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TMI Blog2024 (2) TMI 485X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable company - HELD THAT:- From the financial statements of TCIL it is observed that it is engaged in various types of activities. Hence we accept the alternative submission of the ld. DR that the PLI/profitability should be considered only from the Trading activity of the comparable company as business activity carried out by the assessee company and the ld. AR had also calculated PLI in which the company has profit in one year as observed above. FAR analysis of comparable has to be considered for each year separately irrespective of other years. Accordingly we remit this issue to the ld. TPO/AO for de novo consideration considering the decision of Yazaki India P. Ltd. [ 2019 (7) TMI 1566 - ITAT PUNE] in which it has been observed that if the comparable company is continuously not making loss for any of the three years, it is not persistent loss making company. If the TPO/AO finds that the comparable company is persistent loss making company in trading segment for all the three years, then it should not be considered as a comparable company. Zicom Electronics Security Systems Pvt. Ltd. is offering security products as a cloud based technology driven electronic security servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not clear whether this provision was allowed in earlier years as operating expenditure in trading segment. We therefore remit this issue to AO examine the same. If the provision no longer required back in trading segment is allowed as operating expenditure in the earlier year, the same should be treated as operating revenue in the trading segment. The assessee is directed to produce necessary evidence. Arbitrary adjustment towards GSMAF and MF - TPO has questioned the necessity of the expenditure out of payment made by the assessee towards Management Fees and proceeded to determine the ALP by applying the benefit test - TPO treated the payments towards GSMAF and proceeded to benchmark the same by using the bright line test - HELD THAT:- This issue has been considered by the coordinate Bench of this Tribunal in assessee s own case for AY 2017-18 [ 2023 (5) TMI 1295 - ITAT BANGALORE] we are of the view that the expenditure incurred by assessee towards global sales and marketing activity has to be treated as operating cost and has to be allotted in the ratio of the turnover of the other international transaction for determining the ALP under TNMM analysis. Disallowance u/s. 14A - A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... data by the assessee in its TP documentation. 2. Impugned order erroneously determines TP adjustment in relation to trading segment by attributing notional shortfall in profits entirely towards AE purchases, without restricting the same to proportion of purchase transactions from AEs to total operating costs of the assessee. 3. Impugned order erroneously proceeds on presumptions, choosing following companies which are totally incomparable to Appellant to make huge unjustified adjustment under provisions of Chapter X: * Adtech Systems Limited * Zicom Electronic Security Systems Limited 4. Impugned order erroneously rejects the following comparable company identified by the Applicant on the reasoning that the same is a government company: * Telecommunication Consultants India Limited 5. Impugned order erroneously computes adjustment pertaining to the trading segment, by considering operating revenue of trading segment as INR 2,49,37,26,000 instead of correct amount of INR 2,52,92,26,000 being total operating revenue of the trading segment. Global Sales and Marketing Activities Fees ("GSMAF") 6. Impugned order erroneously determines TP adjustment in relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' for the purpose of Section 14A 14. The Learned AO and DRP has erred in not accepting the claim of the Appellant that only Rs. 1,90,461/- has been incurred for earning the exempt income and hence the disallowance under Section 14A should be restricted to Rs. 1,90,461/- 15. The Learned AO and DRP has erred in not following the method as described under rule 8D for determining amount of expenditure in relation to income not includible in total income' for the purpose of Section 14A 16. Without prejudice to the above ground no. (3), the Learned AO has erred in not following the directions of the Hon'ble DRP for re-computation of the amount of disallowance under section 14A read with Rule 8D and by considering the amount of Rs. 13,910.05 lakhs for the purpose of formula prescribed under rule 8D(2)(ii) 17. The Learned AO and DRP has erred in considering the amount of Rs. 13,910.05 lakhs as indirect expenses for the purpose of computing the amount of disallowance under Section 14A read with Rule 8D 18. The learned AO has erred, in law, and in facts, in computing interest of Rs. 3,18,10,370 under Section 234B of the Act. 19. The learned AO has erred, in law, and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icated on the basis of material on record. It goes to the root of the matter and is required to be adjudicated in order to determine the correct tax liability of the Appellant. Reliance is also placed on the decision of the Apex Court in the case of National Thermal Power Corporation Limited v. CIT (1998) 229 1TR 383 (SC). In the interest of justice, it is therefore humbly submitted that the said additional ground may kindly be admitted and adjudicated. 4. After hearing both the parties, since the additional grounds involves legal issue, therefore following the decision of National Thermal Power Corporation Limited (supra), the same are admitted for adjudication. 5. The brief facts of the case are that the assessee filed return of income for AY 2013-14 on 13.11.2013 admitting an income of Rs. 53.74 crores. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee submitted documents in response to notice u/s. 142(1) and it was observed that the assessee had international transaction exceeding Rs. 15 crores and therefore the case was referred to TPO for determination of ALP after approval from the competent authority. The TPO noted that bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t B 249,37,26,000 Arms Length OC C = (100-A)% of B 228,62,47,996 OC of taxpayer's trading segment D 250,51,31,000 Difference E = D -- C 21,88,83,004 Purchase of traded goods from AE F 128,13,78,072 Payment to AE towards after sales service G 12,795,517 Total AE transactions in OC H = F + G 129,41,73,589 AE transactions as ratio of total OC I = H/D 51.66% Excess in AE transactions to be adjusted J = 1% of E 11,30,74,959/- 10. The TPO further noticed that the assessee has paid Rs. 61,49,549 under the head Management service fees and proposed adjustment of Rs. 38,55,298 towards Public Relations and Rs. 7,31,915 towards Corporate social responsibility totaling to Rs. 45,87,213 based on benefit test. After considering the objections of the assessee and relying on certain judgments quoted in para 5.3 of his order and made adjustment of Rs. 45,87,213. 11. Further, the TPO noticed that the assessee has made payment of Rs. 2,11,01,417 to its AE towards Global Sales and Marketing Fees (GSAMF). The taxpayer's trading segment relates to local sales and software segment is a captive service provider, accordingly this expense is related to manufacturing segment. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct") [Ground Nos. 13 to 17]. We had also submitted that Ground Nos. 18 to 20 are consequential and further that additional Ground No. 21 relating to applicable rate of Dividend Distribution Tax ("DDT") will have to covered by decision of Special Bench of this Hon'ble Tribunal in Total Oil India Pvt. Ltd [TS-197-ITAT-2023(Mum)J, although several aspects of the said dispute remained to be considered by the Hon'ble Special Bench. It was prayed that Appellant's right to contest the issue of DDT on all aspects may kindly be reserved. Ground Nos. 2 to 5 : Transfer pricing adjustment in Trading segment 15. The written submissions of the assessee with respect to these grounds are as under:- A. Ground Nos. 2 to 5 2. Transfer pricing dispute was confined to the Trading segment. Issues involved in brief are: (i) Ld. Dispute Resolution Panel's ("DRP") unjustified withdrawal of proportionate adjustment granted by Ld. Transfer Pricing Officer ("TPO") contrary to Hon'ble Supreme Court's decision in CIT vs Hindustan Unilever Ltd., [2018 259 Taxmann 218 (SC)] [Pg. No. A51/ Case law PB]; (ii) unjustified exclusion of Telecommunication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is totally unjustified. We wish to submit that it cannot be denied that at page 397 of paper book (part of transfer pricing study) details of margin in 3 years for TCIL were provided to Ld. TPO. After verification during TP proceedings Ld. TPO while agreeing that TCIL segment is comparable made a passing observation about persistent operating loss. Appellant specifically objected to above observation before Ld. DRP (please refer page 54 of 119 of appeal set, internal page 13 of DRP objections). Ld. DRP findings are at paras 14 to 16 of Ld. DRP order on internal page 6 of 20. Ld. DRP did not persist with the persistent operating loss allegation but did not direct inclusion of TCIL (segment) as comparable on a new ground that TCIL is a government company. Kind reference is invited to ground wise chart wherein coordinate bench decisions are referred which hold that it is not permissible to reject a company solely on it being government company. Ld. DR's and Ld. DRP's objection deserve to be overruled and TCIL (segment) deserves to be directed to be included. It will amount placing premium on Ld. TPO's and Ld. DRP's failure to expressly comment on specific objections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee submitted that the TPO has granted proportionate adjustment to the assessee. However, the ld. DRP has enhanced TP adjustment reversing the relief granted by the TPO with respect to proportionate TP adjustment. The ld. AR submitted that the issue is no longer res integra and relied on the decision of Bombay High Court in Hindustan Unilever Ltd (ITA No 7868/Mum/2010) which has been upheld by the Hon'ble Supreme Court and the decision of Hindustan Unilever Ltd (supra) is consistently followed by the Bangalore Tribunal and relied on IKA India Ltd. in IT(TP)A No.2476/Bang/2017. 17. The ld. DR relied on the orders of lower authorities. 18. Considering the rival submissions, we noted that the TPO has made adjustment on the international transactions carried out by the assessee with its AE. However, the ld. DRP has considered the entire transactions with AE as well as non-AEs. This issue has been settled by the various Hon'ble High Courts observing that as per the Transfer Pricing provisions and judicial precedents, the TP adjustment should be restricted only to AE related transactions of the assessee. The ld. AR has relied on the judgment of Hon'ble High Court of Bombay in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP in the case of KHF Components P. Ltd. v. ITO, Ward 11(2), Bangalore [2016] 71 taxmann.com 52 (Bang. Trib.) is squarely applicable. He also relied on CITG v. Philip Morris Services India, SA [2019] 102 taxmann.com 376 (Delhi) in which it is held as under:- "4. The Tribunal in the impugned order has gone into great depth and details to record findings as to why the five above mentioned companies should be excluded. For the sake of convenience and completeness, we would reproduce relevant portion of the reasoning given by the Tribunal, which reads:-- "Apitco Ltd., ** ** ** 13. As could be seen from the annual report of this company, is company is one of the 18 TCOs was formed by the key national level financial institutions in association with state-level institutions and banks, and accordingly being a government enterprise Apitco Ltd., was established to provide technical services to other government companies and body corporate. Further this company is engaged in providing services such as asset reconstruction and management, clustered allotment for mega footmarks, and environment services, energy- related services, infrastructure planning and development, energy aud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and is accordingly liable to be excluded. We, therefore, directly Ld. TPO to exclude this company from the finalist of comparables to benchmark the international transaction relating to the market support services provided by the assessee to its AEs." 22. The ld. DR further submitted, however, the case cited above of Hon'ble Delhi High Court relates to selection made by the revenue and the Tribunal directed to exclude the Govt. company named Aptico Ltd., which was confirmed by the High Court. But in the present case on hand, the assessee wants to include the Govt. company as a comparable which cannot be accepted as per the ratio decendi in the above judgment. Alternatively he submitted that the assessee has filed paperbook in which it has computed profit, considering the entire receipts of the assessee, therefore, the PLI/profitability should be considered only from the trading activity of the comparable company as business activity carried out by the assessee company. 23. Considering the rival submissions, the TPO considered trading segment of TCIL as comparable to assessee's trading segment. However, the TPO calculated losses in trading segment from segmental reporting and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the TPO/AO finds that the comparable company is persistent loss making company in trading segment for all the three years, then it should not be considered as a comparable company. 24. The next issue (ground No.3) is exclusion of two companies viz., Adtech Systems Ltd. and Zicom Electronic Security Systems Ltd. from the final list of comparables. The ld. AR submitted that the TPO held that these two companies are broadly similar to business of the assessee's trading segment. Even though there is stark difference in the products traded, there is similarity in the genus of products traded in. He further submitted that The ld. DRP upheld the order of the TPO by observing that these companies are comparable on the broad functional requirements under TNMM. 25. The ld. AR submitted that the TPO concluded that Adtech is comparable based on comparison of engineering/ technical functions i.e., analog signal or digital signal etc., Functional comparability contemplated under chapter X is distinctly different. Audited financials are at page B153 of the Annual Report paper book. Reference to page B157 of the Annual Report Paper book explains business activities, page B160 of the Annual R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Page B378 of the Annual Report paperbook) make this company not comparable to assessee. 29. The Assessee wishes to place reliance on the Hon'ble Delhi High Court in the case of Saxo India Pvt Ltd ITS-790-HC-2016(DEL)-TP]. 30. The ld. DR relied on the order of lower authorities and submitted that assessee and TPO have applied TNMM method for computation of PLI, The TPO has examined the issue in detail and observed that both the companies are engaged in electronic security systems in trading activities and in the written submissions the assessee has also accepted that the Adtech is engaged in trading of electronic security systems, therefore the functional profile of the assessee is same with the comparable company as per the TNMM. The ld. DR further submitted that the company has incurred expenditure towards research & development for the future prospects of trading activities which is clear from the textual information (9) of Adtech Systems Ltd. placed at paper book B163. He also submitted that service income received is only 5.22% of the total revenue & revenue from sale of services are only towards earning post maintenance services activities of traded goods, therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y products and the function of the traded goods are similar with the assessee company as analysed by the TPO. Further we note that the company is not engaged in manufacturing activity as contested by the ld. AR of the assessee. We note from the annexure referred to independent auditor's report financial statement from paperbook page 353 at para no.8 as under:- "The Central Government has prescribed maintenance of cost records under clause (d) of section (1) of section 209 of the Companies Act, 1956. The company during the year under review not used its manufacturing facility and hence the said clause was not applicable." 34. We further note from the "Notes forming part of the financial statements" at paperbook page B359 under the head corporate information which is as under:- "Zicom Electronic Security Systems Ltd. is a public company domiciled in India and incorporated under the provisions of the Companies Act, 1956. Its shares are listed on two stock exchanges in India. The company is engaged in the manufacturing and selling of electronic security systems and equipments. The company also provides maintenance services for electronic security products." 35. We note from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... single segment viz Supply and integration of Electronic Security Systems. Though not strictly necessary, the Company has, for as a measure of providing greater understanding, divided this segment into two viz the Electronic Article Surveillance Systems (EAS) used for providing security to the retail segment and the Commercial Industrial (C/l) for providing security solutions for industrial use. 37. Hence, it can be observed that the company primarily operates in single segment viz Supply and integration of Electronic Security Systems and its functions are broadly same in both segments. The company is in trading activity of the security products and the function of the traded goods are similar with the assessee company as analysed by the TPO. The ratio of sale of service and maintenance income to traded goods is only 5.51%. The company is in trading segment only. On perusal of the financial statements we did not find any expenses under the Research and development account head. Therefore considering the entire facts, the company is comparable. Accordingly, we reject the contention of the ld. AR. Computation of operating margin (Ground No.5) 38. The ld. AR submitted that commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he trading segment. The assessee is directed to produce necessary evidence. We direct accordingly. Grounds 6 to 12 objecting to arbitrary adjustment towards GSMAF and MF 42. The TPO has questioned the necessity of the expenditure out of payment made by the assessee towards Management Fees and proceeded to determine the ALP by applying the benefit test. The TPO treated the payments towards GSMAF and proceeded to benchmark the same by using the bright line test. 43. The ld. AR has filed written submissions on this issue as under:- 11 This issue has been recurring issue since AY 2007-08. Ld. DRP relied on Hon'ble Tribunal's decision in AY 2007-08 and 2009-10 (kindly refer to para 34). Ld. DRP's order in present case is dated 03.7.2017. Kind reference is invited to order passed in Miscellaneous Application relating to AY 10-11 (page 1450 of paperbook @ para 2 on page 1451). Hon'ble Tribunal decided the issue conclusively after taking into account all facts. It is important to note from Hon'ble Tribunal's order for AY 2010-11 @ page 1440 that the Hon'ble Tribunal has taken note of earlier order relating to AY 2007-08 at page 1443 and after considering s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t throughout all years and consistently held in favour of Assessee by various tax authorities (including TPO and DRP). The Bangalore ITAT has relied upon the above ruling and directed the TPO to follow a similar approach for benchmarking the said payments for AY 2014-15 and AY 2017-18. In addition, for AY 2015-16 the DRP issued directions in favour of the assessee by relying on its own case for AY 2010-11 and further for AY 2016-17, the TPO at his own level has not disturbed the ALP of these payments. 45. The ld. DR relied on the orders of the lower authorities. 46. Considering the rival submissions, we note that this issue has been considered by the coordinate Bench of this Tribunal in assessee's own case for AY 2017-18 and it is held as under:- 12. Ground nos. 17-19 has been raised by assessee against the addition made on global sales and marketing activity expenses incurred by assessee to be in the nature of AMP spent. 12.1. The Ld.AR at the outset submitted that this issue stands squarely covered by the order of Hon'ble High Court in assessee's own case for A.Y. 2010-11 in ITA No. 940/2017 by order dated 28/08/2018. The Ld.AR referred to pages 5691-5698 of the paper book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the AE shall be clubbed together and then has to be analysed under TNMM. We further note that the DRP has directed the TPO to determine the ALP in respect of the Global Sale and Marketing Activity Fees instead of considering the ALP at NIL. Therefore in principle we do not find any error or illegality in the directions of the DRP however having regard to the peculiar facts and circumstances of the case wherein the assessee is having multiple and diversified international transactions involving receipt as well as payment, we are of the considered view that the payment in respect of management fees as well as Global Sale and Marketing Activity Fees shall be considered as operating cost and has to allocated in the ratio of turnover of the other international transactions and then the ALP of the other international transactions has to be determined under TNMM analysis. Hence we set aside the entire issue of determination of ALP and TP Adjustment to the record of the TPO/A.O. for carrying out fresh exercise of determination of ALP in respect of international transactions by considering the payment in respect of management fees and Global Sale and Marketing Activity Fees as part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Price' in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs." 5. Having heard the learned counsel appearing for the Appellants-Revenue, we are therefore of the opinion that no substantial question of law arises in the present case also. The Appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs." 12.4. The Ld.DR on the contrary relied on the observations by the DRP. We have perused the submissions advanced by both sides in the light of records placed before us. 12.5. As the issue has been decided in favour of assessee by Hon'ble High Court upholding the view taken by the Tribunal, it has been reproduced in para 3 of the order of the Hon'ble High Court (supra). Respectfully following the same, we are of the view that the expenditure incurred by assessee towards global ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against exempted dividend income of Rs. 24,86,000/-, the assessee has disallowed a sum of Rs. 48,573/- only u/s 14A of the Act. The said disallowance does not appear to be correct when compared with the peak value of investments of Rs. 72.09 crores. In these facts, we are of the view the disallowance may be estimated to meet the requirements of section 14A of the Act. Accordingly, we are of the view that an estimated disallowance of 10% of the dividend income would meet the requirements of provisions of Section 14A of the Act and the same will put this issue at rest. Accordingly, we direct the A.O. to restrict the disallowance u/s 14A of the Act to 10% of exempt dividend income. He may work out the addition accordingly." 52. Respectfully following the above decision in assessee's own case for AY 2014-15, we also restrict disallowance u/s. 14A of the Act to 10% of exempt dividend income. Accordingly, the AO shall work out the disallowance. 53. Ground Nos. 18 to 20 regarding interest u/s. 234A & 234B are consequential. 54. Additional Ground No.21 is regarding of DDT paid to non- resident. The ld. AR submitted that the Special Bench of the Mumbai Tribunal deals with the some of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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