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2019 (5) TMI 679

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..... and the learned Departmental Representative for the Revenue has failed to bring on record any evidence to the contrary - delete the addition made on account of arm's length price of international transactions undertaken by the assessee. Disallowance of amortization of premium paid on leasehold land - HELD THAT:- The said issue raised of disallowance of amortization of premium paid on leasehold has been decided by the Tribunal with lead order relating to assessment year 2001-02 [2015 (8) TMI 557 - ITAT PUNE] we hold that the said expenditure is not allowable in the hands of assessee. - Decided against assessee Disallowance of provision made for expenditure in respect of Bhavishya Kalyan Yojana - HELD THAT:- Said issue has been decided against the assessee as relying on assessee's own case [2015 (8) TMI 557 - ITAT PUNE] Disallowance made u/s 14A read with Rule 8D - HELD THAT:- The first plea of assessee is that it had own funds which were more than its investments and hence, no disallowance under Rule 8D(2)(ii) of the Rules. This argument of assessee needs verification at the end of Assessing Officer.Accordingly, we direct the Assessing Officer to verify the claim .....

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..... rores, only ₹ 295 crores was attributable to AE segment. We find no merit in the orders of authorities below in benchmarking international transactions on entity level. Accordingly, we accept the plea of assessee that segmental details are to be adopted and margins of segment of AE transactions are to be compared with margins of comparables selected. In this regard, the assessee has explained that even if the margins of Eclerx Services are applied, which though he claims to be not functionally comparable, but still margins shown by the assessee would be within +/- 5% range and no adjustment needs to be made in the hands of assessee on account of said segment of Design Engineering Services. The Pune Bench of Tribunal in Tieto IT Services India (P.) Ltd. Vs. DCIT [2018 (3) TMI 940 - ITAT PUNE] had also in similar circumstances directed the application of segmental profitability while benchmarking its international transactions with AEs. Accordingly, the ground of appeal No.2 raised by assessee - ITA Nos.168 And 1708/PUN/2018 - Dated:- 3-5-2019 - Ms. Sushma Chowla, JM And Shri Anil Chaturvedi, AM For the Assessee : Shri Dhanesh Bafna For the Revenue : Ms Nandita Kanchan .....

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..... t prays that the principle of consistency be upheld and the adjustment made by the Hon'ble DRP / Ld, AO ought to be deleted. Ground No.5 5. On the facts and in the circumstances of the case, and in law, the Hon'ble DRP / Ld. AO, erred in rejecting the comparable uncontrolled data submitted by the Appellant to demonstrate the ALP of international transaction pertaining to payment of commission to AE. The Appellant prays that the comparable data submitted by the Appellant ought to be accepted and consequently the transfer pricing adjustment made be deleted. Corporate Tax Grounds Ground No.6 6. On the facts and in the circumstances of the case, and in law, the Hon'ble DRP / Ld. AO, has erred in disallowing the claim of the Appellant in respect of amortization of premium on leasehold land amounting to ₹ 4,30,886. The Appellant prays that the addition pertaining to amortization of premium on leasehold land ought to be deleted and should be allowed as revenue expenditure. Ground No.7 7. On the facts and in the circumstances of the case, and in law, the Hon'ble DRP/Ld. AO, has erred in disallowing the provision for expenditure of ₹ 21,70,000 in respect of provi .....

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..... e manufacturers. The assessee had entered into various international transactions with its associate enterprises including payment of commission to its associate enterprises. The TPO notes the nature of payments on commission of ₹ 4.65 crores to associate enterprise Tata Technologies Pte. Ltd. (in short TTPL ). The case of assessee was that it was paying said commission for the preceding years also. The TPO also notes that the commission paid to TTPL was primarily in respect of software license procured from Dassault. The assessee had entered into Commission Agreement with TTPL. However, the TPO notes that the assessee was procuring Dassault trademark license from IBM, even before entering into such an agreement for payment of commission. The assessee was thus, asked to justify and substantiate with documentary evidence the services rendered by TTPL. The assessee furnished complete reply, which is reproduced by the TPO and pleaded that TTPL had charged commission to third parties @ 15% on sales for marketing support services. However, TTPL had charged the assessee commission @ 6% on sales for similar services. The contention of assessee was that since the rate charged to asse .....

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..... Tribunal in assessment years 2001-02 and 2003-04, which has been applied in assessment year 2012-13. The said issue raised of disallowance of amortization of premium paid on leasehold has been decided by the Tribunal with lead order in ITA No.1345/PN/2011, relating to assessment year 2001-02 vide paras 43 to 46 at pages 14 and 15 of the said order and following the same parity of reasoning, we hold that the said expenditure is not allowable in the hands of assessee. Hence, ground of appeal No.6 raised by assessee is dismissed. 9. Similarly, the next issue raised vide ground of appeal No.7 of disallowance of provision made for expenditure in respect of Bhavishya Kalyan Yojana has also been decided by the Tribunal in ITA No.1346/PN/2011, relating to assessment year 2003-04, vide paras 70 to 87 at pages 24 to 34 of the said order. The said issue has been decided against the assessee. Following the same parity of reasoning, we find no merit in the ground of appeal No.7 raised by the assessee and the same is dismissed. 10. Now, coming to the next issue i.e. disallowance made under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (in short the Rules ). 11. The learn .....

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..... e same were found to be not acceptable. The submission of assessee was that it had huge interest funds for investments and it also earned interest, so no disallowance was warranted. The Assessing Officer notes that it was undeniable that the assessee had claimed interest cost on borrowed funds and the disallowance made by it did not commensurate with the exempt income earned by the assessee. Thus, he held that provisions of section 14A of the Act read with Rule 8D of the Rules were clearly attracted and made disallowance of ₹ 1,95,01,231/-. Since the assessee had already disallowed sum of ₹ 39,32,077/-, the Assessing Officer made balance disallowance at ₹ 1,55,69,154/-. 14. The assessee is in appeal against aforesaid disallowance made under section 14A of the Act read with Rule 8D of the Rules. 15. The perusal of draft assessment order clearly reflects that satisfaction was duly recorded by the Assessing Officer, wherein he noted not only the investments made by assessee but also noted the interest expenditure incurred by assessee and also suo-motu disallowance made by assessee under section 14A of the Act. The Assessing Officer after considering all these aspects .....

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..... ection 10A of the Act on account of corporate tax additions made in its hands. We direct the Assessing Officer to re-compute the aforesaid deduction under section 10A of the Act. Accordingly, ground of appeal No.9 is allowed. 22. Now, coming to appeal of assessee in ITA No.1708/PUN/2018, relating to assessment year 2014-15, wherein the assessee has raised the following grounds of appeal:- Transfer Pricing Grounds Design Engineering Segment (DES) 1. On the facts and in the circumstances of the case, and in law, the Learned Assessing Officer ( Ld AO'), following the directions of the Learned Dispute Resolution Panel ('Ld DRP') erred in confirming the action of the Learned Transfer Pricing Officer ( Ld. TPO') in rejecting the Arm's Length Price ('ALP') computation undertaken by the Appellant for benchmarking the international transactions pertaining to Design Engineering Services ('DES') segment, thereby making a transfer pricing ('TP') adjustment of INR 25,88,00,000. The Appellant prays that the TP analysis conducted by the Appellant ought to be accepted and consequently the TP adjustment ought to be deleted. 2. On the facts and in the circ .....

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..... onsidering operating profit / operating cost ('OP/OC') as the profit level indicator ('PLI') as against operating profit/operating income ('OP/Sales') considered by the Appellant in its TP study report. The Appellant prays that OP/Sales considered by the Appellant in its TP Study ought to be considered as the appropriate PLI for benchmarking the DES segment of the Appellant on an entity level. 8. On the facts and in the circumstances of the case, and in law, the Ld. AO/Ld. DRP/Ld. TPO erred in considering the single year data of comparable companies i.e. data for FY 2013-14 for benchmarking purposes. The Appellant prays that multiple year data of comparable companies ought to be considered for benchmarking purposes. Software Distribution Segment 9. On the facts and in the circumstances of the case, and in law, the Ld. AO, following the directions of the Ld. DRP, erred in confirming the action of the Ld. TPO in rejecting the ALP computation undertaken by the Appellant for benchmarking the international transaction pertaining to payment of commission, thereby making a TP adjustment of INR 5,24,24,881 in the Software Distribution segment. The Appellant prays th .....

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..... the Appellant amounting to INR 41,51,114 directly attributable to the exempt income. The Appellant prays that the disallowance made under Section 14A of the Act by applying Rule 8D ought to be deleted. 15. On the facts and in the circumstances of the case, and in law, the Ld. AO/Ld. DRP erred in disallowing the provision debited to Profit and Loss Account for medicare expenses amounting to INR 86,48,000. The Appellant prays that the disallowance on account of provision for medicare expenses debited to Profit and Loss Account ought to be deleted. 16. On the facts and in the circumstances of the case, and in law, the Ld. AO/Ld. DRP erred in not granting an enhanced deduction under Section 10AA of the Act based on the disallowances made in the Assessment Order. The Appellant prays that an enhanced deduction under Section 10AA of the Act on the disallowances made by the Ld. AO ought to be granted to the Appellant. 17. On the facts and in the circumstances of the case, and in law, the Ld. AO/Ld. DRP erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the penalty proceedings ought to be dropped. 23. The learned Authorized Representative f .....

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..... eal No.9 and following the same parity of reasoning, we direct the Assessing Officer to apply the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. (supra). 30. The issue raised vide ground of appeal No.17 is against initiation of penalty proceedings under section 271(1)(c) of the Act is premature and the same is dismissed. 31. Now, coming to ground of appeal Nos.1 to 8 raised by assessee against transfer pricing adjustment. 32. The learned Authorized Representative for the assessee in this regard pointed out that in case ground of appeal No.2 raised by assessee is adjudicated in favour of assessee, then the other issues would become academic in nature. 33. The assessee was engaged in providing Design Engineering Services to its associate enterprise. The revenue in AE segment was ₹ 295 crores and in non-AE segment was ₹ 467 crores; hence, total revenue earned by assessee was ₹ 764 crores. In the TP study report the assessee had benchmarked the said transactions on entity basis, wherein the margins of assessee were 27.99%. The assessee had selected five concerns as comparables and had declared its international transactions t .....

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..... he assessee has shown PLI at 27.99%. The assessee had applied data of three years of comparables and had declared that its international transactions were at arm's length. The TPO however, asked the assessee to apply data of contemporaneous period. However, the TPO also came to the conclusion that none of concerns selected by assessee were functionally comparable. The TPO thus, carried out fresh search and selected two concerns i.e. Eclerx Services Ltd. and Tata Elxsi Ltd. as comparables whose mean margins worked out to 45.19%. Another aspect noted by the TPO was the segmental information submitted by assessee, as per which the assessee had declared PLI at 54.39%. However, submissions of assessee were not found acceptable, since the assessee had submitted segmental details, only in response to final show cause notice issued. Accordingly, the Assessing Officer computed adjustment in respect of Design Engineering Services and made an upward adjustment at ₹ 25.88 crores. The Assessing Officer issued draft assessment order, against which the assessee filed objections before the DRP. The DRP noted modified filters applied by the TPO and functional comparability of comparables .....

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..... ults at entity level. Where the assessee has provided segmental information which is also audited in the case of assessee, though filed during TP proceedings / DRP proceedings but the same cannot be brushed aside on the ground that the assessee in the TP study report has worked out the margins at entity level. In this developing scenario of transfer pricing, it is necessary to implement and apply the law as it develops. Merely because the assessee had in the TP study report applied margins at the entity level, it cannot be precluded from furnishing segmental details during TP proceedings or DRP proceedings in order to benchmark the margins of its international transactions on the basis of segmental profitability of AE segment. The fact which needs to be kept in mind is the turnover of assessee, which in the AE segment was ₹ 295 crores and in non AE segment was ₹ 467 crores i.e. out of total revenue of ₹ 764 crores, only ₹ 295 crores was attributable to AE segment. We find no merit in the orders of authorities below in benchmarking international transactions on entity level. Accordingly, we accept the plea of assessee that segmental details are to be adopted .....

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