DEPUTY COMMISSIONER OF INCOME-TAX vs. BOBST INDIA PVT. LTD.,, PUNE

आदेश / ORDER

PER VIKAS AWASTHY, JM

This appeal by department is directed against the assessment order dated 29.12.2015 passed under section 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 ( hereinafter referred to as ‘the Act).

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company is 100% subsidiary of the Bobst Group SA, Lausanne, Switzerland.

The assessee company is handling sales, service and technical functions of

the parent company in India, Sri Lanka and Nepal. The assessee is providing

wide range of support services to customers which includes installation,

breakdown (customer support service) etc on behalf of Bobst Group Entities.

The assessee has also set up an Export Oriented Undertaking (EOU) which is

engaged in manufacturing of machine modules required for Printing,

Packaging and ancillary to Packaging Industry. During the assessment year

under appeal, the assessee entered into following international transaction

with its Associated Enterprises (AEs):

Sr. Description of transaction Amount No. 1 Purchase of components for 15,70,47,251 manufacturing machines 2 2 Sale of finished goods Sale of finished goods 43,64,46,595 43,64,46,595

3 Payment of royalty and 86,52,571 trademark charges 4 Recovery of freight & 16,33,444 Clearing charges 5 Allocation of information 24,81,385 technology charges 6 Import of spares for trading 2,92,33,577

7 Rendering of drawing and 31,10,250 designing services to Bobst SA 8 Receipt in respect of 78,52,011 Customer Support Services provided on behalf of AE- Bobst Gp. 9 Receipt of commission for 10,58,04,512 marketing the machine and spares manufactured by Bobst group entities. 10 Export of spares to AEs 44,160

11 Rendering of installation 67,65,168 services on behalf of Bobst Group 12 Allocation of information 7,45,456 technology charges

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13 Amount received from Bobst 55,445 group entities for supply of warranty spares to third party customers 14 Recovery of exhibition 33,15,127 related costs from Bobst group entities 15 Reimbursement of exhibition 2,46,883 related cost to Bobst SA 16 Receipt of reimbursement 44,73,754 from AEs for cost incurred by Indian Company 17 Payment of reimbursement 1,05,83,244 by Indian Company for cost incurred by AEs Total 77,84,90,833

The international transactions undertaken by assessee are partly

divided in two segment i.e.

(1) Transactions relating to EOU operations which cover

transactions from Sr. No. 1 to 5 in the above table.

(2) Transactions relating to Domestic Tarriff Area (DTA) (2) Transactions relating to Domestic Tarriff Area (DTA)

operations at Sr. No. 6 to 15 of the above table.

A reference u/s. 92CA(1) of the Act was made to Transfer Pricing Officer

(TPO) for computing Arm’s Length Price (ALP) in relation to international

transactions. The assessee applied Transactional Net Margin Method (TNMM)

to benchmark its transactions in both segments. During TP proceedings, the

TPO applied CUP to benchmark international transactions with respect to

DTA operations which includes commission received by assessee on sale of

spares and machines. The case of assessee is that it receives commission on

sale of machine @ 5% and commission @18% on sale of spares. The TPO

applied uniform rate of 18% on sale of machine and spares and made

adjustment of Rs.17,73,65,641/-.

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objections before the DRP (Dispute Resolution Panel). The DRP vide

directions dated 23.11.2015 deleted the adjustments made by the TPO in

international transactions carried out by assessee. While deleting the

addition, the DRP followed the order of Tribunal in assessee’s own case for

assessment year 2007-08 and directions of DRP in assessment year 2010-

29.12.2015 deleted the transfer pricing adjustment of Rs. 17,73,65,641/- as

proposed by the TPO. Now, the Department is in appeal against the said

assessment order. The Revenue has raised following grounds of appeal:

“1. The Ld. Dispute Resolution Panel has erred on the facts and in the circumstances of the case , in rejecting the transaction by transaction benchmarking of the international transaction related to commission income rate pertaining to marketing of machines of Associated Enterprise vis a vis commission income rate received on marketing of spare parts, adopted by the Assessing Officer even when these transactions were distinct different and distinguishable in nature and scope and not close inter related. scope and not close inter related. 2. The Ld. Dispute Resolution Panel erred on the facts and in the circumstances of the case, in rejecting the transaction approach of two distinct streams of commission earned by similar functions employing common assets and assuming similar risks. 3. The Ld. Dispute Resolution Panel erred on the facts and in the circumstances of the case and in law in rejecting the benchmarking of receipt of commission from marketing of machine vis a vis controlled transaction when the OECD guidelines suggests such benchmarking after investigation. 4. The appellant craves leave to add, alter or amend any or all the grounds of appeal.”

similar type of adjustments were made by the TPO in earlier assessment

years. The matter travelled up to the Tribunal. In assessment year 2007-08

in ITA No.1295/PN/2011 appeal by assessee, the Tribunal vide order dated

28.02.2013 deleted the adjustment on this count holding that the rate of

commission to be applied on spares and machines are not to be aggregated.

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Thereafter, the Tribunal in assessment year 2006-07, 2008-09 and 2009-10

maintained the consistency and deleted adjustment made for similar

reasons. The ld. AR filed copy of following orders of Tribunal in assessee’s

own case:

i) ITA No. 1295/PN/2011 in assessment year 2007-08 decided on 28.02.2013.

ii) ITA No. 1380/PN/2010 in assessment year 2006-07 decided on 09.10.2014

iii) ITA No. 2090/PUN/2012 in assessment year 2008-09 decided on 03.02.2017

iv) ITA No. 2231/PUN/2013 in assessment year 2009-10 decided on 24.05.2017.

The ld. AR fairly admitted that Department has carried the matter in

appeal before the Hon'ble Bombay High Court for assessment year 2007-08.

The Hon'ble High Court has admitted the appeal of Revenue. The ld. AR The Hon'ble High Court has admitted the appeal of Revenue. The ld. AR

pointed that the substantial question of law formulated by the Hon'ble High

Court is at page No. 94 of the paper book.

vehemently defended the adjustments made by the TPO and prayed for

setting aside the impugned assessment order.

and have perused the orders of Authorities below. The Revenue in appeal has

raised solitary issue relating to benchmarking of international transactions

in respect of rate of commission on spare parts and marketing of machines.

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We find the adjustment was made for similar reasons in assessment

year 2009-10. The uniform rate of commission was applied on marketing of

machines and spares. Before the Tribunal, in ITA No. 2231/PUN/2013, the

assessee had raised following ground:

“11. Erroneous comparison of commission from marketing of machines with the commission from marketing of spares Erred by comparing the international transaction pertaining to receipt of commission from marketing of machines of AEs with the international transaction pertaining to receipt of commission from marketing of spares i.e. controlled transaction of the Appellant itself.”

The Tribunal decided the issue in favour of the assessee by observing

as under :

“12. In ground No. 11 the assessee has impugned the findings of Commissioner of Income Tax (Appeals) in making erroneous comparison of commission from marketing of machines’’ with the commission from marketing of spares’’. We find that similar ground was raised by the assessee before the Tribunal in its appeal for assessment year 2008-09. The Tribunal decided this issue by following the decision in ITA No. 1295/PN/2011 for the assessment year 2007-08 decided on 28-02-2013 in assessee’s own case. The relevant year 2007-08 decided on 28-02-2013 in assessee’s own case. The relevant extract of the findings of Tribunal are as under :

“59. After hearing both sides we find identical ground was raised by the assessee in its own case for A.Y. 2007-08 which reads as under : “5. Erroneous comparison of commission on marketing of machines and commission on marketing of spares.

Erred in comparing the international transaction pertaining to receipt of commission for marketing of Bobst Group machines with the international transaction pertaining to receipt of commission for marketing of spares, i.e. controlled transactions of the Appellant itself.”

“7.3 TPO/AO observed that assessee is receiving commission at the rate of 15% from the AEs for marketing of spares in India while the rate of commission for marketing the machineries of AEs, the stands at @ 5%. In the instant case when the aggregated approach of benchmarking as done by the assessee has not been found to be acceptable and when the stand alone profitability from this international transaction has not been able to be worked out for the reason that the related costs are not identifiable by the assessee and further there cannot be any reliable uncontrolled transaction available in the public domain, it compelled TPO to look into the data and information that is available. Under the circumstances, DRP held that TPO was justified in comparing the international transaction of Bobst India with a controlled transaction of Bobst India itself.

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7.4 Before us Ld. AR reiterated the submission raised before TPO/DRP and also raised additional contention to oppose the finding of DRP on issue while on other hand supported the order of TPO which was upheld by DRP. All these rival contentions of both the parties on the issue at hand are being dealt in succeeding sub para.

7.5 The stand of assessee has been that it is inappropriate to use controlled transactions for bench marking. Based on the Indian TP regulations including Rule 10A(a), Rule 10B(1), Rule 10B(2),Rule 10B (3) and Rule 10B(4), following points need consideration:

A. Transactions entered into by tested party should be compared with uncontrolled transactions; and

B. Uncontrolled transactions do not include transactions between associated enterprises.

Indian TP regulations prescribe that most appropriate method has to be identified for benchmarking an international transaction and comparison has to be done with uncontrolled transactions and not controlled transactions to arrive at the arm's length price. Accordingly, the approach of benchmarking the transaction pertaining to receipt of commission from marketing of machines by comparing the same with controlled transaction of Appellant itself does not fall under any of the methods prescribed under the provisions of section 92C of the Act. It is contrary to Indian TP regulations and not acceptable under the Indian TP regulations. Similar view has been taken by ITAT in case of Skoda Auto India Pvt. Ltd. Vs. ACIT (122 ITJ 699), M.S.S. India Pvt. Ltd. (123 ITJ 657) and Bechtel India Pvt. Ltd. Vs. DCIT (136 ITJ 212). ITAT in the above mentioned decisions view was taken that for determining the arm's length price and benchmarking international transactions of an assessee, reference should be made only to uncontrolled transactions. Hence, benchmarking the international transaction pertaining to receipt of commission using international transaction of Appellant itself for of commission using international transaction of Appellant itself for comparison is not valid as per the Indian transfer pricing regulations. As per Para 2.3 and 2.6 of OECD TP guidelines it is obvious that for application of any TP method for benchmarking international transactions, comparison has to be with uncontrolled transactions. According to us TPO was not justified to not to take this aspect into consideration while dealing issue at hand.

7.7 Next argument on behalf of assessee is that functions involved in marketing of spares are more than functions involved in marketing of machines for sale of machines, the number of transactions and number of negotiations are less as compared to sale of spares where significant efforts are required to be taken on a day to day basis. It is difficult to convince the customers to keep safety stock of spare parts as it involves carrying cost and blockage of funds. The customers have tendency to procure the spares purchased through local suppliers/ fabricators etc as it saves a lot of time as compared to importing these parts and is also cost effective and therefore continuous monitoring / follow-up / liaisoning with the customers is required for sale of spares, according to assessee, the machines of Bobst group are sold in the market by its brand name and quality that it provides. However, in case of spares, customers have an option to purchase spares locally of totally different brand. Further, due to paucity of time the customers prefer taking spares from local suppliers and they also do not prefer to maintain a safety stock even after continuous suggestions by the Appellant regarding the same. According to us TPO / AO have not looked into this practical/particular aspect of assessee’s business while dealing issue at hand which is not justified.

7.8 Next argument of assessee is that Bobst Group entities sale spares on credit basis to customers in India whereas machines are sold only when letter of credit is opened by the customers. Accordingly, for earning commission income vide marketing of spares, the Appellant is

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required to incur additional recovery costs for assisting Bobst Group entities in recovering the payments from customers; this activity is not involved in case of earning commission income from marketing of machines as the payments are received in advance. The parameters demonstrating the fact that functions involved in sale of spares are much more arduous as compared to the functions involved in sale of machines. Accordingly, commission on sale of spares should be higher than the commission on sale of machines. This objective aspect has been ignored by TPO/AO. Moreover, the quantum of sale of machines and sale of spare parts also been ignored. In view of the above, we found that the functions involved in marketing of spares are much more arduous as compared to functions involved in marketing of machines and accordingly, higher commission on marketing of spares as compared to the commission in marketing of machines is justified.

7.9 Next argument of assessee is that market research studies and technical publications suggest the general industry trend that commission on marketing of spares is higher as compared to commission on marketing of machines. We do not accept this argument of assessee in isolation. This is subjective aspect which has to be appreciated in its facts and circumstances. Without prejudice to above we find that according to TPO/AO has not given cogent reasoning for rejecting TNMM identified by the Appellant as the most appropriate method for benchmarking its international transactions pertaining to domestic operations. The approach adopted by the TPO i.e. using controlled transaction of the Appellant itself (receipt of commission on marketing of spares) for benchmarking the international transaction pertaining to receipt of commission for marketing of machines is not appropriate as per the Indian TP regulations. Accordingly international transaction of the appellant pertaining to receipt of commission for marketing of machines benchmarked by assessee by aggregating the same with other international transactions pertaining to domestic operations using TNMM should not be rejected. We hold so.

Since, no change in facts and circumstances have been pointed by the ld. DR during assessment year 2009-10, we see no reason to take a contrary view. Following the order of Tribunal in earlier assessment years, we allow ground NO. 11 raised in the appeal by the assessee.”

This issue is recurring since assessment year 2006-07. In assessment

years 2006-07 to 2009-10, the assessee got relief from Tribunal. In

assessment year 2010-11, the DRP following the decision of Tribunal in

assessee’s own case for assessment year 2007-08, granted relief to the

assessee. The ld. AR pointed that against the findings of DRP, the

Department did not file any appeal. This fact has not been controverted by

the ld. DR. Since the issue involved in the present appeal is identical to the

one which has been adjudicated by co-ordinate Benches of Tribunal, we find

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no reason to take a contrary view. Following the decision of co-ordinate Bench, we uphold the findings of DRP and impugned assessment order. No material has been placed before us to show any change in the facts or nature of international transactions. Accordingly, appeal of Revenue is dismissed being devoid of any merit.

Order pronounced on Monday, the 29th day of January, 2018.

Sd/- Sd/- (डी. क�णाकरा राव/D. KARUNAKARA RAO) (�वकास अव�थी/Vikas Awasthy) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER पुणे/ Pune; �दनांक/ Dated : 29th January, 2018. SB आदेश क� ��त�ल�प अ�े�षत/ Copy of the Order forwarded to : अपीलाथ�/ The Appellant. अपीलाथ� 1. ��यथ�/ The Respondent. 2. 3. The CIT (Appeals)-13, Pune. 4. The CIT- IT/TP, Pune. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “ए” ब�च, पुणे/ DR, ITAT, “A” Bench, Pune. गाड� फ़ाइल/ Guard File. 6.

// True Copy // आदेशानुसार/ BY ORDER,

�नजी स�चव /Private Secretary आयकरअपील�यअ�धकरण, पुणे/ ITAT, Pune.