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TMI Blog2013 (10) TMI 766X X X X Extracts X X X X X X X X Extracts X X X X ..... has undertaken international transaction valued at Rs. 36,98,134/- with Eaton Corporation on account of business support services Held that:- Assessee vide letter dated 03-09-2010 addressed to the TPO has categorically requested for adjustment for differential risk. He has also cited certain decisions In the said letter itself, the assessee has computed such risk adjustment - However, TPO in his order has observed that no such adjustments have been made by the assessee nor claimed during any time of the assessment proceedings - Restored the issue to the file of the Assessing Officer with a direction to decide the issue afresh and in accordance with law Decided in favor of assessee for statistical purpose. - IT Appeal No. 1621 (PN) of 2011 - - - Dated:- 11-1-2013 - SHAILENDRA KUMAR YADAV AND R.K. PANDA, JJ. For the Appellant : Percy Pardiwalla. For the Respondent : S.K. Singh. ORDER:- PER : R.K. Panda This appeal filed by the assessee is directed against the order passed u/s.143(3) r.w.s.144C of the Income Tax Act, 1961. 2. Grounds of appeal No 1 to 3 by the assessee reads as under : "On the facts and circumstances of the case, and in law: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and control products, automotive engine air management and fuel economy products, and intelligent truck systems for fuel economy and safety. During the period from April 2006 to July 2006, Eaton Industries Private Limited rendered the said business support services to Eaton Corporation. However, from August 2006, the said services have been rendered by ETPL to Eaton Corporation. The business support services rendered, which forms the non-STPI unit of ETPL, includes market research and analysis on the Group's high-end markets, analysis of financial reports, analysis of competitive intelligence documents, financial analysis for decisions on mergers and acquisitions, creating acquisition proposals etc. The assessee is remunerated on the basis of cost plus a mark-up for the above mentioned services provided to Eaton Corporation. 4.1 The TPO further noted that the assessee, during the year under consideration, has undertaken the following International transactions : Sr. No. Description Associated Enterprises Amount of Transaction (Rs.) Method 1 Provision of Customer Support Services Eaton Hydraulics Inc, USA 10,22,23,384/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose. The aggregate of total costs plus the mark-up computed on such costs was the total amount charged to ETPL. The travelling expenses have been charged to ETPL on actual basis. 5.2 It was submitted that the transaction does not assume the character of an international transaction. Further, it does not have any bearing on the income or profit of the assessee since the assessee itself has disallowed the expenditure while computing the taxable profit for the A.Y. 2007-08. The assessee has not taken any benefit, whatsoever, in subsequent years on account of the expenditure. Therefore, even if the said transaction is assumed to be an international transaction it does not impact the taxable income of the assessee. 6. However, the TPO was not satisfied with the explanation given by the assessee. Referring to the provisions of section 92B(1) he was of the opinion that the assessee and M/s. Eaton UK Ltd. UK are associated enterprises within the meaning of section 92A of the I.T. Act. Since the assessee has made payment of Rs. 7,42,70,575/- to M/s. Eaton Ltd. UK on account of certain pre-operative expenses in connection with setting up of a new business unit, the payments of which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pacific Shared Services Centre (APSSC) which is a separate business unit of the company under set-up stage as on 31-03-2007. Referring to Page 45 of the Paper Book he submitted that the assessee has not claimed the above amount of Rs. 7.42 Crores as an expenditure and infact added an amount of Rs. 16,70,72,117/- as "items debited to profit and loss account, not allowable under the act" which includes the above Rs. 7.42 Crores. Referring to Page 46 of the Paper Book he drew the attention of the Bench to the break up of Rs. 16,70,72,117/- which includes an amount of Rs. 11,46,04,774/- being "expenditure incurred prior to commencement of business". Referring to Page 180 of the Paper Book he drew the attention of the Bench to the details of break up of Rs. 11,46,04,774/- which includes the amount of Rs. 7,42,20,575/-. He accordingly submitted that from the above details it is clear that the assessee has not claimed the amount of Rs. 7.42 Crores as an expenditure. Even the assessee has not capitalised it towards the cost of any asset. Again referring to Page 45 of the Paper Book he submitted that the assessee has claimed deduction of Rs. 4,69,00,153/- as deduction u/s.10A of the I.T. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust have a bearing on the profit. Since the assessee has not claimed any deduction on account of this expenditure, therefore, the same is not applicable. 11. In his alternate contention the learned counsel for the assessee submitted that the TPO was not justified in determining the value of international transaction at NIL. Referring to provisions of section 92C(3) the learned counsel for the assessee submitted that as per the said provisions the TPO has to determine the ALP in relation to the international transaction in accordance with the sub section (1) and sub section (2) of section 92C. The burden is on the TPO and the TPO cannot take it at NIL. Since the AO/TPO in the instant case has determined such arm's length price at NIL, therefore, the same is not proper and liable to be quashed. He also relied on a number of decisions. 12. The learned Departmental Representative on the other hand heavily relied on the order of the Assessing Officer. He submitted that since the amount paid by the assessee to the AE has a bearing on the assets of the enterprise, therefore, it is a valid international transaction. Further since the assessee did not give any break up or details of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The break up of Rs. 7,42,20,575/- has already been given at Para 2 of this order, the details of which are as under : Sr. No. Nature of expenses Amount Rs. 1 Travelling and Conveyance 15,582,180 2 Legal and Professional Consultancy Charges 1,698,004 3 IT Charges 12,749,200 4 Software Implementation Costs 44,191,190 TOTAL 7,42,20,575/- We find the assessee while claiming deduction of Rs. 4,69,00,153/- u/s.10A has computed such deduction, the details of which are as under (Page 47 and 48 of the Paper Book) : EATON TECHNOLOGIES PVT. LTD. (GSSC-STP UNIT) Computation of Profits and Gains of Business Particulars Amount Amount (in Rs.) Profit before tax as per Profit and Loss Account (as per Note 14(iii) to Financials) 43,522,646 Add : Items debited to Profit Loss Account, not allowable under the Act 1. Depreciation as per books of accounts 1,980,913 2. Disallowance u/s.40(1) (ia) as per E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. The following sub-section (2A) shall be inserted after sub-section (2) of section 92 by the Finance Act, 2012, w.e.f.01-04-2013 : (2A) Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm's length price. (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under subsection (2), or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airly penalising the appellant for an act that was impossible to perform on the part of the appellant." 15.1 Facts of the case, in brief, are that the TPO during the course of TP assessment proceedings noted that the assessee company has undertaken international transaction valued at Rs. 36,98,134/- with Eaton Corporation on account of business support services. He noted that for the purpose of bench marking the international transaction relating to business support services the assessee company has adopted TNMM as the most appropriate method. He observed that for the purpose of analysis of the international transactions segmental operating profit over total cost (OP/TC) has been taken as profit level indicator (PLI). The assessee has taken a set of 4 external comparables and has taken average operating margin as PLI for the set of comparables. The PLI in the case of the assessee company was computed at 8% (OP/TC). For computing the PLI of the comparables data pertaining to three years including assessment year 2007-08 was considered and the weighted average was arrived at 10.98% by the assessee. The TPO therefore asked the assessee to provide the single year profitability ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to him the net profit margin arising in comparable uncontrolled transaction may be adjusted to take into account the differences between the international transactions and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. Thus, under TNMM, in the first step, net operating margin, from international transaction is computed in relation to the appropriate base. In the second step, net operating margin of the uncontrolled transactions are identified. In the third step the net operating margin of uncontrolled transaction are adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entered into such transactions which could materially affect the amount of net profit margin computed in step 3 above is taken to be net operating margin and the Arm's Length Price of the transactions computed by that operating margin. Therefore, it is the margins of comparable companies which are to be adjusted and not the margin of the tested party. No such adjustments have been made by assessee/claimed during any time of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 I D C (India) Ltd. P 13,16% 3 Crisil Ltd. P-seg 16.44% 4 ICRA Online Ltd. (Information Services) C-seg. 16.72% Mean 10.98% Median 14.80% Upper Quartile 16.51% Lower Quartile 9.26% 19.2 Referring to Page 30 of the Paper Book the learned counsel for the assessee drew the attention of the Bench to Para 5.12.1 which reads as under : "If there are material differences between the controlled enterprises being examined, adjustments may need to be made to them to improve the reliability of the results if the effect of such differences on prices or profits can be ascertained with sufficient accuracy. The following comparability adjustments need to be made to this analysis to take into account material difference between ETPL and the selected uncontrolled comparables." 19.3 Referring to the letter addressed by assessee to the TPO placed at Paper Book Page Nos. 58 to 59 the learned counsel for the assessee drew the attention of the Bench to Page No.65 and submitted that the assessee has made a claim regarding the adjus ..... 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