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TMI Blog2021 (3) TMI 1151X X X X Extracts X X X X X X X X Extracts X X X X ..... pertaining to export of spare parts and components to its Associated Enterprises. 2. Inappropriately combining of export of service spare and export of parts and components in global sourcing segment Erred in combining the international transactions pertaining to export of service spares to AE and export of parts and components in global sourcing segment and consequently, following combined benchmarking approach thereby, ignoring the vital differences in functions performed and risk undertaken by the Appellant for the international transactions pertaining to export of service spares to AE vis-à-vis export of parts and components in global sourcing segment. 3. Inappropriate rejection of external Transactional Net Margin Method ('TNMM') approach for benchmarking international transaction of export of spare parts and components in global sourcing segment Erred in rejecting the external TNMM approach adopted by the Appellant and inappropriately applying internal TNMM for determining the arm's length price for the international transaction of export of parts and components in the global sourcing segment. 4. Disregarding the decisions of Hon'ble Pune Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 115-O of the Income-tax Act, 1961 ('the Act') (as Dividend Distribution Tax (DDT) (at the rate of 16.223%); 8.2 Where DDT paid by the Appellant as per the provisions of section 115-O of the Act is held to be in excess of the rate applicable for taxability of dividend in India as per the India -Italy Double Taxation Avoidance Agreement, is the Appellant entitled for refund of such excess DDT paid." ADJUDICATION OF THE GROUNDS IN APPEAL MEMO 3. The Ld. Senior Counsel for the assessee opening his argument submitted that Ground No. 1 is general in nature and hence, no adjudication is required. 4. Ground Nos. 2, 3 and 4 pertains to inappropriately combining of export of service spare and export of parts and components in global sourcing segment. 5. The Ld. Senior Counsel for the assessee referring to the order of the Transfer Pricing Officer (TPO) at Para 6 demonstrated that the activities performed by the assessee company pertains to sale of service spares and sourcing of spares and components. He further submitted that in various assessment years in the case of the assessee, this issue has been decided by the Tribunal in favour of the assessee. Thereafter, the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and considering that the facts of the case are similar to the year before the Hon'ble High Court, with a humble view to protect the right of revenue an addition is being proposed on the similar lines that of the order of the predecessor TPO. It was further reiterated in that same Para, TP adjustment was only being suggested to the Assessing Officer to protect the interest of the revenue at the stage of Hon'ble High Court. Demonstrating this Para, the Ld. Senior Counsel for the assessee submitted that even the TPO was convinced with the transaction of the assessee but only TP adjustment was made to secure the interest of the revenue at the stage of the Hon'ble High Court. 5.4. The Ld. Senior Counsel for the assessee brought notice to the Bench that in assessee's own case for assessment year 2008-09 in ITA No. 2583/PN/2012 wherein the Tribunal has referred to assessee's own case for assessment year 2006-07 wherein the facts are pari-materia with that of the assessment year 2008-09 and therein, the issues raised in the present grounds of appeal No. 2 to 4, those issues were decided in favour of the assessee specifically the activities for benchmarking the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onents: Particul ars Sales to Non-AEs Export to AE Domesti c parties - spares BO (service spares) Exports to third parties - spares BO (service spares) Total sales to Non-AEs Spares -BO (servic e spares) Global sourcing and NQP(sourci ng activities) Total Exports to AE Sales (Rs) 529461 000 154510 00 5449120 00 21860 00 13893400 0 141120 000 Net Profit (Rs) 755910 00 558300 0 8117400 0 87700 0 13832000 147090 00 Total cost (Rs) 453870 000 986800 0 4637380 00 13090 00 12510200 0 126411 000 Profit margin (on sales) 14.27% 36.13% 14.90% 40.12 % 9.96% 10.40% Profit margin (on cost) 16.65% 56.58% 17.50% 67% 11.05% 11.63% the assessee has pointed out that in relation to Category 'A' transactions, the operating margin on exports to AEs is 67% as against 56.58% with respect to the export to third parties (non-AEs) and therefore on this count itself the adjustment in question is untenable. 8. On the other hand, the learned CIT-Departmental Representative, appearing for the Revenue has defended the action of the authorities below by pointing out that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 'A' transaction represents sale of spares by the assessee to third party distributors as well as to the AEs of such spares/components which are required for the purpose of servicing the vehicles sold by the assessee company. Category 'B' transactions represent sourcing of components required by the overseas AEs for manufacture of 2/3 wheelers, and category 'C' transactions represent sourcing of components required by the overseas AEs for manufacture of 4 wheelers, namely, New Quadracycle Poker. On the basis of submissions and material put-forth, it is sought to be explained that the category 'B' and category 'C' transactions involve supply to AEs (situated in Italy) of such parts and components which are used by the AE in the manufacture of vehicles abroad. It is sought to be made out that the source evaluation, pricing and procurement tests are the prerogative of the AE and that the assessee company based in India merely assists in logistic, co-ordination and facilitation/support services in respect of sourcing of such components. On the other hand, with regard to the category 'A' transactions, it involves supplies to third partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and components required for servicing of such vehicles sold by it. Quite clearly, the supplies so undertaken are from already firmed-up sources, inasmuch as the assessee is the manufacturer of vehicles in which such components are used, and at the time of procurement for manufacturing the assessee has mandated the dies, design, quality, warranties, etc. Thus, supply of spare-parts and components as purely after-sales distribution results in higher margins. In contrast, the sourcing of products for overseas AE entailing category 'B' and 'C' transactions, the assessee has very limited role to play, which is akin to logistics support service provider. 11. In this background, we therefore deem it proper to conclude that even according to the internal TNMM mechanism sought to be applied, the comparison of margin of transactions of category 'B' and 'C' undertaken with the AEs is incomparable with the transactions undertaken with the third parties (i.e. non-AEs) which are purely in the nature of category 'A'. Ostensibly, the transactions of Category 'B' and 'C' are not undertaken with third parties (i.e. Non-AEs). 12. So, howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which are required by the overseas associated enterprises for manufacture of four wheelers, namely, New, Quadracycle Poker. For these two categories of transactions, the Tribunal negated the invoking of internal TNM mechanism by the TPO and instead remanded the matter back to the file of the Assessing Officer to examine the plea setup by the assessee. The relevant portion of the decision of the Tribunal for assessment year 2006-07 reads as follows: "13. Now, we are left with the transactions of category 'B' and 'C' which have been undertaken by the assessee with its AE. In so far as such transactions are concerned, there is no internal comparable transaction, inasmuch as such like transactions have not been carried out with non-AEs. The transactions of such nature involving sourcing of spares and components used in the manufacture of vehicles undertaken by the AE abroad have not been undertaken by the assessee with non-AEs. Therefore, in the absence of any internal transactions with third parties with similar functions and economic scenario, benchmarking of transactions of category 'B' and 'C' undertaken with AEs, cannot be done appropriately by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudication is required. ADJUDICATION OF ADDITIONAL GROUNDS 13. Now coming to the additional ground in appeal, the first ground pertains to "whether education cess can be allowed as deduction?" 14. The Ld. Senior Counsel for the assessee has placed strong reliance on the decision of the Hon'ble Bombay High Court in the case of Sesa Goa Limited Vs. Joint Commissioner of Income Tax, (2020) 107 CCH 0376 MumHC, Tax Appeal No. 17 of 2013/18 of 2013 wherein the question raised before the Hon'ble High Court was "whether Education Cess and Higher and Secondary Education Cess collectively referred to as "cess" is allowable as a deduction in year of its payment. It was held and observed by the Hon'ble High Court that "legislature in section 40(a)(ii) has provided that 'any rate or tax levied' on profits and gains of business or profession shall not be deducted in computing income chargeable under head 'profits and gains of business or profession'. There is no reference to any 'cess'. Obviously, therefore, there is no scope to accept that 'cess' being in nature of a tax is equally not deductable in computing income chargeable under head 'pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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