TaxTMI 
TaxTMI 
2018 (6) TMI 1829
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....er (TPO) has been challenged. All these appeals were heard together and for the sake of convenience, they are being disposed of through this consolidated order. 2. At the outset, the Ld. CIT DR submitted that the department's appeal for assessment year 2010-11 and bearing ITA No. 567/Kol/2015 was delayed in filing by a period of ten days due to the file being on transit movement through the proper channel. He drew our attention to the delay condonation application and the affidavit in this regard and prayed that the delay be condoned. 2.1 The Ld. AR opposed the prayer for condonation of delay and submitted that the appeal should be dismissed. 2.2 Having heard both the parties and after having gone through the affidavit as well the delay condonation application, we are of the considered opinion that in the interest of justice, the delay deserves to be condoned. We, accordingly, condone the delay. 3. Brief facts of the case are that the assessee is a wholly owned subsidiary of KHD Humboldt Wedag International GmbH (Humboldt Austria). The company is primarily engaged in designing, supplying of equipment, supervision of installation, erection and commissioning activities for the ce....
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....er, gave relief to the assessee in respect of liquidated damages, addition in respect of advances and deposits written off and addition relating to provision for warranty 3.4 Now, the assessee has approached the ITAT challenging the directions of the Ld. DRP and the subsequent order of the Assessing Officer (AO) in making an adjustment of Rs.42,50,763/- (including mark up) towards receipt of intra group services. 3.5 The Department is also before the ITAT and is challenging the directions of the Ld. DRP in deleting the disallowance pertaining to liquidated damages, addition in respect of advances and deposits written off, deletion of addition relating to provision for warranty as well as for giving relief in respect of transfer pricing adjustment vis-a-vis intra group services. 3.6 The respective grounds raised by both the parties are as under:- 3.6.1 ITA No.567/Kol/2015 (Department's appeal): " 1. That the DRP has erred in law and in facts, in disallowing the addition of provision for liquated damages, without examining the issue involved and the findings of the A.O. 2. That the DRP has erred in law and in facts in disallowing the addition of advances & provisions written....
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....s erred in considering withholding tax (Rs.32,58,919) as mark-up and subsequently disallowing it from the income of the appellant as part of mark-up charged by AE. Further, the Ld. TPO and consequently the Ld. AO have erred in not appreciating the fact that the Appellant has already paid Rs. 32,58,919 as withholding tax. 6. Without prejudice to the above ground, assessee would like to put forward that had the assessee taken such services from a third party, it would have charged a mark-up for such services. Hence, on reasonable facts and circumstances, the Hon'ble DRP erred in giving direction for adjustment to the extent of mark-up charged by the AE for providing intra-group services. 7. Without prejudice to all the above Grounds, the assessee craves leave to add to and to alter, amend, rescind or modify the grounds raised hereinabove before or at the time of hearing of the appeal. Corporate Tax Related: 8. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in proposing and the Hon'ble DRP has erred in confirming the disallowance of provision for loss on suspended contracts of Rs. 9,00,00,000 by treating the same as contingent or disputed l....
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....so a central service provider for marketing services. It was also submitted that the KHD Group has a proper cost allocation methodology to remunerate a central services provider wherein a charge or cost related to shareholder activities has already been deducted from the cost base. It was also submitted that detailed evidences had been submitted regarding the services rendered but the TPO had made only selective observations while making the transfer pricing adjustment. It was also submitted that while making the adjustment, the TPO had grossly overlooked the voluminous evidences furnished by the assessee in this regard and, further, that the TPO cannot question the business expediency of an expenditure incurred by the assessee. It was further submitted that had these services i.e. legal and professional services not been received from the AE, the assessee would have had to perform the functions in-house or hire experienced and trained service providers. It was also submitted that the TPO had not pointed out any specific instance but had made a general statement to conclude that these services were in the nature of stewardship services. It was submitted that the CUP method applied ....
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....loss to the assessee and, therefore, this was an allowable deduction. 5. In response, with respect to the department's appeal, the Ld. CIT DR placed extensive reliance on the findings and observations of the TPO. With respect to the assessee's appeal, the Ld. CIT DR placed reliance on the findings of the TPO as well as the directions of the Ld. DRP and vehemently argued that no further relief was allowable to the assessee. ITA Nos. 1057/Del/2016, 1154/Del/2016 and 3207/Del/2016 for AY 2011-12 6. Brief facts relevant to this assessment year are that in this year, the return of income was filed showing total income of Rs. 27,51,23,720/-. After a reference being made to the Transfer Pricing Officer, the TPO proposed an adjustment of Rs. 8,28,95,238/- in respect of difference in ALP of international related party transactions. Apart from this, an addition was also made on account of liquidated damages amounting to Rs. 9 crore. Another addition was made with respect to disallowance of provision for warranty amounting to Rs. 18,76,87,197/- and an addition of Rs. 1,12,667/- towards advances and deposits written off. Another disallowance was made in respect of advertisement expenses am....
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....ciating that, (i) The appellant did not receive such refund of Rs. 44,94,685 for AY 2011-12. Also, the appellant did not receive any intimation for adjustment of said refund of Rs. 44,94,685 due for the subject AY; (ii )Since the appellant neither received refund of Rs. 44,94,685 nor received any intimation for adjustment of said refund, consequent levy of interest u/s 234D of the Act of Rs. 10,78,724 is incorrect. The appellant prays for leave to add, alter, rescind from or withdraw any at or before the time of hearing of the appeal." 6.3.2 ITA No.1057/Del/2016 (Department's appeal): "1. The Ld. DRP has erred in concluding that the services offered by the AE were not stewardship service, whereas the purpose of management services agreement, between the KHD Humboldt and the assessee company resulting in payment for legal and professional charges under consideration was to exercise control and supervisions of the assessee's activities to fit the sale, into the overall plan of the entries group with sole purpose for maximization of group profitability and parent company's return. 2. The Ld. DRP has erred in concluding that the computational of entity level profit ....
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....provisions of section 92CA(4) of the Income Tax Act, 1961 ('the Act'). 2. On facts and in law, the Ld. AO/ Ld. TPO erred in passing the impugned rectification order which violates various statutory provisions and is liable to be quashed. In doing so, the Ld. AO/ Ld. TPO erred in: 2.1 violating the provisions of section 154(3) of the Act; 2.2 defying the principles of natural justice by not granting an opportunity of being heard to the Appellant; 2.3 violating the provision of section 154(1) of the Act as the basis of issuing the impugned rectification order is not a mistake apparent from record and do not qualify the requirements section 154 of the Act. 3. Without prejudice to Ground no. 2, on facts and in law, the Ld. AO/ Ld. TPO erred in disregarding the directions of the Hon'ble Dispute Resolution Panel ('Hon'ble DRP') while issuing the impugned rectification order and in doing so, violated the provisions of section 144C(10) of the Act. 4. Without prejudice to Ground no. 2, on facts and in law, the Ld. AO/ Ld. TPO erred in rejecting the economic analysis carried out by the Appellant, substituting the same with his own analysis and in doing so, not appreciatin....
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....t pricing has been accepted by the Ld. AO/ Ld. TPO in the subsequent year (i.e., AY 2012-13) in the Assessee's own case and there being no change in the facts and circumstances in AY 2011-12 vis-a-vis AY 2012-13." 8. The Ld. AR submitted that ground no. 1 of assessee's appeal (ITA No. 1154/Del/2016) and pertaining to provision for loss on suspended contracts amounting to Rs. 9 crore was similar to a ground in assessee's appeal for assessment year 2010-11 and the adjudication of the assessee's ground in assessment year 201011 will decide the outcome of this ground in assessment year 2011-12 also. 8.1 With respect to ground no. 2 in the assessee's appeal, it was submitted that the ground pertaining to adjustment of refund and consequent levy of interest u/s 234D of the Act was not being pressed. 8.2 Coming to the department's appeal (ITA No. 1057/Del/2016), the Ld. AR submitted that ground nos. 1, 3, 4 and 5 were similar to the grounds taken by the department in assessment year 2010-11 on identical issues and since the issues were essentially the same, the outcome of the department's appeal in assessment year 2010-11 will have to be followed in assessment year 2011-12 also. 8.3 C....
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....l marketing services, it was submitted that the margin of the comparables with respect to the global marketing services was 8% whereas the assessee had charged cost plus 5% from its AE which was within the +/-5% range. 8.3.2 The Ld. AR also emphasized that the value of intra company transaction was approximately 6% of the total turnover of the assessee, meaning thereby that approximately 94% of the business carried out by the assessee was third party business. The Ld. AR also placed reliance on a number of judicial precedents supporting the transaction level benchmarking analysis. 9. Coming to assessee's appeal bearing ITA No. 3207/Del/2016 challenging the rectification order dated 25.02.2016 passed u/s 154 of the Act, the Ld. AR submitted that the order passed u/s 154 violated the provisions of section 154(1) of the Act because what the TPO had sought to rectify was not a mistake apparent from the records. It was submitted that before the issue can be said to be eligible for rectification u/s 154, it is essential that the issue should be a mistake in the order passed by an income tax authority, the mistake should be apparent and the same should be apparent from the records of th....
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.... parts, the assessee had applied TNMM and a comparable search had resulted in a mean NCPN of 11.85% as compared to 4% mark up charged by the supplier AE and the TPO in his original order had carried out the entity level profit testing by applying the TNMM. The Ld. DRP had upheld the assessee's contention that margin realized by the assessee only from the international transaction with the AE has to be considered but in the final assessment order, the Assessing Officer continued with the entity level profit testing approach which was rectified by the first rectification order darted 9th February, 2016 but vide the impugned order, the entity level benchmarking had been reinstated. 9.4 Similarly, with respect to provision of global marketing services, the assessee had applied TNMM but the TPO had introduced fresh comparables without providing any reason for not accepting the assessee's approach. It was further submitted that similar was the case with respect to the provision for technical services. 9.5 The Ld. AR also submitted that the assessee was also challenging the action of the TPO in rejecting the transfer pricing analysis undertaken by the assessee and the action of the TPO ....
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....n of total adjustment from Rs. 42,50,763/- to Rs. 9,91,844/- only which represents the disallowance of mark-up charged by the AE. It was also submitted that the Final Assessment Order subsequent to the rectification by the TPO was still awaited. The Ld. AR submitted that and if the assessee's ground was accepted in principle, the adjustment with respect to the mark up will not be contested by the assessee. In such a situation, we direct the AO to pass the final assessment order incorporating the adjustment only to the extent of Rs. 9,91,844/- and also protect the assessee's right to raise these grounds again in this assessment year in the event of the final assessment order not having been passed restricting the transfer pricing adjustment to Rs. 9,91,844/- only. The assessee shall also be at liberty to challenge the mark-up in subsequent assessment years should the need so arise. Thus, these grounds stand allowed in terms of our observations. 11.2 The corporate tax related grounds are ground nos. 8 and 9 and they challenge the directions of the Ld. DRP in confirming the provision for loss on suspended contracts amounting to Rs. 9 crores by treating the same as contingent liabilit....
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....hough the Department has assailed these directions of the Ld. DRP, in the proceedings before us, the Department could not point out any factual or legal error in the directions of the Ld. DRP by leading any evidence to the contrary. In such a situation, we are not in a position to differ from the findings of the Ld. DRP and we, accordingly, dismiss ground no. 4. 12.1 As far was ground no. 2 pertaining to deletion of disallowance pertaining to advances and deposits written off are concerned, it is seen that the assessee had written off Rs. 10,50,092/- pertaining to deposits and allowances and the disallowance was made on the ground that party wise details were not provided by the assessee. The Ld. DRP directed deletion of disallowance by observing that from the material available on record, the same appeared to be revenue in nature. Thus, it is not the case of the department that the issue was not examined. The Ld. DRP has returned a categorical finding in this regard and, accordingly, we find no reason to interfere on this issue also. Ground No. 2 also stands dismissed. 12.2 Ground No. 3 challenges the direction of the Ld. DRP in allowing the provision for warranty amounting to R....
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.... level margins. This has resulted in deletion of transfer pricing adjustment of Rs. 2,79,79,689/-. Although, the Ld. CIT DR has vehemently argued against the directions of the Ld. DRP in this regard, the Ld. AR has been equally vehement in arguing that for the purpose of undertaking the benchmarking analysis, the assessee had followed transaction by transaction approach which was in accordance with Rule 10B and 10C of the Income Tax Rules, 1962. It has been further argued that the assessee had identified separate functions and line of operation while undertaking the benchmarking analysis. It was also argued that the principle of undertaking transaction by transaction analysis for determination of ALP is embedded in the Indian Transfer Pricing Regulations, OECD Transfer Pricing Guidelines and UN Transfer Pricing Manual. It was further submitted that as per the UN Practice Manual, the Transfer Pricing analysis should ideally be made on a transaction by transaction basis. It has also been argued that each of the international transaction under dispute viz. purchase of spare parts, provision of technical services, provision of global marketing services were distinct and independent tra....
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....09-10, we had dismissed the assessee's claim for deduction of provision for bank guarantee on the ground that the provision was an unascertained liability which had not crystallized during AY 1014.1 It is the claim of the assessee that this amount of bank guarantee was en-cashed in AY 10-11 i.e. the year under consideration and, therefore, it should be allowed as a deduction in the year of crystallization. The Ld. DRP has discussed the issue at length on pages 11 and 12 of its directions and has held that the contention of the assessee is allowable in view of the facts. The AO is directed to give effect to the directions of the Ld. DRP in this regard. Accordingly, this ground is treated as allowed. 14.2 As the Ld. AR has submitted that Ground No. 2 challenging the adjustment of refund due and charging of interest u/s 234D of the Act was not being pressed, the same is dismissed as not pressed. 14.3 In the result, ITA No. 1154/Del/2016 stands partly allowed. ITA 3207/Del/2016: 15. This appeal by the assessee challenges the rectification order passed by the TPO vide order dated 25.02.2016. It has been submitted that there was a failure to provide an opportunity to the assessee of....