TaxTMI 
TaxTMI 
2016 (8) TMI 1433
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....income to the tune of Rs. 5,27,580/- which was disallowed by the Learned AO by invoking the provisions of section 43B(f) of the Act. The same was also upheld by the Learned Dispute Resolution Panel (DRP in short). Aggrieved, the assessee is in appeal before us. 2.1. We have heard the rival submissions. At the outset, we find that the CIT(A) confirmed the disallowance as made by the Ld. AO on account of claim for provision for leave encashment. Ld. counsel for the assessee stated that the deduction on account of provision for leave encashment was made on the basis of the judgment of Hon'ble jurisdictional High Court in the case of Exide Industries Ltd. Vs. Union of India (2007) 292 ITR 470 (Cal) but he fairly conceded that subsequently Hon'ble Supreme Court has stayed this judgment of Hon'ble jurisdictional High Court vide order 08-05-2009 by following observations:- "Pending hearing and final disposal of the Civil Appeals, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount i....
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....had developed certain metering related software and was engaged in the business of sale (both domestic and export) of such software along with related services. Research and development expenses were incurred in the said business. Mr Gandhi and his personnel through their technical intelligence 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. Theo 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 ot....
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....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 towards the intellectual property the said business possessed. The entire team together with the domain knowledge had been transferred to the assessee pursuant to the agreement. The same had been used by the assessee for its very survival in the business of static meters to be in line with the regulations of the Central Electricity Authority and hence the use of intellectual property for the purpose of business had been duly demonstrated by the assessee and it is not a colourable device as alleged by the Learned DRP. He argued that the allegation of the Learned DRP is without any basis by ignoring the fact that the knowhow in the instant case has been actually acquired by paying a consideration of Rs. 4.92 crores (pursuant to independent valuation by an expert) to Mr Gandhi pursuant to business transfer agreement. He argued that the provisions of the Act in more than one section had, in its wisdom, had defined intangible assets as knowhow, patents, copyrights, trade marks, licences , franchises or any other business or commercial rights of si....
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....ng 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 was carried out by an independent expert and valuation report is enclosed in pages 25 to 82 of paper book. We find that the OECD Transfer Pricing Guidelines for Multin....
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....w 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 Act defines 'knowhow' as any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources ....
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....loping 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 vs 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 assessee pointed out that the amount of Rs. 4.27 crores included composite consideration in respect of all the intangible assets of the firm namely IPRs and the goodwill and submitted a fresh valuation of the assets including that of the goodwill at Rs. 79,50,000/-. The CITA disallowed depreciation on goodwill of Rs. 79,50,000/- and....
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....elied 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. 3.3.6. With regard to the additional ground raised by the assessee vide ground no. 1(b) and 1(c ) on the allowability of depreciation on goodwill amounting to Rs. 93,41,680/- for Asst Year 2007-08 and Rs. 81,73,970/- for Asst Year 2008-09, we find that the Hon'ble Apex Court in the case of CIT vs Smifs Securities ltd reported in 348 ITR 302 (SC) had held that the assessee is entitled for depreciation on goodwill. It is not in dispute that the assessee had paid consideration towards acquisition of Goodwill. This issue is now well settled and not with any dispute. We find lot of force in the ....
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....ed on the order passed by the ld TPO u/s 92 CA(3) of the Act had made additions/disallowances against the international transactions undertaken by the assessee as encompassed under the 'Manufacturing Segment - Domestic' and 'Trading Segment' by imputing a downward adjustment of Rs. 43,27,604/- and Rs. 51,29,012/- respectively. All other international transactions of the assessee have been determined to be at arm's length. 5.1 Trading Segment The transactions encompassed under the Trading Segment have been summarized below:- a) Purchase of Finished Goods - Rs. 3,93,62,040/- b) Payment of consultancy charges for EMPS - Rs. 9,25,716/- The assessee had justified the Arm's Length nature of its international transactions under the trading segment by considering itself as the tested party, wherein it benchmarked the profitability of its trading segment using Resale Price Method (RPM) against third party companies engaged in comparable activities. Accor....
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....uld not be produced before the ld TPO as the same were not available at the time of transfer pricing assessment, as below:- Name of the Company GP / Sales for FY 2006-07 Amzel Automotive Ltd NA Alert Fire Protection Systems Ltd NA Remi Sales & Engg. Ltd NA Digitechtronics Ltd NA 5.1.3. The ld AR argued that, as per paragraphs 2.23 and 2.24 of 'Chapter II : Transfer Pricing Methods' of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations - 2010 , with regard to the extent of product comparability when RPM is considered as MAM, broader differences are more likely to be reflected in differences in functions performed between the parties to the controlled and uncontrolled transactions. Hence, less product comparability is to be compared while using the RPM while more emphasis should be laid on the functional comparability of the comparables. 5.1.4. The ld AR argued that in any case, the margins of the comparable companies selected by the ld TPO should be computed from the audited financials which has more authenticity and if it is considered, then the international transactions of the assessee would be at A....
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....sessment with the margins computed from audited financials. 5.1.6. In response to this, the ld DR fairly agreed for setting aside of this issue to the file of the ld TPO for determine the margins based on audited financials and also give the benefit of 5% tolerance limit. 5.1.7. We have heard the rival submissions and perused the materials available on record including the paper book comprising of relevant extract of OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued in July 2010 (pages 67 to 73) ; relevant extract of OECD / G20 Base Erosion and Profit Shifting (BEPS) Report on Actions 8-10 (2015) - Aligning Transfer Pricing Outcomes with Value Creation (pages 74 to 79) among others. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. There is no dispute with regard to the Most Appropriate Method (in the instant case Resale Price Method) chosen by the assessee for its trading segment. There is no dispute with regard to the identification of Profit Level Indicator. The dispute is only on account of selection of related comparables and adoption of single year margins based on au....
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....parables do not have import of raw materials as their international transactions or because they had high export to turnover ratio. For the remaining comparables, the ld TPO rejected application of CPM as the Most Appropriate Method (MAM) and adopted Transactional Net Margin Method (TNMM) for benchmarking international transactions under the manufacturing (domestic) segment and considered net margins [operating profit / sales (OP / Sales) ] of the assessee as well as the comparables instead of the gross margins [Gross Profit / Direct and Indirect Cost of Production (GP / DICOP) ]. As a result, the ld TPO arrived at results which showed that the international transactions undertaken by the assessee under the manufacturing (domestic) segment were not at Arm's Length. Accordingly, the ld TPO made a downward adjustment of Rs. 43,27,604/- to the 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. 5.2.1. 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 pri....
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....tinuous that they cannot be evaluated adequately on a separate basis.... 5.2.4. The United Nations Practical Manual on Transfer Pricing for Developing Countries, 2013 also states in para 5.3.1.6 of the document as under: 5.3.1.6. The transfer pricing analysis should ideally be made on a transaction-bytransaction basis. However, there are cases where separate transactions are so closely linked that such an approach would not lead to a reliable result. Where transactions are so closely interrelated or continuous that application of the arm's length principle on a transaction-by-transaction basis would become unreliable or cumbersome, transactions are often aggregated for the purposes of the analysis ... 5.2.5. The ld AR argued that it could be observed from the above readings of International Guidelines that both OECD TP Guidelines and UN TP Manual have given primary preference to undertake a transaction by transaction analysis. It is only under certain exceptional circumstances, where separate transaction level analysis could not be undertaken or separate transactions are so closely inter-linked, that aggregation of transaction approach has been warranted. However....
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....all international transactions with associated enterprise without justification. 7.3 Our view is supported by ITAT judgments - Mumbai Bench in the cases of UCB India (P) Ltd. Vs. ACIT (2009) 30 SOT 95 (Mum.); ACIT v. Star India Ltd. (ITA NO.s 3585 & 3846 (M) of 2006); and Kolkata Bench in the case of Development Consultants (P) Ltd. (2008) 23 SOT 455 (Kol.). All these cases clearly lay down that ALP would be determined based on the nature of service provided by assessee for each class of transaction based on various factors and analysis. In the case of Star India Ltd. (supra), also the TPO treated all the activities of the assessee as one and determined the ALP at entity level without appreciating that one cannot compare the FAR of a principal and agent on same footing. 7.4. In our view, in the assessee's case there are different segmental activities, which are independent of each other. They are required to be analyzed on transaction to transaction basis and not by combining all activities. Consequently, we uphold the assessee's method of ALP. Consideration of transaction by transaction approach for determination of the arm's length price has also ....
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....nding close comparable companies engaged in import of such products becomes difficult. Hence, in such a situation it would be ideal to benchmark the transaction of the overseas entities (i.e the AEs) -manufacturing and sale of those semi-finished goods to the assessee. The assessee had further stated that since the bulk of the purchases of raw materials and components were made by the assessee for two of its AEs based in USA and Greece and therefore, it had conducted a benchmarking analysis by using the widely recognized Global Symposium database to identify potentially uncontrolled comparables located in USA and Greece which are engaged in the sale of parts and components/ semi finished goods similar to that sold by the assessee's AE based in USA and Greece. The ld AR also submitted a brief note on each of the transactions and benchmarking methodology adopted by the assessee to determine the arm's length price. 5.2.8. Purchase of raw materials & components - Manufacturing Domestic segment With respect to the above, an adjustment computed as a percentage of transaction value to the total costs of the Manufacturing Segment was undertaken by the Ld. TPO. We find that the as....
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.... i.e. either CPM or TNMM, one needs to appropriately evaluate the functions performed, risks assumed and assets utilized of the parties involved in the transaction and identify the least complex party as the tested party for such transaction. The concept of least complex party has been very well explained in the OECD TP Guidelines as below:- 2.59 A transactional net margin method is unlikely to be reliable if each party to a transaction makes valuable, unique contributions, see paragraph 2.4. In such a case, a transactional profit split method will generally be the most appropriate method, see paragraph 2.109. However, a one-sided method (traditional transaction method or transactional net margin method) may be applicable in cases where one of the parties makes all the unique contributions involved in the controlled transaction, while the other party does not make any unique contribution. In such a case, the tested party should be the less complex one. See paragraphs 3.18-3.19 for a discussion of the notion of tested party. 5.2.11. We find that the concept of overseas tested party and foreign comparable companies is well recognized and acknowledged by Indian Revenue as ....
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....e in the transfer pricing adjustments. The same could be observed from the fact that post applying TNMM, the ld TPO produced an outcome wherein the value of TP adjustment (as initially arrived of Rs. 8.90 crores) was determined to be more than the value of international transactions of Rs. 4.25 crores which is practically not possible. Therefore, to cover up the fallacy in its approach of transfer pricing analysis, the ld TPO then proportioned the value of adjustment to the value of international transaction encompassed in the manufacturing segment to arrive at an adjustment value of Rs. 43,27,604/-. We find that this is modified application of TNMM and not either as per the intention of the Act or OECD Guidelines. Hence with regard to correct application of CPM or TNMM, the Associated Enterprises of the assessee should be selected as tested party to the transaction, as being the least complex entity. Subsequently, an analysis of gross margin or net margin by applying either CPM or TNMM retained by AEs should be undertaken for benchmarking the transaction price pertaining to purchase of materials and components. In this regard, we find that the assessee had submitted the economic a....
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....cense Agreement entered into with the AEs. 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 39 of the Paper Book. The ld AR fairly submitted that with regard to international transaction pertaining to payment of royalty, due to paucity of accessability to the relevant information, the assessee, at the time of maintaining contemporaneous documentation, had clubbed the benchmarking analysis for its international transaction, payment of royalty with the international transactions encompassed under 'Manufacturing - Domestic' Segment. However, in subsequent years, the assessee got access to a database named RoyaltyStat which has repository of royalty agreements entered into between the parties around the world. The details about RoyaltyStat database has been provided by the assessee in Page 1 of the Paper Book as Additional Evidence. Consequently, the assessee undertook a separate benchmarking study for payment of royalty, considering Comparable Uncontrolled Price (CUP) method as the Most Appropriate Method. The details of t....
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....than the value of international transactions. Hence it would be just and fair to ignore the same. The ld TPO had made the adjustment of Rs. 43,27,604/- to Arm's Length Price based on a fallacious approach which is neither intended by the Act nor in OECD guidelines. In view of the above discussions, in order to meet the ends of justice in the facts and circumstances of the case, we deem it fit and appropriate, to set aside this issue to the file of the ld TPO / ld AO for determination of Arm's Length Price based on transaction to transaction approach submitted by the assessee taking the AE as a tested party using CPM as the Most Appropriate Method. Accordingly, the grounds raised in this regard are allowed for statistical purposes. 6. Adjustment to Arm's Length Price - ITA NO. 1623/Kol/2012 - Asst Year 2008-09 The assessee is a closely held company engaged in the business of manufacturing and distribution of electric meters and related components. In the course of its business operations, the assessee has entered into certain international transactions. For the purpose of benchmarking the prices of the international transactions, the assessee in its transfer pricing report,....
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....imilarly, with respect to export sale, the assessee is not required to perform certain functions like marketing activity and do not assume certain risks like product performance risks when compared to its domestic sale business. However, with respect to purchase of components, the assessee needs to ensure that those are appropriately used in its manufacturing process to produce goods with desirable performance quality and meet end customers requirement. Thus, the four impugned transactions are separate and distinct from each other and do require a separate transaction level analysis to determine arm's length price. 6.2. In response to this, the ld DR filed a written submission and also made arguments in support of his written submissions. 6.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee and the written submissions of the ld DR. We would like to give our findings in respect of each of the international transactions entered into by the assessee during the financial year 2007-08 as under:- 6.3.1. Sale of finished goods - Manufacturing (Export) Segment During the Financial Year 2007-08,....
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....ent and Manufacturing Export segment) would reflect the PLI of the concern more appropriately for manufacturing sector. With regard to the above, the ld AR submitted that the functions performed and risks assumed by the assessee in case of the international transactions covered under the two segments i.e. 'Manufacturing - Domestic' segment and' Manufacturing - Export' segment are distinct and separate from one another. It was submitted that with regard to 'Manufacturing - Domestic' segment, the assessee undertakes full-fledged marketing efforts to secure customer contracts. It has to ensure appropriate application of licensed technology from the AE for manufacturing of products to meet customer requirement and satisfaction. The assessee also has to bear product performance risks towards end customers. Further, the assessee also bears credit risk with respect to its domestic operations. While on the other hand, under 'Manufacturing - Export' segment, the assessee receives product specification from its AE and accordingly manufactures and supplies the product. It is not liable to end customers for product performance. Also, no royalty is paid ....
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....t each enterprise performs (taking into account assets used and risks assumed). Therefore, in delineating the controlled transaction and determining comparability between controlled and uncontrolled transactions or entities, a functional analysis is necessary. This functional analysis seeks to identify the economically significant activities and responsibilities undertaken, assets used or contributed, and risks assumed by the parties to the transactions." [Emphasis added) He also placed reliance on the co-ordinate bench decision of Delhi Tribunal in the case of Mentor Graphics (Noida) Pvt. Ltd vs DCIT reported in (2007) 109 ITD 101 (Delhi Trib.), wherein it was held that :- "The function that need to be identified while carrying comparison as per OECD guidelines include design, manufacturing, assembling, research and development, servicing, purchasing, distribution, marketing, advertising, transportation, financial and management activities. It is also necessary to examine as to what is the principal function of the entities. " [Emphasis added] We find that even for comparability purposes, the assessee has undertaken two distinct search strategies for benchmark....
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....ty of different controlled transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise. " Since the assessee was able to appropriately segregate its business operations in to its various business/functional segments, the arm's length nature of the international transaction(s), which could be directly related to such segments, should be determined based on the relevant segmented profitability. We draw support from the following decisions in support of this proposition:- Benetton India P Ltd vs ITO reported in (2012) 134 ITD 229 (Delhi Trib.) Birlasoft (India) Ltd vs DCIT reported in (2011) 44 SOT 664 (Delhi Trib.) General Motors India Pvt Ltd vs 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 g....
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....egard to the payment of royalty. These are enclosed in pages 311 and 143 of the Paper Book. The findings given by us for the Asst Year 2007-08 would apply with equal force for the Asst Year 2008-09 also with regard to payment of royalty. 6.3.4. Payment of Management Service fees - Manufacturing (Domestic) Segment The assessee submitted that it had received varied nature of management services under a Service Agreement entered into with its AE. For the purpose of compliance with the transfer pricing 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 to the revenue. These are enclosed in Page 39 and Pages 294 to 295 of the Paper Book. We find that the assessee had 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 det....