TMI Blog2017 (4) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... from "services" to "manufacturing". Also, it is difficult to accept the contention that people in the manufacturing segment are equipped to render general managerial and administrative support services to group companies. Merely because the assessee had booked these under manufacturing segment does not render it a character of manufacturing activity. Hence, we are of opinion that BMSS service income is certainly not derived from the manufacturing activity of the assessee's and hence should not be considered as a part of the operating income of the manufacturing segment, for computation of PLI. Therefore, the ground raised by the assessee is rejected. Operating expenses allowability - Held that:- 'Liability no longer required written back' is a part of the operating activity of the assessee, if it is relating to the operating expenses of the assessee. According the issue is remitted to AO/TPO for fresh consideration. Regarding others of ₹ 0.12 crores, if the assessee proves that it is an operational income, then AO shall not exclude it while computing the PLI. Not excluding "424 Model" from manufacturing segment as the model was in its start-up phase - Held that:- As r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent to add 2% towards profit. Being so, we do not find any infirmity in the order of lower authorities and the same is confirmed. Hence, this ground is rejected. Addition of wealth-tax provision and incremental depreciation added to book profit - MAT - Held that:- In our considered opinion, provision for Wealth Tax cannot be considered diminution in the value of asset and it is to be added to the book profit of the assessee. Incremental depreciation is nothing but depreciation on revaluation of assets under clause (iia) of the Explanation-1 sub -section (2) of section 115JB of the Act. This ground of assessee is rejected. Setting off brought forward of business losses and unabsorbed depreciation of earlier years before allowing deduction u/s. 10A - Held that:- This issue is squarely covered by the judgement of Supreme Court in the case of CIT v. Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] holding that though Section 1OA, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's Appeal: A.Y 2007-08) 2. At the time of hearing, the ld. AR has not pressed this appeal, as it is a repeated appeal for the same assessment year. Accordingly, this appeal stands dismissed, as not pressed. 3. Now, we take up ITA No. 365/Mds./12 Transfer pricing related issues:- 4. The facts of the case are that Caterpillar India Private Limited ('CIPL') incorporated in 2000, is a wholly-owned subsidiary of Caterpillar Commercial SA, Belgium which is ultimately held by Caterpillar Inc. USA. CIPL is primarily engaged in manufacturing and sale of earthmoving machinery including excavators, bulldozers, dumpers and loaders, and spares for the same. As a part of its expansion plans in India, CIPL has acquired Earthmoving Equipment Division of Hindustan Motors Limited during 2001. The Appellant is also engaged in following other services to its Associated Enterprises ('AEs'): Provision of services ('EDC segment'); and Provision of Asia-Pacific shared services ('APSS') i.e. routine back office accounting and finance related services to Caterpillar Group companies. 4.1 During the financial year 2006-07, CIPL had entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adjustment in respect to APSS segment 28,90,897 4 Adjustment in respect to reimbursement of expenses 3,27,946 Total 115,79,08,911 The DRP confirmed the same. Aggrieved, the assessee is in appeal before us. 5. The first ground in ITA No. 365/Mds/2012 is with regard to internal TNMM to be considered over External TNMM as the most appropriate method. 6. The ld. AR argued that the Non-CAT segment, which comprising of products of erstwhile Hindustan Motors Limited, whose functions, assets and risks are broadly comparable to the CAT segment was identified as a comparable segment for determination of arm's length price. The ld. AR, submitted that there is a broad functional similarity between the CAT and the Non CAT segment and therefore, internal comparability has reliably undertaken to determine the arm's length nature of the international transactions in the manufacturing segment (CAT Segment) of the assessee. The ld. AR further submitted few illustrative points to prove that the CAT and the NON CAT segment are broadly funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Remarks 1 2 3 4 1 Raw materials Actuals 67% The Company has system in place to identify and capture raw material pertaining to both CAT and Non-CAT segment on the actual basis through production orders. This is due to the fact that CIPL has separate production line for both CAT and Non CAT Segment and this facilitate to capture the raw material cost of respective segments. 2 Royalty and other selling expenses Actuals 7% The royalty paid by CIPL is in relation to products manufactured using CAT technology and hence entire payment pertains to CAT segment. Other selling expenses represents payment to dealers, commission to agents, warranty charges paid, sales promotion expenses etc - for which respective segmental cost are identified and reflected in the segmental. 3 Employee cost Actuals (Actual hours spent) 9% Appropriate systems ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain subjective conclusions and rejected in the internal comparability analysis undertaken by the Appellant. 8. The DR relied on the order of the lower authorities. 9. We have heard both the parties and perused the material on record. We are of the opinion that the DRP/TPO was right in rejecting the use of Internal TNMM, by giving a clear finding that the Non-CAT category is not comparable to the CAT category of the Manufacturing Segment. The essential crux of the TPO's argument is that the CAT category and Non-CAT category are not comparable but in separable. The fine distinction between the two has been well brought by the TPO, in the order. The difference between the two may be subtle but is of substantial import. That is what the TPO has successfully argued. The TPO observed that while the CAT category and Non-CAT category are not comparable to be used as internal TNMM, both the categories are to be segregated. The assessee does not appear to have appreciated the difference between the two, brought out by the TPO. 9.1 It was also noted that there is substantial merit in the reasons given by the TPO for rejecting the comparability of the CAT category and Non-CAT c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's objection is that since no modification efforts are made for the Non CAT category, therefore no royalty is paid under this category. Also, there has been up-gradation of technology, like for example, '1035 sprinkler'. But, the averment is not valid as this upgradation is not similar to that of a 777 or 773 and the technological superiority of the categories of products. (v) The process of material acquisition for CAT and Non-CAT is totally different. While the materials are procured locally for Non CAT category, CAT categories are proprietary products and holds warranty. The assessee contends that for the CAT category, localization efforts are being made. This does not negate the fact that the procurement process is very different and most of the raw material are still being imported. (vi) Non CAT category has higher market risk than the CAT category which owns a brand. The assessee contends that merely because CAT is widely known brand, it does not increase the market risk of Non-CAT category. Further the assessee mentions that the HM brand has continued its legacy and like in the case of the Coca Cola Company acquiring the Thumps Up brand did not change th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of margin by excluding certain items that are operating in nature like: (i) BMSS service income received pertaining to manufacturing segment at ₹ 11.49 Crores (ii) Interest on customers overdue deposit (Rs. 0.28 crores) (iii) Market promotion fees (Rs. 0.31 crores); (iv) liabilities no longer required written back (Rs. 1.12 crores) and (v) others (Rs. 0.12 crores). 12. The ld. AR submitted that it was excluded an amount ₹ 11.49 crores derived from BMSS. The assessee has called it the operating income which is integral part of the manufacturing operations and claimed that the services are actually rendered by the employees of the Thiruvallur factory. They do not belong to the EDC and APSS segments. 12.1 During the financial year 2006-07, the assessee has shown receipt as well as the payment towards the Business Management Support Services (BMSS) received from and rendered to the Group Companies. Assessee submitted that there are various general management and administrative support services provided to the group companies. Assessee has further submitted that these services are delivered through manufacturing plant located at Thiruvallur in India. Also, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st, power and fuel, rent higher charges etc. These services are not provided through the service division (EDC and APSS) and hence neither any receipt nor any costs are sitting in the service divisions. According to TPO, it is proper to hold in this regard that the BMSS charges received are not due to manufacturing activity carried on in the manufacturing plant. They are in the nature of ITES but not rendered by the EDC or APSS divisions. Therefore, they are excluded from the manufacturing division but not considered in EDC or APSS divisions. 12.4 Further, the TPO observed that though the receipts of ₹ 11.49 crores have been excluded from manufacturing division, but no expenditure attributable to these receipts are excluded from the financials of the manufacturing division. This is because costs incurred in rendering such services are captured as part of the operating expenses of the manufacturing segment. In other words, even if these receipt had not been arisen, the cost would have definitely be incurred as they constitute inseparable part of operating expenses incurred during the course of the manufacturing activity. Accordingly, the receipts of ₹ 11.49 crores are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he functions performed. If the liability no more required is taken into consideration then it implies that function was performed for the assessee but its price is not correctly reflected in the P L account. Comparison with uncontrolled transactions is made in terms of functions presuming that the price paid for services taken. Therefore, liability no more required is excluded from the manufacturing division while calculating the PLI as it would distort the comparison. (vi) Sales Tax and Excise Duty : Assessee agrees that these items are part of operating cost and not of operating revenue. Therefore, as proposed in the show cause, Excise Duty and Sales Tax are not reduced from operating revenue. Instead they are added in the total cost of the manufacturing division. 13. BMSS service income The assessee's main objection is that BMSS charges received are pertaining to the manufacturing segment involves purchasing services and services related to global production, planning and quality are purely related to the manufacturing segment and should therefore be considered as a part of the operating income of the assessee for this segment. 13.1 The contentions of the TPO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld result in understatement of profit as performed by the ld. AO/ld. TPO. Hence the approach taken by the Ld.AO/Ld. TPO is not justified. 14. In its submission the assessee also provided an affidavit in support of its statement that BMSS charges received are a part of the Manufacturing segment. Further, it was submitted that the TPO in her order has not clearly mentioned the proper treatment of the BMSS charges received, since it has not been considered as a part of the income of the EDC segment as well. 15. The ld. DR relied on the order of the lower authorities. 16. We have heard both the parties and perused the material on record. The contention of the assessee is that BMSS is part of manufacturing activity because it was performed by employees deployed in the manufacturing segment and the costs incurred are booked in the manufacturing segment. The TPO's view is that the nature of the activity is services and merely because the services were rendered by the personnel of manufacturing segment, the nature of the activity cannot change from services to manufacturing . Also, it is difficult to accept the contention that people in the manufacturing segment are equip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting in nature and are derived from normal business operations carried out by the assessee. Hence, there is apparently no reason why the said item should not be considered as a part of the operating activity. The comments of the ld. TPO were highly imaginative and devoid of practical practices. The market promotion fees are in form of cash rebate received from Exxon Mobile which is directly related to the sales volume and is paid as a part of the tie-up between the two companies to promote sales' (iii) We have heard both the parties and perused the material on record. The liability no more required ₹ 1.12 crores. It means that services required have already been taken but the liability related to the service is no more required. While calculating the profit margin as per TP guidelines, FAR analyses are made. Accordingly, if any function has been performed then receipt or expenditure related to that function must be reflected in the Profit and Loss Account. In TNMM net profit margin would level will depend on the functions performed. If the liability no more required is taken into consideration then it implies that function was performed for the assessee but its price i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of manufacturing division as the number of different products is. A proper approach in such a situation is to consider manufacturing division as a unit and find out its PLI. 20.2 The ld AR submitted that in fact Caterpillar group is a well established group world over and therefore assessee cannot claim that it is inexperienced compared to other players in the market. Indian market for the kind of products the assessee produces is ever enlarging and expanding. Therefore, there is always a bright future for the products in India which are produced by reputed companies like Caterpillar on the basis of intensive R D efforts. Backhoe loader is neither a new product in India nor caterpillar brand is new to India. Further, assessee is an experience manufacture of earth moving machines and it has well established selling and distributing infrastructure in India that has been used for the purpose of selling Backhoe loader also. Therefore, in such a situation, only in the initial year of introduction of new product special treatment can be given to the assessee. Thereafter, TPO does not consider it is proper that special treatment is given to the assessee year after year. 20.3 He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same market. Some business strategies involve reductions in tax payer's current profits in anticipation of increased future profits. Therefore, the business strategies should be considered in determining comparability for transfer pricing purposes. Therefore, in order to measure the profitability of the CAT segment properly, given the market scenario and start up phase of the 424 Model, the losses owing to this product need to be separated from the overall CAT segment and in order to depict the actual financial performance of the CAT segment. To demonstrate the effect of the business strategy adopted by the assessee, the ld. AR has drew our attention towards the number of units sold by the assessee over the years. Financial Year Number of Units of 424 Nodel 2005-06 212 2006-07 268 2007-08 818 He submitted that from the above table, it could be appreciate that the sales volume achieved by the assessee has registered growth which proves that the relevant financial year was under start-up phase and sales volume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous unit. Being so, in our opinion, the lower authorities are justified in not excluding the 424 Model from manufacturing segment and also find no merit in the legal argument on this issue. This ground of appeal of the assessee is rejected. 24. The next ground is with regard to Transfer Pricing (TP) adjustment should be restricted only to international transaction and not to the entire turnover. 25. The ld AR submitted that it would be appropriate to consider the margins with respect to the International transactions (i.e. controlled manufacturing segment) and not the enterprise as a whole. He relied on the judgments of Tribunal, Mumbai Bench in the case of Asst. Commissioner of Income-tax vs. M/s. Wockhardt Limited (2010-TII-46-ITAT-MUM-TP), and UCB India P. Ltd. Vs ACIT (2009-TII-02-ITAT-MUM-TP) wherein held that transfer pricing adjustment can be made only arising from international transactions while determining the ALP. Hover TPO holds the view in this regard that while determining the arm's length price, comparison is made between the PLI of the assessee and the arithmetic mean of uncontrolled a comparables. While doing so it is presumed that every other factor is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of CIT v. Thyssen Krupp Industries India (P.) Ltd. Cited supra,, accordingly this ground raised by the assessee is rejected. 27. The next ground in this appeal is that the TPO/DRP have erred in not appreciating the facts to comprehend the nature of reimbursement of expenses received to be income arising out of rendering agency services to its Group Companies by the assessee and considered a mark-up of 2% to be charged on the said receipts. However, the TPO/DRP did not provide the basis or the method of arriving at the said mark-up. 28. The facts of the issue are that during the FY 2006-07, the assessee has made certain recovery of expenses in relation to expenses incurred as salary cost of the employees of the Caterpillar Group who are sent on secondment to CIPL. These expenses are initially borne by CIPL and later recovered from the respective Caterpillar Group company. The recovery also pertains to expenses incurred on business trips of officials from the AEs which are initially incurred by CIPL and later recovered from the AEs. 28.1 The TPO has made an adjustment by adding a 2% mark-up on the recovery made the assessee contending that the assessee has provided s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaken by the assessee with it's A.E. 31. After hearing the both the parties, we are inclined to admit the additional ground by placing reliance on the judgment of Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383. However, as the assessee has raised this ground first time before us, and the Assessing Officer has no occasion to examine this issue, we remit the above issue to the file of Assessing Officer for his consideration after giving an opportunity of being heard to the assessee. Issues relating to Corporate Tax 32. First ground relating to corporate tax which is for our consideration, is with regard to making an addition of wealth-tax provision and incremental depreciation of ₹ 4,52,000/- added to book profit. The assessee has also raised the following sub-grounds for our adjudication. (i) The AO/TPO/DRP erred in making an addition of Wealth Tax provision and incremental depreciation arising on revision of estimated useful life of assets (laptop computers) to book profit u/s. 115JB of the Act. (ii) Provision for Wealth tax can neither be treated as provisions for income tax nor as provisions for diminution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 10A allows deduction only from total income of the assessee and not from the income of the undertaking. Total income defined under section 2(45) of the Act which means the total income referred to in section 5, computed in the manner laid down in the Act . According to AO, the total income of the assessee has to be worked out in the manner laid down in the Act which will be worked after giving effect to provision of Section 71 and 72 contained in Chapter VI of Act which provides for aggregation of income and set off or carry forward of losses. The AO placed reliance on the following decisions:- (a) M/s Intellinet Technologies India Private Limited vs. ITO [2010-Ttiol- 167-ITAT-Bangalore. (b) CIT vs. Himatasingike Seide Limited [286 ITR 255]. (c) M/s Sword J Global (I) Pvt. Ltd Vs ITO [2008] 306 ITR 286 Chennai ITAT. 37.1 Before us, the ld. A.R submitted that the legislature contemplates that profits and gains of the undertakings from the export of articles or things or computer software are to be deducted while computing the profits and gains of business or profession. The deduction under section 10A(1) is computed with reference to the sub-section 10A(4) which r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses of this provision. 17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No. 794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression total income of the assessee in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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