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TaxTMI 
TaxTMI 
TaxTMI 
2020 (9) TMI 1098
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..../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 & administrative expenses 2012-13 8.78 crores Under-recovered selling & administrative ....
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....r 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. However, in case the differences between the international transactions and uncontrolled comparable are significant, but reasonable accurate adjustment can be made to eliminate the differen....
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....ing 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 cost/expenditure in respect of extraordinary items, non-recurring events which are extraordinary in nature. She further referred to the guidance note issued by the Institute of Chartered Accountants of India (ICAI) for the definition of the term 'extraordinary i....
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.... 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 extraordinary items in the assessee's financial accounts. Further, the learned Departmental Representative submitted that the assessee being a tested party is not permitted to make adjustment in its book profit on account of capacity utilisation etc. since as per the Rules, adjus....
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....ident 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 devoid of cogency. The learned counsel of the assessee's submission that it was Assessing Officer's duty to bring the details of adjustment required in comparables is totally unsustainable as the initial duty in this regard is cast on the assessee. The assessee has miserably failed....
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....chmarked 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, Incorporated 6.00% 5 Benthos Inc 6.00% 6 Blue Industries 7.25% 7 Ocean Equipments Manufacturing and Sales Company 10.00% 8 Hardings INC 12.00% Assessee claimed that since the arithmetic mean of royalty rates of comparable agreements are 10.30% is higher than royalty rate of 4.00% / 7.00%, the payment of royalty paid by ....
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....al 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 not been correctly determined by the taxpayer, can substitute their own ALP on the basis of material or information furnished by the assessee or collected by them. However, such ALP has to be determined having in mind provisions of sections 92 and 92C and other rules and regulations. While determining ALP, tax authorities are bound to follow principles of natural justice and be fair and reasonable to the taxpayer. Any mate....
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.... 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 finds that the cases given by the assessee are comparable on the basis of FAR analysis, the matter ends. He will accept them and then determine the average profit. (iii) If the TPO is not satisfied as to the comparability of some of the cases given by the assessor, he will exclude such cases from the final list of comparables, after giving cogent reasons. (iv) The TPO may possibly find that the assessee has done cherry picking and ignored the comparable ....
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.... 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 make the computation of arm's-length price as per the Rules and law. As rightly pointed out by the DRP, the TPO cannot wash his hands of the statutory duties thrust upon him. For the Assessment Year 2013-14, the DRP accepted the rate of royalty for trademark at the rate of 1% as under :- "6.21 ...................It is seen that the assessee has entered into two type of agreements. The first is a royalty agreement for use of trademark and specifies a royalty rate of 1% on net sales (net sales e....
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.... 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, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.]" Examining on the touchstone of above, we note that the method applied by the DRP doesn't fall in any of the methods prescribed in the Act or the Rule. The method applied by the DRP doesn't even fall under Section 92C(1)(f) as the other method defined in Rule 10AB describes the other method to be any method which takes into account the price which have been charged or paid for similar uncontrolled transaction under similar circumstances considering all the relevant f....
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.... 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 assessee in this regard is allowed. As we have already upheld the DRP action of sustaining the 1% rate of royalty for Assessment Year 2013-14 for the trademark, the Revenue's grounds against the DRP direction, in this regard to uphold the computation at Nil by the TPO fails in view of our discussion herein above. Another issue raised is that DRP/AO erred in adding unpaid service tax payable on the receivables not collected by GEPIL as on 31 March 2010. That AO erred in not allowing deduction of service tax paid till 30 September 2010 i.e. due date of filing ROI 2010-11 Rs. 3.52 crores 201....
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....cept 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 Tyres (2002 255 ITR 273) and several decisions of Hon'ble Bombay High Court, following the same, wherein it is held that no adjustment in book profit is to be done unless mandated in the Act. Since, the Act in Explanation (1) of section 115JB(2) does not provide for any such adjustment, this issue is decided in favour of the assessee. Another ground is that AO erred on facts and in law, in making an addition of the four-fifth expenditure disallowance relating to merger expenditure, 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 a....