TaxTMI 
TaxTMI 
2018 (10) TMI 2033
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....TA No. 515/PUN/2016. Since, the issues involved in all these appeals are identical and are arising from same set of facts, these appeals are taken up together for adjudication and are being disposed of vide this common order. ITA Nos.493 & 506/PUN/2015 (A.Y. 2010-11) 2. The Revenue has raised following grounds assailing the order of Commissioner of Income Tax (Appeals) : "1. Whether on the facts and on the law, the Ld. DRP was right in deleting the addition of Rs.45,00,000/- made by the A.O on account of disallowance out of Capital Cost Allocation of Rs.1,80,22,920/- ? 2. Whether on the facts and on the law, the Ld. DRP was right in deleting the addition of Rs.42,60,057/- made by way of disallowance of Warranty Expenses while relying upon the decision of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. vs CIT (2009) 314 ITR 62 (Supreme Court) ? 3. The appellant craves leave to add, amend or alter any of the above grounds of appeal." 3. Shri Vishal Kalra appearing on behalf of the assessee submitted that the assessee had claimed deduction amounting to Rs.1,80,22,920/- in respect of Corporate Cost Allocation. The asse....
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....de a provision for warranty amounting to Rs.1,03,71,987/- in the assessment year 2010-11. The Assessing Officer in draft assessment order, disallowed Rs.42,60,057/- on the ground that the same is not based on any scientific method. The DRP deleted the said addition. The DRP held that the liabilities of the assessee towards warranties is not disputed. The assessee has followed average of percentage of "Free of Cost" dispatches on sales made in last three years. An additional provision of Rs.49 lacs was also made towards warranty for supply made to one of its major customer. The DRP rejected Assessing Officer's observation that the provision is not made on scientific basis. The ld. AR vehemently supported the findings of DRP and further substantiate its submissions by placing reliance on the following decisions: i. Rotork Controls India Pvt. Ltd. Vs. CIT, 314 ITR 62 (SC); ii. Calcutta Co. Ltd. Vs. CIT, 37 ITR 1 (SC); iii. Bharat Earth Movers Vs. CIT, 245 ITR 428 (SC). 4. On the other hand Shri Rajeev Kumar representing the Department submitted that from the details furnished by the assessee relating to corporate cost allocation as head wise expenses and ....
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.... is not for the business of assessee. We do not find any infirmity in the directions of DRP reversing the findings of Assessing Officer in draft assessment order on this count. Accordingly, ground No. 1 raised in the appeal by Revenue is dismissed. 7. In ground No. 2 of the appeal, the Revenue has assailed deleting of provision for Warranty expenses Rs.42,60,057/-. The assessee is providing warranty on its product for the period ranging from 12 to 18 months. In assessment year 2010-11 the assessee made provision for warranty amounting to Rs.1,03,71,987/-, out of which the Assessing Officer disallowed Rs.42,60,057/- on the ground that the provision has not been created on scientific and systematic basis. The ld. AR has submitted that in the earlier assessment years and in the subsequent assessment years the provision for warranty made by assessee has not been disturbed. The manner and the basis for making the provision in all the assessment years including the assessment year under appeal is identical. This fact has not been disputed by the Revenue. Therefore, we are of considered that the principle of consistency demands the provision created by the assessee for warranty deserve....
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....sions / evidence furnished by the Appellant in this regard. The AO / DRP / TPO further erred in alleging that the services received by the Appellant on account of 'corporate support services' and 'Eaton Business System' are similar in nature and the Appellant is making payments under two different nomenclatures for the services which are overlapping, which is contrary to the facts of the case. 5. That on the facts and circumstances of the case and in law, the AO has erred in charging interest under sections 234B and 234C of the Act." 10. The ld. AR submitted that the primary grounds raised by the assessee in appeal is against transfer pricing adjustment in respect of international transactions pertaining to payments made to Associated Enterprises (AEs) for Corporate Support Services. The authorities below have erred in coming to the conclusion that the assessee has not received any services from AEs and hence, no benefit has been derived by the assessee from the alleged services. The ld. AR submitted that the assessee has furnished copies of the agreements entered into with AEs before the authorities below. The assessee had also furnished various other d....
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....8 for receipt of such services from Eaton China. 3.6 Further, the Assessee had entered into a Shared WHQ Services Agreement dated September 1, 2005 with Eaton Corporation, US (Refer pages 319 to 335 of the paperbook). In terms of the Agreement, the Assessee received corporate support services from Eaton Corporation, US, the nature of which is detailed at Annexure A to the agreement placed at pages 331 and 332 of the paperbook. The Assessee, during the year under consideration, paid INR 10,39,210 for receipt of such services from Eaton Corporation, US. 3.7 Eaton China and Eaton Corporation have computed the service charges by including a mark-up of 5% and 8% on total costs respectively, in accordance with the agreements. The CSS charges are consistently applied by the AEs to all the participating entities. 3.8 The Assessee allocated the expenses incurred in respect of receipt of corporate support services from its AE's to manufacturing and trading segment and for the purposes of benchmarking the subject transaction aggregated the portion of payments in respect of corporate support services attributable to the manufacturing segment with the manufacturin....
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....led to establish the expertise of Eaton China and the necessity of availing these services. In this regard, it is submitted that since the factual matrix is identical, the transfer pricing adjustment should be deleted following the decision in Assessee's own case for assessment year 2008-09." 11. On the other hand ld. DR vehemently supported the order of DRP/Assessing Officer in respect of transfer pricing adjustment arising from payments made to the AEs in lieu of alleged corporate support services. However, the ld. DR fairly admitted that the issue raised in ground Nos. 2 to 4 of the appeal for assessment year 2010-11 are similar to the one already adjudicated by the Tribunal in assessee's own case in assessment year 2008-09. 12. Both sides heard. Orders of the authorities below perused. The ground No. 1 of the appeal is general in nature, hence, requires no adjudication. 13. The ground Nos. 2 to 4 of the appeal relate to transfer pricing adjustment amounting to Rs.1,23,36,988/- with respect to international transaction of Corporate Support Services received by assessee from its AE's. The authorities below have raised doubt over the receipt of services and the benefi....
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....nsfer pricing adjustment made by TPO on account of services availed by the assessee from its associated enterprises and taking the value of said international transactions at Nil. In the first instance, we hold that TPO cannot sit in the judgment of business module of assessee and its intention to avail or not to avail any services from its associated enterprises. The role of TPO is to determine the arm's length price of international transactions undertaken by the assessee and whether the same is at arm's length price when compared with similar transactions undertaken by external entities or internal comparables. We have already addressed similar issue in Emerson Climate Technologies (India) Limited Vs. DCIT in ITA No.2182/PUN/2013, relating to assessment year 2009-10 and in ITA No.211/PUN/2015, relating to assessment year 2010-11, order dated 29.12.2017 and observed as under:- "17. We have heard the rival contentions and perused the record. The assessee was 100% subsidiary of Copeland Corporation, USA. The assessee was earlier a company incorporated under the Companies Act and was joint venture of 51:49 between Kirloskar Brother Ltd. (KBL) and Copeland Corporatio....
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....uppliers - viz. Bao Steel 487 - 490 Cost reduction targets achieved due to e-bidding platforms implemented 533 - 534 Identifying lead for new business opportunities for ECT India - Examples of support/inputs received for Whirlpool for Indian markets 587 - 588 Identifying lead for new business opportunities for ECT India - Examples of support/inputs received for Blue Star for its Middle East markets 597 - 598 Sharing of key data related to competitors such as Mitsubishi 565 - 566 Sharing of key data related to competitors such as Sanyo 583 - 584 Assistance in implementation of performance management system for employees of ECT India, identifying the training needs, etc 621 - 622 Access to regional / global information in respect of suppliers, commodities updates etc 539 - 546 Solutions obtained for critical issues such as unionizations issues with labour, legal cases pending in court, union wages proposals, high attrition rates, e-hiring deployment, etc. 613 - 628 19. The assessee thus, filed documentary evidence to demonstrate that it had availed services in the field of Human Resources, Marking and Product, Finance, Busin....
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....of the world adhere to specific rules and regulations while carrying on business under the said brand. The assessee is 100% subsidiary of Copeland Corporation, which admittedly, has presence in various Countries. The assessee has placed on record that besides the assessee entering into agreement with Emerson HK, Emerson TH, various entities of other countries had entered into such agreements. The terms of the agreement are similar for providing services, wherein a particular formula is designed by the person providing the services i.e. the basis for remuneration is the cost incurred by way of man hours charged to the entity with mark up of 5.8%. Such method of charging and remunerating was identical in the case of all the entities which were availing the services from Copeland Corporation through Emerson HK and Emerson TH. The assessee had also furnished on record the basis for charging cost by the two entities from the assessee. No doubt, the complete details of operations of the said concerns worldwide had not been filed, but that had no relevance to the activities or services availed by the assessee. There is no merit in the order of TPO in rejecting the segmental details of AEs....
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.... TNS India Pvt. Ltd. Vs. ACIT (supra), wherein the Assessing Officer had not believed the write-up for the services provided and the benefit obtained. The Tribunal held that unless the Assessing Officer steps into assessee's business premises and observes the role of the said company or the assessee's business transactions, it would be difficult to place on record the sort of advice given in day-to-day operations. Therefore, the order of Assessing Officer/TPO that services were not rendered by the group companies to assessee was negated by the Tribunal. 23. The next stand of the TPO is two-fold; as to what benefits have been received by the assessee against the said support services and intricacy value of services given by the associated enterprises. The said aspect is linked to the issue of whether there is any need for services and in the absence of its establishing the same, whether the TPO / Assessing Officer is correct in determining the arm's length price of transactions at Nil. The assessee had entered into an agreement with its associated enterprises for availing the services because of business benefits arising from such an understanding. Law does not require ....
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....t his business on worldwide platform. The total turnover of assessee for the year was Rs. 173 crores and the services availed from associated enterprises were intermingled to the extent that the Tribunal in earlier years has directed that for benchmarking international transactions undertaken by the assessee, import of raw materials for manufacturing purpose and export of finished goods should be aggregated. The information technology services availed by the assessee also relate to aforesaid business carried on by the assessee and hence, we find merit in the plea of assessee in aggregating the same with other international transactions undertaken by the assessee with its associated enterprises. Accordingly, we hold so. In any case, the assessee in the reasons for filing additional evidence has pointed out that information was filed before the TPO along with agreement and certificate of Eaton China, but thereafter, no other query was raised by TPO or any clarification was sought in respect of information technology services availed. The assessee thus, was under the bonafide belief that the documents and explanation furnished by it has been accepted. Further, the assessee before us h....
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....r was remanded back to the file of concerned Assessing Officer for arm's length price adjustment by the TPO, in accordance with law. The said judgment is dated 23.05.2014. 33. The Hon'ble High Court of Judicature at Hyderabad in the case of R.A.K. Ceramics India Pvt. Ltd. (supra) while deciding the issue of fulfillment of conditions of benefit test as raised by the TPO vis-à-vis royalty payments made by assessee @ 3% which was restricted to 2% of net ex-factory sale proceeds, held that it was incumbent upon the TPO after rejecting comparables selected by the assessee to come up with other comparables so as to justify the reduction of royalty payments. Further, no such exercise was undertaken by the TPO and by going into whys and wherefores of the improvement in the net sales and profits of assessee, the TPO held that there was no justification for payment of royalty @ 3% to associated enterprises by the assessee. The Hon'ble High Court held This reasoning is without legal basis of law as it is not for the TPO to decide the best business strategy for the assessee. The Hon'ble High Court also held that This whimsical fixation by the TPO amounts to an arbitrary and....
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.... Hon'ble High Court vide para 10 held as under:- "10. We must also record the fact that the ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under section 92C of the Act. The method to determine the ALP adopted was not one of the prescribed methods for computing the ALP. It was not even any method prescribed by the Board. At the relevant time, i.e. for A.Y. 2008-09 Section 92C of the Act did not provide for other method as provided in Section 92C(1)(f) of the Act. The impugned order of the Tribunal holds that the method adopted by the Revenue to determine the ALP was alien to the methods prescribed under section 92C of the Act. In the above circumstances, the Tribunal declined to restore the issue to the Assessing Officer for re-determining the ALP by adopting one of the methods as listed out in Section 92C of the Act. This finding of the Tribunal has also not been challenged by the Revenue." 36. In the facts of the case before the Hon'ble High Court of Bombay in CIT Vs. M/s. Lever India Exports Ltd. (supra), the TPO while evaluating the transactions between the parties held that the same were on principal to p....
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....ustained." (underline provided by us for emphasis) 37. In view of the ratio laid down by the jurisdictional High Court in CIT Vs. M/s. Kodak India Pvt. Ltd. (supra) and CIT Vs. M/s. Lever India Exports Ltd. (supra), the proposition laid down by the Hon'ble High Court of Delhi (supra) stands modified. 38. Applying the above said principle and in view of the facts and circumstances as referred to by us in the paras hereinabove, we hold the international transactions of information technology services availed has to be aggregated with other transactions being intrinsically linked to other international transactions undertaken by the assessee during the year and the same has to be benchmarked applying internal TNMM method as in the case of other international transactions. Further, we also reverse the order of TPO in holding that the assessee has not availed any services in view of various documents filed by the assessee and also certificate of Eaton China, which was filed during the course of TP proceedings evidencing not only the availment of services but also the basis of cost for such services. Similar services were availed by other Eaton group entities from Ea....
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.... facts and circumstances of the case and in law, the AO / DRP / TPO have erred in rejecting the benchmarking analysis and methodology adopted by the Appellant, being Transactional Net Margin Method ("TNMM") for benchmarking its international transaction of payments made to AEs for receipt of CSS, without providing any cogent reason and further erred in determining the ALP of such transaction as 'Nil', which is not in accordance with the prescribed methodology under the Act. 4. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in making TP adjustment in respect of the international transaction of payments made to AEs for receipt of CSS, alleging that the Appellant had failed to furnish any supporting evidence/documents to establish the receipt of services and commensurate benefits realized thereof, without appreciating the submissions/evidence furnished by the Appellant in support of the said claim. 5. That on the facts and circumstances of the case and in laws, the TPO has erred in equating the payments made to Eaton Technology Pvt. Ltd. ("ETPL") with payment for CSS. The TPO further erred in alleging that services r....
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....by the assessee is dismissed being devoid of any merit. 23. In the result, the appeal of assessee for assessment year 2011-12 is partly allowed in the aforesaid terms. 24. The Revenue in its appeal for assessment year 2011-12 has assailed the assessment order on following grounds : "1. Whether on the facts and circumstances of the case, the DRP was justified in considering the internal TNMM as most appropriate method for determining ALP of assessees international transactions pertaining to manufacturing activities, in the case when assessee's both AE and non-AE segment consists of AE transactions. Whether the data of comparison available can be considered as reliable for transfer pricing analysis? 2. Whether on the facts and circumstances of the case, the DRP was justified in directing the AO /TPO to recomputed TP adjustment by considering the margin of AE segment and not the overall margin of the entire manufacturing activity without appreciating the fact that no separate profitability of transactions with AE and transactions with non AE is available and assessee has determined profitability by applying certain allocation keys which is not accurate and ....
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....1 raised by the Revenue in assessment year 2010-11. The submissions made in respect of said ground would apply to ground No. 5 of the present appeal as well. 28. The ld. DR vehemently defended the findings of TPO with respect to the grounds raised in ground Nos. 1 to 4 by the Revenue. However, the ld. DR fairly admitted that the issue raised in ground Nos. 1 to 4 by the Revenue is similar to the one adjudicated by the Tribunal in assessee's own case in ITA No. 1623/PN/2011 for assessment year 2007-08. 29. Both sides heard. Orders of the authorities below perused. The Revenue in ground Nos. 1 to 3 of the appeal has assailed adoption of internal TNMM as the most appropriate method for determining arm's length price of international transactions under manufacturing segment. We find that similar issue had come before the Co-ordinate Bench of the Tribunal in assessment year 2007-08. The Tribunal upheld internal TNMM as the most appropriate method for manufacturing segment by observing as under : "12. We have carefully considered the rival submissions. The dispute on this aspect relates to a plea put-forth by the assessee during the course of the proceedings before the TPO....
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....ofitability of the transactions with the third parties. We find that assessee also asserted before the TPO that both the segments, namely, the associated enterprises segment and the third parties segment were functionally comparable in every aspect. Therefore, it was canvassed that based on the aforesaid internal TNM analysis, the international transactions of the assessee in the Manufacturing segment were at an arm's length price. 13. In-fact, the internal comparables do have a more direct and closer relationship to the tested transactions rather than the external comparables. In other words, the profitability of an assessee from the controlled transactions can be benchmarked more meaningfully with reference to the assessee's profitability from similar transactions carried out in uncontrolled conditions, i.e. with third parties. In the present case, assessee pointed out that the associated enterprises segment and the third parties segment were functionally comparable and therefore the third parties segment was a good uncontrolled comparable available to benchmark the international transactions entered with the associated enterprises. 14. Pertinently, assessee....
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....ption of raw materials from AEs. While preparing the AE and Non-AE segment, the revenue and costs to the extent identifiable are determined based on actual. The common costs I expenses, being insignificant portion of total operating expenses, as explained above were allocated considering net sales of each segment as the reasonable allocation key. Your good self would appreciate that Transactional Net Margin Method ('TNMM') requires a functional similarity rather than product similarity. Thus, under both the aforesaid segments, there is a functional similarity viz. manufacturing function though the product may not be identical. In view of the above, the internal comparability of profit from sale of manufactured products under AE and Non-AE segment would be the most appropriate method to benchmark the international transactions pertaining to manufacturing segment." 15. The aforesaid shows that the segmentation of Manufacturing segment into associated enterprises segment and Third parties segment was done by the assessee on product basis, i.e. the associated enterprises segment reflect profitability on products which require consumption of raw materi....
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....ased from AEs and are automatically covered in this segment.) * The profitability of comparable transaction pertaining to purchase of raw material and components purchased from third parties is reflected in the operating margin of the Third party segment. * The operating margin derived from the international transaction pertaining to purchase of raw material and components purchased from AEs (forming a part of in the AE segment) would be benchmarked against the comparable operating margin derived from the third party transactions (covered in the AE segment). * The operating margin derived from the international transaction pertaining to sale of finished products to AEs (forming a part of in the AE segment) would be benchmarked against the comparable operating margin derived from the third party transactions (covered in the AE segment)." 17. On the basis of the aforesaid fact analysis, which has not been controverted by the TPO, we find that in the present case internal comparison of the operating margins using internal TNM Method is liable to be upheld in order to compute arm's length for the international transactions of purchase of raw mate....