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Income Tax Appellate Tribunal, DELHI BENCHES : I-2 : NEW DELHI
Before: SHRI J. SUDHAKAR REDDY & MS SUCHITRA KAMBLE
ORDER PER J. SUDHAKAR REDDY, AM: Both these appeals are filed by the assessee and are directed against separate orders of the DRP-I, New Delhi dated 30.12.2014
As the issues arising on both these appeals are common, for the sake of convenience, they are heard together and disposed of by way of this common order.
The facts in brief are that the assessee is a subsidiary of Avery Dennison Corporation, USA and is engaged in the manufacture and trading of pressure sensitive adhesive film, tape sheets, hand tags, barcodes and dealing in barcode scanners, printers and their spare parts and garment accessories. In these appeals, the assessee company disputes the transfer pricing adjustment made. We first take up ITA No.1670/Del/2015. The grounds of appeal read as follows:-
“1. That the adjustment made by Honorable (Hon’ble) Dispute Resolution Panel (“DRP”)/ Ld. Assessing Officer (AO) / Ld. Transfer Pricing Officer (TPO) of INR 18,43,49,706/- on account of intra-group services received by the Appellant is covered by favourable rulings received by the Appellant in previous years (i.e. Assessment Year 2007-08 and 2008-09) and accordingly should be struck down.
2. That the Hon’ble DRP erred in fact and law by partly upholding the order of the Ld. AO / Ld. TPO wherein the AO/ TPO has held that the Appellant’s international transaction of receipt of intra-group services with its Associated Enterprises (‘AEs’) does not satisfy the arm’s length principle envisaged under the Act and thereby partly upholding an adjustment of INR 18,43,49,706/- and in doing so have grossly erred by:
2.1. not appreciating that the intra-group services received by the Appellant are intrinsically linked to the business operations by the Appellant in its two business segments i.e. Pressure Sensitive Materials (“PSM”) and Retail Information Systems (“RIS”); 2.2. not appreciating the business model of the Appellant and rejecting the Appellant’s economic analysis of benchmarking closely interlinked transactions using Transactional Net Margin Method (‘TNMM’) in favour of Comparable Uncontrolled Price (“CUP”) method;
2.3. failing to appreciate that the services received from the Associated Enterprises are part of a package of composite agreements which cannot be unbundled;
2.4. ignoring sufficient evidences, cost allocation methodology and analysis provided by the appellant and thereby, concluding that the services availed by the Appellant from its AE were in nature of ‘duplicate’ and “shareholder” services which have not conferred any commercial benefit upon the Appellant.
2.5. not appreciating that the Ld. TPO should not question the commercial wisdom of the Appellant and the benefit received by the Appellant from the receipt of intra-group services and can only ascertain the arm’s length price payable for such services; 2.6. not appreciating that the Ld. TPO, while applying CUP method failed to produce any comparable uncontrolled transaction price/ data relied upon for computing the arm’s length price for the intra-group services received by the Appellant as Nil; and 2.7. not appreciating that even at a transactional level, the margin earned by AEs from provision of intra-group services are at arm’s length.
3. The TPO erred in treating certain non-operating expenses (i.e. Excess provision on inventory and Increase in provision on debtors) as 3 operating in nature and in rejecting certain comparable companies chosen by the Appellant for benchmarking the international transactions undertaken under the RBIS segment.
4. The DRP has erred in law by upholding the reference made by the AO to the TPO by not appreciating that such a reference suffers from jurisdictional error as the AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was ‘necessary or expedient’ to refer the matter to the TPO for computation of the arm’s length price (“ALP”), as is required under Section 92CA(1) of the Act.
5. The DRP has erred in law by upholding the adjustment made by the TPO/ AO thereby by not appreciating that while making the said adjustment the TPO/AO have not satisfied the conditions set out in section 92C(3) of the Act.
6. That the AO has erred both in facts and in law, in initiating penalty proceedings under section 271.”
The ld. counsel for the assessee submits that she is not pressing ground No.3 and 4. Hence, the same are dismissed as not pressed.
Ground No.5 is general in nature and Ground No.6 is premature. This leaves us with Ground No.1 and 2. The ld. TPO accepted Transactional Net Margin Method (TNMM) as the most appropriate method with regard to all the international transactions of the assessee, except the receipt of inter group services. The ld. TPO applied Comparable Uncontrolled Price (CUP) method and ascertained the arm’s length price Rs.23.5 crore for the AY 2010-11. When the matter travelled to the Dispute Resolution Panel (DRP), they upheld the methodology, but, modified the order by accepting part of the services of Rs.5.07 crore as at arm’s length and held the balance transactions as not at arm’s length and restricted the adjustment to Rs.18.43 crores. Aggrieved, the assessee is before us.
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 assesseethat, 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 5 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.
25. In alternative, the OECD guidelines has quoted by the ld. TPO in the draft assessment order. The Ld.TPO, states that, for ascertaining the ALP of intra-group services, 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 transactions or data, the Ld. AR submitted that if the said international transaction has to be benchmarked, under cost plus method. 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 hascharged 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 at was charged without margin.
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 +/- 6 5% range, allowed under second proviso tos ection 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 HubServices, 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
Similarly, in the case of Maruti Suzuki India Limited vs. Additional Commissioner of Income Tax (I.T.A. No. 5237/Del/2011), 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. 31. 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. 32. 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- 96-HC-2015(DEL)-TP] 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).
Consistent with the view taken herein, we uphold the contention of the assessee and delete the TP adjustment.
We now take up the appeal for the assessment year 2011-12 in ITA No.1701/Del/2016. The revised grounds are as follows:-
“1. The Ld. Assessing Officer (“AO”) / Ld. Transfer Pricing Officer (“TPO”) has erred in fact and law by not giving effect to the specific directions issued by the Honourable (“Hon’ble”) Dispute Resolution Panel (“DRP”) of allowing, out of the total intra-group services, two intra-group services received by the Appellant, namely Ticketing Hub and VIPS systems. Accordingly, the Ld. AO/ Ld. TPO have inadvertently made an adjustment of INR 16,06,36,482/- as against the adjustment computed in accordance with the directions issued by the Hon’ble DRP amounting to INR 13,47,88,071/-. In this regard, the Appellant has filed a request for rectification of mistake apparent from records under Section 154 of the Act before the Ld. AO/ Ld. TPO/ Hon’ble DRP, which is pending adjudication.
2. That the Hon’ble DRP erred in fact and law by partially upholding the adjustment proposed by the Ld. AO/ Ld. TPO wherein the Ld. AO/ Ld. TPO has held that the Appellant’s international transaction of receipt of intra-group services with its Associated Enterprises (“AEs”) does not satisfy the arm’s length principle envisaged under the Act and thereby partly upholding an adjustment of INR 13,47,88,071/- and in doing so have grossly erred by:
2.1. not appreciating that the intra-group services received by the Appellant are intrinsically linked to the business operations by the Appellant in its two business segments i.e. Pressure Sensitive Materials (“PSM”) and Retail Information Systems (“RIS”);
2.2. not appreciating the business model of the Appellant and rejecting the Appellant’s economic analysis of benchmarking closely interlinked transactions using Transactional Net Margin Method (‘TNMM’) in favour of Comparable Uncontrolled Price (“CUP”) method;
2.3. failing to appreciate that the services received from the Associated Enterprises are part of a package of composite agreements which cannot be unbundled;
2.4. ignoring sufficient evidences, cost allocation methodology and analysis provided by the appellant and thereby, concluding that the services availed by the Appellant from its AE were in nature of ‘duplicate’ and “shareholder” services which have not conferred any commercial benefit upon the Appellant.
2.5. not appreciating that the Hon'ble DRP should not question the commercial wisdom of the Appellant and the benefit received by the Appellant from the receipt of intra-group services and can only ascertain the arm’s length price payable for such services; 11
2.6. not appreciating that the Ld. TPO, while applying CUP method failed to produce any comparable uncontrolled transaction price/ data relied upon for computing the arm’s length price for the intra-group services received by the Appellant as Nil; and 2.7. not appreciating that even at a transactional level, the margin earned by AEs from provision of intra-group services are at arm’s length.
3. The Hon’ble DRP has erred in law by upholding the reference made by the Ld. AO to the Ld. TPO by not appreciating that such a reference suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was ‘necessary or expedient’ to refer the matter to the Ld. TPO for computation of the arm’s length price (“ALP”), as is required under Section 92CA(1) of the Act.
4. The Hon’ble DRP has erred in law by upholding the adjustment made by the Ld. TPO/ Ld. AO thereby by not appreciating that while making the said adjustment the Ld. TPO/Ld. AO have not satisfied the conditions set out in section 92C(3) of the Act.
5. That the Ld. AO has erred both in facts and in law, in initiating penalty proceedings under section 274 read with Section 271.
The TPO, as in the previous year, accepted TNMM as the most appropriate method with regard all the international transactions of the assessee except the receipt of inter group services.
The TPO applied an approach similar to Bright Line Test Approach under the Comparable Uncontrolled Price (CUP) method to ascertain the arm’s length price of the inter group services received. He made an adjustment of Rs.16.06 crore. The DRP followed the earlier year’s approach and accepted part of the services to be at arm’s length and upheld the balance adjustment of 13.48 crore. The TPO did not follow the orders of the DRP and in the final assessment order made an adjustment of Rs.16.06 crore. The assessee has moved an application u/s 154 of the Act for rectification of the mistake. This is pending adjudication. 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 as reproduced above.
Consistent with the view taken herein, we uphold the contention of the assessee and delete the TP adjustment.
In the result, the appeals of the assessee are allowed.
The order pronounced in the open court on 09.09.2016.