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TMI Blog2024 (9) TMI 1270X X X X Extracts X X X X X X X X Extracts X X X X ..... C 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 proceedings in accordance with law and as per the directions issued by the Co-ordinate Bench of Appellate Tribunal in the first round of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aims 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 BorgWarner India. Information as regards 7 TSS said to have been provided by AEs in USA and Spain, during the relevant year, has been made available at page 573 of the Paper Book-I. As per column no.2 of this table, in the Applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 proceedings conducted after remand, TPO observed that the assessee had failed to prove that any Technical Support Service or Business Support Service was actually rendered by the AE to the assessee. Ld. DRP upheld this view. Contentions 14. Learned AR for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Support Services were actually received by the appellant, and as such the authorities below have rightly rejected the claim of the appellant for the reasons recorded in the respective orders. Ld. DR has also contended that in view of the Licence agreement already arrived at between the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Copies of certain emails available subsequent thereto are of the FY 2012-13. Available at page 1083-84 (PB-III) is summary of emails said to have been exchanged between the assessee and its AE(s) as regards BSS. Copy of email available at page 1085-96 (PB-III) pertains to certain refunds relating to the year 2012 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voice 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 in this regard. But, there is nothing on record to suggest that any clarification as regards the contents of said invoices was ever sought or was not provided by the assessee. In view of all this, we see no reason for discarding this valuable piece of evidence produced by the assessee. 21. Before Learned DRP, it was submitted on behalf of the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 agreement the AE agreed to disclose and provide to the licensee such KnowHow, which the licensor deemed necessary and useful to the licensee in production of the applicable licensed products. As per para 3.03 Know How furnished by the licensee under the said agreement will be prepared with the same degree of care the licensor was using in the preparation of its own technical information and such KnowHow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 services from the AEs after the time limit agreed under the licence agreement was over. Why an assessee would need fresh employees with technical skills, in presence of employees already helping in availing of said services? Objection of the assessee on this issue has nowhere been discussed by Ld. DRP in the order. The Panel could conduct thorough enquiry in this regard, if so desired. But, no step in this direction appears to have been conducted. Conclusion 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 available at page 587 PB-II) and pages 651, 652, 654 and 680 to highlight that the sales of the assessee had increased. 30. On the other hand, Learned DR has submitted that all the abovesaid three services are different from each other and cannot be said to be intertwined or closely linked to each other, and as such the authorities were justified in adopting Segregation approach in place of Aggregation approach. 31. On this issue, Ld. DR has placed reliance on decision in LG Electronics India (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the form of designs, process, and bills of the material. In this way, cost of registration and maintenance etc. of the newly developed products and intangible items are incurred by the AEs and not by the assessee. 38. Learned DR for the assessee has submitted that the assessee itself relied on 6 comparables and the TPO removed 3 of the comparables and took the best comparables, and as such, there is no merit in the grounds raised on behalf of the assessee as regards transactions of payments pertaining to Royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 this Signoff the Start of Production(SOP)will be executed. The Diesel Engine Part(Exhaust Gas Recirculation Coolers) manufactured and sold by BorgWarner Emissions Systems India Private Limited is Technologically superior products and BorgWarner Spain & USA has got the technical expertise in Producing the products. Thee Technical Support received from BorgWarner, Spain and USA has provided the Indian Company with the Expertise in this Technology and hence the Indian Company was able to cater to the needs of the Automotive Companies in India. The Technological ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). In this Competitive Automotive World Quotes given to Customers to be competitive and accurate. Robust Review by experienced Senior personnel is required. Global Team Guidance to deal with New Customers is required for winning the confidence of the new Customers. Major Automotive Manufacturers in India are Global Companies, they have their decision making centres in USA, Korea and Japan. Guidance from the BorgWarner Global Senior Management Team has resulted in Sales Growth and provided a Flat form for a sustained profitable growth of BorgWarner Emissions Systems India Private Limited. 3. Auto Expo Exhibition Support Support to Show Case the Ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 maintenance of other IT communication systems like E-mail and other intra Net 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 F Manufacturing Engineering Department: 1. New Project Reviews Robust review process is required to closely monitor the New Projects and ensure that we hit the Customer Set Target/Deadlines. The New Projects with both existing and the New Customers require high technical expertise to hit the Customer Targets. BorgWarner Spain & USA's robust reviews helped us to implement new Programs and Projects. The same improved the Revenue stream of the Company. 2. Support for Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 experience. Determination of arm's length price in case of royalty payment for transfer of intangible property is not an easy exercise. Provisions pertaining to arm's length price have been enacted to prevent tax evasion and also to ensure that intercompany or intra group transactions are conducted at fair market value. Ld. AR for the assessee has contended that Revenue authorities are not empowered to question the commercial wisdom of the assessee, the reason being that it is for the assessee to take such decisions which favour the assessee in advancement of its business in this regard reliance has been placed on decision in CIT v. EKL Appliances Ltd, 345 ITR 241(HC), Delhi. In this regard, it would be relevant here to refer to the findings recorded by Co-ordinate Bench of the Appellate Tribunal in the order passed in the first round. In the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned 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 49. One of the contentions raised on behalf of the appellant is that as regards payments of TSS, BSS and Royalty, TPO has passed orders ignoring the earlier orders pertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 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. Herein, Ld. 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 10B(1)(f), taking average of royalty rates paid by the comparables selected by the assessee in the transfer pricing study filed by the assessee. Learned TPO was of the view that the assessee had failed to discharge its primary onus to file details in respect of differentiating the services for royalty from the technical support services. Learned DRP upheld this view while taking into consideration that contention raised on behalf of the assessee regarding inclusion of 3 companies, which had not been paid any royalty, and then excluding said companies while arriving at average for the determination of ALP of royalty. 55. It has been contended on behalf of the assessee that the comparability analysis made by Ld. TPO without any appropriate basis, and that Aggregation approach deserves to be adopted for determining ALP. 56. It finds mentioned in para 15 of the order passed by Ld. TPO that there were six comparables (taken by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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