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2024 (2) TMI 485 - AT - Income TaxTP Adjustment - international transactions carried out by the assessee with its AE - DRP has considered the entire transactions with AE as well as non-AEs - HELD THAT:- This issue has been settled by the various Hon’ble High Courts observing that as per the Transfer Pricing provisions and judicial precedents, the TP adjustment should be restricted only to AE related transactions of the assessee. The ld. AR has relied on the judgment of CIT–1, Mumbai vs Hindustan Unilever Ltd. [2016 (7) TMI 1245 - BOMBAY HIGH COURT] and the Hon’ble Apex Court dismissed the SLP filed by the revenue[2018 (10) TMI 1611 - SC ORDER] therefore this this is no more res integra Respectfully following the above judgment, we hold that the application of arm’s length price should be restricted only to AEs transactions and not to all transactions. Accordingly, this ground is allowed. Comparability - inclusion of Telecommunication Consultants India Ltd. [TCIL] as comparable company - HELD THAT:- From the financial statements of TCIL it is observed that it is engaged in various types of activities. Hence we accept the alternative submission of the ld. DR that the PLI/profitability should be considered only from the Trading activity of the comparable company as business activity carried out by the assessee company and the ld. AR had also calculated PLI in which the company has profit in one year as observed above. FAR analysis of comparable has to be considered for each year separately irrespective of other years. Accordingly we remit this issue to the ld. TPO/AO for de novo consideration considering the decision of Yazaki India P. Ltd. [2019 (7) TMI 1566 - ITAT PUNE] in which it has been observed that if the comparable company is continuously not making loss for any of the three years, it is not persistent loss making company. If the TPO/AO finds that the comparable company is persistent loss making company in trading segment for all the three years, then it should not be considered as a comparable company. Zicom Electronics Security Systems Pvt. Ltd. is offering security products as a cloud based technology driven electronic security service provider and it installs, manages and performs the maintenance on a regular basis. The company is in trading activity of the security products and the function of the traded goods are similar with the assessee company as analysed by the TPO. Further we note that the company is not engaged in manufacturing activity as contested by assessee As noted from the financial statements, clearly shows that the company has not purchased raw material for its consumption for manufacturing activity during the year under consideration. The service income earned by the comparable company are from the maintenance of product sales, therefore it cannot be said that the company is engaged in separate service segment. The ratio of safety products of purchase and sales are minimal with the main security products purchased and sold. Therefore, no segmental reportings are required as submitted by the ld. DR. Therefore this company is functionally comparable. Adtech Systems Ltd. company primarily operates in single segment viz Supply and integration of Electronic Security Systems and its functions are broadly same in both segments. The company is in trading activity of the security products and the function of the traded goods are similar with the assessee company as analysed by the TPO. The ratio of sale of service and maintenance income to traded goods is only 5.51%. The company is in trading segment only. On perusal of the financial statements we did not find any expenses under the Research and development account head. Therefore considering the entire facts, the company is comparable. Accordingly, we reject the contention of the ld. AR. Computation of operating margin - During the course of hearing, the Bench specifically asked the ld. AR regarding the nature of services rendered by the assessee for the sales from AE to third party customers, but the ld. AR could not show the nature of services rendered by the assessee. Therefore, we hold that that commission received by the assessee cannot be considered as part of trading segment and therefore, dismiss this ground of the assessee. We further note that in segmental operating results of the TP order, the assessee has given details of trading segments in which the assessee has included provision no longer required returned of Rs. 4.26 lakhs. However, the lower authorities have not considered it as part of operating revenue. It is not clear whether this provision was allowed in earlier years as operating expenditure in trading segment. We therefore remit this issue to AO examine the same. If the provision no longer required back in trading segment is allowed as operating expenditure in the earlier year, the same should be treated as operating revenue in the trading segment. The assessee is directed to produce necessary evidence. Arbitrary adjustment towards GSMAF and MF - TPO has questioned the necessity of the expenditure out of payment made by the assessee towards Management Fees and proceeded to determine the ALP by applying the benefit test - TPO treated the payments towards GSMAF and proceeded to benchmark the same by using the bright line test - HELD THAT:- This issue has been considered by the coordinate Bench of this Tribunal in assessee’s own case for AY 2017-18 [2023 (5) TMI 1295 - ITAT BANGALORE] we are of the view that the expenditure incurred by assessee towards global sales and marketing activity has to be treated as operating cost and has to be allotted in the ratio of the turnover of the other international transaction for determining the ALP under TNMM analysis. Disallowance u/s. 14A - AO computed the adhoc disallowance by considering 0.25% of certain expenditure - DRP directed the AO to recompute the disallowance as per formula prescribed in Rule 8D - HELD THAT:- Considering the rival submissions, we note that there is no opening and closing balance of the investments made by the assessee. However the AO has applied Rule 8D(2)(i) and Rule 8D(2)(ii) for calculation of disallowance and calculated total disallowance - We note that similar issue has been decided in M/S. YOKOGAWA INDIA LIMITED [2021 (11) TMI 1178 - ITAT BANGALORE] - Thus we also restrict disallowance u/s. 14A of the Act to 10% of exempt dividend income. Accordingly, the AO shall work out the disallowance. DDT paid to non- resident - AR submitted that the Special Bench of the Mumbai Tribunal deals with the some of the contentions of the assessee on this issue in the case of Total Oil India Pvt. Ltd. [2023 (4) TMI 988 - ITAT MUMBAI (SB)] and prayed that the assessee reserves its right to contest the same before the appropriate forum and subject to the same, this issue may be left open. Accordingly, this issue is left open. Allowability u/s. 37(1) towards education cess paid - AR submitted that the retrospective amendment to section 40(a)(ii) of the Act where it is clarified that education cess cannot be claimed as business expenditure and the Hon’ble Supreme Court has allowed the appeal of the revenue against the decision of the Rajasthan High Court in the case of Chambal Fertilizers & Chemicals Ltd [2017 (5) TMI 1500 - RAJASTHAN HIGH COURT] Accordingly this ground is dismissed.
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