TaxTMI 
TaxTMI 
2017 (4) TMI 908
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....ssee in ITA No.251/PN/2014 has filed modified grounds of appeal, which read as under:- Grounds of appeal pertaining to transfer pricing adjustment: 1. Inappropriately making transfer pricing adjustment even though the pricing of all international transactions of the Appellant was at arm's length Erred in making confirming the transfer pricing adjustment to the international transactions of the Appellant pertaining to purchase of machined components, sale of machined components and payment of Royalty to associated enterprises ('AEs') and concluding that the value of the international transactions are not at arm's length 2. Inappropriate non acceptance of the approach and analysis provided by the Appellant in its transfer pricing study report Erred by not accepting the approach and analysis undertaken provided by the Appellant in its transfer pricing study report for benchmarking its international transactions. 3. Inappropriately considering Shanthi Gears Limited and International Combustion (India) Limited as comparable for AY 2009-10 Erred by concluding that Shanthi Gears Limited and International Combustion (India) Limited are comparable to the Appellan....
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....m's length price in relation to international transactions. The contention of assessee in this regard is that Shanthi Gears Limited and International Combustion (India) Ltd. are functionally not comparable to the assessee, hence the same should not be picked up for benchmarking the international transactions. 6. Briefly, in the facts of the case, the assessee is Joint Venture company between the Anand Automotive Systems, having equity of 24.1% and foreign company Dana Corporation, USA, having equity of 75.90%. The assessee was primarily engaged in the business of manufacture and sale of drive train components namely propeller shafts, universal joints, axles and components thereof, which constitute heart of the transmission system. The assessee had set up its unit to manufacture components of propeller shafts at Jodalli, assembling of propeller shafts at Hosur and Satara, manufacturing of axles at Chakan and driveshaft assembly plant at Pantnagar. The assessee had filed revised return of income declaring total income of Rs. 9,56,666/-. During the year under consideration, the assessee had entered into international transactions with its associated enterprises and hence, the A....
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....ing industry and the manufacture of gear boxes and geared motors. He stressed that segmental details were available, then only the results of manufacture of gear and geared boxes should be taken. Our attention was drawn to the working of OP/OC of the said concern at page 100 of the Paper Book, wherein it worked out at 0.17%. He stressed that since the said concern was not engaged in automotive industry, the results of said concern Industrial Combustion (India) Ltd. should not be adopted for benchmarking international transactions of the assessee and in case, the same is to be included, then at best the same is to be taken at 0.17%. 9. The learned Departmental Representative for the Revenue in this regard placed reliance on the orders of authorities below. 10. We have heard the rival contentions and perused the record. The assessee had entered into various international transactions with its associated enterprises. The assessee was engaged in the business of manufacture and sale of drive train components namely propeller shafts, universal joints, axles and components thereof which constitute heart of the transmission system. The assessee had set up units to manufacture differe....
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....uch concerns in order to benchmark the arm's length price of international transactions undertaken by the assessee. The OECD Guidelines also emphasize the need to apply the test of functional analysis in order to benchmark the international transactions. The bare perusal of website details of the said concern which list out the activities undertaken by it and the range of applications of items manufactured by it, clearly shows that the items manufactured by Shanthi Gears Ltd. are not utilized for automotive industries. As referred to by us in the paras hereinabove, the assessee is engaged in the manufacture and sale of drive train components, which constitute the heart of transmission system of the automobiles and has no application in the fields in which the items manufactured by Shanthi Gears Ltd. are applied. Accordingly, we find no merit in the order of TPO in including the said concern Shanthi Gears Ltd. as comparable. We direct the TPO / Assessing Officer to exclude the same and re-compute the arithmetic mean of finally selected comparables. 12. Now, coming to next concern i.e. International Combustion (India) Ltd. The learned Authorized Representative for the assessee....
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.... 615.68 COGS Mfg D 547.79 Other Expenses E 47.88 COGS with other Expenses F=D+E 595.67 Net Operating Margin G=F-CIT(A) 20.01 Net operating Margin % to Sales H=G/C 3.25% 14. The assessee objected to the said approach and pointed out that at entity level, it had earned 3.66%, as per audited segmental financials which was as under:- Particulars Reference Amount (Rs Crores) / % Net Sales A 528.38 Other Income B 8.52 Total income C=A+B 536.90 Less: Non-operating income Interest received D 3.02 Gain on sale of fixed assets E 0.01 Operating Income F=C-D-E 533.87 Total expenses G 514.74 Less: Non-operating expenses Interest Paid H 0.40 Operating expenses I = G-H 514.34 Operating profits J = F-I 19.53 Operating profit / Operating Revenue K=J/F*100 3.66% 15. The Dispute Resolution Panel (in short 'the DRP') did not comment on the report of TPO while disposing the objections raised by the assessee. Thereafter, the assessee filed rectification application dated 03.02.2015....
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....ectification order dated 14.02.2014 which is placed at page 400 of the Paper Book. Thereafter, the TPO moved an application before the DRP that no rectification is possible because of safety harbour rules, then consequent rerectification order was passed by the DRP on 21.05.2014 which is placed at page 420 of the Paper Book. The learned Authorized Representative for the assessee pointed out that the Assessing Officer in view of the earlier order of rectification passed by the DRP on 14.02.2014 had passed rectification order under section 154 read with Rule 13 of the Income-tax (DRP) Rules, 2009 and determined the income of the assessee and also worked out the refund due to the assessee. The learned Authorized Representative for the assessee pointed out that refund of Rs. 1.37 crores has not been issued to the assessee till date. In view of our decision in holding that there is a mistake in working out the PLI of assessee company, we direct the Assessing Officer to adopt the figure as adopted in order passed under section 154 read with Rule 13 of the DRP Rules dated 26.09.2014. The Assessing Officer is directed to verify the said claim of assessee and determine the refund due to the....
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....ioning that none of the arguments were fresh and new. 20. The assessee is in appeal before us against the final assessment order passed by the Assessing Officer applying the directions of DRP. 21. The learned Authorized Representative for the assessee pointed out that the assessee was paying Royalty to Dana Corporation @ 2.85% of sales except the sales to Dana Corporation. Further, the assessee was also paying management fees to AIPL for rendering several types of services but the remuneration was equivalent to Royalty amount i.e. 2.85% of sales. The learned Authorized Representative for the assessee referred to the copy of agreement dated 14.12.2004 placed at page 462 of the Paper Book and pointed out that in earlier years, there is no disallowance. He pointed out that during the last year, Royalty was paid to the tune of Rs. 8.9 crores and this year Royalty was paid at Rs. 8.60 crores. The management fees to AIPL last year was paid at Rs. 8.51 crores and this year at Rs. 8.11 crores. The Assessing Officer has disallowed Rs. 8.11 crores of management fees. Our attention was drawn to various terms of the agreement for providing services, which are placed at pages 463 to 466 o....
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....es at client location, meeting with key customers to generate opportunities for SIPL, supporting in participation at various business events etc. This support from AIPL resulted in increased turnover year on year as well as boost in aftermarket sales as provided vide submission dated 26 March 2013 before the learned AO. • AIPL's strong corporate relationship with leading lending institutions, commercial banks, insurance companies supported SIPL in arranging and availing long term funds and short term working capital needs at competitive rates, covering foreign exchange exposure risk, negotiating quotes for Insurance as well as reviewing and advising for risk coverage etc. • Legal and taxation: In accordance with frequent changes in various Acts and Rules in Direct and Indirect Tax Laws and various other laws, AIPL supported in advising from time to time with regard to changes which helped SIPL to comply with all the laws and regulations. • Operational overview: AIPL conducted periodic operation review meetings to drive the performance of SIPL and supported for excelling the operations. In addition to that, advisors drawn from diverse field....
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....support services are being rendered by the said concern to the assessee and the perusal of expenses debited by the assessee reflects that no major expenses have been incurred by the assessee and the benefits flow from AIPL to the assessee. The said benefits were for smooth carrying on of the business by the assessee and were incurred for the purpose of business. The assessee is the best judge to decide the expenditure it needs to incur for smooth carrying on of its business. The Assessing Officer cannot sit in judgment of businessman position in incurring any expenditure. The Hon'ble Supreme Court in Hero Cycles (P) Ltd. Vs. CIT (supra) have applied the ratio laid down by the Apex court in S.A. Builders Ltd. Vs. CIT(A) and another (2007) 288 ITR 1 (SC) and upheld the scope of commercial expediency, wherein it was held that The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. Where there is nexus betwe....
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....ces of the case, the DRP erred in holding M/s Raunaq Automotive Components Ltd. as comparable company when it was already rejected by the assessee in the search matrix submitted in TP audit on 11.1.2013, on the basis that it had 'Different functionality'? 4. Whether on the facts and circumstances of the case, the DRP erred, when it held in rectification order that PLI be calculated using Safe Habour rules, 2013 when assessee has been consistently treating foreign exchange fluctuation as operating which has been accepted by revenue? 5. Whether on the facts and circumstances of the case, the DRP erred in granting working capital adjustment to the assessee; a) when it had not been demonstrated or proved that the pricing of the product and services in case of comparables or even in case of the assessee company was actually determined in the basis of the working capital? b) when comparables have been identified following vigorous search process following the provisions of Rule 10A(a), Rule 10B(2), Rule 10B(3) and Rule 10B(1) comparing functions, assets and risks, wherein there is no case for any adjustments, which needs to be made to the financial results....
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....rder passed under section 154 was correct. In respect of second claim of the Revenue that the DRP had held that M/s Raunaq Automotive Components Ltd. and M/s RSB Transmissions India Ltd. were comparable, the learned Authorized Representative for the assessee pointed out that no such direction has been given by the DRP and hence, rectification application before the DRP. The learned Authorized Representative for the assessee pointed out that this was the additional ground of appeal raised before the DRP and since that was not adjudicated in the first round, rectification was possible against it. The DRP asked for remand report. Further, claim was raised in respect of grounds of appeal No.13 and 14, which was additional ground of appeal. Further, the DRP has not adjudicated the ground of objection No.12 i.e. claim of deduction under section 10B of the Act which was not originally allowed to the assessee. 31. The first issue which arises by way of ground of appeal No.1 is against the power of DRP in passing the rectification order. Rule 13 of Income Tax (DRP) Rules, 2009 reads as under:- "After the issue of directions under Rule 10, if any, mistake or error is apparent in such d....
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....ed by the above said directions of DRP since the concerns were not comparable because of various factors. We find no merit in the said ground of appeal raised by the Revenue, where the issue has been remitted back to the Assessing Officer / TPO to verify the claim of assessee and also to apply the filters used by the TPO. The DRP's conclusion was that the said concerns are functionally comparable to the assessee as the same also deals in automotive parts, however, the Assessing Officer is directed to apply other filters selected by the TPO. We modify the order of DRP to the extent that the TPO is to determine the functional comparability of the said concerns and also apply the other filters to decide whether the said concerns were to be included in the final list of comparable. The DRP while exercising the powers of rectification can at best decide whether the issue is rectifiable or not but the merits of the issue need to be looked into by the TPO. Accordingly, the ground of appeal No.3 raised by the Revenue is thus, allowed for statistical purposes. 36. Coming to the ground of appeal No.4 raised by the Revenue, wherein the DRP while passing the order under Rule 13 of the DRP R....
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....stment in proportion to the value of International Transactions only. 2. Erred in not considering the Royalty paid to AE pursuant to a valid agreement, at arm's length and ignoring the fact that the Cross Objector had demonstrated the benefits received by it from Royalty payments to its AE. 3. Failed to appreciate that Royalty cannot be examined on a standalone basis in isolation from production and sales since Royalty is inextricably linked with these activities and was appropriately evaluated along with the same under transactional net margin method (TNMM) analysis. 4. Erred in not appreciating the fact that Royalty agreement entered into by the Respondent with its AE resulted into a bundle of benefits and substantial savings in terms of improved productivity, better utilization of material, manpower and machines over the period. Further, erred in evaluating Royalty payment using a method which is not prescribed in Indian transfer pricing regulations under section 92C of the Income-tax Act, 1961. 5. Failed to appreciate the external benchmark i.e. percentage at which Royalty has been paid by an Indian comparable, Sona Okegawa, which was engaged in similar business....
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....ssee holding that no proper documentation was on record for the payment of Rs. 16 crores of Royalty and management fees. The TPO further observed that where the payments were being made for the last 15 years and there was no requirement to continue to pay such amounts. The TPO further noted that the assessee has not made any profits in the domestic segments but in fact was making loss, which was due to payment of Royalty and equivalent amount of management fees to the domestic associate enterprises. The TPO was of the view that sum of Rs. 16 crores was spent on services which were doubtful. Another point raised by the TPO was that the assessee has not been able to quantify the details of services received from associate enterprises or AIPL. Since it was imperative on the part of assessee to establish that the payments were made commensurate to the volume and quality of technical services and as there was no cogent evidence with regard to the purpose of technical assistance available with respect to the nature of services rendered by associate enterprises to the assessee and where the assessee had not proved the commensurate benefits against the payment of service fees to the associ....
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....rangement and should be disallowed. In view thereof, the DRP vide directions dated 30.12.2013 held that the arguments of assessee were not justified and the objections raised by the assessee were rejected. 45. The assessee has filed Cross Objections against the said directions of DRP / Assessing Officer. 46. Before us, the learned Authorized Representative for the assessee pointed out that similar payment of Royalty to Dana Automotive Systems LLC was accepted to be at arm's length price for all the years starting from assessment year 2005-06 to assessment year 2008-09. For the year under consideration i.e. assessment year 2009-10, the arm's length price was taken at Nil by the TPO. However, in assessment year 2010-11, the same was accepted to be at arm's length price by the CIT(A) and in assessment year 2011-12, the same was accepted to be arm's length price by the DRP itself. The learned Authorized Representative for the assessee in this regard, placed on record the copies of orders of TPO passed under section 92CA(3) of the Act relating to assessment years 2005-06 to 2008-09. The learned Authorized Representative for the assessee further pointed out that the....
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....sociate enterprises, the assessee was to pay Royalty initially @ 3% and thereafter, @ 2.85%. The copies of agreements are placed at pages 116 to 158 of the Paper Book. The assessee also provided documentation, under which the assessee had received the benefits and assistance from its associate enterprises in relation to the Royalty transaction on account of technical assistance, design, process review and technical know-how, which are placed at pages 201 to 210 of the Paper Book. It was pointed out that associate enterprises supports the assessee in technology upgradation by bringing the latest technology in drive train systems to India. The Assessing Officer referred the issue of computation of arm's length price of the said international transaction to the TPO, who in his order treated the arm's length price at Nil. 49. In the facts and circumstances of the present case, the Royalty paid by the assessee to its associate enterprises had been approved by the Secretariat of Industrial Approval, Ministry of Industry, Government of India, vide letter dated 28/31.01.2003 and initially by the RBI @ 3%. However, subsequently, the RBI vide communication dated 21.07.2003 accorde....