2024 (9) TMI 1270 - AT - Income Tax

TPO erred determining NIL arm's length price for technical support services despite proven actual rendering

Borgwarner Emissions Systems India Private Ltd. Versus Deputy Commissioner of Income Tax, Circle-4 (2) New Delhi

The ITAT Delhi held that the assessee successfully established actual rendering of technical support services (TSS) and business support services (BSS) as ... TP Adjustment - selection of MAM - in first round CUP method was adopted by the TPO, but in the second round, TNM method has been adopted - Whether it is a case of benchmarking as per Aggregation or Segregation approach? - HELD THAT:- The assessee established actual rendering of services as per agreements arrived. Having regard to the services availed of, it can safely be said that same were necessary for proper functioning of day to day business operations beneficial to the assessee. In the given facts and circumstances, as regards TSS and BSS, Learned TPO was not justified in arriving at the conclusion that in this matter the assessee was not getting any real service and that it would not have paid anything if it were not controlled by the payee. Consequently, TPO erred in opining that holding the arm’s length price of TSS and BSS services to be NIL. It is noteworthy that in the first round of litigation, the Appellate Tribunal also noticed that certain additional evidence was submitted on behalf of the assessee before Ld. DRP, but there was no finding recorded by Ld. DRP to suggest if said additional evidence was or was not considered. Appellate Tribunal also observed that in the given facts and circumstances and in the interest of justice, it was necessary that the issue with respect to determination of ALP of the international transaction of Business Support Services and Technical Support Services fee be remitted back to the file of Ld. TPO for determination of their ALP. At the same, the assessee was also directed to produce relevant details with respect to rendition of services with credible and contemporaneous evidence for impugned assessment year and also to demonstrate as to how said transactions were required to be aggregated. DRP has not discussed that any of the objections raised by the assessee, what to say of any giving any reason for confirming the views expressed and observations made by Learned TPO. From the order passed by Learned DRP, it transpires that one of the objections or contentions raised there on behalf of the assessee was that TPO had been unable to provide sufficient data of comparability in the case of TSS and BSS.DRP simply observed in the order that the same was well taken, but, surprisingly, at the same time opted to direct the TPO to consider said contention raised by the assessee. Firstly, Ld. DRP itself was to deal with and decide said contention raised by the assessee. The Panel had no jurisdiction to issue direction to the TPO to consider said contention. Secondly, by simply mentioning that the panel had taken the contention well, it cannot be said that said contention was discussed or dealt with. When there were specific directions from the Appellate Tribunal to consider said contention in addition to the additional evidence, Learned DRP was required to consider and discuss the additional evidence. But, as noticed above, learned DRP nowhere discussed any of the objections pertaining to TSS or BSS or even the contention that the TPO had not been able to provide sufficient data of comparability in the case of TSS and BSS. Adoption of approach by the Revenue as regards the assessee, in the Previous years - It is settled law that the principles of res judicata have no application to income-tax assessment proceedings. It is significant to note that when the matter came up before Co-ordinate Bench of ITAT in the first round, it was observed that with respect to the transaction by transaction approach v. aggregation of the transaction for subsequent year as well as in the earlier year, Learned TPO had accepted the aggregation approach adopted by the assessee. Learned Co-ordinate Bench also observed that it was not disputed that for AY 2011-12 and 2013-14, Learned TPO had accepted the aggregation approach; and further that following the principle of consistency, where there is no change in the facts and circumstances of the case for this year, Learned TPO should have followed the same approach; and even further that if for any reason, Learned TPO wanted to deviate from the same, he should also give a detailed reason as to why he was deviating, but in the order passed by Ld. TPO, the Co-ordinate Bench did not find any such discussion. TPO was of the view that the three type of transactions are to be benchmarked at segregate level. The main ground for arriving at this view was that the assessee had failed to prove factum of rendering of services. The factum of rendering of said services stands proved. Therefore, there is merit in the contention raised on behalf of the assessee that TPO has passed orders ignoring the earlier orders pertaining to AYs 2011-12 and 2012-13, passed by the TPOs in the case of the assessee itself as regards payments of TSS, BSS and Royalty, and that the principle of consistency stands violated in this matter. ALP as regards Royalty transactions - Notably, one of the contentions on behalf of the assessee is that Ld. TPO incorrectly computed ALP as regards royalty, without taking into consideration landed cost of imported components in the case of comparables. In the first round of litigation, same argument was put forth on behalf of the assessee before the Appellate Tribunal, and noticing this infirmity and others as pointed out by the assessee, the matter was remitted. In those proceedings, in the first round, it was submitted that assessee had paid royalty in terms of the agreement where royalty was payable @ 5% of the net sales of licensed products in India, and @ 8% of net sales of licensed products outside India. There, it was also submitted that in case of comparables, Ld. TPO had taken the rate of comparable @ 0.63 for both transaction. The assessee also stated that rate of 0.63% in case of comparables was incorrect calculation without considering the landed costs of imported components. However, record does not reveal, nor any has been pointed out, to suggest that landed cost of imported components in the case of comparables was also taken into consideration in the 2nd round. Even Ld. DRP did not consider this aspect. Therefore, there is merit in the contention raised on behalf of the assessee even on this point. Issues Involved:(a) Whether any Technical Support Service was availed of by the assessee from its AE(s)Rs.(b) Whether any Business Support Service was availed of by the assessee from its AE(s)Rs.(c) Whether the transactions were to be treated while adopting aggregative approach or segregative approachRs.(d) Whether transaction pertaining to Royalty payment was intertwined with other transactionsRs.(e) Whether the approach adopted in the previous years in the case of the assessee in respect of said transactions was required to be followed or could be deviated for any reasonRs.(f) Which of the prescribed methods needed to be applied for determination of arm's length priceRs.(g) Whether Dispute Resolution Panel conducted proceedings in accordance with law and as per the directions issued by the Co-ordinate Bench of Appellate Tribunal in the first round of litigationRs.Detailed Analysis:1. Technical Support Service (TSS):The assessee claimed to have availed Technical Support Services (TSS) from its AEs in the USA and Spain, which included application engineering services, prototypes, manufacturing engineering services, quality control services, and other requested services. However, the TPO observed that the assessee failed to provide credible evidence of actually requisitioning or obtaining these services. The TPO held that the arm's length price (ALP) of the purported service (TSS) was NIL, resulting in an adjustment of Rs. 1,73,63,018/-. The DRP upheld this view, noting that the emails provided as evidence were mostly from periods beyond the relevant financial year and did not establish that any specific technical guidelines were received from the purported service provider.2. Business Support Service (BSS):The assessee also claimed to have availed Business Support Services (BSS), including assistance in product pricing, supply chain management, sales support, business expansion strategies, and quality issues. The TPO found that the assessee had failed to furnish any credible evidence about requisitioning or actually obtaining these services. Consequently, the ALP of BSS was held to be NIL, and an adjustment of Rs. 4,08,06,578/- was made. The DRP upheld this view, noting that the evidence provided by the assessee did not establish that any specific advice was sought or received from the AE.3. Aggregative vs. Segregative Approach:The TPO adopted a segregative approach, benchmarking the transactions of TSS, BSS, and Royalty separately. The TPO observed that the assessee failed to demonstrate that these transactions were so intertwined that they could not be benchmarked separately. The DRP upheld this view, noting that the assessee did not provide sufficient data to establish that the transactions were closely linked.4. Royalty Payment:The TPO determined the ALP of royalty paid by the assessee at 1.24% of sales, resulting in an adjustment of Rs. 3,27,73,603/-. The TPO observed that the most appropriate method to determine the ALP of royalty was the 'other method' mentioned in section 92C(1)(f) and rule 10B(1)(f), taking the average of royalty rates paid by comparables selected by the assessee. The DRP upheld this view, noting that the assessee failed to differentiate the services for royalty from the technical support services.5. Consistency with Previous Years:The assessee argued that the TPO's approach violated the principle of consistency, as the TPO had accepted the aggregation approach in previous years (AYs 2011-12 and 2012-13). The DRP did not address this contention adequately, leading to the conclusion that the principle of consistency was violated.6. Prescribed Methods for Determination of ALP:The TPO adopted the Transactional Net Margin Method (TNMM) for benchmarking the transactions. The assessee argued that the TPO should have adopted the aggregation approach, particularly given the observations made by the Appellate Tribunal in the first round of litigation. The DRP upheld the TPO's approach without adequately addressing the assessee's contentions.7. Conduct of DRP Proceedings:The DRP was found to have not adequately discussed or addressed the objections and additional evidence provided by the assessee. The DRP's failure to provide reasons for its decisions and to discuss the evidence in detail indicated a lack of application of mind, leading to the conclusion that the DRP did not conduct the proceedings in accordance with law.Conclusion:The appeal was allowed, and the impugned assessment based on the observations and findings recorded by the TPO and DRP was set aside. The Appellate Tribunal noted that the rejection of the assessee's claims regarding TSS and BSS was done without proper enquiry and application of mind. The Tribunal also found merit in the assessee's contention that the TPO's approach violated the principle of consistency. The Tribunal directed that the file be consigned to the record room after the needful is done by the office.