PPG Coatings India Pvt. Ltd. Vs DCIT (ITAT Mumbai)
It was submitted that SAP license was purchased by the AE at Netherland in bulk quantities. A copy of the agreement entered into between the said AE and the third party along with the copy of the debit note raised by the AE was submitted. It was submitted that purchase of SAP license by the AE was to avail volume discounts. Out of the bulk purchase of SAP license made by the AE, the assessee was allotted 11 SAP professional licenses and one employee user license. It was submitted that the said transaction was benchmarked under Comparable Uncontrolled Price [CUP] method, since the cost of the third party licenses have been allocated based on the number of users. Comparative details of allocation of SAP license cost charged to the assessee with a comparison with the SAP price list was also submitted.
We have gone through the same and we find ourselves in agreements with the submissions of the Ld. Counsel of the assessee that requisite details were submitted and authorities below have failed to consider the same and have held that proper details were not submitted after having held that there was no benefit to the assessee from the said license. For all these reasons as discussed above, we set aside the orders of the authorities below and decide the issue in favour of the assessee.
As regards the issue of cost sharing, the observations of the authorities below that the details have not been submitted is similar to the one on the issue of documentation of SAP discussed as above. Our observation as above is applicable here also. We are in agreement the details were in fact submitted and authorities below have erred in ignoring the same. In this regard, the submissions before the AO/TPO summarized as under:-
It was submitted that assessee has availed following services from the AE under the cost sharing expenses:
Central Support Services, Research and Development Services for protective coating and marine, Marketing and support service for protective coating and marine, Centralized IT service. It was submitted that the said services were availed by the assessee to facilitate management and conduct of its business more efficiently. The cost allocated to the assesse was based upon the application of scientific allocation keys and was governed by the relevant agreements. The transaction was benchmarked under CUP, as the expenses were reimbursed on a cost to cost basis. Copies of relevant cost sharing agreements were also submitted to the TPO. A report of factual findings issued by the Price Water house coopers certifying the cost allocation methodology in connection with the cost sharing agreement was also submitted. Hence, adequate details of working of cost sharing expenses were submitted before the authorities below.
We have examined the submission and the records, We are in agreement that authorities below have erred in holding the ALP at nil on the ground that relevant documents have not been submitted. In our considered opinion, the assessee has discharged the onus caste upon it. The case laws as referred above are duly applicable on this issue also. The determination of ALP at nil in this regard also is not sustainable on the touchstone of the aforesaid case laws from the Hon’ble jurisdictional High Court in the case of Lever India Exports Ltd. (supra) and Johnson and Johnson Ltd.(supra) as the determination of ALP at nil without following one of the methods prescribed u/s. 92C r.w.Rule 10B has been held to be non sustainable. Accordingly, we set aside the orders of the authorities below, and decide the issue in favour of the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal by the assessee is against the order of the Assessing Officer dated 12.12.2011 pursuant to direction of Dispute Resolution Panel (DRP) dated 9.8.2012 pertaining to assessment year 2008-09.
2. Grounds of appeal read as under :
1. That on facts and circumstances of the case and in law the Ld AO erred in assessing the income of the Appellant under the normal provisions of the Act at Rs 6,72,57,997 against returned income of Rs 3,99,18,428based on the directions received from Hon’ble Dispute Resolution Panel (“DRP”) upholding the adjustment to the transfer price proposed by the learned Transfer Pricing Officer (“Ld TPO”).
2. That on facts and circumstances of the case and in law the Ld AO/TPO erred in proposing and the Hon’ble DRP further erred in upholding an adjustment of Rs 2,73,39,569in respect of the international transactions pertaining to (a) payment for SAP license, (b) cost sharing expenses, and (c) reimbursement of expenses (expenses incurred)alleging that the same to be not at arm’s length in terms of the provisions of Sections 92C(1) and 92C(2) of the Act read with Rule 10D of the Income-tax Rules, 1962 (“the Rules”).
3. That on the facts and circumstances of the case and in law the LdAO/ TPO/ DRP grossly erred in computing the arm’s length price at NIL in relation to payment for SAP license, cost sharing expenses, and reimbursement of expenses (expenses incurred)disregarding the provisions of Section 92C read with Rule 10D of the Rules and ignoring the methods prescribed under the Act.
4. That on the facts and circumstances of the case and in law, the LdAO/ TPO/DRP has erred in making a transfer pricing adjustment in relation to the payment for SAP license and cost sharing expenses allegedly ignoring the OECD Transfer Pricing Guidelines, other international and domestic jurisprudence.
5. That on facts and circumstances of the case and in law the Ld AO/TPO/DRP has erred in not appreciating that even after considering payment of SAP license (depreciation), cost sharing expenses and the reimbursement of expenses (expenses incurred) the appellant’s margin on a whole entity basis on the application of Transactional Net Margin Method (“TNMM”) was higher than the margin earned by the comparable companies.
6. That on facts and circumstances of the case and in law Ld AO/TPO/ DRP has also erred in confirming the payment for SAP license as revenue in nature and disallowing the entire payment cost.
6.1 That on facts and circumstances of the case and in law Ld AO/ DRP had failed to appreciate the business and commercial need by appellant company for implementation of SAP software and erred in upholding the TPO’s contention that the cost of SAP license was merely imposed by parent company on the appellant.
6.2 That on facts and circumstances of the case and in law Ld AO/TPO/ DRP had erred in brushing aside the additional evidences filed by the appellant company documenting the benefits derived by it from the implementation of SAP software.
6.3 That on facts and circumstances of the case and in law Ld AO/ TPO/ DRP erred in not considering the details of cost incurred by the Parent Company, the basis of cost allocation and the third party supporting evidences placed on record by the appellant company in connection with the purchase of SAP license.
7. That on facts and circumstances of the case and in law Ld AO/TPO/ DRP failed to appreciate the business and commercial need for the appellant for availing the cost sharing services.
7.1 That on facts and circumstances of the case and in law the Ld AO/TPO/DRP has failed to take cognizance and has merely brushed aside the additional documentary evidences which have been placed on record by the appellant for the cost sharing expenses clearly demonstrating that intra group services have been received by the appellant company and the consequent benefit from availing the services.
7.2 That on facts and circumstances of the case and in law the Ld AO/ DRP has failed to appreciate that the cost recharge was determined based on scientific allocation keys and as per the cost sharing agreements entered into between the appellant and its associated enterprises (“AEs”). 7.3 That on facts and circumstances of the case and in law the Ld AO/ DRP had erred in ignoring the detailed cost allocation workings placed on record by the appellant company in connection with determination of the cost sharing expenses.
8. That on facts and circumstances of the case and in law the Ld DRP has not taken cognizance of the responses filed against the remand report placed on record even after a rectification being filed by the appellant under Rule 13 of the Income Tax (Dispute Resolution Panel) Rules, 2009.
9. That on the facts and in circumstances of the case the Ld AO has erred in initiating penalty proceedings against the appellant company.
Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant.”
3. The assessee has further filed additional grounds as under :
1:0 Re.: SAP software and cost sharing expenses:
1:1 That on facts and circumstances of the case and in law Ld DRP had erred in brushing aside the additional evidences filed by the appellant company documenting the benefits derived by it from the implementation of SAP software, even while passing the rectified Dispute Resolutions Panel (‘DRP’) directions dated 30 October 2012 (‘rectified DRP directions’).
1:2 That on facts and circumstances of the case and in law Ld DRP had erred in not considering the details of cost incurred by the Parent company, the basis of cost allocation and the third party supporting evidences placed on record by the appellant company in connection with the purchase of SAP license, even while passing the rectified DRP directions.
1:3 That on facts and circumstances of the case and in law Ld DRP has failed to take cognizance and has merely brushed aside the additional documentary evidences which have been placed on record by the appellant for the cost sharing expenses clearly demonstrating the intra group services have been received by the appellant company and the consequent benefit from availing the services, even while passing the rectified DRP directions.”
4. Brief facts are as under :
SigmaKalon Marine & Protective Coatings BV, Hollands is holding company of the assessee. Sigma Coatings BV Hollands holds directly or indirectly, shares carrying not less than 26% of the voting power in SigmaKalon India Private Limited and other Sigma group entities. Thus these 21 companies became associated enterprise of the assessee company u/s. 92A(2) of the LT. Act.
International transactions:-
During the relevant previous year, the assessee has entered into the following international transactions.
