REINSHAW METRLOGY SYSTEMS LIMITED,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 5, PUNE

आयकरअपीलीयअधिकरण“सी”न्यायपीठपुणेमें। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI INTURI RAMA RAO, AM AND SHRI SONJOY SARMA, JM आयकरअपऩलसं. / ITA No.1560/PUN/2017 निर्धारणवषा / Assessment Year: 2012-13 Renishaw Metrology Systems Limited, The D.C.I.T., S.No. 283, Hissa No. 2, S.No. 284, Vs Circle-5, Hissa No. 2 & 3A, Raisoni Estate, Pune. Village Mann Taluka, Mulshi, District- Pune 411057. PAN No. AABCR6361F Appellant/ Assessee Respondent /Revenue Assessee by Shri Ajit Jain-AR (Through virtual) Revenue by Shri Piyush Kumar Singh Yadav-DR (Through virtual) Date of hearing 29/03/2022 Date of pronouncement 01/04/2022 आदेश/ ORDER PER:SHRI SONJOY SARMA, J.M. This appeal by the Assessee arises out of the order passed by the ld.Commissioner of Income Tax(Appeals)-13, Pune,(in short, the CIT(A) in relation to the Assessment order dated 23/03/2016 passed by DCIT, Circle-5, Pune for the Assessment Year 2012-13.The grounds of appeal raised by the assessee are as follows: “On the facts and in circumstances of the case and in law, the ld. Transfer Pricing Officer (TPO)/Assessing Officer (AO) has erred and the Hon/ Commissioner of Income Tax (Appeals) (CIT(A)) has further erred in upholding/confirming the action of the ld. TPO/AO in: 1 Transfer Pricing General Ground 1.1 making an addition to the Appellant’s total income based on the provisions of Chapter X of the Act and have further erred in fact and in law in not providing any reasons to show that the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT

Act were satisfied before making an adjustment to the income of the Appellant. 2. Transfer pricing adjustment in respect of availing of management Services of rs. 86,69,501 2.1 determining the arm’s length price of international transaction pertaining to payment of management services fees by the Appellant to its Associated Enterprise (AE) as Rs. 54,25,697 against Rs. 1,40,95,198 as determined by Appellant: 2.2 holding that the Appellant failed to furnish adequate evidences to demonstrate that the services were actually rendered by the AE; 2.3 questioning the commercial expediency for availing such services and failed to appreciate the jurisprudence that the Ld. TPO cannot go beyond his powers in questioning commercial decision of the Appellant. 2.4 not applying any method prescribed by the Rules, to determine the arm’s length price of the intra group services i.e. management services and failed to appreciate that the Appellant in its transfer pricing documentation has benchmarked the said intra-group services, by using the Transactional Net Margin Method (TNMM); 2.5 making an adjustment to the international transaction pertaining to management service fees after accepting the segments to be at arm’s length in which this transactions of management service fees is aggregated; 2.6 not appreciating the fact that the management service fees paid by the Appellant is recharged by the Appellant to the AE, since the Appellant follows a cost plus model for software development service segment and marketing support service segment and the management service fees forms part of the cost base of these segments; 2.7 not appreciating the fact that the international transaction of management service fee was considered to be at arm’s length in the assessment proceedings for AY 2008-09. Thus the ld. A.O./TPO have not followed the ‘Rule of Consistency’; 2.8 ignoring the fact that the AE has paid tax on management service fees and has filed the return of income in India for the year under consideration. 3. Transfer Pricing adjustment in respect of Software Development Services 3.1 disregarding the benchmarking analysis and comparable companies selected by the Appellant in the transfer pricing study report maintained as per Section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 (the Rules);

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT

3.2 applying inappropriate filters and cherry picking companies earning high margins to arrive at a fresh set of companies as comparable to the Appellant; 3.3 rejecting certain comparable companies which are comparable to the Appellant; 3.4 selecting companies as comparable which are in fact not comparable to the Appellant; 3.5 making a double adjustment by separately taking management service fee as nil and again making an adjustment in software development services segment where it forms part of the cost base. 4. Other Transfer Pricing Grounds 4.1 computing the operating margins by treating foreign exchange gain/loss as non-operating in nature in the case of the Appellant as well as the comparable companies; 4.2 not allowing risk adjustment in accordance with the provisions of Rule 10B of the Rules; 4.3 rejecting the use of multiple year data i.e. contemporaneous data in the transfer pricing study report maintained as per Section 92D of the Act read with Rule 10D of the Rules used for determining the arm’s length price of the international transaction of the Appellant; 4.4 violating the principle of “Rule of Consistency” while making the adjustment to the international transaction of provision of software development services and provision of marketing support service; 4.5 not allowing the variation/reduction of 5 percent while determining the arm’s length price as envisaged under the proviso to Section 92C(2) of the Act. 5. Others. On the facts and in the circumstances of the case, the ld. AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act on the premise that the Appellant has concealed/furnished inaccurate particulars of income, without appreciating the fact that adjustment made is not in accordance with the law. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the ld. AO to decide this appeal according to law.”

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT 2. Ground No.1 raised by the assessee is general in nature, hence requires no adjudication.

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT respect of transaction of Management services fees, in spite of number of opportunities given.

a) The application of the arm‟s length principle would be to see whether the charges paid by the taxpayer for intra group services reflect the same charges for the services that would have been, or would reasonably be expected to be, levied between independent parties dealing at arm‟s length for comparable services under comparable circumstances.

b) How much a comparable independent service recipient, under comparable circumstances, would be willing to pay for that service? An arm's length entity would be willing to pay for an activity only to the extent that the activity confers on it a benefit of economic or commercial value.

c) Whether as a result of such payment, the recipient of the services, the taxpayer, resulted in any economic or commercial value to enhance its commercial position. The expected benefit must be sufficiently direct and substantial so that an independent recipient, in similar circumstances, would be prepared to pay for it. If no benefit has been provided (or was expected to be provided), the service cannot be charged for.

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT d) First of all, the taxpayer has to prove that the services are rendered. The second aspect of intra group services is the quantification of such services in terms of actual expenditure incurred and commensurate benefits derived there from. To conform to the arm's length principle, the costs of intra group services can only be charged for where the recipient of the services expected, at the time the relevant activities were undertaken, to derive a benefit from those activities. The expected benefit must be sufficiently direct and substantial so that an independent recipient, in similar circumstances, would be prepared to pay for it.

e) Would the entity for whom the activity is being performed either have been willing to pay for the activity if performed by an arm's length entity or have performed the activity itself? Where it would not have been reasonable to expect the entity to either pay an arm's length entity for the activity or to perform it itself it is unlikely that any charge for the activity would be justified.

f) Whether expenses incurred by one entity should be apportioned and allocated to other members of the group or whether a charge should be levied by the service provider that reflects the value of the services supplied. Because, the arm's length charge is not only a function of the price at which a supplier is prepared to perform the service (or the cost of providing the service), but also a function of the value to the recipient of the service (or the willingness of the recipient to pay for such services). Therefore, the determination of an arm's length charge must take

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT into consideration the amount that an arm's length entity is prepared to pay for such a service in comparable circumstances.

g) The taxpayer's level of documentation and evidence to show that the services are actually rendered by the AEs to the taxpayer. If the services are actually rendered, the level of documentation and also evidence to show that a tangible and direct benefit is derived by the taxpayer in paying the above amounts to the AEs. Just by describing various services, it will not suffice to justify the price charged in intra group services. The taxpayer has to prove with proper documentation and evidence that the services are actually rendered and payment is commensurate with the benefit derived there from.

h) When expenditure is incurred for the benefit of the group as a whole, no charging of such expenditure is required as such expenditure is not incurred in connection with any individual member of the group and the benefit of such expenditure would be available to all the members of the group. Similarly, if no benefit is received or the benefit is remote or for the benefit of entire group, the same need not be charged.

i) When any expenditure is incurred by the AE for stewardship or share holder activities, then the same need not be charged to other group entities. In addition, service fees are not required for services that merely duplicate services the related party independently performs.

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT j) Unless it is shown that tangible and direct benefit is derived by such payment or that the payment made is commensurate with the benefit that is derived or expected to be derived when parties deal with each other at arm's length, the arm's length price of such payment for intra group services would be treated as either Rs. Nil or to the extent it is shown that the benefit actually derived from such payment.

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT the Appellant has not furnished any details of the services received by it from the AE. The Appellant has furnished the narration in the Subsidiary Recharge Report only for some of the charges, which does not establish the rendering of service. If the Appellant works with its AE for the mutual benefit it does not establish that the services were rendered by the AE. 2.16.33 Some of the Subsidiary Recharge Report are reproduced here. These reports are without any narration as to which service is provided by the AE. These reports are as under : …… …… 2.16.34 It can be seen from the above that holding appraisal meeting with the subordinate is part of the superior‟s work. It would be incorrect to treat the same as service rendered by the superior to the subordinate employee. Similarly, holding meeting or discussions or updating sessions with the subordinates does not establish that the AE rendered services to the Appellant. It only establishes that there was an exchange of information between two persons. 2.16.35 In view of the above, I conclude that the Appellant has not established that it received the services in the absence of the information or details of the services stated to be received by it. It is seen on perusal of the narration provided in few cases in which, the Appellant has provided narration that the Appellant cannot establish that it received the services on the basis of its interaction with the AE‟s employees . Accordingly, I conclude that the Appellant has not established the receipt of the management services charged to it by the AE under the head „Others‟. Accordingly, I confirm the adjustment at Rs. Nil for the service rendered on account of „Others‟ as against 91,690 paid by the Appellant.

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT “12. Ground No. 3 raised by the assessee challenging the action of DRP in confirming the transfer pricing adjustment in respect of management services of Rs.1,27,37,577/-. “13. Heard both parties and perused the material available on record. We find the issue raised in ground No. 3 is similar to the issue raised by the assessee in ground No. 3 for A.Y. 2009-10 in assessee‟s own case. On perusal of the same we find the transfer pricing adjustment was made basing on same identical facts and said variance in amounts. The Tribunal vide its order dated 12-09-2019 discussed the facts, evidences, submissions of ld. AR and ld. DR observed that the assessee has filed documents justifying not only the need of services but also the availment of services. The TPO has failed to take into cognizance those documents/evidences and held the value in respect of managerial services availed by the assessee from its associated enterprise is Nil. The Tribunal in the above said order taking into consideration the facts and circumstances, held as under : “14. Now, coming to the next issue raised i.e. in respect of payment of managerial fees. 15. Brief facts relating to the issue are that the assessee had entered into Management Service Agreement with Renishaw Plc in 2006. Under the said agreement, the associated enterprise provided business support and management support services to the assessee, which the assessee claimed enhanced its operational efficiency and also standardized its internal processes. The assessee had furnished documentary evidence in this regard providing details of personnel rendering the services, number of man hours spent, total cost incurred in rendering such services and also explanation was given vis-à-vis work done. The invoices received from associated enterprise were also furnished before the authorities below. However, the TPO held that in fact no services were received by assessee and also observed that services were routine in nature and were neither asked for nor given by associated enterprise and the TPO benchmarked the said transaction at Nil and made an upward adjustment of ₹ 2.18 crores. 16. The learned Authorized Representative for the assessee pointed out that last year the TPO had accepted the said transaction to be at arm's length price. The Assessing Officer had disallowed the said payment under section 37(1) of the Act. However, the DRP deleted the addition, against which no appeal has been filed by Revenue. Our attention was drawn to the order of Tribunal in this regard. He also pointed out that the assessee had filed detailed letter to the TPO explaining the need for availing management services dated 06.05.2011 along with several enclosures and also documents were filed evidencing the said provision of services. However, the TPO does not give any cogent reason in holding that no services were provided and in determining the arm's length price at Nil. 17. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below.

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT 18. We have heard the rival contentions and perused the record. The issue which arises vide ground of appeal No.3 is against arm's length price of transaction of payment for managerial services availed from associated enterprise. The agreement which has been entered into by assessee with its associated enterprise was w.e.f. 01.04.2006. The assessee is availing managerial services under the same agreement from year to year. In assessment year 2007-08, no issue in this regard was raised; in assessment year 2008-09, the TPO accepted the arm's length price but the Assessing Officer held that the said payment was not to be allowed under section 37(1) of the Act. The DRP deleted the addition, against which no appeal has been filed by the Revenue. In assessment year 2009-10 i.e. instant assessment year, no disallowance has been made by Assessing Officer under section 37(1) of the Act, but the TPO had held the arm's length price at Nil. The TPO in final analysis holds the assessee not to have received any services and also holds that there was no need to avail any services. 19. We have in series of decisions already decided similar issue of payment on account of managerial services availed by assessee from its associated enterprises and have held that the TPO or the Assessing Officer cannot sit in judgment of the decision of businessman to avail services and to make payments for that. Further, the assessee has filed documents justifying not only the need of the services but also the availment of services. The TPO has failed to take into cognizance those documents / evidences and we find no merit in the same. In any case, the said agreement between the parties is in force w.e.f. 01.04.2006 and in none of the earlier years any addition has been made by the TPO/Assessing Officer. In the absence of same and following the rule of consistency we find no merit in the orders of TPO/Assessing Officer and the same is reversed. The ground of appeal No.3 raised by assessee is thus, allowed. The grounds of appeal raised by assessee are thus, allowed.” There was no order contrary to the findings of this Tribunal in assessee‟s own case was placed on record and in view of the same, we reverse the order of DRP and direct the AO to accept the value of managerial services as claimed by the assessee at Nil. Thus, ground No. 3 raised by the assessee is allowed.”

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT

Order pronounced in the open Court on 1st April, 2022.

Sd/- Sd/- (INTURI RAMA RAO) (SONJOY SARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER पपणे / Pune;ददिधंक / Dated : 1st April, 2022 *Ranjan/GCVSR आदेशकीप्रनिनलनपअग्रेनषि / Copy of the Order forwarded to : अपऩलधर्थी / The Appellant. 1. प्रत्यर्थी / The Respondent. 2. 3. The CIT 4. The CIT(A) नवभधगऩयप्रनिनिनर्,आयकरअपऩलऩयअनर्करण, “सी” बेंच, 5. पपणे / DR, ITAT, “C” Bench, Pune. गधर्ाफ़धइल / Guard File. 6. आदेशधिपसधर / BY ORDER, // TRUE COPY // Senior Private Secretary आयकरअपऩलऩयअनर्करण, पपणे/ITAT,Pune.

ITA1560/PUN/2017 for A.Y. 2012-13 Renishaw Metrology Systems Ltd. Vs DCIT

S.No Details Date Initials Designation 1 Draft dictated on 01.04.2022 Sr. PS/PS 2 Draft placed before author 01.04.2022 Sr. PS/PS 3 Draft proposed & placed JM/AM before the Second Member 4 Draft discussed/approved by AM/AM Second Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr. PS/PS 7 Date of uploading of Order Sr. PS/PS 8 File sent to Bench Clerk Sr. PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order