BMW INDIA PRIVATE LTD.,GURGAON vs. DCIT, GURGAON

First issue raised in this appeal is against the transfer pricing addition of Rs.85,83,61,733/- made by the AO on account of Advertisement, Marketing and Promotion (AMP) expenses. Succinctly, the facts of the case are that the assessee is a BMW Group company with 99.99% of its capital being owned by BMW Holdings B.V. Netherland, and balance by BMW AG, Munich, Germany. BMW Group is engaged in manufacturing of automobile and motorcycles. The assessee, BMW India Private Limited, filed its return declaring certain international transactions. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price (ALP) of the reported international transactions. The TPO observed during the course of proceedings that the assessee company was selling vehicles in India both by means of distribution of BMW Completely build units (CBU’s) and also after assembly/manufacture of completely knocked down (CKD) kits imported from its Associated enterprises (AEs). He found that the assessee operated an assembly facility in Chennai and the assembly of CKD kits was done there. It was further observed that for marketing and selling the cars, the assessee was having a network of 15 outlets and also a dedicated team for undertaking the marketing and selling functions. Such team was responsible for customizing and executing the marketing and advertising strategy for BMW India based on the Indian scenario within the overall standards and parameters prescribed by the BMW Group. The TPO took into consideration an agreement dated 1.1.2006 between the parent company and the assessee (hereinafter also called `the Agreement’) which spelt out the duties and responsibilities of the assessee with regard to marketing and promotion of the products of the parent company. Thereafter, the TPO noticed from the assessee’s Transfer pricing study report that BMW India was supposed to ensure that it followed the global guidelines provided by BMW Group in terms of the usage of BMW banners, specifications of release of print advertisement for font size and page layout etc. Considering the above facts and the assessee’s exorbitant ratio of AMP expenses/Sales, the TPO observed that the incurring of AMP expenses 3 was an international transactions covered under Section 92B(1) read with Clause (v) of section 92F. After dealing with various objections raised on behalf of the assessee, he determined the ALP of AMP expenses with a mark-up of 11.105 % at Rs. 85,83,61,733/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). That is how, the transfer pricing addition of Rs. 85.83 crore came to be made in the final assessment order, against which the assessee has come up in appeal before the Tribunal.

We have heard the rival submissions and perused the relevant material on record. The learned Sr. counsel submitted at the outset that there is no international transaction of AMP expenses in the instant case and as such there can be no question of determining its ALP. For bolstering this proposition, he relied on the judgment of Hon’ble Delhi High Court in Maruti Suzuki India Ltd vs. CIT & Another (2016) 381 ITR 117 (Del). The learned Sr. AR submitted that the TPO considered only the higher amount of expenditure incurred by the assessee vis-a-vis other comparable companies for drawing an adverse inference of there being an international transaction of brand promotion by the assessee for its AE. This was countered by the ld. DR, who strongly refuted the assertion of there being no international transaction of AMP expenses and the consequential determination of its ALP.

We have gone through the relevant material on record and are not convinced with the submission advanced on behalf of the assessee that the treatment of AMP expense as an international transaction by the TPO is based only on excessive expenditure. It is found that the TPO has referred to other materials to support his conclusion of the existence of an international transaction of AMP expenses. He referred to the agreement dated 1.1.2006 between the assessee and BMW Germany and also reproduced relevant clauses of the same on page 13 of his order. Clause 2.2 of the Agreement deciphers the responsibility of the assessee in the Contract Territory Contract (India). Relevant parts of the clause are as under:-

On going through clause 2.2 of the Agreement, it becomes palpable that the assessee represented the interest of BMW AG in India and is responsible for the sales promotion in India. Later part of the clause stipulates that the assessee undertook certain functions in India, which include “performance of an adequate advertisement and sales promotion as well as public and media relations.” Clause 3 of the Agreement refers to the responsibilities of the assessee for advertising. It provides in no unambiguous terms that the assessee will meet its responsibility for the promotion of sales …. and undertook for applying its best efforts and adequate resources towards effective sales promotion and advertising Clause 3.6 of the Agreement stipulates that the assessee “will establish and supervise ….. an efficient BMW distribution network for sales …. according to the recommendations of BMW. A close scrutiny of the above clauses of the Agreement makes it abundantly clear that the assessee was assigned and it accepted the duty to perform advertisement and sales promotion and also assumed responsibility for deploying adequate resources towards effective sales promotion and advertisement of the goods in India. It is not a case where the assessee on its own volition took up such a huge advertisement, marketing and promotion of the brand owned by its AE. In fact, it was the `responsibility’ of the assessee and it `undertook’ the function of `performance of an adequate advertisement and sales promotion’ pursuant to the Agreement dated 1.1.2006 with BMW AG. Thus it is apparent that the assessee was under a binding obligation to advertise and promote the brand of its AE.

The assessee’s Transfer pricing study report, as referred on page 13 and 14 of the TPO’s order, also mentions that “BMW India ensures that it follows the global guidelines provided by BMW Group in terms of the usages of BMW banners, specifications for release of print advertisement in terms of font size, page layout etc.’ It is thus clear that not only the Agreement between the assessee and BMW AG but also the assessee’s own acknowledgment in the TP study report are flawless pointers to the fact that it carried out AMP functions as a duty assigned by its AE, to be discharged strictly in accordance with the global guidelines provided by the BMW Group.

There is another interesting aspect of the matter. One of the reported international transactions is “Reimbursement of expenses (Amount received)” amounting to Rs. 67,21,54,60/-. On being pointed out to give the nature of such Reimbursement of expenses received, the learned AR took us through page 47 of the paper book, which is a part of the assessee’s Transfer Pricing study report, reading as under:-

It is evident from the above extract of the Transfer Pricing Study report that the assessee received reimbursement of certain marketing and promotion expenses incurred by BMW India on behalf of BMW Group. A further detail of such reimbursements has been given in the Tax Audit Report of the assessee, whose relevant part is as under:-

The learned AR stated that the assessee received reimbursement of marketing and promotion expenses to the tune of Rs.3,33,945/- from its AE. This shows that the asessee’s holding company reimbursed AMP expenses only to the tune of Rs. 3.33 lac as against enormous amount spent by the assessee for promotion of the brand owned by its AE pursuant to the agreement dated 1.1.2006. Factum of the existence of an Agreement obliging the assessee to undertake advertisement and brand promotion in accordance with the global guidelines and the AE reimbursing AMP expenses, albeit, to a very nominal extent, goes a long way to establish the existence of arrangement between the assessee and its AE for promoting BMW brand in India.

Reliance of the learned Sr. AR on the judgment in the case of Maruti Suzuki (Supra) to fortify his point of view of there being no international transaction of AMP expenses, is misconceived. In that case, the existence of international transaction was negatived by the Hon’ble Delhi High Court on the ground that the Revenue could not demonstrate any international transactions of ALP expenses except for showing higher amount of AMP expenses incurred by that assessee vis- à-vis other independent parties. Adverting to the facts of the instant case, we find that apart from such higher AMP expenses, the TPO has elaborately referred to the relevant clauses of the Agreement between the assessee and its AE along with the TP Study report, showing the responsibility of the assessee to perform “adequate advertisement and sales promotion” in accordance with the global guidelines of the BMW Group for the use of BMW brand and further the AE also acknowledging such service of the assessee but reimbursing a minuscule part of expenses incurred by the assessee on advertisement marketing and promotion. It is further relevant to note that the judgment in the case of Maruti Suzuki (Supra) is based on a manufacturing company performing advertisement and promotion. In contrast, the assessee is engaged not only in the sale of manufactured goods but also the traded goods. Profit and loss accounts of the assessee shows Sale of manufactured goods at Rs. 624.66/- crore and those of traded goods of Rs.611.87 crore. Thus, it is manifest that the volume of assessee’s business from trading and manufacturing is almost equal and it is not a case of manufacture alone as was there in the case of Maruti Suzuki (Supra). It is, ergo, vivid that the ratio laid down in Maruti Suzuki (Supra) is not applicable due to differentiation in the facts of the extant case. 11

It is further relevant to note that the Tribunal in assessee’s own case for immediately preceding assessment year, namely, 2009-10 has decided such issue against the assessee vide its order dated 21.10.2014 in ITA No. 385/Del/2014. It is also worthwhile to mention the learned AR’s contention that the Tribunal for the assessment year 2008-09 decided such issue in assessee’s favour by its order dated 16.8.2013. We find from the Tribunal order for the later A.Y. 2009-10, which was also decided at a later point of time, that the Tribunal took a conscious decision of the existence of an international transaction of AMP expenses requiring determination of ALP, after duly considering its order passed for the A.Y. 2008-09. Though the tribunal decided this issue in favour of the assessee for the A.Y. 2008-09, it was candidly admitted by the ld. AR that, on an appeal preferred by the Revenue against the tribunal order for such earlier year, a substantial question of law has been admitted by the Hon’ble High Court. In view of the foregoing discussion, we reject the assessee’s contention and hold that the authorities below were justified in treating AMP as an international transaction. 12

Next comes the question of determination of ALP of the international transaction of AMP expenses. It is seen that the TPO applied bright line test to find out the value of international transaction and then determined the ALP of AMP expenses. The Hon’ble Delhi High Court in Sony Ericson Mobile Communications (India)Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del) and other judgments has held that bright line test cannot be applied for determining the ALP of AMP expenses. The Hon’ble High Court in Sony Ericson Mobile Communications (supra) has restored the matter of determination of its ALP for a fresh determination in the light of guidelines laid down in such a case. It considered the distribution and the brand promotion activities as inter- connected transactions and harped on their aggregation. Crux of the relevant observations of the Hon’ble High Court, which is crucial for our purpose, can be summarized as under :-

With the foregoing understanding of the ratio decidendi of the judgment of the Hon’ble Delhi High Court in the case of Sony Ericsson (supra), which is probably the only judgment that has laid down the mechanism for determining the ALP of AMP expenses in an elaborate manner, let us examine the facts of the case. The assessee applied TNMM as the most appropriate method. Since the profit margin declared by the assessee was favourably comparable with the average margin of the comparables, the assessee claimed that no adjustment should be made on account of AMP expenses because such expenses stood subsumed in the overall operating profit.

We are unable to countenance such a point of view of the assessee for deletion of the addition towards AMP expenses on the plain logic of the assessee’s profit margin being favourable with that of comparables. This is a fallacious argument. It is pertinent to note that the TPO examined and got satisfied with the assessee’s profit margin vis-à-vis the comparables only qua the international transactions of manufacturing/distribution functions. He separately determined the ALP of AMP expenses, albeit, without examining the AMP functions carried out by the assessee and the comparables. Manner of determination of the ALP of the distribution activity and AMP activity has been set out by the Hon’ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables. If probable comparables having performed both the functions are not available, then to determine the ALP of AMP expenses in a segregated manner. As such, it becomes immensely important to separately examine the distribution and AMP functions undertaken by the assessee as well as probable comparables. It is vital to highlight the difference between AMP expenses and AMP functions. Whereas AMP functions are the means by which AMP activity is performed, AMP expenses is the amount spent on the performance of such means (functions). To put it simply, an examination of AMP functions carried out by the assessee and the probable comparables is sine qua non in the process of determination of the ALP of the international transaction of AMP spend, either in a segregate or an aggregate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, being two separate but connected international transactions, for the purposes of determination of the ALP of both these international transactions in a combined manner. The argument of the assessee that since the profit margin of the comparables is much less than the assessee and hence no separate addition should be made for AMP functions, if taken to a logical conclusion, will make the AMP spend as a 17 non-international transaction, which, in our considered opinion, is not appropriate in the given facts. Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assessee under such a transaction need to be compared with similar functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the contention of the assessee that the addition on account transfer pricing adjustment of AMP expenses be deleted without any examination of the AMP functions carried out by the assessee as well as comparables, this will amount to snatching the tag of international transaction from AMP expenses, which admittedly exists in facts and circumstances of the present case. What Their Lordships in Sony Ericsson (supra) have held is that the distribution activity and AMP expenses are two separate but related international transactions. It is only for the purposes of determining their ALP that these two should be aggregated. The process of such an 18 aggregation does not take away the separate character of the AMP expenses as an international transaction. An analysis and examination of the manufacture/distribution and AMP functions carried out by the assessee must be necessarily done in the first instance, which should be then compared with similar functions performed by some comparables. If the manufacture/distribution and AMP functions performed by the assessee turn out to be different from those performed by probable comparables, then, a suitable adjustment should be made to the profits of the comparable so as to counterbalance the effect of such differences. If however differences exist in such functions, but no adjustment can be made, then, such probable comparable should be dropped from the list of comparables. If, in doing this exercise, there remains no company doing comparable manufacture/distribution and AMP functions, then, both the international transactions are required to be segregated and then examined on individual basis by finding out probable comparables doing such separate functions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with the AMP 19 functions performed by a probable comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP of such a transaction. If the AMP functions performed by the two entities are found to be different, then adjustment is required to be made in the case of a probable comparable, so as to make it uniform with the assessee. The assessee may have possibly done, say, four different AMP functions as against the probable comparable having done, say, only three. In such a scenario, again the adjustment will be warranted. In another situation, the AMP functions performed by the assessee and probable comparable may be similar but with varying standards, which will also call for an adjustment. Crux of the matter is that the AMP functions performed by the assessee must be similar to those done by the comparables, in the same manner as such functions are compared in any other international transaction. However, in computing ALP of AMP spend, the adjustment or set off, if any, available from the distribution function, should be made. Essence of the judgment in the case of Sony Ericson Mobile (supra) is that the two international transactions of Distribution and AMP should be examined 20 on the touchstone of transfer pricing provisions, but on an aggregate basis. Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of manufacture/distribution and AMP carried out by the assessee with the comparables, so that surplus from the manufacture/distribution activity could be adjusted against the deficit, if any, in the AMP activity. The Hon’ble High Court has no where laid down that the AMP functions performed by the assessee should not be compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the ld. AR urging for not treating AMP as a separate function, which is apparent from the extraction from para 165 of the judgment : `On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. There are inherent flaws in the said argument’. It held vide para 165 of the judgment that : `An external comparable should perform similar AMP functions.’ Thus it is manifest that comparison of AMP functions is vital which cannot be dispensed with. The alternative prescription of the 21 judgment is that if ALP of both the transactions of Distribution and AMP cannot be determined in a combined manner, then the ALP of AMP functions should be separately done. The stand of the assessee urging the consideration of profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view amounts to treating AMP spend as a non-international transaction, which is patently incapable of acceptance.

We summarize the legal position from the judgment in Sony Ericsson (supra) that the distribution and AMP functions are two separate international activities, which need to be compared with uncontrolled transactions. Because of their inter-twinning, it is only for the purposes of determining their ALP that both these transactions can be aggregated in first instance, so that the surplus from one could be adjusted against the deficit from the other in an overall approach. It does not mean that because of aggregation, the AMP expense transaction sheds its character of a separate international transaction and hence the AMP functions should not be matched with the AMP functions carried out by probable comparables. If suitable comparables can be found having performed both distribution and AMP functions, then, their ALP should be determined on aggregate basis. If, however, there is some difference in the distribution or AMP functions performed by the assessee vis-à-vis the probable comparables, then an attempt should first be made to iron out such difference by making a suitable adjustment to the profit margin of comparables. If such an adjustment is not possible, then such probable comparable should be eliminated. If, by making a comparative analysis of the distribution and AMP functions jointly, there remains no comparable case performing such distribution and AMP functions, then, the international transaction of AMP should be segregated and their ALP be determined separately by applying a suitable method. However, in so determining the ALP of such an international transaction of AMP expenses on separate basis, a proper set off, if any, available from the distribution activity, should be allowed.

Adverting to the facts of the instant case, we find that the assessee did not separately report the international transaction of AMP expenses. Even under the transfer pricing analysis done by it on entity level, there is no identification of AMP functions, what to talk of comparing such functions with the other comparables in a combined or separate approach. The TPO treated the AMP spend as a separate international transaction. He segregated routine AMP expenses incurred by the assessee for his business from the non-routine AMP expenses by treating such non-routine AMP expenses leading to the creation of marketing intangible for its AE. Then he applied a mark-up of 11.05% to determine the ALP of this transaction. There is no attempt to find out the mark-up of comparables by analyzing the AMP functions carried out by the assessee vis-à-vis the comparables. To put it straight, neither the assessee nor the TPO have followed the prescription of the judgment in the case of Sony Ericsson (supra) for benchmarking.

Further, we note that no detail of the AMP functions performed by the assessee is available on record. Similarly, there is no reference in the order of the TPO to any AMP functions performed by comparables. In fact, no such analysis or comparison has been undertaken by the TPO. The assessee has also failed to draw our attention towards any material divulging the AMP functions performed by the assessee as well as comparables. As such, it is not possible to determine the ALP of AMP expenses at our end, either in a combined or a separate approach.

Since the orders of the authorities below are not in conformity with the ratio laid down in Sony Ericsson (supra) as discussed above and further necessary details for doing this exercise at our end are also not available, we set aside the impugned order and send the matter back to the file of the TPO/AO for determining the ALP of the international transaction of AMP spend afresh in accordance with the manner laid down by the Hon’ble High Court in Sony Ericson Mobile (supra).

The next assail in this appeal is to the transfer pricing addition of Rs.2,20,31,561 from the international transaction of `Receipt of I.T. Supports Services’. The TPO observed that the assessee benchmarked this international transaction by clubbing it with the general assembly and distribution functions under the combined TNMM approach. Such a course of action adopted by the assessee was rejected by the TPO, who held that the same was required to be benchmarked separately. He held that the Comparable uncontrolled price (CUP) method should be applied as the most appropriate method for benchmarking the international transaction of `Receipt of I.T. Support Services’. After considering the assessee’s submissions and the relevant material on record, the TPO came to hold that there was no evidence of the assessee having received services from its AE. Even if some sort of services were provided, those were duplicate in nature which did not confer any benefit to the assessee. The TPO, therefore, computed nil ALP of the international transaction. This led to the transfer pricing adjustment of Rs. 2.20 crore and odd. The assessee remained unsuccessful before the DRP. That is how, the AO made addition for such a sum in his final assessment order. The assessee is aggrieved against the addition.

We have heard the rival submissions and perused the relevant material on record. The TPO has made out a case that the assessee did not receive any services or, at the most, such services were duplicate in nature. We first need to examine and evaluate this aspect. Page 180 of the paper book is the assessee’s letter dated 21.1.2014 to the Transfer Pricing Officer. Annexure 1 to this letter on page 181 gives Description of Process closter [Operations (IT Infra); Wholesale Integration (Overall); Ordering (New vehicles); Tech. Info. Mgmt (services)]; Service description [WIT SAP Licenses; SAP Licences; Microsoft Enterprise Agreement; Compute; Corporate Services; WIT 3rd Level support; IVS-R 2nd Lvel Support; WTT Maintenance; and Hottline and hardware service contract extension etc.] and the Basis of allocation [Retail volume; Fixed across territories; Consumption; Market size; Order volume; Approved and implemented changed requests and Retail volume (Budget)]. The learned AR contended that BMW Group incurred I.T. expenses on centralized basis, which were allocated to various entities on certain basis. Page 198 of the paper book is assessee’s another letter dated 17.1.2013 addressed to the TPO annexing therewith copies of sample invoices raised by the AE and a copy of General Services Level Agreement. The assessee also furnished copies of I.T. 27 requests/call logs raised by BMW India employees on sample basis. There is one more letter dated 8.7.2013 on page 445 of the paper book as per which the assessee furnished to the TPO certain details of the services received from its AE. This letter provides that BMW Group supports the assessee by providing online troubleshooting services for its various hardware/software related problems and helps maintaining the IT infrastructure. The assessee stated that the assessee availed the services of Active Directory Operations; Desktop & Office Service (e- client and g-client); Email services; Group Importer System Operations; Provision/operation of a SAP system; Internet Access; Internal Secure Access System; and LAN Management. The assessee also attached a diagram depicting an overall arrangement of the process flow/manner in which provision of I.T. support was structured within the Group. The TPO has simply brushed aside these details furnished before him through the above letters and stuck to his stand of receipt of no services or duplication of services. Obviously these specific I.T. services provided to the assessee do not fall in the category of shareholder services as has been alternatively held by the TPO. There is still one 28 more letter dated 7.10.2013 on page 266 of the paper book as per which the assessee furnished to the TPO working of cost allocation in case of I.T. Support Services. It transpires from this letter that there are two kinds of payments made by the assessee to its AE for receiving IT Support services. First are the services wherein no internal value-add was undertaken, such as, purchase handling for external software. These were charged on cost to cost basis. Second are the services requiring value addition, on which a mark-up of 5% was charged on services requiring value addition.

Two things are discernible from the above letters written by the assessee to the TPO giving nature of I.T. Support services. First is that the assessee did receive I.T. Support Services from its AE and the second is that it is not reimbursement alone inasmuch as in some cases, the assessee was required to pay cost plus mark-up of 5% . Under such circumstances, the view point of the TPO for not having received any services etc. is belied.

This brings us to the next aspect of determination of the ALP of the international transaction of Receipt on I.T. Support Services. It is seen that the assessee clubbed the receipt of I.T. Support Services with the purchase transactions and processed them in a combined manner. No separate benchmarking of the international transaction of Receipt of I.T. Support services was done. The TPO applied the CUP method for benchmarking intra group services and held that in the absence of receipt of any services etc., the ALP was nil.

The ld. Sr. AR reiterated the assessee’s stand taken in the T.P. documentation for benchmarking the `Receipt of I.T. Support Services’ with other international transactions of Purchase etc. on a consolidated basis under the TNMM. We do not approve the contention advanced on behalf of the assessee for such aggregation. Our view is fortified by the judgment of the Hon’ble jurisdictional High Court in Knorr Bremse India Pvt Ltd vs. ACIT 2016 380 ITR 307 (P&H). In that case, the Hon’ble High Court has identified three situations in which more than one transaction can be taken as one composite international transaction to be processed jointly, viz., in case of a package deal where each item is not separately valued but all are given a composite price; or where a number of transaction 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). A caveat has been added that it will be on the assessee to prove that although each is priced separately, but they are provided under one composite agreement; and each component may be priced differently also, but it will have to be shown that they are inextricably linked that one cannot survive without other. Their Lordships expressly held that merely because purchase of goods and acceptance of services lead to manufacture of final product, it does not follow that they are dependent transactions. It is neither the case of the assessee nor any material has been brought on record to demonstrate that any of the three tests laid down in the case of Knorr Bremse (supra) for aggregation, satisfies in the instant case. The Hon’ble jurisdictional High Court further went on to hold that the TNMM may establish the aggregate price paid for some independent international transactions to be at ALP. But it would show skewed picture. There may be more 31 margin from one transaction to set off against the other, but that does not mean that the other transactions should be automatically presumed at ALP. The Hon’ble High Court did not approve the approach of applying a combined TNMM on entity level taking within its sweep two or more independent international transactions. Their Lordships held that : `The TNM Method may establish the aggregate price paid for the goods and services received under independent transactions to be an arm’s length price. This, however, would give a skewed picture. One of these independent transactions may be at a bargain and the pricing, therefore, is not objected to by the department. This bargain may be for a variety of reasons and in a variety of circumstances unconnected however to the other transactions. The value of the other transactions, on the other hand, may be overestimated and would not be at the arm’s length price. In that event, for the purpose of the Act, the price of the second transaction cannot possibly be taken to be the arm’s length price for it was not the arm’s length price. It does not become the arm’s length price merely because the bargain struck with respect to the first transaction balanced the inflated price of the second although the two transactions 32 were independent of each other. The two transactions are different and, therefore, the arm’s length price of each of them must be determined separately.’ Respectfully following the precedent, we hold that the contention of the assessee for aggregation is bereft of any force. A fortiori, receipt of I.T. Support Services is a separate international transaction, whose ALP is required to be separately determined.

Now we espouse the next contention of the ld. AR that the TPO applied the CUP method for determining the ALP of the international transaction of `Receipt of IT Support Services’ without citing any comparable uncontrolled case. It was stated that that if no comparable instance has been taken up by the TPO under the CUP method, then resort to the TNMM on aggregate basis should be made. For this proposition, he relied on certain Tribunal orders in which aggregation of other international transactions with intra-group services has been approved. The learned AR then relied on the judgment dated 11th July, 2016 of Hon’ble Bombay High Court in CIT vs. Kodak India Pvt. Ltd (I.T.A. No. 15 of 2014), judgment dated 23rd January, 2017 (ITA No. 1306/2014) of the Hon’ble Bombay High Court in CIT vs. Lever India Exports Ltd. and the judgment dated 23.12.2016 of the Hon’ble Telangana & Andhra Pradesh High Court in DCIT vs. R.A.K. Ceremics India Pvt. Ltd. for contending that the transfer pricing addition on this score be deleted. This argument was countered by the ld. DR by relying on the judgment of the Hon’ble jurisdictional High Court in Knorr Bremse (supra) and CIT VS. Cushman Wakefield India (P) Ltd. (2014) 367 ITR 730 (Delhi) read along with (2015) 277 CTR 368 (Del).

We have gone through the facts of the present case in the light of the judgments cited by both the sides. In our considered opinion, the reliance of the ld. AR on the decisions in his support, is not appropriate. In CIT vs. Kodak India Pvt. Ltd (Bom) (supra), the assessee sold its `Imaging business’ to an Indian buyer, who was a subsidiary of a USA company. The TPO applied the provisions of section 92B(2) and held that even if it was a transaction between two Indian companies, it will still be an international transaction. The Tribunal held that there was no international transaction. Even on merits, it was held that the TPO determined the ALP by a method not prescribed u/s 92C and hence no addition was called for. When the matter came up before the Hon’ble High Court, it was noticed that the ALP was determined by the TPO without adopting any of the methods under Section 92C of the Act. It was further noticed that the Tribunal for the succeeding year also returned similar finding that the method adopted by the TPO was not one of the prescribed methods and hence declined to restore the issue of redetermination of ALP. The view taken by the Tribunal for such later year was accepted by the Revenue and no further appeal was filed. In view of the fact that the Revenue accepted the order of the Tribunal for the succeeding year, the Hon’ble High Court refused to admit substantial questions of law raised by the Revenue for the year before it. We do not see as to how this judgment is of any relevance to the facts of the instant case. We are confronted with a situation in which the TPO adopted the CUP method, which is one of the prescribed methods. It is not the case of the assessee that similar issue decided against the Revenue in any of the earlier or later years has been accepted by it.

Next judgment is in CIT vs. Lever India Exports Ltd. (supra). In that case, the assessee reimbursed 20% of the advertisement expenses incurred by its AE in respect of the new products. TNMM was applied for the export activity and advertisement expenses. The TPO held that the transactions between the parties were on principal to principal basis and hence no reimbursement of advertisement expenses could be allowed. Consequently, he determined nil ALP and disallowed the advertisement expenditure. When the matter came up before the Hon’ble Bombay High Court, it was observed that the TPO’s jurisdiction was only to determine the ALP of the international transaction and not to consider whether or not the expenditure passed the test of Section 37 of the Act. In this case it was “found both by the CIT(A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent-assessee is challenged by the TPO. Therefore, the ad- hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained.’ When we peruse the facts of the instant case in juxtaposition to the case cited, it turns out that the TPO has not made 36 any ad hoc determination of the ALP. Rather, he admittedly applied the CUP method, which is one of the prescribed methods under section 92C of the Act.

In the case of R.A.K. Ceremics India Pvt. Ltd. (supra), the assessee paid royalty @ 3%, which stood reduced by the TPO to 2%. The Hon’ble High Court held that no substantial question of law arose from the Tribunal order since there was neither any basis nor some comparable instance for reducing the rate of royalty to 2%. Here again we find that this judgment is of no assistance as the TPO did not determine the ALP of the international transaction of `Receipt of I.T. Support Services’ in an ad hoc manner. Though he applied the CUP method but came to hold that no services were received by the assessee from its AE or at the most the services received, if any, were duplicate in nature. This is not a case in which the TPO applied CUP but could not find any comparable instance. We are concerned with a situation in which the matter did not reach up to the stage of finding a comparable uncontrolled transaction because the TPO stopped the matter at an early stage itself by finding that no services etc. were availed.

The ld. DR relied on the decision in the case of Cushman Wakefield India (P) Ltd. (supra) to contend that the ALP of the international transaction of `Receipt of I.T. Support services’ should be determined afresh notwithstanding the fact that the TPO applied CUP method and determined nil ALP without referring to any comparable uncontrolled transaction. In that case, the assessee claimed to have received intra group services. The TPO held that no services were received or were duplicate in nature. When the matter came up for consideration before the Hon’ble High Court, it was held that the jurisdictions of AO u/s 37 of the Act and of TPO u/s 92CA, are distinct. TPO determines whether stated transaction value represents ALP or not (including whether ALP is nil), while AO makes decision as to validity of deduction under Section 37. In the ultimate analysis, the Hon’ble High Court remitted the matter for fresh adjudication in accordance with its directions and did not delete the addition.

At this juncture, it is pertinent to take note of the judgment of the Hon’ble jurisdictional High Court in Knorr-Bremse (supra) in which almost similar facts were considered. Similar to the case under consideration, the assessee in that case also availed and paid for professional consultancy services; support services; SAP consultancy charges; SAP licence fees and software. The assessee aggregated the transactions of intra-group services and manufacturing and distribution and demonstrated all of them at ALP by applying TNMM on entity level. The TPO segregated intra-group services and processed such transactions under the CUP method and came to hold that since no tangible benefit was received by the assessee etc., it could not have made any payment on account of these services. The ALP of such services was determined at Nil. The Tribunal rejected the application of the TNMM in respect of intra group services transactions and upheld the TPO’s adoption of the CUP Method in respect thereof. Eventually, it was held that the TPO rightly adopted Nil value for benchmarking the arm's length price in respect of these services. The Hon’ble High Court did not approve the `benefit test’ as applied. It held that merely because 39 an assessee does not profit from the use of the goods or services it does not follow that they were not sold at an arm's length price. The Hon’ble High Court took into consideration the decision rendered in the case of Cushman and Wakefield (supra) and applied by reproducing para no. 35 from it, but without expressing any view on the observations bracketed by it :-

In the ultimate analysis, the Hon’ble jurisdictional High Court in Knorr Bremse (surpa) remitted the matter for fresh adjudication by noting in para 3 of its judgment that : `The determination of the arm’s length price by the authorities is based on certain findings of law which we have dealt with in the judgment. The entire computation of the arm’s length price, therefore would have to be reconsidered and reassessed based on our findings. We are, therefore, left with no alternative but to remand the matter’ for a fresh consideration in the light of the observations made in the body of the order. That is how, the Hon’ble High Court restored the matter for fresh determination of the issue despite noticing that the TPO determined Nil ALP of the international transaction of intra-group services after applying the CUP method. However, this was done without expressing any opinion on the part bracketed by it from the judgment of Cushman (supra) : `such services exist or benefits have accrued. That exercise - of factual verification is retained by the Assessing Officer under Section 37 in this case.’ This shows that despite being aware of the fact that the TPO determined nil ALP of the international transaction of intra group services in the same manner as has been done in the case under our consideration by applying the CUP method, it did not order for the deletion of addition, but chose 41 to remit the matter for fresh adjudication. This judgment, being that of the Hon’ble jurisdictional High Court, has primacy over the judgments of the other Hon’ble High Courts or of the Tribunal. There is hardly any need to accentuate that judgment of a jurisdictional High Court bears binding force and cannot be overlooked even if there are judgments of the other High Courts holding to the contrary.

To sum up, we hold that the international transaction of `Receipt of I.T. Support Services’ is required to be separately benchmarked, distinct from the international transactions of purchase etc. Since the view of the TPO as regards the receipt of no services etc. has been set aside by us, we remit the matter to the AO/TPO for determining the ALP of this international transaction afresh as per law after allowing a reasonable opportunity of being heard to the assessee.

Next issue raised in this appeal is against the Transfer Pricing addition of Rs.1,16,99,748/- made by the Assessing Officer on account of international transactions of `Procurement support’ and `Training services’. The assessee reported international transactions of `Provision of Procurement services’ with transacted value of Rs. 8,20,70,939/- and “Provision of Training services’ with value on Rs. 3,82,89,753/-. The assessee earned mark-up of 10% on the costs incurred for rendering such services. It applied separate TNMM on these two international transactions and claimed them at arm’s length price. The TPO combined these two transactions after noticing that the assets used for them were similar. By applying the TNMM with PLI of OP/TC, the TPO worked out transfer pricing addition of Rs. 1,16,99,748/-. For doing so, he shortlisted eight comparables companies with their average OP/OC at 21.02%. The assessee remained unsuccessful before the DRP. That is how, the Assessing Officer made this addition in his final assessment order.

We have heard both the sides and perused the relevant material on record. The primary question argued before us is against aggregation of these two international transactions which the assessee processed independently for the purposes of transfer pricing. Page 582 of the paper book is a copy of agreement between the assessee and its AE for rendering `Procurement services’. Such services have been listed in appendix A reading as under:-

On going through the nature of services given in this Annexure, it is manifested that the assessee was supposed to procure the goods from India and export it to the global production network of the BMW Group. For doing this, the assessee was carrying out supplier assessments to identify the most suitable supplier. The assessee was receiving proposal from the supplier and forwarding it to BMW AG for final assessment and approval. On such approval, the International Purchase Office (IPO) was working with the supplier to ensure compliance of BMW AG requirements.

In so far as `Training services’ are concerned, a copy of the relevant agreement between the assessee and BMW AG is available on page 599 of the paper book. Preamble of the agreement provides that BMW AG entered into a contract with Satyam Venture Engineering Services for the provision of design and simulation services. Because Satyam was unfamiliar with BMW processes and tools, the assessee was assigned a duty to impart training to the employees of the Satyam for their utilization in complying with design and simulation services for BMW AG.

It is overt from the two Agreements that the nature of `Procurement’ and `Training’ services is entirely different and bear no functional similarity with each other. Whereas the Procurement services were rendered by IPO of the assessee, the Training services were rendered by its technical staff. In view of there being functional differences between the two and use of separate work force for their rendition, we are not inclined to accept the view point of the TPO for aggregating these two distinct services into one and thereafter determine their ALP in a combined manner. We, therefore, set aside the impugned order and remit the matter to the file of the AO/TPO for a fresh determination of ALP for these two services independently, after allowing a reasonable opportunity of being heard to the assessee.

The only other ground which survives in this appeal is against allowing of depreciation at 15% instead of 60% claimed by the assessee.

Facts apropos this issue are that the assessee purchased a Digital Video Recorder (DVR) on 26.10.2009 which was treated as “Computer” for the purposes of depreciation. On being called upon to explain as to why this device/instrument be not treated as office equipment, the assessee submitted that the same is an integral part of the computer system which can be used only with the computers and not otherwise. The Assessing Officer considered the judgment in the case of CIT vs. BSES Rajdhani Power Ltd (ITA No. 1266/2010) (Del) and special Bench decision in the case of DCIT vs. Data Craft India Ltd 133 TTJ 377 Mumbai (SB). He accepted the assessee’s contention that the computer peripherals also fall within the ambit of the term “Computer”. It was further held that the computer peripherals are those devices which are not capable of being used in isolation. Thus, DVR used exclusively for recording was held not to be a computer peripheral as the same was capable of use independent of computers as well. He, therefore, treated it as an item of Plant and machinery on which depreciation was allowed at the rate of 15% as against 60% claimed by the assessee. The DRP followed its order for the A.Y. 2009-10 and held that 60% depreciation be allowed on Printers and UPS only. The assessee’s contention for allowing higher depreciation on DVR was turned down. The assessee is aggrieved against disallowance of depreciation to this extent. 47

We have heard both the sides and perused the material on record. It is noticed that the DRP followed its order for the A.Y. 2009-10 for negating the assessee’s claim of higher depreciation on DVR. Such issue came up consideration before the Tribunal in assessee’s case for the A.Y. 2009-10. The Tribunal has held in its order that higher rate of depreciation is applicable to switches. Thus the departmental view was upheld on others. Since DVR is not a switch, respectfully following the precedent, we approve the view taken by the AO in its order for treating DVR as a part of Plant and machinery and not computer peripherals and allowing depreciation accordingly.

In the result, the appeal is partly allowed for statistical purposes.