DANA INDIA PVT.LTD,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1(2),, PUNE

आदेश / ORDER

PER R.S.SYAL, VP : This appeal by the assessee is directed against the final assessment order dated 27-11-2017 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter called ‘the Act’) in relation to the assessment year 2013-14.

I. Depreciation adjustment 10.1. The first disputed item of operating costs is a claim for adjustment on account of depreciation at Rs.9.42 crore. The assessee, in the determination of its PLI, reduced such an amount from the total amount of depreciation by claiming before the TPO that depreciation was charged in accounts at much more higher rates than those prescribed under Schedule XIV of the Companies Act, 1956, which was in line with the Global policy adopted by the Dana group. It was, therefore, pleaded before the TPO that such reduction should be allowed. The TPO did not concur with the assessee’s contention by noticing that the financial statements of the assessee clearly indicated that depreciation was calculated as per the rates prescribed in Schedule XIV of the Companies Act. The DRP observed from paras b and c of Significant Accounting Policies of the Annual report of the assessee- company that it calculated depreciation at the rates higher than those prescribed under the Companies Act. The assessee’s contention was that the comparables had charged depreciation as

per the rates given in the Companies Act. The DRP ruled in this regard directing the AO/TPO that: `depreciation adjustment should be worked out in the hands of the comparables and not for the assessee.’ Giving effect to such a direction, the TPO computed the mean PLI of comparables at 6.74% as against originally computed at 6.70% in the consequential order.

10.2. The ld. AR has raised certain issues on the adjustment towards depreciation. Before delving into such aspects, we want to clarify that the dispute on this issue is about adjustment in the profit margin due to higher rates of depreciation charged by the assessee vis-à-vis those comparables. It is not about the adjustment on account of per se higher quantum of depreciation or higher percentage of depreciation in terms of the value of assets or turnover etc. Any adjustment towards depreciation in the computation of the PLI can be granted only when it is charged by the assessee at higher rates vis-à-vis those of comparables and not otherwise as has been consistently held by the Tribunal in several decisions.

10.3.1. The first relief which the assessee seeks is the modification in the direction of the DRP that depreciation adjustment should be worked out in the hands of the comparables and not the assessee. In order to appreciate this contention, it would be apposite to consider the mandate of the TNMM as given in rule 10B(1)(e), reading as under:-

“(e) transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction”

10.3.2. It can be seen that sub-clause (i) of rule 10B(1)(e) deals with the determination of the assessee’s Net Profit margin realized from international transaction with reference to a certain base. Sub-clause (ii) requires determining the Net Profit margin realized by the comparables with similar base. It is with the help of the adjusted margin of the comparables as per sub-clause (iii), that the ALP of the international transaction is determined. Sub- clause (iii) unequivocally provides that the net profit margin referred to in clause (ii), pertaining to the comparables, is to be adjusted to take into account differences, if any, between the international transaction and the comparable uncontrolled transactions. In view of the clear mandate of sub-clause (iii) of Rule 10B (1)(e), there remains no doubt whatsoever that the adjustment on account of differences between the international transactions and the comparable uncontrolled transactions, including the one on account of depreciation, is possible only in the net profit margin of the comparables and not that of the assessee. We, therefore, approve the direction of the DRP and reject the assessee’s contention that adjustment on account of higher rates of depreciation should be granted in the hands of the assessee and not the comparables.

10.4.1. The ld. AR contended that in the schedule of the fixed assets of the assessee, there are certain items of assets, which do not figure in the assets list of the comparables. It was ergo, urged that depreciation on such assets of the assessee be excluded from its overall depreciation amount.

10.4.2. It can be seen from the afore extracted sub-clauses of rule 10B(1)(e) that there is a fixed numerator, being, the net profit margin in the calculation of the assessee as well as of the comparables. Denominator may undergo change depending upon the facts and circumstances of each case. In some cases, it may be costs incurred, while in others, it may be sales effected or assets employed or any other relevant base. Raison d’etre for the delegated legislature to always have the Operating profit as numerator is to deduce a comprehensive and all-impacting figure catering to all the situations and different business models that may have been adopted by the assessee and comparables. This can be understood with the help of an example. An assessee may be carrying on business from its own premises. In that case, there will be depreciation on building cost but no building rent cost.

Another company, selected as a comparable, may be running its business from the rented premises. In that case, there will be only rent cost but no depreciation on building cost. When we compute the operating profits under the TNMM of such an assessee and the comparable, the impact of such differences is creased out.

Depreciation cost in the case of the assessee forming part of its operating costs base gets neutralized with the rent cost in the cost base of the comparables. Having taken the figure of operating profit as numerator, both in the case of the assessee and the comparables, one cannot again go back to the individual items of operating expenses/incomes culminating into the overall operating profit for claiming that adjustment on account of individual particular higher or lower expense/income should be granted. The same rationale of different items of expenses, such as depreciation and rent in the above illustration, not impacting the overall operating profits for comparison, applies to the composition of individual items of expenses also, such as depreciation in our case. Thus the contention of the ld. AR seeking depreciation adjustment on the ground that some of the items of assets possessed by the assessee did not appear in the schedule of assets of the comparables, is sans merit.

10.5.1. The next leg of the submissions of the ld. AR on this issue was that its depreciation claim includes depreciation on certain Intangible assets. It was put forth that since such intangible assets have not impacted the international transaction, the same may be excluded under sub-clause (i) of rule 10B(1)(e).

10.5.2. We have noted sub-clause (iii) of the rule 10B(1)(e) supra, which seeks first considering the operating profit margin of the assessee and comparables and then adjusting the profit margin of the comparables towards differences, if any, between the international transaction and the comparable uncontrolled transactions. The focus under this sub-clause is to fine-tune the operating profit margin of the comparables on the basis of the operating margin of the assessee as deduced under sub-clause (i).

Thus sub-clause (iii) proceeds with the base figure provided by sub-clause (i) of rule 10B(1)(e) of the Rules. Sub-clause (i) calls for determining the operating profit margin of the assessee from an international transaction. On a conjoint reading of the two sub-clauses, it become palpable that, the earlier step under sub- clause (i) calls for determining the operating profit margin of the assessee from the international transaction and the later step under sub-clause (iii) requires adjusting the operating profit of comparables in the backdrop of the operating profit margin of the assessee from the international transaction. In other words, all the operating costs and operating revenues qua the international transaction are to be considered in the earlier step. Operating costs qualifying for inclusion in the cost base are all the costs – direct or indirect; close or remote – which are incurred in relation to the international transaction. Thus, so long as there remains some link or connect between an operating cost and the international transaction, howsoever far-fetched it may be, the same is liable to be considered for the purpose. As a natural corollary, the costs incurred by an assessee, which are not in relation to the international transaction under consideration, go out of reckoning and hence cannot be considered in the determination of operating profit of the enterprise under the sub- clause (i). This can be understood with the help of an example.

Suppose an assessee is engaged in Trading activity only and has applied the TNMM on an aggregate basis. All the costs (other than non-operating) debited to the Trading and Profit & loss account, including the direct costs of purchase of goods etc. and indirect costs of administrative, legal and selling costs etc. are liable to be considered for calculating its operating profit margin.

In the like manner, in the case of an assessee engaged exclusively in Manufacturing and applying the TNMM on aggregate basis, all the costs (other than non-operating) debited to the Trading and Profit & loss account qualify for inclusion notwithstanding the fact that some of them may not have any direct connection with the international transaction. There may be a third situation, where an assessee carries on both the Manufacturing and Trading activities. Further suppose that the assessee uses some trademarks by paying royalty in the manufacturing activities, whereas the Traded products do not carry such trademark. While determining the ALP of international transactions under the Trading segment as per the TNMM on aggregate basis, royalty paid for the use of trademarks will not find place in the operating costs inasmuch as it has been incurred exclusively in relation to the Manufacturing activity. Apart from the costs incurred solely in relation to the trading activity, all other common costs incurred for both the Trading and Manufacturing activity will also warrant inclusion notwithstanding the fact that such costs may be indirectly or remotely connected with the Trading activity.

10.5.3. Reverting to the factual panorama obtaining in the extant case, the claim of the assessee is that depreciation on the Intangible Assets, listed on page 372 of the paper book, should be ignored, as it is alien to the Manufacturing activity and hence do not qualify under sub-clause (i) of Rule 10B(1)(e). A list of six Intangible assets has been given, out of which the dispute is only w.r.t. five items, viz., Goodwill, Computer software, Non- compete fees, Technical knowhow and Customer relationships. It is evident and also admitted on behalf of the assessee that the first three intangible assets, namely, Goodwill Computer software and Non-compete fees are common to both the Manufacturing and Trading activities of the assessee. As such, depreciation on these three items of intangible assets is liable to be considered under sub-clause (i) of Rule 10B(1)(e). The fourth item of Intangible assets is Technical knowhow. There cannot be any dispute that Technical know-how can be used only for manufacturing and not trading activity. When we are determining the ALP of the international transactions of the `Manufacturing activity’, the same is also liable to be considered even if some of the goods manufactured are sold in domestic market to unrelated enterprises. It is another matter that the transfer pricing addition will have to be restricted only to the international transactions.

The last item of Intangible asset is `Customer relationships’. The ld. AR could not precisely provide us the nature of this intangible asset or its manner of user. If it was utilized only for Trading segment, then depreciation on the same will require exclusion under rule 10B(1)(e)(i). In case, it was used either exclusively or jointly for the Manufacturing activity, which international transaction has been benchmarked by the TPO, then depreciation on the same will warrant inclusion in the operating costs. The impugned order on this issue is set aside. The AO/TPO is directed to verify this aspect and then decide accordingly.

II. Prior period expenses 11.1. The next operating cost disputed by the assessee is `Prior period expenses’. The ld. AR stated that the assessee incurred Administrative expenses of earlier years amounting to Rs.4.18 crore which were booked in the year under consideration and hence, the same should be excluded from the determination of the operating cost base of the international transaction under the ‘Manufacturing activity’.

11.2. Relevant discussion has been made on page 12 of the TPO’s order wherein the assessee’s claim has been recorded. The TPO required the assessee to submit any documentary evidence to prove that the expenditure was of prior period. The assessee failed to adduce any such evidence, as a result of which the TPO considered the entire Administrative expenses of Rs.13.67 crore debited to the Profit and loss account as a part of the operating costs. Similar position continued before the DRP that the assessee could not place on record any details to show that such an amount of Administrative expenses did not pertain to the year under consideration.

11.3. We have heard both the sides and gone through the relevant material on record. Out of total Administrative operating costs incurred, the assessee sought exclusion of Rs.4.18 crore urging that it did not relate to the international transaction under consideration. The assessee has tried to make out a case for exclusion under sub-clause (i) of rule 10B(1)(e). Ordinarily, prior period expenses cannot be construed as operating costs relating to the international transaction for the year under consideration unless there is any direct or indirect relation with the same. It goes without saying that when a particular expenditure is debited to the Profit and loss account and the assessee seeks its exclusion, the primary onus is on him to lead evidence to the effect that it is unrelated with the international transaction under consideration.

We are confronted with a situation in which the TPO as well as the DRP categorically required the assessee to prove that Rs.4.18 crore related to prior years. However, no such evidence could be filed. Unfortunately, the situation continues to remain the same before the Tribunal as well. In such a scenario, it is difficult to accept the assessee’s contention for the exclusion of Rs.4.18 crore from the operating cost base since the very foundation for such a claim, being, the expenditure pertaining to earlier years, could not be proved. We, therefore, uphold the impugned order on this score.

III. Tooling provision reversal, Testing provision reversal and Sales tax refund 12.1. The assessee computed its PLI by including Tooling provision reversal, Testing provision reversal and Sales tax refund as part of operating revenue. The TPO held that these three items were not liable to be considered as operating income by relying on Rule 10TA, giving mechanism for the determination of the operating profit under clause (k).

12.2. We have noted supra that rule 10TA is not relevant in determining the ALP under rule 10B(1)(e). Ergo, decision as to a particular item of revenue, being operating or non-operating, needs to be taken in the hue of commercial principles de hors definition given in rule 10TA. In the context of the three items under consideration, namely, Tooling Expenses provision reversal, Testing provision reversal and Sales tax refund, we find that what is relevant in this context is to find out the treatment given to them at the time of the creation of provision for Tooling expenses or Testing expenses on one hand or the payment of Sales tax on the other. In case these three items, at the time of their creation/payment - whether in this year or in any preceding year - were taken as part of operating costs, then the sequitur is that their reversal in the year under consideration would also draw the same colour, namely, that of operating nature and would constitute operating income and vice versa. The ld. AR did not readily have the relevant data to demonstrate their nature at the time of their creation/payment. Under these circumstances, we set aside the impugned order and remit the matter to the file of AO/TPO for seeing if the provisions of Tooling and Testing, at the time of their creation, were taken as part of the operating cost.

In case, the answer is found to be in affirmative, then naturally, their reversal in the year under consideration would also lead to operating revenue. Similarly, if the amount of sales tax was taken as operating cost at the time of payment, then receipt of its refund in the year in question would also give rise of the operating revenue and vice-versa.

IV. Foreign exchange fluctuation gain

14.1. The next issue raised by the assessee is that the transfer pricing adjustment should have been confined only to the international transactions and not the entity level transaction.

14.2. The case of the assessee, to which we accord our imprimatur, is that the transfer pricing adjustment ought to have been restricted to the international transactions rather than the entity level transactions. Section 92 is the first section of the Chapter-X containing special provisions relating to avoidance of tax. Sub-section (1) of section 92 provides that: `Any income arising from an international transaction shall be computed having regard to the arm’s length price’. Thus it is graphically clear that the ALP and the consequential transfer pricing adjustment is contemplated only in respect of the international transactions and not the entity level transactions. It is seen from the TPO’s order that he computed the transfer pricing adjustment under the `Manufacturing activity’ in respect of entity level transactions. It is, therefore, directed that the transfer pricing adjustment should be restricted to the international transaction alone. The impugned order is set-aside pro tanto for giving effect to this direction.

16.1. Having dealt with the PLI determination of the assessee, now we espouse the grounds taken by the assessee against non- inclusion of two companies, namely, G.K.N. Driveline (India)

Private Limited and Exedy India Limited. The ld. AR fairly submitted that these two companies were neither part of the assessee’s Transfer Pricing study report nor any such claim was made for their inclusion before the TPO. It was for the first time that the assessee raised this issue before the DRP who did not accept the same.

16.2. Having gone through the relevant parts of the DRP directions, as contained in para 10.2, it is seen that these two companies were directed to be not considered as these “were not part of the assessee’s TP study report”. By now, it is fairly settled through several precedents that an assessee can make out a fresh case before the higher authorities for inclusion or otherwise of a company in the list of comparables, even though it was not before the authorities below. In view of the fact that the DRP has brushed aside the assessee’s claim for inclusion of the above referred two companies only on the ground that these were not part of the assessee’s TP study report, we cannot countenance the same. The impugned order is set-aside and the matter is restored to the file of AO/TPO for examining the assessee’s contention and then decide their inclusion or otherwise as per law after allowing an opportunity of hearing to the assessee.

B. TRANSFER PRICING ADDITION IN INTRA-GROUP COSTS 17.1. The next issue raised in this appeal is against the transfer pricing addition of Rs.11,71,80,583/- made by the AO in the international transaction of `Intra group Sales, General and Administration services’.

17.2. The facts apropos this ground are that the assessee paid Rs.11.71 crore towards intra-group services pursuant to an agreement with Dana Corporation, USA. The assessee applied the Comparable Uncontrolled method (CUP) as the most appropriate method for benchmarking the transaction. The assessee was called upon to file details for proving the receipt of services and the benefits derived therefrom. In the absence of any satisfactory explanation tendered by the assessee, the TPO determined Nil ALP of the international transaction and proposed transfer pricing adjustment of the equal amount. No succor was allowed by the DRP which led to the making of transfer pricing addition by the AO in the impugned order.

17.3. We have heard the rival submissions and gone through the relevant material on record. It is seen that the assessee claimed to have incurred Rs.11.71 crore to Dana Corporation, USA for receipt of Sales, General and Administration services. The TPO determined Nil ALP primarily on the ground that the assessee could not adduce any evidence for receipt of services and also that no benefit was derived from such services. In our considered opinion, there is no rationale in applying the `benefit test’ while determining the ALP of intra-group services. Once a particular expenditure is incurred for which services are received, it does not matter whether or not such services resulted into any benefit to the assessee. This reasoning of the authorities below is jettisoned.

17.4. The second reason of the TPO is that the assessee could not lead any evidence to support the receipt of services. As against that, the ld. AR has placed before us two paper books, one from pages 1 to 160 and second from 161 to 269 containing the evidence of receipt of services from Dana Corporation, USA along with copies of relevant agreements. It can be seen from various e-mails that the AE did render Sales and Administration services to the assessee. As such, it is difficult to hold that the assessee did not lead any evidence towards receipt of services.

17.5. The ld. AR submitted that the TPO should not have questioned the ALP of the of the intra-group services as it was accepted at arm’s length in the earlier years, that is, 2008-09 and 2012-13. Similar contention was also advanced before the DRP as has been recorded at page 32 of its direction. In our view, the factum of acceptance of payment for the intra-group services at ALP for the preceding years is simply relevant but not decisive.

The international transactions need to be independently proved at ALP every year.

17.6. On a specific query as to the amount of intra-group expense incurred by the assessee in the year under consideration and in the earlier years, the ld. AR could give the amount of intra- group services expense only for the immediately preceding year at Rs.2.74 crore as against cost for the year under consideration at Rs.11.71 crore. Considering the difference in the figures of revenue on one hand and inter-group services on the other for the current year vis-a-vis the preceding year, ex facie, the transaction cannot be declared at ALP, unless a detailed examination is carried out. As the TPO has determined Nil ALP on the preliminary premise that there was no evidence of receipt of services and we have noticed above the fact of receipt of services, we set-aside the impugned order on this score and remit the matter to the file of AO/TPO for determining the ALP of the international transaction of Intra-group Sales, General and Administrative services afresh as per law after allowing reasonable opportunity of hearing to the assessee.

18.1. Now we take up the corporate grounds. The first issue is disallowance of Rs.2,81,104/- on account of late deposit of the employees’ contribution to Provident Fund. The AO invoked the provisions of section 36(1)(va) of the Act and made the disallowance u/s.43B. The case of the assessee is that no disallowance was called for since the payment was made before the due date of filing of return u/s 139(1) of the Act. The DRP, did not provide any reprieve to the assessee.

18.2. We have heard the rival submissions and perused the relevant material on record. The issue is no more res integra. The Hon’ble Apex Court in the case of CIT v. Alom Extrusions Limited (2009) 319 ITR 306 (SC) has held that the amendment to first proviso and omission of the second proviso to section 43B by the Finance Act, 2003, is retrospective. The Hon’ble Delhi High Court in the case of CIT v. Aimil Limited (2010) 321 ITR 508 (Delhi) has allowed deduction in respect of employees’ share when the amount was paid before the due date. When we consider these two judgments, it is manifested that both the employer’s and employees’ contribution are allowable as deduction if these are deposited albeit belatedly under the respective Acts, but before the due date of filing of return u/s 139(1) of the Act. Similar view has been taken by the Hon’ble Bombay High Court in CIT Vs. Ghatge Patil Transports Ltd. (2014) 368 ITR 749 (Bom). It is seen as an admitted position that the assessee deposited the employees’ contribution towards EPF and ESIC before the due date u/s 139(1) of the Act. Respectfully following the aforenoted precedents, we order for the deletion of the addition.

19.1. The only other ground that survives for adjudication is the disallowance of Rs.27,98,305/- towards contribution to the employees’ gratuity fund and Rs.42,44,970/- towards contribution to superannuation fund. The AO invoked the provisions of section 40A(7) for disallowing the claim made by the assessee on the premise of non-approval of the funds from the Commissioner of Income-tax.

19.2. The ld. AR contended that the assessee applied for the approval of these funds before the Commissioner of Income-tax several years ago, but no decision has been rendered so far despite repeated reminders. Considering the provisions of section 40A(7) of the Act, it is apparent that the deduction can be allowed only if the Gratuity and Superannuation Funds are duly approved by the Commissioner of Income-tax. As the requisite funds are still pending approval from the ld. Commissioner of Income-tax, we are constrained to directly grant any deduction in this regard. It is expected that the ld. CIT will shortly pass an order on the assessee’s applications. The matter is sent back to the AO, who will decide the matter in conformity with such order of the ld. CIT.

Order pronounced in the Open Court on 25th February, 2021.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 25th February, 2021 सतीश आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The Respondent; 2.

Date 1. Draft dictated on 23-02-2021 Sr.PS 2. Draft placed before author 25-02-2021 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.