M/S. INGERSOLL - RAND TECHNOLOGIES AND SERVICES PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE- 3(1)(1), BANGALORE

ORDER

PER BEENA PILLAI, JUDICIAL MEMBER Present appeal by the assessee has been filed by assessee against the order dated 11/10/2019 passed by the Ld.ACIT, Circle-3 (1)(1), Bangalore relating to Assessment Year 2015-16 on following grounds of appeal:

Page 2 of 20 IT(TP)A No. 2499/Bang/2019 1.2 The order passed by learned AO in not valid in the law as the same is not digitally signed by the learned AO, as required in accordance with Income Tax Business Application ["ITBA"] Assessment Instruction No- 6 dated 3 October 2017. Notwithstanding and without prejudice to the above, the Appellant wishes to file the following grounds of appeal: Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another.

2. The learned AO, learned Transfer Pricing Officer ('learned TPO') and the Honourable Dispute Resolution Panel ('Hon'ble DRP') grossly erred in determining an adjustment of INR 3,33,89,751/- with respect to the international transaction rendered by the taxpayer u/s 92CA of the Act.

3. Cost contribution charges [Management Fees] 3.1 The learned AO/ learned TPO/ Hon'ble DRP erred in treating the arm's length price ('ALP') in respect of payment for cost contribution charges amounting to INR 3,33,41,681/- as 'NIL'. 3.2 The learned AO/ learned TPO/ Hon'ble DRP erred in not accepting the transfer pricing analysis undertaken considering Transactional Net Margin Method ('TNMM') as the most appropriate method ('MAM') in accordance with the provisions of the Act read with Income-Tax Rules, 1962 ("Rules"). 3.3 The learned AO/ learned TPO/ Hon'ble DRP erred in holding that the international transactions cannot be aggregated in the application of TNMM for the transfer pricing analysis without appreciating the fact that the principle of aggregation of closely linked transactions is a well-established rule prescribed by the Organisation for Economic Co-Operation and Development Guidelines ("OECD Guidelines"). 3.4 The learned AO/ learned TPO/ Hon'ble DRP erred in holding that Comparable Uncontrolled Price ('CUP') is the MAM with respect to the payments made by the Appellant towards cost contribution charges in accordance with the Act read with the Rules, despite the Ld. TPO not following the provisions prescribed in clause (a) of the sub-rule 1) of Rule 10B of the Rules for determining the ALP in relation to an international transaction under CUP. 3.5 The learned AO/ learned TPO/ Hon'ble DRP erred in ignoring the evidences submitted by the Appellant with respect to the payments made by the Appellant towards cost contribution charges to its Associated Page 3 of 20 IT(TP)A No. 2499/Bang/2019 Enterprises ('AE') and thereby erred in concluding that the Appellant has not derived any benefits. 3.6 The learned AO/ learned TPO/ Hon'ble DRP erred in ignoring the submissions made by the Appellant and upheld the principles of receipt of benefit from such services along with demonstrating the actual receipt of services thereby disregarding the fact that such expenses were incurred for business purposes. Corporate Tax 4. Disallowance of deduction claimed towards bonus paid under section 43B of the Act 4.1 The learned AO and Hon'ble DRP have erred in disallowing deduction towards bonus paid during the year, claimed under section 43B of the Act, amounting to INR 2,42,54,379. 4.2 The learned AO and Hon'ble DRP have erred in not considering the explanations and the evidence provided by the Appellant wherein it was explained with documentary evidence that the sum was actually paid during the captioned year and therefore, the Appellant is eligible for deduction towards the same under section 43B of the Act. 4.3 The learned AO and the Hon'ble DRP have erred in not relying on the tax audit report in Form 3CA-3CD issued by an independent Accountant wherein the said amount has been certified as an allowable expenditure.

5. Addition to income of the difference between the revenue as disclosed in the service tax returns and the financial statements 5.1 The learned AO and Hon'ble DRP have erred in making addition to income of an amount of INR 12,80,620 being the excess of revenue as per the service tax returns over the financial statements for the reason that the Appellant has suppressed its income. 5.2 The learned AO and Hon'ble DRP have failed to consider the reconciliation statement provided by the Appellant, of revenue as per the service tax returns and the profit and loss account wherein it was explained that the same was on account of credit notes and exchange difference, and therefore, there is no suppression of income. 5.3 The Hon'ble DRP has erred in not considering the credit note produced during the course of DRP proceedings wherein it is clearly mentioned in the description that it pertains to "Jan, Feb, Oct & Nov - 13", which indicates that it pertains to revenue accounted in earlier years. 5.4 The learned AO and the Hon'ble DRP have erred in not appreciating the exchange rate to be considered for Page 4 of 20 IT(TP)A No. 2499/Bang/2019 the purpose of service tax returns are basis the specific rules issued under the service tax rules and the same differs with the requirement for the purpose of preparation of financial statements.

6. Disallowance of technical consultancy charges 6.1 The learned AO has grossly erred in not following the directions of the Hon'ble DRP, wherein the Hon'ble DRP directed the learned AO to delete the disallowance of technical consultancy service charges amounting to INR 2,86,567 under section 37 of the Act. 6.2 The order passed by the learned AO is not line with the statutory procedure prescribed in sections 144C (10), 144C (13) and 144C (14) of the Act.

7. Disallowance of technical consultancy charges under provisions of Section 115313 of the Act 7.1 The learned AO has grossly erred in adding the sum of provision for technical consultancy service charges amounting to INR 2,86,567 while computing book profits under section 115JB of the Act without appreciating that the said adjustment was not made in the draft assessment order. 7.2 The learned AO has grossly erred in making the said adjustment without discussing the same and has also erred in not providing the workings for computation of income under section 115JB of the Act. 7.3 Notwithstanding the above, the learned AO has failed to appreciate that the same is not a mere provision and the Appellant has actually incurred the same and an invoice to the effect has been produced before the learned AO and the Hon'ble DRP. 7.4 The learned AO has failed to appreciate that the Hon'ble DRP has adjudicated that the said expense should NOT be disallowed as provision/unascertained liability and therefore, the learned AO has grossly erred in making an addition under section 115JB of the Act.

8. Addition to income of the difference between the revenue as disclosed in the financial statements and the Form 26AS 8.1 The learned AO and Hon'ble DRP have erred in making addition to income of an amount of INR 10,65,87,398, being excess of revenue as per Form 26AS over the revenue as disclosed in the profit and loss account. 8.2 The learned AO and Hon'ble DRP have erred in not appreciating that the said difference was on account of recovery of cost from group entities, which has been Page 5 of 20 IT(TP)A No. 2499/Bang/2019 adjusted against the expenses incurred for which the recovery has been made. 8.3 The learned AO and Hon'ble DRP have failed to appreciate that recording a receipt of money as income and claiming the same as an expense is same as reducing the said receipt from the expense incurred for which such recovery is made. The learned AO has failed to appreciate that both the methods are revenue neutral. 8.4 The learned AO and Hon'ble DRP ought to have considered the submission filed and the explanations provided by the Appellant.

9. Disallowance of dealers' commission 9.1 The learned AO and Hon'ble have erred in disallowing the provision for dealers' commission amounting to INR 40,82,286 for the reason that the same is only a provision and no evidences were provided to prove the expense incurred. 9.2 The learned AO and Hon'ble DRP have failed to appreciate the Appellant's business model wherein it becomes immediately liable for dealers commission as and when the sales are effected by the said dealer and the same is recognized as expense since the Appellant has a liability towards the same. 9.3 The Learned AO and Hon'ble DRP failed to appreciate mercantile system of accounting followed by the Appellant, wherein, expenses and income are to be accounted for as and when they are incurred. 9.4 The learned AO and Hon'ble ought to have appreciated that the Appellant pays such commission on the sales made by the dealers as an incentive to increase the sales which is in ordinary course of business. 9.5 The learned AO and Hon'ble DRP ought to have considered the submission filed and the explanations provided by the Appellant.

10. Disallowance of Management Fees 10.1 The learned AO and Hon'ble DRP have erred in making protective disallowance of an amount of INR 3,33,41,681 paid to Ingersoll Rand Company, USA ["IR US"] under the cost contribution agreement entered between the Appellant and IR US. 10.2 The learned AO and Hon'ble DRP have failed to appreciate the documentary evidences submitted by the Appellant which substantiates that the expenses were incurred for the purpose of business of the Appellant. 10.3 The learned AO and the Hon'ble DRP has failed to appreciate that the Learned TPO has already determined the arm's length price to be NIL on the ground that Page 6 of 20 IT(TP)A No. 2499/Bang/2019 evidences were not furnished to prove the arm's length nature and hence the protective assessment by the learned AO on same grounds is infructuous and ought to be deleted.

11. Non grant of brought forward losses 11.1 The Learned AO grossly erred in in not following the directions of the Hon'ble DRP and not granting credit of brought forward losses as appearing in the return of income against tie adjustments made in the final assessment order.

12. Interest under section 234B of the Act 12.1 The learned AO erred in computing incorrect interest under section 234B of the Act, which is consequential in nature. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.”

Page 8 of 20 IT(TP)A No. 2499/Bang/2019 3.3 The Ld.TPO noted that assessee had aggregated the management fee transaction under TNMM. He was of the opinion that assessee has not proved the arm’s length nature of the management cost paid. This observation of the Ld.TPO was based on the DRP directions that upheld the adjustment towards management fee for A.Y. 2014-15 in assessee’s own case and A.Y.

Page 9 of 20 IT(TP)A No. 2499/Bang/2019 2012-13 in assessee’s group case being Ingersoll Rand India Ltd. Another TP adjustment proposed by the Ld.TPO was in respect of interest charged on trade receivables by adopting 6 months LIBOR rate + 400 basis points that worked out to 4.3807%. 3.4 The other international transactions were accepted by the Ld.TPO to be at arm’s length. Thus the proposed adjustment by the Ld.TPO were as under: Cost Contribution Charges 3,33,41,681/- Interest chargeable Rs. 48,070/- Total Adjustments Rs. 3,33,89,751/- 3.5 On receipt of the transfer pricing order, the Ld.AO incorporated the transfer pricing adjustment proposed. However, further disallowance in respect of deduction claimed u/s.43B towards the bonus paid, disallowance of year end provision u/s. 37, difference of revenue between service tax return and income tax return, suppression of revenue between 26AS and audited financials and disallowance of commission expenses on which the TDS payment were not made and was only a provision entry without any evidences were made by the Ld.AO. 3.6 On receipt of the draft assessment order, the assessee filed objections before the DRP. The DRP upheld all the additions made in the draft assessment order. 3.7 The Ld.AO on receipt of the DRP directions, passed the impugned order by making addition in the hands of assessee at Rs.16,98,81,001/-. 3.8 Aggrieved by the impugned order, assessee is in appeal before this Tribunal.

Page 10 of 20 IT(TP)A No. 2499/Bang/2019 5. Ground nos. 3.5 to 3.6 - The Ld.AR submitted that the cost contribution charges are paid by the assessee towards services received from the Associated Enterprise (AE) in the areas of information Technology, Human Resources, Central Finance Functions and other services. The assessee is part of the global group having subsidiaries in various countries across the world all of these entities are integrated by means of group’s information system operations platform. The various activities/services which are centrally performed can be rendered only business. The charges for the services rendered by the AE are allocated to all subsidiaries across the world and this allocation is done using a uniform allocation policy/key. The assessee makes payment to the AE for the direct and indirect services availed as management consultancy charges which are linked and related to the core business of the assessee. Therefore, the transaction of cost contribution charges were aggregated with the transactions related to the business and benchmarked under TNMM.

12. The Ld.DR relied on the orders passed by authorities below. 12.1. We note that in assessee’s own case for A.Y. 2011-12 (supra), Coordinate Bench of this Tribunal observed as under: “11. We heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case of Ingersoll Rand India Ltd., (Supra) has considered the similar issue wherein Tribunal has held the appeal in favour of the assessee by deleting the DRP adjustment made towards cost contribution charges. The Hon’ble Tribunal in Ingersoll Rand India., has held that “22. We find that the Mumbai Bench of the Tribunal in the case of Dresser-Rand India (P) Ltd. v. Addl. CIT [2011147 SOT 423/13 taxmann.com 82 upheld the payment of cost contribution charges and deleted the additions made by the AO observing as follows:-  It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what s not.  An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so.  Whether a particular expense on services received actually benefits an assessee in monetary terms or not is not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service.  The real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same.  Similarly, whether the AE gave the same services to the assessee in the preceding years without any consideration or not is also not relevant.

Page 13 of 20 IT(TP)A No. 2499/Bang/2019  The Assessee has filed a huge compilation of papers, including copies of reports, emails and other documents evidencing the rendering of services. There is no infirmity in this contribution being taken as an arm's length contribution to the costs. There is no objective way in which use of services can be measured and as is the commercial practice even in market factors driven situation, the costs are shared in accordance with some objective criterion, including sales revenues and number of employees. In any case, the assessee has adopted TNMM as most appropriate method, and the revenue authorities have neither made an effort to show as to how this method is not appropriate to the facts of this case, nor shown as to which other prescribed method of ascertaining arm's length price of services received will be more appropriate to these facts.

Page 14 of 20 IT(TP)A No. 2499/Bang/2019 12.2. Further, in respect of the most appropriate method to be adopted, this Tribunal in assessee’s own case for A.Y. 2011-12 (supra) observed as under: “13. With regard to the issue of treating cost construction charges as a separate class of transaction and applying CUP as the most appropriate method as against TNMM, we notice that the the Hon’ble Tribunal while rendering the decision in the case of Ingersoll Rand India Ltd (supra) has also addressed the issue of adopting CUP as the most appropriate method for the cost contribution charges in para 23 as extracted above. In assessee’s case the TPO has treated the cost contribution charges as a separate class of transaction quoting that there is no restriction that the TP should be done only at enterprise level and also on the basis that it is an intra group transaction. From the details of services and the benefits received from these services as submitted by the Ld AR, the payment made towards these charges are integral part of the core business of the assessee. Considering the decision of the Hon’ble Tribunal in Ingersoll Rand India Ltd (supra) and the facts of the present case we are of the considered view that the TPO is not justified in applying CUP is the most appropriate method for computing the ALP treating the cost contribution charges as the most appropriate method.” Respectfully following the above view, in assessee’s own case, we direct the Ld.TPO to use TNMM as the most appropriate method as against CUP for computing the ALP of the international transaction related to cost contribution charges. Accordingly these grounds raised by assessee stands allowed.

13. Ground nos. 4.1 to 4.3 is in respect of deduction claimed towards bonus paid u/s. 43B of the Act. It is submitted by the Ld.AR that the claim was in relation to the provision for bonus disallowed in the earlier years and paid during the year under consideration. The Ld.AR submitted that, the assessee filed details of employees to whom the bonus were paid during the year under consideration which can be verified and has been certified by a Chartered Accountant. He submitted that additional Page 15 of 20 IT(TP)A No. 2499/Bang/2019 evidence were filed before the DRP being – employee-wise provision and the details of the bonus paid to such employees during the year under consideration, pay slips on sample basis which has not been considered and verified. He thus prayed for the issue to be remanded for necessary verification. 13.1 On the contrary the Ld.DR relied on the orders passed by authorities below. 13.2 We have perused the submissions advanced by both sides in the light of records placed before us. 13.3 On perusal of the provision of section 43B shows that clause (c) relates to sum referred to in 36(1)(ii) of the Act which in turn relates to any sum paid to an employee as bonus or commission for services rendered. In the present facts of the case, the details filed by the assessee have not been verified by the Ld.AO. We direct the Ld.AO to verify the evidences filed before the DRP and to consider the claim of assessee in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes.

14. Ground nos. 5.1 to 5.4 is in respect of addition to the income of difference between the revenue as disclosed in service tax returns and financial statement. 14.1. The Ld.AO made addition to income of the excess revenue as disclosed in the service tax returns over the financial statements amounting to Rs.12,80,620/- for the reason that, the assessee suppressed its income and no supporting documents were provided for the same. Before the DRP it was held that, the assessee failed to prove that the credit note raised amounting to Rs.6,20,931/- was offered to tax. The DRP also held that the Page 16 of 20 IT(TP)A No. 2499/Bang/2019 assessee failed to provide any documentary evidence in support of its claim. The Ld.AR submitted that, the assessee had provided explanations and furnished a reconciliation statement of revenue as per service tax return and financial statements along with the copies of service tax returns filed for the financial year 2014-15. The Ld.AR submitted that the same has been summarized by the assessee as under: Credit note raised: a. During FY 2013-14, the assessee recognized revenue including an amount of Rs.6,20,931/-. However, the assessee realized that the same was not recoverable during the course of finalization of its accounts for financial year 2013-14 and therefore, the same was reversed in its books of account. b. However, credit note could only be raised in financial year 2015-16 as the same was indentified at the time of finalization of accounts of FY 2014-15 in FY 2015-16 in relation to the same. Since the credit note was raised in FY 2015-16, the assessee considered the same in the service tax returns for the period FY 2015-16 and accordingly, there is no suppression of income as contended by the Ld.AO. c. The assessee submitted copy of the credit not raised in FY 2015-16 before the DRP which was ignored by the DRP. From the said credit note, it can be observed from the description that the same pertains to excess charges made for the year 2013. Exchange difference:

Page 17 of 20 IT(TP)A No. 2499/Bang/2019 a. The assessee submits that a sum of Rs.6,59,589 pertains to difference on account of foreign exchange rates considered for the purpose of its financial statements and service tax returns. b. The assessee recognizes income/expense on account of foreign exchange conversion in accordance with the generally accounting principles and accounting standards, and any resultant gain/loss is offered to tax/claimed as a deduction for tax purposes. The Ld.AR thus submitted that the issue may be remanded to the Ld.AO for necessary verification. We have perused the submissions advanced by both sides in the light of records placed before us. 14.1 We note that the reconciliation statement furnished by assessee in respect of the revenue as per the service tax returns and the income tax returns has not been considered by the Ld.AO. We direct the Ld.AO to verify the evidences and to consider the claim of assessee in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes.

15. Ground nos. 6.1 – 6.2 is in respect of the disallowance of technical consultancy charges under the normal provisions of the Act. 15.1 It is submitted that the DRP in para 2.4.1 had directed the Ld.AO to verify the claim of assessee based on the additional evidence filed. However, the Ld.AO without carrying out necessary verification made the disallowance.

Page 18 of 20 IT(TP)A No. 2499/Bang/2019 We direct the Ld.AO to verify the evidences and to consider the claim of assessee in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes.

16. Ground nos. 7 is consequential to Ground no. 6 and therefore do not require adjudication.

17. Ground no. 8 is in respect of the difference between revenue disclosed in financial statements and form 26AS. 17.1 It is submitted that assessee had filed relevant details to explain the difference was on account of recovery of cost from group entities which was adjusted against the expenses incurred. It was also submitted that the said group companies had withheld TDS on the payments and therefore assessee had an option to account for the said reimbursement as income and claim the corresponding expenses or adjust it against the reimbursement. 17.2 The assessee chose to debit the net expenses to the profit and loss account which was not verified by the Ld.AO. We direct the Ld.AO to verify the evidences and to consider the claim of assessee in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes.

18. Ground no. 9 is in respect of the disallowance of dealers commission as they were only a provision. 18.1 It has been submitted that assessee furnished break up of the commission paid to the dealers and provided explanation that assessee is liable to pay commission to such dealers who have effected sales of assessee’s products.

Page 19 of 20 IT(TP)A No. 2499/Bang/2019 18.2 It was only on the products being sold by such dealers that the commission is paid and the balance are shown as provision for the year. It is submitted that TDS liability cannot accrue on such provision as it is contingent and is not ascertainable. The Ld.AO/DRP made the disallowance as assessee failed to provide supporting documents. 18.3 In the interest of justice, we remand this issue to the Ld.AO to verify the claim of assessee based on the details filed by the assessee. The assessee is directed to file all necessary evidences in support. Accordingly this ground raised by assessee stands allowed for statistical purposes.

19. Ground no. 10 is in respect of the disallowance of management fee on protective basis. 19.1 We have already upheld the cost contribution charges to be at arm’s length in the preceding paragraphs. Accordingly, this ground becomes infructuous.

20. Ground no. 11 is in respect of non-grant of credit of brought forward losses. We direct the Ld.AO to verify the claim of assessee based on the evidences filed in accordance with law. Accordingly this ground raised by assessee stands allowed.

21. Before us, the Ld.AR has raised legal ground in Ground no. 1.2 challenging the validity of assessment order as the same is not digitally signed by the Ld.AO. 21.1 As we have decided the issue on merits in favour of assessee, we do not find it necessary to adjudicate this ground Page 20 of 20 IT(TP)A No. 2499/Bang/2019 for year under consideration. However we keep the issue open to be argued in an appropriate assessment year. In the result, the appeal filed by the assessee stands allowed. Order pronounced in the open court on 04th January, 2023.