9911796707
TMI Blog2012 (3) TMI 686X X X X Extracts X X X X X X X X Extracts X X X X ..... rming the order passed under sec. 92CA(3) of the Act making an addition of ₹ 49,37,51,430 to the total income of the assessee on account of adjustment in the arm's length price of the international transaction entered by it with its associate enterprises. In ground Nos. 2 to 8, it has mentioned the different fold of submissions raised by it before the Learned DRP. We will be dealing with all its proposition in seriatim. 2. The brief facts of the case are that the assessee company has filed its return of income electronically on 8.3.2007 declaring an income of ₹ 124,64,07,885. It has filed ITR-VI on 22.3.2007. According to the Assessing Officer, the return was filed beyond due date prescribed under section 139(1) of the Act. However, the return was processed under section 143(1) of the Act on 22.2.2008 at the returned income. The case of the assessee was selected for scrutiny assessment and a notice under sec. 143(2) of the Act was issued on 12.10.2007 which was duly served upon the assessee. Assessing Officer thereafter issued notices under sec. 142(1) and 143(2) of the Act on different dates, whereby he called upon various information from the assessee. According to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership during transit on high seas to BSNL. It was also emphasized by the assessee that BSNL contract is a loss making contract for Nortel Group globally. The losses are primarily driven by the existing contractual terms negotiated in response to the pricing pressure as a result of the competitive nature of the india's telecommunication market. The assessee further submitted that the total value of the international transaction related to BSNL contract having an impact on the taxable income of Nortel India for the relevant assessment year was only ₹ 54,35,71,422. According to it, this is the balance amount after Nortel Group issued credit note to the assessee aggregating to ₹ 454,41,21,331 for import from overseas group entities for the BSNL contract. In addition, Nortel Group also agreed for an additional transfer pricing adjustment of ₹ 221,00,74,655 in order to reimburse Nortel India for the losses on the BSNL contract. In this way, assessee has ensured an arm's length price on the contract for the function performed in connection with execution of the BSNL contract. As a result of the credit note and additional transfer pricing adjustment, assessee had offered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted four comparables out of the seven. The arithmetic mean of the comparables which were accepted by the Assessing Officer comes to 6.96%. Learned TPO has recommended the adjustment by adopting PLI of 6.96%. The working made by him in paragraph 11 reads as under: "11. In this context, it also becomes important for the assessee to show where each of the comparables lies in its business cycle if the assessee insists on the use of multiple year data. In this case, nothing has been brought on record to show where any of the comparable lie in their market cycle and therefore, a comparison becomes necessary with only those companies whose data is available for the current year. The final list of comparables, based on the above discussion is as under: S.No. Comparables Operating profits on operating revenue (%) Remarks 1 Arraycom India Ltd. (18.73%) Rejected on account of persistent losses 2 Gemini Communication 11.97% Accepted 3 HCL Comnet Ltd. NC Rejected, since it is not comparable 4 ORG Informatics Ltd. 7.65% Accepted 5 Satco Broadband Equipment NA Rejected - No data available 6 Shyam Telecom Ltd (2.06%) Accepted 7 Spanco Telesystems and Solutions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he method adopted by the assessee has been accepted by the TPO also, therefore, it is not in the area of dispute and we are not required to make much discussion on the issue. 7. The learned counsel for the assessee in his first fold of submissions has pointed out that TPO and DRP have failed to specify the basis under section 92C for rejecting the transfer pricing documentation maintained by the assessee, therefore, the order of the TPO is without jurisdiction. On due consideration of this argument and perusal of the order of the learned TPO, we do not find any substance in it, the assessee was unable to give any specific argument in support of this submission. TPO has considered the transfer pricing study report submitted by the assessee and thereafter proceed to eliminate some of the comparables which in his understanding were not comparable. Thus, there is no force in the contentions of the learned counsel for the assessee that the order of the TPO is without jurisdiction. In our opinion, before proceeding to evaluate the arm's length price of the international transaction, the report submitted by the assessee was considered by the learned TPO and it was not acceptable to him. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act and Nortel Group is compensating the loss by giving credit note at a operative margin of 2% is not sufficient. It is a self-styled declaration of results. It has to be verifiable. The declaration of the assessee ought to be cross verifiable with the relevant details, otherwise it is meaningless and the revenue authorities have rightly observed that this claim of earning 2% operating margin is of no consequence for determining the ALP of the international transaction in respect of import of telecommunication equipments. Therefore, this argument is of de void of any merit, it is rejected. 9. In his next fold of submissions, learned counsel for the assessee pointed out that learned TPO has erred in rejecting use of multiple year data and has erred in using single year data for Financial Year 2005-06. He pointed out that Rule 10D required the assessee to keep and maintain the information and documentation for the purpose of transfer pricing regulation. Rule 10D(4) contemplates that information and documentation should be contemporaneous for that year, in the case of the assessee, it should be 31st October 2006. The assessee had used multiple year data because according to it, sing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has not pointed out any exceptional circumstances which could persuade us to look forward about the applicability of proviso appended to Rule 10B(4) of the Income-tax Rules, 1962. Learned TPO as well as the Learned DRP has considered this aspect and we do not find any error in their findings. 11. In the next fold of submission, it was contended by the assessee that learned TPO has erred in excluding M/s. Arraycom Net Ltd. from the list comparables. It was pointed out by the learned counsel for the assessee that according to the learned TPO, M/s. Arraycom showing persistently loss, therefore, it deserves to be excluded. The loss is an incidence of business and that cannot be a criteria for excluding a comparables, if such an entity is otherwise comes within the ambit of comparables. He also pointed out that as far as the function performed and the assets employed by the assessee as well as M/s. Arraycom is concerned, both are into the distribution of the equipments and the assets employed by the entity were similar. They are exposed to the similar risk. M/s. Nortel India Pvt. Ltd. was assured of a 2% return on the BSNL contract from M/s. Nortel Group, therefore, it was be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be seen from the data submitted by the assessee itself. Therefore, it is being rejected as a comparable". 14. There is no dispute with regard to the proposition that a concern will not lose its status of comparability, merely because it has shown losses. The profit and losses are the two incidence of the business. Every venture makes effort for earning the profit but it is not necessary that it will get the profit every time. However, on an analysis of the comparative details made by the learned TPO as well as by the learned DRP, we find that learned TPO has not excluded M/s. Arraycom simply for the reasons that it has shown losses. He has excluded such concern because it has been showing persistent losses. Its operation has also a reducing tendency. The function in terms of volume also on the lower side then the assessee. It is setting of all these factors cumulatively which make this concern as uncomparable, therefore, we do not find any error in the order of learned DRP for excluding this concerned from the comparables. 15. In the next fold of submissions, assessee has pleaded that learned TPO failed to make necessary adjustment on account of risk profile of the assessee vis- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee with regard to determination of arm's length price of the international transaction with A.E. is that learned TPO/AO has erred in not providing the benefit of 5% in respect of the arm's length range as provided under the proviso to section 92C(2) of the Act, Prior to its substitution by the new proviso by the Finance Act, 2009 w.e.f. October 1, 2009. The learned counsel for the assessee has submitted that the assessee is entitled for a standard deduction of 5% in the PLI determined by the learned TPO. He relied upon the order of ITAT, Bangalore in the case of Sap Lab India (P) Ltd. rendered in ITA No.398/Bang/08. He also relied upon the decision of the ITAT in the case of UE Trade Corporation India Pvt. Ltd. Vs. ACIT. On the other hand, learned DR submitted that the ITAT in a large number of cases has declined such type of claim by the assessee. He relied upon the order of the ITAT in the case of S.T. Micro Electronics ITA No. 1806/Del/08. He also relied upon the order of the Hyderabad Bench in ITA No.1082/Hyd./2010 in the case of DCIT Vs. M/s. Deloitte Consulting India Pvt. Ltd. 18. We have duly considered the rival contentions and gone through the record carefully. In the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act containing a tolerance band is akin to a similar decision rule of confidence interval used in the theory of statistical inference. Under that theory, a 5% level of significance would provide for a tolerance band consisting of 95% & 105% of the arithmetical mean and these points are known as "Critical Values". The rule is one of "All" or "Nothing" kind of a situation. If a computed value falls within the tolerance band, a favorable inference is drawn. The decision rule contained in the proviso to section 92C(2) of the Act thus is a "All" or "Nothing" kind of rule. After all in the transfer pricing analysis, a sample set of comparables along with the distribution of profitability of this set is examined and an inference is sought to be drawn about the appropriateness of profitability shown by a taxpayer. Therefore, statistical inference theory based on sampling is directly applicable to the benchmarking analysis carried out in the transfer pricing analysis with the help of a sample set of comparables. There is no scope for any "standard deduction" under this rule. In other words, if the ALP falls outside the tolerance band, TP adjustment would have to be made for the dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground No.5, assessee has pleaded that learned Assessing Officer has erred in not restricting the transfer pricing adjustment in proportionate to the value of impugned international transaction with the A.E. The brief facts of the case are that assessee has shown the value of international transaction with the A.E. at ₹ 54,35,71,422. Learned TPO has also taken cognizance of this figure in paragraph No.3 of the order passed under sec. 92C(a)(iii) of the Act. He has determined the PLI at 6.96%. According to the TPO, the assessee must have earned this much of the profit on the international transaction in respect of import of telecommunication equipments with the A.E. Learned TPO has observed that assessee has shown the operating profit at ₹ 19,88,92,822. This amount was computed @ 2% of the total cost. Learned TPO has computed the profit on that very cost figure by adopting the rate of 6.96% which gave an amount of ₹ 69,26,44,252. He made the addition of the difference at ₹ 49,37,51,430. The learned counsel for the assessee submitted that the total value of the imported items considered by the TPO in paragraph 3 is ₹ 54,35,71,422. Learned TPO ought to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s erred in recognizing excess revenue to the extent of ₹ 55,46,10,230 on account of project with BSNL. Without prejudice to this ground, assessee has further pleaded that Assessing Officer has erred in recognizing revenue under the BSNL contract which would increase the profit margin even though the profit margin under this contract has already been determined by the learned TPO. At the cost of repetition, it is observed that assessee had entered into a contract with BSNL for supply of telecommunication network system on a turnkey basis. Under the contract, it was responsible for planning, engineering, supply, installation, testing and commissioning of GSM based cellular mobile network across north east and southern telecommunication region in India. The assessee has recognized the revenue under the project as per percentage completion method. The actual cost of contract upto 31.3.2006 was ₹ 200,322,34,055/-. The assessee has estimated the revenue at ₹ 1603,25,61,432/-. It has reduced an amount of ₹ 44,36,24,596/- on account of AMC revenue. It has further reduced a sum of ₹ 38,09,31,081/- under the head 'other revenue'. Assessing Officer in the draft a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5 above, the assessee company was specifically asked to produce all details, ledger copies, explanations and justifications for working the basis of the total estimated revenues and cost. In response only a mathematical working was enclosed without giving justifications, ledger copies, basis. No reasons were given to justify the derecognizition of revenues as indicated above. 9.12 The assessee company was being asked continuously since query u/s 142(1) dated 10.07.2009 to justify the claim of revenue recognition on the basis of percentage completion method along with other issues. Repeated opportunities were given to the assessee company by fixing cases for hearing on 22.07.09, 10.08.2009, 20.08.2009, 03.09.2009, 15.09.2009, 23.09.2009, 06.10.2009, 08.10.2009, 15.10.2009, 28.10.2009, 09.11.2009, 18.11.2009 and thereafter final show cause was issued vide query dated 19.11.2009 fixing dated for compliance on 23.11.2009. As sufficient opportunities have been provided to the assessee company to support its claim on revenue recognition, the same is decided on the basis of the material brought on record by the assessee during the course of the assessment. 9.13 As regards, AMC revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cost and hence matching principles need necessarily to be provided in the revenue. According to the assessee, AMC is a post contract customer support and, therefore, AMC cost is separately recognized by Nortel India rather than being built into the project cost. Before learned DRP, it is submitted that AMC revenue is a post contract customers support. It should not be included for computing revenue recognizable under BSNL Project but if the proposal made by the Assessing Officer is being accepted, following the concept of matching revenue with the cost then even the cost relating to AMC revenue have been deferred by Nortel India and a deduction should be allowed on account of deferment of such cost. The learned counsel for the assessee submitted that the assessee has given the break up of cost. It has also given the estimated figure as to how revenue has been recognized on project completion method, such calculations have been reproduced by the Assessing Officer in the final assessment order on page NOs. 16 & 17 of the assessment order. He emphasized that the learned Assessing Officer failed to take note of the fact that AMC is a separate revenue and it would be a cost to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page No.465 of the paper book which exhibits details of deferred cost. On due consideration of all these material, we find that Assessing Officer refused to reduce the revenue alleged to be representing AMC and other amounts claimed by the assessee on the basis that assessee failed to submit requisite details which can enable the Assessing Officer to cross-verify this claim. We also find that assessee has filed details in different tabular form which are based on its own calculation. For example, the major amount it wants it to exclude is AMC value amounting to ₹ 44,36,24,597. The assessee has not placed on record AMC contract, how that revenue has been calculated. Learned DRP in its order has observed that certain basic details were not submitted by the assessee, hence it is quite difficult to work out comprehensive figure. The operative force of assessee's argument is to persuade the revenue authorities to accept whatever claim it is making. It is highly deplorable. Therefore, it is quite difficult for us to record a specific finding about exclusion or inclusion of the specific amount. We have gone through the objections of the assessee submitted before the learned DRP und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee to use the warranty percentage used by Nortel Group for the other countries in the Asia Pacific Region. It emphasized that percentage was worked out on the average warranty usages pattern observed by Nortel Group Companies in Asian countries, namely, Pakistan, Singapore and Thailand etc. The average utilization rate in the past has been in the range of 3.3% to 3.6%. Learned Assessing Officer requested the assessee to furnish copy of warranty agreement with the BSNL and to provide the details of usage of warranty in case of BSNL project for all years. Learned Assessing Officer further observed that vide order sheet entry dated 9.11.2009,he directed the assessee specifically to provide following details: "(a) Copy of warranty agreement (also asked for vide Order Sheet dated 15.10.2009); (b) Cost of GSM equipments supplied to BSNL with supporting bills/vouchers (for evidencing the basis of the sales figure to BSNL); (c) To give a copy of the ledger account showing cost of imported equipments supplied to South Zone & East Zone; (d) To give a copy of the so called empirical study of the Nortel group on the basis of which 2.5% of cost of sales have been taken as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was filed. Even as per this APO PARA 8.2 laid down as under: "The Warranty of the store Equipments supplied for each service area should be for a period of minimum 12 months from the date of commissioning of the complete network in that service area (Telecom Circle)" As indicated above, the warranty period of 12 months would commence from the date of the commissioning of the complete network in that service area. Since, during the subject assessment year such commissioning did not take place the warranty claims could not have arisen during the year. As such the provision made for warranty was not as per the APO. (ii) Copy of the so called empirical study of the Nortel Group on the basis of which 3.5% of the cost of sales have been taken as basis for the provision for warranty was not provided despite repeated opportunities during the course of the assessment proceedings. It may be mentioned that similar opportunities were provided to the assessee during the course of the assessment proceedings for the assessment year 2005-06. As such, it is held that there is no such report at all and as such the claim at 3.5% is without any basis. (iii) No bills and vouchers were produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic basis and is certainly excessive. It is also held that as the provision has been made on the BSNL sales and the project was not completed during the year, as such there could not have been any claim against the warranty. The entire provision for warranty to the extent of ₹ 14,42,47,994 is therefore disallowed and added to the taxable income of the assessee company. Penalty u/s 271(1)(c) of the Act is also being initiated separately for filing inaccurate particulars and concealment of income". 29. The learned counsel for the assessee while impugning the order of Assessing Officer contended that no doubt no separate warranty agreement was entered by the assessee with BSNL but warranty clause is available in the APO. He made reference to clause 8 of the APO at page 364 which reads as under: "8. WARRANTY Warranty shall be as per Section-III Clause-10 and Clause 108 of Section IV of the tender document. The warranty of the Stores/Equipment supplied for each service area should be for a period of minimum 12 months from the date of commissioning of the complete network in that service area (Telecom Circle). During the warranty the supplier shall perform all the function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and gone through the record carefully. The assessee has made a provision for warranty. It has debited that provision in the P & L account and claimed the deduction. Such deduction can be allowed as an business expenditure. In order to claim any expenditure, not being expenses described in sec. 30 to 36 and not being in the nature of capital expense or personal expense laid out and spend wholly and exclusively for the purpose of the business, one's claim has to be examined under residuary provisions of sec. 37 of the Act. Hence, in order to be eligible for an expense under this section, one has to fulfill the conditions, (i) the expenditure must not be governed by the provisions of sec. 30 to 36; (ii) expenditure must have been laid out wholly and exclusively for the purpose of the business of the assessee; (iii) the expenditure must not be personal in nature and (iv) the expenditure must not be capital in nature. The expression "wholly" employed in section 37 refers to the quantum of expenditure while the word "exclusively" refers to the motive, objective and purpose of the expenditure. Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. has considered this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expected warranty costs in respect of revenue already recognized (accrued). In other words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty costs has to be fully provided for. When Valve Actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it fulfils accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provision should be based on past experience of the company. A detailed assessment of the warran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance purchase order, a condition for providing warranty after commissioning these equipments has been provided in clause 8, which we have noticed in paragraph 29 of this order. From perusal of clause 8, it would reveal that possibility of damage and defects in the goods supplied by the assessee cannot be ruled out. The assessee is bound to make up the damage by replacement etc. According to the revenue, it is contingent liability, because the commissioning of the telecommunication network is uncertain. On the other hand, stand of the assessee is that since revenue is being recognized on percentage completion of the contract, the expenses in the shape of outflow of resources has to be allowed under the matching principles of accountancy. Assessing Officer has disallowed the claim of assessee on the ground it failed to produce concerned data which can enable the Assessing Officer to verify its claim logically, how it has made the provisions for warranty expenses. The assessee failed to provide alleged empirical study report of Asia Pacific Region. It is harping upon the details placed at page 359 of the paper book-II which was filed as Annexure 3 before the lower authorities. On goi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r period expenses". This claim was made in the financial statement on the ground that these expenses pertained to assessment year 2005-06 but had erroneously not being accounted for in the financial statement for assessment year 2005-06. According to the assessee, this aspect was duly verified during the course of assessment proceedings for assessment year 2005-06. Out of these total expenses of ₹ 400,96,607, TDS on the expenses of 124,93,042 was required to be deducted which according to the assessee was duly deducted and deposited by the assessee during the financial year relevant to assessment year 2006-07. It claimed that in accordance with sec. 40(a)(ia), the deduction of this amount is to be claimed in the year in which TDS was paid. The assessee did not dispute with regard to disallowance its claim of balance amount of ₹ 276,03,565. The claim was made by the assessee vide letter dated March 28, 2008 during the assessment proceedings. Assessing Officer has rejected the claim of assessee on the ground that this was not made in the return filed under sec. 139(1) or in the revised return under sec. 139(5) of the Act. Learned Assessing Officer made reference to the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of such amount. Learned Assessing Officer has rightly made a reference to the judgment of Hon'ble Supreme Court in the case of Geotze India. 38. We have duly considered the rival contentions and gone through the record carefully. The ITAT in the case of Chicago Pnematic India Ltd. has considered the judgment of the Hon'ble Supreme Court in the case of Geotze India and made a reference to the Circular of the Board issued way back in 1955. The discussion made by the ITAT reads as under: 49. The assessee claimed deduction in the original return of income. Though the assessee revised its original return, however, claim under sections 80HH and 80-I was not revised. Subsequently, during the course of assessment proceedings, the assessee revised its claim, which the Assessing Officer did not take into cognisance as the assessee had not filed revised return to this effect. The learned CIT(A) also confirmed the action of Assessing Officer. Prima facie, the ratio of the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. (supra) is squarely applicable to the facts of the case because as per the law, the onus lies on the assessee to make right claim and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the Officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with assessees on whom it is imposed by law, officers should :- (a )draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other; (b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs; (c) Public Relation Officers have been appointed at important centres, but by the very nature of their duties, their field of activity is bound to be limited." The following examples (which are : by no means exhaustive) indicate the attitude which officers should adopt :- "(a) Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued by the Board almost 4-5 decades before cast a duty on the assessing authorities to collect only the legitimate tax. Starting from late 1980s, the Government has focussed as voluntary compliance by the assessees and, therefore, Government has reduced the number cases selected for compulsory scrutiny and has also reduced the tax rates. This policy of the Government has resulted into higher tax revenues and simplification of laws. It is a settled position that the Circulars issued by the Board are binding on the subordinate income- tax authorities and if C.B.D.T. issues directions which arc beneficial to the assessees although the same may not be directly in consonance with the provisions of law, even then these instructions have to be given effect and adhered to by the concerned authorities. Thus, there is a strong case for reciprocity to be shown by the Revenue Authorities while completing assessments and to avoid administrative hardships to the assessee. As far as the decision of the Hon'ble Apex Court in the case of Goetze (India) Ltd. (supra) is concerned, there is no dispute that the same is binding on everybody concerned. In the said decision, the Hon'ble Apex Court has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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