ASST. C.I.T., BANGALORE vs. M/S YOKOGAWA INDIA LIMITED, BANGALORE

The assessee is a company registered under the provisions of Companies Act, 1956 and subsidiary of Yokogawa Electric Corporation, Japan. The assessee is engaged in the business of industrial automation and control, test and measurement, Information System and Industry Support. The business of the assessee has been divided into three segments namely System, Trading and Products & software development services. The financial results and segmental information has been reproduced by the TPO in paras 3.1 and 3.2 as under :

The TPO accepted the other international transactions of the assessee at arm’s length except the transactions of Global Sale and Marketing Activity Fees paid by the assessee to the Associated Enterprise (AE) of Rs.5,73,22,150. The TPO held that the services rendered under Global Sale and Marketing Activity Fees is not distinct from the service under management fees and therefore the services are already covered under management fees services and no separate payment under Global Sale and Marketing Activity Fees was required or necessary. The TPO also applied the benefit test. Accordingly, the TPO held that the Arm’s Length Price (ALP) of Global Sale and Marketing Activity Fees is NIL and consequently proposed an adjustment of entire amount of Rs.5,73,22,150. The assessee challenged this action of the TPO before justified in examining the necessity and commercial expediency of payment made by the assessee as it was beyond the jurisdiction of the TPO. The DRP followed the decision of the Tribunal in assessee's own case for the Assessment Year 2007-08 and directed the TPO to determine the ALP by applying the method recognized under the Act. Further, there was a dispute regarding Most Appropriate Method (MAM) adopted by the assessee as Transactional Net Margin Method (TNMM) whereas the TPO applied CUP as MAM. The DRP after examination of the relevant facts directed the TPO to analyse the case law on the point and also give the benefit of comparability anlaysis for identifying the comparables.

We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. We find that the assessee has carried out multiple and diversified international transactions in involve charges for raw material and components, sales and manufacturing goods, reimbursement of expenses, payment towards royalty and management fees, charges of capital equipment, payment of intra-goods services, charges of material, commission income, rendering of software services, reimbursement of expenses and Global Sale and Marketing Activity Fees. The TPO has accepted all other transactions except the international transactions regarding Global Sale and Marketing Activity Fees. It is pertinent to note that the international transactions of the assessee are comprising of revenue receipt from the AE as well as revenue payment to the AE. Therefore in these facts and circumstances of the case, we find that when the other international transactions regarding revenue receipt from the AE are tested under the TNMM analysis then the transaction of fee payment by the assessee towards the services rendered by the AE should not be separately tested but all the international transactions having receipt from the AE and payment to the AE shall be clubbed together and then has to be analysed under TNMM. We further note that the DRP has directed the TPO to Fees instead of considering the ALP at NIL. Therefore in principle we do not find any error or illegality in the directions of the DRP however having regard to the peculiar facts and circumstances of the case wherein the assessee is having multiple and diversified international transactions involving receipt as well as payment, we are of the considered view that the payment in respect of management fees as well as Global Sale and Marketing Activity Fees shall be considered as operating cost and has to allocated in the ratio of turnover of the other international transactions and then the ALP of the other international transactions has to be determined under TNMM analysis. Hence we set aside the entire issue of determination of ALP and TP Adjustment to the record of the TPO/A.O. for carrying out fresh exercise of determination of ALP in respect of international transactions by considering the payment in respect of management fees and Global Sale and Marketing Activity Fees as part of the operating cost and allocating the same in the ratio of the turnover of the other international transactions.

Ground Nos.6 & 7 of assessee's appeal are regarding the foreign tax credit and TDS credit not granted by the Assessing Officer despite the directions of the DRP.

We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The assessee's grievance is limited to the extent that while passing he final order the TPO/A.O. has not given the benefit of foreign tax credit as well as TDS credit in terms of the directions of the DRP. The assessee has also filed a petition under Section 154 of the Act which is pending disposal before the TPO/A.O. There is no quarrel on the point that the Assessing Officer is bound to follow the directions of the DRP and pass the final order in pursuant to the directions of the DRP.

In the result, the appeal of the revenue is allowed for statistical purpose and the appeal of the assessee is partly allowed.