TaxTMI 
TaxTMI 
2022 (3) TMI 1522
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....d Enterprises (AEs) viz., Manufacturing Segment, Trading Segment and Services Segment. 3. In the Manufacturing Segment, the assessee manufactures intermediate products that fall under the product classification automotive components/auto anciliary products like It operates in the following segments: -Instrument clusters; -Engine systems; -Immobilisers and transponders -Speed sensors, -Airbag controllers - Anti-lock braking systems(ABS) -Fuel supply modules; and -Temperature gauges, pressure gauges, etc. 4. In the manufacturing segment, the assessee is in charge of conceptualization and designs. It procures equipment for manufacture both fixed and capital equipments. It owns any intellectual Property rights (IPR) for the products developed by them. It receives technology and manufacturing know-how from its Associate Enterprise (AE) for its manufacturing process. It purchases raw materials and components from both third parties and AEs. The nature of raw materials purchased from the AEs and third parties are different. The raw materials procured from the AE are globally sourced by Continental group wherein ....
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....regard to the arms length price. The Explanation to the said section provides that allowance for any expense or interest arising from an international transaction hall also be determined having regard to the arm' s length price. * The term "international transaction' has been defined in section 92B(1) or the Act to mean a transaction between two or more "associated enterprises" either or both of whom are non-residents in the nature of inter alia purchase, sale or lease of intangible property or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises. * Section 92A of the Act defines the term "associated enterprise" in relation to another enterprise, in a manner where the enterprise directly or indirectly participates in the Management, control or capital of the other enterprise. * The term "arm's length price" (ALP) has been defined in clause (ii) of section 92F of the Act, to mean a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. Section 92C(1) of t....
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....ia, in the case of such multinational enterprises, new provisions are proposed to be introduced in the Income-tax Act, " ... " [248 ITR st 181]. 10. In this appeal we are concerned with two of the International Transactions carried out by the assessee during the previous year, in respect of which additions were made to the total income on account of determination of ALP, which has been challenged by the assessee before the Tribunal, viz., (i) Transfer pricing adjustment ("TP adjustment") of Rs.117,35,51,190/- made by the Transfer Pricing Officer ("TPO") in respect of the manufacturing segment of the Assessee pursuant to the DRP directions. (ii) TP adjustment of Rs.25,95,18,911/- made by the TPO in respect of the software development services ('SWD services' for short) rendered by the Assessee pursuant to the DRP directions. 11. In the course of assessment the Assessing Officer ("AO") made a reference to the TPO for examination of the arm's length price of the aforesaid transactions. On such reference, the TPO passed an order dated 30.10.2017 under Section 92CA of the Income-tax Act, 1961 ("the Act") determining the TP adjustment with respect to manufacturing....
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.... 14. As far as the issue of determination of ALP in the Manufacturing segment are concerned, the facts are that the Assessee filed a Transfer Pricing Study (TP Study) in terms of Sec.92D of the Act justifying the price it received from the AE. The Assessee chose Transactional Net Margin Method (TNMM) - as the Most Appropriate Method for comparing Assessee's profit margin with that of comparable companies. Under this method the comparison is made between the Assessee's the operating/ net margins with that of comparable companies to analyse if the related party transactions have been undertaken on an arm's length basis. Rule 10B(1)(e) of the Income Tax Rules, 1962 (Rules), explains transactional net margin method as a method by which,- (i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is co....
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....d at a margin of 2.38%. as against 16.78% arrived at by the TPO. Besides the above, the Assessee also disputes, inclusion of certain companies as comparable with the Assessee by the TPO and exclusion of a company chosen by the Assessee as a comparable company in its TP study. Besides the above, the Assessee has also raised a contention that the provisions of Sec.92 of the Act have to be applied only to the proportionate value of international transaction i.e., transaction with the AE and transactions with non AEs should be not considered for the purpose of adjustment u/s.92 of the Act. 16. A comparison of the Assessee's TP study and the manner of determination of ALP by the TPO is given below: 1. Net mark-up on cost earned by the Assessee As per the TP study: Operating Income Rs. 5,17,71,00,000/- Operating Cost Rs.5,05,41,30,000/- Operating Profit (Op. Income - Op. Cost) Rs. 12,29,70,000/- Net mark-up (OP/OR) 2.38% As reflected in the TP Order: Operating Income Rs. 5,17,71,00,000/- Operating Cost Rs.6,04,57,20,000/- Operating loss (Op. Income - Op. Cost) Rs.-86,86,20,000/- Net mark-up (OP/OR) -16.78% ....
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....82,82,500 D. Arm's length Cost (B-C) Rs. 478,88,17,500 Shortfall being adjustment u/s. 92CA Rs. 125,69,02,500 17. In arriving at the above adjustment, the TPO imposed the adjustment on an entity level, rather than restricting the adjustment to the proportion of international transactions to total cost in the segment. It can be seen from the above that the TPO arrived at Rs.38,82,82,500 that the operating profit that the Assessee should have made by applying 7.5% on cost of Rs.517,71,00,000 and after reducing the same from the operating revenue arriving at cost of Rs.478,88,17,500. Since the Assessee's cost was Rs. has taken the entire cost of Rs.604,57,20,000 incurred in the manufacturing segment and reduced the Arm's Length margin of 7.50% to arrive at the operating cost of Rs.478,88,17,500 that the Assessee ought to have incurred but since revenue that the Assessee's cost was Rs.604,57,20,000, the difference of Rs.125,69,02,500 (Rs.604,57,20,000 - Rs.478,88,17,500) was added as adjustment consequent to determination of ALP. 18. It is one of the contention of the Assessee before the TPO that the provisions of Sec.92 can be applied only to transactions with AE. In....
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....ation) and the final figure of addition was Rs.8,05,66,807) Total operating cost 6,04,57,20,000 Purchase of raw materials 76,47,58,690 Payment of technical know-how 14,89,99,314 Payment of royalty 27,63,35,693 Payment of services availed 17,07,549 Payment of shared services availed 13,40,30,481 Payment for production support services availed 3,37,97,500 Total value of international transactions in the manufacturing segment 1,35,96,29,227 Percentage of international transactions to total operating cost 22.49% Revised transfer pricing adjustment restricted to percentage of international transactions 26,39,21,336 Relief from original adjustment 90,96,29,854 The above plea was not accepted by the TPO. No specific discussion is there on this issue in the order of the TPO. 18B. Aggrieved by the aforesaid determination of ALP by the TPO in the draft order of Assessment by the AO, the Assessee filed objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act. The DRP issued directions, whereby it upheld the contentions of the TPO, subject to the following directions: (i) Company Hindustan Hardy Sp....
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....is resulted in underutilization of the production capacity in the factory, resulting in low utilization of the available capacity for the FY 2013-14 to manufacture the products. The Assessee operated at 44.76% of its installed capacity whereas the comparable companies chosen by the Assessee operated at an average of 71.94%. It is evident from the capacity utilization of 44.76% 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. 22. The TPO did not grant an adjustment for capacity underutilisation on the ground that the adjustment would have to be made to the comparable companies and not the tested party and that the capacity utilisation of each of the comparable companies has not been considered. According to the AO in terms of Rule 10B(1)( e) clause (iii) the net profit margin arising in comparable uncontrolled transactions has only to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transacti....
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....t or profit may not be available, therefore, a reasonable accurate adjustment in the hands of the tested party may throw fruitful result. This view has been upheld by the ITAT in the case of Pangea3 & Legal Database Systems Pvt Ltd v. Income-tax Officer reported in[2017] 79 taxmann.com 303 (Mumbai - Trib.). This Hon'ble Tribunal has also allowed adjustments in the case of tested party in the following cases: * Skoda India Pvt. Ltd. v. ACIT reported in [2009] 30 SOT 319 (Pune) * Kirloskar Motors Pvt. Ltd. v. ACIT reported in [2012] 28 taxmann.com 293 (Bangalore) 25. It was submitted that in the case of Haworth India, this Hon'ble 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, ....
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....ee's own case for AY 2012-13 in IT (TP) A No.713/Bang/2017 and this Tribunal by its order dated 24.11.2021 remanded to issue to the TPO with the following observations: "24. We have heard both the parties and perused the material on record. In this case, the exact details of capacity utilisation of comparable companies was not made available to the TPO. It was alleged that the TPO should obtained it by exercising his powers u/s. 133(6) of the Act so as to compare the capacity utilisation of the comparables with the assessee company. In our opinion, it is appropriate to remit the issue relating to adjustment on account of capacity utilisation of the assessee to the file of the AO/TPO for deciding the same afresh keeping in view the OECD guidelines. If the exact details of capacity utilisation of comparable companies are not available in the public domain, the AOITPO is directed to obtain the same directly from the comparable companies and decide theissue afresh, after affording opportunity of being heard to the assessee. Accordingly, this issue is remitted to the AO/TPO." 31. Following the aforesaid order, we remand the issue to the TPO/AO for consideration afresh on the....
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....ive Inds. Pvt. Ltd. 0.06% 0.03% TVS Upasana Ltd. 1.24% 0.48% Aspee Springs Ltd. 4.46% 2.23% Supreme Treon Pvt. Ltd 7.47% 3.84% JMT Auto Ltd 6.21% 3.26% Aditya Auto Products &Engg. (India) Pvt Ltd. 19.75% 10.25% Varroc Engineering Pvt Ltd. 7.56% 4.80% Leewon Precision Pvt. Ltd. 2.02% 1.05% Borgwarner Morse TEC Murugappa Pvt. Ltd. 0% 0% Maco Pvt. Ltd 64.88% 40.02% VijayshreeAutocom Ltd. 0% 0% Average Import Consumption 10.33% 6.00% 34. The learned DR while relying on the order of the DRP submitted that arithmetic mean of the margins of comparables under TNMM takes care of such differences and reiterated the stand of the TPO for refusing such adjustment. 35. Both the parties agreed that identical issue was decided by this Tribunal in Assessee's own case for AY 2012-13 in IT (TP) A No.713/Bang/2017 and this Tribunal by it's order dated 24.11.2021 remanded to issue to the TPO with the following observations: "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 ....
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....ofit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the TPO 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 wit....
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....ule (3) of Rule 1013 of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto.' Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP.' Hence, to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the issue to the file of AO for fresh consideration." 31. In view of the above finding of the Tribunal in Gates Unitta India Company (P.) Ltd. (supra), we are inclined to remit this issue to the AO/TPO with similar direction." 36. Following the aforesaid order, we remand the issue to the TPO/AO for consideration afresh on the lines indicated in the decision of the Tribunal for AY 2012-13, after affording the Assessee opportunity of being heard. 37. The next grievance projected by the Assessee in Grd.No.11 is with regard to adjustment to operating cost on account of foreign exchange fluctuation. In this regard 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 significan....
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.... to do whatsoever with this Indian leg of the transaction. Such fluctuation being due to external factors, there would be no reason for the AE to revise its rate contracts where components have been sold broadly at consistent prices (in some cases even at lower prices). It is to be noted that there has been an extraordinary and significant depreciation in INR over Yen/USD during the year when compared to the previous years. • From a harmonious reading of the relevant provisions of Indian TP Regulations, it is evident that for a comparability analysis of an international transaction with the uncontrolled transaction, reasonable and accurate adjustment is permitted to eliminate any difference which materially affects the price or costs or the profit arising from such transaction in the open market. Nowhere the relevant rules suggest that such adjustment should be made only to the uncontrolled transaction, that is, comparable companies and not to the 'tested party' whose transaction is being compared. The adjustment can be made either in the case of the 'tested party' or the comparable companies so that the difference which could materially affect the amou....
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....e 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. 40. The learned counsel for Assessee highlighted the following points that necessitate the adjustment to the Assessee's cost on account of foreign exchange fluctuations: 1. Higher Import Content of the Assessee vis-à-vis comparable companies: 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 learned TPO. It was submitted that in comparison to the Assessee, the comparable companies who are established players in the automobile market, have negligible import content due to indigenization of materials required for production. The Assessee contends that ....
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....rice to customers, and thus it had to bear any increase in the cost of manufacture. The Assessee had to oblige with the terms of contract and supply the products at the committed rate for the entire year even though there was significant increase in the cost of the products by virtue of higher cost of the components being imported vis-à-vis comparable companies selected by the Assessee who had either no imports or less significant imports. Further, it is also to be noted that the Assessee may not be able to pass on the entire impact of foreign exchange to customers as it operates in the competitive environment of the automobile industry. On an analysis carried out to determine the change in selling price per unit of the products to the customer across years, it was also observed that there was no significant increase in the selling price of the Assessee to its customers in majority of products. From the same it is evident that the Assessee is unable to negotiate for an increase in sale prices to account for the impact of forex fluctuations etc. 3. Impact of forex fluctuations on the Assessee 43. In this regard it was submitted that the imports are made in foreign curre....
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....application of the Assessee dated 22.3.3019. The documents sought to be submitted in this regard are as follows: 1. Tabulation of appreciation/depreciation in exchange rate 2. Exchange rates prevailing as per Reserve Bank of India from the years 2008 to 2018 3. Comparison of Rates of import purchases for FY 2013-14 and FY 2012-13 4. Analysis of import prices across FY 2013-14 and FY 2012-13 5. Invoice listing for FY 2013-14 6. Invoice listing for FY 2012-13 7. Invoices submitted for FY2013-14 and FY2012-13 46. It was submitted that the Assessee bears the forex risk, any adverse fluctuation on foreign currency would be borne only by the Assessee. The AE has nothing to do whatsoever with the Indian leg of the transaction. Such fluctuation being due to external factors, there would be no reason for the AE to revise its rate contracts where components have been sold at consistent prices. Further the proportion of imports from AEs as against total imports is only approximately 24% and the majority of imports (76%) pertains to unrelated suppliers. It is evident from the above that the Assessee has incurred substantial cost....
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....he file of the TPO for determining the ALP after considering 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." 50. Following the aforesaid order, we remand the issue to the TPO/AO for consideration afresh on the lines indicated in the decision of the Tribunal for AY 2012-13, after affording the Assessee opportunity of being heard. 51. As far as Grd.No.12 raised by the Assessee is concerned, the same is in relation to the plea of the Assessee for grant of depreciation adjustment in computing operating cost of the Assessee. In this regard it was submitted that the Assessee has invested huge capital in purchasing fixed assets which are an integral part of the manufacturing operations. The Assessee incurred high depreciation cost to sales of 11.55%. As it did not manufacture the products as estimated, the Assessee could not recover its fixed costs and incurred losses. TheAssesse....
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....reciation adjustment. 55. Grounds No.13 and 15 raised by the Assessee are with regard to choice of comparable companies chosen by the TPO and confirmed by the DRP. In ground no. 13, the Assessee is seeking the exclusion of Rajsriya Automotive Industries. Pvt Ltd., TVS Upasana Ltd., Aspee Springs Ltd., Supreme Treon Pvt Ltd., Leewon Precision Pvt Ltd., Borgwarner Morse TEC Murugappa Pvt Ltd., and Maco Pvt Ltd. In ground no. 15, the Assessee is seeking inclusion of Munjal Showa Ltd. as a comparable. We shall deal with comparability of each of these companies. a) Rajsriya Automotive Industries. Pvt Ltd: ("Rajsriya") 56. It is the claim of the Assessee that this company is functionally dissimilar to the Assessee. It is the contention of the Assessee that though Rajsriya is primarily involved in the manufacture of part and accessories for two-wheelers, the components manufactured by Rajsriya can be categorised as mechanical in nature whereas the Assessee is engaged in the manufacture of electrical components like instruments clusters, engine systems, speed sensors, airbag controllers, anti-lock braking system etc. It was also the contention of the Assessee that this company pos....
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....) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 58. In terms of Rule 10B(2)( a) of the rules specific characteristics of property transferred or services provided in either transaction is a relevant criteria. It may be true that broadly the Assessee and the comparable Rajsriya can be said to be in automotive component manufacturing. However, the specific characteristics of the property manufactured by the Assessee is electrical/electronics parts whereas the comparable company Rajsriya is manufacture of automotive components. Therefore there is a difference in the specific characterics of the property manufactured. So also in terms of Rule 10B(2)( b) of the Rules, presence of intangible as an Asset employed would be a relevant criteria to choose comparable. That being the case, we are of the view that if on a narrower search, if sufficient number....
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....saction would vary between 15% and 25% depending on the availability of comparable companies. If more companies are available for comparability then the percentage of RPT can be restricted to 15% and in cases where such comparable companies are not available then the range can go upto 25% to rope in more comparable companies. The fact that raw material consumption is more in the case of the Assessee does not seem to fit into any of the criteria for deciding comparability in terms of Rule 10B(2) of the Rules. c) Aspee Springs Ltd: (Aspee) 62. The plea of the Assessee for exclusion of this company is on the ground that this company is functionally dissimilar to the Assessee. Aspee is engaged in the business of manufacturing Washers, Circlips, Bushes, Retaining Rings, Clips and other similar automotive parts. These auto components are less complex and are mechanical in nature as compared to that of the Assessee which manufactures electrical components. Also, Aspee performs research and development activities and therefore, this company is not functionally comparable to the Assessee. It was submitted that the DRP has erred in holding that R&D activities are not relevant in select....
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....Supreme cannot be compared with that of the Assessee. Since the products manufactured by Supreme are completely different from that of the Assessee, the company is functionally non-comparable and ought to be rejected. It was further submitted that the company fails the RPT filter of 25% applied by the TPO. The RPT workings as extracted from the annual report are provided below: Particulars Amt (Rs.) Related party transactions 119,35,66,404 Sales 424,62,83,702 RPT/Sales 28.11% It was submitted that while the DRP directed the RPT filter to be reapplied by the TPO, the same was inappropriately applied by the latter and the company was included in the final list of comparable companies. The learned DR relied on the order of the DRP. 66. In so far as the contention regarding the dissimilarity in the characterics of the property is concerned, the conclusions while dealing with Rajsriya will apply to this company also. As far as the quantum of RPT is concerned, it would be appropriate to direct the TPO/AO to consider the plea of the Assessee that the RPT percentage is more than 25% for this comparable company. e) Borgwarner Morse TEC Murugappa ....
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.... 69. As far as comparability of this company is concerned, it was submitted that the said company is functionally similar to the Assessee and is engaged in the in the same industry and manufactures similar auto components as that of the Assessee. Therefore, the said company ought to be included in the final list of comparables. The learned DR relied on the order of the DRP. 70. After considering the rival submissions, we find that the DRP has not gone into the comparability of this company but has proceeded under the mistaken belief that this company was not part of the search matrix before the TPO. This was a comparable chosen by the Assessee and rejected by the TPO and it was the plea of the Assessee that this company is comparable functionally. We are therefore of the view that interest of justice would be met, if the TPO/AO is directed to consider comparability of this company afresh. 71. In ground No.16, the Assessee has contended that the adjustment, if any should be restricted to the proportionate value of the international transactions of the Assessee. In this regard it was pointed out by the Assessee that the adjustment (if any) should be restricted only to the int....
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....ge alone. We have already given these figures in the earlier part of this order but for the sake of ready reference, we give below the details of percentage of international transaction in the manufacturing segment, which is as follows: Particulars As per TP order Transfer pricing Adjustment 11,73,55,1190 Total operating cost 6,04,57,20,000 Purchase of raw materials 76,47,58,690 Payment of technical know-how 14,89,99,314 Payment of royalty 27,63,35,693 Payment of services availed 17,07,549 Payment of shared services availed 13,40,30,481 Payment for production support services availed 3,37,97,500 Total value of international transactions in the manufacturing segment 1,35,96,29,227 Percentage of international transactions to total operating cost 22.49% Revised transfer pricing adjustment restricted to percentage of international transactions 26,39,21,336 Relief from original adjustment 90,96,29,854 It was submitted that the transfer pricing adjustment (if any) should be restricted to the international transaction of the Assessee. The learned DR relied on the order of the DRP. 73. In this regard, we fi....
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.... 6.2 Whether on the facts and in the circumstances of the case and in law, the Hon'ble Tribunal was correct while issuing the above directions without appreciating the observations of the DRP that there was no segmental audit of the transactions of AE and non AE and therefore there was no method whereby the AO could come to a fair determination of ALP by only restricting to transactions with AE." 50. The Hon'ble Bombay High Court on the above questions of law held as follows:- "5. With the assistance of the learned counsel for respective parties, we have considered the submissions and the judgment of the Tribunal. The Tribunal in para 7 of its order has observed as under:- "7. We have heard both the parties and their contention have carefully been considered. So far it relates to grievance of the assessee that the TP adjustment can only be applied to international transactions of the assessee with the AE and it cannot be applied at entity level, the issue is found to be covered by the aforementioned decision of the Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. (supra). Therefore, we hold that determination of arms length price....
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....ependent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered to with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act. 5. In the above view, as the provisions of the Act in respect of transfer pricing are self evidence, Question No.(a) as proposed does not give rise to any substantial question of law. Thus not entertained." 52. The ITAT Bangalore in the case of Kirloskar Toyota Textile Machinery Pvt. Ltd. v. ACIT [IT(TP)A No.1401/Bang/2010 held as under:- "Taking into consideration of these factors, we accept the first fold of submission made by the learned counsel for the assessee and direct the Assessing Officer to confine the adjustment, qua the purchases made by the assessee from the AE. To be more specific, the adjustment is to be made only to the purchases made from the AE ..... (emphasis supplied) 53. The CIT(A) in exercise of his powers of enhancement of income took the view that the ALP has to be determined on the basis of the entire sales in the finished goods segment including transactions with Non-AE also. The....
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....ons with AE as well as non-AE gets suppressed." 54. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT(A) that transaction with nonAE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. He also referred to certain decisions of the Tribunal for the proposition that section 92 of the Act is not applicable to non-AE transactions. These decisions have already been extracted in the earlier paragraphs. The ld. DR relied on the order of the CIT(Appeals). 55. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw 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 p....
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....ed that as no adjustment with respect to royalty has been made in view of the adjustment in the manufacturing segment being more than the amount of royalty, the said ground may not be adjudicated at this stage. However, the Assessee reserves liberty to urge this ground at a later stage in the event the adjustment made towards royalty is revived. 76. We are of the view that the prayer so made is acceptable and the liberty prayed for is granted. We hold and direct accordingly. 77. The AO is directed to compute the ALP of the international transaction in the manufacturing segment as per the directions given in this order, after affording opportunity of being heard. 78. SWD SERVICES SEGMENT OF THE ASSESSE It is not in dispute that the transaction of rendering of SWD services by the Assessee to it's AE is an international transaction. ANALYSIS OF THE ASSESSEE'S TP STUDY AND THE TP ORDER Net mark-up on cost earned by the Assessee (as reflected in the TP Order): Operating Income Rs. 1,38,06,40,000/- Operating Cost Rs.1,29,89,30,000/- Operating Profit (Op. Income - Op. Cost) Rs.8,17,10,000/- Operating/Net mark-up (OP/OC) 6.29% Compar....
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....elected by TPO and their arithmetic mean: Sl. No. Name of the Company OP/OC (in %) 1 Infosys Ltd. 36.13 2 Larsen & Toubro Infotech Ltd. 24.61 3 Mindtree Ltd. 20.43 4 Persistent Systems Ltd. 35.10 5 R S Software (India) Ltd. 24.25 6 Cigniti Technologies Ltd. 27.62 7 SQS India Ltd. 22.37 8 Thirdware Solution Ltd. 44.68 AVERAGE MARK-UP 29.40% Computation of arm's length price by the TPO and the adjustment made: Arm's Length Mean Mark-up 29.40% Operating Cost Rs.129,89,30,000/- Arm's Length Price @129.40% of cost Rs.168,08,20,000/- Price Received Rs.1,38,06,40,000/- Shortfall being adjustment u/s. 92CA Rs.30,01,80,000/- 79. Aggrieved by the aforesaid determination of ALP by the TPO in the draft order of Assessment by the AO, the Assessee filed objections before the Dispute Resolution Panel (DRP) u/s.144C of the Act. The DRP issued directions, whereby it upheld the contentions of the TPO, subject to the following directions: Selection of comparable comp....
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....Ltd and Mindtree Ltd. from the list of comparables. 83. As far as the challenge by the assessee on exclusion of aforesaid 5 companies in ground No.23, the ld. counsel for the assessee has brought to our notice a decision of Bangalore Bench of ITAT for the very same Assessment Year 2014-15 in the case of LG Soft India Pvt. Ltd. in IT(TP)A No.3122/Bang/2018 for AY 2014-15, order dated 28.5.2019. In this order rendered in a case of assessee rendering SWD services such as the assessee, the Tribunal excluded 3 out of 5 companies referred to in the earlier paragraph were directed to be excluded with the following observations:- "5. The Ld A.R submitted that M/s Infosys Ltd, M/s Persistent Systems Ltd and M/s Thirdware Solutions Ltd have been excluded by the co-ordinate bench in the assessee's own case in AY 2008-09 in IT(TP)A No.1673/Bang/2012. 6. We notice that the co-ordinate bench has excluded M/s Infosys Ltd in AY 2008-09 by following the decision rendered by another co-ordinate bench in the case of 3DPLM Software Solutions Ltd (IT(TP)A No.1303/Bang/2012 dated 28.11.2013, wherein the decision rendered in the case of Triology E Business Software India P Ltd (ITA N....
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....id decision, we direct exclusion of (1) Infosys Ltd. (2) Larsen & Toubro Infotech Ltd. (3) Persistent Systems Ltd. & (4) Thirdware Solutions Ltd. from the list of comparable companies. 86. As far as exclusion of Mintree Ltd., is concerned, it was submitted that Mindtree ought to be excluded from the final list of comparables inter alia for the reasons that it is not functionally comparable to the Assessee. Mindtree is engaged in the business of Manufacturing, Banking, Financial Services and Insurance, Hitech, Travel & Transportation and Others. It undertakes application development and maintenance, data analytics, digital services, Engineering R&D, Infrastructure management, IT strategy and consulting, integrated services, salesforce, SAP services, test engineering services. Despite rendering diverse services, there are no segmental details in respect of the services rendered. Mindtree has also invested significantly in Intellectual Property whereas the Assessee does not own any IP. It was further submitted that the DRP has failed to consider that Mindtree has a high turnover which makes it incomparable with the Assessee. Also, Mindtree is widely engaged in research and developm....
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....revenues from onsite operations outside India are effectively companies working outside India having their own geographical markets, cost of labour etc., and also return commensurate with the economic conditions in those countries. Thus assets and risk profile, pricing as well as prevailing market conditions are different in predominantly onsite companies from predominantly offshore companies like the taxpayer. Since, the entire operations of the tax payer are taking place offshore i.e. in India; it is but natural that it should be compared with companies with major operations offshore, due to the reason that the economics and profitability of onsite operations are different from that of offshore business model. As already stated the Assessee has limited its analysis only to functions but not to the assets, risks as well as prevailing market conditions in which both the buyer and seller of services located. Hence, the companies in which more than 75% of their export revenues come from onsite operations are to be excluded from the comparability study as they are not functioning in similar economic circumstances to that of the tax payer. Hence, it is held that this filter is appropri....
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....he Annual Report at Page 1373 of Paper Book, found that major revenues are from operations as per Note 19 being income from software services and commission received on sale of software licenses. The earnings as per Note 28 as per the financial statements, the company has earning from export of software and in the F.Y. 2013-14 which constitute more than 95% of income. Therefore we found these facts are not considered by the TPO or DRP and accordingly we restore this issue to the file of TPO for examination and verification." 92. We are of the view that the issue of comparability of Akshay Software Ltd. should be examined afresh by the TPO as per the directions of the Tribunal in the order referred to above. We hold and direct accordingly. 93. As far as inclusion of Maveric Systems Ltd. are concerned, we find that inclusion of Maveric Systems Ltd. was remanded by the Tribunal to the TPO for consideration afresh in the case of EMC Software & Services India P. Ltd. (supra) with the following observations:- "(iii) Maveric Systems Limited : This comparable was rejected by the TPO and it was sought for inclusion by the assessee and whereas TPO has rejected without any basi....
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....f comparables. We are of the view that this aspect was not examined either by the TPO or DRP and therefore deem it fit and appropriate to remit the issue and direct the TPO/AO to consider the claim in this regard. 97. As far as exclusion of Sasken Communication Technologies Ltd. ("Sasken") We find that this company was selected by the Assessee and came to be rejected by the TPO for the reason that the company is functionally not comparable to the Assessee. The exclusion of the company came to be upheld by the DRP on the grounds that (i) the company fails export turnover filter; (ii) the company earns revenue from licensing, SWD and royalty; and (iii) the company offers R&D consultancy, wireless and software products. In this regard, it was submitted that the company is functionally similar to the Assessee as the services rendered by the company predominantly are in the nature of SWD services. The services rendered by the company predominantly fall within the ambit of SWD services as per the Safe Harbour rules prescribed by the CBDT and therefore the company is comparable to the Assessee. The income from software products constitutes a meagre 4.2% of total revenue, which would no....
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....t of is intangible under development, i.e. work-inprogress which the company has not yet employed in its operations. Therefore, this company ought to be included in the final list of comparables. We have considered the submission and are of the view that once the company is found to be a product company also and no segmental details are available and if that finding is not in challenge, then that ground would be sufficient to disregard this company as a comparable company and therefore the presence of intangibles would not make any difference. Hence, the plea of the Assessee for inclusion of this company as a comparable company is rejected. 100. The next issue that requires adjudication is ground No.25 with regard to Non grant of Working Capital adjustment. In this regard it was submitted that Rule 10B(3) of the Income-tax Rules, 1962 ("the Rules"), itself categorically provides that an adjustment ought to be provided for any differences in the economic factors between the tested party and the comparables. A working capital adjustment is one such adjustment which is to be applied in order to adjust for the differences between the working capital positions of the tested party and....
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....y are: a. General Provision for warranty - The Assessee creates general provision for warranty on a scientific basis towards the expected liability that could arise during such warranty period. The Assessee creates provision for warranty on the percentage of sale for each product. The quality department based on past experience and historical trend of the performance of each product arrives at a percentage based on which provision for warranty is created. b. Additional provision for warranty - Bearing in mind the nature of industry of that of automobile components manufacturer, the Assessee needs to create additional provision for warranty based on the circumstances and specific cases. During the year under consideration, there was no additional provision for warranty created. The movement in provision for warranty as accounted for by the Assessee for the year under consideration is as under: Amount in INR Particulars General Warranty Specific Warranty Total Opening balance 2,60,13,380 2,81,32,797 5,41,46,177 Add: Provision created during the year (debited to P & L A/c) 3,21,32,433 0 3,21,32,433 Less : Actua....
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....on 11 March 2019 Page No.1385 to 1509 Page No.1511 The above evidences the methodology of creating such provision and substantiates that the warranty policy adopted by the Assessee is on scientific basis and not adhoc basis. 3 Actual warranty claims debited to profit and loss account/ No separate ledger The AO failed to appreciate that the Assessee adjusts actual warranty claims against provision in the provision account, a separate ledger is maintained for the said purpose. Further, certain direct actual warranty expense not in the nature of provision was directly debited to profit and loss account. It was reiterated that the Assessee follows the specific methodology of creating provision for warranty consistently over the years. The said methodology has been submitted before the AO during the course of assessment proceedings. It was submitted that the Assessee creates provision for warranty on a scientific basis. 104. Reliance was placed on the following decisions in support of the contentions of the Assessee: * Rotork Controls India Private Limited [2009] 180 Taxman 422 (SC) * Nokia Siemens Networks Indi....
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...., ignoring the fact that past experience is also the basis for creation of provision for warranty. We are therefore of the view that the provision for warranty has to be allowed as a deduction, as the provision created satisfies the requirements for claiming provision as a liability, as laid down in the judicial precedents referred to above. We hold and order accordingly and allow the relevant ground of appeal of the Assessee. 108. Ground Nos. 36 to 46 are in respect of Disallowance of annual licence fee of Rs. 28,00,21,116/-. The facts with reference to these grounds are that during the year under consideration the Assessee debited expenses amounting to Rs. 28,00,21,116 to profit and loss account under the head "R&D". The break-up of the total R&D expenses is as under: Sl. No. Nature of expenses Amount in INR 1 License fees to group companies 21,36,97,972 2 Project Research and Development expenses 6,59,74,419 3 Third party and others 3,48,724 Total 28,00,21,116 The Assessee submitted that it had entered into two license agreements with Continental Automotive GmBH, Germany and Continental Teves AG & Co., Germany dated 1.1.2....
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....ch 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 refer page no. 1541 to page no. 1551 of the paper book - volume 3 filed on 11 March 2019): The Assessee has entered into a License and Technical Assistance Agreement dated 1 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 and supply information relating to commercial manufacture, sale and distribution. Compensation for the aforementioned license has been agreed to be paid by the Assessee as an annual royalty fees of 6% of net sales of sensorics products per year. 112. It was submitted that the usage of the term "R&D" was just a nomenclature used by the Assessee for the purpose of accounting such expenditure and the nature of expense as clearly laid out in the....
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....79/DEL/2017 (A.Y 2012-13) & S. A No. 217/Del/2017 in ITA No. 1579/Del/2017 114. Based on above judicial decisions, the factors to be considered and conditions to be satisfied were summarized as 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 further rights/ assignment The licensee has restricted rights to create further rights/ assign the license in favor of third parties 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 hence, is considered as cost in earning the same 115. It was submitted that the agreements under which the annual license fees was paid, satisfies the aforementioned conditions as under: Factors under consideration Whether the conditions are satisfied? Clause reference in the Agreement....
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....nefits out of such knowledge sharing and technical guidance and support. c) Some of the key benefits out of the above support to the Assessee 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 Assessee 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 Assessee to upgrade its business including the manufacturing process to the latest available technology. 117. Relevant Snapshots of the manuals, emails and standard documents demonstrating the rendering of these services are produced before this Hon'ble Tribunal under cover of an application for additional evidence. The additional evidence sought ....
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....he additional evidence is necessary for proper adjudication of the dispute viz., to understand the nature of expenditure in question. 118. It was submitted that adopting standard practices is key to the Assessee's business without which it would not be in a position to produce high quality automobile products as per global standards. - Access to various tools/platforms a) There are numerous tools/ software platforms that are made available by Continental global to the Assessee for the purpose of its business. These tools are developed in-house by Continental global or developed by third party and customized for use by Continental group. These tools/software platforms are primarily online tools/platforms and shared drives which facilitate various technical support including: - Sharing of best practices/ standard procedures (discussed above). - Real-time production control and monitoring. - Planning/ forecasting the material and labor requirements. - Survey the customer's demands/ requirements. - Tracking and overall management of the project on real-time basis. - Integration of costing software and accounting....
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....ption calculation. It's a smart software that makes machines closer to Industry 4.0 smart equipment (industry standard). 119. Snapshots depicting the working of the tools and reports generated are produced before this Hon'ble Tribunal under cover of an application for additional evidence. - Assistance in sourcing: a) Continental global has a global strategic sourcing approach i.e., strategy for obtaining raw material/ resources across the world in a standardized manner, which can achieve economic advantages in terms of obtaining significant discounts. Continental global locates suppliers, seeks samples from them and tests their products. Upon satisfaction about the quality of the product, Continental global provides such information of suppliers located across the globe, to the group. It also negotiates for bulk discounts and set quality standards for the suppliers. This in turn helps the Assessee in procuring quality raw materials at best price without any efforts. Sample email communications demonstrating procurement of raw materials by Continental Global, instructions/solutions on raw material shortage and quality issues are produced before this ....
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....rally entails steps and action points for the Assessee. Sample email communications are also part of the application for additional evidence. - Problem resolution a) The Assessee seeks the help of Continental global to resolve issues in cases where the Assessee is unable to do so. Continental global provides the Assessee with necessary technical support on call and through emails. b) Continental global also voluntarily takes initiatives to mitigate the issues at every plant location across the world. If the issues are highly vulnerable and needs personal monitoring by the experts, the global team send experts to that particular location to address the specific and routine issues and bring down the occurrence of quality incidents. - Other assistance: a) Continental globalenters into centralized agreements for procuring certain techniques, technical services. This helps the Assessee to improve the product quality. The aforesaid assistance received from Continental group helps in improving the technological performance of the Assessee's operations in terms of quality and cost and also helps in optimum utilization of resources in an efficien....
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....her: - capitalised and amortised over the useful life of such Project if the Assessee has actually commercialized the same; or - charged off to the profit and loss account if the same could not be commercialized or recovered from the customers. 122. It was submitted that in line with the above, during the captioned AY, the Assessee has availed technical knowhow from group companies amounting to Rs. 14,89,99,314/- and a summary of the same is as under: Particulars Amount in Rs. Expense capitalized since the same was commercialized 4,10,56,133 Expense charged to the customers in the subsequent year (recorded as unbilled revenue in the captioned AY) 4,07,27,558 Expense charged off in the profit and loss account as it could neither be commercialized nor chargeable to the customers 6,59,74,419 Total 14,89,99,314 It was pointed out that party-wise Invoice details of technical knowhow availed from group companies amounting to Rs. 14,89,99,314 and sample invoice copies thereof were submitted before the Hon'ble DRP. 123. It was submitted that as can be seen from the above, an amount of Rs. 6,59,74,419 has been charged to profit and lo....
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....to its group companies. Please refer page no. 1375 of the paper book - Volume-3 filed on 11 March 2019 3 Expense is capital in nature since it provides enduring benefits From the above factual and legal basis, the Assessee submits that the impugned expense is not a capital expenditure, as there is no enduring benefit derived by the Assessee. The same is related to the business of the Assessee. The judicial precedents discussed above supports the case of the Assessee that expense is not capital in nature. 4 No rationale for entering into agreement with its group entities since the Assessee was carrying on the business even prior to entering aforesaid agreements The Assessee submits that merely because an agreement is entered into, no businessman would change the business. It is for the purpose of the business that a businessman enters into an agreement. Assessee had taken a business decision to avail the services from group entities to facilitate and further its business objects. It is also submitted that having provided the factual and legal basis of the expense, the learned AO cannot question commercial expediency of a transaction. Further, e....
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....5(1)(iv) of the Act. Notwithstanding and without prejudice to the above, even if the said expenses are held as capital in nature, the Assessee 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. In this regard, the Assessee places reliance on the decision of Hon'ble Supreme court in the case of Honda Siel Cars India Ltd.[2019] 101 Taxmann 222 (Supreme Court) wherein it was held that if royalty is treated as capital expenditure, needless to mention that the Assessee shall be entitled to depreciation thereon. It was also submitted that the DRP has erred in holding that the annual license expense does not fall under the definition of intangible assets under section 32 of the Act, without appreciating that the same falls under the limb of aforesaid definition, namely, "any other business or commercial rights of similar nature". Notwithstanding and without prejudice to the above, even if the said expenses are to be disallowed, the AO failed to appreciate that out of the total amount of Rs. 28,00,21,116, an amount of Rs. 27,63,35,693 has already been included in the adjustment made unde....