TaxTMI 
TaxTMI 
TaxTMI 
2017 (9) TMI 1648
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....further adjourned to 16.8.2017. We are given to understand from the statement of the ld DR that he had applied for Earned Leave from 16.8.2017. Since the counsel for the assessee had come from New Delhi, the ld DR was gracious enough to be present on 16.8.2017 for completion of these appeals after cancellation of his sanctioned leave. The enthusiasm with which the ld DR co-operated with us for expeditious disposal of these appeals richly deserves to be appreciated. 3. The Ground No. 1 raised by the assessee for the Asst Year 2010-11 is general in nature and does not require any specific adjudication. The Ground No. 2 raised by the assessee for the Asst Year 2010-11 against the confirmation of adjustment of Rs. 1,87,48,901/- to the international transactions of the assessee with its Associated Enterprises (AEs) is dealt with independently in other grounds adjudicated herein below. Hence this ground does not require any specific adjudication. 4. Adjustment to Arm's Length Price - ITA No. 584/Kol/2015 (Assessee Appeal) - Asst Year 2010-11 The assessee is a closely held company engaged in the business of manufacturing and distribution of electric meters and related components. I....
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....d goods by considering the transactional level profitability for each of the relevant transaction. However, the ld TPO ignored the transactional level analysis submitted by the assessee and instead considered the entire Meter Segment (as reflected in Accounting Standard -17 on 'Segment Reporting' disclosure in the audited financial statements) to determine ALP of aforesaid transactions. 4.5 The assessee submitted that the turnover of the Meter Segment was Rs. 194.07 crores as against the value of international transactions of only Rs. 11.17 crores and accordingly it submitted that while benchmarking the international transactions accounting for merely 5.76% ( 11.17 / 194.07 crores * 100) of the entire Meter Segment, the ld TPO erred in considering the entire Meter Segment margin which majorly includes third party business amounting to Rs. 182.90 crores i.e 94.24% of total meter segment. 4.6 The details of functional segment, tested party, transfer pricing method and Profit Level Indicator (PLI) adopted by the assessee with respect to sale of finished goods (manufacturing segment - export) ; purchase of raw material / finished goods (manufacturing segment - domestic) and p....
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.... the transaction was determined to be at ALP. 5.2 The ld TPO accepted the selection of the tested party to be the assessee itself. He also accepted the TNMM as the MAM and the PLI of OP / Sales as chosen by the assessee. With regard to the benchmarking done by the assessee, the ld TPO ignored the relevant 'Manufacturing-Export Segment' (Rs 9.74 crores) profitability and considered the margin of 'entire meter segment' (Rs 194.07 crores) which also encompasses profit from third party transactions accounting for 95% of the total segment. As a result, the ld TPO identified comparable companies of his own to arrive at the arm's length margin of 15.61% thereby arriving at adjustment of Rs. 1,51,98,611/- . This action of the ld TPO was approved by the ld Dispute Resolution Panel (DRP). Aggrieved, the assessee is in appeal before us. 6. Purchase of raw materials ( Manufacturing Segment - Domestic) The assessee had justified the Arm's Length nature of the aforesaid international transactions selecting the AEs as the tested party wherein it benchmarked the PLI [(Gross Profit (GP) / Direct and Indirect Cost of Production (DICOP) ] using Cost Plus Method (CPM). The b....
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....gth margin of 13.45% thereby arriving at adjustment of Rs. 4,90,394/- . This action of the ld TPO was approved by the ld Dispute Resolution Panel (DRP). Aggrieved, the assessee is in appeal before us. 8. The ld TPO rejected the transactional level analysis and adopted entity wide analysis for determination of ALP of international transactions. This action of the ld TPO was approved by the ld Dispute Resolution Panel (DRP). Aggrieved, the assessee is in appeal before us. 9. The ld AR argued that in transfer pricing analysis a transaction by transaction approach should be undertaken for bench marking analysis to determine the arm's length price of the international transactions being entered into. The principle of undertaking transaction by transaction analysis for determination of arm's length price has been embedded under the Indian Transfer Pricing Regulations, OECD Transfer Pricing Guidelines, 2010 updated via Base Erosion and Profit Shifting Action Plan 8-10, 2015 (herein referred to as 'OECD TP Guidelines') and UN TP Manual, 2013. He drew our attention to Rule 10B(2) of the Income-tax Rules, 1962, which sets out the criteria for comparability of the transactio....
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.... value of international transactions was only Rs. 11.17 crores (i.e sale of finished goods (export) - Rs. 9.74 crores ; purchase of raw materials and components in Manufacturing - Domestic segment - Rs. 1.07 crores and purchase of finished goods in Trading Segment - Rs. 0.36 crores), whereas the value of entire Meter Segment sales was Rs. 194.07 crores. He argued that how can the profitability from entire sales value of Rs. 194.07 crores would be a better reflection of Rs. 11.17 crores of transaction value rather than profitability determined from Rs. 11.17 crores transaction value itself. He submitted that the segmentation undertaken by the assessee was to achieve greater functional comparability and the benchmarking was also undertaken keeping in mind the specific characteristics of the international transactions captured within the relevant segments as per Rule 10B(2) of the Rules. 9.4 In the context of comparability and FAR analysis, he placed reliance on the following paras of OECD Transfer Pricing Guidelines, 2010 updated via Base Erosion and Profit Shifting Action Plan 8-10, 2015 (herein referred to as 'OECD TP Guidelines') since the Indian Transfer Pricing law is l....
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....y engages in a variety of different controlled transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise." 9.7 Accordingly the ld AR submitted that the assessee had carried out the benchmarking exercise based on the segmental profitability and the segmental statement reflects the profitability under relevant segments being 'Manufacturing- Domestic' , 'Manufacturing- Export' and 'Trading Segment'. The assessee had considered the profitability from the relevant segment and benchmarked the same with the companies engaged in similar activities. On the basis of such analysis, the price of international transactions of purchase of materials & components, sale of finished goods and purchase of finished goods were determined to be at arm's length. He also submitted that as per Rule 10B(1) of the Rules comprising of different methods of determination of ALP, the price / profit earned from the relevant international transaction should be tested. In this regard, he also placed reliance on the OECD TP Guidelines in para 3.9 of the document wherein it was stated as under: 3.9 Ideally, in order to arrive at the ....
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....support of his contention, he placed reliance on the Co-ordinate Bench decision of Delhi Tribunal in the case of Benetton India (P.) Ltd. v. ITO [2012] 134 ITD 229/17 taxmann.com 5 wherein it was held that :- 7 ... The first and foremost question in this case is to determine whether the action of TPO in undertaking entity level bench marking by TNM method combining all the international transactions is justifiable or the TP analysis provided by assessee, based on "transaction to transaction" basis in respect of different segments should be adopted. 7.1 From the facts mentioned above, it is clear that assessee's manufacturing export activities: buying/sourcing and commission earning activities are independent of each other. Each activity has different factors in respect of source, identification of vendors, merchandise, designs quality control, handling etc. The FAR analysis in each of the activity will have distinct and separate considerations. 7.2 We find merit in the argument of the learned counsel that the TPO should have accepted the method of assessee's benchmarking analysis on the basis of transaction to transaction basis in respect of different segments of assesse....
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....l/2012 respectively dated 3.8.2016. 10. In response to this, the ld DR stated that the sale of finished goods in 'Manufacturing Segment- Export' ; purchase of raw materials & components in 'Manufacturing Segment - Domestic' are all interlinked and closely related with each other and for this purpose only, payment of royalty is also made by the assessee. The segmental bifurcation made by the assessee between two different segments have been duly rejected by the ld TPO as the basis of allocation of costs thereon was not properly done by the assessee. Even the United Nations TP Manual in para B.2.3.1.11 relied upon by the ld AR supports the case of the revenue in the facts of the instant case as the subject mentioned international transactions are closely related and hence only entity level approach would yield the desirable results for determination of ALP. He also stated that the AE profitability cannot be considered for benchmarking the profitability of international transactions carried out by the assessee. He stated that the provisions of the Act provides for adoption of bundled / composite approach for determination of ALP of international transactions. The asse....
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....s may cover some accompanying services. In some cases, it may not be feasible to evaluate the package as a whole so that the elements of the package must be segregated. In such cases, after determining separate transfer pricing for the separate elements, the tax administration should nonetheless consider whether in total the transfer pricing for the entire package is arm's length." In the instant case, the closely linked transactions of each international transaction are clearly established. He argued that the assessee had segregated the risks in page 187 of the paper book between Manufacturing- Domestic and Manufacturing -Export, which is not at all required. The assessee would not be floating separate tenders for Domestic or Export business. He also placed reliance on the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 (wherein bundled approach was permitted.) wherein the principle of bundled approach had been accepted by the Hon'ble Delhi High Court. 11. We have heard the rival submissions and perused the materials available on record including th....
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....bove, we find that the definition of 'transaction' in section 92F(v) of the Act is an inclusive definition. We also find that Rule 10A(d) of the Rules defines 'transaction' as under:- 'Transaction' includes a number of closely linked transactions. 11.2 The determination of ALP vis a vis the assessment of real income under the Act had been discussed elaborately in the decision of the Hon'ble Delhi High Court in the case ofSony Ericsson Mobile Communications India (P.) Ltd. (supra) wherein it was held :- 77. As a concept and principle Chapter X does not artificially broaden, expand or deviate from the concept of "real income". "Real income", as held by the Supreme Court in Poona Electricity Supply Co. Ltd. v. CIT [1965] 57 ITR 521, means profits arrived at on commercial principles, subject to the provisions of the Act. Profits and gains should be true and correct profits and gains, neither under nor over stated. Arm's length price seeks to correct distortion and shifting of profits to tax the actual income earned by a resident/domestic AE. The profit which would have accrued had arm's length conditions prevailed is brought to tax. Misreporting, ....
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....9,561 20,213,511 68,883,072 3,178,447 235,432 - 72,296,951 - 72,296,951 Royalty 15,890,180 8,073,372 23,963,552 - - - 23,963,552 23,963,552 Selling Agent Commission 97,980,976 19,849,920 117,830,896 - - - 117,830,896 117,830,896 Loss on sale of Fixed assets - - - - - - - 26,291 26,291 Other cost* 53,435,049 57,602,911 111,037,960 9,057,694 670,916 35,921,804 156.688.375 16,907,151 173,595,526 Total Expenses 283,391,583 152,857,768 436,249,351 19,645,158 2,101,459 99,378,650 557,374,618 122,780,109 680,154,727 Profit before Interest &Tax 3,635,881 (13,701,954) (10,066,073) 31,516,390 325,187 64,161,899 85,937,403 (122,442,644) (36,505,241) Interest Cost 24,067,394 24,067,394 Total Operating Cost (DICOP + Total Exps) 1,269,481,029 640,568,225 1,910,049,254 76,618,246 6,923,051 102,410,681 2,096,001,232 122,780,109 2,218,781,341 GP/Sales 33.48% OP/Sales 29.15% Howev....
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....) for adoption of bundled approach, wherein it was held as under:- G. Section 92(3) of the Act and Bundled/Inter-Connected Transactions 79. At this stage and before we examine the TNM Method exhaustively, we deem it necessary to interpret and refer to in some detail sub-section (1) to Section 92C and reference to the term 'transaction' with the vowel 'an', which has been interpreted by the majority judgment of the Tribunal to mean a single independent transaction and not a group or bundle of transactions. We do not think that use of vowel 'an' or the word 'transaction' instead of the word 'transactions' should be given undue notability and prominence. One of the primary rules of statutory construction is that singular includes plural and vice-versa. This rule applies unless a contrary intention is manifest and exhibited. Merely because a statutory provision is drafted in singularity as opposed to plurality, is not enough to exclude application of the general rule that singular includes plural. The rule is not to be discarded on the ground that the relevant provision is singular or plural and the subsidiary and ancillary provision follow the....
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....nd legislative mandate is evident in the said Rule. 81. Similarly, sub-rule (3) to Rule 10B refers to transactions being compared or comparison of the enterprises entering into such transactions likely to affect the price or cost charged etc. A reading of Rule 10C reassures and affirms that the general principle of plurality is not abandoned or discarded. 82. There is considerable tax literature and text that CUP Method, i.e. Comparable Uncontrolled Price Method, RP Method, i.e. Resale Price Method and CP Method, i.e. Cost Plus Method can be applied to a transaction or closely linked, or continuous transactions. Profits Split Method and TNM Method grouped as 'transactional profit methods', can be equally effective and reliable when applied to closely linked or continuous transactions. Thus, it would be inappropriate to proceed with the arm's length computation methods, with a pre-conceived suppositions on singularity as a statutory mandate. Clubbing of closely linked, which would include continuous transactions, may be permissible and not ostracized. Aggregation of closely linked transactions or segregation by the assessed should be tested by the Assessing Officer/TPO....
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....ted in the place of bundled approach adopted by the ld TPO / ld DRP. Accordingly, we hold that the reliance placed by the ld DR on the decision of Sony Ericsson supra does not advance the case of the revenue. In any case, the aggregation is to be done only for international transactions and not for domestic transactions as has been done in the instant case by the ld TPO. We find lot of force in the argument of the ld AR that the ld TPO had accepted Resale Price Method for purchase of finished goods (Trading segment) in Asst Year 2011-12 (which will be dealt separately in this order) and hence the same could not have been bundled. The total value of international transactions in three segments is only Rs. 11.17 crores out of total turnover of the entire meter segment of Rs. 194.07 crores which works out to only 5.75% and the remaining 94.25% represents domestic transactions. Hence the comparison based on aggregation of both domestic and international transactions would only project distorted figures and would result in absurdity. We also place reliance on the decision of the Hon'ble Bombay High Court in the case of CIT v. Tara Jewels Exports (P.) Ltd. [2016] 381 ITR 404/[2017] 8....
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....er stated that the ld TPO in the earlier years has considered prices of international transaction pertaining to export of goods to AEs to be at Arm's Length wherein the assessee followed the same economic analysis to determine the Arm's Length Price. In view of the aforesaid findings and in the facts and circumstances of the case and respectfully following the judicial precedents relied upon hereinabove, we direct the ld TPO / ld AO to consider the certified segmental profitability to determine the Arm's Length Price of the relevant international transactions and hereby reject the combined segment approach adopted by the ld TPO. 11.9 The ld AR also pointed out that the revenue had not preferred any further appeal to the Hon'ble Calcutta High Court against the order of this tribunal for the Asst Years 2007-08 and 2008-09 and hence as such the matter had reached finality and revenue had accepted the verdict of this tribunal in assessee's own case. Hence we hold that the certified segmental statement reflecting separate profitability under different segments are to be considered for the purpose of benchmarking the transaction of (i) sale of finished goods , (ii) ....
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....or determining the ALP of this international transaction. The ld AR also pointed out that the revenue had not preferred any further appeal to the Hon'ble Calcutta High Court against the order of this tribunal for the Asst Years 2007-08 and 2008-09 and hence as such the matter had reached finality and revenue had accepted the verdict of this tribunal in assessee's own case. Hence we hold that the value of export sales of finished goods of the assessee under 'Manufacturing Segment - Export' is at arm's length and no adjustment is warranted thereon. Accordingly the Ground No. 5 raised by the assessee for the Asst Year 2010-11 is allowed. 13. Purchase of materials / components - 'Manufacturing Segment - Domestic' With respect to the above, an adjustment computed as a percentage of transaction value to the total costs of the Meter Segment was undertaken by the ld TPO. The value of purchase of materials / components from its AE was Rs. 1,06,57,099/- (Rs 1.07 crores) which works out to 0.55% of total turnover of meter segment of Rs. 194.07 crores. We find that the assessee is trying to justify its Arm's length price by following transaction- by-transactio....
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....se the access to foreign databases is not available with the ld TPO, the same could not be considered as a reasonable cause to reject the foreign comparable companies. 13.3 We find from the above that the ld TPO had failed to bring anything concrete on records to negate the assessee's approach of determining the ALP of purchase of materials and components from its AEs. We also find that the aforementioned benchmarking analysis of considering the AEs as tested party and benchmarking their margins (earned from sael of materials to assessee) with the margins of comparable companies in AEs region, has been upheld by this tribunal, on due appreciation of the similar facts, in assessee's own case for the Asst Years 2007-08 and 2008-09 vide order dated 3.8.2016 wherein it was held :- 5.2.12 We find that in the transfer pricing analysis with respect to purchase of materials, the ld TPO had continued to select assessee as the tested party for imports of raw materials of Rs. 2.31 crores which is consumed in the manufacturing segment with a turnover of Rs. 90.45 crores. The margin earned from the entire segment cannot be a representation of 2.55% of the international transaction enc....
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....gnize the fact that assessee was comparing AEs margin with comparable companies in AEs region rather than comparing the latter with assessee's margin earned in India (vide page 316 of the Paper Book). Thus the ld DRP summarily rejected the transaction by transaction approach adopted by the assessee. We find that the revenue had not brought anything concrete on records either factually or legally to negate the assessee's approach of determining the Arm's Length Transaction Price. The ld AR also pointed out that the revenue had not preferred any further appeal to the Hon'ble Calcutta High Court against the order of this tribunal for the Asst Years 2007- 08 and 2008-09 and hence as such the matter had reached finality and revenue had accepted the verdict of this tribunal in assessee's own case. Accordingly we hold that the transactions of purchase of raw materials and components carried out by the assessee was at arm's length. Accordingly, the Ground No. 4(a) raised by the assessee for the Asst Year 2010-11 is allowed. 14. Purchase of finished goods - Trading Segment We find that the assessee had justified the Arm's Length nature of the aforesaid interna....
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....anies chosen by the ld TPO was 22.34% based on single year data, whereas assessee's margin was 33.48% using RPM as the MAM. The average margin of comparable companies chosen by the ld TPO using TNMM as the MAM was 6.93%. Hence in any case, we find that the assessee's margin of 33.48% was higher than the average industry margin of comparable companies. Hence we hold that no adjustment is warranted to the ALP determined by the assessee in respect of purchase of finished goods. Accordingly, the Ground No. 4(b) raised by the assessee for the Asst Year 2010-11 is allowed. 15. The Ground Nos. 6 & 7 raised by the assessee were stated to be not pressed during the course of hearing. The same is reckoned as a statement from the Bar and accordingly the Ground Nos. 6 & 7 raised by the assessee for the Asst Year 2010-11 are dismissed as not pressed. 16. Disallowance of Depreciation on Intellectual Property Rights The assessee is a closely held company engaged in the business of manufacturing and distribution of electric meters and related components. The assessee had been a manufacturer and supplier of electro-mechanical meters till 2005 while the market had migrated from electro-mec....
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....ssess certain certification / authenticity / sanctity and or recognition from Government or from competent authority. He further observed that the nature of the IP assets acquired by the assessee does not fall in any of the category or similar nature as mentioned in IT Rules. Therefore, he held that the assets are not intangible assets eligible for depreciation and disallowed the claim of Rs. 60,53,906/- on the opening written down value of intellectual property assets. This disallowance was upheld by the ld DRP on the ground that similar disallowance had been made for Asst Years 2007-08 and 2008-09 in assessee's own case. Aggrieved, the assessee is in appeal before us. 16.1 The ld AR argued that the ld AO erred in alleging that the intellectual property needs to have recognition from government and does not fall in any of the category of intangible assets as mentioned in the Income Tax Rules and accordingly denied the claim of depreciation. He argued that the TECRES, which was taken over from Mr. Gandhi had total assets of Rs. 40.17 lakhs and current liabilities of Rs. 4.69 lakhs, was evaluated at Rs. 4.92 crores wherein the major share of the consideration was attributed tow....
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.... tribunal for Asst Years 2007- 08 and 2008-09 in ITA No. 37 & 1623/Kol/2012 dated 3.8.2016 wherein it was held as under:- 3.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of relevant extracts of Central Electricity Authority (Installation and operation of meters) Regulations, 2006 (pages 47 to 66 of paper book) with regard to this issue. We find that the assessee had capitalized the following assets under intellectual properties :- a. Low cost single phase static meter IP for domestic segment. b. Low cost single phase static meter IP for South Asian market like Vietnam, etc c. RF AMR Radio frequency accelerated meter reading IP d. Salem 3T Metering Module IP e. Salem 1G HVDS IP f. PL Comm Evaluation Modem IP 3.3.1 It was argued that the intellectual property rights acquired by the assessee consisted of designs, software, data base, research and development material and facility , technical know how, process know how , confidential information, basic and detailed drawings, operation and maintenance manuals relating to the business carried out by TECRES. The valuation of the same w....
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....d trade secrets may be protected to some degree by (i) unfair competition or similar laws, (ii) employment contracts, and (iii) economic and technological barriers to competition. Knowhow and trade secrets are intangibles.' Hence it could be safely concluded that even OECD has laid down the principle that intellectual property in the form of knowhow is not required to be registered. 3.3.2 We find that the assessee had filed a copy of the Business Transfer Agreement (BTA) entered into with Mr Gandhi as an additional evidence. It was submitted by the ld AR that the said agreement was never called for by the lower authorities and hence there was no occasion for the assessee to file the same and it was also submitted that the acquisition of business from Mr Gandhi by the assessee was never a subject matter of debate. In these circumstances, we deem it fit and appropriate to admit the said additional evidence for better appreciation of the facts to resolve the issue under dispute before us. 3.3.3 We find force in the argument advanced by the ld AR that the transfer of employees would also result in transfer of knowhow also. We find that the Explanation 4 to section 32(1) of the A....
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....out the entire unit of TECRES along with its specialized research engineers who had enormous experience and domain knowledge in respect of static meters which the assessee could leverage in developing new marketable products. Therefore, in essence what the assessee has acquired is knowhow in developing new type of meters which were digital meters with anti-tampering and other communication facilities. We find that the reliance placed by the ld AR on the Co-ordinate bench decision of Pune Tribunal in the case of Modular Infotech P Ltd v. DCIT reported in 131 TTJ 243 (Pune) is well founded. In the said case, the assessee company was engaged in the business of software development and also licensing of software. It had taken over the business of a firm namely M/s Modular Systems and claimed depreciation @ 25% on an amount of Rs. 4,27,00,000/- pertaining to the value of IPR paid to the firm. The AO disallowed the claim of depreciation on IPR against which assessee filed appeal before the ld CITA. During the appellate proceedings with the CITA, the appellant pointed out that the amount of Rs. 4.27 crores included composite consideration in respect of all the intangible assets of the fir....
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....t authority and it does not fall within the assets specified in IT Rules is without any basis and not tenable. 3.3.5 In view of the aforesaid findings and respectfully following the judicial precedent relied upon hereinabove, we allow the grounds 2(a) to 2(d) raised by the assessee for the Asst Year 2007-08 and grounds 12(1) to 12(c) raised for the Asst Year 2008-09. The ld AO is also directed to rework the opening WDV of this asset in the subsequent year and rework the allowability of depreciation on the same pursuant to this order. In view of this decision, we are not inclined to entertain the alternative claim of the assessee vide ground no. 1(a) that the consideration so paid in the sum of Rs. 4,92,00,000/- has to be construed as Goodwill and depreciation has to be granted accordingly. Respectfully following the said decision of this tribunal for the earlier years, we allow the Grounds 8(a) to 8(c ) raised by the assessee for the Asst Year 2010-11. 17. Disallowance of Depreciation on Goodwill The assessee recorded an amount of Rs. 93,41,680/- as Goodwill arising as a result of acquisition of business from Mr Guljeet Singh Gandhi during Asst Year 2007-08. No depreciation on ....
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....he ld AO in the final assessment order dated 27.2.2015, granted credit for TDS to the tune of Rs. 3,56,256/- only out of Rs. 14,68,728/- ( 11,58,178 +3,10,550) without providing any reason. Hence the assessee is in appeal before us seeking to give direction to grant credit of TDS for the remaining amount to the tune of Rs. 11,12,472/-. 18.1 We find that the ld AO while framing the final assessment order had not carried out the directions of the ld DRP. Once the assessee produces the TDS certificates before the ld AO in support of its claim for credit of TDS, the duty of the ld AO is to grant the same on getting satisfied whether the relatable income thereon has been duly offered to tax by the assessee in accordance with the provisions of the Act. Hence we direct the ld AO to grant the credit of TDS after verification of the fact whether the relatable income thereon is offered to tax. Accordingly the Ground No. 10 raised by the assessee for the Asst Year 2010-11 is allowed for statistical purposes. 19. In the result, the appeal of the assessee in ITA No. 687/Kol/2015 is partly allowed for statistical purposes. Revenue Appeal - Asst Year 2010-11 - ITA No. 584/Kol/2015 20. The Gro....
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.... of benchmarking study has been provided herein below: Pricing methodology followed by AE while rendering services to assessee Arm's length Price of the comparable companies in AE region rendering similar services Cost Plus 5% Cost plus 6.98% As the margin retained by AE of the appellant was less than the margin earned by comparable companies in its region, the transaction price was determined to have been undertaken at arm's length. 21.2 The ld TPO however, disregarded the aforesaid information along with benchmarking analysis submitted by the assessee and treated the ALP of the transaction as NIL stating that the services rendered pertain to stewardship services. The Ld. TPO stated that the services rendered by the AE of the assessee were mostly in the nature of exercising overall control and supervision over the assessee company and hence these were in the nature of stewardship services thereby not meriting any charge. 21.3 The ld DRP deleted the adjustment made by the TPO stating that "From the nature of services described by the assessee, it can be seen that they were mainly for purpose of assessee's own business. While the group as a whole, might al....
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....t that it would be impractical for assessee to keep documentary evidences for each of the services received by it as the services are received in the form of directions, recommendations through emails, calls, reports etc. However, for the purpose of demonstration and explanation before the ld TPO/ld DRP, the assessee had enclosed a sample set of 94 voluminous documents evidencing the regular flow of valuable commercial services under the agreement with the ld TPO. He stated that the ld TPO was offered opportunity to examine all these documents twice i.e. one at the time of original TP hearing and another during remand proceedings. But the ld TPO chose to ignore the said documents without assigning any reasons. Hence the ld DRP had no other option but to examine those documents and concluded that the assessee had indeed received lot of commercial benefits pursuant to payment of management service charges to its AE as could be evident from the various set of emails, correspondences, filed on record. Hence he argued that there is no need to remand the issue to the file of the ld TPO in this regard. The ld AR also placed reliance on the following decisions in support of his contentions....
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....shman and Wakefield (India) (P.) Ltd. [2014] 367 ITR 730/46 taxmann.com 317 is applicable to the facts of the instant case, wherein it was held that :- "35. The Transfer Pricing Officer's report is, subsequent to the Finance Act, 2007, binding on the Assessing Officer. Thus, it becomes all the more important to clarify the extent of the Transfer Pricing Officer's authority in this case, which is to determining the arm's length price for international transactions referred to him or her by the Assessing Officer, rather than determining whether [such services exist or benefits have accrued. That exercise of factual verification is retained by the Assessing Officer under Section 37 in this case.] Indeed, this is not to say that the Transfer Pricing Officer cannot after a consideration of the facts state that the arm's length price is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the Transfer Pricing Officer stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the Transfer Pricing Officer. .....
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.... the context of cost sharing arrangement, the Hon'ble High Court opined that concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, and secondly, whether that amount meets ALP criterion. In the present case however, the arrangement between the AE and the Assessee is not a cost sharing arrangement but a payment for specific services rendered. To this extent the above observations of the Hon'ble High Court may not be relevant to the present case. 28. The following aspects would require consideration in order to identify intragroup services requiring arm's length remuneration: - Whether services were received from related party. - Nature of services including quantum o....
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.... him. The OECD Guidelines merely state that the result must be consistent with what comparable independent enterprises would have been prepared to accept. We do not see how from this observation it follows that the assessee cannot escape its responsibility of having to show the actual benefits it had received. 46. There is yet another issue of law which, in our view, is important and requires consideration. The TPO referred to the management support services. The same fell within four categories, namely, business development, human resource services, accounting, financial support and controlling services and IT services. With regard to the same, the TPO held that the assessee had sufficient local help to allow it to overcome the legal challenges at the local level. The TPO held that there was no reason to believe that the AEs provided assistance that the assessee could not obtain at the local level in India. Mr. Joshi, the learned counsel appearing on behalf of the respondent, submitted that for these and other services, the appellant could always have availed of the services of personnel and enterprises in India. 47. That, however, in our view, cannot be a ground for rejecting a....
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....he parties beforehand. Along with an appropriate benchmarking analysis and evidence of receipt of services with consequent benefits, viewed from whichever way, the payment for management support services fulfil the arm's length test. 21.6.6 In view of the aforesaid findings and respectfully following the judicial precedents relied upon hereinabove, we hold that the determination of ALP for Management Support Services at Rs. NIL is unwarranted and accordingly reject the adjustment made to the income of the assessee by the ld TPO and hence addition made in the sum of Rs. 7,22,96,951/- is deleted. Accordingly, the Ground Nos. 2 raised by the revenue is dismissed. 22. Payment of Royalty - Rs. 2,39,63,552/- The assessee received technology and technical assistance for manufacture of electric and static meters under a Technology License Agreement entered into with the AEs for which a payment of Rs. 2,39,63,552/- (Rs. 2.40 crores) was made by the assessee. The assessee had duly documented the terms of such agreement, description of technology, technical assistance etc in the transfer pricing study report prepared and submitted for the perusal of the ld TPO vide page 209 to 215 of p....
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....es on the basis of the only data base available. The TPO had not pointed out any better basis of benchmarking. It has also pointed been out that as per the agreement produced, the assessee was paying royalty not on the gross sales but only on the value addition made. Thus the apparent rate of 5% actually amounted to about 1.5% of the total sales which was well below the benchmark. 3.5.3 We have considered the facts of the case. The adjustment by the TPO had been made in absence of the details such as agreement and comparables etc. However it is clear that the assessee had provided such details on 28/1/2014. In his comments on the same, the TPO has not pointed out any specific defect in the same. The objections raised by him have in our opinion been satisfactorily replied to by the assessee. The assessee has been all along making payment of royalty to its AE for use of brand name, which has been allowed in the past. Considering all these facts, the proposed adjustment is not considered to be proper and is directed to be deleted. 22.3 We have heard the rival submissions and perused the materials available on record. We find that the information/documents evidencing receipt of techn....
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.... the said technology, the assessee would not have been able to do its manufacturing business. Further, the technology received from the AE, allowed the assessee to introduce for the first time high quality, tamper-resistant electric meters having longer life than its competitor products. Further, continuous improvement, upgradations etc. takes place in the technology of meter manufacturing to meet the expectations of the customer and to stand out as a unique product in the market. Further, Indian electricity market is infected with tampering of meter which obstructs measuring of accurate consumption of energy. The most famous tampers are known as '35kv' and 'Jammer', wherein the capability of measuring energy is affected significantly. Further, new method sofa meter tampering are invented in India. The assessee is expected from its customers and stakeholders to manufacture and deliver tamper-resistant meters. The assessee is dependant on R&D team of its AE for developing specific technology to deal with tampering of meters in India. APPREHENSION 2 - Assessee failed to provide justification regarding reasonableness of the amount of royalty paid to AE The assessee s....
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....1 dated 23.8.2001 which would be relevant in this regard:- CLARIFICATION ON PROVISIONS GOVERNING TRANSFER PRICE IN AN INTERNATIONAL TRANSACTION CIRCULAR : NO. 12/2001, DATED 23-8-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In this background the Board have decided the following : (i) . . . . . . . . . . . . . . . . . . . (ii) . . . . . . . . . . . . . . . . . . . (iii) It should be made clear to the concerned Assessing Officer that where an international transaction has been put to a scrutiny, the Assessing Officer can have recourse to sub-section (3) of section 92C only under the circumstances enumerated in clauses (a) to (d) of that sub-section and in the event of material information or documents in his possession on the basis of which an opinion can be formed that any such circumstances exists. In all other cases, the value of the international transaction should be accepted without further scrutiny. From the reading of the aforesaid circular, it is clear that the intention of the section 92C(3) of the Act has always been that scrutiny of international transactions of an assessee can only be done if the ld TPO can prove that atleast any one of the....
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....ised by the assessee for the Asst Year 2011-12 is general in nature and does not require any specific adjudication. The Ground No. 2 raised by the assessee for the Asst Year 2010-11 against the confirmation of adjustment of Rs. 96,43,641/- to the international transactions of the assessee with its Associated Enterprises (AEs) is dealt with independently in other grounds adjudicated hereinbelow. Hence this ground does not require any specific adjudication. 25. Adjustment to Arm's Length Price - ITA No. 619/Kol/2016 (Assessee Appeal) - Asst Year 2011-12 The Ground Nos. 3, 4(a), 4(b) & 5 raised by the assessee are similar to that raised in Asst Year 2010-11 and the decisions rendered thereon would apply with equal force for this Asst Year also, except with variance in figures. For the sake of clarity, the relevant figures for Asst Year 2011-12 are reproduced below:- International Transactions of the assessee with its associated enterprises Segment of the assessee Amount (Rs.) Import of raw materials & components Manufacturing segment -Domestic Sales 18,60,438 Export of finished goods Manufacturing Segment -Export 11,08,62,642 Purchase of finished goods Trading segment....
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....loyees' contribution to PF in the sum of Rs. 75,580/- which was deposited before the due date of filing the return of income u/s. 139(1) of the Act. The date of deposit of employees contribution to PF before the due date of filing the return u/s. 139(1) of the Act is not in dispute. This issue is settled in favour of the assessee by the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Vijay Shree Ltd. reported in 43 taxmann.com 396 (Cal HC). Respectfully following the same, the Ground No. 12 raised by the assessee for the Asst Year 2011-12 is allowed. 31. The Ground No. 17 raised by the assessee for the Asst Year 2011-12 is with regard to short credit of TDS to the tune of Rs. 2,22,966/-. The assessee claimed credit of TDS amounting to Rs. 4,63,731/- in the return of income and additional credit of TDS of Rs. 2,22,966/- vide letter dated 20.2.2015 during the course of assessment proceedings based on physical TDS certificates received and the said TDS being reflected in Form 26AS. The assessee filed all the TDS certificates to the ld AO. Credit for TDS of Rs. 2,22,966/- was not taken in the return of income as the assessee was not in possession of the....
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....uction provided a scientific data is systematically maintained on the basis of past events. In the instant case, the estimated claims made by the assessee cannot be recognized as a systematic data based on widely accepted scientific calculation supported by information of earlier years. Accordingly, he disallowed the provision for warranty in the assessment under normal provisions of the Act. The ld AO also added the same while computing the book profits u/s. 115JB of the Act treating the same as provision made for unascertained liabilities. This action of the ld AO was upheld by the ld DRP. Aggrieved, the assessee is in appeal before us vide Grounds 11 & 16. 32.2 We have heard the rival submissions. From the perusal of the materials available on record, we find that the assessee had made certain supplies to West Bengal State Electricity Distribution Company Ltd (WBSEDCL in short) who had raised certain issues against the quality of the material supplied by the assessee. The issues against supplies being made within the warranty period and hence the assessee decided to provide for the warranty on the material delivered which the assessee had to replace. The provision was made for ....
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....sp; Total Accrual Currently Recorded 10,480 Difference to be booked 1,279 WB Specified 18,585 Increased Provision 19,864 Incurred 804 Total Charge 20,668 32.2.2 We find from the various correspondences addressed by WESEDCL to the assessee enclosed in pages 1381 to 1401 of Part 3 of Paper Book filed by the assessee inf....
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....liability for which the provision is created is certain to result in outflow of resources of the assessee irrespective of the future conduct of the business, then the liability will be allowed as a deduction. In the instant case, the assessee as afar as the sum of Rs. 1,85,85,000/-, it satisfies all the criteria laid down i.e it is a definitive sum and is extremely certain to be incurred and is a result of the supplies made in the past. Accordingly, following the principles laid down by the Hon'ble Supreme Court supra, there is no doubt that the amount is a certainty for payment and has been incurred in the current previous year. Thus it cannot be termed as an unascertained liability. 32.2.4 When the assessee sells his goods, the warranty clause is part of the sale transaction and therefore it is a committed liability by the assessee at the very initial stage of sale. But for prescription of such a warranty clause, the customer may not even buy the product of the assessee. In the instant case, the assessee had given the figures of actual warranty liability incurred and paid in the previous years which forms the basis of existence of warranty liability in the past. Now it would....
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.... an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g., product warranties or similar contracts) the probability that an outflow will be required in settlement, is determined by considering the said obligations as a whole. In this connection, it may be noted that in the case of a manufacture and sale of one single item the provision for warranty could constitute a contingent liability not entitled to deduction under section 37 of the said Act. However, when there is manufacture and sale of an army of items running into thousands of units of sophisticated goods, the past event of defects being detected in some of such items leads to a present obligation which results in an enterprise having no alternative to settling that obligation. In the present case, the appellant has been manufacturing and selling Valve Actuators. They are in the busines....
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....ld be allowed although liability may have to be quantified and discharged at a future date but what should be definite is incurring of liability. It is not in dispute that the assessee is following mercantile system of accounting. This principle has been endorsed by the Hon'ble Supreme Court in the case of Bharat Earth Movers (supra). Hence we hold that this liability of Rs. 12,79,000/- is an ascertained liability in the year under appeal based on the systematic historical data of the past wherein warranty liabilities had occurred to the assessee. Reliance in this regard is again placed on yet another finding of the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. (supra) wherein it was held as under:- 17. At this stage, we once again reiterate that a liability is a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources and in respect of which a reliable estimate is possible of the amount of obligation. As stated above, the case of Indian Molasses Co. (P.) Ltd. (supra) is different from the present case. As stated above, in the present case we are concerned with an army of items of sophistic....
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....led to notice the "reversal" which constituted part of the data systematically maintained by the assessee over last decade. (UNDERLINING IS PROVIDED BY US) 32.2.7 Accordingly we hold that the entire provision for warranty in the sum of Rs. 206.68 lakhs would be squarely allowed as deduction in the year under appeal under the normal provisions of the Act. 32.2.8 The next dispute in this regard is as to whether the said provision for warranty would have to be construed as ascertained liability or unascertained liability for computing the book profits u/s. 115JB of the Act. We have already held that all the three categories of provision for warranties (i.e 185.85 lakhs, 12.79 lakhs and 8.04 lakhs) are clearly ascertained liabilities and hence there is no question of adding back the same to the net profits as per profit and loss account for computing the book profits u/s. 115JB of the Act. We have already held that the liability towards provision for warranty has been incurred by the assessee during the year under appeal although the actual quantification of the same arises in future date. Once it is held that there is a liability which is certain, the same automatically falls outsi....
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....s. 115JB of the Act. It was held that :- 23. With regard to the adjustment in book profit u/s. 115JB is concerned, it is noted that this issue is squarely covered in favour of the assessee by the judgment of Hon'ble Delhi High Court in the case of Becton Dickinson India (P.) Ltd. (supra), wherein it has been held that the provision for warranty cannot be treated as provision for diminution in value of any assets so as to be covered by Explanation 1(i) to section 115JB (2) and thus no additions to book profit can be made. Further, Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. (supra) held that amount of provision made on account of warranty expenses cannot be said to be unascertained liability. Thus, taking into account both these decisions, we find that no addition could have been made u/s. 115JB for this amount. Therefore, addition to book profit is directed to be totally deleted. 32.3 In view of the aforesaid findings and respectfully following the judicial precedents relied upon hereinabove, we hold that the provision for warranty in the sum of Rs. 206.68 lakhs would be allowed as deduction under normal provisions of the Act as well as while comp....
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....which were required to be maintained by the A' to establish its connection with the obsolete inventories were as under:- (1) Date of manufacture of such electricity meters, etc with batch and quality control inspection numbers. (2) The reasons why such inventories were treated as obsolete. (3) The authorities certifying that such inventories had become obsolete. (4) The technical qualifications and the competency of such authorities to declare the inventories as obsolete. (5) The stock register containing the details and descriptions of the stocks becoming obsolete. (6) The proof of physical verification of the inventories part of which was found to be obsolete. Since the above details were not maintained by the A' the Panel has no hesitation in inferring that there being no proof of actual verification of the inventories leading to detection of inventories worth Rs. 10,00,472/- as obsolete the provision made was unascertained. 33.2 Aggrieved, the assessee is in appeal before us vide Grounds 10 & 15. 33.3 We have heard the rival submissions. From the perusal of the materials available on record, we find that the assessee has created a provision for obsolete invento....
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....hat the valuation of the stocks in accordance with AS-2 issued by the ICAI is one of the standards recognized u/s. 145(2) of the Act, wherein the closing stock is to be valued at lower of cost or net realizable value. 33.3.1 We find that this issue is directly covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in the case of CIT v. Hotline Teletube & Components Ltd. [2008] 175 Taxman 286. The facts before the Hon'ble Delhi High Court and the decision rendered thereon are as under:- 3.1 The assessee had filed a return on 20-10-2002 declaring a loss of Rs. 51,031. The case of the assessee was picked up for scrutiny and a notice under section 143(2) of the Act was issued. During the course of the assessment, it came to light that the assessee is in the business of manufacture of picture tubes of black and white television sets, as well as, glass shells for black and white picture tubes, electron gun and glass stems. 3.2 During the course of the assessment proceedings, the Assessing Officer sought explanation from the assessee with regard to provision in respect of diminution in value of stock. The Assessing Officer also sought the assessee'....
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....he said provision for obsolete stock represents provision made for diminution in value of asset and hence the same requires to be added back while computing the book profits u/s. 115JB of the Act. When this was put to the ld AR, he fairly conceded for the addition u/s. 115JB of the Act. Moreover, we find that the decision of the Hon'ble Delhi High Court supra was rendered on 11.8.2008 which was prior to the amendment brought in by Finance (No. 2) Act, 2009 with retrospective effect from 1.4.2001. Accordingly, the Ground No. 15 raised by the assessee for the Asst Year 2011-12 is dismissed. 34. The last issue to be decided in this appeal is as to whether the ld DRP was justified in upholding the addition made on account of provision for interest on MSMED in the sum of Rs. 29,21,911/- in the facts and circumstances of the case. 34.1 The ld AO observed that assessee had made provision for interest to the tune of Rs. 29,21,911/- for making delayed payment to its suppliers who are registered under The Micro, Small and Medium Enterprises Development Act, 2006. This provision for interest in the sum of Rs. 29,21,911/- was voluntarily disallowed by the assessee in the return of income....
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....t, 1961 only and once section 23 of the MSMED Act, 2006 specifically states that the said interest shall not be allowed as deduction under Income Tax Act, it should not be allowed as deduction even in the computation of book profits u/s. 115JB of the Act. The ld DR argued that only then the real intent of the provisions of section 23 of MSMED Act would get sanctified. 34.2.2 We find that though the provisions of section 115JB of the Act are self contained code in itself and starts with a non-obstante clause creating a legal fiction regarding the total income of the assessee. The provisions of section 115JB of the Act have been introduced in the statute book with effect from 1.4.2001. The MSMED Act, 2006 received the assent of the Hon'ble President of India on 16.6.2006. The Provisions of Section 23 of MSMED Act, 2006 are reproduced hereinbelow for the sake of convenience:- 23. Interest not to be allowed as deduction from income Notwithstanding anything contained in the Income Tax Act, 1961 (43 of 1961), the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the In....
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....oncluded that the said provision of interest would be clearly an ascertained liability. Moreover, we find that out of total provision of Rs. 29,21,911/-, the assessee has paid a sum of Rs. 10,71,467/- before the end of the previous year and the balance outstanding as on 31.3.2011 was only Rs. 18,50,444/- which is quite evident from the annual report enclosed in the paper book of the assessee. This itself proves that the assessee had already discharged partial liability towards interest within the end of the previous year and unless the liability had crystallized, no assessee would come forward to make payment of the same. Hence we hold that it is only an ascertained liability as on 31.3.2011. 34.2.5 We find that the provisions of section 115JB of the Act stipulates that 'Book Profits' shall be deemed to be the total income of the assessee. The expression 'Book Profits' is defined in Explanation 1 to section 115JB of the Act which states as under:- For the purposes of this section, "book profit' means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub- section(2), as increased by - (a) to (k) . . . . . . . ....
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....ncome chargeable under the head 'income from other sources' shall be computed after making the following deductions, namely - . . . . . . . . . . . . . . . . . . . . . 34.2.6 In our considered opinion, what section 23 of MSMED Act, 2006 contemplates or refers to was the 'income' mentioned in section 29 and 57 of the Act i.e how the interest payable under MSMED Act, 2006 shall be treated while computing the income from business or profession u/s. 29 or while computing the income from other sources u/s. 57 of the Act. It cannot be stretched to extend to the provisions of section 115JB of the Act which is a deeming fiction, wherein the book profits shall be deemed to be the 'total income' of the assessee. The expression 'total income' as used in section 115JB of the Act cannot be equated with 'computation of income' used in section 23 of MSMED Act, 2006.. It can be appropriately used only in the context of provisions of section 29 and section 57 of the Act. Thus while computing the income under normal provisions under various heads alone, the provisions of section 23 of MSMED Act, 2006 would assume relevance and significance. Hence we hold tha....