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Income Tax Appellate Tribunal, DELHI I-2 BENCH, NEW DELHI
By way of this appeal, the Assessing Officer has challenged correctness of the order dated 24th February 2014 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2005-06.
Grievance raised by the appellant, by way of a question posed for adjudication by us, is as follows:
Whether learned CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs 1,77,81,000 made by the Assessing Officer on account of transfer pricing adjustment?
The assessee before us is an Indian company, in which 51% equity is held by a German company by the name of Globe Ground Deutschland GmbH and the remaining 49% equity is held by an Indian resident individual in the name of Radha Bhatia. The assessee is engaged in the business of providing ground and passenger handling services to airlines. The international transactions entered into by the assessee with its associated enterprises were Assessment year: 2005-06 Page 2 of 8 referred to the Transfer Pricing Officer for determination of arm’s length price. During the course of these proceedings, the TPO, inter alia, noticed that the assessee has made a payment of Rs 1,77,81,000 to its AE for “process and know how for ground handling services”. The TPO was of the view that the assessee and the AE has common ownership and control and, therefore, the irresistible conclusion is that “the assessee is a mere service provider to its overseas AE” and that “the risk and reward matrix in respect of a contract service provider is entirely different from an independent entrepreneur”. He probed the matter further and questioned the commercial justification for making this payment. He was of the view that there is no justification for making such a payment in an arm’s length situation. He thus proceeded to take the arm’s length price of the royalty and know how payment for process and know how for ground handling services as zero. His justification for this approach, as set out in the TPO’s order, was, inter alia, as follows:
6. In the present case, when the assessee company is performing functions of the contract service provider to the AE only, it is very difficult to understand why there are payments for intangibles like technical know-how royalty is paid to the associated enterprise. In this case the royalty is being provided by the associated enterprise to ensure that quality of service which will be rendered by the assessee company should match to the requirements of the associated enterprise so that it does not suffer any risk in enjoying a benefit In an arrangement, where the reward of services is enjoyed by the associated enterprise and similarly the fruits of intangibles viz. technical know-how royalty being plucked by the other party, the contract service provider cannot be loaded with the expanse of these items.
In the arm’s length circumstances, the independent entrepreneur before concluding any such agreement would like to calculate the benefits arising out of the use of intangibles. The contract service provider should be more concern about the markup on the cost of servicing rendered to another party. The following guidelines of OECD in respect of exploitation of intangibles are very useful in determination of price and benefits to the respective parties to the agreement of authorizing the use of intangibles.
6.14 "Arm's length pricing for intangible property must take into account for the purposes of comparability the perspective of both the transferor of the property and the transferee. From the perspective of the transferor, the arm's length principle would examine the pricing at which a comparable independent enterprise would be willing to transfer the property. From the perspective of the transferee, a comparable independent enterprise may or may not be prepared to pay such a price, depending on the value and usefulness of the intangible property to the transferee in its business. The transferee will generally be prepared to pay Assessment year: 2005-06 Page 3 of 8 this license fee if the benefit it reasonably expects to secure from the use of the intangibles is satisfactory having regard to other options realistically available. Given that the licensee will have to undertake investments or otherwise incur expenditures to use the license it has to be determined whether an independent enterprise would be prepared to pay a license fee of the given amount considering the expected benefits from the additional investments and other expenditures likely to be incurred.''
6.2 Similarly, in some circumstances the price of intangibles may stand included in price of goods either sold by the associated enterprise or purchased from the associated enterprise by the related party. In such circumstance associated enterprise may built in value of intangible in cost of goods transacted. These arrangements are recognized by OECD in following terms:
6.17 The compensation for the use of intangible property may be included in the price charged for the sale of goods when, for example, one enterprise sells unfinished products to another and at the same time, makes available its experience for further processing of these products. Whether it could be assumed that the transfer price for the goods includes a license charge and that, consequently, any additional payment for royalties would ordinarily have to be disallowed by the country of the buyer, would depend very much upon the circumstances of each deal and there would appear to be no general principle which can be applied except that there should be no double deduction for the provision of technology. The transfer price may be a package price, i.e., for the goods and for the intangible property, in which case, depending on the facts and circumstances, an additional payment for royalties may not need to be paid by the purchaser for being supplied with technical expertise. This type of package pricing may need to be disaggregated to calculate a separate arm's length royalty in countries that impose royalty withholding taxes."
6.3 In the present case where assessee company is rendering ground handling services to its related parties and the benefit of services is reaped by overseas entity, the payment of charges for royalty or technical know how do not confirm to arm's length principle. My this view further gets support from an admitted fact that in immediately preceding assessment year the assessee like this year had rendered identical services to its AE only but no technical know-how royalty was charged by the AE.
7. In view of the guidelines above and also facts and circumstances of this case the payment of royalty/technical know-how to the extent of Rs.1,77,81,000/- in an international transaction is treated to be a payments against services haying arm’s length value being nil. The Assessing Officer shall add this amount Assessment year: 2005-06 Page 4 of 8
to the taxable in case of the assessee company for A.Y 2005-06. No adverse inference is drawn in respect of other international transactions.
It was on this basis that the Assessing Officer made an addition of Rs 1,77,81,0000 to the income returned by the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) deleted the said adjustment and observed as follows:
6. Globe Ground India Pvt. Ltd. (GGIPL) was incorporated on 05/05/2000 as a joint venture company between Globe Ground Deutschland GmbH (GGDG) and Bhatia Family, the owners of Bird Group with the objective of providing airport ground handling services to Lufthansa Airline flights as self-handling operation at various airports in India. The company in the prior years was engaged in the business of providing ground handling services to the Lufthansa group entities only at various airports in India. During 2008-09, GGIPL was appointed through global bidding process as a third party ground handling agent at Bangalore International Airport for providing ground handling services to other airlines which include domestic, international and non-scheduled airlines apart from ground handling services to Lufthansa Airline flights. During 2009-10, GGIPL became a wholly-owned subsidiary of Bird Consultancy Services Pvt. Ltd by acquiring 51% equity shares held with GGDG.
Based on the analysis undertaken in the transfer pricing documentation maintained by the appellant, GGIPL's operating margin on operating cost was higher than the arithmetic mean of comparables' margin. Accordingly, the international transactions made between GGIPL and its AEs were considered by the appellant to be at arm's length.
The TPO in his order did not agree with the analysis undertaken by the appellant for transactions pertaining to payment of royalty/technical know-how fee to its AE. However, other international transactions pertaining to the provision of services, purchase of capital items, etc. were held to be at arm's length by the TPO. The TPO disallowed the payment of royalty/technical know- how fee by considering the ALP of the same to be Nil. Accordingly, the TPO has determined a transfer pricing adjustment of Rs.17,781,000/- in this case. The appellant has explained that the appellant has entered into a technical know-how and royalty agreement with its parent company - Globe Ground Deutschland GmbH for technical assistance, know-how and training in respect to the provision of ground-handling services in India. As regards the benefits for the appellant, it has been explained that through the technical know-how and royalty agreement, GGIPL got the access to the 'know how and processes' which includes all the information and knowledge possessed by GGDG in relation to following: Passenger Handling, Cargo Processes, Dangerous goods handling, Assessment year: 2005-06 Page 5 of 8
Operations & ramp equipment, Security (Security check processes - passenger & Security check processes - cargo). The appellant has also informed that in addition to the above, GGDG had provided training to the employees of GGIPL in respect to the methods of using 'process and know how' used for providing ground handling services. Airport ground-handling services are highly specialized services which require trained resources and know-how to perform the necessary functions at the airports. The appellant did not possess relevant technical skills and skilled manpower to carry out its business in India. Accordingly, the appellant entered into the technical know-how and royalty agreement with its AE to obtain necessary know-how along with training courses to employees of GGIPL. The appellant has argued that GGIPL would not have been in a position to render ground handling services to its AEs and to unrelated entities after GGIPL was allowed to render ground handling services to third party customers also for which GGIPL is currently providing ground handling services at Bangalore International Airport Limited ("BIAL"). The appellant has submitted that GGIPL has reaped the benefits of costs incurred in form of "royalty/technical know-how fee" payments, through income earned from both related and unrelated entities.
The appellant has informed that the appellant has earned a healthy profit margin of 38.36 percent on operating cost during the FY 2004-05 in spite of paying for the royalty / technical know-how fee. The appellant has further argued that in case the appellant had not availed process and know-how from its AEs, it would not have been in a position to bargain for higher rates for its services from the AE and the unrelated parties. The appellant has relied on the decision of the Hon’ble ITAT Delhi in the case of Abhishek Auto Industries Ltd vs DCIT, New Delhi (2010-TII-54-ITAT-DEL-TP), wherein the Hon’ble ITAT stated that: "The very existence of this business in AE segment depended upon the joint venture agreement which has been duly approved by the Government of India in accordance with law. In such circumstances, we are of the view that TPO and the CIT (Appeals) were not correct in disregarding this agreement without assigning any cogent reasons except challenging the commercial need for such arrangement which is in the domain of the businessman and not of the Revenue authorities." The appellant has also relied on the decision of Hon’ble Mumbai ITAT in the case of Dresser-Rand India Pvt Ltd vs. Additional Commissioner of Income, Tax Range 6(2), Mumbai (ITA No 8753/Mum/2010), wherein the Hon'ble Mumbai ITAT has held that the revenue authorities cannot question the commercial expediency of any expense incurred by the appellant. The appellant has also relied on the decision of the Hon'ble Delhi High Court in the case of Commissioner Income Tax Vs. EKL Appliances Limited (TS-206-HC- 2012) wherein it is held that royalty payment cannot be disallowed on account of Assessment year: 2005-06 Page 6 of 8 perpetual loss where the expenditure was proven to be incurred "wholly and exclusively" for the purpose of the business of the appellant.
Based on the discussion hereinabove, it is fair to conclude that there is no meaningful analysis/evidence provided by the TPO to hold that the entire royalty/technical know-how payment should be reduced to zero. The appellant has explained that the appellant has entered into a technical know-how and royalty agreement with its parent company -Globe Ground Deutschland GmbH for technical assistance, know-how and training for the provision of ground- handling services in India. Airport ground-handling services are highly specialized services which require trained human resources and know-how to perform the necessary functions at the airports and the appellant did not possess relevant technical skills and skilled manpower to carry out its business in India. As regards the benefits for the appellant, it has been explained that through the technical know-how and royalty agreement, GGIPL got the access to the "know how and processes' which includes all the information and knowledge possessed by the foreign AE in relation to Passenger Handling, Cargo Processes, Dangerous goods handling, Operations & ramp equipment, Security (Security check processes -passenger & Security check processes - cargo). The appellant has also informed that in addition to the above, the foreign AE had provided training to the employees of GGIPL in respect to methods of using 'process and know how' used for providing ground handling services. The appellant has been able to demonstrate that the appellant has acquired the access to the 'know how and processes' which includes all the information and knowledge possessed by GGDG in lieu of the payment of royalty and technical know-how and no independent company will provide such services free of charge. The above benefits derived by the appellant are critical to the smooth functioning of its business. Considering the facts of the case, I am of the view that the action of the TPO in determining the ALP of royalty/technical know-how fee paid by the appellant at Nil is incorrect and unsustainable. Accordingly the AO/TPO is directed to delete the addition of Rs.1,77,81,000/- on account of Transfer Pricing Adjustment in respect to the payment of royalty/technical know-how fee. This ground of appeal is allowed.
5. Aggrieved by the relief so granted by the CIT(A), the Assessing Officer is in appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
We find that the TPO has not stated as to according to which method, the arm’s length price of the services rendered by the German AE to the assessee company is NIL. Assessment year: 2005-06 Page 7 of 8 During the course of hearing, it was suggested that this ALP was on CUP basis as no person, in an arm’s length situation, would pay for these services. In any case, that is the only metjod based on which such a conclusion can be justified. On this issue, however, we find that a coordinate bench of this Tribunal, in the case of AWB India Pvt Ltd Vs DCIT [(2014) 152 ITD 770 (Del)], has, inter alia, observed as follows:
One of the very basic pre condition for use of CUP method is availability of the price of the same product and service in uncontrolled conditions. It is on this basis that ALP of the product or service can be ascertained. It cannot be a hypothetical or imaginary value but a real value on which similar transactions have taken place. Coming to the facts of this case, the application of CUP is dependent on the market value of the arrangements under which the present payments have been made. Unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant services as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. His perception that these services are worthless is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon’ble jurisdictional High Court in the case of CIT Vs EKL Appliances Limited (345 ITR 241), “Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same”.
The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO’s case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions.
Clearly, therefore, it is not for the TPO to decide on commercial expedience of the availing the technical know how. All that he has to ascertain is as to what is the arm’s length price of the technical know how in question. Even if it is assumed that it is taken as NIL value under the CUP method, such a course, for the reasons set out above- which are equally applicable in the present context, has to be held as devoid of legally sustainable basis. No Assessment year: 2005-06 Page 8 of 8 other method, under which such an arm’s length determination at NIL value can be arrived at, has been pointed out to us. We are unable to see any basis for determination of arm’s length price in question.
In any case, we have carefully perused the technical know how and royalty agreement dated 1st April 2004 between the assessee company and GlobeGround Deutschland GmbH and we are unable to persuade ourselves to agree with the learned TPO that the technical assistance and services received by the assessee were worthless or not required in an arm’s length situation. We have also noted that the assessee, in the subsequent years, is rendering these services to a large number of airlines- international, domestic as also air charter operators, and, as such, it cannot even be said that know-how was only for the benefit of the AEs. The services actually rendered by the assessee in the course of its business were not entirely because of its German AE. The very foundation of the stand of the TPO is thus devoid of not only legally sustainable basis but also factually incorrect assumptions.
In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at in well reasoned order of the CIT(A) and decline to interfere in the matter.
In the result, the appeal is dismissed. Pronounced in the open court today on the 23rd 11. day of August, 2018.