Woco Motherson Advanced Rubber Technologies Limited (“the assessee”) is a joint venture of Woco Franz Joseph Wolf Holding GmbH (“Woco Germany”) (66.67%) and Mothersons Sumi Systems Limited (“MSSL”) (33.33%). The assessee is a manufacturer of high quality rubber parts, rubber plastics parts, rubber metal parts and liquid silicon rubber parts. To undertake the manufacturing process, the assessee has licensed the manufacturing technology by Woco Germany at a NIL price and a technical service agreement with Woco Mothersons Sharjah ("Woco Sharjah") for achieving operational and technical competencies, relating to the know-how and technology transferred licensed to the assessee by Woco Germany.
During the year under consideration, the assessee has entered into several international transactions with its AEs including payment for technical service fees, amounting to INR 13,485,624/- paid to Woco Sharjah.
The transfer pricing officer in the course of assessment has determined the ALP of FTS as NIL owing to the following reasons:
Ø Woco Germany is the owner of all intangibles associated with the manufacturing process adopted by the assessee and that Woco Sharjah does not provide any such services (rendition test) to any other AE;
Ø The transaction has been routed through Sharjah albeit a tax-heaven to reduce overall tax base of the Woco group;
Ø The services rendered by Woco Germany and Woco Sharjah are not distinct (duplicate service) and that Woco Sharjah does not possess requisite experience and expertise to provide for the technical services in the agreement;
Aggrieved by the draft order, the assessee preferred an appeal with the DRP. However, the DRP upheld the order of the TPO citing that same services were received by the assessee from Woco Germany, without any consideration and that the said transaction should have been benchmarked by adopting internal CUP. Thereby, rejecting TNMM adopted by the assessee.
Aggrieved by the same, the assessee filed an appeal with the ITAT.
The tribunal dismissed the approach adopted by the DRP contending the same to be unsustainable in law, as services rendered by an AE to another AE cannot be considered as an internal CUP. The tribunal further noted that while the agreement with Woco Germany was for “use of know how and inventions, the agreement with Woco Sharjah was for “provision for technical assistance required for the use of technology”. The ITAT observed that though the two agreements were interlinked and interconnected, their scope distinct and separate. The tribunal also noted that a lot of emphasis has been placed by the lower authorities on the ownership of intangibles, by way of manufacturing technology, what is essentially overlooked is that provision of technical assistance required for use of technology does not require that the technology, which is to be used in the manufacturing process, is not essentially required to be owned by the service provider for use of technology. Further, the ITAT held, In any event, once there was an agreement between Woco Sharjah and the assessee for rendition of technical services, it was immaterial as to whether the Woco Sharjah was in a position to render these services on its own or with the help of other group entities.
Further in regards to the determination of ALP is concerned, the tribunal held that the ALP of the transaction is to be examined irrespective of the fact whether or not the person entering into transaction is in a high tax jurisdiction or a low tax jurisdiction. The tribunal noted that, base erosion, which is sought to be checked by the transfer pricing provisions in India, is the tax base in India, but then irrespective of whether the recipient is in UAE (Sharjah) or Germany, the withholding rate from fee for technical service is the same i.e. 10%. Also, the Indian transfer pricing cannot be, and is not, concerned with whether the Woco Group, as a whole, has been able to reduce tax burden by locating their units rendering technical services outside Germany. The ITAT also dismissed the revenue’s contention of treating the services rendered by Woco personnel as ‘shareholders activity’ stating the technical services can by no stretch of logic or by any convention, are treated as ‘shareholder services’. Thereby ruling that, the impugned ALP adjustment is devoid of any legally sustainable merits and must stand deleted.