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TMI Blog2020 (8) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in disregarding the fact that the commission of 2 % of sales made by the associated enterprises ('AE') in India charged by the Appellant was consistent with the group pricing policy and practice followed globally by other group entities, and hence, the same is at arm's length. 4. erred in disregarding the corroborative benchmarking analysis undertaken by the Appellant by applying transactional net margin method (TNMM). 5. erred in benchmarking the transaction by applying Profit Split Method (PSM) even if the same was not applicable since the conditions prescribed in the Rule 10B(1)(d) of the Income-tax Rules, 1962 ('Rules') for application of the method were not satisfied. 6. erred in considering the differential price charged by AEs to the Appellant vis-a-vis third parties in India attributable to marketing activities performed by the Appellant and applying PSM by allocating the differences on an ad-hoc basis between the Appellant and the AE. 7. Without prejudice to the above, while applying PSM, erred in allocating unusual and excessive profits as compared to the functions performed by the Appellant while undertaking marketing activities on behalf of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that since the appellant has already disallowed the royalty payment to the extent of Rs. 52,65,403/- u/s 40(a)(i), relief of the said amount is to be provided. Consequently, the AO made the following adjustments : S. No. Nature of International transaction/adjustment Amount (Rs) 1. Adjustment in respect of direct sales commission 7,93,37,989/- 2. Adjustment in respect of bad debts written off 72,97,222/- 3. Adjustment in respect of royalty payment 1,05,30,806/- Total 9,71,66,017/- 4. Before us, the Ld. counsel for the assessee submits that the appellant received direct sales compensation @ 2% from its AEs of the FOB value of product sales of its AEs to Indian customers as per the respective Sole Concessionaire Agreements. The details of the commission received by the appellant for the impugned assessment year is as under : AY Direct Sales Compensation (A)-2% of (B) Sales by AEs to Indian third parties on which compensation is received (B) 2010-11 2,40,05,443/- 1,20,02,72,150/- It is further stated by him that the appellant is an indenting agent of the AEs engaged in installation services of control systems for which it received direct sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the rate of commission of 8.61%, the rate that should be used should be 3.42% and therefore, a relief should be granted to the appellant to such an extent. 5. On the other hand, the Ld. Departmental Representative (DR) submits that the AO/TPO has rightly applied profit split method ('PSM') to the transaction of receipt of direct sales commission wherein he compared the price at which the AEs have sold products to the third parties in India vis-à-vis the rate at which they have sold the appellant. Thus it is explained by him that the TPO has rightly arrived at a difference of 17.22% between the sales made by the AEs to the third parties vis-à-vis the appellant and the difference was split in the ratio of 50:50 and therefore, the TPO arrived correctly at a rate of 8.61% thereby making an adjustment between 8.61% and 2% (i.e. the rate at which the compensation was received by the appellant). Thus it is stated by him an additional sale consideration received from the third party customers as compared to the price charged by the AEs to the appellant for the same products would be a reliable indicator for the additional profits earned on account of the marketing fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cience Pvt. Ltd., in their respective assessment/appeals for the year under consideration, viz. A.Y. 2008-09, had therein submitted that the aforesaid average rate of commission of 3.62% (supra), in all fairness, be taken as the arm's length commission rate in the hands of the assessee. We have also observed that the assessee while arriving at the average commission rate of 3.62% in respect of the aforesaid two concerns, viz. M/s Sumitomo Corporation India Pvt. Ltd. and M/s Bayer Material Science Pvt. Ltd., for the year under consideration, viz. A.Y. 2008-09, had in respect of M/s Bayer Material Science Pvt. Ltd.(supra) adopted the commission rate of 5% that was upheld by the Tribunal in the assesses own case for A.Y. 2006-07 and A.Y. 2007-08, as there was no transfer pricing adjustment in the hands of the said concern during the year under consideration. We have given a thoughtful consideration to the aforesaid facts and are of the considered view that the contention of the assessee in the light of the order passed by the Tribunal in its own case for the preceding years, therein warrants acceptance. We, thus in the light of our aforesaid observations direct the A.O. to adopt 3.62% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as accepted to be at arm's length by the TPO. 9. The TPO erred in exercising his jurisdiction by not computing the ALP of the international transaction by applying one of the prescribed methods under the Act. During the year under consideration, the appellant had written off certain invoices as bad debts amounting to Rs. 72,92,222/- in the context of engineering segment. Those invoices were written off on account of the dispute between the appellant and its AEs, wherein the work done by the appellant was not in accordance with the agreed scope of work with the AEs. The appellant claimed that it had raised bills on the AE on the hourly rate of compensation for rendering services and in cases where the AE disputed the rendering of service on account of variation with the agreed scope, the invoices were to be reversed. Such reversals were written off as bad debts in the books of accounts. However, the TPO was not convinced with the above explanation of the appellant and made an adjustment of Rs. 72,97,222/- . Also the DRP in its directions stated that in absence of adequate justification and supporting evidence for the write off of specific entries receivable by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per the benchmarking exercise undertaken in the transfer pricing study, four comparable companies were identified who have earned an arithmetic mean operating margin of 10.24% vis-à-vis operating profit margin earned by the appellant under 'Engineering Services Segment'. The TPO has accepted the operating margin of 'Engineering Services Segment' to meet the arm's length test, after considering the impact of bad debts written off. It is found that even if bad debts are considered as non-operating in FY 2009-10, the appellant's 'Engineering Segment' would still meet the arm's length test. Further, we find that the TPO has not applied any method while disallowing the bad debts written off and has done the same on an ad-hoc basis. In view of the above reasons, we delete the adjustment of Rs. 72,97,222/- made by the AO towards bad debts written off and allow the 8th and 9th ground of appeal. 11. Then we come to the 10th and 11th ground of appeal pertaining to adjustment of royalty payment. These grounds read as under : Based on the facts and circumstances of the case and in law, the appellant submits that the AO/TPO/DRP: 10. erred in disregarding the benchmarking analysi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring services. The details as submitted are as under : * The 'Project Activity' consists of Building Automation and Fire Alarm Systems, Access Control and Security Surveillance System. * The 'Engineering Services' segment consists of rendering associated services relating to manufacture of mechanical and electrical systems that control energy use, heating, ventilating, air-conditioning, lighting, security and fire management for non-residential buildings. It is further clarified that the 'Project Activity' and 'Engineering Services' segment make up the aforementioned 'Building Efficiency' business. It is further elaborated that the EBIT from the 'Building Efficiency' business is derived by reducing EBIT of the 'Global Workspace Solutions' segment Company from the entity wide EBIT of the Company, as prescribed in clause 6.6 of the above mentioned Agreement. The Ld. counsel explains that the appellant has submitted a certificate from the management stating that the "Building Efficiency" segment comprises of "Project Activity" segment as well as "Engineering segment" and the same was submitted before the Tribunal vide letter dated 11.12.2017. Further, it is stated that the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he considered view that the above documents filed on 11.12.2017 and 03.07.2019 are quite relevant for the purpose of deciding the issue arising before us. Therefore, we admit the above additional evidence. However, we find that in the instant case, the AO has passed the order u/s 143(3) r.w.s. 144C(13) for AY 2010-11 on 19.12.2014 and for AY 2011-12 on 30.11.2015. Therefore, we deem it fit to remit the matter to the file of the AO/TPO to pass an order after examining the above documents. Needless to say, the AO would give reasonable opportunity of being heard to the appellant before finalizing the order. Thus the 10th and 11th ground of appeal are allowed for statistical purposes. 15. The 12th ground of appeal relates to short grant of taxes deducted at source. The Ld. counsel submits that in the revised return of income filed by the appellant electronically on 31.03.2012 for AY 2010-11, credit in respect of TDS of Rs. 5,12,86,407/- was claimed. In the assessment order passed u/s 143(3), the AO has granted credit for TDS only to the extent of Rs. 5,08,13,940/-, thereby resulting in short granting of credit for TDS to the extent of Rs. 4,72,467/-. Therefore, the Ld. counsel explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order for AY 2010-11 that as per the assessment order of earlier years, there were no carried forward business losses or unabsorbed depreciation quantified for set off in AY 2010-11. Further, it is stated by him that (i) the ITAT vide order dated 31.12.2015 for AY 2006-07 directed to allow relief on certain grounds to the appellant ; thereafter, the AO passed an order giving effect to the order of the ITAT for AY 2006-07 determining brought forward business loss and unabsorbed depreciation of Rs. 5,26,28,518/-, (ii) the ITAT vide order dated 17.05.2017 for AY 2008-09 and AY 2009-10 also directed to allow part relief to the appellant; the appellant has filed an application to pass an order giving effect to the ITAT's order which shall result in a further brought forward business losses and unabsorbed depreciation to the appellant for AY 2009-10. Stating that the appellant has filed a rectification application dated 03.07.2017 before the AO for set off of brought forward business loss/unabsorbed depreciation against the total income computed for AY 2010-11, it is submitted by the Ld. counsel that direction be given to the AO to set off available brought forward business loss and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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