Gamesa Renewable Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 376/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5823 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 07-08-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 13-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: B RAMAKRISHNAN; S DWARAKESH ACS
• Keywords: Business income; Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Additional depreciation; Earning of tax free income; Proportionate interest; Retrospective amendment; Additional evidence; Question of law; Right to appeal; Commercial expediency
• Section: 92C; 14A; 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! ' ! # . $ , % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER . /ITA NOS. 1420 & 376/MDS/2017 / ASSESSMENT YEARS : 2011-12 & 2012-13 M/S. SIEMENS GAMESA RENEWABLE POWER PVT. LTD., NO.334, FUTURA TECH PARK, 8 TH FLOOR, BLOCK-B, RAJIV GANDHI SALAI, SHOLINGANALLUR, CHENNAI 600 119. PAN AACCG6027C ( /APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME-TAX, CORPORATE CIRCLE-2(1), CHENNAI. RESPONDENT) / APPELLANT BY : SHRI B.RAMAKRISHNAN, FCA & SHRI S. DWARAKESH, ACS / RESPONDENT BY : SMT. VIJAYALAKSHMI, CIT,D.R ! / DATE OF HEARING : 16.08.2017 '# ! / DATE OF PRONOUNCEMENT: 13.11.2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE TWO APPEAL ARE FILED BY THE ASSESSEE, AGGRI EVED BY THE ORDER OF THE LD. ASSESSING OFFICER, CHENNAI, PA SSED U/S.143(3) READ WITH SEC.144C(1) OF THE ACT PURSUAN T TO THE ORDER 2 OF THE T.P.O, CHENNAI AND THE DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL-2, (D.R.P-2), BANGALORE, (DRP) UND ER SEC.144C(5) OF THE INCOME-TAX ACT, 1961, FOR THE AS SESSMENT YEARS 2011-12 AND 2012-13 2. THE FIRST COMMON ISSUE IN THESE TWO APPEALS IS W ITH REGARD TO DOWNWARD ADJUSTMENT IN RESPECT OF PAYMENT OF ROYALTY TO ASSOCIATED ENTERPRISES (AES) ON THE REASON THAT THE ROYALTY PAYMENT IS IN EXCESS OF LIMITS PRESCRIBED UNDER THE PROVISIONS OF FOREIGN EXCHANGE MANAGEMENT ACT, 1999. 3. THE BRIEF FACTS OF THE CASE ARE THAT SIEMENS GAM ESA RENEWABLE POWER PVT. LTD.,(FORMERLY KNOWN AS GAME SA RENEWABLE PRIVATE LIMITED) (GAMESA INDIA OR THE ASSESSEE) IS AN INDIAN COMPANY ENGAGED IN THE BUSINESS OF MAN UFACTURE OF RENEWABLE ENERGY EQUIPMENTS LIKE WIND ENERGY GENERA TION (WEG, COMMONLY KNOWN AS WINDMILLS) AND SOLAR PO WER GENERATORS. THE ASSESSEE PROVIDES TURNKEY SOLUTIONS TO ITS CUSTOMERS WHICH INCLUDES THE FOLLOWING ACTIVITIES: A) UNDERTAKING PRELIMINARY ACTIVITIES SUCH AS IDENT IFYING LAND, OBTAINING APPROVALS FOR DEVELOPING WIND FARMS B) MANUFACTURE AND SALE OF WEGS 3 C) ERECTION AND COMMISSIONING OF WEGS D) OPERATION & MAINTENANCE OF WIND TURBINE GENERATO RS 3.1 THE FACTS OF THE ISSUE AS NARRATED IN THE ASSE SSMENT YEAR 2012-13 ARE THAT THE ASSESSEE MAINTAINED THE DOCUME NTATION AS REQUIRED UNDER THE RULE 10D OF THE I.T RULES, 1962 WITH RESPECT TO INTERNATIONAL TRANSACTION FOR THE FINANCIAL YEAR 2011-12. THE ASSESSEE IS ENGAGED IN MANUFACTURING AND ASSEMBLY O F WIND TURBINES, WIND FARM DEVELOPMENT, ERECTION AND COMMI SSIONING AND OPERATIONS & MAINTENANCE OF WIND TURBINES. BAS ED ON THE FUNCTIONAL ASSET AND RISK ANALYSIS (FAR) AND THE EC ONOMIC ANALYSIS, THE TRANSACTIONAL NET MARGIN METHOD (TNMM ) HAD BEEN CONSIDERED AS THE MOST APPROPRIATE METHOD UNDE R THE INDIAN TRANSFER PRICING REGULATIONS, FOR ANALYZING THE ARMS LENGTH NATURE OF THESE INTERNATIONAL TRANSACTIONS BETWEEN GAMESA INDIA AND ITS A.ES. THE ASSESSEE CONDUCTED A COMMON ANA LYSIS FOR THE INTERNATIONAL TRANSACTIONS INVOLVING PURCHASE O F RAW MATERIALS AND COMPONENTS, PURCHASE OF MANUFACTURING TOOLS, PA YMENT FOR ROYALTY AND MANAGEMENT FEE AS THESE TRANSACTIONS AR E INEXTRICABLY LINKED TO THE ASSEMBLY, ERECTION AND I NSTALLATION FUNCTION PERFORMED BY GAMESA INDIA. IN THE TRANSFE R PRICING 4 STUDY REPORT, THE ASSESSEE CONSIDERED TNMM AS THE M OST APPROPRIATE METHOD. THE TPO IN HIS ORDER HAS REMAR KED THAT THE PLI OF THE COMPARABLES WORKS OUT TO (-1.53) PERCENT AS AGAINST THE PLI OF THE ASSESSEE (-0.37 PERCENT). FURTHER, THE ASSESSEE SUBMITTED BEFORE THE TPO THAT IF THE ECONOMIC ADJUS TMENTS AND EXTRA-ORDINARY COSTS ARE FACTORED, THE PLI OF THE A SSESSEE WORKS OUT TO 4.40%. THUS, IT WAS CONCLUDED THAT GAMESA I NDIAS INTERNATIONAL TRANSACTIONS WITH AES WAS CONSISTENT WITH THE ARMS LENGTH STANDARD FROM AN INDIAN TRANSFER PRICING REG ULATIONS PERSPECTIVE. 3.2 THE ASSESSEE ENTERED INTO TECHNOLOGY TRANSFER AGREEMENTS WITH GAMESA INNOVATION AND TECHNOLOGY SL UNIPERSONAL (GAMESA SPAIN) DATED 1 ST JANUARY 2009 AND 11 TH JULY 2011 FOR AVAILING TECHNOLOGY IN RELATION TO AE 59 AND G 97 MODELS RESPECTIVELY. AS PER THE AGREEMENTS, GAMESA INDIA WOULD PAY ROYALTY AT THE RATE OF 4 PERCENT AND 4.50 PERCENT RESPECTIVELY ON NET ANNUAL TURNOVER. THE ASSESSEE HAS ALSO CONSIDERED CUP AS ALTERNATE METHOD FOR BENCHMARKING THE ROYALTY TRANSACTION. THE ASSESSEE HAS CONSIDERED C ERTAIN COMPARABLES AGREEMENTS AND THE ARITHMETIC MEAN OF T HE ROYALTY 5 AS PER THE COMPARABLE AGREEMENTS AMOUNT TO 6.43 PER CENT. GIVEN THAT THE RATE OF ROYALTY AS PER THE COMPARABL E TRANSACTIONS IS HIGHER THAN THE ROYALTY PAID BY THE ASSESSEE, TH E TRANSACTION HAS BEEN REGARDED AS WITHIN ARMS LENGTH PRICE. DU RING THE COURSE OF TRANSFER PRICING ASSESSMENT PROCEEDINGS, THE TPO RE- COMPUTED THE ARMS LENGTH PRICE(ALP) OF ROYALTY AND PROPOSED DOWNWARD ADJUSTMENT IN THE FOLLOWING MANNER : S.NO. PARTICULARS AMOUNT ( ) 1 DEVELOPMENT REVENUE 1,98,92,236 2 ROYALTY ON ERECTION & COMMISSIONING 3,99,55,152 3 IMPORTED & BOUGHT OUT COMPONENTS 33,10,48,591 TOTAL 39,08,95,979 THE TPO CONTENDED THAT NO TECHNOLOGY IS REQUIRED FO R DEVELOPMENT OF WIND-FARM, ERECTION AND COMMISSIONIN G ACTIVITIES. 3.3 FURTHER, THE TPO QUESTIONED WHY IMPORTED BOUG HT- OUT COMPONENTS SHOULD NOT BE REDUCED FROM TURNOVER AND APPLIED THE RATE OF ROYALTY ON NET TURNOVER. IN TH IS REGARD, THE TPO MENTIONED THAT UNDER THE PROVISIONS OF THE FORE IGN EXCHANGE MANAGEMENT ACT, 1999 (FEMA), NO ROYALTY CA N BE PAID ON BOUGHT OUT COMPONENTS. WITH RESPECT TO ADO PTION OF CUP AS ALTERNATE METHOD, THE TPO REMARKED THAT HE I S NOT 6 INCLINED TO ACCEPT THE SUPPLEMENTARY BENCHMARKING D ONE TO PROVE THE ALP OF ROYALTY ON THE GROUND THAT THE DAT ABASE AND COPIES OF THE AGREEMENTS OF COMPARABLES ARE NOT AVA ILABLE FOR VERIFICATION. IN THIS REGARD, IT IS PERTINENT TO N OTE THAT THE TPO HAS NOT DISPUTED THE SAID POSITION IN THE PRECEDING YEAR AND IN THE SHOW CAUSE NOTICE FOR THE SUBJECT ASSESSMENT YE AR. THE DRP HAS UPHELD THE ADJUSTMENT MADE BY THE TPO IN TH IS REGARD WITHOUT APPRECIATING THE SUBMISSIONS OF THE ASSESSE E. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD. AR SUBMITTED THAT THERE IS NO TRANSFER P RICING ADJUSTMENT IN A SCENARIO WHERE THE TRANSACTIONS ARE AT ARMS LENGTH IN ACCORDANCE WITH THE METHOD PRESCRIBED UND ER RULE 10B. WITHOUT PREJUDICE TO THE ABOVE, HE SUBMITTED THAT TECHNOLOGY IS REQUIRED EVEN IN RESPECT OF OTHER ACT IVITIES SUCH AS DEVELOPMENT OF WIND FARM AND ERECTION AND COMMISSIO NING. THE LD. AR SUBMITTED THAT THE ACTION OF THE TPO IN PROP OSING TRANSFER PRICING ADJUSTMENT IS NOT TENABLE ON ACCOUNT OF THE SUBMISSIONS PROVIDED BY THE ASSESSEE. 4.1 FURTHER, THE LD. AR SUBMITTED THAT IN THE TRANS FER PRICING STUDY, THE ASSESSEE CONSIDERED TNMM AS THE MOST APP ROPRIATE 7 METHOD. FOR THE SUBJECT ASSESSMENT YEARS, THE PLI OF THE ASSESSEE IS HIGHER AS COMPARED TO THE COMPARABLE CO MPANIES. FURTHER, THE ASSESSEE CONSIDERED CUP AS THE MOST AP PROPRIATE METHOD AND CONTENDED THAT AVERAGE RATE OF ROYALTY A S PER COMPARABLE AGREEMENTS IS HIGHER AS COMPARED TO THE SUBJECT ROYALTY RATE. THEREFORE, THE ASSESSEE ARRIVED AT A CONCLUSION THAT THE ROYALTY PAID TO ITS AE IS AT ALP. THE ASSESSEE SUBMITTED THAT TECHNOLOGY IS A CRITICAL FACTOR FOR UNDERTAKING ITS OPERATIONS AND THEREFORE, ROYALTY EXPENDITURE IS INEXTRICABLY LINK ED TO ITS BUSINESS. THE DETERMINATION OF ALP OF ROYALTY ON A STANDALONE IS BASIS IN THE FIRST PLACE. THE TPO HAS ERRED IN NOT APPRECIATING THE BASIS FACT THAT ROYALTY IS INEXTRICABLY LINKED TO BUSINESS OF THE ASSESSEE AND THEREFORE, BENCHMARKING THE PLI AT ENT ITY LEVEL IS SUFFICIENT IN ORDER TO SUBSTANTIATE THAT THE TRANSA CTIONS WITH AE ARE AT ARMS LENGTH. WITHOUT PREJUDICE TO THE ABOV E SUBMISSION, THE ASSESSEE HAS UNDERTAKEN SUPPLEMENTARY BENCHMARK ING UNDER CUP METHOD THEREBY CONSIDERING THE ROYALTY RA TE OF UNCONTROLLED TRANSACTIONS AS WELL AND SUBSTANTIATED THAT THE AVERAGE RATE OF ROYALTY IN RESPECT OF UNCONTROLLED TRANSACTIONS WAS AT 6.43 PERCENT WHICH IS HIGHER THAN THE RATE O F ROYALTY PAID 8 BY THE ASSESSEE TO ITS AE (4 / 4.50 PERCENT), THAT WAS NOT APPRECIATED BY THE TPO AND DRP AS WELL. FURTHER, I T WAS SUBMITTED THAT THE METHODOLOGY ADOPTED BY THE TPO I S NOT IN ACCORDANCE WITH ANY OF THE METHODS PRESCRIBED IN RU LE 10B OF THE RULES AND THE ACTION OF THE TPO IS BEYOND HIS J URISDICTION AS PROVIDED IN THE LAW. THE LD. AR RELIED ON THE FOLL OWING DECISIONS, WHEREIN IT HAS BEEN HELD THAT WHERE THE PLI OF THE ASSESSEE IS DETERMINED UNDER TNMM, A SEPARATE ANALYSIS AND CONS EQUENT DELETION OF ROYALTY / TECHNICAL FEE PAYMENT IS UNWA RRANTED: 1. MAGNETI MARELLI POWERTRAIN INDIA (P) LTD. VS DCI T (389 ITR 469) (DELHI) 2. DCIT VS. AIR LIQUIDE ENGINEERING INDIA (P) LTD. (43 TAXMANN.COM 299(HYD.) 3. DAKSH BUSINESS PROCESS SERVICES (P) LTD. VS. DCI T (DELHI-ITAT) 2666/DEL./2014) 4. ACIT VS. SAKATA INX (INDIA) LTD. (JAIPUR-ITAT) ( ITA NO.376/JAIPUR/2012) 4.2 THE LD. AR SUBMITTED THAT THE TRANSACTIONS ENTE RED INTO BY THE ASSESSEE WITH ITS AE ARE AT ARMS LENGTH UNDER THE METHODS PRESCRIBED UNDER RULE 10B OF THE RULES AND THE TPO HAS NO JURISDICTION TO IDENTIFY ANY METHOD WHICH IS NOT PR ESCRIBED UNDER THE AFORESAID RULES. TO SUPPORT HIS VIEW, THE LD. AR RELIED ON THE 9 FOLLOWING DECISIONS, WHEREIN IT HAS BEEN HELD THAT THE TPO HAS NO JURISDICTION TO APPLY ANY METHOD OTHER THAN THOS E PRESCRIBED UNDER THE RULES. 1. DCIT VS. DIEBOLD SOFTWARE SERVICES (P) LTD. [151 ITD 463] 2. MERCK LTD. VS. DCIT [148 ITD 513] 4.3 REGARDING THE JURISDICTION OF THE AO AND THE TP O TO DETERMINE THE COMMERCIAL EXPEDIENCY OF THE ASSESSEE , IT WAS SUBMITTED BY THE LD. AR THAT UNDER THE PROVISIONS O F SEC.92CA OF THE ACT, THE TPO IS VESTED WITH THE POWER TO DETERM INE THE ALP, WHICH NEEDS TO BE COMPUTED IN ACCORDANCE WITH THE M ETHODS PRESCRIBED. THE TPO HAS REMARKED THAT THE ASSESSEE HAS NOT SUBSTANTIATED THE NECESSITY FOR USE OF TECHNOLOGY I N RELATION TO WIND FARM DEVELOPMENT AND ERECTION AND COMMISSIONIN G ACTIVITIES. ACCORDING TO THE LD. AR, BUSINESS TRAN SACTIONS OF THE ASSESSEE TAKEN PLACE IN THE ORDINARY COURSE CANNOT BE QUESTIONED BY THE TPO AND HE PLACED RELIANCE ON THE JUDGMENT OF THE DELHI HIGH COURT IN THE CASE OF HIVE COMMUNI CATION (P) LTD. VS. CIT (353 ITR 200) WHEREIN THE COURT IN THE CONTEXT OF SEC.40A(2) HAS CLEARLY HELD THAT WHILE EXAMINING TH E REASONABLENESS OF AN EXPENDITURE, THE ASSESSING OFF ICE IS 10 EXPECTED TO EXERCISE HIS CONCLUSION IN A REASONABLE AND FAIR MANNER. IT SHOULD BE BORNE IN MIND THAT THE PROVIS ION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONA BLE PAYMENTS TO RELATIVES AND ASSOCIATE CONCERNS AND SH OULD NOT BE APPLIED IN A MANNER WHICH WILL CAUSE HARDSHIP IN BO NA FIDE CASES. THE LD. AR, ALSO PLACED RELIANCE ON THE JU DGMENT OF THE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIAN CES LTD., (345 ITR 241) WHEREIN IT HAS BEEN HELD THAT IT IS N OT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY LEGITIMATE EXPEND ITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IN ADDITION, THE COURT HELD THAT IT IS ALSO NOT NECESSARY FOR TH E ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE P URPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUB SEQUENT YEARS. 4.4 FURTHER, THE LD. AR, RELIED ON THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE OF CIT VS. COMPUTER GRAPHICS LTD.,(155 TAXMAN 612) WHEREIN IT WAS HELD THAT THE REASONABL ENESS OF THE EXPENDITURE FOR THE PURPOSE OF BUSINESS HAD TO BE A DJUDGED FROM THE VIEW POINT OF A BUSINESSMAN AND NOT THAT OF THE REVENUE, 11 EVEN WHILE INVOKING SEC.40A(2) OF THE ACT. THE LD. AR, ALSO PLACED RELIANCE ON THE DECISION OF THE TRIBUNAL, DE LHI BENCH, IN THE CASE OF SHOWA INDIA (P) LTD. VS. DCIT ( ITA NO.166/DEL./2013) WHEREIN IT WAS HELD THAT WHERE T HE ASSESSEE COMPANY HAS PROVIDED THE DETAILS OF ROYALTY AND TEC HNICAL ASSISTANCE FEES PAID TO AE, IT CANNOT BE SAID THAT THE ASSESSEE WOULD BE COMPETENT TO MAKE USE OF SUCH MACHINERY WI THOUT THE SUPPORT OF THE AE AND ACCORDING TO THE LD. AR, THE TPO CANNOT DETERMINE THE ALP OF ANY TRANSACTION MERELY BASED O N ASSUMPTIONS. THE LD. AR SUBMITTED THAT THE TPO DOE S NOT EXTEND TO STEPPING INTO THE SHOES OF THE ASSESSEE A ND DETERMINING THE NECESSITY OF INCURRENCE OF EXPENDIT URE AND THE COMMERCIAL EXPEDIENCY OF A TRANSACTION HAS TO BE EV ALUATED FROM THE ASSESSEES STAND POINT AND NOT FROM REVENU ES STANDPOINT. THEREFORE, THE LD. AR, SUBMITTED THAT THE CONTENTION OF THE TPO THAT NO TECHNOLOGY IS REQUIRED FOR WIND FARM DEVELOPMENT AND ERECTION AND COMMISSIONING ACTIVITI ES IS UNWARRANTED. 4.5 WITHOUT PREJUDICE TO THE ABOVE SUBMISSIONS, THE LD. AR SUBMITTED THAT FOR THE SUBJECT A.YS. THERE IS NO SU CH RESTRICTION 12 ON PAYMENT OF ROYALTY ON BOUGHT OUT COMPONENTS UNDE R THE PROVISIONS OF FEMA ON THE REASONS THAT AS PER ERSTW HILE FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRANSACTIONS) RULES, 2000, ANY REMITTANCE UNDER TECHNICAL COLLABORATION AGREEMENT TO THE EXTENT OF 5% ON LOCAL SALES AND 8% ON EXPORTS W AS PERMITTED WITHOUT ANY PRIOR APPROVAL OF RBI. FURTHER, IT WA S SUBMITTED THAT THE AFORESAID CEILING ON PAYMENT OF ROYALTY HAS BEE N LIFTED WITH EFFECT FROM 16 TH DECEMBER, 2009 AND FOR THE SUBJECT A.Y., THERE WAS NO RESTRICTION ON PAYMENT OF ROYALTY VIDE CIRCU LAR AND NOTIFICATION ISSUED BY THE RESERVE BANK OF INDIA. ACCORDINGLY, THERE IS NO REQUIREMENT FOR SUCH APPROVAL WITH REFE RENCE TO 16 TH DECEMBER 2009. THEREFORE, ACCORDING TO THE LD. AR, THE ACTION OF THE TPO IN PROPOSING TRANSFER PRICING ADJUSTMENT THEREBY RELYING ON THE PROVISIONS OF FEMA IS IN APPROPRIATE IN THE FIRST PLACE. FURTHER, THE LD. AR SUBMITTED THAT THE TP O RELIED ON THE STANDARD CONDITIONS ATTACHED TO AUTOMATIC APPROVAL S FOR FOREIGN INVESTMENT & TECHNOLOGY AGREEMENT, WHICH EMPHASIZE S FOR CALCULATION OF ROYALTY ON THE BASIS OF NET EX-FACTO RY SALE PRICE OF PRODUCTS EXCLUDING THE EXCISE DUTY AND OTHER TAXES, COST OF STANDARD BOUGHT OUT COMPONENTS AND LANDED COST OF I MPORTED 13 COMPONENTS ETC. AND RELYING ON THE CONDITIONS, THE TPO HELD THAT NO ROYALTY IS PERMISSIBLE UNDER THE PROVISIONS OF F EMA IN RESPECT OF BOUGHT OUT COMPONENTS. ACCORDING TO THE LD. AR, STANDARD CONDITIONS FORM PART OF FORM FC-SIA, WHICH HAS BEEN WITHDRAWN BY RBI, HAVE NO RELEVANCE FOR THESE SUBJECT A.YS. AND RELIANCE ON THE STANDARD CONDITIONS BY THE TPO IS BASELESS. 4.6 THE LD. AR FURTHER SUBMITTED THAT THE RATE OF R OYALTY PRESCRIBED UNDER THE PROVISIONS OF FEMA CANNOT BE R EGARDED AS ALP FOR TRANSFER PRICING PURPOSES. TO SUPPORT HIS VIEW, THE LD. AR, RELIED ON THE FOLLOWING DECISIONS: 1. ORACLE INDIA (P) LTD. VS. DCIT [386 ITR 1](DELHI ) 2. GRUNER INDIA (P) LTD. VS. DCIT[ITA NO.6794 OF 20 15-DELHI, ITAT] 3. A.W.FABER CASTELL (INDIA) (P) LTD. VS. DCIT [ITA NO.1027 OF 2017- MUMBAI, ITAT] THE LD. AR SUBMITTED THAT IN THE CASE OF A.W.FABER CASTELL (INDIA) (P) LTD. VS. DCIT, SUPRA, PERTAINING TO THE A.Y. 2012-13 REFERRED TO THE PRESS NOTE NO.8 OF 2009 AND UPHELD THE TWIN PRINCIPLES AS FOLLOWS : A PERUSAL OF THE AFORESAID NOTIFICATION SHOWS THAT THE GOVERNMENT OF INDIA HAS NOW WAIVED ALL THE RESTRICT IONS ON PAYMENT OF ROYALTY UNDER FOREIGN TECHNOLOGY COLLABO RATION 14 AND PUT THE SAME UNDER AUTOMATIC ROUTE. SINCE THER E ARE NO RESTRICTIONS ON PAYMENT OF ROYALTY BY THE GOVERN MENT OF INDIA, THEREFORE, ANY AMOUNT PAID BY ASSESSEE ON AC COUNT OF ROYALTY WOULD IPSO-FACTO BE ITS ALP ALSO. BOTH THE LEGISLATIONS OPERATE INTO DIFFERENT FIELD S. THE RATES ALLOWED UNDER THE AUTOMATIC ROUTE BY THE RBI OR FIP B ARE MEANT TO ACHIEVE OBJECTIVES IN DIFFERENT AREAS. TH E WHOLE THRUST OF THE INCOME TAX PROCEEDINGS AND TRANSFER P RICING REGULATIONS IS TO ENSURE THAT TAXABLE PROFIT EARNED BY AN ENTITY INDIA ARE NOT SHIFTED TO FOREIGN TAX JURISDI CTION WITHOUT PAYMENT OF LEGITIMATE SHARE OF TAX DUE IN INDIA. THEREFORE, ACCORDING TO THE LD. AR, THE TRANSFER PR ICING ADJUSTMENT PROPOSED BY THE TPO ON THE GROUND THAT T HE ROYALTY PAYMENT IS NOT WITHIN THE LIMITS PRESCRIBED UNDER F EMA PURPOSES IS NOT TENABLE. 4.7 THE LD. AR, FURTHER SUBMITTED THAT THE TPO HAS NO JURISDICTION TO INTERPRET THE PROVISIONS OF FEMA. IN OTHER WORDS, THE ISSUE ON WHETHER THE ASSESSEE HAS REMITTED EXCE SS ROYALTY OR NOT IS A PREROGATIVE OF REGULATORY AUTHORITIES A ND NOT TAX AUTHORITIES. IN THIS REGARD, THE LD. AR RELIED ON THE DECISION OF THE TRIBUNAL, PUNE BENCH, IN THE CASE OF AKZO NOBEL CHE MICALS 15 (INDIA) LIMITED VS. DCIT,( ITA NO.1477/PUNE/2010) W HEREIN IT HAS HELD THAT THE TPO HAS NO JURISDICTION TO INTERP RET THE PROVISIONS OF FEMA IN ORDER TO COMPUTE NET SALES/TU RNOVER FOR THE PURPOSE OF ROYALTY. APPLYING THE RATIONALE, AC CORDING TO THE LD. AR, IN THE INSTANT CASE, THE TPO HAS EXCEEDED H IS JURISDICTION BY INTERPRETING THE PROVISIONS OF FEMA IN ORDER TO PROPOSE TRANSFER PRICING ADJUSTMENTS AND SUBMITTED THAT THE TPO HAS MISINTERPRETED THE PROVISIONS OF FEMA AND RESTRICTE D THE QUANTUM OF ROYALTY. THE LD. AR SUBMITTED THAT IT IS PERTINENT TO NOTE THAT THE TERM BOUGHT OUT COMPONENTS IS NOT D EFINED IN FEMA AND THE SAID TERM INCLUDES ONLY COMPONENTS WHI CH ARE NOT SUBJECT TO FURTHER PROCESSING AND SOLD ON AS-IS-BAS IS TO END CUSTOMERS. ACCORDING TO THE LD. AR, THE INTENT OF FEMA IS TO CURB ROYALTY PAYMENT ON PRODUCT IN RESPECT OF WHICH NO VALUE HAS BEEN ADDED BY THE ASSESSEE COMPANY. 4.8 ACCORDING TO THE LD. AR, FOR EXAMPLE IF A COMPA NY ENGAGED IN MANUFACTURE OF LAPTOP PROCURES WEB CAMER A FROM A THIRD PARTY VENDOR AND SELLS BOTH THE PRODUCTS TO E ND CUSTOMERS AS A COMBINED PRODUCT, ROYALTY SHOULD BE CONFINED O NLY TO THE SELLING PRICE OF LAPTOP (THEREBY EXCLUDING THE COST OF WEB CAMERA 16 FROM THE OVERALL SELLING PRICE). WHEREAS, IN THE I NSTANT CASE, THE COMPONENTS PROCURED BY THE ASSESSEE ARE PROCESSED F URTHER AND THEREFORE, THE SAME CANNOT QUALIFY TO BE STAND ARD BOUGHT OUT COMPONENTS IN ORDER TO BE EXCLUDED FROM TURNOV ER FOR THE PURPOSE OF COMPUTATION OF ROYALTY. FURTHER, IT IS SUBMITTED THAT THE COMPONENTS PROCURED FROM ITS AES HAVE BEEN PROC ESSED FURTHER FOR COMPLETING THE END PRODUCT AND DELIVERI NG TO ITS CUSTOMERS. IN OTHER WORDS, THE SAME DOES NOT CONST ITUTE BOUGHT OUT COMPONENTS THAT ARE READY FOR ASSEMBLING, WHICH ISSUE HAS BEEN DISCUSSED IN DETAIL BY THE PUNE BENCH, TRIBUNA L IN THE CASE OF AKZO NOBEL CHEMICALS (INDIA) LIMITED VS. DCIT, SUPRA. THEREFORE, THE LD. AR, SUBMITTED THAT THE TPO HAS E RRED IN RE- COMPUTING THE QUANTUM OF ROYALTY BY MISINTERPRETING THE PROVISIONS OF FEMA AND NO TRANSFER PRICING ADJUSTME NT IS WARRANTED IN THIS REGARD. 4.9 REGARDING THE ROYALTY ON WIND FARM DEVELOPMENT AND ERECTION AND COMMISSIONING, THE LD. AR, SUBMITTED T HAT THE TPO HAS REMARKED THAT THE SCOPE OF WORK INVOLVED UNDER THESE ACTIVITIES DO NOT INVOLVE ANY TECHNOLOGY WHICH IS N OT AVAILABLE IN INDIA AND FOR WHICH THE ASSESSEE IS DEPENDENT ON TH E AE AS A 17 PART OF THE TECHNOLOGY TRANSFERRED UNDER THE AGREEM ENT AND BASED ON THE OBSERVATION, THE TPO COMPUTED THE ALP OF THE TRANSACTION TO BE NIL. ACCORDING TO THE LD. AR, T HESE ACTIVITIES INVOLVE THE FOLLOWING PROCESSES WHICH REQUIRE TREME NDOUS EXPERTISE AND CANNOT BE UNDERTAKEN DIRECTLY BY SEMI -SKILLED OR UNSKILLED WORKMEN : WIND FARM DEVELOPMENT ERECTION & COMMISSIONING ENVIRONMENTAL SUSTAINABILITY -VISUAL ASPECTS -ECOLOGICAL/ARCHITECTURAL PROTECTION - PROVIDING GUIDELINES TO USE TOOLS - VALIDATION OF FOUNDATION DESIGNS - TRAINING TO PERSONNEL OF GAMESA INDIA AT THE TIME OF DEVELOPMENT OF NEW PROTOTYPES TECHNICAL SUSTAINABILITY - WIND SPEED - GRID CONNECTION - PROVIDING DRAWINGS AND DESIGN - SUPERVISORY CONTROL AND DATA ACQUISITION (SCADA FOR MONITORING WTG THROUGHOUT THE YEAR ON REMOTE BASIS PROFESSIONAL SUPPORT - CONCEPTUAL DESIGN - DESIGN VERIFICATION - PROCESS VALIDATION - WIND MEASUREMENT AND ASSESSMENT THE LD. AR, FURTHER SUBMITTED THAT THE TPO HIMSELF HAS AGREED THAT SUCH ACTIVITIES REQUIRE TECHNOLOGY SUPPORT. T HE ONLY CONTENTION RAISED BY THE TPO IS THAT SUCH ACTIVITIE S DO NOT REQUIRE ANY TECHNOLOGY, WHICH IS NOT AVAILABLE IN I NDIA. ACCORDING TO THE LD. AR, IT IS NOT THE PREROGATIVE OF THE TPO TO DECIDE WHETHER THE ASSESSEE SHOULD HAVE USED THE TE CHNOLOGY PROVIDED BY ITS AE OR NOT. THE TPO OUGHT TO HAVE APPRECIATED THE BASIC FACT THAT THE ASSESSEE DEVELOPED WIND FAR MS, INSTALLED AND COMMISSIONED WEGS ON THE BASIS OF THE INPUTS PR OVIDED BY 18 ITS AE. THE AE HAS SUBSTANTIAL PAST EXPERIENCE IN IMPLEMENTING SIMILAR PROJECTS ACROSS THE GLOBE AND THEREFORE, TH E ASSESSEE OBTAINED TECHNOLOGY AND EXPERTISE FROM ITS AE IN OR DER TO ENSURE BETTER QUALITY TO ITS CUSTOMERS. THEREFORE, ACCORD ING TO THE LD. AR, THE CONTENTION OF THE TPO THAT THE ALP OF ROYAL TY IN RELATION TO WIND FARM DEVELOPMENT ACTIVITIES, ERECTION AND C OMMISSIONING IS NILS IS NOT TENABLE. THE LD. AR FURTHER SUBMITT ED THAT THE COPY OF SAMPLE REPORTS PROVIDED BY ITS AE IN RELATION TO WIND FARM DEVELOPMENT AND SAMPLE MAIL CORRESPONDENCES EVIDENC ING THE FACT THAT THE ASSESSEE HAS SOUGHT THE INPUTS FROM I TS AE ARE ALSO PROVIDED. IN VIEW OF THE ABOVE, THE LD. AR, SUBMI TTED THAT ROBUST TECHNOLOGY AND KNOWLEDGE SUPPORT IS REQUIRED FOR TH E PURPOSE OF EXECUTING THE WIND FARM DEVELOPMENT, ERECTION AND COMMISSIONING ACTIVITIES AND THE CONTENTION OF THE TPO AND DRP THAT NO TECHNOLOGY FROM ITS AE FOR UNDERTAKING SUCH ACTIVITIES IS REQUIRED, IS FACTUALLY INCORRECT. 5. THE LD. DR, SUBMITTED THAT THE TPO HAS NOT DETER MINED THE ALP FOR THE ROYALTY PAID BY THE ASSESSEE TO ITS AE BASED ON FEMA REGULATIONS INSTEAD HE HAS SUBSTANTIATED HIS P OINT OF VIEW THAT NO ROYALTY CAN BE PAID ON THE BOUGHT OUT COMPO NENTS USING 19 THE METHOD OF CALCULATION OF ROYALTY PROVIDED IN FE MA. ACCORDING TO THE LD. DR, IT IS PERTINENT TO NOTE TH AT ALMOST ALL THE COMPANIES OPERATING IN INDIA AND PAYING ROYALTY TO ITS FOREIGN AES FOR THE TECHNOLOGY PROVIDED BY THE AES ARE CALC ULATING ROYALTY ON THE TURNOVER AFTER REDUCING THE VALUE OF THE BOUGHT OUT COMPONENTS FOR THE SIMPLE REASON THAT THE COST OF T HE TECHNOLOGY WERE IMPEDED IN THE PRICE OF THE RAW MATERIAL. IND IAN TRANSFER PRICING REGULATIONS PROVIDE THE CHOICE TO THE ASSES SEE FOR SELECTING MOST APPROPRIATE METHOD FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS WITH ITS AES. SO, THERE IS NO LOGIC BEHIND THE SUPPLEMENTARY BENCHMARKING DONE TO PROVE THE ALP OF THE ROYALTY USING CUP METHOD. THE TPO HAS RIGHT LY REJECTED THE SUPPLEMENTARY BENCHMARKING DONE BY THE ASSESSEE . EVEN FOR THE ARGUMENTS SAKE THE CONTENTION OF THE ASSESS EE IS ACCEPTED, THE AVAILABILITY OF THE DETAILS AND ACCES SIBILITY OF THE FOREIGN COMPANYS DATABASE IS ESSENTIAL FOR THE COM PARABILITY ANALYSIS WHICH IS A FIRST STEP IN DETERMINING THE A LP OF A TRANSACTION. IF THE ASSESSEE COULD NOT PROVIDE THE DETAILS IN SUPPORT OF ITS CLAIM, THE BENCHMARKING DONE BY THE ASSESSEE SHOULD BE REJECTED FOR THE ABOVE MENTIONED REASONS. 20 5.1 THE LD. DR, SUBMITTED THAT THE ASSESSEE IS NOT CORRECT IN STATING THAT NO METHOD PRESCRIBED UNDER THE STATUTE HAS BEEN FOLLOWED BY THE TPO. IN A COMPARABLE SITUATION INV OLVING AN UNRELATED PARTY, SUCH PAYMENT WOULD NOT HAVE BEEN M ADE BY THAT PARTY WITHOUT COMMENSURATE BENEFITS ACCRUING T O IT. EVEN OTHERWISE, THE ASSESSEE DID NOT DEMONSTRATE THE NEE D AND BENEFIT RELATING TO SUCH A PAYMENT. THIS HAS BEEN ELABORATELY DEALT WITH BY THE TPO IN HIS ORDER U/S.92CA(3) OF T HE ACT DATED 29.1.2015. SUCH COMPARISON HAS BEEN CONTEMPLATED I N THE OECD GUIDELINES 2010 WHICH HELD THE FIELD AT THE RE LEVANT TIME OF PASSING THE ORDER. THE SAME IS REPRODUCED BELOW : 7.6 UNDER THE ARMS LENGTH PRINCIPLE, THE QUESTIO N WHETHER AN INTRA-GROUP SERVICE HAS BEEN RENDERED WHEN AN ACTIV ITY IS PERFORMED FOR ONE OR MORE GROUP MEMBERS BY ANOTHER GROUP MEMBER SHOULD DEPEND ON WHETHER THE ACTIVITY PROVID ES A RESPECTIVE GROUP MEMBER WITH ECONOMIC OR SOCIAL VAL UE TOP ENHANCE ITS COMMERCIAL POSITION. THIS CAN BE DETER MINED BY CONSIDERING WHETHER AN INDEPENDENT ENTERPRISE IN CO MPARABLE CIRCUMSTANCES WOULD HAVE BEEN WILLING TO PAY FOR TH E ACTIVITY IF PERFORMED FOR IT BY AN INDEPENDENT ENTERPRISE OR WO ULD HAVE PERFORMED THE ACTIVITY IN-HOUSE FOR ITSELF. 21 ACCORDING TO THE LD. DR, THE TRANSACTIONS CAN BE AG GREGATED ONLY IF THEY ARE INTRICATELY INTERTWINED AND CANNOT BE SEPARATELY ANALYZED. THIS IS NOT THE CASE HERE. M OREOVER, AGGREGATED APPROACH TO TRANSFER PRICING ANALYSIS IS THE EXCEPTION RATHER THAN THE NORM. THIS ISSUE HAS BEE N DEALT WITH EXTENSIVELY BY THE DRP OF ITS ORDER DATED 24.0 3.2017. THE DRP HAS QUOTED CASE LAWS TO REJECT THE ASSESSEE S OBJECTION IN THIS REGARD. THE OECD GUIDELINES OF 2 010 HAS ALSO TAKEN THE VIEW THAT AS FAR AS POSSIBLE, TRANSA CTIONS ARE TO BE EVALUATED SEPARATELY. CONSIDERING THIS, ACCORDI NG TO THE LD. DR, THE ACTION OF THE TPO IS IN ORDER. 5.2. FURTHER, THE LD. DR SUBMITTED THAT THE COMMERC IAL EXPEDIENCY MAY NOT BE QUESTIONED IF THE TRANSACTION S CARRIED OUT BETWEEN UNCONTROLLED PARTIES. IF THE TRANSACTI ONS BETWEEN THE TWO PARTIES ARE CONTROLLED THEN THE NATURE OF T RANSACTIONS SHOULD BE ANALYZED INCLUDING THE COMMERCIAL EXPEDIE NCY. NEEDLESS TO SAY THE COMPARABILITY STUDY WHICH FORMS THE BASIS OF TRANSFER PRICING PROCEEDINGS REQUIRES AN A NALYSIS OF THE NEED FOR SUCH A TRANSACTION AND THE BENEFIT DER IVED BY THE ASSESSEE FROM THAT TRANSACTION. THE TPO HAS NOT SO UGHT TO 22 QUESTION THE COMMERCIAL EXPEDIENCY OF THE ROYALTY. WHAT HAS BEEN DONE IS TO COMPARE THE CIRCUMSTANCES SURROUNDI NG THE PAYMENT AND THE SERVICES SAID TO HAVE RECEIVED WITH AN INDEPENDENT PARTY IN AN UNCONTROLLED SITUATION. THE WAY IN WHICH THE TPO IS LOOKING AT EACH TRANSACTIONS, ARE ALTOGETHER DIFFERENT FROM THE AO. THE NEED BENEFIT ANALYSIS I N THE LIGHT OF THE UNCONTROLLED TRANSACTIONS ARE ESSENTIAL FOR THE COMPARABILITY ANALYSIS. 5.3 THE LD. DR SUBMITTED THAT THE CONTENTION OF THE ASSESSEE THAT NO RESTRICTION ON PAYMENT OF ROYALTY UNDER THE PROVISIONS OF FEMA, RATES PRESCRIBED UNDER FEMA CAN NOT BE REGARDED AS ALP FOR TRANSFER PRICING PURPOSES IS NOT ACCEPTABLE AS THE ASSESSEE TRIED TO MISLEAD THE ITA T THAT THE TPO HAS DETERMINED THE ALP FOR THE ROYALTY PAID BY THE ASSESSED TO ITS AE USING THE PROVISIONS OF FEMA WHI CH IS NOT CORRECT. THE TPO HAS OPINED THAT EVEN THE ROYALTY PAID BY THE INDIAN COMPANIES TO ITS AE ARE NOT CONSIDERING THE VALUE OF THE STANDARD BOUGHT OUT COMPONENTS WHILE CALCULA TING THE ROYALTY AND SIMILAR METHOD OF CALCULATION FOR ROYAL TY ALSO PROVIDED UNDER FEMA REGULATIONS. SO THE TPO HAS FO RMED 23 HIS OPINION BASED ON THE ROYALTY CALCULATION OF UNR ELATED PARTIES WHICH DOES NOT INCLUDE THE VALUE OF BOUGHT OUT COMPONENTS AS THE COST FOR THE TECHNOLOGY ALREADY I MPEDED INTO THE PRICE OF THE RAW MATERIAL (BOUGHT OUT COMP ONENTS). THE LD. DR SUBMITTED THAT THE RBI IS AN AUTHORITY T O REGULATE THE FOREIGN PAYMENTS INCLUDING ROYALTY, PUT RESTRIC TION ON THE ROYALTY PAYMENTS. HOWEVER, THE RBI HAS RELAXED THE CEILING FOR THE PAYMENT OF ROYALTY DOES NOT MEAN THAT THE A SSESSEE CAN PAY ENTIRE PROFITS TO ITS AE AS ROYALTY. THOUG H THE CEILINGS FOR ROYALTY RELAXED BY RBI, THE METHOD OF CALCULATION OF ROYALTY PROVIDED BY THE RBI CAN BE TAKEN AS A RE FERENCE AS THE SAME METHOD FOLLOWED BY MOST OF THE COMPANIES F OR CALCULATING THE VALUE OF ROYALTY. 5.4 THE LD. DR SUBMITTED THAT THE REASON BEHIND THE REDUCTION OF THE VALUE OF BOUGHT OUT COMPONENTS FRO M THE TOTAL SALES WHILE CALCULATING THE ROYALTY IS THE CO ST OF THE TECHNOLOGY ALREADY EMBEDDED IN THE PRICE OF THE RAW MATERIAL AND FOR BETTER UNDERSTANDING, THE ROYALTY CALCULATI ON OF MOBIS INDIA LTD. IS PROVIDED BELOW: ROYALTY TO MOBIUS KOREA FOR FY 2013-14 24 YEAR MONTHS SALES LESS:TRADING & MDI SALES LESS IMPORTS NET SALES ROYALTY 2013 APRIL 3480790763.14 332329122 680868160 247759 3481 74327804 MAY 3421868459.14 266548375 693651740 2461668344 7 3850050 JUNE 3405444134.38 214242332 706660060 2484541742 74536252 JULY 3132628736.49 278692197 651524555 2202411985 66072360 AUGUST 3493824299.49 215174696 683986456 259466314 7 77839894 SEPT. 3431848518.09 183107653 661691049 2587049816 77611494 OCT. 3562398246.85 176505491 814222529 2571670227 77150107 NOV. 3330501933.26 153164362 708028323 2469309249 74079277 DEC. 3199347306.31 152503092 873569387 2173274827 65198245 2014 JAN. 3387231588.36 165947311 809826502 2411577 75 72343733 FEB. 3419453077.38 172590752 781271436 2465590889 7396727 MARCH 3693961712.76 150903444 1088060649 245499762 0 73649929 TOTAL 40959298775.65 2451708826.57 9153360845.99 2 9354229103 .09 880626873 R & D CESS 5% 44031344 TOTAL 924658217 AS PER GL 924658216 DIFFERENCE 0 5.5 THE LD. DR FURTHER SUBMITTED THAT THE ISSUE OF ROYALTY EX- BROUGHT OUT COMPONENTS IS DISCUSSED IN DETAIL BY TH E TPO. ROYALTY IS TO BE PAID ON TURNOVER LESS BROUGHT OUT COMPONENT AS PER THE PRESS NOTE OF THE DEPARTMENT OF INDUSTRIES POLICY AND PROMOTION. THE ASSESSEE HAS NOT EFFECTIVELY COUNTE RED THE STAND OF THE TPO THAT THE ROYALTY IS TO BE PAID NET OF BROUGHT OUT COMPONENTS. NOR HAS THE ASSESSEE GIVEN ANY REASON WHY THE OFFICIAL POLICY DOCUMENT RELIED UPON BY THE TPO IS TO BE DISCARDED. THIS ISSUE HAS ALSO BEEN CONFIRMED BY T HE DRP AND THE REASONING THEREFORE ARE EXPLAINED BY THE PANEL. THE ASSESSEE HAD CLAIMED ROYALTY ON SUBSTATION DEVELOPM ENT CHARGES, DEVELOPMENT REVENUES AND REVENUE ON ERECTI ON AND 25 COMMISSIONING OF WIND TURBINE GENERATORS (WTGS), WH ICH WAS DISCUSSED BY THE TPO IN HIS ORDER. HE HAS, AFTER A PERUSAL OF THE AGREEMENTS RELATING TO THE ABOVE ACTIVITIES, HELD T HAT WHAT WAS BEING DONE UNDER THESE CATEGORIES DID NOT INVOLVE A NY TECHNOLOGY OUT OF COMMON INFRASTRUCTURE ACTIVITIES WHICH DO NOT INVOLVE ANY ELEMENT OF TRANSFER OF TECHNOLOGY. THI S HAS NOT BEEN COUNTERED BY THE ASSESSEE AND THE ISSUE HAS BEEN DE ALT WITH BY THE DRP IN ITS ORDER. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. IN THIS CASE, UNDER THE TECHNOLOGY TRANS FER AGREEMENT DATED 01.01.2009 AND 11.07.2011 WITH GAMESA INNOVAT ION AND TECHNOLOGY SL (GAMESA SPAIN), FOR AVAILING TECHNOLO GY IN RELATION TO A.E 59 AND G97 MODELS RESPECTIVELY, T HE ASSESSEE AGREED TO PAY ROYALTY @ 4% / 4.50% RESPECTIVELY ON NET AMOUNT OF ANNUAL TURNOVER ON SALE OF WIND ENERGY GENERATOR S (WEG) TO ITS CUSTOMERS INCLUDING CHARGES FOR DEVELOPMENT OF LAND, SUBSTATION, AND ERECTION & COMMISSIONING. THE ASSES SEE AGGREGATED THE ROYALTY PAYMENT WHICH IS BEING INTER NATIONAL TRANSACTION WITH AE AND BENCHMARKING IT BY USING NE T PRESENT COST (NPC) ON REVENUES AS PLI WITH TNMM METHOD AS M OST 26 APPROPRIATE METHOD. THE ASSESSEES NPC ON REVENUE WAS CLAIMED TO BE AT 1.49% WITH THREE YEAR WEIGHTED MAR GIN ON REVENUE OF COMPARABLES OF 0.07% AND THEREFORE, THE AE TRANSACTIONS WERE CLAIMED TO BE AT ARMS LENGTH. A CCORDING TO TPO, THE ASSESSEES APPROACH OF COMPUTATION OF ROYA LTY AND MANAGERIAL SERVICES BY BENCHMARKING THEM ON AN AGGR EGATION BASIS WAS NOT ACCEPTED BY TPO / AO. ACCORDING TO TP O, NO ROYALTY PAYABLE ON THE STANDARD BOUGHT OUT COMPONEN TS AND THEREBY REDUCED THE COST OF STANDARD BOUGHT OUT COM PONENTS FROM THE TURNOVER OF THE ASSESSEE AND APPLIED THE R OYALTY RATE ON NET TURNOVER SO AS TO DETERMINE THE ALP. THE PLEA O F THE ASSESSEE IS THAT IT HAS CONSIDERED CERTAIN COMPARAB LES, AGREEMENTS AND THE ARITHMETIC MEAN OF THE ROYALTY A S PER THE COMPARABLE AGREEMENT AMOUNT TO 6.43%. THE AVERAGE RATE OF ROYALTY AS PER THE UNCONTROLLED TRANSACTIONS IS HIG HER THAN THE ROYALTY PAID BY THE ASSESSEE, THE TRANSACTIONS HAS BEEN REGARDED AS WITHIN ARM/S LENGTH PRICE. HOWEVER, THE AO /TPO POINTED OUT THAT ROYALTY PAID BY THE ASSESSEE IS IN EXCESS OF ROYALTY PERMITTED UNDER THE PROVISIONS OF FEMA. TH E PLEA OF THE ASSESSEE IS THAT NO ADJUSTMENT CAN BE APPLIED FOLLO WING ANY 27 METHOD OTHER THAN THOSE PRESCRIBED UNDER RULE-10B O F THE INCOME TAX RULES. MORE SO, THE PLI OF THE ASSESSEE IS AT 4.84% AS COMPARED TO THE COMPARABLES AT 3.77%. FURTHER, C ONSIDERING ECONOMIC ADJUSTMENTS SUCH AS CUSTOMS DUTY AND IDLE CAPACITY ADJUSTMENT, THE MARGIN OF THE ASSESSEE WOULD BE UP TO 13.28%, WHICH WAS ACCEPTED BY TPO AS THE PLI IS HIGHER THAN THE COMPARABLES. EVEN CONSIDERING THE CUP AS A SECONDAR Y METHOD FOR BENCHMARKING THE ROYALTY PAYMENT, AVERAGE RATE OF ROYALTY AT COMPARABLE COMPANIES IS AT 6.43% AS COMPARED TO THE ROYALTY PAID BY THE ASSESSEE COMPANY AT 4%/ 4.5%. THEREFOR E, EVEN APPLYING THE CUP METHOD PERCENTAGE OF PAYMENT ROYA LTY IS LESSER THAN THE COMPARABLE CASES. IN THE CASE OF DCIT VS. DIEBOLD SOFTWARE SERVICES (P) LTD., IN 151 ITD 463( MUM.) IT WAS HELD THAT WHEN THE TPO DID NOT ACCEPT TP ANALYSIS MADE BY ASSESSEE WITHOUT GIVING ANY REASONS AND MADE TP ADJ USTMENT WITHOUT APPLYING ANY PRESCRIBED METHOD, SUCH TP ADJ USTMENT IS NOT SUSTAINABLE EITHER IN LAW OR ON FACTS. 6.1 SIMILAR VIEW WAS TAKEN IN THE CASE OF MERCK LT D. VS. DCIT IN 148 ITD 513(MUM.) WHEREIN HELD THAT THE 28 TP ADJUSTMENT IS REQUIRED TO BE MADE BY APPLYING O NE OF THE PRESCRIBED METHODS. THE TPO HAS NOT APPLIED ANY PRE SCRIBED METHOD AND HAS ONLY DISALLOWED PART OF THE EXPENSES AS DON E IN THE NORMAL ASSESSMENT, WHICH IS NOT PERMITTED UNDER TRANSFER P RICING REGULATION AS PER WHICH ADJUSTMENT ON ACCOUNT OF ANY INTERNATIONA L TRANSACTION IS REQUIRED TO BE MADE AS PER THE METHOD PRESCRIBED. T HE LEARNED CIT (DR) POINTED OUT THAT THE TPO IN RESPECT OF THE NIN E SERVICES NOT AVAILED BY THE ASSESSEE HAS TREATED THE PAYMENT AS NIL SINC E NO INDEPENDENT PARTY WOULD MAKE ANY PAYMENT FOR SERVICES NOT PROVI DED. THE TPO THUS HAD APPLIED THE CUP METHOD AND MADE ADJUSTMENT ON A CCOUNT OF NINE SERVICES ON AVERAGE BASIS. (PARA 24.6) AGREEMENT LISTED CERTAIN SERVICES ON WHICH THE ASSE SSEE REQUIRES GUIDANCE/ASSISTANCE FROM TIME TO TIME. THE ASSESSEE WAS THUS ENTITLED TO ANY OF THE SERVICES AS AND WHEN REQUIRED. THEREF ORE, APPLYING CUP METHOD TO THE SERVICE NOT AVAILED BY THE ASSESSEE D URING THE YEAR IS NOT JUSTIFIED. IT WOULD HAVE BEEN APPROPRIATE IF THE AO HAD APPLIED CUP METHOD TO THE PAYMENT MADE DURING THE YEAR BY THE A SSESSEE FOR THE THREE SERVICES AND COMPARED WITH SIMILAR PAYMENT FO R SUCH SERVICES BY AN INDEPENDENT PARTY. NO EFFORTS HAVE BEEN MADE BY TPO/AO TO DETERMINE THE MARKET VALUE OF SERVICES RECEIVED BY THE ASSESSEE DURING THE YEAR RELATING TO SAP IMPLEMENTATION AND QUALITY CONTROL TO SHOW THAT THE ASSESSEE HAD PAID MORE COMPARED TO ANY INDEPEND ENT PARTY FOR THE SAME SERVICES. THE ASSESSEE HAD SUBMITTED THAT IN C ASE THE ASSESSEE HAD PAID TO THE AE AT MAN HOUR RATE FOR THE TECHNIC AL SERVICES PROVIDED DURING THE YEAR IN RELATION TO SAP IMPLEMENTATION, THE FEES PAYABLE WOULD HAVE BEEN SIGNIFICANTLY HIGER. THERE IS NOTHI NG PRODUCED BEFORE ITAT TO CONTROVERT THE SAID CLAIM. THE ASSESSEE HAS APPLIED TNMM WHICH SHOWS THAT THE MARGIN SHOWN BY THE ASSESSEE W AS HIGHER THAN THE COMPARABLE COMPANIES. THE CASE OF THE ASSESSEE IS ALSO SUPPORTED BY THE DECISION OF TRIBUNAL IN CASE OF MC CAN ERRIC SON INDIA PVT. LTD. (SUPRA) IN WHICH THE DECISION OF TPO TO TAKE THE VA LUE OF CERTAIN SERVICES AT NIL HAS NOT BEEN UPHELD. CONSIDERING TH E ENTIRETY OF FACTS 29 AND CIRCUMSTANCES, THE ADJUSTMENT MADE BY TPO WHICH IS NOTHING BUT DISALLOWANCE OF EXPENSES CANNOT BE UPHELD. ITAT, TH EREFORE, SET ASIDE THE ORDER OF CIT (A) ON THIS POINT AND DELETE THE A DDITION MADE. 6.2 IT IS ALSO OBSERVED THAT WHERE THE ASSESSEE HA S ADOPTED TNMM METHOD FOR THE PURPOSE OF BENCH MARKING ITS PR OFITS, ADOPTION OF CUP METHOD SOLELY FOR THE PURPOSE OF EV ALUATING TECHNICAL ASSISTANCE FEE WOULD LEAD TO ABSURDITY AN D BE DETRIMENTAL TO THE INTERESTS OF BOTH THE DEPARTMENT AND THE ASSESSEE. IN OTHER WORDS, ONCE THE ARMS LENGTH CR ITERIA IS TESTED AT ENTITY LEVEL, THE TPO HAS NO JURISDICTION TO EXA MINE THE NEED, BENEFIT ETC. IN RELATION TO EACH TRANSACTION. THUS, THE TRANSACTION APPROACH IS NOT REQUIRED, IF THE PLI OF THE ASSESSE E AT ARMS LENGTH. THIS VIEW IS FORTIFIED BY THE JUDGMENT OF DELHI HIGH COURT IN THE CASE OF MAGNETI MARELLI POWERTRAIN INDIA PVT . LTD. VS. DCIT IN (2016) 389 ITR 0469 (DELHI) WHEREIN HELD THAT:- 17. AS FAR AS THE SECOND QUESTION IS CONCERNED, TH E TPO ACCEPTED TNMM APPLIED BY THE ASSESSEE, AS THE MOST APPROPRIA TE METHOD IN RESPECT OF ALL THE INTERNATIONAL TRANSACTIONS INCLU DING PAYMENT OF ROYALTY. THE TPO, HOWEVER, DISPUTED APPLICATION OF TNMM AS T HE MOST APPROPRIATE METHOD FOR THE PAYMENT OF TECHNICAL ASS ISTANCE FEE OF RS. 38,58,80,000 ONLY FOR WHICH COMPARABLE UNCONTROLLED PRICE (CUP) METHOD WAS SOUGHT TO BE APPLIED. HERE, THIS COURT C ONCURS WITH THE ASSESSEE THAT HAVING ACCEPTED THE TNMM AS THE MOST APPROPRIATE, IT 30 WAS NOT OPEN TO THE TPO TO SUBJECT ONLY ONE ELEMENT , I.E PAYMENT OF TECHNICAL ASSISTANCE FEE, TO AN ENTIRELY DIFFERENT (CUP) METHOD. THE ADOPTION OF A METHOD AS THE MOST APPROPRIATE ONE AS SURES THE APPLICABILITY OF ONE STANDARD OR CRITERIA TO JUDGE AN INTERNATIONAL TRANSACTION BY. EACH METHOD IS A PACKAGE IN ITSELF, AS IT WERE, CONTAINING THE NECESSARY ELEMENTS THAT ARE TO BE USED AS FILTE RS TO JUDGE THE SOUNDNESS OF THE INTERNATIONAL TRANSACTION IN AN AL P FIXING EXERCISE. IF THIS WERE TO BE DISTURBED, THE END RESULT WOULD BE DISTORTED AND WITHIN ONE ALP DETERMINATION FOR A YEAR, TWO OR EVEN FIVE METHODS CAN BE ADOPTED. THIS WOULD SPELL CHAOS AND BE DETRIMENTAL TO THE INTERESTS OF BOTH THE ASSESSEE AND THE REVENUE. THE SECOND QUEST ION IS, THEREFORE, ANSWERED IN FAVOUR OF THE ASSESSEE; THE TNMM HAD TO BE APPLIED BY THE TPO/AO IN RESPECT OF THE TECHNICAL FEE PAYMENT TOO. 6.3 SIMILAR VIEW WAS TAKEN BY CO-ORDINATE BENCH OF HYDERABAD TRIBUNAL IN THE CASE OF AIR LIQUID ENGINE ERING INDIA (P) LTD., IN 152 ITD 157 WHEREIN HELD THAT:- 20. FURTHERMORE, WE ARE OF THE OPINION THAT ONCE T NMM HAS BEEN APPLIED TO THE ASSESSEE COMPANYS TRANSACTION, IT C OVERS UNDER ITS AMBIT THE ROYALTY TRANSACTIONS IN QUESTION TOO AND HENCE SEPARATE ANALYSIS AND CONSEQUENT DELETION OF THE ROYALTY PAY MENTS BY THE TPO IN THE INSTANT CASE SEEMS ERRONEOUS. WE DRAW SU PPORT FROM THE HONBLE MUMBAI ITAT DECISION IN CADBURY INDIA LTD V S. ACIT (ITA NO 7408/MUM/2010 AND ITA NO.7641/MUM/2010 DATED 13-11- 2013) WHEREIN THE HONBLE ITAT UPHELD THE USE OF TNMM FOR ROYALTY AS WELL AS RELIED ON MANY OF THE ABOVE DECISIONS TO HO LD ADJUSTMENT BY TPO WAS ERRONEOUS: 31 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTI ON MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS REGARD, I T IS SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMINED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY LINKE D WITH THESE ACTIVITIES. IN THE ABSENCE OF PRODUCTION AND SALE O F PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARDING PAYMEN T OF ANY ROYALTY. RULE 10A(D) OF THE ITAT RULES DEFINES TRA NSACTION AS A NUMBER OF CLOSELY LINKED TRANSACTIONS. ROYALTY, T HEN, IS A TRANSACTION CLOSELY LINKED WITH PRODUCTION AND SALE S. IT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTERPRIS E, BEING EMBEDDED THEREIN. THAT BEING SO, ROYALTY CANNOT BE CONSIDERED AND EXAMINED IN ISOLATION ON A STANDALON E BASIS. ROYALTY IS TO BE CALCULATED ON A SPECIFIED AGREED B ASIS, ON DETERMINING THE NET SALES WHICH, IN THE PRESENT CAS E, ARE REQUIRED TO BE DETERMINED AFTER EXCLUDING THE AMOUN TS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SINCE SUCH NE T SALES DO NOT STAND RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. THEREFORE, IT IS OUR CONSIDERED OPINION THAT THE AS SESSEE WAS CORRECT IN EMPLOYING AN OVERALL TNMM FOR EXAMINING THE ROYALTY. THE TPO WORKED OUT THE DIFFERENCE IN THE P LI OF THE OUTSIDE PARTY (THE ASSESSEE) AT 4.09% AND THE COMPA RABLES AT 7.05%. THIS HAS NOT BEEN SHOWN TO FALL OUTSIDE THE PERMISSIBLE RANGE. 34. THE DECISION OF THE TRIBUNAL IN EKLA APPLI ANCES, 2012- TII-01-HCDEL- TP, HAS BEEN SOUGHT TO BE DISTINGUISH ED BY THE TPO, OBSERVING THAT THE FACTS IN THAT CASE ARE NOT IN PARI MATERIA WITH THOSE OF THE ASSESSEES CASE. HOWEVER, THEREIN ALSO, THE BENEFIT TEST HAD BEEN APPLIED BY THE TPO, AS IN THE PRESENT CASE. THE MATTER WAS CARRIED IN APPEAL BEFO RE THE HONBLE HIGH COURT. THE HONBLE DELHI HIGH COURT HA S HELD THAT THE SO-CALLED BENEFIT TEST CANNOT BE APPLIED T O DETERMINE THE ALP OF ROYALTY PAYMENT AT NIL AND THAT THE TPO COULD APPLY ONLY ONE OF THE METHODS PRESCRIBED UNDER THE LAW. A SIMILAR VIEW HAS BEEN TAKEN IN SONA OKEGAWA PRECISION FORG INGS LTD. (SUPRA) AND IN KHS MACHINERY PVT. LTD. VS. I TO, 53 SOT 100 (AHMD) (URO). 35. IT IS, THUS, SEEN THAT THE ROYALTY PAYMENT @ 3% BY THE ASSESSEE IS AT ARMS LENGTH. THE TECHNICAL COLLABOR ATION AGREEMENT STANDS APPROVED BY THE GOVERNMENT OF INDI A. THE ROYALTY PAYMENT HAS BEEN ACCEPTED BY THE DEPARTMENT AS HAVING BEEN MADE BY THE ASSESSEE WHOLLY AND EXCLUSI VELY FOR ITS BUSINESS PURPOSES. FOR ASSESSMENT YEARS 2004-05 AND 2005-06, SUCH PAYMENT OF ROYALTY HAS BEEN ALLOWED B Y THE CIT (A). AS PER THE FEMA REGULATIONS, ROYALTY CAN BE PA ID ON NET 32 SALES @ 5% ON DOMESTIC SALES AND @ 8% ON EXPORT SAL ES. THE ROYALTY PAYMENT BY THE ASSESSEE FALLS WITHIN TH ESE LIMITS. IT ALSO FALLS WITHIN THE LIMITS OF PAYMENT OF ROYAL TY IN THE AUTOMOBILE SECTOR, AS PER THE MARKET TREND. THIS PA YMENT OF ROYALTY IS AT THE SAME PERCENTAGE AS THAT PAID BY O THER AUTO ANCILLARIES IN THE AUTOMOTIVE INDUSTRY. THEN, IN E KLA APPLIANCES (SUPRA) AND IN ERICSSON INDIA PVT. LTD . VS. DCIT, 2012-TII-48-ITAT-DEL-TP, IT HAS BEEN HELD THAT ROYA LTY PAYMENT CANNOT BE DISALLOWED ON THE BASIS OF THE SO -CALLED BENEFIT TEST AND THE DOMAIN OF THE TPO IS ONLY TO E XAMINE AS TO WHETHER THE PAYMENT BASED ON THE AGREEMENT ADHER ES TO THE ARMS LENGTH PRINCIPLE OR NOT. THAT BEING SO, T HE ACTION OF THE TPO IN THE PRESENT CASE, TO MAKE THE DISALLOWAN CE MAINLY ON THE GROUND OF THE BENEFIT TEST, IS UNSUSTAINABLE IN LAW. 36. KEEPING IN VIEW ALL THE ABOVE FACTORS, THE DISALLOWANCE MADE ON ACCOUNT OF ROYALTY IS FOUND TO BE TOTALLY U NCALLED FOR AND IT IS DELETED AS SUCH. . 21. HENCE, FOLLOWING THE RATIO OF THE HONBLE DELHI HIGH COURT IN CIT VS. EKL APPLIANCES (SUPRA) AND VARIOUS OTHER DECISI ONS AS NOTED ABOVE AND GIVEN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, WE HOLD THAT THE ADDITION MADE BY THE TPO AND UPHELD B Y THE DRP IS UNSUSTAINABLE AND IS TO BE DELETED. HENCE GROUND NO . 2 IS HELD IN FAVOUR OF THE ASSESSEE. HENCE, THE APPEAL OF THE RE VENUE ITA.NO.1040/HYD/2011 IS DISMISSED AND ASSESSEES AP PEAL IN ITA.NO.1159/HYD/2011 IS ALLOWED. 6.4 IT IS NOTICED THAT SIMILAR VIEW WAS TAKEN BY T HE CO- ORDINATE BENCH OF JAIPUR IN THE CASE OF ACIT VS. SA KATA INX (INDIA) LTD. IN ITA NO.376/JAIPUR/2012 VIDE ORDER D ATED 14.11.2016. 33 6.5 ONE MORE REASON GIVEN BY TPO IS WITH REGARD TO DOWNWARD ADJUSTMENT IN RESPECT OF PAYMENT OF ROYALT Y TO AE ON THE REASON THAT ROYALTY PAYMENT IS IN EXCESS LIMIT PRESCRIBED UNDER THE PROVISIONS OF FEMA, 1999. ACCORDING TO L D.D.R, ROYALTY WAS REQUIRED TO BE CALCULATED BY THE ASSESS EE ON THE BASIS OF NET EX-FACTORY SALE PRICE OF PRODUCTS EXCL UDING THE EXCISE DUTY, COST OF STANDARD BOUGHT OUT COMPONENTS AND LANDED COST OF IMPORTED COMPONENTS ETC., IRRESPECTIVE OF T HE SOURCE OF PROCUREMENT, INCLUDING OCEAN FREIGHT, INSURANCE, CU STOM DUTIES, ETC. HOWEVER, THE ASSESSEE HAS NOT DONE SO. THE AS SESSEE HAS CLAIMED THAT THE ABOVE CONDITION NO LONGER APPLY AF TER THE ISSUE OF RBI CIRCULAR RBI/2009-10/465 A.P.(DIR SERIES) CI RCULAR NO.52 DATED 13 TH MAY 2010 LIBERALIZING ROYALTY PAYMENT UNDER TECHNOLOGY COLLABORATION AGREEMENTS. THE LD.D.R SU BMITTED THAT THERE IS NO MERIT IN THE ARGUMENT OF THE ASSESSEE. THESE CONDITIONS ARE STILL APPLICABLE. FURTHER, SUCH CON DITIONS ALSO GIVE A METHOD REGARDING CALCULATION OF THE AMOUNT OF ROY ALTY TO BE PAID TO A FOREIGN ENTITY. THE METHOD IS A GOOD GUID ELINE FOR DETERMINATION OF ARMS LENGTH PAYMENT OF ROYALTY BE TWEEN TWO UNRELATED PARTIES. ACCORDING TO LD.D.R, THE DOWNWAR D ADJUSTMENT 34 HAS BEEN DONE BY THE TPO BY EXCLUDING BOUGHT OUT CO MPONENT FOR THE PURPOSE OF CALCULATION OF ROYALTY. IN OUR OPINION, AN ERSTWHILE REGULATORY LAW OF FEMA REGARDING ROYALTY PAYMENT WAS PERMITTED TO THE TUNE OF 5% ON DOMESTIC SALES AND 8 % IN THE CASE OF EXPORT SALES. HOWEVER, THE ABOVE SAID CEILI NG ON PAYMENT OF ROYALTY HAS BEEN LIFTED WITH EFFECT FROM 16.12.2009 VIDE CIRCULAR NO.52 DATED 13 TH MAY 2010, WHICH IS REPRODUCED HEREIN BELOW:- RESERVE BANK OF INDIA ____ FOREIGN EXCHANGE DEPARTMENT CENTRAL OFFICE MUMBAL - 400 001 RB1I2009-1 01465 A. P. (DIR SERIES) CIRCULAR NO. 52 MAY 13, 2010 TO ALL CATEGORY-I AUTHORISED DEALER BANKS MADAM I SIR, FOREIGN EXCHANGE MANAGEMENT ACT (FEMA), 1999 - CURRENT ACCOUNT TRANSACTIONS LIBERALISATION ATTENTION OF AUTHORISED DEALER CATEGORY-I (AD CATEG ORY-I) BANKS IS INVITED TO FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRA NSACTIONS) RULES, 2000 NOTIFIED VIDE NOTIFICATION NO.G.S.R.381(E) DAT ED 3RD MAY 2000, AS AMENDED FROM TIME TO TIME. 2. IN TERMS OF RULE 4 OF THE FOREIGN EXCHANGE MANAG EMENT (CURRENT ACCOUNT TRANSACTIONS) RULES 2000, PRIOR APPROVAL OF THE MINISTRY OF COMMERCE AND INDUSTRY, GOVERNMENT OF INDIA, IS REQU IRED FOR DRAWING FOREIGN EXCHANGE FOR REMITTANCES UNDER TECHNICAL CO LLABORATION AGREEMENTS WHERE PAYMENT OF ROYALTY EXCEEDS 5% ON LOCAL SALES AND 8% ON EXPORTS AND LUMP- SUM PAYMENT EXCEEDS USD 2 MILLION [ITEM 8 OF SCHEDULE II TO THE FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRANSA CTIONS) RULES, 2000]. THE GOVERNMENT OF INDIA HAS REVIEWED THE EXT ANT POLICY WITH REGARD TO LIBERALIZATION OF FOREIGN TECHNOLOGY AGREEMENT A N IT WAS DECIDED TO OMIT ITEM NUMBER 8 OF SCHEDULE II TO THE FOREIGN EXCHANG E MANAGEMENT (CURRENT ACCOUNT TRANSACTION) RULES, 2000, AND THE ENTRY RELATING THERETO. 35 3. ACCORDINGLY, AD CATEGORY-I BANKS MAY PERMIT DRAW AL OF FOREIGN EXCHANGE BY PERSONS FOR PAYMENT OF ROYALTY AND LUMP-SUM PAYM ENT UNDER TECHNICAL COLLABORATION AGREEMENTS WITHOUT THE APPROVAL OF MI NISTRY OF COMMERCE AND INDUSTRY, GOVERNMENT OF INDIA. 4. THE AMENDMENT TO THE FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRANSACTIONS) RULES, 2000, IN THIS REGARD HAS BEEN NOTIFIED BY THE GOVERNMENT OF INDIA VIDE NOTIFICATION NO.G.S.R.382 (E) DATED MAY 5, 2010 (COPY ENCLOSED). 5. AD CATEGORY-I BANKS MAY BRING THE CONTENTS OF TH IS CIRCULAR TO THE NOTICE OF THEIR CONSTITUENTS AND CUSTOMERS CONCERNED. 6. THE DIRECTIONS CONTAINED IN THIS CIRCULAR HAVE B EEN. ISSUED UNDER SECTION 10(4) AND 11(1) OF THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (42 OF 1999) AND IS WITHOUT PREJUDICE TO PERMISSIONS /APPR OVALS, IFANY, REQUIRED UNDER ANY OTHER LAW. YOURS FAITHFULLY, (SALIM GANGADHARAN) CHIEF GENERAL MANAGER-IN-CHARGE MINISTRY OF FINANCE (DEPARTMENT OF ECONOMIC AFFAIRS) NOTIFICATION NEW DELHI, THE 5TH MAY, 2010 FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRANSA CTIONS) (AMENDMENT) RULES, 2010 G.S.R. 382(E)-IN EXERCISE OF THE POWERS CONFERRED B Y SECTION 5 AND SUB- SECTION (1) AND CLAUSE (A) OF SUB-SECTION (2) OF SE CTION 46 OF THE FOREIGN EXCHANGE MANAGEMENT ACT, 1999 (42 OF 1999) AND IN C ONSULTATION WITH THE RESERVE BANK, THE CENTRAL GOVERNMENT, HAVING CONSID ERED IT NECESSARY IN THE PUBLIC INTEREST, HEREBY MAKES THE FOLLOWING FUR THER AMENDMENT IN THE FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCOUNT TRANSA CTIONS) RULES, 2000, NAMELY: 1. (1) THESE RULES MAY BE CALLED THE FOREIGN EXCHAN GE MANAGEMENT (CURRENT ACCOUNT TRANSACTIONS) (AMENDMENT) RULES, 2 010. (2) THEY SHALL BE DEEMED TO HAVE COME INTO FORCE WI TH EFFECT FROM THE 16TH DAY OF DECEMBER, 2009. 2. IN THE FOREIGN EXCHANGE MANAGEMENT (CURRENT ACCO UNT TRANSACTIONS) RULES, 2000, IN SCHEDULE II, ITEM NUMBER 8 AND THE ENTRY RELATING THERETO SHALL BE OMITTED. SD/- DR. K. P. KRISHNAN JOINT SECRETARY 36 ISSUED BY: GOVERNMENT OF INDIA MINISTRY OF FINANCE (DEPARTMENT OF ECONOMIC AFFAIRS), NEW DELHI. [F.NO. 1111EC12004J EXPLANATORY MEMORANDUM :- THE GOVERNMENT OF INDIA REVIEWED THE EXTANT POLICY WITH REGARD TO LIBERALIZATION OF FOREIGN TEC HNOLOGY AGREEMENT AND IT WAS DECIDED TO PERMIT, WITH IMMEDIATE EFFECT, PAYME NTS FOR ROYALTY, LUMP SUM FEE FOR TRANSFER OF TECHNOLOGY AND PAYMENTS FOR USE OF TRADEMARK/BRAND NAME ON THE AUTOMATIC ROUTE. ACCORDINGLY, GOVERNMEN T OF INDIA ISSUED A PRESS NOTE ON 16.12.2009. HENCE, THE RULE SHALL BE DEEMED TO HAVE COME INTO F ORCE WITH RETROSPECTIVE EFFECT, I.E. FROM 16.122009. 1. IT IS CERTIFIED THAT NO PERSON WILL BE ADVERSELY AFFECTED BY GIVING RETROSPECTIVE EFFECT TO THESE RULES. 6.6 IN VIEW OF THIS, THERE IS NO MERIT IN APPLY ING THE PROVISIONS OF FEMA AS INDICATED BY THE TPO AND PLACING RELIANC E ON THE PROVISION OF FEMA IS INCORRECT. 6.7 FURTHER, IT IS TO BE NOTED THAT THERE CAN NOT BE ANY RESTRICTION ON PAYMENT OF ROYALTY ON BOUGHT OUT COM PONENTS WHICH WERE SUBJECT TO FURTHER PROCESSING BY THE ASS ESSEE AND WHICH WAS NOT SOLD ON AS IS BASIS TO END CUSTOMERS. THIS VIEW OF OURS IS FORTIFIED BY THE DECISION OF THE TRIBUNAL I N THE CASE OF AKZO NOBEL CHEMICALS (INDIA) LTD., IN ITA NO.1477/P UNE/2010 DATED 11.02.2014 WHEREIN HELD IN PARA -23 THAT WHA T IS LIABLE TO 37 BE CONSIDERED AS STANDARD BOUGHT-OUT COMPONENTS ARE SUCH MATERIAL ON WHICH NO FURTHER PROCESSING IS REQUIRED AND ARE DIRECTLY FITTED INTO THE FINAL PRODUCT; AND, COST O F SUCH MATERIAL ONLY NEEDS TO BE DEDUCTED FROM THE SALE PRICE TO CO MPUTE THE ROYALTY PAYABLE. APPLYING THE SAID CLARIFICATION TO THE PRESENT SITUATION, CONSIDERING THE MANUFACTURING PROCESS EX PLAINED, IT CANNOT BE CONSTRUED THAT THE SO-CALLED CONSTITUENT MATERIAL ARE MERELY FITTED INTO THE FINAL PRODUCT; ON THE CONTRA RY, IT IS A CASE WHERE SUCH MATERIAL ALSO UNDERGOES A CHEMICAL REACT ION IN THE PROCESS OF PRODUCING THE FINAL PRODUCT AND THE SAME ARE IRRETRIEVABLE ONCE THE FINISHED PRODUCT IS MANUFACT URED. FOR THE SAID REASON ALSO, IN OUR CONSIDERED OPINION CONSIDE RED OPINION, THE SO-CALLED CONSTITUENT MATERIALS CLASSIFIED BY THE TPO CANNOT BE EQUATED TO STANDARD BOUGHT-OUT COMPONENTS SO AS TO REDUCE THEIR COST FROM THE SALES VALUE TO COMPUTE THE ROYA LTY PAYABLE. FOR ALL THE ABOVE REASONS, WE THEREFORE FIND NO JUS TIFICATION ON THE PART OF THE TPO IN REJECTING THE METHODOLOGY AD OPTED BY THE ASSESSEE TO CALCULATE NET SALES FOR THE PURPOSE OF COMPUTING THE ROYALTY PAYABLE. 38 6.8 FURTHER, IN OUR CONSIDERED OPINION, THE TPO HAS NO JURISDICTION TO INTERPRET THE PROVISIONS OF FEMA AN D RESTRICT THE QUANTUM OF ROYALTY. IT IS PERTINENT TO NOTE THAT T HE BOUGHT OUT COMPONENTS IS NOT DEFINED IN FEMA. FURTHER, THE SA ID TERM INCLUDES ONLY COMPONENTS WHICH ARE NOT SUBJECT TO F URTHER PROCESSING AND SOLD ON AS IS BASIS TO END CUSTOMERS . IN THE INSTANT CASE, THE COMPONENTS PROCURED BY THE ASSESS EE ARE PROCESSED FURTHER AND THEREFORE, THE SAME CANNOT BE EXCLUDED FROM TURNOVER FOR THE PURPOSE OF COMPUTATION OF ROY ALTY. RELIANCE PLACED ON PRA-16 OF TRIBUNAL DECISION IN T HE CASE OF AKZO NOBEL CHEMICALS (INDIA) LTD., IN ITA NO.1477/P UNE/2010 DATED 11.02.2014 WHEREIN HELD THAT THE EXAMINATION OF CONTROLLED TRANSACTION SHOULD ORDINARILY BE BASED ON THE TRANS ACTION AS IT HAS BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE AE. THE TPO SHOULD NOT DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACTION FOR THEM. THE TWO EXCEPTIONS WHIC H HAVE BEEN PRESCRIBED ARE (I) WHERE THE ECONOMIC SUBSTANCE DIF FERS FROM ITS FORM; AND (II) WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION IS THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE T RANSACTION, VIEWED IN ITS TOTALITY, DIFFER FROM THOSE WHICH WOU LD HAVE BEEN 39 ADOPTED BY INDEPENDENT ENTERPRISES BE HAVING IN A C OMMERCIALLY RATIONAL MANNER. IN THIS CASE, THE TPO HAS REWORKED THE ROYALTY PAYABLE BY THE ASSESSEE TO ITS AE ON THE BASIS OF H IS INTERPRETATION OF THE EXPRESSION NET SALES FOR TH E PURPOSES OF DETERMINING ALP OF THE INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT TO THE AE, WHILE APPLYING THE CUP METHOD. THE MOOT POINT TO BE CONSIDERED IS WHETHER THE ACTION OF THE TPO IN INTERPRETING THE EXPRESSION NET SALES, CONTAINED IN THE FOREIGN TECHNOLOGY COLLABORATION AGREEMENT APPROVED BY THE GOVT. OF INDIA, DIFFERENTLY FROM WHAT HAS BEEN UNDERSTOOD BY THE ASSESSEE IS JUSTIFIED AND FALLS WITHIN THE EXCEPTIO NS PROVIDED IN THE OECD GUIDELINES WHICH PERMIT THE TPO TO RE-WRIT E THE TRANSACTION OR TO DISREGARD ACTUAL TRANSACTIONS. CO NSIDERED IN THE CONTEXT OF THE OECD GUIDELINES WHICH HAVE BEEN EXHA USTIVELY REFERRED BY THE HONBLE DELHI HIGH COURT IN THE CAS E OF EKL APPLIANCES LTD., (345 ITR241), THE IMPUGNED SITUATI ON DOES NOT FIT INTO THE TWO EXCEPTIONS. FIRSTLY, NEITHER THE REVENUE HAS ALLEGED AND NOR IS THERE ANY MATERIAL ON RECORD TO SUGGEST THAT THE ECONOMIC SUBSTANCE OF THE IMPUGNED TRANSACTION DIFFERS FROM ITS FORM. SECONDLY, THERE IS NO MATERIAL ON RECORD TO SUGGEST THAT 40 THERE IS AN ARRANGEMENT BETWEEN ASSESSEE AND THE AE MADE IN RELATION TO THE IMPUGNED TRANSACTION WHICH WOULD DI FFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MAN NER. WE SAY SO FOR THE REASON THAT THE ENTIRE GAMUT OF ROYALTY PAYMENT BY THE ASSESSEE TO THE AE IS IN TERMS OF THE FOREIGN TECHN OLOGY COLLABORATION AGREEMENT, WHICH IS DULY APPROVED BY GOVT. OF INDIA IN TERMS OF ITS POLICY, WHICH IS APPLICABLE A CROSS THE SPECTRUM. MOREOVER, IT IS NOT THE CASE OF THE TPO OR EVEN OF THE REVENUE BEFORE US THAT THE ROYALTY REMITTED BY THE ASSESSEE TO THE A.E HAS BEEN FOUND TO BE INCONSISTENT OR VIOLAT IVE OF THE RESPECTIVE GOVERNMENT OR RBI GUIDELINES OR ANY OTHE R AUTHORITY IN LAW. FURTHER, IN OUR CONSIDERED OPINION THE ROY ALTY PRESCRIBED UNDER FEMA ARE IRRELEVANT FOR TRANSFER PRICING PURP OSES. IN OTHER WORDS, MERELY BECAUSE A PAYMENT IS NOT RESTRICTED U NDER THE PROVISIONS OF FEMA, THE SAID PAYMENT CANNOT BE SAID TO BE AT ALP AND VICE VERSA. FOR THIS PURPOSE, THE RELIANCE PLACED BY THE LD. A.R IN THE FOLLOWING CASE LAW IS JUSTIFIED: I) ORACLE INDIA (P) LTD., VS. DCIT (386 ITR 1 (DELH I) ) II) GRUNER INDIA (P) LTD. VS. DCIT (ITA NO.6794/DEL HI/2015) 41 III) A.W.FABER CASTELL (INDIA) (P) LTD., VS. DCIT ( ITA NO.1027/MUM/2017) DATED 12.04.2017 ACCORDINGLY, THIS GROUND RAISED BY THE ASSESSEE IN BOTH THE APPEALS IS ALLOWED. 7. THE NEXT COMMON GROUND IN THESE APPEALS IS WITH REGARD TO DOWNWARD ADJUSTMENT ON ROYALTY PAYMENT TO A.E ON THE GROUND THAT NO ROYALTY IS ALLOWABLE ON TURNOVER PER TAINING TO DEVELOPMENT OF LAND, SUBSTATION DEVELOPMENT AND ERE CTION AND COMMISSIONING. 8. THE FACTS OF THE ISSUE ARE THAT FOR ERECTION AND COMMISSIONING OF WTG THE GAMESA-SPAIN PROVIDES HOW THE ERECTIONS ARE TO BE DONE AND NECESSARY STEPS FOR CO MMISSIONING IS PROVIDED IN THE WAY OF MANUAL. FURTHER, GAMESA- SPAIN HAS DEVELOPED SOFTWARE CALLED PRODUCT DATA MANAGEMENT ( PDM) A WEB BASED PORTAL, WHICH CONTAINS SUCH MANUALS FOR DEVELOPMENT, ERECTION AND COMMISSIONING. A GUIDE TO ACCESS OF THE PORTAL IS ATTACHED WHICH ENABLES THE USERS TO U SE SUCH MANUALS. THE TPO HELD THAT NO ROYALTY IS PAYABLE O N REVENUE PERTAINING TO DEVELOPMENT OF LAND, SUBSTATION DEVEL OPMENT AND 42 ERECTION AND COMMISSIONING. THE TPO HIMSELF HAS NO T DISPUTED THE FACT THAT SUCH ACTIVITIES REQUIRE TECHNOLOGY SU PPORT. THE ONLY CONTENTION RAISED BY THE TPO IS THAT SUCH ACTIVITIE S DO NOT REQUIRE ANY TECHNOLOGY, WHICH IS NOT AVAILABLE IN I NDIA. 9. THE LD. AR SUBMITTED THAT THE TPO IS NOT CORRECT IN HOLDING THAT NO TECHNOLOGY IS REQUIRED FOR ALLIED A CTIVITIES SUCH AS ERECTION AND COMMISSIONING, DEVELOPMENT ETC. DURIN G THE COURSE OF PROCEEDINGS BEFORE THE TPO AND DRP, THE A SSESSEE HAS CLEARLY EXPLAINED THE REASONS FOR REQUIREMENT O F TECHNOLOGY AT DIFFERENT STAGES INCLUDING DEVELOPMENT OF LAND, ERECTION AND COMMISSIONING. THE TPO OUGHT TO HAVE APPRECIATED T HAT WEG IS NOT A STANDARD PRODUCT TO BE MANUFACTURED BASED ON A TAILOR MADE TECHNOLOGY. IN OTHER WORDS, IT REQUIRES DETAIL ED EXAMINATION RIGHT FROM SOIL TESTING, EXAMINING THE APPROPRIATENESS OF WIND DIRECTION ETC. WHICH REQUIR ES CUMBERSOME TECHNOLOGY FAILURE OF WHICH THE ENTIRE P RODUCT WOULD BE OF NO USE TO THE CUSTOMERS. THEREFORE, THE ACTI ON OF THE TPO AND DRP IN HOLDING THAT NO ROYALTY IS REQUIRED ON A LLIED ACTIVITIES SUCH AS DEVELOPMENT OF LAND, ERECTION AND COMMISSIO NING ETC, IS NOT TENABLE ION THE FIRST PLACE. THE LD. AR FURTHE R SUBMITTED THAT 43 THE COPY OF SAMPLE REPORTS PROVIDED BY ITS AE IN RE LATION TO WIND FARM DEVELOPMENT AND SAMPLE MAIL CORRESPONDENCES EV IDENCING THE FACT THAT THE ASSESSEE HAS SOUGHT THE INPUTS FR OM ITS AE ARE ALSO PROVIDED. 10. THE LD. DRS SUBMITTED THAT THE ASSESSEE HAD CL AIMED ROYALTY ON SUBSTATION DEVELOPMENT CHARGES, DEVELOPM ENT REVENUES AND REVENUE ON ERECTION AND COMMISSIONING OF WIND TURBINE GENERATORS (WTGS). THIS ISSUE HAS BEEN DIS CUSSED IN PARA 9.7 TO 11.2 BY THE TPO, WHO HAS AFTER A PERUSA L OF THE AGREEMENTS RELATING TO THE ABOVE ACTIVITIES, HELD T HAT WHAT WAS BEING DONE UNDER THESE CATEGORIES DID NOT INVOLVE A NY TECHNOLOGY TRANSFER AND THAT A THIRD PARTY WOULD NO T HAVE AGREED TO PAY ROYALTY ON INCOME ARISING OUT OF COMMON INFR ASTRUCTURE ACTIVITIES WHICH DO NOT INVOLVE ANY ELEMENT OF TRAN SFER OF TECHNOLOGY. THIS HAS NOT BEEN COUNTERED BY THE ASS ESSEE. THIS ISSUE HAS BEEN DEALT BY THE DRP ALSO. 10.1 THE LD.D.R, DREW OUR ATTENTION TO THE RELEVA NT PART OF THE ORDER OF DRP FOR AY 2012-13 WHICH IS REPRODUCED AS FOLLOWS: ON THE ISSUE OF ROYALTY, THE TPO EXAMINED THE TECH NOLOGY TRANSFER AGREEMENTS BETWEEN THE ASSESSEE AND ITS AE AND FOUN D THAT THE ASSESSEE HAD NOT BEEN CALCULATING ROYALTY IN A MANNER, WHICH A P ERSON AT ARMS LENGTH WOULD 44 HAVE DONE. THE ROYALTY WAS BEING PAID EVEN ON READY MADE COMPONENTS BOUGHT BY THE ASSESSEE FROM ITS AB AND FOR WHICH PRICE HAD SEPARATELY BEEN PAID BY IT. THE TPO HAS ALSO REFERRED TO THE NOTE FOR GUIDANCE OF ENTREPRENEURS FOR FOREIGN AND TECHNOLOGY TRANSFER UNDER AUTOMATIC ROUTE OF RB I AND THE STANDARD CONDITIONS ATTACHED TO AUTOMATIC APPROVAL FOR FOREI GN INVESTRNENT TECHNOLOGY AGREEMENTS INCLUDED IN THE SAID NOTE THE RELEVANT PART OF THE SAME IS REPRODUCED AS FOLLOWS 2. (A) THE ROYALTY WILL BE CALCULATED ON THE BASIS OF THE NET EX-FACTORY SALE PRICE OF THE PRODUCT, EXCLUSIVE OF EXCISE DUTIES, MINUS T HE COST OF THE STANDARD BOUGHT- OUT COMPONENTS AND THE LANDED COST OF IMPORTED COMP ONENTS, IRRESPECTIVE OF THE SOURCE OF PROCUREMENT INCLUDING OCEAN FREIGHT INSUR ANCE, CUSTOM DUTIES, ETC. THE PAYMENT OF ROYALTY WILL BE RESTRICTED TO THE LI CENSED CAPACITY PLUS 25% IN EXCESS THEREOF FOR SUCH ITEMS REQUIRING INDUSTRIAL LICENCE OR ON SUCH CAPACITY AS SPECIFIED IN THE APPROVAL LETTER. THIS RESTRICTION WILL NOT APPLY TO ITEMS NOT REQUIRING INDUSTRIAL LICENCE. IN CASE OF PRODUCTION IN EXCESS OF THIS QUANTUM, PRIOR APPROVAL OF GOVERNMENT WOULD HAVE TO BE OBTAINED RE GARDING THE TERMS OF PAYMENT OF ROYALTY IN RESPECT OF SUCH EXCESS PRODUC TION. (B) THE ROYALTY WOULD NOT BE PAYABLE BEYOND THE PER IOD OF THE AGREEMENT F THE ORDERS HAD NOT BEEN EXECUTED DURING THE PERIOD OF A GREEMENT. HOWEVER, WHERE THE ORDERS THEMSELVES LOOK A LONG TIME TO EXECUTE, THEN THE ROYALLY FOR AN ORDER BOOKED DURING THE PERIOD OF AGREEMENT, BUT EXECUTED AFTER THE PERIOD OF AGREEMENT, WOULD BE PAYABLE ONLY AFTER A CHARTERED ACCOUNTANT CERTIFIES THAT THE ORDERS IN FACT HAVE BEEN FIRMLY BOOKED AND EXEC UTION BEGAN DURING THE PERIOD OF AGREEMENT AND THE TECHNICAL ASSISTANCE WA S AVAILABLE ON A CONTINUING BASIS EVEN AFTER THE PERIOD OF AGREEMENT (C) NO MINIMUM GUARANTEED ROYALTY WOULD BE ALLOWED. 3. THE LUMP SUM SHALL BE PAID IN THREE INSTALLMENTS AS DETAILED BELOW, UNLESS OTHERWISE STIPULATED IN THE APPROVAL LETTER:- FIRST 1/3 RD AFTER THE APPROVAL FOR COLLABORATION P ROPOSAL IS OBTAINED FROM THE RESERVE BANK OF INDIA AND COLLABORATION AGREEMENT I S FILED WITH THE AUTHORIZED DEALER IN FOREIGN EXCHANGE. SECOND 1/3RD ON DELIVERY OF KNOW-HOW DOCUMENTATION . 45 THIRD AND FINAL 1/3RD ON COMMENCEMENT OF COMMERCIAL PRODUCTION, OR FOUR YEARS AFTER THE PROPOSAL IS APPROVED BY THE RESERVE BANK OF INDIA AND AGREEMENT IS FILED WITH THE AUTHORISED DEALER IN FOREIGN EXCHANG E, WHICHEVER IS EARLIER. 3.2 THUS THE ROYALTY WAS REQUIRED TO BE CALCULATED BY THE ASSESSEE ON THE BASIS OF THE NET EX-FACTORY SALE PRICE OF THE PRODUCT, EX CLUSIVE OF EXCISE DUTIES, MINUS THE COST OF THE STANDARD BOUGHT-OUT COMPONENTS AND THE LANDED COST OF IMPORTED COMPONENTS, IRRESPECTIVE OF THE SOURCE OF PROCUREME NT, INCLUDING OCEAN FREIGHT, INSURANCE, CUSTOM DUTIES, ETC. HOWEVER, THE ASSESSE E HAS NOT DONE SO. THE ASSESSEE HAS CLAIMED THAT THE ABOVE CONDITIONS NO L ONGER APPLY AFTER THE ISSUE OF RBI CIRCULAR RBI/2009-10/465 A.P (DIR SERIES) CI RCULAR NO.52 DATED 13 TH MAY 2010 LIBERALIZING ROYALTY PAYMENT UNDER TECHNOL OGY COLLABORATION AGREEMENTS. HOWEVER, THIS ARGUMENT OF THE ASSESSEE DOES NOT HAVE ANY MERIT. THESE CONDITIONS ARE STILL APPLICABLE. FURTHER, SUC H CONDITIONS ALSO GIVE A METHOD REGARDING CALCULATION OF THE AMOUNT OF ROYAL TY TO BE PAID TO A FOREIGN ENTITY. THE METHOD IS A GOOD GUIDELINE FOR DETERMIN ATION OF ARMS LENGTH PAYMENT OF ROYALTY BETWEEN TWO UNRELATED PARTIES. C ONSIDERING ABOVE THERE IS MERIT IN THE DOWNWARD ADJUSTMENT AS DONE BY THE TPO BY EXCLUDING BOUGHT OUT COMPONENTS FOR THE PURPOSES OF CALCULATION OF ROYAL TY. THE OBJECTION OF THE ASSESSEE ON THIS ISSUE IS THUS NOT ACCEPTED. 3.3 THE NEXT OBJECTION OF THE ASSESSEE IS IN RELAT ION TO THE ADJUSTMENT DONE BY THE TPO BY CONSIDERING THAT ROYALTY IS NOT TO BE PAID ON REVENUE FROM ERECTION AND COMMISSIONING AND DEVELOPMENT OF LAND. THE ASSESSEE HAS MADE DETAILED SUBMISSIONS ON THESE ISSUES. THE SUBMISSIO NS OF THE ASSESSEE HAVE DULY BEEN CONSIDERED. THE ISSUE HAS BEEN DISCUSSED BY TPO IN PARA 12 AND 13 OF HIS ORDER. THE ISSUE HAS DULY BEEN CONFRONTED TO THE ASSESSEE BY THE TPO AND THE OBJECTIONS OF THE ASSESSEE HAVE BEEN DEALT IN DETAIL IN THE ORDER. THE TPO HAS EXAMINED THE AGREEMENT BETWEEN THE ASSESSEE AND ITS CUSTOMERS TO BRING OUT AS TO HOW THE WORK PERFORMED BY THE ASSES SEE DID NOT REQUIRE USE OF ANY SPECIAL TECHNOLOGY, FOR WHICH THE PAYMENT OF RO YALTY COULD BE CONSIDERED. THE ASSESSEE HAS PUT UNNECESSARILY STRESS ON THE WO RDS MANUFACTURE, SELL, INSTALL & COMMISSION AND CARRY OUT O&M ACTIVITIES A ND USE ALL TECHNICAL DOCUMENTS, DRAWINGS, TYPE CERTIFICATES IN ITS AGRE EMENT WITH AB, FOR CLAIMING 46 THAT THE ROYALTY IS MEANT FOR INSTALL & COMMISSION TECHNOLOGY ALSO. HOWEVER, THE OBSERVATION OF THE TPO THAT THESE WORDS HAVE BE EN USED IN GENERIC SENSE ONLY AND ARE MEANT TO INDICATE THE ACTIVITIES THAT WOULD FOLLOW THE TRANSFER OF TECHNOLOGY, DESERVE SPECIAL CONSIDERATION E.G. THE WORDS INCLUDE SELL HOWEVER THE ASSESSEE HAS NOT REPLIED AS TO HOW THE TRANSFER OF TECHNOLOGY WAS LINKED TO THE SALE OF ITS PRODUCTS AND HOW THE SAME HAS BEEN USED BY IT FOR SALE OF ITS PRODUCTS. SIMILARLY, HOW SEPARATE TECHNOLOGY FOR O& M ACTIVITIES IS REQUIRED WHEN THE ASSESSEE HAS ALREADY GOT THE ENTIRE TECHNOLOGY FOR THE MANUFACTURE OF THE PRODUCT. THE ASSESSEE HAS NOT EXPLAINED AS TO HOW T HE TECHNOLOGY COULD HAVE BEEN TRANSFERRED WITHOUT TECHNICAL DOCUMENTS, DRAWI NGS, TYPE CERTIFICATES ETC. SO RELIANCE OF THE ASSESSEE ON THESE WORDS IN THE A GREEMENT TO SUPPORT ITS CLAIM, IS TOTALLY MISPLACED. THE ACTION OF THE TPO IS FOUND TO BE CORRECT AND THE OBJECTION OF THE ASSESSEE ON THIS ISSUE IS NOT ACCE PTED. 10.2 FURTHER, LD.D.R SUBMITTED THAT DURING THE YE AR UNDER CONSIDERATION, THE ISSUES REGARDING ROYALTY PAYMENT ON BOUGHT OUT COMPONENTS, ROYALTY ON SUBSTATION DEVELOPMENT C HARGES, ROYALTY ON DEVELOPMENT REVENUE AND ROYALTY ON ERECT ION & COMMISSION CHARGES REMAIN SAME AS FOR THE AY 2012-1 3. SINCE THE FACTS REMAIN THE SAME, THERE IS NO REASON TO DIFFER WITH THE ORDER ON THE SAME ISSUES FOR AY 2012-13 AN D THE DRP CONCURS WITH THE REASONING GIVEN BY THE DRP FOR AY 2012-13 FOR REJECTING THE OBJECTIONS OF THE ASSESSEE. IN AD DITION TO THE REASONING OF DRP FOR AY 2012-13, AS REGARDS THE ISS UE OF ROYALTY PAYMENT ON BOUGHT OUT COMPONENTS, THE ASSES SEE WAS ASKED (ORDER SHEET ENTRY 23.02.2017) BY THE PAN EL TO 47 EXPLAIN AS TO WHETHER ANY ROYALTY IS PAID BY THE VA RIOUS GROUP COMPANIES TO GAMESHA INNOVATION & TECH (GIT), THE O WNER OF IPR, AS SUCH COMPANIES WERE USING THE TECHNOLOGY OW NED BY GIT IN THE PROCESS OF MANUFACTURING THE COMPONENT B EING SUPPLIED TO THE ASSESSEE. ACCORDING TO LD.D.R, IN THE WRITTEN SUBMISSIONS DATED 15.03.2017, THE ASSESSEE SUBMITTE D THAT AS PER ITS GROUP POLICY, THE ROYALTY IS NOT REQUIRED T O BE PAID IF SALES ARE MADE TO THE GROUP COMPANIES AND SAME IS C HARGED ONLY WHEN THE SALES ARE MADE TO THE OUTSIDE PARTIES . TO SUPPORT ITS CLAIM THE ASSESSEE PRODUCED COPY OF SOM E SELECTED PAGES OF A DOCUMENT TITLED GAMESHA GROUP TRANSFER PRIING-2014 AND THE FOLLOWING YEARS BEFORE DRP. TH IS DOCUMENT, AS THE TITLE SUGGESTS, IS NOT RELEVANT FO R THE YEAR UNDER CONSIDERATION I.E. F.Y. 2010-11. THE ASSESSEE COULD NOT EXPLAIN AS TO HOW THIS DOCUMENT WAS RELEVANT FOR TH E YEAR UNDER CONSIDERATION AND WHY IT COULD NOT PRODUCE TH E COMPLETE SET OF THE RELEVANT DOCUMENTS. SO NO COGNIZANCE CAN BE TAKEN OF THIS DOCUMENT. FURTHER, NO OTHER DOCUMENTS WERE PRODUCED BY THE ASSESSEE TO SUBSTANTIATE ITS CLAIM THAT GIT WAS NOT CHARGING ANY ROYALTY FROM THE COMPANYS MANUFACTURI NG THE 48 COMPONENTS. IF IT IS CONSIDERED THE CONCEPT OF ARM S LENGTH PRICE, GIT WOULD BE CHARGING ROYALTY FROM THE MANUF ACTURERS UTILIZING ITS TECHNOLOGY AND THE SELLING PRICE OF T HESE MANUFACTURERS (WHICH IS COST PRICE OF THE COMPONENT S FOR THE ASSESSEE) WILL ALREADY BE LOADED WITH COST RELATED TO ROYALTY. SO IN AN ARMS LENGTH SCENARIO: PAYMENT OF ROYALTY ON BOUGHT OUT COMPONENTS WOULD NOT MAKE ANY BUSINESS LOGIC OT HER THAN UNDULY BENEFITTING THE AE. IN FACT, EVEN AS PER THE AGREEMENT BETWEEN THE ASSESSEE AND GIT, THE ROYALTY IS TO BE PAID TO MANUFACTURE, SELL, INSTALL & COMMISSIONING AND CARR Y OUT O&M ACTIVITIES, HOWEVER THE BOUGHT-OUT COMPONENTS ARE NOT AT ALL MANUFACTURED, BUT THE SAME ARE JUST PURCHASED AND T HEN SOLD. SO THE ISSUE OF PAYMENT OF ROYALTY ON THE SAME WOUL D NOT ARISE EVEN AS PER TERMS OF THE AGREEMENT. THE ASSESSEE HA S MADE REQUEST FOR ADMISSION OF CERTAIN ADDITIONAL EVIDENC ES BEFORE THIS PANEL. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE CLAIMED ROYALTY OF 4% ON RE VENUE GENERATED FROM ERECTED AND COMMISSION, WHICH WORKED OUT AT ` 2,96,65,850/- FOR ASSESSMENT YEAR 2011-12 AND A SUM OF 49 ` 5,98,47,389/- FOR ASSESSMENT YEAR 2012-13. THE LD. ASSESSING OFFICER AFTER GOING THROUGH THE AGREEMENT ENTERED I NTO BY THE ASSESSEE WITH THE CUSTOMER IN THIS RESPECT AND SCOP E OF WORK AGREED TO PERFORM BY THE ASSESSEE TO ITS CUSTOMERS, WAS OF THE OPINION THAT IT DOES NOT INVOLVE ANY APPLICATION OF TECHNOLOGY TRANSFERRED TO THE ASSESSEE BY THE AE FOR WHICH THE ASSESSEE IS DEPENDING ON THE AE AS PART OF THE TECHNOLOGY TRANS FER AGREEMENT. THEREFORE, THE CLAIM OF ARMS LENGTH PR ICE ON ROYALTY CLAIMED ON DEVELOPMENT OF REVENUE WAS DETERMINED AS NIL. BEFORE US, THE ASSESSEE EXPLAINED THE ACTIVITIES, W HICH INVOLVED HIGH DEGREE OF EXPERTISE AND CANNOT BE UNDERTAKEN D IRECTLY BY SEMI-SKILLED OR UNSKILLED WORKMEN, WHICH IS AS FOLL OWS:- WIND FARM DEVELOPMENT ERECTION & COMMISSIONING ENVIRONMENTAL SUSTAINABILITY - VISUAL ASPECTS - ECOLOGY/ARCHITECTURAL PROTECTION - PROVIDING GUIDELINES TO USE TOOLS - VALIDATION OF FOUNDATION DESIGNS - TRAINING TOPERSONNEL OF GAMESA INDIA AT THE TIME OF DEVELOPMENT OF NEW PROTOTYPES. - SUPERVISORY CONTROL AND DATA ACQUISITION (SCADA) FOR MONITORING WTG THROUGHOUT THE YEAR ON REMOTE BASIS. PROCESS EXPLAINED IN DETAIL IN PAGE 425 TO 428 OF PAPER BOOK VOLUME-2 TECHNICAL SUSTAINABILITY - WIND SPEED - -GRID CONNECTION - -PROVIDING DRAWINGS AND DESIGN - PROFESSIONAL SUPPORT -CONCEPTUAL DESIGN -DESIGN VERIFICTION -PROCESS VALIDATION 50 - WIND MEASUREMENT AND ASSESSMENT NATURE OF SERVICES RENDERED BY GAMESA SPAIN. ERECTIONS : FOR ERECTION WTC, ALL THE TECHNICAL SUPPORT FOR CRA NE CAPACITY AND ERECTION PROCEDURE AND SAFETY PROCEDURES, VALID ATING THE SITE CONDITIONS ARE PROVIDED. TOOLS FOR ERECTION THE GUIDELINES TO USE ERECTING TOOLS A RE PROVIDED AND THE NECESSARY VALIDATION OF SUCH TOOLS ARE DONE BY GCT.TRAINING ALL NECESSARY TRAINING AT THE TIME OF DEVELOPMENT O F NEW PROTOTYPE. TRANSPORTATION MOVING BLADE FROM FACTORY TO THE WORK SITE IS A DIF FICULT JOB OWING TO THE BULK NATURE OF BLADES. THE WIND FARMS ARE GE NERALLY LOCATED IN HILLY AREAS WHICH WARRANT CONSTRUCTING P ROPER APPROACH ROADS WITH CURVATURE. THE NEEDED TECHNICAL SUPPORT FOR BUILDING APPROACH ROADS IS PROVIDED. SCDA SUPERVISORY CONTROL AND DATA ACQUISITION (SCDA) IS THE REMOTE MONITORING EQUIPMENT OF WIND TURBINES; IT HELPS TO MONITOR THE 51 WTC ALL THROUGHOUT THE YEAR. THE NECESSARY SOFTWARE TRAINING ON HOW TO MAINTAIN THE EQUIPMENT ARE PROVIDED BY GAMES A-SPAIN. WTG MANUFACTURING & ERECTION & COMMISSIONING ALL NECESSARY DRAWING AND REQUIRED PART ARE PROVIDE D BY GIT WITH THE COMMON TOOL OF PDM THE NECESSARY DOCUM ENT IS ATTACHED HEREWITH. ERECTION & COMMISSIONING:- FOUNDATION VALIDATION OF FOUNDATION DESIGNS ARE DONE BY GIT. EACH AND EVERY CHANGE IN TYPE OF WIND TURBINES REQU IRES NECESSARY CHANGES ACCORDING TO DIFFERENT FOUNDATION S WHICH ARE BASED THE BEARING CAPACITY OF SOIL. THE NECESSARY B ASE DRAWINGS ARE APPROVED THROUGH ENGINEERING DEPARTMENT. THE NE CESSARY STANDARD DETAILS ARE TO BE PROVIDED FOR THE SAME BY GAMESA- SPAIN. SUGGESTING TYPE OF FOUNDATIONS BASED ON THE SITE CONDITIONS. PROBLEMS SOLVING DURING CONSTRUCTION AS NECESSARY AN EXTRACT FROM THE EXECUTION AND QUALITY CONTROL M ANUAL IS GIVEN BELOW GAMESA INSTRUCTION EXECUTION AND QUALITY CONTROL FOR WIND TURBINE FOUNDATIONS CODE: ICA-1-011 PREVIOUS CODE: VERSION:1 DATE:03/06/2011 LANGUAGE : EN SECURITY : PUBLIC PAGE :1 OF 37 52 CLASSIFICATION THE AIM IS TO DEFINE THE CONTROL ACTIVITIES FOR THE DESIGN AND VALIDATION OF FOUNDATIONS AND TO DEVELOP, IN DETAIL , THE ACTIVITIES TO BE CARRIED OUT FOR THE EXECUTION O THE SLAB OR PILE CAP AT THE WIND FARM. THIS INSTRUCTION APPLIES TO ALL SHALLOW OR DE EP FOUNDATIONS WITH PILES IN SITU OR MICORPILES OF GAMESA 850 DW A ND GAMESA 2.0 MW STANDARD TYPE WIND TURBINES (WITH WELDED FOU NDATION SECTION) AND FOR THOSE IN WHICH THE FARM IS SUPPLIE D CONCRETE FROM A FACTORY. CONSTRUCTION OPERATIONS: ERECTING WIND TURBINES REQUIRES THE EFFORTS OF MANY SKILLED CONSTRUCTION WORKERS. THE WORK BEGINS BEFORE THE T URBINE COMPONENTS ARRIVE ON SITE: CONSTRUCTION LABORERS AN D CONSTRUCTION EQUIPMENT OPERATORS ARE RESPONSIBLE FO R BUILDING LOCAL ACCESS ROADS AND THE FOUNDATIONS THAT SUPPORT THE TURBINES. BASED ON THE EXPERIENCE GAMESA SPAIN PROVIDE KNOW-H OW ON, HOW TO BUILD THE ACCESS ROADS, TRANSPORT THE WIND T URBINE BLADES ACROSS REMOTE PLACES WHICH MORE CHALLENGING. THEY A LSO PROVIDE THE TECHNICAL FEASIBILITY TO APPROACH THE SITE. 53 AFTER THE TURBINE COMPONENTS ARRIVE, CRANE OPERATOR S SET THE FIRST TOWER SEGMENT VERTICALLY ONTO THE GROUND, WHERE OTH ER WORKERS SECURE IT TO THE FOUNDATION. THE REMAINING TOWER SE GMENTS ARE THEN STACKED ATOP ONE ANOTHER AND FASTENED TOGETHER . WHEN THE TOWER HAS BEEN ERECTED, CRANE OPERATORS CAREFULLY L IFT THE NACELLE AND THE BLADES. THE NACELLE IS PLACED ON THE TOP OF THE TOWER AND THE BLADES ARE ATTACHED TO THE TURBINES HUB. CONSTRUCTION LABOURERS OFTEN WORK ON WIND FARMS AS CONTRACTORS AND ARE RESPONSIBLE FOR PREPARING THE SITE AND BUIL DING THE SURROUNDING INFRASTRUCTURE. THEIR WORK INCLUDES CLE ARING TRESS AND DEBRIS FROM THE WIND FARM, CLEANING MACHINES, AND H ELPING TO BREAK UP THE GROUND ON WHICH THE TURBINE WILL REST. CONSTRUCTION WORKERS EMPLOYED BY COMPANIES THAT SPECIALIZE IN DEVELOPING WIND FARMS ARE SOMETIMES IN SUPERVISORY ROLES. THEY MIGHT WORK UNDER THE PROJECT MANAGER TO DIRECT LOCA L CONTRACTORS AND CONFIRM THAT ALL ON-SITE WORK IS PERFORMED SAFE LY AND CORRECTLY. THESE WORKERS MIGHT ALSO BE TRAINED AS W IND TURBINE SERVICE TECHNICIANS. CONSTRUCTION EQUIPMENT OPERATORS , WITH THE HELP OF CONSTRUCTION LABORERS, ARE RESPONSIBLE FOR BUILDING ACCESSIBLE R OADS DIRECTLY TO 54 THE CONSTRUCTION SITE, HELPING ENSURE THAT THE WIND TURBINE COMPONENTS CAN ARRIVE WITHOUT DAMAGE OR DELAY. THEY USE BULLDOZERS, ROAD GRADERS AND OTHER EQUIPMENT TO SET UP THE CONSTRUCTION SITE. CRANE OPERATORS ARE NECESSARY IN BUILDING A WIND FARM BECAUSE THE COMPONENTS ARE SO LARGE. THEY USE THEIR CRANES TO LIFT THE PIECES OF THE TURBINE OFF THE TRUCKS AS THEY ARRIVE . CRANE OPERATORS ARE INTEGRAL TO THE ACTUAL CONSTRUCTION J OB, AS WELL. FOR EXAMPLE, THEY OPERATE CRANES TO STACK THE TOWER SEG MENTS AND LIFE THE BLADES TO THE HUB. ELECTRICIANS ARE NEEDED TO GET THE ENERGY FROM THE TURBINES GENERATOR TO THE POWER GRID ON THE GROUND. THEY WIR E THE TURBINE TO CONNECT ITS ELECTRICAL SYSTEM TO THE POWER GRID. WHEN INSTALLING WIRING, ELECTRICIANS USE HAND TOOLS SUCH CONDUIT BENDERS, SCREWDRIVERS, PLIERS, KNIVES, AND WIRE STR IPPERS, AS WELL AS POWER TOOLS SUCH AS DRILLS AND SAWS. SUPPORT OF GAMESA- SPAIN ENTITIES IS DRAWN IN ALL THE ABOVE ASPECTS OF OPERATIONS. EDUCATION ANDTRAINING : ALTHOUGH SOME CONSTRUCTION LABOURER JOBS HAVE NO SP ECIFIC EDUCATION OR TRAINING REQUIREMENTS, SOME CONSTRUCTI ON WORKERS 55 RECEIVE MORE FORMAL TRAINING IN THE FORM OF APPRENT ICESHIPS. THESE PROGRAMS CONSIST OF SEVERAL YEARS OF CLASSROO M AND ON THE JOB TRAINING. HIGH SCHOOL CLASSES IN ENGLISH, M ATHEMATICS, PHYSICS, MECHANICAL DRAWING, BLUEPRINT READING, WEL DING AND GENERAL SHOP CAN BE HELPFUL TO PREPARE FOR THE APPR ENTICESHIPS. MANY CONSTRUCTION LABOURERS SKILLS ARE LEARNED ON THE JOB AND BY ASSISTING MORE EXPERIENCED WORKERS. LOCAL CONTRACTORS MAY OR MAY NOT HAVE WORKED WITH WIND TURBINES BEFORE. HOWEVER, CONSTRUCTION WORKERS AND WIND TURBINE SERVICE TECHNICIANS EMPLOYED BY COMPANIES SPECIALIZ ING IN WIND FARM DEVELOPMENT HANDLE THE MORE TECHNICAL OPERATIO NS AND USUALLY HAVE EXTENSIVE EXPERIENCE IN THE WIND INDUS TRY. CONSTRUCTION EQUIPMENT OPERATORS AND CRANE OPERATORS LEARN THEIR SKILLS THROUGH ON-THE-JOB TRAINING, APPRENTIC ESHIPS, OR, FOR SOME, UNION INSTRUCTION. IN ADDITION, THE OPERATORS ARE EXPECTED TO BE CERTIFIED TO OPERATE THEIR EQUIPMENT. CRANE O PERATORS NEED TO BE HIGHLY SKILLED, ESPECIALLY WHEN HANDLING LARG E, EXPENSIVE CARGO LIKE WIND TURBINE COMPONENTS. MOST ELECTRICI ANS LEARN THEIR TRADE THROUGH APPRENTICESHIP PROGRAMS THAT COMBINE ON-THE- JOB TRAINING WITH RELATED CLASSROOM INSTRUCTION. APPREN TICESHIP 56 PROGRAMS USUALLY LAST 4 YEARS, AND, IN THEM, ELECTR ICIANS LEARN SKILLS SUCH AS ELECTRICAL THEORY, BLUEPRINT READING , ELECTRICAL CODE REQUIREMENTS, AND SOLDERING. DEPENDING ON THE STATE , ELECTRICIANS MIGHT HAVE TO PASS AN EXAMINATION THAT TESTS THEIR KNOWLEDGE OF ELECTRICAL THEORY, THE NATIONAL ELECTR ICAL CODE, AND LOCAL AND STATE ELECTRICAL AND BUILDING CODES. FOR THIS CONNECTION GAMESA SPAIN EMPOWERS THE COMPANY TO ABLE TO CONDU CT TRAINING PROGRAMS FOR THEIR EMPLOYEES AS WELL AS CO NTRACTORS, SO THAT SKILLED WORK FORCE IS AVAILABLE TO THEM. PROJECT MANAGERS IT TAKES A LARGE NUMBER OF PEOPLE TO BUILD A WIND F ARM, AND MANAGING THE PROJECT CAN BE A DIFFICULT TASK. PROJE CT MANAGERS OVERSEE THE CONSTRUCTION OF THE WIND FARM FROM SITE SELECTION TO THE FINAL INSTALLATION OF TURBINES. A PROJECT MANAG ER WILL OVERSEE A DIVERSE TEAM, INCLUDING ENGINEERS, CONSTRUCTION WOR KERS, TRUCK DRIVERS, CRANE OPERATORS, AND WIND TECHNICIANS. PRO JECT MANAGERS MUST HAVE EXCELLENT ATTENTION TO DETAIL AND BE GOOD AT TIME AND RESOURCE MANAGEMENT. PROJECT MANAGERS USUALLY HAVE EXPERIENCE IN CONSTRU CTION AND MANAGEMENT OR IN ENGINEERING. THEY MUST BE FAMILIAR WITH ALL 57 ASPECTS OF WIND FARM DEVELOPMENT: FROM BUDGETING, S ITE SELECTION, SITE STUDIES, AND PERMITTING PROCESSES A ND SAFETY POLICIES TO CONSTRUCTION AND TRANSPORTATION OF WIND TURBINES. PROJECT MANAGERS ARE EMPLOYED BY LARGER CONSTRUCTIO N COMPANIES, ENERGY COMPANIES, OR LAND OWNERS AND WOR K UNDER CONTRACT OR AS SALARIED EMPLOYEES. BECAUSE OF THE S IZE AND COMPLEXITY OF SOME WIND FARMS, PROJECT MANAGERS MAY MANAGE PORTIONS OF THE CONSTRUCTION, SUCH AS SITE CLEARING , FOUNDATION CONSTRUCTION, OR TOWER ERECTION THESE MANAGERS REPO RT TO A SENIOR PROJECT MANAGER OR SITE MANAGER. PROJECT MANAGERS SPLIT THEIR TIME BETWEEN THE WIND FARM SITE AND THEIR OFFICE, WHICH MAY BE LOCATED ONSITE OR OFFSIT E. PRIMARY OFFICE RESPONSIBILITIES INCLUDE MANAGING PERMITTING, CONTR ACTING, AND THE BUDGET. AT THE CONSTRUCTION SITE, THE PROJECT MANAG ER MONITORS PROGRESS AND PERFORMS INSPECTIONS FOR QUALITY CONTR OL. PROJECT MANAGERS OVERSEE THE CONTRACTING PROCESS AND MANAGE VARIOUS CONTRACTORS AND SUBCONTRACTORS. THEY ARE RESPONSIBL E FOR PROMOTING A SAFE WORK ENVIRONMENT AND ENSURING STRI CT ADHERENCE TO SITE SAFETY POLICIES. EDUCATION AND TRAINING 58 EXPERIENCE IN CONSTRUCTION, PARTICULARLY WIND FARM CONSTRUCTION, IS VITAL FOR PROJECT MANAGERS. MOST MANAGERS HAVE EXPE RIENCE WORKING ON SEVERAL WIND FARM PROJECTS BEFORE THEY A RE SELECTED TO MANAGE ONE. EDUCATION IS BECOMING IMPORTANT, AND MOST PROJECT MANAGERS HOLD A BACHELORS DEGREE OR HIGHER IN CONSTRUCTION MANAGEMENT, BUSINESS MANAGEMENT, OR ENGINEERING. ADVANCED DEGREES, SUCH AS AN MBA, ARE BECOMING MORE COMMON. BECAUSE EXPERIENCE IS SO IMPORTANT FOR THESE POSITIONS, YEARS OF EXPERIENCE MAY SUBSTITUTE FOR S OME EDUCATIONAL REQUIREMENTS. HOWEVER, THIS IS BECOMING INCREASINGLY RARE, AS PROJECTS GROW MORE COMPLEX AN D EMPLOYERS PLACE MORE EMPHASIS ON SPECIALIZED EDUCATION. NEW G RADUATES FROM CONSTRUCTION MANAGEMENT OR ENGINEERING PROGRAM S MAY BE HIRED AS ASSISTANTS TO PROJECT MANAGERS TO GAIN EXP ERIENCE. TOWARDS EMPOWERING THE PROJECT MANAGERS, GAMESA-SPA IN HELPS THE COMPANY IN PROVIDING SUITABLE TRAINING TO THE STAFF. GAMESA GUIDELINE SHORT CIRCUIT CLACULATIONS CODE: GDE-TEC-004 PREVIOUS CODE: N/A EDITION:1 DATE:14/02/2012 LANGUAGE : SECURITY : PUBLIC RATING PAGE :1 OF 133 59 THE ABOVE GUIDELINES ARE EXPLAINING HOW TO PROCEED WITH THE CALCULATIONS OF SHORT-CIRCUITS CURRENTS AND ITS CON NECTION WITH CABLE SIZING AND PROTECTIVE DEVICES SIZING DOCUMENT S. IT IS IMPORTANT TO KNOW THE CORRECT APPLICATION OF THE VA RIOUS SHORT- CIRCUIT RATINGS BY THE CIRCUIT DESIGNER, IN ORDER T O AVOID LEAVING A CIRCUIT OR EQUIPMENT WITH INADEQUATE CABLE SIZE OR OVER-CURRENT PROTECTION DEVICE. THIS GUIDELINE ANALYSES THE CALC ULATION METHOD DESCRIBED IN THE IEC 60909 STANDARD AND IS C OMPARED WITH THE PROCEDURES DESCRIBED IN IEC 61363-1. THIS GUIDE IS DIRECTLY LINKED WITH ETAP TO LET THE DESIGNER A MOR E PRACTICAL VIEW OF THE DESIGN. GAMESA GUIDELINE CABLE SIZING GUIDELINE CODE: GDE-TEC-002 PREVIOUS CODE: N/A EDITION:1 DATE:14/02/2012 LANGUAGE : SECURITY : PUBLIC RATING PAGE :1 OF 57 THE AIM OF THIS DOCUMENT IS TO WRITE DOWN A GUIDELI NE FOR SIZING THE FOLLOWING CABLE TYPES : POWER MEDIUM VOLTAGE, POWER LOW VOLTAGE, AND SUPPLY LOW VOLTAGE CABLES, CONSIDERING THE CORRESPONDING IEC A ND NEC STANDARDS. ADDITIONALLY, A DETAIL STUDY ABOUT HOW T O PROCEED WITH CABLE SIZING IN ETAP SOFTWARE IS WRITTEN DOWN. THE 60 LIMITATIONS OF THE SOFTWARE ARE EXPLAINED AS WELL A S THE PROCEDURE OF SIZING ALL THE CABLES. USAGE OF SCADA SCADA IS THE EQUIPMENT WHICH WILL MONITOR THE EACH AND E VERY WIND TURBINE FROM THE NECESSARY TRAINING FOR SOFTWA RE USAGE AND EQUIPMENT HANDLING ARE PROVIDED BY THEM. 11.1 IT IS BROUGHT TO OUR NOTICE THAT THE TPO HIMSE LF HAS AGREED THAT SUCH ACTIVITIES REQUIRED TECHNOLOGY SUPPORT. T HE ONLY CONTENTION RAISED BY THE TPO IS THAT SUCH ACTIVITY DID NOT REQUIRE ANY TECHNOLOGY, WHICH IS AVAILABLE IN INDIA. IN OTH ER WORDS, THE CONTENTION OF THE TPO IS THAT REQUIRED TECHNOLOGY F OR THIS ACTIVITY IS AVAILABLE IN INDIA. IN OUR OPINION, IT IS NOT TH E PREROGATIVE OF TPO TO DECIDE WHETHER THE ASSESSEE SHOULD HAVE USED THE TECHNOLOGY PROVIDED BY ITS AE OR NOT. IT IS TO BE NOTED THAT ASSESSEE DEVELOPED WIND FARMS, INSTALLED AND COMMIS SIONED WGS ON THE BASIS OF INPUT PROVIDED BY ITS AE. THE AE HAS VAST EXPERIENCE IN IMPLEMENTING SUCH PROJECTS ACROSS GLO BAL AND THEREFORE, THE ASSESSEE OBTAINED EXPERTISE KNOWLEDG E FROM AE IN ORDER TO ENSURE BETTER QUALITY TO ITS CUSTOMERS. IN OUR OPINION, THE TPO CANNOT QUESTION COMMERCIAL EXPEDIENCY OF IN CURRING 61 ANY EXPENDITURE BY THE ASSESSEE AS HELD BY THE FOLL OWING JUDGMENTS:- A) IN THE CASE OF HIVE COMMUNICATION (P) LTD., VS. CIT IN 353 ITR 200(DELHI) B) IN THE CASE OF CIT VS. EKL APPLIANCES LTD. IN 34 5 ITR 241(DELHI) C) IN THE CASE OF CIT VS. COMPUTER GRAPHIC LTD. IN 155 TAXMAN 612 (MAD.) 11.2 FURTHER, ONCE THE TNMM HAS BEEN APPLIED FO R THE TRANSACTION AND IT COVERED UNDER ITS AMBIT THE ROYA LTY TRANSACTION IN QUESTION. A SEPARATE ANALYSIS AND CONSEQUENT DEL ETION OF ROYALTY PAYMENT IS UNWARRANTED. PLACING RELIANCE I N THE CASE OF MAGNETI MARELLI POWERTRAIN INDIA (P) LTD., VS, DCIT WHEREIN HELD THAT:- 17. AS FAR AS THE SECOND QUESTION IS CONCERNED, THE TPO ACCEPTED TNMM APPLIED BY THE ASSESSEE, AS THE MOST APPROPRIATE METHOD IN RESPECT OF ALL THE INTERNATIONAL TRANSACTIONS INCLUDING PAYMENT OF ROYALTY. THE TPO, HOWEVER, DISPUTED APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD FOR THE PAYMENT OF TECHNICAL ASSISTANCE FEE OF RS. 38,58,80,000 ONLY FOR WHICH COMPARABLE UNCONTROLLED PRICE (CUP) METHOD WAS SOUGHT TO BE APPLIED. HERE, THIS COURT CONCURS WITH THE ASSESSEE THAT HAVING ACCEPTED THE TNMM AS THE MOST 62 APPROPRIATE, IT WAS NOT OPEN TO THE TPO TO SUBJECT ONLY ONE ELEMENT, I.E PAYMENT OF TECHNICAL ASSISTANCE FEE, TO AN ENTIRELY DIFFERENT (CUP) METHOD. THE ADOPTION OF A METHOD AS THE MOST APPROPRIATE ONE ASSURES THE APPLICABILITY OF ONE STANDARD OR CRITERIA TO JUDGE AN INTERNATIONAL TRANSACTION BY. EAC H METHOD IS A PACKAGE IN ITSELF, AS IT WERE, CONTAINING THE NECESSARY ELEMENTS THAT ARE TO BE USED AS FILTERS TO JUDGE THE SOUNDNESS OF THE INTERNATIONAL TRANSACTION IN AN ALP FIXING EXERCISE. IF THIS WERE TO BE DISTURBED, THE END RESULT WOULD BE DISTORTED AND WITHIN ONE ALP DETERMINATION FOR A YEAR, TWO OR EVE N FIVE METHODS CAN BE ADOPTED. THIS WOULD SPELL CHAOS AND BE DETRIMENTAL TO THE INTERESTS OF BOTH THE ASSESSEE AND THE REVENUE. THE SECOND QUESTION IS, THEREFORE, ANSWERED IN FAVOUR OF THE ASSESSEE; THE TNMM HAD TO BE APPLIED BY THE TPO/AO IN RESPECT OF THE TECHNICAL FEE PAYMENT TOO. 11.3 A SIMILAR VIEW WAS TAKEN BY CO-ORDINATE BENCH OF HYDERABAD IN THE CASE OF DCIT VS. AIR LIQUID ENGINE ERING INDIA (P) LTD., IN 43 TAXMANN.COM 229 WHEREIN HELD THAT:- 20. FURTHERMORE, WE ARE OF THE OPINION THAT ONCE TN MM HAS BEEN APPLIED TO THE ASSESSEE COMPANYS TRANSACTION, IT C OVERS UNDER ITS AMBIT THE ROYALTY TRANSACTIONS IN QUESTION TOO AND HENCE SEPARATE ANALAYSIS AND CONSEQUENT DELETION OF THE ROYALTY PAYMENTS BY THE TPO IN THE INSTANT CASE SEEMS ERRONEOUS. WE DRAW SUPPORT FROM THE HONBLE MUMBAI ITAT DECISION, CADBURY INDIA LTD. VS. ACIT ( ITA NO 63 7408/MUM/2010 AND ITA NO.7641/MUM/2010 DATED 13-11- 2013) WHEREIN THE HONBLE ITAT UPHELD THE USE OF TNMM FOR ROYALTY AS WELL AS RELIED ON MANY OF THE ABOVE DECISIONS TO HOLD AD JUSTMENT BY TPO WAS ERRONEOUS: 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS REGARD, I T IS SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMINED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY L INKED WITH THESE ACTIVITIES. IN THE ABSENCE OF PRODUCTION AND SALE OF PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARD ING PAYMENT OF ANY ROYALTY. RULE 1 OA(D) OF THE ITAT RU LES DEFINES TRANSACTION AS A NUMBER OF CLOSELY LINKED TRANSACTIONS. ROYALTY, THEN, IS A TRANSACTION CLOSE LY LINKED WITH PRODUCTION AND SALES. FT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTERPRISE, BEING EMBEDDED T HEREIN. THAT BEING SO, ROYALTY CANNOT BE CONSIDERED AND EXA MINED IN ISOLATION ON A STANDALONE BASIS. ROYALTY IS TO B E CALCULATED ON A SPECIFIED AGREED BASIS, ON DETERMINING THE NET SALES WHICH, IN THE PRESENT CASE, ARE REQUIRED TO BE DETE RMINED AFTER EXCLUDING THE AMOUNTS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SINCE SUCH NET SALES DO NOT STAND RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. T HEREFORE, IT IS OUR CONSIDERED OPINION THAT THE ASSESSEE WAS CORRECT IN EMPLOYING AN OVERALL TNMM FOR EXAMINING THE ROYALTY . THE TPO WORKED OUT THE DIFFERENCE IN THE PU OF THE OUTS IDE PARTY (THE ASSESSEE) AT 4.09% AND THE COMPARABLES AT 7.05 %. THIS HAS NOT BEEN SHOWN TO FALL OUTSIDE THE PERMISS IBLE RANGE. 34. THE DECISION OF THE TRIBUNAL IN EKLA APPLIANCE S, 2012- TH-01-HCDE1- TP, HAS BEEN SOUGHT TO BE DISTINGUISHE D BY THE TPO, OBSERVING THAT THE FACTS IN THAT CASE ARE NOT IN PAN MATENA WITH THOSE OF THE ASSESSEES CASE. HOWEVER, THEREIN ALSO, THE BENEFIT TEST HAD BEEN APPLIED BY THE TPO, AS IN THE PRESENT CASE. THE MATTER WAS CARRIED IN APPEAL BEFO RE THE HONBLE HIGH COURT. THE HONBLE DELHI HIGH COURT HA S HELD THAT THE SO-CALLED BENEFIT TEST CANNOT BE APPLIED T O DETERMINE THE ALP OF ROYALTY PAYMENT AT NIL AND THAT THE TPO COULD APPLY ONLY ONE OF THE METHODS PRESCRIBED UNDER THE LAW. A SIMILAR VIEW HAS BEEN TAKEN IN SONA OKEGAWA PRECIS ION FORGINGS LTD. (SUPRA) AND IN KHS MACHINERY PVT. L TD. VS. ITO, 53 SOT 100 (AHM) (URO). 35. IT IS, THUS, SEEN THAT THE ROYALTY PAYMENT @ 3% BY THE ASSESSEE IS AT ARMS LENGTH. THE TECHNICAL COLLABOR ATION AGREEMENT STANDS APPROVED BY THE GOVERNMENT OF INDI A. THE ROYALTY PAYMENT HAS BEEN ACCEPTED BY THE DEPART MENT AS HAVING BEEN MADE BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR ITS BUSINESS PURPOSES. FOR ASSESSME NT YEARS 2004-05 AND 2005-06, SUCH PAYMENT OF ROYALTY HAS BE EN ALLOWED BY THE CIT (A). AS PER THE FEMA REGULATIONS , 64 ROYALTY CAN BE PAID ON NET SALES @ 5% ON DOMESTIC S ALES AND @ 8% ON EXPORT SALES. THE ROYALTY PAYMENT BY TH E ASSESSEE FALLS WITHIN THESE LIMITS. FT ALSO FALLS W ITHIN THE LIMITS OF PAYMENT OF ROYALTY IN THE AUTO MOBILE SECTOR, AS PER THE MARKET TREND. THIS PAYMENT OF ROYALTY IS AT THE SAM E PERCENTAGE AS THAT PAID BY OTHER AUTO ANCILLARIES I N THE AUTOMOTIVE INDUSTRY. THEN, IN EKIA APPLIANCES (SU PRA) AND IN ERICSSON INDIA PVT. LTD. VS. DCIT, 2012-TII-48 -ITAT-DEL- TP, IT HAS BEEN HELD THAT ROYALTY PAYMENT CANNOT BE DISALLOWED ON THE BASIS OF THE SO-CALLED BENEFIT TE ST AND THE DOMAIN OF THE TPO IS ONLY TO EXAMINE AS TO WHETHER THE PAYMENT BASED ON THE AGREEMENT ADHERES TO THE ARMS LENGTH PRINCIPLE OR NOT. THAT BEING SO, THE ACTION OF THE TPO IN THE PRESENT CASE, TO MAKE THE DISALLOWANCE MAINL Y ON THE GROUND OF THE BENEFIT TEST IS UNSUSTAINABLE IN LAW. 36. KEEPING IN VIEW ALL THE ABOVE FACTORS, THE DISA LLOWANCE MADE ON ACCOUNT OF ROYALTY IS FOUND TO BE TOTALLY U NCALLED FOR AND IT IS DELETED AS SUCH. ... . 21. HENCE, FOLLOWING THE RATIO OF THE HONBLE DELHI HIGH COURT IN CIT VS. EKL APPLIANCES (SUPRA) AND VARIOUS OTHER DECISIONS AS NOTED ABOVE AND GIVEN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CA SE, WE HOLD THAT THE ADDITION MADE BY THE TPO AND UPHELD BY THE DRP IS U NSUSTAINABLE AND IS TO BE DELETED. HENCE GROUND NO. 2 IS HELD IN FAVOUR OF THE ASSESSEE. HENCE, THE APPEAL OF THE REVENUE ITA.NO.1040/HYD/20 11 IS DISMISSED AND ASSESSEES APPEAL IN ITA.NO.1159/HYD/2011 IS AL LOWED. 11.4 BEING SO, IN OUR OPINION, THERE IS NO QUESTIO N OF DOWNWARD ADJUSTMENT TOWARDS ON ROYALTY PAYMENT TO AE ON THE GROUND THAT NO ROYALTY IS ALLOWABLE ON TURNOVER PERTAINED TO DE VELOPMENT OF LAND, SUBSTATION DEVELOPMENT AND ERECTION AND COMMI SSIONING. THIS GROUND OF ASSESSEE IN BOTH THE APPEALS IS ALLO WED. 65 12. THE NEXT GROUND FOR THE ASST. YEAR 2011-12 IS W ITH REGARD TO DOWNWARD ADJUSTMENT IN RESPECT OF ROYALTY PAID P ERTAINING TO THE TURNOVER OF PRECEDING YEAR. 13. THE FACTS OF THE ISSUE AS NOTED BY THE AUTHORIT IES ARE THAT THE TECHNOLOGY AGREEMENT IS DATED 1 ST APRIL, 2010 AND THEREFORE, IT IS VALID ONLY WITH EFFECT FROM THAT DATE. GOING BY THE RATIONAL BUSINESS BEHAVIOR OF ECONOMIC ACTIVITIES, NO ROYALT Y WOULD HAVE BEEN OTHERWISE PAID TO AN UNRELATED PARTY. NO BUSI NESS ENTITY WOULD WILLFULLY IMPOSE ON ITSELF ANY FINANCIAL OBLI GATION FOR A PERIOD FOR WHICH THERE WAS NO LEGAL OBLIGATION. 14. THE LD. AR SUBMITTED THAT THE TECHNOLOGY TRANSF ER AGREEMENT HAS BEEN SIGNED ON 1 ST JANUARY 2009. FURTHER, THE LD. AR SUBMITTED THAT THE TPO HAS NOT DISPUTED THE FACT THAT THE ASSESSEE UTILIZED THE TECHNOLOGY OF THE AE DURING T HE PRECEDING YEAR. FURTHER, THE EXPENDITURE HAS NOT BEEN BOOKED DURING THE PRECEDING YEAR ON ACCOUNT OF THE FACT THAT THE INVO ICE HAS BEEN RECEIVED FROM ITS AE ONLY DURING THE SUBJECT ASST. YEAR. THEREFORE, ACCORDING TO THE LD. AR, THE CONTENTION OF THE TPO THAT SUCH EXPENDITURE IS UNWARRANTED IS BASELESS. 66 15. THE LD.D.R SUBMITTED THAT THE ASSESSEE HAD CLAI MED ROYALTY ON SUBSTATION DEVELOPMENT CHARGES, DEVELOPM ENT REVENUES AND REVENUE ON ERECTION & COMMISSIONING OF WIND TURBINE GENERATOR (WTG5). THIS ISSUE HAS BEEN DISCU SSED BY THE TPO IN PARAS 9.7 TO 11.2 OF HIS ORDER. HE HAS AFTER THE PERUSAL OF AGREEMENTS RELATING TO THE ABOVE ACTIVITIES, HELD T HAT WHAT WAS BEING DONE UNDER THESE CATEGORIES DID NOT INVOLVE A NY TECHNOLOGY TRANSFER AND THAT A THIRD PARTY WOULD NO T HAVE AGREED TO PAY ROYALTY ON INCOME ARISING OUT OF COMMON INFR ASTRUCTURE ACTIVITIES WHICH DO NOT INVOLVE ANY ELEMENT OF TRAN SFER OF TECHNOLOGY. THIS HAS NOT BEEN COUNTERED BY THE ASSE SSEE. THIS ISSUE HAS BEEN DEALT WITH BY THE DRP IN ITS ORDER D T 24.03.2017 IN PARA 4.1 & 4.2. FURTHER, THE ASSESSEE HAD CLAIM ED BEFORE THE DRP THAT IT WAS NORMAL PRACTICE TO HAVE SOME PRODUC TS AS EX- WORKS AT THE END OF THE YEAR AND THE ROYALTY ACCRUE S ONLY ON THE EXECUTION. THE DRP HAS ASKED THE ASSESSEE TO FURNIS H DETAILS OF SUCH EX-WORKS PRODUCTS FOR THE F.Y 2010-11 WHICH WE RE CARRIED OVER AND THE ASSESSEE HAD ADMITTED THAT THERE WERE NO SUCH CARRY OVER EITHER IN THE F.Y 2010-11 OR LATER YEARS . IN SHORT, THE ASSESSEE COULD NOT PROVE THAT SUCH CARRYOVER WERE N ORMAL IN ITS 67 LINE OF BUSINESS. THE ASSESSEE HAS NOT BEEN ABLE TO EXPLAIN AS TO WHY ROYALTY WAS PAID FOR PRIOR PERIOD SALES WHEN THE AGREEMENT ITSELF HAD COME INTO EFFECT ONLY FROM 01- 04-2010. THIS HAS BEEN RECORDED BY THE DRP IN PARA 4.4 OF ITS ORD ER DT 24.03.2017. 16. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE TECHNOLOGY TRANSFER A GREEMENT HAS BEEN SIGNED ON 1 ST JANUARY, 2009. THE ASSESSEE UTILIZED THE TECHNOLOGY OF THE A.E DURING THE PRECEDING YEAR. HO WEVER, NO EXPENDITURE WAS BOOKED BY THE ASSESSEE ON THE REASO N THAT NO INVOICE HAS BEEN RECEIVED FROM ITS AE DURING THE PR ECEDING ASSESSMENT YEAR. THE ASSESSEE CLAIMED THAT ALL THE SALES IN F.Y 2009-10 WERE EXWORKS , INSTALLATION OF WHICH WAS COMPLETED Y IT IN F.Y 2010-11. THE ASSESSEE PAID THE ROYALTY IN TH E YEAR IN WHICH INSTALLATION AND COMMISSIONING WAS COMPLETED. BEFORE TPO, THE ASSESSEE NOT FURNISHED THE DETAILS OF PRO DUCT SOLD DATE AND EXWORK DETAILS IN RELATION TO EACH SUPPLY AGREEMENT ALONG WITH THE COPIES OF RELEVANT AGREEMENT FOR THE FINANCIAL YEARS 2009-10 TO 2012-13 AND IT WAS ALSO NOT PROVED THAT THERE WAS CARRY FORWARD ONE YEAR TO ANOTHER YEAR. BEFORE THE DRP, 68 THERE WAS NO DETAILS PROVIDED BY THE ASSESSEE REGAR DING DATE OF INSTALLATION AND ONLY FURNISHED THE PRODUCT SOLD DA TE FOR F.Y 2009-10 AND NO SUCH DETAILS OF OTHER YEARS WERE PRO VIDED AND THE ASSESSEE FAILED TO SUBSTANTIATE ITS OWN CLAIM. BEFORE US, THE LD. A.R MADE A PLEA THAT SINCE THE INVOICE HAS BEEN RECEIVED FROM THE AE DURING THE ASSESSMENT YEAR UNDER CONSID ERATION, IT WAS SUBJECT TO TDS AND IT IS TO BE ALLOWED. IN OUR CONSIDERED OPINION, IF THE EXPENDITURE WAS CRYSTALLIZED AND AC CRUED IN THE ASSESSMENT YEAR UNDER CONSIDERATION, THE SAME IS TO BE ALLOWED SUBJECT TO DEDUCTION OF TDS AS HELD BY DELHI HIGH COURT IN THE CASE OF SMCC CONSTRUCTION INDIA (ITA NO.12/2010, DATED 15.01.2010) . SIMILAR VIEW WAS TAKEN BY TRIBUNAL IN THE CASE OF I) TERMO PENPOL LTD., (ITA NO.410/COCH/2014 DT.12.12.2014) AND ACIT VS. M/S.ENNORE COKE LTD .,(ITA NO.1921/MDS./2015 DT.22.01.2016). THE ASSESSEE HAS TO FURNISH THE DETAILS OF PRODUCT SOLD DATE AND DATE OF COMPLETION OF INSTALLATION WORK WITH CORRESPONDING AGREEMENTS. THE A.O/TPO SHO ULD EXAMINE THE SAME AND DECIDE THE ISSUE IN THE LIGHT OF ABOVE JUDGMENTS. THIS GROUND IS REMITTED TO THE FILE OF A O FOR FRESH CONSIDERATION. 69 17. THE NEXT COMMON GROUND IN THESE APPEALS IS WITH REGARD TO DOWNWARD ADJUSTMENT IN RESPECT OF MANAGEMENT FEE . 17.1 THE ASSESSEE FILED THE FOLLOWING ADDITIONAL EVIDENCES FOR A.Y 2012-13 AND SUBMITTED THAT THE ASSESSEE COULD N OT FORESEE THE REQUIREMENT OF THE TAX AUTHORITIES AND DRP, THE REFORE THE ASSESSEE DID NOT SPECIFICALLY SUBMIT THE DETAILS OF ALLOCATION OF MANAGEMENT FEE:- SL. NO. PARTICUALRS 1 STATEMENT SHOWING ALLOCATION OF MANAGEMENT FEES 2 LIST OF INVOICES RAISED ON GROUP ENTITIES BY GAME SA CORPORATION TECHNOLOGICAL SA SPAIN(GAMESA SPAIN) FO R THE CALENDAR YEAR 2011 3 SAMPLE COPY OF INVOICES RAISED ON GAMESA GOUP ENT ITIES BY GAMESA SPAIN IT WAS SUBMITTED BY LD. A.R THAT ONLY PURSUANT TO T HE OBSERVATIONS OF THE DRP IN THE ORDER DATED 26 TH NOVEMBER, 2016, THE ASSESSEE UNDERSTOOD THE REQUIREMENT OF AUTHORITIES AND THERE FORE, FILED THE ABOVE INFORMATION BEFORE THIS TRIBUNAL. IT WAS ALS O SUBMITTED THAT NON-SUBMISSION OF THE ABOVE DETAILS BEFORE THE LD. ASSESSING OFFICER/TPO/DRP IS NEITHER INTENTIONAL NOR WANTON. HE DREW OUR ATTENTION TO THE DECISION OF TRIBUNAL IN THE CASE O F ABHAY KUMAR SHROFF VS. I.T.O IN (1997) 63 ITD 144 WHEREIN HE LD THAT IF THE DOCUMENTS SOUGHT TO BE ADMITTED EVEN AT SECOND APPE LLATE STAGE ARE OF A NATURE AND QUALITATIVELY SUCH THAT THEY RE NDER ASSISTANCE 70 TO TRIBUNAL IN PASSING ORDERS OR ARE REQUIRED TO BE ADMITTED FOR ANY OTHER SUBSTANTIAL CAUSE, IT WOULD RATHER BE DUTY OF TRIBUNAL TO ADMIT THEM. SUCH PROPOSITION HAS BEEN LAID DOWN FU RTHER BY DELHI HIGH COURT IN THE CASE OF CIT VS. TEXT HUNDRED INDI A (P) LTD., IN 351 ITR 57 WHEREIN HELD THAT THE COURT HAS HELD THA T RULE 29 CATEGORICALLY PERMITS THE TRIBUNAL TO ALLOW SUCH AD DITIONAL EVIDENCES FOR PROPER ADJUDICATION OF THE MATTER AND IN THE INTEREST OF SUBSTANTIAL CAUSE. 17.2 THE LD.D.R WAS OF THE VIEW THAT THE ASSESSEE HAS NOT GIVEN ANY JUSTIFICATION FOR ADMISSION OF THESE ADDITIONAL EVIDENCES AT THIS STAGE. THE ASSESSEE WAS ASKED FOR THE REASONS OF NO T PRODUCING THESE DOCUMENTS BEFORE THE TPO. IN RESPONSE TO THIS ASSESSEE ONLY SUBMITTED THAT THE TPO DID NOT MAKE ANY SPECIF IC REQUEST FOR PRODUCTION OF THESE DOCUMENTS AND SO THE SAME WERE NOT PRODUCED BEFORE THE TPO. THE ASSESSEE SUBMITTED THA T SINCE THE DRP RULES ALLOW SUBMISSION OF ADDITIONAL EVIDENCE, SO THE SAME SHOULD BE ADMITTED. THE ASSESSEE HAS FAILED TO GIVE ANY REASON FOR NOT FURNISHING THESE DOCUMENTS BEFORE THE TPO T O SUPPORT ITS CASE. THE ASSESSEE HAS NOT GIVEN ANY EXPLANATION AS TO WHAT PREVENTED IT FROM PRODUCING SUCH DOCUMENTS BEFORE T HE TPO AT 71 THE TIME OF TRANSFER PRICING PROCEEDINGS BEFORE THE TPO, ESPECIALLY WHEN SUFFICIENT OPPORTUNITY OF BEING HEARD WAS GIVE N TO IT BY THE TPO. THE ONUS WAS ON THE ASSESSEE TO PRODUCE ALL SU CH RELEVANT DOCUMENTS BEFORE THE TPO, WHICH IN ITS OPINION COUL D SUPPORT ITS CASE. HOWEVER, THE ASSESSEE FAILED TO DO SO. THE AS SESSEE HAS NOT BROUGHT ANYTHING ON RECORD TO SHOW THAT THE DOC UMENTS COULD NOT HAVE BEEN PRODUCED BY IT BEFORE TPO DESPITE ITS BEST EFFORTS ADMISSION OF THE ADDITIONAL EVIDENCE CANNOT BE CLAI MED AS A MATTER OF RIGHT AND IT IS THE DUTY OF THE ASSESSEE TO EXPLAIN THE CIRCUMSTANCES WHICH PREVENTED IT FROM SUBMITTING SU CH DOCUMENTS BEFORE THE LOWER AUTHORITIES. SINCE THE ASSESSEE FA ILED TO PROVIDE SUFFICIENT CAUSE TO FURNISH THESE, DOCUMENTS BEFORE THE TPO, THE SAME CANNOT BE ADMITTED AT THIS STAGE. 17.3. THE LD.D.R, BY PLACING RELIANCE IN THE JUDGM ENT OF ITAT, BANGALORE IN CASE OF ANUPAM KOTHAR IN ITA NO 837 (B ANG) 2012 HELD THAT FOR ADMISSION OF ADDITIONAL EVIDENCE, IT IS REQUIRED FOR THE ASSESSE TO SHOW THAT AUTHORITIES HAD DECIDED ITS GR OUNDS WITHOUT GIVING SUFFICIENT OPPORTUNITY TO ADDUCE EVIDENCE. C ONSIDERING ABOVE THE REQUEST OF ASSESSEE FOR ADMISSION OF ADDI TIONAL EVIDENCES IS NOT ACCEPTED. EVEN ON MERITS, THESE AD DITIONAL 72 EVIDENCES THE ASSESSEE HAS NOT EXPLAINED AS TO HOW THE SAID DOCUMENT WAS RELEVANT TO ITS CASE, WHICH RELATES TO F.Y 2011-12, THE TPO HAS NOT DISPUTED THAT THE ASSESSEE IS CARRY ING OUT THE BUSINESS OF SETTING UP OF WIND TURBINES. THE TPO HA S ONLY DISPUTED THE PAYMENT OF ROYALTY ON CERTAIN SALES/AC TIVITIES. THESE DOCUMENTS DO NOT AT ALL CONTRADICT THE SAME. THE LD .D.R SUBMITTED THAT IN VIEW OF THE ABOVE, THE ACTION OF THE TPO CA NNOT BE FAULTED WITH AND THE OBJECTIONS OF THE ASSESSEE ARE NOT ACC EPTED. 17.4 WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE MATERIAL ON RECORD. IN VIEW OF THE OBSERVATION OF THE DRP, THE BASIC EVIDENCE TO SUPPORT THE CLAIM OF COST INCURRED AT T HE A.ES END ARE NOT AVAILABLE FOR VERIFICATION. THIS IS THE VERY M INIMUM THAT THE TPO REQUIRED TO INVESTIGATE AND TO ESTABLISH WHETHE R THE COST FLOATED AS PER PRE-DETERMINED KEYS IS REASONABLE / LEGITIMATE OR NOT. NO EVIDENCE FROM THE BOOKS OF THE AE WITH REGA RD TO COST, BOTH DIRECT AND INDIRECT, AND PRIMARY DOCUMENTS MAI NTAINED BY AE IN SUPPORT OF THIS CLAIM IN ITS BOOKS, HAS BEEN PRO DUCED BY THE ASSESSEE EITHER BEFORE TPO OR DRP ON THIS ISSUE. N OW, THE ASSESSEE PRODUCED THE DETAILS AS STATED ABOVE. IN OUR CONSIDERED OPINION, IN VIEW OF THE JUDGMENT OF SUPREME COURT I N THE CASE OF 73 NATIONAL THERMAL POWER CO. LTD VS. CIT [(1998) 229 ITR 0383] WHEREIN IT WAS HELD THAT:- UNDER S. 254 THE TRIBUNAL MAY, AFTER GIVING BOTH T HE PARTIES TO THE APPEAL AN OPPORTUNITY OF BEING HEARD, PASS SUCH ORD ERS THEREON AS IT THINKS FIT. THE POWER OF THE TRIBUNAL IN DEALING WI TH APPEALS IS THUS EXPRESSED IN THE WIDEST POSSIBLE TERMS. THE PURPOSE OF THE ASSESSMENT PROCEEDINGS BEFORE THE TAXING AUTHORITIES IS TO ASS ESS CORRECTLY THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. IF , FOR EXAMPLE, AS A RESULT OF A JUDICIAL DECISION GIVEN WHILE THE APPEA L IS PENDING BEFORE THE TRIBUNAL, IT IS FOUND THAT A NON-TAXABLE ITEM IS TA XED OR A PERMISSIBLE DEDUCTION IS DENIED, THERE IS NO REASON WHY THE ASS ESSEE SHOULD BE PREVENTED FROM RAISING THAT QUESTION BEFORE THE TRI BUNAL FOR THE FIRST TIME, SO LONG AS THE RELEVANT FACTS ARE ON RECORD IN RESP ECT OF THAT ITEM. THERE IS NO REASON TO RESTRICT THE POWER OF THE TRIBUNAL UNDER S. 254 ONLY TO DECIDE THE GROUNDS WHICH ARISE FROM THE ORDER OF CI T(A). BOTH THE ASSESSEE AS WELL AS THE DEPARTMENT HAVE A RIGHT TO FILE AN APPEAL/CROSS- OBJECTIONS BEFORE THE TRIBUNAL. TRIBUNAL SHOULD NOT BE PREVENTED FROM CONSIDERING QUESTIONS OF LAW ARISING IN ASSESSMENT PROCEEDINGS ALTHOUGH NOT RAISED EARLIER. JUTE CORPORATION OF INDIA LTD. VS. CIT (1990) 88 CTR (SC) 66 : (1991) 187 ITR 688 (SC) : TC 7R.343 APPLI ED; CIT VS. ANAND PRASAD (1981) 128 ITR 388 (DEL) : TC 8R.1021, CIT VS. KARAMCHAND PREMCHAND (P) LTD. (1969) 74 ITR 254 (GUJ) : TC 8R.547 AND CIT VS. CELLULOSE PRODUCTS OF INDIA LTD. (1985) 44 CTR (GUJ) 278 (FB) : (1985) 151 ITR 499 (GUJ)(FB) : TC 8R.965 OVERRULED. (PARA 3) THE VIEW THAT THE TRIBUNAL IS CONFINED ONLY TO ISSU ES ARISING OUT OF APPEAL BEFORE THE CIT(A) TAKES TOO NARROW A VIEW OF THE PO WERS OF THE TRIBUNAL. UNDOUBTEDLY, THE TRIBUNAL WILL HAVE THE DISCRETION TO ALLOW OR NOT ALLOW A NEW GROUND TO BE RAISED. BUT WHERE THE TRIBUNAL IS ONLY REQUIRED TO CONSIDER A QUESTION OF LAW ARISING FROM THE FACTS W HICH ARE ON RECORD IN THE ASSESSMENT PROCEEDINGS SUCH A QUESTION SHOULD B E ALLOWED TO BE RAISED WHEN IT IS NECESSARY TO CONSIDER THAT QUESTI ON IN ORDER TO CORRECTLY ASSESS THE TAX LIABILITY OF AN ASSESSEE. HENCE, IT IS APPROPRIATE TO ADMIT THE SAME AS ADDI TIONAL EVIDENCE FOR ADJUDICATION FOR THE ASSESSMENT YEAR 2012-13. 74 18. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE HA S ENTERED INTO A SERVICE AGREEMENT DATED 1 ST APRIL, 2010 WITH GAMESA CORPORATION TECHNOLOGICA SA (GCT SPAIN) FOR AVAILI NG THE FOLLOWING SERVICES FROM GCT SPAIN: 1. GENERAL MANAGEMENT SERVICES 2. INTERNAL AUDIT AND RISK SERVICES 3. LEGAL SERVICES 4. COMMERCIAL, MARKETING AND PROMOTION SERVICES 5. FINANCIAL MANAGEMENT SERVICES 6. OPERATIONS MANAGEMENT SERVICES 7. BUSINESS DEVELOPMENT SERVICES 8. HUMAN CAPITAL MANAGEMENT SERVICES 18.1 DURING THE COURSE OF PROCEEDINGS BEFORE THE T PO AND DRP, THE ASSESSEE FILED DETAILED SUBMISSIONS INTER- ALIA ENCOMPASSING THE FOLLOWING POINTS: 1. THE RATIONALE FOR AVAILING THE SERVICES FROM THE AE; 2. COPY OF THE MANAGEMENT SERVICES AGREEMENT; 3. THE DOCUMENTARY EVIDENCES / JUSTIFICATIONS TO DE MONSTRATE THAT THE ASSESSEE HAS INDEED RECEIVED THE SERVICES IN THE FO RM OF EMAIL EXCHANGES BETWEEN THE ASSESSEE AND THE AE; 4. SUMMARY OF THE BENEFITS RECEIVED BY THE ASSESSEE ON ACCOUNT OF RECEIPT OF SERVICES; 5. DETAILS OF DEPARTMENT WISE MANAGEMENT CHARGE ALO NG WITH THE BASIS OF ALLOCATION OF COSTS; 6. DETAILED WORKINGS PERTAINING TO DERIVATION OF AL LOCATION RATE PER HOUR; 75 7. CORROBORATIVE BENCHMARKING ANALYSIS CONDUCTED BY THE ASSESSEE WITH AE AS THE TESTED PARTY, TO DEMONSTRATE THE ARM S LENGTH NATURE OF PRICING OF THE INTERNATIONAL TRANSACTION. 18.2 THE ASSESSEE ALSO SUBMITTED A DETAILED NOTE ON THE VARIOUS SERVICES AVAILED BY THEM UNDER THE TERMS OF THE AGREEMENT. FURTHER, IT WAS ALSO SUBMITTED BEFORE T HE TPO THAT THE AE PARTY HAD IDENTIFIED THE NATURE OF STEWARDSH IP/SHAREHOLDER ACTIVITIES IN EACH OF THE ABOVE DEPARTMENT/SERVICES AND SUCH COSTS WAS EXCLUDED AND NOT CHARGED BACK TO THE ASSE SSEE. SINCE THE COMMERCIAL VALUE OF SUCH SERVICES WAS NOT QUANTIFIABLE IN EXACT MONETARY TERMS, THE ASSESSEE ON IDENTIFICA TION OF ABOVE SERVICES, EXCLUDED THE COST OF STEWARDSHIP/SHAREHOL DING ACTIVITY IN THE RANGE OF 20 PERCENT TO 50 PERCENT DEPENDING ON THE CLOSE NATURE OF ACTIVITIES. 18.3 THE TPO COMPUTED THE ALP OF MANAGEMENT FEE TO BE NIL CITING THE FOLLOWINGS REASONS: THE SCENARIO IS ONE OF CONTROL AND HOLD EXERCISED BY THE AE OVER THE AFFILIATES RATHER THAN IN THE FORM OF A NY SERVICES RENDERED. THE COSTS INCURRED BY THE HOLDING COMPAN Y ARE CHARGED TO AFFILIATES GLOBALLY ON SOME BASIS ON THE 76 ASSUMPTION THAT THE AES EXIST FOR THE BENEFIT OF TH E AFFILIATES. THE COSTS ARE ALLOCATED TO ALL AFFILIATES PRINCIPA LLY ON THE BASIS OF REVENUE WHICH IS BASED ON THE PRINCIPLE OF CAPACITY TO PAY RATHER THAN ON THE BASIS OF THE N EED AND EXTENT OF SERVICES AVAILABLE BY THE AFFILIATES. A MULTINATIONAL ENTERPRISE FUNCTIONING GLOBALLY MA Y LIKE TO CO-ORDINATE WITH THE AFFILIATES TAKING INTO ACCOUNT THE PRINCIPLE OF OPTIMIZATION OF PROFITS. BUT SUCH AN EXERCISE IS NOT NECESSARILY COMPARABLE TO A SERVICE PROVIDED BY A THIRD PARTY PROFESSIONAL SERVICE PROVIDER. IN THE INSTANT CASE, THE ULTIMATE HOLDING COMPANY EITHER BY ITSELF OR THROUGH STEP DOWN SUBSIDIARIES HAVE STAKE S IN AFFILIATES AND IN PURSUIT OF SUCH INVESTMENT INTERE ST, CONSTANTLY EXERCISE CONTROL, DIRECTION, SUPERVISION AND HOLD OVER THE AFFILIATES. SUCH A MONITORING IS NOT NECE SSITATED BY THE NEEDS OF THE AFFILIATES, RATHER THEY STEM FR OM THE INHERENT INTEREST OF THE HOLDING COMPANY IN THE AFF ILIATES AND THE RESULTING COSTS NEED NOT BE PASSED ON TO TH E AFFILIATES. 77 18.4 THE TPO RELIED ON THE FOLLOWING DECISIONS WITH OUT MENTIONING THE CITATIONS AND HELD THAT THE ALP OF T HE MANAGEMENT FEE IS NIL : A. GEMPLUS INDIA (P) LTD. VS. ACIT (BANGALORE, ITAT ) B. DEOLITTE CONSULTING INDIA (P) LTD. VS. DCIT (MUM BAI, ITAT) C. KNORR-BREMSE INDIA (P) LTD. VS. ACIT (DELHI, ITA T) 19. THE LD. AR SUBMITTED THAT THE ADOPTION OF CUP A S MOST APPROPRIATE METHOD FOR BENCHMARKING MANAGEMENT SERV ICE FEE BY THE TPO AND DETERMINING THE ALP TO BE NIL. FUR THER, THE LD. AR SUBMITTED THAT UNDER THE AGREEMENT WITH AES, THE ASSESSEE AVAILED VARIOUS SERVICES IN THE NATURE OF LEGAL, AD MINISTRATIVE, HUMAN RESOURCES, FINANCE, BUSINESS DEVELOPMENT ETC. THE SERVICES ARE SPECIFICALLY RENDERED BY THE SAID ENTI TIES WHICH ACT AS THE GLOBAL HUB FOR RENDERING THE CORRESPONDING S ERVICES. THE SERVICES WOULD EITHER B E RENDERED DIRECTLY BY THE AES THROUGH ITS RESOURCES OR IT WOULD EMPLOY THIRD PARTY CONSULTANT S TO RENDER SUCH SERVICES. THE SERVICE FEE HAS BEEN CHARGED ON THE BASIS OF ALLOCATED COST TO ALL GROUP ENTITIES ACROSS THE GLO BE. IT IS PERTINENT TO NOTE THAT SUCH SIMILAR SERVICES HAVE N OT BEEN AVAILED 78 BY THE ASSESSEE DURING THE YEAR FROM THIRD PARTY CO NSULTANTS AND THEREFORE, THERE IS NO PRICE AVAILABLE TO BE REGARD ED AS INTERNAL CUP. FURTHER, DUE TO CONFIDENTIALITY ISSUES, IT I S THE GENERAL PRACTICE TO UNDERTAKE SUCH SERVICES THROUGH GROUP E NTITIES. IN ADDITION, GCT SPAIN HAS NOT RENDERED SIMILAR SERVIC ES TO UNRELATED PARTIES. IN ADDITION, IT IS NOT PRACTIC ALLY POSSIBLE TO DETERMINE HOW MUCH THIRD PARTY CONSULTANTS WOULD HA VE CHARGED TO RENDER SIMILAR SERVICES IN A ROUTINE MANNER CONS IDERING THE VARIOUS CONTINGENCIES INVOLVED IN THE BUSINESS. TH EREFORE, THE QUESTION OF ADOPTING CUP AS APPROPRIATE METHOD WOUL D NOT ARISE. THE LD. AR RELIED ON THE JUDGMENT OF THE DE LHI HIGH COURT IN THE CASE OF MAGNETI MARELLI POWERTRAIN INDIA (P) LTD. VS. DCIT, WHEREIN IT HAS BEEN HELD THAT IN A CASE WHERE THE A SSESSEE COMPANY HAD ADOPTED TNMM FOR THE PURPOSES OF BENCHM ARKING ITS PROFITS, ADOPTION OF CUP SOLELY FOR THE PURPOSE S OF EVALUATING TECHNICAL ASSISTANCE FEE WOULD LEAD TO CHAOS AND BE DETRIMENTAL TO THE INTERESTS OF BOTH REVENUE AND THE ASSESSEE. FURTHER, THE LD. AR SUBMITTED THAT THE QUESTION OF APPLYING CUP WOULD ARISE ONLY IN A CASE WHERE THE COMPARISON IS MADE WITH UN CONTROLLED TRANSACTION IDENTIFIED WITH REGARD TO SIMILAR SERVI CES RENDERED FOR 79 THE PURPOSE OF TRANSFER PRICING. IN THE INSTANT CA SE, THE TPO HAS MERELY HELD THAT THE ALP OF THE TRANSACTION IS NIL WITHOUT EVEN IDENTIFYING COMPARABLES WHICH IS NOT IN ACCORDANCE WITH THE METHODOLOGIES PROVIDED IN THE RULES. THE LD. AR, A LSO RELIED ON THE FOLLOWING JUDGMENTS, WHEREIN IT HAS BEEN HELD T HAT NO TRANSFER PRICING ADJUSTMENT IS WARRANTED IN A SCENA RIO WHERE THE OFFICER HAS NOT TAKEN ANY STEP TO IDENTIFY A COMPAR ABLE TO DETERMINE THE ALP : A. MERCK LTD. VS. DCIT (148 ITD 513 - MUMBAI, ITAT) UPHELD BY BOMBAY HIGH COURT [ITA 272 OF 2014] B. DCIT VS. FLAKT INDIA LTD. [ITA NO.1032 OF 2014 CHENNAI ITAT] C. SABIC INNOVATIVE PLASTICS INDIA PVT. LTD. VS. AC IT [ITA NO 1125 OF 2014 AHMEDABAD ITAT] APPLYING THE ABOVE PRINCIPLES TO THE CURRENT FACT P ATTERN, THE ASSESSEE SUBMITTED THAT THE ACTION OF THE TPO IN DE TERMINING THE ALP TO BE NIL WITHOUT EVEN IDENTIFYING A COMPARABLE TRANSACTION IS INAPPROPRIATE. THEREFORE, THE LD. AR SUBMITTED THAT THE TRANSFER PRICING ADJUSTMENT IN THIS REGARDS NEEDS T O BE SET ASIDE. 19.1 THE LD. AR ARGUED THAT THERE IS NO TRANSFER PR ICING ADJUSTMENT IN A SCENARIO WHERE THE TRANSACTIONS ARE AT ARMS LENGTH IN ACCORDANCE WITH THE METHODS PRESCRIBED UN DER RULE 80 10B. WITHOUT PREJUDICE TO THE ABOVE SUBMISSION THA T THE SAID MANAGEMENT FEE SATISFIES THE NEED-EVIDENCE-BENEFIT TEST, THE LD. AR SUBMITTED THAT THE ACTION OF THE TPO IN PROP OSING TRANSFER PRICING ADJUSTMENT IS NOT TENABLE ON ACCOUNT OF THE FOLLOWING SUBMISSIONS : AS ELABORATED ABOVE, IN THE TRANSFER PRICING STUDY , THE ASSESSEE CONSIDERED TNMM AS THE MOST APPROPRIATE METHOD. FOR THE SUBJECT ASST. YEAR, THE PLI OF THE ASSESSEE IS HIGHER AS COMPARED TO THE COMPARABLE COMPANIES. FURTHER, THE ASSESSEE CONSIDERED CUP AS THE MOST APPROPRIATE METHOD AND CONTENDED THAT AVERAGE RATE OF ROYALTY AS PER COMPARABLE AGREEMENTS IS HIGHER A S COMPARED TO THE SUBJECT ROYALTY RATES. THEREFORE, THE ASSESSEE ARRIVED AT A CONCLUSION THAT THE ROYALTY P AID TO ITS AE IS AT ARMS LENGTH. THE ASSESSEE SUBMITTED THAT MANAGEMENT SERVICE IS A CRITICAL FACTOR FOR UNDERTAKING ITS DAY TO DAY OPER ATIONS AND THEREFORE IT IS INEXTRICABLY LINKED TO ITS BUSINESS . THEREFORE, THE DETERMINATION OF ALP OF MANAGEMENT FEE ON A STANDALONE BASIS IS UNWARRANTED IN THE FIRST PLACE. THE 81 TPO HAS ERRED IN NOT APPRECIATING THE BASIS FACT TH AT MANAGEMENT SERVICE IS INEXTRICABLY LINKED TO BUSINE SS OF THE ASSESSEE AND, THEREFORE, BENCHMARKING THE PLI A T ENTITY LEVEL IS SUFFICIENT IN ORDER TO SUBSTANTIATE THAT THE TRANSACTIONS WITH AE ARE AT ARMS LENGTH. FURTHER, IT IS PERTINENT TO NOTE THAT THE METHODOL OGY ADOPTED BY THE TPO IS NOT IN ACCORDANCE WITH ANY OF THE METHODS PRESCRIBED IN RULE 10B OF THE RULES. IN OT HER WORDS, THE ACTION OF THE TPO IS BEYOND HIS JURISDIC TION AS PROVIDED IN THE LAW. IN THE FOLLOWING DECISIONS, I T HAS BEEN HELD THAT WHERE THE PLI OF THE ASSESSEE IS DETERMIN ED UNDER TNMM, A SEPARATE ANALYSIS AND CONSEQUENT DELE TION OF ROYALTY /TECHNICAL FEE PAYMENT IS UNWARRANTED : A. DCIT VS. AIR LIQUID ENGINEERING INDIA (P) LTD. (43 TAXMAN.COM 299 (HYD.)) B.DAKSH BUSINESS PROCESS SERVICES (P) LTD.(DEL.,ITAT)(2166/DEL./2011) C.DCIT VS. CORNELL OVERSEAS (P) LTD. (DEL., ITAT )(2166/DEL/2011) 19.2 THE LD. AR, REITERATED THE SUBMISSION STATED A BOVE, IN RESPECT OF JURISDICTIONAL OF THE TPO TO DETERMINE T HE COMMERCIAL EXPEDIENCY OF THE ASSESSEE AND SUBMITTED THAT THE T PO HAS 82 REMARKED THAT THE ASSESSEE HAS NOT SUBSTANTIATED TH E NEED- EVIDENCE-BENEFIT IN RELATION TO MANAGEMENT FEE. FURTHER, THE LD. AR SUBMITTED THAT THE SAID TRANSACTION SATISFIE S ALL THE TESTS, THE TAX AUTHORITIES HAVE NO JURISDICTION TO QUESTIO N THE COMMERCIAL EXPEDIENCY OF THE TRANSACTIONS. IN OTHE R WORDS, THE TPO HAS THE LIMITED RESPONSIBILITY OF COMPUTING THE ARMS LENGTH PRICE OF THE TRANSACTIONS CONSIDERATION THE METHODS PRESCRIBED IN THE ACT READ WITH RULES. THE SAID PRINCIPLE HAS BE EN LAID DOWN IN THE FOLLOWING DECISION: A. HIVE COMMUNICATION (P) LTD. VS. CIT (DELHI)(353 ITR 200) B. CIT VS. EKL APPLIANCES LTD. (DELHI HC)(345 ITR 2 41) C. CIT VS. COMPUTER GRAPHICS LTD.MADRAS HC)(155 TAX MANN 612) D. SHOWA INDIA (P) LTD. VS. DCIT (DELHI, ITAT)(166/DEL/2013,DT.30.06.2016) THEREFORE, THE LD. AR SUBMITTED THAT THE JURISDICTI ON OF THE TPO DOES NOT EXTEND TO STEPPING INTO THE SHOES OF THE A SSESSEE AND DETERMINING THE NECESSITY OF INCURRENCE OF EXPENDIT URE AND THE CONTENTION OF THE TPO THAT THERE IS NO NECESSITY ON THE PART OF THE ASSESSEE TO AVAIL THE MANAGEMENT FEE IS UNWARRANTED IN THE FIRST PLACE. 83 19.3 WITHOUT PREJUDICE TO THE SUBMISSION THAT THE A SSESSEE HAS AVAILED SUBSTANTIAL BENEFITS ON ACCOUNT OF MANA GEMENT SERVICE, THE LD. AR SUBMITTED THAT THE ASSESSEE HAS ENTERED INTO AGREEMENT WITH GCT SPAIN FOR THE PURPOSE OF AVAILIN G SERVICES IN THE AVENUES OF FINANCE, LEGAL ASSISTANCE, ADVISORY, OPERATIONS MANAGEMENT, BUSINESS DEVELOPMENT ETC. IT IS PERTIN ENT TO NOTE THAT ALL THE OPERATING COMPANIES BELONGING TO THE G ROUP HAVE EXECUTED SIMILAR AGREEMENT WITH GCT SPAIN TO AVAIL BENEFITS IN THE FORM OF GLOBAL CONSISTENCY IN BUSINESS, IMPROVE MENT IN EFFICIENCY AND ACCESS TO COMMON SKILL SET AND CENTR ALIZED PORTALS ETC. IT IS PERTINENT TO NOTE THAT THE BENEFITS ARI SING OUT OF THE SERVICES ARE INTANGIBLE IN NATURE. THE LD. AR SUBM ITTED THAT THE MODEL OF AVAILING SERVICES FROM A CENTRALIZED HUB I S A COMMON PHENOMENON IN ALL MULTINATIONAL CORPORATIONS AND IT IS CRITICAL FOR THE ASSESSEE TO AVAIL SUCH SERVICES IN ORDER TO SUS TAIN IN THE MARKET. FURTHER, GIVEN THAT IT IS AN ONGOING ACTI VITY CARRIED ON BY THE AE AND CONSIDERING THE FACT THAT THE BENEFITS A VAILED BY THE ASSESSEE ARE INTANGIBLE IN NATURE WHICH CANNOT BE M EASURED IN MONETARY TERMS IN ALL SCENARIOS. THEREFORE, ACCORD ING TO THE LD. AR, THE QUESTIONING OF EXAMINING THE BENEFITS AVAIL ED BY THE 84 ASSESSEE OUT OF SUCH SERVICES WOULD NOT ARISE IN TH E FIRST PLACE. THE LD. AR, FURTHER SUBMITTED THAT EVEN IN CASE OF AVAILING SERVICES FROM A THIRD PARTY SERVICE PROVIDER, THE R ESULTING BENEFIT CANNOT BE ASSURED AND THE ASSESSEE PAYS FOR THE EXP ERTISE OF THE SERVICE PROVIDER WHICH MAY OR MAY NOT RESULT IN SUBSTANTIAL BENEFITS HAVING MONETARY IMPACT. TO SUPPORT HIS VI EW, THE LD. AR RELIED ON THE FOLLOWING DECISIONS, WHEREIN THE COUR TS AND THE TRIBUNAL HAVE HELD THAT BENEFIT TEST IS NOT A PRE-C ONDITION TO DETERMINE THE GENUINENESS OR ALP OF EXPENDITURE: A. RAK CERAMICS INDIA PVT. LTD. VS. DCIT (HYD., ITA T)[ITA NO.1492/2014 DATED 04.02.2015] UPHELD BY ANDHRA P RADESH HIGH COURT [IN ITA NO.595 OF 2016] B. TNS INDIA PVT. LTD. VS. ACIT (ITA NO.944/HYD./20 07 DATED 22.01.2014) 19.4 REGARDING NEED FOR AVAILING MANAGEMENT SERVICE FROM GCT SPAIN, THE LD. AR, SUBMITTED THAT IN THE CURREN T ERA OF GLOBALIZATION, CENTRALIZATION OF COSTS LEAD TO SIGN IFICANT GROUP COST SAVINGS. GAMESA GROUP IS A MULTINATIONAL GROUP, WH ICH HAS ITS HEADQUARTERS IN SPAIN. THE GROUP IS DEDICATED TO T HE MANUFACTURING, SALE, OPERATION AND MAINTENANCE OF W IND TURBINE 85 GENERATORS, AS WELL AS IN THE DEVELOPMENT OF WIND F ARMS. ITS BUSINESS COVERS ALL ITEMS OF THE WIND VALUE CHAIN: DESIGN, MANUFACTURE, CONSTRUCTION, BALANCE OF PLANT (BOP ALSO KNOWN AS CIVIL WORKS FOR WIND FARMS-), DEVELOPMENT, ADDIT IONAL SERVICES AND OPERATION AND MAINTENANCE (O&M) OF WIND FARMS. ACCORDING TO THE LD. AR, AS PER THE GAMESA GROUP CORPORATE PO LICY, ALL CENTRAL ACTIVITIES ARE CARRIED OUT BY GCT AND WHERE NECESSARY, GCT OBTAINS THE ASSISTANCE OF THIRD PARTY VENDORS I N PROVIDING THE CENTRAL SERVICES IN THE NATURE OF MANAGEMENT AC TIVITIES. THE AFFILIATES COMPANIES (WHICH INCLUDE THE ASSESSEE) O BTAIN ADVICE AND ASSISTANCE FROM GCT AND THE COST INCURRED (GCT OWNS COST AND COST CHARGED BY THIRD PARTY VENDORS) WERE CHARG ED TO ALL THE GROUP COMPANIES. GCT HAS TREMENDOUS MANAGERIAL TAL ENT AND EXPERIENCE IN THE FIELD OF WIND TURBINE INDUSTRY. IT HAS SENIOR PROFESSIONALS WITH LOTS OF YEARS OF EXPERIENCE IN T HE FIELD. AS A NEW PLAYER IN INDIA, THERE WAS A CRITICAL NEED FOR THE ASSESSEE TO DRAW MANAGERIAL SERVICES FROM THIS ENTITY TO FACE T HE CHALLENGES IN THE EMERGING MARKET LIKE INDIA, WHERE THE MARKET IS VERY EARLY PHASE OF DEVELOPMENT AND CHALLENGING. WITH FURTHER EXPANSION OF MANUFACTURING OPERATIONS AND GLOBALIZATION OF CU STOMER 86 ACTIVITIES, IT WAS ESSENTIAL FOR THE ASSESSEE TO AD OPT A GLOBAL APPROACH FOR ITS OWN ACTIVITIES TO SERVE ITS GLOBAL CUSTOMER BASE AND MAINTAIN COMPETITIVE POSITION IN THE MARKET. I T WOULD HAVE BEEN DIFFICULT FOR THE ASSESSEE TO PROCURE THE SERV ICES FROM THIRD PARTY SERVICE PROVIDERS WHICH ARE GROUP AND PRODUCT SPECIFIC. THEREFORE, THE ASSESSEE AVAILED THE SERVICES FROM I TS AES INSTEAD OF APPROACHING ANY THIRD PARTY SERVICE PROV IDER. GIVEN THAT THE SERVICES ARE PECULIAR AND CAN BE RENDERED ONLY BY THE AES BY WAY OF POOLING THE RESOURCES AT GROUP LEVEL, THE CONTENTION OF THE TPO THAT IT IS MERELY IN THE NATU RE OF SHAREHOLDER ACTIVITY IS BASELESS. FURTHER, DUE TO CONFIDENTIALITY ISSUES, IT IS THE GENERAL PRACTICE TO UNDERTAKE SUC H SERVICES THROUGH GROUP ENTITIES. FURTHER, THE ASSESSEE HAS SUBSTANTIATED THAT THE SERVICES HAVE ACTUALLY BEEN RENDERED BY IT S AE AND ESTABLISHED THE UNDERLYING BENEFIT DERIVED OUT OF S UCH SERVICES. DESCRIPTION OF NEED, BENEFIT ON ACCOUNT OF MANAGEME NT SERVICE IS CAPTURED. THEREFORE, THE CONTENTION OF THE TPO AND DRP THAT THERE IS NO REQUIREMENT TO AVAIL MANAGEMENT SERVICE FROM ITS AE IS INAPPROPRIATE. 87 19.5 IN RESPECT OF BENEFITS DERIVED BY THE ASSESS EE ON ACCOUNT OF THE MANAGEMENT SERVICES, THE LD. AR SUBM ITTED THAT THE SUBJECT YEAR WAS THE SECOND YEAR OF COMMERCIAL OPERATIONS OF GAMESA INDIA. THIS YEAR SAW A HUGE INCREASE IN THE ASSESSEES TURNOVER WITH INCREASED ACTIVITY DUE TO NEW WTG MODEL G-58 IN INDIA COUPLED WITH NEW WIND FARM DEVE LOPMENT IN THIS YEAR. TO MEET THIS INCREASED ACTIVITY, THE AS SESSEE HAD TO AVAIL PROFESSIONAL SUPPORT SERVICES IN THE NATURE O F MANAGEMENT SUPPORT (GENERAL, LEGAL, OPERATIONAL ETC.). THE AE POSSESSED IN- DEPTH KNOWLEDGE AND UNDERSTANDING ABOUT THE WIND IN DUSTRY AND THE BUSINESS REALITIES. THEREFORE, THE ASSESSEE BE ING PART OF THE GAMESA GROUP, OBTAINED THE CENTRALIZED SUPPORT SERV ICES FROM THE AE. FURTHER, THE LD. AR, SUBMITTED THAT THE AS SESSEE PRODUCED THE COPY OF MAIL CORRESPONDENCES AND REPOR TS EVIDENCING THE RENDITION OF MANAGEMENT SERVICES AND UNDERLYING BENEFITS AVAILED BY THE ASSESSEE. DESCRIPTION OF N EED, BENEFIT ON ACCOUNT OF MANAGEMENT SERVICE IN RELATION TO EACH O F THE SERVICE IS CAPTURED. THE LD. AR RELIED ON THE DECISION OF THE TRIBUNAL, DELHI BENCH, IN THE CASE OF SHOWA INDIA (P) LTD. VS . DCIT [ITA NO.166 OF 2013], WHEREIN IT HAS BEEN HELD THAT WHER E THE 88 ASSESSEE HAS PRODUCED THE DOCUMENTS/EVIDENCE, THE T PO CANNOT BY ANY STRETCH OF IMAGINATION HOLD THAT THE EVIDENCES ARE IRRELEVANT, WITHOUT EVEN PERUSING SUCH EVIDENCES. FURTHER, THE TRIBUNAL RECOGNIZED THE PRINCIPLE THAT THE TPO HAS NO JURISDICTION TO QUESTION THE COMMERCIAL EXPEDIENCY OF TRANSACTIO NS ENTERED INTO BY THE ASSESSEE COMPANY. 19.6 THE LD. AR, SUBMITTED THAT ALLOCATION OF COST BASED ON TURNOVER OF AES CANNOT BE A FACTOR TO PROPOSE TRANS FER PRICING ADJUSTMENTS. IN THE TRANSFER PRICING ORDER, THE T PO REMARKED THAT THE COSTS ARE ALLOCATED TO ALL AFFILIATES PRIN CIPALLY ON THE BASIS OF REVENUE WHICH IS BASED ON THE PRINCIPLE OF CA PACITY TO PAY RATHER THAN ON THE BASIS OF THE NEED AND EXTENT OF SERVICES AVAILED BY THE AFFILIATES. IN THIS REGARD, THE LD. AR, SUBMITTED THAT UNDER THE PROVISIONS OF SEC.92CA OF THE ACT, THE TP O HAS THE AUTHORITY TO DETERMINE THE ALP OF THE TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. THE JURISDICTION OF THE TPO CANNOT E XTEND TO DECIDE THE BASIS OF CHARGE/ALLOCATION OF EXPENSES. IN THE INSTANT CASE, THE TPO OUGHT TO HAVE CONFINED HIS JURISDICTI ON IN DETERMINING WHETHER THE COSTS ALLOCATED BY GCT SPAI N ARE AT ARMS LENGTH OR NOT. FOR THE PURPOSES OF BENCHMAR KING THE 89 PROFITS, THE ASSESSEE CONSIDERED TNMM AS THE MOST A PPROPRIATE METHOD AND THE PLI OF THE ASSESSEE IS HIGHER THAN T HAT OF THE COMPARABLE COMPANIES. RECENTLY, IN THE CASE OF DUR R INDIA (P) LTD. [ITA NO.754/MDS/2014], THE CO-ORDINATE BENCH O F THE TRIBUNAL HELD THAT ALLOCATION OF COST PARTLY ON THE BASIS OF TURNOVER AND NET PROFIT CANNOT BE CONSIDERED AS A FACTOR TO PROPOSE TRANSFER PRICING ADJUSTMENT. THE BENCH HAS HELD TH AT WHERE THE PLI OF THE ASSESSEE UNDER TNMM IS AT ARMS LENGTH AND IT IS NOT POSSIBLE ON THE PART OF THE DEPARTMENT TO IDENT IFY A COMPARABLE RENDERING SIMILAR SERVICES, THE QUESTION OF CONSIDERING CUP METHOD WOULD NOT ARISE AT ALL. INT ERESTINGLY, IN THE SAID DECISION, A PORTION OF COST (50%) HAS BEEN ALLOCATED ON THE PROPORTION OF NET PROFITS OF THE GROUP ENTITIES . AS A RESULT, ONLY COMPANIES HAVING PROFITS WOULD SUFFER SUCH COS T WHEREAS COMPANIES THAT HAVE INCURRED LOSS WOULD NOT REMIT T HE SAME. EVEN IN A SCENARIO WHERE NET PROFIT IS CONSIDERED A S ALLOCATION KEY, THE CO-ORDINATE BENCH HAS HELD THAT NO TRANSFE R PRICING ADJUSTMENT IS REQUIRED ON MANAGEMENT FEE IN A SCENA RIO WHERE THE PLI OF THE ASSESSEE COMPANY IS AT ARMS LENGTH AS COMPARED TO ITS COMPARABLES. RELEVANT EXTRACTS OF THE DECIS ION ARE 90 CAPTURED. APPLYING THE RATIONALE, THE LD. AR, SU BMITTED THAT THE ALLEGATION OF THE TPO IN HOLDING THAT THE MECHANISM ADOPTED BY THE ASSESSEEIS BASED ON THE PRINCIPLE OF CAPACITY TO PAY IS BASELESS. THE TPO HAS NO JURISDICTION TO QUESTION THE ALLOCATION METHODOLOGY ADOPTED BY THE ASSESSEE. IN OTHER WORD S, THE TPO SHOULD HAVE CONFINED HIS JURISDICTION ONLY TO THE E XTENT OF DETERMINING ALP. FURTHER, IN THE SAID DECISION, TH E TRIBUNAL HAS SPECIFICALLY HELD THAT CUP CANNOT BE CONSIDERED AS METHOD FOR DETERMINATION OF ALP OF MANAGEMENT FEE IN A CASE WH ERE THE PLI OF THE ASSESSEE IS AT ARMS LENGTH. 19.7 ACCORDING TO THE LD. AR, THERE IS NO TRANSFER PRICING ADJUSTMENT IN RESPECT OF TRANSACTIONS WHICH ARE OTH ERWISE CONSIDERED AS GENUINE FOR TAX PURPOSES. THE LD. AR SUBMITTED THAT MANAGEMENT FEE IS NOT TAX FREE. IN OTHER WORD S, THE ASSESSEE HAS BEEN REMITTING SERVICE TAX ON REVERSE CHARGE MECHANISM (BEING RECEIVER OF SERVICE). FURTHER, TH E ASSESSEE HAS OBTAINED A NIL WITHHOLDING CERTIFICATE FROM THE TAX AUTHORITIES. THE SAID PRINCIPLE HAS BEEN LAID DOWN BY THE TRIBUN AL, CHENNAI BENCH, IN THE CASE OF ABAN OFFSHORE LTD. VS. DCIT [ ITA NO.585 OF 91 2015], WHEREIN THE TRIBUNAL HAS HELD THAT ANY PAYM ENT WHICH IS SYSTEMATICALLY SUBJECT TO DEDUCTION OF TAX AT SOURC E CANNOT BE SAID TO BE NON-GENUINE. THEREFORE, THE LD. AR, SUB MITTED THAT THE TPO HAS NO JURISDICTION TO QUESTION THE GENUINENESS OF MANAGEMENT FEE SINCE IT HAS BEEN SUBJECT MATTER OF SERVICE TAX AND SPECIFIC LOWER TAX DEDUCTION CERTIFICATE HAS BE EN AVAILED. 20. THE LD. DR SUBMITTED THAT THE BASIC ISSUE BEFOR E THE TPO WAS TO DETERMINE ALP OF THE FEE PAID BY THE ASSESSE E. FOR DETERMINING THE ALP OF THE TRANSACTION, A PROPER SH OW CAUSE NOTICE WAS ISSUED AND SERVED UPON THE ASSESSEE. TH E ASSESSEE HAS ONLY REFERRED TO THE SERVICE AGREEMENT , SUMMARY OF THE COST ALLOCATION AMONG VARIOUS SERVICES PROVI DED AND COPY OF THE VARIOUS INVOICES/DEBIT NOTES/CREDIT NOTES RA ISED DURING THE RELEVANT YEAR UNDER CONSIDERATION; HOWEVER THE QUER IES OF THE TPO STILL REMAINED UNANSWERED. WHEN THE ASSESSEE I S PAYING ON COST TO COST BASIS TO AE, THEN WHERE ARE THE ACT UAL DETAILS OF THE COST, HOW ASSESSEE HAS CALCULATED THAT THE INVO ICE RAISED BY AE IS CORRECT, WHEN DETAILS OF COSTS ARE NOT AVAILA BLE TO IT? WHERE SUCH A TRANSACTION AT ARMS LENGTH, THE ASSES SEE WOULD HAVE ASKED FOR THE COMPLETE DETAILS OF THE COST INC URRED BY THE 92 AE BEFORE ACCEPTING THE AMOUNT CLAIMED BY AE FROM I T. HOWEVER, ASSESSEE HAS NOT BROUGHT ON RECORD ANY SUC H DETAILS TO SATISFY THE TPO. DOCUMENTS RELIED UPON BY THE A SSESSEE ARE THUS JUST UNSUPPORTED PIECE OF PAPERS, WITHOUT ANY EVIDENTIARY VALUE. SO THERE DOESNT APPEAR TO BE ANY ARBITRARI NESS ON THE PART OF THE TPO. THIS IS NOT THE CLAIM OF THE TPO THAT THE ASSESSEE SHOULD NOT HAVE TAKEN SOME OR ANY SERVICES , BUT THE ISSUE IS THE VALUE OF SUCH SERVICES AT ARMS LENGTH AND THE QUANTUM OF SERVICES ACTUALLY RECEIVED BY THE ASSESS EE. THE AGREEMENT BETWEEN RELATED PARTIES AND THE INVOICES RAISED THERE FROM CANNOT BE CONSIDERED ADEQUATE AND SUFFICIENT E VIDENCED OF SERVICE PERFORMANCE. THUS, IT IS OBSERVED THAT THE BASIC EVIDENCE TO SUPPORT THE CLAIM OF COSTS INCURRED AT THE AES END ARE NOT AVAILABLE FOR VERIFICATION. THIS IS THE VE RY MINIMUM THAT THE TPO IS REQUIRED TO INVESTIGATE TO ESTABLISH WHE THER THE COST ALLOCATED AS PER PREDETERMINED KEYS IS REASONABLE/L EGITIMATE OR NOT. NO EVIDENCE FROM THE BOOKS OF THE AE WITH REG ARD TO ITS COSTS, BOTH DIRECT AND INDIRECT AND THE PRIMARY DOC UMENTS MAINTAINED BY THE AE IN SUPPORT OF THIS CLAIM IN IT S BOOKS, HAS BEEN PRODUCED BY THE ASSESSEE EITHER BEFORE THE TPO OR BEFORE 93 THE PANEL; FOR VERIFICATION OF THIS IMPORTANT AND K EY INGREDIENT IN THE TP ANALYSIS. AS DISCUSSED BY THE TPO IN HIS OR DER, THE ASSESSEE HAS FAILED TO SUBSTANTIATE ITS CLAIM OF HA VING RECEIVED ANY SUCH SERVICES WHICH WERE FOR ITS OWN BUSINESS I NTEREST. THE SERVICES RENDERED, IF ANY, ARE IN THE NATURE OF CON TROL AND HOLD TO BE EXERCISED BY THE AE OVER ITS AFFILIATES. SO TH E OBJECTIONS OF THE ASSESSEE ARE NOT ACCEPTED. THE RELIANCE OF THE TPO ON THE DECISION OF GEMPLUS INDIA (SUPRA) AS WELL AS OTHER CASES IS ALSO WELL PLACED. IN GEMPLUS INDIA (SUPRA) THE ORDER OF THE TPO WAS UPHELD UNDER SIMILAR CIRCUMSTANCES. 20.1 THE LD. DR, SUBMITTED THAT THE ASSESSEE IS SEE KING TO JUSTIFY THE PAYMENT OF MANAGEMENT SERVICE FEE ON TH E GROUND THAT EVEN AFTER PAYMENT OF THESE AMOUNTS, THE NET M ARGINS OF THE ASSESSEE WAS MORE THAN THAT OF COMPARABLE COMPANIES IN THE SAME INDUSTRY. THIS IS A SPECIOUS ARGUMENT. THE P ROFITS OF THE INDIAN ENTITY ARE DUE TO THE EFFORTS OF THIS ENTITY AND CONSEQUENTLY, THE ENTIRE PROFITS ARE TAXABLE IN IND IA EVEN IF THE MARGINS ARE ABOVE THE ARMS LENGTH LEVEL. THIS DOE S NOT IN ANY WAY IMPACT ON THE ROYALTY AND MANAGEMENT SERVICE FE E. THE NEED FOR INCURRING SUCH EXPENSES AND THE BENEFITS A CCRUING AS A 94 RESULT ARE NEEDED TO BE JUSTIFIED ON A STAND-ALONE BASIS WITHOUT TAKING RECOURSE TO THE ARGUMENT OF AVAILABILITY OF SUFFICIENT PROFITS. THESE ARE TWO SEPARATE ISSUES AND ARE NEEDED TO BE DEALT WITH SEPARATELY. IN ANY CASE, THE ASSESSEE COULD NOT SU BSTANTIATE THE NEED-BENEFIT ANALYSIS BEFORE THE TPO AS A RESULT OF WHICH DOWNWARD ADJUSTMENTS WERE PROPOSED IN RESPECT OF RO YALTY AND MANAGEMENT SERVICE FEE. THE TRANSACTIONS CAN BE AG GREGATED ONLY IF THEY ARE INTRICATELY INTERTWINED AND CANNOT BE SEPARATELY ANALYZED. THIS IS NOT THE CASE HERE. MOREOVER, AG GREGATED APPROACH TO TRANSFER PRICING ANALYSIS IS THE EXCEPT ION RATHER THAN THE NORM. THIS ISSUE HAS BEEN DEALT WITH EXTENSIVE LY BY THE DRP IN ITS ORDER DATED 24.3.2007. THE DRP HAS QUOTED T HE CASE LAWS TO REJECT THE ASSESSEES OBJECTIONS IN THIS REGARD. THE GUIDELINES OF 2010 HAS ALSO TAKEN THE VIEW THAT AS FAR AS POSSIBLE, TRANSACTIONS ARE TO BE EVALUATED SEPARATE LY. 20.2 THE LD. DR, FURTHER SUBMITTED THAT THE TPO H AS NOT SOUGHT TO QUESTION THE COMMERCIAL EXPEDIENCY OF THE MANAGEMENT FEE. WHAT HAS BEEN DONE IS TO COMPARE T HE CIRCUMSTANCES SURROUNDING THE PAYMENT AND THE SERVI CES SAID TO HAVE RECEIVED WITH AN INDEPENDENT PARTY IN THE UNCO NTROLLED 95 SITUATION. AFTER ANALYZING THE AGREEMENT AND OTHER DOCUMENTS IN THIS REGARD, THE TPO HAS COME TO THE CONCLUSION THA T THE TRANSACTION WAS NOT AT ARMS LENGTH AS AN INDEPENDE NT ENTITY WOULD NOT HAVE AGREED TO SHOULDER THE LIABILITY FOR SERVICES WHICH DO NOT THE BENEFIT TO IT. ONLY A COST-BENEFIT ANA LYSIS HAS BEEN UNDERTAKEN FROM THE PERSPECTIVE OF ARMS LENGTH AND THE COMMERCIAL EXPEDIENCY OF ENTERING INTO THE AGREEMEN T WAS NEVER QUESTIONED. THE DRP HAS ANALYZED THE TRANSAC TION IN DETAILS AND HAS COME TO THE CONCLUSION THAT THE SER VICES WHICH THE AE IS SUPPORTED TO RENDER TO THE ASSESSEE ARE G ENERAL AND NON-SPECIFIC AND THE ASSESSEE ALSO FAILED TO FURNIS H DOCUMENTS CALLED FOR BY THE DRP. 20.3 THE LD. DR, ALSO SUBMITTED THAT IN THE ANALYSI S OF SERVICES RENDERED BY A GROUP COMPANY TO ONE OR MORE GROUP CO MPANIES, IT REQUIRES THE ECONOMIC VALUE OR COMMERCIAL CONTRI BUTION AND THE BENEFIT WHICH CAN MADE A DIFFERENCE IN THE COMM ERCIAL POSITION OF THE SERVICE RECEIVER TO BE ANALYZED. THIS CONCEPT CALLED BENEFIT TEST, WHICH TAKES PLACE IN THE OECD GUIDELINES AND THE IMPORTANCE OF THE TEST IN QUESTIONS EMPHASI ZED IN FOR 96 JUSTIFICATION OF THE PERFORMANCE OF INTRA-GROUP SER VICES. OECD GUIDELINES STATE THAT A PAYMENT MADE BY A GROUP COM PANY DOES NOT CONSTITUTE A SUFFICIENT EVIDENCE FOR THE PROVIS ION OF THE SERVICES IN RETURN FOR THE PAYMENT. MOREOVER, IT I S ALSO STATED THAT ABSENCE OF PAYMENT OR AGREEMENT BETWEEN THE PA RTIES REGARDING THE SERVICES DOES NOT MEAN THAT THE SERVI CES HAVE NOT BEEN RENDERED. IN THIS CASE, THE SERVICE AGREEMENT S ARE AVAILABLE FOR INTRA-GROUP SERVICES BUT CONDUCT OF T HE PARTIES IS IN QUESTION. THE NEED FOR THE SERVICES FROM THE PERSP ECTIVE E OF THE PURCHASING ENTITY MUST BE EVALUATED IN ORDER TO DETERMINE THAT THE INTRA-GROUP SERVICES HAS IN FACT BEEN RECE IVED WHICH CONSTITUTES THE BASIS OF THE BENEFIT TEST CONCEPT. IN ORDER TO DETERMINE WHETHER AN INTRA-GROUP SERVICE HAS BEEN R ENDERED, IT IS NECESSARY TO EXAMINE WHETHER THE SERVICE IN QUES TION PROVIDES A COMMERCIAL OR ECONOMIC VALUE THAT WOULD STRENGTHEN THE COMMERCIAL POSITION OF THE RECEIVING ENTITY. H ENCE, THE ASSESSEES CONTENTION REGARDING THE NEED BENEFIT TE ST IS NOT ACCEPTABLE. IN THIS CONTEXT THE FOLLOWING OECD GUI DELINES (PARA NO.79, PAGE NO.207) : IN A NARROW RANGE OF SUCH CASE, AN INTRA GROUP ACT IVITY MAY BE PERFORMED RELATING TO GROUP MEMBERS EVEN THOUGH THO SE GROUP 97 MEMBERS DO NOT NEED THE ACTIVITY (AND WOULD NOT BE WILLING TO PAY FOR IT WERE THEY INDEPENDENT ENTERPRISES). SUCH AN AC TIVITY WOULD BE ONE THAT A GROUP MEMBERS, I.E. IN ITS CAPACITY AS SHARE HOLDER. THIS TYPE OF ACTIVITY WOULD NOT JUSTIFY A CHARGE TO THE RECIPIEN T COMPANIES ASSUMES SIGNIFICANCE. THE EUROPEAN UNION JOINT TRANSFER PRICING FORUM (JT PF), IN THEIR SUMMIT AT BRUSSELS ON 04.02.2010 ON THE GUID ELINES ON LOW VALUE ADDING INTRA-GROUP SERVICES HAS DISCUSSE D THIS ISSUE ELABORATELY. IT SAYS THAT COSTS OF MANAGERIAL AND CONTROL (MONITORING) ACTIVITIES RELATED TO THE MANAGEMENT A ND PROTECTION OF THE INVESTMENTS IN PARTICIPATIONS ARE OF SHAREHO LDERS ACTIVITIES ONLY AND THESE COSTS ARE TO BE CLASSIFIED AS SHAREH OLDERS COST ONLY. 20.4 HENCE, THE LD. DR, SUBMITTED THAT THE BENEFIT RECEIVED FROM SUCH STEWARDSHIP SERVICES CAN ONLY BE CONSIDER ED AS INCIDENTAL BENEFITS AS PER THE OECD GUIDELINES AN D DO NOT REQUIRE A SEPARATE PAYMENT. THE RELEVANT PARA NO.7 OF OECD GUIDELINES STATES THAT : THE INCIDENTAL BENEFITS ORDINARILY WOULD NOT CAUSE THESE OTHER GROUP MEMBERS TO BE TREATED AS RECEIVING ON INTRA-G ROUP SERVICE BECAUSE THE ACTIVITIES PRODUCING THE BENEFITS WOULD NOT BE ONES FOR WHICH AN INDEPENDENT ENTERPRISE ORDINARILY WOULD BE WILLING TO PAY. 98 THE LD. DR FURTHER SUBMITTED THAT IT IS THE RESPONS IBILITY OF THE ASSESSEE TO PROVE THE RECEIPT OF SERVICE WITH SUPPO RTING DOCUMENTS. ACCORDING TO THE LD. DR, THE ASSESSEE H AS FAILED TO SUBMIT THE DOCUMENTATION TO SUBSTANTIATE TO PROVE T HE RECEIPT OF SERVICE AND NEED FOR SUCH SERVICE. IN THE ABSENCE OF EVIDENCES AND THE SERVICES RECEIVED ARE IN THE NATURE OF ROUT INE SERVICES FROM A SHAREHOLDER THE TPO DETERMINED THE ALP AS NI L BECAUSE THE SERVICES ARE NOT BE ONES FOR WHICH AN INDEPENDE NT ENTERPRISE ORDINARILY WOULD BE WILLING TO PAY. THE LD. DR ALS O SUBMITTED THAT THE PURPOSE OF TRANSFER PRICING ANALYSIS IS TO ENSU RE THAT THE INDIAN TAX JURISDICTION GETS ITS DUE SHARE OF TAXES IN THE INTERNATIONAL TRANSACTIONS CARRIED BY THE INDIAN CO MPANIES WITH ITS AES ABROAD. SO THE TPO SHOULD CONSIDER ALL THE ASPECTS WHICH MAY AFFECT DUE SHARE OF TAXES TO INDIAN TAX J URISDICTION. 20.5 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED OPINION, TRANSACTION T O TRANSACTION APPROACH IS NOT REQUIRED IF THE PROFIT LEVEL INDICA TOR (PLI) OF ASSESSEE AT ENTITY SEGMENT LEVEL IS AT ARMS LENGTH WHERE THE 99 ASSESSEE COMPANY HAS ADOPTED TNMM FOR THE PURPOSES OF BENCH MARKING, ITS ADOPTION OF CUP SOLELY FOR THE P URPOSES OF EVALUATING TECHNICAL ASSISTANCE FEE WOULD LEAD TO C HAOS AND BE DETRIMENTAL TO THE INTERESTS OF BOTH REVENUE AND TH E ASSESSEE. IN OTHER WORDS, ONCE THE ARMS LENGTH CRITERION IS TES TED AT ENTITY LEVEL, THE LEARNED TPO HAS NO JURISDICTION TO EXAMI NE THE NEED, BENEFIT ETC IN RELATION TO EACH TRANSACTION. THIS V IEW WAS SUPPORTED BY THE JUDGEMENT OF DELHI HIGH COURT IN T HE CASE OF MAGNETIC MARELLI POWERTRAIN INDIA (P) LTD. VS DCIT [389 ITR 469] (DELHI HC) WHEREIN HELD THAT:- 17. AS FAR AS THE SECOND QUESTION IS CONCERNED, THE TPO ACCEPTED TNMM APPLIED BY THE ASSESSEE, AS THE MOST APPROPRIATE ME THOD IN RESPECT OF ALL THE INTERNATIONAL TRANSACTIONS INCLUDING PAYMENT OF ROY ALTY. THE TPO, HOWEVER, DISPUTED APPLICATION OF TNMM AS THE MOST APPROPRIAT E METHOD FOR THE PAYMENT OF TECHNICAL ASSISTANCE FEE OF RS. 38,58,80,000 ONL Y FOR WHICH COMPARABLE UNCONTROLLED PRICE (CUP) METHOD WAS SOUGHT TO BE APPLIED. HERE, THIS COURT CONCURS WITH THE ASSESSEE THAT HAVING ACCEPTED THE TNMM AS THE MOST APPROPRIATE, IT WAS NOT OPEN TO THE TPO TO SUBJECT ONLY ONE ELEMENT, I.E PAYMENT OF TECHNICAL ASSISTANCE FEE, TO AN ENTIRELY DIFFERENT (CUP) METHOD. THE ADOPTION OF A METHOD AS THE MOST APPROPRIATE ONE AS SURES THE APPLICABILITY OF ONE STANDARD OR CRITERIA TO JUDGE AN INTERNATIONAL TRANSACTION BY. EACH METHOD IS A PACKAGE IN ITSELF, AS IT WERE, CONTAINING THE NEC ESSARY ELEMENTS THAT ARE TO BE USED AS FILTERS TO JUDGE THE SOUNDNESS OF THE INTER NATIONAL TRANSACTION IN AN ALP FIXING EXERCISE. IF THIS WERE TO BE DISTURBED, THE END RESULT WOULD BE DISTORTED AND WITHIN ONE ALP DETERMINATION FOR A YEAR, TWO OR EVEN FIVE METHODS CAN BE ADOPTED. THIS WOULD SPELL CHAOS AND BE DETRIMENTAL TO THE INTERESTS OF BOTH THE ASSESSEE AND THE REVENUE. THE SECOND QUESTION IS, T HEREFORE, ANSWERED IN FAVOUR OF THE ASSESSEE; THE TNMM HAD TO BE APPLIED BY THE TPO/AO IN RESPECT OF THE TECHNICAL FEE PAYMENT TOO. 100 20.5.1 IN THE CASE OF DCIT VS AIR LIQUIDE ENGINEER ING INDIA (P) LTD. [152 LTD 157) (HYDERABAD ITAT) HELD THAT :- 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS REGARD, I T IS SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMINED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY L INKED WITH THESE ACTIVITIES. IN THE ABSENCE OF PRODUCTION AND SALE OF PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARD ING PAYMENT OF ANY ROYALTY. RULE 10A(D) OF THE ITAT RUL ES DEFINES TRANSACTION AS A NUMBER OF CLOSELY LINKED TRANSACTIONS. ROYALTY, THEN, IS A TRANSACTION CLOSE LY LINKED WITH PRODUCTION AND SALES. FT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTERPRISE, BEING EMBEDDED T HEREIN. THAT BEING SO, ROYALTY CANNOT BE CONSIDERED AND EXA MINED IN ISOLATION ON A STANDALONE BASIS. ROYALTY IS TO B E CALCULATED ON A SPECIFIED AGREED BASIS, ON DETERMINING THE NET SALES WHICH, IN THE PRESENT CASE, ARE REQUIRED TO BE DETE RMINED AFTER EXCLUDING THE AMOUNTS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SINCE SUCH NET SALES DO NOT STAND RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT. T HEREFORE, IT IS OUR CONSIDERED OPINION THAT THE ASSESSEE WAS CORRECT IN EMPLOYING AN OVERALL TNMM FOR EXAMINING THE ROYALTY . THE TPO WORKED OUT THE DIFFERENCE IN THE PU OF THE OUTS IDE PARTY (THE ASSESSEE) AT 4.09% AND THE COMPARABLES AT 7.05 %. THIS HAS NOT BEEN SHOWN TO FALL OUTSIDE THE PERMISS IBLE RANGE. 34. THE DECISION OF THE TRIBUNAL IN EKLA APPLIANCE S, 2012- TH-01-HCDE1- TP, HAS BEEN SOUGHT TO BE DISTINGUISHE D BY THE TPO, OBSERVING THAT THE FACTS IN THAT CASE ARE NOT IN PAN MATENA WITH THOSE OF THE ASSESSEES CASE. HOWEVER, THEREIN ALSO, THE BENEFIT TEST HAD BEEN APPLIED BY THE TPO, AS IN THE PRESENT CASE. THE MATTER WAS CARRIED IN APPEAL BEFO RE THE HONBLE HIGH COURT. THE HONBLE DELHI HIGH COURT HA S HELD THAT THE SO-CALLED BENEFIT TEST CANNOT BE APPLIED T O DETERMINE THE ALP OF ROYALTY PAYMENT AT NIL AND THAT THE TPO COULD APPLY ONLY ONE OF THE METHODS PRESCRIBED UNDER THE LAW. A SIMILAR VIEW HAS BEEN TAKEN IN SONA OKEGAWA PRECIS ION FORGINGS LTD. (SUPRA) AND IN KHS MACHINERY PVT. L TD. VS. ITO, 53 SOT 100 (AHM) (URO). 35. IT IS, THUS, SEEN THAT THE ROYALTY PAYMENT @ 3% BY THE ASSESSEE IS AT ARMS LENGTH. THE TECHNICAL COLLABOR ATION AGREEMENT STANDS APPROVED BY THE GOVERNMENT OF INDI A. THE ROYALTY PAYMENT HAS BEEN ACCEPTED BY THE DEPART MENT AS HAVING BEEN MADE BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR ITS BUSINESS PURPOSES. FOR ASSESSME NT YEARS 101 2004-05 AND 2005-06, SUCH PAYMENT OF ROYALTY HAS BE EN ALLOWED BY THE CIT (A). AS PER THE FEMA REGULATIONS , ROYALTY CAN BE PAID ON NET SALES @ 5% ON DOMESTIC S ALES AND @ 8% ON EXPORT SALES. THE ROYALTY PAYMENT BY TH E ASSESSEE FALLS WITHIN THESE LIMITS. FT ALSO FALLS W ITHIN THE LIMITS OF PAYMENT OF ROYALTY IN THE AUTO MOBILE SECTOR, AS PER THE MARKET TREND. THIS PAYMENT OF ROYALTY IS AT THE SAM E PERCENTAGE AS THAT PAID BY OTHER AUTO ANCILLARIES I N THE AUTOMOTIVE INDUSTRY. THEN, IN EKIA APPLIANCES (SU PRA) AND IN ERICSSON INDIA PVT. LTD. VS. DCIT, 2012-TII-48 -ITAT-DEL- TP, IT HAS BEEN HELD THAT ROYALTY PAYMENT CANNOT BE DISALLOWED ON THE BASIS OF THE SO-CALLED BENEFIT TE ST AND THE DOMAIN OF THE TPO IS ONLY TO EXAMINE AS TO WHETHER THE PAYMENT BASED ON THE AGREEMENT ADHERES TO THE ARMS LENGTH PRINCIPLE OR NOT. THAT BEING SO, THE ACTION OF THE TPO IN THE PRESENT CASE, TO MAKE THE DISALLOWANCE MAINL Y ON THE GROUND OF THE BENEFIT TEST, IS UNSUSTAINABLE IN LAW . 36. KEEPING IN VIEW ALL THE ABOVE FACTORS, THE DISA LLOWANCE MADE ON ACCOUNT OF ROYALTY IS FOUND TO BE TOTALLY U NCALLED FOR AND IT IS DELETED AS SUCH. ... . 21. HENCE, FOLLOWING THE RATIO OF THE HONBLE DELHI HIGH COURT IN CIT VS. EKL APPLIANCES (SUPRA) AND VARIOUS OTHER DECISIONS AS NOTED ABOVE AND GIVEN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CA SE, WE HOLD THAT THE ADDITION MADE BY THE TPO AND UPHELD BY THE DRP IS U NSUSTAINABLE AND IS TO BE DELETED. HENCE GROUND NO. 2 IS HELD IN FAVOUR OF THE ASSESSEE. HENCE, THE APPEAL OF THE REVENUE ITA.NO.1040/HYD/20 11 IS DISMISSED AND ASSESSEES APPEAL IN ITA.NO.1159/HYD/2011 IS AL LOWED. 20.5.2 IN THE CASE OF ACIT VS SAKATA INX (INDIA) L TD. (JAIPUR) ITA NO. 376/JP/2012] WHEREIN HELD THAT:- 2.9 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE MATERIAL AVAILABLE ON RECORD. IN OUR CONSIDERED VIE W, THERE IS NO INFIRMITY IN THE ORDER OF LD.CIT(A) IN AS MUCH AS: (I) LD.D.R COULD NOT JUSTIFY THE APPLICATION OF CU P METHOD TO ARMS LENGTH WORKING. 102 (II) THE PRODUCTS MANUFACTURED BY THE APPELLANT WER E DEVELOPED FROM TECHNOLOGY SUPPORT PROVIDED BY THE AE, IT WOULD NOT HAVE BEEN POSSIBLE SO WITHOUT THE CONTINUOUS AE SUPPORT. THE RIGHTS OF ACCESS TO THE ONGOING TECHNICAL SUPPORT AND DEVELOP MENT OF NEW PRODUCTS RECEIVED BY THE APPELLANT WERE CLEARLY PRO VIDED IN THE AGREEMENTS ENTERED INTO WITH THE AE. (III) THE COST BENEFIT TEST AS WORKED OUT BY THE T PO WAS NOT BASED ON PROPER APPRECIATION OF THE FACTS AND THUS CUP ME THOD APPLIED BY THE AO/TPO WAS NOT JUSTIFIABLE. (IV) THE JUDICIAL CITATIONS RELIED ON BY LD.CIT(A) AS WELL AS FURTHER JUDGEMENTS RELIED ON BY THE ASSESSEE INCLUDING HON BLE HIGH COURT IN THE CASE OF DELHI EKL APPLIANCE LTD.(SUPRA ) SUPPORT THE VIEW TAKEN BY LD.CIT(A). IN VIEW OF THE FOREGOING, WE UPHOLD THE ORDER OF TH E CIT(APPEALS) AND DISMISS THE REVENUES APPEAL. 20.6 IN OUR CONSIDERED OPINION, ALP OF MANAGEMENT SERVIC E CANNOT BE SAID TO BE NIL IN THE ABSENCE OF A VALID COMPARABLE. SINCE NO EFFORT HAD BEEN MADE BY TPO TO DETERMINE M ARKET VALUE OF SERVICES RECEIVED BY ASSESSEE, ADJUSTMENT MADE BY TPO AS A DISALLOWANCE OF EXPENSE COULD NOT BE UPHEL D. IN OTHER WORDS, THE TPO CANNOT SIMPLY ARRIVE AT A CONCLUSION THAT QUALITY AND VOLUME OF SERVICES RECEIVED BY THE APPELLANT WE RE NOT COMMENSURATE WITH PAYMENT MADE BY THE APPELLANT. T HIS VIEW IS FORTIFIED BY THE ORDER OF TRIBUNAL IN THE CASE O F MERCK LTD. VS DCIT [148 LTD 513] (MUMBAI) - UPHELD BY BOMBAY HIGH COURT [ITA 272 OF 2014] 103 24.7 SUCH ARGUMENT IN OUR VIEW IS NOT CONVINCING. T HE ARGUMENT WOULD HAVE BEEN VALID IF FEES WAS FIXED IN RESPECT OF EACH SERVICE, WHICH WAS COMPULSORILY REQUIRED TOBE PROVIDED TO TH E ASSESSEE, BUT IT IS NOT SO IN THE PRESENT CASE. THE AGREEMENT LIS TED CERTAIN SERVICES ON WHICH THE ASSESSEE REQUIRES GUIDANCE/AS SISTANCE FROM TIME TO TIME. THE ASSESSEE WAS THUS ENTITLED TO ANY OF THE SERVICES AS AND WHEN REQUIRED. THEREFORE, APPLYING CUP METHO D TO THE SERVICE NOT AVAILED BY THE ASSESSEE DURING THE YEAR IS NOT JUSTIFIED. IT WOULD HAVE BEEN APPROPRIATE IF THE AO HAD APPLIE D CUP METHOD TO THE PAYMENT MADE DURING THE YEAR BY THE ASSESSEE FOR THE THREE SERVICES AND COMPARED WITH SIMILAR PAYMENT FOR SUCH SERVICES BY AN INDEPENDENT PARTY. NO EFFORTS HAVE BEEN MADE BY TPO/AO TO DETERMINE THE MARKET VALUE OF SERVICES RECEIVED BY THE ASSESSEE DURING THE YEAR RELATING TO SAP IMPLEMENTATION AND QUALITY CONTROL TO SHOW THAT THE ASSESSEE HAD PAID MORE COMPARED TO ANY INDEPENDENT PARTY FOR THE SAME SERVICES. THE ASSESS EE HAD SUBMITTED THAT IN CASE THE ASSESSEE HAD PAID TO THE AE AT MAN HOUR RATE FOR THE TECHNICAL SERVICES PROVIDED DURIN G THE YEAR IN RELATION TO SAP IMPLEMENTATION, THE FEES PAYABLE WO ULD HAVE BEEN SIGNIFICANTLY HIGHER. THERE IS NOTHING PRODUCED BEF ORE US TO CONTROVERT THE SAID CLAIM. THE ASSESSEE HAS APPLIED TNMM WHICH SHOWS THAT THE MARGIN SHOWN BY THE ASSESSEE WAS HIG HER THAN THE COMPARABLE COMPANIES. THE CASE OF THE ASSESSEE IS A LSO SUPPORTED BY THE DECISION OF TRIBUNAL IN CASE OF MC CAN ERRIC SON INDIA PVT. LTD. (SUPRA) IN WHICH THE DECISION OF TPO TO TAKE T HE VALUE OF CERGAIN SERVICES AT NIL HAS NOT BEEN UPHELD. CONSID ERING THE ENTIRITY OF FACTS AND CIRCUMSTANCES, THE ADJUSTMENT MADE BY TPO WHICH IS NOTHING BUT DISALLOWANCE OF EXPENSES CANNOT BE UPHE LD. WE, THEREFORE, SET ASIDE THE ORDER OF CIT (A) ON THIS P OINT AND DELETE THE ADDITION MADE. 20 .7 FURTHER, THIS VIEW WAS SUPPORTED BY THE DECISIO N OF CO- ORDINATE BENCH, CHENNAI IN THE CASE OF DCIT VS FLAK T INDIA LTD., 104 VIDE ORDER DATED 9 TH JUNE, 2016 FOR ASSESSMENT YEAR 2009-10 AND IN THE CASE OF DA BUSINESS PROCESS SERVICES (P) LTD. VS DCIT ITAT IN ITA NO. 2166 OF 2011. 20.8 IN OUR CONSIDERED OPINION, JURISDICTION OF TH E TPO IS TO DETERMINE THE COMMERCIAL EXPEDIENCY AND NECESSITY I N THE HANDS OF THE ASSESSEE. THE LEARNED TPO HAS REMARKE D THAT THE ASSESSEE HAS NOT SUBSTANTIATED THE NECESSITY TO INC UR SUCH EXPENDITURE. IN THIS REGARD, IT IS PERTINENT TO NOT E THAT THE BUSINESS TRANSACTIONS OF THE ASSESSES TAKEN PLACE I N THE ORDINARY COURSE, WHICH CANNOT BE QUESTIONED BY THE TPO. FURTHER, THE LEARNED TPO CANNOT CONCLUDE BASED ON M ERE ASSUMPTIONS WITHOUT EXAMINING THE COMMERCIAL EXPEDI ENCY OF THE ASSESSEE. THIS VIEW IS FORTIFIED BY THE JUDGMEN TS/ORDER OF THE VARIOUS COURTS AS BELOW:- I) HIVE COMMUNICATION (P) LTD. VS CIT [353 ITR 200 ] (DELI HC) CIT VS EKL APPLIANCES LTD. [345 ITR 241] (DELI HC) II) CIT V COMPUTER GRAPHICS LTD [155 TAXMAN 612] 20.9 IN OUR CONSIDERED OPINION, BENEFIT TEST IS NO T A PRE- CONDITION FOR JUSTIFYING ARMS LENGTH PRICE. UNDER RULE 10B OF THE 105 INCOME TAX RULES, 1962 WHICH DEALS WITH DETERMINAT ION OF THE ARMS LENGTH PRICE, THERE IS NO MENTION OF THE BE NEFIT TEST BEING ADOPTED FOR THE PURPOSE OF DETERMINING SUCH ARMS L ENGTH PRICE. IT IS NOT A PRE-CONDITION TO CONCLUDE THAT THE PAYM ENT IS WITHIN ARMS LENGTH. IN OTHER WORDS, THE TPO CANNOT APPLY THE BENEFIT TEST FOR DETERMINING ALP AS HE CANNOT ASSESS THE BE NEFIT DERIVED BY ASSESSEE IN A PARTICULAR TRANSACTION. T HIS VIEW IS FORTIFIED BY THE FOLLOWING JUDGMENTS:- (I) R.A.K CERAMICS INDIA PVT. LTD. VS DCIT (HYDERA BAD) (ITA NO. 1492/2014 DT.4.02.2015) WHICH WAS UPHELD BY ANDHRA PRADESH HIGH COURT [ITA NO. 595 OF 2016]- 10. WE ARE REALLY SURPRISED TO SEE THE REASONING OF TPO IN FIXING THE ALP OF ROYALTY PAYMENT AT 2%. IT IS MANIFEST FR OM TPO'S ORDER HE HAS REJECTED ASSESSEE'S TP ANALYSIS UNDER TNMM. FURTHER, IN PARA 6.4 OF HIS ORDER, TPO HAS MENTIONED OF UNDERTA KING AN INDEPENDENT ANALYSIS UNDER TNMM FOR SELECTING COMPA RABLES AND DETERMINING ALP. HOWEVER, EVEN AFTER REPEATEDLY SCA NNING THROUGH HIS ORDER, WE FAILED TO FIND ANY SUCH ANALYSIS BEIN G DONE BY HIM. SIMILARLY, THOUGH IN PARA 5.1.1, LD. DRP HAS OBSERV ED THAT TPO HAS BENCHMARKED INTANGIBLE TRANSACTIONS BY USING CUP, B UT, THE ORDER PASSED BY TPO DOES NOT SUPPORT SUCH CONCLUSION. IT IS AN ACCEPTED PRINCIPLE OF LAW THAT TPO HAS TO DETERMINE THE ALP BY ADOPTING ANY ONE OF THE METHODS PRESCRIBED U/S 92C OF THE ACT. M ODE AND MANNER OF COMPUTATION OF ALP UNDER DIFFERENT METHOD S HAVE BEEN LAID DOWN IN RULE 10B. EVEN, ASSUMING THAT TPO HAS FOLLOWED CUP 106 METHOD FOR DETERMINING ALP OF ROYALTY PAYMENT, AS H ELD BY LD. DRP, IT NEEDS TO BE EXAMINED IF IT IS STRICTLY IN C OMPLIANCE WITH STATUTORY PROVISIONS. RULE 10B(1)(A) LAYS DOWN THE PROCEDURE FOR DETERMINING ALP UNDER CUP METHOD. AS PER THE SAID P ROVISION, TPO AT FIRST HAS TO FIND OUT THE PRICE CHARGED OR P AID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UN CONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS. THER EAFTER, MAKING NECESSARY ADJUSTMENTS TO SUCH PRICE, ON ACCOUNT OF DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION AND COMPARABL E UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING IN TO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRI CE IN THE OPEN MARKET, TPO WILL DETERMINE THE ALP. IT IS PATENT AN D OBVIOUS FROM TPO'S ORDER, THE DETERMINATION OF ALP AT 2% IS NOT AT ALL IN CONFORMITY WITH RULE 10B(1)(A). THE TPO HAS NOT BRO UGHT EVEN A SINGLE COMPARABLE TO JUSTIFY ARM'S LENGTH PERCENTAG E OF ROYALTY AT 2% EITHER UNDER CUP OR TNMM METHOD. ON THE CONTRARY , OBSERVATIONS MADE BY TPO GIVES AMPLE SCOPE TO CONCL UDE THAT ADOPTION OF ROYALTY AT 2% IS NEITHER ON THE BASIS O F ANY APPROVED METHOD NOR ANY REASONABLE BASIS. RATHER IT IS ON AD HOC OR ESTIMATE BASIS, HENCE, NOT IN ACCORDANCE WITH STATUTORY PROV ISIONS. THE APPROACH OF TPO IN ESTIMATING ROYALTY AT 2% BY APPL YING THE BENEFIT TEST, IN OUR VIEW, IS NOT ONLY IN COMPLETE VIOLATIO N OF TP PROVISIONS BUT AGAINST THE SETTLED PRINCIPLES OF LAW. ITAT, MU MBAI BENCH IN CASE OF M/S CASTROL INDIA LTD. VS. ADDITIONAL CITY, ITA NO. 1292/MUM/2007 DATED 20/12/2013 WHILE EXAMINING IDEN TICAL ISSUE OF DETERMINATION OF ALP AT 'NIL' BY APPLYING THE BE NEFIT TEST HELD AS UNDER: '11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT TH E IMPUGNED ROYALTY WAS PAID BY THE ASSESSEE COMPANY TO ITS AE NAMELY CASTROL LTD. UK AT 3.5 % OF THE NET EXFACTORY SALE PRICE OF PRODUCTS MANUFACTURED AND SOLD IN INDIA AS PER THE TECHNICAL COLLABORATION 107 AGREEMENT. THIS INTERNATIONAL TRANSACTION INVOLVING PAYMENT OF ROYALTY TO ITS AE WAS BENCH-MARKED BY THE ASSESSEE R.A.K. CERAMICS INDIA P. LTD. BY FOLLOWING CUP METHOD IN I TS TP STUDY REPORT AND SINCE AVERAGE RATE OF ROYALTY OF THREE C OMPARABLES SELECTED BY IT WAS HIGHER AT 4.67% THAN THE RATE AT WHICH ROYALTY WAS PAID BY THE ASSESSEE TO ITS AE, THE TRANSACTION INVOLVING PAYMENT OF ROYALTY WAS CLAIMED TO BE AT ARM'S LENGT H. A PERUSAL OF THE ORDER PASSED BY THE TPO U/S 92CA (3) OF THE ACT SHOWS THAT NEITHER THESE COMPARABLES SELECTED BY THE ASSESSEE IN ITS TP STUDY REPORT WERE REJECTED BY HER NOR ANY NEW COMPA RABLES WERE SELECTED BY HER BY MAKING A FRESH SEARCH IN ORDER T O SHOW THAT THE PAYMENT OF ROYALTY BY THE ASSESSEE TO ITS AE WAS NO T AT ARM'S LENGTH. SHE SIMPLY RELIED ON THE APPROVAL OF SIA TO HOLD THAT ANY ROYALTY PAID BY THE ASSESSEE ON EXPORTS AND OTHER I NCOME WAS NOT ALLOWABLE AND DISALLOWED THE ROYALTY PAYMENT TO THE EXTENT OF RS. 40,51,486/- TREATING THE SAME AS THE ROYALTY PAID B Y THE ASSESSEE IN RESPECT OF EXPORTS SALE AND OTHER INCOME. WE ARE UNABLE TO AGREE WITH THIS STRANGE METHOD FOLLOWED BY THE TPO TO MAKE A TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WHICH IS N OT SUSTAINABLE EITHER IN LAW OR ON THE FACTS OF THE CASE. SHE HAS NEITHER REJECTED THE METHOD FOLLOWED BY THE ASSESSEE TO BENCH-MARK T HE TRANSACTION IN RESPECT OF PAYMENT OF ROYALTY NOR HA S BEEN ADOPTED ANY RECOGNIZED METHOD TO DETERMINE THE ALP OF THE S AID TRANSACTIONS. THE APPROVAL OF SIA ADOPTED BY THE TP O AS BASIS TO MAKE TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WA S UNTENABLE AND EVEN GOING BY THE SAID BASIS WRONGLY ADOPTED BY THE TPO, NO TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WAS LIA BLE TO BE MADE. AS PER THE SAID BASIS, THE NET SALES OF THE A SSESSEE AFTER EXCLUDING EXPORT SALE AND OTHER INCOME WERE TO THE EXTENT OF RS. 1118.70 CRORES AND THE ROYALTY PAID THEREON AT RS. 24.38 CRORE BEING LESS THAN THE RATE OF 3.5% APPROVED BY SIA, T HERE WAS NO CASE OF ANY EXCESS PAYMENT MADE OF ROYALTY BY ASSES SEE THAN APPROVED BY SIA TO JUSTIFY ITS DISALLOWANCE BY WAY OF TP ADJUSTMENT. IN OUR OPINION, THE LD. CIT (A) COULD N OT APPRECIATE THESE INFIRMITIES IN THE ORDER OF THE TPO DESPITE T HE SAME WERE SPECIFICALLY BROUGHT TO HIS NOTICE ON BEHALF OF THE ASSESSEE AND CONFIRMED THE TP ADJUSTMENT MADE BY THE TPO IN RESP ECT OF ROYALTY PAYMENT WHICH WAS TOTALLY UNJUSTIFIED. WE T HEREFORE, DELETE THE ADDITION MADE BY THE AO/TPO AND CONFIRMED BY TH E LD. CIT ON ACCOUNT OF TP ADJUSTMENT IN RESPECT OF ROYALTY PAYM ENT AND ALLOW GROUND NO. 3 OF THE ASSESSEE'S APPEAL.' (II) TNS INDIA PVT. LTD. VS ACIT [ITA NO. 944/HYD. 2007, DATED 22.01.2014 108 16. WE HAVE CONSIDERED THE ISSUE. WE ARE UNABLE TO ACCEPT THE CONTENTION OF THE ASSESSING OFFICER/TPO WITH REFERE NCE TO THE SERVICES PROVIDED BY AES. ASSESSEE HAS PROVIDED THE AGREEMEN TS WHICH WERE ENTERED NOT DURING THE YEAR BUT IN EARLIER YEAR AND HAS BEEN PAYING THE SERVICE FEE TERMED AS MANAGEMENT FEE ACCORDINGLY. T HIS CLAIM IS NOT ARISING FOR THE FIRST TIME IN THIS YEAR BUT, IS ALS O THERE IN EARLIER YEARS AND LATER YEARS. ASSESSEE IS PART OF A WORLDWIDE GROUP AND THEY HAVE PLACED SOME CORPORATE CENTERS FOR GUIDANCE OF VARIOUS UNIT S RUN BY THEM ACROSS THE GLOBE. IT WAS SUBMITTED THAT THE COSTS B EING INCURRED BY THE CENTERS ARE BEING SHARED BY VARIOUS UNITS AND ASSES SEE'S SHARE IN THIS YEAR HAS COME TO 5% OF THE RECEIPTS PAYABLE TO NFO WORLDWIDE INC USA AND AT 4% TO NFO ASIA PACIFIC LTD. HONGKONG ON THE NET REVENUES. THESE AMOUNTS ARE WITHIN THE NORMS PRESCR IBED FOR PAYMENT OF FEES TO VARIOUS GROUP COMPANIES OF SIMILAR NATUR E. THERE IS NO DISPUTE WITH REFERENCE TO SERVICES BEING PROVIDED B Y THE GROUP COMPANIES TO ASSESSEE AND ASSESSEE ALSO PAID VARIOU S OTHER AMOUNTS INCLUDING ROYALTY. AS SUBMITTED BY ASSESSEE, EVEN T HOUGH SOME CORRESPONDENCE WAS PLACED ON RECORD WITH REFERENCE TO THE ADVISE GIVEN TO ASSESSEE, PROVIDING A CONCRETE EVIDENCE WI TH REFERENCE TO THE SERVICES IN THE NATURE OF SPECIFIC ACTIVITIES IS DI FFICULT, LIKE PROVING THE ROLE OF AN ANESTHESIAN IN AN OPERATION CONDUCTED BY A SURGEON. THERE MAY BE AN EVIDENCE OF OPERATION BEING PERFORMED BY THE DOCTOR IN THE FORM OF SUTURES OR SCARS ETC, WHICH CAN BE PROVED L ATER BUT THE ROLE OF AN ANESTHESIAN BEFORE OPERATION AND AFTER GAINING CONS CIOUSNESS IS DIFFICULT TO PROVE AS THAT IS NOT TANGIBLE IN NATUR E. LIKEWISE, FOR THE ADVISE GIVEN BY VARIOUS GROUP CENTERS TO THE GROUP COMPANI ES IN DAY-TO-DAY MANNER IS DIFFICULT TO PLACE ON RECORD BY WAY OF CO NCRETE EVIDENCE BUT THE WAY BUSINESS IS CONDUCTED, ONE CAN PERCEIVE THE SAME. ASSESSEE HAS GIVEN A DETAILED WRITE-UP AS WELL AS THE SERVIC ES PROVIDED AND BENEFIT OBTAINED WHICH WERE NOT CONTRADICTED. THE A SSESSING OFFICER DID NOT BELIEVE THE SAME IN THE ABSENCE OF CONCRETE EVI DENCE. UNLESS THE ASSESSING OFFICER STEPS INTO ASSESSEE'S BUSINESS PR EMISES AND OBSERVES THE ROLE OF THESE COMPANIES/ ASSESSEE'S BU SINESS TRANSACTIONS, IT WILL BE DIFFICULT TO PLACE ON RECO RD THE SORT OF ADVICE GIVEN 109 IN DAY-TO-DAY OPERATIONS. WHAT SORT OF EVIDENCE SAT ISFIES THE AO IS ALSO NOT SPECIFIED. ASSESSEE HAS ALREADY PLACED LOT OF EVIDENCE IN SUPPORT OF CLAIMS. THEREFORE, ON THAT COUNT, WE ARE NOT IN AGREEMENT WITH THE ASSESSING OFFICER AND TPO THAT SERVICES WERE NOT RE NDERED BY THE GROUP COMPANIES TO ASSESSEE. 16.1. EVEN OTHERWISE, THE ROLE OF TRANSFER PRICING OFFICER IS TO DETERMINE THE ARMS LENGTH PRICE OF A TRANSACTION. HE CANNOT R EJECT THE ENTIRE PAYMENT UNDER THE PROVISIONS OF SEC. 92CA AS HELD B Y THE HON'BLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES LTD (SUPRA ) WHEREIN THE HON'BLE DELHI HIGH COURT, ON SIMILAR FACTS WHERE TH E TPO ALSO DETERMINED THE ALP AT NIL, HAS HELD AS UNDER : '21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR ASSESSEE TO SHOW THAT ANY LEGITIM ATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT O F NECESSITY. IT IS ALSO NOT NECESSARY FOR ASSESSEE TO SHOW THAT ANY ITA.NO.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H /10 & 7/H/2012 TNS INDIA PVT. LTD. EXPENDITURE INCURRED B Y HIM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUA LLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN A NY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EX PENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY AND EXCLUSIVELY' FOR THE PURPOSE OF BUSINESS AND NOTHING MORE. IT IS THIS PR INCIPLE THAT INTER ALIA FINDS EXPRESSION IN THE OECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. 22. EVEN RULE IOB(L)(A) DOES NOT AUTHORISE DISALLOW ANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN T HE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUNERATIVE OR T HAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY ASSESSEE I N HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INC URRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FO R THE PURPOSE OF RULE LOB. WHETHER OR NOT TO ENTER INTO T HE TRANSACTION IS FOR ASSESSEE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDIT URE OR A PART THEREOF ON THE GROUND THAT ASSESSEE HAS SUFFERED CO NTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EXPENSE; THER E IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PRESENT CASE IS TO HOLD THAT ASSESSEE OUGHT NOT TO HAVE ENT ERED INTO THE AGREEMENT TO PAY ROYALTY/BRAND FEE, BECAUSE IT HAS BEEN 110 SUFFERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPEN DITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS P ROVIDED IN THE OECD GUIDELINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWAN CE OF THE EXPENDITURE, PARTICULARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORIZED. 23. APART FROM THE LEGAL POSITION STATED ABOVE, EVE N ON MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE / ROYALTY PAYMENT WAS NOT WARRANTED. ASSESSEE HAS FURNISHED COPIOUS MATER IAL AND VALID REASONS AS TO WHY IT WAS SUFFERING LOSSES CON TINUOUSLY AND THESE HAVE BEEN REFERRED TO BY US EARLIER. FULL JUSTIFICATION SUPPORTED BY FACTS AND FIGURES HAVE BEEN GIVEN TO D EMONSTRATE THAT THE INCREASE IN THE EMPLOYEES COST, FINANCE CH ARGES, ADMINISTRATIVE EXPENSES, DEPRECIATION COST AND CAPA CITY INCREASE HAVE CONTRIBUTED TO THE CONTINUOUS LOSSES. THE COMPARATIVE POSITION OVER A PERIOD OF 5 YEARS FROM 1998 TO 2003 WITH RELEVANT FIGURES HAVE BEEN GIVEN BEFORE T HE CIT (APPEALS) AND THEY ARE REFERRED TO IN A TABULAR FOR M IN HIS ORDER IN PARAGRAPH 5.5.1. IN FACT THERE ARE FOUR TABULAR STATEMENTS FURNISHED BY ASSESSEE BEFORE THE CIT (APPEALS) IN S UPPORT OF THE REASONS FOR THE CONTINUOUS LOSSES. THERE IS NO MATERIAL BROUGHT BY THE REVENUE EITHER BEFORE THE CIT (APPEA LS) OR BEFORE THE TRIBUNAL OR EVEN BEFORE US TO SHOW THAT THESE ARE INCORRECT FIGURES OR THAT EVEN ON MERITS THE REASON S FOR THE LOSSES ARE NOT GENUINE. 24. WE ARE, THEREFORE, UNABLE TO HOLD THAT THE TRIB UNAL COMMITTED ANY ERROR IN CONFIRMING THE ORDER OF THE CIT (APPEALS) FOR BOTH THE YEARS DELETING THE DISALLOWA NCE OF THE BRAND FEE ROYALTY PAYMENT WHILE DETERMINING THE ALP . ACCORDINGLY, THE SUBSTANTIAL QUESTIONS OF LAW ARE A NSWERED IN THE AFFIRMATIVE AND IN FAVOUR OF ASSESSEE AND AGAIN ST THE REVENUE. THE APPEALS ARE ACCORDINGLY DISMISSED WITH NO ORDER AS TO COSTS'. 20.10 IN OUR CONSIDERED OPINION, CENTRALIZATION OF COSTS LEADS TO SIGNIFICANT GROUP COST SAVINGS. IT WOULD B E DIFFICULT FOR THE APPLICANT TO PROCURE THE SERVICES FROM THIRD PA RTY SERVICE PROVIDERS WHICH ARE SPECIFIC TO THE GROUP AND PRODU CTS. GIVEN THAT THE SERVICES ARE PECULIAR AND CAN BE RENDERED ONLY BY THE 111 AES BY WAY OF POOLING THE RESOURCES AT GROUP LEVEL, THE CONTENTION OF THE LEARNED TPO THAT IT IS MERELY IN THE NATURE OF SHAREHOLDER ACTIVITY IS BASELESS. FURTHER, DUE TO C ONFIDENTIALITY ISSUES, IT IS THE GENERAL PRACTICE TO UNDERTAKE SUC H SERVICES THROUGH GROUP ENTITIES. THE APPELLANT HAS SUBSTANT IATED THAT THE SERVICES HAVE ACTUALLY BEEN RENDERED BY ITS AE AND ESTABLISHED THE UNDERLYING BENEFIT DERIVED OUT OF SUCH SERVICES . DESCRIPTION OF NEED, BENEFIT ON ACCOUNT OF MANAGEMENT SERVICE I S CAPTURED IN PAGE 660 TO 680 OF PAPER BOOK VOLUME11. THEREFOR E, THE CONTENTION OF THE LEARNED TPO AND DRP THAT THERE IS NO REQUIREMENT TO AVAIL MANAGEMENT SERVICE FROM ITS AE IS INAPPROPRIATE. THE APPLICANT HAS SUBMITTED THE COPIES OF INVOICE AND ELABORATES THE LIST OF SERVICES RENDERED BY THE AE AND BASIS OF CHARGING MANAGEMENT FEE. FURTHER, THE ASSESSEE H AS SUBMITTED THE COPY OF VARIOUS MAIL CORRESPONDENCES WHICH EVIDENCES RENDITION OF MANAGEMENT SERVICES BY ITS A E. SAMPLE MAIL CORRESPONDENCES AND REPORTS SHARED BY THE AE E VIDENCING THE ACTUAL RENDITION OF MANAGEMENT SERVICE IS FURNI SHED IN PAPER BOOK VOLUME-3. IN OUR CONSIDERED OPINION WHERE APPR OPRIATE EVIDENCES HAVE BEEN PROVIDED BY THE APPELLANT, THE ACTION OF 112 THE LEARNED TPO IN HOLDING THAT THE ALP OF MANAGEM ENT FEE IS NIL IS UNWARRANTED AS HELD BY THE DELHI TRIBUNAL IN THE CASE OF SHOWA INDIA (P) LTD. VS DCIT IN ITA NO.166 OF 2013 DT. 30.06.2016. 20.11 THE LD. A.R SUBMITTED THAT UNDER THE PROVI SIONS OF SECTION 92CA OF THE ACT, THE LEARNED TPO HAS THE AU THORITY TO DETERMINE THE ARMS LENGTH PRICE OF THE TRANSACTION S UNDERTAKEN BY THE ASSESSEE. THE JURISDICTION OF THE LEARNED TP O CANNOT EXTEND TO DECIDE THE BASIS OF CHARGE/ ALLOCATION OF EXPENSES. IN THE INSTANT CASE, THE LEARNED TPO OUGHT TO HAVE CON FINED HIS JURISDICTION IN DETERMINING WHETHER THE COST ALLOCA TED BY GCT SPAIN IS AT ARMS LENGTH OR NOT . 20.12 FOR THE PURPOSES OF BENCHMARKING THE PROFITS, THE APPELLANT CONSIDERED TNMM AS THE MOST APPROPRIATE M ETHOD AND THE PLI OF THE APPELLANT IS HIGHER THAN THAT OF THE COMPARABLE COMPANIES. RECENTLY, IN THE CASE OF DURR INDIA (P) LTD IN ITA. NO. 754/MDS/2014 DATED 21.12.2016, THE CO-ORDINATE BENCH OF TRIBUNAL HELD THAT ALLOCATION OF COST PARTLY 113 ON THE BASIS OF TURNOVER AND NET PROFIT CANNOT BE C ONSIDERED AS A FACTOR TO PROPOSE TRANSFER PRICING ADJUSTMENT. FURT HER, IT WAS HELD THAT WHERE THE PLI OF THE APPELLANT UNDER TNMM IS AT ARMS LENGTH AND IT IS NOT POSSIBLE ON THE PART OF THE DE PARTMENT TO IDENTIFY A COMPARABLE, WHICH IS RENDERING SIMILAR S ERVICES, THE QUESTION OF CONSIDERING CUP METHOD WOULD NOT ARISE AT ALL. 20.13 THE APPELLANT REMITTED SERVICE TAX UNDER REV ERSE CHARGE MECHANISM IN RESPECT OF THE SAID MANAGEMENT FEE. FU RTHER, THE APPELLANT HAS OBTAINED A CERTIFICATE UNDER SECTION 197 OF THE ACT FROM THE DEPUTY DIRECTOR OF INCOME TAX, INTERNATION AL TAXATION, CHENNAI IN RELATION TO THE MANAGEMENT FEE. RECENTLY , IN THE CASE OF ABAN OFFSHORE LTD. VS DCLT IN ITA NO. 585 OF 2015 DATED 14 TH SEPTEMBER, 2016, THE CO-ORDINATE BENCH HAS HELD THAT ANY PAYMENT WHICH IS SYSTEMATICALLY SUBJECT TO DEDUCTION OF TAX AT SOURCE CANNOT BE SAID TO BE NON-GENUINE AND FURTHER HELD THAT:- 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ADMITTEDLY, THIS EXPENDITURE WAS INCURR ED IN TERMS OF AGREEMENT ENTERED INTO BY THE ASSESSEE AND INDIA OFFSHORE INC. VIDE AGREEMENT DATED 15.12.1986, WHIC H WAS EXTENDED UPTO 15.12.2014. THIS AGREEMENT WAS SUBJEC T TO 114 SCRUTINY BEFORE THE AUTHORITIES AND THE TRIBUNAL IN EARLIER YEARS AND THERE WAS NO ADDITION ON THIS COUNT. THE PAYMENT HAS BEEN MADE ORIGINALLY, VIDE AGREEMENT DATED 15.1 2.1986 AND IT WAS FURTHER EXTENDED UPTO 15.12.2014. THERE FORE, THERE IS NO QUESTION OF RAISING INVOICES FOR EACH A SSESSMENT YEAR AND THE PAYMENT IS MADE IN TERMS OF APPROVED AGREEMENT. FURTHER, IN OUR OPINION, THE GENUINENES S AGREEMENT CANNOT BE QUESTIONED BY THE ASSESSING AUTHORITIES WHEN IT IS DULY APPROVED BY THE CENTRAL GOVT., MINISTRY OF COMMERCE & INDUSTRY, DEPARTMENT OF INDU STRIAL POLICY AND PROMOTION AND BY THE RESERVE BANK OF IND IA AS WELL. IT IS BROUGHT ON RECORD THAT MINISTRY OF COM MERCE & INDUSTRY, DEPARTMENT OF INDUSTRIAL POLICY AND PROMO TION APPROVED THIS PAYMENT VIDE THEIR LETTER DATED 25.4. 2005. IT IS ALSO BROUGHT ON RECORD THAT THE PAYMENT MADE TO INDIAN OFFSHORE INC WAS SUBJECTED TO WITHHOLDING TAXES U/S .195 OF THE ACT AND TDS WAS DULY DEDUCTED AND DEPOSITED IN THE GOVT. BANK AS SEEN FROM FORM 16A PLACED ON PAPER BO OK AT PAGE 204. WHEN THE DEPARTMENT HAS GIVEN NO OBJECT ION CERTIFICATE FOR REMITTANCE MADE TO INDIAN OFFSHORE INC FOR EARLIER YEARS WHICH IS PLACED ON RECORD AT PAGE NOS .211-212 OF THE PAPER BOOK. FURTHER, IT IS BROUGHT ON RECOR D THAT THERE WAS NO ADDITION IN EARLIER ASSESSMENT YEARS AS EVID ENT FROM THE COPIES FILED BEFORE US FOR THE ASSESSMENT YEARS 2005-06 TO 2008-09 WHICH IS KEPT ON RECORD AT PAGES 1 TO 14 6 OF THE PAPER BOOK. THEREFORE, IT IS NOT POSSIBLE TO HOLD THAT THE PAYMENT IS NOT GENUINE. 6.1 FURTHER, THE TRIBUNAL IN THE CASE OF CADBURY I NDIA LTD. V.ADCIT IN ITA NO.7408/MUM/2010 DATED 13.11.20 13 HELD IN PARAGRAPH 39 THAT IF THE ASSESSEE HAS PAID THE PAYMENTS IN RELATION TO ROYALTY TO ITS PARENT AE FO R USE OF TECHNICAL KNOW-HOW AND TRADEMARK AFTER GETTING DUE APPROVAL FROM RBI AND SIA, THE DISALLOWANCE CANNOT BE MADE. FURTHER, IF THE AMOUNT PAID BY ASSESSEE WAS LESSER 115 THAN SIMILAR PAYMENTS MADE BY OTHER GROUP ENTITIES TO PARENT AE, THEN, TPO SHOULD NOT MAKE THE TP ADJUSTM ENT IN RESPECT OF THE ROYALTY PAYMENT TO ITS PARENT AE. 6.2 IT IS PERTINENT TO NOTE THAT THE TRIBUNAL, HYDE RABAD BENCH IN THE CASE OF AIR LIQUID ENGINEERING INDIA P . LTD. IN ITA NOS.1040 & 1159/HYD/2011 AND 1408/HYD/2010, VID E ORDER DATED 13.2.2014 HELD THAT IN TRANSFER PRICING PROCEEDINGS TPO COULD NOT SIT IN JUDGMENT ON BUSINE SS AND COMMERCIAL EXPEDIENCY OF ASSESSEE COMPANY SO AS TO CONCLUDE THAT PAYMENT OF ROYALTY MADE BY ASSESSEE T O ITS AE WAS UNREASONABLE AND THUS ALP OF SAID PAYMENT WA S TO BE TAKEN AS NIL. 6.3 IT IS TO BE NOTED THAT IN THE CASE OF DCIT V. S ONA OKEGAWA PRECISION FORGINGS LTD. IN ITA NO. 5386/DEL /2010 DATED 16.12.2011, THE TRIBUNAL HELD THAT THE ASSESS EE ENTERED INTO AN INTERNATIONAL TRANSACTION WITH ITS OVERSEAS ASSOCIATES AND PAID ROYALTY @ 3% WHICH WAS CONSIDER ED AS EXCESSIVE BY TPO DID NOT BRING ANY MATERIAL ON RECO RD WHICH COULD SUGGEST THAT PAYMENT OF ROYALTY AS EXCE SSIVE ORDER OF TPO WAS TO BE DISMISSED AND A COLLABORATIO N AGREEMENT HAD BEEN APPROVED BY THE MINISTRY OF INDU STRIES, DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION. 6.4 THE TRIBUNAL ALSO HELD IN THE CASE OF ABHISHEK AUTO INDUSTRIES LTD. IN ITA NO.1433/DEL/2009 DATED 12.11.2010, THAT IT IS A SETTLED PROPOSITION OF THE LAW THAT LEGALLY BINDING AGREEMENTS BETWEEN UNRELATED PARTIE S CANNOT BE DISREGARDED WITHOUT ASSIGNING ANY COGENT REASONS THERETO. IN THIS CASE, IT HAS AGREEMENTS T HAT ARE DULY APPROVED BY RBI AND OTHER REGULATORY AGENCIES. IT IS ALSO A SETTLED PROPOSITION THAT COMMERCIAL TRANSACT IONS ARE IN THE DOMAIN OF THE BUSINESSMAN AND INCOME-TAX DEPARTMENT CANNOT INTERVENE IN REALM OF INTRICACIES OF COMMERCIAL EXPEDIENCIES INVOLVED IN THESE ARRANGEME NTS. 116 6.5 IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE OPINION THAT THE PAYMENT IS MADE IN ACCORDANCE WITH AGREEMENT ENTERED INTO BY THE PARTIES, WHICH IS EVI DENT FROM THE RECORD AND IT WAS SUBJECTED TO TDS, DISALLOWANC E IS NOT JUSTIFIED. ACCORDINGLY, WE ALLOW THE GROUND RAISED BY THE ASSESSEE. 21. HOWEVER, FOR THE A.Y 2012-13, THOUGH THE ASSES SEE WAS ASKED TO EXPLAIN AS TO HOW THE COST OF ALLOCATION F OR THE MANAGEMENT FEE WAS DONE. THE ASSESSEE HAD SUBMITTE D VIDE LETTER DATED 20.03.2017 A COPY OF APPLICATION FILED WITH CENTRE FOR WIND ENERGY TECHNOLOGY WHICH WAS REJECTED BY TH E DRP STATING THAT NO COGNIZANCE IS REQUIRED TO BE TAKEN OF THESE DOCUMENTS SUBMITTED AFTER THE HEARING WERE COMPLETE D. REGARDING COPY OF CORRESPONDENCE WITH THE AE FOR AL LOCATION OF COST, IT WAS OBSERVED BY THE DRP THAT NO SUCH DOCUM ENT WAS FURNISHED BY THE ASSESSEE. HOWEVER, BEFORE US THE ASSESSEE FILED ADDITIONAL EVIDENCES FOR THE A.Y 2012-13 AS D ISCUSSED IN EARLIER PARA ELSEWHERE IN THE ORDER AND WE ARE IN P RINCIPLE AGREE WITH THE CONTENTION OF THE ASSESSEE REGARDING THE ALLOWABILITY OF MANAGEMENT FEES AND THERE IS NO REQ UIREMENT OF TRANSFER PRICING ADJUSTMENT ON THIS ISSUE, SUBJECT TO VERIFICATION OF AVAILING OF ACTUAL SERVICES AND ALLOCATION OF IT S COST TO THE ASSESSEE. FOR THE A.Y 2011-12, IT WAS STATED THAT A LL THE 117 RELEVANT EVIDENCES WERE ALREADY AVAILABLE WITH THE ASSESSING OFFICER/TPO AND ON THAT BASIS; IT IS REQUIRED TO BE VERIFIED WITH REGARD TO AVAILING ACTUAL SERVICES AND ITS ALLOCATI ON OF COST TO THE ASSESSEE. ACCORDINGLY, THIS GROUND RELATING TO MANAGEMENT FEES IS REMITTED TO THE FILE OF LD. ASSESSING OFFIC ER FOR FRESH CONSIDERATION FOR BOTH THE ASSESSMENT YEARS AND THE ASSESSING OFFICER AFTER GOING THROUGH THE EVIDENCES FILED BY THE ASSESSEE DECIDE THE ISSUE FRESH AS INDICATED ABOVE. THIS GRO UND IS PARTLY ALLOWED FOR STATISTICAL PURPOSES FOR BOTH THE ASSES SMENT YEARS. 22. NEXT GROUND FOR THE ASST. YEAR 2012-13 IS WITH REGARD TO DISALLOWANCE U/S.14A READ WITH RULE 8D OF THE INCOM E-TAX RULES,1962 FOR THE PURPOSE OF COMPUTING TOTAL INCOM E. 23. THE FACTS OF THE ISSUE ARE THAT FOR THE SUBJECT ASST. YEAR, THE COMPANY HAD INVESTMENTS IN ITS WHOLLY OWNED SUB SIDIARIES I.E. GM NAVARRA WIND ENERGY PVT. LTD. RSR POWER PV T. LIMITED AND KINTECH SANTALPUR PVT. LTD. AMOUNTING TO 12,25,00,000/-. THE ASSESSEE HAD ALSO SUBMITTED THE TAX AUDIT REPOR T IN FORM 3CA AND 3CD, WHICH CLEARLY INDICATES THAT THE COMPA NY HAD NOT INCURRED ANY EXPENDITURE TOWARDS MAINTENANCE OF THE AFORESAID INVESTMENTS OR FOR EARNING ANY EXEMPT INCOME FROM T HE SAID 118 INVESTMENT. THE ASSESSEE CLAIMED THAT NO EXPENDITU RE IS REQUIRED TO BE DISALLOWED U/S.14A OF THE ACT. HOW EVER, THE AO MODIFIED THE FACTS THAT THERE IS A DIRECT NEXUS BET WEEN INCREASE IN INVESTMENTS AND BORROWED CAPITAL AND AS PER THE GIVEN PORTFOLIO OF INVESTMENT; THE ASSESSEE SHOULD HAVE I NCURRED MINOR EXPENDITURE EMBEDDED IN THE INDIRECT EXPENDITURE OF THE ASSESSEE TOWARDS MAINTAINING THESE INVESTMENTS. 24. THE LD. AR SUBMITTED THAT SEC.14A OF THE ACT CA NNOT BE APPLIED IF THERE IS NO EXEMPT INCOME EARNED DURING THE YEAR. THE LD. AR, FURTHER SUBMITTED THAT THE AO ERRED IN NOT CONSIDERING THE FACT THAT NO EXEMPT INCOME HAD BEEN EARNED DURING THE SAID FINANCIAL YEAR AND NO EXPENDITURE H AS ALSO BEEN INCURRED TOWARDS EARNING EXEMPT INCOME. THEREFORE, DISALLOWANCE U/S.14A OF THE ACT IS NOT APPLICABLE T O THE ASSESSEES CASE. SEC.14A OF THE ACT EMPHASIZES ON DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE QUESTION OF DISALLOWANCE OF EXPENDITUR E WOULD ARISE ONLY IN A SCENARIO WHERE THE ASSESSEE HAS EAR NED EXEMPT INCOME DURING THE YEAR. TO SUPPORT HIS VIEW, HE RE LIED ON THE FOLLOWING JUDICIAL PRECEDENTS: 119 A. CIT VS. CHETTINAD LOGISTICS (P) LTD. [248 TAXMAN 55](MADRAS) WHEREIN HELD THAT:- B. REDINGTON INDIA LTD. VS. ADDL. CIT [TCA 520 OF 2 016](MADRAS) WHEREIN HELD THAT:- SIMILAR VIEW WAS FORTIFIED BY THE FOLLOWING CASE LA WS:- I) CHEMINVEST LTD. V. ACIT [378 ITR 33](DELHI) II) M. BASKARAN V. ACIT [152 ITR 844](CHENNAI, ITAT ) ACCORDING TO THE LD. AR, THE AO RELIED ON CIRCULAR 5 OF 2014, WHICH HAS BEEN ANNULLED BY THE JURISDICTIONAL HIGH COURT AND THE TRIBUNAL IN THE ABOVE DECISIONS. 24.1 THE LD. AR ARGUED THAT THERE IS NO DISALLOWA NCE U/S.14A OF THE ACT, IF THE INVESTMENT IS ON ACCOUNT COMMERC IAL EXPEDIENCY OR FACILITATES THE BUSINESS OF THE ASSES SEE. THE LD. AR, SUBMITTED THAT THE BUSINESS CARRIED ON BY THE S UBSIDIARIES IS INTEGRATED TO THE BUSINESS OF THE ASSESSEE AND THER EFORE THE INVESTMENTS HAVE BEEN MADE ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND IT INDIRECTLY FACILITATES THE BUSINE SS OF THE ASSESSEE. IN OTHER WORDS, THE INVESTMENTS HAVE NOT BEEN MADE WITH AN INTENTION TO EARN DIVIDEND INCOME BUT FOR F URTHERANCE OF THEIR EXISTING BUSINESS. THEREFORE, THE QUESTION O F APPLYING THE 120 PROVISIONS OF SEC.14A OF THE ACT, WOULD NOT ARISE. THE LD. AR RELIED ON THE FOLLOWING DECISIONS, WHEREIN THE SAID PRINCIPLE HAS BEEN UPHELD: A. CIT VS. ORIENTAL STRUCTURAL ENGINEERS (P) LTD. [ ITA NO. 605/2012 DT.15.01.2013.] (DELHI) B. DCIT V. REGEN POWERTECH PVT. LTD. (ITA 766 OF 20 16 DATED 17.08.2016)[CHENNAI]. 24.2 THE LD. AR, FURTHER SUBMITTED THAT THERE IS NO PROPORTIONATE DISALLOWANCE OF INTEREST COST, SINCE THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS TO MAKE INVESTME NTS. THE LD. AR SUBMITTED THAT LOAN FUNDS HAVE NOT BEEN UTILIZED FOR MAKING INVESTMENTS AND THEREFORE NO DISALLOWANCE CAN BE MA DE BY APPLYING THE SECOND LIMB OF RULE 8D I.E. NO REQUIRE MENT TO DISALLOW PROPORTIONATE INTEREST COST. THE LD. AR A LSO SUBMITTED THE EXTRACTS OF BANK STATEMENT SUBSTANTIATING THAT ONLY INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL HAS BEEN IN VESTED IN SUBSIDIARIES. THEREFORE, THE AO HAS FACTUALLY ERRE D IN NOT APPRECIATING THE SAME. THE LD. AR RELIED ON THE DE CISION IN THE CASE OF BEACH MINERALS CO. (P) LTD. V. ACIT, WHEREI N THE TRIBUNAL, CHENNAI BENCH UPHELD THE ABOVE PRINCIPLE. 121 24.3. ON THE OTHER HAND, THE LD. DR RELIED ON THE O RDERS OF THE DRP. 25. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IT WAS SUBMITTED BEFORE US THAT THERE WA S NO EXEMPTED INCOME; HENCE, SEC.14A READ WITH RULE 8D C ANNOT BE APPLIED. IN OUR CONSIDERED OPINION, THIS ISSUE CAME FOR CONSIDERATION BEFORE THE JURISDICTIONAL HIGH COURT IN THE FOLLOWING CASES AND HELD AS FOLLOWS:- I) CIT VS. CHETTINAD LOGISTICS (P) LTD.(SUPRA) WHER E IN HELD THAT :- IN OUR OPINION SECTION 14A, CAN ONLY BE TRIGGERED, IF, THE ASSESSEE SEEKS TO SQUARE OFF EXPENDITURE AGAINST INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE LEGISLA TURE, IN ORDER TO DO AWAY WITH THE PERNICIOUS PRACTICE ADOPTED BY THE AS SESSEES', TO CLAIM EXPENDITURE, AGAINST INCOME EXEMPT FROM TAX, INTRODUCED THE SAID PROVISION. IN THE INSTANT CASE, THERE IS NO DI SPUTE THAT NO INCOME I.E., DIVIDEND, WHICH DID NOT FORM PART OF TOTAL IN COME OF THE ASSESSEE WAS EARNED IN THE RELEVANT ASSESSMENT YEAR . THEREFORE, TO OUR MINDS, THE ADDITION MADE BY THE AO BY RELYING U PON SECTION 14 A OF THE ACT, WAS COMPLETELY CONTRARY TO THE PROVIS IONS OF THE SAID SECTION. IT WAS SUBMITTED THAT THE REVENUE COULD DI SALLOW THE EXPENDITURE EVEN IN SUCH A CIRCUMSTANCE BY TAKING R ECOURSE TO RULE 8D. ACCORDING TO US, RULE 8D, ONLY PROVIDES FOR A M ETHOD TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN REL ATION TO INCOME, WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. RULE 8 D, IN OUR VIEW, CANNOT GO BEYOND WHAT IS PROVIDED I N SECTION 14A OF THE ACT. II) REDINGTON INDIA LTD. VS. ACIT (SUPRA) WHEREIN HELD THAT:- 122 13. RELIANCE IS ALSO PLACED ON A DECISION OF THE JU RISDICTIONAL HIGH COURT IN THE CASE OF BEACH MINERALS COMPANY PVT. LT D. VS. ASSISTANT COMMISSIONER OF INCOME TAX IN TCA NO.681 OF 2013, D ATED 2.12.2013. IN THAT CASE, PAYMENTS OF INTEREST BY TH E ASSESSEE WERE SOUGHT TO BE DISALLOWED INVOKING THE PROVISIONS OF S.14A ON THE PREMISE THAT THE SAME RELATED TO BORROWINGS THAT HA D BEEN INVESTED AND WOULD YIELD EXEMPT RETURNS. THE ASSESSEE CONTES TED THE DISALLOWANCE U/S 14A ON MULTIPLE GROUNDS. IT WAS CO NTENDED THAT THERE WERE SUFFICIENT RESERVES AND SURPLUSES AVAILA BLE FOR THE PURPOSE OF INVESTMENTS, AND BORROWED FUNDS, FOR WHI CH THE PAYMENT OF INTEREST HAD BEEN INCURRED, HAD NOT BEEN INVESTED. THE ASSESSEE SOUGHT TO DRAW A NEXUS BETWEEN THE BORROWE D FUNDS AND THE INTEREST PAYMENTS, HIGHLIGHTING THE POSITION TH AT THE QUANTUM OF AVAILABLE FREE FUNDS WAS FAR IN EXCESS OF THE INVES TMENTS MADE. THE BENCH, IN THE LIGHT OF THE ABOVE SUBMISSIONS, REMAN DED THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO BE CONSIDERED DE NOVO AND AFTER CONDUCTING A PROPER ENQUIRY. INTER ALIA A DIRECTION WAS ISSUED TO THE ASSESSEE TO TENDER A PROPER EXPLANATION FOR THE INT EREST PAYMENTS. THE OPEN REMAND WAS MADE IN THE FACTS AND CIRCUMSTA NCES OF THAT CASE AND NO CONCLUSION WAS DRAWN BY THE BENCH ON TH E POSITION OF LAW INVOLVED. IN FACT, THE SUBSTANTIAL QUESTION OF LAW RAISED IN THAT CASE FOR THE CONSIDERATION OF THE COURT WAS COUCHED IN GENERAL TERMS AS FOLLOWS: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE. THE INCOME TAR APPELLATE TRIBUNAL IS RIGHT IN LAW IN CO NFIRMING THE DISALLOWANCE UNDER SECTION 11.1 OF THE INCOME TAX A CT, OF AN AMOUNT OF RS.55,00.000/- IN RELATION TO ASSESSMENT YEAR 2007- 2008? 14. NOTHING MUCH TURNS ON THE USE OF THE WORD INCL UDABLE AND THE PHRASE UNDER THE ACT IN S. 14A AND WE ARE NOT PER SUADED TO ACCEPT THE EMPHASIS LAID OR THE INTERPRETATION OF THE SAME BY THE REVENUE. AN ASSESSMENT IN TERMS OF THE INCOME TAX ACT IS SPE CIFIC TO AN 123 ASSESSMENT YEAR AND THE RELATED PREVIOUS YEAR. S.4 OF THE ACT, WHICH IMPOSES THE CHARGE TO TAX READS THUS: CHARGE OF INCOME-TAX 4. (1) WHERE ANY CENTRAL ACT ENACTS THAT INCOME TA X SHALL BE CHARGED FOR ANY ASSESSMENT YEAR AT ANY RATE OR RATE S, INCOME-TAX AT THAT RATE OR THOSE RATES SHALL BE CHARGED FOR THAT YEAR IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS (INCLUDING PROVI SIONS FOR THE LEVY OF ADDITIONAL INCOME-TAX) OF, THIS ACT IN RESPECT O F THE TOTAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON: PROVIDED THAT WHERE BY VIRTUE OF ANY PROVISION OF T HIS ACT INCOME- TAX IS TO BE CHARGED IN RESPECT OF THE INCOME OF A PERIOD OTHER THAN THE PREVIOUS YEAR, INCOME TAX SHALL BE CHARGED ACCO RDINGLY. THUS, WHERE THE STATUTE INDENTED THAT INCOME SHALL BE RECOGNIZED FOR TAXATION IN RESPECT OF ANY PREVIOUS OTHER THAN THAT IMMEDIATELY PRECEDING THE RELEVANT ASSESSMENT YEAR, THE PROVISI ON SHALL EXPRESSLY STATE SO. THE PROVISIONS OF S.10 IN CHAPT ER III OF THE ACT DEALING WITH INCOMES NOT INCLUDED IN TOTAL INCOME COMMENCES WITH THE PHRASE IN COMPUTING THE TOTAL INCOME OF A PREV IOUS YEAR, ANY INCOME FALLING WITHIN ANY OF THE FOLLOWING CLAUSES SHALL NOT BE INCLUDED. 15. THE EXEMPTION EXTENDED TO DIVIDEND INCOME WOULD RELATE ONLY TO THE PREVIOUS YEAR WHEN THE INCOME WAS EARNED AND NONE OTHER AND CONSEQUENTLY THE EXPENDITURE INCURRED IN CONNEC TION THEREWITH SHOULD ALSO BE DEALT WITH IN THE SAME PREVIOUS YEAR . THUS, BY APPLICATION OF THE MATCHING CONCEPT, IN A YEAR WHER E THERE IS NO EXEMPT INCOME, THERE CANNOT BE A DISALLOWANCE OF EX PENDITURE IN RELATION TO SUCH ASSUMED INCOME. (MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. CIT (225 ITR 802). THE LANGUA GE OF S.14A(1) SHOULD BE READ IN THE CONTEXT AND SUCH THAT IT ADVA NCES THE SCHEME OF THE ACT RATHER THAN DISTORT IT. 25.1 ACCORDINGLY THE ABOVE GROUND IS DECIDED IN F AVOUR OF THE ASSESSEE AND THERE CANNOT BE ANY DISALLOWANCE U/S.1 4A WHEN 124 THERE IS NO EXEMPTED INCOME. THIS GROUND OF APPEAL OF THE ASSESSEE FOR THE A.Y 2012-13 IS ALLOWED. 26. THE NEXT GROUND FOR THE ASST. YEAR 2012-13 IS W ITH REGARD TO DISALLOWANCE U/S.14A WITH RULE 8D WHILE COMPUTIN G BOOK PROFITS U/S.115JB OF THE ACT. 26.1 THE FACTS OF THE ISSUE ARE THAT THE AO WHILE C OMPUTING BOOK PROFITS U/.S.115JB, EXPENDITURE ATTRIBUTABLE T O EARNING EXEMPTED INCOME ADDED TO NET PROFIT BY INVOKING TH E CLAUSE (F) TO EXPLANATION 1 TO SEC.115JB OF THE ACT AT 51,24,351/-. 27. AFTER HEARING BOTH THE SIDES, WE ARE OF THE OPI NION THAT THIS ISSUE CAME FOR CONSIDERATION BEFORE THE SPECIA L BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. VIREET INVESTMENTS (P) LTD., IN 165 ITD 27(DELHI) WHEREIN HELD THAT SEC.14A R.W.RUL E 8D HAS NO APPLICATION WHILE COMPUTING THE BOOK PROFIT U/S.115 JB OF THE ACT. MORE SO, IN THIS CASE THERE IS NO EXEMPTED INCOME, THIS PROVISION CANNOT BE APPLIED. THIS GROUND OF THE ASSESSEE IS A LLOWED. 28. THE NEXT GROUND FOR THE A.Y. 2011-12 IS WITH R EGARD TO DEDUCTION OF INTEREST ON SERVICE TAX AND TDS. 125 28.1 THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE H AS INCURRED EXPENDITURE IN THE NATURE OF INTEREST ON DELAYED PA YMENT OF SERVICE TAX ( ` 12,02,485) AND TDS ( 3,81,650). THE AO DISALLOWED THE EXPENDITURE CITING THAT UNDER THE PR OVISIONS OF SEC.37(1) OF THE ACT, ANY EXPENDITURE FOR ANY PURPO SE IN THE NATURE OF OFFENCE WHICH IS PROHIBITED BY LAW SHALL NOT BE ELIGIBLE FOR DEDUCTION. 28.2 THE LD. AR SUBMITTED THAT AS PER THE EXPLANATI ON TO SEC.37 OF THE ACT, ALLOWABILITY OF ANY EXPENDITURE WOULD DEPEND ON WHETHER THE EXPENDITURE INCURRED IS PENAL OR COM PENSATORY IN NATURE. WHERE THE EXPENDITURE INCURRED IS COMPENSA TORY IN NATURE, THE SAME SHOULD BE ALLOWED AS DEDUCTION. I T IS PERTINENT TO NOTE THAT ANY INTEREST PAYMENT IS COMPENSATORY I N NATURE AND THEREFORE CANNOT BE SAID TO BE A PENAL EXPENDITURE. THE LD. AR RELIED ON THE DECISION OF THE TRIBUNAL, DELHI BENCH IN THE CASE OF MESSEE DUSSELDORF INDIA (P) LTD. VS. CIT [129 TTJ 8 1] REGARDING THE INTEREST ON SERVICE TAX. HE ALSO RELIED IN RES PECT OF INTEREST ON TDS, ON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF ARTHUR ANDERSON & CO. VS. ACIT [190 TAXMAN 279]. 29. ON THE OTHER HAND, LD.D.R RELIED ON THE ORDER OF DRP. 126 30. AFTER HEARING BOTH THE PARTIES WITH REGARD TO D EDUCTION OF INTEREST ON TDS AND SERVICE TAX AND TDS, THIS ISSU E IS SQUARELY COVERED IN FAVORU OF ASSESSEE BY THE DECISION OF BO MBAY HIGH COURT IN THE CASE OF ARTHUR ANDERSON & CO., VS. ACI T IN 190 TAXMAN 279(BOM) WHEREIN HELD THAT:- 9. APART FROM THE FACT THAT THERE HAS BEEN NO FAILURE ON THE PART OF THE ASSESSEE TO MAKE A FULL AND TRUE DISCLOSURE OF ALL MATERIAL FACTS, IT WILL BE NECESSARY TO ADVERT TO THE DECISION OF T HE SUPREME COURT IN HARSHAD SHANTILAL MEHTA VS. CUSTODIAN & ORS. (1998) 231 ITR 871 (SC). THE SUPREME COURT, IN THE COURSE OF ITS JUDGM ENT OBSERVED THAT UNDER THE IT ACT, 1961 THE DEFINITION OF TAX U NDER S. 2(43) DOES NOT INCLUDE PENALTY OR INTEREST AND THAT THE CONCEP TS OF TAX, PENALTY AND INTEREST ARE DIFFERENT CONCEPTS UNDER THE ACT. JUSTICE SUJATA MANOHAR SPEAKING FOR A BENCH OF THREE LEARNED JUDGE S OF THE SUPREME COURT OBSERVED THUS : 'WE ARE CONCERNED IN THE PRESENT CASE WITH PENALTY AND INTEREST UNDER THE IT ACT. TAX, PENALTY AND INTEREST ARE DIF FERENT CONCEPTS UNDER THE IT ACT. THE DEFINITION OF TAX UNDER S. 2(43) DOES NOT INCLUDE PENALTY OR INTEREST. SIMILARLY, UNDER S. 15 6, IT IS PROVIDED THAT WHEN ANY TAX, INTEREST, PENALTY, FINE OR ANY OF OTH ER SUM IS PAYABLE 127 IN CONSEQUENCE OF ANY ORDER PASSED UNDER THIS ACT, THE AO SHALL SERVE UPON THE ASSESSEE A NOTICE OF DEMAND AS PRESC RIBED. THE PROVISIONS FOR IMPOSITION OF PENALTY AND INTEREST A RE DISTINCT FROM THE PROVISIONS FOR IMPOSITION OF TAX.' 10. THE DECISION OF THE SUPREME COURT WAS DELIVERED IN AN APPEAL WHICH AROSE OUT OF THE SPECIAL COURT (TRIAL OF OFFE NCES RELATING TO TRANSACTION IN SECURITIES) ACT, 1992. THE INTERPRET ATION WHICH HAS BEEN PLACED ON THE PROVISIONS OF S. 2(43) AND THE O BSERVATIONS OF THE SUPREME COURT NOTED EARLIER, HOWEVER, BIND THIS COURT AS REGARDS THE GROUND ON WHICH THE REOPENING OF THE AS SESSMENT HAS BEEN SOUGHT IN THIS CASE. 31. FURTHER, THE CO-ORDINATE BENCH OF DELHI IN TH E CASE OF MESSEE DUSSELDORF INDIA (P) LTD., VS. DCIT IN 129 T TJ 81 (DELHI) WHEREIN HELD THAT:- INTEREST PAID FOR DELAYED PAYMENT OF SERVICE-TAX I S COMPENSATORY AND HAS THE SAME CHARACTER AS SERVICE-TAX AND, THEREFORE, I T IS ALLOWABLE AS DEDUCTION. 31.1 FURTHER, IN THE CASE OF CIT VS. UDAIPUR DISTI LLARY (160 ITR 444 (RAJASTHAN) WHEREIN IT WAS HELD THAT INTEREST P AID FOR DELAY IN PAYMENT OF SALES TAX IS ALLOWABLE EXPENDITURE. KERA LA HIGH COURT IN THE CASE OF CIT VS. TM CHACKO AND PARTNERS (115 ITR 40) (KERALA) WHEREIN IT WAS HELD THAT INTEREST PAID FOR LATE PAYMENT OF KIST IS ALLOWABLE BUSINESS EXPENDITURE. THE SAME VI EW WAS TAKEN BY THE KERALA HIGH COURT 128 IN THE CASE OF CIT VS. PACHI PHILLIP & CO., 212 IT R 75 (KERALA). FURTHER, THE TRIBUNAL IN THE CASE OF REMFRY & SAGAR CONSULTANTS PVT. LTD. VS. ACIT (34 CCH 131 (DELHI) WHEREIN IT H AS BEEN HELD THAT INTEREST PAID FOR DELAYED PAYMENT OF SERVICE-T AX IS ALLOWABLE. HOWEVER, IN RESPECT OF PAYMENT OF INTEREST ON DELAY ED TDS PAYMENT IT CANNOT BE ALLOWED IN VIEW OF THE JUDGEME NT OF SUPREME COURT IN THE CASE OF BHARAT COMMERCE & INDU STRIES LTD. VS. CIT (230 ITR 733). FURTHER, THE KOLKOTTA H IGH COURT IN THE CASE OF EAST INDIA PHARMACEUTICAL INDIA LTD. VS . CIT 114 ITR 423 WHEREIN IT WAS HELD THAT INTEREST PAID ON MONEY BORROWED FOR THE PAYMENT OF INCOME TAX COULD NOT BE ALLOWED AS A BUSINESS EXPENDITURE.IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE OPINION THAT INTEREST ON DELAY IN PAYMENT OF SERVIC E TAX, WHICH IS ONLY COMPENSATORY NATURE PAID ON ACCOUNT OF DELAY I N THESE PAYMENTS AND TO BE ALLOWED AS BUSINESS EXPENDITURE. HOWEVER, INTEREST PAID FOR DELAY IN PAYMENT OF TDS CANNOT BE ALLOWED AS BUSINESS EXPENDITURE. THIS GROUND RAISED BY ASSESS EE IN ITS APPEAL FOR THE ASSESSMENT YEAR 2011-12 IS PARTLY AL LOWED. 129 32. THE NEXT GROUND FOR THE ASSESSMENT YEAR 2012-1 3 IS WITH REGARD TO DISALLOWANCE OF SPILL OVER OF ADDITIONAL DEPRECIATION U/S.32(1)(IIA) ON PLANT AND MACHINERY PUT INTO USE DURING THE PRECEDING YEAR. 33. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE AC QUIRED AND INSTALLED PLANT AND MACHINERY DURING THE PRECEDING YEAR IN RESPECT OF WHICH ADDITIONAL DEPRECIATION AT THE RAT E OF 20% HAS BEEN CLAIMED. IN RESPECT OF ASSETS PUT INTO USE FO R A PERIOD OF LESS THAN 180 DAYS DURING THE PRECEDING YEAR, ADDIT IONAL DEPRECIATION HAS BEEN CLAIMED AT THE RATE OF 10 PER CENT. THEREFORE, THE REMAINING SPILL OVER OF 10 PERCENT H AS BEEN CLAIMED DURING THE SUBJECT AY. THE AO HELD THAT AD DITIONAL DEPRECIATION WOULD BE ALLOWABLE ONLY IN THE YEAR IN WHICH THE ASSET IS PUT INTO USE AND REJECTED THE CLAIM OF THE ASSESSEE. 33.1 THE PROVISIONS OF THE ACT ARE AMBIGUOUS AND IN CASE ASSET IS PUT TO USE FOR LESS THAN 180 DAYS IN AN YE AR THEN ADDITIONAL DEPRECIATION U/S.32(1)(IIA) HAS TO BE RE DUCED TO HALF THE SPECIFIED RATE. FURTHER, THERE ISNT ANY PROVI SION OF CARRY FORWARD OF BALANCE ADDITIONAL DEPRECIATION TO THE S UCCEEDING PREVIOUS YEAR. SO THERE ISNT ANY FLAW IN THE ORDE R OF THE AO IN 130 THIS REGARD AND THE OBJECTION OF THE ASSESSEE IS NO T ACCEPTED. THIS IS IMPORTANT TO NOTE THAT REALIZING THIS ASPEC T OF LOSS TO THE ASSESSEE OF BALANCE DEPRECIATION, AN AMENDMENT IN T HE ACT HAS ALREADY BEEN CARRIED OUT WHICH ALLOWS THIS BENEFIT OF CARRY FORWARD TO THE ASSESSEE IN IMMEDIATELY SUCCEEDING Y EAR, HOWEVER SUCH BENEFIT IS AVAILABLE ONLY W.E.F. 01.04 ./2016 AND NOT FOR THE YEAR UNDER CONSIDERATION. MEMORANDUM TO FI NANCE BILL, 2015 WHILE INTRODUCING THIS AMENDMENT READS AS FOLL OWS: NON-AVAILABILITY OF FULL 100% OF ADDITIONAL DEPREC IATION FOR ACQUISITION AND INSTALLATION NEW PLANT AND MACH INERY IN THE SECOND HALF OF THE YEAR MAY MOTIVATE THE ASS ESSEE TO DEFER SUCH INVESTMENT TO THE NEXT YEAR FOR AVAIL ING FULL 100% OF ADDITIONAL DEPRECIATION IN THE NEXT YEAR. TO REMOVE THE DISCRIMINATION IN THE MATTER OF ALLOWING ADDITIONAL DEPRECIATION ON PLANT OR MACHINERY USED FOR LESS THAN 180 DAYS AND USED FOR 180 DAYS OR MORE THUS, THE MEMORANDUM ACKNOWLEDGES THAT AS OF TODAY IF THE ASSETS ARE USED FOR LESS THAN 180 DAYS, IT IS NOT E LIGIBLE FOR FULL 100% OF ADDITIONAL DEPRECIATION. ACCORDINGLY, THE AMENDMENT IS MORE FOR THE FUTURE YEARS RATHER THAN AN AMENDMENT AS APPLICABLE EVEN TO EARLIER YEARS PRIOR TO FINANCIAL YEAR 2015-16. THUS, IT WAS NEVER THE INTENTION OF THE LEGISLATURE TO ALLOW THE 131 CLAIM OF BALANCE 50% ADDITIONAL DEPRECIATION IN THE IMMEDIATELY SUBSEQUENT YEAR IN CASE OF FINANCIAL YEARS PRIOR TO 2015-16. THE ISSUE ALSO HAS BEEN DECIDED BY THE TRIBUNAL, CHENNA I BENCH IN THE CASE OF BRAKES INDIA LTD. VS. (96 DTR 281), WHE RE THE TRIBUNAL DID NOT ALLOW THE BALANCE ADDITIONAL DEPRE CIATION IN SUBSEQUENT FINANCIAL YEAR. 34. AFTER HEARING BOTH THE PARTIES, WE FIND THAT SI MILAR ISSUE WAS CONSIDERED BY THE KARNATAKA HIGH COURT IN THE C ASE OF ACIT VS. M/S.RITTAL INDIAPVT LTD. IN VIDE ORDER DA TED 24.11.2015 IN 2016-TIOL-07-HC-KAR-IT WHEREIN HELD THAT:- IT HAS BEEN CONSISTENTLY HELD BY THIS COURT, AS WE LL AS THE APEX COURT, THAT BENEFICIAL LEGISLATION, AS IN THE PRESENT CASE , SHOULD BE GIVEN LIBERAL INTERPRETATION SO AS TO BENEFIT THE ASSESSEE. IN TH IS CASE, THE INTENTION OF THE LEGISLATION IS ABSOLUTELY CLEAR, THAT THE AS SESSEE SHALL BE ALLOWED CERTAIN ADDITIONAL BENEFIT, WHICH WAS RESTRICTED BY THE PROVISO TO ONLY HALF OF THE SAME BEING GRANTED IN ONE ASSESSMENT YE AR, IF CERTAIN CONDITION WAS NOT FULFILLED. BUT, THAT, IN OUR CONS IDERED VIEW, WOULD NOT RESTRAIN THE ASSESSEE FROM CLAIMING THE BALANCE OF THE BENEFIT IN THE SUBSEQUENT ASSESSMENT YEAR. THE TRIBUNAL, IN OUR VI EW, HAS RIGHTLY HELD THAT ADDITIONAL DEPRECIATION ALLOWED UNDER SECTION 32(I) (IIA) OF THE ACT IS A ONETIME BENEFIT TO ENCOURAGE INDUSTRIALIZATION , AND THE PROVISIONS RELATED TO IT HAVE TO BE CONSTRUED REASONABLY, LIBE RALLY AND PURPOSIVELY, TO MAKE THE PROVISION MEANINGFUL WHILE GRANTING ADD ITIONAL ALLOWANCE. WE ARE IN FULL AGREEMENT WITH SUCH OBSERVATIONS MAD E BY THE TRIBUNAL. IN VIEW OF THE AFORESAID, WE DO NOT FIND THAT ANY I NTERFERENCE IS CALLED 132 FOR WITH THE ORDER OF THE TRIBUNAL, OR THAT ANY QUE STION OF LAW ARISES IN THIS APPEAL FOR DETERMINATION BY THIS COURT. 35. SIMILAR VIEW WAS TAKEN BY THE JURISDICTIONAL H IGH COURT IN THE CASE OF CIT VS. T.P. TEXTILES PVT LTD., (TCA NO.157 OF 2017, DT.06.03.2017) AND THE TRIBUNAL IN THE CASE OF R.R DONNELLEY PUBLISHING INDIA (P) LTD., VS. ACIT (ITA NO.909/MDS ./2016 DT.24.08.2016). RESPECTFULLY FOLLOWING THE ABOVE PR ECEDENTS, WE ARE INCLINED TO DECIDE THE ISSUE IN FAVOUR OF THE A SSESSEE. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 36. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSE E ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 13 TH NOVEMBER, 2017 AT CHENNAI. SD/- SD/- ( $ % . & '( ) ( ) * + , ) DUVVURU RL REDDY - ./012304556037- 8 9: /JUDICIAL MEMBER ! 9:;<<5=1>01>?@AB@3 )8 /CHENNAI, C9 /DATED, THE 13 TH NOVEMBER, 2017. K S SUNDARAM 133 9D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H- /CIT(A) 4. H /CIT 5. FIJ K /DR 6. J(L /GF.