M/S. VISHAY COMPONENTS INDIA PRIVATE LIMITED,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 13,, PUNE

The brief facts of the case as emanating from records are that the assessee is a company engaged in the business of manufacturing of resistors i.e. high voltage resistors, low surge resistors, power resistors, etc. and capacitors like film capacitors, trimmer capacitors and power capacitors used in various electronic applications/products and also the assessee provide back office services to its overseas group companies in the nature of IT Enabled services. During the course of assessment proceedings the assessee filed Transfer Pricing Study Report (TPSR) along with other documents and detailed submissions to justify the arms length price computed relating to international transactions. The said details along with documents and information were examined by the TPO and found not acceptable and issued a show cause notice.

It is pertinent to mention the most appropriate method adopted by the assessee was Transactional Net Margin Method (TNMM) which was accepted by the TPO. The assessee adopted profit level indicator of Operating Profit before Depreciation, Interest and Tax to Operating Cost but however, it was held by this Tribunal in assessee’s own case that the Operating Profit of assessee and comparables should be calculated after depreciation since the depreciation is an integral part of Operating Cost. Regarding foreign exchange gain/loss has been treated as non-operative by the TPO which the Tribunal in assessee’s own case we note that held the amount of foreign exchange gain/loss arising out of revenue transactions should be considered as an item of operating revenue/cost for the assessee as well as comparables. Further, the TP adjustment should be restricted to the international transactions and not at entity level transactions.

Under the manufacturing activity, the assessee chosen to have four comparables, out of which the TPO/AO included CTR Manufacturing Industries and excluded Gujarat Poly Avx Electronics Limited. The AO/TPO computed PLI margin of the comparables on profit on PBIT to cost treating forex gain/loss as non-operative at 13.80%. Thus, the TPO/AO proposed TP adjustment to an extent of Rs.7,89,06,028/-. The DRP in its direction order dated 17-09-2018 rejected the objections of assessee for inclusion of CTR Manufacturing Industries and for exclusion of Gujarat Poly Avx Electronics Limited.

We note that annual report of CTR Manufacturing Industries Ltd. is at Page No. 596 of the paper book which was established in 1964 and is a major player in India, manufacturing a wide range of transformer ancillary products and plastic film capacitors. It operates from three locations i.e. Pune, Aurangabad and Nashik. In Page No. 607 the gross revenue operation shown at Rs.18,216.16 Lacs and in Page No. 628 the net sale of products at Rs.17,720.55 Lacs amongst which the sale of Transformer Ancillaries and others at Rs.14,275.30 Lacs and Rs.1,662.68 Lacs, respectively which are in the category of manufacturing of goods were given

We note that in profit and loss account of assessee which is placed at Page No. 186 of the paper book wherein we note that the gross revenue from operations is at Rs.2,433.38 Million (Rs.243.338 crores). The segmental account of revenue operations were given at Page No. 199 of the paper book wherein it is noted the Finished Capacitors was sold at Rs.1,539.36 Million (Rs.153.936 crores) and Resistors at Rs.593.06 Million (Rs.59.306 crores). Therefore, it appears the sale of products in finished category of capacitors and resistors amounts to Rs.2,132.42 Million (Rs.213.242 crores) as against the gross revenue from operations Rs.2,433.38 Million (Rs.243.338 crores). It clearly shows the assessee has shown the revenue operations up to 60% to 70% from the sale of capacitors and resistors whereas there was no segmental information about manufacturing as well as sale of capacitors and resistors in the

It is agreed by both the parties that the comparability of certain companies in the Back Office Support Segment, this Tribunal remanded the matter to the file of AO/TPO to ascertain the precise nature of services rendered by the assessee under ITES and to examine the comparability or otherwise of the companies challenged in this segment in A.Y. 2010-11. The said order is placed at page Nos. 314 to 341 of the paper book wherein the relevant portion at page No. 336 at para 23 is reproduced as under : “23. As the assessee has only challenged the comparability of certain companies, we consider it expedient to first examine the nature of services rendered by the assessee in this segment. Page 4 of the TPO’s order gives an overview of the services rendered by the assessee to various AEs in this segment, which have been stated to be: “in the nature of Information Technology Enabled Services which, inter alia, include Accounts Receivable Processing (ARP services), Global IT Support (IT Support Services), Bill of Materials Conversion (BOMcon Services), Marketing Logistics Support services (Support services), Designing Services, Restriction of Hazardous Substance (ROHS) and certain Environment Compliance Support Services”. This is a generalized description of services without reference to the further details as to their comprehensive nature and also whether these are highend or low-end services and further the extent of

In the light of the above, the AO is directed to ascertain the nature of services rendered by the assessee and examine the comparability of the companies indicated therein. Accordingly, this issue is remanded the file of AO/TPO for fresh examination. The assessee is liberty to file evidences, if any, in support of its claim.

Ground No. 23 raised by the assessee challenging the disallowance of Rs.6,47,15,145/- u/s. 40(a)(i) of the Act made in the final assessment order by the AO in the facts and circumstances of the case.

The assessee for convenience Vishay India hereafter paid an amount of Rs.6,47,15,145/- to its Associated Enterprise (AE) i.e. Vishay Intertechnology Asia Pte Ltd., Singapore (in short “Vishay Singapore”). The AO asked the assessee to explain why disallowance u/s. 40(a)(i) of the Act should not be made for non-deduction of tax.

It was explained that the Vishay Singapore has cross charged certain expense to Vishay India in the nature of leased line charges (Communication cost or Equant charges) involving IT charges, IT support cost, and allocation towards development, maintenance, up gradation, backup, security maintenance of global IT infrastructure/security/web charges. Vishay Singapore initially paid that amount and got reimbursement from Vishay group situated all over including the assessee on cost to cost basis. Vishay Singapore did not charge any mark up nor any income involved in it. The same was accepted by the TPO during the Transfer Pricing proceedings that the payments made to Vishay Singapore are in the nature of cost to cost allocation only. Further, it was explained that the assessee was not required to withhold tax at source in India to remittances on cost allocation and as such no TDS was deducted as it is not taxable in India.

The AO was of the opinion that the Hon’ble Supreme Court in the case of GE India Technology Cen (P) Ltd. Vs. CIT reported in 327 ITR 456 did not suggest that the quantum of income embedded in the sum paid to the non-resident which is chargeable to tax is the test for deducting tax at source and by referring to Sub-section (1) of Section 195 of the Act that the quantum of income embedded in the sum paid is a subject of the sum paid to the non-resident. He observed that sum paid by the assessee is chargeable to tax u/s. 195 of the Act and proposed disallowance of the aforesaid amount.

In order to come to above conclusion, the AO placed reliance on the directions of DRP in assessee’s own case for A.Ys. 2012-13 and 2013-14 wherein on the consistency method it was held Vishay Singapore has made available various facilities to the assessee for which the assessee has made aforesaid payment and the nature of facilities indicates that the payment is in the nature of royalty as defined u/s. 19 r.w. Article 12 of the DTAA between India and Singapore. Accordingly, disallowed the said expenditure for violation of non-deduction of TDS u/s. 40(a)(i) of the Act.

The DRP in its directions vide para 24.2 referred to the discussion made by the DRP in A.Y. 2012-13 in assessee’s own case. We note that the DRP while dealing the issue in A.Y. 2012-13 placed reliance in the case of AMD Research & Development Center India Pvt. Ltd. reported in TS-649- ITAT-2014 (HYD) which held the payment made to the parent company with the services rendered by the third party, would not mean that the payment is reimbursement and not payment in the nature of royalty. In the case of CGI Information Systems and Management Consultants Pvt. Ltd. reported in TS-519-HC-2014 (KAR) the Hon’ble Karnataka High Court held that the payment for intranet facility under cost sharing arrangement is taxable as royalty. In the case of Vertex Customer Management Ltd. reported in (2016) 67 taxmann.com 105 (Delhi-Trib.) it was held that where the assessee received reimbursement from its India entity for use of equipment situated outside India is taxable as royalty in India. The DRP held the facts and circumstances in A.Y. 2014-15 is identical to facts in A.Y. 2012-13 and accordingly confirmed the disallowance made by the AO for violation of section 195 u/s. 40(a)(i) of the Act.

We note that the similar issue on same identical facts, this Tribunal in assessee’s own case for A.Y. 2012-13 at Page Nos. 343 to 351 of the paper book wherein the issue on hand discussed by this Tribunal form paras 6 to 12 of the said order, wherein we note that the assessee availed similar services from its holding company in USA for which the Vishay Singapore paid the said amount on behalf of other entities situated worldwide and charged without no markup from the assessee as well as from other entities. No disallowance was made in this regard by the respondent authorities in the earlier years. The Tribunal examined the final assessment orders/TPO’s orders of earlier years along with the necessary documentation filed by the assessee therein and held the reimbursement of expenses for leaseline are not in the realm of royalty and section 9 of the Act or Article 12 of DTAA is attracted. The Tribunal further placed reliance in the case of John Deere India Pvt. Ltd. reported in (2019) 70 ITR (Trib.) 73 (Pune) wherein the similar issue was raised and held that the payment made for such leaseline charges was not royalty under DTAA and no obligation to deduct tax at source. Having considering the facts and circumstances of the case for the year under consideration be that of the facts arose in A.Y. 2012-13, in our opinion, are identical and squarely covered by the order of this Tribunal in assessee’s own case for A.Y. 2012-13, hence, the disallowance as confirmed by the AO in accordance with the directions of DRP is not justified and accordingly, deleted. Thus, the assessee in Point No. 23 in ground No. II succeeds and it is allowed.

In Ground No. III the assessee has assailed initiation of penalty proceedings u/s. 271(1)(c) of the Act. Challenge to penalty proceedings at

In the result, the appeal of assessee is partly allowed for statistical purpose.