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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI B. R. BASKARAN
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A No.3373/Bang/2018 Assessment Year : 2014-15 M/s. TE Connectivity India Private Limited, Vs. ACIT, TE Park, 22B, Doddenakundi Corporation, 2nd Circle - 2, Large Taxpayer Unit, Phase, Industrial Area, Whitefield Road, Bengaluru. Bengaluru – 560 048. PAN : AABCT 7374 C ASSESSEE RESPONDENT Assessee by : Shri. Sriram Seshadri, Advocate Revenue by : Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru Date of hearing : 22.02.2022 Date of Pronouncement : 25.02.2022 O R D E R Per N V Vasudevan, Vice President
This appeal by the assessee is directed against the final Order of Assessment dated 29.10.2018, passed by ACIT, Circle –2, LTU, Bengaluru, under section 143(3) read with Section 144C of the Income Tax Act, 1961 (Act), in relation to AY 2014-2015.
The concise grounds of appeal filed by the assessee before the Tribunal reads as follows:
IT(TP)A No.3373/Bang/2018 Page 2 of 33 I. GENERAL [Original GoA - No. 1] ISSUE GROUNDS OF APPEAL 1. Common 1.1. The lower authorities erred in finalizing an order of assessment Ground which suffers from legal defects such as being devoid of merits, contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such bad in law and is liable to be quashed
II. TRANSFER PRICING [Original GoA - No. 2 - 15] ISSUE GROUNDS OF APPEAL 2. Common 2.1. The lower authorities erred in making a transfer pricing Ground adjustment of INR 87.89 Crores, comprising of INR 54.48 Crores in respect of licensed manufacturing segment and INR 33.42 Crores [Original GoA in respect of payments towards Information System charges (“IS - No. 2] charges”) and Corporate Service charges. A. TP Adjustment - License Manufacturing Segment [Original GoA - No. 3 - 13] 3. Final Order 3.1. The lower authorities erred in passing a final order of assessment not in that is not in conformity with the Directions of issued by the Ld. conformity Dispute Resolution Panel (“Ld. DRP”), to the extent that the relief with DRP granted by the Ld. DRP, amounting to INR 7.06 Crores, is not given Directions effect to in the said final order. 4. Rejection of 4.1. The lower authorities erred in rejecting the Transfer Pricing (“TP”) TP Study and Study/economic analysis undertaken by the Appellant in Segmentation accordance with the provisions of the Income Tax Act, 1961, (“the Act”) read with the Income Tax Rules, 1962, (“IT Rules”) and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transactions and holding that the Appellant’s international transactions are not at arm’s length. 4.2. The lower authorities erred in disregarding the bona fide segment financials of the Appellant as adopted in the TP Study and arbitrarily recasting the same between the licensed manufacturing and trading segments, allegedly based on the revenue ratio. 5. Margin 5.1. The lower authorities erred in not providing purchase price
IT(TP)A No.3373/Bang/2018 Page 3 of 33 ISSUE GROUNDS OF APPEAL Computation adjustment, to eliminate the impact of rupee depreciation against the foreign currencies (USD, Euro and GBP) in which the transactions of the Appellant were undertaken during the Impugned AY. 6. Comparability 6.1. The lower authorities erred in considering the following companies Analysis as comparable to the Appellant, in undertaking a comparability analysis for benchmarking and determination of ALP of the Appellant’s margin in relation to its licensed manufacturing segment: (a) Kavveri Telecom Infrastructure Ltd; (b) Veto Switchgears & Cables Ltd.; (c) Birla Cable Ltd.; & (d) Vindhya Telelinks Ltd. 6.2. The lower authorities erred in not considering the following companies that were identified by the Appellant as comparable to itself, in undertaking a comparability analysis for benchmarking and determination of ALP of the Appellant’s margin in relation to its licensed manufacturing segment: (a) Easun Reyrolle Ltd; (b) Fine-Line Circuits; & (c) Akasaka Electronics Ltd. 6.3. The lower authorities erred in arbitrarily holding that only such companies that are available in the search matrix of the Ld. TPO as on the day of his search, would qualify as comparable companies for benchmarking analysis. 7. Economic 7.1. The lower authorities erred in not providing working capital Adjustment adjustment that the Appellant is eligible to, in relation to its Licensed Manufacturing segment. 8. Proportionate 8.1. The lower authorities erred in determining the transfer pricing adjustment adjustment at the segment level, in relation to the Appellant’s margin from its licensed manufacturing segment, without restricting such adjustment to the proportion of its international transactions in the said segment. B. TP Adjustment - IS charges and corporate service charges[Original GoA - No. 14 - 15] 9. ALP cannot be 9.1. The lower authorities erred in determining the ALP of IS Charges held as ‘NIL’ and Corporate Service charges at NIL, on the allegation that no
IT(TP)A No.3373/Bang/2018 Page 4 of 33 ISSUE GROUNDS OF APPEAL services were rendered by the AEs to the Appellant. 10. Absence of 10.1. The lower authorities erred in determining the ALP of IS comparability Charges and corporate service charges, without undertaking any analysis benchmarking exercise using comparability analysis. 11. Rejection of 11.1. The lower authorities erred in holding that the IS Charges and TNMM corporate service charges shall be benchmarking separately under method the CUP method and in rejecting the aggregation approach adopted by the Appellant under the TNMM method. 12. Double- 12.1. The lower authorities erred in disallowing the entire amount IS Adjustment of Charges and Corporate Service charges, without appreciating that the same same is included in the cost-base of the license manufacturing transaction segment for determining the margin, in respect of which an adjustment is already made.
III. CORPORATE TAX GROUNDS [Original GoA - No. 16 - 40] ISSUE GROUNDS OF APPEAL (“GoA”) 13. Disallowance 13.1. The lower authorities erred in disallowing depreciation of INR of Dep. on 7.23 Crores and INR 3.33 Crores claimed by the Appellant in its Goodwill return of income, on Goodwill arising pursuant to an arising on amalgamation, and a busines acquisition in a slump sale account of respectively, during the Impugned AY, failing to appreciate that Amalgamatio the same is a mandatory allowance n & Slump 13.2. The lower authorities erred in not following the binding Sale judicial precedents and the position of law settled by the [Original GoA - No. Hon’ble Supreme Court regarding the eligibility of depreciation 16 - 30] claim on goodwill, under section 32 of the Act. 13.3. The lower authorities erred in alleging that Goodwill is fictitious in nature and erroneously depriving the Appellant of its claim of depreciation thereon, under section 32 of the Act. 13.4. The lower authorities failed to appreciate the claim of depreciation under section 32 of the Act is a mandatory allowance goodwill arising on merger satisfied the conditions specified under section 32(1)(ii) of the Act, as certified in the tax audit report
IT(TP)A No.3373/Bang/2018 Page 5 of 33 ISSUE GROUNDS OF APPEAL (“GoA”) issued by Chartered Accountant. 14. Disallowance 14.1. The lower authorities erred in disallowing special discount of of spl. INR 43.25 Crores, given by the Appellant to dealers who are also discount given its customers, under section 40(a) of the Act, without to dealers considering the sample copies of agreements furnished by the under section Appellant, in connection with the provision of the said discounts. 40(a) of the 14.2. The lower authorities erred in not appreciating that the special Act discount is not in the nature of ‘commission payments’ [Original GoA - No. warranting deduction of tax at source under section 194H of the 31-36] Act. 14.3. The lower authorities erred in not appreciating that no disallowance shall be made under section 40(a) of the Act where the payee (in this case, the recipient of discounts) has remitted the taxes due in respect of the payments made towards the expenditure incurred by the payer. 15. Short grant of 15.1. The Ld. AO erred in granting lower amount of TDS credit, i.e., tax Credits INR 1,43,66,866 as against the actual deduction of INR 1,59,50,812. [Original GoA - No. 37-40] 15.2. The Ld. AO erred in granting the lower amount of Advance Tax credit, of INR 26,30,00,000, as against the actual payment of INR 28,30,00,000. The Ld. AO further erred in not granting self- assessment tax credit of INR 15,96,000, as claimed in the return of income.
Ground Nos.1 and 2 raised by the assessee are general in nature. As far as ground Nos.3 to 8 raised by the assessee is concerned, the same relates to addition made to the total income on account of determination of Arm’s Length Price (ALP) under section 92 of the Act in respect of the international transaction of rendering licenced manufacturing services (Licensed Manufacturing Segment) by the assessee to its Associate Enterprise.
IT(TP)A No.3373/Bang/2018 Page 6 of 33
As far as the aforesaid grounds are concerned, the factual details are as follows: The assessee is a wholly owned subsidiary of Tyco Electronics Singapore Pvt. Ltd., Singapore and is engaged inter alia in the business of manufacture of connectors and cable interconnect and fibre optic cable interconnect and trading of AMP net connect cables. The assessee carried out licensed manufacturing on behalf of its wholly owned subsidiary. As far as the transaction of manufacture of interconnector 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 applies. In support of the assessee’s claim that the price received by assessee from its AE for services rendered in the form of carrying out licensed manufacturing activity, is at arm’s length, the assessee filed the transfer pricing study adopting Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determination of ALP. The Profit Level Indicator (PLI) chosen for the purpose of the comparison of the assessee’s profit margin with that of the comparable companies was operating profit / operating revenue (OP/OR). The assessee chose 10 comparable companies from Prowess and Captaline Plus database and the profit margin of those 10 comparable companies were comparable with that of the assessee. Hence, the assessee claimed that the price received in the international transaction was at arm’s length.
The TPO accepted 1 out of 10 comparable companies chosen by the assessee. The TPO also applied TNMM as the most appropriate method for determination of the ALP. The PLI chosen for the purpose of comparison was operating profit / operating cost (OP/OC). The TPO selected 8 other
IT(TP)A No.3373/Bang/2018 Page 7 of 33 comparable companies and arrived at a set of 9 comparable companies. The average arithmetic mean of the 9 comparable companies was as follows:
Sl Company Name OP/OC No 1 Kavveri Telecom Infrastructure 16.23% Ltd. 2 Centum Electronics Ltd. 13.80% 3 Veto Switchgears & Cables 11.11% Ltd. 4 Birla Cable Ltd. 9.56% 5 Powersonic Electric 4.68% Solution India Pvt. Ltd. 6 Vindhya Telelinks Ltd. 8.35% 7 C & S Electric Ltd. 7.29% 8 Kaycee Industries Ltd. 3.14% 9 S P E L Semiconductors Ltd. 7.08% Average 9.03%
The OP/OR computed by the assessee was at 5.99% but the TPO did not accept the said computation. The computation as done by the assessee for OP/OR was as follows:
Manufacture of Particulars interconnects, connectors, fibre optical wires Sales and service income 5,870,115,674
Cost of materials 3,002,220 322 Employee expenses 1,058,977,900 Other operating expenses 1,578,559,181 Depreciation 156,781,968 Total Cost 5,796,539,370 Less: Purchase price adjustment 278,025,432
IT(TP)A No.3373/Bang/2018 Page 8 of 33 Adjusted Total Cost 5,518,513,939 Operating Profit 351,601,735 Add: Other income Less: other expenses Profit before tax Operating Profit/Sales 5.99% The TPO however computed OP/OC as follows:
Manufacture of Particulars interconnects, connectors, fibre optical wires Sales and service income 5870115674 Add: Forex gain 64167153 Operating Revenue 5934282827
Cost of materials 3002220322 Employee expenses 1336262400 Other expenses 1510580130 Depreciation 170468000 Less: Provision for 29192266 doubtful trade receivables Less: Provision for 8374830 doubtful loans and advances Total Cost 5981963756 -47680929 Operating Profit OP/OC -0.80% OP/OR -0.80% As can be seen from the computation of OP/OR by the TPO, the TPO did not exclude Price adjustment of Rs. 278,025,432/- from the cost base and
IT(TP)A No.3373/Bang/2018 Page 9 of 33 therefore the OP/OR or OP/OC computed by the TPO lower than what was computed by the Assessee. 7. Ultimately, the TPO computed the ALP and the consequent addition to be made to the total income is as follows: “9. Computation of Arm's Length Price: 9.1 The arithmetic mean of the Profit Level indicators is taken as the arm's length margin. Please see Annexure 'A' for details of computation of PLI of the comparable. Based on this, the arm's length price of the services rendered by the taxpayer to its AE(s) is computed as under:
Arm's Length Mean Margin on cost 9.03% Operating Cost 59819,63,756 Arm's Length Price(ALP) @ 109.03% 65221,35,083 59342,82,827 Price Received Variation in Price 5878,52,256 3% of price received 1780,28,485 Shortfall being adjustment 58,78,52,256
The aforesaid addition suggested by the TPO was incorporated by the AO in the Draft Order of Assessment. The assessee filed objection to the Draft Order of Assessment before the Dispute Resolution Panel (DRP). The DRP did not accept the objections of the assessee except the following:
a. On the issue of adoption of comparable companies for benchmarking, the Hon’ble DRP held that the 3 companies, namely, Circuit Systems (India) Limited, Cosmo Ferrites Limited, and Ruttonsha International Rectifier Limited are comparable to the Appellant. The Hon’ble DRP upheld their inclusion for comparability analysis, if these companies were a part of the Ld. TPO’s search matrix, at the time of undertaking a fresh search [Pg. 12 of DRP Directions].
IT(TP)A No.3373/Bang/2018 Page 10 of 33 b. The Ld. TPO passed an order-giving effect to the Hon’ble DRP Directions, wherein 2 out of the above-mentioned 3 companies (i.e., Circuit Systems and Ruttonsha International) were included in the set of comparable companies, as they formed part of the Ld. TPO’s search matrix. 9. The AO passed the Final Order of Assessment giving effect to the directions of the DRP. To the extent, the assessee aggrieved by the Final Order of Assessment, the assessee has raised concise ground Nos.3 to 6 before the Tribunal. 10. Learned Counsel for the assessee submitted that the TPO as well as the DRP fell into an error in selecting Kavveri Telecom Infrastructure Ltd., as a comparable company. He pointed out that the aforesaid company was engaged in rendering services and was not into manufacture and this flaw in the search process conducted by the TPO vitiates the entire approach of the TPO in choosing comparable companies. He pointed out that when these specific defects were pointed out by the assessee before the DRP, the DRP held that broad comparability is to be seen in the TNMM and rejected the plea of the assessee. 11. The next aspect pointed out by the learned Counsel for the assessee was that the TPO fell into an error in disturbing the computation of OP/OR as done by the assessee. He pointed out that one of the items of cost which the assessee sought to exclude was purchase price adjustment of Rs.27,80,25,432/-. He made the following submissions as to why this adjustment was necessary: i. This adjustment is claimed in order to eliminate the effect of long-term depreciation in the Indian Rupee via-a-vis the foreign currencies in which the Assessee undertakes its regular business operations. The Assessee has significant transactions in foreign exchange and therefore such impact has a material impact on its profitability.
IT(TP)A No.3373/Bang/2018 Page 11 of 33 ii. The Assesseee demonstrated in its TP documentation, based on an analysis of exchange rates over the past 10 financial years, that the fluctuation in the Indian rupee in FY 2013-14 was anomalous, and accordingly, a forex adjustment in the nature of an economic adjustment discussed under Rule 10B(3)(ii) of the IT Rules, is imperative. Reference in this regard was made to Appendix K of Assessee’s TP Study Report [Pg. 692 of Paperbook – Part b] and Form 35A [Pg.75 to 80 of Appeal set]. iii. The requirement for such adjustment was upheld by the Delhi Bench of the Hon’ble Tribunal in the case of Honda Trading Corp India (P.) Ltd1, TS 345-ITAT-2013 stating that an appropriate adjustment to remove abnormal and huge fluctuation in foreign exchange rate against Indian currency, has to be allowed while calculating the profit margin, in light of Rule 10B(3) of IT Rules and if said adjustment is not considered by lower authorities, the same should be set aside for disposal afresh [S. No. 44 – Pg. 370 of the Case Law Compilation]. iv. It is evident from the TP Order that the Ld. TPO failed to appreciate the nature of the said adjustment and mechanically dealt with it like a routine forex gain/loss arising out of the operations for the year [Pg. 5 of TP order/ Pg. 142 of Appeal set]. v. In light of the above, the said adjustment ought to be considered and adjudicated in light of the facts and circumstances of the case.
Learned Counsel for the assessee therefore submitted that these fundamental errors in determination of ALP is sufficient to vitiate the entire manner of determination of ALP and therefore the issue with regard to determination of ALP in the licence manufacturing segment should be set aside to the AO/TPO to denovo determine ALP in accordance with law. Learned DR while relying on the order of the TPO and DRP also was of the view that the issue requires a fresh look especially in the light of the errors pointed out by the learned Counsel for the assessee. 13. We have considered the rival submissions and we find that the mistakes pointed out in the approach adopted by the Revenue authorities go to the very root of the exercise of determination of ALP as per the various
IT(TP)A No.3373/Bang/2018 Page 12 of 33 provisions of the Act. In these circumstances, we accept the prayer of the learned Counsel for the assessee and set aside the order of the AO and remand the issue for denovo consideration to the AO/TPO to carry out the exercise of determination of ALP in the licence manufacturing segment denovo. The AO/TPO will afford opportunity of being heard to the assessee in the set aside proceedings. The relevant grounds of appeal are accordingly treated as allowed for statistical purpose. 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, 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
IT(TP)A No.3373/Bang/2018 Page 13 of 33 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, 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/
IT(TP)A No.3373/Bang/2018 Page 14 of 33 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 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
IT(TP)A No.3373/Bang/2018 Page 15 of 33 adequately to show that the payment is in consonance with the costs rendered in connection with the IT infrastructure and other support services 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.
Before the Tribunal, the learned Counsel for the assessee has filed an application for admission of the following documents as additional evidence:
SI No Particulars Page No 1 Report on Information Services received from Tyco 1- 55 Electronics Corporation, US 2 Sample copies of related invoices 56 - 72 The learned counsel for the Assessee submitted that the allegation that no documentation / information was furnished by the Assessee before the
IT(TP)A No.3373/Bang/2018 Page 16 of 33 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 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.
IT(TP)A No.3373/Bang/2018 Page 17 of 33 18. The learned counsel submitted that the IS Charges are already iincluded 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 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:
Decision Forum Ref. – Case law Compilation Magneti Marelli Powertain Supreme S.No. 67 – Pg. India (P.) Ltd.2 Court 495
IT(TP)A No.3373/Bang/2018 Page 18 of 33 Magneti Marelli Powertain High Court, S.No. 68 – Pg. India (P.) Ltd 3 Delhi 497 Bonfigioli Transmissions (P.) Tribunal, S.No. 71 – Pg. Ltd4 Chennai 524
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: Amount Particulars AS PER TP ORDER Ref. (INR [Pg. 3 & 4] Crores) Operating Revenue A 593.42 Operating Cost B 598.20 Particulars AS PER TP ORDER [Pg.3 &] Less: Allocation of IS charges, C 22.05 which is separately benchmarked by TPO (66% of INR 33.42 Cr.) [Pg. 16 of TP Order] D = B - 576.14 Revised Operating Cost C Operating profit E = A – 17.29 D Margin % F = E / 3.00% D
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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: Decision Forum Ref. – Case law Compilation Flakt (India) Ltd5 Tribunal, S.No. 72 – Pg. Chennai 531 AB Mauri India Pvt. Ltd6 Tribunal, S.No. 73 – Pg. Chennai 542
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, 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
IT(TP)A No.3373/Bang/2018 Page 20 of 33 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.
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. 22. 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. 23. The assessee has raised corporate tax issues apart from Transfer Pricing Issues, which we have already adjudicated in the earlier paragraphs of this order. As far as ground No.13 is concerned, the same relates to depreciation on goodwill claimed by the assessee which was rejected by the
IT(TP)A No.3373/Bang/2018 Page 21 of 33 revenue authorities. Depreciation on Goodwill was claimed on account of Acquisition of business by the assessee on merger and on Slum sale basis. 24. The factual details in so far as it concerns, acquisition of business on merger are as follows: Acquisition of companies by the Assessee on Merger: During the previous year relevant to AY 2014-15, the Assessee received the approval from the Hon’ble High Court of Karnataka for the merger of two companies with itself under a Scheme of Amalgamation, i.e., Tyco Electronics Systems Pvt Ltd (“TESIL”) -- a fellow subsidiary, and XOL Technologies Pvt.Ltd. (XOL)- a subsidiary of the Assessee. The appointed date of the merger as per the Scjheme was April 1str, 2013. All the assets and liabilities of the merging companies were accounted by the Assessee as per the Purchase Method of Accounting prescribed in Accounting Standard 14 of the Institute of Chartered Accountants of India, in accordance with the Scheme. The Fair Value of the Assets consideration discharged by the Assessee and the mode of discharge of consideration and excess consideration that was treated as goodwill on which the Assessee claimed depreciation were as follows: Amt. in Crores Particulars TESIL XOL Fair Value of Net 26.56 33.60 Assets Transferred Consideration 28.28 60.76 discharged by the Assessee Mode of discharge of Issues of shares to the Cancellation of the consideration shareholders of Assessee’s investment TESIL- in equity shares of XOL (a) Equity 0.002
IT(TP)A No.3373/Bang/2018 Page 22 of 33 (b) Preference: 28.28 Excess consideration 1.72 27.16 treated as Goodwill Total Goodwill 28.88 Depreciation u/s.32 of 7.22 the Act @ 25% Acqusition of Business on Slump Sale: On March 30, 2014, the Assessee purchased the Infocomm business unit of Raychem RPG Private Limited ("RRPGL"), a JV between TE Connectivity Group and the RPG Group, on a slump purchase basis under a Business Transfer Agreement ("BTA"). [BTA in Pg. 236 of Paperbook - Part A; Affirmative vote agreement in Pg. 314 of Paperbook - Part A; Note on accounting the acquisition in the Audited Financial Statements - Note No. 47 in Pg. 38 of Paperbook - Part A]. The said acquisition was accounted by the Assessee, as per the relevant accounting standard and generally accepted accounting principles. A summary of the said accounting is provided below:
Particulars INR Cr. Basis Fair Value of net assets 11.73 [ Refer Note on acquired accounting the acquisition in the Audited Financial Statements - Note No. 47 in Pg. 38 of Paperbook - Part A] Consideration discharged by 38.39 [Refer Note on the Appellant (USD 6.25 accounting the Mio.) acquisition in the
IT(TP)A No.3373/Bang/2018 Page 23 of 33 Particulars INR Cr. Basis Mode of discharge of Audited Financial consideration: Statements - Note No. 47 a. 14.72 in Pg. 38 of Paperbook - b. 3.67 a. Payment to RRGPL (USD Part A]. 2.5 Mio.) b. Payment to shareholders of RRGPL (USD 3.75 Mio.) Excess consideration – G/W 26.66 Depreciation u/s 32 of the 3.33 [Refer ITR in Pg. 57 of Act @ 25% the Paperbook - Part A]
The claim for depreciation on Goodwill was disallowed by the AO both depreciation on G/W arising on merger as well as on the business acquisition on slump sale basis, alleging that intangible asset capitalised as goodwill is fictitious in nature, without any basis. The Ld. AO further attempted to distinguish the decision of the Hon’ble SC in the case of Smifs Securities Ltd7 348 ITR 302 (SC) holding that the question raised before the Hon’ble SC was limited to whether G/W is an asset u/s 32, that the findings of facts by the Hon’ble Tribunal were not under appeal and that SC did not rule on the contextual facts of the present case. The DRP upheld the disallowance and held that the basis for valuation could not be produced before the lower authorities, and valuation was done arbitrarily without any technical study.
Aggrieved by the order of the AO incorporating the directions of the DRP refusing depreciation on Goodwill, the assessee has raised Grd. No.13.1 to 13.4 before the Tribunal. The learned counsel for the assessee
IT(TP)A No.3373/Bang/2018 Page 24 of 33 submitted that all the relevant documents with respect to the claim of depreciation on goodwill arising on merger as well as slump sale, including the purchase price allocation report and swap ratio analysis report, were furnished before the lower authorities and hence, the observation of the Hon’ble DRP that no basis of valuation was furnished is factually incorrect. It was submitted that the purchase price allocation report shows how the goodwill of INR 27.16 crores was crores has been arrived on merger of XOL Similarly, the swap ratio analysis report, evidences the basis for issue of shares to the shareholders of TESIL on merger of TESIL with the assessee.
It was submitted that Goodwill is in the nature of any other commercial or business right under the category of an intangible asset that is eligible for depreciation under section 32 of the Act. The issue whether Goodwill arising on amalgamation is eligible for depreciation or not, is no longer Res-Integra, and has been settled by the Hon’ble SC in the case of Smifs Securities (Supra). It was submitted that the Hon'ble SC categorically held that, a reading of the words 'any other business or commercial rights of similar nature' in clause (b) to Explanation 3 of Section 32(1), indicates that goodwill would fall under the said clause. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Having considered the explanation that "excess of consideration” over the value of net assets acquired is to be considered as Goodwill in the hands of amalgamated company arising on amalgamation, laid down that such Goodwill is a depreciable asset. Therefore, both valuation and characterization has been settled by the Hon'ble SC in this judgment [Para 2 and 4 of the order]. The lower authorities are bound to apply this decision in all other cases involving the same issue, based on the facts and circumstances of the case, and shall
IT(TP)A No.3373/Bang/2018 Page 25 of 33 not try to distinguish the position of law settled by the Hon’ble SC on frivolous grounds. In light of the above, Goodwill arising on amalgamation, in the hands of amalgamated company is an intangible asset in terms of Section 32(1)(ii) of the Act and thus eligible for depreciation under the Act. The issue whether Goodwill arising on amalgamation is eligible for depreciation or not, is no longer Res-Integra. Further, it is not disputed by the Revenue that the assessee paid consideration which is said to be in excess of the fair value of assets taken over. 28. The learned counsel for the assessee besides relying on several decisions also referred to decision of Hon’ble Karnataka High in the case of Manipal Universal Learning P. Ltd.8359 ITR 369 (Karn) , wherein the facts and circumstances of which are similar to the preset case, and the Hon’ble High Court allowed the claim of depreciation on Goodwill arising on acquisition of business under slump sale model, reiterating the decision of the Hon’ble SC in the case of Smifs Securities (Supra). Further reliance was placed on the decisions, wherein it was principally held that Goodwill is an intangible asset eligible for depreciation under section 32 of the Act in the context of business transfer through slump sale. The learned counsel for assessee submitted that Goodwill is not fictitious in nature as held by the revenue authorities. It was submitted that the assessee invested in the shares of XOL which is nothing but the consideration for acquisition of tangible and intangible assets upon merger. It also discharged consideration to TESIL by way of allotment of shares. As regards the transaction of slump sale, the Appellant paid actual cash consideration to RRPGL and the shareholders, for purchase of Infocomm business unit. It was submitted that it is a well settled by the judicial precedents that the excess consideration paid over the
IT(TP)A No.3373/Bang/2018 Page 26 of 33 net assets acquired constitutes Goodwill arising on merger/slump sale, as the case may be, which is eligible for deprecation under section 32 of the Act. Further, the recording of Goodwill pursuant to merger and slump sale was not on account of revaluation of assets by the assessee. Therefore, Goodwill recorded in the present case, on account of merger and slump sale, is not fictional in nature. It was submitted that the Finance Act, 2021, inserted a series of amendments in relation to the allowance of depreciation on Goodwill. Post such amendments, no depreciation is allowable to an assessee on goodwill. However, it has been specifically provided that the aforementioned amendments will take effect from April 01, 2021 and will, accordingly, apply in relation to AY 2021-22 and subsequent Ays. Further, amendments were made in section 55 of the Act, in relation to the meaning of ‘cost of acquisition’ etc. This amendment recognizes that depreciation on Goodwill in relation to the years prior to April 1, 2021 may have been claimed and allowed and provides for a mechanism for the adjustment of such depreciation claimed and allowed, for determining the cost of acquisition. It was submitted that it would be evident from the above, that the intention of the legislature, that depreciation on Goodwill is allowable prior to the said Amendments, is manifest from the adjustment mechanism. If the legislative intention was to deny depreciation for the past years as well, then there was no need for any adjustment to the cost of acquisition of the goodwill. Such an interpretation would lead to a provision of the law being redundant or otiose and such interpretation should be rejected. 29. The learned DR submitted that in so far as depreciation on acquisition of business on Slump Sale is concerned, he would rely on the order of the DRP. In so far as depreciation on acquisition of business on merger is concerned, the learned DR submitted that there was no real outflow in the
IT(TP)A No.3373/Bang/2018 Page 27 of 33 form of consideration to the subsidiary XOL and TESIL. It was submitted that the investment in subsidiary company i.e., XOL got diminished. In the absence of any payment in the form of consideration the same cannot be assigned as value of goodwill. He distinguished case laws cited by the learned counsel for the Assessee by pointing out that in all case laws cited there was flow of consideration. According to him allowance of depreciation generated as a result of amalgamation in the hands of amalgamated company needs depper judicial scrutiny especially in the light of the intent of the legislature to keep amalgamation a tax neutral scheme for companies and not to provide any scope to derive undue tax benefits. In particular he drew attention to Explanation 7 to Sec.43(1) of the Act which provides that actual cost of the transferred capital asset to the amalgamated company to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business. When cost is not recorded of any goodwill in the amalgamating company, there can no cost or goodwill in the amalgamated company. It best can be nil in such a situation.
Both the parties agree that the facts as brought out in the submissions made by the learned Counsel for the assessee before the Revenue authorities have not been considered either by the AO or the DRP and therefore this issue also needs to be remanded to the TPO/AO for fresh consideration. Accordingly, we set aside the issue to the AO for fresh consideration in accordance with law and in the light of the submissions made before the Tribunal. The AO/TPO will afford opportunity of being heard to the assessee before deciding the issue.
IT(TP)A No.3373/Bang/2018 Page 28 of 33 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. 32. 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;
IT(TP)A No.3373/Bang/2018 Page 29 of 33 - 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 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
IT(TP)A No.3373/Bang/2018 Page 30 of 33 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: Decision Forum Ahmedabad Stamp Vendors Supreme Court Association10 348 ITR 378(SC) Ahmedabad Stamp Vendors High Court, Association11 Gujarat 257 ITR 202 (Guj) Bharti Airtel Ltd12 High Court, Karnataka 372 ITR 33(Kar) Kerala State Stamp Vendors High Court, Association13 Kerala 282 ITR 7 (Ker)
IT(TP)A No.3373/Bang/2018 Page 31 of 33 33. 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. 34. 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.
Ground No.15 raised by the assessee is with regard to short grant of tax credit. As far as this ground is concerned, the learned counsel for the assessee has submitted that the assessee is eligible for a higher credit of
IT(TP)A No.3373/Bang/2018 Page 32 of 33 TDS, advance tax and self-assessment tax based on records, as summarized herein (All amounts in INR Crores): Credit Reference to Credit Basis for the Particulars to be Paperbook - Part Granted differential amount Granted A Short credit - INR 0.16 Form 26 AS of: Cr. -- pertains to the - XOL: Pg. amalgamating 563 to 567; TDS 1.44 1.60 companies [XOL - - TESIL: Pg. INR 0.08 Cr. & TESIL 571 to 573 - INR 0.08 Cr.] Short credit - INR 1.73 Pg. 568 Advance Cr. -- pertains to the 26.30 28.03 Tax credit of amalgamating company - XOL Short Credit -INR 0.16 Pg. 573 Self- Cr. – pertains to Assessment Nil 0.16 amalgamating Tax company - TESIL 36. We are of the view that it would be just and appropriate to direct the AO to consider the claim of the assessee as made above and allow credit for TDS in accordance with law, after affording assessee opportunity of being heard. In the result, the appeal by the assessee is treated as partly allowed for 37. statistical purposes.
Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (B. R. BASKARAN) (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 25.02.2022. /NS/*
IT(TP)A No.3373/Bang/2018 Page 33 of 33 Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order
Assistant Registrar, ITAT, Bangalore.