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

The ITAT Delhi held that the assessee successfully established actual rendering of technical support services (TSS) and business support services (BSS) as per agreements, which were necessary for day-to-day business operations. The TPO erred in determining arm's length price as NIL for these services. The DRP failed to properly consider the assessee's objections and additional evidence as directed by the Appellate Tribunal in the first round. The TPO violated consistency principles by deviating from aggregation approach accepted in previous assessment years without providing detailed reasons. Regarding royalty transactions, the TPO incorrectly computed arm's length price without considering landed costs of imported components in comparables. The matter was remitted back for fresh determination.

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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.

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