TaxTMI 
TaxTMI 
2014 (7) TMI 639
X X X X Extracts X X X X
X X X X Extracts X X X X
....s at Balanagar (AP) and Ballabgarh (Haryana). The Balanagar facility predominantly manufactures compressors for air conditioning equipments whereas the Ballabgarh facility makes compressors meant for refrigeration equipments. In addition, Assessee manufactures sub-assembly and components (pump kits, crankshafts etc.) from its Export Oriented Manufacturing Unit (EOU Unit) in Balanagar and exports them to TPC USA. All the compressor sub-assembly & components produced from EOU Unit is exported only to TPC USA, in order to manufacture compressor for sale in USA market. The annual requirements and the specifications of the components are provided by TPC USA. Assessee does not sell similar components to any other customer in India or outside India and therefore acts as a contract manufacturer for TPC USA with respect to sale of compressor sub-assembly and components. ITA.No.2228/Hyd/2011- AY 2007-08 4. Assessee has raised 6 grounds in ITA.No.2228/Hyd/2011 for the A.Y. 2007-08 out of which, ground No.1 is general in nature and therefore does not require adjudication. Ground No. 2.2, 2.5 and 2.6 are not pressed and accordingly, these grounds are dismissed as not pressed. Assessee also pl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ections and accordingly, the AO passed consequential order making the adjustments to the income returned, along with other corporate adjustments in computation. 7. The learned counsel referring to the orders of the authorities and the paper books filed submitted that orders of the TPO/DRP suffers certain factual errors as well as the issues on comparability. On Ground 2.1, referring to the adjustments made with reference to sales made to AE of Compressor sub-assembly and components, it was submitted that Assessee operates 100% EOU and exports to TPC USA. Assessee arrived at the cost, which is identifiable from the separate books of account maintained for the EOU at 16,38,68,871/-. However, the AO without any show cause notice to Assessee, re-worked out the proportionate operating cost, ignoring the separate details furnished in this regard, at operating cost at a higher figure of Rs. 20.02 crores. Referring to TPO's order, the learned counsel submitted that on a total cost of Rs. 459.63 crores of Assessee company, the AO arrived at the proportionate cost attributable, on the basis of sales turnover, at Rs. 20.02 crores. It is the submission that when Assessee has maintained se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ced on record, it was submitted that Assessee is not selling compressors to the AE but only components pertaining to the compressor for which separate 100% EOU is established. Therefore, selecting companies, which are dealing in compressors is not correct. In view of this, Assessee is objecting to inclusion of various comparables by the TPO in the transfer pricing analysis and arriving at the arithmetic mean of PLI at 9.79%. It was fairly admitted that adjudication on the basis of comparables will arise only if the suo-moto adjustment made by Assessee was ignored. If it is taken into consideration the adjustment proposed by the TPO on the basis of PLI at 9.79% is within the (+)/(-) 5% threshold limit provided under the Act. 10. The learned DR, however, referred various facts and submitted that TPO is correct in arriving at the operating cost on proportionate basis and correct in rejecting revised return, which was filed after filing original return and in selection of comparables which were not objected to by Assessee. He supported the orders of TPO/DRP. 11. We have considered rival contentions and examined the record. There are five issues for adjudication in this appeal under t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be stated as omission on the part of Assessee or in a worse situation a wrong statement in the original return, as provided u/s 139(5). The provisions of section 139(5) are as under: "139(5): If any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier." As can be seen from the above provision of the Act, we are of the opinion that the return filed subsequently is a valid return, which is to be considered as correct. Since both the TPO and DRP erred in not considered the same, we direct the AO to consider the revised return as a valid return. In these circumstances, grounds of Assessee on this issue are allowed. (B) Whether adjustment made by the AO ignoring suo-moto adjustment made by the Assessee is correct or not ? This issue was decided in earlier year in assessee own case in ITA No 1686/Hyd/2010 dt 13-11-2013. It was decided as under: &nb....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee makes suo-moto adjustments to the net profit margin as realized by the enterprise, the same has to be considered under (e)(i) of section 10B. In this connection, we refer to the findings of the coordinate bench of ITAT, Delhi in the case of Haworth (India) Pvt. Ltd. (supra), which are as under: "66. It can be seen from the above table that the major component of receipt of International transaction of the assessee is commission income as it constitute Rs. 15,39,33,769/- of the total operating income of Rs. 17,73,98,197/-. Therefore, it cannot be said that commission expenses which have been suomoto disallowed by the assessee were not claimed as operating expenses while computing the arm length price. If they are subsequently disallowed suomoto by the assessee in the revise return, they are required to be excluded from the operating cost and the calculation of the assessee should have been accepted that its profit margin should have been taken according to the income computed in the revise return for which the assessee has also paid the due taxes. In this manner, finding force in the contentions of ld. AR, we are of the opinion that ground no. 2 of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g the same and estimating the operating cost on the basis of the proportionate turnover. In fact, Assessee has incurred loss in these transactions, where as there was profit in other activity, which constitute 95% of Assessee's turnover. Taking sales as basis and arriving at the OP cost does not result in correct appreciation of Assessee's transactions. Therefore, since segmental working is available on the basis of separate books of account maintained for EOU unit, we are of the opinion that operating cost has to be taken at Rs. 16,38,68,871/- and the TPO/AO is directed to take operating cost with the above figure. Accordingly, this contention of Assessee is allowed. (D) Whether the comparables selected by the TPO is correct ? There are two sets of objections on the comparables selected by TPO; one being data pertaining to companies which have different accounting period than that of Assessee and the second one being the functional comparability of selected companies, being in business of compressor manufacturing whereas adjustments were done in the segmented results of supply of components (to the compressors). As selection of comparables by TPO suffers from these basic....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of such enterprises." Explanation provided retrospectively there in also clarifies the expression 'international transaction'. International Transaction means a transaction between two or more AEs. This does not take into consideration adjustments made to ALP at this stage at all. (iii) Section 92C, which is computation of arm's length price is as under: "92C. (1) The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed : Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm&....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (vi) There is one more aspect to the contention made. As briefly stated, Assessee incurred loss in International transaction and suo-moto adjustment of Rs. 2,82,69,298 on the basis of transfer pricing documentation. This indicates that the Assessee exercised option provided u/s 92C particularly of proviso of (+) or (-) 5% threshold and did not treat the actual sale transaction as ALP. Having exercised the option and treating the different (enhanced) amount as ALP, in our view, Assessee cannot contend that the threshold of (-) or (+) 5% is available again, if TPO action results in further addition. On this reason also the claim fails. This contention of Assessee is considered as rejected. Respectfully following the above, we reject this contention of assessee. 12. Ground no 2 is accordingly considered partly allowed for statistical purposes. 13. Ground No.3 pertains to the addition of amount of Rs. 1,07,59,077/- to the CADEM segment in the transfer pricing report of the A.O. The TPO/DRP determined the arms length mark-up for provision of software engineering services to be at 24.35%. It was the contention that TPO rejected the comparability a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp; (7) Megasoft Ltd., (8) Tata Elxsi Ltd., (9) Thirdware Software Solutions Ltd., (10) Wipro Ltd., 16. In all the cases above, Ld. Counsel relied on the Coordinate Bench decision in the case of Intoto Software P. Ltd. in ITA.No.2102/Hyd/2011for exclusion of the above comparables, except one in case of Tata Elxsi Lmited which was objected relying on the Co-ordiante Bench decision in the case of N/s. Conexant Systems India Private Limited ITA.No.1429/Hyd/2010 and ITA.No.1978/Hyd/2011 dated 22.03.2013. 17. After hearing rival contentions, we agree that the following comparables were excluded by the Coordinate Bench considering the similar facts in the case of Intoto Software India Ltd. (supra). The findings in Intoto and also in the case of Conexant Systems India (P.) Ltd. (supra) Software India with reference to each of the comparables and are as under : "Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software produc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp; "We have heard both the parties. We find that Infosys Technologies Ltd., though, is into the similar business of the assessee as software development, cannot be considered as a comparable to any other companies which are also involved in similar activities. It is not only a giant company but is also engaged in development of various niche products. It cannot be compared to the assessee in any manner. Similar directions have been given by the Tribunal at Delhi and Hyderabad Benches in the cases cited (supra)". KALS INFORMATION SYSTEMS LTD: "We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on and also because of diverse nature of its business, it is very difficult to scale-up the operations of Tata Elxsi Limited. In view of this, Tata Elxsi Limited has informed that it is not fair to use its financial numbers to compare it with any other company. The communication dated 25th August, 2009 to the TPO is placed before us. As this communication was not before the TPO at the time of transfer pricing adjustment we deem it fit and proper to remand this issue also to the file of the TPO to reconsider adopting this company as the comparable in the light of observations of this company to the TPO in the case of another assessee. In the result, the Assessing Officer/TPO is directed to reconsider the issue in accordance with law, after affording a reasonable opportunity of being heard to the assessee". THIRDWARE SOFTWARE SOLUTION LIMITED : "As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no software products that the company invoiced during the relevant financial year and the financial ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....llowed an amount of Rs. 13,27,123/-. Assessee submitted before the DRP that an amount of Rs. 7.67 lakhs was deducted and paid during the year and amount of Rs. 5,50,000/- was reversed, therefore, A.O. should not have disallowed the amount. The DRP however, relied on the orders of the A.O. but directed that assessee can furnish challan and A.O. may consider the same in accordance with law. It was the contention that A.O. did not give any opportunity in order to reduce the amount. 20. We are of the opinion that this issue is to be restored to the file of A.O. for examination of the facts and if assessee has already paid the amount or amount was disallowed in earlier year, the disallowance to that extent should not be made. In case, assessee reversed the amounts provided in earlier year also and to that extent, A.O. is directed to examine the facts and decide the issue accordingly. Assessee should be given due opportunity before deciding the issue. With these directions, ground Nos. 4 and 5 of the assessee are considered as allowed for statistical purposes. 21. Ground No.6 pertains to disallowance of an amount of expenditure paid on account of Daughter's Marriage Benefit fund. A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ployees and assessee has been making matching contribution, allowability of this amount does not attract the provisions of section 40A(9). Therefore, we are of the opinion that both A.O. and DRP are wrongly disallowed the amount. We direct the A.O. to allow the amount, as claimed. 23. In the result, appeal of the assessee is partly allowed for statistical purposes. ITA.No.1863/Hyd/2012 - A.Y. 2008-2009 : 24. In this appeal the assessee has raised 12 grounds which are as under : "1. That on the facts and circumstances of the case, the assessment order ('Order') passed by the Learned Assessing Officer ("A.O".) / Ld. Transfer Pricing Officer ("TPO") and Hon'ble Disputes Resolution Panel ('DRP') under section 143(3) read with section 144C of the Income Tax Act, 1961 ('Act') is bad in law. 2. That on the facts and circumstances of the case, the Ld. A.O. /Ld. TPO and the Hon'ble DRP have erred in making an adjustment to the arm's length price of the appellant's international transactions in the nature of sale of compressor sub-assembly and components with Associated Enterprises by Rs. 4,62,00,0....
X X X X Extracts X X X X
X X X X Extracts X X X X
....552 3. Leave pay 21,75,463 4. Service rewards 7,14,326 Total 92,80,575 10. That the Ld. A.O. and the Hon'ble DRP have erred, on the facts and circumstances of the case, in disallowing the payment of Rs. 4,80,000/- made on account of daughter's marriage benefit. 11. That the Ld. A.O. and the Hon'ble DRP have erred, on the facts and circumstances of the case, in not allowing the claim for deduction of provision for commission of Rs. 3,09,033/- made during the year. 12. That the Ld. A.O. and the Hon'ble DRP have erred, in including the interest income of Rs. 5,37,000/- twice in computing the total income'. 25. In this year, Return of income was filed originally on September 30, 2008 declaring total income of Rs. 37,15,14,613/- and subsequently revised return was filed declaring income of Rs. 30,26,79,341/- after setting off earlier year losses thereby, arriving at total income at INR NIL. In the T.P. documentation, assessee made suo motu adjustment of an amount of Rs. 2,32,09,835/- in order to made the arms length standard. In the T.P. study, A.O. considered amongst vari....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that the said evidence was already furnished and also enclosed as attachment-7 to Annexure-1 to Form 3CD. DRP was requested to admit additional evidence which was filed along with the application. Unfortunately, DRP did not decide either of the issues. It only directed the A.O. to allow the same as per the provisions of the Act. A.O. did not make any verification. 28.2 On perusing the facts on record, we are of the opinion that both A.O. and DRP wrongly considered the above amounts. As far as disallowance of Rs. 5,23,715/- is concerned, it is simply in higher disallowance than required which should be excluded. As regards amount of Rs. 27,64,234/- it is also a direction by DRP to examine and allow the amount. It is the duty of the A.O. to examine and allow the amount. Since he has not complied with the directions of the DRP, we direct the A.O. to again verify the payment and allow the same. Ground No.9 is accordingly allowed for statistical purposes. 28.3 Bonus, Leave Pay and Service Rewards : Similar disallowance with reference to bonus, leave pay and service rewards was made. Even though, the DRP directed the A.O. to verify and allow the amounts, A.O. did not allow the amount ....