TaxTMI 
TaxTMI 
2026 (8) TMI 384
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....anufacture of auto-electrical components which include instrument clusters, engine systems, speed sensors, airbag controllers, anti-lock braking system etc., for the automobile industry. Trading segment, The assessee's operations in this segment primarily related to the trading of dashboard instruments, tachographs, sensors and other allied components for the automobile industry. Services segment. In the services segment, the assessee renders application / specific services to its Associated Enterprises ("AEs") with regard to development of software. 3. Assessee filed its return of income on 30.11.2013 declaring a loss of Rs. 60,26,07,779/- for the Assessment Year 2013-14. Subsequently, the case was selected for scrutiny and statutory notices under sections 143(2) and 142(1) of the Act were issued and served on the assessee calling for details. It was noticed that during the Financial Year 2012-13, assessee has entered into international transactions with its AEs as detailed in Form 3CEB filed by the assessee. The following are the international transactions mentioned in Form 3CEB report: Sl No. International transaction Amount (in Rs. ) 1 Purchase....
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.... Babcock Borsig Softech Pvt Limited 1.55 10. Sasken Communication Technologies Ltd. 5.56 11. Tata Elxsi Ltd. 11.09 12. Kireeti Soft Technologies Limited 2.20 13. Mindtree Ltd. 7.64 Arithmetical Mean 8.60 NOTE: Out of the 13 comparables selected by the assessee, the TPO accepted the 2 highlighted above, viz. Mindtree Ltd. and RS Software. and rejected the other 11. 5. The learned Assessing Officer (in short 'AO'), thereafter, made a reference to the TPO to determine the Arm's Length Price (in short 'ALP') as per provisions of section 92CA of the Act after obtaining permission from the concerned authorities. The learned Transfer Pricing Officer (in short 'TPO'), rejected the TP study report of the assessee. The learned TPO by applying the following filters arrived at selection of 7 comparables as detailed below: A.6. Filters applied by the TPO: Step Description 1. Companies whose data is not available for FY 2012-13- excluded. 2. Companies having different financial year ending or data of the company which does not fall within 12-month period i.e., 01.04.2012 to 31.03.2013- excluded 3.....
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....,743,222/- to the manufacturing segment. 10. The learned TPO after considering the details furnished by the assessee with respect to trading segment computed the ALP as follows: Sl. No. Particulars Amoun 1 Operating Revenue 2,419,050,000 2 Operating Cost 2,416,685,756 3 OP (Co1.1-2) 2,364,244 4 OP/OR (Col.3/1) 0.10% 5 OP/OC (Col.3/2) 0.10% 6 Arm's length OP/OR (Comparables margin) 3.43% 7 Arm's length OP (Co1.1*6) 82,973,415 8 Arm's length cost (Col.1-7) 2,336,076,585 9 Adjustments (Col.2-8) 80,609,171 10 3% of Price paid (Operating cost) 72,500,573 11 Shortfall being adjustment 80,609,171 11. The learned TPO during the Transfer Pricing (in short 'TP') proceedings concluded an upward adjustment totaling to Rs. 134,34,45,024/- vide its Order dated 28.09.2016. The learned AO, thereafter, passed the Draft Assessment Order dt 29.11.2016 by making an addition of Rs. 1,66,55,739/- as disallowance of warranty Rs. 26,77,78,286/- towards research and development expenses and Rs. 1,25,93,958/- being disallowance due to belated remittance of employees' contribution of ....
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....e tax Act. 7. Whether the CIT(A) is correct in imposing conditions is beyond the scope of law and business reality by rejecting all close comparables on one or the other ground, without appreciating that not two companies can ever be same. 8. Whether the CIT(A) is correct in trying to find out exact replica of the assessee for determining the Arm's length price based on such replica, even when the law and the international jurisprudence itself recognize that there cannot be an exact comparable to a given situation, especially with TNMM as the most appropriate method. 9. Whether the CIT (A) is right in including companies Akshay Software Technologies Limited and Cigniti Technologies Limited that are functionally dissimilar to the taxpayer's business in the set of comparables for determining the arm's length price? 10. Whether the CIT(A) is right in the inclusion of comparablesAkshay Software Technologies Limited and Cigniti Technologies Limited that operate in specialized segments of the software industry, such as software testing or ERP implementation, under the legal framework of transfer pricing comparability analysis? 11. ....
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....CIT(A) was right in directing to confine the TP adjustment to the value of International Transactions in manufacturing segment of the assessee. 22. Whether the CIT(A) erred in not considering the fact that whatever is the reduction in the margin of the assessee viz a viz comparables is on account of purchase from AЕ at a higher price and the same gets considered when ALP is calculated by applying TNMM. 23. Whether the CIT(A) is right in restricting the adjustment to international transaction when it brings the margin of the tested party at -13.19% which is much lower than the ALP of 3.77%, when the ALP margin is confirmed. and non-AE 24. Whether the CIT(A) erred in ignoring the interdependency between AE transactions and the impact of controlled transactions driving down the margin in manufacturing segment. 25. Whether the CIT(A) is right in considering amortization of goodwill as nonoperating cost of the tested party without verifying the facts of circumstances of the case. 26. Whether the CII(A) is right in ruling that amortization of goodwill should be considered as non-operating cost, without verifying whether the acquisition o....
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....012-13 and in the assessment year 2015-16 held the royalty expenses as revenue in nature. Therefore, we hold that such expenses cannot be treated as capital in nature in the year under consideration. The copy of the assessment order framed for the assessment year 2012-13 in pursuance to the direction of the ITAT and the remand report of the AO for the assessment year 2015-16 are available on record. Even at the time of hearing, the learned DR has not brought anything on record contrary to the arguments advanced by the learned AR for the assessee. Accordingly, we set aside the order of the learned DRP/ the AO with the direction to allow the deduction to the assessee on account of royalty expenses treating the same as revenue in nature. Hence the ground of appeal of the assessee is hereby allowed." 5.3.1 Further, in the remand report for A.Y.2015-16, the AO accepted the contention of the appellant that the said royalty payment is revenue in nature. 5.3.2 In view of the above, the AO is directed to treat the royalty payment as revenue in nature. The appellant succeeds on this ground." 17. In the absence of any change in the facts and circumstances during the impug....
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....count of warranty stands vindicated by the fact that the actual liability on account of warranty expenses is always on the higher side. The reasons given by the DRP for not accepting the claim of the Assessee is that the provision is created as a percentage of sale, ignoring the fact that past experience is also the basis for creation o provision for warranty. We are therefore of the view that the provision for warranty has to be allowed as a deduction, as the provision created satisfies the requirements for claiming provision as a liability, as laid down in the judicial precedents referred to above. We hold and order accordingly and allow the relevant ground of appeal of the Assessee." 5.4.1 Respectfully following the decision of the ITAT, Bengaluru the provision for warranty is allowed as deduction. 21. The decision of the Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. v. CIT [2009] 180 Taxman 422/314 ITR 62 relied on by Ld DR could not be of any help to the Revenue. 22. In the absence of any change in the facts and circumstances during the impugned Assessment Year, we do not find any infirmity in the Order of the learned CIT(A) and hence no i....
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.... a comparable in the case of M/s. EPAM Systems India Private Limited (ITA No.2122/Hyd/2017 for assessment year 2013- 2014). Vide order dated 20.11.2018, the Tribunal held as under:- "16. Having regard to the rival contentions and the material on record, we find that the assessee has raised its objections before 10 the TPO but he held that it is functionally similar. We have gone through the annual reports of CGVAK Software & Exports Lid and find that the said company is having revenue from both software services and BPO services but there is no segmental data with regard to each of these transactions. Therefore, as held by the Coordinate Bench of the Tribunal in a number of cases (cited supra), we hold that this company cannot be taken as a comparable to the assessee-company. Accordingly, we direct the TPO to exclude this company from the final list of comparables." 24.1 Similarly. in the case of M/s.ION Trading India Private Limited v. ITO (ITA No.1035/De1/2015 for the assessment year 2010-2011). The Tribunal vide its order dated 07.12.2015, held as under:- "21. We have considered the submission of the Id. counsel for the assessee and have considered the....
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....able companies should be excluded from the list of comparable companies." 22.1 It was also brought to our notice that in earlier year, Larsen & Toubro Infotech Limited has incurred expenditure on "cost of brought out items for resale at Rs. 27,10,89,274 for which he drew our attention to the financial statement of Larsen & Toubro Infotech Limited placed at paper book page No.1081, which is absent in the case of present assessee. He also submitted that it has huge intangible assets and brand value in software at Rs. 143;61,95,196 and it has intangible asset in the form of business rights to the tune of Rs. 153,42,45,196 as shown in the Fixed Assets as on 31.03.2013 placed at paper book page No.1078. Being so, in our opinion, it cannot be compared with the assessee's case. Accordingly, we direct the TPO to exclude the same from the list of comparables. II. PERSISTENT SYSTEMS LIMITED 23. As discussed in earlier year, Persistent Systems Limited is engaged in product engineering services, platforms and solutions, IP and related business, which is functionally different from assessee's case and it has earned revenue from R & D activities. Persistent Sys....
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....n hand which is rendering software development services. It is ordered accordingly." 23.1 Therefore, Persistent Systems Limited cannot be compared with the assessee's case. Accordingly, we direct the TPO to exclude the said company from the list of comparables, with the similar directions given in the above order of the Tribunal (supra). 5.1.1.3 Respectfully following the jurisdictional ITAT, Bengaluru decisions for the same A.Y.2013-14 in the above case, these comparables are excluded from the list of comparables." 26. Further, it is noticed that the functional profile of the assessee and of M/s NXP India P Ltd is identical where the said company is also involved in providing SWD services to its AE, and therefore in our view the exclusion of functionally dissimilar companies is justified. The learned TPO has also chosen certain comparable companies which were also chosen by the assessee company for the purposes comparability. Further the Revenue has not brought on record any material countering the submissions of the assessee. 27. In the absence of any change in the facts and circumstances during the impugned Assessment Year, we do not find any infirmit....
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....gaged in software testing service. This company is also into computer programming, consultancy and related activities. According to the TPO, it was functionally different from assessee-company. As seen from the revenue from operations, which is as follows:- Particulars Year ending 31.03.2013 Revenue from operations Sale of Services Domestic 4,632,731 Export 231,042,089 Total Revenue from Operations 235,674,820 34.1 In our opinion, software testing is a part of software development life cycle and being so, this company should be considered as a comparable. Accordingly, we direct the TPO to include Cigniti Technologies Limited as a comparable to the assessee-company, while selecting the comparables." 5.2.1.2 Respectfully following the jurisdictional ITAT, Bengaluru decisions for the same A.Y.2013-14 in the above case, these comparables are to be included to the list of comparables." 32. Further, it is noticed that the functional profile of the assessee and of M/s NXP India P Ltd is identical where the said company is also involved in providing SWD services to its AE. The learned TPO has also chosen certain comparable companies....
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....s :' "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 Skoda Auto India p Ltd 122 TT.I 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that,-" "No doubt, a higher imp....
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.... 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 perusal of the impugned orders shows that the above cited guidelines by way of de....
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....held. 39. Per contra, the learned DR relied on the Orders of the Revenue authorities. 40. We have heard the rival contentions. We note that in para 5.8, the learned CIT(A) has held as follows: "5.8 Next ground relates to treating forex fluctuation as operating. The appellant relied on ITAT, Bengaluru decision in its own case for AY 2012-13 wherein it is held that: 35. The Id. AR submitted that during the FY 2011-12, there was an abnormal depreciation in the value of Euro and USD as against the average movement for the preceding periods. This has resulted in a higher outflow of INR for the same value of Euro and USD which was transacted in the previous year. 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 year has to be considered on the value of import purchases made during the year. He highlighted the following points that necessitate the adjustment to the Appellant's cost on account of foreign exchange fluctuation....
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.... by the decision of the Tribunal in the cases of Honda Trading Corp. India Pvt. Ltd. v. ACIT in ITA No.5297/Del/2011 for the assessment year 2007-08 and DHL Express (India) Pvt. Ltd. v. ACIT in ITA No.7360/Mum/2010 for the assessment year 2006-07. Accordingly, we direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment." Accordingly, this issue is remitted to the file of AO for fresh consideration." 40. Following the aforesaid decision of the Tribunal, we remit this issue to the AO/TPO with similar directions for fresh decision. 5.8.1 In the OGE to ITAT order for A.Y.2012-13, the TPO treated forex fluctuation as operating in nature by stating that: "5.5 Foreign exchange fluctuation adjustment: The Hon'ble ITAT has remitted the matter to the file of the Id. TPO relying on the decision of Gates Unitta India Company (P.) Ltd to determine the ALP considering foreign exchange fluctuatio....
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....y utilisation of the assessee to the of the AO/TPO for deciding the same afresh keeping in view the OECD guideline the exact details of capacity utilisation of comparable companies are not available in public domain, the AO/TPO is directed to obtain the same directly from the comparable companies and decide the issue afresh, after affording opportunity of being heard to assessee. Accordingly, this issue is remitted to the AO/TPO." 5.7.1 The AO is directed to follow the same directions given the ITAT, Bengaluru for AY 2012-13, in the present case also." 45. The learned CIT(A) has rightly followed the view taken by this Tribunal in the assessee own case for the AY 2012-13. In the absence of any change in the facts and circumstances during the impugned Assessment Year, we do not find any infirmity in the Order of the learned CIT(A) and hence no interference is required. Thus, ground No. 17 - 20 raised by the Revenue is dismissed. 46. Ground Nos.21 to 24 relates to proportionate adjustment to be restricted to international transactions. On this issue, the learned AR submitted that the learned CIT(A) has relied on the decision of the Coordinate Bench of Bangalore in the a....
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....d as follows: "5.5 Next ground relates to depreciation on goodwill amortisation as non-operating in nature which is relevant for all three segments i.e., Manufacturing, Trading, and Services segments. The appellant relied on ITAT, Bengaluru decision in its own case for AY 2012-13 wherein it is held that: "41. Ground No.7 is regarding treatment of amortisation of goodwill as operating expenditure. The facts of this issue are that the assessee had purchased the automotive components business of Siemens Limited pursuant to a business purchase agreement dated 23.11.2007. The sale consideration for the said purchase was Rs. 1,700 million. The assessee had accounted for the tangible and intangible assets based on the fair value of these assets as determined by an external valuer appointed by the company. Thereafter, an amount of Rs. 1226.70 million was accounted as goodwill and amortized over a period of 5 years. An amount of Rs. 245.60 million was amortized in FY 2011-12 and the assessee has considered the said expenses as nonoperating in nature and the same was not included in the cost base for determination of operating margin of the manufacturing segment for transfe....
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....s no change in the facts of AYs 201011, 2011-12, 2012-13 and 2013-14. Perusal of the order passed by Id. DRP available at page 2681 relevant portion at page 2691, shows that amortization of goodwill is an extra-ordinary item and is not pertaining to the regular operation of the assessee, and hence non-operating in nature. So, in these circumstances, we direct the TPO to verify the facts and treat the amortization of the goodwill as nonoperating expenditure in order to compute the operating margin of the assessee. So, ground no.7 is determined in favour of the assessee." 46. Following the above cited decision of the Delhi Tribunal, this issue is decided in favour of the assessee." 5.5.1 Respectfully following ITAT, Bengaluru above said decision, depreciation on goodwill which is amortised is to be treated as nonoperating in nature." 53. The learned CIT(A) has rightly followed the view taken by this Tribunal in the assessee own case for the AY 2012-13. In the absence of any change in the facts and circumstances during the impugned Assessment Year, we do not find any infirmity in the Order of the learned CIT(A) and hence no interference is required. Thus, ground N....