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TMI Blog2017 (12) TMI 1423X X X X Extracts X X X X X X X X Extracts X X X X ..... proposition laid down by the Hon’ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (supra), we hold that accepting the aggregation approach of the assessee of its transactions under the manufacturing activity, we hold that while applying TNNM method, the margins of assessee company are to be compared with the margins of external comparables. However, since the TPO had not verified this factum of comparison with external comparables, we direct the Assessing Officer / TPO to consider the case of assessee and determine the arm's length price and re-compute adjustment, if any, in the hands of assessee on account of international transactions. It may be pointed herein itself that the adjustments were made in the hands of assessee in HHP division and no adjustment was made in LHP division. Approach adopted by the TPO in application of net profit to cost as PLI - Held that:- We direct the Assessing Officer that while determining the PLI to adopt net profit to sales in order to benchmark the international transactions. Benefit of variation / reduction of 5% from the arithmetic mean is now decided against the assessee by the Special Bench of Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Rejection of benchmarking done by the Appellant: 2.1 The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in rejecting the external comparable companies selected by the Appellant for benchmarking the manufacturing function. 3. Inappropriate comparison of profitability between export to Associated Enterprises (AEs) segment and domestic sales segment ignoring differences in Functions, Assets and Risks (FAR), differences in products sold and comparison of controlled transactions with controlled transactions 3.1 The learned ACIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in comparing segmental profitability of the Appellant i.e. between export to AEs segment and domestic sales segment ignoring product differences, differences in markets as well as differences in the functions, assets and risks (FAR). 3.2 The learned ACIT pursuant to the directions of the learned DRP erred in law and on facts and in circumstances of the case in comparing segmental profitability of the Appellant exports to AEs segment and domes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and in circumstances of the case in determining the value of the international transaction of payment of technical know-how as 'Nil' without applying any of the prescribed methods under section 92C(2) of the Act. 6.3 The learned ACIT pursuant to the directions of the learned DRP erred in facts and in circumstances of the case in treating ₹ 8,86,15,435 as income of the Appellant while the aforesaid amount is accounted as Capital Work in Progress , pending capitalization. Consequently no depreciation is claimed in the return of income for the assessment year 2007-08. 6.4 The learned ACIT pursuant to the directions of the learned DRP erred in facts and in circumstances of the case in rejecting Transactional Net Margin Method (TNMM) as most appropriate method of the Appellant for benchmarking the payment of technical know-how. D. International Transaction relating to Procurement Support Services 7. Inappropriate approach adopted by TPO in benchmarking procurement support services provided to associated 7.1 The learned ACIT pursuant to the direction of the learned DRP erred in facts and circumstances of the case in wrongly rejecting the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempt income u/s. 14A of the Income Tax Act, 1961. 10.2 The learned ACIT pursuant to the directions of the learned URP erred in not appreciating that there was no dominant and immediate connection between the expenditure incurred and exempted income and therefore there cannot be any adhoc disallowance out of general expenses. They erred in not following the ratio of the following decisions: a) CIT v Hero Cycles Ltd (2010) 323 ITR 518 (P H) b) CIT v Printers House (P.) Ltd (2010) 188 Taxman 70 (Delhi) c) ITO v M/s. Daga Capital Management Pvt. Ltd. (SB-Mum ITAT) d) CIT v General Insurance Corporation of India (2002) 254 ITR 203 (Bom.) e) CIT v BSES Ltd. (2008) 113 TTJ 227 (Mum.) f) Space Financial Services v ACIT (2008) 115 TTJ I65 (Del.) 11. Initiation of Penalty Proceedings 11.1 The learned ACIT erred on the facts and in law in initiating penalty proceedings under section 271(1)(c) of the Act. 12. Each one of the above grounds of appeal is without prejudice to the other. 3. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised in the present appeal is covered by the orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating both in domestic segment and export, then following the dictate of the Hon ble High Court of Delhi, where aggregation of transactions has been accepted, then internal comparables were the best to be compared with. He further stated that in any case the cost of goods had been taken and the Tribunal had directed that net profit be applied. In this regard, he placed reliance on the orders of Dispute Resolution Panel (DRP) and the Assessing Officer / Transfer Pricing Officer (TPO). He further placed reliance on the order of TPO in respect of ground of appeal No.4. 5. The learned Authorized Representative for the assessee in rejoinder referred to para 91 of the judgment in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (supra) and pointed out that the Hon ble High Court of Delhi had upheld that while applying TNNM method and aggregating various international transactions, then the margins had to be compared with external comparables. He further pointed out that the assessee in the TP study report had applied aggregation approach and had further made comparison with functionally comparable external concerns and no adjustment on account of arm's lengt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal in assessment year 2006-07. The first issue which was addressed by the Tribunal in assessment year 2006-07 was the aggregation approach, whether to be applied or not. The Tribunal after deliberating on the said issue in paras 14 and 15 and making reference to the order of Tribunal dated 31.12.2014 relating to assessment year 2005-06 i.e. entity which was engaged in after market support for IC engines sold by Cummins entity, held as under:- 16. The assessee for the year under consideration before us is engaged in the manufacturing activity along with other related activities and had aggregated international transactions as tabulated hereinabove and had benchmarked the international transactions by using TNNM method as most appropriate method by taking external comparables and adopted PLI as operating margins to sales. The TPO on the other hand, had made adjustment after rejecting the claim of aggregation and also while applying the TNNM method had compared the same with internal comparables i.e. domestic sales made by the assessee. Under section 92B of the Act, meaning of expression international transaction‟ is provided i.e. a transaction between two or more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed IC engines, then the said international transactions undertaken by the assessee for the year under consideration need to be aggregated for undertaking benchmarking analysis applying TNNM method. The Tribunal in this regard placed reliance on the principles laid down by the Hon ble High Court of Delhi in Sony Ericsson Mobile Communications India Pvt. Ltd. Vs. CIT (supra). Following the same principle and where the assessee was engaged in similar activity of manufacturing, we hold that various activities need to be aggregated. Accordingly, we direct so. 10. The second issue which arises is that while applying the TNNM method whether the margins earned by the assessee from exports to associated enterprises is to be compared with margins earned from sales in domestic market or the same have to be compared with external comparables. The Tribunal had noted the pleadings of assessee in this regard vide para 17, which read as under:- 17. Now, coming to the second related issue arisen to benchmark the international transactions of the assessee. The TPO had issued various show cause notices to the assessee. In the first show cause notice, the assessee was asked to benchmark the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds to be made to the arm's length price of international transactions and consequently, the comparison of net margins earned by the assessee to be compared with the margins of uncontrolled transactions of external comparables became academic in nature, hence, the same was dismissed. It is not the case that the assessee had not pressed the above said ground of appeal but the same were dismissed because they were academic in nature. However, he further pointed out that once the aggregation approach is adopted by the assessee is accepted, then the profit margins earned by the assessee need to be compared with external comparables as has been done in the transfer pricing study report. There can be no comparison of the margins earned from domestic sales with the margins earned from exports due to the fact that the manufacturing segment includes import of components, which are used for manufacturing of goods which are sold locally as well as exported. Hence, such a comparison between the margins earned from domestic sales with the margins earned from exports would mean comparing a controlled transaction with another controlled transaction which is not permitted. 12. We have peruse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l vide para 18 had laid down that the comparison of gross margins was not envisaged under the Income Tax Rules and the net margins have to be applied. However, we have already held in the paras hereinabove that the margins of assessee are to be benchmarked against average margins of external concerns which are functionally comparable and consequently, this issue becomes academic in nature. However, the TPO is directed to apply the net profit margins earned by the assessee for benchmarking international transactions. 14. The next issue raised vide ground of appeal No.4 is against the approach adopted by the TPO in application of net profit to cost as PLI. The said issue was also decided by the Tribunal in assessment year 2006-07 vide para 22 at page 30 of the order which reads as under:- 22. The next issue raised by way of ground of appeal No.7 is the methodology adopted by the TPO in application of net profit to cost as PLI. The case of assessee is that where selling price of component manufactured by it derives the profitability and not the cost of components utilized for manufacturing activity, the PLI should be adopted as net profit to sales and not net profit to cost. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had claimed deduction under section 80IB of the Act at ₹ 11.34 crores in respect of profits derived by its industrial undertaking located at Daman. The Assessing Officer allocated part of head office expenses, directors salary, sitting fees and commission, etc. to the activities of Daman unit and re-computed the profits of eligible business and consequently, reduced deduction claimed under section 80IB of the Act. 20. The learned Authorized Representative for the assessee fairly pointed out that the issue stands covered against the assessee by the order of Tribunal in assessee s own case in assessment year 2006-07. 21. We find that the Tribunal while deciding the issue in assessment year 2006-07 vide para 53 at pages 44 and 45 of order dated 03.03.2017 had upheld the orders of authorities below in allocating head office expenses, directors salary, etc. to the Daman unit and thus, upheld the re-computation of deduction under section 80IB of the Act. Following the same parity of reasoning, we find no merit in the issue raised vide ground of appeal No.8 and the same is dismissed. 22. The ground of appeal No.9 raised is not pressed and hence, the same is dism ..... X X X X Extracts X X X X X X X X Extracts X X X X
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