TaxTMI 
TaxTMI 
TaxTMI 
2022 (2) TMI 1291
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..... TRANSFER PRICING [Original GoA - No. 2 - 15] ISSUE GROUNDS OF APPEAL 2. Common Ground [Original GoA - No. 2] 2.1. The lower authorities erred in making a transfer pricing adjustment of INR 87.89 Crores, comprising of INR 54.48 Crores in respect of licensed manufacturing segment and INR 33.42 Crores in respect of payments towards Information System charges ("IS charges") and Corporate Service charges. A. TP Adjustment - License Manufacturing Segment [Original GoA - No. 3 - 13] 3. Final Order not in conformity with DRP Directions 3.1. The lower authorities erred in passing a final order of assessment that is not in conformity with the Directions of issued by the Ld. Dispute Resolution Panel ("Ld. DRP"), to the extent that the relief granted by the Ld. DRP, amounting to INR 7.06 Crores, is not given effect to in the said final order. 4. Rejection of TP Study and Segmentation 4.1. The lower authorities erred in rejecting the Transfer Pricing ("TP") Study/economic analysis undertaken by the Appellant in accordance with the provisions of the Income Tax Act, 1961, ("the Act") read with the Income Tax Rules, 1962, ("IT Rules") and conducting a fresh economic analysis for ....
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....The lower authorities erred in determining the ALP of IS Charges and Corporate Service charges at NIL, on the allegation that no services were rendered by the AEs to the Appellant. 10. Absence of comparability analysis 10.1. The lower authorities erred in determining the ALP of IS Charges and corporate service charges, without undertaking any benchmarking exercise using comparability analysis. 11. Rejection of TNMM method 11.1. The lower authorities erred in holding that the IS Charges and corporate service charges shall be benchmarking separately under the CUP method and in rejecting the aggregation approach adopted by the Appellant under the TNMM method. 12. Double- Adjustment of the same transaction 12.1. The lower authorities erred in disallowing the entire amount IS Charges and Corporate Service charges, without appreciating that same is included in the cost-base of the license manufacturing segment for determining the margin, in respect of which an adjustment is already made. III. CORPORATE TAX GROUNDS [Original GoA - No. 16 - 40] ISSUE GROUNDS OF APPEAL ("GoA") 13. Disallowance of Dep. on Goodwill arising on account of Amalgamation & Slump Sale [Original G....
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....ment tax credit of INR 15,96,000, as claimed in the return of income. 3. Ground Nos.1 and 2 raised by the assessee are general in nature. As far as ground Nos.3 to 8 raised by the assessee is concerned, the same relates to addition made to the total income on account of determination of Arm's Length Price (ALP) under section 92 of the Act in respect of the international transaction of rendering licenced manufacturing services (Licensed Manufacturing Segment) by the assessee to its Associate Enterprise. 4. As far as the aforesaid grounds are concerned, the factual details are as follows: The assessee is a wholly owned subsidiary of Tyco Electronics Singapore Pvt. Ltd., Singapore and is engaged inter alia in the business of manufacture of connectors and cable interconnect and fibre optic cable interconnect and trading of AMP net connect cables. The assessee carried out licensed manufacturing on behalf of its wholly owned subsidiary. As far as the transaction of manufacture of interconnector fibre optical wires carried out by the assessee on behalf of its AE is concerned, it is not in dispute that it is an international transaction to which the provisions of section 92 of the Act ....
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....ture of interconnects, connectors, fibre optical wires Sales and service income 5870115674 Add: Forex gain 64167153 Operating Revenue 5934282827 Cost of materials 3002220322 Employee expenses 1336262400 Other expenses 1510580130 Depreciation 170468000 Less: Provision for doubtful trade receivables 29192266 Less: Provision for doubtful loans and advances 8374830 Total Cost 5981963756 Operating Profit -47680929 OP/OC -0.80% OP/OR -0.80% As can be seen from the computation of OP/OR by the TPO, the TPO did not exclude Price adjustment of Rs. 278,025,432/- from the cost base and therefore the OP/OR or OP/OC computed by the TPO lower than what was computed by the Assessee. 7. Ultimately, the TPO computed the ALP and the consequent addition to be made to the total income is as follows: "9. Computation of Arm's Length Price: 9.1 The arithmetic mean of the Profit Level indicators is taken as the arm's length margin. Please see Annexure 'A' for details of computation of PLI of the comparable. Based on this, the arm's length price of the services rendered by the taxpayer to its AE(s) is computed as under: Arm's Length Mean Margi....
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....rice adjustment of Rs.27,80,25,432/-. He made the following submissions as to why this adjustment was necessary: i. This adjustment is claimed in order to eliminate the effect of long-term depreciation in the Indian Rupee via-a-vis the foreign currencies in which the Assessee undertakes its regular business operations. The Assessee has significant transactions in foreign exchange and therefore such impact has a material impact on its profitability. ii. The Assesseee demonstrated in its TP documentation, based on an analysis of exchange rates over the past 10 financial years, that the fluctuation in the Indian rupee in FY 2013-14 was anomalous, and accordingly, a forex adjustment in the nature of an economic adjustment discussed under Rule 10B(3)(ii) of the IT Rules, is imperative. Reference in this regard was made to Appendix K of Assessee's TP Study Report [Pg. 692 of Paperbook - Part b] and Form 35A [Pg.75 to 80 of Appeal set]. iii. The requirement for such adjustment was upheld by the Delhi Bench of the Hon'ble Tribunal in the case of Honda Trading Corp India (P.) Ltd1, TS 345-ITAT-2013 stating that an appropriate adjustment to remove abnormal and huge fluctuation in forei....
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....was in the business of manufacturing and distributing products and systems for a broad set of markets namely (a) Electronic components, (b) Network solutions, (c) Wireless Systems and (d) Undersea telecommunications. TE Group, being a global company, present in multiple countries, is required to have an integrated approach in its operations wherein the requirement of an ERP implementation arises. As TE Group did not have a uniform pre-existing ERP package that could cater to multiple entities having varying modules, hence the requirement of consistent ERP for the Group as a whole, which was decided to be SAP worldwide. Given the use of such services across the various entities in the Group, the costs pertaining to the same were charged to the respective entities based on the extent of the utilization. 'TE US' IT shared services center ("TEIS Shared Services organization') is the global organization that provides information technology ("IT') services to the TE Group entities worldwide. Predominant part of the activities in the TEIS Shared Services organization resides in Harrisburg, Pennsylvania. However, it also has presence in various TE entities in Germany, Singapore....
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....O, however, did not accept the plea of the assessee. He held that in terms of Rule 10B of the Income Tax Rules, 1962 (Rules), the determination of ALP for providing intergroup services has to be decided either by applying the Comparable Uncontrolled Price (CUP) or TNMM. The TPO held that the transaction of rendering intergroup services has to be separately analyzed and he applied the CUP method as the MAM. The TPO thereafter held that there was no evidence that services were rendered by the AE for which the assessee made payment. In this regard, the AO observed as follows: "Thus the Taxpayer's agreement says that the AE would charge for services only to the extent of the costs incurred in providing such services to the Taxpayer. The Taxpayer produced copies of invoices raised by the AE. But this invoice does not contain any details of services provided and costs incurred for each type of service except stating as "Charge Back IT Expenses". As can be seen from above, the invoice did not speak about anything on the nature of service rendered and costs involved except mentioning as "Chargeback IT Exp". The Taxpayer did not adduce any primary evidence to show that the payment ....
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....s of related invoices 56 - 72 The learned counsel for the Assessee submitted that the allegation that no documentation / information was furnished by the Assessee before the lower authorities is incorrect. He gave the details of documents/information filed before the TPO in the following summary: * IS charges are received pursuant to the Agreement for Support Functions entered with Tyco Electronics Corporation, USA, dated October 1, 2002 [refer Pg. 702 of Paperbook - Part B]; Corporate services rendered by Tyco electronics Limited, Switzerland, to TECIL primarily comprised of services in relation to (i) Financial Planning and analysis (ii) Treasury (iii) Taxes (iv) Legal and government affairs (v) corporate governance (vi) operational excellence (vii) Human resources etc. These services are rendered pursuant to the Corporate Services Agreement [refer Pg. 707 of Paperbook - Part B]; * The nature of services received, basis of quantification of such services provided by the Group, the basis for such apportionment and the cost allocation keys depicting the nature of the costs were provided in SCN response [refer Pg. 785 of Paperbook - Part B]; * The cost centre details of Corp....
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....e, if the separate benchmarking of IS and corporate service charges is upheld, the same shall be excluded from the segment costs considered under the licensed manufacturing segment, for margin determining. In such event, the margin as computed in the TP order in this regard, at -0.80% will increase to 3%, as shown below: Particulars AS PER TP ORDER [Pg. 3 & 4] Ref. Amount (INR Crores) Operating Revenue A 593.42 Operating Cost B 598.20 Particulars AS PER TP ORDER [Pg.3 &] Less: Allocation of IS charges, which is separately benchmarked by TPO (66% of INR 33.42 Cr.) [Pg. 16 of TP Order] C 22.05 Revised Operating Cost D = B - C 576.14 Operating profit E = A - D 17.29 Margin % F = E / D 3.00% 19. Without prejudice to the above contentions, it was contended that the TPO has failed to undertake a benchmarking analysis based on comparable transactions which is a mandatory requirement for the application of the CUP method, which is also recognized by several precedents: Decision Forum Ref. - Case law Compilation Flakt (India) Ltd5 Tribunal, Chennai S.No. 72 - Pg. 531 AB Mauri India Pvt. Ltd6 Tribunal, Chennai S.No. 73 - Pg. 542 20. The....
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....ard to determination of ALP in respect of payment of IS charges should be set aside to the AO/TPO for fresh consideration denovo in the light of the submissions and additional evidence filed before us and these submissions and additional evidence go to the root of the matter. The AO and TPO will afford opportunity of being heard to the assessee in the set aside proceedings. 23. The assessee has raised corporate tax issues apart from Transfer Pricing Issues, which we have already adjudicated in the earlier paragraphs of this order. As far as ground No.13 is concerned, the same relates to depreciation on goodwill claimed by the assessee which was rejected by the revenue authorities. Depreciation on Goodwill was claimed on account of Acquisition of business by the assessee on merger and on Slum sale basis. 24. The factual details in so far as it concerns, acquisition of business on merger are as follows: Acquisition of companies by the Assessee on Merger: During the previous year relevant to AY 2014-15, the Assessee received the approval from the Hon'ble High Court of Karnataka for the merger of two companies with itself under a Scheme of Amalgamation, i.e., Tyco Electronics System....
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....epreciation u/s 32 of the Act @ 25% 3.33 [Refer ITR in Pg. 57 of the Paperbook - Part A] 25. The claim for depreciation on Goodwill was disallowed by the AO both depreciation on G/W arising on merger as well as on the business acquisition on slump sale basis, alleging that intangible asset capitalised as goodwill is fictitious in nature, without any basis. The Ld. AO further attempted to distinguish the decision of the Hon'ble SC in the case of Smifs Securities Ltd7 348 ITR 302 (SC) holding that the question raised before the Hon'ble SC was limited to whether G/W is an asset u/s 32, that the findings of facts by the Hon'ble Tribunal were not under appeal and that SC did not rule on the contextual facts of the present case. The DRP upheld the disallowance and held that the basis for valuation could not be produced before the lower authorities, and valuation was done arbitrarily without any technical study. 26. Aggrieved by the order of the AO incorporating the directions of the DRP refusing depreciation on Goodwill, the assessee has raised Grd. No.13.1 to 13.4 before the Tribunal. The learned counsel for the assessee submitted that all the relevant documents with respect to the ....
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.... assessee paid consideration which is said to be in excess of the fair value of assets taken over. 28. The learned counsel for the assessee besides relying on several decisions also referred to decision of Hon'ble Karnataka High in the case of Manipal Universal Learning P. Ltd.8359 ITR 369 (Karn) , wherein the facts and circumstances of which are similar to the preset case, and the Hon'ble High Court allowed the claim of depreciation on Goodwill arising on acquisition of business under slump sale model, reiterating the decision of the Hon'ble SC in the case of Smifs Securities (Supra). Further reliance was placed on the decisions, wherein it was principally held that Goodwill is an intangible asset eligible for depreciation under section 32 of the Act in the context of business transfer through slump sale. The learned counsel for assessee submitted that Goodwill is not fictitious in nature as held by the revenue authorities. It was submitted that the assessee invested in the shares of XOL which is nothing but the consideration for acquisition of tangible and intangible assets upon merger. It also discharged consideration to TESIL by way of allotment of shares. As regards the trans....
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.... any payment in the form of consideration the same cannot be assigned as value of goodwill. He distinguished case laws cited by the learned counsel for the Assessee by pointing out that in all case laws cited there was flow of consideration. According to him allowance of depreciation generated as a result of amalgamation in the hands of amalgamated company needs depper judicial scrutiny especially in the light of the intent of the legislature to keep amalgamation a tax neutral scheme for companies and not to provide any scope to derive undue tax benefits. In particular he drew attention to Explanation 7 to Sec.43(1) of the Act which provides that actual cost of the transferred capital asset to the amalgamated company to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. When cost is not recorded of any goodwill in the amalgamating company, there can no cost or goodwill in the amalgamated company. It best can be nil in such a situation. 30. Both the parties agree that the facts as brought out in the submissions made by the learned Counsel for the assessee before the Revenue authorities have not....
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....ting sub-distributors. i. Once a party agrees to act as a Regional Distributor ("RD") and signs an agreement, such RD shall abide by the conditions of the agreement and shall be eligible to receive price discount on the distributor price. The discount given to distributors on the sale price is sales discount in normal business parlance and not commission on sales. All such agreements clearly define the relationship between both the parties as principal to principal which is evident from the terms of the said agreement. Hence the said dealers were not acting as the agents of the Appellant. ii. The reason for issuance of debit notes periodically on a consolidated basis, instead of billing the net sale price post such discounts for each transaction, is purely on account of the operational process and commercial practice adopted in this regard. These discounts are made known to the dealers even before they purchase goods from the Appellant company and quantification thereof is possible only at the end of the quarter/period as specified in the agreement. The dealers fulfilling the qualification conditions become eligible to get discount at the end of the notified period, processed b....