Bobst India Pvt Ltd., Pune vs Assessee

M/s. Bobst India Private Limited, Plot No.82, 126-132, Village Kasar Amboli, Post : Ambadvet, Ghotavade Road, Tal : Mulshi, Dist : Pune - 412 108 .. Appellant PAN No.AAACB7295F

Vs.

DCIT, Circle-1(1), Pune .. Respondent

Appellant by : Shri Rajendra Agiwal Department by : Shri B.C. Malakar Date of Hearing : 29-04-2015 Date of Pronouncement : 29-05-2015

ORDER

PER R.K. PANDA, AM :

This appeal filed by the assessee is directed against the order

dated 23-12-2011 of the CIT(A)-I, Pune relating to Assessment Year

2002-03.

2. Grounds raised by the assessee are as under :

"Based on the facts and circumstances of the case, Bobst India Private Limited ('Appellant')respectfully craves leave to prefer an appeal against the order passed by the Commissioner of Income Tax Appeals

-1 [CIT(A)] under section 250 of Income-tax Act, 1961 ('the Act') dated 23 December 2011 received by Bobst India on 10 May 2012 on the following grounds:

On the facts and in circumstances of the case and in law, the Hon'ble CIT(A):

1. General ground challenging the transfer pricing adjustment of Rs 35,44,063

Erred in confirming the transfer pricing adjustment made by the learned assessing officer ('AO') and the learned transfer pricing officer ('TPO') to the international transactions of the Appellant.

2 2. Erred in considering the arm's length price of recovery made by the Appellant from its associated enterprise towards rendering marketing support services as Rs 1,11,02,491 instead of Rs 1,01,33,420

Erred by not accepting the arm's length price of the recovery made by the Appellant from its associated enterprises towards marketing support services amounting to Rs 1,01,33,420 and consequently increasing the same by an amount of Rs 9,69,071.

3. Erred in applying a mark-up of 8% on the indirect expenses amounting to Rs 8,97,289 even though the same did not pertain to the agency business of the Appellant

Erred in holding that indirect expenses amounting to Rs 8,97,289 incurred by the Appellant are attributable to the agency business and hence the Appellant should have recovered said expenses along with a mark-up of 8% from its associated enterprise.

4. Erred in considering the arm's length price of technician fees paid by the Appellant to its associated enterprise as Nil instead of Rs 25,74,992

Erred by not accepting the arm's length price of technician fees paid by the Appellant to its associated enterprise and considering the same to be Nil as against Rs 25,74,992

5. Non consideration of the invoices/other details submitted by the Appellant and submission filed by the Appellant dated 8 December 2011 in response to the remand report

Erred in not considering the invoices, field services reports, minutes of discussions and the submission dated 8 December 2011 filed by the Appellant in response to the remand report prepared and submitted by the TPO (handed over by the CIT(A) to the Appellant).

6. Penalty proceedings initiated under section 271(1)(c) of the Act based on the transfer pricing adjustment to the income of Appellant not dropped.

Erred on the facts and in circumstances of the case by not dropping the penalty proceedings initiated by the learned AO u/s. 271(1)(c) of the Act, without considering the fact that, adjustment to transfer price is just on account of difference of opinion as to the computation of arm's length price determined by the learned TPO vis-à-vis arm's length price determined by the Appellant".

3. At the time of hearing, the Ld. Counsel for the assessee did

not press grounds of appeal No.2, 3, & 6 for which the Ld.

Departmental Representative has no objection. Accordingly, the

above grounds are dismissed as 'not pressed'. Grounds of appeal

No.1 being general in nature is dismissed.

3

4. Facts of the case, in brief, are that the assessee company

filed its return of income on 31-10-2002 disclosing total income of

Rs.67,87,770/-. The Assessing Officer noted that the assessee

company was originally incorporated as Bobst (India) Sales and

Services Private Limited on 14-08-1995 under the provisions of the

Companies Act, 1956 and it changed its name to Bobst India

Private Limited on 10-05-2000. The assessee company is part of

the multinational group known by the name 'Bobst' world over. It's

headquarter is situated in Switzerland and are foremost supplier of

products and services for the folding carton, corrugated board and

flexible packaging industries. Bobst SA manufactures mainly

production lines for the printing and converting of holding carton

and the corrugated board for packaging products, together with

electronic equipment for print to print register control and other

products of quality assurance. The group comprises of more than

30 affiliated companies around the globe. The Indian subsidiary i.e.

the assessee is engaged in marketing the Bobst machines and

spare parts for commission as well as trading of Bobst machines in

India, Sri Lanka and Nepal. Bobst India provides a wide range of

support services e.g. installation, breakdown (customer support

services) to customers on behalf of group The Assessee is a wholly

owned subsidiary of Bobst' Group SA, ('Bobst SA').

5. The Assessing Officer referred the matter to the TPO

u/s.92CA(1) to determine the Arm's Length Price of the

international transactions.

6. During the course of TP assessment proceedings the TPO

noted that the company has paid an amount of Rs.25,74,992/- to

Bobst as payment of technical fees. On being questioned by him,

the assessee submitted that during the relevant previous year the 4

assessee had paid an amount of Rs.25,74,992/- as technical fees

to Bobst. It was submitted that one of the activities of the assessee

is to undertake installation and commission of machines. This

activity is independent of the activity of agency as envisaged in the

agency agreement. The assessee received its charges directly from

its customers. In this activity Bobst has no role to play. It was

submitted that during the impugned assessment year, the assessee

had done installation work for M/s. Borkar Packaging Pvt Ltd., in

respect of Machine No. Media 100-A2 No.0341 069 02 sold to them

for which the assessee had received consideration vide Invoice

No.BIN/SET/I/DAA dated 09-12-1999 for Rs.19,05,000/-. Since

the said customer was experiencing problems in the performance

of the said machine, the assessee referred the matter to Bobst who

are the supplier of the said machines. It was opined by Bobst that

the problems were related to the defects/shortcomings in the

installation and had nothing to do with the manufacturing

defects/shortcomings. Since the installation work was done by the

assessee, it was submitted that it was the legal duty of the

assessee to rectify the defects/shortcomings in the installation job.

Since the assessee did not have the necessary technical expertise,

therefore, the assessee had sought help from Bobst in this regard.

Accordingly, Bobst deputed their technical experts who visited the

site and rectified the defects in installation for which the assessee

has paid the technical fees amounting to Rs.98,211.79. Since the

assessee had solved the problems on its own cost, the said

customer was very happy and he purchased one more machine

from the assessee and also entrusted the installation and

commission job of the said machine to the assessee whereby the

assessee earned sizeable income. The assessee also received

installation charge of Rs.16,50,000/- from the said customer vide 5

Invoice No.BIN/01/SER/I/AVE dated 16-03-2001. Since this was

the new model and the assessee had no experience of erection,

start up and training of this machine, therefore, the assessee

sought help from Bobst and paid charges of Rs.11,56,921.74.

Similarly, the assessee had undertaken to provide to ITC Ltd.

instruction and training of Gravure Printing Unit which is a

Lemanic machine and which was a new machine in terms of

technology and speed. This was the first machine in India and still

the only machine in India. For providing the services the assessee

received the consideration of Rs.17,26,460/- under Invoice No.BIN-

01/SER/I/AAU dated 08-01-2001. Since the assessee did not

have the full expertise, therefore, the assessee availed the services

from Bobst for which Bobst had raised 3 invoices in all amounting

to Rs.13,19,859/-.

7. However, the TPO was not satisfied with the above

explanation given by the assessee and considered the Arm's Length

Price of the technicians paid at Nil as against Rs.25,74,992/- due

to the following reasons :

(i) The company did not requisition the services of technicians, by issue of any request letter/purchase order;

(ii) Bobst SA had supplied the machineries to the companies, whose sites the technicians had visited.

(iii) The company did not submit the copy of invoices issued by Bobst SA to ITC Ltd. and Borkar Packaging, therefore, it could not be verified that what are the terms and conditions of the sales;

(iv) From the invoices of Bobst SA, for technician, it is seen that the Bobst SA charged Bobst India at CHF 103 per hour. This amounts to charge of Rs.2,884/- per hour. The working hours are charged at 100% of this amount. Some working hours are charged at 125% of this amount. Some working hours are charged at 150% of this amount. The travel hours are charged at 100% of this amount and other travel hours are also charged at 150% of this amount per hour. Bobst SA also recovered the daily allowance, hotel expenses and other travelling expenses.

6 Bobst SA, sells the machines to the Indian customers directly, the details of sales made by Bobst SA during the financial year are not submitted. The responsibility for servicing the warrantee for the machines is of Bobst SA, but the services are being rendered by Bobst India on behalf of Bobst SA. Bobst SA is being charged Rs.5,000/- for a single visit made by technician of Bobst India. The contrast in charging is obvious, whereas Bobst India is being charged at Rs.2,884/- per hour, travelling, hotel and daily allowance are being charged separately, whereas, Bobst SA is paying only Rs.5,000/-, which might involve visit of two days by the technician of Bobst India.

(v) The company submitted the copy of invoices of raised by Bobst India to Borkar Packaging and ITC Ltd. The invoice to Borkar Packaging Pvt. Ltd., for sales and services is of Rs.1,650,000/-. This invoice is dated 16.03.2001. Another invoice to Borkar Packaging Pvt. Ltd. is dated 01.08.2001, for Rs.1,321,000/-, this invoice is for installation of Bobst Media 45 II machine. From the details of technical fees paid by the company, it is seen that, the foreign technician did not visit the Borkar Packaging during the installation of these machines, but they visited during the installation of SP102 and Media 100 Machines. Due to this, the company could not establish that, the foreign technician visited to the sites, for which it raised invoices to Borkar Packaging. Similarly, for ITC Ltd., the company submitted the invoice dated 08.01.2001 for Sales and Services of Rs.1,726,460/-. From the details filed, it is seen that the foreign technician visited the site of ITC Ltd. during March 2001, September 2001 and November 2001, which is subsequent to the date of raising the invoice. Therefore, the receipt from ITC Ltd vide invoice dated 08.01.2001, does not correspond to the foreign technician visit to ITC Ltd. site

(vi) The Bobst SA supplies the machines directly to customers and considering the client like ITC Ltd. and Borkar Packaging, the Bobst SA might be sending its technicians to the customers, for trouble shooting and which might be a part of obligation during warrantee period or to assure the client, for Bobst SA continued assistance.

The company has failed to demonstrate that the services of technicians of Bobst SA, were requisitioned by it for its business and also could not prove that their visit has resulted into income to the company, for which it is required to make the payment.

Considering the above, the Arm's Length Price of the Technicians Fees paid is computed at Nil as against Rs.2,574,992/-."

8. During the course of assessment proceedings the Assessing

Officer made addition of Rs.35,44,063/- as per the order of the

TPO which included this amount of Rs.25,74,992/- being payment

of technical fees. Since the other issue in the order of the TPO

relating to reimbursement towards marketing support services 7

amounting to Rs.9,69,071/- is not in dispute before us, therefore,

we are not concerned with the same.

9. Before CIT(A) the assessee strongly challenged the

adjustment made by the TPO on account of the technicians fees.

The assessee submitted the copies of the agency agreement

between the assessee and Bobst along with expenditure details as

well as invoices and correspondences. It was argued that the

finding of the Assessing Officer regarding the disallowance of

payment for technical services to Bobst amounting to

Rs.25,74,992/- was incorrect.

10. Based on the various submissions made by the assessee the

Ld.CIT(A) called for a remand report from the TPO. After the said

remand report has received a copy of the same was given to the

assessee for its comments. After considering the remand report

and the submission of the assessee to such remand report the

Ld.CIT(A) upheld the addition made by the Assessing Officer by

observing as under :

"5.5. I have carefully considered the facts of the case and the law as are apparent from records. It is an undisputed fact that the appellant company is the 100% subsidiary of Bobst S.A. Switzerland which is the leading manufacturer provider for folding carton, corrugated board and industries etc. The appellant company was incorporated in this background in India on 14.8.1995 to provide sales and support services in and neighboring countries. However, the Assessing Officer/TPO noted while examining the payment of Rs.25,74,992 as fee for technical services to the holding AE company u/s 92CA(3) that the payment is not allowable and the ALP of this claimed service is Nil, The Assessing Officer and the TPO has noted in the respective orders that the appellant did not provide the necessary evidences during the course of assessment/ TPO analysis, by which it could be hold that the claim of the appellant for the payment for services could be allowed by treating the same as ALP. The TPO has specifically noted that the appellant has agreed as per the agreement entered into with the Bobst S.A. that it will identify third customers in its territory but the sales would be directly madevide the Bobst S.A. to the customers. However, the installation commissioning services are to be received by the appellant company. It has been claimed by the appellant that the services of technicians were obtained for providing the services from Bobst S.A, for which the payment has been made. The Assessing 8

Officer / TPO called for relevant details like sales invoice etc, to verify the terms of the sale, as to what part of the service is the obligation of the Bobst S.A. or the appellant company and what is the period of warranty, nature of warranty etc. Similarly who decides what will be chargeable as installation, Commissioning etc. As these details were not made available to the AO /TPO, it was held that the claim of technical services cannot be allowed. Similarly, the Assessing Officer / TPO also pointed out the difference in the charging of rates on the appellant company by the Bobst S.A. and the appellant on the client. The AO /TPO also pointed out the mismatch in the period of arrival of the foreign technician and the service bill raised by the appellant. For all the above reasons, the AO /TPO held the ALP for this service as Nil. In the remand report also, the AO /TPO has pointed out specifically that the appellant has not brought any new fact on record based on which the inference can be altered. The appellant in the rejoinder submitted on the remand report has claimed that the fees held payable by the technicians of Bobst S.A, are relating to the services provided to Borkar Packaging, ITC Ltd. etc. In respect of the mismatch of time for the bills raised by the appellant on the client and with the visits of the foreign technicians, it has been stated that the bills raised on clients is for annual maintenance contract and the visits are as and when required.

The appellant has therefore, tried to justify the business nexus for the above payment to Bobst S.A. After carefully considering the materials available on record, I find that the appellant has not provided the details necessary for the issue in hand. The issue was whether the services rendered by the technicians of the Bobst S.A, to the clients the after the sale of the machines were the obligation of the Bobst S.A. or the appellant company. Similarly the payments received from client and the payments to Bobst S.A. are at Arm's Length or not. This is not a case, where appellant purchases goods and sales as per their own policy and decisions. It has to be understood that the appellant and Bobst S.A. are associate enterprises and Bobst S.A. to whom the impugned payment has been made is the holding company having full control on the affairs of the appellant company. In that context, it is the responsibility of the appellant that the roles and responsibilities, privileges and obligations have to be explained and demonstrated to be based on the principle of independence or arm's length. The details and evidences submitted by the appellant before the AO /TPO are found to be lacking on this account.

In view of the above, the claim cannot be admitted and the finding given by the AO /TPO that the ALP for the technical services fee will be Nil in this regard is upheld. Ground No. 4 is treated as dismissed. The appellant has relied on certain decisions quoted supra in their submissions 8.12.2011. It is found that the above referred cases related to claim of business expenses on the basis of commercial expediencies. The Courts in the aforesaid cases have only held that the commercial decisions of assessee cannot be questioned by sitting in the armchair of the assessee as to how the businesses are to be run. In the present case, there is no issue of this nature involved. The issue involved is whether the payment made to the AE holding 100% shares of the assessee is at Arm's Length or not and if the same is not at Arm's Length, then what is the value at the Arm's Length. In the present case, the AO /TPO has held the ALP of this service at Nil and I do not find any materials available asking for any interference in this finding. Ground No. 4 therefore, is dismissed."

9 11. Aggrieved with such order of the CIT(A) the assessee is in

appeal before us.

12. The Ld. Counsel for the assessee drew the attention of the

Bench to page 70 of the appeal memo which gives summary of

invoices raised by Bobst India on customers and invoices raised by

Bobst on Bobst India, the details of which are as under :

Bobst India Private Limited ("Bobst India') For A.Y. 2002-03 Summary of invoices raised by Bobst India on customers

Sr No invoice No Invoice Name of the Description of machine Nature of service Amount (Rs) 1 BIN/SER/I/DAA 09-Dec-99 Ms/ Borkar Machine No Media Installation and 1,905,000 Packaging Pvt Ltd 100-A2 No 0341 069 commissioning of 02 machine 2 BIN-01/SER/1/AVE 16-Mar-01 Ms/ Borkar SP 102-BMA No 0571 Installation and 1,650,000 Packaging Pvt Ltd 248 06 commissioning of machine - Erection, start up and training

3 BIN-01/SER/1/AAU 08-Jan-01 ITC Ltd Gravure Printing Unit Instruction and training 1,726,460 (Lemanic Machine) in relation to Lemanic machine

TOTAL 5,281,460

Summary of invoices raised by Bobst SA on Bobst India Sr No Invoice No Invoice Name of the payee Description Nature of Amount Amount 1 401060 14-May-01 Bobst SA Machine No Media 100-A2 Installation and 3,631 98,212 No 0341 069 02 commissioning of machine 2 401061 14-May-01 Bobst SA SP 102-BMA No 0571 248 Installation and 42,770 1,156,922 06 commissioning of machine -

Erection, start up and training

3A 334735 17-Dec-01 Bobst SA Gravure Printing Unit Instruction and 16,149 1,319,859 (Lemanic Machine) training in relation to Lemanic machine

3B 334658 17-Dec-01 Bobst SA 20,582

3C 335466 09-Jan-02 Bobst SA 8,600

TOTAL 91,732 2,574,993 10

12.1 The Ld. Counsel for the assessee referring to pages 70 to 84

of the paper book drew the attention of the Bench to the copies of

the invoices raised by Bobst on Bobst India.

12.2 He submitted that the TPO/Assessing Officer without

appreciating the proper facts held that services of technicians of

Bobst for which Bobst India paid technical fees were not required

and accordingly considered the Arm's Length Price of technical fees

at NIL which has been upheld by the CIT(A). He submitted that the

assessee Bobst India had properly given response to the questions

of the TPO. It had also submitted the copies of invoices raised by

Bobst India on third party customers, copies of invoices raised by

Bobst on Bobst India, field service report, minutes of discussion

with technicians etc., the details of which are enclosed as per

pages 70 to 84 of the appeal memo. Without prejudice to the

above, he submitted that the questions asked by the TPO like

formal requests raised by Bobst India to Bobst, itinerary of foreign

technicians who visited India etc., are irrelevant and are not really

required in determining the Arm's Length Price and the

international transactions.

12.3 As regards the allegation of the TPO that different rates per

hour are charged by Bobst to Bobst India and the payment of DA,

hotel expenses and other travelling expenses of technicians

recovered from Bobst India, the Ld. Counsel for the assessee

submitted that all these things are unwarranted for the TPO to ask

for. He submitted that on the basis of reasonable presumption and

assumption and in absence of any tangible material brought on

record, the TPO made the adjustment which has been upheld by

the CIT(A). Since Bobst India was engaged by third party

customers for installation, commissioning, training etc., and since 11

Bobst India did not have required technical expertise to solve the

problems faced by the customer after installation of machines it

took assistance from Bobst. Further, Bobst India earned an

amount of Rs.52,81,460/- for rendering said services which it

would not have been able to earn without the assistance of Bobst

and after giving the technician fees the assessee has earned

sizeable profit of Rs.27.06 lakhs.

12.4 Referring to the decision of the Pune Bench of the Tribunal

in the case of Honeywell Turbo Technologies Ltd. for A.Y. 2006-07,

a copy of which is placed at pages 35 to 42 of the paper book he

submitted that under somewhat similar circumstances the

Tribunal has deleted the addition made by the Assessing

Officer/TPO to the Arm's Length Price where adjustment was made

with respect to payment of assignment fees to the AE. He also

relied on the following decisions :

1. ITW India Ltd. Vs. ACIT - ITA No.521/Del/2013 (Delhi ITAT).

2. R.A.K. Ceramics Pvt. Ltd. Vs. DCIT - ITA No.1492/Hyd/2014 (Hyderabad ITAT)

3. Cushman and Wakefield (India) Pvt. Ltd. Vs. CIT - ITA No.475/Del/2012 (Hon'ble Delhi High Court.

13. The Ld. Departmental Representative on the other hand

heavily relied on the order of the CIT(A).

14. We have considered the rival arguments made by both the

sides, perused the orders of the Assessing Officer and the CIT(A)

and the Paper Book filed on behalf of the assessee. We have also

considered the various decisions cited before us. As mentioned

earlier the assessee during the year has received an amount of Rs.

52,81,460/- from customers towards installation/commissioning

of certain machineries. Since it did not have the requisite expertise 12

for installation and commissioning of these machines it required

the services of Bobst, i.e. AE who have raised bill of Rs.25,34,992/-

on the assessee. It is the case of the Revenue that since the

assessee has agreed as per the agreement entered into with Bobst

that it will identify third party customers in its territory but the

sales would be directly made by Bobst and install machines,

therefore, in absence of any satisfactory details by the assessee the

responsibility for servicing, warrantee etc. for the machines is that

of the assessee and not that of Bobst. Therefore, the TPO

determined the payment of Rs.25,74,992/- being fees for technical

services to the holding AE company as not allowable. It is the

submission of the Ld. Counsel for the assessee that it has already

filed the necessary details which shows that the assessee company

was engaged by third party customers for installation,

commissioning, training etc. and since it did not have the requisite

man power/expertise, it took the help of Bobst for which it was

required to pay the technical fees to the AE amounting to

Rs.25,74,992/-. Further, it has also earned substantial amount

since as against the amount of Rs.52,81,460/- received by the

assessee from various customers towards installation and

commissioning of machines. It has paid only an amount of

Rs.25,74,993/- to Bobst and in the process have earned profit of

Rs.27,06,467/-, (i.e. Rs.52,81,460 - Rs.25,74,993). According to

the Ld. Counsel for the assessee without availing of the services of

the AE the assessee could not have met its obligation and earned

the profit for the impugned assessment year as well as bright

future for getting orders from other customers. 13

14.1 We find merit in the above submission of the Ld. Counsel for

the assessee. One of the activity of the assessee company is to

undertake installation and commissioning of machine is not in

dispute. The assessee in the instant case has received an amount

of Rs.52,81,460/- from various customers on account of

installation and commissioning of machines, training etc. the

details of which are already given at para 12 of the impugned

order. Similarly, the assessee has paid an amount of

Rs.25,74,993/- to Bobst on the basis of bills raised by them for

installation of the aforementioned machines. The submission of

the assessee before the lower authorities that it did not have the

necessary expertise/technical persons for the above installations

has not been controverted by the Revenue. It is not the case of the

Revenue that the assessee had the necessary technical support

and despite having that it had availed of the services of the AE and

in turn has paid the amount to the AE. It is also not the case of

the Revenue that no services are rendered by AE. The various bills

raised by Bobst on Bobst India were already there before the

revenue authorities which shows the nature of services rendered.

14.2 We find the Pune Bench of the Tribunal in the case of

Honeywell Turbo Technologies Ltd. vide ITA No.765/PN/2012 order

dated 31-12-2013 for A.Y. 2006-07 while deleting the payment of

assignment fees by Honeywell Turbo Technologies Ltd. to HTS has

observed as under :

"9. In this context, we have perused the judgment of the Hon'ble Delhi High Court in the case of EKL Appliances Ltd. (supra). In the said case, assessee had entered into an international transaction by way of payment of brand fee/royalty to its associated enterprise under an agreement. The Revenue was required to determine the arm's length price of the transaction. While doing so, the TPO noticed that assessee has been incurring losses year after year, and considering such perpetual losses the TPO held that the payment of royalty did not appear justified as the technical knowhow/brand fee 14

agreement with the associated enterprise had not benefited the assessee in achieving profits from its operations. For the said reason, the TPO held that the brand fee payment made by the assessee to the associated enterprise was unjustified and the arm's length price of the transaction should be taken as 'NIL'. The Hon'ble High Court disapproved the action of the TPO, and after referring to the OECD's transfer pricing guidelines observed that the TPO was expected to examine the international transactions as he actually found them. In our considered opinion, the aforesaid parity of reasoning laid down by the Hon'ble Delhi High comes into play in the present fact-situation also, as our following discussion would show.

10. In the case before the Hon'ble Delhi High Court, the TPO had applied the CUP method while examining the payment of brand fee/royalty, which also is the position in the case before us. The Hon'ble High Court referred to the OECD's "transfer pricing guidelines" for multinational enterprises and tax administrations, and reproduced paras 1.36 to 1.41 of such guidelines, which provide for "recognition of the actual transactions undertaken". Thereafter, the Hon'ble High Court opined as under :-

"17. The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage restructuring of legitimate business transactions. The reason for characterisation of such restructuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured.

18. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form; and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner."

"11. From the aforesaid, it follows that the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. Thus, the TPO should not disregard the actual transaction or substitute other transactions for them. The two exceptions which have been prescribed are (i) where the economic substance differs from its form; and, (ii) where the form and substance of the transaction is the same but arrangements made in relation to the transaction, viewed in its totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner.

12. In this background, we have perused the order of TPO dated 30-010-2009 (supra). The TPO considered the transaction of payment of assignment fee by the assessee to HTS as consideration of having obtained the contract for supply of Turbo charges to Tata Motors Ltd. In the course of determining its arm's length price, the TPO has come 15

to a finding that the assessee-company had no capacity to perform the rights assigned to it in terms of the agreement. Therefore, as per his perception, the transaction entered into by the assessee with HTS for payment of assignment fee was void. In this context, the following discussion in the order of TPO is relevant to peruse:-

"In view of the above, arm's length price of the international transaction relating to payment of assignment fees is considered as NIL. The assessee company has no capacity to perform in terms of agreement the rights of which purportedly been assigned to the assessee and, therefore, it is clear that there are no assignment of any worthwhile rights which either have been assigned to the assessee or which having been assigned to it, the assessee has the capacity to discharge. Further, failure on the part of the assessee to benchmark the same leads to the inevitable conclusion that the arm's length price of the international transaction relating to payment of assignment fees can only be taken as NIL."

13. Ostensibly, the TPO has disregarded the assignment agreement with HTS as according to him, there was no capacity on the part of the assessee to have carried out its share of functions envisaged in the assignment agreement. In our considered opinion, the TPO was expected to examine the internal transaction of payment of assignment fee as he actually found it or in other words, as it was transacted between the parties; and, then make suitable adjustments, if required in order to determine its arm's length price, but it was impermissible for him to treat the agreement as void based on his own understanding of the commercial feasibility of the transaction.

14. The Hon'ble Delhi High Court has also emphasised that the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises except in two exceptions which we have discussed above. In the facts of the present case, we are unable to appreciate as to how the same falls into any of the aforesaid exceptions.

15. At this point, it may also be relevant to observe that in the course of hearing, it was stated by the appellant that the impugned assignment agreement was also before the Authority for Advance Rulings (AAR) with regard to the taxability of the assignment fee in India, on being approached by HTS. The AAR in its order dated 07-10- 2005 concluded that none of the clauses of the proviso to section 245R(2) are attracted in the present case. Notably, one of the clauses in the proviso to section 245R(2) of the Act stipulate that the transaction should not be designed prima-facie for avoidance of income-tax. We are only pointing out this to say that such agreement was not found to be in-genuine or non-bonafide or as being designated for avoidance of the taxes by the AAR. Thus, the action of the TPO becomes untenable.

16. Therefore, considered in the context of OECD guidelines which have been referred to by the Hon'ble Delhi High Court in the EKL Appliances Ltd (supra), the impugned action of the TPO does not fit into the exceptions which would empower him to disregard the actual transaction as manifested by the assignment agreement with HTS. Therefore, the inference of the TPO to disregard the assignment agreement, in our view, is beyond his jurisdiction, whereby, the TPO ought not to have ventured into the commercial rationale and validity of the transaction. Quite clearly, the aforesaid action of the TPO would not render the assessment order erroneous in so far as it is prejudicial 16

to the interest of the Revenue within the meaning of section 263 of the Act in so far as it relates to the payment of the assignment fee to HTS. The Commissioner, therefore, has erred in directing the Assessing Officer to make an assessment on the said basis."

14.3 Considering the totality of the facts and circumstances of the

case and relying on the decision of the Pune Bench of the Tribunal

in the case of Honeywell Turbo Technologies Ltd. cited (Supra) we

are of the considered opinion that the Ld.CIT(A) was not justified in

not accepting the Arm's Length Price of Technical Fees paid by the

assessee to its AE at Rs.25,74,993/-. Accordingly, the order of

Ld.CIT(A) on this issue is set aside and the grounds of appeal No. 4

& 5 by the assessee are allowed.

15. In the result, the appeal filed by the assessee is partly

allowed.

Pronounced in the open court on 29-05-2015.

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

satish Pune Dated: 29th May, 2015

Copy of the order forwarded to :

1. Assessee 2. Department 3. CIT(A)-I, Pune 4. CIT-I, Pune 5. The D.R, "B" Pune Bench 6. Guard File

By order

// True Copy // Senior Private Secretary ITAT, Pune Benches, Pune