TMI Blog2024 (2) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... s comparable company - HELD THAT:- From the financial statements of TCIL it is observed that it is engaged in various types of activities. Hence we accept the alternative submission of the ld. DR that the PLI/profitability should be considered only from the Trading activity of the comparable company as business activity carried out by the assessee company and the ld. AR had also calculated PLI in which the company has profit in one year as observed above. FAR analysis of comparable has to be considered for each year separately irrespective of other years. Accordingly we remit this issue to the ld. TPO/AO for de novo consideration considering the decision of Yazaki India P. Ltd. [ 2019 (7) TMI 1566 - ITAT PUNE] in which it has been observed that if the comparable company is continuously not making loss for any of the three years, it is not persistent loss making company. If the TPO/AO finds that the comparable company is persistent loss making company in trading segment for all the three years, then it should not be considered as a comparable company. Zicom Electronics Security Systems Pvt. Ltd. is offering security products as a cloud based technology driven electronic securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perating revenue. It is not clear whether this provision was allowed in earlier years as operating expenditure in trading segment. We therefore remit this issue to AO examine the same. If the provision no longer required back in trading segment is allowed as operating expenditure in the earlier year, the same should be treated as operating revenue in the trading segment. The assessee is directed to produce necessary evidence. Arbitrary adjustment towards GSMAF and MF - TPO has questioned the necessity of the expenditure out of payment made by the assessee towards Management Fees and proceeded to determine the ALP by applying the benefit test - TPO treated the payments towards GSMAF and proceeded to benchmark the same by using the bright line test - HELD THAT:- This issue has been considered by the coordinate Bench of this Tribunal in assessee s own case for AY 2017-18 [ 2023 (5) TMI 1295 - ITAT BANGALORE] we are of the view that the expenditure incurred by assessee towards global sales and marketing activity has to be treated as operating cost and has to be allotted in the ratio of the turnover of the other international transaction for determining the ALP under TNMM analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the TP documentation and also rejecting the use of multiple year data by the assessee in its TP documentation. 2. Impugned order erroneously determines TP adjustment in relation to trading segment by attributing notional shortfall in profits entirely towards AE purchases, without restricting the same to proportion of purchase transactions from AEs to total operating costs of the assessee. 3. Impugned order erroneously proceeds on presumptions, choosing following companies which are totally incomparable to Appellant to make huge unjustified adjustment under provisions of Chapter X: Adtech Systems Limited Zicom Electronic Security Systems Limited 4. Impugned order erroneously rejects the following comparable company identified by the Applicant on the reasoning that the same is a government company: Telecommunication Consultants India Limited 5. Impugned order erroneously computes adjustment pertaining to the trading segment, by considering operating revenue of trading segment as INR 2,49,37,26,000 instead of correct amount of INR 2,52,92,26,000 being total operating revenue of the trading segment. Global Sales and Marketing Activities Fees ( GS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of Section 14A 14. The Learned AO and DRP has erred in not accepting the claim of the Appellant that only Rs. 1,90,461/- has been incurred for earning the exempt income and hence the disallowance under Section 14A should be restricted to Rs. 1,90,461/- 15. The Learned AO and DRP has erred in not following the method as described under rule 8D for determining amount of expenditure in relation to income not includible in total income' for the purpose of Section 14A 16. Without prejudice to the above ground no. (3), the Learned AO has erred in not following the directions of the Hon'ble DRP for re-computation of the amount of disallowance under section 14A read with Rule 8D and by considering the amount of Rs. 13,910.05 lakhs for the purpose of formula prescribed under rule 8D(2)(ii) 17. The Learned AO and DRP has erred in considering the amount of Rs. 13,910.05 lakhs as indirect expenses for the purpose of computing the amount of disallowance under Section 14A read with Rule 8D 18. The learned AO has erred, in law, and in facts, in computing interest of Rs. 3,18,10,370 under Section 234B of the Act. 19. The learned AO has erred, in law, and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e adjudicated on the basis of material on record. It goes to the root of the matter and is required to be adjudicated in order to determine the correct tax liability of the Appellant. Reliance is also placed on the decision of the Apex Court in the case of National Thermal Power Corporation Limited v. CIT (1998) 229 1TR 383 (SC). In the interest of justice, it is therefore humbly submitted that the said additional ground may kindly be admitted and adjudicated. 4. After hearing both the parties, since the additional grounds involves legal issue, therefore following the decision of National Thermal Power Corporation Limited (supra), the same are admitted for adjudication. 5. The brief facts of the case are that the assessee filed return of income for AY 2013-14 on 13.11.2013 admitting an income of Rs. 53.74 crores. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee submitted documents in response to notice u/s. 142(1) and it was observed that the assessee had international transaction exceeding Rs. 15 crores and therefore the case was referred to TPO for determination of ALP after approval from the competent authority. The TPO not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny in Prowess inside industrial electronics classification. The TPO applied qualitative filter, trading sales filter, RPT filter, merging companies filter and Govt. ownership filter and after considering the objections of the assessee, selected the following comparables:- Sl. Name of company OP/OR 1 Adtech Systems Ltd 15.11% 2 Kusam Electrical Inds. Ltd 3.33% 3 Zicom Electronic Security Systems Ltd 6.51% OP/OR 8.32% 9. The TPO made the adjustment of Rs. 11,30,74,949 in trading segment as under:- Arms length OP/OR A 8.32% Operating revenue in trading segment B 249,37,26,000 Arms Length OC C = (100-A)% of B 228,62,47,996 OC of taxpayer's trading segment D 250,51,31,000 Differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justments were made by the TPO:- Adjustment Ref Amount in Rs Purchase of traded goods Para 4.7 11,30,74,959/- Management support service fees Para 5.5 45,87,213/- Excess AMP payment to AE Para 7 2,03,41,827/- Rs. 13,80,03,999/- 13. After the receipt of TPO order dated 13.10.2016, the AO passed the draft assessment order u/s. 143(3) r.w.s. 144C on 24.10.2016 making the TP adjustment and he also made addition u/s. 14A. Aggrieved, the assessee filed objections before the DRP and the DRP passed the order on 3.7.2017. Accordingly, the AO passed the final assessment order making TP adjustment of Rs. 24,11,65,069 and addition u/s. 14A of Rs. 22,91,614 determining assessed income at Rs. 78,08,57,463. Aggrieved, the assessee is in appeal before the Tribunal. 14. The ld. AR has filed written submissions as under:- 1. At the hearing held on 11th of September 2023, we had submitted, along with a ground-wise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or doubtful debts are treated the same by Ld. DRP at paras 30 to 32 of DRP's order (internal page 11 of 20). Decisions relied on by Ld. DRP of Telecordia, 22 taxmann.com 96 and Thyssen Krupp Industries India Pvt. Ltd., 33 taxmann.com 107 were considered in paras 6 to 10 of later decision of this Hon'ble Tribunal in M/s Evolving Systems Networks India Pvt. Ltd. vs DCIT, IT(TP)A No. 2751/Bang/2017. It was our respectful submission that the later decision based on Hon'ble High Court decision deserves to be applied in present case and direction issued to include commission and reversal of provisions towards doubtful debts as part of the operating revenue for margin computation. Ld. DR's reliance on para 31 of Ld. DRP's order is misplaced 5. As coordinate Bench decision in Evolving Systems (supra) notes Telecordia (supra) and Thyssen Krupp (supra) and is a later decision in time following Hon'ble Karnataka High Court's decision, reliance placed by Ld. DR deserves to be overruled and may kindly be overruled. 6. Ground No. 4 Appellant requested inclusion of TCIL. Multiple reasons in support of such request are set out in the Ground-wise summary chart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round No. 3 It was submitted that Adtech and Zicom are not functionally comparable to trading segment of Appellant for reasons briefly stated in the ground-wise summary chart and further made good during hearing of the Appeal by drawing reference to relevant portions of audited financials of these companies placed on record: a. For Adtech kindly refer to Pg. Nos. B 157, B160, B162, B163, B191, B192, B221, B225, B236, B237, B245 and B257 b. For Zicom kindly refer to Pg. Nos. B272, B276, B278, B280, B282, B299, B300, B304, B344, B359, B369 and B378. Cursory glance through above cited pages would show that functionally Adtech and Zicom are not comparable to any trading segment. During the hearing attention was also invited to paras 4.4 and 4.5 of Ld. TPO's order as also paras 19 to 21 of Ld. DRP's order to demonstrate the arbitrary and unreasonable manner in which these companies have been compared to Appellant's trading segment. 10. Ground No. 2 Reference to computation at para 4.6 on internal page 9 of Ld. TPO's Order (running page 113 of appeal set) would show that adjustment is proportionately quantified for transactions with AE (51.66%). Enhanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat TCIL is not persistent loss making company as evident from the profit margins of TCIL for 3 years in the TP study and TCIL has earned profit in FY 2010-11 thereby not incurring losses for all the 3 years. He relied on the Madras High Court in the case of Same Deutz-Fahr India P. Ltd. (ITA No.567 of 2017) where it is held that Government Company cannot be treated as not comparable. He also relied on the decisions of Moog Controls (India) Private Limited [IT(TP)A No.412/Bang/2015 IT(TP)A No.425/Bang/2015 2010-11] and IKA India Pvt. Ltd. (supra) and Yazaki India P. Ltd. (ITA No.621(PUN) of 2014 that persistent loss making means only if company incurred all 3 years losses. It was further submitted that TCIL has been considered as a comparable by Ld. TPO for AY 2014-15 and AY 2017-18 in assessee s own case. 21. The ld. DR relied on the orders of lower authorities and submitted that the TPO has observed that this company is persistent loss making company as computed by him. The ld. DRP noted that the company is a government company which is engaged in engineering and consultancy under the administrative control of the Dept of Telecommunications (DOT), Ministry of Communications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal against this decision of the tribunal was dismissed by the Hon'ble jurisdictional High Court.. Further it could be seen in Vestegaard Asia private limited verses DCIT in ITA No. 6670/del/2015 and H M Mouritz India private limited verses DCIT in ITA 282/Bang/2015 it is held that the Aptico Pvt Ltd., is not a good comparable with any company rendering business support services on the ground that this company is a public sector undertaking and its operations are mainly based the on the policy requirements of the government. 15. Further reliance is placed by the counsel on the decision of the Mumbai bench of this tribunal in TysokKrupp industries India private limited verses ACIT in ITA No. 6460/mum/2012 wherein it was held that this company being a government enterprises is not comparable with a private business service provider because in case of government enterprises profit motive is not irrelevant consideration, and government companies work for other public sector undertakings and in that sense the related party transactions are much more than the filter of 25%. This decision of the tribunal was upheld by the Hon'ble Bombay High Court in ITA number 20/02/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n subsequent years, therefore to maintain parity, we reject the argument of the ld. DR that Govt. company cannot be considered as a comparable, if it passes FAR analysis. We further observe that the TPO has observed this company is a persistent loss making company. However, as per the computation submitted by the assessee at page No.397 of PB, it has been shown as a profit making company in the FY 2010-11 in unadjusted margin analysis, whereas at page 398 of PB in the adjusted margin of analysis of trading activity it is shown as persistent loss for FYs 2010-11 to 2012-13. We note from the order of the ld. DRP that this aspect has not been examined. From the financial statements of TCIL it is observed that it is engaged in various types of activities. Hence we accept the alternative submission of the ld. DR that the PLI/profitability should be considered only from the Trading activity of the comparable company as business activity carried out by the assessee company and the ld. AR had also calculated PLI in which the company has profit in one year as observed above. FAR analysis of comparable has to be considered for each year separately irrespective of other years. Accordingly we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Assessee wishes to submit that Adtech provides a wide range of solutions in electronic security systems and service with a pan India presence. Adtech functions would be vastly different like its divergent business activities and cannot be compared to simple trading of Assessee. 26. The Company operates mainly in one single segment viz Supply and integration of Electronic Security Systems which are further categorised into industrial use and to cater to the retail segment, however, there is no break-up as between the two. (Page B225 of the annual report paperbook). ZICOM 27. Audited financial of Zicom (refer B268 onwards) indicates that this company is engaged in the manufacturing and selling of Electronic security systems and equipment including CCTV Surveillance System, Access Control System, Fire Alarm System, intruder Alarm system Multi-Apartment Video Door Phones, Fingerprints Locks Video Door Phones. (Page B359 of the Annual Report paperbook). Zicom belongs to Electronic security industry B274 of the Annual Report Paperbook) as compared to ' testing and measurement business' of Assessee (page 211 of the factual paper book), page B282 of the Annual Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r considering the rival submissions, we note that the TPO has observed that the taxpayer trades in oscilloscope, temperature measurement instruments, power measurement instruments, etc. Both Adtech Systems Ltd. and Zicom Electronic Security Ltd. deal in electronic products, smoke detectors, among other fire and safety electronics. A power measurement instrument traded by taxpayer has sensors that sense an analog signal which is converted into digital signal using analog to digital converter and fed to an electronic circuit which gives an output on screen. Similarly a smoke detector has also sensors which converts digital signal and gives output alarm. The TPO observed that both taxpayer and the two companies trade in multiple industrial electronics. There is diversification in products but similarity in products traded by tax payer and comparable companies and treated these two companies as comparables. 32. We note from pg. 212 235 of PB the activities of the assessee is trading of finished goods. It purchases various finished products in the nature of transmitters, recorders, flow meters, oscilloscopes, digital power analysers, optical spectrum analysers etc. from its AEs for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nil reporting. It clearly shows that the company has not purchased raw material for its consumption for manufacturing activity during the year under consideration. We note from page B340 of PB that under Electronic Security Business, the company on standalone has three main business verticals viz., Sales Distribution business, Direct Sales business and Builder business. Accordingly, we hold that the company is engaged in trading activity. Further, we note from Note No.27.18 that the company is selling safety products of Rs. 1,44,88,051, security products of Rs. 2,62,81,36,825 and others of Rs. 14,56,683. Similarly, the company has purchased safety products of Rs. 32,58,337, security products of Rs. 2,22,12,28,527 and others of Rs. 1,76,023. The service income earned by the comparable company are from the maintenance of product sales, therefore it cannot be said that the company is engaged in separate service segment. The ratio of safety products of purchase and sales are minimal with the main security products purchased and sold. Therefore, no segmental reportings are required as submitted by the ld. DR. Therefore this company is functionally comparable. Adtech Systems Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Thyssen Krupp Industries India P. Ltd., the Mumbai Tribunal held that provision for doubtful debts is to be considered as non-operating in nature because it is only a provision. He further submitted that only receipt expenditure for determining the operating profit should be considered which has direct relation for determining the profit has to be taken into account. 40. On going through the paperbook filed by the assessee at page 235 of PB, it is clear that the AEs are selling goods also directly to third party customers in India. During the course of hearing, the Bench specifically asked the ld. AR regarding the nature of services rendered by the assessee for the sales from AE to third party customers, but the ld. AR could not show the nature of services rendered by the assessee. Therefore, we hold that that commission received by the assessee cannot be considered as part of trading segment and therefore, dismiss this ground of the assessee. 41. We further note that in segmental operating results at para 2.2 of the TP order, the assessee has given details of trading segments in which the assessee has included provision no longer required returned of Rs. 4.26 la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issues relating to GSMAF and MF arising from identical facts and law for several years stand decided in favour of assessee which we respectfully request to be followed in present appeal also. 12. Ld. DR's submission that AYs 2011-12 and 2012-13 have not been cited in the Ground wise chart as perhaps same may not be favourable to Assessee stands explained above viz., that these years were decided by the Hon'ble Tribunal in favour of the taxpayer on technical grounds and not merits. 44. The ld. AR further submitted that this issue is squarely covered by the decisions in assessee s own case for other assessment years. In the Assessee s own case for AY 2010-11 (ITA No. 342 464/Bang/2015) the Tribunal held that the said payments shall not be tested separately and are to be considered as operating cost and to be allocated on the basis of turnover and the ALP has to be determined under TNMM analysis. This decision of Tribunal was subsequently upheld by the Hon'ble Karnataka High Court and Hon'ble Supreme Court (copies placed from page 1440 to 1492 paper book). This decision and corresponding MA order were passed subsequently and were not available to Ld. DRP at time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in transfer pricing? 12.3. The Ld.AR submitted that Hon ble High Court referring to various observations of the Tribunal s order observed and held as under: 3. The learned Tribunal, after discussing the rival contentions of both the Appellants- Revenue and Respondent- Assessee, has returned the findings as under: 4. We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. We find that the assessee has carried out multiple and diversified international transactions in different segments. The international transactions of the assessee involve charges for raw material and components, sales and manufacturing goods, reimbursement of expenses, payment towards royalty and management fees, charges of capital equipment, payment of intra-goods services, charges of material, commission income, rendering of software services, reimbursement of expenses and Global Sale and Marketing Activity Fees. The TPO has accepted all other transactions except the international transactions regarding Global Sale and Marketing Activity Fees. It is pertinent to note that the international transactions of the assessee are comprising of revenue receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 2CO-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. AR submitted that the AO in the final assessment order has incorrectly considered Rs. 13,910.50 lakhs as relatable expenditure to apply the formula prescribed under Rule 8D(2)(ii) as against Nil amount. Disallowance already made of Rs. 1.96 lakhs deserves to be accepted as correct. The Tribunal s order in assessee s own case for AY 2014-15 on similar issue cannot be followed in the facts of the present case. 50. The ld. DR relied on the orders of the lower authorities. 51. Considering the rival submissions, we note that there is no opening and closing balance of the investments made by the assessee. However the AO has applied Rule 8D(2)(i) and Rule 8D(2)(ii) for calculation of disallowance and calculated total disallowance of Rs. 22,91,614. We note that similar issue has been decided by the coordinate Bench of the Tribunal in IT(TP)A No.3369/Bang/2018 dated 24.9.2021 in which it has been held as under:- 20. We noticed earlier that the assessee has made investments during the course of the year and has sold the same before the end of the year. Accordingly, the value of investments as on beginning of the year and as on end of the year were Nil. In this fact situation, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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