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TMI Blog2015 (5) TMI 546X X X X Extracts X X X X X X X X Extracts X X X X ..... it is but appropriate that only those transactions pertaining to the infrastructure group segment are considered for making the T.P. Adjustment. In this factual matrix, we hold and direct that the adjustments are to be made only on those transactions pertaining to the Infrastructure Group Segment, as decided by the TPO in his order under Section 92CA of the Act, and that the computation is to be decided accordingly. The segmental details made to be examined in detail to decide how much of it relates to the Infrastructure Group Segment and how much to the Air Solutions Segment. As the TPO has not examined the same and rendered any finding in this regard, we deem it appropriate to remand this issue back to the file of the TPO to examine the matter - Decided in favour of assessee for statistical purposes. Adjustment only on AE transactions - assessee contends that the adjustments are to be made only on AE transactions related to the Infrastructure Segment and not only the entire transactions of the segment - Held that:- The assessee had raised the issue before the TPO in the rectification application dt.2.2.2010, but we find that the TPO has not rendered any specific finding on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preparation of its T.P. Study report. Further, we are also of the view that the TPO has rightly rejected the use of earlier year’s data by the assessee, as the assessee failed to establish how such earlier year’s data had an influence on the prices of the current financial year - Decided against assessee. Interest on Receivable - Held that:- Following the decision of Evonik Degussa India P. Ltd. (2013 (1) TMI 60 - ITAT MUMBAI), we hold that the addition on account of notional interest relating to alleged delayed payment in collection of receivables from AEs is not called for. However, as can be seen from the extract of the decision reproduced above, the above decision has been rendered in the factual context that there has been no agreement for charging interest on delayed payment. We, therefore, deem it appropriate to remand this issue back o the file of the Assessing Officer / TPO for examination as to whether there was any agreement for charging interest on late payments or not and if it is found that there was no such agreement, then the T.P. Adjustment made in this regard requires to be deleted - Decided in favour of assessee. Charge of interest u/s.234C - Held that:- T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order under Section 92CA of the Act vide order dt.28.10.2009 proposing on T.P. Adjustment of ₹ 34,40,77,835 which comprised of the following :- i) Adjustment to the manufacturing segment : Rs.33,58,49,835. ii) Adjustment towards interest on debts outstanding : Rs.56,28,000. 2.2 Subsequent to the receipt of the TPO s order under Section 92CA of the Act dt.28.10.2009, the Assessing Officer passed a draft order of assessment dt.30.12.2009 determining the income of the assessee at ₹ 81,84,09,305, which included the proposed T.P. Adjustment of ₹ 34,40,77,835. 2.3 Aggrieved by the draft order of assessment for Assessment Year 2006-07 dt.30.12.2009, the assessee filed its objections thereto before the DRP. The assessee also preferred an application under Section 154 of the Act before the TPO vide letter dt.2.2.2010. The TPO passed an order under Section 92CA(5) rws 154 of the Act dt.29.6.2010 wherein the T.P. Adjustment was revised to ₹ 11,84,66,758; the break up of which is as under :- i) Adjustment to the manufacturing segment : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated the fact that even after accepting the international transactions pertaining to the Air Solutions Segment to be at arm s length, it was erroneous on the part of the learned TPO to have included the aggregate value of the international transactions entered into by the Air Solutions segment instead restricting himself only to the international transactions entered into by the Infrastructure segment of the business. Ground No. 3 (iii): The Honourable DRP and the learned AO have erroneously erred in not appreciating the fact that the learned TPO has included a sum of `845,033,854 pertaining to the sale of finished goods by the Air Solutions segment as part of the sale of goods made by the Infrastructure segment. The aggregate revenues derived by the Infrastructure segment with reference to the international transactions entered into with the AEs amounts to `88,180,275 Ground No. 3 (iv): The Honourable DRP and the learned AO have erroneously erred in not appreciating the fact that the learned TPO completely ignored the fact that not only the products sold by the two segments are completely different, but they cater to a different clientele base. Ground No. 4(i): The Honour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eover the data of the preceding two financial years gives a clear indication of the business and economic conditions prevailing at the beginning of the relevant financial year i.e. the time when the transfer prices are set up, and the purpose of using multiple year data is to minimize and even out the impact of any abnormal factor which might have unduly influenced the outcomes of the data used for the comparability analysis. Escorts Limited should not be rejected: Ground No. 6(i): The Honourable DRP and the learned AO have erroneously rejected Escorts Ltd, which was selected by the Appellant, on the ground that the company had a different accounting year ending. The Learned TPO has erred in not obtaining information from Escorts Ltd regarding the financial results for the 12 month period ending 31st March 2006. Ground No. 6(ii): The Honourable DRP and the learned AO ought to have appreciated the fact that the learned TPO has not disputed the selection of Escorts Limited on the basis of any functional parameter, but solely on the ground that the financial results for the 12th month period ending 31st March 2006 were not available. Ground No. 6(iii): The Honourable DRP a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplying the prescribed methods in determining the arms length price for interest on outstanding debt and treating the receivable on par with investment grade bond rated as BBB by credit rating agencies. Ground No. 12:Also the learned AO/DRP/TPO have failed to appreciate the fact that on a consolidated basis, the outstanding payable of the appellant due to the holding company and other fellow subsidiaries is more than the outstanding receivable from the holding company and fellow subsidiaries. Ground No.13: Without prejudice to the above, we respectfully submit that should the learned Transfer Pricing Officer propose to impute interest on such advances, which the assessee has never earned, it would result in a hypothetical income and not real income. The supreme court in the case of Commissioner of Income Tax Vs. Bokaro Steel Ltd. 236 ITR 315 1999 SC has held that only real income can be brought to tax and not hypothetical income. Error in levying interest under the provisions of Section 234C: The Honourable DRP and the learned AO have grossly erred in levying a sum of `642,471 as interest under the provisions of Section 234C of the Act. The appellant craves leave to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nents and spares. 86,87,23,023 4. Rendering of CAD/CAM services 6,05,05,588 5. Co-ordinating sales for commission. 39,85,518 6. Recovery of expenses 1,83,55,185 7. Reimbursement of expenses 38,54,136 Adjustment only on the Infrastructure Segment. 6.3 The assessee had undertaken its T.P. Study with respect to the following two segments separately :- (i) Air Solutions, and (ii) Infrastructure Segments. The TPO, however, rejected the assessee's T. P. Study mainly due to the non-use of current year data, use of earlier year data of the comparable companies and use of comparable companies with different accounting years. After making these observations, the TPO proceeded to examine the comparability of the 5 comparable companies chosen by the assessee. The TPO accepted 4 of the companies chosen by the assessee as comparables, which are as under :- i. Andhra Pradesh Heavy Machinery Engineering Ltd. ii. Bharat Earth Movers Ltd. iii. Elcon Engineering Co. Ltd. iv. TRF L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both segments separately; different comparables were chosen for the two segments and ALP was drawn up separately for both the segments. The learned Authorised Representative also drew the attention of the bench to the fact that the comparables adopted by the TPO for making the adjustment were the 4 comparables related to the infrastructure group and that the three comparables selected by the assessee for the air solutions group are not considered by the TPO at all. 6.5.2 It was therefore contended by the learned Authorised Representative that while the adjustment made by the TPO pertains to the infrastructure segment only, the TPO has also taken the sales of the air solutions segment while computing the ALP adjustment. The learned Authorised Representative drew our attention to the order dt.29.6.2010 passed by the TPO under Section 92CA rws 154 of the Act wherein the value of the international transactions has been taken at ₹ 93,32,14,129. It was contended by the learned Authorised Representative that out of this amount of ₹ 93,32,14,129, a sum of ₹ 84,50,33,854 pertains to the air solutions segment and only an amount of ₹ 8,81,80,275 pertains to the infr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the Air Solutions Group, the assessee had selected the following three companies as comparables :- 1) Elgi Equipments Ltd. 2) Kirloskar Copeland Ltd. 3) Kirloskar Pneumatic Co. Ltd. 6.7.2 In the T.P. order passed by the TPO under Section 92CA of the Act dt.28.10.2009, it is seen that there is neither any mention whatsoever about the two segments nor is there any finding whether the TPO accepts or rejects the segmental details furnished by the assessee. However, for the computation of the ALP of international transactions, the TPO has adopted four out of five of the comparables chosen by the assessee in its T.P. Study for its infrastructure group and also adopted the current year margins of these comparables for determining the mean margin of the comparables. From these details as emanate from the record, it is clear that the TPO has made an adjustment only to the Infrastructure Group Segment and has not proposed any T.P. Adjustment for the Air Solutions Segment. That being the case, it is but appropriate that only those transactions pertaining to the infrastructure group segment are considered for making the T.P. Adjustment. In this factual matrix, we hold and dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made only on AE transactions related to the Infrastructure Segment and not only the entire transactions of the segment. It was submitted by the learned Authorised Representative that the infrastructure segment which has been subjected to T.P. Adjustment consisted of both the sales made not only to AEs and but also to non-AEs. The learned Authorised Representative submitted the sales revenues from the AEs only ₹ 8,81,80,275 out of the Revenues of ₹ 1,76,49,86,478 of the total infrastructure segment, as can be seen from the details extracted in the Table below :- Particulars Revenue from AEs (Rs.) Revenue from Non-AEs (Rs.) Total (Rs.) Sales of finished goods 2,36,89,169 1,67,68,06,203 1,70,04,95,372 Rendering of services 6,05,05,588 6,05,05,588 Sales Commission 39,85,518 39,85,518 8,81,80,275 1,67,68,06,203 1,76,49,86,478 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f being heard and considering the submissions / details / evidence furnished by the assessee in this regard. 8. Grounds No.3, 4 7 : Error in computation of operating margin in Infrastructure Segment. 8.1 The assessee has contended that notwithstanding the submissions on the T.P. Adjustment, the following errors have crept into the computation of the operating margin :- (i) that the TPO has erroneously considered the other operating income of the infrastructure segment to be ₹ 6,95,00,000 instead of the correct figure of ₹ 7,89,27,267 for computing the operating profitability of the Infrastructure Segment while computing the T.P. Adjustment. (ii) that the excise duty being pass through costs, the same should be excluded from the sales as well as from the operating expenses while computing the operating profitability of both the assessee as well as comparable companies. 8.2 Before us, the learned Authorised Representative submitted that the TPO has adopted the figure of other operating income of the infrastructure segment wrongly in the computation of the T.P. Adjustment. In this regard, we direct the TPO to examine this contention of the assessee and ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the margins. 9. Ground No.6 : Escorts Ltd. should not be excluded as a comparable. 9.1 In the TPO s order under Section 92CA of the Act, while the TPO accepted four out of the five comparables selected by the assessee for the infrastructure segment, he rejected one of the comparables, namely Escorts Ltd., on the ground that it had a different year ending. In this regard, as per the assessee's admission, this company had a different year ending and the figures related to the year ending 31st March were not available. We are of the view that in the above factual matrix, since the financial figures adopted for this company were for a different period, the TPO was right in holding that it is not comparable. We, therefore, find no infirmity in the decision of the TPO in rejecting this company as a comparable company. Consequently, Ground No.6 raised by the assessee is dismissed. 10. Ground No.5 - Multiple year data should be accepted. 10.1 The assessee has used Multiple Year Data while computing the margins of comparable companies. The TPO, however, while accepting four of the five comparables chosen by the assessee, has considered the current year s data for these com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act r.w. Rule 10B of the I.T. Rules, 1962. However, such non-availability will not dispense with the mandatory requirement of Rule 10B(4) for using current financial year data in conducting comparability analysis and in determining the ALP in accordance with section 92C(1) and 92C(2) of the Act. As it is mandatory requirement of law to utilise data of the current financial year to conduct the comparability analysis at the time of transfer pricing proceedings, the TPO is not only empowered but is also duty bound to determine the ALP using such contemporaneous data for this purpose even if such data was not available to the assessee in the public data bases at the time of preparation of its T.P. Study report. Further, we are also of the view that the TPO has rightly rejected the use of earlier year s data by the assessee, as the assessee failed to establish how such earlier year s data had an influence on the prices of the current financial year. Consequently, Ground No.5 raised by the assessee is dismissed. 11. Ground Nos.10 to 13 - Interest on Receivable - ₹ 56,28,000. 11.1 In the course of T.P. proceedings, the TPO observed that there are certain receivables fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. Ltd. V ACIT - OSD, Circle 3(1) (ITA No.7653/Mum/2011) of ITAT, Mumbai Bench. 11.2.3 It was also submitted by the assessee that it had not charged any interest for delayed realisations even in the case of Non-AE transactions. It was submitted that the debts were outstanding with both the AEs and Non-AEs for a period exceeding the credit period purely because of business reasons and that this is a common business practice prevailing in the industry and the delay if any in the payment is not due to extension of credit period by the assessee to its AEs. In this regard, the assessee placed reliance on the decision of the Hon'ble High Court of Bombay in the case of CIT V Indo American Jewellery Ltd., in ITA No.1053 of 2012. 11.2.4 The assessee further made the following submissions :- (i) The TPO had mentioned, in his order under Section 92CA of the Act, that debts outstanding for more than 6 months is considered for making the T.P. Adjustment towards notional interest. However, the actual adjustment has been made on the total amount of receivables. In this regard, it was submitted by the learned Authorised Representative that there were no receivables from AEs outstandi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the AEs is uncalled for on the facts of the present case and is, accordingly, deleted. 11.4.2 Following the above decision of the ITAT, Mumbai Bench in the case of Evonik Degussa India P. Ltd. (supra), we also hold that the addition on account of notional interest relating to alleged delayed payment in collection of receivables from AEs is not called for. However, as can be seen from the extract of the decision reproduced above, the above decision has been rendered in the factual context that there has been no agreement for charging interest on delayed payment. We, therefore, deem it appropriate to remand this issue back o the file of the Assessing Officer / TPO for examination as to whether there was any agreement for charging interest on late payments or not and if it is found that there was no such agreement, then the T.P. Adjustment made in this regard requires to be deleted. As this issue has been decided, in principle, in favour of the assessee by placing reliance on the aforesaid decision of the ITAT, Mumbai Bench (supra), it is not necessary for us to adjudicate on the other grounds of appeal raised on this issue. Consequently, the grounds raised at S.Nos.10 to 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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