GATES UNITTA INDIA COMPANY PRIVATE LIMITED,KANCHIPURAM vs. DCIT CORPORATE CIRCLE 2(1), CHENNAI

आदेश / O R D E R PER MANJUNATHA.G, AM:

This appeal filed by the assessee is directed against final Assessment

Order passed by the Assessing Officer (in short “the AO") u/s.143(3)

r.w.s.144C of the Income Tax Act, 1961 dated 24.09.2018, in pursuant to

directions of the Dispute Resolution Panel-2 (in short “the DRP"),

Bengaluru, u/s.144C(5) of the Income Tax Act, 1961 dated 30.08.2018 and

pertains to AY 2014-15.

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Downward Transfer Pricing adjustment relating to Management Service Fee

2.1 The Learned Assessing Officer/ Transfer Pricing Officer, based on the directions issued by the Dispute Resolution Panel failed to appreciate that based on the Transactional Net Margin method (TNMM') applied by the Appellant, the net margins of Appellant even after deducting the management service fee was higher than that of the comparable companies in the same industry.

2.2 The learned Dispute Resolution Panel has erred in upholding the action of the learned TPO in rejecting the aggregated approach adopted by the Assessee without appreciating that the transactions are inextricably linked.

2.3 The Learned Assessing Officer/ Transfer Pricing Officer, based on the directions issued by the Dispute Resolution Panel, erred in holding Comparable Uncontrolled Price ('CUP') method as the most appropriate method and rejected TNMM adopted by the Appellant for the purposes of determining the ALP in relation to Management Service Fee.

2.4 The Learned Assessing Officer/ Transfer Pricing Officer, based on the directions issued by the Dispute Resolution Panel, erred in holding the Arm's Length Price of the management service fee to be Nil under CUP method without identifying any comparable.

2.5 The Learned Assessing Officer/ Transfer Pricing Officer and the Dispute Resolution Panel have erred in exceeding their jurisdiction to determine the commercial expediency of the assessee.

2.6 The Learned Assessing Officer/ Transfer Pricing Officer and the Dispute Resolution Panel ought to have appreciated that benefit test is not a pre-condition to hold that a transaction is at arm's length.

2.7 Without prejudice to the above grounds, the Learned Assessing Officer/ Transfer Pricing Officer and Dispute Resolution Panel have erred in holding that no benefit has arisen to the Assessee on account of management services rendered by its Associated Enterprise.

2.8 Without prejudice to the above grounds, the Learned Assessing Officer/ Transfer Pricing Officer and Dispute Resolution Panel have erred in holding that the Assessee has not provided any tangible documentation or information to substantiate the economic and commercial benefits derived.

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Transfer pricing adjustment - Re-computation of margin of the Appellant and ALP

Other transfer pricing adjustments

Levy of Interest

General

12, For these grounds and such other grounds that may be adduced before or during the hearing of the appeal, it is prayed that the Hon'ble Tribunal may be pleased to delete the disallowances or pass such other orders as the Hon'ble Tribunal may deem fit.

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India Co. Pvt. Ltd., is a joint venture between Gates Corporation, United

States and Nitta Corporation, Japan. The assessee company is

manufacturing of micro belts, multi speed belts, wiper blades, tension

testers alignment devices, multi rib belt, synchronized belt, timing belt, and

V-belts for use in automotive sector and industrial applications to

independent customers in India. The assessee company also engaged in

the business of import of automotive drive system and industrial drive

system and other components and re-sells to customers in India. The

assessee has filed its return of income for AY 2014-15 on 29.11.2014

declaring a loss of Rs.24,30,53,666/-. During the course of assessment

proceedings, it was seen that the company had entered into international

transactions with its Associated Enterprises (in short “AEs"). Therefore, a

reference was made to the Transfer Pricing Officer (in short “TPO") to

determine Arm’s Length Price (in short “ALP") with reference to all

international transactions reported in Form No.3CEB.

TPO noticed that the assessee had entered into following international

transaction with its AEs:

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PLI of OP/OI and claimed that its transactions with AE are at ALP. The

assessee has computed PLI of -12.82% for manufacturing segment and

-17.73% for trading segment. The assessee has computed PLI by

considering various incomes and expenditure as non-operating in nature.

The TPO after considering the TP Report submitted by the assessee opined

that a fresh TP study needs to be conducted by applying certain filters, and

accordingly, an independent search was conducted and identified 12 set of

comparables with average PLI of 8.17% for manufacturing segment, and 7

set of comparables with average PLI of 4.29% for trading segment. Since,

margin computed by the assessee is (+/-) above the tolerance range, the

TPO proposed TP study adjustment of Rs.23,74,74,646/- for manufacturing

segment, and Rs.6,40,67,600/- for trading segment. The TPO had also

made TP adjustment of Rs.6,82,14,564/- towards management fees paid

by the assessee to its parent company on the ground that the assessee

could not justify payment of huge management fees with necessary

evidences and also failed to establish the benefit derived from payment of

management fees.

has passed draft assessment order u/s.143(3) r.w.s.144C(1) of the Act

dated 30.11.2017 and determined total income of Rs.12,92,43,579/- and

made additions towards TP adjustment as suggested by the TPO. The AO

had also made additions towards belated payment of employee’s

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contribution to PF & ESI u/s.36(1)(va) of the Act, and disallowance of

certain expenses u/s.40(a)(ia) of the Act, for non-deduction of TDS under

respective provisions of the Act.

an objection before the DRP, Panel-2, Bangalore, and raised various

objections, including computation of operating margin by extending certain

income and expenditure and also rejection of comparable companies

selected by the assessee and inclusion of certain new comparables. The

assessee had also raised objection towards management fees on the

ground that the AO cannot make ‘nil’ adjustment for management fees by

holding that the assessee has not derived any benefit from payment of

management fees. The assessee has also challenged additions made

towards belated payment of PF & ESI u/s.36(1)(va) of the Act.

30.08.2018 rejected objections filed by the assessee in respect of payment

of management fees and held that for claiming deduction for expenditure

in respect of international transactions, the assessee has to prove that the

expenses have been incurred wholly and exclusively for the purpose of

business of the assessee. Although, the assessee claims that it has paid

huge management fees for rendering various services, but could not

produce any evidences to justify payment of management fees. Therefore,

rejected arguments of the assessee and upheld adjustment proposed by

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the TPO. The TPO had also rejected various grounds raised by the assessee

challenging computation of operating margin in respect of manufacturing

and trading segments on the ground that the assessee could not explain

how such expenditure is non-operating in nature and needs to be excluded

for the purpose of computation of operating margin. The DRP had also

rejected adjustment made by the TPO on entity level by holding that there

is no error in the reasons given by the TPO to make adjustment at entity

level. However, the DRP has directed the AO to delete additions made

towards disallowance of employee’s contribution to PF & ESI u/s.36(1)(va)

of the Act.

r.w.s.144C of the Act, on 24.09.2018 and determined total income of

Rs.12,68,71,481/- and made addition towards TP adjustment of

Rs.36,97,56,810/- and disallowance of Rs.1,68,338/- u/s.40(a)(ia) of the

Act. Aggrieved by the final assessment order, the assessee in appeal before

us.

hence, does not adjudicated.

Nos.2 & 3 of the assessee’s appeal is downward TP adjustment relating to

management service fees. During the AY 2014-15, the assessee has paid

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management service fees to its AEs amounting to Rs.6,82,14,564/-. The

assessee claims that as per the agreement with its AE, the AE provided

various services in connection with procurement strategy, customer

relationship, etc. The intent of such an arrangement is to ensure that the

operating entities across the globe adhere to group standards and minimize

their operating costs which would ultimately maximize the profits of the

operating companies. The assessee has carried out TP study and

considered TNMM as most appropriate method for all transactions, including

payment of management fees. The AO rejected the TP study conducted by

the assessee and has adopted CUP as most appropriate method and made

downward adjustment of Rs.6,82,14,564/- towards payment of

management service fees on the ground that the assessee could not furnish

any evidences to justify payment of management service fees.

11.1 The Ld.Counsel for the assessee submitted that the TPO/DRP are

erred in adopting CUP as most appropriate method without appreciating the

fact that the assessee has carried out TP study by aggregating all

transactions, including payment of management service fees and adopted

TNMM as most appropriate method. The assessee has also filed necessary

evidences, including agreement between the parties and certain e-mail

correspondence to prove that AEs have provided various services in the

day-to-day management of the assessee companies. The question of

applying CUP method would arise only, in a case, where the comparison is

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made with uncontrolled transaction identified with regard to similar services

rendered for the purpose of TP adjustment. Therefore, the action of the

TPO in determining ALP to be ‘nil’ without even identifying comparable

transaction is inappropriate. The Ld.Counsel for the assessee further

submitted that the ITAT in the assessee’s own case for AY 2013-14 held

that ALP under CUP method cannot be ‘nil’. Further, the Tribunal directed

the TPO to identify comparables, and thereafter, decide the most

appropriate method, and then, find out whether any adjustment is required

in respect of management service fees. Therefore, he submitted that for

this year, issue may be set aside to the file of the AO to carry out fresh TP

Study to ascertain the proper method to be applied to bench mark payment

of management service fees.

11.2 The Ld.DR, Shri A.Sasi Kumar, CIT, on the other hand, supporting

the order of the DRP submitted that the assessee could not furnish any

evidences to justify, it has availed services from its AE. Except, few e-mail

correspondences which are general in nature, no evidence has been filed

by the assessee. The TPO/DRP after considering relevant facts has rightly

held that the assessee could not justify payment of management service

fees, and thus, made downward adjustment of entire amount of

management service fees paid to AE. In this regard, he relied upon the

decision of ITAT Chennai in the case of M/s.Lite-on Mobile India Pvt. Ltd. v.

DCIT in ITA Nos.3194 & 478/Chny/2017 dated 03.11.2021.

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11.3 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. The assessee

claims to have paid management service fees to its AE for availing various

services, including procurement, strategy, customer relationship, etc. The

assessee claims that the intent of such an arrangement is to ensure that

the operating entities across the globe adhere to group standards and

minimize their operating cost which would ultimately maximize the profits

of the group entities. The assessee has filed certain evidences, including

agreement between the parties and few e-mail correspondences and

claimed that it has availed various services. We have gone through the

agreement between the parties and find that said agreement and services

to be provided by the AEs, specified therein, which are general in nature

and does not give any light on various services claims to have been availed

by the assessee. Further, said agreement between the parties only

specifies various need based services to be provided by the AEs to all

entities across the globe without any specific services that has been

provided to the assessee. Further, except few e-mail correspondences

between the assessee’s company and AE which are general in nature, the

assessee could not file any credible evidences which can justify payment of

management fees. Therefore, we are of the considered view that the

assessee could not furnish any evidences to prove availing management

services from its AE and justified payment of management services fees to

its AE. But, fact remains that when the assessee has adopted TNMM as

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most appropriate method and aggregated all transactions, including

management service fees and claimed that its international transactions

with its AE at ALP, the TPO cannot brush aside the method adopted by the

assessee and choose CUP as most appropriate method without assigning

proper reasons and ascertained the comparable cases of similar nature.

Even if the TPO adopted CUP as most appropriate method, but he has to

bring comparable case of similar nature to bench mark payment of

management service fees with appropriate comparables of similar nature.

Since, the TPO has simply rejected the method followed by the assessee

and has claimed that CUP is appropriate method and further, made ‘nil’

adjustment for payment of management service fees, in our considered

view, the issue needs to go back to the file of the TPO for fresh

consideration. Further, a similar issue has been considered by the co-

ordinate bench of ITAT Chennai, in the assessee’s own case for AY 2013-

14, in ITA No.2745/Chny/2017 dated 06.04.2018. Under identical

circumstances, the issue has been set aside to the file of the TPO. T he

relevant findings of the TPO are as under:

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11.4 In this view of the matter and consistent with view taken by the

coordinate Bench on this issue, we set aside the issue of TP adjustment

towards payment of management service fees to AE, to the file of the

TPO/AO and direct the TPO/AO to re-consider the issue in light of various

evidences that may be filed by the assessee to justify payment of

management service fees and to decide the issue afresh in accordance with

law.

Nos.4-8 of the assessee’s appeal is error in computation of margin of the

assessee and rejection of benchmarking exercise undertaken by the

assessee and revising the comparable. The Ld.Counsel for the assessee

submitted that the TPO and the DRP have erred in re-computing the PLI of

manufacturing and trading segments without considering certain

components as operating income. The Ld.AR further submitted that the

assessee has computed operating margin by excluding incremental

management fees as an extra-ordinary item. However, the TPO without

considering the increase in payment of management service fees, simply

rejected arguments of the assessee and computed PLI without assigning

any reasons. The Ld.Counsel for the assessee further submitted that the

TPO has excluded other income being reversal for provision for expenditure

from operating income for the purpose of computation of PLI, even though,

in earlier years, said expenditure has been claimed as operating in nature.

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The AR further submitted that the TPO has identified new comparables like

M/s.Somi Conveyor Beltings Ltd., and M/s.International Conveyers Ld., and

claimed that those two companies are similar to assessee company, but

fact remains that above two companies are engaged in manufacturing of

conveyors which is different from the products manufactured by the

assessee, and thus, needs to be excluded. The Ld.Counsel for the assessee

further submitted that the assessee claimed customs duty adjustment on

the ground that out of the total purchase of the assessee, substantial

portion consists import, which is not in the case of the comparable

companies. Therefore, the lower margin of the assessee is on account of

import duty offered in respect of purchase which needs to be eliminated

while computing operating margin. Further, the TPO/DRP without

understanding, simply rejected arguments of the assessee and included

customs duty while computing operating margin. The Ld.Counsel for the

assessee further submitted that the assessee has considered foreign

exchange loss as non-operating in nature and excluded for the purpose of

computing operating margin. But, TPO held that any gain or loss arising

directly related to exports or imports are operating in nature and therefore,

cannot be excluded for computing PLI. The Ld.Counsel for the assessee

further submitted that the TPO is erred in making adjustment at entity level

and not confined to AE’s cost alone, even though, it is a well settled

principle of law by the decision of the Hon’ble Bombay High Court in the

case of CIT v. Ratilal Becharlal & Sons, reported in [288 CTR 31] where it

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has been clearly held that TP adjustment needs to be made to AE

transaction, but not at entity level.

12.1 The Ld.DR, on the other hand, supporting the order of the TPO/DRP

submitted that there is no merit in the arguments of the assessee for

exclusion of incremental management fees as an extraordinary item,

because, once management fees is considered as operating in nature, any

increase in payment in proportion to sales or turnover of the assessee,

cannot be considered as non-operating. The Ld.DR further submitted that

although, the assessee claims for exclusion of certain item of expenditure

and income as non-operating in nature, but on perusal of the reasons given

by the TPO/DRP, it is very clear that the assessee seeks for exclusion of

foreign exchange loss, as non-operating in nature, even though, it has

direct link with imports and exports of goods. The assessee seeks for

exclusion of import duty on the ground that it has higher imports when

compared to comparables, but no evidence has been placed to justify the

arguments. Therefore, the TPO/DRP has rightly rejected arguments of the

assessee and computed PLI by excluding certain items of expenditure and

including certain items of income and their orders should be upheld.

12.2 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. The assessee has

raised various grounds in respect of errors in computation of PLI at

manufacturing and trading segments, computation of PLI by including

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certain items of expenditure as non-operating in nature. The assessee also

claims for economic adjustment like customs duty by arguing that when

compared to comparable companies, it has higher amount of imports, on

which, paid higher amount of customs duty and same needs to be excluded.

We have gone through the averments of the Ld.Counsel for the assessee

in light of reasons given by the TPO/DRP and we find that, in respect of

exclusion of incremental management fees as an extraordinary item for the

purpose of determining PLI, we find that the assessee is paying

management service fees on the basis of turnover achieved for the relevant

assessment year, and any increase in payment of management service fees

is directly related to turnover of the assessee. Therefore, merely for the

reason that there is an increase in management service fees for the

impugned assessment year when compared to earlier period, it cannot

partake the nature of the non-operating in nature. Therefore, we are of

the considered view that there is no error in the reasons given by the

TPO/DRP to include incremental management fees as operating in nature

for the purpose of computation of margin.

12.3 Coming back to arguments of the Ld.Counsel for the assessee on

error in computing PLI of manufacturing segment. The assessee claims

that it has reversed certain provisions made for expenditure in earlier years

and credited into P & L A/c. The assessee claims that those expenditure

has been treated as non-operating in nature and have been excluded for

the purpose of computation of PLI. If the claim of the assessee is correct

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and the TPO has excluded those items of expenditure for the purpose of

computation of PLI in earlier years, then, reversal of said expenditure and

credited into P & L A/c for the impugned assessment year, needs to be

considered as operating in nature. Therefore, we direct the TPO/AO to

verify the claim of the assessee and re-compute the PLI of manufacturing

segment in accordance with law.

12.4 As regards the economic adjustment in respect of customs duty

payment, we find that the assessee makes vague claim of higher import

duty payment of raw materials when compared to comparable companies

without there being any data to show that it has paid higher amount of

import duty. Further, the assessee is also not able to demonstrate with

evidence, that it has not factored the impact of higher import duty in

margins or selling price. In absence of any evidence, it is difficult to accept

the arguments of the assessee. However, fact remains that, in case, the

assessee pays higher amount of import duty when compared to comparable

companies, then, the incremental or higher amount of import duty should

be eliminated to compute PLI, otherwise, it gives distorted figures. Since,

the assessee could not file any evidences, this issue needs to go back to

the file of the TPO/AO for further verification. Similarly, assessee claims for

exclusion of foreign exchange loss as non-operating in nature on the ground

that for the impugned assessment year due to depreciation of Indian rupee,

it has substantial amount of foreign exchange loss compared to earlier

years. We find that there is no merit in the arguments of the assessee for

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the simple reason that foreign exchange loss is always operating in nature,

if it pertains to trading account like import of goods or export of services or

goods. In the present case, there is no dispute with regard to the fact that

the assessee has incurred foreign exchange loss in connection with

transactions of import of goods and export of services and goods. Just

because, there is an increase in foreign exchange loss on account of

depreciation of Indian rupee, it cannot partake the nature of non-operating

in nature. Further, if the claim of the assessee is correct that it has incurred

substantial amount of foreign exchange loss on account of depreciation of

Indian rupee abnormally when compared to earlier years, same needs to

be factored while computing PLI of the assessee. Facts are not clear.

Therefore, we are of the considered view that this issue also needs to go

back to the file of the AO/TPO for further verification.

12.5 Coming back to inclusion of M/s.Somi Conveyor Beltings Ltd., and

M/s.International Conveyers Ld., as comparables. The TPO has included

above two companies as comparables on the ground that the product

manufactured by the assessee are similar to products manufactured by the

above two companies. It was the arguments of the Ld.Counsel for the

assessee that above two companies manufacturing conveyer belts which is

different from the products manufactured by the assessee. We find that

although, the TPO included above two companies in the list of comparables

but no reason has been given in respect of FAR analysis while including

above two comparables. There is no iota of discussion either in the TPO

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order or in the DRP directions, how those two companies are comparables

to the assessee company. In absence of any reason for inclusion of above

two companies, it cannot be simply accepted on the basis of broad product

comparison that a particular company is similar to assessee company.

Since, there is no findings from the authorities to include above two

companies as comparables, in our considered view, this issue also go back

to the file of the TPO/AO to conduct fresh verification with regard to above

two comparables to ascertain the FAR analysis of the assessee company

and comparables companies. Therefore, we set aside the issue to the file

of the TPO/AO and direct the TPO/AO to re-examine the claim of the

assessee in accordance with law.

12.6 In so far as entity level adjustment, it is a well settled principle of law

by the decision of various courts including the decision of the Hon’ble

Bombay High Court in the case of CIT v. Ratilal Becharlal & Sons (supra),

that if the adjustment is made on total cost without confining to

international transactions, it would result in tax in non-existing

income/profits of transactions entered into between the assessee and

independent third parties. The TPO has arrived at an incorrect mechanism

for computing TP adjustment without acknowledging that profits arise

evenly from each and every cost which has incurred and shortfall in profits

cannot be attributed entirely to the cost pertaining to the international

transactions entered into by the assessee with its AE. Therefore, we are of

the considered view that adjustment needs to be made only to international

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transaction of the assessee, but not at entity level, including third party

transactions. Therefore, we direct the TPO to make adjustment only to the

international transactions of the assessee.

12.7 To sum up, the issue of incorrect computation of PLI of manufacturing

segment, selection of comparable companies and computation of PLI by

including incremental management fees and the issue of economic

adjustment like import duty adjustment and foreign exchange loss

adjustment and also inclusion of comparables, has been set aside to the

file of the AO/TPO and direct the TPO/AO to reconsider the issue afresh in

light of any evidences that may be filed by the assessee and also in

accordance with law. Thereafter, the AO/TPO is directed to make

adjustment, if any, to be made on international transaction of the assessee

only, but not at entity level.

of the assessee’s appeal is consideration of CUP as secondary method for

the purpose of determining ALP of goods imported from AEs. The assessee

has considered TNMM as most appropriate method in its TP study report.

The assessee makes alternative claim and argued that CUP can be

considered as secondary method for the purpose of determining ALP of

goods imported from AEs on the ground that the AEs have substantial third

party transactions and sells products to third party customers as well.

Further. the price on which such products are sold by the AEs to the

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assessee are lower as compared to its higher selling price to third party

customers.

13.1 We have heard both the parties, perused the materials available on

record and gone through orders of the authorities below. Admittedly, the

assessee has considered TNMM as most appropriate method in its TP study

report. Although, the assessee claims that CUP can be considered as

secondary method for the purpose of determining ALP of goods imported

from AEs, but, no data has been furnished even before us to prove that it

has sufficient data to adopt CUP method as most appropriate method.

Further, CUP method is tolerant to the price charged for a property or

service transferred in a controlled transaction. The price charged for

property or services in an uncontrolled transaction in comparable stations.

In other words, to adopt CUP method, accurate comparables and

comparison of product and price is necessary. In absence of data that

needs to be considered for adoption of CUP, the arguments taken by the

assessee cannot be accepted. Since, the assessee could not file any

evidences to justify the adoption of secondary method for the purpose of

determining ALP of goods imported from AE, and further, the assessee itself

has considered TNMM as most appropriate method in the given facts and

circumstances of the case. In our considered view, the alternative

arguments taken by the assessee cannot be accepted, and thus, we reject

Ground No.9 taken by the assessee.

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Nos.10 & 11 of the assessee’s appeal is levy of interest u/s.234A of the

Act. The assessee claims that it has filed return of income on 29.11.2014

which is well within the due date specified in sec.139(1) of the Act.

However, the AO erroneously levied interest u/s.234A of the Act, on the

ground that there has been delay in filing of return of income. Similarly,

the assessee has challenged levy of interest u/s.234B of the Act, on the

ground that it is consequential in nature. If the claim of the assessee is

correct that it has filed return of income on or before due date specified

u/s.139(1) of the Act, then question of levy of interest u/s.234A of the Act

does not arise. Similarly, levy of interest u/s.234B of the Act, is mandatory

and consequential in nature and depends on total income computed by the

AO and pre-paid taxes, if any, paid by the assessee. Therefore, we direct

the AO to verify the claim of the assessee and re-compute interest

chargeable u/s.234A & 234B of the Act, in accordance with law.

statistical purposes.

Order pronounced on the 30th day of November, 2023, in Chennai.

Sd/- Sd/- (महावीर िसंह) (मंजूनाथा.जी) (MANJUNATHA.G) (MAHAVIR SINGH) उपा�� /VICE PRESIDENT लेखा सद�य/ACCOUNTANT MEMBER

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चे�ई/Chennai, �दनांक/Dated: 30th November, 2023. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ� / Appellant 3. आयकर आयु� / CIT 5. गाड� फाईल / GF 2. ��यथ� / Respondent 4. िवभागीय �ितिनिध / DR