TMI Blog2015 (7) TMI 448X X X X Extracts X X X X X X X X Extracts X X X X ..... gh, it is true that the method adopted is TNMM, under this method the product is broadly compared. However, in the present case, the TPO has sought to compare the valves which is a consumer product with the industrial product of the tested party, which in our view, would not give a true picture of the profit. Under these facts, it would subserve the interest of justice if a TPO conduct a fresh study comparing the same or similar product, so that a fair picture of the profit could be arrived in order to ascertain whether the TP adjustment is required to be made or not. Therefore, we hereby set aside the order of the authorities below and restore these issues before the TPO for conducting a fresh transfer price study for the purpose of finding out the nature of product, its market, geographical location, etc. as given under OECD guidelines regarding the comparability of the comparables. While doing so, the TPO would afford opportunity to the assessee for submitting fresh T.P. study comparables. Disallowance of expenses due to non deduction of TDS - Accordingly, the Assessee claimed a deduction for the expenses as shown in the table referred in para 2.4 above in the financial year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Panel, Ahmedabad dated 26/12/2013 and the order of the Assessing Officer passed u/s.143(3) r.w.s. 92CA r.w.s.144C(1) of the Act dated 08/03/2013 pertaining to Assessment Year (AY) 2009-10. The Assessee has raised the following grounds of appeal :- The Grounds of Appeals to the proposed adjustments of ₹ 4,63,25,722 are as under. All the below mentioned grounds are without prejudice to each other: 1. On the facts and in the circumstances of the case and in law, the Learned Assistant Commissioner of Income-tax, Circle-4, Baroda ('the Ld. AC-') under the directions of Honourable Dispute Resolution Panel ('Hon'ble DRP'), erred in making adjustment of ₹ 4,17,26,088/- in relation to the international transaction of sale of goods to Associated Enterprises ('AE'). It is prayed that the additions made by the Ld. AO in relation to the international transaction of sale of goods to AE be deleted. 2. On the facts and circumstances of the case and in law, the Ld. AO under the directions of Hon'ble DRP erred in not allowing the benefit of 5% range as per Section 92C(2) of the Income-tax Act, 1961 ('the Act') in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee has reiterated the submissions as were made before the DRP in the form of Appendix-I, II, III. 4.1. On the contrary, ld.CIT-DR supported the order of the DRP. 5. We have heard the rival contentions and perused the material available on record. We find that before the DRP, the assessee had raised objection and made submission in the form of Appendix-I, II III. The contents of the Appendix-I, II III are reproduced hereunder for the sake of clarity:- Appendix I Weatherford Drilling Production Services (India) Private Limited Assessment Year: 2009-10 General Backgroun4: *During the year under consideration Weatherford Drilling Production Services (India) Private Limited ( WOPS ) was a subsidiary of Weatherford Lamb Inc., a Weatherford group company, which held 99.99% of the equity capital of the company. WDPS operates vide the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. The authorized representative submitted a detailed submission on January 22, 2013 and attended the hearing; * The Ld. TPO proposed a Transfer Pricing adjustment amounting to ₹ 3,02,66,356 vide his order dated January 24, 2013 (Please refer Page Nos. .35. to 93 of the Paper Book for the same). Further details of the proposed adjustment are provided in Table 1 below: Table 1: Disallowances /Adjustments proposed by Ld. TPO Sr.No. Particulars Amount as per books of Accounts (Rs.) Arm s length Price determined by the Ld.TPO Amount (Rs.) Proposed disallowance/Adjustment by the Ld.TPO Amount (Rs.) 1 Sales made to Associated Enterprises ( AEs ) 34,26,77,543 37,29,43,899 3,02,66,356 *Relying on the Ld. TPO's order, the Ld. AO has passed the Draft Assessment Order as provided u/s 143(3) r. 92CA r.w.s. 144C(1) of the Act ( draft order ) which was received by the Assessee on March 12, 2013 (Please refer Page Nos. 94.. to 96 of the Paper Book for the same). In the draft order, apart from c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppendix III. * Objection 3 - Disallowance u/s 4o(a)(ia): On the facts and circumstances of the case, and in law, the Ld. AO has erred in proposing to disallow the deduction claimed of ₹ 45,99,634 under Section 4o(a)(ia) of the Act. It is prayed that the AO be directed to allow the deduction claimed based on the facts as submitted by the Assessee. For detailed submission on this objection kindly refer Appendix IV . We crave leave to add, alter and/or amend the aforesaid grounds of objection at or before the time of hearing. For Weatherford Drilling Production Services (India) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering Operating Profit/ Sales ( OP/Sales ) as Profit Level Indicator ( PIT). A structured benchmarking process was carried out by the Assessee which is reflected in the TP Study report, identifying 7 comparables having average OP/Sales of 8.85%, whereas OP/Sales of the tested party i.e. Manufacturing division of WDPS, was 16.15%; 2.3 The Ld. TPO, vide Show Cause notice dated December 14, 2012, rejected some of the filters adopted by the Assessee in its search process and carried out a new search process identifying 4 comparables having average OP/TC of 28.87% considering OP/TC as PLI and compared it with the PLI of the tested party i.e. 19.31% and hence proposed an adjustment to the international transaction of Sales to AEs. 3. Facts modified by the Assessing Officer Following are the facts modified by the AO: i. The Ld TPO/AO conducted a fresh search to identify comparables with inappropriate filters, disregarding the search process carried out by the Assessee; ii. The Ld. TPO/AO disregarded the usage of multiple year data in the TP Documentation of the Assessee without considering the impossibility of performance for usage of single year dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ariations in variable costs rather than long-term trends in fixed costs. Accordingly, if an analysis of the repercussions of economies of scale on the profitability of a company is to be made, it must be over a long-term period and not over a single year (Please refer Page Nos.278 to 280 of the Paper Book for the same) Adoption of RPT rejecting companies having related party transactions more than 25% The Assessee had rejected the companies having controlled transaction more than 10% of their operating revenue. However, section 92C of the Act read with Rule 10B of the Income Tax Rules, 1962 which provides that the comparable transactions are to be uncontrolled for determining the arm s length price, has remained constant over the years. Considering the same, the Assessee has been following a conservative approach of adopting 10% RPT filter while carrying out the search process. There are judicial pronouncements suggesting application of 25% RPT filter and also suggesting application of 10% of RPT filter. A mere change of opinion, which is very subjective, cannot jeopardize the situation of the Assessee. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... search set; (Please refer Section to and refer Page Nos.283 to 283 of the Paper Book, for detailed understanding on this) On analysis of the financial statement of Tyco Sanmar, it is observed that approximately 48% of the turnover of the company is from sale of spares and others, which enable higher recovery. Hence, the profitability of Tyco Sanmar is thus an outcome of sales of spares, and not the main products. Hence should not be considered as comparable. (Please refer Section 10 and refer Page Nos.283 to 283 of the Paper Book, for detailed discussion on this) Not considering UDTL as comparable in the fresh search conducted UDTL is engaged in supplying and manufacturing various kinds of oil drilling tools, equipments and accessories, which can be considered as comparable with the products manufactured by WDPS. If 25% export filter is adopted to identify comparables for an 80% and more, export oriented company, the filter is incorrect and not serving the required purpose. In such a situation relaxing the filter to 17% would not be inappropriate to bring in a good comparable. (Please refer section 10 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... putation of the arm's length price is not reliable or correct, the Ld. TPO may proceed to determine arm's length price in relation to the international transactions in accordance with Section 92C(1) and 92C(2) on the basis of such material or information or document available with him. b. For the using the current year data (i.e. FY 2008-09), the Ld. TPO has relied on Rule 10B(4) of the Rules which provides that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be data relating to the financial year in which the international transaction has been entered into. Accordingly, the Ld. TPO/AO has disregarded the usage of multiple year data by the Assessee. 8. Case, laws relied upon by Assessing Officer a. Chiron Behring Vaccines Pvt Ltd(2011) (2011-TII-30~ITATMUM-TP) b. Deloitte Consulting India Pvt. Ltd c. ITO Vs CRM Services India (P.) Ltd (14 Taxmann 96) d. Skoda Auto India Pvt Ltd (2009)(TIOL-214-lTAT-)(Pune) e. Egain Communication Pvt Ltd 2008-TIOL-282-ITAT-Pune f. Sony India Ltd (114 ITD 448)(Del) g. Agnity India Technologies Pvt Ltd (2010)(lTA no 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies having export sales to the total sales ratio of 25% or more would not result into identification of suitable comparable. In paucity of comparables the same may rather not be applied, instead of adopting an arbitrary 25% export filter without any basis. (Please refer Page Nos.276 5o 277 of the Paper Book for the same). ii, RPT Filter : The Assessee has adopted a 10% RPT filter in its search process where as the Ld. TPO/AO has adopted 25% RPT filter. It is pertinent to note that there is no change in law to provide any concrete guidance on this threshold. Hence, a conservative approach of the assessee to consider 10% RPT filter, which is being consistently followed cannot be rejected, merely in view of some judicial pronouncements, which are very subjective, cannot jeopardize the situation of the Assessee. Hence 10% RPT filter may be preferred over the 25%, preferred by the Ld. TPO/AO (Please refer Page Nos. 281 to 281 of the Paper Book for the same). iii. Turnover Filter : The economies of scale impact the profitability of a company by lowering its fixed costs in the long run and that there is no major correlation between turnover and profitability of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngineering (India) Ltd. 32.57% 2. Prowess KAR Mobiles Ltd. 5.27% 3. Prowess Rane Engine Valve Ltd. 5.46% 4. Prowess Tyco Sanmar Limited 72.22% Mean 28.87% ii. The Ld. TPO/AO arrived at a final set of 4 companies by: * Rejecting all the comparables selected by the Assessee in the TP study on the ground that they are engaged in pumps industry, export filter, etc and hence functionally noncomparable; and * Added 4 new companies by carrying out word search of 'valves' without considering 'pumps' industry and the submissions made by the Assessee on benchmarking process and on comparables and on comparables (Please refer Page Nos. 268 to 270 of the Paper Book for the same) In identifying the final set of the comparables, the Ld. TPO/AO erred hi selecting one comparable and rejecting one comparable; the details of both the comparables are gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry the time period between sale of valves and commencement of sale of spares being approximately 4 to 5 years. The replacement market (spares) is characteristically more lucrative than the sale of valves and provides the necessary impetus to a company's bottom line growth. This future potential prompts companies to offer large discounts to customers to often secure an order for valves. d. The profitability of the comparable is thus skewed by the profit on sales of spares. The computation of spares percentage of Tyco Sanmar is shown as under; Table 4: Product profile and composition of spares Description Amount (Rs.) Amount (Rs.) Sales (a) 1,37,40,05,650 Safety Valves 72,14,17,081 Spares and accessories (b) 65,25,88,569 Spares % (b/a) 47.50% Hence, by not applying the import filter and not appreciating the above industry average returns of Tyco Sanmar, it can be observed that the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o basis. Further, in such situation, adoption of a comparable with 17% of export would not be inappropriate to bring in a good comparable. c) The Ld. TPO/AO has sighted the arbitrary 25% to reject a comparable, which has 17% exports. d) It is meaningful to note that when it comes to incorporating a good comparable whose export is 17% the difference (between 25 and 17) becomes material to reject the good comparable, A larger difference (19 and 36) on the cost side was not ; material to the Ld. TPO/AO, as discussed while observing Tyco Sanmar. e) The contradiction in the contentions of the Ld. TPO/AO suggests that the selection/rejection of the comparables is erroneous and incorrect. The Hence it can be observed that the Ld. TPO/AO erred in not selecting UDTL as a comparable. 10.4 Closing remarks As discussed above, and various annexure referred there in, the search filters adopted by the Ld. TPO/AO are inappropriate. However, without prejudice to the above, even if the search conducted by the Ld. TPO/AO is adopted after appropriately factoring the discussion on the comparables i.e. Tyco Sanmar is not considered as part of the set of comparables id ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manufacturing division of WDPS to be at arm's length by adopting TNMM considering OP/Sales as PLI. A structured benchmarking process was carried out by the Assessee which is reflected in the TP Study report, identifying 7 comparables having average OP/Sales of 8.85%, whereas OP/Sales of the tested party i.e. Manufacturing division of WDPS was,l6.15%. The Assessee has also filed various submissions time to time to substantiate the arm's length nature of its international transactions and has produced the evidences upon which the Assessee has relied in support of the computation of ALP in relation to its international transactions. The Assessee filed a detailed submission, in response to rejection of TP Documentation by the Ld. TPO on January 22, 2013. Also, Assessee filed a letter to Ld. AO showing factual and legal causes why the upward adjustment proposed by the Ld. TPO should not be made. Facts modified by the Assessing officer The Ld, TPO/AO has rejected the Transfer pricing document by terming the data used by the Assessee as not reliable and correct on the basis of the following: i. Rejected the economic analysis of the Assessee without giving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two years prior to such FY 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. In the instant case, the relevant prior years are FY 2006-07 and FY 2007-08. 6. Case laws relied upon by the Assessee a. Hon'ble Mumbai Tribunal in case of Star India Pvt. Ltd. Vs. ACIT (ITA 3585/M/2OO6) ('Star India case') b. DCIT vs Indo American Jewellery Pvt. Ltd. [ITA No. 6194 / Mum, 2008] c. Income-tax Appellate Tribunal (Tribunal), Delhi Bench, in the case of Mentor Graphics (Noida) Pvt. Ltd. V Dy. Commissioner of Income-tax [2007] 109 ITD 101 d. Philips Software Centre Pvt. Ltd. Vs ACIT (119 TTJ 721) e. Supd of Taxes, Dhubri and Others (1975 CTR (S.C.) 172) f. South Eastern Coalfields Ltd, V. Joint Commissioner Of Income-tax (260 ITR 1 - ITAT) g. Income Tax Officer vs. LIC (79 ITD 278), the Hon'ble Tribunal h. ACIT vs. Jindal Irrigation Systems Limited (56 ITD i64(Hyd)) i Mafarlal Apparel Mfg, Co. Ltd. V. Deputy Commissioner Of Income Tax (61 TTJ 323) 7. Legal arguments relied upon by the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w are the arguments in a summarized manner to substantiate the factual and legal arguments against the addition proposed by the A.O: 10.1 Ground of objection No.2A Rejecton of economic analysis . The Ld. TPO/AO, without giving any sufficient and justifiable reasons, has rejected the economic analysis undertaken by the Assessee in accordance with the provisions of the Act read with the Rules and has undertaken a fresh economic analysis for the determination of the arm s length price in connection with the impugned international transaction and held that the Assessee s international transaction is not at arm s length. (Please refer Page Nos.257 to 259 of the paper book for the same) Additionally the Assessee would like to furnish the following: The Ld.TPO has passed the adjustment without providing any cogent reasons as per section 92C(3). This particular section specifies a list of 4 criteria based on which the documentation provided by the Assessee can be rejected and thereafter the Ld. TPO may proceed to determine the ALP. Sec. 92C (3) provides that (3) Where during the course of ay proceeding for the assessment of income, the assessing offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the responsibility shifts to the revenue to determine ALP in accordance with law. In view of all of the above, we would humbly submit that ejection of economic analysis carried out by the Assessee is incorrect. 10.2. Ground of objection No.2B- Rejection of usage of multiple year data. i. The Ld. TPO/AO has erred in rejecting the use of multiple year data used by the Assessee for the benchmarking exercise in the TP documentation. The Assessee has to submit the following in this regard: 10.2.1 Principle of impossibility of performance Ii. We would specifically draw your attention to comparables G T N Engineering (India) Ltd. and Tyco Sanmar being two comparables out of total four comparables considered the Ld. TPO/AO. It is submitted in this regard that the financial data of both these companies were not available for consideration on the date i.e. February 27, 2009 for carrying out benchmarking process for TP documentation purpose. iii. Considering the data for F.Y. 2008-09 for captioned companies at the time of TP Documentation clearly falls within the frame of impossibility of performance on the part of the Assessee. Hence, the Ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied out by the Assessee considered companies engaged in the manufacture of both pumps and valves; . Manu comparable companies selected in the TP analysis manufacture both valves and other accessories of the flow control industry this again illustrates that the fortunes of flow control industry is interlinked; . Since pumps and valves are both require concurrently when an installation/plant is set up, their demand supply patterns overlap. (Please refer Page Nos.268 to 270 of the paper book for the same.) In view of all of the above, we would humbly submit that limiting the search process to Valves is incorrect. 10.4. Conclusion and prayer. In view of the above, the Assessee accordingly prays that the Ld. A.O. be directed to accept the Transfer pricing documentation maintained by the Assessee and consider the international transaction of Sales to AEs by the WDPS s manufacturing division to be arm s length, from an Indian TP regulation perspective; The Assessee craves leave to add and submit such further facts, statements, documents and papers as may be considered necessary either before or during the hearing of the objections. 5.1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are -sales of spares is more than 48% of revenue, it has super normal profit 71.44 percent and that it has RPT of 29.10 percent on total cost incurred by Tyco Sanmar. This Panel holds that sales of spares and super normal profit are not valid objections raised by the assessee. Sale of spare has not been segregated in any comparable as well as in the case of assessee. Further, what constitutes high percentage of sale of spares for this purpose is not established. Super normal profit with due respect to Tribunal decisions referred to is not considered compelling reason to exclude Tyco Sanmar as so long it qualifies on all the filters. In so far RPT is concerned the TPO has applied filter '25 % of operating revenues. Therefore, RPT on cost is not considered a valid criterion to exclude this comparable. Therefore no direction to exclude this comparable can be given by this Panel. iii) The assessee has also requested to include United Drilling Tools Ltd. The reasons given by the assessee while requesting to include it as comparable are not valid reasons. The export percentage of this company is only 17%. Import percentage filter has not been applied by the TPO and therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve rightly been applied by the TPO. For each filter the assessee has given the reason for applying the same. We find that there were certain flaws in the transfer pricing study of the assessee which the TPO has removed them as the TP Provisions contained in Chapter X of the Act and the Rules do not permit them. One such change made by the TPO in the TP study presented by the assessee is use of multiyear data by the assessee. TPO has applied this filter as the data used as per Act for comparison should be contemporaneous. Other filters applied by the assessee were the based on study of condition existing in this case. Filter Related party transactions more than 25 percent was used by the TPO to reject those companies which has transaction more than 25 percent as the TPO considered this limit as reasonable for identifying uncontrolled comparable companies. TPO has considered that more than this limit will vitiate the comparison as the basic fundamental principle of Transfer Pricing study is that related parties can manipulate the prices. Though there is no sacrosanct limit of related party transactions and different Tribunals have approved different percentage of RPT. In our view app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries which were engaged in the manufacturing of valves. During the course of hearing, it was pointed out by the ld.counsel for the assessee that the valves that are sought to be compared by the TPO are functionally different, entirely a different product, although it is named as valve. Although, it is true that the method adopted is TNMM, under this method the product is broadly compared. However, in the present case, the TPO has sought to compare the valves which is a consumer product with the industrial product of the tested party, which in our view, would not give a true picture of the profit. Under these facts, it would subserve the interest of justice if a TPO conduct a fresh study comparing the same or similar product, so that a fair picture of the profit could be arrived in order to ascertain whether the TP adjustment is required to be made or not. Therefore, we hereby set aside the order of the authorities below and restore these issues before the TPO for conducting a fresh transfer price study for the purpose of finding out the nature of product, its market, geographical location, etc. as given under OECD guidelines regarding the comparability of the comparables. While doi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed in the assessment year 2008-09 are given hereunder:- Sr.No. Particulars/ nature of expense Amounts voluntarily disallowed (Rs.) Tax deductible but not deducted (Rs.) 1. Management fees 40,04,126 4,22,736 2. Legal professional fees. 5,95,508 67,471 Total. 45,99,634 4,90,207 2.3. However, the Assessee had subsequently deducted and deposited all taxes on the above referred amounts during the financial year 2008-09 (relevant to assessment year 2009-10) along with other payments for financial year 2008-09. Details of the same are shown in as shown in the table below in para 2.4. 2.4. Details of the taxes paid in the subsequent year on the amounts so disallowed and dates of payment of the same are given hereunder: Sr.No. Particulars/nature of expense. Amounts claimed Tax deducted Date of payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans were for Assessment Years 2009-10 and 2010-11.Further, the A.O. also observed that all the TDS payments made by the Assessee during the period under consideration pertains to Assessment Year 2009-10 as per TDS challans produced by the Asessee and that the Assessee has not produced any TDS challan showing Assessment Year 2008-09. 4. Do you wholly agree with the modifications in the facts by the Assessing Officer? If not, give reasons pointing the specific fact or facts with which you do not agree along with the reasons and documentary evidence, if any. The assessee does not agree wit the above referred modifications in the facts by the A.O. The assessee submits that the taxes deducted on the amounts have been deducted and deposited on the dates mentioned in the table atr para 2.4 above. The payments have been made within the financial year ended March 31, 2009, as relevant to Assessment year 2009-10. 5. Legal arguments submitted to the Assessing Officer . None. 6. Case laws relied upon by the Assessee . None. 7. Legal arguments submitted to the Assessing Officer . None. 8. Case laws relied upon by the Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,97,402 -d0- 80532 7,17,895 2009- 10 1,13,428 December 4, 2008 80158 3,80,410 2009-10 Sub-total. 4,22,736 2. Legal and Professional Fees 5,95,508 67,471 March 3, 2009. 80143 93,346 2009-10 Grand Total 45,99,634 4,90,207 10.5. Accordingly, the Assessee claimed a deduction for the expenses as shown in the table referred in para 2.4 and para 10.4 above, in the financial year in which the taxes have been deducted and deposited in the Government Treasury, i.e., in the Assessment Year 2009-10. 10.6. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iculars/nature of expense Amounts voluntarily disallowed (Rs.) Tax deductible but not deducted(Rs.) 1) Management fees 40,04,126 4,22,736 2) Legal and professional fees 5,95,508 67,471 Total 45,99,634 4,90,207 Accordingly, the Assessee claimed a deduction for the expenses as shown in the table referred in para 2.4 above in the financial year in which the taxes have been deducted and deposited in the Government Treasury, i.e., in the Assessment Year 2009-10. The Assessee inadvertently mentioned the Assessment Year as A.Y. 2009-10 and not as A.Y. 2008-09, in the challans used for depositing the taxes deducted on the above referred payments. The AO observed that on verification of challans furnished by the Assessee, all the challans were for Assessment Years 2009-10 and 2010-11. Further, the AO also observed that all the TDS payments made by the Assessee during the period under consideration pertains to Assessment Year 2009-10 as p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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