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TMI Blog2017 (4) TMI 1497X X X X Extracts X X X X X X X X Extracts X X X X ..... rcise i.e. determination of arm s length price of such international transactions which are referred under section 92C of the Act by the Assessing Officer. The perusal of para 4 of the TPO s order shows the international transactions which were referred by the Assessing Officer to the TPO under section 92C of the Act and the above said transactions of support payments is not part of reference. The ground of appeal No.2.1 is thus, allowed. TP adjustment under market support services - assessee had provided marketing support services to its various groups in favour of OPW-FC division and corporate division - HELD THAT:- We agree with the contention of assessee that the approach of TPO should be consistent, in case, he wants to apply the margins of concerns selected in the preceding year as comparable, then such concerns should be picked up and their margins by applied. This selective approach of the TPO is not correct approach. Assessee has fairly made alternate plea before us that either the margins of all the concerns except Agrima International should be applied to benchmark the international transactions of the assessee or at best, the margins of three concerns which are showing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected and applied and in case any concern is engaged in various activities, then the segmental details of the activity, which is functionally comparable to the assessee are to be applied in order to work out the margins of the said concern. Accordingly, we hold so and direct the Assessing Officer to re-compute the margins of KLG Systel Ltd. The ground of appeal No.2.3 is thus, allowed. Disallowance under section 10A on the portion of export proceeds received in Indian Rupees - HELD THAT:- Amount due against four of the bills raised by the assessee during the year was received in Indian rupees but from the foreign entity through a foreign bank establishes the case of assessee that it has received the said consideration in foreign exchange through the foreign bank against export of goods. Where the assessee had fulfilled the first condition of exporting the goods to a concern outside India and had also received the money from the said concern from outside India, merely because the amount was received in Indian currency, does not establish the case of the Revenue that the amount has not been received in foreign exchange. We find no merit in the order of Assessing Officer in this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble DRP Pune has erred in law and on facts in accepting and the learned AO / TPO erred in not granting carve out amounting to ₹ 1,61,09,646, for underutilization of Capacity in manufacturing division. 2.1.3 The Hon'ble DRP Pune has erred in law and on facts in accepting and the learned AO / TPO erred in holding that the assessee company cannot alternatively apply Resale Price Method ('RPM'), for benchmarking purchase and sales transactions with its AE companies. 2.1.4 The Hon'ble DRP Pune has erred in law and on facts in accepting and the learned AO / TPO erred in holding that the assessee company cannot alternatively apply Gross profit Margin % as PLI for benchmarking purchase and sales transactions with its AE companies under TNMM 2.2 Marketing Support Services (Total addition ₹ 69,71,612) 2.2.1 The Hon'ble DRP Pune has erred in law and on facts in accepting and the learned AO / TPO erred in holding that ALP for Marketing Support services should be worked out by considering 20.49% margin on costs instead of 6.24% margin, leading to an addition of ₹ 69,71,612/- 2.2.2 The Hon'ble DRP Pune has erred in law and on facts in accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general, hence the same is dismissed. The issue raised in ground of appeal No.2 raised by the assessee relates to the transfer pricing adjustment. Under ground of appeal No.2.1, the assessee is aggrieved by the order of Assessing Officer / Dispute Resolution Panel (in short 'the DRP') in making addition of ₹ 1,65,23,053/- as support payment from its associate enterprises against losses incurred in the manufacturing division. The assessee is also aggrieved by the order of Assessing Officer / DRP in not granting carve out amounting to ₹ 1,61,09,646/- for underutilization of capacity in the manufacturing division. 4. Briefly, in the facts of the case, the assessee was wholly owned subsidiary of Dover (Switzerland) holding LLC and the business of assessee was divided into different business segments. The assessee for the year under consideration had furnished return of income declaring total loss of ₹ 3,37,48,249/-. The assessee was operating different divisions i.e. OPW - Fuel components (OPW-FC), OPW-fluid transfer (OPW-FT), Heail Trailer, Wilden Pumps and corporate divisions. The assessee was operating Pune division at Chakan. The assessee had undertaken several i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that once the economic conditions improve, then the sales would increase and the company would be able to earn normal profits on its operations. The TPO vide para 10.2 observed that where the assessee was 100% owned subsidiary of the Dover Group and where associate enterprises takes decisions on behalf of the assessee company, then underutilization of capacity could be directly attributed to associate enterprises, at whose instance the assessee had set up the capacity. The TPO referred to the instance of assessment year 2010-11, wherein the assessee was asked to pay commission to third party in anticipation of certain orders, which did not materialize, then the amount was paid to the assessee by associate enterprises as support payments. The TPO in such scenario, was of the view that the assessee was totally under the control of associate enterprises. He also pointed out that in case there was third party scenario, then any person who had set up the capacity would have asked for compensation from the principal if the installed capacity remained underutilized. Another point noted by the TPO was that the assessee was working only for the associate enterprises from year to year, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication of RPM was rejected where the same is generally applied to trading concerns. The TPO concluded by holding as under:- "23. Thus either there should be no adjustment for capacity underutilization and adjustment to be worked out following TNMM as applied by the assessee company or there should be a claim of compensation from the AE as happened in the subsequent years. On TNMM as MAM, there will be a TP adjustment of ₹ 1,44,58,737/-. Alternatively in view of the above discussion, I hold that on using the extended CUP for the valuation of the Support Payments for the current AY, DIPL should have received ₹ 1,65,23,053/-, an amount of Support Payments towards marketing expenses and initial startup overhead charges. (The lower amount of TP adjustment of ₹ 1,44,58,737 will get subsumed in the higher figure of ₹ 1,65,23,053/-). TP adjustment on account of the non receipt of the Support Payments towards marketing expenses and initial startup overhead charges of ₹ 1,65,23,053/-" 5. The Assessing Officer proposed addition by way of draft assessment order, against which the assessee filed objections before the DRP. The DRP however, while taking note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... othetical link which has been propounded by the TPO. In this regard, reliance was placed on the ratio laid down by the Hon'ble High Court of Delhi in Maruti Suzuki India Ltd. & Anr. Vs. CIT & Anr. (2016) 282 CTR 0001 (Del) and in CIT Vs. Whirlpool of India Ltd. (2016) 129 DTR 169 (Del). The learned Authorized Representative for the assessee pointed out that associate enterprises had given support services in the next year but the same could not be the basis for making any adjustment in the absence of any transaction between the assessee and it associate enterprises in the current year. Another aspect pointed out by the learned Authorized Representative for the assessee was that vide para 4 of the TPO's order, the international transactions which were referred under section 92C of the Act are enlisted and there is no reference of this transaction by the Assessing Officer to the TPO. He further pointed out that the TPO has benchmarked the transaction of import of raw materials where the TPO says that the assessee has not benchmarked it. He stressed that if the TPO's order is upheld, then cost of goods would be nil and this would be an adjustment. He pointed out that the order of TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing provisions to the manufacturing division of the assessee, wherein the assessee was manufacturing specialized high precision products. The manufacturing unit was established in the assessment year 2008-09 and operated for three months. The total sales of the goods manufactured were for domestic market, except to the extent of 10%. However, sourcing for the manufacturing was from the associate enterprises. The assessee was 100% captive service provider to its associate enterprises. During the year under consideration, in the manufacturing unit, the assessee had unadjusted margins of OP/sales at (-) 68.59%. While benchmarking its international transactions by using TNMM method as most appropriate method, the assessee in the TP study report worked out the adjustment on account of capacity under-utilization at ₹ 1,61,09,646/-. Similar adjustment of under-utilization of capacity was carved out and allowed to the assessee by the Assessing Officer in the preceding year. Since this was the first complete year of operation and the manufacturing unit was in the nascent stage, the assessee incurred losses and asked for aforesaid adjustments. During the succeeding year i. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n associate enterprises, which would be deemed to be an international transaction entered into between two associate enterprises, if there existed prior agreement in relation to relevant transactions, etc. Explanation under section 92B of the Act clarifies that the expression 'international transaction ' would include various transaction of purchase, sale, transfer or lease of tangible or intangible property, capital financing, borrowing, lending, etc. and provision of services including different types of services; and transaction of business restructuring or reorganization, etc. In other words, section 92B of the Act covers such transactions which actually exist between two associate enterprises. None of the limbs of section 92B of the Act or Explanation defining the expression 'international transaction' talks of any hypothetical transaction and in the absence of the same, TPO cannot pre-suppose an international transaction between the assessee and its associate enterprises and the determination of TP adjustment on account thereof. Admittedly, during the year under consideration, the assessee had not received any support payments towards its marketing expenses or the initial sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The strength of a brand, which could be product specific, may be impacted by numerous other imponderables not limited to the nature of the industry, the geographical peculiarities, economic trends both international and domestic, the consumption patterns, market behaviour and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 13. The Hon'ble High Court of Delhi in CIT Vs. Whirlpool of India Ltd. (2016) 129 DTR 169 (Del) has held that Revenue was unable to demonstrate any tangible material to effect that there was international transaction involving AMP expenses between assessee and its associate enterprises. In the absence of first step, question of determining the ALP of such transaction could not arise. In absence of machinery provision it would be hazardous for any TPO to proceed to determine ALP of such transaction since BLT had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions which were referred by the Assessing Officer to the TPO under section 92C of the Act and the above said transactions of support payments is not part of reference. The ground of appeal No.2.1 is thus, allowed. 16. The issue in ground of appeal No.2.2 raised by the assessee is against the TP adjustment under market support services at ₹ 69,71,612/-. The assessee had provided marketing support services to its various groups in favour of OPW-FC division and corporate division. The assessee had selected TNMM method as the most appropriate method to benchmark the international transaction relating to rendering of software development services. The PLI was adopted at operating profits / operating cost. The assessee had identified comparable companies on the basis of FAR analysis and had selected four concerns as comparable. The TPO proposed fresh concerns as comparable and issued show cause notice to the assessee in view thereof. The assessee objected to the inclusion of said new concerns which was not accepted by the TPO. The TPO in the final analysis rejected all the concerns which were initially selected by the assessee and adopted the margins of following concerns to ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e record. The issue which arises vide ground of appeal No.2.2 is in respect of adjustment made to the marketing support services division. The assessee was providing the said services to its associate enterprises and in order to benchmark the international transaction, TNMM method was selected as the most appropriate method. The concerns selected by the assessee were rejected and the TPO was of the view that similar transactions having been undertaken in the preceding year, the margins of comparables picked up in the preceding year should be applied. Though, he talks of the concerns which were finally selected in assessment year 2008-09 but while making the analysis for the year under consideration, he selects only three concerns which were profit making and rejects the margins of other concerns which were selected and applied in assessment year 2008-09. We agree with the contention of assessee that the approach of TPO should be consistent, in case, he wants to apply the margins of concerns selected in the preceding year as comparable, then such concerns should be picked up and their margins by applied. This selective approach of the TPO is not correct approach. The learned Authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the premise that it had different year ending. The said concern was also selected and applied by the TPO in assessment year 2008-09 but the Tribunal (supra) had considered that the year ending of Rolta India Ltd. was 30.06.2007 as against assessee's year ending was 31.03.2008 and hence, held that the data of the said concern could not be applied because of different accounting periods. 24. The Hon'ble Bombay High Court in CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732/2014 vide judgment dated 26.09.2016 have held that where the concern has different accounting period, then the same cannot be compared as comparable. The Hon'ble Bombay High Court held that as per provisions of section 10B(4) of the Income Tax Rules, 1962 clearly mandates that the data to be used for comparability analysis should be of the same financial year in which the international transactions were entered into by the tested party. In view thereof, it held that where a concern has different accounting period, then the margins of said concerns are not comparable. Following the same parity of reasoning, we hold that Rolta India Ltd. having different year closing than the assessee before us cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or USD foreign exchange, along with date of receipt of the said payments, which are tabulated at pages 2 and 3 of the assessment order. The assessee further explained that as per provisions of section 10A of the Act, the amount should be received in convertible foreign exchange. He further referred to the definition of convertible foreign exchange under the Income Tax Act, which meant foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purpose of Foreign Exchange Regulation Act, 1973 and any Rules made thereunder. He pointed out that FERA did not define convertible foreign exchange but defined foreign exchange as foreign currency and deposits, credits and balances payable in any foreign currency; drafts, travelers' cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in foreign exchange; and drafts, travellers' cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency. The contention of assessee was that even the amount received in Indian Rupees, can be considered as received in convertible fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 64 (Madras), wherein the payments were received in Indian currency and the authorities were of the view that it was not export. The Hon'ble High Court held that where the services were provided to foreign company and services were consumed abroad, it amounts to export of services and there was no charge of service tax. 28. The learned Departmental Representative for the Revenue relying on the order of Assessing Officer pointed out that deemed foreign exchange concept is not applicable for claim of deduction under section 10A of the Act. 29. We have heard the rival contentions and perused the record. Under the provisions of section 10A of the Act, deduction is allowable on such profits and gains which are derived by an undertaking from export of articles or things or computer software services. The main provisions of said section provides that in respect of an undertaking deriving profits from export of articles or things or computer software for period of ten consequent assessment years, is entitled to claim the deduction under section 10A of the Act. So at first step, the undertaking must make exports of the articles or things or computer software in order to be eligible to clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receives in India payment in rupees from the account of a bank or an exchange house situated in any country outside India, maintained with an authorized dealer." 30. As per clause (2) to Article 4, a person shall be deemed to have repatriated the realized foreign exchange to India when he receives in India payment in rupees from the account of a bank or an exchange house situated in any country outside India, maintained with an authorized dealer. Then the period for surrender of realized foreign exchange is provided which are not necessary for adjudicating the present issue. 31. Thereafter, the Reserve Bank of India had issued notification No.FEMA 14/2000-RB, dated 03.05.2000, which laid down the regulations for Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2000. It also vide Article 2 provided various definitions and Article 3 referred to manner of receipt in foreign exchange which had group of member countries in the Asian Clearing Union, as a separate group from all countries other than mentioned in clause (1). In respect of all the other countries, it was provided that the manner of receipt of foreign exchange would be payment in rupees from the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Central Excise Vs. Shelpan Exports (supra) held that where the assessee exported various goods on commission basis and the claim of exemption from payment of service tax was denied by the Revenue authorities on the ground that the assessee had not received commission in foreign exchange and hence, was not eligible for exemption. The Tribunal held that where the payment of commission was made in Indian rupees at prevailing USD/INR conversion rate and the same was made to minimize cost relating to transfer charges by foreign bank, then it was held that the commission amount was received in foreign currency and the assessee was entitled to its claim. 35. The Hon'ble Supreme Court in J.B. Boda & Co. Pvt. Ltd. Vs. CBDT (supra) while deciding the issue of deduction under section 80-O of the Act, wherein the deduction was allowable when the receipts were from foreign enterprise in convertible foreign exchange, observed that where the entire transaction was effected through RBI, in conformity with the agreement between the assessee and foreign reinsurers and where the amount was expressed to be in Dollars, merely because the brokerage commission was retained in Indian rupees for se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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