Income Tax Appellate Tribunal - Chennai
Gamesa Renewable Private Limited, ... vs Dcit, Chennai on 13 November, 2017
आयकर अपील
य अ धकरण, 'डी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, CHENNAI
ी चं पज
ू ार
, लेखा सद य एवं ी ध"ु व#
ु आर.एल रे $डी,
या%यक सद य के सम'
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER
आयकर अपील सं./ITA Nos. 1420 & 376/Mds/2017
नधा रण वष /Assessment Years : 2011-12 & 2012-13
M/s. Siemens Gamesa The Deputy Commissioner of
Renewable Power Pvt. Ltd., v. Income-tax,
No.334, Futura Tech Park, Corporate Circle-2(1),
8th floor, Block-B, Rajiv Gandhi Chennai.
Salai, Sholinganallur,
Chennai - 600 119.
PAN AACCG6027C
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर /Appellant by : Shri B.Ramakrishnan, FCA &
Shri S. Dwarakesh, ACS
यथ क ओर से/Respondent by : Smt. Vijayalakshmi, CIT,D.R
सन
ु वाई क तार ख/Date of Hearing : 16.08.2017
घोषणा क तार ख/Date of Pronouncement: 13.11.2017
आदे श /O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER
These two appeal are filed by the assessee, aggrieved by the order of the ld. Assessing Officer, Chennai, passed u/s.143(3) read with sec.144C(1) of the Act pursuant 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) under sec.144C(5) of the Income-tax Act, 1961, for the assessment years 2011-12 and 2012-13
2. The first common issue in these two appeals is with 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 Gamesa Renewable Power Pvt. Ltd.,(formerly known as 'Gamesa Renewable Private Limited') ('Gamesa India' or 'the assessee') is an Indian company engaged in the business of manufacture of renewable energy equipments like Wind Energy Generation ('WEG', commonly known as 'windmills') and Solar Power Generators. The assessee provides turnkey solutions to its customers which includes the following activities:
a) Undertaking preliminary activities such as identifying 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 generators 3.1 The facts of the issue as narrated in the assessment year 2012-13 are that the assessee maintained the documentation 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 of wind turbines, wind farm development, erection and commissioning and operations & maintenance of wind turbines. Based on the Functional Asset and Risk Analysis (FAR) and the economic analysis, the Transactional Net Margin Method (TNMM) had been considered as the most appropriate method under the Indian transfer pricing regulations, for analyzing the arm's length nature of these international transactions between Gamesa India and it's A.Es. The assessee conducted a common analysis for the international transactions involving purchase of raw materials and components, purchase of manufacturing tools, payment for royalty and management fee as these transactions are inextricably linked to the assembly, erection and installation function performed by Gamesa India. In the transfer pricing 4 study report, the assessee considered TNMM as the most appropriate method. The TPO in his order has remarked 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 adjustments and extra-ordinary costs are factored, the PLI of the assessee works out to 4.40%. Thus, it was concluded that Gamesa India's international transactions with AEs was consistent with the arm's length standard from an Indian transfer pricing regulations perspective.
3.2 The assessee entered into Technology Transfer Agreements with Gamesa Innovation and Technology SL Unipersonal ('Gamesa Spain') dated 1st January 2009 and 11th 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 certain comparables agreements and the arithmetic mean of the royalty 5 as per the comparable agreements amount to 6.43 percent. Given that the rate of royalty as per the comparable transactions is higher than the royalty paid by the assessee, the transaction has been regarded as within arm's length price. During the course of transfer pricing assessment proceedings, the TPO re- computed the Arm's 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 for development of wind-farm, erection and commissioning activities.
3.3 Further, the TPO questioned why imported bought- out components should not be reduced from turnover and applied the rate of royalty on net turnover. In this regard, the TPO mentioned that under the provisions of the Foreign Exchange Management Act, 1999 (FEMA), no royalty can be paid on bought out components. With respect to adoption of CUP as alternate method, the TPO remarked that he is not 6 inclined to accept the supplementary benchmarking done to prove the ALP of royalty on the ground that the database and copies of the agreements of comparables are not available for verification. In this regard, it is pertinent to note that the TPO has not disputed the said position in the preceding year and in the show cause notice for the subject assessment year. The DRP has upheld the adjustment made by the TPO in this regard without appreciating the submissions of the assessee. Against this, the assessee is in appeal before us.
4. The ld. AR submitted that there is no transfer pricing adjustment in a scenario where the transactions are at Arm's Length in accordance with the method prescribed under Rule 10B. Without prejudice to the above, he submitted that technology is required even in respect of other activities such as development of wind farm and erection and commissioning. The ld. AR submitted that the action of the TPO in proposing 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 transfer pricing study, the assessee considered TNMM as the most appropriate 7 method. For the subject assessment years, 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 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 linked 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 entity level is sufficient in order to substantiate that the transactions with AE are at arm's length. Without prejudice to the above submission, the assessee has undertaken supplementary benchmarking under CUP method thereby considering the royalty rate 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 of 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, it was submitted that the methodology adopted by the TPO is not in accordance with any of the methods prescribed in Rule 10B of the Rules and the action of the TPO is beyond his jurisdiction as provided in the law. The ld. AR relied on the following decisions, wherein it has been held that where the PLI of the assessee is determined under TNMM, a separate analysis and consequent deletion of royalty / technical fee payment is unwarranted:
1. Magneti Marelli Powertrain India (P) Ltd. vs DCIT (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. DCIT (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 entered into by the assessee with its AE are at arm's length under the methods prescribed under Rule 10B of the Rules and the TPO has no jurisdiction to identify any method which is not prescribed 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 those 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 TPO to determine the commercial expediency of the assessee, it was submitted by the ld. AR that under the provisions of sec.92CA of the Act, the TPO is vested with the power to determine the ALP, which needs to be computed in accordance with the methods prescribed. The TPO has remarked that the assessee has not substantiated the necessity for use of technology in relation to wind farm development and erection and commissioning activities. According to the ld. AR, business transactions 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 Communication (P) Ltd. vs. CIT (353 ITR 200) wherein the Court in the context of sec.40A(2) has clearly held that while examining the reasonableness of an expenditure, the Assessing Office is 10 expected to exercise his conclusion in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases. The ld. AR, also placed reliance on the judgment of the Delhi High Court in the case of CIT vs. EKL Appliances Ltd., (345 ITR 241) wherein it has been held that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. In addition, the Court held that it is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent 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 reasonableness of the expenditure for the purpose of business had to be adjudged 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, Delhi Bench, in the case of Showa India (P) Ltd. vs. DCIT ( ITA No.166/Del./2013) wherein it was held that where the assessee company has provided the details of royalty and technical assistance fees paid to AE, it cannot be said that the assessee would be competent to make use of such machinery without the support of the AE and according to the ld. AR, the TPO cannot determine the ALP of any transaction merely based on assumptions. The ld. AR submitted that the TPO does not extend to stepping into the shoes of the assessee and determining the necessity of incurrence of expenditure and the commercial expediency of a transaction has to be evaluated from the assessee's stand point and not from Revenue's 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 activities is unwarranted.
4.5 Without prejudice to the above submissions, the ld. AR submitted that for the subject A.Ys. there is no such restriction 12 on payment of royalty on bought out components under the provisions of FEMA on the reasons that as per erstwhile 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 was permitted without any prior approval of RBI. Further, it was submitted that the aforesaid ceiling on payment of royalty has been lifted with effect from 16th December, 2009 and for the subject A.Y., there was no restriction on payment of royalty vide Circular and Notification issued by the Reserve Bank of India. Accordingly, there is no requirement for such approval with reference to 16th 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 TPO relied on the 'Standard conditions attached to automatic approvals for Foreign Investment & Technology Agreement', which emphasizes for calculation of royalty on the basis of net ex-factory sale price of products excluding the excise duty and other taxes, cost of standard bought out components and landed cost of imported 13 components etc. and relying on the conditions, the TPO held that no royalty is permissible under the provisions of FEMA 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 royalty prescribed under the provisions of FEMA cannot be regarded 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 2015-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 restrictions on payment of royalty under foreign technology collaboration 14 and put the same under automatic route. Since there are no restrictions on payment of royalty by the Government of India, therefore, any amount paid by assessee on account of royalty would ipso-facto be its 'ALP' also.
• Both the legislations operate into different fields. The rates allowed under the automatic route by the RBI or FIPB are meant to achieve objectives in different areas. The whole thrust of the income tax proceedings and transfer pricing regulations is to ensure that taxable profit earned by an entity India are not shifted to foreign tax jurisdiction without payment of legitimate share of tax due in India.
Therefore, according to the ld. AR, the transfer pricing adjustment proposed by the TPO on the ground that the royalty payment is not within the limits prescribed under FEMA 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 excess royalty or not is a prerogative of regulatory authorities and not tax authorities. In this regard, the ld. AR relied on the decision of the Tribunal, Pune Bench, in the case of Akzo Nobel Chemicals 15 (India) Limited vs. DCIT,( ITA No.1477/Pune/2010) wherein it has held that the TPO has no jurisdiction to interpret the provisions of FEMA in order to compute net sales/turnover for the purpose of royalty. Applying the rationale, according to the ld. AR, in the instant case, the TPO has exceeded his 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 restricted the quantum of royalty. The ld. AR submitted that it is pertinent to note that the term 'bought out components' is not defined in FEMA and the said term includes only components which are not subject to further processing and sold on as-is-basis 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 company engaged in manufacture of laptop procures web camera from a third party vendor and sells both the products to end customers as a combined product, royalty should be confined only to the selling price of laptop (thereby excluding the cost of web camera 16 from the overall selling price). Whereas, in the instant case, the components procured by the assessee are processed further and therefore, the same cannot qualify to be 'standard bought out components' in order to be excluded from turnover for the purpose of computation of royalty. Further, it is submitted that the components procured from its AEs have been processed further for completing the end product and delivering to its customers. In other words, the same does not constitute bought out components that are ready for assembling, which issue has been discussed in detail by the Pune Bench, Tribunal in the case of Akzo Nobel Chemicals (India) Limited vs. DCIT, supra. Therefore, the ld. AR, submitted that the TPO has erred in re- computing the quantum of royalty by misinterpreting the provisions of FEMA and no transfer pricing adjustment is warranted in this regard.
4.9 Regarding the royalty on wind farm development and erection and commissioning, the ld. AR, submitted that the TPO has remarked that the scope of work involved under these activities do not involve any technology which is not available in India and for which the assessee is dependent on the AE as a 17 part of the technology transferred under the agreement and based on the observation, the TPO computed the ALP of the transaction to be Nil. According to the ld. AR, these activities involve the following processes which require tremendous expertise and cannot be undertaken directly by semi-skilled or unskilled workmen :
Wind farm development Erection & Commissioning Environmental sustainability - Providing guidelines to use tools
-Visual aspects - Validation of foundation designs
-Ecological/architectural protection - Training to personnel of Gamesa India at the time of development of new prototypes Technical sustainability - Supervisory control and Data
- Wind speed acquisition (SCADA - for monitoring
- Grid connection WTG throughout the year on remote
- Providing drawings and design 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. The only contention raised by the TPO is that such activities do not require any technology, which is not available in India.
According to the ld. AR, it is not the prerogative of the TPO to decide whether the assessee should have used the technology provided by its AE or not. The TPO ought to have appreciated the basic fact that the assessee developed wind farms, installed and commissioned WEGs on the basis of the inputs provided by 18 its AE. The AE has substantial past experience in implementing similar projects across the globe and therefore, the assessee obtained technology and expertise from its AE in order to ensure better quality to its customers. Therefore, according to the ld.
AR, the contention of the TPO that the ALP of royalty in relation to wind farm development activities, erection and commissioning is Nils is not tenable. The ld. AR further submitted that the copy of sample reports provided by its AE in relation to wind farm development and sample mail correspondences evidencing the fact that the assessee has sought the inputs from its AE are also provided. In view of the above, the ld. AR, submitted that robust technology and knowledge support is required for the 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 determined the ALP for the royalty paid by the assessee to its AE based on FEMA Regulations instead he has substantiated his point of view that no royalty can be paid on the bought out components using 19 the method of calculation of royalty provided in FEMA. According to the ld. DR, it is pertinent to note that almost all the companies operating in India and paying royalty to its foreign AEs for the technology provided by the AEs are calculating royalty on the turnover after reducing the value of the bought out components for the simple reason that the cost of the technology were impeded in the price of the raw material. Indian Transfer Pricing regulations provide the choice to the assessee 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 rightly rejected the supplementary benchmarking done by the assessee. Even for the arguments sake the contention of the assessee is accepted, the availability of the details and accessibility of the foreign company's database is essential for the comparability analysis which is a first step in determining the ALP 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 involving an unrelated party, such payment would not have been made by that party without commensurate benefits accruing to it. Even otherwise, the assessee did not demonstrate the need and benefit relating to such a payment. This has been elaborately dealt with by the TPO in his order u/s.92CA(3) of the Act dated 29.1.2015. Such comparison has been contemplated in the OECD Guidelines 2010 which held the field at the relevant time of passing the order. The same is reproduced below :
"7.6 Under the arm's length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or social value top enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself."21
According to the ld. DR, the transactions can be aggregated only if they are intricately intertwined and cannot be separately analyzed. This is not the case here. Moreover, aggregated approach to transfer pricing analysis is the exception rather than the norm. This issue has been dealt with extensively by the DRP of its order dated 24.03.2017. The DRP has quoted case laws to reject the assessee's objection in this regard. The OECD Guidelines of 2010 has also taken the view that as far as possible, transactions are to be evaluated separately. Considering this, according to the ld. DR, the action of the TPO is in order.
5.2. Further, the ld. DR submitted that the commercial expediency may not be questioned if the transactions carried out between uncontrolled parties. If the transactions between the two parties are controlled then the nature of transactions should be analyzed including the commercial expediency. Needless to say the comparability study which forms the basis of Transfer Pricing proceedings requires an analysis of the need for such a transaction and the benefit derived by the assessee from that transaction. The TPO has not sought to 22 question the commercial expediency of the royalty. What has been done is to compare the circumstances surrounding 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 in 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 cannot be regarded as ALP for transfer pricing purposes is not acceptable as the assessee tried to mislead the ITAT that the TPO has determined the ALP for the royalty paid by the assessed to its AE using the provisions of FEMA which 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 calculating the royalty and similar method of calculation for royalty also provided under FEMA regulations. So the TPO has formed 23 his opinion based on the royalty calculation of unrelated parties which does not include the value of bought out components as the cost for the technology already impeded into the price of the raw material (bought out components). The ld. DR submitted that the RBI is an authority to regulate the foreign payments including royalty, put restriction on the royalty payments. However, the RBI has relaxed the ceiling for the payment of royalty does not mean that the assessee can pay entire profits to its AE as royalty. Though the ceilings for royalty relaxed by RBI, the method of calculation of royalty provided by the RBI can be taken as a reference as the same method followed by most of the companies for calculating the value of royalty.
5.4 The ld. DR submitted that the reason behind the reduction of the value of bought out components from the total sales while calculating the royalty is the cost of the technology already embedded in the price of the raw material and for better understanding, the royalty calculation of Mobis India Ltd. is provided below:
ROYALTY TO MOBIUS KOREA FOR FY 2013-14 24 Year Months Sales Less:Trading Less Net Sales Royalty & MDI sales Imports 2013 April 3480790763.14 332329122 680868160 2477593481 74327804 May 3421868459.14 266548375 693651740 2461668344 73850050 June 3405444134.38 214242332 706660060 2484541742 74536252 July 3132628736.49 278692197 651524555 2202411985 66072360 August 3493824299.49 215174696 683986456 2594663147 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 241157775 72343733 Feb. 3419453077.38 172590752 781271436 2465590889 7396727 March 3693961712.76 150903444 1088060649 2454997620 73649929 Total 40959298775.65 2451708826.57 9153360845.99 29354229103 880626873 .09 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 the 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 countered 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 the DRP and the reasoning therefore are explained by the Panel. The assessee had claimed royalty on substation development charges, development revenues and revenue on erection and 25 commissioning of Wind Turbine Generators (WTGs), which was discussed by the TPO in his order. He has, after a perusal of the agreements relating to the above activities, held that what was being done under these categories did not involve any technology out of common infrastructure activities which do not involve any element of transfer of technology. This has not been countered by the assessee and the issue has been dealt with by the DRP in its order.
6. We have heard both the parties and perused the material on record. In this case, under the technology transfer agreement dated 01.01.2009 and 11.07.2011 with Gamesa Innovation and Technology SL (Gamesa Spain), for availing technology in relation to A.E 59 and G97 models respectively, the assessee agreed to pay royalty @ 4% / 4.50% respectively on net amount of annual turnover on sale of Wind Energy Generators (WEG) to its customers including charges for development of land, substation, and erection & commissioning. The assessee aggregated the royalty payment which is being international transaction with AE and benchmarking it by using Net Present Cost (NPC) on Revenues as PLI with TNMM method as most 26 appropriate method. The assessee's NPC on revenue was claimed to be at 1.49% with three year weighted margin on revenue of comparables of 0.07% and therefore, the AE transactions were claimed to be at arm's length. According to TPO, the assessee's approach of computation of Royalty and Managerial services by benchmarking them on an aggregation basis was not accepted by TPO / AO. According to TPO, no royalty payable on the standard bought out components and thereby reduced the cost of standard bought out components from the turnover of the assessee and applied the royalty rate on net turnover so as to determine the ALP. The plea of the assessee is that it has considered certain comparables, agreements and the arithmetic mean of the royalty as per the comparable agreement amount to 6.43%. The average rate of royalty as per the uncontrolled transactions is higher 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. The plea of the assessee is that no adjustment can be applied following any 27 method other than those prescribed under Rule-10B of the Income Tax rules. More so, the PLI of the assessee is at 4.84% as compared to the comparables at 3.77%. Further, considering 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 secondary 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%. Therefore, even applying the CUP method percentage of payment royalty 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 adjustment without applying any prescribed method, such TP adjustment is not sustainable either in law or on facts.
6.1 Similar view was taken in the case of Merck Ltd. Vs. DCIT in 148 ITD 513(Mum.) wherein held that the 28 "TP adjustment is required to be made by applying one of the prescribed methods. The TPO has not applied any prescribed method and has only disallowed part of the expenses as done in the normal assessment, which is not permitted under transfer pricing regulation as per which adjustment on account of any international transaction is required to be made as per the method prescribed. The learned CIT (DR) pointed out that the TPO in respect of the nine services not availed by the Assessee has treated the payment as nil since no independent party would make any payment for services not provided. The TPO thus had applied the CUP method and made adjustment on account of nine services on average basis.
(para 24.6) Agreement listed certain services on which the Assessee requires guidance/assistance from time to time. The Assessee was thus entitled to any of the services as and when required. Therefore, applying CUP method to the service not availed by the Assessee during 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 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 Assessee had submitted that in case the Assessee had paid to the AE at man hour rate for the technical services provided during the year in relation to SAP implementation, the fees payable would have been significantly higer. There is nothing produced before ITAT to controvert the said claim. The Assessee has applied TNMM which shows that the margin shown by the Assessee was higher than the comparable companies. The case of the Assessee is also supported by the decision of Tribunal in case of Mc Can Erricson India Pvt. Ltd. (Supra) in which the decision of TPO to take the value of certain services at nil has not been upheld. Considering the entirety of facts 29 and circumstances, the adjustment made by TPO which is nothing but disallowance of expenses cannot be upheld. ITAT, therefore, set aside the order of CIT (A) on this point and delete the addition made." 6.2 It is also observed that where the assessee has adopted TNMM method for the purpose of bench marking its profits, adoption of CUP method solely for the purpose of evaluating technical assistance fee would lead to absurdity and be detrimental to the interests of both the Department and the assessee. In other words, once the arm's length criteria is tested at entity level, the TPO has no jurisdiction to examine the need, benefit etc. in relation to each transaction. Thus, the transaction approach is not required, if the PLI of the assessee at arm's 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, 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 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 assures 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 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 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, 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 Engineering India (P) Ltd., in 152 ITD 157 wherein held that:-
"20. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company's transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion of the Royalty payments by the TPO in the instant case seems erroneous. We draw support from the Hon'ble Mumbai ITAT decision in Cadbury India Ltd vs. ACIT (ITA No 7408/Mum/2010 and ITA No.7641/Mum/2010 dated 13-11-2013) wherein the Hon'ble ITAT upheld the use of TNMM for Royalty as well as relied on many of the above decisions to hold adjustment by TPO was erroneous:31
"33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined 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. Therefore, 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 PLI of the outside party (the assessee) at 4.09% and the comparables at
7.05%. This has not been shown to fall outside the permissible range.
34. The decision of the Tribunal in 'Ekla Appliances', 2012- TII-01-HCDel- TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in pari materia with those of the assessee's case. However, therein also, the benefit test had been applied by the TPO, as in the present case. The matter was carried in appeal before the Hon'ble High Court. The Hon'ble Delhi High Court has held that the so-called benefit test cannot be applied to 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 Forgings Ltd.' (supra) and in 'KHS Machinery Pvt. Ltd. vs. ITO', 53 SOT 100 (Ahmd) (URO).
35. It is, thus, seen that the royalty payment @ 3% by the assessee is at arm's length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net 32 sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits. It also falls within the limits of payment of royalty in the automobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in 'Ekla Appliances' (supra) 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 test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the disallowance 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 uncalled for and it is deleted as such. ...".
21. Hence, following the ratio of the Honb'le 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 case, we hold that the addition made by the TPO and upheld by 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 Revenue ITA.No.1040/Hyd/2011 is dismissed and Assessee's appeal in ITA.No.1159/Hyd/2011 is allowed."
6.4 It is noticed that similar view was taken by the Co- ordinate Bench of Jaipur in the case of ACIT vs. Sakata Inx (India) Ltd. in ITA No.376/Jaipur/2012 vide order dated 14.11.2016.
336.5 One more reason given by TPO is with regard to downward adjustment in respect of payment of royalty to AE on the reason that royalty payment is in excess limit prescribed under the provisions of FEMA, 1999. According to ld.D.R, royalty was required to be calculated by the assessee on the basis of net ex-factory sale price of products excluding the excise duty, cost of standard bought out components and landed cost of imported components etc., irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc. However, the assessee has not done so. The assessee has claimed that the above condition no longer apply after the issue of RBI circular RBI/2009-10/465 A.P.(DIR Series) Circular No.52 dated 13th May 2010 liberalizing royalty payment under technology collaboration agreements. The ld.D.R submitted that there is no merit in the argument of the assessee. These conditions are still applicable. Further, such conditions also give a method regarding calculation of the amount of royalty to be paid to a foreign entity. The method is a good guideline for determination of arm's length payment of royalty between two unrelated parties. According to ld.D.R, the downward adjustment 34 has been done by the TPO by excluding bought out component 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 ceiling on payment of royalty has been lifted with effect from 16.12.2009 vide Circular No.52 dated 13th 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 Category-I) banks is invited to Foreign Exchange Management (Current Account Transactions) Rules, 2000 notified vide Notification No.G.S.R.381(E) dated 3rd May 2000, as amended from time to time.
2. In terms of Rule 4 of the Foreign Exchange Management (Current Account Transactions) Rules 2000, prior approval of the Ministry of Commerce and Industry, Government of India, is required for drawing foreign exchange for remittances under technical collaboration 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 Transactions) Rules, 2000]. The Government of India has reviewed the extant policy with regard to liberalization of foreign technology agreement an it was decided to omit item number 8 of Schedule II to the Foreign Exchange Management (Current Account Transaction) Rules, 2000, and the entry relating thereto.35
3. Accordingly, AD Category-I banks may permit drawal of foreign exchange by persons for payment of royalty and lump-sum payment under technical collaboration agreements without the approval of Ministry 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 this circular to the notice of their constituents and customers concerned.
6. The directions contained in this Circular have been. issued under Section 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions /approvals, 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 Transactions) (Amendment) Rules, 2010 G.S.R. 382(E)-In exercise of the powers conferred by Section 5 and sub- section (1) and clause (a) of sub-section (2) of Section 46 of the Foreign Exchange Management Act, 1999 (42 of 1999) and in consultation with the Reserve Bank, the Central Government, having considered it necessary in the public interest, hereby makes the following further amendment in the Foreign Exchange Management (Current Account Transactions) Rules, 2000, namely:
1. (1) These rules may be called the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2010.
(2) They shall be deemed to have come into force with effect from the 16th day of December, 2009.
2. In the Foreign Exchange Management (Current Account 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 technology agreement and it was decided to permit, with immediate effect, payments for royalty, lump sum fee for transfer of technology and payments for use of trademark/brand name on the automatic route. Accordingly, Government of India issued a Press Note on 16.12.2009.
Hence, the rule shall be deemed to have come into force 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 applying the provisions of FEMA as indicated by the TPO and placing reliance on the provision of FEMA is incorrect.
6.7 Further, it is to be noted that there cannot be any restriction on payment of royalty on bought out components which were subject to further processing by the assessee and which was not sold on as is basis to end customers. This view of ours is fortified by the decision of the Tribunal in the case of Akzo Nobel Chemicals (India) Ltd., in ITA No.1477/Pune/2010 dated 11.02.2014 wherein held in para -23 that "what 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 of such material only needs to be deducted from the sale price to compute the royalty payable. Applying the said clarification to the present situation, considering the manufacturing process explained, it cannot be construed that the so-called constituent material are merely fitted into the final product; on the contrary, it is a case where such material also undergoes a chemical reaction in the process of producing the final product and the same are irretrievable once the finished product is manufactured. For the said reason also, in our considered opinion considered 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 royalty payable.
For all the above reasons, we therefore find no justification on the part of the TPO in rejecting the methodology adopted by the assessee to calculate net sales for the purpose of computing the royalty payable".
386.8 Further, in our considered opinion, the TPO has no jurisdiction to interpret the provisions of FEMA and restrict the quantum of royalty. It is pertinent to note that the 'bought out components is not defined in FEMA. Further, the said term includes only components which are not subject to further processing and sold on as is basis to end customers. In the instant case, the components procured by the assessee are processed further and therefore, the same cannot be excluded from turnover for the purpose of computation of royalty. Reliance placed on pra-16 of Tribunal decision in the case of Akzo Nobel Chemicals (India) Ltd., in ITA No.1477/Pune/2010 dated 11.02.2014 wherein held that the examination of controlled transaction should ordinarily be based on the transaction 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 which have been prescribed are (i) where the economic substance differs from its form; and (ii) where the form and substance of the transaction is the same but arrangements made in relation to the transaction, viewed in its totality, differ from those which would have been 39 adopted by independent enterprises be having in a commercially rational manner. In this case, the TPO has reworked the royalty payable by the assessee to its AE on the basis of his interpretation of the expression "Net Sales" for the 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 exceptions provided in the OECD guidelines which permit the TPO to re-write the transaction or to disregard actual transactions. Considered in the context of the OECD guidelines which have been exhaustively referred by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd., (345 ITR241), the impugned situation 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 differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. 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 Technology Collaboration agreement, which is duly approved by Govt. of India in terms of its Policy, which is applicable across 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 violative of the respective Government or RBI guidelines or any other authority in law. Further, in our considered opinion the royalty prescribed under FEMA are irrelevant for transfer pricing purposes. In other words, merely because a payment is not restricted under 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 (Delhi) )
ii) Gruner India (P) Ltd. Vs. DCIT (ITA No.6794/Delhi/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 pertaining to development of land, substation development and erection 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 commissioning 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 use such manuals. The TPO held that no royalty is payable on revenue pertaining to development of land, substation development and 42 erection and commissioning. The TPO himself has not disputed the fact that such activities require technology support. The only contention raised by the TPO is that such activities do not require any technology, which is not available in India.
9. The ld. AR submitted that the TPO is not correct in holding that no technology is required for allied activities such as erection and commissioning, development etc. During the course of proceedings before the TPO and DRP, the assessee has clearly explained the reasons for requirement of technology at different stages including development of land, erection and commissioning. The TPO ought to have appreciated that WEG is not a standard product to be manufactured based on a tailor made technology. In other words, it requires detailed examination right from soil testing, examining the appropriateness of wind direction etc. which requires cumbersome technology failure of which the entire product would be of no use to the customers. Therefore, the action of the TPO and DRP in holding that no royalty is required on allied activities such as development of land, erection and commissioning etc, is not tenable ion the first place. The ld. AR further submitted that 43 the copy of sample reports provided by its AE in relation to wind farm development and sample mail correspondences evidencing the fact that the assessee has sought the inputs from its AE are also provided.
10. The ld. DR's submitted that the assessee had claimed royalty on substation development charges, development revenues and revenue on erection and commissioning of Wind Turbine Generators (WTGs). This issue has been discussed in para 9.7 to 11.2 by the TPO, who has after a perusal of the agreements relating to the above activities, held that what was being done under these categories did not involve any technology transfer and that a third party would not have agreed to pay royalty on income arising out of common infrastructure activities which do not involve any element of transfer of technology. This has not been countered by the assessee. This issue has been dealt by the DRP also.
10.1 The ld.D.R, drew our attention to the relevant part of the order of DRP for AY 2012-13 which is reproduced as follows:
"On the issue of Royalty, the TPO examined the Technology Transfer agreements between the assessee and its AE and found that the assessee had not been calculating royalty in a manner, which a person at arm's length would 44 have done. The royalty was being paid even on readymade 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 RBI" and the "Standard conditions attached to automatic approval for foreign 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 the cost of the standard bought- out components and the landed cost of imported components, irrespective of the source of procurement including ocean freight insurance, custom duties, etc. The payment of royalty will be restricted to the licensed 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 regarding the terms of payment of royalty in respect of such excess production.
(b) The royalty would not be payable beyond the period of the agreement f the orders had not been executed during the period of agreement. 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 execution began during the period of agreement and the technical assistance was 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 proposal is obtained from the Reserve Bank of India and collaboration agreement is 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 Exchange, 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, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc. However, the assessee has not done so. The assessee has claimed that the above conditions no longer apply after the issue of RBI circular RBI/2009-10/465 A.P (DIR Series) Circular No.52 dated 13th May 2010 liberalizing Royalty payment under technology collaboration agreements. However, this argument of the assessee does not have any merit. These conditions are still applicable. Further, such conditions also give a method regarding calculation of the amount of royalty to be paid to a foreign entity. The method is a good guideline for determination of arm's length payment of royalty between two unrelated parties. Considering above there is merit in the downward adjustment as done by the TPO by excluding bought out components for the purposes of calculation of royalty. The objection of the assessee on this issue is thus not accepted.
3.3 The next objection of the assessee is in relation 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 submissions 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 assessee did not require use of any special technology, for which the payment of royalty could be considered. The assessee has put unnecessarily stress on the words "manufacture, sell, install & commission and carry out O&M activities and use all technical documents, drawings, type certificates" in its agreement 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 been 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 the technology could have been transferred without technical documents, drawings, type certificates etc. So reliance of the assessee on these words in the agreement 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 accepted." 10.2 Further, ld.D.R submitted that during the year under consideration, the issues regarding royalty payment on bought out components, royalty on substation development charges, royalty on development revenue and royalty on erection & commission charges remain same as for the AY 2012-13. Since the facts remain the same, there is no reason to differ with the order on the same issues for AY 2012-13 and the DRP concurs with the reasoning given by the DRP for AY 2012-13 for rejecting the objections of the assessee. In addition to the reasoning of DRP for AY 2012-13, as regards the issue of Royalty payment on bought out components, the assessee was asked (order sheet entry 23.02.2017) by the Panel to 47 explain as to whether any Royalty is paid by the various group companies to Gamesha Innovation & Tech (GIT), the owner of IPR, as such companies were using the technology owned by GIT in the process of manufacturing the component being supplied to the assessee. According to ld.D.R, in the written submissions dated 15.03.2017, the assessee submitted that as per its Group Policy, the royalty is not required to be paid if sales are made to the group companies and same is charged only when the sales are made to the outside parties. To support its claim the assessee produced copy of some selected pages of a document titled 'Gamesha Group Transfer Priing-2014 and the following Years' before DRP. This document, as the title suggests, is not relevant for the year under consideration i.e. F.Y. 2010-11. The assessee could not explain as to how this document was relevant for the year under consideration and why it could not produce the 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 company's manufacturing the 48 components. If it is considered the concept of arm's length price, GIT would be charging Royalty from the manufacturers utilizing its technology and the selling price of these manufacturers (which is cost price of the components for the assessee) will already be loaded with cost related to royalty. So in an arm's length scenario: payment of royalty on bought out components would not make any business logic other 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 carry out O&M activities', however the bought-out components are not at all manufactured, but the same are just purchased and then sold. So the issue of payment of royalty on the same would not arise even as per terms of the agreement. The assessee has made request for admission of certain additional evidences before this Panel.
11. We have heard both the parties and perused the material on record. The assessee claimed royalty of 4% on revenue 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 into by the assessee with the customer in this respect and scope 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 Transfer Agreement. Therefore, the claim of arm's length price on royalty claimed on development of revenue was determined as 'Nil'. Before us, the assessee explained the activities, which involved high degree of expertise and cannot be undertaken directly by semi-skilled or unskilled workmen, which is as follows:-
Wind farm development Erection & Commissioning
- Providing guidelines to use Environmental sustainability tools
- Visual aspects - Validation of foundation
- Ecology/architectural protection designs
- Training topersonnel of Gamesa India at the time of Technical sustainability development of new
- Wind speed prototypes.
- -Grid connection
- -Providing drawings and design - Supervisory control and Data
- acquisition (SCADA) - for
monitoring WTG throughout
Professional support the year on remote basis.
-Conceptual design
-Design Verifiction Process explained in detail in page
-Process validation 425 to 428 of paper book volume-2
50
-Wind measurement and assessment
Nature of services rendered by Gamesa Spain.
Erections:
For erection WTC, all the technical support for crane capacity and erection procedure and safety procedures, validating the site conditions are provided.
Tools For erection the guidelines to use erecting tools are provided and the necessary validation of such tools are done by GCT.Training All necessary training at the time of development of new prototype.
Transportation Moving blade from factory to the work site is a difficult job owing to the bulk nature of blades. The wind farms are generally located in hilly areas which warrant constructing proper 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 Gamesa-Spain.
WTG Manufacturing & Erection & Commissioning All necessary drawing and required part are provided by GIT with the common tool of PDM the necessary document is attached herewith.
Erection & Commissioning:-
Foundation Validation of foundation designs are done by GIT.
Each and every change in type of wind turbines requires necessary changes according to different foundations which are based the bearing capacity of soil. The necessary base drawings are approved through engineering department. The necessary 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 manual is given below Gamesa Instruction Code: ICA-1-011 Execution and quality Previous code:
control for wind turbine
foundations
Version:1 Language : EN Page :1 of 37
Date:03/06/2011 Security : Public
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 deep foundations with piles in situ or micorpiles of Gamesa 850 dw and Gamesa 2.0 MW standard type wind turbines (with welded foundation section) and for those in which the farm is supplied concrete from a factory.
Construction Operations:
Erecting wind turbines requires the efforts of many skilled construction workers. The work begins before the turbine components arrive on site: construction laborers and construction equipment operators are responsible for building local access roads and the foundations that support the turbines.
Based on the experience Gamesa Spain provide know-how on, how to build the access roads, transport the wind turbine blades across remote places which more challenging. They also provide the technical feasibility to approach the site.53
After the turbine components arrive, crane operators set the first tower segment vertically onto the ground, where other workers secure it to the foundation. The remaining tower segments are then stacked atop one another and fastened together. When the tower has been erected, crane operators carefully lift the nacelle and the blades. The nacelle is placed on the top of the tower and the blades are attached to the turbine's hub.
Construction labourers often work on wind farms as contractors and are responsible for preparing the site and building the surrounding infrastructure. Their work includes clearing tress and debris from the wind farm, cleaning machines, and helping 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 local contractors and confirm that all on-site work is performed safely and correctly. These workers might also be trained as wind turbine service technicians.
Construction equipment operators, with the help of construction laborers, are responsible for building accessible roads 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 job, as well. For example, they operate cranes to stack the tower segments and life the blades to the hub.
Electricians are needed to get the energy from the turbine's generator to the power grid on the ground. They wire 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 strippers, 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 specific education or training requirements, some construction workers 55 receive more formal training in the form of apprenticeships.
These programs consist of several years of classroom and on the job training. High school classes in English, mathematics, physics, mechanical drawing, blueprint reading, welding and general shop can be helpful to prepare for the apprenticeships.
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 specializing in wind farm development handle the more technical operations and usually have extensive experience in the wind industry.
Construction equipment operators and crane operators learn their skills through on-the-job training, apprenticeships, or, for some, union instruction. In addition, the operators are expected to be certified to operate their equipment. Crane operators need to be highly skilled, especially when handling large, expensive cargo like wind turbine components. Most electricians learn their trade through apprenticeship programs that combine on-the- job training with related classroom instruction. Apprenticeship 56 programs usually last 4 years, and, in them, electricians 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 Electrical Code, and local and State electrical and building codes. For this connection Gamesa --Spain empowers the company to able to conduct training programs for their employees as well as contractors, so that skilled work force is available to them.
Project Managers It takes a large number of people to build a wind farm, and managing the project can be a difficult task. Project managers oversee the construction of the wind farm from site selection to the final installation of turbines. A project manager will oversee a diverse team, including engineers, construction workers, truck drivers, crane operators, and wind technicians. Project managers must have excellent attention to detail and be good at time and resource management.
Project managers usually have experience in construction and management or in engineering. They must be familiar with all 57 aspects of wind farm development: from budgeting, site selection, site studies, and permitting processes and safety policies to construction and transportation of wind turbines.
Project managers are employed by larger construction companies, energy companies, or land owners and work under contract or as salaried employees. Because of the size 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 report 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 offsite. Primary office responsibilities include managing permitting, contracting, and the budget. At the construction site, the project manager monitors progress and performs inspections for quality control. Project managers oversee the contracting process and manage various contractors and subcontractors. They are responsible for promoting a safe work environment and ensuring strict adherence to site safety policies.
EDUCATION AND TRAINING 58 Experience in construction, particularly wind farm construction, is vital for project managers. Most managers have experience working on several wind farm projects before they are selected to manage one. Education is becoming important, and most project managers hold a bachelor's 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 some educational requirements. However, this is becoming increasingly rare, as projects grow more complex and employers place more emphasis on specialized education. New graduates from construction management or engineering programs may be hired as assistants to project managers to gain experience.
Towards empowering the project managers, Gamesa-Spain helps the company in providing suitable training to the staff.
Gamesa Guideline Code: GDE-TEC-004
Short circuit claculations Previous code: N/A
Edition:1 Language : Page :1 of 133
Date:14/02/2012 Security : Public
Rating
59
The above guidelines are explaining how to proceed with the calculations of short-circuits currents and its connection with cable sizing and protective devices sizing documents. It is important to know the correct application of the various short-
circuit ratings by the circuit designer, in order to avoid leaving a circuit or equipment with inadequate cable size or over-current protection device. This guideline analyses the calculation method described in the IEC 60909 standard and is compared with the procedures described in IEC 61363-1. This guide is directly linked with ETAP to let the designer a more practical view of the design.
Gamesa Guideline Code: GDE-TEC-002
Cable Sizing Guideline Previous code: N/A
Edition:1 Language : Page :1 of 57
Date:14/02/2012 Security : Public
Rating
The aim of this document is to write down a guideline for sizing the following cable types:
Power medium voltage, power low voltage, and supply low voltage cables, considering the corresponding IEC and NEC Standards. Additionally, a detail study about how to proceed with Cable Sizing in ETAP software is written down. The 60 limitations of the software are explained as well as the procedure of sizing all the cables.
Usage of SCADA SCADA is the equipment which will monitor the each and every wind turbine from the necessary training for software usage and equipment handling are provided by them.
11.1 It is brought to our notice that the TPO himself has agreed that such activities required technology support. The only contention raised by the TPO is that such activity did not require any technology, which is available in India. In other words, the contention of the TPO is that required technology for this activity is available in India. In our opinion, it is not the 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 commissioned WGS on the basis of input provided by its AE. The AE has vast experience in implementing such projects across global and therefore, the assessee obtained expertise knowledge from AE in order to ensure better quality to its customers. In our opinion, the TPO cannot question commercial expediency of incurring 61 any expenditure by the assessee as held by the following 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 345 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 for the transaction and it covered under its ambit the royalty transaction in question. A separate analysis and consequent deletion of royalty payment is unwarranted. Placing reliance in 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. Each 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 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, 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 Engineering India (P) Ltd., in 43 Taxmann.com 229 wherein held that:-
20. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company's transaction, it covers 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 Hon'ble 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 Hon'ble ITAT upheld the use of TNMM for Royalty as well as relied on many of the above decisions to hold adjustment by TPO was erroneous:
"33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 1 OA(d) of the ITAT Rules defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. ft cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined 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. Therefore, 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 outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range.
34. The decision of the Tribunal in 'Ekla Appliances', 2012- TH-01-HCDe1- TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in pan matena with those of the assessee's case. However, therein also, the benefit test had been applied by the TPO, as in the present case. The matter was carried in appeal before the Hon'ble High Court. The Hon'ble Delhi High Court has held that the so-called benefit test cannot be applied to 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 Forgings Ltd.' (supra) and in 'KHS Machinery Pvt. Ltd. vs. ITO', 53 SOT 100 (Ahm) (URO).
35. It is, thus, seen that the royalty payment @ 3% by the assessee is at arm's length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, 64 royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits. ft also falls within the limits of payment of royalty in the auto mobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in 'Ekia Appliances' (supra) 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 test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the disallowance 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 uncalled for and it is deleted as such. ... ".
21. Hence, following the ratio of the Honb'le 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 case, we hold that the addition made by the TPO and upheld by 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 Revenue ITA.No.1040/Hyd/2011 is dismissed and Assessee's appeal in ITA.No.1159/Hyd/2011 is allowed." 11.4 Being so, in our opinion, there is no question of downward adjustment towards on royalty payment to AE on the ground that no royalty is allowable on turnover pertained to development of land, substation development and erection and commissioning. This ground of assessee in both the appeals is allowed. 65
12. The next ground for the asst. year 2011-12 is with regard to downward adjustment in respect of royalty paid pertaining to the turnover of preceding year.
13. The facts of the issue as noted by the Authorities are that the technology agreement is dated 1st April, 2010 and therefore, it is valid only with effect from that date. Going by the rational business behavior of economic activities, no royalty would have been otherwise paid to an unrelated party. No business entity would willfully impose on itself any financial obligation for a period for which there was no legal obligation.
14. The ld. AR submitted that the Technology Transfer Agreement has been signed on 1st 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 the preceding year. Further, the expenditure has not been booked during the preceding year on account of the fact that the invoice 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 claimed royalty on substation development charges, development revenues and revenue on erection & commissioning of wind turbine generator (WTG5). This issue has been discussed 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 that what was being done under these categories did not involve any technology transfer and that a third party would not have agreed to pay royalty on income arising out of common infrastructure activities which do not involve any element of transfer of technology. This has not been countered by the assessee. This issue has been dealt with by the DRP in its order dt 24.03.2017 in para 4.1 & 4.2. Further, the assessee had claimed before the DRP that it was normal practice to have some products as ex- works at the end of the year and the royalty accrues only on the execution. The DRP has asked the assessee to furnish details of such ex-works products for the F.Y 2010-11 which were 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 normal 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 order dt 24.03.2017.
16. We have heard both the parties and perused the material on record. In this case, the Technology Transfer Agreement has been signed on 1st January, 2009. The assessee utilized the technology of the A.E during the preceding year. However, no expenditure was booked by the assessee on the reason that no invoice has been received from its AE during the preceding 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 the year in which installation and commissioning was completed. Before TPO, the assessee not furnished the details of "product 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 regarding date of installation and only furnished the product sold date for F.Y 2009-10 and no such details of other years were provided 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 consideration, it was subject to TDS and it is to be allowed. In our considered opinion, if the expenditure was crystallized and accrued 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 should examine the same and decide the issue in the light of above judgments. This ground is remitted to the file of AO 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 not foresee the requirement of the tax authorities and DRP, therefore 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 Gamesa
Corporation Technological SA Spain(Gamesa Spain) for the calendar year 2011 3 Sample copy of invoices raised on Gamesa goup entities by Gamesa spain It was submitted by ld. A.R that only pursuant to the observations of the DRP in the order dated 26th November, 2016, the assessee understood the requirement of authorities and therefore, filed the above information before this Tribunal. It was also 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 of Abhay Kumar Shroff Vs. I.T.O in (1997) 63 ITD 144 wherein held that "if the documents sought to be admitted even at second appellate stage are of a nature and qualitatively such that they render 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 further by Delhi High Court in the case of CIT vs. Text Hundred India (P) Ltd., in 351 ITR 57 wherein held that the Court has held that Rule 29 categorically permits the Tribunal to allow such additional 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 not producing these documents before the TPO. In response to this assessee only submitted that the TPO did not make any specific request for production of these documents and so the same were not produced before the TPO. The assessee submitted that 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 to support its case. The assessee has not given any explanation as to what prevented it from producing such documents before the TPO at 71 the time of transfer pricing proceedings before the TPO, especially when sufficient opportunity of being heard was given to it by the TPO. The onus was on the assessee to produce all such relevant documents before the TPO, which in its opinion could support its case. However, the assessee failed to do so. The assessee has not brought anything on record to show that the documents could not have been produced by it before TPO despite its best efforts Admission of the additional evidence cannot be claimed as a matter of right and it is the duty of the assessee to explain the circumstances which prevented it from submitting such documents before the lower authorities. Since the assessee failed 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 judgment of ITAT, Bangalore in case of Anupam Kothar in ITA No 837 (Bang) 2012 held that for admission of additional evidence, it is required for the assesse to show that authorities had decided its grounds without giving sufficient opportunity to adduce evidence. Considering above the request of assessee for admission of additional evidences is not accepted. Even on merits, these additional 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 carrying out the business of setting up of Wind Turbines. The TPO has only disputed the payment of royalty on certain sales/activities. 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 cannot be faulted with and the objections of the assessee are not accepted. 17.4 We have heard both the parties and perused the material on record. In view of the observation of the DRP, the basic evidence to support the claim of cost incurred at the A.E's end are not available for verification. This is the very minimum that the TPO required to investigate and to establish whether the cost floated as per pre-determined keys is reasonable / legitimate or not. No evidence from the books of the AE with regard to cost, both direct and indirect, and primary documents maintained by AE in support of this claim in its books, has been produced by the assessee either before TPO or DRP on this issue. Now, the assessee produced the details as stated above. In our considered opinion, in view of the judgment of Supreme Court in 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 the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, there is no reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect 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 CIT(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 applied; 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 issues arising out of appeal before the CIT(A) takes too narrow a view of the powers 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 which are on record in the assessment proceedings such a question should be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee."
Hence, it is appropriate to admit the same as additional evidence for adjudication for the assessment year 2012-13. 74
18. The facts of the issue are that the assessee has entered into a Service Agreement dated 1st April, 2010 with Gamesa Corporation Technologica SA ('GCT Spain) for availing 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 TPO 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 demonstrate that the assessee has indeed received the services in the form 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 along with the basis of allocation of costs;
6. Detailed workings pertaining to derivation of allocation 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 the TPO that the AE party had identified the nature of stewardship/shareholder activities in each of the above department/services and such costs was excluded and not charged back to the assessee.
Since the commercial value of such services was not quantifiable in exact monetary terms, the assessee on identification of above services, excluded the cost of stewardship/shareholding 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 any services rendered. The costs incurred by the holding company are charged to affiliates globally on some basis on the 76 assumption that the AEs exist for the benefit of the affiliates.
• The costs are allocated to all affiliates principally on the basis of 'revenue' which is based on the principle of 'capacity to pay' rather than on the basis of the need and extent of services available by the affiliates.
• A multinational enterprise functioning globally may 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 stakes in affiliates and in pursuit of such investment interest, constantly exercise control, direction, supervision and hold over the affiliates. Such a monitoring is not necessitated by the needs of the affiliates, rather they stem from the inherent interest of the holding company in the affiliates and the resulting costs need not be passed on to the affiliates.77
18.4 The TPO relied on the following decisions without mentioning the citations and held that the ALP of the management fee is NIL :
a. Gemplus India (P) Ltd. vs. ACIT (Bangalore, ITAT) b. Deolitte Consulting India (P) Ltd. vs. DCIT (Mumbai, ITAT) c. Knorr-Bremse India (P) Ltd. vs. ACIT (Delhi, ITAT)
19. The ld. AR submitted that the adoption of CUP as most appropriate method for benchmarking management service fee by the TPO and determining the ALP to be Nil. Further, the ld. AR submitted that under the Agreement with AEs, the assessee availed various services in the nature of legal, administrative, human resources, finance, business development etc. The services are specifically rendered by the said entities which act as the global hub for rendering the corresponding services. The services would either b e rendered directly by the AEs through its resources or it would employ third party consultants to render such services. The service fee has been charged on the basis of allocated cost to all group entities across the globe. It is pertinent to note that such similar services have not been availed 78 by the assessee during the year from third party consultants and therefore, there is no price available to be regarded as 'internal CUP'. Further, due to confidentiality issues, it is the general practice to undertake such services through group entities. In addition, GCT Spain has not rendered similar services to unrelated parties. In addition, it is not practically possible to determine how much third party consultants would have charged to render similar services in a routine manner considering the various contingencies involved in the business. Therefore, the question of adopting CUP as appropriate method would not arise. The ld. AR relied on the judgment of the Delhi 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 assessee company had adopted TNMM for the purposes of benchmarking its profits, adoption of CUP solely for the purposes 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 uncontrolled transaction identified with regard to similar services rendered for 79 the purpose of transfer pricing. In the instant case, 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, also relied on the following judgments, wherein it has been held that no transfer pricing adjustment is warranted in a scenario where the officer has not taken any step to identify a comparable 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. ACIT [ITA No 1125 of 2014
- Ahmedabad ITAT] Applying the above principles to the current fact pattern, the assessee submitted that the action of the TPO in determining 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 to be set aside.
19.1 The ld. AR argued that there is no transfer pricing adjustment in a scenario where the transactions are at arm's length in accordance with the methods prescribed under Rule 80 10B. Without prejudice to the above submission that the said management fee satisfies the NEED-EVIDENCE-BENEFIT test, the ld. AR submitted that the action of the TPO in proposing 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 as compared to the subject royalty rates. Therefore, the assessee arrived at a conclusion that the royalty paid to its AE is at arm's length.
• The assessee submitted that management service is a critical factor for undertaking its day to day operations 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 that management service is inextricably linked to business of the assessee and, therefore, benchmarking the PLI at entity level is sufficient in order to substantiate that the transactions with AE are at arm's length.
• Further, it is pertinent to note that the methodology adopted by the TPO is not in accordance with any of the methods prescribed in Rule 10B of the Rules. In other words, the action of the TPO is beyond his jurisdiction as provided in the law. In the following decisions, it has been held that where the PLI of the assessee is determined under TNMM, a separate analysis and consequent deletion 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 above, in respect of jurisdictional of the TPO to determine the commercial expediency of the assessee and submitted that the TPO has 82 remarked that the assessee has not substantiated the NEED-
EVIDENCE-BENEFIT in relation to management fee. Further, the ld. AR submitted that the said transaction satisfies all the tests, the tax authorities have no jurisdiction to question the commercial expediency of the transactions. In other words, the TPO has the limited responsibility of computing the arm's length price of the transactions consideration the methods prescribed in the Act read with Rules. The said principle has been 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 241) c. CIT vs. Computer Graphics Ltd.Madras HC)(155 Taxmann 612) d. Showa India (P) Ltd. vs. DCIT (Delhi, ITAT)(166/Del/2013,dt.30.06.2016) Therefore, the ld. AR submitted that the jurisdiction of the TPO does not extend to stepping into the shoes of the assessee and determining the necessity of incurrence of expenditure 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 assessee has availed substantial benefits on account of management service, the ld. AR submitted that the assessee has entered into agreement with GCT Spain for the purpose of availing services in the avenues of finance, legal assistance, advisory, operations management, business development etc. It is pertinent to note that all the operating companies belonging to the Group have executed similar agreement with GCT Spain to avail benefits in the form of global consistency in business, improvement in efficiency and access to common skill set and centralized portals etc. It is pertinent to note that the benefits arising out of the services are intangible in nature. The ld. AR submitted that the model of availing services from a centralized hub is a common phenomenon in all multinational corporations and it is critical for the assessee to avail such services in order to sustain in the market. Further, given that it is an ongoing activity carried on by the AE and considering the fact that the benefits availed by the assessee are intangible in nature which cannot be measured in monetary terms in all scenarios. Therefore, according to the ld. AR, the questioning of examining the benefits availed by the 84 assessee out of such services would not arise in the first place. The ld. AR, further submitted that even in case of availing services from a third party service provider, the resulting benefit cannot be assured and the assessee pays for the expertise of the service provider which may or may not result in substantial benefits having monetary impact. To support his view, the ld. AR relied on the following decisions, wherein the Courts and the Tribunal have held that benefit test is not a pre-condition to determine the genuineness or ALP of expenditure:
a. RAK Ceramics India Pvt. Ltd. vs. DCIT (Hyd., ITAT)[ITA No.1492/2014 dated 04.02.2015] - upheld by Andhra Pradesh High Court [in ITA No.595 of 2016] b. TNS India Pvt. Ltd. vs. ACIT (ITA No.944/Hyd./2007 dated 22.01.2014) 19.4 Regarding need for availing management service from GCT Spain, the ld. AR, submitted that in the current era of globalization, centralization of costs lead to significant group cost savings. Gamesa Group is a multinational group, which has its headquarters in Spain. The Group is dedicated to the manufacturing, sale, operation and maintenance of wind turbine 85 generators, as well as in the development of wind farms. 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, additional services and operation and maintenance (O&M) of wind farms. According to the ld. AR, as per the Gamesa Group corporate policy, all central activities are carried out by GCT and where necessary, GCT obtains the assistance of third party vendors in providing the central services in the nature of management activities. The affiliates companies (which include the assessee) obtain advice and assistance from GCT and the cost incurred (GCT owns cost and cost charged by third party vendors) were charged to all the group companies. GCT has tremendous managerial talent and experience in the field of Wind Turbine industry. It has senior professionals with lots of years of experience in the field. As a new player in India, there was a critical need for the assessee to draw managerial services from this entity to face the 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 customer 86 activities, it was essential for the assessee to adopt a global approach for its own activities to serve its global customer base and maintain competitive position in the market. It would have been difficult for the assessee to procure the services from third party service providers which are group and product specific.
Therefore, the assessee availed the services from its AEs instead of approaching any third party service provider. 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 nature of shareholder activity is baseless. Further, due to confidentiality issues, it is the general practice to undertake such services through group entities. Further, the assessee has substantiated 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 is captured. Therefore, the contention of the TPO and DRP that there is no requirement to avail management service from its AE is inappropriate.
8719.5 In respect of benefits derived by the assessee on account of the management services, the ld. AR submitted that the subject year was the second year of commercial operations of Gamesa India. This year saw a huge increase in the assessee's turnover with increased activity due to new WTG Model G-58 in India coupled with new wind farm development in this year. To meet this increased activity, the assessee had to avail professional support services in the nature of management support (general, legal, operational etc.). The AE possessed in- depth knowledge and understanding about the wind industry and the business realities. Therefore, the assessee being part of the Gamesa Group, obtained the centralized support services from the AE. Further, the ld. AR, submitted that the assessee produced the copy of mail correspondences and reports evidencing the rendition of management services and underlying benefits availed by the assessee. Description of need, benefit on account of management service in relation to each of 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 where the 88 assessee has produced the documents/evidence, the TPO 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 transactions 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 transfer pricing adjustments. In the transfer pricing order, the TPO remarked that the costs are allocated to all affiliates principally on the basis of 'revenue' which is based on the principle of 'capacity 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 TPO has the authority to determine the ALP of the transactions undertaken by the assessee. The jurisdiction of the TPO cannot extend to decide the basis of charge/allocation of expenses. In the instant case, the TPO ought to have confined his jurisdiction in determining whether the costs allocated by GCT Spain are at arm's length or not. For the purposes of benchmarking the 89 profits, the assessee considered TNMM as the most appropriate method and the PLI of the assessee is higher than that of the comparable companies. Recently, in the case of Durr India (P) Ltd. [ITA No.754/Mds/2014], the co-ordinate Bench of 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 that where the PLI of the assessee under TNMM is at arm's length and it is not possible on the part of the department to identify a comparable rendering similar services, the question of considering CUP method would not arise at all. Interestingly, 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 cost whereas companies that have incurred loss would not remit the same. Even in a scenario where net profit is considered as allocation key, the co-ordinate Bench has held that no transfer pricing adjustment is required on management fee in a scenario where the PLI of the assessee company is at arm's length as compared to its comparables. Relevant extracts of the decision are 90 captured. Applying the rationale, the ld. AR, submitted 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 words, the TPO should have confined his jurisdiction only to the extent of determining ALP. Further, in the said decision, the Tribunal has specifically held that CUP cannot be considered as method for determination of ALP of management fee in a case where the PLI of the assessee is at arm's length.
19.7 According to the ld. AR, there is no transfer pricing adjustment in respect of transactions which are otherwise considered as genuine for tax purposes. The ld. AR submitted that management fee is not tax free. In other words, the assessee has been remitting service tax on reverse charge mechanism (being receiver of service). Further, the assessee has obtained a Nil withholding certificate from the tax authorities. The said principle has been laid down by the Tribunal, Chennai Bench, in the case of Aban Offshore Ltd. vs. DCIT [ITA No.585 of 91 2015], wherein the Tribunal has held that any payment which is systematically subject to deduction of tax at source cannot be said to be non-genuine. Therefore, the ld. AR, submitted 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 been availed.
20. The ld. DR submitted that the basic issue before the TPO was to determine ALP of the fee paid by the assessee. For determining the ALP of the transaction, a proper show cause notice was issued and served upon the assessee. The assessee has only referred to the service agreement, summary of the cost allocation among various services provided and copy of the various invoices/debit notes/credit notes raised during the relevant year under consideration; however the queries of the TPO still remained unanswered. When the assessee is paying on cost to cost basis to AE, then where are the actual details of the cost, how assessee has calculated that the invoice raised by AE is correct, when details of costs are not available to it? Where such a transaction at arm's length, the assessee would have asked for the complete details of the cost incurred by the 92 AE before accepting the amount claimed by AE from it. However, assessee has not brought on record any such details to satisfy the TPO. Documents relied upon by the assessee are thus just unsupported piece of papers, without any evidentiary value. So there doesn't appear to be any arbitrariness 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 arm's length and the quantum of services actually received by the assessee. The agreement between related parties and the invoices raised there from cannot be considered adequate and sufficient evidenced of service performance. Thus, it is observed that the basic evidence to support the claim of costs incurred at the AE's end are not available for verification. This is the very minimum that the TPO is required to investigate to establish whether the cost allocated as per predetermined keys is reasonable/legitimate or not. No evidence from the books of the AE with regard to its costs, both direct and indirect and the primary documents maintained by the AE in support of this claim in its books, has been produced by the assessee either before the TPO or before 93 the Panel; for verification of this important and key ingredient in the TP analysis. As discussed by the TPO in his order, the assessee has failed to substantiate its claim of having received any such services which were for its own business interest. The services rendered, if any, are in the nature of control and hold to be exercised by the AE over its affiliates. So the 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 seeking to justify the payment of management service fee on the ground that even after payment of these amounts, the net margins of the assessee was more than that of comparable companies in the same industry. This is a specious argument. The profits of the Indian entity are due to the efforts of this entity and consequently, the entire profits are taxable in India even if the margins are above the arm's length level. This does not in any way impact on the royalty and management service fee. The need for incurring such expenses and the benefits accruing 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 substantiate the need-benefit analysis before the TPO as a result of which downward adjustments were proposed in respect of royalty and management service fee. The transactions can be aggregated only if they are intricately intertwined and cannot be separately analyzed. This is not the case here. Moreover, aggregated approach to transfer pricing analysis is the exception rather than the norm. This issue has been dealt with extensively by the DRP in its order dated 24.3.2007. The DRP has quoted the case laws to reject the assessee's objections in this regard. The Guidelines of 2010 has also taken the view that as far as possible, transactions are to be evaluated separately. 20.2 The ld. DR, further submitted that the TPO has not sought to question the commercial expediency of the management fee. What has been done is to compare the circumstances surrounding the payment and the services said to have received with an independent party in the uncontrolled 95 situation. After analyzing the agreement and other documents in this regard, the TPO has come to the conclusion that the transaction was not at arm's length as an independent entity would not have agreed to shoulder the liability for services which do not the benefit to it. Only a cost-benefit analysis has been undertaken from the perspective of arm's length and the commercial expediency of entering into the agreement was never questioned. The DRP has analyzed the transaction in details and has come to the conclusion that the services which the AE is supported to render to the assessee are general and non-specific and the assessee also failed to furnish documents called for by the DRP.
20.3 The ld. DR, also submitted that in the analysis of services rendered by a group company to one or more group companies, it requires the economic value or commercial contribution and the benefit which can made a difference in the commercial 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 emphasized in for 96 justification of the performance of intra-group services. OECD guidelines state that a payment made by a group company does not constitute a sufficient evidence for the provision of the services in return for the payment. Moreover, it is also stated that absence of payment or agreement between the parties regarding the services does not mean that the services have not been rendered. In this case, the service agreements are available for intra-group services but conduct of the parties is in question. The need for the services from the perspective e of the purchasing entity must be evaluated in order to determine that the intra-group services has in fact been received which constitutes the basis of the benefit test concept. In order to determine whether an intra-group service has been rendered, it is necessary to examine whether the service in question provides a commercial or economic value that would strengthen the commercial position of the receiving entity. Hence, the assessee's contention regarding the need benefit test is not acceptable. In this context the following OECD Guidelines (para No.79, page No.207) :
"In a narrow range of such case, an intra group activity may be performed relating to group members even though those group 97 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 members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies"
assumes significance."
The European Union Joint Transfer Pricing Forum (JTPF), in their summit at Brussels on 04.02.2010 on the "Guidelines on low value adding Intra-Group Services" has discussed this issue elaborately. It says that Costs of managerial and control (monitoring) activities related to the management and protection of the investments in participations are of shareholders activities only and these costs are to be classified as shareholders cost only.
20.4 Hence, the ld. DR, submitted that the benefit received from such stewardship services can only be considered as 'incidental benefits' as per the OECD guidelines and 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-group 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 responsibility of the assessee to prove the receipt of service with supporting documents. According to the ld. DR, the assessee has failed to submit the documentation to substantiate to prove the receipt of service and need for such service. In the absence of evidences and the services received are in the nature of routine services from a shareholder the TPO determined the ALP as nil because the services are not be ones for which an independent enterprise ordinarily would be willing to pay. The ld. DR also submitted that the purpose of transfer pricing analysis is to ensure that the Indian tax jurisdiction gets its due share of taxes in the International transactions carried by the Indian companies with its AEs abroad. So the TPO should consider all the aspects which may affect due share of taxes to Indian tax jurisdiction. 20.5 We have heard both the parties and perused the material on record. In our considered opinion, transaction to transaction approach is not required if the Profit Level Indicator ('PLI) of assessee at entity segment level is at arm's length where the 99 assessee company has adopted TNMM for the purposes of bench marking, its adoption of CUP solely for the purposes of evaluating technical assistance fee would lead to chaos and be detrimental to the interests of both revenue and the assessee. In other words, once the arm's length criterion is tested at entity level, the learned TPO has no jurisdiction to examine the need, benefit etc in relation to each transaction. This view was supported by the judgement of Delhi High Court in the 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 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 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. Each 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 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, 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."100
20.5.1 In the case of DCIT vs Air Liquide Engineering 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, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. ft cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined 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. Therefore, 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 outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range.
34. The decision of the Tribunal in 'Ekla Appliances', 2012- TH-01-HCDe1- TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in pan matena with those of the assessee's case. However, therein also, the benefit test had been applied by the TPO, as in the present case. The matter was carried in appeal before the Hon'ble High Court. The Hon'ble Delhi High Court has held that the so-called benefit test cannot be applied to 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 Forgings Ltd.' (supra) and in 'KHS Machinery Pvt. Ltd. vs. ITO', 53 SOT 100 (Ahm) (URO).
35. It is, thus, seen that the royalty payment @ 3% by the assessee is at arm's length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 101 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits. ft also falls within the limits of payment of royalty in the auto mobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in 'Ekia Appliances' (supra) 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 test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the disallowance 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 uncalled for and it is deleted as such. ... ".
21. Hence, following the ratio of the Honb'le 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 case, we hold that the addition made by the TPO and upheld by 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 Revenue ITA.No.1040/Hyd/2011 is dismissed and Assessee's appeal in ITA.No.1159/Hyd/2011 is allowed." 20.5.2 In the case of ACIT vs Sakata Inx (India) Ltd. (Jaipur) ITA No. 376/JP/2012] wherein held that:-
"2.9 We have heard the rival contentions and perused the material available on record. In our considered view, 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 CUP method to Arm's Length working.102
(ii) The products manufactured by the appellant were 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 development of new products received by the appellant were clearly provided in the agreements entered into with the AE.
(iii) The cost benefit test as worked out by the TPO was not based on proper appreciation of the facts and thus CUP method 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 the CIT(Appeals) and dismiss the revenue's appeal."
20.6 In our considered opinion, ALP of management service cannot be said to be Nil in the absence of a valid comparable. Since no effort had been made by TPO to determine market value of services received by assessee, adjustment made by TPO as a disallowance of expense could not be upheld. In other words, the TPO cannot simply arrive at a conclusion that quality and volume of services received by the Appellant were not commensurate with payment made by the Appellant. This view is fortified by the order of Tribunal in the case of 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. The argument would have been valid if fees was fixed in respect of each service, which was compulsorily required tobe provided to the assessee, but it is not so in the present case. The agreement listed certain services on which the assessee requires guidance/assistance from time to time. The assessee was thus entitled to any of the services as and when required. Therefore, applying CUP method to the service not availed by the assessee during 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 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 assessee had submitted that in case the assessee had paid to the AE at man hour rate for the technical services provided during the year in relation to SAP implementation, the fees payable would have been significantly higher. There is nothing produced before us to controvert the said claim. The assessee has applied TNMM which shows that the margin shown by the assessee was higher than the comparable companies. The case of the assessee is also supported by the decision of Tribunal in case of Mc Can Erricson India Pvt. Ltd. (Supra) in which the decision of TPO to take the value of cergain services at nil has not been upheld. Considering the entirity of facts and circumstances, the adjustment made by TPO which is nothing but disallowance of expenses cannot be upheld. We, therefore, set aside the order of CIT (A) on this point and delete the addition made.
20.7 Further, this view was supported by the decision of Co- ordinate Bench, Chennai in the case of DCIT vs Flakt India Ltd., 104 vide order dated 9th 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 the TPO is to determine the commercial expediency and necessity in the hands of the assessee. The learned TPO has remarked that the Assessee has not substantiated the necessity to incur such expenditure. In this regard, it is pertinent to note that the business transactions of the Assesses taken place in the ordinary course, which cannot be questioned by the TPO. Further, the learned TPO cannot conclude based on mere assumptions without examining the commercial expediency of the assessee. This view is fortified by the judgments/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 not a pre-
condition for justifying arm's length price. Under Rule 10B of the 105 Income Tax Rules, 1962 which deals with 'Determination of the arm's length price', there is no mention of the 'benefit test' being adopted for the purpose of determining such arm's length price. It is not a pre-condition to conclude that the payment is within arm's length. In other words, the TPO cannot apply the benefit test for determining ALP as he cannot assess the benefit derived by assessee in a particular transaction. This view is fortified by the following judgments:-
(i) R.A.K Ceramics India Pvt. Ltd. vs DCIT (Hyderabad) (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 from TPO's order he has rejected assessee's TP analysis under TNMM. Further, in para 6.4 of his order, TPO has mentioned of undertaking an independent analysis under TNMM for selecting comparables and determining ALP. However, even after repeatedly scanning through his order, we failed to find any such analysis being done by him. Similarly, though in para 5.1.1, ld. DRP has observed that TPO has benchmarked intangible transactions by using CUP, but, 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. Mode and manner of computation of ALP under different methods have been laid down in rule 10B. Even, assuming that TPO has followed CUP 106 method for determining ALP of royalty payment, as held by ld. DRP, it needs to be examined if it is strictly in compliance with statutory provisions. Rule 10B(1)(a) lays down the procedure for determining ALP under CUP method. As per the said provision, TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions. Thereafter, making necessary adjustments to such price, on account of differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market, TPO will determine the ALP. It is patent and 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 brought even a single comparable to justify arm's length percentage of royalty at 2% either under CUP or TNMM method. On the contrary, observations made by TPO gives ample scope to conclude that adoption of royalty at 2% is neither on the basis of any approved method nor any reasonable basis. Rather it is on adhoc or estimate basis, hence, not in accordance with statutory provisions. The approach of TPO in estimating royalty at 2% by applying the benefit test, in our view, is not only in complete violation of TP provisions but against the settled principles of law. ITAT, Mumbai Bench in case of M/s Castrol India Ltd. Vs. Additional CITY, ITA No. 1292/Mum/2007 dated 20/12/2013 while examining identical issue of determination of ALP at 'Nil' by applying the benefit test held as under:
"11. We have considered the rival submissions and perused the relevant material on record. It is observed that the 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 its TP study report and since average rate of royalty of three comparables 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 length. 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 comparables were selected by her by making a fresh search in order to show that the payment of royalty by the assessee to its AE was not 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 income was not allowable and disallowed the royalty payment to the extent of Rs. 40,51,486/- treating the same as the royalty paid by 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 not sustainable either in law or on the facts of the case. She has neither rejected the method followed by the assessee to bench-mark the transaction in respect of payment of royalty nor has been adopted any recognized method to determine the ALP of the said transactions. The approval of SIA adopted by the TPO as basis to make TP adjustment in respect of royalty payment was untenable and even going by the said basis wrongly adopted by the TPO, no TP adjustment in respect of royalty payment was liable to be made. As per the said basis, the net sales of the assessee 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, there was no case of any excess payment made of royalty by assessee than approved by SIA to justify its disallowance by way of TP adjustment. In our opinion, the ld. CIT (A) could not appreciate these infirmities in the order of the TPO despite the same were specifically brought to his notice on behalf of the assessee and confirmed the TP adjustment made by the TPO in respect of royalty payment which was totally unjustified. We therefore, delete the addition made by the AO/TPO and confirmed by the ld. CIT on account of TP adjustment in respect of royalty payment 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 reference to the services provided by AEs. Assessee has provided the agreements which were entered not during the year but in earlier year and has been paying the service fee termed as management fee accordingly. This claim is not arising for the first time in this year but, is also 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 units run by them across the globe. It was submitted that the costs being incurred by the centers are being shared by various units and assessee'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 prescribed for payment of fees to various group companies of similar nature. There is no dispute with reference to services being provided by the group companies to assessee and assessee also paid various other amounts including royalty. As submitted by assessee, even though some correspondence was placed on record with reference to the advise given to assessee, providing a concrete evidence with reference to the services in the nature of specific activities is difficult, 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 later but the role of an anesthesian before operation and after gaining consciousness is difficult to prove as that is not tangible in nature. Likewise, for the advise given by various group centers to the group companies in day-to-day manner is difficult to place on record by way of concrete evidence but the way business is conducted, one can perceive the same. Assessee has given a detailed write-up as well as the services provided and benefit obtained which were not contradicted. The Assessing Officer did not believe the same in the absence of concrete evidence. Unless the Assessing Officer steps into assessee's business premises and observes the role of these companies/ assessee's business transactions, it will be difficult to place on record the sort of advice given 109 in day-to-day operations. What sort of evidence satisfies 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 rendered 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 reject the entire payment under the provisions of sec. 92CA as held by 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 the 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 legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for assessee to show that any ϭϱ 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 by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle 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 disallowance of any expenditure on the ground that it was not necessary or prudent for assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule lOB. Whether or not to enter into the 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 expenditure or a part thereof on the ground that assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been 110 suffering losses continuously. 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. As provided 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 disallowance 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, even on merits the disallowance of the entire brand fee / royalty payment was not warranted. Assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity 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 the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine.
24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of assessee and against 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 be difficult for the Applicant to procure the services from third party service providers which are specific to the group and products. 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 confidentiality issues, it is the general practice to undertake such services through group entities. The Appellant has substantiated 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 is captured in Page 660 to 680 of Paper book Volume11. Therefore, 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 has submitted the copy of various mail correspondences which evidences rendition of management services by its AE. Sample mail correspondences and reports shared by the AE evidencing the actual rendition of management service is furnished in Paper book Volume-3. In our considered opinion where appropriate evidences have been provided by the Appellant, the action of 112 the learned TPO in holding that the ALP of management 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 provisions of section 92CA of the Act, the learned TPO has the authority to determine the arm's length price of the transactions undertaken by the assessee. The jurisdiction of the learned TPO cannot extend to decide the basis of charge/ allocation of expenses. In the instant case, the learned TPO ought to have confined his jurisdiction in determining whether the cost allocated by GCT Spain is at arm's length or not.
20.12 For the purposes of benchmarking the profits, the Appellant considered TNMM as the most appropriate method 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 considered as a factor to propose transfer pricing adjustment. Further, it was held that where the PLI of the Appellant under TNMM is at arm's length and it is not possible on the part of the department to identify a comparable, which is rendering similar services, the question of considering CUP method would not arise at all. 20.13 The Appellant remitted service tax under reverse charge mechanism in respect of the said management fee. Further, the Appellant has obtained a certificate under section 197 of the Act from the Deputy Director of Income Tax, International 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 14th 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 incurred in terms of agreement entered into by the assessee and India Offshore Inc. vide agreement dated 15.12.1986, which was extended upto 15.12.2014. This agreement was subject 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 15.12.1986 and it was further extended upto 15.12.2014. Therefore, there is no question of raising invoices for each assessment year and the payment is made in terms of approved agreement. Further, in our opinion, the genuineness agreement cannot be questioned by the assessing authorities when it is duly approved by the Central Govt., Ministry of Commerce & Industry, Department of Industrial Policy and Promotion and by the Reserve Bank of India as well. It is brought on record that Ministry of Commerce & Industry, Department of Industrial Policy and Promotion 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 book at page 204. When the Department has given "No Objection 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 record that there was no addition in earlier assessment years as evident from the copies filed before us for the assessment years 2005-06 to 2008-09 which is kept on record at pages 1 to 146 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 India Ltd. V.ADCIT in ITA No.7408/Mum/2010 dated 13.11.2013 held in paragraph 39 that if the assessee has paid the payments in relation to royalty to its parent AE for 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 adjustment in respect of the royalty payment to its parent AE. 6.2 It is pertinent to note that the Tribunal, Hyderabad Bench in the case of Air Liquid Engineering India P. Ltd. In ITA Nos.1040 & 1159/Hyd/2011 and 1408/Hyd/2010, vide order dated 13.2.2014 held that in transfer pricing proceedings TPO could not sit in judgment on business and commercial expediency of assessee company so as to conclude that payment of royalty made by assessee to its AE was unreasonable and thus ALP of said payment was to be taken as nil.
6.3 It is to be noted that in the case of DCIT v. Sona Okegawa Precision Forgings Ltd. in ITA No. 5386/Del/2010 dated 16.12.2011, the Tribunal held that the assessee entered into an international transaction with its overseas associates and paid royalty @ 3% which was considered as excessive by TPO did not bring any material on record which could suggest that payment of royalty as excessive order of TPO was to be dismissed and a collaboration agreement had been approved by the Ministry of Industries, 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 parties cannot be disregarded without assigning any cogent reasons thereto. In this case, it has agreements that are duly approved by RBI and other regulatory agencies. It is also a settled proposition that commercial transactions are in the domain of the businessman and Income-tax Department cannot intervene in realm of intricacies of commercial expediencies involved in these arrangements.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 evident from the record and it was subjected to TDS, disallowance is not justified. Accordingly, we allow the ground raised by the assessee."
21. However, for the A.Y 2012-13, though the assessee was asked to explain as to how the cost of allocation for the management fee was done. The assessee had submitted vide letter dated 20.03.2017 a copy of application filed with Centre for Wind Energy Technology which was rejected by the DRP stating that no cognizance is required to be taken of these documents submitted after the hearing were completed. Regarding copy of correspondence with the AE for allocation of cost, it was observed by the DRP that no such document was furnished by the assessee. However, before us the assessee filed additional evidences for the A.Y 2012-13 as discussed in earlier para elsewhere in the order and we are in principle agree with the contention of the assessee regarding the allowability of management fees and there is no requirement of transfer pricing adjustment on this issue, subject to verification of availing of actual services and allocation of its cost to the assessee. For the A.Y 2011-12, it was stated that all 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 allocation of cost to the assessee. Accordingly, this ground relating to Management fees is remitted to the file of ld. Assessing Officer 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 ground is partly allowed for statistical purposes for both the assessment years.
22. Next ground for the asst. year 2012-13 is with regard to disallowance u/s.14A read with Rule 8D of the Income-tax Rules,1962 for the purpose of computing total income.
23. The facts of the issue are that for the subject asst. year, the company had investments in its wholly owned subsidiaries i.e. GM Navarra Wind Energy Pvt. Ltd. RSR Power Pvt. Limited and Kintech Santalpur Pvt. Ltd. amounting to ₹12,25,00,000/-. The assessee had also submitted the Tax Audit Report in Form 3CA and 3CD, which clearly indicates that the Company had not incurred any expenditure towards maintenance of the aforesaid investments or for earning any exempt income from the said 118 investment. The assessee claimed that no expenditure is required to be disallowed u/s.14A of the Act. However, the AO modified the facts that there is a direct nexus between increase in investments and borrowed capital and as per the given portfolio of investment; the assessee should have incurred 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 cannot 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 has also been incurred towards earning exempt income. Therefore, disallowance u/s.14A of the Act is not applicable to the assessee's case. Sec.14A of the Act emphasizes on disallowance of expenditure incurred in relation to exempt income. The question of disallowance of expenditure would arise only in a scenario where the assessee has earned exempt income during the year. To support his view, he relied 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 2016](Madras) wherein held that:-
Similar view was fortified by the following case laws:-
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 disallowance u/s.14A of the Act, if the investment is on account commercial expediency or facilitates the business of the assessee. The ld. AR, submitted that the business carried on by the subsidiaries is integrated to the business of the assessee and therefore the investments have been made on account of commercial expediency and it indirectly facilitates the business of the assessee. In other words, the investments have not been made with an intention to earn dividend income but for furtherance of their existing business. Therefore, the question of 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 2016 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 investments. The ld.
AR submitted that loan funds have not been utilized for making investments and therefore no disallowance can be made by applying the second limb of Rule 8D i.e. no requirement to disallow proportionate interest cost. The ld. AR also submitted the extracts of bank statement substantiating that only interest free funds in the form of share capital has been invested in subsidiaries. Therefore, the AO has factually erred in not appreciating the same. The ld. AR relied on the decision in the case of Beach Minerals Co. (P) Ltd. v. ACIT, wherein the Tribunal, Chennai Bench upheld the above principle. 121 24.3. On the other hand, the ld. DR relied on the orders of the DRP.
25. We have heard both the parties and perused the material on record. It was submitted before us that there was no exempted income; hence, Sec.14A read with Rule 8D cannot 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) where in held that:-
In our opinion Section 14A, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act. The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision. In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year. Therefore, to our minds, the addition made by the AO by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section. It was submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D. According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation 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 in 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 jurisdictional High Court in the case of Beach Minerals Company Pvt. Ltd. Vs. Assistant Commissioner of Income Tax in TCA No.681 of 2013, dated 2.12.2013. In that case, payments of interest by the assessee were sought to be disallowed invoking the provisions of s.14A on the premise that the same related to borrowings that had been invested and would yield exempt returns. The assessee contested the disallowance u/s 14A on multiple grounds. It was contended that there were sufficient reserves and surpluses available for the purpose of investments, and borrowed funds, for which the payment of interest had been incurred, had not been invested. The assessee sought to draw a nexus between the borrowed funds and the interest payments, highlighting the position that the quantum of available free funds was far in excess of the investments made. The Bench, in the light of the above submissions, remanded 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 interest payments. The open remand was made in the facts and circumstances of that case and no conclusion was drawn by the Bench on the 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 the case. the Income Tar Appellate Tribunal is right in law in confirming the disallowance under Section 11.1 of the income Tax Act, 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 'includable' and the phrase 'under the act' in s. 14A and we are not persuaded to accept the emphasis laid or the interpretation of the same by the Revenue. An assessment in terms of the Income tax Act is specific 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 --tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:
Provided that where by virtue of any provision of this 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 accordingly.
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 provision shall expressly state so. The provisions of s.10 in Chapter III of the Act dealing with 'Incomes not included in total income' commences with the phrase 'In computing the total income of a previous 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 connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. (Madras Industrial Investment Corporation Ltd. Vs. CIT (225 ITR 802). The language of S.14A(1) should be read in the context and such that it advances the scheme of the Act rather than distort it."
25.1 Accordingly the above ground is decided in favour of the assessee and there cannot be any disallowance u/s.14A 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 with regard to disallowance u/s.14A with Rule 8D while computing book profits u/s.115JB of the Act.
26.1 The facts of the issue are that the AO while computing book profits u/.s.115JB, expenditure attributable to earning exempted income added to net profit by invoking the 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 opinion that this issue came for consideration before the Special 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.Rule 8D has no application while computing the book profit u/s.115JB of the Act. More so, in this case there is no exempted income, this provision cannot be applied. This ground of the assessee is allowed.
28. The next ground for the a.y. 2011-12 is with regard to deduction of interest on service tax and TDS.
12528.1 The facts of the issue are that the assessee has incurred expenditure in the nature of interest on delayed payment of service tax (`12,02,485) and TDS (₹ 3,81,650). The AO disallowed the expenditure citing that under the provisions of sec.37(1) of the Act, any expenditure for any purpose 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 Explanation to sec.37 of the Act, allowability of any expenditure would depend on whether the expenditure incurred is penal or compensatory in nature. Where the expenditure incurred is compensatory in nature, the same should be allowed as deduction. It is pertinent to note that any interest payment is compensatory in 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 81] regarding the interest on service tax. He also relied in respect 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 deduction of interest on TDS and service tax and TDS, this issue is squarely covered in favoru of assessee by the decision of Bombay High Court in the case of Arthur Anderson & Co., vs. ACIT 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 the Supreme Court in Harshad Shantilal Mehta vs. Custodian & Ors. (1998) 231 ITR 871 (SC). The Supreme Court, in the course of its judgment observed that under the IT Act, 1961 the definition of tax under s. 2(43) does not include penalty or interest and that the concepts of tax, penalty and interest are different concepts under the Act. Justice Sujata Manohar speaking for a Bench of three learned Judges 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 different concepts under the IT Act. The definition of 'tax' under s. 2(43) does not include penalty or interest. Similarly, under s. 156, it is provided that when any tax, interest, penalty, fine or any of other 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 prescribed. The provisions for imposition of penalty and interest are 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 Offences Relating to Transaction in Securities) Act, 1992. The interpretation which has been placed on the provisions of s. 2(43) and the observations of the Supreme Court noted earlier, however, bind this Court as regards the ground on which the reopening of the assessment has been sought in this case."
31. Further, the Co-ordinate Bench of Delhi in the case of Messee Dusseldorf India (P) Ltd., vs. DCIT in 129 TTJ 81 (Delhi) wherein held that:-
"Interest paid for delayed payment of service-tax is compensatory and has the same character as service-tax and, therefore, it is allowable as deduction."
31.1 Further, in the case of CIT vs. Udaipur Distillary (160 ITR 444 (Rajasthan) wherein it was held that interest paid for delay in payment of sales tax is allowable expenditure. Kerala 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 view was taken by the Kerala High Court 128 in the case of CIT vs. Pachi Phillip & Co., 212 ITR 75 (Kerala). Further, the Tribunal in the case of Remfry & Sagar Consultants Pvt. Ltd. Vs. ACIT (34 CCH 131 (Delhi) wherein it has been held that interest paid for delayed payment of service-tax is allowable. However, in respect of payment of interest on delayed TDS payment it cannot be allowed in view of the judgement of Supreme Court in the case of Bharat Commerce & Industries Ltd. Vs. CIT (230 ITR 733). Further, the Kolkotta High 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 service tax, which is only compensatory nature paid on account of delay in 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 assessee in its appeal for the assessment year 2011-12 is partly allowed. 129
32. The next ground for the assessment year 2012-13 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 acquired and installed plant and machinery during the preceding year in respect of which additional depreciation at the rate of 20% has been claimed. In respect of assets put into use for a period of less than 180 days during the preceding year, additional depreciation has been claimed at the rate of 10 per cent. Therefore, the remaining spill over of 10 percent has been claimed during the subject AY. The AO held that additional 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 year then additional depreciation u/s.32(1)(iia) has to be reduced to half the specified rate. Further, there isn't any provision of carry forward of balance additional depreciation to the succeeding previous year. So there isn't any flaw in the order of the AO in 130 this regard and the objection of the assessee is not accepted. This is important to note that realizing this aspect of loss to the assessee of balance depreciation, an amendment in the Act has already been carried out which allows this benefit of carry forward to the assessee in immediately succeeding year, however such benefit is available only w.e.f. 01.04./2016 and not for the year under consideration. Memorandum to Finance Bill, 2015 while introducing this amendment reads as follows:
"Non-availability of full 100% of additional depreciation for acquisition and installation new plant and machinery in the second half of the year may motivate the assessee to defer such investment to the next year for availing 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 eligible 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, Chennai Bench in the case of Brakes India Ltd. vs. (96 DTR 281), where the Tribunal did not allow the balance additional depreciation in subsequent financial year.
34. After hearing both the parties, we find that similar issue was considered by the Karnataka High Court in the case of ACIT Vs. M/s.Rittal IndiaPvt Ltd. in vide order dated 24.11.2015 in 2016-TIOL-07-HC-KAR-IT wherein held that:-
"It has been consistently held by this Court, as well as the Apex Court, that beneficial legislation, as in the present case, should be given liberal interpretation so as to benefit the assessee. In this case, the intention of the legislation is absolutely clear, that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to only half of the same being granted in one assessment year, if certain condition was not fulfilled. But, that, in our considered view, would not restrain the assessee from claiming the balance of the benefit in the subsequent assessment year. The Tribunal, in our view, 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, liberally and purposively, to make the provision meaningful while granting additional allowance. We are in full agreement with such observations made by the Tribunal. In view of the aforesaid, we do not find that any interference is called 132 for with the order of the Tribunal, or that any question of law arises in this appeal for determination by this Court."
35. Similar view was taken by the jurisdictional High 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 precedents, we are inclined to decide the issue in favour of the assessee. Accordingly, this ground of appeal of the assessee is allowed.
36. In the result, both the appeals of the assessee are partly allowed for statistical purposes.
Order pronounced on 13th November, 2017 at Chennai.
Sd/- Sd/-
(धु$वु% आर.एल रे 'डी) (चं* पज
ू ार )
(Duvvuru RL Reddy) (Chandra Poojari)
8या यक सद:य/Judicial Member लेखा सद:य/Accountant Member
चे8नई/Chennai,
th
Cदनांक/Dated, the 13 November, 2017.
K S Sundaram
133
आदे श क तEलFप अGेFषत/Copy to:
1. अपीलाथ /Appellant
2. यथ /Respondent
3. आयकर आयुHत (अपील)/CIT(A)
4. आयकर आयुHत/CIT
5. Fवभागीय त नKध/DR
6. गाड फाईल/GF.