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TMI Blog2020 (9) TMI 1098X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has proceeded to make adjustment in its profits despite the assessee being the tested party. There is nothing on record to suggest that in the comparables submitted, whether there was any adjustment for extraordinary and non-recurring items. This was required as evident from the various case laws referred by the DRP. Assessee itself being the tested party cannot adjust its profits without ensuring corresponding adjustment in the result of comparables. As regards the one-time technical assistance fee for Chennai Metrorail project is concerned, we find ourselves in agreement with the TPO that it is very much normal business expenditure of the assessee and same cannot be said to be extraordinary. Assessee s submission that it was Assessing Officer s duty to bring the details of adjustment required in comparables is totally unsustainable as the initial duty in this regard is cast on the assessee. The assessee has miserably failed in discharging this initial duty. Accordingly, in our considered opinion, the adjustment sought by the assessee in this regard has rightly been disallowed by the authorities below. Adjustment, if any, must be made only in respect of international transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee in this regard is allowed. As already upheld the DRP action of sustaining the 1% rate of royalty for Assessment Year 2013-14 for the trademark, the Revenue s grounds against the DRP direction, in this regard to uphold the computation at Nil by the TPO fails in view of our discussion herein above. Addition of unpaid service tax payable on the receivables not collected by GEPIL as on 31 March 2010 - whether AO erred not allowing deduction of service tax paid till 30 September 2010 i.e. due date of filing ROI? - HELD THAT:-This issue is covered in favour of the assessee by the ITAT decision in the case of G.E. Power India Ltd.[ 2019 (6) TMI 1526 - ITAT MUMBAI] wherein a delete the disallowance made by the assessee under section 43B. Addition of TPA to the book profits for the purposes of section 115JB - Whether book profits of a company cannot be adjusted except as provided in Explanation 1 of Section 115JB(2), and transfer pricing adjustment is not one of the classes of adjustments provided in that Explanation? - HELD THAT:- We find that this issue is to be decided in favour of the assessee on the touchstone of Hon ble SC decision in Appollo Tyres [ 2002 (5) TMI 5 - SU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rance. The assessee is now GE Power India Ltd. In assessee's Transfer Pricing proceedings, the Transfer Pricing Officer (TPO) had made adjustments in respect of Transport segment and Power segment. In the Transport segment, the assessee has aggregated all the transactions pertaining to the segment and has applied Transactional Net Margin Method (TNNM) to benchmark the international transaction. During his examination, the TPO observed that while working out the margin in Transport segment, the assessee has wrongly added to operating profits the following items :- i) Extraordinary overheads production cost; ii) Extraordinary overheads selling and administrative cost; and, iii) One time technological fee for Chennai Metro. The assessee's reported financials did not disclose any of these adjustments. It was claimed as adjustment after the audited financials by the assessee for transfer pricing. While examining the submissions in this regard, the TPO observed that assessee has claimed that certain available manpower could not be utilised. The TPO observed that the assessee's expenditure are routine and normal as in the industry. The TPO was also not convinced with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustments. According to the Rule, the profit arising in comparable uncontrolled transaction has to be adjusted to take into account the differences, if any, between the international transaction and comparable uncontrolled transaction or between the enterprises entering into such transaction, which could materially affect the net profit margin in the open market. 3.13 The comparability adjustment under the TNM Method, taking into account the Rule 10B(3) and Rule 10B(1)(e), has been subject matter of consideration and interpretation by the Tribunal in various decisions." Thereafter, the DRP referred to certain case laws in this regard, which are as under :- i) Haworth (India) (P.) Ltd., 11 taxmann.com 76 (Del.) ii) M/s. Geodis Overseas (P) Ltd., 45 SOT 375 (Del.) iii) Honda Motorcycle & Scooters India (P) Ltd., 56 taxmann.com 237 (Delhi) iv) Petro Araldite (P.) Ltd., 35 taxmann.com 590 (Mum.) v) M/s. EDAG Engineers and Design India (P.) Ltd., 50 taxmann.com 322 (Delhi) vi) Westfalia Separator India (P.) Ltd., 52, taxmann.com 381 (Delhi) vii) Thomas Cook (India) Ltd., ITA No. 1261 & 1238/Mum/2015 dated 31.05.2016 Referring to the above cases, the DRP found that if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Chennai Metrorail project as the entire manufacturing unit required a technological upgrade and, therefore, such expenditure is to be treated as an extraordinary expenditure and non-recurring in nature. As regards the under-recovered selling and trading overheads, she submitted that these are extraordinary expenses. She submitted that the detailed reason for the same has been provided. She submitted that despite assessee providing all the necessary details, the authorities below have not accepted the same. In this regard, she placed reliance upon the case law from Hon'ble Apex Court for the proposition that the Revenue authorities cannot sit in the armchair of assessee to determine the nature and extent to which it should incur expenditure in relation to business. She submitted that the under-recovered selling and administrative overheads should be treated as extraordinary in nature, and thereby excluded in computing the profits. She further submitted the safe harbour rule and various case laws in this regard to support the case of the assessee. She submitted that in order to carry out actual comparison between the margins of the assessee and the comparable company, the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables under transfer pricing studies, initial duty has been cast on the assessee to demonstrate with proper details manner and methodology of absorption of such overheads by comparable selected. He submitted that assessee has failed to provide such data and details to the TPO. He further submitted that it is undisputed fact that the international transactions constitute only a small portion of the total business of the Transport segment. In such circumstances, the adjustment in Transfer Pricing study, as claimed by the assessee, cannot be allowed at entity level. The learned Departmental Representative submitted that in ground No. 5 the assessee has requested to restrict the Transfer Pricing adjustment to AE transaction only. We have carefully considered the submissions and perused the records. We find that the adjustment on account of extraordinary expenses in production overheads and selling and administrative overheads claimed by the assessee are not of any specific distinct expenditure. These are the regular expenses normally incurred by the assessee during the course of business. The assessee is making comparison from its budgeted figures and the actual figures and ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of assessee itself and the ITAT also in assessee's own case have held that the adjustments have to be made with regard to the transactions of the AE and not at the entity level. (CIT Vs. Alstom Projects I. Ltd. (88 Taxman.com 465), Bombay High Court upheld the order of the ITAT for A.Y. 2006-07 in ITA No. 8670/Mum/2010) Furthermore, we note that in assessee's own case, the DRP for assessment year 2009-10 and 2010-11 has held that adjustment, if any, must be made only in respect of international transactions pertaining to Transport segment of the assessee and not the segment as a whole. In our considered opinion, the above is also a sound and consistent proposition and we are of the considered opinion that the same should be applied for the current year also. Furthermore, it is a submission of counsel of the assessee with respect to the financial year 2013-14 that if the adjustment is restricted to AE transaction of Transport segment, the addition under Transport segment would significantly reduced and once adjustments are carried out, the adjustments would fall within the safe harbour rule. In our considered opinion, there is no infirmity in the principles in this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IJI ACQUISITION CORP. INTERNATIONAL JENSEN INCORPORATED 2.67% 3 Pacific Engineering company Ltd. 2.00% 4 Carlisle Tire & Wheel Co. 3.33%" Assessee claimed that since Royalty rates of comparables were higher than the royalty rate paid by the assessee the Royalty payment was at arm's length. However, the TPO proceeded to examine the comparables and the agreements as well as the assessee's agreements. He proceeded to reject the claim and held that these agreements cannot be considered as comparable agreements and the analysis made by the assessee was rejected due to functional dissimilarity between the taxpayer and the comparable entities. The TPO held that assessee should have obtained comparable agreements. Hence, he proceeded to hold that assessee has failed to apply the most appropriate method and accordingly, the TPO proceeded to hold the arm's length price as Nil for assessment year 2013-14. On similar reasoning, the TPO computed the arm's length price of Royalty at Nil and did the transfer pricing adjustment. Upon assessee's appeal, the DRP for the assessment year 2012-13 upheld the action of the TPO. For the assessment year 2013-14, the DRP dealt wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellate authorities are satisfied and records a finding that ALP submitted by the assessee is fair and reasonable. Merely by finding faults with the transfer price determined by the revenue authorities (AO/TPO), addition on account of "adjustments cannot be deleted. This is because the mandate of section 92(1) is that in every case of international transaction, income has to be determined having regard to ALP. Therefore, unless ALP furnished by the taxpayer is specifically accepted, the appellate authorities on the basis of material available on record has to determine ALP itself. Subject to statutory provisions, Appellate authorities can direct lower revenue authorities to carry this exercise in accordance with law. The matter cannot be left hanging in between. ALP of international transaction has to be determined in every case. 134. There would be cases, where taxpayer does not cooperate and fails to furnish ALP or disclose full information, relevant for determination of ALP when called upon to do so by tax authorities. The taxpayer fails to discharge burden placed on the taxpayer. In similar enactments of other countries, it is provided that burden on the revenue auth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o mention that the voluntary selection of comparable cases by the TPO is his power and not the duty. He may or may not exercise his power in given circumstances. If he gets satisfied with the cases left out from the assessee's list, he may skip the exercise of voluntarily finding the comparable cases at his end. Thus it is the aggregate of such cases being shortlisted from the assessee's list and those voluntarily included by the TPO, which are considered to find out the average profit for the purposes of comparison. (v) It may also happen that all the cases chosen by the assessee turn out to be incomparable and as such the basket of comparable cases is emptied. As the exercise of determining ALP is inconceivable without any comparable case, the TPO will have to afford one more opportunity to the assessee enabling it to give certain other cases which are really comparable. On the receipt of details of such comparable cases, the steps at (ii) to (iv) shall be undertaken by the TPO. (vi) If despite being put to notice as per step (v) the assessee fails to give any list of comparable cases or the cases given are again found to be incomparable, then the power of the TPO in volu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty rate of 3.33% which has been rejected by the TPO. The TPO has held that the trade mark licensors are not functionally similar to the Licensor in the present case and hence, these agreements are not acceptable. 6.22 In our view, even if the above agreements relate to a segment which is more profitable or may invite a higher royalty charge due to its popularity, the assessee's payment of 1% royalty on its use of the AE's trade mark is significantly lower than the trade mark charges in the above cases. The trademark royalty paid by the assessee is found to be well within the range even if an adjustment of 50% is applied on these rates to allow for the functional difference. In our view, in light of the submission made by the assessee, the trade mark royalty is liable to be accepted as being at arm's length. The TPO is directed to allow trademark royalty at 1%." For the Royalty for technology license, the DRP contradicted itself and did exactly what the TPO has done with a difference that after holding that the comparable agreement submitted in this regard by the assessee are different, it proceeded to fix the rate of royalty in this regard the rate of 1% of net sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or royalty rate for technology license. The same is not at all based upon cogent reasoning and due analysis which can be said to have taken into account the price which have been charged or paid for similar uncontrolled transaction under similar circumstances concerning all the relevant facts. In this regard, Hon'ble Bombay High Court in the case of Johnson & Johnson has held that ad hoc adjustment for Transfer Pricing is not permissible. The Hon'ble jurisdictional High Court in this case while dealing with the issue of determination of arm's length price of royalty on estimation basis by the TPO held as under :- "(d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in section 92C of the Act read with Rule 10B of the Income Tax Rules, However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical knowhow has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial on record. We have also applied our mind to the decisions relied upon. Undisputedly, the amount in dispute represents service tax which remains to be paid by the assessee. It is the contention of the assessee that service tax is payable only on receipt from consumer of such service. It is observed that the Hon'ble Jurisdictional High Court in Tops Security Ltd. (supra) following its earlier judgment held that provision of section 43B of the Act does not impose liability to pay service tax before actual receipt of the fund in the account of the assessee. The Hon'ble Jurisdictional High Court held that liability to pay service tax into the treasury will arise only upon the assessee receiving the fund and not otherwise. Further, in Knight Frank India Pvt. Ltd. (supra), the Hon'ble Jurisdictional High Court held that since the assessee did not claim any deduction on account of service tax payable, there can be no occasion to invoke provisions of section 43B of the Act. In the facts of the present case also, it is the contention of assessee that since it has not claimed any deduction on account of service tax payable, no disallowance under section 43B of the Act can ..... X X X X Extracts X X X X X X X X Extracts X X X X
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