M/s Bucher Hydraulics Pvt Ltd., Gurgaon V. ACIT, New Delhi

ITA 177/DEL/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4197 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 13-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: H K CHAUDHARY
• Assessee Lawyers: R K KAPOOR
• Keywords: Depreciation; Transfer pricing; International transaction; Wholly owned subsidiary; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI O.P. KANT, ACCOUNTANT MEMBER I.T.A. NO. 177/DEL/2016 ASSESSMENT YEAR: 2011-12 BUCHER HYDRAULICS P. LTD., PLOT NO.6, SECTOR-5, IMT MANESAR, GURGAON. V. ACIT, CIRCLE-5(1), NEW DELHI. TAN/PAN: AAECS 5991H (APPELLANT) (RESPONDENT) APPELLANT BY: MS. PALLAVI DINODIA GUPTA, ADV., SHRI PRADIP DINODIA, ADV. & SHRI R.K. KAPOOR, ADV. RESPONDENT BY: SHRI H.K. CHAUDHARY, CIT-D.R. DATE OF HEARING: 14 02 2019 DATE OF PRONOUNCEMENT: 10 05 2019 O R D E R PER AMIT SHUKLA, JM: THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE FINAL ASSESSMENT ORDER DATED 30.10.2015 , PASSED U/S.143(3) R.W.S. 144C IN PURSUANCE OF ORDER GIVEN BY THE DISPUTE RESOLUTION PENAL-I, NEW DELHI VIDE ORDER DA TED 11.09.2015. 2. IN VARIOUS GROUNDS OF APPEAL, THE ASSESSEE HAS CHALLENGED, FIRSTLY; THE ADDITION OF RS.84,86,175/- ON ACCOUNT OF ADJUSTMENT MADE ON ARMS LENGTH PRICE, WHICH IS MAINLY ON ACCOUNT OF INTRA GROUP SERVICES FOR RS.10,16,073 /-; AND ADJUSTMENT OF RS.74,70,102/- ON ACCOUNT OF PURCHASE AND I.T.A. NO.177/DEL/2016 2 SALE OF RAW MATERIAL/FINISHED GOODS; SECONDLY, DISA LLOWANCE OF ADJUSTMENT ON BROUGHT FORWARD BUSINESS LOSS FROM PR EVIOUS YEARS AND UNABSORBED WHILE CALCULATING ASSESSED INC OME; AND LASTLY , INTEREST CHARGED U/S.234B AND 234C. BESIDES THIS, ASSESSEE HAS ALSO RAISED ADDITIONAL GROUND OF APPEA L VIDE ITS APPLICATION DATED 13.09.2008, WHICH READS AS UNDER: CONSIDERING THE SECOND PROVISO OF SECTION 92C(2) O F THE ACT, THE ADJUSTMENT IN ARMS LENGTH PRICE MADE BY THE LD. AS SESSING OFFICER AT THE INSTANCE OF LD. TPO/DRP AMOUNTING TO RS.74,7 0,102/- IS NOT WARRANTED AND IS PRAYED TO BE DELETED SINCE THE ARM S LENGTH OPERATING MARGIN (I.E. OPERATING PROFIT/OPERATING I NCOME) OF 5.64% AS PER THE TP ORDER GIVING EFFECT TO THE DRP DIRECT IONS FALLS WITHIN THE ARMS LENGTH RANGE OF +/-5% OF OPERATING MARGIN OF THE APPELLANT I.E. 1.44%. 3. THE FACTS IN BRIEF ARE THAT THE ASSESSEE, BUTCHE R HYDRAULICS P. LTD. IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF HYDRAULIC DRIVE PUMPS AND CONTROL SYSTEMS WHICH ARE USED IN THE AUTOMOBILE INDUSTRY, AGRICULT URE INDUSTRY, CONSTRUCTION OF ROADS, MINING CONCERN DEA LING IN HYDRAULIC DRIVE AND CONTROL SYSTEMS WHICH ARE USED IN THE AUTOMOBILE INDUSTRY, AGRICULTURE INDUSTRY, CONSTRUC TION OF ROADS, MINING INDUSTRY ETC. IT HAS ITS MANUFACTURIN G PLANT LOCATED IN GURGAON. DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE HAS ENTERED INTO VARIOUS INTERNATIONAL TRA NSACTIONS PERTAINING TO PURCHASE OF RAW MATERIAL, CONSUMABLES AND SPARES, MANAGEMENT FEES, SALE OF FINISHED GOODS, ET C. WITH ITS AE. ALL THE INTERNATIONAL TRANSACTIONS WERE BENCHMA RKED BY THE ASSESSEE BY APPLYING TNMM AS THE MOST APPROPRIA TE I.T.A. NO.177/DEL/2016 3 METHOD BY TAKING PLI AS OPERATING PROFIT/OPERATING INCOME. THE ASSESSEE HAD SELECTED THREE COMPARABLES WHOSE P LI WAS MUCH LOWER THAN THAT OF THE ASSESSEE AND HENCE IT W AS REPORTED THAT ALL THE INTERNATIONAL TRANSACTIONS WE RE AT ARMS LENGTH PRICE. THE BENCHMARK SUMMARY AS PER TP STUDY REPORT WAS AS UNDER: NATURE OF INTERNATIONAL TRANSACTIONS AMOUNT (RS.) MOST APPROPRIATE METHOD (MAM) PLI OF APPELLANT AVERAGE PLI OF 4 COMPARABLES PURCHASE OF RAW MATERIAL, CONSUMABLES AND 7,66,61,153 TRANSACTIONAL NET MARGIN METHOD (TNMM) 2.37% -3.74% MANAGEMENT FEES 10,16,073 COMMISSION RECEIVED 2,46,896 LICENSE FEES ON SALES TO THIRD PARTIES 14,63,621 SALE OF FINISHED GOODS 64,23,390 COMPARABLE UNCONTROLLED PRICE (CUP) METHOD PURCHASE OF FIXED ASSETS 8,75,879 TOTAL 8,66,87,012 4. THE TPO HOWEVER MADE AN ADJUSTMENT OF RS.2,19,93,409/- WHICH COMPRISED OF ADJUSTMENT IN INTERNATIONAL TRANSACTION OF PURCHASE AND SALE OF R AW MATERIAL/FINISHED GOODS AMOUNTING TO RS.2,09,77,336 /-; AND INTRA GROUP SERVICES DETERMINING ALP AT NIL BY TH E TPO AMOUNTING TO RS.10,16,073/-. AFTER DRPS DIRECTION, THE TP ADJUSTMENT WAS FINALLY WORKED OUT UNDER BOTH THE SE GMENTS AT RS.84,86,175/-. 5. IN SO FAR AS TP ADJUSTMENT ON ACCOUNT OF PURCHAS E OF RAW MATERIAL AND SALE OF FINISHED GOODS IS CONCERNE D, THE TPO I.T.A. NO.177/DEL/2016 4 HAD REJECTED TWO COMPARABLES SELECTED BY THE ASSESS EE- COMPANY, NAMELY, ADARSH PLANT PROTECT LTD.; AND HAW A ENGINEERS LTD. HE FINALLY ACCEPTED TWO OF THE ASSES SEES COMPARABLE, NAMELY, CONTINENTAL VALVES LTD. AND BEM CO HYDRAULICS LTD. THE LD. TPO FURTHER INTRODUCED ONE MORE COMPARABLE, NAMELY, ROTO PUMPS LTD. FINALLY, THE OP ERATING MARGIN AS PER THE TPO AFTER THE DRP DIRECTION WAS A S UNDER: FINAL COMPARABLE LIST S.NO. COMPARABLE COMPANY COMPARABLE SELECTED BY APPELLANT/LD. TPO OPERATING MARGIN AS PER TPO ORDER AFTER DRP DIRECTIONS 1. CONTINENTAL VALVES LIMITED ASSESSEE 0.01% 2. ROTO PUMPS LIMITED TPO 13.57% 3. BEMCO HYDRAULICS LIMITED ASSESSEE 3.33% ARITHMETICAL MEAN 5.64% 6. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE, MS. PALLAVI DINODIA GUPTA, SUBMITTED THAT THE ADDITIONAL GROUND RAISED BY THE ASSESSEE GOES TO THE VERY ROOT OF THE ADJUST MENT MADE BY THE TPO AT RS.74,70,102/- ON ACCOUNT OF PURCHASE S FOR THE REASON THAT, EVEN AFTER THE ADJUSTMENT MADE BY THE TPO IS TAKEN INTO ACCOUNT, THEN THE ARMS LENGTH PRICE FAL LS WITHIN THE RANGE OF (+)/(-) 5%. SINCE, THE CALCULATION OF THE ADDITION WAS WORKED OUT AFTER THE DIRECTION OF THE DRP, THER EFORE, SUCH A GROUND HAS BEEN TAKEN BY WAY OF ADDITIONAL GROUND . IF ADDITION IN RESPECT OF ALP ADJUSTMENT ON ACCOUNT OF SALE AND PURCHASE TRANSACTION WITH THE AE FALLS WITHIN THE P ERMISSIBLE RANGE, THEN ALL THE GROUNDS RAISED ON THE ADDITION AMOUNTING I.T.A. NO.177/DEL/2016 5 TO RS.74,70,102/- WOULD BECOME PURELY ACADEMIC. SHE POINTED OUT THAT THE PLI OF THE THREE COMPARABLES A S NOTED ABOVE WORKS OUT AT 5.64% AND ASSESSEES MARGIN WAS AT 1.44%. THE DIFFERENCE IN THE PLI IS 4.20% WHICH FAL LS WITHIN THE ARMS LENGTH RANGE FOR WHICH SHE HAS GIVEN THE TWO COMPUTATIONS, ONE BASED ON ENTITY LEVEL COMPUTATION ; AND SECOND ONE BASED ON PROPORTIONATE COMPUTATION. ENTITY LEVEL COMPUTATION REFERENCE AMOUNT (`) OPERATING INCOME OF THE APPELLANT AS PER REVISED TP ORDER A 15,34,99,852 ARM'S LENGTH MARGIN AS PER REVISED TP ORDER B 5.64% OPERATING PROFIT AT ALP C=A*B 86,57,392 ARM'S LENGTH OPERATING COST D=A-C 14,48,42,460 ACTUAL OPERATING COST AS PER TP ORDER GIVING EFFECT TO DRP DIRECTIONS (WITHOUT EXCLUDING IGS PAYMENT FROM OPERATING COST) [OPERATING COST OF `15,39,11,182-FOREIGN EXCHANGE LOSS OF `15,98,620] E 15,23,12,562 TP ADJUSTMENT U/S 92CA F 74,70,102 TP ADJUSTMENT WITHIN THE +/-5% ARM'S LENGTH RANGE F/E 4.90% OR WITHIN THE ARM'S LENGTH RANGE LOWER LIMIT: MINUS 5% OF ACTUAL OPERATING COST (E) - 5% * (E) 14,46,96,934 UPPER LIMIT: PLUS 5% OF ACTUAL OPERATING COST (E) + 5% * (E) 15,99,28,190 I.T.A. NO.177/DEL/2016 6 PROPORTIONATE COMPUTATION REFERENCE TOTAL (`) ARM'S LENGTH OPERATING COST A 14,48,42,460 ACTUAL OPERATING COST OF THE APPELLANT B 15,23,12,5 62 TP ADJUSTMENT U/S 92CA C = B-A 74,70,102 IMPUGNED INTERNATIONAL TRANSACTION (I.E. PURCHASE OF RAW MATERIAL, CONSUMABLES AND SPARES) AFFECTING COST SIDE OF P/L ACCOUNT D 7,66,61,153 PERCENTAGE OF IMPUGNED INTERNATIONAL TRANSACTION AFFECTING COST SIDE OF P/L ACCOUNT E = D/B 50.33% PROPORTIONATE ARM'S LENGTH OPERATING COST ALLOCATED TO IMPUGNED INTERNATIONAL TRANSACTION (A*E) 7,29,01,341 WITHIN THE ARM'S LENGTH RANGE LOWER LIMIT: MINUS 5% OF VALUE OF IMPUGNED INTERNATIONAL TRANSACTION (D) - 5% * (D) 7,28,28,095 UPPER LIMIT: PLUS 5% OF VALUE OF IMPUGNED INTERNATIONAL TRANSACTION (D) + 5% * (D) 8,04,94,211 OR PROPORTIONATE TP ADJUSTMENT U/S 92CA F = C*E 37,59, 812 PROPORTIONATE TP ADJUSTMENT WITHIN THE +/-5% ARM'S LENGTH RANGE F/D 4.90% 7. THUS, IT WAS SUBMITTED THAT ALP OF THE ASSESSEE FALLS WITHIN (+)/(-)5% RANGE WHETHER EXAMINED AT ENTITY L EVEL OR IN PROPORTION TO THE AE TRANSACTIONS. 8. LD. CIT-DR AFTER VERIFYING THE COMPUTATION OF (+ )/(-) 5% ARMS LENGTH RANGE, ADMITTED THAT FINAL ADDITION MA DE AFTER I.T.A. NO.177/DEL/2016 7 THE DIRECTION OF THE DRP IS AT RS.74,70,102/- WHICH PRIMA FACIE FALLS WITHIN THE PERMISSIBLE RANGE OF +/-5%. HOWEVER, HE STRONGLY RELIED UPON THE ORDER OF THE ASSESSING OFF ICER. 9. AFTER CONSIDERING THE AFORESAID SUBMISSIONS AN D LOOKING TO THE COMPUTATION AS GIVEN BY THE LEARNED COUNSEL, WE FIND THAT ADJUSTMENT MADE ON ACCOUNT OF PURCHASE AND SALE OF RAW MATERIAL/FINISHED GOODS AFTER THE DIREC TION OF THE DRP DOES FALL WITHIN THE+/-5% RANGE. THE PLI OF THE COMPARABLES WORKS OUT TO 5.64%, WHEREAS THE ASSESSE E HAD SHOWN PROFIT MARGIN OF 1.44% AND THE DIFFERENCE IN THE PLI THUS COMES TO 4.20%. FROM THE WORKING AS INCORPORAT ED ABOVE, IT IS SEEN THAT ARMS LENGTH OPERATING COST IS RS.14,48,42,460/- AS AGAINST ACTUAL OPERATING COST OF THE ASSESSEE WHICH IS RS.15,23,12,562/-. THE DIFFERENCE OF RS.74,70,102/- HAS BEEN ADDED. THE IMPUGNED INTERNA TIONAL TRANSACTION, I.E., PURCHASE OF RAW MATERIAL, CONSUM ABLES AND SPARES, AFFECTING THE COST SIDE OF THE PROFIT AND L OSS IS RS.7,66,61,153/- AND IF THE PERCENTAGE OF THE IMPUG NED INTERNATIONAL TRANSACTION AFFECTING THE COST SIDE O F THE P&L ACCOUNT IS WORKED OUT, THEN IT COMES TO 50.33% WHIC H GIVES THE PROPORTIONATE ARMS LENGTH OPERATING COST ALLOC ATED TO THE IMPUGNED INTERNATIONAL TRANSACTION AT RS.7,29,01,34 1/-. THE PLI AFTER THE PROPORTIONATE TP ADJUSTMENT WITHIN (+ )/(-) RANGE FALLS TO 4.90%. EVEN AT THE ENTITY LEVEL COMPUTATIO N WHICH HAS BEEN DONE BY THE TPO IS TAKEN INTO ACCOUNT, THEN AG AIN SAME FALLS WITHIN (+)/(-) RANGE, WHICH WORKS OUT AT 4.90 %; AND HENCE THE DIFFERENCE OF 4.20% FALLS WITHIN THE ALP RANGE. I.T.A. NO.177/DEL/2016 8 ACCORDINGLY, NO ADJUSTMENT IS REQUIRED TO BE MADE IN VIEW OF SECOND PROVISO TO SECTION 92C. ACCORDINGLY, THE ADD ITION OF RS.74,70,102/- IS DIRECTED TO BE DELETED. CONSEQUEN TIALLY, THE OTHER ISSUES RAISED ON MERIT HAVE BECOME PURELY ACA DEMIC. 10. THE OTHER ADJUSTMENT RELATES TO INTRA GROUP SER VICES FOR RS.10,16,073/-. 11. THE FACTS IN BRIEF ARE THAT THE ASSESSEE HAD EN TERED INTO AGREEMENT WITH BUCHER MANAGEMENT AG, SWITZERLAND FO R RECEIPT OF MANAGEMENT SERVICES. BUCHER INDUSTRIES A G IS THE MAIN SHAREHOLDER OF THE ASSESSEE AND ULTIMATE PAREN T COMPANY OF THE BUCHER INDUSTRIES GROUP. BUCHER MANAGEMENT AG (100% SUBSIDIARY OF BUCHER INDUSTRIES AG) PROVIDES SERVICES OF TWO TYPES TO BUCHER INDUSTRIES AG AND TO ITS GROUP COMPANIES, NAMELY, GENERAL FUNCTIONAL SER VICES AND SPECIAL AND PROJECT SERVICES. THE LD. TPO REJECT ED THE AGGREGATED TNMM ANALYSIS OF THE ASSESSEE TO BENCHMA RK THE INTERNATIONAL TRANSACTION OF PAYMENT OF MANAGEMENT FEES FOR IGS AND HAS APPLIED CUP METHOD TO DETERMINE THE ALP OF THE SAID TRANSACTION AT NIL BY APPLYING THE BENEFIT TES T WITHOUT GIVING COMPARABLE UNCONTROLLED TRANSACTIONS OF IDEN TICAL SERVICES. HE QUESTIONED THE COMMERCIAL EXPEDIENCY O F THE SAID TRANSACTION AND ALLEGED THAT THE ASSESSEE RECEIVED NO ECONOMIC BENEFIT FROM SUCH SERVICES. 12. THE SUMS AND SUBSTANCE OF THE TPOS REASONING A RE AS UNDER: I.T.A. NO.177/DEL/2016 9 ASSESSEE FAILED TO SUBSTANTIATE THAT SERVICES HAVE ACTUALLY BEEN RENDERED TO IT AND BENEFIT HAS ACTUALLY BEEN DERIVE D BY IT ON THE BASIS OF DOCUMENTARY EVIDENCE. THE SERVICES RECEIVED ARE INCIDENTAL BEING IN NATUR E OF LONG ASSOCIATION. NO EVIDENCE FILED TO SUPPORT ACTUAL PROVISION OF SE RVICES BY AE TO ASSESSEE AT ITS REQUEST TO MEET SPECIFIC NEED AND T O PROVE TANGIBLE AND CONCRETE BENEFITS ACCRUED TO THE ASSESSEE. INCIDENTAL / DUPLICATIVE SERVICES DO NOT FALL UNDER IGS INCIDENTAL BENEFIT RECEIVED FROM SERVICES PROVIDED TO ONE OR M ORE FELLOW AFFILIATES. TP REPORT HAS NO FAR ANALYSIS ON IGS AND ASSESSEE H AS NOT BENCHMARKED IGS UNDER ANY OF 5 METHODS PRESCRIBED U NDER THE ACT NO COST-BENEFIT ANALYSIS CARRIED OUT AT THE TIME OF REQUISITION OF SERVICES. 13. BEFORE US, LD. COUNSEL FOR THE ASSESSEE SUBMITT ED THAT ITS AE PROVIDES TWO TYPES OF SERVICES, ONE IS GENERAL S HAREHOLDER SERVICES FOR WHICH NO CHARGE HAS BEEN MADE BY THE A E; AND OTHER SERVICES ARE SPECIFIC AND PROJECT RELATED SER VICES FOR WHICH AN APPROPRIATE CHARGE HAS BEEN MADE BY THE AE . THE LD. COUNSEL TOOK US THROUGH THE ORDER OF DRP, WHERE IN IT ACCEPTED THAT THE SERVICES ARE ACTUALLY RENDERED WH ICH TERMED SUCH SERVICES AS SHAREHOLDER SERVICES. THE AR FURTH ER DEMONSTRATED THAT ANNEXURE 1 OF MANAGEMENT SERVICE AGREEMENT PROVIDES DETAILED DESCRIPTION OF SERVICE S INCLUDING ALLOCATION KEYS FOR EACH TYPE OF SERVICE. IT WAS HI GHLIGHTED THAT THE COSTS INCURRED FOR MANAGEMENT SERVICES ARE DIVI DED INTO NON-CHARGEABLE COSTS (BEING SHAREHOLDER SERVICE POR TION) AND I.T.A. NO.177/DEL/2016 10 CHARGEABLE COSTS TO SERVICE RECIPIENTS BASED ON ALL OCATION KEYS. FOR EXAMPLE IN CASE OF GROUP FINANCE SERVICES , THE CHARGEABLE COSTS TO ALL SERVICE RECIPIENT COMPANIES ARE 65% AND THE REMAINING 35% COSTS ARE TREATED AS NON-CHAR GEABLE SHAREHOLDER COSTS. IT WAS BROUGHT TO OUR NOTICE THA T THE SHAREHOLDER SERVICE COSTS WERE NOT CHARGED BY AE AN D ONLY COMMERCIAL SERVICES RECEIVED BY THE ASSESSEE WERE C HARGED BY THE AE. SHE FURTHER SUBMITTED THAT THE TPO AND CONS EQUENTLY THE DRP HAS APPLIED BENEFIT TEST TO DETERMINE THE A LP OF THESE IGS AT NIL WHICH IS NOT IN ACCORDANCE WITH THE LAW AS HAS BEEN LAID DOWN BY VARIOUS JUDICIAL AUTHORITIES INCL UDING THE JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF EKL APPLIANCES LTD. [TS-206-HC-2012(DEL)-TP] AND ALSO IN THE CASE OF CIT V. CUSHMAN AND WAKEFILED (INDIA) PVT. LTD. AS REPORTED IN [ (2014) 367 ITR 730 (DEL)]. 14. COMING TO THE BENEFIT TEST, THE LD. COUNSEL SUBM ITTED THAT ALTHOUGH BENEFIT TEST CANNOT BE APPLIED FOR BE NCHMARKING THE IGS, YET THE ASSESSEE HAS DEMONSTRATED BEFORE T HE AUTHORITIES BELOW THAT IT HAD ACTUALLY BENEFITED FR OM SUCH SERVICES AND HAD FILED THE COMPUTATION OF ESTIMATED BENEFITS IN THE MONETARY TERMS IN RESPECT OF YEAR IN WHICH A SSESSEE RECEIVED SUCH SERVICES SUCH AS GROUP FINANCE & CONT ROLLING, GROUP TREASURY, ETC. FOR WHICH THE AMOUNT OF RS. 10 ,16,073/- WAS PAID BY THE ASSESSEE TO ITS AE. TABLE SHOWING C OST- BENEFIT ANALYSIS OF IGS AS HIGHLIGHTED BEFORE US IS AS UNDER:- I.T.A. NO.177/DEL/2016 11 PARTICULARS AMOUNT (`) TANGIBLE BENEFITS DERIVED FROM SERVICES GROUP FINANCE & CONTROLLING (REFER POINT (I) BELOW) SALARY COST SAVING OF CFO FAMILIAR WITH IFRS REPORT ING REQUIREMENTS 10,35,000 ANNUAL COST SAVING PER USER FOR LICENSE, MAINTENANC E AND DEVELOPMENT OF COGNOS REPORTING SOFTWARE 2,00,000 GROUP TREASURY (REFER POINT (II) BELOW) INTEREST RATE SAVING OF 2.25% ON BANK OVERDRAFT 3,52,376 SALARY COST SAVING OF QUALIFIED ADDITIONAL ACCOUNTI NG PERSON FOR TREASURY FUNCTION 4,60,000 SAVING OF GUARANTEE FEE OF 0.5% ON LETTER OF COMFOR T 1,50,000 TOTAL BENEFITS & COST SAVINGS 21,97,376 MANAGEMENT SERVICE FEES PAID - 10,16,073 NET PROFIT GENERATED BY AGREEMENT 11,81,303 THE LD COUNSEL DREW OUR ATTENTION TO THE AFORESAID TABLE AND SUBMITTED THAT ASSESSEE HAS ACTUALLY SAVED INTEREST COST, SOFTWARE SUBSCRIPTION FEE, GUARANTEE FEE AND EMPLOY EE COST WHILE OBTAINING THE SERVICES FROM THE AE, IN ABSENC E OF WHICH THE ASSESSEE WOULD HAVE BEEN REQUIRED TO PUT MORE P EOPLE IN PLACE AND WOULD HAVE OBTAINED LOANS FROM BANKS AT H IGHER COST IF SUCH LOANS WERE NOT ARRANGED AT THE INSTANC E OF OR REFERENCE OF THE PARENT COMPANY / AE OF THE ASSESSE E. SHE ALSO SUBMITTED THAT THE TPO & DRP HAVE RELIED ON PA RA 7.6 OF OECD GUIDELINES FOR IGS TO SAY THAT COMMERCIAL POSI TION SHOULD BE ENHANCED BY WAY. THIS GUIDANCE OF OECD IN FACT IS I.T.A. NO.177/DEL/2016 12 IN FAVOUR OF ASSESSEE. THE COMMERCIAL POSITION HAS BEEN ENHANCED BY WAY OF BENEFITS RECEIVED AND FROM THE E MPLOYEE LIST SHE POINTED OUT THAT THERE WAS NO CFO WITH IFR S KNOWLEDGE . FURTHER, INSPITE OF SUCH SHORTAGE OF RESOURCES, THE SALES HAVE INCREASED AND POINTED OUT THAT IN FIRST 3 YEARS FROM AY 2007-08 TO AY 2009-10 OF SETTING UP OF COMPANY, THERE WAS NO CHARGE BY AES FOR MANAGEMENT SERVICES RENDER ED AS SUPPORT. THEREFORE, ALLEGATION OF TPO FOR SHIFTING OF PROFITS FROM INDIA IS BASELESS. THE ASSESSEE IS A LOSS MAKI NG COMPANY AND EVEN AFTER TP ADDITION ON ACCOUNT OF IG S, IT HAS INCURRED A LOSS. THEREFORE, OVERALL GROUP TAX WOULD BE HIGHER IF PROFIT MAKING COMPANY GETS INCOME AND LOSS MAKING COMPANY CONTINUES TO INCUR LOSSES. THE ASSESSEE FUR THER SUBMITTED THAT THE AO OR TPO CANNOT DECIDE THE COMM ERCIAL EXPEDIENCIES OF CONDUCTING THE BUSINESS AND BY DETE RMINING THE ALP OF THESE IGS AT NIL, TPO/DRP HAS ATTEMPTED TO JUDGE SUCH COMMERCIAL EXPEDIENCIES. THE LD. COUNSEL FURTH ER SUBMITTED THAT THE TPO HAS ATTEMPTED TO APPLY THE C UP METHOD WHILE DETERMINING THE ALP OF IGS AT NIL WHIC H IS ALSO FAULTY AND WRONGLY APPLIED, BECAUSE TPO HAS FOUND N O COMPARABLE UNDER THE CUP METHOD AS PER RULE 10B(1)( A) TO JUSTIFY HIS ACTION OF DETERMINING THE ALP OF IGS AT NIL. THE ASSESSEE HAS RELIED UPON VARIOUS CASE LAWS FOR THIS PROPOSITION TO SUBMIT THAT UNDER THE CUP METHOD, APPROPRIATE COMPARABLE UNCONTROLLED PRICES / TRANSA CTIONS ARE REQUIRED TO BE PROVIDED AS PRESCRIBED UNDER THE LAW FOR I.T.A. NO.177/DEL/2016 13 APPLYING SUCH METHOD. RELIANCE WAS PLACED ON THE FO LLOWING JUDGMENTS:- 1. AWB INDIA (P) LTD. V. ADDL. CIT [TS-67-ITAT-2013 (DEL)-TP]. 2. GATES UNITTA INDIA COMPANY PRIVATE LIMITED [TS-310- ITAT-2018 (CHNY)]. 3. KNORR BREMSE INDIA (P) LTD. [TS-661-ITAT-2016 (DEL) - TP AND TS-527-ITAT-2018 (DEL)-TP]. 15. IT WAS ALSO SUBMITTED THAT THE CHART OF BEN EFITS GIVEN ABOVE SHOWS COMPARABLE UNCONTROLLED TRANSACTIONS WH ICH GOES TO SHOW THAT, IF SERVICES WOULD HAVE BEEN TAKE N FROM AN UNCONTROLLED / INDEPENDENT ENTITY IN INDIA, THE ASS ESSEE WOULD HAVE PAID MORE. THEREFORE, IN THAT MANNER, CU P IS ALSO SATISFIED AND THE INTERNATIONAL TRANSACTION OF IGS PAYMENT SHOULD BE CONSIDERED AS HAVING BEEN UNDERTAKEN AT A LP. THE LD. C SUBMITTED THAT THE AE HAS CHARGED COST PLUS 1 0% MARGIN ON ACTUAL COSTS. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS FOR COST PLUS 10%, WHEREIN IN CASE INDIAN COMPANY HAD RENDERED THE SUPPORT SERVICES, THEN THE REVENUE DEPARTMENT IS ACCEPTING COST PLUS 10%: ACTIS ADVISERS PVT. LTD. [TS-181-ITAT-2013(DEL)-TP] SHELL INDIA MARKETS PVT. LTD. [TS-430-ITAT-2014(MUM )- TP] 16. THE LD. COUNSEL FURTHER SUBMITTED THAT SAFE HARBOUR RULES RECOGNIZE THE INTERNATIONAL TRANSACTION OF IG S AS ELIGIBLE INTERNATIONAL TRANSACTION. THE ASSESSEE SUBMITTED T HAT ONCE I.T.A. NO.177/DEL/2016 14 THESE SERVICES HAVE BEEN BENCHMARKED UNDER OVERALL TNMM IN THE TP STUDY, THE ACTION OF THE TPO AND CONSEQUE NTLY THE DRP WAS NOT IN ACCORDANCE WITH LAW TO BENCHMARK THE SE IGS ON STANDALONE BASIS. THE ASSESSEE FOR THIS PROPOSIT ION RELIED UPON THE JUDGMENT OF MSS INDIA (P) LTD. [TS-14-ITAT-2009 (PUN)-TP] AND JUDGMENT OF HONBLE DELHI ITAT IN THE CASE OF FRIGO GLASS INDIA (P) LTD. V. DCIT [TS-112-ITAT-201 4 (DEL)]. THE ASSESSEE HAS ALSO RELIED UPON THE DEFINITION OF TRANSACTION AS CONTAINED IN RULE 10A(D) TO CLAIM TH AT TRANSACTION INCLUDES A NUMBER OF TRANSACTIONS WHICH ARE CLOSELY LINKED. THE AR SUBMITTED THAT THE RENDERIN G OF THESE IGS ARE CLOSELY LINKED TO OTHER OPERATIONS AND OTHE R AE TRANSACTIONS OF PURCHASES OF COMPONENTS ETC. AND SA LE OF FINISHED GOODS TO ITS AE AND THEREFORE, CANNOT BE S EPARATELY BENCHMARKED FOR DETERMINING ITS ALP ESPECIALLY WHEN THE SAME HAS BEEN BENCHMARKED UNDER THE OVERALL TNMM. I N SUPPORT THIS CONTENTION, THE ASSESSEE PLACED RELIAN CE ON THE SUPREME COURT RULING IN THE CASE OF MAGNETI MARELLI POWERTRAIN INDIA PVT. LTD. (2017-TII-23-SC-TP) IN WHICH IT CONCURRED WITH THE OPINION OF THE JURISDICTIONAL DELHI HIGH COURT (2016-TII-80-HC-DEL-TP) ON ADOPTION OF AGGREGATED TNMM AS MAM AND HELD THAT HAVING ACCEPTED TNMM AS THE MOST APPROPRIATE FOR COMPUTING ALP IN CASE OF ENTIR E INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE, IT WAS NOT OPEN FOR THE TPO TO SUBJECT ONLY ONE PARTICULAR ELEMENT, I.E. PAYMENT OF TECHNICAL ASSISTANCE FEE, TO AN ENTIRELY DIFFERENT CUP METHOD. I.T.A. NO.177/DEL/2016 15 17. THE LD. CIT DR, ON THE OTHER HAND SUBMITTED THA T TPO WAS FULLY JUSTIFIED IN BENCHMARKING THE TRANSACTION OF IGS ON STANDALONE BASIS. HE SUBMITTED THAT THE CONTENTION S OF THE ASSESSEE ON RULE 10A AND ASSESSEES RELIANCE ON SUC H RULES ARE MISPLACED, BECAUSE TRANSACTIONS OF IGS ARE REQU IRED TO BE EXAMINED AS SEPARATE INTERNATIONAL TRANSACTIONS AND CANNOT BE CLUBBED UNDER THE OVERALL TNMM AS HAS BEEN DONE BY THE ASSESSEE. BY MAKING REFERENCE TO ORDER OF THE TPO, THE DR SUBMITTED THAT ASSESSEE FAILED TO ESTABLISH THE REC EIPT OF SERVICES AND THE PAYMENT HAS BEEN MADE BY THE ASSES SEE TO ITS AE WITHOUT ANY BASIS. HE SUBMITTED THE REAL TE ST WHICH IS REQUIRED TO BE APPLIED AS TO WHETHER ANY INDEPENDEN T PARTY WOULD PAY FOR THE ALLEGED SERVICES CLAIMED TO HAVE BEEN RECEIVED BY THE ASSESSEE. HE THUS SUBMITTED THAT T HE ORDER OF TPO / DRP ON THIS ISSUE SHOULD BE CONFIRMED. 18. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO P ERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATERIAL REFERRED TO BEFORE US. LD. TPO HAD FIRST O F ALL SEGREGATED THE INTRA GROUP SERVICES AS A SEPARATE T RANSACTION AND THEREBY AFTER DETAILED REASONING HAS HELD THAT THE ALP OF INTRA GROUP SERVICES HAS TO BE DETERMINED AT NIL BASED ON HIS REASONING AS INCORPORATED ABOVE THAT NO BENEFIT HAS BEEN RECEIVED BY THE ASSESSEE ON PAYMENT OF INTRA GROUP FEES/CHARGES. THE TPO HAS ALSO REFERRED TO OECD GUI DELINES WITH REGARD TO THE INTRA GROUP SERVICES AND ALSO RE FERRED TO CERTAIN DECISIONS FOR COMING TO THE CONCLUSION THAT THE PAYMENTS OF RS.10,16,073/- MADE TO ITS AE FOR INTRA GROUP I.T.A. NO.177/DEL/2016 16 SERVICES HAS TO BE TAKEN AT NIL ON APPLICATION OF C UP METHOD AS NO UNCONTROLLED ENTERPRISES COULD HAVE PAID ANY AMOUNT OF SERVICES AND DO NOT TANTAMOUNT TO INTRA GROUP SERVI CES WITH ADMINISTRABLE BENEFITS. FROM A BARE PERUSAL OF THE INTERNATIONAL TRANSACTION AS RECORDED BY THE ASSESS EE, IT IS SEEN THAT ASSESSEE HAS SEPARATELY SHOWN MANAGEMENT FEES OF RS.10,16,073/- FOR WHICH NO SEPARATE BENCHMARKING H AS BEEN DONE ON THE GROUND THAT THESE MANAGEMENT FEES PAID TO AE IS PART AND PARCEL OF OVER ALL TRANSACTIONS TAKE N BY THE AE. SUCH A CONTENTION OF THE ASSESSEE CANNOT BE SUSTAIN ED ON THE FACTS OF THE PRESENT CASE, FOR THE REASON THAT THE MAIN TRANSACTION UNDERTAKEN BY THE ASSESSEE WITH ITS AE IS WITH REGARD TO THE PURCHASE OF RAW MATERIAL, CONSUMABLES AND SPARES AND SALE OF FINISHED GOODS AND PURCHASE OF F INISHED GOODS. BESIDES THIS, THERE IS ONE LICENSE ON SALE T O THIRD PARTIES. ON THE OTHER HAND, MANAGEMENT FEE IS ARISI NG OUT OF ALTOGETHER SEPARATE AGREEMENT WITH THE AE WITH REGA RD TO MANAGEMENT SERVICES. THE ASSESSEE ITSELF HAS POINTE D OUT THAT MANAGEMENT SERVICES INCLUDE THE FOLLOWING SERVICES: A. CHAIRMAN OF BUCHER INDUSTRIES GROUP B. GROUP MANAGEMENT] C. GROUP FINANCE D. GROUP CONTROLLING E. GROUP TREASURY F. GROUP DEVELOPMENT G. INTERNAL AUDIT H. HUMAN RESOURCES I. LEGAL & GENERAL COUNSEL J. GROUP TAX I.T.A. NO.177/DEL/2016 17 THE SERVICE FEE HAS BEEN CALCULATED BASED ON ACTUAL COST PLUS PROFIT MARGIN OF 10% AND THE SPLIT OF THE COST HAVE BEEN WORKED OUT BY CERTAIN ALLOCATION KEYS. ACCORDINGLY, IT CANNOT BE HELD THAT SUCH A PAYMENT FOR MANAGEMENT FEES (IG S) IS DIRECTLY LINKED WITH THE OTHER INTERNATIONAL TRANSA CTION WHICH HAS BEEN BENCHMARKED UNDER TNMM, THEREFORE, SUCH A CONTENTION OF THE ASSESSEE ON THE FACTS OF THE PRES ENT CASE CANNOT BE ACCEPTED. 19. HOWEVER, CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE AND ALSO THE AGREEMENT OF MANAGEMENT SERVI CES, IT IS SEEN THAT, MANAGEMENT SERVICES HAVE BEEN DIVIDED IN TO NON CHARGEABLE COST, I.E., SHAREHOLDER SERVICE PORTION AND CHARGEABLE COST TO THE SERVICE RECIPIENT BASED ON C ERTAIN ALLOCATION KEYS. IT HAS BEEN CLARIFIED BEFORE THE A UTHORITIES BELOW THAT SHAREHOLDER SERVICES COST HAS NOT BEEN C HARGED BY THE AE. COMING TO THE BENEFIT TEST, LEARNED COUNSEL HAD SUBMITTED THE ESTIMATED BENEFIT IN MONETARY TERMS I N RESPECT OF THE YEAR IN WHICH ASSESSEE HAS RECEIVED SERVICES SUCH AS GROUP FINANCE AND CONTROLLING, GROUP TREASURY ETC W HICH HAS BEEN INCORPORATED ABOVE. EVEN BEFORE THE TPO THE AS SESSEE NOT ONLY HAD FILED THE AGREEMENT BUT HAS ALSO PROVI DED DETAIL ANALYSIS OF THE SERVICES RENDERED BY THE AE AND HAS FURNISHED DETAILS OF COST BENEFIT ANALYSIS INCLUDING THE EXPE CTED BENEFIT FROM THE IGS AND IT HAS BEEN POINTED OUT THAT IF TH E MANAGEMENT SERVICES WOULD NOT HAVE BEEN RECEIVED TH EN OVERALL COST OF THE ASSESSEE WOULD HAVE BEEN HUGE I F PROCURED I.T.A. NO.177/DEL/2016 18 FROM ANY THIRD PARTY, WHEREAS, THE ASSESSEE IS GETT ING THIS SERVICE ON LOWER PRICE BECAUSE AE IS INVOLVED IN PR OVIDING MANAGEMENT SERVICES ON GLOBAL BASIS. FROM THESE FAC TS, IT CANNOT BE HELD THAT THE MANAGEMENT SERVICES PROVIDE D BY THE AE HAVE NOT BENEFITTED THE ASSESSEE FOR REDUCING IT S COST. WHAT IS REQUIRED TO BE SEEN IN SUCH CASES WHETHER T HERE IS ANY ECONOMIC AND COMMERCIAL VALUE IN SUCH KIND OF S ERVICES AND WHETHER AN INDEPENDENT ENTERPRISES IN SUCH CIRCUMSTANCES WOULD HAVE BEEN WILLING TO PAY FOR AC TIVITY IF PERFORMED FOR IT BY AN INDEPENDENT ENTERPRISES OR W OULD HAVE PERFORM THE ACTIVITY IN HOUSE FOR ITSELF. THE TPO C ANNOT DECIDE THE BENEFIT DERIVED BY SUCH SERVICES AND WHAT IS RE QUIRED TO BE SEEN WHETHER THE SERVICES WERE ACTUALLY RENDERED BY THE AE TO THE ASSESSEE OR NOT. THE HON'BLE JURISDICTION AL HIGH COURT IN THE CASE OF EKL APPLIANCES LTD. (SUPRA), CIT VS. CUSHMAN AND WAKEFILED (INDIA) P. LTD. (SUPRA) HAS HELD THAT THE BENEFIT TEST TO DETERMINE THE ALP AT NIL F OR IGS SERVICES CANNOT BE ACCEPTED AS SAME HAS TO BE SEEN FROM THE POINT OF VIEW OF THE ASSESSEE ON THE BASIS OF FACTS . THE ASSESSEE HAS HIGHLIGHTED TANGIBLE BENEFIT DERIVED F ROM SERVICES AND SUCH SERVICE HAS TO BE EVALUATED TO EX AMINE THE OVERALL BENEFIT AND THE COST SAVINGS DUE TO MANAGEM ENT SERVICES PROVIDED BY THE AE. IF TPO HAS SEGREGATED THIS TRANSACTION TO BE BENCHMARKED SEPARATELY, THEN IT W AS INCUMBENT FOR HIM TO ANALYZE THE SAID TRANSACTION B Y COMPARING SIMILAR SERVICES WITH UNCONTROLLED COMPAR ABLE TRANSACTIONS. HE SIMPLY CANNOT DETERMINE AT NIL WIT HOUT I.T.A. NO.177/DEL/2016 19 CARRYING OUT ANY BENCHMARKING ANALYSIS. THUS, WE AG REE WITH THE LEARNED COUNSEL THAT ALP FOR THE MANAGEMENT SER VICES CANNOT BE DETERMINED AT NIL. THE TPO IS HOWEVER DIR ECTED TO VERIFY THE WORKING OF TANGIBLE BENEFIT DERIVED FROM THE SERVICES AS GIVEN BY THE ASSESSEE AND HE SHOULD EXAMINE HOW SUCH SERVICES HAVE GIVEN BENEFIT TO THE ASSESSEE OVERALL AND IF SUCH BENEFITS ARE DEMONSTRATED, THEN NO ADJUSTMENT SHOUL D BE MADE. WITH THIS DIRECTION, THIS GROUND IS TREATED A S PARTLY ALLOWED FOR STATISTICAL PURPOSES. 20. LASTLY, IN SO FAR AS DISALLOWANCE OF CARRY FORW ARD LOSS AND DEPRECIATION IS CONCERNED, THE ASSESSING OFFICE R IS DIRECTED TO VERIFY THE SAME FROM THE RECORDS AND AL LOW THE SAME IN ACCORDANCE WITH THE PROVISION OF LAW. THE O THER GROUNDS ARE CONSEQUENTIAL IN NATURE. 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH MAY, 2019. SD/- SD/- [O.P. KANT] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 10 TH MAY, 2019 PKK: