DURR INDIA PRIVATE LIMITED,CHENNAI vs. ACIT, CHENNAI

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER

Sl. Name of Associated Details of International Amount(Rs) No Enterprise transactions as per form 3 CEB 1 Durr Systems GmBH, Import of parts and 53,79,164 Germany, Durr accessories. Anlagenbau, Austria, Durr Somac GmbH, Germany 2 Durr Systems GmBH, India Purchase of Assets 58,841 3 Durr Systems GmBH, Installations & Other 29,58,25,325 Germany, Durr Systems services rendered Korea by/for Durr India.

4 Durr Systems GmBH UK, Engineering services 1,47,30,372 Durr Systems Inc, USA, rendered by Durr India Durr Poland Sd. Z.o.o., Poland 5 Durr Systems GmBH, Research & 8,64,46,671 Germany Development and Management fees 6 Durr Systems GmBH, Reimbursement of 11,99,49,850 Germany, Durr Korea, expenses receivable by Durr Limited, UK, Durr Durr India. system Inc, USA, Durr Eco Clean Filderstadt. , 972/15 & 455/16 :- 3 -:

Such transactions for previous year ended 31.03.2010 were as under:-

Name of Associated Details of International Amount as per Enterprise transactions FORM 3CEB (INR) Durr Germany, Durr Import of parts and 17,06,50,450 Austria, Durr China, Durr accessories Italy, Durr Polans Durr India Limited, UK Purchase of fixed assets 98,11,466 Durr Germany Provision of installation 4,35,31,588 services Durr Germany Payment of Research & 12,97,07,200 development and management fees Durr UK, Durr Korea & Provision of engineering 1,73,09,677 Durr Spain design services Durr Germany, Durr UK & Reimbursement of actual 8,03,28,367 Durr Ecoclean expenses by the Associated Enterprise to Durr India. Durr Germany Reimbursement of expenses 2,64,62,572 receivable by Durr India.

Such transactions for previous year ending 31.03.2011 were as under:-

Sl.No Name of the AE Description of Amount (in �) the transactions 1 Durr Germany 7,79,37,902

Import of pars Durr Spain 1,50,148 and accessories Durr China 1,26,917 2 Durr Germany Purchase of 4,53,947 fixed assets 3 Durr Germany 7,24,94,116 Durr Germany-other Provision of services 48,189 Engineering Durr US 14,10,735 services Durr UK 16,85,991 , 972/15 & 455/16 :- 4 -:

4 Durr Germany Payment of 16,47,25,100 research and development and management fees 5 Durr Germany 23,16,161 Durr UK 3,030 Reimbursement Durr Spain 2,600 of expenses Durr US 35,652 receivable 6 Durr Germany 1,35,07,014 Reimbursement Durr US 3,55,464 of expenses Durr China 2,600 paid Durr IT Service 27,53,435 Durr Italy 21,137 Assessee had adopted TNMM for analyzing the pricing of these international transactions. Assessee had adopted aggregation method whereby all classes of international transactions were considered together. As per assessee, if TNMM was adopted its profits were comparable to the average PLI of selected comparables and hence there was no requirement of any adjustment for Arms Length Price (ALP).

transaction basis considering functions performed, assets employed and risks assumed by an assessee. Ld.TPO rejected the TNM method adopted by the assessee and considered CUP method as the most suitable one in assessee’s case. Adjustments proposed by the ld. TPO was confined to engineering services segment and management fees segment. Assessee was required to justify the payments effected to Associated Enterprise abroad on these segments and to demonstrate that it was on an Arms Length basis. In reply it was submitted by the assessee that the payment of management fees as well as Research and Development fees were based on an agreement called PAS cost allocation agreement with Durr Systems Gmbh, Germany. As per assessee M/s. Durr Systems Gmbh, Germany allocated the cost incurred by it for common services/ benefits arising from its R & D and use of their management expertise, and shared it with its various Associated Enterprises spread all over the world. The said agreement also specified the nature of services that were to be rendered by Durr Systems Gmbh, Germany for the research and development services and management services separately. As per the assessee allocation of R & D expenditure was done by its Associated Enterprise abroad by using a formula whereby 50% of such cost was allocated between various Associated Enterprise in the ratio of total external sales of Durr group to the external sales of each , 972/15 & 455/16 :- 6 -:

Associated Enterprise. Balance 50% as per assessee was allocated in the ratio of total operating profit of the Durr Systems Gmbh, Germany to the operating profit of the Associated Enterprise. In respect of management fees the allocation was a bit different. 50% of the total management cost of the Durr Systems Gmbh, Germany was allocated in the ratio of total external sales of Durr Systems Gmbh, Germany to the external sales as in the case of R & D fees. However balance 50% was allocated in the ratio of head counts. Claim by the assessee before ld. TPO was that allocation was done by applying the above formula with all Associated Enterprise of M/s.Durr Systems Gmbh, Germany wherever it was situated and there was no preferential treatment for the assessee.

However, ld. TPO did not accept the contention of the 4. assessee that R &D and management fees were allocated by its Associated Enterprise in Germany in a fair and reasonable manner.

According to ld. TPO method adopted by the M/s.Durr Systems Gmbh, Germany was to even out the R & D expenditure and management fees between its various Associated Enterprise and those Associated Enterprise which were having more profits and more turnover had to bear higher proportion of such cost, irrespective of the actual benefits received by it. The formula according to ld. TPO was skewed and not , 972/15 & 455/16 :- 7 -: an acceptable one. Ld. TPO took this view for the first time in previous year relevant to assessment year 2009-2010. Ld. TPO substituted the method of allocation with a method, which he called as Normalization/linearization. Ld. TPO fixed the value of R & D fees and management fees by adopting the rate of increase in sales, considering financial year 2006-2007 as the base. Ld. TPO recommended an upward adjustment of �1,43,73,193/- for overcharging of R & D fees and management fees by the Associated Enterprise, for assessment year 2009-2010.

When the matter reached ld. DRP, for assessment year 5.

2009-2010, the ld. DRP confirmed the order of the ld. TPO in so far as it related to rejection of TNMM adopted by the assessee and rejection of the formula considered by the assessee for allocation of the R & D and management cost. However, ld. DRP was of the view that the method of fixing R & D and management fees adopted by the ld. TPO based on the rate of increase in turnover, considering financial year 2006-07 as the base was also incorrect. According to them, increase in profitability of various Associated Enterprises could not be attributed solely to the R & D services rendered by M/s. Durr Systems Gmbh, Germany. They held that allocation of shared cost had to be done on the basis of the ratio of sales of various Associated Enterprises of M/s. , 972/15 & 455/16 :- 8 -:

Durr Systems Gmbh, Germany. Ld. DRP also held that negative adjustment for management charges could not be done since cross subsidization was not recognized in Transfer Pricing. Ld. DRP further held that method used by ld. TPO was nothing but CUP, since by applying the excess earning method, what would be arrived at was the CUP price. The assessment was thereafter completed for assessment year 2009-2010, considering the directions of ld. DRP and result was a downward adjustment of R& D expenses by a sum of �2,17,88,709/-.

For the subsequent two assessment years 2010-2011 and 6.

2011-12, ld. TPO after rejecting TNMM adopted by the assessee followed the method suggested by the ld. DRP described by us in preceding para, for fixing the Arms Length Price of the R & D fees and management fees. resultant adjustment recommended for assessment year 2010-2011 came to �1,72,41,453/- and for assessment year 2011-12 came to �11,00,91,861/-. Though assessee moved before ld. DRP for these two years also, the ld. DRP followed its own direction for assessment year 2009-2010 and confirmed recommendation of ld. TPO for these two years. Assessments for all the years were accordingly completed. , 972/15 & 455/16 :- 9 -:

According to the ld. Authorised Representative for assessment year 2008-09 on the similar set of facts, TNMM was accepted by the ld. TPO as most appropriate method, for arriving at Arms Length Price.

According to him, allocation of R& D and management fees was done in a fair manner by M/s.Durr Systems Gmbh, Germany and such allocation gave no preferential treatment to the assessee in India. As

per ld. Authorised Representative principle behind the apportionment of such cost was a scientifically grounded one, since management fees had a direct nexus with head count, and R & D had direct nexus with profits/ sales. According to him, 50% each of these two were rightly allocated based on the ratio of sales. Ld. Authorised Representative submitted that for making such allocation the total turnover of all the group entities of M/s.Durr Systems Gmbh, Germany were considered and therefore claim of the lower authorities that the apportionment was unfairly done was unfounded. In support of his contention that a consistent approach had to be followed when facts and circumstances were similar, ld. Authorised Representative placed , 972/15 & 455/16 :- 10 -:

reliance on the judgment of Hon’ble Apex Court in the case of Radhasoami Satsang vs. CIT 193 ITR 321.

Ltd, (in ITA 1032/Mds/2014, dated 9.06.2016). According to him there was no requirement for any adjustment for Arms Length Price of the , 972/15 & 455/16 :- 11 -: international transaction undertaken by the assessee for the impugned three years.

Per contra, ld. Departmental Representative strongly 9.

supported the directions of the ld. DRP and the pursuant orders of the ld. Assessing Officer.

We have considered the rival contentions and perused the 10. 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 , 972/15 & 455/16 :- 12 -: 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 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:- , 972/15 & 455/16 :- 13 -:

‘’(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 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 thesewhich were set out in Rule 10B or Rule 10AB. Co-ordinate Bench , 972/15 & 455/16 :- 14 -: 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 of Frigoglass 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. , 972/15 & 455/16 :- 15 -:

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. , 972/15 & 455/16 :- 16 -:

Assessing Officer /ld. TPO for consideration afresh in accordance with law.

Order pronounced on Wednesday, the 21st day of December, 2016, at Chennai.