 deal with the Indian entity communicating to the assessee that they have got Canon G-300 series PU foaming machine which was calibrating manually by means of calibration nozzle provided by Canon. It further states that “we are in process of clearing Formal Q- audit and securing VW polo business”. This was responded by the assessee stating that from the view of quality explanations to customer,

11 ITA No.1207/PUN/2017 there was no issue if machine is manual or automatic. It was further responded by the assessee that `GA guarantees the ratio control for both cases manual/automatic foaming machines and the only penalty is that with manual machines we lose much more time for calibrating so that we usually work with these machines at some ratio’. Finally, the assessee directed in its next communication to “set machine to a given nominal value and pour 5-10 times and record the values. Calculate CpK and let us know whether we’re OK or not.” Pages 254 and 255 contain e-mails by which the assessee stated to the Indian entity that there was an issue which cropped up lately after new audits by writing that: “We observe a worrying profusion of software development at Grupo Antolin plants worldwide. These developments very frequently support critical process and overlay functionality with corporate tools or platforms. As a rule, this is in place to provide standardized and secure environment........... In case of your plants, the following licenses must be removed”. Thereafter, the Indian entity expressed some difficulties in removing the software. However, the assessee eventually prevailed over the Indian entity by writing that “you can remove this software immediately. Of course keep us informed any problem in SAP. We would not want to disrupt our service to the customer”. Page 258 is again e-mail exchanges between the assessee and the Indian entity about certain hardware procurement. Pages 260 and 261 are e-mails between the assessee and Indian entity about purchase of certain goods. The Indian entity sent new price. The assessee after certain calculations responded that the pricing was not proper and there was a need to renegotiate the price with the suppliers. Pages 264 to 267 are certain e-mail exchanges on Human resources by which the Indian entity was directed by the assessee to furnish particulars of certain employees and also expressing its displeasure over the Indian entity not responding timely. Pages 268 and 269 are copies of e-mail exchanges between the assessee and Indian entity in connection with the IT services, discussing about difference in the information under SAP system and the report by which the Indian entity was questioned and called upon to change the information in SAP and report in uniform manner. Pages 270 and 271 again deal with e- mail exchanges between Indian entity and assessee. The Indian entity attached monthly cost reduction plan duly updated for May 2009 for information of the assessee. The assessee required it to submit all information in new format which was attached in the e- mail. Similar is the position regarding other e-mail exchanges placed on record. 5.4. With the above understanding of the nature of services, we now proceed to determine the taxability of the amount under the Act, which encompasses consideration, inter alia, for managerial, consultancy or technical services. The term `manage’ in the context of business, connotes administering and supervising the affairs of a business, encompassing Planning, Execution and Performance evaluation. Ex consequenti, the term `Managerial services’ contemplate services in connection with administration and supervision of the business, starting with establishing proper management systems, policies, standards and procedures in the business areas, such as

12 ITA No.1207/PUN/2017 administration, purchasing, marketing, and Human Resources; then executing the implementation of such systems either through self or someone else; and at the end, ensuring that the systems or policies so formulated have been properly adhered to. Thus, it can be seen that the term `managerial services’ is like a package of planning services, execution services and evaluation services to ensure implementation in the business administration fields. Consultancy services, on the other hand, refer to giving some professional advice on a subject, in which the expert advice is sought and given. Once the expert advice is given, the consultancy service comes to an end. Technical services cover giving expert services in the field of technology. Contextually, consultancy and technical services, being separate species of technical services u/s 9(1)(vii) of the Act, need to be viewed separately from managerial services. Even though, the line may be blur in some cases and a service may appear to be both managerial por ona parte and consultancy or technical por otra parte, the consultancy or technical services need to be characterized as such independent of the managerial services for the purposes of this section. 5.5. On an overview of the above e-mails exchanges between the assessee and the Indian entity read in conjunction with the services as described in the Agreement, it becomes overt that the services mainly envisage i) formulating the global policies in the spheres of the business, including, Administration, Purchases, and Human resources so as to have world-wide uniformity in compliance; ii) ensuring application of the such policies by all the global entities including the Indian AE; and iii) evaluating their compliance. The services also cater to giving expert advice on certain matters to the Indian entity, such as, Legal services (falling within the domain of consultancy services) and also giving expert technical opinion on Quality and environment, Research and I.T. Support (falling within the domain of technical services). Thus consideration received by the assessee is partly for the managerial and partly for the consultancy or technical services. Ergo, it satisfies the requirement of taxability under the Act.” 12. We wish to reiterate here that the assessee’s service agreement has remained the same throughout since 2003 onwards (supra). We therefore conclude in this factual backdrop that the assessee has sufficiently proved to have received “advisory services” from its group entity(ies) and the learned lower authorities have erred in law and on facts in rejecting the same in entirety. We, accordingly, delete the impugned adjustment of Rs.3,35,16,306/- in these

13 ITA No.1207/PUN/2017 peculiar facts and circumstances. The assessee succeeds in its first and foremost grievance. No other ground or argument has been pressed before us. 13. This assessee’s appeal is allowed in above terms. Order pronounced on this 13th day of October, 2022. Sd/- Sd/- (DR. DIPAK P. RIPOTE) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER पुणे / Pune; �दनांक / Dated : 13th October, 2022. Sujeet आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(A)-13, Pune. 4. The Pr. CIT-1, Pune. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “C” ब�च, 5. पुणे / DR, ITAT, “C” Bench, Pune. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.