Deputy Commissioner of Income -tax, V. M/s. Renishaw Metrology System Pvt.Ltd, Pune

ITA 2557/PUN/2016

• Counselvise Citation: [2021] 109 COUNSELVISE.COM (IT) 6878 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 2 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 09-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A M KRISHNAN MADHAVAN
• Assessee Lawyers: TUSHAR PATIL
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Rule of consistency; Corroborative evidences; Avoidance of tax; Set aside
• Section: 92C; 37(1); 144C; 13; 153; 22; 92CA; 37; 10; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, J UDICIAL MEMBER . / ITA NO . 2664 /PUN/201 6 / ASSESSMENT YEAR : 20 1 1 - 12 RENISHAW METROLOGY SYSTEMS LIMITED, S. NO. 283, HISSA NO. 2, S. NO. 284, HISSA NO. 2 & 3A, RAISONI ESTATE, VILLAGE - MANN, TALUKA - MULSHI, DISTRICT - PUNE 411057 PAN : AABCR6361F ...... / APPELLANT / V/S. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5, PUNE / RESPONDENT . / ITA NO.2557/PUN/2016 / ASSESSMENT YEAR : 2011 - 12 DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5, PUNE ...... / APPELLANT / V/S. RENISHAW METROLOGY SYSTEMS PVT. LTD., S. NO. 282, RAISONI ESTATE, VILLAGE - MANN, TALUKA - MULSHI, DISTRICT - PUNE 411057 PAN : AABCR6361F / RESPONDENT ASSESSEE BY : S/SHRI AJIT KUMAR JAIN & TUSHAR PATIL REVENUE BY : SHRI A.M. KRISHNAN MADHAVAN / DATE OF HEARING : 06 /07 - 01 - 2021 / DATE OF PRONOUNCEMENT : 28 - 01 - 2021 2 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 / ORDER PER S.S. VISWANETHRA RAVI, JM : BOTH THESE CROSS APPEALS BY THE ASSESSEE AND REVENUE ARE DIRECTED AGAINST THE COMMON ORDER DATED 11 - 08 - 2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) - 13, PUNE [CIT(A)] FOR ASSESSMENT YEAR 2011 - 12. 2. WE FIND THAT THE ISSUES RAISED IN BOTH APPEALS ARE SIMILAR, BASED ON SAME IDENTICAL FACTS. UPON HEARING BOTH THE PARTI ES, WE PROCEED TO HEAR BOTH THE APPEALS TOGETHER AND TO PASS A CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. FIRST , WE SHALL TAKE UP THE APPEAL OF ASSESSEE IN ITA NO. 2664/PUN/2016. ITA NO. 2664/PUN/2016 FILED BY ASSESSEE 4. GROUND NO. 1 RAISED BY THE ASSESSEE IS GENERAL IN NATURE, HENCE, REQUIRES NO ADJUDICATION. 5. THE LD. AR SUBMITS THAT THE ASSESSEE IS NOT INTERESTED TO PROSECUTE GROUND NOS. 3, 3.1, 3.2, 3.5, 3.6, 4, 4.1, 4.2 AND 5, 5.1 TO 5.4 AND REQUESTED TO TREAT THE SAME AS NOT PRESSED. ACCORDINGLY, THE SAME ARE DISMISSED AS NOT PRESSED. 6. GROUND NO. 2 RAISED BY THE ASSESSEE CHALLENGING THE ACTION OF CIT(A) IN CONFIRMING THE ADJUSTMENT MADE IN RESPECT OF AVAILING OF MANAGEMENT SERVICES IN THE FACTS AND CIRCUMSTAN CES OF THE CASE. 3 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 7. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORDS ARE THAT T HE ASSESSEE IS ENGAGED IN PROVISION OF SOFTWARE SERVICES, MARKETING SUPPORT SERVICES, MANUFACTURING FUNCTION AND TRADING PRODUCTS . 8. DURING THE YEAR UNDER CONSIDERATION , THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AE IN RESPECT OF MANAGEMENT SERVICES AND RECEIVED AN AMOUNT OF RS.1 , 90 , 69,391/ - . FOR THE PURPOSE OF ESTABLISHING THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTIONS, THE ASSESSEE AG GREGATED WITH THE VARIOUS FUNCTIONS UNDERTAKEN BY THE ASSESSEE. THE ASSESSEE APPLIED TNMM AS THE MOST APPROPRIATE METHOD WHICH W AS ACCEPTED BY THE TPO. A SHOW CAUSE NOTICE WAS ISSUED AS TO WHY ARMS LENGTH PRICE OF THE TRANSACTION SHOULD NOT BE TREATED AS NIL. THE ASSESSEE RELIED ON MANAGEMENT SERVICES AGREEMENT, INVOICE RAISED BY THE PARENT COMPANY AND VARIOUS DECISIONS OF TRIBUNAL. THE TPO EXAMINED TIMESHEET RELATED TO CHARGES TO AE AND OBSERVED THAT THERE WAS NO CLARITY REGARDING THE SERVICES AVAILE D OR SERVICES PROVIDED. FURTHER, HE OBSERVED THAT IT IS VERY DIFFICULT TO ACCEPT A PERSON FROM UK WILL TRAVEL TO INDIA TO PROVIDE MANAGEMENT SERVICES FOR 1HR 30 MIN., 5HR 50 MIN., AND 6 HRS. INDICATING THAT THE PERSON REFERRED IN THE SHEET RELATED TO CHAR GES TRAVELLED TO INDIA FOR SOME OTHER BUSINESS REASONS AND THERE COULD BE SOME INFORMAL DISCUSSION, IT DOES NOT ANY WAY SUPPORT THE CONTENTION OF ASSESSEE THAT MANAGEMENT SERVICES HAS BEEN AVAILED FROM THE SAID PERSON. ACCORDING TO TPO THE TAXPAYER TO EST ABLISH THAT THE PAYMENTS WERE MADE COMMENSURATE TO THE VOLUME , QUALITY OF SERVICES AND SUCH COSTS ARE COMPARABLE WITH EVIDENCES OF DETAILS OF EXPENSES INCURRED BUT NO SUCH EVIDENCES FILED BY THE AE . FURTHER, THAT EXPENSES WERE APPORTIONED BY THE AE AMONG DIFFERENT COUNTRY - CENTRES ON THE BASIS OF THEIR OWN AGREEMENTS AND IT HAS NO RELEVANCE WITH THE ACTUAL SERVICES RENDERED TO INDIVIDUAL UNITS, THE 4 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 PAYMENT TERM S OF THE MANAGEMENT SERVICES ARE INDEPENDENT OF THE NATURE OR VOLUME OF SERVICES AND EXPENSES. TH US, THE TPO REJECTED THE CONTENTION OF THE ASSESSEE AND TREATED THE VALUE OF MANAGEMENT SERVICES FEE AS NIL IN THE ABSENCE OF SUPPORTING EVIDENCE OF AVAILING SUCH SERVICES. 9. THE CIT(A) IN ITS ORDER AT PAGE NO. 46 OBSERVED THAT THE ASSESSEE FURNISHED S CANNED ILLEGIBLE IMAGES IN A VERY SMALL FONT SIZE OF ITS INVOICES AND IMAGE OF SOME COMPUTATION SHEET INTERSPERSED IN THE TEXT OF ITS WRITTEN SUBMISSION. THE SAID IMAGES BEING ILLEGIBLE, CONSTITUTE NO EVIDENCE IN SUPPORT OF ASSESSEES CLAIM OF RECEIPT OF MANAGEMENT SERVICES AND HELD THE ASSESSEE HAS NOT FURNISHED ANY EVIDENCE OF THE SERVICES RECEIVED BY IT OR OF THE COST ALLOCATION AND CONFIRMED THE ADJUSTMENT MADE BY THE AO TO THE ASSESSEES INTERNATIONAL TRANSACTION OF AVAILING MANAGEMENT SERVICES FROM THE AE AT RS. NIL AS AGAINST RS.1,90,69,391/ - . 10. THE LD. AR, SHRI AJIT KUMAR JAIN SUBMITS THAT THE TPO/CIT(A) OBSERVED THAT THE SERVICES WERE NOT PROVIDED TO THE ASSESSEE IS INCORRECT AND BASELESS. THE SERVICES BY NATURE ARE INTANGIBLE. HE SUBMITS THA T THE RENISHAW PLC. PROVIDED THE SERVICES TO THE ASSESSEE THROUGH CORRESPONDENCE, TELEPHONE, TELEX , PERIODIC VISIT OF PERSONNEL AND THROUGH OTHER MEANS AS AGREED BETWEEN THE ASSESSEE AND RENISHAW PLC. 11. HE REFERRED TO THE AGREEMENT AT PAGE NO. 631 OF THE PAPER BOOK AND DREW OUR ATTENTION TO THE POINT NO. 2 OF THE SERVICES AND SUBMITTED THAT THE PROVIDING PARTY SHALL FROM TIME TO TIME AT THE REQUEST OF ASSESSEE ( RMSPL ) PROVIDE WITH ALL OR ANY OF THE SERVICES UNDER THE TERMS SET OUT IN THE SAID AGREEMENT . HE REFERRED TO THE DETAILS OF SERVICES PLACED AT PAGE NO. 639 OF THE PAPER BOOK AND SUBMITTED THAT THE ASSESSEE FURNISHED ONLY SOME OF THE 5 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 INVOICES AND THE SAID INVOICES ISSUED QUARTERLY. WE FIND INVOICE DATED 31 - 03 - 2011 CLAIMING CHARGES AS PER MANAGE MENT SERVICES AGREEMENT AND EXPENSES INCURRED FOR THE PERIOD 01 - 01 - 2011 TO 31 - 03 - 2011 FOR 8,273 POUND IN WHICH IT IS CLEARLY DISCLOSE THAT THE SAID INVOICE WAS RAISED BY THE RENISHAW PLC. AGAINST THE ASSESSEE FOR THE SERVICES AVAILED BY THE ASSESSEE FOR TH E PERIOD OF 01 - 01 - 2011 TO 31 - 03 - 2011. WE FIND ANOTHER INVOICE DATED 31 - 03 - 2011 RAISED BY THE RENISHAW PLC. AGAINST THE ASSESSEE CLAIMING CHARGES FOR THE PERIOD 01 - 01 - 2011 TO 31 - 03 - 2011 FOR 33,093 POUND IN ACCORDANCE WITH THE MANAGEMENT SERVICES AGREEMENT. 12. THE LD. AR , SHRI AJIT KUMAR JAIN DREW OUR ATTENTION TO PAGE NO. 665 OF THE PAPER BOOK AND SUBMITTED THAT A PERSON BY NAME PETER BOWLER WAS IN INDIA PROVIDING ASSISTANCE TO LOCAL MANAGEMENT ON ALL PERSONNEL ISSUES. WE FIND THAT IN PAGE NO. 660, THE TIMESHEET SHOWS THE DETAILS OF ADVICE, ASSISTANCE AND SERVICES PROVIDED TO OVERSEAS SUBSIDIARY COMPANIES BY RENIS HAW PLC. WHICH CLEARLY SHOWS THAT THE NAME OF PETER BOWLER IS REFLECTED IN THE DEPARTMENT OF PERSONNEL HAVING NO. 5041, CORP. SERVICES DIVISION WAS IN INDIA WITH THE ASSESSEE FOR 50 HRS. FROM JANUARY TO MARCH, 2011. FURTHER, IT SHOWS THE PETER BOWLER ADVI SED ON PERSONNEL ISSUES INCLUDING GENERAL RECRUITMENT WITH PARTICULAR FOCUS ON SALES AND MARKETING MANAGER. 13. LIKEWISE, ROBERT GREEN WAS IN INDIA FOR 9 HRS. GIVEN FINANCE TRAINING TO ONE BY NAME MS SWATI AND HAD VARIOUS MEETINGS WITH AVINASH. FURTHER , HE HAD ARBITRATION WITH MR SUHAS AND MR AVINASH REGARDING PAYMENT PROBLEM. FURTHER HAD MEETING WITH ROB MAC/ALAN SEARLE ON CORPORATE ISSUES. THE CONTENTION OF LD. AR IS THAT HAVING ALL THESE EVIDENCES THE DETAILS OF PERSONS VISITED INDIA, TIMESHEET AND THE DETAILS OF 6 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 ISSUES ATTENDED BY THEM , THE FINDING OF AO/DRP THAT NO SERVICES WERE AVAILED BY ASSESSEE IS INCORRECT. IN PAGE NO. 662, WE FIND THAT THE DETAILS OF ADVICE, ASSISTANCE AND SERVICES PROVIDED BY BRIAN LYALL IN THE DEPARTMENT OF BUSINESS SYSTEM AND CORPORATE SERVICES DIVISION WHERE IT SHOWS THAT HE VISITED IT INFRASTRUCTURE OF RENISHAW MSPL , PUNE FOR 56 HOURS. IN PAGE NOS. 663 AND 664 THE COPY OF PASSPORT AND VISA ARE PROVIDED WHEREIN THE VISA HAS BEEN GIVEN FROM 20 - 01 - 2011 TO 19 - 01 - 2012. HE VISITED INDIA DURING 14 - 02 - 2011 TO 18 - 02 - 2011, NUMBER OF HOURS SHOWN IN THE TIMESHEET AGAINST BRIAN LYALL , IN OUR OPINION , PROVIDED SERVICES TO ASSESSEE FOR 56 HOURS SUPPORTING THE SUBMISSIONS OF LD. AR. WE FIND FORCE IN THE SUBMISSIONS OF LD. AR , FR OM PAGE NOS. 631 TO 662 OF THE PAPER BOOK SHOWS THAT THE ASSESSEE AVAILED SERVICES FROM ITS RENISHAW PLC. AND PAID THE CHARGES RAISED THROUGH INVOICES WHICH ARE PAGE NOS. 665 AND 666 OF THE PAPER BOOK. 14. THE LD. DR, SHRI A.M. KRISHNAN MADHAVAN SUBMITS THAT THE ASSESSEE MENTIONED THAT THE PAYMENT OF MANAGEMENT SERVICE FEE WAS AGGREGATED WITH THE VARIOUS FUNCTION OF THE ASSESSEE AND SINCE THE NET COST PLUS (NCP) MARGIN OF EACH OF THE SEGMENTS OF THE ASSESSEE, AFTER CONSIDERING THE INTERLINKED TRANSACTION S WERE AT ARM S LENGTH, THE PAYMENT OF MANAGEMENT SERVICE FEES WAS ALSO DEEMED TO BE AT ARM' S LENGTH. HE SUBMITS THAT THE ASSESSEE HAD NOT SEPARATELY BENCHMARKED THE TRANSACTIONS OF INTRA GROUP CHARGES. A REFERENCE IS MADE TO SECTION 92(2) OF THE ACT WHI CH MENTIONS THAT EVEN IN CASE OF COST ALLOCATIONS FOR BENEFITS, SERVICES OR FACILITY, THE ARM'S LENGTH PRINCIPLE IS APPLICABLE AND THE METHODS DESCRIBED IN SECTION 92C ARE APPLICABLE. FURTHER, IT NEEDS TO BE KEPT IN MIND THAT AS PER RULE 10C(2)(A) OF I . T . RULES, 1962, WHILE CONDUCTING BENCHMARKING VIS - A - VIS UNCONTROLLED TRANSACTIONS, THE MOST APPROPRIATE METHOD IS TO BE SELECTED 7 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 BY TAKING INTO ACCOUNT, INTER ALIA, THE NATURE AND CLASS OF THE INTERNATIONAL TRANSACTIONS. TO ARRIVE AT THE ARM'S LENGTH PRICE OF TRANSACTIONS WHICH ARE CLASSIFIED AS IGS, THEY NEED TO BE BENCHMARKED SEPARATELY AS A CLASS OF TRANSACTIONS BY THE MOST APPROPRIATE METHOD. THE LD. DR FURTHER STATES THAT DU RING THE ENTIRE PROCEEDINGS, THE ASSESSEE WAS NOT ABLE TO PROVIDE A VALID CUP TO JUSTIFY THE ARM S LENGTH PRICE THAT IT HAD ARRIVED AT IN THIS TRANSACTION. RULE 10D(1)(H) OF IT RULE, 1962, REQUIRES THE ASSESSEE TO KEEP AND MAINTAIN A RECORD OF THE ANALYSIS PERFORMED TO EVALUATE COMPARABILITY OF UNCONTROLLED TRANSACTIONS WITH THE RELEV ANT INTERNATIONAL TRANSACTIONS. AS THE ASSESSEE HAS NOT PROVIDED SPECIFIC COMPARABLES WHICH COULD JUSTIFY ITS CLAIM OF PAYMENT OF SERVICES, THE ACTION OF TPO IN DETERMINING THE COST OF SERVICES AS NIL IS PERFECTLY JUSTIFIED. 15. THE LD. DR SUBMITS THAT THE HONBLE ITAT HAS RELIED ONLY ON THE BENEFIT TEST APPLIED BY THE TPO AND HELD THAT TPO CANNOT SIT IN THE JUDGMENT OF THE DECISION OF BUSINESSMAN TO AVAIL SERVICES AND TO MAKE PAYMENTS . I T IS SUBMITTED THAT THIS WAS NOT ONLY ONE OF THE FACTOR FOR REJEC TION OF ASSESSEE'S CLAIM OF COST ALLOCATION. THE TPO HAS BENCHMARKED THE COST OF SERVICES AS NIL ON VARIOUS GROUNDS SUCH AS: - I . A NALYSIS OF COMPARABLE UNCONTROLLED TRANSACTIONS NOT FURNISHED TO SUBSTANTIATE ITS CLAIM II . P AYMENTS MADE BY ASSESSEE TO AE ARE IN T HE NATURE OF DUPLICATE SERVICES III . NO INDEPENDENT PARTY WOULD HAVE MADE SUCH PAYMENT IN UNCONTROLLED CIRCUMSTANCES IV . N O BENEFIT DERIVED 1 6 . HE SUBMITS THAT THE REASONS DISCUSSED BY TPO WERE NOT CONSIDERED BY HON'BLE ITAT BEFORE REJECTING TPO'S VIEW. 8 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 17. THE LD. DR SUBMITS THAT THE HON'BLE ITAT HAS MAINLY EMPHASIZED THAT BENEFIT TEST CANNOT BE APPLIED BY TPO WHILE DETERMINING ALP OF THE TRANSACTION AND TPO CANNOT DISALLOW THE EXPENSE MADE BY ASSESSEE ONLY ON THE GROUND THAT THERE WAS NO NEED OF THESE SERVI CES. IN THIS MATTER IT IS SUBMITTED THAT VARIOUS CASE LAWS DISCUSSING THE ISSUE OF BENEFIT DERIVED FROM THE SERVICES RENDERED ARE RELATING TO SECTION 37 OF THE ACT. IT IS TRUE THAT FACT OF BENEFIT DERIVED OR NOT FROM THE EXPENDITURE INCURRED IS AN IRRELEVA NT CONSIDERATION FOR THE ALLOWANCE OF THE EXPENDITURE U/S. 37. T HE FACTS AND CONSIDERATIONS FOR TPO ARE TOTALLY DIFFERENT AND TPO HAS TO DETERMINE WHAT WILL BE THE PRICE OF THE TRANSACTION IN UNCONTROLLED SITUATION WHICH MAY INVOLVE THE CRITERION OF BENEFI T TEST. 18. THE LD. DR FURTHER SUBMITS THAT F OR THE DETERMINATION OF ALP OF INTRA GROUP SERVICES, THE ASSESSEE HAS TO DEMONSTRATE THAT THE SERVICES WERE NOT ONLY RENDERED BY THE AE BUT ALSO THAT THE ASSESSEE HAD PAID CHARGES AS PER THE ARMS LENGTH. THE TEST TO DECIDE WHETHER CHARGEABLE INTRA - GROUP SERVICES HAVE BEEN PROVIDED UNDER THE ARM'S LENGTH PRINCIPLE IS WHETHER THE ACTIVITY IS ONE FOR WHICH THE INDEPENDENT ENTERPRISE WOULD HAVE BEEN WILLING TO PAY OR PERFORM ITSELF. THE INDEPENDENT ENTERPRISE WOUL D NEVER PAY FOR ANY SERVICE FROM WHICH IT DOES NOT BENEFIT . THE BENEFIT TEST DETERMINES WHETHER THE ASSOCIATE ENTERPRISE DERIVES ANY BENEFIT FROM THE PAYMENT OF SERVICE CHARGES AND IS ESSENTIAL PART OF DETERMINATION OF ARM'S LENGTH PRINCIPLE. IT DOES NOT QUESTION THE NEED OR NECESSITY OF INCURRING THE EXPENDITURE BUT ONLY SEEKS TO DETERMINE THE PRICE TO BE PAID FOR SERVICES IN UNCONTROLLED SITUATION BY CARRYING OUT COST - BENEFIT ANALYSIS. THE HON'BLE ITAT ERRED IN NOT APPRECIATING THAT THE TPO/ D RP WERE NOT QUESTIONING THE NEED FOR SEEKING THE SERVICES BUT WERE SEEKING JUSTIFICATION FOR THE PRICE PAID BY MEANS OF VARIOUS EVIDENCES AND DETERMINE WHE THER IT IS IN LINE 9 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 WITH THE ALP . 19. FURTHER, SHRI A.M. KRISHNAN MADHAVAN SUBMITTED THAT THE ONLY INTENTION BEH IND CARRYING OUT THE COST - BENEFIT ANALYSIS WAS TO DETERMINE WHETHER IN RELATED PARTY SITUATION THE COST OF SERVICES SHOULD BE COMMENSURATE AND NOT OUTWEIGH THE ECONOMIC AND COMMERCIAL VALUE FROM SUCH SERVICES, IN SUCH A SITUATION, IT WAS INCUMBENT UPON THE TPO TO LOOK INTO THE COST - BENEFIT ANALYSIS. THE ASSESSEE HAS FAILED TO PROVE THAT THE COMMERCIAL BENEFITS DERIVED BY THE ASSESSEE FROM SERVICES WERE COMMENSURATE TO QUANTUM OF PAYMENT OF SERVICE FEES. 20. FURTHER, HE SUBMITS THAT THE PRESENT CASE PERTAI NS TO TPO BENCHMARKING THE ALP OF INTERNATIONAL TRANSACTION AT NIL U/S SECTION 92CA OF THE ACT. THE TPO IS NOT STEPPING IN TO THE SHOES OF THE BUSINESSMAN BUT ONLY CARRYING OUT THE COST - BENEFIT ANALYSIS TO DETERMINE WHETHER IN RELATED PARTY SITUATION THE CO ST OF SERVICES SHOULD BE COMMENSURATE AND NOT OUTWEIGH THE ECONOMIC AND COMMERCIAL VALUE FROM SUCH SERVICES. THE REQUIREMENT FOR EXPENDITURE TO BE ALLOWED UNDER REGULAR CIRCUMSTANCES IS DIFFERENT THAN THAT OF INTERNATIONAL TRANSACTIONS RELATED TO INTRA - GRO UP SERVICES. THE TRANSFER PRICING PROVISIONS ARE 'SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX' AND OVERRIDE GENERAL PROVISIONS. ONCE THERE IS AN INTERNATIONAL TRANSACTION, THEN THE TP PROVISIONS SHALL PREVAIL OVER THE OTHER REGULAR PROVISIONS GOVERNIN G THE DEDUCTIBILITY OR TAXABILITY OF AN AMOUNT FROM SUCH TRANSACTION. THE SPECIAL BENCH OF IT AT IN THE CASE OF M/S . LG ELECTRONICS INDIA PVT. LTD. REPORTED IN [2015] 153 ITD 591 (DELHI - TRIB.) (ANNEXURE B) HAS HELD THAT THE AMBIT OF TRANSFER PRICING PROVIS IONS ARE WIDER THAN NOT ONLY SECTION 37 BUT ALSO SECTION 40A(2)(B). THE SPECIAL BENCH HELD THAT THE SECTION 37(1) ONLY REQUIRES THAT 10 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 THE EXPENDITURE SHOULD BE INCURRED 'WHOLLY' 'EXCLUSIVELY 'FOR THE PURPOSE OF BUSINESS BUT THE TRANSFER PRICING PROVISIONS REQUIRE THAT THE PRICE PAID (QUANTUM OF EXPENDITURE) TO THE AE SHOULD BE COMMENSURATE WITH THE SERVICES RECEIVED AND IS AT ARM'S LENGTH PRICE I.E. THE PRICE WHICH WOULD HAVE BEEN PAID TO THE INDEPENDENT THIRD PARTY. FURTHER, THE SPECIAL BENCH ALSO HELD TH AT SECTION 40A(2) ONLY DETERMINES AS TO WHETHER THE QUANTUM OF A PARTICULAR EXPENDITURE IS REASONABLE OR NOT WHEREAS TP PROVISIONS TEST WHETHER THE CLAIM OF EXPENDITURE IS AT ALP OR NOT. FURTHER WHILE SECTION 40A(2) IS ONLY APPLICABLE TO EXPENDITURE, TRANS FER PRICING PROVISIONS ARE APPLICABLE TO BOTH INCOME AND EXPENDITURE. W HILE APPLYING THE BENEFIT TEST , TPO IS NOT ANALYZING WHETHER THE TRANSACTION PASSES SEC 37 TEST OR NOT, BUT HE ANALYZES THAT WHETHER IN THE SIMILAR CIRCUMSTANCES ANY THIRD PARTY WOULD HAVE PAID THE SAME PRICE FOR THE SERVICES RECEIVED I.E . WHETHER PRICE PAID IS COMMENSURATE WITH THE SERVICES RECEIVED. THIS RATIO OF THE DECISION OF SPECIAL BENCH WAS APPROVED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATIO NS LTD (ITA NO. 16/2014) . 21. THE LD. DR FURTHER SUBMITTED THAT, IN FACT , IN THIS CASE, THE ONUS WAS ON THE ASSESSEE TO SHOW THAT IN UNCONTROLLED CIRCUMSTANCES THE THIRD PARTY WOULD HAVE PAID THE SAME AMOUNT TO OTHER UNRELATED PARTIES FOR THE SERVICES IT RECEIVED FROM ITS AE. THE OECD GUIDELINES MANDATE THAT FOLLOWING TWO POINTS NEED TO BE ANALYZED IN CASE OF INTERNATIONAL INTRA - GROUP SERVICES, W HETHER CHARGEABLE INTRA - GROUP SERVICES HAVE BEEN RENDERED , IF SO, WHAT THE CHARGE SHOULD BE AS PER THE ARM'S LEN GTH PRINCIPLE. 22. THE LD. DR SUBMITS THAT THE HON'BLE ITAT HAS NOT CONSIDERED THE 11 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 DECISION OF DELHI TRIBUNAL IN THE CASE OF OE MONEY FINANCIAL SERVICES (P) LTD. VS ACIT [2 016] 69 TAXMANN.COM 420 (DELHI - TRIB . ) IN WHICH THE TRIBUNAL HAS HELD THAT TPO WHILE DECIDING THE ALP OF THE IOS IS REQUIRED TO ENQUIRE WHETHER: - I . SERVICES ARE REQUIRED, (NEED TEST) II . SERVICES ARE RENDERED (RENDITION TEST) III . SERVICES ARE BENEFITTING THE RECIPIENT (BENEFIT TEST) IV . SERVICES ARE DUPLICATIVE IN NATURE (DUPLICATION TEST) V . SERVICE S ARE FOR THE SAFEGUARDING INTEREST OF OWNER I.E. SHAREHOLDER ACTIVITY. 23 . THE LD. DR F URTHER SUBMITS THAT TRANSFER PRICING PROVISIONS ARE INTRODUCED TO PROTECT THE TAX BASE OF THE COUNTRY, WHICH AT TIMES IS REDUCED BY SOME OF THE MNC'S BY MISPRICING THE GOODS AND SERVICES TRANSFERRED AMONG DIFFERENT GROUP ENTITIES IN INTERNATIONAL TRANSACTION. IN THIS CASE, THE ASSESSEE HAS NOT ESTABLISHED THE ALP OF THE INTERNATIONAL TRANSACTION OF THE MANAGEMENT SERVICES ACCORDING TO THE PROVISIONS OF RULE 10B(1)(A) OF THE INCOME TAX RULES, NOR HAS PROVIDED THE PRIMARY INFORMATION ON THE BASIS OF WHICH, THE LEARNED TPO CAN WORK OUT THE ALP U/S 92C(3) R.W.S 92C(4) AND SUCH PAYMENT, WHICH REDUCES INDIA'S TAX BASE, CANNOT BE CONSIDERED TO BE AT THE ALP. 24. IN SIMILAR CIRCUMSTANCES ON IDENTICAL FACTS THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2009 - 10 REVERSED THE ORDER OF DRP AND DIRECTED THE AO TO ACCEPT THE VALUE OF MANAGEMENT SERVICES AS CLAIMED BY THE ASSESSEE. SIMILARLY, THIS TRIBUNAL IN A.Y. 2010 - 11 ALSO TAKI NG INTO CONSIDERATION THE FINDINGS OF TRIBUNAL IN A.Y. 2009 - 10 ALLOWED GROUND NO. 12 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 3 RAISED THEREIN AND DIRECTED THE AO TO ACCEPT THE VALUE OF MANAGEMENT SERVICES AS CLAIMED BY THE ASSESSEE BY REVERSING THE ORDER OF DRP VIDE ORDER DATED 29 - 01 - 2020. THE RELEVANT PORTION IN ITA NO. 623/PUN/2015 FOR A.Y. 2010 - 11 IS REPRODUCED HERE - IN - BELOW : 12. GROUND NO. 3 RAISED BY THE ASSESSEE CHALLENGING THE ACTION OF DRP IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF MANAGEMENT SERVICES OF RS.1,27,37,577 / - . 13. HEARD BOTH PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THE ISSUE RAISED IN GROUND NO. 3 IS SIMILAR TO THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 3 FOR A.Y. 2009 - 10 IN ASSESSEES OWN CASE. ON PERUSAL OF THE SAME WE FIND T HE TRANSFER PRICING ADJUSTMENT WAS MADE BASING ON SAME IDENTICAL FACTS AND SAID VARIANCE IN AMOUNTS. THE TRIBUNAL VIDE ITS ORDER DATED 12 - 09 - 2019 DISCUSSED THE FACTS, EVIDENCES, SUBMISSIONS OF LD. AR AND LD. DR OBSERVED THAT THE ASSESSEE HAS FILED DOCUMEN TS JUSTIFYING NOT ONLY THE NEED OF SERVICES BUT ALSO THE AVAILMENT OF SERVICES. THE TPO HAS FAILED TO TAKE INTO COGNIZANCE THOSE DOCUMENTS/EVIDENCES AND HELD THE VALUE IN RESPECT OF MANAGERIAL SERVICES AVAILED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRIS E IS NIL. THE TRIBUNAL IN THE ABOVE SAID ORDER TAKING INTO CONSIDERATION THE FACTS AND CIRCUMSTANCES, HELD AS UNDER : 14. NOW, COMING TO THE NEXT ISSUE RAISED I.E. IN RESPECT OF PAYMENT OF MANAGERIAL FEES. 15. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD ENTERED INTO MANAGEMENT SERVICE AGREEMENT WITH RENISHAW PLC IN 2006. UNDER THE SAID AGREEMENT, THE ASSOCIATED ENTERPRISE PROVIDED BUSINESS SUPPORT AND MANAGEMENT SUPPORT SERVICES TO THE ASSESSEE, WHICH THE ASSESSEE CLAIMED ENHANCED ITS OPE RATIONAL EFFICIENCY AND ALSO STANDARDIZED ITS INTERNAL PROCESSES. THE ASSESSEE HAD FURNISHED DOCUMENTARY EVIDENCE IN THIS REGARD PROVIDING DETAILS OF PERSONNEL RENDERING THE SERVICES, NUMBER OF MAN HOURS SPENT, TOTAL COST INCURRED IN RENDERING SUCH SERVICE S AND ALSO EXPLANATION WAS GIVEN VIS - - VIS WORK DONE. THE INVOICES RECEIVED FROM ASSOCIATED ENTERPRISE WERE ALSO FURNISHED BEFORE THE AUTHORITIES BELOW. HOWEVER, THE TPO HELD THAT IN FACT NO SERVICES WERE RECEIVED BY ASSESSEE AND ALSO OBSERVED THAT SERVICE S WERE ROUTINE IN NATURE AND WERE NEITHER ASKED FOR NOR GIVEN BY ASSOCIATED ENTERPRISE AND THE TPO BENCHMARKED THE SAID TRANSACTION AT NIL AND MADE AN UPWARD ADJUSTMENT OF 2.18 CRORES. 16. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED O UT THAT LAST YEAR THE TPO HAD ACCEPTED THE SAID TRANSACTION TO BE AT ARM'S LENGTH PRICE. THE ASSESSING OFFICER HAD DISALLOWED THE SAID PAYMENT UNDER SECTION 37(1) OF THE ACT. HOWEVER, THE DRP DELETED THE ADDITION, AGAINST WHICH NO APPEAL HAS BEEN FILED BY REVENUE. OUR ATTENTION WAS DRAWN TO THE ORDER OF TRIBUNAL IN THIS REGARD. HE ALSO POINTED OUT THAT THE ASSESSEE HAD FILED DETAILED LETTER TO THE TPO EXPLAINING THE NEED FOR AVAILING MANAGEMENT SERVICES DATED 06.05.2011 ALONG WITH SEVERAL ENCLOSURES AND ALS O DOCUMENTS WERE FILED EVIDENCING THE SAID PROVISION OF SERVICES. HOWEVER, THE TPO DOES NOT GIVE ANY COGENT REASON IN HOLDING THAT NO SERVICES WERE PROVIDED AND IN DETERMINING THE ARM'S LENGTH PRICE AT NIL. 17. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 18. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES VIDE GROUND OF APPEAL NO.3 IS AGAINST ARM'S LENGTH PRICE OF TRANSACTION OF PAYMENT FOR MANAGERIAL SERVIC ES AVAILED FROM ASSOCIATED ENTERPRISE. THE AGREEMENT WHICH HAS BEEN ENTERED INTO BY 13 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 ASSESSEE WITH ITS ASSOCIATED ENTERPRISE WAS W.E.F. 01.04.2006. THE ASSESSEE IS AVAILING MANAGERIAL SERVICES UNDER THE SAME AGREEMENT FROM YEAR TO YEAR. IN ASSESSMENT YEAR 2 007 - 08, NO ISSUE IN THIS REGARD WAS RAISED; IN ASSESSMENT YEAR 2008 - 09, THE TPO ACCEPTED THE ARM'S LENGTH PRICE BUT THE ASSESSING OFFICER HELD THAT THE SAID PAYMENT WAS NOT TO BE ALLOWED UNDER SECTION 37(1) OF THE ACT. THE DRP DELETED THE ADDITION, AGAINST WHICH NO APPEAL HAS BEEN FILED BY THE REVENUE. IN ASSESSMENT YEAR 2009 - 10 I.E. INSTANT ASSESSMENT YEAR, NO DISALLOWANCE HAS BEEN MADE BY ASSESSING OFFICER UNDER SECTION 37(1) OF THE ACT, BUT THE TPO HAD HELD THE ARM'S LENGTH PRICE AT NIL. THE TPO IN FINAL ANALYSIS HOLDS THE ASSESSEE NOT TO HAVE RECEIVED ANY SERVICES AND ALSO HOLDS THAT THERE WAS NO NEED TO AVAIL ANY SERVICES. 19. WE HAVE IN SERIES OF DECISIONS ALREADY DECIDED SIMILAR ISSUE OF PAYMENT ON ACCOUNT OF MANAGERIAL SERVICES AVAILED BY ASSESSEE FROM ITS ASSOCIATED ENTERPRISES AND HAVE HELD THAT THE TPO OR THE ASSESSING OFFICER CANNOT SIT IN JUDGMENT OF THE DECISION OF BUSINESSMAN TO AVAIL SERVICES AND TO MAKE PAYMENTS FOR THAT. FURTHER, THE ASSESSEE HAS FILED DOCUMENTS JUSTIFYING NOT ONLY THE NEE D OF THE SERVICES BUT ALSO THE AVAILMENT OF SERVICES. THE TPO HAS FAILED TO TAKE INTO COGNIZANCE THOSE DOCUMENTS / EVIDENCES AND WE FIND NO MERIT IN THE SAME. IN ANY CASE, THE SAID AGREEMENT BETWEEN THE PARTIES IS IN FORCE W.E.F. 01.04.2006 AND IN NONE OF THE EARLIER YEARS ANY ADDITION HAS BEEN MADE BY THE TPO/ASSESSING OFFICER. IN THE ABSENCE OF SAME AND FOLLOWING THE RULE OF CONSISTENCY WE FIND NO MERIT IN THE ORDERS OF TPO/ASSESSING OFFICER AND THE SAME IS REVERSED. THE GROUND OF APPEAL NO.3 RAISED BY AS SESSEE IS THUS, ALLOWED. THE GROUNDS OF APPEAL RAISED BY ASSESSEE ARE THUS, ALLOWED. THERE WAS NO ORDER CONTRARY TO THE FINDINGS OF THIS TRIBUNAL IN ASSESSEES OWN CASE WAS PLACED ON RECORD AND IN VIEW OF THE SAME, WE REVERSE THE ORDER OF DRP AND DIRECT THE AO TO ACCEPT THE VALUE OF MANAGERIAL SERVICES AS CLAIMED BY THE ASSESSEE AT NIL. THUS, GROUND NO. 3 RAISED BY THE ASSESSEE IS ALLOWED. 25. IN THE LIGHT OF ABOVE FINDINGS RENDERED BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2010 - 11 FOLLOWING THE ORDER IN A.Y. 2009 - 10 IN ASSESSEES OWN CASE, THE ORDER OF CIT(A) IS SET ASIDE AND DIRECT THE AO TO ACCEPT THE VALUE OF MANAGEMENT SERVICES AS CL AIMED BY THE ASSESSEE. THUS, GROUND NO. 2 RAISED BY THE ASSESSEE IS ALLOWED. 26. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWED. ITA NO. 2557/PUN/2016 FILED BY REVENUE REGARDING INCLUSION OF QUADRANT COMMUNICATION LTD. 27. THE LD. DR, SHRI A.M. KRISHNAN MADHAVAN SUBMITS THAT THE TPO HAS INCLUDED QUADRANT COMMUNICATION LTD. AS A COMPARABLE OBSERVING THAT 14 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 THE DRP HA S UPHELD THE INCLUSION OF SAID COMPANY IN ASSESSEES OWN CASE FOR A.Y. 2010 - 11. HE REFERS TO ANNUAL REPORT OF QUADRANT COMMU NICATION LTD. AND SUBMITS THAT IT IS EXPLICITLY CLEAR THAT THE M/S. QUADRANT COMMUNICATION LTD. IS ENGAGED IN ITS ONLY BUSINESS SEGMENT I.E. ADVERTISING UNDER SCHEDULE 11 ENDED ON 31 - 03 - 2010. THE SAID COMPANY DETERMINED ITS BUSINESS SEGMENT AS ADVERTISING ON SEGMENTAL REPORTING IN ACCORDANCE WITH THE REQUIREMENTS OF ACCOUNTING STANDARD 17. THE SEGMENT REVENUE, SEGMENT RESULTS, TOTAL CARRYING AMOUNT OF SEGMENT ASSETS, TOTAL CARRYING AMOUNT OF SEGMENTAL LIABILITIES, TOTAL COST INCURRED TO ACQUIRE SEGMENT AS SETS, THE TOTAL AMOUNT OF CHARGE FOR DEPRECIATION REFLECTED IN THE FINANCIAL STATEMENTS FOR THE YEAR ENDED ON 31 - 03 - 2010. FURTHER, HE REFERS TO ANNUAL REPORT REGARDING COMMISSION AND SERVICE FEES AND SUBMITTED THE COMMISSION AND SERVICE FEES REPRESENT INC OME TO THE COMPANY FROM JOBS COMPLETED ON BEHALF OF CLIENTS. THE COMMISSION IN RESPECT OF ADVERTISEMENTS, WHERE THE COMPANY PERFORMS ONLY CREATIVE WORK, IS RECOGNISED IN THE PERIOD DURING WHICH THE ADVERTISEMENT IS PUBLISHED OR AIRED, BASED COMPANYS ESTI MATES/STATEMENTS RECEIVED FROM CLIENT. FURTHER, HE STATED THAT THE RETAINER FEES ARE ACCOUNTED ON ACCRUAL BASIS OVER THE PERIOD OF CONTRACT. HE VEHEMENTLY ARGUED THAT IT IS EVIDENT THAT QUADRANT COMMUNICATION LTD. EARNS REVENUE FROM COMMISSION AND SERVIC E FEES IN RESPECT OF ADVERTISING. THE PROFIT AND LOSS ACCOUNT OF QUADRANT COMMUNICATION LTD. SHOWS THAT 100% OF THE OPERATING REVENUE COMES FROM COMMISSION AND SERVICE EARNED BY PROVIDING ADVERTISEMENT. THE SAID SERVICE PROVIDED BY THE QUADRANT COMMUNICA TION LTD. INCLUDE FULL SERVICE ADVERTISING AGENCY, PROVIDING CLIENTS WITH 360 DEGREE MARKETING COMMUNICATION SOLUTIONS WHICH COMES UNDER THE PURVIEW OF MARKETING SUPPORT SERVICES. 15 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 28. HE REFERS TO ORDER OF KOLKATA BENCH OF TRIBUNAL IN THE CASE OF M/S. PHI LIPS MEDICAL SYSTEM (P) LTD. VS. ITO REPORTED IN (2019) 102 TAXMANN.COM 441 (KOL KATA - TRIB.) AND SUBMITTED THAT THE RESTRICTION STIPULATED IN RULE 10D RELATING TO SELECTION OF COMPARABLES WHOSE RESULTS ARE NOT AVAILABLE IN PUBLIC DOMAIN IS APPLICABLE ONLY T O AUDITOR AND NOT TO TPO. THE TPO HAS AN INHERENT POWER TO MAKE ENQUIRY AND COLLECT AND USE INFORMATION AND MATERIAL FOUND TO BE RELEVANT FOR THE PURPOSE OF TRANSFER PRICING ANALYSIS IN ORDER TO DETERMINE ARMS LENGTH PRICE OF RELEVANT INTERNATIONAL TRANS ACTIONS ENTERED INTO BETWEEN AES. 29. THE LD. AR SUBMITTED THAT THE QUADRANT COMMUNICATION LTD. IS ENGAGED IN ADVERTISING AND THE ASSESSEE WAS NOT ENGAGED IN ADVERTISING SEGMENT. THIS TRIBUNAL IN EARLIER YEARS FOR A.Y S. 2009 - 10 AND 2010 - 1 1 IN ASSESSES OWN CASE CONSIDERED THE SAME AND HELD THE QUADRANT COMMUNICATION LTD. IS NOT COMPARABLE DUE TO DISSIMILARITY IN FUNCTIONS AND DIRECTED THE ASSESSING OFFICER TO ACCEPT THE CLAIM OF ASSESSEE IN MARKETING SUPPORT SERVICES. 30. WE FIND THE SEGME NT OF MARKETING SUPPORT SERVICES CAME UP BEFORE THIS TRIBUNAL IN A.Y. 2010 - 11 WHEREIN THE TPO BASING ON THE DIRECTIONS OF DRP IN A.Y. 2010 - 11 INCLUDED QUADRANT COMMUNICATION LTD. IN THE LIST OF COMPARABLES. THE ASSESSEE CHALLENGED THE INCLUSION OF QUADRAN T COMMUNICATION LTD. BEFORE THIS TRIBUNAL AND THIS TRIBUNAL TAKING INTO CONSIDERATION THE EVIDENCE REGARDING THE FUNCTIONAL DISSIMILARITY BETWEEN THE QUADRANT COMMUNICATION LTD. AND ASSESSEE VIDE ANNUAL REPORT HELD THE QUADRANT COMMUNICATION LTD. CANNOT BE COMPARED AND REVERSED THE DIRECTIONS OF DRP TO INCLUDE THE SAME AS COMPARABLE. THE RELEVANT PARAGRAPHS OF THE ORDER ARE REPRODUCED HE RE - IN - BELOW FOR READY REFERENCE : 16 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 7. THE ASSESSEE OBJECTED FOR CONSIDERING THE FOREX AS NON - OPERATIVE TO THE INCLUSION OF QUADRANT COMMUNICATIONS THAT IT IS NOT FUNCTIONALLY COMPARABLE AND THE SAID COMPANY INVOLVED IN ADVERTISING AGENCY AND NON - AVAILABILITY OF REQUIRED DATA FOR COMPARABILITY. THE TPO REJECTED THE OBJECTIONS OF ASSESSEE AND HELD THE SAID COMPANY IS ENGAGED I N THE ADVERTISING BUSINESS AND THE SERVICES PROVIDED INCLUDE FULL SERVICE ADVERTISING AGENCY, PROVIDING CLIENTS WITH 360 DEGREE MARKETING COMMUNICATIONS SOLUTIONS. THE DRP UPHELD THE TP REPORT FOR INCLUSION OF QUADRANT COMMUNICATIONS BY HOLDING THAT IT IS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE. 8. RENISHAW PLC IS INCORPORATED IN ENGLAND AND RENISHAW METROLOGY SYSTEMS PRIVATE LTD. IS INCORPORATED IN INDIA. WE FIND FUNCTIONS INVOLVED IN MARKETING SUPPORT SERVICES OF ASSESSEE I.E. RENISHAW METROLOGY SYST EMS PRIVATE LTD. (RMSPL) ENTERED INTO AN AFFILIATE AUTHORIZED SALES REPRESENTATIVE AGREEMENT ON 01 - 04 - 2005 WITH ITS AE RENISHAW PLC WHICH IS PLACE AT PAGE NO. 149 OF THE PAPER BOOK, WHEREIN IT REVEALS THAT THE BACKGROUND OF AGREEMENT THAT RENISHAW PLC AGRE ED TO GRANT RMSPL A NON - EXCLUSIVE RIGHT TO PROVIDE SUPPORT SERVICES WITH REGARD TO SALE AND REPAIR OF THE PRODUCTS DESCRIBED IN SCHEDULE 1. THE PRIMARY FUNCTIONS OF RMSPL IN RELATION TO MARKETING SUPPORT SERVICES SUCH AS BRING TO THE NOTICE OF CUSTOMERS, THE GENERAL CONDITIONS OF SALES AS DOCUMENTED BY RENISHAW PLC TO EFFECTIVELY COMMUNICATE THE COMPLAINTS OR OBSERVATIONS MADE BY THE CUSTOMERS IN INDIA TO RENISHAW PLC AND PROVIDE INFORMATION TO RENISHAW PLC, IN RELATION TO THE COMPETITORS AND THEIR ACTIVIT IES IN INDIA. FOR PROVIDING THE ABOVE MENTIONED SERVICES THE RMSPL WOULD BE COMPENSATED AT 9% OF THE NET SALE PRICE OF THE PRODUCTS SOLD IN INDIA. THEREFORE, INTER AFFILIATE AGREEMENT BETWEEN RENISHAW PLC AND RMSPL IS LIKE INTERNAL AGREEMENT BETWEEN THEM LIAISONING AND COORDINATING WITH THE CLIENTS BASED IN INDIA. 9. WE NOTE THAT THE ANNUAL REPORT OF QUADRANT COMMUNICATIONS FOR A.Y. 2010 - 11 IS PLACED AT PAGES 271 TO 287 WHEREIN WE FIND NO ACTIVITIES OF SUCH KIND THE SAID COMPANY IS REFLECTING FROM THE SA ID ANNUAL REPORT. WE ALSO NOTE THAT THE ASSESSEE VIDE ITS SUBMISSIONS DATED 18 - 11 - 2013 WHICH IS AT PAGE NO. 162 OF THE PAPER BOOK OBJECTED TO THE INCLUSION OF QUADRANT COMMUNICATIONS BY STATING THE DATA OF SAID COMPANY IS NOT AVAILABLE. THEREFORE, IN OUR OPINION WHEN THE DATA IS NOT AVAILABLE IN PUBLIC DOMAIN, FOR COMPARABILITY OF BUSINESS SUPPORT SYSTEM SEGMENT BE THAT OF SAID COMPANY DOES NOT ARISE AT ALL. THEREFORE, WE REVERSE THE DIRECTION OF DRP TO INCLUDE THE SAME AS COMPARABLE RESULTING INTO THE A DJUSTMENT MADE BY THE AO IS THEREFORE DELETED. THEREFORE, WE HOLD THAT THE QUADRANT COMMUNICATIONS CANNOT BE COMPARED. 31. IN THE LIGHT OF THE ABOVE, THE QUADRANT COMMUNICATION LTD. IS NOT COMPARABLE AND WE DIRECT THE ASSESSING OFFICER TO EXCLUDE THE SAME. ACCORDINGLY, THE ORDER OF CIT (A) IS UPHELD . THUS, GROUND NO. 1 RAISED BY THE REVENUE IS DISMISSED. REGARDING INCLUSION OF ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. 32. THE LD. DR , SHRI A.M. KRISHNAN MADHAVAN SUBMITS THAT ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. IS INVOLVED IN CONDUCTING EXHIBITION AND EVENTS. HE REFERRED TO PAGE NO. 9 OF ANNUAL REPORT AND SUBMITTED THE SAID COMPANY RECOGNIZES ITS REVENUE FROM SALE OF STALL SPACE IN EXHIBITION 17 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 AND EVENTS. SALE OF STALL SPACE IS ALSO ACHIEVED THROUGH MEDIA INSERTIONS IN PUBLICATIONS. BOTH THESE REVENUES ARE RECOGNIZED ON ACCRUAL BASIS ON COMPLETION OF EVENT. FURTHER, REFERRING TO ANNUAL REPORT HE SUBMITTED THAT THE ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. ACTIVITIES FALL WITHIN A SINGLE SEGMENT, I.E. INCOME FROM EXHIBITION AND EVENTS AND OPERATE ONLY IN DOMESTIC MARKET. FURTHER, HE STATES THAT THE COMPANY OPERATING INCOME OF 95.79% COMES FROM EXHIBITION AND EVENTS WHICH COMES UNDER THE PURV IEW OF MARKETING SUPPORT SERVICES. THE TPO BENCHMARKED ITS TRANSACTIONS AS TNMM WHICH EXAMINES THE NET PROFIT MARGIN RELATIVE TO AN APPROPRIATE BASE (COST, SALES AND ASSETS) REALIZED ON THE TRANSACTION. UNDER TNMM, COMPARABLES NEED TO BE BROADLY SIMILAR AND SIGNIFICANT PRODUCT DIVERSITY AND SOME FUNCTIONAL DIVERSITY BETWEEN THE MARGINS (RETURN ON ASSETS, OPERATING INCOME TO SALES AND OTHER MEASURES OF NET PROFIT) ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES. FURTHER, HE SUBMITS THAT THE NET MARGINS ALS O MAY BE MORE THAN GROSS PROFIT MARGINS AND GEOGRAPHICAL DIFFERENCES ARE NOT CONSIDERED FOR DETERMINING COMPARABILITY IN TNMM METHOD. DIFFERENCES IN THE FUNCTIONS PERFORMED BETWEEN ENTERPRISES ARE OFTEN REFLECTED IN VARIATIONS IN OPERATING EXPENSES. ENTE RPRISES MAY HAVE A WIDE RANGE OF GROSS PROFIT MARGINS BUT STILL EARN BROADLY SIMILAR LEVELS OF NET PROFITS. HE VEHEMENTLY SUPPORTED THE ORDER OF TPOS VIEW IN PURSUANCE OF DRP DIRECTIONS FOR INCLUSION OF ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. AS COMP ARABLE AS IT CONDUCTS EXHIBITION AND EVENTS WHICH ARE BROADLY SIMILAR TO SERVICES OF ASSESSEE IN RESPECT OF MARKETING SUPPORT SERVICES. 33. THE LD. AR , SHRI AJIT KUMAR JAIN REFERRED TO PAGE NO. 614 OF THE PAPER BOOK REGARDING THE REVENUE DETERMINATION P OLICY OF ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. AND SUBMITTED THAT THE SAID COMPANY RECOGNIZES ITS REVENUE FROM SALE OF STALL SPACE IN EXHIBITION AND EVENTS. 18 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 SALE OF STALL SPACE IS ALSO ACHIEVED THROUGH MEDIA INSERTIONS IN PUBLICATIONS. BOTH THESE R EVENUES ARE RECOGNIZED ON ACCRUAL BASIS ON COMPLETION OF EVENT. THE COMPANY HAS INCOME FROM COMMISSION DUE TO ADVERTISEMENT INSERTIONS IN EXTERNAL PUBLICATIONS. FURTHER, HE SUBMITS THAT THE ADDITIONAL REVENUE GENERATED DURING EXHIBITION BY PROMINENTLY DI SPLAYING/ASSOCIATING NAME OF CERTAIN EXHIBITIONS IN SIGNAGES HOARDINGS BANNERS FLAGS ETC. DURING THE EXHIBITION FOR PROMOTING THEIR BRANDS. THE SAID INCOME IS ACCOUNTED ON ACCRUAL BASIS ON COMPLETION OF THE EVENT. FURTHER, THE COMPANY EARNED INCOME FROM DELEGATE FEES AND DELEGATES ATTENDING CONFERENCES/EVENTS DURING EXHIBITION. IT ALSO EARNS INCOME FROM ENTRY CHARGES FOR CERTAIN EVENTS ENTRY TICKETS FOOTFALL COLLECTIONS HAVE BEEN CHARGED FROM VISITORS. HE SUBMITS THAT TH IS TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2010 - 11 CONSIDERED ALL THESE ASPECTS AND BY PLACING RELIANCE ORDER DATED 25 - 04 - 2019 PASSED IN JOHN DEERE INDIA (P) LTD. HELD THE BIFURCATION OF SALES AND SERVICE COMMISSION FROM MARKETING SUPPORT SERVICE IS MEAGR E AND CANNOT BE COMPARED BE THAT OF ASSESSEE. THE TRIBUNAL EXAMINED THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. AND HELD THE DIRECT INCOME OF THE SAID COMPANY IS FROM EXHIBITION AND EVENTS AND PLACED RELIANCE ON THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE PASSED IN A.Y. 2010 - 11. 34. WE FIND AS RIGHTLY SUBMITTED BY THE LD. AR THAT THIS TRIBUNAL CONSIDERED THE COMPARABILITY OF ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. AND EXCLUD ED THE SAME IN THE LIST OF COMPARABLES FOR A.Y. 2010 - 11. THE LD. DR DID NOT DISPUTE THE SAME AND NO ORDER PLACED ON RECORD TO SHOW THE FINDING OF THIS TRIBUNAL IN A.Y. 2010 - 11 IS REVERSED. THE RELEVANT PARAGRAPHS OF THE ORDER FOR A.Y. 2010 - 11 IS REPRODUCED HERE - IN - BELOW : 19 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 10. TH E ASSESSEE OBJECTED THAT THE ACTIVITY OF ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. IS FUNCTIONALLY DIFFERENT. FURTHER, IT WAS SUBMITTED THAT THE SAID COMPANY IS INTO ORGANIZING EXHIBITION AND TRADE FAIRS IN WHICH THE ASSESSEE IS NOT AT ALL INVOLVED. TH E TPO REJECTED THE OBJECTIONS OF ASSESSEE. WE NOTE THAT THE TPO HAS OBSERVED IN ITS REMARKS THAT THE SAID COMPANY INVOLVED IN CONDUCTING EXHIBITIONS AND EVENTS AND MOST OF THE INCOME COMES FROM EXHIBITIONS AND EVENTS. THE DRP HELD THE FUNCTIONS OF THE SA ID COMPANY ARE COMPARABLE WITH THE ASSESSEE AND THE AO MADE TRANSFER PRICING ADJUSTMENT. THE ASSESSEE PLACED ON RECORD THE ORDER DATED 25 - 04 - 2019 OF THIS TRIBUNAL PASSED IN M/S. JOHN DEERE INDIA PVT. LTD. WHEREIN THE REVENUE CHALLENGED DIRECTIONS OF DRP F OR EXCLUSION OF ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. FROM THE LIST OF COMPARABLES. THE TRIBUNAL RENDERED THE DETAILED DISCUSSION AND HELD THE DRP IS JUSTIFIED IN DIRECTING TO EXCLUDE THE SAID COMPANY FROM THE COMPARABLES. WE NOTE THAT THE ASIAN BU SINESS EXHIBITION & CONFERENCE LTD. IS ENGAGED IN ORGANIZING EXHIBITION AND CONFERENCE. 11. THE TRIBUNAL EXAMINED THE PROFIT AND LOSS ACCOUNTS OF THE SAID COMPANY AND HELD THE DIRECT INCOME OF SAID COMPANY IS FROM EXHIBITION AND EVENTS. THEREFORE, AS WE DISCUSSED IN THE AFOREMENTIONED PARAGRAPHS THE AGREEMENT BETWEEN RENISHAW PLC AND RMSPL IS AN INTERNAL AFFILIATE AGREEMENT OF THE SAID TWO COMPANIES TO CO - ORDINATE AND EXCHANGE THE COMMUNICATION AND CORRESPONDENCE BETWEEN THEM RELATING TO THE CLIENTS BASED IN INDIA. WE NOTE THAT THE FINANCIAL STATEMENTS FOR THE PERIOD ENDED ON 31 - 03 - 2010 PLACED A T PAGE NO. 19 WHEREIN THE SALES AND SERVICES INCOME OF RS.45,02,00,743/ - OUT OF WHICH THE MARKETING SUPPORT SERVICES IS ONLY RS.5,14,37,962/ - . THEREFORE, BIFURCATION OF SALES AND SERVICE INCOME THE INCOME EARNED FROM MARKETING SUPPORT SERVICES IS ONLY TO MEAGER, THEREFORE, WHICH CANNOT BE COMPARED WITH ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. THUS, GROUND NOS. 2.1, 2.2, 2.8 AND 2.9 ARE ALLOWED. 3 5 . IN THE LIGHT OF THE FINDINGS OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2010 - 11 FOR EX CLUSION OF ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. BY PLACING RELIANCE ON SIMILAR ISSUE ON SAME IDENTICAL FACTS INVOLVED IN THE CASE OF M/S. JOHN DEERE INDIA PVT. LTD. THE ORDER OF CIT (A) IS UPH ELD AND DIRECT THE ASSESSING OFFICER TO EXCLUDE THE ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. FROM THE LIST OF COMPARABLES. THUS, GROUND NO. 2 RAISED BY THE REVENUE IS DISMISSED. 3 6 . GROUND NOS. 3 AND 4 RAISED BY THE REVENUE CHALLENGING THE ACTION OF CIT (A) IN DELETING THE ADDITION MADE ON ACCOUNT OF PAYMENT OF ROYALTY . 3 7 . BRIEF FACTS, THE ASSESSEE RENISHAW INDIA HAS PAID ROYALTY OF RS.68,39,772/ - TO ITS AE RENISHAW PLC. THE ASSESSEE FOLLOWED TNMM AND BENCHMARKED INDIVIDUAL ITEM IN PROFIT AND LOSS ACCOUNT. THE ASSESSING 20 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 OFFICER DID NOT AGREE WITH THE BENCHMARKING OF INDIVI DUAL ITEM. THE ASSESSING OFFICER HELD THAT THE ASSESSEE IS A CONTRACT MANUFACTURER AS THE ASSESSEE MADE PURCHASES OF RS.10,16,30,118/ - OUT OF WHICH OF RS.5,46,59,405/ - FROM AE. ACCORDING TO ASSESSING OFFICER SINCE THE ASSESSEE PURCHASED MORE THAN 50% FRO M ITS AE THE PAYMENT OF ROYALTY IS NOT JUSTIFIABLE. FURTHER, HE RELIED ON DIRECTIONS OF DRP AND TREATED THE ALP O F INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY AT NIL. THE CIT(A) OBSERVED THAT THE ASSESSING OFFICER DISREGARDING THE AGREEMENT BETWEEN THE ASSESSEE AND ITS AE PROVIDING ROYALTY PAYMENT DELETED THE ADJUSTMENT MADE BY THE ASSESSING OFFICER IN RESPECT OF ROYALTY PAYMENT. 38. THE LD. DR SUBMITS THAT THE RENISHAW INDIA PROVIDES MANUFACTURING SERVICES FOR THE PRODUCTS OF RENISHAW GROUP . RENISHAW INDIA DOES THE ASSEMBLY OF A RANGE OF MACHINE TOOL PROBING PRODUCTS AND CABLE HARNESSES. THE MANUFACTURING ACTIVITY IS PREDOMINANTLY MANUAL ASSEMBLY, AIDED BY SOME COMPUTERIZED SEMI - AUTOMATED PROCESSES. FURTHER, THE PRODUCT AND ASSEMBLY PROCE SS TRAINING OF INDIAN ENGINEERS IS UNDERTAKEN IN THE UK AND IRELAND PRIOR TO THE TRANSFER OF PRODUCTION TO INDIA. ASSEMBLY OPERATORS IN INDIA ARE TRAINED LOCALLY BY INDIAN ENGINEERS IN THE RAMP UP TO FULL PRODUCTION. MATERIALS AND COMPONENTS TO SUPPORT P RODUCTION ASSEMBLY OPERATIONS ARE INITIALLY SOURCED FROM THE PARENT COMPANY AND EFFORTS ARE MADE FOR THESE TO BE SOURCED LOCALLY AS FAR AS IS PRACTICABLE. RENISHAW INDIA HAD ENTERED INTO A TECHNICAL COLLABORATION AGREEMENT WITH RENISHAW PLC. UNDER WHICH RENISHAW PLC. PROVIDES RENISHAW INDIA, THE RIGHT TO USE TECHNICAL KNOW - HOW, PATENTS AND TRADEMARKS . SUCH TECHNICAL KNOW - HOW, PATENTS AND TRADEMARKS ARE USED BY RENISHAW INDIA IN ITS MANUFACTURING PROCESS. THE PRI MARY MARKET RISK RESIDES WITH THE AE. RENISHAW INDIA DOES NOT B EAR MARKET RISK AS IT RENDERS MANUFACTURING ACTIVITY ONLY TO ITS 21 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 AES. AND RENISHAW INDIA DOES NOT BEAR ANY CONTRACT RISK. THE AES DIRECTLY CONTRACTS WITH ITS CUSTOMERS IN THE TERRITORY AND TH E CREDIT RISK VIS - - VIS THE END CUSTOMER IS BORNE BY THE AES WHICH CLEARLY SHOWS THE RENISHAW INDIA DOES NOT BEAR ANY CREDIT RISK. THE RENISHAW INDIA IS ONLY RESPONSIBLE TO ITS AES WITH REGARD TO PRODUCT QUALITY AND WARRANTY. REGARDING CAPACITY UTILIZATI ON RISK THE RENISHAW INDIAS PRODUCTION SCHEDULES ARE DEPENDENT ON THE ORDERS PLACED BY ITS AES AND B E ARS THE CAPACITY UTILIZATION RISK. FURTHER, RENISHAW INDIA BEARS THE FOREIGN EXCHANGE FLUCTUATION RISK IN RESPECT OF IMPORT OF RAW MATERIALS CONSUMABLES AND EXPORT OF FINISHED GOODS DUE TO FLUCTUATION IN THE FOREIGN EXCHANGE CURRENCY RATES. HE ARGUED THAT THE RISKS OF ASSESSEE INDICATE THAT THE ASSESSEE IS A CONTRACT MANUFACTURER AND PAYMENT OF ROYALTY WAS NOT REQUIRED TO BE MADE AND SUBMITTED THE TPO HAD RIGHTLY TREATED THE ALP OF THE ROYALTY PAYMENT TRANSACTION AT NIL. 39. THE LD. AR, SHRI AJIT KUMAR JAIN SUBMITS THAT THE ASSESSEE PAID ROYALTY TO ITS AE FOR THE USE OF TECHNICAL KNOWHOW OWNED BY RENISHAW PLC. THE TECHNICAL KNOWHOW INCLUDES ALL INVENT IONS, PATENTS, ENGINEERING AND MANUFACTURING SKILL AND OTHER TECHNICAL INFORMATION. RENISHAW PLC. I S THE OWNER OF TECHNOLOGY USED BY THE ASSESSEE FOR MANUFACTURER AND SALE OF GOODS TO RENISHAW GROUP ENTITIES AND CONTINUOUSLY INNOVATES AND IMPROVES THE TEC HNOLOGY OF MANUFACTURING USED BY THE ASSESSEE. THE ASSESSEE DOES NOT INCUR ANY EXPENDITURE ON THE RESEARCH AND DEVELOPMENT. RENISHAW PLC. HAS ITS OWN DEDICATED RESEARCH AND DEVELOPMENT FACILITIES WHICH CONTINUOUSLY INNOVATES AND IMPROVES THE TECHNOLOGY O F MANUFACTURING GOODS. DUE TO CENTRALIZED RESEARCH AND DEVELOPMENT, RENISHAW PLC HAS BEEN ABLE TO DEVELOP A VAST KNOWLEDGE BASE. RENISHAW PLC. IMPARTS THIS KNOWLEDGE TO ITS GROUP ENTITIES FOR CONSIDERATION . 22 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 THE IMPARTED KNOWLEDGE INCLUDES PRODUCE SPECIFIC INFORMATION, ALL OPERATIONAL ASPECTS OF FACTORY OPERATION AS WELL AS SAFETY, ENVIRONMENT PROTECTION AND QUALITY ASSURANCE. THE RENISHAW PLC. INCURS SUBSTANTIAL AMOUNT ON RESEARCH AND DEVELOPMENT ACTIVITY FO R CONTINUOUS IMPROVEMENTS IN TECHNOLOGY BY R E NISHAW INDIA . THE RENISHAW PLC. INCURRED R&D EXPENDITURE OF 29,392 GBP AGAINST TOTAL OPERATING EXPENSES AT 79.693 GBP SHOWING PERCENTAGE OF OPERATION EXPENSES AT 36.88% . THE HUGE COST INCURRED BY RENISHAW PLC. FOR THE CONTINUOUS UPDATION OF THE TECHNOLOGY AND OUT OF THE SAID EXPENDITURE A PART OF WHICH IS RECOVERED FROM RENISHAW INDIA AS ROYALTY FOR SHARING THE TECHNOLOGY WHICH IS RESULTANT OF ITS R&D ACTIVITY. 40. FURTHER, HE SUBMITS THAT THE RENISHAW INDIA ENTERED INTO A TECHNICAL COLLABORATION AGREEMENT WITH RENISHAW PLC. ON 01 - 04 - 2006 AT PAGE 887 OF THE PAPER BOOK. IN PURSUANCE OF SUCH AGREEMENT THE RENISHAW PLC. PROVIDES THE RIGHT TO USE TECHNICAL KNOW - HOW, PATENTS AND TRADEMARK S TO RENISHAW INDIA AND T HAT THE PAYMENT OF ROYALTY HAS BEEN MADE AS PER CONTRACTUAL AGREEMENT. 41. THE RENISHAW INDIA EXPORTS THE GOODS MANUFACTURED BY USING ABOVE TECHNICAL KNOW - HOW TO RENISHAW PLC. AND TO ITS AFFILIATE ENTITIES. RENISHAW INDIA PAYS A ROYALTY OF 2% OF THE NE T EXPORT SALES FOR USE OF SUCH TECHNICAL KNOW - HOW, PATENTS AND TRADEMARKS. IT IS ALSO EXPLAINED THAT THE PAYMENT OF ROYALTY FOR THE USE OF TECHNICAL KNOW - HOW OWNED BY THE RENISHAW PLC. DOES NOT RELATE TO THE SALES MADE TO RENISHAW PLC. AND THAT THE PAYMEN T OF ROYALTY HAS BEEN MADE ONLY TOWARDS THE NET SALES MADE TO RENISHAWS ENTITIES. 23 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 42. WE NOTE THAT THE RELEVANT DETAILS OF NET SALES MADE TO ITS ENTITIES ARE AT PAGE NO. 896 OF THE PAPER BOOK WHICH ARE AS UNDER : SR. NO. ASSOCIATED ENTERPRISES TOTAL SALES (IN INR) PAYMENT OF ROYALTY @2% OF SALES (IN INR ) 1 RENISHAW (HONG KONG) LIMITED 156,855,160 3,137,103 2 RENISHAW (IRELAND) LIMITED 110,091 2,202 3 RENISHAW AG 4,894,790 97,896 4 RENISHAW GMBH 10,389,082 207,782 5 RENISHAW INC. 10,837,924 216,758 6 RENISHAW KK 153,367,882 3,067,358 7 RENISHAW SAS 1,686,904 33,738 TOTAL 338,141,834 6,762,837 43. WE FIND THAT ALL THE ENTITIES UNDER THE RENISHAW GROUP WHICH ARE SEPARATE LEGAL ENTIT IES AND THEY OPERATE INDEPENDENT OF EACH OTHER IN THEIR BUSINESS PROCESS. IT WAS CONTENDED THE SALE OF GOODS TO GROUP ENTITIES BY USING THE TECHNICAL KNOW - HOW OWNED BY RENISHAW PLC. WARRANTS THE PAYMENT OF ROYALTY TO RENISHAW PLC. @2% ON SALES. WE NOTE THAT AS CONTENDED BY THE LD. AR THAT THE PAYMENT OF ROYALTY DOES NOT RELATE TO SALES MADE TO RENISHAW PLC. AND THE DETAILS PAYMENT OF ROYALTY RS.6 7 , 62,837/ - MADE ARE ONLY ON SALES MADE TO GROUP ENTITIES. IT IS FURTHER NOTED THAT THE RENISHAW PLC. HAS PAID TAX ES ON THE ROYALTY INCOME RECEIVED FROM RENISHAW INDIA AND FILED RETURN OF INCOME A CKNOWLEDGING THE RECEIPT ON ACCOUNT OF ROYALTY AS INCOME. 44. SIMILAR ISSUE BASING ON SAME IDENTICAL FACTS CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN ASSESSEES OWN CASE IN A.Y. 2010 - 11 AND THE SAID ORDER IS PLACED AT PAGE NO. 211 OF THE PAPER BOOK. ON PERUSAL OF THE RELEVANT PARAGRAPHS FROM 14 TO 19 WE NOTE THAT THE FACTS AND 24 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 CIRCUMSTAN CES INVOLVING THE ISSUE DISCUSSED THEREIN ARE IDENTICAL TO THE FACTS ON HAND. THE LD. AR AND LD. DR DID NOT DISPUTE THE SAME. THIS TRIBUNAL EXAMINED THE DETAILS OF PAYMENT OF ROYALTY ON TOTAL SALES MADE TO RENISHAW GROUP ENTITIES IN DETAIL AND HELD THE P AYMENT OF ROYALTY @ 2% IS IN ACCORDANCE WITH THE AGREEMENT DATED 01 - 04 - 2006 WHICH IS BEING RENEWED FROM TIME TO TIME SINCE THE N INVOLVING THE YEAR UNDER CONSIDERATION ALSO AND DIRECTED THE ASSESSING OFFICER TO ACCEPT THE ARMS LENGTH PRICE ADOPTED BY THE A SSESSEE. THE RELEVANT PARA NOS. 14 TO 19 OF THE ORDER FOR A.Y. 2010 - 11 IN ASSESSEES OWN CASE IS REPRODUCED HERE - IN - BELOW : 14. GROUND NO. 4 RAISED BY THE ASSESSEE CHALLENGING THE ACTION OF AO IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT AS DIRECTED BY THE DRP ON ACCOUNT OF PAYMENT OF ROYALTY OF RS.27,32,494/ - . 15. HEARD BOTH PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE MADE PAYMENT OF RS.27,32,494/ - TO ITS ASSOCIATED ENTERPRISE RENISHAW PLC ON ACCOUNT OF ROYALTY. THE TPO CALLED FOR EXPLANATION AS TO WHY THE ROYALTY SHOULD NOT BE TREATED AS NIL. THE ASSESSEE EXPLAINED THE MARGIN EARNED BY THE ASSESSEE IS HIGHER THAN THAT OF COMPARABLES AND ASSESSEE MADE SUBSTANTIAL PURCHASE OF RAW MATERIAL FROM LOCAL MARKET, ASSESSEE IS NOT A CON TRACT MANUFACTURE. THE TPO HELD THAT THE ASSESSEE IS A CONTRACT MANUFACTURE AND REFERRED TO RELEVANT TP DOCUMENTATION REGARDING THE FUNCTIONS. ON PERUSAL OF THE FUNCTIONS AS REPRODUCED BY THE TPO IN ITS ORDER AT PAGE NO. 15 SHOWS THAT THE ASSESSEE PROVID ES MANUFACTURING SERVICES FOR THE PRODUCTS OF RENISHAW GROUP AND DOES ASSEMBLY OF A RANGE OF MACHINE TOOL PROBING PRODUCTS AND CABLE HARNESSES. THE MANUFACTURING ACTIVITY IS PREDOMINANTLY MANUAL ASSEMBLY, AIDED BY SOME COMPUTERIZED SEMI - AUTOMATED PROCESSE S. FURTHER, TRAINING OF INDIAN ENGINEERS IS UNDERTAKEN IN THE UK AND IRELAND PRIOR TO THE TRANSFER OF PRODUCTION TO INDIA. MATERIALS AND COMPONENTS REQUIRED FOR PRODUCTION ASSEMBLY OPERATIONS WERE INITIALLY SOURCED FROM THE PARENT COMPANY AS WELL AS LOCA L MARKET. REGARDING TECHNICAL COLLABORATION, THE ASSESSEE HAS RIGHT TO USE TECHNICAL KNOW - HOW, PATENTS AND TRADEMARKS, OWNED BY ITS ASSOCIATED ENTERPRISE RENISHAW PLC IN ITS MANUFACTURING PROCESS. THE BARE READING OF THE FUNCTIONS OF ASSESSEE ON ACCOUNT OF ROYALTY UNDER AN AGREEMENT CLEARLY SHOWS THAT THE ASSESSEE IS AVAILING TECHNICAL KNOW - HOW, PATENTS AND TRADEMARKS OWNED BY THE ITS ASSOCIATED ENTERPRISE IN ITS MANUFACTURING SERVICES FOR THE PRODUCTS WHICH ARE SUPPLIED TO ENTIRE RENISHAW GROUP. 16. FUR THER, THE TPO DISCUSSED VARIOUS RISKS FACED BY THE ASSESSEE AND HELD THAT THE ASSESSEE IS A CONTRACT MANUFACTURER AND THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS ON ACCOUNT OF ROYALTY IS TREATED AT NIL. THE ASSESSEE CHALLENGED THE SAME BEFORE THE DRP UNDER SUB - CLAUSE (1)(B) OF SUB - SECTION (2) OF SECTION 144C OF THE ACT. THE DRP CONFIRMED THE VIEW OF TPO AND REJECTED THE CONTENTION OF ASSESSEE THAT IT IS NOT A CONTRACT MANUFACTURE AND HELD PAYMENT OF ROYALTY IS NOT JUSTIFIED IN VIEW OF THE FACT TH AT THE ASSESSEE SUPPLIED 100% MANUFACTURED GOODS TO ITS AE. AGGRIEVED BY THE DIRECTION OF DRP, THE ASSESSEE BEFORE US CHALLENGING THE ACTION OF AO IN GIVING EFFECT TO DIRECTIONS OF DRP IN TREATING THE ROYALTY TRANSACTION AT NIL. 17. WE NOTE THAT THE TECH NICAL COLLABORATION AGREEMENT DATED 01 - 04 - 2006 ENTERED BETWEEN THE ASSESSEE RMSPL AND ITS ASSOCIATED ENTERPRISE RENISHAW PLC IS AT PAGE NO. 561 OF THE PAPER BOOK. THE OBJECTIVE OF THE SAID 25 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 AGREEMENT EXPLAINS THE RENISHAW PLC IS CONSIDERABLE ENGINEERING K NOW - HOW AND TECHNICAL INFORMATION AND EQUIPMENT FOR MANUFACTURE OF METROLOGY PRODUCTS. THE RMSPL HAS BEEN DESIROUS OF MANUFACTURING METROLOGY PRODUCTS AND EXPORT THE SAME TO RENISHAW AND ANY COMPANY IN WHICH RENISHAW OWNS 20% OR MORE OF THE VOTING SHARE C APITAL (AFFILIATE) ON THE TERMS AND CONDITIONS AS DETAILED THEREIN. THE TECHNICAL KNOW - HOW INCLUDES ALL INVENTIONS, PROCESSES, PATENTS, ENGINEERING AND MANUFACTURING SKILL AND OTHER TECHNICAL INFORMATION CALLED BY THE RENISHAW PLC HAVE BEEN AGREED TO USE WITHOUT INTIMATION BY THE RMSPL. FURTHER, RENISHAW PLC GRANTED AN EXCLUSIVE LICENSE TO MAKE IN INDIA THE PRODUCTS BY USE OF ANY OR ALL OF THE KNOW - HOW AND A NON - EXCLUSIVE LICENSE TO USE AND SELL THE SAID PRODUCTS THROUGHOUT INDIA AND OUTSIDE INDIA TO RENI SHAW AND ITS AFFILIATES. THEREFORE, IT IS CLEARS THAT HAVING TECHNICAL KNOW - HOW OWNED BY THE RENISHAW PLC INCLUDING A TECHNICAL AND ENGINEERING DATA, CALCULATION AND INFORMATION, DESIGN DATA, CALCULATIONS AND INFORMATION, DETAILS OF LAYOUT OF WORKS, INCLU DING DETAILS AND SPECIFICATION OF MACHINERY AND LICENSE TO MAKE IN INDIA AND NON - EXCLUSIVE LICENSE TO USE AND SELL THE SAID PRODUCTS THROUGHOUT INDIA AND OUTSIDE INDIA HAS BEEN GRANTED TO RMSPL. 18. WE NOTE THAT THE STATEMENT SHOWING THAT THE DETAILS OF P AYMENT OF ROYALTY ON THE BASIS OF TOTAL SALES TO ITS AFFILIATES IS PLACED AT PAGE NO. 560 OF THE PAPER BOOK WHICH CLEARLY SHOWS THAT THE TOTAL SALES TO ITS AFFILIATES IS RS.13,66,27,209/ - AND ROYALTY OF RS.27,32,494/ - @ 2% WAS PAID BY THE ASSESSEE TO ITS A E RENISHAW PLC. FURTHER, WE NOTE THAT THE RMSPL MANUFACTURED GOODS AND GOODS OTHER THAN ARMS AND MANUAL CONTROL UNIT TO RENISHAW PLC TO AN EXTENT OF RS.12,62,13,313/ - AND RS.4,46,69,492/ - WHERE NO ROYALTY WAS PAID UNDER THE TRANSACTIONS HAD WITH ITS ASSOC IATED ENTERPRISE. THAT MEANS TO SAY THE ASSESSEE PAID ROYALTY ON THE SALES EFFECTED TO ITS AFFILIATES AND NO ROYALTY PAID TO THE SALES EFFECTED TO RENISHAW PLC. SUPPORTING THE STATEMENT AT PAGE 560 THE CALCULATION OF ROYALTY FOR THE YEAR UNDER CONSIDERAT ION IS PLACED AT PAGE NO. 579 OF THE PAPER BOOK WHEREIN IT CLEARLY SHOWS THAT NO ROYALTY PAID TO THE RENISHAW PLC ON THE SALE OF MANUFACTURED GOODS AND SUPPLIED TO IT. FURTHER, IN SUPPORTING PAYMENT OF ROYALTY TO RENISHAW PLC THE ASSESSEE CLAIMS THAT THE RENISHAW PLC CONTINUOUSLY INNOVATES AND IMPROVES THE TECHNOLOGY OF MANUFACTURING USED BY THE ASSESSEE. THE NEW AND IMPROVED TECHNOLOGY HELPS THE RMSPL IN MINIMIZING ITS RISK OF PRODUCING SUB - STANDARD PRODUCTS AND MAINTAINING THE HIGHEST MANUFACTURING QUAL ITY. THE ASSESSEE DOES NOT INCUR ANY EXPENSES ON THE RESEARCH AND DEVELOPMENT AND NO EXPENDITURE WAS DEBITED TO PROFIT AND LOSS ACCOUNTS AS ON 31 - 03 - 2010. IT IS OBSERVED FROM THE PAGES NOS. 587 AND 589 OF THE PAPER BOOK THAT THE RESEARCH AND DEVELOPMENT WHICH REVEALS THAT THE RENISHAW IT INCURRED HUGE COST FOR UPDATION OF THE TECHNOLOGY WHICH SUPPORTS THE VIEW OF ASSESSEE PAYING ROYALTY ON THE EXPORT SALES EFFECTED TO ITS RENISHAW AFFILIATES, A THIRD PARTY. 19. FURTHER, WE NOTE THAT THE PAYMENT OF ROYALT Y HAS BEEN ACCEPTED BY THE RESPONDENT - REVENUE FROM 2006 ONWARDS THE DETAILS OF WHICH FILED AND THE TPO DID NOT ACCEPT CONTENTIONS OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. THE TPO ACCEPTED THE ARMS LENGTH PRICE ON MANUFACTURING ACTIVITY BUT HOWEV ER TREATED THE TRANSACTIONS ON ACCOUNT OF ROYALTY AT NIL WITHOUT APPLYING ANY METHOD. IN VIEW OF THE DISCUSSION MADE HERE - IN - ABOVE, WE DIRECT THE AO TO ACCEPT ARMS LENGTH PRICE ADOPTED BY THE ASSESSEE IN INTERNATIONAL TRANSACTIONS ON EXPORT OF SALES ON A CCOUNT OF ROYALTY. THEREFORE, TRANSFER PRICING ADJUSTMENT MADE BY THE AO IN PURSUANCE OF DIRECTIONS OF DRP IS DELETED. THUS, GROUND NO. 4 RAISED BY THE ASSESSEE IS ALLOWED. 4 5 . IN VIEW OF THE ABOVE AS THERE WAS NO ORDER CONTRARY TO THE VIEW TAKEN BY THIS TRIBUNAL BROUGHT ON RECORD BY THE REVENUE , WE DIRECT THE ASSESSING OFFICER TO ACCEPT THE ALP COMPUTED BY THE ASSESSEE BY ADOPTING TNMM ON 26 ITA NO S. 2664 & 2557/PUN/2016, A.Y. 2011 - 12 ACCOUNT OF PAYMENT OF ROYALTY. THUS, THE GROUND NOS. 3 AND 4 RAISED BY THE REVENUE ARE DISMISSED. 46. IN T HE RESULT, THE APPEAL OF REVENUE IS DISMISSED. 47. TO SUM UP, THE APPEAL OF ASSESSEE IS ALLOWED AND THE APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH JANUARY, 202 1 . SD/ - SD/ - ( R.S. SYAL ) ( S.S. VISWANETHRA RAVI ) VICE PRESIDENT JUDICIAL MEMBER / PUNE; / DATED : 28 TH JANUARY, 202 1 . RK / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(A) - 13, PUNE 4. THE PCIT - 3, PUNE 5. , , , / DR, ITAT, C BENCH, PUNE. 6. / GUARD FILE. // // TRUE COPY// / BY ORDER, / PRIVATE SECRETARY, , / ITAT, PUNE