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2022 (7) TMI 1328
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....owned subsidiary. 3. As far as the transactions of manufacture of inter connectors, 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 apply. The assessee also trades in AMP Netconnect cables and switches which are used in providing IT networking solutions to commercial premises. The assessee buys interconnectors from Tyco group and sells them to auto ancillaries in India and to various other industrial schemes. The assessee is also engaged in sourcing of raw materials and components from Asia-Pacific region for Tyco group. These services are provided based on service agreement entered with Tyco Plastics LP. 4. The international transactions entered into by the assessee with its AE are broadly classified into two segments; Contract manufacturing segment and License manufacturing segment. In respect of the assessee's claim that the price received by the assessee from its AE for the services rendered in the form of carrying out license manufacturing activity and contract manufacturing activity are at arm's length, the assessee filed a TP s....
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....nce. (ix) Ground Nos.19 to 24 relate to disallowance of special discount u/s. 40(a) to the dealers/customers. (x) Ground Nos.25 to 27 is regarding disallowance of liquidator damages. (xi) Ground Nos.28 to 30 relate to disallowance made against consideration received on slump sale. (xii) Ground Nos.31 & 32 are of consequential nature. 8. First we will take up the adjustment made by the TPO in the License manufacturing segment. The segmental financials of the assessee as per P&L account are as follows:- Particulars Manufacturing interconnectors, fibre optical wires Sales & Service income 500,81,58,396 Cost materials 282,39,65,287 Employee expenses 70,93,73,282 Other operating expenses 104,17,13,267 Depreciation 15,65,44,543 Less: Total cost 473,15,96,380 Operating profit 27,65,62,018 Operating profit/Sales 5.52% 9. The assessee selected the following comparables and arrived at an average margin of 5.80% on sales S.No. Name of the company OP/OR (%) 1. Akasaka Electronics Ltd 3.63 2. Centum Electronics Lts 5.66 3. Circuit Systems (India) Ltd 2.98 4. ....
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....um Electronics Limited • Circuit Systems (India) Limited • Cosmo Ferrites Limited • MMG India Private Limited 7. That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/learned TPO in accepting/ rejecting certain companies with respect to the Licensed Manufacturing segment based on unreasonable comparability criteria. Erroneously rejected by the learned TPO/ learned DRP, sought to be included by the Appellant • Incap Limited • Kaycee Industries Limited • Ruttonsha International Rectifier Limited • Easun Reyrolle Limited Erroneously accepted by the learned TPO/ learned DRP, sought to be rejected by the Appellant • Jtekt Sona Automotive India Limited • Roots Industries India Limited • Roop Telesconic Ultrasonix Limited. • Remi Elektrotechnik Limited." 13. During the course of hearing the ld AR did not press for the following (i) Inclusion of MMG India Private Limited and Easun Reyrolle Limited (ii) Exclusion of JtekSona Automotive India Ltd., Roots Industr....
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....ualified as nonlegitimate comparable. The Tribunal drew strength from Brigade Global services (supra) for reaching this conclusion and held that the assessee had rightly taken Capital Trust as valid comparable and the Revenue authorities have erred in excluding the same. A similar view has been taken by ITAT, Mumbai 'K' Bench in the case of Temasek Holdings Advisors vs. DCIT. In sum and substance, all the above cases is that the company making persistent loss for past 3 years is not good comparable. According to us, when loss making company has been selected for comparison in TP study for necessary, which is profit making one, there is a need for more attention qua the conditions prescribed in clause (a) to (d) of Rule 10B(2) of IT Rules, 1962 for an ultimate judgment of comparability of impugned transaction . So, the persistent loss making means continuous loss making for more than 3 years but in the case before us i.e. Stovec has earned a margin of 2.39% in comparable segment in F.Y. 2003- 04. Hence, it could not be considered as loss making, so the same should be excluded for computing operative margin of comparable companies for arriving at ALP in relation to international tran....
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....nformatics Limited although were having loss in the year of comparison but whether they were consistent loss making companies has not been ascertained by the TPO before rejecting the same. A company is said to be bad comparable if it is a consistent loss making entity. Accordingly, we are of the opinion that this issue needs a revisit to the Assessing Officer. The Assessing Officer after considering the submissions of the assessee and documents on record shall decide the issue afresh in the light of the decisions discussed above. Accordingly, this ground of appeal of the assessee is allowed for statistical purpose." 17. In the given case, we notice that the three of the comparable companies in the FY 2011-12 & one company in 2012-13 and have earned profits and therefore following the ratio laid down in Affinity Express India P Ltd (supra), we hold that these companies should be included for the purpose of comparability and computation of ALP. 18. The other companies sought for inclusion vide ground No.7 by the assessee are Incap Ltd., Kaycee Industries Ltd. & Ruttonsha International Rectifier Ltd. The TPO rejected the above companies on the ground that there is no data available....
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.... this company is engaged in the manufacture of electronic component/instrument. 24. Before the DRP, the assessee reiterated the submissions made before the TPO and also submitted that this company is functionally different from the assessee and same cannot be included. The assessee also submitted the extract of P&L account to support its contention. The DRP, however, upheld the order of the TPO. 25. Before us, the ld. AR submitted that Roop Telsconic Ultrasonix Ltd. is engaged in a product manufacture of ultrasonic equipments, whereas the assessee is manufacturing components, switches, cables, relays and connectors. He drew our attention to relevant extract of P&L account of this company at Pg.231 of PB to submit that the product sold by that company mainly consist equipments. Therefore there was no functional comparability between the assessee and that company and therefore it has to be excluded from the comparables. 26. The ld. DR relied on the orders of the lower authorities. 27. We have considered the rival submissions and perused the material on record. Before we go into the facts, we will look at the Rule 10B (1) (d) which states as under 10B . (1) For th....
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....lities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 28. We notice that the P&L account of Roop Telsconic Ultrasonix Ltd. shows that it manufacture consists of ultrasonic equipments which support the claim of the ld. AR that it is into product manufacturing. In determining the degree of comparability between controlled and uncontrolled transactions, it is necessary to compare the significant risks that could affect prices or profits. The risk involved for a company involved in manufacturing of equipments would be significantly different from the component manufacturing company. The assessee is a manufacturer of components and therefore cannot be compared with an equipment manufacturing company as per the principle laid down in Rule 10B(2)(b). In view of the above discussion, we hold....
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....d. was not pressed during the course of hearing. As regards inclusion of Electronica Machine Tools Ltd., the TPO rejected it stating that data is not available in the public domain and that the company has different year ending. The assessee submitted before the TPO that the annual report is available in the public domain and furnished a copy of the same before him. It was submitted that the company is engaged in the manufacture of machine tools and functionally comparable to the assessee. In this regard, the assessee submitted the disclosure of principal products of the company. However, the TPO rejected the assessee's contentions which was upheld by the DRP. 35. Before us, the ld. AR reiterated the submissions made before the lower authorities to contend that data of this company is very much available in the public domain and the finding of the TPO that the company has a different year ending is not factually correct. 36. We notice that this company is into manufacture of machine tools as can be seen from the disclosure of principal product and services as given below:- [Ref: P&L account of Electronica - Pg. 250] 37. We also notice that the lower authorities have not....
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....turing segment." 43. The TPO was of the view that the assessee is a captive unit remunerated on cost plus basis and the cost of working capital towards advances received from the AE is NIL and rejected the working capital adjustment in relation to contract manufacturing segment. The DRP confirmed the order of the TPO. 44. We notice that similar issue of working capital adjustment came up for consideration before the coordinate Bench of the Tribunal in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018, wherein it was held as under:- "15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed througho....
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....ute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objecti....
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....al adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly." 45. Respectfully following the above decision of the Tribunal, we direct the AO/TPO to allow working capital adjustment claimed by the assessee. 46. Ground No. 9 raised by the assessee reads as follows:- "9.a) That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/ learned TPO in arbitrarily disallowing the entire payment towards IS Charges of INR 269,516,933. b) That the learned DRP erred in upholding the view of the learned AO/ learned TPO in concluding that Information services were not rendered by the Associated Enterprise (`AE') to the Appellant. c) That the learned DRP erred in upholding the approach of the learned AO/ learned TPO in rejecting the aggregated Transactional Net Margin Method (`TNMM') analysis undertaken by the Appellant in its TP Study and instead using the Comparable Uncontrollable Price (`CUP') method to determine the arm's length price of this international transaction. d) That the learned DRP erred in law and in facts, in upholding the approach of the learned AO/ lear....
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....g TECIL for IT services. The services rendered by TE US to its various AEs (including TECIL) primarily comprised of (i) IT infrastructure and (ii) other auxiliary services. It was also submitted that during FY 2005-06 and 2006-07, TE Group was in the process of integrating the various affiliates globally through a single Enterprise Resource Program ("ERP") for better management and control of operations. As TE Group had acquired varied business operations globally, the requirement of an ERP was felt for efficient management of the operations. Towards this, TEIS Shared Services established ERP Competency Centers with an objective to create technical capabilities and excellence within the TE Group, and also to serve as a global resource for TE Group's enterprise systems. This ERP system had assisted in integrating all data and processes of TE Group into a single unified system with the usage of multiple components of computer software and hardware. With SAP being the preferred ERP being implemented the primary centre was based in Harrisburg, Pennsylvania, with other centers at Fuquay-Variana, North Carolina, US (Manufacturing-Pro) and in Singapore (AMPICS). Post the implementatio....
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....ted by record that are supposed to be kept by the AE to show the details of the services rendered to the Taxpayer and actual direct and indirect costs incurred in connection with rendering of such services to the Taxpayer. The Taxpayer did not submit records adequately to show that the payment is in consonance with the costs rendered in connection with the IT infrastructure and other support services rendered by the AE. In fact, the Taxpayer stated that even the direct cost involved in implementing SAP is apportioned based on some allocation key. The Taxpayer did not disclose the allocation or other details." So, the argument of the Taxpayer before the TPO is only post mortem to justify the above payment. In an Arm's Length condition, the payment is not only a function of services provider's willingness to pay. The Taxpayer mentioned various services to support above invoice without giving any primary evidence that those services are actually rendered. Thus the Taxpayer except producing above invoices and mentioning various services not at all proved the second aspect. This issue is discussed below." 16. The TPO thereafter called upon the assessee to explain as to ....
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.... before the Tribunal, which we have referred to earlier. 18. The learned counsel submitted that the IS Charges are already included in the cost -base of licensed manufacturing segment under TNMM i. In respect of the said charges, TNMM was determined as the most appropriate method as they were closely linked with the primary international transactions under the three segments of the Assessee. The learned counsel in this regard drew support from the OECD Guidelines on aggregation of transactions which states as follows: "Ideally, in order to arrive at the most precise approximation of arm's length conditions, the arm's length principle should be applied on a transaction-by transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis." ii. The TPO arbitrarily rejected the said aggregation approach and determined the ALP of the manufacturing segment and the above charges separately. However, in determining the ALP for the manufacturing segment, the said charges were not excluded from the cost-base under TNMM. Hence, the upward TP....
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....ovides that where a transaction (international or specified domestic) continues for a period of more than one year, fresh documentation need not be maintained separately for each year, unless there is any significant change in either nature or terms of the transaction, assumptions made or other factor which could influence the transfer price. The principle of consistency in respect of a transaction undertaken across years with no change in the facts and circumstances, is well settled by the Hon'ble SC. It was pointed out that this principle is also provided in rule 10D(4) of the IT Rules. 21. The learned Counsel for the assessee therefore submitted that the issue with regard to determination of ALP in respect of international transaction on payment of IS charges is also required to be set aside to the AO to be done afresh in the light of the submissions as made above in the light of the additional evidence now filed before the Tribunal. Learned DR however relied on the order of the TPO and the DRP but was of the view that the prayer of set aside to the AO in the light of the additional evidence may be considered by the Bench. 22. We have given a careful considerat....
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.... materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm's length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm's length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non- AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. 56. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee." 52. Respectfully following the above decision of the Tribu....
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....ppreciating the fact that depreciation allowance under section 32 of the Act is mandatory and disallowing the same on the basis of surmises, conjectures and suspicion would violate the settled position of law as laid down by the Honourable Supreme Court of India. 18. The learned DRP had erred in not considering the sample invoices pertaining to addition made to the fixed assets." 54. The AO disallowed the entire depreciation claimed by the assessee stating that assessee has not provided any supporting details with respect to assets and depreciation claimed thereon. The DRP upheld the decision of the AO on the same reasoning. Though the assessee had submitted before the DRP the supporting bills and invoices substantiating the claim of depreciation, however, the DRP confirmed the disallowance stating that the additional evidence produced before the DRP could not be verified due to time constraint. 55. Before us, the ld. AR drew our attention to the additional evidence submitted before the DRP in the form of bills and vouchers at page 476 of PB. He submitted that the tax auditor has verified the addition to the fixed assets and that in itself substantiates that claim of....
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....d by the Appellant during the course of DRP proceedings." 58. This issue also was considered by the Tribunal in the assessee's own case for AY 2014-15 in assessee's own case and the Tribunal vide order dated 25.02.2022 in IT(TP)A No.3373/Bang/2018 held as under:- "31. As far as ground No.14 raised by the assessee is concerned, the issue arises under the following facts and circumstances. During the previous relevant to AY 2014-15, the Assessee incurred expenses (INR 43.25 Crores) in the nature of discounts, referred to as 'Special Discounts', to dealers who essentially its customers amounting. The same is disclosed under the nomenclature 'Commission' in the P&L A/c. The AO disallowed the same under section 40(a) of the Act for failure to deduct tax at source, alleging that it is in the nature of commission, warranting deduction of tax at source under section 194 of the Act. The Hon'ble DRP confirmed the same, holding that special discount were rightly confirmed to be in the nature of commission since the assessee itself grouped the special discount under the head "commission" in its financials. 32. The learned counsel for the assessee submitted before the tribu....
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....Therefore, the said discounts are not in the nature of commission payments warranting deduction of tax at source under section 194H of the Act, which is applicable only in case where the payment is made for services rendered in the course of buying or selling of goods and the payee acts on behalf of the payer. In other words, principal-agent relationship is a sine-qua-non for invoking the provisions of section 194H of the Act. Reliance is placed on the decision of the Hon'ble Bombay High Court in the case of Harihar Cotton Pressing Factory9 39 ITR 594 (Bom), which held that there is a distinction between commission and rebate and therefore rebate cannot be treated as commission. iv. The learned counsel for the Assessee further relied on the following judicial precedents including that of the Hon'ble Karnataka High Court and other Courts wherein it was held the provisions of section 194H are not applicable in the absence of principal-agent relationship between the parties:" 33. It was submitted that the mere nomenclature does not determine the nature of transaction. In this regard it was pointed out that it is an undisputed fact that the AO and DRP treated the spec....
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....course of DRP proceedings." 61. The AO disallowed the claim of liquidated damages on the ground that the assessee has not provided any details with respect to the basis of quantification of liquidated damages and evidence in support of the same. The DRP did not consider the additional evidence provided by the assessee and verify it for the reason of time constraint. 62. Before us, the ld. AR submitted that the liquidator damages are genuine which were incurred and paid during the course of the business of the assessee and hence entitled to deduction u/s. 37 of the Act. He drew our attention to the additional evidence filed before the DRP at page 589 of PB. 63. We have considered the rival submissions and perused the material on record. Since the evidence and supporting bills submitted by the assessee are not verified by the lower authorities, we remit this issue to the AO to look into the facts and evidence afresh and decide the issue in accordance with law, after providing reasonable opportunity of being heard to the assessee. 64. The next issue pertains to disallowance of "claims made by buyers" pursuant to the slump sale and ground nos. 28 to 30 raised by the assesse....
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.... that the capital gain / loss is computed correctly. The certificate from the chartered accountant is issued based on the information and explanation provided to the best of their knowledge and the same does not prevent the AO from going into the root of the transaction calling for further evidence. In our view the onus is on the assessee to provide the required details as a foolproof evidence to substantiate the claim that the buyer deducted an amount of Rs.94.70 lakhs from the final sale consideration. In the given case we notice that the lower authorities did not take call for any further evidence and have not taken the necessary steps to verify the issue factually based on details furnished by the assessee. We therefore remit the issue back to the AO with a direction to issue summons to the buyer of the undertaking in order to verify the claim of the assessee and decide the issue in accordance with law, after giving reasonable opportunity of being heard to the assessee. 69. The ld. AR did not press for the additional ground with regard to education cess and secondary & higher education cess in the light of recent statutory amendment. Hence the same is dismissed as not presse....