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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SMT DIVA SINGH & SHRI PRASHANT MAHARISHI
PER DIVA SINGH, JUDICIAL MEMBER :
The present appeal has been filed by the assessee assailing the correctness of the order of the assessing officer under section 143(3) read with section 144(C) on the following grounds :
1. That on the, facts and circumstances of the case and in law, the order passed by the Learned Assessing Officer ('AO)') / Transfer Pricing Officer ('TPO') and upheld by the Hon'ble Dispute Resolution Panel ("DRP") is bad in law and erroneous.
2. That the Ld. AO pursuant to the directions of the Hon'ble DRP erred on facts and in law in making an addition of Rs.6,27,11,181/- to the income of the appellant on account of international transaction of payment of management cost contributions (after allowing network administration costs) undertaken by the Appellant.
3. The Ld. AO/TPO erred on facts and law in determining the arm's length price ('ALP') of the Appellant's international transactions pertaining to payment of management cost contributions (after allowing network administration costs) to its Associated Enterprise ('AE') as Nil- against the sum of Rs.6,27,11,181/- incurred by the Appellant and thereby making an addition of Rs.6,27,11,181/- on that account to the Appellant's income and in doing so have grossly: 3.1 erred in disregarding the ALP, as determined by the Appellant in the TP documentation maintained by it in terms of section 92D of the Income Tax Act, 1961 ("the Act") read with Rule l0D of the Income Tax Rules, 1962 ("the Rules"). 3.2 erred in holding that the transactions are covered under intra group services without appreciating that the payment made to Atotech Group was governed by a Cost Contribution Arrangement ("CCA") and not under an agreement for rendering intra-group services. 3.3 erred in ignoring the submissions and documents submitted by the Appellant during the assessment proceedings and holding that the Appellant has not furnished/furnished only generic documentary evidence to demonstrate the benefits received from the AE. 3.4 erred in holding that the Appellant has not identified payment for each service
ITA-1461/Del/2015 Page 2 of 13 separately and in order to benchmark the payment for each service under CCA, it is necessary to bifurcate the different services. 3.5 erred in holding that the services received by the Appellant arc in the nature of shareholder services and no payment was warranted for the same. 3.6 erred in considering the ALP of the transaction to be Nil by inappropriate application of CUP method in contravention of the provision of Rule l0B of the Rules merely based on presumptions without furnishing details of price charged in any comparable uncontrolled transaction 3.7 erred in ignoring the report obtained by the participants of the CCA (including the Appellant) from the independent auditors documenting the quantum, manner and methodology for computing the contribution to be made by each participating entity while applying CUP method. 3.8 erred in holding that the Appellant has not been able to establish the need for the services received from AKs based on the premises that no cost benefit analysis was undertaken with regard to cost of services and benefit received from AEs vis-a-vis independent parties. 3.9 erred in not appreciating that the Appellant derived significant benefits from the CCA and the cost relating thereto was allocated on the basis of prudent, reasonable and appropriate allocation keys. 3.10 erred in disregarding judicial pronouncements in India on the issues involved.”
The relevant facts of the case are that the assessee company is a wholly owned subsidiary of Atotech B.V., a company incorporated in the Netherlands. Assessee is primarily involved in the business of manufacturing and marketing of specialty chemical and components used for general metal finishing and production of printed circuit boards. Various international transactions were disclosed by the assessee in the year under consideration. The subject matter of dispute, in the present proceedings, revolves around the cost sharing expenses amounting to Rs.17,60,55,082/-. The assessee had executed a Contract of Accession with its AE, Atotech Deutschland GmBH, wherein it had concluded two underlying Cost-Sharing Agreements ('CSAs') / CCAs, effective January 01, 2002 (revised on January 01, 2007), namely Global Research & Development and Technical Sales Services Cost Sharing Agreement ('R&DTSS-CSA') and Global Management Group Cost Sharing Agreement ('MCSA'), The R&DTSS-CSA involved the sharing of R&D arid technical sales service support costs. The agreement required from Atotech Group to maintain laboratories, product development centres, technical centres and a staff of experts, engineers and scientists to conduct R&D and provide related engineering and technical support and services to the world-wide group entities. The essence of the agreement, it was stated, was that each member country, instead of investing and doing the R&D
ITA-1461/Del/2015 Page 3 of 13 and technical sales service everywhere locally by themselves, should benefit out of the combined R&D and technical sales service functions. 2.1 The MCSA, on the other hand, involved the sharing of common general management and administrative costs (such as marketing / finance / human resource / quality control safety and host of other critical management functions that are of global strategic importance). The functions and services covered under this agreement included: • Product Management • Network Administration • Management Cost • Regional Cost Sharing. 2.3 Following payments on account of cost contributions under the CCA were made :- S.No. Particulars Sub-Head Amount 1 Research & R&D Cost 9,59,76,149 10,49,74,509 Development Technical Sales Service 89,98,360 Product Management 2,69,85,288 Intellectual properties 1,24,69,229 Regional Management 7,14,430 Global Management 1,50,60,117 Management Network Administration 83,69,192 2 Group Cost Regional Cost Sharing 74,82,317 (Global and 7,10,80,573 (EU) Regional) Total 17,60,55,082 2.4 The TPO recharacterized the transactions relating to payment of management cost contributions under the CCA under intra group services and determined the ALP of these payments as nil after reducing networking administrative charges of Rs.83,69,192/- from management group cost. The TPO proposed an addition of Rs.6,27,11,181/-.
Assessee carried the issue before the DRP by filing various objections. The DRP relied upon the past position taken by the said Forum and held that the TPO was justified in adopting CUP as a method and the assessee’s submissions on the objections posed to the TPO were dismissed for the reasons set out in the preceding assessment years. Aggrieved by this, the assessee is in appeal before the ITAT.
The appeal was heard in June 2018 wherein the ld. AR had pleaded that these issues had traveled to the ITAT in the earlier years on similar facts and circumstances and these were remanded back to the AO/TPO. Copies of the orders were stated to be available. However, while finalizing the orders, it was noticed that the copies shown on the ITA-1461/Del/2015 Page 4 of 13 Bench had not been filed. Consequently, the appeal was re-fixed for bringing these orders on record. The copies of these orders dated 12.08.2016 in pertaining to 2011-12 AY and a consolidated order dated 11.05.2018 pertaining to 2008-09, 2009-10 & 2012-13 assessment years have been made available on record. The ld. AR made a prayer for remand relying on these orders.
Mr. Sanjay I. Bara, ld. CIT DR appearing on behalf of the Revenue submitted that he has no objection to the prayer of the assessee for a remand to the TPO with similar directions.
We have heard the submission and perused the material available on record. It is seen that in the facts of the present case, the issue of selection of most appropriate method itself has been remanded back vide order dated 11.05.2018 with the direction to first decide whether the payments made under the Agreement are in the nature of Cost Sharing payments or Intragroup Services. The said direction in order dated 12.08.2016 was repeated in order dated 11.05.2018. Accordingly, in the absence of any change in fact or law, we remand the issue to the file of the AO/TPO with similar direction. While so directing, it is necessary to note that the Co-ordinate Bench has directed the AO/TPO to go through the Agreement on the records and determine whether the nature of the transaction is Cost Sharing Agreement or were these payments in the nature of intra group services for the sake of completeness so as to bring out the issues on record in the year under consideration, we deem it appropriate to briefly address the background of the case by first addressing the ownership structure of the assessee in the TP Study :- “Ownership structure of Atotech India Atotech B.V. Netherlands 99.99% shares Outside India Atotech India (Holding 6 shares) Individuals (6) Nominees of Atotech B.V. The company is engaged in manufacturing and marketing of electroplating chemicals in India. It caters primarily to the domestic market with export sales constituting less than 5% of its sales revenue.”
6.1 The profile of the assessee and its holding company of the Atotech Group as per the record is as under :- “3. Nature of business of the assessee and the group: 3.1 Atotech Group: The Atotech Group was formed in 1993 with the merger of M&T Harshaw, operations of ELF Atochem group, (a supplier of General Metal Finishing
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('GMF'), chemistry and processes/Chemistry for Printed Circuit Board ("PCB") manufacturing) and the Electroplating Division of Schering AG, (a manufacturer of PCB Chemistry, GMF chemistry and equipment for the same). The Atotech Group is present in around 40 countries and employs over 3200 people across five continents. The Global Research and Development ("R&D") centre is mainly located in Berlin (Germany). Rock Hill (South Carolina, USA) and Yokohama (Japan) are the other two centers). 3.2 Atotech Deutschland GmbH Atotech Deutschland GmbH ("Atotech GmbH") is primarily involved in the business of manufacturing and marketing of equipment and specialty chemicals used for GMF and production of PCB and it harbours the global management as well as a major part of the global laboratories and certain overall European functions. Today, Atotech GmbH is a direct subsidiary of the world's fourth-largest oil and gas company Total, created from the merger of TotalFina and Elf Aquitaine in 2003. Being part of the chemical branch of the oil and gas group Total, the Atotech Group has access to substantial resources and benefits from production, R&D and distribution synergies. 3.3 Atotech India is a wholly owned subsidiary of Atotech B.V., a company incorporated in the Netherlands. Prior to this, Atotech India was operating in India as Max Atotech Limited. Max Atotech Limited was a 50:50 joint venture between Atotech BV and Max India Limited. Incorporated in March 1996 to meet the requirements of electroplating chemicals for PCB manufacturers in the country, the company expanded its operations into the General Metal Finishing segment in the second year of its operations and started manufacturing GMF plating chemicals used primarily in the automotive and construction industry. As part of its strategy to exit non-core businesses, Max India Limited sold its equity stake in Max Atotech to Atotech B.V. in July 2001.” 6.2 The functions performed for the purposes of FAR analysis carried out by the assessee in its TP Study claiming its transactions to be at arm’s length in its TP Study noticed by the TPO are as under:- 4. FAR Analysis: 4.1 Summary of Functions performed, Risks undertaken and Asset utilized for manufacturing: Atotech India, the assessee is a routine manufacturer and marketer of specialty chemicals & compounds used for general metal finishing and production of printed circuit boards. It carries out routine functions and. assumes normal risks associated with carrying out such business. It is also involved in the commissioning of certain chemicals and capital equipments to certain customers in India. As a part of this arrangement, the assessee also provided after sales service to the customers for the chemicals commissioned. At present, however this activity forms a very small portion of the total income. Atotech India utilizes its manufacturing facilities, distributing infrastructure, office premises, warehousing facilities, communication facilities etc. for the purpose of its business. On account of acquisitions, it has come to acquire certain routine intangibles such as goodwill, Intellectual Property Rights and non-compete fees, it does not- undertake any significant R & D on Its account that leads to the development of non-routine intangibles. However it contributes to the Atotech Group's R & D costs, it uses the trademarks, process, knowhow, technical data software, operating/quality standards etc. developed/owned by Atotech Group, 4.2 Functions performed with respect to Cost sharing Arrangements: 4.2.1 Cost Sharing Arrangements: In order to bring synergies in research activities, worldwide technologies, technical support, know- how and management activities, Atotech India has entered into the following agreements (collectively referred to as 'CSA') vide the Contract of Accession effective from 1 January 2002 which replaces
ITA-1461/Del/2015 Page 6 of 13 the old versions valid since 1 February 1993, with Atotech GmbH, representing the Atotech Group worldwide: • Research & Development and Technical Sales Service Cost Sharing Agreement ('RDTSSA' or 'R&D and TSS Agreement') • Management Group Cost Sharing Agreement ('MCSA') 4.2.2 R& D an d TSS Agreement The agreement was subsequently revised with effect from 1 January 2007. These agreements provide that all Atotech Group companies combine their efforts in order to develop/have the necessary management tools to be a global player in the selected product area and to develop/have access to the designed proprietary products and know-how, The agreements set out the framework in which entities communicate with each other in the Group, define joint goals, implement and use them. The Atotech Group companies bear the cost of the joint R&D functions and have acquired joint ownership in the intellectual property which exists in the Atotech Group. Therefore every entity has access to all patents, non-patented know-how, trademarks and brand names (without paying any extra fees or royalties). Upon exit, the leaving company is compensated for the loss resulting from the transfer of its part in the IP back to Atotech Deutschiand which coordinates the CSA for the Atotech Group for and on behalf of all remaining CSA member companies. Atotech Group companies which have joined these agreements have the same rights and obligations. Here the development of technology is carried out for the joint benefit. By virtue of CSAs, Atotech India has got access to, as well as joint ownership of all Atotech Group know-how, technologies and intellectual property rights owned by the Atotech Croup. Presently, Atotech India does not perform any R&D activities. "Client to Confirm» Such R&D activities are carried out primarily in the U.S.A., Germany and Japan. Local Atotech companies always use global strategies and other global management know-how jointly developed under the CSA agreements. The R&D and TSS Agreement has been executed to carry out R&D activities and thereafter, provide technical sales service support to all the participants in connection with the proprietary chemicals- being developed under it. The objective of this agreement is to maintain during the term of the agreement laboratories, product development centres and technical centres and a staff of experts, engineers, scientists who shall conduct research, development and engineering in the science of electroplating and such other activities in which the parties are concerned. R&D: These costs can be easily identified, as every worked hour is allocated to a project. The worked hours represent a major part of cost of doing improvements to existing products and making relaunches and only to a small extent the cost of the products which are not yet being launched. Interne Leistungs Verrechung ('ILV'): This represents the technical support from the Technical Centers and functions for the products already being launched. These functions comprise in particular sample testing required by the local customer.” 6.3 The Cost Sharing Agreement entered into by the assessee is explained before the TPO as per record in the following manner :- “4.2.3 MSCA MCSA has been executed to provide general management expertise and guidance for carrying out the business by each of the participants in a smooth manner and sharing the globally available management expertise and best practices. Under this agreement services such as strategic and general management, strategic business development, development of worldwide quality standards, training and aid of highly qualified employees (expatriates), administration assistance, human resources, organization of the worldwide quality program are performed for the benefit of the Croup companies charged,
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Furthermore, tasks such as the organization of shareholders' meetings of the subsidiaries, execution of the shareholders' Group control, and consolidation of the financial statements are performed only for Atotech B.V. and Atotech Inc. Here a cost share of the cost centres such as the Group Controlling Department (50%) and Legal Services (20%) is used. This cost share is directly invoiced to Atotech B.V. and Atotech Inc. and therefore, not part of the cost allocation to all CSA members. «Client to Confirm» It is pertinent to note that stewardship services are not charged from any CSA member, including Atotech India. Global Management, Regional Management: The Operation Committee ('OC') is a strategic management team that comprises the President, the Functional Vice Presidents (WW Operations, WW HR and Legal, Finance - IT), the Business Unit Vice Presidents (GMF, Electronics, Wafer, Electronic Material) and the Regional Vice Presidents (Europe, Far East, Americas). Product Management: This has been divided into two segments i.e. GMF and EL, Here responsibility for the product development, product marketing, trademark, customer services, treatment of customer requests, and corporate communication activities is ensured. Network Administration Costs: Considering the steadily increasing importance of network administration costs the updated contract of 2007 includes additional location rules such as general IT costs according to the number of PCs. As per the scheme of the CSA, all actual costs under R&D and general management costs of each individual constituents of the CSA are pooled together and allocated to individual constituents based on the sales ratio i.e. sales of individual constituents of the CSA, to the total worldwide sales. The fact that the costs are pro-rated amongst the AEs on the basis of turnover does not change the character of these transactions as it is only an appropriate method of apportionment. The costs also include a 5% mark-up to meet the overhead costs of Atotech Group entities carrying out the R&D and management operations. Under the CSA, costs are gathered and allocated to the participants by Atotech GmbH as operator of the pool. The following allocation rates are applied: Charge-out: entities with central functions charge central costs to the CSA pool administered by the Group Controlling Department. Charge-in: The Group Controlling Department allocates the total central costs mainly according to ratios of the external sales to all CSA members The costs recharged relating to the skills and facilities maintained by the AEs rendering R&DTSS are made according to the ratio of proprietary chemical sales in the different product groups to third parties of the parties to the R&DTSS agreement. The allocation of R&D costs is done on a sales basis for the reason that in the long run, sales is a good reflection of how the value of R&D efforts have been used by the group companies. The cost to be charged are increased by a mark-up of 5% which covers any costs not already covered. As per the agreement, costs for rendering management services are allocated to the Group companies in the ratio of the sales to third parties performed by each member of the receiving Group company and the charging company to the total sales to third parties of all these companies along with a mark-up of 5% on such allocated costs to cover any costs that might not already be included.” 6.4 For the purposes of FAR, the assets stated to be utilized and the risks undertaken were described as under:- 4.3 Assets employed The Atotech Croup utilises routine tangible assets for the purposes of undertaking R&D Activities under the CSA. Intangibles Atotech India uses the trademarks, process, know-how, technical data software, operating/quality standards etc. developed by the Atotech Group.
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Atotech India is the co-owner of IP created due to R&D activities undertaken by the Atotech Group under the CSA. 4.4 Risks assumed Risk profiling of Atotech India vis-a-vis its AEs is provided in the table below:
Risk Category and Exposure to Atotech Exposure to AEs Description India The Indian entity does R&D Risk: Represents risk that not perform significant The Atotech Group R&D activities performed by an R&D, but shares in the engages in significant enterprise may not be Group R&D cost. complex R&D for successful. Therefore it bears the developing new, improved risk associated with the products/technologies. success/failure of R&D Accordingly, they are efforts of other Atotech significantly exposed to Group companies. this risk.
Atotech India does not The AEs receive payments Credit Risk: This is the risk bear this risk with from Atotech India and arising from , non- respect to the sharing hence bear limited risk on payment of dues by of cost under the CSA. this account. customers. The AEs are exposed to Atotech India does not Foreign Exchange Risk: bear foreign exchange foreign currency risk to a This risk relates to the limited extent as they risk as cost recharges potential impact on profits that raise invoices in INR to/from the AEs are may arise because of changes in invoices in INR foreign exchange rates Atotech India does not The AEs bear all the risk Legal and Sttutory Risk : This risk for compliance with bear the risk for primarily arises on non compliance in India legal matters relating to compliance with any this activity legal/contractual/statutory provisions 6.5 It is seen that for justification of the payments, the assessee has offered the following information before the DRP :- “7.1 The assessee has submitted that the general matters pertaining to management functions performed at group level include the following :- Product Management : Project management comprises of the following tasks and responsibilities - a. Creation of market introduction documentation ego product name, price guidelines, technical features etc. b. Preparation of brochures, advertisements, posters and press releases. c. Publication of technical papers and participation at conferences and tradeshows. d. Management of Atotech website, internet content. e. Publication of newsletters etc. f. Trainings/workshops for local product marketing managers Network Administration- Network management refers to the activities, methods, procedures, and tools that pertain to the operation, administration, maintenance, and provisioning of networked systems. In this regard the following functions are performed by group companies- a. SAP Basis Team- The basis team is in charge of running all necessary systems to run the SAP system architecture for Atotech. b. Global Sap Competence Centre Team- In charge of maintaining, supporting and enhancing the system settings and the business processes. c. Global lotus Notes Competence Centre Team- in charge of maintaining, supporting and enhancing the system settings. d. Global Infrastructure competence Team- The central team is in charge of maintaining, supporting and enhancing the system settings of the relevant
ITA-1461/Del/2015 Page 9 of 13 infrastructure to assure a proper working of all users. In addition the team is in charge of developing new concepts and evaluating new features and tools to assure the necessary level of security and standardisation. Management Cost- Management cost involves the cost towards the following- a. Finance & Treasury b. Legal assistance c. Risk management and Internal Control d. Human Resources e. Health, Safety, Environment and Security Regional Cost Sharing- Payment towards regional cost sharing involves costs towards the following- a. Worldwide purchasing for ensuring optimum pricing for input material b. Logistics and inventory management c. Quality control d. Customer and Pricing development” 6.6 The appropriateness of allocation keys used and the expectation of mutual benefit on the incurring of the expenditure has been explained in the following manner :- “7.3.1 Appropriateness of allocation keys used The costs are allocated in the following" manner under the cost sharing agreement: • Charge-out: The entities with central functions charge central costs incurred by them to the CSA pool administered by the group controlling department. • Charge-in: Group Controlling Department allocates the total central costs to all the group entities including the charge out parties in the proportion of costs Incurred to total external sales. Furthermore, the assessee submitted that the" audit report contains, inter-alia quantum, cost, allocation methodology and the allocation keys for computing the contribution to be made by each participating group entity and accordingly, such analysis cannot be rejected without detailed reasons: It is submitted that the following factors distinguish a CCA from the rendering of Intra-Group services- • Expectation of mutual benefit • Economic ownership by each participant In case of the assessee, all cost contributions are accompanied by an expectation of mutual benefit. Moreover, the assessee and the AEs also share in the costs and risks associated with each activity undertaken jointly by them, thus becoming joint economic owners of the common shared/pooled assets, services or rights developed thereby. Since both the above conditions are satisfied, the intra-group arrangements In case of the assessee qualify as CCAs. Accordingly the payments made by the assessee are covered by Chapter VIII of the GECD Guidelines (and not Chapter VII of the GECD Guidelines, which deals with 'intra-group services'). Hence there is no need to identify the amount paid for each service separately.” 6.7 The documentary evidences demonstrating that benefit has been received from the payment of cost charges before the DRP were canvassed in the following manner :- “7.3.2 Documentary evidences demonstrating the benefit received from the payment of cross charges The assessee by way of the CCA has access to greater and global experience of the Atotech for the management related activities and thus can benefit from the global best practices. Furthermore, to demonstrate the economic benefits realised by Atotech India by entering into the MCSA with its AEs the assessee submitted the following documentary evidences:
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• List of new products Introduced by Atotech India in the market in the Financial Year 2009-10. • Technical material containing manufacturing procedure/chemical composition for new products Introduced by Atotech India • List of trainings and workshops attended by employees of assessee Company overseas which were conducted by AEs during the Financial Year 2008-09. • Sample of technical materials received during some of the workshops attended by employees of assessee Company which was organized overseas by AEs. • Sample of technical reports and troubleshooting support of key customer accounts received from AEs. • List of new products relocated to Atotech India during the Financial Year 2009- 10. In view of the above, the costs incurred by the assessee to avail the management group benefits are commensurate with the benefits received by the assessee considering the nature of the functions performed by the AE and costs allocations charged to the assessee in lieu thereof.” 6.8 However, the DRP has dismissed the submissions relying on the past history. 6.9 In the said background, it is seen that the issue first come up for consideration before the ITAT in 2011-12 AY wherein relying upon the decision of Hon’ble Delhi High Court in the case of CIT vs. Cushman Wakefield (India) P. Ltd.-46 Taxmann.com 317 (DEL), the coordinate Bench remanded the matter to the TPO to determine after going through the record whether the payments made were under the cost sharing arrangements or were they in the nature of intra-group services. It is further seen that the coordinate Bench vide its consolidated order pertaining to 2008-09. 2009-10 & 2012-13 AYs had an occasion to consider the aforesaid order of the ITAT for 2011-12 AY and noticed that in fact there were no directions therein qua the selection of the most appropriate method itself which was also an issue. Considering the position of law as laid down by Hon’ble Punjab & Haryana High Court in the case of Knorr-Bremse India P. Ltd. vs. ACIT – (2016) 380 ITR 307 (P&H) it was concluded that the Court had clearly held that whether the transaction results in an increase in assessee’s profit was not determinative of the question whether the transaction was at arm’s length price or not. The said factor, it was noticed at best would only reflect the genuineness of the assessee’s claim. Having addressed the legal position which clearly holds that the rise in profit is definitely not a relevant factor and hence not determinative of the issue. The said controversy was put to rest. The Courts are alive to the fact that a business decision, may at times turn out bad and unprofitable for various reasons as necessarily all business decisions cannot always meet
ITA-1461/Del/2015 Page 11 of 13 with success. Accordingly, the question whether the decision was commercially sound or not was consequently held to be not relevant for deciding the issue. It has been held by the Court that what would be relevant is to determine whether the transaction so entered into has been entered in a bonafide manner or not or was it sham transaction and has only been entered into for the purpose of diverting the profits. 6.10 It is also pertinent to note that the Co-ordinate Bench also noticed that the TPO had applied CUP method and taking note of the decision of the Hon’ble High Court in Knorr-Bremse India P. Ltd. (supra) the Co- ordinate Bench observed that the Court has held that where number of transactions are priced differently, but on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e. either take all or leave all) then it is also an international transaction. However, it was noticed that it was for the assessee to prove that each transaction is priced separately but all of these put together are provided under one composite agreement and it will be necessary to show that it was inextricably linked to show that one cannot survive without the other. It was observed that purchase of goods and acceptance of services lead to manufacture of a final product and can be said to be dependent transactions. Considering the facts in the instant case, it was held that it did not satisfy the criteria as laid down by the Hon’ble jurisdictional High Court in Knorr-Bremse India P. Ltd. (supra) as firstly there was no package deal to show that the international transaction in question was fairly valued; secondly, despite the fact that the international transactions were priced differently, there was nothing to show that there was an understanding that the pricing was dependent upon the assessee accepting all together. Further, the assessee was also found to have not shown any facts or evidences to demonstrate that the transactions were inextricably linked so as to demonstrate that one did not survives without the other. Accordingly, the view of the TPO rejecting the aggregation approach adopted by the assessee was upheld. Noticing the fact that the assessee had applied TNMM as the MAM on aggregate basis and taking note of the fact that management cost has been held separate, the coordinate Bench taking note of the past history wherein the ITAT had approved CUP as MAM relying on the concession given by the assessee and taking note of the fact that in the facts of the present case i.e. 2008-09 AY, there was no such concession, further taking note
ITA-1461/Del/2015 Page 12 of 13 of the fact that in 2011-12 AY, the issue of most appropriate method had not been adjudicated upon proceeded to direct the TPO to first apply CUP as the most appropriate method and supplemented it with the direction that some comparable uncontrolled instance be cited in terms of the mandate of Rule 10B(1)(a)(i). It was also made clear that in case, the TPO finds that the CUP method cannot be applied either due to non- availability of the data or due to some other reason, he was free to apply any appropriate method for fresh determination of ALP of the international transaction of “Management Group Cost”. The relevant paras are extracted from the aforesaid order :- “13. By now, it is fairly settled through a catena of decisions that the CUP is the most appropriate method to determine the ALP of an international transaction because it seeks to compare the price charged or paid for property transferred or services rendered, provided proper comparables are available. It is under this method alone that the price charged or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction. The remaining four specific methods seek to make comparison of the price charged or paid indirectly through the medium of normal profit arising in a comparable uncontrolled transaction. Further, the CUP method is a transaction specific method which strives to determine the ALP of an international transaction on a micro level, thereby lending more credibility to the ALP of a transaction.
Considering the decision in Knorr-Bremse (supra) and the view taken by the Tribunal in assessee’s own case as discussed above, we set aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction of `Management Group cost’, primarily, under the CUP method. While applying the CUP method, it is always obligatory to bring on record some comparable uncontrolled instance as per the mandate of rule 10B(1)(a)(i). Not even a single comparable instance has been brought on record by the TPO in his order to facilitate comparison between the price paid by the assessee vis-à-vis that paid by other comparables in similar uncontrolled circumstances. It was on account of his having canvassed a view that either the services were not received by the assessee or were duplicate in nature. Such a view has been overturned by us in earlier paras. Under these circumstances, we are left with no option but to set aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction, primarily, under the CUP method. In case, the TPO finds that the CUP method cannot be applied either due to non-availability of the relevant data or for some other genuine reasons, he is free to apply any other appropriate method for a fresh determination of the ALP of the international transaction of `Management Group cost’. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings.” 6.11 It is seen that the said view was followed in 2009-10 and 2012-13 AYs wherein note was taken of the international transaction of R&D and management cost, the relevant para is extracted hereunder :- “20. Here, again, both the sides agree that the facts and circumstances of this appeal are similar to those of preceding years dealt with above except that in this year the TPO, apart from determining Nil ALP of the international transaction of payment of ‘Management group cost’, also recommended transfer pricing adjustment in respect of ‘R&D assistance cost.’ The Tribunal has passed an order for the immediately preceding year restoring the fresh determination of the ALP of `R&D assistance cost’ and `Management group cost’ to the file of the AO/TPO. Following the view taken in such an order of the immediately preceding year and the two earlier years dealt with hereinabove, we set aside the impugned order and remit the matter to the file of Assessing Officer/TPO for a fresh determination of the ALP of the international
ITA-1461/Del/2015 Page 13 of 13 transaction of ‘Management group cost’ and ‘R&D assistance cost’ in accordance with the observations made in our detailed order for the assessment year 2008-09 above.”
6.12 Accordingly, in terms of the said decision, the issues are remanded back to the file of the TPO directing that qua the claim of management cost, the TPO shall, considering the past history to decide the issues in terms of the directions first determining the nature of transaction whether the payment made in terms of the Cost Contributing Agreement were cost sharing arrangement or in the nature of intra-group services and thereafter determine the issue of selection of most appropriate method which the Co-ordinate Bench has directed to first apply CUP using some comparable instances following Rule 10B(1)(a)(i) and in the eventuality the TPO comes to the conclusion that the relevant data is not available, he is free to select any appropriate method for fresh determination of ALP after hearing the assessee. Similarly, qua the R&D expenses etc. the Co-ordinate Bench remanded the issue back. Accordingly, in terms of the above, the issues are remanded with identical directions. The appeal of the assessee is allowed for statistical purposes. The order pronounced in the open court on 12.10.2018. Sd/- Sd/- (PRASHANT MAHARISHI) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER TS/Poonam(CHD)