TMI Blog2020 (1) TMI 1008X X X X Extracts X X X X X X X X Extracts X X X X ..... company namely Rolta India Ltd. cannot be considered as comparable. Accordingly, we reverse the finding of the learned DRP and direct the TPO not treat this company as the comparable for the purpose of working out the ALP of the assessee with respect to the transactions carried out with its associated enterprises. As, we have rejected Rolta India Ltd as one of the comparable, we do not find any reason to adjudicate the issue for the inclusion of Geometric Software Solution Co Ltd. Hence, the ground of appeal of the assessee is partly allowed for statistical purposes. ALP adjustment in relation to Reimbursement of management fees expenses - HELD THAT:- Regarding the ad hoc disallowance of management fee expenses, we note that there is no power under the provisions of the Act which allows to the TPO to make the disallowance on ad hoc basis. As such the law is fairly clear and requires the TPO to determine the arm length price of the international transaction with the AE. As such there is no power available to the TPO to make the ad hoc disallowance while computing the income under the head business and profession. See M/S. FLAKT (INDIA) LTD. (NOW KNOWN AS M/S SOLYVENT FLAKT INDI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We find no infirmity in the direction of the learned DRP in view of the fact that the issue involved is factual in nature. Accordingly we hold that no separate adjudication is required in the given facts and circumstances. Thus, we dismiss the ground of appeal raised by the assessee. - ITA No. 2993/Ahd/2011 - - - Dated:- 22-1-2020 - SHRI WASEEM AHMED, ACCOUNTANT MEMBER And Ms. MADHUMITA ROY, JUDICIAL MEMBER For the Appellant : Shri S.N. Soparkar, Sr.Adv., Ms.Urvashi Shodhan Shri Parin Shah, ARs For the Respondent : Shri Mahesh Shah, CIT-DR ORDER PER BENCH: The appeal has been filed at the instance of the Assessee against the order of Dispute Resolution Panel, Ahmedabad [DRP in short] passed under section 144C(5) of the Act dated 12/09/2011 arising in the assessment order passed under s.143(3) r.w.s.92C and r.w.s.144C of the Act dated 10/10/2011 for AY 2007-08. The assessee has raised the following grounds of appeal: Ground no.1 1.1 On the facts and circumstances of the case the AO following the directions of the DRP erred in making an adjustment of ₹ 2,20,69,862 in relation to determination of Arm's Length Price relating to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the DRP has erred in adding back an amount of ₹ 79,684 being assets costing less than ₹ 5,000 and depreciated fully in the books of account. Your Appellant submits that the said amount formed part of the book depreciation which had already been disallowed by the Appellant in the computation of income. The Appellant craves leave to add, to amend, to alter, to substitute, to modify and / or withdraw all or any of the Grounds of Appeal as they may be advised to do so and to submit such statements, documents and papers as may be considered necessary either at or before the time of hearing of the appeal. The assessee has raised additional ground of appeal vide letter dated 17- 02-2019 reproduced as under: The Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (229ITR 383), it can be raised before the Hon'ble ITAT. 1. Without prejudice to the other grounds in appeal, it is respectfully submitted to exclude the amount of management fee while computing margins of Baroda unit, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was setup in 1999. 3.2. The assessee filed its return of income for the year under consideration dated 08-11-2007 declaring an income of ₹ 29,76,18,120/- which was processed u/s 143(1) of the Act. Subsequently, the case of the assessee was selected under scrutiny assessment. Accordingly the AO referred the case to the TPO. 3.3. The assessee during the year under consideration has entered into various transactions with its related parties as shown in the TP study which are in detailed as under: S.No. Description of the transactions Amount paid (in Rupees) Amount received (In Rupees) 1. Import of raw materials, parts etc. 235766,610 - 2. Import of finished goods for Resale 183,087,977 - 3. Export of valves and valve components - 447,290,344 4. Export of finished goods for Resale - 25,435,903 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used operating profit margin to sales as its PLI. 3.6. Accordingly, the assessee selected 5 comparable after applying the following filters: a) Select valves and pump manufacturing co. b) Exclude the comparable having related party transactions c) Used more than 1 year data d) Sales zero e) Manufacturing sale to sales 90% 3.7. Thus, the assessee determined the operating profit margin @ 9.65% of the comparable cases which was compared with operating margin of it (the assessee) i.e. 15.91%. Thus the assessee claimed its margin on the transactions with the AE is at Arm length and no adjustment in the international transactions with the AE is required. 3.8. However, the TPO was not satisfied with the filters used/ applied by the assessee for determining the ALP. Similarly, the AO was also unsatisfied from the action of the assessee for aggregating the transaction in working out the ALP for the International Transactions with the AE. Accordingly, the TPO rejected the comparable selected by the assessee and conducted fresh search by considering the Baroda and Chennai unit separately and by using the following filters: 1) Only select valves manufacturing co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned about the sales of the spares. 4) The assessee has not submitted any economic analysis suggesting that the comparable selected by him (the TPO) are not acceptable for both unit. It is very clear that proposed comparable may not be exactly similar to the both unit but these are broadly similar. 3.14. Accordingly, the TPO determined the PLI for both the units separately i.e. for Baroda unit PLI computed as 25.88% and for Chennai Unit PLI computed as 23.88%. ( after 2% risk adjustment as discussed above). Thus the TPO has made addition in case of Baroda unit amounting to ₹ 6,70,07,374/- and in case of Chennai unit amounting to ₹ 4,71,42,168/-. 3.15. Aggrieved assessee, preferred an appeal before the Ld. DRP and reiterated the submissions as made before the TPO. However the Ld. DRP rejected the contention of the assessee and confirmed the order of the TPO in part by observing as under: 33. The main issue, apart from the other legal issues which would be discussed later, related to the inclusion of the rejection of the aggregation approach and inclusion of the Asco Pneumatics (India) Pvt. Ltd in the comparables. Both the issues were discussed in detail with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a benefit to another associated enterprise which is balanced to some extent bydifferent benefits received from that enterprise in return. In such situation the enterprises may claim that the benefit received by the respective enterprises should be set-off against the benefit each enterprise has provided as full or part payment of those benefits and only net gain or loss of the transactions needs to be considered. But the assessee's case does not fall- in the ambit of any of the above examples given above. Thus, the Panel is of the view that the aggregation approach would not be the right approach for the TP study as adopted by the assessee. The action taken by the TPO in this respect was appropriate and needs no interference. 34. The other objection was on the inclusion of the Asco Pneumatics (India) Pvt. Ltd in the comparables. The Panel looked into all the comparables. The Panel decided to look into the comparable set adopted by the TPO, and decided to Asco as the same was considered having high margin and so liable to be not included m the set. The comparable is given below: Sr. No. Company name Comparables for Baro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to place new company as comparable either before the AO or appellate proceedings as held by the Bangalore Tribunal in the case of NTT Data global delivery services Ltd reported in 69 taxmann.com 7. 4.3. The learned AR alternatively submitted that the assessee should be allowed proportionate adjustments in the event any adjustment made in the management expenses while determining the ALP. The learned AR accordingly submitted that the DRP in the own case of the assessee for the assessment years 2012-13 and 2013-14 has granted such proportionate adjustments. 4.4. The learned AR further alternatively submitted that the assessee has filed fresh TP study report in line of the search process of the TPO before the DRP but the DRP has not considered the same while adjudicating the issue before it. Accordingly the learned AR prayed before us to remit the matter to the file of the TPO for fresh adjudication after considering the fresh TP report/such filters filed by the assessee before the DRP. 5. On the contrary, the learned DR before us submitted that each assessment year is a different assessment year and the search filters used in one year is not necessary to be used in the anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO to work out the PLI of the assessee after considering the disallowance of the management expenses confirmed by us. In this connection we draw support and guidance from the judgment of Hon ble ITAT Hyderabad in case of TNS India(P) Ltd. Vs ACIT reported in 48 taxmann.com 80 wherein it was held as under: iii) We have considered the submissions of the parties and perused the materials on record. It is the contention of the learned AR that though the TPO has disallowed the payment of management fees by determining the ALP at Nil, but, at the same time, he has considered the same while computing operating margin of the assessee. We are of the view that when the TPO is disallowing the payment of management fees, it cannot be considered for the purpose of computation of operating margin, otherwise, it will amount to double addition. We, therefore, remit this issue back to the file of the AO/TPO to look into this aspect and decide the issue after affording reasonable opportunity of being heard to the assessee. 6.4. In view of the above, we direct the TPO/AO to decide the issue raised by the assessee in the additional ground of appeal in the light of the above stated discussion an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,922/- only without charging any markup. However the assessee suo-moto declared markup amounting to ₹ 1,82,03,035/- equivalent to 11.15% on cost. The assessee in providing these services uses CAD/CAM software and high qualified technical person. 7.5. The assessee applied TNMM method for determining the ALP for such engineering design service provided to AE and used PLI as Return on total cost. Accordingly, the assessee selected 5 comparables and calculated PLI at 11.87%. The details of comparables are available as under: S.No. Name of the Company Data Source Mark-up on Total Cost 1. Ace Software Exports Ltd. P 10.91% 2. Geometric Software Solutions Co.Ltd. P 12.46% 3. Onward Technologies Ltd. P 6.65% 4. Tata Technologies Ltd. P 15.79% 5. Infotech Enterprises Ltd. Seg-P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9/- to the total income of the assessee. 7.10. Aggrieved assessee preferred an appeal before the Ld. DRP and reiterated the submission before the Ld. DRP. However the Ld. DRP partly allowed the appeal of the assessee by observing that the power soft Global solution was a software development company and it was not a suitable comparable. Accordingly the ld. DRP excluded from the set of comparable. Therefore the DRP direct to the TPO/AO compute the ALP accordingly. Being aggrieved by the order of the Ld. DRP the assessee is in appeal before us. 8. The learned AR before us submitted that the margin computed by the TPO in case of ACE software was incorrect. As such the margin adopted by the TPO is 16.32% whereas correct margin is -6.79%. This fact was brought to notice of the learned DRP but the same was not considered by it. 8.1. The learned AR in support of his contention referred the order of Delhi ITAT in the case of Tech books electronics reported in 65 taxman.com 241 where the margin of -6.79% was accepted. 8.2. The learned AR further submitted that the comparable selected by the TPO namely Rolta should be rejected for the reasons detailed under: i. The related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble. The learned AR also claimed that the impugned company is also offering engineering Solution services. Thus the learned AR prayed for the inclusion of this as comparable company. However, the learned AR further submitted that if Rolta is rejected from the set of comparables, then he will not press for the inclusion of Geometric in the list of comparables. 9. On the other hand, the learned DR submitted that the matter for working out the correct margin in case of Ace software can be set aside to the file of the TPO for fresh adjudication. 9.1. The learned DR also claimed that the related party transactions in the case of Rolta is less than 25% and therefore the same should be included. 9.2. The learned DR further submitted that the assessee in the assessment year 2005-06 has offered the margin at the rate of 20.96% and there was no change in the facts and circumstances. Accordingly, the ld. DR claimed that the margin at the rate of 20.96% should also be applied for working out the ALP for the year under consideration. The learned DR vehemently supported the order of the authorities below. 9.3. The learned AR in his rejoinder submitted that the margin in the earlier a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at only the Indian company of Rolta group can be considered as one of the comparable for working out the ALP of the assessee. The consolidated financial statements of Rolta are placed on page no. 603 of the paper book. 10.4. In holding so we also draw support and guidance from the order of Hon ble Mumbai tribunal in the case of Capgemini India Private Limited, ITA no 7861/MUM/2011 dated 28-02-2013 wherein it was held as under: 5.3.3 We first deal with the pleas raised by the ld. Sr. Counsel for using consolidated results for the purpose of comparison of margins. The ld. CIT-DR has pointed out that the four comparables having substantial related party transactions i.e., CG-VAK, Mascon Global Limited, Mastek Ltd. and Patni Computer Systems Ltd. have substantial revenue's from overseas market and, therefore, the consolidated results which have profit from different markets will not be comparable. It was pointed out in case of Mascon Global Limited, 75% of the revenue came from USA, Moscow and UK and in case of CG-VAK 75% of the revenue came from other jurisdictions. In case of Patni Computer Systems Ltd., 61% of the revenue came from USA, UK, Germany and Brazil whereas in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Tyco Flow Control Ote. Ltd. Singapore (TFCA) to receive the Management and marketing services as detailed under: S.No. Type of service Nature of service provided 1. Management fee 1 a IT Department Data Network/Infrastructure consultancy Desktop Hardware/Software consultancy Email Accounts and Access Remote Access (VPN/Dialup) support Technology Infrastructure Consultation 1 b HR Department Strategic Initiatives Provides leadership and partners with business unit in all corporate initiatives/projects Coordinates with the US headquarter and liaison between 5 businesses and the Corporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nthly reporting matters for actual and forecast, quarterly reporting and budgeting Facilitate the Intercompany Intracompany reconciliation process for both segment companies and Tyco companies. Consulting support on improvements to internal controls (documentation, action item evaluation, implementation) and coordinating resources thereon. 2 Marketing fees 2 a ProductManagement Transfer Price Administration Transfer of Technology Increase product penetration Product innovation technology Product benchmarking Expand product applications 2 b Marketing Services Maintain corporate identity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices from its AE then it (the assessee) would have procured the same from third party service provider. 3) These services help in maintaining better internal controls in the company. 10.12 However, the TPO rejected the contention of the assessee and disallowed part of the management fees of ₹ 64,76,711/- being 20% of ₹ 3,23,83,555/- by treating the same as the expenses not required for its business. The TPO further marked-up 10% of these expenses for ₹ 6,47,671.00. Therefore the TPO made the upward adjustment of ₹ 71,24,382/- only. 10.13 Aggrieved assessee preferred an appeal before the Ld. DRP. 10.14 The assessee before the ld. DRP reiterated the submissions as made before the TPO. However the Ld. DRP dismissed the appeal of the assessee by observing that disallowance was made on the basis of the fact rather than any adjustment. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 10.15. The learned AR before us submitted that the assessee has claimed total management fee expenses in the year under consideration amounting to ₹ 4,59,80,354/-only. The ld. AR for the assessee has further filed the brea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on one hand has not furnished the documentary evidence in support of such management fee expenses and on the other hand there will not be any addition for the disallowance of such expenses which is loss to the Government exchequer. 12. We have heard the rival contentions of both the parties and perused the materials available on record. Regarding the management fees of ₹ 1,25,56,602/- we note that the assessee was under the duty to provide the documents as desired by the TPO during the proceedings. But the assessee failed to do so. Therefore, the TPO has made the disallowance of entire expenses. Now the controversy arises whether there is a need to determine the ALP of the impugned expenses which has already been disallowed in the computation of income on account of non-deduction of TDS. 12.1. If we accept the argument of the learned counsel for the assessee, then the impugned expenses will be allowed as deduction to the assessee in the year in which the assessee complies the provisions of TDS. Thus we disagree with the contention of the assessee for not computing the arm length price of such management fees as discussed above. Furthermore, there was no documentary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dhocism permissible in the manner of computation of arm's length price of an international transaction, whereas the action of the Transfer Pricing Officer in considering the arm's length price @10% of the expenses recovered is not only adhoc but it also does not conform to any of the methods prescribed in section 92C(1) of the Act. On this count itself, the action of the TPO is suspect, even if, it is to be understood that the impugned transaction was an international transaction requiring computation of income having regard to its arm's length price. 12.3. In view of the above, we hold that the TPO has erred by making the disallowance on ad hoc basis. Accordingly we delete the addition made by the authorities below. 12.4. We are also conscious to the fact that the assessee in the said facts and circumstances will get double benefit. First of all the assessee did not furnish the basic requirements as desired by the Income Tax Department and at the same time it has not been penalized. But, the provisions of law is supreme which requires that the TPO to determine the ALP of the transactions referred by the AO. The TPO as such cannot make the disallowance on ad hoc b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue raised by the assessee in ground No. 1.4 is that the AO has denied the benefit available under proviso to section 92C(2) of the Act for +/- 5% benefit. 13.4. The assessee during the proceedings also claimed the benefit of +/- 5% range as provided in proviso to section 92C(2) of the Income Tax Act. The assessee in support of the claim refer the press note issued by the Ministry of Finance (Dept. of Revenue) which was released at the time when the TP provision had been brought into the statute i.e. Finance Act 2001. The ministry of Finance through its press release specifically expressed that TP adjustment would not be made where price taken up by the assessee either 5% less or upto 5% more than the ALP determined by the AO. 13.5. The assessee also referred the circular issued by the CBDT vide circular no. 12 dated 23-08-2001 where it was clarified that the AO shall accept the price declared by the assessee if such price does not varied up to 5% less or more than with the ALP determined by the AO. 13.6. However, the AO observed that the price claimed by the assessee is above 5% of the ALP determined in its case. Therefore the assessee does not fall in the proviso as pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the transaction being compared than other datas for period not more than two years prior to such financial year may be used. This issue is covered in favour of the revenue in a catena of cases including the recent decision of Delhi Bench of the Tribunal in the case of M/s.ST Microelectronics Private Limited vs. CIT(A) XX, New Delhi and others (ITA Nos.1806, 1807/Del/2008 and others) dated 30-6-2011, the ITAT stated. Accordingly, in this case the assessee did not show why the multiple year data needs to be sued for determination of ALP. That being so, the action of the TPO is upheld. Being Aggrieved by the order of the Ld. DRP the assessee is in appeal before us. 14. The Ld. AR before us has not advanced any argument on this ground of appeal. 15. Similarly, the Ld. DR before us has not advanced any argument. 16. We have heard the rival contentions of both the parties and perused the materials available on record. We find that during the course of hearing of this appeal, neither the ld. counsel for the assessee nor the ld. D.R. for the revenue have been able to point out any basis or material or criteria to controvert or to rebut the findings and conclusion arrived a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Chennai unit. 16.4. The assessee in the year under consideration has claimed deduction u/s 10B amounting to ₹ 7,14,80,242.00. However the AO disallowed the deduction claimed by the assessee by observing that such deduction in the earlier year assessment year was disallowed by the respective AO. The disallowance made by the AO in earlier year was based on the following points: 1) The Chennai unit had more than 20% old plant machinery which was earlier used for production purpose. 2) The assessee claimed that during FY 2001-02 it had taken plant machinery for Chennai unit on lease from Sakhi Raimondi Valves (India) Ltd. However at the time of assessment of Sakhi Raimondi Valves (India) Ltd, the respective AO has given finding that the Sakhi Raimondi Valves (India) Ltd had transferred the machinery to the assessee on outright purchase. 16.5. In view of the above the AO denied the deduction claimed by the assessee under section 10B of the Act. 16.6. Aggrieved assessee preferred an appeal before the Ld. DRP who confirmed the order of the AO. Being aggrieved by the order of the learned DRP, the assessee is in appeal before us. 17. The learned AR before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under the new provisions will be subject to the following conditions:- (i) That the unit manufactures or produces any articles or things. The term manufacture will include any processing or assembling or recording of programmes on disc, tape, perforated, media or other information storage device; (ii) That the unit has not been formed by the splitting up or reconstruction of an existing business; (iii) That it has not been formed by the transfer to a new business of machinery or plant previously used for any purpose. Unlike the provisions of section 10A of the Income-tax Act, even the existing hundred per cent export-oriented undertakings will be eligible to avail of the tax holiday for a full period of five assessment years in a block of eight years. Therefore, the start point of the limitation for claiming the benefit flowing from section 10B would commence from the year of manufacture or production of the undertaking. If the conditions prescribed in the section are not satisfied in the year of commencement of production, it would not be able to claim such deduction in the subsequent years, unless the said initial test on the date of the starting point has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is regard, the first appellate authority has given a finding of fact that it was not evident from the records that the transaction relating to the machinery constituted outright sale. Likewise, as also simultaneously in the case of M/s.Sakhi Raimondi the first appellate authority has given a clear-cut finding that lease-rentals were received, relevant order of ld.CIT(A) has already been referred supra. Because of these facts and other evidences, such as the agreement, etc. we hereby hold that the AO has wrongly presumed that the transaction in question was a purchase of machinery by Chennai Unit. Because of this finding on facts a conclusion can be drawn that the rejection of deduction u/s.10B was bad in law. 6.2. An alternate plea has also been raised by ld.AR that the machinery which was taken on hire had costed less than the 20% of the total value of the machinery, therefore the impugned restrictive clause of section 10(b) was otherwise incorrectly invoked by the AO. For this proposition case laws cited was CIT vs. Nayyars Minerals Exports Pvt.Ltd. 231 ITR 864 (H.P.). A calculation in this regard has also been furnished; however, at this stage of second appeal no verification ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
