THE ACIT, CIRCLE- 4,, BARODA vs. TYCO VALVES & CONTROLS (INDIA) PVT. LTD., BARODA

आदेश / O R D E R

PER BENCH: The cross-appeals have been filed at the instance of the Revenue and Assessee against the common order of the Commissioner of Income Tax (Appeals)–III, Baroda [CIT(A) in short] vide appeal no.CAB/III-227/11-12 dated 27/09/2012 arising in the assessment order

(by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 passed under s.143(3) r.w.s.147 r.w.s.92CA r.w.s.144C(4) of the Income Tax Act, 1961(hereinafter referred to as "the Act") dated 27/09/2012 relevant to Assessment Year (AY) 2006-07.

2. First we take up assessee’s appeal in for AY 2006-07, wherein the assessee has raised the following grounds of appeal:

“On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) –III, Baroda [‘CIT(A)’] erred in confirming the addition of Rs.2,16,03,797 made by the Assessing Officer (‘Assessing Officer’) in relation to the arm’s length price of the Appellant’s international transaction as follows: 1. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) [‘CIT(A)’] erred in confirming the addition of Rs.1,91,90,781 in relation to determination of Arm’s Length Price relating to the Appellant’s international transaction of engineering design services; 2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs.17,15,967 in relation to determination f Arm’s Length Price relating to the Appellant’s international transaction of Reimbursement of Management fee expenses; 3. On the facets and circumstances of the case and in law, the learned CIT(A) erred in confirming the addition of Rs.6,97,049 in relation to determination of Arm’s Length Price relating to the Appellant’s international transaction of Reimbursement of Insurance Premium; 4. The learned Assessing Officer be directed to grant (+/-) 5% benefit as available under proviso to Section 92C(2) of the Act. It is prayed that the learned Assessing Officer be directed to consider the international transactions of the Appellant as arm’s length and accordingly the total transfer pricing adjustment of Rs.2,16,03,797 should be deleted.

2.1. The issue raised by the assessee in ground No 1 is that the Ld. CIT(A) erred in confirming the ALP adjustment of Rs. 1,91,90,781/- in relation to Engineering design service.

(by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 - 3 -

3. At the outset we note that, the assessee has raised the similar issue in ITA 2993 for the assessment year 2007-08. The facts of the dispute for the year under consideration viz a viz in are identical. Moreover, the TPO in his order has also made reference to his order framed for the assessment year 2007-08 for making the disallowance/addition for the year under consideration. Therefore, we are not inclined to repeat the facts of the dispute for the year under consideration for the sake of brevity.

3.1. We further note that the issue raised by the assessee is limited to the extent of the adjudication so as to whether certain comparables should be included while determining the arm length price of the international transaction carried out by the assessee with its associated enterprises. In this regard, we also find that similar issue was also raised in the assessment year 2007-08, therefore we proceed to adjudicate the ground of appeal raised by the assessee in the ground of appeal.

3.2. The controversy arises while determining the arm length price for the Engineering services rendered by the assessee to its AE whether the following companies/comparable to be included/rejected as the case may be.

(by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07

“10.3. The financial statement of Rolta India Ltd was for the entire group which was used as comparable of the assessee company. In our considered view the consolidated financial statements cannot be compared with the assessee before us. It is because the consolidated financial statement of Rolta India Ltd. also contain the information/financial result of the entire group. As such, the provisions of the Act requires that only the Indian company of Rolta can be considered as 1 of the comparable for working out the ALP of the assessee. The consolidated financial statements of Rolta are placed on page no 603 of the paper book. 10.4. In holding so we also draw support and guidance from the order of Hon’ble Mumbai tribunal in the case of Capgemini India Private Limited, dated 28-02-2013 wherein it was held as under: “5.3.3 We first deal with the pleas raised by the ld. Sr. Counsel for using consolidated results for the purpose of comparison of margins. The ld. CIT-DR has pointed out that the four comparables having substantial related party transactions i.e., CG-VAK, Mascon Global Limited, Mastek Ltd. and Patni Computer Systems Ltd. have substantial revenue's from overseas market and, therefore, the consolidated results which have profit from different markets will not be comparable. It was pointed out in case of Mascon Global Limited, 75% of the revenue came from USA,

(by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07

Moscow and UK and in case of CG-VAK 75% of the revenue came from other jurisdictions. In case of Patni Computer Systems Ltd., 61% of the revenue came from USA, UK, Germany and Brazil whereas in case of Mastek Ltd. substantial part of the revenue came from other countries. These claims of ld. CIT-(DR) which were based on the annual reports of the companies which were placed on record were not disputed by the ld. Sr. Counsel. Under the provisions of Rule 10B(2)(d), comparability of transactions has to be considered after taking into account the prevailing market conditions including geographical locations, size of market and cost of capital and labour etc. Therefore, we agree with the ld. CIT-(DR) that the consolidated results which include profit from different overseas jurisdictions having different geographical and marketing conditions will not be comparable. No material has been brought on record by the assessee to show that any of the comparables were having branches abroad in addition to subsidiaries. We also note that in case of American Express (India) Pvt. Ltd. (supra), the TPO had taken consolidated results to nullify the results of AY .07-08 related party transactions but the Tribunal in a similar situation had not allowed the same on the ground that substantial revenue came from other markets which were not comparable. We, therefore, uphold the view taken by the authorities below to adopt standalone results for the purpose of comparison of margins. Consequently we also uphold the order of TPO for rejecting the above mentioned four comparables which have substantial related party transactions because the transactions in these cases could not be considered as fully uncontrolled.” 10.5. In view of the above, we hold that the company namely Rolta India Ltd. cannot be considered as comparable. Accordingly, we reverse the finding of the learned DRP and direct the TPO not treat this company as the comparable for the purpose of working out the ALP of the assessee with respect to the transactions carried out with its associated enterprises. As, we have rejected Rolta India Ltd as 1 of the comparable, we do not find any reason to adjudicate the issue for the inclusion of Geometric. Hence, the ground of appeal of the assessee is partly allowed.”

3.4. In view of the above, we respectfully following the same, we direct the TPO not consider Rolta India Ltd. as the comparable for determining the ALP.

(by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 - 6 - At the outset, we note that the learned DRP in the assessment year 2007- 08 has excluded this company from the list of comparable by observing as under: “37. In the case of the objection pertaining to Engineering Design Services, the Panel decided to consider the following comparables as given in the TPO’s selection:

Sr.No. Company name OP/TC 1. Ace Software Exports Ltd. 16.32% 2. KLG Systel Ltd. 22.25% 3. Powersoft Global Solutions Ltd. 15.35% 4. Rolta India Ltd. 38.79% Mean 23.18%

In the above set of comparables, the assessee states that Powersoft Global Solutions was a software development and not a service company using CAD/CAM. The Panel decided to exclude this from the set. Accordingly, the Panel decided to have the following companies in the set:

1. Ace Software Exports Ltd. 16.32% 2. KLG Systel Ltd. 22.25% 3. Rolta India Ltd. 38.79% Mean 25.79%

The Panel decided to adopt the above average PLIs and directs the TPO/Assessing Officer to compute the ALPs and the compute TP adjustments.”

3.5. The above order of the learned DRP was not challenged by the Revenue. Moreover, the TPO has considered this company as one of the comparable by observing that the same company was considered as (by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 - 7 - comparable in the assessment year 2007-08. Thus, it is transpired that the entire basis for choosing this company as comparable was the order for the assessment year 2007-08. As such, the finding of the learned DRP has reached to its finality. Accordingly, we direct the AO not consider this company as the comparable for determining the ALP.

“10.1. Regarding the question No. 1, we find that the issue is factual in nature and accordingly we set aside to the file of the TPO to work out the actual margin of Ace software.

3.6. In view of the above, it is clear that the TPO has considered this company as one of the comparable by observing that the same company was considered as comparable in the assessment year 2007-08. Thus, it is transpired that the entire basis for choosing this company as comparable was the order for the assessment year 2007-08. Therefore respectfully following the same, we direct the TPO to consider this comparable for determining the ALP. In view of the above, the ground of appeal of the assessee is allowed.

(by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 3.7. The issue raised by the assessee in ground no. 2 is that the Ld. CIT (A) erred in confirming the ALP adjustment of Rs. 17,15,967/- in relation to Reimbursement of management fees expenses.

3.8 At the outset, we note that the identical issue in the own case of the assessee has been decided in its favor of assessee in the relevant extract of the order reproduced as under:

“Regarding the ad hoc disallowance of management fee expenses, we note that there is no power under the provisions of the Act which allows to the TPO to make the disallowance on ad hoc basis. As such the law is fairly clear and requires the TPO to determine the arm length price of the international transaction with the AE. As such there is no power available to the TPO to make the ad hoc disallowance while computing the income under the head business and profession. In this regard we find support and guidance from the judgment of Hon’ble Mumbai Tribunal in case DCIT Vs. Flakt (India) Ltd. reported in 76 taxmann.com 209 where in it was held as under: “Another aspect which emerges from the order of the TPO is as follows. After considering the factual matrix, the TPO has proceeded to determine the arm's length price for the service charges at 10% of the expenses recovered. Ostensibly, the income arising from an international transaction is liable to be computed, having regard to the arm's length price as mandated in section 92(1) of the Act. Section 92C prescribes the manner of determination of the arm's length price and sub-section (1) thereof specifically lays down various methods by which the determination of arm's length price has to be made. It is quite clear that there is no adhocism permissible in the manner of computation of arm's length price of an international transaction, whereas the action of the Transfer Pricing Officer in considering the arm's length price @10% of the expenses recovered is not only adhoc but it also does not conform to any of the methods prescribed in section 92C(1) of the Act. On this count itself, the action of the TPO is suspect, even if, it is to be understood that the impugned transaction was an international transaction requiring computation of income having regard to its arm's length price. 12.3. In view of the above, we hold that the TPO has erred by making the disallowance on ad hoc basis. Accordingly we delete the addition made by the authorities below.

(by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 - 9 - 3.9. In view of the above, we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.

4. The assessee during the year has reimbursed the Insurance premium of Rs. 6,97,049/- to its AE in violation of the Insurance Act. Accordingly the TPO disallowed the same and added to the total Income of the Assessee.

Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.

(by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 - 10 - 6.1. The learned AR also submitted that similar expenses was also incurred by the assessee in the assessment year 2008-09 but the TPO has not made any disallowance.

i. The payment of insurance premium to a foreign company is prohibited under the insurance Act. ii. The assessee has derived no benefit out of this expense.

8.1. Admittedly, there is no power available to the TPO to verify the allowability of any business expense. As such the role of the TPO is limited to the extent of determining the arm length price of the transaction carried out by the assessee with the AE. However in the case on hand, the TPO without determining the arm length price of the insurance expenses claimed by the assessee has disallowed such expenses

(by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 - 11 - by observing that the same is prohibited under the insurance that. Admittedly, such expenses are prohibited under the insurance Act. But the controversy arises whether such expenses can be disallowed by the TPO in the given facts and circumstances. In this regard we note that the role of the TPO is to determine the arm length price of the transactions of insurance premium as the impugned payment was prohibited, therefore the TPO has made the disallowance after considering the fact that there was no benefit derived by the assessee out of such expenses.

8.2. The learned AR also before us has not brought anything on record suggesting that the assessee has derived any benefit against such expenses. Thus, we feel that the assessee fails in the benefit test for such expenses. Hence, we do not find any reason to interfere in the order of the authorities below. Thus the ground of appeal of the assessee is dismissed.

9. The next issue raised by the assessee in ground no 4 is that Ld. CIT (A) erred in denying the benefit of range (+/-5%) to the assessee.

9.1. At the outset, we note that the identical issue has been decided against the assessee in its own case in of this order. The relevant extract of the order reproduced as under:

“We have heard the rival contentions of both the parties and perused the materials available on record. We find that during the course of hearing of this appeal, neither the ld. counsel for the assessee nor the ld. D.R. for the revenue have been able to (by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 point out any basis or material or criteria to controvert or to rebut the findings and conclusion arrived at by the ld. DRP. Though the ld. counsel for the assessee made a specific ground of appeal for the benefit of adjustment of + 5% to be given while determining the Arm Length Price, the ld. counsel for the assessee has not been point out as to how and in what manner, the order of ld. DRP in rejecting this claim of the assessee is improper and unjustified. Since both the parties have not been able to controvert the findings recorded by the ld DRP or point out any material to enable us to take a view other than view taken by the ld. DRP, we do not want to interfere in the order of the ld. DRP.

16.1 We also draw our support and guidance from the judgment Hon’ble Delhi ITAT bench in the case of Globle Ventedge Pvt Ltd v/s DCIT reported in 37 SOT 1 where in it was held as under:

During the course of hearing of this appeal, neither the ld. counsel for the assessee nor the ld. D.R. for the revenue have been able to point out any basis or material or criteria to controvert or to rebut the findings and conclusion arrived at by the ld. CIT(A) except by relying upon their respective stand taken before the ld. CIT(A). Though the ld. counsel for the assessee made a specific submission about the benefit of adjustment of + 5% to be given while determining the Arms Length Price, the ld. counsel for the assessee has not been point out as to how and in what manner, the order of ld. CIT(A) in rejecting this claim of the assessee is improper and unjustified. Since both the parties have not been able to controvert the findings recorded by the ld CIT(A) or point out any material to enable us to take a view other than view taken by the ld. CIT(A), we are inclined to uphold the order of ld. CIT(A) on the point of determination of Arms Length Price in respect of the transactions entered into by the assessee with its associate enterprises, namely, RCS Centre Corp. Therefore, the order of ld. CIT(A) is upheld, and the grounds raised by the assessee as well as by the revenue on this issue are rejected.

In view of the above we do not any reason to interfere in the finding of the DRP and accordingly uphold the order of the AO. Hence, the ground of appeal of the assessee is dismissed.

9.2. In view of the above, we respectfully following the order as discussed above, we are inclined to confirm the order of the Ld. CIT(A). Hence, the ground of appeal of the assessee is dismissed.

NOW COMING TO REVENUE’S APPEAL IN (by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07

- 13 - 10. The Revenue has raised the following grounds of appeal:

1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing the deduction of ₹14,63,59,948/- claimed u/s.10B of the Act without considering the fact that the assessee did not fulfill the basic conditions for claiming deduction u/s.10B of the Act.

2. On the facts and in the circumstances of the case, the learned CIT(A) ought to have upheld the order of the Assessing Officer. 3. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary. Relief claimed in appeal It is, therefore, prayed that the order of the CIT(A) on the issues raised in the aforesaid grounds be set aside and that of the Assessing Officer be restored.

10.1. The issue raised by the assessee in ground No.1 is that the Ld.CIT (A) erred in allowing the deduction u/s 10B of the Act for Rs. 14,63,59,948/- in respect of profit of Chennai unit.

begun or begin to manufacture or produce articles or things during the previous year relevant to the assessment year commencing on or after April 1, 1981. The tax holiday is at the option of the assessee for five consecutive assessment years falling within the block of eight years beginning within the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. The term "manufacture" includes processing or assembling or recording of programmes on any disc, tape, perforated media or other information storage device. The above tax holiday was not available to a hundred per cent export-oriented undertaking. Such undertakings were eligible only for deduction out of their export profits under section 80HHC of the Income-tax With a view to providing further incentive for earning foreign exchange, a new section 10B has been inserted by the Act, so as to secure that the income of a hundred per cent, export-oriented undertaking shall be exempt from tax for a period of five consecutive assessment year falling within the block of eight assessment years. The exemption provided under the new section is similar to the one provided to industrial undertakings operating in free trade zones. The exemption under the new provisions will be subject to the following conditions:-

(i) That the unit manufactures or produces any articles or things. The term "manufacture" will include any processing or assembling or recording of programmes on disc, tape, perforated, media or other information storage device; (ii) That the unit has not been formed by the splitting up or reconstruction of an existing business; (iii) That it has not been formed by the transfer to a new business of machinery or plant previously used for any purpose.

Unlike the provisions of section 10A of the Income-tax Act, even the existing hundred per cent export-oriented undertakings will be eligible to avail of the tax holiday for a full period of five assessment years in a block of eight years.

Therefore, the start point of the limitation for claiming the benefit flowing from section 10B would commence from the year of manufacture or production of the undertaking. If the conditions prescribed in the section are not satisfied in the year of commencement of production, it would not be able to claim such deduction in the subsequent years, unless the said initial test on the date of the starting point has been satisfied. Section 10B therefore do not give any indication that in each year of claim it's eligibility should be newly established; because the relevance of the phrase "newly established undertaking" is only to identify initial year of period for which assessee is eligible for claim of exemption u/s.10B of IT Act. Therefore, at the outset, it is justifiable to concentrate on the fact that whether the Chennai Unit was (by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 established in the year under consideration or not. On examination of the facts recorded by the AO, it was noticed that the Chennai Unit was established/acquired in the year 2000-01. This fact was rather noted by the Hon'ble Gujarat High Court in the aforecited decision dated 11.4.2008 and made an observation that the year 2001-02 was found to be the first year of the claim of deduction u/s.10B of IT Act. Due to this reason, reliance can be placed on Saurashtra Cement & Chemical Industries 123 ITR 669 (Guj.) and thus we hold that in the absence of any disturbance in respect of relief granted in initial year, there was no legal justification to disturb the continuous deduction of section 10B in any of the subsequent assessment year. The first year is the year in which the inquiry about the formation of the undertaking is required to be made by the AO. Although it is possible, as in the present case, that in any of the subsequent years the assessee had acquired new plant & machinery, may be of substantial value, as also may be increase the turnover or efficiency, nonetheless the act subscribes that the undertaking must not be formed by the splitting up or the reconstruction of a business already in existence. The Act also subscribes that the profits shall not to be included in the total income in respect of the prescribed consecutive assessment years beginning with the assessment years undertaking begins to manufacture an article. Therefore, the initial year is the year to establish the eligibility of the claim. Even the Ahmedabad Benches are also consistently subscribing this view as held in the case of Gateway Technolabs Pvt.Ltd., ITAT "C" Bench Ahmedabad (in & 2519/Ahd/2006 - AY 2003- 04) order dated 4.9.2009.

6.1. As far as the question of alleged purchase of the machinery in question is concerned, there are few facts which indicate that the AO has wrongly held that it was an outright purchase by the Chennai Unit. In this regard, the first appellate authority has given a finding of fact that it was not evident from the records that the transaction relating to the machinery constituted outright sale. Likewise, as also simultaneously in the case of M/s.Sakhi Raimondi the first appellate authority has given a clear-cut finding that lease-rentals were received, relevant order of ld.CIT(A) has already been referred supra. Because of these facts and other evidences, such as the agreement, etc. we hereby hold that the AO has wrongly presumed that the transaction in question was a purchase of machinery by Chennai Unit. Because of this finding on facts a conclusion can be drawn that the rejection of deduction u/s.10B was bad in law.

6.2. An alternate plea has also been raised by ld.AR that the machinery which was taken on hire had costed less than the 20% of the total value of the machinery, therefore the impugned restrictive clause of section 10(b) was otherwise incorrectly invoked by the AO. For this proposition case laws cited was CIT vs. Nayyars Minerals Exports Pvt.Ltd. 231 ITR 864 (H.P.). A calculation in this regard has also been furnished; however, at this stage of second appeal no verification about the correctness of the said calculation is (by revenue), (by assessee)& ACIT vs. M/s.Tyco Valves & Controls (I) Pvt.Ltd. Asst.Year - 2006-07 - 16 - possible. Let it be as it is; notwithstanding this alternate plea do not survive anymore because we have already taken a view in assessee's favour as discussed in above paras. In the result, we hereby confirm the findings of ld.CIT(A), therefore the claim of deduction u/s.10B is directed to be allowed. 19.1. In view of the above, we do not find any reason to uphold the finding of the learned DRP. Accordingly, we set aside the order of the learned DRP and direct the AO to allow the benefit to the assessee for the deduction under section 10B of the Act. Hence the ground of appeal of the assessee is allowed.

12. In view of the above, and respectfully following the order as discussed above, we are inclined to confirm the order of the Ld. CIT(A) and direct the AO to delete the addition made by him. Hence, the ground of appeal of the Revenue is dismissed.