TaxTMI 
TaxTMI 
2024 (9) TMI 1270
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....re issued to charge interest under sections 234Aa, 234B, 234C and 234D. Even penalty proceedings under section 271(1)(c) were also directed to be initiated separately. The two additions pertain to international transactions regarding: (i) payment for Business support service (BSS); (ii) Payment for Technical support service (TSS); and (iii) Royalty payment. The issues involved herein are: (a) Whether any Technical Support Service was availed of by the assessee from its AE(s) ? (b) Whether any Business Support Service was availed of by the assessee from its AE(s) ? (c) Whether the transactions were to be treated while adopting aggregative approach or segregative approach? (d) Whether transaction pertaining to Royalty payment was intertwined with other transactions? (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 reason? (f) Which of the prescribed methods needed to be applied for determination of arm's length price? (g) Whether Dispute Resolution Panel conducted proc....
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....rest under section 234B and 234C has been raised against the assessee-appellant. Hence, this appeal. 7. Arguments heard. File perused. 8. The assessee-appellant-company claims that it is engaged in manufacturing and marketing of Exhaust Gas Recirculation systems (in short "EGR" systems) and its components for use by automotive industry. Registered office of the appellant company is in New Delhi; It has manufacturing facility at Manesar (Haryana). 9. Assessee also claims to have availed of Technical Support Services (hereinafter referred to as "TSS") and Business Support Services (hereinafter referred to as "BSS") from its AEsBorgWarner Emission Systems Spain S.L. and BorgWarner Emission Systems of Michigan Inc., USA. It further claims to be providing technical support services to its customers in relation to EGR systems and its components. TSS Assessee claims that there was need for said services i.e. -application Engineering services; -prototypes of products being developed by BorgWarner India; -Manufacturing engineering services; -Quality control services, and; -Other services as were to be requested by BorgWarn....
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....of BSS. It was further observed that when the buyer is not getting any real service it would not have paid anything if it was not controller by the payee. 10. As regards TSS, having regard to the terms and conditions of the two agreements, Ld. TPO rightly observed that the assessee had right to receive Know How and technical training as part of the license agreement with its AE, for which it paid royalty, but the assessee failed to prove that it required additional Know How/training to run its business and for that assessee paid additional amount of Rs. 1,73,61,018/- as TSS fee. 11. Ultimately Ld. TPO concluded that in the given facts of the case, when the buyer was not getting any real service, the assessee would not have paid anything if it was not controlled by the payee. Arm's Length Price (ALP) & Adjustment made 12. Having regard to the provisions of Rule 10AB, the arm's length price of the purported service (TSS) was held to be NIL and adjustment of Rs. 1,73,63,018/- was made on this account. As per Rule 10AB, arm's length price of BSS was held to be NIL, and thus an adjustment of Rs. 4,08,06,578/-was made as regards said service. 13. Record reveals that on ....
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....be submitted. In this regard, reliance has been placed on the sample invoices available at page 1480 and 1481 (PB-III). In this regard, attention has been drawn to copy of said list Annexure 2. Business Support Service 15. Learned AR for the appellant has submitted that Service Agreements were arrived at between the assessee and AEs to avail of assistance in product pricing, supply chain management, sales support, business expansion strategies and issues relating to product warrant and quality etc. As regards exact nature of such services received, need for said services and benefits received on said services, reliance has been placed on pages 574 to 579(PB-I). In proof of the contention that said services were actually rendered, reliance has been placed on evidence said to contain in pages 1083 to 1193 (PB-III). One of the contentions raised on behalf of the assessee is that that margins of the assessee were continuously increasing and having regard to the healthy margins, and as such benefits available to the assessee under the law could not be denied to the assessee. 16. On the other hand, Learned DR has vehemently contended that no Technical or Business Suppor....
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.... Learned TPO observed that as per its terms, TSS were to be provided on written request, but, the assessee did not lead any evidence that any written request was made for providing TSS. Learned DRP upheld abovesaid observations. Ld. DRP also upheld another observation by Ld. TPO that few emails received during the relevant previous year did not show that same were received from the purported service provider or any technical guideline provider. As regards copies of emails, which form part of Paper Book-III, Ld. TPO observed that few emails did not appear to have been received from the purported service provider. On perusal of the record, particularly copies of emails starting from page 956 to 1061 and 1065-66 (PB-III), it transpires that these are copies of emails sent in the years 2016 or 2017, whereby copies of certain previous emails i.e. of the years 2012-13 are purported to have been communicated. This shows that evidence as regards emails of the years 201213 is of secondary nature. Best or primary evidence regarding said emails of the years 2012-13 was not led, as rightly submitted by Learned DR. Copies of emails at page 1063-64 and 1068-69 are duplicates. ....
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....assessee in support of its claim that its AE(s) rendered services (TSS & BSS) and it made them payments for said services. Record reveals that on behalf of the assessee, reliance was placed to copies of two invoices. One is available at page 1480 and the other at page 1498. In the course of arguments, Learned AR submitted that the first invoice pertains to TSS and the second one pertains to BSS. No doubt, these copies have been represented to be sample invoices, but while dealing with the objections, Ld. DRP nowhere recorded any observation so as to reject said invoices. In the first invoice, in the column meant for description, there is mention of "2012 Engineering Services". In the second mentioned invoice, in the column meant for description, there is mention of "2012 Emissions HQ Annual Service Charge". As per these invoices payments were made in EUROs. It is significant to note that at no stage of the proceedings, for the concerned assessment year, any of the books of accounts of the assessee have been rejected on any such ground. In case, any clarification was required from the assessee-objector regarding these invoices, Ld. DRP could exercise its powers ....
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....ed at between the assessee and AE(s). Copy of the Engineering Support Agreement is available at page 100 to 122. It was entered into between the parties on 1.5.2010. Another Engineering Services Agreement between the parties and effective from 1.1.2012 is available at page 107 to 116. Still copy of another Service Agreement between the parties and effective from 1.5.2010 is available at page 117 to 122. From page 123 to 126 is available copy of another Service Agreement between the parties and effective from 1.1.2011 is available. Copy of another Service Agreement between the parties and effective from 1.1.2012 is available from page 129 to 134. There is another copy of Service Agreement between the parties, effective from 1.1.2011, available from page 135 to 139. 23. As per license agreement arrived at between the assessee and its AE, it was agreed that the licensee shall acquire rights under Patent, Trade Secrets and other Intellectual Property Rights including technical design, manufacturing information and other engineering knowledge relating thereto, which the licensor and AE agreed to grant limited rights to the licensee. As per para 3.02 of the said a....
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....ms; Global Product Manager Support and Global Chief Engineer Support were required. 3 TSS are stated to have been provided by the AEs in USA and Spain, as according to the assessee, there was need for said services as described in column No.3 of said table. Column No.2 depicts that in the Manufacturing Engineering Department, such services were provided as regards new project reviews; support for furnace and Manufacturing Engineering Signoff. Available at page 664 & 665 (PB-II) is Annexure 5, which depicts names of employees, with their designation, period of employment, and salary. This pertains to the FY 2012-13. In the course of arguments, on behalf of assessee, it was argued that the employees already employed by the assessee for said services were not having the capabilities to render services, and that is why, eligible and competent employees were employed and services were availed of from the AEs. 27. Ld. DRP appears to have not considered the time limit for the services agreed to be provided by the AEs to the assessee as per the licence agreement. Further, the Panel appears to have not considered the list of the employees engaged by the assessee to avail of said....
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....lhi), also relied on by Learned TPO; only para 10 extracted from the decision in Bonfigioli Transmissions Private Ltd., by Coordinate Bench of ITAT, Chennai, reported in TS-388-ITAT-2018 (CHNY)-TP); on para 16 only extracted from the decision by Hon'ble Bench of ITAT, Delhi, in Goodyear India Ltd. v. DCIT, (2016) 70 taxmann. Com 67 (Delhi); on the observations extracted from decision in CIT v. Cushman & Wakefield (India) P. Ltd., (2014) 367 ITR 730; observations extracted from decision in Magneti Marelli Powertrain India (P) Ltd. v. DCIT, ITA No.350 of 2014, by Hon'ble Delhi High Court. At the same time, Learned AR for the assessee has contended that when Ld. TPO was unable to provide sufficient data of comparability as regards TSS and BSS, it was imperative to adopt Aggregation approach i.e. by aggregating the transactions with the transactions pertaining to purchase of raw material. Learned AR for the assessee has submitted that Learned DRP accepted in the order and well took the contention raised on behalf of the assessee that the TPO was unable to provide sufficient data of comparability as regards TSS and BSS. Learned AR has relied on para 3.4 of the document availabl....
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....f services. In support of his contention, Learned DR also referred to the decision in L.G. Electronics India (P) Ltd. v. ACIT, (2014) 52 taxmann.com 240 (Delhi). 36. In reply, learned AR for the assessee has submitted that in the first round, CUP method was adopted by the TPO, but in the second round, TNM method has been adopted, and that no justification has been given for adopting TNMM and in not adopting "other method" in the given facts and circumstances. 37. Learned AR has contended that agreement was arrived at between the appellant and AE BorgWarner Emission Systems Spain SL for use of technology, patents, know-how and trademarks; that as agreed, the assessee pays royalty @ 5% on net sales due to sale of licensed products within India; that as agreed, the assessee pays royalty @ 8% of net sales outside India. Further, it has been submitted that licensing agreements were so arrived at with AEs to save its time, and cost, which the assessee would have been required to invest, in absence of transfer of intangible items from the AE. It has also been submitted that for manufacture of new products developed by the group, AEs provide technical information and know-how in t....
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....ll said services were held to be covered by manufacturing of automotive components. Whereas the assessee had invoked TNM method for all the services, collectively, the TPO applied TNM method except as regards payments made by way of fee for technical assistance, but worked out arms length price for said fee on an entirely different method-CUP method. In the given facts and circumstances, it was held that once the TPO had applied TNM method as the most appropriate method, it was not open to the TPO to determine arm's length price in respect of the sole element i.e. payment of fee for technical assistance on CUP method. 40. Herein, as claimed by the assessee, following services were rendered to and availed of by it-the appellant: "Financial Year 2012-13-Business Support Services Sl.No. Particulars of Services provided by Borg Warner Emissions Systems of MI Inc. USA Borg Warner Emissions Systems Spain S.L. Spain Need for the services Benefit Translation A Application Engineering Department 1. Engineering Signoff(ESO) for New Programs Engineering Signoff shortly called as the ESO for New Programs to be done, Only based on th....
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....ing Signoff shortly called as the MSOK for New Programs to be done. Only based on this signoff the Start of Production(SOP) will be executed. The analysis of the Manufacturing process resulted in Quality Product Output and efficient Engineering Process. This resulted in Cost Effectiveness and cost savings. Financial Year 2012-13-Business Support Services Sl. No. Particulars of Services provided by Borg Warner Emissions Systems of MI Inc, USA BorgWarner Emissions Systems Spain S.L. Spain Need for the services Benefit Translation C. Sales Department 1. TAP Review-Target Agreement Process Fixing of targets for sales and support to Sustain the Growth of the Company. To identify New Projects and New Customers in this highly Competitive Automotive Market. Improvement in Revenue. New Business and improvements in the existing Business opportunities were identified. Revenue Targets were achieved and the future Revenue growth is also substantial. 2. New Quote Review and Guidance for discussing New Programs with Customers The Company's Business is Manufacture and Sale of Diesel Engine Part(Exhaust Gas Recirculation Coolers....
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....ever there is any change in the Product or the raw Materials used for making the Product. Only based on this signoff the Start of Production (SOP) will be executed. 3. Global Product Manager Support Support required for assisting in the Product development and Product Engineering stages. 4. Global Chief Engineer Support Support required for assisting in the Product development and Product Engineering stages. Sl. No. Particulars of Services provided by Borg Warner Emissions Systems of MI Inc.USA Borg Warner Emissions Systems Spain S.L. Spain Need for the services Benefit Translation E IT Department: 1. Global support for projects - New implementation of ERP Support is required to setting up and smooth functioning of the ERP system. We use Oracle Based TERMS, Mawai. Good and proven ERP system in place and smooth running of the operations. 2. ERP-JDE support Support for ERP running Good and proven ERP system in place and smooth running of the operations. 3. Weekly staff reviews conducted by Vice President IT Support for all IT Related activities Good maintenance of the ERP system, good maintena....
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....f Aggregate level approach and segregative level approach observed that preferred approach is segregative approach, and that only if a transaction cannot be benchmarked separately the aggregative level approach is to be adopted. Ld. TPO went on to observe that the assessee had not been able to prove that its transactions of TSS, BSS and Royalty were so intertwined with other transactions that they cannot be benchmarked separately. As regards Royalty, Ld. TPO observed that rates are available for other similar businesses, and as such royalty could be benchmarked looking at what other enterprises having similar FAR were paying. Ld. TPO observed that the assessee had failed to demonstrate that in its case TSS, BSS or Royalty cannot be benchmarked separately. Ultimately, Ld. TPO was also of the view that the assessee having failed to prove receipt of any of the services, said transactions could not be closely intertwined. 42. Royalty means payment of any kind received as consideration for the use of or right to use any intangible property like copyright, design or model, secret formula or process, trademark, trade name or for information concerning industrial and commercial....
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....ness 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. 47. As noticed above, Learned DRP has not discussed in para 4.2.2 and 4.2.3 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. 48. 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. In this regard, Learned 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....
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.... respect of each assessment year has to be decided in view of the evidence produced regarding rendering or receipt of services to or from AE. 51. In the case of Akzo Nobel India Pvt. Ltd.'s case (supra) relied on by Learned DR, assessee could not prove receipt of Intra Group Services, by producing requisite documents, and further that each year is based on different facts and the issue involved is to be decided on the basis of evidence produced. In Safran Engineering Services India Pvt. Ltd., 1989 taxmann.com 77 (Bengaluru), referred to in AT Kearney Ltd.'s case (supra) relied on behalf of the Revenue, it was held that before the authorities below, the assessee had not discharged the onus of proving the receipt of services, and further that each assessment year is separate and distinct. Therein, on this point, reliance was also placed on decision in Lintas India Pvt. Ltd. v. ACIT. It is settled law that the principles of res judicata have no application to income-tax assessment proceedings. 52. 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 ap....
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....ted persons or functions performed by such persons or such other relevant factors, as prescribed by CBDT, may be taken into consideration. Expression "other method" as provided under this provision may be used while taking into consideration the price which has been charged or paid or the price which would have been charged or paid fr the same or similar uncontrolled transactions with or between non-associated enterprises, under similar circumstances. In the first round of litigation, said issue was also remitted back to the file of Ld. AO with the direction to the assessee to show as to how payment of royalty was inextricably linked with the manufacturing activities and as to why it ought to be aggregated and benchmarked together with other international transactions under transactional net margin method. On remand, ALP of royalty paid by the assessee was determined at 1.24% of sales made by the assessee. The ALP of royalty was determined at Rs. 92,81,625/-and adjustment of Rs. 3,27,73,603 was made on this account. In so determining, Ld. TPO observed that the most appropriate method to determine ALP of royalty is the "other Method" mentioned in section 92C(1)(f) and rule ....