TMI Blog2017 (11) TMI 715X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 proposal from the supplier and forwarding it to BMW AG for final assessment and approval. On such approval, the International Purchase Office (IPO) was working with the supplier to ensure compliance of BMW AG requirements. In so far as ‘Training services’ are concerned, a copy of the 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. It is overt from the two Agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turing of automobile and motorcycles. The assessee, BMW India Private Limited, filed its return declaring certain international transactions. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm s length price (ALP) of the reported international transactions. The TPO observed during the course 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 also a dedicated team for undertaking the marketing and selling functions. Such team was responsible for customizing and executing the marketing and advertising strategy for BMW India based on the Indian scenario within the overall standards and parameters prescribed by the BMW Group. The TPO took into consideration an agreement dated 1.1.2006 between the parent company and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Agreement deciphers the responsibility of the assessee in the Contract Territory Contract (India). Relevant parts of the clause are as under:- 2.2. Responsibility in the Contract Territory BMW India represents the interests of BMW AG in the Contract Territory. It is responsible for the sales promotion and the full utilization of the market potential for the Contract Goods in the Contract Territory. .. Furthermore, BMW India undertakes the following functions in the Contract Territory in accordance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s own acknowledgment in the TP study report are flawless pointers to the fact that it carried out AMP functions as a duty assigned by its AE, to be discharged strictly 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- Reimbursement of expenses from BMW Group Under Class IV transactions, reimbursement of expenses by BMW Group to BMW India is included. During the year, such reimbursements were primarily on account of BMW Service Inclusive Package / normal warranty claims raised by BMW India on BMW Group and certain marketing and promotion expenses incurred by BMW India on behalf of BMW Group. These expenses were subsequently reimbursed by BMW Group to BMW India . 9. It is evident from the above extract of the Transfer Pricing Stu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 contrast, the assessee is engaged not only in the sale of manufactured goods but also the traded goods. Profit and loss accounts of the assessee shows Sale of manufactured goods at ₹ 624.66/- crore and those of traded goods of ₹ 611.87 crore. Thus, it is manifest that the volume of assessee s business from trading and manufacturing is almost equal and it is not a case of manufacture alone as was there in the case of Maruti Suzuki (Supra) . It is, ergo, vivid that the ratio laid down in 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 Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) others]; * If no comparables having performed 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 separately determining the ALP of AMP expenses, the TPO is free to choose any other suitable method including Cost plus method [Para 194(xiii)]; * In so making a TP adjustment on account of AMP expenses, a proper set off/purchase price adjustment should be allowed from the other transaction of distribution of the products [Para 93] ; * Selling expenses cannot be considered as part of AMP expenses [Paras 175 176 of the judgment]. 14. With the foregoing understanding of the ratio decidendi of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transactions, for the purposes of determination of the ALP of both these international transactions in a combined manner. The argument of the assessee that since the profit margin of the comparables is much less than the assessee and hence no separate addition should be made for AMP functions, if taken to a logical conclusion, will make the AMP spend as a non-international transaction, which, in our considered opinion, is not appropriate in the given facts. Once AMP expense has been held to be an international transaction, it is, but, natural that the functions performed by the assessee under such a transaction 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 examination of the AMP functions carried out by the assessee as well as comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith varying standards, 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 Distribution and AMP should be examined on the touchstone of transfer pricing provisions, but on an aggregate basis. Determining the ALP of two transactions in an aggregate manner postulates making a comparison of both the functions of manufacture/distribution and AMP carried out by the assessee with the comparables, so that surplus from the manufacture/distribution activity could be adjusted against the deficit, if any, in the AMP activity. The Hon ble High Court has no where laid down that the 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. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a comparative analysis of the distribution and AMP functions jointly, there remains no comparable case performing such distribution and AMP functions, then, the international transaction of AMP should be segregated and their ALP be determined separately by applying a suitable method. However, in so determining the ALP of such an international transaction of AMP expenses on separate basis, a proper set off, if any, available 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 segregated routine AMP expenses incurred by the assessee for his business from the non-routine AMP expenses by treating such non-routine AMP expenses leading to the creation of marketing intangible for its AE. Then he applied a mark-up of 11.05% to determine the ALP of this tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 relevant material on record. The TPO has made out a case that the assessee did not receive any services or, at the most, such services were duplicate in nature. We first need to examine and evaluate this aspect. Page 180 of the paper book is the assessee s letter dated 21.1.2014 to the Transfer Pricing Officer. Annexure 1 to this letter on page 181 gives Description of Process closter [Operations (IT Infra); Wholesale Integration (Overall); Ordering (New vehicles); Tech. Info. Mgmt (services)]; 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pport services. First is that the assessee did receive I.T. Support Services from its AE and the second is that it is not reimbursement alone inasmuch as in some cases, the assessee was required to pay cost plus mark-up of 5% . Under such circumstances, 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 method for benchmarking intra group services and held that in the absence of receipt of any services etc., the ALP was nil. 24. The ld. Sr. AR reiterated the assessee s stand taken in the T.P. documentation for benchmarking the Receipt of I.T. Support Services with other international transactions of Purchase etc. on a consolidated basis under the TNMM. We do not approve the contention advanced on behalf of the assessee for such aggregation. Our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Act, the price of the second transaction cannot possibly be taken to be the arm s length price for it was not the arm s length price. It does not become the arm s length price merely because the bargain struck with respect to the first transaction balanced the inflated price of the second although the two transactions were independent of each other. The two transactions are different and, therefore, the arm s length price of each of them must be determined separately . Respectfully following the precedent, 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 instance has been taken up b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestions of law raised by the Revenue for the year before it. We do not see as to how this 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 the new products. TNMM was applied for the export activity and advertisement expenses. The TPO held that the transactions between the parties were on principal to principal basis and hence no reimbursement of advertisement expenses could be allowed. Consequently, he determined nil ALP and disallowed the advertisement expenditure. When the matter came up before the Hon ble Bombay High Court, it was observed that the TPO s jurisdiction was only to determine the ALP of the international transaction and not to consider whether or not the expenditure passed the test of Section 37 of the Act. In this case it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding whether ALP is nil), while AO makes decision as to validity of deduction under Section 37. In the ultimate analysis, the Hon ble High Court remitted the matter for fresh adjudication in accordance with its directions and did not delete the addition. 30. At this juncture, it is pertinent to take note of the judgment of the Hon ble jurisdictional High Court in Knorr-Bremse (supra) in which almost similar facts were considered. Similar to the case under consideration, the assessee in that case also availed 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 payment on account of these services. The ALP of such services was determined at Nil. The Tribunal rejected the application of the TNMM in respect of intra group services transactions a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh 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 Officer under Section 37 in this case. This shows that despite being aware of the fact that the TPO determined nil ALP of the international transaction of intra group services in the same manner as has been done in the case under our consideration by applying the CUP method, it did not order for the deletion of addition, but chose to remit the matter for fresh adjudication. This judgment, being that of the Hon ble jurisdictional High Court, has primacy over the judgments of the other Hon ble High Courts 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 transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Within this RfQ-phase, detailed techno-commercial discussions take place between the IPO and the respective suppliers in order to achieve a most competitive Quotation package. The proposal from the supplier would be forwarded to BMW AG for final assessment and approval. If BMW AG approves the proposal, IPO would work closely with the supplier throughout 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 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 proposal from the supplier and forwarding it to BMW AG for final assessment and approva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uter . It was further held that the computer peripherals are those devices which are not capable of being used in isolation. Thus, DVR used exclusively for recording was held not to be a computer peripheral as the same was capable of use independent of computers as well. He, therefore, treated it as an item of Plant and machinery on which depreciation was allowed at the rate of 15% as against 60% claimed by the assessee. The DRP followed its order for the A.Y. 2009-10 and held that 60% depreciation be allowed on Printers and UPS only. The assessee s contention for allowing higher depreciation on DVR was turned down. The assessee is aggrieved against disallowance of depreciation to this extent. 40. We have heard both the sides and perused the material on record. 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 on others. Since DVR is not a switch, respectfully following the p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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