M/S CORNING SAS INDIA BRANCH OFFICE,GURGAON vs. DDIT, NEW DELHI

PER KULDIP SINGH, JUDICIAL MEMBER :

ITA No.816/Del/2017 passed by the AO in consonance with the orders passed by the ld.

DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2010-11 on the grounds inter alia that :-

“1. That the assessing officer erred on facts and in law in completing the assessment under section 144C read with section143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs.6,11,08,644 as against the income of Rs.3,77,44,037 returned by the appellant.

2. That the assessing officer erred on facts and in law in making an adjustment of Rs. 2,33,64,607 allegedly on account of the difference in the arm's length price of the international transactions undertaken by the appellant on the basis of the order passed under section 92CA(3) of the Act by the TPO.

3. That the DRP/TPO erred on facts and in law in making an adjustment of Rs.39,89,080 to the arm's length price of the 'international transaction' of receipt of administration and support services on the basis of the order passed under section 92CA(3) of the Act by the TPO. 3.1 That the DRP/TPO erred on facts and in law in determining the arm's length price of the transaction of payment of administration and support services fee to the associated enterprise without providing any cogent reasons and basis.

3.2 That the DRP/TPO erred on facts and in law in holding that arm's length price of the 'international transaction' regarding payment of administration and support services fees at nil allegedly concluding that no such service/ benefit has been received by the appellant and therefore there is no rationale for payment of support services fees to the associated enterprise. 3.3 That the DRP/TPO erred on facts and in law in not appreciating that the payment of administration and support services fees was validly bench marked applying TNMM as most appropriate method and that no adverse inference could be drawn on this account.

ITA No.816/Del/2017 3.4 That the DRP/TPO erred on facts and in law in computing adjustment on account of international transaction of payment of administration and support services fee without reasonably applying any prescribed methods, thereby, violating the basic principles of TP regulations.

3.5 That the DRP/TPO erred on facts and in law in holding that the entire arrangement of the payment of support services fees is designed to shift profits outside India.

3.6 Without prejudice to the merits of the ground, the DRP/TPO erred on facts and in law in not appreciating the fact that the adjustment on account of arm's length price of the international transaction cannot exceed the markup of 5% charged by the associated enterprise.

4. That the DRP/TPO erred on facts and in law in making adjustment of Rs.1,64,90,548 to the income of the appellant on account of the difference in the arm's length price of the international transaction of receipt of commission income undertaken during the previous year.

4.1 That the DRP/TPO erred on facts and in law in inappropriately aggregating the international transaction of provision of agency services with market support services, without appreciating that such services ought to have been aggregated with the distribution segment, being closely linked with such segment.

4.2 That the DRP/TPO erred on facts and in law in not appreciating that the distribution and agency segment relates to the same products, viz., ophthalmic glass products and life sciences products and involves performing some of the common functions by the same employees and it is not feasible to segregate the cost relating to the same.

4.3 That the DRP/TPO erred on facts and in law in not appreciating that the appellant does not employ any separate/specific personnel/asset for provision of agency services and same employees engaged in the distribution segment perform the necessary functions for provision of agency services.

4.4 That the DRP/TPO erred on facts and in law in allocating common expenses to the agency segment in the ratio of sales, resulting in disproportionate allocation of expenses not appreciating that such expenses ought to have been allocated in the gross profit ratio.

ITA No.816/Del/2017 ITA No.817/Del/2016

4.5 That the DRP/TPO erred on facts and in law in using inappropriate quantitative filters which are not based on any rational or reasonable basis.

4.6 That the DRP/TPO erred on facts and in law in selecting the following companies which are functionally dissimilar to the appellant as comparable companies for the purpose of benchmarking analysis: a) Cybermedia Online Ltd. b) Global Procurement Consultant Limited c) HCCA Business Services Pvt. Ltd. d) TSR Darshaw Ltd.

4.7 That the DRP/TPO erred on facts and in law in rejecting the following comparable companies identified by the appellant for the purpose of benchmarking analysis:

S. Name of the company Reasons for No. rejection 1. Educational Consultants - Functionally India Ltd. different - 2. Indian Tourism Functionally Development different - Corporation Ltd. Service income less than 75% of total sales - Unavailability of segmental data 3. In house productions - Functionally Ltd different 4. Overseas Manpower - Functionally Corporation Ltd. different - Turnover less than Rs 5 crore

4.8 That the DRP/TPO erred on facts and in law in not appreciating that the aforesaid companies are functionally comparable to the appellant.

4.9 That the DRP/TPO erred on facts and in law in adopting inappropriate filter for selecting companies having sales more than five crore without objectively applying this filter for eliminating both low and high turnover companies.

4.10 That the DRP/TPO erred on facts and in law in not appreciating the fact that the sales filter of Rs. 1 crore was ITA No.816/Del/2017 applied and accepted by the department in the earlier assessment years.

4.11 That the DRP/TPO erred on facts and in law in selecting following super normal profit companies as comparable to the appellant:

S.No. Name of the company OP / OC (%) 1. Cybermedia Online Ltd. 35.14% 2. Global Procurement and 37.19% Consultants Ltd. 3. TSR Darashaw Ltd. 41.15%

4.12 That the DRP/TPO erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk- bearing captive service provider as opposed to the comparable companies who were independent entrepreneurs.

5. That the assessing officer erred on facts and in law in making an adjustment of Rs. 28,84,979 to the arm's length price of the alleged 'international transactions' of accounts receivable undertaken with the associated enterprise, on the basis of the order passed under section 92CA(3) of the Act by the TPO.

5.1 That the DRP/TPO erred on facts and in law in not appreciating that delay in receipt of receivable is not an international transaction, per se, under section 92B of the Act but is a consequence of an international transaction undertaken in the form of services rendered to the associated enterprises.

5.2 That the DRPITPO erred on facts and in law in re- characterizing the alleged transaction of receipts of receivables as unsecured loans advanced to the associated enterprises.

5.3 Without prejudice, the DRP/TPO erred on facts and in law in considering the annual average yield of corporate bonds prevailing during the financial year 2009-10 as the arms length rate of interest to be charged on delay in receipt of receivables without appreciating that such rate is applicable on loans availed in India in domestic currency.

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5.4 Without prejudice, the DRP/TPO erred on facts and in law in further adding a markup of 300 bps to the PLR of SBI, on account of adjustment for security and transaction cost, without providing cogent reasons and on the basis of his surmises and conjecture. 5.5 Without prejudice, the DRP/TPO erred on facts and in law in disregarding the fact that since the receivables outstanding from the associated enterprises were denominated in foreign currency, interest rate computed on the basis of UBOR rates shall be applied being applicable on loan available in the international market. 5.6 Without prejudice, the DRPITPO erred on facts and in law in incorrectly imputing the interest on receivables for a period beginning from the date of invoice till the realization date, without appreciating the fact that interest is to be computed upto 31.03.2010. 5.7 Without prejudice, the DRPITPO erred on facts and in law in not setting off the amount of payables outstanding from the receivables. 5.8 Without prejudice, the DRPITPO erred on facts and in law in disregarding the fact that the interest is required to be computed at the rate of 9%, being SBI base rate at 7.5% plus 150 bps, instead of 14.88%.”

For the sake of brevity, facts pertaining to ITA No.548/Del./2015 for AY 2010-11 are taken and discussed to decide the identical issues involved in all the appeals bearing ITA No.548/Del./2015 for AY 2010-11, ITA No.816/Del./2017 for AY 2012-13 and ITA No.817/Del./2017 for AY 2011-12.

Sr.No. Nature of transactions Arm’s length prices as per taxpayer (i) Import of Rough Ophthalmic Blanks Rs.204,179,389 (ii) Import of life science products Rs.63,888,486 (iii) Commission Income received Rs.9,277,050 (iv) Receipt of Admin and Support Service Rs.3,989,079 (v) Income from marketing support services Rs.101,489,370 (vi) Reimbursement of expenses to AEs Rs.7,780,043

3. TPO disputed international transaction qua receipt of administrative and support services to the tune of Rs.39,89,079/-.

Assessee paid administrative and support services fee amounting to Rs.39,89,079/- to its AEs. Assessee in order to benchmark international transactions applied TNMM as the most appropriate method treating itself to be the tested party and Operating Profit to Operating Cost (OP/OC) as the Profit Level Indicator (PLI) by aggregating receipt of administrative and support services and ITA No.816/Del/2017 commission income received being closely linked. Assessee by selecting 7 comparable companies in its transfer pricing study computed their weighted average operating profit margin of 5.63%.

However, TPO rejected the combined transaction approach adopted by the assessee and treated the administrative and support services as a separate class of transaction to benchmark the international transaction and applied the “principle of benefit test” and proceeded to apply CUP as the most appropriate method and thereby benchmarked the international transaction of intra group services at nil and proposed the addition of Rs.39,89,079/-.

GROUNDS NO.1 & 2 IN 816/DEL/2017 & 817/DEL/2017

GROUNDS NO.4 TO 4.3 IN GROUNDS NO.4 TO 4.4 IN ITA NO.817/DEL/2017

“5.6 On the basis of above, it can be seen that in order to examine the arm's length price of intra group services received by one of the associated enterprises following essential information should be available :

1. 1. Whether the AE has received intra group services? 2. What are the economic and commercial benefits derived by the recipient of intra group services? 3. In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs.

4. Whether a comparable independent enterprise would have paid for the services in comparable circumstances? From the details available it is clear that the taxpayer has not been able to prove that he has actually received services of some value that call for cost allocation.”

ITA No.816/Del/2017 and in an uncontrolled environment, any taxpayer for availing the services would produce the documentary evidences to substantiate on the following issues :-

“In an uncontrolled environment any taxpayer for availing the services would produce the documentary evidences to substantiate on the following issues: (i) Contemporaneous documentary evidence to show that these services have actually been received. (ii) Need for the receipt of such services for which payment has been made. (iii) Documentary evidences as to when and how these services were requisitioned from the AEs. (iv) Basis of determination of rate or payment for intra- group services at the time of entering into the agreement. (v) Details of cost benefits analysis vis-a-vis the expected benefit from the intra-group services and the payment made for the same. (vi) Details of benchmarking analysis done at the time of entering into the agreement so as to compare the payment of intra-group services to the AE vis-a-vis an independent party under similar circumstances. (vii) Tangible and direct benefits derived. by the taxpayer company from the use of such intra-group services. (viii) Details and documentary evidence of cost incurred by the AE for rendering each type of services purportedly received by the taxpayer company.”

17. However, assessee used TNMM as the most appropriate method and brought on record evidence of receipt of services in the shape of agreement, available at pages 261 to 265 of the paper book, Annexure 1 available at page 264 of the Paper Book, service charge summary available at page 265, second agreement available at page 266, invoice raised by the AE available at page 271 onwards, the complete detail is given in the table reproduced in the succeeding para no.31 of this order.

Ltd. (supra) determined the identical issue as to whether administrative support services fee is liable to be determined at nil for benchmarking the international transaction on the ground that no services were actually received by assessee; no benefit was derived by the assessee by making payment for administrative support services; and that services were not actually needed by the assessee, as held by the TPO / DRP.

ITA No.816/Del/2017 “16. We have considered the issue. We are unable to accept the contention of the Assessing Officer/TPO with reference to the services provided by AEs. Assessee has provided the agreements which were entered not during the year but in earlier year and has been paying the service fee termed as management fee accordingly. This claim is not arising for the first time in this year but, is also there in earlier years and later years. Assessee is part of a worldwide group and they have placed some corporate centers for guidance of various units run by them across the globe. It was submitted that the costs being incurred by the centers are being shared by various units and assessee's share in this year has come to 5% of the receipts payable to NFO Worldwide Inc USA and at 4% to NFO Asia Pacific Ltd. Hongkong on the net revenues. These amounts are within the norms prescribed for payment of fees to various group companies of similar nature. There is no dispute with reference to services being provided by the group companies to assessee and assessee also paid various other amounts including royalty. As submitted by assessee, even though some correspondence was placed on record with reference to the advise given to assessee, providing a concrete evidence with reference to the services in the nature of specific activities is difficult, like proving the role of an anesthesian in an operation conducted by a surgeon. There may be an evidence of operation being performed by the Doctor in the form of sutures or scars etc, which can be proved later but the role of an anesthesian before operation and after gaining consciousness is difficult to prove as that is not tangible in nature. Likewise, for the advise given by various group centers to the group companies in day-to-day manner is difficult to place on record by way of concrete evidence but the way business is conducted, one can perceive the same. Assessee has given a detailed write-up as well as the services provided and benefit obtained which were not contradicted. The Assessing Officer did not believe the same in the absence of concrete evidence. Unless the Assessing Officer steps into assessee's business premises and observes the role of these companies/assessee's business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations. What sort of evidence satisfies the AO is also not specified. Assessee has already placed lot of evidence in support of claims. Therefore, on that count, we are not in agreement with the Assessing Officer and TPO that services were not rendered by the group companies to assessee.”

Hence in view of the overwhelming evidence placed by the assessee for receipt of services and following the decision of coordinate bench respectfully, we are of the view that rendering of services must be seen from the view point of the ITA No.816/Del/2017 assessee and further assessee cannot be asked to keep and maintain evidences of services rendered by AE higher than which is expected from a businessman receiving services from an unrelated provider. Therefore, we reject the view point of Ld. TPO and Ld. DRP that assessee has not shown the receipt of the services. In view of above we are of the view that assessee has justified the receipt of services and satisfied the rendition test.”

21. Ld. AR for the assessee challenging the impugned order determining the value of administrative support services fee as nil filed written synopsis as under :-

“It is respectfully submitted that the adjustment made by the TPO on the aforesaid grounds is not sustainable for the reasons submitted hereunder :- The breakup of administrative support services availed by the appellant during the year along with the amount incurred for each type of services is submitted as under :-

ITA No.816/Del/2017 ITA No.817/Del/2016 Name of the Nature of Amount Allocation Keys Reference to PB AEs Service (Documentary evidences) Corning Inc., IT Support 1,725,976 Expenses are allocated Invoice – Page United States on the basis of the actual 274 – 295 hours spent by the associated enterprise for providing services to the appellant. Details placed Details of hours on record by way of spent by AE – additional evidence Page 402-403B before the Hon'ble DRP Corning China Accounting 553,140 The basis of allocation Invoice – Page (Shanghai) services for these administrative 271 – 273 Regional including support services is Headquarter processing volume of activity/ Shared Service of accounts transactions or Full Time Agreement Equivalent (“FTE") Page 261 – 265 dedicated to service the particular service Mails – Page availing entity. The 385 – 388 payment terms as agreed between Mail – Page the appellant and the 394 – 395 associated enterprises is (allocation) provided in clause 4, "Annual Service Costs" and Exhibit A to Annexure 1 of the Shared Service Agreement. Corning Human 1,160,239 Associated enterprise Invoice – Page Development resource allocates only 35% of the 296 – 297 Inc. Singapore support actual monthly cost services and incurred on an estimated Agreement – training basis. Corning, Page 266 – 270 services Singapore does not allocate 100% of the cost Mails – Page incurred for providing 389 – 393 services to the appellant. Thereafter, 5% mark-up is added to the cost in terms of the Shared Service agreement entered with Corning, Singapore. Corning IT Support 549,725 Corning, Taiwan is Invoices – Page Display services remunerated on a cost 300 - 301 Technology, including plus 5 percent markup Taiwan setting up of wherein cost includes all systems direct and indirect cost technical incurred in provision of assistance the services etc.

It would be appreciated that the appellant vide submissions dated 10.12.2013 and 07.11.2014 submitted sample copy of correspondences (mails), agreement entered between the appellant and the associated enterprises, copy of invoices raised by the associated enterprises on the appellant and details of allocation keys applied by the associated enterprises for the purpose of allocating expenses to the appellant before the lower authorities, substantiating the fact that the services have been actually received by the appellant.

Reliance, in this regard is placed on the recent decision of Delhi Bench of the Tribunal in the case of GE Money Financial Services Pvt. Ltd. vs. ACIT (ITA No.5882/De1/2010), wherein, the Hon'ble Tribunal held that the assessee is required to maintain and produce the evidence of receipt of services, which a businessman keeps and maintains regarding services received from the third party. The assessee cannot be expected to maintain detailed documentation evidencing the receipt of services merely because the services have been rendered by its associated enterprise.

2. The TPO, further held that no benefit was derived by the assessee by making payment for Administrative Support Services.

It is reiterated that in terms of the group policy, all Corning Group entities have a mandate to avail support function services from the respective shared service centers to avail the benefit of low cost, specialization and confidentiality.

The shared service centers offer the advantage of economical, specialized services, expertise in terms of knowledge of Corning products, adherence to Corning culture, Corning rules and procedures and most importantly confidentiality. It would be appreciated that the shared service centers cater to all Corning entities based out of Asia and the volumes of transactions of the assessee are very less compared to the volume of other Corning Asian entities. Outsourcing the same work to third party vendors would not only involve training them in Corning group's procedures and infrastructure but also compromise on data confidentiality as well as on the stability of the services. Further, if each group entity is expected to contract with local vendors themselves, the group's operations as a whole will not only become far more expensive but also inefficient since each group entity would be ITA No.816/Del/2017 replicating the same work and multiple third party vendors shall be involved in processing the same transactions.

Recently, Delhi Bench of the Tribunal in the case of GE Money Financial Service Pvt. Ltd. vs. ACIT (supra), held that benefit test for determination of ALP is to be seen from the perspective of the assessee and businessman and not from the perspective of revenue.

As per the group policy, all Corning Group entities have a mandate to avail support function services from the respective shared service centers to avail the benefit of low cost, specialization and confidentiality.

Delhi Bench of the Tribunal in the case of GE Money Financial Services Pvt. Ltd. vs. ACIT (supra), held that the assessee pays for the services only if it receives benefit from the services.

Reliance is also placed on the following decisions: i. M/s. Control Techniques India Pvt Ltd. vs. JCIT (ITA No. 2575/Mds/2016) ii. CIT vs. Max India Ltd. (ITA No. 186/2013) (P&H HC) iii. CIT vs. EKL Appliances Ltd. 345 ITR 241 iv. Ericsson India Pvt. Ltd. vs. DCIT (ITA No. 5141/De1l2011) v. Dresser Rand India Pvt. Ltd. vs. Addl. CIT (ITA No 8753/Mum/2010) vi. LG Polymers India Pvt. Ltd vs Add!. CIT (ITA No 524Nizag/2010) vii. SC Enviro Agro India Ltd vs DCIT (ITA No 2057 & 2058/Mum/2009) viii. AWB India Pvt Ltd vs Add!. CIT (ITA No 4454/De1l2011) ix. PERI India Pvt. Ltd. vs. DCIT (ITA No. 7265/Mum/2012) x. DCIT VS. MIs Danisco India Pvt Ltd(ITA 24441 Dell 2012) xi. TNS India Pvt. Ltd. (ITA No. 944/Hyd/2007) xii. Gillette India Limited vs. ACIT (ITA 10871 JPI 2011) xiii. DCIT vs Danisco (India) Pvt Ltd (ITA 24441 De1/2012) xiv. Indigene Pharmaceuticals vs. ACIT (ITA No.1541Hyd/2011 & 1874/Hyd/2012) xv. Kirby Building Systems India Ltd VS. Addl CIT (ITA 19751 HYDI 2010)

ITA No.816/Del/2017 xvi. Festo Controls Pvt. Ltd. vs DCIT (ITA No. 969/Bang/2011) xvii. Honda Siel Power Products Ltd. vs. DCIT (ITA 57131 Dell 2011) xviii. Quintiles Research (India) Private Ltd. vs DCIT (ITA 1605/Bang/2012) xix. Rockwell Automation India Pvt Ltd vs DCIT (ITA 5671 Dell 2015)”

“ In the TP Study Report the assessee has clubbed the above International Transaction (Receipt of IT Support Services, Accounting Services, Human Resource Services etc. from four AEs at Markup of Cost Plus 5%) with other International Transactions - Import of ROBs & Life Science Products and Commission Income for the purpose of benchmarking. It is pertinent to mention that no such payments were made in the earlier years by the assessee. In the PB the assessee has submitted only Agreements (w.e.f. 1st January, 2010) with only 2 AEs whereas payments have been made to 4 AEs. It is evident that prior to 01.01.2010 the assessee was not availing these services from the 4 AEs and thus it was capable in itself for these services. The assessee has failed to furnish any justification for availing of these services from AEs w.e.f. 01.01.2010. The assessee has also failed to furnish any details regarding corresponding reduction of its expenses w.e.f. 01.01.2010. The TPO correctly segregated the above transaction for the purpose of benchmarking in view of the fact that Receipt of Administrative Support Services are not inextricably linked with the other International Transacti.ons. Reliance is placed on the judgement of Hon'ble Punjab and Haryana High Court in case of Knorr-Bremse India(P .) Ltd. v. Assistant Commissioner of Income-tax, Circle-I, Faridabad (2015) 63 taxmann.com 186 (Punjab & Haryana) wherein the Hon 'ble High Court has held that the closely linked transactions can, in a given situation, be components of a single composite transaction but the assessee would, however, have to prove that although each sale and each provision of service is priced separately, they were all provided under one composite agreement which constitutes an international transaction.

ITA No.816/Del/2017 The Hon'ble ITAT Delhi has followed the above judgment in case of Gruner India (P.) Ltd. [2016] 70 taxmann.com 240 (Delhi - Trib.).

Even in case of assessee itself it has been held by the Hon'ble ITAT in the earlier assessment years that distribution business cannot be aggregated with the commission business.

TPO has adopted CUP for benchmarking which is also the Most Appropriate Method under the circumstances.

TPO has discussed in detail that assessee was not able to substantiate receipt of any services from the AE. The assessee also failed to establish the need for such services. The TPO further held that the services provided were duplicate in nature and in the nature of Shareholder Services (refer pg no. 19-20 of the TPO's order).

Thus, the ALP of IGS was correctly taken at NIL after conducting need test, rendition test and benefit test.

The Hon'ble Delhi High Court has held in case of Commissioner of Income-tax-I v. Cushman and Wakefield (India) (P.) Ltd. [2014] 46 taxmann.com 317 (Delhi) that ALP can be computed at NIL by the TPO if an independent entity would not pay any amount. The relevant extract of the above judgment is reproduced below:-

35. The TPO's Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise – of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot - after a consideration of the facts - state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO. This aspect was made clear by the ITAT in Delloite Consulting India (P) Ltd. v. Dy. CIT/ITO [2012] 137 ITD 21/22 taxmann.com 107 (Mum):

'37. On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at "nil ", we find that the Bangalore

ITA No.816/Del/2017 Bench of the Tribunal in Gemplus India (P.) Ltd. v. Asstt. CIT [IT Appeal No. 352 (Bang.) of2009, dated 20-10-2010] held that the assessee has to establish before the Transfer Pricing Officer that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price.

38. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at "nil" keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at "nil". '

The Hon'ble ITAT Delhi has held in case of GE Money Financial Services (P.) Ltd. [2016] 69 taxmann.com 420 (Delhi - Trib.) after considering the judgment of Hon'ble Delhi High Court in case of Cushman and Wakefield [ 2014 ] 46 taxrnann.com 317 (Delhi) that-

"The TPO can compute NIL ALP after conducting benefit test, need test and rendition lest. The benefit test is necessary part of determining arm's length price of any international transaction. This is so because if there is no need of any services (i.e. need Test), it would not be paid by the independent parties. Similarly if the services are not rendered (rendition test), independent parties will definitely not pay for it, and thirdly if the services though required and are rendered but are not beneficial to the receiver (benefit test) then naturally the independent parties will not pay for such services. Similarly, the services, which one already is availing, independent parties may not pay for it as it amounts to redundancy. Therefore as the TPO is only empowered to determine arm’s length price of international transaction, as per provision of section 92(2) he is required to consider all

ITA No.816/Del/2017 the above aspects of the services for which AE is remunerated.” In absence of all these criteria satisfied cumulatively for services, it is incomprehensible that any independent party would pay for the services i.e. i. if services are not required, ii. if they are not rendered, iii. if they are not benefitting the recipient iv. if they are duplicative in nature v. if they are for the safeguarding interest of owner i. e. shareholder activity vi. And if it were so, there would not be any comparable instances for similar kind of services and the purpose of determining arms length price of the International transaction will most probably fail. In a recent judgement the coordinate bench of Hon'ble ITAT Bangalore has held in case of Volvo India Pvt. Ltd. v. CIT (IT(TP)A No. 384/Bang/2013, dated 16.12.2016) that the onus lies on the assessee to prove that the services are actually rendered by the assessee and if the assessee fails to discharge the above onus then the TPO is justified in adopting ALP at NIL. It is pertinent to mention that the assessee has not properly benchmarked the above transaction as it has aggregated this transaction with the other transactions which are not closely linked at all hence even if the benchmarking of the TPO is not accepted as in conformity with the judgment of Hon'ble Delhi High Court in Cushman and Wakefield then the above issue is required to be remanded back to the file of the concerned AO, for an ALP assessment by the TPO, followed by the AO's assessment order in accordance with law (refer para 45 and 46 of the above order of the jurisdictional High Court).”

In other words, services are need based and no fee shall be paid if services were not rendered. Furthermore, if the services though required and are rendered but are not needed / beneficial to the receiver then independent parties need not to pay for such services.

(i) that so far as question of receipt of services by the assessee from its AE is concerned, ld. DRP in para

11.3 of its order admitted that the assessee has received services but the explanation given about the benefit derived by the taxpayer are too generic in nature in respect of all the services availed by them. For facility of reference, para 11.3 of the DRP is reproduced as under :-

ITA No.816/Del/2017 “11.3 From the taxpayer's submission, it is seen that though the taxpayer has submitted documents to the TPO and before the Panel to substantiate that they have received the services but the explanation given about the benefits derived by the taxpayer are too generic in nature in' respect of all the services availed by them. Inspite of the opportunity given by this Panel no details about the total expenses incurred by the AE and its participating countries were provided no basis for the allocation key for those expenses have been provided.

In an uncontrolled environment any taxpayer for availing the services would produce the documentary evidences to substantiate on the following issues: (i) Contemporaneous documentary evidence to show that these services have actually been received. (ii) Need for the receipt of such services for which payment has been made. (iii) Documentary evidences as to when and how these services were requisitioned from the AEs. (iv) Basis of determination of rate or payment for intra-group services at the time of entering into the agreement.

(v) Details of cost benefits analysis vis-a-vis the expected benefit from the intra-group services and the payment made for the same.

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(vi) Details of benchmarking analysis done at the time of entering into the agreement so as to compare the payment of intra-group services to the AE vis-a-vis an independent party under similar circumstances.

(vii) Tangible and direct benefits derived. by the taxpayer company from the use of such intra-group services.

(viii) Details and documentary evidence of cost incurred by the AE for rendering each type of services purportedly received by the taxpayer company.”

The taxpayer has not been able to show that the above mentioned criteria were duly being fulfilled. Further, when independent enterprises transact with other independent entity; the price of goods transferred or services provided and conditions of the transfer or provisions ordinarily are determined by market forces. Therefore, when AEs transact with each other, for the purpose of transfer pricing they must replicate the dynamics of market forces, as there is no concept of free lunch in business dealings.

The benefit test which is well recognized by OECO and other developed countries Tax regime have to be seen for allowing the payment in case of Intra-group services. The expected benefit must be sufficiently direct and substantial so that an independent entity in similar circumstances, would be ITA No.816/Del/2017 prepared to pay for it. If no benefits have been provided (or was expected to be provided), then the services cannot be charged for.

In view of the above, since the taxpayer has just explain in generic nature about the benefits vis-a-vis the intra-group' services' payment, hence this DRP holds that TPO is right in holding the value of services to be as “Nil” and thus proposing the adjustment.”

(ii) that furthermore, the assessee has brought on record the evidences as to the receipts of the services in the forms of agreements available at pages 261 to 265 and 266, Annexure 1 available at pave 264 and invoices raised available at page 271 onwards.

“as to whether assessee has failed to provide rationale or need for receipt of such services as held by ld. DRP?”

20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred “wholly, necessarily and exclusively for the purposes of business in order to merit deduction. Pursuant to public protest, the word “necessarily” was omitted from the section.

21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred “wholly and exclusively” for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above.

22. 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 or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he

ITA No.816/Del/2017 not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.”

“20. A reading of the orders of the TPO, the DRP and of the Tribunal makes it clear that one of the main reasons for not accepting the assessee’s case was that the assessee had not been able to substantiate that the payment for the services had actually increased its profits. As we noted earlier, the TPO, in fact, further held that the assessee should have been able to show the level of increase in profit post the said transactions.

ITA No.816/Del/2017 that the assessee was not required to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in the subsequent year. Similarly, Hon’ble Punjab & Haryana High Court in the judgment in M/s. Knorr-Bremse India Pvt. Ltd. (supra) also held that the assessee is not required to establish that it has benefited from the international transactions by taking services from its AE. So, in these circumstances, contentions raised by ld. DR are not sustainable.

ITA No.816/Del/2017 ITA No.817/Del/2016

Name of the Nature of Amount Allocation Keys Reference to PB AEs Service (Documentary evidences) Corning IT Support 1,725,976 Expenses are allocated Invoice – Page Inc., United on the basis of the actual 274 – 295 States hours spent by the associated enterprise for providing services to the appellant. Details placed Details of hours on record by way of spent by AE – additional evidence Page 402-403B before the Hon'ble DRP Corning Accounting 553,140 The basis of allocation Invoice – Page China services for these administrative 271 – 273 (Shanghai) including support services is Regional processing of volume of activity/ Shared Service Headquarter accounts transactions or Full Time Agreement Equivalent (“FTE") Page 261 – 265 dedicated to service the particular service Mails – Page availing entity. The 385 – 388 payment terms as agreed between Mail – Page the appellant and the 394 – 395 associated enterprises is (allocation) provided in clause 4, "Annual Service Costs" and Exhibit A to Annexure 1 of the Shared Service Agreement. Corning Human 1,160,239 Associated enterprise Invoice – Page Development resource allocates only 35% of the 296 – 297 Inc. support actual monthly cost Singapore services and incurred on an estimated Agreement – training basis. Corning, Page 266 – 270 services Singapore does not allocate 100% of the cost Mails – Page incurred for providing 389 – 393 services to the appellant. Thereafter, 5% mark-up is added to the cost in terms of the Shared Service agreement entered with Corning, Singapore. Corning IT Support 549,725 Corning, Taiwan is Invoices – Page Display services remunerated on a cost 300 - 301 Technology, including plus 5 percent markup

ITA No.816/Del/2017 Taiwan setting up of wherein cost includes all systems direct and indirect cost technical incurred in provision of assistance etc. the services

So, the “benefit test” for determination of ALP is to be seen from the standpoint of assessee and businessman and not from the standpoint of Revenue.

ITA No.816/Del/2017 475/212 dated 23.05.2014) held that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. Hon’ble jurisdictional High Court after holding that TPO cannot after consideration of facts state that the ALP is nil given that an independent entity in a comparable transaction would not pay any amount. For facility of reference, operative part of the judgment in case of CIT-I vs. M/s. Cushman and Wakefield (India) Pvt. Ltd. (supra) is reproduced as under :-

“34. The Court first notes that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. This distinction was made clear by the ITAT in Dresser-Rand India Pvt. Ltd. v. Additional Commissioner of Income Tax, 2012 (13) ITR (Trib) 422: “8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to ITA No.816/Del/2017 decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is No. evidence of services having been rendered at all, the arm's length price of these services is 'nil'.”

35. The TPO’s Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO’s authority in this case, which is to determining the ALP for international

ITA No.816/Del/2017 transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise – of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot – after a consideration of the facts – state that the ALP is ‘nil’ given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO. This aspect was made clear by the ITAT in Delloite Consulting India Pvt. Ltd.v. Deputy Commissioner of Income Tax, [2012] 137 ITD 21 (Mum) :

“37. On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at “nil”, we find that the Bangalore Bench of the Tribunal in Gemplus India P. Ltd. 2010- TII-55-ITAT-BANG-TP, held that the assessee has to establish before the Transfer Pricing Officer that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price.

38. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at “nil” keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at “nil”.

This is a slender yet crucial distinction that restricts the authority of the TPO. Whilst the report of the TPO in this case ultimately noted that the ALP was ‘nil’, since a comparable entity would pay ‘nil’ amount for these services, this Court noted that remarks concerning, and the final

ITA No.816/Del/2017 decision relating to, benefit arising from these services are properly reserved for the AO.”

Volvo India Private Limited vs. CIT (IT (TP) A.No.

384/Bang/2013 dated 16.12.2016) decided by ITAT, ‘A’ Bench, Bangalore wherein the coordinate Bench also held that ALP of the services of AE cannot be determined at nil by questioning the benefits of the expenditure incurred but subject to proving the fact by the assessee that the services are actually rendered by the AE.

37A. As discussed in the preceding paras, this issue has also been discussed at length and para 12 of the judgment cited as M/s. Volvo India Private Limited (supra) relied upon by ld. DR is distinguishable from the facts and circumstances of the case because, in the instant case, issue as to rendering the services has already been admitted by the DRP. So, the TPO has erred in ITA No.816/Del/2017 determining the ALP at nil by holding that the services were actually not rendered nor such services were needed by the assessee company nor any benefit has been accrued to the assessee company by availing such services from its AE.

“as to whether intra group services (IT Support Services, Accounting Services, Human Resources Services, etc.) from AEs at mark-up of cost plus 5% are to be clubbed together with other international transactions i.e. import of ROBs and life science products and commission income for the purpose of benchmarking or the administrative or the administrative support services are to be segregated for the purpose of benchmarking as has been done by the TPO?”

“17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs.38,58,80,000 only for which Comparable Uncontrolled Price (“CUP”) method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too.”

ITA No.816/Del/2017 the TPO cannot apply different standard or criteria to judge an international transaction which would disturb the end result in determining the ALP. So, assessee has rightly clubbed intra group services transactions with other international transactions for the purpose of determination of ALP. So, the question framed in preceding para 37 is replied in favour of the assessee.

ITA No.816/Del/2017 Grounds No.3 TO 3.6 IN ITA NO.548/DEL/2015, Grounds No.4 TO 4.3 IN and Grounds No.4 TO 4.4 IN ITA No.817/DEL/2017 are determined in favour of the assessee.

GROUNDS NO.3 TO 3.9 IN GROUNDS NO. 3 TO 3.8 IN ITA NO.817/DEL/2017

S.No. International Transaction Amount Method (in Rs.) Applied 1. Import of Rough Opthalmic Blanks 204,179,389 2. Import of life sciences products 63,888,486 3. Commission income 9,277,050 TNMM 4. Receipt of Admin and Support 3,989,079 Services 5. Income from marketing support 101,489,370 TNMM services

“14. Now, the assessee company challenged the segregation of its agency activities form distribution and clubbing the same with marketing activities for the purpose of determining ALP. From the grounds of appeal and arguments addressed by the parties to the appeal, the question arises for determination in this case is :- “as to whether TPO has erred in allocating expenses to the agency segment in the ratio of sales by ignoring the fact that such allocation is to be made on the basis of function performed, assets employed and risk assumed by the assessee in agency segment?”

15. The issue in controversy was first time agitated before ITAT in assessee’s own case qua Assessment Year 2003-04 and has been answered in favour of the assessee company. The operative part of the order dated 28.08.2015 (supra) contained in para 26, 27, 28 & 29 is reproduced for ready perusal as under :- “26. So far as the allocation of expenses is concerned it is noted that TPO had identified indirect expenses common to both the functions at Rs. 1,93,29,321/- details of which are as under:

Particulars Amount (In Rs.) Salaries 42,72,231/- Advertisement 30,78,570/- Insurance 3,77,758/- Repairs and maintenance 8,24,105/- Professional fee 28,31,227/-

ITA No.816/Del/2017 Rent 12,57,636/- Communication 5,93,240/- Travelling & Conveyance 33,79,299/- Misc. 12,32,610/- Depreciation 14,82,645/- Total (A) 1,93,29,321/-

27. The CIT(A) has held that out of the aforesaid sum of Rs. 30,78,570/- and Rs. 3,77,758/- pertaining to advertisement and insurance have no nexus with the agency function.

28. We find merit in the said conclusion as no material has been lead to discredit the above conclusion. Thus we hold that aggregate indirect expenses common to both the functions are of Rs. 1,58,72,993/- (Rs. 1,93,29,321/- - Rs. 30,78,570/- - Rs. 3,77,758/-). The CIT(A) further more held that allocation of such expenses should be done on the basis of gross margin of distribution function and commission income receipts and not on the basis of sales, as adopted by the TPO. Here too, we do not find any infirmity in the approach adopted by the CIT(A). The CIT(A) has correctly held that allocation of expenses in proportion to sales would amount to give equal weightage in terms of functions performed, assets utilized and risks assumed to both distribution function as well as agency service activity, which otherwise involves much lesser functions and utilization of assets and risk. The CIT(A) has held as under:

“It would not be correct to allocate expenses attributed to purchase/sale of finished goods, warehousing and handling of inventory etc., to the agency service activity, wherein such activities are not involved. Allocation of common expenses in proportion to gross margin/income from distribution function and the commission income, irons out or eliminate the impact of purchase of finished goods, handling of inventory and undertaking distribution function, etc. Allocation of common expenses in proportion to gross margin from distribution function and commission income is a reasonable and rationale basis of allocating of such common expenses between the two activities. I accordingly uphold allocation of common cost by the assessee and accordingly computed the adjustment after combining the agency service activity with marketing service function, as follows:

Particulars Rupees Income from market support 3,41,76,307 services Add: Commission income 55,94,311 Total income from market 3,97,70,618

ITA No.816/Del/2017 support and agency service activity Cost for market support (from 3,21,05,659 letter dated 16.11.200) Cost for commission income (as 27,55,968 determined in para 21.3 above) Total aggregated cost 3,48,61,627 Arm’s length marketing support 3,75,38,999 service and agency service income (A) Marketing support and agency 3,97,70,618 service income earned by the appellant (B) Difference (A-B) (-) 22,31,619

20 Since total income from market support and agency service activities at Rs. 3,97,70,618/- is higher than the arm’s length price of such services, computed as per basis adopted by the TPO at Rs. 3,75,38,999/-, no adjustment on this account is warranted. Accordingly, adjustment of Rs. 20,87,795/- in respect of international transactions of agency service activity is, therefore not sustainable and is directed to be deleted. “

29. Having regard to the above factual conclusion we uphold the action and reject the grounds raised by the revenue. Ground 1 thus stands dismissed.

16. So, there being no dispute that the issue in controversy has been squarely covered in assessee’s own case vide order dated 28.08.2015 (supra) qua AY 2003-04 which has been further validated up to AY 2006-07, by following the order passed by the coordinate Bench, we direct the TPO to allocate the expenses on the basis of gross margin in the agency segment and not in the ratio of sales for the purpose of computing the ALP of the international transactions as the TPO/DRP/AO have erred in making adjustment by clubbing commission income with market support services in allocating expenses to the agency segment in the ratio of sales. So, ground no.2.2 is determined in favour of the assessee.

GROUNDS NO.2.3, 2.4, 2.5, 2.6 & 2.7

ITA No.816/Del/2017 NO.816/DEL/2017 and Grounds No.3 to 3.8 in ITA NO.817/DEL/2017 are determined in favour of the assessee.

GROUNDS NO. 5 TO 5.3 IN ITA NO.817/DEL/2017

ITA No.816/Del/2017 Even otherwise, the assessee benchmarked its operating profit margin earned from international transaction with AEs at 6.82% with the weighted average profit margin (OP/OC) of the comparables companies as compared to the comparable companies at 5.63%, which is higher than weighted average operating profit margin of the comparables and as such, the international transaction was treated as arm’s length price.

GROUNDS NO.5 IN GROUNDS NO.6 IN ITA NO.817/DEL/2017