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2024 (2) TMI 485 - AT - Income TaxTP Adjustment - international transactions carried out by the assessee with its AE - DRP has considered the entire transactions with AE as well as non-AEs - HELD THAT - This issue has been settled by the various Hon ble High Courts observing that as per the Transfer Pricing provisions and judicial precedents, the TP adjustment should be restricted only to AE related transactions of the assessee. The ld. AR has relied on the judgment of CIT 1, Mumbai vs Hindustan Unilever Ltd. 2016 (7) TMI 1245 - BOMBAY HIGH COURT and the Hon ble Apex Court dismissed the SLP filed by the revenue 2018 (10) TMI 1611 - SC ORDER therefore this this is no more res integra Respectfully following the above judgment, we hold that the application of arm s length price should be restricted only to AEs transactions and not to all transactions. Accordingly, this ground is allowed. Comparability - inclusion of Telecommunication Consultants India Ltd. TCIL as 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 security service provider and it installs, manages and performs the maintenance on a regular basis. The company is in trading activity of the security products and the function of the traded goods are similar with the assessee company as analysed by the TPO. Further we note that the company is not engaged in manufacturing activity as contested by assessee As noted from the financial statements, clearly shows that the company has not purchased raw material for its consumption for manufacturing activity during the year under consideration. 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. company primarily operates in single segment viz Supply and integration of Electronic Security Systems and its functions are broadly same in both segments. The company is in trading activity of the security products and the function of the traded goods are similar with the assessee company as analysed by the TPO. The ratio of sale of service and maintenance income to traded goods is only 5.51%. The company is in trading segment only. On perusal of the financial statements we did not find any expenses under the Research and development account head. Therefore considering the entire facts, the company is comparable. Accordingly, we reject the contention of the ld. AR. Computation of operating margin - 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. We further note that in segmental operating results 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 lakhs. However, the lower authorities have not considered it as part of operating 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. Disallowance u/s. 14A - AO computed the adhoc disallowance by considering 0.25% of certain expenditure - DRP directed the AO to recompute the disallowance as per formula prescribed in Rule 8D - HELD THAT - 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 - We note that similar issue has been decided in M/S. YOKOGAWA INDIA LIMITED 2021 (11) TMI 1178 - ITAT BANGALORE - Thus we also restrict disallowance u/s. 14A of the Act to 10% of exempt dividend income. Accordingly, the AO shall work out the disallowance. DDT paid to non- resident - AR submitted that the Special Bench of the Mumbai Tribunal deals with the some of the contentions of the assessee on this issue in the case of Total Oil India Pvt. Ltd. 2023 (4) TMI 988 - ITAT MUMBAI (SB) and prayed that the assessee reserves its right to contest the same before the appropriate forum and subject to the same, this issue may be left open. Accordingly, this issue is left open. Allowability u/s. 37(1) towards education cess paid - AR submitted that the retrospective amendment to section 40(a)(ii) of the Act where it is clarified that education cess cannot be claimed as business expenditure and the Hon ble Supreme Court has allowed the appeal of the revenue against the decision of the Rajasthan High Court in the case of Chambal Fertilizers Chemicals Ltd 2017 (5) TMI 1500 - RAJASTHAN HIGH COURT Accordingly this ground is dismissed.
Issues Involved:
1. Transfer Pricing Adjustments in Trading Segment 2. Transfer Pricing Adjustments for Global Sales and Marketing Activities Fees (GSMAF) 3. Transfer Pricing Adjustments for Management Fees (MF) 4. Disallowance under Section 14A 5. Computation of Interest under Sections 234B and 234C 6. Penalty Proceedings under Section 274 read with Section 271(1)(c) 7. Refund of Dividend Distribution Tax (DDT) 8. Deduction of Education Cess and Secondary and Higher Secondary Education Cess under Section 37(1) Summary of Judgment: 1. Transfer Pricing Adjustments in Trading Segment: The Tribunal addressed multiple issues regarding the transfer pricing adjustments in the trading segment. The appellant argued that the DRP unjustifiably withdrew proportionate adjustments granted by the TPO, contrary to the Supreme Court's decision in CIT vs Hindustan Unilever Ltd. The appellant also contested the exclusion of Telecommunication Consultants India Ltd. (TCIL) as a comparable, the inclusion of Adtech Systems Ltd. and Zicom Electronic Security Systems Ltd., and the incorrect exclusion of commission income and reversal of provisions for doubtful debts from operational income. The Tribunal held that the application of arm's length price should be restricted only to AE transactions and not to all transactions, following the judgment of the Bombay High Court in Hindustan Unilever Ltd. The Tribunal remitted the issue of TCIL's comparability to the TPO/AO for de novo consideration and upheld the inclusion of Adtech Systems Ltd. and Zicom Electronic Security Systems Ltd. as comparables. 2. Transfer Pricing Adjustments for Global Sales and Marketing Activities Fees (GSMAF): The Tribunal noted that the issue of GSMAF has been consistently decided in favor of the assessee in previous years. The Tribunal held that the expenditure incurred towards GSMAF should be treated as operating cost and allocated in the ratio of the turnover of other international transactions for determining the ALP under TNMM analysis. This decision was based on the Tribunal's and the Karnataka High Court's rulings in the assessee's own case for AY 2010-11. 3. Transfer Pricing Adjustments for Management Fees (MF): Similar to GSMAF, the Tribunal held that the payment towards Management Fees should be considered as operating cost and allocated in the ratio of the turnover of other international transactions. The Tribunal followed its previous decisions in the assessee's own case for AY 2010-11 and subsequent years. 4. Disallowance under Section 14A: The Tribunal noted that there was no opening and closing balance of investments made by the assessee. The AO had applied Rule 8D for calculation of disallowance and calculated a total disallowance of Rs. 22,91,614. The Tribunal, following its decision in the assessee's own case for AY 2014-15, restricted the disallowance under Section 14A to 10% of exempt dividend income. 5. Computation of Interest under Sections 234B and 234C: The Tribunal held that the issues regarding interest under Sections 234B and 234C are consequential and did not provide specific details on these grounds. 6. Penalty Proceedings under Section 274 read with Section 271(1)(c): The Tribunal did not provide specific details on the penalty proceedings under Section 274 read with Section 271(1)(c). 7. Refund of Dividend Distribution Tax (DDT): The Tribunal noted that the issue of DDT paid to non-residents is covered by the Special Bench of the Mumbai Tribunal in the case of Total Oil India Pvt. Ltd. The appellant reserved its right to contest this issue before the appropriate forum, and the Tribunal left this issue open. 8. Deduction of Education Cess and Secondary and Higher Secondary Education Cess under Section 37(1): The Tribunal dismissed this ground, noting the retrospective amendment to Section 40(a)(ii) of the Act, which clarified that education cess cannot be claimed as a business expenditure. The Supreme Court allowed the appeal of the revenue against the Rajasthan High Court's decision in the case of Chambal Fertilizers & Chemicals Ltd. Conclusion: The appeal by the assessee was partly allowed, with specific directions provided for each issue.
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