DSM NUTRITIONAL PRODUCTS INDIA PRIVATE LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX-9(3)(1), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2011-12 preferred by the order against the final assessment order passed by the Assessing Officer dated 28/01/2016 u/s.143(3) r.w.s.144C(13) of the Income Tax Act, hereinafter referred to as Act, pursuant to the directions of the ld. Dispute Resolution Panel (DRP in short) u/s.144C(5) of the Act dated 03/12/2015 for the A.Y.2011-12.

2 IT(TP)A No.2076/Mum/2016 M/s. DSM Nutritional Products Pvt Ltd.

produced evidencing the receipt of services nor any evidence has been produced regarding determination of cost of such services. The assessee has merely produced a letter from AE stating that costs have been allocated without any mark up and bills filed by the assessee only show that rates have been charged on the basis of number of users. In a transfer pricing scenario, it is not only to be established that any services have been obtained but what has to be established is that such services were at arm’s length vis a vis a third party uncontrolled transaction. Unless this exercise is carried out (which actually has not been carried out by the assessee), it cannot be established that the benefits if any, derived from such tools and services were at arm’s length. The ld DRP observed that no comparability analysis has been carried out rather all the transactions have been bundled and the TNMM has been applied. The sum and substance of ld DRP observation is that the assessee had not provided the evidences regarding receipt of services , the benefits derived from such services or cost incurred towards such so called services. With these observations, the ld DRP upheld the action of the ld TPO.

Each of the grounds and/ or sub-grounds of the appeal are independent and without prejudice to the others.

1. On the facts and in the circumstances of the case and in law, the Ld. Dispute Resolution Panel ('DRP') erred in confirming the action of the Ld. Transfer Pricing Officer ('TPO') in determining the arm's length price of the Appellant's international transaction of payment for e-connectivity services availed from its associated enterprise as NIL instead of Rs. 52,83,464 as determined by the Appellant.

2. In doing so, the HonTDle DRP/ Ld. TPO has grossly erred in : a) Ignoring that the Appellant had supported the value of e-connectivity charges paid with appropriate evidences;

5 IT(TP)A No.2076/Mum/2016 M/s. DSM Nutritional Products Pvt Ltd. b) Challenging the commercial rationale and expediency of availing services by the Appellant; c) Ignoring that the Appellant is not required to establish the benefit arising out of the said services; d) Rejecting the comparability analysis carried out by the Appellant to demonstrate ALP in the Transfer Pricing study The Appellant therefore prays that the addition made by the Ld. AO of Rs. 52,83,464 under section 143(3) read with Section 144(0(5) of the Act on the basis of the directions provided by the DRP be deleted.

3. On the facts and in the circumstances of the case and in law, the Learned AO erred in levying interest under section 2340 of the Act amounting to Rs. 3,84,159. The Appellant craves leave to add, omit or alter grounds of appeal before or during the hearing of aforesaid matter.”

• Information & Communication Technology (Aurora): Operation, maintenance and update of ICT on workplaces, includes communication via networks and office applications as well as conferencing system. • Server maintenance charges:

6 IT(TP)A No.2076/Mum/2016 M/s. DSM Nutritional Products Pvt Ltd.

Operation, maintenance and execution monitoring of data / application servers for data storage and application execution. Includes monitoring of access rights to folders on servers. • Intranet services: Secure access to DSM owned internal data from all ICT workplaces. Includes system to share structured information and data from all DSM locations and premises. • Access to DSM from non DSM locations: Data connection costs from outside DSM connection points into DSM owned network.  Pushmail on Tablets &. Smart phones: Email exchange between DSM ICT's Email System and tablet computers And smart phones • Operation costs of dedicated applications like Domino and Quick plac”e 6.1. We find that the assessee had further elaborated in detail vide its letter dated 12.1.2015 before the ld TPO , the various services provided by the AE and the benefits derived by the assessee pursuant to rendering of such services at global level by the AE in the tabular form as under:-

Service Nature Benefit to assessee Information & Operation, maintenance Installation of DSM customized Communication and update of ICT' on operating system, installed on Technology workplaces, includes specific hardware manufactured (Aurora) communication via by Dell only mid its updates networks and office needed by users within DNP applications as well as India which makes a secured conferencing system. DSM Intrant-1 (called DSM AURORA). Communication within DSM employees via live meeting and conferencing. Without this DSM employee cannot work within DSM Network (this is basic services to by part of DSM). No activity like mail communication / data storage etc is possible in this intranet if it is not under AURORA environment Server Operation, maintenance Storage of all documents

7 IT(TP)A No.2076/Mum/2016 M/s. DSM Nutritional Products Pvt Ltd.

Maintenance and execution, produced or received by monitoring of data / employees within DNP India at application servers for safe and secure data storage data storage and locations including backups and application execution. restore facilities. Operation of Includes monitoring of applications tor DNP India at access rights to folders application servers placed in safe on servers. and secure locations including support in case of failure and disturbances. Intranet Services Service access in DSM It provides a secured platform owned internal data from where ONP India employees can all-1CT workplaces. access the information wherein Includes system in share no outsider has access to get the structured information information. Important and and data from all DSM actual information about locations and premises. belongings of the DSM company can be extracted to do the daily work. Access to DSM Data connection from It provides facility to all the from non DSM outside DSM connection employees of DNP India locations points into DSM owned particularly sales and marketing network team working from outside DNI' India environment to access mails and internet when they are travelling or working from home. Pushmail on E-mail system on tablet All email exchange, contact lists Tablets and computers and and time planning is made Smartphones smartphones available at tables and / or smartphones for the employees which are on travel or outside the DNP India Premises Application like Access to applications It provides access to DNP Domino and like Domino and employee to important Quickplace Quickplace applications like Domino and Quickplace required for business operations.

6.2. We are convinced with the arguments advanced by the ld AR that the aforesaid services are extremely critical to ensure the smooth functioning of day to day business of the assessee in India. We find that the whole purpose of having a centralized IT-set up within the group was to avoid

8 IT(TP)A No.2076/Mum/2016 M/s. DSM Nutritional Products Pvt Ltd. duplication of efforts and to make the arrangement administratively convenient and cost effective. Accordingly, we hold that the said services are such that an independent enterprise in comparable uncontrolled circumstances would have been willing to pay for the activity if performed for it by an independent enterprise.

6.3. We find lot of force in the argument of the ld AR that the e- connectivity services availed by the assessee form part of the cost base of the following main activities of the assessee :- a) Marketing support services – wherein as per the agreement for provision of marketing support services between the assessee and the AE, the assessee is compensated on cost plus basis ( i.e agreed operating expenses plus agreed margin) for its activity of provision of marketing support services. Hence the payment of e-connectivity charges to its AE on cost allocation basis form part of the cost base and is already recovered by the assessee with a mark up from its AE. b) Distribution activity - wherein as per the distribution agreement entered into by the assessee with its AE , the purchase price of the products for the assessee shall be arrived at after reducing the expected operating expenses and the arm’s length operating margin from the expected net sales price of the products to the customer. It is not in dispute that the payment of e-connectivity charges to its AE on cost allocation basis form part of the cost base. The pricing policy of the distribution activity of the assessee is such where the assessee pays the AE after retaining a margin on revenue and recovering its operating costs including e-connectivity charges from the revenue earned from customers in India. There is no dispute before us that the payment of e-connectivity charges being on revenue account, its impact would be directly on the 9 IT(TP)A No.2076/Mum/2016 M/s. DSM Nutritional Products Pvt Ltd. operating margin. Therefore along with other operating costs , e- connectivity charges is also reduced from the sales to determine the amount to be paid by the assessee to its AE.

6.4. We find that the assessee had provided the basis of allocation of cost before the ld TPO vide letter dated 12.1.2015 by primarily stating that the costs incurred by AEs in providing the services to the various AEs along with third party costs are pooled together and then allocated to the different AEs on a ‘Per User’ basis. Therefore the allocation basis is ‘Usage’. We find that the allocation key used in the instant case is ‘Usage’ and the assessee had placed reliance on Para 7.20 to 7.24 of OECD TP Guidelines wherein ‘Direct Charge Method’ and ‘Indirect Charge Method’ are prescribed. In the instant case, we find that the cost has been allocated by the AE to the Indian entity (i.e assessee herein) by applying Indirect Charge Method based on the Usage. The ld AR stated that each DSM group entity availing the services from the AE will give the AE the projected number of users for each service and based on that the AE will determine the per user cost. The total cost is accumulated with respect to each service and per user cost is calculated by dividing the total cost by number of budgeted users.

6.5. We find that the ld TPO agreed to the fact that the services were indeed rendered by the AE to the assessee herein, but concluded that the nature of services rendered are routine in nature. Having accepted the fact that services were rendered by AE, then there is no reason to disbelieve the payment incurred thereon on cost to cost basis without any mark up. We find that the ld TPO in his order conceded the fact of rendering of services by the AE to the assessee but stated that they were only routine in nature not warranting any payment of cost. Whereas the 10 IT(TP)A No.2076/Mum/2016 M/s. DSM Nutritional Products Pvt Ltd. ld DRP observed that no services were indeed rendered by the AE to the assessee warranting any payment of cost and additionally the ld DRP stated that the assessee had not proved the benefits derived by it from the services availed from AE. We find that the ld DR vehemently relied only on the order of the ld DRP. It is now well settled that the ld TPO cannot question the commercial expediency of the transaction carried out by the assessee as it falls within the exclusive domain of the ld AO. We have already held hereinabove that variety of services rendered by the AE to all the group entities including the assessee herein together with the related benefits derived by the assessee therein. We find that the cost allocation key used is ‘Per User’ basis by the AE for allocation of cost without any mark up. The invoices raised by the AE on the assessee in this regard also goes to prove that the same are on cost to cost without any mark up. All these facts are confirmed by the AE vide separate letter dated 21.10.2014 filed before the lower authorities. Moreover, we have already held that the payment of e-connectivity charges forms part of the cost base (i.e operating cost in both marketing support services and distribution activity) and the entire operating costs had been recovered with arm’s length margin from the AE. Hence there is no reason to determine the ALP of the said international transaction at NIL by the ld TPO which has been wrongly upheld by the ld DRP.

6.6. We find that the ld TPO for the Asst Year 2010-11 (immediately preceding assessment year), had accepted the claim of the assessee for payment for e-connectivity charges in the sum of Rs 41,48,949/- wherein CUP method was followed by the assessee for making payment to AE on cost to cost basis without any mark up , u/s 92CA(3) of the Act dated 29.1.2014 which is placed on record before us. We find that the assessee had also placed on record a letter dated 8.1.2014 filed for the Asst Year

11 IT(TP)A No.2076/Mum/2016 M/s. DSM Nutritional Products Pvt Ltd.

2010-11 before the ld TPO gave the same reply as was given for Asst Year 2011-12. When the same reply was accepted by the ld TPO in Asst Year 2010-11, there is no reason to take a divergent stand in Asst Year 2011-12 especially when there is absolutely no change in the facts and circumstances of the case. We also find that the ld TPO had also accepted the payment of e-connectivity charges to be at arm’s length in the transfer pricing assessment completed u/s 92CA(3) of the Act dated 8.1.2016 for the Asst Year 2012-13, a copy of which is placed on record.

6.7. Finally we hold that the ld TPO had determined the ALP of payment for e-connectivity charges at NIL without resorting to any of the methods prescribed in the statute. We hold that once a reference is received by the ld. TPO u/s.92CA(1) of the Act from the ld. AO, the ld. TPO is required to determine the ALP of the international transaction as per the provisions contained in Section 92C and 92CA of the Act read with relevant rules thereon. From the conjoint reading of the relevant sections and the relevant rules, we find that the duty of the ld. TPO is restricted only to the determination of the arm’s length price of an international transaction between two related parties by applying any of the methods prescribed u/s.92C of the Act read with rule 10B of the rules. Thus, there is no provision made in the statute empowering ld. TPO for determining the ALP on a particular international transaction at NIL without resorting to any of the methods prescribed. We find that the Hon’ble Jurisdictional High Court in the case of CIT vs. Johnson & Johnson Limited in of 2014 dated 07/03/2017 had held as under:-