TaxTMI 
TaxTMI 
2015 (7) TMI 448
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....t of Rs. 4,17,26,088/- in relation to the international transaction of sale of goods to Associated Enterprises ('AE'). It is prayed that the additions made by the Ld. AO in relation to the international transaction of sale of goods to AE be deleted. 2. On the facts and circumstances of the case and in law, the Ld. AO under the directions of Hon'ble DRP erred in not allowing the benefit of +/-5% range as per Section 92C(2) of the Income-tax Act, 1961 ('the Act') in relation to the international transaction of sale of goods to AE. It is prayed that the Ld. AO be directed to grant range benefit in accordance with law. 3. On the facts and in the circumstances of the case and in law, the Ld. AO under the directions of Hon'ble DRP erred in making disallowance of Rs. 45,99,634 under Section 40(a)(i)/(ia) of the Act without appreciating that tax has been deducted and paid during the previous year in question. It is prayed that the claim made by the appellant be allowed as per the first provisio to Section 40(a)(i)/(ia) of the Act. 4. On the facts and in the circumstances of the case and in law, the Ld. AO under the directions of Hon'ble DRP erred in ....
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....; "Appendix I Weatherford Drilling & Production Services (India) Private Limited Assessment Year: 2009-10 General Backgroun4: *During ....
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.... cause notice reflecting a detailed search process and identifying new set of comparables with an average margin of 28.87% Operating Profit/Total Cost ("OP/TC") as compared to 19.31% OP/TC of WDPS Manufacturing Division. The authorized representative submitted a detailed submission on January 22, 2013 and attended the hearing; * The Ld. TPO proposed a Transfer Pricing adjustment amounting to Rs. 3,02,66,356 vide his order dated January 24, 2013 (Please refer Page Nos. .35. to 93 of the Paper Book for the same). Further details of the proposed adjustment are provided in Table 1 below: Table 1: Disallowances /Adjustments proposed by Ld. TPO Sr.No. Particulars Amount as per books of Accounts (Rs.) Arm's length Price determined by the Ld.TPO Amount (Rs.) Proposed disallowance/Adjustment by the Ld.TPO Amount (Rs.) 1 Sales made to Associated Enterprises ("AEs") 34,26,77,543 37,29,43,899 3,02,66,356 *Relying on the Ld. TPO's order, the Ld. AO has passed the Draft Assessment Order as provided u/s 143(3) r. 92CA r.w.s. 144C(1) of the Act ("draft order") which was received by the Assessee on March 12, 2013 (Please refer Page Nos. 94.. to 96 of the Paper Book fo....
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....law, the Ld. AO has erred in proposing to disallow the deduction claimed of Rs. 45,99,634 under Section 4o(a)(ia) of the Act. It is prayed that the AO be directed to allow the deduction claimed based on the facts as submitted by the Assessee. For detailed submission on this objection kindly refer Appendix IV. We crave leave to add, alter and/or amend the aforesaid grounds of objection at or before the time of hearing. ....
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....sp; Private Limited Place : Ahmedabad  ....
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.... length price of the international transaction at Rs. 37,29,43,899 instead of Rs. 34,26,77,543 as determined by the Assessee, thereby computing a TP adjustment of Rs. 3,02,66,356. Ground of objection No.1A; Search process adopted by the TPO The Assessee objects the filters adopted by the Ld. TPO in the search process executed to identify comparables viz. Export filter of 25%, related party filter of 25% etc. and usage of single year data in the search process. Ground of objection No.1B; Choice of comparables The Assessee objects the comparables identified by the Ld. TPO/AO primarily the inclusion of Tyco Sanmar Limited ('Tyco Sanmar") and exclusion of United Drilling Tools limited ("UDTL") as comparables in the fresh search conducted by the Ld. TPO 2. Facts as submitted to Assessing Officer 2.1 The Manufacturing division of WDPS is engaged in manufacturing of Gas Lift Valves ("GLV") and Packers Manufacture, which is essentially a labour assisted assembly process. 2.2 The Sales to AEs of Rs. 34,26,77,543 represents more than So% of the revenue generated by the Manufacturing division of WDPS for the period under consideration viz. FY 2008-09. The Assessee subst....
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....al sales. Manufacturing division of WDPS has 100% export sales during the year under consideration. Accepting the companies having equaled to or more than 25% of export sales does not result into near comparables considering Assessee's export sales being 100%. The intention of application of the above filter to identify the comparables, who are engaged into significant export business and application of a 25% filter is not appropriate as 25% does not denote any relevance to the application of filter (Please refer Page Nos.276 to 277 of the Paper Book for the same) Turnover filter adopted by rejecting companies having turnover more than 350 crore The difference in the level of turnover cannot be the sole reason for rejection of comparables having similar functional profile, especially while applying the TNMM. Accordingly, the functional profile of the comparables has to be taken into consideration while accepting/rejecting any company. The annual profitability of a company is impacted more by current market forces/fluctuations and short-term variations in variable costs rather than long-term trends in fixed costs. Accordingly, if an analysis of the repercuss....
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....ew of its functional profile, the Assessee is of the view that OP/Sales should be considered as PLI. (Please refer Page Nos.271 to 271 of the Paper Book for the same) (iv) Disregarding Assessee's observations on the comparables Application of Import Filter - Two Sanmar The adoption of import filter is as important as the export filter to identify suitable comparables. It can be observed that the comparables identified by the TPO the intensity of imports in each of them is more than 35% subject to Tyco Sanmar, in which case the proportion is just 19.46%. This clearly reflects that, Tyco Sanmar does not observe similar pricing pressures on the cost side as the tested party (imports 36%) and other comparables and hence should be rejected i.e. should not be considered as comparable to be a part of the TPO's fresh search set; (Please refer Section to and refer Page Nos.283 to 283 of the Paper Book, for detailed understanding on this) On analysis of the financial statement of Tyco Sanmar, it is observed that approximately 48% of the turnover of the company is from sale of spares and others, which enable higher recovery. Hence, the profitability of Tyco Sanmar is thus an....
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....ed (56 ITD 164(Hyd)) h. Mafatlal Apparel Mfg. Co. Ltd. V. Deputy Commissioner Of Income Tax (61 TTJ 323) i. Hon'ble Delhi Tribunal in the case of Sony India Pvt. Ltd vs. DCIT (ITA No.1189/Del 2005,819/Del/2007& 820/Del 2007) j. ITAT Delhi in case of Global Logic India (P.) Ltd. (12 Taxman 295) k. Quark Systems Pvt. Ltd VS DCIT Mohall, (ITA No. 100/CHD/2009) 7. Legal arguments relied upon by the Assessing Officer a. For the purpose of conducting a fresh search rejecting the approach adopted by the Assesses, the Ld. TPO has relied on the provisions of Section 92C(3)(c) read with Section 92CA which provides that if the Ld. TPO is of the opinion that the information or data used in computation of the arm's length price is not reliable or correct, the Ld. TPO may proceed to determine arm's length price in relation to the international transactions in accordance with Section 92C(1) and 92C(2) on the basis of such material or information or document available with him. b. For the using the current year data (i.e. FY 2008-09), the Ld. TPO has relied on Rule 10B(4) of the Rules which provides that the data to be used in analyzing the comparability of an uncontrolle....
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....The Assessee would like to submit that the TP Documentation has been maintained by the Assessee as per the requirement of statute. (Please refer Page Nos. 138 to 255 of the Paper Book for the same). The Ld. Ld. TPO/AO conducted a fresh search to identify comparables with inappropriate filters, disregarding the search process carried out by the Assessee. The following provides a quick insight on the approach. 10.2.1 In appropriate Search process adopted by the TPO L Export Filter of 25% : - Manufacturing division of WDPS being 100% export oriented unit, acceptance of companies having export sales to the total sales ratio of 25% or more would not result into identification of suitable comparable. In paucity of comparables the same may rather not be applied, instead of adopting an arbitrary 25% export filter without any basis. (Please refer Page Nos.276 5o 277 of the Paper Book for the same). ii, RPT Filter : The Assessee has adopted a 10% RPT filter in its search process where as the Ld. TPO/AO has adopted 25% RPT filter. It is pertinent to note that there is no change in law to provide any concrete guidance on this threshold. Hence, a conservative approach of the assessee to c....
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....bove (Please refer Page Nos.260 to 267 of the Paper Book for the same) 10.2.2 Choice of comparables i. The Ld. TPO/ AO, after disregarding the benchmarking approach and the submissions made by the Assessee, carried out a fresh search identifying a new set of comparables as below: Tables 3: Set of comparables identified by Ld. TPO/AO Sr.No. Database Name of the Company OP/Sales 1. Prowess GTN Engineering (India) Ltd. 32.57% 2. Prowess KAR Mobiles Ltd. 5.27% 3. Prowess Rane Engine Valve Ltd. 5.46% 4. Prowess Tyco Sanmar Limited 72.22% Mean 28.87% ii. The Ld. TPO/AO arrived at a final set of 4 companies by: * Rejecting all the comparables selected by the Assessee in the TP study on the ground that they are engaged in pumps industry, export filter, etc and hence functionally noncomparable; and * Added 4 new companies by carrying out word search of 'valves' without considering 'pumps' industry and the submissions made by the Assessee on benchmarking process and on comparables and on comparables (Please refer Page Nos. 268 to 270 of the Paper Book for the same) In identifying the....
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....nover of the company is from sale of spares and others. c. It is to be noted that in the valves industry the time period between sale of valves and commencement of sale of spares being approximately 4 to 5 years. The replacement market (spares) is characteristically more lucrative than the sale of valves and provides the necessary impetus to a company's bottom line growth. This future potential prompts companies to offer large discounts to customers to often secure an order for valves. d. The profitability of the comparable is thus skewed by the profit on sales of spares. The computation of spares percentage of Tyco Sanmar is shown as under; Table 4: Product profile and composition of spares Description Amount (Rs.) Amount (Rs.) Sales (a) 1,37,40,05,650 Safety Valves 72,14,17,081 Spares and accessories (b) 65,25,88,569 Spares % (b/a) 47.50% Hence, by not applying the import filter and not appreciating the above industry average returns of Tyco Sanmar, it can be observed that the Ld. TPO erred in selecting the same as a comparable to substantiate the arm's length nature of international transaction of sales to AEs of Ma....
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....rary 25% to reject a comparable, which has 17% exports. d) It is meaningful to note that when it comes to incorporating a good comparable whose export is 17% the difference (between 25 and 17) becomes material to reject the good comparable, A larger difference (19 and 36) on the cost side was not ; material to the Ld. TPO/AO, as discussed while observing Tyco Sanmar. e) The contradiction in the contentions of the Ld. TPO/AO suggests that the selection/rejection of the comparables is erroneous and incorrect. The Hence it can be observed that the Ld. TPO/AO erred in not selecting UDTL as a comparable. 10.4 Closing remarks As discussed above, and various annexure referred there in, the search filters adopted by the Ld. TPO/AO are inappropriate. However, without prejudice to the above, even if the search conducted by the Ld. TPO/AO is adopted after appropriately factoring the discussion on the comparables i.e. Tyco Sanmar is not considered as part of the set of comparables identified and UDTL is included, the international transaction of Sales to AEs of Manufacturing division of WDPS could be observed to be at arm's length, even with the fresh search on single year data o....
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....reas OP/Sales of the tested party i.e. Manufacturing division of WDPS was,l6.15%. The Assessee has also filed various submissions time to time to substantiate the arm's length nature of its international transactions and has produced the evidences upon which the Assessee has relied in support of the computation of ALP in relation to its international transactions. The Assessee filed a detailed submission, in response to rejection of TP Documentation by the Ld. TPO on January 22, 2013. Also, Assessee filed a letter to Ld. AO showing factual and legal causes why the upward adjustment proposed by the Ld. TPO should not be made. Facts modified by the Assessing officer The Ld, TPO/AO has rejected the Transfer pricing document by terming the data used by the Assessee as not reliable and correct on the basis of the following: i. Rejected the economic analysis of the Assessee without giving any cogent reason; ii. Disregarded the impossibility of performance for the use of single year data of the comparables in the TP Documentation; iii. Carried out the word search in the electronic databases to select 'Valves', 'Industrial Valves', 'Other Valves' limitin....
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....llate Tribunal (Tribunal), Delhi Bench, in the case of Mentor Graphics (Noida) Pvt. Ltd. V Dy. Commissioner of Income-tax [2007] 109 ITD 101 d. Philips Software Centre Pvt. Ltd. Vs ACIT (119 TTJ 721) e. Supd of Taxes, Dhubri and Others (1975 CTR (S.C.) 172) f. South Eastern Coalfields Ltd, V. Joint Commissioner Of Income-tax (260 ITR 1 - ITAT) g. Income Tax Officer vs. LIC (79 ITD 278), the Hon'ble Tribunal h. ACIT vs. Jindal Irrigation Systems Limited (56 ITD i64(Hyd)) i Mafarlal Apparel Mfg, Co. Ltd. V. Deputy Commissioner Of Income Tax (61 TTJ 323) 7. Legal arguments relied upon by the Assessing Officer a. For the purpose of usage of multiple year data by the Assessee, the Ld TPO has relied on the provisions of Section 92C(3)(c) read with Section 92CA which provides that if the Ld. TPO is of the opinion that the information or data used in computation of the arm's length price is not reliable or correct, the Ld. TPO may proceed to determine arm's length price in relation to the international transactions in accordance with section 92C(1) and 92C(2) on the basis of such material or information or document available with him. b. For the use of the cur....
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....e paper book for the same) Additionally the Assessee would like to furnish the following: The Ld.TPO has passed the adjustment without providing any cogent reasons as per section 92C(3). This particular section specifies a list of 4 criteria based on which the documentation provided by the Assessee can be rejected and thereafter the Ld. TPO may proceed to determine the ALP. Sec. 92C (3) provides that - "(3) Where during the course of ay proceeding for the assessment of income, the assessing officer is, on the basis of material or information or document in his possession of the opinion that - (a) Te price charged or paid i an international transaction has not been determined in accordance with sub-section (1) and (2); (b) Any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was....
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....It is submitted in this regard that the financial data of both these companies were not available for consideration on the date i.e. February 27, 2009 for carrying out benchmarking process for TP documentation purpose. iii. Considering the data for F.Y. 2008-09 for captioned companies at the time of TP Documentation clearly falls within the frame of "impossibility of'performance' on the part of the Assessee. Hence, the Ld. TPO/AO has erred in considering single year data for the companies. 10.2.2. Maintenance of Contemporaneous TP documentation. i. We refer to the TP Study submitted vide our submission dated December 22, 2011. For the reasons summarised hereunder, the Assessee submits that the comparable data relied upon by the TP documentation is contemporaneous, existed by the latest data specified by the Rules and is used in accordance with law. 10.2.3. Comparable data relied by the TP Study is contemporaneous i. The Assessee would like o submit that the Assessee is in compliance with the documentation requirement as enunciated in Section 92D of the Act read with Rule 10D(4) of the Rules and has maintained the contemporaneous TP documentation for F.Y. 2008-09. ii. As....
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....d consider the international transaction of Sales to AEs by the WDPS's manufacturing division to be arm's length, from an Indian TP regulation perspective; The Assessee craves leave to add and submit such further facts, statements, documents and papers as may be considered necessary either before or during the hearing of the objections." 5.1. However, the ld.DRP rejected the objections by observing as under:- " Directions of the DRP: i) The application of each filter has relevance. It represents the effort made by the TPO on the basis of study of the tested party, the international transaction, the conditions existing in case of the international transaction, the tested party, the economy at macro and micro level to identify those features which are relevant and must be identified in the comparables too so that proper comparison may be made of tested party with the uncontrolled comparables and the market price or arm's length price of international transactions may be determined. However, in the light of arguments of the assessee in respect to filters given in the table above, this Panel directs as follows. * The TPO has applied export filter rejecting companies having....
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....be given by this Panel. iii) The assessee has also requested to include United Drilling Tools Ltd. The reasons given by the assessee while requesting to include it as comparable are not valid reasons. The export percentage of this company is only 17%. Import percentage filter has not been applied by the TPO and therefore, it cannot be used as criterion to include this company. It has already been clarified by the TPO that import percentage filter has not been intended to be included. Therefore no direction is given to the TPO to include it in the set of comparables. 3. Objection 2; Rejection of the Transfer Pricing Documentation Ground of objection No.2; Rejection of the Transfer Pricing Documentation The Ld. TPO/ AO rejected the Transfer Pricing Documentation of the Assessee without giving any cogent reason. The Ld. TPO/AO has, erred in rejecting the Transfer Pricing Document prepared by Assessee by applying the provisions of Sec. 92C(3)(c) read with Sec. 92CA thus being of the opinion that the data used in computation of the arms length price is not reliable or correct. The Assessee objects the rejection of the Transfer pricing document by Ld. TPO/AO on the basis of foll....
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....iate the comparison as the basic fundamental principle of Transfer Pricing study is that related parties can manipulate the prices. Though there is no sacrosanct limit of related party transactions and different Tribunals have approved different percentage of RPT. In our view applying the filter of 25 percent RPT in this case is absolutely proper and no alteration in it is called for. The TPO has rightly rejected the Transfer pricing analysis of the assessee as the data used by the assessee is not reliable as per the provisions of section 92 C (3) (c) of the Act. ii) The purpose of making fresh search by the TPO after rejection of TP study of the assessee is to refine the search as more companies data is uploaded between the period assessee carried out the search and the TPO carries out the search during TP proceedings. If data was not available when the assessee carried on the study is not a bar for the TPO to carry out search later. Further, the TPO has carried out search to identify better comparables and this is what is required in transfer pricing study. Thus the assessee and the TPO are not working at cross purposes and therefore assessee should not have any objection again....
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....nd restore these issues before the TPO for conducting a fresh transfer price study for the purpose of finding out the nature of product, its market, geographical location, etc. as given under OECD guidelines regarding the comparability of the comparables. While doing so, the TPO would afford opportunity to the assessee for submitting fresh T.P. study comparables. However, it is made clear that the TPO would restrict his study to the financial year under consideration unless he feels that there are grounds for adopting the data of other two years as prescribed under the Rules. Hence, ground Nos.1 & 2 of assessee's appeal are partly allowed for statistical purposes. 6. Ground No.3 is against the direction of the DRP in respect of disallowance of Rs. 45,99,634/- made u/s.40(a)(i)/(ia) of the Act. The ld.counsel for the assessee reiterated the submissions as were made before the DRP as per Appendix-IV. 6.1. On the contrary, ld.CIT-DR supported the order of the DRP on this issue. We find that before the DRP the following submissions made in the form of Appendix-IV, which is reproduced hereunder:- &nbs....
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....e return of income filed for the assessment year 2008-09, the Assessee disallowed an amount of Rs. 45,99,634/- under section 40(a)(ia) of the Act, being management fees and legal and professional fees as no taxes were deducted thereon. These amounts were also reported in the tax audit report for the assessment year 2008-09.Relevant extracts of the tax audit report as submitted before the AO are also attached herewith(please refer page Nos.384 to 386 of the paper book for the same.) 2.2 Details of the amounts so disallowed in the assessment year 2008-09 are given hereunder:- Sr.No. Particulars/ nature of expense Amounts voluntarily disallowed (Rs.) Tax deductible but not deducted (Rs.) 1. Management fees 40,04,126 4,22,736 2. Legal & professional fees. 5,95,508 67,471 Total. 45,99,634 4,90,207 2.3. However, the Assessee had subsequently deducted and deposited all taxes on the above referred amounts during the financial year 2008-09 (relevant to assessment year 2009-10) along with other payments for financial year 2008-09. Details of the same are shown in as shown in the table below in para 2.4. 2.4. Details of the taxes paid ....
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....t or facts with which you do not agree along with the reasons and documentary evidence, if any. The assessee does not agree wit the above referred modifications in the facts by the A.O. The assessee submits that the taxes deducted on the amounts have been deducted and deposited on the dates mentioned in the table atr para 2.4 above. The payments have been made within the financial year ended March 31, 2009, as relevant to Assessment year 2009-10. 5. Legal arguments submitted to the Assessing Officer. None. 6. Case laws relied upon by the Assessee. None. 7. Legal arguments submitted to the Assessing Officer. None. 8. Case laws relied upon by the Assessee. None. 9. Any additional new case laws which the Assessee may like to rely upon. None. 10. Factual and legal arguments against the addition proposed by the Assessing Officer. 10.1. In the return of income filed for the assessment year 2008-09, the Assessee disallowed an amount of Rs. 45,99,634/- under Section 40(a)(i) and 40(a)(ia) of the Act, being management fees and legal and professional fees as no taxes were deducted thereon. These amounts were also reported in the tax audit report for the assessment....
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....es and challans are attached herewith (Please refer page Nos.324 to 383 of the paper book for the same). 10.7. On perusal of the details above, it would be observed that necessary TDS deducted and deposited of Rs. 4,90,207/- during Financial Year 2008-09 (relevant to A.Y. 2009-10) pertains to amounts disallowed by the assessee under section 40(a)(i) and section 40(a)(ia) of the Act for A.Y. 2008-09. Mere inadvertent error on the challan with respect to the correct Assessment year should be considered as a typographical erred and the assessee ought to be allowed deduction amounting to Rs. 45,99,634/- for the year under consideration. 10.8. Conclusion and prayer. The assessee prays that the A.O. be directed to allow the deduction claimed amounting to Rs. 45,99,634/- being expenses pertaining to Assessment Year 2008-09, but on which, taxes have been deducted and paid for in the financial year relevant to the assessment year under consideration. The Assessee craves leave to add, alter and/or amend the aforesaid Grounds of Objection at or before the time of hearing." 6.2. However, the DRP has given direction as under:- " 4. Objection 3 - Disallowance under Section 40(a)(D and....