TaxTMI 
TaxTMI 
2025 (10) TMI 1003
X X X X Extracts X X X X
X X X X Extracts X X X X
....2017. Reference under Section 92CA(1) of the Act was made by the Ld. AO to the Ld. TPO, New Delhi for determining arm's length price in respect of international transaction with associated enterprise at Rs. 1,65,21,97,000/-. Ld. TPO passed order dated 30.10.2017 under Section 92CA(3) of the Act determining adjustment/difference on account of ALP in respect of international transaction. Ld. AO passed draft assessment order under Section 144C(1) of the Act proposing variation in income on 17.11.2017. The assessee raised objections against draft assessment order before Hon'ble DRP which were decided vide order dated 27.08.2018. In view of directions of Ld. DRP dated 27.08.2018 and Ld. TPO's order dated 28.09.2018, Ld. AO made additions of Rs. 55,10,67,832/- under Section 92CA(3) of the Act and addition of Rs. 1,89,71,525/- on account of advertisement expenses vide order dated 25.10.2018. 3. Being aggrieved, appellant/assessee preferred present appeal with following grounds: "A. TRANSFER PRICING GROUNDS: 1. On the facts and circumstances of the case and in law, the learned AO/TPO/ Hon'ble DRP erred in law and in facts by making an adjustment to the total income....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the action of the learned TPO/AO of allocating interest expense solely to the business support services segment 8. Without prejudice to ground of appeal No. 6 and 7, the learned AO/TPO/ Hon'ble DRP also erred by following an inconsistent approach in the treatment of interest expense for computation of margins of the appellant and comparable companies. III. EQUIPMENT DISTRIBUTION SEGMENT 9. The learned AO/TPO/ Hon'ble DRP erred in law by not accepting the economic analysis undertaken by the appellant in connection with the international transaction pertaining to equipment distribution segment ("equipment distribution transaction") in accordance with the Act read with the Rules and modifying the same for determination of ALP of the said international transaction and incorrectly holding that the impugned transaction is not at arm's length. 10. The learned AO/ TPO/ Hon'ble DRP have erred, in law and on facts and circumstances of the case, by: a. Not accepting the use of multiple year data, as adopted by the appellant in TP documentation; and b. Determining the arm's length margins / prices using data pertaining ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt earned a higher mark-up of 19.91% from local segment (which includes revenue earned and corresponding costs incurred by the appellant in relation to installation and commissioning) as against the 14.5% mark-up proposed by the learned AO/TPO. 18. Without prejudice to the above, the learned AO/TPO/ Hon'ble DRP erred in not restricting the quantum of adjustment to value of international transactions of the appellant pertaining to the said segment. V. AVAILING OF TECHNICAL SERVICES 19. The Hon'ble DRP erred in facts and in law by upholding the action of the learned TPO of rejecting the economic analysis undertaken by the appellant, for determining the ALP of the international transaction pertaining to availing of technical services without assigning any reasons thereto in the impugned order. 20. The Hon'ble DRP erred in facts and in law by upholding the action of the learned TPO of determining the ALP as NIL by adopting a methodology which was in violation of provisions of section 92C(1) of the Act and rejecting the comparable uncontrolled price ("CUP") analysis undertaken by the appellant. 21. The learned TPO/AO/Hon'ble D....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... DRP has erred in law and facts and the circumstances of the case in not allowing depreciation on the amount disallowed allegedly treated as capital in nature. Without prejudice to the above, Learned AO/DRP has erred in law and facts and the circumstances of the case in not allowing depreciation on the amount disallowed allegedly treated as capital in nature. 28. The learned AO/Hon'ble DRP has erred in not providing deduction in respect of provision for customer claims utilized during the subject year, out of the amount disallowed in the assessment orders passed for AY 2012-13 and AY 2013-14, thereby leading to permanent disallowance of business expenditure in the year of creation as well as utilization of provision." 4. Learned Authorized Representative for the appellant/assessee submitted that ground of appeal nos.1 to 3 are general in nature. 5. Learned Authorized Representative for the appellant/assessee submitted regarding ground of appeal no.4 including additional grounds of appeal and ground of appeal no.5 qua rejection of the segmental financials prepared by the assessee submitted that Ld. TPO erred in rejecting the segmental financials prepared by the ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
....i) Marubeni India Pvt. Ltd. (ITA 1042/2011) vs DIT- Jurisdictional Delhi High Court (Refer page 93 of the convenience paper book); and vii) Techbooks International Pvt. Ltd., vs. DCIT (ITA No.240/Del/2015) (Refer paras 5.2 page 114-115 of the convenience paper book) 6.1 Action of the Ld. TPO of allocating interest expense to BSS segment lack cogent reasoning. Under this segment, the appellant renders services to its AEs on a cost + mark-up basis and the receivables are collected in a timely manner therefore, the appellant does not require loan for this segment. Ld. TPO rejected the segmental financials as Equipment distribution segment. 7. Learned Authorized Representative for the appellant/assessee regarding Equipment Distribution Segment dealt by grounds of appeal nos. 9 to 14 submitted that the equipment distribution segment Method applied: Transactional Net Margin Method ("TNMM") Appellants margin: 11.95% (as per segmental financial prepared in accordance with the FAR profile of this segment). Arm's length price ("ALP"): 1.71%, Rejection of economic analysis of the appellant. 7.1 Ld. TPO rejected the segmental financials as provided in the TP documentation on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not the entire cost base of the taxpayer. Further, reliance may be placed on the following rulings: (a) Commissioner of Income Tax vs M/s Tara Jewels Exports Pvt. Ltd. ( ITA No. 1814 of 2013) (Refer para 6 pages 196-197 of the convenience paper books). (b) IL Jin Electronics India Private Limited v. ACIT 05(2010) 36 SOT 227 (Refer para 15 page 205 of the convenience paper book) (c) Emersons Process Management India P td (ITA NO 8118/M/2010) (AY-2006-07) (Refer para 19 page 222 of the convenience paper book) (d) Kyungshin Industrial Motherson Limited v. DCIT (I.T.A No. 1396(Del)/2009). 8. Learned Authorized Representative for appellant/assessee qua Business Support Services segment raised in grounds of appeal nos. 15 to 18, submitted that method applied: Transactional Net Margin at 14.50% (as per segmental financial prepared in accordance with FAR profile of this segment), ALP: 10.42%. Segmental financials duly certified by a cost accountant should have been considered. Interest expense should be considered as non-operating in nature (detailed arguments provided above). The appellant earned a higher mark-up of 19.91% (Refer TP documentation p.g....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by Indian taxpayer from the overseas AE are shareholder activities and tend to determine the ALP as NIL, let alone the reimbursement on a cost-to-cost basis. However, in the present appeal, the Ld. TPO has failed to consider the nature of expenses and re-characterized the transaction of recovery as services and imputed an ad hoc mark-up thereon. 11. Learned Authorized Representative for appellant/assessee regarding ground nos. 25 to 27, submitted that disallowance of 30% of advertisement expenditure towards public relation service, promotion activities, commercial advertisement, sponsorship, print media, media monitoring and analysis etc. whilst treating the same as capital expenditure. 11.1 Issue is covered in favour of the Appellant in its own case for AY 2012- 13 and AY 2013-14. 11.2 The test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Income Tax Department. (Refer Form 35A p.g. 211-217 of appeal set / PDF File Page 209-215 of appeal set) (Bifurcation of Advertisement Expen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....garding Availing of Technical Services. Ld. TPO in para 35 summarized the segmental accounts submitted by the assessee. Finance cost not attributed to any segment was found. Therefore, Ld. TPO recasted BSS & local segment by considering OP/TC as arm's length mark up. Business Support Services were regarding the assessee working foreign PE. Section 91.(1)b provides that agreement/arrangement need not be in writing. In para no. 53 under the head 'Business Support Services after Sales Equipment", Ld. TPO observed that "whether the finance expenses should also be included as a part of cost base as by assessee's own admission, the finance expense relate to short term unsecured Indian Rupee loan taken from Indian banks for meeting working capital requirements and the loans are covered under corporate guarantee/letters of comfort by the AEs of assessed". 13.1 As per Assessee and AE agreement, the services were provided by the assessee regarding availing of technical support and findings performed thereunder. 13.2 Hon'ble High Court of Delhi in CIT vs. EKL Appliances Ltd. [2012] 24 taxmann.com 199 (Del.) in para nos. 16 to 18 are held under: "16. The Organization for Economi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orm. In such a case the tax administration may disregard the parties' characterization of the transaction and recharacterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner". 13.3 Ld. TPO considering letter of comforts to trade payable, the trade and other receivable on short term dealings held that interest has to be spread over. Additional evidence of cost accountant cannot be relied. Finance Cost & nonoperating costs are irrelevant. The Allocation of Expenses, Ld. TPO allocated finance cost to the others. TP Study Report in para 6.1.1.2 on page no.85 of paper books Volume-I mentions Functions performed by Huawei India with bullet points on page no.86. Interest is required to be made in PLI in view of TNMM Method. TP Study Report Volume 1 on page 149 deals with Segmented Financial Information "i.e. Imported Equipment, BSS, Factory & Local". The inventory is being maintained by the assessee. Ld. TPO considered all the aspects and views taken in the earlier years regarding providing of Intra Group Services and Reimbursement of Expenses etc. 14. From examination of record in li....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... business income, but the same does not assume the character of operating expense as it is not concerned with the operations of the hub activity of business. The same logic applies to the interest income which is also considered as non-operating revenue unless the business is that of financing. The crux is that not only interest income is construed as non-operating, but interest expenditure is also considered as non-operating. Thus both the interest expense as well interest income are required to be eliminated from the purview of operating cost and operating revenue to find out the net operating profit". 15.3 In view of above material facts and well settled principles of law, it is held that the action of Ld. TPO is illegal and set aside. Accordingly, ground of appeal nos.6 to 8 are allowed. 16. Grounds of appeal nos. 9 to 14, are regarding equipment distribution segment. Ld. AO and Ld. DRP erred in not accepting the economic analysis undertaken by assessee in connection with international transaction pertaining to equipment distribution segment in accordance with the Act/Rules and modifying the same for determination of ALP of the said international transaction incorrectly h....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....g. 261 of the appeal set). As per appellant/assessed, the segmental financials duly certified by a cost accountant should be considered. Interest expense should be considered as nonoperating in nature (detailed arguments provided above) and the appellant earned a higher mark-up of 19.91% (Refer TP documentation p.g. 149 of the paper book) from local segment (which includes revenue earned and corresponding costs incurred by the appellant in relation to installation and commissioning) as against the 14.5% arm's length price determined by the Ld. TPO/Hon'ble DRP for the BSS segment (Refer TPO order p.g. 261 of the paper book). In view of above facts and judicial precedents, it is held that the action of Ld. TPO is illegal and set aside. Accordingly, grounds of appeal nos. 15 to 18 are allowed. 18. Qua Availing of technical support service with regard to grounds of appeal nos. 19 to 21, Hon'ble ITAT in appellant's own case for AY 2012-13 and AY 2013-14 held that the appellant had reproduced substantial documentary evidence to substantiate receipt of services. Also, it was held that the Ld. TPO cannot challenge/ question the commercial expedience of the appellant. Th....