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Income Tax Appellate Tribunal, BANGALORE BENCHES “C”, BANGALORE
O R D E R Per George George K, JM : These cross appeals are directed against final assessment order dated 26.11.2015, passed u/s 143(3) r.w.s. 144C of the I.T.Act. The relevant assessment year is 2011- 2012.
We shall first adjudicate the Revenue’s appeal.
IT(TP)A No.41/Bang/2016 (Revenue’s appeal)
The effective grounds raised read as follows:
2 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited.
“Trading segment 2. The DRP erred in directing the AO/TPO to include M/s. Dhandapani & Co. Ltd., in the list of comparables based on trading segment results, thereby seeking exact comparability, when such company does not satisfy the comparability parameters involved in the case. 3.The DRP erred in directing the AO/TPO to exclude M/s. Dynalog (India) Ltd., and M/s. Spanco Ltd.from the list of comparable's, holding them> to be functionally dissimilar when comparables qualifies all the qualitative and quantitative filters applied by the TPO and strict comparability under TNMM method defeats the very purpose of law relating to determination of ALP under the Income Tax Act. 4.The DRP erred in directing the AO/TPO to exclude M/s. Spanco Ltd., from the list of comparables, thereby seeking exact replica of the assessee for determining the Arm's Length Price (ALP) even when the law and international jurisprudence itself recognize that there cannot be an exact comparable to a given situation especially with TNMM as the most appropriate method. Corporate Issue: 5.The DRP erred in directing the AO to delete the disallowance made u/s 40(a)(i) to the tune of Rs.1,36,42,976/-, holding that provisions of Section 40(a)(i) of the Act are not applicable to the management service fees without appreciating the fact that the payments fall within the ambit of "fees for technical services" as defined in Section 9( l)(vii) of the I.T. Act. 6.The DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of De beer India Minerals Pvt Ltd(2012) 346 ITR 467 has not-been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court.
7.The DRP erred in directing the AO to delete the addition made u/s 40A(7) by relying on its own direction in assessee's own case for A.Y.2010-11, without appreciating the fact that the assessee company had failed to communicate the changes I alterations made to the fund, as required under Rule 4(2) of the Fourth Schedule of IT Act and the contribution to fund is only a provision and not an actual expense under the purview of section 37(1) of the Act.”
3 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited. We shall adjudicate the above grounds as under.
Ground 2 (TP adjustment on trading segment) 3. The Revenue is seeking to exclude Dandapani & Co. from the list of comparables. The TPO excluded Dandapani & Co. from the list of comparables for the reason that this company is into manufacturing and distribution activities and no segmental details is available for the distribution activities.
3.1 The Dispute Resolution Panel (DRP) directed the AO / TPO to include Dandapani & Co. in the list of comparables. The DRP examined the segmental details and observed that the said company is functionally similar to that of the assessee.
3.2 We have heard rival submissions and perused the material on record. The segmental details of distribution activities of Dandapani & Co. was filed before the DRP by the assessee. In the interest of justice and equity, we direct the assessee to furnish the segmental details of Dandapani & Co. before the AO / TPO to prove its case that the said company is functionally similar to that of the assessee. It is ordered accordingly.
3.3 In the result, ground 2 is allowed for statistical purposes.
Ground 3 (TP Adjustment on trading segment) 4. By raising ground 3, the Revenue seeking to include the company, Dynalog (India) Limited in the list of comparables.
4 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited. 4.1 The DRP directed the AO / TPO to exclude the company Dynalog (India) Limited from the list of comparables by observing as under:-
“Having considered the submissions, in addition to the reasons given by the assessee, on perusal of annual report, it is also noticed by us that the 70% of purchases are from imports, which is not in the case of the assessee. It is also noticed by us that in the assessment year 2010-11, the company was directed to be excluded by the DRP, we are also of the view, that due to above functional differences, the company cannot be retained as comparable, accordingly, we direct the assessing officer to exclude the company from comparable.” 4.2 We have heard rival submissions and perused the material on record. On going through the financials of Dynalog (India) Limited, it is seen that the said company is engaged in assembling of computers and sale of training kits, indenting, trading of chemical products and pharmaceuticals. The activities of the said company is not comparable with that of the assessee, which is a normal distributor and does not perform assembling work. Therefore, we find no reason to interfere with the directions of the DRP given the clear functional dissimilarity between Dynalog (India) Limited and the assessee. Accordingly, we reject ground 3 raised by the Revenue.
Ground 4 (TP adjustment in trading segment) 5. By raising the above ground, the Revenue seeking to exclude the company Spanco Limited from the list of comparables. The DRP directed the exclusion of Spanco Limited as the said company is engaged in provision of services and is functionally dissimilar to that of the assessee.
5 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited.
5.1 We have heard rival submissions and perused the material on record. Since nothing has brought on record to show that Spanco Limited is engaged in the business of provision of services and in absence of segmental financial, we find no reason to interfere with the directions of the DRP. Therefore, we dismiss ground 4 raised by the Revenue.
Grounds 5 and 6 (Corporate Tax issues – Disallowance u/s 40(a)(i) of the I.T.Act.) 6. The learned DR submitted that management fees amounting to Rs.1,36,42,976 paid by the assessee to foreign entity is liable for tax as “fees for technical services” u/s 9(1)(vii) of the I.T.Act and having failed to deduct tax at source u/s 195 of the I.T.Act, the expenditure cannot be allowed as deduction in view of the provisions of section 40(a)(i) of the I.T.Act. The learned DR further submitted that the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. De Beers India Minerals (P.) Ltd. reported in 346 ITR 467 has not attained finality as appeal has been preferred before the Hon’ble Apex Court.
6.1 We have heard rival submissions and perused the material on record. It is undisputed fact that the issue involved in ground 5 and 6 is covered in favour of the assessee by the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. De Beers India Minerals (P.) Ltd. (supra). Merely because the issue has been raised in appeal before the Hon’ble Apex Court, the same would not preclude us from following the dictum laid down by the Hon’ble
6 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited. jurisdictional High Court unless and until the Hon’ble Apex Court takes a contrary view. In view of the judgment of the Hon’ble jurisdictional High Court, which is identical to the issue raised in grounds 5 and 6, we reject the plea of the Revenue. It is ordered accordingly.
Ground 7 (Corporate Tax issue) 7. As regards the above ground, the learned DR submitted that the TPO has correctly disallowed the contribution made to approved gratuity fund for the reason that the same is in the nature of a provision and not an ascertained liability. The DRP allowed the objections of the assessee by following the order of the Co-ordinate Bench of Bangalore Tribunal in assessee’s own case for assessment year 2010-2011 in IT(TP)A No.407/Bang/2015 and 585/Bang/2015 (order dated 27.01.2021).
7.1 We have heard rival submissions and perused the material on record. It is an undisputed fact that the issue involved in ground 7 is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for assessment year 2010-2011 (supra). The Revenue has not able to point out any distinguishing factors. Therefore, following the Co-ordinate Benches order of the Tribunal in assessee’s own case for assessment year 2010-2011, we reject ground 7 raised in Revenue’s appeal. It is ordered accordingly.
In the result, the appeal filed by the Revenue is partly allowed for statistical purposes.
7 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited. IT(TP)A No.79/Bang/2016 (Assessee’s appeal) 9. The assessee has raised 13 grounds in the revised memorandum of appeal and an additional ground, namely, ground 12A. However, during the course of the hearing, the learned AR had only pressed grounds 3, 7, 12 and additional ground 12A. The surviving grounds raised are as follows:-
“3. That, in relation to the trading segment, the learned DRP erred in upholding the inclusion of Kusum Electricals Industries Limited on the grounds of functional similarity, whereas, this company should be excluded on the ground of functional dissimilarity.
That, in relation to the manufacturing segment, the learned DRP erred in upholding the exclusion of Fib Com India Ltd. on the ground that the company is engaged in the sale of goods, service income and also supply, installation and commissioning contracts and also non-availability of segmental information whereas the company is mainly engaged into manufacturing of products comparable to the assessee and passes all the filters applied by the TPO.
That, on a without prejudice basis, the learned AO/TPO/DRP erred in law and on facts in arriving at the adjustment with respect to the manufacturing and the trading segments considering all transactions (both controlled and uncontrolled) and in not restricting the same to be controlled transactions of the appellant. Additional Ground 12A 12A. Without prejudice to the grounds of appeal already filed, on the facts and in the circumstances of the case and in law, the learned AO/TPO erred in not adopting Resale Price Method (PRM) as the most appropriate method for determining the Arm’s Length Price of the international transactions in respect of import of traded goods by the appellant from the Associate Enterprises.” We shall adjudicate the above grounds as under:
Additional Ground 12A (TP Adjustment in trading segments)
8 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited.
The learned AR submitted that the issue raised in the additional ground was decided in favour of the assessee by the Co-ordinate Bench of the Bangalore Tribunal in assessee’s own case for assessment year 2010-2011 in and 585/Bang/2015 (order dated 27.01.2021). The assessee has submitted a petition for admission of additional ground. It was submitted that the above ground was not raised before the lower authorities out of inadvertent simpliciter. It was submitted that since the issue raised is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for assessment year 2010-2011(supra), the additional ground may be admitted in the interest of justice and equity.
10.1 The additional ground does not require investigation of new facts. The Hon’ble Apex Court in the case of CIT v. S.Nelliappan reported in 66 ITR 722 (SC) had held that “In hearing an appeal the Tribunal may give leave to the assessee to urge grounds not set forth in the memorandum of appeal, and in deciding the appeal the Tribunal is not restricted to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal.” Since no new facts is required for adjudication of the above ground and the issue raised being legal in nature, the additional ground is taken on record and we proceed to dispose the same on merits.
10.2 The issue raised in the additional ground is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for assessment year 2010-2011 in ITA
9 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited. No.407/Bang/2015 and 585/Bang/2015 (supra). The relevant finding of the Tribunal reads as follows:-
“16. In the light of the aforesaid decisions, we are of the view that the approach of the Revenue authorities in rejecting the RPM as the MAM and the reasons given by them for doing so cannot be sustained. We are therefore of the view that in the given facts and circumstances, it would be appropriate to set aside the order of DRP on the issue of ALP and remand the question of determination of ALP to the TPO/AO for consideration afresh adopting RPM as the MAM. As pointed in the decision cited by learned DR in the case of Kohler India Corporation Pvt. Ltd., (supra), the assessee is directed to furnish all the required information necessary for determination of ALP in the set aside proceedings. In view of the decision and the MAM, we are of the view that the grounds raised by the Revenue in its appeal viz., grounds 1 to 4 on the exclusion of comparable companies by the DRP under the TNMM does not require any adjudication.
10.3 In view of the co-ordinate Bench order in assessee’s own case, we direct the AO to consider whether the bench marking done by the assessee under the resale price method is as per the provisions of the Act read with the relevant Rules (since the lower authorities has scrutinized the benchmarking under the TNMM). Therefore, additional ground 12A is allowed for statistical purposes.
Revised ground 3 (TP Adjustment in trading segment) 11. In the above ground, the assessee is seeking to exclude one company from the list of comparables, namely, Kusum Electricals Industries Limited. According to the learned AR, the said company is functionally dissimilar to the assessee. It is submitted that Kusum Electricals Industries Limited is engaged in single business of trading and electrical and electronics measuring equipments, which is not comparable to fiber optic cables traded by the assessee.
11.1 The learned DR supported the orders of the AO / TPO.
10 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited. 11.2 We have heard rival submissions and perused the material on record. Given the availability of comparable companies, which are engaged in trading of fibre optic cables, whether there is a need to consider the comparable companies engaged in trading of other products, is a matter to be examined afresh. Therefore, we direct the AO / TPO to examine once again the functions of this company with that of the assessee. It is ordered accordingly.
11.3 In the result, ground 3 in the revised comparable is allowed for statistical purposes.
Revised ground 7 (TP Adjustment in the manufacturing segment) 12. The assessee is seeking to include in the list of comparables, Fib com India Limited. The inclusion of this company is sought on the ground that the basis of rejection by the DRP is incorrect. The DRP had stated that the company is into sale of goods, service income and supply, installation and commissioning contracts. The learned AR had pointed out that no such information is emanated from the annual report of the company.
12.1 The learned DR supported the orders of the AO / TPO.
12.2 We have heard rival submissions and perused the material on record. As per the annual report of the company, the same is engaged in the single business segment, i.e., manufacturing, marketing and selling of all types of fibre optic transmission products and the same is considered
11 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited. functionally comparable to the activities of the assessee. Therefore, we direct the AO / TPO to examine the functions of this company as evident from the annual report. If the AO / TPO wishes to place reliance on other information / documents, the same may be furnished to the assessee to contest on merits by following the principles of natural justice.
Revised ground 12 (TP Adjustment in the manufacturing segment) 13. It was submitted by the learned AR that the TP adjustment should be restricted to the value of the international transaction. The learned AR relies on the following judicial pronouncements:-
(i) Jin Electronics I P Ltd. v. ACIT reported in (2010) 36 SOT 227 (Delhi) (ii) Kirloskar Toyota Textile Machinery P. Ltd. to ACIT in IT(TP)A No.1401/Bang/2010 (order dated 14.11.2014) (iii) CIT v. Phoenix Mecano India P Ltd. (ITA No.1182 of 2014 – judgment dated 07.06.2017) (iv) CIT v. Thyssen Krupp Industries India P. Ltd.
13.1 We have heard rival submissions and perused the material on record. The above judicial pronouncements have clearly held that Arm’s length price can only be determined on the value of the international transaction alone and not the entire turnover of the assessee at the entity level. We accordingly, allow this ground of the assessee and direct the 12 IT(TP)A Nos.41 & 79/Bang/2016. M/s.ADC India Communications Limited. AO / TPO to restrict the addition to the value of the international transactions only and not to the entire turnover. It is ordered accordingly.
In the result, the appeal filed by the assessee is partly allowed and the appeal preferred by the Revenue is partly allowed for statistical purposes.