M/S BUCHER HYDRAULICS PVT LTD.,,GURGAON vs. ACIT, NEW DELHI

The aforesaid appeal has been filed by the assessee against the final assessment order dated 30.10.2015, passed u/s.143(3) r.w.s. 144C in pursuance of order given by the Dispute Resolution Penal-I, New Delhi vide order dated 11.09.2015.

In various grounds of appeal, the assessee has challenged, firstly; the addition of Rs.84,86,175/- on account of adjustment made on Arm’s Length Price, which is mainly on account of intra group services for Rs.10,16,073/-; and adjustment of Rs.74,70,102/- on account of purchase and sale of raw material/finished goods; secondly, disallowance of adjustment on brought forward business loss from previous years and unabsorbed while calculating assessed income; and lastly, interest charged u/s.234B and 234C. Besides this, assessee has also raised additional ground of appeal vide its application dated 13.09.2008, which reads as under: “Considering the second proviso of Section 92C(2) of the Act, the adjustment in Arm’s Length Price made by the ld. Assessing Officer at the instance of Ld. TPO/DRP amounting to Rs.74,70,102/- is not warranted and is prayed to be deleted since the arm’s length operating margin (i.e. operating profit/operating income) of 5.64% as per the TP order giving effect to the DRP Directions falls within the arm’s length range of +/-5% of operating margin of the appellant i.e. 1.44%.”

The facts in brief are that the assessee, Butcher Hydraulics P. Ltd. is engaged in the business of manufacturing of hydraulic drive pumps and control systems which are used in the automobile industry, agriculture industry, construction of roads, mining concern dealing in hydraulic drive and control systems which are used in the automobile industry, agriculture industry, construction of roads, mining industry etc. It has its manufacturing plant located in Gurgaon. During the relevant Assessment Year, the assessee has entered into various international transactions pertaining to purchase of raw material, consumables and spares, management fees, sale of finished goods, etc. with its AE. All the international transactions were benchmarked by the assessee by applying TNMM as the most appropriate method by taking PLI as operating profit/operating income. The assessee had selected three comparables whose PLI was much lower than that of the assessee and hence it was reported that all the international transactions were at Arm’s Length Price. The Benchmark summary as per TP study report was as under:

The TPO however made an adjustment of Rs.2,19,93,409/- which comprised of adjustment in international transaction of purchase and sale of raw material/finished goods amounting to Rs.2,09,77,336/-; and Intra Group Services determining ALP at ‘Nil’ by the TPO amounting to Rs.10,16,073/-. After DRP’s direction, the TP adjustment was finally worked out under both the segments at Rs.84,86,175/-.

In so far as TP adjustment on account of purchase of raw material and sale of finished goods is concerned, the TPO had rejected two comparables selected by the assessee- company, namely, Adarsh Plant Protect Ltd.; and Hawa Engineers Ltd. He finally accepted two of the assessee’s comparable, namely, Continental Valves Ltd. and Bemco Hydraulics Ltd. The Ld. TPO further introduced one more comparable, namely, Roto Pumps Ltd. Finally, the operating margin as per the TPO after the DRP direction was as under: Final Comparable List S.No. Comparable Comparable Operating Margin as company selected by per TPO order after Appellant/Ld. TPO DRP Directions 1. Continental Valves Assessee 0.01% Limited 2. Roto Pumps Limited TPO 13.57% 3. Bemco Hydraulics Assessee 3.33% Limited Arithmetical mean 5.64%

At the outset, ld. counsel for the assessee, Ms. Pallavi Dinodia Gupta, submitted that the additional ground raised by the assessee goes to the very root of the adjustment made by the TPO at Rs.74,70,102/- on account of purchases for the reason that, even after the adjustment made by the TPO is taken into account, then the arm’s length price falls within the range of (+)/(-) 5%. Since, the calculation of the addition was worked out after the direction of the DRP, therefore, such a ground has been taken by way of additional ground. If addition in respect of ALP adjustment on account of sale and purchase transaction with the AE falls within the permissible range, then all the grounds raised on the addition amounting to Rs.74,70,102/- would become purely academic. She pointed out that the PLI of the three comparables as noted above works out at 5.64% and assessee’s margin was at 1.44%. The difference in the PLI is 4.20% which falls within the arm’s length range for which she has given the two computations, one based on entity level computation; and second one based on proportionate computation.

Thus, it was submitted that ALP of the assessee falls within (+)/(-)5% range whether examined at entity level or in proportion to the AE transactions.

Ld. CIT-DR after verifying the computation of (+)/(-) 5% Arm’s Length Range, admitted that final addition made after the direction of the DRP is at Rs.74,70,102/- which prima facie falls within the permissible range of +/-5%. However, he strongly relied upon the order of the Assessing Officer.

After considering the aforesaid submissions and looking to the computation as given by the learned counsel, we find that adjustment made on account of purchase and sale of raw material/finished goods after the direction of the DRP does fall within the+/-5% range. The PLI of the comparables works out to 5.64%, whereas the assessee had shown profit margin of 1.44% and the difference in the PLI thus comes to 4.20%. From the working as incorporated above, it is seen that arm’s length operating cost is Rs.14,48,42,460/- as against actual operating cost of the assessee which is Rs.15,23,12,562/-. The difference of Rs.74,70,102/- has been added. The impugned international transaction, i.e., purchase of raw material, consumables and spares, affecting the cost side of the profit and loss is Rs.7,66,61,153/- and if the percentage of the impugned international transaction affecting the cost side of the P&L account is worked out, then it comes to 50.33% which gives the proportionate arm’s length operating cost allocated to the impugned international transaction at Rs.7,29,01,341/-. The PLI after the proportionate TP adjustment within (+)/(-) range falls to 4.90%. Even at the entity level computation which has been done by the TPO is taken into account, then again same falls within (+)/(-) range, which works out at 4.90%; and hence the difference of 4.20% falls within the ALP range.

The other adjustment relates to intra group services for Rs.10,16,073/-.

The facts in brief are that the assessee had entered into agreement with Bucher Management AG, Switzerland for receipt of management services. Bucher Industries AG is the main shareholder of the assessee and ultimate parent company of the Bucher Industries Group. Bucher Management AG (100% subsidiary of Bucher Industries AG) provides services of two types to Bucher Industries AG and to its Group Companies, namely, General Functional Services and Special and Project Services. The Ld. TPO rejected the aggregated TNMM analysis of the assessee to benchmark the international transaction of payment of management fees for IGS and has applied CUP method to determine the ALP of the said transaction at Nil by applying the Benefit Test without giving comparable uncontrolled transactions of identical services. He questioned the commercial expediency of the said transaction and alleged that the assessee received no economic benefit from such services.

The sums and substance of the TPO’s reasoning are as under:

Before us, ld. counsel for the assessee submitted that its AE provides two types of services, one is general shareholder services for which no charge has been made by the AE; and other services are specific and project related services for which an appropriate charge has been made by the AE. The ld. Counsel took us through the order of DRP, wherein it accepted that the services are actually rendered which termed such services as Shareholder services. The AR further demonstrated that Annexure 1 of ‘Management Service Agreement’ provides detailed description of services including allocation keys for each type of service. It was highlighted that the costs incurred for management services are divided into non-chargeable costs (being shareholder service portion) and chargeable costs to service recipients based on allocation keys. For example in case of Group Finance services, the chargeable costs to all service recipient companies are 65% and the remaining 35% costs are treated as non-chargeable shareholder costs. It was brought to our notice that the shareholder service costs were not charged by AE and only commercial services received by the assessee were charged by the AE. She further submitted that the TPO and consequently the DRP has applied benefit test to determine the ALP of these IGS at NIL which is not in accordance with the law as has been laid down by various Judicial Authorities including the judgment of Jurisdictional High Court in the case of EKL Appliances Ltd. [TS-206-HC-2012(DEL)-TP] and also in the case of CIT v. Cushman and Wakefiled (India) Pvt. Ltd. as reported in [(2014) 367 ITR 730 (Del)].

Coming to the benefit test, the Ld. Counsel submitted that although benefit test cannot be applied for benchmarking the IGS, yet the assessee has demonstrated before the authorities below that it had actually benefited from such services and had filed the computation of estimated benefits in the monetary terms in respect of year in which assessee received such services such as Group Finance & Controlling, Group Treasury, etc. for which the amount of Rs. 10,16,073/- was paid by the assessee to its AE. Table showing Cost- Benefit Analysis of IGS as highlighted before us is as under:-

It was also submitted that the Chart of Benefits given above shows comparable uncontrolled transactions which goes to show that, if services would have been taken from an uncontrolled / independent entity in India, the assessee would have paid more. Therefore, in that manner, CUP is also satisfied and the international transaction of IGS payment should be considered as having been undertaken at ALP. The Ld. C submitted that the AE has charged cost plus 10% margin on actual costs. Reliance was placed on the following case laws for cost plus 10%, wherein in case Indian company had rendered the support services, then the revenue department is accepting cost plus 10%: • Actis Advisers Pvt. Ltd. [TS-181-ITAT-2013(DEL)-TP] • Shell India Markets Pvt. Ltd. [TS-430-ITAT-2014(Mum)- TP]

The Ld. Counsel further submitted that Safe harbour rules recognize the international transaction of IGS as eligible international transaction. The assessee submitted that once these services have been benchmarked under overall TNMM in the TP Study, the action of the TPO and consequently the DRP was not in accordance with law to benchmark these IGS on standalone basis. The assessee for this proposition relied upon the judgment of MSS India (P) Ltd. [TS-14-ITAT-2009 (Pun)-TP] and judgment of Hon’ble Delhi ITAT in the case of Frigo Glass India (P) Ltd. v. DCIT [TS-112-ITAT-2014 (Del)]. The assessee has also relied upon the definition of transaction as contained in Rule 10A(d) to claim that transaction includes a number of transactions which are closely linked. The AR submitted that the rendering of these IGS are closely linked to other operations and other AE transactions of purchases of components etc. and sale of finished goods to its AE and therefore, cannot be separately benchmarked for determining its ALP especially when the same has been benchmarked under the overall TNMM. In support this contention, the assessee placed reliance on the Supreme Court ruling in the case of Magneti Marelli Powertrain India Pvt. Ltd. (2017-TII-23-SC-TP)in which it concurred with the opinion of the Jurisdictional Delhi High Court (2016-TII-80-HC-DEL-TP) on adoption of aggregated TNMM as MAM and held that “having accepted TNMM as the most appropriate for computing ALP in case of entire international transactions entered into by the assessee, it was not open for the TPO to subject only one particular element, i.e. payment of technical assistance fee, to an entirely different CUP method.”

The Ld. CIT DR, on the other hand submitted that TPO was fully justified in benchmarking the transaction of IGS on standalone basis. He submitted that the contentions of the assessee on Rule 10A and assessee’s reliance on such rules are misplaced, because transactions of IGS are required to be examined as separate international transactions and cannot be clubbed under the overall TNMM as has been done by the assessee. By making reference to order of the TPO, the DR submitted that assessee failed to establish the receipt of services and the payment has been made by the assessee to its AE without any basis. He submitted the real test which is required to be applied as to whether any independent party would pay for the alleged services claimed to have been received by the assessee. He thus submitted that the order of TPO / DRP on this issue should be confirmed.

We have heard the rival submissions and also perused the relevant findings given in the impugned orders as well as material referred to before us. Ld. TPO had first of all segregated the Intra Group Services as a separate transaction and thereby after detailed reasoning has held that the ALP of Intra Group Services has to be determined at ‘Nil’ based on his reasoning as incorporated above that no benefit has been received by the assessee on payment of Intra Group Fees/charges. The TPO has also referred to OECD guidelines with regard to the Intra Group Services and also referred to certain decisions for coming to the conclusion that the payments of Rs.10,16,073/- made to its AE for Intra Group Services has to be taken at Nil on application of CUP method as no uncontrolled enterprises could have paid any amount of services and do not tantamount to intra group services with administrable benefits. From a bare perusal of the international transaction as recorded by the assessee, it is seen that assessee has separately shown management fees of Rs.10,16,073/- for which no separate benchmarking has been done on the ground that these management fees paid to AE is part and parcel of over all transactions taken by the AE. Such a contention of the assessee cannot be sustained on the facts of the present case, for the reason that the main transaction undertaken by the assessee with its AE is with regard to the purchase of raw material, consumables and spares and sale of finished goods and purchase of finished goods. Besides this, there is one license on sale to third parties. On the other hand, management fee is arising out of altogether separate agreement with the AE with regard to management services. The assessee itself has pointed out that management services include the following services: a. Chairman of Bucher Industries Group b. Group management] c. Group Finance d. Group controlling e. Group treasury f. Group development g. Internal Audit h. Human Resources i. Legal & General counsel j. Group Tax The service fee has been calculated based on actual cost plus profit margin of 10% and the split of the cost have been worked out by certain allocation keys. Accordingly, it cannot be held that such a payment for management fees (IGS) is directly linked with the other international transaction which has been benchmarked under TNMM, therefore, such a contention of the assessee on the facts of the present case cannot be accepted.

However, considering the submissions made by the assessee and also the agreement of management services, it is seen that, management services have been divided into non chargeable cost, i.e., shareholder service portion and chargeable cost to the service recipient based on certain allocation keys. It has been clarified before the authorities below that shareholder services cost has not been charged by the AE. Coming to the benefit test, learned counsel had submitted the estimated benefit in monetary terms in respect of the year in which assessee has received services such as group finance and controlling, group treasury etc which has been incorporated above. Even before the TPO the assessee not only had filed the agreement but has also provided detail analysis of the services rendered by the AE and has furnished details of cost benefit analysis including the expected benefit from the IGS and it has been pointed out that if the management services would not have been received then overall cost of the assessee would have been huge if procured from any third party, whereas, the assessee is getting this service on lower price because AE is involved in providing management services on global basis. From these facts, it cannot be held that the management services provided by the AE have not benefitted the assessee for reducing its cost. What is required to be seen in such cases whether there is any economic and commercial value in such kind of services and whether an independent enterprises in such circumstances would have been willing to pay for activity if performed for it by an independent enterprises or would have perform the activity in house for itself. The TPO cannot decide the benefit derived by such services and what is required to be seen whether the services were actually rendered by the AE to the assessee or not. The Hon'ble Jurisdictional High Court in the case of EKL Appliances Ltd. (supra), CIT vs. Cushman and Wakefiled (India) P. Ltd. (supra) has held that the benefit test to determine the ALP at Nil for IGS services cannot be accepted as same has to be seen from the point of view of the assessee on the basis of facts. The assessee has highlighted tangible benefit derived from services and such service has to be evaluated to examine the overall benefit and the cost savings due to management services provided by the AE. If TPO has segregated this transaction to be benchmarked separately, then it was incumbent for him to analyze the said transaction by comparing similar services with uncontrolled comparable transactions. He simply cannot determine at Nil without carrying out any benchmarking analysis. Thus, we agree with the learned counsel that ALP for the management services cannot be determined at Nil. The TPO is however directed to verify the working of tangible benefit derived from the services as given by the assessee and he should examine how such services have given benefit to the assessee overall and if such benefits are demonstrated, then no adjustment should be made. With this direction, this ground is treated as partly allowed for statistical purposes.

Lastly, in so far as disallowance of carry forward loss and depreciation is concerned, the Assessing Officer is directed to verify the same from the records and allow the same in accordance with the provision of law. The other grounds are consequential in nature.

In the result, the appeal of the assessee is partly allowed.