TaxTMI 
TaxTMI 
2024 (2) TMI 485
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.... segment by attributing notional shortfall in profits entirely towards AE purchases, without restricting the same to proportion of purchase transactions from AEs to total operating costs of the assessee. 3. Impugned order erroneously proceeds on presumptions, choosing following companies which are totally incomparable to Appellant to make huge unjustified adjustment under provisions of Chapter X: * Adtech Systems Limited * Zicom Electronic Security Systems Limited 4. Impugned order erroneously rejects the following comparable company identified by the Applicant on the reasoning that the same is a government company: * Telecommunication Consultants India Limited 5. Impugned order erroneously computes adjustment pertaining to the trading segment, by considering operating revenue of trading segment as INR 2,49,37,26,000 instead of correct amount of INR 2,52,92,26,000 being total operating revenue of the trading segment. Global Sales and Marketing Activities Fees ("GSMAF") 6. Impugned order erroneously determines TP adjustment in relation to GSMAF by considering only export sales of manufactured goods to non-AEs in the denominator to compute the percentage of GSMAF, an....
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....er Section 14A should be restricted to Rs. 1,90,461/- 15. The Learned AO and DRP has erred in not following the method as described under rule 8D for determining amount of expenditure in relation to income not includible in total income' for the purpose of Section 14A 16. Without prejudice to the above ground no. (3), the Learned AO has erred in not following the directions of the Hon'ble DRP for re-computation of the amount of disallowance under section 14A read with Rule 8D and by considering the amount of Rs. 13,910.05 lakhs for the purpose of formula prescribed under rule 8D(2)(ii) 17. The Learned AO and DRP has erred in considering the amount of Rs. 13,910.05 lakhs as indirect expenses for the purpose of computing the amount of disallowance under Section 14A read with Rule 8D 18. The learned AO has erred, in law, and in facts, in computing interest of Rs. 3,18,10,370 under Section 234B of the Act. 19. The learned AO has erred, in law, and in facts, in computing interest of Rs. 13,46,477 under Section 234C of the Act. 20. The learned AO has erred, and in facts, in initiating penalty proceedings under Section 274 read with Section .271....
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....ecision of the Apex Court in the case of National Thermal Power Corporation Limited v. CIT (1998) 229 1TR 383 (SC). In the interest of justice, it is therefore humbly submitted that the said additional ground may kindly be admitted and adjudicated. 4. After hearing both the parties, since the additional grounds involves legal issue, therefore following the decision of National Thermal Power Corporation Limited (supra), the same are admitted for adjudication. 5. The brief facts of the case are that the assessee filed return of income for AY 2013-14 on 13.11.2013 admitting an income of Rs. 53.74 crores. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee submitted documents in response to notice u/s. 142(1) and it was observed that the assessee had international transaction exceeding Rs. 15 crores and therefore the case was referred to TPO for determination of ALP after approval from the competent authority. The TPO noted that business of the assessee is divided into three segments - Systems, Trading of products and Engineering services. Under the Systems segment, the company manufactures and sells process control systems/solutions. Th....
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....128,13,78,072 Payment to AE towards after sales service G 12,795,517 Total AE transactions in OC H = F + G 129,41,73,589 AE transactions as ratio of total OC I = H/D 51.66% Excess in AE transactions to be adjusted J = 1% of E 11,30,74,959/- 10. The TPO further noticed that the assessee has paid Rs. 61,49,549 under the head Management service fees and proposed adjustment of Rs. 38,55,298 towards Public Relations and Rs. 7,31,915 towards Corporate social responsibility totaling to Rs. 45,87,213 based on benefit test. After considering the objections of the assessee and relying on certain judgments quoted in para 5.3 of his order and made adjustment of Rs. 45,87,213. 11. Further, the TPO noticed that the assessee has made payment of Rs. 2,11,01,417 to its AE towards Global Sales and Marketing Fees (GSAMF). The taxpayer's trading segment relates to local sales and software segment is a captive service provider, accordingly this expense is related to manufacturing segment. He noted that goods exported by taxpayer in FY 2012-13 is Rs. 20.48 crores out of which Rs. 8.86 crores is sale of systems to AE. Hence the only export in manufacturing segment to third parties is Rs. 28....
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.... to covered by decision of Special Bench of this Hon'ble Tribunal in Total Oil India Pvt. Ltd [TS-197-ITAT-2023(Mum)J, although several aspects of the said dispute remained to be considered by the Hon'ble Special Bench. It was prayed that Appellant's right to contest the issue of DDT on all aspects may kindly be reserved. Ground Nos. 2 to 5 : Transfer pricing adjustment in Trading segment 15. The written submissions of the assessee with respect to these grounds are as under:- A. Ground Nos. 2 to 5 2. Transfer pricing dispute was confined to the Trading segment. Issues involved in brief are: (i) Ld. Dispute Resolution Panel's ("DRP") unjustified withdrawal of proportionate adjustment granted by Ld. Transfer Pricing Officer ("TPO") contrary to Hon'ble Supreme Court's decision in CIT vs Hindustan Unilever Ltd., [2018 259 Taxmann 218 (SC)] [Pg. No. A51/ Case law PB]; (ii) unjustified exclusion of Telecommunication Consultants India Ltd. ("TCIL") as comparable; (iii) inclusion of Adtech Systems Ltd. ("Adtech") and Zicom Electronic Security Systems Ltd. ("Zicom") in final set of comparable companies; and (iv) incorrect exclusion of `commission income' a....
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....t is comparable made a passing observation about persistent operating loss. Appellant specifically objected to above observation before Ld. DRP (please refer page 54 of 119 of appeal set, internal page 13 of DRP objections). Ld. DRP findings are at paras 14 to 16 of Ld. DRP order on internal page 6 of 20. Ld. DRP did not persist with the persistent operating loss allegation but did not direct inclusion of TCIL (segment) as comparable on a new ground that TCIL is a government company. Kind reference is invited to ground wise chart wherein coordinate bench decisions are referred which hold that it is not permissible to reject a company solely on it being government company. Ld. DR's and Ld. DRP's objection deserve to be overruled and TCIL (segment) deserves to be directed to be included. It will amount placing premium on Ld. TPO's and Ld. DRP's failure to expressly comment on specific objections and coming up with a new ground each time. Further, as will kindly be noticed from the ground-wise chart TCIL (segment) was included in other years including AYs 2014-15 and 2017-18. 8. In addition to above kind attention is invited to Pg. Nos. 1036 to 1046 of paper book whe....
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....elied on the decision of Bombay High Court in Hindustan Unilever Ltd (ITA No 7868/Mum/2010) which has been upheld by the Hon'ble Supreme Court and the decision of Hindustan Unilever Ltd (supra) is consistently followed by the Bangalore Tribunal and relied on IKA India Ltd. in IT(TP)A No.2476/Bang/2017. 17. The ld. DR relied on the orders of lower authorities. 18. Considering the rival submissions, we noted that the TPO has made adjustment on the international transactions carried out by the assessee with its AE. However, the ld. DRP has considered the entire transactions with AE as well as non-AEs. This issue has been settled by the various Hon'ble High Courts observing that as per the Transfer Pricing provisions and judicial precedents, the TP adjustment should be restricted only to AE related transactions of the assessee. The ld. AR has relied on the judgment of Hon'ble High Court of Bombay in the case of CIT-1, Mumbai vs Hindustan Unilever Ltd. reported in [2016] 72 taxmann.com 325 ( Bombay) and the Hon'ble Apex Court dismissed the SLP filed by the revenue reported in [2018] 99 taxmann.com 135 (SC), therefore this this is no more res integra Respectfully following the above ju....
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....he impugned order has gone into great depth and details to record findings as to why the five above mentioned companies should be excluded. For the sake of convenience and completeness, we would reproduce relevant portion of the reasoning given by the Tribunal, which reads:- "Apitco Ltd., ** ** ** 13. As could be seen from the annual report of this company, is company is one of the 18 TCOs was formed by the key national level financial institutions in association with state-level institutions and banks, and accordingly being a government enterprise Apitco Ltd., was established to provide technical services to other government companies and body corporate. Further this company is engaged in providing services such as asset reconstruction and management, clustered allotment for mega footmarks, and environment services, energy- related services, infrastructure planning and development, energy audit etc. and undoubtedly this company is a high-end consultancy service provider. The annual report further reveals that this company is engaged in providing high-end technical services also. 14. Ld. AR brought to our notice that they Apitco Ltd., was rejected by a catena of decisions r....
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....d, however, the case cited above of Hon'ble Delhi High Court relates to selection made by the revenue and the Tribunal directed to exclude the Govt. company named Aptico Ltd., which was confirmed by the High Court. But in the present case on hand, the assessee wants to include the Govt. company as a comparable which cannot be accepted as per the ratio decendi in the above judgment. Alternatively he submitted that the assessee has filed paperbook in which it has computed profit, considering the entire receipts of the assessee, therefore, the PLI/profitability should be considered only from the trading activity of the comparable company as business activity carried out by the assessee company. 23. Considering the rival submissions, the TPO considered trading segment of TCIL as comparable to assessee's trading segment. However, the TPO calculated losses in trading segment from segmental reporting and observed that this company is persistent loss making and hence rejected it as comparable. The assessee has computed profit for all the three years. The ld. DRP have rejected this company only on the basis that it is a Government company relying on the judgement of the case of KHF Compone....
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....ctronic Security Systems Ltd. from the final list of comparables. The ld. AR submitted that the TPO held that these two companies are broadly similar to business of the assessee's trading segment. Even though there is stark difference in the products traded, there is similarity in the genus of products traded in. He further submitted that The ld. DRP upheld the order of the TPO by observing that these companies are comparable on the broad functional requirements under TNMM. 25. The ld. AR submitted that the TPO concluded that Adtech is comparable based on comparison of engineering/ technical functions i.e., analog signal or digital signal etc., Functional comparability contemplated under chapter X is distinctly different. Audited financials are at page B153 of the Annual Report paper book. Reference to page B157 of the Annual Report Paper book explains business activities, page B160 of the Annual Report paper book shows efficient R&D department which is out of place for trading activity like assessee, B162 of the Annual Report paper book under head ' material changes' shows distinctly different business model of Adtech, B163 of the Annual Report paper book' details of ....
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.... submitted that assessee and TPO have applied TNMM method for computation of PLI, The TPO has examined the issue in detail and observed that both the companies are engaged in electronic security systems in trading activities and in the written submissions the assessee has also accepted that the Adtech is engaged in trading of electronic security systems, therefore the functional profile of the assessee is same with the comparable company as per the TNMM. The ld. DR further submitted that the company has incurred expenditure towards research & development for the future prospects of trading activities which is clear from the textual information (9) of Adtech Systems Ltd. placed at paper book B163. He also submitted that service income received is only 5.22% of the total revenue & revenue from sale of services are only towards earning post maintenance services activities of traded goods, therefore the service income is the part of the trading activities, it cannot be said that the , company is earning for providing different service. Therefore, no separate segmental reportings are required. Further in the case of Zicom Electronic Security Systems Ltd., the ld. DR reiterated the submi....
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....report financial statement from paperbook page 353 at para no.8 as under:- "The Central Government has prescribed maintenance of cost records under clause (d) of section (1) of section 209 of the Companies Act, 1956. The company during the year under review not used its manufacturing facility and hence the said clause was not applicable." 34. We further note from the "Notes forming part of the financial statements" at paperbook page B359 under the head corporate information which is as under:- "Zicom Electronic Security Systems Ltd. is a public company domiciled in India and incorporated under the provisions of the Companies Act, 1956. Its shares are listed on two stock exchanges in India. The company is engaged in the manufacturing and selling of electronic security systems and equipments. The company also provides maintenance services for electronic security products." 35. We note from the above the independent auditor has reported at one place the company has not utilized its manufacturing facility, however, under the corporate information the auditor has stated the company is engaged in manufacturing and selling activities. We further note from the financial statements fr....
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.... retail segment and the Commercial Industrial (C/l) for providing security solutions for industrial use. 37. Hence, it can be observed that the company primarily operates in single segment viz Supply and integration of Electronic Security Systems and its functions are broadly same in both segments. The company is in trading activity of the security products and the function of the traded goods are similar with the assessee company as analysed by the TPO. The ratio of sale of service and maintenance income to traded goods is only 5.51%. The company is in trading segment only. On perusal of the financial statements we did not find any expenses under the Research and development account head. Therefore considering the entire facts, the company is comparable. Accordingly, we reject the contention of the ld. AR. Computation of operating margin (Ground No.5) 38. The ld. AR submitted that commission income earned by the Appellant is closely linked to its Trading segment and has been tested under Combined approach. He referred to Page 209 & page 235 of the paperbook and submitted that the TP study explained the direct linkage to trading. He submitted that commission income deserves to ....
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....and proceeded to determine the ALP by applying the benefit test. The TPO treated the payments towards GSMAF and proceeded to benchmark the same by using the bright line test. 43. The ld. AR has filed written submissions on this issue as under:- 11 This issue has been recurring issue since AY 2007-08. Ld. DRP relied on Hon'ble Tribunal's decision in AY 2007-08 and 2009-10 (kindly refer to para 34). Ld. DRP's order in present case is dated 03.7.2017. Kind reference is invited to order passed in Miscellaneous Application relating to AY 10-11 (page 1450 of paperbook @ para 2 on page 1451). Hon'ble Tribunal decided the issue conclusively after taking into account all facts. It is important to note from Hon'ble Tribunal's order for AY 2010-11 @ page 1440 that the Hon'ble Tribunal has taken note of earlier order relating to AY 2007-08 at page 1443 and after considering submissions of both sides and decided the issue, which was further clarified by MA order as referred just above. Subsequently the same conclusion as in AY 2010-11 has been followed by coordinate benches in all years (except AYs 11-12 and 12-13 in which years, assessment orders were quashed / s....
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....tion, for AY 2015-16 the DRP issued directions in favour of the assessee by relying on its own case for AY 2010-11 and further for AY 2016-17, the TPO at his own level has not disturbed the ALP of these payments. 45. The ld. DR relied on the orders of the lower authorities. 46. Considering the rival submissions, we note that this issue has been considered by the coordinate Bench of this Tribunal in assessee's own case for AY 2017-18 and it is held as under:- 12. Ground nos. 17-19 has been raised by assessee against the addition made on global sales and marketing activity expenses incurred by assessee to be in the nature of AMP spent. 12.1. The Ld.AR at the outset submitted that this issue stands squarely covered by the order of Hon'ble High Court in assessee's own case for A.Y. 2010-11 in ITA No. 940/2017 by order dated 28/08/2018. The Ld.AR referred to pages 5691-5698 of the paper book wherein the order of the Hon'ble High Court is placed. 12.2. At page 5692, following substantial questions of law was framed by Hon'ble High Court. "Whether the Hon'ble Tribunal is justified in setting aside the determination of Arms Length Price done by assessing authority and has directed ....
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....ity in the directions of the DRP however having regard to the peculiar facts and circumstances of the case wherein the assessee is having multiple and diversified international transactions involving receipt as well as payment, we are of the considered view that the payment in respect of management fees as well as Global Sale and Marketing Activity Fees shall be considered as operating cost and has to allocated in the ratio of turnover of the other international transactions and then the ALP of the other international transactions has to be determined under TNMM analysis. Hence we set aside the entire issue of determination of ALP and TP Adjustment to the record of the TPO/A.O. for carrying out fresh exercise of determination of ALP in respect of international transactions by considering the payment in respect of management fees and Global Sale and Marketing Activity Fees as part of the operating cost and allocating the same in the ratio of the turnover of the other international transactions." 4. However, this Court in a recent judgment in I.T.A. Nos.536/2015 c/w 537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. -v- M/s Softbrands India Pvt. Ltd.,) has hel....
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....before this Court. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs." 5. Having heard the learned counsel appearing for the Appellants-Revenue, we are therefore of the opinion that no substantial question of law arises in the present case also. The Appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs." 12.4. The Ld.DR on the contrary relied on the observations by the DRP. We have perused the submissions advanced by both sides in the light of records placed before us. 12.5. As the issue has been decided in favour of assessee by Hon'ble High Court upholding the view taken by the Tribunal, it has been reproduced in para 3 of the order of the Hon'ble High Court (supra). Respectfully following the same, we are of the view that the expenditure incurred by assessee towards global sales and marketing activity has to be treated as operating cost and has to be allotted in the ratio of the turnover of the other international transaction for determining the ALP under TNMM analysis. Accordingly ground nos. 17-19 raised by assessee stands allowed." 47. Respectfully following the above decisio....