Rockwell Automation India Pvt. Ltd., ... vs Assessee

M/s. Rockwell Automation India Pvt. Ltd., vs. DCIT, Circle 21 (2), 131, Functional Industrial Area, New Delhi. Patparganj, Delhi - 110 092. (PAN : AACCR3791A) (APPELLANT) (RESPONDENT)

ASSESSEE BY : Shri Nitin Narang, CA REVENUE BY : Shri Ajit Kumar Singh, CIT DR Date of Hearing : 27.03.2015 Date of Pronouncement : 31.03.2015 ORDER

PER GEORGE GEORGE K., JM:

This appeal, at the instance of the assessee, is directed against the

assessment order passed under section 143(3) r.w.s. 144C of the Income-tax

Act, 1961 dated 31.12.2014. The relevant assessment year is 2010-11.

2. The assessee has raised four grounds in its memorandum of appeal.

Ground No.1 & 2 relates to the Transfer Pricing adjustment. Ground No.3

relates to initiation of penalty proceedings. This ground is premature and is not 2 Stay No.57/Del/2015 and ITA No.567/Del/2015

maintainable, hence, ground no.3 is dismissed. Ground No.4 is regarding levy

of interest u/s 234B and 234C. The levy of interest under the above provisions

is mandatory and consequential. Hence, ground no.4 is rejected.

3. Briefly stated, the facts of the case are as follows.

The assessee is engaged in manufacturing/assembling automation and

industrial control products/systems. Apart from manufacturing / assembling,

the assessee company is also engaged in trading in certain products. The

assessee company is also providing services like information technology and

engineering based consultancy services, training etc. During the relevant

assessment year, assessee had undertaken the following international

transactions with its AEs :-

S.No. Nature of Amount Method Tested Comparables Transactions (in INR) Party

i) Export of finished Transactional OP/Sales 4.72% goods 84,03,311 Net Margin as PLI (as per TP Study)

ii) Import of Method 6.88% products/ 2,43,07,41,591 ("TNMM") 3.04% components

iii) Import of capital 56,56,517 2.15% (Working goods Capital Adjusted)

iv) Receipt of 1,63,88,484 services

v) Provision of 1,85,86,840 services

vi) Management fee 7,54,58,373

vii) Cost recharges to Comparable Group Companies 3,45,05,554 Uncontrolled Price Method ('CUP') 3 Stay No.57/Del/2015 and ITA No.567/Del/2015

The Transfer Pricing Officer accepted all the international transactions entered

into by the assessee with its AEs during the year under consideration to be at

arm's length except the transaction relating to payment of management fees

amounting to Rs.7,54,58,373/-, thereby making a TP adjustment of

Rs.7,54,58,373/-. In making the TP adjustment, the TPO stated that no benefit

was availed by the assessee by making such payments to its AEs and in the

absence of any analysis presenting the cost benefit, the payment of management

fees was unwarranted. Pursuant to the TPO's order, the AO issued a draft order

under section 143(3) of the Act. The assessee filed objections to the draft

assessment order to the DRP. The DRP disposed off the assessee's objections

vide its order/directions dated 02.12.2014. The DRP confirmed the TP

adjustment made by the TPO/AO. Pursuant to the DRP's directions, final

assessment order was passed on 31.12.2014.

4. Aggrieved by the TP adjustment, the assessee has filed the appeal before us.

Both the sides agreed that the Transfer Pricing issue is to be restored to the AO/TPO

for fresh consideration in the light of the judgment of the Hon'ble Jurisdictional High

Court of Delhi in the case of CIT-I Vs. Cushman and Wakefield (India) (P.) Ltd.

reported in [2014] 46 taxmann.com 317 (Delhi). It was submitted that similar view

was taken by tribunal in assessee's own cases for AY 2008-09 and 2009-10 in ITA

No.6262/Del./2012 & ITA No.504/Del./2014 (order dated 22.12.2014).

5. We have heard rival submissions and perused the material on record. The

Hon'ble Jurisdictional High Court in the case of Cushman and Wakefield 4 Stay No.57/Del/2015 and ITA No.567/Del/2015

(India) (P.) Ltd. (Supra) held that TPO cannot determine arm's length price of

the payments made by the assessee to its 'AE' at 'nil' for the reason that

assessee did not derive any benefit from services rendered by AE. The relevant

finding of the Hon'ble jurisdictional High Court reads as under:-

"34. The Court first notes that the authority of the TPO is to conduct a transfer pricing analysis to determine the ALP and not to determine whether there is a service or not from which the assessee benefits. That aspect of the exercise is left to the AO. This distinction was made clear by the IT AT in Dresser-Rand India (P.) Ltd v. Addl. ClT (2011) 47 SOT 423/13 taxxmann. com 82 (Mum.):

"8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and. therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what 6 ITA Nos.6262/Del /2012 ITA No.504/D/2014 is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further 5 Stay No.57/Del/2015 and ITA No.567/Del/2015

noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also irrelevant. The AE may have given the same service on gratuitous basis in the earlier period, but that does not mean that arm's length price of these services is 'nil'. The authorities below have been swayed by the considerations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is No. evidence of services having been rendered at all, the arm's length price of these services is 'nil'."

35. The TPO's Report is, subsequent to the Finance Act, 2007, binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise - of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot - after a consideration of the facts - state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of 6 Stay No.57/Del/2015 and ITA No.567/Del/2015

the TPO. This aspect was made clear by the ITAT in Delloite Consulting India (P.) Ltd. v. Dy. CIT/ITO [2012] 137 ITD 21122 taxmann.com 107 (Mum):

"37. On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at "nil", we find that the Bangalore Bench of the Tribunal in Gemplus India (P.) Ltd. v. Asstt. CIT [IT Appeal No. 352 (Bang.) of 2009, dated 20-10-2010] held that the assessee has to establish before the Transfer Pricing Officer that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price.

38. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at "nil" keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at "nil"."

This is a slender yet crucial distinction that restricts the authority of the TPO. Whilst the report of the TPO in this case ultimately noted that the ALP was 'nil', since a comparable entity would pay 'nil' amount for these services, this Court noted that remarks concerning, and the final decision relating to, benefit arising from these services are properly reserved for the AO.

36. In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this Court, must question the commercial wisdom of the assessee, or replace its own assessment 7 Stay No.57/Del/2015 and ITA No.567/Del/2015

of the commercial viability of the transaction. The services rendered by CWS and CWHK in this case concern liaising and client interaction with IBM on behalf of the assessee - activities for which, according to the assessee's claim - interaction with IBM's regional offices in Singapore and the United States was necessary. These services cannot - as the IT A T correctly surmised - be duplicated in India insofar as they require interaction abroad. Whether it is commercially prudent or not to employ outsiders to conduct this activity is a matter that lies within the assessee's exclusive domain, and cannot be second- guessed by the Revenue.

37. At this point, it is noteworthy that the circumstance that the assessee had market research facilities in India does not correspond to the performance of services abroad, especially in relation to client interaction services located outside India - albeit for ultimately sourcing them into the Indian market. The e-mails considered by the ITA T from Mr. Braganza and Mr. Choudhary so far as they deal with specific interaction with IBM by those persons, and relate it to benefits obtained by the assessee, provide a sufficient basis to hold that benefit accrued to the assessee. However, this determination remains unclear and inchoate. The devil here lies in the details. The details of the specific activities for which cost was incurred by both CWS and CWHK (for the activities of Mr. Braganza and Mr. Choudhary), and the attendant benefit to the assessee, have not been considered till date. This must be provided, in addition to a consideration of the ALP vis-a- vis the total cost claimed by these AEs. To this extent, for the consideration of ALP in respect of these transactions, the matter is remanded back to the file of the concerned AO, for an ALP assessment by the TPO, followed by the AO's assessment order in accordance with law."

6. The Hon'ble High Court categorically held that the TPO is to conduct a

Transfer Pricing analysis to determine the arm's length price (ALP) and not to

determine whether there is a service from which assessee has derived benefit or

not. The Hon'ble Court held that the exercise to determine whether assessee had

derived any benefit or not from payment of such management fee is to be 8 Stay No.57/Del/2015 and ITA No.567/Del/2015

examined by the AO and appropriate disallowance u/s 37 is called for. In the

instant case, the TPO had determined the ALP of payment of management fees

at 'NIL' by holding that the assessee did not derive any benefit from services

rendered by the AE. Therefore, keeping in view the dictum laid down by the

judgment of the Hon'ble Jurisdictional High Court, necessarily AO as to

determine whether the assessee has derived any benefit from payment of

professional fees and if any benefit had derived, whether such payment is

commensurate to comparable transaction has to be examined by the TPO. For

the above said purpose, the Transfer Pricing issue is restored to AO/TPO for de-

novo consideration. We order accordingly.

6. In the result, the appeal of the assessee is partly allowed for statistical

purposes.

7. The stay application is dismissed as infructuous since the appeal is heard.

Order pronounced in open court on this 31st day of March, 2015.

Sd/- sd/- (R.S. SYAL) (GEORGE GEORGE K.) ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated the 31st day of March, 2015/TS Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A) 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.