TaxTMI 
TaxTMI 
2020 (1) TMI 1008
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....facts and circumstances of the case the AO following the directions of the DRP erred in making an adjustment of Rs. 2,38,65,077 in relation to determination of Arm's Length Price relating to the Appellant's international of engineering design services; 1.3 On the facts and circumstances of the case the AO following the directions of the DRP erred in making an adjustment of Rs. 2,07,21,181 in relation to determination of Arm's Length Price relating to the Appellant's international transactions of Reimbursement of Management fee expenses; 1.4 On the facts and circumstances of the case the AO following the direction of the DRP erred in denying the (+/-) 5% range benefit available under proviso to Section 920(2) of the Act. It is prayed that the learned AO be directed to consider the international transactions of the Assessee as arm's length and accordingly the total transfer pricing adjustment of Rs. 6,66,56,120 should be deleted. Ground no. 2 2.1 The AO following the directions of the DRP has erred in law and in facts of the case in not allowing the deduction under section 10B of the Act of Rs. 7,14,80,242 as claimed by....
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....ee in profit level indicator of Baroda unit is resulting into double taxation of management fee. 2. It is further respectfully submitted that even if adjustment is made, same ought to be restricted to the amount of international transactions only and shall not be made on entire cost of the Assessee's Baroda unit. The Appellant also craves leave to add, amend, alter, change, delete and edit the above grounds of appeal before or at the time of the hearing of the appeal. 2. The issue raised by the assessee in ground number 1.1 and the additional ground No. 1 vide letter dated 17th February, 2019 is interconnected, therefore we have clubbed both of them for the purpose of the adjudication. 2.1. The issue raised by the assessee in ground no 1.1 is that the Ld. DRP erred in confirming the ALP adjustment of Rs. 2,20,69,862/- in relation to manufacturing of valves transactions with its AE. The assessee also claimed that if any disallowance is confirmed for the management expenses, then the margin of the assessee should be enhanced by such amount. 3. Briefly stated facts are that the assessee is private Limited company and engaged in the activities as detailed....
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....ee has categorized the above transactions into 5 different heads for the purpose of TP study. The details of the categorization of the transactions are as under: "4.2. Overview 4.2.1. During the year ended March 31, 2007, TVCIPL engaged in the following international transactions: i. Activities carried out in relation to valves, components etc. * Import of raw materials, parts etc; * Import of finished goods for resale; * Export of valves and valve components; * Export of finished goods (resale); and * Receipt of commission. ii. Provision of support services * Receipt of service charges for support services. iii. Services received * Payment of management charges. iv. Provision of design related services v. Reimbursements 4.2.2. For the purposes of our analysis, this report is divided into five sections namely, Activities carried out in relation to valves, components, etc.; Provision of support services; Receipt of Management charge; Provision of design related services and Reimbursements." 3.5. The Assessee for benchmarking its transactions class....
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.... 3. Virgo Engineers Ltd. 12.59% 3.10. Accordingly, the TPO determined the average PLI of the comparable at 25.88% for comparing the same with the PLI of Baroda and Chennai Unit separately. However, the TPO has made risk adjustment on account of bad debts, lower inventory, capacity utilization and market plan in the average mean of PLI of the comparables while working out the ALP of the Chennai Unit by 2%. Thus the PLI of the comparable was taken at 23.88% in case of Chennai Unit. 3.11. The TPO further worked out the PLI of Baroda and Chennai Unit at 18.42% and 17.01% respectively. 3.12. However, the assessee objected on the working of the AO by observing as under: 1) Pumps and valves are intrinsically connected to each other as they are used together. Therefore pump manufacturing company should also be considered/ selected as comparable. 2) Turnover filter of Rs. 25 crore is not acceptable. As such it should be of Rs. 1 crore. 3) ASCO India Limited is manufacturer of solenoid Valves and its 30 % turnover from sale of spares and others. Therefore the same should not be selected as comparable. 4) All three comparable cannot be acc....
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....rt of raw materials, parts etc; Import of finished goods for resale; Export of valves and valve components; Export of finished goods (resale); and Receipt of commission. The assessee is primarily engaged in manufacturing activities and is also engaged in distribution based, on varied customer demands. The manufacture of a valve and distribution of spares accordingly to the assessee, Is an integrated activity- within the valve industry and. accordingly wants its operations to be viewed as one consolidated function. But, distribution forms a small fraction of the total revenue of the company and is essentially undertaken to supplement the product range already offered to customer. All these suggest that the assessee company is basically a normal company. There is no transaction which can be stated to be different and be considered to be interlinked. Every business enterprise has purchases and sales. But they are not interlinked. Paragraph 1.42 of the OECD guidelines provide for evaluation of combined transactions where such transactions are closely linked or continuous and cannot be evaluated separately. As per the OECD guidelines, examples may include, (a) long-term contracts ....
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....her risk as compared to Chennai Unit which .is catering to the AEs only. In this regard, assessee has submitted to the TPO that the bad debt ratio to sales of, comparables was 0.23% whereas same for the Chennai unit was Nil. Similarly, Chennai unit had lower inventory, capacity utilization risk as it is catering to AEs and its marketing plan are based on forecast received from the AEs. Considering the same, the same risk adjustment is also allowed. The Panel decided to adopt the above average PLIs and directs the TPO/AO to compute the ALPs and the compute TP adjustments." Being aggrieved by the order of the Ld. DRP the assessee is in appeal before us. 4. The learned AR before us filed three paper book running from pages 1 to 704, 1 to 1041 and 1 to 122 and proposed to include one company namely KAR Mobile in the list of comparable finally decided by the learned DRP. The learned AR in support of his contention further submitted that the impugned company was passed in the search filters applied by the TPO for the assessment year 2011-12. Therefore such company should also be considered for the year under consideration. The learned AR drew our attention on pages no 178 of Volume....
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....der consideration in the given facts and circumstances. 6.1. Admittedly, the name of the impugned company was proposed by the assessee 1st time before the learned DRP in the list of comparable companies selected in pursuance to the fresh search filters as adopted by the TPO. Keeping in view the fact that such company has already been included as one of the comparable in the own case of the assessee in several assessment years as mentioned above, we find considerable force in the argument of the assessee. 6.2. However, there is no law suggesting that the comparable selected one year should necessarily be selected in the other. It is because the filter applied can be different from one year to other depending upon the facts and circumstances of each year. Therefore, we cannot direct the AO to include such company as comparable but he can certainly consider the inclusion of such company in the list of comparable companies in the light of search filters adopted by him for the year under consideration. Accordingly, in the interest of justice and fair play we remit the impugned issue to the file of the AO for fresh adjudication as per the provisions of law and in the light of the a....
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....assessee as per the search filters adopted by the TPO, requires consideration. Therefore, we set aside the order of the learned DRP to the file of the TPO for fresh adjudication as per the provisions of law. 7.1. It is also pertinent to note that the company namely KAR Mobiles suggested by the assessee for inclusion in the list of comparables, is also available in the fresh comparables furnished by the assessee before the learned DRP which, we have already set aside the file of the TPO for fresh adjudication as discussed above. In case the AO/TPO agrees to include the above company i.e. KAR Mobile, then there is no need for the AO/TPO to consider the fresh TP study filed by the assessee before the ld. DRP. 7.2. In view of the above, and after considering the facts in totality, we are of the view that the entire issue raised in the main ground of appeal is set aside to the file of the TPO for fresh adjudication in the light of the above stated discussion and as per the provisions of law. Hence the main ground of appeal of the assessee is allowed for the statistical purposes. However, the additional ground raised by the assessee is allowed. 7.3. The issue raised by the asses....
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....parable. 2) In case of other comparable namely Power Soft Global Solution Limited, the assessee submitted that this company is engaged in IT service, outsourcing engineering sources, GIS services RFID services. Further it has not reported segmental result therefore it should not be treated as suitable comparable. 7.8. However, the Ld. TPO rejected the contention of the assessee by observing that - 1) In case of Rolta India limited the assessee did not provide any difference in Indian AS and IFRS which affected the profit. 2) In case of power soft global solution, all the segments of the company are the parts of engineering design service or engineering service. 7.9. Accordingly, the AO determined the ALP of Rs. 20,09,28,656/- by using PLI of 23.18% and made the addition of Rs. 1,96,07,699/- to the total income of the assessee. 7.10. Aggrieved assessee preferred an appeal before the Ld. DRP and reiterated the submission before the Ld. DRP. However the Ld. DRP partly allowed the appeal of the assessee by observing that the power soft Global solution was a software development company and it was not a suitable comparable. Accordingly the ld. DRP exc....
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....ent of Rolta for the stand alone segment for the year under consideration was not available. Accordingly the assessee claimed that such consolidated financial statements cannot be used as comparable. The learned AR also drew our attention on pages 611 volume III where the financial statements of the comparable were placed. The learned AR in support of his contention referred to the following judgments: 1. American express (44 Taxmann.com 389 (Delhi Trib.) (para 21) Page 749 2. 3DPLM Software Solutions Ltd. vs. Dy.Cit (2014) 42 taxmann.com 333 (Bang. - Trib.) (Para 12.4.1.) Page 777 8.3. The learned AR also alternatively submitted that the TPO has accepted a comparable namely KLG Systel Ltd. which is engaged in life cycle management. Accordingly it claimed that the similar company engaged in product life cycle services namely Geometric should also be considered as one of the comparable. The learned AR also claimed that the impugned company is also offering engineering Solution services. Thus the learned AR prayed for the inclusion of this as comparable company. However, the learned AR further submitted that if Rolta is rejected from the set of comparables, then ....
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....K 100 Rolta Beneulx B.V. Nehterlands 100 Rolta Canada Limited Canada 100 Rolta Deutschland GmbH Germany 100 10.3. The financial statement of Rolta India Ltd was for the entire group which was used as comparable in the case of the assessee company. In our considered view the consolidated financial statements cannot be compared with the assessee. It is because the consolidated financial statement of Rolta India Ltd. also contain the information/financial result of the entire group. As such, the provisions of the Act requires that only the Indian company of Rolta group can be considered as one of the comparable for working out the ALP of the assessee. The consolidated financial statements of Rolta are placed on page no. 603 of the paper book. 10.4. In holding so we also draw support and guidance from the order of Hon'ble Mumbai tribunal in the case of Capgemini India Private Limited, ITA no 7861/MUM/2011 dated 28-02-2013 wherein it was held as under: "5.3.3 We first deal with the pleas raised by the ld. Sr. Counsel for using consolidated results for the purpose of comparison of margins. The ld. CIT-DR has pointed out that the four comparabl....
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....ansactions carried out with its associated enterprises. As, we have rejected Rolta India Ltd as one of the comparable, we do not find any reason to adjudicate the issue for the inclusion of Geometric Software Solution Co Ltd. Hence, the ground of appeal of the assessee is partly allowed for statistical purposes. 10.6. The issue raised by the assessee in ground no. 1.3 is that the Ld. DRP erred in confirming the ALP adjustment of Rs. 2,07,21,181/- in relation to Reimbursement of management fees expenses. 10.7. The assessee has entered into an agreement with Tyco Flow Control Ote. Ltd. Singapore (TFCA) to receive the Management and marketing services as detailed under: "S.No. Type of service Nature of service provided 1. Management fee 1 a IT Department Data Network/Infrastructure consultancy Desktop Hardware/Software consultancy Email Accounts and Access Remote Access (VPN/Dialup) support Technology & Infrastructure Consultation 1 b HR Department Strategic Initiatives Provides leadership and partners with business u....
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....thereon. 2 Marketing fees 2 a ProductManagement Transfer Price Administration Transfer of Technology Increase product penetration Product innovation & technology Product benchmarking Expand product applications 2 b Marketing Services Maintain corporate identity Print collaterals - literature, posters, launch manuals Administers the Tyco valves website Events management - sales conferences, exhibitions Branding & positioning" The TFCA charge Markup 5% on cost. 10.8 However, the TPO found from the details filed by the assessee that the assessee did not file the invoice of management expenses amounting to Rs. 1,25,56,602/-. Therefore the TPO accordingly benchmarked such expenses at Rs. NIL. Accordingly the TPO made upward adjustment of Rs. 1,25,56,602/- only. 10.9 The TPO further found from the details filed by the assessee that the some of the invoices pertains to earlier year. However the assessee did not make any provision of thes....
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....r than any adjustment. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 10.15. The learned AR before us submitted that the assessee has claimed total management fee expenses in the year under consideration amounting to Rs. 4,59,80,354/-only. The ld. AR for the assessee has further filed the breakup of such expenses as detailed under: i. Management fee of Rs. 1,25,56,602/- where the debit notes or not available. ii. Management fees of Rs. 10,40,197/- where the debit note of the earlier years are available. iii. Management fees of Rs. 3,23,83,555/- being 20% of ad hoc disallowance along with 10% markup thereon. 10.16. At the outset, the learned AR, before us submitted that he doesn't want press for the management fees of Rs. 10,401,97/- where the debit note of the earlier year were not available. 10.17. The learned AR further submitted that the assessee has already made the disallowance of management fees amounting to Rs. 1,25,56,602/- on account of non-deduction of TDS. Accordingly the learned AR claimed that there cannot be further disallowance to the extent of such management fee expenses. 10.18. The le....
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....d counsel for the assessee, then the impugned expenses will be allowed as deduction to the assessee in the year in which the assessee complies the provisions of TDS. Thus we disagree with the contention of the assessee for not computing the arm length price of such management fees as discussed above. Furthermore, there was no documentary evidence filed by the assessee in support of such expenses. Therefore, we are inclined to confirm the same by upholding the order of the authorities below. We are also not oblivion to the fact that there cannot be double addition of the same amount by treating the ALP at nil and on account of nondeduction of TDS under the provisions of the Act. As such, there will be the addition of one-time for the amount of Rs. 1,25,56,602.00 only. Moreover, it is not the case of the assessee that there was the double addition for the amount as discussed above and for the reasons elaborated in the preceding paragraph. It is also pertinent to note that the assessee will not get the benefit by way of deduction of the impugned amount even after complying the provisions of TDS in future years. It is because the ALP of such transaction has been determined ....
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....fit. First of all the assessee did not furnish the basic requirements as desired by the Income Tax Department and at the same time it has not been penalized. But, the provisions of law is supreme which requires that the TPO to determine the ALP of the transactions referred by the AO. The TPO as such cannot make the disallowance on ad hoc basis. In view of the above and after considering the facts in totality, the ground of appeal raised by the assessee is partly allowed. 13. The 2nd issue raised by the assessee in the additional ground of appeal date 09-02-2019 requested to direct the TPO to restrict the adjustments if any to the amount of international transactions only. 13.1. The provisions of section 92(1) of the Act requires to determine the income arising from the international transactions having regard to the arm's length price. Further the meaning of international transaction has been defined under section 92B(1) of the Act i.e. between 2 or more associated enterprises. Thus from the above provisions it is clear that the adjustment in determining the income shall be limited to the extent of international transactions entered between the associated enterprises. Accordi....
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....it was clarified that the AO shall accept the price declared by the assessee if such price does not varied up to 5% less or more than with the ALP determined by the AO. 13.6. However, the AO observed that the price claimed by the assessee is above 5% of the ALP determined in its case. Therefore the assessee does not fall in the proviso as provided in proviso to section 92C(2) of the Act. The AO accordingly rejected the claim of the assessee. 13.7. Aggrieved assessee, preferred an appeal before the Ld.DRP who confirm the action of the TPO/AO by observing as under: "Sr.No. Company name Comparables for Baroda Unit Comparables for Chennai Unit 1. KSB Pumps Ltd (Valves Segment) 23.95% 23.95% 2. Virgo Engineers Ltd. 17.19% 17.19% Mean 20.57% 20.57% ........... 35. On the +/-5% margin, the Panel relied on the decision of the ITAT Hyderabad Bench in the case of M/s.Deloittee Consulting India Pvt.Ltd. (ITA Nos.1082 & 1084 of 2010). In this case the ITAT stated that from the Instructions Nos.12 and 14/2001, 8/2002 and 5/2010 the intention of the lawmakers and the stand of the Department is clear that 5% margin is not, and n....
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....he revenue have been able to point out any basis or material or criteria to controvert or to rebut the findings and conclusion arrived at by the ld. DRP. Though the ld. counsel for the assessee made a specific ground of appeal for the benefit of adjustment of + 5% to be given while determining the Arm Length Price, the ld. counsel for the assessee has not been point out as to how and in what manner, the order of ld. DRP in rejecting this claim of the assessee is improper and unjustified. Since both the parties have not been able to controvert the findings recorded by the ld DRP or point out any material to enable us to take a view other than view taken by the ld. DRP, we do not want to interfere in the order of the ld. DRP. 16.1 We also draw our support and guidance from the judgment Hon'ble Delhi ITAT bench in the case of Globle Ventedge Pvt Ltd v/s DCIT reported in 37 SOT 1 where in it was held as under: During the course of hearing of this appeal, neither the ld. counsel for the assessee nor the ld. D.R. for the revenue have been able to point out any basis or material or criteria to controvert or to rebut the findings and conclusion arrived at by the ld. CIT(A) exce....
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....irmed the order of the AO. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 17. The learned AR before us submitted that this tribunal in the own case of the assessee in the earlier assessment year 2003-04 in ITA number 2981 & 246/Ahd/2008 vide order dated 23-0-2012 has decided the issue in favor of the assessee. 18. On the other hand, the learned DR vehemently supported the order of the authorities below. 19. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that the impugned issue has already been decided in favor of the assessee in its own case (supra). The relevant extract of the order is reproduced as under: "6. We have heard both the sides at some length. We have also perused the orders referred before us. Before we appreciate the facts of the case, we may like to place on record the scope of the introduction of section 10B in the Statute. Under the provisions of section 10A of the Income-tax Act, a five year tax holiday is allowed to industrial undertakings manufacturing or producing articles or things in a free trade zone subject to certain con....
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.... the year of commencement of production, it would not be able to claim such deduction in the subsequent years, unless the said initial test on the date of the starting point has been satisfied. Section 10B therefore do not give any indication that in each year of claim it's eligibility should be newly established; because the relevance of the phrase "newly established undertaking" is only to identify initial year of period for which assessee is eligible for claim of exemption u/s.10B of IT Act. Therefore, at the outset, it is justifiable to concentrate on the fact that whether the Chennai Unit was established in the year under consideration or not. On examination of the facts recorded by the AO, it was noticed that the Chennai Unit was established/acquired in the year 2000-01. This fact was rather noted by the Hon'ble Gujarat High Court in the aforecited decision dated 11.4.2008 and made an observation that the year 2001-02 was found to be the first year of the claim of deduction u/s.10B of IT Act. Due to this reason, reliance can be placed on Saurashtra Cement & Chemical Industries 123 ITR 669 (Guj.) and thus we hold that in the absence of any disturbance in respect of rel....
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....on case laws cited was CIT vs. Nayyars Minerals Exports Pvt.Ltd. 231 ITR 864 (H.P.). A calculation in this regard has also been furnished; however, at this stage of second appeal no verification about the correctness of the said calculation is possible. Let it be as it is; notwithstanding this alternate plea do not survive anymore because we have already taken a view in assessee's favour as discussed in above paras. In the result, we hereby confirm the findings of ld.CIT(A), therefore the claim of deduction u/s.10B is directed to be allowed." 19.1. In view of the above, we do not find any reason to uphold the finding of the learned DRP. Accordingly, we set aside the order of the learned DRP and direct the AO to allow the benefit to the assessee for the deduction under section 10B of the Act. Hence the ground of appeal of the assessee is allowed. 19.2. The interconnected issue raised by the assessee in ground no 3 is that the Ld. DRP erred in confirming the addition of Rs. 79,684/- on account of full depreciation charged by assessee on asset costing less than Rs. 5000/-. 19.3. The AO observed from schedule 18 clause 1(b) of the financial statement of the assessee that t....