9911796707
TMI Blog2023 (8) TMI 714X X X X Extracts X X X X X X X X Extracts X X X X ..... re independent and without prejudice to each other. 1. GENERAL GROUND 1.1. The Learned AO and the Hon'ble DRP have erred, in law and in facts, by not accepting the economic analysis undertaken by the Assessee in accordance with the provisions of the Act read with the Rules, and conducting a fresh search for the determination of Arm's length price in connection with the impugned international transactions in the paint finishing segment ('PFS') and holding that the Assessee's international transactions are not at arm's length. 1.2. The Learned AO and the Hon'ble DRP have, in the facts and circumstances of the case, erred in passing orders with unwarranted adjustments to the reported income of the Appellant by misapplying the provisions of the Act. 2. TRANSFER PRICING ADJUSTMENT 2.1 The Learned TPO/AO and the Hon'ble DRP have erred in law and facts of the case by rejecting the detailed transfer pricing analysis carried out by the Appellant for impugned international transaction (in accordance with the provisions of Sec 92D of the Act read with Rule 10D of the Income Tax Rules 1962) following Transactional Net Margin Method (TNMM), without pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grossly erred by not following the principles of AS 7 and ICDS 3 gad-have held that revenue accrues basis invoices raised by the Company without considering the percentage/ stage of completion of the contract. 3.4 The Learned AO and the Hon'ble DRP have grossly erred in not considering the fact that the method of accounting is followed consistently by the Assessee over the years. 3.5 The Learned AO and the Hon'ble DRP have erred in not appreciating the fact that the amount is recognized as revenue in the subsequent years. 3.6 Further, the Learned AO and the Hon'ble DRP have failed to appreciate the principles upheld by various courts on the abovementioned aspects which are squarely applicable to the Appellant. 3.7 The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3.8 The learned AO has erred in computing interest under section 234B and section 234C on the above adjustments and the appellant craves that such interest will not be leviable if the grounds mentioned supra are adjudicated in favor of the appellant. The Appellant prays that directions be given to grant all such relief arising from the grounds of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(3) r.w.s.92CA r.w.s.144C of the Act, dated 21.11.2019 and determined total income of Rs. 74,74,91,268/- by making addition towards downward adjustment on management fees paid to AE amounting to Rs. 3,78,78,968/- and additions towards reversal of billing in excess of Revenue amounting to Rs. 52,31,62,000/-. Aggrieved by the final assessment order, the assessee is in appeal before us. 4. The first issue that came up for our consideration from Ground Nos. 2.1 to 2.6 of the assessee's appeal is downward adjustment towards management fees paid to AE amounting to Rs. 3,78,78,968/-. The Ld. Counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of the ITAT, in the assessee's own case for earlier assessment years, where the issue has been set aside to the file of the AO/TPO to re-examine the issue of management fees paid to AE in light of various evidences filed by the assessee. Therefore, this year also, the issue may be set aside to the file of the AO/TPO. 4.1 The Ld.CIT-DR has filed detailed written submissions on this issue along with the decision of the ITAT Chennai Benches in the case of M/s. Lite- On Mobile India Pvt. Ltd., and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. the Hon'ble ITAT D Bench has ruled in favour of the department. In page 14 of its order it is remarked as under:- "In this case, the assessee, except furnishing agreement between parties, invoices raised by AE and few e-mail correspondence, no other documents have been filed to prove any services in fact, was rendered by its AE. Therefore, in our considered view, even if agreement is considered to be genuine, the assessee has never tried to verify correctness of cost allocation done by service provider. Further, the assessee has failed to substantiate payment of such huge managerial fees month on month without any supporting evidences like technical specification of services rendered by its AE, personnel deployed for said purposes and other evidences including correspondence between parties. Although, the assessee refers to number of e-mail correspondence between few employees of the assessee and its AE, but on perusal of e-mail samples filed by the assessee, what we could notice is these e- mails are general in nature and further with reference to daily production of products manufactured by the assessee in respect of sales to different regions. Further, none of e- mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he international transactions entered by the assessee during the previous years relevant to impugned assessment year which have been reproduced by us at para 2 above would clearly show that these were not pure independent transactions amenable to an independent analysis for pricing. Parts and accessories imported from Associated Enterprise would have been used by the assessee for installation and other services in India as well as engineering services. Reimbursement of expenditure could also have been only in connection with these activities. Ld. TPO had singled out management fees and R & D fees and subjected it to a separate analysis disregarding the TNMM adopted by the assessee. Ld. TPO did not discuss anything regarding the comparables considered by the assessee for the TNMM study. Ld. TPO had summarily rejected the TNMM study citing a reason that intra-group services had to be benchmarked separately by analyzing the actual services received. No doubt there can be no quarrel on the view taken by the ld. TPO that Arm's Length Price should be determined on a transaction by transaction basis. However, where the international transactions are closely linked this approach may not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly held that once method of ascertaining Arms Length Price followed by the assessee was rejected by the ld. TPO, for good and sufficient reason, he had to select most appropriate method out of these which were set out in Rule 10B or Rule 10AB. Co-ordinate Bench in the case of M/s. Flakt (India) Ltd (supra) had held as under at para 9 of its order:- ''The Transfer Pricing Officer has not taken any pain to identify uncontrolled transaction between two independent entities. In the absence of any comparison of the transaction with transaction carried out in a uncontrolled market, this Tribunal is of the considered opinion that the Transfer Pricing Officer cannot independently come to a conclusion that volume and quality of services was disproportionate to the payment made by the assessee. The matter may be totally different if the Transfer Pricing Officer was able to Identify the uncontrolled transaction between the enterprises entering into such transaction which would materially affect the price in the open market. In this case, such an exercise was not made by the Transfer Pricing Officer. The Dispute Resolution Panel has, therefore, rightly found that the method adopted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration afresh in accordance with law." 8. In this case, neither the TPO nor the DRP could identify a single uncontrolled comparable for bench marking R&D fees and management fees paid by the assessee. Hence, Rule 10AB, extracted supra, and relied on by the Revenue cannot be applied in this case. Since, there is no change in the facts, by following this tribunal order extracted supra, on the same lines, we remit the issue, for fixing the ALP of the international transaction of the assessee under TNMM, to the file of the AO/TPO for a fresh consideration in accordance with law. 4.3 In this view of the matter and consistent with view taken by the coordinate Bench, we are of the considered view that this issue needs to go back to the file of the AO/TPO for the impugned assessment year also. In so far as the arguments of the CIT-DR in light of decision of ITAT Chennai Benches, in the case of M/s. Lite-On Mobile India Pvt. Ltd., we find that although co-ordinate Bench of the Tribunal has taken a different view, but in assessee's own case, this issue has been remitted back to the file of the lower authorities with specific directions, we prefer to follow the decision of the co-ordinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng this method of accounting for recognition of Revenue right from the beginning and the Department has accepted the method followed by the assessee in the past. Therefore, unless there is a change in the facts, the Department cannot follow a different method for the impugned assessment year. In this regard, the Ld.Counsel for the assessee has explained method of accounting followed by the assessee and recognition of Revenue in the books of accounts. 5.2 The CIT-DR filed written submissions on this issue and argued that there is no dispute with regard to method followed by the assessee for recognition of Revenue, but fact remains that when entire cost is debited, how can they claim that there was excess billing in advances. Further, unless, the assessee does work, it cannot rise bill to its customers. Further, the moment bill is raised, Revenue is accrued to the assessee when the assessee is following mercantile system of accounting. The assessee could not adduce any evidences to defer Revenue which accrued and arises to the assessee. The AO/DRP has rightly rejected the arguments of the assessee. In this regard, the CIT-DR has filed written submissions which is re-produced as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 173.26 Cr. 4. AY 2015-16: However, as on 31.03.2015, the aggregate amount of contract cost was disclosed into Rs. 481.93 Cr and the cost debited to P&L a/c was Rs. 92.92 Cr. In this year, the amount of billing in excess of revenue disclosed was Rs. 52.31 Cr and that was added into total income by the Assessing Officer. It was observed that these are already billed to the client and the cost incurred was already debited in the P&L a/c. Hence, there cannot be any such deferment. 5. However, the appellant claimed that it was "legally accrued" in subsequent assessment year. Cost is not differed; only revenue is differed. 6. The DRP also held that in AS-7, when the assessee follows percentage completion method for their construction contract, there cannot be billing in excess of revenue. Accordingly, the addition made in the draft order was upheld by DRP. 5.3 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. There is no dispute with regard to the fact that the assessee is following mercantile system of accounting and percentage completion method in respect of project executed. In percentage completio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The next issue that came up for our consideration from additional grounds raised by the assessee is refund of excess DDT paid over and above the DTAA rate. The Ld. Counsel for the assessee fairly agreed that this issue is covered against assessee by the decision of ITAT Special Benches in the case of DCIT v. Total Oil India Pvt. Ltd., in ITA No.6997/Mum/ 2019, where it has been held that non-resident shareholders cannot take advantage of lower tax rate prescribed in DTAA for taxation of dividend where Dividend Distribution Tax is applicable. 6.1 The CIT-DR supporting the order of the DRP submitted that now this issue has been resolved by the decision of the ITAT Mumbai Bench in the case of Total Oil India Pvt. Ltd., where it has been held that DDT rate prevails over DTAA Rate in respect of dividend paid to non-resident shareholders. 6.2 We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. This issue has been decided against the assessee by the ITAT Special Bench, Mumbai in the case of Total Oil India Pvt. Ltd., in ITA No.6997/Mum/2019, where it has been held that non-resident shareholders cannot take advantag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f proceedings 2.1. The TPO has erred, in law by passing the transfer pricing (TP) order on 01 November 2019, which is beyond the timeline for completion of proceedings under section 92CA(3A) of the Act, and hence the TP order is invalid and unsustainable in law. Further, the AO has erred, in law and facts, by passing a draft assessment order incorporating an invalid adjustment proposed in the TP order. 3. Grounds relating adjustment towards transfer pricing matters 3.1. The TPO/AO and DRP have erred in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules by re-determining the ALP in connection with the impugned international transactions of provision of engineering design services (EDS) and thereby holding that the Appellant's international transactions are not at arm's length. 3.2. The TPO/AO and DRP have erred in not providing for working capital adjustment on comparable companies to arrive at the ALP to account for difference between the Appellant and comparable companies. 3.3. The TPO/AO and DRP have erred, in law and facts, adopting inappropriate filters whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of revenue. 4.8. Further, the AO and DRP have failed to appreciate the principles upheld by various courts on the abovementioned aspects which are squarely applicable to the Appellant. 5. Interest for delayed remittance of Dividend Distribution Tax ('DOT') 5.1. The AO has erroneously computed interest for delayed remittance of DOT under section 115P of the Act amounting to INR 3,60,111. 6. Refund of excess DDT paid over and above the Double Taxation Avoidance Agreement ('DTAA') rate 6.1. In the facts and circumstances of the case and in law, the benefit of applicable DTAA between India and Germany ought to be extended qua the rate of tax on payment of dividend to the shareholders. 6.2. In the facts of the case, since the dividend income was that of a non-resident recipient who was governed by the provisions of relevant DTAA, the lower rate ought to be applied. 6.3. In the facts of the case, the Appellant is entitled to refund of the DOT paid in excess over the amount to be paid as per DTAA as per the provision of section 137 of the Act read with Article 265 of the Constitution of India. 7. Allowance of cess as a deduction in computing the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions of the assessee with its AE. The TPO vide their order dated 01.11.2019 made a downward adjustment of Rs. 3,84,71,227/- towards management services fees and upward adjustment of Rs. 45,96,564/- towards engineering design segment to the international transactions of the assessee. In pursuant to TPO order, the AO has passed draft assessment order u/s. 144C of the Act on 16.12.2019, and proposed TP adjustment as suggested by the TPO. The AO had also made various additions towards disallowance of expenditure u/s. 40(a)(ia) of the Act, additions towards billing in excess of Revenue & interest income. The assessee has filed objection against draft assessment order before the DRP- 2, Bangalore. The DRP, vide their order dated 22.03.2021 issued direction u/s. 144C(5) of the Act. Thereafter, the AO passed final assessment order u/s. 143(3) r.w.s.144C(13) of the Act on 30.04.2021 and determined total income of Rs. 30,65,94,268/-. Aggrieved by the final assessment order, the assessee preferred an appeal before the Tribunal. 11. The Ld. Counsel for the assessee referring to Ground No.2.1 of the assessee's appeal submitted that the order passed by the TPO on 01.11.2019 is beyond the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er passed by the TPO on 01.11.2019 is beyond limitation prescribed u/s. 92CA(3) of the Act, and consequently, final assessment order passed by the AO on 30.04.2021 would be barred by limitation, since, in terms of section 153(1) r.w.s.153(4) of the Act, the same should have been passed on or before 31.12.2019. The same is accordingly liable to be quashed. The relevant findings of the Tribunal are as under: 5. The undisputed fact that emerges is that for AY 2016-17, the order has been passed by Ld. TPO u/s 92CA (3) on 01.11.2019. As per the decision of Hon'ble Single Judge in cited decision of M/s Pfizer Healthcare India Pvt. Ltd. & ors. (supra), this order would be barred by limitation. In this decision, bunch of assessee invoked writ jurisdiction of Hon'ble Court on the ground that the order passed u/s 92CA(3) was barred by limitation by one day. It was noted that in terms of Sec. 92CA(3A), an order has to be passed by TPO before 60 days prior to the last day on which the period of limitation referred to in Sec. 153 for making assessment expires. The assessment is to be completed within 21 months from end of assessment year in which the income was first assessable. Therefore. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP in terms of Section 144C(12) and passing of final assessment order after receipt of directions from the DRP in terms of Section 144C(13). An assessment involving issues of transfer pricing is thus measured by limitation at every step. 23. On the question of interpretation of the language employed in the provisions, the following judgements of the Supreme Court settle the position that one should not proceed blindly on the basis of the words/phrases employed in Statute, whether 'may', 'shall', 'no order shall be passed' or 'within' and the scheme of assessment in entirety as well as the intention of Legislature qua that scheme of assessment must be taken into account. Drawing support from various judicial precedents, it was finally held by Hon'ble Court as under: - 29. The provisions of Section 144C prescribe mandatory time limits both pre and post the stage of passing of a transfer pricing order. Assessments involving transfer pricing issues are different and distinct from regular assessments and the intention of Legislature is to fast track such assessments. Bearing in mind the specialized nature of such assessments, a separate set of Officers attend to the framing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproaching DRP, it would be open for the assessee to canvass all legal and factual issues before Tribunal before which the appeal was pending at that stage. 7. The assessee raised similar legal plea before Ld. DRP who held that the intention was never to make this time limit of 60 days mandatory since the expression used in Sec. 92CA(3A) is "may" in contrast to "shall" as used in Sec. 92CA(4). The word "may" could not be read as "shall" and therefore, the time period was not mandatory. It was further observed by Ld. DRP that the department has not accepted the ruling and preferred Writ Appeals with the division bench and therefore, to keep the matter alive, the objection raised by the assessee were dismissed. Aggrieved, the assessee is in further appeal before us. 8. The undisputed position that emerges is that now the division bench has dismissed the Writ appeals of the revenue and confirmed the adjudication of Hon'ble Single Judge. Accordingly, the legal plea as raised by Ld. Sr. Counsel squarely favors the case of the assessee. Therefore, we would hold that considering the statutory time limit, the order passed by Ld. TPO u/s 92CA(3) on 01.11.2019 would be barred by limita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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