TMI Blog2014 (7) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... Pvt. Ltd. Versus Asst. Commissioner of Income tax [2014 (4) TMI 816 - ITAT HYDERABAD] followed - the TPO/DRP are not correct in not considering suo-moto adjustments made by Assessee - For arriving at the profit margins realized by the enterprise, suo-moto adjustment has to be taken into account in arriving at the difference to be added so as to make the 'net profit realised' to arrive at the arm's length price in relation to the international transaction as provided under 10B(e)(v) - The AO is directed to consider suo-moto adjustment made by Assessee accordingly – Decided in favour of Assessee. Adoption of operating cost - Whether operating cost adopted by TPO is correct or not – Held that:- Without considering the objections of Assessee, TPO determined the operating cost based on the proportionate cost on the ratio of sales in various segments - The action of the TPO was not justified at all when Assessee has maintained separate books of account, which was also accepted under the provisions of the Act - The decision in M/s Tecumseh Products India Pvt. Ltd. Versus Asst. Commissioner of Income tax [2014 (4) TMI 816 - ITAT HYDERABAD] followed - Decided in favour of Assessee. Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on made on CADEM segment, the orders of the TPO and DRP are set aside – thus, the matter is remitted back to the TPO/AO – Decided in favour of Assessee. Expenses on Daughter's Marriage Benefit fund – Held that:- The amount is an allowable deduction u/s 37(1) of the Act - assessee is adding back the provision and claiming only the actual amount - Industrial Dispute Act permits this sort of benefit for the employees and assessee has been making matching contribution, allowability of this amount does not attract the provisions of section 40A(9) - both AO and DRP are wrongly disallowed the amount – Decided in favour of Assessee. Bonus, Leave Pay and Service Rewards – Held that:- AO did not allow the amount on the reason that third party evidences were not furnished – it could not be understood as to what sort of third party evidences are required to allow the amounts – the AO is directed to examine the vouchers furnished by the assessee and allow the amounts - With reference to service rewards also, it seems to be a gift in kind like fridge - This also requires to be examined by the AO – the AO is directed to give opportunity to the assessee and allow the amounts after due examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssor sub-assembly and components. ITA.No.2228/Hyd/2011- AY 2007-08 4. Assessee has raised 6 grounds in ITA.No.2228/Hyd/2011 for the A.Y. 2007-08 out of which, ground No.1 is general in nature and therefore does not require adjudication. Ground No. 2.2, 2.5 and 2.6 are not pressed and accordingly, these grounds are dismissed as not pressed. Assessee also placed on record voluminous paper books in volumes, from pages 1 to 160 and another paper book from pages 161 to 576. 5. Assessee filed its original return of income for the AY 2007-08 on October 25, 2007 declaring the total loss as INR 30,49,68,581. The return of income was subsequently revised u/s 139(5) of the Act by offering suo-moto transfer pricing adjustment of INR 3,21,69,098, thereby reducing the total loss to INR 27,27,99,483. During the Financial Year 2006-07, Assessee has entered into the following international transactions with its AEs: 1. Purchase of hardware 2. Purchase of drawing and design services 3. Purchase of components, tools, spares and accessories 4. Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PC USA. Assessee arrived at the cost, which is identifiable from the separate books of account maintained for the EOU at 16,38,68,871/-. However, the AO without any show cause notice to Assessee, re-worked out the proportionate operating cost, ignoring the separate details furnished in this regard, at operating cost at a higher figure of ₹ 20.02 crores. Referring to TPO's order, the learned counsel submitted that on a total cost of ₹ 459.63 crores of Assessee company, the AO arrived at the proportionate cost attributable, on the basis of sales turnover, at ₹ 20.02 crores. It is the submission that when Assessee has maintained segmental information, particularly 100% EOU unit accounts are maintained as such, there is no need to adopt proportionate turnover at a higher figure than what was spent by Assessee as operating cost. 8. The next objection of the learned counsel (ground no 2.4 and 2.2) is with reference to the addition made after arriving at the PLI taking comparables. Reserving his submissions on the comparables, it was submitted that Assessee itself has made suo-moto adjustments at the time of filing return along with TP report and this adjustment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment made by Assessee was ignored. If it is taken into consideration the adjustment proposed by the TPO on the basis of PLI at 9.79% is within the (+)/(-) 5% threshold limit provided under the Act. 10. The learned DR, however, referred various facts and submitted that TPO is correct in arriving at the operating cost on proportionate basis and correct in rejecting revised return, which was filed after filing original return and in selection of comparables which were not objected to by Assessee. He supported the orders of TPO/DRP. 11. We have considered rival contentions and examined the record. There are five issues for adjudication in this appeal under the transfer pricing provisions, which are as under: (A) whether Assessee's return filed along with TP report is to be considered or not ? (B) Whether adjustment made by the AO ignoring suo-moto adjustment made by the Assessee is correct or not ? (C) Whether operating cost adopted by TPO is correct or not (D) Whether the comparables selected by the TPO is correct (E) Whether (+)/(-) 5% threshold limit available under the Act can be invoked in this case. These issues were similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove provision of the Act, we are of the opinion that the return filed subsequently is a valid return, which is to be considered as correct. Since both the TPO and DRP erred in not considered the same, we direct the AO to consider the revised return as a valid return. In these circumstances, grounds of Assessee on this issue are allowed. (B) Whether adjustment made by the AO ignoring suo-moto adjustment made by the Assessee is correct or not ? This issue was decided in earlier year in assessee own case in ITA No 1686/Hyd/2010 dt 13-11-2013. It was decided as under: There is no dispute with reference to arriving at the arm's length price under the provisions of the Act as prescribed under the Rules and making adjustment with reference to the International transactions undertaken by Assessee. Rule 10B(e) pertaining to TNMM method, is as under: 10B(e) transactional net margin method, by which, (i) the net profit margin realised by the enterprise from [an international transaction or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed suomoto by the assessee in the revise return, they are required to be excluded from the operating cost and the calculation of the assessee should have been accepted that its profit margin should have been taken according to the income computed in the revise return for which the assessee has also paid the due taxes. In this manner, finding force in the contentions of ld. AR, we are of the opinion that ground no. 2 of the assessee is to be allowed and accordingly allowed. Ground no. 3 is the alternative argument and as the main argument of the assessee is accepted we need not required to go in the alternative claim made by the assessee. Therefore, the TPO/DRP are not correct in not considering suo-moto adjustments made by Assessee. For arriving at the profit margins realized by the enterprise, suo-moto adjustment has to be taken into account in arriving at the difference to be added so as to make the 'net profit realised' to arrive at the arm's length price in relation to the international transaction as provided under 10B(e)(v). The AO is directed to consider suo-moto adjustment made by Assessee accordingly. (C) Whether operating cost adopted by TPO is corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct ? There are two sets of objections on the comparables selected by TPO; one being data pertaining to companies which have different accounting period than that of Assessee and the second one being the functional comparability of selected companies, being in business of compressor manufacturing whereas adjustments were done in the segmented results of supply of components (to the compressors). As selection of comparables by TPO suffers from these basic deficiencies, we are of the opinion that this issue requires re-examination by TPO by selecting proper comparables and then determine the ALP. In the interest of justice, we restore this issue of arriving at ALP to the file of TPO/AO for fresh consideration by taking objections from Assessee and also on the basis of TP proceedings of earlier year. Therefore, for determination of ALP, the issue is set aside to the file of the TPO/AO to do the same afresh as per the provisions of the Act. (E) Whether (+)/(-) 5% threshold limit available under the Act can be invoked in this case. This issue was decided in earlier year in assessee own case in ITA No 1686/Hyd/2010 dt 13-11-2013. It was decided as under: (i) Before a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed : Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. (3) (4) (iv) The next step is to determine the ALP in one of the methods. As can be seen from the provisions, international transaction refers to a transaction actually been undertaken between two or more AEs. Short of other details, it refers only to transactions actually undertaken by Assessee with AE. After determining the arm's length price in any one of the methods prescribed, what is required to be compared under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral Government in the Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price. Explanation. For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009. The intention of the legislature is clear. The present proviso makes it absolute that comparison is with actual transaction only and no adjustment need be required if the variation as compared to the actual transaction undertaken by Assessee is with in the thresh hold provided. In this case, the actual transaction undertaken by Assessee as reported is the sale at ₹ 17,17,79,149/-. if the ALP determined by the AO/TPO is (+)/(-) 5% of this transaction on actual sales reported, then no adjustment is required. While making any adjustment, first step is to verify whether this (+)/(-) 5% threshold has exceeded when compared to actual transaction undertaken by Assessee, if yes, adjustment is required under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustments, working capital adjustments etc., Hence, assessee has raised detailed grounds before us vide ground No.3. 14. It was informed that after the DRP order there are about 26 comparables which are finally selected to arrive at the margin of profit at 24.35%. Apart from objecting to some of the comparables, it was the submission of the Ld. Counsel that TPO has considered the operating cost of both AE segment and non-AE segment and accordingly made the addition on the entire turnover of the assessee without restricting to the AE segment. It was the submission that if the cost pertaining to only AE segment is considered then the addition would be less. Even if all the comparables were accepted at the adjustment would be only ₹ 27,70,699/- as against ₹ 1.07 crores added by the TPO. Ld. Counsel placed on record a chart indicating the proportionate operating cost for A.E segment and non-AE segment based on the sales ratio to determine the operating cost at ₹ 84,77,135/- as against ₹ 3,29,12,391/- adopted by the TPO for the entire segment. It was further contended that Managing Marketing Director was appointed at the end of the year and his services were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into consideration for comparability analysis. Accel Transmatic Ltd. On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin. FLEXITRONICS SOFTWARE LIMITED : As far as Flexitronics Software Limited is concerned, we find that at page 90 of his Order, the TPO has also observed that the said company has incurred expenditure for selling of products and has incurred R D expenditure for development of the products. The above facts clearly demonstrate that there is functional dissimilarity between the assessee and these companies and without making adjustment for the dissimilarities brought out by the TPO himself, these companies cannot be taken as comparable companies. The method ado ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer/TPO not to include Lucid Software Limited as a comparable. MEGA SOFT : As far as Mega-Soft is concerned, the learned Counsel for the assessee has drawn our attention to the fact that the segmental margin of this company's software development services is only 23.11%. Whereas, the Assessing Officer/TPO has taken the combined result of 60.23%. He submitted that the Tribunal at Bangalore in the case of M/s. Trilogy E-Business Software India Private Limited has directed the Assessing Officer/TPO to take only the segmental margin into consideration while computing the ALP of that company i.e., M/s. Trilogy E-Business Software India Private Limited. The learned Counsel for the assessee has sought similar direction in this case also. Having gone through the decision of the Tribunal at Bangalore Bench in the case of M/s. Trilogy E-Business Software India Private Limited vs. DCIT in ITA.No.1054/Bang/2011 at paras 24 to 26, we direct the Assessing Officer/TPO to take only the segmental margin of this company for the relevant previous year into consideration for computing the ALP of the assessee . TATA ELXSI LIMITED : As regards this company, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases, we direct that these comparables companies should be excluded from the computation of PLI. It was submitted that the mean PLI of the rest of the comparables selected by the TPO would come to 18.19% and this is within the margin as arrived at by the assessee, after making adjustments to the working of the TPO as suggested above. However, these aspects require examination by the TPO. Therefore, we direct the TPO to consider exclusion of the above 10 comparables and to restrict the addition to the AE transactions only. AO/TPO is free to consider whether proportionate cost of Marketing Director salary is to be included in operating cost or not, depending on the nature of his employment and also to examine whether assessee's contention that he was employed at the end of the year has any bearing on issue so the cost should not be included for the working of this year. Therefore, to the extent of addition made on CADEM segment, the orders of the TPO and DRP are set aside. The issue is restored to the file of the TPO/A.O. to do the needful. Assessee should be given due opportunity and his objections should be considered in detail and should not be rejected without consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Faridabad and original settlement under Industrial Disputes Act was from the period September 2001 to 31st August, 2004 which was further extended by another three years from 1st September, 2004 to 31st August, 2007 and this settlement was still in force. Subsequently also, as per the settlement vide para-G in page 9 Daughter's Marriage Benefit Fund has been increased from ₹ 20,000/- to ₹ 30,000/- and the provision of amount is from management and employees will be 50% each. Accordingly, it was the submission that assessee made the provision to the Daughter's Marriage Benefit Fund as per the requirements and since it is a provision, assessee was consistently disallowing, following the accounting principles. It claimed only the actual amount paid out of the fund during the year. Since the amount was paid for the benefit of the employees, this does not get attracted under section 40A(9) of the Act and the same is allowable under section 37(1). Assessee also relied on the decision of ITAT Bench in the case of Bata India Ltd. v. Dy. CIT [2003] 85 ITD 257 (Kol.) and decision of India Pistons Repco Ltd. v. IAC [1988] 26 ITD 413 (Mad.) and Rasi Cements Ltd. v. ITO [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of the difference between the disputed international transaction and the arms length price in the income tax return and thereby subjecting the appellant to double taxation. 6. That the Ld. A.O. and the Hon'ble DRP have grossly erred in rejecting the comparability analysis carried in the TP documentation and in carrying out a fresh comparability analysis without share the search process and the methodology with the appellant, thereby arriving at revised arm's length margin of 8.8% on incorrect operating cost. 7. That the Ld. TPO/Ld. DRP erred in law and facts by making an adjustment to the arm's length price of the appellant whereby the appellant transfer price post suo-moto adjustment in the Income Tax Return is within the range of +/-5% as contemplated in proviso to section 92C(2) of the Act. 8. That the Ld. A.O./Ld. TPO and the Hon'ble DRP have erred, while determining the arm's length price, in using data available only at the time of assessment proceedings, instead of using data available as on the date of preparing the TP documentation for comparable companies. 9. That the Ld. A.O. and the Hon'ble DRP erred, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment years 2006-07 and A.Y. 2007-08. These were elaborately discussed in Para 11 of this order earlier in ITA.No.2228/2011. Since these issues are covered by the Orders of ITAT in earlier years, A.O. is directed to follow the same and rework out the same in this year as well. Accordingly, grounds 2 to 7 are partly allowed for statistical purposes. 27. Ground No. 8 also pertaining to transfer pricing issue is about the objection in using data available at the time of assessment proceedings. This objection was not pressed. Accordingly, the same was rejected. 28. Ground No. 9 is with reference to disallowance of various claims of payments to the extent of ₹ 92,80,575/-. The details of payments disallowed are as under : S.No. Particulars of disallowances Amount (Rs.) 1. Gratuity 27,64,234 2. Bonus 36,26,552 3. Leave pay 21,75,463 4. Service Rewards 7,14,326 28.1 Gratuity amount of ₹ 27,64,23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be some calculation mistakes as well. With reference to service rewards also, it seems to be a gift in kind like fridge. This also requires to be examined by the A.O. Therefore, we direct the A.O. to give opportunity to the assessee and allow the amounts after due examination. 29. Ground No.10 pertains to the issue of payment of ₹ 4,80,000/- made on account of Daughter's Marriage Benifit Fund. For the reasons stated in A.Y. 2007-08 vide para No. 21 and 22 the issue being similar, we direct the A.O. to allow the amount. 30. Ground No.11 pertains to the claim of deduction for provision of commission of ₹ 3,09,033/- made during the year. Assessee claimed an amount of ₹ 3,09,033/- being provision made towards commission whereas, A.O. on the reason that it was a provision, disallowed the amount of ₹ 3,09,033/-. It was submitted that the commission liability has accrued to the assessee based on sales income booked and was in consistence with accounting Standard-I under section 145 of IT Act 1961 wherein accrual concept is required to be followed. Without verifying the factual position, it was submitted that A.O. disallowed the expenditure claimed as a pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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