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Facts
The assessee, M/s Aptive Components India Private Limited, challenged the TPO's determination of Arm's Length Price (ALP) for technical support services and cost recharges from its Associated Enterprises (AEs) at Rs. Nil for Assessment Year 2018-19. The assessee had paid for these services with a 5% markup on actual cost for technical support and on a cost-to-cost basis for recharges, benchmarking them using the Transactional Net Margin Method (TNMM).
Held
The Tribunal found that the assessee had sufficiently proved the need for and rendition of services by its AEs, as well as the benefits derived. It was held that the transactions were at arm's length, noting that the assessee's margins fell within the comparable range and that the TPO had no basis to summarily reject the assessee's benchmarking. The Tribunal directed the deletion of the transfer pricing adjustments for both technical support services and cost recharges.
Key Issues
Whether the TPO/AO was justified in determining the Arm's Length Price (ALP) of payment for technical support services and cost recharges at Nil; and whether the assessee had provided sufficient evidence for the need, rendition, and benefits of such services.
Sections Cited
143(3), 144C(13), 144C(5), 92CA(3), 234B, 234C, 92CA
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “H”: NEW DELHI
O R D E R PER M. BALAGANESH, A. M.: 1. The Assessee M/s Aptive Components India Private Limited (hereinafter referred to as „assessee) by filing the present appeal sought to set aside the impugned order dated 29.07.2022 passed by the Assessing Officer (AO) under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (for short „the Act‟) inconsonance with the order passed by the Dispute Resolution Panel (DRP) dated 22.06.2022 u/s 144C(5) and order passed by Transfer Pricing Officer (TPO) under section 92CA(3) dated 30.07.2021 for AY 2018-19.
2. The Ground No. 1 is general in nature and does not require any specific adjudication.
The Ground No. 2 raised by the assessee was stated to be not pressed by the Learned AR at the time of hearing. The Learned AR has also filed a letter dated 23-5-2023 in this regard before us. Accordingly, the Ground No. 2 raised by the assessee is hereby dismissed as not pressed.
The assessee has raised Ground Nos. 3 to 4.5 on an issue as to whether the Learned TPO/ AO was justified in determining the Arm‟s Length Price ( ALP) of payment of technical support services and payment of cost recharges at Rs. Nil in the facts and circumstances of the instant case.
We have heard the rival submissions and perused the materials available on record. The assessee was formerly known as Delphi Automotive Components India Pvt Ltd. The assessee is a subsidiary of Aptiv International Holdings 2, Luxembourg and SARL (formerly known as Delphi International SARL, Luxembourg) and is primarily engaged in the business of manufacturing automotive components. The operation of assessee is classified in following business segments:-
Automotive Component Manufacturing Segment The assessee is engaged in the manufacturing of automotive components. This segment can be further categorized into three divisions namely Powertrain, Packard and Packard and Electronics & Safety Systems (E&S) based on the different product lines. The manufacturing facilities are located at Dharuhera (Haryana), Pune (Maharashtra) and Chennai (Tamil Nadu).
Software Development Segment (Tech Centre, Bangalore)
The assessee is engaged in modification and testing of software modules used in integrated circuits in automotive component industry. This facility is located in Bangalore (Karnataka).
Further, assessee has one Engineering Centre based in Pune along with manufacturing segment.
5.1. The International transactions carried out by the assessee are listed at pages 1 and 2 of the order of the Learned TPO dated 30-4-2021 in tabular form duly mentioning the Most Appropriate Method (MAM) applied by the assessee for each transaction. Out of the total 13 international transactions , the disputed transactions before us are with Payment for Technical Support Service Charges of Rs 2,95,57,620/- and Payment for Cost Recharges of Rs 21,07,60,642/-. Let us examine each of these transactions separately.
Payment for Technical Support Services – Rs 2,95,57,620/- The assessee during the year had availed technical support services from its Associated Enterprises (AEs), which are in the nature of (i) coordinating and engineering support services for existing and new projects, (ii) engineering support services on existing product and process, (iii) product testing and process improvements, (iv) training to its employees related to software upgradation and safety control measures, and (v) production control logistic management. For the provision of such services, the AE charges actual cost to the assessee with a markup of 5%. Against the receipt of above services, the assessee made payment of Rs 2,95,57,620/- to its associated enterprises, which were utilized in its manufacturing segment and software service segment as under:-
Segment Amount (in Rs.) Automotive Component Manufacturing Segment 2,04,21,168
IT Software/ Support Services Segment 89,40,978 Others 1,95,474 Total 2.95.57.620 5.2. For benchmarking the aforesaid transaction of payment of technical services undertaken with the associated enterprises, the assessee in its Transfer Pricing Study Report (TPSR) had applied Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) considering the associated enterprise (AE) as the tested party and taking the profit level indicator as Operating Profit to Operating Cost (OP/)OC) margin. The assessee selected 10 comparable companies wherein the weighted average margin of the comparables was in the range of 4.14 to 14.01 percent, since the cost plus markup of 5% earned by the assessee was within the prescribed range of 4.14 to 14.01 percent, the international transaction of payment of technical services undertaken by the assessee with its AE was found to be at arm's length (ALP) using TNMM.
5.3. The Learned TPO held that the assessee had failed to produce evidence to substantiate that the services were actually rendered by the AE or that any cost has actually been incurred by them in provision of such services. Accordingly, as per the learned TPO, in an uncontrolled circumstance, no independent party would have made such payment for lack of services applying „Any Other Method‟ and determined the ALP of the transaction of payment of technical support fee at Rs Nil.
5.4. The assessee furnished the need for availing the technical support services from its AE along with the evidences to prove that the AE had indeed rendered services to the assessee and the benefits derived by the assessee out of availing of such services from the AE. With regard to the need for availing technical support services, it was submitted that assessee is engaged in manufacturing of critical components for passenger safety, security, comfort, etc. of a vehicle. In order to manufacture such products and sell to its domestic customers, namely Ford, Fiat, Nissan, Hero, Motor Corp, etc., the assessee requires services such as product testing, process improvements and technical support services from its AE. Accordingly, the assessee has from time to time entered into technical support service agreements with its AEs seeking specific services in relation to a particular product manufactured and sold to a domestic customer. Hence, the AE at the request of the assessee has, on need basis, time to time provided such technical support services at actual cost incurred in rendering such services along with markup of 5%.
5.5. With regard to the evidences to prove that the AE had indeed rendered such technical support services to the assessee, it was submitted that assessee had made payment against the following invoices aggregated under the technical support service fees:-
Name of S. No. associated Name of agreement Invoice no. Amount Value in INR enterprises 1. 42150166 $ 23,640 14,91,171 Aptiv Services Ford Dragon 2. 42152829 $ 23,640 14,95,899 Deutschland Program Consulting 3. 42155461 $ 23,640 14,74,622 GmbH Services Agreement 4. 42156215 $ 15,872 10,12,172 Total 54,73,866 Delphi Packard 5. Electric System Nissan K2 Project 452581071 $ 36,502 23,03,276 Co., Ltd. (EJV) Total 23,03,276 6. Technical Service 4917700782 € 4,074 3,22,600 Delphi Italia Agreement of the 7. 4917700560 € 4,074 3,08,135 Automotive wiring harness for Systems S.r.l Flat 2.0 Multijet 8. 4917700398 € 4,075 3,08,211 Engine Total 9,38,947 9. Aptiv Services UK Panther program 1800024414 €37,531 26,57,842 10. Limited consulting service 1800024600 €37,531 28,22,980 11. agreement 1800024993 €37,531 29,61,845 12. 1800025020 € 8,953 7,02,735 13. 1800024175 €37,531 25,59,676 Total 1,17,05,078 Delphi Automotive Training Fees to DCHC- 14. $ 15,988 10,25,676 Systems (China) Employees TB457-1712 Holding Company 15. 1,95,474 Ltd Total 12,21,150 16. DDD023-17 ¥ 1,08,838 62,963 17. DDE023-17 ¥ 73,045 41,636 18. DDF023-17 ¥ 94,886 54,749 Aptiv Mobility 19. DDG023-17 ¥97,012 54,660 Services Japan 20. DDH023-17 ¥ 1,12,030 63,869 Ltd.
21. DDI023-17 ¥ 1,15,385 66,485 (Delphi Engineering Rebill 22. DDJ023-17 ¥81,340 46,051 Automotive 23. DDK023-17 ¥97,180 55,097 Systems Japan 24. DDE023-17 ¥ 1,19,033 67,044 Ltd) 25. DDA022-18 ¥ 1,28,120 70,957 26. DDB022-18 ¥ 74,398 43,708 27. DDC022-18 ¥ 1,59,201 95,769 Total 7,22,987 28. 1800080889 $ 7,525 4,79,348 29. 1800096588 $ 7,525 4,82,734 30. 1800087789 $ 7,525 4,79,348 Rebill of PCLS - Aptiv Safety & 31. 1800089989 $ 7,525 4,77,843 Procurement and Mobility Services 32. Logistics Cost / MPL - 1800091388 $ 7,525 4,77,467 Singapore Pte Ltd 33. 1800085388 $ 7,525 4,77,090 Manufacturing (Delphi 34. Planner Cost / DGSM 1800082488 $ 7,567 4,82,980 Automotive 35. - Delphi Global 1800093889 $ 7,525 4,78,848 Systems Supply Chain 36. 1800090989 $ 7,525 4,84,868 Singapore Pte Ltd) Management Cost 37. 1800084389 S 7,535 4,74,969 38. 1800096789 $ 7,535 4,75,346 39. 1800103888 $ 7,535 4,82,881 Total 57,53,722 DCTC-ENG- 40. $2,147 1704 1,37,897 DCTC-00457- 41. $4,174 1705 2,65,479 DCTC-ENG- 42. $ 3,249 1706 2,06,323 DCTC-ENG- 43. $ 1,882 1707 1,19,521 Aptiv (China) DCTC-ENG- Technical Centre Product 44. $ 1,909 Co. Ltd. Line_CTRLS_Active 1708 1,21,148 (Delphi (China) Safety / Product Line DCTC-ENG- 45. $ 3,731 Technical Center CTRLS BodyS ec 1709 2,35,998 Co. Ltd) DCTC-ENG- 46. $ 1,096 1710 70,531 DCTC-ENG- 47. $ 2,573 1711 1,65,973 DCTC-ENG- 48. $960 1712 60,727 DCTC-ENG- 49. $ 871 1801 54,995 | Total 14,38,592 Grand Total 2,95,57,620
Let us now examine the details of requisitioning of services by the assessee and the services actually rendered by the AE in respect of each of the customers.
A. Aptiv Services Deutschland GmbH – Ford Dragon Program Consulting Services The assessee in order to manufacture and supply engine wiring harness to its customer, Ford, a commercial vehicle and four-wheeler car manufacturer, has engaged with its AE for availing engineering support services, which were covered under the „Dragon Programme Consulting Service Agreement‟ entered with the AE. Under the said programme, the assessee has continuously received technical support services from the AE in respect of the product, i.e. engine wiring harness to be manufactured and sold to Ford. The following documents were furnished as supporting evidences by the assessee in support of rendition of services:- a) Summary of AEs from whom services are availed, nature of agreement, invoice number and invoice amount. b) Copy of Dragon Programme Consulting Service Agreement entered between assessee and Delphi Deutschland GmbH, Germany. c) Copy of invoices raised by Delphi Deutschland GmbH, Germany. d) Copy of various emails with testing results data issued by Mr. Stefan Voigt, Product Engineer Ford EDS of Delphi Deutschland GmbH, to Mr. Prittam Narayan and other Indian counterparts in relation to Dragon Project. The Learned AR before us drew our attention to Page No. 733 of the Index of Papers Volume II of the Paper Book to the email sent by Mr. Darren Grennal from Ford to Mr. Stefan Voigt, Product Engineer Ford EDS of Delphi Deutschland GmbH, Germany, wherein he had proposed to make changes in the wiring harness with subject of the email as “Dragon B562MCA Wiring Page | 7 Harness Change Proposal AIM 3598747”. Subsequently, under the same subject line “DRAGON B562MCA Wiring Harness Change Proposal AIM 3598747”, Mr. Stefan Voigt, Product Engineer Ford EDS of Delphi Deutschland GmbH has also issued email to Mr. Ajit Mishra of Delphi India (the assessee herein) stating the change suggested in the meeting held at Ford DRAGON program office and also provided the presentation to him. This email is enclosed in Page 736 of Index of Papers Volume II of the Paper Book. Thereafter, Mr. Ajit Mishra of Delphi India has requested Mr. John Joji of Delphi Deutschland GmbH, Germany to provide the tooling cost and standard time impact of the project. The evidence in this regard is enclosed in Page 723 of Index of Papers Volume II of the Paper Book. Mr. Stephen Broad of Delphi Automotive Systems, UK sent a mail dated 23-06- 2017 providing necessary information on the project to Mr. Saubhagaya Ranjan Samal. The evidence in this regard is enclosed in Page 718 of Index of Papers Volume II of the Paper Book. In another email dated 4-07-2017 with subject “Dragon PFI C519P_C13364439”, Mr. Stefan Voigt, Product Engineer Ford EDS of Delphi Deutschland GmbH provided necessary information to Mr. Prittam Narayan, for making changes in the system design of the product. The evidence in this regard is enclosed in Page 736 of Index of Papers Volume II of the Paper Book. B. Delphi Packard Electric System Co. Ltd (EJV) – Nissan K2 Project The assessee, in order to manufacture and supply of wiring harness to its customer, Nissan, a four-wheeler car manufacturer, has engaged the services of its AE for testing the products. The following documents were furnished to prove the need for services for the assessee and rendition of services by the AE :- a) Copy of documents including email dated 08.05.2017 sent by Mr. Ajay Sharma seeking services of the AE for testing the TRs at Shanghai Test Lab, along with various other emails providing technical information in relation to testing of the product are provided by the assessee, along with copy of invoices raised by Delphi Packard Electric Systems, China . These documents are enclosed in Pages 740 to 770 of Index of Papers Volume II of the Paper Book. b) The Learned AR before us specifically drew our attention to the email sent by Mr. Ajay Sharma and other employees seeking testing services of the AE for testing the TRs at Shanghai Test Lab, along with various other emails providing technical information in relation to testing of the product in relation to “Nissan K2 project” . c) In email dated 08.05.2017, with subject “Electrical testing of K2 Nissan - India project”, Mr. Pan Wenzhu of Delphi, China has requested Mr. Ajay Sharma to provide the connector number for providing heating and bending test results sought from him. The evidence in this regard is enclosed in Page 748 of Index of Papers Volume II of the Paper Book. d) In another mail dated 24.04.2017, with subject “Electrical testing projection for India projects”, Mr. Ajay Sharma of Delphi India has requested Mr. Pan Wenzhu and Xuanxua Xie to provide test results for “Ford Panther program” and “Nissan K2” program. The evidence in this regard is enclosed in Page 752 of Index of Papers Volume II of the Paper Book. e) In email dated 06.11.2017, Mr. Ankit Jain of Delphi India shared the test invoice raised by Delphi China along with the PO issued by Delphi India and confirmed that the necessary services have already been provided. The evidence in this regard is enclosed in Page 768 of Index of Papers Volume II of the Paper Book. C. Delphi Italia Automative Systems S.r.l. – Technical Services Agreement of the wiring harness for Flat 2.0 Multijet Engine The assessee, in order to manufacture and supply of wiring harness for Fiat 2.0 Multijet Engine for its customer, Fiat, a four-wheeler car manufacturer, has engaged the services of its AE for developing the design of such products. The following documents were furnished to prove the need for services for the assessee and rendition of services by the AE :- a) Copy of Technical Service Agreement dated 16-05-2016 entered between assessee and Delphi Automotive Systems S.r.l. Italy which is enclosed in Pages 771-772 of Index of Papers Volume II of Paper Book. b) Copy of invoices raised by Delphi Automotive Systems S.r.l. Italy which are enclosed in Pages 773-778 of Index of Papers Volume II of Paper Book. c) Copy of email dated 27-04-2017 sent by Ms. Varsha Narula seeking services of the AE for developing the drawing and design of wiring harness, along with technical information. Drawing and design provided by the AE in response to the queries of the assessee which is enclosed in Pages 779-786 of Index of Papers Volume II of Paper Book. d) In email dated 14-04-2017 under subject „12V BSG Harness Update‟, Ms. Varsha Narula has requested Mr. Alberto Massucco of Delphi Italy to provide the cost and the timeline for undertaking modification of the change in wiring harness. The evidence in this regard is enclosed in Page 781 of Index of Papers Volume II of the Paper Book. e) In email dated 26-05-2017 under subject „12V BSG Harness Update‟, Mr. Alberto Massucco of Delphi Italy has provided the necessary drawings of the changes to Ms. Varsha Narula. The evidence in this regard is enclosed in Page 779 of Index of Papers Volume II of the Paper Book. D. Aptiv Services UK Limited – Panther Program Consulting Service Agreement Page | 10 The said services are covered under the “Panther Program Consulting Service Agreement” entered with the AE. Under the said program, the assessee has continuously received technical support services from the AE in respect of the product i.e. engine wiring harness, to be manufactured and sold to Ford. The following documents were furnished to prove the need for services for the assessee and rendition of services by the AE:- a) Copy of documents including email dated 27-04-2017 issued by Mr. Prittam Narayan seeking services of the AE for development of engine wiring harness in Ford. b) Copy of „Panther Program Consulting Service Agreement‟ entered between assessee and Delphi Packard Electrical / Electronic Architecture - Customer Service Center, UK enclosed in Pages 787-791 of Index of Papers Volume II of the Paper Book. c) Copy of invoices raised by Activ Services UK Limited enclosed in Pages 792-797 of Index of Papers Volume II of the Paper Book. d) Copy of email dated 27-04-2017 sent by Mr. Prittam Narayan seeking services of the AE for development of engine wiring harness in Ford. e) Copy of emails between Mr. Prittam Narayan and Hiba Zouhaoui for developing the drawing and design of wiring harness in relation to Ford Panther Program. The evidence in this regard is enclosed in Pages 798-801 of Index of Papers Volume II of the Paper Book. f) Email dated 27-04-2018 with subject “released print for Panther Dragon GTDI and FOX‟, wherein Mr. Prittam Narayan of assessee has requested Mr. Sanae Lahouini for print of drawing of parts developed under the Panther Program. Page | 11 g) Email dated 3-05-2018 sent by Ms. Hiba Zouhaoui providing drawings relating to FOX, Panther and Dragon Program. The evidence in this regard is enclosed in Page 798 of Index of Papers Volume II of the Paper Book.
E. Delphi Automative Systems (China) Holding Company Ltd – Training of employees During the year under consideration, the assessee, time to time, sent its various employees to Shanghai, China for availing various operations and management related training. Such training was related to employees working under the software development segment and therefore was cross charged to the AE along with 5% markup. The following documents were submitted to prove the need for training of the employee and rendition of such services by the AE:- a) Copy of invoices raised by Delphi Automotive Systems (China) Holding Company Limited for training of employees enclosed in Pages 844 to 846 of Index of Papers Volume II of the Paper Book. b) Copy of email dated 29-06-2017 issued by Mr. Ravi Salagame requesting for training of one group manager Mr. Pratik Sheth enclosed in Pages 847 to 849 of Index of Papers Volume II of the Paper Book. c) Copy of invitation letter issued by Delphi China for training of Mr. Pratik Sheth. Invitation was confirmed by Aptiv China and the letter issued to visa office in India. The evidence in this regard is enclosed in Page 850 of Index of Papers Volume II of the Paper Book. d) Copy of email dated 1-06-2017 confirming the fact that Mr. Pratik Sheth of assessee being enrolled for technical training from Aptiv (China) Page | 12 Holding Company enclosed in Page 848 of Index of Papers Volume II of the Paper Book.
F. Aptiv Mobility Services Japan Ltd (Delphi Automative Systems Japan Ltd) – Engineering Rebill The assessee in terms of agreement dated 1-1-2012 entered with Delphi Automotive Systems Japan Ltd had agreed to receive following services:- a) Engineering services, such as coordinating and providing engineering support for existing and new projects. b) Engineering services incurred to apply existing technology, product, or process to a specific platform for an existing or potential customer. c) Quality services, such as developing effective quality systems, product testing and process improvements.
In support of this, the assessee furnished the copy of Engineering Services Agreement dated 1-1-2012, entered between assessee and Delphi Automotive Systems Japan Ltd, which is enclosed in Pages 851-854 of Index of Papers Volume II of the Paper Book, together with the invoices raised by Delphi Automotive Systems Japan Ltd enclosed in Pages 855-872 of Index of Papers Volume II of the Paper Book.
G. Aptiv Safety & Mobility Services Singapore Pte Ltd (Delphi Automative Systems Singapore Pte Ltd) – PCLS, MPL, DGSM services The assessee in terms of agreement dated 1-10-2012 entered with Delphi Automotive Systems Singapore Pte Ltd, has agreed to receive services in relation to the following functions relating to its automotive segment:- a) PCL- Procurement and Logistics b) MPL -Manufacturing Planner and Logistic c) GSCM- Global Supply Chain Management.
The assessee furnished the following documents in relation to the above services:- a) Copy of Engineering Services Agreement dated 1-10-2012 entered between assessee and Delphi Automotive Systems Singapore Pte Ltd, enclosed in Pages 873 -876 of Index of Papers Volume II of the Paper Book, along with invoices raised by Delphi Automotive Systems Singapore Pte Ltd, enclosed in Pages 877 -900 of Index of Papers Volume II of the Paper Book.
H. Aptiv (China) Technical Centre Co. Ltd [Delphi (China) Technical Centre Co. Ltd] The AE of the assessee has undertaken two projects, namely Activ Safety and Body Security for the assessee to India specific customers such as Mahindra and Mahindra, Hero MotoCorp etc. The technology developed through the projects were utilized in the products manufactured by the assessee in its automotive segment. Further, the AE has also provided services to India specific customers to Mahindra and Mahindra, Hero MotoCorp etc. The assessee furnished the copy of invoices raised by Delphi (China) Technical Centre Co. Ltd in relation to the above services which are enclosed in Pages 901 - 916 of Index of Papers Volume II of the Paper Book.
6.1. With the aforesaid documentary evidences, the assessee had duly proved the need for availing services from its AE and the proof of rendition of actual services by the AE to the assessee.
Let us now examine the benefits derived by the assessee pursuant to availing of aforesaid services from the AEs. In this regard, the Learned AR stated that the AE with years of research and development and incurring associated cost had gained expertise in developing various processes to improve the product quality and manufacturing processes. Further the advanced training, education and development programs provided by the AE also leads to efficient working of assessee‟s employees in terms of reduction of errors, enhancing productivity and with less supervision etc. The Learned AR submitted that on the sale of products (wiring harness) developed by the assessee using the technical support services availed from its AEs under the Ford Dragon program and Ford Panther program, the assessee has generated substantial revenue as under :-
Product Name Period from date of production to Dec 2019 Amount of Sales (INR) Ford Dragon Program Feb 2016- Dec 2019 56,62,88,993 Ford Panther Program March 2018-Dec 2019 99,07,35,518 7.1. It was submitted that the revenue earned by the assessee from sale of products using the technology of the AE is far more than the cost incurred by the assessee and also submitted that without the technology received from the AE, the assessee would not have been in the position to develop such products. The AE has charged actual cost incurred by it in relation to provision of such technical support services with a markup of 5% on the assessee. We have already seen in the TP study report of the assessee that the comparables margin range was between 4% to 14% and that assessee‟s margin of 5% falls within that range and accordingly the transaction of the assessee with its AE was considered to be at arm's length. We find lot of force in the arguments of the Learned AR that had the aforesaid services not been availed from the AE by the assessee, the assessee would have ended up in hiring additional engineers, public consultants to perform the said functions in-house, provide necessary resources and training to them on their own or by outsourcing such services to external third parties by incurring additional costs. In either of the situation, the assessee would have incurred much higher cost spending substantial time in receiving those services which may or may not meet the ultimate requirements of the AE with regard to the global recognition.
The Learned DR before us with regard to the need for availing services from the AE, rendition of services by the AE to the assessee and the benefits derived by the assessee as elaborated hereinabove, merely relied on the orders of the lower authorities and the remand report submitted by the Learned TPO before the Learned DRP. However, he vehemently argued that the AE had charged the assessee with a mark up of 5% over and above the actual cost incurred by the AE. The Learned DR submitted that the assessee in the instant case had not produced the details of actual cost incurred by the AE. Accordingly, a query was posed by the Bench directing the assessee to furnish the details of actual cost incurred by the AE, which was furnished by the Learned AR at the time of subsequent hearing.
We find that the assessee had furnished all the requisite details namely the need for availing the technical support services from AE, actual rendition of services by the AE to the assessee and the benefits derived by the assessee out of availing such services as detailed supra.
We find that the assessee had benchmarked the international transaction of technical support services applying TNMM as the MAM considering the AE as the tested party. It is a fact that AE had charged 5 percent on the actual cost incurred by it on the assessee in consideration of rendering the technical support services to the assessee. The assessee had adopted PLI of OP/OC and identified 10 comparable companies which had availed similar type of services from its AEs. The margin charged by the AE on the assessee at the rate of 5 percent fell within the PLI range of 4.41 % to 14.01 % of the comparables and accordingly it was held that the margin of 5% paid by the assessee to its AE was at arm's length. The learned TPO without finding fault in the method adopted by the assessee and the PLI of the comparables worked out there on, cannot summarily reject the same and proceed to determine the arm's length price of the international transaction at Rs Nil. On perusal of the orders of the lower authorities, we find that there is absolutely no basis that has been brought on record by the lower authorities to reject the contentions of the assessee and determine the ALP of the international transaction at Rs Nil. In fact, the assessee on an alternative basis had also benchmarked the international transaction of technical support services applying TNMM as MAM considering assessee as the tested party. The technical support services availed by the assessee were utilized by the assessee in manufacturing segment and software service segment, which fact is not in dispute. Even keeping assessee as the tested party, the PLI of the assessee in manufacturing segment was worked out at 9.63 % under TNMM and PLI of the assessee for software service segment was worked out at 12.91 % as against the median of the comparable companies of 5.25% and 5.88 % respectively. Hence even on alternative workings of keeping assessee as the tested party using TNMM, the margins derived by the assessee in manufacturing and software services segment was more than the comparables margin. Hence even on the alternative workings submitted by the assessee before the lower authorities, the transactions of payment of technical support services need to be accepted to be at ALP. It is also pertinent to note that in earlier years, eventhough the same agreements were continuing from earlier years, no ALP adjustment was made in respect of the technical support services fees by the Learned TPO. Even on facts and figures as is evident from the Audited financials of the assessee for the year ended 31-3-2018, we find that the export revenue earned by the assessee is only Rs 31681.26 lakhs as against the total revenue of Rs 82415.95 lakhs. Even out of export revenue of Rs 31681.26 lakhs, the exports made to AEs were only Rs 2928.27 lakhs. Similarly, the total expenditure incurred by the assessee was Rs 76495.12 lakhs. Out of this, the payment of technical support services fees to AE was Rs 295.58 lakhs.
In view of the aforesaid elaborate observations, we hold that the payment of technical support service charges by the assessee to its AEs with a mark up of 5% over and above the actual cost incurred by the AEs is to be accepted to be at ALP under both the circumstances of considering AE as the tested party as well as the assessee as the tested party. Hence the transfer pricing adjustment made in this regard is hereby directed to be deleted.
Payment of Cost Recharges – Rs 5,13,72,451/-
During the year under consideration, the AE has incurred certain common charges, predominantly comprising of IT charges, for its group companies, which are in the nature of: a) IT network i.e. WAN, Skype, LAN, MS Outlook, Lync b) IT hosting i.e. SAP, Oracle c) IT application i.e. BUS, ENG, ERP d) IT End User - McAfee, MSEA The above IT services were utilized by the assessee in its manufacturing and software services segment. The common charges are paid by the AEs to Page | 18 unrelated third parties and in turn cross charged to the respective group companies, including the assessee, on the basis of their respective usage. The AEs do not charge any markup with respect to such common recharges.
For the purpose of benchmarking the aforesaid transaction of payment of cost recharges undertaken with the AEs, the assessee in its Transfer Pricing Study Report had applied “Any Other Method” as the Most Appropriate Method (MAM). Since the aforesaid expenses were merely reimbursement of actual cost incurred by the AEs on assessee‟s behalf and did not involve any element of service or income, therefore the transaction of payment of cost recharges was considered to be at arm's length applying „any other method‟. The learned TPO observed that assessee has failed to provide evidence to substantiate that the AE has actually incurred such common cost and that if the assessee is requisitioning / receiving services related to computer software, then there would have been license issued by the software developers authorizing the assessee to use the software. The learned TPO observed that out of the total cost recharges of Rs 21,07,60,342/-, an amount of Rs 15,93,87,892/- was related to software development segment and the expense was rebuilt to the AE along with a markup. This has been accepted by the learned TPO. However, the learned TPO disallowed the balance sum of Rs 5,13,72,451/- (210760342 – 159387892) by determining the arm's length price of the same at Rs Nil.
The assessee furnished the need for availing the predominantly common IT related services from its AE along with the evidences to prove that the AE had indeed rendered services to the assessee and the benefits derived by the assessee out of availing of such services from the AE.
Need for incurring cost on IT Related Services There are certain software, applications, infrastructure equipments which are general in nature and are utilized across industry or a group. In the case before us, the assessee has utilized such software, applications and infrastructure equipments on sharing basis with the AE in order to (i) reduce its cost of directly owning the same, (ii) investing time and effort in identification of supplier, negotiating with such suppliers and making payments thereof and (iii) having consistency in the use of such software and applications across the group. During the year under consideration, the AE had availed following services from third party suppliers on behalf of the group companies including the assessee and cross charged the expenses on the assessee on usage basis:-
Amount (Grand S. total charged paid Name of AE Name of service provider Invoice No. by AE to 3rd party No. service providers) Dassault Systems 2017DSAC000 1 $ 17,02,945 Americas Corp (DSAC) 075 Aptiv Services 3 Altair Engineering Inc. 452486971 $ 25,000 US, LLC AN SYS, Inc. with its (formerly Delphi 4 3346185 $ 28,88,000 Affiliates Automotive 5 Systems, LLC) Microsoft Corporation 45269243 $ 124,36,768 6 (“Aptiv US”) (SHI UK) 48379767 $41,20,000 Mentor Graphics 7 48361185 $ 38,50,000 Corporation The services availed under the aforesaid agreements were further substantiated by the assessee as under:-
A. Aptiv Services US, LLC (formerly Delphi Automative Systems, LLC)- Dassault Systems Americas Corp (DSAC)
The copy of invoice raised by the company provides the details of Dassault Systems software licensed to the AE for use by 32 of its group companies, including the assessee. The software acquired from Dassault Systems has following description :- “1. SIMULIA Abaqus Software: SIMULIA offers an advanced simulation product portfolio. It covers simulation disciplines such as structural mechanics, computational fluid dynamics and electromagnetic field simulation for a true multi- physics simulation approach. The SIMULIA product portfolio comprises tools for process integration and optimization. With Abaqus / CAE you can quickly and efficiently create, edit, monitor, diagnose and visualize advanced Abaqus analysis. The intuitive interface integrates modeling, analysis, job management and results visualization in a consistent, easy-to-use environment that is simple to learn for new users, yet highly productive for experienced users. Abaqus /CAE supports familiar interactive computer-aided engineering concepts such as feature-based, parametric modeling, interactive and scripted operation and GUI customization. The open customization toolset of Abaqus / CAE provides a powerful process automation solution enabling specialists to deploy proven workflows across the engineering enterprise. Abaqus / CAE also offers comprehensive visualization options which enable users to interpret and communicate the results of any Abaqus analysis.
CATIA: CATIA stands for Computer Aided Three-Dimensional Interactive Application. It is a Computer Aided Design (CAD) software package. It is a full software suite which incorporates Computer Aided Design (CAD), Computer Aided Engineering (CAE) and Computer Aided Manufacture (CAM).”
B. Aptiv Services US, LLC (formerly Delphi Automotive Systems, LLC) – ANSYS, Inc. with its Affiliates The group company has engaged the service provider with intention to collaborate in the design, development, testing, scaling and commercializing version of a simulation platform incorporating commercial software applications, ANSYS Background Intellectual Property, ANSYS developed IP, Aptiv developed IP and Aptiv Background Intellectual Property that is specifically configured for Aptiv, for use in automated driving applications that will be capable of (a) using models of (i) sensors (including radar, camera, lidar and maps) and (ii) roadways, vehicles, pedestrians and (b) integrating policy and planning software that controls Level 0 through Level 5 vehicle autonomy to simulate vehicle control and interaction with vehicular environments.
C. Aptiv Services US, LLC (formerly Delphi Automotive Systems, LLC) – Microsoft Corporation (SHI UK) The AE has engaged with Microsoft Corporation for receipt of various Enterprise Products such as Office 365, versions of Windows and Enterprise Online Services from its group companies. Such products and solutions are availed on per user basis and number of users in each group companies are identified. The basis of allocation of cost incurred by Aptiv US for each of such software, antivirus, LAN, etc. among the group entities is as under:- Service Classification Allocation Key IT Applications BUS Per User (Net ID) IT Applications ENG Per User (Net ID) IT Applications ERP Per User (User ID) IT End User Compute McAfee Per User (Net ID) IT End User Compute MSEA Per User (Net ID) IT Hosting Oracle No. of Licensee IT Hosting SAP Per User (Net ID) IT Network Lync Per User (Display Name) IT Network LAN Per User (Unique)
Detailed analysis of allocation of various IT cost allocated to the assessee company on sample basis is provided by the assessee as under:-
IT Regional Rebill Jan- Mar'18 S. Allocation Key India India/ No. Service Classification Allocation Total Cost Grand % 1 IT Applications BUS PerUser (Net ID) - 87,548 0.00% Page | 22 2 IT Applications ENG Per User (Net ID) - 15,56,654 0.00% 3 IT Applications ERP Per User (User ID) 63 6,87,437 0.01% IT End User Compute 4 McAfee Per User (Net ID) 56 90,429 0.06% IT End User Compute 5 MSEA Per User (Net ID) 768 12,39,644 0.06% 6 IT Hosting Oracle No. of Liscense - 4,89,557 0.00% 7 IT Hosting SAP Per User (Net ID) - 6,37,766 0.00% Per User (Display 8 IT Network Lync Name) 2,00,534 0.00% 9 IT Network LAN Per User (Unique) - 1,88,728 0.00% Grand Total 887 51,78,298 Further taking IT applications MSEA (Microsoft) as an example, which constitutes 87% of the total IT regional rebills, the cost allocated to assessee is determined as under:-
India Annual India Monthly IT End User Compute MSEA No. of Users Allocation Allocation 10023 29 9,219 768 Subtotal 9,219 768 Accordingly, the following invoice was raised by the AE for charging the IT cost:-
Evidence for receipt of above services The assessee submitted the following documentary evidences in support of rendition of services by the AE which were placed before the Learned DRP as under:- a) Summary of invoices received by the AE from third party suppliers for providing services to the group companies including the assessee. This is enclosed in page 802 of the paper book. b) Copy of invoices raised by Dassault Systems America's Corp along with copy of Proprietary Information Agreement entered between Delphi Automotive Systems LLC and Dassault Systems America's Corp. This is enclosed in pages 801 to 804 D of the paper book. c) Copy of Aptiv Configured Simulation Platform Agreement dated 22-11- 2017 entered between Aptiv Technologies Ltd and ANSYS Inc. This is enclosed in pages 805 to 835 of the paper book. d) Copy of invoices raised by ANSYS Inc. This is enclosed in page 836 of the paper book. e) Copy of invoices raised by Microsoft Corporation along with copy of sample copy of purchase order providing description of services. This is enclosed in pages 837 to 837 C of the paper book. f) Copy of invoices raised by Mentor Graphics. This is enclosed in pages 838 to 839 of the paper book. g) Copy of invoices raised by Delphi Automotive Systems LLC for allocation of cost free charges to the assessee. This is enclosed in pages 840 to 841 of the paper book. h) Copy of screenshot taken for various software such as McAfee, Office, Skype etc. being used by Aptiv India. This is enclosed in pages 917 to 922 of the paper book. i) Sample copy of invoices raised by AE on other group entities for charging similar cost recharges on account of IT cost. This is enclosed in pages 923 to 934 of the paper book.
Benefits derived The benefits derived by the assessee from use of each of the above IT related services are as under :- a) IT network i.e. WAN, Skype /Lync, LAN, MS Outlook With the help of business Skype / Lync, assessee‟s employees could share files with ease, communicate within the organization, organize meetings with the clients, etc. b) IT hosting i.e. SAP, Oracle SAP / Oracle helps in consolidation of data, forecasting / budgeting of data, security assurance, etc. c) IT application i.e. BUS, ENG, ERP ERP is a reporting tool which helps in supply chain management, inventory management, etc. d) IT End User - McAfee, MSEA McAfee helps in detecting intrusion of risk from outside the organization and eliminates such risk on real-time basis. It also helps maintaining confidentiality policy and protecting organization's privacy.
Based on the above, it was submitted that the assessee has derived significant operational benefits in the context of data management, data organizing, data confidentiality, employment of best practices to improve the quality of reporting, better performance of processes, reduction of errors, etc. Similarly such services have assisted the assessee in improving Page | 25 overall business efficiency, guided the assessee to effectively perform its management and administration functions and undertake disaster recovery planning. The Learned AR submitted that the AE has not charged any markup on such cost recharges and only the actual cost allocable to the assessee company on the basis of identified number of users are charged to it. It was also submitted that had the aforesaid services not been availed through the AE, the assessee would have hired these suppliers to perform similar services on its own. In such situation, the assessee would have made substantial effort and incurred high cost , as the centralized services taken by the group provides benefit of economies of scale as compared to individual company negotiating for similar services on its own.
14.1. With the aforesaid documentary evidences, the assessee had duly proved the need for availing services from its AE and the proof of rendition of actual services by the AE to the assessee together with the benefits derived by the assessee by availing such services.
It is not in dispute that the services received against payment of cost recharges were utilized by the assessee in its manufacturing segment and software development segment. The common charges are paid by the AEs to unrelated third parties and cross-charged to respective group companies, including the assessee on the basis of their respective usage. For the purpose of benchmarking the said transaction of payment of cost recharges undertaken with the AE, the assessee in its Transfer Pricing Study Report (TPSR) has applied “Any Other Method” as the Most Appropriate Method (MAM). Since the aforesaid expenses were merely reimbursement of actual cost incurred by the AE on assessee„s behalf and did not involve any element of service or income, therefore the transaction of payment of cost recharges was to be at arm's length applying “Any Other Method”.
The Learned DR placed reliance on observations of the Learned TPO in his order vide para 4.2.(iii) in Page 26 thereon. We find that each of agreements entered by the assessee with its AE itself provides nature of services / database/ software required by the assessee from its AE. We find that each of the observations made by the Learned TPO in his order were duly met by the Learned AR before us by drawing our attention to the relevant pages of the Paper Book. With regard to the ownership of license for using the software, it was submitted that the license of these software / applications are owned by external vendors and was licensed to AE of the assessee for multiple users, including the assessee. The AE had made payment to the external vendors centrally on behalf of the group companies and then allocated the costs to the group companies including the assessee on the basis of users, IDs and licensees of respective entities. The screenshots shared by the assessee before the lower authorities duly proved that the assessee had obtained the license to install and use the software /application in daily operation and it cannot be assumed that such proprietory software / application are provided by the thiry party supplier, free of charge. With regard to the comments made by the Learned TPO that the assessee had not produced evidence of having requisitioned the aforesaid services, we find that the assessee had duly placed on record snapshot of some of the common software / application / databases being used by the assessee in Pages 917 to 922 of the Paper Book. Further from the Fixed Assets Schedule forming part of the audited accounts of the assessee, it was noted that the assessee is not owning any intangibles such as software and licenses in its name and therefore, paying the AE for making available such licenses necessary for conducting its business activities.
We find that the amounts were paid by the assessee to its AE on cost to cost reimbursement. In this regard, the reliance placed by the Learned AR on the decision of Delhi Tribunal in the case of Danisco India P Ltd vs DCIT in dated 7-10-2020 is well founded:-
“23. In the present set of facts where the assessee was availing specialized services which were provided by the AEs from common pool and the evidences in this regard have been filed by the assessee and where the services were charged on cost to cost basis, there is no merit in the order of the Assessing Officer in questioning the availment of services and the benefit derived by the assessee. It may be pointed out that the Assessing Officer in the alternate held that there was duplication of services. The CITA in the final analysis held it to be shareholder activity. All the above said observations of the authorities below, established the availment of services. We have also perused the data of evidences filed by the assessee to establish its case of availment of services ; under law the benefit, if any, arises to the assessee or not cannot be questioned. Hence, the payment made by the assessee being cost to cost reimbursement of the services availed from common pool is duly allowable as a business expenditure in the hands of the assessee. The TPO has exceeded its jurisdiction in holding the value of the said international transaction assessee at Nil. The Hon‟ble Delhi High Court in CIT vs EKL Appliances Limited Supra had held that benchmarking of cost to cost reimbursement of expenses was not within the jurisdiction of the TPO while computing the arm's length price of the international transaction under section 92CA of the Act. In such facts, we direct the Assessing Officer / TPO to allow the claim of assessee in entirety. The ground of appeal numbers 1 and 2 are allowed.”
We hold that the learned TPO without finding fault in the method adopted by the assessee cannot summarily reject the same and proceed to determine the arm's length price of the international transaction at Rs Nil. On perusal of the orders of the lower authorities, we find that there is absolutely no basis that has been brought on record by the lower authorities to reject the contentions of the assessee and determine the ALP of the international transaction at Rs Nil. In fact, the assessee on an alternative basis had also benchmarked the international transaction of payment of cost recharges applying TNMM as MAM considering assessee as the tested party.
The payment of cost recharges for services availed by the assessee were utilized by the assessee in manufacturing segment and software service segment, which fact is not in dispute. Even keeping assessee as the tested party, the PLI of the assessee in manufacturing segment was worked out at 9.63 % under TNMM and PLI of the assessee for software service segment was worked out at 12.91 % as against the median of the comparable companies of 5.25% and 5.88 % respectively. Hence even on alternative workings of keeping assessee as the tested party using TNMM, the margins derived by the assessee in manufacturing and software services segment was more than the comparables margin. Hence even on the alternative workings submitted by the assessee before the lower authorities, the transactions of payment of cost recharges need to be accepted to be at ALP. It is also pertinent to note that in earlier years, no ALP adjustment was made in respect of the payment of cost recharges by the Learned TPO. Further, we find that out of the total payment of cost recharges of Rs 21,07,60,342/-, the Learned TPO himself had accepted the need for services, rendition of services and benefits derived by the assessee by availing such services to the extent of Rs 15,93,87,892/-. The Learned TPO had only disallowed the balance sum of Rs 5,13,72,451/-. When there is cost to cost reimbursement made by the assessee to its AE, how could the same be accepted partially for software development segment merely because it was rebilled to the AE along with mark up and how could the remaining sum be disallowed by the Learned TPO.
In view of the aforesaid observations and respectfully following the judicial precedent relied upon hereinabove, we hold that the payment of cost recharges by the assessee to its AE without any mark up is to be accepted to be at ALP. Hence the transfer pricing adjustment made in this regard is hereby directed to be deleted.
In view of the aforesaid observations on payment of technical support services and payment of cost recharges, the Ground Nos. 3 to 4.5. raised by the assessee are allowed.
The Ground No. 5 raised by the assessee is challenging the chargeability of interest under section 234B and 234C of the Act. With regard to interest under section 234B of the Act, the same is consequential in nature. With regard to interest under section 234C of the Act, the law is very well settled that the interest could be charged only on the returned income and not on the assessed income.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 01/10/2025.