TaxTMI 
TaxTMI 
2022 (6) TMI 1562
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....Schneider Electric announced its takeover of the Invensys Group, globally. The takeover was completed in January 2014. Pursuant to the same, In February 2016, the name of the Assessee was changed from Invensys India Private Limited to Schneider Electric Systems India Private Limited [SESIPL]. There has been no changed in the shareholding structure of SESIPL pursuant to the name change. The Assessee has two divisions (1) Invensys Process Systems (IPS), Chennai and (2) Appliance Control Division (ACD). 2.1 In this case, the Transfer Pricing Officer [TPO] has proposed a transfer pricing adjustment of Rs.159,29,31,162/- in respect of the international transaction with the Associated Enterprises [AE]. Aggrieved by this order, the Assessee had filed an objection before the learned Dispute Resolution Panel-2, Bengaluru (in brevity " the DRP") against the draft assessment order dated 15.12.2017. The learned DRP passed an order dated 27.09.2018 with a proposal in different issues. After the proposal of the learned DRP, the final assessment order was passed dated 11.12.2018. 2.2 The following impugned order is under appeal before the Income Tax Appellate Tribunal [ITAT]. The Assessee f....
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....P erred in law and on facts by making transfer pricing adjustment at the entity level though the Tax Department's special leave petition in the case of Firestone International Pvt. Ltd (CA 8177 of 2016), referred to by the TPO in his order, has been dismissed by the Hon'ble Supreme Court with a batch of appeals. 3.4 The Learned TPO and Learned DRP erred in law and on facts by failing to apply the principles of consistency in computing the transfer pricing adjustment. The Ld. TPO in the prior and subsequent years has computed the adjustment in proportion to international transactions. 3.5 The Learned DRP erred in law and on facts and circumstances of the case in making contradictory observations with respect to the entity level transfer pricing adjustment, thereby upholding an adjustment 4 times the value of the purchases from AEs and 3.5 times the AE revenue. 3.6 The Learned DRP erred in law and on facts in disregarding the additional submissions filed before Learned DRP on Firestone International Pvt. Ltd and not providing any meaningful hearing/ opportunity to the Appellant to present its case. [4] Adjustment towards international trans....
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....he life of the project and the Appellant's reversal of the provisions in the subsequent assessment years. 4.8 The learned DRP erred in law and facts by following an inconsistent approach for same set of facts to uphold the adjustments made by AO and TPO, stating that provisions are scientific under transfer pricing objections while rejecting the expenses as ad-hoc provisions under corporate tax objections. [5] Adjustment towards international transactions in EEC Segment - Tax Effect - INR 2,07,63,746/- 5.1 The Learned TPO and Learned DRP erred in law and on facts in failing to aggregate the same class of international transactions undertaken by the Appellant in the EEC segment during the year for the purpose of determination of arm's length price, thereby disregarding the provisions of Section 92C of the Act, read with Rule 10B(2) of the Income Tax Rules, 1962. 5.2 The Learned TPO and Learned DRP erred on facts and circumstances of the case in computing the profits on a project by project basis by ignoring that the Appellant operates as a captive service provider with an assured margins at the net segment level. 5.3 The Learned T....
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....he function of rendering services (including such travel activity etc.) has been included in the cost base and only the third-party costs of the Appellant has been considered as pass though. Grounds relating to Corporate Tax: [8] Disallowance of provisional for contract losses - Tax Effect - INR 34,90,83,776/- 8.1 The learned DRP erred in confirming the order of the AO that provision for contract losses is an adhoc provision and is in the nature of unascertained liability. 8.2 The learned DRP erred in confirming the order of the AO, by disregarding the submission made by the Appellant which explained that the provision created towards contract losses was on a scientific and reasonable basis. 8.3 The learned DRP has failed to appreciate that provision for contract losses was created in accordance with Accounting standard "AS-7- Accounting for Construction Contracts" issued by the Institute of Chartered Accountant of India. 8.4 The learned DRP erred in law and facts by following an inconsistent approach for same set of facts to uphold the adjustments made by AO and TPO. [9] Non-Grant of TDS Credit - Tax Effect - INR 7,80,109/- ....
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....tatements, documents and papers as may be considered necessary either at or at any time before the hearing of this appeal. 3. Considering the above grounds, here we are adjudicating the issues ground-wise. The first Ground No.1 is general in nature and Ground No.4 [4.1 to 4.3] was not pressed by the learned Assessing Officer during hearing. So, the rest of the grounds are adjudicated as follows :- 4. Ground No.8 [8.1 to 8.4] : Disallowance of provision for contract losses amounting to Rs.102,70,19,053/-. The Assessee made a project J3 and in anticipation of losses in finances, created a provision for such losses to the extent of Rs.102.7 crore. The learned Assessing Officer after examining held that it is an ad-hoc provision and not an ascertainable liability. Accordingly, the Assessing relied on the order of M/s. EDAC Engineering Limited Vs. DCIT reported in 141 ITD 231 wherein it is held that it is a cardinal principle that only the expenses incurred or losses suffered could be allowed and future loss / cost could not be allowed. The Assessee before the learned DRP has not provided any details of the losses for ascertaining the same and accordingly the provision of loss was....
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....computed and claimed are allowed as expenses under the regular IT provisions and even for TP purposes they constitute operating expenses. Further the TPO has taken consistent stand for Assessee as well as for the comparable. Hence, the contentions of the Assessee cannot be accepted. Ground rejected." 5.1 On consideration of the issue, we already discussed in the above-mentioned paragraphs that the particular provision of contract losses is duly rejected by the Income Tax Appellate Tribunal in the same order. Accordingly, this particular ground on contract losses cannot be accepted as is operating in nature. The issue is itself controversial for taking the issue as operating in nature, this particular losses is not ascertainable. Thus, this issue of future losses cannot be accepted as operating. So, we are not accepting the inconsistent approach of the learned DRP. Hence, this ground of the Assessee is allowed. 6. Ground No.4 [4.9 to 4.10] : Treatment of other income as non-operating in nature: The Revenue authorities did not consider the other income as operating expenses whereas treated the same as non-operating expenses. The learned Counsel of the Assessee pointed out from ....
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.... the provision of written back is in accordance with the requirements of the Accounting Standards 9 on Revenue Recognition. The revenue from project sales is accounted for under the "percentage of completion" method. The billing of the company may not necessarily coincide with the recognition of the revenue, as billing is generally based on the milestones such as completion of supply and at the commissioning stage and not on the stage of completion of the contract. Hence, there are situations where the billing for a particular contract may be less than or in excess of revenue recognized on such contract. This results in recognition of unbilled revenue and income billed in advance. The income billed in advanced is reviewed on a year on year basis and a provision for the corresponding costs is created in the books of the Assessee. Based on the annual review, the provisions are reversed if required. Further, in miscellaneous income of Rs.1.07 crore, it is related to the scrap sales and write of admin related payables which are directly related to the business operations. 6.2 In this respect, the learned Counsel of the Assessee referred to the judgement in the case of M/s. Rieter In....
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.... on one side but the provisions written back are not treated as operating income. In this regard the provision created relates to the operations of the current year based on scientific and structured estimation of provision. These provisions are generally created year on year basis consistently. However, the written off item do not belong to the operations of the current year but they are reversal entries of earlier year. Further these reversals are not structured but are done from time to time based on certain developments beyond the operations of business. Also, the assessee should not have grievance as the stand taken is applicable for the Assessee as well as the comparables uniformly. Accordingly, the ground is rejected." 8. We have heard the rival submissions. The details of the other income which is mentioned by the Assessee in the paper-book at Page No.488 [Volume No.2] are duly operating in nature. All the income are related with the business operation of the previous year or of the current year. It is to be directed to the learned Assessing Officer to reconsider the issue in the light of treating the expenses as operating expenses for this assessment year. Thus, this gr....
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....les of natural justice and proposing an adjustment of INR 1,447,512,401 which is in excess the total value of international transactions (costs and revenue) entered into by the Assessee in the IPS projects segment (INR 1,112,577,971), thereby disregarding the provisions of Section 92C of the Act, read with Rule 10B(1)(e) of the Income Tax Rules, 1962. The Learned TPO grossly erred in violating the principles of natural justice by proposing an adjustment in excess of the total revenue in the JPS segment of the Assessee. 3B. The Learned TPO erred in proposing an adjustment at the entity level, instead of restricting the adjustment to the value of international transactions. Panel: The contentions of the assessee are carefully considered. It is the plea of the assessee that the adjustment should not be done at entity level but restricted only to international transactions in IPS EEC segment. The assessee has purchases from both AEs and non-AEs in this segment. The primary international transaction in the case is the purchase of goods to the extent of Rs. 34.2 I crore as provided by the assessee in the grounds of objections. It is interesting to note....
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....e plea of the assessee to restrict the adjustment to AE-transactions alone is not accepted. The assessee made an alternate plea that the adjustment be restricted to the AE-transaction. The contention of the assessee is carefully considered. [tis a case where AE transactions arc on both sides, expenditure as well as revenue. Out of total revenue of 138.7 crore the AE revenue is Rs.38 crores. This is apart from 65 crore expenditure (after rectification) and 25 crore other revenue including reimbursements However the adjustment is done only towards cost Hence the contention of the assessee that the TP adjustment be restricted to purchases alone cannot be acceded to. This argument would have some force if the international transactions are only purchases or expenses. When assessee is also having revenue stream from AEs the situation is not the same. Hence the contention of the assessee cannot be acceded to. Ground rejected." 9.3 We observed the rival submissions and considered the documents available on record. The Assessee filed an objection before the learned DRP which is in the paper-book at Page No.39 to 143 which is kept in the record. The Assessee in two segm....
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....dentical issue and held that transfer pricing adjustment has to be made only in respect of transactions of the assessee being a tested party, with associated enterprises after comparing the transactions made by similarly placed company in uncontrolled transactions with non-associated enterprises. The sum and substance of the ratios laid down by Hon'ble Supreme Court and Hon'ble High Courts are that TP adjustment can be made only in respect of transactions of the assessee with its associated enterprises, but not to a third party transactions at entity level. Although the Ld. TPO as well as Ld. DRP have accepted the fact that the issue has been decided in favour of the assessee by various Hon'ble High Courts, but because the SLP filed by the Department has been admitted by the Hon'ble Supreme Court they have proposed adjustment at entity level to keep the issue alive. But fact remains that the SLP filed by the Department has been dismissed by the Hon'ble Supreme Court vide its order dated 31.01.2018 and hence, the issue of TP adjustment at entity level had attain finality by dismissal of SLP filed by the Department by the Hon'ble Supreme Court. Therefore, we a....
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....sessee in the EEC software segment was a benchmark against the comparable companies performing similar functions. He relied on the Circular No.14 of 2021 issued by the CBDT r.w.s. 92C(3) of the Act which clearly states that "under the new provisions, the primary onus is on the tax-payer who determines the arm's length price in accordance with any rules and to substantiate the same with the prescribed documentation. When such onus is discharged by the Assessee and the data used for determining the arm's length price is reliable and correct, there can be no intervention by the Assessing Officer. 10.1 The learned Departmental Representative only relied on the order of the DRP. 10.2 We have heard both the parties and relied on the documents available on record. The Assessee had filed an objection before the learned DRP which is kept at Page Nos.88 to 95 of the paper-book [Volume No.1]. During the TPO study, the learned TPO had made a cherry picking. The ALP study closely linked transactions is to be taken into account considering the geographical and segmental attitude. The segment wise study was not done properly. The Assessee mainly wanted to point out that in this case....
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.... for, by the Assessee. As per the learned DRP, the Assessee had only given general statements to substantiate its claim that the use of multiple year data affects the data for the year under consideration and accordingly the ground of the Assessee was rejected by the DRP. 11.3 We have considered the rival submissions and relied on the documents available on record. It is a fact that in this year, the Assessee had incurred losses in the ACD segment. But the Revenue authorities are not satisfied about the documentation and the data provided by the Assessee. The Assessee should another reasonable opportunity to substantiate its claim before the learned TPO. So, the matter is being setting aside to the learned TPO for further consideration. In the result, Ground No.6 [6.1 to 6.3] is allowed for statistical purposes. 12. Ground No.7 [7.1 to 7.4]: Adjustment towards recovery of expenses, alleging mark-up based on travel companies: This particular ground is recovery of expenses alleging mark-up based on travel companies amounting to Rs. 57,96,070/-. The learned Counsel of the Assessee mentioned that this is reimbursement in group adjustment mark-up reimbursements from the AEs. This ....
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.... extracted as under: "6.0 Objection No.5: The Learned AO erred on facts and circumstances in disallowing payment of shared service expenses to Invensys USA amounting to INR 21,200,000 on account of non-deduction of taxes under section 195 of the IT Act. 5A. The Learned AO has erred in law and on facts in concluding that lax is required to be deducted on payments made towards shared service expenses to Invensys USA amounting to INR 21,200,000. 5B. The Learned AO has failed to appreciate that the subject payment does not involve rendition of any services which is technical or consultancy in nature and that no technical knowledge, experience, skill, know-how, or processes is being made available. 5C. The Learned AO failed in appreciating that the subject payment does not fall within the definition of Fees for Included Services as per the India-USA DTAA and hence liability to withheld taxes 011 such payments does not arises. Panel: The assessee contends that the disallowance of Rs.2.12 crore u/s 40(a)ia) is not correct. From the order of AO it is seen that assessee reported payment in foreign currency to M/s Invensys Inc USA for sof....