TaxTMI 
TaxTMI 
2026 (7) TMI 482
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....-18. 2. Brief facts of the case are that, the assessee filed return of income on 03.11.2016 declaring total income of Rs. 2,48,97,272/-. The case was selected for complete through CASS on following issues: i. Double taxation relief u/s. 90/91 ii. Claim of 'Any other amount allowable as deduction' in Schedule BP. iii. Depreciation Claim iv. Sales turnover/receipts v. Custom duty paid vi. International transaction (s) vii. Other income reported in Schedule A-O1 viii. Loss from currency fluctuations 2.1 Notice u/s. 143(2) dated 24.08.2018 was issued. The case was transferred to the Regional Assessment Unit for completing the assessment under the faceless assessment Scheme (FAS), 2019 on 25/01/2019. Notice under section 142(1) along with questionnaire was issued on 08.05.2019, 29.05.2019, 17.02.2021. 2.2 As per Form 3CEB filed by the assessee for the relevant period, the assessee has entered into international transactions with its associated enterprises. So, the matter was referred to the TPO for determination of Arm's Length Price in respect of international transaction made with its AEs. The TPO has pas....
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....9,340 as against the returned income of INR 2,48,97,272. Grounds specific to Transfer Pricing Adjustments 2. That, on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO have erred in making an adjustment of INR 17,99,43,815 in pursuance to the order passed under section 92CA (3) of the Act read with provisions of section 144C of the Act. 2.1. That, on the facts and circumstances of the case and in law, the Ld. AO/TPO have erred in computing the margins of the comparable companies and in considering the operating cost of the Assessee, while giving effect to the directions issued by Hon'ble DRP, thereby leading to an adjustment almost thrice the amount of adjustment computation based on such calculations. 3. That, on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO/Ld. TPO have erred in the facts and law by rejecting the scientific analysis carried out by the Appellant which was consistent with the Indian transfer pricing regulations prescribed under the Income Tax Act, 1961 and Income Tax Rules, 1962. 4. That, on the facts and circumstances of the case and in law, the Hon'ble DRP/L....
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.... during the subject year. 7. Without prejudice to the contention that the analysis undertaken by the Ld. AO/Ld. TPO is flawed, the Ld. TPO has grossly erred in undertaking an opaque analysis by not sharing the search methodology, keywords used, criterions of selection/rejection of companies, number of companies rejected by way of applying various filters etc., used for identification of fresh companies considered as comparable for the purpose of arm's length evaluation and also by not allowing the sufficient opportunity to the Appellant to present its case. 8. That, on the facts and circumstances of the case and in law, the Ld. AO/Ld. TPO have erred in applying inappropriate filters on selective basis to: • Reject companies having export income less than 70% of total income • Reject companies having employee cost less than 25% of total cost 9 That, on the facts and circumstances of the case and in law, the Hon'ble DRP/Ld. AO/Ld. TPO have erred in ascertaining the risk profile of the Appellant by comparing it against the companies bearing substantial entrepreneurial risk, without giving due cognizance to the fact that. App....
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....nt of Rs. 17,99,43,815/- in pursuance to the order passed u/s. 92CA(3) of the Act read with provisions of section 144C of the Act. The ld. AO/TPO have erred in computing the margins of the comparable companies and in considering the operating cost of the Assessee, while giving effect to the directions issued by Hon'ble DRP, thereby leading to an adjustment almost thrice the amount of adjustment computation based on such calculations. The Hon'ble DRP/Ld. AO/Ld. TPO have erred in the facts and law by rejecting the scientific analysis carried out by the appellant/assessee which was consistent with the Indian transfer pricing regulation prescribed under the Income Tax Act, 1961 and Income Tax Rules, 1962. 6. The Hon'ble DRP/Ld. AO/Ld. TPO erred in law in re-determining the price of the impugned international transaction involving "provision of basic market research and testing services", as the circumstances necessitating the determination of price by the ld. TPO as mentioned in sub-section (3) of section 92C did not exist in case of the appellant/assessee. 7. The Hon'ble DRP/Ld. AO/Ld. TPO erred in rejecting Unimed Diagnostics Private Limited, India Tourism Development Corpo....
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....¢ Reject companies having export income less than 70% of total income • Reject companies having employee cost less than 25% of total cost 14. The Hon'ble DRP/Ld. AO/Ld. TPO have erred in ascertaining the risk profile of the Appellant by comparing it against the companies bearing substantial entrepreneurial risk, without giving due cognizance to the fact that. Appellant indeed enjoys a "No Risk" status, ie, all expenses incurred by the Appellant get reimbursed with an arm's length mark-up, irrespective of their commercial success. 15. The Hon'ble DRP/Ld. AO/Ld. TPO have erred in not making suitable adjustments to account for differences in the risk profile of the Appellant (no risk) vis-à-vis the comparables (bearing full-fledged entrepreneurial risk). 16. Ld. Departmental Representative submitted that ld. TPO had conducted proceedings fairly. Marketing research testing based on data compilation mistake of 70% is to be ignored. India Tourism Development Corporation Limited, Unimed Diagnostics Pvt. Ltd. and Medall Healthcare Private Limited were rightly rejected to comparables. IGT Solutions Pvt. Limited as well as Fuzen Software Pvt. Ltd. we....
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....health-related activities and was functionally different. 17.5 Ld. TPO held Medall Healthcare Private Limited company, as not a comparable, since the company is involved in a chain of Medical Diagnostics Service providing pathology, radiology imaging services. The company failed the export income and employee cost filters. 17.6 The assessee submitted functional analysis report as under: - "Honda R& D (India) Private Limited ("HRID") was incorporated under the provisions of the Companies Act, 1956 as a wholly owned subsidiary of Honda R&D Co. Ltd., Japan ("HG"). HRID is engaged in conducting basic market research and testing activity for two-wheeler and power products for HG and is remunerated on a cost-plus mark-up basis for the same. HG is a fully integrated and independent unit of Honda Motor Co. Ltd., Japan ("HM Japan") and serves as a central research and development organization for all Honda products. HG was spun off as an independent entity in 1960 from the research and development division of HM Japan. The brief description of activities carried out by HRID are as follows: For the purpose of providing market research and testing ser....
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....nsactions has been treated as closely linked to the main international transaction. Hence, the impact of the credit period extended on the arm's length price has been considered while determining arm's length price of the underlying transaction] HRID provides basic market research and testing services to its AE and is remunerated on a total 'cost-plus' mark-up basis of the services provided. During the FY 2016-17, the value of international transaction involving provision of market research and testing services is as follows: Associated enterprise Amount (INR) Honda R&D Co. Ltd., Japan 1,857,875,299 Honda R&D Co. Ltd., Japan (supply of components and spare parts) 3,975,836 Total 1,861,851,135 Supply of components and spare parts - closely linked transaction During the year, HRID has 'on specific requests from AE' supplied certain spare parts for use in testing. Even though, the cost of these spare parts supplied should ideally be recovered on actual cost basis, however since the same is fundamentally linked with HRID's main business i.e. provision of market research and testing services, the cost of the ....
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....arch, product styling/modification, information gathering, and testing activities related to research and development of the products to be manufactured by Honda Motors or its subsidiaries (i.e. Honda Group). The nature of services to be rendered by HRID under the above Agreement includes the following: • HRID undertakes basic market research activities, information gathering and competition screening for Honda products in India. Research includes primary and secondary information gathering, data compilation, which are refined and presented to Honda R&D Japan for use in R&D on the respective products. • Due to a better understanding of the tastes, preferences and trends prevailing in the Indian market, and after analysing the competitor products, HRID proposes basic design / style modifications to Honda R&D Japan, for their further research and development. An example for such activity is suggesting designs of graphics used on Honda motorbikes and scooters. • Conducting testing on products developed by affiliates based on requests made by Honda R&D Japan. The tests conducted would of the nature of testing noise generated by the gen-sets, rusti....
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....s been diagrammatically described below: 4.7 Functions performed In performing its operations, the functions performed in the overall supply chain process is as under: • Strategic management functions are those activities that determine the overall strategy and organization of the firm. • Corporate service functions assist in the day-to-day management of the organization (e.g. finance, human resources, information systems, etc). • Research service functions provide data which can be interpreted and analysed to derive effective business decisions. • Testing service functions involve conducting tests to analyse products for international standards of the Honda Group. • Product development functions involve bringing a new product or service to the market. The purpose of this section is to identify economically important activities performed by each of the related parties and to explain the significance that each function has in creating value for the business. This section provides a broad overview of the various functions performed by the AE and HRID in relation to the identified international....
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....sist in the day-to-day management of the organization (e.g. finance, human resources, information systems etc.). With respect to human resources, financial management, routine administration etc., HRID is responsible for organizing and mobilizing the necessary resources for the provision of market research and testing services to Honda R&D Japan. HRID is responsible for managing its own cash flows, accounts payable, accounts receivables, employee management, management information systems, and training and hiring employees. All resourcing functions like hiring, training and allocation of funds and support functions like administration, finance and accounts, human resources, etc. are undertaken by HRID. All day to day administrative and operations are undertaken by HRID independently. The AE is not involved in this process pertaining to the provision of market research and testing services. 4.7.3 Research services Research is an activity based on intellectual application in the investigation of matter. The primary aim for research is discovering, interpreting, and analysing details procured which leads to actionable recommendations for an organisa....
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....he Honda R&D Japan, based on the limited specifications and requirements as laid out by Honda R&D Japan. It is the responsibility of Honda R&D Japan to then analyse the outcome of the research activity, and decide on the final R&D offering or solution. The overall development of new products is the responsibility of Honda Group entities and HRID's role is limited to assisting Honda R&D Japan in providing research and testing services so that Honda R&D Japan can provide the overall R&D solution to Honda Group entities. The functions performed by HRID and its AE, are summarized in the table below. Type of Functions HRID Honda R&D Japan Strategic Management Corporate Strategy Yes (local) Yes (global) Budgeting Yes Limited Conceptualisation of product/services No Yes Corporate services Administration Yes Yes Research services Limited Yes Testing services Limited Yes Product Development and Functional Analysis No Yes (along with Honda operating entities) 17.8 Ld. Authorized Representative for appellant/assessee referred to transfer pricing, drew our attention to page no. 63 of appeal set as und....
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.... in applying inappropriate filters on a selective basis i.e., rejected companies having export income less than 70% of total income and rejected companies having employee cost less than 25% of total cost. Ld. AO erred in not following the rule of consistency in Assessment Year 2013-14, IDMA and ITDC were considered as comparables. Further, ld. AO/TPO failed to follow directions of the DRP thereby violated provisions of Section 144C of the Act. The additional evidence produced before Ld. DRP was not considered by Ld. AO. Therefore, Ground of appeal No. 8 to 10 are accepted. 22. The assessee had filed details relating to computers at page No. 148 of paper book. The corporate tax adjustments were challenged in Grounds No. 11 to 14. The copies of invoices in relation to computer software purchased during the year, on sample basis are at page Nos. 157-177 of paper book and the details of tax depreciation on computer software and hardware are at page Nos. 138-156 of Paper Book. The Ld. AO erred in facts and in law in treating computer software as 'Intangible assets eligible for depreciation at the rate of 25 percent as against treating it as 'Computers including computer softw....
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....ounting to INR 2,91,74,619/- without appreciating the documentary evidences submitted by the Appellant which substantiate that applicable taxes have been duly deducted on the entire expenditure of INR 2,91,74,619/- under the Act. 22.3 A Co-ordinate Bench in ITA No. 703/Del/2021 titled as Honda R & D (India) P. ltd. (supra) in assessee's own case in para No. 10 observed as under: "10. In ground no. 20 of appeal, the assessee has assailed disallowance made u/s. 40(a)(ia) of the Act for non deduction of taxes on payment for International Travel Expenses. The short contention of ld. Counsel for the assessee is that the AO while passing final assessment order has not complied with the directions of the DRP. The DRP in para 16.1.3 of the order had given following directions in this regard:- "16.1.3. Ground number 3 is with reference to disallowance under 40a(i)(a) of the Act. Vide submissions dated 27.07.2020 the assessee has submitted that out of Rs. 8,988,520/- of disallowance so made, taxes on international travel expense of Rs. 30,355,292/- was duly deducted and deposited. The AO is directed to verify this contention of the assessee and take necessary action as p....