TaxTMI 
TaxTMI 
2016 (9) TMI 1288
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....ernational transaction pertaining to its manufacturing segment, distribution segment and research and development (R&D)support services segment of the appellant does not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ('the Act'). Manufacturing Segment 2. The Ld AO/Transfer Pricing Officer ('TPO') erred in enhancing the income of the appellant by making a TP adjustment of Rs. 60,14,65,390 on account of the manufacturing segment while passing the rectification order u/s 154 of the Act and not allowing the adjustment claimed by the appellant in its TP study which is allowed in the order passed by the Ld TPO u/s section 92 CA(3) of the Act dated January 30, 2013. 3. The Ld. AO ID RP ITPO erred in enhancing the income of the appellant by making a TP adjustment \ of Rs. 60,14,65,390 on account of the manufacturing segment of the appellant by erroneously rejecting the appellant's segmentation of its account for TP purpose as undertaken in the TP Study. 3.1 Without prejudice to ground number 3 and as an alternate, the Ld AO/TPO/DRP erred in failing to consider that in any event, only proportionate TP a....
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....y erroneously holding that such expenditure is enduring in nature and thus, in the nature of deferred revenue expenditure. 10. That on the facts of the case and in law, the Ld. AO/Ld. DRP has erred* in not allowing the appellant the eligible deduction under section 10A of the Act amounting to Rs. 3,53,38,348. 10.1 That on the facts of the case and in law, the Ld. AO/Ld.DRP has gravely erred in not excluding the income of section 10A unit amounting to Rs. 3,53,38,348 at source itself before arriving at the gross total income of the appellant. 11. Without prejudice to the above Ground No.7, 8 and 9, the Ld. AO ought to be directed to recompute the deduction under section 10A of the Act after considering the disallowance of expenses viz. Advertisement and sales promotion expenditure, Recruitment expenditure and Licences and permits expenditure and excluding any adjustment under section 92C(4) of the Act in view of the proviso to section 92C(4) of the Act. 12. That the Ld. AO has grossly erred in law in levying interest under section 234B and 234D of the Act and also withdrawing interest under section 244A of the Act. 13. That the Ld. AO has....
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....e) 682,422,512 TNMM 14. Reimbursement of expenses (paid/payable) 98,050,206 TNMM 15. Recovery of expenses (received/receivable) 62,624,694 Refer Para 1.15 4. For benchmarking, the ld. TPO has confined himself to manufacturing segment, trading segment and R&D segment. Assessee in its Transfer Pricing Report (TP Report) used previous data to benchmark the international transactions and has selected OP/Sales as the PLI. Assessee worked out the weighted average of OP/Sales of 7 comparables at7.44%, calculated the average of the raw material import of the total raw material at 17.03% in comparables as against 83.68% of the assessee. For international transactions of "manufacturing export to AEs", the assessee has taken OP/Sales as PLI with greater average of 7 comparables at 9.55% as against 27.97% of the assessee. 5. TPO, however, called upon the assessee to use contemporaneous data and to file the audited margin of comparables by using data for the financial year 2008-09 which the assessee has provided. The mean margin of OP/Sales of 7 comparables at 7.88% is proposed to be used as the Arms Length Margin for computing the Arms Length Price (ALP) in ....
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.... arithmetic mean of NCP margin at 11.50%. The adjusted margin of the assessee was calculated at 11.30% and the assessee has suo motu carried out adjustment of Rs. 411 lakhs under this segment. However, the assessee was called upon to furnish updated margin of 14 comparables which the assessee has furnished. Ld. TPO, after considering the reply filed by the assessee and the contention that the assessee is exempted u/s 10A, came to the conclusion that adjustment of Rs. 6,00,92,904/- is required to be made as the price charged by the assessee varies more than 5% for the value of the international transaction being the difference between the ALP and the price charged by the assessee from its AEs for export of services and thereby enhanced the income of the assessee by an amount of Rs. 6,00,92,904/- in respect of the international transactions for provision of the R&D of software services. 10. TPO also enhanced the income of the assessee qua manufacturing segment at Rs. 78,32,55,000/- and further made an adjustment of Rs. 37,58,66,000/- qua the tradings segment transactions. 11. Assessee company carried the matter by raising objections before the ld. DRP which has upheld the order....
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....stries Ltd 3. Reed Relays & Electronics India Ltd 4. Salzer Electronics Ltd 3.3 In the TP Report three year's data has been used to benchmark the international transactions. For the international transactions of "Manufacture using imported components and sold to Non AE's" the assessee has selected the OP/Sales of the as the PLI. The weighted average OP/Sales of the 7 comparables has been worked out at 7.44%. Further, the average of raw material imports to total raw materials and spares was calculated at 17.03% in comparables as against 83.68% of the assessee. The NPM for manufacturing was adjusted for the ratio of high imports in the case of the assessee and the adjusted NPM was calculated at 12.29% (Appendix C5 of TP Report) as against a net level loss of - 3.33%. 3.5 For the international transactions of "Manufacture and exports to AEs" the assessee has selected the OP/sales as the PLI. The weighted average OP/sales of the 7 comparables has been worked out at 9.55% as against 27.97% of the assessee. 3.6 It was noticed from the submission dated 16.04.2012 that six segments have been created for benchmarking purposes. Besides there are....
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.... India Ltd 10.69 7. Salzer Electronics Ltd 9.34 Mean 7.88% 3.9 The comparables selected by the assessee are thus proposed to be used for the purpose of benchmarking. Single year's data is proposed to be used. The mean margin OP/Sales of 7 Comparables 7.88% is proposed to be used as the arm's length margin for computing the arm's length price in this segment, in place of the margin of the tested party which is computed at 4.89%. Thus the amount of adjustment proposed is computed as under: Particulars Total Sales net of excise 61,357.96 Arm's length margin @ 7.88% 4835 Margin of the assessee -2997.55 Difference in the margin 7832.55 Adjustment proposed to be made 7832.55 As computed above, an adjustment of Rs: 7832.55 Lakhs is proposed to be made in the manufacturing segment 5.6 REPLY OF THE ASSESSEE * The assessee in reply to show-cause notice issued, has furnished reply dated 24.01.2013, in which the assessee has taken the following arguments: * The assessee has stated that 'Manufacturing Local segment' was created because this segment contains majority o....
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....ted. However, the contentions regarding segregation of this segment at all are considered separately. ii) The assessee has stated that they have now got their accounts audited and for the above segmental accounts, assessee has furnished certificate from Pankaj Billa & Co., Chartered Accountants dated 21.01.2013. In the above stated certificate, the Firm of CA has only certified what the assessee had carried out in its TP report. No basis for above certification has been given by the auditors except for reiterating what the assessee had itself carried out in its TP report. This post-facto certificate is not valid because of the following reasons: * The segmentation carried out for TP purposes is not supported by audited AS-17 financials. * The original auditors of the company, S R Batliboi & Associates have carried out segmentation on the basis of Accounting Standard AS-l1 issued by Chartered Accountants of India. The segmental reporting is with respect to primary business segments, i.e. industrial, electrical and electronics items. The other segment is the segment relating to services segment which includes research and other services provided to group co....
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....t should have been given to it. The taxpayer's above objection is not acceptable in view of the amendments made in the income tax act and various case laws. 5.10 In view of detailed discussions in the foregoing paragraph the quantum of adjustment to be made is computed as under: Particulars Total Sales net of excise 61,357.96 Arm's length margin @ 7.88% 4835 Margin of the assessee -2997.55 Difference in the margin 7832.55 Adjustment proposed to be made 7832.55 5.11 Since the price charged by the assessee varies by more than 5% from the value of international transactions, an adjustment of Rs. 78,32,55,000/- is to be made to the income of the assessee in the Contract R&D Segment, being the difference between the arm's length price and the price charged by the assessee from its AEs for export of services. The Assessing Officer shall enhance the income of the assessee by an amount of Rs. 78,32,55,000/- while computing its total income." 16. The ld. TPO declined to entertain the contentions raised by the assessee to adopt the transaction by transaction approach on the ground that assessee has artificially segregated its m....
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....adopt the transaction by transaction approach for benchmarking the international transaction and to select its AEs as tested party has neither been discussed nor answered by the ld. TPO. 20. Likewise, the additional evidences brought before ld. DRP available at pages 550 to 597 of Paper Book-1 have also neither been discussed nor replied with by the ld. DRP. 21. Identical issued was come up before the Tribunal in assessee's own case qua AY 2007-08 and AY 2008-09 wherein matter has been set aside to the AO for fresh adjudication, operative part of the order passed by the coordinate Bench of the Tribunal in assessee's own case for AY 2008-09 in ITA No.6281/Del/2012 is reproduced for ready perusal :- "5. We have heard both the sides on the issue. We have also gone through the written submissions made. The ITAT in assessee's own case Assessment Year 2007-08 in ITA No.5728/Del/2011 dated 22.11.2012 has restored the issue to the file of the Assessing Officer. The relevant portion of the order of ITAT is as under :- "5. Considering the above submissions we find that in the case Kyungshin Industrial Motherson Ltd. (Supra) the primary contentions of the assessee invo....
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....restored back to the file of the Assessing Officer." 22. So, keeping in view the fact that additional evidences brought on record by the assessee before the ld. TPO/ld. DRP have not been considered and the fact that identical issue in assessee's own case has already been restored back for fresh adjudication by the AO qua AY 2007-08 and AY 2008-09, we deem it expedient to restore this issue as to the manufacturing segment to the file of AO who shall adjudicate after providing an opportunity of being heard to the assessee. Consequently, grounds no.3, 3.1 and 3.2 are determined in favour of the assessee. However, in the light of the findings returned by the Bench on grounds no.3, 3.1 and 3.2, ground no.2 has since become infructuous and needs no adjudication. GROUND NO.5 : 23. Assessee has benchmarked the international transaction relating to contract and R&D and made a suo motu adjustment to the tune of Rs. 411 lakhs. However, the ld. TPO in order to benchmark international transaction to contract R&D support services segment adopted the following filters :- "i. Use of current year data : It has already been argued earlier that the transfer pricing provisions lay do....
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....s is at least 75% of total income: This filter is required to be applied since you are primarily earning income from exports. Even in cases where an assessee is having income from domestic operations, the transfer pricing audit will benchmark transactions with the AE which will be an export transactions. There are Judicial pronouncements that support the case that exporters should not be compared with domestic companies. Hence, this filter is required to be applied with a threshold 75%. vi. Reject companies where related party transactions exceed 25% of sales: There is no doubt that companies with significant related party transactions need to be excluded from the benchmarking process. On the issue of threshold of related party transactions, it can be stated that when the RPT exceeds 25% of sales, it can be said to be the stage when it will start affecting the price paid/received. The rationale given for the use of the If in it of 25% is sound and this threshold limit has been approved explicitly an implicitly in quite a few judicial pronouncements. However, companies which are having consolidated sales not exceeding 125% of sales of standalone entity and not havi....
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.... factors like persistent: losses, declining sales, extraordinary income or expense, mergers and acquisitions or other such factors which affect the operations of the company substantially should not be used as comparables as they will not prove to be good benchmarks." 24. After applying the aforesaid filters, TPO rejected following comparables companies as selected by the assessee for benchmarking :- S.No. Name of the company Remark s of this office 1. Aditya Birla Minacs Technologies Ltd./Birla Technologies Ltd. Reject 2. Akshay Software Technolgies Ltd. Accept 3. Computech International Ltd. Reject 4. Halios & Matheson Information Technology Ltd. Reject 5. L G S Global Ltd. Accept 6. Powersoft Global Solutions Ltd. Reject 7. R Systems International Ltd. Reject 8. Sasken Communication Accept 9. Sonata Software Ltd. Reject 10. Quintegra Solutions Ltd. Reject 25. Ld. TPO selected the following final set of comparables for benchmarking international transaction relating to contract R&D:- S.No. Comparables OP/OC (w/o fx) (%) 1. Akshay Software Technolgies Ltd. 7.9....
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....r available at pages 18 to 37 of the supplementary paper book, dealt with identical issues and restored the case to the TPO to decide afresh. In the light of the directions given by the coordinate Bench in the order dated 09.09.2003 qua AY 2008-09 (supra), operative part of which is reproduced in preceding para no.25 of this order. Moreover, TPO has dealt with all the segments differently showing average OP/TC of comparables at 26.86% vis-à-vis assessee's OP/TC at 11.14% . Ld. AR further contended that the TPO has not adopted transaction by transaction approach for making TP adjustment. 28. However, on the other hand, ld. DR contended that this issue has already been determined by both TPO and DRP. Assessee company while making submissions before the TPO dated 24.01.2013 in response to the show-cause notice took a specific stand that benchmarking of international transactions needs to be made on transaction by transaction basis for which complete documents have been submitted as referred at page 291 of the paper book in the form of Annexure D-1 to D-42 and Annexure D43 to D-44. The TPO has examined separate segmental account in respect of transaction by transaction segmen....
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.... (ii) K. Dhandapani & CO. Ltd. 0.32 (iii) Karuna Cables Limited 3.64 (iv) Remi Sales & Engineering Limited 1.98 (v) Chloride International Limited -1.37 4.30 33. The TPO computed the proposed amount of adjustment as under :- Particulars Total Sales net of excise 42,084.56 Arm's length margin @ 4.30% 1809.64 Margin of the assessee -1949.02 Difference in the margin 3758.66 Adjustment proposed to be made 3758.66 34. Assessee company's contention for adjusting its margin because of its high import content in comparison to the comparables has not been accepted by the TPO. TPO categorically observed that even during the TP proceedings, the assessee has not come up with suitable comparables and made the adjustment in distribution segment by taking the updated margin of comparables taken by the assessee in its report and computed the amount of adjustment as under :- Particulars Total Sales net of excise 42,084.56 Arm's length margin @ 4.30% 1809.64 Margin of the assessee -1949.02 Difference in the margin 3758.66 35. Perusal of the order passed by the TPO as wel....
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....be carried out to eliminate any material differences between the assessee and the comparable companies and the assessee relied upon order passed by ITAT, Delhi Bench in case cited as Honda Trading Corporation India Pvt. Ltd. vs. ACIT - (ITA No.5297/Del/2011 order dated 08.03.2013). 38. In the identical situation arisen in Honda Trading Corporation India Pvt. Ltd. (supra), benefit has been extended to the assessee on account of foreign exchange fluctuation, operative part of the order is reproduced for ready perusal as under :- "19. ...... On the issue of adjustment of exchange fluctuation, loss incurred by the assessee, we observe that it is a well accepted principle of Transfer Pricing regulations to compare like with like and eliminate the differences if any, by suitable adjustment. The said principle clearly provides for adjustments in margins of the enterprise entering into international transactions for any differences between such international transactions and the transaction of comparables or between the enterprise entering into internationals transactions and comparable companies. The foreign exchange element also needs consideration. Rule 10B(3) of Income Tax ....
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....nt of advertisement and sales promotion expenses to the tune of Rs. 6,32,85,750/- and recruitment expenditure to the tune of Rs. 1,12,88,617/- made by the AO and confirmed by ld. DRP are allowable on the ground that these expenditure have not resulted into acquisition of any asset by the assessee company nor any enduring additions have been accrued to the assessee. So, by following the order passed by the coordinate Bench in assessee's own case qua AY 2002-03 and AY 2003-04, grounds no.7 & 8 are determined in favour of the assessee as AO/DRP have erred in disallowing 3/4th of the advertisement and sales promotion expenses amounting to Rs. 6,32,85,750/- and 4/5th of the expenditure of the recruitment expenditure to the tune of Rs. 1,12,88,617/-. However, AO to verify the exact period of contract to compute the expenses incurred by the assessee and disallow the expenses if the same are found to be not attributable to the year under assessment. GROUND NO.9 44. AO disallowed 3/4th of the licences and permits expenditure amounting to Rs. 1,69,93,222/- out of the licences and permits expenses of Rs. 2,26,57,629/- on the ground that the same lead to the enduring benefit to the asses....
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....essee was engaged in business of share trading and stock braking - Since year under consideration was first year of business, revenue authorities rejected various claims of expenditure made by assessee on ground that expenditure had been incurred for initial outlay or for acquiring or bringing in existence assets or advantage of enduring benefit and hence they were capital in nature and did not fall within purview of section 37(1) - Whether development fee paid to Calcutta Stock Exchange Association to become member thereof, was capital expenditure - Held, yes - Whether expenditure towards fees for operating on floor paid to Calcutta Stock Exchange Association was of revenue in nature - Held, yes -Whether payment of admission fee to OTC Exchange of India (OTCEI) in order to become dealer on OTCEI and to operate counter for conducting assessee's business as a share dealer and payment of Technology cost for imparting training to assessee's employees so as to make them qualified as per guidelines laid down by OTCEI was for purpose of carrying or running assessee's business of share trading in a profitable manner and was revenue expenditure - Held, yes - Whether expenditure....