AVERY DENNISON (INDIA) PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

Briefly stated, the facts of the case are that Avery Dennison (India) private limited is a subsidiary of Avery Dennison Corporation, USA and is engaged in the Manufacturing and trading of Pressure sensitive adhesive material, self-adhesive paper, self-adhesive film, tape, sheets, tags and Labels. It filed its return of income on 27/11/2012 declaring nil income which was subsequently revised on 26/12/2012 declaring income of Rs. 40245490/-. As the assessee has entered into international transactions with associated enterprise within the meaning of section 92B of the act, Form No. 3CEB was filed by the assessee showing that it has entered into the international transaction of 14 types, such as i. purchase of material of Rs. 1 029235500 /-, ii. purchase of trade material 124206127/-, iii. receipt of services of Rs. 2 8204 6989 /- , iv. reimbursement of expenses paid of Rs. 1 621 8343 /-, v. reimbursement of expenses Rs. 3208 6979 /- , vi. rendering of services of Rs. 4 880 9183/–, vii. sale of material 406287680/–, viii. packing materials Rs. 58168 /- , ix. purchase of stores and spares Rs. 3 675216/–, Page 3 of 13 x. computer software and license fees paid Rs. 5 712 7321/–, xi. purchase of fixed assets 906 8947/–, xii. repairs and maintenance 371 8586/–, xiii. selling commission paid Rs. 1 8253 9808, and xiv. Rebate of Rs. 9 371 9213/–.

According to the assessee, It is operating in two segments a. PSM i.e. Pressure sensitive Materials and b. RBIS – i.e. retail information and branding solutions.

During the course of assessment proceedings, the Ld. assessing officer referred the matter to the Ld. transfer pricing officer as per the provisions of section 92CA (1) of the income tax act. On receiving the reference the Ld. transfer pricing officer accepted all the transactions entered into by the assessee to be at arm’s length except in the case of the international transaction relating to the receipt of intragroup services in the 2 business segments, which are stated above, amounting in all to Rs. 282046989/–. As the assessee has not benchmarked these receipts separately, but they were aggregated into both the services, the Ld. Transfer pricing officer asked for the information of the services received by the assessee from its AE. The Ld. Transfer pricing officer further stated that in absence of information along with contemporaneous documentary evidences the arm’s length payment for these intragroup services would be treated as nil by applying CUP method The assessee submitted that it has received marketing support services, operating and logistic, technical assistant services, accounting and administration services, Management Information Systems, labour law and employee relations, financial services, and corporate supports Centre services with respect to its pressure sensitive material segment and with respect to retail information system, it received services of ticketing HUB, GVP services, VIPFS services and strategic support and guidance. Thereafter, the Ld. Transfer pricing officer proceeded to assess the services of the Page 4 of 13 assessee for both the segments and then hold that as the services are separate class of transactions, the same are required to be analysed separately. After this, the Ld. transfer pricing officer presented its comments with respect to each of the intragroup services received as under :- a. Marketing support services of Rs. 27187758/– Ld. Transfer pricing of officer noted that there is a high possibility of the duplication of services and there was no need for the same. According to him the assessee also failed to give any evidence as to what is the benefit that is accrued to it, with respect to the markup also it was held that relevant cost which are taken into consideration for determining the markup was also not submitted. b. Accounting and administration services/labour law and employee relations/financial services/corporate support Centre services/strategic support and guidance/GVP services of Rs. 61994903/–, it was noted that assessee has failed to substantiated to how this services were useful to it, and no evidence were furnished by the assessee to show that associated enterprise is indeed helped the taxpayer in implementation of SKP and tightening of controls. It was also noted by him that taxpayer has not been able to show as to what were the actual services that the corporate management group provided and how it helped the assessee in strategic planning and development. He ultimately held that all the services are in the nature of shareholder services. c. With respect to Management Information Systems services, he held that taxpayer has not been able to substantiate actual receipt of the services and as no documentary evidences were furnished. d. With respect to technical assistant services it has been held by the Ld. Transfer pricing officer that assessee has not been able to give evidence regarding receipt of these services and is merely submitted emails wherein assistance was shot on technical matter. However, no evidence was submitted regarding actual receipt of such services.

He further held that there is a high possibility of duplication of services and further the taxpayer is also not been able to demonstrate that any tangible gains achieved indeed on account of the results of the effort of overseas team and not as a result of the efforts of the taxpayer. He ultimately held that these are all the devices and fancy descriptions are used to take profits out of India and taxpayer has merely submitted that the rate of payment for IGS was determined by identifying the relevant cost plus markup. However, no details were furnished as to the relevant cost which were taken into consideration for determining the markup and no documentation was submitted to the substantiate the markup which was Page 5 of 13 applied. He further held that all these payments were in the nature of shareholder services as they were meant to a judge that the overall policies/procedures of the taxpayer were in consonance with the global associated enterprise policy/procedure and therefore these expenses were basically incurred by the assessee to comply with the overall procedures and programs of the associated enterprise. On the aspect of the service agreement between the appellant and the associated enterprise it was held by him that these are merely the agreements but they do not show the scope of work and service agreement is to be defined in the terms of service level agreement and operated by the scope of work but does not prove the rendering of services. He further referred to the agreement entered into by the assessee as an omnibus fashion where the range of services have been covered and the scope of each such services are not clearly defined. Regarding the receipt of services, he held that only some documents have been furnished for receipt of services of intragroup services by way of few emails and copy of brochures etc. He therefore held that there was no submission of documents regarding the conveyance of desire to obtain specific services or the actual rendering or communication of having received such services. Therefore he held that the taxpayer has failed to substantiate that any such services were received or has actually been availed by it. With regard to the cost plus markup, he held that no evidences were furnished as to the cost, which was taken into consideration for determination of the compensation, and therefore according to him, it violates provisions of rule 10D of the income tax rules. He further referred to the various allocation key and held that with respect to many services, the allocation was based on without applying any markup. Therefore he held that taxpayer could not show as to when and how the various services were requisitioned from associated enterprise and whether the services were actually needed by it and whether the same were actually received by it by producing contemporaneous documentary evidence at the time of entering into agreement and what benchmarking analysis was done, what cost benefit analysis was done particular when a huge payment has been made by the assessee to the associated enterprise. He further held that in an arm’s length situation before availing any services and independent person should consider nature of services required by it and would make the payment, which commensurate with the nature of the services and expected benefit derived there from. He further held that these are the shareholder services and therefore cannot be remunerated. He further held that the payments did not commensurate to the volume and quality of services and apportionment by the associated enterprise was not based on the actual services rendered to the individual units, but based on their own arrangement. In the nutshell, ld TPO held that determination of ALP is justified at NIL because the payments have failed need Test, benefit test, Rendition test, duplicity test and Shareholder’s activity test. He further referred to the directions given by the dispute resolution panel for Page 6 of 13 assessment year 2010 – 11 in 2011 – 12 where only the payments with relation to ticketing HUB and BIPF as services were held to be at arm’s length. Therefore, similarly he accepted the arm’s length price for these two services and further with regard to the balance intragroup services amounting to Rs. 230271861/– the arm length price was computed by the Ld. Transfer pricing officer at NIL by applying the CUP method. Thereafter, the Ld. Transfer pricing officer proposed an adjustment under section 92CA of Rs. 230271861/– with respect to the services of Rs. 282046990/- for which ALP was determined of Rs. 51775129/- by his order dated 29/01/2016.

Consequently draft assessment order under section 144C (1) read with section 143 (3) of the Income Tax Act dated 03/03/2016 was passed proposing the addition of Rs. 230271861/– on account of the transfer pricing adjustment. The assessee filed objection before the Ld. Dispute resolution panel on 08/04/2016. The Ld. Dispute resolution panel passed its direction on 12/08/2016 upholding the proposed addition. Consequently, the final order was passed under section 144C (13) read with section 143 (3) of the income tax act on 30 September 2016 wherein an addition of Rs. 230271861/– was made. Therefore, assessee being aggrieved with that order of the Ld. assessing officer has preferred appeal before us.

Before us the Ld. authorized representative submitted that issue is now squarely covered in favour of the assessee in appellant’s own case in for assessment year 2007 2008, ITA No. 4869/del/2014 for assessment year 2008 – 09, ITA No. 1670/ Del/2015 for assessment year 2010 – 11 and ITA number 1721/ Del/ 2016 for assessment year 2011- 12. It was further submitted that the orders of the coordinate bench for assessment year 2007 – 08 and 2008 – 09 were also confirmed by the Hon’ble Delhi High Court in ITA No. 386/2016 and 392/2016. The Ld. authorized representative further submitted that by granting the stay it has been also held by the coordinate bench that the issue is squarely covered by the orders of the coordinate bench. Therefore it was submitted that adjustment/addition made by the Ld. assessing officer/Transfer pricing officer is erroneous and Ld. Dispute resolution panel has confirmed the finding of the Ld. Transfer pricing officer erroneously. The Ld. authorized representative further submitted a chart of intragroup services showing the nature of services and evidences submitted before the Ld. transfer pricing officer and benefits derived by the assessee from this intragroup services.

Ld. Departmental representative submitted that the services are not closely linked with the other international transactions merely because the agreements are interlinked and therefore the transfer pricing approach of the assessee is incorrect. For this he referred to para number 5.5.5 that page No. 771 of the paper book where in transfer pricing study report it has been mentioned that the given the range of transactions involved, the arm’s length method cannot be adequately applied on a transaction by transaction basis and therefore the aforesaid international transactions have been aggregated for benchmarking. He submitted that the aggregation of the transactions have been made only on the basis of above aspects which is not the correct approach. He further relied on the decision of the Hon’ble Delhi High Court in Sumitomo Corporation versus CIT 387 ITR 611 (Del) to support his contention.

We have carefully considered the rival contentions. The identical issue in case of the assessee has been dealt with by the coordinate bench for Assessment Year 2010-11 and 2011-12 wherein, vide order dated 09.09.2016 the coordinate bench has decided this issue as under:-

After hearing the rival contentions, we find that the very same issue has been dealt by the Tribunal in the assessee’s own case in & 4869/Del/2014 for AYs 2007-08 and 2008-09 at para 23 onwards and held as follows:- “AY 2007-08 23. From the above discussion we are of the considered opinion that the agreement is an intrinsic one and that it is wrong to split the same and hold that some services are at arm’s length and some services are not.

The Ld.CIT(A) accepted TNMM to arrive at the ALP, in respect of certain services received by the assessee and in the same breath, has rejected the analysis undertaken by the assessee under the TNMM in respect of other services. We are informed by the assessee that, the authorities have accepted TNMM as MAM in the subsequent years. The Revenue has to be consistent in its approach. In our view, the TPO analysis of the assessee using TNMM as the MAM has to be accepted. When there is an agreement for services and certain services out of a bundle of services are undisputedly rendered, the entire agreement has to be viewed as a whole. Whether the services have actually resulted in a benefit to the assessee or not is not material. The conclusion of the Ld. TPO that the services have not resulted in any benefit and that no independent entity would have made such a payment is in the realm of surmises and conjunctures and not backed by any material. Thus the ALP determined by the assessee company is accepted and the TPO adjustment is deleted.

In view of the above discussion, we are of the considered opinion that with regard to PSM and RIS segments, even if cost plus method is taken as the MAM, the markup charged by the AEs is within the +/- 5% range, allowed under second proviso to section 92C of the Indian Income Tax Act, 1961, these services can be considered to be at arm’s length; Regarding GVP services, VIPFS services and Ticketing Hub Services, the service charges paid by the Assessee, represents the actual cost incurred by the AEs, without any markup. Hence these can be considered to be at arm’s length. AY 2008-09 23. Similarly, in the case of Maruti Suzuki India Limited vs. Additional Commissioner of Income Tax (I.T.A. No. 5237/Del/2011),v it was held that: 11. The another purpose for which the royalty has been paid to the SMC is the use of license information for the engineering, design and development, manufacture, testing quality control, sale and after sales service of products and parts. Thus, we agree with the submission of the ld. Counsel of the assessee that royalty thus paid by the assessee to SMC constitute a single/inserverable/ indivisible contract/package which provided assessee the exclusive right and license to manufacture and to sell the licensed product for a specified limited duration. All others rights vested in the license agreement including technology, technical know how and trade mark are linked to the core right to manufacture and sell licensed products…. 13…….we place reliance upon the decision of the Hon’ble Apex Court in the case of Vodafone International Holdings B.V. vs. UOI (Civil Appeal No. 733 of 2012) wherein the Hon’ble Court held that it is not open to revenue authorities to split an agreement when the parties to the agreement themselves have not contemplated a split up in the agreement and have considered the agreement as an entire package. The relevant citations in this regard has been brought out in detail in the assessee’s submission above. Thus, we find that for the purpose of computing the arm’s length price, The TPO has re- written the agreement/transaction undertaken by the assessee by artificially segregating the single transaction of payment of royalty into two transactions of payment of royalty for use of brand name and for use of technology. We agree with such re-writing of transaction undertaken by the assessee is inconsistent with the factual realities of the case and is also contrary to the various judicial pronouncements. In this regard, the following case laws referred by the assessee’s counsel are germane and supports the case of the assessee. i) Hon’ble Delhi High Court decision in the case of SonyIndia (P) Ltd. vs. DCIT (ITA No. 1189/D/2005) ii) Hon’ble Delhi High Court decision in the case of CITvs. EKL Appliances (ITA No. 1068/2011 and1070/2011). (Emphasis supplied) From the above discussion we to take a view that the agreement to be an intrinsic one and that it is wrong to split the same.

The OECD guidelines as quoted by the ld. TPO in the draft assessment order by the Ld.TPO, states that, for ascertaining the ALP of intra-group services, either CUP method or cost plus method should be applied. The ld.AR submits that, CUP method would be applicable where there is a comparable service provided between independent enterprises, or by the AE, providing the services to an independent enterprise.

In the absence of such information, alternatively the Ld AR submitted that if the said international transaction has to be benchmarked, then testing the full cost plus margin, earned by the AE, who are providing such services under TNMM would be appropriate. The Ld.AR submitted that the services received by the assessee are charged by the AE’s as below; • Cost Plus Method may be adopted for arriving at the ALP in the assessee’s case. The AE in respect of the PSM segment of services being marketing, accounting and administration, financial services product research and development and operations and logistics have charged the service fees by allocating the full cost incurred in providing support service. The allocation is based on budgeted sales and the AE applies mark-up of 5% on cost. • In respect of RIS segment, the AE (Dennison Manufacturing Company, USA) performed various services. The AE has charged a mark-up of 4% on the cost incurred in providing Marketing support services under RIS segment. And • In respect of GVP services, VIPFS services and Ticketing Hub services cost to cut may be adopted.

We are of the considered opinion that, with regard to PSM and RIS segments, the markup charged by the AEs is within the +/-5% range, allowed under second proviso to section 92C of the Indian Income Tax Act, 1961. Accordingly, these services can be considered to be at arm’s length; And with regard to of GVP services, VIPFS services and Ticketing Hub Services, the service charges paid by the Assessee, represents the actual cost incurred by the AEs, without application of any markup. Accordingly, these can be considered to be at arm’s length.

The assessee is predominantly a manufacturer and the services received by the assessee from its AEs are intrinsically linked to the core business operations of the assessee, in the following form: i. Based on the support provided by the AEs in terms of marketing services and strategic services, the assessee is able to achieve higher sales, both in terms of higher sales quantity and sale prices. ii. Based on the support provided by the assessee in terms of operations and logistics the assessee has been able to procure raw materials at lower costs. Accordingly, the impact of such support services is received by the assessee in the form of lower direct costs.

We observe that there exists a direct nexus between the revenue earned/cost incurred by the Assessee and the majority intra-group services received, it would be incorrect to analyze theintra-group service received as a single element of cost in isolation. In this regard, the Assessee would liketo place reliance on the following rulings, wherein aggregation of closely interlinkedinternational transactions has been upheld: i. Sony Ericsson Mobile Communication India Pvt. Ltd. [TS- ii. McCann Ericsson India v. Addl. CIT (ITA No. 5871/Del/2011) iii. Kusum Healthcare Pvt. Ltd. (ITA No. 6814/Del/2011), etc. 33. Further, the ld. DR had raised a contention that the assessee has not demonstrated how the services received are beneficial to the assessee. We are of the opinion that, ascertaining whether a service has actually benefitted the taxpayer or not is not within the prerogative of the Tax Authorities. To avail a service or not is a commercial decision which cannot be challenged by the Tax Authorities. In this regard, we rely upon the following judgments: i) M/s Cushman & Wakefield India Private Limited vs. ACIT (ITA No. 475/Del/2010) ii) Dresser-Rand India Pvt. Ltd. vs. ACIT (ITA No.8753/Mum/2010). 6. Consistent with the view taken herein, we uphold the contention of the assessee and delete the TP adjustment.”

Further, the assessee has submitted that the Hon'ble Delhi High Court vide its order dated 28.07.2016 has also not admitted the appeal of the revenue against the order of the tribunal for AY 2007-08 and 2008-09 wherein, it has been as under:- “2. The question urged by the Revenue concerns the determination of the Arms Length Price („ALP‟)by the Transfer Pricing Officer („TPO‟) of the international transactions involving the Assessee and its Associated Enterprise („AE‟). The Assessee adopted the Transactional Net Margin Method(„TNMM‟)and had taken Operating Profit/Total Cost as the profit level indicator („PLI‟). The TPO, however, applied the CUP method and proceeded to make adjustment of Rs.3,69,29,533on the basis of which the AO framed the assessment on 1stFebruary2011. 3. The Commissioner of Income Tax (Appeals), [„CIT(A)‟] on appeal restricted the transfer pricing adjustment to Rs. 1,66,18,290. The contention of the Assessee was that agreement between the Assessee and its AE was a composite one and could not be split up for the purposes of holding that some services are at arm‟s length and some are not. The ITAT appears to have agreed with the above contention of the Assessee on viewing the agreement as a whole. It was not within the purview of the TPO to determine if some of the services resulted in any actual benefit to the Assessee or not. 4. Having heard learned counsel for the Revenue at length and having perused the order of the TPO, CIT(A) and the ITAT, the Court is of the view that the view taken by the ITAT is plausible one and does not warrant any interference.”

We have perused the orders of the coordinate bench as well as of Hon'ble High Court. To determine ALP of intra group services according to us it is necessary for TPO to assess (a) need test, (b) benefit test, (c) rendition test, (d) duplication test and (e) share holder activity Page 10 of 13 test. It is also accepted that need test and benefit test are required to be examined from the perspective of a businessman and not from the perceptive of the revenue. Services may be required by a person for its business need and at the time of availing it, the benefit accruing to that person is perceived, such benefit may or may not accrue but if services are rendered the payment is required to be made for those services subject to the other conditions. Off course no independent person pays for the activities / services which are duplicate in nature. Person may also not pay for the services which he is not required to carry out but by other such as shareholders to protect their investments and control interest. It may not be possible always that direct and tangible benefit can be demonstrated by concrete evidence by the assessee. Therefore, if it is found that the normal business justifies the need of those services and it has some perceivable benefit then revenue cannot question payment for those services provided those services are rendered and are neither duplicative or in the nature of share holder services. This is for the simple reason that unless the services are rendered which are neither duplicate and are not share holder activity then only any independent person would be willing to pay for those services. This is a necessary ingredient for determination of ALP of intra group services. As the earlier orders passed by the coordinate bench for Assessment Year 2007-08 to AY 2011-12 also concerning the same agreement which is also before ld TPO for determination of ALP of intra group services, we respectfully following the order of the coordinate bench hold that need test and benefit test are already satisfied for determination of ALP of those intra group services and therefore for this year also we hold that such test questioned by the ld TPO is incorrect as the services concerned are pertaining to the same agreement which has been examined by the coordinate benches in case of assessee for earlier years. However, the rendering of such services is subject to determination for each Assessment Year independently based on the evidences for rendering of the services. Therefore the assessee is required to demonstrate with credible evidence to satisfy that such services have actually been rendered by the foreign AE to the assessee for the year. Evidences of services which have been submitted before the ld TPO for the following services are as under:-

We have carefully analysed whether the evidences submitted by the assessee are sufficient to conclude that services have actually been rendered by the foreign AE or not. Coming to the Paper Book at Page 235-253 we found that it is a marketing broacher for labeling solutions. We failed to understand that how this marketing broacher can show that the marketing support services have been rendered by AE. Page Nos. 254 to 259 is with respect to some conference call and webinar. Further the mails at Page No. 262 to 262 are with respect to ‘Beer in India’ which is just the information asked with respect to some connectivity as well as communication from Executive Vice President . Page No. 263 to 280 is a product finder and similarly some of the mails are very general and pertaining to team meetings and teleconference between the two parties. Similarly we have also perused such evidence with respect to other services also as per chart produced before us. Startlingly, assessee himself has not submitted any proof with respect to accounting administrative services and management information system listed at Sl No. 6 and 7 of the chart. With respect to financial services only sector revenue forecast and Q3 forecast revenue were mentioned. Therefore, on analysis of the above documents we found that there are no proper evidences led before the ld TPO that services have infact been actually rendered by the AE. It is expected from the assessee for proper benchmarking to lead evidence with respect to each of the nature of services with respect to each class of services mentioned in the above chart with corresponding manner of rendering of the services, the time lag of initiation of services and closure of the services. The evidences produced are apparently very general and do not show the rendering of the services. In view of this we set aside the appeal of the assessee to the file of ld TPO/AO for verifying the evidence of rendering of the services by the AE with respect to nature of each of the services listed in the agreement. The assessee is also further directed to lead proper and credible evidence with respect to nature of services and how and when those services have been rendered by the AE. It is also made clear that AO shall not question the need and benefit arising out of these services as the same have been conclusively decided by the order of the coordinate bench for earlier years in the case of the assessee itself. In the result the appeal of the assessee with respect to ground No. 1, 2, and 3 are allowed with above direction accordingly.