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BMW India Private Ltd. Versus DCIT Circle-1 (1) , Gurgaon

2017 (11) TMI 715 - ITAT DELHI

Determination of ALP of the international transaction of AMP expenses - Held that:- Since the orders of the authorities below are not in conformity with the ratio laid down in Sony Ericsson (2015 (3) TMI 580 - DELHI HIGH COURT) as discussed above and further necessary details for doing this exercise at our end are also not available, we set aside the impugned order and send the matter back to the file of the TPO/AO for determining the ALP of the international transaction of AMP spend afresh in a .....

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ng a reasonable opportunity of being heard to the assessee. - International transactions of ‘Procurement support’ and ‘Training services' - Held that:- On going through the nature of services given in this Annexure, it is manifested that the assessee was supposed to procure the goods from India and export it to the global production network of the BMW Group. For doing this, the assessee was carrying out supplier assessments to identify the most suitable supplier. The assessee was receiving p .....

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the provision of design and simulation services. Because Satyam was unfamiliar with BMW processes and tools, the assessee was assigned a duty to impart training to the employees of the Satyam for their utilization in complying with design and simulation services for BMW AG. - It is overt from the two Agreements that the nature of ‘Procurement’ and ‘Training’ services is entirely different and bear no functional similarity with each other. Whereas the Procurement services were rendered by IP .....

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vices independently, after allowing a reasonable opportunity of being heard to the assessee. - Higher depreciation on DVR - Held that:- It is noticed that the DRP followed its order for the A.Y. 2009-10 for negating the assessee’s claim of higher depreciation on DVR. Such issue came up consideration before the Tribunal in assessee’s case for the A.Y. 2009-10. The Tribunal has held in its order that higher rate of depreciation is applicable to switches. Thus the departmental view was upheld o .....

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the assessee emanates from the final assessment order dated 24.02.2015 passed by the Assessing Officer (AO) under section 143(3) read with section 144 C of the Income-tax Act, 1961 (hereinafter also referred to as the Act ) in relation to the assessment year 2010-11. 2. First issue raised in this appeal is against the transfer pricing addition of ₹ 85,83,61,733/- made by the AO on account of Advertisement, Marketing and Promotion (AMP) expenses. Succinctly, the facts of the case are that t .....

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ourse of proceedings that the assessee company was selling vehicles in India both by means of distribution of BMW Completely build units (CBU s) and also after assembly/manufacture of completely knocked down (CKD) kits imported from its Associated enterprises (AEs). He found that the assessee operated an assembly facility in Chennai and the assembly of CKD kits was done there. It was further observed that for marketing and selling the cars, the assessee was having a network of 15 outlets and als .....

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ard to marketing and promotion of the products of the parent company. Thereafter, the TPO noticed from the assessee s Transfer pricing study report that BMW India was supposed to ensure that it followed the global guidelines provided by BMW Group in terms of the usage of BMW banners, specifications of release of print advertisement for font size and page layout etc. Considering the above facts and the assessee s exorbitant ratio of AMP expenses/Sales, the TPO observed that the incurring of AMP e .....

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p in appeal before the Tribunal. 3. We have heard the rival submissions and perused the relevant material on record. The learned Sr. counsel submitted at the outset that there is no international transaction of AMP expenses in the instant case and as such there can be no question of determining its ALP. For bolstering this proposition, he relied on the judgment of Hon ble Delhi High Court in Maruti Suzuki India Ltd vs. CIT & Another (2016) 381 ITR 117 (Del). The learned Sr. AR submitted that .....

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ith the submission advanced on behalf of the assessee that the treatment of AMP expense as an international transaction by the TPO is based only on excessive expenditure. It is found that the TPO has referred to other materials to support his conclusion of the existence of an international transaction of AMP expenses. He referred to the agreement dated 1.1.2006 between the assessee and BMW Germany and also reproduced relevant clauses of the same on page 13 of his order. Clause 2.2 of the Agreeme .....

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nce with the laws of the contracting territory. …….. Performance of an adequate advertisement and sales promotion as well as public and media relation. …….. 5. Clause 3 of the Agreement is also material for our purpose, which has been equally taken note of by the TPO as well in his order. Relevant parts of clause 3 read as under :- 3.1. Responsibilities for Sales and Advertising The BMW India will establish and supervise in the Contract Territory an efficient BMW dist .....

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ch include performance of an adequate advertisement and sales promotion as well as public and media relations. Clause 3 of the Agreement refers to the responsibilities of the assessee for advertising. It provides in no unambiguous terms that the assessee will meet its responsibility for the promotion of sales …. and undertook for applying its best efforts and adequate resources towards effective sales promotion and advertising Clause 3.6 of the Agreement stipulates that the assessee will .....

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wn volition took up such a huge advertisement, marketing and promotion of the brand owned by its AE. In fact, it was the responsibility of the assessee and it undertook the function of performance of an adequate advertisement and sales promotion pursuant to the Agreement dated 1.1.2006 with BMW AG. Thus it is apparent that the assessee was under a binding obligation to advertise and promote the brand of its AE. 7. The assessee s Transfer pricing study report, as referred on page 13 and 14 of the .....

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rictly in accordance with the global guidelines provided by the BMW Group. 8. There is another interesting aspect of the matter. One of the reported international transactions is Reimbursement of expenses (Amount received) amounting to ₹ 67,21,54,60/-. On being pointed out to give the nature of such Reimbursement of expenses received, the learned AR took us through page 47 of the paper book, which is a part of the assessee s Transfer Pricing study report, reading as under:- Clause IV- Reim .....

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e Transfer Pricing Study report that the assessee received reimbursement of certain marketing and promotion expenses incurred by BMW India on behalf of BMW Group. A further detail of such reimbursements has been given in the Tax Audit Report of the assessee, whose relevant part is as under:- Reimbursement of marketing / business promotion / other expenses Ultimate Holding Company 16,869,213 Ultimate Holding Company (333, 945) Fellow Subsidiaries 378, 197 Fellow Subsidiaries (545, 780) 10. The le .....

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nce with the global guidelines and the AE reimbursing AMP expenses, albeit, to a very nominal extent, goes a long way to establish the existence of arrangement between the assessee and its AE for promoting BMW brand in India. 11. Reliance of the learned Sr. AR on the judgment in the case of Maruti Suzuki (Supra) to fortify his point of view of there being no international transaction of AMP expenses, is misconceived. In that case, the existence of international transaction was negatived by the H .....

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y of the assessee to perform adequate advertisement and sales promotion in accordance with the global guidelines of the BMW Group for the use of BMW brand and further the AE also acknowledging such service of the assessee but reimbursing a minuscule part of expenses incurred by the assessee on advertisement marketing and promotion. It is further relevant to note that the judgment in the case of Maruti Suzuki (Supra) is based on a manufacturing company performing advertisement and promotion. In c .....

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Maruti Suzuki (Supra) is not applicable due to differentiation in the facts of the extant case. 12. It is further relevant to note that the Tribunal in assessee s own case for immediately preceding assessment year, namely, 2009-10 has decided such issue against the assessee vide its order dated 21.10.2014 in ITA No. 385/Del/2014. It is also worthwhile to mention the learned AR s contention that the Tribunal for the assessment year 2008-09 decided such issue in assessee s favour by its order dat .....

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nst the tribunal order for such earlier year, a substantial question of law has been admitted by the Hon ble High Court. In view of the foregoing discussion, we reject the assessee s contention and hold that the authorities below were justified in treating AMP as an international transaction. 13. Next comes the question of determination of ALP of the international transaction of AMP expenses. It is seen that the TPO applied bright line test to find out the value of international transaction and .....

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nd the brand promotion activities as interconnected transactions and harped on their aggregation. Crux of the relevant observations of the Hon ble High Court, which is crucial for our purpose, can be summarized as under :- * Inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set-off [Paras 80 & 81]; * AMP is a separate function. An external comparable should perform similar AMP functions. [Paras 165 &166] ; * Bright line test cannot be ap .....

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ed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international transactions and comparable transactions at par [Para 194 (iii)] ; * If adjustment is not possible or comparable is not available, then, the TNMM on entity level should not be applied [Paras 100, 121, 194(iii) & (vi)] ; * In the above eventuality, international transaction of AMP should be viewed in a de-bundled manner or separately [Paras 121& 194(xi)] ; * In separate .....

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dgment of the Hon ble Delhi High Court in the case of Sony Ericsson (supra), which is probably the only judgment that has laid down the mechanism for determining the ALP of AMP expenses in an elaborate manner, let us examine the facts of the case. The assessee applied TNMM as the most appropriate method. Since the profit margin declared by the assessee was favourably comparable with the average margin of the comparables, the assessee claimed that no adjustment should be made on account of AMP ex .....

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facturing/distribution functions. He separately determined the ALP of AMP expenses, albeit, without examining the AMP functions carried out by the assessee and the comparables. Manner of determination of the ALP of the distribution activity and AMP activity has been set out by the Hon ble High Court to be conducted, firstly, in a bundled manner by considering the distribution and AMP functions performed by the assessee as well as the probable comparables. If probable comparables having performed .....

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it simply, an examination of AMP functions carried out by the assessee and the probable comparables is sine qua non in the process of determination of the ALP of the international transaction of AMP spend, either in a segregate or an aggregate manner. What Their Lordships have held is to bundle the distribution activity with the AMP activity, being two separate but connected international transactions, for the purposes of determination of the ALP of both these international transactions in a com .....

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ransaction need to be compared with similar functions performed by a comparable case. If AMP functions performed by the assessee turn out to be different from those performed by a probable comparable company, then, an adjustment is required to be made so as to bring AMP functions performed by the assessee as well as the comparable, at the same pedestal. If we concur with the contention of the assessee that the addition on account transfer pricing adjustment of AMP expenses be deleted without any .....

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e process of such an aggregation does not take away the separate character of the AMP expenses as an international transaction. An analysis and examination of the manufacture/distribution and AMP functions carried out by the assessee must be necessarily done in the first instance, which should be then compared with similar functions performed by some comparables. If the manufacture/distribution and AMP functions performed by the assessee turn out to be different from those performed by probable .....

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amined on individual basis by finding out probable comparables doing such separate functions similarly. For the international transaction of AMP spend, this can be done by, firstly, seeing the AMP functions actually performed by the assessee and then comparing it with the AMP functions performed by a probable comparable. If both are found out to be similar, then the matter ends and a comparable is found and one can go ahead with determining the ALP of such a transaction. If the AMP functions per .....

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ds, which will also call for an adjustment. Crux of the matter is that the AMP functions performed by the assessee must be similar to those done by the comparables, in the same manner as such functions are compared in any other international transaction. However, in computing ALP of AMP spend, the adjustment or set off, if any, available from the distribution function, should be made. Essence of the judgment in the case of Sony Ericson Mobile (supra) is that the two international transactions of .....

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e AMP functions performed by the assessee should not be compared with those performed by the comparable parties. On the contrary, it turned down the contention raised by the ld. AR urging for not treating AMP as a separate function, which is apparent from the extraction from para 165 of the judgment : On behalf of the assessee, it was initially argued that the TPO cannot account for or treat AMP as a function. This argument on behalf of the assessee is flawed and fallacious for several reasons. .....

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eration of profit on an entity level without making comparison of AMP functions done by the assessee as well as the comparable, will render this alternative approach incapable of compliance. Canvassing such a view amounts to treating AMP spend as a non-international transaction, which is patently incapable of acceptance. 16. We summarize the legal position from the judgment in Sony Ericsson (supra) that the distribution and AMP functions are two separate international activities, which need to b .....

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nctions carried out by probable comparables. If suitable comparables can be found having performed both distribution and AMP functions, then, their ALP should be determined on aggregate basis. If, however, there is some difference in the distribution or AMP functions performed by the assessee vis-à-vis the probable comparables, then an attempt should first be made to iron out such difference by making a suitable adjustment to the profit margin of comparables. If such an adjustment is not .....

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ble from the distribution activity, should be allowed. 17. Adverting to the facts of the instant case, we find that the assessee did not separately report the international transaction of AMP expenses. Even under the transfer pricing analysis done by it on entity level, there is no identification of AMP functions, what to talk of comparing such functions with the other comparables in a combined or separate approach. The TPO treated the AMP spend as a separate international transaction. He segreg .....

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the prescription of the judgment in the case of Sony Ericsson (supra) for benchmarking. 18. Further, we note that no detail of the AMP functions performed by the assessee is available on record. Similarly, there is no reference in the order of the TPO to any AMP functions performed by comparables. In fact, no such analysis or comparison has been undertaken by the TPO. The assessee has also failed to draw our attention towards any material divulging the AMP functions performed by the assessee as .....

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ansaction of AMP spend afresh in accordance with the manner laid down by the Hon ble High Court in Sony Ericson Mobile (supra). 20. The next assail in this appeal is to the transfer pricing addition of ₹ 2,20,31,561 from the international transaction of Receipt of I.T. Supports Services . The TPO observed that the assessee benchmarked this international transaction by clubbing it with the general assembly and distribution functions under the combined TNMM approach. Such a course of action .....

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some sort of services were provided, those were duplicate in nature which did not confer any benefit to the assessee. The TPO, therefore, computed nil ALP of the international transaction. This led to the transfer pricing adjustment of ₹ 2.20 crore and odd. The assessee remained unsuccessful before the DRP. That is how, the AO made addition for such a sum in his final assessment order. The assessee is aggrieved against the addition. 21. We have heard the rival submissions and perused the .....

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Service description [WIT SAP Licenses; SAP Licences; Microsoft Enterprise Agreement; Compute; Corporate Services; WIT 3rd Level support; IVS-R 2nd Lvel Support; WTT Maintenance; and Hottline and hardware service contract extension etc.] and the Basis of allocation [Retail volume; Fixed across territories; Consumption; Market size; Order volume; Approved and implemented changed requests and Retail volume (Budget)]. The learned AR contended that BMW Group incurred I.T. expenses on centralized basi .....

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etails of the services received from its AE. This letter provides that BMW Group supports the assessee by providing online troubleshooting services for its various hardware/software related problems and helps maintaining the IT infrastructure. The assessee stated that the assessee availed the services of Active Directory Operations; Desktop & Office Service (eclient and g-client); Email services; Group Importer System Operations; Provision/operation of a SAP system; Internet Access; Internal .....

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s been alternatively held by the TPO. There is still one more letter dated 7.10.2013 on page 266 of the paper book as per which the assessee furnished to the TPO working of cost allocation in case of I.T. Support Services. It transpires from this letter that there are two kinds of payments made by the assessee to its AE for receiving IT Support services. First are the services wherein no internal value-add was undertaken, such as, purchase handling for external software. These were charged on co .....

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mstances, the view point of the TPO for not having received any services etc. is belied. 23. This brings us to the next aspect of determination of the ALP of the international transaction of Receipt on I.T. Support Services. It is seen that the assessee clubbed the receipt of I.T. Support Services with the purchase transactions and processed them in a combined manner. No separate benchmarking of the international transaction of Receipt of I.T. Support services was done. The TPO applied the CUP m .....

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risdictional High Court in Knorr Bremse India Pvt Ltd vs. ACIT 2016 380 ITR 307 (P&H). In that case, the Hon __________ble High Court has identified three situations in which more than one transaction can be taken as one composite international transaction to be processed jointly, viz., in case of a package deal where each item is not separately valued but all are given a composite price; or where a number of transaction are priced differently but on the understanding that the pricing was de .....

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s lead to manufacture of final product, it does not follow that they are dependent transactions. It is neither the case of the assessee nor any material has been brought on record to demonstrate that any of the three tests laid down in the case of Knorr Bremse (supra) for aggregation, satisfies in the instant case. The Hon ble jurisdictional High Court further went on to hold that the TNMM may establish the aggregate price paid for some independent international transactions to be at ALP. But it .....

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ent transactions to be an arm s length price. This, however, would give a skewed picture. One of these independent transactions may be at a bargain and the pricing, therefore, is not objected to by the department. This bargain may be for a variety of reasons and in a variety of circumstances unconnected however to the other transactions. The value of the other transactions, on the other hand, may be overestimated and would not be at the arm s length price. In that event, for the purpose of the A .....

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recedent, we hold that the contention of the assessee for aggregation is bereft of any force. A fortiori, receipt of I.T. Support Services is a separate international transaction, whose ALP is required to be separately determined. 25. Now we espouse the next contention of the ld. AR that the TPO applied the CUP method for determining the ALP of the international transaction of Receipt of IT Support Services without citing any comparable uncontrolled case. It was stated that that if no comparable .....

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Bombay High Court in CIT vs. Lever India Exports Ltd. and the judgment dated 23.12.2016 of the Hon ble Telangana & Andhra Pradesh High Court in DCIT vs. R.A.K. Ceremics India Pvt. Ltd. for contending that the transfer pricing addition on this score be deleted. This argument was countered by the ld. DR by relying on the judgment of the Hon ble jurisdictional High Court in Knorr Bremse (supra) and CIT VS. Cushman Wakefield India (P) Ltd. (2014) 367 ITR 730 (Delhi) read along with (2015) 277 C .....

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will still be an international transaction. The Tribunal held that there was no international transaction. Even on merits, it was held that the TPO determined the ALP by a method not prescribed u/s 92C and hence no addition was called for. When the matter came up before the Hon ble High Court, it was noticed that the ALP was determined by the TPO without adopting any of the methods under Section 92C of the Act. It was further noticed that the Tribunal for the succeeding year also returned simil .....

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his judgment is of any relevance to the facts of the instant case. We are confronted with a situation in which the TPO adopted the CUP method, which is one of the prescribed methods. It is not the case of the assessee that similar issue decided against the Revenue in any of the earlier or later years has been accepted by it. 27. Next judgment is in CIT vs. Lever India Exports Ltd. (supra). In that case, the assessee reimbursed 20% of the advertisement expenses incurred by its AE in respect of th .....

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nd not to consider whether or not the expenditure passed the test of Section 37 of the Act. In this case it was found both by the CIT(A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent-assessee is challenged by the TPO. Therefore, the adhoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained. When we peruse the facts of the instant case in juxtaposi .....

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e for reducing the rate of royalty to 2%. Here again we find that this judgment is of no assistance as the TPO did not determine the ALP of the international transaction of Receipt of I.T. Support Services in an ad hoc manner. Though he applied the CUP method but came to hold that no services were received by the assessee from its AE or at the most the services received, if any, were duplicate in nature. This is not a case in which the TPO applied CUP but could not find any comparable instance. .....

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CUP method and determined nil ALP without referring to any comparable uncontrolled transaction. In that case, the assessee claimed to have received intra group services. The TPO held that no services were received or were duplicate in nature. When the matter came up for consideration before the Hon ble High Court, it was held that the jurisdictions of AO u/s 37 of the Act and of TPO u/s 92CA, are distinct. TPO determines whether stated transaction value represents ALP or not (including whether .....

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and paid for professional consultancy services; support services; SAP consultancy charges; SAP licence fees and software. The assessee aggregated the transactions of intra-group services and manufacturing and distribution and demonstrated all of them at ALP by applying TNMM on entity level. The TPO segregated intra-group services and processed such transactions under the CUP method and came to hold that since no tangible benefit was received by the assessee etc., it could not have made any paym .....

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t profit from the use of the goods or services it does not follow that they were not sold at an arm's length price. The Hon ble High Court took into consideration the decision rendered in the case of Cushman and Wakefield (supra) and applied by reproducing para no. 35 from it, but without expressing any view on the observations bracketed by it :- 35. The Transfer Pricing Officer s report is, subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more .....

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he facts - state that the arm s length price is nil given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the Transfer Pricing Officer stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the Transfer Pricing Officer. …… ……. …. . 31. In the ultimate analysis, the Hon ble jurisdictional High Court in Knorr .....

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ade in the body of the order. That is how, the Hon ble High Court restored the matter for fresh determination of the issue despite noticing that the TPO determined Nil ALP of the international transaction of intra-group services after applying the CUP method. However, this was done without expressing any opinion on the part bracketed by it from the judgment of Cushman (supra) : such services exist or benefits have accrued. That exercise - of factual verification is retained by the Assessing Offi .....

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urts or of the Tribunal. There is hardly any need to accentuate that judgment of a jurisdictional High Court bears binding force and cannot be overlooked even if there are judgments of the other High Courts holding to the contrary. 32. To sum up, we hold that the international transaction of Receipt of I.T. Support Services is required to be separately benchmarked, distinct from the international transactions of purchase etc. Since the view of the TPO as regards the receipt of no services etc. h .....

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ment services with transacted value of ₹ 8,20,70,939/- and Provision of Training services with value on ₹ 3,82,89,753/-. The assessee earned mark-up of 10% on the costs incurred for rendering such services. It applied separate TNMM on these two international transactions and claimed them at arm s length price. The TPO combined these two transactions after noticing that the assets used for them were similar. By applying the TNMM with PLI of OP/TC, the TPO worked out transfer pricing a .....

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s of transfer pricing. Page 582 of the paper book is a copy of agreement between the assessee and its AE for rendering Procurement services . Such services have been listed in appendix A reading as under:- Focus on the development of export potentials from India to the global production network of the BMW Group. Analysis of the Indian Automative Industry, the key technologies are identified, which might be suitable for being exported. Detailed supplier assessments are carried out in order to ide .....

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the entire process-development phase in order to ensure full compliance with all BMW AG requirements up to a successful Start of Production (SOP) of the respective component. The IPO monitors the serial supply chain and if required, the IPO can step in for a quick problem resolution as a long arm of the applicable European BMW plant(s), where the part is supplied. 35. On going through the nature of services given in this Annexure, it is manifested that the assessee was supposed to procure the g .....

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e relevant agreement between the assessee and BMW AG is available on page 599 of the paper book. Preamble of the agreement provides that BMW AG entered into a contract with Satyam Venture Engineering Services for the provision of design and simulation services. Because Satyam was unfamiliar with BMW processes and tools, the assessee was assigned a duty to impart training to the employees of the Satyam for their utilization in complying with design and simulation services for BMW AG. 37. It is ov .....

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nto one and thereafter determine their ALP in a combined manner. We, therefore, set aside the impugned order and remit the matter to the file of the AO/TPO for a fresh determination of ALP for these two services independently, after allowing a reasonable opportunity of being heard to the assessee. 38. The only other ground which survives in this appeal is against allowing of depreciation at 15% instead of 60% claimed by the assessee. 39. Facts apropos this issue are that the assessee purchased a .....

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