Income Tax Appellate Tribunal - Chennai
Durr India Private Limited, Chennai vs Acit, Chennai on 16 August, 2017
आयकर अपीलीय अिधकरण,'डी' यायपीठ, चे ई।
IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH: CHENNAI ी एन.आर.एस. गणेशन, याियक सद य एवं ीएसजयरामन, लेखासद य के सम BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER आयकरअपीलसं./ITA No. 232/Mds/2017 िनधा रणवष /Assessment Year: 2012-13 M/s. Durr India Pvt. Ltd., Vs. The Asst. Commissioner of 471, Ground and Second Floor, Income Tax, Corporate Range Prestige Polygon, Anna Salai, 1, 121, Nungambakkam High Nandanam, Chennai-600 035. Road, Chennai-600 034.
[PAN:AAACD 3568 P]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से/ Appellant by : Mrs. KapilHirani, Adv.
यथ क ओर से /Respondent by : Mr. PathlavathPeerya, CIT
सुनवाई क तारीख/Date of Hearing : 18.05.2017
घोषणा क तारीख /Date of Pronouncement : 16.08.2017
आदेश / O R D E R
PERS. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the AO passed in pursuant to the directions of the Dispute Resolution Panel in F.No.100/DRP-2-BNG/16-17 dated 06.10.2016.
:-2-: ITA No. 232/Mds/2017
2. Durr India Private Limited (Durr India) was incorporated on February 6, 1997 in Chennai, Tamil Nadu, as a wholly owned subsidiary of Durr systems Gmbh, Germany. It is engaged in the business of providing paint finishing systems to automakers as well as related services to meet the demand for paint finishing systems in the Asia- Pacific region. Further, Durr India is also engaged in rendering engineering design services to its AEs. The Durr Group in Germany is represented in more than 20 countries. Durr AG is the strategic management holding company directing the international operations of the business units. The assessee has entered into an agreement with Durr Systems, Gmbh, to avail working assistance in acquiring contracts and to provide technical assistance and training to its employees. Under this scheme, Durr India contracts with its clients to set up paint systems. Durr Systems GmbH, Germany sources the basic designs and drawings for setting up the paint shop. The materials required for the paint shop are sourced by the assessee and erection of the paint shop is subcontracted to other third party suppliers. It prepares the detailed designs and supervises the subcontractors and continues to be responsible for the quality of products fabricated through the subcontract. Its major customers are Tata Motors Limited, Mahindra, Ford India Limited and other passenger car manufacturer. Durr India is also engaged in providing Engineering Design services and Energy and Environmental Systems for the projects executed by Durr Group entities.
:-3-: ITA No. 232/Mds/2017
3. During the FY 2011-12 , the assessee company has entered into the following International Transaction with its AE.
Sl.No Name of the AE Description of Amount (In Rs.)
the transactions
1 Durr Systems GmbH, Import of parts 1,22,18,158
Germany and accessories
DurrPaintshop 1,56,427
Systems,Shangai
OLPI Durrs.p.a 12,26,511
Total 1,36,01,096
2 Durr Systems GmbH, Import of traded 15,29,542
Germany goods
3 Durr Systems GmbH, Purchase of fixed 1,33,484
Germany assets
4 Durr Systems GmbH, Payment of 9,83,41,500
Germany research and
development
and
management
fees
5 Durr Systems GmbH, Installation 2,15,28,465
Germany services/technica
Durr Systems S.A.S l service income 20,83,092
DurrPaintshop Systems, 25,77,0 19
Shangai
DurrEcoclean S.A.S 49, 15,240
6 Durr Systems GmbH Provision of 2,78,04,743
Durr Limited, UK Engineering 4,50,366
DurrEcoclean, GmbH design services 2,44,045
Total 2,84,99,154
7 Durr Systems GmbH, Reimbursement 38,43,811
Germany of actual
Durr Systems Inc, USA expenses by to 3,77,825
DurrPaintshop Systems, the AE 3,814
Shangai
OLPI Durrs.p.a 1,16,910
Durr IT services GmBH 1,36,36,095
Total 1,79,81,455
8 Durr Systems GmbH, Reimbursement 8,80,620
Germany of actual
expenses by the
:-4-: ITA No. 232/Mds/2017
AE
DurrEcoclean, GmbH 5,169
Total 8,85,789
Total Rs,19,20,75,83
5
4. The details of international transactions as per assessee's TP study report is as under :
Nature of Margin Margin of
Amount. MAM PLI
International of comparables
(in Rs.)
Transaction taxpayer
Import of parts 1,36,01,096 TNMM OP/OR 8.24% 2.95%
and' accessories
Import of traded 15, 29,542
goods
Purchase of fixed 1,33,484
assets
Payment of 9,83,41,500
research and
development and
management fees
Installation 3,11,03,815
services/technical
service income
Provision of 2,84,99,154 TNMM OP/OC 69.79% 9.53%
Engineering design
services
Reimbursement of 1,79,8 1,455 NA NA NA NA
actual expenses by
to the AE
Reimbursement of 8,85,789 NA NA NA NA
actual expenses by
the AE
Total Rs.19,20,75,835
5. The assessee using Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) determined ALP of the transactions with the AE's. This method has been accepted by the Department in ay 2008-
:-5-: ITA No. 232/Mds/2017 09 on identical facts. It had earned an operating margin of 8.24% on its operating cost which was arrived at after considering the costs allocated by Durr Germany w.r.t R&D and management services. Its operating margin of 8.24% on operating cost was higher than arithmetic mean of the comparable margins of 2.95% and hence the assessee considered that its international transaction with its AEs were at arm's length. 5.1 The assessee during a y 2012-13, paid Rs. 9,83,41,500/- towards its share of R&D and management fees to its AEs for the services provided to it by Durr Germany. In this regard, it explained that all the costs for services rendered by Durr Germany to its AEs identified to be under the head of "Management Services" and "R&D Services" are totaled up for all the members of the Durr Group. The total cost for all the AEs represents the total pool of allocable costs under the heads "Management Services" and "R&D Services". The total allocable costs are then allocated to the AEs in accordance with the agreement entered into between Durr Germany and its AEs including the assessee. This allocation procedure is pursuant to a group policy which is common across all the other group entities covered under the agreement and not unique to the assessee. The total allocable costs are redistributed amongst the participating AEs in accordance with a formula applicable to all AEs as stated in the agreement being:
:-6-: ITA No. 232/Mds/2017
a) R&D Services - 50% according to relative external (i.e non AE and non commission) sales and 50% according to relative Operating Profits.
b) Management Fees - 50% according to relative external (i.e non AE and non commission) sales and 50% according to Head Count. 5.2 The assessee further explained that the rationale behind adopting external sales and operating profits of the business unit for the allocation of R&D fees is based upon the fact that an investment in R&D leads to better products and projects. Further, continuous updation of the technology is done according to the projects requirements that ultimately results in higher margins and increase in operational efficiency of the business. If Profits of a participating foreign AE was negative, then that would be artificially set to zero. This would mean that the formula would be confined to 50% of Relative Sales alone and the Indian entity would not suffer the costs of a mal-performing foreign AE. 5.3 However, the TPO rejected the TNMM as MAM for benchmarking intra group services and adopted CUP as the MAM. The TPO held that allocation of shared costs on the basis of profit earned by the assessee is not an arm's length criterion of allocation and recomputed the share in R&D Fees and Management Fees solely on the basis of sales and proposed a downward adjustment of Rs. 4,34,44,588/- towards excess R&D and Management Fees. Aggrieved, the asssessee filed its objections before the :-7-: ITA No. 232/Mds/2017 Dispute Resolution Panel (DRP) objecting to all the additions proposed in the draft assessment order. The DRP sustained the ALP adjustment towards excess R&D Fees and Management fees of Rs. 4,34,44,588/- relying on its orders in the assessee's case on identical facts for ays2009- 10, 2010-11 and 2011-12. The AO passed the final order on 25.11.2016 making an addition of Rs.4,34,44,588/- towards excess R&D Fees and Management fees, following the DRP's directions. Against that order, the assessee is in appeal before us, inter alia, with the following grounds of appeal:
" Issue 1: Downward TP adjustment in case of payment of research & development (R&D) and management fee -
1. The order passed by the Assistant Commissioner of Income tax, Corporate Range 1, Chennai (Assessing Officer or the AO) pursuant to the order of the Learned Deputy Commissioner of Income-tax (Transfer pricing officer or TPO) and the directions issued by the Hon'ble Dispute Resolution Panel - 2, Bangalore (DRP) to the extent prejudicial to the Appellant, is erroneous, bad in law.
2. The learned TPO/AO and the Hon'ble DRP have erred in law and facts of the case by rejecting the detailed transfer pricing analysis (in accordance with the provisions of Sec 92D of the Act read with Rule 1 OD of the Income Tax Rules 1962) carried out by the Appellant following Transactional Net Margin Method (TNMM) without providing any cogent reasons.
3. On the facts and circumstances of the case, the international transactions of the Appellant being closely linked, use of TNMM as done by the Appellant is more appropriate under law and deserves to be retained as the most appropriate method to determine the Arms Length Price.
4. Without prejudice to the ground 2 above, the learned TPO/AO and the Hon'ble DRP have grossly erred in application of CUP methodology by not identifying any third party comparable data which is mandatory under law.
5. Without prejudice to the above grounds, CUP being incapable of being applied considering the facts and circumstances of the case, :-8-: ITA No. 232/Mds/2017 the most appropriate method deserves to be retained as TNMM which was adopted by the Appellant, in the interest of justice.
6. Without prejudice to the above grounds, the TPO/AO and the Hon'ble DRP have further under the guise of using CUP, grossly erred in merely changing the cost allocation procedure adopted by the Appellant which is impermissible under law.
7. The Learned TPO/AO and the Hon'ble DRP have grossly erred in re-working the R&D fee and Management Fee paid by the Appellant that has been duly and correctly computed in accordance with the agreement entered into by the Appellant with the Durr Group of Companies. The learned TPO/AO and the Hon'ble DRP in doing so have completely ignored the fact that the allocation procedure is pursuant to a group policy which is common across all the other group entities covered under the agreement and not unique for the Appellant. The said methodology arrived based on a scientific basis cannot be substituted by the learned TPO/AO with an arbitrary value of its own that completely ignores the terms and conditions agreed to between the parties. Moreover the OECD guidelines also support the use of profit, headcount as the appropriate allocation keys.
Also, the learned TPO/AO and the Hon'ble DRP have not disputed the receipt of benefits by the Appellant on account of the R&D and management services.
8. Without prejudice to the above grounds of objections, the Appellant wishes to submit before the Hon'ble Tribunal that, the matter to be determined as per law by taking into account appellant's various contentions before the Hon'ble Tribunal and also the benefit of +/- 5 percent provided under second proviso to section 92C(2) be granted.
Issue 2: Initiation of penalty proceedings
9. The Learned AO has erred in initiating penalty proceedings under section 271 of the Act."
6. The Ld.AR submitted that the Department having accepted the TNMM in AY 2008-09 on identical facts, it cannot reject the same for this year on the basis of rule of the consistency and relied on 100 CTR 267 SC. The TNMM adopted by the assessee is legally acceptable method, it should not have been rejected without cogent reasons. The :-9-: ITA No. 232/Mds/2017 CUP method is not feasible as the transactions has been entered by the assessee with its AE are assessee specific and not comparable with other entity. The application of CUP as MAM is thus incapable of being applied and as such cannot be the MAM. CUP method can be adopted as MAM over TNMM, only when comparable product or service is available and not otherwise. In this regard, the AR relied on Frigo glass India (P) Ltd. Vs. ACIT (2016) 180 TTJ (Del) 265.In the absence of any comparison of the transaction with transaction carried out in auncontrolled market, the TPO cannot independently come to a conclusion that volume and quality of service was disproportionate to the payment made by the assessee. For this, the AR relied onDCIT vs. Flakt (India) Ltd. ITA No.1032/Mds/2014. Further, he submitted that the TPO / AO & the DRP have grossly erred in merely changing the cost allocation procedure adopted by the assessee under the guise of using CUP as MAM. The ALP adjustment thus made by merely changing the cost allocation procedure is not a prescribed method of computing ALP prescribed under the Act read with the Rules and is thus illegal. Ad hoc ALP additions in the value of international transactions is not permitted under law and placed reliance on Det Norske Veritas A/S Vs. Addi. Director of IT (International Taxation) (2016) 178 TTJ (Mumbai 'K') 59 .Per contra, the Ld.DR relied on the orders of the TPO/DRP and Rule 10AB of the IT Rules, which is extracted as under: 55
[ Other method of determination of arm's length price . 10AB . For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's :-10-: ITA No. 232/Mds/2017 54b length price in relation to an international transaction [or a specified domestic transaction]shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.]
7. We have heard the rival contentions. Similar issue came up in the assessee's case before this tribunal for the ays 2009-10, 2010-11 & 2011-
12. This tribunal in ITA Nos.754/Mds/2014, No.972/Mds/2015 & No.455/Mds/2016 dated 21.12.2006 disposed the matter as under:
"10. We have considered the rival contentions and perused the orders of the authorities below. Case of the assessee is that TNMM was rejected without proper reasoning and a method which was unknown to the law was used by the ld. TPO for the transfer pricing analysis. A look at the international transactions entered by the assessee during the previous years relevant to impugned assessment year which have been reproduced by us at para 2 above would clearly show that these were not pure independent transactions amenable to an independent analysis for pricing. Parts and accessories imported from Associated Enterprise would have been used by the assessee for installation and other services in India as well as engineering services. Reimbursement of expenditure could also have been only in connection with these activities. Ld. TPO had singled out management fees and R & D fees and subjected it to a separate analysis disregarding the TNMM adopted by the assessee. Ld. TPO did not discuss anything regarding the comparables considered by the assessee for the TNMM study. Ld. TPO had summarily rejected the TNMM study citing a reason that intra-group services had to be benchmarked separately by analyzing the actual services received. No doubt there can be no quarrel on the view taken by the ld. TPO :-11-: ITA No. 232/Mds/2017 that Arms Length Price should be determined on a transaction by transaction basis. However, where the international transactions are closely linked this approach may not be feasible and a method of aggregation which is more amenable to a TNMM methodology could be better. Ld. TPO ought not have considered the rule regarding transaction to transaction comparison as so rigid that it could not give way to an aggregate method, where the transactions were so interconnected and intertwined, when an independent analysis would not give reasonably fair results. In the case before us, ld. TPO based on ld. DRP direction elected to bench mark the fees paid by the assessee for management services and R & D on the basis of the ratio of the turnover of the whole of the M/s. Durr Systems Gmbh, Germany to the turnover of the assessee in India. Ld. DRP was of the opinion that this method was nothing but CUP. The method by which Arms Length Price has to be determined are set out in Rule 10B and Rule 10AB of the Income Tax Rules. Clause (a) to Rule 10B(1) describes the CUP method, and this is reproduced hereunder:-
''(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in international transactions or specified domestic transactions'' ; Other methods mentioned in the said Rule are resale price method, cost plus method, profit split :-12-: ITA No. 232/Mds/2017 method and transactional net margin method. There is residual clause (f) which gives freedom to the ld. TPO to follow a method which takes into account the price which was charged or paid or would have been charged or paid and rule 10AB defines it so. Mumbai Bench in the case of DET Norske Veritas As (supra) has clearly held that once method of ascertaining Arms Length Price followed by the assessee was rejected by the ld. TPO, for good and sufficient reason, he had to select most appropriate method out of these which were set out in Rule 10B or Rule 10AB. Co-ordinate Bench in the case of M/s. Flakt (India) Ltd (supra) had held as under at para 9 of its order:- ''The Transfer Pricing Officer has not taken any pain to identify uncontrolled transaction between two independent entities. In the absence of any comparison of the transaction with transaction carried out in a uncontrolled market, this Tribunal is of the considered opinion that the Transfer Pricing Officer cannot independently come to a conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The matter may be totally different if the Transfer Pricing Officer was able to identify the uncontrolled transaction between the enterprises entering into such transaction which would materially affect the price in the open market. In this case, such an exercise was not made by the Transfer Pricing Officer. The Dispute Resolution Panel has, therefore, rightly found that the method adopted by the TPO for disallowing the claim of the assessee was not justified. As rightly observed by the Dispute Resolution Panel, the TPO has not brought on record the base on which he estimated the ALP at 25% when Rule 10B ( c) provides for method of determining the ALP. This Tribunal is of the considered opinion that estimation of the services rendered and costs for such services may be outside the scope of transfer pricing adjustment. Without identifying the comparable cases, this Tribunal is of the considered opinion that estimation of the disallowance without any base is not called for. Therefore, the Dispute Resolution Panel has rightly upheld the transfer pricing study made by the assessee. This Tribunal do not find any reason to interfere with the order of the lower authorities and accordingly the same is confirmed''. In the case :-13-: ITA No. 232/Mds/2017 of Frigo glass India (P) Ltd (supra) Delhi Bench of the Tribunal had held CUP method could be adopted after discarding TNMM only when a comparable product or service is available. Ld. TPO and ld. DRP were not able to identify a single uncontrolled comparable for bench marking R & D fees and management fees paid by the assessee. This may be due to the difficulties in finding another entity that had rendered services which were identical to what were given to the assessee by M/s. Durr Systems Gmbh, Germany, that too in an uncontrolled set of circumstance. In such a situation in our opinion assessee could not be faulted in insisting that the TNMM method adopted by it for analyzing its international transactions with Associated Enterprises, for the impugned assessment years should be accepted. Nevertheless, we find that lower authorities having rejected the TNMM method did not verify the appropriateness of the comparables selected by the assessee in its TP study. Functional profile of the comparables and that of the assessee were never verified. Lower authorities did not verify whether the Arms Length Price analysis done by the assessee based on TNMM was correctly done and whether any modification in the comparables selected or the PLI computed were necessary. Thus, while setting aside the orders of the lower authorities for all the impugned assessment years, we remit the issue of fixing the Arms Length Price of the international transactions of the assessee under TNMM, back to the file of the ld. Assessing Officer /ld. TPO for consideration afresh in accordance with law."
8. In this case, neither the TPO nor the DRP could identify a single uncontrolled comparable for bench marking R&D fees and management fees paid by the assessee. Hence, Rule 10AB, extracted supra, and relied on by the Revenue cannot be applied in this case. Since, there is no change in the facts, by following this tribunal order extracted supra, on :-14-: ITA No. 232/Mds/2017 the same lines, we remit the issue, for fixing the ALP of the international transaction of the assessee under TNMM, to the file of the AO/TPO for a fresh consideration in accordance with law.
9. In the result, all the grounds of the appeal are treated as allowed for statistical purposes.
Order pronounced in the Open Court on 16th August, 2017, at Chennai.
Sd/- Sd/-
(एन.आर.एस. गणेशन)
(एसजयरामन)
(N.R.S. GANESAN)
(S. JAYARAMAN)
!याियक सद#य/JUDICIAL MEMBER
लेखासद#य/ACCOUNTANT MEMBER
चे%ई/Chennai,
&दनांक/Dated: August 16th , 2017.
TLN
आदेश क ितिलिप अ*ेिषत/Copy to:
1. अपीलाथ /Appellant 4. आयकर आयु+/CIT
2. यथ /Respondent 5. िवभागीय ितिनिध/DR
3. आयकर आयु+ (अपील)/CIT(A) 6. गाड फाईल/GF