TaxTMI 
TaxTMI 
2013 (11) TMI 1238
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....12, according to which, ground No.1 being general in nature; it does not survive for adjudication. The remaining grounds are reformulated as under: "That the AO/TPO erred: (2) in disallowing Rs. 3,14,830/- being proportionate lease charges in respect of leasehold land; (3) in disallowing Rs. 4,16,978/- being expenditure incurred on gifts; (4) in disallowing Rs. 2,50,68,560/- on account of provision for slow moving and obsolete inventory made by the assessee in respect of some items in accordance with the method of accounting consistently followed by it; (5) without prejudice, the AO/DRP erred in not allowing a deduction of Rs. 3,67,03,644/-being provision for slow moving and obsolete inventory reversed during the year and credited to P & L account; (6) in making an ad-hoc disallowance of Rs. 10,60,000/- out of account of workmen and staff welfare expenses; (7, 8, 9 & 11) in making a transfer pricing adjustment of Rs. 152,44,00,000/- [Rs.140.26 crores + Rs. 12.18 crores]; - by reducing an expenditure of Rs. 140,26,00,000/- on purchase of CKD Kits; - by making an addition of Rs. 12,18,00,000/- in respect of its Tech. Centre operations; Additional ground: - by ma....
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....rguments of the cases were concluded by the rival parties on 15.3.2013. Subsequently, on 15.5.2013, the Revenue came up with the copies of findings of the Hon'ble Mumbai Benches in the cases of (i) Onward Technologies Ltd. in ITA NO.7985/Mum/2010 and (ii) Aurionpro Solutions Ltd. in ITA NO.7872/Mum/2001 with a plea that since the issue of determining of the 'tested party' under dispute is covered by the above findings and in favour of the Revenue, the same requires to be considered while deciding the present appeals. In order to facilitate the assessee to have its comments, if any, on the case laws on which the Revenue has placed its reliance (supra), the cases were scheduled for final hearing on 7.6.2013 and finally the case was re-heard on 27.06.2013. 5. Reverting back to the main issue, during the course of hearing, the assessee vide its application dated 2.11.2012 sought the permission of this Bench to produce additional evidence on the premise that during the hearings before the TPO & DRP, un-audited analysis of the product line profitability schedules prepared by the assessee including the figures of yearly sales and operating profit were submitted. One of the ob....
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....the assessee. Accordingly, the AO had, in his order u/s 143(3) r.w.s. 144C of the Act dated 20.9.2010 worked out the gross total income of the assessee at Rs. 191.69 crores which consisted of, among others, the following additions: (i) Adjustment on account of ALP in intl. transactions [including Rs. 140.26 crores being expenditure on purchase of CKD kits and Rs. 12.18 Crores under Tech Centre Operations] Rs.152,44,00,000 (ii) Amortization of lease hold-land Rs. 3,14,830 (iii) Out of gift exp. Rs. 4,16,978 (iv) Out of workmen & staff welfare exp. Rs. 10,60,000 (v) Out of cost of wastage & Obsolete material etc., Rs. 2,50,68,560 A.Y. 2007-08: 7.2 Likewise, for this assessment year too, the AO had, u/s 143 (3) r.w.s. 144C of the Act dated 28.10.2011, made the following additions, as per the directions of the DRP and for the detailed reasons recorded in the assessment order, namely: (i) Adjustment on account of ALP in intl. transactions [including Rs. 206 + 4.9 + 16.32 crores] being expenditure on purchase of CKD kits, royalty and Tech Centre operations Rs.227,21,60,504 (ii) Amortization of lease hold-land Rs. 2,91,258 (iii) Out of gift exp. Rs. 5,15,....
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....ssee vis-à-vis comparable companies. Attention was drawn to the decision in the case of Mentor Graphics (Noida) (P.) Ltd v. Dy. CIT [2007] 109 ITD 101/18 SOT 76 (Del). 9.1.3 Description of various produces manufactured by comparable companies proposed by the TPO/assessee along with companies selected as comparables in the transfer pricing documents was as under: Name of the company Selected by the assessee Selected by the TPO Product profile Force Motors Limited ✓ x On-road automobiles having 4 or more wheels such as light, medium and heavy commercial vehicles, jeep type vehicles and passer cars, agricultural tractor and diesel engines for other purposes Hindustan Motors Ltd ✓ x Passenger cars in the mid size premium segment, sports utility vehicle, utility vehicles, multi-purpose vehicles and total passenger vehicles [Mitsubishi Lancer, Mitsubishi Pajero, Lancer Cedia, Ambassador] Mahindra & Mahindra Limited ✓ ✓ Four or more wheels such as light, medium and heavy commercial vehicles, jeep type vehicles and passenger cars (Scorpio, Balero, Cargo three wheeler - Champion Alfa) 9.1.4 It was, further, submitted that as per ....
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....d selecting the final comparable companies. TPO had finally proposed one company (M&M as a comparable with a profit margin of 9.7 percent on revenue). 9.1.8 It was submitted that the assessee carried out adjustments to the operation margin on account of idle capacity adjustment; indigenization adjustment and excessive marketing spend. The normalized profitability for assessee was worked out to be 5.9 per cent which was rejected by the TPO stating that adjustment should be made if the difference exists in respect of details of the comparables vis-à-vis the assessee. It was also contended by the assessee that adjustment should be applied in relation to the cost price pertaining to the imported goods. Reliance was placed on the decision in the case of IL Jin Electronics (I) (P.) Ltd. v. Asstt. CIT [2010] 36 SOT 227 (Delhi) 9.2 After taking into consideration of the submission of the assessee, the DRP had recorded its findings [for the AY 2007-08 under dispute] as under: "(On page 19) 11....The tested party has to be participant in the controlled transaction whose operating profit attributable to the controlled transactions can be verified using the most reliable data and re....
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....and of the TPO/DRP in the issue of 'tested party', among others, the assessee has come up before us. 10.1 During the course of hearing, the lengthy and elaborate submissions made by the learned Senior Counsel are summarized as under: 10.1.1 In rebutting the learned DR's accusation that the assessee had not produced the entire functional analysis of the assessee - General Motors India Private Limited - the learned Counsel drew our attention to the Transfer Pricing report [pages 13 to 19] wherein a detailed record of functions performed by the assessee and General Motors Daewoo & Auto Technology Limited [GMDAT] were recorded. It was, further, submitted that the learned DR in his submission had confined only a part of the functions performed by the assessee whereas for GMDAT, he had reproduced the entire list of functions performed [courtesy: Annexure Exhibit II of DR's submission] thereby, according to the learned Sr. counsel, a systematic attempt was made to underplay the functions actually performed by the assessee vis-à-vis GMDAT. 10.1.2 The functions performed by the assessee and GMDAT with respect to purchase of CKD kits and components are provided as....
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....most popular products globally; (iv) That the company produces and sells finished vehicles [internally referred to as complete built-up units [CUBS] to its associated enterprises for distribution in the local markets. The company also produces and sells finished vehicle kits [internally referred as CKD Kits] to its associated enterprises who in turn assemble the CKD Kits to produce finished vehicles; (v) That in addition to CKD Kits, GMDAT also produces and purchases parts and accessories for use in its vehicles. The company sells parts and accessories to its associated enterprises for resale in local markets; (vi) That CKD Kits may include essentially a complete kit to build an automobile i.e., engine, transmission, body panels etc., or may include only the key components where the significant portion of the automobile parts are indigenized; (vii) That at a start of each financial year, a price-walk is performed and a pricing approach is then established based on budgeted costs and revenues of the parties involved. Pricing of CKD Kits follow cost plus mark-up based approaches internally referred to as 'fully costed prices'; (viii) That under this method, the tran....
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.... as the tested party by the assessee, it was submitted that: (i) GMDAT in relation to sale of CKD Kits and components to GMI acts as a contract manufacturer undertaking limited functions. On the other hand, the assessee carries the entrepreneurial role in relation to sale of GM Cars in India; a. that GMDAT carries the limited function for manufacturing of CKD Kits and components; b. the GMDAT assumes limited risks in this regard; c. GMDAT is simpler of the two entities and, hence, considered as the tested party; d. Adequate and reliable date is available for GMDAT and its comparable companies; and e. Choice of GMDAT as the tested party is in line with the OECD transfer pricing guidelines; 10.1.7 In respect of non-selection of GMI (the assessee) as the tested party, the learned Sr. Counsel submitted that - (i) GMI acts as an entrepreneur in relation to sale of GM Cars in India undertaking full risks is in this regard. On the other hand, GMDAT act as a contract manufacturer undertaking limited risks and owning routine intangibles; (ii) GMI is entirely responsible for the sale of cars assembled by it in India. Towards this end, GMI markets the cars through its extens....
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.... manufacture and sale of cars and components, GMI incurs significant time and cost in conducting local research and development activities in relation to its cars that it assembles. The need for undertaking such research and development activities arises owing to the following reasons: (i) GMI constantly endeavors to indigenize the cars by replacing imported components with alternative local supplies; & (ii) From time to time, there is a need to adopt the car's basic technology to suit the Indian environment. The adoption could be driven by factors such as changes in the Indian automobiles regulatory environment, customer feedback etc., 10.1.10 Disproving the learned D.R's allegation that the assessee in its transfer pricing documentation had selected GMDAT as the tested party as GMDAT with respect to its transaction with GMI is engaged in manufacturing and supplying CKD Kits and components and in other words, GMDAT acts as an Original Equipment Manufacturer [OEM] for GMI and, therefore, the functional profile of the comparables should also be same as that of GMDAT etc., it was submitted that all the comparable companies selected by the assessee were functioning as OE....
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....party and relying on ADGAR online data-base. This approach of the Revenue, according to the learned Sr. Counsel, as good as to enhance the adjustment made to the assessee. 10.1.14 It was, further, submitted that the TPO was not framing an assessment on the comparable companies selected by the assessee, instead, was assessing as to whether the assessee had in any way over paid for purchase of CKD Kits and components to its AE, GMDAT. The financial statement of comparable companies was audited by independent auditors and, hence, it should be appropriate to place reliance on the same. It was, further, argued that the TPO, while applying TNMM was expected to compute the profit level indicator/operating margins from the financial information submitted for the comparable companies and till the time those financial statements enable the TPO to reliably compute the profit level indicator and there should not be any concern whatsoever. 10.1.15 Rejecting the Revenue's allegation that sufficient financial data was not available for the tested party, it was submitted that the segmental financial data for benchmarking a part of GMDAT's business which relates to manufacturing and sal....
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....djustment (as already done by the TPO in this case); (iv) Therefore, while selecting GMI as the tested party, whole business of GMI will get aggregated and will be benchmarked against independent comparable companies. 10.1.19 This view of the assessee of benchmarking only the relevant international transaction while adopting transaction-by-transaction approach also gets support from Indian TP regulations, OECD guidelines and Indian judicial decisions. 10.1.20 Placing emphasis on s. 92(1) of the Act, relevant I.T. Rules and also Para 3.9 of O.E.C.D. Guidelines, the learned Sr. Counsel had placed reliance on the following case laws: (i) M/s. Ranbaxy Laboratories Ltd v. Addl CIT (299 ITR 175); (ii) Development Consultants (P.) Ltd v. Dy. CIT [2008] 23 SOT 455 (Kol.); (iii) Star India (P) Ltd. v. ACIT [IT Appeal No. 3585(M) of 2006, dated 28-5-2008]; (iv) Ankit Diamonds v. DCIT [8 ITR (Trib) 487]; (v) Technimount ICB Pvt. Ltd v. ACIT [ITA No.7098/Mum/2010]; (vi) Destination of the World (Sub-continent) Pvt.Ltd [ITA No.534 (Delhi Trib) 2010 AY 06-07]; (vii) Addl. CIT v. Tej Diam [2010] 37 SOT 341 (Mum); & (viii) Twinkle Diamond [ITA No.5033/Mum/07] 10.1.21 In con....
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....y mentioned in TP Documentation at para 3.1. GMDAT is the technology owner who is supplying CKDs and intangibles (for which royalty is also paid) and on whose specifications, the manufacturing activity is being carried out by the assessee. Even in development of local content, the approval of the foreign party is a must before the changes are incorporated. The case of the assessee fails on the first count as GM DAT is more complex of the two parties and would require large number of adjustments in case of being selected as comparable. It was, further, submitted that the mechanism of culling out the data pertaining to the transaction under reference from the financial statement of AE has not been produced before the TPO. The assessee has not been able to submit any reliable segmental data or reliable basis on which the global accounts have been segregated and the accounts with respect to Indian transactions have been prepared. Hence, it was claimed, the data utilized by the assessee in respect of the tested party is unreliable and unsubstantiated. If the assessee is to choose its tested party, it has to make available correct, verifiable and validated data in respect of such tested ....
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....mitted that there is huge functional and geographical variation in selection of comparables. The market for the products of these comparables is not known. The local laws in different countries in which these entities operate is now known. It is also not known whether segmental data for specific area of assessee's function is available or not. No details whatsoever are available relating to financial aspect of these companies. The assessee has not attempted computation for functional or geographical differences in the study. It is known fact that the Japanese, Chinese, Malaysian, Indian markets or financial background is totally different and cannot constitute a single set of data for comparison with a Korean company without any adjustment in margins. It is clear that sufficient financial data is not available either in the case of the tested party or in the case of selected comparables. 10.2.5 To strengthen his stand, he had placed strong reliance on the following case laws, namely: (i) Onward Technologies Ltd. (supra) (ii) Aurionpro Solutions Ltd. (supra) 11. We have carefully considered the rival submissions, perused the relevant materials on record and also voluminou....
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....ort service to AE and the difficulty arose that the said function was compared with the companies engaged in the business of development of software. So the question was that whether a minute examination of functional profile is necessary for the purpose of selection of comparables and the answer given was that functional profile must be first examined and after that proceeds to select the comparables. Interestingly, in the present case now before us, comparables chosen by the assessee were discussed by the TPO and those were discarded. The basic reason for rejection of those comparables was that the companies those were quoted by the assessee were dealing in product distribution whereas the TPO was of the view that the AE was nothing but 'front office' of the assessee and simple engaged in marking activity. In this context, we are of the view that in order to determine the most appropriate method for determining the arm's length price, first it is necessary to select the 'tested party' and such a selected party should be least complex and should not be unique, so that prima facie cannot be distinguished from potential uncontrolled comparables." We are in agre....
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....he divergent submissions, the Hon'ble Tribunal had recorded its findings that - "33. Based on facts and our findings of the case, after due consideration of all the facts, we conclude that the analysis undertaken by the assessee to determine the arm's length price of the international transaction with Datacore USA is correct and on the basis of the analysis it is seen that transaction undertaken by the taxpayer with Datacore US is at arm's length for both the assessment years." (iii) In the case of Ranbaxy Laboratories Limited (Supra) the Hon'ble Delhi Tribunal had recorded its findings that - "58.... The tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one party to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that generally least of the complex controlled taxpayer should be taken as a tested party. But where comparable or almost comparable, contro....
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............................ The Indian transfer pricing administration prefers Indian comparables in most cases and also accepts foreign comparables in cases where the foreign associated enterprise is the less or least complex entity and requisite information is available about the tested party and comparables." 11.2.1 It was also vouched during the course of hearing by the learned Sr. Counsel that the financial details including operating margin of comparable companies along with the back-up computations were furnished before the TPO in the transfer pricing documentation [Source: Pages 113 to 210 of the Transfer Pricing Study]. This contradicts the assertion of the learned DR that the assessee had not furnished any financial information of the comparable companies. 11.2.2 The United Nation's Practical Manual on Transfer Pricing also contradicts the TPO's argument that GMDAT should not be selected as the tested party as the comparable companies selected by the assessee doesn't fall within his jurisdiction and he can neither call for any additional information nor scrutinize their books of accounts etc., 11.2.3 However, we find inconsistency in the stand of the TPO to ....
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....pugned order before any forum would be an exercise in futility, as no appeal would be entertained against an order passed on a concession. Thus, the dispute Resolution Panel has virtually closed all doors for the petitioner. In the circumstances, impugned order of the Dispute Resolution Panel suffers from the vide of being contrary to the record as well as non-application of mind, in as much as the petitioner had never sought withdrawal of the objections filed by it. The impugned order also causes immense prejudice to the petitioner as recorded hereinabove. In the circumstances, the impugned order of the Dispute Resolution Panel, therefore, cannot be sustained...." 11.3 We shall now peruse the case laws on which the learned DR had placed reliance in the findings of the Hon'ble Mumbai Tribunals in the cases of (i) Aurionpro Solutions Ltd. (supra) and (ii) Onward Technologies Ltd. (supra). (i) In the case of Aurionpro Solutions Ltd. (supra), the issue before the Hon'ble Bench was that the assessee engaged in the business of software development and web designing services and that the assessee had lent loans to its AEs stationed at USA, Singapore and Bahrain. The assessee h....
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....ted to transaction between the assessee and its foreign AE. It can neither call for also roping in and taxing in India the margin from the activities undertaken by the foreign AE nor can it curtail the profit arising out of transaction between the Indian and foreign AE at arm's length. The contention of the ld. AR in considering the profit of the foreign AE as 'profit A' for the purposes of comparison with profit or comparables, being 'profit B', to determine the ALP of transaction between the assessee and its foreign AE, misses the wood from the tree by making the substantive section 92 otiose and the definition of 'internal transaction' u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible. The requirement under our law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to as prescribed. This contention is, therefore, repelled." With have duly perused the findi....
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....tries had observed that 'It may be the local or the foreign party', we tend to agree with the same. 11.5 Reverting back to the issue, the assessee submitted that in the transfer pricing documentation, it had provided the business profit of all 101 comparables selected by the assessee. 11.5.1 The DRP in its findings at para 11 had stated, among others, that in most cases the tested party will be the least complex of the controlled tax payers, and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. As GMDAT is not only a complex entity owning valuable intangibles, the data for comparability of GMDAT or the comparable is also not available. 11.5.2 This view of the DRP has been denied by the learned Sr. Counsel during the course of hearing which has not been contradicted by the Revenue with any documentary evidence. 11.6 To sum up, it was the argument of the assessee that if stringent comparability analysis as adopted by the TPO were to be adopted, and then M&M should also be put to such a stringent comparability test. It was, further, argued that M&M is also involved in the manufacture of multi utility veh....
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....ing the inter-company transactions of the assessee for both the AYs under consideration. To facilitate the TPO to analyze the inter-company transactions in the case of the assessee by selecting GMDAT as 'tested party' as directed above, this issue is restored on the files of the TPO. It is ordered accordingly. Gr. No.2 Disallowance of Rs. 3,14,830/- and Rs. 2,91,258/- being proportionate lease charges in respect of lease-hold land for the AYs 2006-07 & 07-08: 12. The assessee had claimed the expenses of Rs. 3.14 lakhs and Rs. 2.91 lakhs being amortized over the period of lease of 99 years in respect of lease-hold land. The lease-hold land was initially acquired under a lease agreement by Hindustan Motors Limited from Gujarat Industrial Development Corporation. Subsequently, the land was assigned by HML to the assessee vide assignment deed. By virtue of such an assignment, according to the assessee, the assessee has only got right to use the lease-hold land for the purpose of its business. The assessee has the right for the possession and use of land till the expiry of the said lease period. However, the AO had disallowed the amounts claimed by the assessee by following th....
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...., employees etc., during the course of business. The AOs have, however, disallowed such expenditure on the premise that the assessee manufactures passenger cars and the sale of the same is being effected through its authorized dealers and, thus, there is no need for incurring such expenditure. 13.1 DRP had also rejected the assessee's claim on the ground that the assessee had not submitted any evidence in support of the claims that the expenditure incurred on gifts etc., was only for the purpose of its business and not for directors or their relatives. 13.2 Before us, it was claimed by the assessee that the expenses incurred duly satisfy the conditions stipulated in s. 37(1) of the Act as the same were neither in the nature of capital nor personal. It was, further, claimed that the expenses were incurred for maintaining and furthering good and cordial business relationship with its business associates including the employees and promoting the business activities of the assessee on an on-going basis. It was, further, justified that the practice of giving such gifts is customary and unavoidable having regard to the competitive environment the assessee operates in and the same o....
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.... account of provision for slow moving and obsolete inventory being net increase in provision during the year. 14.1 Even though, the AO had accepted the claim of the assessee with regard to expense of Rs. 73.3 crores on account of process rejects, material scrapped, contract cancellation for obsolete material and shortage on physical inventory count, however, disallowed the claim of Rs. 2.44 crores on account of provision for slow moving and obsolete inventory being net increase in provision during the year by placing reliance on the Tribunal's order in the assessee's own case for the AYs 1997-98 & 98-99 wherein it was held that the market value of the wastage/obsolete materials should be included for calculating the total income. 14.2 The DRP, on its part, rejected the assessee's objection on the premise that the assessee had not led any evidence that the findings of the jurisdictional Tribunal has been challenged or reversed by the Hon'ble High Court. 14.3 During the course of hearing, the submissions of the learned Sr. Counsel are summed up as under: (a) That according to the regular accounting method followed, the closing stock of inventories is valued at co....
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.....f. 1.4.1999. Hence, the decision of the Hon'ble Tribunal will have limited applicability only for AYs 1997-98 and 1998-99 and will not be binding precedent for subsequent years including the AYs under dispute. The AO, instead of considering the submission of the assessee, relied on the findings of the Hon'ble Tribunal which were binding only for the AYs 1997-98 and 98-99; (f) Without prejudice, that in any event the disallowance proposed by the AO was erroneous as the entire cost of the inventories has been added back. The disallowance has been made on the ground that the market value of the obsolete stocks needs to be added as directed by the Hon'ble Tribunal for the AYs. 1997-98 and 98-99.The AO had, erroneously assumed that the entire sums of Rs. 2.5 crores and Rs. 2.44 crores represent the market values of the inventory and had failed to appreciate that the above amounts represent the cost of inventories to the assessee and not the market value thereof. Even if any addition can be made for the market value of such obsolete inventories, it was evident that proposed disallowances of Rs. 2.5 crores and Rs. 2.44 crores were unjustified as that values represent the co....
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....s. 3,67,03,644/- being provision for slow moving and obsolete inventory reversed during the year and credited to the P & L account which had already been disallowed in earlier year(s) in spite of the same having been verified and accepted by the AO himself in the remand report furnished before the DRP." 15.1 On a perusal of the directions of the DRP dated 27.8.2010; it is observed that the issue has been dealt with by the DRP. For ready reference, the relevant portions of the directions of DRP are extracted as under: "73.4.11. Further, vide supplementary submissions filed on 10th June, 2010 with the Panel, the assessee has submitted a chart showing movement of slow moving/obsolete inventory under various heads for the previous years ended March 31, 2005 and March 31, 2006 indicating that there has been a net reversal of provision amounting to Rs. 1,16,35,084/- during the financial year 2005-06 as summarized below. Increase in provision amounting to Rs. 2,50,68,560/- under the sub-head 'Inventory vehicles-excess & obsolete basic' Reduction of provision amounting to Rs. 3,67,03,644/- under the sub-head 'Inventory P&A - excess and obsolete'. It has been submitte....
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....r taking into consideration the realizable value estimated and assigned to scrap which had already been accounted for in the books of account, and, thus, no further adjustments were made while giving effect to the Tribunal's order for the said AYs. Further, the learned Sr. Counsel had asserted that the deduction of Rs. 3,67,03,644/- being provision for slow moving and obsolete inventory reversed during the year and credited to the P & L account had already been disallowed in earlier year(s) and the same having been verified and accepted by the AO himself in the remand report furnished before the DRP. 15.2 1 The learned DR present was also heard. 15.3 We have carefully considered the submission of the learned Sr. Counsel on the issue. Ironically, the DRP took a stand by citing the findings of the earlier Bench of this Tribunal for the AYs 1997-98 and 98-99 (supra) that the market value of such obsolete material as on 31st March 2006 is to be taken and added to the total income. However, the learned Sr. Counsel for the assessee stated that the AO granted relief to the assessee as per the directions of the ITAT for the AYs 1997-98 and 98-99 after taking into consideration the re....
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....he aspect of increase in workmen and staff welfare expenses was examined in the AY 2002-03 also and the same was partly found to be unverifiable and considering the same and also in view of the possibility of inclusion of certain expenditure for non-business purposes, a disallowance of Rs. 10.6 lakhs being 10% of Rs. 1.06 crores was made. 16.2 Aggrieved, the assessee took up the issue with the DRP for relief. The DRP had, after due consideration of the assessee's contention as recorded in its direction, confirmed the addition for the reasoning that - "73.3.7....The assessee has not submitted any cogent reason as to why there is such abnormal increase in said expense as compared to last year. Further, the AO has given a finding that the entire expense on this account is not verifiable..." 16.3 We have carefully considered the submissions made by the rival parties during the course of hearing. 16.3.1 At the outset, we would like to point out the prime reasoning for the AO to resort to make an ad-hoc disallowance of 10% was that he had compared the expenses claimed for the AY under dispute with that of the expenses incurred for the AY 2002-03 and came to a conclusion that the....
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....following grounds: (i) Rolta India Limited: During the year under consideration, the company had undergone business restructuring as per its annual report and, thus, this company cannot be a comparable on the ground of functional dissimilarity. Relies on the following case laws: (a) Petro Araldite (P.) Ltd. v. Dy. CIT [2013] 31 taxamnn.com 281 (Mum.) (b) Capital IQ Information Systems (India) Pvt. Ltd v. DICT - ITA No.6961/Hyd/2011 dated 23.11.2012. (ii) Powersoft Global solutions Limited: Since this company is engaged in diversified business operations and all these services apart from engineering services are functionally different from the assessee. Comparables rejected by the TPO: 17.2 The submissions of the assessee are under: (i) Onward Technologies Ltd: The TPO had rejected Onward stating that the company had related party transactions of 65 per cent of sales. In this regard, it was submitted that the TPO erred while not considering the consolidated results; that in preparing the consolidated statements, the profit made on inter-company transactions would be eliminated and, therefore, the margins earned in the inter-company transactions would be totally elimi....
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....ning to the provisions of engineering services has been considered in the computation of the arm's length range for the assessee. Thus, the TPO had erred in rejecting PSI as a comparable to the assessee. (iv) Tata Technologies Limited: The TPO had rejected this company as it is a software development company and basically engaged in providing life cycle management technology services and that it has more than 7 per cent handling and distribution expenses and also has related party transactions and, therefore, it is functionally different from the business of the assessee. Assessee's submission: 17.4 It was, however, asserted that as per the annual report of the company, the company's business operations is related to engineering services and that its marketing expenses in the FY ending 2007 was only 3.31 percent of total revenue which was a part of business activity like any other company who incurs such expenses to boost their product sales and expand their business operations etc. 17.5 Thus, the TPO had erred in stating that the company is having more than 7 per cent handling and distribution expenses thereby classifying it as in different function segment of car....
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....rgers/de-mergers. In this case, there is no exceptional final result due to merger/demerger; (c) That the assessee's Tech Centre Operations are not low end captive operation, but, full fledged R & D activity liable to be compared with a high end research oriented company. The functional profile of Rolta is seen that there is functional similarity between the two companies. Hence, the reliance placed on Bindview India (P.) Ltd. [ITA NO.1386/PN/10] by the assessee is liable to be rejected; (d) That the assessee had termed that Rolta is a company with abnormal margins. In the case of SAP Labs India (P.) Ltd. [ITA No.398/Bang/20], the margin was 72% and in the case of Saunay Jewels Pvt. Ltd, the margin was 53.81% and, thus, the margins in those cases were in the range of 54% to 72% which have been found to be high by the Hon'ble Tribunal(s). However, the margin of Rolta India Ltd being 38.79% as adopted by the TPO which doesn't come in the ambit of exceptionally high margin. Moreover, in many cases, the Benches of the Tribunal have held that high profitability of a company cannot be a ground for its exclusion from comparable and, thus, Rolta India Ltd is found to be a c....
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....mited and KLG Systel Ltd. M/s. Powersoft Global solutions Limited does not have related party transactions. Rolta India Limited has only 20% related party transactions. Therefore, the working of the TPO deserves t be sustained...." 17.8. 1 The DRP's assumption was that the assessee had not put forth any arguments with regard to Ace Software Exports and KLG Systel Limited. 17.8.2 The assessee had identified itself as low-end engineering and R&D work and a small markup of 7% was given for its work. However, the TPO analyzed the selected parties and rejected for the reasons recorded [which have been cited supra] the following companies: (i) Onward Technologies Limited; (ii) Pentasoft Technologies Limited; (iii) Tata Technologies Limited 17.8.3 However, it was contention of the assessee that the TPO erred while stating that assessee's tech-center is engaged in providing high-end research services. Tech-Center is essentially engaged in provision of engineering design and analysis of automobile parts, assemblies and manufacturing tools. This entails provision of computer-aided design and data translation services. Such services involve product assembly documentation, ext....
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....e issue is restored with a specific direction to take appropriate action in accordance with the provisions of the Act after affording a reasonable opportunity to the assessee of being heard. In the meanwhile, the assessee, through its ARs, to furnish all the relevant details as to why the companies quoted it should be taken as comparables and also as to why the companies selected by the TPO cannot be as comparables so as to enable the TPO arrive at a conclusion as directed by us supra. It is ordered accordingly. Gr. No.10 Non-providing the assessee the benefit of 5 per cent Gr.No.13. range as provided by the proviso of s. 92C(2) of the Act for the AYS 2006-07 & 2007-08: 18. Even though the assessee has consistently raised this issue before the DRPs, neither the TPO nor DRPs have dealt with the issue. 18.1 Before us, it was pleaded that the AO/TPO be directed to provide the benefit of 5 per cent range as provided by the proviso to s. 92C(2) of the Act. The learned DR present was heard. 18.2 We have carefully considered the submission of both the parties on the issue and also perused the provisions of s. 92C (2) of the Act. For ready reference, the relevant portion of s.92C (2)....
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....-200 project whereas agreement between Korea Delphy Automotive Systems Corporation, Korea and Jingzhou Hengoing Automotive Parts Company Limited, China is exactly comparable in respect of all technical specification and for same project of %age of royalty payment to gross selling price is not correct way of comparing prices. Accordingly, the adjustment to royalty payment was determined at Rs. 4,89,60,504/-. 19.3 Being aggrieved, the assessee took up the issue, among others, before the DRP and contested the TPO's working. As usual, the DRP sustained the TPO's stand with its inexplicable way that "In view of independently comparable agreement which resembles the assessee's agreement for payment of royalty, the order of TPO does not merit any interference." 19.4 Before us, it was contended on behalf of the assessee that in both the agreements, namely Delphi-Jinzhou agreement and Namyang-Henglong agreement, 'the licensed product' is only for a single component/parts of the vehicle and not the entire vehicle which is in contrast to the TLA between GMDAT and GMI. According to the assessee, the agreement between GMI and GMDAT was Automotive agreement for manufacturin....
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....be reliably ascertained. Therefore, it was submitted that, application of CUP entails stringent comparability requirements between the tested party and the comparable selected, even a minor difference among the two may leave the whole analysis irrelevant. In conclusion, it was submitted that there were material differences between the third party agreements being compared by the TPO which was only for a single component/parts of the vehicle as compared to the agreement of the assessee with GMDAT which was for the entire vehicle. Therefore, it was inappropriate on the part of the TPO to compare the agreement between GMDAT and the assessee with agreements between third parties. 19.6 On the other hand, the submissions of the Revenue are summarized as under: (a) That there was no change in tested party. The only change was the comparable used. While the assessee had used an internal CUP whereas the TPO had used external CUP; (b) That the assessee had wrongly stated that the royalty rate in the Isuzu agreement which has been adopted as CUP by the assessee at 5%. The royalty rate was JPY 25000 per licensed vehicle or 5% whichever is low and such a rate comes to around 1.2% of net s....
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....the Isuzu case, because of the per licensed vehicle rate of Rs. 9072/vehicle, would be much lower than the rate of 5% in the case of GMDAT rate. As computed above, if the net sale price of a Tavera vehicle is adopted at Rs. 7.5 lakhs, the royalty rate would be merely 1.2% which should have been adopted as the CUP rate in the case of the assessee. 19.10 In conclusion, it was submitted that the TPO had rightly selected the two comparables and had rightly rejected the GMI -Isuzu agreement as a proper comparable. 19.11 We have carefully considered the lengthy submission made by the assessee which has been equally refuted by the revenue by its elaborate submission. 19.12 On considering the contentions of the rival parties, it is observed that the tussle between the parties has been narrowed down to the issue of comparing of the agreements. The assessee had taken the agreement entered into between the assessee and Isuzu and treated as CUP whereas the TPO had as CUP the agreements of (i) Namyang-Henglong; and (ii) Delphi-Jingzhou. This has been assailed by the assessee for the reasons narrated above. The agreement entered into by the assessee as well as the agreements of unrelated part....