9911796707
TMI Blog2014 (7) TMI 1297X X X X Extracts X X X X X X X X Extracts X X X X ..... was not a contingent liability' - Decided in favour of assessee. TDS liability on technical drawing expenses under the head cost of raw materials and components - AO treated the same as expenditure in the nature of royalty within the meaning of Article 12 of DTAA with Austria - HELD THAT:- merit in the conclusion of the lower authorities insofar as the design and drawings was purchased on a principle to principle basis and same was in the nature of purchase of goods. Precisely the drawing is in the nature of purchase of copyright articles and not of purchase of copyright itself in the drawings. Hence, the same is in the nature of business expenditure and not in the nature of royalty. The payments of technical drawings and design have been incurred to procure such drawings and designs along with all the rights attached to them as the entire set was required to be provided to the customers as per the terms of the contract. Without acquiring all the rights attached to such drawings and designs, the assessee would not have been in the position to meet its contractual obligation. We had verified the copies of bills of entry, copy of physical drawings receipt, copies of inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NIL in respect of purchase of machinery on the basis of that it is a gratuitous act of parent company. During the year under consideration, the AO had followed the order passed by the TPO in assessment year 2005-06 and disallowed the depreciation on such capital assets in these years also. We found that same issue for A.Y.2005-06 is still pending before the CIT(A), therefore, before finalizing the main assessment year in which value was taken at Nil by the TPO, it will be premature to decide the issues during the years under consideration. Disallowance of depreciation is consequential to the decision of assessment year 2005-06, which is pending before the CIT(A). Hence, in the interest of justice and fair-play, we restore back this ground to the file of the AO in all the years under consideration with a direction to decide the same after considering the order passed by CIT(A) in the A.Y.2005-06. Appeal of assessee allowed in part - IT(TP)A No.5/Ind/2011, IT(TP)A No.313/Ind/2011, IT(TP)A No.616/Ind/2012, IT(TP)A No.120/Ind/2014 - - - Dated:- 3-7-2014 - SHRI JOGINDER SINGH, JM AND SHRI R.C.SHARMA, AM For the Appellant : Shri Ajit Tolani For the Respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble DRP/ Ld. TPO have further erred in law and in facts in not accepting the detailed and robust set of comparable companies submitted by the appellant, while undertaking the analysis using TNMM as most appropriate method. 5.2 The Hon'ble DRP / Ld. TPO had failed to appreciate appellant's contention of not accepting BHEL as a comparable on account of extra-ordinary size of operations of BHEL as compared to appellant having regard to the functions performed, assets employed and risk assumed. 6. Erroneous computation of operating margins of appellant and comparable companies 6.1 Without prejudice to above, based on the facts and circumstances of the case, the Hon'ble DRP/ Ld. TPO have erred in fact in not accepting the computation of comparable companies submitted by the appellant while applying TNMM. 6.2 The Hon'ble DRP/ Ld. TPO have erred in law and in fact, in resorting to use of financial information of comparable companies as derived from Prowess database and disregarding the use of audited financial information of comparable companies as used by the appellant while computing operating margins of comparable compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating cost of the appellant) and not with reference to total value of all the transactions undertaken by the appellant. 10.3 That based on the facts and in law, the Hon'ble DRP / Ld. TPO have erred in ignoring the judicial pronouncements upholding the appellant's contention of transfer pricing adjustment to be made with reference to value of international transaction only. 11. Aggregation of transactions while applying Cost-plus method Based on the facts and circumstances of the case, the Hon'ble DRP/ Ld. TPO have erred in law and in fact, in not considering the internal Cost Plus Method ( CPM ) analysis undertaken by the appellant by way of aggregation of transactions in accordance with the provisions of the Act read with the Income Tax Rules, 1962 for determination of the arm's length price of international transaction on account of sale of generators and generator parts to AEs. 12. Proviso to section 92C(2) That on facts and in law, the Hon'ble DRP / Ld. TPO have erred in law in not applying the proviso to section 92C of the Act and have failed to allow the appellant an option for fixing the arm's length price at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding that appellant has furnished inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 271 (1 )(c) of the Act. 3.1 Grounds raised by the assessee in assessment year 2007-08 are as under :- Based on the facts and circumstances of the case, ANDRITZ HYDRO Private Limited (here-in-after referred to as the 'Appellant') respectfully craves leave to prefer an appeal under section 253 of the Income-tax Act, 1961 ('Act') against the assessment order issued under section 143(3) read with section 144C(13) of the Act by Assistant Commissioner of Income-tax - 3(1), Bhopal (here-in-after referred to as 'learned AO') in pursuance of the directions issued by Dispute Resolution Panel- 1 Mumbai (here-in-after referred to as 'DRP'),. The appeal is preferred on the following grounds. The following grounds of appeal are mutually exclusive of and without prejudice to each another. On the facts and in the circumstances of the case and in law, the learned AO based on directions of DRP: GROUNDS ON JUDICIAL DISCIPLINE AND NATURAL JUSTICE 1. err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the transaction on sale of generator and generator parts resulting into double taxation of the Appellant's income. Use of single year data of comparable companies 8. Without prejudice to the above grounds, based on fact and circumstances of the case, the Hon'ble DRP / Ld. TPO have erred in law and in fact, by adopting a flawed approach by using single year data as against the multiple year data used by the appellant to compute the arm's length price of the international transaction using TNMM. Aggregation of transactions while applying Cost-plus method 9. erred in law and in fact, in not considering the internal Cost Plus Method ( CPM ) analysis undertaken by the appellant by way of aggregation of transactions in accordance with the provisions of the Act read with the Income Tax Rules, 1962 for determination of the arm's length price of international transaction on account of sale of generators and generator parts to AEs. 10. erred by ignoring the functional and business profile of the appellant and various business exigencies which may lead to varying level of gross margins in various controlled transactions. Further erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18. erred in holding that appellant has furnished inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 271(1)(c) of the Act. 3.2 Grounds raised by the assessee in assessment year 2008-09 are as under :- Based on the facts and circumstances of the case, VA TECH Hydro India Private Limited (here-in-after referred to as the' Appellant') respectfully craves leave to prefer an appeal under section 253 of the Income-tax Act, 1961 (' Act') against the assessment order issued under section 143(3) of the Act by Deputy Commissioner of Income Tax - 1(1), Bhopal (,here-in-after referred to as 'learned AO') in pursuance of the directions issued by Dispute Resolution Panel - II, Mumbai (here-in-after referred to as 'DRP'). The appeal is preferred on the following grounds. : On the facts and circumstances of the case and in law, the learned AO based on directions of DRP: Disallowance of technical drawing and designs expenditure 1. erred in law and on fact by disallowing the payments made by the appellant to its associated en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in law and in fact, in not considering the internal CPM analysis undertaken by the Assessee by way of aggregation of transactions in accordance with the provisions of the Act read with the Rules, for determination of the arm s length price of international transaction on account of contract revenue from projects. 3. erred on the facts and circumstances of the case by not considering the functional end risk differences between individual controlled transactions and aggregate uncontrolled transactions. 4. erred in law and in fact, by not taking cognizance of the fact that same international transaction of Assessee has been accepted by Revenue authorities to be at arm s length in previous year. 5. erred in law in not applying the Proviso to section 92C(2) of the Act and has failed to allow the Appellant the benefit of upward variation of 5 percent in determining the ALP. Corporate Tax Grounds Disallowance of technical drawing and designs expenditure 6. erred in law and on fact by disallowing the payments made by the appellant to its associated enterprises during AY 2009-10 for the purchase of technical drawings and des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Disallowance of depreciation on capital asset purchased from AE in AY 2005-06 4,480,347 2,284,977 - - Transfer pricing adjustment: 4 Transfer pricing adjustment to the international transaction related to purchase of raw material from AEs 24,189,935 13,996,551 - - 5 Transfer pricing adjustment to the international transaction related to sales to AEs 897,262 5,732,927 - 10,915,735 Total addition 43,068,482 34,862,441 21,600,817 59,066,107 5. The AO also disallowed provision of warranty expenses on the plea that warranty provision is a contingent liability . The fact as submitted by the assessee in the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hecked from the warranty provision reversed on a yearly basis. For A Y 2003-04 and A Y 2004-05, the provision for warranty has been held to be in the nature of ascertained liability and not a contingent liability by the Commissioner of Income Tax (Appeals) ( Ld. CIT(A) ) (vide orders dated 19 January 2007 and 23 November 2007). Further, the CIT(A) order for A Y 2003-04 has also been upheld by the same bench of the Hon'ble Indore Bench of the Income Tax Appellate Tribunal vide order dated 28 December 2011 in lTA No. 255/IND-2007. Further, no appeal has been filed by the tax authorities against the order of the Ld. CIT(A) for AY 2004-05. The facts of the current appeals are same as those covered in the aforesaid orders. The contentions of the assessee are supported by the following key judicial precedents: DCIT-3(1), Bhopal vs VA TECH Hydro India Private Limited (ITA No 255/IND- 2007) . Rotork Controls India (P) Ltd - 2009-TIOL-64-SCIT Bharat Earth Movers v CIT - 245 ITR 428 (2000) (SC) CIT v Vinitec Corporation Pvt Ltd - 278 ITR 337 (2005) (Del) CIT vs. Majestic Auto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from supply Rana Sugars 5190000 51900 2 crushing seasons Triveni Turbo 4915000 49150 24 months from supply HPCL 6600000 66000 24 months from supply Renuka Sugars 9150000 91500 2 crushing seasons Na Loi 25450000 254500 24 months/8 hrs. of operation Pan Africa 9028000 90280 18 months from commissioning Shri Ram 5315000 53150 18 months from commissioning Koradi 1630000 16300 12 months from commissioning West ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinent to mention here that against the order of CIT(A) for the assessment year 2004-05, no appeal has been filed by the Revenue before the Tribunal, which further substantiates the fact that the department has accepted the assessee s claim of warranty as ascertained liability . In the result, grounds taken by the assessee in all the years with respect to provision of warranty are allowed. 8. The assessee company has debited ₹ 66,90,516/- in the A.Y. 2006-07 on account of technical drawing expenses under the head cost of raw materials and components . The AO treated the same as expenditure in the nature of royalty within the meaning of Article 12 of DTAA with Austria. As no TDS was deducted thereon by invoking provisions of Section 40(a)(ia), the AO disallowed the payment was so made. 8.1 The fact as submitted by the assessee with regard to payment for designs drawings as under: The assessee company is a wholly owned subsidiary of nonresident company M/s Andritz Hydro GmbH, Austria ( Andritz Austria ) and is engaged in the business of manufacturing generators and other heavy electrical equipments for supply to Hydro Power Plants. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not royalty as contended by the Ld. AO. 8.2 The contention of the assessee with regard to the disallowance of payment u/s.40(a)(i) was as under :- The designs and drawings are purchased on a principle-to-principle basis and is in the nature of purchase of goods The transaction is in the nature of purchase of Copyrighted article and not of a purchase of copyright itself in the drawings. Hence, the same is in the nature of the business income and not in the nature of royalty . To substantiate the nature of transaction as a purchase of goods, the Appellant has provided various supporting documents such as copies of bill of entry, copy of physical drawings received, copies of invoices and details regarding the terms and conditions of the transaction, which have not been challenged by the Ld. AO For AY 2003-04 and AY 2004-05, the Ld. CIT(A) has also held that the transaction is in the nature of purchase of designs and drawings not in the nature of royalty (vide orders dated 19 January 2007 and 23 November 2007). Further, the CIT(A) order for A Y 2003-04 has also been upheld by the same bench of the Hon'ble IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in assessee s own case for the A.Y. 2003-04 vide order dated 28-12- 2011 in ITA No.29/Ind/2005. The precise observation of the Tribunal were as under :- First, we shall take up the appeal of the Revenue for assessment year 2000-01 (ITA No.29/Ind/2005) wherein first ground pertains to granting relief of ₹ 4,14,18,313/- representing disallowance of expenditure under the head technical design drawings . The crux of arguments on behalf of the Revenue is in support to the assessment order whereas the learned counsel for the assessee contended that the impugned issue has already been decided in favour of the assessee by the Tribunal. In reply, the ld. CIT/DR Shri Anadi Varma invited our attention to pages 2 to 5 and para 37 of page 13 of the assessment order. 2. We have considered the rival submissions and perused the material available on file. Since common grounds are involved, therefore, these can be disposed of by this common consolidated order for the sake of brevity. Without going into much deliberation, we are reproducing hereunder the relevant portion of the order for assessment year 1999-00 to 2002-03 (ITA Nos.112 to 115/Ind/2007), order dated 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Heavy Industries Company Ltd. In re (AAR) 271 ITR 193 makes the position of taxability clear. 6.3. The non-Resident Austrian Parent company is not marketing design as goods for sale to all. And also the assessee company V A Tech India is not keeping, nor has any intention to keep, the design as goods. It is in fact more like a secret formula. The web site of the assessee company gives the details about the algorithms and the design process (Enclosed as annexure A). That Design is being used by it to manufacture the end product (generator) which is meant for sale after that it is of no use to the assessee. Therefore, design of a generator cannot be equated with software package or any other copy righted articles whose unlimited number can be sold in market. 6.4. No outright sale of designs has taken place. It is only the limited use for manufacturing that the assessee company is holding authority to use design. Assessee company cannot purchase these design from any other third company as the trade name under which assessee company and non-resident Austrian Company are manufacturing and selling the generator is same and both the companies are known for their s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DTAA. 6.9. The Legal provisions have been examined in para 2 supra and the DTAA in para 3. The payment made by assessee company is covered in definition of Royalty as per DTAA, which defines Royalty as consideration for the use of or the right to use design or model, plan, secret formula or process information concerning industrial, commercial or scientific experience. 6.10. The payment made by assessee company is also covered in definition of Royalty as per IT Act, 1961 explanation 2 section 9(1)(vi); Explanation 2.- For the purpose of this clause royalty means ..(ii) the imparting of any information concerning the working of ..design, secret formula or process 6.11. The facts along with the case laws have been examined in para 4 and 5. After the detailed examination of facts and circumstances of the case it is held that VA TECH HYDRO India Pvt. Ltd. has failed to deduct tax on sums paid to the Parent Austrian company which was chargeable to tax within India by virtue of the IT Act, 1961 and as per the provisions of DTAA between India and Austria. 6.12. Assessee company is manufacturing Generator and its accessories i.e. only the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of no use. The design of particular generator is specific to that only and is of no use in case of any other generator. Hence the arguments of the assessee that they are selling the design along with generator is simply misleading and not relevant to the issue of taxability. 6.15. As discussed earlier in para 1.9 the drawings and designs are made with the help of sophisticated computer programs and algorithms. (Please see Annexure Austria). The computer program along with the brain of the design engineer is the input in the process and output is certain design and other parameters. These parameters are for the help of detailed design which is prepared in India by the assessee VA Tech India. The parent Austrian company has neither given the sophisticated computer programs nor the algorithms to VA Tech India. Only the output of the sophisticated computer programs and algorithms is provided to the assessee VA Tech India which it calls as design . Rights over these designs is with parent Austrian company. The assessee company further prepares detailed designs on the basis of the parameters and designs provided by its parent company. The rights over these detailed design ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entire transaction between the appellant and the nonresident company is of sale and purchase of goods on principal to principal basis. The meaning of royalty has been defined in the DTAA. The Apex Court in the case of Union of India Vs Azadi Bacho Andolan and Another reported in 263 ITR 706 (SC) held that in case of difference between the provisions of the Act and the Agreement, the provisions of the Agreement would prevail over the provisions of the Act, therefore, the definition of royalty is under the domestic law is not applicable for the purpose of understanding the concept of royalty under the Double Taxation Avoidance Agreement between India and Austria and, therefore, the A.O. is not justified in applying the provisions of section 9(1)(vi) of the IT Act. As regards the ownership is concerned, as rightly explained by the learned counsels that the transfer of ownership in the case of movable goods is governed by the Sales of Goods Act. The sale bill issued by the selling party contains the terms and condition on the basis of which the goods are being sold against the price. In the sale bills issued by the non-resident Austrian company, there is no mention that despite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of section 9(1)(vi) and Explanation 2 thereto and also to the provisions of Article 12 of DTAA with Austria which are reproduced as under for the sake of convenience :- Provided that nothing containing contained in this clause shall apply In relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the Ist day of April, 1976, and the agreement is approved by the Central Government. Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a nonresident manufacturer along with a computer or compute-based equipment under any scheme approved under the Poli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the royalties and fees for technical services. (3) The term royalties as used in this Article, means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematography films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. The learned CIT DR contended that as per the meaning of the term royalty , as per both these provisions, the transaction between the assessee company and its parent non-resident company, fell within the realm thereof, hence, the assessee should have deducted the tax at source. The learned CIT DR thereafter also drew our attention to the observations of the Assessing Officer as regard to procurement of the same designs for the same contract, which also indicated that it was a case of royalty and not a case of out-right purchase thereof. The learned CIT DR placed heavy reliance on the conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant and machinery and such condition also restricted such buyers from using such drawings for commercial manner benefits. The learned counsel for the assessed, thereafter, contended that these were subject to the custom duty and refund of custom duty had also not been claimed which was generally a case in respect of an item received for a limited use or for a limited period. It was also specifically pointed out that such designs were procured for specific projects on a single user basis as the same had to be given to the buyer of plant and machinery manufactured by the assessee company. The learned counsel for the assessee thereafter controverted the factual findings of the Assessing Officer, particularly in regard to the Assessing Officer s contention that the assessee had paid money for the same drawing three times and referred to the various pages of the paper book in this regard. The learned counsel for the assessee also submitted that the action of the Assessing Officer was a case of change of opinion in respect of the same transaction which had been found to be of the nature of purchases, both in the course of proceedings under section 144A as well as under section 92CA of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to the ruling of the learned Commissioner of Incometax (Appeals) for advance ruling in the case of Pre-quip Corporation v. CIT, as reported in 255 ITR 354 (pages 140 to 150 of the paper book) wherein it has been opined that transaction of sale of engineering drawings and designs by US Company to Indian Company did not amount to a transaction resulting into payment of royalty. The learned counsel for the assessee submitted that the facts of this case are identical with the facts of the present case before the Tribunal and the royalty as per article 12(3) of Indo US DTAA was also similar. Hence, the ratio laid down in this case is squarely applicable to the present case. The learned counsel for the assessed, thereafter, referred to the decision of the Tribunal in the case of Lucent Technologies Hindustan Limited v. ITO as reported in 270 ITR 62 (AT) wherein the assessee had acquired hardware and software and the department bifurcated the transaction as one of supply of hardware and the other of the software, treating the software part as royalty, the Tribunal held that the assessee s transaction with the non-resident company was for the purchase of integrated equipment which c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso relied upon the decision of the Hon ble Karnataka High Court in the case of Jindal Thermal Power Company Limited v. DCIT (2009) 225 CTR (Kar) 220. 8. The learned CIT DR, in the rejoinder, contended that in the case of Pro-quip Corporation v. CIT (supra), the language of article 12(3) of DTAA was materially different and the said decision was based on such language, hence, not applicable to the facts of the case. The learned CIT DR further submitted that the other decisions relied upon by the assessee were factually different as in those cases, the assessee was the ultimate user of those designs/drawings along with the plant and machinery, whereas in the present case, the assessee manufactured turbine/generator and sold such turbine/generators. The CIT DR further submitted that the decision of the Tribunal in the case of Lucent Technoligies Hindustan Limited (supra) rather supported the case of the revenue. The CIT Departmental Representative further submitted that the basic design obtained by the assessee company was further modified and such modified design was given to the buyer of the turbine/generator and not basic design, as contended by the learned counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich cannot be correct as even the software has been judicially classified as goods. We also do not agree with the contention of the revenue that when the goods are acquired for self-consumption, that would amount only to use of such items, resulting into royalty because items for selfconsumption for use in intermediate process are also acquired on principal to principal basis by way of purchase. It is also to be noted that in the hands of non-parent company, such transactions have been accepted by the revenue authorities of that country as of the nature of business profits resulting from the sale of such drawings. Hence, when the same provisions of DTAA are applicable then this action of such revenue authorities also supports the claims of the assessee. To sum up, even at the cost of repetition, we state that it is a case of purchase of a copyrighted article on principal to principal basis and not a case of payment for transfer of right in the copy right of such designs. In this view of the matter, we confirm the findings of the learned Commissioner of Incometax (Appeals). 10. In the result, all the appeals of the revenue fail and are dismissed. Order pronounc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand of the ld. CIT(A) on this issue. Consequently, affirmed. Our conclusion will cover ground no.1 of ITA No.253/Ind/2007 (Assessment Year 2001-02) and ground no.2 of ITA No.255/Ind/2007 (Assessment Year 2003-04) also. 8.1 The department has also not filed any appeal against the order of CIT(A) for A.Y.2004-05 holding that transaction is in the nature of purchase and design and drawings are not in the nature of royalty. As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal in assessee s own case, we delete the disallowance made by the AO by invoking section 40(a)(i) for all the years under consideration. 9.1 During the assessment year 2006-07, the assessee had made payments of ₹ 4,32,74,022/- to its non-resident parent company and its subsidiaries for purchase of raw materials and components etc. The assessee company has also made sales of ₹ 18375126/- of generators and its equipment parts to its non-resident parent company and its subsidiaries. Since the international transactions were more than 5 crores, the case was referred to the Transfer Pricing Officer being Asst. Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) Receipt for turbine errection/inspection service V A Tech PT Indonesia 244209 i) Inter Corporate Deposit VA Tech Finance (lreland) Ltd, Ireland 3104878 i) Reimbursement of Expenses V A Tech ELIN EBG GmbH Co.,Austria 680356 i) Reimbursement of expenses VA Technology AG, Austria 14952505 Total 11,69,86,949 Purchase of Raw Materials: During the year under consideration, the assessee company has purchased raw material from AEs worth ₹ 4,32,74,0221-. These transactions are analyzed as follows: Selection of Tested party In the transfer pricing documentation submitted by the assessee, the assessee has selected V.A.Tech Hydro India Pvt. Ltd.(Indian Company) as tested party keeping in view complexity of functions performed av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-04 was used, which is also in accordance with the proviso to Rule 10B(4). The assessee has used an average of the two/three year data (wherever available) to justify the arm s length nature of the international transaction because of certain factors which are explained below. The contracts sales in respect of the projects undertaken by the assessee are recognized by the assessee using percentage of completion ( POC ) method. The billing of POC projects range from 2 to 4 years depending on the length of the projects and profitability can be reasonably ascertained only over the period of contract. Hence, financial data for a single year would present distorted profitability of the company and it would be inappropriate to use single year data in this industry. Accordingly, the use of multiple year data generally captures market cycles and reduces the likelihood that the financial results of an anomalous will distort the arm's length ranges. In consideration of the assessee's business cycle, industry profile and economic conditions, a two -three year data is appropriate rather than the use of a single year data. 11. The AO rejected the assessee s contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.76% Silvon 2902301 2225771 676530 30.4% Karun Commissioning 1471846 338615 1133231 334.67% Karebbe Design 330279 288995 41285 14.29% Maso Coron 1100116 998897 101219 10.13% Gil Gel Gibe-Spares 79911 52364 27547 52.61% 13.1 The AO observed that the transactions as per Proviso to Section 92C(2) having gross profit margin within the range of 11.85% to 23.66% are accepted at arm s length margin controlled transactions having margins more than 23.63%, which was not disturbed in view of the provisions of Section 92(3) as they have effect of reducing the income chargeable to tax. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into. 14.2 Further, reliance has also been placed on Circular 14/2001 issued by the Central Board of Direct Taxes ( CBDT ) which clarifies that transfer pricing regulations are not intended to be applied to cases where the adoption of the arm s length price determined under the regulations would result in a decrease in overall tax incidence in India in respect of the parties involved in the international transaction. Since, the application of an arm s length price to the present case may result in reduction of the overall tax incidence in India, the cost only reimbursement by the AEs was considered to be in compliance with the import of the Indian transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee and ignored the fact that purchases made by assessee from its AEs are on cost-to-cost basis. The Ld.TPO proceeded to determine the ALP of subject transaction using TNMM as most appropriate method. However, while doing so, the Ld. TPO: Used the financial data for comparable companies only for financial year ( FY ) 2005-06 and rejected the multiple year data as used by the assessee; Use the financial data as available on databases instead of annual reports, which provide more authentic information. Rejected the contention of the assessee for rejection of one of companies selected by assessee as comparable. The assessee has argued that due to one comparable companies identified by assessee, based on principles of robust analysis, should be rejected on account of difference in turnover; Rejected the request for allowing working capital adjustment made by the assessee. Based on above, the Ld. TPO concluded that subject transaction does not meet the arm s length test and accordingly recomputed the ALP of the same. Sale of generators generator parts to AEs The Ld. TPO accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available from Prowess database 6. Sixth Ground of Objection Based on the facts and circumstances of the case, the Ld. TPO has erred in law and in fact, in failing to make appropriate adjustments to account for differences in working capital employed by the assessee vis- -vis the comparables and in the process also ignored Indian transfer pricing regulations and judicial precedence. 7. Seventh Ground of Objection Based on the facts and circumstances of the case, the Ld. TPO has erred in law and in fact, by not taking cognizance of the fact that same international transaction of assessee has been accepted by Revenue authorities to be at arm s length in previous years 8. Eighth Ground of Objection Based on the facts and circumstances of the case, the Ld. TPO has erred in law and in fact, in making an upward transfer pricing adjustment on account of purchases made from AE by alleging that entire difference in operating margins of assessee and comparable companies is on account of purchases being made by assessee from AE at higher price and ignoring the fact that purchases from AE constitute less than 5% of the total ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transfer pricing assessment proceedings, the assessee had provided the details of the international transactions relating to import of material and components from its AE stating that the same have been carried out on cost to cost basis and the AE s do not charge any mark-up on same. Since the AEs did not charge any mark, the assessee has placed reliance on Section 92(3) of the Act, which inter alia provides that The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into. Further, reliance has also been placed on Circular 14/2001 issued by the CBDT which clarifies that transfer pricing regulations are not intended to be applied to cases wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a cost to cost basis between the assessee and its AE, the assessee, by correctly placing reliance on the provisions of section 92(3) and Circular 14 of 2001, concluded that subject impugned international transaction is at arm s length. 19. In support of its above contention, the assessee had submitted before the Ld. TPO, a copy of the certificate obtained from its AE confirming that AE had quoted and invoiced all goods and services delivered to assessee on full cost basis. Further, AE had confirmed that it does not have any excess cost cover and the margin earned by the AE is zero 20. The Ld. TPO did not take into consideration the above certificate submitted by the assessee, while determining the ALP of transaction involving import of material by the assessee. This is evident from the fact that entire order of Ld. TPO is silent on the issue and has simply discusses determination of ALP by using TNMM. This shows that Ld. TPO approached the case with a biased mind and chose to ignore valid documentary evidence in his possession to arrive at his conclusion. 21. The Ld. TPO had ignored the fact during FY 2005-06, there has been no change in the nature and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities and responsibilities undertaken or to be undertaken by the independent and associated enterprises. Furthermore, in agreement with OECD, the Mentor Graphics case also underscores the need for a close functional similarity even where TNMM is applied. Relevant in this regard are the following extracts from the decision. It is clear that even when TNMM method is applied to determine arm s length price as per OECD guidelines, functional profile, assets, assumed risks of controlled and uncontrolled transaction are to be seen while screening. Besides, it is not possible to ignore specific Indian regulations on the subject. Hence, based on Indian transfer pricing regulations supported by judicial decisions, it is clear that a robust functional analysis is required even where TNMM is applied. 23. Against use of BHEL as comparable, contention of assessee before DRP was as under :- Assessee had applied wider comparability criteria while screening the companies at the time of preparing transfer pricing study; Detailed evaluation of all factors such as functions performed, assets employed and risks undertaken had been un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth price in accordance with section 92C (1) and 92C(2) of the Act. The relevant extract of Section 92C(2) of the Act is reproduced below. As per Section 92C(2), where more than one price is determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean Similarly, Notes on Clauses - Income Tax (Finance Bill, 2001) clarified that, under the existing provisions contained in sub-section (2) of the said section, the most appropriate method shall be applied for determination of arm s length price in the manner prescribed. The proviso to sub-section (2) provides that if the application of the most appropriate method leads to determination of more than one price, the arithmetical mean of such prices shall be taken to be the arm s length price in relation to the international transaction. It is proposed to substitute the aforesaid proviso to sub-section (2) so as to provide that where the most appropriate method results in more than one price, the arithmeti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision as far as right of the taxpayer to challenge the determined price is concerned. The second limb only allows marginal relief to the taxpayer at his option to take ALP not exceeding 5% of the arithmetic mean. Therefore, in line with the view taken by Kolkata Bench of the Tribunal, we are of the view that benefit of the second limb is available to all taxpayers irrespective of the fact that price of international transaction disclosed by them exceeds the margin provided in the provision .. 27. In light of the above and the option allowed to the assessee by Proviso to section 92C(2), the action of the Ld. TPO in not applying the provisions of proviso to Section 92C(2) was against the legal provisions. 28. In view of the above discussion, we can conclude that BHEL is not a comparable owing to the significant difference in size of operations and turnover. Even we found that BHEL had been accepted as non-comparable by the TPO for the assessment year 2008-09. We also found that turnover of segment of BHEL which has been considered as comparable is 100 times more than that of assessee. It is also a matter of record that same international transaction has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Actual transaction value 4,32,74,022 Difference between ALP and transaction value 2.52% Transaction value within 5% of ALP Yes Computation of working of adjustment having regard to the value of international transactions of assessee for the A.Y.2007-08 : Particulars Amount (in Rs.) Total sales 1,11,86,31,546 Less : Operating cost 98,46,33,243 Operating profits ( OP ) 13,39,98,303 OP/sales 11.98% Arm s length margin as determined by AO 13.23% Transfer Pricing adjustment-Addition on account of arm s length price made by TPO( A ) 1,39,96,551 Particulars Related Party Cost Unrelated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5-06, the value of which had been determined by the then Ld. TPO as Nil. The AO erred on facts and circumstances of the case and in law by determining arm s length value of capital asset purchased from AE during AY 2005-06 as Nil and concluding for disallowance of depreciation thereon claimed during that year. In doing so, the then Ld. TPO had misplaced facts of case. 32. The contention of the assessee before the AO was as under :- During FY 2004-05, assessee recorded an amount of ₹ 23,658,600 in relation to an Insulating taping machine (capital asset under consideration) purchased by it to from its AE. The machine had been purchased by the AE during FY 2001-02 from an unrelated entity and was provided to assessee during FY 2001-02 only. Such machine was put to use by the assessee on October 1, 2002. No charge was made for the same by the AE in FY 2001-02. However, the AE raised invoice for such machine on the assessee during the FY 2004-05. Further, such machine had originally been purchased by AE for CHF 9,12,279 (INR equivalent at the exchange rate prevalent on the date of purchase i.e. February 22, 2002 is ₹ 2,62,37,144). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if it is considered that capital asset purchased by assessee from its AE is a transaction relating to FY 2004-05, its depreciated value would had been approximately been ₹ 80,04,844/- (Rs. 1.89 crore less depreciation @ 25% for FY 02-03, 03-04 on WDV) i.e. after considering depreciation of 25% as per Income Tax Act, 1961 for each of the three preceding financial years. The assessee accounts for the fixed assets at cost of acquisition or construction less accumulated depreciation. The cost of fixed assets includes freight, preoperative expenses, capitalized foreign exchange losses, duties and taxes incurred to put them into use. Depreciation on fixed assets is provided on pro-rata for the period of use on straight line method, at rates specified in Schedule XIV to the Companies Act, 1956. It is significant to note that the aforesaid contention of the TPO falls short of merit as he had grossly failed to give cognizance to the generally accepted accounting policies and the accounting policy of the assessee to account for the fixed assets and depreciation by considering the Customs valuation as the value of asset for arriving at the conclusion, thereby ignoring the other incide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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