TaxTMI 
TaxTMI 
2020 (9) TMI 1098
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....t the outset, it is noted that in ITA No. 956/Mum/2018 there is a delay of 63 days in filing the appeal. The reasonable cause for the delay has been attributed to the reason that concerned person was medically unfit. In this regard, assessee has duly submitted an Affidavit in support of the reasonable cause. Upon hearing both the parties and perusing the records, we are inclined to condone the delay. Accordingly, the delay in ITA No. 956/Mum/2018 is condoned. The various grounds arising in the assessee's appeal and cross objection are dealt as under. One common issue raised in these appeals relate to disallowance of the claim of adjustment for extraordinary expenses relating to recovery of production overheads, selling and administrative overheads, one time technological fee for Chennai metro in the Transport segment. A.Y Amount Items of adjustment claimed 2010-11 3.52 crores Unabsorbed production overhead 2011-12 2.42 crores Unabsorbed production overhead 2012-13 6.03 crores Unabsorbed production overhead 2010-11 3.4 crores Under-recovered selling & administrative expenses 2011-12 7.27 crores Under-recovered selling & adm....
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....able or not furnished ? iv) Whether the claim of adjustment sought by the assessee presupposes that comparables are utilising their full capacity ? v) Whether the adjustment of part of the deduction overheads and selling and administrative overheads sought is extraordinary ? The DRP proceeded to examine these issues. It referred to Rule 10B and observed as under :- "3.11 It will be relevant to refer to Rule 10B(3) for the purpose of consideration of the issue of the comparability adjustments. Rule 10B(3) provides that an uncontrolled transaction shall be comparable to an international transaction, if none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions or likely to materially affect the price, cost or the profit arising from such transactions in the open market or reasonably accurate adjustment can be made to eliminate the material effect of such differences. In other words, if the difference between the international transactions and uncontrolled comparable are insignificant, which do not affect the price, cost or transaction, no comparable adjustment are required....
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....respect of comparable companies. The DRP observed that the assessee in its submission has nowhere demonstrated data, manner and methodology of absorption of overheads by the comparables selected and used for benchmarking under the TNM method. The DRP referring to the case laws found that similar claim by assessee of not working at full capacity and recovery of cost at a lower rate were rejected by the Tribunal. In view of the cases referred above, the DRP upheld the action of TPO denying the adjustment on account of extraordinary production overheads and extraordinary selling and administration. Against this order, assessee is in appeal before us. The learned counsel of the assessee in his submissions submitted that the extraordinary expenditures were required to be removed for proper comparison. As regards one-time technological assistance fee of Rs. 2.36 crore in relation to Chennai Metrorail project, she submitted that the same was necessary to give the necessary upgrade to the system. She submitted that as per the Rules, in order to compute the correct profitability from an international transaction of the tested party, that is, the assessee, it is necessary to eliminate ....
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.... should be made and it should not be made at an entity level. She further submitted that in assessee's own case for assessment year 2009-10 & 2010-11 on similar facts, it has also been accepted by DRP that addition should be made only in respect of international transactions. Hence, she submitted that without admitting any disallowance of adjustment for extraordinary overheads it is her contention that if adjustment for extraordinary overheads are not allowed by the TPO and adjustment are restricted to AE transaction only, then assessee's claim would fall under the safe harbour rule. The Departmental Representative in the submissions has submitted that extraordinary expenses and production overheads were disallowed by the TPO correctly. The learned Departmental Representative submitted that these are not extraordinary expenses. Since such expenses have been incurred year after year, he submitted that these are regular business expenses for any business concern. He further submitted that the Accounting Standard - 5 mentions that extraordinary items need to be disclosed in the statement of Profit & Loss Account. He submitted that there is no such disclosure of extraordinar....
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....the assessee has proceeded to make adjustment in its profits despite the assessee being the tested party. There is nothing on record to suggest that in the comparables submitted, whether there was any adjustment for extraordinary and non-recurring items. This was required as evident from the various case laws referred by the DRP. Assessee itself being the tested party cannot adjust its profits without ensuring corresponding adjustment in the result of comparables. As regards the one-time technical assistance fee for Chennai Metrorail project is concerned, we find ourselves in agreement with the TPO that it is very much normal business expenditure of the assessee and same cannot be said to be extraordinary. That DRP has not specifically dealt with this item is not of significance. Furthermore, we find that it is an accepted accounting principle that extraordinary expenditures have to be identified separately in the financial accounts. In the financial accounts of the assessee there is no such identification of extraordinary items. Hence, the deduction of expenditure, claiming them to be extraordinary expenses for the purpose of Transfer Pricing study is clearly an afterthought de....
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....technical services. Assessee had applied TNMM under the Power segment. The TPO rejected the assessee's approach. He held that entity level benchmarking of royalty transaction was not acceptable. Further, he held that under the transfer pricing provisions, international transactions have to be benchmarked separately. As Royalty constituted a separate class of transaction, it should be benchmarked separately. In this regard, the TPO relied upon certain case laws. In response, the assessee submitted alternative benchmarking by submitting comparable analysis with 8 agreements for the issue of royalty for technical know-how and 4 comparables for benchmarking royalty for trademark fees. The assessee's submission of 8 comparable agreements and royalty fee before TPO were as under:- "1) Comparable analysis of technical know-how Royalty agreements : In this connection, the assessee submitted following eight comparable agreements and royalty rates Sr.No. Licensee Name Royalty rate 1 Ocean Equipments Manufacturing and Sales Company 15.00% 2 Parker - Hannifin corporation 16.67% 3 Aspect Systems 9.75% 4 Aspect Systems, Incorp....
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....he DRP in this regard as under for Assessment Year 2013-14. "6.13 We are conscious of the fact that the DRP, while deciding the same issue in the preceding year, has upheld the decision taken by the TPO to benchmark the transaction at nil in absence of any proper comparable forthcoming from the assessee using CUP as most appropriate method. 6.14 In this regard, the decision of the five member Special Bench of ITAT Bench in the case of Aztech Software Technology 294 ITR (AT)(32)(Bang)(SB) is found to be highly relevant. 133. Having regard to the statutory provisions, particularly the mandate of sections 92(1) and 92D read with relevant rules, we hold that it is obligatory on the part of the taxpayer to furnish information relating to controlled international transactions, select a suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. The taxpayer has further to cooperate in the determination of the ALP by the tax authorities by furnishing all relevant information. The tax authorities in cases where they are of the opinion that ALP has ....
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.... But even such approximations and estimations must satisfy dictates of justice and fair play and look reasonable. It cannot be arbitrary and capricious. The order of TPO is appealable and therefore, it must be objective, contain detailed reasons, conform to regulations and should be seen as just and fair. 6.15 In the case of Serdia Pharmaceuticals (India) Pvt Ltd 44 SOT 391 (Mum), it was held by the Bench that there cannot be a case where no method can be applied to the transaction. Even if all the methods are considered inappropriate, the method which is less inappropriate is to be applied. 6.16 The method of carrying out the exercise of determination of arm's length price of a transaction has been very lucidly brought out by the bench in the case of Bayer Material Science (P.) Ltd. [2012] 18 taxmann.com 60 (Mum.) where in the Bench has elaborated that: (i) As the assessee knows the nature of its business well, it is he who always has the prerogative of choosing the comparable cases. (ii) Once the assessee has chosen the comparable cases, then it becomes the duty of the TPO to find whether these cases are, in fact, comparable or not. If he f....
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.... to be not suited to the transaction under benchmarking. He may give opportunity to the assessee to produce desirable comparables to his satisfaction. Of course, he is permitted to effect any adjustment he may like to make in light of the variations noted in order to bring these comparables as close to the transaction under benchmarking as possible. However, if the TPO does not succeed in getting suitable comparables from the assessee, then it is his duty to either get his own comparables or make necessary adjustments to the comparables filed by the assessee and ensure that the task of determination of arm's length price is completed satisfactorily. He cannot just wash his hands off by claiming that the assessee has failed to produce proper comparables and hence the arm's length price cannot be determined." We find ourselves in full agreement with the above said proposition of the DRP. Accordingly, we are of the considered opinion that the determination of arm's length price as Nil by the TPO is not at all sustainable. The assessee had duly provided the details, agreements and comparables. If the TPO is not in agreement to the same, the onus now shifts to the TPO to m....
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....of the Act, which reads as under :- "92C.(1) The arm's length price in relation to an international transaction or specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board." The other method of determination of ALP is defined in Rule 10AB as under:- "10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, wit....
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.... Hence, from the plain reading of the relevant provisions and the ratio laid down by the Hon'ble jurisdictional High Court, it can be concluded that the law does not permit the TPO or DRP to determine the arm's length price on estimation or adhoc basis. The learned Departmental Representative's plea in this regard is that since the authorities below have failed to follow the prescription of the Act and law, the matter should be remanded to them is not at all sustainable as we find that assessee has duly submitted the comparables and agreements and if the authorities below rejected the same, but failed to follow the prescription of Act, the duty cast upon them, the assessee cannot be put through the rigours of 2nd round of litigation without any fault of its own. In this regard we draw support from the above decision from Hon'ble Jurisdiction High Court which confirmed the order by ITAT similar to this case. Accordingly, in the background of aforesaid discussion and precedents, we are of the considered opinion that assessee's grievance of ad hoc determination of arm's-length price for royalty paid by the TPO and the DRP succeeds. Accordingly, the ground raised by the ....
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....ng deduction of service tax on payment basis in current year which was disallowed u/s 43B in previous year (2010-11 Rs. 9.24 crores). This is a factual issue. The AO is directed to reexamine the same in light of our order in above ground. In case the amount has been disallowed in the concerned assessment year for not payment, the assessee's ground deserves to succeed. Additional ground :- AO erred on facts and in law in making an addition of the transfer pricing adjustment to the book profits of the Appellant for the purposes of section 115JB of the Act, without appreciating that book profits of a company cannot be adjusted except as provided in Explanation 1 of Section 115JB(2), and transfer pricing adjustment is not one of the classes of adjustments provided in that Explanation. (2012-13 Rs. 59.27 crores). Since the aforesaid additional ground is a legal issue we admit the same on the touchstone of Hon'ble Supreme Court decision in the case of National Thermal Power Co. Ltd. vs Commissioner of Income Tax on 4 December, 1996 (1998) 229 ITR 383. We find that this issue is to be decided in favour of the assessee on the touchstone of Hon'ble SC decision in Appollo Tyre....