DCIT, BANGALORE vs. LM WIND POWER BLADES (INDIA) LTD.,, BANGALORE

O R D E R Per Smt.Beena Pillai, JM :

ITA No.440/Bang/2 Present cross appeals by assessee and revenue has been filed against final assessment order passed by Ld.DCIT Circle 4 (1) (1) Bangalore, under section 143 (3) read with 144C read with section 254 of the Act, on following grounds of appeal: “1. That the order of the learned Deputy Commissioner of Income Tax, Circle 4(1)(1), Bangalore ("Assessing Officer" or "AO") pursuant to the direction of the learned Dispute Resolution Panel ("Panel"), to the extent prejudicial to the Appellant, is bad in law and liable to be quashed. Transfer Pricing Issues

2. That the learned AO and the learned Panel erred in upholding the approach of the learned Deputy Commissioner of Income Tax, (Transfer Pricing - VI) ("learned TPO") of applying the Comparable Uncontrolled Price ("CUP") method as most appropriate method and rejecting the application of Transactional Net Margin Method ('TNMM'), for determination of the arm's length price of the international transaction of payment of management fees and sales commission. Further, the learned TPO failed to provide any evidence of comparable uncontrolled transactions relied upon for application of the CUP method.

3. That the learned AO and the learned Panel failed to appreciate the nature of management support services received by the Appellant and thereby erred in upholding the computation of arm's length price of management fees at INR 74,75,737/- instead of INR 3,98,38,794/- as computed by the Appellant by applying the TNMM based on the detailed Function Asset Risk ("FAR") analysis;

4. That the learned AO and the learned Panel failed to appreciate the nature of sales support services received by the Appellant and thereby erred in computation of arm's length price of sales commission at INR 1,57,79,102/- 2 INR 14,04,55,153/- as computed by the Appellant by applying the TNMM based on a detailed FAR analysis.

5. That the learned AO and the learned Panel erred in not appreciating that on account of using TNMM and aggregating closely linked transactions, each of those transactions, including the payment for management fees and sales commission were at arm's length.

6. That the learned AO and the learned Panel erred in not appreciating the business requirement for the expenses incurred by the Appellant in relation to the payment of management services fees and sales commission.

7. That the learned AO and the learned Panel erred in disregarding the conditions prescribed under section 92C(3) of the Act for determining the arm's length price in relation to the international transactions of payment of management fees and sales commission.

8. That the learned AO and the learned Panel erred in upholding the conclusion of the learned TPO that services received by the Appellant are duplicative in nature. Other than Transfer Pricing Issues

9. That on the facts and circumstances of the case, the learned Panel erred in not adjudicating on any of the following non transfer pricing grounds of the Appellant. 9.1 That the learned AO erred in disallowing expenses incurred on purchase of computer software and license fees amounting to INR 2,432,678 as capital expenditure. 9.2 Without prejudice to the above, the learned AO erred in not allowing depreciation at 60% under section 32 of the Act on the said capital expenditure.

10. The learned AO erred in disallowing expenditure on technical assistance and training fees amounting to INR 1,331,032 as capital expenditure. 3

Brief facts of the case are as under: 2. Assessee filed its return of income for year under consideration on 14/11/07 declaring total income of Rs.41,44,70,704/-. The assessment order was completed on 29/09/11 assessing total Rs.67,82,69,690/-, which was confirmed by Ld.CIT(A). Assessee came in appeal before this Tribunal. This Tribunal vide order dated 20/07/12 and clarificatory order dated 17/05/13, set aside original assessment with certain directions to consider the issues raised by assessee in the appeal de novo. 2.1. Ld.AO on receipt of order passed by this tribunal issued notice under section 142 (1) of the Act, wherein assessee furnished additional evidences as directed by the Tribunal. The present appeal is against the order passed by authorities below in the remand proceedings. 2.2. Ld.AO has recorded that assessee was incorporated as a joint venture between LM Glassfibre A/S Denmark. It has been submitted that LM wind power is worlds leading manufacturer of blades for wind turbines. Ld.AO has observed that assessee is engaged in the business of manufacture of wrote or blades for both small onshore wind turbines and the large offshore wind turbines. Assessee do not own any interest in intangibles and performs the functions of a licensed manufacturer. 2.2. It has been submitted that assessee adopted TNMM as most appropriate method for determining arms length price in transfer prising study report, whereas Ld.TPO ignored method by assessee and adopted CUP to determining arms length price of payment of sales commission and management fees to LM Wind Power Group. 2.3. Ld.TPO accepted that services have been rendered by the group company to assessee for which management fees has been paid.

ITA No.440/Bang/2 Ld.AR submitted that assessee pays management fees which are actually cost sharing with 5% markup on cost in respect of which substantial evidences were filed before Ld.TPO. Upon perusal of evidences Ld.TPO accepted payment made to be justifiable. 2.4. Ld.TPO thereafter applied CUP for determining arms length price. Learn TPO was of the opinion that though assessee has received services from its group company, they should be ideally covered under royalty payment instead of management fees. He thus excluded cost of manufacturing by holding it to be duplicate payment for services rendered. 2.5. Ld.TPO also observed that that management fees was being paid towards procurement of raw materials and general assistances. Ld.TPO observed that sales commission paid separately for sale support services received from parent company. He was of the opinion that as a sales includes procurement cost on which management fees are already paid there is a duplication of payment of fees for the same services. Ld.TPO thus excluded cost of materials and operating cost from sales commission that was allowed. 2.6. Ld.TPO thus proposed adjustment as under: Particulars Amount (in rupees) Sales commission 12,46,76,051/- Management fees 3,23,63,057/- Markup on reimbursements 13,77,358/- Total 15,84,16,466/- Against proposed adjustment, assessee raised objections before DRP. 2.7. DRP rejected the application of services carried out by assessee thereby using TNMM as the most appropriate method. DRP upheld the view characterisation of management fees into royalty by Ld.TPO and computing royalty at an ad hoc rate without any basis. DRP also disallowed the commission paid for sales to the global customers that 6% and local customers at 2% of sales instead restricted the expenditure on ad hoc basis at 4.74% without any basis. DRP rejected the objections raised by assessee. 2.8. On receipt of DRP directions, Ld.AO passed the final assessment order by making addition in the hands of assessee amounting to Rs.15,70,39,108/-. Ld.AO also disallowed expenditure incurred during construction period amounting to Rs.12,11,712/- as capital expenditure. However upon subject to rectification order passed by DRP software license fees amounting to Rs.24,32,678/- was allowed. Aggrieved by order passed by Ld.AO, assessee as well as revenue are in appeal before us now.

ITA No.440/Bang/2 Both sides submitted issue raised in appeal filed by revenue is below taxes fact. In the light of aforestated submissions the appeal filed by revenue stands dismissed due to tax effect. In the result appeal filed by revenue stands dismissed. Assessee’s Appeal Effective grounds to be considered are Grounds 2-8 and ground 11 4. Grounds 2-8: Ld.AR submitted that these grounds could be considered together as they are interlinked with each other. Ld.AR submitted that management service fee being an international transaction has been analysed under transactional net margin method. Whereas Ld. TPO rejected the analysis and was of the opinion that no independent company would pay such huge amount which is about 13.5% of the profit. Further it has been submitted that assessee had aggregated transaction which learnt TPO segregated and held it to be intragroup services. It has been submitted that in the 1st round of Transfer Pricing assessment learn TPO did not appreciate the some documents provided and held the arms length price at nil and made addition of Rs.3,98,38,794/-under CUP. Ld.AO has further submitted thatassessee had paid sales commission to Denmark AE amounting to Rs.14,04,55,153/-. Ld.TPO also analysed commission paid independently. Ld.TPO was of opinion that sales commission was a device to pass on cost of parent company to the subsidiaries and that none of the functions have been actually received by assessee as mentioned in the agreement. 4.1. This Tribunal remanded issues to Ld.TPO for de novo assessment. Ld.AR submitted that in remand proceedings, Ld.AO changed character of management fees paid into royalty. It has been submitted that assessee pays 5% of entire sales which has been considered by learnt TPO as royalty for the technical know-how received from the parent company. During remand proceedings, Ld.TPO however admitted on the basis of evidences filed by assessee that services have been received by assessee however changes the character of the services to be royalty. In respect of the sales commission was restricted at 4.74% on profits earned during the year. 4.2. Ld.AR placed reliance on following decisions in support of the submissions that assessing officer has to determined arm’s length price of an international transaction in accordance with the method prescribed under section 92C of the Act.  CIT vs Kodak India private limited reported in (2017) 79 Taxmann.com 362 (Bombay)  Decision of Hon’ble Bombay High Court in CIT vs M/s Johnson and Johnson Ltd in ITA No. 1030 of 2014 vide order dated 07/03/17  In case of R.A.K. Ceramix India Pvt.Ltd vs DCIT reported in (2015) 55 Taxmann.com 15, which has been approved by Hon’ble High Court of Hydrabad and For State of Telingana in case of DCIT vs R.A.K. Ceramix India Pvt.Ltd in ITAT a No. 595 of 2016 vide order dated 23/12/16 4.3. On the contrary, Ld.CIT DR placing reliance on orders passed by authorities below submitted that relied upon by Ld.AR are on different issue. It has been submitted that in the original order passed by this Tribunal CUP has been upheld as the most appropriate method and therefore arms length price has to be determined by using CUP. She thus submitted that the matter may be remanded back to Ld. AO/TPO for determining arms length price of the transactions. 4.4. We have perused submissions advanced by both sides in light of records placed before us. It is noted that this tribunal initially had remanded the issue is to Ld. TPO for de novo consideration on the basis of evidences filed by assessee. However the reasoning of learn TPO in fixing the ALPA of sales commission at 4.74% is surprising. It is even more surprising to note that after appreciating the evidences filed by assessee in respect of intragroup services Ld. TPO admits to the fact that services has been rendered by the parent company to assessee however he characterises the payment as royalty. It is noted that the agreements entered into by assessee with its parent company are very specific in terms of management agreement, sales commission agreement and agreements of know-how transfer. Services are rendered by parties to each other on the basis of terms and conditions accepted in these agreements.

ITA No.440/Bang/2 Disregarding the specific services rendered by parent company under management agreement and agreement of know-how transfer, Ld.TPO held the services to be same and computed the ALP of management services by applying a formula without any basis. 4.5. In respect of sales commission ALP of transaction has been computed at 4.74%, even though assessee has paid sales commission during the year at 2% on local sales and 6% on exports. Ld.TPO has assumed a percentage of commission without any basis/evidences. Such kind of assumptions is not acceptable. 4.6. It is noted that there is nothing on record brought on by the authorities below to substantiate the method of computation adopted by Ld.TPO. There is also nothing on record brought out to establish the payments made by assessee to be not at arms length price. Such kind of callous approach by Ld.TPO is not acceptable as it is caused huge injustice to assessee. It is noted that this issue is unsettled insofar as Ld.TPO is concerned since 2011. Ten years have passed by that Ld.TPO could not follow the due process of law in determining arms length price of the transaction even after a remand by this tribunal wide order dated 20/07/12 in ITA No. 1091/B/2011. 4.7. We understand the difficulty assessee has to undergo for such failures on the part of revenue. However we also cannot overlook the fact that the exercise of determining arms length price of the transactions has not been undertaken by the authorities below in accordance with provisions of law. As the rendition test stands established on acceptable by Ld.TPO, direct Ld.TPO to compute ALP of the transaction by using CUP method. It has been contended by Ld.AR that sufficient comparables are not available under CUP and therefore TNMM has been used by assessee in the trans-apprising study. We therefore direct Ld.TPO that in the event sufficient comparables are not available under CUP to determined arm’s length price of the transaction, TNMM shall be used. 4.8. We thus set aside the trans-apprising issues back to Ld. AO/TPO to compute the ALPA of the transaction as indicated hereinabove. It is also directed that this exercise shall be carried out by Ld.AO/TPO in a time bound manner by granting proper opportunity of being represented to assessee. Accordingly these grounds raised by assessee stands allowed for statistical purposes.

5. Ground No. 12 is in respect of interest under section 234B of the Act which is consequential in nature and therefore do not require any adjudication. In the result appeal filed by assessee stands allowed for statistical purposes. Order pronounced in the open court on 30.01.2020. Sd/- Sd/- (B.R.Baskaran) (Smt.Beena Pillai) ACCOUNTANT MEMBER JUDICIAL MEMBER Bangalore ; Dated : 30.01.2020.