TaxTMI 
TaxTMI 
2017 (4) TMI 1275
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the time of hearing, the ld. AR has not pressed this appeal, as it is a repeated appeal for the same assessment year. Accordingly, this appeal stands dismissed, as not pressed. 3. Now, we take up ITA No. 365/Mds./12 Transfer pricing related issues:- 4. The facts of the case are that Caterpillar India Private Limited ('CIPL') incorporated in 2000, is a wholly-owned subsidiary of Caterpillar Commercial SA, Belgium which is ultimately held by Caterpillar Inc. USA. CIPL is primarily engaged in manufacturing and sale of earthmoving machinery including excavators, bulldozers, dumpers and loaders, and spares for the same. As a part of its expansion plans in India, CIPL has acquired Earthmoving Equipment Division of Hindustan Motors Limited during 2001. The Appellant is also engaged in following other services to its Associated Enterprises ('AEs'): • Provision of services ('EDC segment'); and • Provision of Asia-Pacific shared services ('APSS') i.e. routine back office accounting and finance related services to Caterpillar Group companies. 4.1 During the financial year 2006-07, CIPL had entered into the following intern....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bility has reliably undertaken to determine the arm's length nature of the international transactions in the manufacturing segment (CAT Segment) of the assessee. The ld. AR further submitted few illustrative points to prove that the CAT and the NON CAT segment are broadly functionally comparable and that internal comparability is best suited in the instant case, which is as under: • Both CAT and non-CAT segment are engaged in manufacturing and sale of heavy earth moving equipment. • Both CAT and non-CAT category have broad similarity in the functions performed, risks assumed and assets employed. • The sales of the CAT and non-CAT segment are 58% and 42% respectively of the total manufacturing sales of the Appellant. This goes to demonstrate that both segments have almost equal volume of sales and therefore, the comparability analysis on a comparison of the two segments would not give a distorted picture. • Both CAT and non-CAT segment sells its products in India having same market, geographic location, market size, same government regulations, same cost of labour and capital in the market, overall economic development, level o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Appropriate systems are in place to track the time spent on each of the segment. Employee costs are identified and captured to the CAT and non-CAT products based on the respective production order routings. 4 Sales tax and excise duty Actuals 10% The sales tax and excise duty paid by CIPL are levied and identified to specific CAT and Non-CAT products. 5 Sale Sales 7% Turnover has been considered as a basis allocate the cost Total 100% 6.2 He submitted that 93% of the total operating costs are on actual basis and mere 7% of the total operating cost which represent other expenses have been allocated based on the turnover which is a fair basis for allocation and not based on estimates as the Ld. TPO has mentioned in the TP order. 6.3 According to A.R, these details were not been considered by the Ld TPO despite making available at the time of assessment proceedings and he drew our attention concerned details in paper book specifically Book 3 - Page 360-361 and Page no 16-17 of submission before TPO dated Oct 22, 2010. According to him the Ld. TPO has merely presumed that the allocation are based on estim....
X X X X Extracts X X X X
X X X X Extracts X X X X
....odern technology of Caterpillar Group. Even the types of machines in both the categories are different with different specifications. The assessee's stand on this point that both the technologies are same and neither of them is old nor new has no merit. That the age of the machineries in the Non-CAT category is much older as compared to the CAT category is a fact, not refuted by the assessee itself. So, the risk profile between the two categories has to be different. (ii) There were pre existing marketing arrangements of the Non CAT category whereas the CAT category is a well known global brand. Hence, the disparity in marketing efforts between the two categories cannot be lost sight of. The assessee's stand that Caterpillar Commercial Private Limited has been providing marketing support to both the categories does not, in any way, explain the point raised by the TPO. That there will be substantial disparity in the marketing efforts and such disparity makes the two categories incomparable is an inevitable conclusion. (iii) HM brand on the Non CAT category does not generate a modern image as compared to the CAT brand. The assessee's stand that the '....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of this industry of heavy earthmoving machinery cannot be compared with that of the commodity like a beverage. The fact remains that there is a big difference in market risk between the two categories. (vii) The Non CAT category is exposed to more technological risk as compared to the CAT category. The assessee's argument in this case is that 1035 sprinkler is an example of improvements made in the technology of the Non CAT category. Again here the same argument holds true that this product cannot be compared to the complexity of the technology of the 777 and 773 or the localization efforts made cannot be compared to the significant technological improvements. Also, improvements can mitigate obsolescence but does not reduce technology risk. (viii) R & D efforts do not have much scope in the case of the Non CAT category whereas continuous R & D efforts are being made by the Caterpillar Group Companies in case of the CAT category. The ld. AR arguments of improvements being done to the Non CAT category products have no merit as such efforts cannot be compared to the efforts made by the Caterpillar Group companies for product improvement under the CAT category w....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... e.g. employee cost, power and fuel, rent, higher charges etc. These services are not provided through the service division (EDC and APSS) and hence neither any receipt nor any costs are sitting in the service divisions. 12.2 It was the contention of the AR that it is necessary to visualize for analyzing the nature of BMSS charges received. It is pertinent to note in this regard that Manufacturing plant is engaged in the business of manufacturing the earth moving machines. Can the manufacturing plant be visualized as having expertise in general management and administrative support services? According to the TPO, it is not having expertise in general management and support services. The assessee has one specialized division known as EDC division, which is located at RMZ building Taramani, Chennai and is a separate division registered as STP unit and enjoying holiday under Section 10A of the Act. This unit provides BMSS to the group companies. Therefore, on one hand assessee has one division called EDC division, which is registered as STP unit, and which has employees who are expert in providing EDC. Same technical work has been provided by the manufacturing plant, by employees n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e show cause of certain non-operating income items. Assessee has submitted on page 21 of the reply dated Oct. 22, 2010 that few items of income proposed to be excluded are operating revenues. Objection on each items is as under : (i) Income from engineering design service (Rs. 78.77 crores): Assessee writes on page 21 of the reply dated Oct., 22, 2010 that this income has not been considered under manufacturing segment. Therefore, in view of assessee's reply the income from engineering design services Rs. 78.77 crores is excluded from manufacturing division. (ii) Profit on sale of assets (Rs. 0.70 crores): Assessee agrees with this exclusion proposed in the show cause. (iii) Interest on customs over dues deposit (Rs. 0.28 crores): In this connection, the reasoning given by the assessee is wrong. Assessee has referred to revised OECD TP guidelines. "2.81 In those cases where there is a correlation between the credit terms and the sales prices, it could be appropriate to reflect interest income in respect of short-term working capital within the calculation of the net profit indicator." The revised guidelines quoted by the assessee rel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pts Rs. 11.49 crores have been excluded from manufacturing division, but no expenditure attributable to these receipts are excluded from the financials of the manufacturing division. This is because costs incurred in rendering such services are captured as part of the operating expenses of the manufacturing segment. In other words, even if these receipts had not been arise, the cost would have definitely be incurred as they constitute inseparable part of operating expenses incurred during the course of the manufacturing activity. Accordingly, as proposed in the show cause, the receipts Rs. 11.49 crores are excluded from the manufacturing division." 13.2 The contention of AR is that: "The BMSS services on the other hand are meant for the manufacturing process and are rendered by professionals who are plant engineers, technical skilled operators obtaining constant knowledge from the production lines and manufacturing process. These services are mainly performed by the purchase/procurement team and include the following : * Identification of reliable vendors/suppliers who will supply quality product (replacement products) * Co-ordination servi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es to group companies. Merely because the assessee had booked these under manufacturing segment does not render it a character of manufacturing activity. Hence, we are of opinion that BMSS service income is certainly not derived from the manufacturing activity of the assessee's and hence should not be considered as a part of the operating income of the manufacturing segment, for computation of PLI. Therefore, the ground raised by the assessee is rejected. 17. Regarding "other operating income" receipts i.e. interest on customs overdues (Rs. 0.28 crores), the TPO's contention is as under:- '(iii) Interest on customers over dues deposit (Rs. 0.28 crores): In this connection the reasoning given by the assessee is wrong. Assessee has referred to revised OECD TP guidelines no. "2.81: In those cases where there is a correlation between the credit terms and the sales prices, it could be appropriate to reflect interest income in respect of short-term working capital within the calculation of the net profit indicator." According to TPO the revised guidelines quoted by the assessee relates to interest income on short term working capital. As against it what is propose....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ison with uncontrolled transactions is made in terms of functions presuming that the price paid for services taken. Therefore, liability no more required is excluded from the manufacturing division while calculating the PLI as it would distort the comparison. In our opinion, the market promotion fees are relating to operating activity of the assessee, the objection of the assessee is allowed. 18. In our opinion, the 'liability no longer required written back' is a part of the operating activity of the assessee, if it is relating to the operating expenses of the assessee. According the issue is remitted to AO/TPO for fresh consideration. Regarding others of Rs. 0.12 crores, if the assessee proves that it is an operational income, then AO shall not exclude it while computing the PLI. 19. The next issue is that the TPO/DRP has erred in not excluding "424 Model" from manufacturing segment as the model was in its start-up phase. 20. The Ld AR submitted that model 424 to be excluded treating the same as a different segment to calculate the PLI of the manufacturing division without corresponding financials of the model 424. The TPO wrongly observed that CAT category is a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and has supplied emphasis on clause (d) of sub-rule(2) of Rule 10B, which says that the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to conditions prevailing the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets, overall economic development and level of competition and whether the markets are wholesale of retail. Accordingly, in view of the fact that uncontrolled comparables are from same geographical area (Indian Territory) in the case of assessee all the conditions mentioned in clause (d) are automatically taken care of. This is an advantage especially in external TNMM wherein the arithmetic mean of PLIs of the comparables is taken. Arithmetic mean of PLI of uncontrolled comparables represents ideal comparable to arrive at the arm's length price. Therefore, assessee's request to segregate the 424 model segment before the external TNMM is applied is not accepted. The TN....
X X X X Extracts X X X X
X X X X Extracts X X X X
....segmental revenue of CAT category, the margin of CAT segment is 6.43% which is more than 0.48% of Non-CAT segment. Without prejudice, the ld. AR submitted that even if the external comparability analysis has considered, the TPO should consider the CAT segment (without 424 Model in order to ensure closer and effective comparability analysis. 22.3 He has also explained the computation of CAT segment without '424 model' which is as given below: Particulars CAT segment '424 Model' CAT segment without '424 Model' Operating income 5,359,107,728 489,041,957 4,870,065,771 Less: Operating Cost 5,250,647,590 693,525,166 4,557,122,424 Operating Profit 108,460,137 (204,483,209) 312,943,347 Operating Profit/Operating Revenue 2.03% -41.81% 6.43% The ld. DR submitted that the assessee has come out of the initial start up phase of the 424 model and the assessee should have been able to reduce its import prices and shared some of the losses with the other group concerns in order to attain the arm's length result of this particular segment. 23. We have heard bot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it margin of 11.87% in the case of uncontrolled companies. Hence, the PLI of the assessee is less by 11.93% compared to the PLI of 11.87% in case of the uncontrolled comparables. Therefore, in respect to international transactions, which have been taken into consideration for computing the profit of Manufacturing Segment viz. Manufacturing and sale of Earthmoving Machinery and Trucks Rs. 90.75 crores, purchase of assemblies, sub-assemblies and replacement parts, service manuals and catalogues Rs. 239.59 crores and Royalty Rs. 8.67 crores, adjustment of Rs. 1,100,369,250 is made. According to A.R, the calculation has been made as follows : Profit @ 11.93 (9172187404*11.93)/100=1,094,241,957. Therefore adjustment made is Rs. 1,094,241,957- (61,27,293) =1,100,369,250/-. According to ld AR based on the arm's length margin of 11.87% (as calculated by the TPO), the arm's length profit would be 1.104.587.596 (i.e 9,305,708,478-1,1104,587,596). The said arm's length price of operating cost has been apportioned between AE and non-AE on the basis of cost ration (i. Rs. 2, 748,582,838: Rs. 6,418,583,220). 25.2 The ld. D.R relied on the order of lower authorities. 26. We h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ties and perused the material on record. The claim of the assessee is that it is only reimbursement towards the services provided to the A.E and it does not include any element of profit so as to mark up of 2%. In our opinion, no unrelated parties would provide such services on regular basis so someone, unless a reasonable profit is involved in it. Being so, the services rendered by the assessee to its A.E cannot be free of charge and there should be element of profit, to that extent to add 2% towards profit. Being so, we do not find any infirmity in the order of lower authorities and the same is confirmed. Hence, this ground is rejected. 30.1 The assessee raised the additional ground that the ld. TPO erred in not considering the following comparables, though they were coming up based on the filters adopted by the Ld. TPO (a) TIL Ltd., (b) Escorts Ltd., (c) Magnum Machines Pvt Ltd., (d) Walchandnagar Industries Ltd., (e) Jost's Engineering Co. Ltd., (f) Skyline Millers Ltd., The ld. AR filed petitions for admission of additional grounds stating that during the preparation of Form 36B has taken a ground against the comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sion for diminution in the value of assets as per clause (I) of Explanation 2 to sec. 115 JB of the Act. Further, the ld. AR submitted that the incremental depreciation charge is on account of review of estimated useful life of assets and it is not on account of re-valuation, as per clause (iia) of Explanation 2 to sec.115JB of the Act. He relied on Accounting Standard 6 on depreciation accounting. According to him, there is difference between revision in useful life of assets and revaluation of assets which are as follows : Revision in useful life Revaluation of Asset Only depreciation rate will undergo a change Value of the asset on which depreciation is claimed would undergo a change 34. The ld. DR submitted that these amounts were added to the book profits on the basis that Provision for Wealth tax and provision for diminution in the value of assets falls under the clause-(i) of Explanation-1 to sub-section (2) of Sec.115JB of the Act. According to ld. D.R, the artificial difference cannot be made between revision in useful life of assets and revaluation of assets. 35. We have heard both the parties and perused the material on record. In our consider....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the profits and gains of business itself and not from the Gross Total Income. The assessee case involves set off of unabsorbed depreciation and losses from other business or undertakings i. e. Non 10A unit, against the profit of the 10A unit. The ld. A.R further submitted that the Intellinet Technologies India case upon is based on the karnataka High Court ruling in the case of Himatasingike Seide Ltd. case (supra). The Himatasingike Seide Ltd. case (supra) is distinguishable on facts since it was on the set off of unabsorbed depreciation of the same EOU unit. However the facts in this case relate to set off of unabsorbed depreciation of non-EOU unit, which was decided by the Ld. CIT (A) in favour of the assessee for assessment year 2005-06. 38. We have heard both the parties and perused the material on record. In our opinion, this issue is squarely covered by the judgement of Supreme Court in the case of CIT v. Yokogawa India Ltd. [2007] 391 ITR 274wherein held that:- "16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e stage of computation of the total income under Chapter VI." In view of the above judgement of Apex Court, we are inclined to allow the ground taken by the assessee. 39. The next ground is with regard to exclusion of internet (Telecommunication) expenses Rs. 47,860/- towards charges for delivery of computer software outside India from Export turnover u/s. 10A of the Act. 40. We have heard both the parties and perused the material on record. In our opinion, the decision of the Chennai Special Bench in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 is squarely covered this issue wherein held that "parity needs to be maintained between export turnover and total turnover", directed the AO to reduce the expenses which have been excluded from export turnover, the same to be excluded from the total turnover also for purpose of computing deduction u/s. 10B of the Act. Accordingly, we direct the AO to follow the decision of the decision of Sak Soft Ltd. cited (supra) and held the issue in favour of the assessee. 41. The next issue is with regard to treating the cost of mobile phones as capital expenditure. 42. The contention of the ld. A.R is that the cost of mobile phone....