TaxTMI 
TaxTMI 
2013 (11) TMI 1238
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.... additional ground vide its letter dated 5.9.2012, 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 maki....
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....eing almost similar and identical, for the sake of convenience and clarity, they were heard, considered together and disposed of in this consolidated order. 4. For record, we would like to point out that the final arguments 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....
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.... in purchase of CKD kits and services and Rs. 19.66 crores in Tech. Centre operations. 7.1 After due consideration of the assessee's submissions and for the reasons recorded therein, the DRP directed the AO to enhance the income of 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) ....
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.... for developing local marketing intangibles for competing in the Indian market. The functions and risks of the assessee are more complex in nature. 9.1.2 Under TNMM, various suitable adjustments were made to mitigate the material differences on account of various extra-ordinary factors experienced by the assessee 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 vehicl....
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....MI Margin (after adjustment considering 3 comparables) 2.88 9.1.7 It was, further, argued by the assessee that based on the prior year's approach, the TPO selected only one company as comparable and no fresh analysis was undertaken for the same comparables. Stringent comparability filters were applied to reject two companies selected by the assessee. TPO was not consistent while applying filters and 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 i....
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..... However, as per the information available, Force motors are planning to launch SUV in the year 2011 which has no relevance with the financial data for assessment year 2007-08. The turnover of Mahindra & Mahindra in the jeeps' segment is approximately Rs. 6500 crores which is comparable with that of the assessee. In view of the facts narrated above, the results of assessee have to be compared with Mahindra & Mahindra only............" 10. Aggrieved by the stand 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 ....
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....arket are made through Daewoo Motor Sales corporation whereas in the overseas market, it is through the Associated enterprises (AE); (iii) That GMDAT's vehicles are sold under GM brands in most markets and this allows GMDAT to capitalize on brands that GM has already established without the need for GMDAT to build up its own branch. The company focuses on smaller sized vehicles to complement GM's product offerings which are focused on the larger sized passenger cars, SUVs and pick-up trucks. The small size cars have been one of GMDAT's 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; ....
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....sessee) are - (a) that the assessee purchases CKD Kits and components from GMDAT for assembling cars; and that these kits are in addition to locally purchased components which are also used in the cars manufactured; (b) that to effectively meet the after sales servicing needs of its customers, the assessee imports spare parts and accessories from GMDAT in addition to local procurement for their resale in India; and that the assessee imports spare parts and accessories as finished goods and do not undertake any further value addition and the assessee also distributes the imported spare parts and accessories through its dealership network; 10.1.6 With regard to the selection of GMDAT 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 s....
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....velopment activities [R&D] undertaken by GMI and GMDAT: Denying the Revenue's allegation that the GMDAT carries out all the research and development activities (R&D) whereas GMI does not undertake any R&D on its own account, it was submitted that GMI had incurred expenditure of Rs. 16.11 crores on R&D which has been reported in the financial statement of GMI and that as per the financial statements of GMDAT, the company does not own significant intangibles. In fact, the company has negative goodwill amount to Korean Won [14,87,013] in its books of accounts. This makes it absolutely clear that GMI's operations relating to manufacture and sale of cars and components are much complex than that of GMDAT which is only engaged in manufacturing and supply of certain components used in manufacturing the car itself. Also, with respect to 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 ....
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....0.1.13 In respect of the Revenue's (TPO's) averment that GMDAT should not be selected as the tested party as the comparable companies selected by the assessee does not come under his jurisdiction and, thus, he can neither call for any additional information nor scrutinize their books of accounts etc., it was contended on behalf of the assessee that on the one hand the DRP/TPO had rejected the assessee's approach of selecting GMDAT as the tested party by arguing that there was no reliable data available for both GMDAT and comparables and, therefore, GMDAT cannot be taken as the tested party, however, the TPO himself had taken GMDAT as the tested party while making adjustment to transaction relating to payment of royalty by the assessee to GMDAT. It was argued that the TPO had rejected internal CUP used by the assessee, instead, adopted external CUP taking GMDAT as the tested 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 th....
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....selecting GMDAT as the tested party, we would be benchmarking only the international transaction of manufacturing of CKD Kits and components by GMDAT with independent companies involved in similar business; (ii) On the other hand, if one chooses to select GMI as the tested party, the whole business of GMI will need to be tested against the independent comparable companies. Therefore, apart from the relevant international transaction i.e., purchase of components and spares, other third party costs including manufacturing expenses, employee remuneration, selling and general get tested; (iii) That only a part of the total expenses i.e., 17.55 per cent pertains to international transaction with AEs and out of this, only 15 per cent pertains to import of CKD and components. Thus, while selecting GMI as the tested party, the balance 82 per cent which pertains to third party cost will need to be benchmarked the risk of transfer pricing adjustment (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....
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....selection of the tested party, the following criteria are to be kept in view, namely: (a) Tested party to be one with less complex functional analysis; (b) Reliability of data of the party selected as tested party; & (c) Selection of the party requiring minimum adjustments. 10.2.2 It was, further, submitted that the functional description of GMDAT as detailed in the transfer pricing documentation, it is seen that GMDAT is an entrepreneur engaged in manufacturing of Completely Knocked Down [CKD] Kits in its plants across many countries, manufacturing of cars and also involved in R & D. The company has complex business activities and a high level of intangible assets. Compared to the activities of GMDAT, it was argued that the assessee company is a manufacturer of automobiles but has no R & D activity and no technological intangibles. Its produce line is similar to other manufacturers in the country and there is no geographical adjustment required. 10.2.3 Admittedly, it was argued by the learned DR, all the intangibles are owned by GMDAT which has been specifically mentioned in TP Documentation at para 3.1. GMDAT is the technology owner wh....
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....ngaged in manufacturing and sale of automobiles and CKDs. The second comparable is engaged in iron, gravity and aluminum castings, the third is engaged in production of body parts like floors, center pillars, hoods and so on. Perusal of the companies and the description mentioned by the assessee is sufficient to come to conclusion that these companies cannot be compared with tested party of the assessee. No details relating to geographical sale or sourcing is available. It was submitted that companies like Toyota Corporation with a turnover of Rs. 36,000 crores and Sumitomo Electric Industries Limited with turnover of Rs. 42,000 crores have been included in the study. No reliable data is available on any of the companies which have multifarious operations around the globe. Rule 10B (2) sets out the broad parameters of comparability which decide the kind of comparables can be selected. FAR, Risk and responsibilities, laws of different Governments, geographical loan and size of market etc., are the key issues in selection of comparables, if the comparables happen to be spread across multiple geographies. It was submitted that there is huge functional and geographical variation in sel....
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....teristics of controlled transaction. It is also required that there should be proper study of functions performed so as to match the identical situations under which functions have been performed. Then risk profile is also required to be compared. We may like to add that there are so many perspectives which were required to be compared and in this connection the Hon'ble Courts have also suggested so, such as, comparison of functional profile, similarity in respect of assets employed and a thorough screening of the comparables etc. Hence, in the present case, it is necessary to consider an analysis that whether the comparables selected by the TPO had analogous functional profile to that of functional profile of the assessee. It is true that functional profile and assets and risk analysis was made available but that is to be correctly understood in the light of the nature of International transaction carried out by the assessee with the said AE. A similar problem was considered by ITAT Delhi Bench in the case of Bechtel India Pvt. Ltd v. DCIT (2011-TII-07-ITAT-DEL-TP) where the assessee stated to be engaged in the business of providing electronic data support service to AE and th....
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....received for work off-shored to India cannot be separately identified). Further, the revenue generated from the services provided by the assessee would form only a small part of the entire operations. The value of engineering drawing and design services rendered by the assessee to TKC for AY 2002-04 was Rs. 1,58,43,923/- and for AY 2004-05 it was Rs. 1,45,77,704/-. The value of service forms approximately 6% to 7% of the Cost of Sales to TKC. HENCE, THIS Shri Rahul Mitra argued, shows that testing the margins of TKC would not serve the purpose of determining the arm's length nature of the transactions undertaken by the assessee with TKC. Hence, the recourse available to test the arm's length price of the services rendered by the assessee to TKC is to test the margins from the Indian side. In view of the discussion on tested part earlier, the assessee was selected as the tested party being least complex of the two entities. Hence, the transfer pricing analysis in this case was done from the Indian side, wherein, the margins of the assessee with respect to services provided to TKC were compared internally with services provided to other third parties in foreign market." ....
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.... or Transactional Net Margin Method (see further Chapter 6) it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should be consistent with the functional analysis of the controlled transaction. Attributes of controlled transaction(s) will influence the selection of the test party (where needed). The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration and vice versa in order for the latter to be able to verify the selection and application of the transfer pricing method." With regard to the challenges emerging in transfer pricing in India, it has been observed as under: "10.4. Emerging Transfer Pricing Challenges in India 10.4.1 Transfer pr....
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....ld not be selected as the tested party for analyzing the inter-company transactions. Instead, the DRP had, in a cryptic manner, concluded that the results of assessee have to be compared with the stand alone results of Mahindra & Mahindra in the automotive segment. 11.2.6 In this connection, we tend to recall the ruling of the Hon'ble Jurisdictional High Court [Special Civil Application No.8179 of 2010 dated 31.8.2010] in the case of AIA Engineering Ltd. v. Dispute Resolution Patel through Secretary-DRP & 1. After due consideration of rival submissions, the Hon'ble Court had ruled thus - "16....If the Dispute Resolution Panel was of the opinion that the application dated 22.4.2010 could not have been entertained, it should have considered the objections filed by the petition on merits. As a consequence of the impugned order, firstly the objections raised by the petitioner have not been decided, secondly, in view of the directions issued by the Dispute Resolution Panel, the petitioner would not be in a position to avail of the remedy of appeal before commissioner (Appeals) against the draft assessment order; and thirdly, in the light of the observation made by the di....
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.... the Bench was the percentage of the interest to be calculated on the loan advanced by the assessee to its foreign AEs. We are, therefore, of the view that this case is not directly applicable to the issue under dispute. (ii) In the case of Onward Technologies Ltd. (supra) as relied on by the Revenue, it is observed that the assessee, a parent company had international transaction with its AEs. With regard to IT enabled services provide to its AEs, the assessee had chosen six comparables with its foreign AEs as a tested party. The TPO had ignored the working of the assessee whereby selecting 20 comparable cases. When the issue reached before the Tribunal for resolve, the Hon'ble Bench had, after having considered rival submissions, recorded its findings, among others, as under: "11.2.2. (On page 12).... So, it is the profit actually realized by the Indian assessee from the transaction with its foreign AE which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise from its foreign AE with the profit realized by the foreign AE from the ultimate customers for the purposes of determining the....
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.... 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." Thirdly, the Hon'ble Delhi Tribunal in the case of Ranbaxy Laboratories(P) Ltd. (supra) took a stand that 'If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration.' Then, the United Nation's Practical Manual on Transfer Pricing for Developing Countries had observed that "5.3.3.1...... The tested party normally should be the less complex party to the controlled transaction and should be the party in respect of which the most reliable data for comparability is available. It may be the local or the foreign party. If a taxpayer wishes to select the foreign associated enterprise as the tested party, it must ensure that the necessary relevant information about it and sufficient data on comparables is furnished to the tax administration...." 11.4 Considering the divergent views expressed by various Tribunals (supra) and majori....
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....same. 11.6.2 As rightly highlighted by the assessee, we find inconsistency in the approach of the TPO with regard to the issue of 'tested party'. On the one hand, the TPO averred that there was no reliable data available for both GMDAT and comparables; however, on the other hand, he had conveniently taken GMDAT as the 'tested party' while making adjustment to transaction relating to payment of royalty by the assessee to GMDAT. This exposes the inconsistency approach of the TPO. 11.6.3 The financial statements of comparable companies have since been audited by the independent auditors and, thus, there can be no reservation in placing a reliance on the same. 11.6.4 However, the learned Sr. Counsel submitted that segment financial data for benchmarking - a part of GMDAT's business - was made available to the TPO and also on his request, the financial statements of GMDAT (at company level) was furnished to the TPO and the same is not disputed. Therefore, there should be no grievance on the part of the Revenue to say that no sufficient data was made available. 11.6.5 Taking all the above facts and circumstances of the issue as discussed in the foregoing p....
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....he Revenue's appeal by affirming the Tribunal's findings that 'merely because the deed was registered, the transaction in question would not assume as different character. The lease rent was nominal. By obtaining the land on lease, the capital structure of the assessee did not under go any change. The assessee only acquired a facility to carry on business profitably by paying nominal lease rent. In the light of the aforesaid findings of fact and the ratio of the Apex Court decisions, the Court does not find this to be a case which warrants interference...' 12.1 4 In consonance with the ruling of the Hon'ble Court (supra), this issue is decided in favour of the assessee for both the AYs under dispute. It is ordered accordingly. 12.1 5 Before parting with, we would like to reiterate that we have duly perused the case laws on which the revenue had placed strong reliance. Since, the Hon'ble jurisdictional High Court in the case of Sun Pharmaceuticals Ind. Ltd. (supra) ruled in favour of the assessee, we have allowed the assessee's ground(s) on this point. Gr.3 Disallowance of gift expenses of Rs. 4,16,978/- & Rs. 5,15,876/-for the AYS 2006-07 & 2007....
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....o as to maintain cordiality, rapport etc., Under these circumstances, the amounts spent for giving presents to them could be said to be expenditure incurred wholly and exclusively for the purpose of its business since this amount was spent for keeping alive its good image amongst its patrons and ensuring that goodwill and ensuring the continuity of business with them as before. Since these kinds of gifts have been presented during the course of business, the expenditure incurred under this head was nothing but business expediency which falls within the purview of s. 37(1) of the Act. We are, therefore, of the firm view that the authorities below were not justified in rejecting the assessee's legitimate claim on the issue. In essence, this issue goes in favour of the assessee for both the AYs. It is ordered accordingly. Gr.4 & 5: Disallowance of Rs. 2,50,68,560/- & Rs. 2,44,28,818/-on account of provision for slow moving and obsolete inventory made by the assessee for the AYS 2006-07 & 2007-08: 14. Briefly, the assessee had debited [for the AY 2007-08] total provision amounting to Rs. 9,75,15,307/- to the P & L account on account of 'wastage and obsolete' material.....
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....sessee's business requirement, it has to maintain huge stock. A part of these stocks become obsolete on account of several reasons, including the fact that a model may get discontinued during the year or the inventory may be otherwise non-usable; (d) Further, the assessee regularly reviews the provisions made and, if upon such review, it is observed that some stocks have been utilized or certain stock is no more slowing moving or obsolete, the assessee reverses the provision made in the earlier years; (e) That the AO had erred in following the order of the Hon'ble Tribunal in a mechanical manner and had failed to examine the issue on merits based on facts and law applicable during the years under assessments. The AO had also failed to recognize that the legislature has included specific provision under the Act vide s. 145A which was inserted by the Finance (No.2) Act, 1998 w. e. f. 1.4.1999 with regard to valuation of closing stock that enables the assessee to value inventory for the purpose of determining the income chargeable under the head 'profit and gains of business and profession' in accordance with the method of accounting regular employed ....
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....he rival submissions and also perused the findings of the earlier Bench of this Tribunal in the assessee's own case for the AYs 1997-98 and 1998-99 and also the specific provision of s. 145A which was inserted by the Finance (No.2) Act, 1998 w. e. f. 1.4.1999 with regard to valuation of closing stock which enables the assessee to value inventory for the purpose of determining the income chargeable under the head 'profit and gains of business and profession' in accordance with the method of accounting regularly employed by the assessee. During the course of hearing, the learned Sr. Counsel had categorically stated that no further adjustment was made by the AO while giving effect to the findings of the earlier Bench of this Tribunal in the assessee's own case for the AYs 1997-98 and 1998-99 [Courtesy: Page 10 of written submission of the AR dated 19.6.2012]. 14.6 In view of the facts and circumstances of the issue and also keeping the principles of natural justice and equity in view, this issue is restored on the files of the AO with a directions to look into the matter afresh and to take appropriate action after due verification of the assertion of the assessee in....
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....value of the scrap of such wastage/obsolete materials as on the 31st March of the financial year should be added to total income. The assessee has not led any evidence that the said decision of the Hon'ble ITAT in the assessee's own case has been reversed by the High Courts. The assessee has not submitted any details/evidence to show that it has even challenge the said finding of the Hon'ble ITAT. Hence, respectfully following the above decision of the Hon'ble ITAT it is held that, the market value of such obsolete material as on the 31st March 2006 is to be taken and added to the total income. The AO has determined the market value of such obsolete stock is Rs. 2,50,68,560/- being the net increase in the provision made during the year for slow moving and obsolete inventory. The said fact has not been controverted by the assessee and no evidence has been led either before the AO or before us to substantiate that the market value of such obsolete stock was different as determined by the AO. Hence, the said proposed addition of Rs. 2,50,68,560/- is confirmed." 15.2 However, during the course of hearing before us, the learned Sr. Counsel drew our attention to the ef....
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....ng the year and credited to the P & L account which had already been disallowed in the earlier year(s) etc., we are of the considered view that this issue also requires to be looked into by the AO. To facilitate the AO to do the exercise, this issue is restored on the file of the AO for needful. It is ordered accordingly. Gr. No.6 [For AY 06-07]: Disallowance out of workmen and staff welfare expenses account - Rs. 10.6 lakhs: 16. Briefly, the assessee had claimed an expenditure of Rs. 10,89,67,670/- under the head 'workmen and staff welfare'. According to the AO, since some of the expenses have increased disproportionately from the previous year, the assessee was required to explain the same. It was submitted by the assessee that the increase was primarily due to an exceptional provision for PF liability of Rs. 5.44 crores booked under the head 'Admn. Employee welfare and recreation'. Excluding the said sum, there was an increase of Rs. 1.06 crores. It was explained by the assessee that there has been an increase in the employees' strength from 1649 to 1882 during the year under consideration. It was, further, explained that as workmen and staff welfare ex....
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....place. In a nut-shell, the AO had not come out with any documentary evidence to remotely suggest that an ad-hoc disallowance was warranted in this case. In judicial parlance, an ad-hoc disallowance doesn't stand the testimony of law. As a matter of fact, no disallowance can be resorted to for the sake of making a disallowance. While making any disallowance, it must be ensured that such a disallowance shall withstand further scrutiny. 16.3.3 In view of the above, we are of the firm view that the authorities below were not justified in disallowing a sum of Rs. 10,60,000/-on this count that too an ad-hoc basis. Therefore, we hereby delete the addition of Rs. 10,60,000/- being disallowance of workman & staff welfare expense. Gr. No.9: Additions of Rs. 12.18 Crores & Rs. 16.32. Crores in respect Gr.No.10 of Tech. Centre Operations for the AYs. 2006-07 & 2007-08 respectively: 17. During the years under consideration, the assessee had provided certain engineering and R & D services to its AEs and earned a net operating profit of 10.22% over total costs. The TPO had objected to the ALP margin computed for provision of engineering services. He had also rejected four comparable ....
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....nctions performed by the assessee. According to the assessee, Esoftcom (Mauritius) Ltd provides its international clients a broad range of services through its three divisions, namely, The Business software Division, the Engineering Division and the Education and training division. The engineering Division will provide engineering software, consulting services and product design, architectural design services, interactive media and electronic and embedded systems. The target market will be the automotive, aerospace and heavy engineering industries. 17.3 However, the TPO had rejected Pentasoft on the premise that the company has declining revenue during the financial year 2006-07. Rebutting the TPO's stand, it was submitted that there are no specific provisions under Indian transfer pricing regulations that require a de facto rejection of companies with declining revenue. Moreover, the TPO had not provided any concrete rationale to substantiate that the company had negative phase of economic cycle. Relies on the findings of the Hon'ble Tribunal in the case of Sony India (P) Ltd. (supra) (iii) PSI Data Systems Limited [PSI]: The TPO had rejected PSI on the ground ....
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....ee that before the DRP the detailed workings were furnished, however, no direction was issued in this behalf. The adjustment was, however, allowed by the DRP in the FYs. 2005-06 and 2007-08. 17.7 On the other hand, the Revenue had refuted the assessee's claim as under: (a) That the assessee had claimed that routine and low-value added functions were outsourced to various tech centres across the world including India, however, had failed to explain the presence of highly qualified metallurgical and IT personnel from IISc, Bangalore and other Indian Institutes; (b) That even the software admitted by the assessee to have been used by the Tech Centre enables high end research. High end research would not mean merely developing additional codes of software. Admittedly, the team is engaged in developing use for futuristic materials, safety related research, integration of control and telemetric software etc., Thus, the claim of the assessee that CAD/CAM is different from high end research services and consequent inference that the Centre is not engaged in high end research is incorrect and is liable to be rejected. (A) Selection of comparables for Tech Centre ....
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....: (a) Sony India Ltd. (supra) (b) Teva India (P.) Ltd. v. Dy. CIT [2011] 44 SOT 105 (Mum.)(URO) (c) Mentor Graphics (Noida)(P) Ltd . (supra) (d) Global Logic India (P) Ltd v. DCIT - 46 SOT 285 (Del)(URO) (ii) Pentasoft Technologies Limited: A company with significant related party transactions cannot be taken as a comparable. In this case, the related party transactions are to the extent of over 80%, there is no question of accepting this company as comparable. (iii) PSI Data Systems Limited: Extensively quoting the Press Release of the company dated 13.8.2009 - Post restructuring, the TPO had claimed that 'As is evident from the above press release, even after reorganization, post 2009, the company is not in engineering design. It was alleged by the Revenue that the assessee had misled by quoting that only engineering related accounts have been adopted for computing comparable margins. The accounts of PSI Data system was available as a consolidated account and no segmental were available. The assessee had adopted the entire turnoff of PSI Data Systems for computing the margins and not segmental accounts. ....
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....ncluding standard process of approvals based on cost of projects. These guidelines and procedures are common for all GM operations around the world. These procedures are defined in advance before executing this work from India. ISL is engaged in provision of various support services for computer aided designing and analysis of automobile parts for the Group's internal requirements for provision of engineering services. It was, further, submitted that the TPO's assertion that provision of CAD/CAM services is functionally comparable to provision of high-end research service providers is misplaced. It was also pointed out that the TPO erred in rejecting four out of six comparables selected by the assessee on the following reasons: (i) Different business profile; (ii) Segmental results not available; & (iii) Related party transactions. 17.8.5 The TPO was inconsistent while applying filters and selecting the final comparables. The assessee had also assailed the rejection of companies such as (i) Onward Technologies Ltd., (ii) Pentasoft Technologies Ltd., (iii) PSI Data Systems Ltd; & (iv) Tata Technologies Limited and also objected to the selection ....
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....th price." 18.3 In view of the above provision of the Act, the AO/TPO is directed to verify as to whether the variation between the ALP so determined and the price at which the international transaction had been undertaken is within the range of five per cent of the latter as subscribed and, if so, the TPO is directed to adopt the price at which the international transaction worked out as the ALP. Otherwise, the assessee's claim is not entertain-able. It is ordered accordingly. Gr. No.11: Addition of Rs. 4,89,60,504/- being royalty transaction for the AY 2007-08: 19. During the year, the assessee had paid royalty of Rs. 12,24,01,259/- as per technology license agreement to GMDAT @ 5%. From the search of ADGAR online database for royalty agreement for independent parties related to assemblies for automobiles. The TPO found two agreements , one of those agreements were related to GMDAT's, M 150 and M 200 project itself i.e., the project for which the assessee had paid royalty to GMDAT. This agreement was exactly the same on account of product royalty with the assessee's product royalty agreement. 19.1 The contention of the assessee before the TPO was that it h....
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....ng to which, Isuzu is to provide certain technical information and assistance in relation to manufacturing of the entire vehicle, 1-163 Wagon (Tavera) and components or parts thereof in India. The royalty was agreed upon at 5 per cent of 'net selling price'. It was, therefore, submitted that it is clear that the royalty rate of 3 per cent paid in both Namyan-Henglong agreement and Delphi-Jingzhou agreement relates to technology transfer with respect to only a single component/parts of a vehicle only whereas the TLA between GMDAT and the assessee relates to technology transfer with respect to an entire vehicle. Moreover, it was claimed by the assessee that the royalty rate of 3 per cent on selling price of the licensed product was in addition to the initial signing payment of USD 80,000 & 1,00,000 respectively. It was, further, claimed that as per the agreement between the assessee and GMDAT, the assessee had paid royalty at the rate of 5 per cent of the Net assessable value in accordance with the formula set-forth in the Government of India regulations. However, in the agreements considered by the TPO, the base of royalty rate was computed on net selling price of the produc....
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....ing as the assessee was wrong in presenting royalty payment as a %age of gross selling price as such sale includes non-licensed items also which form a substantial value out of total sale; (d) That the transaction of payment of royalty has been benchmarked by the assessee by using an internal CUP which has been rejected by the TPO and he had conducted his own search to find two external CUP which have been used for benchmarking the transaction of payment of royalty in the case of the assessee; (e) That the royalty rate referred in Isuzu agreement was not 5% but it was Yen 25000 (Rs.l9072) per licensed vehicle subject to a ceiling of 5% of the net sale price. At an estimated price of Rs. 7.5 lakhs for a Tavera Vehicle, the royalty percentage would be merely 1.2% and not 5% as adopted by the assessee 19.7 Extensively quoting the agreement entered into between GMDAT and the assessee, it was submitted that - (a) That accordingly the assessee can only source or manufacture licensed parts for installation in the vehicles manufactured/distributed by it. The remaining parts will have to be sourced only from GMDAT as per the CKD Agreement; (b) That the....