TMI Blog2020 (9) TMI 1098X X X X Extracts X X X X X X X X Extracts X X X X ..... s required as evident from the various case laws referred by the DRP. Assessee itself being the tested party cannot adjust its profits without ensuring corresponding adjustment in the result of comparables. As regards the one-time technical assistance fee for Chennai Metrorail project is concerned, we find ourselves in agreement with the TPO that it is very much normal business expenditure of the assessee and same cannot be said to be extraordinary. Assessee s submission that it was Assessing Officer s duty to bring the details of adjustment required in comparables is totally unsustainable as the initial duty in this regard is cast on the assessee. The assessee has miserably failed in discharging this initial duty. Accordingly, in our considered opinion, the adjustment sought by the assessee in this regard has rightly been disallowed by the authorities below. Adjustment, if any, must be made only in respect of international transactions pertaining to Transport segment of the assessee and not the segment as a whole. In our considered opinion, the above is also a sound and consistent proposition and we are of the considered opinion that the same should be applied for the cur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard to uphold the computation at Nil by the TPO fails in view of our discussion herein above. Addition of unpaid service tax payable on the receivables not collected by GEPIL as on 31 March 2010 - whether AO erred not allowing deduction of service tax paid till 30 September 2010 i.e. due date of filing ROI? - HELD THAT:-This issue is covered in favour of the assessee by the ITAT decision in the case of G.E. Power India Ltd.[ 2019 (6) TMI 1526 - ITAT MUMBAI] wherein a delete the disallowance made by the assessee under section 43B. Addition of TPA to the book profits for the purposes of section 115JB - Whether book profits of a company cannot be adjusted except as provided in Explanation 1 of Section 115JB(2), and transfer pricing adjustment is not one of the classes of adjustments provided in that Explanation? - HELD THAT:- We find that this issue is to be decided in favour of the assessee on the touchstone of Hon ble SC decision in Appollo Tyres [ 2002 (5) TMI 5 - SUPREME COURT] and several decisions of Hon ble Bombay High Court, following the same, wherein it is held that no adjustment in book profit is to be done unless mandated in the Act. Since, the Act in Explanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.78 crores Under-recovered selling administrative expenses 2013-14 4.70 crores Under-recovered selling administrative expenses 2014-15 3.39 crores Under-recovered selling administrative expenses 2013-14 2.36 crores One time technological fee of Chennai Metro The assessee company is a part of the Alstom group, which was headquartered in France. The assessee is now GE Power India Ltd. In assessee's Transfer Pricing proceedings, the Transfer Pricing Officer (TPO) had made adjustments in respect of Transport segment and Power segment. In the Transport segment, the assessee has aggregated all the transactions pertaining to the segment and has applied Transactional Net Margin Method (TNNM) to benchmark the international transaction. During his examination, the TPO observed that while working out the margin in Transport segment, the assessee has wrongly added to operating profits the following items :- i) Extraordinary overheads production cost; ii) Extraordinary overheads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect the price, cost or transaction, no comparable adjustment are required. However, in case the differences between the international transactions and uncontrolled comparable are significant, but reasonable accurate adjustment can be made to eliminate the differences then, comparable adjustments are required. 3.12 In this case, TNM Method has been adopted for which reference can be made to Rule 10(B)(1)(e) of the Income Tax Rules. The TNM Method described in the Rule as five sub-clauses and reference is invited to sub-clause (iii), which especially refers to adjustments. According to the Rule, the profit arising in comparable uncontrolled transaction has to be adjusted to take into account the differences, if any, between the international transaction and comparable uncontrolled transaction or between the enterprises entering into such transaction, which could materially affect the net profit margin in the open market. 3.13 The comparability adjustment under the TNM Method, taking into account the Rule 10B(3) and Rule 10B(1)(e), has been subject matter of consideration and interpretation by the Tribunal in various decisions. Thereafter, the DRP referred to certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is necessary to eliminate cost/expenditure in respect of extraordinary items, non-recurring events which are extraordinary in nature. She further referred to the guidance note issued by the Institute of Chartered Accountants of India (ICAI) for the definition of the term extraordinary item and operating profit . She submitted that, accordingly, expenses of non-recurring and/or extraordinary nature are to be excluded at the time of computing the operating profit. She submitted that one-time technological assistance expense was incurred in connection with a specific requirement of Chennai Metrorail project as the entire manufacturing unit required a technological upgrade and, therefore, such expenditure is to be treated as an extraordinary expenditure and non-recurring in nature. As regards the under-recovered selling and trading overheads, she submitted that these are extraordinary expenses. She submitted that the detailed reason for the same has been provided. She submitted that despite assessee providing all the necessary details, the authorities below have not accepted the same. In this regard, she placed reliance upon the case law from Hon'ble Apex Court for the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no such disclosure of extraordinary items in the assessee s financial accounts. Further, the learned Departmental Representative submitted that the assessee being a tested party is not permitted to make adjustment in its book profit on account of capacity utilisation etc. since as per the Rules, adjustment, if any, can be made to the results of the comparables to bring it to the level of efficiency or inefficiency of the tested party. For this proposition, he placed reliance upon several case laws. The learned Departmental Representative further submitted that, to allow any adjustment to the comparables under transfer pricing studies, initial duty has been cast on the assessee to demonstrate with proper details manner and methodology of absorption of such overheads by comparable selected. He submitted that assessee has failed to provide such data and details to the TPO. He further submitted that it is undisputed fact that the international transactions constitute only a small portion of the total business of the Transport segment. In such circumstances, the adjustment in Transfer Pricing study, as claimed by the assessee, cannot be allowed at entity level. The learned Departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tudy is clearly an afterthought devoid of cogency. The learned counsel of the assessee s submission that it was Assessing Officer s duty to bring the details of adjustment required in comparables is totally unsustainable as the initial duty in this regard is cast on the assessee. The assessee has miserably failed in discharging this initial duty. Accordingly, in our considered opinion, the adjustment sought by the assessee in this regard has rightly been disallowed by the authorities below. However, we agree with the submission of the learned counsel of the assessee that Hon'ble Bombay High Court in the case of assessee itself and the ITAT also in assessee's own case have held that the adjustments have to be made with regard to the transactions of the AE and not at the entity level. (CIT Vs. Alstom Projects I. Ltd. (88 Taxman.com 465), Bombay High Court upheld the order of the ITAT for A.Y. 2006-07 in ITA No. 8670/Mum/2010) Furthermore, we note that in assessee s own case, the DRP for assessment year 2009-10 and 2010-11 has held that adjustment, if any, must be made only in respect of international transactions pertaining to Transport segment of the assessee and not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate 1 Ocean Equipments Manufacturing and Sales Company 15.00% 2 Parker Hannifin corporation 16.67% 3 Aspect Systems 9.75% 4 Aspect Systems, Incorporated 6.00% 5 Benthos Inc 6.00% 6 Blue Industries 7.25% 7 Ocean Equipments Manufacturing and Sales Company 10.00% 8 Hardings INC 12.00% Assessee claimed that since the arithmetic mean of royalty rates of comparable agreements are 10.30% is higher than royalty rate of 4.00% / 7.00%, the payment of royalty paid by the assessee is at Arm s length. 2) Comparable analysis of trademark Royalty agreements : In this connection, the assessee submitted following four comparable agreements and royalty rates : S.No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate method. 6.14 In this regard, the decision of the five member Special Bench of ITAT Bench in the case of Aztech Software Technology 294 ITR (AT)(32)(Bang)(SB) is found to be highly relevant. 133. Having regard to the statutory provisions, particularly the mandate of sections 92(1) and 92D read with relevant rules, we hold that it is obligatory on the part of the taxpayer to furnish information relating to controlled international transactions, select a suitable method for determination and furnish ALP of such international transactions carried by it and give basis and supporting authentic evidence of ALP and adjustments made. The taxpayer has further to cooperate in the determination of the ALP by the tax authorities by furnishing all relevant information. The tax authorities in cases where they are of the opinion that ALP has not been correctly determined by the taxpayer, can substitute their own ALP on the basis of material or information furnished by the assessee or collected by them. However, such ALP has to be determined having in mind provisions of sections 92 and 92C and other rules and regulations. While determining ALP, tax authorities are bound to fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aceuticals (India) Pvt Ltd 44 SOT 391 (Mum), it was held by the Bench that there cannot be a case where no method can be applied to the transaction. Even if all the methods are considered inappropriate, the method which is less inappropriate is to be applied. 6.16 The method of carrying out the exercise of determination of arm's length price of a transaction has been very lucidly brought out by the bench in the case of Bayer Material Science (P.) Ltd. [2012] 18 taxmann.com 60 (Mum.) where in the Bench has elaborated that: (i) As the assessee knows the nature of its business well, it is he who always has the prerogative of choosing the comparable cases. (ii) Once the assessee has chosen the comparable cases, then it becomes the duty of the TPO to find whether these cases are, in fact, comparable or not. If he finds that the cases given by the assessee are comparable on the basis of FAR analysis, the matter ends. He will accept them and then determine the average profit. (iii) If the TPO is not satisfied as to the comparability of some of the cases given by the assessor, he will exclude such cases from the final list of comparables, after giving cogent reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... succeed in getting suitable comparables from the assessee, then it is his duty to either get his own comparables or make necessary adjustments to the comparables filed by the assessee and ensure that the task of determination of arm's length price is completed satisfactorily. He cannot just wash his hands off by claiming that the assessee has failed to produce proper comparables and hence the arm's length price cannot be determined. We find ourselves in full agreement with the above said proposition of the DRP. Accordingly, we are of the considered opinion that the determination of arm s length price as Nil by the TPO is not at all sustainable. The assessee had duly provided the details, agreements and comparables. If the TPO is not in agreement to the same, the onus now shifts to the TPO to make the computation of arm s-length price as per the Rules and law. As rightly pointed out by the DRP, the TPO cannot wash his hands of the statutory duties thrust upon him. For the Assessment Year 2013-14, the DRP accepted the rate of royalty for trademark at the rate of 1% as under :- 6.21 ...................It is seen that the assessee has entered into two type of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. The other method of determination of ALP is defined in Rule 10AB as under:- 10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.] Examining on the touchstone of above, we note that the method applied by the DRP doesn t fall in any of the methods prescribed in the Act or the Rule. The method applied by the DRP doesn t even fall under Section 92C(1)(f) as the other method defined in Rule 10AB describes the other method to be any meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter should be remanded to them is not at all sustainable as we find that assessee has duly submitted the comparables and agreements and if the authorities below rejected the same, but failed to follow the prescription of Act, the duty cast upon them, the assessee cannot be put through the rigours of 2nd round of litigation without any fault of its own. In this regard we draw support from the above decision from Hon'ble Jurisdiction High Court which confirmed the order by ITAT similar to this case. Accordingly, in the background of aforesaid discussion and precedents, we are of the considered opinion that assessee s grievance of ad hoc determination of arm s-length price for royalty paid by the TPO and the DRP succeeds. Accordingly, the ground raised by the assessee in this regard is allowed. As we have already upheld the DRP action of sustaining the 1% rate of royalty for Assessment Year 2013-14 for the trademark, the Revenue s grounds against the DRP direction, in this regard to uphold the computation at Nil by the TPO fails in view of our discussion herein above. Another issue raised is that DRP/AO erred in adding unpaid service tax payable on the receivables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n making an addition of the transfer pricing adjustment to the book profits of the Appellant for the purposes of section 115JB of the Act, without appreciating that book profits of a company cannot be adjusted except as provided in Explanation 1 of Section 115JB(2), and transfer pricing adjustment is not one of the classes of adjustments provided in that Explanation. (2012-13 ₹ 59.27 crores). Since the aforesaid additional ground is a legal issue we admit the same on the touchstone of Hon ble Supreme Court decision in the case of National Thermal Power Co. Ltd. vs Commissioner of Income Tax on 4 December, 1996 (1998) 229 ITR 383. We find that this issue is to be decided in favour of the assessee on the touchstone of Hon ble SC decision in Appollo Tyres (2002 255 ITR 273) and several decisions of Hon ble Bombay High Court, following the same, wherein it is held that no adjustment in book profit is to be done unless mandated in the Act. Since, the Act in Explanation (1) of section 115JB(2) does not provide for any such adjustment, this issue is decided in favour of the assessee. Another ground is that AO erred on facts and in law, in making an addition of the four-fift ..... X X X X Extracts X X X X X X X X Extracts X X X X
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