TMI Blog2017 (4) TMI 1261X X X X Extracts X X X X X X X X Extracts X X X X ..... in nature. Once, the expenditure has not been incurred for the development of new product but is for the improvisation of the products already being manufactured by the assessee, then such an expenditure which is a regular expenditure incurred by the assessee for smooth and efficient working of its business, is to be allowed as revenue expenditure in its hands - Decided against revenue. TPA - selection of comparable - Held that:- In the IT Enabled Services Division, the assessee was providing services to its parent company in Germany and was a limited scope service provider, thus companies functionally dissimilar with that of assessee need to be deselected from final lit of comparable. Allocation of lease line cost to two segments operated by the assessee i.e. manufacturing segment and ITES segment - Held that:- The assessee had estimated the use of two lines out of six lines for Design Engineering Segment i.e. about 40% of the lease line cost. However, the TPO and the CIT(A) were of the view that 80% of the total cost was attributable to Design Engineering Segment. The case of the assessee was that it had consistently followed the said allocation procedure on the basis of u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the product manufactured by the Co. by making changes at the same time remaining price competitive. (iv) Whether on the facts and circumstances of the case the CIT(A) erred in inferring that the expenses were incurred on account of subjecting the appellants product to testing which is done on ongoing basis every year to cater the needs of customers that the expenses is incurred for testing trails of products already being manufactured sold by the assessee. 4. Briefly, in the facts of the case, the assessee was engaged in the business of manufacturing of automotive air conditioning systems, parts and components. The assessee had furnished the return of income declaring net loss of ₹ 11,69,72,270/-. The assessment order was passed u/s. 143(3) of the Act and loss was assessed at ₹ 12,22,41,490/-. In the said assessment proceedings the Assessing Officer had made an addition of ₹ 42,21,665/-, which was claimed as an expenditure under the head Development Cost . The assessee had claimed the said special development cost paid to M/s. Behr Gmbh Co., Germany for preparation of design and drawing and prototype samples. The Assessing Officer had capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein testing of products consist of cooling performance, air flow, air distribution, body leakage tests and also reimbursement of expenses on proto sample of components/subparts development and their testing. The Assessing Officer was of the view that the testing was done so as to bring better end products and thereby new customers would be attracted, hence, it was clearly in the direction that a new benefit is sought after. The Assessing Officer, thus, held that the said expenditure was to be capitalized in the hands of the assessee. Accordingly, the Assessing Officer disallowed expenditure of ₹ 42,21,665/-. 6. The CIT(A) noted that the issue was covered in favour of the assessee company by the order of CIT(A) relating to assessment years 2002-03, 2003-04, 2007-08 and 2008-09 and noted that percentage of product development expenditure to total sale was only 1.77% in assessment year 2000-01 and 0.97% for assessment year 2001-02 and 0.77% for assessment year 2002-03. The CIT(A) also referred to the decision of Pune Bench of the Tribunal in the case of Asstt. CIT Vs. Spicer India Ltd. in ITA Nos. 1191/PN/2007, 1192/PN/2007 and 102/PN/2008 relating to assessment years 2001-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the products in order to test suitability in the environment in which it is to be used and hence, the said expenditure is duly allowable in the hands of the assessee as revenue expenditure. The bill wise nature of expenses are tabulated at page 6 of the order of CIT(A) and perusal of the same reflects expenditure to be revenue in nature. Once, the expenditure has not been incurred for the development of new product but is for the improvisation of the products already being manufactured by the assessee, then such an expenditure which is a regular expenditure incurred by the assessee for smooth and efficient working of its business, is to be allowed as revenue expenditure in its hands. We also find support from the ratio laid down by the Tribunal in Asstt. CIT Vs. Spicer India Ltd. (supra) wherein similar expenditure was allowed as revenue expenditure in the hands of the said assessee. The learned Departmental Representative for the Revenue has placed reliance on the ratio laid down in Commissioner of Income Tax Vs. Saravana Spg. Mills (P.) Ltd. (supra) which was a case of current repairs to the plant and machinery which stand on a different footing and the said ratio is not applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I. In respect of other non Transfer Pricing issues 5. In not allowing the deduction claimed in respect of incremental provision for warranty amounting to ₹ 31,37,190/-on the ground that it was created on an adhoc basis and allegedly did not meet the tests laid down by the Honourable Supreme Court in the case of Rotork Controls Limited 314 ITR 62 (SC). [Paras 2.2.1 to 2.2.6 Pages 15 to 17 ofCITA's order] 6. Your appellant craves leave to add, alter, amend, modify or delete any of the above grounds of appeal, if necessary. 12. The Revenue in ITA No.645/PUN/2013 has raised following grounds of appeal : 1. Whether on the facts and circumstances of the case, the CIT(A)(IT/TP) was justified in holding that adjustment should be made on proportionate basis to the international transaction when the assessee has benchmarked the international transactions following aggregation approach when no segmental data is available for working out the separate profitability of each international transaction. 2. Whether on the facts and circumstances of the case, the CIT(A)(IT/TP) was justified in holding Product Development Expenses as revenue expenditure without anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction. The first international transaction was the provision of engineering services, under which the assessee was rendering computer aided design engineering services to Behr Group entities. The assessee set up a Design Engineering Services Division in which both the international transactions to various Behr entities were ₹ 1.66 crores. The TPO noted that the assessee was charging Euro 25.56 per man hour for rendering the services which was a fixed rate and the services were rendered to the different entities in India i.e. (offshore) and also at the premises of AEs (on-site). The assessee had identified five companies as comparables and the arithmetic mean of the said concerns was 3.52%. The TPO was of the view that out of five concerns selected, only three concerns were comparable and using the data for the financial year under consideration, the arithmetic mean was worked out at 15.07% as against the OP/OC of the assessee at 3.52%. The TPO also reworked the operating cost of the design engineering services by allocating certain cost on account of leased line, hence, the adjustment of ₹ 11,11,428/-. 15. The second provision considered by the TPO was import of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue are in appeal against the respective portion of the order of CIT(A). 18. The first issue raised by the Revenue is against the order of CIT(A) in holding that the adjustment should be made to the international transaction and not to the total turnover. The learned Authorized Representative for the assessee at the outset pointed out that the said issue is squarely covered in favour of the assessee as per the decision of Hon ble Bombay High Court in Commissioner of Income Tax Vs. ALSTOM Projects India Limited in Income Tax Appeal No.362 of 2014, order dated 14 th September, 2016. 19. The learned Departmental Representative for the Revenue on the other hand placed reliance on the order of Assessing Officer/TPO. 20. We have heard the rival contentions and perused the record. The issue arising by way of ground No. 1 raised by the Revenue is against the direction of CIT(A) in restricting the TP adjustment, if any, to the value of international transactions and not to the total turnover of the assessee. We find that the said issue is squarely covered by the decision of Hon ble Bombay High Court in Commissioner of Income Tax Vs. ALSTOM Projects India Limited (supra), wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial increase in the profits of transactions entered into with non Associated Enterprises by applying the margin at entity level which is not the object of Chapter X of the Act. Absence of segmental accounting is not an insurmountable issue, as proportionate basis could be adopted as done by the Delhi High Court in Keihin Panalfa Ltd. (supra). 13. In the above view, no substantial question of law arises. Therefore, we do not entertain the present appeal. 21. Applying the ratio laid down by the Hon ble Bombay High Court, we uphold the order of CIT(A) and dismiss the ground No.1 raised by the Revenue. 22. The issue in ground of appeal No.2 raised by the Revenue is against the order of CIT(A) in holding that the product development expenses are to be allowed as revenue expenditure. The said issue raised by the Revenue is identical to the issue raised by the Revenue in assessment year 2001-02. We have already allowed the claim of the assessee in the paras hereinabove and dismiss the ground of appeal No.2 raised by the Revenue. Following the same parity of reasoning we dismiss the ground No. 2 raised by the Revenue. 23. Now, coming to the appeal filed by the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee concern Banco Products (India) Ltd. is excluded, then only one concern i.e. Subros Ltd. remains as comparable. He referred to the ratio laid down in Petro Araldite (P.) Ltd. Vs. Deputy Commissioner of Income Tax reported in 31 taxmann.com 281 (Mumbai-Trib.) to propose that even one comparable is enough to apply the transfer pricing provisions. 25. We have heard the rival contentions and perused the record. The first transfer pricing issue raised by the assessee is in relation to its segment consisting of import of material and components, export of heat exchangers and product testing charges. The assessee was engaged in the manufacture of sale of air conditioning systems and components thereof in its manufacturing segments. The TNMM method had been adopted and accepted to be the most appropriate method for benchmarking the arm s length price of the international transaction with its AE. The TPO while computing the PLI of the assessee had included depreciation as part of total operating cost. However, while working out the PLI of the external comparables, depreciation was excluded from the operating cost, by adding depreciation to operating profit, at pages 15 and 16 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerns i.e. Banco Products (India) Ltd. and M/s. Subros Ltd. In respect of M/s. Subros Ltd., the learned Authorized Representative for the assessee pointed out that the operating profit was wrongly taken at 36.52% as against 3.55% shown by the assessee. The contention of the assessee needs verification. Accordingly, we direct the Assessing Officer/TPO to verify the same and compute the margins of M/s. Subros Ltd. 29. The margins of the other concern which was applied to benchmark the international transaction of the assessee was Banco Products (India) Ltd. The said concern was picked up by the assessee in its TP study report to be comparable which was accepted by the TPO. However, the assessee before us claims that there were distinctive factors which affected the comparable Banco Products (India) Ltd. with the assessee. The first difference is the application of the products manufactured by the said concern and by the assessee. The second aspect is the non-availability of the segmental information in respect of manufacture of radiators. The assessee has filed tabulated details in this regard and has pointed out that in the aforesaid facts and on analysis of functions, assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies being not comparable to captive service provider and (c) rejection of concern Gilcon Project Services Ltd. on the premise that the financial results were not available in public domain. 32. The learned Authorized Representative for the assessee pointed out that risk adjustment should be allowed in the Design Engineering Services which was denied by the TPO. In respect of Public Sector Companies, the learned Authorized Representative for the assessee pointed out that the said concerns have social obligations for providing services and from risk perspective, the said concerns were not at all comparable. Since the assessee was a captive service provider, then its margins could not be compared with the Public Sector Enterprises. Reliance in this regard was placed on the ratio laid down by the Delhi Bench of Tribunal in Bechtel India Pvt. Ltd. Vs. DCIT in ITA No.1478/Del/2015, relating to assessment year 2010-11, order dated 21.12.2015 and the Hon ble Bombay High Court in CIT Vs. M/s. Thyssen Krupp Industries India Pvt. Ltd. in Income Tax Appeal No.2218 of 2013, judgment dated 28.03.2016. In respect of third aspect of transfer pricing, the learned Authorized Representative for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in CIT Vs. M/s. Thyssen Krupp Industries India Pvt. Ltd. reported in 239 Taxman 46 (Bom) had excluded Engineers India Ltd. being government company and where substantial part of its revenue came from executing projects of Public Sector Undertakings. Following the same parity of reasoning, we hold that Engineers India Ltd. and the other concerns M/s. KITCO and M/s. WAPCOS are to be excluded from the final list of comparables. 36. The next objection raised by the assessee is against exclusion of a concern which was selected by the assessee being functionally comparable. The TPO had rejected Gilcon Project Services Ltd. as comparable on the basis that the results of the said concerns were not available in public domain. However, the assessee claims that the said details are duly available in the Prowess data base. In view thereof, we remit this issue back to the file of Assessing Officer to verify the claim of assessee and in case, the details of the said concern are available in the Prowess data base, in the absence of any finding that the said concern was functionally not comparable, the margins of the said concern be applied to benchmark the international transactions of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. reported in 114 ITD 448 and compute the TP adjustment, if any, in the hands of assessee. 39. Now, coming to the next issue raised by way of ground of appeal No.4 i.e. allocation of lease line cost to two segments operated by the assessee i.e. manufacturing segment and ITES segment. The assessee had estimated the use of two lines out of six lines for Design Engineering Segment i.e. about 40% of the lease line cost. However, the TPO and the CIT(A) were of the view that 80% of the total cost was attributable to Design Engineering Segment. The case of the assessee was that it had consistently followed the said allocation procedure on the basis of usage and since out of six lines, two lines were used by ITES segment, then there was no need to disturb the same. The assessee was operating both the segments and where the assessee had consistently followed a basis for allocation of the lease line cost, then there is no merit in adhoc apportionment of the said cost basis. Hence, we reverse the orders of TPO and the CIT(A) in this regard and allow the ground of appeal No.4 raised by the assessee. 40. The last issue raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Babcock Wilcox Ltd. (supra) relating to assessment year 1990-91. First of all, where the assessee is following systematic basis for making the said provision for warranty which has been consistently followed by the assessee, then the same merits to be allowed in the hands of assessee. In this regard, we find support from the ratio laid down by the Hon'ble Supreme Court in Rotork Controls India P. Ltd. Vs. CIT (supra). 45. Now, coming to the stand of the Assessing Officer that in assessment year 1990-91 in the case of Thermax Babcock Wilcox Ltd. (supra), disallowance was made since the assessee had not sold single unit of manufactured product in the said year. The Tribunal in the later assessment years 1992-93 and 1993-94 in ITA Nos.1246/PN/1995, 157/PN/1997 and 158/PN/1997, vide consolidated order dated31.05.2005 in the said concern had allowed the claim of provision for warranty. Accordingly, we reverse the order of CIT(A) in this regard and direct the Assessing Officer to allow the claim of the assessee vis- -vis provision for warranty. 46. In the result, both the appeals of Revenue are dismissed and the appeal of assessee is partly allowed. Order pronounced on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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