BRADY COMPANY INDIA PRIVATE LIMITED,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1(1)(1), BANGALORE

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ITTPA 900/BANG/2022Status: DisposedITAT Bangalore16 March 2023AY 2018-197 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal decided to restore the issue of IT and management support charges to the file of the TPO for fresh examination. The Tribunal noted that in the assessee's own case for AY 2014-15, an identical issue was restored to the TPO. The payments in question pertain to agreements that are binding for AY 2014-15 and the relevant assessment year. Therefore, to maintain consistency, the TPO is directed to re-examine the issue by considering the evidence filed by the assessee to substantiate the receipt of services from its AEs. The grounds related to this issue (Grounds 3.1 to 3.9) are allowed for statistical purposes. Regarding the short grant of TDS, the AO is directed to examine the issue, and it is ordered accordingly. The appeal filed by the assessee is allowed for statistical purposes.

What were the facts?

The assessee, M/s. Brady Company India Pvt. Ltd., is appealing against a final assessment order dated 25.07.2022 for Assessment Year 2018-19. The assessee, engaged in manufacturing, trading, and back office support, filed its return of income on 27.11.2018. During scrutiny, the case was referred to the Transfer Pricing Officer (TPO) who proposed an adjustment of Rs. 2,69,17,970/-. A draft assessment order incorporating this adjustment was passed. The assessee's objections before the Dispute Resolution Panel (DRP) were rejected, and the DRP confirmed the adjustment. The final assessment order was then passed, computing total income at Rs. 17,96,63,310/-. The appeal before the Tribunal concerns two main issues: IT and management support charges (TP adjustment) and short grant of TDS.

What were the issues?

1. Whether the Tribunal should restore the issue of Arm's Length Price (ALP) for IT and management support charges to the TPO for fresh examination, considering the assessee's contention that services were received and payments were justified, supported by inter-company agreements, ledger extracts, and case law, versus the TPO's finding that services were not substantiated and the ALP should be 'Nil', as upheld by the DRP and supported by the revenue citing case law. 2. Whether the assessee was granted short credit for Tax Deducted at Source (TDS) to the tune of Rs. 2,806/-, as contended by the assessee, and if the Assessing Officer (AO) should examine this issue. Assessee's arguments: The assessee argued that payments for IT and management support charges were justified as services were received from AEs, supported by documentary evidence and Tribunal precedents. For the TDS issue, the assessee contended a short credit of Rs. 2,806/- Revenue's arguments: The revenue, through the CIT-DR, relied on the TPO's finding that the assessee failed to produce proof of services received and supported the TPO's determination of ALP as 'Nil' for IT and management support charges, citing the decision in Lite-On Mobile India (P) Ltd. vs. DCIT.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 144B,Section 143(2),Section 92CA(3),Section 143(1)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, BENGALURU “B” BENCH, BENGALURU

Before: Shri George George K. & Shri Laxmi Prasad Sahu

For Appellant: Shri K.R. Vasudevan &, Shri Ankur Pai, Advocates
For Respondent: Shri Sunil Kumar Singh, CIT-DR
Hearing: 15.03.2023Pronounced: 16.03.2023

IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU “B” BENCH, BENGALURU Before Shri George George K., Judicial Member and Shri Laxmi Prasad Sahu, Accountant Member IT(TP)A No. 900/Bang/2022 (Assessment Year: 2018-19)

M/s. Brady Company India Pvt. Ltd. vs. DCIT, Circle 1(1)(1) No. 26, Survey No. 41 2nd Floor, BMTC Building Konappana Agrahara Village 80 Feet Road, Koramangala Begur, Hobli Electronic City Bengaluru 560095 Phase-II, Bengaluru 560100 PAN – AACCB8163A (Appellant) (Respondent) Assessee by: Shri K.R. Vasudevan & Shri Ankur Pai, Advocates Revenue by: Shri Sunil Kumar Singh, CIT-DR Date of hearing: 15.03.2023 Date of pronouncement: 16.03.2023 O R D E R Per: George George K., J.M. This appeal at the instance of the assessee is directed against the final assessment order dated 25.07.2022 passed under Section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (the Act). The relevant assessment year is 2018-19.

2.

The brief facts of the case are as follows: - The assessee is a private limited company engaged in three distinct operations/ activities, i.e. manufacturing activity, trading activity and back office support services. For AY 2018-19 return of income was filed on 27.11.2018 disclosing income of Rs.15,27,45,340/-. The assessment was

2 IT(TP)A No. 900/Bang/2022 M/s. Brady Company India Pvt. Ltd. selected for scrutiny and notice under Section 143(2) of the Act was issued on 23.09.2019. During the course of scrutiny assessment the case was referred to the Transfer Pricing Officer (TPO) to determine the arm's length price (ALP) of the international transactions undertaken by the assessee with its Associated Enterprises (AEs). The TPO, vide his order dated 30.07.2021 passed under Section 92CA(3) of the Act, proposed a TP adjustment of Rs.2,69,17,970/-. Pursuant to the TPO’s order draft assessment order was passed on 21.09.2021 incorporating the above TP adjustment.

3.

Aggrieved by the draft assessment order the assessee filed objections before the District Resolution Panel (DRP). The DRP, vide its directions dated 30.06.2022, rejected the objections of the assessee and confirmed the TP adjustment. Subsequent to the DRP directions the impugned final assessment order was passed on 25.07.2022. The total income computed in the final assessment order reads as follows: -

Total Income as pr ROI dated 27.11.2018 Rs.15,27,45,340/- i) Addition on account of Arm's length price as Rs. 2,69,17,970/- referred to in the order of TPO dated 30.06.2022 Total Assessed Income Rs.17,96,63,310/-

4.

Aggrieved by the final assessment order the assessee has filed the present appeal before the Tribunal. The assessee raised two issue before the Tribunal, namely IT and management support charges and short grant of TDS. We shall adjudicate the above issues as under.

IT and Management Support Charges (TP Adjustment) (Ground 3.1 to 3.9) 5. The brief facts in relation to the above issue are as follows: - The assessee in its transfer pricing study aggregated the IT and management support charges with the manufacturing and trading segment

3 IT(TP)A No. 900/Bang/2022 M/s. Brady Company India Pvt. Ltd. for the purpose of benchmarking. The cost split between the manufacturing and trading segment is as under: -

Costs pertaining to manufacturing segment Rs. 2,15,82,177 Costs pertaining to trading segment Rs. 53,35,793 6. The assessee in the manufacturing segment earned margin of 11.95% applying OP/OR as the profit level indicator ("PLI") after including the IT and management support charges in the cost base. The assessee adopted transaction net margin method ("TNMM") as the most appropriate method ("MAM") and conducted search for independent companies which yielded a set of 22 comparable companies with 35th to 65th percentile range of 2.72% to 5.69%. Since the margin of the assessee in the manufacturing segment at 11.95% was higher than the 65th percentile range, the transactions of the assessee with the AE were treated to be at arm's length.

7.

Similarly, the assessee in the trading segment i.e., sale of finished goods, earned margin of 37.39% applying OP/OR as the PLI after including the IT and management support charges in the cost base. The assessee adopted TNMM as the MAM and conducted search for independent companies which yielded a set of 6 comparable companies with 35th to 65th percentile range of 2.92% to 4.59%. Since the margin of the assessee in the trading segment at 37.39% was higher than the 65th percentile range, the transactions of the Assessee with the AE were treated to be at arm's length.

8.

The TPO held that the IT and management support charges were a class of transaction on its own and required separate benchmarking. The TPO observed that the assessee had not substantiated that the services have actually been rendered to it and certain tangible and concrete benefit has actually been derived by the assessee. The TPO further alleged that the

4 IT(TP)A No. 900/Bang/2022 M/s. Brady Company India Pvt. Ltd. assessee had not benchmarked the IT and management support charges and had failed to justify the functions rendered by the AE for the payments. The TPO also observed that uncontrolled independent enterprises will not be willing to pay similar charges to any third party. The TPO however while denying that services have been rendered by the AE to the assessee observed that the services received by the AE are incidental being in nature of long association. The TPO applied comparable uncontrolled price ("CUP") as the MAM. The TPO treated the arm's length price of the IT and management support charges as 'Nil' and made downward adjustment of Rs.2,69,17,970/- towards Management Fees.

9.

The DRP, vide its directions dated 21.06.2022, disposed off the objections of the assessee. The DRP upheld the TP adjustment made by the TPO and confirmed the addition towards IT and management support charges. The DRP, however, provided relief with respect to the addition made by the CPC while processing the return of income under Section 143(1) of the Act.

10.

Aggrieved, the assessee has raised this issue before the Tribunal. The assessee has filed paper books comprising of 637 pages. It was submitted that the assessee was in receipt of services from its AEs and the payment made under the head ‘IT and management support charges’ was justified. In this context the learned A.R. relied on the inter company agreement between the assessee and its AEs, which is placed in pages 381 to 386 of the paper book of the assessee, the ledger extracts for the management charges in the books of account of the assessee, sample invoice, various correspondence, list of software applications which were provided by the AEs to the assessee, etc. The learned A.R. submitted that the payment made to the AE was justified and hence treating the same as ‘Nil’ by observing that the assessee had not received any benefit is factually incorrect. The learned A.R. placed reliance on

5 IT(TP)A No. 900/Bang/2022 M/s. Brady Company India Pvt. Ltd. various orders of the Tribunal in support of his contention. The case laws relied by the A.R. are as follows: - i) Ingersoll-Rand (India) Limited ITA No. 228/Bang/2015 – AY 2010-11 ii) Ingersoll-Rand Services and Technologies Pvt Ltd. IT(TP)A No. 89/Bang/2016 – AY 2011-12 iii) Bostik India Private Limited IT(TP)A No. 837/Bang/2016 iv) Cisco Systems Capital (India) Pvt. Ltd. Pvt. Ltd. IT(TP)A No. 801/Bang/2022 11. The learned D.R., on the other hand, relied on the decision of the Chennai Bench of the Tribunal in the case of Lite-On Mobile India (P) Ltd. vs. DCIT reported in (2022) 96 ITR (Trib) 352 (Chennai) and contended that the assessee in the instance case has not produced any proof to show that it was in receipt of services from it AEs. Hence it is stated that the TPO was justified in arriving at ALP of ‘IT and management support’ charges as ‘Nil’.

12.

We have heard the rival contentions and perused the material on record. The assessee claims that it receives IT support from its AE Brady USA. The assessee explains the nature of various services received by it from the AE. In similar fashion assessee claims that it received management support services from its AE, namely Brady Singapore. For the relevant assessment year the payments made under the IT support services to Brady USA is Rs.1,65,75,789/- and management support service fees paid to Brady Singapore was Rs.1,03,42,181/- totalling to Rs. 2,69,17,960/-. Copy of the agreement for IT support services entered between the assessee and Brady USA is placed on record at pages 369 to 380 of the paper book. Copy of the inter company agreement entered into by the assessee with Brady Singapore dated 01.08.2008 is placed on record from pages 381 to 386 of the paper book filed by the assessee.

13.

The Tribunal in assessee’s own case for AY 2014-15 had restored an identical issue to the TPO to determine the ALP of the IT and Management

6 IT(TP)A No. 900/Bang/2022 M/s. Brady Company India Pvt. Ltd. support charges. The payment of IT support services and management support services are pertaining to the agreement dated 01.08.2007 and 01.08.2008, respectively and is binding for AY 2014-15 and also for the relevant assessment year. Therefore, we deem it appropriate to restore this issue to the file of the TPO so that consistency can be maintained. The TPO is directed to examine the issue afresh by taking into account the evidences filed by the assessee in support of its contention that it was in receipt of services from it AEs for making the above said IT and management support services payments. With these observations, we direct the TPO to re-examine the matter in line with the issue already pending before him for AY 2014-15 (restored by the Tribunal in assessee’s own case for AY 2014-15 in IT(TP)A Nos. 103 & 790/Bang/2019, reported in 136 taxmann.com 298). Hence, ground Nos. 3.1 to 3.9 are allowed for statistical purposes.

Corporate Tax Issues (short grant of TDS) (Ground No. 5.1) 14. In the above ground it is contended that the assessee was granted short grant of TDS in the final assessment order to the tune of Rs.2,806/-. The AO is directed to examine this issue. It is ordered accordingly.

15.

In the result, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 16th of March, 2023.

Sd/- Sd/- (Laxmi Prasad Sahu) (George George K.) Accountant Member Judicial Member Bengaluru, Dated: 16th of March, 2023

7 IT(TP)A No. 900/Bang/2022 M/s. Brady Company India Pvt. Ltd. Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) -DRP 4. The CIT - 5. The DR, ITAT, Bengaluru 6. Guard File By Order //True Copy// Assistant Registrar ITAT, Bengaluru n.p.

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