TaxTMI 
TaxTMI 
2026 (4) TMI 1908
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.... this consolidated order. 2. The assessee has raised the following grounds of appeal : The grounds of appeal stated hereunder are independent of, and without prejudice to one another 1(a) The Order passed by the Learned ('Ld.") Commissioner of Income Tax (Appeals)-20, (CIT(A)") in pursuance of the grounds filed by the Appellant against order under section 143(3) r.w.s. 92CA of the Income-Tax Act, 1961 ('the Act'), is bad in law and on facts. 1(b) The Ld. CIT(A)/AO has erred in law and on facts by failing to record an opinion that any of the conditions in section 92C(3) of the Act were satisfied and erroneously disregarded the TP study maintained by the Appellant as per section 92D of the Act read with rule 10D of the Income-tax Rules, 1962 (the Rules). On the facts and in the circumstances of the case and in law, the Ld. TPO and Ld. AO, under the order issued by the Ld. CIT(A), erred in the following grounds: Manufacturing of Earthmoving Equipment Segment - Adjustment-INR 185,92,87,574 2 Erroneous Rejection of Economic Adjustments 2(a) Erred in not allowing appropriate economic adjustments when applying T....
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.... the industry slowdown which the Appellant had referred to pertain to the economic situation of the export market and not in India. 2 (g) Erred in law and on facts in not adjudicating on the claim of economic adjustment relating to low realization in export sales, without appreciating the peculiar business reasons and global economic parameters influencing the business of the Appellant for the year under consideration. 3 Provision no longer required written back 3(a) Erred in law and on facts in treating provision no longer required written back as a non-operating item without appreciating that the provisions were considered as an operating expense in the assessment years when they were created. 3(b) Erred in considering the reversal of the provisions as non-operating which would inter alia construe as double adjustment, when the Appellant had already disallowed the provisions in the year they were created and had paid taxes on the same. 4 Miscellaneous Receipts 4 (a) Erred in considering the miscellaneous receipts under other income as non- operating without appreciating the submission made by the Appellant 5 Business ....
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....ering the margins of the comparable company, Global Content Transformation Pvt Ltd as computed from Annual Reports. Market Support Services Segment 8 No meaningful opportunity of being heard - violation of Principle of natural justice. - Adjustment- INR 28,67,00,000 Notional Effect -Tax INR 9,74,49,330 8(a) The Ld. TPO erred in law by violating the principles of natural justice and provisions of Section 92C(3) of the Act by not providing reasonable opportunity of being heard to the Appellant. The Ld. TPO erred in proceeding with a predetermined approach while determining the Arm's length price for the marketing support services transaction and, the opportunity provided through show-cause notice was not meaningful, rather a mere formality. 9 Non-appreciation of business model and erroneous adjustment proposed Without prejudice to the above ground on Principal of Natural Justice 9(a) Erred on facts in not appreciating the business model of the Appellant and erroneously recharacterized the appellant as a commission agent when in fact it was only a Marketing Support Service provider, and thereby computing an ad hoc adjustment ba....
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....t that the assessee had only acquired a license to use the software and further classified the same as "intangible asset" in the books of the assessee, as such the depreciation rates as applicable to "licenses" as stated in Part B of New Appendix- 1 of the IT Rules, which 25% shall only be applicable to such acquisition of license 5. The Id. CIT(A) has erred in not appreciating that the amount reimbursed to the foreign AE for secondment of employees is in the nature of fee for technical [2:59 PM, 4/6/2026] DVani: services which calls for withholding of tax u/s 195 of the Act and since the assess has not withheld tax u/s 195 the same calls for disallowance u/s 40(a)(i) of the Act. 5.1 The CIT(A) has erred in directing the AO to verify whether the assessee has deducted tax at source u/s 192 both on remuneration component that accrued to the seconded employees and reimbursement of expenses to the foreign AE and if TDS has been made on both the components, no disallowance is called for. 5.2. The ld CIT(A) has erred in ignoring the various clauses of the Agreement which signified that the overseas entity through the employees rendered technical, managerial and....
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.... d) Addl Ground of Appeal no.2: Customs duty adjustment e) Addl Ground of Appeal no.4: AE and Non-AE segmentation f) Addl Ground of Appeal no.3: Corporate tax - Provision for Obsolescence - Alternative ground on opening stock and closing stock to be recomputed 7. Brief facts in relation to manufacturing segment is that the Assessee benchmarked the international transaction under TNMM and as per TP study the PLI of the Assessee was OP/OR and for this segment the Assessee has reported an adjusted Net profit margin of 6.13% (adjusted margin after idle capacity cost) with 9 comparable companies margin in the range of 2.90% to 5.51% with a median 3.53% and thus substantiated its international transaction is at arm's length. The TPO has accepted the most appropriate method i.e. TNMM adopted by the Assessee but proposed to reject the adjustment for 'idle capacity' and considered forex gain/loss as non-operating while computing the margin of the Assessee and arrived at a revised margin of Assessee at -23.31%. Further, the TPO rejected 2 comparable of the Assessee and undertook a fresh search and brought in 4 additional comparable with totally 11 com....
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....ee does not have committed capacity in relation to AE and hence the assessee has to bear market and capacity risk. Accordingly, the assessee has in its TP document sought for idle capacity adjustment by reckoning only 52.03% of fixed cost as operating expense which is based on the assessee's own previous three years average capacity. The Ld.AR submitted that as a second approach, the capacity details of comparable companies have to be considered. Further, only details of 2 comparable are available in public domain, therefore the TPO could collate the data by issuing notice 133(6) for the remaining comparable companies and then allow appropriate adjustment. The third and last approach of the assessee is on without prejudice basis that industry average capacity as reported by RBI and FICCI could be considered for arriving at the quantum of idle capacity utilization adjustment. The Ld.AR has also refer to various judicial precedents including that of the jurisdictional Tribunal. 10. The Ld. DR on the other hand vehemently argued and emphasized that the TPO and ld. CIT(A) have brought out categorical reasoning that granting of capacity adjustment is unwarranted in the present ca....
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....atistical purposes. 13. Since the primary economic adjustment of idle capacity adjustment is remitted to the file of the TPO, we hereby admit the additional ground on custom duty adjustment. We also note that this issue was considered in the Assessee's own case in IT(TP)A No. 42/Chny/2023 vide order dated 06.06.2025 wherein it was remanded back to the TPO to examine the issue of necessity of granting custom duty adjustment in light of the principle laid down by the jurisdictional Tribunal in the case of Doowon Automotive Systems India Pvt Ltd [IT(TP)A No.7/Chny/2018. 14. Respectfully following the said decision, we remit this issue to the file of the TPO for re-examination in light of the decision in the case of Doowon Automotive Systems India Pvt Ltd (supra). The assessee is directed to furnish the necessary details/working in relation to the same. The TPO after affording sufficient opportunity to the assessee, may decide this issue in accordance with law and the judicial precedence referred to hereinabove. This ground of appeal is allowed for statistical purposes. 15. Next Ground nos.3(a) to 3(b) treatment of provision no longer required written back. The contention ....
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.... no.3(a) & 3(b) is allowed for statistical purposes. 19. Next Ground No.4(a) treatment of Miscellaneous receipts as non- operating. The TPO has given a finding that there is a difference in the breakup of the miscellaneous income submitted during show cause notice response and in the response to previous notices and therefore that the TPO has held as miscellaneous income as non-operating income. Before the ld.CIT(A), the assessee was not able to file the reconciliation and therefore the ld.CIT(A) has held that in the absence of reconciliation the benefits sought for by the Assessee cannot be granted. It is the contention of the Assessee that the ld.CIT(A) has misinterpreted the breakup of miscellaneous income amounting to Rs.2.8 crores as reported in the financial statement with the bifurcation of service income of Rs.2.7 crores and other income of Rs.2.8 crores aggregating to Rs.5.32 crores which has been classified as operating revenue in the earthmoving segment in the segmental financial statement. In light of this confusion the Ld.AR prayed that this issue may be remitted back to the file of the TPO for reconsideration. 20. The Ld.DR submitted that affording one more oppo....
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....ated on the basis of the ratio laid down by this Hon'ble Tribunal in the Assessee's own case in IT(TP)A No.42/Chny/2023 dated 6.6.2025. 23. The Ld. DR contented that there is a categorical finding by the lower authorities expenses allocation between the AE segment and the Non-AE segment are not rational and therefore the contention of the Assessee ought not to be accepted. 24. We have heard the rival contentions and perused the material on record and gone through the orders of the authorities along with the paper books filed by the assessee. The assessee has furnished multiple documents in the paper book in volume 2 and 3 in support of its contention in relation to allocation of expenses between both the segments and determination of COGS. Though the assessee has furnished these details, the allocation of forex does not seem to have been done by the assessee which shows the fallacy in the allocation of expenses between the AE segment and the Non-AE segment. However, now before us the Ld.AR has prayed that the allocation can be done in accordance with the ratio laid down by this Tribunal in the Assessee's own case supra. Since we have already remitted the main issu....
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....t the contention that people in the manufacturing segment are equipped to render general managerial and administrative support services to group companies. Merely because the assessee had booked these under manufacturing segment does not render it a character of manufacturing activity. Hence, we are of opinion that BMSS service income is certainly not derived from the manufacturing activity of the assessee's and hence should not be considered as a part of the operating income of the manufacturing segment, for computation of PLI. Therefore, the ground raised by the assessee is rejected." 28. Respectfully following the above decision, we also hold that the service income has to be considered as non-operating income. However, in so far as the alternate prayer is concerned, we find that the Tribunal has neither adjudicated on the same nor issued any directions. Accordingly, the ld.CIT(A) finding on the alternate prayer for exclusion of corresponding cost is incorrect to this extent. It is trite law that if the revenue is excluded then the corresponding expenditure should also be excluded by applying parity principles. Accordingly, we direct the TPO to exclude the corresponding e....
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.... and has not made any arguments in respect of other ground nos.7(b) to 7(d) and as such ground nos.7(b) to 7(d) are not adjudicated by us. In so far ground no.7(a) the Ld.AR has sought for inclusion of M/s.Allsec Technologies Ltd. The TPO has excluded this company on the ground that the company has been incurring losses in 2 out of the 3 years. The ld.CIT(A) also has held that when the company is making losses it cannot be considered as a comparable. 33. It is the contention of the Ld.AR that this company is not making consistent losses and it has earned profit in the FY 2013-14 therefore, this company should be considered as one of the comparables. 34. We have heard the rival contentions and perused the material on record and we find that this company has earned profits in the FY 2013-14 that is the year preceding to the subject assessment year and therefore this company is not incurring consistent losses. Accordingly, we are of the view that as long as this company is not making persistent losses this company could be considered as a comparable and as such, we direct the TPO to consider this company as a comparable in the final list of comparable companies. This ground no.7....
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....machine and engine sales and it cannot be extended to parts. Accordingly, this ground no. 8(a) is partly allowed. 38. Next additional ground no.3: Corporate tax: if provision for obsolescence is held to be not allowable, then opening stock and closing to be recomputed. The Ld.AR contended that this issue is squarely covered by the decision in IT(TP)A No. 42/Chny/2023 dated 06.06.2025. The relevant extract is as under: "26. Respectfully following the same, we also hold that the provision is not allowable as deduction for AY 2014-15. Nevertheless, we find that the alternate argument of the Assessee merits consideration i.e. since the provision has been disallowed in the immediately preceding year AY 2013-14 and we have also now disallowed the same in the subject AY 2014-15, we hereby direct the AO to rework the opening stock and closing stock of AY 2014-15 after taking into consideration the aforesaid disallowances made in AY 2013-14 & 2014-15. This ground is disposed off with the above direction." 39. Respectfully following the above decision, we hold that since the provision has been disallowed in the immediately preceding AY 2014-15 and we have also propose to disal....
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....he Assessee did not furnish substantive evidence to show that certain losses were on account of restatement. The Ld. AR and the Ld. DR reiterated the arguments raised before lower authorities. In our view, this Tribunal has been consistently holding that translation in forex loss or gain ought to be treated as operating in nature while computing the margins of the Assessee as well as the comparable companies. Accordingly, we hold in principle that forex loss should be treated as operating expense. However, whether the entire quantum of forex loss (i.e. realised/actual and unrealised/notional) should be treated as operating expense is concerned we hold it is only the actual forex translation should be considered as operating expense and we find merit in the contention of the Ld.AR. Accordingly, we hold that only actual forex loss should be treated as operating expense and the notional Forex loss should not be treated as operating expense. Accordingly, this ground of appeal is partly allowed in favour of the Appellant." (emphasis supplied) 43. Respectfully following the above decision, we hold in principle that forex gain should be treated as operating income. However, wh....
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.... "We find that this issue is covered in assessee's favor by the decision of Hon'ble High Court of Madras in the case of Computer Age Management Services (267 Taxman 146) wherein it has been held that where software license acquired by assessee was in nature of software application, the assessee would be eligible to claim depreciation at 60%." 47. Respectfully following the same we decide this issue against the revenue and in favour of the Assessee. This ground of appeal no.4 is dismissed. Disallowance u/s.40(a)(i) for reimbursement of seconded employees cost: 48. Ground Nos.5, 5.1 & 5.2 The AO disallowed the reimbursement as according to him it is in the nature of "fees for technical services". The ld. CIT(A) allowed the same basis the fact that tax has already been deducted TDS u/s.192 of the Act and also by following the Tribunal decision in Assessee's own case for AY 2008-09. The Ld. DR vehemently argued that employees are that of the overseas entity and as such deduction of tax at source u/s. 192 has no relevance. In this regard, the Ld. DR relied on Delhi High Court decision in the case of Centrica India Offshore Ltd 374 ITR 336 and SLP dismissed by the H....