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Income Tax Appellate Tribunal, DELHI BENCH “I-1”: NEW DELHI
Before: SMT DIVA SINGH & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
This appeal is filed by the assessee against the order of the Asst Commissioner of Income Tax, Circle 5(1), New Delhi (the ld AO) passed on 13/9/2017 under section 143(3) of the Income Tax Act, 1961 ( the Act) in pursuance to the direction of the ld. Dispute Resolution Panel – I, New Delhi (the ld DRP) issued under section 144C(5) of the Act on 31/8/2017.
The assessee is a company engaged in manufacturing and marketing of EGR systems for automotive industry. It is also engaged in providing technical support services to its customers with respect to the above components on request basis. The assessee filed its return of income on 27.11.2013 showing income of ₹ 20,58,49,610/-. The learned Assessing Officer found that assessee has entered into certain international transactions with its associated enterprises and therefore made reference to the Learned Transfer Pricing Officer to examine the arms length price of those transactions. The learned Transfer Pricing Officer passed order under section 92CA(3) on 18/10/2016, wherein he determined the arm‟s Page | 1 Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) length price of international transaction of payment of business support service of Rs. 4,08,06,578/- at Rs. Nil, international transaction of payment of technical support services amounting to Rs. 1,73,61,018/- at Rs. Nil and international transaction of payment of royalty of Rs. 4,20,55,227/- at ₹ 47,15,664/-. Consequently the adjustment of ₹ 9,55,07,159/- was proposed. Consequently the Learned Assessing Officer passed the draft assessment order on 30/11/2016 wherein against the returned income of Rs. 20,58,49,610/- the proposed income of the assessee was determined at ₹ 30,13,59,066/-. Against this assessee preferred objection before the Learned Dispute Resolution Panel–I, New Delhi who passed the directions on 31/8/2017 u/s 144C (5) of the Income Tax Act. Consequently the final assessment order under section 143 (3) of the Act was passed on 13/9/2017 wherein the total income of the assessee was assessed at ₹ 30,13,59,066/–. The learned Transfer Pricing Officer has proposed adjustment of Rs. 9,55,07,159/- u/s 92CA(3) was confirmed by the learned Dispute Resolution Panel without any adjustment. Therefore, assessee is aggrieved with the order of the learned Assessing Officer has preferred this appeal before us raising following grounds of appeal:- “1. That on the facts and circumstances of the case and in law, the order passed by the Learned Assessing Officer („Ld. 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 law in making an addition of INR 9,55,07,159/- to the income of the Appellant on account of international transactions pertaining to payment of business support service, payment of technical support service and payment of royalty.
3. The Ld. AO/TPO/DRP erred on facts and in law in determining the arm‟s length principle („ALP‟) of the Appellant‟s international transactions pertaining to payment of Business Support Services at Nil against the sum of INR 4,08,06,578/-, payment of Technical Support Services at Nil against the sum of INR 1,73,61,018/- and payment of royalty at INR 47,15,664/- against the sum of INR 42,055,227/- incurred by the Appellant and thereby making an addition of INR9,55,07,159/. While undertaking the above, the Ld. AO/TPO/DRP have grossly erred: Page | 2 Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) 3.1 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 10D of the Income Tax Rules, 1962 (“the Rules”); 3.2 in incorrectly rejecting the aggregation approach as followed by the Appellant for the transactions of payment of Business Support Services, Technical Support Services and payment of royalty and applying the transaction by transaction approach ignoring the fact that the aforesaid transactions are closely linked to each other and cannot be evaluated adequately on a separate basis; 3.3 in rejecting the TNMM as the appropriate method even when the same was upheld as the by TPO‟s predecessors in earlier years thereby disregarding the principle of consistency; 3.4 in holding that Business Support Services and Technical Support Services have not been received by the Appellant and that the payment made by the Appellant for Business Support Services and Technical Support Services do not tantamount to intra group services with demonstrable benefits; 3.5 in holding that the Appellant failed to demonstrate that the services received by the Appellant is not in form of shareholder services, incidental benefit or duplicative services without appreciating the fact that the Appellant in the first place had discharged its obligation by submitting detailed documentation justifying the arm‟s length nature of onus and burden to prove the negative has now shifted to AO/TPO/DRP; 3.6 in incorrectly holding that in relation to the payment of Business Support Services and Technical Support Services, the Appellant has not furnished any documentary evidence as to when and how these services were requisitioned from the Associated Enterprises CAEs‟) and manner and methodology of computation of payment for the services; 3.7 in holding that the Appellant has not been able to establish the need for payment of Business Support Services and Technical Support Services based on the premises that no cost benefit analysis was undertaken with regard to cost of activities and benefit received from AEs vis-a- vis independent parties; 3.8 in applying Comparable Uncontrolled Price („CUP‟) in contravention of the provision of Rule 10B of the Rules merely based on presumptions without furnishing details of price charged in any comparable uncontrolled transaction; Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) 3.9 in calculating payment of royalty at INR 47,15,664/- against the sum of INR 42,055,227/-by incorrectly holding that the same is in nature of price reduction for the products sold to the AEs and stating that the AEs are collecting royalty from the Appellant on the sales made to themselves; 3.10 while computing the arm‟s length royalty rate for comparables (using the companies selected as comparables by Appellant in its TP documentation) by taking the royalty paid by the comparables on their total sales thereby irrationally assuming that the royalty paid by them pertains to overall sales and not on certain specific technology availed for a particular product line, even though such information is not available in the annual report/public domain; 3.11 using the comparables selected by the Appellant in its Transfer Pricing („TP‟) Documentation for the purpose of application of CUP method for benchmarking the payment of royalty made by the Appellant, disregarding the fact that 3 out of the selected 6 comparables have not even paid royalty; 3.12 incorrectly rejecting the additional evidence filed by the Appellant before the Hon‟ble DRP in form of an internal CUP for benchmarking the payment of royalty.
4. That the Ld. AO/TPO/DRP erred in making various statements in their respective orders, based on conjectures, surmises, inferences and presumptions which are not in accordance with the facts of the case and is against legal principles.
5. That the Ld. AO/TPO/DRP erred in disregarding judicial pronouncements in India undertaking the TP adjustment.”
The learned authorized representative referred to the several grounds of appeal however his main grievance covered in ground No. 2 and 3 was with respect to the determination of the arms length price of international transaction of business support service at rupees Nil against the amount of transaction at Rs. 4,08,06,578/- and determination of arms length price of international transaction of Rs. 17361018/- at Rs. Nil and deciding the payment of royalty of Rs. 47,15,664/- against the international transaction of Rs. 42055227/-. This has resulted into the addition of Rs. 9,55,07,159/-. He submitted that in preceding as well as in subsequent years no adjustment has been made to the arms length price of the international transactions despite those transactions are Page | 4 Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) entered into by the assessee under similar circumstances. For this proposition he referred to the order passed by the learned transfer pricing officer under section 92CA (3) of the Act for assessment year 2012-13 passed on 14/1/2016, wherein all the above transaction of payment of royalty payment, of technical support fees and payment for services charges for business support services benchmarked by the assessee applying the transactional net margin method was accepted by him. Therefore, he submitted that when there is no change in the facts and circumstances of the case learned Assessing Officer/ Transfer Pricing Officer should have accepted the benchmarking methodology adopted by the assessee in subsequent years also. He further referred to the Assessment Order passed u/s 143(3) read with section 144C of the Act for Assessment Year 2011–12, wherein, the methodology of determination of arms length price adopted by the assessee was accepted by the ld Transfer Pricing Officer without drawing any adverse inferences and without proposing any adjustment. He further referred to the Assessment Order passed u/s 143(3) of the Income Tax Act for Assessment Year 2014-15, wherein, there was no reference made by the Learned Assessing Officer to the Ld. Transfer Pricing Officer for determination of Arms Length Price of the International Transactions though there were similar international transaction entered into in similar facts and circumstances of the case. He therefore submitted that in the past year as well as in the subsequent years all the international transactions of the assessee were accepted where assessee applied transactional net margin method on aggregate basis. He therefore submitted that only for this year the international transactions have been disturbed by the Learned Transfer Pricing Officer without any change in the facts and circumstances of the case. He further submitted that this year combined transaction approach followed by the assessee has been rejected by the Learned Transfer Pricing Officer without considering the decision of the Hon‟ble Jurisdictional High Court in case of Sony Ericsson.
Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) He further submitted that with respect to the provision of the business support services the assessee submitted a complete list of documents which are enlisted at page number 141 of the paper book which has not been considered by the learned transfer pricing officer as well as the ld DRP. He further referred to page Nos. 12 and 13 of the paper book wherein letter is placed dated 5th July 2017, where vide para number 7 the assessee has placed on record the additional evidences before the learned dispute resolution panel in the form of emails exchange between the assessee company and its associated enterprise in relation to availing of technical support services and business support services. He stated that despite the above evidences submitted before the Ld lower authorities they have not commented on any of those evidences which conclusively proves that the assessee has provided the services to its associated enterprises. He further submitted that as the transactions are closely linked to each other they are benchmarked together by the assessee following the transactional net margin method. This stand of the assessee is also supported by the decision of the Hon‟ble Delhi High Court. He further submitted that the learned transfer pricing officer has not challenged the applicability of most appropriate method as transactional net margin method for other international transactions except in case of business support services. He further submitted that the profit level indicator of the assessee is 17.97% whereas of the comparable companies have PLI of 4.09%. Therefore the net margins of the appellant is much higher than the comparable companies which clearly shows that the international transactions of the company are carried out at arm‟s length price. He further submitted that the CUP method has been adopted by the learned transfer pricing officer to benchmark intragroup services of business support services where the comparable information cannot be obtained. He further stated that in applying the CUP method the learned transfer pricing officer has not furnished any comparable data to determine the arms length price at nil.
Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) With respect to the payment of royalties, he submitted that the transaction of the payment of royalty is inextricably linked with the manufacturing activities and should be aggregated and benchmarked together with the other activities under the transactional net margin method. He further stated that the learned transfer pricing officer has calculated the arms length price of royalty at percentage of comparable is. He further stated that in case of comparable royalty calculations have been done as a percentage of total sales whereas in the case of the assessee royalty calculation is paid as a percentage of the specific sales in respect of which royalty is paid. He further stated that average rate of royalty paid by the comparable has been calculated considering all the six comparable companies disregarding the fact that three of such companies have not paid any royalty and therefore they should not have been included as a comparable. In the end, he submitted that the order passed by the Ld Transfer Pricing Officer, ld. Assessing Officer and Learned Dispute Resolution Panel are not in accordance with the law and disregarding the evidences submitted before them.
The Learned Departmental Representative vehemently supported the orders of the lower authorities. He vehemently contested the argument of the learned authorised representative that all the transactions must be aggregated and the transactional margin method should be adopted as the most appropriate method for benchmarking the international transactions. It is stated that the royalty transaction is not closely linked with the business support services as well as the provision of the technical support services by the assessee, therefore they cannot be aggregated. He further referred to paper book submitted by the assessee in the form of additional evidences and details filed before the learned dispute resolution panel. He further stated referring to page number 12 of the paper book that that assessee has not submitted the complete details is required for the provision of such services and availing of such services. He further stated that assessee has only provided the sample emails. He Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) therefore submitted that the complete details of the provision of the services have not been provided to the assessing officer, Transfer Pricing Officer/ Learned Dispute Resolution Panel. He further referred to page number 19 of the paper book and referred to the mail dated 09/01/2017 and submitted that such emails do not pertain to the Assessment Year 2013-14 but to the current year and therefore the provision of the details submitted by the assessee vied paper book volume No. 2 containing page No. 12-251 is not the evidence of the services received by the assessee. He therefore submitted that details submitted by the assessee is not the evidence of the services rendered by the associated enterprise of the international transactions. He further referred to the order of the learned transfer pricing officer wherein it has been specifically mentioned by him that if the assessee fails to submit the information called for in case of business support services fees then the arms length price of these international transaction would be treated as nil by applying the CUP method. According to him as the assessee has failed to furnish the complete details, learned transfer pricing officer did not have any other option but to follow that. He further referred to benchmarking of the payment of royalty and submitted that the assessee has paid royalty at the rate of 5% of the sales in India whereas the comparable companies have paid royalty @0.6% the percent of the sales. Regarding the aggregation of the transaction he submitted that the transaction by transaction approach is required to be needed for determination of the arms length price, as all these transactions are a separate class of transactions and therefore they needs to be separately analysed. He therefore submitted that there is no infirmity in the order of the learned transfer pricing officer.
We have carefully considered the rival contentions and perused the orders of the lower authorities. Assessee is engaged in the business of manufacturing and marketing of exhaust gas recirculation systems for automobile industries. During the year assessee entered into 10 types of Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) international transactions and benchmarked those transaction aggregating all of them together under the transactional net margin method (TNMM) method as most appropriate method taking the Profit Level Indicator (PLI) OP/Sales six comparables were taken. The PLI of the assessee was 17.9 % and PLI of the comparables was worked out at 4.09% and held that international transactions carried out by the assessee are at arm‟s length. The ld TPO accepted the 7 transactions and did not propose any adjustment. He benchmarked the payment of royalty transaction of Rs. 42055227/-, at Rs. 4715664/- and payment of business support income of Rs. 40806578/- on payment of technical support services of Rs. 17361018/- at Nil. While holding so the ld Transfer Pricing Officer adopted the „transaction by transaction‟ approach rejecting the „combined transaction approach‟ applied by the assessee. For holding so, he relied upon almost 20 judicial precedents. Therefore, he proceeded to benchmark the transaction related to business support services, payment for technical support fees and royalty payment separately. With respect to the business support services, he held that assessee has not furnished the contemporaneous documentary evidences to support that services have been received by the assessee. He held that merely having an agreement is not enough to determine the arm‟s length price of these transactions. He extensively relied upon the guidelines of OECD in that respect. He therefore, held that essential information should be available with respect to receipt of intra group services, the economic and commercial benefits derived by the recipient and the cost identification of those services. He held that on these basis only, it can be determined whether a comparable independent enterprises would have paid for those services in comparable circumstances. He held that taxpayer is not able to prove that he has actually received the services. He also stated that assessee is also required to prove the need for such services. He further held that Rule 10D of the income Tax Rules also support it. Therefore, he held that payment for business support fees and payment for technical Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) support fees does not satisfy all these criteria. With respect to the royalty he held that it is in nature of price reduction for the products sold to associated enterprise. He worked out that royalty paid by the assessee is 8% of the net export sales whereas, the comparable companies have paid royalty @0.63% and further in case of domestic sales assessee has paid royalty @5% whereas comparable companies have paid royalty @0.63%. Consequently, he held that assessee has paid excess royalty of Rs. 37339563/-. Therefore, he determined the ALP of business support services and technical support services at Nil and ALP of royalty payment at Rs. 4715664/- and thereby proposing an adjustment of Rs. 95507159/-. The above view were confirmed by the ld DRP. Before the ld DRP assessee submitted additional evidences vide letter dated 5th July 2017 which have been recorded by the DRP at page No. 3 of their direction, however, there is no finding that whether these evidences admitted and considered by the ld DRP. Further, the ld Authorised Representative has submitted that Hon'ble Delhi High Court has held in CIT Vs. Cushman and Wakefield (India) Pvt. Ltd in dated 23.05.2014 that it is the „commercial wisdom‟ of the assessee which should be respected. Therefore, respectfully following the decision of the Hon'ble Delhi High Court, we hold that the ld TPO should have verified and examined the aspect of benefit and need on the basis of commercial wisdom of the assessee while benchmarking the international transaction where ALP is determined at Nil. Further, with respect to the transaction by transaction approach Vs. Aggregation of the transaction for subsequent year as well as in the earlier year, the ld TPO has accepted the aggregation approach adopted by the assessee. It is not disputed that for AY 2011-12 and 2013-14, the ld TPO has accepted the aggregation approach. Therefore, following the principle of consistency, where there is no change in the facts and circumstances of the case for this year, the ld TPO should have followed the same approach. If for any reason, he wants to deviate from the same, he should also give a detailed reason why he is Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) deviating. In the order of the ld TPO, we do not find any such discussion. He has merely relied upon several judicial precedents for applying transaction by transaction approach for benchmarking these three services. However, on reading the order of the ld TPO where he has considered on page No. 15 and 16 of his order but surprisingly he has not considered para No 136 to 139 of the decision of the Hon'ble Delhi High Court in case of Sony Ericson Mobile Communication India Pvt. Ltd Vs. CIT 374 ITR 118. The Hon'ble High Court has held that the aggregation of transaction seems desirable if the nature of the transactions taken as a whole are so interrelated that it will be more reliable means of determining the arm‟s length transaction for the controlled transaction. It is further held that a „broad brush approach‟ cannot be advocated. Such decision is required to be based on scrutinized ascertainment and determination whether or not the aggregation or segregation of transaction would be appropriate and proper while applying transaction net margin method. Neither such efforts made by the ld AO nor could be seen such documentation placed by the assessee before TPO. From the decision of the Hon'ble Delhi High Court it is deciphered that this is fact based analysis and no set rules can be applied without analysis of the facts. Further, before the ld Assessing Officer assessee has submitted the copies of invoices pertaining to these two services and certain email communications. The assessee has also submitted a chart which is placed at page No. 210-212 of the paper book which shows need for the services and also the benefit translated therefrom. Further, during the course of proceedings before the ld TPO assessee has shown the copies of the email which are placed at page NO. 193 to 208 of the paper book. On reading of the email placed shows that certain services are received however same are only sample emails which are stated by the assessee as proof of receipt of the services. The emails are dated 16.08.2012, 13.06.2010, 02.05.2012, 07.05.2013, 14.06.2013. Some of the emails are not pertaining to the impugned assessment year and from these emails it is Borgwarner Emissions Systems India Pvt. Ltd Vs. ACIT (Assessment Year: 2013-14) for the assessee to show before the ld TPO that services have been received by the assessee. Furthermore, the additional evidences filed by the assessee before the ld DRP also contains certain emails which have not been considered by the lower authorities. These are also required to be considered. In view of these facts and in view of the history of determination of ALP by the ld AO in case of the assessee for earlier and subsequent years and in the interest of justice, it is necessary that the issue with respect to determination of the ALP of the international transaction of business support services and technical service fees are remitted back to the file of the ld Transfer Pricing Officer for determination of their ALP. The assessee is also directed to produce the relevant details with respect to rendition of services with credible and contemporaneous evidences for impugned Assessment Year and also to demonstrate how these transactions are required to be aggregated.
Further, with respect to the royalty payment of Rs. 42055227/- ALP of which determined by ld TPO of Rs. 4715664/-, we also remit the issue back to the file of the ld AO with a direction to the assessee to show how payment of royalty is inextricably linked with the manufacturing activities and why it ought to be aggregated and benchmarked together with other international transaction under transactional net margin method. Further, the ld TPO has considered the comparable without showing that whether in case of the comparables there was any payment of royalty and what was the basis. In the case of the assessee it is submitted that assessee has paid royalty in terms of the agreement where royalty was payable @5% of the net sales of licensed products in India and @8% of net sales of licensed products outside India. In case of comparables the ld TPO has taken the rate of the comparable @0.63% for both transaction. It is also the fact that assessee has stated that above royalty rate of 0.63% in case of comparables is an incorrect calculation without considering the landed costs of imported components. It is also contested that out of the six comparables there is no royalty payment in case of three comparables. In