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2015 (10) TMI 396 - ITAT DELHI

2015 (10) TMI 396 - ITAT DELHI - TMI - Rejection of the Appellant’s TP documentation, comparable companies and analysis thereof - not considering and appreciating the business model of the Appellant and its AEs and classified it as a “technical service provider” - assessee i.e. AVLTC is a subsidiary of AVL India Private Limited who holds 70% of its shares and the remaining 30% shares are held by AVL Holding GmbH, Austria - Held that:- DR who had initially taken the stand that non-discussion woul .....

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ck. The Ld. AR stated that qua the remaining grounds on behalf of the assessee the submissions are in the synopsis. However he agreed that in the circumstances the issue may be restored so as to address the first issue first.

In the facts of the present case where the Ld. AR has taken the argument that the intensity of functions with the non-AEs are higher than the intensity of functions with the AE’s the nuanced difference if any on the business model of the assessee has to be seen. .....

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e record that based on its intensity of functions performed that the tax payer was not a routine normal distributor. Analyzing the Agreements and the functions undertaken the tax payer’s claim that it was a normal distributor was not accepted and the tax payer on an analysis of its Agreement with its AE was found to have performed a greater intensity of functions as opposed to a routine distributor who may not be called upon to perform the intensity of functions undertaken by the BMW. Thus the r .....

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parties. In these peculiar facts and circumstances, we find that the submissions of the Ld. Sr. DR inasmuch that the relief granted to the assessee relatable to the exclusion of a comparable challenged by the Revenue before this forum also needs to be set aside. The said approach would in all fairness be appropriate as once the entire edifice of the business model for non-appreciation of relevant facts is demolished the occasion to consider the appropriateness of selection of the comparables wi .....

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I.T.A .No.-368/Del/2013 - Dated:- 4-9-2015 - SMT DIVA SINGH, JUDICIAL MEMBER AND SHRI N.K.SAINI, ACCOUNTANT MEMBER, JJ. For The Appellant : Sh.Amrendra Kumar, CIT DR and Ms.Y.Kakkar, Sr. DR For The Respondent : Sh.S.P.Singh, Sh. Gaurav Bhutani & Sh. Utsav Vijay, AR ORDER PER DIVA SINGH, JM Both the assessee and the Revenue have assailed the correctness of the order dated 22.11.2012 of CIT(A)-XX, New Delhi pertaining to 2008-09 assessment year on various grounds in their respective appeals. 2 .....

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the other sub-grounds may be dismissed as not pressed. The specific grounds on which the Ld. AR requests a finding read as under:- 3. (a) The Ld.CIT(A) erred in upholding rejection of the Appellant s TP documentation, comparable companies and analysis thereof. (c) The Ld.CIT(A) erred in not considering and appreciating the business model of the Appellant and its AEs and classified it as a technical service provider . (d) The Ld.CIT(A erred in confirming companies, selected by Ld.TPO/AO, which we .....

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ting attention to Paper Book page 248 - 294 which contains the Transfer Pricing Officer s (hereinafter referred to as TPO ) and pages 39 to 176 which contains the Transfer Pricing Study submitted that in the facts of the present case the business model of the assessee has not been correctly appreciated. As a result of this, it was submitted mistakes have occurred in the subsequent steps of selection of comparables etc. It was his submission that it is not a new line of argument taken at this sta .....

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as completely been lost sight of. 3.2. Addressing the facts it was submitted that the most appropriate method selected by the assessee was Transactional Net Margin Method (hereinafter referred to as TNMM ) and it has not been disputed by the TPO. Similarly the Profit Level Indicator (hereinafter referred to as PLI ) taken by the assessee was Operating Profit/Total Cost (hereinafter referred to as OP/TC ) has also not disputed by the Revenue. The mistake thus occurred in characterizing the assess .....

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of the Paper Book which contains the detailed submissions dated 26.12.2012 before the CIT(A), it was submitted that this specific pleading was made before the Ld. CIT(A) and it can be found addressed at pages 338- 343 on record. Inviting attention to the impugned order it was his submission that despite the recording of detailed pleadings on the said issue there is no discussion whatsoever in the finding. 3.3. On the basis of these arguments it was his submission that the issue may be remanded t .....

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ments for accepting or rejecting the comparables as argued by the assessee before the CIT(A) can also be stated to be fully considered and rejected. Thus remand to the TPO was objected to. 5. We have heard the rival submissions and perused the material available on record. Before we address the issues canvassed before us, it is appropriate to address the relevant facts. The assessee i.e. AVLTC is a subsidiary of AVL India Private Limited who holds 70% of its shares and the remaining 30% shares a .....

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under the normal provisions of the Income Tax Act, 1961 ( the Act ). The return was processed under section 143(1) accepting the returned income and subsequently after issuance of notice etc. u/s 143(2) etc. was selected for scrutiny assessment. The AO after referring the transfer pricing issues to the TPO passed the assessment order u/s 143(3) resulting in various additions including the additions proposed by the TPO thereby reducing the assessed loss to ₹ 98,18,940/- as against the clai .....

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Founded in 1948, AVL is the world's largest privately owned and independent company specialized in the design and development of internal combustion engines, conventional and hybrid powertrains, powertrain test instrumentation and test systems with global manpower of over 4,000 employees in more than 45 countries. Powertrain Engineering Division activities embrace all functions from concept definition through to production development. Supported by comprehensive in-house research, AVL sets n .....

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facilities, plus cutting edge-application and reliability engineering capabilities, AVL is fully equipped to provide its customers with mature solutions ready for series production. Ail AVL's software and methodology development capabilities for engine and powertrain simulation are concentrated in its "software house", Advanced Simulation Technologies. The AVL-designed software tools represent state-of the-art technology based on long experience in engine and drivetrain developmen .....

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productivity. Provided below is a brief description of each of the segments in which the AVL Group operates: Development of Powertrain Systems: AVL develops and improves all kinds of powertrain systems and is a competent partner to the engine and automotive industry. In addition, AVL develops and markets the simulation method that are necessary for the development work. Engine-Instrumentation and Test Systems: The products of this business area comprise all the instruments and systems required .....

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otive industry. The worldwide network of AVLTC and AVL s instrumentation & test systems divisions provides additional support. This pool of in-house expertise and resources ensures rapid response to customer requirements. AVLTC has complete capability for simulation, analysis & design, engine & powertrain development, calibration, validation, etc. 8. The shareholding pattern disclosed in the TP study report is shown as under:- 9. The record shows that both the assessee and the TPO ch .....

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ailed Objections are found placed at pages 338 to 342. For ready-reference the same is reproduced below:- Ground No. 4.2- The ld. TPO erred to consider and appreciate the business model followed by the Appellant and its AEs. 2.40 At the outset, the Appellant strongly objects to the fact that the Ld. TPO has wrongly classified the Appellant as a technical support service provider. In turn the comparables used by the Ld. TPO are all engaged in high-end technical consultancy services and hence refl .....

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ertrain design development and testing services to the automotive industry. AVLTC has capability for simulation, analysis & design, engine & powertrain development, calibration, validation, etc. The first requirement in powertrain engineering process is, to establish clear boundaries and expectation of the project. Once the project is defined, program management disciplines are used to build the most appropriate project team. The next stage usually consists of detail design supported by .....

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nge from a small two and three wheeler engines to small commercial vehicle and stationary engines. All kinds of development including testing and analysis is done using different test beds, which may be different, types depending upon their capabilities and features. The services offered by AVLTC can be divided into two categories mentioned below along with the process flow chart: 1. Design & Development Services * Design and simulation / calculation of engine * Performance measurement and e .....

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lation * Combustion and emission calculation * Structural strength and dynamic analysis It may be noted that the Appellant provides Research & Development services to its AE's as well as avails these services from the AE's. The following describes the circumstances in which each of the following services is entered: i. Provision of services: The AEs, after the contract has been awarded to them by the ultimate customer, subcontracts different tasks project to different AVL Group compa .....

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made software. Meshing means dividing the total structure (3D CAD model) in very small elements or parts using finite element software. b) Design: The design team in AVLTC has engineers who have undergone project related training at AVL Graz for understanding the specific requirements of AVL Design Methodology as applied to Automotive Engine Components and Systems. The technical lead for design projects involving commercial vehicles to be developed to meet the more stringent emission norms are t .....

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py to the AE. The life cycle of a project in relation to the Appellant can be explained as a diagram presented below: DIAGRAM……………… ii. Availing of services: In this regard it is worth mentioning that AVLTC had secured a project of Tata Motors Ltd. The work entailed concept design, layout design, detail design, procurement/project logistics, mechanical development, engine certification etc. However, AVLTC does not have the expertise to handle the project .....

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ransactions relating to provision of services, the main contractor to the project is AVL List, GmbH. Hence the primary responsibility of the delivery to the final customer is of that entity. This would entail, maintaining adequate infrastructure, resource, skills, in terms of qualified people and quality assurance of the delivered product. Only part of the main contract is subcontracted to AVLTC. AVLTC is involved only in design development and testing services for the AE. It functions as a cont .....

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that AVLTC avails services from AE of the same quantum in terms of value. The nature of the services availed by it are of much higher grade than the services provided by it. In this regard it is worth mentioning that AVLTC had secured a project of Tata Motors Ltd. The work entailed concept design, layout design, detail design, procurement/project logistics, mechanical development, engine certification etc. However, AVLTC did not have the expertise to handle the project and hence it was sub-cont .....

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Ld. CIT(A) proceeded to take all these grounds as being linked to each other. In para 6 the ld. CIT(A) sums up the issues to be considered in the following manner:- 6. The appellant raised various issues during the course of the TP proceedings. The submissions of the appellant as well as order of the TPO are considered carefully. The following issues emanate for a decision in this case:- 1. Use of single year date vs multiple year data. 2. Use of powers u/s 133(6) by the TPO. 3. Rejection of the .....

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scussion would amount to non-acceptance from a reading of the above was unable to point out whether the issue was considered at all. In the circumstances it was her submission that if the business model needs to be addressed first then the finding of the CIT(A) giving part relief to the assessee should also be set aside as the remaining issues in both the assessee s appeal and the department s appeal be treated on the same platform. Thus the grounds in the departmental appeal also should be rest .....

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06/- as against ₹ 2,47,70,365/-. (a) The Ld.CIT(A) has erred in deleting the M/s Semac Ltd. from the final list of comparables used by the TPO in the TPO Audit merely on the objections raised by the assessee. (b) The ld.CIT(A) erred in deleting this company merely on the submission of the assessee and without going facts of the case and obtaining comments of the TPO in that regards. 2. Whether the Ld.CIT(A) has erred in law and on facts in deleting the addition made on account of provision .....

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n view of the fact that the issue has to be restored to the TPO/AO for first consideration on merits the fundamental issue of characterization of the assessee on the basis of its FAR the appeal of the Revenue accordingly necessarily also has to be allowed as the entire issue is restored. In the facts of the present case where the Ld. AR has taken the argument that the intensity of functions with the non-AEs are higher than the intensity of functions with the AE s the nuanced difference if any on .....

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considering the conduct as borne out from the record that based on its intensity of functions performed that the tax payer was not a routine normal distributor. Analyzing the Agreements and the functions undertaken the tax payer s claim that it was a normal distributor was not accepted and the tax payer on an analysis of its Agreement with its AE was found to have performed a greater intensity of functions as opposed to a routine distributor who may not be called upon to perform the intensity o .....

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