TaxTMI 
TaxTMI 
2015 (6) TMI 591
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....06-07. ITA No. 2071/K/2010 by assessee is arising out of order of Dispute Resolution Panel, Kolkata passed u/s. 144C(5) of the Act vide F. No. DRP/Kol/06/2010-11/107-111 dated 28/29.09.2010. Assessment was framed by DCIT, Circle-11, Kolkata (order giving effect to DRP's direction) u/s. 143(3) r. w. s. 144C(13) of the Act vide his order dated 04.10.2010 for AY 2007-08. 2. At the outset, it is noticed that assessee's appeal in ITA No.186/Kol/2011 is barred by limitation by 202 days and a condonation petition is filed qua that. The reasons stated are that such delay occurred on account of fire accident took place on assessee's business premises on 13.06.2010. The order of CIT(A) in appeal no. 614/CIT(A)-XII/Circle-XI/09- 10/Kol for the AY 2005-06 was served on assessee on 14.05.2010 and the last date for filing of appeal before Tribunal against this order was 13.07.2010. As there was a fire accident on 13.06.2010, the papers relating to assessment for the above stated assessment year 2005-06 and orders in appeal passed by CIT(A) against the assessment order got dislocated during such fire. In this fire, computers, UPS and other assets were destroyed or damaged and records were disloc....
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....1962. Against confirmation of disallowance of warranty and reworking costs of Rs. 2,26,84,459/- assessee has raised fol lowing ground no. 3(a), (b) and (c): "3. (a) That the ld. CIT(A) erred in confirming the order of the AO disallowing the sum of Rs. 22,684,459/- being reimbursement of reworking cost paid by the appellant to M/s. AT & S Austria, by applying the provisions of section 40(a)(i) of the Act. (b) That the ld. CIT(A) erred in confirming the order of the AO holding the aforesaid payment to be in the nature of fees for technical services under section 9(1)(vii) of the Act. (c) That the ld. CIT(A) erred in confirming the order of the AO holding that tax was required to be deducted at source from the aforesaid payment by applying the provisions of section 40(a)(i) of the Act." 4. Brief facts relating to the above common issue are that the assessee is an Indian Company being subsidiary to its parent company AT&S Austria is engaged in the manufacture and sale of professional grade printed circuit boards. The AO noticed from audited accounts that the assessee has paid a sum of Rs. 2,55,17,674/ being payment for preliminary warranty and reworking costs, which are in the nat....
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....le to this ground also in relation to reworking cost and therefore, the appellant is liable to deduct tax at source under section 195 of the Inc Tax Act, 1961 from payment towards reworking cost. (iii) Regarding plea of the appellant that the reworking costs are not in the nature of fees for technical service it may be noted that the appellant is engaged in the business of manufacture and sale of professional grade printed circuit board and in my opinion repair jobs of such sophisticated goods shall always be in the nature of technical services. In this regard reference is made to the case laws viz., Sahara Airlines Ltd. Vs. Deputy CIT (2002) 83 ITD 11, 41 (Del) wherein it was held that the consideration for repair job amounted to for technical service as defined in section 9(1)(vii) of the Act. In the case of Mannesmann Demag Lauchhammer Vs. CIT (1988) 26 ID 198, 202-03 (Hyd), it was held fees for services rendered to repair of machinery already installed amounts to technical fees. (iv) Therefore based on the above facts and the cited case laws, in my opinion, there is no force in the submission of the appellant that the payments of reworking jobs are not in the nature of fees f....
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....ns taking place in India, it would be futile to contend that the source of earning income is outside India, i.e., in the country of the customer. Source is referable to the staring point or the origin or the spot where something springs into existence. The fact that the customer and the payer is a non-resident and the end product is made available to that foreign customer does not mean that the income is earned from a source outside India. (vi) The appellant has also submitted that the price of the product sold to AT & S Austria are fixed at fair market value compared with other distributors or customers of the appellant taking into account sales volume, competition and local market conditions etc., Therefore, the goods exported by the appellant to the AT & S Austria are not at cost price but at cost plus profit. Therefore, it could not be said that the source of income is outside India. Another hurdle that comes in the way of the appellant is that it cannot be said that the transfer has taken place outside India. The property could have very well passé in India. It may also be noted that the appellant has also claimed deduction under section 80HHC in respect of such export....
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....e for TDS. Hence, he argued that the order of the CIT(A) was liable to be reversed. Ld. CIT-DR could not point out the nature of the fresh evidence filed before CIT(A) by the assessee in respect of the second ground raised by the Revenue that the deletion by CIT(A) was on the basis of fresh evidence produced in the course of the appeal proceedings. 6. In reply, Ld. Counsel for the assessee made argument that in order to reach the customers in Europe, the assessee had entered into a Distribution Agreement with AT & S Austria whereby the assessee has granted exclusive rights to AT & S Austria to market, distribute and sell products in European countries. Under the aforesaid agreement, the goods manufactured by the assessee were sold to AT & S Austria which in turn sold the goods to final customers. The price for the products was fixed at fair market value compared with other distributors or customers of AT & S Austria taking into account various parameters. As per the aforesaid agreement, the warrant costs to the customers for the goods sold were lying with the assessee. Accordingly, AT & S Austria was entitled to deduct a preliminary warranty amount of 2% of the gross invoice price....
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....rdinate Bench of this tribunal in assessee's own case for the assessment year 2004-05, wherein the Tribunal had set aside the issue to the file of the Assessing Officer as no agreement for payment of warranty was made available before the Tribunal. Ld. Counsel drew our attention to the copy of the order of the Tribunal at page 47 of assessee's paper book and stated that consequential order had been passed for the assessment year 2004-05 by the Assessing Officer wherein he has allowed the warranty costs incurred by the assessee by holding that the payments of warranty costs represent only reimbursement of actual cost and there was no need to deduct TDS before making payment to AT & S Austria. He drew our attention to page 49 of the paper book, which was the copy of the assessment order for the assessment year 2004-05 and stated the fact that while passing the consequential assessment order for the AY 2004-05, the AO had taken cognizance of the order of the CIT(A) for the AY 2005-06 being the impugned order of CIT(A) and had held that the fact relating to the AY 2005-06 was identical to that of AY 2004-05 and as such there was no need to deviate from the decision given by CIT(A) for ....
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....ground that the terms of the agreement provides from making available inventory physical movement and self-control process, assistance to enable inventory transactions and management and business planning to address service level relating to the local business and customer needs. However, the assessee is not utilising the said services in order to avoid deduction tax at source. This court had an occasion to consider this agreement in the case of CIT v. De Beers India Minerals P. Ltd. Reported in[2012] 346 ITR 467 (Karn), where, after referring to various provisions of law, it was held that the question, whether along with rendering technical services, whether the technical knowledge with which the services was rendered was also made available to the assessee/customers is purely a question of fact which is to be gathered from the terms of the contract, the nature of services undertaken and what has transmitted in the end after rendering technical services. If along with technical services rendered, if the service provider also makes available the technology which they used in rendering services, then it falls within the definition of "fees for technical services" as contained in th....
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....M/s. AT & S, Austria Technology & Systemtechnik, Aktiengesellschaft (hereinafter called 'AT & S, Austria"). The above payment was made by the assessee without deduction of tax at source. Before the AO, it was explained by the assessee that the amount has been paid at cost of inter-company services received. The assesese has entered into an agreement dated 13.03.2001 with M/s. AT & S, Austria. In the agreement, it is stated that M/s. AT & S, Austria has entered into different agreements with different providers of services. A part from these services rendered by the service providers relates to business operation of the assessee and are utilized by the assessee. M/s. AT & S, Austria makes the payment on behalf of the assessee to the service providers for those services which are rendered by the service providers for the business operation of the assessee. The assessee then reimburses M/s. AT & S, Austria for the payment made by it on behalf of the assessee to the service providers. The AO was of the view that the services provided are in the nature of fees for technical services u/s. 9(1)(vii) of the I.T. Act, 1961. He also rejected the assessee's contention that it is reimbursement....
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.... (TDS). 2.3. The ld. Departmental Representative, on the other hand, relied upon the orders of the authorities below. He submitted that the assessee has utilized the services being provided by various service provider companies. The assessee made the payments for such services utilized by it. Therefore, in effect, the payment was made by the assessee to various service providing companies through M/s. AT & S. Austria. M/s. AT & S. Austria was only a conduit through which payment was made. The services utilized by the assessee were highly technical and therefore, the same were within the meaning of technical services as provided u/s. 9(1)(vii) of the Act. He, therefore, submitted that the assessee was liable to deduct tax at source from the payments made by it. Since the assessee had failed to deduct tax at source, sec. 40(a)(i) of the Act was attracted. The same should be sustained. The ld. DR also stated that the facts of various cases relied upon by the ld. Counsel for the assessee are altogether different. 2.4. In the rejoinder, it is stated by the ld. Counsel that the various service providers had an agreement with M/s. AT & S. Austria and not with the assessee-company. There....
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....R/3 Einfuhurung IN9 3 108,693 13,386 No B. Licenc es for Firewall software and hardware. Costs will be evenly spared among the total number of plants l in the AT&S group Projec t Firewall Cis co PIX IN11 4 3,589 449 No Wartung Firewall Cisco PIX 4 0 7 Not mentioned ND Charon Faxserver- Kauf IN11 2 7,885 1,606 TOTAL 87,481 2.6. From the above, it is evident that the allocation of expenditure for utilizing Microsoft products was on the basis of number of PCs used by the service receiver companies. Similarly, services provided by SAP, Austria were allocated on the basis of number of SAP users. In view of the above, we are of the opinion that the amount paid by M/s. AT & S. Austria for using the products of various service provider companies was allocated amongst the group companies including the assessee on t....
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.... we hold that in the process of reimbursement of expenditure, no income can be said to have generated requiring deduction of tax at source. Since there was no liability of deduction of tax at source, section 40(a)(i) of the Act cannot be invoked. Accordingly, ground no. 2 of the assessee's appeal is allowed". As the facts are similar for the AY 2005-06 considering the fact that for the AY 2004-05 the AO has accepted the claim of the assessee that the reimbursement of the warranty expenses is not liable for TDS u/s 195 of the Act and as the Revenue has not been able to dislodge this finding, the finding of CIT(A) deleting the disallowance made on account of non-deduction of TDS in respect of warranty expenses stands confirmed. This issue of revenue's appeal is dismissed. 8. The common issue in this appeal of assessee raised by way of above reproduced grounds 3(a) to 3(c), is against the partial confirmation of the disallowance made by the Assessing Officer in respect of the reimbursement of the reworking costs. Main contention of Ld. Counsel for the assessee in respect of the balance amount of Rs. 2,26,84,456/- the said amount was on account of reworking costs paid by the assessee....
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....duct sold and in order to make the product viable for sale as agreed, the customer themselves incurred cost on their own to remove the defects and got the same reimbursed from AT & S Austria and consequently got the cost reimbursed on actual basis from the assessee. 9. Ld. Counsel stated that during the relevant previous year, AT & S Austria raised debit notes on the assessee towards the said manufacturing costs incurred by it and the repairing cost reimbursed to the customers in Europe in order to get the products repaired before sale in Europe, amounting to Rs. 2,26,84,459/-. The detailed break-up of the debit notes issued by AT & S Austria for reimbursement of actual cost is enclosed at pages 63 to 122 of the paper book. The said cost was debited in the books of accounts of the assessee under the head "Sub-contracting charges" during the previous year relevant to the AY under consideration. It was further explained by Ld. Counsel that while making the subject payment of Rs. 2,26,84,459/- to AT & S Austria in respect of the reimbursement of actual manufacturing and repair cost, the assessee did not deduct any tax under section 195 of the Act as payments constituted reimbursement....
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....anation to section 9(1)(vii) in so far as there was no managerial technical or consultancy services provided by AT & S Austria but what was being done under the re-working was mere in the nature of assembly. According to him, even as per the provisions of section 9(1)(i) and clause (a) of Explanation 1 thereto no part of the income earned by AT & S Austria was attributable to the operations carried on by the assessee in India in so far as the manufacturing operations and the repairing operations are carried out by AT & S Austria by using their manufacturing facilities located in Austria and there was no operation of the same attributable to any operation carried on in India by AT & S Austria. Hence, as per the DTAA agreement entered into between India and Austria as per Article 5 read with Article 7 as AT & S Austria did not have any permanent establishment in India, the income earned by AT & S Austria was liable to tax only in Austria and not in India. Moreover, the nature of the activities performed by AT & S Austria on the products sold by the assessee in Europe was in the following manner. The sale of the products in Europe consisted of two parts, the first part is the goods ma....
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....e Act. Consequently it cannot be held that the assessee has common establishment of the parent company AT & S Austria. This is because the assessee has sold goods to AT & S Austria. A perusal of the provisions of section 195 of the Act alongwith Explanation (2) thereto as explained by the Ld. SR D.R. would give an indication that all types of payments made to a non-resident by an Indian Company would be liable for TDS under section 195of the Act. It would mean even that if an assessee in India makes any purchases from a foreign entity or a non-resident entity and the assessee in India makes the payment for such purchases even that would be hit by section 195 of the Act. This is because of the Explanation (2) to section 195 of the Act. However, this is not the true interpretation. The Explanation only explains the provision. The main provision of section 195(1) of the Act uses these specific words "any other sum chargeable under the provisions of this Act". Therefore, for the invocation of the provisions of section 195(1) of the Act, the main condition is that the payment must be of the sum chargeable under the provisions of the Indian Income Tax Act, 1961. Admittedly there is a DTA....
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..... 2,26,84,459/-, stands deleted. This issue of assessee's appeal is allowed. 13. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of AO in disallowing the payments made towards reimbursement of Information Technology costs being expenses on connectivity and software charges. For this the assessee raised following ground:- "(2)(a) that the ld. CIT(A) erred in confirming the order of the Assessing Officer disallowing Rs. 1,50,44,031/-, being payments made to M/s. AT & S Austria towards reimbursement of Information Technology costs being expenses on connectivity charges and software, without appreciating appellants contention. (b) that the ld. CIT(A) erred in confirming the order of the Assessing officer disallowing the aforesaid sum of Rs. 15,044,031 paid to M/s. AT & S Austria, by applying the provisions of section 40(a)(i) of the Act. (c) That the ld. CIT(A) has not appreciated the fact that the impugned amount is not income chargeable to tax in the hands of M/s. AT & S Austria or respective vendors and consequently no tax was required to be deducted at source there from. (d) That the CIT(A) erred in not following Jurisdictional Tr....
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....ink between Austria and Nanjangud and software license and up gradation to the parent company in Austria and also to the subsidiary companies including the appellant company. It is not that the parent company has received the above said services and in turn just passed on the same to the subsidiary companies. All the group concerns including the parent company and the appellant company simultaneously received the services from the service providers. It is only when the payment comes an internal arrangement among group companies has arrived at and the parent company being at the helm of the affairs controlling/supervising all the group concerns including the appellant company has taken up the responsibility to make the payments not only on its behalf but also on behalf of subsidiary companies including the appellant company. This is mere an arrangement and the facts remains that the appellant company received the services along with the group concerns and remitted the payments through its parent company. As said earlier this has been done for the sake of convenience and with a view to exempt itself for making TDS on such payments. By this kind of arrangement one cannot escape from ....
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.... This needs investigation and there may be situations that 100 per cent of such sum is chargeable to tax and there may be situations where practically the whole of such sum is not chargeable to tax. This would depend on the facts and circumstances of each case. Now, whenever an assessee making payment to a non-resident finds that only a particular portion is chargeable, then obviously he has been given a right in terms of subsection (2) which the assessee has called a beneficial section. As per sub-section (2), of section 195 whenever a person responsible for paying any sum chargeable considers that whole of such sum would not be income chargeable in the case of recipient, he may9 make an application to the AO to determine the appropriate portion of such sum so chargeable and upon such determination, tax shall be deducted under sub-section (1) only on that proportion of sum which is so chargeable, which means, the person responsible for making payment, etc., cannot himself decide what is the appropriate proportion which is chargeable to tax. The expression "by general or special order" and the "appropriate proportion" in this sub[section are key words to understand the meaning in t....
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....the basis number of PC's/laptop used, number of SAP user and time used in using the leased lines for connectivity charges but AO disallowed the aforesaid payment by rejecting the contention of the assessee that reimbursement of actual cost would not constitute income in the hands of AT & S Austria and further alleged that AT & S Austria was merely a conduit pipe for making the payment way of internal arrangements which could not escape tax liability under section 195 of the Act. And CIT(A) also confirmed the action of the AO. He stated that in the assessee's own case for the assessment years, 2002-03, 2003-04 and 2004-05, Coordinate Bench of this Tribunal had accepted the contention of the assessee that the reimbursement of the actual cost is not liable to tax. He drew our attention to pages 129 to 144 of the paper book, which were the copies of the orders of the Coordinate Bench of this Tribunal in the assessee's own case in ITA Nos. 1448 & 1449/Kol/2008 dated 24.07.2009 for the assessment years 2002-03 and 2003-04 and ITA No. 1450/Kol/2008 dated 31.03.2010 for the assessment year 2004-05. (These orders have already been relied upon in the appeal of revenue above in ITA NO. 1262/K....
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....ld not be invoked. The facts being identical for this assessment year, respectfully following the decision of Coordinate Bench of this Tribunal in the assessee's own case for the assessment years 2002-03 and 2003-04 referred to supra, finding of CIT(A) stands reversed and the disallowance as made by the Assessing Officer in respect of the reimbursement of the payments made to AT & S Austria to the extent of Rs. 1,50,44,031/- stands deleted. This issue of assessee's appeal is allowed. 19. The first common issue in ITA No. 2071/Kol/2010 & ITA No. 779/Kol/2012(assessee's appeals) for AY 2006-07 & 2007-08 is against the assessments framed by AO u/s. 143(3) read with section 144C(13) of the Act dated 04.10.2010 & 09.11.2011 for the AY 2006-07 and 2007-08 respectively and al so the directions given by DRP u/s. 144C(5) of the Act dated 28.09.2010 & 23.09.2011 making an adjustment towards Arm's Length Price of Rs. 20,14,14,448/- and Rs. 22,80,03,914/-. For this, assessee has raised following 6 grounds in AY 2006-07: "1. That the order of the learned Deputy Commissioner of Income Tax, Circle-11, Kolkata (Assessing Officer or Learned AO) which is in conformity with the direct ions of the D....
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....ons as a distributor earning arm's length returns and AT&S Austria functions as a distributor earning arm's length returns and AT&S India is characterised as a full fledged licensed manufacturer which assumes significant business risks associated with carrying out its manufacturing activity. 5. The learned DRP erred in not appreciating the fact that the appellant had incurred operat ing losses in net level only for FY 2005-06 as compared to profit in previous and subsequent years. Such losses were due to various business reasons including rise in raw materials prices and also due to it being the first year of expansion. Also, the learned DRP erred in ignoring the business and commercial realit ies of the appellant. 6. That the learned DRP erred in concluding that the amended proviso to section 92C(2) of the Act under Finance (No.2) Act, 2009 would be applicable to assessment year 2006-07 and in not appreciat ing that even if the arm's length price falls outside the 5% tolerance band the adjustment would have to be reckoned after allowing the benefit of +/-5% variat ion as provided in proviso to section 92C(2) of the Act, while determining the arm's length pr ice." For AY 2007-08....
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....orm No. 35A before the Dispute Resolution Panel (DRP), Kolkata. DRP vide its order dated 28.09.2010 directed the AO u/s.144C(5) of the Act to make an adjustment towards Arm's Length Price at Rs. 20,14,14,448/- as against the adjustment determined by TPO at Rs. 15,92,64,423/-. Aggrieved, assessee is in appeal before Tribunal. The Assessing Officer referred the computation of the Arm's Length Price in relation to the international transactions entered into by the assessee, which is Associated Enterprise for the relevant previous year to the Transfer Pricing Officer. The assessee had filed its transfer pricing study for the relevant previous year with the Transfer Pricing Officer . The assessee had adopted the TNMM method representing the transactional net margin method as the most reliable measure of arm's length result for the manufacturing segment. Under the TNMM method, the term specified in transactional net margin, the assessee had adopted the cash profit margin on sales as the profit level indicator for the TNMM analysis. The assessee had completed the search process in Prowess and capital line plus data-bases in adopting the filters for the search. One of the most filters of s....
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....he submission that the Dispute Resolution Panel vide an order dated 28.09.2010 accepted the assessee-company's claim for adoption of the cash profit margin on sales as the appropriate profit level indicator. However , the DRP directed for the exclusion of the Fine Line Circuits Limited from the list of comparable companies on the ground that the five year's average NFA to sales ratio of Fine Line Circuits Limited was significantly lower than that of the assessee as al so on the ground that Fine Line Circuits Limited did not clear the text of the fixed assets ratio analysis as the ratio of assets employed to the total turnover was significantly lower as compared to that of the assessee. Consequently the DRP computed the Arithmetic Mean of the cash profit margin on sales of the remaining three comparable companies at 17.7433% based on the data for the financial year 2005-06 for the assessment year 2007-08 relevant to the financial year 2006- 07. The Transfer Pricing Officer again applied the net fixed assets to sales ratio to exclude the Fine Line Circuits Limited and considered only two of the comparables being BCC Fuba India Limited and Precision Electronics Limited as comparable c....
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....disapproval was not necessarily a binding precedent. In this connection, the appellant company's plea that there was no change in the operations in the subsequent year (i.e. previous year 2006-07) had no relevant. Seventh Allegation: the appellant company had failed to demonstrate as to how in the circumstances of the appellant company cash profit margin on sales would be the most appropriate PLI of the six PLI pointed out by the appellant company itself. Eighth Allegation: The appellant company misplaced its reliance in explaining the moot point as to which of the ratios between cash profit margin on sales and operating profit margin in the circumstances of the appellant company truly indicated its profit level." 23. Ld. Counsel argued that for the AY 2007-08, the methodology adopted by the DRP was erroneous in so far as for the AY 2006-07 the DRP itself had accepted the contention of the assessee that it is a cash profit margin on sales which was the appropriate profit level indicator under the TNMM method. Now for the AY 2007-08, it was the submission that the operating profit margin was more realistic profit level indicator than cash profit margin on sale was not correct. It....
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....delines for Multinational Enterprises and Tax Administrations (hereinafter referred to as the 'OECD Guidelines'). In this background, considering the legislative intent manifested by way of rule 10A(d) read with rule 10B of the Rules, it clearly emerges that in appropriate circumstances where closely linked transactions existed, the same should be treated as one composite transaction and a common transfer pricing analysis be performed for such transactions by adopting the most appropriate method. In other words, in a given case where a number of closely linked transactions are sought to be aggregated for the purposes of bench marking with comparable uncontrolled transactions, such an approach can be said to be well established in the transfer pricing regulation having regard to rule 10A(d) of the Rules. It may not be feasible to define the parameters in water tight compartment as to what transactions can be considered as 'closely linked', since the same would depend on facts and circumstances of each case. As per an example noted by the Institute of Chartered Accountants of India (hereinafter referred to as the 'ICAI') in its Guidance Notes on transfer pricing in para 13.7, it is s....
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....s distributed among the group companies based on actual usage of the information technology se54rvices. During the previous year 2006-07, the appellant company received shared information technology services from AT&S AG and made payment of INR 115.75 Thousand to the latter for satellite link charges and software used in running the business. * Your Honours may please find in page no.97 of the paper book that AT&S AG would charge the appellant company a preliminary warranty of 2% on the sales price relating to its sales of the appellant company's finished goods (i.e printed circuit boards) to end-customers as per the distribution agreement entered into between AT&S AG and the appellant company. During the previous year 2006-07, the appellant company received a sum of INR 113.38 Thousand as warranty claim and repair / reworking income which represented the sum released by the distributor (i.e AT&S AG) on account of no warranty claims arising out of printed circuits boards manufactured by the appellant company. * Your Honours may please find in page no.97 of the paper book that the appellant company was sanctioned certain credit facilities i.e. working capital limits arrangement fr....
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....thout any mark-up thereto. 4.7 Your Honours may please appreciate that the aforesaid international transactions were directly linked to the business activity (i.e, production and sale of printed circuit boards) of the appellant company and generated from a common source i.e., manufacture and sale of printed circuit boards by the appellant company. Hence, the transactions were closely linked in view of the decision given by the Hon'ble Pune Tribunal and the Guidelines issued by the ICAI. The aforesaid international transactions could therefore be treated as one composite transaction and a common transfer pricing analysis could be performed for such transactions by adopting the most appropriate method. 4.8 Further, Your Honours may please note that the appellant company adopted the aggregate benchmarking method under the TNMM consistently for all the past assessment years and the later assessment years and the same was accepted by the TPO for all the assessment years and confirmed by the DRP for the assessment year 2006-07. In view of this, Your Honours may please appreciate that the allegation made by the DRP leads to the violation of the principle of consistency pronounced by the....
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....mparability factors that should be taken into account. Step 4: Review of existing internal comparables, if any Step 5: Determination of available sources of information on external comparables where such external comparables are needed taking into account their relative reliability. Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (e.g. determination of the relevant net profit indicator in case of a transactional net margin method). Step 7: Identification of potential comparables: det4ermining the key characteristics to be met by any uncontrolled transaction in order to be regarded as potentially comparable, based on the relevant factors identified in Step 3 and in accordance with the comparability factors set forth at paragraphs 1.38-1.63. Step 8: Determination of and making comparability adjustments where appropriate. Step 9: Interpretation and use of date collected, determination of the arm's length remuneration..." 4.13 As documented in the chapter 'Economic Analysis' of the Transfer Pricing Study Report for the assessment year 2007-08, the appellant company followed the proc....
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....comparable companies in order to establish that the controlled transactions were at arm's length. 4.14 In view of the above, Your Honours may please appreciate that the comparability analysis and the subsequent determination of arm's length result is a scientific and methodical process. The search process carried out by the appellant company for the assessments year 2006-07 (earlier year) has no connection with the search process carried out by the appellant company for the current year (assessment year 2007-08). The Prowess and CapitalinePlus databases, which are maintained and updated every year by the Centre for Monitoring India Economy (CMIE) Private Limited and Capital Markets Publishers Private Limited respectively (independent bodies), were used by the appellant company to get external comparables. Your Honours may please note that the PLI 'cash profit margin on sales' was selected by the appellant company at step 5. The ratio had no role to play in the search process carried out by the appellant company in databases at Step 4 by applying various comparability criteria to the companies forming the search universe. After selecting the final comparable companies, the appellan....
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....us. In this regard, the requirement of law is two-fold: * As per rule 10B(4) of the Rules, the data to be used for analyzing the comparability of an uncontrolled transaction shall be the data relating to the financial year in which the international transaction has been entered into; and * As per the rule 10D(4) of the Rules, amongst other things, the data which is used for the comparability analysis should exist latest by the specified date mentioned in section 92F (iv) of the Act. 4.19 The Hon'ble Tribunal has further held that rule 10B(4) of the Rules casts an obligation on the taxpayer to conduct the comparability analysis using data for the relevant financial year. However, rule 10D(4) of the Rules makes it mandatory for the taxpayer to take into consideration the data that exists by the time specified by the Act under section 92F(iv) of the Act (i.e. in the March, 2007). Hence, the appellant company could not get current year data i.e. data for the financial year ended 31st March, 2007 for the companies available in the aforesaid databases at the cut-off date i.e. 15th February, 2007. Quarterly financial information, where available, was in abridged form and might be unaud....
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....t the appellant company submitted the reasons for using multiple year data in respect of comparable companies to the DRP vide submission dated 25th July, 2011, which Your Honours may please find in Page no. 142 of the paper book. 4.24 Without prejudice to above, the appellant company submitted the current year data pertaining to financial year 2006-07 during the course of hearing before the TPO, based on which the T PO had made the transfer pricing adjustment in his order. In view of our above submissions, Your Honours my please appreciate that the aforesaid allegations made by the DRP are not relevant in the instant case and hence, to be struck down. Rebuttal of the Fourth and Fifth Allegations made by the DRP against the appellant company. 4.25 Fourth Allegation: The DRP alleged that the appellant company could not furnish any tenable explanation to defend its own PLI (i.e cash profit margin on sales) and to enable the DRP to reject the TPO's contention that operating profit margin was more realistic PLI than cash profit margin on sales. 4.26 Fifth Allegation: The DRP alleged that the appellant company's contention that the activities carried out by it required huge capital i....
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....the comparables arising due to adoption of different method of charging depreciation ...." 4.29 Reference may pleases be invited to the decision of the Hon'ble Delhi Tribunal in the matter of Schefenacker Motherson Ltd. V. Income-tax Officer reported in [2009] 123 TTJ 509 (DELHI). The Hon'ble Tribunal has inter alia held that: "17 ... ... There is no standard test for deciding what constitute operational income (or profit). What receipts or expenditure would constitute operational income would depend upon facts and circumstances of the case and nature of business involved. Therefore, Revenue's conclusion that operating profit or manufacturing cost must include "depreciation" irrespective of peculiar facts of case cannot prima facie be accepted as correct. If value of capital assets has got depleted then depleted value is to be taken into account to have commercial "true profit". Depreciation in such a case must be the actual value by which the asset has suffered depletion and not a notional amount under tax or company law or some policy or statutory provision....." 4.30 In view of the above decisions, Your Honours may please appreciate that the best way of computing the operatin....
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.... DRP against the appellant company 4.34 The DRP in the current year (assessment year 2007-08) alleged that the decision given by the DRP in the earlier year (assessment year 2006-07) in approving the PLI selected by the appellant company (i.e. cash profit margin on sales) was relevant in the context of the draft order passed by the AO for the earlier year only and therefore the DRP's approval or disapproval was not necessarily a binding precedent. In this connection, he further alleged that the appellant company's plea that there was no change in the operations in the subsequent year (assessment year 2007-08) had no relevance. 4.35 Your Honours may please note that the industry in which the appellant company operates is a technology-intensive industry. The appellant company selected the ratio of cash profit margin on sales as an appropriate PLI in order to eliminate the impact on profitability of differences in the technology adopted, age of assets used in production, differences in capacity utilisation and the different depreciation policies adopted by the comparable companies. The use of 'cash profit' as the numerator of PLI has been confirmed by the decision of the Hon'ble Pan....
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....nsfer pricing adjustment in the appellant company's case for each of the aforesaid assessment years (please refer to page no. 209, 215 and 221 of the paper book). * Fine-Line Circuits Ltd was selected as a comparable company for each of the aforesaid assessment years by the appellant company and the same was accepted by the TPO/AO. (please refer to page no. 205, 211 and 217 of the paper book) 4.37 In this connection, attention may please be invited to the judgment delivered by the Hon'ble Supreme Court of India in the matter of Radhasoami Satsang v Commissioner of Income Tax reported in 193 ITR 321 (SC) wherein the Hon'ble Supreme Court has inter alia held as under: "We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one yaer may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On th....
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....ng v Commissioner of Income Tax (Supra) and followed by the Hon'ble Mumbai Tribunal in the case of DCIT vs.Reuters India (P) Ltd. (supra). Though there was no material change in the circumstances in which the appellant company operates, the DRP in the current year rejected the PLI (i.e 'cash profit margin on sales') which was approved by the DRP in the earlier year and also approved by the TPO for the assessment year 2004-05, 2005-06 and 2008-09. Similarly, Fine-Line Circuits Ltd was accepted as a comparable company by the TPO for the assessment year 2004-05, 2005-06 and 2008-09. However, the DRP, in the current year, confirmed the action of the TPO in excluding the aforesaid company from the list of comparable companies based on the action of the DRP in the earlier year (i.e previous year 2005-06 / assessment year 2006-07). 4.40 In view of this, Your Honours may please appreciate that the actions of the DRP inn confirming the rejection of cash profit margin on sales as an appropriate PLI and also in confirming rejection of Fine-Line Circuits Ltd as a comparable company were not sustainable as the aforesaid actions violate the principle of consistency pronounced y the Hon'ble Apex....
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....w and it had been blowing hot and cold at the same time at its sweet will. On the one hand, when the question of accepting cash profit margin on sales as an appropriate PLI arose, the DRP in the current year stated that the DRP's approval or disapproval for the aforesaid PLI in the earlier year was not necessarily a binding precedent. On the other hand, when the TPO rejected Fine Line Circuits Ltd. based on the action of the DRP in the earlier year, the DRP approved the same without valid reason and further investigation. Your Honours may please further note that while conducting search process in Prowess and Capital line Plus databases, the appellant company applied the search criterion companies with a ratio of net fixed assets to sales ratio greater than 500% were rejected with a view to eliminating companies with excessive unutilised assets. Fine Line Circuits Ltd. satisfied the aforesaid comparability criterion. The aforesaid comparability criterion was applied by the appellant company in the TP report for the assessment years 2004-05, 2005-06 and 2008-09 and the same was accepted by the Tax Authority. 4.45. In view of our above submissions, your Honours may please appreciate....
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....t before interest and tax. The aforesaid ratios are good indicators of the total return to the business activity. As the appellant company is engaged in technology intensive industry, there is a need to take care of the factors such as differences in the technology used, age of assets used in production, differences in capacity utilisation and the different depreciation policies adopted by the companies to ensure comparability. However, it is extremely difficult for the appellant company to get detailed information on the aforesaid factors from the annual reports of the comparable companies and from the databases used by them, it is not appropriate to use the aforesaid ratios as PLI. The ratio of cash profit to sales eliminates the impact on profitability of differences in the technology used, age of assets used in production, differences in capacity utilization and the different depreciation policies adopted by the companies. We have various judicial precedents in which the use of cash profit as numerator of PLI has been approved by the Hon'ble Tribunals of the country such as the decision given by the Hon'ble Delhi Tribunal in the case of Schefenacker Motherson Ltd. - vs.- Incom....
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....regarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances. Net profit used in Rule 10B can be taken to mean commercial profit......In the case in hand, revenue authorities went wrong in disregarding the context and purpose for which the net profit was to be computed. Depreciation, which can have varied basis and is allowed at different rates, is not such an expenditure which must be deducted in all situations.....Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen.....". 4.51. In view of the aforesaid decision, your Honours may please note that the net profit used in rule 10B(1)(e) of the Rules can be taken to mean commercial profit. Depreciation, which can have varied basis and is allowed at different rates, is not such an expenditure that must be deducted in all situations to arrive at the commercial profit. Your Honours may please further note that the industry in which the appellant company operated during the relevant previous year was a technology-inten....
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....llant company which were computed by the appellant company based on current year data (i.e. previous year 2006- 07/ assessment year 2007-08). The aforesaid ratios are as follows:- Table No. (2)- Computation of PLI Name of comparable company Cash profit margin on sales BCC Fuba India Ltd. 18.49% Fine Line Circuits Ltd. 11.33% Precision Electronics Ltd. 19.45% Arithmetic Mean 16.42% Tested Party 13.39% 4.55. We have furnished hereinbelow the computation of arm's length operating income based on the data furnished in Table No. 2: Table No. (3) - Computation of Arm's Length Operating Income Particulars Page reference of paper book Arm's length cash profit margin on sales (A) 16,42% 71 and 72 Cash profit margin on costs : [16.42/(100- 16.42)x100....(B) 19.65% INR 000 Cash expenses LC) 171,65,00 60 Arm's Length Cash Profit: C*B 3,37,292 Arm's Length Operating Income: [(C)=+ (C * B)] 20,53,792 4.56. We have furnished hereinbelow the tolerance band of +5% in view of the proviso to section 92C of the Income Tax Act, 1961 [prior to the amendment made by Finance (No. 2) Act, 2009]: Table No. 4....
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....y change in the facts for that relevant AY. He placed reliance upon the decision of the Hon'ble Supreme Court in the case of Radhasoami Satsang v CIT 193 ITR 321(SC) as also the decision of the Hon'ble Jurisdictional High Court in the case of Birla Corporation Limited (2014) 43 Taxman.com 267 (Cal). Hence, he urged that the addition made under transfer pricing adjustment was liable to be deleted. 25. In reply, SR DR vehemently supported the order of the Dispute Resolution Panel and the Assessing Officer. 26. We have considered the rival submissions and gone through facts and circumstances of the case. At the outset, perusal of the DRP's directions for the AY 2006-07, the DRP has directed for exclusion of Fine Line Circuits Limited on the basis of the NFA to sales. The DRP admittedly has not specified as to which is the appropriate profit level indicator? Whether it is a cash profit margin or whether it is operating profit margin. However, the DRP repeatedly talks of applying the cash profit margin. If cash profit margin is to be considered as the most appropriate profit level indicator, then obviously the NFA to sales ratio cannot be applied as that would be a filter which is mor....
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....cing Study. Once Fine Line Circuits Limited is also considered and the same methodology as adopted for the earlier years being the cash profit margin to sales ratio is applied for arriving at the appropriate profit level indicator , then admittedly no addition remains in the hands of the assessee on account of the Transfer Pricing. In these circumstances, the AO is directed to delete the addition made on account of arm's length price for the AY 2006-07. As the facts are identical for the AY 2007-08 on similar grounds, the addition made by the Assessing Officer for the AY 2007-08 also stands deleted. Hence, this common issue in both AYs of assessee's appeal is allowed. 27. The next issue in this appeal of the assessee (in ITA No. 2071/Kol/2010 for AY 2006-07) is against the order of DRO & AO in disallowing the expenses of Rs. 6,810/- by holding that the same are incurred for earning exempted income and thereby invoking the provisions of section 14A of the Act read with Rule 8D of the Rules. For this, assessee has raised following ground no. 7 to 12: "7.That the learned Assessing Officer has erred in disallowing the business expenditure of Rs. 6,810/- by invoking the provisions of ....
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....We direct the AO to give credit for TDS while giving appeal effect to this order after allowing reasonable opportunity of being heard to the assessee and in case assessee produces TDS certificates or in case it has already filed the same may be taken into consideration. 31. The next issue in this appeal of assessee (in ITA No. 2071/Kol/2010 for AY 2006-07) is against the order of AO charging interest u/s. 234B and 234D of the Act. For this, assessee has raised following ground no. 15: "That the learned AO erred in levying interest of Rs. 24,927,980/- under section 234B of the Act, and Rs. 563,550/- under section 234D of the Act." 32. We are of the view that charging of interest u/s. 234B and 234D of the Act is procedural and consequential. Hence, the AO will recompute the interest under both the sections while giving appeal effect to this order as per law. 33. The next issue in this appeal of assessee (in ITA No. 2071/Kol/2010 for AY 2006-07) is against the order of AO not considering the issuance of refund order u/s. 143(1) of the Act. For this, assessee has raised following ground no. 16. "The learned Assessing Officer erred in considering the effect of the refund order issu....