AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2025 (11) TMI 1060
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....) is erroneous and contrary to the provisions of law, facts and circumstances of the case and therefore requires to be modified. 2. The AO erred in law and on facts in making and Commissioner of Income-tax (Appeals) ('CIT(A)') in upholding upward adjustment to the value of international transactions of Rs. 1,77,85,368 u/s 92CA(3) of the Income-tax Act, 1961 ('the Act'). 3. The Id. AO erred in law and on facts in making the adjustment to the international transactions of the appellant without establishing that the preconditions specified in section 92C(3) read with section 92CA(3) of the Act were satisfied. 4. ITES segment (Adjustment of Rs. 4,447,175) 4.1. The Id. AO/CIT(A) erred in law and on facts, in holding that the international transaction of providing back-office support services by the appellant to its associated enterprises is not at arm's length and making an adjustment of Rs. 4,447,175, 4.2. The Id. AO/CIT(A) erred in facts by not appreciating the fact of the case and in classifying the services as high-end services. 4.3. The id. AO/CIT(A) erred in law and on facts in rejecting use of multiple year....
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....te with the volumes and quality of services received by the appellant. 5.6. The Id. AO/CIT(A) erred in law and on facts in conveniently neglecting the detailed management recharge analysis and various evidences submitted by the appellant to support its contentions. 5.7. The Id. AO/CIT(A) erred in law and on facts, in not providing any observation/findings on various documentary evidences submitted by the appellant to demonstrate benefits received by the appellant. 5.8. The id. AO/CIT(A) erred in law and on facts, in arbitrarily holding that the basis of allocation of management charges adopted by the appellant is not supported by documentary evidences and is in ad-hoc basis. 5.9 Without prejudice to the contentions of the appellant that no adjustment is warranted in case of the appellant, it is submitted that as the amount of cost recharge incurred by the associated enterprise, directly or indirectly, related to the appellant and be allowed as reimbursement of expenses by the appellant to the associated enterprise. 6. Manufacturing segment 6.1. Without prejudice, the appellant submits that amount of management charges has been d....
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....nal transaction of providing back-office support services by the assessee to its associated enterprises was not at arm's length, resulting in an upward adjustment of Rs. 44,47,175/-. The TPO classified the services rendered by the assessee as high-end knowledge process outsourcing (KPO) services rather than low-end routine IT-enabled services. The assessee's use of multiple-year data was rejected by invoking Rule 10B(4) of the Income-tax Rules, 1962, on the ground that the assessee failed to demonstrate how prior-year data influenced the determination of the arm's length price (ALP) for the current year. The TPO also rejected six out of eight comparables proposed by the assessee on various grounds such as failure of turnover and export filters, differing accounting years, and extraordinary events. The Assessing Officer in turn, selected seven new comparables, including Accentia Technologies Ltd., Acropetal Technologies Ltd. (Seg.), Coral Hubs Ltd., Crossdomain Solutions Pvt. Ltd., Eclerx Services Ltd., and Genesys International Corporation Ltd. These companies were held to be functionally similar, according to the TPO, and their margins were used to compute the mean profit level in....
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....h as Dresser-Rand India Pvt. Ltd. (ITAT Mumbai) and CIT v. Vishakhapatnam Port Trust (144 ITR 146), on the ground that the commercial expediency of such expenditure could not be questioned by the tax authorities. However, the CIT(A) upheld the TPO's findings, observing that a similar issue had arisen in the assessee's own case for AY 2007-08, where the ALP was also held to be nil. The CIT(A) held that the assessee failed to demonstrate the actual receipt of services or produce any evidence to justify the payment. The allocation of expenses on an equal-share basis among 83 group companies, without establishing a link between the costs and the benefits received, was held to be arbitrary. The CIT(A) further noted that the assessee's allocation method was inconsistent with the cost-sharing mechanism outlined in the inter-company agreement, and that no documentation substantiating the time spent or the quantum of services rendered was furnished. Therefore, following the reasoning adopted in AY 2007-08, the CIT(A) confirmed the adjustment and sustained the ALP of nil for management charges. 6. As regards the Manufacturing Segment, the TPO made an upward adjustment by rejecting several....
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....ed to be set aside or suitably modified. It was submitted at the outset that the transfer pricing adjustments sustained by the lower authorities aggregating to Rs. 1,77,85,368/- were unwarranted since the preconditions for invoking section 92C(3) read with section 92CA(3) of the Act were not satisfied, and the authorities below erred in law in making the adjustments without properly establishing that the assessee's international transactions were not at arm's length. With regard to the ITES segment adjustment, the learned counsel drew the Bench's attention to the findings of the lower authorities and submitted that the adjustment of Rs. 43,02,777/- made to the international transaction of providing back-office support services to its associated enterprises was unjustified. He submitted that the assessee was engaged in routine, low-end IT-enabled back-office services and not in highend KPO operations, as incorrectly characterized by the TPO. The assessee's benchmarking analysis was prepared using the Transactional Net Margin Method (TNMM) as the most appropriate method and identified eight comparables with an average margin of 17.73%. However, the TPO rejected six of these comparabl....
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....k Vol. 1) and to the MAP resolution (Page 164 of Vol. 1 and Page 339 of Vol. 2) in support of this submission. 9. For the manufacturing segment, the learned counsel submitted that the authorities erred in disregarding the detailed and methodical search process undertaken by the assessee and in arbitrarily rejecting the comparables selected by it. It was submitted that the amount of management charges disallowed by the TPO/CIT(A) had already been deducted from the operating cost base while computing the operating margins of the manufacturing segment, and after such adjustment, the resultant operating margin of the assessee was within the arm's length range. Hence, no further transfer pricing adjustment was warranted for this segment. The learned counsel contended that the TPO and CIT(A) failed to appreciate the functional comparability of the companies identified by the assessee. It was argued that companies like IAI Industries Ltd. and Victor Gaskets India Ltd., which were engaged in manufacturing auto components such as hydraulic systems and gaskets-similar to the products manufactured by the assessee-ought to have been accepted as valid comparables. The ld. counsel for the ass....
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.... Rs. 44,47,175/- was made. The assessee had contested this adjustment before the Ld. CIT(A) in respect of rejection of seven out of twelve comparable companies selected by it. Further the assessee had also objected to the six new comparable selected by the TPO. The operating profit (OP) margin earned by the assesse from its manufacturing activity was 10.36% which was compared with OP margin of 26.7% of the comparables selected by the TPO and accordingly an adjustment of Rs. 44,47,175/- was made to ITES segment. The Ld. CIT(A) rejected the objection of the assesse in respect of comparable used by the TPO and upheld the TP adjustment in this segment. 9.2 The Ld. A.R. submitted that the assessee company had opted for Mutual Agreement Procedure (MAP) in respect of TP adjustment pertaining to transactions with United Kingdom (UK) AE. The assessee had accepted the terms mutually agreed under MAP resolution in respect of transactions made with UK Tax Residents AEs and a copy of the relief under MAP with UK companies has been brought on record. As a result of the MAP resolution, the assessee company has filed revised Ground of Appeal withdrawing the grounds challenging the TP adju....
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....the 41.16%. Thus, the facts of the two cases are found to be distinctly different as the transaction not covered under MAP in that case was a miniscule 4% whereas such transactions in this case is substantial 58.48%. Further, this issue can be decided after undertaking FAR analysis of non-UK transactions in order to find out whether there is any distinction in the factors influencing the price between UK and non-UK transactions. The assessee has not brought on record any similarities of factors that influenced the price between UK and non-UK transactions. Therefore, we are of the considered opinion that the matter may be restored to the file of the TPO/AO for analysis of factors influencing the price between UK and non-UK AE transactions for ITES segment. If it is found that the factors influencing the price are similar between UK and non-UK transactions, the price adopted for UK transactions may also be adopted for non-UK transactions. In this regard we are guided by decision of the Ld. ITAT, Bangalore in the case of Dell International Services India (Pvt.) Ltd. Vs. DCIT (73 taxmann.com 24), wherein it was held that if after taking a FAR analysis of non-US transactions, it is foun....
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....petent Authorities, shall be applied for determining the arm's length price of the ITES segment for non-UK transactions as well. We, therefore, set aside the findings of the lower authorities on this issue and restore the matter to the file of the Assessing Officer/TPO for a fresh determination of the arm's length price of the ITES segment in accordance with law and in the light of the directions contained herein. The assessee shall be afforded reasonable opportunity of being heard and to furnish necessary documentation in support of its contentions. 15. In the result, the ground of appeal relating to the ITES segment adjustment is allowed for statistical purposes, in line with the decision of the Coordinate Bench of this Tribunal in the assessee's own case for AY 2007-08 in ITA No. 1764/Ahd/2013. Ground 5: Disallowance of Management Charges (Rs. 1,34, 82, 591/-) 16. We have carefully considered the rival submissions, perused the orders of the lower authorities, and examined the material placed on record. The issue for adjudication before us pertains to the transfer pricing adjustment made by the Assessing Officer/TPO in respect of the international transaction involving p....
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.... was allowed and, therefore, the assessee has requested for withdrawal of the ground in respect of disallowance of management charges. 10.2 We have considered the request of the assessee. It is found from the letter dated 18.08.2016 of the CBDT that payment of management charges by the assessee to TI Group Automatic System Ltd., UK was settled at 30% of TP adjustment of Rs. 145,54,002/-. As this ground has been withdrawn by the assessee, the same is dismissed as withdrawn." 19. Accordingly, we hold that relief may be accorded to the assessee in light of the observations made by ITAT in the assessee's own case for AY 2007-08 and the submissions of the ld. counsel for the assessee in which reliance has been placed on the aforesaid decision, Ground Number 5 of the assessee's appeal is dismissed as withdrawn, in view of MAP settlement. Ground Number 6: Manufacturing Segment: 20. We have carefully considered the rival contentions of both sides, perused the orders of the lower authorities, and examined the material placed on record. The issue for adjudication before us relates to the transfer pricing adjustment made by the Assessing Officer/TPO in respect of the manufac....
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....cluded by the TPO/CIT(A). The Tribunal observed that the comparables such as Coventry Coil-O-Matic (Haryana) Ltd., Frontier Springs Ltd., Gabriel India Ltd., and Jamna Auto Industries Ltd. were functionally dissimilar, as they were engaged in manufacturing coil springs, shock absorbers, or suspension components, and utilized different raw materials, mainly spring steel, whereas the assessee's manufacturing operations were based on copper-coated materials. The Tribunal, therefore, upheld the rejection of such comparables by the TPO. On the other hand, the Tribunal held that FCC Rico Ltd. was liable to be excluded due to high related party transactions exceeding 25%, and directed the exclusion of that company from the final set of comparables. Further, the Tribunal observed that Setco Automotive Ltd., engaged in the manufacture of clutch drive plates and clutch cover assemblies, was functionally comparable to the assessee, since both products-clutch plates and brake/fuel line assemblies- formed part of the same automotive hydraulic and mechanical system. The Tribunal, however, clarified that the mere presence of intangibles in Setco Automotive Ltd. did not render it incomparable, as ....