TMI Blog2021 (11) TMI 1059X X X X Extracts X X X X X X X X Extracts X X X X ..... m the comparable price also to arrive at correct PLI. Accordingly, we remit the issue to the file of AO for fresh consideration. Adjustment for foreign exchange fluctuations - Higher Import Content of the assessee vis- -vis comparable companies - This issue was also considered by the Chennai Tribunal in the case of Gates Unitta India Company (P.) Ltd [ 2017 (4) TMI 1585 - ITAT CHENNAI] direct the TPO to provide considerable exchange fluctuation adjustment while determining the ALP. Accordingly, this issue is remitted to the file of the TPO for determining the ALP after considering the above three components i.e. customs duty adjustment, air freight adjustment and foreign exchange fluctuation adjustment. Treatment of amortisation of goodwill as operating expenditure - HELD THAT:- As relying on ST-ERICSSON INDIA PVT. LTD. VERSUS DCIT, CIRCLE 24 (2) , NEW DELHI AND VICE-VERSA [ 2018 (7) TMI 1903 - ITAT DELHI] as held mortization of goodwill is an extra ordinary item and is not pertaining to the regular operation of the assessee, and hence non-operating in nature - issue decided in favour of assessee. Adjustment, if any, should be restricted to proportionate value of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich provision amount is arrived at. The assessee follows the specific methodology of creating provision for warranty consistently over the years. The said methodology has been submitted before the AO during the course of assessment proceedings. It creates provision for warranty on a scientific basis. We direct the AO to examine the assessee s past record and allow the provision for warranty in the same proportion as compared to the sales as in the earlier assessment years.For this purpose, the AO may consider the data of the immediate past five assessment years and decide the issue accordingly. Disallowance of annual licence fee - AO disallowed the same contending it to be capital in nature and also that it is not a genuine expenditure while passing the draft order, on the contention that no evidences were submitted supporting the same - HELD THAT:- The claim of the assessee regarding the expenses being for annual licence fees has not been examined at all and that the details / evidences submitted by the assessee before the DRP has not been admitted for consideration, we deem it appropriate to follow the order of the Co-ordinate Bench of this Tribunal in the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dditions on account of disallowance of provision for warranties and R D expenses. 6. Aggrieved, the assessee filed its objections before the DRP which, vide its directions dated 30.12.2016, partly accepted the assessee s contentions with regard to the TP adjustments made by the TPO were concerned. As regards provision for warranty, the DRP allowed the expenses to the extent incurred by the assessee of Rs. 2,62,34,907/- and R D expenses to the extent of Rs. 26,39,28,539 as a deduction on the ground that the same has been considered a part of the operating cost for computing the margin for manufacturing segment. 7. Pursuant to the directions of the DRP, the AO passed the final assessment order dated 31.01.2017 in which the TP adjustment was reworked to Rs. 50,68,91,405/-. Aggrieved, the assessee has preferred this appeal before this Tribunal. 8. Ground Nos. 1 to 3 are general in nature which do not require adjudication. MANUFACTURING SEGMENT 9. Ground No. 4 is that the DRP erred in not granting an adjustment for underutilisation of capacity. 10. The details of the appellant s international transactions are as follows:- Sl. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Cost Rs.539,43,70,000/- Operating loss (Op. Income Op. Cost) Rs.-56,33,10,000/- Net mark-up (OP/OR) -11.66% 11. In the assessee s TP study, the following adjustments were made to the operating cost: costs associated with unutilised capacity. costs on account of high customs duty 12. On making the above mentioned adjustments, the assessee arrived at a margin of 6.34% as against -11.66% arrived at by the TPO. Though the TPO accepted the comparables selected by the assessee, he did not grant an adjustment for under-utilisation of capacity and an adjustment for expenses incurred towards customs duty. The TPO also treated amortization of goodwill as an operating expense while computing the margin of the Appellant. Filters applied by assessee in its TP study: Step Description 1. Companies for which the latest data available was for a period ended prior to 31.03.2010 rejected 2. Companies reporting net sales Rs. 1 crore selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, the TPO imposed the adjustment on an entity level, rather than restricting the adjustment to the proportion of international transactions to total cost in the segment. 15. The DRP upheld the order passed by the TPO holding that the adjustment for unutilised capacity and customs duty was unwarranted and upheld the treatment of goodwill as an operating expense while computing the margin of the assessee. The DRP also did not accept the contention of the assessee that there must be an adjustment to the margin of the assessee on account of foreign exchange fluctuation, on the basis that the treatment by the TPO of foreign exchange loss as non-operating took care of the differences arising on account of foreign exchange fluctuation. The DRP did not also agree with the contention of the assessee that the adjustment, if any, should be restricted to the international transactions of the assessee. The DRP, however, directed that depreciation be considered for the comparable companies at the same percentage of the operating cost as in the case of the assessee. 16. Now we will take up the grounds of appeal which are argued by the assessee before us. Ground No.4 : Capacity util ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justment should be made only to the uncontrolled transaction, that is, comparable companies and not to the 'tested party' whose transaction is being compared. It is submitted that the adjustment can be made either in the case of the 'tested party' or the comparable companies so that the difference which could materially affect the amount of net profit margin is removed. More so, in practical situations there may be absence of reliable data in the case of the comparable companies for which such material difference is to be analysed or examined. In certain cases there may arise some difficulty when the reliable data for particular cost or profit may not be available and, therefore, a reasonable accurate adjustment in the hands of the tested party may throw fruitful result. This view has been upheld by the ITAT in the case of Pangea3 Legal Database Systems Pvt Ltd v ITO reported in [2017] 79 taxmann.com 303 (Mumbai - Trib.). This Tribunal has also allowed adjustments in the case of tested party in the following cases: Skoda India Pvt. Ltd. v. ACIT reported in [2009] 30 SOT 319 (Pune) Kirloskar Motors Pvt. Ltd. v. ACIT reported in [2012] 28 taxmann.com 293 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by this Tribunal in the case of IKA India Private Limited v. ACIT reported in [2019] 101 taxmann.com 276 (Bangalore). It was therefore submitted the adjustment for capacity utilisation as made by the assessee in its TP study be upheld. In the alternative, as submitted above, since the respondent-revenue is well within its powers to call for details from the comparable companies, such course may be adopted and the adjustment be granted. 22. The ld. DR submitted that the DRP relied upon the decision of the Tribunal, Mumbai Bench in Petro Araldite P Ltd. (ITA No.3782/Mum/2011 dated 24.7.2013) and held that allowing depreciation in the case of comparable companies at the same rate of the operating cost (as that of the tested party) would take care of the differences with regard to underutilization of capacity. She submitted that the DRP also relied upon the decision in Haworth India Private Limited (FA No.5341/Del/2010)wherein it was held that the decisions in the case of ACIT vs. Fiat India Pvt. Ltd. [Hon'ble Mumbai Tribunal (ITA No.1848/ Mum/2009)]; Skoda Auto India (P) Ltd. Vs. ACIT [Hon'ble Pune Tribunal (122 TTJ 699)] ; E-Gain Communication (P) Ltd. Vs. ITO [Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing regulations call for an adjustment.to be made in case of material differences in the transactions or the enterprises being compared so as to arrive at a more reliable arm's length price/ margin. While the Indian transfer pricing regulations refer to the adjustments on uncontrolled transactions, however the same has to be read with Rule 10B(3) of the Rules which clearly emphasizes the necessity and compulsion of undertaking adjustments. Hence in case appropriate adjustments cannot be made to the uncontrolled transaction, due to lack of data, then in order to read the provisions of transfer pricing regulations in harmony, the adjustments should be made on the tested party. In the following decisions it has been held that adjustment to the profit margins have to be made on account of underutilization of capacity: (i) In the case of Mando India Steering Systems (P.) Ltd. v. Asstt. CIT [2014] 45 taxmann.com 160/ 149 ITD 284 (Chennai Trib) the Tribunal upheld the contention of the taxpayer for making a suitable adjustment on account of idle capacity for the purpose of margin computation. The relevant extract is reproduced as below: 10. We are of the considered view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilisation adjustment is also supported by the following decision of Bangalore ITAT in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT 12012] 20 tcvcmann.com 715/ 53 SOT 159. Relevant extract of the decision is under:- 15.2 We agree with this contention of the counsel for the assessee. All the comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure. The all consider this fact also while deter mining the ALP and TP adjustments. With these directions, the appeal of the disposed of. 30.1 The reliability and accuracy of adjustments would largely depend of reliable and accurate data. For certain types of adjustments, relevant data for comparables may either not be available in public domain or may not be reliably determinable based on information available in public domain, whereas, it may be possible to make equally reliable and accurate adjustments on the tested party (whose data would generally be easily accessible). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company or any officer thereof, to furnish info, (nation in relation to such points or matters, or to furnish statements of accounts and affairs verified in the manner specified by the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), giving information in relation to such points or matters as, in the opinion of the Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner or the Commissioner (Appeals), will be useful for, or relevant to, any enquiry or proceeding under this Act : 34. In this regard, we find that the Mumbai ITAT in case of M/ s Jt. CIT v. Kiara Jewellery P. Ltd. (2014) 45 taxmann.com 548//2015] 152 ITD 891 (Mum. Trib.) has directed the to obtain the exact details of capacity utilization of comparable companies, if not available in public domain. The relevant extract of the aforesaid decision is as under:- 11. Keeping in view the decision of the Tribunal in the case of Petro Araldite (P) Ltd (supra) laying down the guidelines on the issue of capacity utilization, we consider it appropriate to restore this issue relating to adjustment on account of capacity utilization in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee by this ground is that the DRP erred in not granting adjustment towards custom duty expenses. The assessee has incurred significant customs duty charges which are proportionately much greater than that of the comparable companies leading to a lower profitability for the assessee. The comparable companies have not incurred any significant custom duty expense as they primarily manufacture using materials available indigenously within India. It is submitted that the assessee is still in the process of localizing its manufacturing process. To meet the quality standards and to overcome technological challenges, the assessee imports raw materials from its AEs. Therefore, it becomes necessary for the assessee to import raw materials from its AEs which is not the case for the comparable companies, thus, putting the assessee in a comparative disadvantage vis-a-vis the comparables. The TPO rejected the adjustment sought for the reason that the decision to import is a conscious decision taken by the assessee and in the absence of any external factors, beyond the control of the Assessee necessitating imports, no adjustment can be made. The TPO also observed that the import duty is a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic mean of the margins of the comparables under TNMM takes care of such differences and she further submitted that the adjustments were rejected on the following reasons:- a. Adjustments are to be made to the margins of the comparable companies to account for differences which could materially affect the amount of net profit margin in the open market. In the case of the assessee, it is the business model by which the assessee imports most of its raw materials from its AEs. The assessee company manufactures goods and sells in India out of raw materials procured from its AEs. This import duty is not a onetime cost which would affect the company's margin as an extraordinary event. b. Import duty per se does not call for an adjustment. It requires to be seen whether the import is necessitated by certain factors beyond the control of the assessee company. If it is the normal business model of the assessee to import goods, it is not an extraordinary event affecting its margin. c. The higher percentage of import content in the assessee's production is a conscious decision taken by the assessee keeping in mind all commercial considerations including the obvious benefits o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal in the case of Skoda Auto India p Ltd 122 TTJ 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that,- No doubt , a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd.'s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of E-Gain Communication (P) Ltd. (supra) the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect . We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO for fresh adjudication in the light of our above observations. 38. The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of Rule 10B of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto.' Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP.' Hence, to bring uniformity, the customs duty was to be eliminated from the comparable price also to arrive at correct PLI. Accordingly, we remit the issue to the file of AO for fresh consideration. 31. In view of the above finding of the Tribunal in Gates Unitta India Company (P.) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in Euro, USD and Yen. While accounting, the same is converted to INR based on the foreign exchange rates communicated by the Continental Group. During the relevant years, the INR depreciated considerably vis- -vis most of the other major currencies and imports became costlier for the assessee. The fluctuation in the value of Euro and USD vis-a-vis INR for a 10 year from FY 2008-09 to FY 2017-18 is as under: Financial year Euro to INR rate % depreciation/ appreciation Average depreciation/ appreciation 2008-09 65.45 - (3.95%) 2009-10 67.37 2.94% 2010-11 60.06 (10.85%) 2011-12 66.29 10.37% 10.37% 2012-13 70.03 5.64% 1.42% 2013-14 80.66 15.18% 2014-15 78.15 (3.11%) 2015-16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, the comparable companies who are established players in the automobile market, have negligible import content due to indigenization of materials required for production. The assessee contends that due to stricter quality norms and necessity for adherence to the global quality standards, the assessee had to import from its group affiliates/foreign unrelated suppliers and therefore localisation of such high quality raw materials had not occurred during the assessment year in question due to several factors. In this connection, the assessee s import consumption vis- -vis the imports of comparable companies selected by the TPO and the assessee are as below for the FY 2011-12. 38. The ld. DR submitted that the assessee incurred foreign exchange loss of Rs.284.98 million which is considered by the TPO as non-operating. The TPO has also considered the foreign exchange fluctuation as nonoperating in the case of comparables. This takes care of the differences with regard to foreign exchange fluctuation. Accordingly no further adjustment on this count was required. 39. This issue was also considered by the Chennai Tribunal in the case of Gates Unitta India Company (P.) L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring segment for transfer pricing purposes. 42. It is submitted that for the purpose of net margin computation, only the income and expenditure in connection with the business operations of the company is to be considered. In the present case, goodwill has resulted on account of an extra-ordinary circumstances involving merger of an automotive components business of Seimens Limited and amortization of goodwill is due to such extraordinary circumstances. Hence, amortization of goodwill should not be considered as operating expenses. Detailed submissions in this regard are placed at pages 224-225 and 1604 of the paperbook. 43. Reliance in this regard is placed on the decision of the Delhi Bench of this Tribunal in ST Ericsson India Pvt Ltd v. DCIT (order dated 03.07.2018 in ITA No. 609/Del/2015) where it was held that amortization of goodwill is an extraordinary item and is not pertaining to the regular operations of the assessee, and hence non-operating in nature. 44. The ld. DR submitted that the DRP has already held that depreciation of the comparables should be brought to same rate of depreciation of the operating cost of the assessee company and the same cannot be fault ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. It was submitted that the mandate in Chapter X of the Act is only to re-determine the consideration received or given to arrive at income arising from an International Transaction with Associated Enterprises. In respect of transactions with non-AEs, Chapter X of the Act has no role to play and therefore to make an adjustment including the non-AE transactions is erroneous and contrary to the provisions of the Act. Reliance is placed on the following decisions in support of the above contention of the Appellant: IL Jin Electronics (I) (P.) Ltd v. ACIT reported in [2010] 36 SOT 227 (DELHI) M/s Tupperware India Private Limited (ITA No. 2140/Del/2011 and 1323/Del/2012) IKA India Private Limited v. ACIT reported in [2019] 101 taxmann.com 276 (Bangalore). CIT v. Alstom Projects India Limited reported in [2017] 88 taxmann.com 465 (Bombay) Alstom Projects India Limited v. CIT reported in [2013] 36 taxmann.com 130 (Mumbai - Trib.) CIT v. Thyssen Krupp Industries (P) Limited reported in [2016] 70 taxmann.com 329 (Bombay) Claas India Pvt. Ltd., - ITA No.3883/Del/2010 CIT v. Petro Araldite Pvt. Ltd reported in [2018] 93 taxmann.com 438 (Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NMM as the most appropriate method applied by the assessee with regard to the manufacturing segment. The TPO has also accepted the comparables selected by the assessee. He only modified the margin based on the use of data relevant to the financial year. The following international transactions are part of operating cost and operating revenue, with regard to the manufacturing segment:- Operating cost Purchase of raw materials and components 77,90,18,698 Technical knowhow 43,08,67,934 Research and development licence fees 26,39,28,539 Payment towards services availed 56,66,07,292 TOTAL 204,04,22,463 Operating revenue Sale of automotive components 21,77,46,807 52. Thus, in the manufacturing segment, the international transactions related to the expenses are to the extent of 204,04,22,463 and in respect of revenue are to the extent of 21,77,46,807. The object of applying the TNMM at the manufacturin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices segment. 56. Application for admission of additional ground is filed submitting that this ground was raised in ground No.7 in the manufacturing segment before the lower authorities and the Tribunal, however, due to oversight the same was not raised specific to services segment, which is a bona fide mistake and the same may be admitted. We have considered the rival submissions, perused the record and are of the view that the additional ground now raised before us requires no fresh investigation into facts and is borne out of material available on record. Accordingly, following the Hon ble Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), the additional ground is admitted for adjudication. 57. Now we take up ground No.7 along with additional ground 24(a). It is submitted that the TPO, whilst computing the margin of the assessee for the services segment, treated amortization of goodwill as operating in nature and consequently computed the margin for the segment as 5.31% as against 8.35% computed by the assessee in its TP study. As stated above whilst dealing with ground no. 7 under the manufacturing segment, it is submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucts which are developed in-house such as Unitrax and Accurusi. The company has also incurred significant expenses in foreign currency amounting to 40.38% of its total expenditure which suggests that is engaged in provision of onsite services. Hence, it operates on a business model different from that of the Appellant and is thus incomparable to it. It is further submitted that L T is functionally not comparable as it is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles and intellectual property rights. L T has been consistently excluded from the final list of comparables in the cases of assessees similar to the Appellant Accordingly, the Appellant submits that the company is a product company having significant intangibles and is thus not comparable to captive software service providers such as the Appellant. Detailed submissions in this regard are made at pages 320-327and pages 642-645 of the paperbook. He submitted that the DRP, however, failed to properly appreciate the assessee s submissions in this regard and thereby upheld its inclusion in the list of comparables. 64. Reliance in this regard is placed on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal held that the provision for doubtful debts is to be considered as nonoperating in nature because it is only a provision. While working out the operating profit, only items of receipts and expenditure, which have direct relation for determining the profit have to be taken into account. In the case of Four Soft Ltd. vs. Dy, CIT [2011] 142 TTJ 3581[2012] 16 ITR (Trib.) 73 (Hyd.). Therefore, there is no error in considering such provisions as nonoperating in nature. However, with regard to reduction of foreign exchange loss of Rs.28,11,75,063 and 'interest and finance expenses' of Rs.7,68,51,641 from the operating expenses of Rs.2340,08,18,255, it was pointed out that from the following extracts of the statement of P L account that the operating expenditure does not include Finance cost (including foreign exchange loss) which is provided in Note P(i) and P(ii) of the Annual Report:- EXPENSES Employee benefit expenses O(i) 17,700,804,103 Operating expenses O(ii) 2,233,789,603 Sales, administra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. In addition, during the year under consideration, Persistent acquired the software marketing and development business of a company based in France which contributed to its strategic thrust in the life sciences and healthcare markets and helped expand its business for which no adjustment can be made to eliminate the material effects of the said differences between it and the assessee. Further, during the year under consideration, two of the company s subsidiaries viz., Persistent eBusiness Solutions Ltd. and Persistent Systems and Solutions Ltd merged with the company which are peculiar to this company during the year. Detailed submissions in this regard are made at pages 330-340 and pages 645-650 of the paperbook. 70. Reliance in this regard is placed on the decision of this Tribunal in EMC Software and Services India Private Limited v. ACIT ITA 523/Bang/2017 (Order dated 03.07.2019) wherein the company was excluded from the final list of comparables. Reliance is also placed on the decision of this Tribunal in CGI Information Systems Management Consultants (P.) Ltd. v. ACIT (reported in [2018] 94 taxmann.com 97 (Bangalore - Trib.) and PCIT v. Cash Edge India P. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to only 2.54% of the operating profit of 217.32 crores computed by the TPO. Accordingly, we do not find any infirmity in selection of the above company as a comparable. 73. With regard to erroneous computation of margin, the ld. DR submitted that the TPO has considered provision for bad debts and provision for doubtful debts as non-operating in nature In this regard, our direction with regard to L T Infotech Ltd. is equally applicable. The TPO has also considered the foreign exchange fluctuation as non-operating, in respect of which the directions have been issued in paragraph No.2.3 of the DRP order. 74. These comparables i.e., L T and Persistent were considered as not comparable in the case of CGI Information Systems Management Consultants (P.) Ltd. v ACIT, 94 taxmann.com 97 (Bangalore Trib.) wherein it was held as under:- 29. We have considered the rival submissions. In the case of Agilis Information Technologies India (P.) Ltd. (supra), this Tribunal considered the comparability of the 3 companies which the Assessee seeks to exclude from the final list of comparable companies chosen by the TPO. The functional profile of me Assessee and that of the Assessee in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two companies from the final list of comparables. Inclusion of comparables 76. Vide ground No.21, the ld. AR submitted that the assessee seeks inclusion of Akshay Software Technologies Ltd., Evoke Technologies Ltd and Technosoft Engineering Projects Ltd. Akshay Software Technologies Ltd. 77. It was submitted that this company was proposed by the assessee as an additional comparable before the TPO and came to be rejected on the basis that the company s functions are more in the nature of IT Enabed Services [ITeS]. The exclusion of this company came to be upheld by the DRP on the basis that the company is engaged in professional services and ERP services and segmental details for the same were not available. In this regard, the ld. AR submitted that firstly, perusal of the functions of the company listed in its annual report shows that the company is functionally similar to the assessee. Akshay is primarily engaged in provision of software development services. It derives 99.74% of its income from provision of software services. The website of the company states that the company is engaged in rendering IT services, which are in the nature of SWD and caters to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment company for the simple reason that it is a skill oriented business. The skill-set required for the employees in the case of the assessee, required knowledge of Arabic also, making it all the more scarce. In any case, for A.Y. 2009-10, M/s. Akshay Software Technologies Ltd. was considered as a proper comparable and not excluded. In his order dated 07-1-2015 for A.Y. 2009-10, after applying the onsite revenue filter of 50%, TPO himself had considered M/s. Akshay Software Technologies Ltd., as a proper comparable. As to the argument of the Ld. DR that Related Party Transaction, volume of M/s. Akshay Software Technologies was not provided by the assessee, leading to its rejection, we find that assessee had at paras 5.172 and 5.173 of its objections before DRP, submitted that RPT of the said company was 4.33% only, compiling the figures from previous years data available in Annual Report of Financial Year 2010-11 of the said company. This working stands unrebutted. We are, therefore of the opinion that the assessee has to succeed in its claim that M/s. Akshay Software Technologies Ltd, is a proper comparable. We direct the TPO to include the said company as a comparable along ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Computer Software designing activity and other allied services during the year therefore Maintenance of cost records Under Section 209(1)(d) of the Companies Act, 1956 is not applicable to the company. [100200] Statement of profit loss Unless otherwise specified all monetary values are in INR 1.4.2010 to 31.3.2011 1.4.2010 to 31.3.2011 Statement of profit loss (Abstract) Disclosure of revenue from operations (Abstract) Disclosure of revenue from operations for other than finance company (Abstract) Revenue from sale of products Revenue from sale of services 13,31,10,444 11,95,52,334.63 Other operating revenue 1,93,24,552 1,79,90,616 Total revenue from operations other than finance company 15,24,34,996 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the company ought to be included in the final list of comparables. 89. The ld. DR submitted that in addition to the reasons recorded by TPO and assessee failed to contradict the finding of TPO, on perusal of the Annual Report, it is noticed that against the share capital of a small sum of Rs.2,18,180, the reserve and surpluses are to the extent of Rs.14,98,93,187 and borrowings to the extent of Rs.2,55,08,763, which makes the financials of the company unreliable. Also the company offers end-to-end IT services that can be quickly built and deployed to suit their clients unique industry requirements. The company's core IT service include:- Oracle Consulting Service Microsoft Consulting Services Java Consulting Services IT Staffing Solutions QA and Testing Services Mobility Services BPM Consulting Services Open Source Services Big Data Analytics Solutions 90. The above functions are not comparable to the software development services rendered by the assessee and therefore the rejection of the above company from the comparables is to be upheld. 91. We have heard both the parties on this issue and perused the material on rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is as follows:- Customer Name Defect Tata The LED lights are not working Mondo (Glovis) There is a flux issue in the Electronic Controller Unit for steering Ford Cracks found on the top crystal on the visible radius 96. Out of the provision amount of Rs. 7,07,03,390/-, an amount of Rs. 6,33,00,008/- has been actually incurred towards actual warranty claims over a period of the next two years and balance has been reversed. The details of the additional/special warranty provision created during FY 201112 and the actual payments in the subsequent years is available at pages 418-419 of Volume 2 of the paperbook. 97. The movement in provision for warranty as accounted for by the Appellant for the year under consideration is as under:- Particulars General Warranty Specific Warranty Total Opening balance 1,39,86,741 3,02,01,581 4,41,88,322 Provision created ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en submitted before the AO during the course of assessment proceedings. It creates provision for warranty on a scientific basis. 102. Reliance is placed on the following decisions in support of the above contentions: - Rotork Controls India Private Limited [2009] 180 Taxman 422 (SC) Nokia Siemens Networks India Private Limited Vs. CIT[2011] 14 Taxmann.com 84 (Karnataka High Court); Micro Land Ltd [2012] 18 taxmann.com 80 (Karnataka High Court); Toyota Kirloskar Motors (P.) Ltd. v CIT[2013] 30 taxmann.com 294 (Karnataka High Court); Hewlett Packard India Sales (P.) Ltd. v CIT[2014] 49 taxmann.com 166 (Karnataka High Court); Motor Industries Co. Ltd. v CIT[2015] 55 taxmann.com 377 (Karnataka High Court); Denso Kirloskar[2013] 34 taxmann.com 238 (Karnataka High Court); Ericsson Communications Pvt. Ltd v CIT[2009] 318 ITR 340 (Delhi High Court). 103. Based on the above discussion, the ld. AR submitted that the expenses incurred by it towards warranty expense are allowable under section 37 of the Act. In assessee s own case for AY 2009-10 and AY 2010-11, the DRP directed the AO to delete the disallowance in respect of provision for warranty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount in INR Particulars General Warranty Specific Warranty Total Opening balance 13,986,741 30,201,581 44,188,322 Odd: Provision created during the year (debited to P L A/c) 7,664,521 70,703,390 78,367,911 Less : Actual warranty claims - - (26,234,907) Closing balance 96,321,326 106. She further submitted that, however, the DRP noticed that in all the above assessment years, the actual expenses incurred has been allowed, but the Assessing Officer, in the draft assessment order, has not even allowed the actual expenditure incurred during the year and also no reason has been given for not allowing the same. Hence the DRP directed the Assessing Officer to allow the actual expenses incurred during the assessment year. 107. We have heard both the parties and perused the material on record. This issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assesseecompany for meeting the liability incurred by it under the gratuity scheme would be entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability. The same principle is laid down in the judgment of this Court in the case of Bharat Earth Movers (supra). In that case the assessee-company had formulated leave encashment scheme. It was held, following the judgment in Metal Box Co. of India Ltd.'s case (supra), that the provision made by the assessee for meeting the liability incurred under leave encashment scheme proportionate with the entitlement earned by the employees, was entitled to deduction out of gross receipts for the accounting year during which the provision is made for that liability. The principle which emerges from these decisions is that if the historical trend indicates that large number of sophisticated goods were being manufactured in the past and in the past if the facts established show that defects existed in some of the items manufactured and sold then the provision made for warranty in respect of the army of such sophisticated goods would be entitled to deduction from the gross receipts u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO and rejected the assessee s objections in this regard. However, the DRP directed that to the extent of Rs. 26,39,28,539/-, as the same has been considered as part of the operating cost for computing the margin with respect to the manufacturing segment in the TP order, the same could not be disallowed once again u/s. 37. Pursuant to above, the AO has passed the final order as per the directions of the DRP making - a disallowance of Rs. 2,75,76,144/- (Rs. 29,15,04,683/-- Rs. 26,39,28,539/-). 111. In this regard, the Assessee submitted as follows:- Expenditure incurred is allowable under section 37 of the Act: a. Annual License Fee: 112. The assessee incurred Rs. 26,39,28,539/- towards payment of Annual License Fees to its parent company and its sister concern ( Continental Global for short) under the following agreements: Agreement A (page no. 1125 to page no. 1137 of the paper book) The assessee has entered into a License Agreement effective from 1st January 2009 with Continental Automotive GmbH, Germany ( CA GmbH ). Under this agreement, CA GmbH grants a non-exclusive, non-transferable license to use intellectual property owned by it as well as the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntellectual property and/ or technical information owned by the Continental Group. iv. Such payments are made only towards access to technical knowledge and not absolute transfer of technical knowledge or information. v. Such expenses were incurred by the Appellant for increasing profitability relating to products manufactured by the Appellant by applying new methods of manufacture/ technology provided under the aforementioned agreements. vi. The object of the aforementioned agreements was to obtain the benefit of technical knowledge available with the licensors, for running the business of the Appellant. vii. Further, the license fee is calculated as a percentage of sales, hence, it is recurring in nature and there is no enduring benefit derived by the Appellant in this regard. Accordingly the same should be considered as revenue in nature and should be allowed as deduction under section 37(1) of the Act, since it satisfies all the aforementioned conditions. viii. In this regard, reliance is placed on following decisions: Kanpur Cigarettes (P.) Ltd. v. CIT147 Taxman 428 (Allahabad High Court) CIT v. Kirloskar Tractors Ltd [1998] 231 ITR 849 (Bombay HC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. Agreement A - 8 Agreement B - 6.1 to 6.5 Degree of transfer Yes. The scope of the license is only to grant right to use licensed intellectual property. There is no transfer of absolute ownership of any intellectual property. Agreement A - 2.1 Agreement B - 3.1 Nature of royalty Yes. Royalty was paid based on a percentage of net sales as provided in the agreements Agreement A - 5.1 Agreement B - 4.1 116. It is submitted that for the above expenses, the assessee receives a wide array of assistance, services, support and guidance on a recurring basis. It can be said that these royalty payments made are commensurate to the benefits obtained by the Appellant on a year on year basis. The broad key areas of support/ assistance/ service provided by Continental global to Appellant is described below in detail:- Standard Practices: a) Continental global provides access to standard procedures, methodologies, best practices, knowledge updates, etc. relating to manufacturing process of a product. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red drives which facilitate various technical support including: - Sharing of best practices/ standard procedures (discussed above). - Real-time production control and monitoring. - Planning/ forecasting the material and labor requirements. - Survey the customer s demands/ requirements. - Tracking and overall management of the project on real-time basis. - Integration of costing software and accounting software (SAP). b) Various tools like tech.net, prod.net, log.net, camline etc. are provided to the Appellant and some of the key tools in use by the Appellant are discussed below:- Sl. No. Tool Name Tool/ platform description Benefit to Continental India 1 Tech.Net It is a platform which provides access to latest technical information, standard practices, procedures, etc. Tech.Net members possess highest level of education (PHd) and provide support centrally to each location whenever a problem cannot be resolved locally. Appellant uses Tech.net (manufacturing technology network) to gain access to the technical infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial/ resources across the world in a standardized manner, which can achieve economic advantages in terms of obtaining significant discounts. Continental global locates suppliers, seeks samples from them and tests their products. Upon satisfaction about the quality of the product, Continental global provides such information of suppliers located across the globe, to the group. It also negotiates for bulk discounts and set quality standards for the suppliers. This in turn helps the Appellant in procuring quality raw materials at best price without any efforts. Sample email communications demonstrating procurement of raw materials by Continental Global, instructions/solutions on raw material shortage and quality issues are produced before thisHon ble Tribunal under cover of an application for additional evidence. - Provision of designs, procedures and layouts Every product that the Appellant manufactures is unique and complex. Continental global develops and shares its designs, layouts and drawings relating to products, manufacturing process, etc. with the Appellant. The requirement of the customers varies from country to country and therefore, Continental global provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt location across the world. If the issues are highly vulnerable and needs personal monitoring by the experts, the global team send experts to that particular location to address the specific and routine issues and bring down the occurrence of quality incidents. - Other assistance: a) Continental global enters into centralized agreements for procuring certain techniques, technical services. This helps the Appellant to improve the product quality. The aforesaid assistance received from Continental group helps in improving the technological performance of the Appellant s operations in terms of quality and cost and also helps in optimum utilization of resources in an efficient manner. It also creates synergy among the group entities including the Appellant and ensures access to latest technical information. The assessee has filed an application for additional evidence to produce snapshots of various manuals, processes, standard documents and email communications demonstrating the rendering of services under each of the heads specified above. Based on the above, it was submitted that as the present case satisfies the conditions of section 37 of the Act, the license fee pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion commercial expediency of a transaction. Further, entering into agreements for use of intellectual property of the group companies has benefited the Appellant. 5 Sundry creditors increasing are This is a mere remark made by the learned AO without any basis/ conclusion towards the same. However, the Appellant submits that sundry creditors account is a running account and represents payables to third parties/ group entities for goods/ services availed from them. 6 Evidence for deducting the taxes at source not furnished The Appellant submits that it has duly deducted tax at source under Section 195 of the Act, on the payments made/payable to the group companies. 7 No rationale for paying royalty since there are import of raw materials, consumables, and other supplies. The import of raw material, consumable and other supplies from the group companies and payment of royalty are two distinct transactions, and the Appellant has substantiated the business rationale for the payment of royalty through evidences and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en produced in respect of nature of expenses. The A.O. also observed that the R D activities carried out while result in enduring benefit to the assessee. It is also noticed by us from paragraph 10.2 of the draft assessment order that before the assessing officer, the evidences now has been produced before us have not been made available to arrive at a correct conclusion. It is also noticed by us that the similar issue was examined by the DRP in A.Y. 2009-10 and 2010-11. The observation of the DRP-1, Bengaluru for A.Y. 2010-11 as narrated in paragraph 4.3 of the order are reproduced below :- Having heard the assessee and examination of the finding recorded by the Assessing Officer, we examined the records and submissions made by the assessee, the outcome of which is summarized below :- (i) In the profit and loss account, the amount has been debited under the head 'Research Development' , there is nothing on record to suggest that before the Assessing Officer, the alleged license agreement between the assessee and Continental Automotive GMBH, Germany dated 01-01-2009 (hereafter referred as Agreement) was produced, which is further evident from the submission of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re us at this stage, accordingly, the above objections are dismissed. 125. The ld. DR submitted that the factual aspect of the above claim remains the same with one more addition of fact that during the assessment year, the assessee also failed to produce such evidences before the TPO during the TP proceedings and therefore the TPO considered the ALP of such transactions at 'nil'. In respect such payments to the extent of Rs.26,39,28,539, the findings recorded by the TPO and the Assessing Officer, both makes it clear that the expense of Rs.26,39,28,539 are not genuine and therefore not allowable under section 37(1) of the Act, question of allowing such claim under section 35(1) does not arise. At the same time, the DRP disagreed with the finding of the Assessing Officer that the said amount is a capital expenditure and hence was of the view that the question of allowing depreciation under section 32(1) does not arise. In respect of the balance amount of Rs.2,75,76,144 (29,15,04,683 - 226,39,28,539) also, the assessee failed to furnish evidences before the Assessing Officer to establish that the services are actually rendered and therefore such expenses cannot be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot been made available to the AO to arrive at a correct conclusion. The DRP also noted that similar issue was examined by the DRP in Assessment Year 2009-10 and held that where similar disallowance was made for Assessment Year 2009-10 was upheld by the DRP. However, since the evidences were never produced before the AO, the DRP in this year i.e., Assessment Year 201112 declined admission of the evidence produced by the assessee and upheld the addition. 7.2.1 We have considered the rival contentions of both parties and perused and examined the material on record in respect of the issue of R D IT(TP)A No. 457/Bang/2016 IT(TP)A No. 425/Bang/2016 expenses; which is for consideration before us. The assessee has debited these expenses in the Profit Loss Account under the head R D Expenses . However, in its objections before the DRP, the assessee claimed that these expenses are towards annual licence fee for the R D work carried out by the group company, which was used by the assessee. This claim, though not put forth before the AO has been made before the DRP. The DRP, however, declined admission of this claim and also the details / documents filed in support thereof. In doin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee will provide all the details required by the AO for this purpose. The ld. DR of revenue supported the orders of authorities below. 7. We have considered the rival submissions. Regarding ground no. 8 of assessee's appeal, we feel it proper that this issue should go back to the file of AO for fresh decision and hence, we restore this matter back to the file of AO for fresh decision with the direction that the assessee should provide complete details and evidence which may be required by the AO to examine and decide the claim of the assessee. The AO should provide reasonable opportunity of being heard to assessee. Ground no. 8 is allowed for statistical purposes. 7.2.4 In view of the above order of the Co-ordinate Bench of this Tribunal in the assessee's own case for Assessment year 2009-10 (supra), and considering that the claim of the assessee regarding the expenses being for annual licence fees has not been examined at all and that the details / evidences submitted by the assessee before the DRP has not been admitted for consideration, we deem it appropriate to follow the order of the Co-ordinate Bench of this Tribunal in the assessee's own case for Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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