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TMI Blog2015 (6) TMI 591X X X X Extracts X X X X X X X X Extracts X X X X ..... rticle 7 of the DTAA between India and Singapore, which is identically worded to article 7 of DTAA between India and Austria. The Explanation only explains the provision. The main provision of section 195(1) of the Act uses these specific words “any other sum chargeable under the provisions of this Act”. Therefore, for the invocation of the provisions of section 195(1) of the Act, the main condition is that the payment must be of the sum chargeable under the provisions of the Indian Income Tax Act, 1961. Admittedly there is a DTAA between India and Austria. As per the Article 5 read with Article 7 of the DTAA, it is categorical in so far as if the assessee in the contracting State does not have a PE in the other State, then the income of the assessee in the contracting State is liable to tax only in that contracting State and not in the other State. The facts in the present case clearly show that AT & S Austria is carrying out the re-working of the products of the assessee at its own manufacturing plant at Austria and there is no connection between the manufacturing activities done by AT & S Austria with the manufacturing process done by the assessee at its manufacturing facility i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el indicator, then obviously the NFA to sales ratio cannot be applied as that would be a filter which is more appropriate when adopting the operating profit to sales method for arriving at the PLI. Admittedly, perusal of Transfer Pricing Study and orders for AYs 2004-05, 2005-06 and 2008-09 show that the cash profit margin to sales is the method adopted for arriving at the appropriate PLI for the said AYs. In these circumstances, admittedly the principles of consistency would have to be followed and the methodology followed for the earlier years cannot be tinkered with or modified just for the purpose of assessment years in between with no variation in the facts and circumstances are available for the two AYs. In these circumstances, we direct that in the assessee’s case most appropriate PLI is to be arrived at by applying the cash profit margin to sales ratio. - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... peal and filed appeal before Tribunal on 31.01.2011 with a delay of 202 days. In view of the above, now Ld. Counsel for the assessee before us requested for condonation of delay for the reason that there is reasonable cause in view of the above reasons. Ld. CIT, DR, on the other hand, has not seriously objected to the condonation. In view of the above reasons, we are of the view that there is a reasonable cause due to fire occurred in the business premises of the assessee and due to that assessee's paper relating to CIT(A)'s order were lost sight off. There is a reasonable cause and hence, we condone the delay and admit the appeal. 3. The first common issue in these cross appeals (in ITA No.1262/Kol/2010 of revenue's appeal and ITA No. 186/Kol/2011 of assessee's appeal)is as regards to the order of CIT(A) restricting disallowance at ₹ 2,26,84,459/- out of the total disallowance of payment for preliminary warranty and reworking costs of ₹ 2,55,17,674/- made by AO by invoking the provisions of section 40(a)(i) of the Act for the reason of nondeduction of TDS u/s. 195 of the Act. According to AO, these payments are in the nature of fees for technical services. For deletio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of technical services being reworking costs. Accordingly, he held that the warranty costs are not liable to TDS but reworking costs being in the nature of technical services are liable to TDS. The observations of CIT(A) reads as under:- "5.3.4 I have considered the appellants submissions as well as observations of the AO. My observations are a under: (i) From the above facts and circumstances of the case it is clear that the above mentioned payments made by the appellant to its parent company AT&S Austria are only in terms of the distribution agreement. As per the terms of the agreement the patent company paid the amount of warranty to the customers and reworking cost (repair cost) to the service providers and thereafter raised debit note on the appellant in respect of both these costs. This is purely internal arrangement of the group and it is established principle that a person cannot escape its legal tax liability through its internal arrangement. Since, the warranty claim directly paid to the customers in consideration of their claim regarding defective goods there is no income component in the hands of customers. However, in respect of reworking cost the true recipient of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of fees for technical services paid by a resident. According to the 'exception', the fees for technical services payable in respect of any services utilized; (a) for the purpose of business or profession carried out by such person outside India or; (b) for the purpose of making or earning any income from any source outside India is not an income that falls within the net of section 9. The appellant is relying on the second part of the exception, i.e., 'for the purposes of making or earning any income from any source outside India'. It is the case of the appellant that its business principally comprises of export revenue in the sense that it sold its products to its parent company in Austria pursuant to a distribution agreement and in turn the parent company sold these goods to customers in Europe. Hence, the source of income in hands of the appellant company is not mere selling of the goods to the distributor, but the actual sale of the goods by the distributor and although its business is carried out from India, yet the income it get is from a source outside India and the payments made towards reworking cost is for the purpose of earning income from a source outside India. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g cost u/s 40(a)(i) due to non deduction of Tax at source under section 195 of the Inc Tax Act, 961 is confirmed and of ₹ 28,33,215/- on account of warranty claim is deleted. The appellant's ground is partly allowed." 5. First, we will deal with the issue of revenue's appeal qua the first and second ground against the order of CIT(A) in deleting the disallowance of the warranty payments/costs on the ground that the same was in the nature of technical services as defined under section 9(1)(vii) of the Act and hence liable for deduction of TDS under section 195 and on account of the said nondeduction of tax under the provisions of sub- section 40(a)(ia). Ld. DR argued that in the course of assessment, it was noticed that the assessee had paid an amount of ₹ 2,55,17,674/- for preliminary warranty costs and re-working costs and the same was liable for deduction under section 195 of the Act but the assessee had not deducted TDS, the provisions of section 40(a)(ia) had been invoked and the disallowance made. He stated that the assessee is in the business of manufacture and sale of printed circuit boards from its factory in Nanjangud and is a subsidiary of AT & S Austria. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , any excess of actual costs incurred by AT & S Austria over the retained 2% was required to be borne by the assessee and payable to AT & S Austria. The actual costs incurred would include journey and lodging expenses, re-work/chemical and other material costs. He argued that the Assessing Officer disallowed the warranty expenses reimbursed on the ground that essentially in the nature of technical fees. He explained that the payments to AT & S Austria were not on account of any services rendered by AT & S Austria but was only the reimbursement of warranty obligation which the assessee as a seller of the products is bound to discharge. Since the assessee is responsible for paying the warranty claims of the customers for defects in the goods sold, for the sake of convenience AT & S Austria is incurring such costs on behalf of the assessee and is claiming reimbursements of the same from the assessee. The payments made on cost to cost basis for the services rendered and did not involve any profit element. On this, Ld. Counsel for the assessee placed reliance on the decision of Hon'ble Supreme Court in the case of CIT v Tejaji Farasram Kharawalla Limited (1967) 67 ITR 95 (SC) to support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sun Microsystems India P. Ltd. (2014) 369 ITR 63 (Karn) exactly on the similar issue interpreting article 7 of the DTAA between India and Singapore, which is identically worded to article 7 of DTAA between India and Austria, and held as under:- "The material on record discloses that the assessee entered into an agreement for availing of logistic service for Sun Microsystems Singapore P. Ltd. ("Sun Singapore" for brevity). In terms of the agreement, Sun Singapore is required to provide distribution, management and logistic services to Sun Microsystems India P. Ltd. ("Sun India" for brevity) and such services included providing spare management services provision of buffer stock, defective repair services, managing local repair centres, business planning to address service levels, etc., Sun Singapore is not having any place of business or permanent establishment in India. Entire services were rendered by Sun Singapore from outside India. Sun Singapore is not engaged in the business of providing logistic services in India. Sun India the assessee avails of services of Sun Singapore for which a service fee is paid. From the business description of the assessee, it is clear that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is a finding of fact recorded by the Tribunal on appreciation of the entire material on record. When once factually it is held the technical services has not been made available, then in view of the law declared in the aforesaid judgment, there is no liability to deduct tax at source and, therefore, the finding recorded by the appellate authority cannot be found fault with. In that view of the matter, the substantial question of law is answered in favour of the assessee and against the Revenue." From the above Judgement of Hon'ble Karnataka High Court it is clear that the parent company has not made available to the assessee the technology or the technological services which was required to provide the distribution, management and logistic services. In view of this judgment and perusal of the order of the AO giving effect to the order of Coordinate Bench of this Tribunal for the AY 2004-05 in ITA No. 1450/Kol/2008 dated 31.03.2010 clearly shows that the Assessing Officer after verifying the agreement with AT & S Austria has also taken into consideration the decision of CIT(A) for the AY 2005-06 and has held that the said warranty expenses are nothing but reimbursement of the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were of two folds, viz.- (i) That the payment made by the assessee to M/s. AT & S, Austria was only reimbursement. He pointed out that M/s. AT & S, Austria has entered into different agreements with different providers of service. Since part of the services were utilized by the assessee, M/s. AT & S, Austria has recovered such part from the assessee. He pointed out that the allocation of the actual expenditure incurred has been made on a rational basis, i.e. on the basis of number of PCs used by the assessee and other group concerns, the details of which were duly furnished before the lower authorities and the CIT(A) has also reproduced the same on page 6 of his order. He submitted that there is no liability of TDS for reimbursement of the expenditure. In support of this contention, he relied upon the following decisions:- 309 ITR 356 (AAR) - Cholamandalam Ms General Insurance Co. Ltd. 142 ITR 493 (Cal.) - CIT -vs.- Dunlop Rubber Co. Ltd. (ii) That the services received by the assessee were in the nature of user of the copy right products. The licence to use copy right products does not amount to rendering of technical services within the meaning of section 9(1)(vii) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tilized by them. Thus, in the process, no income has accrued to M/s. AT & S. Austria. It has only recovered the actual expenditure incurred from all group concerns. 2.5. We have carefully considered the arguments of both the sides and perused the material placed before us. M/s. AT & S. Austria had entered into agreements with several companies for utilizing their products. In turn, it permitted its group concerns to utilize those products and the total payments made to the service providers were allocated to the group companies who actually utilized the services, the details of which has given in page 6 of the CIT(A)'s order, read as under:- Sr. No. Particulars of ser vic e Code Keys Total cos t incurred by HQ Share of AT & 2001-02 Invoice/ agreement received 3 Services provided by Microsoft Ireland Operations Ltd., see licenses for AT&S A licence for Microsoft produc t. Charges will be based on number of PCs used per legal entity. IN4 2 180,431 36,754 Yes Microsoft enterpr ise Lizenzen IN5 2 0 0 No Microsoft Medien 4 Services provided by SAP Oster reich GMbH, see contract with AT&S, Austr ia A. SAP Maintenance, charges will be passed on the number of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gether indicated that it could not be treated as income. The fact that only 0.67 per cent of the turnover was allowed as research contribution to the assessee-company, was because of the restrictions imposed by the Government. Therefore, the amounts received by the assessee-company did not constitute income assessable to tax". The above decision of Hon'ble Jurisdictional High Court was also relied upon by the Authority for Advance Rulings in the case of Cholamandalam Ms General insurance Co. Ltd. (supra), wherein their Lordships held as under:- "That the amount paid by the applicant could not be said to be in the nature of consideration for offering the services of I. The parties had entered into a mutually beneficial agreement, and incidental thereto, the applicant reimbursed a part of the salary of the employee payable by HMFICL. What the applicant paid went to reimbursement of the cost borne by HMFICL on account of employment I, that too, partly. In this process no income could be said to have been generated which answered the description of "fees for technical services". 2.8. In view of the above decisions of Hon'ble Jurisdictional High Court as well as Authority for Advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout which the customers would not accept the product AT & S Austria completed the manufacture of the product in Austria by using its manufacturing facilities and for the same it was mutually agreed by the assessee and AT & S Austria that the actual cost incurred by AT & S Austria in performing the aforesaid manufacturing activity to finish the production of PCBs would be reimbursed by AT & S India. It was also agreed that these costs would inter alia include direct material s cost, material overhead costs, production overhead costs, transportation costs, etc. incurred in Austria by AT & S Austria. Further, it was also agreed that the assessee would bear all the risks associated with the product defects or non-conformities that existed at the time of delivery of products by the assessee to AT & S Austria which in turn, after rework, would be sold to final customers. By virtue of the aforesaid agreement, the actual cost incurred by AT & S Austria in getting the products repaired in Europe in order to get the product sold was reimbursed from the assessee during the relevant previous year. In fact, the customers to whom the products were sold in Europe made complaint about the defec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the reworking, there was no income element in the payment to AT & S Austria and consequently the provisions of deduction of tax would not apply. As per him, the provisions of section 195 of the Act what is required is that the payment to the nonresident must be an amount chargeable under the provisions of the Act and the income, if any, of AT & S. Austria was not liable to tax in India under the Indian Income Tax Act, 1961 as AT & S Austria did not have any common establishment or any other presence in any manner whatsoever in India. He stated that though CIT(A) and AO was of the view that in view of the Explanation to section 195, the payment by the assessee to AT & S. Austria was liable for deduction of TDS as AT & S. Austria had no common establishment or residence or place of business or business connection in India nor any other presence in any manner whatsoever and the provisions of DTAA applied, the income of AT & S. Austria was liable to tax only in Austria. He explained that as per the provisions of section 9(1)(vii) of the Act, it is only the income by way of fees for technical services which is deemed to accrue or arisen in India but the work done by AT & S Austria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 195 could not be invoked in respect of the payments made to AT & S Austria. Accordingly it was urged that the disallowance made by the AO and confirmed by CIT(A) was liable to be deleted. 11. In reply, SR D.R. stated that in view of the amendment to Section 195 by the introduction of Explanation (2) thereto, any payments made by an Indian Company to a non-resident whether they have a residence or place of business or business connection or any other persons in any manner whatsoever made no difference and the assessee was liable to deduct TDS. She argued that re-working costs are in the nature of fees for technical services as the assessee itself is engaged in the business of manufacture and sale of professional goods of Printed Circuit Boards and the repair jobs of such sophisticated goods could only be in the nature of technical services. 12. We have considered the rival submissions and gone through facts and circumstances of the case. Admittedly the assessee is dealing its business with its subsidiary company AT & S Austria. Undisputedly the assessee's transaction with the parent company AT & S Austria is also subject matter of Arm's Length Pricing un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that AT & S Austria is carrying out the re-working of the products of the assessee at its own manufacturing plant at Austria and there is no connection between the manufacturing activities done by AT & S Austria with the manufacturing process done by the assessee at its manufacturing facility in Nanjangud. Consequently the income, if any, generated by AT & S Austria on account of the repairing operations or manufacturing operations done by AT & S Austria at its manufacturing facility outside India cannot be held to generate any income taxable in India under the Indian Income Tax Act, 1961. Admittedly even as per the provisions of section 9(1)(vii) of the Act and the Explanation (2) thereto clearly excludes the consideration for the assembly undertaken by AT & S Austria from the rigours of section 9(1)(vii) of the Act. In these circumstances, as the income of AT & S Austria is not chargeable to tax under the Indian Income Tax Act, 1961, the requirement of deduction of tax at source under section 195 of the Act would not be applicable and consequently no disallowance under section 40(a)(ia) of the Act can be made. In the result, the addition as made by AO and as confirmed by CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant to note that the above mentioned section requires "any sum" (and not any income) chargeable to tax under the Income Tax Act, to be subjected to deduction of tax at source. The assessee's claim that the payments made were only in the nature of reimbursements and contained no element of income, and hence not subject to withholding of tax u/s 195 is found untenable in view of the decision of the Hon'ble Supreme Court in the case of Transmission Corporation of AP Ltd. V CIT where the Apex Court held that the sum here connotes gross sum and not merely the sum that represents income of the payee. The assessee-company, in the instant case has not made any tax deduction at source on the payments made to AT&S Austria. Hence, in view of the failure to deduct the tax at source the amount of ₹ 1,50,44,031/- is disallowed u/s. 40(a)(ia) of the I.T. Act, 1961 and the same is added back to the total income of the assessee company." Aggrieved, assessee preferred appeal before CIT(A). 15. The CIT(A) al so confirmed the action of the AO by giving the following three reasons:- i) "Here the service provider highly technical/skilled services in the nature of information technology,, elect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices and cost of software license and up gradation are not in the nature of royalty as per the meaning of the said term assigned under the provisions of section 9 of the Inc Tax Act, 1961 and the facts of the decisions as cited by the appellant are not identical to the facts of the instant case therefore, these payments are not chargeable to tax in India even in the hands of ultimate vendor/service providers namely, Austrian Telecom, Lotus Inc. Microsoft Corporation etc.," iii) As regards the contention of the appellant that there is no element of income embedded in the payments made by the appellant company to parent company in addition to observations given in para (i) when the whole of section 195 and Chapter XVII-B are read, then the real picture would emerge. The provision of section 195(1) clearly shows that any person responsible for making payment to non-resident in respect of any interest or any other sum chargeable under the provisions of this Act has to deduct tax at the rates in force. Now what is the meaning of any other sum chargeable under the provisions of this Act. Obviously, it would mean that portion of the sum on which tax is payable by such non-resident. But ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re us Ld. Counsel for the assessee stated in respect of reimbursed to AT & S Austria that the actual cost of an amount of ₹ 1,50,44,031/- was under the head "Information Technology Costs" . He narrated facts that the assessee had entered into an agreement dated 13.03.2001 with AT & S Austria. AT & S Austria, in order to provide services to various group companies carrying out their business, in turn entered into different agreements with different service providers for acquiring licences of various products and payment of lease rent for connectivity charges. AT & S Austria made payments on behalf of the group companies to the service providers and thereafter claimed reimbursements of the payments made on cost to cost basis for the services rendered by Service providers, from group companies including the assessee. He stated that while making the subject payment of ₹ 1,50,44,031/- to AT & S Austria in respect of the reimbursement of actual cost, the assessee did not deduct any tax under section 195 of the Act, as payments for reimbursement of actual costs incurred by AT & S Austria was not chargeable to tax. He stated that the allocation of actual cost which was reimburs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Coordinate Bench of this Tribunal referred to supra for the assessment years 2002-03 and 2003-04 clearly shows that the Tribunal has taken into consideration the agreement dated 13.03.2001 between the assessee and AT & S Austria. Further, similarly, Hon'ble Karnataka High Court in a recent judgment in the case of DIT v. Sun Microsystems India P. Ltd. (2014) 369 ITR 63 (Karn) exactly on the similar issue interpreting article 7 of the DTAA between India and Singapore, which is identically worded to article 7 of DTAA between India and Austria held that the parent company has not made available to the assessee the technology or the technological services which was required to provide the distribution, management and logistic services. We further noticed that in the said order the Tribunal has taken into consideration the decision of the Hon'ble Jurisdictional High Court in the case of CIT v Dunlop Rubber Co. Limited (1983) 142 ITR 493 (Cal) and in the similar circumstances that of the assessee to hold that the reimbursement of the expenditure does not generate any income in the hands of the recipient and consequently there was no requirement of deduction of TDS and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility analysis and incorrectly included only profitable entrepreneurial companies as uncontrolled comparables, while excluding comparable low margin companies from its comparability analysis. (3.2.) That the learned DRP erred in not appreciating the fact that there are significant differences in the levels of working capital employed by the comparables vis-a-vis that of the appellant and suitable adjustment for differences in working capital needs to be provided. (3.3.) That the learned DRP erred in appreciating the fact that cash operating margin earned by appellant from AT&S Group sales is higher than the cash operating margins earned from third party sales. Therefore, even from an internal comparability perspective, the profitability from the transactions with AT&S group compares favourably with sales made to third parties, establishing the transactions at arm's length. 4. That the ld. DRP erred in disregarding the alternative economic analysis carr ied out by the assessee considering the overseas entity as the tested party an thereby justifying that international transactions undertaken by such overseas entity are at arm's length price. The learned DRP erred in not apprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate profit level indicator as against cash profit margin adopted by the appellant in determinat ion of arm's length price; (b) Disregarding the fact that the learned Panel had accepted the cash profit margin as an appropriate PLI in the proceedings for FY 2005-06 in view of the appellant being a capital intensive unit. 6.That the learned AO and the learned Panel erred in not providing appropr iate economic adjustments while determining the arm's length pr ice. 7.The learned AO and the learned Panel er red in not proving the benefit of lower range of +/-5% in determination of arm's length price." 20. As the Transfer Pricing issue in both these appeals are identical, this issue is being decided by this common order taking the facts, circumstances and issue from AY 2006-07. 21. Brief facts leading to the above issue are that the assessee filed its return of income on 23.11.2006 for the relevant AY 2006-07 a draft assessment order was passed on 24.12.2009 u/s. 143(3) read with section 144C(1) of the Act making following additions: "i) Adjustment of Arm's Length Price as per TPO's order dated 30.10.2009 ₹ 15,92,64,423, ii) Disallowance u/s. 14A read with Rule 8D ₹ 68 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Transfer Pricing Officer rejected the assessee's contention to take the cash profit margin on sales as the appropriate profit level indicator and selected the operating profit margin as the appropriate profit level indicator for the assessee and the Transfer Pricing Officer computed the operating profit margin of the assessee at (-) 1.57308107% and the arithmetical mean of the operating profit margins of the comparable companies selected by the assessee at 7.80836917%. Consequently the Transfer Pricing Officer computed the transfer pricing adjustment at ₹ 15,92,64,423/-. Against the said proposed draft assessment order, the assessee had approached the DRP, Kolkata. Before the DRP, it was stated that the methodology adopted by the Transfer Pricing Officer being the net fixed assets to sales ratio was not the correct method in so far as the ratio did not indicate as to whether the company was the capital intensive or otherwise. It was the submission that by adopting the net fixed assets to sales ratio, the comparables reduced from the four mentioned above to three in so far the Fine Line Circuits Limited got excluded from the list of comparable companies in so far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the computation of PLI of comparable companies, the appellant company could not demonstrate as to how the proviso to rule 10B(4) of the Rules was to be invoked in the circumstances of the appellant company. Even otherwise also, no specific objection was filed by the appellant company before the DRP with regard to rejection of multiple year data by the TPO. Fourth Allegation: The appellant company could not furnish any tenable explanation to defend its own PLI (i.e. cash profit margin on sales) and to enable the DRP to reject the TPO's contention that operating profit margin was more realistic PLI than cash profit margin on sales. Fifth Allegation: The appellant company's contention that the activities carried out by it required huge capital investment led to the conclusion that its true profit could not be determined on the strength of the cash profit and hence, pricing of the international transactions could not entirely be unconcerned with depreciation. Sixth Allegation: The DRP's decision for the previous year relevant assessment year 2006-07 in approving the PLI selected by the appellant company (i.e. cash profit margin on sales) was relevant to the context of the draft o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvited to the rule 10A (d) of the Rules, wherein it has been provided that: "(d) 'transaction' includes a number of closely linked transactions." 4.5 Reference is invited to the decision of the Hon'ble Pune Tribunal in the matter of Demag Cranes & Components (India) (P) Ltd. Vs. Deputy Commissioner of Income-tax reported in [2013] 30 taxmann.com 364 (Pune - Trib.). The Hon'ble Tribunal inter alia held that rule 10A (d) of the Rules explains the meaning of the expression 'transactions' for the purpose of computation of arm's length price as to include a number of closely linked transactions. On a combined reading of rule 10A(d) and 1-B of the Rules, it comes out that a number of transactions can be aggregated and construed as a single 'transaction' for the purpose of determining the arm's length price, provided of course that such transactions are 'closely linked'. Ostensibly the rationale of aggregating 'closely linked' transactions to facilitate determination of ALP envisaged a situation where it would be inappropriate to analyse the transactions individually. The proposition that a number of individual transactions can be aggregated and construed as a composite transaction in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne common source, that is, the business of manufacture and sale of PCBs. We have briefly described the aforesaid international transaction hereinbelow: • Your Honours may please find in page no. 97 of the paper book that the raw materials/consumables/spares valued INR 9.24 Thousand were purchased by the appellant company from AT&S AG in a certain emergency situation to meet immediate requirement and to run the production smoothly. • Your Honours may please find in page no 108 of the paper book that two second hand capital equipments valued INR 48.35 Thousand were purchased by the appellant company from AT&S AG for using the same in the production process. • During the previous year 2006-07, a part of the finished products (PCBs) of the appellant company valued INR 1,28,98,46 Thousand was sold to associated enterprise. • Your Honours may please find in page no. 108 of the paper book that in order to take advantage of economy of scale and operational convenience, AT&S AG entered into a global arrangement with various service providers in the area of information technology. The benefit of technology was shared by all the AT&S group companies including the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n page no.99 of the paper book that as per the sales support agreement dated 10.10.2003. AT&SHK was responsible to identify and solicit customers on behalf of the appellant company in the overseas market (Asia except India, America and Australia) in return for a commission of 3% on sales per annum. The appellant company paid sales commission to AT&SHK for a sum of INR 61.80 Thousand for obtaining sales services under the aforesaid agreement during the previous year 2006-07. • Your Honours may please find in page no.108 & 109 of the paper book that according to the secondment agreement dated 17.9.2002, AT&S AG had undertaken to provide qualified employees to AT&S group companies including the appellant company. During the previous year 2006-07, the seconded employees worked for the appellant company as per the agreement. They received compensation from ATD&S AG, which was reimbursed by the appellant company to AT&S AG(INR 32.166 Thousand) without any mark-up thereto. Further, during the previous year 2006-07, the appellant company incurred travelling and personal expenses (mainly pertaining to airfare and visiting card charges) amounting to INR 16.18 Thousand for employees dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... z., Akasaka Electronics Ltd and Anand Electronics & Inds. Ltd which were selected in the earlier year (previous year 2005-06) and also approved by the DRP, were not included in the list of comparable companies by the appellant company in the following previous year (i.e. previous 2006-07). Hence, the DRP held that the appellant company selected the comparable companies as per its own convenience, ignoring consistency and without any apparent reason for not selecting Akasaka Electronics Ltd and Anand Electronics & Inds. Ltd. 4.12 In this connection, reference is invited to page no. 108 of the OECD Guidelines (Chapter III - Comparability Analysis - July, 2010) which describes the comparability analysis as follows: "Below is a description of a typical process that can be followed when performing a comparability analysis ... ... Step 1: Determination of years to be covered. Step 2: Broad-based analysis of the taxpayer's circumstances. Step 3: Understanding the controlled transaction(s) under examination, based in particular on a functional analysis in order to choose the tested party (where needed), the most appropriate transfer pricing method to the circumstances of the case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies which were functionally comparable with the appellant company were selected. • Companies with sales greater than zero were accepted. • Companies with a ratio of total sales from manufacturing activity to total sales less than 90% were rejected. • Companies with a ratio of research and development expenses to sales less than 3% were accepted. • Companies with a ratio of net fixed assets to sales ratio greater than 500% were rejected. • Companies with sales less than INR 1 Crore were rejected. • Companies with net worth greater than zero were accepted. • Companies manufacturing electronic components correlating to the activities of the appellant company were accepted. (3 companies selected such as BCC Fuba India Ltd. Fine-Line Circuits Ltd and Precision Electronics Ltd) Step 5: After selecting the comparable companies, the appellant company selected the appropriate PLI i.e., 'cash profit margin on sales'. Step 6: The appellant company computed the PLIs of the afo5resaid comparable companies. Step 7: The appellant company computed the arithmetic mean of the PLIs of the afo5resaid comparable companies which is termed as arm's length r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year data was concerned in the computation of PLI of comparable companies, the appellant company could not demonstrate as to how the proviso to rule 10B (4) of the Rules was to be invoked in the circumstances of the appellant company. It was further alleged that even otherwise, no specific objection was filed by the appellant company before the DRP with regard to rejection of multiple year data by the TPO. 4.17 In this connection, attention may please be invited to the provision of rule 10B(4) of the Rules, which reads as under: "(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." 4.18 The aforesaid provision was explained by the Hon'ble Bangalore Tribunal in the matter of Philips Software Centre (P) Ltd v. ACIT reported in [20008] 26 SOT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erences between dealings might reflected differences in circumstances; and (iii) this approach of using multiple-year data was consistent with the OECD Guidelines and the Indian Transfer Pricing Regulation. The OECD Guidelines in page no. 129 (Chapter III - Comparability Analysis) has provided that: "3.76 In order to obtain a complete u9nderstanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both the year under examination and prior years. The analysis of such information might disclose facts that may have influenced (or should have influenced) the determination of the transfer price.... 3.77 Multiple year data will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. 3.78 Multiple year data can also improve the process of selecting third party comparables e.g. by identifying results that may indicate a significant variance from the underlying comparability characteristics of the contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate PLI for the appellant company. The DP, in its order, approved the selection of PLI made by the TPO. 4.28 In this connection, reference is invited to the decision of the Hon'ble Panaji Bench of the Income Tax Appellate Tribunal in the matter of Pentair Water India (P) Ltd. Vs. ACIT, Goa reported in [2014] 47 taxmann.com 132 (Panaji). The Hon'ble Tribunal has inter alia held that: "..... We noted that different companies have adopted different method of depreciation. In fact, for charging depreciation to the Profit & Loss account there are different prevalent recognized methods of depreciation. Some Assessees opt for Straight Line method, some opt for Written Down method and some opt for Sum of Digit method or even Replacement Cost method. Selection of each method will affect the rate and quantum of depreciation even if the nature of the asset is the same and ultimately, the net profit derived by the company will vary. For determining the fair and true profit, in our opinion, it is appropriate that the effect of the depreciation must be excluded out of the operating profit for determining the operating profit ratio. Therefore, the best way of computing the operating pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's Act, 1956, the higher will be the deviation from 'true profit' which would have been computed had the actual amount of depletion of fixed assets been taken into consideration by a company in arriving at the profit net of depreciation. 4.31 Your Honours may please note that the appellant company filed detailed submission with the DRP in favour of selection of 'cash profit margin on sales' as an appropriate PLI vide letter dated 20th May, 2011, which Your Honours may please find in page no. 125 and 126 of the paper book. 4.32 Your Honours may please further note that the appellant company had used the aforesaid PLI for assessment year 2004-05, assessment year 2005-06 and assessment year 2008-09 and the same was accepted by the Tax Authority for the aforesaid assessment years. The aforesaid PLI was also approved by the DRP for the assessment year 2006-07. In view of this, Your Honours may please appreciate that the allegations made by the DRP leads to the violation of the principle of consistency pronounced by the Hon'ble Supreme Court of India in the case of Radhasoami Satsang v Commissioner of Income Tax reported in 193 ITR 321 (SC). 4.33 In view of our above submissions, Your ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld vary from year to year depending upon the facts and circumstances of the case. Your Honours may please appreciate that the aforesaid allegation of the DRP was misconceived because the determination of PLI, in the absence of any change in the functions performed / assets employed / risks assumed by the appellant company, would remain unchanged from year to year. In the instance case, there was no change in the functions performed / assets employed / risks assumed by the appellant company between the two consecutive assessment year (i.e assessment year 2006-07 to assessment year 2007-08) and hence, the allegation made by the DRP for the assessment year 2008-09 was misplaced. 4.36 Further, Your Honours may please note that the appellant company selected the PLI 'cash profit margin on sales' for the assessment year 2004-05, 2005-06 and 2008-09 and the same was accepted by the Tax Authorities for the respective assessment years. The search processes were documented in page no. 207 of the paper book (Transfer Pricing Study Report for assessment year 2004-05), page no. 213 of the paper book (Transfer Pricing Study Report for the assessment year 2005- 06) and page no. 219 of the paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Mumbai Tribunal in the case of DCIT vs. Reuters India (P) Ltd reported in [2013] 33 taxmann.com 481 (Mumbai - Trib.) for assessment year 2005-06. The Department Representative argued before the Hon'ble Tribunal that the rule 19B (1)(e) of the Rules did not permit the adoption of cash profit. He accentuated on that the aforesaid rule provides for taking only the net profit in numerator with varying denominators whose selection depends upon the act and circumstances of each case. In the opposition, the Learned Counsel for the assessee argued that in the order passed by the TPO in assessee's own case for the assessment year 2007-2008, cash profit/operating cost was accepted as the PLI. Similar position was demonstrated in respect of the order passed by the TPO for assessment year 2008-2009 also. The Hon'ble Tribunal held that the TPO himself accepted the ratio of cash profit/operating cost as the correct PLI in assessee's own case for assessment years 2007-08 and 2008- 2009 and in this regard, the principle of consistency could not be ignored. The Hon'ble Tribunal held that the learned CIT(A) was justified in applying cash profit/operating cost as the correct PLI under TNMM. 4.39 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), wherein the Hon'ble Tribunal inter alia held that: "7. ....It cannot be open to the Assessing Officer to blow hot and cold at the same time.................He ought to have at least dealt with the merits of the issue and examined if different considerations must apply here. There was thus clear incongruity in the approach of the AO and this intricacy is indeed erroneous and prejudicial to the interest of the revenue inasmuch as the very reasons for which the foreign travel expenses has been disallowed having not been taken into account for the purposes of examining the actual expenditure of such travel". 4.43. Your Honours may please note that the DRP in the current year alleged that the DRPs approval or disapproval for the aforesaid PLI in the earlier years was not necessarily a binding precedent. However, the DRP in the current year confirmed the following view of the TPO without any valid reason and further investigation that: Further if the filter of NFA/sales is applied as done by DRP, Kolkata for AY 2006-07 the less intensive company Fine Line Circuits ltd. is automatically rejected. Hence, there is no further adjustment required for depreciation and working capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argin on sales and operating profit margin in the circumstances of the appellant company truly indicated its profit level. 4.48. Reference may please be invited to page no. 116 of the paper book, wherein Your Honours may please find that the appellant company submitted to the DRP some PLIs which could be used for determining arm's length price under the TNMM) prescribed by the Institute of Chartered Accountants of India in their 'Guidance Note on Report on International Transactions under section 92E of the Income Tax Act, 1961 (Transfer Pricing)". The ratios are as under:- (i) Ratio of net profit before tax to sales, (ii) Ratio of net profit before interest and tax to sales; (iii) Ratio of cash profit to sales; (iv) Ratio of net profit before tax to shareholders funds; (v) Ratio of net profit before interest and tax to assets, (vi) Berry ratio - ratio of operating cost to operating revenue. 4.49. We have described the aforesaid ratios in nutshell hereinbelow: The ratio of net profit before tax to sales or the ratio of net profit before interest and tax to sales: Your Honour may please note that the rule 10B(1)(e) of the Rules provides for the application of net profit mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of fixed assets (net block plus capital work in progress) as on 31s t March, 2007 stood at INR 834,544 thousand, whereas the total assets (=next fixed assets+ investments + deferred tax assets + net current assets) stood at INR 1,334,660 Thousand. Hence, the ratio of the fixed assets to total assets ratio was not so high as to justify the use of the aforesaid ratios as PLI. Berry ratio focuses on comparing the gross profitability of an activity and operating expenses necessary to carry it out. A situation where berry ratio can prove useful is for intermediary activities, where a taxpayer purchases goods from an associated enterprise and on-sells them to other associated enterprises. However, the appellant company is engaged in manufacture and sale of printed circuit boards and as such berry ratio is not an appropriate PLI for the appellant company. 4.50. In this connection, reference is invited to the decision of the Hon'ble Hyderabad Tribunal in the matter of BA Continuum India (P) Ltd. -vs.- ACIT reported in [2013] 40 Taxman.com 311 (Hyderabad- Trib.), wherein it has been held that : The Tribunal in the case of Qual Core Logic Ltd. -vs.- Dy. CIT [2012] 22 taxman.com 4/52 SOT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision, the objection of transfer pricing is to compare like with like and to eliminate differences, in the instant case, Your Honours may please note that depreciation was not deducted from profit while computing the PLI of the appellant company as well as the comparable companies and hence, the object of transfer pricing to compare like with like and to eliminate differences has been fulfilled. 4.52. Your Honour may please note that the Hon'ble DRP approved the selection of cash profit margin on sales as an appropriate PLI in the appellant company's case for the assessment year 2006-07. However, though there was no change in the circumstances, in which the appellant company operated in the subsequent year (i.e. previous year 2006-07/ assessment year 2007-08), the DRP rejected the aforesaid ratio as a PLI. Further, the aforesaid ratio was accepted as an appropriate PLI by the Tax Authority for the assessment years 2004-05, 2005-06 and 2008-09. 4.53. in view of our above submissions, Your Honours may please appreciate that the aforesaid allegations made by the DRP are not sustainable and hence to be struck down. Computation of arm's length price 4.54. Your Honours may please fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method by the DRP for the assessment year 2006-07 and the assessee's method of computing the operating profit by considering the profit before depreciation being cash profit to sales method for arriving at the appropriate profit level indicator which had also been accepted by the DRP for the assessment year 2006-07 and which was also the methodology adopted for AYs 2004-05, 2005-06 and 2008-09, wherein no transfer pricing adjustment had been made. According to him, the DRP ought not to have directed the AO to exclude Find Line Circuits Limited because the NFA to sales ratio was significantly lower than that of the assessee. He stated that the DRP having accepted the correctness of the methodology adopted by the assessee for arriving at the profit level indicator could not have used the discarded method just for the purpose of excluding one of the comparables. He admitted that each assessment year is a separate unit but when there are no change in these facts and circumstances, the methodology adopted for the earlier years and such possession having been sustained, the same could not be changed in a subsequent year and concept of consistency was to be considered and the methodology ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the comparables cannot be applied. This is because NFA to sales has nothing to do with the cash profit margins generated by an assessee. Further for applying the filter of NFA to sales ratio of the comparables, an average of five years has been considered representing two years pr ior and two years subsequent. This again would derail the exact purpose and the applicability of the TNMM method in so far as the AY under dispute is the AYs 2006-07 and 2007-08. However, when the NFA to sales ratio for the five years average is considered, it takes into consideration the AYs 2004-05, 2005-06 and 2007- 08 for which years in the Transfer Pricing Study the said computation itself had not been adopted and Fine Line Circuits Limited was considered and accepted as comparables by the Transfer Pricing Officer and the assessee. Here it is noticed that the NFA to sales filter has been applied exclusively for the purpose of exclusion of one of the comparables out of the four, which have been consistently adopted as a comparable for earlier and subsequent AYs. In these circumstances, we are of the view that the NFA to sales filter cannot be applied and result of Fine Line Circuits Limited is liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,84,000/- only." 28. The facts are that the assessee has earned dividend income at ₹ 24,570/- and not the sum of ₹ 25,203/- as noted by the AO. None of the authorities i.e. the AO or the DRP has gone into the issue and summarily made disallowance by invoking the provisions of Rule 8D. This issue is covered by the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom.), wherein it is held that Rule 8D of the Rules as inserted by the I. T (Fifth Amendment) Rules, 2008 w.e.f. 24.3.2008 is prospective and not retrospective. Hence, this provision will not apply to relevant AY 2006-07, which is under dispute. The Tribunal is taking a consistent view that prior to AY 2008-09, when Rule 8D will apply, the disallowance be restricted at 1% of the exempted income u/s. 14A of the Act. We direct the AO accordingly. This issue of assessee's appeal is partly allowed. 29. The next issue in this appeal of assessee (in ITA No. 2071/Kol/2010 for AY 2006-07) is against the order of AO not allowing credit for TDS amounting to ₹ 1,58,430/-. For this assessee has raised following ground no. 14" "That the learned AO erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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