TaxTMI 
TaxTMI 
2021 (11) TMI 1059
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....nt primarily relate to the trading of dashboard instruments, tachographs, sensors and other allied components for the automobile industry. (iii) Services segment In the services segment, the assessee renders application / specific services to its Associated Enterprises ("AEs") with regard to development of software. 3. During the AY 2012-13, several international transactions took place between the assessee and its AEs, including purchase of raw materials for the manufacturing segment and the aforesaid provision of SWD services and in the course of assessment, the AO made a reference to the TPO for examination of the arm's length price of the aforesaid transactions. 4. On such reference, the TPO passed an order dated 25.01.2016 under Section 92CA of the Income-tax Act, 1961 ("the Act") determining the TP adjustment with respect to manufacturing segment as Rs. 89,85,85,564/- and the TP adjustment with respect to software development services ["SWD services"] segment at Rs.11,77,20,997/- totalling to Rs.101,63,06,561/-. 5. In the draft assessment order dated 28.03.2016 the aforesaid TP adjustment was incorporated, apart from the additions on account of disa....
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....R) 6.34% As reflected in the TP Order: Operating Income Rs. 483,10,60,000/- Operating Cost Rs.539,43,70,000/- Operating loss (Op. Income - Op. Cost) Rs.-56,33,10,000/- Net mark-up (OP/OR) -11.66% 11. In the assessee's TP study, the following adjustments were made to the operating cost: * costs associated with unutilised capacity. * costs on account of high customs duty 12. On making the above mentioned adjustments, the assessee arrived at a margin of 6.34% as against -11.66% arrived at by the TPO. Though the TPO accepted the comparables selected by the assessee, he did not grant an adjustment for under-utilisation of capacity and an adjustment for expenses incurred towards customs duty. The TPO also treated amortization of goodwill as an operating expense while computing the margin of the Appellant. Filters applied by assessee in its TP study: Step Description 1. Companies for which the latest data available was for a period ended prior to 31.03.2010 - rejected 2. Companies reporting net sales >Rs. 1 crore - selected 3. Companies with positive net worth - selected 4. Companies reporting average m....
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....of appeal which are argued by the assessee before us. Ground No.4 : Capacity utilization 17. Before us, the ld. AR submitted that the assessee was not able to operate at its optimum capacity and could not recoup its fixed costs due to industry slowdown, leading to lesser demand and high depreciation cost, since the economy had faced global recession and the industry meltdown had hit the automotive industry and affected the opportunity of the assessee to acquire new customers. This resulted in underutilization of the production capacity in the factory, resulting in low utilization of the available capacity for the FY 2011-12 to manufacture the products. The assessee operated at 40.39% of its installed capacity whereas the comparable companies chosen by the assessee operated at an average of 77.42%. It is evident from the capacity utilization of 40.39% that the assessee had under-utilized its capacity considering low demand for its products. Hence, the assessee could not manufacture at optimal capacity and recoup the fixed expenses for the year and the adjustment for under-utilization of capacity is warranted. 18. The ld. AR submitted that the TPO did not grant an adjustment....
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.... (Pune) * Kirloskar Motors Pvt. Ltd. v. ACIT reported in [2012] 28 taxmann.com 293 (Bangalore) 20. Further, it is submitted that in the case of Haworth India (supra), this Tribunal had held that the adjustment, if any, can be made to eliminate the material differences between the assessee and its comparable companies to the extent these adjustments are reasonably accurate. Such adjustment can be allowed only in a case where assessee is able to furnish accurate and credible evidence in this regard. In the relevant case law, since Haworth India had not been able to furnish credible and accurate information with regard to capacity utilization, the adjustment was not allowed. However, in the assessee's case, it has provided all information practically possible. Sufficient evidence has been provided in the form of capacity data of comparable companies as well as industry average from the Federation of Indian Chambers of Commerce & Industry ("FICCI") survey report. Hence principally capacity utilization adjustment should have been granted. The assessee also relies on the following judicial precedents in this regard:- * Global Vantedge P. Ltd. v. DCIT reported in [201....
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....009)]; Skoda Auto India (P) Ltd. Vs. ACIT [Hon'ble Pune Tribunal (122 TTJ 699)] ; E-Gain Communication (P) Ltd. Vs. ITO [Hon'ble Pune Tribunal (118 TTJ 354)] and Global Vatedge Pvt. Ltd. Vs DCIT [Hon'ble Delhi Tribunal (ITA Nos.2763 & 2764/De1/2009)] are not applicable considering the fact that the expression "net profit margin realized" means the net profit margin actually realized and actual cost incurred and sale affected and thus, there is no room for any assumption for taking the profit margin which has been realized. In the case of the tested party (assessee), it is not permissible to deviate from the book results on the ground of capacity utilization and observing that "The perusal 'of the above provision will reveal that every person who is entered into an international transaction is under an obligation to keep and maintain the information and document with respect to the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arms length price. The TPO in his report has observed that assessee did not submit any evidence for assuming the capacity utilization of the comparables and whatever data relied up....
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....ble adjustment on account of idle capacity for the purpose of margin computation. The relevant extract is reproduced as below: "10. We are of the considered view that underutilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production." (ii) In the ruling of Dy. CIT v. Panasonic AVC Networks India Co. Ltd. 12014] 42 taxmann.com 420/ 63 SOT 121 (URO) (Delhi - Trib.) it was held that:- "5. ........... Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerted, is reasonable accuracy embedded in the mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment." (iii) In the case of Biesse Mfg. Co. Ltd. v. Asstt. CIT 1201....
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.... be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party (whose data would generally be easily accessible). 31. In such a scenario, one has to resort to the provisions of Rule 10B(3)(ii) which provides for making "reasonably accurate adjustments" for eliminating any material differences between the two transactions being compared. The purpose or intent of the comparability analysis is to examine as to whether or not, the values stated for the international transactions are at ALP i.e., whether the price charges is comparable to the price charges under an uncontrolled transaction of similar nature. The regulations don't restrict or provide that the adjustments cannot be made on the results of the tested party. Therefore, keeping in mind the aforesaid objective, the net profit margin of the tested party drawn from its financial accounts can be suitably adjusted to facilitate its comparison with other uncontrolled entities/ transactions as per sub-clause (i) of rule 10B(1)(e) of the Rules itself The absence of specifi....
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....d decision is as under:- "11. Keeping in view the decision of the Tribunal in the case of Petro Araldite (P) Ltd (supra) laying down the guidelines on the issue of capacity utilization, we consider it appropriate to restore this issue relating to adjustment on account of capacity utilization in the case of assessee company to the file of AO/ TPO for deciding the same afresh keeping in view the said guidelines. If the exact details of capacity utilization of the comparable companies are not available in the public domain, the AO/ TPO is directed to obtain the same directly from the concerned parties and to decide this issue afresh after giving assessee an opportunity of being heard." (Emphasis Supplied) 35. Accordingly, we direct the TPO to exercise powers under section 133(6 * the Act to call for information on capacity utilization of the companies such as - * Installed Capacity, * Actual production in Units, * Break up of Fixed Cost and Variable Cost; * Segmental/ product wise information, if any. 36. Post obtaining the information, he is requested to provide the assessee an opportunity by sharing the details so obt....
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....mparative disadvantage vis-a-vis the comparables. The TPO rejected the adjustment sought for the reason that the decision to import is a conscious decision taken by the assessee and in the absence of any external factors, beyond the control of the Assessee necessitating imports, no adjustment can be made. The TPO also observed that the import duty is a part of the cost of material which is always included at the time of pricing of the product and also that the assessee ought to have considered the customs duty component payable while negotiating the price at which the raw materials are imported. 26. The DRP has upheld the non-grant of customs duty adjustment on the basis that the arithmetic mean of margins under the TNMM method takes care of such difference. 27. The assessee submits that the import of raw materials is not a commercial decision but on the other hand is necessitated for reasons beyond the assessee i.e., by lack of capacity to localize the procurement which the assessee is still in the process of doing. Reliance is placed on the following decisions in support of the Appellant's contentions. * Skoda India Pvt. Ltd. v. ACIT reported in [2009] 30 SOT 319 (....
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....idual elements of cost were to be separately adjusted for differences between the tested party and the comparables, then the profit margin of all the companies would become uniform. e. The assessee company ought to have considered the customs duty component payable while negotiating the price at which the raw materials were imported from the AEs. 30. This issue came up for consideration before the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd. v. DCIT, 84 taxman.com 69 wherein it was held as follows:- "5. Before us, ld. A.R submitted that 90% of the raw materials of the assessee are imported as such customs duty adjustments to be made and it includes Rs. 4.31 crores pertained to the customs duty in the manufacturing segment. In principle the customs duty adjustments is allowed in view of the Co-ordinate Bench decision in the case of Motonic India Automotive (P.) Ltd. v. Asstt. CIT [2016] 73 taxmann.com 235 (Chennai - Trib.) wherein held that: '6.1 At this stage, it is pertinent to mention the finding of the Pune Bench in the case of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT (supra) dated 4.1.2012 in ITA No.120/PN/201....
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....O has adopted in this case. The adjustments then are required to be made for functionally differences. The other way of looking at the present situation is to accept that business model of the assessee company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee's operations and complete facilities ensuring a reasonable indigenous raw material content was not in place. The assessee's claim is that it....
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....regard to aadjustment for foreign exchange fluctuations. It was submitted that the assessee imports a considerable amount of raw material for undertaking the manufacturing operations in India. As a rule, import prices are significantly impacted by the foreign exchange rates, which is the case for the assessee as well. Hence, foreign exchange fluctuation will be one of the significant factors impacting the import costs and in turn influencing the profitability. The assessee's claim for an adjustment for such fluctuations was negatived by the DRP stating that the TPO had considered foreign fluctuation as non-operating in the case of the assessee and the comparables and that therefore, the same takes care of the differences on account of foreign exchange fluctuations. 33. It is submitted that the above mentioned foreign exchange gain/loss arises on account of change in foreign exchange rate at the time of realisation or otherwise, i.e., after booking the transaction at a different exchange rate. This does not affect the transaction which has already taken place. Further, it is submitted that the foreign exchange gain or loss and hedging cost will vary depending on the risk manageme....
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....e FY 2011-12, there was an abnormal depreciation in the value of Euro and USD as against the average movement for the preceding periods. This has resulted in a higher outflow of INR for the same value of Euro and USD which was transacted in the previous year. Although there was no significant increase in the price of imports as compared to the previous year, the foreign exchange rate fluctuations has also contributed towards increased material costs. Therefore, an adjustment for the abnormal impact due to foreign currency fluctuation during the year has to be considered on the value of import purchases made during the year. He highlighted the following points that necessitate the adjustment to the Appellant's cost on account of foreign exchange fluctuations: Higher Import Content of the assessee vis-à-vis comparable companies: 36. As stated above, the assessee imports a considerable amount of raw materials for undertaking the manufacturing operations in India unlike the comparable companies selected in the transfer pricing documentation by the assessee and also the comparable companies selected by the TPO. 37. It is submitted that in comparison to the assessee, the ....
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.... the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment." Accordingly, this issue is remitted to the file of AO for fresh consideration." 40. Following the aforesaid decision of the Tribunal, we remit this issue to the AO/TPO with similar directions for fresh decision. 41. Ground No.7 is regarding treatment of amortisation of goodwill as operating expenditure. The facts of this issue are that the assessee had purchased the automotive components business of Siemens Limited pursuant to a business purchase agreement dated 23.11.2007. The sale consideration for the said purchase was Rs. 1,700 million. The assessee had accounted for the tangible and intangible assets based on the fair value of these assets as determined by an external valuer appointed by the company. Thereafter, an amount of Rs. 1226.70 million was accounted as goodwill and amortized over a period of 5 years. An amount of Rs. 245.60 million was amortized in FY 2011-12 and the assessee has considered the said expenses as non-operating in nature and the same was not included in the cost base for determination of operating margin of the man....
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....is no change in the facts of AYs 2010-11, 2011-12, 2012-13 and 2013-14. Perusal of the order passed by ld. DRP available at page 2681 relevant portion at page 2691, shows that amortization of goodwill is an extra ordinary item and is not pertaining to the regular operation of the assessee, and hence non-operating in nature. So, in these circumstances, we direct the TPO to verify the facts and treat the amortization of the goodwill as nonoperating expenditure in order to compute the operating margin of the assessee. So, ground no.7 is determined in favour of the assessee." 46. Following the above cited decision of the Delhi Tribunal, this issue is decided in favour of the assessee. 47. The next ground (no. 9) is with regard to the adjustment, if any, should be restricted to proportionate value of international transaction of the assessee. 48. Without prejudice to the above, the ld. AR submitted that the transfer pricing adjustment (if any) should be restricted only to the international transaction pertaining to purchase of raw materials from its AEs and other related transactions. The DRP did not accept this contention of the assessee despite various decisions of this Tribu....
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.... royalty C 23,60,81,090 Availing of services D 2,78,47,449 Production Support Service E 2,64,51,066 Shared support services F 51,23,08,777 Total value of international transactions G=SUM(A:F) 2,01,25,75,014 Total adjustment under manufacturing segment H 38,91,70,408 Total Operating Cost (from TP Order) I 5,39,43,70,000 Adjustment restricted to international transactions J=(H*G)/I 14,51,94,831 50. Hence, based on the above, without prejudice to the other arguments of the assessee, it is submitted that the transfer pricing adjustment (if any) should be restricted to the international transaction of the assessee. 51. The ld. DR submitted that it is an undisputed fact that the TPO has accepted the TNMM as the most appropriate method applied by the assessee with regard to the manufacturing segment. The TPO has also accepted the comparables selected by the assessee. He only modified the margin based on the use of data relevant to the financial year. The following international transactions are part of operating cost and operating revenue, with regard to the manufacturing segment:- Operating cost Purchase of ....
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....the assessee. SOFTWARE SEGMENT 54. Only ground Nos. 22 to 24 are pressed before us. 55. The additional ground 24A reads as follows:- "24A. The learned AO/learned TPO/learned DRP erred in treating the amortization of goodwill arising out of the purchases by the Appellant from Siemens Limited pursuant to the purchase of business by the Appellant from Siemens Limited pursuant to the Business Purchase Agreement dated 23 November 2001 as operating in nature for the purpose of margin computation of the Appellant's services segment." 56. Application for admission of additional ground is filed submitting that this ground was raised in ground No.7 in the manufacturing segment before the lower authorities and the Tribunal, however, due to oversight the same was not raised specific to services segment, which is a bona fide mistake and the same may be admitted. We have considered the rival submissions, perused the record and are of the view that the additional ground now raised before us requires no fresh investigation into facts and is borne out of material available on record. Accordingly, following the Hon'ble Supreme Court judgment in the case of M/s National Thermal P....
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....computing, consulting, enterprise integration, infrastructure management services, integrated engineering services, mobility services, oracle services, SAP services etc., none of which are comparable to the Appellant's SWD services. Further, L&T owns several intangibles and enjoys significant brand value (intangibles of 18.56% of its asset base). As a result of this high brand value, the company enjoys a high bargaining power in the market. The company is also into development of products. It owns proprietary software products which are developed in-house such as Unitrax and Accurusi. The company has also incurred significant expenses in foreign currency amounting to 40.38% of its total expenditure which suggests that is engaged in provision of onsite services. Hence, it operates on a business model different from that of the Appellant and is thus incomparable to it. It is further submitted that L&T is functionally not comparable as it is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles and intellectual property rights. L&T has been consistently excluded from the final list of comparables in the cases of assessees similar to the ....
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....ovisions are excluded from the tested parties as well as the comparable, the error in the margins of the relevant year are taken care of. This view also finds support from several decisions of the Hon'ble ITAT, including in the case of M/s Telcordia Technologies India Pvt. Limited 22 taxmann.com 96/ 137 ITD 1 (Mum), in which it was decided that the provision for doubtful debt cannot form part of operating cost. Further, in the case of Thyssen Krupp Industries India Pvt. Ltd., [2013] 33 taxmann.com 107, the Mumbai Tribunal held that the provision for doubtful debts is to be considered as nonoperating in nature because it is only a provision. While working out the operating profit, only items of receipts and expenditure, which have direct relation for determining the profit have to be taken into account. In the case of Four Soft Ltd. vs. Dy, CIT [2011] 142 TTJ 3581[2012] 16 ITR (Trib.) 73 (Hyd.). Therefore, there is no error in considering such provisions as nonoperating in nature. However, with regard to reduction of foreign exchange loss of Rs.28,11,75,063 and 'interest and finance expenses' of Rs.7,68,51,641 from the operating expenses of Rs.2340,08,18,255, it was poin....
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....ition, during the year under consideration, Persistent acquired the software marketing and development business of a company based in France which contributed to its strategic thrust in the life sciences and healthcare markets and helped expand its business for which no adjustment can be made to eliminate the material effects of the said differences between it and the assessee. Further, during the year under consideration, two of the company's subsidiaries viz., Persistent eBusiness Solutions Ltd. and Persistent Systems and Solutions Ltd merged with the company which are peculiar to this company during the year. Detailed submissions in this regard are made at pages 330-340 and pages 645-650 of the paperbook. 70. Reliance in this regard is placed on the decision of this Tribunal in EMC Software and Services India Private Limited v. ACIT ITA 523/Bang/2017 (Order dated 03.07.2019) wherein the company was excluded from the final list of comparables. Reliance is also placed on the decision of this Tribunal in CGI Information Systems & Management Consultants (P.) Ltd. v. ACIT (reported in [2018] 94 taxmann.com 97 (Bangalore - Trib.) and PCIT v. Cash Edge India P. Ltd reported in TS-26....
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....orks out to only 2.54% of the operating profit of 217.32 crores computed by the TPO. Accordingly, we do not find any infirmity in selection of the above company as a comparable. 73. With regard to erroneous computation of margin, the ld. DR submitted that the TPO has considered provision for bad debts and provision for doubtful debts as non-operating in nature In this regard, our direction with regard to L & T Infotech Ltd. is equally applicable. The TPO has also considered the foreign exchange fluctuation as non-operating, in respect of which the directions have been issued in paragraph No.2.3 of the DRP order. 74. These comparables i.e., L&T and Persistent were considered as not comparable in the case of CGI Information Systems & Management Consultants (P.) Ltd. v ACIT, 94 taxmann.com 97 (Bangalore Trib.) wherein it was held as under:- "29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd. (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of me Assessee and that of the A....
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....onsistent view, we direct exclusion of these two companies from the final list of comparables. Inclusion of comparables 76. Vide ground No.21, the ld. AR submitted that the assessee seeks inclusion of Akshay Software Technologies Ltd., Evoke Technologies Ltd and Technosoft Engineering Projects Ltd. Akshay Software Technologies Ltd. 77. It was submitted that this company was proposed by the assessee as an additional comparable before the TPO and came to be rejected on the basis that the company's functions are more in the nature of IT Enabed Services [ITeS]. The exclusion of this company came to be upheld by the DRP on the basis that the company is engaged in professional services and ERP services and segmental details for the same were not available. In this regard, the ld. AR submitted that firstly, perusal of the functions of the company listed in its annual report shows that the company is functionally similar to the assessee. Akshay is primarily engaged in provision of software development services. It derives 99.74% of its income from provision of software services. The website of the company states that the company is engaged in rendering IT services, which are in....
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....st is a normal feature for a software development company for the simple reason that it is a skill oriented business. The skill-set required for the employees in the case of the assessee, required knowledge of Arabic also, making it all the more scarce. In any case, for A.Y. 2009-10, M/s. Akshay Software Technologies Ltd. was considered as a proper comparable and not excluded. In his order dated 07-1-2015 for A.Y. 2009-10, after applying the onsite revenue filter of 50%, TPO himself had considered M/s. Akshay Software Technologies Ltd., as a proper comparable. As to the argument of the Ld. DR that Related Party Transaction, volume of M/s. Akshay Software Technologies was not provided by the assessee, leading to its rejection, we find that assessee had at paras 5.172 and 5.173 of its objections before DRP, submitted that RPT of the said company was 4.33% only, compiling the figures from previous years data available in Annual Report of Financial Year 2010-11 of the said company. This working stands unrebutted. We are, therefore of the opinion that the assessee has to succeed in its claim that M/s. Akshay Software Technologies Ltd, is a proper comparable. We direct the TPO to include....
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....us, since the company is carrying out of Computer Software designing activity and other allied services during the year therefore Maintenance of cost records Under Section 209(1)(d) of the Companies Act, 1956 is not applicable to the company. [100200] Statement of profit & loss Unless otherwise specified all monetary values are in INR 1.4.2010 to 31.3.2011 1.4.2010 to 31.3.2011 Statement of profit & loss (Abstract) Disclosure of revenue from operations (Abstract) Disclosure of revenue from operations for other than finance company (Abstract) Revenue from sale of products Revenue from sale of services 13,31,10,444 11,95,52,334.63 Other operating revenue 1,93,24,552 1,79,90,616 Total revenue from operations other than finance company 15,24,34,996 13,75,42,950.63 Total revenue from operations 15,24,34,996 13,75,42,950.63 85. However, the allegation of the ld. DR is that the complete financials are not made available to the AO/TPO. In our opinion, if the data is not in the public domain, the AO can exercise his powers u/s. ....
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....d borrowings to the extent of Rs.2,55,08,763, which makes the financials of the company unreliable. Also the company offers end-to-end IT services that can be quickly built and deployed to suit their clients unique industry requirements. The company's core IT service include:- * Oracle Consulting Service * Microsoft Consulting Services * Java Consulting Services * IT Staffing Solutions * QA and Testing Services * Mobility Services * BPM Consulting Services * Open Source Services * Big Data & Analytics Solutions 90. The above functions are not comparable to the software development services rendered by the assessee and therefore the rejection of the above company from the comparables is to be upheld. 91. We have heard both the parties on this issue and perused the material on record. In this case, the company has earned revenue from software development charges which is clear from the Notes forming part of the accounts as follows:- 92. Being so, Evoke Technologies Ltd. is a comparable company. Accordingly, we remit the issue to the AO/TPO with a direction to go through the financials of thi....
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....33,00,008/- has been actually incurred towards actual warranty claims over a period of the next two years and balance has been reversed. The details of the additional/special warranty provision created during FY 201112 and the actual payments in the subsequent years is available at pages 418-419 of Volume 2 of the paperbook. 97. The movement in provision for warranty as accounted for by the Appellant for the year under consideration is as under:- Particulars General Warranty Specific Warranty Total Opening balance 1,39,86,741 3,02,01,581 4,41,88,322 Provision created 76,64,521 7,07,03,390 7,83,67,911 Provision utilized against actual payment/debit by customer - - (2,62,34,907) Closing balance - - 9,63,21,326 98. It was submitted that the assessee has created the provision for general warranty as per the policy of the company based on scientific method and also the company has created provision for additional warranty based on circumstances. It has followed the below mentioned method for creating provision for general warranty:- a) The quality department of the company maintains the record/data for goods retu....
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....taxmann.com 377 (Karnataka High Court); * Denso Kirloskar[2013] 34 taxmann.com 238 (Karnataka High Court); * Ericsson Communications Pvt. Ltd v CIT[2009] 318 ITR 340 (Delhi High Court). 103. Based on the above discussion, the ld. AR submitted that the expenses incurred by it towards warranty expense are allowable under section 37 of the Act. In assessee's own case for AY 2009-10 and AY 2010-11, the DRP directed the AO to delete the disallowance in respect of provision for warranty. Also, it is submitted that for the assessment years 2008-09 and 2011-12 the issue has been remanded for fresh consideration by this Tribunal. 104. On the other hand, the ld. DR submitted that similar objections was rejected by the DRP by observing as under:- "we peruse paragraph 9 of the draft assessment order, from which, it is noticed by us that the A.O. made the disallowance on the reason that the assessee failed to furnish the scientific basis on which the provision is made. It is also noticed by us from the order of the DRP for A.Y. 201011, that the actual expenses incurred during the year was Rs. 1,95,00,000/- as against the provision for warranty of Rs. 87....
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....allowing the same. Hence the DRP directed the Assessing Officer to allow the actual expenses incurred during the assessment year. 107. We have heard both the parties and perused the material on record. This issue was considered by the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT, 314 ITR 62 (SC) wherein it was held as under:- "16. The question which arose for determination was : whether during the assessment years 1949-50, 1950-51, 1951-52 and 1952-53 the assessee-company was entitled to claim deduction of the yearly premium from its profits under section 10(2)(xv) of the Income-tax Act, 1922. It was held that the provision in the policy for surrendering annuity and the provision in policy for return of premium was not entitled to deduction as the payment made to the trustees by the assessee-company was towards a contingent liability or towards a liability depending on a contingency, namely, the life of a human-being. It was held that putting aside of money which may become expenditure on the happening of an event is not an expenditure under section 10(2)(xv) of the 1922 Act. It was held on facts that the money was placed in the hands of t....
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.... established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts under section 37 of the 1961 Act. It would all depend on the data systematically maintained by the assessee. It may be noted that in all the impugned judgments before us the assessee(s) has succeeded except in the case of Civil Appeal Nos. 3506-3524 of 2009 - Arising out of S.L.P.(C) Nos. 14178-14182 of 2007 - Rotork Controls India (P.) Ltd. v. CIT, in which the Madras High Court has overruled the decision of the Tribunal allowing deduction under section 37 of the 1961 Act. However, the High Court has failed to notice the "reversal" which constituted part of the data systematically maintained by the assessee over last decade. 18. For the above reasons, we set aside the impugned judgment of the Madras High Court dated 5-2-2007 - Rotork Controls India (P.) Ltd.'s case (supra) and accordingly the civil appeals stand allowed in favour of the assessee with no order as to costs." 108. In view of the above judgment, we direct the AO to examine the asse....
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....ical information, to the Appellant for development, manufacturing and sale of automotive products. * Compensation for the aforementioned license has been agreed to be paid by the Appellant as an annual royalty of 3% of net sales on account of use of intellectual property generated from basic R&D and 2% on net sales (which shall decrease by 0.25% during every calendar year after 2009) on account of use of intellectual property generated from old application R&D. [Basic R&D is Product related research and development for the general benefit of the company in manufacturing of the automotive products and Application R&D is Customer specific product related research and development]. Agreement B (page no. 2241 to page no. 2251 of the paper book): The Appellant has entered into a License and Technical Assistance Agreement effective from 1st January 2009 with Continental Teves AG & Co. OHG, Germany ("CT AG"). * Under this agreement, CT AG grants license to use technical information for development, manufacture and sale of sensors. * Compensation for the aforementioned license has been agreed to be paid by the Appellant as an annual royalty fees of 6% of net s....
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....urt) * CIT v. Kirloskar Tractors Ltd [1998] 231 ITR 849 (Bombay HC) * Alembic Chemical Works Co. Ltd. v. CIT[1989] 43 Taxman 312 (SC) * J.K. Synthetics Ltd. v. CIT[2009] 176 Taxman 355 (Delhi High Court) * DCIT v. Honda SIEL Power Products Ltd I.T.A .No. 1579/DEL/2017 (A.Y 2012-13) & S. A No. 217/Del/2017 in ITA No. 1579/Del/2017 ix. Based on above judicial decisions, the factors to be considered and conditions to be satisfied are summarized below:- Factors to be considered Conditions to be satisfied License period and termination The license is granted for a limited period and not exclusive. The parties have a right to terminate the license Restriction on creation of The licensee has restricted rights to create further rights/ assign the license in favor of third parties further rights/ assignment Confidentiality The arrangement prohibits parting with confidential information Degree of transfer The license does not transfer all the 'fruits of research' of the licensor, "once for all" Nature of royalty Royalty paid as a percentage of sales is linked to sales achieved by the assessee and he....
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.... processes and techniques is the foundation for Continental group's business as an organization as they aim to serve the customer's requirements in a standardized manner. The Appellant being part of the group benefits out of such knowledge sharing and technical guidance and support. c) Some of the key benefits out of the above support to the Appellant includes timely business planning, optimum resource utilization, and meeting customer's requirements where the expectation is always to deliver as per global standards, gaining competitive advantage, and running the business smoothly and efficiently. d) Corporate Project Management Manuals and Standards - CPMMs and CPMS provided by Continental global aid in project management. Further, the Appellant refers to the standard document provided by Continental global in planning introduction of a new product, which provides basic guideline for innovation introduction. Continental group provides the latest updates relating to development of key manufacturing technologies. This helps the Appellant to upgrade its business including the manufacturing process to the latest available technology. 117. Relevant Snapshots of the....
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....hances overall performance with possible savings in terms of lead time and increase in efficiencies. 3 Camline Camline is an internal customized software for monitoring and tracking of the line performance of the machinery/ equipment in the plant during the process of manufacturing. Camline analyses performance of the machineries over a period and provides quality rates, performance rates. It also records the equipment status and provides report of the unplanned errors occurred. 4 Space planning tool LFPT tool is another tailor-made tool from Continental global for management of manufacturing floor space, logistics floor space etc. This helps the Appellant in planning as well as optimum utilization of available resources. 5 Manufacturing execution systems ("MES") MES is an auxiliary bundle of software that work hand-inhand with Camline software/ platform and provides real time production monitoring. MES is integrated with the SAP system in a way that MES provides automatic data to SAP. It counts automatically how many units were built, how many tests failed, how many units were shipped, what product routing (recipe) was used. These provide basic ....
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....ides a "go-ahead" to the local team for its implementation. This is prepared and submitted in the form of a project matrix. b) Continental global, due to their expertise could uncover any issues at an initial stage itself. Therefore, the above process aids Continental India to prevent any issues, avoid duplication of efforts and ensures timely response to the issues beforehand. - Testing a) A crucial aspect of any manufacturing process is testing. The Appellant undertakes testing of the products/ components as per the guidance and set standards by Continental global. Continental global releases guides/ standard practices to be followed by the Appellant for testing purposes on continuous basis. b) Where the existing testing procedures have not been helpful or the local team is unable to render the testing equipment/ software for testing purposes, the appellant requests the assistance of Continental global. A screenshot of the source code shared with the Appellant in one such instance is produced under cover of the application for additional evidence. c) Sometimes, the technical support would be provided through emails. These are facilitat....
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....nto with group entities 4. List of projects for which amount was charged specifically to projects 5. Sample copy of two patents which in the name of Continental, Germany The above substantiates rendition of service, the nature of expense incurred and the benefits obtained by the Appellant. 2 Reasons for classification of expense as R&D not provided Appellant had submitted that R&D is only a nomenclature used by the Appellant in the financial statements and a major portion of the said expense is towards annual license fees paid by the Appellant to its group companies. 3 Expense is capital in nature since it provides enduring benefits From the above factual and legal basis, the Appellant submits that the impugned expense is not a capital expenditure, as there is no enduring benefit derived by the Appellant. The same is related to the business of the Appellant. 4 No rationale for entering into agreement with its group entities since the Appellant was carrying on the business even prior to entering aforesaid agreements The Appellant submits that merely because an agreement is entered into, no businessman would change the business. It is for the purpo....
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....l is mandated for weighted deduction under section 35(2AB). Claim of the Appellant under section 32 of the Act 121. Notwithstanding and without prejudice to the above, even if the said expenses are held as capital in nature, the Appellant would be eligible to claim depreciation under section 32 of the Act at the rate of 25% on the amount capitalized as license fees, for income tax purposes. 122. In this regard, the ld. AR placed reliance on the decision of Hon'ble Supreme court in the case of Honda Siel Cars India Ltd.[2019] 101 Taxmann 222 (SC) wherein it was held that if royalty is treated as capital expenditure, needless to mention that the Appellant shall be entitled to depreciation thereon. 123. In view of the above, it was prayed that the claim of deduction for R&D expenses be allowed. 124. On the other hand, the ld. DR submitted that the DRP observed that similar objection raised by the assessee in assessment year 2011-2012, was decided by the DRP, as under:- "we peruse the draft assessment order from which it is noticed by us that the A.O. in paragraph 10.3 has observed that the assessee has not produced necessary approval from the prescribed authori....
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....ere is no evidence to support that the tax has been deducted at source on payment of such Royalty. (vi) In the TP study, the above amounts has not been shown separately as payment of Royalty, similarly, in audit report in Form 3CEB also, the amount has not been shown as paid towards Royalty. (vii) Except the copy of the agreement, the assessee failed to produce any evidence to support the technical knowhow provided by the AE, further, when the import of raw material, consumable and other supplies are from the AE, there is no rationale for making the payment of above Royalty on sales, In addition to the payment of capital expenditure on technical knowhow amounting to 45.41 crores to the AE during the year. In view of the fact discussed as above, we are of the view that the above payment of Royalty is not a genuine expenditure which can be allowed u/s 37(1) or under any other provisions of the Income tax Act. Accordingly, the objection is not found acceptable. The fact and circumstances are similar for the assessment year also. Further, it is a case where the similar disallowance is made from A.Y. 2009-10 and confirmed by DRPs, but the ....
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....stage, either the adjustment under TNMM is reduced to less than the above payments, then the disallowance under section 37(1) and alternatively under section 40(a)(i) has to be revived as the assessee failed to produce any evidence to establish that tax was deducted at source and paid within the time limit allowed under proviso applicable to sub-clause (i) of clause (a) of section 40 the Act for the assessment year. Accordingly, the DRP directed the Assessing Officer to reduce the proposed addition by Rs.26,39,28,539. 127. We have heard both the parties and perused the material on record. Similar issue came up for consideration before this Tribunal in assessee's own case for AY 2011-12 and the Tribunal vide order dated 12.4.2019 held as follows:- "7. Ground No.2 (a to h) - Annual Licence Fees / R & D Expenses 7.1 In the course of assessment proceedings, the AO noticed that the assessee had debited an amount of Rs.22,39,43,000/- towards R & D Expenses. The AO observed that the assessee had not furnished any evidence of the nature of expenses and therefore held them to be capital in nature and disallowed the assessee's claim. The AO also observed that approvals ....
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....ds operating activities of the Appellant and do not provide any enduring benefits. 8.B Notwithstanding and without prejudice to the above, even if the said expenditure are held to give enduring benefit on the argument that the same pertain to research & development, the expenditure should be allowed as a deduction under section 35(1) of the Act." 7.2.3 The Co-ordinate Bench of the Tribunal in its order for Assessment Year 2009-10 (supra) disposed off this ground of appeal at paras 6 & 7 of the order; which is extracted hereunder:- "6. Regarding corporate tax issues raised by the assessee in its appeal as per ground nos. 8 and 9, it was submitted by ld. AR of assessee that ground no. 9 is not pressed and accordingly ground no. 9 is rejected as not pressed. Regarding ground no. 8, it was submitted that the finding of DRP on this issue is in para no. 18 of DRP order wherein it is noted by DRP that the onus lies on the assessee to prove that the expenses was laid out exclusively for the business and that it wasn't in the nature of capital expenditure to claim it u/s.37(1) but in the present case, the assessee has not been able to substantiate its claim ei....