SCHNEIDER ELECTRIC IT BUSINESS INDIA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, LTU, CIRCLE-2, BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against the assessment order passed by Deputy Commissioner of Income-tax Circle 1(1)(1) dated 25.2.2022 u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act consequent to the direction of the Ld. Dispute Resolution Panel (“DRP”) dated 12.1.2022. The assessee has raised following revised grounds of appeal:-

IT(TP)A No.185/Bang/2022 Schneider Electric IT Business India Pvt. Ltd., Bangalore

Page 2 of 17 1. “That on the facts and circumstances of the case and in law, the order passed by the Ld. AO under Section 143(3) read with section 144C(13) read with section 144B of the Act is bad in law arid liable to be quashed to the extent it confirms the additions/ disallowances made in the assessment, order. 2. That the Learned Dispute Resolution Panel ("Ld. DRP") ignored the judicial pronouncements and erred in dismissing the grounds of objections raised by the Appellant and upholding the adjustment proposed by the Ld. AO/ Learned Transfer Pricing Officer ("Ld. TPO") without providing any cogent reasons for the same. 3. That the Ld. AO erred in computation of the demand against the order passed u/s 143(3) r.w.s 144C(13) of the Act. The Ld. AO erred in considering the amount of Tax deducted at source/ Tax collected at source credit ("TDS/TCS credit") to be INR 42,392,755 instead of INR 96,255,133 and INR 43,851 respectively as mentioned in the income tax return of the Appellant. Transfer Pricing 4. That the Ld. AO/ Ld. TPO/ Ld. DRP erred in enhancing the income of the Appellant by INR 1,153,540,461/- pertaining to the contract manufacturing segment that do not satisfy the arm's length principle envisaged under the Income-tax Act, 1961 ("the Act") and in doing so, have grossly erred in: 4.1. erroneously rejecting the economic analysis undertaken by the Appellant in the Transfer Pricing ("TP") documentation maintained by it in terms of section 92D of the Act read with Rule IOD of the Income- tax Rules, 1962 ("Rules");

4.2. conducting a fresh comparability analysis based on the application of additional/ modified filters in determining the arm's length price of contract manufacturing segment and rejecting the filters applied by the Appellant in the TP study; 4.3 erroneously rejecting the audited segmental accounts furnished by the Appellant by arbitrary allocating operating specific expenses on the basis of revenue earned by the Appellant in each segment which were originally allocated by the Appellant on sound allocation keys. Thus, the Ld. AO/ Ld. TPO/ Ld. DRP erred in considering the margin of the Appellant in contract manufacturing segment as 1.79% as against the actual margin of 7.70%:

4.4. Inappropriate acceptance and rejection of companies for benchmarking the contract manufacturing segment;

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Page 3 of 17 4.5. erroneously including certain functionally dissimilar companies/ companies failing quantitative filters on arbitrary/ frivolous grounds;

4.5.1.ehneously including a functionally dissimilar comparable, Amara Raja Power Systems Private Limited, that fails related party filter less than 25% and manufacturing income/sales greater than 75% filter, on arbitrary / frivolous grounds;

4.5.2.Inadvertently including Genus Power Infrastructure Limited, a functionally dissimilar comparable in the final set in place of Genus Innovation Limited, a comparable selected by the Appellant and accepted by the Ld. TPO; 4.6. erroneously excluding certain functionally similar companies on arbitrary/ frivolous grounds; 4.6.1.Inadvertently excluding Genus Innovation Limited, a functionally similar comparable accepted by the Ld. TPO, and including Genus Power Infrastructure Limited in the final set; 4.7. erroneously rejecting the fresh search furnished by the Appellant on a without prejudice basis; 4.8. disregarding the corrected margins of comparable companies submitted by the Appellant; 4.9. disregarding various economic adjustments including working capital adjustment in determining the arm's length profit margin; and 4.10. disregarding judicial pronouncements in India while undertaking the TP adjustment. Corporate tax 5. Disallowance of expenditure towards Corporate Social Responsibility u/s 80G of the Act.

5.1. On the facts and circumstances of the case and the law, the Ld. AO/ Ld. DRP erred in proposing disallowance of INR 24,733,027/- towards claim under section 80G of the Act during the subject year, and holding that the contributions towards Corporate Social Responsibility ("CSR") of the Appellant were not eligible for the said deduction under section 80G of the Act. 5.2. That the Ld. AO/ Ld. DRP failed to appreciate that CSR expenditure is disallowed only under section 37 of the Act and which does not restrict the Appellant from claiming deduction under any other provisions of the Act.

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Page 4 of 17 6. Disallowance of Voluntary Retirement Scheme Claim 6.1. On the facts and circumstances of the case and the law, the Ld. AO/ Ld. DRP erred in disallowing the deduction claimed by the Appellant under 35DDA of the Act and enhancing the income of the Appellant by INR 22,04,576/- 6.2. That the Ld. AO/ Ld. DRP failed to appreciate that, the Appellant had disallowed the entire amount paid under the VRS scheme paid during the year in the Income tax computation of Af 2017-18 and claimed only 1/5th portion of the expense as deduction, in accordance with section 35DDA of the Act. 6.3. That the Ld. AO/ Ld. DRP failed to appreciate the fact that all the requisite conditions mentioned under section 35DDA of the Act for claiming the I/5th portion of VRS, payment as allowance were duly satisfied by the Appellant. 7. Disallowance u/s 14A of the Act 7.1. On the facts and circumstances of the case and the law, the Ld. AO/ Ld. DRP erred in enhancing the income of the Appellant by INR 62,500,000/- under section 14A of the Act read with rule 8D of the Income tax Rules, 1962 ("the Rules"). 7.2. The Ld. AO/ Ld. DRP failed to record proper satisfaction in the impugned assessment order before making disallowances under section 14A(2) of the Act read with and rule 8D of the Rules. 7.3. That the Ld. AO/ Ld. DRP failed to appreciate that no expenditure directly or either indirectly was incurred by the Appellant for earning any income which does not form part of the total income. Accordingly, the provisions of section 14A of the Act read with Rule 8D are not applicable in the instant case. 7.4. That the Ld. AO/ Ld. DRP failed to appreciate that for the purpose of disallowing any expenditure under section 14A of the Act, there should be an actual receipt of income which is not includible in the total income during the relevant previous year. 7.5.That the Ld. AO/ Ld. DRP erred in holding that Section 14A is automatic and it comes into operation as soon as the dividend income is claimed exempt, without taking into cognizance that no dividend income has been earned during the year. As no income has been claimed as exempt, the provisions of Section 14A are not applicable in the instant case. 8. Additional claim— Ind AS adjustment on Preference share — Omission in tax return

IT(TP)A No.185/Bang/2022 Schneider Electric IT Business India Pvt. Ltd., Bangalore

Page 5 of 17 8.1. On the facts and circumstances of the case and the law, the Ld. AO/ Ld. DRP erred in not allowing the Appellant an additional claim on account of Ind AS adjustment on Preference share of Schneider Electric Infrastructure Limited amounting to INR 5,41,28,664/- 8.2.That the Ld. AO/ Ld. DRP failed to appreciate the additional documents submitted by the Appellant during the Assessment proceedings. 9. That the Ld. AO also erred in proposing to initiate penalty proceedings under section 270A of the Act mechanically on the additions made.”

2.1 The activities undertaken by SEITB are summarized as follows: Contract Manufacturing - The assessee procures certain raw materials and components from AEs and third parties which is used in manufacturing of UPS products and accessories and exports them as finished products to its AEs. Solution Business segment - The Company manufactures UPS products locally as per the requirements of the domestic market. For such UPS products, the Company procures battery and other ancillary components domestically and sells the UPS products within the domestic market as an overall package which includes associated sales and warranty support to its customers. It is imperative to note that solution business segment is a third party business segment with no involvement of AEs.

IT(TP)A No.185/Bang/2022 Schneider Electric IT Business India Pvt. Ltd., Bangalore

Page 6 of 17 Distribution segment - SEITB India imports finished products i.e. UPS from its AEs and third party suppliers for resale/ distribution in domestic market. The Company also provides after sale support and warranty support services along with the UPS products sold to its customers.

2.2 A brief summary of the economic analysis conducted by the assessee in TP documentation with respect to the contract manufacturing segment has been encapsulated below:

Table 1: Summary of benchmarking of contract manufacturing segment by Assessee

Arm's length Nature of Profit Level Tested Value of Method No. of margin as international Indicator party transaction applied Comprables per TP (in INR) transaction ("PLI") margin study Transactional Contract Operating Net Margin 2.76% to 7.70% 1758,56,20,609 manufacturing Profit /Cost 7 Method 5.12% (-0P/TC") segment (-TNNIM")

2.3 The summary of adjustments made by the Learned Transfer Pricing Officer ("Ld. TPO") / Learned Assessing Officer ("Ld. AO") in assessment order has been presented in the table 2 and 3 below:

Table 2: Summary of adjustment made in TP order

Arm's length Nature of Tested party Method No. of Adjustment margin as per margin as international P LI applied Comprables in INR per Ld. transaction Ld. TPO TPO Contract '1" 7.75% to ..-\TNMN1 OP/TC 6 1 .79')/0 115,35,40,461 manufacturinu, 9.19% ...: segment Total adjustment in TP order 115,35,40,461 Note: The Ld. TPO has redrawn segmental profitability of the assessee thereby arrived at the margin of 1.79% In contract manufacturing segment via-a-vis 7.70% as computed by the Appellant in the TP documentation.

IT(TP)A No.185/Bang/2022 Schneider Electric IT Business India Pvt. Ltd., Bangalore

Page 7 of 17 Table 3: Summary of adjustments made in final assessment order

S. No. Nature of international transactions/ disallowance [—Adjustment in 1NR Transfer Pricing adjustment 1 As per table 1 above 115,35,40,461 Corporate Tax adjustment 2 Addition on account of deduction u/s 80G of the Act 2,47,33,027 Addition on account of deduction claimed u/s 35DDA of the Act 22,04,576 3 4 Disallowance u/s 14A of the Act 6,25,00,000 Total adjustment in assessment order 124,29,78,064

Summary of Transfer Pricing assessment proceedings 2.4 In the contract manufacturing segment, the Appellant is engaged in the business of manufacturing of UPS products and accessories for which certain raw material and components are imported from its AEs and certain raw materials are sourced locally from third parties in India. SEITB India exports the manufactured UPS products and accessories to its AEs

2.5 During the course of TP assessment proceedings, the Ld. TPO adopted the following approach for benchmarking Appellant's international transactions with respect to contract manufacturing segment: • 1. Fresh search for comparables based on application of additional/ modified filters: The Ld. TPO rejected the economic analysis undertaken by the assessee in its TP documentation and undertook a fresh search based on additional /modified filters. Thus, the Ld. TPO selected a set of 6 companies with a percentile range of OP/TC of 7.75% to 9.19% and median of 8.47% for benchmarking contract manufacturing segment of the assessee.

IT(TP)A No.185/Bang/2022 Schneider Electric IT Business India Pvt. Ltd., Bangalore

Page 8 of 17 2. Fresh search undertaken by the assessee: The Ld. TPO didn't appreciate the fresh search undertaken by the assessee during the assessment proceedings and rejected the same by stating that the comparable proposed by the assessee are not available in the search matrix applied by the Ld. TPO.

2.7 The Ld. DRP in its proceedings held the following: 1. Ld. DRP held that the Ld. TPO was correct in adopting certain filters and rejecting the TP Study of the Assessee and consequently undertaking a fresh benchmarking analysis with respect to contract manufacturing segment.

IT(TP)A No.185/Bang/2022 Schneider Electric IT Business India Pvt. Ltd., Bangalore

Page 9 of 17 3. In respect of the exclusion / inclusion of certain comparable companies, Ld. DRP held that the comparability of a company cannot be determined with regard to the decisions of the assessee bodies rendered for some other year and thus, rejected the Assessee's plea of inclusion/exclusion of certain comparable companies. 2.8 The Ld. DRP, after hearing the matter, dismissed all the objections raised by the Assessee and proceeded to uphold the adjustments proposed by the Ld. TPO/ Ld. AO without providing any cogent reasoning for the same. 2.7 Pursuant to the directions passed by the Ld. DRP, the Ld. AO issued the final assessment order and the accompanying notice of demand confirming the additions proposed in the order on February 25, 2022. 2.8 Aggrieved by the final order, the Assessee has filed an appeal before the Hon'ble Tribunal vide application dated March 23, 2022. The Assessee also filed an application for keeping the demand recovery proceedings in abeyance vide application filed before the Ld. Assessing Officer on March 23, 2022, and the Hon'ble ITAT on March 24, 2022.

2.9 The Assessee does not agree with the approach adopted by the Ld. TPO/ Ld. DR' Ld. AO and submits that the Ld. TPO/ Ld. DRP/ Ld. AO have erred in rejecting the arm's length computation of the assessee as detailed in the TP documentation.

IT(TP)A No.185/Bang/2022 Schneider Electric IT Business India Pvt. Ltd., Bangalore

Page 10 of 17 5. Ground No.4.3 is reproduced below:-

“4.3 erroneously rejecting the audited segmental accounts furnished by the Appellant by arbitrary allocating operating specific expenses on the basis of revenue earned by the Appellant in each segment which were originally allocated by the Appellant on sound allocation keys. Thus, the Ld. AO/ Ld. TPO/ Ld. DRP erred in considering the margin of the Appellant in contract manufacturing segment as 1.79% as against the actual margin of 7.70%:”

5.1 The Ld. A.R. submitted that assessee had prepared and maintained segmental financials on the basis of Transfer Pricing principle, wherein revenue and costs are allocated in each of the segment on the basis of sound allocation keys. According to the Ld. A.R., basis of allocating the revenue and costs in segmental financials is as follows:- 1. Revenue from operation is identified on the basis of actual sales recorded under each sub-segment 2. Direct cost of sales/installation and commissioning/AMC services is identified with reference to the product references (codes-wise) bill of materials in the system of respective department i.e. of actuals. 3. Operating specific expenses have been allocated on the basis of relevant activity i.e. actuals. 4. Common expenses that cannot be identified directly as are allocated based on sales ratio. According to the assessee, it has followed the OECD guidelines and the segmental accounts are prepared on cogent basis which cannot be rejected without providing any reason for rejecting the same. 5.2 On the other hand, ld. D.R. submitted that there was no finding by the Ld. DRP on this issue. Hence, this ground shall not be entertained by the Tribunal as it is not emanated from the direction of the Ld. DRP.

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Page 11 of 17 6. We have heard the rival submissions and perused the materials available on record. Admittedly, assessee has raised the ground No.2(c) before Ld. DRP as follows:- “(c) Erroneously rejecting the audited segmental accounts furnished by the Assessee by arbitrary allocating operating specific expenses on the basis of revenue earned by the assessee in each segment which were originally allocatd by the assessee on sound allocation keys. Thus, the Ld. AO/Ld. TPO erred in considering the margin of the assessee in contract manufacturing segment as 1.79% as against the actual margin of 7.70%.”

6.1 However, there was no specific finding by Ld. DRP on this issue. Hence, in the interest of justice, it is appropriate to remit this issue to the file of Ld. DRP to give specific direction on the above issue raised by the assessee before Ld. DRP as well as before us.

4.5.1.ehneously including a functionally dissimilar comparable, Amara Raja Power Systems Private Limited, that fails related party filter less than 25% and manufacturing income/sales greater than 75% filter, on arbitrary / frivolous grounds;

4.5.2.Inadvertently including Genus Power Infrastructure Limited, a functionally dissimilar comparable in the final set in place of Genus Innovation Limited, a comparable selected by the Appellant and accepted by the Ld. TPO; 4.6. erroneously excluding certain functionally similar companies on arbitrary/ frivolous grounds; 4.6.1.Inadvertently excluding Genus Innovation Limited, a functionally similar comparable accepted by the Ld. TPO, and including Genus Power Infrastructure Limited in the final set;

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Page 12 of 17 7.1 The crux of the above grounds is with regard to the inclusion and exclusion of certain comparables.

“d. Erroneously including certain functionally dissimilar companies on arbitrary/frivolous grounds;

e. Erroneously excluding certain functionally similar companies on arbitrary/frivolous grounds;

f. Erroneously rejecting the fresh search furnished by the assessee on a without prejudice basis.”

8.1 In view of this, we remit this issue to the file of Ld. DRP to specify the specific comparables which are to be included or excluded before the lower authorities. The lower authorities has to decide the issue afresh giving opportunity of hearing to the assessee.

“4.8. disregarding the corrected margins of comparable companies submitted by the Appellant”

9,1 We have remitted the issue relating to the rejection of segmental financials and selection of comparables to the file of Ld. DRP for fresh consideration. This issue is also remitted to Ld. DRP to consider the correct margin of the comparables. 10. Ground No.4.9 of the assessee’s appeal is reproduced below:-

“4.9. disregarding various economic adjustments including working capital adjustment in determining the arm's length profit margin.”

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Page 13 of 17 10.1 We remit this issue also to the file of Ld. DRP to grant actual working capital adjustment to the assessee in accordance with law.

Corporate Tax:

5.1. On the facts and circumstances of the case and the law, the Ld. AO/ Ld. DRP erred in proposing disallowance of INR 24,733,027/- towards claim under section 80G of the Act during the subject year, and holding that the contributions towards Corporate Social Responsibility ("CSR") of the Appellant were not eligible for the said deduction under section 80G of the Act. 5.2. That the Ld. AO/ Ld. DRP failed to appreciate that CSR expenditure is disallowed only under section 37 of the Act and which does not restrict the Appellant from claiming deduction under any other provisions of the Act. 11.1 The contention of the Ld. A.R. is that the assessee has disallowed the CSR expenditure u/s 37 of the Act and requested that the same may be considered for deduction u/s 80G of the Act.

11.2 We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that the claim of the assessee has to be examined by the Ld. DRP on production of the requisite details by the assessee. The Ld. DRP also directed to consider the order of the Tribunal in the case of First America (India) Pvt. Ltd. in ITA No.1762/Bang/2019, wherein held that “assessee cannot be denied benefit of claim of deduction under Chapter VIA of the Act

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Page 14 of 17 in relation to payments, which form part of CSR expenses since that would lead to double disallowance, which is not the intention of legislature.” Accordingly, this issue is remitted to the file of Ld. DRP for fresh consideration.

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Page 15 of 17 7. Disallowance u/s 14A of the Act 7.1. On the facts and circumstances of the case and the law, the Ld. AO/ Ld. DRP erred in enhancing the income of the Appellant by INR 62,500,000/- under section 14A of the Act read with rule 8D of the Income tax Rules, 1962 ("the Rules"). 7.2. The Ld. AO/ Ld. DRP failed to record proper satisfaction in the impugned assessment order before making disallowances under section 14A(2) of the Act read with and rule 8D of the Rules. 7.3. That the Ld. AO/ Ld. DRP failed to appreciate that no expenditure directly or either indirectly was incurred by the Appellant for earning any income which does not form part of the total income. Accordingly, the provisions of section 14A of the Act read with Rule 8D are not applicable in the instant case. 7.4. That the Ld. AO/ Ld. DRP failed to appreciate that for the purpose of disallowing any expenditure under section 14A of the Act, there should be an actual receipt of income which is not includible in the total income during the relevant previous year. 7.5.That the Ld. AO/ Ld. DRP erred in holding that Section 14A is automatic and it comes into operation as soon as the dividend income is claimed exempt, without taking into cognizance that no dividend income has been earned during the year. As no income has been claimed as exempt, the provisions of Section 14A are not applicable in the instant case. 13.1 The argument of the Ld. A.R. is that assessee has no exempted income as such there cannot be any disallowance u/s 14A of the Act.

13.2 The Ld. D.R. submitted that even though there is no expenditure has been incurred, AO has to presume that there was incurring of expenditure u/s 14A read with Rule 80D(2) of the Income Tax Rules and for that purpose he relied on the order of the Tribunal in the case of Technopark Advisors Ltd. Vs. ACIT reported in 50 SOT 31 (Del.)

13.3 We have heard the rival submissions and perused the materials available on record. In our opinion, if there is no exempted income, there cannot be any disallowance u/s 14A read with Rule 8D of the I.T. Rules. Accordingly, we remit this issue to the file of Ld.

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Page 16 of 17 DRP to examine the file of financials of the assessee and if there is no exempted income, there cannot be any disallowance u/s 14A read with Rule 8D of the I.T. Rules or if there is no exempted income, there cannot be any disallowance.

14.1 We have heard the rival submissions and perused the materials available on record. The assessee has made claim on this count in revised return. The Ld. DRP has directed the AO to verify the validity of revised return so claimed to have been filed by the assessee and consider the same if the revised return is valid return as per the provisions of the Act for computing total income of the assessee. In our opinion, appellate authority could entertain the claim of assessee, even though no revised return is filed. Hence, we direct the Ld. DRP to examine this issue afresh.

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Page 17 of 17 15. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 1st Sept 2022.

Sd/- Sd/- (N.V. Vasudevan) (Chandra Poojari) Vice President Accountant Member

Bangalore, Dated 1st Sept, 2022. VG/SPS

Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order

Asst. Registrar, ITAT, Bangalore.