AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (9) TMI 1288
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.... 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 adjustment should have been made in the appellant's case under the Transactional Net Margin Method ('TNMM'). 3.2 The....
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....t 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 grossly erred in law in initiating the penalty proceedings under section 271(1)(c) of the Act." 2. Briefly stated the facts of this case are : assessee company, Schneider Electric India Pvt. Ltd. (SEIPL), is a wholly owned subsidiary of Sc....
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....ational 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 this segment in place of the margin of the tested party which is computed at minus 4.89% on the basis of which the TPO proposed the adjustment of Rs. 7832.55 lakhs with the manufacturing segment detailed 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....
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....ame 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 passed by the ld. TPO. Feeling aggrieved, the assessee has come up before the Tribunal by challenging the impugned order passed by AO/TPO/DRP by way of present appeal. 12. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. Our ground-wise findings are as....
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....s 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 four segments in which there are stated to be no international transaction. It is noticed from this chart furnished by the assessee that there is one segment by the name of Manufacturing (TP) and there is another segment Manufacturing (Local]. Vide order sheet dated 12.06.2012, the assessee was asked to explain as to how the segments have been drawn and to explain the key to allocation. The assessee, vide submissions dated 08.10.2012, submitted the reply. However it is seen that: there are no cogent reasons for cre....
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.... 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 of domestic transactions and does not involve significant international transactions. The imported raw material components constitute only 15% of the total cost for manufacture of final products, whereas in the 'Manufacturing imported segment', these account for more than 80% of total cost. * Assessee has relied upon Rule 10B(l)(e) wherein definition of TNMM has been given to state that the NPM margin pertaining to 'Manufacturing Local Segment' involves negligible international transactions and 'Manufacturing Exports Segment' was not comparable. * Assessee has slated that the ambit of segmentation under transfer pricing is much wider t....
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....ed 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 companies. The segment accounting policies have been specifically laid out in Note B of Schedule 19 to the accounts. No such sub segmenting has been carried out by the original auditors of the company. * Certain expenses have been allocated on the basis of certain keys such as 'hours spent', 'net sales', 'fixed assets' and 'usage'. These allocation keys are not defined so as to arrive at accurate allocation. * It may be mentioned that in the Audited Report which was prepared on the basis of actual audit and physical verification, no such differentiation has been reported by the Auditor. The claim made by the assessee in the certificate is based on an artificial assumption, which is not substantiat....
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....he 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 manufacturing segment function for TP purposes in order to determine inflated tested party margin to bring its transaction in arms length range. TPO also declined to entertain the reason given by the assessee for excluding "manufacturing local segments" being not convincing as the assessee has itself admitted that the "manufacturing local segment" includes international transaction relating to import of raw material component. TPO also observed that the assessee has failed to explain/adjustment as to how this international transaction under the manufacturing local segment are getting benchmark under TNMM by excluding this segment form its benchmarking analysis. TPO has also not admitted certificate for audited segmental accounts given by Pankaj Billa & Co., CA dated 21.01.2013 on the grounds inter a....
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....he 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 involved was regarding analysis of suppliers' profitability for imports and limiting the variation on account of transfer pricing only to the proportion of related party transactions. The authorities below did not address the issues for want of data. The Tribunal acceded to the assessee's plea for accepting these additional evidences and remanding the matter to the authorities below for fresh adjudication. Again in the case of Quark Systems India Pvt. Ltd. (Supra) the Special Bench of the Tribunal has held that the appellant can not be estopped from highlighting mistakes in the assessment even though such mistake is the result of evidence adduced by the tax payer. We find that in the present case the assessee has also collated supplementary evidence to corroborate the arm's length nature of its international trans....
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....on 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 down that primarily current year data should be use. You have objected to the use of this filter. However, you have ignored the/act that the proviso to Rule 10D(4) allows the use of multiple year data only if the assessee is able to demonstrate through relevant data that certain factors of earlier years has affected the transfer prices for the current year. You have not been able to do so in any of your submissions. There are sufficient judicial pronouncements that support the use of current year data. ii. Different financial year : If a company is having an accounting year different from financial year for which financials of your company are being considered, the same has been excluded as the profits and revenue pertain to different period other than current year which is FY 2008-09. This filter is being applied because even after applicat....
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....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 having large variation in the profit margins between the standalone entity and consolidated entity have been considered at the consolidate level irrespective of the related party transactions as the 'related party transactions cancel out at consolidated level and significant portion of the business (>80%) considers the operations in Indian conditions in which you operate. in case of companies which are not having significant difference between the margins of standalone entity and consolidated entity, it is clear that RPT have not significantly influenced the margins of such companies and hence they have been considered. Further, as per the disclosure norms, related party transactions are mandatorily required to be reported by a company having turnover above Rs. 50 crores. Hence, companies where turnover is less than 50 crores and no disclosure in respect of related party transacti....
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....PO 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. 7.99 2. Aztecsoft Ltd. (Consolidated) 27.37 3. Bodhtree Consulting Ltd. 69.80 4. Cat Technolgoies Ltd. 34.43 5. Goldstone Technologies (Seg) 10.28 6. Infosys Technologies Limited 40.74 7. Larsen & Turbo Infotech Limited 21.56 8. LGS Global Ltd. 17.55 9. Mindtree Limited 27.36 10. Persistent Systems Limited 37.77 11. R S Software (I) Limited 10.15 12. Sasken Communication Tech. Ltd. 22.67 13. Tata Consultancy Services Ltd. 31.44 14. Tata Elxsi Ltd. 16.89 15. Think Soft Global 16.56 16. Thirdware Solutions 37.27 Average OP/TC 26.86 26. On the basis of TP study, the ld. TPO determined the arms length price as under :- "18. DETERMINATION OF ARM'S LENGTH PRICE: On the basis of above discussion, the average mean margin of comparable companies in ' Provision of software development services' segment comes to 26.86%. This margin shall be adopted for the purpose of benchmarking international transaction in the provision of software de....
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....unt in respect of transaction by transaction segment. However, by following the rule of consistency, the TPO is required to decide the issue de novo after providing an opportunity of being heard to the assessee. So, ground no.5 is determined in favour of the assessee and the matter is restored to the TPO. GROUNDS No.4 & 4.1 29. The ld. AR for the assessee challenging the impugned TP adjustment regarding trading segment to the tune of Rs. 37,58,66,000/- contended that there is no dispute with the revenue as to the distribution segment in the earlier years as there was healthy margin and no adjustment was made. But, during the year under assessment, healthy margin could not come on record only due to foreign currency loss. 30. Undisputedly, as per financials given in annexure D-5 to the TP report, the operating profit to the sales ratio in case of assessee is minus 4.63%. Assessee has carried out the adjustment on the ground that it is importing 100% finished goods being sold by it as against the average 6.12% of import contents in the trading functions of comparables selected by the assessee company. Assessee has computed adjusted Net Profit Margin (NPM) at 13.97%. 31. However, ....
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....ing to the unhealthy margin. Ld. DRP rather toed the line of TPO to decide this issue. 36. Assessee categorically submitted before the ld. DRP that loss in distribution segment is due to adverse foreign exchange movement and has duly demonstrated the effect of loss of foreign currency at page 979 and 980 of the paper book. Relevant para are reproduced for ready perusal as under :- "50. The assessee would further emphasize that the loss in this segment was primarily on account of adverse foreign exchange movement. The assessee, in its distribution segment, imported 100% of finished goods from its AEs and hence the INR value purchases [invoiced in foreign currency by the AEs i.e. EURO C'EUR') in this case] depended highly on the prevailing exchange rates. Thus, the assessee was exposed to high economic foreign exchange risk. This typically occurs when the business generates sales in one currency and incurs costs in another. 51. During FY 2007-08, the movement of EUR against INR was range bound between INR 54/EUR 112 to INR 59/EUR 1 levels. However, during FY 2008-09, there was a sharp depreciation of INR against EUR and the Indian currency fell around 16% (from INR 58/EU....
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....that an uncontrolled transaction shall be comparable to an international transaction, if none of the differences between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market. This rule clearly stipulates that reasonably accurate adjustments can be made to eliminate the material effects of such differences." 39. By following the rule of consistency and the facts and circumstances of the case, foreign currency fluctuation needs to be taken into account for TP adjustment both for comparable companies as well as tested party. So, this ground is also required to be restored to the TPO to make fresh adjustment regarding distribution segment by taking into account foreign currency fluctuation duly demonstrated by the assessee in view of the observations made herein before. CORPORATE GROUNDS GROUND NO.6 40. Ground No.6 is general in nature which would be decided in the remaining corporate grounds and as such, needs no specific findings. GROUNDS NO.7 & 8 41. Ld. AO/ld. DRP have disallowed 3/4th of the advertisemen....
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....nd thereby made an addition of Rs. 1,69,93,222/-. Ld. DRP also affirmed the order passed by the AO. 45. Ld. AR for the assessee, relying upon the Special Bench decision of ITAT in case of Peerless Securities Limited vs. JCIT - (2005) 94 ITRD 89 (Kol.)(SB) and decision rendered by Hon'ble High Court of Madras in case of CIT vs. Southern Roadways Ltd. - (2006) 155 Taxman 493 (Mad). 46. Operative part of the decision rendered by Special Bench of the Tribunal in case of Peerless Securities Limited (supra) is reproduced as under for kind perusal :- "Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1996-97 - Whether a payment made to remove possibility of a recurring disadvantage cannot be considered as payment made to secure an enduring advantage - Held, yes - Whether where advantage consists of merely in facilitating assessee's trading operations or enabling management or conduct of assessee's business to be carried on more efficiently or more profitably, while leaving fixed capital untouched, expenditure would be on revenue account, even though advantage may endure for indefinite future - Held, yes - Whether if expenditur....
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....a nationwide level so as to facilitate it to carryon business smoothly, extensively, effectively and profitably was of revenue in nature - Held, yes - Whether deposit for Very Small Aperture Terminals (VSATs) on account of providing by NSEI online Screen Based Trading Facilities on Equal Access basis to all Trading Members, directly related to business operation and trading activities carried on by assessee and was, therefore, allowable as Revenue Expenditure - Held, yes." 47. Keeping in view the settled principle and the facts and circumstances of the case, expenditure of Rs. 2,26,57,629/- incurred by the assessee on licences and permits being necessary to run the business without which assessee's unit would have stopped, which are revenue in nature and cannot be deferred to another 5 years. Even otherwise, licence fee for one year has been claimed by the assessee in the year under assessment itself. So, ground no.9 is determined in favour of the assessee and AO is to recompute the deductions in the light of section 10A of the Act. GROUNDS NO.10 & 10.1 48. Ld. AR for the assessee contended that AO/DRP have erred on facts and in law in not recomputing the deduction u/s 10A after....