M/S. WALTER TOOLS INDIA PRIVATE LIMITED,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 10, PUNE

आदेश / ORDER

PER SS VISWANETHRA RAVI, JM :

1. Ground 1: The Ld.AO under the direction 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 Ni. While doing so the Ld.AO/Hon‟ble DRP have erred. - in rejecting the benchmarking analysis conducted by the appellant by considering the overseas Associated Enterprise („AE‟) as the tested party under Transactional Net Margin Method (“TNMM”) as the most appropriate method. - in not taking cognizance of the submission made by the Appellant covering substantive documentary evidences demonstrating the receipt of management services and benefits derived therefrom, for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A)

- in challenging the commercial business needs and decisions of the Appellant with respect to availing the services from AE, - in disregarding the analysis conducted by the appellant under aggregation approach, while applying entity level TNMM as the most appreciate method for its Distribution activity, thereby ignoring the fact that the transaction of payment of Management Service Fee is inextricably linked with Applicant‟s Distribution activity, and - in 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 Income-tax Act, 1961. The Appellant prays that the transfer pricing adjustment pertaining to Management Service Fee be deleted. The Appellant craves leave to add, amend, alter, modify and/or substitute, and to withdraw the above grounds of appeal

.”

2. Brief facts of the case are that the assessee company is a domestic company. The company is engaged in distribution of cutting and drilling tools, especially tungsten carbide tools. The company imports 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 “Prototvp” and “Walter”. Separately, the company also procures “Titex” brand machine tools from Sandvik Asia Private Limited for the purpose of resale of third party Indian customers. The company is a subsidiary of Walter AG, a body corporate registered in Germany and having its registered office in Tubingen, Walter AG is engaged in manufacturing and trading of cutting and drilling tools.

4.1 The Transfer Pricing Officer(TPO) vide his order dated 31.10.2016 has analysed the said transaction in para 5.1. The relevant portion is reproduced here as under: “From the submission made it appears that the expenses were apportioned by the AE among different country-centres on the basis of their own agreements and it has no relevant with the actual services rendered to individual units. This implies that the payment terms of the MSA are independent of the nature or volume of services and therefore expenses. As no details are available on record with respect to the nature of services rendered by the AE to the Taxpayer the assessee has failed to establish that fees charged are commensurate benefits against the payment of service fees to the AE. Reliance is placed on the Banglore ITAT decision in the case of M/s Gemplus India Pvt. Ltd.,(ITA No.352/bang/2009) Under these circumstances, it is difficult to accept proposition of the assessee that the cost of the services rendered is at arm‟s length. In absence of all these details, I considered value of these service at NIL and accordingly there is an upward adjustment of Rs.1,17,45,602/-.

6. Tested Party: Without prejudice to the upward adjustment as proposed in the order, issue of selecting Walter AG as a tested party was also considered independently. It was brought to the notice of the assessee that tested party should be least complex entity. Walter AG is having unique expertise in manufacturing and trading in tools for metalworking and machinery and tools for rock excavation, stainless steel, special alloys and resistance heating materials and process for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A)

systems. Under these circumstances, Walter AG cannot be considered as Tested Party. Further, Walter AG is rendering Management services, while assessee company is receiving management services, therefore FAR of both the parties do not match. Therefore also selection of tested patty is not correct and not acceptable. The issue i9s discussed as under: Criterion Assessee’s Remarks TPO’s Remarks Tested party should For the transaction Submission of the assessee factually be the least complex pertaining to MSF, incorrect. From the website of Walter, it (functionally) of the Walter AG is the is seen that Walter Group is involved in transacting parties least complex entity, implementing machining solutions, since these services particularly solutions for the special tools are used for the sector. With a product range of about purpose of its entire 49,000 catalogue tools, the Group serves business operations, in more than 80 countries and about which are more 3,800 employees. On the other hand complex compared to assessee is engaged in distribution of mere provision of cutting tools with aggressive marketing. services. There should be We have enclosed a Since, Walter AG is a complex entity, the availability of copy of the question of reliability of data does not reliable data that agreement, whereby arise. The assessee has considered it as a requires fewest and it is clearly stated tested party, to find out the exact most reliable that a mark-up of 4% comparable is difficult. adjustments has been levied.

7. Reliance is placed on the decision of Onward Technologies Ltd (ITAT Mumbai) 08. The adjustment in the Management Service Fees is made in the case of assessee. Income of the assessee shall be increased by Rs.1,17,45,602/-” 4.2 The Dispute Resolution Panel vide its order dated 30.06.2017 has uphold the order of the Transfer Pricing Officer. The relevant paragraphs are reproduced here as under : “3.2.3.6 However, in the instant case, the assessee has not submitted the Annual Report of Walter AG, either before the TPO or before this Panel. Further, the Annual Reports of the comparables identified by the assessee to benchmark its MSF transaction using Walter AGas the tested party, have also not been submitted either before the TPO or his Panel. Without this basic information, appropriate verification of the benchmarking analysis carried out by the assessee using Walter AG as the tested party cannot be carried out. Moreover, it would have been apt if the assessee also would have submitted a TPSR of Walter AG in connection with the benchmarking done in respect of management service fees. All this information has not been submitted. for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A)

3.2.3.7 In view of the above discussion, we see no infirmity in the action of the TPO in rejecting the benchmarking analysis of the assessee related to MSF, using Walter AG as the tested party, since Walter AG is not the least complex party and also because reliable data of Walter AG and the comaparables selected by the assessee are not available. Accordingly, the first issue raised by the assessee in this objection is rejected. 3.2.4.3 The nature of service to be rendered and the fees to be charged for the services have been laid out in the said MS.F. Agreement entered into by the assessee with Walter AG, effective from 1/1/2012. It is observed that in this agreement (Appendix 1 to Schedule 1 of this agreement), the services to be rendered are very general in nature, related to Produce Area and regional Management, financial, marketing, technical and quality management, human resource and administrative management techniques. The service fee to be charged has been stated by the assessee to be cost of service incurred by Walter AG plus a mark up of 4%, which is supported by the agreement vide Appendix 2. Similarly, the books and records related to costs incurred by Walter AG for providing services are stipulated in clause 4 of the MSF Agreement. It has been stipulated that accurate books and records necessary to identify the cost allocation should be maintained by Walter AG. It also provides that the assessee can review the books and records to ascertain its share of the cost allocation. However, here also, no documentary evidences are apparently available with the assessee to show that it has reviewed the said books and records maintain by Walter AG for the year under consideration or in earlier years, when Sandvik AB wsas providing the said management services. 3.2.4.8 The assessee has failed to furnish details and evidences of the costs incurred by Walter AG in providing management services to the various entities of the group. Accepting the cost allocation made by Walter AG to the assessee for the year under consideration and by Sandvik AB in the preceding years without obtaining and examining the total cost incurred by the AE(s) for years together does not happen in an uncontrolled situation where such services are received from an independent third party. It is also observed that the allocation of the expenditure among the various entities of the group by the AEs is not necessarily need-based. Even if during the year, no services have been sought by the assessee, still the assessee is liable to make the payment as per apportionment of the total costs incurred by the said AE(a) among the various entities of the group. Also, no evidence has been submitted to show the expertise of Walter AG for the year under consideration and of Sankvik AB of the preceding years in rendering of management services. for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A)

3.2.4.9 In view of the above discussion, we see no infirmity in the conclusion drawn by the TPO that no services have been rendered by Walter AG to the assessee.”

AE in providing management services, the formulae adopted for cost allocation has not been submitted before the Lower Authorities. The ld.DR invited our attention to page no.443 of the assessee’s paper book which is a certificate regarding cost of management service fees from 1st January 2012 to 31st December 2012, was not filed before the Lower Authorities and it is an additional evidence. The ld.AR has accepted this fact that page no.443 was not submitted before the Lower Authorities, however, the ld.AR stated that he does not wisht to rely on page no.443.

7.1 In this case, the first issue to be decided is whether the services were provided by the AE or not! The assessee filed a Chart on page no.368, 369 & 370 of the paper book. In support of the services mentioned in the chart, the assessee has also filed copies of sample emails. The Item No.4 of the said Chart is reproduced here as under as a sample: for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A)

S.No Category Detailed Explanation in Benefits Description Description of brief on the type of Derived of sample the service services received evidence 4 Product Addressing the The query of the Advice Email Area enquiry from a customer was provided response Management customer for addressed by Rolf were from Rolf related operation of Muller after beneficial in Muller dated Gear shifter providing the offering 11/5/2012 hole necessary products of specifications, optimum information quality and relating to adapter retaining the and inserts, business preprocessing deal with details, etc. Escorts Ltd. 7.2 In similar fashion, the assessee has explained the services provided, there are corresponding emails to explain the services. The ld.DR has not pointed out any discrepancy in the said Chart. Therefore, after carefully analysing the Charts and Emails, one can arrive at the conclusion that services were provided to the assessee by the AE. 7.3 Once the question related to services have been answered, the second question is determination of ALP. The Hon’ble ITAT in assessee’s own case for A.Y. 2012-13, in the identical facts and situations has held the transaction of payment of management services fee at ALP, following the earlier years decisions. The factual assertion could not be controverted by the ld.DR. 7.4 For relevant issue discussed by the Co-ordinate Bench in assessee’s own case for the A.Y. 2012-13 is placed at page no.221 of the paper book and the relevant portion being at para no.9 to 10 reproduced herein below for ready reference: “9. We have heard both the sides and gone through the relevant material on record. It is seen from a copy of Management services Agreement between Sanedvik AB (the providing party) and the assessee(the receiving party), which is applicable to the year under for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) consideration as well, that the term “Providing party” has been defined as „all or some of the Sandvik companies which provide management services‟. Thus, it is clear that the charges by Sandvik AB were not only for the services provided by it but also some other group companies including Walter AB. The view point of the DRP on this issue is, therefore, not correct.

7.5 In the Transfer Pricing Order dated 31.10.2016 for the A.Y.2013-14, the TPO has categorically mentioned as under: “In this segment there are two issues involved: i) The reasonableness of MSF Apaid ii) Determination of ALP by considering Walter AG as tested party. As far as issue i) is concerned, elaborate discussion has been made in the previous year‟s order. Therefore, as there are no changes in the facts and circumstance of the issue, MSF paid by the assessee are considered as NIL for current year also.” Thus, the TPO has specifically mentioned that there are no changes in facts and circumstances of the issue. In the absence of any distinguishing feature in the facts of the immediately preceding year vis-à-vis the current year, respectfully following the precedent, we hold the international transaction of payment of management services fees was at ALP.