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Income Tax Appellate Tribunal, BANGALORE BENCHES “A”, BANGALORE
O R D E R
Per George George K, JM :
This appeal at the instance of the assessee is directed against final assessment order dated 30.10.2017 passed u/s 143(3) r.w.s. 144C of the I.T.Act. The relevant assessment year is 2013-2014.
The brief facts of the case are as follows: The assessee is a company engaged in the business of process industrial automation that includes manufacture and trading of automation products, solutions and services for the process controlled application. For the relevant assessment year the return of income was filed by the assessee on 29.11.2013 declaring total loss of Rs.1,06,46,560. The 2 IT(TP)A No.356/Bang/2018 M/s.Emerson Automation Solutions Intelligent Platforms Pvt.Ltd assessment was selected for scrutiny by issuance of notice u/s 143(2) of the I.T.Act. During the course of assessment proceedings, the matter was referred to the Transfer Pricing Officer (TPO) to determine the Arm’s Length Price (ALP) of the international transactions undertaken by the assessee with its Associated Enterprises (AEs). The TPO vide order dated 31.10.2016 passed u/s 92CA of the I.T.Act proposed the following adjustments:- Segment Value of adjustment (Rs.) Manufacturing segment 4,43,23,760 HQ charges 86,39,654 Total 5,37,40,836
Pursuant to the TPO’s order proposing the above transfer pricing adjustment, the A.O. passed a draft assessment order dated 26.12.2016 incorporating the above TP adjustments. Aggrieved by the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP issued directions vide order dated 7.09.2007 primarily upholding the TP adjustment proposed by the TPO and the draft assessment. Pursuant to the DRP’s directions, the A.O. issued final assessment order dated 30.10.2017. Aggrieved by the final assessment order, the assessee has filed this appeal before the Tribunal. The assessee has filed revised ground. In the revised ground, the assessee has raised 12 grounds. However, during the course of hearing, the assessee has only pressed grounds 5 to 11. The surviving grounds, namely, grounds 5 to 11 reads as follows:-
3 IT(TP)A No.356/Bang/2018 M/s.Emerson Automation Solutions Intelligent Platforms Pvt.Ltd “Grounds relating to transfer pricing matters 5. That on the facts and in the circumstances of the case, the Learned DRP /Ld. AO/Ld. TPO erred in law and in facts in incorrectly computing the operating margin of the Appellant for the manufacturing segment by excluding revenue from sale of services amounting to INR 3,65,82,437 and other income amounting to INR 61,89,982 from the operating revenue. (corresponding to original ground 5) 6. That on the facts and in the circumstances of the case, the Learned DRP/Ld. AO/Ld. TPO erred in law and in facts in erroneously including the excise duty paid amounting to INR 4,20,63,126 to the operating cost without appreciating the fact that the same has already been reduced from the sale of manufacture products. (corresponding to original ground 6) 7. That on the facts and in the circumstances of the case, the Learned DRP /Ld. AO/Ld. TPO erred in law and in facts in treating the loss/gains on account of foreign exchange fluctuations as operating in nature. (Corresponding to original ground 7) 8. That on the facts and in the circumstances of the case, the Learned DRP /Ld. AO/Ld. TPO erred in law and facts in Considering Comparable Uncontrolled Price ("CUP") method as most appropriate method and not accepting Transactional Net Margin Method ('TNMM') adopted by the Assessee for determining the Arm's Length Price (,ALP') of the international transaction of payment of HQ charges. (corresponding to original ground 8) 9. That on the facts and in the circumstances of the case, the Learned DRP /Ld. AO/Ld. TPO erred in law and in facts in disallowing the payment of INR 86,39,654 made by the Appellant with respect to HQ services received from its AE by holding that the Arm's length price for such service is Nil. (corresponding to original ground 9) Grounds relating to other than transfer pricing 10. That on the facts and in the circumstances of the case, the Ld. AO erred in not considering the eligible set off of current year business loss against the available income from other sources in accordance with section 71 of the Income-tax Act, 1961. (corresponding to original ground 11) 11. That on the facts and in the circumstances of the case, the Ld. AO erred in not giving effect to the directions of the Learned DRP to consider the eligible set off of current
4 IT(TP)A No.356/Bang/2018 M/s.Emerson Automation Solutions Intelligent Platforms Pvt.Ltd year business loss against the available income from other sources in accordance with section 71 of the Income-tax Act, 1961. (corresponding to original ground 12).”
We shall adjudicate the above grounds as under:
Ground 5 (TP Adjustment) ( Manufacturing Segment) 4. In the above ground, the assessee is contending that the TPO has erred in computing the operating margin of the assessee for the manufacturing segment by excluding revenue from sales of services amounting to Rs.3,65,82,437 and other income amounting to Rs.61,89,982 from the operating revenue. The view taken by the TPO was confirmed by the DRP, which reads as follows:
“With regard to exclusion of revenue from sale of service, the assessee has not given any reason as to why it should be included in the manufacturing segment. Hence this plea is rejected. With regard to not including other income of Rs.61,89,982/- also, the assessee has not given any reasons to how it is operating revenue for manufacturing segment. Hence, this plea is rejected.” 4.1 Aggrieved, the assessee has raised this issue before the Tribunal. The assessee has filed additional evidence in form of providing details in relation to composition of income from sale of services and back-ups justifying the nature of such income. The assessee has also submitted the work orders to substantiate the nature of services which are after sales, repairs and maintenance, etc. However, the learned AR during the course of hearing, candidly submitted that if the revenue from sales of services and other income are excluding from operating income of manufacturing segment of the assessee,
5 IT(TP)A No.356/Bang/2018 M/s.Emerson Automation Solutions Intelligent Platforms Pvt.Ltd the same needs to be reduced from the operating income of the comparable companies. The learned AR has produced detailed computation of net operating margin of comparable companies after exclusion of revenue from sale of services and other income.
4.2 The learned Departmental Representative did not have serious objections for the matter to be restored to the AO / TPO for examination of the above contention of the learned AR.
4.3 We have heard rival submissions and perused the material on record. The learned AR’s limited submission is that when revenues from sale of services and other income are excluded from the total operating income of the manufacturing segment of the assessee, the same also needs to be reduced from the operating income of the comparable companies. The learned AR has produced computation of revised margin of comparable companies after exclusion of service income and other income in the case of comparable companies. The submission of the learned AR is only fair. For an apple-to-apple comparison, if the income from “sale of services” and “other income” are excluded from the operating income of the manufacturing segment of the assessee, then similar approach should be undertaken in the case of comparable companies, as well. Therefore, the alternative submission raised by the learned AR is restored to the files of the AO / TPO. The AO / TPO is directed to examine the plea
6 IT(TP)A No.356/Bang/2018 M/s.Emerson Automation Solutions Intelligent Platforms Pvt.Ltd of the assessee and recompute the ALP of the international transactions undertaken by the assessee with its AEs in the manufacturing segment.
4.4 In the result, ground 5 is allowed for statistical purposes.
Ground 6 (TP Adjustment) (Manufacturing Segment) 5. In the above ground, it is contended that the TPO has erred in including the excise duty paid amounting to Rs.4,20,63,126 to the operating cost without appreciating that the same has already been reduced from the sale of manufactured products.
5.1 The DRP in its order dated 07.09.2017 directed the TPO to verify the claim of the assessee and rectify the same if there is any error in the computation of the TPO. The directions of the DRP read as follows:- “Having considered the submissions, we note that the TPO has arrived at segmental margin for the manufacturing segment (given at page 2 of the TP order). It is not clear whether he had added back excise duty as claimed by the assessee. Hence the TPO is directed to examine the same and if there is error the same may be rectified.”
5.2 It is claimed by the learned AR that, however, no verification was done and the excise duty paid was included as part of the operating cost.
5.3 We have heard rival submissions and perused the material on record. We endorse the above directions of the 7 IT(TP)A No.356/Bang/2018 M/s.Emerson Automation Solutions Intelligent Platforms Pvt.Ltd DRP. The AO / TPO is directed to reexamine the claim of the assessee. It is ordered accordingly.
5.4 In the result, ground 6 is allowed for statistical purposes.
Ground 7 (TP Adjustment) (Manufacturing Segment) 6. In the above ground, the assessee contends that the TPO has erred in treating loss / gains on account of foreign exchange fluctuation as operating in nature. The TPO in the impugned order at page 7 had relied on nine case laws and have held that foreign exchange gain / loss is operating in nature. The DRP in its directions at page 7, confirmed the view taken by the Assessing Officer.
6.1 Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR fairly admitted that forex gain / loss is part of the operating income in view of various judicial pronouncements. However, the limited submission of the learned AR was that the assessee had incurred huge foreign exchange loss because of significant exposure to foreign currency transactions, whereas the comparable companies are not undertaking foreign currency transactions to such an extent. Therefore, it was submitted that adjustment be carried out to the margin of comparable companies and their cost base be enhanced by similar percentage of foreign exchange loss to mitigate the variations.
8 IT(TP)A No.356/Bang/2018 M/s.Emerson Automation Solutions Intelligent Platforms Pvt.Ltd 6.2 The learned DR strongly supported the orders of the Income-tax Authorities.
6.3 We have heard rival submissions and perused the material on record. The TPO has considered the foreign exchange fluctuation loss / gain as operational in computing the operating income of both the assessee and the comparable companies. The DRP has followed the decision of the ITAT Bangalore Bench in the case of Sap Labs India P Ltd. v. ACIT (2011) 44 SOT 156, Cisco Systems Services BE in IT(TP)A No.270/Bang/2014, wherein it was held that foreign exchange fluctuation arising to the assessee on realization of trade debtors payment to creditors etc, were nothing but operational income. We, therefore, do not find any infirmity in the TPOs / DRPs finding that the foreign exchange fluctuation gain / loss as operating in nature while determining the operating margin of the assessee-company and the comparable companies. As regards the contention of the learned AR that adjustment be carried out to margin of comparable, since they were not exposed to significant foreign exchange loss as that of assessee, we are of the view, no material has been placed on record warranting such an adjustment.
6.4 Therefore, ground 7 is dismissed.
Grounds 8 and 9 (TP Adjustment (Payment of HQ charges) 7. The TPO was of the view of the international transaction of headquarter charges is a class of its own and ALP of the 9 IT(TP)A No.356/Bang/2018 M/s.Emerson Automation Solutions Intelligent Platforms Pvt.Ltd transaction cannot be determined using TNMM. In order to understand the nature of services received, the TPO called for copy of the agreements, break up of the services received, need for the above services, documentary proof for receipt of the requisitioned services, tangible benefit arising on receipt of services and cost benefit analysis done while entering agreements with AEs. The assessee submitted that without these services manufacturing would not have been possible and it furnished a cost benefit analysis study report. The TPO however held that (i) the assessee has not quantified the benefit received in terms of value of the costs saved because of services received from the AEs; (ii) copy of the agreement entered into if any has not been submitted to analyse the terms and conditions; (iii) no supporting documents of any emails or reports through which the services were supposedly been received have not been submitted. In view of the above reasons, the TPO determined the ALP of payment of headquarter charges of Rs. 86,39,654 at NIL. The DRP confirmed the finding of the TPO by observing that the TPO has not questioned the necessity of the expenditure but had called to demonstrate the services availed and benefits derived in respect of the payments to AE.
7.1 The learned AR argued that it had submitted a copy of the benefits test prepared by it vide submission to TPO dated 21.10.2016. It was submitted that headquarter charges were incurred for receipt of various services like technology services, product management, legal services, marketing
10 IT(TP)A No.356/Bang/2018 M/s.Emerson Automation Solutions Intelligent Platforms Pvt.Ltd services, finance and human services. It was submitted that these services were received for the benefit of the business operations and hence the cost in relation to such services were aggregated with the manufacturing, trading and the marketing support services segment of the assessee.
7.2 We have considered the rival contentions and perused the material on record. Admittedly, apart from submitting the cost benefit document vide submission dated 21.10.2016, the assessee has not submitted any other documentary evidence to substantiate the receipt of services provided by the AE. We therefore restore this issue to TPO with a direction to the assessee to submit all documentary evidences like emails, reports etc. for receipt of the service and also justify as to how these services are closely linked to the manufacturing, trading and marketing support services segment of the assessee so as to justify TNMM. The TPO shall consider the same and decide the issue as per law.
7.3 Therefore, grounds 8 and 9 are allowed for statistical purposes.
Grounds 10 and 11 (Corporate Tax Issues)
The DRP in its order had directed the AO to examine the claim of the assessee. The relevant objections before the DRP and the directions of the DRP in regards to the above grounds read as follows:-
11 IT(TP)A No.356/Bang/2018 M/s.Emerson Automation Solutions Intelligent Platforms Pvt.Ltd “That on the facts and in the circumstances of the case, the learned AO has failed to consider setting off of income from other sources with current year business loss in accordance with section 71 of the Act. The assessee has inadvertently not set off income from other sources against business loss of the current year in its return of income. The assessee has requested learned Assessing Officer to consider the eligible set off of current year business loss against the available income from other sources in accordance with section 71 of the Act. However, the set off was not provided while computing the total assessed income as per the Draft Assessment Order. Having considered the submissions, we consider it appropriate to direct the AO to examine the claim and allow the benefit of set off, if the assessee is found eligible as per law. Accordingly this objection is disposed of.”
8.1 We have heard rival submissions and perused the material on record. We are of the view that the matter needs to be set aside to the AO / TPO. The AO / TPO is directed to examine the above plea of the assessee raised in grounds 10 and 11. The directions of the DRP shall be followed by the AO / TPO. It is ordered accordingly.
8.2 In the result, grounds 10 and 11 are allowed for statistical purposes.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced on this 24th day of May, 2022.