TaxTMI 
TaxTMI 
2014 (7) TMI 1297
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....assed by the learned Assessing Officer ("Ld.AO")/learned Transfer Pricing Officer ("Ld.TPO")/Hon'ble Dispute Resolution Panel("DRP") are bad in law and void ab-initio. 2. The Hon'ble DRP/Ld AO and Ld. TPO have erred in facts and in law in computing the total income at Rs. 4,30,68,482/- as against the NIL returned income in the present case. 3. That the order passed by the Ld. AO/Hon'ble DRP is bad in law to the extent it has vitiated judicial discipline by not following the decision of Hon'ble Income-tax Appellate Tribunal("ITAT") on similar facts, in appellant's own case for earlier years. GROUNDS ON TRANSFER PRICING ISSUES. 4. Arm's length price of purchase made by appellant from its associated enterprises ("AEs") are on cost-to-cost basis and hence should be considered to be at arm's length. 4.1 The Hon'ble DRP/Ld.TPO have erred in law and in facts, in ignoring that purchases made by appellant from its AEs are on cost-to-cost basis and that AEs have not charged any mark-up on same. Further, the Hon'ble DRP/Ld.TPO have not appreciated that same transaction of appellant has been accepted to be at arm's length in preceding years. ....
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....justment Based on the facts and circumstances of the case, the Hon'ble DRP/ Ld. TPO have erred in law and in fact, in failing to make appropriate adjustments to account for differences in working capital employed by the appellant vis-a-vis the comparables and in the process also ignored Indian transfer pricing regulations and judicial precedence. 9. Principle of res-judicata Based on the facts and circumstances of the case, the Hon'ble DRP/ Ld. TPO have erred in law and in fact, by not taking cognizance of the fact that impugned international transaction of appellant has been accepted by Revenue authorities to be at arm's length in previous years. 10. Transfer pricing adjustment to be made with reference to value of international transaction only 10.1 Based on the facts and circumstances of the case, the Hon'ble DRP/ Ld. TPO have completely ignored the functional and business profile of the appellant and have failed to appreciate that appellant is a risk bearing entity. Consequently, it would be incorrect on Ld. TPO's account to contend that the alleged difference in operating margins of appellant vis-a-vis comparable....
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....ase, the Hon'ble DRP/ Ld. AO have erred in law and on fact by disallowing the payments made by the appellant to its overseas parent company during AY 2006-07 for the purchase of technical drawings and designs and alleging the same to be in the nature of royalty on which tax had to be withheld at the time of payment. 14.2 That the order passed by the Hon'ble DRP / Ld. AO is bad in law to the extent it has vitiated judicial discipline by not following the decision of Hon'ble Income-tax Appellate Tribunal ("ITA T") on similar facts, in appellant's own case for earlier years. 15. Disallowance of provision for warranty for AY 2006-07 15.1 Based on the facts and circumstances of the case, the Hon'ble DRP/ Ld. AO have erred in law and in fact in alleging that the provision for warranty has been created by the appellant on an arbitrary basis and accordingly is not a deductible expenditure while computing the income tax payable by the appellant. 15.2 Further the Hon'ble DRP / Ld. AO have completely erred in facts and in law, in ignoring the order passed by Hon'ble Commissioner of Income Tax (Appeals) in appellant's own case....
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....tor & generator parts to AEs; * Purchase of raw materials; Selection of most appropriate method for purchase of raw material 4. erred in law and in facts, in ignoring that purchases made by appellant from its AEs are on cost-to-cost basis and that AEs have not charged any mark-up on same. Further, the Hon'ble DRP/ Ld. TPO have not appreciated that same transaction of appellant has been accepted to be at arm's length in preceding years rather proceeded to evaluate the appellant's transaction using Transactional Net Margin Method ("TNMM"). Comparable companies for the purpose of applying the TNMM 5. Without prejudice to the above grounds, erred in law and in facts in not accepting the appellant's contention of not accepting BHEL as a comparable on account of extra-ordinary size of operations of BHEL as compared to appellant having regard to the functions performed, assets employed and risk assumed. Scope of transfer pricing adjustment 6. Without prejudice to the above grounds, erred in making transfer pricing adjustment on account of purchases made from AE by ignoring that adjustment has to be made in rela....
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....chnical drawings/ designs; and * Warranty expenses. Disallowance off depreciation on capital asset 13. erred in law and in fact, in disallowing the depreciation claimed on capital asset purchased from AE during AY 2005-06, the value of which had been determined by the then Ld. TPO as Nil on account of Indian transfer pricing provisions. Disallowance of technical drawing and design expenditure 14. erred in law and on fact by disallowing the payments made by the appellant to its associated enterprises during AY 2007-08 for the purchase of technical drawings and designs and alleging the same to be in the nature of royalty on which tax had to be withheld at the time of payment. 15. The Hon'ble DRP / Ld. AO is bad in law to the extent it has vitiated judicial discipline by not following the decision of Hon'ble Income-tax Appellate Tribunal ("ITA T") on similar facts, in appellant's own case for earlier years. Disallowance of provision for warranty 16. erred in law and in fact in alleging that the provision for warranty has been created by the appellant on an arbitrary basis and accordingly is not a deduc....
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....ncome Tax (Appeals) in appellant's own case in relation to A Y 2004-05 on similar issue, whereby' matter has been decided in favour of the appellant. Penalty for concealment of income 5. erred in holding that the appellant has furnished inaccurate particulars of income in respect of each item of disallowance/addition and in initiating penalty proceedings under section 271(1)(c) of the Act." 3.3 Grounds raised by the assessee in assessment year 2009-10 are as under :- GROUNDS OF APPEAL Based on the facts and circumstances of the case, VA TECH Hydro India Private Limited (here-in-after referred to as the 'Appellant') respectfully craves leave to prefer an appeal under section 253 of the Income Tax Act, 1961 ('Act') against the assessment order issued under Section 143(3) of the Act by Deputy Commissioner of Income-Tax-1(1), Bhopal (here-in-after referred to as 'learned AO') in pursuance of the directions issued by Dispute Resolution Panel- I, Mumbai (here-in-after referred to as 'DRP'). The appeal is preferred on the following grounds : On the facts and circumstances of the case and in law, the learned AO based on directions of ....
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....in holding that the appellant has furnished inaccurate particulars of income in respect of each item of disallowance/addition and in initiating penalty proceedings under section 271(1)(c) of the Act." 4. Rival contentions have been heard and record perused. Facts in brief are that the assessee company is manufacturing generators and its equipments besides providing installation and erection services. Assessee is a 100% subsidiary of non-resident company M/s Andritz Hydro GmbH, Austria. The following additions/ adjustments have been made by the Transfer Pricing Officer ("Ld. TPO")/ Assessing Officer ("Ld. AO"), which are being contested in the aforesaid appeals: S. No Details of Additions Amount (in INR) AY 2006-07 AY 2007-08 AY 2008-09 AY 2009-10 Corporate tax addition: 1 Disallowance of provision for warranty expenses 6,810,422 6,572,822 6,890,631 21,103,474 2 Disallowance of payment for purchase of technical drawings/designsu/s 40(a)(i) 6,690,516 6,275,164 14,710,186 27,046,898 3 Disallowance of depreciation on capital asset purchased from AE in AY 2005-06 4,480,347 2,284,977 - - ....
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....h customers The provision for warranty is made at for each project separately, taking into consideration various factors such as the complexity of the scope of work, warranty terms agreed with the customers, estimated cost of warranty based on past experiences. This methodology for warranty provision has been consistently followed over the years and is also consistent with the accounting standards u/s 145(2) of the income tax act. Hence the basis of provision is not ad-hoc as claimed by the Ld. AO. Further, the reasonableness of the warranty provision can also be checked from the warranty provision reversed on a yearly basis. For A Y 2003-04 and A Y 2004-05, the provision for warranty has been held to be in the nature of ascertained liability and not a contingent liability by the Commissioner of Income Tax (Appeals) ("Ld. CIT(A)") (vide orders dated 19 January 2007 and 23 November 2007). * Further, the CIT(A) order for A Y 2003-04 has also been upheld by the same bench of the Hon'ble Indore Bench of the Income Tax Appellate Tribunal vide order dated 28 December 2011 in lTA No. 255/IND-2007. * Further, no appeal has been filed by the tax autho....
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....s 12000000 120000 2 crushing seasons Vajra 6550000 65500 18 months from supply Chaskaman 7550000 75500 18 months from supply Rana Sugars 5190000 51900 2 crushing seasons Triveni Turbo 4915000 49150 24 months from supply HPCL 6600000 66000 24 months from supply Renuka Sugars 9150000 91500 2 crushing seasons Na Loi 25450000 254500 24 months/8 hrs. of operation Pan Africa 9028000 90280 18 months from commissioning Shri Ram 5315000 53150 18 months from commissioning Koradi 1630000 16300 12 months from commissioning West Coast 12200000 122000 24 months from operation Total 15,88,080 The details of warranty provision and its reversals are reproduced hereunder: S. No. Assessment Year Warranty provision created during the period (in Rs.) Warranty provision of earlier years reversed during the period (in Rs.) 1 2003-04 1588080 - 2 2004-05 3024128 680100 3 2005-06 6954871 529718 4 2006-07 681....
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.... enters into contracts with its customers for supply of generators and equipments as per their specifications of frequency, current, capacity, speed, efficiency etc. Such contracts include supply of 'technical drawing and design' to the customers along with the equipments. * The assessee does not possess the requisite skills and technical expertise for the designing of the generators and in this regard seeks assistance from its overseas parent entity. * For the above purpose, purchase orders are placed on Andritz Austria for the supply of technical drawings and designs to manufacture the generators customized to the needs of the customers. Copies of some of the sample Purchase Orders are attached as Exhibit 35 of the Paperbook) to substantiate the fact that orders are place by the Assessee for purchase of the Designs and not obtaining a limited right to use them. * It has been submitted to the AO that Andritz Austria sells the technical drawings and designs to the assessee on a principal to principal basis and does not retain any right in such drawings and designs. The drawings procured from Andritz Austria are used in the manufacture of generators and su....
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....ITA No 29/IND-2005 for AY 2000-01, ITA No 253 and 254/1ND- 2007 for AY 2001-02 and AY 2002-03, ITA No 255/IND-2007 for AY 2003-04). * Further, no appeal has been filed by the tax authorities against the order of the Ld. CIT(A) for AY 2004-05. * The facts of the current appeals are same as those covered in the aforesaid orders. In this regard Appellant has relied on following key judicial precedents: * DCIT-3(1), Bhopal vs VA TECH Hydro India Private Limited (ITA No 255/IND-2007) * ACIT, 3(1), Bhopal vs VA TECH Hydro India Private Limited (ITA No 112 to 115/IND-2007) * Davy Ashmore India Ltd. vs CIT - 190 ITR 626 * Pro-Quip Corporation Vs CIT - 255 ITR 354 9. With regard to the payment made for design and drawing imported by it from its group companies in Austria, the AO held that such import of design is not in nature of 'purchase of raw materials', however, the AO treated the same as payment of royalty as per Section 91(vii). While reaching to this conclusion the AO has relied upon the order passed u/s.201(1). As no tax was deducted on these payments, the AO disallowed the same by invoking provisions of Section 40(a....
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....sessee company is a manufacturer of dydroelectric and turbo-generators for hydel and turbo projects and selling the same in India and abroad. The assessee is a 100% subsidiary of VA TECH HYDRO GmbH Austria from 1.4.2001. VA TECH Hydro is an established name in the world in the field of manufacturing and erection of Hydro and Turbo projects since last about 100 years. The Assessing Officer, on scrutiny of books of accounts of the assessee company and Form No. 27 for the assessment years, in question, found that though the assessee company has spent huge amounts as expenditure on technical drawings and designs on account of payments to parent company, neither the tax was deducted at source, nor the assessee company obtained no deduction certificate from the Assessing Officer. The Assessing Officer, called for the explanations of the assessee and after considering the same, made the following observations :- "6.1 Arguments of the assessee are hovering around incorrect reasoning that a) it has purchased the design on out right basis as commodity and b) on the dictionary meaning of Royalty. 6.2. Royalty has been given wider meaning both in the Income Tax Act and DTAA, ....
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....ed on the designs that it is the property of the parent Austrian Company. The assessee had right to use a particular design for single time. The assessee has been barred to sale the design as such to another manufacturer by the specific condition and warning printed on the design. When the design cannot be sold as above how it can be termed as outright purchase as claimed by the assessee. Thus, the assessee has only been given the right to use the design. 6.5. The designs are not purchased through open tender or bid because assessee is manufacturing generators with a unique technology which is possessed by the parent Austrian company only hence the designs are specific to the parent company. Because of this special relationship assessee is bound to purchase the design from its parent Austrian company only. The design is first received through Internet and its hard copy along with bill is received through Customs to justify the payments made to the parent company from the angle of allowability of expenditure. 6.6. There is no agreement/terms and conditions in purchase of the designs from the parent Austrian company. Assessee is just placing the orders for supply of....
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....on of electricity. Turbine is manufactured by the VATECH ESCHER VYAS Floval Ltd., Faridabad, which is again Austria 100% subsidiary company of Austria in India. International orders for supply of generators are received through its parent company in Austria for which the assessee company supplies generator and its accessories to its parent Austrian company. Turbine and erection infrastructure is supplied by the Austrian company in such projects. Projects in India are completed by the assessee company with the Turbine supplied by the another 100% subsidiary company i.e. VATECH ESCHER VYAS FLOVAL Ltd., Faridabad. In all the cases design of generator is supplied by the parent Austria company only. 6.13. The 'V Austria Tech India' has stated that its Parent Austrian Company does not have Austria permanent establishment. In fact, there is no need for the Austrian company to have another permanent establishment in India, as they have their 100% subsidiary company in India (VA Tech India') which is acting on their behalf for procuring orders etc. Further the 'VA Tech India' is manufacturing every generator on the basis of design provided by the Austrian company. Thus the assessee....
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....itself. Thus it is clear that there are two sets of designs, one prepared by the Parent Austrian company for which assessee makes payment and another in house detailed design prepared by 'VA Tech India' based on the original design. 6.16. From the discussion, it is clear that with the design and other parameters supplied by the parent Austrian company, the assessee cannot create another output in Austria different case or even Austria similar case. From all the discussion and case laws cited above, it is beyond doubt that the payments made by the assessee 'VA Tech India' are in the nature of Royalty and are squarely covered by the decision of Royalty both in the DTAA and IT Act, 1961. I hold that the payments made by the assessee 'VA Tech India' are in the nature of Royalty and that the assessee 'VA Tech India' having failed to deduct tax has committed default within the meaning of sec.195(1) read with DTAA between Austria and India and read with sec.9(1)(vi) of the Income Tax Act, 1961." The Assessing Officer, for the reasons mentioned above, finalised the proceedings initiated earlier culminating in the order under section 195(1) read with section 9(1)(vi) and 2....
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....sale of the drawings and designs from outside country to the appellant company is chargeable to tax in India, when the non resident company is not having any permanent establishment in India, is taxable in India and, therefore, in the absence of any concrete finding that such payments are chargeable to tax in India, section 195 has no application. Having regard to the detailed and exhaustive submission and the case laws relied upon by the appellant, I hold that the payments made for the purchase of drawings and designs do not give rise to any income in India and no tax needs to be deducted u/s 295 of the IT Act. The said payments are also not in the nature of royalty as defined in the DTAA entered into between India and Austria. In any case, it is not a case of the A.O. that there is a transfer of copyright by the Austrian company in favour of the appellant company but its is a case of sale of copyrighted articles and therefore also the payments made by the Indian company to non resident company are not in the nature of royalty. Hence the demands raised u/s 201(1A) for interest payable from the date of default in not deducting the tax at source till passing of the order by the A.O.....
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....ation but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for - (i) the transfer of all or any rights (including the granting of a license) in respect of a paten, invention, model, design, secret formula or process or trade mark or similar property. (ii) the imparting of any information concerning the working of, or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property. (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipments but not including the amount referred to in section 44AB (v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not inc....
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....ies. Hence, it was not a case of sale of copy righted articles. The learned CIT DR further emphasized on the fact that it was used by the assessee in manufacturing of the turbine/generator and was not sold as such in the open market like purchase and sale of a copy righted book or software, etc. The learned CIR DR further emphasized on the fact that if the view of the assessee was accepted then every transaction would become a case of sale and in that case, provisions relating to royalty would become redundant. At this stage, a question was posed to him that if the view of the revenue is accepted, then every transaction would become a case of royalty, to which the learned CIT DR could not give any effective reply. The learned CIR DR thereafter placed reliance on the order of the Assessing Officer. 7. The learned counsel for the assessee submitted additional evidence as regards the treatment of such transactions in the books of non-resident parent company which was admitted as the learned CIT DR did not object for admission of the same. The learned counsel for the assessee submitted that as per this information, it was abundantly clear that such transactions were treated as....
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....again submitted that the transfer of such designs by the assessee to the buyers of generators in an unbridled manner established this fact. The learned counsel for the assessee further reiterated the submissions made before the learned Commissioner of Incometax (Appeals), particularly in respect of drawings being goods and the acquisition of drawings on out-right purchase basis could not be considered as a transaction of the nature of royalty. The learned counsel for the assessee further submitted that the provisions of DTAA were to supercede the provisions of the Income Tax Act and for this proposition the learned CIT DR also did not disagree. The learned counsel for the assessee thereafter placed reliance on the decision of the Hon'ble Calcutta High Court in the case of Davy Ashmore India Limited v. CIT; 190 ITR 626, wherein the Hon'ble High Court had pointed out that the transferor retained the proprietary right in the designs and allowed the use of such rights, the consideration received for such user was in the nature of royalty. However, in the present case, the assessee company was not allowed to use such right i.e. to make similar designs at its level and to sell the same t....
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....cision of the Tribunal also supported the claim of the assessee. The learned counsel for the assessee thereafter referred to the decision of the Tribunal in the case of Indian Hotels Co. Ltd. v. ITO in ITA No.553/Mum/00 (refer pages 163 to 167 of the paper book),wherein Indian Oil had obtained the services of a foreign company to prepare the interior design which had to be used by the Indian company for the purpose of re-designing or renovating the interiors of Taj Mahal Hotel at Mumbai and the design supplied by the foreign company became the property of Indian Hotel Company Limited (assessee) and in that background, the Tribunal held that the assessee company had purchased and acquired interior design on a principal to principal basis i.e. as a buyer and in that view of the matter, the payment by that company did not amount to royalty. The learned counsel for the assessee relied upon the decision of the Tribunal in the case of Wipro Limited v. ITO as reported in 94 ITD 9 for the proposition that where the payment was for obtaining the data and use it the way the assessee wanted to use it, it was the use of a copy-righted article and not a case of transfer of right in the copy-rig....
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....requirements of its customers. For this purpose, the assessee procures basic design from its parent company and accordingly manufactures such plant and machinery. It is also noted that such basic design is also given to the buyer of plant and machinery by the assessee company. The dispute before us is regarding the nature of payment made by the assessee company to its parent nonresident company for obtaining such designs. The conclusions of the Assessing Officer as well as the findings of the learned Commissioner of Incometax (Appeals) have already been reproduced which contain details of judicial decisions relied upon by both the sides. In our opinion, if the view of the Assessing Officer is accepted, then there will not be any transaction of sale and purchase in such situations and every transaction would come within the meaning of term 'royalty'. Further, in our opinion, the basic distinction between a transaction of 'royalty' and of outright sale and purchase is transfer of ownership to the buyer and this distinction has been maintained even in the provisions of section 9(1)(vi) as well as of DTAA. We have also perused the note on the hard copy of such designs. In our opinion, ....
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.... technical drawings and design for Rs. 4,14,18,313/- from its Austrian Joint Venture Company i.e. VA Space Tech Elin, Austria and the said expenditure was directly claimed to be manufacturing expenses and was claimed in its P & L account under the head 'manufacturing expenses' which were disallowed by the ld. Assessing Officer doubting the genuineness of the expenses. Admittedly, the audited accounts, Trading and P & L Account and details of technical drawings expenses were duly furnished by the assessee before the Assessing Officer as well as before the ld. CIT(A). The stand of the assessee before the Revenue authorities as well as before us is that the expenses were incurred for purchase of technical drawings and design from its joint venture company for business expediency. Uncontrovertedly, the impugned expenditure was fully supported by bill of entries, custom clearance, shipping agents documents, payments through banking channel with compliance of rules and regulation of Foreign Regulation Act (at the relevant time). All these documents were not disputed by the Assessing Officer and were duly examined by the ld. CIT(A), meaning thereby, the expenses were claimed to be genuine....
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....issioner of Income tax, Bhopal on 12-6-2008. The findings/conclusions/observations mentioned in the Transfer Pricing Report were taken into consideration by AO while framing the assessment for the current assessment year as provided in section 92CA (4) which reads as under: "On receipt of the order under sub section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub section (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer" Accordingly u/s 144C(10) the draft as assessment order dated 24.12.2009 is being finalized as final assessment order as under :- The findings of the Transfer Pricing Report dated 14-10-2009 are dealt in the assessment as under: The details of the international transactions of the assessee company are detailed as under: Transaction AE Amount (Rs.) i)Purchase of raw material V A Tech Hydro GmbH & Co, Austria 17135713 ii) Sale of Generators & Generator part 7872948 iii) Training 1089304 iv) Technical service 1508058 v) Consulting provided for designing 14840000 vi)Recharge of exp....
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....nce with Rule 10B(4). 10. The assessee in its reply dated 05/01/2009 submitted as under :- "In this regard, we would like to submit that in determining the arm's length nature of the international transaction entered into by the assessee, the data pertaining to the AY-2005-06, FY 2004-05 and FY 2003-04 was used, which is also in accordance with the proviso to Rule 10B(4). The assessee has used an average of the two/three year data (wherever available) to justify the arm's length nature of the international transaction because of certain factors which are explained below. The contracts sales in respect of the projects undertaken by the assessee are recognized by the assessee using percentage of completion ("POC") method. The billing of POC projects range from 2 to 4 years depending on the length of the projects and profitability can be reasonably ascertained only over the period of contract. Hence, financial data for a single year would present distorted profitability of the company and it would be inappropriate to use single year data in this industry. Accordingly, the use of multiple year data generally captures market cycles and reduces the likelihood that th....
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.....63%, which was not disturbed in view of the provisions of Section 92(3) as they have effect of reducing the income chargeable to tax. Accordingly, the adjustment was done only in case of project Karun III, Maso Corona. The total amount of such adjustment was Rs. 8,97,262/-. 14. During the subject year under assessment, ANDRITZ India had entered into following international transactions with its Associated Enterprises (AEs): S. No. Type of transaction Value (in Rs.) 1. Export of generators and related parts 1,83,75,126 2. Import of raw materials and components 4,32,74,022 3. Payment of interest on Inter Company Deposit 31,04,878 4. Receipt of turbine erection/ inspection services 2,44,209 5. Receipt of training 10,89,304 6. Receipt of technical services 15,08,058 7. Provision of consulting services 1,48,40,000 8. Payment of claims against warranty 1,47,20,867 9. Payment of commitment charges 1,49,52,505 10. Reimbursement of expenses to AEs 42,00,021 11. Reimbursement of expenses incurred by AEs 6,77,959 14.1 In relation....
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....similar business as the assessee. For the companies identified as comparables, weighted average of operating profit margins earned on operating revenue was computed using the financial data available at the time of undertaking the transfer pricing study (including data upto two years prior to the financial year for which the search was undertaken). Since, even after inclusion of cost of imports in the cost base, the operating profit of the assessee was higher than arithmetic mean margin of comparable companies, the transaction was concluded to be at arm's length. 14.6 In relation to above transaction, the assessee had undertaken an economic analysis choosing the CPM as the most appropriate method with Gross Profit mark-up (GP) as the appropriate Profit Level Indicator. In order to undertake the analysis for identification of comparable transactions for the export of finished goods, the assessee has considered the transactions undertaken under similar conditions with unrelated parties as comparable to establish the ALP. Based on such analysis, since the overall GP earned by assessee from sales to AEs was higher than sales to unrelated entities, the transaction involving sale of g....
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....eously proceeded to evaluate the impugned transaction using TNMM; 2. Second Ground of Objection Without prejudice to the first ground of objection, based on the facts and circumstances of the case, the Ld. TPO has further erred in law and in fact in not accepting the detailed and robust set of comparable companies submitted by the assessee, while undertaking the analysis using TNMM as most appropriate method 3. Third Ground of Objection Without prejudice to aforesaid grounds of objection, based on facts and circumstances of the case, the Ld. TPO had erred in law and in fact, by adopting a flawed approach by using single year data as against the multiple year data used by the assessee, to compute the ALP of the international transaction of the assessee using TNMM 4. Fourth Ground of Objection Without prejudice to the third ground of objection that multiple year data should be used in applying TNMM, based on the facts and circumstances of the case, the Ld. TPO had erred in law and in fact in disregarding the profit level indicator of operating profit as a percentage of operating revenue (OP/OR) as considered by the assessee while ....
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....5 percent from the arithmetic mean determined by him and hence erroneously adjusting the income of the assessee to mean. 11. Eleventh Ground of Objection Based on the facts and circumstances of the case, the Ld. AO/TPO had erred in law and in fact, and had violated the principles of natural justice by not giving cognizance to the detailed analysis and technical arguments submitted by the assessee and in not issuing a 'speaking order' 12. Twelfth Ground of Objection Based on the facts and circumstances of the case, the Ld. AO has erred in law and in fact, in disallowing the depreciation claimed on capital asset purchased from AE during AY 2005- 06, the value of which had been determined by the then Ld. TPO as Nil on account of Indian transfer pricing provisions. 13. Thirteenth Ground of Objection Based on the facts and circumstances of the case, the Ld. AO has erred in law and on fact by disallowing the payments made by the assessee to its overseas parent company during AY 2006-07 for the purchase of technical drawings and designs and alleging the same to be in the nature of royalty on which tax had to be withheld at the time of ....
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....mple invoices for purchase of raw material from AE's, to justify cost to cost basis. In response to the same, assessee has submitted that such invoices were not available with the assessee as the assessee does not have access to supplier's invoices of its AE, as the same is the proprietary information of its AE. * However, in support of the contention that material was supplied on cost to cost basis, assessee submitted to the Ld. TPO that its AE's purchase material from its suppliers in bulk. Further, the AE had to incur several other expenses like freight, insurance, store handling cost, cost of conversion etc. for procurement of the material and converting the same into a finished product. Accordingly, the AE sells material to assessee on full cost basis. * To substantiate the above, the assessee has furnished a copy of the certificate obtained from its AE confirming that AE had quoted and invoiced all goods and services delivered to assessee on full cost basis. Further, AE had confirmed that it does not have any excess cost cover and the margin rate of AE is zero (copy enclosed as Exhibit 6 of the Paperbook). * Based on the management certificate, asse....
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....ity analysis. In this regard paragraph 1.20 of the OECD Guidelines states that: "In dealings between two independent enterprises, compensation usually will reflect the functions that each enterprise performs (taking into account assets used and risks assumed). Therefore, in determining whether controlled and uncontrolled transactions or entities are comparable, comparison of the functions taken on by the parties is necessary." The above-mentioned guidance laid down by OECD has been relied upon by both Bangalore Income-tax Appellate Tribunal ("Tribunal") and Delhi Tribunal. In M/s Aztec Software & Technology Services Ltd v ACIT (I.T.A. No.584/Bangalore/2006), the Special Bench of the Income-tax Appellate Tribunal ("Tribunal") agreed that: "Before we go into each one of these methods, the fundamental requirement, in any of the method selected, is the selection of "comparables", for benchmarking international transactions. This selection of a comparable should be based on functional, asset, and risk analysis of both the parties and transactions." Similarly, in the recent Tribunal ruling in the case of Mentor Graphics (Noida) Pvt. Ltd. (supra), the T....
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....Limited 10.82% 3. Powerica Limited 10.27% 4. Triveni Engineering & Industries Limited 13.86% Arithmetic mean 9.51% 24. However, Ld. TPO had failed to cite reasons for not accepting assessee's contention for considering the use of detailed and robust set of functionally more comparable companies. 25. In light of above, the 4 companies (excluding BHEL) should be considered as comparable to assessee's business operations. These comparable companies have been identified based on a strict and detailed functional comparability undertaken having regard to the business profile of the assessee. 26. As per the proviso to Section 92C(2) of the Act, an assessee has the option to determine the transaction price, which may vary from the arm's length price by +/- 5%. Section 92C(3) of the Act provides that the Ld. TPO has to determine the arm's length price in accordance with sub-section (3) of section 92C. Section 92C(3) further states that the arm's length price shall be determined by the AO in accordance with sub section (1) and (2) of section 92C. Therefore, it should be appreciated that the Ld. TPO is mandatorily required to calculate the arm's....
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....ot always be straightforward to apply in practice, it does generally produce appropriate levels of income between members of MNE groups, acceptable to tax administrations." Further, the Hon'ble ITAT Delhi bench in case of M/s Sony India (P) Limited vs. Deputy Commissioner of Income Tax (ITA 114 ITD 448), has held that: In our view, both in the first as also in the second limb, implications of determined Arm's Length Price are the same except for the marginal benefit allowed to the taxpayer under the second limb. Hence, we are of the view that second limb is applicable even to cases where the taxpayer intends to challenge Arm's Length Price taken as arithmetic mean and determined through the Most Appropriate Method. As stated above, the second proviso is intended to give marginal relief to all taxpayers as determination of Arm's Length Price is not an exact science but is an approximation. Option is given to the taxpayer as in some cases, variation not exceeding 5% of arithmetic mean might not suit the taxpayer, and, therefore, taxpayer in such cases should not be put to a prejudice. Otherwise, there is no difference between the first and the second limb of the pro....
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....ccount of arm's length price made by TPO('A') 2,41,89,935 Particulars Related Party Cost Unrelated party Cost Total Expenditure (other than related party expenditure relating to design & drawings, technical knowhow and royalty) 4,32,74,022 94,27,40,205 98,60,14,227 Ratio ('B') 4.39% 95.61% 100.00% Proportionate adjustment based on value of international 10,61,644 transactions undertaken with related party(C=AxB) ALP of transaction 4,22,12,378 Actual transaction value 4,32,74,022 Difference between ALP and transaction value 2.52% Transaction value within 5% of ALP Yes Computation of working of adjustment having regard to the value of international transactions of assessee for the A.Y.2007-08 : Particulars Amount (in Rs.) Total sales 1,11,86,31,546 Less : Operating cost 98,46,33,243 Operating profits ('OP') 13,39,98,303 OP/sales 11.98% Arm's length margin as determined by AO 13.23% Transfer Pricing adjustment-Addition on account of arm's length price made by ....
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....ing so, the then Ld. TPO had misplaced facts of case. 32. The contention of the assessee before the AO was as under :- "During FY 2004-05, assessee recorded an amount of Rs. 23,658,600 in relation to an Insulating taping machine (capital asset under consideration) purchased by it to from its AE. The machine had been purchased by the AE during FY 2001-02 from an unrelated entity and was provided to assessee during FY 2001-02 only. Such machine was put to use by the assessee on October 1, 2002. No charge was made for the same by the AE in FY 2001-02. However, the AE raised invoice for such machine on the assessee during the FY 2004-05. Further, such machine had originally been purchased by AE for CHF 9,12,279 (INR equivalent at the exchange rate prevalent on the date of purchase i.e. February 22, 2002 is Rs. 2,62,37,144). During the FY 2004-05, AE transferred this machine to assessee at a consideration of Euro 420,000 equivalent to INR 23,658,600. The assessee in its transfer pricing documentation had mentioned that had it capitalised the machine in its books of account on October 1, 2002 (date of machine put to use), during the period October 1....