9911796707
TMI Blog2017 (4) TMI 908X X X X Extracts X X X X X X X X Extracts X X X X ..... Grounds of appeal pertaining to transfer pricing adjustment: 1. Inappropriately making transfer pricing adjustment even though the pricing of all international transactions of the Appellant was at arm's length Erred in making confirming the transfer pricing adjustment to the international transactions of the Appellant pertaining to purchase of machined components, sale of machined components and payment of Royalty to associated enterprises ('AEs') and concluding that the value of the international transactions are not at arm's length 2. Inappropriate non acceptance of the approach and analysis provided by the Appellant in its transfer pricing study report Erred by not accepting the approach and analysis undertaken provided by the Appellant in its transfer pricing study report for benchmarking its international transactions. 3. Inappropriately considering Shanthi Gears Limited and International Combustion (India) Limited as comparable for AY 2009-10 Erred by concluding that Shanthi Gears Limited and International Combustion (India) Limited are comparable to the Appellant for arriving at the arm's length price in relation to the international transactions 4. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anthi Gears Limited and International Combustion (India) Ltd. are functionally not comparable to the assessee, hence the same should not be picked up for benchmarking the international transactions. 6. Briefly, in the facts of the case, the assessee is Joint Venture company between the Anand Automotive Systems, having equity of 24.1% and foreign company Dana Corporation, USA, having equity of 75.90%. The assessee was primarily engaged in the business of manufacture and sale of drive train components namely propeller shafts, universal joints, axles and components thereof, which constitute heart of the transmission system. The assessee had set up its unit to manufacture components of propeller shafts at Jodalli, assembling of propeller shafts at Hosur and Satara, manufacturing of axles at Chakan and driveshaft assembly plant at Pantnagar. The assessee had filed revised return of income declaring total income of Rs. 9,56,666/-. During the year under consideration, the assessee had entered into international transactions with its associated enterprises and hence, the Assessing Officer made reference to the Transfer Pricing Officer (in short 'the TPO') for benchmarking the internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only the results of manufacture of gear and geared boxes should be taken. Our attention was drawn to the working of OP/OC of the said concern at page 100 of the Paper Book, wherein it worked out at 0.17%. He stressed that since the said concern was not engaged in automotive industry, the results of said concern Industrial Combustion (India) Ltd. should not be adopted for benchmarking international transactions of the assessee and in case, the same is to be included, then at best the same is to be taken at 0.17%. 9. The learned Departmental Representative for the Revenue in this regard placed reliance on the orders of authorities below. 10. We have heard the rival contentions and perused the record. The assessee had entered into various international transactions with its associated enterprises. The assessee was engaged in the business of manufacture and sale of drive train components namely propeller shafts, universal joints, axles and components thereof which constitute heart of the transmission system. The assessee had set up units to manufacture different components at different places. The assessee had entered into international transactions and had applied modified CPM metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of functional analysis in order to benchmark the international transactions. The bare perusal of website details of the said concern which list out the activities undertaken by it and the range of applications of items manufactured by it, clearly shows that the items manufactured by Shanthi Gears Ltd. are not utilized for automotive industries. As referred to by us in the paras hereinabove, the assessee is engaged in the manufacture and sale of drive train components, which constitute the heart of transmission system of the automobiles and has no application in the fields in which the items manufactured by Shanthi Gears Ltd. are applied. Accordingly, we find no merit in the order of TPO in including the said concern Shanthi Gears Ltd. as comparable. We direct the TPO / Assessing Officer to exclude the same and re-compute the arithmetic mean of finally selected comparables. 12. Now, coming to next concern i.e. International Combustion (India) Ltd. The learned Authorized Representative for the assessee in this regard referred again to the website extract of the said concern which is placed at pages 685 to 688 of the Paper Book and pointed out that the said concern is engaged in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. The assessee objected to the said approach and pointed out that at entity level, it had earned 3.66%, as per audited segmental financials which was as under:- Particulars Reference Amount (Rs Crores) / % Net Sales A 528.38 Other Income B 8.52 Total income C=A+B 536.90 Less: Non-operating income Interest received D 3.02 Gain on sale of fixed assets E 0.01 Operating Income F=C-D-E 533.87 Total expenses G 514.74 Less: Non-operating expenses Interest Paid H 0.40 Operating expenses I = G-H 514.34 Operating profits J = F-I 19.53 Operating profit / Operating Revenue K=J/F*100 3.66% 15. The Dispute Resolution Panel (in short 'the DRP') did not comment on the report of TPO while disposing the objections raised by the assessee. Thereafter, the assessee filed rectification application dated 03.02.2015. The DRP in the rectified directions dated 14.02.2015 directed the Assessing Officer to examine the working of operating profit margins furnished by the assessee and re-work the net operating profit margin considering draft safe harbour rules. Consequent thereto, the TPO filed rectification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at page 420 of the Paper Book. The learned Authorized Representative for the assessee pointed out that the Assessing Officer in view of the earlier order of rectification passed by the DRP on 14.02.2014 had passed rectification order under section 154 read with Rule 13 of the Income-tax (DRP) Rules, 2009 and determined the income of the assessee and also worked out the refund due to the assessee. The learned Authorized Representative for the assessee pointed out that refund of Rs. 1.37 crores has not been issued to the assessee till date. In view of our decision in holding that there is a mistake in working out the PLI of assessee company, we direct the Assessing Officer to adopt the figure as adopted in order passed under section 154 read with Rule 13 of the DRP Rules dated 26.09.2014. The Assessing Officer is directed to verify the said claim of assessee and determine the refund due to the assessee along with interest as per the Act. The ground of appeal No.4 raised by the assessee is thus, allowed. 18. Now, coming to the issue in ground of appeal No.5 i.e. corporate issue of disallowance of Management Fees. The Assessing Officer in the draft assessment order passed under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty to Dana Corporation @ 2.85% of sales except the sales to Dana Corporation. Further, the assessee was also paying management fees to AIPL for rendering several types of services but the remuneration was equivalent to Royalty amount i.e. 2.85% of sales. The learned Authorized Representative for the assessee referred to the copy of agreement dated 14.12.2004 placed at page 462 of the Paper Book and pointed out that in earlier years, there is no disallowance. He pointed out that during the last year, Royalty was paid to the tune of Rs. 8.9 crores and this year Royalty was paid at Rs. 8.60 crores. The management fees to AIPL last year was paid at Rs. 8.51 crores and this year at Rs. 8.11 crores. The Assessing Officer has disallowed Rs. 8.11 crores of management fees. Our attention was drawn to various terms of the agreement for providing services, which are placed at pages 463 to 466 of the Paper Book. He further referred to the detailed note filed of services provided by AIPL which are placed at pages 472 to 478 of the Paper Book. The learned Authorized Representative for the assessee pointed out that the assessee has not claimed any major expenses and the expenditure of management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. * AIPL's strong corporate relationship with leading lending institutions, commercial banks, insurance companies supported SIPL in arranging and availing long term funds and short term working capital needs at competitive rates, covering foreign exchange exposure risk, negotiating quotes for Insurance as well as reviewing and advising for risk coverage etc. * Legal and taxation: In accordance with frequent changes in various Acts and Rules in Direct and Indirect Tax Laws and various other laws, AIPL supported in advising from time to time with regard to changes which helped SIPL to comply with all the laws and regulations. * Operational overview: AIPL conducted periodic operation review meetings to drive the performance of SIPL and supported for excelling the operations. In addition to that, advisors drawn from diverse fields were available for advising SIPL in the matters of strategic issues, key business decisions, organizational market development and global trend. * Operational Excellence Drive: As the main focus was on competence with global benchmark, AIPL initiated various programs with an objective which directly benefited SIPL to manufacture based on the requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r smooth carrying on of its business. The Assessing Officer cannot sit in judgment of businessman position in incurring any expenditure. The Hon'ble Supreme Court in Hero Cycles (P) Ltd. Vs. CIT (supra) have applied the ratio laid down by the Apex court in S.A. Builders Ltd. Vs. CIT(A) and another (2007) 288 ITR 1 (SC) and upheld the scope of commercial expediency, wherein it was held that The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. Where there is nexus between the expenditure incurred and the purpose of business, then the revenue cannot put itself in the arm chair of the businessman to decide how much of the expenditure is reasonable. Applying the above said proposition laid down by the Hon'ble Supreme Court, we hold that the expenditure incurred by the assessee on management fees in order to facilitate smooth running of its business is an allowable expenditure in the hands of assessee. Simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly treating foreign exchange fluctuation as operating which has been accepted by revenue? 5. Whether on the facts and circumstances of the case, the DRP erred in granting working capital adjustment to the assessee; a) when it had not been demonstrated or proved that the pricing of the product and services in case of comparables or even in case of the assessee company was actually determined in the basis of the working capital? b) when comparables have been identified following vigorous search process following the provisions of Rule 10A(a), Rule 10B(2), Rule 10B(3) and Rule 10B(1) comparing functions, assets and risks, wherein there is no case for any adjustments, which needs to be made to the financial results of either assessee company or the comparables as the factors which effect the prices of the products and services are already taken care in the qualitative and quantitative search criteria and the assessee has not asked nor worked out any working capital adjustment in the Transfer Pricing Documentation? c) when it has not considered the fact that the profit level indicator used for comparison was operating profit before interest and thus any impact of credit policy o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the DRP and since that was not adjudicated in the first round, rectification was possible against it. The DRP asked for remand report. Further, claim was raised in respect of grounds of appeal No.13 and 14, which was additional ground of appeal. Further, the DRP has not adjudicated the ground of objection No.12 i.e. claim of deduction under section 10B of the Act which was not originally allowed to the assessee. 31. The first issue which arises by way of ground of appeal No.1 is against the power of DRP in passing the rectification order. Rule 13 of Income Tax (DRP) Rules, 2009 reads as under:- "After the issue of directions under Rule 10, if any, mistake or error is apparent in such direction, the panel may, suo moto or an application from the eligible assessee or the Assessing Officer, rectify such mistake or error, and also direct the Assessing Officer to modify the assessment order accordingly." 32. In view of clear-cut provisions of the Rules, any mistake or error which is apparent from the record in such directions issued by the DRP and once the same is brought to the knowledge of DRP, it can direct the Assessing Officer to modify the assessment order accordingly. Henc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply other filters selected by the TPO. We modify the order of DRP to the extent that the TPO is to determine the functional comparability of the said concerns and also apply the other filters to decide whether the said concerns were to be included in the final list of comparable. The DRP while exercising the powers of rectification can at best decide whether the issue is rectifiable or not but the merits of the issue need to be looked into by the TPO. Accordingly, the ground of appeal No.3 raised by the Revenue is thus, allowed for statistical purposes. 36. Coming to the ground of appeal No.4 raised by the Revenue, wherein the DRP while passing the order under Rule 13 of the DRP Rules has made reference to Safe Harbour Rules, has been expunged by the DRP in the second rectification order passed, hence, we allow the ground of appeal No.4 raised by the Revenue in this regard. 37. The issue in ground of appeal No.5 is whether the DRP had erred in granting working capital adjustment to the assessee in the rectification order. The issue which arises in the present ground of appeal raised by the Revenue is whether such ground could be allowed when not originally decided. The factual as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same under transactional net margin method (TNMM) analysis. 4. Erred in not appreciating the fact that Royalty agreement entered into by the Respondent with its AE resulted into a bundle of benefits and substantial savings in terms of improved productivity, better utilization of material, manpower and machines over the period. Further, erred in evaluating Royalty payment using a method which is not prescribed in Indian transfer pricing regulations under section 92C of the Income-tax Act, 1961. 5. Failed to appreciate the external benchmark i.e. percentage at which Royalty has been paid by an Indian comparable, Sona Okegawa, which was engaged in similar business of manufacturing auto components and the working of net present value of future earnings (incremental profits) based on well recognized and accepted methodology of discounted cash flow. 40. The assessee is aggrieved by the order of Assessing Officer / TPO in making adjustment to the amount of Royalty paid to associate enterprises by taking arm's length price of Royalty at Nil. 41. Briefly, in the facts of the case, the assessee had paid Royalty of Rs. 8.11 crores to M/s. Dana Corporation, The TPO noted that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t sum of Rs. 16 crores was spent on services which were doubtful. Another point raised by the TPO was that the assessee has not been able to quantify the details of services received from associate enterprises or AIPL. Since it was imperative on the part of assessee to establish that the payments were made commensurate to the volume and quality of technical services and as there was no cogent evidence with regard to the purpose of technical assistance available with respect to the nature of services rendered by associate enterprises to the assessee and where the assessee had not proved the commensurate benefits against the payment of service fees to the associate enterprises, the said expenditure was held to be not allowable in the hands of assessee. The TPO concluded by holding as under:- "39. In view of the facts of the case, discussion as above, it is arrived at that though an amount of Rs. 8,11,62,569/- has been paid by the assessee towards the international transaction of the payment of Royalty to the AE Dana USA, the payment made, does not support the fact that payments have been made either towards the quantum of technical services received, or any services received at all. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2005-06 to assessment year 2008-09. For the year under consideration i.e. assessment year 2009-10, the arm's length price was taken at Nil by the TPO. However, in assessment year 2010-11, the same was accepted to be at arm's length price by the CIT(A) and in assessment year 2011-12, the same was accepted to be arm's length price by the DRP itself. The learned Authorized Representative for the assessee in this regard, placed on record the copies of orders of TPO passed under section 92CA(3) of the Act relating to assessment years 2005-06 to 2008-09. The learned Authorized Representative for the assessee further pointed out that the role of TPO while benchmarking arm's length price of international transaction was only to determine the arm's length price of the transaction and not to decide the admissibility of expenditure. Reliance in this regard was placed on the ratio laid down by Bangalore Bench of Tribunal in M/s. Inteva Products India Automotive Pvt. Ltd. Vs. DCIT in ITA No.83/Bang/2015, relating to assessment year 2010-11, order dated 20.07.2016. He further pointed out that the Royalty had been paid as per SIA approval, copy of which is placed at page 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in technology upgradation by bringing the latest technology in drive train systems to India. The Assessing Officer referred the issue of computation of arm's length price of the said international transaction to the TPO, who in his order treated the arm's length price at Nil. 49. In the facts and circumstances of the present case, the Royalty paid by the assessee to its associate enterprises had been approved by the Secretariat of Industrial Approval, Ministry of Industry, Government of India, vide letter dated 28/31.01.2003 and initially by the RBI @ 3%. However, subsequently, the RBI vide communication dated 21.07.2003 accorded automatic approval route to make the Royalty payment at 8% on exports and 5% on domestic sales without any restriction on the duration of Royalty payments. Thereafter, this rate was reduced to 2.85% by the RBI. The case of the assessee before the TPO was that since the Royalty payments were in terms of approval granted by SIA and RBI, the same were at arm's length price and the assessee placed reliance on CUP method for benchmarking the said transaction of payment of Royalty in this regard. The plea of assessee that the rate approved by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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