TaxTMI 
TaxTMI 
2015 (7) TMI 448
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....39;ble DRP'), erred in making adjustment 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 ....
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....bsp; "Appendix I Weatherford Drilling & Production Services (India) Private Limi....
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.... letter dated December 14, 2012 for the said year i.e. AY 2009-10 issued a show 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....
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....ion kindly refer Appendix III. * Objection 3 - Disallowance u/s 4o(a)(ia): On the facts and circumstances of the case, and in 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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....nbsp; Private Limited Place : Ahmedabad &....
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....international transaction of Sale to AEs 1. Ground of objection No.l: Sales to AEs The Ld. TPO/ AO has erred in recomputing the arm's 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 represe....
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....arables with inappropriate filters, disregarding the search process carried out by the Assessee Export filter adopted by rejecting companies having export sales <25% of total 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 ....
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....tion). Ideally a licensed manufacturer will target to earn a return on sales and not over costs, thus the PLI was chosen to be OP/Sales. Since PLI denotes measurement of the profits earned by any entity in view 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 financ....
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.... Taxes, Dhubri and Others (1975) (CTR (S.C.) 172) e. South Eastern Coalfields Ltd. V. Joint Commissioner Of Income-tax (260) (TTR 1 -1TAT) f. Income Tax Officer vs. LIC (79 ITD 278) g. ACIT vs. Jindal Irrigation Systems Limited (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 inf....
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.... Assessee. d. The search resulted into set of 4 comparables with an OP/TC of 28.87%. e. In this process Ld.TPO/AO has considered data of FY 2008-09 only, disregarding the multiple year approach of the Assessee for the purpose of identifying the comparables; 10.2 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 : Th....
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....ating the fact that the past two years clearly have an impact on the current year business pricing approach. The same analogy, the Ld. TPO/AO is accepting without any questions to identify the comparables having diminishing revenues/persistent losses, in the filter mentioned above (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 nonc....
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....es having consistent loss if it is arising due to peculiar economic circumstances. The margins earned i.e. OP/TC makes the comparable an outlier which should be rejected relying on the same analogy for peculiar economic circumstances; b. On analysis of the financial statement of Tyco Sanmar, it is observed that approximately 48% of tile turnover 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 S....
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....ilter hence is not serving any purpose of identifying comparables facing similar export market pressures. Hence, it would be prudent not to apply the export filter rather than adopting an arbitrary 25%, with no basis. Further, in such situation, adoption of a comparable with 17% of export would not be inappropriate to bring in a good comparable. c) The Ld. TPO/AO has sighted the arbitrary 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, ev....
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.... to Assessing Officer The Assessee substantiated the arm's length nature of its international transaction of Sales to AEs of the Manufacturing division of WDPS to be at arm's length by adopting TNMM considering OP/Sales as PLI. A structured benchmarking process was carried out by the Assessee which is reflected in the TP Study report, identifying 7 comparables having average OP/Sales of 8.85%, whereas 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 n....
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....ch could have an influence on the determination of transfer prices in relation to the transactions being compared. In the instant case, the relevant prior years are FY 2006-07 and FY 2007-08. 6. Case laws relied upon by the Assessee a. Hon'ble Mumbai Tribunal in case of Star India Pvt. Ltd. Vs. ACIT (ITA 3585/M/2OO6) ('Star India case') b. DCIT vs Indo American Jewellery Pvt. Ltd. [ITA No. 6194 / Mum, 2008] c. Income-tax Appellate 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 provision....
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....omic analysis. The Ld. TPO/AO, without giving any sufficient and justifiable reasons, has rejected the economic analysis undertaken by the Assessee in accordance with the provisions of the Act read with the Rules and has undertaken a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction and held that the Assessee's international transaction is not at arm's length. (Please refer Page Nos.257 to 259 of the 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 accorda....
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....bjection No.2B- Rejection of usage of multiple year data. i. The Ld. TPO/AO has erred in rejecting the use of multiple year data used by the Assessee for the benchmarking exercise in the TP documentation. The Assessee has to submit the following in this regard: 10.2.1 Principle of impossibility of performance Ii. We would specifically draw your attention to comparables G T N Engineering (India) Ltd. and Tyco Sanmar being two comparables out of total four comparables considered the Ld. TPO/AO. 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 Asse....
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....try is interlinked; . Since pumps and valves are both require concurrently when an installation/plant is set up, their demand supply patterns overlap. (Please refer Page Nos.268 to 270 of the paper book for the same.) In view of all of the above, we would humbly submit that limiting the search process to 'Valves' is incorrect. 10.4. Conclusion and prayer. In view of the above, the Assessee accordingly prays that the Ld. A.O. be directed to accept the Transfer pricing documentation maintained by the Assessee and 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 tra....
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....le as well as in the case of assessee. Further, what constitutes high percentage of sale of spares for this purpose is not established. Super normal profit with due respect to Tribunal decisions referred to is not considered compelling reason to exclude Tyco Sanmar as so long it qualifies on all the filters. In so far RPT is concerned the TPO has applied filter '25 % of operating revenues. Therefore, RPT on cost is not considered a valid criterion to exclude this comparable. Therefore no direction to exclude this comparable can 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 object....
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....sented by the assessee is use of multiyear data by the assessee. TPO has applied this filter as the data used as per Act for comparison should be contemporaneous. Other filters applied by the assessee were the based on study of condition existing in this case. Filter Related party transactions more than 25 percent was used by the TPO to reject those companies which has transaction more than 25 percent as the TPO considered this limit as reasonable for identifying uncontrolled comparable companies. TPO has considered that more than this limit will vitiate 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....
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....roadly compared. However, in the present case, the TPO has sought to compare the valves which is a consumer product with the industrial product of the tested party, which in our view, would not give a true picture of the profit. Under these facts, it would subserve the interest of justice if a TPO conduct a fresh study comparing the same or similar product, so that a fair picture of the profit could be arrived in order to ascertain whether the TP adjustment is required to be made or not. Therefore, we hereby set aside the order of the authorities below and 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 a....
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....; Objection 3 - Disallowance under Section 40(a)(i) & 40(a)(ia) of the Act. 1. Ground of Objection 1.1 On the facts and circumstances of the case, and in law, the AO has erred in law, the A.O. has erred in proposing to disallow the deduction claimed of Rs. 45,99,634/- under section 40(a)(ia)of the Act. It is prayed that the A.O. be directed to allow the deduction claimed based on the facts as submitted by the Assessee. 2. Facts as submitted to the Assessing Officer. 2.1. 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)(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 ....
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....invoices and challans are attached herewith. (Please refer Page Nos.324 to 383 of the paper book for the same). 3. Facts, if any, modified by the Assessing Officer. The AO observed that on verification of challans furnished by the Assessee, all the challans were for Assessment Years 2009-10 and 2010-11.Further, the A.O. also observed that all the TDS payments made by the Assessee during the period under consideration pertains to Assessment Year 2009-10 as per TDS challans produced by the Asessee and that the Assessee has not produced any TDS challan showing Assessment Year 2008-09. 4. Do you wholly agree with the modifications in the facts by the Assessing Officer? If not, give reasons pointing the specific fact 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 ar....
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....ub-total. 4,22,736 2. Legal and Professional Fees 5,95,508 67,471 March 3, 2009. 80143 93,346 2009-10 Grand Total 45,99,634 4,90,207 10.5. Accordingly, the Assessee claimed a deduction for the expenses as shown in the table referred in para 2.4 and para 10.4 above, in the financial year in which the taxes have been deducted and deposited in the Government Treasury, i.e., in the Assessment Year 2009-10. 10.6. The assessee also submitted all corroborating evidences in the form of copies of invoices, and copies of all relevant challans evidencing payment of taxes made in respect of the above referred amounts. Copies of submissions dated February 26, and March 1, 2013 as submitted before the AO are also attached along with all the relevant invoices 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 d....
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....red payments. The AO observed that on verification of challans furnished by the Assessee, all the challans were for Assessment Years 2009-10 and 2010-11. Further, the AO also observed that all the TDS payments made by the Assessee during the period under consideration pertains to Assessment Year 2009-10 as per TDS challans produced by the Assessee and that the Assessee has not produced any TDS challan showing Assessment Year 2008-09. The Assessee requests that the AO 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. Directions of this Panel: This Panel directs the AO to verify the claim of the assessee and allow the deduction as per law." 6.3. Since the DRP has directed the AO to verify the claim of the assessee, we do not see any reason to interfere with the order of the DRP, the same is hereby upheld. Thus, ground No.3 of assessee's appeal is rejected. 7. Apropos to additional ground raised by the assessee (reproduced hereinabove), the ld.counsel for the assessee submitt....