9911796707
TMI Blog2020 (1) TMI 1008X X X X Extracts X X X X X X X X Extracts X X X X ..... can be considered as one of the comparable for working out the ALP of the assessee. Thus company namely Rolta India Ltd. cannot be considered as comparable. Accordingly, we reverse the finding of the learned DRP and direct the TPO not treat this company as the comparable for the purpose of working out the ALP of the assessee with respect to the transactions carried out with its associated enterprises. As, we have rejected Rolta India Ltd as one of the comparable, we do not find any reason to adjudicate the issue for the inclusion of Geometric Software Solution Co Ltd. Hence, the ground of appeal of the assessee is partly allowed for statistical purposes. ALP adjustment in relation to Reimbursement of management fees expenses - HELD THAT:- Regarding the ad hoc disallowance of management fee expenses, we note that there is no power under the provisions of the Act which allows to the TPO to make the disallowance on ad hoc basis. As such the law is fairly clear and requires the TPO to determine the arm length price of the international transaction with the AE. As such there is no power available to the TPO to make the ad hoc disallowance while computing the income under the head busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow the claim of the assessee after necessary verification. We find no infirmity in the direction of the learned DRP in view of the fact that the issue involved is factual in nature. Accordingly we hold that no separate adjudication is required in the given facts and circumstances. Thus, we dismiss the ground of appeal raised by the assessee. - SHRI WASEEM AHMED, ACCOUNTANT MEMBER And Ms. MADHUMITA ROY, JUDICIAL MEMBER For the Appellant : Shri S.N. Soparkar, Sr.Adv., Ms.Urvashi Shodhan Shri Parin Shah, ARs For the Respondent : Shri Mahesh Shah, CIT-DR ORDER PER BENCH: The appeal has been filed at the instance of the Assessee against the order of Dispute Resolution Panel, Ahmedabad [DRP in short] passed under section 144C(5) of the Act dated 12/09/2011 arising in the assessment order passed under s.143(3) r.w.s.92C and r.w.s.144C of the Act dated 10/10/2011 for AY 2007-08. The assessee has raised the following grounds of appeal: Ground no.1 1.1 On the facts and circumstances of the case the AO following the directions of the DRP erred in making an adjustment of ₹ 2,20,69,862 in relation to determination of Arm's Length Price relating to the Appellant's international t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets costing less than ₹ 5,000 and depreciated fully in the books of account. Your Appellant submits that the said amount formed part of the book depreciation which had already been disallowed by the Appellant in the computation of income. The Appellant craves leave to add, to amend, to alter, to substitute, to modify and / or withdraw all or any of the Grounds of Appeal as they may be advised to do so and to submit such statements, documents and papers as may be considered necessary either at or before the time of hearing of the appeal. The assessee has raised additional ground of appeal vide letter dated 17- 02-2019 reproduced as under: The Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (229ITR 383), it can be raised before the Hon'ble ITAT. 1. Without prejudice to the other grounds in appeal, it is respectfully submitted to exclude the amount of management fee while computing margins of Baroda unit, as inclusion of management fee in profit level indicator of Baroda unit is resulting into d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring an income of ₹ 29,76,18,120/- which was processed u/s 143(1) of the Act. Subsequently, the case of the assessee was selected under scrutiny assessment. Accordingly the AO referred the case to the TPO. 3.3. The assessee during the year under consideration has entered into various transactions with its related parties as shown in the TP study which are in detailed as under: S.No. Description of the transactions Amount paid (in Rupees) Amount received (In Rupees) 1. Import of raw materials, parts etc. 235766,610 - 2. Import of finished goods for Resale 183,087,977 - 3. Export of valves and valve components - 447,290,344 4. Export of finished goods for Resale - 25,435,903 5. Agency Commission - 4,747,935 6. Provision of design related Services - 163,117,922 7 Payment of management fee and professional charges 45,980,354 - 8 Service Charges - 1,969,725 9 Reimbursement of other Expenses 16,117,651 - 3.4. Further, the assessee has categorized the above transactions into 5 different heads for the purpose of TP study. The details of the categorization of the transactions are as under: 4.2. Overview 4.2.1. During the year ended March 31, 2007, TVCIPL engaged in the following inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AE. Accordingly, the TPO rejected the comparable selected by the assessee and conducted fresh search by considering the Baroda and Chennai unit separately and by using the following filters: 1) Only select valves manufacturing companies. 2) Sale 25 crores. 3) Similar financial year data 4) Turnover more than 25 crores and less than 25 crore. 5) Related party transaction up to 25% should be accepted. 3.9. In view of the above, the TPO found three comparable as discussed below: S. No. Name of the comparable/company OP to sales 1. ASCO 36.49% 2. KSB (Segment) 23.95% 3. Virgo Engineers Ltd. 12.59% 3.10. Accordingly, the TPO determined the average PLI of the comparable at 25.88% for comparing the same with the PLI of Baroda and Chennai Unit separately. However, the TPO has made risk adjustment on account of bad debts, lower inventory, capacity utilization and market plan in the average mean of PLI of the comparables while working out the ALP of the Chennai Unit by 2%. Thus the PLI of the comparable was taken at 23.88% in case of Chennai Unit. 3.11. The TPO further worked out the PLI of Baroda and Chennai Unit at 18.42% and 17.01% respectively. 3.12. However, the assessee objected on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee is engaged hi the business of manufacturing (namely machining, assembly and testing) of valves, valve parts, actuators, components and accessories. Its business operations are conducted through two major business divisions; namely the Baroda Unit which mainly caters to the domestic market and the Chennai Unit, which being a 100% EOU, caters to export of components to associated enterprises. The activities carried out in relation to manufacturing of valves are: Import of raw materials, parts etc; Import of finished goods for resale; Export of valves and valve components; Export of finished goods (resale); and Receipt of commission. The assessee is primarily engaged in manufacturing activities and is also engaged in distribution based, on varied customer demands. The manufacture of a valve and distribution of spares accordingly to the assessee, Is an integrated activity- within the valve industry and. accordingly wants its operations to be viewed as one consolidated function. But, distribution forms a small fraction of the total revenue of the company and is essentially undertaken to supplement the product range already offered to customer. All these suggest that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19% Mean 20.57% 20.57% The AO/TPO is directed to recompute the adjustment on the basis of the above comparables for each unit of the assessee, the approach adopted by the TPO. The TPO had allowed 2% risk adjustment on comparable for Baroda Unit while comparing them with Chennai Unit, as the TPO accepted that there was difference in risk profile of Chennai Unit and Baroda Unit as comparables typically assume higher risk as compared to Chennai Unit which .is catering to the AEs only. In this regard, assessee has submitted to the TPO that the bad debt ratio to sales of, comparables was 0.23% whereas same for the Chennai unit was Nil. Similarly, Chennai unit had lower inventory, capacity utilization risk as it is catering to AEs and its marketing plan are based on forecast received from the AEs. Considering the same, the same risk adjustment is also allowed. The Panel decided to adopt the above average PLIs and directs the TPO/AO to compute the ALPs and the compute TP adjustments. Being aggrieved by the order of the Ld. DRP the assessee is in appeal before us. 4. The learned AR before us filed three paper book running from pages 1 to 704, 1 to 1041 and 1 to 122 and proposed to include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion of this new company as comparable in the year under consideration. The learned DR vehemently supported the order of the authorities below. 6. We have heard the rival contentions of both the parties and perused the materials available on record. The 1st issue arises for our consideration whether the company KAR Mobiles should be considered as one of the comparable for the year under consideration in the given facts and circumstances. 6.1. Admittedly, the name of the impugned company was proposed by the assessee 1st time before the learned DRP in the list of comparable companies selected in pursuance to the fresh search filters as adopted by the TPO. Keeping in view the fact that such company has already been included as one of the comparable in the own case of the assessee in several assessment years as mentioned above, we find considerable force in the argument of the assessee. 6.2. However, there is no law suggesting that the comparable selected one year should necessarily be selected in the other. It is because the filter applied can be different from one year to other depending upon the facts and circumstances of each year. Therefore, we cannot direct the AO to include s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there are certain differences in the companies selected by the TPO viz a viz selected by the assessee in pursuance to the search filters applied by the TPO. The assessee in this connection has made detailed representation before the DRP but the same was not considered while adjudicating the issue by it. As such, we are of the view that the companies selected by the assessee as per the search filters adopted by the TPO, requires consideration. Therefore, we set aside the order of the learned DRP to the file of the TPO for fresh adjudication as per the provisions of law. 7.1. It is also pertinent to note that the company namely KAR Mobiles suggested by the assessee for inclusion in the list of comparables, is also available in the fresh comparables furnished by the assessee before the learned DRP which, we have already set aside the file of the TPO for fresh adjudication as discussed above. In case the AO/TPO agrees to include the above company i.e. KAR Mobile, then there is no need for the AO/TPO to consider the fresh TP study filed by the assessee before the ld. DRP. 7.2. In view of the above, and after considering the facts in totality, we are of the view that the entire issue rai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olidated financial statements have been prepared by the Company as per AS-21 and IFRS. Therefore this is not a suitable comparable. 2) In case of other comparable namely Power Soft Global Solution Limited, the assessee submitted that this company is engaged in IT service, outsourcing engineering sources, GIS services RFID services. Further it has not reported segmental result therefore it should not be treated as suitable comparable. 7.8. However, the Ld. TPO rejected the contention of the assessee by observing that - 1) In case of Rolta India limited the assessee did not provide any difference in Indian AS and IFRS which affected the profit. 2) In case of power soft global solution, all the segments of the company are the parts of engineering design service or engineering service. 7.9. Accordingly, the AO determined the ALP of ₹ 20,09,28,656/- by using PLI of 23.18% and made the addition of ₹ 1,96,07,699/- to the total income of the assessee. 7.10. Aggrieved assessee preferred an appeal before the Ld. DRP and reiterated the submission before the Ld. DRP. However the Ld. DRP partly allowed the appeal of the assessee by observing that the power soft Global solution was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment for the year under consideration was not available. Accordingly the assessee claimed that such consolidated financial statements cannot be used as comparable. The learned AR also drew our attention on pages 611 volume III where the financial statements of the comparable were placed. The learned AR in support of his contention referred to the following judgments: 1. American express (44 Taxmann.com 389 (Delhi Trib.) (para 21) Page 749 2. 3DPLM Software Solutions Ltd. vs. Dy.Cit (2014) 42 taxmann.com 333 (Bang. Trib.) (Para 12.4.1.) Page 777 8.3. The learned AR also alternatively submitted that the TPO has accepted a comparable namely KLG Systel Ltd. which is engaged in life cycle management. Accordingly it claimed that the similar company engaged in product life cycle services namely Geometric should also be considered as one of the comparable. The learned AR also claimed that the impugned company is also offering engineering Solution services. Thus the learned AR prayed for the inclusion of this as comparable company. However, the learned AR further submitted that if Rolta is rejected from the set of comparables, then he will not press for the inclusion of Geometric in the li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Ltd was for the entire group which was used as comparable in the case of the assessee company. In our considered view the consolidated financial statements cannot be compared with the assessee. It is because the consolidated financial statement of Rolta India Ltd. also contain the information/financial result of the entire group. As such, the provisions of the Act requires that only the Indian company of Rolta group can be considered as one of the comparable for working out the ALP of the assessee. The consolidated financial statements of Rolta are placed on page no. 603 of the paper book. 10.4. In holding so we also draw support and guidance from the order of Hon ble Mumbai tribunal in the case of Capgemini India Private Limited, ITA no 7861/MUM/2011 dated 28-02-2013 wherein it was held as under: 5.3.3 We first deal with the pleas raised by the ld. Sr. Counsel for using consolidated results for the purpose of comparison of margins. The ld. CIT-DR has pointed out that the four comparables having substantial related party transactions i.e., CG-VAK, Mascon Global Limited, Mastek Ltd. and Patni Computer Systems Ltd. have substantial revenue's from overseas market and, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Solution Co Ltd. Hence, the ground of appeal of the assessee is partly allowed for statistical purposes. 10.6. The issue raised by the assessee in ground no. 1.3 is that the Ld. DRP erred in confirming the ALP adjustment of ₹ 2,07,21,181/- in relation to Reimbursement of management fees expenses. 10.7. The assessee has entered into an agreement with Tyco Flow Control Ote. Ltd. Singapore (TFCA) to receive the Management and marketing services as detailed under: S.No. Type of service Nature of service provided 1. Management fee 1 a IT Department Data Network/Infrastructure consultancy Desktop Hardware/Software consultancy Email Accounts and Access Remote Access (VPN/Dialup) support Technology Infrastructure Consultation 1 b HR Department Strategic Initiatives Provides leadership and partners with business unit in all corporate initiatives/projects Coordinates with the US headquarter and liaison between 5 businesses and the Corporate Evaluate and lead to increase Employee Attitude Survey scores Succession Planning Organization Leadership Review Span Layers Analysis to access organization efficiency Core Business Functions Establish Policy and guidelines to assist effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.9 The TPO further found from the details filed by the assessee that the some of the invoices pertains to earlier year. However the assessee did not make any provision of these services in the relevant FY. Therefore the TPO benchmarked these invoices at NIL. Accordingly the TPO made upward adjustment of ₹ 10,40,197/- 10.10 The TPO further found from the details filed by the assessee for the remaining management expenses of ₹ 3,23,83,555 that these are in the nature of followings: (i) Policies and Procedures (ii) Internal MIS and forecasting (iii) Support of Tax Legal matters (iv) Support of internal audit (v) Treasury support maintaining banking limits and banking facilities on global basis. (vi) Management support to Indian operation. (vii) Insurance support (viii) Support on Sarbans-Oxley implementation. 10.11 It is clear from the above details that the services provided by the AE are duplicate in nature and repetitive. The service rendered by the AE to assessee was the requirement of holding company in its stewardship capacity. These services are beneficial to shareholder, group entities, and compliance of law and regulation of other countries. There was no evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the extent of such management fee expenses. 10.18. The learned AR further submitted that the TPO has no jurisdiction to make the disallowance on ad hoc basis. As such the TPO is under the obligation to determine the Arm Length Price. The learned AR in support of his contention relied on the following orders: a) Flakt India Ltd. ITA No 1032/Mds/2014 b) Ness Technologies (India) Pvt Ltd. reported in 76 taxmann.com 209 c) Debt Norske Veritas reported in 67 Taxmann.com 16 10.19. The learned AR further submitted that the in AY 2009-10 the Ld. DRP delete the same addition made by the Ld. TPO on ad hoc basis. 11. On the other hand, the learned DR regarding the management fees of ₹ 1,25,56,602/- submitted that the impugned amount needs to be determined on arm length basis irrespective of the fact that the same was disallowed on account of non-deduction of TDS. The learned DR further submitted that the determination of the arm length price for such management fees is essential in the sense that the assessee in future will deposit the amount of TDS and claimed the deduction of the entire amount. 11.1. The learned DR further submitted that the assessee has not furnished sufficient docu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been determined at nil for the year under consideration. 12.2. Regarding the addition of ₹ 10,40,197/-, we find that the assessee has not pressed the same at the time of hearing. Therefore we dismiss the same as not pressed. Regarding the ad hoc disallowance of management fee expenses, we note that there is no power under the provisions of the Act which allows to the TPO to make the disallowance on ad hoc basis. As such the law is fairly clear and requires the TPO to determine the arm length price of the international transaction with the AE. As such there is no power available to the TPO to make the ad hoc disallowance while computing the income under the head business and profession. In this regard we find support and guidance from the judgment of Hon ble Mumbai Tribunal in case DCIT Vs. Flakt (India) Ltd. reported in 76 taxmann.com 209 where in it was held as under: Another aspect which emerges from the order of the TPO is as follows. After considering the factual matrix, the TPO has proceeded to determine the arm's length price for the service charges at 10% of the expenses recovered. Ostensibly, the income arising from an international transaction is liable to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e direct the AO if any adjustment needs to be made then it should be limited to the extent of international transaction between the associate enterprises. In this regard we find support and guidance from the judgment of Mumbai Tribunal in case of Phoeinx Macano (India Pvt Ltd) ITA no 7361/MUM/2012 vide order dated 7th January 2014 where in it was held as under: 7. We have heard both the parties and their contention have carefully been considered. So far it relates to grievance of the assessee that the TP adjustment can only be applied to international transactions of the assessee with the AE and it cannot be applied at ITA No.7361/2012 entity level, the issue is found to be covered by the aforementioned decision of the Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. (supra). Therefore, we hold that determination of arms length price should be restricted only to international transaction of the assessee with its AE. It was pointed out that the figures are available with the AO, detail of which has also been filed before us at page 170 of the paper book. Therefore, we direct the AO to take only the international transactions of the assessee with its AE for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of ST Microelectronics Pvt.Limited, in a decision dated 34d June, 2011 ruled that the assessee was not entitled to such an interpretation of the then proviso to Section 92C(2) of the Act as is being claimed in the present case. The ITAT also averred that the Transfer Pricing legislation cannot be seen as incentive provisions admitting of liberal construction. It seeks to protect a nation s tax base by correcting an artificial assumption of margin made possible in the first place by the fact that transacting parties are but limbs of the same enterprise, though legally distinct entities across separate sovereign taxing nations. Thus the claim of the assessee for 5% margin was rejected. 36 As regards the use of multiple year data, the Panel once again relied on the decision of ITAT Hyderabad Bench in the case of M/s Deloittee Consulting India Pvt.Ltd. (ITA Nos.1082 1-84 of 2010). The ITAT in the above case stated that the lower authorities were right in considering the data of only one year. The expression shall used in the said Rule makes it clear that it is mandatory to use the current year data first, and if any circumstances reveal an influence on the determination of ALP i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit of adjustment of + 5% to be given while determining the Arms Length Price, the ld. counsel for the assessee has not been point out as to how and in what manner, the order of ld. CIT(A) in rejecting this claim of the assessee is improper and unjustified. Since both the parties have not been able to controvert the findings recorded by the ld CIT(A) or point out any material to enable us to take a view other than view taken by the ld. CIT(A), we are inclined to uphold the order of ld. CIT(A) on the point of determination of Arms Length Price in respect of the transactions entered into by the assessee with its associate enterprises, namely, RCS Centre Corp. Therefore, the order of ld. CIT(A) is upheld, and the grounds raised by the assessee as well as by the revenue on this issue are rejected. In view of the above we do not any reason to interfere in the finding of the DRP and accordingly uphold the order of the AO. Hence, the ground of appeal of the assessee is dismissed. 16.3. The interconnected issue raised by the assessee in ground No. 2.1 to 2.3 is that the Ld. DRP erred in denying the deduction u/s 10B of the Act for ₹ 7,14,80,242/- in respect of profit of Chennai unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or after April 1, 1981. The tax holiday is at the option of the assessee for five consecutive assessment years falling within the block of eight years beginning within the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. The term manufacture includes processing or assembling or recording of programmes on any disc, tape, perforated media or other information storage device. The above tax holiday was not available to a hundred per cent export-oriented undertaking. Such undertakings were eligible only for deduction out of their export profits under section 80HHC of the Income-tax With a view to providing further incentive for earning foreign exchange, a new section 10B has been inserted by the Act, so as to secure that the income of a hundred per cent, exportoriented undertaking shall be exempt from tax for a period of five consecutive assessment year falling within the block of eight assessment years. The exemption provided under the new section is similar to the one provided to industrial undertakings operating in free trade zones. The exemption under the new provisions will be subject to the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made by the AO. Although it is possible, as in the present case, that in any of the subsequent years the assessee had acquired new plant machinery, may be of substantial value, as also may be increase the turnover or efficiency, nonetheless the act subscribes that the undertaking must not be formed by the splitting up or the reconstruction of a business already in existence. The Act also subscribes that the profits shall not to be included in the total income in respect of the prescribed consecutive assessment years beginning with the assessment years undertaking begins to manufacture an article. Therefore, the initial year is the year to establish the eligibility of the claim. Even the Ahmedabad Benches are also consistently subscribing this view as held in the case of Gateway Technolabs Pvt.Ltd., ITAT C Bench Ahmedabad (in ITA No.2473 2519/Ahd/2006 - AY 2003-04) order dated 4.9.2009. 6.1. As far as the question of alleged purchase of the machinery in question is concerned, there are few facts which indicate that the AO has wrongly held that it was an outright purchase by the Chennai Unit. In this regard, the first appellate authority has given a finding of fact that it was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 79,684/- and added to the total income of the assessee. . Aggrieved assessee preferred an appeal before the Ld. DRP. 19.4. The assessee before the learned DRP filed the details of purchase of assets amounting to ₹ 79,684/- which are duly capitalized in the books of accounts and claimed depreciation u/s 32 of the Income tax Act. The ld. DRP directed to AO allow the claim of the assessee after necessary verification. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us. 20. The learned AR before us reiterated the submission as made before the learned DRP. 21. On the other hand, the learned DR vehemently supported the order of the authorities below. 22. We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates whether the assessee has claimed 100% deduction in respect of the assets costing less than ₹ 5,000.00 or it has claimed depreciation thereon as per the provisions of law. In this regard, we note that the learned DRP has given a direction to allow the claim of the assessee after necessary verification. We find no infirmity in the direction of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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