DURR INDIA PRIVATE LIMITED,CHENNAI vs. ACIT, CHENNAI

आदेश / O R D E R

PERS. JAYARAMAN, ACCOUNTANT MEMBER:

The assessee filed this appeal against the order of the AO passed in

pursuant to the directions of the Dispute Resolution Panel in

F.No.100/DRP-2-BNG/16-17 dated 06.10.2016.

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February 6, 1997 in Chennai, Tamil Nadu, as a wholly owned subsidiary of

Durr systems Gmbh, Germany. It is engaged in the business of providing

paint finishing systems to automakers as well as related services to meet

the demand for paint finishing systems in the Asia- Pacific region. Further,

Durr India is also engaged in rendering engineering design services to its

AEs. The Durr Group in Germany is represented in more than 20

countries. Durr AG is the strategic management holding company

directing the international operations of the business units. The assessee

has entered into an agreement with Durr Systems, Gmbh, to avail

working assistance in acquiring contracts and to provide technical

assistance and training to its employees. Under this scheme, Durr India

contracts with its clients to set up paint systems. Durr Systems GmbH,

Germany sources the basic designs and drawings for setting up the paint

shop. The materials required for the paint shop are sourced by the

assessee and erection of the paint shop is subcontracted to other third

party suppliers. It prepares the detailed designs and supervises the

subcontractors and continues to be responsible for the quality of products

fabricated through the subcontract. Its major customers are Tata Motors

Limited, Mahindra, Ford India Limited and other passenger car

manufacturer. Durr India is also engaged in providing Engineering Design

services and Energy and Environmental Systems for the projects executed

by Durr Group entities.

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following International Transaction with its AE.

Sl.No Name of the AE Description of Amount (In Rs.) the transactions 1 Durr Systems GmbH, Import of parts 1,22,18,158 Germany and accessories DurrPaintshop 1,56,427 Systems,Shangai OLPI Durrs.p.a 12,26,511 Total 1,36,01,096 2 Durr Systems GmbH, Import of traded 15,29,542 Germany goods 3 Durr Systems GmbH, Purchase of fixed 1,33,484 Germany assets 4 Durr Systems GmbH, Payment of 9,83,41,500 Germany research and development and management fees 5 Durr Systems GmbH, Installation 2,15,28,465 Germany services/technica Durr Systems S.A.S l service income 20,83,092 DurrPaintshop Systems, 25,77,0 19 Shangai DurrEcoclean S.A.S 49, 15,240 6 Durr Systems GmbH Provision of 2,78,04,743 Durr Limited, UK Engineering 4,50,366 design services DurrEcoclean, GmbH 2,44,045 Total 2,84,99,154 7 Durr Systems GmbH, Reimbursement 38,43,811 Germany of actual Durr Systems Inc, USA expenses by to 3,77,825 the AE DurrPaintshop Systems, 3,814 Shangai OLPI Durrs.p.a 1,16,910 Durr IT services GmBH 1,36,36,095 Total 1,79,81,455 8 Durr Systems GmbH, Reimbursement 8,80,620 Germany of actual expenses by the

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AE DurrEcoclean, GmbH 5,169 Total 8,85,789 Total Rs,19,20,75,83 5

report is as under :

Nature of Margin Margin of Amount. MAM PLI International of comparables (in Rs.) Transaction taxpayer Import of parts 1,36,01,096 TNMM OP/OR 8.24% 2.95% and’ accessories Import of traded 15, 29,542 goods Purchase of fixed 1,33,484 assets Payment of 9,83,41,500 research and development and management fees Installation 3,11,03,815 services/technical service income Provision of 2,84,99,154 TNMM OP/OC 69.79% 9.53% Engineering design services Reimbursement of 1,79,8 1,455 NA NA NA NA actual expenses by to the AE Reimbursement of 8,85,789 NA NA NA NA actual expenses by the AE Total Rs.19,20,75,835

Most Appropriate Method (MAM) determined ALP of the transactions with

the AE’s. This method has been accepted by the Department in ay 2008-

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09 on identical facts. It had earned an operating margin of 8.24% on its

operating cost which was arrived at after considering the costs allocated

by Durr Germany w.r.t R&D and management services. Its operating

margin of 8.24% on operating cost was higher than arithmetic mean of

the comparable margins of 2.95% and hence the assessee considered

that its international transaction with its AEs were at arm’s length.

5.1 The assessee during a y 2012-13, paid Rs. 9,83,41,500/- towards

its share of R&D and management fees to its AEs for the services

provided to it by Durr Germany. In this regard, it explained that all the

costs for services rendered by Durr Germany to its AEs identified to be

under the head of “Management Services” and “R&D Services” are totaled

up for all the members of the Durr Group. The total cost for all the AEs

represents the total pool of allocable costs under the heads “Management

Services” and “R&D Services”. The total allocable costs are then allocated

to the AEs in accordance with the agreement entered into between Durr

Germany and its AEs including the assessee. This allocation procedure is

pursuant to a group policy which is common across all the other group

entities covered under the agreement and not unique to the assessee.

The total allocable costs are redistributed amongst the participating AEs in

accordance with a formula applicable to all AEs as stated in the

agreement being:

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a) R&D Services - 50% according to relative external (i.e non AE

and non commission) sales and 50% according to relative Operating

Profits.

b) Management Fees - 50% according to relative external (i.e non

AE and non commission) sales and 50% according to Head Count.

5.2 The assessee further explained that the rationale behind adopting

external sales and operating profits of the business unit for the allocation

of R&D fees is based upon the fact that an investment in R&D leads to

better products and projects. Further, continuous updation of the

technology is done according to the projects requirements that ultimately

results in higher margins and increase in operational efficiency of the

business. If Profits of a participating foreign AE was negative, then that

would be artificially set to zero. This would mean that the formula would

be confined to 50% of Relative Sales alone and the Indian entity would

not suffer the costs of a mal-performing foreign AE.

5.3 However, the TPO rejected the TNMM as MAM for benchmarking

intra group services and adopted CUP as the MAM. The TPO held that

allocation of shared costs on the basis of profit earned by the assessee is

not an arm’s length criterion of allocation and recomputed the share in

R&D Fees and Management Fees solely on the basis of sales and proposed

a downward adjustment of Rs. 4,34,44,588/- towards excess R&D and

Management Fees. Aggrieved, the asssessee filed its objections before the

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Dispute Resolution Panel (DRP) objecting to all the additions proposed in

the draft assessment order. The DRP sustained the ALP adjustment

towards excess R&D Fees and Management fees of Rs. 4,34,44,588/-

relying on its orders in the assessee’s case on identical facts for ays2009-

10, 2010-11 and 2011-12. The AO passed the final order on 25.11.2016

making an addition of Rs.4,34,44,588/- towards excess R&D Fees and

Management fees, following the DRP’s directions. Against that order, the

assessee is in appeal before us, inter alia, with the following grounds of

appeal:

“ Issue 1: Downward TP adjustment in case of payment of research & development (R&D) and management fee –

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the most appropriate method deserves to be retained as TNMM which was adopted by the Appellant, in the interest of justice.

Also, the learned TPO/AO and the Hon’ble DRP have not disputed the receipt of benefits by the Appellant on account of the R&D and management services.

Issue 2: Initiation of penalty proceedings

the TNMM in AY 2008-09 on identical facts, it cannot reject the same for

this year on the basis of rule of the consistency and relied on 100 CTR

267 SC. The TNMM adopted by the assessee is legally acceptable

method, it should not have been rejected without cogent reasons. The

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CUP method is not feasible as the transactions has been entered by the

assessee with its AE are assessee specific and not comparable with other

entity. The application of CUP as MAM is thus incapable of being applied

and as such cannot be the MAM. CUP method can be adopted as MAM

over TNMM, only when comparable product or service is available and not

otherwise. In this regard, the AR relied on Frigo glass India (P) Ltd. Vs.

ACIT (2016) 180 TTJ (Del) 265.In the absence of any comparison of the

transaction with transaction carried out in auncontrolled market, the TPO

cannot independently come to a conclusion that volume and quality of

service was disproportionate to the payment made by the assessee. For

this, the AR relied onDCIT vs. Flakt (India) Ltd. ITA No.1032/Mds/2014.

Further, he submitted that the TPO / AO & the DRP have grossly erred in

merely changing the cost allocation procedure adopted by the assessee

under the guise of using CUP as MAM. The ALP adjustment thus made by

merely changing the cost allocation procedure is not a prescribed method

of computing ALP prescribed under the Act read with the Rules and is thus

illegal. Ad hoc ALP additions in the value of international transactions is

not permitted under law and placed reliance on Det Norske Veritas A/S

Vs. Addi. Director of IT (International Taxation) (2016) 178 TTJ (Mumbai

‘K’) 59 .Per contra, the Ld.DR relied on the orders of the TPO/DRP and

Rule 10AB of the IT Rules, which is extracted as under:

55 [ Other method of determination of arm's length price . 10AB . For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's

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length price in relation to an international transaction 54b[or a specified domestic transaction]shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.]

assessee’s case before this tribunal for the ays 2009-10, 2010-11 & 2011-

No.455/Mds/2016 dated 21.12.2006 disposed the matter as under:

“10. We have considered the rival contentions and perused the orders of the authorities below. Case of the assessee is that TNMM was rejected without proper reasoning and a method which was unknown to the law was used by the ld. TPO for the transfer pricing analysis. A look at the international transactions entered by the assessee during the previous years relevant to impugned assessment year which have been reproduced by us at para 2 above would clearly show that these were not pure independent transactions amenable to an independent analysis for pricing. Parts and accessories imported from Associated Enterprise would have been used by the assessee for installation and other services in India as well as engineering services. Reimbursement of expenditure could also have been only in connection with these activities. Ld. TPO had singled out management fees and R & D fees and subjected it to a separate analysis disregarding the TNMM adopted by the assessee. Ld. TPO did not discuss anything regarding the comparables considered by the assessee for the TNMM study. Ld. TPO had summarily rejected the TNMM study citing a reason that intra-group services had to be benchmarked separately by analyzing the actual services received. No doubt there can be no quarrel on the view taken by the ld. TPO

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that Arms Length Price should be determined on a transaction by transaction basis. However, where the international transactions are closely linked this approach may not be feasible and a method of aggregation which is more amenable to a TNMM methodology could be better. Ld. TPO ought not have considered the rule regarding transaction to transaction comparison as so rigid that it could not give way to an aggregate method, where the transactions were so interconnected and intertwined, when an independent analysis would not give reasonably fair results. In the case before us, ld. TPO based on ld. DRP direction elected to bench mark the fees paid by the assessee for management services and R & D on the basis of the ratio of the turnover of the whole of the M/s. Durr Systems Gmbh, Germany to the turnover of the assessee in India. Ld. DRP was of the opinion that this method was nothing but CUP. The method by which Arms Length Price has to be determined are set out in Rule 10B and Rule 10AB of the Income Tax Rules. Clause (a) to Rule 10B(1) describes the CUP method, and this is reproduced hereunder:-

‘’(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in international transactions or specified domestic transactions’’ ; Other methods mentioned in the said Rule are resale price method, cost plus method, profit split

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method and transactional net margin method. There is residual clause (f) which gives freedom to the ld. TPO to follow a method which takes into account the price which was charged or paid or would have been charged or paid and rule 10AB defines it so. Mumbai Bench in the case of DET Norske Veritas As (supra) has clearly held that once method of ascertaining Arms Length Price followed by the assessee was rejected by the ld. TPO, for good and sufficient reason, he had to select most appropriate method out of these which were set out in Rule 10B or Rule 10AB. Co-ordinate Bench in the case of M/s. Flakt (India) Ltd (supra) had held as under at para 9 of its order:- ‘’The Transfer Pricing Officer has not taken any pain to identify uncontrolled transaction between two independent entities. In the absence of any comparison of the transaction with transaction carried out in a uncontrolled market, this Tribunal is of the considered opinion that the Transfer Pricing Officer cannot independently come to a conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The matter may be totally different if the Transfer Pricing Officer was able to identify the uncontrolled transaction between the enterprises entering into such transaction which would materially affect the price in the open market. In this case, such an exercise was not made by the Transfer Pricing Officer. The Dispute Resolution Panel has, therefore, rightly found that the method adopted by the TPO for disallowing the claim of the assessee was not justified. As rightly observed by the Dispute Resolution Panel, the TPO has not brought on record the base on which he estimated the ALP at 25% when Rule 10B ( c) provides for method of determining the ALP. This Tribunal is of the considered opinion that estimation of the services rendered and costs for such services may be outside the scope of transfer pricing adjustment. Without identifying the comparable cases, this Tribunal is of the considered opinion that estimation of the disallowance without any base is not called for. Therefore, the Dispute Resolution Panel has rightly upheld the transfer pricing study made by the assessee. This Tribunal do not find any reason to interfere with the order of the lower authorities and accordingly the same is confirmed’’. In the case

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of Frigo glass India (P) Ltd (supra) Delhi Bench of the Tribunal had held CUP method could be adopted after discarding TNMM only when a comparable product or service is available. Ld. TPO and ld. DRP were not able to identify a single uncontrolled comparable for bench marking R & D fees and management fees paid by the assessee. This may be due to the difficulties in finding another entity that had rendered services which were identical to what were given to the assessee by M/s. Durr Systems Gmbh, Germany, that too in an uncontrolled set of circumstance. In such a situation in our opinion assessee could not be faulted in insisting that the TNMM method adopted by it for analyzing its international transactions with Associated Enterprises, for the impugned assessment years should be accepted. Nevertheless, we find that lower authorities having rejected the TNMM method did not verify the appropriateness of the comparables selected by the assessee in its TP study. Functional profile of the comparables and that of the assessee were never verified. Lower authorities did not verify whether the Arms Length Price analysis done by the assessee based on TNMM was correctly done and whether any modification in the comparables selected or the PLI computed were necessary. Thus, while setting aside the orders of the lower authorities for all the impugned assessment years, we remit the issue of fixing the Arms Length Price of the international transactions of the assessee under TNMM, back to the file of the ld. Assessing Officer /ld. TPO for consideration afresh in accordance with law.”

uncontrolled comparable for bench marking R&D fees and management

fees paid by the assessee. Hence, Rule 10AB, extracted supra, and relied

on by the Revenue cannot be applied in this case. Since, there is no

change in the facts, by following this tribunal order extracted supra, on

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the same lines, we remit the issue, for fixing the ALP of the international transaction of the assessee under TNMM, to the file of the AO/TPO for a fresh consideration in accordance with law.

Order pronounced in the Open Court on 16th August, 2017, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) (एसजयरामन) (N.R.S. GANESAN) (S. JAYARAMAN) �याियक सद�य/JUDICIAL MEMBER लेखासद�य/ACCOUNTANT MEMBER

चे�ई/Chennai, �दनांक/Dated: August 16th , 2017. TLN

आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 4. आयकर आयु�/CIT 2. ��यथ�/Respondent 5. िवभागीय �ितिनिध/DR 3. आयकर आयु� (अपील)/CIT(A) 6. गाड� फाईल/GF