TaxTMI 
TaxTMI 
2017 (9) TMI 1648
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....n 14.8.2017 and was kept as part heard and 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 distribu....
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....d the international transactions of sale of finished goods, purchase of raw materials and purchase of finished 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 (man....
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.... of 29.15% with uncontrolled comparable companies at 5.17% operating in India and since the assessee's margin was more than the margin of comparable companies, 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 select....
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....rofit from third party transactions accounting for 99.81% 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 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 '....
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....arket is likely to have a different realization from the Domestic market and therefore the two sub-segments cannot be compared for analysis purposes. 9.3 He again reiterated that the total 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 Tran....
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....hat are appropriately aggregated according to the guidance at paragraphs 3.9 - 3.12). Therefore, it would be inappropriate to apply the transactional net margin method on a company wide basis if the company 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 int....
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....ry impugned transactions i.e sale of finished goods and purchase of raw materials are separate and distinct from each other and do require a separate transaction level analysis to determine arm's length price. In 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....
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....ertaken by the assessee. 9.10 The ld AR also submitted that the consideration of transaction by transaction approach had been upheld by this tribunal in assessee's own case for the Asst Years 2007-08 and 2008-09 in ITA Nos. 37 & 1623/Kol/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 benc....
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....tive services, and the lease of production facilities. This type of arrangement is often referred to as a package of deal. Such comprehensive packages would be unlikely to include sales of goods, however, although the price charged for sales of goods 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 tax....
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....erve, that clause (v) thereof stipulates that an arrangement, understanding or action in concert would be a transaction whether or not such arrangements, etc. are formal or in writing or whether or not such arrangements are legally enforceable. From the above, 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 n....
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....- 44.040,025 - 44,040,025 DICOP 986,089,446 487,710,457 1,473,799,903 56,973,088 4,821,592 3,032,031 1,538,626,614 - 1,538,626,614 GP 287,027,464 139,155,814 426,183,278 51,161,548 2,426,646 163,540,549 643,312,021 337,465 643,649,486 Personnel costs* 58,807,345 34,571,384 93,378,729 5,436,132 1,195,111 57,577,684 157,587,656 77,661,649 235,249,305 Depreciation* 8,608,472 12,546,670 21,155,142 1,972,885 - 5,879,162 29,007,188 28,185,018 57,192,206 Management Service fees 48,669,561 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 Ex....
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....g Standard (AS) 17 issued by the Institute of Chartered Accountants of India (ICAI) requires reporting of financial information or result about the different types of products or services that the business segment produces and there is no requirement of reporting details for transaction with related parties and unrelated parties separately. In addition, there is no statutory requirement of the segmental accounts of being audited or certified by any independent agency and neither these are required to be part of audited financial statements. However, the assessee still submitted the copy of segmental accounts certified by an independent Chartered Accountant before the ld TPO / ld DRP. 11.5 We find that the reliance has been placed by the ld DR on the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. (supra) 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 t....
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....action' would "include a number of closely linked transactions". This Rule in positive terms declares that the legislative intent is not to deviate from the generic rule that singular includes plural. The meaning or definition of the expression 'transaction' in clause (d) to Rule 10A read with sub- section (1) to Section 92C, therefore, does not bar or prohibit clubbing of closely connected or intertwined or continuous transactions. This is discernible also from sub- rule (2) to Rule 10B quoted above. The sub-rule refers to 'services provided', 'functions performed', 'contractual terms (whether or not such terms are formal or in writing) of the transactions' which lay down explicitly or impliedly the responsibilities, risks and benefits to be divided between the respective parties to the transactions. Use of plurality by way of necessity and 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 princi....
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....transactions of the assessee with its AEs. In the instant case, the assessee had undertaken the transactional level analysis by considering the certified segmental statement profitability earned by it under its various segments being 'Manufacturing-Domestic', 'Manufacturing-Export' and 'Trading' Segment. Infact we find that the arguments of the ld DR are duly answered in para 3.9 of the OECD Transfer Pricing Guidelines for MNEs and Tax Administrations in Chapter III which are reproduced hereinabove. It states that only in the event of assessee not able to benchmark the transactions independently, then bundled approach could be adopted. In the instant case, the assessee was able to prepare the segmental profitability statement for each of its segments and prove the ALP thereon with respect to its comparables. Hence we hold that the said approach should be adopted 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 domes....
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....h nature of the international transaction(s), which could be directly related to such segments, should be determined base don the relevant segmented profitability. We draw support from the following decisions in support of this proposition:- Benetton India P Ltd v. ITO reported in (2012) 134 ITD 229 (Delhi Trib.)Birlasoft (India) Ltd v. DCIT reported in (2011) 44 SOT 664 (Delhi Trib.)General Motors India Pvt Ltd v. DCIT reported in (2013) 146 ITD 559 (Ahd Trib.) Moreover, we find that the ld TPO had accepted the certified segmental profitability as he has considered 'Manufacturing Segment' profitability from the same. However, he did not consider the sub-segment profitability of Manufacturing Segment into Manufacturing (Domestic) segment and Manufacturing (Export) segment based on difference in FAR analysis to determine the profitability from sale of finished goods. The ld AR further 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 fi....
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....he assessee. The margins for the comparable companies have been erroneously computed by the ld TPO and hence the correct margins as computed from the audited financial statements have been considered by the assessee. On comparing the average OP/Sales of these comparable companies at 5.17% based on single year data with OP/Sales earned by the assessee at 29.15% from sale of finished goods under the 'Manufacturing-Export Segment', the transaction value was determined to be at arm's length. The details of the same are available in page 195 of Vol. I read together with page 1296 of Vol. III of the Paper Book. We also find that similar decision was rendered in assessee's own case, on due appreciation of similar facts, by this tribunal for the Asst Years 2007-08 and 2008-09 in ITA Nos. 37 & 1623/Kol/2012 dated 3.8.2016 for considering the segmental level profitability as submitted by the assessee for 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 matte....
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....COP - 40.80% GP/DICOP - 4.81% GP/DICOP - 50.26% The margin retained by AEs of the assessee were less than the margin earned by comparable companies in their region and accordingly the transaction price of supply of materials and components to assessee was determined to have been undertaken at arm's length by the AE. 13.2 However, the ld TPO rejected the aforesaid benchmarking analysis and in the remand report dated 18.12.2014 mentioned the following points for rejection :- a. stating that information available from the certificates runs contrary to the claim of the assessee regarding AEs suffering loss in respect of their transaction with AEs . It was explained that the ld TPO erred in computing margin on sales as against margin on cost computed by the assessee. b. database of foreign companies is not available to ld TPO's office, hence veracity of data could not be verified. It was explained that merely because 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 ....
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.... for the analysis and profitability retained by them were benchmarked. The assessee provided the ld TPO with the group transfer policy wherein it was stated that the supplier of the components would retain a maximum margin of 5% on costs on supply of materials to members of the group (vide page 215 of the paper book). Accordingly, the comparable companies were identified and arithmetic mean was computed. The prices of such transfer of materials and components were determined to be at Arm's Length. The detailed benchmarking analysis as submitted before the ld DRP and ld TPO is enclosed in pages 211 to 227 of the Paper book. However, we find that the ld TPO in his remand report dated 8.8.2011 had rejected the analysis on the following grounds (vide pages 228 to 236 of the Paper Book) :- .................................... 5.2.13 We find that the ld DRP failed to understand the benchmarking approach as submitted by the assessee. The ld DRP did not recognize 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 summaril....
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.... 2008-09 vide its order dated 3.8.2016 had directed to consider the profitability of the comparable companies from audited financial statements for more authenticity of the data and compute the average margin accordingly. If the same is done, then the transaction was determined to be at arm's length as the profitability earned by the assessee under the trading segment was higher than the average industry margin. We also find that the ld TPO had combined the trading segment with the manufacturing segment of the assessee to separately benchmark the transaction of purchase of finished goods. In doing so, we find that the ld TPO had contradicted his own stand from earlier years of considering the profitability of relevant segment (i.e for benchmarking the transaction encompassed under that segment) and ended up considering the combined profitability from both manufacturing and trading operations for the analysis. We find that the average margin of comparable companies 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%....
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....nce and expertise developed know-how for producing metering related softwares. Since TECRES possessed the requisite know-how, a key to survival in the market for static meters, the assessee entered into Business Transfer Agreement for acquisition of business of TECRES. The entire team of the said TECRES along with their developed codes and domain repository had joined the assessee pursuant to the Business Transfer Agreement. 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 ld AO observed that the Income Tax Rules recognizes intangible assets such as knowhow, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature and these assets must possess 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 ....
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....gued that there is no mandate in the law that the knowhow needs to be registered with the Indian Government to fall under the category of intangible asset for claiming depreciation u/s 32 of the Act. 16.2 The Learned DR argued that the IP's acquired by the assessee have not been approved by any authority and hence not recognized by the Indian Government. Hence the claim of purchase of IP from a private unrelated entity is merely a self serving statement and not supported by any evidences. He further argued that the unit having assets of just Rs. 40.17 lakhs had been given a fancy valuation of Rs. 4.92 crores which is very unlikely. Moreover, the components of assets predominantly comprised of computers worth Rs. 1.93 lakhs and Software of Rs. 1.34 lakhs, Furniture of Rs. 10.84 lakhs, Car of Rs. 8.56 lakhs, among others. 16.3 We have heard the rival submissions. We find that this issue is already settled in favour of the assessee in its own case by the order of this 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....
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....that assists or improve a commercial activity, but that are not registered for protection in the manner of patent or trademark. Knowhow and trade secrets generally consist of undisclosed information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise. Knowhow and trade secrets may relate to manufacturing, marketing, research and development, or any other commercial activity. The value of know how and trade secrets is often dependent on the ability of the enteprise to preserve the confidentiality of the know how or trade secret. In certain industries the disclosure of information necessary to obtain patent protection could assist competitors in developing alternative solutions. Accordingly, an enterprise may, for sound business reasons, choose not to register patentable knowhow, which may nonetheless contribute substantially to the success of the enterprise. The confidential nature of knowhow and 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 tra....
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....nce in the hands of a licensor firm's professional personnel. 3.3.4 It is not in dispute that assessee had acquired from TECRES six different IPs which were independently valued by the independent expert before the company was taken over by the assessee company. Admittedly TECRES was engaged in the research and development of metering related to software and communication technology which is useable in measurement of electrical and management of energy. It is not in dispute that the said company had been delivering service in the field of metering software development of static meters for major Indian manufacturers in the metering industry namely L & T, Genus, HPL Socomec etc apart from doing work for other overseas clients. We find that the assessee in order to migrate into the new lucrative business of manufacturing static meters was looking for partner which could help it out in its new venture. Therefore, after a detailed study and informed business decision, the assessee decided to buy 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 ....
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....roperties from Mr Gandhi. The total consideration paid by the assessee in the sum of Rs. 6,07,89,093/- to Mr. Gandhi has not been disputed. Out of this total consideration, the assessee had bifurcated the value towards IP rights to the tune of Rs. 4.92 crores based on an independent valuation from an expert. The main emphasis for disallowance is only on the point that the intellectual properties is not approved by any government or any competent authority. Nowhere the income tax act mandates the registration of the intellectual properties for the purpose of granting depreciation u/s 32 of the Act. Getting the intellectual properties registered is within the domain of the assessee and it only offers protection to the assessee from preventing other parties to use the same. The revenue cannot thrust the mandate of registration of the same and mere non- registration of the same does not make the transaction ingenuine or sham. Hence the version of the revenue that IP should be certified by the government 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 ju....
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....dit of TDS to the tune of Rs. 11,12,472/-. The assessee claimed credit of TDS amounting to Rs. 11,58,178/- in the return of income and additional credit of TDS of Rs. 3,10,550/- vide letter dated 7.3.2014 during the course of assessment proceedings. The assessee filed all the TDS certificates to the ld AO. Credit for TDS of Rs. 3,10,550/- was not taken in the return of income as the assessee was not in possession of the TDS certificates at that point of time and had received the same subsequent to the date of filing the return. In the draft assessment order, the ld AO gave credit for TDS of Rs. 11,58,178/- as claimed in the return of income and denied the additional claim of credit of TDS of Rs. 3,10,550/- without providing any specific reason. The assessee filed an objection before the ld DRP. The ld DRP vide its direction dated 29.12.2014 directed the ld AO to verify the TDS certificates and allow due credit to the assessee. In case of any short allowance, the ld AO was directed to pass a speaking order. The 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....
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.... documentation requirements, the assessee documented in its transfer pricing study report and submitted in the course of assessment, the management services framework wherein the description of services received, payment terms, details of cost allocation mechanism, evidences of benefits received from such services etc were explained. These are enclosed in Pages 199-208 read with pages 282 to 1068 of the Paper Book. With respect to economic analysis, the assessee considered, payment of management service fee to be a different class of transaction, distinct from other international transactions. Accordingly, based on functional analysis, AE was determined as the least complex party and accordingly determined to be the tested party for the purpose of analysis. Further, TNMM was determined to be the most appropriate method of the methods prescribed. A search process was also undertaken to identify comparable companies rendering similar services and the international transaction was determined to at arm's length. Summary of benchmarking study has been provided herein below: Pricing methodology followed by AE while rendering services to assessee Arm's length Price of the co....
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....eports etc and the illustration of benefits received from various categories of services as mentioned in the cost allocation sheet was duly submitted before the ld TPO and ld DRP. In fact the ld DRP had called for a remand report from the ld TPO in this regard for determination of ALP based on the documents available on record. The ld TPO did not give any adverse finding about this issue in the remand report and merely stated that these were in the nature of shareholder services. Hence the ld DRP had analysed the entire services in great detail along with the benefits accruing from the services to the assessee as could be seen in Pages 25 to 30 of ld DRP order. The ld DRP on perusing and analyzing the same information/documents, concluded that the assessee had duly received services which had benefited the assessee in its business operations. Accordingly it concluded that the services were in the nature for which any third party would be willing to pay and hence not in the nature of stewardship services. The ld DRP also appreciated the fact 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....
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....al benefits by the assessee from its AE pursuant to payment of management service charges for rendering intra group services. We find that the ld DRP had duly examined the various set of documents placed on record and had concluded that the assessee had indeed derived commercial benefits out of rendering of intra group services by the AE and the payment made thereon are in the nature which any third party would be willing to pay and held that they are not in the nature of stewardship services. We have gone through those papers placed in the paper book before us (pages 1354 to 1359 of Paper Book) and we hold that the said services enable the assessee to meet the challenges of the business environment on an on-going basis and the same are rendered continuously and the assessee had been actually benefited out of those services. In any case, we hold that the ld TPO cannot determine the value of management services to be Rs. Nil without applying any transfer pricing methods. 21.6.1 We find that the Hon'ble Delhi High Court in the case of CIT v. Cushman and Wakefield (India) (P.) Ltd. [2014] 367 ITR 730/46 taxmann.com 317 is applicable to the facts of the instant case, wherein it ....
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....CIT v. Cushman & Wakefield (India) (P.) Ltd. (Supra) and co-ordinate bench of Mumbai Tribunal in the case of Dresser Rand India (P.) Ltd. v. Addl CIT [2011] 47 SOT 423 (Mum.) and applied the principles emanating out of those judgments and applied the same to the facts of the case in Bata India Ltd. In the said case (i.e Bata India Ltd.supra) it was observed as under:- 27. The Hon'ble High Court of Delhi in the case of CIT v. EKL Appliances Ltd. [2012] 345 ITR 241/24 taxmann.com 199/209 Taxman 200 as well as CIT v. Cushman & Wakefield (India) (P.) Ltd. [2014] 367 ITR 730/46 taxmann.com 317 (Delhi), rendered similar ruling as was rendered in the case of Dresser-Rand India (P.) Ltd. (supra). In the case of Cushman & Wakefield India (P.) Ltd. (supra), the Hon'ble Delhi High Court observed that whether a third party - in an uncontrolled transaction with the Taxpayer would have charged amounts lower, equal to or greater than the amounts claimed by the AEs, has to perforce be tested under the various methods prescribed under the Indian TP provisions. In the context of cost sharing arrangement, the Hon'ble High Court opined that concept of base erosion is not a logical infer....
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....xmann.com 186 (Delhi) wherein it was held as under:- 29. We hasten to add that in the case before us the assessee has, in fact, contended that it has benefited from the international transactions entered into by it with its AEs. However, even assuming that this has not been established, it would make no difference. 31. The TPO, in the case before us, had observed as under:- "The OECD guidelines lay down the principle that the basis of indirect charge will have to answer the benefit test. Para 7.24 of the OECD guidelines further states, "To satisfy the arm's length principle, the allocation method chosen must lead to a result that is consistent with what comparable independent enterprises would have been prepared to accept." Therefore, the assessee cannot escape its responsibilities of having to show the actual benefit it has received. The assessee will also have to demonstrate that independent parties would be inclined to make such a payment in similar circumstances." The TPO's conclusion in the last but one sentence does not follow from the OECD Guidelines quoted by him. The OECD Guidelines merely state that the result must be consistent with what comparable in....
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....ns for arguments raised by the assessee before the ld DRP, the ld TPO did not provide any comments with respect to economic analysis carried out by the assessee and the documents submitted by the assessee for transaction pertaining to payment of management service fees. Hence in these circumstances, there is no harm in accepting the assessee's method of benchmarking and the payment of management service charges for the intra group services received from its AE. There is no dispute that the assessee had indeed received services from its AE. There is no dispute that the assessee had indeed received commercial benefits out of services rendered by the AE. The findings given by the ld DRP in this regard are not controverted by the ld DR before us. 21.6.5 We find that the ld AR also stated that the allocation keys used to share the burden of the cost are also sound and can be taken to be as the arm's length contribution to the costs. For the same, the assessee has shared the cost allocation statements wherein appropriate cost allocation drivers have been used which have been agreed between the parties beforehand. Along with an appropriate benchmarking analysis and evidence of ....
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....hat it derived any substantial benefit from the technology received from the AE and accordingly imputed an upward adjustment of Rs. 2,39,63,552/- for the same. 22.2 The ld DRP deleted the adjustment made by the ld TPO by stating as under:- 3.5.2 Since it had been claimed that the assessee had filed all the details called for before the TPO, vide its submission dated 27/1/2014, which had not been taken into account by the TPO, comments of the TPO were called for by the Panel vide letter dated 10/12/2014. The comments of the TPO have been received. It has been stated by him, that its submission dtd 27/1/2014, the assessee has provided comparable royalty transaction using foreign data base and comes up with royalty of comparables at 4.33%. The TPO has objected to the choice of database of US company used by the assessee and has stated that the royalty paid by assessee in case of Baddi-Static meter unit at 5% was higher than the benchmark computed by assessee. The assessee has given its counter comments on 23/12/2014. In this it has been stated that the assessee has provided the royalty agreement and has also provided comparables on the basis of the only data base available. The ....
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....esting process etc for making a mechanical meter compliant with Swiss quality and standards. Further, the intangible property shall also include the following: - Drawings and parts list of the complete products and various CKD products - Work instructions for the manufacture, assembly and calibration of the meters - Information on quantity and quality of materials to be used and parts to be purchased - Information on necessary tooling activity required for manufacturing of meter - Operational manuals The assessee submitted that the unique property is the design of the meter that is being manufactured. Further, the Swiss technology was used to design a meter specifically for Indian market customizing the same as per the Central Electricity Authority of India. From perusal of the annual report of the assessee, it could be seen that there are no R&D expenses in the books of the assessee. This implies that the assessee is not engaged in R&D activities with respect to manufacturing and sale of meters in India. The assessee is made available with ready and tested technology to manufacture the meter. It stated that without the aid of the sai....
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....of the transaction at Rs. Nil stating that the assessee was not able to justify the reasonableness of the amount of royalty. We find that in the following decisions, it has been held that CUP method is the MAM to determine the arm's length nature of international transaction of payment of royalty:- (a) Castrol India Ltd. v. Dy. CIT [2014] 52 taxmann.com 262 (Mum. - Trib.) (b) Reebok India Co. v. Addl CIT [2014] 146 ITD 469/[2013] 35 taxmann.com 578 (Delhi) (c) Benetton India (P.) Ltd. v. ITO [2012] 134 ITD 229/17 taxmann.com 5 (Delhi - Trib.) (d) Ciba India Ltd. v. Dy. DIT [2014] 147 ITD 580/[2013] 38 taxmann.com 189 (Mum-Trib) We find that the ld TPO erred in not communicating the relevant clause of section 92C(3) of the Act under which the CUP analysis undertaken by the assessee was found to be defective leading him to reject the analysis and adopt TNMM as the MAM. 22.3.2 We find that as per the provisions of section 92C(3) of the Act read with section 92CA(3) of the Act, the ld TPO may proceed to determine the ALP if he is of the opinion that conditions as provided in section 92C(3) of the Act have been satisfied. In this regard, CBDT had issued a Circular ....
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....M and using specific database 'RoyaltyStat' for benchmarking royalty transactions which has been accepted by the revenue in the subsequent years, should be applied for the years under appeal also to put an end to this controversy. Hence in order to meet the ends of justice, we direct the ld TPO/ld AO accordingly. 22.3.4 We also find that during the course of TP assessment for the Asst Year 2011-12, the said transaction of payment of royalty has been considered to be at arm's length by the ld TPO wherein same economic analysis has been adopted by the assessee to determine the ALP of the transaction. 22.3.5 In view of the aforesaid findings and respectfully following the judicial precedents relied upon hereinabove, we hold that the determination of ALP for payment of royalty 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. 2,39,63,552/- is deleted. Accordingly, the Ground Nos. 3 raised by the revenue is dismissed. 23. In the result, the appeal of the revenue in ITA No. 584/Kol/2015 for Asst Year 2010-11 is dismissed. Asst Year 2011-12 - ITA No. 619/Kol/201....
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.... AR had proved that the international transactions had been carried out at arm's length by benchmarking its transactions with the comparables chosen by the ld TPO only. Hence the adjudication of this ground becomes academic in nature in view of our decision rendered in assessee appeal for the Asst Year 2010-11 with regard to TP issues. Accordingly, the Ground Nos. 6 & 7 raised by the assessee are allowed. 27. The Ground No. 8 raised by the assessee for the Asst Year 2011-12 is general in nature and does not require any specific adjudication. 28. The Ground No. 13 raised by the assessee is stated to be not pressed by the ld AR at the time of hearing as necessary relief had already been granted by the ld DRP. Accordingly the Ground No. 13 raised by the assessee is dismissed as not pressed. 29. The Ground No. 9 raised by the assessee for the Asst Year 2011-12 is with regard to the claim of depreciation on intellectual properties. This issue has been adjudicated at length for the Asst Year 2010-11 vide paras 16 to 16.3 above and the decision rendered thereon would apply with equal force for this Asst Year also. Accordingly, the Ground No. 9 raised by the assessee for the A....
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....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. 17 raised by the assessee for the Asst Year 2011-12 is allowed for statistical purposes. 32. The next issue to be decided in this appeal of the assessee is as to whether the ld DRP was justified in upholding the disallowance made in the sum of Rs. 2,06,67,831/- on account of provision for warranty in the facts and circumstances of the case. The interconnected ground is as to whether the same would have to be added back while computing book profits u/s. 115JB of the Act. 32.1 The ld AO observed that the assessee claimed deduction on account of provision for warranty of Rs. 2,06,67,831/- in the return of income. The assessee was asked to furnish the details and explanation in respect of claim of warranty on provision basis. The assessee produced/furnished details in respect of provision for warranty. The ld AO observed that the Hon'ble Apex Court had clearly emphasiz....
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....Y^07 BY06 BY05 BY04 BY03 BY02 BY01 BY00 @0.110% average cost 2,560 2,206 2,027 1,395 1,131 1,072 1,738 1,228 1,700 2,359 1,588 Additional 20% to reach full warranty cost 3,072 2,648 2,432 1,676 1,357 1,287 1,485 1,474 2,040 2,831 1,905 Divided by 10 years 307 265 243 168 136 129 149 147 204 283 191 Remaining Exposure (Years) 10.00 9.00 8 7.0 6.0 5.0 4.0 3.0 2.0....
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....4.9.2010 (enclosed in page 1381 of Part 3 of Paper Book). The total purchase order is for 814000 Nos. of meters valued at Rs. 68.04 crores. Out of that deliveries made upto the month of receipt of compliant i.e upto sept 2010 was 296000 meters totally sold to WBSEDCL in Bankura, Burdwan and Midnapore. Out of this supply, 31500 units of meters have been identified to be defective pursuant to the personal inspection of the assessee's representative and assessee made provision for the same by taking the cost of production of 31500 meters and arrived at the figure of Rs. 1,85,85,000/-. The details of the same are enclosed in page 1391 of Part 3 of Paper Book. We find that the assessee had made a provision for warranty in this regard on coming to know that it had to replace 31500 units of meters to WBSEDCL and accordingly considered its cost of production of Rs. 590 per meter and arrived at the figure of Rs. 1,85,85,000/-, which liability is certain. 32.2.3 We place reliance on the decisions of the Hon'ble Apex Court in Bharat Earth Movers v. CIT [2006] 245 ITR 428/112 Taxman 61 and Rotork Controls India (P.) Ltd. (supra) to prove that the provision made for warranty is clear....
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....he ld DR objected to the allowability of provision for warranty in the sum of Rs. 1,85,85,000/-. For the sake of convenience, the relevant clause 19 under the caption 'Guarantee' is reproduced hereunder:- 19. Guarantee: (a) The Meters and Pilfer Proof Meter Boxes shall be guaranteed arising out faulty design, materials, bad workmanship for a period of 5-1/2 years from the date of supply. The meters/Pilfer Proof Meter Boxes found defective within the above guarantee period should be replaced by the supplier free of cost within one month on receipt of intimation. If the defective meters/Pilfer Proof Meter Boxes are not replaced within the above specified period, WBSEDCL will recover twice the cost of meters/Pilfer Proof Meter Boxes from the supplier. (b) Name plate of the meter is to be marked with 'Guarantee of the Meter' : 5- 1/2 years from the date of supply. We find from the above clause, the warranty clause is inbuilt in the Guarantee Clause itself. As it could be seen that the assessee in the event of any defective supply within a period of 5-1/2 years had to replace the meters to WBSEDCL and in the event of meters not getting replaced, then the asse....
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....tes that being sophisticated item no customer is prepared to buy Valve Actuator without a warranty. Therefore, warranty became integral part of the sale price of the Valve Actuator(s). In other words, warranty stood attached to the sale price of the product. These aspects are important. As stated above, obligations arising from past events have to be recognized as provisions. These past events are known as obligating events. In the present case, therefore, warranty provision needs to be recognized because the appellant is an enterprise having a present obligation as a result of past events resulting in an outflow of resources. Lastly, a reliable estimate can be made of the amount of the obligation. In short, all three conditions for recognition of a provision are satisfied in this case. Hence we hold that the provision for warrant in the sum of Rs. 1,85,85,000/- is an ascertained liability based on the claims made by WBSEDCL during the year under appeal for which the liability to incur the same had definitely arisen during the year under appeal and accordingly eligible for deduction in the year of arising of liability. 32.2.5 There is no dispute with regard to the actual warr....
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....ny had estimated its liability under two gratuity schemes and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out its estimated liability on actuarial valuation. It had made provision for such liability spread over to a number of years. In such a case it was held by this Court that the provision made by the assessee-company for meeting the liability incurred by it under the gratuity scheme would be entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The same principle is laid down in the judgment of this Court in the case of Bharat Earth Movers (supra). In that case the assessee-company had formulated leave encashment scheme. It was held, following the judgment in Metal Box Co. of India Ltd.'s case (supra), that the provision made by the assessee for meeting the liability incurred under leave encashment scheme proportionate with the entitlement earned by the employees, was entitled to deduction out of gross receipts for the accounting year during which the provision is made for that liability. The principle which emerges from these decisi....
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....ent assessees from making some ad hoc provisions in the books, which would never crystallize, so as to reduce the net profits as per the books with consequential reduction in the tax payable u/s. 115JB of the Act. That is not the case here and that is not the allegation also raised by the revenue in this case. The assessee herein had made provision for warranty based on a systematic and scientific working and method by taking into account the past history of incurrence product warranties and the said workings were also filed before the lower authorities. Hence it could be safely concluded that the said provision for warranty is not made based on ad hoc provision. Rather it has got a sound basis and judgment on the part of the assessee creating an obligating event on the assessee as a result of past events. We find that this provision would also not tantamount to provision made for diminution in value of assets. 32.2.9 We would like to place reliance on the decision of the Hon'ble Delhi High Court in the case of CIT v. Becton Dickinson India (P) Ltd. [2013] 29 taxmann.com 80/214 Taxman 636 (Delhi) dated 19.11.2012 wherein it was held as under:- 6. In the facts of the prese....
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.... 10,00,472/- on account of provision for obsolescence of inventory in the facts and circumstances of the case. The interconnected ground is as to whether the same would have to be added back while computing book profits u/s. 115JB of the Act. 33.1 The ld AO observed that the assessee claimed deduction on account of provision for obsolescence of raw materials of Rs. 10,00,472/- (being the provision made for the year under appeal) in the return of income in respect of old and dead stocks which has got no realizable value. It was explained that assessee had converted into static meters as per the mandate of West Bengal Electricity Department. However, it was holding certain old stocks for years in view of the fact, that there might be some liability for replacement of those old stocks in respect of sales made in the earlier years pursuant to warranty clause prevailing in the old agreements. For this purpose, it had to maintain sufficient quantity of inventories even though it is old and not presently usable in the line of business of assessee. However, the same had become obsolete compared to the present line of business of the assessee and accordingly thought it fit to make a prov....
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....tion of stock should be cost or net realizable value whichever is lower. The ld AR stated that the items of obsolete stock are identified from the system maintained by the assessee. The system captures the slow moving inventories nad thereafter the realizable value of the stock is considered vis a vis the cost of those items. The items of inventory identified are those items which have lost their consumer acceptability over a period of time and hence are considered obsolete. The realizable market value considered for comparison is determined based upon prevalent prices and is the only practical method for comparison and subsequent evaluation whether an item of inventory has become obsolete or not. He stated that the method for determining the item of obsolete inventory being a scientific and commercially acceptable method and the provision created based thereupon indicate that the loss has actually incurred in the current period and it is only its actual quantification which is not possible and hence the provision is recorded in the books. We find from the workings of provision for obsolete stocks furnished before the lower authorities by the assessee (enclosed in pages 1185 to 118....
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.... stock by submitting that a sum of Rs. 12,02,973 debited to the profit and loss account was on account of obsolete and old picture tubes. It was the assessee's say that since the demand for black and white television picture tubes had diminished, the inventory with respect to the same which it had been carrying for more than three years had become obsolete and hence, it was unable to sell the same which, prompted the assessee to write off the same as a loss. 5. In the instant case we find that the principle for valuing stock at cost or realizable market price whichever is lower is applicable. The assessee has demonstrated that the stock being obsolete did not move for over three years and also the fact that it could only be sold if at all as scrap. As a matter of fact, the assessee also established that in the event it is sold as scrap the burden of excise duty would be much more than what it could realize on sale of the said stock as scrap. The Tribunal has returned this as a finding of fact. In view of these findings, it is quite clear that, all that, the assessee has done by making the provision for diminution in value of stock is to anticipate the loss in the value of st....
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....ing the book profits u/s. 115JB of the Act. This action of the ld AO was upheld by the ld DRP. Aggrieved, the assessee is in appeal before us vide Ground No. 14. 34.2 We have heard the rival submissions. We find that as per the provisions of The Micro, Small and Medium Enterprises Development Act, 2006, any amount due to the supplier as defined in section 2(n) of the MSMED Act, should be paid on the date agreed upon between the buyer and the seller, which shall be before the appointed date as per section 15 of MSMED Act. Section 16 of the said Act provides that in case the buyer (i.e the assessee herein) fails to make the payment to the supplier, then the buyer shall be responsible to pay interest at monthly intervals on the amount due to the supplier from the appointed date at three times the bank rate notified by the Reserve Bank of India. Accordingly, the ld AR argued that the liability towards interest can in no way be termed as an unascertained liability as it gets crystallized pursuant to an independent statute. He stated that the term 'ascertained' as defined in the Oxford Dictionary means "find out, definite, certain". He stated that as per the method prescribed ....
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....me Tax Act, 1961'. In this regard, it was argued by the ld DR that the wisdom of the legislators need to be accepted that the Parliament ought to have considered the provisions of the earlier Act while legislating the new Act. Obviously the MSMED Act was legislated and assent of the Hon'ble President of India obtained only on 16.6.2006 which is much after the Income Tax Act, 1961 and section 115JB of the Act contained therein. Going by the intention behind enacting the MSMED Act, i.e to protect the interests of the micro, small and medium enterprises that they get their dues in time for the supplies made by them and they don't get exploited by the big corporates or bigger players in the market, this payment of interest to those suppliers were provided in the MSMED Act. But we would like to state that the issue before us is to be decided as per the provisions contained in section 115JB of the Act. It is not in dispute that the revenue had sought to add back the provision for interest in the sum of Rs. 29,21,911/- while computing the book profits u/s. 115JB of the Act by treating the same only as an unascertained liability falling in clause (c) of Explanation 1 to section....
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.... profit and loss account, and as reduced by, - . . . . . . . . . . . . . . . . . . . . . Once the expression "Book Profits" is defined in section 115JB of the Act, we cannot travel beyond what is defined therein and we cannot impute any other words or provisions therein unless otherwise specified by the statute. Reliance in this regard is placed on the decision of the Hon'ble Apex Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562. Admittedly the interest payable to suppliers under MSMED Act, 2006 is not one of the item contemplated for addition to net profit for the purpose of computing book profits u/s. 115JB of the Act. It is well settled that provisions of section 115JB of the Act creates a deeming fiction and there cannot be deeming fiction on an existing deeming fiction by imputing the provisions of section 23 of MSMED Act, 2006 into the expression "book profits" as defined in Explanation 1 to Section 115JB of the Act. We find that there is no other clause provided in Explanation (1) to section 115JB(2) of the Act for increasing the book profits of the assessee due to this provision for interest under MSMED Act, 2006. Moreover, we find t....