TaxTMI 
TaxTMI 
2023 (2) TMI 1419
X X X X Extracts X X X X
X X X X Extracts X X X X
....tices were duly served on the assessee. During the previous year relevant to the assessment year 2016-17, several international transactions took place between the Assessee and its AEs, including purchase of raw materials for the manufacturing segment, payment of royalty fee and provision of SWD services and 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 28.10.2019 under Section 92CA of the Income-tax Act, 1961 ("the Act") determining a TP adjustment with respect to manufacturing segment, SWD services segment and payment of royalty totalling to Rs. 173,02,90,000/-. Initially, a draft assessment order dated 30.12.2019 came to be passed by the AO in which the aforesaid TP adjustment was incorporated, apart from the additions made to the income of the Assessee on account of disallowance of provision for warranty and royalty expenses claimed as revenue expenditure. 3. Aggrieved, the Assessee filed its objections before the DRP which, vide its directions dated 22.02.2021, rejected Assessee's objections insofar as the TP a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es to be followed. The assessee sells finished products to third parties as well as to its AE. Majority of the sales are to OEMs. Continental Group has a Global Key Accounts Management (KAM) structure through which it maintains customers relationship with OEMs having global presence which helps the assessee to establish customer relationship with the Indian entities of global OEMs. The assessee sells goods both to independent third parties as well as to its AEs. For sales to third parties the price is driven by market conditions and for sales to AEs, it is based on agreed pricing policy. 6. In the manufacturing segment the assessee adopted the Transaction Net Margin Method (TNMM) as the most appropriate method for determination of Arm's Length Price (ALP). 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....80,000/- Operating Profit (Op. Income (less) Op. Cost Rs. 52,88,90,000/- Net mark-up (OP/OR) 6.73% 9. The TPO did not allow the above adjustments to the operating cost and accordingly recomputed the margin of the assessee as under - Operating Income Rs. 786,29,70,000/- Operating Income Rs. 786,29,70,000/- Total Cost Rs. 842,40,50,000/- Operating loss (Op. Income - Op. Cost) (Rs. 56,10,80,000/-) Net mark-up (OP/OR) -7.14% 10. The assessee selected the following comparables in the TP study- Sl. No. Name of the company Average OP/Sales(in %) (weighted average) 1. Rane Engine Valve Ltd. 2.46 2. Hindustan Hardy Spicer Ltd. 1.19 3. JMT Auto Ltd. 7.09 4. Bharat Gears Ltd. 2.72 5. Munjal Showa Ltd. 5.49 Arithmetical Mean 3.79 11. Accordingly the assessee concluded that the margin on the international transaction in the manufacturing segment is within the arm's length price. 12. The TPO in addition to the comparables selected by the assessee conducted new search to filter fresh comparables. The final list of comparables as per TPO is as listed below - Sl. No. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re general in nature. 17. The grounds raised and pressed by the assessee with regard to TP adjustment in manufacturing segment are - (i) That the lower authorities erred in not granting an adjustment for under utilisation of capacity (Ground No. 11). (ii) That the lower authorities erred in not granting adjustment towards custom duty expenses.(Ground No. 12). (iii) That the lower authorities erred in not granting an adjustment towards exchange fluctuation.(Ground No. 13) (iv) That the lower authorities erred in not granting depreciation adjustment (Ground No. 14) (v) That the lower authorities erred in upholding the inclusion of Aditya Auto Products and Engg. (India) Pvt. Ltd., Aspee springs Ltd., Leewon Precision Pvt. Ltd., Maco Pvt. Ltd., TVS Upasana Ltd., and Varroc Engineering Ltd. as comparable to the Assessee(Ground No. 15). (vi) That the lower authorities erred in not including Gabriel India Ltd. and Vijayshree Autocom Ltd. as comparables to the Assessee. (Ground No. 16) (vii) That the TPO erred in not including the additional companies of the Assessee (Ground No. 17) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ious other rulings to hold that the Assessee did not produce any evidence for assuming the capacity utilization of comparable companies and whatever data relied upon by the assessee for seeking the adjustment was either unreliable or incorrect 20. Before the Tribunal, it was submitted by the ld. AR that firstly, from a harmonious reading of sub-clause (iii) of clause (e) of Rule 10B and sub-rule (3) of 10B, 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 rule 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. It is submitted that 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 amount of net profit margin is removed. More so, in practical situations there may be absence of reli....
X X X X Extracts X X X X
X X X X Extracts X X X X
....irected to obtain the same directly from the comparable companies and decide the issue afresh, after affording opportunity of being heard to the assessee. Accordingly, this issue is remitted to the AO/TPO." 24. Respectfully 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. Ground no. 12: Adjustment for custom duty 25. This ground is in relation to adjustment to the cost base of the Assessee on account of custom duty. The Assessee has incurred significant customs duty charges which are proportionately much greater than that of the comparable companies leading to a lower profitability for the Assessee. The comparable companies have not incurred any significant custom duty expense as they primarily manufacture using materials available indigenously within India. It is submitted that the Assessee is still in the process of localizing its manufacturing process. To meet the quality standards and to overcome technological challenges, the Assessee imports raw materials from its AEs. Therefore, it becomes necessary f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ltd. v. DCIT (supra) dated 4.1.2012 in ITA No. 120/PN/2011, which is as follows : "37. We have heard the parties and perused the available material on records in the light of the second limb of the ground 4(b). it is relevant mentioned that we have already analysed the relevant provisions of Income Tax rules vis a vis the scope of the adjustments in the preceding paragraphs in the context of the adjustments on account of the 'working capital'. in principles, our findings on the issue remain applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of 'import cost' works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these factual circumstances and in the light of the scope of adjustments discussed above, in our opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee's counsel supports our finding relates to the decision of this bench of the Tribunal in the case of SkodaAuto India p Ltd 122 TT.I 699 (Pune) dated March 2009 wherein,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... content was not in place. The assessee's claim is that it was in These circumstances that the assessee had to sell the cars with such high import contents, and essentially high costs, while the normal selling price of the car vas computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Co-ordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. 17-25 additional argument was not available before authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations." 38. The perusa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ment. 31. The DRP denied the Assessee's claim for the adjustment on the grounds that (i) the adjustment should be made to the comparables; (ii) there are many assumptions in the process of granting the adjustment; (iii) the selling price is determined by the market force, and it appears that the Assessee is paying high price to its AEs which is making it suffer losses. 32. In this regard, the ld. AR submitted that the Assessee bears the forex risk and hence it has incurred high forex fluctuation loss which is embedded in the raw material import cost. The significant imports made by the Assessee are in Euro and USD. While accounting, the same is converted to INR based on the foreign exchange rates communicated by the Continental Group. During the relevant year, the INR depreciated considerably vis-à-vis most of the other major currencies and imports became costlier for the Assessee. 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 y....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bunal, 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. 34. Respectfully following the above decision we the TPO/AO for consideration afresh on the lines indicated in the decision of the Tribunal for AY 2014-15, after affording the Assessee opportunity of being heard. Ground No. 14: Depreciation adjustment 35. The assessee raised this ground in relation to the plea of the Assessee for grant of depreciation adjustment in computing operating cost of the Assessee. It is 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 8.70%. As it did not manufacture the products as estimated, the Assessee could not recover its fixed costs and incurred losses. The Assessee, without prejudice to the above arguments, has claimed adjustment to neutralize the difference between its depreci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n electric circuitry to function. Therefore the non-electronic products manufactured by this company are not comparable to the products manufactured by the Assessee. Research and development: The company is engaged in inhouse R&D resulting in creation of intangibles and has a certified R&D centre. On the other hand, the Assessee does not undertake and R&D activities. Detailed submissions in this regard are placed at pages 221-226 of the appeal set. Reliance in this regard is placed on the findings of this Hon'ble Tribunal in the order passed in the Assessee's case for the assessment year 2014-15, while adjudicating on the comparability of Rastriya Automotive Industries Pvt. Ltd. (at paras 56-58) Aspee Springs Ltd: (Aspee) Functionally dissimilar: It is submitted 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. Aspee can be characterized as a full-fledged ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssee. It is submitted that in the assessment year 2015-16, this company was rejected by the TPO as being functionally dissimilar (screenshot of the search matrix is placed at page 241 of the appeal set). In the absence of any change in facts, this company is liable to be rejected for the year under consideration. Reliance in this regard is placed on the findings of this Hon'ble Tribunal in the order passed in the Assessee's case for the assessment year 2014-15, while adjudicating on the comparability of Rajsriya Automotive Industries Pvt. Ltd. (at paras 56-58). Detailed submissions in this regard are placed at pages 233-242 TVS Upasana Ltd: ("TVS") Functionally dissimilar: It is submitted that TVS is functionally not comparable to the Assessee as it is engaged in the business of manufacturing spokes and nipples for all the major OEM's in India. These auto components are less complex and are mechanical in nature as compared to the electric components manufactured by the Assessee. It is submitted that in the assessment year 2015-16, this company was rejected by the TPO as being functionally dissimilar (screenshot of the search matrix is pl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... who manufacture automotive components. We hold and direct accordingly. 43. We further notice that the Hon'ble Tribunal has applied the same criteria while considering the exclusion of the TVS Upasana Ltd., and Aspee springs Ltd and held that - TVS Upasana Ltd: ("TVS") 59. The plea of the Assessee for exclusion of TVS is almost identical to the plea for rejection of Rajsriya as a comparable. It is the plea of the Assessee that TVS is functionally not comparable to the Assessee as it is engaged in the business of manufacturing spokes and nipples for all the major OEM's in India. These automotive components are less complex and are mechanical in nature as compared to the electric components manufactured by the Assessee. The Assessee is into the manufacture of electrical components like instrument clusters, engine systems, speed sensors, airbag controllers, anti-lock braking system etc. for the automobile industry. It is the further plea of the Assessee that TVS is also engaged in manufacture of various products and operates in different segments. Moreover, raw material consumption ratio on sales of TVS and the Assessee are widely variant. The proportion of raw ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....red in holding that R&D activities are not relevant in selection of comparables as the same will exist is many companies. The DRP has failed to consider that Aspee has spent an amount of Rs. 40,00,000 towards development of a product which will have a material impact on the financials of the company. Aspee can be characterized as a full-fledged manufacturer while the Assessee is only a licensed manufacturer assuming normal risks and not engaged in R&D activities. The company is also in possession of intangible assets generated during the course of its operations. The proportion of raw materials consumed by the Assessee (76%) exceeds 1.5 times that of the comparable company. The relevant details as extracted from the annual reports are provided below. Particulars Amt (Rs.) Raw material cost 14,55,03,466 Sales 30,61,07,713 Raw material cost/Sales 48% From the above, it is evident that Aspee operates on a different business model from that of the Assessee and hence is functionally non-comparable. Therefore, the said company ought to be excluded from the final list of comparables. 63. The learned DR relied on the order of the DRP. 64. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... absence of any change in facts, the company ought to be included in the final list of comparables. The company passes all the filters applied by the TPO. It is submitted that since the company is functionally comparable, the DRP's action in affirming the rejection of the company merely on the ground that it does not feature in the search matrix, is baseless. In addition to the above, the aforesaid company has been directed to be included in the final set by the Hon'ble DRP in the Assessee's own case for AY 2017-18, post which the TPO, in order giving effect, had accepted the said company as comparable and included it in the final set. Vijayshree Autocom Ltd.: This company was rejected by the TPO in the search matrix on the ground of no availability of data. The DRP affirmed its exclusion on the ground that company does not feature in the search matrix of the TPO. In this regard, it is submitted that the company is engaged in the manufacture of automotive components, which includes fuel tanks, chassis reinforcements, stressed members and brackets, and is therefore comparable to the Assessee. In fact, in the previous assessment y....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee pertaining to purchase of raw materials from its AEs and other related transactions. The DRP did not accept this contention of the Assessee despite various decisions of this Hon'ble Tribunal in support of the Assessee. The Assessee submits that the mandate in Chapter X of the Act is only to re- determine the consideration received or given to arrive at income arising from an International Transaction with Associated Enterprises. In respect of transactions with non AEs, Chapter X of the Act has no role to play and therefore to make an adjustment including the non-AE transactions is erroneous and contrary to the provisions of the Act. Reliance in this regard is placed on the findings of this Hon'ble Tribunal in the order passed in the assessee's own case for the assessment year 2014-15. 51. We notice that the coordinate bench in assessee's own case has considered the identical issue and held that - 73. In this regard, we find that identical issue has been decided by the Tribunal in the case of Ika India Pvt. Ltd., (supra) and the Tribunal held as follows: "44. Section 92(1) of the Act provides as under:- "Any income arising from an international ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dit 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 arm's length price should be restricted only to international transaction of the assessee with its AE. It was pointed out that the figures are available with the AO, details of which has also been filed before us at page 170 of the paperbook. Theref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r 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." 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) 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 reasoning adopted by the CIT (A) for doing so was as follows:- "10.0 While examining the working of ALP in the case of Assessee, it was observed that the TPO has reduced the adjustment proportionately by ho....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct 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). 52. 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 products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e determined and could not substantiated for the basis of quantification of the amount of payment. The payment made by Continental India apparently looks like a tribute payable by a subsidiary to its holding company. It is not relatable to any specific tangible service rendered by the holding company to the subsidiary and hence the undersigned treats the entire payment toward royalty paid to the AE by the Taxpayer as NIL under CUP method as no other third party would have paid such a sum form any other third party without actually receiving any tangible services, without any basis of quantification and without any proof for the receipt of the services. In view of the above, the entire payment of Royalty Fee of Rs. 29, 14, 50,952 is treated as an adjustment U/s 92CA." 54. Before the DRP the assessee submitted that the payment of Royalty is integral part of manufacturing activity and accordingly there should not be any separate adjustment. The assessee also submitted that the DRP in assessee's own case for AY 2012-13 has deleted the adjustment made towards payment of royalty. The DRP did not accept the submissions of the assessee and held that the assessee has not substan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oup including Development results such as designs, formulas, improvements, discoveries and software, technical drawings and specifications which can mean any oral or written information for instance, drawings, illustrative materials, cards, films specifications or any other technical description including quality and test specifications and other know-how data, Trade secrets. etc. * The technical assistance provided by the Continental Group helps in avoiding a disruption in the production process by breakdown of machinery/equipment as these help the machines to function smoothly and seamlessly. The Assessee does not undertake any research activity on its own and relies on the R&D activity performed by the Continental Group for undertaking its manufacturing operations. The Basic R&D is therefore, the essence or the heart of the manufacturing process undertaken by the Assessee and as such the business of the Assessee cannot survive in absence of the same. In fact the growth of the manufacturing sales year on year as tabulated below demonstrates the importance of the know how received: Financial year 07-08 08-09 09-10 10-11 11-12 12-13 13-14 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee has placed the relevant documents in terms of agreement etc., in this connection before the lower authorities and that the same have not been examined. We also see merit in the argument of the ld. AR that the AO and the DRP, while making an adjustment on the corporate tax front, have categorically held that the Assessee has received the services having enduring benefit thereby disallowing the same expenses u/s. 37 also and therefore revenue cannot take a different stand for TP adjustment. We further notice that the TPO has arrived at the ALP as NIL without doing any bench marking merely based on the ground that the assessee has not substantiated having received the services without examining the documents submitted. In view of this we remit the issue back to the TPO for fresh examination of various evidences submitted by the assessee and decide the issue in accordance with law. SWD SERVICES SEGMENT 57. The assessee chose TNMM as the most appropriate method in the TP study for SWD services segment. Operating Profit by Operating Cost is the profit level indicator. Accordingly the operating margin of the assessee in this segment is arrived at as below - Operating Inco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Taxpayers PLI 5.81% 35th Percentile Margin of comparables set 20.87% Adjustment required (if PLI<35th Percentile) Yes Median margin of comparable set 26.36% Arm's length price Rs. 3,876.71million Price received Rs. 3,246.11 million Shortfall being adjustment u/s. 92CA Rs. 630.6 million 61. The DRP rejected all the contentions of the Assessee and upheld the TP order. The AO passed the final assessment order in line with the directions of the DRP in which the TP adjustment of Rs. 63,06,00,000/- was sustained and the assessee is in appeal against the same. 62. The grounds in the appeal which are being pressed are as follows: (i) That the lower authorities erred in including Rheal Software Pvt. Ltd., Inteq Software Pvt. Ltd., Larsen & Toubro Infotech Ltd., Nihilent Ltd, Persistent Systems Ltd., Infobeans Technologies Ltd., Aspire Systems (India) Pvt. Ltd., Infosys Ltd., Cybage Software Pvt. Ltd., and Thirdware Solution Ltd. (Ground No. 28). (ii) That the lower authorities erred in not directing inclusion of Maveric Systems Ltd., Akshay Software Technologies Ltd., Sasken Communication Technologies Ltd., Ace Software....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icant related party transactions: The company's related party transactions (sales) for the FY 2013- 14 stand at 79.49% of sales, and therefore the company ought to be excluded. Wide fluctuation in the margin: It is submitted that the company's margin fluctuate widely, suggesting that there exists a peculiar economic circumstance. For the FY 2013-14, the company's margin stood at 47.21%, for the FY 2014-15 32.14% and for the FY 2015-16 7.56%. Submissions in this regard are placed at pages 316-325 of the appeal set. In view of the above, it is submitted that Inteq ought to be excluded from the final list of comparables. Larsen & Toubro Infotech Ltd. ('L&T') Functionally different: It is submitted that the company is engaged in diversified business which are not comparable to that of the Assessee. Further, segmental details as regards the same are not available. Further, the company owns proprietary software products which are developed in-house. Accordingly, it is submitted that L&T is a product company and is thus not comparable to captive SWD service providers such as the Assessee. Significant brand value and intangible....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ties as provided by the Assessee. The company undertakes R&D activities. Significant marketing expenses: The company has incurred marketing expenses of 2.11% (of total sales) during the FY 2013-14, 1.65% during the FY 2014-15 and 0.69% during the FY 2015-16. On the contrary the Assessee's marketing expenses are marginal (0.13%) Significant expenses in foreign currency: The company has incurred significant expenses in foreign currency of 37.68%, 33.27% and 37.47% of its total expenditure during the FYs 2015-16, 2014-15 and 2013-14, respectively, which suggests that is engaged in provision of onsite services. Hence, it operates on a business model different from that of the Assessee and is thus incomparable to it. Peculiar economic circumstances: It is submitted that during the FY 2015-16, Nihilent had acquired GNet Group LLC - a business intelligence and analytical company, and Intellect Bizware Services Pvt. Ltd. specialising in ERP and enterprise innovation. The acquisitions are bound to have a significant impact on the financials of the company, and thus it cannot be considered for the comparability analysis. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itrix. As a part of the acquisition, the company acquired development centres in Belfast, UK and Srilanka. This acquisition is bound to have an effect on the margin of the company, in respect of which no reasonably accurate adjustments can be made to eliminate the material effects thereof. Detailed submissions are placed at pages 345-353 of the appeal). Therefore, it is submitted that this company ought to be excluded from the final list of comparables. Infobeans Technologies Ltd. ('Infobeans') Functionally different: The company is engaged in providing software engineering services primarily in Custom application development, Content Management Systems, Enterprise Mobility, big data analytics. Though the annual report of the company mentions that the company is earning 100% revenues from sale of software services, such services are in the nature of CAD,CMS etc., which are in the nature of KPO services. The above services rendered by the company are vastly different from the SWD services rendered by the Assessee, and therefore the company ought to be excluded as being functionally different. Further, the segmental details for these diverse servic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....12 Total RPT 482,768,179 623,303,216 960,709,645 Total Sales 1,565,292,158 1,791,127,395 2,308,061,232 RPT to Sales% 30.84% 34.80% 41.62% Source Note.31 of AR Note.31 of AR Pg.195 of AR Peculiar economic circumstance: It is also submitted that the company has entered into amalgamations during the relevant FY. The extra ordinary event of the company will have an impact on its profitability as the revenue of the amalgamated company is now included in the revenue of Aspire. Detailed submissions are placed at pages 363-367 of the appeal set. In view of the above, it is submitted that the Company is functionally not comparable to the Assessee and ought to be excluded from the final list of comparables. Infosys Ltd. ('Infosys') Functionally different: The company earns income from both rendering software services and development of products. The company provides end-to-end business solutions like business consulting, technology, engineering and outsourcing services. In addition, the company offers software products and platforms. Despite rendering diverse services, there are no segmental....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nformation in respect of the diverse business functions undertaken by the company. Moreover, the company renders diverse range of marketing services like content marketing, creative production and marketing operations. The company earns significant onsite revenue. Super normal profits: The company is making super normal profits (details of which are as under) and the same is not reflective of the performance of the industry in which the assessee operates. Particulars FY 2013-14 FY 2014-15 FY 2015-16 OP/OC 62.82% 68.68% 62.90% Detailed submissions are placed at pages 385-391 of the appeal set. In view of the above, it is submitted that the Cybage ought to be excluded from the final list of comparables. Thirdware Solution Ltd. ('Thirdware') Functionally different: The company is engaged in development of software products and earns revenues from sale of user licenses for software applications apart from rendering software development services, implementation services, application management services and other related services. These diverse services are reported under one segment without any detail....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case of Global Logic India Ltd (supra) has considered the exclusion of the above companies and held that - COMPARABLE COMPANIES SOUGHT TO BE EXCLUDED BY THE TAXPAYER LARSEN & TOUBRO INFOTECH LTD. (L&T) 14. The taxpayer sought to exclude L&T from the final set of comparables chosen by the ld. TPO for the purpose of benchmarking its international transactions qua SDS on the grounds inter alia that it is functionally dissimilar; that its segmental data is not available; that L&T is a huge brand with ownership of intangibles and on account of extra ordinary event; and on the ground that this company was rejected in taxpayer's own case in Global Logic India Ltd. v. Dy. CIT [2020] 117 taxmann.com 39 (Delhi - Trib.). 15. However, on the other hand, ld. DR for the Revenue opposed the contentions raised by the taxpayer to exclude L&T as a comparable on the grounds inter alia that this comparable was chosen by the taxpayer itself and in case of TNMM applied for benchmarking the international transactions minor dissimilarities are not to be taken into account; that the taxpayer cannot be taken as a captive entity as its spectrum is much more and it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB2), it is reported as under : "TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GDA TECHNOLOGIES INC. (GDA INC.) As part of business restructuring undertaken within L&T Group, it was decided to consolidate the engineering services business under a separate subsidiary of L&T, L&T Technology Services Ltd. (LTTSL). Pursuant to this, the Company initiated and completed transfer of its Product Engineering Services (PES) Business Unit to LTTSL effective January 1, 2014, PES Business Unit was transferred by way of slump sale for total sales consideration of Rs. 489.53 crs based on ITA No. 4740/Del./2018 fair valuation, GDA Technologies Inc., USA (GDA Inc.), a wholly owned subsidiary of the Company was part of PES business with synergy in terms of the end customers they serve, primarily the semiconductor companies. Over last few years, the performance of GDA Inc. was adversely affected resulting in falling revenues and operational losses. Consequent to the transfer of PES business, certain IPs (Intelle....
X X X X Extracts X X X X
X X X X Extracts X X X X
....entre Private limited ("ISRC") thereby making it wholly owned subsidiary and because of such extraordinary event of acquisition, the said concern cannot be held to be a valid comparable and thus has to be excluded from the final set of comparable. Accordingly, we hold so." 20. In view of the facts inter alia that L&T is into various segments having no segmental financials, having huge brand value and intangibles is not a suitable comparable vis-à-vis taxpayer which was working as a captive entity and that contention raised by the ld. DR that under TNMM minor dissimilarities do not affect the overall comparability is not sustainable because though it is a taxpayer's own comparable but there being no estoppel against statute and that taxpayer can rectify its mistake at any stage of the proceedings. Secondly, it is not a case of minor dissimilarities rather it is a case of functional dissimilarity and non-availability of segmental financials to provide the clear picture qua profit earned by the company from provisions of SDS. L&T is a big brand having ownership of huge intangibles which ought to provide competitive advantage to the taxpayer in the form of premium p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(CAD), Content Management Systems, Enterprise Mobility, Big Data Analytics, UX & UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book. 45. The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that it is providing wide range of services under four verticals i.e. services, automation, enterprise and industries and under the automation services verticals, the company is providing advanced robotic process automation services. Since Infobeans is into diversified activities it cannot be a suitable comparable vis-à- vis the taxpayer which is a routine software development services provider. Infobeans has been excluded as a comparable on account of functional dissimilarity vis-à-vis routine software development service provider by the coordinate Bench of the Tribunal in case of Pub Matic India (P.) Ltd. (supra). So, in view of the matter, we order to exclude Infobeans from the final set of comparables. INTEQ SOFTWARE LTD. (INTEQ) 46. The taxpayer sought exclusion of Inteq again on account of fun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mmunications and transportation industries and systems integration and support services for enterprise customers. It also provides digital content creation for media and entertainment industry" 29. We find that in the case of Infor (India) (P) Ltd vs. ACIT in ITA No. 2307/Hyd/2018, the Coordinate Bench of the Tribunal has considered similar objections of the assessee therein and has held that these two companies along with Thirdware Solutions Ltd is not comparable to the software development company like the assessee before us. The relevant portions has been reproduced by us in the above paras. Respectfully following the same, these two companies are also directed to be excluded from the final list of ITA No 2233 of 2018 ADP Private Ltd Hyderabad comparables. Thus, assessee's ground of appeal No. 2 is partly allowed." 6.3 In the said decision, it has been held that the company is functionally different and engaged in diversified activities and since the revenue could not controvert the said decision nor brought any contrary decision, following the same, we direct the AO/TPO to exclude this company from the final list of comparables. Aspire S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to 10%, as against the margin of 17% shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order". 26. Respectfully following the same, we direct the exclusion of this company from the final list of comparables." 9.4 On perusal of the entire financial statements, we observe that the company is functionally not comparable and selling and marketing expenses are 5% of revenue and there were extraordinary events also noted i.e. transfer of product - financial & edge services as well as diversified activities like artificial intelligence, products services, platforms, consulting etc. Also onsite revenue was 52.7% and no segmental details like services, consulting products are available. In view of the above observations, the coordinate bench in assessee's own case for AY 2014-15 directed to exclude this company as comparable. Respectfully following the said decision, we direct the AO/TPO to exclude this company as comparable from the list of comparables. 71. We also notice that the coordinate bench in the case of ARM Embedded Technologies Pvt. Ltd (supra) has considered the exclusion of Nihilent Ltd., and Cybage Software Pvt. Ltd.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....segment Services segment may include: * Product conceptualization; * Designing / development; and * know-how, customization, etc. Functional Analysis Continental India has entered into an agreement with its AEs for providing application / specific with regard to development and porting of software, creation of software specification Under the services segment, AEs perform the following functions and assumes the following sensibilities * Perform market research for the products. * The basic designs/technical drawings required for the development activity is provided by the AEs. Therefore, the base technology is owned by the AEs; and * Provide other ancillary or related documentation as may reasonably be required and requested by Continental India. Continental India performs the following functions -and assumes the following responsibilities _rter the development agreement executed with its AEs: Perform work with regard to development and porting of software, creation of software specifications and test specifications, performance of integration tests and studies as well as the development of fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... matrix of the TPO. The ld. AR further submitted that the company is functionally comparable and passes all the filters applied by the TPO. The company is engaged in computer programming, consultancy and related services, which are comparable to the services of the Assessee. It is submitted that a company which is comparable to the Assessee cannot be rejected on the only ground that it does not feature in the search matrix of the TPO. The ld. AR also submitted that this Hon'ble Tribunal in the Assessee's case for AY 2014-15, wherein this company was remanded to the TPO for fresh examination. Moreover, the DRP had remanded the company for verification by the TPO in the assessment year 2017-18, post which the company was included in the final list of comparables. Therefore it is submitted that the company ought to be included in the final list of comparables. 76. The ld. DR submitted that the decision of the DRP for AY 2017- 18 cannot be directly considered as the basis for inclusion of this company. 77. We heard the rival submissions and perused the material on record. We notice that the coordinate bench in assessee's own case for AY 2014-15 has considered the inclusion of thi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sales and the income from sale of software licenses constitutes a meagre 3.4% of the total revenue and therefore the same would not have any impact on the profitability of the company. The ld. AR further submitted that the company passes all the filters applied by the TPO. Reliance in this regard is placed on the decision of this Hon'ble Tribunal in the Assessee's own case for the AY 2014-15, where in the company came to be remanded. 81. We heard the parties and perused the materials on record. We notice that the coordinate bench in assessee's own case for AY 2014- 15 has considered the inclusion of this company and held that - 90. As far as inclusion of Akshay Software Technologies Ltd. is concerned, it was selected by the assessee as a comparable company in its TP study, but was rejected by the TPO for the reason that this company was engaged in providing professional services, procurement, installation, implementation, support & maintenance of ERP products and services and incurrent significant foreign branch expenses indicating a different operating model from that of assessee. It is the plea of assessee that assessee's function is comparable with this company and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e company did not feature in the search matrix of the TPO. 84. The ld. AR submitted that the Assessee has re-run the search (using same keywords applied by the learned TPO) and thereby identified Sasken as comparable company and submitted the Annual Report for the TPO's consideration. Further, it is submitted that the company is functionally comparable to the Assessee and passes all the filters applied by the TPO. Submissions in this regard are placed at pages 414-417 of the appeal set. It is further submitted that in the Assessee's own case for AY 2018-19, pursuant to a remand by the DRP, the TPO included the company in the final list of comparables. 85. We heard the ld. DR. We notice that the coordinate bench in assessee's own case while considering the inclusion of Sasken as a comparable has held that - 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 filt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....programming, consultancy and related activities which are IT services comparable to the services of the Assessee. Therefore the DRP's findings are erroneous. Moreover, the company passes the service revenue filter applied by the TPO. Submissions in this regard are placed at pages 424-427 of the appeal set. It is further submissions that in the Assessee's own case for AY 2018-19, the DRP directed inclusion of this company at para no. 2.55. Hence, considering no change in facts in terms functional profile of Ace Software Exports Ltd from the current year to AY 2018-19, the said comparable company should be accepted. 89. We heard the rival submissions. We notice that for AY 2018-19, in assessee's own case the DRP has given a direction to TPO (page 4980 & 4982) to include this company on the ground that the functions are similar to that of the assessee. We also notice that the TPO in the order giving effect has included the company as per DRP directions. The DRP has rejected the inclusion for the reason that the assessee did not propose the inclusion of this company during TP proceedings and that it is involved in ITES services. However it is the submission of the ld. AR that the co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....termining whether the two are comparable or not for the purpose of determining the ALP. 29. ***** 30. This view is not contrary to Rule 10(B)(4) which reads as under:- "10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into". 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R. Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not considered by the Ld. TPO as they did not appear in the search matrix carried out by him, which has been upheld by the DRP. He placed reliance on the decisions of coordinate bench of this Hon'ble Tribunal in the case of Prism Networks Pvt. Ltd. reported in (2022) 141 taxmann.com 163. On the contrary, the Ld. DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. We note that this Tribunal in case of Prism Networks Pvt. Ltd.(supra) observed and held as under: 18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for inclusion of comparable companies. The TPO excluded these companies only on the ground that information related to these companies was not available in the public domain and this fact was shown to be an incorrect assumption by the Assessee in the submissions before the DRP. In such circumstances, it was incumbent on the part of the DRP to....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... being heard to the assessee. 101. Sagarsoft India Ltd.: The company was rejected by the TPO on the ground that it fails 75% service revenue filter, and was upheld by the DRP on the ground that it did not feature in the search matrix of the TPO. 102. In this regard, it is submitted that the company is engaged in software development and consultancy services and 100% of its revenue is from rendering SWD services. Therefore the TPO's rejection on the ground that it fails the service revenue filter is grossly erroneous. It is submitted that the company passes all the filter applied by the TPO. Therefore, the DRP's rejection of the company on the sole ground that it did not feature in the TPO's search matrix is erroneous. It is submitted that in the Assessee's own case for the assessment years 2017-18 and 2018-19, the company was remanded by the DRP to the TPO for verification of its comparability, post which the company was included in the final list of comparables. The ld. AR in this regard placed reliance on the decision of this Hon'ble Tribunal in NTT Data FA Insurance Systems (India) Pvt. Ltd. v. DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021) at para nos. 10-12. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the company did not feature in the search matrix of the TPO. We are therefore of the considered view that the comparability and inclusion of this company needs to be looked afresh for the year under consideration based on examination of facts and to see whether all the filters applied by the TPO is satisfied. Accordingly we remit the issue back to the AO/TPO for verification of facts afresh and decide accordingly. 108. DCIS Dot Com Solutions Pvt. Ltd. This company was rejected by the TPO on the ground that sufficient financial information was unavailable and was affirmed by the DRP on the ground that it did not feature in the search matrix of the TPO. 109. In this regard, it is submitted that DCIS is engaged in software development services as is evident from the annual report of the company and hence, functionally similar. The annual report of the company furnishes all relevant details for determining its comparability, and therefore the TPO's rejection on the ground of insufficient information is erroneous. It is submitted that the company passes all the filters applied by the TPO. Therefore, the DRP's rejection on the sole ground that it does not feature in the search matr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the functions are similar to that of the assessee. We also notice that the TPO in the order giving effect has included the company as per DRP directions. The DRP has rejected the inclusion that the company did not feature in the search matrix of the TPO. We are therefore of the considered view that the comparability and inclusion of this company needs to be looked afresh for the year under consideration based on examination of facts and to see whether all the filters applied by the TPO is satisfied. Accordingly we remit the issue back to the AO/TPO for verification of facts afresh and decide accordingly. 114. Ground No. 30 is with regard to the lower authorities erred in computing the margin of Harbinger Systems Pvt. Ltd. Thirdware Solutions Ltd. and CG VAK Software and Exports Ltd. We remit this issue back to AO/TPO with a direction to examine afresh and consider the correct margins accordingly. 115. Ground Nos. 31 and 32 have become academic in the light of our above decision with regard to inclusions and exclusions and therefore do not warrant separate adjudication. 116. Ground No. 33 is with regard to non grant of Working Capital adjustment by the TPO. The ld. AR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ansaction [or a specified domestic 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 realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base: (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the DECO on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially effect the condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid DECO guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 day....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... have to he kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rare (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n.com 195 (Delhi -Trib.}, has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting raters) of interest applicabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly. In view of the above, we remit the issue to the file of AO/TPO to compute the working capital adjustment after necessary examination in the light of the above observation and after allowing an opportunity of hearing to the assessee 118. Respectfully following the above decision of the Co-ordinate Bench we hold that the working capital adjustment is to be allowed as per actuals, after considering the decisions rendered in this order on the exclusion/inclusion of comparable companies out of/into the final set of comparables. The TPO/ AO are accordingly directed. 119. The other grounds raised in its appeal in relation to its international transaction of provision of SWD services are not pressed at this stage. However, the Assessee seeks liberty to urge the said grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. The liberty prayed for is allowed. The TPO/AO is directed to compute the ALP in the SWD services segment, af....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation (Rs. 9,04,03,141/-) during the year under consideration is more than the provision created (Rs. 8,46,53,034/-). As such the net impact on account of provision for warranty to the profit and loss results is negative. Accordingly, the ld. AR submitted that the utilization of the expense is on the higher side compared to the provision created, which itself indicates that the methodology followed by the Assessee is scientific. The ld. AR further submitted that an analysis of the warranty provision over a period of five years and the same is tabulated below: AY Opening balance Actual debit to P&L Actual expenditure Balance 2012-13 4,41,87,200 7,83,67,911 2,62,34,907 9,63,20,204 2013-14 9,63,20,204 1,66,55,739 5,88,40,832 5,41,35,111 2014-15 5,41,35,111 94,97,052 2,61,22,163 3,75,10,000 2015-16 3,75,12,432 4,10,30,636 3,84,30,238 4,01,12,830 2016-17 4,01,12,831 8,46,53,034 9,04,03,141 3,43,62,724 Total 23,02,04,372 24,00,31,281 123. It is contended by the ld. AR that it can observed from the above table that the utilization of the warranty provision exceeds the provision ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ears. The said methodology has been submitted before the AO during the course of assessment proceedings. The Assessee submits that it creates provision for warranty on a scientific basis. The ld. AR drew our attention to the decision of coordinate bench of this Hon'ble Tribunal in the Assessee's own case for the assessment year 2014-15, on identical facts, has held that the provision for warranty is to be allowed as a deduction as the provision created satisfied all the requirements for claiming the provision as a liability. The ld. AR further, submitted that this Hon'ble Tribunal in the Assessee's own case for the assessment year 2010-11 has rendered a finding that the Assessee is following scientific basis of creating the provision and had remanded the matter for verification of details by the Assessing Officer. Subsequently, the Assessing Officer passed an order giving effect to this Hon'ble Tribunal's order, accepting the claim made by the Assessee. 126. Notwithstanding and without prejudice to the above the ld. AR submitted that AO cannot disallow closing balance of the provision for warranty as the same is not debited to the profit and loss account. The AO ought to have ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... net sales on account of use of intellectual property generated from old application R & D. Further, separate compensation towards the license has been agreed to be paid by the Assessee as royalty computed as percentage of net sales of sensoric products per year. The AO disallowed the claim treating the same as R&D expenditure giving enduring benefit to the assessee and accordingly capital in nature. The AO held that the assessee has not produced proper evidence of the nature of expenditure. The DRP upheld the treatment of the impugned amount as capital expenditure but directed the AO to allow depreciation u/s. 32 on the same by placing reliance on the decision of the Supreme Court in the case of Honda Siel Cars India Limited (2019) 101 taxman 222(SC). Aggrieved by the final order passed by the AO pursuant to the directions of the DRP the assessee is in appeal before the Tribunal 131. The ld. AR submitted that that the royalty incurred by was for the use of technology of the Continental Group for manufacturing and sales of the products. Such expenditure should be allowed under section 37(1) of the Act based on following submission: i. Section 37 of the Act is a residual....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gard. Accordingly the same should be considered as revenue in nature and should be allowed as deduction under section 37(1) of the Act, since it satisfies all the aforementioned conditions. viii. In this regard, the Assessee also wishes to place reliance on the following decisions: * Hon'ble Karnataka High Court decision in the case of CIT v. Luwa India Ltd [2012] 18 taxmann.com 365 (Kar.) * Samsung India Electronics Private v. ACIT [I.T.A. No. 5316/Del/2011] * Kanpur Cigarettes (P.) Ltd. v. CIT 147 Taxman 428 (Allahabad High Court) * CIT v. Kirloskar Tractors Ltd [1998] 231 ITR 849 (Bombay HC) * Alembic Chemical Works Co. Ltd. v. CIT[1989] 43 Taxman 312 (SC) * J.K. Synthetics Ltd. v. CIT[2009] 176 Taxman 355 (Delhi High Court) * DCIT v. Honda SIEL Power Products Ltd I.T.A .No. 1579/DEL/2017 (A.Y 2012-13) & S. A No. 217/Del/2017 in ITA No. 1579/Del/2017 132. The ld. AR submitted that the ratio laid down by these judicial pronouncements is that that there are certain conditions to be satisfied for the payment to be treated as revenue expenditure and in this regard drew our attention to the various clauses....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the case. In the present case, the ITAT having regard to the contents of the agreement entered into by the assessee with M/s. LUWA Switzerland has held that the licence that was granted does not confer any proprietary right in obtaining technical know-how, the licence is granted as per the agreement subject to payment of royalty to make use of knowhow and technology. The royalty payable is depending upon the sales made and export. The said finding is on the question of fact and cannot at all be said to be perverse or arbitrary. As the facts in this case is identical to the facts of the case in Ciba of India Ltd. case cited above and also the decision in I.A.E.C. (Pumps) Ltd. (supra) cited above. There is no merit in the contention of learned counsel appearing for the Assessee that since know-how and technology granted by the licence and the patents is of enduring nature, the same would constitute capital expenditure as the payment made is on the basis of sales and export made by the assessee. The mere fact that the said know-how and patent has been acquired even before commencement of production in this case would not in any way material itself having regard to the agreement and pa....