TMI Blog2015 (6) TMI 591X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of section 195(1) of the Act uses these specific words “any other sum chargeable under the provisions of this Act”. Therefore, for the invocation of the provisions of section 195(1) of the Act, the main condition is that the payment must be of the sum chargeable under the provisions of the Indian Income Tax Act, 1961. Admittedly there is a DTAA between India and Austria. As per the Article 5 read with Article 7 of the DTAA, it is categorical in so far as if the assessee in the contracting State does not have a PE in the other State, then the income of the assessee in the contracting State is liable to tax only in that contracting State and not in the other State. The facts in the present case clearly show that AT & S Austria is carrying out the re-working of the products of the assessee at its own manufacturing plant at Austria and there is no connection between the manufacturing activities done by AT & S Austria with the manufacturing process done by the assessee at its manufacturing facility in Nanjangud. Consequently the income, if any, generated by AT & S Austria on account of the repairing operations or manufacturing operations done by AT & S Austria at its manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r arriving at the PLI. Admittedly, perusal of Transfer Pricing Study and orders for AYs 2004-05, 2005-06 and 2008-09 show that the cash profit margin to sales is the method adopted for arriving at the appropriate PLI for the said AYs. In these circumstances, admittedly the principles of consistency would have to be followed and the methodology followed for the earlier years cannot be tinkered with or modified just for the purpose of assessment years in between with no variation in the facts and circumstances are available for the two AYs. In these circumstances, we direct that in the assessee’s case most appropriate PLI is to be arrived at by applying the cash profit margin to sales ratio. - Decided in favour of assessee. - I.T.A. No. 1262/Kol./ 2010, I.T.A. No. 186/Kol./ 2011, I.T.A. No. 2071/Kol./ 2010, I.T.A. No. 779/Kol./ 2012 - - - Dated:- 29-1-2015 - Shri Mahavir Singh and Shri Shamim Yahya, JJ. For The Assessee : Shri Soumitra Choudhury, Advocate For The Department : Smt. Madhu Malati Ghosh, JCIT ORDER Per Mahavir Singh: These cross appeals by revenue (ITA No.1262/K/2010) and by assessee (ITA No.186/K/2011) are arising out of order of CIT(A) in Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal before Tribunal on 31.01.2011 with a delay of 202 days. In view of the above, now Ld. Counsel for the assessee before us requested for condonation of delay for the reason that there is reasonable cause in view of the above reasons. Ld. CIT, DR, on the other hand, has not seriously objected to the condonation. In view of the above reasons, we are of the view that there is a reasonable cause due to fire occurred in the business premises of the assessee and due to that assessee s paper relating to CIT(A) s order were lost sight off. There is a reasonable cause and hence, we condone the delay and admit the appeal. 3. The first common issue in these cross appeals (in ITA No.1262/Kol/2010 of revenue s appeal and ITA No. 186/Kol/2011 of assessee s appeal)is as regards to the order of CIT(A) restricting disallowance at ₹ 2,26,84,459/- out of the total disallowance of payment for preliminary warranty and reworking costs of ₹ 2,55,17,674/- made by AO by invoking the provisions of section 40(a)(i) of the Act for the reason of nondeduction of TDS u/s. 195 of the Act. According to AO, these payments are in the nature of fees for technical services. For deletion of ₹ 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of technical services being reworking costs. Accordingly, he held that the warranty costs are not liable to TDS but reworking costs being in the nature of technical services are liable to TDS. The observations of CIT(A) reads as under:- 5.3.4 I have considered the appellants submissions as well as observations of the AO. My observations are a under: (i) From the above facts and circumstances of the case it is clear that the above mentioned payments made by the appellant to its parent company AT S Austria are only in terms of the distribution agreement. As per the terms of the agreement the patent company paid the amount of warranty to the customers and reworking cost (repair cost) to the service providers and thereafter raised debit note on the appellant in respect of both these costs. This is purely internal arrangement of the group and it is established principle that a person cannot escape its legal tax liability through its internal arrangement. Since, the warranty claim directly paid to the customers in consideration of their claim regarding defective goods there is no income component in the hands of customers. However, in respect of reworking cost the true recipien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the taxability of fees for technical services paid by a resident. According to the exception , the fees for technical services payable in respect of any services utilized; (a) for the purpose of business or profession carried out by such person outside India or; (b) for the purpose of making or earning any income from any source outside India is not an income that falls within the net of section 9. The appellant is relying on the second part of the exception, i.e., for the purposes of making or earning any income from any source outside India . It is the case of the appellant that its business principally comprises of export revenue in the sense that it sold its products to its parent company in Austria pursuant to a distribution agreement and in turn the parent company sold these goods to customers in Europe. Hence, the source of income in hands of the appellant company is not mere selling of the goods to the distributor, but the actual sale of the goods by the distributor and although its business is carried out from India, yet the income it get is from a source outside India and the payments made towards reworking cost is for the purpose of earning income from a source out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount of reworking cost u/s 40(a)(i) due to non deduction of Tax at source under section 195 of the Inc Tax Act, 961 is confirmed and of ₹ 28,33,215/- on account of warranty claim is deleted. The appellant s ground is partly allowed. 5. First, we will deal with the issue of revenue s appeal qua the first and second ground against the order of CIT(A) in deleting the disallowance of the warranty payments/costs on the ground that the same was in the nature of technical services as defined under section 9(1)(vii) of the Act and hence liable for deduction of TDS under section 195 and on account of the said nondeduction of tax under the provisions of sub- section 40(a)(ia). Ld. DR argued that in the course of assessment, it was noticed that the assessee had paid an amount of ₹ 2,55,17,674/- for preliminary warranty costs and re-working costs and the same was liable for deduction under section 195 of the Act but the assessee had not deducted TDS, the provisions of section 40(a)(ia) had been invoked and the disallowance made. He stated that the assessee is in the business of manufacture and sale of printed circuit boards from its factory in Nanjangud and is a subsidiary of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT S Austria. Hence, any excess of actual costs incurred by AT S Austria over the retained 2% was required to be borne by the assessee and payable to AT S Austria. The actual costs incurred would include journey and lodging expenses, re-work/chemical and other material costs. He argued that the Assessing Officer disallowed the warranty expenses reimbursed on the ground that essentially in the nature of technical fees. He explained that the payments to AT S Austria were not on account of any services rendered by AT S Austria but was only the reimbursement of warranty obligation which the assessee as a seller of the products is bound to discharge. Since the assessee is responsible for paying the warranty claims of the customers for defects in the goods sold, for the sake of convenience AT S Austria is incurring such costs on behalf of the assessee and is claiming reimbursements of the same from the assessee. The payments made on cost to cost basis for the services rendered and did not involve any profit element. On this, Ld. Counsel for the assessee placed reliance on the decision of Hon ble Supreme Court in the case of CIT v Tejaji Farasram Kharawalla Limited (1967) 67 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of DIT v. Sun Microsystems India P. Ltd. (2014) 369 ITR 63 (Karn) exactly on the similar issue interpreting article 7 of the DTAA between India and Singapore, which is identically worded to article 7 of DTAA between India and Austria, and held as under:- The material on record discloses that the assessee entered into an agreement for availing of logistic service for Sun Microsystems Singapore P. Ltd. ( Sun Singapore for brevity). In terms of the agreement, Sun Singapore is required to provide distribution, management and logistic services to Sun Microsystems India P. Ltd. ( Sun India for brevity) and such services included providing spare management services provision of buffer stock, defective repair services, managing local repair centres, business planning to address service levels, etc., Sun Singapore is not having any place of business or permanent establishment in India. Entire services were rendered by Sun Singapore from outside India. Sun Singapore is not engaged in the business of providing logistic services in India. Sun India the assessee avails of services of Sun Singapore for which a service fee is paid. From the business description of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement and logistic services. That is a finding of fact recorded by the Tribunal on appreciation of the entire material on record. When once factually it is held the technical services has not been made available, then in view of the law declared in the aforesaid judgment, there is no liability to deduct tax at source and, therefore, the finding recorded by the appellate authority cannot be found fault with. In that view of the matter, the substantial question of law is answered in favour of the assessee and against the Revenue. From the above Judgement of Hon ble Karnataka High Court it is clear that the parent company has not made available to the assessee the technology or the technological services which was required to provide the distribution, management and logistic services. In view of this judgment and perusal of the order of the AO giving effect to the order of Coordinate Bench of this Tribunal for the AY 2004-05 in ITA No. 1450/Kol/2008 dated 31.03.2010 clearly shows that the Assessing Officer after verifying the agreement with AT S Austria has also taken into consideration the decision of CIT(A) for the AY 2005-06 and has held that the said warranty expenses are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee argued at length. His arguments were of two folds, viz.- (i) That the payment made by the assessee to M/s. AT S, Austria was only reimbursement. He pointed out that M/s. AT S, Austria has entered into different agreements with different providers of service. Since part of the services were utilized by the assessee, M/s. AT S, Austria has recovered such part from the assessee. He pointed out that the allocation of the actual expenditure incurred has been made on a rational basis, i.e. on the basis of number of PCs used by the assessee and other group concerns, the details of which were duly furnished before the lower authorities and the CIT(A) has also reproduced the same on page 6 of his order. He submitted that there is no liability of TDS for reimbursement of the expenditure. In support of this contention, he relied upon the following decisions:- 309 ITR 356 (AAR) Cholamandalam Ms General Insurance Co. Ltd. 142 ITR 493 (Cal.) - CIT vs.- Dunlop Rubber Co. Ltd. (ii) That the services received by the assessee were in the nature of user of the copy right products. The licence to use copy right products does not amount to rendering of technical services within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice user companies on the basis of services actually utilized by them. Thus, in the process, no income has accrued to M/s. AT S. Austria. It has only recovered the actual expenditure incurred from all group concerns. 2.5. We have carefully considered the arguments of both the sides and perused the material placed before us. M/s. AT S. Austria had entered into agreements with several companies for utilizing their products. In turn, it permitted its group concerns to utilize those products and the total payments made to the service providers were allocated to the group companies who actually utilized the services, the details of which has given in page 6 of the CIT(A) s order, read as under:- Sr. No. Particulars of ser vic e Code Keys Total cos t incurred by HQ Share of AT 2001-02 Invoice/ agreement received 3 Services provided by Microsoft Ireland Operations Ltd., see licenses for AT S A licenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S group Projec t Firewall Cis co PIX IN11 4 3,589 449 No Wartung Firewall Cisco PIX 4 0 7 Not mentioned ND Charon Faxserver- Kauf IN11 2 7,885 1,606 TOTAL 87,481 2.6. From the above, it is evident that the allocation of expenditure for utilizing Microsoft products was on the basis of number of PCs used by the service receiver companies. Similarly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost borne by HMFICL on account of employment I, that too, partly. In this process no income could be said to have been generated which answered the description of fees for technical services . 2.8. In view of the above decisions of Hon ble Jurisdictional High Court as well as Authority for Advance Rulings, we hold that in the process of reimbursement of expenditure, no income can be said to have generated requiring deduction of tax at source. Since there was no liability of deduction of tax at source, section 40(a)(i) of the Act cannot be invoked. Accordingly, ground no. 2 of the assessee s appeal is allowed . As the facts are similar for the AY 2005-06 considering the fact that for the AY 2004-05 the AO has accepted the claim of the assessee that the reimbursement of the warranty expenses is not liable for TDS u/s 195 of the Act and as the Revenue has not been able to dislodge this finding, the finding of CIT(A) deleting the disallowance made on account of non-deduction of TDS in respect of warranty expenses stands confirmed. This issue of revenue s appeal is dismissed. 8. The common issue in this appeal of assessee raised by way of above reproduced grounds 3(a) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the aforesaid agreement, the actual cost incurred by AT S Austria in getting the products repaired in Europe in order to get the product sold was reimbursed from the assessee during the relevant previous year. In fact, the customers to whom the products were sold in Europe made complaint about the defects in the product sold and in order to make the product viable for sale as agreed, the customer themselves incurred cost on their own to remove the defects and got the same reimbursed from AT S Austria and consequently got the cost reimbursed on actual basis from the assessee. 9. Ld. Counsel stated that during the relevant previous year, AT S Austria raised debit notes on the assessee towards the said manufacturing costs incurred by it and the repairing cost reimbursed to the customers in Europe in order to get the products repaired before sale in Europe, amounting to ₹ 2,26,84,459/-. The detailed break-up of the debit notes issued by AT S Austria for reimbursement of actual cost is enclosed at pages 63 to 122 of the paper book. The said cost was debited in the books of accounts of the assessee under the head Sub-contracting charges during the previous year re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the provisions of DTAA applied, the income of AT S. Austria was liable to tax only in Austria. He explained that as per the provisions of section 9(1)(vii) of the Act, it is only the income by way of fees for technical services which is deemed to accrue or arisen in India but the work done by AT S Austria fell within the Explanation to section 9(1)(vii) in so far as there was no managerial technical or consultancy services provided by AT S Austria but what was being done under the re-working was mere in the nature of assembly. According to him, even as per the provisions of section 9(1)(i) and clause (a) of Explanation 1 thereto no part of the income earned by AT S Austria was attributable to the operations carried on by the assessee in India in so far as the manufacturing operations and the repairing operations are carried out by AT S Austria by using their manufacturing facilities located in Austria and there was no operation of the same attributable to any operation carried on in India by AT S Austria. Hence, as per the DTAA agreement entered into between India and Austria as per Article 5 read with Article 7 as AT S Austria did not have any permanent establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. We have considered the rival submissions and gone through facts and circumstances of the case. Admittedly the assessee is dealing its business with its subsidiary company AT S Austria. Undisputedly the assessee s transaction with the parent company AT S Austria is also subject matter of Arm s Length Pricing under section 92C of the Act. Consequently it cannot be held that the assessee has common establishment of the parent company AT S Austria. This is because the assessee has sold goods to AT S Austria. A perusal of the provisions of section 195 of the Act alongwith Explanation (2) thereto as explained by the Ld. SR D.R. would give an indication that all types of payments made to a non-resident by an Indian Company would be liable for TDS under section 195of the Act. It would mean even that if an assessee in India makes any purchases from a foreign entity or a non-resident entity and the assessee in India makes the payment for such purchases even that would be hit by section 195 of the Act. This is because of the Explanation (2) to section 195 of the Act. However, this is not the true interpretation. The Explanation only explains the provision. The main provision of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustria is not chargeable to tax under the Indian Income Tax Act, 1961, the requirement of deduction of tax at source under section 195 of the Act would not be applicable and consequently no disallowance under section 40(a)(ia) of the Act can be made. In the result, the addition as made by AO and as confirmed by CIT(A), to the extent of ₹ 2,26,84,459/-, stands deleted. This issue of assessee s appeal is allowed. 13. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of AO in disallowing the payments made towards reimbursement of Information Technology costs being expenses on connectivity and software charges. For this the assessee raised following ground:- (2)(a) that the ld. CIT(A) erred in confirming the order of the Assessing Officer disallowing ₹ 1,50,44,031/-, being payments made to M/s. AT S Austria towards reimbursement of Information Technology costs being expenses on connectivity charges and software, without appreciating appellants contention. (b) that the ld. CIT(A) erred in confirming the order of the Assessing officer disallowing the aforesaid sum of ₹ 15,044,031 paid to M/s. AT S Austria, by ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 and the same is added back to the total income of the assessee company. Aggrieved, assessee preferred appeal before CIT(A). 15. The CIT(A) al so confirmed the action of the AO by giving the following three reasons:- i) Here the service provider highly technical/skilled services in the nature of information technology,, electronic data processing for WAN satellite link between Austria and Nanjangud and software license and up gradation to the parent company in Austria and also to the subsidiary companies including the appellant company. It is not that the parent company has received the above said services and in turn just passed on the same to the subsidiary companies. All the group concerns including the parent company and the appellant company simultaneously received the services from the service providers. It is only when the payment comes an internal arrangement among group companies has arrived at and the parent company being at the helm of the affairs controlling/supervising all the group concerns including the appellant company has taken up the responsibility to make the payments not only on its behalf but also on behalf of subsidiary companies including the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for making payment to non-resident in respect of any interest or any other sum chargeable under the provisions of this Act has to deduct tax at the rates in force. Now what is the meaning of any other sum chargeable under the provisions of this Act. Obviously, it would mean that portion of the sum on which tax is payable by such non-resident. But how much, that portion is actually there? This needs investigation and there may be situations that 100 per cent of such sum is chargeable to tax and there may be situations where practically the whole of such sum is not chargeable to tax. This would depend on the facts and circumstances of each case. Now, whenever an assessee making payment to a non-resident finds that only a particular portion is chargeable, then obviously he has been given a right in terms of subsection (2) which the assessee has called a beneficial section. As per sub-section (2), of section 195 whenever a person responsible for paying any sum chargeable considers that whole of such sum would not be income chargeable in the case of recipient, he may9 make an application to the AO to determine the appropriate portion of such sum so chargeable and upon such determination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while making the subject payment of ₹ 1,50,44,031/- to AT S Austria in respect of the reimbursement of actual cost, the assessee did not deduct any tax under section 195 of the Act, as payments for reimbursement of actual costs incurred by AT S Austria was not chargeable to tax. He stated that the allocation of actual cost which was reimbursed by the assessee to AT S Austria was made on the basis number of PC s/laptop used, number of SAP user and time used in using the leased lines for connectivity charges but AO disallowed the aforesaid payment by rejecting the contention of the assessee that reimbursement of actual cost would not constitute income in the hands of AT S Austria and further alleged that AT S Austria was merely a conduit pipe for making the payment way of internal arrangements which could not escape tax liability under section 195 of the Act. And CIT(A) also confirmed the action of the AO. He stated that in the assessee s own case for the assessment years, 2002-03, 2003-04 and 2004-05, Coordinate Bench of this Tribunal had accepted the contention of the assessee that the reimbursement of the actual cost is not liable to tax. He drew our attention to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of the Hon ble Jurisdictional High Court in the case of CIT v Dunlop Rubber Co. Limited (1983) 142 ITR 493 (Cal) and in the similar circumstances that of the assessee to hold that the reimbursement of the expenditure does not generate any income in the hands of the recipient and consequently there was no requirement of deduction of TDS and consequently the provisions of section 40(a)(ia) could not be invoked. The facts being identical for this assessment year, respectfully following the decision of Coordinate Bench of this Tribunal in the assessee s own case for the assessment years 2002-03 and 2003-04 referred to supra, finding of CIT(A) stands reversed and the disallowance as made by the Assessing Officer in respect of the reimbursement of the payments made to AT S Austria to the extent of ₹ 1,50,44,031/- stands deleted. This issue of assessee s appeal is allowed. 19. The first common issue in ITA No. 2071/Kol/2010 ITA No. 779/Kol/2012(assessee s appeals) for AY 2006-07 2007-08 is against the assessments framed by AO u/s. 143(3) read with section 144C(13) of the Act dated 04.10.2010 09.11.2011 for the AY 2006-07 and 2007-08 respectively and al so the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ird parties, establishing the transactions at arm s length. 4. That the ld. DRP erred in disregarding the alternative economic analysis carr ied out by the assessee considering the overseas entity as the tested party an thereby justifying that international transactions undertaken by such overseas entity are at arm s length price. The learned DRP erred in not appreciating the fact that associated enterprise i.e. AT S Austria functions as a distributor earning arm s length returns and AT S Austria functions as a distributor earning arm s length returns and AT S India is characterised as a full fledged licensed manufacturer which assumes significant business risks associated with carrying out its manufacturing activity. 5. The learned DRP erred in not appreciating the fact that the appellant had incurred operat ing losses in net level only for FY 2005-06 as compared to profit in previous and subsequent years. Such losses were due to various business reasons including rise in raw materials prices and also due to it being the first year of expansion. Also, the learned DRP erred in ignoring the business and commercial realit ies of the appellant. 6. That the learned DRP erred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leading to the above issue are that the assessee filed its return of income on 23.11.2006 for the relevant AY 2006-07 a draft assessment order was passed on 24.12.2009 u/s. 143(3) read with section 144C(1) of the Act making following additions: i) Adjustment of Arm s Length Price as per TPO s order dated 30.10.2009 ₹ 15,92,64,423, ii) Disallowance u/s. 14A read with Rule 8D ₹ 6810/-. Against this draft assessment order assessee filed objection in Form No. 35A before the Dispute Resolution Panel (DRP), Kolkata. DRP vide its order dated 28.09.2010 directed the AO u/s.144C(5) of the Act to make an adjustment towards Arm s Length Price at ₹ 20,14,14,448/- as against the adjustment determined by TPO at ₹ 15,92,64,423/-. Aggrieved, assessee is in appeal before Tribunal. The Assessing Officer referred the computation of the Arm s Length Price in relation to the international transactions entered into by the assessee, which is Associated Enterprise for the relevant previous year to the Transfer Pricing Officer. The assessee had filed its transfer pricing study for the relevant previous year with the Transfer Pricing Officer . The assessee had adopted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t fixed assets to sales ratio was not the correct method in so far as the ratio did not indicate as to whether the company was the capital intensive or otherwise. It was the submission that by adopting the net fixed assets to sales ratio, the comparables reduced from the four mentioned above to three in so far the Fine Line Circuits Limited got excluded from the list of comparable companies in so far as the NFA to sales in respect of the Fine Line Circuits Limited was also very low. It was the submission that the Dispute Resolution Panel vide an order dated 28.09.2010 accepted the assessee-company s claim for adoption of the cash profit margin on sales as the appropriate profit level indicator. However , the DRP directed for the exclusion of the Fine Line Circuits Limited from the list of comparable companies on the ground that the five year s average NFA to sales ratio of Fine Line Circuits Limited was significantly lower than that of the assessee as al so on the ground that Fine Line Circuits Limited did not clear the text of the fixed assets ratio analysis as the ratio of assets employed to the total turnover was significantly lower as compared to that of the assessee. Consequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he conclusion that its true profit could not be determined on the strength of the cash profit and hence, pricing of the international transactions could not entirely be unconcerned with depreciation. Sixth Allegation: The DRP s decision for the previous year relevant assessment year 2006-07 in approving the PLI selected by the appellant company (i.e. cash profit margin on sales) was relevant to the context of the draft order passed by the AO for the earlier year only and therefore, the DRP s approval or disapproval was not necessarily a binding precedent. In this connection, the appellant company s plea that there was no change in the operations in the subsequent year (i.e. previous year 2006-07) had no relevant. Seventh Allegation: the appellant company had failed to demonstrate as to how in the circumstances of the appellant company cash profit margin on sales would be the most appropriate PLI of the six PLI pointed out by the appellant company itself. Eighth Allegation: The appellant company misplaced its reliance in explaining the moot point as to which of the ratios between cash profit margin on sales and operating profit margin in the circumstances of the appellant c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of determining the arm s length price, provided of course that such transactions are closely linked . Ostensibly the rationale of aggregating closely linked transactions to facilitate determination of ALP envisaged a situation where it would be inappropriate to analyse the transactions individually. The proposition that a number of individual transactions can be aggregated and construed as a composite transaction in order to compute arm s length price also finds an echo in the OECD Transfer Pricing guidelines for Multinational Enterprises and Tax Administrations (hereinafter referred to as the OECD Guidelines ). In this background, considering the legislative intent manifested by way of rule 10A(d) read with rule 10B of the Rules, it clearly emerges that in appropriate circumstances where closely linked transactions existed, the same should be treated as one composite transaction and a common transfer pricing analysis be performed for such transactions by adopting the most appropriate method. In other words, in a given case where a number of closely linked transactions are sought to be aggregated for the purposes of bench marking with comparable uncontrolled tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant company valued INR 1,28,98,46 Thousand was sold to associated enterprise. Your Honours may please find in page no. 108 of the paper book that in order to take advantage of economy of scale and operational convenience, AT S AG entered into a global arrangement with various service providers in the area of information technology. The benefit of technology was shared by all the AT S group companies including the appellant company. The total cost incurred by AT S AG to provide the shared services to the group companies was distributed among the group companies based on actual usage of the information technology se54rvices. During the previous year 2006-07, the appellant company received shared information technology services from AT S AG and made payment of INR 115.75 Thousand to the latter for satellite link charges and software used in running the business. Your Honours may please find in page no.97 of the paper book that AT S AG would charge the appellant company a preliminary warranty of 2% on the sales price relating to its sales of the appellant company s finished goods (i.e printed circuit boards) to end-customers as per the distribution agreement entered into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees worked for the appellant company as per the agreement. They received compensation from ATD S AG, which was reimbursed by the appellant company to AT S AG(INR 32.166 Thousand) without any mark-up thereto. Further, during the previous year 2006-07, the appellant company incurred travelling and personal expenses (mainly pertaining to airfare and visiting card charges) amounting to INR 16.18 Thousand for employees deputed to it under the aforesaid secondment agreement. AT S AG reimbursed the aforesaid expenses to the appellant company without any mark-up thereto. 4.7 Your Honours may please appreciate that the aforesaid international transactions were directly linked to the business activity (i.e, production and sale of printed circuit boards) of the appellant company and generated from a common source i.e., manufacture and sale of printed circuit boards by the appellant company. Hence, the transactions were closely linked in view of the decision given by the Hon ble Pune Tribunal and the Guidelines issued by the ICAI. The aforesaid international transactions could therefore be treated as one composite transaction and a common transfer pricing analysis could be performed for suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess that can be followed when performing a comparability analysis ... ... Step 1: Determination of years to be covered. Step 2: Broad-based analysis of the taxpayer s circumstances. Step 3: Understanding the controlled transaction(s) under examination, based in particular on a functional analysis in order to choose the tested party (where needed), the most appropriate transfer pricing method to the circumstances of the case, the financial indicator that will be tested in the case of a transactional profit method), and to identify the significant comparability factors that should be taken into account. Step 4: Review of existing internal comparables, if any Step 5: Determination of available sources of information on external comparables where such external comparables are needed taking into account their relative reliability. Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (e.g. determination of the relevant net profit indicator in case of a transactional net margin method). Step 7: Identification of potential comparables: det4ermining the key characteristics to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Ltd. Fine-Line Circuits Ltd and Precision Electronics Ltd) Step 5: After selecting the comparable companies, the appellant company selected the appropriate PLI i.e., cash profit margin on sales . Step 6: The appellant company computed the PLIs of the afo5resaid comparable companies. Step 7: The appellant company computed the arithmetic mean of the PLIs of the afo5resaid comparable companies which is termed as arm s length result. Step 8: The appellant company computed its own PLI based on the financial information for the assessment year 2007-0 and compared the same with the mean PLI of the comparable companies in order to establish that the controlled transactions were at arm s length. 4.14 In view of the above, Your Honours may please appreciate that the comparability analysis and the subsequent determination of arm s length result is a scientific and methodical process. The search process carried out by the appellant company for the assessments year 2006-07 (earlier year) has no connection with the search process carried out by the appellant company for the current year (assessment year 2007-08). The Prowess and CapitalinePlus databases, which are maintained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. 4.18 The aforesaid provision was explained by the Hon ble Bangalore Tribunal in the matter of Philips Software Centre (P) Ltd v. ACIT reported in [20008] 26 SOT 226 (Bang.). The Hon ble Tribunal has held that the Act and the Rules provided that while conducting the comparability analysis, the data to be used should be contemporaneous. In this regard, the requirement of law is two-fold: As per rule 10B(4) of the Rules, the data to be used for analyzing the comparability of an uncontrolled transaction shall be the data relating to the financial year in which the international transaction has been entered into; and As per the rule 10D(4) of the Rules, amongst other things, the data which is used for the comparability analysis should exist latest by the specified date mentioned in section 92F (iv) of the Act. 4.19 The Hon ble Tribunal has further held that rule 10B(4) of the Rules c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. 3.78 Multiple year data can also improve the process of selecting third party comparables e.g. by identifying results that may indicate a significant variance from the underlying comparability characteristics of the controlled transaction being reviewed, in some cases leading to the rejection of the comparable, or to detect anomalies in third party information. 4.23 Your Honours may please note that the appellant company submitted the reasons for using multiple year data in respect of comparable companies to the DRP vide submission dated 25th July, 2011, which Your Honours may please find in Page no. 142 of the paper book. 4.24 Without prejudice to above, the appellant company submitted the current year data pertaining to financial year 2006-07 during the course of hearing before the TPO, based on which the T PO had made the transfer pricing adjustment in his order. In view of our above submissions, Your Honours my please appreciate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igit method or even Replacement Cost method. Selection of each method will affect the rate and quantum of depreciation even if the nature of the asset is the same and ultimately, the net profit derived by the company will vary. For determining the fair and true profit, in our opinion, it is appropriate that the effect of the depreciation must be excluded out of the operating profit for determining the operating profit ratio. Therefore, the best way of computing the operating profit, in our opinion, will be to compute the profit before depreciation in respect of each of the company. This will take out the inconformity or the variation in the profit level of the comparables arising due to adoption of different method of charging depreciation .... 4.29 Reference may pleases be invited to the decision of the Hon ble Delhi Tribunal in the matter of Schefenacker Motherson Ltd. V. Income-tax Officer reported in [2009] 123 TTJ 509 (DELHI). The Hon ble Tribunal has inter alia held that: 17 ... ... There is no standard test for deciding what constitute operational income (or profit). What receipts or expenditure would constitute operational income would depend upon facts and circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the same was accepted by the Tax Authority for the aforesaid assessment years. The aforesaid PLI was also approved by the DRP for the assessment year 2006-07. In view of this, Your Honours may please appreciate that the allegations made by the DRP leads to the violation of the principle of consistency pronounced by the Hon ble Supreme Court of India in the case of Radhasoami Satsang v Commissioner of Income Tax reported in 193 ITR 321 (SC). 4.33 In view of our above submissions, Your Honours may please appreciate that the DRP s allegations (fourth and fifth allegations) are not sustainable and hence to be struck down Rebuttal of the Sixth Allegation made by the DRP against the appellant company 4.34 The DRP in the current year (assessment year 2007-08) alleged that the decision given by the DRP in the earlier year (assessment year 2006-07) in approving the PLI selected by the appellant company (i.e. cash profit margin on sales) was relevant in the context of the draft order passed by the AO for the earlier year only and therefore the DRP s approval or disapproval was not necessarily a binding precedent. In this connection, he further alleged that the appellant company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, Your Honours may please note that the appellant company selected the PLI cash profit margin on sales for the assessment year 2004-05, 2005-06 and 2008-09 and the same was accepted by the Tax Authorities for the respective assessment years. The search processes were documented in page no. 207 of the paper book (Transfer Pricing Study Report for assessment year 2004-05), page no. 213 of the paper book (Transfer Pricing Study Report for the assessment year 2005- 06) and page no. 219 of the paper book (Transfer Pricing Study Report for the assessment year 2008-09). In this connection, we would like to invite the attention of Your Honour to the facts that: There was no transfer pricing adjustment in the appellant company s case for each of the aforesaid assessment years (please refer to page no. 209, 215 and 221 of the paper book). Fine-Line Circuits Ltd was selected as a comparable company for each of the aforesaid assessment years by the appellant company and the same was accepted by the TPO/AO. (please refer to page no. 205, 211 and 217 of the paper book) 4.37 In this connection, attention may please be invited to the judgment delivered by the Hon ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar position was demonstrated in respect of the order passed by the TPO for assessment year 2008-2009 also. The Hon ble Tribunal held that the TPO himself accepted the ratio of cash profit/operating cost as the correct PLI in assessee s own case for assessment years 2007-08 and 2008- 2009 and in this regard, the principle of consistency could not be ignored. The Hon ble Tribunal held that the learned CIT(A) was justified in applying cash profit/operating cost as the correct PLI under TNMM. 4.39 In view of the above decision, Your Honours may please appreciate that the DRP has violated the principle of consistency pronounced by the Hon ble Apex Court in the matter of Radhasoami Satsang v Commissioner of Income Tax (Supra) and followed by the Hon ble Mumbai Tribunal in the case of DCIT vs.Reuters India (P) Ltd. (supra). Though there was no material change in the circumstances in which the appellant company operates, the DRP in the current year rejected the PLI (i.e cash profit margin on sales ) which was approved by the DRP in the earlier year and also approved by the TPO for the assessment year 2004-05, 2005-06 and 2008-09. Similarly, Fine-Line Circuits Ltd was accepted as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year alleged that the DRPs approval or disapproval for the aforesaid PLI in the earlier years was not necessarily a binding precedent. However, the DRP in the current year confirmed the following view of the TPO without any valid reason and further investigation that: Further if the filter of NFA/sales is applied as done by DRP, Kolkata for AY 2006-07 the less intensive company Fine Line Circuits ltd. is automatically rejected. Hence, there is no further adjustment required for depreciation and working capital as the filter has resulted in elimination of less capital intensive comparables. 4.44. In view of the above, Your Honours may please appreciate that the DRP had not maintained consistency in view and it had been blowing hot and cold at the same time at its sweet will. On the one hand, when the question of accepting cash profit margin on sales as an appropriate PLI arose, the DRP in the current year stated that the DRP s approval or disapproval for the aforesaid PLI in the earlier year was not necessarily a binding precedent. On the other hand, when the TPO rejected Fine Line Circuits Ltd. based on the action of the DRP in the earlier year, the DRP approved the same wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest and tax to sales; (iii) Ratio of cash profit to sales; (iv) Ratio of net profit before tax to shareholders funds; (v) Ratio of net profit before interest and tax to assets, (vi) Berry ratio ratio of operating cost to operating revenue. 4.49. We have described the aforesaid ratios in nutshell hereinbelow: The ratio of net profit before tax to sales or the ratio of net profit before interest and tax to sales: Your Honour may please note that the rule 10B(1)(e) of the Rules provides for the application of net profit margin in relation to sales effected by an enterprise as a PLI. In the first ratio, the numerator represents net profit before tax, whereas in the second ratio, the numerator represents net profit before interest and tax. The aforesaid ratios are good indicators of the total return to the business activity. As the appellant company is engaged in technology intensive industry, there is a need to take care of the factors such as differences in the technology used, age of assets used in production, differences in capacity utilisation and the different depreciation policies adopted by the companies to ensure comparability. However, it is extremely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and on-sells them to other associated enterprises. However, the appellant company is engaged in manufacture and sale of printed circuit boards and as such berry ratio is not an appropriate PLI for the appellant company. 4.50. In this connection, reference is invited to the decision of the Hon ble Hyderabad Tribunal in the matter of BA Continuum India (P) Ltd. vs.- ACIT reported in [2013] 40 Taxman.com 311 (Hyderabad- Trib.), wherein it has been held that : The Tribunal in the case of Qual Core Logic Ltd. vs.- Dy. CIT [2012] 22 taxman.com 4/52 SOT 574 (Hyd.) held as under:- 57. .....It is evident from statutory provisions that it is nowhere provided that deduction of depreciation is a must. Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances. Net profit used in Rule 10B can be taken to mean commercial profit......In the case in hand, revenue authorities went wrong in disregarding the context and purpose for which the net profit was to be computed. Depreciation, which can have varied basis and is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the circumstances, in which the appellant company operated in the subsequent year (i.e. previous year 2006-07/ assessment year 2007-08), the DRP rejected the aforesaid ratio as a PLI. Further, the aforesaid ratio was accepted as an appropriate PLI by the Tax Authority for the assessment years 2004-05, 2005-06 and 2008-09. 4.53. in view of our above submissions, Your Honours may please appreciate that the aforesaid allegations made by the DRP are not sustainable and hence to be struck down. Computation of arm s length price 4.54. Your Honours may please find in page no. 71 and 72 of the paper book (please refer to Table No. X in the order) that the TPO in his order provided the cash profit margins of the comparable companies and that of the appellant company which were computed by the appellant company based on current year data (i.e. previous year 2006- 07/ assessment year 2007-08). The aforesaid ratios are as follows:- Table No. (2)- Computation of PLI Name of comparable company Cash profit margin on sales BCC Fuba India Ltd. 18.49% Fine Line Circuits Ltd. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 20.40% 4.57. In view of the above computation, Your Honours may please note that the arm s length PLI being 16.42%, the tolerance band of +5% would be in the range of 12.02% to 20.40%. the actual PLI of the appellant company is 13.39% falls within the range of 12.02% to 20.40%. Hence, Your Honours may please appreciate that the international transactions entered into by the appellant company with its associated enterprises during the relevant previous year were at arm s length . 24. In view of above submissions Ld. Counsel for the assessee argued that the NFA to sales being the methodology adopted by the Transfer Pricing Officer having been not found to be the correct method by the DRP for the assessment year 2006-07 and the assessee s method of computing the operating profit by considering the profit before depreciation being cash profit to sales method for arriving at the appropriate profit level indicator which had also been accepted by the DRP for the assessment year 2006-07 and which was also the methodology adopted for AYs 2004-05, 2005-06 and 2008-09, wherein no transfer pricing adjustment had been made. According to him, the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the methodology followed for the earlier years cannot be tinkered with or modified just for the purpose of assessment years in between with no variation in the facts and circumstances are available for the two AYs. In these circumstances, we direct that in the assessee s case most appropriate PLI is to be arrived at by applying the cash profit margin to sales ratio. This admittedly is also in line with the requirements of TNMM method prescribed under section 92CA(2) of the Act read with Rule 10B and 10C of the Income Tax Rules, 1962. Once it is held that appropriate PLI is to be arrived at by applying the ratio profit margin to sales ratio, then obviously the filter representing the NFA to sales ratio for filtering the comparables cannot be applied. This is because NFA to sales has nothing to do with the cash profit margins generated by an assessee. Further for applying the filter of NFA to sales ratio of the comparables, an average of five years has been considered representing two years pr ior and two years subsequent. This again would derail the exact purpose and the applicability of the TNMM method in so far as the AY under dispute is the AYs 2006-07 and 2007-08. However, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08 and onwards. 10.That learned AO has erred in disregarding the assessee s contention that dividend income was exempt under section 10(34) of the Act and that was earned through investment in equity shares made during the earlier years and no fresh investment was made and no expenditure was incurred in realising the dividend. 11.That without prejudice to the above, the learned AO has erred in considering that the assessee earned dividend income of ₹ 25,203/-, whereas factually, the assessee had earned ₹ 24,570/- on this account. 12.That without prejudice to the above, the AO has erred in considering the average value of investment of ₹ 13,62,000/- under rule 8D(2)(iii) of the Rules, instead of ₹ 3,84,000/- only. 28. The facts are that the assessee has earned dividend income at ₹ 24,570/- and not the sum of ₹ 25,203/- as noted by the AO. None of the authorities i.e. the AO or the DRP has gone into the issue and summarily made disallowance by invoking the provisions of Rule 8D. This issue is covered by the decision of Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom.), wherein it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the order of AO DRP disallowing the payments made to AT S towards reimbursement of technology costs being expenses on connectivity and software charges. For this, assessee has raised following ground no. 8: (8)(a) That the learned AO and the learned Panel erred in disallowing ₹ 1,15,74,726/- being payments made to AT S Austria towards reimbursement of Information Technology costs being expenses on connectivity charges and software, without appreciating appellant s contention. (b) That the learned AO and the learned Panel erred in confirming the order of the AO disallowing the aforesaid sum of ₹ 1,15,74,726/- paid to AT S Austria, by applying the provisions of section 40(a)(i) of the Act. (c) That the learned AO and the learned Panel has not appreciated the fact that the impugned amount does not constitute income chargeable to tax in the hands of AT S Austria or respective vendors and consequently no tax was required to be deducted at source therefrom. (d) That the learned AO and the learned Panel erred in not following the Jurisdictional Tribunal order in the appellant s own case for the AY 2002-03, 2003-04 and 2004-05. 36. At the outset, it is to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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