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TMI Blog2017 (4) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... ces were rendered by the personnel of manufacturing segment, the nature of the activity cannot change from "services" to "manufacturing". Also, it is difficult to accept the contention that people in the manufacturing segment are equipped to render general managerial and administrative support services to group companies. Merely because the assessee had booked these under manufacturing segment does not render it a character of manufacturing activity. Hence, we are of opinion that BMSS service income is certainly not derived from the manufacturing activity of the assessee's and hence should not be considered as a part of the operating income of the manufacturing segment, for computation of PLI. Therefore, the ground raised by the assessee is rejected. Operating expenses allowability - Held that:- 'Liability no longer required written back' is a part of the operating activity of the assessee, if it is relating to the operating expenses of the assessee. According the issue is remitted to AO/TPO for fresh consideration. Regarding others of 0.12 crores, if the assessee proves that it is an operational income, then AO shall not exclude it while computing the PLI. Not excluding "424 Model ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its A.E cannot be free of charge and there should be element of profit, to that extent to add 2% towards profit. Being so, we do not find any infirmity in the order of lower authorities and the same is confirmed. Hence, this ground is rejected. Addition of wealth-tax provision and incremental depreciation added to book profit - MAT - Held that:- In our considered opinion, provision for Wealth Tax cannot be considered diminution in the value of asset and it is to be added to the book profit of the assessee. Incremental depreciation is nothing but depreciation on revaluation of assets under clause (iia) of the Explanation-1 sub -section (2) of section 115JB of the Act. This ground of assessee is rejected. Setting off brought forward of business losses and unabsorbed depreciation of earlier years before allowing deduction u/s. 10A - Held that:- This issue is squarely covered by the judgement of Supreme Court in the case of CIT v. Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] holding that though Section 1OA, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l: A.Y 2007-08) 2. At the time of hearing, the ld. AR has not pressed this appeal, as it is a repeated appeal for the same assessment year. Accordingly, this appeal stands dismissed, as not pressed. 3. Now, we take up ITA No. 365/Mds./12 Transfer pricing related issues:- 4. The facts of the case are that Caterpillar India Private Limited ('CIPL') incorporated in 2000, is a wholly-owned subsidiary of Caterpillar Commercial SA, Belgium which is ultimately held by Caterpillar Inc. USA. CIPL is primarily engaged in manufacturing and sale of earthmoving machinery including excavators, bulldozers, dumpers and loaders, and spares for the same. As a part of its expansion plans in India, CIPL has acquired Earthmoving Equipment Division of Hindustan Motors Limited during 2001. The Appellant is also engaged in following other services to its Associated Enterprises ('AEs'): * Provision of services ('EDC segment'); and * Provision of Asia-Pacific shared services ('APSS') i.e. routine back office accounting and finance related services to Caterpillar Group companies. 4.1 During the financial year 2006-07, CIPL had entered into the following internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... few illustrative points to prove that the CAT and the NON CAT segment are broadly functionally comparable and that internal comparability is best suited in the instant case, which is as under: * Both CAT and non-CAT segment are engaged in manufacturing and sale of heavy earth moving equipment. * Both CAT and non-CAT category have broad similarity in the functions performed, risks assumed and assets employed. * The sales of the CAT and non-CAT segment are 58% and 42% respectively of the total manufacturing sales of the Appellant. This goes to demonstrate that both segments have almost equal volume of sales and therefore, the comparability analysis on a comparison of the two segments would not give a distorted picture. * Both CAT and non-CAT segment sells its products in India having same market, geographic location, market size, same government regulations, same cost of labour and capital in the market, overall economic development, level of competition etc. 6.1 The ld. AR further submitted that the assessee has applied TNMM as the most appropriate method which eliminates the functional differences which exists between controlled and uncontrolled transaction, if any. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T and Non-CAT products. 5 Sale Sales 7% Turnover has been considered as a basis allocate the cost Total 100% 6.2 He submitted that 93% of the total operating costs are on actual basis and mere 7% of the total operating cost which represent other expenses have been allocated based on the turnover which is a fair basis for allocation and not based on estimates as the Ld. TPO has mentioned in the TP order. 6.3 According to A.R, these details were not been considered by the Ld TPO despite making available at the time of assessment proceedings and he drew our attention concerned details in paper book specifically Book 3 - Page 360-361 and Page no 16-17 of submission before TPO dated Oct 22, 2010. According to him the Ld. TPO has merely presumed that the allocation are based on estimates and therefore not reliable for undertaking internal comparability analysis. 6.4 Further, he drew our attention to the Cost Accountant Certification dated October 18, 2007 placed at Paper book 5-Page 936-938 vide submission to TPO dated June 10, 2010 wherein stated that the segmental information which also provides bifurcation between CAT and Non-CAT has been prepared based on prudent and genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofile between the two categories has to be different. (ii) There were pre existing marketing arrangements of the Non CAT category whereas the CAT category is a well known global brand. Hence, the disparity in marketing efforts between the two categories cannot be lost sight of. The assessee's stand that Caterpillar Commercial Private Limited has been providing marketing support to both the categories does not, in any way, explain the point raised by the TPO. That there will be substantial disparity in the marketing efforts and such disparity makes the two categories incomparable is an inevitable conclusion. (iii) HM brand on the Non CAT category does not generate a modern image as compared to the CAT brand. The assessee's stand that the '2021' model of the Non CAT category enjoyed more market share and therefore the brand image of Non CAT does not impede particular product depends on several factors, including longevity of the product, brand loyalty etc. It need not have any direct relationship with brand image, which is the point made by the TPO. That CAT category enjoys the brand image of the CAT brand, which the Non-CAT category lacks makes the two categories ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same argument holds true that this product cannot be compared to the complexity of the technology of the 777 and 773 or the localization efforts made cannot be compared to the significant technological improvements. Also, improvements can mitigate obsolescence but does not reduce technology risk. (viii) R & D efforts do not have much scope in the case of the Non CAT category whereas continuous R & D efforts are being made by the Caterpillar Group Companies in case of the CAT category. The ld. AR arguments of improvements being done to the Non CAT category products have no merit as such efforts cannot be compared to the efforts made by the Caterpillar Group companies for product improvement under the CAT category worldwide. (ix) CAT category is exposed to exchange fluctuations and not the Non CAT category. The A.R argued that localization efforts are being made to reduce imports under the CAT category. However it may be noted here that the localization efforts are yet to be fully realized and most of the raw materials are still imported since they are of proprietary nature under the CAT category. The risk profile due to this risk exists. 10. In view of all the above factors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g plant be visualized as having expertise in general management and administrative support services? According to the TPO, it is not having expertise in general management and support services. The assessee has one specialized division known as EDC division, which is located at RMZ building Taramani, Chennai and is a separate division registered as STP unit and enjoying holiday under Section 10A of the Act. This unit provides BMSS to the group companies. Therefore, on one hand assessee has one division called EDC division, which is registered as STP unit, and which has employees who are expert in providing EDC. Same technical work has been provided by the manufacturing plant, by employees not having expertise in engineering design services. 12.3 The TPO observed that even if it is accepted that the same employees who are engaged in manufacturing plant have rendered BMSS and it resulted in receipts for ₹ 11.49 crores, still the issue remains pending to be decided is as to whether or not amount of ₹ 11.49 crores can be treated as operating income from manufacturing activity or it should be excluded treating the same as income from other sources. According to the TPO, thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering design services ₹ 78.77 crores is excluded from manufacturing division. (ii) Profit on sale of assets (Rs. 0.70 crores): Assessee agrees with this exclusion proposed in the show cause. (iii) Interest on customs over dues deposit (Rs. 0.28 crores): In this connection, the reasoning given by the assessee is wrong. Assessee has referred to revised OECD TP guidelines. "2.81 In those cases where there is a correlation between the credit terms and the sales prices, it could be appropriate to reflect interest income in respect of short-term working capital within the calculation of the net profit indicator." The revised guidelines quoted by the assessee relates to interest income on short term working capital. As against it what is proposed to be excluded as per show cause is interest on customs over dues deposit. They are two different issues and therefore it cannot be allowed based on revised OECD TP guidelines quoted above. Further, interest on Custom over dues deposit is not considered operating income and hence excluded from Manufacturing division for the purpose of calculating PLI in the case of the assessee. (iv) Market Promotion Fees: (Rs. 0.31 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring activity. Accordingly, as proposed in the show cause, the receipts ₹ 11.49 crores are excluded from the manufacturing division." 13.2 The contention of AR is that: "The BMSS services on the other hand are meant for the manufacturing process and are rendered by professionals who are plant engineers, technical skilled operators obtaining constant knowledge from the production lines and manufacturing process. These services are mainly performed by the purchase/procurement team and include the following : • Identification of reliable vendors/suppliers who will supply quality product (replacement products) • Co-ordination services • Documentation" The relevant knowledge required to deliver these services to the Group Companies are therefore available with the personnel of the Manufacturing segment. However, in para 5.3.4.5 on page 58 of the impugned order the Ld. TPO states that the cost for rendering the BMSS services are inseparable and hence have been retained under the manufacturing division. No expenses attributable to the receipts have been excluded from the financials of the manufacturing division stated that costs incurred for r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipts i.e. interest on customs overdues (Rs. 0.28 crores), the TPO's contention is as under:- '(iii) Interest on customers over dues deposit (Rs. 0.28 crores): In this connection the reasoning given by the assessee is wrong. Assessee has referred to revised OECD TP guidelines no. "2.81: In those cases where there is a correlation between the credit terms and the sales prices, it could be appropriate to reflect interest income in respect of short-term working capital within the calculation of the net profit indicator." According to TPO the revised guidelines quoted by the assessee relates to interest income on short term working capital. As against it what is proposed to be excluded is interest on customs over dues deposit. They are two different issues and therefore it cannot be allowed based on revised OECD TP guidelines quoted above. Further, interest on Customer over dues deposit is not considered operating income and hence excluded from Manufacturing division for the purpose of calculating PLI in the case of the assessee.' 17.1 The contention of the AR is that the interest on customer overdue is operational in nature and has been considered as part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, if it is relating to the operating expenses of the assessee. According the issue is remitted to AO/TPO for fresh consideration. Regarding others of ₹ 0.12 crores, if the assessee proves that it is an operational income, then AO shall not exclude it while computing the PLI. 19. The next issue is that the TPO/DRP has erred in not excluding "424 Model" from manufacturing segment as the model was in its start-up phase. 20. The Ld AR submitted that model 424 to be excluded treating the same as a different segment to calculate the PLI of the manufacturing division without corresponding financials of the model 424. The TPO wrongly observed that CAT category is a homogenous category in which most of the functions are same and they cannot be segregated in terms of various products manufactured. As already discussed, if functions are same, any artificial division, even if based on some scientific basis, would distort the exercise of finding the arm's length price. It would also take away the advantage accruing due to synergic effect of same functions performed on a homogenous unit. 20.1 He submitted that the TPO version is that this is not the first year of 424 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets, overall economic development and level of competition and whether the markets are wholesale of retail. Accordingly, in view of the fact that uncontrolled comparables are from same geographical area (Indian Territory) in the case of assessee all the conditions mentioned in clause (d) are automatically taken care of. This is an advantage especially in external TNMM wherein the arithmetic mean of PLIs of the comparables is taken. Arithmetic mean of PLI of uncontrolled comparables represents ideal comparable to arrive at the arm's length price. Therefore, assessee's request to segregate the 424 model segment before the external TNMM is applied is not accepted. The TNMM is applied on the aggregated profit and loss account which includes CAT and Non-CAT categories and from which no segment related to 424 model is removed. 21. The AR contention is that the it has come out of the initial start-up phase of 424 model and the assessee should have been able to reduce its import prices and shared some of the losses with the other group concerns in order to attain the arm's length result of this particular segment. 22. The ld AR submitted that it is important from the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g income 5,359,107,728 489,041,957 4,870,065,771 Less: Operating Cost 5,250,647,590 693,525,166 4,557,122,424 Operating Profit 108,460,137 (204,483,209) 312,943,347 Operating Profit/Operating Revenue 2.03% -41.81% 6.43% The ld. DR submitted that the assessee has come out of the initial start up phase of the 424 model and the assessee should have been able to reduce its import prices and shared some of the losses with the other group concerns in order to attain the arm's length result of this particular segment. 23. We have heard both the parties and perused the material on record. As rightly pointed out by the ld. D.R., Model 424 cannot be excluded treating the same as a different segment to calculate the PLI of the manufacturing division without corresponding financial of the model 424. The CAT category is a homogenous category in which most of the functions are same and they cannot be segregated in terms of various products. In our opinion, if functions are same, any artificial division, even if based on some scientific basis, would distort the exercise of finding the arm's length price. It would also take away the advantage accruing due to synergic effe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been made as follows : Profit @ 11.93 (9172187404*11.93)/100=1,094,241,957. Therefore adjustment made is ₹ 1,094,241,957- (61,27,293) =1,100,369,250/-. According to ld AR based on the arm's length margin of 11.87% (as calculated by the TPO), the arm's length profit would be 1.104.587.596 (i.e 9,305,708,478-1,1104,587,596). The said arm's length price of operating cost has been apportioned between AE and non-AE on the basis of cost ration (i. ₹ 2, 748,582,838: ₹ 6,418,583,220). 25.2 The ld. D.R relied on the order of lower authorities. 26. We have heard both the parties and perused the material on record. In our opinion, while determining the ALP, comparison is made between the PLI of the assessee and the arithmetic mean of uncontrollable comparables. While doing so, it is presumed that every other factor is constant and difference has arisen only because of international transactions. If this presumption is not made, no adjustment in any case may be made and the assessee can always make an argument that difference in PLI is not due to international transactions; it is due non-international transactions, therefore we are not in a position to appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ground is rejected. 30.1 The assessee raised the additional ground that the ld. TPO erred in not considering the following comparables, though they were coming up based on the filters adopted by the Ld. TPO (a) TIL Ltd., (b) Escorts Ltd., (c) Magnum Machines Pvt Ltd., (d) Walchandnagar Industries Ltd., (e) Jost's Engineering Co. Ltd., (f) Skyline Millers Ltd., The ld. AR filed petitions for admission of additional grounds stating that during the preparation of Form 36B has taken a ground against the computation of adjustment by the ld. TPO on uncontrolled transactions instead of restricting the same to the controlled transactions. However, in order to bring clarity on the existing ground No. B.1(iii), the assessee submitted that the ld. TPO while proposing the transfer pricing adjustment with respect to the manufacturing segment of the appellant, has not restricted the adjustment only to the value of the international transactions entered with it's A.Es. Further, it has also come to the notice that various Tribunal rulings and High Court precedents have held that if at all the adjustments have to be made, it is should be restricted to the proportion of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34. The ld. DR submitted that these amounts were added to the book profits on the basis that Provision for Wealth tax and provision for diminution in the value of assets falls under the clause-(i) of Explanation-1 to sub-section (2) of Sec.115JB of the Act. According to ld. D.R, the artificial difference cannot be made between revision in useful life of assets and revaluation of assets. 35. We have heard both the parties and perused the material on record. In our considered opinion, provision for Wealth Tax cannot be considered diminution in the value of asset and it is to be added to the book profit of the assessee. Incremental depreciation is nothing but depreciation on revaluation of assets under clause (iia) of the Explanation-1 sub -section (2) of section 115JB of the Act. This ground of assessee is rejected. 36. The next ground for our consideration is with regard to setting off brought forward of business losses and unabsorbed depreciation of earlier years before allowing deduction u/s. 10A of the Act. 37. The facts of the case are that the AO mentioned in the assessment order that Section 10A allows deduction only from total income of the assessee and not from the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2005-06. 38. We have heard both the parties and perused the material on record. In our opinion, this issue is squarely covered by the judgement of Supreme Court in the case of CIT v. Yokogawa India Ltd. [2007] 391 ITR 274wherein held that:- "16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision." 17. If the specific provisions of the Act pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses which have been excluded from export turnover, the same to be excluded from the total turnover also for purpose of computing deduction u/s. 10B of the Act. Accordingly, we direct the AO to follow the decision of the decision of Sak Soft Ltd. cited (supra) and held the issue in favour of the assessee. 41. The next issue is with regard to treating the cost of mobile phones as capital expenditure. 42. The contention of the ld. A.R is that the cost of mobile phone and telephone instruments to be treated as revenue expenditure as the life of these equipments is very short. 43. We have heard both the parties and perused the material on record. In our opinion, the cost of these devices needs to be capitalized under the block of assets "Electrical and Electronic equipments' as per section 32 of the Act read with Depreciation Schedule of the Income Tax Rules, 1962 with applicable depreciation allowance. Accordingly, this ground raised by the assessee stands dismissed. 44. The next ground is with regard to disallowance of interest of ₹ 51,313/- on delayed payment of TDS. 45. Before us, ld. A.R submitted that it was paid towards interest on delay in remittance of T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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