TaxTMI 
TaxTMI 
2015 (6) TMI 591
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.... vide his order dated 09.11.2011 for AY 2006-07. 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 ....
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....iolating the provision of Rule 46A of I.T. Rules, 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 pr....
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....nnection to ground no.2(a), (b) and (c) above are squarely applicable 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 app....
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....rried on by the appellant in India and the income is earned from such operations 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 ap....
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.... holding that the reimbursement of the costs of warranty to AT & S Austria was not liable 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 Aus....
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....made. It was stated that the issue was squarely covered by the decision of the Hon'ble Coordinate 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 ....
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....e 7 of the DTAA between India and Singapore. The Revenue is challenging the said finding on the 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....
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....ar relevant to assessment year under consideration, the assessee made the payment of Rs. 45,94,291/- to 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....
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....(Del-SB)- Motorola Inc. -vs.- DCIT, Non-resident Circle; 94 ITD 91 (Bang.) - Samsung Electronics Co. Ltd. -vs.- ITO (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. Coun....
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....A. SAP maintenanc e. Charges will be passed on the number of SAP users per legal entity mySAP.com Lizenzvertrag IN7 3 20,315 2,502 No SAP R/3 Lizenzgebuhr IN8 3 84,417 10,396 No SAP 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....
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....cidental thereto, the applicant reimbursed a part of the salary of the employee payable by HMFICL. What the applicant paid went to reimbursement of the cost borne by HMFICL on account of employment I, that too, partly. In this process no income could be said to have been generated which answered the description of "fees for technical services". 2.8. In view of the above decisions of Hon'ble Jurisdictional High Court as well as Authority for Advance Rulings, 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 confirme....
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....ed at the time of delivery of products by the assessee to AT & S Austria which in turn, after rework, would be sold to final customers. By virtue of the aforesaid agreement, the actual cost incurred by AT & S Austria in getting the products repaired in Europe in order to get the product sold was reimbursed from the assessee during the relevant previous year. In fact, the customers to whom the products were sold in Europe made complaint about the defects in the product 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 b....
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....o common establishment or residence or place of business or business connection in India nor any other presence in any manner whatsoever and the provisions of DTAA applied, the income of AT & S. Austria was liable to tax only in Austria. He explained that as per the provisions of section 9(1)(vii) of the Act, it is only the income by way of fees for technical services which is deemed to accrue or arisen in India but the work done by AT & S Austria fell within the Explanation 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 agr....
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....l goods of Printed Circuit Boards and the repair jobs of such sophisticated goods could only be in the nature of technical services. 12. We have considered the rival submissions and gone through facts and circumstances of the case. Admittedly the assessee is dealing its business with its subsidiary company AT & S Austria. Undisputedly the assessee's transaction with the parent company AT & S Austria is also subject matter of Arm's Length Pricing under section 92C of the 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 sec....
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....ssembly undertaken by AT & S Austria from the rigours of section 9(1)(vii) of the Act. In these circumstances, as the income of AT & S Austria is not chargeable to tax under the Indian Income Tax Act, 1961, the requirement of deduction of tax at source under section 195 of the Act would not be applicable and consequently no disallowance under section 40(a)(ia) of the Act can be made. In the result, the addition as made by AO and as confirmed by CIT(A), to the extent of Rs. 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 conf....
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....ailure to deduct the tax at source the amount of Rs. 1,50,44,031/- is disallowed u/s. 40(a)(ia) of the I.T. Act, 1961 and the same is added back to the total income of the assessee company." Aggrieved, assessee preferred appeal before CIT(A). 15. The CIT(A) al so confirmed the action of the AO by giving the following three reasons:- i) "Here the service provider highly technical/skilled services in the nature of information technology,, electronic data processing for WAN satellite link 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 res....
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....read, then the real picture would emerge. The provision of section 195(1) clearly shows that any person responsible for making payment to non-resident in respect of any interest or any other sum chargeable under the provisions of this Act has to deduct tax at the rates in force. Now what is the meaning of any other sum chargeable under the provisions of this Act. Obviously, it would mean that portion of the sum on which tax is payable by such non-resident. But how much, that portion is actually there? 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....
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....sis for the services rendered by Service providers, from group companies including the assessee. He stated that while making the subject payment of Rs. 1,50,44,031/- to AT & S Austria in respect of the reimbursement of actual cost, the assessee did not deduct any tax under section 195 of the Act, as payments for reimbursement of actual costs incurred by AT & S Austria was not chargeable to tax. He stated that the allocation of actual cost which was reimbursed by the assessee to AT & S Austria was made on 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 contentio....
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....and logistic services. We further noticed that in the said order the Tribunal has taken into consideration the decision of the Hon'ble Jurisdictional High Court in the case of CIT v Dunlop Rubber Co. Limited (1983) 142 ITR 493 (Cal) and in the similar circumstances that of the assessee to hold that the reimbursement of the expenditure does not generate any income in the hands of the recipient and consequently there was no requirement of deduction of TDS and consequently the provisions of section 40(a)(ia) could 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....
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....rofitability from the transactions with AT&S group compares favourably with sales made to third parties, establishing the transactions at arm's length. 4. That the ld. DRP erred in disregarding the alternative economic analysis carr ied out by the assessee considering the overseas entity as the tested party an thereby justifying that international transactions undertaken by such overseas entity are at arm's length price. The learned DRP erred in not appreciating the fact that associated enterprise i.e. AT&S Austria functions 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....
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....s common order taking the facts, circumstances and issue from AY 2006-07. 21. Brief facts leading to the above issue are that the assessee filed its return of income on 23.11.2006 for the relevant AY 2006-07 a draft assessment order was passed on 24.12.2009 u/s. 143(3) read with section 144C(1) of the Act making following additions: "i) Adjustment of Arm's Length Price as per TPO's order dated 30.10.2009 Rs. 15,92,64,423, ii) Disallowance u/s. 14A read with Rule 8D Rs. 6810/-." Against this draft assessment order assessee filed objection in Form 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 pr....
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....hat the methodology adopted by the Transfer Pricing Officer being the net fixed assets to sales ratio was not the correct method in so far as the ratio did not indicate as to whether the company was the capital intensive or otherwise. It was the submission that by adopting the net fixed assets to sales ratio, the comparables reduced from the four mentioned above to three in so far the Fine Line Circuits Limited got excluded from the list of comparable companies in so far as the NFA to sales in respect of the Fine Line Circuits Limited was also very low. It was the 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 turnove....
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....e activities carried out by it required huge capital investment led to the conclusion that its true profit could not be determined on the strength of the cash profit and hence, pricing of the international transactions could not entirely be unconcerned with depreciation. Sixth Allegation: The DRP's decision for the previous year relevant assessment year 2006-07 in approving the PLI selected by the appellant company (i.e. cash profit margin on sales) was relevant to 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, 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 s....
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.... transactions can be aggregated and construed as a single 'transaction' for the purpose of determining the arm's length price, provided of course that such transactions are 'closely linked'. Ostensibly the rationale of aggregating 'closely linked' transactions to facilitate determination of ALP envisaged a situation where it would be inappropriate to analyse the transactions individually. The proposition that a number of individual transactions can be aggregated and construed as a composite transaction in order to compute arm's length price also finds an echo in the OECD Transfer Pricing guidelines 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 aggre....
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.... previous year 2006-07, a part of the finished products (PCBs) of the appellant company valued INR 1,28,98,46 Thousand was sold to associated enterprise. * Your Honours may please find in page no. 108 of the paper book that in order to take advantage of economy of scale and operational convenience, AT&S AG entered into a global arrangement with various service providers in the area of information technology. The benefit of technology was shared by all the AT&S group companies including the appellant company. The total cost incurred by AT&S AG to provide the shared services to the group companies was 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 ....
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.... the appellant company. During the previous year 2006-07, the seconded employees worked for the appellant company as per the agreement. They received compensation from ATD&S AG, which was reimbursed by the appellant company to AT&S AG(INR 32.166 Thousand) without any mark-up thereto. Further, during the previous year 2006-07, the appellant company incurred travelling and personal expenses (mainly pertaining to airfare and visiting card charges) amounting to INR 16.18 Thousand for employees deputed to it under the aforesaid secondment agreement. AT&S AG reimbursed the aforesaid expenses to the appellant company without 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 ....
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....comparability analysis as follows: "Below is a description of a typical process that can be followed when performing a comparability analysis ... ... Step 1: Determination of years to be covered. Step 2: Broad-based analysis of the taxpayer's circumstances. Step 3: Understanding the controlled transaction(s) under examination, based in particular on a functional analysis in order to choose the tested party (where needed), the most appropriate transfer pricing method to the circumstances of the case, the financial indicator that will be tested in the case of a transactional profit method), and to identify the significant comparability 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: Iden....
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....he appellant company were accepted. (3 companies selected such as BCC Fuba India Ltd. Fine-Line Circuits Ltd and Precision Electronics Ltd) Step 5: After selecting the comparable companies, the appellant company selected the appropriate PLI i.e., 'cash profit margin on sales'. Step 6: The appellant company computed the PLIs of the afo5resaid comparable companies. Step 7: The appellant company computed the arithmetic mean of the PLIs of the afo5resaid comparable companies which is termed as arm's length result. Step 8: The appellant company computed its own PLI based on the financial information for the assessment year 2007-0 and compared the same with the mean PLI of the 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 y....
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....the data relating to the financial year in which the international transaction has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 4.18 The aforesaid provision was explained by the Hon'ble Bangalore Tribunal in the matter of Philips Software Centre (P) Ltd v. ACIT reported in [20008] 26 SOT 226 (Bang.). The Hon'ble Tribunal has held that the Act and the Rules provided that while conducting the comparability analysis, the data to be used should be contemporaneous. 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. ....
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....sfer price.... 3.77 Multiple year data will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. 3.78 Multiple year data can also improve the process of selecting third party comparables e.g. by identifying results that may indicate a significant variance from the underlying comparability characteristics of the controlled transaction being reviewed, in some cases leading to the rejection of the comparable, or to detect anomalies in third party information." 4.23 Your Honours may please note that 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 hi....
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....aight Line method, some opt for Written Down method and some opt for Sum of Digit method or even Replacement Cost method. Selection of each method will affect the rate and quantum of depreciation even if the nature of the asset is the same and ultimately, the net profit derived by the company will vary. For determining the fair and true profit, in our opinion, it is appropriate that the effect of the depreciation must be excluded out of the operating profit for determining the operating profit ratio. Therefore, the best way of computing the operating profit, in our opinion, will be to compute the profit before depreciation in respect of each of the company. This will take out the inconformity or the variation in the profit level of 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 expendi....
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....assessment year 2004-05, assessment year 2005-06 and assessment year 2008-09 and the same was accepted by the Tax Authority for the aforesaid assessment years. The aforesaid PLI was also approved by the DRP for the assessment year 2006-07. In view of this, Your Honours may please appreciate that the allegations made by the DRP leads to the violation of the principle of consistency pronounced by the Hon'ble Supreme Court of India in the case of Radhasoami Satsang v Commissioner of Income Tax reported in 193 ITR 321 (SC). 4.33 In view of our above submissions, Your Honours may please appreciate that the DRP's allegations (fourth and fifth allegations) are not sustainable and hence to be struck down Rebuttal of the Sixth Allegation made by the 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 ....
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.... made by the DRP for the assessment year 2008-09 was misplaced. 4.36 Further, Your Honours may please note that the appellant company selected the PLI 'cash profit margin on sales' for the assessment year 2004-05, 2005-06 and 2008-09 and the same was accepted by the Tax Authorities for the respective assessment years. The search processes were documented in page no. 207 of the paper book (Transfer Pricing Study Report for assessment year 2004-05), page no. 213 of the paper book (Transfer Pricing Study Report for the assessment year 2005- 06) and page no. 219 of the paper book (Transfer Pricing Study Report for the assessment year 2008-09). In this connection, we would like to invite the attention of Your Honour to the facts that: * There was no transfer 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....
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....essment year 2007-2008, cash profit/operating cost was accepted as the PLI. Similar position was demonstrated in respect of the order passed by the TPO for assessment year 2008-2009 also. The Hon'ble Tribunal held that the TPO himself accepted the ratio of cash profit/operating cost as the correct PLI in assessee's own case for assessment years 2007-08 and 2008- 2009 and in this regard, the principle of consistency could not be ignored. The Hon'ble Tribunal held that the learned CIT(A) was justified in applying cash profit/operating cost as the correct PLI under TNMM. 4.39 In view of the above decision, Your Honours may please appreciate that the DRP has violated the 'principle of consistency' pronounced by the Hon'ble Apex Court in the matter of Radhasoami Satsang 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 200....
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....ch travel". 4.43. Your Honours may please note that the DRP in the current year alleged that the DRPs approval or disapproval for the aforesaid PLI in the earlier years was not necessarily a binding precedent. However, the DRP in the current year confirmed the following view of the TPO without any valid reason and further investigation that: Further if the filter of NFA/sales is applied as done by DRP, Kolkata for AY 2006-07 the less intensive company Fine Line Circuits ltd. is automatically rejected. Hence, there is no further adjustment required for depreciation and working capital as the filter has resulted in elimination of less capital intensive comparables. 4.44. In view of the above, Your Honours may please appreciate that the DRP had not maintained consistency in view 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. base....
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.... Ratio of net profit before tax to sales, (ii) Ratio of net profit before interest and tax to sales; (iii) Ratio of cash profit to sales; (iv) Ratio of net profit before tax to shareholders funds; (v) Ratio of net profit before interest and tax to assets, (vi) Berry ratio - ratio of operating cost to operating revenue. 4.49. We have described the aforesaid ratios in nutshell hereinbelow: The ratio of net profit before tax to sales or the ratio of net profit before interest and tax to sales: Your Honour may please note that the rule 10B(1)(e) of the Rules provides for the application of net profit margin in relation to sales effected by an enterprise as a PLI. In the first ratio, the numerator represents net profit before tax, whereas in the second ratio, the numerator represents net profit 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 policie....
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....y activities, where a taxpayer purchases goods from an associated enterprise and on-sells them to other associated enterprises. However, the appellant company is engaged in manufacture and sale of printed circuit boards and as such berry ratio is not an appropriate PLI for the appellant company. 4.50. In this connection, reference is invited to the decision of the Hon'ble Hyderabad Tribunal in the matter of BA Continuum India (P) Ltd. -vs.- ACIT reported in [2013] 40 Taxman.com 311 (Hyderabad- Trib.), wherein it has been held that : The Tribunal in the case of Qual Core Logic Ltd. -vs.- Dy. CIT [2012] 22 taxman.com 4/52 SOT 574 (Hyd.) held as under:- 57. .....It is evident from statutory provisions that it is nowhere provided that deduction of depreciation is a must. Depreciation can be taken into account or disregarded 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 ne....
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....s case for the assessment year 2006-07. However, though there was no change in the circumstances, in which the appellant company operated in the subsequent year (i.e. previous year 2006-07/ assessment year 2007-08), the DRP rejected the aforesaid ratio as a PLI. Further, the aforesaid ratio was accepted as an appropriate PLI by the Tax Authority for the assessment years 2004-05, 2005-06 and 2008-09. 4.53. in view of our above submissions, Your Honours may please appreciate that the aforesaid allegations made by the DRP are not sustainable and hence to be struck down. Computation of arm's length price 4.54. Your Honours may please find in page no. 71 and 72 of the paper book (please refer to Table No. X in the order) that the TPO in his order provided the cash profit margins of the comparable companies and that of the appellant 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% Precisi....
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....d also been accepted by the DRP for the assessment year 2006-07 and which was also the methodology adopted for AYs 2004-05, 2005-06 and 2008-09, wherein no transfer pricing adjustment had been made. According to him, the DRP ought not to have directed the AO to exclude Find Line Circuits Limited because the NFA to sales ratio was significantly lower than that of the assessee. He stated that the DRP having accepted the correctness of the methodology adopted by the assessee for arriving at the profit level indicator could not have used the discarded method just for the purpose of excluding one of the comparables. He admitted that each assessment year is a separate unit but when there are no change in these facts and circumstances, the methodology adopted for the earlier years and such possession having been sustained, the same could not be changed in a subsequent year and concept of consistency was to be considered and the methodology for arriving at the PLI could not be changed year after year unless there is any 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 ....
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....sidered representing two years pr ior and two years subsequent. This again would derail the exact purpose and the applicability of the TNMM method in so far as the AY under dispute is the AYs 2006-07 and 2007-08. However, when the NFA to sales ratio for the five years average is considered, it takes into consideration the AYs 2004-05, 2005-06 and 2007- 08 for which years in the Transfer Pricing Study the said computation itself had not been adopted and Fine Line Circuits Limited was considered and accepted as comparables by the Transfer Pricing Officer and the assessee. Here it is noticed that the NFA to sales filter has been applied exclusively for the purpose of exclusion of one of the comparables out of the four, which have been consistently adopted as a comparable for earlier and subsequent AYs. In these circumstances, we are of the view that the NFA to sales filter cannot be applied and result of Fine Line Circuits Limited is liable to be considered when computing the profit level indicator in the Transfer Pricing 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 ap....
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....voking the provisions of Rule 8D. This issue is covered by the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom.), wherein it is held that Rule 8D of the Rules as inserted by the I. T (Fifth Amendment) Rules, 2008 w.e.f. 24.3.2008 is prospective and not retrospective. Hence, this provision will not apply to relevant AY 2006-07, which is under dispute. The Tribunal is taking a consistent view that prior to AY 2008-09, when Rule 8D will apply, the disallowance be restricted at 1% of the exempted income u/s. 14A of the Act. We direct the AO accordingly. This issue of assessee's appeal is partly allowed. 29. 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 allowing credit for TDS amounting to Rs. 1,58,430/-. For this assessee has raised following ground no. 14" "That the learned AO erred in not giving credit for taxes deducted at source amounting to Rs. 158,430/- while determining the tax payable." 30. 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 assesse....