TaxTMI 
TaxTMI 
2017 (4) TMI 1261
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.... Revenue has raised the following grounds of appeal:- "(i) 'Whether on the facts and circumstances of the case and in law, the Ld CIT(A) was justified in deleting the disallowance of product development expenses of Rs. 42,21,665/-without analysing the nature of expenditure? (ii) Whether on the facts and circumstances of the case and in law, the Ld CIT(A) was justified in holding product development expenses as revenue expenditure when the bill wise nature of expenses shows that the product development expenditure conferred enduring benefit to the assessee? (iii) Whether on the facts and circumstances of the case the CIT(A) erred in inferring that the expenditure was incurred to bring in improvisation & improvement in the product manufactured by the Co. by making changes & at the same time remaining price competitive. (iv) Whether on the facts and circumstances of the case the CIT(A) erred in inferring that the expenses were incurred on account of subjecting the appellants product to testing which is done on ongoing basis every year to cater the needs of customers & that the expenses is incurred for testing & trails of products already being manufactured & sold by the as....
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....ertion of the assessee that the expenditure was towards testing of the products manufactured by the assessee. However, since, this factual aspect was not before the Assessing Officer, although plea was raised before the CIT(A), the matter was restored to the file of Assessing Officer who was directed to cull out the appropriate facts and determine the nature of expenditure, in accordance with law. In the second round of assessment proceedings, the Assessing Officer show caused the assessee who in turn, explained in detail the nature of expenditure. The assessee explained that the expenditure incurred was to bring in improvisation and modifications in the product as per the requirements of the customers wherein testing of products consist of cooling performance, air flow, air distribution, body leakage tests and also reimbursement of expenses on proto sample of components/subparts development and their testing. The Assessing Officer was of the view that the testing was done so as to bring better end products and thereby new customers would be attracted, hence, it was clearly in the direction that a new benefit is sought after. The Assessing Officer, thus, held that the said expendit....
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....products wherein the products were sent to Germany in order to test its validation, since, the final product was being sold to AE. In the first round of assessment proceedings the said expenditure was connected with the expenditure incurred in the first year of commencement of business on product development and hence, the expenditure was held to be capital in nature. However, where expenditure on testing of the product which is required to be incurred on a regular basis and which does not result into creation or acquisition of any assets, then there is no merit in holding the expenditure to be of enduring benefit. The assessee is carrying out this exercise of modification and improvisation in the products in order to test suitability in the environment in which it is to be used and hence, the said expenditure is duly allowable in the hands of the assessee as revenue expenditure. The bill wise nature of expenses are tabulated at page 6 of the order of CIT(A) and perusal of the same reflects expenditure to be revenue in nature. Once, the expenditure has not been incurred for the development of new product but is for the improvisation of the products already being manufactured by the....
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....aken by it in respect of IT enabled design engineering services provided to the AE/s in the light of the functions performed by it. (Paras 2.1.2.8 to 2.1.2.11 Pages 14 & 15 of ClTA's order) 4. In not allowing adjustment asked for reduction from 80% of the total leased line cost attributed by the learned TPO to 40 % in arriving at the operating profit earned by the appellant in providing IT enabled design engineering services by relying on the estimate of the said cost made by the TPO on presumptive basis instead of on the basis of usage of the leased lines as contended by the appellant. (Paras 2.1.2.4 to 2.1.2.6 Pages 13 & 14 of CITA's order). II. In respect of other non Transfer Pricing issues 5. In not allowing the deduction claimed in respect of incremental provision for warranty amounting to Rs. 31,37,190/-on the ground that it was created on an adhoc basis and allegedly did not meet the tests laid down by the Honourable Supreme Court in the case of Rotork Controls Limited 314 ITR 62 (SC). [Paras 2.2.1 to 2.2.6 Pages 15 to 17 ofCITA's order] 6. Your appellant craves leave to add, alter, amend, modify or delete any of the above grounds of appeal, if necessary....
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.... expenditure of Rs. 55,75,000/-on account of product development expenses. A reference u/s. 92CA(1) of the Act was made to the Transfer Pricing Officer (TPO) for the computation of arm's length price in relation to the international transactions undertaken by the assessee. The TPO noted that the activities of the assessee for the domestic market and for its AE. The TPO has also referred to the international transactions of the assessee with its AE which are tabulated under para 4 at page 20 of the TPO's order. The assessee had applied TNMM method as most appropriate method to bench mark its international transaction. The first international transaction was the provision of engineering services, under which the assessee was rendering computer aided design engineering services to Behr Group entities. The assessee set up a Design Engineering Services Division in which both the international transactions to various Behr entities were Rs. 1.66 crores. The TPO noted that the assessee was charging Euro 25.56 per man hour for rendering the services which was a fixed rate and the services were rendered to the different entities in India i.e. (offshore) and also at the premises of AEs (on-si....
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....nd not to the entire turnover was also accepted. In respect of the adjustment made to engineering design services, the CIT(A) upheld the cost allocation made by the TPO i.e. to be allowed 80% of the total leased line cost to the engineering design services. The CIT(A) also rejected the plea of the assessee for granting risk adjustment. In respect of corporate issues, the CIT(A) confirmed the disallowances of warranty provisions of Rs. 31,37,190/-. However, the product development expenses were allowed as expenditure in the hands of the assessee. 17. Both the assessee and the Revenue are in appeal against the respective portion of the order of CIT(A). 18. The first issue raised by the Revenue is against the order of CIT(A) in holding that the adjustment should be made to the international transaction and not to the total turnover. The learned Authorized Representative for the assessee at the outset pointed out that the said issue is squarely covered in favour of the assessee as per the decision of Hon'ble Bombay High Court in Commissioner of Income Tax Vs. ALSTOM Projects India Limited in Income Tax Appeal No.362 of 2014, order dated 14th September, 2016. 19. The learned Departme....
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....eration received or given to arrive at income arising from for International Transactions with Associated Enterprises. This is particularly so as in respect of transaction with non Associated Enterprises, Chapter X of the Act is not triggered to make adjustment to considerations received or paid unless they are Specified Domestic Transactions. The transaction with non Associated Enterprises are presumed to be at arms length as there is no relationship which is likely to influence the price. If the contention of the Revenue is accepted, it would lead to artificial increase in the profits of transactions entered into with non Associated Enterprises by applying the margin at entity level which is not the object of Chapter X of the Act. Absence of segmental accounting is not an insurmountable issue, as proportionate basis could be adopted as done by the Delhi High Court in Keihin Panalfa Ltd. (supra). 13. In the above view, no substantial question of law arises. Therefore, we do not entertain the present appeal." 21. Applying the ratio laid down by the Hon'ble Bombay High Court, we uphold the order of CIT(A) and dismiss the ground No.1 raised by the Revenue. 22. The issue in ground....
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....out that depreciation is to be considered as part of operating cost. He further pointed out that certain income was not considered as operating revenue as duty drawback, group sales and sales tax set off. He stressed that all the items were part of manufacturing operation and hence, should be included in the profit margins. Another contention raised by the assessee was that for the comparable Subros Ltd., the operating profits were wrongly taken at 36.52% as against correct operating profits 3.55%. He also pointed that in case the assessee concern Banco Products (India) Ltd. is excluded, then only one concern i.e. Subros Ltd. remains as comparable. He referred to the ratio laid down in Petro Araldite (P.) Ltd. Vs. Deputy Commissioner of Income Tax reported in 31 taxmann.com 281 (Mumbai-Trib.) to propose that even one comparable is enough to apply the transfer pricing provisions. 25. We have heard the rival contentions and perused the record. The first transfer pricing issue raised by the assessee is in relation to its segment consisting of import of material and components, export of heat exchangers and product testing charges. The assessee was engaged in the manufacture of sale ....
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.... exercise should be made in respect of operating margins of external comparables. Similarly, scrap sales of Rs. 23.04 laks is to be included as part of operating profits of the assessee and similar adjustment should be made to the operating profits of the external comparables. 28. Now, coming to the comparables which were finally selected for benchmarking the international transactions of the assessee in the manufacturing division. The margins shown by the assessee were proposed to be compared to the margins of two concerns i.e. Banco Products (India) Ltd. and M/s. Subros Ltd. In respect of M/s. Subros Ltd., the learned Authorized Representative for the assessee pointed out that the operating profit was wrongly taken at 36.52% as against 3.55% shown by the assessee. The contention of the assessee needs verification. Accordingly, we direct the Assessing Officer/TPO to verify the same and compute the margins of M/s. Subros Ltd. 29. The margins of the other concern which was applied to benchmark the international transaction of the assessee was Banco Products (India) Ltd. The said concern was picked up by the assessee in its TP study report to be comparable which was accepted by the....
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....dingly, the ground of appeal No. 1 raised by the assessee and the additional ground raised by the assessee are allowed. 30. The ground No. 2 raised by the assessee is not pressed and hence, the same is dismissed as not pressed. 31. The issue in ground No. 3 is in respect of arm's length price in design engineering services. There are three aspects to the said adjustment made on account of application of transfer pricing provisions i.e. (a) allowability of risk adjustment, (b) exclusion of public sector companies being not comparable to captive service provider and (c) rejection of concern Gilcon Project Services Ltd. on the premise that the financial results were not available in public domain. 32. The learned Authorized Representative for the assessee pointed out that risk adjustment should be allowed in the Design Engineering Services which was denied by the TPO. In respect of Public Sector Companies, the learned Authorized Representative for the assessee pointed out that the said concerns have social obligations for providing services and from risk perspective, the said concerns were not at all comparable. Since the assessee was a captive service provider, then its margins co....
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....nt Enterprises were completely distinct and dissimilar from a concern which was a captive service provider to its associated enterprises. The assessee was operating on Cost Plus Method which was distinct from the operations of the Public Sector/Government Enterprises. Further, even from the risk perspective, the assessee does not bear material risk including credit risk product liability, etc., whereas the said concerns bear the market and credit risk and other risks. 35. The Hon'ble Bombay High Court in CIT Vs. M/s. Thyssen Krupp Industries India Pvt. Ltd. reported in 239 Taxman 46 (Bom) had excluded Engineers India Ltd. being government company and where substantial part of its revenue came from executing projects of Public Sector Undertakings. Following the same parity of reasoning, we hold that Engineers India Ltd. and the other concerns M/s. KITCO and M/s. WAPCOS are to be excluded from the final list of comparables. 36. The next objection raised by the assessee is against exclusion of a concern which was selected by the assessee being functionally comparable. The TPO had rejected Gilcon Project Services Ltd. as comparable on the basis that the results of the said concerns w....
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....unal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee." 38. Following the said ratio, we direct the Assessing Officer to allow the risk adjustment and re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448 and compute the TP adjustment, if any, in the hands of assessee. 39. Now, coming to the next issue raised by way of ground of appeal No.4 i.e. allocation of lease line cost to two segments operated by the assessee i.e. manufacturing segment and ITES segment. The assessee had estimated the use of two lines out of six lines for Design Engineering Segment i.e. about 40% of the lease line cost. However, the TPO and the CIT(A) were of the view that 80% of the total cost was attributable to Design Engineering Segment. The case of the assessee was that it had consistently followed the said allocation procedure on the basis of usage and since out of six lines, two lines were used by ITES segment, then there was no need to disturb the same. The assessee was operating both the segments and where the assessee had consistently foll....