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TMI Blog2023 (2) TMI 556X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 adjustment of Rs. 27,39,376/-. 4. The learned CIT(A) has erred in confirming the action of the AO and TPO in: (i) Considering foreign exchange gain/loss as operating in nature in the case of comparables and the Appellant; (ii) Concluding that berry ratio is not an appropriate PLI in the case of Appellant and adopting OP/OC as the most appropriate PLI; and 5. The learned CIT(A) has erred in confirming the action of the AO and TPO in: (i) Conducting a fresh TP analysis despite absence of any defects in the transfer pricing analysis submitted by the Appellant; and (ii) Selecting inappropriate comparables and selecting companies as comparables even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roper 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 section 92C(2). GROUNDS RELATED TO CORPORATE TAX: 13. The learned CIT(A) has erred in confirming the action of the AO of: (i) Disallowing entire amount of software purchased u/s 40(a)(ia) for non-deduction of TDS without appreciating that software purchased was capitalised and only depreciations was claimed on it; (ii) Not appreciating that the requirement for withholding tax on purchase of software was mandated vide Finance Act 2012 which was not in force when the Appellant complied with TDS provisions; and (iii) Not appreciating that provisions of section 40(a)(ia) are not applicable on assets capitalised and depreciation claimed thereon. 14. The learned CIT(A) has erred in concluding that purchase of software is revenue expenditure without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at, the assessee had bifurcated the segmental details in respect of the services rendered by it to the AE and non-AE as under: Manufacturing segment for sales to other than AE Manufacturing segment for sales to AE Trading Commission Sale to AE 107387170 282,23,683 Sale to 3rd party 44,93,57,154 33,34,39,059 The Ld.TPO noted that the assessee had not made any cost allocation key based on which the expenditure were bifurcated between the AE and non-AE segment. The Ld.TPO also noted that, the assessee considered forex gain /loss as non-operating which was denied by the Ld.TPO. The Ld.TPO thus allocated, the forex gain/loss, proportionately, based on the turnover between manufacturing for sales to non-AE and AE segments and trading segment. 2.4 Further in respect of the manufacturing segment, the Ld.TPO was not satisfied with the companies selected by the assessee. The Ld.TPO noted that assessee had used OP/OR as the PLI and assessee's margin was computed at 2.59%, after taking foreign exchange loss as non-operating in nature, whereas, the comparables selected by assessee had an average margin of 2.57% and therefore it held the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 86% 4 Killick Agencies & Mktg. Ltd. 8.96% 5 Marketing Consultants & Agencies Ltd 10.53% AVERAGE 12.06% 2.8 The Ld.TPO thus proposed following adjustment in the hands of the assessee. Adjustment Reference Amount in Rs Adjustment to Marketing Support service segment Para 7 27,39,376 Adjustment to Manufacturing for sale to non-AE segment Para 8.7 12,30,662 Adjustment to trading segment Para 9 81,59,183 TOTAL 1,21,29,221 3. On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order on 24/03/2016, incorporating the adjustment proposed by the Ld.TPO. The Ld.AO also made certain disallowances being software capitalized u/s. 40(a)(i) of Rs.6,36,784/- for non-deduction of TDS on purchases of computer software. 3.1 The assessee on receipt of the draft assessment order communicated to the Ld.AO regarding its preference to file an appeal before the Ld.CIT(A). Thus the Ld.AO passed the final assessment order on 20/05/2016. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the 92CA order, as well as the Ld.CIT(A) at page 9 has accepted this company to be an advertising company wherein its clients place their advertisements. 5.1.2 The Ld.DR on the contrary relied on the orders passed by the Ld.CIT(A). 5.1.3 We have perused the submissions advanced by both sides in the light of records placed before us. We note that assessee under the marketing support service segment, is rendering services to its AE based on commission. The Ld.AR submitted that the company Cyber Media (India) Ltd. is providing services of placing advertisement including sale of magazines. This fact is clear from the annual reports at note 20.1 that is placed in the paper book. We also note that there is a bifurcation of income earned by this company from sale of products and sale of services. Assessee before us is into marketing support services to its associated enterprises. From the segment reporting 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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. Accordingly, this ground raised by assessee stands allowed. 7. Ground no. 7(ii) The Ld.AR submitted that, by this ground, the assessee seeks correction with regard to computation of margin of comparables. We direct the Ld.AO/TPO to compute the margins of the outstanding comparables that would survive while giving effect to the present order as per law. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 8. Ground no. 8(ii) - Assessee seeks to exclude two comparables being 1) Lumax Automotive Systems Ltd. and 2) Mahle Filter Systems India Ltd. 8.1 The Ld.AR at the outset submitted that, the assessee under the manufacturing segment manufactures filters 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground no. 5(iv) hereinabove. Respectfully following the same, we direct the Ld.AO/TPO to compute working capital adjustment in accordance with Rule 10B(1)(e). Accordingly, this ground raised by assessee stands allowed. 10. Ground nos. 9-10 has been raised by assessee in respect of the trading segment. The Ld.AR submitted that assessee had selected TNMM as the most appropriate method by using OP/OR as the PLI. He submitted that the Ld.TPO accepted the most appropriate method however held foreign exchange gain / loss as operating in nature. The Ld.AR submitted that when the issue was raised before the Ld.CIT(A), the Ld.CIT(A) held that RPM should be the most appropriate method. Before us, the Ld.AR did not object for adopting RPM to be the most appropriate method however he submitted that no comparability analysis has been carried 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, Section 40 refers to the outgoing amount chargeable under this At and subject to TDS under Chapter XVII-B. The deduction under Section 32 is not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation. Section 40(a)(i) and (ia) of the Act provides for disallowance only in respect of expenditure, which is revenue in nature, therefore, the provision does not apply to a case of the assessee whose claim is for depreciation, which is not in the nature of expenditure but an allowance. The depreciation is not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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