TMI Blog2018 (6) TMI 1829X X X X Extracts X X X X X X X X Extracts X X X X ..... the year under consideration but en-cashed by the customers in AY 2011-12. It is also undisputed that the assessee has already offered to tax the amount of advance which had been forfeited from the customers and to which the bank guarantee relates. The bank guarantee has been en-cashed in the subsequent assessment year, therefore, the liability has crystallized in the subsequent assessment year when it was en-cashed on 28/04/2010. The fact remains that at the time of furnishing the bank guarantee, it was not known as to when the liability will crystallize. Accordingly, we find no reason to interfere with the directions of the Ld. DRP. TP Adjustment - services offered by the AE were not stewardship services - HELD THAT:- DRP has taken note of the fact of the assessee providing substantial evidence in form of e-mails, correspondence with the AE etc. so as reach a conclusion that the AE was rendering services which were beneficial for the assessee in conducting its business and some benefits might have accrued to the overall group but the primary beneficiary was the assessee. DRP concluded that the services rendered by the AE were not in the nature of stewardship activity. Altho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd. Accordingly, this ground is treated as allowed. Rectification of mistakes u/s 154 - failure to provide an opportunity to the assessee of being heard before enhancing the income and this violated the provisions of section 154(3) - HELD THAT:- The Hon ble Apex Court in the case of Chockalingam Meyyappan [ 1962 (10) TMI 48 - SUPREME COURT ] is precisely holding that principle of natural justice has to be followed by the authorities. As per Section 154(3) of the Act amendment/rectification which has the effect of enhancement of an assessment or reducing a refund or otherwise increasing the liability of the assessee shall not be made unless the authority concerned gives notice to the assessee of its intention to do so. Therefore, it is obligatory under the statute to issue notice by the tax authority to give a reasonable opportunity of being heard to the Assessee. This is clearly set out u/s 154 of the Income Tax Act and it has to be followed by the tax authorities at the initial stages. If this procedure of issuing the notice and giving reasonable opportunity of being heard is not followed, any further exercise will be non est. Therefore, the order itself becomes void ab ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (non-civil). The return of income for assessment year 2010-11 was filed at a total income of Rs.77,56,15,890/-. Subsequently, after processing of the return u/s 143(1) of the Act, the return was selected for scrutiny through CASS. Reference was also made to the Transfer Pricing Officer (TPO) u/s 92CA of the Act for determination of the Arms Length Price (ALP) in respect of the international transactions entered into with its Associated Enterprises (AE). During the assessment year 2010-11, the assessee had entered into the following international transactions with its AE:- 3.1 As per the Transfer Pricing Study (TP Study), the Profit Level Indicator (PLI) had been calculated at 8.27% by taking OP/TC and the assessee had selected 8 comparables at the entity level. The TPO, however, conducted a fresh search for determining the companies which were performing similar functions. In the process, he identified 21 comparables with an average margin of 16.51%. Thereafter, after taking the objections of the assessee into consideration, the TPO selected a list of 22 companies as comparable having an average margin of 16.77%. The TPO proceeded to make a transfer pricing adjustment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout allowing the AO to examine whether the entries were actually written off in the books and ledger of the assessee. 3. The DRP has erred in law and in facts, in disallowing the addition of provision for warranty, as the assessee has failed to maintain a scientific and consistent method for estimation of/determination of its provision for warranty. 4. Whether the Ld DRP has erred in concluding that the services offered by the AE was not stewardship service, whereas the purpose of management services agreement, between the KHD Humboldt, and the assessee company, resulting in payment for legal professional charges under consideration, was to exercise control and supervision of the assessee s activities to fit the same, into the overall plan of the entire group with sole purpose for maximization of group profitability and parent company s return, indicating the services rendered by KHD Humboldt, AE was of stewardship in nature and in the form of shareholder activity. 3.6.2 ITA No.494/Kol/2015 (Assessee s appeal): General Ground 1. That on the facts and circumstances of the case the Hon ble DRP, Learned Transfer Pricing Officer ( Ld. TPO ) and accordingly the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or disputed liability. 9. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in proposing and the Hon ble DRP has erred in not appreciating that, (i) Provision is in respect of advance bank guarantee actually encashed by the customer in respect of suspended/ terminated contract, resulting in actual business loss to the appellant; (ii) It is an allowable deduction in accordance with the principles laid down by the Hon ble Supreme Court in the case of Rotork Controls India (P) Ltd Vs CIT [2009] 180 Taxmann 422 (SC) i.e. reliable estimation, outflow of resources, fulfils matching concept; (iii) Without prejudice to the above, the Ld. AO should be directed to allow the deduction in the next assessment year [i.e. Assessment Year 2011-12] as per directions of the Hon ble DRP. 4. The Ld. AR submitted that ground nos. 1 and 3 in the department s appeal pertaining to provision for liquidated damages and provision for warranty respectively were considered by the ITAT in assessee s own case for assessment year 2008-09 also. It was submitted that ITAT Delhi Bench in assessee s own case for assessment year 2008-09 in ITA No. 2295/Del/2013 had hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CUP method applied by the TPO was incorrect as the TPO himself had not brought out any comparable uncontrolled transaction to justify the ALP at nil. It was also submitted that the department had not followed the rule of consistency while making this adjustment as these payments had been duly accepted by the department in the earlier assessment years as well as in subsequent assessment year 2012-13 and the impugned adjustment had been made without bringing on record any material to bring out the difference between the facts of the year in which they were accepted and in the present year under consideration. The Ld. AR also submitted that the TPO had passed a rectification order on 18/04/2017 which has resulted in reduction of total adjustment from Rs. 42,50,763/- to Rs. 9,91,844/- only which represents the disallowance of mark-up charged by the AE. It was also submitted that the Final Assessment Order subsequent to the rectification by the TPO was still awaited. The Ld. AR submitted that and if the assessee s ground was accepted in principle, the adjustment with respect to the mark up will not be contested by the assessee. 4.3 With respect to ground nos. 8 and 9 relating to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of advertisement expenses amounting to Rs. 25,34,649/- u/s 40(a)(ia) of the Act. Similar to AY 2010-11, loss on suspended contracts was also disallowed. 6.1 The assessee filed objections before the Ld. DRP and the Ld. DRP reduced the transfer pricing adjustments in respect of the international transaction with related parties to an amount of Rs. 3,06,96,810/- against Rs. 8,28,95,238/- proposed by the TPO by restricting the adjustment to legal and professional services only. The Ld. DRP also directed the deletion of additions pertaining to liquidated damages, provision for warranty, advances and deposits written off, provision for loss and disallowance with respect to advertising expenses. The Ld. DRP, however, directed that the disallowance in respect of suspended contracts be maintained. 6.2 Now, the assessee is in appeal against the directions of the Ld. DRP in not allowing the deduction of provision for loss on suspended contracts and the department is in appeal challenging the directions of the Ld. DRP in restricting the transfer pricing adjustment to legal and professional charges only as well as in directing the deletion of addition with respect to liquidated dama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concluding that the computational of entity level profit margin of the assessee contravened the provisions of Rule 80B(l)(c)(i) of the rules when in fact the TPO allowed proportionate adjustment to the assessee. 3. The Ld. DRP has erred in law and in facts in disallowing the addition of provisions for liquidated damages, without examining the issue involved and the finding of the AO. 4. The Ld. DRP has erred in law and in facts in disallowing the addition of provisions for warranty, as the assessee has failed to maintain a scientific and consistent method for estimation of / determination of its provision of warranty. 5. The Ld. DRP has erred in law and facts in disallowing the addition of advances provisions written off, without allowing the AO to examine whether the entries were actually written off in the books and ledger of the assessee. 6. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing. 7. Subsequently, after passing of the final assessment order for AY 2011-12, the TPO passed a rectification order u/s 154 with respect to assessment year 2011-12 vide order dated 09.02.2016. The TPO passed anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tituting the same with his own analysis and in doing so, not appreciating that conditions set out in section 92C(3) of the Act are not satisfied in the present case. 5. Without prejudice to Ground no. 2, on facts and in law, the Ld. AO/ Ld. TPO erred in rejecting the transfer pricing analysis undertaken by the Appellant in line with the Rule 10B(2) of the Rules to determine the arm's length price of international transactions pertaining to purchase of spare parts. In doing so, the Ld. AO/ Ld. TPO has grossly erred in 5.1 misinterpreting the directions given by the Hon'ble DRP that hold the transaction level analysis to be valid; and 5.2 misinterpreting the directions given by the Hon'ble DRP that hold the Appellant to be considered as the tested party. 6. Without prejudice to Ground no. 2 and Ground no. 5, on the facts and in law, the Ld. AO has grossly erred in computing the profit level indicator of the Appellant by disregarding the directions of the Hon'ble DRP that hold the treatment of income and expenses of similar nature to be consistent. 7. Without prejudice to Ground no. 2, on facts and in law, Ld. AO/ Ld. TPO has grossly erred in rejecting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year 2010-11 will have to be followed in assessment year 2011-12 also. 8.3 Coming to ground no. 2 of the department s appeal, the Ld. AR submitted that this ground challenges the direction of the Ld. DRP in concluding that the computation of entity level profit margin of the assessee did not contravene the provisions of Rule 10B(1)(c)(i) of the Rules. It was submitted that for the purpose of undertaking the benchmarking analysis, the assessee had followed transaction by transaction approach which was in accordance with Rule 10B and 10C of the Income Tax Rules, 1962. It was further submitted that the assessee had identified separate functions and line of operation while undertaking the benchmarking analysis. It was also submitted that the principle of undertaking transaction by transaction analysis for determination of ALP is embedded in the Indian Transfer Pricing Regulations, OECD Transfer Pricing Guidelines and UN Transfer Pricing Manual. It was further submitted that as per the UN Practice Manual, the Transfer Pricing analysis should ideally be made on a transaction by transaction basis. It was further submitted that each of the international transaction under disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity, the mistake should be apparent and the same should be apparent from the records of the assessee. It was submitted that by passing the rectification order, the TPO had carried out a fresh benchmarking analysis and this amounted to change in the view of the TPO and was not a mistake apparent from the record. It was further submitted that the TPO had selected fresh comparables and that too without granting a proper opportunity to the assessee to present its contentions and, thus, the same was not a mistake apparent from record. The Ld. AR also submitted that an earlier rectification order had been passed by the TPO on 9th February 2016. It was after due consideration of the material on record wherein the TPO had accepted the analysis carried out by the assessee and, therefore, the impugned rectification order was bad in law. 9.1 It was further submitted that there was a failure to provide an opportunity to the assessee of being heard before enhancing the income and this violated the provisions of section 154(3) of the Act. It was submitted that the principle of natural justice has been upheld by the various Hon ble Courts across the country in numerous cases and a list of case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO in rejecting the transfer pricing analysis undertaken by the assessee and the action of the TPO in computing the profit level indicator of the assessee by disregarding the directions of the Ld. DRP. It was further submitted that the assessee was also challenging the action of the TPO in rejecting the transfer pricing analysis of the assessee so as to determine the ALP of the international transaction pertaining to global marketing services while misinterpreting the directions given by the Ld. DRP that the assessee was to be considered as the tested party. It was also submitted that the TPO had erred in computing the transfer pricing adjustment by considering wrong cost base of the segment pertaining to global marketing services. 9.6 The Ld. AR also submitted that the TPO, while passing the impugned rectification order, had disregarded the fact that the impugned transactions and the relevant pricing had been accepted by the Assessing Officer/TPO in the subsequent assessment year i.e. assessment year 2012-13 in assessee s own case and there was no change in facts and circumstances in assessment year 2011-12 vis- -vis assessment year 2012-13. 9.7 The Ld. AR also submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision for loss on suspended contracts amounting to Rs. 9 crores by treating the same as contingent liability. The facts remain undisputed. The amount represents bank guarantee furnished by the assessee to its customers which was given in the year under consideration but en-cashed by the customers in AY 2011-12. It is also undisputed that the assessee has already offered to tax the amount of advance which had been forfeited from the customers and to which the bank guarantee relates. The bank guarantee has been en-cashed in the subsequent assessment year, therefore, the liability has crystallized in the subsequent assessment year when it was en-cashed on 28/04/2010. The fact remains that at the time of furnishing the bank guarantee, it was not known as to when the liability will crystallize. Accordingly, we find no reason to interfere with the directions of the Ld. DRP in this regard and dismiss ground nos. 8 and 9. 11.3 Accordingly, the assessee s appeal ITA 494/Kol/2015 stands partly allowed. ITA 567/Kol/2015: 12. Department s ground no. 4 relates to the deletion of the transfer pricing adjustment amounting to Rs. 3,25,89,168/-and challenges the direction of the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed. 12.2 Ground No. 3 challenges the direction of the Ld. DRP in allowing the provision for warranty amounting to Rs. 28,81,12,854/-. We find that the Ld. DRP had held the issue in assessee s favour by noting that this issue was a recurring issue in the assessee s case and a similar issue had arisen in AY 200809 wherein the Ld. CIT (A) had deleted the disallowance. The Ld. DRP has noted that the facts were identical in AY 2008-09 and the year under consideration and, therefore, the disallowance was to be deleted. We also find that the department s challenge to the findings of the Ld. CIT (A) on this issue in AY 2008-09 was dismissed by the ITAT in ITA No. 2295/Del/2013. The Department has not been able to bring out any distinguishing factor with respect to the facts in the proceedings before us. In the circumstances, we find no reason to interfere and dismiss ground no. 3. 12.3 Ground no. 1 challenges the direction to delete the provision for liquidated damages amounting to Rs. 3,18,02,972/. This issue is covered in favour of the assessee by the order of the ITAT in assessee s own case for AY 2008-09 (supra) wherein the ITAT upheld the adjudication of the Ld. CIT (A) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e viz. purchase of spare parts, provision of technical services, provision of global marketing services were distinct and independent transactions and warranted separate analysis so as to determine the ALP. Also comparative analysis has been submitted by the Ld. AR in this regard. However, a perusal of the directions of the Ld. DRP shows that this aspect has not been considered in a proper perspective by the Ld. DRP and the directions in this regard have been given without recording a finding of fact in this regard and without giving any sound reason for such direction. In the circumstances, we have no option but to restore this ground to the file of the Ld. DRP with a direction to pass a speaking order on the issue after giving proper opportunity to the assessee. Accordingly, ground no. 2 stands allowed for statistical purposes. 13.2 Ground No. 3 challenges the deletion of disallowance of Rs. 10,97,86,518/- pertaining to liquidated damages. An identical ground has been held in favour of the assessee in earlier part of this order in department s appeal for AY 10-11 wherein we upheld the directions of the Ld. DRP subject to the rider that the assessee will substantiate before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rectification order passed by the TPO vide order dated 25.02.2016. It has been submitted that there was a failure to provide an opportunity to the assessee of being heard before enhancing the income and this violated the provisions of section 154(3) of the Act. It has also been argued that the principle of natural justice has been upheld by the various Hon ble Courts across the country in numerous cases wherein it has been held that the failure to provide an opportunity before enhancement will render the entire proceedings null and void. Admittedly, the impugned rectification order was passed proposing to enhance the income of the assessee by enhancing the transfer pricing adjustments as made in the final assessment order dated 30/12/2015 passed subsequent to the directions of the Ld. DRP. In the proceedings before us, the department was not able to negate the contention of the assessee that the impugned rectification order was passed without giving any opportunity to the assessee. It remains uncontroverted that principle of natural justice was not followed by the Transfer Pricing Officer while rectifying his earlier order. It is settled law that it not proper to remove a defect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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