SKF INDIA LTD,MUMBAI vs. ASST CIT 4(3)(2), MUMBAI

The aforesaid appeal has been filed by the assessee against Final Assessment Order dated 30th January, 2016, passed by ACIT, Circle 4(3)(2), Mumbai, (AO) under section 144C r.w.s. 143(3) for the assessment year 2011-12 in pursuance of the directions given by the Dispute Resolution Panel (DRP) vide order dated 14.12.2015. In various grounds of appeal, the assessee has challenged following issues:-

Brief facts qua the issue of Transfer Pricing adjustment are that, the assessee company is part of Global AB SKF Group, which is a leading technology and solution provider of products, solutions and services in the area comprising Manufacturing & Sales of Ball Bearings, Roller Bearings, Hub Bearings & Textile Machinery components service and lubricants systems. In its Transfer Pricing Study report, the assessee disclosed the following transactions with its AE:- International transactions Value Rs.in lakhs) Purchase of Raw materials, consumables or any other supplies for manufacturing of goods from associated enterprises 5,028.82 Sale of finished goods (bearings) to associated enterprises 17,978.02 Purchase of finished goods from associated enterprises 66,845.16 Import of Capital items 1,081.17 International Transaction(s) in respect of use of Intangible Property such as know-how, patents, 1,168,55 copyrights, licenses, etc. Availing of services such as financial, administrative, technical, Commercial services, etc. 5,441.53 Total 97,543.25

For rendering all these services, the AE charges intra- group service fees from the assessee and other group companies, which are based on actual cost incurred plus a mark-up of 5%. The assessee has benchmarked the entire international transactions with the AE by aggregating under the manufacturing segment as all the transaction including services received were inextricably linked with manufacturing. For benchmarking the entire transactions, the assessee has adopted TNMM as MAM and the margin earned by the assessee on the total assets in the manufacturing segment was 32% and operating profit offered on total cost (OP/TC) was 19.77%. In the TP Study undertaken, the arithmetic mean of the profit margins of the comparable companies shortlisted was arrived at 10.85% and accordingly, it was stated that, assessee has earned very high margins as compared to the comparable companies engaged in the similar activities even after making the payment of intragroup services. It was stated by the assessee that, the cost of the 4 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 intragroup services has been allocated in both the segments on the basis of direct allocation to the extent possible and the balance on the basis of net sales. Thus, the assessee contented for the aggregation of the transactions.

Intragroup services availed by the assessee during the assessment year 2011-12 was classified under the following heads:- (Amount in Lakhs) Data Cost 1,730.34 Business support and Consultancy 205.73 Service Charges 3,339.48 Testing Charges 47.89 Training Charges 118.08 Total 5,441.53 The nature of each heads were elaborately given before the AO vide letter dated 9th October, 2014, the copy of which has been placed before us in the Paper book from pages 246 to 263 and our specific attention was drawn to pages 250 onwards. The TPO, noted that assessee except for providing sample copies of email correspondences in support of services rendered by the AE, and write-up of nature of services, no other documents were submitted to show that these costs were actually incurred. Further no separate benchmarking has been done for these transactions in the Transfer Pricing Study Report. On this premise and reasoning the TPO held that, Arm’s Length Price of services should be considered as “Nil” and the entire payment made for such services of Rs.54.41 crores was added back. The relevant observation for making the said adjustments reads as under:- “The submissions provided by the assessee are not acceptable. No supporting documents have been provided to show that these services were actually required by the assessee from the AEs. The 5 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 email correspondence provided is vague and cannot be used to determine the actual receipt of the services at all. The assessee has not provided any documents to show that these costs were actually incurred by the AEs. Even the cost allocation formula or working has not been provided by the assessee.

Before the DRP, assessee objected to the TPO’s order on various counts and first and foremost contention raised was that TPO has passed a non-speaking order without giving any show-cause notice for adjustment of intra-group services and ignoring submissions made in this regard. It was further submitted that, as per the OECD Guidelines, aggregation of the transactions can be done and further in support decision of Hon’ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd., reported in [2015] 374 ITR 118 was relied upon. The assessee’s objections on various counts have been incorporated in the DRP’s order from pages 3 to 6. That apart, the assessee had also filed various additional evidences giving the details of intra-group services availed from the AE during the year. On such additional evidences and submissions, remand report was called for, in response the TPO again contended that, no 6 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 agreements for services with the AE have been provided and how these services have been actually received and what the benefits derived from such services has not been given. Hence, he again justified the value of the transaction to be taken at “nil”. In rebuttal, assessee submitted that such an observation of the TPO is absolutely incorrect as the service agreement was very well filed before the TPO along with the various other evidences, which has not been considered by the TPO.

The DRP, after detailed discussion, rejected the assessee’s contention, which can be summarized in the following manner:- (i) The assessee company is paying Royalty of Rs.116.9 million to its AE and has not been able to justify what extra services were required from the AE. Apart from the services covered under the “royalty agreement”. (ii) The only evidence on record is in the form of e-mail correspondence which itself cannot prove that services were actually rendered by the AE and were actually received by the assessee; (iii) The assessee has incurred employee cost of Rs.1238.9 million and has not furnished the profiles of the employees and what kind of services rendered were by them; (iv) There is no added commercial value provided by providing such kind of services and thus, it cannot be regarded being rendered for the related party; (v) Business support consultancy and training charges are a typical shareholder activity of the AE, as the entire

Before us, the Ld. Counsel after explaining the entire facts as discussed above, submitted that the whole approach of the TPO as well as the DRP are factually and legally incorrect. He, first of all submitted that, plethora of evidences for rendering of intra-group services were filed before the authorities below. At the outset, the service agreements between the assessee and AE which has been placed in the paper-book at page 264 and 274 onwards, clearly describes the nature and scope of services rendered by the AE. Apart from that, he pointed out to summary of various categories of services received by the assessee which have been tabulated and given at pages 336 to 342 of the paper-book. Our attention was also drawn to various e-mail correspondences

On the other hand, the Ld. DR strongly relied upon the order of the DRP and submitted that, firstly, the intragroup

We have considered the rival submissions, perused the relevant finding given in the impugned orders, as well as material referred and relied upon before us. The main issue involved is Transfer Pricing Adjustment of Rs.54.41 crores on the transaction of intra-group services. The entire amount of payment made to the AE has been added to the income of the assessee by the departmental authorities holding that, the assessee could not provide any evidences to show that these services were actually availed by the assessee from the AE and no separate benchmarking has been done by the assessee qua this transaction. The assessee company which is part of SKF Group Worldwide is mainly engaged in Manufacturing & Sales of Ball Bearings, Roller Bearings, Hub Bearings & Textile Machinery components service and lubricants systems etc. As part of its manufacturing activity, assessee has shown availing of various services from its AE. The overall profit margin of the manufacturing and related activities worked out at 19.77% (on the base of operating profit/total costs). This PLI was benchmarked with the independent comparables whose average profit margin was worked out at 10.85% and hence it was reported that assessee’s entire transaction of manufacturing segment which included these services also are at Arm’s Length Price. Even if aggregations of all the transactions including relating to these

Now, whether the payment and the margin on these services are to be subsumed with other transactions, that is, whether all the transactions are to be aggregated for determination of ALP and would be covered under the overall profit margin worked out under the TNMM. As discussed in earlier part of our order, the intra-group services were stated to be inextricably linked with the manufacturing segment and hence it has been contended that the margin earned on the overall assets as well as the operations have to be aggregated. Since, the assessee’s operating profit margin over total cost is much higher, that is 19.77% as compared to the average profit margin of comparables arrived at 10.25% and, therefore, it has been contended that, such a high margin will take care of the payment made for intra-group services. In theory this contention of the assessee appears to be tenable, however the onus is on the assessee to demonstrate, whether the two AEs have treated the international transactions as a single transaction or is attributed to the aggregate package or not. If the assessee is able to demonstrate that the transaction of intra-group services are inextricably linked with the overall business activities undertaken by the assessee which herein this case is ‘manufacturing’ and has a overall effect on net income or loss in the final result then, such a transaction can be aggregated for the purpose of determining the Arm’s Length Price of the transactions between the AEs. Under the facts and circumstances of the 14 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 case, we are of the opinion that, this matter needs to be restored back to the file of the AO/TPO to examine whether the transaction of intra-group services are inextricably linked with the manufacturing and overall business activities carried out by the assessee. The primary onus would be on the assessee to provide necessary details and explain as to how these services provided by the AE can be subsumed or can be aggregated with the overall business activities. If it is found that all the transactions are to be aggregated then definitely under the TNMM and given the high profit margin of the assessee, no separate benchmarking would be required qua the intra-group services. In case, if it is found that these transactions needs to be separately benchmarked, then needless to say that, proper comparability analysis has to be carried out by following prescribed method under the Transfer Pricing provisions. With these directions, the issue of Transfer Pricing is set aside to the file of the TPO / AO for fresh and proper analysis after giving due and effective opportunity to the assessee to present its case properly.

So far as second issue relating to adjustment to closing stock on account of CENVAT under section 145A, the only contention raised by the Ld. Counsel before us is that, the same treatment should be given to the opening stock also in line with the decision of Hon’ble Bombay High Court in the case of CIT vs Mahalakshmi Glass Works Private Limited, reported in [2009] 318 ITR 116. Ld. DR admitted that, this issue may be set aside to the file of the AO to follow the principle laid down by the Hon’ble Bombay High Court.

The third issue relates to addition on account of reconciliation on the basis of AIR information. It has been pointed out before us, in the earlier year, the Tribunal has set aside this issue to the file of the CIT(A) on this issue.

Both the parties agreed that, this matter should be restored back to the file of the AO for this year on the similar line of directions. We find that the addition has been made on account of un-reconciled ITS data based on AIR Information. This precise issue had come up for consideration before the Tribunal, wherein, the matter was set aside to the file of the CIT(A) after observing and holding as under:- “9. In this regard, the learned Counsel for the assessee submitted that AIR data amounting to Rs.65,93,498, the assessee successfully reconciled to the extent of Rs.52,93,803 that constitute 80% of the entire transaction. Regarding the 16 एस के एफ़ इं�डया �ल�मटेड SKF India Limited ITA 1420/Mum/2016 balance of Rs.12,99,690, the Assessing Officer did not provide the necessary details to enable the assessee to reconcile the same. It is a settled issue that merely non-reconciliation of the AIR data does not lead to sustainable addition in the assessment. In our opinion, there is a need for remanding this issue to the file of the Assessing Officer. Consequently, we set aside the impugned order passed by the learned CIT(A) on this issue and restore the issue back to his file with a direction to furnish requisite specific information to the assessee calling for reconciliation. Normally, the AIR data is generic as well as general in nature. The Assessing Officer is required to first examine the specific of the transaction that require reconciliation. Thus, ground no.3, is allowed for statistical purposes”

In this year also, we set aside this issue to the file of the AO (because the matter has come through DRP route before us) and direct him to furnish all the requisite information to the assessee and after calling for the re-conciliation, the issue may be decided accordingly. Thus, these grounds are treated allowed for statistical purposes.

So far as short-deduction of TDS, it has been pleaded by the Ld. Counsel that, directions should be given to the AO for verifying the same and give the credit for TDS in accordance with the law. Accordingly, we direct the AO to examine this fact and to give credit for taxes on account of TDS after verification. Accordingly, the ground on this score is allowed for statistical purposes.

Regarding last ground, it has been stated that, the same is premature and accordingly the said ground is dismissed.