TMI Blog2023 (2) TMI 556X X X X Extracts X X X X X X X X Extracts X X X X ..... capital adjustment being allowed to assessee on actual. We therefore direct the Ld.AO/TPO to provide the working capital adjustment on actuals in accordance with Rule 10B(1)(e) of the Rules. Exclusion of Lumax Automotive Systems Ltd. and Mahle Filter Systems India Ltd. - We note that the instances of comparables shortlisted by the Ld.TPO are basically used in automotive industry whereas assessee is manufacturing filters that are used in pharmaceutical and food processing industries. Although it is correct that while adopting TNMM as the most appropriate method, only profit based comparison is made however, the start point for every comparison is the product which is the subject matter of the international transaction. In the present facts of the case though there is no primary difference in the product being filter however the industry to which the comparables are catering is different with that of assessee and therefore there will be a different economic analysis which would impact the manufacturing activity carried on by the comparables and the assessee. In our view, these comparables cannot be considered as good for assessee as assessee is catering to pharmaceutical ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 passed by the Ld.CIT(A) for A.Y. 2012-13 on following grounds of appeal: GENERAL GROUND 1. The Order of the learned Commissioner of Income Tax (Appeals)-6 (hereinafter referred to as CIT(A)) to the extent prejudicial to the Appellant is bad in law. TRANSFER PRICING - GENERAL GROUNDS 2. The learned CIT(A) has erred in confirming the action of the AO and TPO in: a) Making a reference for the determination of the Arm's length Price of the international transactions to the TPO without demonstrating as to why it was necessary and expedient to do so. b) Not appreciating that there is no amendment to the definition of income and the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X and therefore addition under Chapter X is bad in law. c) Passing the order without demonstrating that the Appellant had any motive of tax evasion. GROUNDS RELATING TO TP ADJUSTMENT IN MARKETING SUPPORT SERVICES SEGMENT 3. The learned CIT(A) has erred in confirming the action of the AO and TPO in making a transfer pricing adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DS RELATING TO TP ADJUSTMENT IN TRADING SEGMENT 9. The learned CIT(A) has erred in confirming the action of the AO and TPO in making transfer pricing adjustment of Rs. 81,59,183/-. 10. The learned CIT(A) has erred in confirming the action of the AO and TPO in: (i) Not considering Resale Price Method as the appropriate method to compute arm's Length price under trading segment; (ii) Considering foreign exchange gain/loss as operating in nature in the case of comparables and the Appellant; and (iii) Not granting working capital adjustment for the trading segment. GROUNDS RELATED TO TP ADJUSTMENT AND RANGE 11. The learned CIT(A) has erred in confirming the action of the AO and TPO in: (i) Not making proper adjustment for enterprise level and transactional level differences between the Appellant and the comparable companies; and (ii) Not recognizing that the Appellant was insulated from risks, as against comparables, which assume these risks and therefore have to be credited with a risk premium on this account. 12. The learned AO and TPO have erred in not allowing the benefit of the +/- 5% range as prescribed in the sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (page 73-76 of Appeal papers) 2 Manufacturing segment for sales to AE Purchase of raw material from AE and sale of finished goods to AE Held at ALP (Para 8.6 on page 76 of Appeal papers) 3 Trading Segment Import of finished goods and sale to third parties in India Rs.81,59,183/- (page 76-77 of Appeal papers) 4 Marketing segment (Commission income) Marketing on behalf of the AE and receipt of commission income Rs. 27.39,376/- (page 68-73 of Appeal papers) 2.2 The assessee has international transactions in four segments. The details of these segments are tabulated below: Particulars Amount in Rs. Import of Raw Materials 5,64,68,056 Import of Finish goods 22,80,97,511 Intent Commission Expenses Reimbursement, cost charged to SSB 3,13,19,832 Validation Expenses, Microsoft License fee Interest on E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 3.20% MEAN 5.08 2.5 The Ld.TPO thereafter by taking foreign exchange loss to be operating in nature, computed the margin of assessee under the AE segment to be 4.4%, however no adjustment was proposed under the AE segment as the margin so computed by the Ld.TPO was within +5% of that of the comparables selected by him. The Ld.TPO noted that in sofar as the manufacturing of sales to non-AE segment, the assessee computed the margin to be (-)6.54% and as this was not at arms length with that of the comparables selected by the Ld.TPO at 5.08% (that pertained to the AE segment), an adjustment was proposed amounting to Rs.12,30,662/- being the shortfall. 2.6 In respect of the trading segment, the Ld.TPO noted that assessee used OP/OR as the PLI to compute the margins of the comparables and had taken foreign exchange gain/loss as the operating. The Ld.TPO noted that assessee had computed the margins of the comparables as 2.92% whereas assessee had computed its margin at (-)4.12%. The Ld.TPO computed the margin of assessee by treating forex gain/loss as operating in nature and thus proposed adjustment at Rs.81,59,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.2 Against this final assessment order, the assessee filed appeal before the Ld.CIT(A). The Ld.CIT(A) gave partial relief with respect to the transfer pricing adjustment however confirmed the disallowance made by the Ld.AO u/s. 40(a)(i) of the Act. 3.3 Aggrieved by the order of Ld.CIT(A), assessee is in appeal before this Tribunal. 4. The Ld.AR at the outset submitted that assessee wish to contest the issues alleged in Ground nos. 3-4, 5(iv), 7(ii), 8(ii), 8(iii), 9-10 and 13-14. Even in the synopsis filed, the Ld.AR has filed submissions only in respect of the above grounds. Accordingly, all other grounds raised are treated as not pressed for the year under consideration by the assessee. 4.1 Before we undertake the comparability analysis, it is sinequa non to understand the functions performed by the assessee under the segments. FUNCTIONS: Manufacturing SSI has the following manufacturing functions with its associated enterprises. The company imports raw materials and consumables from members of the Sartorius Group which are used in designing, engineering, manufacturing Filtration Fermentation systems. The company also import membrane sheets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details, we note that this company is engaged in the media business which is identified as the only and primary business segment of the company. The present assessee before us is not catering to non-AEs for marketing support services as observed from the segmental details and it is a captive service provider in sofar as Marketing Support Service segment is concerned. This company being Cyber Media is into Advertisement of its wide range of clientele that includes advertisement through Magazine. Functionally in our view this company is not comparable with the assessee who is providing Marketing Services to its AE only and the same deserves to be excluded. 5.2 Just Dial Ltd. It is submitted that this company is functionally different with that of the assessee as it operates as internet based local search engine to locate various business concerns. It is submitted that this company has significant intangibles whereas assessee does not own any intangibles. The turnover of this company is said to be 262.02 crores as against the turnover of assessee being 10.73 crores. Assessee has placed reliance on the decision of Delhi Tribunal in case of Corning Technologies India Pvt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilters for pharmaceutical and food processing industries. It is submitted that in case of Lumax Automotive Systems Ltd., this company is engaged in manufacturing various automotive products like Oil/Air filters, Cleaners Elements, Rear View Mirrors, Plastic Moulded Components and other components and parts. 8.2 The Ld.AR also submitted that in case of Mahle Filter Systems India Ltd., deals in various automotive products like Air/Oil/Fuel/Hydraulic Filters, Oil Mist Separators, Air Intake Manifolds and Plastic Engine Components. He thus submitted that both the above comparables are rendering services by manufacturing products which is more used in automotive industry, as against the assessee, that is manufacturing filters for pharmaceutical and food processing industry. 8.3 The Ld.DR submitted that as assessee is using TNMM as the most appropriate method, a broad classification will not prejudice the assessee as the comparables selected by the TPO are also into manufacturing of filters. 8.4 We have perused the submissions advanced by both sides in the light of records placed before us. While carrying out the comparability analysis, similarity of functions is of utmo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arried out in respect of the same to determine the arms length margin under the trading segment. The Ld.DR also agreed to the submissions of the assessee. Based on the joint submission, we are of the opinion that the trading segment of the assessee needs to be denovo analysis by the Ld.AO/TPO by using RPM as the most appropriate method. We also direct the Ld.AO to grant Working Capital Adjustment on actuals based on the details filed. The Ld.TPO is directed to carry out bench marking analysis of the trading segment by considering appropriate comparables and to compute the arms length price of the transaction in accordance with law. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 11. Ground nos. 13-14 are in respect of the disallowance computed u/s. 40(a)(ia). The Ld.AR submitted that during the year under consideration, assessee purchased computer software aggregating to Rs.6,36,784/- on which depreciation was claimed. He submitted that the computer software purchased was capitalized in the books of accounts of the assessee. The Ld.AO however held that assessee has not deducted tax at source and therefore disallowed the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an outgoing expenditure and therefore, provisions of Section 40(a)(i) and (ia) of the Act are not applicable. In the absence of any requirement of law for making deduction of tax out of expenditure, which has been capitalized and no amount was claimed as revenue expenditure, no disallowance under Section 40(a)(i) and (ia) of the Act would be made. It is also pertinent to note that depreciation is a statutory deduction available to the assessee on a asset, which is wholly or partly owned by the assessee and used for business or profession. The depreciation is an allowance and not an expenditure, loss or trading liability. The Commissioner of Income Tax (Appeals) has held that the payment has been made by the assessee for an outright purchase of Intellectual Property Rights and not towards royalty and therefore, the provision of Section 40(a)(ia) of the Act is not attracted in respect of a claim for depreciation. The aforesaid finding has rightly been affirmed by the tribunal. The findings recorded by the Commissioner of Income Tax (Appeals) as well as the tribunal cannot be termed as perverse. In view of preceding analysis, the substantial question of law framed by a bench of this c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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