M/s. Walter Tools India Private Limited, Pune V. Assistant Commissioner of Income-tax, Circle - 10, Pune

ITA 2711/PUN/2017

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 5293 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-04-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 19-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction

Judgement Text

आयकर अपीलीय अधिकरण “सी” न्यायपीठ पुणे में । IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, PUNE BEFORE SHRI R.S.SYAL, VICE PRESIDENT AND SHRI S.S.VISWANETHRA RAVI, JUDICIAL MEMBER आयकरअपऩलसं. / ITA No.2711/PUN/2017 निर्धारण वषा / Assessment Year : 2013-14 Walter Tools India Private Limited, Mumbai-Pune road, Dapodi, Pune – 411 0102. PAN: AAACW 4857 C Vs The Asst. Commissioner of Income Tax, Circle-10, Pune. Appellant/ Assessee Respondent /Revenue Assessee by Shri Nikhil S Pathak – AR Revenue by Shri Suresh Yadav - DR Date of hearing 06/01/2022 Date of pronouncement 04/04/2022 आदेश / ORDER PER SS VISWANETHRA RAVI, JM : This is an appeal filed by the Assessee directed against the order of ld.Assistant Commissioner of Income Tax, Circle-10 Pune dated 19.09.2017 for the Assessment Year 2013-14. The Assessee raised following grounds of appeal: “1. Ground 1: The Ld.AO under the direction of Hon‟ble DRP have erred in holding that the arm‟s length value of the international transaction pertaining to payment of Management Service Fee to be Ni. While doing so the Ld.AO/Hon‟ble DRP have erred. - in rejecting the benchmarking analysis conducted by the appellant by considering the overseas Associated Enterprise („AE‟) as the tested party under Transactional Net Margin Method (“TNMM”) as the most appropriate method. - in not taking cognizance of the submission made by the Appellant covering substantive documentary evidences demonstrating the receipt of management services and benefits derived therefrom, ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 2 - in challenging the commercial business needs and decisions of the Appellant with respect to availing the services from AE, - in disregarding the analysis conducted by the appellant under aggregation approach, while applying entity level TNMM as the most appreciate method for its Distribution activity, thereby ignoring the fact that the transaction of payment of Management Service Fee is inextricably linked with Applicant‟s Distribution activity, and - in determining the arm‟s length value of the transaction pertaining to payment of Management service fee as Nil without undertaking any analysis for selection of most appropriate method and search for comparable uncontrolled transaction to compute arm‟s length price as prescribed by Indian Transfer Pricing Regulations, thereby violating the provisions of Section 92C(3) of the Income-tax Act, 1961. The Appellant prays that the transfer pricing adjustment pertaining to Management Service Fee be deleted. The Appellant craves leave to add, amend, alter, modify and/or substitute, and to withdraw the above grounds of appeal.” 2. Brief facts of the case are that the assessee company is a domestic company. The company is engaged in distribution of cutting and drilling tools, especially tungsten carbide tools. The company imports finished goods (i.e. cutting and drilling tools) from overseas Walter Group entities for the purpose of resale in India under the brand name of “Prototvp” and “Walter”. Separately, the company also procures “Titex” brand machine tools from Sandvik Asia Private Limited for the purpose of resale of third party Indian customers. The company is a subsidiary of Walter AG, a body corporate registered in Germany and having its registered office in Tubingen, Walter AG is engaged in manufacturing and trading of cutting and drilling tools. 3. As per the assessment order, A reference under section 92CA(1) of the I.T.Act, 1961 was made to the Transfer Pricing Officer for the computation of Arm’s Length Price in relation to the International Transactions, The TPO ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 3 after enquiring into details of the value of international transactions entered into by the assessee with its associated enterprises made an adjustment of Rs.1,17,45,602/- on account of Management Service Fee paid. The same is added back to the total income of the assessee. 4. The only issue for consideration is determination of Arm’s Length Price of payment of Management Service Fee to Associated Enterprises (AE). 4.1 The Transfer Pricing Officer(TPO) vide his order dated 31.10.2016 has analysed the said transaction in para 5.1. The relevant portion is reproduced here as under: “From the submission made it appears that the expenses were apportioned by the AE among different country-centres on the basis of their own agreements and it has no relevant with the actual services rendered to individual units. This implies that the payment terms of the MSA are independent of the nature or volume of services and therefore expenses. As no details are available on record with respect to the nature of services rendered by the AE to the Taxpayer the assessee has failed to establish that fees charged are commensurate benefits against the payment of service fees to the AE. Reliance is placed on the Banglore ITAT decision in the case of M/s Gemplus India Pvt. Ltd.,(ITA No.352/bang/2009) Under these circumstances, it is difficult to accept proposition of the assessee that the cost of the services rendered is at arm‟s length. In absence of all these details, I considered value of these service at NIL and accordingly there is an upward adjustment of Rs.1,17,45,602/-. 06. Tested Party: Without prejudice to the upward adjustment as proposed in the order, issue of selecting Walter AG as a tested party was also considered independently. It was brought to the notice of the assessee that tested party should be least complex entity. Walter AG is having unique expertise in manufacturing and trading in tools for metalworking and machinery and tools for rock excavation, stainless steel, special alloys and resistance heating materials and process ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 4 systems. Under these circumstances, Walter AG cannot be considered as Tested Party. Further, Walter AG is rendering Management services, while assessee company is receiving management services, therefore FAR of both the parties do not match. Therefore also selection of tested patty is not correct and not acceptable. The issue i9s discussed as under: Criterion Assessee’s Remarks TPO’s Remarks Tested party should be the least complex (functionally) of the transacting parties For the transaction pertaining to MSF, Walter AG is the least complex entity, since these services are used for the purpose of its entire business operations, which are more complex compared to mere provision of services. Submission of the assessee factually incorrect. From the website of Walter, it is seen that Walter Group is involved in implementing machining solutions, particularly solutions for the special tools sector. With a product range of about 49,000 catalogue tools, the Group serves in more than 80 countries and about 3,800 employees. On the other hand assessee is engaged in distribution of cutting tools with aggressive marketing. There should be availability of reliable data that requires fewest and most reliable adjustments We have enclosed a copy of the agreement, whereby it is clearly stated that a mark-up of 4% has been levied. Since, Walter AG is a complex entity, the question of reliability of data does not arise. The assessee has considered it as a tested party, to find out the exact comparable is difficult. 07. Reliance is placed on the decision of Onward Technologies Ltd (ITAT Mumbai) 08. The adjustment in the Management Service Fees is made in the case of assessee. Income of the assessee shall be increased by Rs.1,17,45,602/-” 4.2 The Dispute Resolution Panel vide its order dated 30.06.2017 has uphold the order of the Transfer Pricing Officer. The relevant paragraphs are reproduced here as under : “3.2.3.6 However, in the instant case, the assessee has not submitted the Annual Report of Walter AG, either before the TPO or before this Panel. Further, the Annual Reports of the comparables identified by the assessee to benchmark its MSF transaction using Walter AGas the tested party, have also not been submitted either before the TPO or his Panel. Without this basic information, appropriate verification of the benchmarking analysis carried out by the assessee using Walter AG as the tested party cannot be carried out. Moreover, it would have been apt if the assessee also would have submitted a TPSR of Walter AG in connection with the benchmarking done in respect of management service fees. All this information has not been submitted. ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 5 3.2.3.7 In view of the above discussion, we see no infirmity in the action of the TPO in rejecting the benchmarking analysis of the assessee related to MSF, using Walter AG as the tested party, since Walter AG is not the least complex party and also because reliable data of Walter AG and the comaparables selected by the assessee are not available. Accordingly, the first issue raised by the assessee in this objection is rejected. 3.2.4.3 The nature of service to be rendered and the fees to be charged for the services have been laid out in the said MS.F. Agreement entered into by the assessee with Walter AG, effective from 1/1/2012. It is observed that in this agreement (Appendix 1 to Schedule 1 of this agreement), the services to be rendered are very general in nature, related to Produce Area and regional Management, financial, marketing, technical and quality management, human resource and administrative management techniques. The service fee to be charged has been stated by the assessee to be cost of service incurred by Walter AG plus a mark up of 4%, which is supported by the agreement vide Appendix 2. Similarly, the books and records related to costs incurred by Walter AG for providing services are stipulated in clause 4 of the MSF Agreement. It has been stipulated that accurate books and records necessary to identify the cost allocation should be maintained by Walter AG. It also provides that the assessee can review the books and records to ascertain its share of the cost allocation. However, here also, no documentary evidences are apparently available with the assessee to show that it has reviewed the said books and records maintain by Walter AG for the year under consideration or in earlier years, when Sandvik AB wsas providing the said management services. 3.2.4.8 The assessee has failed to furnish details and evidences of the costs incurred by Walter AG in providing management services to the various entities of the group. Accepting the cost allocation made by Walter AG to the assessee for the year under consideration and by Sandvik AB in the preceding years without obtaining and examining the total cost incurred by the AE(s) for years together does not happen in an uncontrolled situation where such services are received from an independent third party. It is also observed that the allocation of the expenditure among the various entities of the group by the AEs is not necessarily need-based. Even if during the year, no services have been sought by the assessee, still the assessee is liable to make the payment as per apportionment of the total costs incurred by the said AE(a) among the various entities of the group. Also, no evidence has been submitted to show the expertise of Walter AG for the year under consideration and of Sankvik AB of the preceding years in rendering of management services. ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 6 3.2.4.9 In view of the above discussion, we see no infirmity in the conclusion drawn by the TPO that no services have been rendered by Walter AG to the assessee.” 5. The Ld.Authorised Representative(ld.AR) of the assessee submitted that that the said issue is covered by the Hon’ble ITAT’s order in assessee’s own case for the A.Y. 2012-13 which was submitted on page no.221 to 235 of the paper book. The ld.AR took us through the Hon’ble ITAT’s order for the A.Y. 2012-13. The ld.AR vehemently argued that the TPO’s findings that no details were filed is actually incorrect. The ld.AR invited our attention to the page no.327 to 367 of the paper book. The page no.351 to 367 is the agreement for MSF. Page No.327 is the covering letter, page no.333 to 335 is a Chart explaining the nature of services provided by the AE. The ld.AR also submitted that the TPO has not benchmarked the MSF services using any of the methods prescribed by the Act. Therefore, determination of value of MSF transaction at NIL is bad in law. For this proposition the ld.AR relied on the decision of Hon’ble ITAT in ITA No.150/PUN/2017 for the A.Y. 2011-12 INA Bearings India Pvt. Ltd., 6. The ld.Departmental Representative(ld.DR) for the Revenue supported the order of the TPO and DRP. The ld.DR specifically invited our attention to the fact that the decision of Hon’ble ITAT in assessee’s own case for A.Y. 2012-13 is distinguishable on facts. The ld.DR submitted that for A.Y. 2012- 13, the assessee himself had made adjustments. The ld.DR also submitted that during the A.Y. 2013-14 the assessee has not submitted specific details called-for. The ld.DR specifically stated that as mentioned in the DRP’s order, the annual report of the AE, evidence regarding cost incurred by the ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 7 AE in providing management services, the formulae adopted for cost allocation has not been submitted before the Lower Authorities. The ld.DR invited our attention to page no.443 of the assessee’s paper book which is a certificate regarding cost of management service fees from 1 st January 2012 to 31 st December 2012, was not filed before the Lower Authorities and it is an additional evidence. The ld.AR has accepted this fact that page no.443 was not submitted before the Lower Authorities, however, the ld.AR stated that he does not wisht to rely on page no.443. 7. We have heard both the parties, perused the material available on record and gone through the orders of the Lower Authorities. Page no.106 to 122 is the Transfer Pricing Study Report(TPSR) for A.Y.2013-14 submitted by the assessee before both the Lower Authorities. As per the said TPSR, it is an admitted fact that assessee has made payment of MSF to its AE. The assessee has benchmarked this transaction by using TNMM as the most appropriate method and has used European Comparables. The OP/TC of comparable was 5.13. 7.1 In this case, the first issue to be decided is whether the services were provided by the AE or not! The assessee filed a Chart on page no.368, 369 & 370 of the paper book. In support of the services mentioned in the chart, the assessee has also filed copies of sample emails. The Item No.4 of the said Chart is reproduced here as under as a sample: ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 8 S.No Category Detailed Description of the service Explanation in brief on the type of services received Benefits Derived Description of sample evidence 4 Product Area Management related Addressing the enquiry from a customer for operation of Gear shifter hole The query of the customer was addressed by Rolf Muller after providing the necessary specifications, information relating to adapter and inserts, preprocessing details, etc. Advice provided were beneficial in offering products of optimum quality and retaining the business deal with Escorts Ltd. Email response from Rolf Muller dated 11/5/2012 7.2 In similar fashion, the assessee has explained the services provided, there are corresponding emails to explain the services. The ld.DR has not pointed out any discrepancy in the said Chart. Therefore, after carefully analysing the Charts and Emails, one can arrive at the conclusion that services were provided to the assessee by the AE. 7.3 Once the question related to services have been answered, the second question is determination of ALP. The Hon’ble ITAT in assessee’s own case for A.Y. 2012-13, in the identical facts and situations has held the transaction of payment of management services fee at ALP, following the earlier years decisions. The factual assertion could not be controverted by the ld.DR. 7.4 For relevant issue discussed by the Co-ordinate Bench in assessee’s own case for the A.Y. 2012-13 is placed at page no.221 of the paper book and the relevant portion being at para no.9 to 10 reproduced herein below for ready reference: “9. We have heard both the sides and gone through the relevant material on record. It is seen from a copy of Management services Agreement between Sanedvik AB (the providing party) and the assessee(the receiving party), which is applicable to the year under ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 9 consideration as well, that the term “Providing party” has been defined as „all or some of the Sandvik companies which provide management services‟. Thus, it is clear that the charges by Sandvik AB were not only for the services provided by it but also some other group companies including Walter AB. The view point of the DRP on this issue is, therefore, not correct. 10. Now we turn to the issue of availing actual services. It is seen from the Agreement that it provides for rendering intra group services consisting of Management services, IT related services, Services primarily aimed at increasing and retaining the value or intangible assets, Sales services and Schedule related service activities. The Agreement provides that there will be no charge for shareholder related activities. WE have perused the nature of services received by the assessee, which have been tabulated on pages 521 and 522 of the paper book. There is a detailed description of services in the categories of Pricing and quotation, Produce and proposal, Product related pricing and quotation, Product drawing and pricing, Business promotion and Calculation. Against each of the above categories, there is an elaborate description of the nature of services and the person/AE providing them. Then there are copies of e-mails from pages 523 to 537 of the paper book which demonstrate that the personnel of the AE table given at pages 521 and 522 of the paper book. /this shows that not only there was an Agreement between the assessee and its AE for rendering the services but the assessee actually availed same. 11. Having come to the conclusion that the services were availed by the assessee, the next question is determination of the ALP of the transaction. The ld.AR drew our attention towards the order passed by the Tribunal in the assessee‟s own case for the immediately preceding assessment year, 2011-12, a copy of which has been placed at page 224 of the paper book. It was shown that in the identical fact situation, the Tribunal has held the transaction of Payment of management services fee at ALP. This factual assertion could not be controverted by the ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 10 ld.DR. In the absence of any distinguishing feature in the facts of the immediately preceding year vis-à-vis the current year, respectfully following the precedent, we hold the international transaction of Payment of management services fees was at ALP.” 7.5 In the Transfer Pricing Order dated 31.10.2016 for the A.Y.2013-14, the TPO has categorically mentioned as under: “In this segment there are two issues involved: i) The reasonableness of MSF Apaid ii) Determination of ALP by considering Walter AG as tested party. As far as issue i) is concerned, elaborate discussion has been made in the previous year‟s order. Therefore, as there are no changes in the facts and circumstance of the issue, MSF paid by the assessee are considered as NIL for current year also.” Thus, the TPO has specifically mentioned that there are no changes in facts and circumstances of the issue. In the absence of any distinguishing feature in the facts of the immediately preceding year vis-à-vis the current year, respectfully following the precedent, we hold the international transaction of payment of management services fees was at ALP. 8. In the result, appeal of the assessee is allowed. Order pronounced in the open Court on 4 th April, 2022. Sd/- Sd/- Sd/- Sd/- (R S SYAL) (SS VISWANETHRA RAVI) VICE PRESIDENT JUDICIAL MEMBER पपणे / Pune; ददिधंक / Dated : 04 th April, 2022/ SGR* आदेश की प्रनिनलनप अग्रेनषि / Copy of the Order forwarded to : 1. अपऩलधर्थी / The Appellant. 2. प्रत्यर्थी / The Respondent. 3. The ACIT, Pune. 4. The Pr. CIT cocerned, Pune. 5. नवभधगऩय प्रनिनिनर्, आयकर अपऩलऩय अनर्करण, “सी” बेंच, पपणे / DR, ITAT, “C” Bench, Pune. 6. गधर्ा फ़धइल / Guard File. ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 11 आदेशधिपसधर / BY ORDER, // TRUE COPY // Senior Private Secretary आयकरअपऩलऩयअनर्करण, पपणे/ITAT, Pune. ITA No.2771/PUN/2017 for A.Y. 2013-14 Walter Tools India Pvt. Ltd., (A) 12