Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN, VICE PRESEIDENT & SHRI PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESEIDENT AND SHRI PADMAVATHY S, ACCOUNTANT MEMBER
IT(TP)A No.2680/Bang/2017 Assessment year : 2013-14
M/s. TE Connectivity India Private Vs. The Deputy Limited, Commissioner of “TE Park”, 22B, Doddanekundi 2nd Income-tax, LTU, Phase, Circle 1, Industrial Area, Bengaluru. Whitefield Road, Bangalore – 560 048. PAN: AABCT 7374C APPELLANT RESPONDENT
Appellant by : Shri Sumeet Khurana, CA Respondent by : Shri V.S. Chakrapani, CIT(DR)(ITAT), Bengaluru.
Date of hearing : 23.06.2022 Date of Pronouncement : 18.07.2022
O R D E R Per Padmavathy S., Accountant Member This appeal is against the final assessment order of the AO passed u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [the Act] dated 9.10.2017 in pursuance of the DRP directions for the assessment year 2013-14.
IT(TP)A No.2680/Bang/2017 Page 2 of 50
The assessee is a wholly owned subsidiary of Tyco Electronics Singapore Pte Ltd. The assessee manufactures connectors, relays, sensors, switches, terminals and cable interconnects sold in India as well as exported to Tyco group companies worldwide. It also manufactures fibre optics cable, which are entirely exported to Tyco group. The assessee also carried out licensed manufacturing on behalf of its wholly owned subsidiary.
As far as the transactions of manufacture of inter connectors, fibre optical wires carried out by the assessee on behalf of its AE is concerned, it is not in dispute that it is an international transaction to which the provisions of section 92 of the Act apply. The assessee also trades in AMP Netconnect cables and switches which are used in providing IT networking solutions to commercial premises. The assessee buys interconnectors from Tyco group and sells them to auto ancillaries in India and to various other industrial schemes. The assessee is also engaged in sourcing of raw materials and components from Asia-Pacific region for Tyco group. These services are provided based on service agreement entered with Tyco Plastics LP.
The international transactions entered into by the assessee with its AE are broadly classified into two segments; Contract manufacturing segment and License manufacturing segment. In respect of the assessee’s claim that the price received by the assessee from its AE for the services rendered in the form of carrying out license manufacturing activity and contract manufacturing activity are
IT(TP)A No.2680/Bang/2017 Page 3 of 50
at arm’s length, the assessee filed a TP study adopting Transactional Net Margin Method [TNMM] as the most appropriate method for determination of the Arm’s Length Price (ALP). The Profit Level Indicator (PLI) chosen for the purpose of comparison of the assessee’s profit margin with that of all the comparable companies was Operating Profit to Operating Revenue (OP/OR) for License manufacturing segment and Operating Profit to Operating Cost (OP/OC) for Contract manufacturing segment.
The assessee filed return of income on 30.11.2013 admitting an income of Rs.83,73,94,460. The case was selected for scrutiny and notice u/s. 143(2) of the Act was issued. As the international transaction of the assessee with its Associated Enterprise (AE) exceeded Rs.15 crores, the case was referred to the TPO to determine the ALP. The TPO made several TP adjustments to the tune of Rs.50,21,44,842. The AO passed the draft assessment order incorporating the TP adjustment and in addition, made the following disallowances towards corporate tax:-
(i) Disallowance of depreciation – Rs.4,39,35,813 (ii) Disallowance of commission payment – Rs.32,11,54,279 (iii) Disallowance of liquidated damages – Rs.20,33,797 (iv) Disallowance of amount deducted on slump sale – Rs.94,70,000. 6. On objections raised by the assessee, the DRP confirmed the TP adjustment as well as the corporate tax additions/disallowances made
IT(TP)A No.2680/Bang/2017 Page 4 of 50
by the AO. In pursuance thereof, the AO passed the final assessment order. Aggrieved, the assessee is in appeal before the Tribunal.
The assessee has raised 32 grounds.
(i) Ground No. 1, 2 & 3 are general grounds and does not warrant separate adjudication. (ii) Ground No. 4 was not pressed and dismissed as not pressed. (iii) Ground Nos. 5 & 7 pertain to inclusion & exclusion of comparables in the license manufacturing segment. (iv) Ground No.6 pertains to inclusion & exclusion of comparables in the contract manufacturing segment. (v) Ground No.8 is regarding the working capital adjustment. (vi) Ground No.9 is regarding the TP adjustment made towards intra-group services. (vii) Ground No.10 is with regard to non-grant of proportionate adjustment ignoring that the TP adjustment is to be restricted to international transactions only. (viii) Ground Nos. 11 to 18 relate to disallowance of depreciation allowance. (ix) Ground Nos.19 to 24 relate to disallowance of special discount u/s. 40(a) to the dealers/customers. (x) Ground Nos.25 to 27 is regarding disallowance of liquidator damages.
IT(TP)A No.2680/Bang/2017 Page 5 of 50
(xi) Ground Nos.28 to 30 relate to disallowance made against consideration received on slump sale. (xii) Ground Nos.31 & 32 are of consequential nature. 8. First we will take up the adjustment made by the TPO in the License manufacturing segment. The segmental financials of the assessee as per P&L account are as follows:-
Particulars Manufacturing interconnectors, fibre optical wires Sales & Service income 500,81,58,396 Cost materials 282,39,65,287 Employee expenses 70,93,73,282 Other operating expenses 104,17,13,267 Depreciation 15,65,44,543 Less: Total cost 473,15,96,380 Operating profit 27,65,62,018 Operating profit/Sales 5.52%
The assessee selected the following comparables and arrived at an average margin of 5.80% on sales
S.No. Name of the company OP/OR (%) 1. Akasaka Electronics Ltd 3.63 2. Centum Electronics Lts 5.66 3. Circuit Systems (India) Ltd 2.98 4. Cosmo Ferrites Ltd 8.78 5. EasunReyrolle Ltd 5.39 6. Incap Ltd 2.87 7. Kaycee Industries Ltd 5.39 8. MMG India Pvt Ltd 6.21 9. Ruttonsha International Rectifier Ltd 11.29 Average 5.80
IT(TP)A No.2680/Bang/2017 Page 6 of 50
Since the OC/OR of the assessee is within +/- 5% of the average margin of the comparables, the assessee concluded that the international transaction entered into with the AE is within arm’s length price.
The TPO rejected the comparables chosen by the assessee on the ground of negative PBIT (Sl.No.1 to 4 & 8), non-payment of Royalty (Sl.No.5) and data not being available in public database (Sl.No.6,7 &9). The TPO conducted independent search to arrive at the following comparables resulting in a margin of 9.9%:-
S.No. Name of the company OP/OR (%) 1. JtekSona Automotive India Ltd. 6.20 2. Roots Industries India Ltd. 8.35 3. RoopTelsonicUltrasonix Ltd. 15.19 4. Remi Elektrotechnik Ltd. 9.87 Average 9.90
Therefore the TPO made an adjustment in this segment as given below:-
(in Rs.) Operating revenue 500,81,58,396 Arm’s length margin 9.90% Arm’s length Cost (ALP) @ 109.90% of 550,36,60,772 operating cost Revenue as per books 73,15,96,380 Difference being adjustment u/s. 92CA 77,20,64,392
The assessee submitted before the DRP that the TPO rejected the comparables chosen by it on the ground that they had a negative
IT(TP)A No.2680/Bang/2017 Page 7 of 50
Profit Before Interest & Tax [PBIT]. The negative margin of those comparables was only in one year and they had profit in other year. It was submitted that persistent loss is the criteria and if the companies chosen incur persistent loss for three years, then only the same could be excluded and not otherwise. The assessee did not press for inclusion of M M G India Pvt. Ltd. before the DRP. The DRP rejected the claim of the assessee. Aggrieved, the assessee is in appeal before the Tribunal raised the following grounds:-
“5. That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/learned TPO in rejecting certain comparable companies listed below, which were identified by the Appellant, by using the negative Profit before Interest and Tax (`PBIT') filter as a comparability criterion. • Akasaka Electronics Limited • Centum Electronics Limited • Circuit Systems (India) Limited • Cosmo Ferrites Limited • MMG India Private Limited
That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/learned TPO in accepting/ rejecting certain companies with respect to the Licensed Manufacturing segment based on unreasonable comparability criteria. Erroneously rejected by the learned TPO/ learned DRP, sought to be included by the Appellant • Incap Limited • Kaycee Industries Limited • Ruttonsha International Rectifier Limited • Easun Reyrolle Limited
IT(TP)A No.2680/Bang/2017 Page 8 of 50
Erroneously accepted by the learned TPO/ learned DRP, sought to be rejected by the Appellant • Jtekt Sona Automotive India Limited • Roots Industries India Limited • Roop Telesconic Ultrasonix Limited. • Remi Elektrotechnik Limited.” 13. During the course of hearing the ld AR did not press for the following
(i) Inclusion of MMG India Private Limited and Easun Reyrolle Limited (ii) Exclusion of JtekSona Automotive India Ltd., Roots Industries India Ltd., and Remi Elektrotechnik Ltd. 14. Before us, the ld. AR submitted that the coordinate Bench of the Tribunal in the case of Affinity Express India Pvt. Ltd. in ITA No.107/PN/2012 dated 9.3.2016 has held that only a company that is incurring persistent loss for 3 consecutive years cannot be considered for comparability. In the present case, four comparables have profits in certain years as submitted before the DRP as under:-
S.No. Name of the comparable Operating profit Remarks margin for FY 2012-13 2011-12 1. Akasaka Electronics Ltd. 0.54% Does not 2. Centum Electronics Ltd. 5.45% satisfy 3. Circuit Systems (India) Ltd. 2.64% consistent 4. Cosmo Ferrites Ltd. 4.06% loss making 5. MMG India Pvt. Ltd. 8.33% filter. Average 9.90
The ld. DR relied on the orders of the lower authorities.
IT(TP)A No.2680/Bang/2017 Page 9 of 50
We notice that the Hon’ble Tribunal Pune Bench in the case of Affinity Express India Pvt. Ltd. (supra) has held as follows:-
“13.2 The contention of the assessee is that the said companies cannot be rejected merely on the ground that in a particular year, the companies have incurred losses. We find merit in the contention of the ld. AR of the assessee. A comparable can be rejected only if it is a consistent loss making company and the consistent loss making company is one which sustains losses in the three consecutive financial years. The Pune Bench of the Tribunal in the case of M/s. Bobst India Private Limited Vs. DCIT (supra) has held as under: “5.4 Further, we find in the case of Goldman Sachs (India) Securities Pvt. Ltd. vs. ACIT, which has been decided by ITAT, Mumbai ‘K’ Bench, wherein the TPO rejected Capital Trust as comparable because of two out of last three years taken into consideration. Capital Trust was in the red and not because the nature of business had any variance with that of the assessee. The Tribunal looked into the business segment of Capital Trust and found that in the foreign consultancy segment with which the Bench was concerned in the year 2004-05, it had operative profit / operative cost at 27.25%. Since the nature of services rendered by comparable were exactly on similar lines as that of the assessee, though, during the year, it was in the loss could not be disqualified as nonlegitimate comparable. The Tribunal drew strength from Brigade Global services (supra) for reaching this conclusion and held that the assessee had rightly taken Capital Trust as valid comparable and the Revenue authorities have erred in excluding the same. A similar view has been taken by ITAT, Mumbai ‘K’ Bench in the case of Temasek Holdings Advisors vs. DCIT. In sum and substance, all the above cases is that the company
IT(TP)A No.2680/Bang/2017 Page 10 of 50
making persistent loss for past 3 years is not good comparable. According to us, when loss making company has been selected for comparison in TP study for necessary, which is profit making one, there is a need for more attention qua the conditions prescribed in clause (a) to (d) of Rule 10B(2) of IT Rules, 1962 for an ultimate judgment of comparability of impugned transaction . So, the persistent loss making means continuous loss making for more than 3 years but in the case before us i.e. Stovec has earned a margin of 2.39% in comparable segment in F.Y. 2003- 04. Hence, it could not be considered as loss making, so the same should be excluded for computing operative margin of comparable companies for arriving at ALP in relation to international transactions pertaining to EOU operations. The Assessing Officer is directed accordingly.” 14. The contention of the Revenue is that results of the aforesaid two comparable entities are on the extreme negative side. Therefore, they should not be considered. The Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT (supra) after considering various decisions of the Tribunal and the judgment of division bench of the Hon'ble Delhi High Court in the case of CIT Vs. Mentor Graphics (Noida) (P.) Ltd. reported as 354 ITR 586 concluded as under: “44. a. The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 108(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable.”
IT(TP)A No.2680/Bang/2017 Page 11 of 50
In the case of Cummins Turbo Technologies Limited Vs. DDIT (International Taxation) (supra) the Co-ordinate Bench of the Tribunal observed that where the assessee has taken super loss making companies in the list of comparables. The burden is on the TPO to prove that such comparable companies are consistent loss making companies. The relevant extract of the findings of Tribunal are as under: “14. We find that in respect of the selection of the comparables, the Tribunal has taken the consistent stand that as the super profit companies should not be included, the same way, super loss making companies should also be excluded. Though we agree with the TPO that some of the comparables for the purpose of PLI adopted by the assessee are showing the loss, but the burden is on the TPO to prove where those companies are consistently loss making companies. Moreover, except unsupported reasoning, no data has been brought on record by the TPO for excluding the comparables selected by the assessee in the Transfer Pricing study report. We, therefore, find no justification to the adjustment made u/s.92CA(3) of the Act. We accordingly delete the same. In the result, relevant grounds are allowed.” 16. Thus, in view of the fact that the comparables F I Sofex Limited and Fortune Informatics Limited although were having loss in the year of comparison but whether they were consistent loss making companies has not been ascertained by the TPO before rejecting the same. A company is said to be bad comparable if it is a consistent loss making entity. Accordingly, we are of the opinion that this issue needs a revisit to the Assessing Officer. The Assessing Officer after considering the submissions of the assessee and documents on record shall decide the issue afresh in the light of the decisions discussed above. Accordingly, this ground of appeal of the assessee is allowed for statistical purpose.”
IT(TP)A No.2680/Bang/2017 Page 12 of 50
In the given case, we notice that the three of the comparable companies in the FY 2011-12 & one company in 2012-13 and have earned profits and therefore following the ratio laid down in Affinity Express India P Ltd (supra), we hold that these companies should be included for the purpose of comparability and computation of ALP.
The other companies sought for inclusion vide ground No.7 by the assessee are Incap Ltd., Kaycee Industries Ltd. & Ruttonsha International Rectifier Ltd. The TPO rejected the above companies on the ground that there is no data available with respect to these companies in the public domain. In the objections raised before the DRP, the assessee submitted that at the time of TP documentation the details of these companies were extracted from the public domain and furnished before the TPO and prayed for its inclusion before the DRP.
The DRP without giving any reasons and not appreciating the real issue rejected the submissions of the assessee and confirmed the TPO’s order.
Before us, the ld. AR submitted that the relevant financial statements of the comparable companies for AY 2012-13 is available in the public domain and same was submitted before the TPO [pg. 229 of PB] and the lower authorities did not examine the factual submissions of the assessee while rejecting the claim of the assessee. The ld AR also submitted that these companies are functionally comparable with the assessee which can be evidenced from the Annual Reports as submitted before the lower authorities viz., In Cap Ltd (Pg
IT(TP)A No.2680/Bang/2017 Page 13 of 50
409 of PB), Kaycee Industries (Pg 480 of PB) and Ruttonsha International Rectifier Ltd. (Pg 522 of PB)
The ld. DR supported the orders of the lower authorities.
We have considered the rival submissions and perused the material on record. We notice that the TPO/DRP have not examined the facts pertaining to the claim of the assessee for inclusion of the above three comparables and have just rejected the same on the basis that no data is available in the public domain. We also notice that the assessee has submitted the financial statements of these companies from the public domain before the lower authorities. In view of this, we remit this issue back to the TPO/AO to take into consideration the details submitted by the assessee and also verify the data from public domain and decide the issue of comparability of these companies in accordance with law, after providing reasonable opportunity of being heard to the assessee.
The next issue relates to exclusion of Roop Telsconic Ultrasonix Ltd. The TPO while rejecting the comparables of the assessee made an independent search and included Roop Telsconic Ultrasonix Ltd. as comparable. The assessee submitted that this company is engaged in the manufacture of ultrasonic equipments which is different from the cable coils and connectors manufactured by the assessee. However, the TPO rejected the contention of the assessee stating that this company is engaged in the manufacture of electronic component/instrument.
IT(TP)A No.2680/Bang/2017 Page 14 of 50
Before the DRP, the assessee reiterated the submissions made before the TPO and also submitted that this company is functionally different from the assessee and same cannot be included. The assessee also submitted the extract of P&L account to support its contention. The DRP, however, upheld the order of the TPO.
Before us, the ld. AR submitted that Roop Telsconic Ultrasonix Ltd. is engaged in a product manufacture of ultrasonic equipments, whereas the assessee is manufacturing components, switches, cables, relays and connectors. He drew our attention to relevant extract of P&L account of this company at Pg.231 of PB to submit that the product sold by that company mainly consist equipments. Therefore there was no functional comparability between the assessee and that company and therefore it has to be excluded from the comparables.
The ld. DR relied on the orders of the lower authorities.
We have considered the rival submissions and perused the material on record. Before we go into the facts, we will look at the Rule 10B (1) (d) which states as under
10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— ****** (e) transactional net margin method, by which,—
IT(TP)A No.2680/Bang/2017 Page 15 of 50
(i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction];
(2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:—
(a) the specific characteristics of the property transferred or services provided in either transaction;
IT(TP)A No.2680/Bang/2017 Page 16 of 50
(b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 28. We notice that the P&L account of Roop Telsconic Ultrasonix Ltd. shows that it manufacture consists of ultrasonic equipments which support the claim of the ld. AR that it is into product manufacturing. In determining the degree of comparability between controlled and uncontrolled transactions, it is necessary to compare the significant risks that could affect prices or profits. The risk involved for a company involved in manufacturing of equipments would be significantly different from the component manufacturing company. The assessee is a manufacturer of components and therefore cannot be compared with an equipment manufacturing company as per the principle laid down in Rule 10B(2)(b). In view of the above discussion, we hold that Roop Telsconic Ultrasonix Ltd. is functionally different from the assessee and cannot be included as a comparable. It is directed to be excluded from the comparables.
IT(TP)A No.2680/Bang/2017 Page 17 of 50
Contract manufacturing segment
The segmental financials of the assessee in contract manufacturing segment are as follows:-
Particulars Tools manufacturing division Sales & Service income 36,20,33,053 Cost materials 21,67,97,561 Employee expenses 4,82,32,767 Other operating expenses 7,44,81,454 Depreciation 1,81,96,933 Less: Total cost 35,77,08,715 Operating profit 43,24,338 Operating profit/Sales 1.21%
The assessee selected two comparables and arrived at average margin of 4.22% to conclude that the margin of the contract manufacturing segment is within the arm’s length as follows:-
S.No. Name of the company OP/OC (%) 1. Electronica Machine Tools Ltd. 4.69 2. Polymechplast Machines Ltd. 3.75 Average 4.22
The TPO rejected the above comparables and after fresh search chose the following 4 comparables:-
IT(TP)A No.2680/Bang/2017 Page 18 of 50
S.No. Name of the company OP/OC (%) 1. Sulzer India Ltd. 7.57 2. Vikram Industries Ltd. 6.79 3. United Drilling Tools Ltd. 4.66 4. T & I Global Ltd. 4.63 Average 5.91
Accordingly the TPO proposed the TP adjustment of Rs.1,68,16,247 as follows:-
(in Rs.) Operating cost 35,77,08,715 Arm’s length margin 5.91% Arm’s length Cost (ALP) @ 105.91% of 37,88,49,300 operating cost Revenue as per books 36,20,33,053 Difference being adjustment u/s. 92CA 1,68,16,247
The assessee has raised ground No.6 as follows:-
“6. That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/learned TPO in accepting/ rejecting certain companies with respect to the Contract Manufacturing segment based on unreasonable comparability criteria. Erroneously rejected by the learned TPO/ learned DRP, sought to be included by the Appellant • Electronica Machine Tools Limited • Polymechplast Machines Limited Erroneously accepted by the learned TPO/ learned DRP, sought to be rejected by the Appellant • Vikram India Limited • T & I Global Limited
IT(TP)A No.2680/Bang/2017 Page 19 of 50
The inclusion of Polymechplast Machines Ltd. was not pressed during the course of hearing. As regards inclusion of Electronica Machine Tools Ltd., the TPO rejected it stating that data is not available in the public domain and that the company has different year ending. The assessee submitted before the TPO that the annual report is available in the public domain and furnished a copy of the same before him. It was submitted that the company is engaged in the manufacture of machine tools and functionally comparable to the assessee. In this regard, the assessee submitted the disclosure of principal products of the company. However, the TPO rejected the assessee’s contentions which was upheld by the DRP.
Before us, the ld. AR reiterated the submissions made before the lower authorities to contend that data of this company is very much available in the public domain and the finding of the TPO that the company has a different year ending is not factually correct.
We notice that this company is into manufacture of machine tools as can be seen from the disclosure of principal product and services as given below:-
IT(TP)A No.2680/Bang/2017 Page 20 of 50
[Ref: P&L account of Electronica – Pg. 250]
IT(TP)A No.2680/Bang/2017 Page 21 of 50
We also notice that the lower authorities have not taken into consideration the submissions and details produced by the assessee and have rejected the claim based on incorrect facts. In view of this, we remit this issue back to the AO/TPO to take into consideration the various details submitted by the assessee, analyse the data from the public domain and for fresh decision in accordance with law, after providing opportunity of being heard to the assessee.
The ld. AR did not press for exclusion of T&I Global Ltd. during the course of hearing. As regards exclusion of Vikram India Ltd., the TPO after a fresh search of comparables included it as comparable company on the ground that this company is into manufacture of machine tools. The assessee submitted before the DRP that this company is engaged in manufacture of processing machinery tools and spare parts and accessories and also involved in trading activities. The highest contributing product as disclosed by this company is from the manufacture of machineries that constitute 50% of total revenue and therefore it is functionally different from that of the assessee which requires to be excluded. The DRP upheld the order of the TPO.
Before us, the ld. AR submitted that Vikram India Ltd. is into manufacture of agricultural machineries which are used for tea, rice, coconut and other plantation industries and the company is also involved in trading activities. Hence this company is not functionally comparable with the assessee.
IT(TP)A No.2680/Bang/2017 Page 22 of 50
We notice that Vikram India Ltd. is engaged in the business of manufacture and sale of complete range of processing machinery, tools, spare parts and accessories and is also involved in trading activities as seen from the disclosure of principal product or services of this company as under:-
As per Rule 10B of the Income Tax Rules, which we have discussed in the preceding paragraphs, the comparability of the companies should be made with respect to functions, assets and risks. In the given case, Vikram India. Ltd. which is into manufacturing activities is not functionally comparable with the assessee and therefore, we delete the inclusion of this company from the comparables.
IT(TP)A No.2680/Bang/2017 Page 23 of 50
Ground No.8 reads as follows:-
“8. That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/ learned TPO in not providing working capital adjustment in relation to the Contract Manufacturing segment.” 43. The TPO was of the view that the assessee is a captive unit remunerated on cost plus basis and the cost of working capital towards advances received from the AE is NIL and rejected the working capital adjustment in relation to contract manufacturing segment. The DRP confirmed the order of the TPO.
We notice that similar issue of working capital adjustment came up for consideration before the coordinate Bench of the Tribunal in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No.1939/Bang/2017 dated 31.10.2018, wherein it was held as under:-
“15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons:
(i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore
IT(TP)A No.2680/Bang/2017 Page 24 of 50
proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore nothing turns on the decision relied upon by the CIT (A) in the impugned order. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the Assessee or the Department to show what is the Arm's Length Price. The data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital
IT(TP)A No.2680/Bang/2017 Page 25 of 50
adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable
IT(TP)A No.2680/Bang/2017 Page 26 of 50
uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of net profit margin in the open market. It is not the case of the CIT (A) that differences in working capital requirements of the international transaction and the uncontrolled comparable transactions is not a difference which will materially affect the amount of net profit margin in the open market. If for reasons given by CIT (A) working capital adjustment cannot be allowed to the profit margins, then the comparable uncontrolled transactions chosen for the purpose of comparison will have to be treated as not comparable in terms of Rule 10B(3) of the Rules, which provides as follows: "(3) An uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences." 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly.”
IT(TP)A No.2680/Bang/2017 Page 27 of 50
Respectfully following the above decision of the Tribunal, we direct the AO/TPO to allow working capital adjustment claimed by the assessee.
Ground No. 9 raised by the assessee reads as follows:-
“9.a) That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/ learned TPO in arbitrarily disallowing the entire payment towards IS Charges of INR 269,516,933. b) That the learned DRP erred in upholding the view of the learned AO/ learned TPO in concluding that Information services were not rendered by the Associated Enterprise (`AE') to the Appellant. c) That the learned DRP erred in upholding the approach of the learned AO/ learned TPO in rejecting the aggregated Transactional Net Margin Method (`TNMM') analysis undertaken by the Appellant in its TP Study and instead using the Comparable Uncontrollable Price (`CUP') method to determine the arm's length price of this international transaction. d) That the learned DRP erred in law and in facts, in upholding the approach of the learned AO/ learned TPO in adjudicating on the legitimate need of the business and the quantification of expenses on the principles of arm's length.” 47. Identical issue came up for consideration in the assessee’s own case for AY 2014-15 and the Tribunal vide order dated 25.02.2022 in IT(TP)A No.3373/Bang/2018 held as under:-
“14. Grounds 9 to 12 of the concise grounds of appeal are with regard to determination of ALP in respect of Information Service (IS) charges and corporate service charges Segment. The assessee paid a sum of Rs.33,41,55,226/- to its AE. The assessee submitted that it received IS services from Tyco Electronics Corporation,
IT(TP)A No.2680/Bang/2017 Page 28 of 50
USA, an AE, for which it made the payment. TE Group and its overseas entities, during the year under consideration, was in the business of manufacturing and distributing products and systems for a broad set of markets namely (a) Electronic components, (b) Network solutions, (c) Wireless Systems and (d) Undersea telecommunications. TE Group, being a global company, present in multiple countries, is required to have an integrated approach in its operations wherein the requirement of an ERP implementation arises. As TE Group did not have a uniform pre-existing ERP package that could cater to multiple entities having varying modules, hence the requirement of consistent ERP for the Group as a whole, which was decided to be SAP worldwide. Given the use of such services across the various entities in the Group, the costs pertaining to the same were charged to the respective entities based on the extent of the utilization. ‘TE US' IT shared services center ("TEIS Shared Services organization') is the global organization that provides information technology ("IT') services to the TE Group entities worldwide. Predominant part of the activities in the TEIS Shared Services organization resides in Harrisburg, Pennsylvania. However, it also has presence in various TE entities in Germany, Singapore, Brazil and Hong Kong. The costs incurred by the TEIS Shared Services organization are charged to beneficial legal entities. The IT service expenses of the non-US entities, referred above, being part of the TEIS Shared Services organization are first charged back to TE US and are then included in the monthly IT services charge-outs by TE US. Your good self would note that TE US cross-charges to the global TE affiliates, including TECIL for IT services. The services rendered by TE US to its various AEs (including TECIL) primarily comprised of (i) IT infrastructure and (ii) other auxiliary services. It was also submitted that during FY 2005-06 and 2006-07, TE Group was in the process of integrating the various affiliates globally through a single Enterprise Resource Program ("ERP") for better management and control of operations. As TE Group had acquired varied business operations globally,
IT(TP)A No.2680/Bang/2017 Page 29 of 50
the requirement of an ERP was felt for efficient management of the operations. Towards this, TEIS Shared Services established ERP Competency Centers with an objective to create technical capabilities and excellence within the TE Group, and also to serve as a global resource for TE Group's enterprise systems. This ERP system had assisted in integrating all data and processes of TE Group into a single unified system with the usage of multiple components of computer software and hardware. With SAP being the preferred ERP being implemented the primary centre was based in Harrisburg, Pennsylvania, with other centers at Fuquay-Variana, North Carolina, US (Manufacturing-Pro) and in Singapore (AMPICS). Post the implementation of the SAP ERP, TE Group provided hardware, software and applications to run TECIL's SAP applications, including Financial, Sales & Distribution, Purchasing, SAP Shop Floor User Fee and SAP Development and Consulting. The Group also helped to develop and support TECIL's Global SAP system (PR2/APO) and the TE US HR/ Payroll System (HRP). In addition, TEIS team members supported the certified softwares: Xelus, Vertex and Firmware. It also supported legacy US Manufacturing finance and EDI applications. The charges pertained to licence fee/ usage fee for the software, hardware and other applications. In addition to the above, TE Group provides various other IT Infrastructure support services the details of which were also given to the TPO. 15. The TPO, however, did not accept the plea of the assessee. He held that in terms of Rule 10B of the Income Tax Rules, 1962 (Rules), the determination of ALP for providing intergroup services has to be decided either by applying the Comparable Uncontrolled Price (CUP) or TNMM. The TPO held that the transaction of rendering intergroup services has to be separately analyzed and he applied the CUP method as the MAM. The TPO thereafter held that there was no evidence that services were rendered by
IT(TP)A No.2680/Bang/2017 Page 30 of 50
the AE for which the assessee made payment. In this regard, the AO observed as follows: “Thus the Taxpayer's agreement says that the AE would charge for services only to the extent of the costs incurred in providing such services to the Taxpayer. The Taxpayer produced copies of invoices raised by the AE. But this invoice does not contain any details of services provided and costs incurred for each type of service except stating as "Charge Back IT Expenses". As can be seen from above, the invoice did not speak about anything on the nature of service rendered and costs involved except mentioning as "Chargeback IT Exp". The Taxpayer did not adduce any primary evidence to show that the payment made is only to the extent of cost actually incurred in connection with rendering of services to the Taxpayer. Further, as per the above agreement, the AE shall keep accurate and adequate records of all support functions rendered to the Taxpayer and all costs incurred by TEC USA in providing such support functions. The Taxpayer only submitted invoices and description of services. These services are not supported by record that are supposed to be kept by the AE to show the details of the services rendered to the Taxpayer and actual direct and indirect costs incurred in connection with rendering of such services to the Taxpayer. The Taxpayer did not submit records adequately to show that the payment is in consonance with the costs rendered in connection with the IT infrastructure and other support services
IT(TP)A No.2680/Bang/2017 Page 31 of 50
rendered by the AE. In fact, the Taxpayer stated that even the direct cost involved in implementing SAP is apportioned based on some allocation key. The Taxpayer did not disclose the allocation or other details.” So, the argument of the Taxpayer before the TPO is only post mortem to justify the above payment. In an Arm's Length condition, the payment is not only a function of services provider's willingness to pay. The Taxpayer mentioned various services to support above invoice without giving any primary evidence that those services are actually rendered. Thus the Taxpayer except producing above invoices and mentioning various services not at all proved the second aspect. This issue is discussed below.” 16. The TPO thereafter called upon the assessee to explain as to how the services are quantified under each head or expense under IS charges for which the assessee could not give a proper answer. The TPO therefore proceeded to hold that the ALP of the IS charges was NIL and therefore the entire payment made by the assessee by the assessee to its AE had to be considered as adjustment of determination of ALP under section 92CA of the Act. Accordingly, the AO added as sum of Rs.33,41,55,226/- to the total income of the assessee. The DRP confirmed the order of the AO. 17. Before the Tribunal, the learned Counsel for the assessee has filed an application for admission of the following documents as additional evidence:
IT(TP)A No.2680/Bang/2017 Page 32 of 50
The learned counsel for the Assessee submitted that the allegation that no documentation / information was furnished by the Assessee before the lower authorities is incorrect. He gave the details of documents/information filed before the TPO in the following summary: • IS charges are received pursuant to the Agreement for Support Functions entered with Tyco Electronics Corporation, USA, dated October 1, 2002 [refer Pg. 702 of Paperbook - Part B]; Corporate services rendered by Tyco electronics Limited, Switzerland, to TECIL primarily comprised of services in relation to (i) Financial Planning and analysis (ii) Treasury (iii) Taxes (iv) Legal and government affairs (v) corporate governance (vi) operational excellence (vii) Human resources etc. These services are rendered pursuant to the Corporate Services Agreement [refer Pg. 707 of Paperbook - Part B]; • The nature of services received, basis of quantification of such services provided by the Group, the basis for such apportionment and the cost allocation keys depicting the nature of the costs were provided in SCN response [refer Pg. 785 of Paperbook - Part B]; • The cost centre details of Corporate Service charges were filed as part of additional evidence before the Hon’ble DRP [refer Pg. 855 of
IT(TP)A No.2680/Bang/2017 Page 33 of 50
Paperbook - Part B], however the Hon’ble DRP did not deal with the same; • Additionally, a detailed study of the Nature of various services rendered and cost centre analysis in relation to IS charges as additional evidence before the Tribunal, which we have referred to earlier. 18. The learned counsel submitted that the IS Charges are already included in the cost -base of licensed manufacturing segment under TNMM i. In respect of the said charges, TNMM was determined as the most appropriate method as they were closely linked with the primary international transactions under the three segments of the Assessee. The learned counsel in this regard drew support from the OECD Guidelines on aggregation of transactions which states as follows: “Ideally, in order to arrive at the most precise approximation of arm’s length conditions, the arm's length principle should be applied on a transaction-by transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis.” ii. The TPO arbitrarily rejected the said aggregation approach and determined the ALP of the manufacturing segment and the above charges separately. However, in determining the ALP for the manufacturing segment, the said charges were not excluded from the cost-base under TNMM. Hence, the upward TP adjustment for the said segment factors the adjustment for the IS and corporate charges as well. The TPO shall therefore not make
IT(TP)A No.2680/Bang/2017 Page 34 of 50
further adjustment in this regard, as it would result in a double adjustment. It was submitted that the aforesaid view was upheld by the following judicial pronouncements:
iii. Further, the margin for the distribution and services segments, which factors the above charges in the cost-base, were accepted to be at arm’s length by the TPO. In view of this, the TPO cannot arbitrarily reject its aggregation only in respect of the license manufacturing segment. iv. Without prejudice, if the separate benchmarking of IS and corporate service charges is upheld, the same shall be excluded from the segment costs considered under the licensed manufacturing segment, for margin determining. In such event, the margin as computed in the TP order in this regard, at -0.80% will increase to 3%, as shown below:
IT(TP)A No.2680/Bang/2017 Page 35 of 50
Without prejudice to the above contentions, it was contended that the TPO has failed to undertake a benchmarking analysis based on comparable transactions which is a mandatory requirement for the application of the CUP method, which is also recognized by several precedents:
The learned counsel for the assessee pointed out that in respect of the said adjustment for AY 2009-10, the DRP, considering the submissions made by the assessee,
IT(TP)A No.2680/Bang/2017 Page 36 of 50
concluded that the entire value of the IS charges cannot be ‘Nil’. It further held that the portion of expenses in respect of costs allocated based on per user basis shall be allowed since the facilities/services have been utilised by the assessee and allowed the same [Pg. 824 of Paperbook - Part B]. The said directions were given effect to by the AO and consequentially the TP adjustment to the extent of expenses rendered on per user basis stood deleted [Pg. 838 of Paperbook - Part B]. Relying on the said directions, similar direction was issued by the DRP for AY 2010-11 as well, on the same facts [Pg 852 of Paperbook - Part B]. It was submitted that though the principle of res judicata is not applicable to tax matters, the Supreme Court in various cases have consistently held that Revenue Authorities should not take contrasting stands in respect of one transaction in different years, unless there are fresh circumstances surrounding the transaction in question. which provides that where a transaction (international or specified domestic) continues for a period of more than one year, fresh documentation need not be maintained separately for each year, unless there is any significant change in either nature or terms of the transaction, assumptions made or other factor which could influence the transfer price. The principle of consistency in respect of a transaction undertaken across years with no change in the facts and circumstances, is well settled by the Hon’ble SC. It was pointed out that this principle is also provided in rule 10D(4) of the IT Rules. 21. The learned Counsel for the assessee therefore submitted that the issue with regard to determination of ALP in respect of international transaction on payment of IS charges is also required to be set aside to the AO to be done afresh in the light of the submissions as made above in the light of the additional evidence now filed before the Tribunal. Learned DR however relied on the order of the TPO and the DRP but was of the view that the prayer of set aside to the AO in the light of the additional evidence may be considered by the Bench.
IT(TP)A No.2680/Bang/2017 Page 37 of 50
We have given a careful consideration to the rival submissions and are of the view that the issue with regard to determination of ALP in respect of payment of IS charges should be set aside to the AO/TPO for fresh consideration denovo in the light of the submissions and additional evidence filed before us and these submissions and additional evidence go to the root of the matter. The AO and TPO will afford opportunity of being heard to the assessee in the set aside proceedings. 48. In the present case, the ld. AR submitted a detailed report from the AE in the form of additional evidence in a separate PB and prayed for admission of additional evidence. We admit the additional evidence since it goes to the root of the matter.
The ld. AR also submitted that if separate benchmarking is to be done in respect of intra-group services, then the effect of the same should be given in the operating cost considered for PLI purposes. We see merit in the submission of the ld. AR and direct the TPO/AO accordingly.
Ground No. 10 is as follows:-
“10. That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/ Learned TPO in not granting proportionate adjustment, thereby ignoring the fact that any transfer pricing adjustment should be restricted to the amount of international transactions only.” 51. The coordinate bench of the Tribunal in the case of IKA India (P.) Ltd. (supra) dealt with the similar issue and held that section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. The relevant observations are as follows:-
IT(TP)A No.2680/Bang/2017 Page 38 of 50
“54. We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions made before the CIT(A) that transaction with non-AE cannot be subject matter of determination of ALP because section 92 clearly speaks of determination of ALP only in respect of transactions with AE. He also referred to certain decisions of the Tribunal for the proposition that section 92 of the Act is not applicable to non-AE transactions. These decisions have already been extracted in the earlier paragraphs. The ld. DR relied on the order of the CIT(Appeals). 55. We have considered the rival submissions. The reasoning of the CIT(A) for considering the entire sales in manufactured finished goods segment for determination of ALP is that certain components and raw materials used in manufacture of finished goods are also sourced from AE and there is a possibility of the cost of such component having been bargained at a price which is not at arm's length. This presumption of the CIT(Appeals) is without any basis. He has not demonstrated with actual figures as to how there would be impact on profit margin on sale of finished products to AE because of purchases of some components from AE. He has given examples which are imaginary figures. Apart from this, the TPO has accepted that purchase of raw material and components by the assessee from its AE is at arm's length. Therefore, the basis on which the CIT(A) proceeded to apply the ALP test for transactions with non- AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. 56. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee.”
IT(TP)A No.2680/Bang/2017 Page 39 of 50
Respectfully following the above decision of the Tribunal, we hold that the transfer pricing adjustment should be restricted only to the international transactions with the AE. This ground is allowed in favour of the assessee.
Corporate tax issues
The assessee has raised ground Nos.11 to 18 regarding depreciation and additional depreciation as follows:-
“11. That on the facts and circumstances of the case, the learned AO/ learned Dispute Resolution Panel (learned DRP') has erred in disallowing depreciation amounting to INR 2,21,15,523/- claimed by the Appellant on additions made to fixed assets during the Financial Year (`FY') 2012-13. 12. That the learned AO/learned DRP has erred in not appreciating the fact that the twin conditions for claiming depreciation were duly satisfied in the case of the Appellant i.e., the fixed assets were owned by the Appellant and were put to use for the purpose of business during the year under consideration. 13. That on the facts and circumstances of the case, the learned AO/learned DRP has erred in disallowing additional depreciation amounting to INR 2,18,20,290/- claimed by the Appellant on additions made to the 'plant and machinery' block of assets during the year. 14. That the learned AO/learned DRP has erred in not appreciating the fact that the assets purchased during the year under consideration and categorised under the block 'plant and machinery' satisfied the conditions specified under section 32(1)(iia) of the Act, as certified in the tax audit report issued by the Chartered Accountant and accordingly the Appellant was eligible to claim additional depreciation on such assets at the rate of 20% for the AY 2013-14.
IT(TP)A No.2680/Bang/2017 Page 40 of 50
That the learned AO/learned DRP has erred in not appreciating the fact that the Appellant's eligibility to claim depreciation is substantiated in the tax audit report issued under section 44AB of the Act and particulars given in Form 3CD are found to be 'true and correct' as per the Audit Report in Form 3CA certified by the Chartered Accountant. 16. That the learned AO/learned DRP has erred in not appreciating the fact that the Appellant should not be deprived of benefit under section 32 of the Act for mere reason that invoices could not be furnished during the course of assessment proceedings. 17. That the learned AO/learned DRP has erred in not appreciating the fact that depreciation allowance under section 32 of the Act is mandatory and disallowing the same on the basis of surmises, conjectures and suspicion would violate the settled position of law as laid down by the Honourable Supreme Court of India. 18. The learned DRP had erred in not considering the sample invoices pertaining to addition made to the fixed assets.” 54. The AO disallowed the entire depreciation claimed by the assessee stating that assessee has not provided any supporting details with respect to assets and depreciation claimed thereon. The DRP upheld the decision of the AO on the same reasoning. Though the assessee had submitted before the DRP the supporting bills and invoices substantiating the claim of depreciation, however, the DRP confirmed the disallowance stating that the additional evidence produced before the DRP could not be verified due to time constraint.
Before us, the ld. AR drew our attention to the additional evidence submitted before the DRP in the form of bills and vouchers at page 476 of PB. He submitted that the tax auditor has verified the
IT(TP)A No.2680/Bang/2017 Page 41 of 50
addition to the fixed assets and that in itself substantiates that claim of the assessee is genuine.
We have considered the rival submissions and perused the material on record. In view of the fact that the additional evidence has not been verified by the TPO/DRP, we deem it fit to remit this issue back to AO/TPO for fresh consideration and decision in accordance with law, after providing reasonable opportunity of being heard to the assessee. The assessee is also directed to produce all the relevant details and evidence in respect of the claim and cooperate with the remand proceedings. It is ordered accordingly.
Ground Nos. 19 to 24 regarding disallowance of special discount u/s. 40(a)(ia) of the Act are as follows:-
“19. The learned AO/learned DRP erred in disallowing the special discount relating to AY 2012-13 in the direction passed for AY 2013-14 which has already been disallowed by the Hon'ble DRP in their directions passed for the AY 2012-13. 20. Without prejudice to the above, the learned AO/learned DRP has erred in not appreciating the fact that the special discount granted to the dealers who are also the customers is in the nature of discount on special price clearance quote and is not in the nature of 'commission' payments warranting deduction of tax at source under section 194H of the Act. 21. That on the facts and circumstances of the case, the learned AO/learned DRP has erred in disallowing special discount given to dealers who are also its customers amounting INR 32,11,54,279 under section 40(a) of the Act as the amount is not subject to withholding tax. 22. That the learned AO/learned DRP erred in disallowing special discount without appreciating the fact that:
IT(TP)A No.2680/Bang/2017 Page 42 of 50
• Discounts given to the dealers who are also its customers are genuine; • Discounts given was for the purpose of business of the Appellant; • Discounts being given were based on certain customs and trade practices prevalent in the industry in which the Appellant operates; and • Accordingly, discounts should be allowed as tax deductible expenditure under section 37 of the Act. 23. That the learned AO/learned DRP has erred in law and on facts by not following the principles of commercial expediency. 24. The learned DRP has erred by not considering the sample copies of agreements in connection with provision of special discount filed by the Appellant during the course of DRP proceedings.” 58. This issue also was considered by the Tribunal in the assessee’s own case for AY 2014-15 in assessee’s own case and the Tribunal vide order dated 25.02.2022 in IT(TP)A No.3373/Bang/2018 held as under:-
“31. As far as ground No.14 raised by the assessee is concerned, the issue arises under the following facts and circumstances. During the previous relevant to AY 2014-15, the Assessee incurred expenses (INR 43.25 Crores) in the nature of discounts, referred to as ‘Special Discounts’, to dealers who essentially its customers amounting. The same is disclosed under the nomenclature ‘Commission’ in the P&L A/c. The AO disallowed the same under section 40(a) of the Act for failure to deduct tax at source, alleging that it is in the nature of commission, warranting deduction of tax at source under section 194 of the Act. The Hon’ble DRP confirmed the same, holding that special discount were rightly confirmed to be in the nature of commission since the assessee itself grouped the special discount under the head “commission” in its financials.
IT(TP)A No.2680/Bang/2017 Page 43 of 50
The learned counsel for the assessee submitted before the tribunal that the nature of the transaction is sale and not agency. It was submitted that the assessee appointed distributors for the purpose of sale and distribution of its products under various dealer agreements, with the following key features of the arrangement with its dealers/distributors: - The title to the goods, risks and rewards in the goods pass to the distributors on delivery of the goods by the Assessee; - The goods sold by the Assessee to such distributors is reduced from the inventory of the Assessee and reflected accordingly in its accounts as sales; - The recovery against the sales made by the Assessee is not contingent upon the sales made by the distributors; - The Assessee only gives a discount to the distributors on the goods purchased by them; - The distributors invoice the retailers/ consumers in their own names and earn a margin on the difference between the value of sales effected by them and the price paid to the Assessee; - The Assessee does not control the operations of the distributors; - The Assessee does not restrict the distributors from appointing sub-distributors. i. Once a party agrees to act as a Regional Distributor (“RD”) and signs an agreement, such RD shall abide by the conditions of the agreement and shall be eligible to receive price discount on the distributor price. The discount given to distributors on the sale price is sales discount in normal business parlance and not commission on sales. All such agreements clearly define the relationship between both the parties as principal to principal which is evident from the terms of the said
IT(TP)A No.2680/Bang/2017 Page 44 of 50
agreement. Hence the said dealers were not acting as the agents of the Appellant. ii. The reason for issuance of debit notes periodically on a consolidated basis, instead of billing the net sale price post such discounts for each transaction, is purely on account of the operational process and commercial practice adopted in this regard. These discounts are made known to the dealers even before they purchase goods from the Appellant company and quantification thereof is possible only at the end of the quarter/period as specified in the agreement. The dealers fulfilling the qualification conditions become eligible to get discount at the end of the notified period, processed by way of debit notes. iii. Therefore, the said discounts are not in the nature of commission payments warranting deduction of tax at source under section 194H of the Act, which is applicable only in case where the payment is made for services rendered in the course of buying or selling of goods and the payee acts on behalf of the payer. In other words, principal-agent relationship is a sine-qua-non for invoking the provisions of section 194H of the Act. Reliance is placed on the decision of the Hon’ble Bombay High Court in the case of Harihar Cotton Pressing Factory9 39 ITR 594 (Bom), which held that there is a distinction between commission and rebate and therefore rebate cannot be treated as commission. iv. The learned counsel for the Assessee further relied on the following judicial precedents including that of the Hon’ble Karnataka High Court and other Courts wherein it was held the provisions of section 194H are not applicable in the absence of principal-agent relationship between the parties:”
IT(TP)A No.2680/Bang/2017 Page 45 of 50
It was submitted that the mere nomenclature does not determine the nature of transaction. In this regard it was pointed out that it is an undisputed fact that the AO and DRP treated the special discount allowed as Commission merely based on the disclosure in the Profit & Loss Account as 'commission' . It was submitted that mere nomenclature is not conclusive for determining the nature of a transaction and it is the essence the transaction that should be considered, while determining its real nature. The Learned counsel for Assessee reiterated that the said expense is in the nature of special discount given to its dealers/ customers and not in the nature of commission as contended by the lower authorities, so as to attract the applicability of section 194H of the Act. It was also submitted that the Assessee’s stand on identical payment that it was not in the nature of Commission attracting the provisions of Sec.194 H of the Act was accepted by the AO in AY 2015-16 and no disallowance was made. The learned DR relied on the order of the DRP.
IT(TP)A No.2680/Bang/2017 Page 46 of 50
We have given a careful consideration to the rival submissions and are of the view that the issue with regard to the question whether the payment in question is in the nature of discount or commission should be set aside to the AO/TPO for fresh consideration denovo in the light of the submissions made before us, the case laws cited and the real nature of the transaction and not to conclude only on the basis of entries in books of accounts and nomenclature used therein. The AO and TPO will afford opportunity of being heard to the assessee in the set aside proceedings.” 59. Respectfully following the above decision of the Tribunal, we set aside the issue to the AO/TPO for fresh consideration with similar directions as in AY 2014-15.
Ground Nos. 25 to 27 regarding disallowance of liquidated damages are as under:-
“25. That the learned AO/learned DRP has erred in disallowing liquidated damages amounting to INR 20,33,797/- without appreciating the fact that: • Liquidated damages paid are genuine; • Liquidated damages were paid during the course of carrying out business of the Appellant; and • Accordingly, liquidated damages are allowable as tax deductible expenditure under section 37 of the Act. 26. That the learned AO/learned DRP has erred in law and on facts by not following the principles of commercial expediency. 27. That the learned DRP has erred in not considering the sample copies of invoices provided during the course of DRP proceedings.” 61. The AO disallowed the claim of liquidated damages on the ground that the assessee has not provided any details with respect to
IT(TP)A No.2680/Bang/2017 Page 47 of 50
the basis of quantification of liquidated damages and evidence in support of the same. The DRP did not consider the additional evidence provided by the assessee and verify it for the reason of time constraint.
Before us, the ld. AR submitted that the liquidator damages are genuine which were incurred and paid during the course of the business of the assessee and hence entitled to deduction u/s. 37 of the Act. He drew our attention to the additional evidence filed before the DRP at page 589 of PB.
We have considered the rival submissions and perused the material on record. Since the evidence and supporting bills submitted by the assessee are not verified by the lower authorities, we remit this issue to the AO to look into the facts and evidence afresh and decide the issue in accordance with law, after providing reasonable opportunity of being heard to the assessee.
The next issue pertains to disallowance of “claims made by buyers” pursuant to the slump sale and ground nos. 28 to 30 raised by the assessee in this regard are as follows:-
“28. That the Learned AO/ learned DRP erred in adding back an amount of INR 9,470,000 to the sale consideration for the purpose of computing capital loss, being certain claims made by the buyers of the tooling and tooling parts business of the Assessee which was sold under a slump sale arrangement. 29. That the Learned AO/ learned DRP has added back the aforementioned claims without providing cogent reasons for the same in the draft assessment order.
IT(TP)A No.2680/Bang/2017 Page 48 of 50
That in proposing the aforementioned disallowance, the Learned AO/ learned DRP has disregarded Form 3CEA obtained by the Assessee from a Chartered Accountant which certifies that the capital loss on account of slump sale has been computed correctly in accordance with the provisions of section 50B of the Act.” 65. The assessee has entered into business transfer agreement for sale of tooling parts business as a going concern for a consideration of Rs.10,64,80,000 and claimed capital loss of Rs.1,67,30,000. The AO called for details regarding calculation of capital loss. From the details furnished by the assessee, the AO noticed that the assessee made a deduction of Rs.94.70 lakhs towards “claims made by buyers” from the sale consideration. The AO rejected the claim stating that slump sale is a transfer of undertaking as a whole and no deduction towards any liability can be allowed on the same. He also stated that the assessee has not provided any proof as to how the amount of Rs.94.70 lakhs is arrived at.
The DRP confirmed the action of the AO on the ground that the transfer is a slump sale and there is no reason why the said amount was not part of the net worth computed while arriving at the sale consideration and the capital loss.
Before us, the ld. AR submitted that the buyer did not pay the whole consideration originally agreed and had reduced the said amount of Rs.94.70 lakhs while paying the final consideration towards some expenses. Therefore, the assessee offered the net income while computing the capital gain on slump sale. He also submitted that the
IT(TP)A No.2680/Bang/2017 Page 49 of 50
certificate from Chartered Accountant in Form 3CEA u/s.50B of the Act was obtained [page 681 of PB] and was submitted before the lower authorities which is sufficient proof for the claim.
We heard the rival submissions. The assessee has submitted Form 3CEA to substantiate that the capital gain / loss is computed correctly. The certificate from the chartered accountant is issued based on the information and explanation provided to the best of their knowledge and the same does not prevent the AO from going into the root of the transaction calling for further evidence. In our view the onus is on the assessee to provide the required details as a foolproof evidence to substantiate the claim that the buyer deducted an amount of Rs.94.70 lakhs from the final sale consideration. In the given case we notice that the lower authorities did not take call for any further evidence and have not taken the necessary steps to verify the issue factually based on details furnished by the assessee. We therefore remit the issue back to the AO with a direction to issue summons to the buyer of the undertaking in order to verify the claim of the assessee and decide the issue in accordance with law, after giving reasonable opportunity of being heard to the assessee.
IT(TP)A No.2680/Bang/2017 Page 50 of 50
The ld. AR did not press for the additional ground with regard to education cess and secondary & higher education cess in the light of recent statutory amendment. Hence the same is dismissed as not pressed.
In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 18th day of July, 2022..
Sd/- Sd/- ( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER Bangalore, Dated, the 18th July, 2022. /Desai S Murthy / Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order
Assistant Registrar ITAT, Bangalore.