Income Tax Appellate Tribunal - Delhi
Bmw India Private Ltd., Gurgaon vs Acit, Gurgaon on 14 May, 2018
In the Income-Tax Appellate Tribunal,
Delhi Bench 'I-2', New Delhi
Before : Shri Bhavnesh Saini, Judicial Member And
Shri L.P. Sahu, Accountant Member
ITA No. 6160/Del./2014
Assessment Year: 2007-08
BMW Inida Pvt. Ltd., 7th floor, Tower-B, vs. A.C.I.T., Circle 1(1),
Building No. 8, DLF Cyber City, Phase-II, Gurgaon.
Gurgaon
(PAN- AABCB7140C) (Respondent)
(Appellant)
Assessee by Sh. Ashwani Taneja &
Sh. Shantanu Jain, Adv.
Revenue by Sh. Sanjay Kumar Yadav, Sr. DR
Date of Hearing 21.02.2018
Date of Pronouncement 14.05.2018
ORDER
Per L.P. Sahu, A.M.:
This is an appeal filed by the assessee against the order of ld. CIT(A)- Faridabad, New Delhi dated 20.08.2014 for the assessment year 2007-08 on the following grounds :
1. "The Learned Commissioner of Income-tax (Appeals) ('Ld. CIT(A)') erred on facts and in law in confirming the addition of Rs. 1,17,11,690 made to the income of the Appellant by the Learned Assessing Officer ('Ld. AO') in the assessment order passed under section 143(3) ofthe Income-tax Act, 1961 ('the Act'), by holding that the international related party transaction of the Appellant with respect to the Marketing survey expenses do not satisfy the arm's length principle envisaged under the Act.
In doing so the Ld. CIT(A) has grossly erred:
ITA No. 6160/Del/2014 21.1 by holding that the Marketing survey expenses have not benefitted the Appellant and there was no need for such payment, thereby challenging the commercial wisdom of the Appellant;
1.2 by not appreciating that none of the conditions set out in section 92(3} of the Act are satisfied in the present case;
1.3 by ignoring / rejecting the Comparable Uncontrolled Price ('CUP') analysis undertaken by the Appellant to substantiate the arm's length nature of the pricing of the transaction of Marketing survey expenses and by not appreciating the CUP data furnished in this regard; 1.4 by erroneously assuming and confirming the conclusion made by the Ld. AO/ Ld. Transfer Pricing Officer ('TPO') that the activity was undertaken by Associated Enterprise ('AE'), BMW AG, in the capacity of an owner / shareholder in the Appellant and that the said activity benefitted BMW AG and not the Appellant;
1.5 by ignoring the fact that the market survey report relates entirely to the Indian market for automobiles and therefore the benefit of the said report can only be availed by the Appellant and not BMW AG;
2. The Ld. CIT(A) erred on facts and in law in confirming the addition to the income of the Appellant to the extent of Rs. 1,22,94,398 made by the Ld. AO/ Ld. TPO by holding that the international related party transaction of the Appellant with respect to the payment for technical support services do not satisfy the arm's length principle envisaged under the Act and in doing so the Ld. CIT(A) has grossly erred:
2.1 by not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case;
2.2 by ignoring various documentary evidences/ data/ comparability analysis furnished in support of the underlying transaction; 2.3 by relying on the arbitrary internet search carried out by the Ld. AO/Ld. TPO for man-day rates charged by automobile engineers, without considering the actual nature of services received by the Appellant and without taking into account the comparability requirements of the CUP method.
ITA No. 6160/Del/2014 33. That given the facts and circumstances of the case, the Ld. CIT(A) has grossly erred in confirming the action of the Ld. AO of initiating penalty proceedings under section 271(1)(c ) of the Act."
2. The brief facts of the case are that assessee filed return of income on 31.10.2007 declaring Loss of Rs. 21,79,54,465/- . Later on the return of income was revised on 27.03.2009, declaring Loss of Rs. 23,99,18,230/-. The case was selected for scrutiny and statutory notices were issued to the assesssee. Since international transactions were carried out by the assessee, a reference was made to the TPO ( Transfer Pricing Officer) U/s 92CA(1) for determining the arms length price U/s 92 CA(3) of the Act for the international transactions entered into by the assessee during the financial year 2006-07. The Ld. TPO made upward adjustment of Rs. 2,85,39,979/- in respect of the international transactions made with its associated enterprises. The summary of international transaction and adjustment made are in the table below:
Nature of Most Profit Level Transaction
Amount Outcome of
International Appropriate Indicator
Order of CIT(A)
Transaction Method (PLI) (in INR Crores)
Purchase of raw
materials 16.71 Accepted
(CKDs) - Class I
Purchase of traded 53.54
Resale Price Gross Profit Accepted
vehicles (CBUs) - Method (GP)/Sales
Class II ('RPM')1
Purchase of spare 1.81
parts - Accepted
Class III
Payment of interest Comparable
on external Uncontrolled Prime
1.30 Accepted
commercial Price Method Lending Rate
borrowing (ECB) - ('CUP')
ITA No. 6160/Del/2014 4
Nature of Most Profit Level Transaction
Amount Outcome of
International Appropriate Indicator
Order of CIT(A)
Transaction Method (PLI) (in INR Crores)
Class IV
Purchase of fixed _ 17.53 Accepted
assets - Class V
Purchase of 7.89
software - _ Accepted
Class VI
Payment of IT
support service _ 0.27 Accepted
charges - Class VII
Payment of technical 2.95 TP Adjustment of
support cost - Class _
INR 1.22 Cr.
VIII
CUP
Payment of market TP Adjustment of
survey expenses - _ 1.17
INR 1.17 Cr.
Class IX
Reimbursement of 1.73
personnel costs - _ Accepted
Class X CUP
Reimbursement of _ 1.19 Accepted
expenses - Class XI
4. All the international transactions except that of payment of market survey expenses and technical fees by BMW India with its overseas associated enterprises (AEs), were considered to be at arm's length by the TPO. Thereafter, in pursuance to the order passed by the TPO, the AO made final assessment order dated February 2, 2011 under Section 144C of the Act wherein he proposed to assess the total income of the Appellant in conformity with the arm's length price determined by the TPO in his order.
ITA No. 6160/Del/2014 55. Being Aggrieved, the Appellant filed an appeal against the final assessment order before the CIT (A), who gave relief on account of fee for technical support services to the extent of costs pertaining to reimbursements of travel and lodging costs. Accordingly, the following adjustments remained in dispute:
a) Adjustment of INR 1,17,11,690 on account of market survey expenses;
b) Adjustment of INR 1,22,94,398 on account of payment for technical support services
6. Apropos ground No. 1, the issue involved is that during the year BMW AG arranged for a market survey report for BMW India. In arranging for the report, BMW AG incurred cost towards the third party, who undertook the survey and prepared the report. Without any margin/mark-up built in, the costs incurred were subsequently charged to BMW India. Hence, the Appellant, in its TP study documentation, concluded that after applying the CUP method, this payment complies with the arm's length standard.
6.1 Before the TPO, it was submitted by the Appellant that the market survey report related entirely to the Indian market for automobiles and therefore any benefit of the research/ findings/ analysis/ information contained within the report can only be availed by BMW India. Therefore, it was submitted by the Appellant that the market survey report directly impacts and benefits the sales of BMW India. However, the TPO contended that the market survey report was for the benefit of BMW Group and rejected submission of the appellant on the following grounds:
ITA No. 6160/Del/2014 6• Market survey report was prepared by third party on BMW AG's request. The fact that BMW AG was involved in preparation of the report, satisfies the presumption that the report was carried out to benefit BMW AG;
• Indian automobiles market being huge in size, carries an immense strategic importance for BMW Group as a whole; and • BMW India making a reimbursement of these expenses is inconsequential to the need of survey and BMW AG would have anyways undertaken the survey, in view of its strategic importance for the BMW Group.
Thus, the TPO made adjustment on the above said grounds. During the course of appeal before Ld. CIT(A), the Appellant made detailed submission and tried to substantiate its case with various supporting evidences and case laws but CIT(A) also did not agree with the submission of the Appellant, observing as under :
'The submissions made by the appellant and the reason given by the TPO have been carefully considered by me. The appellant has not brought out any new arguments or facts at this juncture which have already not been considered by the IPO before passing his order. It is a tact that the said markets survey report has been prepared not at the behest of the appellant but at the behest of AE, BMW AG. The appellant has not been able to provide any reason as to why BMW AG had to get involved in this transaction if it did not benefit BMW AG. Moreover, the appellant has not been able to demonstrate that this market survey would not have been carried out by BMW AG even if the cost of the survey would not have been reimbursed by the appellant. In view of these facts, I see no reason to interfere with the findings of the TPO and thus this ground of the appellant is dismissed.' 6.2. Being aggrieved the Appellant is in appeal before the Income-tax Appellate Tribunal and reiterated the submissions made before the authorities below.ITA No. 6160/Del/2014 7
During the course of hearing before us, the Ld. Counsel placing reliance on the OECD guidelines, invited our attention to relevant portion of the guidelines that provides the following guidance on shareholder services (enclosed at Page no 418-419 of the paperbook):
"7.9 A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the group as a whole. In a narrow range of such cases, an intragroup activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies. It may be referred to as a "shareholder activity", distinguishable from the broader term "stewardship activity" used in the 1979 Report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group members, 7.10 The following examples (which were described in the 1984 Report) will constitute shareholder activities, under the standard set forth in paragraph 7.6:
a) Costs of activities relating to the juridical structure of the parent company itself, such as meetings of shareholders of the parent, issuing of shares in the parent company and costs of the supervisory board;
b) Costs relating to reporting requirements of the parent company including the consolidation of reports;
c) Costs of raising funds for the acquisition of its participations.ITA No. 6160/Del/2014 8
6.3. In light of the above, it was contested by the Appellant that the market survey report was arranged by BMW AG only for the benefit and use of BMW India and no other member of the BMW Group and also not for BMW Group as a whole. The only user and beneficiary of the report therefore was BMW India.
6.4. Our attention was also drawn upon relevant backups substantiating the transaction (enclosed at pages 309 to 317 of the Paper book) vide submission dated July 27, 2010 (refer page 306 of the paper book), which included the following:
• Written confirmation from the relevant overseas AE, i.e. BMW AG, stating that it had contracted with a third party and arranged for a market survey report for BMW India. The price charged by BMW AG from BMW India represents only the costs incurred by BMW AG towards the third party who undertook the survey and prepared the report, without any margin/mark-up built in.
• Relevant debit note for INR 11,711,690 (as settled by BMW India) along with the corresponding back-up third party invoice depicting the cost to cost nature of the transaction (refer pages 311 to 316 of Paper book) • Copy of the report was also filed (refer pages 161 to 274 of Paper book) 6.5. It was also contended by the Counsel that the market survey report was solely for the benefit of BMW India since:
• The report relates entirely to the Indian market for automobiles and therefore any benefit of the research / findings / analysis / information contained within the report can only be availed by BMW India and not BMW AG; and ITA No. 6160/Del/2014 9 • BMW AG does not sell any cars in the Indian market directly. BMW cars are sold in India only through BMW India, as submitted before the CIT (Appeals) 6.6. Therefore, it was also submitted that if the market survey report directly impacts and benefits the sales of any entity, it is of BMW India and not BMW AG. Further, it was submitted that shareholder services are essentially relating to juridical structure of the parent Company (like shareholder meetings, issuing of shares in parent Company etc.), consolidation of financial statements for reporting purposes, etc. These activities are undertaken by the parent to further its interests in the Group as an owner. On the contrary, arranging for a country specific market survey report cannot be termed as costs incurred by the parent as an owner, because such an activity has to largely be for the benefit of the group entity situated in that country and any benefit to the parent is only incidental / indirect in nature, for which there is no justification for the parent to bear any costs. The rightful beneficiary in this case is the group entity operating in that country and therefore the corresponding costs should also be borne by it. Further to corroborate the above, the market survey report was filed before the TPO and it was demonstrated that the report is entirely for the enduring use and benefit of BMW India and is only expected to further the sales and interests of BMW India as it operates in the Indian market. This is evident from the report that it was not undertaken to decide whether BMW AG should set up operations in India or not.
6.7. Further, the Ld. Counsel stated that the revenue authorities cannot question the commercial decision of a businessman. How the Company wants ITA No. 6160/Del/2014 10 to run its business is entirely its own prerogative and challenging the commercial expediency of the same is not within the purview of the tax authorities. The following judicial precedents are relied by the Counsel to support the above:
o AWB India Pvt. Ltd. [TS-67-ITAT-2013(DEL)-TP] - The Hon'ble Tribunal held as follows (refer pages 24 to 25 of compendium):
"27. that as provided in the OECD guidelines, the TPO is expected to examine the international transactions as he finds the same and then make suitable adjustment, but a wholesale disallowance of the expenditure, particularly on extraneous grounds, is neither contemplated, nor authorized."
o AWB India Pvt. Ltd. [2014] 50 taxmann.com 323 (Delhi - Trib.) - The Hon'ble Tribunal held that it is Appellant's decision / prerogative whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions. The Hon'ble Tribunal held as follows (refer page 44 of compendium):
" 16.... it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions."
o McCann Ericskon India Pvt. Ltd. Vs. Addl. CIT [TS-391-ITAT-
2012(DEL)]([2012] 24 taxmann.com 21 (DELHI) - The Hon'ble Tribunal has held as follows (refer pages 78 to 80 of compendium):
o
9. "...It shall be just to avoid any guesswork to evaluate or judge value of these services in isolation or individually. In any case, the value of these services cannot be taken at nil which the AO as well as TPO originally sought to do."
o CIT Vs. EKL Appliances Ltd. (345 ITR 241) - The Hon'ble High Court ('HC') has held that Even Rule 10B(1)(a) does not authorize ITA No. 6160/Del/2014 11 disallowance of any expenditure on the ground that it was not necessary or prudent for the Appellant to have incurred the same or that in the view of the Revenue the expenditure was un-remunerative or that in view of the continued losses suffered by the Appellant in his business, he could have fared better had he not incurred such expenditure. So long as the expenditure 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.
o CIT Vs. Edward Keventer (Private) Ltd. (1972 86 ITR 370, the Calcutta High Court) - The Hon'ble High Court has held that legitimate business needs of the Company must be judged from the view point of the Company itself and must be viewed from the point of view of a prudent businessman. It is not for the Assessing Officer to dictate what the business needs of the Company should be and he is only to judge the legitimacy of the business needs of the Company from the point of view of a prudent businessman. The benefit derived or accruing to the Company must also be considered from the angle of a prudent businessman. The term "benefit" to a Company in relation to its business, it must be remembered, has a very wide connotation and may not necessarily be capable of being accurately measured in terms of pound, shillings and pence in all cases.
o Dresser Rand India Pvt. Ltd vs Addl. CIT [2012] 13 ITR(T) 422 (Mumbai)
- The Hon'ble Mumbai bench of the Tribunal held that benefits derived by the Company is not a relevant criteria for determination of arm's length of an expenditure incurred by the Company. The Hon'ble Mumbai bench held as follows (refer pages 92 to 93 of compendium):
"8. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not.
The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities."ITA No. 6160/Del/2014 12
o Sabic Innovative Plastics India Pvt. Ltd. vs ACIT [TS-234-ITAT-
2017(Ahd)-TP] - The Hon'ble Ahmedabad Bench of the Tribunal held that the in light of the reasonable evidence of the rendition of service, it cannot be open to TPO to proceed on the basis that the services were not rendered. Also, the method of ascertaining the arm's length price, on the basis of TPO's subjective perception about worth of services, is not sustainable in law either. The Hon'ble Ahmedabad Bench held as follows (refer pages 108 to 109 of compendium):
"10. In our considered view, there is reasonable evidence of the rendition of service and it cannot be open to TPO to proceed on the basis that the services were not rendered."
6.8. It was also submitted that the TPO did not provide details of any comparable uncontrolled transaction based on which the arm's length price has been arrived at NIL. In this regard, reliance was placed on the following judgements wherein it was held as follows:
o AWB India (P) Ltd vs. ACIT [TS-67-ITAT-2013(DEL)-TP] (refer pages 24 to 25 of compendium) "27. Further, the TPO applied the CUP Method for benchmarking the international transaction pertaining to availing of management services, discarding the TNMM applied by the assessee. While doing so, as correctly pointed out, the TPO remained oblivious of the fact that Rule 10B(1)(a) of the Rules stipulates 'comparable' and 'uncontrolled transactions', both of which elements are absent herein."
o Citicorp Maruti Finance Ltd [TS-500-ITAT-2017(DEL)-TP] (refer pages 141 to 142 of compendium) "5.08 It is further seen that the TP Officer has applied the CUP method while determining the ALP of the impugned international transactions and has determined the value by applying the CUP method at nil. However, this approach of the TP Officer is also not as per the mandate of law. The Ld. AR is absolutely correct in contending that where CUP is considered as the most appropriate method, the value cannot be nil."