M/S. AVERY DENNISON (INDIA) PRIVATE LIMITED,GURGAON vs. ACIT, NEW DELHI

The assessee had entered into following International Transactions with its AE during the relevant financial year: S.No. Description of transaction Method Value (in Rs.) 1. Purchase of Raw Material TNMM 236,987,158 2. Sale of finished goods TNMM 55,297,411 3. Import of printers/cutter/Slitter TNMM 2,244,918 4. Import of software-MFG PRO TNMM 2,075,297 5. Service fee paid TNMM 36,929,533 6. Service income TNMM 239,009 7. Reimbursement of expenses TNMM 4,837,792

The assessee has been considered as the tested party, to test the Arms Length Price (“ALP”) of the service charges paid for the support services received from Avery Dennison USA, and Avery Dennison Manufacturing Company Co.USA. For the purpose of bench marking the International Transactions, Transactional Net Margin Method (“TNMM”) was selected as the MAM by the assessee, with Operating Margin (“OP/TC”), as the profit level indicator to determine the ALP. The assessee received services from its AE’s, in lieu of which it had made a payment of Rs. 36,929,533/-. The Services and the benefits claimed to have been received by the assessee from its AE’s include the following; S.No. Description of Benefits derived Service 1. Marketing Increase in sales due to customized Services solutions and customer relationships;

GVP Services Provides with list of people available on call, having intensive knowledge in Avery’s products and business model 3. VIPFS Services Regular support from technical experts with regard to usage of the software/platforms on a need basis;

Accounting and High value support services from Administration industry experts who are able to Services provide forecast with higher accuracy by analyzing industry trends, demand trends etc. on a need basis;

Financial Services High level support services from industry experts who are able to manage ADIPL’s finances efficiently on a need basis; Cost savings in terms of loan/insurance facilities due to higher bargaining power of AEs; Identify areas where cost escalation is happening and suggesting strategies for lowering product cost including renegotiation with vendors, suggesting alternative materials etc.

Product Research High level support services from And Development technical experts who are able to resolve the technical issues faced by the appellant or its customers on a need basis

Operations and High value operational support Logistic Support services from personnel of the AEs who have significant experience in handling the similar operations in various jurisdictions, worldwide on a need basis;

The ld. AO made a reference u/s 92CA(i) to the ld. Additional Commissioner of Income Tax Transfer Pricing Officer, 1(1) (“Ld. TPO”). The ld.TPO disagreed the TP Study prepared by the assessee. The ld. TPO held that the assessee has not been able to show that, the service rendered by the AE have actually resulted in any benefit to the assessee He held that, no independent party would have made a payment of Rs. 3,69,29,533/- to its AE’s on account of such service in uncontrolled circumstances. The Ld.TPO held that CUP as the most appropriate method (MAM), for arriving at the ALP of the international transaction, for payment of service fee. The Ld.TPO determined the ALP at –NIL- by applying CUP, thereby making an adjustment of Rs.3,69,29,533/-.

We shall first deal with the , being appeal filed by the assessee.

The ld. AR for the assessee contended before us that: • The ld. CIT(A)’s approach is against the well settled TP principles, as on the one hand, he has accepted the overall TNMM analysis using aggregation approach conducted by the assessee and on the other hand, has rejected one element of cost which is also a part of the overall TNMM analysis, thereby adopting a contradictory approach. • The assessee’s case, TNMM is the most appropriate method for bench marking of the international transactions undertaken by the assessee during the year. • the ld.CIT(A) did not appreciate the arm’s length justification submitted by the assessee, demonstrating the substantial cost-benefit derived by it of intra-group services; • the ld. CIT(A) disregarded the contemporaneous evidences submitted by the Assessee demonstrating the receipt of the intra-group services and the benefit received from them.

It is submitted by the ld. AR that the services received from the AE’s have helped the assessee in increasing its sales, increasing its customer base, increase in higher selling price received assistance towards the order processing provided to the customers, capturing customer data etc. The services from the AEs have also lead to the reduction in the cost incurred towards purchase of raw materials and logistics etc. It has been submitted by the Ld.AR that, the receipt of services was not disputed by the ld. CIT(A)/AO/TPO. The ALP was determined at NIL by adopting CUP as the MAM, on the ground that no benefit has accrued to the assessee due to those services. The Ld.AR submitted that such rejection is not in accordance with law. 14. The Ld.AR further submitted that the international transactions entered into by the assessee are intrinsically linked to ITA No. 4933/Del/2014 the business operations of the two segments of the assessee and that the nature of the activities undertaken by the assessee under the two segments, being PSM and RIS, are closely linked with each other and played a critical role for delivering the intra group services received from the AE’s in the business operations of the segments.

The AR placed his reliance on the jurisdictional Delhi High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd., reported in TS-96-HC-2015(DEL)-TP.

The Ld.DR on the other hand relied on the orders passed by the authorities below. She argued that cost has been allocated in a blanket fashion on the basis of the sales without any specific nexus to the services received. The ld, DR places reliance on the decision of Bangalore bench in the case of Gems Plus bearing and submitted that the order of the Ld.TPO has to be restored by holding CUP as the MAM. She further submitted that, as no benefit was derived by the assessee in these transactions, the ALP has rightly been determined at –NIL-. She further submitted that huge payments have been made to AE without any rhyme or reason and that no assesse would have made such payments to unrelated parties.

We have heard the rival contentions. On a careful consideration of the facts and circumstances of the case and perusal of the papers on record and the orders of the authorities below and case law cited, we hold as follows. The issues before us are; A. Whether on the facts and circumstances of the case, the Ld. CIT(A) is right in holding that the services rendered under the agreement entered into between the assessee with its AE’s is partly at arms length?; B. Whether the on the facts and circumstances ofthe case, the Ld. CIT(A) is right in upholding the TPO’s finding that the MAM, for benchmarking the international transactions, must be at CUP and not TNMM as done by the assessee ? C. Whether on the facts and circumstances of the case, the Ld. CIT(A) is right in holding that, the transactions entered into by the assessee with the AE’s are not interlinked and cannot be aggregated? 18. During the relevant year under consideration we notice that the assessee had entered into an Intercompany Service Agreement with its AE’s being “Dennison Manufacturing Company, USA” and “Avery Dennison Hong Kong B.V” to carry out International Transactions being Purchase of Raw Material, Sale of finished goods, Import of printers/cutter/Slitter, Import of software-MFG PRO, Service fee paid, Service income, Reimbursement of expenses.

The assessee had conducted FAR analysis as a part of TP documentation, wherein it had aggregated the international transactions pertaining to PSM segment and RIS segment and had determined the ALP, by applying TNMM as MAM and selecting OP/Sales as the relevant PLI.

On perusal of the TP Study, we observe that each transaction are interlinked with each other. We notice that the assesee has treated the agreement as a whole, and has applied TNMM, in respect of the services received to arrive at the ALP. It is observed that the ld. CIT(A) accepted the contentions of the assessee that, intra group services were received by the assessee as per the agreement, and that these are critical, and linked to the core business operations of the assessee. However, the Ld.CIT(A) held that certain services specified in the agreement did not result in any benefit to the assessee.

All the services received are part of composite contracts/agreements which in our view cannot be unbundled. IN this context, Hon’ble Delhi High Court in the case of Sony Ericson Mobile Communication India Pvt. Ltd. (supra) has observed as under; “93…..These anomalies arise on account of fact that there was no apportionment and division of the transactional compensation, but the packaged transaction has been bifurcated and divided into two. This position is not acceptable as it is irrational and unsound. “137. The question of aggregation and disaggregation of transactions when the TNM Method or even in other methods is sought to be applied, must have reference to the strength and weaknesses of the TNM Method or the applicable method. Aggregation of transactions is desirable and not merely permissible, if the nature of transactions taken as a whole is so inter-related that it will be more reliable means of determining the arm’s length consideration for the controlled transactions. There are often situations where separate transactions are intertwined and linked or are continuous that they cannot be evaluated adequately on separate basis……” (Emphasis supplied)

Similarly, in the case of Maruti Suzuki India Limited vs. Additional Commissioner of Income Tax (I.T.A. No. 5237/Del/2011), it was held that: 11. The another purpose for which the royalty has been paid to the SMC is the use of license information for the engineering, design and development, manufacture, testing quality control, sale and after sales service of products and parts. Thus, we agree with the submission of the ld. Counsel of the assessee that royalty thus paid by the assessee to SMC constitute a single/inserverable/ indivisible contract/package which provided assessee the exclusive right and license to manufacture and to sell the licensed product for a specified limited duration. All others rights vested in the license agreement including technology, technical know how and trade mark are linked to the core right to manufacture and sell licensed products…. 13…….we place reliance upon the decision of the Hon’ble Apex Court in the case of Vodafone International Holdings B.V. vs. UOI (Civil Appeal No. 733 of 2012) wherein the Hon’ble Court held that it is not open to revenue authorities to split an agreement when the parties to the agreement themselves have not contemplated a split up in the agreement and have considered the agreement as an entire package. The relevant citations in this regard has been brought out in detail in the assessee’s submission above. Thus, we find that for the purpose of computing the arm’s length price, The TPO has re-written the agreement/ transaction undertaken by the assessee by artificially segregating the single transaction of payment of royalty into two transactions of payment of royalty for use of brand name and for use of technology. We agree with such re- writing of transaction undertaken by the assessee is inconsistent with the factual realities of the case and is also contrary to the various judicial pronouncements. In this regard, the following case laws referred by the assessee’s counsel are germane and supports the case of the assessee. i) Hon’ble Delhi High Court decision in the case of Sony India (P) Ltd. vs. DCIT (ITA No. 1189/D/2005) ii) Hon’ble Delhi High Court decision in the case of CIT vs. EKL Appliances (ITA No. 1068/2011 and 1070/2011). (Emphasis supplied)

From the above discussion we are of the considered opinion that the agreement is an intrinsic one and that it is wrong to split the same and hold that some services are at arm’s length and some services are not.

The Ld.CIT(A) accepted TNMM to arrive at the ALP, in respect of certain services received by the assessee and in the same breath, has rejected the analysis undertaken by the assessee under the TNMM in respect of other services. We are informed by the assessee that, the authorities have accepted TNMM as MAM in the subsequent years. The Revenue has to be consistent in its approach. In our view, the TPO analysis of the assessee using TNMM as the MAM has to be accepted. When there is an agreement for services and certain services out of a bundle of services are undisputedly rendered, the entire agreement has to be viewed as a whole. Whether the services have actually resulted in a benefit to the assessee or not is not material. The conclusion of the Ld.TPO that the services have not resulted in any benefit and that no independent entity would have made such a payment is in the realm of surmises and conjunctures and not backed by any material. Thus the ALP determined by the assessee company is accepted and the TPO adjustment is deleted.

In alternative, the OECD guidelines has quoted by the ld. TPO in the draft assessment order. The Ld.TPO, states that, for ascertaining the ALP of intra-group services, CUP method or cost plus method should be applied. The ld.AR submits that, CUP method would be applicable where there is a comparable service provided between independent enterprises, or by the AE providing the services to an independent enterprise. In the absence of such transactions or data, the Ld. AR submitted that if the said international transaction has to be benchmarked, under cost plus method. The Ld.AR submitted that the services received by the assessee are charged by the AE’s as below; • Cost Plus Method may be adopted for arriving at the ALP in the assessee’s case.The AE in respect of the PSM segment of services being marketing, accounting and administration, financial services product research and development and operations and logistics have charged the service fees by allocating the full cost incurred in providing support service. The allocation is based on budgeted sales and the AE applies mark-up of 5% on cost. • In respect of RIS segment, the AE (Dennison Manufacturing Company, USA) performed various services. The AE has charged a mark-up of 4% on the cost incurred in providing Marketing support services under RIS segment. And, • in respect of GVP services, VIPFS services and Ticketing Hub services at was charged without margin.

It is stated at the Bar that, for A.Y. 2010-11, the DRP has accepted the ALP determined by the assessee, in respect of GVP services, VIPFS services and Ticketing Hub Services.

In view of the above discussion, we are of the considered opinion that with regard to PSM and RIS segments, even if cost plus method is taken as the MAM, the markup charged by the AEs is within the +/-5% range, allowed under second proviso to section 92C of the Indian Income Tax Act, 1961, these services can be considered to be at arm’s length; Regarding GVP services, VIPFS services and Ticketing Hub Services, the service charges paid by the Assessee, represents the actual cost incurred by the AEs, without any markup. Hence these can be considered to be at arm’s length.

Based on the above discussion, we are of the opinion that the services received by the assessee should be considered to be arm’s length.

Accordingly, assessee’s appeal is allowed.